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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Apollo writing a trade war is a stagflation shark, Torson
Speaker 2: Slock to understand for more. Torston good Morning Monday morning,
Speaker 2: is firing the FED chair a stagflation shark.
Speaker 3: Well, so, a stagflation shark is by definition that inflation
Speaker 3: will go up and GDP growth will go down. But
Speaker 3: if you fire the fiture, as we saw yesterday, the
Speaker 3: dollar will likely go down, and at the same time
Speaker 3: long race will be going up, and the dollar going
Speaker 3: down is certainly inflationary. But rates going up is of
Speaker 3: course holding back growth. So firing the FT chair will
Speaker 3: probably mainly mean a decline in the dollar and an
Speaker 3: increase in long rates.
Speaker 2: Let's talk about the snack versus the FLA shed. Do
Speaker 2: you expect to see that flation for very long?
Speaker 4: Well, so so far.
Speaker 3: There's a number of here from c members when they
Speaker 3: talk about this, that they discuss what is the persistence
Speaker 3: of the stackflation shug in other words, when tariffs start
Speaker 3: to be more visible in the data. And I absolutely
Speaker 3: believe the data we just got this week it is
Speaker 3: the case that we're now seeing lift off in inflation
Speaker 3: in goods. Because we are seeing goods inflation, which makes
Speaker 3: up forty percent of the CPI basket, seeing on a
Speaker 3: number of different categories tools, toys, apparel, furniture, we've seen
Speaker 3: a fairly decent rise. And if we begin to see
Speaker 3: that lift off now over the next several months, then
Speaker 3: the risk is, of course that this becomes the more persistent.
Speaker 3: And Beth Hammock from the Cleveland Fed has said that
Speaker 3: in her district, companies that are exposed to tariffs have
Speaker 3: been raising prices, but even companies that are not exposed
Speaker 3: to tariffs have for competitive reasons, also been raising prices
Speaker 3: because hey, if others are doing it, we can also
Speaker 3: do it. So the fear it is that this does
Speaker 3: become more persistent and more sticky. So that's why it's
Speaker 3: so difficult for the FED to go out and the
Speaker 3: clear victory and say, oh, this is just temporary. They
Speaker 3: need to wait to see the peak, and we have
Speaker 3: really only at the takeoff stage, so we have not
Speaker 3: seen the peak. The consensus expect that later this year,
Speaker 3: by probably in November or December. But the bottom line is,
Speaker 3: before we could see that peak in site, it is
Speaker 3: not clear that the FED will say that now we're
Speaker 3: going to cut rates more meaningful.
Speaker 2: How do we explain what's handling with services prices?
Speaker 3: Well, so, of course, when something has a weight of
Speaker 3: forty percent and we know very well that that's now
Speaker 3: going up, of course the issue is, well, what about
Speaker 3: the sixty percent? Is that also going up? The sixty
Speaker 3: percent consists to a last degree also of wages and
Speaker 3: what we know from deportations. Of course, at a run
Speaker 3: rate around a million people in twenty twenty five, that
Speaker 3: means that wage inflation would likely begin to go up
Speaker 3: in the areas where unauthorized immigrants are working, for example,
Speaker 3: in agriculture, construction, leisure, and hospitality. So the fear you
Speaker 3: can have is that it's not only goods inflation coming
Speaker 3: from tariffs. Is also the upside risk to services inflation
Speaker 3: coming from wages, especially because of deportations potentially beginning to
Speaker 3: play a more significant role Turstan.
Speaker 5: Is the consumer able to absorb this well?
Speaker 3: On the retail sales data today, It's quite interesting because
Speaker 3: the low in consumer has been in trouble for quite
Speaker 3: some time, because we've seen all the loan the linguaities
Speaker 3: go up. We've seen credit card the linguagies go up.
Speaker 3: That's mainly because low income householes generally have more debt
Speaker 3: that generally have lower FICO scores. And when you have
Speaker 3: more debt and the FED race race in twenty twenty two,
Speaker 3: that means the low income houses are having hired debt
Speaker 3: interest payments. So therefore, low income houses have been in
Speaker 3: trouble for some time now. High income houses have been
Speaker 3: in good shape because stock markets are home prizer up.
Speaker 3: If you own fixed income, the cash flow you get
Speaker 3: from private credit, public credit, that's been very very strong.
Speaker 3: But the middle income households are now facing the news
Speaker 3: shock that student loan payments restarted after the monitorium or
Speaker 3: the pause on paying back your student no ended here
Speaker 3: in May, So that means that the rating burrows are
Speaker 3: now being told if I'm not paying my student loan,
Speaker 3: and that means that we are, unfortunately for the consumer
Speaker 3: outlook and therefore for retail sales here at eight thirty
Speaker 3: seeing the risk that is not only low in consumers
Speaker 3: that are now facing headwinds, is also the middle income consumers.
Speaker 3: And there's about eleven million people who are not paying
Speaker 3: their student loan on time at the moment out of
Speaker 3: forty five million people who have a student loan. So
Speaker 3: that means where that twenty five percent delinquity rates on
Speaker 3: student loans. This is at risk of implying that credit
Speaker 3: scods are going.
Speaker 6: To go down.
Speaker 3: According to the New York Fed Lab's This Streek blog post,
Speaker 3: it could be as much as seventy five points on
Speaker 3: your FICO scale, So people who have a credit score
Speaker 3: of seven twenty five goes down to six fifty. That
Speaker 3: means that middle income households at risk of seeing not
Speaker 3: an ability to borrow to buy a car, house watch,
Speaker 3: a dryer, iPhone. So therefore the risk to consumption is
Speaker 3: that it's going to broaden out the headwinds not only
Speaker 3: to low end but also.
Speaker 7: To middle income when you look at tariffs as a headwind.
Speaker 7: If the President is about to potentially settle on ten
Speaker 7: to fifteen percent across the board for one hundred and
Speaker 7: fifty countries, while it's an active negotiations with some of
Speaker 7: the biggest trading partners, is that enough for the FED
Speaker 7: to then start to model out what that could mean
Speaker 7: and cut rates. What's the timeline between getting the final
Speaker 7: tariff rates and the FED being willing to cut That.
Speaker 3: Is really important because they excuse my picture, pick is
Speaker 3: coming through the pie here in terms of terrorists and
Speaker 3: what it means our company is going to raise prices
Speaker 3: for consumers and that's the way we pay for tariffs.
Speaker 3: All our company is going to take it in earnings.
Speaker 3: So there are various simulations from the Yeald Budget lab
Speaker 3: the pen One budget Model, the Tax Foundation. We try
Speaker 3: to look at what are the implications of different levels
Speaker 3: of the effective arid seriff rate, and those show indeed
Speaker 3: that it does take time. So the FAI will not
Speaker 3: have clarity on this issue, maybe not even this year,
Speaker 3: which is exactly WHYMC members are so reluctant to come
Speaker 3: up with the answers how do we even quantify what
Speaker 3: the impact is? And the final point in your world is,
Speaker 3: of course, also what about the hearings for the IPA
Speaker 3: on July thirty first, that's now several weeks away. With
Speaker 3: that all deemed that there is a risk that this
Speaker 3: could all turn out to be not legal, what does
Speaker 3: that then mean for the August one deadline? So in
Speaker 3: the near term, the FED is certainly going into the
Speaker 3: July meeting in my view, thinking we cannot just even
Speaker 3: signal that there is any rate catch coming because we
Speaker 3: just don't know yet the persistence, the magnitude, and therefore overall,
Speaker 3: what are the implications of tariffs at this point?
Speaker 2: Can I just stay with that word for how many
Speaker 2: people make up that word way? And how many people
Speaker 2: Joria hand up and say, you know what, actually we
Speaker 2: should cut and we should count this month.
Speaker 6: Yeah.
Speaker 3: Of course, both Chris Waller and Miki Bowman have been
Speaker 3: turning more towards talking about cuts but potentially being something
Speaker 3: that should be likely. But the answer is to your question,
Speaker 3: at least the vast majority of comedia at this point
Speaker 3: is certainly at least in the reading. If you need
Speaker 3: to look at the dot plot weighing towards saying, well,
Speaker 3: there is probably a good argument for waiting.
Speaker 2: Median dot Steele projects implies two cuts, Morgan Stanley, no cuts,
Speaker 2: Bank for America, no cuts for twenty twenty five. What's
Speaker 2: your base case given what we know? Now, what's your basically?
Speaker 3: We have one cut in December. But I do think
Speaker 3: that the market is way way too eager to price
Speaker 3: in cuts. Again, the risks are and not only we
Speaker 3: talk about tariffs as upward pressure on inflation, we also
Speaker 3: talk about immigration restrictions and deportations as upward pressure inflation.
Speaker 3: But let's also not forget that if you take purpose,
Speaker 3: the FETs model of the ER's economy, and you ask
Speaker 3: the question, what does the fat itself think is the
Speaker 3: implication of a ten percent depreciation in the trade weighted dollar,
Speaker 3: and the answer out of purpose is that inflation will
Speaker 3: go up over the next four call us by zero
Speaker 3: point three. So now we certainly don't only have the
Speaker 3: uncertainty about terrrists putting up by pressure on inflation. We
Speaker 3: also have immigration restrictions putting up by pressure inflation. And
Speaker 3: then we also have that depreciating dollar for the last
Speaker 3: six months is also putting up by pressure on inflation,
Speaker 3: So all that argues for rates higher for longer, and
Speaker 3: on top of that, in the long end, we're also
Speaker 3: fiscal issues putting up by pressure on inflation. So the
Speaker 3: whole Yel curve is likely to stay elevated for a
Speaker 3: much more extended period than what the market is appreciating.
Speaker 2: The Federal Reserve is projecting transit three. It's just implied
Speaker 2: by the forecasts core PC for twenty five three point one,
Speaker 2: twenty six two point four, then down to two point
Speaker 2: one and twenty seven.
Speaker 4: That's the glide path. Do you project transits? Well?
Speaker 3: That is also if I type ECFC go on Bloomberg,
Speaker 3: I see exactly that profile where inflation will peak at
Speaker 3: three point three by Q four this year, and then
Speaker 3: it will begin to come down. But noteworthy is it
Speaker 3: including in the Fed forecast that we will only buy
Speaker 3: then of next year have inflation is still at two
Speaker 3: and a half. That's still way above the FETs two
Speaker 3: percent target. So you could begin to argue if you
Speaker 3: begin to cut rates when inflation is two point eight nine,
Speaker 3: or if we get basic the situation where inflation sets
Speaker 3: out to about more sticky. The risk is of course
Speaker 3: that they will be cutting prematurely. And that's what literally
Speaker 3: every airform cemener worries about, namely, did we cut too
Speaker 3: quickly and are we therefore then creating more boom in
Speaker 3: the economy, including with the one big beautiful bill lifting
Speaker 3: GDP next year, we could have a fairly strong economy
Speaker 3: going into twenty twenty six, and with that backdroup, it
Speaker 3: becomes very difficult to argue that you should see a
Speaker 3: lot of FED cuts next year.
Speaker 2: Do you think the one hundred basis points of cuts
Speaker 2: in the run up to the election was premature?
Speaker 3: Well, of course at this point that we had only
Speaker 3: all got to talk about our star as we have
Speaker 3: done now for a long long time. And this was
Speaker 3: the strong, strong argument at the time that monetary polsy
Speaker 3: was restrictive, that even still in the footnotes of aform
Speaker 3: CE member speeches talks about well, monastery pols is still
Speaker 3: today restrictive. But if you look at it that way, well,
Speaker 3: if monetary pols is so restrictive, why is the economic
Speaker 3: data and still doing so well? So that suggests that
Speaker 3: maybe this whole discussion has interestingly enough completely faded into
Speaker 3: the backseat of the car. We're no longer talk about
Speaker 3: our star and restrictive now we are so eager instead
Speaker 3: to talk about the inflation or impulse coming from in
Speaker 3: particular teriffs, but also the dollar going down. So I
Speaker 3: think that the debate around why are we at these
Speaker 3: levels of interest rates and where should we be? That
Speaker 3: debate seems to be almost yesterday's debates. So that's why
Speaker 3: I take a lot of the impulse and the discussions
Speaker 3: on there from seeing now is all about what's coming
Speaker 3: ahead of us, and what we know is coming ahead
Speaker 3: of us is exactly what the forecast from the Fed
Speaker 3: is saying amy higher inflation. J Pile said himself, we
Speaker 3: expect a meaningful increase in inflation over the coming months.
Speaker 3: That's a very strong statement from the Fetchure. So I
Speaker 3: think that we should in market take that very seriously
Speaker 3: when the Feture is taking a lot of credibility on
Speaker 3: saying we expect a meaningful increase in inflation over the
Speaker 3: coming months.
Speaker 2: Tustan, it's going to say, as always, thank you, sir,
Speaker 2: Tolston Snock that of Apollo. Jim Demarth, Bank for America
Speaker 2: writing volatility is whipsord global markets. That's been good for
Speaker 2: the markets. Businesses Bank of America. Jim joins a snaff
Speaker 2: of more. Jim, good morning, good morning.
Speaker 4: It's going to see you. Great to see you.
Speaker 2: It's going to catch out masses of volatility. Yes, you
Speaker 2: can have the good kind and the bad kind. Why
Speaker 2: was this the good kind?
Speaker 8: You know, the we'd like to think about everything in
Speaker 8: terms of channels. You know, when there are channels of
Speaker 8: price action, channels of volatility, those tend to be better
Speaker 8: opportunities for investors to put money to work. You know,
Speaker 8: if we were sitting here ten years ago, the bigger
Speaker 8: conversation was financial repression, right, and if you look at
Speaker 8: realized volatility in both the equity markets and in the
Speaker 8: rates markets, let's focus on the US, those that realize
Speaker 8: volatility is considerably higher than where we were then. And
Speaker 8: you see a lot of investors, you know, macro strategies
Speaker 8: are becoming much more popular today than they were ten
Speaker 8: years ago, when it was just difficult with suppressed volatility
Speaker 8: to deliver alpha.
Speaker 4: And so I think, you know, volatilities here.
Speaker 6: We're in a.
Speaker 8: Different you know, political and economic environment than we were
Speaker 8: ten years ago. So you know, my my suggestion, will
Speaker 8: we get used to to a higher degree of volatility.
Speaker 2: Do you think this is an ongoing feature of this regime.
Speaker 8: I think just where we are in the economic cycle,
Speaker 8: I mean, things are just very different. Right We're going
Speaker 8: to have increased uh, you know, there's increased pending happening
Speaker 8: in infrastructure, in technology, in defense. We've got high levels
Speaker 8: of debt in the developed world. That becomes you know,
Speaker 8: more topical depending on what other actions are taking place.
Speaker 8: Our headlines are hitting during you know, during a given day,
Speaker 8: a lot of focus on Japan, you know, for the
Speaker 8: last month to month and a half. You know, in
Speaker 8: April we were talking more about the US markets and
Speaker 8: concerns about you know, a failed treasury auction, which I
Speaker 8: think was extreme, you know, to say the least. But
Speaker 8: you know, in the end, some of these larger structural
Speaker 8: issues remain, and I think we'll go through periods of Yes,
Speaker 8: there's obviously concern about out you know, fed independence and
Speaker 8: what could happen there, you know, and I think you've
Speaker 8: had pretty much everybody on the show talk about it
Speaker 8: for the last the last you know, twenty four hours,
Speaker 8: Please get the last twenty four hours. Fed independence is good.
Speaker 4: I'll leave it that. If it starts to be threatened.
Speaker 4: What does it mean.
Speaker 8: I think people are going to I think people are
Speaker 8: going to wait to see what happens. I don't think
Speaker 8: anybody is going to be uh is going to exit
Speaker 8: the markets on concerns that that that is a certainty.
Speaker 8: I think with many things that have transpired over the
Speaker 8: last ninety days, there's a there's a test period. You know,
Speaker 8: theories are tested in the markets, markets respond, that information
Speaker 8: is filtered back into the decisioning process, and we're going
Speaker 8: to continue, you know, we're going to continue on that path.
Speaker 4: But I do think, you know, when.
Speaker 8: You think about the sovereign debt levels in developed you
Speaker 8: know economies across the across the globe, that is a
Speaker 8: real concern. It's going to you know, it's going to
Speaker 8: keep popping its head up or rearing its head until
Speaker 8: you know, there's some resolution. There was a lot more
Speaker 8: talk about it until the bill was passed. Now it's
Speaker 8: again a focus on Japan, and I'm sure there'll be
Speaker 8: talks about you know, other countries in Western Europe and
Speaker 8: you know, and in the UK as we as we
Speaker 8: continue on that path. So now I think betting against
Speaker 8: volatility is not a good strategy for the near and midterm.
Speaker 7: When it comes to volatility right now, what makes this
Speaker 7: environment potentially different or I guess you can mirror it
Speaker 7: to Trump one point. Oh, is it's politics and policy
Speaker 7: that is driving this in financial market?
Speaker 3: Yes?
Speaker 8: And again I think that's why it's a materially different
Speaker 8: environment than we had, you know, post a financial crisis
Speaker 8: up through COVID. While we had different administrations, the policy
Speaker 8: path was still pretty consistent regardless of democratic or Republican administrations,
Speaker 8: and the FED policy was very consistent. And you know,
Speaker 8: it was q E for a large part of it,
Speaker 8: and that was a you know, repression in volatility, and
Speaker 8: that environment is no longer here.
Speaker 5: What's the number one question client to ask you?
Speaker 8: Wow, that's a that's a really great question. I think
Speaker 8: the biggest focus remains on whether we're getting cuts this year,
Speaker 8: you know or not. And there's some pretty strong views
Speaker 8: on on either side, you know, And that's really a
Speaker 8: bigger question on what do we think inflation looks like
Speaker 8: as a transitory you know, or is it going to
Speaker 8: s remain at a higher elevated rate. I would say
Speaker 8: the second largest question, if you get out of the
Speaker 8: bond markets for a second, is you know, the AI
Speaker 8: investment period.
Speaker 4: That we're in today, is it a bubble?
Speaker 8: Is it a high correlation to what we saw you
Speaker 8: know in the late nineties going into two thousand and
Speaker 8: you know there's stories written on that that every day.
Speaker 8: I think what's very clear is that the investment is
Speaker 8: going to continue for the for the near to medium term,
Speaker 8: whether it's a result of corporations or sovereign uh sovereign
Speaker 8: you know, governments being focused on uh AI being critical
Speaker 8: to economic growth and safety, and so you see that
Speaker 8: regardless all around the world.
Speaker 4: You know, governments are.
Speaker 8: Making it one of their top mandates to be to
Speaker 8: be a leader in.
Speaker 2: AI drive an equity markets in a massive way, basically
Speaker 2: at all time high still on the s and P
Speaker 2: five hundred very close, and credit spreads a super time.
Speaker 2: How it spreads up very very tight. Do you see
Speaker 2: that as justified or a sign of complacency? There is
Speaker 2: a manner another banking beliefs that maybe it's a sign
Speaker 2: of complacency. Don't have to name it today, want your
Speaker 2: opinion on that.
Speaker 8: Yeah, I mean we go through periods of you know,
Speaker 8: when the market's down, nobody wants to buy and everybody
Speaker 8: gives fifteen reasons why it's going to go lower, and
Speaker 8: it goes up, and then people give you reasons why
Speaker 8: it's not going to go you know, it's not going
Speaker 8: to go any higher. I think the markets in general
Speaker 8: and people were you know, as humans, we have a
Speaker 8: certain degree of fear in US and we're worried about
Speaker 8: what could happen and what could be life threatening, and
Speaker 8: that's just human psychology, and post a financial crisis, we
Speaker 8: look at it and say, Okay, we know what are
Speaker 8: we missing. I think a lot of what the issues
Speaker 8: are that could result in a repricing in assets across
Speaker 8: the markets, they're all out there. The question is are
Speaker 8: the markets reflecting that in their current price? To me,
Speaker 8: that's really the question that you always have. And you know,
Speaker 8: the debate is today. You could sit with people today
Speaker 8: and they'll tell you that, you know, the real level
Speaker 8: of rates in the US market and the long end
Speaker 8: is too high based on what their expectations are.
Speaker 1: You know.
Speaker 8: The converse of that is people saying that we're concerned
Speaker 8: about long term debt because.
Speaker 4: Of structural budget deficits. You know. Flip it over to
Speaker 4: the equity markets.
Speaker 8: There's many people that are excited in saying AI is real,
Speaker 8: it's going.
Speaker 4: To drive productivity. We're going to see a.
Speaker 8: Boost in earnings across you know, across industries and across sectors.
Speaker 8: And then there are others that say, wow, you know,
Speaker 8: this is just another bubble and we've seen this, We've
Speaker 8: seen this play through. It's a good opportunity for us.
Speaker 8: We have a lot of clients that are thinking about
Speaker 8: things differently, and obviously, you know, our strength is intermediating risk,
Speaker 8: lending to them as they pursue these opportunities, and that's
Speaker 8: what we're that's what done.
Speaker 2: What I sense from you is that now there is
Speaker 2: a bus to act. In early April, it felt like
Speaker 2: a lot of people were just paralyzed by the bank drop. Yes,
Speaker 2: where's the buyas to act coming from? Are they just
Speaker 2: moving on from this policy story in Washington or have
Speaker 2: they got the clarity they want at least enough clarity
Speaker 2: to just move on.
Speaker 8: I think the first that's a really great question, and
Speaker 8: I think it's difficult to answer, but I would answer
Speaker 8: it this way. You know, you start with framing what
Speaker 8: are the extremes that could happen, and then getting comfort
Speaker 8: within that. And I think at the time when the
Speaker 8: tariffs were announced, the concerns were, how you know, this
Speaker 8: could be a material negative impact on global GDP okay,
Speaker 8: and that was reverberating. And at the same time, we
Speaker 8: just happened to have treasury auctions, you know, within a
Speaker 8: week's time.
Speaker 4: And then so you had this.
Speaker 8: Period of disruption in the equity markets, uncertainty. You get
Speaker 8: to the bond markets, we're having large auctions. Someone starts
Speaker 8: to focus on and proliferated in the market. What the
Speaker 8: participation rate was of you know, foreign investors in the
Speaker 8: three year note, which you know, if you go back
Speaker 8: and look at the numbers, yes, that was a high
Speaker 8: single digit participation at the time, but that's not the
Speaker 8: first time it's been a high single digit participation relative
Speaker 8: to participation, you know, in double digits. But you know,
Speaker 8: if you wanted to find negative dots to connect to
Speaker 8: come up with a very negative story, we provide, you know,
Speaker 8: the markets provided it.
Speaker 2: So a few months ago, twenty year real shit, Yes,
Speaker 2: nobody in fixed income cares about a twenty year treasury
Speaker 2: nobody nobody, And then all of a sudden you have
Speaker 2: a SOLF twenty year and all of a sudden, that's
Speaker 2: a reason to sell everything.
Speaker 8: Yes, So to that point, I think that framing and
Speaker 8: then bringing it in and as some of those outliers
Speaker 8: or the extremes of those risks are framed and framed
Speaker 8: narrower and narrower, that's when you get that, you know,
Speaker 8: you get positive sentiment.
Speaker 5: When you talk about those extremes.
Speaker 7: Do you also think that the president has set red
Speaker 7: lines what he's willing and not willing to do this
Speaker 7: idea of a Trump put Do you think investors have
Speaker 7: taken that on board.
Speaker 4: I think that.
Speaker 8: He's a very smart man and he's very connected to
Speaker 8: what's happening in the markets. I don't think that that's
Speaker 8: the only driver of his decisions, clearly based on what
Speaker 8: the statements have come from him in the administration. But
Speaker 8: that being said, you know, we are one of the
Speaker 8: most powerful economies in the world, and you need to
Speaker 8: be cognizant of that. But I do think that there's
Speaker 8: if you're being objective and independent, you can frame things,
Speaker 8: I think, and get to a.
Speaker 4: Point where you know where the extremes could be.
Speaker 8: And those extremes have been coming in and I think
Speaker 8: that's giving people more comfort to make some of these decisions.
Speaker 8: I mean you know, sector trends that are happening in equities.
Speaker 8: The investment's happening. It's happening with people that have the
Speaker 8: capital to make the investments. It's clear that the need
Speaker 8: is there. Now, whether it's going to result in the
Speaker 8: productivity or cost saves, you know, that's going to take
Speaker 8: you know, more two three, four years to see that.
Speaker 8: So I think for that sector. But then you have
Speaker 8: it an energy investment that's happening, defense, which is you
Speaker 8: know globally that's becoming a thing. So I think if
Speaker 8: you look at those sectors in the equity markets, people
Speaker 8: feel comfortable that there are strong fundamentals and technicals and
Speaker 8: it gives them the kind of strength and optimism to
Speaker 8: carry on. I think the bond markets are going to keep,
Speaker 8: you know, the volatility up, and you know, Brian mentioned it,
Speaker 8: you know yesterday. You know, we went through a historical
Speaker 8: period of low front end rates that was unprecedented, and
Speaker 8: I don't think those times are coming back. I think
Speaker 8: there are people that run certain investment strategies and certain
Speaker 8: people in the real economy that would really like zero
Speaker 8: interest rates, and I think that's why you're seeing some
Speaker 8: of the corrections continue in the real estate market, just
Speaker 8: because interest rates are normalizing higher and we're going to
Speaker 8: continue to see, you know, challenges for those industries. And
Speaker 8: I'm not you know, highlighting just the real estate industry.
Speaker 8: If you were a highly lever comp and you were
Speaker 8: used to borrowing short term, that's no longer a viable strategy.
Speaker 4: Can we finish at the long end of the curve?
Speaker 2: Yes, it's the character of developed markets, sovereign debt markets
Speaker 2: beginning to change. Typically by definition, when bad things happened
Speaker 2: to DM, you bought the bonds, you bought treasuries. It
Speaker 2: just feels like that story starting to turn. And we
Speaker 2: have these moments of stress where we see equities and
Speaker 2: bonds trade in tandem together. It's not just the US
Speaker 2: we see in Europe. We're seeing in other countries too.
Speaker 2: What's happening and how investors changing.
Speaker 4: Well, I think it's I think, I mean, you hit it.
Speaker 8: And that was one of the big concerns, you know,
Speaker 8: for smart investors that saw that price action, you know,
Speaker 8: stocks down, bonds down. That's not a good sign for
Speaker 8: health of the markets from a historical perspective. And with
Speaker 8: that being said, and with the concerns about the deficit.
Speaker 8: I still think, I mean the markets are telling me.
Speaker 8: I think that there's still optimism that there's going to
Speaker 8: be you know, a better uh deficit environment on a
Speaker 8: go forward basis. I mean, if you think about it,
Speaker 8: meaning maybe we're going to get growth its higher than
Speaker 8: that's projected, and perhaps the deficit, the structural deficit that
Speaker 8: we have won't remain as large as what's been feared.
Speaker 8: I mean, if you think about it, the bill was passed,
Speaker 8: the information is now clearly out there, this is what
Speaker 8: everybody was worried about, and there hasn't been a consistence.
Speaker 8: There hasn't been a significant sell off. I'm not saying
Speaker 8: that there hasn't been ten to fifteen basis points moves,
Speaker 8: but you know, people are talking about a six percent
Speaker 8: long bonds as a given, not as a possibility, you know,
Speaker 8: just months ago. So I do think that the calmer
Speaker 8: heads are prevailing and people are just want to see
Speaker 8: this data flow through the system and see this policy
Speaker 8: flow through the system.
Speaker 2: Let's hope to stays that way. Let's do it against
Speaker 2: this great great to see if thank you, sir Jim Demanda,
Speaker 2: I thankful market. We've seen the reports, we've heard the denials.
Speaker 2: Let's get into it with the former sen Lewis FED
Speaker 2: President Jim Pula. Jim, welcome back to this program, Sir.
Speaker 2: I want to get some monetary policy and economics before
Speaker 2: we get to the politics of it all. Do you
Speaker 2: think this is a credible argument for lower interest rates
Speaker 2: at this month's meeting.
Speaker 9: I do think that the FACT could resume its normalization process,
Speaker 9: which was interrupted in the first six months of this year.
Speaker 9: So I do think that that is the baseline plan
Speaker 9: at this point. September would be a natural focal point
Speaker 9: for that, and then maybe follow that up at a
Speaker 9: subsequent meeting. But I don't think that the committee is
Speaker 9: considering the sort of wholesale reductions in the policy rate
Speaker 9: because inflation is still somewhat above the target and they
Speaker 9: want to see the effects of tariffs.
Speaker 2: Beneath the headline, Jim, as you know, in the details,
Speaker 2: it's very much good versus services the moment, how concern
Speaker 2: value by what's developing in services.
Speaker 9: I still think that the overall inflation rate is going
Speaker 9: to continue to either stay where it is or decline slightly,
Speaker 9: and I think that's pretty good policy. I think you
Speaker 9: want to bring the inflation rate back to two percent,
Speaker 9: but not too fast. And I think they've got about
Speaker 9: the right policy to do that. But they do have
Speaker 9: some room to lower the policy rate, and I think
Speaker 9: we'll see that in the second half the year.
Speaker 2: Jim, you've been on the committee, You've got plenty of experience.
Speaker 2: Experience also if the pressure coming from the White House.
Speaker 2: At the same time, the pressure coming from the White
Speaker 2: House and the president's second term is much higher, much
Speaker 2: more powerful, stronger than we saw in the first term.
Speaker 2: When you're on the committee and you hear these kind
Speaker 2: of threats, does it change the way you go about
Speaker 2: your business in any way, shape or form.
Speaker 6: No, it doesn't accept that.
Speaker 9: What's happening is that this will induce inflation risk premium
Speaker 9: in the ten year and so you'll get how ten
Speaker 9: year yields than you would otherwise have.
Speaker 10: If this wasn't going on, and then the committee has
Speaker 10: to take that into account. I don't know why you
Speaker 10: want to whip up an inflation risk premium, but obviously
Speaker 10: investors want to be careful. You know how much inflation
Speaker 10: is the new administration willing to tolerate going forward? And
Speaker 10: that's the thing that the bond investors have to price in,
Speaker 10: So unfortunately this is going in the wrong direction. That's
Speaker 10: also going to push up financing costs for the government.
Speaker 10: That depends on the weighted average maturity of the treasury
Speaker 10: debt and some of that's longer term, so some of
Speaker 10: that is going to be influenced also by the inflation
Speaker 10: risk premium that will now start to develop. So unfortunately
Speaker 10: it's going a little bit in the wrong direction I
Speaker 10: think from probably where the administration really wants to go.
Speaker 5: That's the market impact.
Speaker 7: When it comes to the political theater of this, all
Speaker 7: JP Morgan's Equity Derivatives team is that with a note saying,
Speaker 7: what's currently unfolding before our eyes has been happening for
Speaker 7: decades behind closed doors.
Speaker 5: Is this idea FED independence a myth?
Speaker 9: You know, we've talked about it before, but I don't
Speaker 9: use the phrase. I try not to use the phrase
Speaker 9: FED independence. I would say it's designed to be arms
Speaker 9: length from politics, which would mean that the FED chair
Speaker 9: is not a cabinet position like the Treasury secretary that
Speaker 9: you get to a point as soon as you take office.
Speaker 6: But you do get to.
Speaker 9: Appoint the FED chair about one year into a new term,
Speaker 9: and you know, that's to give a little bit of
Speaker 9: political installation and so that things aren't moving, you know,
Speaker 9: quite so rapidly and are smooth out a little bit. Otherwise,
Speaker 9: you would have a lot of back and forth as
Speaker 9: administrations come and go with monetary policy, and that would
Speaker 9: be probably counter productive.
Speaker 6: Again, you get a lot of uncertainty.
Speaker 9: In markets that would have to be priced in, you
Speaker 9: get a higher level of rates, so that would be unnecessary.
Speaker 9: So I think arms length from politics is the way
Speaker 9: to think about this. I mean, you do have political
Speaker 9: appointees at the Fed, so obviously there's a political element
Speaker 9: to it, but it's designed to smooth out the ups
Speaker 9: and downs compared to what you would get for a
Speaker 9: cabinet level position, Jim.
Speaker 2: As you know, each leader at the Federal Reserve has
Speaker 2: a different style. There is a theory on Wall Street,
Speaker 2: which I'm sure you've heard that if someone is nominated
Speaker 2: by this president that the rest of the committee believes
Speaker 2: it's just a political puppet, the rest of the committee
Speaker 2: will gang up against them, and maybe they'll just be
Speaker 2: a chairman in name only. Can you describe the dynamic
Speaker 2: on the FMC whether that's conceivable from your point of view, Yeah,
Speaker 2: you did.
Speaker 11: Have the example of Gay Miller during the Carter administration,
Speaker 11: and he did not have the support of the committee
Speaker 11: or Paul Volker in particular, who is then the head
Speaker 11: of the New York FED. The story that I remember
Speaker 11: that your viewers might appreciate is that there was no
Speaker 11: smoking in the room. There was a no smoking sign
Speaker 11: and Volker lit up his cigar and.
Speaker 6: Started smoking his cigar.
Speaker 9: So I think that shows you what can happen if
Speaker 9: you nominate somebody and have somebody come into the job
Speaker 9: that doesn't have the respect of the institution. And by law,
Speaker 9: this is all done by committee, and really a chair
Speaker 9: has to navigate the committee and win friends and influence people.
Speaker 6: So that's a key element of the FED chair's role.
Speaker 2: Jim, I've only thirty seconds left, so forgive me. But
Speaker 2: Governor Waller was your director of research at a smile
Speaker 2: was fed. What kind of fetchad would he make?
Speaker 6: I think you'd be very good.
Speaker 9: I think he's a very strong candidate.
Speaker 12: I don't know if you'll win this, but he's certainly
Speaker 12: got a lot of background in macroeconomics and monitoria economics.
Speaker 12: But he's also been on the board for quite a
Speaker 12: while now and has a lot of sense of.
Speaker 9: Washington interface, so I think he'd probably be a good
Speaker 9: choice here.
Speaker 4: Jim.
Speaker 2: I appreciate your time as always, the Fulma San libis
Speaker 2: fed President Jimpilot.
Speaker 1: Great to be here in Chicago and thank you so much.
Speaker 1: I am here with Scott Kirby, the CEO of United Airlines,
Speaker 1: after earnings came out. He really echoed what we heard
Speaker 1: from Delta, which was a first reporter, which is stability, solidness,
Speaker 1: a sense of recovery. You said the world is less
Speaker 1: uncertain today than it was during the first six months
Speaker 1: of twenty twenty five. What was the inflection point where
Speaker 1: you saw that certainty come into play.
Speaker 6: You know, this year a lot of uncertainty in the
Speaker 6: first half of the year at Macro insert and that
Speaker 6: led to an impact on bookings and demand at United
Speaker 6: and across the whole industry. But it felt like there
Speaker 6: was a turning point at the end of June where
Speaker 6: the tax bill passed and the situation in the Middle
Speaker 6: East was calmer and tariffs, while not certain, yet narrowing
Speaker 6: the range, and it really felt like people felt enough
Speaker 6: confidence or enough lower level of uncertainty that they kind
Speaker 6: of came off the sidelines and were unfrozen, and particularly
Speaker 6: for business demand, I mean, you can't stay on the
Speaker 6: sidelines forever, and that was enough of a trigger. It
Speaker 6: really was like a light switch flipped at the end
Speaker 6: of June, particularly for business demand. Double digit acceleration in
Speaker 6: business demand as we ended June, and that's continued through yesterday.
Speaker 1: We've talked a lot about the K shaped recovery and
Speaker 1: the idea that high end consumers have really been driving
Speaker 1: the economy. Corporations kind of dropped off with business travel,
Speaker 1: as you said.
Speaker 5: They picked back up. What about the.
Speaker 1: Rest of the travelers, the main cabin How much have
Speaker 1: they rebounded back to where they would have been had
Speaker 1: there not been some of the headline volatility.
Speaker 6: So you sort of separate into those three pieces. Business
Speaker 6: demand dropped off at the start of the year. That
Speaker 6: seems like it's bounced back to what we were expecting
Speaker 6: it to be as we moved into July. Premium and
Speaker 6: higher end leisure sort of stayed consistent throughout. It never
Speaker 6: really dropped off, and the biggest impact for the consumer
Speaker 6: was in low end leisure. That's come back some in July,
Speaker 6: but not as much. I'd say that's sort of fifty
Speaker 6: percent recovered to what we were expecting at the start
Speaker 6: of the year, So business back to mostly a full
Speaker 6: recovery and low end leisure kind of fifty percent recover.
Speaker 6: Premium leisure never never fell off.
Speaker 1: We've seen sort of one entrance into the CPI report.
Speaker 1: The idea of inflation has been airline tickets have actually
Speaker 1: prices have been coming down, and there's this question of
Speaker 1: whether discounting is required to bring some of the main
Speaker 1: cabin back and whether that's going to be a persistent
Speaker 1: trend that competing on price is going to be really important.
Speaker 1: How much do you see that as persisting into the second.
Speaker 5: Half of the year.
Speaker 6: The airline industry is always good value, it always has
Speaker 6: as attractive prices, but I think it's more of a
Speaker 6: supply demand imbalance that there are a number of airlines.
Speaker 6: You know, there are two brand loyal airlines in the
Speaker 6: United States who are now generating the bulk of the
Speaker 6: industry's profits. Because those customers that care about quality, care
Speaker 6: about service, that care about technology, are We're just better,
Speaker 6: and they're choosing us, And you can see it in
Speaker 6: the data. You can see it in the numbers for
Speaker 6: the more commoditized part of the business. You know, there's
Speaker 6: simply more seats available. There's been more seats available than
Speaker 6: there is demand. But encouragingly, there's a big change coming
Speaker 6: in mid August. Well, we've talked about demand, and I
Speaker 6: see an inflection demand. There's also an inflection coming in
Speaker 6: supply as by the time we get to mid August,
Speaker 6: there are a lot of seats. The same thing happened
Speaker 6: last year, a lot of seats coming out of the industry,
Speaker 6: particularly from the low end carriers who've been struggling. Those
Speaker 6: seats are coming out. So my guess is that's going
Speaker 6: to lead to a firmer pricing environment as we move
Speaker 6: into mid August and one, and actually we can already
Speaker 6: see that in our numbers for later in the year.
Speaker 1: Are you expecting to take any capacity out?
Speaker 6: You know, continue to prune, but there's not going to
Speaker 6: be any structural changes to our capacity. And you know,
Speaker 6: we are encouraged by the environment. In fact, just in
Speaker 6: the last couple of weeks for US at least, the
Speaker 6: yields have turned positive on domestics. They've been down, you know,
Speaker 6: for several months as we started the year, but yields
Speaker 6: have now turned positive for forward bookings at least, So
Speaker 6: why have.
Speaker 1: You not gone with the more bullish potential estimates then
Speaker 1: for your forecast, given that you sound incredibly positive and
Speaker 1: you have seen this ongoing rebound.
Speaker 6: Yeah, you know, it has been it's been a good year.
Speaker 6: I mean, it's actually pretty remarkable that we've grown earnings
Speaker 6: and margins for the first half of the year despite
Speaker 6: everything that's happened. But a lot has happened this year,
Speaker 6: and we like to have a policy of being conservative
Speaker 6: on our guidance because stuff does happen, and we want
Speaker 6: to be able to absorb some unexpected events in our guidance.
Speaker 6: We intentionally build it conservatively. We did that's we do
Speaker 6: that all the time. But so really what happened this
Speaker 6: time is we've been able to build that conservativesm back.
Speaker 6: So you know, if nothing else happens this year, which
Speaker 6: is a big if, and if demand stays as strong
Speaker 6: booking demand stays as strong as it is right now,
Speaker 6: there's probably upside. But we'd rather be conservative than than
Speaker 6: get out two four out over our skis.
Speaker 1: One reason why I was really excited to speak with
Speaker 1: you is say you have a real time view of
Speaker 1: not only the consumer and the appetite there, but also
Speaker 1: international demand and whether there has been any damage to
Speaker 1: the brand Americana, the idea of foreign travelers coming to
Speaker 1: the United States for tourism, etc. You've said that there
Speaker 1: has been a drop off at European travelers. How sustained
Speaker 1: do you expect that to be? Are you seeing any
Speaker 1: permanent shifts in that international inbound landscape?
Speaker 6: You know, there has been a drop off in in
Speaker 6: inbound Your demand of Europe is one but it's a
Speaker 6: single digit decline, so and US point of sale has
Speaker 6: more than made up for it. It's eighty percent of
Speaker 6: our business. I don't think it'll be permanent. You know,
Speaker 6: the the United States is the greatest country on earth.
Speaker 6: It's a great place for people to come, a great
Speaker 6: place for people to visit. Demand is affected by all
Speaker 6: kinds of things. That we have fewer students coming to
Speaker 6: the US right now, you know, not surprisingly that's a
Speaker 6: big point. You are quite a bit fewer. I mean enough,
Speaker 6: you know, it's a small, relatively small percentage of the business.
Speaker 6: But when you're talking about one, two, three percent changes
Speaker 6: in demand, you can see it. When you're talking about
Speaker 6: small changes, But those my guess is that we will
Speaker 6: get back to normal. And you know, people's desire to
Speaker 6: travel see the world, whether you're an American or European
Speaker 6: or a Canadian, is strong. This is a great place
Speaker 6: to visit. And my guess is it will get back
Speaker 6: to normal.
Speaker 1: And if you're a senior and you're applying to colleges
Speaker 1: right now in the US, you probably are pretty good shape.
Speaker 5: That's all I can say.
Speaker 1: There's also a question about the further uncertainty, and tariffs
Speaker 1: are almost a certainty at this point.
Speaker 5: How do you expect to absorb them? Are you planning
Speaker 5: or do you have.
Speaker 1: A base case for whether you'll increase prices or whether
Speaker 1: we'll just hit margins more significantly.
Speaker 6: You know, for United we're fortunate that most of our
Speaker 6: aircraft come from Boeing so here in the US, and
Speaker 6: even in the airbus deliveries we have are mostly used
Speaker 6: here in the United States, so tariffs don't have as
Speaker 6: big of a direct impact on US as they do
Speaker 6: perhaps on our competitors. The bigger issue for US is
Speaker 6: the impact that has on the macro economy. And you know,
Speaker 6: I feel really good you were right earlier you said
Speaker 6: we have a real time indication of the economy. We're
Speaker 6: a very good real time indicator of what's going on
Speaker 6: with the company. Not always advanced, but good real time.
Speaker 6: And it really does feel like something changed at the
Speaker 6: end of the jewe the level of confidence, at least
Speaker 6: less uncertainty. People are moving forward, and I think on
Speaker 6: tariffs there's a narrower range of outcomes, like probably not
Speaker 6: going to be one hundred and forty five percent on time.
Speaker 6: There's a narrow range of outcomes, and people have had
Speaker 6: six months to sort of figure out how to deal
Speaker 6: with it and have some contingency planning. Whatever the reasons are,
Speaker 6: it does feel like there's more certainty with Boeing.
Speaker 1: Do you expect the deliveries to be on time or
Speaker 1: do you expect there to be more competition with all
Speaker 1: the other countries that are making deals to buy gooing plans.
Speaker 6: You know, that will be an interesting point of what
Speaker 6: happens with tariff's. I guess his aviation ultimately will wind
Speaker 6: up excluded. It's the one industry. US exports six times
Speaker 6: more aviation products than we import, so the big trade
Speaker 6: surplus on that side, So my guess is those will
Speaker 6: wind up excluded. But Boeing, you know, is back on track.
Speaker 6: You know, if narrow bodies are actually ahead of schedule
Speaker 6: for US, wide bodies are still behind. I think that's
Speaker 6: a less a Boeing issue, probably more engine issue and
Speaker 6: the supply chain for engines. I think that's a longer term,
Speaker 6: multi year challenge to get the wide body back on track.
Speaker 6: But Boeing seems to have turned the corner on production.
Speaker 1: I just want to finish on Newark and whether Newark's
Speaker 1: turned the corner.
Speaker 5: I do know that we could go for an hour.
Speaker 1: About the delays and some of the drama around that airport.
Speaker 1: You guys have a huge presence there. You have made
Speaker 1: this partnership with Jeff Blue and move to JFK. Do
Speaker 1: you expect to expand more in the Tri state area
Speaker 1: to try to diversify your presence away from you at first?
Speaker 6: I'm really pleased with what Secretary Toughy and the Department
Speaker 6: Transportation FA have done. My entire career at United have
Speaker 6: been trying to get Newark on an equal footing with
Speaker 6: the Guardian JFK. That's essentially putting slide controls. Have the
Speaker 6: number of flights at the airport equal to the capacity
Speaker 6: of the airport, and we've finally done that and you
Speaker 6: can already see the results. In June, Newark was the
Speaker 6: most reliable of the three New York Area airports. It's
Speaker 6: and the future looks really good. So we feel really
Speaker 6: good about Newark and it's a crown jewel and we're
Speaker 6: going to grow it and you know, it's always going
Speaker 6: to be a crown jewel for United But from the
Speaker 6: first day I got here to United I wanted us
Speaker 6: to get back into JFK. Our goal is to be
Speaker 6: the premier flag carrier of the United States and we
Speaker 6: need to be in JFK to do that. So the
Speaker 6: Jet Blue partnership is a great way for us to
Speaker 6: have a partner who cared has the same sort of
Speaker 6: culture on DNA, for customers to get back, you know,
Speaker 6: and have a presence on both sides of the river.
Speaker 1: Scott Kirby, thank you so much for taking the time today.
Speaker 2: This is the Bloomberg Sevenants podcast, bringing you the best
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Speaker 3: Mm hmm