Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 2: with Paul Sweeney. Join us each day for insight from
Speaker 2: the best in economics, finance, investment, and international relations. You
Speaker 2: can also watch the show live on YouTube. Visit the
Speaker 2: Bloomberg Podcast channel on YouTube to see the show weekday
Speaker 2: mornings from seven to ten am Eastern from our global
Speaker 2: headquarters in New York City. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen and always i Bloomberg Radio,
Speaker 2: the Bloomberg Terminal, and the Bloomberg Business App. The first
Speaker 2: print here off Lisa's Great data check is up five
Speaker 2: ninety five on the doll. What a perfect moment to
Speaker 2: speak to mister Eisman with Newberger Berman acclaimed in a
Speaker 2: movie of a few years ago. Look for the new
Speaker 2: Eisman Hollywood property. I think it's a Memorial Day, Paul.
Speaker 2: You know, Memorial Day's a good open. Sure, you know, yes,
Speaker 2: it's very good. Look for Bear Squeeze. You're gonna see
Speaker 2: that Memorial Day twenty twenty five, Steve, is this just
Speaker 2: one big short cover? We got the wall of money
Speaker 2: out there. Lawrence McDonald, who has been brilliant on this
Speaker 2: with the action yesterday. Is it an indirect short cover
Speaker 2: going on?
Speaker 3: That's too sophisticated for me. I mean, I find the
Speaker 3: whole incredible amount of energy that people spend on the
Speaker 3: FED day more amusing than informative. You know, think about
Speaker 3: it for a second. How much ink was spilt about
Speaker 3: whether the Fed with lower twenty five or fifty? All right,
Speaker 3: so they lowered fifty, and then what happened? The market
Speaker 3: had no reaction, just went up and down. Nobody knew
Speaker 3: what to do. And today the market's up huge, but
Speaker 3: rates are higher, so you know, you put it all together.
Speaker 3: I tried not to spend too much time trying to
Speaker 3: figure it out. All I care about is the general
Speaker 3: direction of the FED is lower. How much lower? I
Speaker 3: don't particularly care. I don't think that's particularly important. The
Speaker 3: more important question is how's the economy. Economy is slowed,
Speaker 3: But the data seems to indicate that the economy is fine,
Speaker 3: and that's all that really matters.
Speaker 4: So what other than you or I guess in the
Speaker 4: context of the economy, what are the drivers for kind
Speaker 4: of whether you're bullish or bearish, what's some of the
Speaker 4: big variables that you've find.
Speaker 3: I've gotten thematic more thematic in the last bunch of years.
Speaker 3: And I think that there are two great equity themes
Speaker 3: of our time, and we try and focus our portfolios
Speaker 3: as much as reasonable on those themes, and those are AI,
Speaker 3: slash tech and infrastructure. And I think those themes will
Speaker 3: last for years. They'll be variations, you know, on the
Speaker 3: infrastructure side there you know, politics do matter, but the
Speaker 3: overall theme will continue.
Speaker 2: Paul, let me interrupt with the data check here as
Speaker 2: a market surge, Dow up five hundred and sixty six
Speaker 2: points on a percentage basis, the market lifts here at
Speaker 2: nine thirty three, greater than futures NaSTA cup two point
Speaker 2: three percent as Paul predicted, the vis comes in sixteen
Speaker 2: point four zero on.
Speaker 4: The AI trade, Steve, how do you suggest people play it?
Speaker 4: I think the first name people kind of jumped on
Speaker 4: was in Vidia for good reason, because they put up
Speaker 4: that big revenue prints a couple of years ago. How
Speaker 4: else are you trying to play this?
Speaker 3: So, I mean the way we play it is where
Speaker 3: most people are playing it. In Vidia, some other chip companies,
Speaker 3: the very large companies with massive databases, you know, then
Speaker 3: the question becomes, you know, what apps and who's going
Speaker 3: to create them are going to work? And I think
Speaker 3: that is so early right now that it's really not
Speaker 3: worth talking about.
Speaker 2: You know.
Speaker 3: Just as an example, the part of the business of
Speaker 3: accenture that is doing extremely well is not the consulting side,
Speaker 3: which would do when companies are spending a lot of
Speaker 3: money on AI. It's the outsourcing side. And the reason
Speaker 3: why the outsourcing side is doing well is that most
Speaker 3: S and P companies do not have their data sufficiently
Speaker 3: in one place, structured appropriately to even do anything with
Speaker 3: respect to AI. So it's very very early in the
Speaker 3: AI story. The one longer term theme that we've been
Speaker 3: thinking about, although it's so long term I don't know
Speaker 3: quite what to do with it yet, is I think
Speaker 3: there's a good argument to be made that we have
Speaker 3: seen hardware rerate up and software somewhat de rate, and
Speaker 3: I think it's possible that AI could cause that to continue,
Speaker 3: because it's possible that the cost of creating software because
Speaker 3: of AI is going to plummet. And if that's the case,
Speaker 3: some of the iconic software companies out there may not
Speaker 3: have motes around their business that are quite as high
Speaker 3: as they.
Speaker 2: Used to be within the skill set that you've earned.
Speaker 2: And at Newburger Berman, do you people believe the capex
Speaker 2: expenditure of technology is being done intelligently and efficiently or
Speaker 2: is there wasted money being squandered away on AI?
Speaker 3: I mean, I'm sure both. It's you know, we won't know.
Speaker 3: We won't know the answer to that question for years,
Speaker 3: so I don't think it's worth trying to figure that
Speaker 3: out at this point.
Speaker 5: So how else do you think? I mean, it's.
Speaker 4: Are you A lot of folks are concerned about this
Speaker 4: mag seven is concentration risk?
Speaker 5: Just as a market concern?
Speaker 4: Do you have this market structure concern that so much
Speaker 4: of this market is weighted towards these MAG seven ors
Speaker 4: that beyond kind of well, I think.
Speaker 3: One interesting aspect of that it'll come to that is
Speaker 3: that many active managers, probably more on the institutional side,
Speaker 3: underperform because their risk parameters don't allow them to overweight
Speaker 3: the MEG seven because the megs so big, and it's
Speaker 3: probably going to continue. I don't think we will really
Speaker 3: see a broadening out until we see apps come out
Speaker 3: so that some of the middle more middle companies can
Speaker 3: do that. But that's we're ways away from that.
Speaker 2: Do you have a favorite mag seven?
Speaker 3: Is there one where you I don't want to talk
Speaker 3: about individual stocks. I'm just not gonna do that, right,
Speaker 3: I get into my firm gets me into trouble.
Speaker 5: The firm gets you into trouble. You don't get yourself
Speaker 5: into trouble. Okay, I got it on the list.
Speaker 4: On the infrastructure theme, yes, do I go out there
Speaker 4: and just buy like Cummings and engines and.
Speaker 3: Well, let's let me talk about that because politics are important. Okay.
Speaker 3: So I think that there are four mega infrastructure themes,
Speaker 3: and then there's a fifth. The four are on shoring.
Speaker 3: The second is you know, improvement of the grid yep.
Speaker 3: Third is everything having to do with actually building the
Speaker 3: data centers and that is overlapp there with the grid.
Speaker 3: And then there's then there's gratification, and then there's all
Speaker 3: the bills that Guiden passed to shove money into all
Speaker 3: four boxes. You know where the politics can become important
Speaker 3: is you know I'll do to extreme cases. If Trump sweeps,
Speaker 3: gratifications are going to get de emphasized, and if Harris sweeps,
Speaker 3: you know, gratification will get re emphasized. So that's important.
Speaker 3: So the politics here are important.
Speaker 2: Steve Weisman with us, and we will continue here. Let
Speaker 2: me do a data check here with the markets and
Speaker 2: the move SPX, Dow records, Dow up five and forty
Speaker 2: points to the solid forty two thousand print in the
Speaker 2: Dow fifty seven hundred, SPX up eighty six points, Nasdaq
Speaker 2: one two point with Steve Weison.
Speaker 5: Steve, how you, how concerned are you if at all?
Speaker 3: We're not on right now? What's on? We're We're on,
Speaker 3: We're on Ali's far radio. It's hard to tell you.
Speaker 5: Yeah, with the red light. You make it easy. The
Speaker 5: red light. Yes, that's for me.
Speaker 3: I've just learned something.
Speaker 5: Exactly, all right, valuation.
Speaker 4: How concerned are you, if at all about this market broadly?
Speaker 3: You know, I think I learned this lesson in the
Speaker 3: dot com bust. So you know, when when dot com
Speaker 3: was rocking and rolling, everybody was yelling and screaming about evaluation.
Speaker 3: But that didn't matter until there was a recession and
Speaker 3: it turned out that a lot of these companies had
Speaker 3: actually fundamental problems. So I don't spend I mean, generally speaking,
Speaker 3: I'm not going to invest in a company that sells
Speaker 3: at a thousand PE. That's just not what I do.
Speaker 3: But we'll invest in some high PE stocks. I just
Speaker 3: don't feel like it's as long as the economy is fine.
Speaker 3: It's not. It's more of an academic exercise than anything else.
Speaker 4: So the economy, I mean, from what we're hearing from you,
Speaker 4: the economy really is underpinning almost everything you foundation. I
Speaker 4: guess of how you view investments correct? Okay, how about
Speaker 4: on the fixed income side, what do we do there?
Speaker 4: I mean I can sit in it to your treasury.
Speaker 4: I used to get five percent. I'm still getting three
Speaker 4: point six percent. That's not bad for you know, like
Speaker 4: no risk?
Speaker 5: What do I got there? And takes my credit risk?
Speaker 5: Do you think?
Speaker 3: Look, we do some corporate bond investing, but mostly what
Speaker 3: we do is equities. Okay, I'm I don't have a
Speaker 3: strong view on fixed income right now, one way or
Speaker 3: the other. I really don't.
Speaker 5: You have alternatives in your portfolio.
Speaker 3: I don't have alternatives either. I'm just a stock jockey,
Speaker 3: stock jobs, stock and I always have been.
Speaker 2: Okay, we got to talk banks here in Financial with
Speaker 2: Steve Iceman. Here's a quote. So, yeah, I met with
Speaker 2: this retail banker yesterday, and I'm supposed to be getting
Speaker 2: him to invest in her fun but instead I start
Speaker 2: grilling him about our overdraft penalties. And now was bank,
Speaker 2: let's a customer write ten twelve checks before they tell
Speaker 2: them they're overdrawn. And this creep is making billions off
Speaker 2: of screwing over people.
Speaker 3: This way script that sounds like a much younger version
Speaker 3: of me. It's from the script A very angry young man,
Speaker 3: A very angry.
Speaker 2: Young man from twenty fifteen. Can you buy New York
Speaker 2: big bank? Can you buy the future of Bank of America?
Speaker 2: You know, not individual stocks, but can you buy the
Speaker 2: big bank success of the future.
Speaker 3: So let's talk about what the positives are. The positives
Speaker 3: are that the regulators did a very very good job
Speaker 3: post Dodd Frank led by vice chair Daniel Torulo, truly
Speaker 3: one of the unsung heroes of the financial system. The
Speaker 3: leverage in the banks is cut by more than half.
Speaker 3: Even within that leverage, they have been de risked. So
Speaker 3: the financial system of the United States, as far as
Speaker 3: I'm concerned, is very very safe, and I don't lose
Speaker 3: any sleep about it. And by the way, I sleep
Speaker 3: very well. But do I think there's a great story
Speaker 3: to invest in some of the very large banks. Not really.
Speaker 3: I just don't think there's a story there one way
Speaker 3: or the other.
Speaker 2: It's too important. I got to get this in lex
Speaker 2: in the Ft today, blistering about private equity and the
Speaker 2: ability not to cash out. Do you see potential problems
Speaker 2: within the illiquidity of private equity?
Speaker 3: You know, you could spend any bad tail you want.
Speaker 3: I don't know. There's just not enough data on what's
Speaker 3: in private expert to really know one way or the other.
Speaker 2: You can't make that.
Speaker 3: I can't make that judgment.
Speaker 2: See that. You know his lawyers love him, you know,
Speaker 2: won't do individuals.
Speaker 3: My lawyers love me.
Speaker 1: You know.
Speaker 3: One time, in this quick story in the nineties, Oppenheimer
Speaker 3: got I was a Oppenheimer, and Oppenheimer got sued over
Speaker 3: something that I had written, and and there was you know,
Speaker 3: it was discovery, and the lawyers called me and said,
Speaker 3: send us everything you have on this company that you
Speaker 3: wrote about. And I sent it to them, which was
Speaker 3: only the reports that I had written. And the lawyer
Speaker 3: called me and said, what about your notes? And I said,
Speaker 3: I don't have notes. I don't take notes. He goes,
Speaker 3: I love you.
Speaker 2: Guys, thank you so much. We love you too. I
Speaker 2: greatly appreciate it. Streisman is with Newburger Berman some perspectives
Speaker 2: there given most interesting times. Julian Emmanuel joins us. Right now,
Speaker 2: can you send thanks to Edward Heiman ed Heiman and
Speaker 2: tell him thank you for appearing generously ten eleven, twelve
Speaker 2: days ago and then coming in with your redo call
Speaker 2: he cast aspersion on you. What did you say to
Speaker 2: ed Heyman to get him to switch a view from
Speaker 2: recession difficulty into the soft landing we're celebrating this morning.
Speaker 6: Well, I think if you go back and think about it, Tom,
Speaker 6: what it does is, you know our business first of all,
Speaker 6: forecasting things is difficult whether you're an economist or a strategist.
Speaker 6: But as part of the process again, you know, Kin's
Speaker 6: is famous for the statement when the facts change, I change,
Speaker 6: what do you do?
Speaker 2: Sir?
Speaker 6: We went through that same thing ourselves at midyear in
Speaker 6: terms of taking our price target up to six thousand,
Speaker 6: essentially recognizing that this environment is totally different than anything
Speaker 6: right any of us have ever seen.
Speaker 2: And with immense respect to CJ. Lawrence and what Edheimen
Speaker 2: invented years ago is the distinction pandemic, fiscal stimuli or
Speaker 2: is it a new productivity we don't understand well?
Speaker 6: And the kicker is is that it could well be
Speaker 6: the new productivity we don't understand. And clearly, you know,
Speaker 6: you wouldn't have seen the announcement of this massive deal
Speaker 6: for building AI, you know, power plant type build out
Speaker 6: that we've seen in the last couple of days if
Speaker 6: there were not the belief and we share that belief
Speaker 6: that AI is absolutely going to underpin productivity in the
Speaker 6: long run.
Speaker 4: Here, what did you make yesterday of our fetter reserve
Speaker 4: and kind of what they're messaging was, what'd you take
Speaker 4: away from that?
Speaker 6: Well, it really was an example of again getting the
Speaker 6: dual mandate back squarely in focus, but also reinforcing the
Speaker 6: message we're cutting because we can not because we have to,
Speaker 6: and this whole idea that they know something that we
Speaker 6: don't with regard to economic weakness completely discredit that. But
Speaker 6: yet at the same time it's also an implicit message
Speaker 6: that if the data does weaken, and particularly if we
Speaker 6: have the kind of election volatility that we had, say
Speaker 6: in the Hanging Chad year of two thousand, where stocks
Speaker 6: were similarly expensive, the economy was starting to slow and
Speaker 6: then all of a sudden you couldn't figure out who
Speaker 6: the resident was, and that soured the mood and soured
Speaker 6: asset markets. The FED is prepared to act. The FED
Speaker 6: did not act in two thousand and that's part of
Speaker 6: why you got a recession in early one.
Speaker 4: So, given what we've heard from the Fed yesterday, given
Speaker 4: what we know about I guess earnings, is it full
Speaker 4: speed ahead on risk assets?
Speaker 5: And if so, or do you see the opportunities?
Speaker 6: So we do continue to be very positive into year end,
Speaker 6: and so far twenty five looks good to us as well.
Speaker 6: You know, part of this narrative again is the FEDS
Speaker 6: behind us. We have earnings that will once again when
Speaker 6: the reports start in a couple of weeks, confirm the
Speaker 6: fact that second quarter was not an anomaly. That yes,
Speaker 6: the other four hundred and ninety three stocks in the
Speaker 6: S and P five hundred are growing their earnings. And
Speaker 6: that combination along with the statistic that we quote and
Speaker 6: we really like six out of six presidential election years
Speaker 6: where you were up double digits on labor day, every
Speaker 6: single one of them finished higher by year end.
Speaker 2: What does the I do to go to you know,
Speaker 2: Edwards in and of course I start with trucking statistics
Speaker 2: because that's what he's doing. But what what is the
Speaker 2: dynamics of corporate and business investment given the madness of
Speaker 2: the last twenty four hours, Well.
Speaker 6: It's got to be plus plus it is. And again
Speaker 6: we've been doing this while and we try to tempt
Speaker 6: you know, it's curb your enthusiasm the legendary comedy show,
Speaker 6: because part of what you don't ever really want to
Speaker 6: do emotionally in the last twenty four hours is a
Speaker 6: perfect example of this, because the initial reaction was disappointment
Speaker 6: to weigh to way the market traded, and then all
Speaker 6: of a sudden this morning we've reassessed and it's full
Speaker 6: steam ahead. We want to be temp but the fact
Speaker 6: is is that we are in one of those unique
Speaker 6: situations where because the economy looks like it's going to
Speaker 6: soft land at having changed his forecast, you are in
Speaker 6: one of these win win scenarios where companies are likely
Speaker 6: going to be more incentivized to increase cappex, to take
Speaker 6: on M and A, you know, regardless of the fact
Speaker 6: that valuation.
Speaker 2: To take on new technology, yep, it's understated.
Speaker 4: How about old technology I mean here in a two
Speaker 4: year treasure, we've gone from five percent yield down to
Speaker 4: three sixty During that period of time, stuff like utilities
Speaker 4: and roots have done well. Are they more to go
Speaker 4: or to take some profits there?
Speaker 6: So so from our point of view, we've trusted in
Speaker 6: what we call the Fed rate cut Playbook, and basically
Speaker 6: what it says is that a lot of the move
Speaker 6: on the long end of yields is done. You know, frankly,
Speaker 6: you've come in one hundred basis points on the ten
Speaker 6: year yield. If you're not having a recession. We don't
Speaker 6: think you're having a recession. And the best of inflation
Speaker 6: is just recently passed. Not to say that inflation won't
Speaker 6: continue lower. That to us means the yield story is
Speaker 6: likely higher, and that's where you want to sort of
Speaker 6: trim your holdings on places like rets and utility.
Speaker 2: Single point SPX twelve months.
Speaker 6: Out, well, come on, I can't do that until we
Speaker 6: put out the year ahead. But frankly, you know, we
Speaker 6: do think, particularly if you think about past valuation paradigms,
Speaker 6: we're expensive at twenty four times, but we're nowhere near
Speaker 6: the twenty eight to thirty times. We've seen in prior peaks,
Speaker 6: and the feed is with us and productivity is with us.
Speaker 2: Juan Emmanuel, thank you so much for that. Hymen Evercoret
Speaker 2: this morning, let's talk to a bond guy. Sure that's great.
Speaker 2: What an equity response we see here? Joining us now,
Speaker 2: Jim Caron, he's at Morgan Stanley for an extended period.
Speaker 2: He'll join us across his half hour. So Jason Furman's
Speaker 2: out yesterday and he's got his offspring, a teenager, emailing
Speaker 2: dad in the middle of the FED meetings saying you
Speaker 2: were wrong. I was wrong. I didn't say what my
Speaker 2: opinion was because nobody cares full disclosure. I was looking
Speaker 2: for twenty five I was wrong. You were wrong. Why
Speaker 2: were we wrong?
Speaker 7: I think we were thinking too logically about it.
Speaker 8: And by the way, Jason Furman's offspring's response is probably
Speaker 8: what my offspring would love to say to me as
Speaker 8: often as possible. So look, I mean, fifty basis points
Speaker 8: is absolutely a justifiable number. It was a close call.
Speaker 8: I think why we were wrong is that there was
Speaker 8: a component of Powell wanted to probably cut interest rates
Speaker 8: in July, and I think if you look at the
Speaker 8: dot plot and you look at the makeup of this decision.
Speaker 8: I think he kind of strong arm the committee and
Speaker 8: he said, look, we're going fifty. We didn't do July.
Speaker 8: It was a mistake and I need you guys to
Speaker 8: get behind me on this one.
Speaker 7: And I think that's that's why it was such a
Speaker 7: close call.
Speaker 8: And I think it was a judgment call, but I
Speaker 8: think there was a bit of strong arming that came
Speaker 8: through there.
Speaker 7: So that's hard. You know, that can break either way.
Speaker 5: We had a dissenting vote there, and that's no visual.
Speaker 5: What does that tell to you? Is that what does
Speaker 5: that telegres.
Speaker 8: You know, it's been like nineteen years since we've had
Speaker 8: a descent on something like this, you know, during like
Speaker 8: a rate cut. Like look, look, I mean it tells
Speaker 8: me that Again, I'm going to go back to.
Speaker 7: The dot plot.
Speaker 8: If you look at the dot plot for twenty twenty four,
Speaker 8: there's a lot of cohesiveness. Okay, we've got a contristraates,
Speaker 8: you know, we've got to get on the move here.
Speaker 8: When you start to go out to twenty twenty five
Speaker 8: and out to twenty twenty six, there's a huge amount
Speaker 8: of dispersion of opinions across the whole thing. So I
Speaker 8: don't think this is just a done deal where the
Speaker 8: Fed Okay, that's it. We don't have to worry about
Speaker 8: it anymore. Gordon cut two hundred and fifty basis points.
Speaker 8: The market's got that price. Let's all just sit back
Speaker 8: and relax. Although that's what the markets are doing today.
Speaker 8: But you know, the question for me, and the thing
Speaker 8: that gets me the most on this whole number is
Speaker 8: the unemployment rate component. Right, everything is hinged upon a
Speaker 8: number that has been so terrible over the last couple
Speaker 8: of years, really since COVID. There's not a lot of
Speaker 8: certainty in the number in the jobs reports. They're heavily revised.
Speaker 8: Yet we're basing all of this monetary policy on a
Speaker 8: four point four percent, which is offense unemployment rate target.
Speaker 7: I don't know.
Speaker 8: I mean, like, look, if the economy is really slowing,
Speaker 8: I would imagine that the employment rate goes up.
Speaker 2: And you know, you're not going to get my opinion here, folks,
Speaker 2: but I am going to say what I'm going to
Speaker 2: observe around what Jim Kurrn just said is a three
Speaker 2: month moving average of non farm payrolls. David Kelly over
Speaker 2: at JP Morgan, that's another bank. I don't know if
Speaker 2: you're familiar with them. David Kelly says, look, you're going
Speaker 2: to get a vector to a three month moving average.
Speaker 2: It could be a negative statistic and that would be
Speaker 2: the shock Jim's talking about. Okay, physics envy here, Boden Guy,
Speaker 2: I took from point twenty five out to five point
Speaker 2: five zero. Bob since taught me how to do this
Speaker 2: strap of Fibonacci to get a central central tendency two
Speaker 2: and seven eighths would be this roughly central in the
Speaker 2: middle and neutral. We have ten twenty five measured rate
Speaker 2: cuts to get to normality as well. The reason he
Speaker 2: was bold and strong armed him because he knows he's
Speaker 2: got massive room to move to quote unquote normal.
Speaker 7: Right, So look, we can think of this.
Speaker 8: You know, the fed's decision is almost like a talk
Speaker 8: about physics, a three dimensional problem.
Speaker 1: Right.
Speaker 7: The first dimension is where is that neutral rate?
Speaker 8: Now you just highlighted a two point eight seven five percent,
Speaker 8: Let's call it three percent.
Speaker 7: Finally, let's just make that three percent.
Speaker 8: The second question is how quickly do you want to
Speaker 8: get there? And the third dimension of this whole thing
Speaker 8: is the unemployment component. Right, if the unemployment rate rises fast,
Speaker 8: then they're going to move fast.
Speaker 3: Right.
Speaker 7: So what my view is is that if we.
Speaker 8: Are in an inflationary environment, and I still believe that
Speaker 8: we are in one inflation stable for now, then that
Speaker 8: means that the Fed does not have a free shot
Speaker 8: at just cutting interest rates as aggressively without inflation picking up,
Speaker 8: and that could slow their rate of heightens Can we.
Speaker 2: Just spherical geometry?
Speaker 7: Do it?
Speaker 2: For George Struick of MIT years ago? But the bottom
Speaker 2: line is the elasticities of the x, y and Z
Speaker 2: axis there are different I agree with you that the
Speaker 2: mother of all elasticities for your post election is the
Speaker 2: labor economy and the unemployment.
Speaker 8: Right right, Yeah, And so my suspicion here again this
Speaker 8: is a suspicion, is that one of the things that
Speaker 8: triggered the Fed to move as aggressively as they did
Speaker 8: is that they may may think that the employment situation
Speaker 8: is worse than what the data is actually telling us,
Speaker 8: and that they do need to move quickly today.
Speaker 3: So this goes back to.
Speaker 8: The thought that if they go fifty, what are they
Speaker 8: telling the markets? Should we be nervous. I'm a little
Speaker 8: concerned here and I want to be very clear about that.
Speaker 8: I want to admit that that I think the unemployment
Speaker 8: rate is probably really higher than what is actually being
Speaker 8: forecasted in the data. And remember this data gets revised
Speaker 8: all the time, and I think, as David Kelly was saying,
Speaker 8: from that other bank, I think it's another bank. You know,
Speaker 8: he may be correct about this, right, you know, you
Speaker 8: could get into.
Speaker 5: A period of time that data is maybe not as accurate.
Speaker 8: So look, I mean all of the statistics that have
Speaker 8: been coming through, well, first of all, we had an
Speaker 8: eight hundred and forty thousand revision to payrolls, you know,
Speaker 8: lower than what we thought, right, So, like the run
Speaker 8: rate is much lower, we.
Speaker 7: Got that, we got that last month.
Speaker 8: We have a significant amount of immigration, right, so we're
Speaker 8: still trying to calculate all of the people. Like the
Speaker 8: labor force grew. When the labor force grows when the
Speaker 8: economy is really strong and the unemployment rates three point
Speaker 8: five percent, that's great. When things start to slow down,
Speaker 8: a really large labor force is actually can actually be
Speaker 8: a little bit of a dead weight drag on the
Speaker 8: economy because what that means is that you have a
Speaker 8: lot of people looking for a and less jobs available.
Speaker 8: That unemployment rate can go up quite a bit. So
Speaker 8: that reflexivity argument that Tom's making is actually extremely important.
Speaker 8: Like if the unemployment rate today was five point two percent,
Speaker 8: were having a different discussion right now.
Speaker 2: So go mertiner telleb on you. The point here, folks,
Speaker 2: of all this blather, which only Jim Karen can do
Speaker 2: with this prodigious physics ability, is there's an assume belief
Speaker 2: that we have a resilience what the physics world will
Speaker 2: be tensile strength to withstand these shocks. Blooney, we don't
Speaker 2: nobody listening except for old farts understands it. A five
Speaker 2: percent unemployment rate changes the dialogue.
Speaker 7: Yeah, absolutely.
Speaker 8: I mean look, I mean you know, you know this
Speaker 8: is where the markets really start to lose steam. And
Speaker 8: I think this is what the FED is worried about
Speaker 8: the most. So what they're communicating is that they will
Speaker 8: be very aggressive in order to defend that four point
Speaker 8: four percent unemployment rate level. And that's what we have
Speaker 8: to watch because it may be difficult for them to defend.
Speaker 5: Jim, you're sticking around, You're not going ahead.
Speaker 8: I still want to talk Jets Patriots, by the way,
Speaker 8: it's their best game of the night.
Speaker 7: It's the best game of the Whost season, by the way.
Speaker 2: Wait wait wait, wait, wait wait wait. Larian came in yesterday
Speaker 2: because he got tickets to the Jets. Is that why
Speaker 2: you're here today?
Speaker 7: You're going I'm a Patriots fan. No, I'm not.
Speaker 2: I'm just beside. Take a note. We got to get
Speaker 2: Jim Carron and Muhammad Hlarian together. Yes, I just got
Speaker 2: an emil from Boston. Enough of the Jets. Now, Sweeney
Speaker 2: won't talk about this because the future Tom Brady's a
Speaker 2: U n C guy exactly, But I mean, you got
Speaker 2: Jacoby and this guy from UNC. Is it a rebuilding
Speaker 2: year for the Patriots or is it? Like, let's go now.
Speaker 7: I think it's a rebuilding year.
Speaker 8: Look, I mean the Patriots have had some you know,
Speaker 8: has had a tough go of it. But this why
Speaker 8: I'm excited about the Jets game, right, because the Jets.
Speaker 8: It's always kind of random with the Jets, right, you
Speaker 8: just never know what you're gonna get. I know, their
Speaker 8: favorite to win, their favorite to win by about six.
Speaker 8: I think the total points score in the game is
Speaker 8: just under forty points, so it's gonna be a relatively
Speaker 8: low scoring So it could be very interesting to very
Speaker 8: evenly matched.
Speaker 2: Well, we didn't want to talk to you about this.
Speaker 2: I want to know who's doing better, Brady or Belichick.
Speaker 2: Brady's doing better, Yeah, I think so.
Speaker 4: I hope You've had a whole generation of Patriots fans
Speaker 4: that have only known winning and winning Super Bowls.
Speaker 8: What's the mindset for the folks depends how all that
Speaker 8: Patriots are, Okay, because I have like maybe twenty years
Speaker 8: of really really bad memories, right right, So yeah, very true.
Speaker 2: Let us continue here with Jim Karen and Morgan Stanley
Speaker 2: and and where we are yesterday. A lot of smart people,
Speaker 2: we're talking the Jim Karen dialogue. They're watching spreads. Tell
Speaker 2: me you're mortals, now, how odd your bond market is
Speaker 2: in what spreads will do given the Powell's soft landing.
Speaker 8: So this is this is positive for risky assets and
Speaker 8: credit spreads. Just broadly speaking, Powell is basically saying that
Speaker 8: he is going to stand behind and support this market.
Speaker 8: If we look at default rates, default rates have been
Speaker 8: coming down, specifically Tom default rates have been coming down
Speaker 8: even in the triple C space, So even in the
Speaker 8: part of the credit market that people are worried about
Speaker 8: the most, so the lower credit echelons, triple c's, those
Speaker 8: spreads have actually started to come in as as well. Now,
Speaker 8: if that starts to happen, then what you're going to
Speaker 8: see is a decline in the overall yield for high yield,
Speaker 8: and it makes it a very positive setup for these assets.
Speaker 8: And let's not just talk about high yield. We can
Speaker 8: also talk about private credit, private assets, all of these
Speaker 8: other things all are competing with each other for for returns.
Speaker 8: So as these bond yields and these credit spreads start
Speaker 8: to come in, money is going to start to follow it.
Speaker 8: And I think this becomes positive not just for bonds,
Speaker 8: but also frequities.
Speaker 4: I mean, I'm looking at the iend go function on
Speaker 4: the Bloomberg terminal, the Bloomberg Bloomberg Index browser. Boy, the
Speaker 4: best return has been in that US corporate high yield
Speaker 4: market up seven point five percent year to data. I mean,
Speaker 4: that is really strong, particularly given the brutal twenty twenty two.
Speaker 4: The fixed income market dealt with a little bit of
Speaker 4: it thanks to November December twenty twenty four.
Speaker 5: Twenty three came out okay, but issue looks pretty solid.
Speaker 8: Yeah, So fortunately I'm happy to say that we've been
Speaker 8: overweight high yield all year or so, even counter to
Speaker 8: popular you know views.
Speaker 7: At some points.
Speaker 8: So look, high yield has two things going forward. Number one,
Speaker 8: the majority of the high yield index is actually the
Speaker 8: higher quality is actually double bees, which means that high
Speaker 8: yields has a longer duration, so they have more interest
Speaker 8: rate sensitivity built into them. So as rates start to
Speaker 8: come down, high yield is also getting the benefit of
Speaker 8: the decline and interest rates in addition to the decline
Speaker 8: and default risks, particularly in the lower credit segments of
Speaker 8: that overall index.
Speaker 7: Which is which are the triple c's.
Speaker 8: So put those two things together, and high yield starts
Speaker 8: to look very attractive, or it's looked very attractive. It's
Speaker 8: it's becoming, you know, maybe a bit more pricey right now.
Speaker 8: But there's no reason to believe that you're not going
Speaker 8: to really get that coupon minus some of that default risk.
Speaker 8: And that's what the markets are betting on right now.
Speaker 4: You know, as a former investment banker, I pay attention
Speaker 4: to new new issues and the equity markets, and in
Speaker 4: the bond market, boy, the bond market, they've been issue
Speaker 4: has been coming to market like crazy do you guys
Speaker 4: pick up the phone when they call you.
Speaker 8: Look absolutely and talk about issuance and technicals and supply.
Speaker 8: One of the things that's been interesting about high yield
Speaker 8: is that the technicals are so positive that the net
Speaker 8: supply of high yield is negative, meaning that you know,
Speaker 8: so there's been gross issuance in the high yield market,
Speaker 8: but on net there's been more things maturing and you know,
Speaker 8: versus what's been being issued, so on net the supply
Speaker 8: is actually negative. So not only do you have some
Speaker 8: positive fundamentals support from Powell, but you also have supply
Speaker 8: technicals that have been very strong, and like you said,
Speaker 8: you know you're putting up some pretty good numbers this year.
Speaker 2: Wow.
Speaker 5: So what do we do here? I guess, you know,
Speaker 5: think about total risk here?
Speaker 3: Where do I go?
Speaker 4: Where is it better equities, fixed income, alternative investments? Where
Speaker 4: do you guys see the best opportunities? And I guess
Speaker 4: what is a solidly declining interest rate environment?
Speaker 8: So so let me say that we're also overweight equities at
Speaker 8: this point. We have more of a risk on until
Speaker 8: towards EC The thing that we have to recognize here
Speaker 8: is that if you look at twenty twenty five full
Speaker 8: year earnings for equities, it's around two hundred and eighty dollars.
Speaker 3: Now.
Speaker 8: The view there is that you would get a PE
Speaker 8: multiple decline, it would come into like nineteen nineteen and
Speaker 8: a half, and that would suggest that, you know, maybe
Speaker 8: earnings come down as well and you get a lower
Speaker 8: equity price. But what's starting to happen right now is
Speaker 8: that two hundred and eighty dollars earnings number for twenty
Speaker 8: twenty five is becoming more believable. People are assigning a
Speaker 8: twenty or even a twenty.
Speaker 7: One PE multiple to that.
Speaker 8: So you're getting numbers that are getting up towards that
Speaker 8: fifty eight hundred and fifty nine hundred, and I know
Speaker 8: that's you know, obviously what's going on today, all of
Speaker 8: that is.
Speaker 7: Getting pulled forward.
Speaker 8: That's my concern with equities right now is that we're
Speaker 8: pulling forward all of that twenty twenty five potential good news,
Speaker 8: and it's happening right now. So now as we go forward,
Speaker 8: it's going to be about show me, show me the data,
Speaker 8: show me the numbers as we move through the fourth quarter,
Speaker 8: as we move through the first quarter, and you know,
Speaker 8: we're priced, I don't want to say to perfection, but
Speaker 8: pretty close.
Speaker 2: So what if we pull forward buns, price up, yelled down,
Speaker 2: spreads it, you know, odd levels to say it's the
Speaker 2: same thing in bonds. I'm sorry.
Speaker 8: So you're absolutely right, and that's why we're underweight fixing.
Speaker 8: We're underweight duration here even though the Fed's cutting and
Speaker 8: we expect because the markets have already priced this in right,
Speaker 8: we're already looking at a ten year note that's around
Speaker 8: three point seventy five percent, a two year that is
Speaker 8: not three point six percent. You know, if the yelkur steepens,
Speaker 8: I mean, how much further can these bond.
Speaker 7: Yees go down? Even if the FED goes to three percent?
Speaker 7: I mean, how much further can foniles go down?
Speaker 2: Can we link our ute? Let's do this now with
Speaker 2: James Karen. I went up to Orno where they have
Speaker 2: a black bear to see a total eclipse of the
Speaker 2: sun as a wreck at my father was in and
Speaker 2: we had to stop at Boden and stare at one
Speaker 2: hundred and thirty two year old observatory. It was like
Speaker 2: the original thing. A student died in a rock climbing
Speaker 2: accident and his father put up the money to rebuild
Speaker 2: that puppy in Boden. Did you go into that observatory
Speaker 2: as a kid in physics?
Speaker 7: Absolutely, it was a right of passage. Yeah, you had
Speaker 7: to get joy it.
Speaker 8: Yes, I mean now it's such a historic thing. Absolutely, Yeah,
Speaker 8: there's no question. And that eclipse was pretty interesting this
Speaker 8: time around.
Speaker 2: Yeah, it was great. But the Boaden what's explained to
Speaker 2: our audience. What's it like to be a brady nineteen
Speaker 2: year old in physics and you got to sit there
Speaker 2: and put your eye up and say, oh, that's the
Speaker 2: moons of Jupiter. Mean, it gets you right back to
Speaker 2: the sixteen hundreds.
Speaker 8: It's humbling it, There's no question. It's a humbling experience
Speaker 8: when you're surrounded by so many smart people and you
Speaker 8: realize that you know as much as you want to,
Speaker 8: you know, think, you.
Speaker 7: Know, think of yourself.
Speaker 8: You realize that there's a bigger universe around you, and
Speaker 8: it gives you a lot of perspective. And I think
Speaker 8: that's the one thing that I really learned and took
Speaker 8: away from that.
Speaker 2: We got to do you and l Area and at
Speaker 2: some point your patriots and just Jip Careen thank you
Speaker 2: so much. With Morgan Stanley really informative there. If you
Speaker 2: look at somebody's Razumi on LinkedIn, you can say, well,
Speaker 2: this was easy, you know, you know, you drop by
Speaker 2: the Treasury and you do some John Taylor kind of
Speaker 2: Johnstone International stuff, and then you go to the White
Speaker 2: House and the worst coffee in the world. They serve
Speaker 2: coffee and styrofoam cups at the White House. Everybody goes
Speaker 2: out to Charbucks. Then you go over to the Feller
Speaker 2: Reserve and he Echoes building and you polish the table
Speaker 2: for the governors and the presidents. And then if you
Speaker 2: get lucky, you become chief us economist for Bloomberg. And
Speaker 2: it starts somewhere. For Anim Wong, it started with one
Speaker 2: of my favorite people. He defined the study of gold
Speaker 2: with golden fetters a number of decades ago, Bury King
Speaker 2: Green at Berkeley. What was it like in a lecture hall?
Speaker 2: How intimidating was it with Ke and Green?
Speaker 1: It was actually a small seminar. So even worse, he's
Speaker 1: not an intimidating at all. He's just a sweet historian.
Speaker 1: He's very into details and very meticulous in his impairicle.
Speaker 2: Work, in the empirical work. Bring that forward to where
Speaker 2: you are with a question the most influential call in
Speaker 2: American economics that you forget about our started Williams. That's
Speaker 2: old news birth debt in our misguess on the labor economy,
Speaker 2: how oft the mark are we right now?
Speaker 1: I think my estimate is that every month the non
Speaker 1: farm payroll is overstating by an average of ninety one
Speaker 1: thousand per month. So if the three month average moving
Speaker 1: average from June, July and August is one hundred and
Speaker 1: sixteen thousand, I mentioned that yesterday though, so basically the
Speaker 1: true underlying pace is probably closer to twenty thousand.
Speaker 2: Does that migrate to a negative statistic as David Kelly
Speaker 2: and JP Morgan talks.
Speaker 1: About, Well, I think that would be very close to
Speaker 1: saw speed. So if the FETs an estimate of a
Speaker 1: even pace of job growth required to stabilize unemployment rate
Speaker 1: is about two hundred thousand, and the economy is only
Speaker 1: producing twenty thousand per month, yeah, then that that.
Speaker 2: Was well, that's jargon. Small speed is what the Boston
Speaker 2: Red Sox are doing right now?
Speaker 5: Continue Why are the overcounting again? What's the miscalculation? Right?
Speaker 1: So, in an economic downturn, there's just a lot of
Speaker 1: firms going, you know, bankrupt piling Chapter eleven, and we
Speaker 1: have seen as a mid year a thirty one percent
Speaker 1: rise in Chapter eleven filings and at the same time
Speaker 1: business formations is slowing. So as a result, the BLS
Speaker 1: estimate the job growth from net birth and death firms
Speaker 1: right because they tend to get these data only a
Speaker 1: year later.
Speaker 9: With the QCW. Powell mentioned qc.
Speaker 1: W yesterday, I predict that the qc W will be
Speaker 1: the next CPI supercore Like now that Powell has mentioned
Speaker 1: that he's going to mentally adjust the non farm payrolls
Speaker 1: according to qc W, everybody would be paying attention to
Speaker 1: the next qc W update, which we would be for
Speaker 1: the second quarter. We estimate that the second quarter actually
Speaker 1: did see a sharp rise in bankruptcies and slowed down
Speaker 1: in job formation. That was a quarter when non farm
Speaker 1: payroll in April was probably negative once you adjust for
Speaker 1: the adjustment.
Speaker 4: Well, is the Fed now behind behind behind dealing with
Speaker 4: the labor market, do you think? And that may be
Speaker 4: one of the reasons why he went fifty basis points
Speaker 4: in not twenty five.
Speaker 1: So Powell did not acknowledge that, but but I think
Speaker 1: they are now back.
Speaker 9: On the curve. They used to be behind. Now they're
Speaker 9: back when.
Speaker 2: You look at the Let's bring this back to English. Okay,
Speaker 2: let's move away from your you mentioned Imperial professor Eichingreen.
Speaker 2: Let's move it to English model what you just said
Speaker 2: over to the tip point. Mentally, in the country of
Speaker 2: four point x five point x unemployment rate, when do
Speaker 2: we emotionally get into stall speed on the unemployment rate?
Speaker 1: That is the hardest question I've ever heard, emotional stall speed.
Speaker 2: You know Austin, Goldsby and Booth would have done that.
Speaker 2: You know, come on, I mean, when does the unemployment
Speaker 2: rate become politically painful in this nation?
Speaker 1: Hi?
Speaker 2: Ana Wong? Is it four point five point one per
Speaker 2: do I gotta wait for six?
Speaker 9: Well?
Speaker 1: Four point eight is there already? In fact, now is
Speaker 1: already there. You talk to anyone on the street, they
Speaker 1: will tell you not Wall Street, Main Street. They would
Speaker 1: tell you that it's hard to find a full time job.
Speaker 1: They can only find part time jobs, and they have
Speaker 1: to find a lot of hard time jobs in order
Speaker 1: to pay the bill. And in fact, this will show
Speaker 1: up in the household survey data if you're drill into
Speaker 1: the details. So micro Micro's data shows that, in fact,
Speaker 1: the reason why prime age employment is at peak was
Speaker 1: because a lot of Native workers are working part time,
Speaker 1: not full time as in a typical healthy labor market cycle.
Speaker 4: What is the immigration policies or experience over the past
Speaker 4: two or three years with a lot of the migration
Speaker 4: coming in on the southern border, how does that affect Again,
Speaker 4: what's the analysis showing you how's that affecting the labor market?
Speaker 1: Yeah, so, our estimate is that the unemployment rate of
Speaker 1: the new immigrants who came in since twenty twenty two
Speaker 1: is about eleven percent right now, So I think they
Speaker 1: it takes time to integrate them in the labor market,
Speaker 1: and during this transition period is when they could push
Speaker 1: up the unemployment rate.
Speaker 9: So it really.
Speaker 1: Depends on whether the labor market is healthy enough to
Speaker 1: quickly absorb them.
Speaker 2: Okay, I got time for one more question because you
Speaker 2: didn't answer my last question. You went around it like
Speaker 2: a pro. The answer is when does the unemployment rate
Speaker 2: become stressful for all including the Central bank? Near that
Speaker 2: or does Anaalog frame that out to June of next
Speaker 2: year or even out farther. How close are we to
Speaker 2: labor stress?
Speaker 1: So if you think that four point eight percent is
Speaker 1: when people are obviously alarmed about the possibility of recession.
Speaker 1: Then I think in the November payrolls, it's possible that
Speaker 1: you could see the unemployment eight rising to four point
Speaker 1: five for sec.
Speaker 2: Here November, first week in November, first.
Speaker 1: Week of December, November one, so that would be the
Speaker 1: October payrolls. It's possible that that, judging by the unemployment flows,
Speaker 1: that could show four point five percent.
Speaker 2: I rarely do this, Paul. I'm going to editorialize that
Speaker 2: Powell set these people down at the FED and he
Speaker 2: said we got to get out front of the November
Speaker 2: October payrolls, November first week in November, right around the election.
Speaker 4: At that point, what's the greatest risk here to this
Speaker 4: economy right today?
Speaker 5: Is it the labor marketing?
Speaker 9: It is both labor market and the election.
Speaker 2: Ah me go there next time I drag icon Green
Speaker 2: in here, you gotta show up.
Speaker 9: You know, definitely Advisor, we got we gotta get.
Speaker 2: You both in here. He's been huge support for decades
Speaker 2: for me and his paper at Jackson Hole. Last year
Speaker 2: on debt and deficit was outstanding. It was really got
Speaker 2: some splash animog. It's August I can't call you the
Speaker 2: Economist of the Year yet. It's too early. It's like
Speaker 2: the oscars. I gotta wait. But you're killing it. ANAMG
Speaker 2: for Bloomberg Economics and with a team around her internationally extraordinary.
Speaker 2: We're doing great work. Of all. How do you get
Speaker 2: a job at Bloomberg and work out of Barcelona?
Speaker 3: What is that about?
Speaker 5: Let me know if you figured out Madrid.
Speaker 2: I mean, you know, it's like it's unreal. Animong there
Speaker 2: on your labor economy into the end of the year.
Speaker 2: This is a Bloomberg Surveillance podcast, bringing you the best
Speaker 2: in economics, finance, investment, and international relations. You can also
Speaker 2: watch the show live on YouTube. Visit the Bloomberg Podcastest
Speaker 2: channel on YouTube to see the show weekday mornings from
Speaker 2: seven to ten am Eastern from our global headquarters in
Speaker 2: New York City. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen, and always on Bloomberg Radio,
Speaker 2: the Bloomberg Terminal, and the Bloomberg Business app.