Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: that responding to this economic data now is the Minneapolis
Speaker 2: Fed President Neil Kashgari, President kash Scary.
Speaker 3: Good morning, got to see you again, Good morning, good
Speaker 3: to see you.
Speaker 4: Rate a cats shop.
Speaker 2: I saw some comments from you yesterday, and for our
Speaker 2: audience that might have missed them, I'll share them with
Speaker 2: our audience.
Speaker 4: Now we can pick up on them.
Speaker 2: Then have to be a surprise on the inflation front
Speaker 2: to change the outlook so dramatically. If we saw inflation
Speaker 2: surprises to the upside between now and then, that might
Speaker 2: give us pause for December. It'd be hard to imagine
Speaker 2: the labor market really heat something between now and December.
Speaker 4: That's just not that much time.
Speaker 2: Inflation dates around just months ago, and I think in
Speaker 2: that to disrupt this easing bias that seems to have
Speaker 2: gripped the FED over the last few months.
Speaker 5: Well, first of all, it's very fresh data, so I
Speaker 5: haven't had time to go through it in a lot
Speaker 5: of detail, but at least on the headline level, it
Speaker 5: seems to be confirming the path that we're on.
Speaker 3: We've made a lot of.
Speaker 5: Progress in the last year or so bringing inflation down.
Speaker 5: I need to go through the components of that release,
Speaker 5: which I have not done yet, but generally speaking, goods
Speaker 5: inflation is back down to where we want it to
Speaker 5: be where it was pre pandemic. Services inflation, which is
Speaker 5: tied to wages, is gently trending down. And then finally,
Speaker 5: housing inflation, we know is a lagging indicator. We know
Speaker 5: that it takes a couple of years for the new
Speaker 5: leases to turn over, and the new leases.
Speaker 3: Are showing that we're headed in the right direction.
Speaker 5: So right now I think that inflation is headed in
Speaker 5: the right direction.
Speaker 3: I've got confidence about that, but we need to wait.
Speaker 5: We've got another month or six weeks of data to
Speaker 5: analyze before we make any decisions.
Speaker 6: One of the things that has been very noticeable the
Speaker 6: week is the change in investors' views about where you're
Speaker 6: going to end up. If you're looking at so for
Speaker 6: futures right now, the only price in about seventy five
Speaker 6: basis point cuts between now and the end of twenty
Speaker 6: twenty five. Are we entering a period because we don't
Speaker 6: know what Donald Trump's policies are actually.
Speaker 7: Going to be.
Speaker 6: Where the dot plot, the summary of economic projections are
Speaker 6: kind of off the table, can't really put a lot
Speaker 6: of faith in them, and that maybe you're in the
Speaker 6: layel brainer attenuation phase where you slow down everything and
Speaker 6: people should expect not a lot of guidance from the Fed.
Speaker 5: Well, you know, the dot plot is something that I
Speaker 5: at times I'm glad we have it, and in times
Speaker 5: it's more of a frustration that we have to fill
Speaker 5: it out because there's so much uncertainty about the economic outlook.
Speaker 5: Over the past year or two, I've been surprised at
Speaker 5: the resilience of the US economy in the face of
Speaker 5: seemingly quite high policy rates. Yet the labor market has
Speaker 5: stays strong and the economic growth continues to surprise. So
Speaker 5: for me, I've been asking questions about where's the neutral
Speaker 5: rate for the last year or two.
Speaker 3: That's not about the election.
Speaker 5: That's just about how the economy has been performing over
Speaker 5: the past year or two. And so you know, for example,
Speaker 5: there's been revisions that suggests that productivity is now higher
Speaker 5: that it had been in prior years. If that higher
Speaker 5: productivity environment is maintained, that would tell me we're probably
Speaker 5: in a somewhat higher neutral rate environment. Again, that's not
Speaker 5: about the election. That's just about how the economy has
Speaker 5: actually been performing. And so for me as a policymaker,
Speaker 5: that's what's leading to my own uncertainty about where's our
Speaker 5: ultimate destination. And I think that people are raising questions
Speaker 5: about what is the new administration going to do, what
Speaker 5: is the new Congress going to do? I think that's
Speaker 5: also adding uncertainty about ultimately what's the growth trajectory of
Speaker 5: the US economy.
Speaker 6: Well, Tom Barkin said yesterday your colleague from the Richmond Fed,
Speaker 6: that right now there's no way to know, so one
Speaker 6: has to just kind of assume that things are going
Speaker 6: to be maybe stuck inflation, stuck above two percent.
Speaker 8: Would you join in that sentiment.
Speaker 5: I'm not sure that I'm ready to say that inflation
Speaker 5: is stuck above two percent. I think it's right now
Speaker 5: running in the mid twes on.
Speaker 3: A PCE basis.
Speaker 5: And as I said earlier, goods inflation is backed down.
Speaker 5: Services inflation is tied to wages, and wages are gently
Speaker 5: trending down. And housing inflation, we know, is going to
Speaker 5: take a couple of years before completely before the new
Speaker 5: leases roll all the way through the housing inflation. So
Speaker 5: I have confidence that inflation is headed in the right direction.
Speaker 5: Is it headed there fast enough? Do we want it
Speaker 5: to get there more quickly? You know, we will see.
Speaker 5: But ultimately that and the labor market are going to
Speaker 5: guide our policy decisions.
Speaker 9: Well. Back in September, on the labor market, you said
Speaker 9: that the balance of risks had shifted towards a more
Speaker 9: weakening labor market. Do you think we've backed off that risk?
Speaker 9: Is it not as acute as it was since we've
Speaker 9: had the data since September.
Speaker 7: Yeah.
Speaker 5: We had seen some data piling up up until that
Speaker 5: September meeting, which was pretty much pointed in one direction,
Speaker 5: which was a softening labor market. We then had a
Speaker 5: surprise on the other way, the labor market looks stronger,
Speaker 5: but then a reversal in the subsequent good job report,
Speaker 5: and so I still think the labor market is softening.
Speaker 5: On four point one percent unemployment rate is a good
Speaker 5: unemployment rate.
Speaker 3: It's a good labor market.
Speaker 5: It's not as tight as it was a year ago
Speaker 5: or two years ago. So it's unquestioned that it has
Speaker 5: been softening. And right now we're in a good place
Speaker 5: in the labor market and we want to keep it there.
Speaker 5: You know, I do a lot of outreach to businesses
Speaker 5: large and small around my region, as well as labor
Speaker 5: unions around my region. Generally, what I hear is cautious optimism.
Speaker 5: People feel good about the outlook, but there are some
Speaker 5: trends that it's slowly softening, and we just want to
Speaker 5: watch that carefully.
Speaker 2: Know the election, We've got to talk about the election,
Speaker 2: and I know it's a difficult moment for the Federal Reserve.
Speaker 2: I think it's a difficult moment for managty policy makers
Speaker 2: worldwide for that matter. The Chairman down with it in
Speaker 2: the news conference, and it's pretty clear. We don't speculate,
Speaker 2: we can't make assumptions, but you're in the risk management business,
Speaker 2: and you've been in the risk management business for a
Speaker 2: long time. It predates your experience at the Federal Reserve.
Speaker 2: Do you think we've introduced two way risk in twenty
Speaker 2: twenty five, and when you think about the balance of risk,
Speaker 2: does that call for slow approach to any move in
Speaker 2: monetary policy one way or the other?
Speaker 3: Well, two way risk, I think we've already had two
Speaker 3: way risks.
Speaker 5: So we've got risks of the labor market continuing to
Speaker 5: soften and over softening, and then we've got risks of
Speaker 5: inflation potentially getting stuck. I'm not seeing a lot of
Speaker 5: upside risks yet we don't know what's going to get enacted.
Speaker 5: I'm not seeing a lot of upside risk that inflation
Speaker 5: is going to take off from here.
Speaker 3: The bigger risk that I'd be concerned about.
Speaker 5: In the inflation front is just if we're landing at
Speaker 5: around the two and a half percent level instead of
Speaker 5: back down to two percent level. I think that those
Speaker 5: risks existed before the election, and I think that there
Speaker 5: continues to be uncertainty now and we need to just
Speaker 5: be take our time, let the data come to us,
Speaker 5: and let that guide us. Ultimately, for me, this goes
Speaker 5: back to the discussion we had a moment ago about
Speaker 5: where's the neutral rate. There's tremendous uncertainty in my mind
Speaker 5: about where the neutral rate is, and the longer the
Speaker 5: economy continues to exceed expectations, the more signal I take
Speaker 5: that we must not be as restrictive as I would
Speaker 5: have assumed.
Speaker 1: FED staff analyzed though, during the first iteration of Trump
Speaker 1: the impact of the tariffs, and everyone coalesce around this
Speaker 1: idea that there was a one off increase in inflation.
Speaker 4: You can look through it.
Speaker 1: It wasn't going to be this vicious cycle and ongoing
Speaker 1: inflation threat. Did you agree with that assessment at the time,
Speaker 1: and do you still think that that's what tariffs could
Speaker 1: do in terms of inflation.
Speaker 3: I agree with that assessment at the time.
Speaker 5: I still agree with that, but I think your prior
Speaker 5: guest touched on it, which is it really depends on
Speaker 5: what the other countries end up doing. If there ends
Speaker 5: up being a tit for tat and one country raises terifts,
Speaker 5: they respond and you go back and forth, and definitely
Speaker 5: that could lead to a longer term imprint on inflation
Speaker 5: and potentially inflation expectations and of course, we don't know
Speaker 5: what our own tariffs are going to be, let alone,
Speaker 5: what other countries are going to respond with, and so
Speaker 5: we just need to be patient and see.
Speaker 6: I had a note come in from one of the
Speaker 6: Wall Street analysts that had a line that I thought
Speaker 6: was really valid, and that is that if you're going
Speaker 6: to forecast inflation, you have to have a theory of
Speaker 6: inflation and what's causing inflation. We've got relatively strong labor
Speaker 6: markets right now, and we've got concern about inflation. Real
Speaker 6: interest rates just keep rising and they're working in opposition
Speaker 6: to your rate cuts. What's your theory of inflation and
Speaker 6: how come we're seeing this kind of real rate reaction.
Speaker 5: Well, I've done a lot of soul searching on why
Speaker 5: I missed the inflation run up in the first place.
Speaker 5: I was surprised on the run up. I was also
Speaker 5: surprised on the disinflation that followed it. And the one
Speaker 5: thing that's been content is it was not the labor market.
Speaker 3: On the run up or the disinflation.
Speaker 5: It was mostly supply factors, and so you know, supply
Speaker 5: chains got gummed up.
Speaker 3: That took a lot longer to.
Speaker 5: Resolve the inflation took off, you the war in Ukraine,
Speaker 5: also pushing inflation up, and then many of those factors
Speaker 5: unwound or didn't get worse, bringing inflation back down. So
Speaker 5: monetary policy's role, in my judgment, in this episode, has
Speaker 5: been to keep long run inflation expectations anchored, and it
Speaker 5: has provided some gentle cool into the labor market. I
Speaker 5: don't think the supply factors are what have caused the
Speaker 5: labor market to gently cool. I do think monetary policy
Speaker 5: has been doing that. And so you put all that together,
Speaker 5: it says that when I thought we were applying two
Speaker 5: feet on the breaks of the economy with monetary policy,
Speaker 5: we might only have been applying.
Speaker 3: One foot on the break.
Speaker 5: And so this goes back to where ultimately are we
Speaker 5: going to settle. We're going to have to let the
Speaker 5: economy guide us.
Speaker 6: We are now paying as much attention to CPI again
Speaker 6: as we are to the labor market.
Speaker 4: But the labor market.
Speaker 3: Comes up in early December.
Speaker 6: We had a really really strong September.
Speaker 3: And a really really weak October.
Speaker 4: What do you where is the labor market as far
Speaker 4: as you're.
Speaker 5: Concerned, I think the labor market is in a good
Speaker 5: place right now.
Speaker 3: Again, the anecdotes that I get.
Speaker 5: I look at the data, the official statistics, which always
Speaker 5: have uncertainty. There's even more uncertainty about the labor market statistics,
Speaker 5: not just because of the hurricanes and the Boeing strike,
Speaker 5: but because of the large immigration flows, which are we're
Speaker 5: not exactly sure how big they are and their time varying.
Speaker 3: So what is this month's.
Speaker 5: Break even level of job growth? You know, your guest
Speaker 5: is as good as mine. So I look at the
Speaker 5: official statistics, and then I marry it to what we're
Speaker 5: all here in my colleagues and I from all of
Speaker 5: our contacts around the country. The labor market right now
Speaker 5: is strong. It's a healthy labor market. Jobs are available,
Speaker 5: businesses are feeling good.
Speaker 3: We want to keep it that way.
Speaker 5: And so as we get the data in, I'm going
Speaker 5: to continue to do my own outreach, and all of
Speaker 5: the other presidents are going to do their outreach to
Speaker 5: the businesses large and small, and labor groups to get
Speaker 5: a sense of is the labor market cooling slowly, is
Speaker 5: it heating up, or is it cooling quickly? And that
Speaker 5: will those will be important judgments into our policy deliberations.
Speaker 9: Your former colleague, Bill Dudley wrote a Bloomberg opinion piece
Speaker 9: earlier this week basically saying that there's this possibility that
Speaker 9: Trump enacts policy quickly and forcedly in a way that
Speaker 9: doesn't give the FED enough time to respond and without
Speaker 9: the proper tools to respond. Is that a concern you
Speaker 9: also share?
Speaker 5: I think fiscal policy is always an input into our
Speaker 5: deliberations and into our analysis and assessment of the economy.
Speaker 5: I don't think that's new now, and it's not just
Speaker 5: US fiscal policy. It's what happens with other countries, what
Speaker 5: happens with our trading partners, and so that type of
Speaker 5: uncertainty we're used to dealing with it. Obviously, we would
Speaker 5: like to have less uncertainty. That'd be great, but it's
Speaker 5: the world that we live in, and we will take
Speaker 5: all the information we can as we get it and
Speaker 5: incorporate it into our thinking.
Speaker 1: Speaking of uncertainty, there's been a lot of concern about
Speaker 1: what Trump two point zer would mean in tern of
Speaker 1: job voting, the FED, and how we felt about j.
Speaker 4: Powell.
Speaker 1: The FOMC had this plan during the first iteration of
Speaker 1: Trump that maybe they even move Powell to chair of
Speaker 1: the FOMC if he was going to take over the
Speaker 1: chairmanship of the actual FED. Would you basically all act
Speaker 1: as a group to potentially thwart anything that was coming
Speaker 1: at you that would negate the FED independence.
Speaker 7: We are all.
Speaker 3: Committed to our dual mandate goals.
Speaker 5: Everybody around the table, all of my colleagues, stable prices
Speaker 5: and maximum employment. So number one, we're all committed to
Speaker 5: those goals. Number two, I don't think those goals are controversial.
Speaker 5: I think everybody across the political spectrum wants us to
Speaker 5: get inflation all the way back down to two percent
Speaker 5: and wants to keep a strong labor market.
Speaker 3: So I think that also provides us a lot of support.
Speaker 5: And then there's built in continuity into the structure of
Speaker 5: the FED that Congress designed governors serve up to fourteen
Speaker 5: year terms, the presidents are independent, the presidents of the
Speaker 5: twelve reserve banks.
Speaker 3: These structures help us provide continuity.
Speaker 5: I'm confident that between the people who are there are
Speaker 5: commitment to our dual mandate goals and the structures that
Speaker 5: are in place, I'm confident that we will do the
Speaker 5: right thing and focus on the economy.
Speaker 3: The housing market.
Speaker 6: How do you explain what's going on the fact that
Speaker 6: prices aren't coming down, and if you keep rates higher
Speaker 6: than anticipated, we've already seen mortgage rates go up since
Speaker 6: you started cutting.
Speaker 3: The housing market dead.
Speaker 5: Well, the housing market as I've studied it, and this
Speaker 5: is an issue all around the country, the lack of affordability,
Speaker 5: not just for low income workers, but for middle class
Speaker 5: families and more. It's really one that we've underbuilt housing
Speaker 5: for the last decade following the Great Financial Crisis. We
Speaker 5: just structure the underbuilt housing, so there's a sense of shortage.
Speaker 5: And as I think back to the notion of a
Speaker 5: neutral interest rate, think about a neutral mortgage rate. If
Speaker 5: we have structurally underbuilt housing and there's a lot of
Speaker 5: demand for housing, what interest rate is going to clear
Speaker 5: that market? All else being equal, you would think a
Speaker 5: higher interest rate will clear that market. And so I
Speaker 5: think the housing market has its own unique dynamics that
Speaker 5: are going on that are driving these more than just
Speaker 5: a macroeconomic landscape and more than just monetary policy.
Speaker 6: So the Fed raises its hands and says it's not
Speaker 6: something we can fix.
Speaker 3: Yeah, we can't fix it.
Speaker 5: I mean, if we said we're going to cut interest
Speaker 5: rates to try to support housing affordability, setting aside the
Speaker 5: rest of our goals.
Speaker 3: What would that probably do? That would probably push.
Speaker 5: Up the price of housing, and so would that actually
Speaker 5: improve affordability? And so I don't think monetary policy is
Speaker 5: well suited to address the structural issues that are going
Speaker 5: on in the housing market.
Speaker 2: We've touched on absolutely everything. Can we finish on financial markets?
Speaker 3: Sure?
Speaker 4: You know them? Well? Are you worried about coming into
Speaker 4: an asset bubble?
Speaker 5: You know when I always go back to when chair
Speaker 5: then Chairman Green spent in nineteen ninety five declared irrational
Speaker 5: exuberant nineteen ninety five, you declared it, and the stock
Speaker 5: market went out for the next four years. I look
Speaker 5: at that episode and think if the FED had tried
Speaker 5: to use monetary policy to address that bubble, it would
Speaker 5: have done more harm to the economy than the fairly
Speaker 5: mild recession that followed when the tech bubble burst. And
Speaker 5: so I just think monetary policy is the wrong tool
Speaker 5: to try to address acid bubbles.
Speaker 4: Do you think there's something that needs to be addressed?
Speaker 5: Well, you know, bubbles are easy to spot in hindsight.
Speaker 5: If we really are in a higher productivity environment, if
Speaker 5: we're in a higher growth environment, and corporate earnings are
Speaker 5: going to continue to climb. One might look back and say, hey,
Speaker 5: these asset prices are not irrational. So it's hard to
Speaker 5: judge right now. If I knew where productivity was going,
Speaker 5: I'd be able to give you a.
Speaker 3: More definitive answer.
Speaker 2: Just look in the markets right now. Equity is very
Speaker 2: close to old time highs. We've got credit spreads that
Speaker 2: are at incredibly tight levels for investment grade tights than
Speaker 2: anything we've seen so farbus century for high YELD, I
Speaker 2: think you've got to go back to PREGFC and you
Speaker 2: know what happened next. We kind of get rights into that.
Speaker 2: We have authorities down in Washington, d C. It's some
Speaker 2: second administraction that could be kind of taxes going into
Speaker 2: that as well. What is something you'll write down with
Speaker 2: regards to that, What would you watch to say, actually,
Speaker 2: something coming on here that may be we need to
Speaker 2: pay a little bit more attention to well.
Speaker 5: From a financial stability perspective, traditionally, the biggest sources of
Speaker 5: financial instability are leverage and maturity transformation and the intersection
Speaker 5: of those two. That's why banks are inherently risky. Leverage
Speaker 5: tend to want or more they take overnight money and
Speaker 5: then they lend long into it. So, for example, a
Speaker 5: lot of people have looked at private credit and said,
Speaker 5: this is a huge growing asset class.
Speaker 3: Isn't a scary as I've looked into it.
Speaker 5: They seem to be much less levered than banks, and
Speaker 5: they generally have longer term funding. So in those two
Speaker 5: primary dimension of financial instability, leverage and maturity transformation, it
Speaker 5: doesn't seem to be riskier than banks, probably less risky
Speaker 5: than banks. So we continue to look for leverage, we
Speaker 5: continue to look for maturity transformation.
Speaker 2: No small as I'm going to say it, good to
Speaker 2: see you, thanks me, No cash canry there. The Minneapolis
Speaker 2: Fed President, Johnny guess Now is the JP Morgan chief
Speaker 2: strategist from JP Morgan Asset Management. David Kelly, David Gamon,
Speaker 2: it's your thoughts on this. So were on course for
Speaker 2: a red cut in December?
Speaker 7: I think we probably are.
Speaker 10: I think the key thing here is the Federal Reserve
Speaker 10: is not going to assume or speculate or predict what
Speaker 10: policy on tariffs and fiscal policy is going to be.
Speaker 10: I think they've got an idea where we're headed here,
Speaker 10: but they're just not going to put it into their thinking,
Speaker 10: and I don't think they want to pick a fight
Speaker 10: at this stage.
Speaker 7: They're going to have to have a fight.
Speaker 10: At some stage with the administration, but I don't think
Speaker 10: they want to pick it right now. So what I
Speaker 10: think they'll do is, you know, the markets are pricing
Speaker 10: in a quarter points, So if markets are pricing in
Speaker 10: a quarter point, they'll they'll they'll.
Speaker 7: Do the quarter point.
Speaker 10: But I will say that Marcus at this stage are
Speaker 10: only pricing two more rate cuts next year, and so
Speaker 10: the market are stopping short of the dopplot. The dop
Speaker 10: plot says the Fed keeps going another four rate cuts
Speaker 10: second half of next year or early twenty twenty six,
Speaker 10: and the market saying, look, given this agenda, the different
Speaker 10: pieces of this agenda, there's going to be too much
Speaker 10: inflation potentially the system, and too much debt growth in
Speaker 10: the system to remake that a rational policy.
Speaker 2: The e feed does not speculate, the market does. Which
Speaker 2: explains the daylight that's opened up over the past week
Speaker 2: or so, which you endorse that daylight opening gup?
Speaker 4: Do you think there's a good reason for it.
Speaker 10: I think the way that both the stock market and
Speaker 10: the bond market have acted is logical.
Speaker 7: I think that.
Speaker 10: We're I think the assumption is that we're going to
Speaker 10: get a big fiscal stimulus. Now it's going to have
Speaker 10: to go through the reconciliation processes. They don't have sixty
Speaker 10: votes in the Senate, So I think this is going
Speaker 10: to be a slow moving trade and everybody's going to
Speaker 10: be piling tax cuts on throughout next year, and so
Speaker 10: when it hits in twenty twenty six, it's a lot
Speaker 10: of fiscal stimus and just huge, massive deficits rising over
Speaker 10: the next decade.
Speaker 7: I mean, it's good.
Speaker 10: It is a really kind of scary thing, but that is.
Speaker 10: But that's not there yet. But what's going to happen
Speaker 10: over the next year. The thing that's really important here
Speaker 10: is tariff's just how aggressive and how quickly does it
Speaker 10: do we follow this this tariff agenda. Because the early
Speaker 10: smoke signal suggests that the new Trump administration is going
Speaker 10: to be very serious about putting in big tariffs fast.
Speaker 9: Well, the market has decided to look through it and say,
Speaker 9: maybe we don't expect indiscriminate tariffs, that it'll be more selective.
Speaker 9: If you look at a market like that and you're
Speaker 9: concerned about it and you're concerned with some of the appointments.
Speaker 9: Do you want to push back on some of this
Speaker 9: market pricing?
Speaker 10: Then yeah, I think i'd be I would be nervous
Speaker 10: just in terms of where people's portfolios are because if
Speaker 10: people have not rebalanced, there now way overweight US equity
Speaker 10: is a way of wait megacap US equities. So the
Speaker 10: market has got not only got richer, but it's also
Speaker 10: got more and more on balance over time. So I
Speaker 10: think this is a real time to think. Look, we
Speaker 10: moved from election uncertainty that's over to policy uncertainty, and
Speaker 10: there is a lot of policy uncertainty.
Speaker 7: And I agree with you though, you know, the first.
Speaker 10: Smoke signals suggests that the tariff approach is going to
Speaker 10: be very aggressive. But we'll have to see, because you know,
Speaker 10: there are people in American business who have got huge
Speaker 10: interests in being too aggressive. Here you've got trade agreements
Speaker 10: you've got to deal with and and you know, yeah,
Speaker 10: you're pushing up the price of stuff coming in. Everybody
Speaker 10: likes the tariff on their competitors. Results gonna be tariff
Speaker 10: on your suppliers, and I think that that could, that
Speaker 10: could there's gonna be a lot of conflict.
Speaker 1: Over these tariffs well in terms of the uncertainty personnel's policy,
Speaker 1: and so far Lightheiser has not been given the nod
Speaker 1: to go up to the Treasury Department, which many would
Speaker 1: view as antagonistic and aggressive. In terms of tariffs. We
Speaker 1: had tariffs, though in the first iteration of Trump the
Speaker 1: Biden administration kept some of those tariffs on. Do you
Speaker 1: view them as a one shot head to inflation that
Speaker 1: potentially you see an elevated price level then you can
Speaker 1: look through it, or do you think this could continue
Speaker 1: in the when it comes to reacceleration of inflation.
Speaker 10: Probably continues because you know, if you punch somebody who
Speaker 10: knows guess what, they're gonna punch you back. And so
Speaker 10: if we put on tariffs and they put tariffs on us,
Speaker 10: and you know, then I can't believe they put tariffs on.
Speaker 10: We're gonna put a bigger tariff in that, well you
Speaker 10: know I'm going cycle wells, yeah, I mean, that's why
Speaker 10: they call it a tariff war. You don't just get
Speaker 10: to unilaterally attack them, put tariffs on, expect nothing to
Speaker 10: happen to you. So the and by the way, it's
Speaker 10: not just on inflation. It's also on growth because we sell,
Speaker 10: we export two trillion dollars worth of goods in this
Speaker 10: country and all that is going to be a target
Speaker 10: now for countries around the world say, well, you're gonna
Speaker 10: put terror from us, We're gonna putter from that.
Speaker 2: Isn't that a bigger problem for Europe and China than
Speaker 2: it is in the United States? Relatively spake in Well, yeah,
Speaker 2: because we're on a trade deficit, So yes, it is.
Speaker 7: But you know, a tarif for a tarwerf will make
Speaker 7: the whole world poor. It is.
Speaker 10: You know, there are very few things that will that
Speaker 10: are sort of a stagflation elixir that can actually push
Speaker 10: inflation up and sew the economy down at the same time.
Speaker 10: I mean, I say this as an economist, and I
Speaker 10: think almost all people have been traded as economists over
Speaker 10: the years realize that both academically, you know, in theory
Speaker 10: and in practice, tariffs tend to slow down global trade.
Speaker 10: They make domestic columny companies inefficient, and they push up inflation.
Speaker 7: And they also push up inflation on.
Speaker 10: Lower income individuals because lower income households buy more goods,
Speaker 10: upper income households buy more services.
Speaker 7: This is going to be on goods.
Speaker 4: It sounds incredibly verish.
Speaker 9: But you also started out with saying that the markets
Speaker 9: moves have been logical in stocks.
Speaker 10: Well, yes, because there are all sets for stalks. One
Speaker 10: of them is that we could get a further cut
Speaker 10: in the corporate income tax and that has a huge
Speaker 10: impact on earnings, and nothing is more important for stocks
Speaker 10: than earnings. So if you do see a reduction in
Speaker 10: the corporate income tax rate from twenty one percent to
Speaker 10: fifteen percent for domestic production, that could have a big impact.
Speaker 10: And of course one of the other things beople going
Speaker 10: to be debating is what can I call this production?
Speaker 10: And so there's going to be a lot of debate
Speaker 10: around that. But I think those tax cuts for corporations
Speaker 10: will be positive with stock.
Speaker 1: Libby Cantrove PIMCO had a note about this last night,
Speaker 1: talking about how historically low and slim the margin is
Speaker 1: going to be. The Republicans in the House, no one.
Speaker 7: Can take a day off.
Speaker 1: The President Electrump might need to be careful who else
Speaker 1: he tries to pull from Congress to join his administration.
Speaker 1: Do you have conviction they will actually get that fifteen
Speaker 1: percent tax cut?
Speaker 10: Quite possibly, because I think you've got to look at
Speaker 10: I mean, I think that the you know, I'm not
Speaker 10: a political observer, but it would seem to be the
Speaker 10: Democrats were prett dispirited here.
Speaker 7: This is what the people have voted for, and.
Speaker 1: Democrats will sign up for fifteen percent corperate text.
Speaker 10: Right, Well, they don't have to in the House. You've
Speaker 10: just got to get you've just got to get fifty percent.
Speaker 10: And it looks to me right now if the vote
Speaker 10: stopped today, it will be two twenty two to two thirteen,
Speaker 10: So that's nine seeds.
Speaker 7: That's enough to get the thing through.
Speaker 2: Debad Kelly, A lot to look forward to over the
Speaker 2: next several years. It's got to see you, sir. Thank you,
Speaker 2: Devid Kelly there, JP Morgan, Kevin Gordon of Charles Swamp
Speaker 2: saying monetary policy might be hamstrung in twenty five. Much
Speaker 2: of the policy landscape is still to be decided. But
Speaker 2: if deficits widen out aggressively Hyatts Harris put upward pressure
Speaker 2: on inflation and immigration policy restricts labor force growth, it's
Speaker 2: plausible to see how the terminal rate might be raised.
Speaker 2: Kevin John just now for more, Kevin good Mornick and
Speaker 2: and raising that rate maybe for bad reasons and not
Speaker 2: good ones.
Speaker 4: Is that how you say things?
Speaker 11: Yeah, And I think it's tough because, of course, you know,
Speaker 11: this is all a guess at this point as to
Speaker 11: what policies are going to be put in place. And
Speaker 11: the thing I struggle with right now is if you
Speaker 11: look historically more sort of less aggressive FED easing cycles,
Speaker 11: if they're not going at every single meeting, or if
Speaker 11: they're not cutting by fifty basis points, that actually tends
Speaker 11: to be a healthier backdarp for the equity market. However,
Speaker 11: when you overlay all of the policy of uncertainty, especially
Speaker 11: from a tariff and a labor perspective, I think that
Speaker 11: introduces another set of risks. And you know the unfortunate
Speaker 11: part for the FED. I think you're talking about risks
Speaker 11: to inflation, but also risks to labor. It's not that
Speaker 11: the headwinds for the labor market have just gone away automatically.
Speaker 11: It's the fact that now you have to start thinking
Speaker 11: about and I do think it's early, but you do
Speaker 11: have to start thinking about the fact or the reality
Speaker 11: or really the possibility that you could be in a
Speaker 11: position in twenty twenty five where there are still significant
Speaker 11: headwinds to labor, but then you have some reflationary forces building.
Speaker 11: And I think the difference now is from a labor
Speaker 11: standpoint in particular, if that comes via more restrictions labor
Speaker 11: supply and you do get more of a sort of
Speaker 11: you know, fanning of the embers of from a wage perspective,
Speaker 11: I think that becomes a little bit more of an issue.
Speaker 4: Ken you know how this works.
Speaker 2: In moments of maximum uncertainty and low conviction, we all
Speaker 2: reach for a historical parallel. Yeah, we have a playbook
Speaker 2: the first Trump presidency. How useful is that playbook?
Speaker 6: You know?
Speaker 11: In some ways it's useful. In some ways it's incredibly
Speaker 11: not helpful. And I think the useful standpoint you could
Speaker 11: go back to, Yes, maybe the obsession with using tariffs
Speaker 11: as a tool, the obsession of looking at equity markets
Speaker 11: in particular and how they react to them.
Speaker 8: You could use that as a playbook.
Speaker 11: On the other hand, the economic environment could not be
Speaker 11: more different. I mean, you know, when Trump took office
Speaker 11: the first time, the uneployment rate still had more you know,
Speaker 11: to go to the downside. We were in that secular
Speaker 11: decline for the unemployment rate. You were in a relatively
Speaker 11: you know, healthy growth environment. You had twenty seventeen, which
Speaker 11: was basically the best you could get for across risk assets,
Speaker 11: where everything you know was sort of low ball and
Speaker 11: everything was rallying. The volatility didn't start to show up
Speaker 11: until the following year. There's just such a different setup
Speaker 11: this time. So I think that, you know, it is
Speaker 11: a knee jerk reaction to go back to that one
Speaker 11: era and say, you know, this is exactly how things
Speaker 11: can play out, but we're just facing a different set
Speaker 11: of circumstances.
Speaker 8: I would probably put.
Speaker 11: More emphasis or most emphasis on labor in particular, because
Speaker 11: when you look at the gap that has been filled
Speaker 11: from a labor force perspective over the past four years,
Speaker 11: it has been from the foreign born labor force. It
Speaker 11: hasn't been from the native foreign labor force. So if
Speaker 11: you are putting some sort of restriction on that, or
Speaker 11: if you're taking a chunk of that out, not all
Speaker 11: at once, but phasing that in over time, that does
Speaker 11: put some pressure on the labor market. From a growth
Speaker 11: perspective in terms of overall consumer spending and the power
Speaker 11: associated with it, but also from a wage and inflation perspective, too, But.
Speaker 9: To your point, we kind of have no idea what
Speaker 9: that's going to actually look at, like what form, what
Speaker 9: pace would amount for all of the policies. So in
Speaker 9: the meantime for twenty twenty four, before we have clarity
Speaker 9: on any of that, can you stand in front of
Speaker 9: this bullish train or do you just want to hop on?
Speaker 7: Well?
Speaker 11: I think that, you know, momentum is a powerful thing.
Speaker 11: I was just looking at the SP five hundred momentum index.
Speaker 11: It's having its best year since nineteen ninety eight, since
Speaker 11: nineteen ninety nine, but now we've nudged up.
Speaker 8: Just a little bit more.
Speaker 11: So it's hard to fight against that trend, especially when
Speaker 11: you've got you know, close to seventy five percent of
Speaker 11: members in the S and P trading above their two
Speaker 11: undred day moving average.
Speaker 8: Breadth has improved significantly.
Speaker 11: Down the cab spectrum, especially for the RUST of two
Speaker 11: thousand in particular.
Speaker 8: So you know, on the one hand.
Speaker 11: I wouldn't want to fight the tape that way, but
Speaker 11: on the other hand, I think that you do have
Speaker 11: to to some extent start looking at these policy narratives
Speaker 11: that are that are flying around for twenty twenty five,
Speaker 11: and you know, I've yet to see a model that
Speaker 11: has not suggested that the tariff, you know, the tariff
Speaker 11: implementation as it stands right now, if all of it
Speaker 11: was to be implemented, would not be stagflationary where you
Speaker 11: wouldn't get hit a hit to growth and you wouldn't
Speaker 11: get a boost to inflation. And that to me would
Speaker 11: be probably what comes first before you talk about sequencing earlier.
Speaker 11: I know, in the show of you know, potential fiscal stimulus,
Speaker 11: but also potential tariff policy from a unilateral perspective and
Speaker 11: not having to think about Congress, it would seem that
Speaker 11: everything unilateral from a tariff perspective probably comes first and
Speaker 11: you get maybe some sort of fiscal aid later down
Speaker 11: the road. But that's also harder because you were discussing,
Speaker 11: you know, the slimmer margin in the House.
Speaker 1: That may be, which is why shocking the market is
Speaker 1: pricing in these tax cuts, which do we actually get
Speaker 1: them if you have a one seat two seat majority.
Speaker 11: Even this discussion about pricing things in, you know, I
Speaker 11: find it hard to believe that over the past week
Speaker 11: the market is pricing in the next four years, you know,
Speaker 11: I think to me, just because the overwhelming consensus heading
Speaker 11: into the election was that it was going to be
Speaker 11: this drawn out process where we weren't going to know
Speaker 11: who the winner was for several weeks. The fact that
Speaker 11: you got such a decisive result, I think the market
Speaker 11: really treated as a clearing event and took that huge,
Speaker 11: you know, uncertainty chip off the table.
Speaker 8: So I don't think that we should.
Speaker 11: Be looking at, you know, the moves over the past
Speaker 11: week and thinkings that somehow suggests that this is what's
Speaker 11: going to be, you know, the dominant market force, or
Speaker 11: these are going to be the dominant parts of leadership
Speaker 11: within the market.
Speaker 8: And you know, just as a as a as a
Speaker 8: store of.
Speaker 11: Historical anecdote, if you go back to twenty sixteen, from
Speaker 11: election day to inauguration day of twenty seventeen, the market
Speaker 11: that we're rallying and that we're leading or are similar
Speaker 11: to what has been leading this time. But actually in
Speaker 11: the ultimate irony of it is that if you look
Speaker 11: at those groups and what their performance was in the
Speaker 11: following year, they ended up underperforming the so called Trump losers,
Speaker 11: which lagged from election day twenty sixteen to inauguration day
Speaker 11: twenty seventeen. So not to say that we get a
Speaker 11: perfect repeat this time. But I think you have to
Speaker 11: sort of take a step back as an investor and
Speaker 11: not get caught up in the election narrative and focus
Speaker 11: more on what macro forces are at play.
Speaker 9: Does that mean that this is a great opportunity to
Speaker 9: take some profits in some areas and where would that be?
Speaker 11: I mean, we've been in the camp that, you know,
Speaker 11: starting Midsummer that if you had seen some opportunities from
Speaker 11: the high flyers that had done really well, not just
Speaker 11: year to date, but over the past several years, and
Speaker 11: at that point it was more in the tech communication
Speaker 11: services parts of the market, then it made sense to
Speaker 11: do so, especially if you're more nervous about higher valuation
Speaker 11: and valuations just looking stretched in general. Those were a
Speaker 11: lot of the culprits or a lot of the culprits
Speaker 11: were in those sectors. So it had made sense from
Speaker 11: our perspective to start adding into maybe you know, deeper
Speaker 11: cyclical areas that hadn't done as well.
Speaker 8: And you know, for sort of all of the.
Speaker 11: Stress associated with the aggressive move in the market over
Speaker 11: the past week and how cyclicals have really started to rally,
Speaker 11: a lot of those areas were doing well before, so
Speaker 11: It's not as if there was this massive leadership shift
Speaker 11: where you now all of a sudden have to be
Speaker 11: concerned about what might do well in the next several
Speaker 11: months because the election somehow changed it.
Speaker 8: That isn't the case. So I view that as a
Speaker 8: relatively constructive backdrop.
Speaker 4: What do I do with the banks?
Speaker 2: Everyone's built up, Goldman's up by fifty four percent year today,
Speaker 2: Morgan Stanley's up by more than forty. I mean, pick
Speaker 2: a bank right now. They've absolutely ripped as well over
Speaker 2: the last week. What's I do with those names now?
Speaker 11: I mean, the momentum is strong for a sector like financials,
Speaker 11: The breadth is strong for a sector like financials, you know,
Speaker 11: for banks in particular. That's another area where I would
Speaker 11: be careful about drawing some sort of election related, you know, conclusion,
Speaker 11: because and again I don't want to just look at
Speaker 11: the first Trump administration and say it's going to be
Speaker 11: a similar or the repeat of what had happened, because
Speaker 11: the dynamic in the environment is different. But banks were
Speaker 11: the sixth worst performing sector during his administration. So it's
Speaker 11: not as if you can just say, oh, it's a
Speaker 11: pro growth administration or it's an anti growth or pro regulatory,
Speaker 11: anti regulatory, and tie that to what sector or what
Speaker 11: industry is going to outperform. So I would pay attention
Speaker 11: more to the underlying environment. And right now things look
Speaker 11: relatively strong. I think a year from now, if we
Speaker 11: do start to see more material hits from tariff policy
Speaker 11: or immigration policy, then I think it's a little bit.
Speaker 1: But when it comes to the banks, Trump is winning.
Speaker 1: When there's a time where you see the regulators at
Speaker 1: play under a Biden administration, if Kamala Harris did win,
Speaker 1: do you think we actually would see these move in
Speaker 1: these banks.
Speaker 8: It's out, you know, ultimate counterfactual.
Speaker 11: I think that, you know, regardless of what the who
Speaker 11: the winner was, I do think that if it was
Speaker 11: as decisive, if it was still as decisive, even if
Speaker 11: it went the other way, you would probably still have
Speaker 11: a similar reaction, maybe not as strong in the bond market,
Speaker 11: but that that's still to me.
Speaker 8: Is a really interesting move.
Speaker 11: The initial knee jerk move with the rise and yields
Speaker 11: and the rise in equities. You typically don't see that
Speaker 11: kind of move inequities. If yields were you know, shooting up.
Speaker 2: That much, and we can debank this because no one's
Speaker 2: wrong just by definition. We've got to look back and
Speaker 2: try and figure it out. At a guess, Harris Win
Speaker 2: a blue sweep, a big warrant influence. I don't think
Speaker 2: apollows up like almost twenty percent and six sessions, and
Speaker 2: I think you see that big run in region always
Speaker 2: all for the banks, Well, they would arrive that.
Speaker 1: They'd be doubling down on regulation, not this idea that
Speaker 1: the valve is going to open and maybe there will
Speaker 1: be this m and a activity of what Jane Frazier said.
Speaker 1: They're all game on, waiting on the sidelines and excited
Speaker 1: to get in.
Speaker 2: I think Kevin's absolutely right just clearing the event because
Speaker 2: the base case for a lot of people was this
Speaker 2: might take a while, and it didn't take it. While
Speaker 2: it was over by the time the sun rose the
Speaker 2: following morning.
Speaker 9: It is quite remarkable to literally pull up any volatility index,
Speaker 9: any volatility index on any asset class, a straight nose
Speaker 9: dive down. That's basically a green light to say, if
Speaker 9: you are a bull and you want to buy, you're
Speaker 9: an asset manager and you were scared of volatility, you
Speaker 9: can jump in now. And that's what we've seen.
Speaker 2: So what we saw overnight Kevin. It's good to see
Speaker 2: you overnight on election night. Just straight down, Kevin Golden.
Speaker 2: There of chowgh Swap. This is the Bloomberg Sevenants podcast,
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Speaker 9: M HM