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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: The President saying he has preferred fed Share candidate, but
Speaker 3: is in no hurry to make an announcement. Mark Banna,
Speaker 3: Bank of America joins us now for more. Mark, I
Speaker 3: am curious from your vantage point and good morning, how
Speaker 3: relevant you find all these comments job.
Speaker 1: Owning the Fedger Reserve.
Speaker 3: What's your takeaway when you hear President Trump continue to
Speaker 3: talk and really bash fetcher?
Speaker 4: Jerome Powell, good morning, Happy New Year.
Speaker 5: I hope you had a nice holiday with you your family.
Speaker 4: So our take is that we've heard this so many
Speaker 4: times before, and what we're really interested in is who
Speaker 4: is the individual going to be? What is their preference
Speaker 4: on policy broadly, and then will there be any further
Speaker 4: turnover or change within the Federal Reserve.
Speaker 5: It is a committee.
Speaker 4: We do know that it takes a number of individuals
Speaker 4: to move the needle on FED policy and impact interest rates,
Speaker 4: and we're really trying to figure out who that's going
Speaker 4: to be, what their preferences are, and how does the
Speaker 4: committee composition change. So we, just like the rest of
Speaker 4: the market, are waiting for guidance on this. So we
Speaker 4: do think it'll come relatively soon. As you know, at
Speaker 4: the end of January, that's when Stephen Moran's term ends.
Speaker 5: He can stay on, but we do expect that as his.
Speaker 4: Term comes to a close, we will get the nomination
Speaker 4: for the next FED chair. If it is an outsider,
Speaker 4: a e not Bowman or Waller, then they're going to
Speaker 4: likely want to be confirmed by the end of January,
Speaker 4: and then they will join the committee serving in a
Speaker 4: bit of a shadow chair capacity, and we're going to
Speaker 4: learn a little bit more about what their preferences are
Speaker 4: on rates and what that means for the general outlook
Speaker 4: for policy in the near future.
Speaker 6: Mar good morning, it's this guy. Is it important if
Speaker 6: Powell when he steps down, leaves entirely entirely or continues
Speaker 6: to retain a seat. Is that going to be important
Speaker 6: and how pivotal could it be?
Speaker 4: Yeah, it doesn't matter a lot because it influences that
Speaker 4: composition of the committee. As you know, it takes seven
Speaker 4: voters for any action at the FED. And if Powell
Speaker 4: chooses to stay, which would be historically unprecedented, then it
Speaker 4: will mean that there's probably less willingness to cut rates aggressively.
Speaker 4: If he leaves, it'll give the Trump administration one more
Speaker 4: seat in which they can potentially remake that committee and
Speaker 4: potentially then advocate for lower rates. History would suggest that
Speaker 4: Powell will step down, but this is indeed his decision,
Speaker 4: and if he goes, it's just going to mean one
Speaker 4: more vote for potentially lower rates and reference to likely
Speaker 4: overweight the unemployment side of the Fed's mandate versus the
Speaker 4: inflation side of the feds mandate.
Speaker 5: And look, when we think about the outlook.
Speaker 4: For interest rates over the course of twenty twenty six,
Speaker 4: we do think that the FED composition is extremely important,
Speaker 4: and that's one of the reasons that we do believe
Speaker 4: that the distribution of risk to the rate outlook is
Speaker 4: kewed to the downside, we do believe it means likely
Speaker 4: lower rates. It's deeper curve, lower real rates, higher inflation,
Speaker 4: lower volatility, which, by the way, I do think is
Speaker 4: quite a story for the end of twenty twenty five.
Speaker 4: That doesn't get a ton of airplay, but that low
Speaker 4: ball environment is so important for US rates, for US
Speaker 4: fixed income more broadly, for elements of the dollar, elements
Speaker 4: of the commodities trade and the goal trade that you
Speaker 4: were talking about before, and that FED composition does very
Speaker 4: much influence the outlook for rates and the outlet for
Speaker 4: VALL and we do think that that's going to be
Speaker 4: a very very relevant theme as we start twenty twenty six.
Speaker 6: Mark, I was thinking about this as well this morning.
Speaker 6: The move index that you guys create been tracking lower
Speaker 6: throughout the back half of the year. What I don't
Speaker 6: get is if I have a more volatile FED, if
Speaker 6: I have a more volatile FMC, why doesn't that translate
Speaker 6: into a more volatile market.
Speaker 1: Can you explain that?
Speaker 4: Yeah, So, the way that we think about it is
Speaker 4: that there may be disagreement within the FED, but as
Speaker 4: you get the shift in composition at the FED, what
Speaker 4: it does is it just narrows the range of potential
Speaker 4: rate outcomes, and as you increasingly staff the FED with
Speaker 4: individuals that are going to be advocating for at worst
Speaker 4: rates on hold or potentially lower rates, what it does
Speaker 4: is that just further trims the potential that rates will
Speaker 4: be moving higher. And as you narrow the range of outcomes,
Speaker 4: that does mean that VAUL should be moving lower and lower.
Speaker 4: Rate VAULT does touch a wide set of financial markets,
Speaker 4: and we do think that that's going to be a
Speaker 4: key and persistent theme over the first half of twenty
Speaker 4: twenty six. As you get later into twenty twenty six,
Speaker 4: the range of outcomes widens, there's midterms to consider and
Speaker 4: just natural uncertainty that that rises with time. But in
Speaker 4: the first half of twenty twenty six, we do things
Speaker 4: that VUL will remain low, and that's going to keep
Speaker 4: financial conditions quite easy, and that's going to be generally
Speaker 4: supportive for the growth backdrop. As long as you have
Speaker 4: FED that's not hiking, then you've got really only, you know, either.
Speaker 5: Stable rates or lower rates to seriously consider.
Speaker 3: I can think of all the metals traders out there
Speaker 3: listening to this conversation and saying, but gold it's telling
Speaker 3: us something.
Speaker 1: What is it telling us?
Speaker 3: The idea that copper has been on a tear, that
Speaker 3: silver has been on a tear, that you have seen
Speaker 3: a depreciation of the dollar, and frankly and underperformance of
Speaker 3: US assets in relation to some of these precious metals.
Speaker 3: Do you think that this is telling you of some
Speaker 3: kind of inflationary impulse that will come out in what
Speaker 3: we're seeing with respect to steeper yield curves and even
Speaker 3: if it's not volatility, that that will grind wider throughout
Speaker 3: the year and potentially put a cap on some of
Speaker 3: that risk appetite.
Speaker 5: Well, we do.
Speaker 4: I mean, look, we think it's going to be a
Speaker 4: dynamic that is characterized by very strong growth, by inflation,
Speaker 4: albeit sticky that generally gets overlooked in favor of driving
Speaker 4: a continued strong labor market and keeps it all out.
Speaker 4: All of those things will be very, very supportive of growth,
Speaker 4: and I do think that metals are very consistent with
Speaker 4: that right now. Doctor Copper, as you mentioned, certainly is
Speaker 4: telling me that growth is going to be very strong
Speaker 4: globally over the course of twenty twenty six. What we
Speaker 4: see in gold and silver, there's no doubt some technicals
Speaker 4: that are at play there that drove the very very
Speaker 4: sharp spike in silver and then slight rebound or slight
Speaker 4: decline that we've seen over the last few days.
Speaker 5: But I do think that there is a bit of
Speaker 5: a debasement concern there.
Speaker 7: I e.
Speaker 4: Central banks, especially the FED, that may be a little
Speaker 4: bit more dismissive of inflation than they've traditionally been, and
Speaker 4: that should mean weaker dollar, should mean lower rates, and
Speaker 4: that again should be tailwinds broadly for financial conditions.
Speaker 5: All of this points to a better growth backdrop.
Speaker 4: All of this points to a very supportive backdrop for
Speaker 4: activity and continued easing in financial conditions of the course
Speaker 4: of twenty twenty six. We think the biggest risk do
Speaker 4: all of that is inflation. The biggest risk is that
Speaker 4: the FED has to consider raising rates at some point
Speaker 4: over the course of next year. We put very low
Speaker 4: probability on that right now. The market does as well
Speaker 4: it seems, but that would be the biggest shift that
Speaker 4: could potentially throw a wrench into the low ball and
Speaker 4: easy financial conditions and high overall base metal price conditions
Speaker 4: that we are currently seeing today.
Speaker 3: So next year we're going to see the one big
Speaker 3: beautiful bill. In some of the tax cuts that people
Speaker 3: are already expecting, we could potentially see two thousand dollars
Speaker 3: checks sent out.
Speaker 1: To different individuals.
Speaker 3: There is a concern about budget deficits, especially if AIPA
Speaker 3: is overturned.
Speaker 1: What happened to bond vigilantes? Are they of sleep? Do
Speaker 1: they not exist?
Speaker 3: Is that going to be a story that's going to
Speaker 3: come back in twenty twenty six?
Speaker 4: It could right now. You're right, Lisa, that the market
Speaker 4: is very unconcerned with that. If you look at asset
Speaker 4: swap spreads in addition to VALL, they tell you that
Speaker 4: the bond vinchil Anti concerns are very very low. We
Speaker 4: think that they remain at bay and a big part
Speaker 4: of that is due to changes that we are seeing
Speaker 4: with US Treasury issuance changes very technically that the FED
Speaker 4: is pursuing in terms of these reserve management purchases and
Speaker 4: the addition of liquidity that we're seeing to really better
Speaker 4: anchor repo rates in the Fed's target range, and potentially
Speaker 4: changes that are happening on the regulatory front for banks
Speaker 4: and as well as dealers. There's also important market structure changes,
Speaker 4: very technical in nature that I won't go into in
Speaker 4: great depth, but you're going to get cross margining benefits,
Speaker 4: you're going to get something called collateral and loo. All
Speaker 4: of these things we do think will be supportive of
Speaker 4: increasing dealer intermediation capacity. And what that will mean is
Speaker 4: that you're just going to have a better environment for
Speaker 4: risk taking and fixed income, specially in the treasury market.
Speaker 4: And that should mean that you don't get these type
Speaker 4: of bond vigilanity concerns in a big way.
Speaker 5: It helps a lot.
Speaker 4: The Treasury is really only increasing issuance at the very
Speaker 4: front end of the curve where duration risk is very,
Speaker 4: very minimal, and what that should mean is that that
Speaker 4: will limit those concerns of bard and vigilantes from really
Speaker 4: taking off despite all of the headwinds that you just mentioned.
Speaker 6: Well, can I come that question from a different angle.
Speaker 6: I'm talking a little bit about market structure. There is
Speaker 6: an increasing more we're seeing the treasury market being held
Speaker 6: increasingly by private foreign holders, right and the data you
Speaker 6: look at, the ticket data that supports that when you
Speaker 6: get shifts in sentiment, does that mean that you're going
Speaker 6: to see those shifts in sentiment being amplified because traditional
Speaker 6: reserve managers although kind of more stable position, private owners don't,
Speaker 6: and therefore are likely to change opinions and more dramatically
Speaker 6: once once the ground.
Speaker 5: Shifts under them.
Speaker 6: If we do see some sort of a change in
Speaker 6: twenty twenty six, if inflation is a problem, does that
Speaker 6: mean the magnitude of that shift is going to be
Speaker 6: even greater?
Speaker 5: It certainly could.
Speaker 4: Now when we think about ownership of treasuries, you rightly
Speaker 4: highlight that private foreign demand has been remarkably resilient despite
Speaker 4: all of the concerns that were evidenced over the course
Speaker 4: of twenty twenty five. But when we think about for
Speaker 4: private foreign demand, I really think of it coming through
Speaker 4: two different ways, One through let's say the more traditional
Speaker 4: asset manager or real money investor, and then the second
Speaker 4: through a highly levered let's say relative value hedge fund
Speaker 4: type trade. In the real money sector. We think that
Speaker 4: that money should be pretty stable, that should be pretty sticky,
Speaker 4: And that's largely because when we talk to global investors,
Speaker 4: what they frequently reiterate is just that there's not a
Speaker 4: lot of great alternatives in the global fixed income markets
Speaker 4: away from the US dollar fixed income and if you
Speaker 4: want relatively risk free assets, like you get in the
Speaker 4: treasury market. The size of the market, the depth of
Speaker 4: the market is really unparalleled, and so many investors feel like, well,
Speaker 4: they might not want to be in dollars, but they
Speaker 4: don't have many other good alternatives, so they have to
Speaker 4: remain there.
Speaker 5: Now, where we do get a little.
Speaker 4: Bit more concern is when we think about the relative
Speaker 4: value and highly levered let's say hedge fund positions. Those
Speaker 4: investors are worldwide, but there's a high concentration of those investors,
Speaker 4: especially in the UK. And what we do worry about
Speaker 4: there is anything that could potentially trigger elevated volatility and
Speaker 4: subsequent deleveraging That could come from the repo market, it
Speaker 4: could come from a very volatile macro environment, and we
Speaker 4: do worry about the concentration of ownership. There is potentially
Speaker 4: exacerbating volatility if it were to rise meaningfully. Now we
Speaker 4: don't think that'll be the case in the first half
Speaker 4: of twenty twenty six. We do think that low fall inflation,
Speaker 4: it's moving generally lower, a FED that's at worst on hold,
Speaker 4: if not cutting, will characterize the market in the first
Speaker 4: half of twenty twenty six. But that concentration is in
Speaker 4: data risk that these market structure and regulatory changes should
Speaker 4: help limit that risk in the near term.
Speaker 2: Stay with US multile impag Savannah's counting up off.
Speaker 5: To this.
Speaker 3: Investors looking ahead to fresh data in the new year
Speaker 3: to get a clear read on the US economy, Constance
Speaker 3: Hunter of Economist Intelligence writing, the US will face a
Speaker 3: bumpy road. If twenty twenty six were a fairy tale,
Speaker 3: it would be a mashup of chicken little and ugly
Speaker 3: duckling to talk about this story to Constance joins us, now,
Speaker 3: do we have a sense of how clear the data
Speaker 3: has been so far? In other words, have we gotten
Speaker 3: any tell from the data in November and December that
Speaker 3: has been muddied by the government shutdown.
Speaker 8: We've gotten very little data that's showed the impact of
Speaker 8: the government shutdown. The first piece of data would be
Speaker 8: the Job's data that we received earlier this month, and
Speaker 8: of course that shows that the number of people who
Speaker 8: took the early retirement packages that came into effect in October.
Speaker 8: But of course we know that the October collection for
Speaker 8: both jobs and NCPI had flaws, so there's not a
Speaker 8: lot there, And honestly, I don't think that matters that much.
Speaker 8: What matters is how the interplay of the risks and
Speaker 8: the tailwinds are going to interplay in twenty twenty six.
Speaker 8: So of course we have tailwinds in the fact that
Speaker 8: we have really strong consumption in the US. The Q
Speaker 8: three GDP report was solid. If you had a smooth
Speaker 8: road ahead of you, that would absolutely be the ugly
Speaker 8: duckling right where it turns into a swan, and everybody
Speaker 8: thinks it's beautiful, But of course there are potholes in
Speaker 8: the road, and that acorn that falls on Chicken Little's
Speaker 8: head may in fact mean that there are more acorns
Speaker 8: than that. The sky may fall right, So we have
Speaker 8: the whole situation with trade, so not just that the
Speaker 8: IEPA tariffs may be overturned, but the US MCA is
Speaker 8: up for renegotiation. And remember these agreements that have been
Speaker 8: made are not trade deals. It takes decades to negotiate
Speaker 8: trade deals, and so there's still a great deal of
Speaker 8: uncertainty there. And then, of course, as we've been talking
Speaker 8: about all morning, is the geopolitical uncertainty, whether we're talking
Speaker 8: about the Middle East, whether we're talking about China Taiwan,
Speaker 8: which is now of course saber rattling to send a
Speaker 8: message to Japan, whether we talk about China making breakthroughs
Speaker 8: in the Arctic, whether we're talking about strikes against Venezuela.
Speaker 7: There's a lot of political.
Speaker 9: Uncertainty on the horizon as well.
Speaker 1: So con says this to me.
Speaker 3: There is the unknown unknown, right, which is the geopolitics,
Speaker 3: and then there's a known unknown, which is whether we
Speaker 3: see any kind of resurgence in the labor market or
Speaker 3: whether we see a resurgence in inflation.
Speaker 1: Which do you think is the bigger risk some sort of.
Speaker 3: Resurgence in inflation or a real substantial deterioration in the
Speaker 3: backdrop for the jobs market.
Speaker 7: So you know, I don't know that they're mutually exclusive.
Speaker 8: And you know, you had the Stephen Marin interview playing
Speaker 8: earlier and he talked about it depends if you have
Speaker 8: a surgeon demand, but you also have a surgeon, and
Speaker 8: supply we don't think there's going to necessarily be a
Speaker 8: surgeon to apply. One of the really interesting things about
Speaker 8: the Q three GDP report was all of the corporate
Speaker 8: profit information that was contained in there. So basically the
Speaker 8: measure that's that's sort of similar to retained earnings rose
Speaker 8: thirty three percent. Quoter a q Q three over Q three,
Speaker 8: so year over year in the third quarter, firms retained
Speaker 8: a huge amount of earnings, and we saw in the
Speaker 8: data that they didn't hire, They really slowed hiring. They
Speaker 8: absorbed some of the costs of the tariffs. They also
Speaker 8: front loaded those tariffs right by importing at the end
Speaker 8: of last year and beginning of this year. And we
Speaker 8: really think that that that something has to give there, Right,
Speaker 8: So firms don't keep thirty three percent retain year over
Speaker 8: year retained earnings, they invest in capex, they pay them
Speaker 8: out in the form of dividends, or they hire more people.
Speaker 7: We think some combination of those things will happen.
Speaker 8: In conjunction with them passing on higher prices. In addition,
Speaker 8: we're going to get the tax refunds from the One
Speaker 8: Big Beautiful Bill Act. So the first quarter GDP data
Speaker 8: and all of the data leading up to that release
Speaker 8: of the first quarter GDP is going to look fairly
Speaker 8: strong after coming off a pretty weak Q four because
Speaker 8: of the government shutdown. Right, So it's going to be
Speaker 8: a very confusing data landscape. And I think people have
Speaker 8: this idea that the tariffs are behind us, and that
Speaker 8: the the uncertainty from tariffs are behind us.
Speaker 9: That is not our view.
Speaker 8: We think that that uncertainty is going to prevail next year.
Speaker 8: And again, one of those signals from that high retained
Speaker 8: earnings shows that firms are paralyzed. They're uncertain what are
Speaker 8: what are they going to do with this profits? And
Speaker 8: I think that's the big The answer to that question
Speaker 8: is going to be the answer to the contour of
Speaker 8: the economy.
Speaker 6: Okay, let's let's break that down a little bit.
Speaker 1: Consons.
Speaker 6: Can the FED continue to cut with inflation sounding as
Speaker 6: sticky as you make it sound.
Speaker 8: Well, I suppose it could, depending upon the makeup of
Speaker 8: the FOMC. Is it likely to in the first half
Speaker 8: of the year. We don't think so. We think that
Speaker 8: there will continue to be descents and that the FED
Speaker 8: will will hold rate steady for the first half of
Speaker 8: the year.
Speaker 7: On the other hand, if we see.
Speaker 8: Deterioration as a result of higher tariffs, and if firms
Speaker 8: margins compress in the second half of the year, then
Speaker 8: we could very well see two rate cuts in the
Speaker 8: second half of the year, especially as the pass through
Speaker 8: from tariffs is likely to have dissipated by that time.
Speaker 8: But it's a big unknown when and how firms are
Speaker 8: going to pass on tear frates. We also don't know
Speaker 8: if these tari frates are the permanent tariff rates. We
Speaker 8: know that the administration likes to move things around as
Speaker 8: a matter of strategy, right, so there's a lot of
Speaker 8: uncertainty in that realm.
Speaker 2: Stay with us. Mulpleinberg Savanna's coming up off to this.
Speaker 3: The stocks going nowhere as traders trim bets on megacap
Speaker 3: tech stocks heading into the end of twenty twenty five.
Speaker 3: Data Doria Investment joins us now Data. You did some
Speaker 3: work on what a Santa rally actually is, looking at
Speaker 3: how often you usually see gains.
Speaker 1: Why is it not working this time around?
Speaker 7: Yeah, unfortunately it's not.
Speaker 10: I mean, of course, we have nothing to complain about,
Speaker 10: right that this has been another double digit year, and
Speaker 10: you know, the economy has remained very strong in spite
Speaker 10: of kind of taking some crazy hits. So when we
Speaker 10: look back across the course of the air may not
Speaker 10: hit that twenty percent. It's not looking good at this
Speaker 10: stage of the game.
Speaker 7: But it's still been.
Speaker 10: A phenomenal year in markets, and I think, you know,
Speaker 10: it might be too much to expect at this point,
Speaker 10: you know, and stocks don't really have a catalyst, right
Speaker 10: there's you know, to your point on you know, kind
Speaker 10: of FED meeting minutes coming out later this afternoon. We'll
Speaker 10: get some interesting content there, but you know, and jobs
Speaker 10: be who are coming out. But I mean, where things
Speaker 10: stand today, there's not a huge amount that's going to
Speaker 10: happen in the course of this week that's going to
Speaker 10: kind of drive stocks forward.
Speaker 7: I think we.
Speaker 10: Probably have to be happy with the phenomenal performance we
Speaker 10: already received this year.
Speaker 3: That probably is too much to ask for people waiting
Speaker 3: for extra gains to put into their stocking at year end.
Speaker 3: There is this question though about whether we are seeing
Speaker 3: a true rotation, and that's what you're seeing this morning
Speaker 3: on the margins. I mean, it is tepid, Let's be honest.
Speaker 3: It's not exactly an active trading session. But you are
Speaker 3: seeing the outperformance come from the rustle two thousand and
Speaker 3: you have seen that over the past three weeks. Is
Speaker 3: that something you can kind of sink your teeth into
Speaker 3: and say it has lasting power?
Speaker 7: We'll see.
Speaker 10: We certainly have economic data point that suggests that the
Speaker 10: FED saying that there's one R eight cut coming next
Speaker 10: year is low. Right, we know FED Fund's futures already
Speaker 10: thinks that you know, we're going to have more than
Speaker 10: that if employment keeps weakening, if inflation kind of stays
Speaker 10: somewhat cool, it's hard to imagine that the FED doesn't
Speaker 10: cut more.
Speaker 7: And if the FED cuts more, that's great for small caps.
Speaker 10: And so I think to a certain extent, some of
Speaker 10: that might be filtering into you know, the expectation set
Speaker 10: for that part of the economy. Look, I'm a strong
Speaker 10: believer in having that kind of diversification in the portfolio
Speaker 10: to begin with. I mean, obviously large caps have outpaced
Speaker 10: small caps this year, but I think if you take
Speaker 10: a step back and look from just a broad diversification theme,
Speaker 10: we've had a phenomenal year for diversification, right, International developed,
Speaker 10: emerging market stocks thirty plus returns, so as good as
Speaker 10: it's been in the US market. If you had a
Speaker 10: diversify outlook in your portfolio, probably did better.
Speaker 7: And small caps are around fifteen percent.
Speaker 10: This is not a bad outcome, right for spreading your dollars,
Speaker 10: spreading the risk a little bit, particularly when we know
Speaker 10: the large cap index is so concentrated, it's so heavily
Speaker 10: dependent and top heavy on you know, certain stocks. So
Speaker 10: whether we're rotating into small caps or you know, we're
Speaker 10: seeing some of the effective interest rate chatter, I think
Speaker 10: it's a great thing to have that kind of diversification
Speaker 10: in your portfolio.
Speaker 6: Dana. Let's dig into that a little bit more. Does
Speaker 6: the dollar continue to weaken in twenty twenty six? You
Speaker 6: just talked about the fact that maybe the Fed continues
Speaker 6: to cut That would imply maybe it does.
Speaker 7: Yeah, for sure.
Speaker 10: I mean, obviously the dollar has been kind of a
Speaker 10: release valve here over the course of the last year,
Speaker 10: and you know, notwithstanding that, you know, we don't know
Speaker 10: for sure what's happening with inflation, right we see a
Speaker 10: report that came out the data we know, because of
Speaker 10: the shutdown the data, there's questions around that. We want
Speaker 10: to get back to a place where we're collecting data
Speaker 10: very effectively efficiently as we used to and getting what
Speaker 10: we feel is a really solid look at what inflation
Speaker 10: is doing. And that's obviously going to have a huge
Speaker 10: impact on where the dollar goes in twenty twenty six.
Speaker 10: For sure, you know, to the extent that we have
Speaker 10: interest rate cuts, you know, and by the way, this
Speaker 10: is just sort of to a large extent, getting the
Speaker 10: US on pace with the accommodative policy.
Speaker 7: We've seen it in the rest of the globe, you know,
Speaker 7: throughout the year as well.
Speaker 10: So this isn't you know, it's not to say that
Speaker 10: this is terministic, but we have zumer inflation goes and yes,
Speaker 10: interest rate cuts. Of course, if they're significantly more than expected,
Speaker 10: we'll have that impact.
Speaker 6: Dana, you talk about the diversification trade in dollar terms.
Speaker 6: If I'm a dollar investor, I made thirty percent in
Speaker 6: the foot Set one hundred this year, twenty five percent
Speaker 6: in the cat care on the DAX has delivered nearly
Speaker 6: forty percent, the Spanish market is delivered nearly seventy percent.
Speaker 6: Are those kinds of numbers for US investors going to
Speaker 6: be available next year? How much emphasis do I need
Speaker 6: to put on the x US part of my portfolio?
Speaker 10: I think, you know, the starting point from an academic perspective, right,
Speaker 10: if nothing else, first principles here, the starting point is what.
Speaker 7: Is the global ratio? Right?
Speaker 10: So MSCI AQUI all country World index. That gives me
Speaker 10: a great starting point for where I potentially want to
Speaker 10: have international stocks. Now, of course, you know, coming from
Speaker 10: a place where it's retail investors, it's advisors needing to
Speaker 10: keep clients discipline in their in their portfolios, which is
Speaker 10: sort of job number one.
Speaker 7: You know, you have to measure that to a certain extent.
Speaker 10: If US as gangbusters next year and they're measuring against
Speaker 10: the S and P five hundred index, it may be
Speaker 10: hard to keep them in place if international stocks don't deliver.
Speaker 10: So to a certain extent, there's a behavioral question here
Speaker 10: around how much can the can the person tolerate what
Speaker 10: are they looking to as the benchmark against that portfolio.
Speaker 10: If they're looking to a world index, I think the
Speaker 10: starting point being the world you know, that Aqui index
Speaker 10: that includes emerging markets. But if they're not, if they're
Speaker 10: really tied to a US view, then maybe you have
Speaker 10: a little bit of a reduced you know, diversification heads
Speaker 10: there with international, but it's not as big in the
Speaker 10: portfolio as otherwise would be because the client just you know,
Speaker 10: if US does poorly, they're expecting their portfolio not to
Speaker 10: do as well.
Speaker 7: But if US outperforms, it's tough for them to kind
Speaker 7: of stay put.
Speaker 10: And you know, these are just kind of the behavioral considerations,
Speaker 10: and I'll again say, I think small caps have a place.
Speaker 7: You know, both small caps and value stocks over time
Speaker 7: have outperformed.
Speaker 10: We haven't seen a lot of that in the last
Speaker 10: several years, but I think some of these fundamentals, these
Speaker 10: first principle fundamentals are good not only for the potential
Speaker 10: to outperform over the long haul, but also for diversifying.
Speaker 7: Again, what is a very.
Speaker 10: Concentrated, top heavy you know index at this point, and
Speaker 10: most people have that in their portfolios, right unless you
Speaker 10: have a massive tracking error to the index. You have
Speaker 10: a ton of AI trade, right, a ton of big tech.
Speaker 3: Well, the diversification trade is sort of taken on new
Speaker 3: meaning every single year is people try to cry the
Speaker 3: death of the sixty forty portfolio. I just wonder how
Speaker 3: much you have seen a true shift toward precious metals
Speaker 3: as a diversifier at a time where you've seen an
Speaker 3: incredible run so far this year.
Speaker 10: Yeah, no doubt people sort of it was this Barbell
Speaker 10: kind of approach right to how people were putting portfolios together,
Speaker 10: and so you had I want to not miss out
Speaker 10: on the AI trade, but at the same time, the
Speaker 10: ballast of my portfolio becomes gold or even silver. Now
Speaker 10: at this point, I do think what's happening in the
Speaker 10: retail space as well is more diversification into these sort
Speaker 10: of alternative asset classes. And a lot of that is
Speaker 10: happening because of product innovation in the space, so not
Speaker 10: only commodities, not only precious metals, but private equity, private
Speaker 10: credit in particular, and a lot of that's happening because
Speaker 10: there's vehicle availability that allows retail investors through things like
Speaker 10: interval funds.
Speaker 7: These are point and clicks.
Speaker 10: You can't get out of the fund as quickly as
Speaker 10: you can in generate a standard mutual fund, but you
Speaker 10: can get in and you can get access to a
Speaker 10: different return stream. We all know there's correlation there. It's
Speaker 10: the mark to market that kind of makes that correlation
Speaker 10: look lower than it is. But at the same time,
Speaker 10: you are getting access to companies that you're not going
Speaker 10: to get in the public equity markets. And so what
Speaker 10: we're seeing in the retail space is massive interest and
Speaker 10: sort of to your point, diversifying that sixty forty and
Speaker 10: doing it with alternative assets now that they're more accessible
Speaker 10: to the average client.
Speaker 2: Stay with us. Mult Blomberg Savanna's coming up off to.
Speaker 3: This, So turning to the labor market picture, we want
Speaker 3: to speak with Nicole. The show of Zippercrudo, who wrote
Speaker 3: the low higher, low fire environment that defined much of
Speaker 3: twenty twenty five will persist into early twenty twenty six,
Speaker 3: but with a crucial difference. Employers are preparing for growth,
Speaker 3: not just survival.
Speaker 1: Nicole joins us. Now, Nicole, thank you so much for
Speaker 1: being with us.
Speaker 3: So let's get into that this idea that you could
Speaker 3: start to see a revival of a labor market that
Speaker 3: has been pretty mora bound for the second half of
Speaker 3: this year.
Speaker 11: Whatever movements we see in twenty twenty six will be gradual.
Speaker 11: This is going to be slow and steady wins the
Speaker 11: race here instead of any sort of dramatic surge that
Speaker 11: could reignite inflation pressures. We will see hiring activities slowly
Speaker 11: start to pick up as clear kind of comes into
Speaker 11: view around policies like inflation and tariffs and how these
Speaker 11: factors are going to continue to impact employers into the
Speaker 11: new year.
Speaker 6: Nicole, Who's going to be employed in this next phase.
Speaker 6: Is it going to be graduates? Is it going to
Speaker 6: be workers on AI data centers? Kind of where is
Speaker 6: the growth going to come from.
Speaker 11: We're not seeing AI really reshaping where people are working.
Speaker 11: We're really seeing AI right now impacting the labor market
Speaker 11: in how certain roles are showing up. Workers who are
Speaker 11: able to utilize AI to increase productivity, to streamline their processes,
Speaker 11: that's where we're going to see the most demand. And
Speaker 11: we're already seeing employers start to focus on upscilling their
Speaker 11: current workforce and employers who are able to remove unnecessary
Speaker 11: barriers to make it easier to integrate AI into their
Speaker 11: workflows and to train employees on how to use those
Speaker 11: tools properly. That's where we're going to see the biggest
Speaker 11: hiring bumps in the new year, Employers who are really
Speaker 11: going to be able to take advantage of those movements.
Speaker 11: When we look at the new grads side of the house,
Speaker 11: we have seen, you know, obviously this is a really
Speaker 11: challenging labor market for new entrants. There is evidence from
Speaker 11: some surveys that we've done at zip Recruiter that employers
Speaker 11: are eager to hire more new grads into the year,
Speaker 11: more early early talent into their pipeline. That has kind
Speaker 11: of been missed over the last couple of years as
Speaker 11: focus has been shifted away from those higher tenured roles
Speaker 11: into earlier processes in the labor market.
Speaker 6: What does this mean for wages?
Speaker 11: Wages will likely start to stagnate across twenty twenty six.
Speaker 11: We've seen wages and inflation kind of converging together over.
Speaker 9: The past several months.
Speaker 11: As inflation continues to cool, wages will likely continue to
Speaker 11: come down.
Speaker 9: From where they're at.
Speaker 11: We saw around three point five percent annual growth in
Speaker 11: the last labor market readout, and well we see that
Speaker 11: continuing to slip a bit into twenty twenty six as well.
Speaker 3: How much nicole Are we starting to see the employment
Speaker 3: picture move away from healthcare at some of these defensive
Speaker 3: areas that need bodies.
Speaker 1: And go to more growth areas.
Speaker 3: I'm thinking of services, I'm thinking of manufacturing.
Speaker 1: Are you starting to see any of that shift whatsoever?
Speaker 9: Quite the opposite.
Speaker 11: We're still seeing healthcare being the dominant industry, as well
Speaker 11: as construction and other manual labor and skilled labor trades.
Speaker 11: Healthcare is going to continue to dominate throughout twenty twenty
Speaker 11: six and beyond, especially as US population continues to age.
Speaker 9: There will be more demand for.
Speaker 11: Healthcare services, especially support roles like nursing and home health aids.
Speaker 11: As we're seeing the population demographics kind of point towards
Speaker 11: a more bulk in that workforce for the future, so
Speaker 11: we will continue to see those manual and skilled trades
Speaker 11: kind of pushing up the labor market, and the cyclical
Speaker 11: cycles of industries where we look at manufacturing and retail,
Speaker 11: those are going to continue to stay stagnant while while
Speaker 11: employers are figuring out.
Speaker 9: How tariffs are really going.
Speaker 11: To be impacting their business lines moving forward.
Speaker 3: Taking a step back, Nicole, when we take a look
Speaker 3: at twenty twenty five, a lot of people will say
Speaker 3: this was the year when suddenly the labor market was
Speaker 3: buffeted by a secular trend with artificial intelligence and companies
Speaker 3: not wanting to hire, particularly entry level jobs because in
Speaker 3: entry level positions because they could see potential efficiencies with technology.
Speaker 1: Do you have any evidence to back that up. Do
Speaker 1: you think that that's going to become an even greater
Speaker 1: story in twenty twenty six.
Speaker 11: I don't, and I don't know that there's a lot
Speaker 11: of evidence that really points to AI being the actual reason,
Speaker 11: whether that's in the headlines or not being the actual
Speaker 11: reason for a lot of the slowdowns and hiring we've seen.
Speaker 9: It's a convenient excuse for low hiring.
Speaker 11: Given a lot of the other factors going on in
Speaker 11: the macro environment that are impacting businesses right now. Now,
Speaker 11: when we look ahead to twenty twenty six, you know,
Speaker 11: there's a lot of room for AI to continue to
Speaker 11: reshape how workers show up to their jobs. But there's
Speaker 11: so much work that's not able to be taken over
Speaker 11: by AI, especially not where we're at right now. So
Speaker 11: this is still going to be a gradual pickup to
Speaker 11: where we see AI really you know, hitting its stride
Speaker 11: and taking over a lot of the automated tasks in
Speaker 11: the workforce.
Speaker 9: But that's not necessarily what we're seeing right.
Speaker 5: Now, Nikole.
Speaker 6: The FED has delivered a series of right cuts which
Speaker 6: were labeled insurance cuts. Insurance about relating to a labor
Speaker 6: market that was apparently slowing down. A well, those insurance
Speaker 6: cuts required and B if they were acquired, what effects
Speaker 6: have they had.
Speaker 11: Unemployment has been rising throughout the second half of twenty
Speaker 11: twenty five, so the cuts intending to stabilize unemployment, you know,
Speaker 11: did come at the right time. But the goal of
Speaker 11: those is to stimulate more hiring. Activity, and we have
Speaker 11: not seen that happen yet. We haven't seen businesses be
Speaker 11: able to translate those lower rates into actual hires and
Speaker 11: more job growth that hopefully will come in the next
Speaker 11: couple of months. This is also coming at a really
Speaker 11: challenging time, as you all know, with this big kind
Speaker 11: of data blackout and murkey data situation due to the
Speaker 11: government shutdown. So as we look ahead to next week
Speaker 11: where we're anticipating a new Job Support and and JOLTS
Speaker 11: report to look at how openings and job growth look
Speaker 11: towards the end of this year, that will really help
Speaker 11: to clarify, you know, whether or not we're actually seeing
Speaker 11: those cuts to do what they're intended to do, or
Speaker 11: if we're still seeing a lot of stagnation as tariffs
Speaker 11: and sticky inflation continue to take hold of employers.
Speaker 2: This is the Bloomberg Sevendents podcast, bringing you the best
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Speaker 3: Mm hmm.