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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: Let's turn to the stock market.
Speaker 2: Mana Mahajana Edward Jones writing, we believe US corporate earnings
Speaker 2: are on pace to achieve double digit growth this year.
Speaker 2: We remain overweight equities relative to fixed income. Mona, Welcome
Speaker 2: to the program. This is slightly unfair because those headlines
Speaker 2: only just cross. So you're going to have to do
Speaker 2: this with me in real time. And if you don't
Speaker 2: want to go there, don't go there. But what on
Speaker 2: earth would happen and everyone started to happening there four
Speaker 2: or one case to buy houses, what would happen to
Speaker 2: the stock market?
Speaker 4: Yeah, you know, look, we'll have to wait for details
Speaker 4: from the President next week, but certainly I think the
Speaker 4: motivation here is to make sure that all households, whether
Speaker 4: you're in the upper income bracket, mid income, or lower income,
Speaker 4: have exposure to.
Speaker 5: A diverse set of asset classes.
Speaker 4: And I do think fundamentally that theory and consideration is
Speaker 4: the right one. We want to make sure that all
Speaker 4: households are thinking about investments from an early stage of
Speaker 4: their career, their family development, their homeownership development. So broadly speaking,
Speaker 4: we think if this starts a conversation of how should
Speaker 4: I position my assets, whether it's in equities, fixed income,
Speaker 4: or real estate, it's a good step in the right direction.
Speaker 3: Well, let's start with where this is coming from.
Speaker 2: So there is an affordability problem has been for a
Speaker 2: long time. This administration inherited it. Now they need to
Speaker 2: address it. The remedies to that affordability crisis. How do
Speaker 2: you think that's going to shape market outcomes in the
Speaker 2: year to come.
Speaker 4: Yeah, you know, there's different ways the administration can force
Speaker 4: this or do this. If it's using blunt instruments like
Speaker 4: putting caps on credit card interest rates, that will have
Speaker 4: adverse incomes, outcomes for the broader economy and then certainly
Speaker 4: the players in that sector. Now, if you do this
Speaker 4: in a way, that is, let us do this in
Speaker 4: a gradual way. Let us take an approach that offers you,
Speaker 4: whether it's tax relief, whether it's deferred tax payments, whether
Speaker 4: it's thinking about opportunities at lower rates depending on your
Speaker 4: income level. I think doing it in a graduated fashion
Speaker 4: makes more sense than trying to use the blunt instrument approach.
Speaker 4: But I think overall, the affordability issue needs to be addressed,
Speaker 4: and certainly, as we are approaching a midtrum election year,
Speaker 4: makes sense that we're starting to think about this early on.
Speaker 1: If you want to start thinking about affordability the midtrum
Speaker 1: election year, what do you want to be exposed to
Speaker 1: in the equity market?
Speaker 4: Yeah, you know, and I think your earlier guests alluded
Speaker 4: to this as well. We do think that this is
Speaker 4: a year where diversification does matter. And I think, you know,
Speaker 4: we've come off of three years where AI and technology
Speaker 4: have really dominated leadership in the markets. If you did
Speaker 4: not have exposure to those themes, you really were underperforming.
Speaker 4: Now this year, we think if you have exposure to
Speaker 4: both the AI parts of market, but you have some
Speaker 4: exposure to cyclical parts of market value, parts of market
Speaker 4: international and EM and by the way, have a little
Speaker 4: bit of fixed income exposure. That is the way that
Speaker 4: your portfolio is going to perform. And I think the
Speaker 4: combination of a steady economic growth picture, a FED that
Speaker 4: is likely going to cut on the margin, but also
Speaker 4: earnings growth that is accelerating this year supports that broading theme.
Speaker 1: When you say the FED cutting on the margin, one
Speaker 1: cut is that.
Speaker 3: What we're expecting for in twenty twenty.
Speaker 4: Six, So you know, our base case is one to
Speaker 4: two cuts in twenty twenty six. We think they're probably
Speaker 4: towards the tail end of this rate cutting cycle. But nonetheless,
Speaker 4: we do think the FED is looking to get towards
Speaker 4: a neutral level. And typically, if you look historically, that
Speaker 4: neutral levels usually some somewhere around one hundred basis points
Speaker 4: above inflation. So if you think inflation ends around or
Speaker 4: you know it kind of steadies out around two two
Speaker 4: and a half percent, a FED funds rate around three
Speaker 4: and a half percent to us makes a lot of
Speaker 4: sense as a.
Speaker 3: Base case since we're on the federal reserve.
Speaker 2: This week really kicked off with Sham and Powell coming
Speaker 2: out quite publicly and pushing back against the administration. That
Speaker 2: story's got old very very quickly, Mona. Do you see
Speaker 2: that as noise or news?
Speaker 4: Yeah, you know, I think it was initially quite a
Speaker 4: bit of shocking news to hear that the Federal Reserve
Speaker 4: chair was under criminal investigation. But to your point, since then,
Speaker 4: we've seen not only FED Chair Drone Powell come out strongly,
Speaker 4: but old former FED chairs as well as congressional members
Speaker 4: from both sides of the aisle supporting this idea that
Speaker 4: the FED independence is important. And what we've always said
Speaker 4: is if the market gets a sense that FED independence
Speaker 4: is being questioned or challenged, not only can you see
Speaker 4: mork of volatility, you'll probably see rates rise, especially on
Speaker 4: the long end, as that risk premium gets baked in.
Speaker 4: And that's squarely opposite of what this administration wants, which
Speaker 4: is lower rates. So there's a little bit of a counterintuitive,
Speaker 4: you know, cycle happening there. But I think generally markets
Speaker 4: have made it clear that FED independence is important.
Speaker 2: Stay with US multil Inpex surveillance coming up after this,
Speaker 2: John Labor of the Eurasia Grape joins US. Now, John,
Speaker 2: you heard it there from Tyler Amrie mentioned it as well.
Speaker 2: Gavna Shapiro at the White House, Is this just a
Speaker 2: new political reality that both parties have to confront.
Speaker 6: Yeah, I mean, I think actually President Trump's trying to
Speaker 6: get out ahead of the curve here. We know affordability
Speaker 6: is probably the number one issue on voters' minds for
Speaker 6: twenty twenty six, and this electricity issue was a factor
Speaker 6: in some of the off cycle elections that we saw
Speaker 6: in New Jersey and Virginia last year. So you know,
Speaker 6: the data centers, it's a big deal. It's a big
Speaker 6: part of Trump industrial strategy. They want the US to
Speaker 6: be the world leader in AI, and to be the
Speaker 6: world leader in AI, you need to consume a lot
Speaker 6: of energy and that's going to become an increasing political
Speaker 6: problem for people all over the country. I do think
Speaker 6: to your point, it's notable that Democrats are willing to
Speaker 6: play ball here with the administration. This reflects the power
Speaker 6: that only the White House has, and I think that
Speaker 6: this is going to be an ongoing theme that we
Speaker 6: see throughout the year.
Speaker 1: Not just democratic governors willing to play ball, tech companies, Microsoft,
Speaker 1: Brad Smith. We're going to ask utilities and public commissions
Speaker 1: to set our rates high enough to cover electricity costs
Speaker 1: for our data centers. John, is this just another implementation
Speaker 1: of state capitalism?
Speaker 3: Yeah.
Speaker 6: I think that's exactly one way to think about it.
Speaker 6: I think Microsoft knows that the Trump administration is their
Speaker 6: biggest champion. They really need Trump to get the licenses
Speaker 6: that they need to have access to semiconductors. I mean,
Speaker 6: the administration has been extraordinarily aggressive in shaping how these
Speaker 6: tech companies sell chips by chips have access around the globe,
Speaker 6: and they've been championing them. And I think the Microsoft
Speaker 6: sees the writing on the wall here, which is that
Speaker 6: this is a growing political story that they need to
Speaker 6: get ahead of, exactly the same as how the Trump
Speaker 6: administration's doing this. And I think this again, this is
Speaker 6: going to be a big theme for the year. I
Speaker 6: think that electricity is a vulnerability for the president, and
Speaker 6: by doing this and by getting their partners like Microsoft
Speaker 6: to do this, it's an incredibly savvy way of saying
Speaker 6: he's doing something about the problem.
Speaker 1: Not to get two in the weaves, but there is
Speaker 1: a law from nineteen thirty five, the Federal Power Act,
Speaker 1: which basically separates when it comes to the grid, how
Speaker 1: the states jurisdiction is over the federal government. Are we
Speaker 1: pretty much just resetting new rules of engagement between how
Speaker 1: the states deal with electricity.
Speaker 6: You know, I'm not familiar with the rules of the
Speaker 6: electrical grid and how it works at the state level,
Speaker 6: but I do think federal intervention here is probably appropriate.
Speaker 6: And given that this is multiple states coming together to
Speaker 6: drive this new initiative and put this new electricity on
Speaker 6: the market, and it's affecting all these tech companies that
Speaker 6: are trying to invest everywhere in the United States. This
Speaker 6: sets a tone for the entire country and tells these
Speaker 6: tech companies that they're going to need to be partners
Speaker 6: in solving this problem. And because of that, you're probably
Speaker 6: going to see more efforts to take advantage of a
Speaker 6: diverse source of electricity generation, including probably over time nuclear power,
Speaker 6: which had previously fallen out of favor in the United States,
Speaker 6: and now that the tech companies need it is going
Speaker 6: to be surging back.
Speaker 1: John mentioned all what's going on in terms of the
Speaker 1: presidents laid his sol those on truth, social the defense sector, housing,
Speaker 1: credit card companies. What do you expect him to deliver
Speaker 1: at Davos?
Speaker 6: Yeah, it's only been We're in the third week of
Speaker 6: the year, and it feels like we've lived three years
Speaker 6: so far, given all the stuff that's going on. Yeah,
Speaker 6: I think the Davos speech will probably be a chance
Speaker 6: for Trump as he does to air some grievances in
Speaker 6: front of a crowd that he probably thinks is hostile
Speaker 6: to him, but he still wants to get in front
Speaker 6: of He mentioned housing as one of the things he's
Speaker 6: going to talk about. I think there's going to be
Speaker 6: other affordability things brought up. One of the big things
Speaker 6: on housing is long term rates. They've been attempting to
Speaker 6: use Fanny and Freddy in order to get long term
Speaker 6: mortgage rates down. I think that probably healthcare is going
Speaker 6: to be an issue that is focused in focus in
Speaker 6: this speech on affordability. There's still the live issue of
Speaker 6: these Affordable Care Act subsidies that's happening in Congress right now.
Speaker 6: And then electricity, I think and energy costs are probably
Speaker 6: going to be a big piece of it, not just electricity,
Speaker 6: but also energy prices, I mean oil prices. That's one
Speaker 6: of the primary drivers, or at least it's the primary
Speaker 6: outcome of this Venezuela in addiction is that they're putting
Speaker 6: all these new barrels of oil on the market, and
Speaker 6: I think that keeping energy costs low is going to
Speaker 6: be a big theme.
Speaker 2: John, Is there a home for people who support traditional
Speaker 2: conservative policy.
Speaker 3: In the United States?
Speaker 6: I mean no, You've got the Republican Party is, or
Speaker 6: at least under Trump, massively interventionists. And there are a
Speaker 6: lot of Republicans, many of whom have only been elected
Speaker 6: in the Trump era. I mean over the half of
Speaker 6: the House of Representatives came into office after Trump was
Speaker 6: already here and have helped him totally reshape this party
Speaker 6: into a much more populous, much more aggressive, much more
Speaker 6: interventionist party that seems to have no limits to the
Speaker 6: kind of things that they're going to do to deliver
Speaker 6: benefits for voters. So, I think the ara of small
Speaker 6: government is really over here, and you're going to see
Speaker 6: a government that's on both sides that's now reacting to
Speaker 6: the need for voters to want to see change in
Speaker 6: their life. And so I think both parties now are
Speaker 6: going to be much much more aggressive in how they
Speaker 6: try to do that.
Speaker 2: How much daylight do you think they'll be between the
Speaker 2: two parties on economic policy?
Speaker 3: By the time we get to twenty eight very little.
Speaker 6: Probably tax policy will be the big one. There will
Speaker 6: probably be more lip service paid to the deficit from
Speaker 6: the Republicans. The Democrats will probably support a more larger
Speaker 6: tax increases in order to bring down the deficit. I
Speaker 6: think on trade you're going to see a lot of similarities.
Speaker 6: Labor policies probably another one where you see a big difference,
Speaker 6: but more divergence in the coming years. So you know,
Speaker 6: I think the parties are going to compete on cultural differences.
Speaker 6: Immigration will probably be a big wedge issue in the
Speaker 6: upcoming election. But on economic policy, you know, these parties
Speaker 6: are looking more and more similar to each other.
Speaker 2: Stay with US mult Blomberg surveillance coming up after this,
Speaker 2: and let's keep it on the federal reserve. Stephen Stanley
Speaker 2: of Santantie writing this, I look for the unemployment rate
Speaker 2: to stabilize. Inflation is likely to remain stubbornly high. I
Speaker 2: look for the FMC to remain on hold for all
Speaker 2: of twenty twenty six. Stephen joins the staffer or Stephen
Speaker 2: Goodmonick warning controversial call of the president's watching this morning,
Speaker 2: Good morning, missed the President?
Speaker 3: Why not ray cuts for the year ahead.
Speaker 7: Well, I think what we're seeing now as the FED
Speaker 7: has moved into pause mode and there are at least
Speaker 7: someone in the Committee that would like to move further.
Speaker 5: I think.
Speaker 7: But what you heard from Powin to summer I thought
Speaker 7: was really important, where he's said that the rate is
Speaker 7: now within the plausible range of neutrality, so there's no
Speaker 7: urgency to move. I think that pause turns into a
Speaker 7: full stop because I look for the economy to do
Speaker 7: better in twenty twenty six and most as sooning.
Speaker 2: Okay, so we can sort of tease and unpack some
Speaker 2: of this. So the first half, I've got it. You
Speaker 2: mentioned chairman power, he's gone. Let's get to the second half.
Speaker 2: What you're essentially forecasting is whoever takes over the feder Reserve,
Speaker 2: and we imagine whoever it is is going to vote
Speaker 2: for interest rate cuts, given that this is what the
Speaker 2: President is looking for. They're going to be voted down
Speaker 2: by the Committee for every single meeting for the rest
Speaker 2: of the year.
Speaker 7: Well, look, I'm going to take the optimistic teck on this, Okay.
Speaker 7: I've always assumed that whoever is the nominee for chair
Speaker 7: will operate more or less as the FED has always
Speaker 7: operated based on the data. So if look, if it's
Speaker 7: a close call, I'm sure that a very dubbsh new
Speaker 7: FED chair is going to kind of push in that direction.
Speaker 7: But they have to convince the entire committee, and if
Speaker 7: the data are relatively clear, I think that would be difficult.
Speaker 7: I would also point out we're not talking about a
Speaker 7: big break here because Chairman Powell has been a dubvish
Speaker 7: FED chair and I think the December move was the
Speaker 7: latest side of that. I mean, he very much personally
Speaker 7: pushed that through right. That committee was very divided. The
Speaker 7: decision could have gone either way, and the fact that
Speaker 7: they moved in December, I think is clear evidence that
Speaker 7: Powell was pushing in that direction.
Speaker 1: If that's your case, does this set up the new
Speaker 1: FED at very more of a frictious market relationship with
Speaker 1: this White House.
Speaker 5: Friction between the FED and the Yeah, And if it is.
Speaker 1: Someone like Kevin Hassett and you think they're going to
Speaker 1: operate independently.
Speaker 5: Well, I mean, look, I think it remains to be seen.
Speaker 7: I would say that if the economy is doing better,
Speaker 7: that is likely to reduce the level of ogita in
Speaker 7: the White House. Right, even if the FED is not
Speaker 7: cutting as the President has suggested he would like, if
Speaker 7: people are feeling better about the economy and the president,
Speaker 7: it's maybe feeling better at the margin about election prospects.
Speaker 7: In November, I suspect the heat will tamp down a
Speaker 7: little bit on the wa.
Speaker 1: You're basically saying it all is predicated on polling numbers
Speaker 1: from the White House perspective. Yeah, I mean, no, man,
Speaker 1: how much they want to maybe jow bone the Federal Reserve,
Speaker 1: even if it is someone that the President has decided
Speaker 1: you wanted to put in because he thinks they're going
Speaker 1: to be a part of.
Speaker 5: This lowering interest rate.
Speaker 7: Well, we're you know, we've kind of we've moved into
Speaker 7: territory where I'm far from an expert. I'm not much
Speaker 7: of a political analyst. But look, the administration wants to
Speaker 7: do well in the mid term elections, and I think
Speaker 7: it's very clear from what we saw last November and
Speaker 7: kind of the just the general conversation around politics at
Speaker 7: the moment that economic issues are going to be very
Speaker 7: important to voters. Right, so our vote oters feeling good
Speaker 7: about things? Do they feel more confident in their job?
Speaker 7: Are they feeling like inflation is less of a concern.
Speaker 7: Those are things that are obviously going to If things
Speaker 7: are moving in a good direction on that front, that's
Speaker 7: probably good for the President and for the Republican Party
Speaker 7: and vice versa.
Speaker 5: So that's kind.
Speaker 7: Of what I'm thinking there is that, you know, the
Speaker 7: reason I have the FED on hold is because I
Speaker 7: think the economy does better. Well, if the economy does better,
Speaker 7: then you know, maybe the sentiment around the economy also improved.
Speaker 2: Let's say on that then the core if youel cool
Speaker 2: a better economy, what's driving it? What are the town
Speaker 2: wins that you go confiden scent?
Speaker 7: Yeah, I think the biggest one is that, in my view,
Speaker 7: a big thing that held us back in twenty twenty
Speaker 7: five was uncertainty around policy.
Speaker 5: I mean, Terris being one of the key pieces of that.
Speaker 7: And you know, I've felt for a long time that
Speaker 7: businesses would re engage in twenty twenty six, not that
Speaker 7: the policy, not that policy and certainly goes away entirely.
Speaker 7: I mean that clearly is not going to happen, and
Speaker 7: there's always some level of uncertainty. But you're hearing a
Speaker 7: lot more FED officials who are communicating that their contacts
Speaker 7: are telling them that businesses are kind of getting ready
Speaker 7: to re engage.
Speaker 5: A little bit.
Speaker 7: So in twenty twenty five, investment spending was really just
Speaker 7: about AI, and if you were to strip out the
Speaker 7: AI pieces, business investment was probably negative in real terms
Speaker 7: to the first three quarters. I think you'll see a
Speaker 7: broadening out in twenty twenty six, reflecting the tax cuts
Speaker 7: that were put into place, the deregulatory push, and some
Speaker 7: of the other things, assuming that the administration kind of
Speaker 7: ties up some of the loose ends around terras.
Speaker 2: Will that be accompanied with better payroll growth?
Speaker 7: Yes, because I think the same dynamic that has businesses
Speaker 7: hitting the pause button on investment is also applicable to
Speaker 7: the labor market.
Speaker 5: I think they're businesses who maybe.
Speaker 7: Would otherwise have hired, who are holding off because of
Speaker 7: that uncertainty. The complication around that, I think is that
Speaker 7: now what we're hearing again, what we're hearing FED officials
Speaker 7: saying that they're being told by their contacts in their districts,
Speaker 7: is that there's also now a second feature, which is AI.
Speaker 7: And do I maybe want to hold off on hiring
Speaker 7: because I'm not sure if I'm going to need those
Speaker 7: workers A year, two years, three years down the line.
Speaker 5: But I mean, you know, if the economy.
Speaker 7: Is growing as it has, ultimately you have to grow
Speaker 7: your workforce to measure up to that. So I do
Speaker 7: think we'll see an improvement, not a drastic improvement, but
Speaker 7: some improvement in the pace of hiring enough that we
Speaker 7: should be able to get the unplantent rate down a
Speaker 7: little bit as we move into the latter part of
Speaker 7: the year.
Speaker 1: Will that growth lift all both say the bottom part.
Speaker 1: If you do believe we're in a CA shaped economy.
Speaker 5: That is a very real phenomenon.
Speaker 7: There's no question that the folks at the lower end
Speaker 7: of the income scale are struggling more than the folks
Speaker 7: at the higher end. It remains to be seen whether
Speaker 7: that dynamic changes. I think that they're in some ways.
Speaker 7: What we're seeing over the last year or two is
Speaker 7: really just a normalization. I think the people at the
Speaker 7: lower end of the income scale benefited greatly. They got
Speaker 7: most of the federal government money during the pandemic. We
Speaker 7: had mortgage foreclosure moratorium, student loan payments weren't due for
Speaker 7: four years, and the labor market was very tight and
Speaker 7: skewed toward lower paying jobs. Right because it was the
Speaker 7: retail and the restaurant, the high contact jobs during the
Speaker 7: pandemic where we were seeing the highest pay raises. What
Speaker 7: we've seen over the last few years is kind of
Speaker 7: getting back to normal, which is that the folks at
Speaker 7: the lower end of the income scale are seeing slower
Speaker 7: wage gains than the folks at the top, and as always,
Speaker 7: they're not benefiting as much from higher asset prices.
Speaker 3: Just quickly, where have you got Inflation at the end
Speaker 3: of the year.
Speaker 7: Still in the high twos. I think it probably accelerates
Speaker 7: early in the year as more of the terrif related
Speaker 7: pressures get pushed through, and then maybe comes off a
Speaker 7: little bit as we move toward the end of the year.
Speaker 7: I think by the end of the year the run
Speaker 7: rate will be two and a half, maybe even a
Speaker 7: slight bit lower than that, but still above target.
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