Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Lisa Abramoids along with Tom Keane and Jonathan Ferrell.
Speaker 2: Join us each day for insight from the best in economics, geopolitics,
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Speaker 3: I'll be with us.
Speaker 4: Now, let's talk about markets. Cee of cross Smark Global
Speaker 4: Investments Pop, Good morning to here same. Let's talk about
Speaker 4: retail sales twenty five minutes away. Are we going to
Speaker 4: see that resilience in this US economy? This US consumer
Speaker 4: in the data was set to say in this hour,
Speaker 4: you just.
Speaker 5: Put a lot of good things, the two of you
Speaker 5: on the table. A soft landing is like putting a
Speaker 5: thread into the needle and the eye of that needle
Speaker 5: is shrinking. It's getting tougher and tougher. The com consumer
Speaker 5: eventually will come to their niece. We always see at
Speaker 5: the low end. We all see it with credit extension,
Speaker 5: we see it. Wage growth is strong. How long will
Speaker 5: it stay strong? And that is just fueled the consumer
Speaker 5: and it's fueled our economy. And this thing is kept
Speaker 5: ongoing despite all the things in the background that you
Speaker 5: just put on the table, including the lagged effects of
Speaker 5: the FED gone from zero to five and a quarter.
Speaker 5: We have not felt all of that yet.
Speaker 4: Let's unpack that it will happen eventually. Are we seeing
Speaker 4: signs of it now? You mentioned credit? You can see
Speaker 4: it through credit maybe one way. Another way it might
Speaker 4: be to sit in the official data. We'll see that
Speaker 4: at the bottom of the hour eight thirty. Another way
Speaker 4: might be the earnings across those three things right now,
Speaker 4: credit data, earnings. Are you seeing a slow down?
Speaker 5: Not really, It's all lead indicators. The coincident indicators are positive.
Speaker 5: Some of them are getting a little mixed. It's going
Speaker 5: to take some more time to go there. We've been
Speaker 5: since the first of the year saying recession starts sometimes
Speaker 5: between labor day and the end of the year. Still
Speaker 5: sticking with that. Think it's it's a mild recession, as
Speaker 5: many do, although recessions left most people's vocabularies.
Speaker 2: You know, but where does that recession come from? If
Speaker 2: you do see the strength in consumers, and a lot
Speaker 2: of people have pointed to the student loan issue. And
Speaker 2: I was reading this article the survey by Credit Karma,
Speaker 2: and it was showing that forty five percent of student
Speaker 2: loan borrowers say that they are not going to repay.
Speaker 2: They're basically going to be delinquent for twelve months because
Speaker 2: they're not going to get penalized.
Speaker 1: For being delinquent for twelve months.
Speaker 2: So aren't we basically getting a self stimulus ongoing that
Speaker 2: will remain in place for a while.
Speaker 5: Well, it's been the story, and it's lasted a little
Speaker 5: longer than many people thought, and it's still not finished.
Speaker 5: But eventually consumers will come to the realization that things
Speaker 5: are a lot more expensive. Inflation is still a problem.
Speaker 5: They have no savings at the lower end of the
Speaker 5: consumer bracket and that's a problem, and they're going to
Speaker 5: have to retrench some or find a second job, and
Speaker 5: they've already done that.
Speaker 2: What's the hedge?
Speaker 1: What's the defensive play?
Speaker 2: At a time A lot one of the strongest companies
Speaker 2: have incredibly high multiples, and you're looking at bond yields
Speaker 2: that are not giving a consistent message.
Speaker 5: Yeah, I think that within the equity market, you try
Speaker 5: to focus on companies that are high earnings predictability, high
Speaker 5: earnings persistence, and are not selling it crazy prices. That's
Speaker 5: not a whole lot of places. I like the HMOs
Speaker 5: for example. I've not given up on tech, but I
Speaker 5: want to be careful what pe I'm paying for my tech.
Speaker 5: So some of the semiconductor stocks, some of the software stocks,
Speaker 5: they're not so cheap Visa MasterCard, two names. I still
Speaker 5: like they've gotten more expensive. So you have to pick
Speaker 5: your spots. And I come back to earnings persistence and
Speaker 5: cash flow generation.
Speaker 4: Let's talk about the retailers then, I'm deepot out this morning,
Speaker 4: Walmart later this week, Thursday, Target tomorrow. Have they still
Speaker 4: got that pricing power? Can they keep margins pretty steady
Speaker 4: or do those margins get eaten away out eventually?
Speaker 5: And I think we'll see some of that, Like now,
Speaker 5: those margins get eaten away because you see, companies can
Speaker 5: only raise prices so far, and you're already seeing consumers
Speaker 5: begin to make noise and balk and stop buying some things.
Speaker 5: It won't it won't be everything, but slowly but surely
Speaker 5: you take the edge off. We have to operate on
Speaker 5: eight cylinders to keep the thing where it is now
Speaker 5: and even we back off to six, that's going to
Speaker 5: disappoint a lot of people with stock selling where they.
Speaker 4: Are the winness forget tech cruise lines, airlines. Are we
Speaker 4: at that point where we've reached consumer price intolerance. They
Speaker 4: just don't want to pay it anymore.
Speaker 5: As you said a minute ago, people are flying around
Speaker 5: going on an airplane and you know, every seat's taken.
Speaker 5: So we're not there yet, but we'll get there.
Speaker 2: Okay.
Speaker 1: So what's going to get us there?
Speaker 2: Because everyone's been saying this that the consumer eventually will
Speaker 2: push back, and then they haven't, and then you go
Speaker 2: out to eat and it costs twice what it used to.
Speaker 2: I mean, honestly, this is the kind of increases that
Speaker 2: you're seeing.
Speaker 5: Yeah, so it was subtle. We had fifteen months in
Speaker 5: a row of better than expected monthly employment numbers. Two
Speaker 5: months have been below expectations, so their cracks beginning to develop.
Speaker 5: I don't want to come across as the economy's tanking
Speaker 5: and you know, want to be a bear overall. I'm
Speaker 5: just cautious. And I add to it, I said, all right,
Speaker 5: I'll say it again. If the pe were fourteen, different story.
Speaker 5: But you know, at the peak a couple of weeks ago,
Speaker 5: I looked at my screen on trailing earnings twenty three
Speaker 5: times earnings.
Speaker 2: When you talk about being cautious, what's the ballast if
Speaker 2: you talked about your equities, Is it cash?
Speaker 1: Is it going into duration?
Speaker 5: I think having some cash in your portfolio when he
Speaker 5: yields five percent is not a stupid idea. Have you
Speaker 5: been increasing it in the balanced accounts where we can
Speaker 5: in the equity market neutral portfolios, We've been bringing our
Speaker 5: ex exposure down in there for our cash exposure up. Yes,
Speaker 5: bonds own some bonds. I'm not sure that we've seen
Speaker 5: the high end yields yet, but I'd rather begin to
Speaker 5: nibble it. You know, four and a quarter than three
Speaker 5: and a half where we were not that long ago.
Speaker 4: You think, start to go out along the curve, startlocking
Speaker 4: some of the stuff in slowly.
Speaker 3: Truly, Yes, I heard the same.
Speaker 4: Thing from Lisa shatout over in Morgan Stanley. You think
Speaker 4: we face that reinvestment risk rate cuts on the horizon.
Speaker 5: That will happen at some point. So I want all
Speaker 5: my eggs in the short term five percent basket. Look
Speaker 5: a year ago, eighteen months ago, one and a half percent,
Speaker 5: ten year Treasury. That was a bad deal four and
Speaker 5: a quarter. I think I'll think about it.
Speaker 3: It's unthinkable, isn't it. It wasn't let long ago. No,
Speaker 3: it wasn't. That happened fast.
Speaker 4: I know it really did, Bob, It's happening fast now.
Speaker 4: Bob's good to see you. Thank you, sir, Thank you,
Speaker 4: Bob Dole of cross Mark Global Investments. Jordan Rochester join
Speaker 4: us now G ten FX strategist over Namura.
Speaker 3: Jordan.
Speaker 4: Great to catch up with you, buddy. Let's just start
Speaker 4: in the UK at the Bank of England, record wage growth.
Speaker 4: Are we bringing them back in for more rate hikes
Speaker 4: to come?
Speaker 3: John?
Speaker 6: I think that wage number will definitely make the Bank
Speaker 6: of England's absolutely think about raising rates the next meeting.
Speaker 6: We think there'll be two more rate hikes this year,
Speaker 6: so we already thought there was enough data to tell.
Speaker 3: Them you should probably keep more hiking more.
Speaker 7: I do think the.
Speaker 6: Risks are that we get a weaker services CPI, perhaps
Speaker 6: not this month, maybe next month, and that the risks
Speaker 6: are actually tilted to just one hike rather than two.
Speaker 6: The idea of having two maybe three would require a
Speaker 6: reacceleration in that services CPI. So I always John think
Speaker 6: that the labor markets the most lagged indicator to track
Speaker 6: as a central banker. Rewind back two years ago, the ECB,
Speaker 6: the Bank of England, all these other central banks that
Speaker 6: are pointing out weak wages as a reason not to
Speaker 6: raise rates was actually a ridiculous thing to look at
Speaker 6: because you missed all of the energy and commodities inflation
Speaker 6: that was coming. And it's why we are where we
Speaker 6: are today with central banks having to make up for
Speaker 6: lost time with all these rate hikes quite late on
Speaker 6: in that cycle. John, so strong wages fantastic for those workers.
Speaker 6: Pretty difficult for.
Speaker 3: The Bank of England to turn dovish with those numbers.
Speaker 3: Sterling positive or still in negative if they have to
Speaker 3: hike more.
Speaker 6: Well, look at the reaction today.
Speaker 3: You're at Sterling is the way to look at it.
Speaker 6: Sterling tried to rally and then it came back off
Speaker 6: and you're Sterling's pretty much flat on the day. If
Speaker 6: the banking and raise rates at twenty five based up
Speaker 6: points like we expect, it wouldn't really move the needle
Speaker 6: for stirring. I think what'll be really interesting is if
Speaker 6: we get some more negative news on growth. We're starting
Speaker 6: to see that in China for example, But we were
Speaker 6: also having pretty dismal surveys out of the UK as well.
Speaker 6: When it comes to price pressures, they're all turning lower.
Speaker 6: Maybe at the next meeting we'll get a better sense
Speaker 6: of whether that we will get that extra fifty. So
Speaker 6: two twenty five is in a row.
Speaker 2: How much is that weakness that we're seeing in China
Speaker 2: bleeding through not only do the UK but Europe and
Speaker 2: the euro I.
Speaker 6: Think what you were saying earlier, Lisa is spot on.
Speaker 6: There has been a little bit decoupling. You look at
Speaker 6: the likes of risk on in the US market, the
Speaker 6: move in US yields. Yet if you were to use
Speaker 6: the usual frameworks when China slows down like this, usually
Speaker 6: it's risk off and very dubvish, and it leads to
Speaker 6: dollar strength. And this is kind of what we're seeing
Speaker 6: in dollar C and H. So that's a clear trade.
Speaker 6: We think dollar S and H gets to seven to fifty,
Speaker 6: perhaps that's the sort.
Speaker 3: Of move we're looking for.
Speaker 6: We're doing it in a basket format, but it's not
Speaker 6: leading to massive Euro dollar weakness, which is very odd.
Speaker 6: And it's similar for sterling as well. It used to
Speaker 6: be If C and H move like this, you would
Speaker 6: absolutely have to be short euro. And the reason for
Speaker 6: that is because of this decoupling, equities are rallying in
Speaker 6: the US more broadly over the past few months, and
Speaker 6: that's held up euro.
Speaker 1: Can it last?
Speaker 2: And I noticed that you actually abandoned your strong Euro
Speaker 2: call recently, and you said, you know what, I actually
Speaker 2: see it being a bit.
Speaker 1: Weaker from here.
Speaker 2: What triggers that, if not the bad data out of
Speaker 2: China and this concern around the inability to stimulate.
Speaker 6: The hardest part about effects, Lisa is there's three pillars
Speaker 6: to consider. One is what's going on with equities, Two
Speaker 6: what's going on with rates, and three what's going on
Speaker 6: with commodities. And for quite some time I was leaning
Speaker 6: on that equity pillar. The sort of rally we'd had
Speaker 6: in equities over the past few months was one of
Speaker 6: the reasons we had that uro dollar call.
Speaker 3: We're looking for top side.
Speaker 6: We still are by year end, but in the short
Speaker 6: term I see the other two pillars really dominating, which
Speaker 6: is the rates market says ur dollars should be towards
Speaker 6: one oh five. That's not a good thing where we
Speaker 6: are at current levels. And of course, with commodities, we've said,
Speaker 6: we've had a much higher and oil prices and natural
Speaker 6: gas one of the biggest imports for the Euro Area.
Speaker 6: Energy supply crisis has perked up recently of late, so
Speaker 6: it's maybe more nervous watching dollar s and h moved
Speaker 6: the way it is. Default risks building in China, low
Speaker 6: credit demand, we saw new one loans collapse. That in
Speaker 6: the short term, given we've got not very little data
Speaker 6: now until we get the next CPI and NFP reports,
Speaker 6: and we've got Jackson Hole, but I think in the
Speaker 6: short term that they're not catalysts enough to boost euro.
Speaker 6: I'm surprised euro wasn't on an one eleven handle after
Speaker 6: that CPI report. So a few disappointments with the reactions
Speaker 6: in the market and going forward over the next two
Speaker 6: weeks only Jackson Hole to really talk about. That's not
Speaker 6: a reason to be long euro dollar. But we are
Speaker 6: long Euro versus Norway, and we are long euroversus Sterling,
Speaker 6: so there are still eurobside bias in.
Speaker 3: Our view, Jordan.
Speaker 4: What you just described smeus like Eurozone stagflation is that
Speaker 4: what it is.
Speaker 3: Well, inflation's going to.
Speaker 6: Come down, John, It's going to come down quite quickly
Speaker 6: according to the sort of PPI and surveys. So the
Speaker 6: stagflation concerns, I think we're more last year's story. But
Speaker 6: the growth numbers Zew's this morning were pretty disappointing. I
Speaker 6: thought maybe we start to see positive momentum in European
Speaker 6: data surprises. They were so weak that maybe they improved,
Speaker 6: but ultimately the surveys suggests that it's going to be
Speaker 6: a pretty weak outlook for European growth. And my problem
Speaker 6: on that side is I'm not sure where the next
Speaker 6: stimulus is going to come from. The Fed's not cutting
Speaker 6: rates until March next year, the ECB is not going
Speaker 6: to be talking about cutting rates until later the next
Speaker 6: year October November time. China's not doing a big fiscal
Speaker 6: steamer so far. So it is a combination that makes
Speaker 6: it really hard for me to see why surveys and
Speaker 6: growth surveys should really pick up. So yes, and answer
Speaker 6: your question, it's still a bit like stagflation, but hopefully
Speaker 6: that inflation component comes down.
Speaker 3: So Jordan, just quickly you think the guard is done.
Speaker 5: We do.
Speaker 6: We do think the ECB is done because we think
Speaker 6: that the data over the next few months will develop
Speaker 6: in such a way they'll justify no more rate hikes.
Speaker 6: I think the ECB and the FED have both introduced
Speaker 6: the skip concept, and hopefully by the time we get
Speaker 6: a few more reports that will then say we don't
Speaker 6: maybe need to hike at all. The banking in a
Speaker 6: weird place where they don't give that sort of strong
Speaker 6: forward guidance about skipping or not. Hopefully we start to
Speaker 6: see that build up as a narrative for the UK
Speaker 6: as well in the next few months too.
Speaker 4: I've got a birthday present for you. We're not going
Speaker 4: to talk about Eston Villa, Okay, I'm just gonna let
Speaker 4: you go. We won't talk about the score over the weekend.
Speaker 4: Short and happy birthday song.
Speaker 3: Cheers guys, Rochester and Namura Jordan. Thank you.
Speaker 2: Lindsay pigs As, someone who's been calling for reeds to
Speaker 2: be much higher, potentially even with a six handoff for
Speaker 2: the Federal Reserve to get inflation under control, joins us
Speaker 2: right now. She is a chief economist at Stifel.
Speaker 1: Lindsay, what's your view.
Speaker 2: On why we saw such a big upside surprise on
Speaker 2: retail sales?
Speaker 8: Well, this certainly was a stronger than expected report. And
Speaker 8: no doubt this will boost optimates that because of the
Speaker 8: resilience of the consumer, we can achieve that soft landing.
Speaker 8: But I would push back a little bit in the
Speaker 8: sense that we don't need to put too much focus
Speaker 8: on one month's numbers. What we have seen is a
Speaker 8: tremendous amount of volatility in terms of consumer activity month
Speaker 8: to month, suggesting that yes, while this was a welcome
Speaker 8: step in the right direction, consumers are increasingly shifting the
Speaker 8: goods and services in their basket on a month to
Speaker 8: month basis, something that they do, something we do as
Speaker 8: consumers when we are increasingly concerned about our financial footing.
Speaker 8: So while this is again beating the expectations for the market,
Speaker 8: I wouldn't necessarily say that this is a trend that
Speaker 8: can continue to rise, particularly against the backdrop drop of
Speaker 8: some of these factors that prove artificial support drawing down
Speaker 8: savings a last sputtering of state and local stimulus. We
Speaker 8: see hardship withdraws from four to one k's up over
Speaker 8: forty percent on a year over year basis. But while
Speaker 8: this will provide a temporary support, this is not an
Speaker 8: indefinite support to the consumer.
Speaker 2: So where does this fit in Lindsay to your view
Speaker 2: that you previously had, that the FED had a lot
Speaker 2: more work to do, that they had to get to
Speaker 2: a level that nobody was gaming out or very few
Speaker 2: of six percent or north of that.
Speaker 8: Well, I think this is going to make the Fed's
Speaker 8: job more difficult because the longer it takes for the
Speaker 8: labor market for the consumer to show that needed weakness
Speaker 8: or respond to earlier policy tightening, the more aggressive the
Speaker 8: response from the FED must be, thus ensuring an eventual downturn.
Speaker 8: So the notion that the fact that consumer has continued
Speaker 8: to be resilient across the first five hundred and twenty
Speaker 8: five basis points supporting the notion of a soft landing, No,
Speaker 8: I would argue it's quite the opposite. That simply means
Speaker 8: the Fed will have to be more aggressive raising rates
Speaker 8: higher and keeping rates higher for longer than investors had anticipated,
Speaker 8: suggesting that the downturn potentially and eventually will come and
Speaker 8: may be more more aggressive, more of a downturn than
Speaker 8: previously anticipated. If the Fed didn't need to raise rates
Speaker 8: quite as much, lindsa squash out inflation.
Speaker 2: Lindsay said two things, raise rates higher and keep them
Speaker 2: there for longer, and those are worthy ideas that people had,
Speaker 2: But some people are starting to think, Okay, what if
Speaker 2: the Fed is done with how high they're going to
Speaker 2: raise rates, but they are going to keep them there
Speaker 2: for longer. And that's what we're seeing priced into the
Speaker 2: market gradually with some of the highest longer term expectations
Speaker 2: for FED funds rates that we've seen in this cycle.
Speaker 1: At what point does that cause more damage in your view?
Speaker 8: Well, I think it's certainly going to cause more damage. Again,
Speaker 8: the more pressure on the FED to respond. Now, if
Speaker 8: we continue to see this type of resilience, if we
Speaker 8: continue to see a third quarter GDP surpass earlier expectations
Speaker 8: or surpass what we saw in the second quarter, I
Speaker 8: think the FED doesn't necessarily need to continue to raise
Speaker 8: rates indefinitely. But once they reached that sufficiently restrictive level,
Speaker 8: as you mentioned, we've long conceded that will be six
Speaker 8: percent or above, the Feed is likely going to be
Speaker 8: forced to keep us at that elevated level for some time.
Speaker 8: The FET itself has said rate cuts are not in
Speaker 8: their base case scenario for twenty twenty three, but even
Speaker 8: twenty twenty four remains a sizable question mark. If we
Speaker 8: aren't able to see that intended result. Remember, the feed
Speaker 8: is raising rates to tap down consumption, tap down investment,
Speaker 8: and result in a slower level of activity in order
Speaker 8: to get that more benign inflation. But thus far the
Speaker 8: economy is pushing very hard against the intentions of tighter
Speaker 8: monetary policy.
Speaker 2: If you are just joining us, we are just seeing
Speaker 2: the ramifications of retail sales numbers that came in significantly
Speaker 2: higher than expected. We're seeing the overall month over month
Speaker 2: headline number of zero point seven percent versus expectations of
Speaker 2: zero point four percent. The control group, which does factor
Speaker 2: into the US gross domestic product figure, came in at
Speaker 2: one percent from the expected zero point five percent. We
Speaker 2: are seeing two year yield surge past five percent, ten
Speaker 2: year yields and thirty year yields both reaching the highest
Speaker 2: level since October, climbing up. We're seeing thirty year yields
Speaker 2: four point three two percent. Lindsay Piagsa of Stefol with
Speaker 2: us and Lindsey, I really want to get your sense
Speaker 2: of what could potentially halt this spending. You're saying it
Speaker 2: can't persist. You're not going to see this forever. Some
Speaker 2: people have pointed to the student loan repayments that are
Speaker 2: going to start in October.
Speaker 1: Do you give credence to.
Speaker 2: This sort of idea that we could see some sort
Speaker 2: of tightening and and fiscal tightening on that front going forward.
Speaker 8: Oh. Absolutely, But there's a number of factors. And remember,
Speaker 8: even with this monthly increase of beating expectations, when we
Speaker 8: take a step back and look at the longer term momentum,
Speaker 8: it's very clear that consumers are beginning to slow their activity.
Speaker 8: Coming out of the gate from the Great Shutdown, we
Speaker 8: had double digit growth, then we slowed to eight to six.
Speaker 8: Now we're talking about bouncing around two percent on an
Speaker 8: annual basis. So while still positive, the consumer has clearly
Speaker 8: pulled back. And these other factors, as you mentioned, monthly
Speaker 8: payments for student loans, additional housing payments coming back online.
Speaker 8: This is going to compound the pressure on the consumer. Now,
Speaker 8: there are some temporary supports that we're still tapping into.
Speaker 8: There still is a sputtering of state and local stimulus.
Speaker 8: Consumers are turning to four oh one ks, Consumers are
Speaker 8: ramping up credit card debt, and with the relative health
Speaker 8: of the balance sheet, meaning we paid down debt during
Speaker 8: the closure during the pandemic, there still is some wiggle
Speaker 8: room for the consumer to expand that balance sheet. So
Speaker 8: I'm certainly not suggesting that the consumer is going to
Speaker 8: immediately fall off a cliff. But what we are seeing
Speaker 8: is these indefinite supports beginning to wane, putting additional pressure
Speaker 8: on the consumer eventually as we head further into the
Speaker 8: second half of the year.
Speaker 1: What do you expect j Powell to say in Jackson
Speaker 1: Hole next week? Given all of this, I think one of.
Speaker 8: The biggest questions that investors have is for how long?
Speaker 8: And that's really what I think Chair Powell is going
Speaker 8: to focus on. It's not necessarily how high, because it
Speaker 8: seems as if the Committee is of one mind that
Speaker 8: we're nearing that terminal level. Whether it's one, two, maybe
Speaker 8: even three additional rate hikes, we're up near that sufficiently
Speaker 8: restrictive level. But how long will the Fed need to
Speaker 8: raise rate or keep rate excuse me, at that elevated level.
Speaker 8: I also think he's going to talk about the context
Speaker 8: of inflation against monetary policy. How does the FED respond
Speaker 8: if we see a reversal in inflationary pressures? Is that
Speaker 8: even a scenario that the Fed is considering, and how
Speaker 8: does the committee balance the risk between raising rates even
Speaker 8: higher than previously expected slowing the economy, against the risks
Speaker 8: of wanting to obtain that two percent inflation target. So
Speaker 8: there's a lot of questions that investors are going to
Speaker 8: be listening for that I'm going to be listening for
Speaker 8: in terms of how to gauge the Fed's mindset on
Speaker 8: these broader, broader themes for inflation and monetary policy.
Speaker 1: Lindsay Pigs of Stefha.
Speaker 4: Joining us now on Washington and the latest developments down
Speaker 4: in Georgia. Terry Haynes, founder of panchea policy Terry wanted
Speaker 4: for to catch up with you, sir, always thoughtful our
Speaker 4: conversations together. We mentioned this in the last couple of hours,
Speaker 4: and I think it's the appropriate place to start. We've
Speaker 4: got cases now in New York, in Washington, d C.
Speaker 4: And Florida in Georgia. Terry, how do you rank those
Speaker 4: just in terms of importance?
Speaker 9: Oh, importance. I think it's far too early to tell.
Speaker 9: For one reason that you and Lisa were just talking about,
Speaker 9: which is the timing of the cases. You know, there's
Speaker 9: a whole there's a lot of different ways you can
Speaker 9: slice these things federal versus state, racketeering versus conspirators, all
Speaker 9: kinds of things. I'd rank them in order of how
Speaker 9: they're actually going to come to trial, and to some extent,
Speaker 9: excuse me, and to some extent it matters greatly, you know, Frankly,
Speaker 9: I think whether they're televised or not, as you say,
Speaker 9: I mean, the closer people see what's apply going on
Speaker 9: and why they're going to have more of an opportunity
Speaker 9: to make up their minds on it.
Speaker 2: Terry, can you elaborate a little bit why is the
Speaker 2: televisation of this important? You said to make up their minds,
Speaker 2: but what do you think the outcome will be of
Speaker 2: having it very much in the public eye.
Speaker 9: I think there's just an immediacy to television, frankly, And
Speaker 9: you know, I think we've seen that over the past
Speaker 9: sixty seventy years just in terms of how people perceive
Speaker 9: candidates and people choose candidates. So you know, very broadly
Speaker 9: there's that. But secondly, there is a debate, more than
Speaker 9: a debate in the country about whether this is politicized
Speaker 9: prosecution or whether there's something here. So there's going to
Speaker 9: be an awful lot of pressure on the Fulton County
Speaker 9: DA to show that these charges are real and they're
Speaker 9: not the kind of standard splash that prosecutors do. You know,
Speaker 9: prosecutors tend to go, you know, go in front of
Speaker 9: grand juries, particularly how big you go broad you get
Speaker 9: the maximum you can from the grand jury. In this case,
Speaker 9: it's going to be you know, did she overstep? Does
Speaker 9: she actually have evidence? And you know, and of course
Speaker 9: the other side has a great deal to say about
Speaker 9: how to interpret the evidence. So you know, this is
Speaker 9: going to be on a pretty big stage, and even
Speaker 9: more so if it's the first one.
Speaker 2: Terry, there's a real question around the different polls of
Speaker 2: the political sphere right now and how people are going
Speaker 2: to respond to court cases that most of America or
Speaker 2: many of Americans have already decided about regardless of what's happened. Yet,
Speaker 2: what do you think the outcome will be to some
Speaker 2: sort of conclusion of the trial, if there is some
Speaker 2: sort of conviction. I mean, I'm just trying to play
Speaker 2: out the political risks here on a social level.
Speaker 9: Well, I think firstly, and I've said this to you
Speaker 9: all before, I think there is greater uncertainty around the
Speaker 9: twenty twenty four presidential election because you have an increased
Speaker 9: risk for an uncertainty about Trump and about Biden. On
Speaker 9: Trump specifically, I think what you've got is a situation
Speaker 9: where you know, if there's a conviction. My instinct is
Speaker 9: what happens is that it accelerates this death by a
Speaker 9: thousand paper cuts process where people say, you know what,
Speaker 9: regardless of Trump policies, regardless of whatever, you know, movement,
Speaker 9: you know, kind of anti establishment movement I think exists here,
Speaker 9: I'd be better off with another candidate. So I tend
Speaker 9: to think that the more the prosecutions start landing home,
Speaker 9: the more that the Republican electorate turns elsewhere.
Speaker 2: Right now, Terry, is you game out that political risk?
Speaker 2: Can you talk to different clients? What are you telling
Speaker 2: them to prepare for? What is the way that it
Speaker 2: will manifest itself if we're not focused as much on say,
Speaker 2: debt reduction or some of the tangibles nuts and bolts
Speaker 2: of fiscal governance.
Speaker 9: Well, I say a couple of things. One is that
Speaker 9: the the first action in the presidential primary process is
Speaker 9: five months I think from today. I mean, you know, Iowa,
Speaker 9: I think it's five months from today. So you know,
Speaker 9: that's a very long time in politics, and there are
Speaker 9: examples all over the board about how you have somebody
Speaker 9: that was leading in the polls today, you know, didn't
Speaker 9: win different primary challenges. So you know, number one, there's that.
Speaker 9: Number two, keep your eye on the panoply of things
Speaker 9: that are going on in Washington, you know, not just
Speaker 9: the Trump matter or the Biden matter. You've got just
Speaker 9: in the next few months. You've got a i think
Speaker 9: a shutdown likelihood, a government shutdown likelihood at sixty percent.
Speaker 9: You've got probably no meaningful action on debt and fiscal
Speaker 9: which markets are increasingly interested in. You've got everything from
Speaker 9: the China economy to the Ukraine Russia matter to think about,
Speaker 9: you know, bank capital standards, and all the way down
Speaker 9: to John's favorite topic, UFO. So, uh, you know, what
Speaker 9: we've got is a situation here where there's an awful
Speaker 9: lot of risk coming out of Washington on a variety
Speaker 9: of fronts, all at once, and it would behooves investors
Speaker 9: to pay attention to all of it, not just this
Speaker 9: particular bread and circus.
Speaker 3: Terry, how did you know that? How did you know that? Terry?
Speaker 3: How real is this down in DC? When you watch
Speaker 3: these hearings. How real is it?
Speaker 9: Which part the UFO was obviously, Terry. You know, the
Speaker 9: cheap and easy line is to say, anybody that watches
Speaker 9: Washington with regularity, uh, you know, does believe in uh
Speaker 9: you know that that there's something out there that you know,
Speaker 9: is affecting things that isn't us. You know, I think
Speaker 9: there's an awful lot of circumstantial evidence on the UFO matters.
Speaker 9: There always has been, and you know, they're going to
Speaker 9: need to get to the next step to start convincing people.
Speaker 4: Terry, Thank you, sir, Terry Haynes, a panteer policy Then
Speaker 4: in Washington, Drew Reading joined US Now home builders analysts
Speaker 4: for Bloomberg Intelligence Stree, can we start with Home Depot.
Speaker 3: What have you learned from the numbers this morning?
Speaker 7: Yeah, so Home Depot had a modest beat, same sort
Speaker 7: of sales down two percent. Expectations were for declind of
Speaker 7: about four percent. I mean, this was pretty much in
Speaker 7: line with what we were expecting. There's been some noise
Speaker 7: quarter to quarter with lumber and weather. The key takeaway
Speaker 7: is that they reaffirmed their four year guidance calling for
Speaker 7: a decline of two to five percent, which includes a
Speaker 7: backdrop of the broader home improvement market falling five to
Speaker 7: ten percent. So you know, they reaffirmed this back at
Speaker 7: their investor day a couple of months ago, so not
Speaker 7: a whole lot of new news from this release. They
Speaker 7: did confirm that they're still caution among consumers and that
Speaker 7: big ticket discretionary projects are still under a little bit
Speaker 7: of pressure.
Speaker 3: For get big tech.
Speaker 4: One of the stories of the year in the acuity
Speaker 4: market has been this rip roaring rally in the home
Speaker 4: builders through later and I were just talking about how
Speaker 4: frozen this housing market is in America. Can you put
Speaker 4: some numbers on that, just how frozen our things at
Speaker 4: the moment.
Speaker 7: Yeah, So if you look at the existing home market,
Speaker 7: sales are down more than thirty percent from their peak.
Speaker 7: I looked at the thirty year mortgage rate before I
Speaker 7: came on this morning, and we're at seven and a
Speaker 7: quarter percent, So, I mean, that's kind of startling. And
Speaker 7: just to give you some perspective of how out of
Speaker 7: whack rates and prices seem, home prices would have to
Speaker 7: fall somewhere around thirty five percent in order for monthly
Speaker 7: payments relative to incomes to fall back to trend levels. Now,
Speaker 7: we don't think that's going to happen. The main reason
Speaker 7: is because the market is frozen. There's no inventory in
Speaker 7: the existing home market, and that's really what's put the
Speaker 7: builders in a unique situation. They've been able to bring
Speaker 7: new product to market. They've been able to help customers
Speaker 7: make their monthly payments work by offering great buydowns. So
Speaker 7: they've kind of been in the sweet spot with higher rates,
Speaker 7: which is something we know we and others didn't really
Speaker 7: expect coming into this year.
Speaker 2: Bear with me, Drew, But immediately I started thinking, does
Speaker 2: this mean that when the FED cut rates, or if
Speaker 2: they've cut rates, maybe they're going to hold rates here
Speaker 2: for a very long time.
Speaker 1: Most people expect them rates to go down, that.
Speaker 2: Home builders will sell off, that that will actually reduce
Speaker 2: some of the proposition that they offer at a time
Speaker 2: where you start to see a little bit more loosening
Speaker 2: in the housing market.
Speaker 7: So it's an interesting question. And the reason I said
Speaker 7: that they're uniquely positioned is because we think they could
Speaker 7: benefit in the current environment where rates are around seven
Speaker 7: and they're buying them down to five and a half.
Speaker 7: But if rates fall back to five and a half percent,
Speaker 7: naturally you've expanded the buyer pool, so it increases mobility.
Speaker 7: So we think even in that environment, builders can still
Speaker 7: do well. I think the biggest risk, and it's not
Speaker 7: something we're seeing now, is that you get more stress
Speaker 7: in the labor market and unemployment starts to spike. That's
Speaker 7: where you would start to see pressures on home prices
Speaker 7: and more supply coming to market because there's forced selling activity.
Speaker 7: That's just something we haven't had to this point.
Speaker 2: Home builders have also been in a sweet spot because
Speaker 2: you've seen lumber prices come in and from home depots earnings,
Speaker 2: that's been actually a headwind for them.
Speaker 1: That's been a problem.
Speaker 2: They've actually seen margins come in with some of their
Speaker 2: supplies and their sales increase.
Speaker 1: Not able to be passed along as much. How much?
Speaker 2: Is that kind of one of the variables that can
Speaker 2: back up a home builder or not if you start
Speaker 2: to see lumber prices go back up.
Speaker 9: Yeah.
Speaker 7: So right now, profitability for the builders in terms of
Speaker 7: gross margin has benefited from the fall and lumber prices.
Speaker 7: We expect that to continue over the near term, but
Speaker 7: they have started to take back higher and that could
Speaker 7: add some pressure to margins alongside the increased use of
Speaker 7: sales incentives. So it's certainly something to watch because obviously,
Speaker 7: as you would expect, lumber is the biggest component of
Speaker 7: a house.
Speaker 2: When, Drew, do you expect mortgage rates as you mentioned
Speaker 2: seven and a quarter seven and a half percent if
Speaker 2: you look at bank right, when will that actually trickle
Speaker 2: out into valuations in a more material way? Are we
Speaker 2: just basically saying that because of the term structure, it's
Speaker 2: not going to have the ramifications that anyone expected it
Speaker 2: to have.
Speaker 7: Yeah, it's certainly an interesting dynamics that's taken shape. And
Speaker 7: I think the reason that higher rates aren't having an
Speaker 7: impact on home prices and the evaluation houses is because
Speaker 7: there's no supply. In order for a price see to
Speaker 7: see a dramatic decline, you'd have to have that forced
Speaker 7: selling activity, which would be associated with an economic recession
Speaker 7: and rising unemployment. We've got very well healed borrowers out there.
Speaker 7: We haven't seen those exotic loans this cycle, so we
Speaker 7: have good borrowers. They're locked into low fixed rates, so
Speaker 7: there's really no reason for them to be forced to
Speaker 7: sell absent on broader economic recession.
Speaker 4: Dre Can you give me that number again? For those
Speaker 4: that missed it, what the housing prices need to fall
Speaker 4: by to go back to trend repayment levels.
Speaker 7: So in the existing home market, home prices would have
Speaker 7: to fall about thirty five percent in order for that
Speaker 7: monthly payment relative to income to kind of fall back
Speaker 7: to those trend levels.
Speaker 4: We talked about thirty five percent, Jay. Thank you Drevenning
Speaker 4: there Bloomberg Intelligence.
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