WEBVTT - Bloomberg Surveillance TV: May 21, 2024 0:00:02.440 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.400 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.240 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.920 Terminal and the Bloomberg Business App. Mike Wilson's capitulated. He's 0:00:37.960 --> 0:00:40.560 moved from forty five hundred to fifty four hundred and 0:00:40.600 --> 0:00:42.519 all of that. Can we just start with the scube 0:00:42.840 --> 0:00:45.000 the wide range of outcomes, because that was the headline 0:00:45.000 --> 0:00:47.600 of the piece, the bear case versus the bull case. 0:00:47.640 --> 0:00:49.040 Has it ever been this wide? 0:00:49.120 --> 0:00:51.680 Well, not for us, I think for other people they've 0:00:51.680 --> 0:00:54.640 had wider skews, And look, it just reflects the uncertainty 0:00:55.120 --> 0:00:57.200 that has been the case for the last several years. 0:00:57.560 --> 0:00:59.959 And quite frankly, I wouldn't be surprised if we had 0:01:00.040 --> 0:01:01.880 both sides, you know, I mean, like that's kind of 0:01:01.880 --> 0:01:04.080 the world we're in, which is, you know, think about 0:01:04.080 --> 0:01:05.480 this year, and we talked about this at the beginning 0:01:05.480 --> 0:01:07.000 of the year, which is, we had three sort of 0:01:07.040 --> 0:01:09.920 equally similar opera, you know, sort of outcomes. One was 0:01:10.040 --> 0:01:12.080 a soft landing is the goldilocks, which is kind of 0:01:12.080 --> 0:01:14.600 consensus now and that's our house view. Then you have 0:01:14.640 --> 0:01:16.920 the no landing, which is kind of a reacceleration, the 0:01:17.040 --> 0:01:20.399 stickier inflation, even maybe a stagflationary outcome, which is what 0:01:20.480 --> 0:01:22.120 the market was thinking about in April. 0:01:22.560 --> 0:01:23.720 And now you're back to a soft line. 0:01:23.760 --> 0:01:25.759 But you still can't rule out of recession either, right, 0:01:25.800 --> 0:01:28.600 So like all of these are very possible, and you know, 0:01:28.640 --> 0:01:31.720 they could all happen with a higher than normal degree 0:01:31.840 --> 0:01:32.959 of you know, certainty. 0:01:33.319 --> 0:01:35.160 So that's that's really. 0:01:34.880 --> 0:01:37.039 The headline that should have been out is that, look, 0:01:37.120 --> 0:01:39.480 nobody knows anything, right, I mean, and particularly at a 0:01:39.480 --> 0:01:42.240 point in time, and I think maybe maybe our mistake 0:01:42.319 --> 0:01:44.000 is just admitting that we don't know as much as 0:01:44.040 --> 0:01:48.080 maybe everybody else claims to. That's called humility, something that 0:01:48.080 --> 0:01:49.559 we've learned the hard way over life. 0:01:50.040 --> 0:01:51.200 But anyways, the point here. 0:01:51.120 --> 0:01:53.400 Is that the meat of our report this year or 0:01:53.440 --> 0:01:55.600 this this update was really more about how do you 0:01:55.640 --> 0:01:59.760 make money in an environment whe have basically zero percent 0:01:59.800 --> 0:02:01.880 ups side and the base case and you could have 0:02:01.920 --> 0:02:03.880 twenty percent upside or twenty percent downside. 0:02:03.920 --> 0:02:05.200 And that's what clients pay us for. 0:02:05.280 --> 0:02:05.400 Right. 0:02:05.440 --> 0:02:06.360 It's the process. 0:02:06.520 --> 0:02:08.680 It's understanding, Okay, what kind of environment and how are 0:02:08.680 --> 0:02:10.520 we going to navigate that and manage that. So we 0:02:10.520 --> 0:02:12.760 spend a large part of the report yesterday talking about 0:02:12.760 --> 0:02:16.919 trade ideas, specific sector ideas. That's not the headline that 0:02:16.919 --> 0:02:19.560 people want to write about. That's fine, and it's your prerogative, 0:02:20.120 --> 0:02:21.480 but that's what we want to talk about. 0:02:21.600 --> 0:02:23.280 That was never going to fit in the headline. We 0:02:23.280 --> 0:02:25.240 will talk about some of that stuff in just a moment. 0:02:25.280 --> 0:02:27.440 Let's talk about the headline just brief flake, Sure, are 0:02:27.480 --> 0:02:29.760 you de emphasize in the fifty four hundred are you 0:02:29.800 --> 0:02:31.920 saying as a price target is not actually that important 0:02:31.919 --> 0:02:32.600 to you in the firm? 0:02:32.720 --> 0:02:33.280 What is that? 0:02:33.440 --> 0:02:36.280 Well, it's not important to most clients. Institutional clients don't 0:02:36.280 --> 0:02:38.200 care about the target on the S and P. Five 0:02:38.200 --> 0:02:40.639 finals to being honest, they're trying to pick stocks and look, 0:02:40.880 --> 0:02:42.239 one of the most important things we talked about in 0:02:42.240 --> 0:02:45.040 the report is alpha generation. This year has been spectacular. 0:02:45.600 --> 0:02:47.600 The way we measure it with our client our client base, 0:02:47.600 --> 0:02:50.040 which is significant, is this is the best alpha generation 0:02:50.160 --> 0:02:52.840 alpha capture we've seen since we've started recording it since 0:02:52.880 --> 0:02:53.639 twenty ten. 0:02:54.160 --> 0:02:56.440 So that's what people care about. We're trying to help 0:02:56.480 --> 0:02:57.639 them in their. 0:02:57.520 --> 0:03:01.720 Process of Okay, what kinds of stocks work in this environment? Oh, 0:03:01.720 --> 0:03:04.120 by the way, when we skew from these different outcomes, 0:03:04.280 --> 0:03:06.440 you need to be ready to pivot towards different types 0:03:06.480 --> 0:03:07.240 of securities. 0:03:07.320 --> 0:03:08.320 Right now, like. 0:03:08.320 --> 0:03:11.600 Our house call is it's a soft landing goldilocks outcome. 0:03:12.040 --> 0:03:14.680 We're not that confident that we want to make that 0:03:14.720 --> 0:03:16.880 bet fully. Like we think it's still late cycle, which 0:03:16.919 --> 0:03:20.679 means quality. Okay, large caps over small caps. Still, we 0:03:21.000 --> 0:03:24.880 like staples over discretionary. We have two defensive sectors overweight 0:03:25.000 --> 0:03:27.720 utilities and staples because that kind of protects against slowing 0:03:27.760 --> 0:03:30.079 growth risk. So there's a bunch of different things, but 0:03:30.200 --> 0:03:31.720 the main factor that's. 0:03:31.520 --> 0:03:32.560 Been working is quality. 0:03:32.680 --> 0:03:34.760 Quality has been the most consistent factor and we don't 0:03:34.760 --> 0:03:35.480 see that changing. 0:03:35.680 --> 0:03:36.960 I just want to say that if you wrote a 0:03:36.960 --> 0:03:38.960 headline saying nobody knows anything, I mean, we could do 0:03:39.000 --> 0:03:41.680 that every day, but it probably wouldn't really gain that 0:03:41.760 --> 0:03:45.120 much attraction. I am wondering if there are certain areas 0:03:45.120 --> 0:03:47.800 that would win in either scenario, the fifty four hundred 0:03:48.160 --> 0:03:49.280 or the forty five hundred. 0:03:49.920 --> 0:03:51.760 Well, I think that we lay that out once again, 0:03:51.920 --> 0:03:52.560 that's our bare case. 0:03:52.600 --> 0:03:55.760 A forty five hundred scenario is that's not really our 0:03:55.760 --> 0:03:56.840 bare case, that's our base. 0:03:56.640 --> 0:03:57.400 Case for a year end. 0:03:57.400 --> 0:04:00.640 Originally that obviously has proven to be wrong, mainly because 0:04:00.640 --> 0:04:03.360 of multiples, right. I think this is the main thing 0:04:03.640 --> 0:04:06.640 said that people have either gotten right or wrong in 0:04:06.640 --> 0:04:09.080 the last twelve months. Is that I mean a twenty 0:04:09.680 --> 0:04:12.800 one multiple is you know, in the top death style 0:04:13.000 --> 0:04:14.920 of the last eighty years. I mean that is an 0:04:15.000 --> 0:04:18.120 expensive multiple. So the question I think investors have to 0:04:18.160 --> 0:04:20.680 ask themselves is is that a fair multiple to be 0:04:20.760 --> 0:04:24.120 paying well and the goaldilocks, you know, perfect soft landing. 0:04:24.160 --> 0:04:25.160 I think that's plausible. 0:04:25.360 --> 0:04:27.120 But that's where we're trading, and that's why there's not 0:04:27.160 --> 0:04:29.520 a lot of upside at the index level. 0:04:29.320 --> 0:04:32.479 Which raises this question, are there specific sectors that win 0:04:32.720 --> 0:04:35.800 regardless of the overall index? Do you see certain areas 0:04:35.839 --> 0:04:38.760 that are kind of independent of this overall shift of 0:04:38.800 --> 0:04:41.599 whether there is this momentum in international money that pours 0:04:41.600 --> 0:04:43.719 in and keeps valuations high and sends them higher. 0:04:43.760 --> 0:04:44.840 It's large scamp quality. 0:04:44.960 --> 0:04:46.720 I mean, I mean that is what's continues to and 0:04:46.720 --> 0:04:48.400 by the way, it's not just high growth. It's also 0:04:48.520 --> 0:04:51.000 cyclicals can work in that. But it's still up the 0:04:51.080 --> 0:04:53.920 quality curve and we show it in the note very clearly. 0:04:54.000 --> 0:04:56.400 I mean, it's just it's the it's been the best 0:04:56.480 --> 0:04:59.000 carry factor for the last year, year and a half, 0:04:59.080 --> 0:05:01.320 which is a classic late cycle winner. 0:05:01.120 --> 0:05:02.000 Which is where we are. 0:05:02.360 --> 0:05:05.520 So you know, don't overthink that and don't try to 0:05:05.560 --> 0:05:07.560 be cute and say, well, I'm going to jump over 0:05:07.600 --> 0:05:09.800 here because I think there's better returns there could be. 0:05:10.000 --> 0:05:12.800 Look in the small cap and in the lower quality areas. 0:05:13.160 --> 0:05:16.520 We can't own nothing. I mean, it's very idiosyncratic. It's 0:05:16.600 --> 0:05:19.880 very idiosyncratic. It's not a factor that's carrying well. It's 0:05:19.920 --> 0:05:22.080 a okay, I have a stock specific idea. It's a 0:05:22.120 --> 0:05:25.360 low quality stock potentially that has a very unique story 0:05:25.360 --> 0:05:25.919 to itself. 0:05:26.120 --> 0:05:27.680 Next week's still for this market, as you know, it's 0:05:27.680 --> 0:05:31.159 tomorrow afternoon. We get numbers from Nvidia megacap Tech. What 0:05:31.279 --> 0:05:34.200 supports that fifty four hundred? What supports it? For you? 0:05:34.320 --> 0:05:36.160 Is it mega cap tech, the NVIDIAs of this world? 0:05:36.279 --> 0:05:36.960 Is it elsewhere? 0:05:37.200 --> 0:05:40.479 Well, it's basically you're assuming that multiple stay elevated. 0:05:40.560 --> 0:05:40.720 Right. 0:05:41.360 --> 0:05:44.120 You know, we didn't change our earnings forecasts in this report. 0:05:44.320 --> 0:05:47.120 We've had this sort of boom idea that we had 0:05:47.279 --> 0:05:49.840 the boom bust thesis for a while. We probably were 0:05:49.839 --> 0:05:52.320 early in calling for a recovery in earnings this year 0:05:52.360 --> 0:05:54.680 in twenty twenty five, so that didn't change. So you 0:05:54.720 --> 0:05:56.560 have earnings coming from a lot of different groups. Now, 0:05:56.560 --> 0:06:00.719 I would say the biggest contributors have been technology, Energy 0:06:00.800 --> 0:06:04.200 spent a big contributor surprisingly industrials because of all the 0:06:04.279 --> 0:06:07.040 spending that's going on fiscally. So those are three major 0:06:07.040 --> 0:06:09.799 sectors that are contributed to the earning story. But ultimately 0:06:09.839 --> 0:06:13.479 the fifty four hundred is being supported by policy, right 0:06:13.680 --> 0:06:17.719 by very loose fiscal and monetary policy. Now you may say, well, 0:06:17.760 --> 0:06:20.120 monetary policy is tight, not really. I mean we have 0:06:20.160 --> 0:06:22.200 an incredible amount of liquidity coming in to pay for 0:06:22.240 --> 0:06:25.239 that fiscal So to me, the risk in the story 0:06:25.320 --> 0:06:28.320 for the next six to twelve months is do the 0:06:28.360 --> 0:06:33.480 market start to balk at this unsustainable fiscal policy and 0:06:34.520 --> 0:06:36.720 the way that they're funding it, and we've wrote about this, 0:06:36.800 --> 0:06:40.120 you know, in detail. We have these liquidity provisions in 0:06:40.160 --> 0:06:42.719 place now, the reverse repo which everybody knows about. The 0:06:42.760 --> 0:06:45.839 Treasury General Account can be drained if necessary to pay 0:06:45.880 --> 0:06:48.160 for fiscal stemus in a budget if they need to. 0:06:48.279 --> 0:06:50.279 And the Fed has already said they're going to start 0:06:50.279 --> 0:06:53.839 tapering QT. Well, that's like a trillion dollars of liquidity. 0:06:54.080 --> 0:06:56.760 That's pretty loose right to pay for the fiscal So 0:06:56.800 --> 0:06:59.120 to me, does the market and I think this is 0:06:59.200 --> 0:07:02.880 just something we're watching very carefully. Last fall when multiples 0:07:02.880 --> 0:07:05.160 came down hard, it was because rates were going up 0:07:05.279 --> 0:07:08.760 due to term premium widening. Mean the bond market we're 0:07:08.800 --> 0:07:12.200 starting to push back on this strategy right now, that's 0:07:12.240 --> 0:07:14.160 not a problem. So one of the things we're going 0:07:14.200 --> 0:07:16.560 to be watching, you know, to change our view on 0:07:16.600 --> 0:07:18.560 how things trade at the index level is does the 0:07:18.640 --> 0:07:20.200 term premium start to widen again? 0:07:20.320 --> 0:07:22.160 We don't know, but that's what we're going to be watching. 0:07:22.200 --> 0:07:24.480 So big risk factor is in the bond market, and 0:07:24.520 --> 0:07:28.280 in the bond market, the big focus is November. Does 0:07:28.320 --> 0:07:30.640 this have a political twist to it? An election call 0:07:30.800 --> 0:07:31.480 embedded in it? 0:07:31.840 --> 0:07:32.080 Well? 0:07:32.280 --> 0:07:34.840 I mean yes, and no, because I wouldn't say either 0:07:35.240 --> 0:07:38.280 party has shown any fiscal discipline, right, So in other words, 0:07:38.320 --> 0:07:41.200 I think we're going to get a strong fiscal support 0:07:41.680 --> 0:07:44.560 no matter who wins the election, both in Congress or 0:07:44.600 --> 0:07:48.400 at the presidential level. The real question for markets is 0:07:48.560 --> 0:07:50.320 how does it get funded? 0:07:50.680 --> 0:07:51.520 How is it funded? 0:07:51.840 --> 0:07:54.520 Can they fund it at a reasonable rate? Right now, 0:07:54.600 --> 0:07:58.640 the bond market seems very relaxed about that feature, which 0:07:58.720 --> 0:08:00.400 is why multiples have expanded again. 0:08:00.560 --> 0:08:02.720 So if the bond market stays relaxed about this, but 0:08:02.720 --> 0:08:04.440 there's a lot of people prick that it will and 0:08:04.480 --> 0:08:06.640 believe me, I get very excited about auctions, but every 0:08:06.640 --> 0:08:09.360 week people tell me that I shouldn't because there's plenty 0:08:09.400 --> 0:08:13.280 of interest at these levels. If there isn't pushback, then 0:08:13.320 --> 0:08:15.360 fifty four hundred is that too conservative? 0:08:15.680 --> 0:08:16.640 Maybe you could be. 0:08:16.720 --> 0:08:18.760 I mean, look, I can make a case for seventeen times, 0:08:18.800 --> 0:08:21.080 which is when our target was originally for this year, 0:08:21.200 --> 0:08:23.320 seventeen eighteen times. I can make a case for twenty 0:08:23.320 --> 0:08:25.000 one times. I can make case for twenty two times. 0:08:25.000 --> 0:08:27.920 That's the problem, right, We don't know, So that's why 0:08:27.960 --> 0:08:29.000 we have a wider skew. 0:08:29.280 --> 0:08:32.280 And I would say this, Lisa, that the. 0:08:32.280 --> 0:08:36.520 Target will be more determined, probably by multiples than we're 0:08:36.520 --> 0:08:39.880 going to be wildly surprised on earnings. Okay, unless it's recession, 0:08:39.880 --> 0:08:41.839 of course, then you'll be surprising the downside. But I 0:08:42.240 --> 0:08:44.400 don't like the earnings haven't really moved that much for 0:08:44.440 --> 0:08:46.320 twenty twenty four and twenty five. Right, If you think 0:08:46.320 --> 0:08:49.400 about since October, which is with the low last fall, 0:08:49.960 --> 0:08:52.959 twenty twenty four, earnings estimates are up a couple percent. 0:08:53.480 --> 0:08:55.719 You know, the market's a twenty five thirty, so it's 0:08:55.800 --> 0:08:58.400 all multiple. So this is why you just need to 0:08:58.480 --> 0:09:01.839 be alert to think changing potentially in the bomb market first, 0:09:01.880 --> 0:09:03.640 and then that will feed into the equity multiples. 0:09:03.720 --> 0:09:05.640 When you talk about fiscal spending, to go back to 0:09:05.679 --> 0:09:09.679 John's point earlier in the election, it's very different what 0:09:09.720 --> 0:09:12.000 the fiscal spending may be used on depending on who 0:09:12.040 --> 0:09:15.040 wins the White House. You're talking about potentially industrials, the 0:09:15.080 --> 0:09:17.679 green energy economy. This is a new industrial policy from 0:09:17.679 --> 0:09:20.360 the Biden administration that could continue or it could stop 0:09:20.360 --> 0:09:22.680 short if it's Trump. How are you thinking about twenty 0:09:22.679 --> 0:09:24.040 twenty five, Well. 0:09:23.960 --> 0:09:26.360 I mean, look, I think the industrial policy will remain strong. 0:09:26.400 --> 0:09:28.679 I mean, that's our reshoring thing, which was part of 0:09:28.679 --> 0:09:29.600 the Trump administration. 0:09:29.760 --> 0:09:32.000 So half of the industrial policy. 0:09:31.679 --> 0:09:33.920 Is potentially green energy and half of it, I would say, 0:09:33.960 --> 0:09:37.080 is reshoring in the de globalization trend. So there's going 0:09:37.120 --> 0:09:40.400 to be spending either way. It may be redirected, like 0:09:40.480 --> 0:09:43.240 I could see maybe the energy policy shifting back towards 0:09:43.280 --> 0:09:46.960 traditional energy, but I would be surprised if spending is 0:09:47.040 --> 0:09:51.280 curtailed in a meaningful way. From that standpoint, I think 0:09:51.280 --> 0:09:53.560 we will see changes or differences is in maybe in 0:09:53.600 --> 0:09:56.240 the tariffs, although recently that seemed to be more aligned. 0:09:56.720 --> 0:09:58.920 And then of course immigration is a big one, and 0:09:58.960 --> 0:10:01.520 that was a huge surprise this year that really nobody 0:10:01.559 --> 0:10:04.960 saw it coming around the label to positive labor shock 0:10:05.000 --> 0:10:05.720 from immigration. 0:10:06.040 --> 0:10:06.920 So to me, that's a while. 0:10:07.080 --> 0:10:09.560 That's probably the single biggest wildcard depending out who. 0:10:09.480 --> 0:10:10.040 Wins the election. 0:10:10.280 --> 0:10:12.319 Bigger not tighter is if you coming from men and 0:10:12.400 --> 0:10:14.719 Zentner and the team Molk and Stanley, this economy can 0:10:14.960 --> 0:10:18.679 grow without it getting tighter and generating inflation pressure. Are 0:10:18.679 --> 0:10:20.520 you saying that could flip the other way pretty quickly 0:10:20.679 --> 0:10:21.800 based on the outcome the election? 0:10:22.280 --> 0:10:25.720 I think, well, depending on how things behave if policy 0:10:25.760 --> 0:10:28.520 really changes, But yeah, sure, you if you all of 0:10:28.559 --> 0:10:31.320 a sudden shut the borders down, and you know Trump's 0:10:31.320 --> 0:10:35.120 talking about deporting people, that would be a negative labor shock, 0:10:35.240 --> 0:10:36.040 and then we'd be in. 0:10:35.960 --> 0:10:36.840 A reverse situation. 0:10:37.040 --> 0:10:39.120 So look, right now, I think the election is literally 0:10:39.120 --> 0:10:41.040 a fifty to fifty I mean, I mean the polls 0:10:41.040 --> 0:10:43.160 are right there forty eight, forty nine to fifty percent 0:10:43.320 --> 0:10:44.440 for both sides. 0:10:44.480 --> 0:10:46.600 So this is not an issue yet. 0:10:46.280 --> 0:10:48.680 We talked about this in the note two, which is 0:10:48.720 --> 0:10:51.840 that volatility and election years typically doesn't start picking up 0:10:51.920 --> 0:10:54.760 until August September, So I think it'll be okay for 0:10:54.800 --> 0:10:56.040 the next month or this is not going to be 0:10:56.040 --> 0:10:59.480 a topic, but it can come at as quickly, probably 0:10:59.559 --> 0:11:01.320 post conventions. 0:11:10.880 --> 0:11:13.320 With us around a table Deutsche Banks Mattlasi joining us, 0:11:13.360 --> 0:11:16.719 also Aberdeen's Luk here look heickmore. If I may go 0:11:16.800 --> 0:11:20.440 through the lineup again today Williams Boss the Baking bah, 0:11:20.600 --> 0:11:23.880 Walla Collins, Ande Mester all speaking once again, Luke. What 0:11:24.040 --> 0:11:26.040 is left to know that we don't know already from 0:11:26.080 --> 0:11:26.840 these officials. 0:11:28.320 --> 0:11:29.440 Yeah, it's tough, isn't it. 0:11:29.520 --> 0:11:31.839 I Mean we've been talking about Table Mountain earlier in 0:11:31.880 --> 0:11:34.600 the year. In the films, they're all deck chairs waiting 0:11:34.640 --> 0:11:38.080 around at the top can't see a thing below them. 0:11:38.440 --> 0:11:40.840 If you've ever been there, it's like that so often. 0:11:40.520 --> 0:11:42.679 And that lack of visibility. 0:11:43.600 --> 0:11:46.360 It's useful to have all these BED speakers with us 0:11:46.440 --> 0:11:48.000 now to get a sense of where they are, what 0:11:48.040 --> 0:11:51.600 they're thinking. But they don't see any further than we see, 0:11:51.760 --> 0:11:54.079 and we need to see the data change. 0:11:54.120 --> 0:11:55.080 I think it is changing. 0:11:55.120 --> 0:11:57.280 I think there's early signs of it changing, and they 0:11:57.320 --> 0:11:58.760 need to see the data change. So I think this 0:11:58.880 --> 0:12:01.400 whole thing that might was talking about, the three month 0:12:01.520 --> 0:12:05.320 visibility period feels about right set hand and feels about right, 0:12:06.160 --> 0:12:09.680 but in years time will be hundred basis points line rates. 0:12:10.120 --> 0:12:13.600 Mattmasseetti if you had enough a FED speak, Yeah, yeah, 0:12:13.720 --> 0:12:13.920 you know. 0:12:14.040 --> 0:12:17.560 I think we're hearing obviously a pack calendar today. A 0:12:17.559 --> 0:12:19.480 lot of it is not related to the outlook. We 0:12:19.760 --> 0:12:21.720 have a lot of commencement speeches on the docket, so 0:12:21.800 --> 0:12:24.920 I'm focused on a few things. One we had Jefferson yesterday. 0:12:25.040 --> 0:12:27.559 I think hearing from the vice chair is important. He 0:12:27.920 --> 0:12:30.480 noted that the fed's forecast essentially for core PC at 0:12:30.520 --> 0:12:32.720 the end of this month is basically twenty six basis points. 0:12:33.200 --> 0:12:36.320 We're talking about getting progress that is definitely progressed from 0:12:36.360 --> 0:12:38.160 the very strong princes that we had earlier this month, 0:12:38.360 --> 0:12:40.760 earlier this year. But we also have to know the 0:12:40.800 --> 0:12:42.800 context that is still well above the fed's objective. It's 0:12:42.800 --> 0:12:45.400 still annualizes to above three percent today. I would have 0:12:45.440 --> 0:12:47.120 like Governor Waller, you know, in the past he has 0:12:47.160 --> 0:12:50.559 given actually some decent for guidance about the deity. He's 0:12:50.559 --> 0:12:52.040 looking at the number of prints that he would likely 0:12:52.120 --> 0:12:54.080 to see. Perhaps he doesn't go that far. I think 0:12:54.120 --> 0:12:56.400 the FED is fully pulled back from calendard based guidance 0:12:56.440 --> 0:12:58.600 at this point in time. But the reality is that 0:12:58.640 --> 0:13:01.800 the FED is highly data dependent. Forecasting the high frequency 0:13:01.880 --> 0:13:04.200 data is hard in this environment, and so the data 0:13:04.240 --> 0:13:06.760 should do more in terms of market moves than the 0:13:06.760 --> 0:13:07.640 FED speakers should. 0:13:07.760 --> 0:13:09.640 Luke was saying that he thinks that you actually are 0:13:09.679 --> 0:13:12.080 starting to see a turn in the data. There is 0:13:12.160 --> 0:13:14.679 something going on under the hood that's consistent. Do you 0:13:14.760 --> 0:13:17.079 agree that that there is this feeling not only does 0:13:17.120 --> 0:13:19.440 inflation but weakness. It's coming through maybe more than the 0:13:19.480 --> 0:13:21.600 overlaw overall data might suggest. 0:13:21.880 --> 0:13:26.280 Yeah, you look at economic surprises, they're negative. Now on average, 0:13:26.440 --> 0:13:29.560 the inflation data did improve in the last month, but 0:13:29.600 --> 0:13:32.520 it's too high IFED needs a lot more evidence on that. 0:13:32.840 --> 0:13:34.880 Some caution I have around these three month rates that 0:13:34.920 --> 0:13:38.160 everybody's talking about. Everybody thinks that there's residual seasonality in 0:13:38.200 --> 0:13:40.040 the data. We get stronger prints earlier in the year, 0:13:40.040 --> 0:13:41.560 we get weaker prints in the back half of the year. 0:13:41.880 --> 0:13:43.960 If that is true, and I believe it is, the 0:13:44.000 --> 0:13:47.160 FED should be cautious about overinterpreting three months of data 0:13:47.240 --> 0:13:50.840 if it does improve broadly. More broadly, you had some 0:13:50.920 --> 0:13:54.200 giveback on the retail sales data that was probably welcome from. 0:13:54.080 --> 0:13:54.960 The Fed's perspective. 0:13:55.280 --> 0:13:57.800 You have a labor market that did soften a little bit, 0:13:58.120 --> 0:14:00.880 but the context is we grew above three percent last year. 0:14:01.000 --> 0:14:03.360 The land of FED is tracking very strong GDP growth. 0:14:03.360 --> 0:14:03.839 For Q two. 0:14:04.280 --> 0:14:07.080 It is softer, but it's not obvious at this point 0:14:07.080 --> 0:14:09.240 that it's soft enough to get inflation back down to target. 0:14:09.280 --> 0:14:11.560 Softer but not soft, as John's been talking about quite 0:14:11.559 --> 0:14:14.000 a bit. I am wondering if, from your perspective, if 0:14:14.040 --> 0:14:17.920 there is a signal with in specific areas like retail sales. 0:14:18.080 --> 0:14:22.120 We see this discussion around more discretion price cuts from target. 0:14:22.200 --> 0:14:23.760 All of these types of things that are leaving us 0:14:23.760 --> 0:14:26.760 feeling like things might be shifting, but not enough to 0:14:26.840 --> 0:14:28.520 change the narrative. How do you interpret this? 0:14:30.120 --> 0:14:33.760 Yeah, I can see the thing too, But I'm also 0:14:33.840 --> 0:14:35.560 looking at what's going on with companies. 0:14:36.040 --> 0:14:39.080 Are they spending? Are they capex plans growing? And they're not. 0:14:40.080 --> 0:14:42.320 The federal budget is. 0:14:42.560 --> 0:14:46.680 Probably a big p now that's starting to be less 0:14:46.680 --> 0:14:50.880 of a stimulus going forward. So consumer may be stalling, 0:14:50.920 --> 0:14:54.480 maybe not going down, but stalling that. Companies are happy 0:14:54.480 --> 0:14:58.320 diagonaled cat quite frankly, and the federal government participation may 0:14:58.320 --> 0:15:00.680 be easing off a little bit. All of those are 0:15:00.840 --> 0:15:03.360 just those early warning sides. I mean, it may be 0:15:03.640 --> 0:15:05.880 that will pass is in the next two to three 0:15:05.920 --> 0:15:08.240 months and we get back and stare these levels of 0:15:08.280 --> 0:15:10.520 interest rates to you next year. But I don't think 0:15:10.560 --> 0:15:12.880 that's where we are. I think we are in a 0:15:12.920 --> 0:15:15.720 period where that in the thirty yield curve is starting 0:15:15.760 --> 0:15:19.600 to bind, is hitting consumers, companies, and the fiscal side 0:15:19.640 --> 0:15:20.720 from the government's changing. 0:15:21.080 --> 0:15:22.680 Matt, you read a lot about the labor market in 0:15:22.680 --> 0:15:25.280 your most recent note. What are these factors that can 0:15:25.320 --> 0:15:28.040 be a tight labor market but also low turn. 0:15:28.480 --> 0:15:31.360 Yeah, so the labor market is fascinating. At the moment, 0:15:31.520 --> 0:15:33.480 you have a very low un employment rate. We're turning 0:15:33.480 --> 0:15:35.200 out two hundred and forty thousand jobs per month on 0:15:35.240 --> 0:15:38.000 average over three six twelve month period. At the same time, 0:15:38.000 --> 0:15:39.480 when you look at some of these other indicators, the 0:15:39.560 --> 0:15:41.880 quits rate, the hiring rate, it actually does show what 0:15:42.000 --> 0:15:43.880 looks like some weakness. The quits rate is the lowest 0:15:43.880 --> 0:15:45.680 since twenty eighteen, the hiring rates of the lowest since 0:15:45.720 --> 0:15:48.920 twenty fourteen. Those are typically associated with a much higher 0:15:49.000 --> 0:15:50.920 unemployment rate, you know, probably something in the four and 0:15:50.960 --> 0:15:53.520 a half to five percent range. So understanding what's going 0:15:53.520 --> 0:15:57.160 on there, I think is absolutely critical. It is the 0:15:57.200 --> 0:16:00.440 result of a very low layoff rate. Now I don't 0:16:00.480 --> 0:16:02.400 think it's just about labor hoarding. If it was just 0:16:02.440 --> 0:16:05.640 about labor hoarding, you expect productivity growth to be quite low. 0:16:05.680 --> 0:16:07.760 Productivity growth of the past year is actually quite strong. 0:16:07.960 --> 0:16:10.120 You expect people not to be working their workers very 0:16:10.120 --> 0:16:10.560 long hours. 0:16:10.600 --> 0:16:11.800 That that's not really happening. 0:16:12.120 --> 0:16:13.720 So I think we don't understand. 0:16:13.280 --> 0:16:13.960 It all that well. 0:16:14.280 --> 0:16:18.240 I speculate that this big burst in labor market trend 0:16:18.280 --> 0:16:20.320 that took place, basically everybody was able to quit their 0:16:20.400 --> 0:16:22.640 jobs around the pandemic and it led to this much 0:16:22.680 --> 0:16:24.440 better matching between employers and employees. 0:16:24.480 --> 0:16:25.000 We also have a. 0:16:25.000 --> 0:16:27.440 Lot more flexibility in the labor market with work from home. 0:16:27.760 --> 0:16:29.080 If that's true, you should. 0:16:28.800 --> 0:16:31.240 Have less people cutting their jobs, less lay also taking place, 0:16:31.280 --> 0:16:33.800 less hires, but also big productivity gains, which is at 0:16:33.880 --> 0:16:35.160 least is what we're seeing over the past year. 0:16:35.280 --> 0:16:38.200 Mid cycle adjustment. It's a phrase that I first read 0:16:38.000 --> 0:16:40.800 in your research. I think a lot of other people 0:16:40.840 --> 0:16:43.280 started to think about it in the months afterwards. You've 0:16:43.280 --> 0:16:45.160 put forward this idea that what we're going to get 0:16:45.160 --> 0:16:47.400 as a complic counts and maybe that's it a high 0:16:47.480 --> 0:16:50.760 neutral rate as well? What underpinds that view? Where did 0:16:50.840 --> 0:16:52.800