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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. David Bianco of DWS
Speaker 2: looking ahead to next year and writing this line, while
Speaker 2: a recession is not the base case, risks of overheating
Speaker 2: and macroeconomic concertainty remain. David joins us now for more. David,
Speaker 2: good morning, Good morning. Let's talk about that risk of overheating.
Speaker 2: How very real is that risk for next year?
Speaker 3: Well, the economy like this STI is strong. I don't
Speaker 3: think it accelerates because things have been good in the
Speaker 3: Probably stas not about two and a half sent GDP growth.
Speaker 3: It's inflation being sticky, particularly because of services. That's a risk.
Speaker 3: So that's perhaps an overheating risk. The other thing is
Speaker 3: excessive fiscal spending. Now that's why with best in markets
Speaker 3: not just markets. You know, the equity side has been
Speaker 3: very excited about Trump ever since the win. But this
Speaker 3: is good news for the bottom market. The Secretary Treasury
Speaker 3: to come is concerned about the deficits. That's welcome news.
Speaker 3: And the message of three three three, that's that's good
Speaker 3: messaging so far.
Speaker 2: So let's get to the three three three three percent growth,
Speaker 2: three percent deficit. And I think also it's three million
Speaker 2: bounds a day of all equivalents, not just oil aill equivalents,
Speaker 2: And I think that's a really important point. Do you
Speaker 2: think that could be met? You think that can be achieved?
Speaker 4: Right?
Speaker 3: So three percent real GDP growth is within reach for
Speaker 3: the US economy with the right balance of things like
Speaker 3: tariff's versusy regulation and lower taxes. Three million barrels over
Speaker 3: a few years time, additional to the about fourteen million
Speaker 3: that's I would argue that's well within but that would
Speaker 3: hurt profits. But it's within reach. Now the three percent deficit,
Speaker 3: that's out of reach. But I'm glad he's reaching forward
Speaker 3: and pointing to it. And I think the bomb market's
Speaker 3: excited to hear Secretary Treasury being concerned about these deficits.
Speaker 1: How do you translate ideas and a muddied set of
Speaker 1: signals from some of the cabinet members who have gotten
Speaker 1: selected Scott Best catering to the market friendly crowd, others
Speaker 1: catering to the vaccine skeptic crowd, others possibly talking about
Speaker 1: ripping up the Justice Department. How do you put this
Speaker 1: together to understand whether you need to change your forecast
Speaker 1: for next year, whether Washington is just going to basically
Speaker 1: tamp down any extremes and keep things the way they are.
Speaker 4: Well, it's still early on.
Speaker 3: We're still learning so much about these policies. But I'm
Speaker 3: a markets guy, best in some markets person, so we're
Speaker 3: feeling good today. But this is an environment where who's
Speaker 3: to say where these policies are going to go and
Speaker 3: the right mix and balance of them, and how other
Speaker 3: countries in the world respond to our policies, particular things
Speaker 3: like tariffs. Is still a risky geopolitical world. So on
Speaker 3: one hand, oil prices might go down because of domestic supply,
Speaker 3: but that's still under geopolitical threat. So are forecasting to
Speaker 3: be flexible and markets are likely going to be voluid
Speaker 3: over the coming year, but probably still upward.
Speaker 1: Is this Treasury secretary pick though, really crucial when it
Speaker 1: comes to pinning the treasury market in particular, sort of
Speaker 1: pinning bond yields with somebody at the helm who is
Speaker 1: going to be very trained on what exactly the markets say.
Speaker 3: Well, well, the candidates were all good candidates, so you
Speaker 3: know this is there. I don't think there's alarm in
Speaker 3: this area, but I do think that this is a
Speaker 3: selection that people like myself say, this makes sense. This
Speaker 3: is a thoughtful person and experience with markets. And one
Speaker 3: of the things that you know Secretary Treasury does is
Speaker 3: help deal with problems, particularly problems and markets for problems
Speaker 3: with funding. Keeping confidence in the in the US bomb
Speaker 3: market is an important thing. So right person for the job.
Speaker 5: He's been very critical of Secretary Yallen in terms of
Speaker 5: when comes to the front end and these bond auctions,
Speaker 5: do you think he will push that out to longer
Speaker 5: day to debt?
Speaker 3: If you go back a couple of years ago, a
Speaker 3: few years ago, one ten year treasury years were where
Speaker 3: they were one percent, you know, everybody has to wonder
Speaker 3: why didn't you take more advantage of that, why didn't
Speaker 3: you do it? Mortgage borrowers did, But that's hindsight, and
Speaker 3: from here, I think the key is making sure that
Speaker 3: efforts are made to bring the deficit down or probably
Speaker 3: be seven to eight percent next year, but bring it down.
Speaker 3: I think the deficit is almost like a very high
Speaker 3: pe multiple on a stock, and the only way to
Speaker 3: keep markets calm about that is deliver growth. So that's
Speaker 3: why I think delivering growth and that three percent on
Speaker 3: real GDP growth is also an important part of that
Speaker 3: three point strategy.
Speaker 5: That three point strategy though, and you said that the
Speaker 5: one thing you don't think he's going to be able
Speaker 5: to accomplish is cutting the deficit by three percent, but
Speaker 5: he says by twenty three percent. Yeah, by twenty twenty eight. Though,
Speaker 5: if you were to get a deficit reduction by two
Speaker 5: to three percent, how long do you think it would take.
Speaker 3: To get the deficit all the way down to three
Speaker 3: percent under the entitlements we have. It's very unlikely. Lot's ever,
Speaker 3: it's unlikely in my view if it's achieved over a
Speaker 3: handful of years or within the next four years. DeBie,
Speaker 3: Weston and Hamilton will go down in history has great
Speaker 3: Secretary Jursdays.
Speaker 2: Administrations running seven percent deficits at a time when unemployment's
Speaker 2: close to four and GDP is really robust. The idea
Speaker 2: that we can get down to three anytime soon? Is
Speaker 2: it worthy?
Speaker 1: Go?
Speaker 2: Is it achievable?
Speaker 1: Yeah? Well, this is the reason why people are skeptical
Speaker 1: of it. Whether someone can actually try to achieve it
Speaker 1: is also another question. What is your most contrarian call
Speaker 1: going into next year given that a lot of the
Speaker 1: goals to reduce the deficit and also to keep growth
Speaker 1: of three percent seem unattainable.
Speaker 3: Yeah, being contrarian or even being skeptical has not been
Speaker 3: very useful the past few years. So what I look
Speaker 3: for are we're are good fundamentals still at a price
Speaker 3: that I won't bicker with, and I would say for
Speaker 3: the coming year that that's still financials. I wouldn't bicker
Speaker 3: with those valuations quickly for big banks. Healthcare as an
Speaker 3: area that I think has still been overlooked for a
Speaker 3: long time because it's so much excitement and technology and digital,
Speaker 3: but very good earnings growth there, great long term prospects
Speaker 3: in tangible assets, innovation, very on demanding valuation. So healthcare,
Speaker 3: financials and capital goods companies. That's what I like. So
Speaker 3: one of the things is that more oil perhaps lower
Speaker 3: oil prices, but it's good for everything combustion, whether it's
Speaker 3: oil services, refiners, but also diesel engines, natural gas turbines
Speaker 3: and jet engines, things like that.
Speaker 1: Healthcare stocks have actually been down since the election because
Speaker 1: of some of the picks and some of the questions
Speaker 1: around how these departments are going to be overhauled. Do
Speaker 1: you lean into that at all or do you basically
Speaker 1: see it as an opportunity.
Speaker 3: We see it as an opportunity. I mean, the healthcare
Speaker 3: sector has generated really good earnings growth through bigger challenges
Speaker 3: than this, including already the negotiated drug prices.
Speaker 5: Now we know that with.
Speaker 3: A Republican sweep they'll probably make some changes to some
Speaker 3: of these policies. But healthcare spending is going up and
Speaker 3: the innovation that we see at most medicine makers and
Speaker 3: even medical device makers, we're encouraged with that, and the
Speaker 3: valuations are undermanding.
Speaker 2: Hey David, it's good to see you and see you
Speaker 2: in person as well. Thank you. Defin Bianco there of DWS,
Speaker 2: Adrian Ye of Barclay's writing this gamp is our top
Speaker 2: retail idea for a cyclical recovery into twenty twenty five
Speaker 2: as it shifts from solidifying operations to growth mode. Adrian
Speaker 2: joins us now for more. Welcome to the program. Let's
Speaker 2: start with GAB. Can you tell us what you think
Speaker 2: they're getting right at the moment what's leading to this
Speaker 2: big share game.
Speaker 4: So what they're getting right is the value equation for
Speaker 4: the consumer. So if you look at the retailers that
Speaker 4: are sort of winning in this environment, it's those who
Speaker 4: are like Walmart, TJX, the off pricers told me in
Speaker 4: this particular case, and they truly are kind of giving
Speaker 4: back real value to the consumer. With regard to the
Speaker 4: Gap brand. Within the Gap organization, they're also finally starting
Speaker 4: to hit their stride on connecting with the consumer. So
Speaker 4: it's been at least a couple of decades probably. You know,
Speaker 4: last time that we saw them do positive comps at
Speaker 4: the Gap brand was twenty eleven and twelve when it
Speaker 4: was kind of a skinny leg craze. And I think
Speaker 4: part of it is that really focused on the fundamentals.
Speaker 4: They've got the sub they've solidified their store based the
Speaker 4: cost basis, and we also for lack of you know,
Speaker 4: other things. They also have a silhouette shift that is
Speaker 4: a debt and base one and it's in their favor.
Speaker 1: So you talk about creating value, and I think about
Speaker 1: the sort of pairing that idea the lowest prices with
Speaker 1: style and getting influencers to get wide legged genes that
Speaker 1: look like they are in vogue and get them out
Speaker 1: to the masses. What does value mean? Who isn't creating value?
Speaker 4: Yeah, that's a great question. And we like to separate
Speaker 4: value versus cheap. So value is price paid for quality receives.
Speaker 4: So when you go to an off pricer or even
Speaker 4: if you go to Old Navy, you know, you think
Speaker 4: that you're getting, you know, you're paying something, and you
Speaker 4: don't mind paying fifty dollars for something that you think
Speaker 4: is probably worth more than that seventy five or one
Speaker 4: hundred dollars even in off price. But what you do
Speaker 4: care about is paying, you know, cheap prices for something
Speaker 4: that you think is worth exactly.
Speaker 1: That or less.
Speaker 4: Right, And that's the huge differentiator here in this especially
Speaker 4: in this environment where CPI inflation across all these different
Speaker 4: products is eating away at that wallet. The consumers really
Speaker 4: looking for somebody who's going to provide them the ability
Speaker 4: to stretch their dollar and stretch.
Speaker 1: Their wallet, Adrian, something that we woke up to this
Speaker 1: morning with suddenly in renewed focus on shipping costs and
Speaker 1: how that can come back to bite and for an
Speaker 1: e commerce type of organization, which a lot of these
Speaker 1: retailers seem to be coming. How important is minimizing shipping costs?
Speaker 1: How much is that becoming an increasing drag on some
Speaker 1: of the companies you cover.
Speaker 4: So the e commerce piece of it exactly that last
Speaker 4: mile delivery what you're talking about, we should think about
Speaker 4: those like wages, they just perpetually go up. Remember the
Speaker 4: essence of kind of that shipping is going to be
Speaker 4: an employee base where their wages are going up, whether
Speaker 4: it's ups or FedEx, et cetera, any of these delivery companies.
Speaker 4: So you can kind of think about that as a
Speaker 4: permanent inflator. And the way to combat that, frankly, because
Speaker 4: it's very much a variable expense is to get ever
Speaker 4: smarter and ever better about your inventory management, trying to
Speaker 4: buy and see what demand is and sell at full price.
Speaker 4: So it's a really really tough you know, you know,
Speaker 4: equation there, But just as on their store side, the
Speaker 4: store payroll will permanently go up. It's just about operating
Speaker 4: your entire omni channel business much more efficiently.
Speaker 2: Drian just wanted to finish on this. I know it's
Speaker 2: not a company under your converage, so I won't name
Speaker 2: it by name. We'll just talk about the story in
Speaker 2: general terms. There's a company this morning where a single
Speaker 2: employee was responsible for small package delivery expense accounting intentionally
Speaker 2: made these massive, erroneous entries to hide about one hundred
Speaker 2: and fifty million dollars worth of expenses. How unusual is
Speaker 2: it for something like that to happen in a company
Speaker 2: like this?
Speaker 4: It is, you know, it's a breakdown of the disciplines.
Speaker 4: It is pretty unusual, frankly typically. I mean, let's put
Speaker 4: it into perspective that one hundred and fifty million is
Speaker 4: on about four point three billion dollars worth of total
Speaker 4: delivery expenses. So it's a number, it's a real number
Speaker 4: since twenty twenty one, but it's about three percent of
Speaker 4: their delivery expenses. Not a great look for you know,
Speaker 4: said company. But what I will say that there's a
Speaker 4: lot that goes on. You know, I've been in the
Speaker 4: retail industry that P and L has thousands of lines
Speaker 4: in it and thousands of employees that you have to
Speaker 4: assume are doing the right thing. And I think that
Speaker 4: there is a there was a breakdown in this particular
Speaker 4: instant of the oversight in that department, for sure.
Speaker 2: Dan, appreciate your views on that story as well. Thanks
Speaker 2: for being with us. Drin Gident Fankles No, John will No,
Speaker 2: it's good to see you.
Speaker 6: Good to see you.
Speaker 2: Do you think that's the scenario we will be facing
Speaker 2: in twenty five?
Speaker 6: I think so. I think so. I think there's you know,
Speaker 6: some euphoria obviously, Uh, we got the red wave. Everyone's
Speaker 6: looking to the to the pro uh positive parts of
Speaker 6: the policy. But we're going to get into a situation where,
Speaker 6: like I said, you know, the FED is easing into strength. Uh,
Speaker 6: you know, you have these fiscal issues, uh, tariffs, I
Speaker 6: think will be a big risk event. So I think
Speaker 6: those concerns come up in the first half of next year.
Speaker 2: So what are you advocating full into next year?
Speaker 6: Yeah, so I think I would probably take some risk
Speaker 6: off the table coming into next year. I also think
Speaker 6: the dollar will continue to grind higher. I think that
Speaker 6: it's sort of the the US will continue to be
Speaker 6: the cleanest dirty shirt, and I think we'll have probably
Speaker 6: lower global growth if we do get that tariff policy implemented.
Speaker 1: This might be a dumb question, what is risk? What
Speaker 1: counts is that because some people are talking about risk
Speaker 1: in stocks, other people are saying risk is in duration
Speaker 1: and the chance that maybe there isn't necessarily any kind
Speaker 1: of controlling force and the deficit, and that you do
Speaker 1: end up, like Francis Donald said, with even rate hikes
Speaker 1: by the end of next year.
Speaker 6: Yeah, so I think the biggest risk is in the
Speaker 6: long end of the curve. I think duration is you know,
Speaker 6: that's what you want to focus on taking off. I
Speaker 6: think equities, you know, they had a big rally right now.
Speaker 6: Like I mentioned before, it's it's sort of what's not
Speaker 6: to like? But you know, when we get into next year,
Speaker 6: it's going to say, what is there too like? Because
Speaker 6: you're going to have overvalued equities, You're going to have
Speaker 6: this fiscal concern moving into next year, and then you're
Speaker 6: going to have a FED that's going to be forced
Speaker 6: to pause its policy.
Speaker 1: So you're not buying the best in bump.
Speaker 6: I'm not I'm not, you know, I think again, I
Speaker 6: don't want to go against it In the short run.
Speaker 6: I think you kind of ride the wave, maybe you
Speaker 6: get a Santa Claus rally, But once we get a
Speaker 6: little doser reality into twenty twenty five, I think that's
Speaker 6: when you want to start to take some risk off.
Speaker 5: You say tariffs are the biggest risk. Do you view
Speaker 5: terrors so? Do you think this administration will view terras
Speaker 5: as a negotiating tool to reset the playing field when
Speaker 5: it comes to free trade or do you actually think
Speaker 5: they're going to use them as pay force for their
Speaker 5: tax cuts, which would then mean that the sequencing has
Speaker 5: to be in parallel.
Speaker 6: I think it's the latter. I think that, you know,
Speaker 6: the administration perceives teriffs as a way to pay for
Speaker 6: some of the tax cuts that are going to come through.
Speaker 6: But I think what they forget is that, you know,
Speaker 6: tariffs are going to go one way. It's either going
Speaker 6: to impact the consumer, so companies will pass the cost on,
Speaker 6: or it will put some pressure on corporate margins. So
Speaker 6: I think that probably is a misguided sort of focused
Speaker 6: But I do think their perception is that it'll pay
Speaker 6: for some of the tax cuts.
Speaker 5: So if you if this is your base case, what
Speaker 5: does someone like Scott beston't at the Treasury mean for
Speaker 5: that impulse that some other members of the administration might
Speaker 5: have when it comes to terror. Yeah.
Speaker 6: So, I think the initial reaction is that he's more
Speaker 6: of a pragmatist. But we have to realize that Trump
Speaker 6: won the popular vote. So I believe from his perspective,
Speaker 6: he thinks he has a mandate and he, as he
Speaker 6: said before, his favorite word is tariff. So I think,
Speaker 6: you know, bessint, you know, his perspective is he would
Speaker 6: like to ease things in. But I feel like Trump
Speaker 6: is going to want to implement that policy at.
Speaker 2: These towns a bigger problem for the rest of the
Speaker 2: world than they on the United States.
Speaker 6: I don't think so. I think it's a problem for
Speaker 6: everyone because I think naturally you're going to get retaliatory
Speaker 6: reaction from other countries. I think when we look at
Speaker 6: the first administration, it actually the retaliatory tariffs actually impacted
Speaker 6: the US export disproportionately to the importers.
Speaker 2: These are some of the fombing producing states agricultural commodities.
Speaker 2: They were the big focus. Then should we be focused
Speaker 2: on anything else?
Speaker 6: I think because tariffs are across the board, I think
Speaker 6: everything should be a focus. I think it's going to be,
Speaker 6: you know, a real different sort of scenario. We're at
Speaker 6: a very different started.
Speaker 2: Expecting those blanket tariffs that have impromised on a campaign trip.
Speaker 2: Do you think they could become reality?
Speaker 6: I think so. He promised it. He won the popular vote.
Speaker 6: I believe you know, that's what he campaigned on. That's
Speaker 6: what what kind of drove him into the White House,
Speaker 6: and I think he's going to continue to focus on
Speaker 6: that path.
Speaker 1: So just to sort of put a bow on it
Speaker 1: or underscore what you're saying, is that the dose of
Speaker 1: reality that you think will really curtail what could be
Speaker 1: a Santa Claus rally in this melt up?
Speaker 6: I think so. I think you know, markets are sort
Speaker 6: of waiting for the clarity on that. I would augment that.
Speaker 6: Obviously with just the fiscal spending, we already have structural deficits.
Speaker 6: So all of that combined, that's something the Fed's going
Speaker 6: to have to focus on. And when they have to
Speaker 6: pause for that reason, they could cause some risk off.
Speaker 5: Who's the biggest loser in a trade war?
Speaker 6: I think the biggest loser probably I would say China
Speaker 6: initially because their economy is already pretty weak. You know,
Speaker 6: they've you know, planned for it. I'm assuming, but you know,
Speaker 6: they still are in a very vulnerable position. I would
Speaker 6: say outside of that, I think Europe is very vulnerable
Speaker 6: as well.
Speaker 2: No, I appreciate your time. Thank you, sir. No dexon there,
Speaker 2: stay Street. This is the Bloomberg Surveillants podcast, bringing you
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