WEBVTT - Bloomberg Surveillance: Inside Boeing's 'Mistake' 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best an economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.400 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.880 Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app. 0:00:30.080 --> 0:00:33.199 Where are Boeing Aircraft made? I believe it's Renton, Washington 0:00:33.240 --> 0:00:36.239 where they were tuned into the college football game here 0:00:36.280 --> 0:00:39.519 a while back. The seven thirty seven comes out of Reton, Washington. 0:00:40.000 --> 0:00:44.280 An expert on that is Sheila Kiglu, senior equity research 0:00:44.320 --> 0:00:46.720 analyst at Jeffreys and joins us this morning. Have you 0:00:46.760 --> 0:00:47.920 been to Reton, Washington? 0:00:48.040 --> 0:00:48.400 I have. 0:00:48.560 --> 0:00:49.840 There's three production lines. 0:00:49.880 --> 0:00:51.760 The third one just opened up, so if you think 0:00:51.800 --> 0:00:54.960 about it, each one of those turns out fifteen to 0:00:55.040 --> 0:00:59.600 seventeen max's per month. The fourth one will open next 0:00:59.640 --> 0:01:02.120 year and ever at about an hour and a half 0:01:03.040 --> 0:01:03.880 away from Renton. 0:01:03.960 --> 0:01:05.920 So I want you to speak and I don't want 0:01:05.920 --> 0:01:07.880 you to talk about all your leverage finance work at 0:01:07.959 --> 0:01:10.479 JP Morgan and your wonderful work at Jefferys, your award 0:01:10.520 --> 0:01:12.959 winning work and institutional investor. 0:01:12.680 --> 0:01:13.520 Forget about it. 0:01:13.840 --> 0:01:17.440 Our listeners and viewers want to know where's the problem 0:01:17.600 --> 0:01:19.760 and is it easy to fix? Is it rent in 0:01:19.880 --> 0:01:24.119 Washington or is it the fuselage riveters in Kansas. 0:01:25.480 --> 0:01:29.240 I think the problem is the pandemic deteriorated their aerospace 0:01:29.319 --> 0:01:32.880 workforce not so much. And I mean the problem is 0:01:32.880 --> 0:01:35.520 in Renton, not only at the Boeing factory, but the 0:01:35.560 --> 0:01:38.400 small Tier three, Tier four suppliers around there. They're seeing 0:01:38.400 --> 0:01:41.760 strain on their workforce. The problem has been really focused 0:01:41.800 --> 0:01:46.160 over the last year in Spirit in Wichita, with three 0:01:46.280 --> 0:01:48.760 incidents either on the Max or the eight to seven 0:01:49.120 --> 0:01:50.440 involving quality issues. 0:01:50.760 --> 0:01:52.520 So there's been management changes there. 0:01:52.360 --> 0:01:55.200 To address those quality issues, and I think that's really 0:01:55.280 --> 0:01:57.960 the focus item. Given we've seen small improvements in the 0:01:58.000 --> 0:01:59.960 engine manufacturers and the Tier three. 0:02:00.480 --> 0:02:02.960 This sounds absolutely shocking when I start to hear about this, 0:02:03.000 --> 0:02:04.680 At least for ask this question earlier in the week. 0:02:04.720 --> 0:02:07.240 I'd love your response to it. Are we suggesting that 0:02:07.600 --> 0:02:09.520 things are safe but not as safe as they were 0:02:09.520 --> 0:02:10.359 before the pandemic? 0:02:10.400 --> 0:02:13.840 Now in this industry, I think the industry is having 0:02:13.840 --> 0:02:16.880 a tough time recruit you know, getting back up to 0:02:17.040 --> 0:02:20.560 post pandemic levels, and you know we're manufacturing. 0:02:20.600 --> 0:02:23.280 In September, we were only manufacturing. 0:02:22.840 --> 0:02:24.880 In the teens a month on these max is when 0:02:24.919 --> 0:02:26.520 we were supposed to be at thirty eight a month. 0:02:26.880 --> 0:02:30.200 So we essentially, you know, in December deliveries were forty four. 0:02:30.280 --> 0:02:32.400 Half of that was out of inventory, half of it. 0:02:32.240 --> 0:02:33.120 Was actual production. 0:02:33.560 --> 0:02:36.440 So we basically doubled output in three months, right, we 0:02:36.440 --> 0:02:39.959 were trying to double output. So there's a stream, given 0:02:40.600 --> 0:02:42.720 air traffic is back to one hundred percent of twenty 0:02:42.800 --> 0:02:45.800 nineteen levels, to get this aircraft production back, and it 0:02:45.840 --> 0:02:47.399 was very constrained over the last three years. 0:02:47.480 --> 0:02:50.280 You've now did demand at Boeing isn't the problem, it's deliveries. 0:02:50.680 --> 0:02:53.240 We had Ryan as Michael O'Leary sit in your seat 0:02:53.280 --> 0:02:55.760 actually at the end of last year, complaining about the 0:02:55.800 --> 0:02:58.880 delays to the seven thirty seven max getting delivered to 0:02:58.960 --> 0:03:03.320 Ryanair how Osawi to further delays and ultimately canceled orders 0:03:03.440 --> 0:03:04.640 because of what's tanking place. 0:03:04.880 --> 0:03:06.959 I'm sure he was more entertaining than me, and this seat, 0:03:07.040 --> 0:03:07.440 I will. 0:03:07.320 --> 0:03:09.120 Tell you that he's more entertaining than I Am, don't 0:03:09.160 --> 0:03:09.799 worry about it. 0:03:11.040 --> 0:03:13.280 You know, what we've seen is that we've seen a 0:03:13.320 --> 0:03:18.560 delivery slip. We delivered about one thousand aircraft in twenty two. 0:03:18.600 --> 0:03:21.320 That number was fifteen hundred post pandemic on the narrow body. 0:03:21.400 --> 0:03:23.600 So we've seen that happen already. But we're not going 0:03:23.680 --> 0:03:26.680 to see cancelations. We're seeing the order brook stretch out 0:03:26.680 --> 0:03:29.040 twenty eight twenty nine. Everybody wants to get in line, 0:03:29.320 --> 0:03:33.040 and even Ryanair, who's been the most outspoken against Boeing, 0:03:33.480 --> 0:03:37.119 has talked about wanting that aircraft sooner and pricing being 0:03:37.160 --> 0:03:40.320 better for them, Pricing being better for Boeing on some 0:03:40.360 --> 0:03:42.880 of the Ryan Air aircraft because they want the aircraft sooner. 0:03:43.000 --> 0:03:45.440 What's the opportunity here for Airbus? I mean, I mean 0:03:45.480 --> 0:03:47.080 just as simple and tou luise I got to play 0:03:47.120 --> 0:03:49.640 this low. It could be them. I get the whole dance. 0:03:49.720 --> 0:03:53.080 But is this a huge strategic opportunity in the United 0:03:53.120 --> 0:03:55.960 States of America for unit sales for Airbus? 0:03:56.880 --> 0:03:57.560 Not so much. 0:03:57.840 --> 0:04:00.280 I think the opportunity was from twenty nineteen to twenty 0:04:00.360 --> 0:04:03.920 three twenty two, when the Max was essentially grounded, not 0:04:04.000 --> 0:04:06.320 delivering to China as well, where we're forgetting about that 0:04:06.400 --> 0:04:07.000 China element. 0:04:07.080 --> 0:04:09.560 But Airbus had their market share opportunity. 0:04:09.600 --> 0:04:11.880 So what we see in twenty five as Boeing produces 0:04:11.960 --> 0:04:14.760 fifty max is a month and Airbus does seventy five 0:04:15.080 --> 0:04:17.120 maybe in the twenty twenty six time frame is more 0:04:17.200 --> 0:04:19.840 likely to be honest. So they already have that market 0:04:19.839 --> 0:04:21.880 share game. And let's not for Yes, Airbus has its 0:04:21.920 --> 0:04:26.080 own issues. The Airbus aircraft is mad has two engine options, 0:04:26.120 --> 0:04:29.359 either the ge leap option and the Raithyon GTF option. 0:04:30.000 --> 0:04:32.680 We know the GTF has a contaminated powder in it, 0:04:33.040 --> 0:04:36.359 so they're basically grounding forty percent of the GTF engines 0:04:36.400 --> 0:04:39.000 in the first half of this year to do inspections 0:04:39.000 --> 0:04:41.360 on them. So Airbus is not short of its issues 0:04:41.400 --> 0:04:42.039 as well. 0:04:42.120 --> 0:04:43.880 Okay, some of this is. 0:04:43.880 --> 0:04:47.520 The complexity of the engineering across all of aviation. Are 0:04:47.520 --> 0:04:49.120 we at a point now and then, I mean, I 0:04:49.160 --> 0:04:51.760 get the COVID idea. I think that's brilliant, But are 0:04:51.800 --> 0:04:55.400 we at a point where these things are becoming too complex? 0:04:56.400 --> 0:04:59.159 Some areg you, it's not complex enough, not enough fuel efficiency, 0:04:59.520 --> 0:05:03.120 not enough energy efficiency, two pilots to by the plane. 0:05:03.120 --> 0:05:05.800 So I think that what we've seen in the aircraft 0:05:05.800 --> 0:05:09.120 industry is no new models really, this is the twenty 0:05:09.200 --> 0:05:14.040 twenties are just an upgrade of the existing models and efficiency. 0:05:14.880 --> 0:05:17.839 Are they still trying to do a one pilot plane. 0:05:18.240 --> 0:05:19.760 I think that's off the books for now. 0:05:19.760 --> 0:05:22.599 The focus has really been on the engine, the fuel efficiency, 0:05:23.120 --> 0:05:25.119 and what kind of engine we get in the twenty 0:05:25.160 --> 0:05:28.240 thirty five twenty forty time frame and how that aircraft 0:05:28.279 --> 0:05:30.120 takes us over the next two to three decades. 0:05:30.240 --> 0:05:33.120 The sitting of the jet back and forth on the 0:05:33.160 --> 0:05:36.960 wing was due to fuel efficiency, right, should we jettison? 0:05:37.080 --> 0:05:42.200 Fuel efficiency is an engineering mandate, that's what we're aiming for. 0:05:42.320 --> 0:05:44.559 But clearly the engine OEMs have had a lot of trouble, 0:05:44.680 --> 0:05:47.239 not only in production but the efficiency that they're getting. 0:05:47.360 --> 0:05:51.000 So not calling out GTF only with the raytheon issues. 0:05:51.400 --> 0:05:54.320 Not only do they have the contaminated powder, they've needed 0:05:54.320 --> 0:05:56.280 to do upgrades to get their engine. 0:05:55.960 --> 0:05:58.200 Up to par so is leaps. So that's what we're 0:05:58.320 --> 0:05:59.320 calling fence building. 0:06:00.040 --> 0:06:02.680 Let's finish on the regulator. This is a difficult one. 0:06:02.720 --> 0:06:04.520 How do you expect the regulator to respond to this? 0:06:04.880 --> 0:06:07.000 How do authority step in here? Given what could have 0:06:07.040 --> 0:06:08.080 taken place on Friday. 0:06:08.160 --> 0:06:10.360 So, John, you started off very stark contrast with Dave 0:06:10.400 --> 0:06:13.520 Calhoun yesterday, and I think the regulators took that same message. 0:06:13.640 --> 0:06:15.840 NTSP is solely focused on the accident. Well, no, in 0:06:15.839 --> 0:06:18.960 twelve to eighteen months, what really happened? The FAA said 0:06:18.960 --> 0:06:22.280 Grounding twelve hours in, so did Yassa. So I think 0:06:22.320 --> 0:06:25.880 that they're taking a stark stance. Boeing has this directive 0:06:25.880 --> 0:06:28.400 out on how to inspect the aircraft, and I think 0:06:28.440 --> 0:06:30.600 we could see the aircraft back in the air by 0:06:30.600 --> 0:06:31.080 the end. 0:06:30.920 --> 0:06:31.559 Of next week. 0:06:31.720 --> 0:06:33.000 The end of next week. That quickly. 0:06:33.240 --> 0:06:36.520 The directive said four to eight hours to inspect the aircraft. 0:06:36.960 --> 0:06:40.240 You think about just the pr element of it. An 0:06:40.279 --> 0:06:41.240 extra week. 0:06:41.360 --> 0:06:43.039 When you hear from the regulator. Of course, they have 0:06:43.080 --> 0:06:46.520 to start out really broad, actually have all options open, 0:06:46.560 --> 0:06:49.159 t K consider everything, Shila. Do you get the sense 0:06:49.200 --> 0:06:52.200 that they've narrowed this investigation down already? Then, given your expectation, 0:06:52.240 --> 0:06:54.080 we'll be back up in the air next week. 0:06:55.400 --> 0:06:57.840 So the NTSP, I think, will take a year to 0:06:57.880 --> 0:07:00.320 come to a conclusion on exactly what happened and what 0:07:00.360 --> 0:07:03.320 the cause was. But the FAA seems pretty confident that 0:07:03.360 --> 0:07:05.000 the directive came out so quickly. 0:07:04.880 --> 0:07:07.920 Thirty seconds normal conversation. What's your single best. 0:07:07.680 --> 0:07:08.400 Buy right now? 0:07:08.760 --> 0:07:12.480 Oh, this amazing company called Higo. When I started covering 0:07:13.040 --> 0:07:13.760 it's called Hiko. 0:07:14.400 --> 0:07:14.760 Hiko. 0:07:15.040 --> 0:07:19.440 Yes, twenty one billion market cap fifty one times PE. 0:07:19.480 --> 0:07:21.240 But when I first started covering this stock, and I 0:07:21.280 --> 0:07:23.000 won't tell you when that was, the market cap was 0:07:23.040 --> 0:07:28.400 two billion dollars. They are a generic aircraft parts manufacturer 0:07:28.920 --> 0:07:31.720 and they supply the aftermarket. The more we don't get 0:07:31.960 --> 0:07:35.720 new aircraft deliveries, the more Hiko benefits because the old 0:07:35.720 --> 0:07:36.720 planes get serviced. 0:07:36.760 --> 0:07:38.840 Interesting. I thought we could have rund out that conversation 0:07:39.000 --> 0:07:41.400 sort of long bowing, but we didn't. Shada, thank you, 0:07:41.760 --> 0:07:42.280 it's good to hear. 0:07:42.280 --> 0:07:42.520 Free me. 0:07:42.600 --> 0:07:45.680 Just fantastic, real depth to that conversation. Shada kyli that 0:07:46.040 --> 0:07:58.200 of Jeffreys. Let's catch out with say Mishap the chief 0:07:58.240 --> 0:08:00.920 club was strategistic principal asset man wish and seem pleased 0:08:00.920 --> 0:08:02.600 to say joined us right now. Seem a greater catch 0:08:02.680 --> 0:08:05.600 up two part story this year for you, first half, 0:08:05.840 --> 0:08:09.320 second half, first half, volatility, second half rally. I have 0:08:09.320 --> 0:08:10.920 to say it reminds me of some of the outlooks 0:08:10.920 --> 0:08:13.720 that I got last year for twenty twenty three, saying, 0:08:13.880 --> 0:08:15.440 what is it about twenty twenty four where you think 0:08:15.480 --> 0:08:16.760 that story could actually take place? 0:08:18.240 --> 0:08:20.320 So I think that Look, if you think about where 0:08:20.360 --> 0:08:22.240 we were at the end of last year, where you 0:08:22.280 --> 0:08:25.320 had I think a price per perfection, you know you 0:08:25.320 --> 0:08:27.440 couldn't get better news in the idea that the FED 0:08:27.440 --> 0:08:30.320 would start cutting it early in this year. You would 0:08:30.320 --> 0:08:32.400 have a soft landing, et cetera. Now, I'm not saying 0:08:32.400 --> 0:08:35.040 that that's not all going to come true, but at 0:08:35.040 --> 0:08:37.679 the beginning of this year, you're already seeing the market 0:08:37.840 --> 0:08:40.600 push back on some of those original expectations about early 0:08:40.640 --> 0:08:44.400 FED cuts. You're seeing ecod basilience that is creating a wobble, 0:08:45.040 --> 0:08:46.679 and I struggled to see what is going to be 0:08:46.720 --> 0:08:49.400 the catalyst to drive another leg up in the near term. 0:08:49.840 --> 0:08:52.440 Yourys need to see a bit of a pullback as 0:08:52.440 --> 0:08:56.360 the market starts to question their raid expectations. And then 0:08:56.559 --> 0:08:58.679 as you get towards the middle of the year and 0:08:58.720 --> 0:09:01.480 you get closer to that actual rate cut date, you 0:09:01.480 --> 0:09:03.679 see an economics slow down, but it doesn't turn out 0:09:03.720 --> 0:09:07.480 to be too damaging. That to me is that greed 0:09:07.520 --> 0:09:09.480 signal four and a more prolonged rally. 0:09:09.640 --> 0:09:13.800 Yes, seem a dovetail nominal GDP. Now that combination of 0:09:13.840 --> 0:09:18.240 real GDP plus the inflation with the IMS call of 0:09:18.640 --> 0:09:23.320 a beleaguered, slow global economy out four years to twenty 0:09:23.480 --> 0:09:26.440 twenty eight, where are we in that continuum as we 0:09:26.520 --> 0:09:29.920 go into twenty twenty four? Is there an animal spirit 0:09:30.000 --> 0:09:34.840 within our nominal GDP or is it going to drift away? 0:09:34.960 --> 0:09:37.319 So, look, we are anticipating a bit of a global 0:09:37.400 --> 0:09:41.360 growth slowdown. You know, if you look across the US, Europe, China, 0:09:41.640 --> 0:09:43.920 it's not particularly exciting, but you do have a couple 0:09:43.920 --> 0:09:47.479 of bright spots around the globe. But we're not anticipating 0:09:47.520 --> 0:09:50.280 a very prolonged economic weakness. So I think this is 0:09:50.320 --> 0:09:54.480 a fairly decent nominal growth environment. But along with that 0:09:54.520 --> 0:09:57.120 comes the idea that we don't necessarily see inflation coming 0:09:57.160 --> 0:09:59.240 all the way back down to two below two percent 0:09:59.360 --> 0:10:03.079 like you saw in previous years. So from a real rate, 0:10:03.120 --> 0:10:05.160 which I know you've been focused on, it is a 0:10:05.160 --> 0:10:07.679 slightly more challenging environment than we've seen in previous years, 0:10:07.720 --> 0:10:10.320 and I think investors need to start taking that into 0:10:10.320 --> 0:10:13.840 consideration as they're starting to position their portfolios. 0:10:14.120 --> 0:10:16.520 What does the real rate do this year the ten 0:10:16.600 --> 0:10:20.160 year inflation adjusted rate in the United States. 0:10:21.160 --> 0:10:24.199 So we're expected to come down slightly, but not too much. 0:10:24.880 --> 0:10:26.760 If I give you an idea, you know, we're expecting 0:10:26.800 --> 0:10:30.400 the FED to color three times twenty five basis points 0:10:30.440 --> 0:10:33.120 each time, so it's not very significant. We are expecting 0:10:33.120 --> 0:10:35.280 inflation to come down to around the two point four 0:10:35.320 --> 0:10:37.320 percent level, so it's not too far from where we 0:10:37.360 --> 0:10:41.319 are today. That is a little bit still quite restrictive, 0:10:42.200 --> 0:10:45.040 so you're not in a fantastic environment for risk assets, 0:10:45.040 --> 0:10:46.760 but there is a lot of cyclical factors that we 0:10:46.800 --> 0:10:49.520 can take into consideration. It's just if you're thinking about 0:10:49.520 --> 0:10:51.720 your portfolio, you're looking at a higher cost of capital 0:10:51.760 --> 0:10:54.440 than you've had in the last decade or so, so 0:10:54.520 --> 0:10:58.480 you need to be kind of screening your stocks a 0:10:58.480 --> 0:11:01.240 little bit closer. You need to be start thinking a 0:11:01.240 --> 0:11:03.120 little bit more about bonds as well. You know, in 0:11:03.200 --> 0:11:05.439 terms of it's great in inflationary, it's or in a 0:11:05.480 --> 0:11:09.320 disinflationary scenario. But in an inflationary scenario where inflation doesn't 0:11:09.320 --> 0:11:11.000 come all the way back down to what maybe was 0:11:11.080 --> 0:11:14.360 accustomed to before, bonds don't necessarily perform as well as 0:11:14.400 --> 0:11:15.320 you would have expected. 0:11:15.480 --> 0:11:17.920 I wonder what your call is then on consumer discretionary. 0:11:17.920 --> 0:11:19.920 I'll share with you what we heard from Lori Cavasina 0:11:20.200 --> 0:11:25.160 of RBC overnight, greating discretionary to market way and saying this, Seema, 0:11:25.320 --> 0:11:28.560 We're wary of being underweight going forward, given the tendency 0:11:28.559 --> 0:11:31.720 of this sector to outperform when interest rates are falling. 0:11:32.080 --> 0:11:33.680 They're two sectors at the moment that are kind of 0:11:33.720 --> 0:11:36.120 leading the pact to close out last year. And whenever 0:11:36.160 --> 0:11:39.760 we rally, it's discretionary, it's tech. Where are you on 0:11:39.840 --> 0:11:42.120 the format and for that matter, where are you on 0:11:42.160 --> 0:11:42.600 the latter. 0:11:43.920 --> 0:11:46.120 So actually on the consumer discretioning, I'm not too negative. 0:11:46.240 --> 0:11:49.160 I do think there are challenges coming for consumers, but 0:11:49.240 --> 0:11:51.120 I don't think there is significant as maybe a lot 0:11:51.120 --> 0:11:53.920 of people, including myself, were worried about at the end 0:11:53.920 --> 0:11:55.920 of last year. There's just a lot going for consumers 0:11:55.960 --> 0:11:57.800 at the moment. I mean, as long as the labor 0:11:57.800 --> 0:12:00.120 market is holding up as strong as it is, and 0:12:00.120 --> 0:12:03.280 I think consuming discretion can do well. On the tech side, 0:12:03.360 --> 0:12:07.320 I still have good, I guess solid expectations for tech. 0:12:07.440 --> 0:12:10.640 I do worry though about whether the expectations from the 0:12:10.640 --> 0:12:12.840 market is going to be fulfilled. So whereas I wouldn't 0:12:12.840 --> 0:12:15.560 want to go negative or underweight technology, I think there 0:12:15.600 --> 0:12:17.120 are other parts of the market which are a little 0:12:17.120 --> 0:12:19.680 bit more interesting for twenty twenty four. If, as you said, 0:12:19.679 --> 0:12:22.079 you're going to see FED cuts and soft learning, I 0:12:22.080 --> 0:12:23.920 think there are other parts of the market can do well. 0:12:23.960 --> 0:12:25.520 We'll talk to me about the other parts. Then what's 0:12:25.520 --> 0:12:27.520 the big call for you? Banks? Where do they fit in? 0:12:27.559 --> 0:12:28.959 Give me we get earnings on Friday. 0:12:29.880 --> 0:12:31.640 I think banks can do pretty well. I think you know, 0:12:31.920 --> 0:12:33.160 as you're going to see in a lot of parts 0:12:33.160 --> 0:12:35.280 of the market, there are headwinds in the first half 0:12:35.280 --> 0:12:36.760 of the year, but as you get through to the 0:12:36.800 --> 0:12:40.280 second then I think banks can do well. The other 0:12:40.280 --> 0:12:42.280 part of the market, which I think should be gaining interest, 0:12:42.400 --> 0:12:43.600 there's going to be a bit of a warble in 0:12:43.600 --> 0:12:46.720 the first quarter at least bit small caps, I think 0:12:46.760 --> 0:12:49.640 the evaluations are very attractive. Typically, when you get a 0:12:49.640 --> 0:12:53.679 fed cutting cycle and it's accompanied by a kind of 0:12:53.720 --> 0:12:56.520 a return to or at least solid growth, that is 0:12:56.559 --> 0:12:59.679 typically a very good signal for small caps. And when 0:12:59.679 --> 0:13:01.880 you're looking at that valuation gap between the large and 0:13:01.920 --> 0:13:04.559 the small cup, it is very attractive so I think 0:13:04.600 --> 0:13:06.520 this is the time that investors start thinking about it 0:13:06.559 --> 0:13:08.280 and maybe edging into those positions. 0:13:08.480 --> 0:13:12.120 If youels come down, is the is the flow of 0:13:12.200 --> 0:13:15.880 money out of money market funds it's assumed. Is it 0:13:16.040 --> 0:13:20.920 linear or does it all come in one great surge. 0:13:21.000 --> 0:13:23.000 I think that's it's really difficult to say in terms 0:13:23.040 --> 0:13:24.720 of how the investors sentiment is going to go. What 0:13:24.800 --> 0:13:27.320 I do think though, is one is that those money 0:13:27.320 --> 0:13:29.320 market funds, they do have the potential to create a 0:13:29.320 --> 0:13:33.000 pretty strong rally once some of the questions that investors 0:13:33.000 --> 0:13:35.720 have hanging over them are answered. So those questions would 0:13:35.760 --> 0:13:38.320 include when is the going to start reducing interest rates? 0:13:38.520 --> 0:13:40.520 And the second thing is is there could be an 0:13:40.520 --> 0:13:43.000 economic slow down? And if there is an economic slow down, 0:13:43.000 --> 0:13:45.400 how devastating is it going to be. I think all 0:13:45.440 --> 0:13:47.480 three of those questions are going to be answered fairly 0:13:48.200 --> 0:13:50.440 from in a positive tilt in that there's a slowdown, 0:13:50.520 --> 0:13:53.240 but it's not too devastating at all. And I think 0:13:53.280 --> 0:13:55.880 once you have some of these questions answered, then money 0:13:55.880 --> 0:13:58.240 market funds that trickle is going to move towards those 0:13:58.360 --> 0:14:00.280 risk acids, which is one of the reason do you 0:14:00.280 --> 0:14:03.120 think investors should be positioning for a stronger second half 0:14:03.120 --> 0:14:03.480 of the year. 0:14:03.600 --> 0:14:06.160 Russ Coastrick at Black Crog said something similar in Raka 0:14:06.320 --> 0:14:08.199 Semath thank you. Going to hear from your Sam a 0:14:08.320 --> 0:14:10.920 Chant of Principal Asset Management. 0:14:15.240 --> 0:14:15.720 Right now to. 0:14:15.760 --> 0:14:19.720 Further discussion and the American economy. Kathleen bus Johnson joins 0:14:19.720 --> 0:14:23.680 his chief economists Nationwide Mutual Insurance. Kathy, what's the state 0:14:23.720 --> 0:14:24.400 of the consumer? 0:14:25.960 --> 0:14:28.960 Good morning, Tom and John Happy to be with you. Well, 0:14:28.960 --> 0:14:32.320 the consumer has been really resilient and not really reflective 0:14:32.360 --> 0:14:36.640 of the labor market continue to be quite strong. We've 0:14:36.680 --> 0:14:41.320 got employment growth that continues to kind of outpace the 0:14:41.360 --> 0:14:46.360 monthly estimates, and wage growth continues to be buoyant. So 0:14:46.560 --> 0:14:48.720 you know, put that together, you still have you know, 0:14:48.760 --> 0:14:52.160 income wherewithal of the consumer to keep spending. Now, it's 0:14:52.200 --> 0:14:54.360 not going to be the buoyant spending that we had 0:14:54.400 --> 0:14:56.840 in the past. You know, most much of the of 0:14:56.920 --> 0:14:59.920 not all of the pandemic related savings has been run down. 0:15:00.240 --> 0:15:02.320 But you know, until we see a slow down a 0:15:02.400 --> 0:15:04.880 labor market, the consumer can continue to run Here. 0:15:05.320 --> 0:15:08.520 The character of our wage growth is compared to a 0:15:08.600 --> 0:15:12.960 declining inflation is something the optimist speak of. 0:15:13.880 --> 0:15:14.800 Is it normal? 0:15:15.120 --> 0:15:17.920 Is it a normal dynamic now or do you put 0:15:17.920 --> 0:15:21.000 an asterisk around what that means? 0:15:22.440 --> 0:15:26.920 It's getting more normalized. I mean wage growth. If you 0:15:26.960 --> 0:15:29.600 look at the average earlier earnings numbers running four to one, 0:15:30.120 --> 0:15:32.440 you know you would probably in a more normal time 0:15:32.480 --> 0:15:36.800 see that around three and a half. So you're seeing 0:15:36.840 --> 0:15:39.840 wage growth is still a bit you know, buoyant there, 0:15:40.280 --> 0:15:42.920 but inflation is not back to two percent yet either. 0:15:43.080 --> 0:15:45.640 So I think in the mix, what you're seeing is 0:15:46.080 --> 0:15:51.560 real wage growth that is steady. You know, it's not stellar, 0:15:52.320 --> 0:15:55.640 but it's not negative either, So you know that that 0:15:55.760 --> 0:15:58.480 helps to you know, kind of keep the consumer buoyant. 0:15:59.640 --> 0:16:03.120 But we do think there's some slowing underneath the headline 0:16:03.120 --> 0:16:05.960 and employment numbers, and I do think we are going 0:16:06.000 --> 0:16:08.720 to see The question is do we see you know, 0:16:08.840 --> 0:16:11.040 just a soft patch in growth in the middle part 0:16:11.080 --> 0:16:12.680 of the year, or do we get a mild recession. 0:16:12.720 --> 0:16:16.640 We're still thinking that mild recession is possible, but you know, 0:16:16.720 --> 0:16:19.920 certainly recognize that the data have come in stronger than 0:16:19.960 --> 0:16:22.120 expected and that could continue. 0:16:22.360 --> 0:16:24.840 Kathy, how would you expect John Williams, the New York 0:16:24.840 --> 0:16:27.160 Fed President, to address some of those issues this afternoon? 0:16:28.680 --> 0:16:33.240 Yeah, very much. Looking forward to his comments, you know, 0:16:33.320 --> 0:16:35.640 and to put into perspective like they kind of we're 0:16:35.680 --> 0:16:39.640 talking about ray cuts. Well not really, but you know, 0:16:39.960 --> 0:16:41.840 and the Minute's helped us out a little bit there. 0:16:41.880 --> 0:16:45.400 But I do think they're at an interesting time now. 0:16:45.400 --> 0:16:47.760 I mean, in a way it's better than they thought, right, 0:16:47.800 --> 0:16:50.880 but it's still complicated. It's better because inflation has come 0:16:50.920 --> 0:16:54.240 down much quicker than they thought, the labor market has 0:16:54.280 --> 0:16:58.120 been more resilient. But now that the idea is well, 0:16:58.120 --> 0:17:01.080 it's not just about lowering inflation, but can we stabilize 0:17:01.120 --> 0:17:04.479 the economy to avoid, you know, a harder landing. So 0:17:05.640 --> 0:17:08.320 I'm very interested to see how he kind of threads out. 0:17:08.400 --> 0:17:11.480 I think one message you'll probably deliver is the bond 0:17:11.520 --> 0:17:14.439 market is still a little too optimistic in the start 0:17:14.440 --> 0:17:17.800 of the timing of rate cuts. But to be honest, 0:17:17.840 --> 0:17:21.480 we're looking for May May June market sort of pricing 0:17:21.520 --> 0:17:24.720 and high odds and marks not all that different. The 0:17:24.760 --> 0:17:26.400 fact is the Fed's is going to be cutting rates 0:17:26.400 --> 0:17:29.560 this year unless something on inflation starts to turn around 0:17:29.560 --> 0:17:30.440 in a very ugly way. 0:17:30.640 --> 0:17:32.879 Well, Kathy, not all rate cuts are created equally, and 0:17:32.960 --> 0:17:35.639 I think that on the surface, it's almost contradictory to 0:17:35.680 --> 0:17:39.120 talk about maintaining a restrictive stance and entertain the surgical 0:17:39.200 --> 0:17:41.280 rate cuts at the same time with a focus on 0:17:41.320 --> 0:17:43.919 real yields. Do you think they can entertain both iteas 0:17:43.960 --> 0:17:47.080 simultaneously and communicate effectively and clearly. 0:17:48.920 --> 0:17:52.800 Well, communication has not been there, you know, the top 0:17:53.119 --> 0:17:57.760 bright spot here really to be honest, you know they 0:17:57.880 --> 0:18:00.840 need to communicate clearly. But I you also think your 0:18:00.840 --> 0:18:04.520 point is well taken. Are you just removing some of 0:18:04.560 --> 0:18:07.320 that restrictiveness but still want to hang on to it 0:18:07.320 --> 0:18:11.119 because you're not quite one hundred percent confident infleetion's getting 0:18:11.119 --> 0:18:13.320 back to two percent? Or do you say, you know 0:18:13.400 --> 0:18:15.720 what inflation? We do have a high degree of confidence. 0:18:15.960 --> 0:18:18.320 You're getting to the point with you know Mike's interview 0:18:18.400 --> 0:18:21.560 with Lorettemester. You know how confident they are we're going 0:18:21.600 --> 0:18:24.280 back to two percent? And how does that real rate, 0:18:24.520 --> 0:18:26.960 you know, play in to the mix of things, because 0:18:27.000 --> 0:18:28.719 right now the real rate is higher. 0:18:28.840 --> 0:18:32.800 Right the fact that it can't in Columbus, Ohio nationwide 0:18:32.840 --> 0:18:35.920 is on your side, and all that the unemployment rate 0:18:36.200 --> 0:18:41.640 is two point eight zero percent. Help me with Senator 0:18:41.680 --> 0:18:45.080 Warren from the Commonwealth of Massachusetts. Shouldn't we be up 0:18:45.080 --> 0:18:49.760 on the tables pop and champagne and celebrating an unemployment 0:18:49.840 --> 0:18:52.440 rate of two point eight zero percent. 0:18:55.600 --> 0:18:59.680 Yes, I mean we should be celebrating that this economy 0:18:59.760 --> 0:19:05.360 is is quite good, and you know, inflation is coming down. 0:19:05.400 --> 0:19:08.320 You know, maybe that is why consumers overall and maybe 0:19:08.359 --> 0:19:13.160 there's not as much exuberance out there, but inflation's coming 0:19:13.200 --> 0:19:15.480 down eventually. If it's going to be cutting interest rates 0:19:15.560 --> 0:19:18.000