Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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. Jenny and Manuel of
Speaker 2: evercret I I right in this The phrase it is
Speaker 2: different this time is being heard everywhere, especially since the
Speaker 2: FED has promised the cut raids from a position where
Speaker 2: the economy is not slowing. We do think that Friday's
Speaker 2: core PC number could surprise to the upside and a
Speaker 2: cut would get quickly priced out and the market would
Speaker 2: respond with stock weakness. Judian and place to say with
Speaker 2: us for more. Julian, good morning, good morning to see
Speaker 2: you said in the exuberance zone. Can you describe what
Speaker 2: that zone is irrational or not?
Speaker 3: It is not irrational, okay, because I think when we
Speaker 3: as investors think about history. We have to go back
Speaker 3: to the time where, frankly, having run money during that time,
Speaker 3: you knew there was irrationality. In year two thousand that
Speaker 3: was twenty eight times earnings. We are at twenty three
Speaker 3: times earnings.
Speaker 4: Now. The S and P and rview.
Speaker 3: Would have to get a lot closer to six thousand
Speaker 3: to get to irrational. However, we are seeing signs of
Speaker 3: the wall of warri having given completely dissolved, very barrant
Speaker 3: behavior in the options markets. Betting on stocks doubling in
Speaker 3: the course of three or four days, incredible betting on
Speaker 3: the Nasdaq rallying a further thirty three percent out to
Speaker 3: June after already rallying thirty percent since the October low.
Speaker 4: All of these.
Speaker 3: Signs you see short interest being a decade lows. All
Speaker 3: these things say that there is a feeling that the
Speaker 3: market isn't invincible. And when you think about the narrative
Speaker 3: of the last several months where we walk back from
Speaker 3: six rate cuts to three rate cuts without the market
Speaker 3: you know, pausing for even a moment, Yeah, you can
Speaker 3: understand why we're there. We think that the reaction to
Speaker 3: hotter inflation may be different.
Speaker 2: You know, what the comeback might be. Just because you
Speaker 2: found someone playing blackjack doesn't mean we're in Las Vegas, right,
Speaker 2: You know, you can always find something like that. You
Speaker 2: find it, you can find the gambling going on somewhere.
Speaker 2: That stuff always exists. What's new about this?
Speaker 3: So what's new about this is that this phenomenon known
Speaker 3: as zero daised expiration options really in a lot of
Speaker 3: ways is the equivalent of what we saw back in
Speaker 3: the late nineteen nineties.
Speaker 4: It was called day trading then.
Speaker 3: Obviously it's called high frequency quantitative trading now.
Speaker 4: But the speculation that.
Speaker 3: You can really cause to happen every single day, and
Speaker 3: we saw it in this earning season, this last earning season,
Speaker 3: and we're likely to see it again this earning season,
Speaker 3: where you have these stocks that have enormous gaps to
Speaker 3: the upside and the downside because of the exuberance that
Speaker 3: really has no precedent in the options market.
Speaker 5: Which race is a question where is the reality check?
Speaker 5: Where is the gut check?
Speaker 2: You say it.
Speaker 5: Comes from in some ways the inflation data, It comes
Speaker 5: from FED expectations, it comes from the bond market. What's
Speaker 5: the trigger though, at a time where the market is
Speaker 5: hearing what the FED is saying, and then some they're
Speaker 5: hearing the rosiest picture that the Fed's going to let
Speaker 5: inflation come down very slowly, but that they will get
Speaker 5: an under control.
Speaker 3: So, when you have momentum of this kind of strength,
Speaker 3: and we have to acknowledge that this is among the
Speaker 3: most record scenting periods of momentum that we've seen, there
Speaker 3: tends not to be a discrete trigger.
Speaker 4: The one thing we would point to.
Speaker 3: Is when you think about it, actually the month of
Speaker 3: April is sort of an outlier in that what you
Speaker 3: tend to see is sort of momentum reversals, and what
Speaker 3: we've looked at over the month of March is some
Speaker 3: of these momentum names have stalled.
Speaker 4: They haven't reversed, they've stalled.
Speaker 3: But when you are trying to feed that sort of exuberance,
Speaker 3: stalling is something that we take note of. And again
Speaker 3: with this tendency, turning the page to the second quarter,
Speaker 3: there is a potential in our view of momentum really
Speaker 3: taking a backseat.
Speaker 5: How do some of the retail investors, the traders that
Speaker 5: use these options contracts that you were talking about fit
Speaker 5: into the picture of how this will develop. Do you
Speaker 5: think that they increase the fragility of markets, or do
Speaker 5: you think that essentially they're just a feature of the
Speaker 5: moment we're in.
Speaker 3: Well, no, actually, and we said this when zero disted
Speaker 3: expiration options first became quote unquote a thing that we
Speaker 3: felt very highly convicted that it would suppress volatility because
Speaker 3: think about it, the casino is open from nine point
Speaker 3: thirty to four and then you cast your chips in
Speaker 3: and there's no overnight risk, okay. And actually, as a
Speaker 3: professional investor, that gives you opportunities that you might not
Speaker 3: normally have because when you're pushing the action on a
Speaker 3: day to day basis in this way and you get
Speaker 3: these gap moves. If you're a disciplined buyer and seller
Speaker 3: of stocks, you get these opportunities to add.
Speaker 4: To positions, to trim positions.
Speaker 3: That actually increase the alpha and make this it really
Speaker 3: The environment that we're in of stock selection is also
Speaker 3: unlike anything we've seen, But a lot of this is
Speaker 3: driven by this constant exuberance that we see on the
Speaker 3: part of the public.
Speaker 2: Can you talk to us about opportunities right now? Then
Speaker 2: what are they?
Speaker 3: So we continue to think that there's a likelihood of
Speaker 3: the economy slowing in the second half and into twenty
Speaker 3: twenty five. And when you think about it, some of
Speaker 3: these more defensive sectors that actually tend to do well
Speaker 3: in the period from the last hike to the first
Speaker 3: cut it have lagged. They've had idiosyncratic issues. Healthcare, consumer
Speaker 3: staples really sort of working off the GLP one phenomenon.
Speaker 3: We think there's a lot of value there. And there's
Speaker 3: also this entire subset of names whose valuations haven't moved
Speaker 3: out in the way the index has that still have
Speaker 3: strong earnings.
Speaker 4: It's a cross sector.
Speaker 2: Now, can we get to healthcare on place? You put
Speaker 2: it out, what am I buying? Going to buy healthcare?
Speaker 2: Is it just the JLP well semantic story and some
Speaker 2: people might point to that as a zuber and well
Speaker 2: am I buying well?
Speaker 3: So that's what held the rest of the sector back
Speaker 3: for the majority of last year. But when you look
Speaker 3: at it right, there's this whole notion that we've started
Speaker 3: to CM and a activity come back because financing conditions
Speaker 3: have remained as favorable as they have and that really
Speaker 3: points to, you know, the future. In terms of biotech,
Speaker 3: small cap biotech has done pretty well this year. We
Speaker 3: think there's a broadening, and of course, in this environment
Speaker 3: where the likelihood is that you know it with a
Speaker 3: yield on some of these names four or five six percent,
Speaker 3: bar belling into some of the safer names, cash flow
Speaker 3: generators makes sense to us as well.
Speaker 2: Interesting, Julian, thank you. It's good to see you as always.
Speaker 2: Thank you saying Jenny and Monnuwether of Evercore in the
Speaker 2: Exuberance Zone. Israel Prime Minister Benjamin Nettania, who's office canceling
Speaker 2: a planned visit by senior aide to Washington. The decision
Speaker 2: coming after the US abstained from voting a UN resolution
Speaker 2: demanding an immediate cease far in Gaza. One of the
Speaker 2: eighth scheduled to visit the US was Ron Dermer. These
Speaker 2: Arareel Strategic Affairs Minister. He joined us now from Jerusalem. Minister,
Speaker 2: wonderful to catch with you once again, Sir. I want
Speaker 2: to begin our conversation if we can, with a quote
Speaker 2: from John Kirby, the spokesperson for the UST National Security Council,
Speaker 2: and Minister. This is what he had to say. There's
Speaker 2: no reason for this to be seen as some sort
Speaker 2: of escalation. Nothing has changed about our policy. Nothing. We
Speaker 2: still want to see a ceasefire, we still want to
Speaker 2: get hostages out. Minister, Can we just begin with that
Speaker 2: line coming from the administration, What exactly do you believe
Speaker 2: has changed as they turn around and say nothing has.
Speaker 6: Well, I believe there are policy that has been pretty consistent, John,
Speaker 6: since the beginning of the war about six months ago,
Speaker 6: was to not accept the cease fire. That would be
Speaker 6: unconditional and it would have to be connected to an
Speaker 6: agreement to release hostages. Unfortunately, in this text there was passed.
Speaker 6: Those two issues were separated for the first time. In fact,
Speaker 6: five days before there was a resolution that the United
Speaker 6: States put forward that was vetoed by a China and Russia.
Speaker 6: And one of the reasons why they vetoed it is
Speaker 6: because it connected those two issues. And if you look
Speaker 6: at the text, and everyone can go see it on
Speaker 6: the UN website, and you look at the resolution five
Speaker 6: days ago and you look at the resolution that passed yesterday,
Speaker 6: you'll see a huge difference. And unfortunately, that's a change
Speaker 6: in US policy.
Speaker 1: Now.
Speaker 6: I'm glad to hear that John Kirby said, it's not
Speaker 6: a change in US policy, and I hope that they
Speaker 6: will continue to connect those two issues. But that's not
Speaker 6: the text of the resolution, and that's why Tamas celebrated
Speaker 6: the resolution and welcomed it.
Speaker 1: That's why Iran welcomed it.
Speaker 6: Believe me, any resolution by the UN Security Council that
Speaker 6: Kamas welcomes is not a good resolution for Israel.
Speaker 2: A minister, you would you to travel yesterday evening. Could
Speaker 2: you share with us what you said to the administration
Speaker 2: directly after that decision?
Speaker 1: Well, I spoke to them.
Speaker 6: I haven't spoken to them after that decision. I spoke
Speaker 6: to them before that decision. When we first learned about
Speaker 6: which direction this was going. I did on I think
Speaker 6: it was Sunday night, and when I heard what was happening,
Speaker 6: I said, look, you're going to have it's the wrong
Speaker 6: message at the wrong time. I explained to you, why
Speaker 6: was the wrong message because it's not connecting the issue
Speaker 6: of a ceasefire with the return of the hostages.
Speaker 1: And why is it such bad timing.
Speaker 6: Because we had negotiators in Doha trying to get an
Speaker 6: agreement to release hostages. And it's not surprising that Hamas
Speaker 6: decided to reject the latest proposal that was put forward
Speaker 6: by the Americans, because why should they not reject it?
Speaker 6: They think they're going to get a ceasefire without giving
Speaker 6: up the hostages, because that's what the resolution said. And
Speaker 6: I understand and I appreciate that the United States has
Speaker 6: said that's not our policy, but that's not the text
Speaker 6: of the resolution.
Speaker 1: And that's the problem.
Speaker 6: I told them before if this would be the case,
Speaker 6: I would find it very difficult to believe that the
Speaker 6: Prime Minister would send a delegation to Washington. Why because
Speaker 6: the purpose of us going to Washington was to discuss
Speaker 6: and to actually listen to American ideas of how we
Speaker 6: should go into Rafa the other ideas that they said
Speaker 6: they had without a major military operation in Rafa. What
Speaker 6: message John is going to send to hamas that the
Speaker 6: day after that the Americans separate these two issues. Hey,
Speaker 6: you know what, you could have a ceasefire without a
Speaker 6: hostage negotiations, and then the United States is presenting its
Speaker 6: proposal how we should not go into Rafa.
Speaker 1: That's a real big problem.
Speaker 6: And that's why the Prime Minister made the right decision,
Speaker 6: made the right decision to stop the delegation which I
Speaker 6: was leading to go to Washington.
Speaker 7: Okay, so this trip was suspended. Is there any plans
Speaker 7: for you to come to Washington then in the future.
Speaker 1: I don't know.
Speaker 6: We'll have to discuss it with the US administration. We
Speaker 6: haven't had those discussions yet. I think the context here
Speaker 6: was particularly problematic. Obviously, the US has ideas, and I'm
Speaker 6: sure they'll share it with us. I don't know if
Speaker 6: it'll be in a delegation in Washington's people coming here
Speaker 6: us speaking over the phone, but they have ideas that
Speaker 6: they won't want to present to us. The President asked
Speaker 6: the Prime Minister of Israel to send the delegation so
Speaker 6: that we can hear their ideas. We have our Defense
Speaker 6: minister in Washington now. I'm sure he's discussing.
Speaker 1: This with them.
Speaker 6: But I think that timing was particularly problematic because of
Speaker 6: the message that this UN Security Council resolution was sending.
Speaker 6: It was a very very bad message, both for the
Speaker 6: hostage negotiations and also we have to be very clear
Speaker 6: with Hamas. We have to be very clear that we're
Speaker 6: going to fight this war until the end. And the
Speaker 6: last thing we want them to believe that the international
Speaker 6: pressure on Israel will get us to simply not finish
Speaker 6: the war. That's not going to happen now. I don't
Speaker 6: decide what the United States will do or won't do.
Speaker 6: They're a sovereign government, they'll have to make their own decisions.
Speaker 6: But Israel has to make clear to Hamas did we
Speaker 6: intend to fight this fight till the very end, and
Speaker 6: hopefully that pressure they're understanding that we're going to fight
Speaker 6: this to the end will enable us to get to
Speaker 6: a hostage deal.
Speaker 7: Well, these really defense minister, as you say, is in Washington.
Speaker 7: We have Benjamin Ettiaho, the Prime Minister, approving a Rafa operation.
Speaker 7: But the Israeli Defense minister said he had a good
Speaker 7: meeting with officials in Washington. Did anyone convince anyone on
Speaker 7: other side to change?
Speaker 6: Well, look, we've been in discussions with the US administration
Speaker 6: for a long time. The initial US policy was essentially
Speaker 6: not that they're against an operation in Rafa full stop.
Speaker 6: What they said initially was that Israel has to make
Speaker 6: efforts to get the civilians out of harms way and
Speaker 6: to ensure that humanitarian assistants can get to them. And
Speaker 6: guess what, we agree, and we've been working on a
Speaker 6: plan to get the civilians out of harms way and
Speaker 6: to get ramp up humanitarian assistance to them. So this
Speaker 6: is something where the two governments should be able to
Speaker 6: get to common ground and should be able to get on.
Speaker 1: The same page.
Speaker 6: Now, if the position of the United States is there
Speaker 6: should not be a major military operation in Gaza, then
Speaker 6: we're not going to be on the same page because
Speaker 6: we have to go in to Rafa, we have to
Speaker 6: finish the job. We have to take care of these
Speaker 6: four battalions. We can lead, leave twenty percent or twenty
Speaker 6: five percent of the Hamas force in Gaza so they
Speaker 6: can simply reorganize and comeback. And Israel's major military operations
Speaker 6: actually have enabled us to do much smaller operations and
Speaker 6: achieve great success. Look at what happened in Shifa Hospital.
Speaker 6: I don't know if you're following that, in the northern
Speaker 6: part of the Gaza strip.
Speaker 1: We were there a few months.
Speaker 6: Ago and we did a major operation just now. We
Speaker 6: went back last week and we have done one of
Speaker 6: the most successful operations in Shifa Hospital in our history.
Speaker 6: Nearly two hundred terrorists were killed there, over eight hundred
Speaker 6: terrorists were captured, and there have been zero civilian casualties.
Speaker 6: In fact, there have been more Israeli soldiers too who
Speaker 6: have died in that operation. Than civilian casualties. Why can't
Speaker 6: we do that? And I think this is a very
Speaker 6: important point for your viewers to understand, because once you
Speaker 6: do the major military operations, once you crush these battalions
Speaker 6: and defeat them, Israel has to.
Speaker 1: Come in with a much smaller force, much more.
Speaker 6: Careful military operations, and achieved great success. That's why it's
Speaker 6: so important for us to go to Rafah and to
Speaker 6: finish the job.
Speaker 5: You keep saying, fight this until the end. People have
Speaker 5: already talked about when you have people living in dire situations,
Speaker 5: people who've seen their loved ones being killed, that breeds extremist.
Speaker 2: Type of behavior.
Speaker 5: You're already seeing that in certain places that even if
Speaker 5: you kill Hamas, something else will come in its place
Speaker 5: because there isn't leadership and there isn't a sense of
Speaker 5: what the future is. How do you counter those types
Speaker 5: of discussions? How do you say there is an end
Speaker 5: that you have in sight?
Speaker 1: Well, first of all, understand what we're trying to achieve.
Speaker 6: We're trying to destroy Kamas's military in Gaza. They're not
Speaker 6: a terror organization in Gaza. They're a military terror organization
Speaker 6: in Gaza, and we have to crush their military and
Speaker 6: it's divided up into battalions, and we're doing that I
Speaker 6: think very well. But what you just said about it
Speaker 6: breeds extremism. I'd ask you, do you think that the
Speaker 6: action of the United States against the Nazis in Germany?
Speaker 1: Do you think that bred extremism among Germans? Do you
Speaker 1: think the.
Speaker 6: Actions of the United States in Japan bred extremism? I mean,
Speaker 6: you were smart enough to first of all finish the
Speaker 6: job and win the war, and you demanded unconditional surrender
Speaker 6: to achieve it, and then you were smart enough to
Speaker 6: be magnanimous in victory and provide a different path for
Speaker 6: the future. Have to finish the job is what if
Speaker 6: you not finish the job, the situation will actually be worse.
Speaker 6: You have to finish the job, defeat them, and then
Speaker 6: you can talk about a day after. Then we can
Speaker 6: talk about how we can expand peace in the region,
Speaker 6: what we should do in the long term prospects of
Speaker 6: Israelis and Paal sittings. But there will be no day
Speaker 6: after Hamas if Ramas is still there.
Speaker 1: That's why we have to finish the job.
Speaker 5: I guess that one of the key questions that has
Speaker 5: been kind of hanging over this is we don't have
Speaker 5: a clear sense of how you provide that type of
Speaker 5: structure in any way when you don't have that being
Speaker 5: provided with respect to who's going to be the leader,
Speaker 5: with respect to who's going to provide the financing, with
Speaker 5: respect to even whether there'll be two states and what
Speaker 5: that will look like with a certain land in the
Speaker 5: West Bank being seized. So how do you address those
Speaker 5: kinds of questions that do need to be put into
Speaker 5: place before you finish the job.
Speaker 6: I don't believe they have to be put in place
Speaker 6: before you finish the job.
Speaker 1: In fact, I think just the opposite.
Speaker 6: I think if you try to put the that in
Speaker 6: place now, you can actually undermine the effort to get
Speaker 6: to a real good day after plan afterwards, because first
Speaker 6: everybody has to understand that Hamas and Gaza is finished.
Speaker 6: Until they understand that, no one will step forward. So
Speaker 6: you're going to actually have a plan that's going to
Speaker 6: be stillborn the second you win. That's the time when
Speaker 6: the international community, obviously led by the United States, Israel,
Speaker 6: Ara partners in the region, have to come in and say, Okay,
Speaker 6: what do we do now? Now Hamas is defeated, in Gaza.
Speaker 6: What is the next step to think that anyone is
Speaker 6: going to emerge now when you have four terrorist battalions
Speaker 6: of Hamas and Gaza, maybe around fifteen thousand terrorists fighting there,
Speaker 6: and that somebody is going to step forward kidding themselves.
Speaker 6: We saw what happened in the northern part of the
Speaker 6: Gaza strip when we try to work with local actors.
Speaker 6: Hamas took them out and executed them. That's what's going
Speaker 6: to happen until we finish the job. That's why I
Speaker 6: think it is in the interest of all countries who
Speaker 6: not only are interested in israel security, but interested in
Speaker 6: a better future for the Palestinians to get Israel to
Speaker 6: finish the job as quickly as possible so we can
Speaker 6: move on to a day after. And the truth is,
Speaker 6: we have real partners in the region for that day after.
Speaker 1: I think the are a partner.
Speaker 6: I think the Amarades are a partner. I think they
Speaker 6: are starting and they've worked to deradicalize their own societies.
Speaker 6: I think we need to look for them into their
Speaker 6: leadership to see what we can do in a day after,
Speaker 6: and then we can talk about all of those political issues.
Speaker 6: But first we have to get to a day after.
Speaker 6: We have to finish the job. You cannot leave that
Speaker 6: force in Gaza. It would be like, as one Israeli
Speaker 6: minister said, Minister against He said, it would be like
Speaker 6: fighting eighty percent of a fire, leaving twenty percent of
Speaker 6: the fire and simply hoping that it's.
Speaker 1: Not going to come back. Of course it'll come back.
Speaker 6: We have to douse these flames and then we can
Speaker 6: talk about the day after.
Speaker 2: Minista, I know we only have a few minutes left
Speaker 2: with you. I had a few direct questions to work
Speaker 2: through with you, if I may. The Vice President of
Speaker 2: the United States spoke over the weekend. Here's a quote
Speaker 2: from her. Any major military operation in Rafa would be
Speaker 2: a huge mistake. I'm not trying to understand from your
Speaker 2: site why you think that's not a mistake. I'm trying
Speaker 2: to understand now what the consequences would be if you
Speaker 2: cross that perceived red line. Now, have they communicated what
Speaker 2: the consequences would be for Israel and the relationship between
Speaker 2: you and the United States? Have you heard anything whatsoever?
Speaker 6: No, they haven't communicated that with this, But I can
Speaker 6: tell you, John, what the consequences will be if we
Speaker 6: don't go in and finish the job. It'll be that
Speaker 6: October seventh will happen again and again and again. People
Speaker 6: in the United States have to understand that the people
Speaker 6: of Israel see what happened on October seventh as an extent,
Speaker 6: as an existential threat to the country.
Speaker 1: And I'll explain to you what I mean. It's not
Speaker 1: because I think.
Speaker 6: Hamas can destroy the State of Israel. They cannot. But
Speaker 6: if we do not destroy the terror organization that did
Speaker 6: that on October seventh, if we do not take them
Speaker 6: out as a military organization in Gaza, then I truly
Speaker 6: believe that this country has no future Because all the
Speaker 6: buzzards who are circling around Israel and are looking to
Speaker 6: see what's going to happen to Hamas after they perpetrated
Speaker 6: that attack, they have to understand that Hamas is a
Speaker 6: terror organization in Gaza, as a military is finished. You know,
Speaker 6: they are American officials. This happened a couple months ago.
Speaker 6: A senior official came and he said, you know, Hamas
Speaker 6: is an idea, and you can't destroy idea. And I
Speaker 6: countered by saying, you know, Nazism is an idea and
Speaker 6: there are Nazis in Charlottesville walking around with tiki torches
Speaker 6: that they bought at bed Bath and beyond.
Speaker 1: But they don't have a state called Germany.
Speaker 6: ISIS is an idea, and there are people who follow ISIS.
Speaker 6: You saw the attack in Moscow just a few days ago,
Speaker 6: and there are black flags that are in bedrooms, probably
Speaker 6: not just in the Middle East, but in Europe and
Speaker 6: even places in.
Speaker 1: The United States. But they don't have a state.
Speaker 6: They don't control the territory of a caliphate between Iraq
Speaker 6: and Syria. It is one thing to deal with a
Speaker 6: terror organization is It's another thing to deal with a
Speaker 6: military that is a terror group. That's a total different story.
Speaker 6: And we're going to dismantle comases military regime in Gaza.
Speaker 6: It's gonna happen, and I would like to have the
Speaker 6: United States by our side. They've been there for the
Speaker 6: last five months, five and a half months, with critical
Speaker 6: support out of the gate. The moral clarity of the
Speaker 6: President calling a hamas sheher evil. Worse than isis the
Speaker 6: fact that they send aircraft carriers here that the President
Speaker 6: himself visited ten days into the war, where we could
Speaker 6: have had an escalation in the northern part with Hezbella.
Speaker 1: So they've done very important things.
Speaker 6: And what I would and what I have implored them,
Speaker 6: is to stand with Israel until the end, because we're
Speaker 6: going to achieve this victory. And I think it's not
Speaker 6: only an Israel's interest to achieve that victory. I think
Speaker 6: it's an America's interest to achieve that victory because they've
Speaker 6: been part of this through the prom They've been part
Speaker 6: of this victory up until now, and now we're down
Speaker 6: the home stretch. I think, stand with us. Let us
Speaker 6: finish the job and let's get to a day after
Speaker 6: where we could actually have a real peace process that
Speaker 6: can give hope not just to Israelis but also to Palestinians.
Speaker 2: Minister, this is a conversation that you and I will
Speaker 2: have to continue the requires a. Heck, have a lot
Speaker 2: more time than the ten minutes we just had. Run Tom,
Speaker 2: thank you, sir for joining us today. The Israel Strategics
Speaker 2: minista more upside surprises in America, Let's get said the
Speaker 2: chafe US economist Andrew Haldenhoe to break down some of this. Andrew,
Speaker 2: you listen to my mcase breakdown of it as your
Speaker 2: first reaction to it.
Speaker 8: Please yeah, I mean, I think, like Mike, I would
Speaker 8: emphasize that these numbers have really been bounced around by aircraft,
Speaker 8: by autos. You want to kind of look at the
Speaker 8: core of it, and what are we seeing at the core?
Speaker 8: Is week not too exciting, not too positive on the
Speaker 8: shipment side. We saw that this morning.
Speaker 4: Again.
Speaker 8: I think if you look at the various manufacturing diffusion indices,
Speaker 8: they've bottomed, they've come off of the bottom, but they're
Speaker 8: still sitting close to contractionary territory or in contractionary territory.
Speaker 8: So I don't think we're really changing the narrative around
Speaker 8: CAPEX here.
Speaker 2: We're all super familiar with your research. One thing that's
Speaker 2: come up throughout this year, and I keep sing in
Speaker 2: every single note that you send down this economy is
Speaker 2: going to slow down, slow down by such an amount
Speaker 2: that this federal Reserve is going to need to cut
Speaker 2: interest rates. You're still thinking about endcycle type stuff, dynamics
Speaker 2: that are going to become more apparent and obvious through
Speaker 2: the year. What's leading to that conclusion for you?
Speaker 8: It's really the labor market. It's really what we're seeing
Speaker 8: in the labor market where you're seeing things like ours
Speaker 8: work that are coming down, a hiring rate that's coming down.
Speaker 8: I think that's why we heard share Powell saying in
Speaker 8: his evaluation of the data, it's not that we're weakening yet,
Speaker 8: and I would agree with that, but the labor market
Speaker 8: is his emphasis. In terms of a point of concern,
Speaker 8: it would be mine also.
Speaker 5: So do you think that at this point he had
Speaker 5: the right message? The market's gotten it and it's only
Speaker 5: us it's kind of trying to understand and freak out
Speaker 5: around him.
Speaker 4: Yeah.
Speaker 8: I mean, I think one thing that was probably constructive
Speaker 8: that Shair Powell tried to do and that the Committee
Speaker 8: is trying to do, is to get away from responding
Speaker 8: to each individual data point as it comes in. That's
Speaker 8: a very difficult way to set policy. They're kind of
Speaker 8: trying to tell us that we're on a path to
Speaker 8: get to rate cuts now inflation has come down enough
Speaker 8: that they think that they can be cutting interest rates. Now,
Speaker 8: it's not all clear that inflation's returned to two percent
Speaker 8: with some of these supply side disruptions. It's a good
Speaker 8: reminder of why they're still upside risks to inflation.
Speaker 5: Let's sit on that for a minute, because really this
Speaker 5: is really dominating my thoughts right now is the Baltimore
Speaker 5: Bridge and what that means for infrastructure spending. What that
Speaker 5: means for some of the importance right now of getting
Speaker 5: more spending has tried to us at a time with
Speaker 5: the deficit, as John Righty said, is like having fifteen
Speaker 5: big mac So at what point do you see this
Speaker 5: as an inflationary type of impulse where the US has
Speaker 5: to keep borrowing to keep investing to prop up certain
Speaker 5: industries at the expense potentially of bond heels and inflation.
Speaker 8: Yeah, this comes back to the idea of fiscal space.
Speaker 8: Right We usually don't really worry too much about fiscal
Speaker 8: space in the US because politically there always seems to
Speaker 8: be more space to do more spending. But when you've
Speaker 8: already done a lot of spending, when you've already put
Speaker 8: a lot of stimulus into the economy, then when you
Speaker 8: have real shocks to the economy, clearly no one would
Speaker 8: disagree that we should be rebuilding this bridge, that we
Speaker 8: should be investing in infrastructure, But that spending, to John's point,
Speaker 8: is going to come on top of a large deficit
Speaker 8: that we're already running. So I think that's where you
Speaker 8: really get into difficulties potentially politically but also economically. Is
Speaker 8: that also increasing price pressures in the short term and
Speaker 8: the long term investing in infrastructure is going to be
Speaker 8: deflationary positive for productivity, but in the short term you
Speaker 8: need to hire people, you need to source material and inputs,
Speaker 8: and that puts upward pressure on prices.
Speaker 7: Public debt situation. Most urgent I can ever remember is
Speaker 7: from Larry Fink this morning. What do you think this
Speaker 7: does in terms of the impact.
Speaker 2: Of a dollar.
Speaker 8: Yeah, I think that that is something that's increasingly in focus.
Speaker 8: I think we saw a bit of that last year.
Speaker 8: We saw it maybe less in currencies, we saw it
Speaker 8: more in treasury yields, where you had the tenure yield
Speaker 8: there was upwards of five percent, And I think that
Speaker 8: was some foreign investor concern that is this a country
Speaker 8: that is going to run sustainable deficits. They certainly do
Speaker 8: not look sustainable right now. That's ultimately an issue for
Speaker 8: the currency.
Speaker 2: Also, I want to build on on LEAs this line
Speaker 2: of questioning around this port in Baltimore and what could
Speaker 2: develop in the East Coast in the weeks and months
Speaker 2: to come. Can you help us understand just frame briefly,
Speaker 2: how strong the tail winds are that disinflation retail winds
Speaker 2: in goods at the moment in America, because there was
Speaker 2: some sign in the last few months and maybe that's fading,
Speaker 2: And I just wonder how vulnerable we are to maybe
Speaker 2: a reacceleration in goods prices off the back of a
Speaker 2: development like this one this morning.
Speaker 8: Yeah, I think it's a really important thing to draw
Speaker 8: attention to because a lot of the disinflation that we've
Speaker 8: had has been that goods price disinflation, and that was
Speaker 8: energy prices coming down.
Speaker 2: That was supply.
Speaker 8: Constraints that had been constraining supply and boosting prices that
Speaker 8: were relaxing.
Speaker 1: Look at where we are now.
Speaker 8: We have gasoline prices that are rising, that are projected
Speaker 8: to rize further into the summer. We now have this
Speaker 8: supply side disruption related to the port in Baltimore that
Speaker 8: would also indicate that, if anything, goods prices.
Speaker 4: Could be higher.
Speaker 8: We already know about the Panama Canal, we know about
Speaker 8: the Red Sea and the Suez Canal, and we saw
Speaker 8: on the last inflation report. To your point, core goods
Speaker 8: prices came up. They've been coming down. They came up
Speaker 8: in the last report. It doesn't mean they're going to
Speaker 8: come up in every report. But this period of deflation
Speaker 8: and goods that we've been in for the last six
Speaker 8: months or so, we're probably coming out of that now.
Speaker 2: Do you think services can do the heavy lifting as
Speaker 2: that develops on the good side?
Speaker 8: So I think that's what you need to happen. Have
Speaker 8: happened to bring inflation down, So in some ways, this
Speaker 8: kind of idea that the labor market is softening, you
Speaker 8: really need to see that continue to bring inflation overall down,
Speaker 8: which is a very unfortunate scenario. We'd like to have
Speaker 8: a strong labor market and we like to have inflation
Speaker 8: come down. There's a reason it hasn't happened historically. If
Speaker 8: goods are going to be less disinflationary, less deflationary, then
Speaker 8: services needed to pick up for that, and that has
Speaker 8: to be through a software labor mark.
Speaker 2: What I hear from you is different to what I
Speaker 2: heard from the chairman. Is that fair?
Speaker 8: I think that's fair.
Speaker 2: So basically you're saying to get inflation back to target,
Speaker 2: we need a recession.
Speaker 8: That's still the most likely way you bring inflation back
Speaker 8: to target. Is there some probability that you get a
Speaker 8: true soft landing. Sure, there's some probability, but I think
Speaker 8: what we're seeing is just consistent with the idea that
Speaker 8: wage growth is kind of stalled out around four to
Speaker 8: five percent by various different measures. If you want wage
Speaker 8: growth to discelerate further, the labor market probably needs to soften.
Speaker 5: From you disruptions like what we're going to see inevitably,
Speaker 5: either on a very small term or potentially medium term
Speaker 5: with respect to the Baltimore Bridge and shipping passages, we've
Speaker 5: seen shipping disrupted in general. Does that make it more
Speaker 5: or less likely we'll get the recession that you're talking
Speaker 5: about to bring inflation under control.
Speaker 8: So the worst thing that can happen for the economy
Speaker 8: of the worst thing that can happen for the FED
Speaker 8: are these kind of supply side shocks, because what they
Speaker 8: do is they reduce the productive capacity of the US
Speaker 8: economy and they boost inflation at the same time. So
Speaker 8: it's negative for growth and it means you get higher inflation.
Speaker 8: That's different than a demand shock, where you get stronger
Speaker 8: growth and you get higher inflation. That's kind of been
Speaker 8: where we've been.
Speaker 5: But this goes to something that John was talking about
Speaker 5: if we get that kind of stagflationary shock, which is
Speaker 5: essentially what you're describing, are the FEDS hands tied or
Speaker 5: have they made it clear that they're going to air
Speaker 5: on the side of supporting the economy and the labor
Speaker 5: market over continuing the.
Speaker 2: Fight for inflation.
Speaker 8: I think they're in a transition here. But what they're
Speaker 8: transitioning to is this increased emphasis on the labor market
Speaker 8: on the economy, the idea which we saw in their
Speaker 8: summary of economic projections, inflation can run closer to three
Speaker 8: percent than two percent, and they still plant to cut rates.
Speaker 8: That's what they have in their projections.
Speaker 4: Now.
Speaker 8: If that number sneaks up a little bit higher on
Speaker 8: core inflation at the end of this year, and I
Speaker 8: suspect it will over the course of the year, I
Speaker 8: think they'll still be cutting.
Speaker 2: Some debate this morning about whether the Federer serve is
Speaker 2: basically saying they've got a high tolerance for inflation. I'd
Speaker 2: love your response to that. We caught it with Barclay's
Speaker 2: earlier this morning and kind of push back against that view.
Speaker 2: Others have endorsed it. Mohammadd Aaron said this could be
Speaker 2: the beginning of a long story, but the beginning of
Speaker 2: a story that suggests this FED is now targeting a
Speaker 2: range and not a point target. Can I get your
Speaker 2: view on that?
Speaker 8: Yeah, I think implicitly that's true. Explicitly, are we going
Speaker 8: to hear FED officials come out and say, you know what,
Speaker 8: we've got uncomfortable being away from target to the upside?
Speaker 8: I don't think we're going to hear that in the
Speaker 8: near term. But this idea that they can accept somewhat
Speaker 8: stronger inflation, I think everybody would basically say, yeah, two
Speaker 8: and a half percent inflation, that's close enough to two
Speaker 8: percent inflation. Now the problem that you get to is, well,
Speaker 8: is three percent close enough to two and a half percent?
Speaker 8: Is four percent close enough to three percent? And we're
Speaker 8: kind of in that region now. I think it is
Speaker 8: a transition though, where they're moving more towards this kind
Speaker 8: of labor market concern, economy concern, and the reality is
Speaker 8: that they will accept higher inflation.
Speaker 2: The issue with that, and you know it well, once
Speaker 2: you begin to give signs, even if you don't say
Speaker 2: it explicitly, doesn't that make it harder to get back
Speaker 2: down it even more?
Speaker 4: Yeah?
Speaker 8: Absolutely, this can easily lock US into not just a
Speaker 8: short period, but but really a new regime where inflation
Speaker 8: is higher, more elevated, or more volatile.
Speaker 2: This switch in Bianco of Bianca Research was talking about yesterday.
Speaker 2: In fact, I'd go back almost a full twelve months.
Speaker 2: Richard Clarender in a second outlook for Pimco coming out
Speaker 2: and saying this FED is going to be accept two
Speaker 2: points somethink, which sounded controversial at the time, and it's
Speaker 2: almost consensus now on Wall Street.
Speaker 5: And it's led to this incredible euphoria that people are
Speaker 5: pointing to in markets because you're basically having the FED
Speaker 5: that's got your back and you can eat your cake
Speaker 5: and have it too. What is the consequence of that?
Speaker 5: Is it inflation that's not two point something but it's
Speaker 5: three points something to Andrew's point, And then at what
Speaker 5: point does the FED have to say bastard enough, like
Speaker 5: we got to actually do something and hold raise higher.
Speaker 2: Need to put an Italian on the FMC, don't we? Andrew?
Speaker 2: Thank you, Andrew hartenhaus A City. This is the Bloomberg
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