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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
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Jay remember when summer was boor and wasn't that great?
Speaker 2: There is nothing boring about this right now, is there?
Speaker 3: No? Not at all? John.
Speaker 4: It's been really a crazy market just in the last
Speaker 4: couple of days, going back the last couple of months.
Speaker 4: I mean, when you talk about just as the crescendo
Speaker 4: about a narrow market in bad breath reaches its peak,
Speaker 4: right boom, massive reversal.
Speaker 2: Huge move in small caps that we can talk about
Speaker 2: throughout this morning, needs to talk about the politics as well, Ja,
Speaker 2: So let's get into it. The former president addressing the
Speaker 2: Republican Convention a little bit later, we need to talk
Speaker 2: about the pressure building on Joe Biden. The dam is
Speaker 2: breaking big time, and I'll go through just some of
Speaker 2: the reports we've had, not in the last twenty four hours,
Speaker 2: in the last twelve hours. This from ABC News reporting
Speaker 2: that both Senate Majority Leader Chuck Schumer and Minority Leader
Speaker 2: of the House at King Jeffries have indicated to the
Speaker 2: president it's time to step aside. CNN reporting the former
Speaker 2: House Speaker Nancy Pelosi is basically told President Biden the
Speaker 2: same thing in private conversation Semophore yesterday afternoon as well,
Speaker 2: Jay reporting that the campaign funding is essentially drying up.
Speaker 2: Has the pressure ever been greater on this president?
Speaker 3: Yeah?
Speaker 4: It's interesting, right, John, because I think Joe Biden is
Speaker 4: a fighter, and this is all making him dig in.
Speaker 4: Seems to be the case so far. And what's really
Speaker 4: surprising to me is you have this massive push, but
Speaker 4: on the other side of it, you have things like
Speaker 4: five thirty eight and they're pulling on the electoral college,
Speaker 4: which suggests Joe Biden today if the election was held today,
Speaker 4: Joe Biden would win with two hundred and seventy seven
Speaker 4: electoral votes versus two sixty three for former President Trump,
Speaker 4: and yet that seems to get lost in the perspective.
Speaker 4: The other thing that I think is really powerful, and
Speaker 4: I know we're going to talk about it over the
Speaker 4: course of the hour here, is that the economic policy
Speaker 4: mix between the two candidates is night and day.
Speaker 3: And one of.
Speaker 4: Them is very constructive for the United States, is I believe,
Speaker 4: and the other is very destructive from an economic point
Speaker 4: of view.
Speaker 2: Would you like to tell us which one's destructive and
Speaker 2: which one's constructive.
Speaker 4: Well, it's not just me, right, I mean, if you
Speaker 4: look at Goldman Sachs, if you look at Moody's, if
Speaker 4: you look at the Peterson Institute, if you look at
Speaker 4: sixteen Nobel laureates all have come out and said that
Speaker 4: Donald Trump's plan is bad for the United States. It
Speaker 4: means lower growth, it means higher inflation.
Speaker 3: Right.
Speaker 4: You have mass deportations that throws a wrench into the
Speaker 4: labor market.
Speaker 3: You have tariff hikes, you have.
Speaker 4: Extension of fiscal of tax cuts, you have essentially fiscal
Speaker 4: and continents. And I think it's sets up the real
Speaker 4: risk of a dollar crash, which sets the stage for
Speaker 4: a reversal of what has been a fifteen year run
Speaker 4: of massive US financial asset outperformed it.
Speaker 2: Donnar weakness appears to be the objective of the incoming
Speaker 2: administration if they win. Are you saying that US exceptionalism
Speaker 2: dollar dominance is going to be questioned come November if
Speaker 2: Donald Trump wins.
Speaker 4: Absolutely, that's I think that's the case, And you're already
Speaker 4: starting to see it a little bit right now. It
Speaker 4: hasn't really manifested because I think, notwithstanding the kind of
Speaker 4: the frenzy around Joe Biden, the polling.
Speaker 3: Is not at all a suggestive of the same. Right.
Speaker 4: Polling is extremely tight within the margin of error across
Speaker 4: the swing states as well as nationally, and so that's
Speaker 4: why I think the market hasn't quite moved in this.
Speaker 4: But it really does set the stage for things like, Okay,
Speaker 4: does this small cap rally have legs? Does this broadening
Speaker 4: out of the equity market is it sustainable?
Speaker 3: Or do we run kind of hard.
Speaker 4: Into the fall and then get smacked in the face
Speaker 4: with a from victory that leads people to question the
Speaker 4: policy mix of the United States and the FED gets
Speaker 4: put in a box, right, because the Fed is going
Speaker 4: to be cutting I think that's pretty clear. But if
Speaker 4: we get this situation, this worry, the dollar starts to fall,
Speaker 4: the Fed has to raise rates, the dollar continues to fall,
Speaker 4: rates have to go higher. And look, we're in a
Speaker 4: bond market that has not broken out. Equities have clearly
Speaker 4: broken out. And by the way, it's global, right, it's
Speaker 4: not narrow. It's not the magnificent seven AQUI all country
Speaker 4: world all time highs, IFA all time highs, aqui xus
Speaker 4: two year highs, emerging market two year highs. Okay, So
Speaker 4: we're in a situation where the other countries are starting
Speaker 4: to do reasonably well, and here we call them to
Speaker 4: question the policy mix of the United States and a
Speaker 4: massively over owned asset. Right, everybody is overweight US equities,
Speaker 4: everybody is overweight US treasuries. Okay, So you have things
Speaker 4: like the yen fair value is considered to be one hundred,
Speaker 4: it's now at.
Speaker 3: One fifty six.
Speaker 4: You look at the euro fair value is considered one twenty,
Speaker 4: it's at one o nine. You work at emerging market
Speaker 4: currency's absolutely bludgeoned. So I think there's it's not yet
Speaker 4: percolated in the minds of folks, but we got to
Speaker 4: be careful what we wish for if we wish for
Speaker 4: a week or dollar and we get a weeker dollar,
Speaker 4: then I think that suggests that the US is not
Speaker 4: going to be the place to be for the next
Speaker 4: several years.
Speaker 2: We've got a stronger dollar on the screen this morning,
Speaker 2: were Firmer by tent to one percent on the Dollar Index.
Speaker 2: We've got a lot to talk about this morning too.
Speaker 2: Through the hour with Ja Piloski, you recording market on
Speaker 2: the s and P five hundred just to touch Firmer
Speaker 2: trying to crawl back inchin Kai by just two points
Speaker 2: on the SMP up my zero point zero five percent
Speaker 2: in the bond market, yields creeping higher back towards four
Speaker 2: twenty four, eighteen twenty seven. We can talk a lot
Speaker 2: about foreign exchange. The Euro a little weaker going into
Speaker 2: that ECB decision a little bit later, Euro dollar at
Speaker 2: one on nine thirty, coming up this hour, and Marie
Speaker 2: joining us as Democratic leadership pushes Biden to step aside.
Speaker 2: Shila Coolu, Jeffries as deep discounting hits the airlines, and
Speaker 2: Louke kickmore of Aberdeen looking for a super September for
Speaker 2: global rate cuts. We begin with our top story, Biden
Speaker 2: can't catch a break. Just as illness forces the President
Speaker 2: to leave the campaign trail, the damn breaks. ABC News
Speaker 2: reporting both Senate Majority Leader Chuck Schumer and House Minority
Speaker 2: Leader Haqem Jeffries have indicated to President Biden it might
Speaker 2: be best to step aside. Am re joined us now
Speaker 2: from the R and C in Milwaukee, Wisconsin, and Marie,
Speaker 2: before we get to the events of where you are,
Speaker 2: we need to talk about what's happening elsewhere. How great
Speaker 2: is the pressure on President Biden to make a move.
Speaker 5: It's intensifying, that's for sure. Over the past twenty four hours.
Speaker 5: He had a really rough twenty four hours. Not to
Speaker 5: mention that the White House came out and said he
Speaker 5: tested positive for COVID nineteen. It is not just Senate
Speaker 5: Majority Leader Chuck Schumer going to Rehoba Beach over the
Speaker 5: weekend telling him we think you need to step aside,
Speaker 5: or the fact that Hakeem Jeffries as well, the House
Speaker 5: Minority Leader, saying to the President, if you stay in
Speaker 5: this race, this is going to hurt down ballot. This
Speaker 5: might mean we can lose the House. But then you
Speaker 5: have former Speaker of the House Nancy Pelosi. According to CNN,
Speaker 5: according to Politico, also having a direct conversation with the
Speaker 5: President saying, look, you're polling shows that this is going
Speaker 5: to be a loss against former President Donald Trump, and
Speaker 5: you are going to really ruin the ticket for House members.
Speaker 5: So these are three top Democrats. Now they're not saying
Speaker 5: this publicly, although if you read their statements of denials,
Speaker 5: these are not exactly straightforward denials to the press that
Speaker 5: these conversations took place. But what you are seeing is
Speaker 5: top three Democrats, especially Speaker Pelosi, who's very close to
Speaker 5: the President, telling him directly face to face that we
Speaker 5: think you need.
Speaker 6: To step aside.
Speaker 7: Now.
Speaker 5: The President is now isolating. He's back in Delaware, and
Speaker 5: I think the next few days we should note who
Speaker 5: he is meeting with. Is there going to be a
Speaker 5: family powwow? And could this potentially can he heed these
Speaker 5: calls and step aside at the moment, though it does
Speaker 5: sound like he is defiant. When you ask the White
Speaker 5: House what is going on, they say, this is his race.
Speaker 5: He's sticking with it. He has the delegates, and he
Speaker 5: will be on the ticket November fifth.
Speaker 4: Je Marie, I think that's really interesting. Jay Puloski here,
Speaker 4: I know, we like to talk to geopolitics.
Speaker 3: You know, it's funny. I think that Joe Biden.
Speaker 4: Is a fighter, right, and all this pressure is forcing
Speaker 4: him to dig in deeper.
Speaker 3: You talk about the down ballots.
Speaker 4: It's interesting, right, because when you look at the Senate
Speaker 4: races in the swing states, Democrats are pulling considerably above
Speaker 4: the Republican candidates. So in the Senate, which is arguably
Speaker 4: more important for the Democrats to hold than taking the House,
Speaker 4: they actually seem to be doing well. Biden, truly, as
Speaker 4: you note, is not pulling as well as those candidates.
Speaker 4: So I wonder if we're not getting over our skis
Speaker 4: a little bit and talking about Biden stepping away.
Speaker 5: Well, you're one hundred percent right that Biden is a fighter,
Speaker 5: and this is a man who's fueled really by the
Speaker 5: complications in his life, and he talks about the trial
Speaker 5: tribulations of his life and then he's always able to
Speaker 5: overcome it. He thinks he's still in the best position
Speaker 5: to beat Donald Trump when it comes to some of
Speaker 5: these swing states. This is where he's really struggling. But
Speaker 5: you're right, a lot of this is in the margin
Speaker 5: of error when you look at some of the different polling.
Speaker 5: But that is why you see the concern of individuals
Speaker 5: on the ballot, whether they're running for Senate, whether they're
Speaker 5: running for Congress, they think that Biden is actually potentially
Speaker 5: going to hurt their chances. There's something else that I
Speaker 5: think we should take it to consideration. Biden has changed
Speaker 5: his message three different times. When asked what would it
Speaker 5: take to drop out when he sat down with ABC.
Speaker 5: In that interview, he said he could only be convinced
Speaker 5: if the Lord Almighty came down and said, Joe get
Speaker 5: out of the race. Then the NATO press conference about
Speaker 5: a week later, he was pressed on this issue.
Speaker 1: I was in the room, This was.
Speaker 5: All anyone cared about, and he said, no, there's nothing
Speaker 5: that can make me get out of the race, except
Speaker 5: maybe they came back and they said there's no way
Speaker 5: to win.
Speaker 7: The polls.
Speaker 5: He says, if his team came to me and said
Speaker 5: the polls show there's no way to win, then In
Speaker 5: an interview with Beet that was on display last night
Speaker 5: was broadcasting is supposed to be this counter programming to
Speaker 5: the RNC, He said, if he had some sort of
Speaker 5: medical condition that emerged, if someone if doctors came to
Speaker 5: me and said, you got this problem and that problem anyway,
Speaker 5: he said that would potentially be a reason why drop out.
Speaker 5: So I do think there is a little bit more
Speaker 5: of wiggle room now because Joe Biden himself has changed
Speaker 5: the reasoning why he would get out of this race.
Speaker 2: And right after we saw those comments about the potential
Speaker 2: of a medical problem taking him out of the race,
Speaker 2: he gets a COVID diagnosis. Can we just look at
Speaker 2: the compare and contrast. It could not be staker Saturday evening,
Speaker 2: an attempt at assassination on the form of President of
Speaker 2: the United States walks away from it with this fists raised,
Speaker 2: American flag waving in the background, compared to say this
Speaker 2: and re I understand this brutal, But look at the
Speaker 2: pictures of yesterday evening, Yesterday afternoon, President Biden contracting COVID
Speaker 2: no musk, struggling to walk up the steps of Air
Speaker 2: Force one a little bit later on this evening, This
Speaker 2: president won't be able to count a program the former
Speaker 2: president of the United States when he addresses the RNC.
Speaker 2: How stark is that contrast going to be?
Speaker 5: It's incredibly stark because you also have a Republican party
Speaker 5: that's trying to tone down the rhetoric at this RNC,
Speaker 5: and they're trying to unify really the Maga wing of
Speaker 5: the party, this trump Ism that many Hawks and many
Speaker 5: fiscally conservative and more moderate Republicans were hoping potentially this
Speaker 5: would basically no longer be the brand of the Republican
Speaker 5: Party unless Trump was top of the ticket. But yesterday
Speaker 5: and that speech from JD Vance that just showed that
Speaker 5: Maga and trump Ism is.
Speaker 6: Here to stay.
Speaker 5: The populous wing of this Republican Party is now the
Speaker 5: majority of the Republican Party with this ticket, and this evening,
Speaker 5: we're just going to see that tonight with President Trump
Speaker 5: coming to the stage and formally accepting his party's nominee
Speaker 5: to face off against potentially what will be Joe Biden
Speaker 5: November fifth, and he's probably going to put his fist
Speaker 5: in the air and say fight, fight, fight, like he
Speaker 5: did after that former that assassination attempt on Saturday. And
Speaker 5: then in contrast to President Joe Biden, who cannot counter
Speaker 5: programming because he's self isolating in Delaware. And then it's
Speaker 5: just a drip treat of reports that members of his
Speaker 5: own party, senior members of his own party, and some
Speaker 5: of them who really love the president, like Nancy Pelosi,
Speaker 5: are telling him, we think it's time you step aside.
Speaker 2: Let's get into that address a little bit later. Let's
Speaker 2: talk about that and finish there. I want to talk
Speaker 2: about policy on Wall Street. For a long long time,
Speaker 2: we've always thought of the Republican Party is pro business.
Speaker 2: And you and I have been talking about this now
Speaker 2: for a number of weeks, been talking about how pro
Speaker 2: business this Republican administration may actually turn out to be.
Speaker 2: What is going to be in the address a little
Speaker 2: bit late to maybe settle that school on that front, Well,
Speaker 2: it's very different.
Speaker 5: I think if you hear what jd Vance has to
Speaker 5: say his VP pick and what President Trump has to say.
Speaker 5: So jd Vance last night said this is no longer
Speaker 5: the party of Wall Street. This is the party of
Speaker 5: the working class. He called out auto workers in Michigan,
Speaker 5: factory workers in Wisconsin, and energy workers in Pennsylvania. Donald
Speaker 5: Trump likely chose him to park him in these three
Speaker 5: states to try to win the election, because if Joe
Speaker 5: Biden cannot hold the Russ Belt, if he cannot hold
Speaker 5: the Blue Wall, then he is not winning re election.
Speaker 5: To see the White House again, but Donald Trump is
Speaker 5: going to go to the stage today after an interview
Speaker 5: with Bloomberg business Week, and he said he'd actually like
Speaker 5: the corporate tax rate at fifteen percent. So I am
Speaker 5: struggling in all of my conversations here. And I had
Speaker 5: this conversation yesterday with Virginia Governor Glenn Younkin, who they
Speaker 5: think Virginia is definitely in play when it comes to
Speaker 5: Republican Party about which Republican Party is good for business?
Speaker 5: And honestly, Jonathan, I still don't know the answer. It
Speaker 5: really depends who you ask, because someone like JD. Van's
Speaker 5: wants to see a higher corporate tax rate, while the
Speaker 5: top of the ticket wants as low as fifteen percent.
Speaker 5: So we're still struggling to.
Speaker 6: Figure this out.
Speaker 5: One thing that I'm continuously told when I ask about
Speaker 5: some of the rhetoric from Jdvans about the business community,
Speaker 5: everyone says the same thing. It's Trump's party. Jdvans is
Speaker 5: going to.
Speaker 3: Get in line.
Speaker 2: I might on the lights said the Republican Convention. I'm Marie,
Speaker 2: thank you.
Speaker 3: Jay.
Speaker 2: That's a question we keep asking just how business friendly
Speaker 2: is is government going to be if they get back
Speaker 2: into power.
Speaker 4: I think that there's a queer distinction between the two
Speaker 4: candidates and their economic policy.
Speaker 3: Ms.
Speaker 4: Biden has been probably the most successful president in terms
Speaker 4: of economic policy and outcomes in.
Speaker 3: Fifty years or more.
Speaker 4: Right and President former President Trump, I think is his
Speaker 4: policy mix is basically fiscal incontinence, where you're talking about
Speaker 4: mass deportation that destroyed the labor market, You're talking about
Speaker 4: raising tariff sixty percent, you're talking about extending tax cuts,
Speaker 4: you're talking about cutting taxes even further. So I think
Speaker 4: the situation is setting up for really it could be
Speaker 4: a significant shift, in a significant surprise in terms of
Speaker 4: the dollar, because if the dollar weekends, when we blow
Speaker 4: out the physical deficit here, the bed is in a box.
Speaker 4: I think people start to get worried about policy confusion
Speaker 4: and chaos, which was kind of the motif of the
Speaker 4: Trump first administration. Then I think you have a situation
Speaker 4: where you have a massively over owned asset, which is
Speaker 4: US financial assets represented.
Speaker 3: By the dollar, that could roll over. It's at one
Speaker 3: oh four to one oh three.
Speaker 4: People target ninety as a reasonable place if it really
Speaker 4: does start to sell off.
Speaker 2: J Piloskiv TPW Advisory is still optimistic. Rights In this
Speaker 2: they say rotation is the lifebud of Bullmark, and it
Speaker 2: sure seems like a broadening gown in rotation to x
Speaker 2: Tech would go a long way to sustaining the bull Jays.
Speaker 2: With us around the table through the rest of this hour, Jay,
Speaker 2: I want to talk about one name in particular, before
Speaker 2: we've broaden out ourselves. I want to talk about Taiwan
Speaker 2: Semi time on Semi gets Hamma yesterday. But this is
Speaker 2: a company putting up real numbers just this morning. This
Speaker 2: is what we learned. They now expect sales to grow
Speaker 2: more than the maximum mid twenty percent it had guided
Speaker 2: towards previously with things that buy yesterday for you, Yes.
Speaker 4: They were, John, I think you know markets that really extended.
Speaker 4: You live by the sword, you die by the sword. Right,
Speaker 4: So when you're up twenty thirty percent in a matter
Speaker 4: of a month or two, you come you pull back
Speaker 4: eight percent a day.
Speaker 3: That's just kind of normal.
Speaker 4: But the point you're making is fundamentally, these are solid, fast,
Speaker 4: rapidly growing stories.
Speaker 3: Which are unique in the world.
Speaker 4: Right, You're talking about forecasts that were made a couple
Speaker 4: of months ago, and they're already beating them and raising them.
Speaker 3: And this is a story we've seen with.
Speaker 4: N Video and other chip makers that are involved in
Speaker 4: AI for a year now, right, and so you've had
Speaker 4: massive moves, but the stocks are actually cheaper now than
Speaker 4: they were a year ago because earnings have outpaced the
Speaker 4: stock price appreciation. And so we have been and continue
Speaker 4: to be big believers in AI and big believers in
Speaker 4: the idea of the pick and shovel.
Speaker 3: Right.
Speaker 4: The pick and shovel for AI is the semiconductor space,
Speaker 4: and so when you have pullbacks, those are opportunities to.
Speaker 3: Add in our views.
Speaker 2: So this is what we've been rotating away from in
Speaker 2: the last week. Let's talk about what we've been rotating
Speaker 2: towards small caps. I've had questions around this table, conversations
Speaker 2: about whether we're going into a small cap presidency with
Speaker 2: Donald Trump the president in the White House, heading up
Speaker 2: the United States and driving small business in America and
Speaker 2: punishing big business big tech in particular. How do you
Speaker 2: frame that one?
Speaker 3: Yeah, I look at it differently.
Speaker 4: I look at it that small caps are big beneficiaries
Speaker 4: of lower interest rates. Right, fifty percent of small cap
Speaker 4: debt is floating rate versus ten percent for large cap,
Speaker 4: So they are big beneficiaries. And so we've seen this movie.
Speaker 4: We saw it in the fall. Right, small caps at
Speaker 4: are twenty seven percent move in three months October to December.
Speaker 4: I think they're set up for something similar. Small caps
Speaker 4: today trade at ten times twenty twenty five earnings on
Speaker 4: a medium basis, That is extremely cheap. They're massively under owned. Right,
Speaker 4: there's a massive short which is why this is moved
Speaker 4: so fast. Right, This is always the case. Right, it's
Speaker 4: a massive short covering, but you have fundamentals again like
Speaker 4: DSMC to support it. The other thing that I think
Speaker 4: is really really interesting, John, is that things are broadening
Speaker 4: out right. We just updated our model portfolios at TPW Advisory,
Speaker 4: and I go through all the positions, all the indices,
Speaker 4: and all the things we're thinking about. And what's interesting
Speaker 4: to me is that thematics are breaking out right. You
Speaker 4: look at biotech, you look at things like robotics, you
Speaker 4: look at things like security, cybersecurity, they're all breaking out
Speaker 4: to new all time highs. You also look at things
Speaker 4: like infrastructure and cap X. Right, we saw the industrial
Speaker 4: production numbers yesterday. Infrastructure pave all time highs, XLI all
Speaker 4: time highs, which is a smart energy for the grid system,
Speaker 4: all time highs. And so to me, you're looking at
Speaker 4: a situation where there's multiple parts of the market starting
Speaker 4: to move in unison higher and it's not just the
Speaker 4: Magnificent seven anymore. And to me, that's a much more robust,
Speaker 4: much healthier market. Now, as we talked about it the
Speaker 4: open whether with a Donald Trump, should he win, whether
Speaker 4: that sustains, I think is a very real question.
Speaker 2: That's a good thing, so long as we are going
Speaker 2: into an economic answer, just cyclicals for an example, Let's
Speaker 2: take the likes of Delta United in the last twenty
Speaker 2: four hours. They're warning about discounting, they're wanting about driving
Speaker 2: down prices going for the summer. That shouldn't be happening
Speaker 2: if this economy is hold enough, should it.
Speaker 3: Yeah?
Speaker 4: It's so interesting, right because we ran airlines and jets
Speaker 4: for quite some time as a reopening play coming out
Speaker 4: of COVID.
Speaker 3: And they really just didn't work.
Speaker 4: And they still don't work, even though you read about
Speaker 4: tourism US citizens going abroad in record numbers this year,
Speaker 4: and yet it obviously doesn't seem be enough for the
Speaker 4: airlines to make money. And so I think it's it's
Speaker 4: it's interesting, but I think it's an anomaly. If you
Speaker 4: work at broader issues like you look at retail sales
Speaker 4: the other day. Consumer is still strong, right, you have
Speaker 4: real wage growth, you have record loan unemployment or close
Speaker 4: to it, you have disposable income rising, and so consumption
Speaker 4: I think is fine. And what's interesting is are we
Speaker 4: having the manufacturing sector starting to catch up and give
Speaker 4: us another.
Speaker 2: Leg to banter japerslk Gen writing this well, recent data
Speaker 2: is supportive of rate cuts sooner than we anticipated. The
Speaker 2: market might be getting ahead of itself, pricing more than
Speaker 2: three cuts by January and nearly six cuts by the
Speaker 2: middle of twenty twenty five. Stres with us for more
Speaker 2: Sabatric and Morning Good Mine the official house called at
Speaker 2: salt Gen was no cuts yep this year. It feels
Speaker 2: like September might happen before we get there. I want
Speaker 2: to talk about the biger you from you and the
Speaker 2: tea challenging really this view that once you stop, they
Speaker 2: keep going. What's the pushback to that?
Speaker 7: The fact that the data has been relatively strong, right,
Speaker 7: it's it's something that the FED has to kind of
Speaker 7: recalibrate as we go along. If you listen to what
Speaker 7: you know. Fed Chair Williams. I'm sorry, Williams, the FED
Speaker 7: president said. He basically said that, you know that they're
Speaker 7: trying to move into less restrictive policy, so they're not
Speaker 7: really talking about embarking on a very aggressive path of
Speaker 7: rate cuts or even any sort of a you know,
Speaker 7: a cadence of once a meeting or once a quarter.
Speaker 7: So they're going to be very very data dependent once
Speaker 7: they start. So you know, kind of drawing the analogy
Speaker 7: with the ECB. They cut rates in June, and some
Speaker 7: often rightfully called it a data independent rate cut, so
Speaker 7: you know, again coming into the end of the year,
Speaker 7: they're going to be faced with questions about unit labor
Speaker 7: costs and how the data is progressing. So it's not
Speaker 7: certain to us that the ECB is going to be
Speaker 7: cutting every meeting. So the FED might very well be
Speaker 7: in the same situation where they're going to have to
Speaker 7: recalibrate as we go along, as they move away from
Speaker 7: from restrictive policy.
Speaker 2: There might be something else they need to consider as well,
Speaker 2: And Robert Kaplan talked about it. If you're a current
Speaker 2: FED official you want to touch this subject. Former FED officials
Speaker 2: can dance around it a little bit more. I guess
Speaker 2: if new policies come out, it'll take some time for
Speaker 2: them to digest those, and that may affect their next decisions.
Speaker 2: How important is November as a date for how you
Speaker 2: think about twenty twenty five?
Speaker 7: So the November elections I think are very very meaningful.
Speaker 7: I think that after they cut in September, it'll be
Speaker 7: interesting to see how they message their policy path from
Speaker 7: there on. You know, the market I think is aggressively
Speaker 7: pricing in for several cuts between between now and January.
Speaker 7: That feels like it's a little bit too much, But
Speaker 7: really the outcome of the elections I think are going
Speaker 7: to be very key on how they think about policy
Speaker 7: after November. So the you know, the the Trump administration
Speaker 7: is talking about, you know, higher tariffs, you know, the
Speaker 7: debt and deficits picture is something that they're going to
Speaker 7: be very focused on as well. So, you know, it's
Speaker 7: something that the power, the the the FED is going
Speaker 7: to have to be more attention to. Is not just
Speaker 7: a monettery side, but also the general trajectory for the
Speaker 7: for the fiscal side of things.
Speaker 6: You know, it's interesting because both the ECB and the
Speaker 6: FED have had calls of being political different flavors. For
Speaker 6: the ECB, it's that by cutting, you're acting as a
Speaker 6: king maker. You're letting these governments come in run really
Speaker 6: high deficits and again you're saving them by cutting. If
Speaker 6: we're in a position we're in November, we get a
Speaker 6: Trump presidency and we know that's going to be the policy,
Speaker 6: we know the deficit is going to be higher, and
Speaker 6: the Fed is still cutting.
Speaker 2: Is that a problem?
Speaker 6: Are they doing the same thing that's accused of the
Speaker 6: that the ECB is being accused of doing.
Speaker 7: So, you know, the trajectory for debton deficits is quite
Speaker 7: dire regardless of who gets elected, whether it's it's Trump
Speaker 7: or Biden. I think that that's something that the next
Speaker 7: administration is going to have to address. So it's not
Speaker 7: really the purvey of one, you know, party or the other.
Speaker 7: And I think that that's why I think it makes
Speaker 7: it very tricky for the FED to be able to
Speaker 7: cut rates. You know, in an environment where debton deficits
Speaker 7: are and long end yields could potentially arise of the
Speaker 7: market and the bond vigilanties start to kind of push
Speaker 7: back on the narrative that's coming and coming put forth
Speaker 7: by the administrations that come to power. So I think
Speaker 7: that they're going to be very very careful about policy adjustments.
Speaker 7: It's going to be more about moving away from restrictive
Speaker 7: policy as opposed to embarking on several rate cuts. I mean,
Speaker 7: the last leg of inflation is going to be kind
Speaker 7: of tricky. Again. You're talking about, you know, infation getting
Speaker 7: from three percent to two percent. That pathway is probably
Speaker 7: going to be a lot slower than people anticipate. So
Speaker 7: the first rate cuts, you know, will kind of signal
Speaker 7: that they're willing to do more, but whether they deliver
Speaker 7: on that really depends on the data.
Speaker 6: That idea that you mentioned that the bond of vigilantes
Speaker 6: are going to come in if there's government spending that
Speaker 6: they don't like. To your point, we already know there's
Speaker 6: going to be a lot of spending, and with that backdrop,
Speaker 6: sure there's been some curve steepeners, but we still get
Speaker 6: a twenty year auction yesterday that's absorbed really well. There's
Speaker 6: clearly still demand for duration. So how big of a
Speaker 6: risk you actually think that is that at some point
Speaker 6: this bond market might try to punish too much spending
Speaker 6: from the government.
Speaker 7: So at an environment where the data is starting to weaken,
Speaker 7: you are going to see the market rallying and bondiles
Speaker 7: coming down. If anything, I'd say in the last you know,
Speaker 7: three to four weeks, what we have seen is the
Speaker 7: market kind of getting ahead of itself, pricing in the
Speaker 7: Trump trade, the five series part of the curve steepening
Speaker 7: out quite meaningfully, and in the last week I'd say
Speaker 7: there's been a little bit of a rethink and profit
Speaker 7: taking on those trades, and as the market positions for
Speaker 7: Ray cuts, you're going to see that decline in yields
Speaker 7: heading into the elections. This has been our call all
Speaker 7: along is that TENNY yields will start to decline. We'll
Speaker 7: get TENNY yels around four percent by the elections or
Speaker 7: the end of the year, and then after that is
Speaker 7: when you'll start seeing the selloff led by the back
Speaker 7: end because of debt and deficits. There's really not any
Speaker 7: willingness on either party to really address the debt and
Speaker 7: deficit issues, and there's not really that much room, i
Speaker 7: would argue, for cuts and spending. So it's going to
Speaker 7: be very very interesting to see how the next administration
Speaker 7: deals with the issues. On debton deficits and how much
Speaker 7: the bond market is going to push back on that narrative.
Speaker 2: That's an important phrase and deficits, So let me get
Speaker 2: this right. Rallianto November, yourself coming down in November. We've
Speaker 2: been trying to work out if we get higher yields,
Speaker 2: is it because of a better growth profile, higher inflation,
Speaker 2: or because of supply. Do you think it's just about
Speaker 2: supply or do we get a higher bump of inflation
Speaker 2: as well? Do we get higher interest rates from the
Speaker 2: Federal Reserve too? How do you think about those other
Speaker 2: parts of this?
Speaker 7: So I think it's going to be a combination of factors, John,
Speaker 7: and I think you're right to point out that part
Speaker 7: of that could be because of the stimulative effects you're
Speaker 7: getting from rate cuts. So if the market starts to
Speaker 7: look towards you know, especially at a time when the
Speaker 7: economy is relatively strong, this is a very unusual cycle,
Speaker 7: at least in my career. I haven't seen one where
Speaker 7: the Fed is cutting rates to get policy out of
Speaker 7: restrictive territory and not cutting rates because we're heading into
Speaker 7: some sort of a crisis or a meaningful recession. So
Speaker 7: in that sort of context. They have to be very
Speaker 7: very careful if they cut too aggressively, that could again
Speaker 7: lead to frauth in the market. We've already seen an
Speaker 7: easing of financial conditions. You know, if you look at
Speaker 7: the equity markets, it's extraordinarily you know, it's performing really well.
Speaker 7: Credits are very very tight, so you're looking and the
Speaker 7: dollar is very strong. So all of these metrics lead
Speaker 7: us to believe that financial conditions are easy. So they
Speaker 7: have to be careful about cutting and not causing financial
Speaker 7: conditions to ease further. And if that would happened, and
Speaker 7: if growth actually starts to pick up, and we see
Speaker 7: what we saw in the first month of the year,
Speaker 7: the first few months of the year, you could actually
Speaker 7: see you yields rise.
Speaker 2: Super unfair to once for number. But I've got a
Speaker 2: once for number. So we run it down to four
Speaker 2: percent on tens, what do we sell off to. We're
Speaker 2: threatening five again on a ten year in America.
Speaker 7: Probably at least our forecasts are foretelling it's getting back
Speaker 7: towards four and a half percent by the middle of
Speaker 7: next year. Again, it's you know, the policies put forth
Speaker 7: by the administration to come is going to dictate how
Speaker 7: much of a selloff we see, and it also depends
Speaker 7: on the trajectory for the economy. So a modest sell
Speaker 7: off from here on makes sense for us to get
Speaker 7: from four and a half to five percent. You're going
Speaker 7: to really need to see a perhaps a further degeneration
Speaker 7: in the outlook for a fiscal policy.
Speaker 2: Sabanthra super thoughtful. It's going to say thank you, Sabata
Speaker 2: Jampether of selk Gen. Chris Harvey off wels Fargo saying
Speaker 2: this what looked like a popped last week has indeed
Speaker 2: become a rotation driven by Trump's polling and policies. We
Speaker 2: are confident regulatory pressure has crested, and we upgreat banks
Speaker 2: to outperform. Chris joins us for more. Chris is good
Speaker 2: to see you. It's good to see this is a
Speaker 2: change for you and a short amount of time as well.
Speaker 3: It is a change, right.
Speaker 1: We didn't expect what happened this weekend to happen, and
Speaker 1: what that did. It made the probability of Trump taking
Speaker 1: the presidentship from likely to highly likely. And then suddenly
Speaker 1: we weren't talking about the fundamentals anymore. We were talking
Speaker 1: about policies. We were talking about tariffs, we were talking
Speaker 1: about taxes, where we're talking about regulation. And when you
Speaker 1: talk to people, and I'm sure you've had lots of conversations,
Speaker 1: get you have ten different ten different conversations, you get
Speaker 1: ten different answers. Rates are going higher, rates are going lower.
Speaker 1: The curve's going to step, and the curve is going
Speaker 1: to invert. We're going to have inflation. We're not going
Speaker 1: to have inflation. The only thing that we're confident in
Speaker 1: is that we've crested on the regulatory side.
Speaker 3: Right.
Speaker 1: It was already occurring with some of the things with
Speaker 1: Basil III, it was occurring with Chevron, But now that
Speaker 1: it looks like the Trump Trump administration is going back
Speaker 1: in it is something that we think is long and exploitable,
Speaker 1: which was a.
Speaker 3: Catalyst we needed to upgrade banks.
Speaker 2: How broad is this bank's co Is it launch caps
Speaker 2: and regional is one or the other.
Speaker 1: It's starting with large cap, But really we like the banks,
Speaker 1: we like the financial space, and the regulation is going
Speaker 1: to help the group across the board. It's going to
Speaker 1: help multiples, right. Ultimately, I think it's going to help
Speaker 1: earnings as well.
Speaker 3: But the issue is that.
Speaker 1: It's multiples and you can start to price that in
Speaker 1: and it's already beginning.
Speaker 3: We can talk as much as.
Speaker 1: We want about trade and tariff, but the regulatory environment
Speaker 1: is already changing.
Speaker 6: So having a vice presidential candidate who talks about Wall
Speaker 6: Street barons saying you won't cater to Wall Street? Do
Speaker 6: you just write that office campaign rhetoric.
Speaker 3: I wouldn't.
Speaker 1: No, I wouldn't write that office campaign rhetoric. Right, there's
Speaker 1: going to be a lot of push and there's going
Speaker 1: to be a lot of pull. Jd Vance is new
Speaker 1: to the platform, and so there's going to be some
Speaker 1: I think there's also going to be some growing pains,
Speaker 1: and he has some very strong opinions. I don't dismiss that, right.
Speaker 1: But what they talk about and what I think is
Speaker 1: going to come through and is coming through, is it's
Speaker 1: America first, right, and so it's domestic companies over global companies.
Speaker 3: There's a talk.
Speaker 1: About being pro cyclical, and so it's more about economically
Speaker 1: sensitive names, at least in the short term than your
Speaker 1: growth names. And also with the regulation, it's more about
Speaker 1: the capital markets, whether it's companies with M and A
Speaker 1: or IPOs or just multiple revow valuation across the financial
Speaker 1: and banking space in that.
Speaker 6: Trade of American companies versus abroad. Full on display yesterday
Speaker 6: where you get the TSMC's the world. Those chip makers
Speaker 6: are falling, and Intel does find it kind of trades
Speaker 6: Water does that kind of rally have legs.
Speaker 1: So yesterday was a really interesting one because you're right,
Speaker 1: everything went down and so there wasn't a whole lot
Speaker 1: of discrimination. And if you look across tech, there's certain tech,
Speaker 1: more so on the hardware semi side that you would
Speaker 1: punish or weigh on a little bit more than you
Speaker 1: would on the services and software side. But everything went down,
Speaker 1: and I think it's just going to take a while
Speaker 1: for the market to really discriminate. And the other thing
Speaker 1: is we're going we saw this last time. We're going
Speaker 1: to have a number of iterations. There's going to be
Speaker 1: a number of things out in the public that we
Speaker 1: talk about. It's going to be ten percent, it's going
Speaker 1: to be these companies, it's going to be that come
Speaker 1: this industry, and it's going to change over time and
Speaker 1: the markets reacting. But what the market is saying is, hey,
Speaker 1: we went from a likely change in administrations to a
Speaker 1: highly likely change administration. And the views here are much different.
Speaker 2: So we need to price those in just to get
Speaker 2: a bit of nu ones fo you from you and
Speaker 2: pin you down a little bit. What is the difference
Speaker 2: between sort of this traditional rotation and a pure Trump trade.
Speaker 2: What's the difference between it's.
Speaker 1: So traditional rotation. So I think there are two things.
Speaker 1: So last week what we were saying and we were
Speaker 1: wrong about this. Hey, the rotation is not going to
Speaker 1: happen because it's not fundamentally driven. The fundamentals just aren't there, right,
Speaker 1: Because what we're seeing is if you look at surprise indicies,
Speaker 1: they're rolling over right. If you look at the reaction
Speaker 1: to bad news, companies are reacting poorly to bad news.
Speaker 1: But then you had the weekend and all of a sudden,
Speaker 1: the political environment just changed, right, And this week it
Speaker 1: was all about almost all about the political So I
Speaker 1: think the only thing that's really long tailed nature are
Speaker 1: things that touch that regulatory environment. As far as the fundamentals,
Speaker 1: we need to start digesting the fundamentals, and I still
Speaker 1: think the fundamentals favor your larger cap and your growth.
Speaker 1: Your names we'll see, right, But until we see the
Speaker 1: fundamentals change, I'm still not entirely sure that you're going
Speaker 1: to see the broadening out that a lot of people hope.
Speaker 2: So let's park the banks right dory story that you've
Speaker 2: got confidence on. I'm not just in your recession. I
Speaker 2: think it's a fact character by some what you've just
Speaker 2: said as well, a little bit nervous about incoming gaining
Speaker 2: so far. It likes a doubt set what we had
Speaker 2: from United yesterday pepsi as well. What do you say
Speaker 2: in in those stories?
Speaker 3: It's not great?
Speaker 1: Right, So the economy is not as strong as I
Speaker 1: think people expected. And what you're seeing is, you know,
Speaker 1: if you look at the beginning of the year, a
Speaker 1: lot of economists I think that the forecast was for
Speaker 1: like one or one, one, two, and it doubled, but
Speaker 1: economic strength did not double. And what happened was people
Speaker 1: took out the recession.
Speaker 3: Forecast, right.
Speaker 1: It wasn't oh my god, the economy is so strong,
Speaker 1: it said, and we're not going to have a recession.
Speaker 3: Right.
Speaker 1: And now what we're looking at is, hey, we didn't
Speaker 1: expect the FED to be as strong or as tight
Speaker 1: as they have been, and that that's starting to eat
Speaker 1: into the psyche. What's also happening is you're having inflation fatigue,
Speaker 1: and you're also saying that companies have been pushing price
Speaker 1: and individuals are beginning to push back, right, and so
Speaker 1: now you really can't have And what we say is
Speaker 1: the economy is not going to value out. People think
Speaker 1: the economy is accelerating, I just don't see it, and
Speaker 1: so we need things to slow down. And what we've
Speaker 1: had is we had a bump because of the Trump trade,
Speaker 1: but it's really not supported by the fundamentals.
Speaker 6: So there are people who say, it's not the economy
Speaker 6: that's going to save us, it's the FED that's going
Speaker 6: to save us. And we're going to get some Fed
Speaker 6: FED cuts rather, and that means that for these small
Speaker 6: caps that have floating rate debt, they're all going to
Speaker 6: be saved.
Speaker 3: Yeah, fair point.
Speaker 1: Right, So we were oversold, we had an oversold bounce. Now,
Speaker 1: this is probably the oddest easing cycle I've ever seen. Right,
Speaker 1: Typically when you enter an easing cycle, things are really bad.
Speaker 1: The Fed's cutting because either there's a liquidity issue or
Speaker 1: the economy slowing down. Here, they're just saying, hey, we're
Speaker 1: going to start cutting. So how are they going to
Speaker 1: cut twenty five basis points here twenty five basis points there?
Speaker 1: Is that really aggressive enough to change the economy?
Speaker 3: I don't think so.
Speaker 1: Is that enough to change an oversold condition to something
Speaker 1: a little bit better?
Speaker 3: Yeah? I think so.
Speaker 1: But until you see the economy is starting to reaccelerate,
Speaker 1: it's really hard for these smaller cap companies that have
Speaker 1: a tremendous amount of balance sheet and operational leverage to
Speaker 1: outperform for a sustained period of time recap growth.
Speaker 2: You've heard some of these simplastic sort of commentary we've
Speaker 2: heard over the last couple of weeks as well, which
Speaker 2: is sort of buy everything else, leave big techet behind,
Speaker 2: buy everything else? Can you tell us not just what
Speaker 2: you want to buy banks? What wouldn't you touch? What
Speaker 2: would you tell our audience this morning as everyone gets
Speaker 2: wrapped up in the everything house rally?
Speaker 1: What should they avoid? Yeah, so we're still not fans
Speaker 1: of commoding commodity related stocks. If you're going to a
Speaker 1: period where inflation is lower, I'm not really sure how
Speaker 1: that works. Also, we don't think the economy is accelerating.
Speaker 1: Those are places where where we don't want to be.
Speaker 1: So we're still underweight energy and we think that's going
Speaker 1: to be a difficult spot. So anything commodity commodity related,
Speaker 1: you know, in an inflation or non inflation or environment,
Speaker 1: I just don't see how it works.
Speaker 2: Chris, it's going to see I've bred in the banks.
Speaker 2: Thank you, sir, Thank you, Chris Harvey.
Speaker 1: There.
Speaker 2: This is the Bloomberg Sevenans podcast, bringing you the best
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Speaker 7: Mm hmm