Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 2: with Paul Sweeney. Join us each day for insight from
Speaker 2: the best in economics, finance, investment, and international relations. You
Speaker 2: can also watch the show live on YouTube. Visit the
Speaker 2: Bloomberg Podcast channel on YouTube to see the show weekday
Speaker 2: mornings from seven to ten am Eastern from our global
Speaker 2: headquarters in New York City. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen and always I'm Bloomberg Radio,
Speaker 2: the Bloomberg Terminal, and the Bloomberg Business app. Just about
Speaker 2: in town. Keen with you and you get started. Tourist
Speaker 2: and Slock joins us for the Street. The ex Dedeutsche
Speaker 2: banker puts out a note nine ish a clock every
Speaker 2: morning maybe eightish, which is a single paragraph two paragraphs
Speaker 2: in one chart is read by Global Wall Street. Turstan,
Speaker 2: thanks for joining us for the entire How far will
Speaker 2: do some hurricane stuff here in the middle here this
Speaker 2: is so serious for Tampa and the golf, Turstan. What's
Speaker 2: your chart this morning? What's the number one thing that's
Speaker 2: on your mind?
Speaker 3: It?
Speaker 1: Apollo so well, the job this morning is showing that
Speaker 1: twenty six percent of our consumption in Virginia goes to
Speaker 1: data centers. So the need ford investment in renewable energy
Speaker 1: need find investment in data centers. The need for long
Speaker 1: term caucil to invest in long term projects is including
Speaker 1: in boosting here the AI revolution.
Speaker 2: Why can't Google by their own utility?
Speaker 1: Well, some of the tech companies are actually building their
Speaker 1: own power plans and building their own power sources. But
Speaker 1: the bigger issue, of course continues to be that, as
Speaker 1: we all know, one search on CHATGBT takes ten times
Speaker 1: as much energy as one search on Google. So therefore,
Speaker 1: with everything that's going on everywhere in AI, last language models,
Speaker 1: things getting more complicated, processing powers needed. There is certainly
Speaker 1: a very substantial need to power the AI revolution, and
Speaker 1: that does require long term capital to finances.
Speaker 2: And Turst and Sluck Andjument on the same page. He's
Speaker 2: writing about this this morning for Bloomberg. Just let's complete
Speaker 2: your story. Questions for Twisted Sluck.
Speaker 4: Well, you were talking about how the risk to cutting
Speaker 4: interest rate too much too quickly is, especially on the
Speaker 4: back of the latest jobs report, could become and especially
Speaker 4: looking at inflation might be too hot again. Expand more
Speaker 4: on that because we're gonna get an update on CPI
Speaker 4: later this week.
Speaker 5: Yeah, this is very important.
Speaker 1: So the key question really is why is the economy
Speaker 1: still so strong. Your textbook would have told you that
Speaker 1: when the FITS started raising interest rates in much of
Speaker 1: twenty twenty two, the economy should have begun to slow
Speaker 1: down because when interest rates go up, people should be
Speaker 1: buying fuel costs.
Speaker 5: That's not what we have seen.
Speaker 1: When insist rates go up, you should have seen the
Speaker 1: housing markets low down. That's not what we've seen. So
Speaker 1: there's a number of tailwinds to the economic outlook from AI,
Speaker 1: from defense spending, from fiscal policy, the Chips Act, the
Speaker 1: Face and Production Act. All those things combined have kept
Speaker 1: the economy afloat, including also that consumers were less sensitive
Speaker 1: to interest rates because they had locked in mortgage rates
Speaker 1: at very low levels. Ninety five percent of mortgages are
Speaker 1: fixed rates. So because of these very special forces, we've
Speaker 1: just not had that slow down that the FED has
Speaker 1: been looking for, and we think these forces will continue.
Speaker 1: So therefore the answer to your question is we still
Speaker 1: think that the economy is doing fine.
Speaker 5: There is no need for the FED to lower interest rates.
Speaker 4: And you made a bold call earlier this spring that
Speaker 4: the Fed wouldn't cut interest rates this year. What changed?
Speaker 1: So we actually still think that that was and is
Speaker 1: the right call, because now we're debating was it a
Speaker 1: mistake for the Fed to cut rates fifty basis points?
Speaker 1: We just saw non fine payrolls on Friday. It again
Speaker 1: shows that there is no need to lower interest rates.
Speaker 1: So this raises the question why did the FIT lower
Speaker 1: interest rates?
Speaker 5: And this Tom and I have been talking about this for.
Speaker 1: Year because they have an our style model framework which
Speaker 1: says that, well, our long term interest rate needs to
Speaker 1: be lower, so therefore we need to lower it, not
Speaker 1: because of the incoming data, but really because we think
Speaker 1: in the long run we should have a lower level
Speaker 1: of rates. So yes, it is true that they did
Speaker 1: cut and our expectation is that they may even also
Speaker 1: cut here in November.
Speaker 5: But given the incoming data.
Speaker 1: The risks are rising now that we may have more
Speaker 1: upside risk than downside risk to the economic.
Speaker 2: Tursting on about so if your continental view of years
Speaker 2: ago at Deutsche Bank, to me, the great differential here
Speaker 2: in becoming ever more evident each and every day, is
Speaker 2: the nominal GDP difference between Europe, say, and the United States.
Speaker 2: I got four percent even five percent nomenal working in
Speaker 2: the US. Europe's pretty much flat on their back. Is
Speaker 2: that because of our debt build up or we sent
Speaker 2: our grandchildren essentially funding our nominal GDP.
Speaker 1: Well, the US has some tailwinds that are rather unique
Speaker 1: to the US. We have an AI revolution in the
Speaker 1: US we don't really have in Europe. We also have
Speaker 1: significant support from the Chips Act, the Inflaze Production Act,
Speaker 1: the Infrastructure Act. We don't have those tailwinds in Europe either.
Speaker 1: And on top of that, Europe has now some headwinds,
Speaker 1: of course from inner new sensation, from the challenges more
Speaker 1: broadly speaking that they have with the economy with low productivity.
Speaker 1: They have some challenges also with elections in Germany and
Speaker 1: in France that have created a little bit more complicated
Speaker 1: political situation. So broadly speaking, the US has some tailwinds,
Speaker 1: Europe has some hit winds, and that's the reason why
Speaker 1: Europe still is unfortunately having a weaker outlook for growth.
Speaker 2: So you're having a cup of coffee with Rowan and Zelter.
Speaker 2: I know you're not on speaking terms with them, but
Speaker 2: you know, Let's presume you know you're doing an eight
Speaker 2: o'clock meeting with the fancy people, Apollo, what are you
Speaker 2: advising them about the general market, the tone of our
Speaker 2: equity markets.
Speaker 5: Well, we talk every day.
Speaker 1: And the advice, of course is here still that the
Speaker 1: economy is doing just fine across the board wide range
Speaker 1: of indicators we are seeing. If you look at the
Speaker 1: daily data for how many people fly on airplanes is
Speaker 1: still very strong. The daily data from my Bloomberg screen
Speaker 1: how many people go to restaurants is also very strong.
Speaker 1: The daily data from my Bloomberg screen on depit card
Speaker 1: transactions is also very strong. The weekly data for how
Speaker 1: many people go to the movies, go to Broadway shows,
Speaker 1: retail spending is all very strong. So that's basically telling
Speaker 1: you that broadly speaking, there is no recession. There's no
Speaker 1: sign of a recession. GDP last quarter was three percent
Speaker 1: Atlanta fit GDP NOWT for this quarter is two and
Speaker 1: a half. Where is the slowdown everyone is so worried about,
Speaker 1: So it's not surprising the non found payrolls.
Speaker 5: Continues to be strong.
Speaker 1: So the advice really is that look at the data
Speaker 1: that comes in instead of looking at frameworks for thinking
Speaker 1: about where we might be theoretically with us STAR and
Speaker 1: if it funds raised in several years time.
Speaker 4: What's the top question that you're getting from clients and
Speaker 4: how do you use that as a potential sentiment gauge.
Speaker 1: Yeah, a very important question is, of course financing and
Speaker 1: financial conditions. Financial markets are very easy, with the stock
Speaker 1: market as usual close to all time highs, credit spreads
Speaker 1: very tight on ITG high yield and loans, and likewise,
Speaker 1: when it comes to financing for companies, there is a
Speaker 1: general trend of deep banking, where financing is moving away
Speaker 1: from the banking sector, moving to long term stable financing
Speaker 1: capucial sources, and those types of financing of course are
Speaker 1: beginning to play a bigger and bigger role because there
Speaker 1: is a change in the financial system that's beginning to
Speaker 1: be much more pronounced and play a more significant role
Speaker 1: when it comes to providing financing to consumers and providing
Speaker 1: financing to firms.
Speaker 5: So this debate about how is.
Speaker 1: The financial system changing, both in terms of how we
Speaker 1: say for retirement, also in terms of how consumers borrow,
Speaker 1: how firms borrow, and also in terms of the role
Speaker 1: of banks is playing a very important part of my
Speaker 1: conversations with LPs.
Speaker 5: At the moment.
Speaker 2: Torston slock with us with apollow global management. We continue
Speaker 2: a good conversation here Turiston. If we don't get the
Speaker 2: rate cuts, so many people are modeling what does that
Speaker 2: do to our economy? Is it something that we have
Speaker 2: to work out and work through or is it just
Speaker 2: another at the races and we normalize at these levels.
Speaker 5: I like that description another day the races.
Speaker 1: So I do think that this is a very fundamental question, namely,
Speaker 1: if monetary policy really is restrictive.
Speaker 5: The FED keeps emphasizing and saying the Fed funds rate.
Speaker 1: Which today is about five, and in the long run
Speaker 1: we're going to down around three. Well, given five in
Speaker 1: interest rates is higher than three, then the definition, according
Speaker 1: to the Fed must be that the monetary policy stands
Speaker 1: is restrictive or constraining on economic growth. But that's not
Speaker 1: what non found payrolls of two hundred and fifty four
Speaker 1: thousand suggesting, that's not what a declining on in plantar
Speaker 1: rate is suggesting. That's not a declining default rate for
Speaker 1: lebl loads is suggesting. So if it really were the
Speaker 1: case that monaster policy was restrictive, as the FED has
Speaker 1: been arguing, why is the incoming data then still good? So, therefore,
Speaker 1: tom to your question, if they do not cut, we
Speaker 1: should expect that these tailwinds from AI investing, from energy transition,
Speaker 1: from the Chips Act, Inflation Reduction Act, infrastruction, government spending,
Speaker 1: and generally less sensitivity to interstrates for consumers and firms
Speaker 1: because they have locked in low interest rates. We should
Speaker 1: expect these things to still provide a tail and therefore
Speaker 1: make the US economic outlook stronger than what we see
Speaker 1: elsewhere in the world because of these idiosyncratic forces that
Speaker 1: we're seeing in the US.
Speaker 4: After that blew out jobs report, Bank of America is
Speaker 4: making a call about how CPI is no longer a
Speaker 4: non event. And the implied move right now in the
Speaker 4: options market for CPI day is about one point one
Speaker 4: percent in either direction for the S and P five
Speaker 4: hundred versus about a seventy basis point move over the
Speaker 4: last three months on that day. So how vital is
Speaker 4: it when it comes to this latest report coming up
Speaker 4: in a few sessions here as far as what it
Speaker 4: means for the Fed's next rate decision.
Speaker 1: Yeah, this is a really important question because think about
Speaker 1: it for years when inflation started going up in twenty
Speaker 1: twenty one twenty two, all the debate was inflation, inflation, inflation.
Speaker 1: Now when inflation there has come down much closer to two,
Speaker 1: we're two and a half today. We were at nine
Speaker 1: in twenty twenty two, so we are very close to two.
Speaker 1: Now the pendulum swung back to well, now you know
Speaker 1: what it's all about unemployment, because we can check off
Speaker 1: the box with inflation and say, let's not worry about
Speaker 1: that anymore. But because we now have this risk that
Speaker 1: inflation could potentially begin to move higher, it is almost
Speaker 1: as if the problem is about to swing back towards
Speaker 1: inflation again. As you're saying, that's not how markets look
Speaker 1: at Thursday's data that's coming out on the CPI. But
Speaker 1: it still is very important here that the different focus
Speaker 1: from the Fed sometimes is inflation.
Speaker 5: Now it's been unemployment.
Speaker 1: Well, now we're back to watching inflation actually is on
Speaker 1: its way.
Speaker 5: Back to the two percent target.
Speaker 1: Or if there's a risk that in particular the forty
Speaker 1: percent of the CPI basket that is housing, if that
Speaker 1: begins to move higher again, then we will certainly have
Speaker 1: much more focus back on inflation again.
Speaker 4: And of course when you're looking at the money market
Speaker 4: funds still being around records here, if rates do stay
Speaker 4: a bit elevated, what's the actual yield based on history
Speaker 4: as far as when need see money coming out of
Speaker 4: money market funds and more going into the equity market.
Speaker 1: Yeah, and this is the real host mystery looking ahead,
Speaker 1: namely the more than six trillion dollars in money market funds.
Speaker 1: A lot of that money came into money market funds
Speaker 1: because the fifth funds rate went up. Now the fifth
Speaker 1: funds rate is going down. So the question is what
Speaker 1: I invest us in money market funds going to do?
Speaker 1: Historically they have gone into other types of fixed income itg. Credit,
Speaker 1: some high yield, maybe some loans. But the question is
Speaker 1: might they even take some of this and put it
Speaker 1: into equities if the fit continues to.
Speaker 5: Lower interest rates?
Speaker 1: In other words, what is the risk willingness of that
Speaker 1: six trillion dollars in money market funds?
Speaker 5: Where do they go?
Speaker 2: Yeah, this is brilliant tours. Just great question because this
Speaker 2: is just the heart of the matter. But it's nonlinear tours.
Speaker 2: And we just had a model. What did you learn
Speaker 2: in the lower interest rate experiment of the last twelve
Speaker 2: Maybe sixteen weeks. What's a lesson you took away?
Speaker 1: Well, I think a lesson is exactly something that we
Speaker 1: can get from what happened for the fourteen years from
Speaker 1: two thousand and eight to twenty twenty two, when interest
Speaker 1: rates were literally at zero. Well, in those situations, when
Speaker 1: we had investors a lot of money that gave much
Speaker 1: lower in.
Speaker 5: Return in rates, they began to chase yield.
Speaker 1: The hunter yield, of course resulted in a rally in
Speaker 1: a broad range of asset classes, and also in this case,
Speaker 1: will likely result when the Fed now embarks on lowering rates.
Speaker 1: What we're debating is to speak with which they're lowering rates,
Speaker 1: not if they're lowering rates. So even if they do
Speaker 1: lower a little bit slower as I would expect, I
Speaker 1: do think that this will.
Speaker 5: Be positive also for credit. It will also be positive
Speaker 5: for equities.
Speaker 1: It'll be positive for asset classes that generally benefit when
Speaker 1: interest rates move to lower levels. But what's most important
Speaker 1: this debate is that we are not going back to zero.
Speaker 1: We will have According to so for futures, the fitfunds
Speaker 1: rate at around three to four percent for the next
Speaker 1: five to seven years, and that does mean that fixed
Speaker 1: income including private credit is looking more attractive because we
Speaker 1: had a very different environment with interest rate for zero
Speaker 1: relative to now we're interest rates are between three and
Speaker 1: four Tourdson Slack.
Speaker 2: Michelle Bowman gets a massive victory lab you grew up
Speaker 2: with the descent of the ECB, the descent of the
Speaker 2: Bank of England, and should we see more Michelle Bowman
Speaker 2: like dissent at the FED.
Speaker 1: I do think that this is a healthy development. Not
Speaker 1: that they shouldn't all agree all the time, but I
Speaker 1: do think that in particular in this instance where we
Speaker 1: are exactly debating will maybe the fifty basis points cut
Speaker 1: which was really justified by a recalibration. Remember j Pal
Speaker 1: mentioned ten times in the press conference that the reason
Speaker 1: why they did this was to recalibrate monetary policy, not
Speaker 1: because the incoming data was weak. I do think that
Speaker 1: there is now a healthy debate among the FFORMC MEM
Speaker 1: which we heard from several of them yesterday, that hey,
Speaker 1: maybe we should go a little bit slower, maybe we
Speaker 1: should watch the data a bit more carefully. And I
Speaker 1: do think that therefore descents are probably more pronounced feature
Speaker 1: of AFMC meetings over the next level.
Speaker 2: Quarters can't wait towisted few to be appointed a governor.
Speaker 2: Mister Slock is with the Powell. Thank you for the
Speaker 2: generous time here. Had an uncle. He is a professor
Speaker 2: at Union College in Schenectady. When my father got angry
Speaker 2: at me, say spell Schenectady, which I never could do.
Speaker 2: Jennifer Lawless Caspell, Schenectady. She survived Winter's there. What was
Speaker 2: it like at Union College a few years ago, Jennifer Lawless.
Speaker 6: It was so many years ago now, but it was
Speaker 6: snowy and cold.
Speaker 2: It was cold, That's what I remember. On the Mohawk River,
Speaker 2: it was mostly called. Jennifer Lawless out of Union and
Speaker 2: of course Stanford and now holding court at the University
Speaker 2: of Virginia. She's absolutely definitive on the female species in
Speaker 2: our political moment, Professor Lawless, How was the Vice President
Speaker 2: of the United States doing and garnering the votes of women?
Speaker 6: She's doing as well as most Democratic candidates do. Most
Speaker 6: people think that when there's a woman at the top
Speaker 6: of the ticket, there's a bigger gender gap, But the
Speaker 6: reality is that female voters tend to prefer Democratic candidates,
Speaker 6: male voters to prefer Republicans, and the sex of the
Speaker 6: candidate doesn't matter that much in terms of vote choice.
Speaker 6: But what Kamala Harris is doing is really motivating women
Speaker 6: to turnout, and ultimately it's likely going to be a
Speaker 6: turnout election.
Speaker 2: Which is the key female turnout? Is it the women
Speaker 2: of the suburbs of Philadelphia and Pittsburgh that we heard
Speaker 2: about two years ago and four years ago or is
Speaker 2: it a different distinction of women that she needs to win.
Speaker 7: I think it's two groups of women.
Speaker 6: It's the suburban women for sure, because in battleground states
Speaker 6: they're often decisive. But it's also motivating young women who
Speaker 6: need to turn out if Harris is going to not
Speaker 6: only build up her popular vote but also secure wins
Speaker 6: in tough states, and young people have traditionally been less
Speaker 6: reliable when it comes to turnout, so anything she can
Speaker 6: do to make sure that young women are enthusiastic will
Speaker 6: be very helpful on election day.
Speaker 4: So which states are going to be most crucial for
Speaker 4: the female vote?
Speaker 6: Well, basically the female vote is really important in all
Speaker 6: states because when the Democrats are able to ensure that
Speaker 6: they have greater margins among women, they tend to win.
Speaker 6: So if she can up the female vote, if she
Speaker 6: can increase her margins on blue wall states like Michigan, Wisconsin,
Speaker 6: in Pennsylvania as well as along the Sun Belt. Those
Speaker 6: are two good paths to victory without a big advantage
Speaker 6: among women, it's hard to see that happening.
Speaker 4: And as far as when it comes to those swing states,
Speaker 4: which ones do you think are most crucial because you're
Speaker 4: named a couple there, But do you think it'll really
Speaker 4: come down to those?
Speaker 7: I do.
Speaker 6: I think without winning Pennsylvania it becomes very, very difficult
Speaker 6: to win the election, especially given the amount of time
Speaker 6: that she's been spending in Pennsylvania, that Walls has been
Speaker 6: spending in Pennsylvania, and Joe Biden's connections to Pennsylvania.
Speaker 7: So I think that's the most important state.
Speaker 6: And if she wins Pennsylvania or plans to win Pennsylvania,
Speaker 6: the easiest path to victory is then through the blue
Speaker 6: wall states of Michigan and Wisconsin.
Speaker 2: I look, Jennifer Loss, I want to go back to
Speaker 2: your core research here, which is so many other countries
Speaker 2: we seem to be very comfortable with women in any
Speaker 2: number of slots, whether a representative, senator, even at the
Speaker 2: local level, is well, you know, the work you've done
Speaker 2: at UVA. Running for office is still for men. How
Speaker 2: did we get there? Why are we distinctive in this?
Speaker 6: It's interesting. It's really a supply problem and not a
Speaker 6: demand problem. And by that I mean that when women
Speaker 6: run for office, they generally fare just as well as men.
Speaker 6: They're just as likely to win their elections, they raise
Speaker 6: just as much money, their media coverage generally looks the same.
Speaker 7: And keep in mind, in twenty sixteen, Hillary Clinton.
Speaker 6: Did win the popular vote, so voters, donors, and the
Speaker 6: media seem okay with women. The problem is that women
Speaker 6: are still significantly less likely than men to emerge as
Speaker 6: candidates and run for office, largely because they perceived that
Speaker 6: there's widespread systematic bias against them.
Speaker 7: And so it's sort of a chicken and egg problem.
Speaker 6: If we don't have enough women out there, we can't
Speaker 6: normalize it for more women to start emerging.
Speaker 4: So what do you think ultimately needs to be done
Speaker 4: in order to fix that?
Speaker 7: Two things. The first is political recruitment.
Speaker 6: When women are encouraged to run for office, either by
Speaker 6: a party leader, elected official, or political activist, but also
Speaker 6: by a family member, colleague, or friend, they're far more
Speaker 6: likely to give it serious thought. And if you don't
Speaker 6: think about something, you're not going to do it. So
Speaker 6: that's an important first step. And the next thing that
Speaker 6: we have to do, I think, is convey the reality
Speaker 6: that when women run, they are just as likely to win.
Speaker 6: We hear high profile stories about gender bias and discrimination
Speaker 6: right all the time, and those things are true and
Speaker 6: they do happen. But part of the reason that they're
Speaker 6: newsworthy is because they're rare.
Speaker 2: Professor Lawless, I believe in the Wall Street Journal today,
Speaker 2: I don't have it in front of me. There was
Speaker 2: a patheartical about Democrats in Michigan basically saying to the
Speaker 2: vice president, let's go lose the media dash and get
Speaker 2: up here in campaign. Where do you stand on that?
Speaker 2: Does a vice president? I mean President Trump has a mode,
Speaker 2: He has a model and he grinds it out every day.
Speaker 2: Is there a mode? Is there a model to Harris
Speaker 2: or does she to shift now? Twenty x days before.
Speaker 6: The election, I think she's got to walk on chew gum.
Speaker 6: We saw in twenty sixteen that Hillary Clinton wasn't campaigning
Speaker 6: as actively as a lot of people thoughts it's and
Speaker 6: turnout wasn't where it needed to be. But We've also
Speaker 6: seen people like Joe Biden take a hit for avoiding
Speaker 6: tough questions by journalists and doing the media tours and blitzes.
Speaker 6: So I think the Harris campaign is trying to do both,
Speaker 6: and she's got twenty eight days to demonstrate that she's
Speaker 6: able to do it.
Speaker 2: Jennifer Lawless, thank you so much, greatly, greatly appreciate it.
Speaker 2: I really can't convey enough the theoretical foundations of Jeffrey Rosenberg.
Speaker 2: He comes on the Fed day, he comes on other days,
Speaker 2: and for Black Rock it's blah blah blah, and the
Speaker 2: fixed income market over to economics, even with a touch
Speaker 2: of equity analysis, but behind it is me Minnesota, Wisconsin,
Speaker 2: and then on to Carnegie Mellon. It is rigorous mathematics.
Speaker 2: Behind the Jeffrey Rosenberg comments, Jeff, what part of your
Speaker 2: mathematics matters right now? And a basic equation of where
Speaker 2: we're heading? What's your number one focus?
Speaker 8: That's a great question, Tom, and the answer is rate
Speaker 8: of change. And that's really what markets focus on. They
Speaker 8: focus on much more than the level, the rate of change,
Speaker 8: and that's really what last week's economic data and really
Speaker 8: before that was all about. Right the rate of change
Speaker 8: in the actual data and as importantly the rate of
Speaker 8: change in.
Speaker 3: The revised data.
Speaker 8: And so that's really changing people's perspective about where this
Speaker 8: economy is and where the FED has to be. And
Speaker 8: that's what you see in the bond market the last
Speaker 8: two three days. And it's pretty violent this rate of change.
Speaker 2: To me, what's important here with first second derivative Newtonian
Speaker 2: mechanics is a basic idea, Jeff Rosenberg, it's simple, chug
Speaker 2: and plug. I mean, what does Jerown Powell need to
Speaker 2: plug into the equation to lead us some stability for
Speaker 2: dare I say a vision out to late twenty twenty five,
Speaker 2: What does he need to do?
Speaker 8: Yeah, you know, it's it's an interesting question because there
Speaker 8: is a lot of you know, kind of taking the
Speaker 8: SEP forecasts for growth and inflation, plugging those into a formula,
Speaker 8: various variants of the tailor rule, and determining whether or
Speaker 8: not the Fed's policy excuse me here for a second,
Speaker 8: is overly restrictive. And the problem is the inputs to
Speaker 8: those formulas they change, right, And that's a big part
Speaker 8: of the recent you know, kind of reassessment here in
Speaker 8: the bond markets. Really all the financial markets, that the
Speaker 8: data has been revised, and the data particularly on labor markets,
Speaker 8: the data in terms of the consumer and the broad
Speaker 8: a coomy.
Speaker 3: The debate between GDP.
Speaker 8: And gd I basically was settled in favor of GDP
Speaker 8: being the right measure, meaning this economy is as strong
Speaker 8: as it appears and not this kind of stinky weakening.
Speaker 8: And so the data going into those formulas is changing,
Speaker 8: and it's basically saying, you know, the Fed is not
Speaker 8: as restrictive as.
Speaker 3: It thought it was.
Speaker 4: And so in that case, on the back of this
Speaker 4: latest jobs report and ahead of the CPI data later
Speaker 4: this week, what is speculative trading in the futures market
Speaker 4: for bonds telling us about the direction of yields?
Speaker 8: Well, I mean you don't have to look at the
Speaker 8: futures markets to see what the trading is saying. It's
Speaker 8: it's basically spoken pretty clearly here and I think you
Speaker 8: highlighted it in the break a minute ago. That we've
Speaker 8: priced out the expectation that we're going to have, you know,
Speaker 8: three fifty basis point cuts in a row, and now
Speaker 8: you've backed off that pricing to November's twenty five. It's
Speaker 8: actually a little bit underneath the twenty five and then
Speaker 8: another twenty five in December, and so you're back to
Speaker 8: a little bit more of the bond markets aligned to
Speaker 8: what the FED was saying, whereas before and really much
Speaker 8: of the year, the bond market has been just very
Speaker 8: much aggressive, kind of overreacting.
Speaker 2: You know.
Speaker 8: Obviously, we came into the year huge expectations for a
Speaker 8: lot of cuts. We had to price that out given
Speaker 8: the inflation.
Speaker 4: So level, and you know, as we head into the
Speaker 4: final months of the year, how are you suggesting to clients?
Speaker 4: What do they buy? What do they sell? In the
Speaker 4: treasury market.
Speaker 8: We've been, you know, pretty adamant that the vulnerability in
Speaker 8: the bond positioning for most clients is what we've been
Speaker 8: seeing a lot in the flows.
Speaker 3: And what you see in the flows is this kind
Speaker 3: of knee jerk.
Speaker 8: Reaction to the expectation of the commencement of the Fed's
Speaker 8: cutting cycle. And the knee jerk reaction is if the
Speaker 8: Fed's cutting interest rates, then duration is my my friend,
Speaker 8: and I want to own the maximal amount of duration
Speaker 8: in my portfolio.
Speaker 3: I want to own the longest maturities out there.
Speaker 8: And that we've really been very much saying you gotta
Speaker 8: be careful now. Number one, it's a little bit of
Speaker 8: buy the rumor sell the news. The FED cut fifty
Speaker 8: basis points and bonds lost money, so a lot of
Speaker 8: it was already in the price, and you had a
Speaker 8: lot of heightened expectations.
Speaker 3: And number two is that.
Speaker 8: You just have a lot differential reaction along the maturity spectrum.
Speaker 8: When the FED cuts rates, it's mostly in the front
Speaker 8: end where you see that impact, and the back end
Speaker 8: can be affected by a lot of different things besides
Speaker 8: just the FED cutting rate.
Speaker 2: Now, I'm gonna go a little mathy here math warning
Speaker 2: and Jeff, it goes off of what James Glassman said
Speaker 2: yesterday I retired from JP Morgan about the technology overlay.
Speaker 2: All the work you've done, Jeff, and how it folds
Speaker 2: into the bond market is off of a productivity analysis
Speaker 2: off of technology, and I would suggest off the foundation
Speaker 2: Cob Douglas function, which has some exponents, it's got some
Speaker 2: Greek letters in it, but there's a big, fat, ugly
Speaker 2: A at the beginning of the Cob Douglas function, and
Speaker 2: that's sort of like where are we now? Well, it's like, okay,
Speaker 2: this is the technology, this is the economy. We're going
Speaker 2: to do the math, but we really don't know where
Speaker 2: are we now. How blind are you, Jeff Rosenberg in
Speaker 2: working in fixed income at Blackrock, because you don't know
Speaker 2: where we are right now on productivity or technology.
Speaker 8: Yeah, the Cob Douglas production function, we can measure what
Speaker 8: goes in and we can measure what comes out. It's
Speaker 8: the magic inside that we don't know about. That's total
Speaker 8: factory productivity.
Speaker 5: You know.
Speaker 3: You know, it's interesting time.
Speaker 8: You talk a lot about you know, the math and
Speaker 8: the science that we use, and a lot of the
Speaker 8: math and the science that we use is the mathematics
Speaker 8: of uncertainty, right It's it's using probability and statistics and
Speaker 8: risk models to try to quantify uncertainty, because that's really
Speaker 8: what it's about.
Speaker 2: You know.
Speaker 3: The cop Douglass function is nice.
Speaker 8: It gives you a very certain form with a very
Speaker 8: uncertain input. And that's a lot of what we see
Speaker 8: in kind of the mathematics of economics is that there's
Speaker 8: a there's a proposal of how the economy works, and
Speaker 8: it's very nice and clean. The problem is a lot
Speaker 8: of the inputs are unknown, and that's really what we're
Speaker 8: dealing with whether it's kind of the role of AI,
Speaker 8: the role of technology in changing total factor productivity and
Speaker 8: our inability to measure that, or other things that we
Speaker 8: were talking about before in reference to the tailor role.
Speaker 8: The other you know, kind of big uncertainty is, you know,
Speaker 8: the real neutral rate.
Speaker 3: We don't know what that real neutral rate is, or
Speaker 3: something even.
Speaker 8: More, you know, kind of basic, which is we measure
Speaker 8: economic data that we think we know with certainty, like
Speaker 8: growth and inflation, or our payrolls are employment, we measure
Speaker 8: it with error. So when there are revisions, there's a lot.
Speaker 8: So it's really about dealing with that uncertainty. And I
Speaker 8: think on this technology issue, you know, we really just
Speaker 8: don't know what we really see in terms of technology.
Speaker 8: The impact is this first phase, which is the investment
Speaker 8: side and the tremendous kind of infrastructure build out, but
Speaker 8: it's really kind of the second phase, which is the
Speaker 8: services on top of that, and then the third stage,
Speaker 8: which is you have the services that are expanding the
Speaker 8: impact of that AI. That really builds into that fundamental
Speaker 8: game shift or that many are talking about. Here is
Speaker 8: the potential for AI to shift upward the total factor productivity.
Speaker 8: But to say that's in the economic statistics today. I
Speaker 8: think it's too early for that. What we clearly see
Speaker 8: is this first phase of the investments.
Speaker 2: I can't emphasize enough, Jess, and everybody knows where I
Speaker 2: am on this is l Arian would say, thenown unknowns
Speaker 2: right now that Jeff brilliantly laid out there the finance media.
Speaker 2: I'm as guilty as this as anyone. We are certitude
Speaker 2: one oh one. We believe the ten year yield Blowney,
Speaker 2: I'm sorry. We have no clue when you look at
Speaker 2: these variables like technology.
Speaker 4: And this time a year ago is actually when the
Speaker 4: ten year treasury yield spiked around five percent to that level.
Speaker 2: There.
Speaker 4: If you look now, it's trading at around the four
Speaker 4: level after being around three six. But of course, if
Speaker 4: you're looking at the Atlanta Fed GDP now model, it's
Speaker 4: around two and a half percent for the third quarter.
Speaker 4: So I'm curious why had Bonn yields continued to creep
Speaker 4: lower this year despite sturdy economic growth.
Speaker 3: You know, they went lower on a number of factors.
Speaker 8: The biggest thing, you know, was this this fear, this slowdown, right,
Speaker 8: I mean, we had a lot of conversation about the
Speaker 8: unemployment rate ticking up, the PM rule predicting in recession,
Speaker 8: a lot of recession fears, and that you know, pushed
Speaker 8: and we got I would say, you know, the kind
Speaker 8: of impact on that was. You know, the big fifty
Speaker 8: basis point start of the cutting cycle is very much
Speaker 8: built off of this kind of legacy of the late.
Speaker 3: Summer slow down in the labor markets.
Speaker 8: And now when we look back on it, with the
Speaker 8: revisions and the data, the residual seasonality story around initial
Speaker 8: jobless claims, you know, it's all kind of pointing to
Speaker 8: maybe this labor market is a lot tighter than we
Speaker 8: thought it was. But I think the big drop in
Speaker 8: the yields was because we had this recession fear and
Speaker 8: the jobs market and the labor data kind of supporting
Speaker 8: this notion that the shift from the focus on inflation
Speaker 8: to the shift on securing the soft landing meant the
Speaker 8: FED had to be very, very aggressive, and that's where
Speaker 8: you got yields coming down so aggressively.
Speaker 4: And do you still see and you're keeping your call
Speaker 4: of two twenty five basis point rate cuts for the
Speaker 4: remainder of the year. For obviously, we have two more
Speaker 4: meetings left in November and then in December.
Speaker 8: Yeah, I said that kind of at the end of
Speaker 8: Friday post payroll that you know, the easy call was
Speaker 8: taking the fifty out for November. I think they're going
Speaker 8: to want to stick with tw twenty five and twenty five.
Speaker 8: Obviously we've got some more data between now and then,
Speaker 8: and you know, critically.
Speaker 3: Thursday this this inflation report. You know, we've moved inflation
Speaker 3: to the secondary category of importance because of the I
Speaker 3: would say erroneous belief that the attainment of two percent
Speaker 3: is just is just a given.
Speaker 8: And so I think if you had some surprises on inflation,
Speaker 8: you can't really predict that.
Speaker 3: That's the definition of surprise.
Speaker 8: You know, you could change the narrative around the twenty five,
Speaker 8: but right now, not knowing you know, whether we're.
Speaker 3: Going to get that. I think the Fed's going to
Speaker 3: try to continue to deliver on.
Speaker 8: Twenty five and twenty five in November December, and that's
Speaker 8: where I would you be expecting.
Speaker 3: But you know, the data changes, we're going to have
Speaker 3: to change your mind.
Speaker 2: Jeff, this has been brilliant. Thank you so much, Jeff
Speaker 2: Rosenberg with us in Black Rocket. This is a joy.
Speaker 2: Greg Giau and the only one close is Dave Wasserman
Speaker 2: and Cook Political Report is the granularity of America away
Speaker 2: from all the endless news of two candidates. In that
Speaker 2: we are thrilled that Greg Dureau of Bloomberg Government would
Speaker 2: take time with us this morning. Greg, you're focused on
Speaker 2: Washington State Republicans, and you're focused in California and Democrats
Speaker 2: in a two at the top outcome. Explain that.
Speaker 9: Yeah, So in some states it's possible for two Democrats
Speaker 9: or two Republicans to advance to the general election because
Speaker 9: they have unusual primary systems. Everyone runs on one ballot
Speaker 9: in the primary instead of in separate Democratic or Republican primaries,
Speaker 9: and the top two vote getters in that single ballot
Speaker 9: race advanced to the general election regardless of party affiliation.
Speaker 9: So in states like California, Washington State, and even in
Speaker 9: states like Louisiana, it's possible to have two members of
Speaker 9: the same party compete against one another in the general election.
Speaker 2: It even sounds like seventeen eighty or seventeen ninety almost,
Speaker 2: Greg duo, How is the left, the liberals, the progressive
Speaker 2: doing nationwide? Do they have traction in this election? Yeah?
Speaker 9: I mean I think they probably cast their lot in
Speaker 9: with Vice President Harris. In the presidential race, you have,
Speaker 9: you know, two choices. The left is going to buy
Speaker 9: and large back Vice President Harris. I mean, they're always
Speaker 9: going to be some disgruntle of people on the left
Speaker 9: and the right who are going to, you know, maybe
Speaker 9: not vote. But I think there'd probably be a decent
Speaker 9: voter I to not in this election. In the Senate,
Speaker 9: I think it's a bit different in that control the
Speaker 9: Senate may come down to not what progressives think, but
Speaker 9: what some Trump voters in Montana think, because I think
Speaker 9: the tipping point state for control of the Senate right
Speaker 9: now is Montana. And if John Tester, the Democratic senator there,
Speaker 9: can win enough ticket splitters in his state, which is
Speaker 9: going to vote for Trump by about fifteen to twenty points,
Speaker 9: he needs so many Trump voters to split their tickets
Speaker 9: and back him. So progressives will be very I think,
Speaker 9: more important than presidential race and some down ballot races
Speaker 9: for the House. But in the Senate, while they're important
Speaker 9: in law of these swing states, watch Montana and what
Speaker 9: do these Trump voters do.
Speaker 4: One state I wanted to bring up is Texas because
Speaker 4: you've written about how it's offering Democrats the best shot
Speaker 4: for a Senate upset. Walk us through the dynamics here
Speaker 4: and what's happening.
Speaker 9: Yeah, So in Texas As, Senator Ted Cruz is seeking
Speaker 9: a third term. Texas has not elected a Democrat and
Speaker 9: a state wide election since since the nineteen nineties, has
Speaker 9: not voted Democratic for the Senate since Lloyd Benson in
Speaker 9: nineteen eighty eight, but Democrats have come close, including in
Speaker 9: twenty eighteen when Bellew O'Rourke, who was Cruise's challenger, came
Speaker 9: within three percentage points of beating the Senator. That wasn't
Speaker 9: a good Democratic year Texas. Now we're in a presidential
Speaker 9: election year. Trump is almost certainly going to carry Texas.
Speaker 9: Maybe not by a wide margin, but the margin in
Speaker 9: Texas four years ago was only five and a half
Speaker 9: percentage points. So it's not a blowout state of Republicans anymore.
Speaker 9: But it's still going to be very tough for Colin already,
Speaker 9: a Democratic congressman who is Cruci's Democratic opponent, to get
Speaker 9: from say forty seven percent to fifty percent plus one.
Speaker 2: Greg jo Nick conadd article two days ago I think
Speaker 2: in the New York Times, and I'm going to Senator
Speaker 2: around the New York congressional race the surprise of twenty
Speaker 2: twenty two. Do you frame the Greg juro work is
Speaker 2: a continuation of what we saw in twenty twenty two
Speaker 2: or is twenty twenty four really discreete and presidential?
Speaker 9: Well, I think twenty twenty four in the race for
Speaker 9: the House, New York is a state to watch, New
Speaker 9: York and California, which makes it kind of different from
Speaker 9: the presidential and senate election maps, which have a lot
Speaker 9: of overlap in you know, the industrial Midwest and some
Speaker 9: competitive sun Belt states. But when we were looking at
Speaker 9: control of the House, yes, I'm looking at a lot
Speaker 9: of my twenty twenty two notes in New York. You
Speaker 9: have some rematch campaigns there, and it's going to come
Speaker 9: down to Harris's margin in New York is going to
Speaker 9: be important. Biden carried New York by about twenty three
Speaker 9: points four years ago. It looks like Harris is not
Speaker 9: going to win New York by that much. And therefore,
Speaker 9: you know, those Republican congressmen seeking reelection may not have
Speaker 9: to win as many ticket splitters as they did before,
Speaker 9: but those are that the disproportionate number of competitive seats
Speaker 9: for the House are in New York and California.
Speaker 2: Greg. One final question, what's the single race Greg Dureau
Speaker 2: is most focused on.
Speaker 9: Wow, Well, I think the Montana Senate race for the
Speaker 9: past as you mentioned earlier, but also I don't know.
Speaker 9: I think I'll pick New York's nineteenth district since we
Speaker 9: were just talking about New York Mark Malonaro. This district
Speaker 9: runs from Ithaca east through the Catskills, some of the
Speaker 9: Upper Hudson Valley all the way to the past Albany.
Speaker 9: It voted almost exactly for Biden and Trump as the
Speaker 9: nation did. So it's a very good I think bell
Speaker 9: weather as to which which way the political wins may
Speaker 9: be shifting this year.
Speaker 2: Greg, this has been wonderful. Hope we can catch up
Speaker 2: with you on a weekly basis here as we dashed
Speaker 2: in November fifth, Greg d Folks. For those of you
Speaker 2: within Bloomberg Government and available on the Bloomberg terminal, I
Speaker 2: can't say enough about Greg Dua. His newsletter Ballots and
Speaker 2: Power is absolutely must read. I just I can't say enough.
Speaker 2: Sign up for that as you're able to Greg Duau
Speaker 2: with Bloomberg Government. This is the Bloomberg Surveillance Podcast. Bringing
Speaker 2: you the best in economics, finance, investment, and international relations.
Speaker 2: You can also watch the show live on YouTube. Visit
Speaker 2: the Bloomberg Podcast channel on YouTube to see the show
Speaker 2: weekday mornings from seven to ten am Eastern from our
Speaker 2: global headquarters in New York City. Subscribe to the podcast
Speaker 2: on Apple, Spotify, or anywhere else you listen, and always
Speaker 2: on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.