Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. Here's the take from
Speaker 2: evercre Julian Emmanuel is somewhat cautious. Here's the quote from him.
Speaker 2: Given the uncertainty on policy in the economy and with
Speaker 2: stocks expensive, three plus steps forward rally is set to
Speaker 2: yield to two steps back correction. Julian joins us now
Speaker 2: for more. Julian, good Mornick, good morning. We want to
Speaker 2: give you some credit. A number of weeks ago, still
Speaker 2: a lot of pan account there, a lack of confidence,
Speaker 2: and you said, we've seen the lows recession averted. That
Speaker 2: certainly looks like a good call. At least can things
Speaker 2: change and how quickly?
Speaker 3: Well, It's amazing, John, because when you think about it, right,
Speaker 3: as long term investors, we are supposed to be thinking twelve,
Speaker 3: twenty four, thirty six months in advance, and in this environment,
Speaker 3: there is so much news and so much change that
Speaker 3: you can barely think twelve twenty four or thirty six
Speaker 3: hours in advance. And that was really part of the
Speaker 3: condition that's set up that low on April seventh, you know,
Speaker 3: just abject panic about the state of the economy, you know,
Speaker 3: the need to de risk, and from our point.
Speaker 4: Of view, we do believe that you are.
Speaker 3: Going to end It's obviously a difficult path avert the
Speaker 3: recession barely, but again, when we think about where the
Speaker 3: market is right now, there's that high level of uncertainty
Speaker 3: that makes it, you know, a difficult proposition to commit
Speaker 3: capital long term.
Speaker 2: At least a frank the econom account comes quite well,
Speaker 2: not just about recession or no recession, and we'll continue
Speaker 2: that conversation later on. This morning, we've seen growth expectations
Speaker 2: come down from two to somewhere closer to zero, and
Speaker 2: I just wonder what your expectations are now phenomenal growth
Speaker 2: in the year ahead, and what you need to see
Speaker 2: from these talks between the US and China. What's achievable,
Speaker 2: what's reasonable?
Speaker 3: Well, I think the acknowledgment and I think Secretary Vesson
Speaker 3: is painting it the correct way, is that this is
Speaker 3: a process. It's going to take time, it's going to
Speaker 3: take a number of months.
Speaker 4: There will probably be wins.
Speaker 3: Announced small ones over the next several weeks. Obviously TikTok
Speaker 3: is an issue that's coming up again in reasonably short order.
Speaker 3: But from our point of view, again, just the fact
Speaker 3: that the process is going in the right direction is
Speaker 3: a plus. But at the end of the day, and
Speaker 3: as you said at the top of the show, we
Speaker 3: don't know where the landing zone is. And if the
Speaker 3: landing zone is a global weighted tariff right somewhere of
Speaker 3: around fifty teen to seventeen percent, that's still extraordinarily high
Speaker 3: by historical standards, and that brings you to growth.
Speaker 4: In our mind, we're looking for point nine for the year.
Speaker 1: Is this a tyflation type environment that calls for a
Speaker 1: stagflation type playbook that we haven't seen for many years.
Speaker 3: Well, we would actually say that, and again in true
Speaker 3: market discounting fashion is that that's already been discounted. So
Speaker 3: in this stagflation playbook. The market averages annually a ten
Speaker 3: percent decline, led by sectors like energy and consumer staples,
Speaker 3: and we've seen in various points of the last few
Speaker 3: months those themes.
Speaker 4: Play out to us. It's actually, again, I.
Speaker 3: Go back to what I said a little while ago,
Speaker 3: to the extent possible and necessary, we want to look
Speaker 3: through this under the assumption that all sides are incentivized
Speaker 3: to make sure the global economy stays on course. So
Speaker 3: we think that now's the time to re engage in
Speaker 3: the longer term themes of the sectors that we're leading
Speaker 3: prior to the sell off, and the sectors that we
Speaker 3: think are going to continued to lead technology centric.
Speaker 1: Okay, you say you look through this, but what is
Speaker 1: this that we're looking through? And I talked, I think
Speaker 1: about what you just said, which is the market's pricing
Speaker 1: and a cyflationary like scenario. But they're not necessarily pricing
Speaker 1: in a federal reserve that responds to stagflation. They are
Speaker 1: actually pricing in a federal reserve that responds to something
Speaker 1: more like recession or more like some kind of negative
Speaker 1: growth shock that maybe isn't in the cards. If we
Speaker 1: have a sagflation type of environment. How much is that
Speaker 1: the ultimate wildcard, whether the that is going to respond
Speaker 1: to this like some sort of recessionary or recessionary like
Speaker 1: condition versus stiflation, which is much more difficult.
Speaker 3: So look, there's no question about the fact that we
Speaker 3: will find out we already know this, but we'll find
Speaker 3: out more that the Fed's hands are in fact tied
Speaker 3: to with a certain extent, and that obviously goes back
Speaker 3: to the ratcheting hire of inflation expectations.
Speaker 4: But ultimately I.
Speaker 3: Go back to Chair Pale's use of the t word
Speaker 3: transitory a number of weeks ago. I don't think he
Speaker 3: would have used that without having true conviction whether it's
Speaker 3: a function of demand moderating Inflation's happened before. Go on, Well,
Speaker 3: you try not to repeat the same mistakes. But actually,
Speaker 3: to us, that's the path forward, And I would say
Speaker 3: that in fact, as we've seen in other times over
Speaker 3: the last couple of years, if we take the under
Speaker 3: on the number of cuts the market is pricing, that
Speaker 3: will end up being a market positive.
Speaker 5: How challenging is it going to be as these talks start,
Speaker 5: to Jonathan's point first time, around eighteen months we see
Speaker 5: fits and starts. Sometimes when it comes to these negotiations,
Speaker 5: how challenging is it going to be to keep your
Speaker 5: head on and look straight ahead and say, I'm not
Speaker 5: going to get distracted by all the stop and start
Speaker 5: and go and potentially some of the rhetoric that will
Speaker 5: come from this.
Speaker 3: Well, that's kind of why we're cautious in the near term,
Speaker 3: within the context of our view that that April seventh
Speaker 3: low was the resumption of the structuraball market, that at
Speaker 3: some point down the road we are going to see
Speaker 3: new all time highs. But to your point, it's even
Speaker 3: more of a challenge because we know we're about to
Speaker 3: get data that's going to scare us over the next
Speaker 3: number of weeks and months.
Speaker 2: What a scary data look like.
Speaker 4: You know?
Speaker 3: To us, it all goes back to the labor market.
Speaker 3: So the thing that we focus on the most is
Speaker 3: the high frequency weekly jobless claims. If that starts nudging
Speaker 3: towards three hundred thousand, that's when you're going to get
Speaker 3: sort of gross scare act too. And that's sort of
Speaker 3: our two steps back process.
Speaker 2: Takes us back to the FED last summer. We know
Speaker 2: what they did. They reduced interest rates by one hundred
Speaker 2: basis points the moment you've got to freak out in
Speaker 2: the labor market, just a small one in the summer
Speaker 2: of last year. That's when it started. They move. Are
Speaker 2: they constrained this time?
Speaker 4: They are constrained. There's no question about it.
Speaker 3: And you know even more so because they're certainly going
Speaker 3: to get political pressure in however many hours that's going
Speaker 3: to be. But the fact is is that the inflation
Speaker 3: dynamic is different and at risk of being more anchored
Speaker 3: than it has been in the past. We don't think
Speaker 3: ultimately it will be, but.
Speaker 4: There is that risk.
Speaker 2: The President doesn't like it when other central banks reduce
Speaker 2: interest rights. And it's interesting that going into this one,
Speaker 2: it's not the ECP this time around, it's the Chinese, and.
Speaker 1: They're doing it pretty aggressively to pave the way for
Speaker 1: fiscal stimulus. In addition, it's basically everything the US isn't doing,
Speaker 1: and they're setting the stage potentially to bolster an economy
Speaker 1: that has been flagging, but also potentially to gurd to
Speaker 1: sort of set the stage for retaliation potentially to head
Speaker 1: into these talks.
Speaker 2: It's going to say, as always, thanks for dropping by
Speaker 2: Chilian and Manuel another cult premissra of JP Morgan writing,
Speaker 2: we are in a giant game of check in between
Speaker 2: the market, the administration, and the rest of the world.
Speaker 2: Maybe great deals are just a round the corner, prayer
Speaker 2: joint is now for more preaking mornic morning. Are they
Speaker 2: just a rand the corner?
Speaker 6: I think that's what the equity markets hoping, not realizing,
Speaker 6: or maybe hoping that that doesn't happen. That trade deals,
Speaker 6: even in agreement in principle with all our trading partners,
Speaker 6: is incredibly hard.
Speaker 7: It's going to take a while.
Speaker 6: The administration saying this is strategic uncertainty, which tells you
Speaker 6: remember when we were thinking maybe April second was peak uncertainty, Well, okay,
Speaker 6: maybe it was peak or not.
Speaker 7: That much lower.
Speaker 6: This is a plateau of uncertainty that the economy.
Speaker 7: It's going to weigh on the economy. It's very nonlinear.
Speaker 6: You can handle some time of uncertainty. When that just
Speaker 6: goes into weeks and months, and you know, Congress is
Speaker 6: also sort of dealing with the fiscal side. So there's
Speaker 6: uncertainty on immigration, there's uncertainty on trade.
Speaker 7: When all that uncertainty starts to weigh on the economy,
Speaker 7: I think the equity market's hoping, well.
Speaker 6: The deals right here. At least we know they're talking.
Speaker 6: That's good news.
Speaker 7: We weren't sure if that was happening.
Speaker 6: But it's going to take a long time even to
Speaker 6: get that agreement in principle, So we don't know how
Speaker 6: long it will.
Speaker 7: Take, and we don't know the end point.
Speaker 6: The end point is not where we were on, you know,
Speaker 6: at the start of this year.
Speaker 2: No question, it's a policy shock. The ACP's decided it's
Speaker 2: a disinflationary shock that've cut rights. The Chinese have done
Speaker 2: the same thing overnight. The Federal Reserve when they have
Speaker 2: to address the same question, what kind of a shock
Speaker 2: is it for them?
Speaker 6: I think Cheval's going to have to master the art
Speaker 6: of saying nothing today.
Speaker 7: You know. So, what kind of shock is a great question.
Speaker 6: I think it's a supply shock, which is very hard
Speaker 6: for monitory policy to address, but the Fed really can't.
Speaker 7: Commit to it. It might morph.
Speaker 6: I think it will from a supply shock to a
Speaker 6: demand shock when you get prices going up and the
Speaker 6: consumer has to pick between dolls or anything else and services.
Speaker 7: Do they cut back on services? The US is a service.
Speaker 6: Led econy, but look at the data right now. Now,
Speaker 6: if you take a step back, the hard data is okay.
Speaker 6: You know, payrolls are strong, Inflation is still above target.
Speaker 6: So I think the financial conditions have eased in the
Speaker 6: last month, or at least in the last few weeks.
Speaker 6: So I think the Fed will say we have no urgency.
Speaker 6: They've already cut rates, They've taken the preemptive steps. I
Speaker 6: think people are looking for them to be preemptive. They've
Speaker 6: already preemptive last year. They've taken rates down. We're at
Speaker 6: four and a half. They're going to keep it here
Speaker 6: until they figured out what's the shock, what's the policy offset.
Speaker 6: Do we get a big fiscal stimulus deal, in which
Speaker 6: case they don't need to address the supply shock. So
Speaker 6: I think for the Fed, it's trying to, you know,
Speaker 6: I think clarify the reaction function.
Speaker 7: That's the most they can do that.
Speaker 6: Look, if the economy slows down, we'll respond. We're not
Speaker 6: there yet. We're watching like everyone else, we're watching everything,
Speaker 6: and we'll respond appropriate.
Speaker 7: The reaction function.
Speaker 1: This is really interesting to me because right now we
Speaker 1: don't have a clear sense of what the reaction function
Speaker 1: is and what data dependency means in the new world,
Speaker 1: where data is incredibly backward looking, and this economy depends
Speaker 1: on people having thirty dollars, is not necessarily two dollars.
Speaker 1: And when you start to have that come to fruition,
Speaker 1: how quickly could you see it manifest in the actual
Speaker 1: heart data as a demand shock rather than the much
Speaker 1: more quickly moving supply shock that translates into higher inflation
Speaker 1: that could come as soon as next.
Speaker 6: Week, right, So, I think that's the question we're all
Speaker 6: grappling with that. You know, we've not seen it in
Speaker 6: the hard data. How long does it take? I don't
Speaker 6: think it's that long. I do think it's a little
Speaker 6: more delayed because we learn from the pandemic, companies learn
Speaker 6: from the pandemic consumers. I've not done any early shopping,
Speaker 6: but people have, you know. I think this front loading.
Speaker 6: You're seeing it in the data, You're seeing it in
Speaker 6: the trade data. You're seeing it in you know, companies
Speaker 6: sort of picking up appiling inventories. So the lag might
Speaker 6: be a little longer. What I'm watching is what do
Speaker 6: companies do. Do they pass on that cost? Do prices
Speaker 6: go up? Do we see it next week in CPI?
Speaker 6: If prices are going up. That's when consumers have to
Speaker 6: decide where do they cut back because real incomes are
Speaker 6: not really growing.
Speaker 7: So maybe it.
Speaker 6: Shows up in prices first, and then consumers start to
Speaker 6: pull back on demand. Or do companies say, our margins
Speaker 6: can afford to take that price increase, and in that case,
Speaker 6: when margin compression starts to build, do they start to
Speaker 6: lay off people? So I think we're going to have
Speaker 6: to watch consumers. We're also watching companies. What do companies do?
Speaker 6: I think hiring freezers are happening to the layoff start.
Speaker 6: And so it's the next few months. I don't think
Speaker 6: we're waiting till fourth quarter. I think the next few
Speaker 6: months you'll either see the consumers pulling back or you'll
Speaker 6: see companies trying to keep some margin and having to
Speaker 6: cut costs elsewhere. And I guess the interplay of that
Speaker 6: will show up in the economic data, which the FED
Speaker 6: will respond to.
Speaker 1: It seems like the Chris Waller reaction function is to
Speaker 1: look through the price increases and look straight to what
Speaker 1: could potentially happen with the demand shock, What could happen
Speaker 1: to the labor market. Do you expect to get a
Speaker 1: better sense of whether that's consensus today at a meeting
Speaker 1: that francistan Al is going to sleep through.
Speaker 6: I don't think we'll get such a cleaner signal from
Speaker 6: chap Out because we've and I think there's a little
Speaker 6: bit of path dependency. We just lived through a transitory
Speaker 6: supply driven pandemic shock becoming a demand shock because we
Speaker 6: had a lot of fiscal stimulus and it fed through
Speaker 6: into wages.
Speaker 7: And inflation expectations.
Speaker 6: So I think what we'll hear from Chepaul is we
Speaker 6: haven't seen it in the data. We're watching inflation expectations,
Speaker 6: so you know, which is why I struggled with them
Speaker 6: being preemptive. But I do think when they see that data,
Speaker 6: and I think it's a matter of months, they can
Speaker 6: be very aggressive. The power leg fed doesn't necessarily move
Speaker 6: in twenty five increments. They started hiking late and then
Speaker 6: they went in seventy five increments. I think they're going
Speaker 6: to start almost by definition, a little late because they're
Speaker 6: waiting on data that is lagging.
Speaker 7: But once they realize it, and I think.
Speaker 6: That's where the market's pricing in the market's pricing in
Speaker 6: a scenario where they don't need to do anything because
Speaker 6: maybe we get these quick deals, credible quick deals, or
Speaker 6: the scenario where the economy actually slows down and the
Speaker 6: FED then aggressively cuts. I think we're pricing in this
Speaker 6: bimodal distribution, which is why the rate market's pricing in
Speaker 6: these rate cuts. I think actually the market can price
Speaker 6: him more if you start to see that hard data.
Speaker 2: You said they're going to be like I can think
Speaker 2: of one person who doesn't like people being like, particularly
Speaker 2: Chairman Pound. It's the President of the United States. That
Speaker 2: this afternoon is going to be somewhat interesting.
Speaker 5: Absolutely, I think you're going to get a live drip
Speaker 5: feed on truth social of him, job voting, or potentially
Speaker 5: we talks to the press. He's going to say chair
Speaker 5: Pal is wrong and should be cutting interest rates. But
Speaker 5: that's not going to be new. We've heard this all
Speaker 5: wong from the President. The one thing that he has
Speaker 5: come out and said is he does not want to
Speaker 5: actually get rid of him, even though he has in
Speaker 5: the past. He's the word termination.
Speaker 2: Do you think this comes up in the news conference
Speaker 2: today or is this yesterday's news.
Speaker 6: I'm sure it'll come up, and I'm sure Chefal is
Speaker 6: prepared to say we're apolitical, We're not even thinking about
Speaker 6: this because there is an argument which I don't love
Speaker 6: that because he's getting this pushback to cut that that
Speaker 6: chepel may not cut.
Speaker 7: No.
Speaker 6: I think they're looking at their mandate, the mandate. I
Speaker 6: agree it's backward looking data, but the hard data is
Speaker 6: not suggesting that they need to cut here. So he's
Speaker 6: got an easy pass. I think it can get a
Speaker 6: lot harder if the unemployment rate starts to rise and
Speaker 6: inflation starts to rise. I think then he's going to
Speaker 6: have to explain why he's not cutting rates.
Speaker 5: But JUX suppose this moment in time to before the
Speaker 5: election when he cut rates, Why did he do it?
Speaker 7: Then?
Speaker 6: I think, you know, the labor market was showing signs
Speaker 6: of weakness. Now I'd like to give the Fed credit
Speaker 6: that just because the cut rates, the labor market sort
Speaker 6: of recover.
Speaker 8: No.
Speaker 6: I think turns out that was a sort of noise
Speaker 6: in the data. We had those week three week payroll reports.
Speaker 7: And FED funds was at five and a half.
Speaker 6: So the cut rates to take some of that edge
Speaker 6: off the economy to move rates lower, they didn't need
Speaker 6: to do more.
Speaker 7: The long and sold off, So I think.
Speaker 6: The market pushed back and said no, you actually don't
Speaker 6: need to cut a lot more. The FED heard it,
Speaker 6: so I think that I don't think is political. He'll
Speaker 6: absolutely be asked that. But you know, I think the
Speaker 6: as long as he's not fired, I think it's a
Speaker 6: free country.
Speaker 2: People can slight barrier, right, as long as he's not
Speaker 2: five let's build on some of this and unpack it.
Speaker 2: So on March nineteenth, we close around four twenty four
Speaker 2: on tens. We're around four to twenty four on tens,
Speaker 2: despite the fact we had a major policy shop Dan
Speaker 2: in Washington, DC. You know where this is cat number
Speaker 2: one question for portfolio managers right now for anybody's cross
Speaker 2: ass set. Is the long bond going to provide me
Speaker 2: some comfort if things go wrong with the economy.
Speaker 7: I'm not sure about the long bond.
Speaker 6: I think the long bond has supply demand for treasuries
Speaker 6: as much as the economic fundamentals of where FED policy
Speaker 6: is going to be.
Speaker 7: The five year.
Speaker 6: Absolutely, we've been adding any backup in interest rates, We've
Speaker 6: been adding to the five year. Concerns around releveraging, we've
Speaker 6: been adding to the five year because that's much more
Speaker 6: levered to essentially fedcuts and that end point. So we
Speaker 6: don't have to have necessarily a view. Do they start
Speaker 6: cutting in July or September, what's the end point. I
Speaker 6: think it's going to be below that three percent. So
Speaker 6: the five year, I think does provide you that hedge.
Speaker 6: You know, I think it's it's a true hedge. The
Speaker 6: long end, now we're talking about supply demand, is what's
Speaker 6: the end goal of tariffs. Is it to remove the
Speaker 6: trade deficit. If it is to remove the trade deficits
Speaker 6: of the rest of the world, doesn't need to hold
Speaker 6: as much in treasures. I don't think that's the end goal,
Speaker 6: but you know, I think the long end has a
Speaker 6: lot more supply demand. We're also talking about this reconciliation package.
Speaker 6: It's very hard to get the Medicaid cuts in there.
Speaker 6: So if Congress doesn't end up doing the cuts but
Speaker 6: still manages to do all these tax cuts, you know,
Speaker 6: beyond the extension, I think that's going to put pressure
Speaker 6: on the long end. If we have a politicized FED
Speaker 6: at some point, inflation rist premium skin rise.
Speaker 7: So I think there's a lot more going on with
Speaker 7: the long end. I would stay away from the long end.
Speaker 6: We like steepness, but I think that zero to five
Speaker 6: is still rock solid.
Speaker 1: What has changed in the past month or really since
Speaker 1: the last FED meeting that makes you that much less
Speaker 1: positive on the long.
Speaker 7: End of the YELD curve. April second, But what about it?
Speaker 6: So I think the idea you know, and I think
Speaker 6: you all have talked about it, which I think is
Speaker 6: a great way to saying, is this a shock to
Speaker 6: the cycle or the system? And is this like a
Speaker 6: change in the US lead world order? Trading order, economic DAN?
Speaker 6: Trade is always a lot of US have been talking
Speaker 6: about trade. The flip side of trade is that the
Speaker 6: rest of the world buys US assets, and if we're
Speaker 6: trying to reduce the trade deficit, it means that the
Speaker 6: net international capital position of the US is going to change.
Speaker 7: If the rest of the world doesn't need.
Speaker 6: To own as much in US assets, cost of capital
Speaker 6: is going to go up. It's not just for companies
Speaker 6: and consumers, for the US government. And at the same time,
Speaker 6: what are we getting in terms of the on the
Speaker 6: fiscal side, If we were getting significant fiscal retrenchment, I
Speaker 6: would have said, okay, demands less, supply.
Speaker 7: Is going to be less too. We're not really seeing
Speaker 7: that now.
Speaker 6: You know, the tax bill is being talked about, So
Speaker 6: I think April second, I don't view that as necessary,
Speaker 6: just a negotiating chip, and you know, we'll just get
Speaker 6: better fair trade deals and we'll go.
Speaker 7: Back to where we were the start of this year.
Speaker 6: I think the administration's trying, and I think the damage
Speaker 6: is already being done. The rest of the world now
Speaker 6: sees the US, not necessarily as a very credible trading partner,
Speaker 6: and therefore, should capital come back to US. I think
Speaker 6: we have to do a lot of work to attract
Speaker 6: that capital back.
Speaker 5: When it comes to the tax bill, does the FED
Speaker 5: need to cut if we get all the sweeteners the
Speaker 5: President has promised?
Speaker 7: Not necessarily, but do we get that?
Speaker 6: And I think that's why the FED, and I hope
Speaker 6: chep Owls asked about that.
Speaker 9: That.
Speaker 7: How does the tax deal?
Speaker 6: It's another form of uncertainty they did see. You know,
Speaker 6: what resulted in inflation becoming entrenched. I think was part
Speaker 6: of it was fiscal you know, right after the pandemic.
Speaker 7: So if we get significant fyscal stimulus that.
Speaker 6: Can offset tariffs, the FED can step back.
Speaker 7: I don't think we're going to get that.
Speaker 6: And the FED will realize it and and you know,
Speaker 6: then they'll have to cut more aggressively. But we don't know,
Speaker 6: and they don't know, and so they're just going to
Speaker 6: try and say nothing for an.
Speaker 2: Hour, which is going to be going to be fun, right,
Speaker 2: isn't it? Life on Bloomberg saye lights around the staff
Speaker 2: and it Heythan of Truist is pushing back writing effortens
Speaker 2: that yes, the term risk reward profile is less favorable
Speaker 2: following the sharp market rebound. Keith Joint just now for
Speaker 2: more Keith kipmonic, great to be here. Just want to
Speaker 2: frame your years so far, just for the audience, because
Speaker 2: it's been pretty decent. You downgraded equities something like five
Speaker 2: days after equity's top down all time highs in the
Speaker 2: middle of February. You clearly think things have shifted again.
Speaker 2: The risk reward profile has changed given the aggressive runny
Speaker 2: we've seen off the loads. Where are you now?
Speaker 8: That's why, Well, we are thinking that the risk reward
Speaker 8: is somewhat less favorable.
Speaker 10: At the lows we were down nineteen percent.
Speaker 8: We were telling our investors to start thinking about upside risk,
Speaker 8: not just downside risk. Because at that point you were
Speaker 8: down nineteen percent, you were pricing in a recession well,
Speaker 8: largely pricing in a recession at this point. As you
Speaker 8: snap back, we've kind of really priced in a good
Speaker 8: scenario going forward. So if I look at it using
Speaker 8: this way of the evidence approach, we still think the
Speaker 8: economy continues to slow down somewhat, earning estimates likely have
Speaker 8: some downside. At the same time, when you look at
Speaker 8: the forward multiple for the market, you're round twenty and
Speaker 8: a half at the peak we were at twenty two.
Speaker 8: I would argue that given the uncertainty, that we shouldn't
Speaker 8: be back at twenty two.
Speaker 10: And it's not just the terrorists.
Speaker 8: Don't forget earlier this year when we were at the highs,
Speaker 8: we had deep seat come in, so on the margin,
Speaker 8: tech evaluations should be somewhat lower than they were as well.
Speaker 8: So putting that all together, it doesn't mean we have
Speaker 8: to collapse. It doesn't mean we don't have some headlines
Speaker 8: to keet this market up, but we think the upside
Speaker 8: is likely capped around fifty eight hundred. On the upside,
Speaker 8: maybe you squeeze because sentiment is still relatively negative. That's
Speaker 8: the biggest asset for the market right now.
Speaker 2: This information in the headline, this information and how the
Speaker 2: market responds to the headline, what do you make of
Speaker 2: these mosts this morning and response to these scheduled talks
Speaker 2: this weekend.
Speaker 8: You know, as we were talking a little bit earlier,
Speaker 8: I think a month ago this would have really moved
Speaker 8: the market much more.
Speaker 10: I think, you know, we've moved up a lot.
Speaker 8: So some of this is priced in the market is
Speaker 8: pricing in that we're going to get some terroriff relief.
Speaker 8: But the question that I think we're all wrestling with
Speaker 8: is how much STAMMERS has been done. And we still
Speaker 8: think look at US GDP estimates they would come into
Speaker 8: the year above two percent there at one point three,
Speaker 8: one point four, and then globally you're seeing GDP estimates
Speaker 8: come down for China, for.
Speaker 10: Europe, for the UK, so it's not just the US story.
Speaker 7: I guess.
Speaker 10: The challenge I have is that at at this valuation levels.
Speaker 8: Even if forward estimates stay somewhere resilient. You saw that
Speaker 8: with Disney this morning, you're still trading at a pretty
Speaker 8: hefty multiple, and we still think there's some downside, trying
Speaker 8: to keep an open mind what could go right. And
Speaker 8: the tech side is something where we've seen spending still
Speaker 8: pretty healthy, so that's a good story, but at this
Speaker 8: point on a shorter term basis, we just think the
Speaker 8: risk reward is a little bit less favorable.
Speaker 5: Keith President Trump's maximus approach on April second, this Liberation Day,
Speaker 5: that chart that came out, then continue ratcheting up on
Speaker 5: China one hundred and forty five percent.
Speaker 7: Did he cushion the market to then be.
Speaker 5: Able to absorb whatever rate he ends on, whether or
Speaker 5: not it's ten percent tariff ring in sixty percent on China?
Speaker 10: I think so.
Speaker 8: I mean, if you think about where we are right now,
Speaker 8: we're fifteen percent above that low from early April, so
Speaker 8: we have a long like a big cushion to get
Speaker 8: back down there as well. So I do think Listen,
Speaker 8: you come out with the most aggressive stance, you pull
Speaker 8: it back. But again, the market at this point, when
Speaker 8: you've come back and where valuations are, I would say
Speaker 8: that the market is certainly expecting some teriff relief, But
Speaker 8: are we not going to see some slow down? Businesses
Speaker 8: are still are somewhat frozen. And I guess the other
Speaker 8: thing we've been wrestling with too, is there is a
Speaker 8: difference between the economy and the stock market, right, I mean,
Speaker 8: the economy small and middle sized businesses that.
Speaker 10: We talk to are more.
Speaker 8: Concerned that the bigger companies are able to manage this
Speaker 8: a somewhat better. And we all know that the S
Speaker 8: and P five hundred is much more of a growth
Speaker 8: index with forty percent plus in tech and communication, So
Speaker 8: there's this also. That's why I also think that low
Speaker 8: is a pretty good low, because the technology earnings, unlike
Speaker 8: the oble and market, are still moving higher at this point.
Speaker 7: So well, so where are you seeing opportunity then?
Speaker 1: If you are sounds like tech companies, Yes, it sounds
Speaker 1: like Rustle two thousand. No, it sounds like there's a
Speaker 1: real question though about bonds as an offset about gold.
Speaker 1: It seems like structurally we have changed the assumptions since
Speaker 1: April second, for at least some portfolio managers.
Speaker 8: Yeah, early in the year, back in February, we did
Speaker 8: downgrade small caps well less favorable for some of the
Speaker 8: things I mentioned. They are achieved, maybe a bit over
Speaker 8: sold from a Sextus standpoint, because those are the back
Speaker 8: and forth and the whiplast.
Speaker 10: What we're trying to.
Speaker 8: Do is we have a mixed sector approach, so we
Speaker 8: have our favorite technology of growth players communication services.
Speaker 10: You're seeing there with you know, not only like the
Speaker 10: Metas and the.
Speaker 8: Googles of the world, but also as we saw with
Speaker 8: Disney and Netflix. So there's some kind of secular growth
Speaker 8: there our favorite defensive areas utilities, but there's also a
Speaker 8: secular story there with AI, which we're seeing actually last
Speaker 8: couple of days. And then on the cyclical side, we
Speaker 8: were favorable on financials, and our view is like, instead
Speaker 8: of trying to try to move back and forth each
Speaker 8: day with these moves, have your favorite area of defensive
Speaker 8: growth and cyclical as well.
Speaker 1: You said the error a ceiling was about fifty eight hundred.
Speaker 7: What's your floor?
Speaker 4: You know?
Speaker 8: Well, I think the floor is likely that low, that
Speaker 8: forty eight thirty five, and maybe we find support before that,
Speaker 8: you know, you know, maybe you know, fifty one hundred
Speaker 8: somewhere in that neighborhood. Again, keep an open mind. I
Speaker 8: think that floor is good as long as you don't
Speaker 8: go into recession. Our house views we're around fifty to fifty,
Speaker 8: which is, you know, that's where we're basically at.
Speaker 10: And you did have you know, the VIC spike, and you.
Speaker 8: Know the sentiment that you normally seem at bottoms, And
Speaker 8: the question is do you just v shape right to
Speaker 8: new all time highs or come back down? And we
Speaker 8: do think the FED is somewhere constrained.
Speaker 2: This is the big issue we've all got as investors
Speaker 2: right now. Can the promise of deals continue sustaining the
Speaker 2: secretary market? And there is there a risk that between
Speaker 2: now and whatever the deal looks like we hit an
Speaker 2: air pocket in the economic data. And if we do,
Speaker 2: do we have a good understanding of what is defensive
Speaker 2: in the secrety market? Can you have a so answer
Speaker 2: all that?
Speaker 8: Yeah, sure, I have all the answers for us today now,
Speaker 8: and I think that's I think the biggest thing as
Speaker 8: I'm thinking about again, I always think about it because
Speaker 8: we're a bit more defensive. What could go right as well?
Speaker 8: You know, is the market going to look through this
Speaker 8: as a short term here?
Speaker 10: Right?
Speaker 8: If we're buying companies, we're really buying them for the
Speaker 8: next five and ten years and that secular story of
Speaker 8: AI is still there. So I guess the question is
Speaker 8: will the market see through some short term pain or
Speaker 8: at least a reduction in growth that the market is
Speaker 8: a discounting mechanism. But at the same time, you know,
Speaker 8: almost have to see it to believe it. So I
Speaker 8: actually think that will constrain the upside. And so if
Speaker 8: we come back down and we think that we're past this,
Speaker 8: will likely look to baby upgrade stocks again. But we're
Speaker 8: just not based on the risk reward at this point.
Speaker 8: By the way, I'm not waiting for clarity. I'm not
Speaker 8: waiting because it was say, hey, we want clarity. By
Speaker 8: the time clarity comes to the market has moved. But I'm
Speaker 8: looking for a better risk reward. And from a nasal
Speaker 8: allocation standpoint, we're not saying to go like thirty percent cash.
Speaker 8: We have a little bit more cash, we have a
Speaker 8: little bit less equities. We still have high quality bonds
Speaker 8: which actually have been acting well. We upgraded investment grade
Speaker 8: bonds on the spread winding recently. We've been bullish gold
Speaker 8: all year, though I will say short term it's a
Speaker 8: bit extended as well.
Speaker 2: We've seen it aggressive rarely off the low. That's the
Speaker 2: number one question for me, Lisa. Can we keep this
Speaker 2: secuity market granted higher? Can it be sustained just by
Speaker 2: the promise of deals, and can it be sustained by
Speaker 2: the promise of deals even if you bump into some
Speaker 2: weak heart data.
Speaker 1: A lot of people say that's the ultimate check hard data.
Speaker 1: When it actually does roll over, that is going to
Speaker 1: be what ultimately could check this sense that we've seen
Speaker 1: in the markets. I'm wondering about foreign demand and how
Speaker 1: much that changes in the meantime, how much there's been
Speaker 1: a structural shift for dollars nominated assets that coincide with
Speaker 1: potential hard data.
Speaker 11: That does roll over.
Speaker 2: Okay, if I finished on that premise, re talked about
Speaker 2: this earlier on. We keep coming back to this framework.
Speaker 2: Were seeing a cycle level shock or a system level shock?
Speaker 2: And if you're still trying to figure that out, do
Speaker 2: investors abroad behave as if we are seeing a system
Speaker 2: level shock and begin to diversify away from dollar denominated assets.
Speaker 2: Is there a risk of that plank out? Do you
Speaker 2: see signs of it already plank out.
Speaker 10: On the margin?
Speaker 8: But I don't think there's a wholesale change. I think
Speaker 8: there was kind of this abrupt change initially. But the
Speaker 8: way we're thinking about it from a portfolio standpoint, we've
Speaker 8: been team USA for several years and we still have
Speaker 8: a slight US tilt. But second according you have more
Speaker 8: different you know, you have different scenarios happening. You have
Speaker 8: the currency moving a lot. We're bringing our bets and
Speaker 8: we've been doing that since last fall. We added to
Speaker 8: EM a little bit, we added to investment sorry developed
Speaker 8: markets this year. I mean, it is notable that on
Speaker 8: this V shaped recovery, while the US market's still below
Speaker 8: the highs, you know, Europe's back to all time highs.
Speaker 8: European financials are all time highs. The other thing that's
Speaker 8: interesting if you look at the returns you know, Internet
Speaker 8: are developed about they're up about twelve percent, you know,
Speaker 8: almost like nine percent. Is the currency on that side
Speaker 8: as well? A longer time, longer term though, we still say,
Speaker 8: you know, are the's big the best companies in the world.
Speaker 8: They're still in the US, so we have that battle.
Speaker 10: But even I guess the.
Speaker 8: Bottom line is stay with the US, but bring in
Speaker 8: those best. And I do think there is some some
Speaker 8: signal in that the recovery has happened quicker overseas.
Speaker 2: It's still exceptional. What did Mark Romans say over Apollo,
Speaker 2: It's just not hyper exceptional anymore.
Speaker 1: It's heading down to just exceptional. And yet, what does
Speaker 1: just exceptional look like? After so many decades of the
Speaker 1: US being exceptional when it comes to the currency, when
Speaker 1: it comes to its funding markets, and then of course
Speaker 1: when it comes to tech development.
Speaker 2: A lot of changed is the Fed last night on
Speaker 2: March nineteenth, one of the bigger changes in foreign exchange.
Speaker 2: You wrote dollar was trading at one O nine. This
Speaker 2: morning one's thirteen sixty one. Keith is good to see you, sir.
Speaker 2: Thank you. Keith le under that of Truist some pourt
Speaker 2: study of PGM fixed income has this to say. He's
Speaker 2: got thoughts. What's started out as a year that could
Speaker 2: have been easily achieved. Trained growth has now quickly deteriorated.
Speaker 2: We will be lucky to see growth in the one
Speaker 2: percent range. Tom joins us now for more. Tom, good morning,
Speaker 2: got to see.
Speaker 9: You, Good see you all. Has everyone very.
Speaker 2: Well, been very busy since we last spoke. A lot
Speaker 2: of changed since the Fed last met March nineteenth, they
Speaker 2: put out an SEP, and in their SEP, their forecast
Speaker 2: for growth of this year for twenty twenty five was
Speaker 2: one point seven percent, and that was a downgrade from
Speaker 2: the previous forecast. And we all sat around the table
Speaker 2: and said, well, look, compare that to where the median
Speaker 2: dot is. They've downgraded their assessment of growth, and the
Speaker 2: Median dot is unchanged. They've not increased the outlook for
Speaker 2: interest rate cuts. My question to you if they put
Speaker 2: an SEP out today and what is not due. But
Speaker 2: if they did and had to downgrade that GDP target
Speaker 2: one point seven percent down to say one percent, what
Speaker 2: would the median dot do?
Speaker 11: So they would be in good company if they downgraded
Speaker 11: it a one percent, and yeah, the median died, I
Speaker 11: think would not move. And I think this really sort
Speaker 11: of drives home they're sort of where they're leaning, right.
Speaker 11: I mean, in terms of dual mandate, it's entirely bad
Speaker 11: inflation right now. And you know, the irony, of course
Speaker 11: is I think the administration is sort of, you know,
Speaker 11: as much as they desperately want the FED to cut raids,
Speaker 11: I think all that's happening is actually it's just going
Speaker 11: to sort of, you know, sort of force that day
Speaker 11: out even further.
Speaker 9: So we expect cuts this year, but.
Speaker 11: We just don't expect them, you know, immediately. I mean,
Speaker 11: we don't expect that. I think even July is actually
Speaker 11: looking a little too early for us, so I think
Speaker 11: it'd be more backloaded. But I think that there's no
Speaker 11: question that if you have inflation above target, if you
Speaker 11: have inflation expectations that are starting the process of becoming unanchored,
Speaker 11: and if you're now waiting for the inflation thrust from teriffs,
Speaker 11: I think that this really sort of pushes the FED
Speaker 11: to the silence.
Speaker 7: Can you help us out a little bit?
Speaker 1: No one knows anything about anything. These FED officials have
Speaker 1: actually been going around the country listening to business leaders
Speaker 1: and talking with people.
Speaker 7: The whole FED listens ideas.
Speaker 1: Are they gleaning any more information about the stasis in
Speaker 1: C suites, the idea of what companies are doing and
Speaker 1: how that could triggle into the economy.
Speaker 11: Yeah, I mean, honestly, it's little in the Beige book, right,
Speaker 11: I mean in the beageook you can hear this.
Speaker 9: In the isms, you can hear this. I mean anything
Speaker 9: that actually.
Speaker 11: Has some sort of like you know, sort of qualitative
Speaker 11: sort of assessment attached to it, we hear it loud
Speaker 11: and clear, and all of these reports. Now, I think
Speaker 11: this gets to a really important idea because pal keeps
Speaker 11: one saying, hey, but you know, the soft data is
Speaker 11: you know, sort of softening, but the hard data remains firm. Okay,
Speaker 11: But at some point the soft becomes the hard data,
Speaker 11: and I think we have to sort of recognize that.
Speaker 9: You know, it's funny.
Speaker 11: I think the last few years have really done a
Speaker 11: disservice to this entire conversation because there has been a
Speaker 11: divergence between the hard and soft data for reasons that
Speaker 11: are pretty clear, right, I mean, which I'm happy to
Speaker 11: elaborate on. So I think if you just lop off
Speaker 11: the last few years and you look at the Harvard
Speaker 11: soft data, historically speaking, they do move together. So it's
Speaker 11: I think it's just a question of time now before
Speaker 11: it sort of translates.
Speaker 1: Neil dot has put out there this idea that hard
Speaker 1: data is getting inflated by the pull forward one hundred percent,
Speaker 1: and there's this feeling that you really have to look
Speaker 1: at the soft data, which is a much more accurate
Speaker 1: reflection now than say, ye're or two years ago. If
Speaker 1: that's true, why are you less worried about some kind
Speaker 1: of real pernicious outcome for the economy given how negative
Speaker 1: the soft data has looked.
Speaker 11: Yeah, so, which is why we've taken down our growth expectations,
Speaker 11: I mean, and not just taking down our growth expectations,
Speaker 11: but raised our recession probabilities.
Speaker 9: It's a coin flip right now.
Speaker 11: Whether or not you have a recession, we still expect
Speaker 11: economic expansion to continue at a much slower pace. But
Speaker 11: I think you know you are taking that to account,
Speaker 11: I think in a very meaningful way, recognizing that the
Speaker 11: downside risk I think is growing seemingly by the day.
Speaker 5: Coin flip based on what what's the catalyst, whether or
Speaker 5: not deals credible deals get done into.
Speaker 9: Frystrating the window is closing rapidly.
Speaker 11: I think if you don't start to see some real deals,
Speaker 11: which again seems seemingly they're teeing that up right now,
Speaker 11: I think that you'll the confidence that's already been wrecked,
Speaker 11: I think remains that way, and people and companies stay
Speaker 11: on the sidelines. And I'll say one last thing on this,
Speaker 11: because I think it's such an important idea that I
Speaker 11: think everyone's missing.
Speaker 9: Let's say you do get credible and.
Speaker 11: If you have the threat of tariffs that remain in
Speaker 11: place even after the deals get done, which I can
Speaker 11: easily see a scenario like that playing out, then I
Speaker 11: think that just actually keeps already crumbled confidence pretty pretty suppressed.
Speaker 2: This keeps them back to the theory that maybe we've
Speaker 2: started a process, the process has starts and it becomes
Speaker 2: self fulfilling. What is on your dashboard beyond just say
Speaker 2: volume going through the port of Ala, what's next? How
Speaker 2: did the dominoes fall?
Speaker 11: Yeah, I think it gets to exactly this idea that
Speaker 11: we were just talking about. I think the dominoes have
Speaker 11: to fall, and I think this is the most critical domino.
Speaker 9: It has to be.
Speaker 11: Okay, terrorists are done right, like we've got We've achieved
Speaker 11: what we wanted. Because if you keep the stick of
Speaker 11: tariffs out there, I think that it's the uncertainty that
Speaker 11: everyone keeps on talking about will just remain in place.
Speaker 2: There's a price for that uncertainty. And right now, that price, Lisa,
Speaker 2: is wait and see. A lot of companies, to your question,
Speaker 2: are just sitting there on their hands and saying, got
Speaker 2: to wait and see.
Speaker 1: In the meantime, though they have to raise prices, so
Speaker 1: they might wait and see when it comes to their investments.
Speaker 1: They might wait and see when it comes to hiring people.
Speaker 1: But they have some of them at least have talked
Speaker 1: about how they can't wait and see when it comes
Speaker 1: to at least passing along that price increase, which is
Speaker 1: the reason why you might see that inflation aspect reflective
Speaker 1: faster than anything else.
Speaker 11: And actually, I make one last point, I don't know
Speaker 11: that's like the queue for you wrapping it up.
Speaker 2: So I think, how did you not?
Speaker 9: I know your tricks?
Speaker 11: So I think, just keep in mind something to this
Speaker 11: really important idea. If all of a sudden you start
Speaker 11: to see margin compression, right, profit margin compression, then the
Speaker 11: labor part of that equation becomes even worse. I mean, look,
Speaker 11: we're already expecting labor to slow down, and there's already
Speaker 11: signs that that's happening.
Speaker 9: That would make it, I think, meaningfully worse.
Speaker 2: I have one more question. Somebody to guy Mida Case says,
Speaker 2: this is going to be really boring. How could you
Speaker 2: make this interest in this news conference? What would you
Speaker 2: ask the chairman?
Speaker 4: You know?
Speaker 11: So I think that this would be one of these
Speaker 11: events where I'm guessing Howell would would love it if
Speaker 11: there was.
Speaker 9: No press conference attached to this.
Speaker 11: You know, I don't know that there's anything more than
Speaker 11: he can can say that's new, I think, and in fact,
Speaker 11: inference to him, I think he's doing the right thing.
Speaker 11: I think he's basically saying we'll wait and see more
Speaker 11: to see what happens, and I can live with that narrative.
Speaker 2: We know each other too well. Go away some for
Speaker 2: selling picture. Thank you, sir. This is the Bloomberg Surveillance Podcast,
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