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
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
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Speaker 2: Terminal and the Bloomberg Business App. Russ Coasterrick at Black
Speaker 2: Rog saying this, we think markets are vulnerable to modest
Speaker 2: pullbacks on both sticky inflation as well as the pre
Speaker 2: election trade as we get into late summer and fall
Speaker 2: election season. That said, we think the market can end
Speaker 2: this year higher. Russ joins us. Now for more so,
Speaker 2: let's start with the equery market picture. Sir, you've been.
Speaker 3: Trimming since spring.
Speaker 2: I know you're still constructive on the stock market. Can
Speaker 2: you just walk us through where you've been pulling back
Speaker 2: to a little bit?
Speaker 4: Absolutely good? More on, Jonathan.
Speaker 5: You look, we still think the market is going to
Speaker 5: end to year higher. We're still in a bold market.
Speaker 5: You know, that said we've taken a little bit off
Speaker 5: the table. We started doing that back in the spring,
Speaker 5: and I think it reflects a few things. One the
Speaker 5: magnitude of the gains, the fact that you still have
Speaker 5: a lot of uncertainty around the Fed, and the you know,
Speaker 5: the sentiment is going to get a little bit more
Speaker 5: challenging as we get towards the end of summer and
Speaker 5: the early fall and the market deals with the uncertainty
Speaker 5: of a very unusual election.
Speaker 2: What about the election, Russ are you concerned about because
Speaker 2: what we hear from a lot of people is that
Speaker 2: it's the bond market, not equities. And that's where the
Speaker 2: risk is, is that how do you and the team see things?
Speaker 5: You know, I think the biggest issue is really the
Speaker 5: simply the uncertainty that hopefully will resolved once the election
Speaker 5: is over. You know, in terms of whether or not
Speaker 5: you're going to get aggressively long or short the market,
Speaker 5: it's generally been the wrong call.
Speaker 4: I think what you go back to or the fundamentals.
Speaker 5: Strong growth, inflation has moderated, moderating, albeit not in a
Speaker 5: straight line. But the reality is investors are likely to
Speaker 5: deal with some of the uncertain team to run up,
Speaker 5: and that often causes a little volatility in September and October.
Speaker 6: Russ, it strikes me that we're talking about the equity
Speaker 6: market as a monolith and taking risk exposure as though
Speaker 6: all of it were exposed to macro risk or any
Speaker 6: risk whatsoever. How much you just basically hide out in
Speaker 6: certain cash rich companies, the magnificent two or three or
Speaker 6: whatever is left, and basically stay away from small caps,
Speaker 6: stay away from those that are interest rate sensitive, stay
Speaker 6: away from those that are vulnerable to all these risks.
Speaker 5: So this is a great question, and I do think
Speaker 5: that the megacap trend again not necessarily just two or
Speaker 5: three companies, but those companies that are exposed to these
Speaker 5: longer term secular trends like AI, like internet commerce, like
Speaker 5: cloud computing, they have further togo.
Speaker 4: So that is definitely part of it. And I also
Speaker 4: agree you were talking to me for about real estate.
Speaker 5: One of the best ways to add value this year
Speaker 5: has been to avoid what I would call rate data.
Speaker 5: In other words, those segments in the market, whether we're
Speaker 5: talking about low income consumers and companies that are geared
Speaker 5: to their spending commercial real estate smaller regional banks.
Speaker 4: These are all parts of the market. They're generally going
Speaker 4: to be more.
Speaker 5: Sensitive to the fact that rates have actually grind it
Speaker 5: higher this year, and one of the things we've done
Speaker 5: is try to minimize exposure to those segments.
Speaker 4: Generally that's worked.
Speaker 5: I think you continue to do it given this higher
Speaker 5: for longer environment.
Speaker 6: There's an ax that's developing because people need something to
Speaker 6: worry about. People being myself as everyone basically says the
Speaker 6: same thing in terms of crowding into the names that
Speaker 6: have been just throwing off bucket loads of cash and
Speaker 6: staying away from some of the more rate sensitive sectors.
Speaker 6: It's the reason why we've seen the Russell two thousand underperform.
Speaker 6: At what point do you worry about crowding and the
Speaker 6: sense that you can't avoid going into these stocks if you.
Speaker 7: Want to outperform.
Speaker 6: But that leaves the market that much more vulnerable to
Speaker 6: an idiosyncratic shock hinge to one of these companies.
Speaker 4: I think it's a real risk.
Speaker 5: Hard to argue that there's not been crowning, but it's
Speaker 5: been interesting. You know, this is still a narrow market.
Speaker 5: It's still a market led by a handful of names
Speaker 5: that you have seen some broadening out good example, utilities.
Speaker 5: Utilities is generally considered a low beta sector. It can
Speaker 5: be a very rat sensitive sector having a good year.
Speaker 5: Why is that well, of course, because for many investors,
Speaker 5: they're realizing that one of the constraints on the AI
Speaker 5: revolution is going to be electricity generation, and companies that
Speaker 5: are geared to that, that are geared to utilities the grid,
Speaker 5: et cetera, many of them.
Speaker 4: Are having a great year.
Speaker 5: Now, this is something we didn't see twelve or fifteen
Speaker 5: or eighteen months ago, but I think it is an
Speaker 5: example of investors looking beyond two, three, four or five
Speaker 5: companies and thinking about one of the other beneficiaries of
Speaker 5: this AI revolution.
Speaker 2: Russ I've got to ask, though, if that means the
Speaker 2: correlation between utilities and the biggest market way on a
Speaker 2: SMP five hundred goes up, what am I actually owning
Speaker 2: in the portfolio?
Speaker 5: Well, you're still going to have a very big exposure
Speaker 5: to that mega trend, and that's going to be something
Speaker 5: along with economic growth and rate data that you're really
Speaker 5: just going to have to decide how much of that
Speaker 5: exposure do you want? That said, you know, again, I
Speaker 5: think the reason that these trains have become crowded. Is
Speaker 5: that there are multi year trends and the companies that
Speaker 5: are give to them when we know their names, are
Speaker 5: doing an amazing job of generating cash flow, and that's
Speaker 5: still a very desired commodity. And you think about what's
Speaker 5: work in this market, things like consistency companies that can
Speaker 5: generate consistent revenue, consistent margins, and you know, again, if
Speaker 5: you can you can stay long those themes I think
Speaker 5: you're going to do all right.
Speaker 2: Saw this line from Mike Wilson and more can standing
Speaker 2: yesterday said bottom line, the data remains mixed, leaving all
Speaker 2: the major macro outcomes on the table. RUSS is never easy.
Speaker 2: I always sit here and say that what you guys
Speaker 2: do is never easy. It's always easy looking back. But
Speaker 2: what about this moment is more difficult than maybe other
Speaker 2: moments in the past.
Speaker 5: Well, I think I actually would agree with some of
Speaker 5: the promise would microsine, which is that it's complicated up. Generally,
Speaker 5: the economy is strong or it's certainly in decent shape.
Speaker 5: We had more evidence of that last Friday with the
Speaker 5: main non farm pay report. But there are segments in
Speaker 5: the market that are under pressure. We've spoken about the
Speaker 5: lower end consumer. They are feeling the pain of higher rates,
Speaker 5: commercial real estate, the smaller banks. So I do think
Speaker 5: that generally, if you look at the economy, you've got
Speaker 5: strong growth.
Speaker 4: It's likely to moderate in the back half of the year.
Speaker 5: But you have to keep thinking about what are the
Speaker 5: segments of the market that are going to feel pressure
Speaker 5: because we are in a higher for longer environment where
Speaker 5: the FED clearly does not have the latitude of the
Speaker 5: desire to Russian cut rates.
Speaker 2: Hi rush Graz to get your thoughts. As always, Buddy
Speaker 2: Ross costrict there of black Drob. It's on thoughte have
Speaker 2: maximum group rights in this Consumers feel like they have
Speaker 2: new phones. When Apple updates it's mobile operating system to
Speaker 2: the extent it rolls out its AI related efforts in
Speaker 2: a way that breaks that bond with consumers, that could
Speaker 2: result in backlash for the company. Tom joined us now
Speaker 2: for more Tom, I just want to start with that point,
Speaker 2: in what way would that break its bond with consumers?
Speaker 1: If you want, there's two.
Speaker 8: Real risks to Apple's brand on Apple Intelligence. One is
Speaker 8: what I wrote there, which is when you buy an iPhone,
Speaker 8: you get that new iPhone feeling every fall when they
Speaker 8: roll out the new mobile operating system.
Speaker 1: So if Apple's saying, you know, this, Apple.
Speaker 8: Intelligence is really cool, which remains to be seen. If
Speaker 8: it is, but you need to have an iPhone fifteen
Speaker 8: pro because the chip on your iPhone fifteen is not
Speaker 8: adequate to do it, then you do not get that
Speaker 8: new iPhone feeling every time they upgrade the software, and
Speaker 8: I think they're breaking a bond with the consumer. The
Speaker 8: other risk to brand is that they've named it Apple Intelligence.
Speaker 8: So if for you, Siri as a guide serious kind
Speaker 8: of been a failure to the extent that my own
Speaker 8: anecdotal use of Syria is a glorified egg timer. So
Speaker 8: to the extent that now I'm going to rely on
Speaker 8: Apple Intelligence and Siri for all this supposedly wonderful artificial intelligence, I.
Speaker 1: Think there's a lot of brain risks for Apple in
Speaker 1: the move here.
Speaker 3: Tom.
Speaker 2: This is interesting because we caught it with Dan Ives,
Speaker 2: and I wish we'd formed a panel with you both
Speaker 2: a little bit earlier this morning. Dan Ives of wet
Speaker 2: Bush earlier today was saying, this is it. This is
Speaker 2: going to be the thing that unlocks that elusive upgrading cycle,
Speaker 2: that mega upgrading cycle we've been looking for for years now.
Speaker 2: Dan says it's just around the corner based on what
Speaker 2: they released yesterday.
Speaker 3: Why is he wrong?
Speaker 8: He's wrong because I think that artificial intelligence is not
Speaker 8: ready for prime time. When you think about hallucinations, you
Speaker 8: think about the many issues that Google's had with barn
Speaker 8: and then now integrating with Chat GPT, consumers are going
Speaker 8: to get a lot of bad information.
Speaker 1: It may not be have a rock.
Speaker 8: Every day, or you know, include the glue when you
Speaker 8: make the pizza to keep the cheese, the stick. Things
Speaker 8: that nature and it may be. So I think that
Speaker 8: I understand why Dan thinks this could be the elusive
Speaker 8: upgrade cycle, the first major upgrade cycle since five G.
Speaker 1: But I'm not convinced that we're there yet.
Speaker 6: Tom, just to put a bow on this, basically, we
Speaker 6: heard from Dan Ives that he will wear a black suit.
Speaker 6: If they don't get the kind of increase in sales, well,
Speaker 6: you wear dan ives wardrobe. But if they do see
Speaker 6: that increase in sales come September, I.
Speaker 8: Will wear his most obnoxious, boldest color outfit. We could
Speaker 8: go Nick's blue and orange, even though I'm a Bulls fan.
Speaker 1: Absolutely all right, we.
Speaker 3: Will be there for that.
Speaker 6: I will wonder just going forward. You said something that
Speaker 6: I found really compelling, that this is breaking a bond
Speaker 6: with the consumer. There has been a feeling that if
Speaker 6: you had an Apple phone, if you had an iPhone,
Speaker 6: you would be a subject of whatever kind of new
Speaker 6: advancements were coming out for the phone. Specifically, you think
Speaker 6: that this is actually going to cause people to turn
Speaker 6: away from the iPhone?
Speaker 1: Is that correct?
Speaker 6: Or else just keep their old ones.
Speaker 8: I think there's real risk here that the consumer will
Speaker 8: be less enthralled to continue to buy smartphones from Apple
Speaker 8: if they don't get that new phone feeling every fall
Speaker 8: when they upgrade the software. So yeah, I think that's
Speaker 8: real issue.
Speaker 3: Where do they go?
Speaker 6: And I guess this is why we saw Samsung kind
Speaker 6: of trolling Apple yesterday, putting this out adding Apple doesn't
Speaker 6: make it newer, groundbreaking, welcome to AI, followed by an
Speaker 6: Apple emoji. This was Samsung's official account putting that out
Speaker 6: there on social media. Do you think that Samsung wins
Speaker 6: out here if they introduce something that's more polished, more advanced,
Speaker 6: and frankly diverges more significantly from what's currently available.
Speaker 8: Well, I think Samsung con went out to the extent
Speaker 8: that a consumer dissatisfied with the Apple experience, either because
Speaker 8: of Siri or Apple Intelligence or things of that nature,
Speaker 8: may gravitate to Samsung. So yes, But at the same time,
Speaker 8: I think that AI issues are kind of industry wide.
Speaker 8: They're solucinating on sam phones as well. But yeah, I
Speaker 8: think you might see some switching here if this bond
Speaker 8: is in fact broken.
Speaker 3: It's on.
Speaker 2: This relationship with Google is interesting. You're one of the
Speaker 2: few that's really really digging deep and talking about it.
Speaker 2: I assume we'll be spending lots of time doing other
Speaker 2: things and less time on Google Search, and I'm trying
Speaker 2: to work out if that's sort of good for Apple
Speaker 2: and bad for Google, or bad for both.
Speaker 8: I do think that bad for Google is a fair
Speaker 8: interpretation of yesterday's news to the extent that they're integrating
Speaker 8: chat GBT, although they did open it to other large
Speaker 8: language models, including.
Speaker 1: Gemini from Google.
Speaker 8: But yeah, I think that the challenge for Google in
Speaker 8: search is to the extent that Microsoft integrates open AIS
Speaker 8: technology and to the extent that consumers lean into artificial
Speaker 8: intelligence to advanced search. Despite the challenges, that could be
Speaker 8: a real issue.
Speaker 6: For Google, not just Google, there is an issue for
Speaker 6: a lot of apps and app creators that came out.
Speaker 6: I'm thinking of Grammarly, I'm thinking of some others. There
Speaker 6: was sort of a list of rip all of these
Speaker 6: different apps yesterday trending as people took a look at
Speaker 6: what would be rendered obsolete by some of this technology.
Speaker 6: Do you think there's going to be a real tension,
Speaker 6: particularly with Apple's dominance in the app Store, between some
Speaker 6: of these app providers and frankly the fact that they've
Speaker 6: been rendered obsolete overnight.
Speaker 1: Absolutely.
Speaker 8: The number that that set out to me yesterday is
Speaker 8: that there's only two thousand native apps for the Vision
Speaker 8: pro So that feels like a low number one year
Speaker 8: into the product, and I do it reminded.
Speaker 1: Me on larger scale of the flashlight app.
Speaker 8: So there was a point in time where if you
Speaker 8: wanted to use your iPhone as a flashlight, you had
Speaker 8: to get a dedicated app. Now it's a future within iPhone.
Speaker 8: So yeah, I think there's a lot of risk of
Speaker 8: irritating the developers here as well.
Speaker 3: Tom. Just finally, we'd love your view.
Speaker 2: Just to finish up, I want to hear a little
Speaker 2: bit more from you on Elon Musk and that complain
Speaker 2: for Melon, what did you actually make of that?
Speaker 3: Do you actually think you'll follow through with that?
Speaker 8: I do, and so I admit, though I'm only halfway
Speaker 8: through Isaacson's book on Elon, which I'm enjoying immensely, but
Speaker 8: I do think.
Speaker 1: That Elon, while he may prave drama.
Speaker 8: I think there's a lot of validity into his comments.
Speaker 8: And I worry about the consumer who flip flops between
Speaker 8: Apple Intelligence and Chat GPT, one that's supposedly privacy protected
Speaker 8: and then one that's open and.
Speaker 1: Doesn't know better.
Speaker 8: So I think, you know, there's gonna be a lot
Speaker 8: of fun stories. The good news is now we have
Speaker 8: Apple strategy. Now we get to.
Speaker 1: See how it works out.
Speaker 2: Interesting Tom looking forward to the results. Tom fordy of
Speaker 2: Maximum Group and I was of Wetburst joined us now
Speaker 2: for more so, Dan, let's separrite the two stories. The
Speaker 2: complaint coming from Elon Musk and what was unveiled yesterday.
Speaker 2: And you were in Coopatino, California. So Dan, tell me
Speaker 2: how impressed you were by yesterday's release.
Speaker 9: I thought it was a historical moment for Apple, because
Speaker 9: this is really now as much as we can talk
Speaker 9: about the generative AI. From an enterprise perspective, the consumer
Speaker 9: AI story is going to go through Apple.
Speaker 10: This is significant.
Speaker 9: I believe this will be a catalyst to an AI
Speaker 9: driven super cycle over the next two years.
Speaker 2: Dam we started the program by talking about Apple always
Speaker 2: being late, but better. Can you tell me if this
Speaker 2: is late and better? It feels late. I just need
Speaker 2: to understand if it's better.
Speaker 10: Yeah, I think we said was exactly great.
Speaker 9: It's late, but you have two point two billion iOS devices,
Speaker 9: so they.
Speaker 10: Can be late. But they have an install base.
Speaker 9: That's unrival and that's really what they're going after right now.
Speaker 9: It's going to be on the services side, the modization.
Speaker 9: I think eventu will be a subscription service. And then
Speaker 9: this is something if you don't have an iPhone fifteen
Speaker 9: or later, you're not going to be able to access
Speaker 9: Apple intelligence.
Speaker 10: And I think that that is the key.
Speaker 9: The headline here is the long away at operat cycle
Speaker 9: that we've talked about while on the show is now
Speaker 9: in front of us.
Speaker 6: So let's take it to that little bit. Dan. If
Speaker 6: we don't see a material uptick in sales, say in September, November, December,
Speaker 6: and October, are you going to basically retrench some of
Speaker 6: your bullishness or do you think it could come as
Speaker 6: as late as next year and it still would be valid.
Speaker 1: Yeah.
Speaker 9: If that doesn't happen, I'll come into the studio wearing
Speaker 9: a black sports jacket because I because I believe this
Speaker 9: is the start of a renaissance of growth. And I
Speaker 9: think what's important now is that Apple, you know, really
Speaker 9: unveiling their AI strategy. Of course, Altman there the open
Speaker 9: AI being significant. I mean this is ultimately most consumers
Speaker 9: twenty twenty five percent in the world, they will access
Speaker 9: AI through an Apple device.
Speaker 6: Well, if we end up with sales as soon as
Speaker 6: next week, you'll be wearing the dray of stead. I'm
Speaker 6: curious about the idea of.
Speaker 3: A subscription, sir.
Speaker 7: What are people going to be.
Speaker 6: Subscribing to Given the fact that right now you've got
Speaker 6: Apple Music, you have a number of other services, are
Speaker 6: these going to subscribe to Apple Intelligence?
Speaker 10: I think in first it's free and that's the key
Speaker 10: for any Apple user.
Speaker 9: But this is essentially an AI brand in the iPhone
Speaker 9: and where eventually there's going to go developers that were
Speaker 9: all there yesterday that I saw they're going to be
Speaker 9: building hundreds of apps based on this technology stack within
Speaker 9: the Apple ecosystem, and that's.
Speaker 10: Where more and more consumers are going to interact with it.
Speaker 9: This is just the start of now this AI party
Speaker 9: coming to Cupertino. But as much as it's lead to
Speaker 9: the party, it's still nine pm in this party that
Speaker 9: I believe goes.
Speaker 10: To four or five am.
Speaker 2: Side, Dan, can you tell us why you la must
Speaker 2: doesn't want to attend.
Speaker 9: Because Musk had soured greats because ultimately this is what
Speaker 9: he wanted to do from a tested perspective. Obviously there's
Speaker 9: a beef with the open Ai going back years, but
Speaker 9: this is essentially Apple in their castle saying it's our data,
Speaker 9: it's our customers, you're not gonna have access. But I
Speaker 9: believe Musk this could be just some stress going to
Speaker 9: shaold of me this week. He's not gonna ban iPhones
Speaker 9: in my opinion.
Speaker 2: In super super simple terms, can you explain what his
Speaker 2: complaint actually is?
Speaker 3: What's he concerned about.
Speaker 9: He's basically concerned about Apple and open ai having access
Speaker 9: to the data and no one else has access to it,
Speaker 9: and that what he speaks to would be a broader
Speaker 9: concern among other tech players because Apple has a castle
Speaker 9: that no one else has.
Speaker 10: They have the devices.
Speaker 9: It's one point five billion iPhones worldwide, and they're saying
Speaker 9: it's me casser not to casta.
Speaker 2: So, Danie, you mentioned Musk contesta and some of the
Speaker 2: issues he's having. Let's stock that nine folds under your comforage,
Speaker 2: Joe clearly, very very constructive on Apple. Where are you
Speaker 2: now on Tesla?
Speaker 10: Look, I think.
Speaker 9: They've gone through a Category five storm, but they're starting
Speaker 9: to turn the corner.
Speaker 10: And in terms.
Speaker 9: Of what we see later this week, I think that
Speaker 9: compact does pass, that does remove and overhang, and then
Speaker 9: it's all about stabilization in China, FSD and autonomous going forward.
Speaker 10: I think right now the rich reward is there positive.
Speaker 9: That's why the stock, I believe, is hanging in even
Speaker 9: though they're going through some tough times from a demand perspective,
Speaker 9: better days ahead despite what's definitely a white knuckle period
Speaker 9: for Tesla shareholders.
Speaker 6: That's it, dan We talk about the AI super cycle,
Speaker 6: and that's the reason why Apple is sitting in its
Speaker 6: castle and creating a party that's going to go to
Speaker 6: four or five am. But there's a question for Tesla here.
Speaker 7: You have Elon Musk.
Speaker 6: You said sour grapes about not having this first.
Speaker 7: This is what he wanted.
Speaker 6: He wanted the castle and reportedly diverting chips from Nvidia
Speaker 6: from Tesla to some of his other efforts because he
Speaker 6: has no place to deploy them. Does that concern you
Speaker 6: at all in terms of Tesla's valuation as a technolology
Speaker 6: company and that as just a car company.
Speaker 9: Yeah, Look, the AI initiatives have to be under Tesla,
Speaker 9: and I think when Musk made that threat, and this
Speaker 9: will come out as Cheryl in the meeting as well this.
Speaker 10: Week, twenty five percent ownership.
Speaker 9: Otherwise he takes AI out of Tesla, it does raise
Speaker 9: some concerns, but I believe at the end of the day,
Speaker 9: it's all going to be under the hood of the
Speaker 9: Tesla ecosystem, and it's with Musk right now. It's a balance,
Speaker 9: but it's a pivotal time for mus to prove that
Speaker 9: AI will be under Tesla.
Speaker 10: He recommits to being CEO.
Speaker 9: No, I believe the next three to five years and
Speaker 9: I think then we have better days ahead. But right
Speaker 9: now it's definitely been a turbulent period and he doesn't
Speaker 9: help that.
Speaker 6: Dan on a bigger level, this is the first day
Speaker 6: of a two day FED meeting, and a lot of
Speaker 6: people are wondering how long can this continue? Where the
Speaker 6: AI early starters just basically accumulate all the cash and
Speaker 6: are the winners, and accumulate all of the investments that
Speaker 6: we have from a lot of different investment managers, and
Speaker 6: I leave most people behind. How long can that divergence
Speaker 6: continue before something's got to give.
Speaker 9: Look, I've been the valid now for two weeks, seen
Speaker 9: twenty tech companies, you know, all front and center in
Speaker 9: terms of.
Speaker 10: The AI revolution.
Speaker 9: This is in nineteen ninety five movement, nine ninety nine
Speaker 9: nine movement.
Speaker 10: And what I mean is tech the stronger and gets stronger.
Speaker 9: And I don't see any slow down what we're seeing here,
Speaker 9: what we're seeing in terms of supply chain Asia, And
Speaker 9: that's why I believe this is a tech boal market
Speaker 9: that continues to go forward for the next eighteen months.
Speaker 9: But many they'll be in the right lane forty five
Speaker 9: miles an hour in the minivan worrying about valuation.
Speaker 10: I just think right now, this.
Speaker 9: Tech party is gonna be left lane one hundred miles
Speaker 9: an hour.
Speaker 10: I don't see it slowing down.
Speaker 2: Joining us now to discuss his TD's Mark McCormick alongside
Speaker 2: Santante's Stephen Stanley. Jen It's great to catch up with you, Steven.
Speaker 2: I've got to start with you. We caught up with
Speaker 2: you a few months ago. I believe you were sat
Speaker 2: right here to the right of me, not to the
Speaker 2: left of me, and I was speaking to this individual
Speaker 2: about when we were going to get that first interest
Speaker 2: rate cut, and you said something like November, and Lisa
Speaker 2: and I sort of looked at each other, like this
Speaker 2: guy a little bit nuts, a bit crazy started twenty
Speaker 2: four Everyone's looking for March, and you're like, November. November
Speaker 2: is still November, isn't it.
Speaker 4: That's still my call.
Speaker 11: Yeah, Yeah, I think the inflation data are not cooperating,
Speaker 11: so it's still going to be a while.
Speaker 2: How do you think they'll view the labor market data
Speaker 2: from Friday?
Speaker 11: Yeah, I mean I think they've Schirm and Power kind
Speaker 11: of broke the link a little bit between the labor
Speaker 11: market and the economy and inflation earlier this year when
Speaker 11: they suggested that maybe we can have the economy continue
Speaker 11: to grow and still get inflation down. I think that
Speaker 11: was a bit of an ill feated shift on his part.
Speaker 10: But I think the.
Speaker 11: Labor market only comes into play. It feels like if
Speaker 11: things start to weaken dramatically, and obviously may suggest that
Speaker 11: that's not happening. So it's back to inflation.
Speaker 2: Mat mccomke, I want a sense to you how important
Speaker 2: is tomorrow morning's pa CPI print.
Speaker 12: I think it's important, But I think, as you mentioned,
Speaker 12: the key thing here is like progress on inflation. I
Speaker 12: think that's part of the thing is it's a stumbling block.
Speaker 12: We're not seeing the progress that we need. You're also
Speaker 12: going to see the FED likely revise up their core
Speaker 12: PC numbers in terms of the target number they're looking at.
Speaker 12: So when you think about whether or not inflation's moving
Speaker 12: the right direction, it is is it moving fast enough
Speaker 12: for the markets to kind of get on board with
Speaker 12: the certainty of how many times they can cut this
Speaker 12: year and reduce the volatility in the bond market.
Speaker 7: I don't think we're going to see that tomorrow.
Speaker 12: So I do think the key here is there's an
Speaker 12: intersection of volatility that's not pricing the markets, the geopolitics
Speaker 12: which continues to push on the fiscal side, and the fact.
Speaker 7: That the markets aren't really prepared for any of.
Speaker 6: Us So do you think Mark that the Fed's could
Speaker 6: respond to this by doing absolutely nothing, trying to keep
Speaker 6: things as stable as possible having and otherwise just in
Speaker 6: terms of the balance a bit more of the dubbsh
Speaker 6: side of things than Hawk.
Speaker 7: Yeah, I think they're going to try to sound neutral.
Speaker 7: They're not really.
Speaker 12: They can't really project anything to the into September or
Speaker 12: November December. At the moment, they still need to see
Speaker 12: four inflation reports stilly get to the September meeting. So
Speaker 12: I think right now the forward guidance and I think
Speaker 12: markets understand this.
Speaker 7: There's not much.
Speaker 12: Significance that comes from Ford guidance because we're all data dependent.
Speaker 12: So as we kind of watch the data come in,
Speaker 12: if it's a soft month over month, which is maybe
Speaker 12: a point twenty six, or if it's a hot month
Speaker 12: over month, which is maybe point two eight, we're talking
Speaker 12: about decimal points which the FED can't really provide the
Speaker 12: guidance for the markets to feel very clear about where
Speaker 12: we're going on this. And I think the one thing
Speaker 12: that you know, most people are covering the market now
Speaker 12: feels much clearer about is we're just going to see
Speaker 12: more volatility. And I think that's the key thing that
Speaker 12: we need for markets is is really you should be
Speaker 12: trading and thinking about the surprises. Everything needs to go
Speaker 12: right to get to this clear path, but you only
Speaker 12: need one or two things to go wrong, and that's
Speaker 12: where the asymmetries lie for markets, especially in the FX side.
Speaker 6: All right, well we'll get to the X side in
Speaker 6: a second. But Stephen, from your vantage point, this extreme volatility,
Speaker 6: is there a cost to that when it comes to
Speaker 6: both economics but also just market risk. When we talk
Speaker 6: about how rapidly some of these yields are swinging, even
Speaker 6: if the end of the day at the same place.
Speaker 11: Well, I think it makes it very difficult as an investor.
Speaker 11: And the FED certainly doesn't like to cause volatility, so
Speaker 11: they're going to try to do what they can to
Speaker 11: give an accurate picture of where they're headed. But the
Speaker 11: problem is that they're data dependent, and so if the
Speaker 11: data are volatile back and forth, high and low, then
Speaker 11: the markets are going to be volatile, and the expectations
Speaker 11: around the FED are also going to be volatile.
Speaker 3: You see, they still believe that financial conditions are tight.
Speaker 11: I think they believe that the level of the funds
Speaker 11: rate is very tight.
Speaker 3: Obviously you don't.
Speaker 2: What do you think that's based on, Because we had
Speaker 2: from built down to be former New York Fed President
Speaker 2: right a great pay somepole in back opinion and said,
Speaker 2: maybe it's high indefinitely, not high for longer.
Speaker 11: Yeah. I think the problem for them is that there
Speaker 11: are tailwinds that are working against what they're doing with
Speaker 11: the rate level. One is their own balance sheet strategy,
Speaker 11: where the balance sheet is still too big and that's
Speaker 11: a lot of excess liquidity slashing around in the system
Speaker 11: making financial conditions easier.
Speaker 7: And the other one is fiscal.
Speaker 11: Policy, which is continuing to stimulate the economy.
Speaker 2: The stress that we are saying pocketslf it. We're saying
Speaker 2: it at small banks. Regional lenders saw that last year,
Speaker 2: got PINCA this morning warning a more to comp We're
Speaker 2: seeing certain buildings have some difficulty and get priced that
Speaker 2: really really stay discounts, particularly here in midsom Manhattan. Another
Speaker 2: example of that. What do you think that is on
Speaker 2: the radar for these officials?
Speaker 3: Definitely watching it.
Speaker 11: I mean I think to some degree the Fed probably
Speaker 11: looks at the CIRE situation and says, look, this is
Speaker 11: something we can't really address directly. Because this is a
Speaker 11: secular change in the demand for commercial real estate after COVID, right,
Speaker 11: so there's only so much they can do. They can
Speaker 11: help to smooth the transition, but this is a a
Speaker 11: change in the valuation of this sector that needs to happen.
Speaker 11: But I think what they're watching more broadly is are
Speaker 11: we seeing the effects of high interest rates? And it
Speaker 11: does feel like we're starting to see that more. You're
Speaker 11: hearing it more in the housing sector. The ISM Non
Speaker 11: Manufacturing report last week there were several mentions by a
Speaker 11: company by respondents in different industries who were saying, high
Speaker 11: interest rates are really a negative for my business right now. So,
Speaker 11: I mean, I think from that perspective they're probably justified
Speaker 11: and feeling that.
Speaker 3: The policy rate itself is high.
Speaker 11: But as you say, financial conditions generally are not particularly restrictive.
Speaker 6: Mark to build on that, I remember a couple of
Speaker 6: months ago people were looking at property markets around the
Speaker 6: world to determine which currency to go with. That was
Speaker 6: actually one of the big risks and potentially indicators of
Speaker 6: a central bank that would essentially be forced to cut
Speaker 6: in order to preserve the sanctity of the economy in
Speaker 6: that region. Do you think that that's still applicable.
Speaker 12: Yeah, that's all we track very so we kind of
Speaker 12: look at the effective mortgage rates and how it's correlated
Speaker 12: with interest rates and kind of which currencies.
Speaker 7: Are the most vulnerable to that.
Speaker 12: You could you kind of play the home base here,
Speaker 12: but it's very clear this is on the Bank of
Speaker 12: Canada's radar screen, and it's very clear this is something
Speaker 12: that was on most European currencies radar screen.
Speaker 9: Light.
Speaker 12: I always find the primary case study with Sweden, which
Speaker 12: was if you looked at the mortgage rates, the bulk
Speaker 12: of the mortgages were under one year and.
Speaker 7: They were floating.
Speaker 12: So Sweden already took the pain medicine and they've already
Speaker 12: had a massive move in the currency market.
Speaker 4: Things are starting to stabilize a little bit.
Speaker 12: But that is something that's on I think the radar screen,
Speaker 12: which is which are the next tiers of countries that
Speaker 12: are very vulnerable to a housing disruption, and again this
Speaker 12: is something that's very insulated in something that's resilient for
Speaker 12: the US at least relative to other currencies, and how
Speaker 12: you would look at the housing market as an impact.
Speaker 12: So I'd say the one that's on everyone's radar screen
Speaker 12: that we talked to happens to be Canada largely again
Speaker 12: because they're mostly under the four to five year fixed
Speaker 12: and those fixed mortgages are adjusting from the COVID period
Speaker 12: now and you're basically seeing mortgages go from one and
Speaker 12: a half to two all the way up to maybe
Speaker 12: five six percent. So that is something that is going
Speaker 12: to feed into consumer spending, consumer slow down. And this
Speaker 12: is part of the G ten central bank divergence story,
Speaker 12: which is, you know, the FED might not just have
Speaker 12: to go is quickly or might not be able to
Speaker 12: go at all, where all these other central banks do
Speaker 12: have to go and they have to go.
Speaker 6: Now, Stephen, Housing is one thing. Commercial real estate, though,
Speaker 6: is another. And you are searing, as John mentioned, two
Speaker 6: hundred billion dollars of maturities coming up within the next
Speaker 6: twelve twenty four to eighteen months. And there's a question
Speaker 6: of whether we're accurately pricing the risk that this could
Speaker 6: cause the FED to respond in a more material way.
Speaker 6: Should it be I don't want to say contagious that
Speaker 6: might be too strong, but have sort of trickle out effects.
Speaker 6: Do you buy into any of this? Are you watching
Speaker 6: this really understand that risk.
Speaker 11: Well, I think one thing to keep in mind is
Speaker 11: that I mentioned the balance sheet before. I mean, liquidity
Speaker 11: is still plentiful, right, so this isn't likely to lead
Speaker 11: to a broader credit crunch. I think the other issue is,
Speaker 11: unlike the housing situation fifteen years ago, there's not a
Speaker 11: ton of leverage spread through the system that hinges on
Speaker 11: commercial real estate. So I think the risks are very
Speaker 11: different than they were in the lead up to the
Speaker 11: financial crisis. Having said that, I mean I have to say,
Speaker 11: I mean, you know, banks are sitting with a lot
Speaker 11: of loans on their books that are that are in
Speaker 11: some jeopardy, So I think there will be further adjustment
Speaker 11: going forward. It's just a matter of how broad that
Speaker 11: pain gets and what the overall environment is it resilient
Speaker 11: enough to manage through that.
Speaker 2: We're going to continue this conversation with mart McCormick a TD.
Speaker 2: I know you've got to run, so I just wanted
Speaker 2: to get some details from you novembers when they're going
Speaker 2: to move first cup, that's you cool? Can we just
Speaker 2: go to the top plot just quickly tomorrow what's going
Speaker 2: to look like two or one?
Speaker 11: I think it's probably median is probably two. There'll probably
Speaker 11: been a minority of people with zero or one.
Speaker 2: Though, what do you think the forecast directionally are going
Speaker 2: to look like? Are we revising growth up and inflation up,
Speaker 2: unemployment high?
Speaker 3: What's that look like?
Speaker 11: Not much of a change in growth in unemployment, but
Speaker 11: probably we're going to need to go up on inflation
Speaker 11: just for what's already happened.
Speaker 2: Just a NUTCH higher on CPI. The difference between the
Speaker 2: Federalserve and the ECB though, is that they do that
Speaker 2: and they're not cutting interest rates on the same day.
Speaker 3: Well, they were pre committed.
Speaker 2: So can you imagine can I just finish on that?
Speaker 2: Can you imagine if the Fed did what the ECP
Speaker 2: did last week? What do you think that would look
Speaker 2: like in markets?
Speaker 11: Well, so, the Fed historically has tended to have a
Speaker 11: very high bar for their first move, and the ECB,
Speaker 11: as you said, kind of locked in that first move early.
Speaker 11: The Fed has never really behaved that way, so it's
Speaker 11: hard to say, but yeah, that would have that would
Speaker 11: have been interesting.
Speaker 2: I forgot who wrote the article, but I was someone
Speaker 2: here at Blimberg that referenced a reverse tree shae. So
Speaker 2: tree shae for those of you that maybe aren't familiar.
Speaker 2: Former ECP president did a couple of hikes at.
Speaker 3: Precisely the wrong time. I think one was in our way.
Speaker 2: Another series of them around twenty eleven around the usone
Speaker 2: debt crisis, a reverse tree shape big. Ultimately you've cut
Speaker 2: too soon. That the cuts the mistake this time and
Speaker 2: not the hike.
Speaker 3: Well, we'll see.
Speaker 6: I mean, is that really the is why the euro
Speaker 6: is weakening so much? Probably some other issues, but it's
Speaker 6: a good question, and it's something that people are going
Speaker 6: to be asking.
Speaker 3: Yes, something will keep asking. Steven. It's good to see you.
Speaker 3: Thank you.
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