Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. If
Speaker 1: we can't break out of this regime, that that will
Speaker 1: feed into a more existential question of why not and
Speaker 1: whether we can ever move. Let's bring in my daughter show.
Speaker 1: We MKM Partner's chief economist and chief market strategist Might.
Speaker 1: Good morning to you. Thanks for having me on what
Speaker 1: happened to the high Evold regime February. It really feels
Speaker 1: like a distant memory now, it does. It does, so
Speaker 1: it's dissipated for now. Obviously, markets care a lot about
Speaker 1: inflation concern and so we're getting strong job growth without
Speaker 1: wages picking up, and so that hasn't you know that
Speaker 1: that threat in terms of the Fed panicking uh is
Speaker 1: not with us at the moment. And then the last
Speaker 1: CPI report, we had the core inflation rate a few
Speaker 1: months back running you know, up into the threes and
Speaker 1: headline into the fours on a three month annualized basis.
Speaker 1: And that's completely come off the boil with this, with
Speaker 1: this weak print. Now it is one month and if
Speaker 1: you look at the year over year data, we're still
Speaker 1: just above two percent on both headline and core cp I.
Speaker 1: So you know, maybe it's not a good idea to
Speaker 1: you know, to make too much of just one month.
Speaker 1: You know, one month's uh, you know, cooling off. But
Speaker 1: the markets do seem to care about this a lot
Speaker 1: because ultimately, when we have discussions about how long is
Speaker 1: the FED going to tighten, will they invert the yield
Speaker 1: curve if they start to really get concerned about overheating,
Speaker 1: that's when you know, business cycles tend to end, you know,
Speaker 1: with with the FED tightening enough to kill the expansion.
Speaker 1: So it looks like that risk, at least in the
Speaker 1: very short term is you know, it's been stepped back
Speaker 1: a bit, so we're back to goldilocks. In other words, Yeah,
Speaker 1: basically it's an uncomfortable place. So so so basically everyone
Speaker 1: should feel good to take lots of risk and and
Speaker 1: and keep on singing kumbay yah um. But I do
Speaker 1: want to get your sense. I mean, at what point
Speaker 1: do we have to start worrying? And do you expect
Speaker 1: treasure yields to go lower. I do think so. If
Speaker 1: we're thinking more broadly about two thousand, nineteen and two
Speaker 1: thousand and twenty, the key question is what kind of
Speaker 1: nominal GDP growth backdrop are we going to have? You know,
Speaker 1: the main reason that the ten year yield ran up
Speaker 1: to about three percent or just over from what the
Speaker 1: one thirties and two thousand sixteen was that we had
Speaker 1: a pre dramatic pickup in the business cycle. Right nominal
Speaker 1: GDP growth was running at just two and a half
Speaker 1: percent year to year in the middle of two thousand
Speaker 1: and sixteen, We're up at four point eight percent year
Speaker 1: over year, a nominal growth, so a pretty significant re
Speaker 1: acceleration and growth, and that came on the back of
Speaker 1: a huge narrowing and credit spreads right easing financial conditions.
Speaker 1: If that's essentially behind us now. But what's in front
Speaker 1: of us is the impact of the accumulated fed tightening
Speaker 1: that we'll see this year, you know and last year,
Speaker 1: and nominal growth is slower as a result, you know,
Speaker 1: back down to the recovery averages or maybe a bit
Speaker 1: less so over the course of the next two years.
Speaker 1: The tenure yield in my view, will you know if
Speaker 1: anything be a bit lower. So that's sort of an
Speaker 1: out of consensus call because most of the people I
Speaker 1: talked to in financial circuits circles are thinking, well, we're
Speaker 1: kind of on a moon shot to like four percent
Speaker 1: on the tenure. That could happen. But yes, yes, now
Speaker 1: that could happen. I could be wrong in my assessment.
Speaker 1: But if I'm wrong, I think it will simply be
Speaker 1: because the nominal growth rate not only fails too slow,
Speaker 1: but continues to accelerate. If that's really the environment we're in,
Speaker 1: growth continuing at a strong pace, inflation, you know, continuing
Speaker 1: to move to move up this last month, notwithstanding, but
Speaker 1: the year over year rates, then you could see, you know,
Speaker 1: higher yields. But that's what it would need to be
Speaker 1: connected to what I don't see as a growth moderation,
Speaker 1: and then you know, rates aching up. That would be
Speaker 1: a bit unusual. So think the base case view among
Speaker 1: economists surveyed by Bloomberg on the street right now, on
Speaker 1: Wolf Street, not the street street. It's for growth to
Speaker 1: peak this year, to roll over a little bit. Can
Speaker 1: you imagine to roll over a little bit next year,
Speaker 1: and to roll over a little bit more after that.
Speaker 1: That seems to be the consensus view amongst everybody that
Speaker 1: I've spoken to. We pick this year, we get close
Speaker 1: to three roll over towards two and a half roll
Speaker 1: over towards two in the next two years. Is that
Speaker 1: your base case? Basically, it's not. I don't like running
Speaker 1: with the consensus, but you know, the consensus is actually
Speaker 1: usually right. They're just wrong at turning points, right, always
Speaker 1: wrong at turning points, but otherwise generally correct. Uh So,
Speaker 1: so right now, we sort of have this you know,
Speaker 1: goldilox situation where the growth numbers have been good it
Speaker 1: wages and inflation have you know have you know, have
Speaker 1: not been alarming, and you know, the cases for a
Speaker 1: slowdown to not be violent, but but to you know,
Speaker 1: to be more modest because you're not in an environment
Speaker 1: where saying, credit spreads are shooting up. At this point
Speaker 1: you mentioned the volatility tends to correlate pretty closely with
Speaker 1: with credit spreads and financial conditions. So that's where we are,
Speaker 1: So it would make sense that the consensus would hold
Speaker 1: their view. Makes me a little bit uncomfortable to be
Speaker 1: running with the consensus um, but you know, it does
Speaker 1: make sense based on you know, that the backdrop just described. Well,
Speaker 1: you you mentioned the absence of credit risk LEASA triple CS.
Speaker 1: I mean, if we keep coming back to this triple ses,
Speaker 1: the junkiest part of junk is where the performance is
Speaker 1: beat well. And people will argue this is part because
Speaker 1: the energy sector was dominanting the Triple C sectuary, and
Speaker 1: you've got energy prices rebounding. Perhaps that's it, but there
Speaker 1: also hasn't been that much supply. People aren't Companies that
Speaker 1: are a risk here haven't been selling as much debt,
Speaker 1: with the exception of we Work and Uber and some
Speaker 1: of these other UH questionable companies. I want to get
Speaker 1: your take, Mike on something that sort of is a
Speaker 1: little off topic, and that is geopolitical risk. Because you know, yes,
Speaker 1: every thing seems great, as John was saying, we're back
Speaker 1: to goldilocks stands. Everyone's happy, and yet there's a war
Speaker 1: UH that is at risk of breaking out between Assyria
Speaker 1: and UH and and Israel with Iran getting involved. The
Speaker 1: US just exited the Iranian nuclear deal. You have issues
Speaker 1: with North Korea, you have China and US trade wars.
Speaker 1: When do we when do we have to care? Yeah,
Speaker 1: it's it's an interesting question. Because you know, markets seem
Speaker 1: like they just overlooked this stuff, and typically they do
Speaker 1: unless you have a geopolitical event that actually threatens to
Speaker 1: disrupt commerce and profits. You know, it sounds like a
Speaker 1: cold statement, right, markets don't care about dead bodies, You
Speaker 1: care about commerce, And it is a cold statement. But
Speaker 1: historically it stands up if you look at the Yeah,
Speaker 1: it stands up if you look at the data. So
Speaker 1: it does seem like the world just got a little
Speaker 1: bit more dangerous in the last forty eight hours. But
Speaker 1: in terms of of markets, you know, we need to
Speaker 1: see a series of events that actually threatens commerce on
Speaker 1: a you know, on a broad scale and uh and
Speaker 1: then you know markets will it will react to that
Speaker 1: is trite that issue. I think trade is that issue.
Speaker 1: I mean, at this point, you know, we've seen a
Speaker 1: lot of bluster. We'll see what happens with policy follow
Speaker 1: through our lack thereof. I think the administration has a
Speaker 1: bit of a challenge in terms of getting on the
Speaker 1: same page. I know you've done some interviews with some
Speaker 1: key administration officials, and depending on who you have on
Speaker 1: and what you at, you get a different answer. You know,
Speaker 1: even asking the same questions as confused as I am. So, so,
Speaker 1: you know, the President seems to you know, his issue
Speaker 1: seems to be the trade deficit, right, I mean that's
Speaker 1: if you when he's asked what is the goal with
Speaker 1: you know, with the China trade negotiations, it's the trade deficit. Well,
Speaker 1: you know, if you're running up the fiscal deficit at
Speaker 1: exactly the wrong time in the business cycle, you do
Speaker 1: a two year spending blowout, you know, and and then
Speaker 1: as tax cut, the trade deficit is going to go higher,
Speaker 1: all other things equal. So I mean, potentially you could
Speaker 1: shift it from China somewhere else, but protectionist policy is
Speaker 1: not going to succeed in reducing the trade deficit unless
Speaker 1: you actually we're able to do something that blew up
Speaker 1: the U. S economy in the process. So if investment
Speaker 1: in spending collapse relative to the level of savings, then
Speaker 1: you could run trade surpluses. That's what we did during
Speaker 1: the nineteen thirties. Probably not a policy path that anyone
Speaker 1: is knowingly advocating. Marke Donda has been great to see you.
Speaker 1: Thank you very much for joining us this morning. So
Speaker 1: M Campound is chief economist and Chafe market strategist. President
Speaker 1: Trump welcomed home three American prisoners from North Korea. We
Speaker 1: also found out yesterday Singapore is the designated location for
Speaker 1: the June twelfth, the meeting between President Trump and North
Speaker 1: Korean leader Kim Jong What are we expecting to hear
Speaker 1: out of these meetings? Uh? Joining us now? Nick Wadam's
Speaker 1: Bloomberg State Department reporter, Nick, what do you think is
Speaker 1: the most likely outcome of the historic summit between Trump
Speaker 1: and Kim Jong un? Well, that's that's really the big question,
Speaker 1: because they haven't done a lot of the sort of
Speaker 1: nitty gritty groundwork, uh to pin down, um, you know,
Speaker 1: real sort of deliverables from this meeting. So I think
Speaker 1: what you're likely to see the strategy being is a
Speaker 1: sort of hoping to start the momentum going so that um,
Speaker 1: when those negotiations do get tough on the on the
Speaker 1: details of how North Korea would be nuclearize. Uh, They're
Speaker 1: hoping that basically the momentum created by that handshake would
Speaker 1: push those negotiations through, so sort of a very symbolic
Speaker 1: opening um, opening shot that would then push the negotiations through.
Speaker 1: Who is coming into these meetings with the upper hand,
Speaker 1: President Trump or North Korean leader Kim jonger Well, I
Speaker 1: think at this stage it's clearly Kim Jong. I mean,
Speaker 1: this is a huge risk for President Trump because if
Speaker 1: he cannot deliver a deal, uh, then he will look
Speaker 1: very bad and his his reputation and credibility will really
Speaker 1: be undermined. I mean for Kim Jong, and the meeting
Speaker 1: itself is a huge victory. He gets to share the
Speaker 1: stage with the President of the United States, and so
Speaker 1: far he has not committed to doing anything that North
Speaker 1: Korea has not committed to in the past, only two
Speaker 1: reneg upon so so far, I think Kim John looks
Speaker 1: like the queer winner here. Nick Waams. Great to have
Speaker 1: you with us on the program, of course, joining us
Speaker 1: over the next couple of weeks in the lead up
Speaker 1: to that amazing summits the set to happen between the
Speaker 1: President the two respective leaders of North Korea and the
Speaker 1: United States up Blomberg State Department reporter. What a place
Speaker 1: to say that with us here in New York is
Speaker 1: Stephen Cook, CFR, CFR Senior Fellow for the Middle East. Stephen,
Speaker 1: great to have you with us on a program. Pleasure
Speaker 1: to be here. Let's talk about the Middle eights tensions
Speaker 1: really flaring, and earlier on I said to you, let's
Speaker 1: talk about your base case for the conflict. You said,
Speaker 1: which one? Um, So let's begin with one these writings
Speaker 1: and the Iranians. Tensions continuing to flare, some might say
Speaker 1: even an escalation of the last couple of weeks. Stephen,
Speaker 1: how do you see things evolving the Well, the Israelis
Speaker 1: are seeing the right things without not wanting an escalation.
Speaker 1: But there is an existential issue at play for the Israelis.
Speaker 1: They do not and they are intent on preventing the
Speaker 1: Iranians establishing a permanent presence in Syria in which to
Speaker 1: arm his Ballah. They have vowed not to allow what
Speaker 1: happened in Lebanon, where his blow was able to acquire
Speaker 1: tens of thousands, hundreds of thousands of rockets and missiles.
Speaker 1: They vowed to prevent that from happening in Syria. So
Speaker 1: I expect that not only will tensions continue to flare,
Speaker 1: but the kind of violence that we've seen over the
Speaker 1: last few weeks, most dramatically the other the other night,
Speaker 1: uh to continue. Does Israel field emboldened now the president
Speaker 1: has pulled out of the j c P A well,
Speaker 1: Let's let's be clear. Um, this tip for tat violence
Speaker 1: between the Israelities and the Iranon's has been happening before
Speaker 1: the President withdrew from the j c p o A.
Speaker 1: But certainly the Israelis feel emboldened. This has been a
Speaker 1: goal of Israeli Prime Minister Netanya since the Iran nuclear
Speaker 1: agreement was being negotiated. UM. So they certainly feel as
Speaker 1: if the situation in the region, with their relations with
Speaker 1: the wider Arab world and support from the United States,
Speaker 1: is shifting in Israel's direction. So pretty much everyone who
Speaker 1: I've heard talk about this expects the conflict to escalate here.
Speaker 1: What does the base case look like in your mind
Speaker 1: as to an escalated conflict and how why does it
Speaker 1: get Well, it strikes me that it's going to be
Speaker 1: their escalation is is certainly a likelihood here, but whether
Speaker 1: it widens to include other actors like the Russians or
Speaker 1: even the United States seems to be somewhat limited. Uh.
Speaker 1: The Russians. Um, every party to this conflict in Syria
Speaker 1: has to go to the Russians for permission for a deal. Uh,
Speaker 1: and so UH it's unlikely that the Russians will get
Speaker 1: directly involved on behalf of the assad regime in the
Speaker 1: fight between Israeli's and Iranians. However, UH, it could escalate
Speaker 1: to the point where you do have a kind of
Speaker 1: open conflict, not just these air strikes and missile strikes.
Speaker 1: It is unbearable from the perspective of Israelis to have
Speaker 1: large numbers of Iranian Revolutionary Guard Corps members UH in Syria.
Speaker 1: How did how did Russia end up being the powerbroker
Speaker 1: in all of this with Vladimir Putin kind of having
Speaker 1: his ring out and everybody coming to kiss it because
Speaker 1: the Russians intervened in UH and essentially saved the outside
Speaker 1: regime Asside is dependent upon him UH. The Iranians have
Speaker 1: become partners of sorts with the Russians UH, and the
Speaker 1: Israelis need Russian ascent essentially to operate with impunity the
Speaker 1: way that they have in the skies over Syria. And
Speaker 1: what Putin does is he provides that permission. He saves
Speaker 1: the Asseid regime. He works with the Iranians, but he
Speaker 1: demonstrates that his interests are independent of Theirs. Thus he
Speaker 1: hasn't come to the defense of the Syrian regime when
Speaker 1: it comes to the Israelis taking matters into their own hands. Uh.
Speaker 1: This is a way of keeping each and every one
Speaker 1: of these parties. Coming back to Moscow. Uhnatia was just
Speaker 1: there UH discussing these issues with with Putin. So how
Speaker 1: on earth do we get a broader deal that the
Speaker 1: president would like for Iran to come to the table,
Speaker 1: agree to everything they've already agreed to, and then agree
Speaker 1: to even more intervention in the region, ballistic missile testing.
Speaker 1: That broader deal that the President wants, and some people
Speaker 1: might say, quite rightly wants, can he get it? Well,
Speaker 1: that's the logical flight in the president's decision to breach
Speaker 1: the j c p O A UH two, break the
Speaker 1: agreement and then demand a whole host of measures that
Speaker 1: were already included in the agreement. Plus, UH would if
Speaker 1: one was an Iranian decision maker, why would anybody take
Speaker 1: that deal? And let's be clear, Steven, what we've heard
Speaker 1: in the last couple of days as well, is that
Speaker 1: this administration would like the inspectors to still go into
Speaker 1: Iran even though the unartist STATS has pulled out of
Speaker 1: the deal. I mean, this is some very very high
Speaker 1: expectations on the U S administration side for what might
Speaker 1: happen here with Iran. It does seem that every time
Speaker 1: the administration makes a decision along these lines, they have
Speaker 1: failed to underestimate the likely reaction of their adversaries or interlocutors.
Speaker 1: Once again, if you look at it from the perspective
Speaker 1: of the Iranians, the United States is in breach of
Speaker 1: the agreement. There's no reason, there's no compelling reason for
Speaker 1: them to allow UH the United States to dictate terms
Speaker 1: now that the United States is out of the deal,
Speaker 1: but the Europeans and other signatories remain in it. So
Speaker 1: I want to know sort of what you expect the
Speaker 1: consequences to be on the Iranian economy. Some people are
Speaker 1: saying that the people might uproot the current leadership and
Speaker 1: there might be regime change sort of de facto as
Speaker 1: a result of the U S decision here. Do you
Speaker 1: think that that's likely. Well, it is no secret that
Speaker 1: there has been unrest in Iran over the course of
Speaker 1: the last months, and much of the unhappiness in Iran
Speaker 1: has to do with the fact that President Rohani UH
Speaker 1: said that after this agreement things would get better UH
Speaker 1: for Iranians. But Iranians are upset about a whole host
Speaker 1: of things about Irani adventuresome adventure, an adventurous Iranian foreign
Speaker 1: policy around the Middle East, that that the focus has
Speaker 1: been taken off the Iranian people and on this kind
Speaker 1: of imperial policy on the part of of the Iranians.
Speaker 1: As far as the sanctions and what effect they will have,
Speaker 1: they certainly will have an effect on Iranian businesses and
Speaker 1: individuals who have been who have been sanctioned. But let's
Speaker 1: be clear, bilateral sanctions are weaker than multilateral sanctions. And
Speaker 1: as long as the Europeans, the Indians, and the Russians,
Speaker 1: the Chinese are not playing along with the United States,
Speaker 1: the Iranians continue to have options to get around them,
Speaker 1: even with tough secondary sanctions that the Congress and the
Speaker 1: administration are problems. And that's what it all comes down to,
Speaker 1: Stephen pulling down of the deal is only effective if
Speaker 1: US sanctions effectively, or international sanctions and secondary sanctions apply
Speaker 1: to European companies. That's exactly It was the multilateral sanctions
Speaker 1: that ultimately brought the Iranians to the table, that led
Speaker 1: to the negotiations that led to the j c p
Speaker 1: o A. I think it's unlikely that you're going to
Speaker 1: have that kind of international consensus to negotiate a bigger,
Speaker 1: better deal. Stephen Cook, It's great to have you with us,
Speaker 1: and maybe we can switch for all day on this
Speaker 1: specific issue. So curious and so many questions as to
Speaker 1: what is happening in the Middle East at the moment. CF.
Speaker 1: Senior Fellow for the Middle East, Karen Well. Our next
Speaker 1: guest has gotten it right again and again when it
Speaker 1: comes to US stocks. So we are going to tap
Speaker 1: him and his crystal ball of a mind to find
Speaker 1: out where things are going next. Jonathan Gollub joins US
Speaker 1: Credit sweet chief US Equity strategy in our eleven three
Speaker 1: Oh studios. Jonathan, before we get into sectors, particularly healthcare,
Speaker 1: ahead of this President Trump speech on drug prices, UM,
Speaker 1: where are we are you still as bullish as you
Speaker 1: have been on US equities and you still see gains ahead?
Speaker 1: I am pretty optimistic and mean. First of all, the
Speaker 1: underlying fundamental is great. This earning season, UM earnings were
Speaker 1: up twenty five percent year over year, which is just
Speaker 1: an unheard of thing. UM. A chunk of that is
Speaker 1: from taxes. But even if you strip out the taxes,
Speaker 1: earnings growth which is great. A lot of investors are
Speaker 1: asking if can you get any better than this? And
Speaker 1: the answer is probably not, But that doesn't mean that
Speaker 1: they won't be really good. And I think that investors
Speaker 1: are struggling with that whole idea that, um, the underlying
Speaker 1: trend is good, but it can't be as good as
Speaker 1: as what we've just achieved. So what the answer might
Speaker 1: be we were talking about this ahead of the segment,
Speaker 1: is to rotate towards sectors that you like best or
Speaker 1: think there might be opportunities, rather than just going in
Speaker 1: whole hog broadly, if you think that this is sort
Speaker 1: of as good as it gets with respect to earnings,
Speaker 1: is that right? Yeah? And I think that's exactly how
Speaker 1: you have to think about it. I mean, so the
Speaker 1: first is if you start with tech, which has been
Speaker 1: the market leader. Um, I think that that will continue
Speaker 1: to be the market leader for for quite a while. Yeah.
Speaker 1: I mean, if you look at the returns that you've
Speaker 1: gotten in the tech sector, they've been driven by earnings,
Speaker 1: not by the by stock multiple. So if something goes
Speaker 1: up by and it's earnings go by thirty, it didn't
Speaker 1: get more expensive, it got cheaper, right, So, Um, the
Speaker 1: tech sector has just been out delivering everything else, and
Speaker 1: I think that it's going to continue to be a winner. However,
Speaker 1: those areas like industrials or materials or mining companies that
Speaker 1: are to do really well when the economy is re
Speaker 1: accelerating are probably going to do a little bit less well.
Speaker 1: I wouldn't necessarily want to sell them, but you probably
Speaker 1: want to move from there to other other areas. The
Speaker 1: problem this time around, which is something we haven't seen,
Speaker 1: is that the areas you want to rotate to, which
Speaker 1: would be like consumer staples or healthcare, have their own problems.
Speaker 1: And so it's a little bit more challenging this time
Speaker 1: than than it has been in the past. All Right,
Speaker 1: so let's talk about them. Healthcare. Let's talk about the problems,
Speaker 1: because we've got the speech that we're expecting from President
Speaker 1: Trump at two pm Eastern time talking about bringing down
Speaker 1: pharmaceutical prices. Is that is that one of the big
Speaker 1: headwinds here. It is the big headwind and and and
Speaker 1: I don't think that's the President's speech. That's that's the issue.
Speaker 1: We've seen lack of pricing power in the last few years,
Speaker 1: um from from big big biotech and big farmer names,
Speaker 1: and that's really eaten into the profits. I mean, these
Speaker 1: have been high growth areas. And if you look at
Speaker 1: the expected earnings growth rate for these big, bigger companies,
Speaker 1: not the more speculus small guys, Um, they've really come
Speaker 1: down to the low single digits. And that's a problem. Um.
Speaker 1: Does that mean that I think that that we should
Speaker 1: be targeting? Um? You know what, should the president be
Speaker 1: targeting these companies? Probably not. It's a lot cheaper to
Speaker 1: give someone a pill that can keep them from getting
Speaker 1: a heart attack and you know, than taking care of
Speaker 1: them in the hospital. So there's places that you might
Speaker 1: want to ring costs out. I don't know if I
Speaker 1: would be attacking drug companies, but nonetheless, drug pricing has
Speaker 1: been a problem. So you're fairly neutral health we we
Speaker 1: we are neutral on healthcare. I would love to rotate there,
Speaker 1: but but again there's a little problem. And then consumer
Speaker 1: staples that's other than next So Coca Cola, PNG, Uh,
Speaker 1: what do you think? You know? You know, not not
Speaker 1: to comment on on specific names, but a couple of
Speaker 1: years ago we would agreed that those companies that are
Speaker 1: in Amazon sites are gonna get crushed and brick and
Speaker 1: mortar retail has gotten hurt, and we've been overweight consumer
Speaker 1: discretionary stocks, but it really has been short brick and
Speaker 1: mortar retail or underweight that and go along everything else
Speaker 1: in consumers discretionary. And that's been a really great call.
Speaker 1: But now you have something else happening. The brands that
Speaker 1: are being sold in the supermarket, are they're being sold
Speaker 1: in your department stores, are coming under pressure because we're
Speaker 1: changing the way we're we're purchasing things because basically, you
Speaker 1: can't pay for shelf space at eye level and people
Speaker 1: buy it as much that that simple it is. It
Speaker 1: is pretty much that simple. And also, you know, there's
Speaker 1: been this huge premium that we've paid for consumer products
Speaker 1: because of these brands that we're comfortable with. And now
Speaker 1: all you need is a certain number of likes on
Speaker 1: you know, Amazon or some other social media and and
Speaker 1: now you're going and buying a product which may be
Speaker 1: better for less money. Now does that mean everybody is
Speaker 1: changing their their buying behavior. No, But this earning season
Speaker 1: you've seen that the margin story has deteriorated in every
Speaker 1: one of the subgroups within staples. So it's not a
Speaker 1: couple of names, it's really a change in in shopping behavior.
Speaker 1: So on one hand, I'd love to be rotating into
Speaker 1: these names because I think the economy is kind of
Speaker 1: not necessarily get becoming slow, but is becoming less fast.
Speaker 1: On the other hand, the earnings outlook for these stocks
Speaker 1: are are really more troubled. Okay, so let's shift to energy.
Speaker 1: Energy stocks in the SMP five hundred up almost seven
Speaker 1: percent on the year. Uh, certainly this comes as oil
Speaker 1: prices surge. Are you seeing still some profits here or
Speaker 1: do you think that it's already been baked in. Yeah,
Speaker 1: we've we've been underweight energy for the last two years,
Speaker 1: and our read was that oil prices may be going up,
Speaker 1: but that ultimately these stocks were just way too expensive
Speaker 1: and there were other issues. And then about five or
Speaker 1: six weeks ago, we we switched direction and said, uh,
Speaker 1: now is the time to warm up to two energy companies.
Speaker 1: So we moved from underweight to neutral. And as we're
Speaker 1: talking to larger institutions, hedge funds, mutual fund managers, we're
Speaker 1: finding it at just about the same time they're seeing
Speaker 1: the same thing. Oil prices are higher, the profits are
Speaker 1: are stronger, and the valuations on these energy companies looks
Speaker 1: more favorable. And then there's other dynamics around new technologies
Speaker 1: and fracking that that actually makes these stocks less volatile,
Speaker 1: so they're worth more um in the current environment. So
Speaker 1: you're still neutral. Do you expect to go overweight? I
Speaker 1: don't know if we're gonna go overweight, But the case
Speaker 1: that we had against energy, which would really they've been
Speaker 1: a terrible performance for so long, I think doesn't make
Speaker 1: sense any worse anymore. So I think the real question
Speaker 1: is should you be neutral, should you be overweight? But
Speaker 1: to be underweight the energy sector, um, we just don't
Speaker 1: think it's justified anymore. Okay, So given the fact that
Speaker 1: there are sort of idiostocratic opportunities depending on the sector, uh,
Speaker 1: and sort of a broad goldilocks backdrop here where earnings
Speaker 1: might have peaked, earnings growth might have peaked, but you
Speaker 1: still have that goldilocks scenario and a lot of central
Speaker 1: bank stimulus. Uh. How much do you expect the SMP
Speaker 1: five hundred to gain by the end of the year.
Speaker 1: We're up about two and a half percent right now. Yeah,
Speaker 1: I think that we'll probably see low double digit numbers.
Speaker 1: We have a three thousand target. Really, so you think
Speaker 1: it's like percent. We started a year, we're stock multiples.
Speaker 1: The the pe on the SMP was eighteen two at
Speaker 1: the beginning of the year. We're at something like sixteen
Speaker 1: two right now. And that's a combination of the e
Speaker 1: got so much bigger. I mean, the earnings are just fantastic,
Speaker 1: and the stock prices are up. You know, as of
Speaker 1: right now what a little bit less than two percent um.
Speaker 1: So our call was that we're going to see something
Speaker 1: like one percent a month throughout the course of the year.
Speaker 1: I think that we're going to catch up a little
Speaker 1: bit from what we lost, and I think we're gonna
Speaker 1: be surprised. The other thing that's happening, and it's a
Speaker 1: really big story, volatility spiked and it really beat up
Speaker 1: on the market in February and March. That volatility, if
Speaker 1: you if you look on your Bloomberg screen is really
Speaker 1: is really really fallen, and I think it is not
Speaker 1: going to pop back up. I think that we'll see
Speaker 1: the VIX between twelve and fourteen throughout the year, maybe
Speaker 1: a little bit lower, and I think that that is
Speaker 1: going to be a real positive the market. That's underestimated.
Speaker 1: All right, So what's gonna be the best performing sector.
Speaker 1: I think tech would be the best performing sector again
Speaker 1: this year. And you can see it um in a
Speaker 1: variety of in a variety of different areas. I'll just mentioned,
Speaker 1: you know, one theme, but it plays out across things. UM.
Speaker 1: How big is the is the potential market for online
Speaker 1: advertising compared to what we're spending today, And I don't
Speaker 1: know whether it's double from here over the next decade,
Speaker 1: but it's much much bigger if you look at the
Speaker 1: cloud computing and data centers. And by the way, you
Speaker 1: can play this in all kinds of other groups reats. UM.
Speaker 1: There's there's data center reats that are just doing unbelievably
Speaker 1: well and making big capital commitments. UM. But some of
Speaker 1: these areas are growing really fast, and it's it's not
Speaker 1: a question of is this a good quarter. These are
Speaker 1: multi multi year themes. They're gonna play out. Jonathan Call
Speaker 1: of Credit Suites, Chief US Equity Strategists, joining us here
Speaker 1: in our eleven three oh studios, I want to shift
Speaker 1: our focus now to technology and joining us now, I'm
Speaker 1: so pleased to say is Austin Goulsby. Some people say
Speaker 1: he is the funniest economist out there. I call him
Speaker 1: perhaps the most overqualified comedian. Austin Goolsby was the chair
Speaker 1: of the Council of Economic Advisors to President Barack Obama.
Speaker 1: He has a storied history in the economics profession. He
Speaker 1: is currently University of Chicago's Booth School of Business Professor. Austin,
Speaker 1: thank you so much for being with us. I want
Speaker 1: to start with this meeting with some White House officials
Speaker 1: and representatives from Alphabet, Google, Facebook, Goldman, Sachs, Boeing, where
Speaker 1: the White House told them we are not going to
Speaker 1: bother you in your development of artificial intelligence. Go crazy,
Speaker 1: do what you need to do. We won't get in
Speaker 1: your way. What's reaction to that, Well, it's probably healthy
Speaker 1: as an approach at the beginning, as you know, you know,
Speaker 1: AI and machine learning in all of the buzzwords are
Speaker 1: still in a very early stage, so we don't have
Speaker 1: any idea which which way they're headed. And for the
Speaker 1: most part, over time technologies what made us rich. So
Speaker 1: I wouldn't I wouldn't be too paranoid elon Musk style
Speaker 1: that the AI is going to turn us into the
Speaker 1: movie and the machines are going to take over the world,
Speaker 1: you know, just yet. So it's it's probably not it's
Speaker 1: it's it's probably the healthy approach. Well, the reason why
Speaker 1: I think this is interesting is because it's coming at
Speaker 1: a time when people are wondering about Facebook's use of
Speaker 1: data uh and Google is coming under similar criticism in
Speaker 1: the European Union is implementing some data protection security and
Speaker 1: that's intimately connected to artificial intelligence. Now, it's how people
Speaker 1: use this data and creates systematic ways of analyzing it
Speaker 1: and potentially in ways that the people could find creepy. Yes,
Speaker 1: I look, I don't disagree with your If the premise
Speaker 1: of that is should we be concerned about the the
Speaker 1: role of our personal data that the tech companies have
Speaker 1: and should we have better privacy protection? I totally agree
Speaker 1: with that. I think that's a little different than saying
Speaker 1: should we have Congress go down and regulate artificial intelligence,
Speaker 1: which it's pretty clear virtually no member of Congress has
Speaker 1: any idea what it is or how it works. So
Speaker 1: I would just be a little let let's just be
Speaker 1: a little careful on that end, But that that's not
Speaker 1: an excuse to do nothing when there are actually things
Speaker 1: going wrong. The things going wrong on Facebook are not
Speaker 1: really about artificial intelligence. It's about their desire slash willingness
Speaker 1: to share are far more about us with third parties
Speaker 1: than we are comfortable with. All right, well, Austin Goolsby,
Speaker 1: maybe this is an appropriate time to then segue to
Speaker 1: the Chinese government their push for AI dominance. They've already
Speaker 1: set goals for a tenfold increase in artificial intelligence output
Speaker 1: in order to keep up with the United States. UM,
Speaker 1: let's say, get your thoughts on the US Chinese trade confrontation,
Speaker 1: and do you believe that it will it will really
Speaker 1: become a trade war? God, I hope not. You know,
Speaker 1: I don't know what you guys think about that. But
Speaker 1: my view is the economic relationship between the US and
Speaker 1: China is clearly the most important relationship in the world.
Speaker 1: And I've been a public critic of some aspects of
Speaker 1: the Chinese economic approach. Um. And the President Trump is
Speaker 1: not wrong when he puts focus on the violations of
Speaker 1: intellectual property them forcing our companies to make joint ventures
Speaker 1: and then the joint venture partner kind of steals all
Speaker 1: the plans and comes out with a competitor. We should
Speaker 1: be pressing on that. Um. If we just knew what
Speaker 1: they're doing now and we're gonna go over and and
Speaker 1: yell at them about the size of the trade deficit
Speaker 1: and threaten a hundred billion dollars of terriffs and then
Speaker 1: they say, well, we'll put a hunter billion on you.
Speaker 1: And then oh, yeah, well you put a hunter billion
Speaker 1: on us, We'll put two on you. That doesn't sound
Speaker 1: very good. Now, I'm I'm open to be I don't
Speaker 1: know proven wrong. I'm open to the idea that somebody
Speaker 1: in a strategic way and they're gonna that they're gonna
Speaker 1: only use this as as a kind of a threat
Speaker 1: to get some deal. Um. But if we actually into
Speaker 1: the trade ward, no way trade ward, there's no sense
Speaker 1: in which trade wards are good. I think for sure, Um,
Speaker 1: it would lead to a freak out and it might
Speaker 1: very well lead the US into a recession. How would
Speaker 1: you counsel the president if he asked you for your input?
Speaker 1: Because US trade groups are saying that Ford Automobiles, naval oranges, Lemons,
Speaker 1: cherries from California, they're all sitting on docks as well
Speaker 1: as pork. It's sitting on docks in China because Chinese
Speaker 1: officials have in a sense adopted a go slow inspection
Speaker 1: policy and a lot of this stuff is just rotting.
Speaker 1: What would the United States do? What would you suggest
Speaker 1: to the president? Well, the thing to remember about that
Speaker 1: is I have heard those those reports that the Chinese
Speaker 1: that customs are slow walking a bunch of American stuff. Um,
Speaker 1: they didn't randomly do that. They are doing that in
Speaker 1: bonds to US, threatening and imposing hundreds of billions of
Speaker 1: dollars of tariffs on them. So I guess my advice
Speaker 1: is that I'm not a massive expert about negotiating with
Speaker 1: the Chinese. I talked in my part of the world
Speaker 1: in the administration UH at the Strategic Economic Dialogue on
Speaker 1: various issues with the Chinese. My my experience says, getting
Speaker 1: in a big public degradation ceremony in which you announced
Speaker 1: to the Chinese we're gonna shove your face in the
Speaker 1: dirt and you're going to have to stand up and
Speaker 1: publicly capitulate to us will never work. If you take
Speaker 1: that attitude, which so far we are kind of taking. Um, you,
Speaker 1: you basically can't negotiate with them because they publicly have
Speaker 1: to save faith and say no, we will oppose you
Speaker 1: in every way. The the the advice that we give
Speaker 1: now is if you fire a shot acros us the bow.
Speaker 1: Then go in private, shut the door and have a
Speaker 1: negotiation and figure out what it is that you want
Speaker 1: is are you wanting the Chinese too to commit to
Speaker 1: certain standards on intellectual property? Are you trying to get
Speaker 1: them to open this, that or the other market? If
Speaker 1: you do that privately, after firing a shot across the value,
Speaker 1: might be able to achieve it. But you don't want
Speaker 1: to simultaneously threaten all of our allies who could be
Speaker 1: helping us in that circumstance, threaten them with trade wars,
Speaker 1: which is what now, what we're doing to the Europeans
Speaker 1: on steel and aluminum, to the Canadians and the Mexicans
Speaker 1: on NAFTA, and to the Japanese. That doesn't make any
Speaker 1: sense to me, And so I guess I would I
Speaker 1: would advise, I don't anticipate that the President is going
Speaker 1: to be calling me, but if he did, I would advise,
Speaker 1: you know, take one step back and just get a
Speaker 1: strategy together. University of Chicago's Booth School of Business professor,
Speaker 1: thank you so much for being with us. This is
Speaker 1: Bloomberg Surveillance. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom
Speaker 1: Keene before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio