00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts. 00:00:05 Speaker 2: Radio. 00:00:06 Speaker 3: News. 00:00:12 Speaker 4: This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. 00:00:27 Speaker 5: The swirl, folks, is from another time and place. 00:00:30 Speaker 6: And for all of us with gray hair, including Julian Emanuel, Evercore ISI. 00:00:34 Speaker 5: With us, I got eight ways to go to start this off. 00:00:36 Speaker 6: And I'm going to start with ECB raising rates, this country, the Damien Sassour world raising rates, the United States of America raising rates, and London just said no. The city just said no. The Bank of England just said no. The dynamics now hearken to tensions of long ago. Should equity investors be worried about these new tensions? 00:00:59 Speaker 5: Well, look, the data tells a story. 00:01:04 Speaker 7: When global central banks are hiking, stocks have a more difficult time. The bull doesn't die, and we don't think it dies now. But the road ahead is bumpy. And look, we've had convergence, divergence around central bank trajectories for a very long time now. And it's more rare that like a Japan and the U.S. would be on the same trajectory. 00:01:31 Speaker 5: Is this a different Thursday morning for the big banks of America? 00:01:36 Speaker 8: It is. 00:01:36 Speaker 6: It is. 00:01:38 Speaker 7: And if you actually look at it, you know, the big banks outperformed massively in until several weeks ago and have been correcting because, frankly, when you look at trading volumes, they've been off. But again, when we think about where the Fed is taking us, as we heard at the top of the hour, credibility has been restored and you cut off the concept Of six or seven percent on a 10 year yield, which clients had been discussing with us. 00:02:14 Speaker 5: Over the last. 00:02:14 Speaker 1: How did that happen? 00:02:15 Speaker 9: Why is that the case? 00:02:16 Speaker 7: It just, you know, fear that they wouldn't, you know, really address the concept of the two percent inflation target. And we're here and we're and he's serious. 00:02:29 Speaker 8: So, again, we've got the market futures equity futures trading up this morning. Is that a reflection of, OK, we have a little bit more confidence in this. 00:02:36 Speaker 9: Fed, do you think? 00:02:38 Speaker 5: Yeah, absolutely. 00:02:39 Speaker 7: And so, again, for us, the most important feed-through for the last number of months has been the 10-year yield. Oil pressuring the 10-year yield. 10-year yield pressuring the ability for hyperscalers to issue debt. You've sort of got the release valve here. That's why stocks are doing better. That's why long-end yields are lower. 00:03:02 Speaker 5: Right. 00:03:03 Speaker 9: Looking at Brent, Tom, sitting right at $ 100 a barrel. 00:03:05 Speaker 5: It's come back. This is very important, folks. 00:03:07 Speaker 6: I think this is my two cents, folks, worth not even one cent, is that a lot of the move this morning is for the oil pullback, and that's the Saudi news. 00:03:17 Speaker 5: On the pipeline. 00:03:17 Speaker 9: Yeah, yep. 00:03:18 Speaker 5: You know, it's a jumble. 00:03:19 Speaker 6: Like I said, it's a swirl. Okay, thanks for emailing in. Barack Hurwitz, Michael Chu, and Stephen Vandozzi email in and say, start the interview on the acclaimed Julian Emanuel earnings report that those three guys do all the work on. Are we going to have a redux of the last earnings season, Owise One? 00:03:37 Speaker 7: No, we're not going to because think about it. We're in the 40s, maybe close to 50% year-on-year growth last quarter. 00:03:45 Speaker 5: So that was peak. I'm sorry, split the difference. 18%? So big. 00:03:52 Speaker 7: Look, it's going to be another amazing quarter, but that was peak. rate of growth and peak surprise. And that's one of the reasons the market has been as choppy as it's been for the last month or so, is because investors are digesting the concept that you've reached peak, but they're transitioning to the message that even if that was peak, we're still at a fantastic earnings-driven growth trajectory into 2027. 00:04:20 Speaker 8: So can equity markets perform here if your 2027 outlook is a more pedestrian low double digit kind of earnings that is still by historical standards, excellent, but relative to what we've seen this year, Difficult? 00:04:36 Speaker 9: Can the market perform in that kind of outlook? 00:04:38 Speaker 7: Yes, and the reason is because we have been discounting this for months now. So in my time of being a strategist, we have never had a year like this year where we've taken our earnings numbers up as aggressively as we have, lagging the brilliance of this trajectory, but haven't changed our price target. The compression has happened. 00:05:04 Speaker 6: I want to get simple here. After the festivities yesterday, you're not selling shares into the market opening. And you're considering acquiring shares out to 2027? 00:05:15 Speaker 7: So, yeah, no, we don't think, you know, long term, the bull is intact here. OK, the volatility that we saw yesterday, the upside volatility that we're seeing today is is par for the course in September with a new Fed chair, with the start of a hiking regime and oil that's still $ 100 and midterms in two months, less than two months. 00:05:39 Speaker 6: Julian, thank you so much. Julian Emanuel, that you're sure to visit here this morning. Evercore ISI. Stay with us. 00:05:47 Speaker 5: More from Bloomberg Surveillance coming up after this. 00:05:58 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:06:03 Speaker 1: Eastern. 00:06:04 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:06:10 Speaker 6: We need to get a brief and we get it from the trenches of what retail's doing. Colin Martin joins us right now. This on fixed income is well, I saw as Ben Bernanke would call it, hockey stick moves yesterday. two-thirds of the way into the press conference. Brammer and I disagreed on the why of that, but the fact is we saw price down, yield up. 00:06:33 Speaker 5: Does it sustain? 00:06:35 Speaker 10: I don't know if it necessarily does sustain, maybe not in a significant move. I think there is more upside risk than downside risk with long-term treasury yields, but I think if we look at the 10-year last year, or yesterday rather, We saw it move down, I think, based on the Fed that the idea of the Fed hiked, you know, the credibility idea. 00:06:52 Speaker 11: And I think that was the right move. The Fed hiking. 00:06:55 Speaker 10: Rates to keep inflation expectations at bay and and to boost the credibility. I don't think they had lost credibility, but the risk was rising. But then we saw yields pick up as the press conference went on. I think due to Kevin Warsh's outlook on the economy, and he talked about the factors driving up long-term yields, they're still very much present. And a Fed rate hike or two or three won't fix that. The economy is strengthening, as Warsh mentioned. He talked about the potential crowding out from corporate bond issuance. 00:07:27 Speaker 11: So all those factors are still here. 00:07:29 Speaker 10: So we think that a Fed hike or maybe one or two more, maybe that puts a lid on long-term yields. 00:07:36 Speaker 11: But it's going to be difficult to see yields move significantly lower from here. 00:07:40 Speaker 5: So over. 00:07:41 Speaker 8: I mean, it feels like this is kind of the new normal for yields, again, 10-year, you know, around 5%. For an economy that has nominal growth of 6%, 6-plus percent, is that kind of a reasonable interest rate environment for that type of economic growth? 00:07:57 Speaker 10: Yeah, I think it's very reasonable. You know, we get all these headlines about the rise up in yields. And, you know, I worry for our clients at Schwab, a lot of times the headlines are kind of nefarious. 00:08:04 Speaker 9: Uh-oh, what's wrong? 00:08:06 Speaker 11: I don't think anything's wrong. 00:08:07 Speaker 10: And if we go back to the August 19th announcement from Treasury Secretary Besant about the upsized liquidity buybacks, I don't think this is an issue that needs to be fixed. It's indicative of a strong economy, strong nominal growth. And when you are seeing a growing economy and a Fed at neutral or below neutral, it sounds like you should see a positively sloped yield curve. So yeah, I think 5% seems pretty reasonable. 00:08:33 Speaker 6: Colin Martin with us on the redo of the bond market, chief fixed income strategist, Charles Schwab. John Writing published this moments ago from Breen Capital with all of his heritage with the Bank of England and with the Federal Reserve System, one of the very rare people that's worked for both institutions. And he calls yesterday's press conference impressive, makes very clear that this is a war, so it's figuring out how to do it. 00:08:57 Speaker 5: An all-around much improved and impressive performance. 00:09:02 Speaker 6: With that is the bond rationalization that price is down, but I'm gathering a coupon. 00:09:08 Speaker 5: Was that upset yesterday? 00:09:10 Speaker 11: I don't think so. 00:09:12 Speaker 10: On the first point, I think that it was a better press conference that we finally have a pretty clear view of how Warsh is thinking. He thinks the economy is okay, and he made it clear that monetary policy was accommodative. In terms of bond expectations and what investors should think, you're right, Tom, in that the more coupon you get, that serves as a cushion. So if you're getting 5% on a 10-year treasury, now not that we're suggesting everyone go by 10-year just yet. We actually suggest a below benchmark average duration of But a 5% coupon can really help cushion the blow if yields do rise. And that's what we're highlighting here. There's probably going to be some volatility going forward. There's ups and downs. You have to take that when you invest in the bond market, specifically longer-term bonds. But we're at a point now where the income earned can do a lot of the heavy lifting for your portfolio, can help drive total returns, and can help cushion that blow if yields do drift a little bit higher. 00:10:07 Speaker 9: Is that what you're hearing from the Schwab Clients, are they saying, I didn't know I could get 5% on a U.S. government bond. I haven't seen that in more than a decade. 00:10:18 Speaker 8: I mean, are you starting to get the inflow of calls to your advisor saying, maybe I should be buying some bonds here? 00:10:23 Speaker 11: We're getting closer, and it's funny. 00:10:25 Speaker 10: I mean, 5% really is that psychological barrier, and we're starting to get that. We're hearing from our wealth advisors at Schwab, hey, is now the time? 00:10:32 Speaker 11: Which is good. 00:10:33 Speaker 10: We want our clients engaged and interested. What we find more, though, is you hear the idea of a potential, not even a potential, the Fed hiked rates with the potential for more. That can be good for things like money market funds. So we know a lot of investors, whether it's at Schwab or elsewhere, sitting and waiting, saying, well, if the Fed's going to hike rates, why not wait in cash? And we tell them, well, you can get 100 basis points or more if you go just a little bit further out. So why wait for the Fed to hike? Because we don't really know how much they'll end up hiking when all is said and done. 00:11:06 Speaker 6: The blue button, the Detroit Lions blue button, I can press that. Colin, you know, this is the joy of surveillance, folks. We just had John Wrighty construct it. David Rosenberg up in Toronto published this 30 seconds ago, and he is absolutely blistering on the press conference. He says a truly head-scratching worship press conference. And he notes, as I do, Paul, what broke the price was Saudi and oil when we went from 109, 107. 00:11:31 Speaker 5: Where are we now in Brent, Paul? 00:11:34 Speaker 9: Brent 102, 103. 00:11:35 Speaker 10: 102. 00:11:35 Speaker 5: We're down $ 7 on Brent crude. I'm sorry. 00:11:39 Speaker 6: I think that's got a lot to do with the toned futures up 64. I want you to talk about Schwab clients. They're going to get their statement and it's priced down and fixed income. My guess is they won't panic. But how many months can that go on before your phone line is burning up? 00:11:57 Speaker 11: No, it is a challenge. 00:11:58 Speaker 10: I mean, just yesterday, you know, we do a lot of client events and one of the submitted questions was, I look at my account. I see the value of my bonds going down daily. And so a lot of it's education and messaging. And that's why we like to have those conversations and explain the why and explain that, listen, there is a secondary market for bonds. If you hold to maturity, you're going to get that stated yield. And not that we can undo those declines that you saw, but focus on that yield. 00:12:23 Speaker 12: Okay. 00:12:23 Speaker 5: I got to ask a Paul Sweeney question because I've run out of ideas. So do you go to credit? Do you go to full faith? Do you go to high yield? What Sweeney flavor of bonds do you recommend? 00:12:34 Speaker 11: Well, I'll say all the above. 00:12:36 Speaker 5: Oh, come on. 00:12:37 Speaker 11: It's a Lizanne Saunders answer. 00:12:40 Speaker 10: We have a favorable outlook on credit, both investment grade and high yield. 00:12:44 Speaker 13: Okay. 00:12:44 Speaker 5: I got to go to Barr here because the Orioles won. Did you see when we came in? 00:12:48 Speaker 2: Yep. 00:12:49 Speaker 6: Orioles 7, Mets 1. It's on the top of the top news page worldwide. 00:12:53 Speaker 5: Why is that for Bloomberg News? I don't know. 00:12:56 Speaker 6: I have no idea why that is. I just want to say this. I can't believe I'm saying it. I think, John, the first Tito's and Tang here this morning was great. 00:13:06 Speaker 5: Single best chart yesterday, Kevin Gordon. 00:13:11 Speaker 6: In the entire zeitgeist and all sorts of, when I retweeted it out, all sorts of fancy people picked it up. 00:13:18 Speaker 5: The Fed story is the economy is going to be fine. 00:13:21 Speaker 9: Okay. 00:13:22 Speaker 6: And Kevin had the clearest presentation of that yesterday of anybody. Are you in speaking terms with him? 00:13:28 Speaker 9: No, of course. 00:13:29 Speaker 10: I was going to say, shout out Schwab Center for Financial Research. What was that chart, though? It was a. 00:13:33 Speaker 6: Chart of how many Fed gurus are guessing the economy will be fine. And the answer is, it's now better than it was in 2021 with stimulus. 00:13:43 Speaker 5: I can't believe I'm saying it. Don't look, Kevin. I know he's not listening. He never listens, but that's fine. Colin Martin, thank you so much. Greatly appreciate it. Chief Fixed Income Strategist, Charles Schwab. Stay with us. More from Bloomberg Surveillance coming up after this. 00:14:06 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:14:12 Speaker 1: Eastern. 00:14:13 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. 00:14:17 Speaker 1: Or watch us live on YouTube. 00:14:19 Speaker 5: Finally in with us, Savita Subramanian, Bank of America. 00:14:22 Speaker 6: Security's fabulous quantitative study wrapped around equity strategies. 00:14:29 Speaker 5: Jill Carey Hall. There's like 47 people in her group. 00:14:31 Speaker 12: I know. 00:14:32 Speaker 9: I know. 00:14:32 Speaker 5: What do you do with all those people there? Do you just go to lunch and Zoom meetings? 00:14:39 Speaker 7: No. 00:14:39 Speaker 13: I mean, we're all cranking. 00:14:40 Speaker 3: And we're doing things faster now with AI. 00:14:43 Speaker 13: You're doing very AI. Yeah. 00:14:45 Speaker 5: So you've been very... Let's make this clear. You've been cautious. Yes. Yes. But you've been in the market participating, right? 00:14:54 Speaker 13: Yeah, absolutely. 00:14:55 Speaker 3: I think there's parts of the S & P that look amazing. 00:14:58 Speaker 6: Can you readjust the MAG-7 now after the Fed meeting yesterday? The hyperscaler debt where you've got Mark Cabana working for it. 00:15:05 Speaker 5: That's a good start. 00:15:06 Speaker 13: No, he doesn't work for me. I work for him. 00:15:08 Speaker 6: But can you say tech is still a place to be? 00:15:13 Speaker 3: Look, I think tech has gotten really interesting and we've seen a massive rotation. 00:15:18 Speaker 13: So we have this thesis that, you know, the hyperscalers. 00:15:21 Speaker 3: We're going to derate and price in the fact that they're getting a little bit more levered. 00:15:27 Speaker 13: They're getting more capital intensive. 00:15:29 Speaker 3: They're less asset late, and they spend less on R & D and buybacks and more on physical capbacks, which is generally a reason to expect multiple compression. And we got that. We also got a big earnings surprise. So I think what we've seen this year is sort of what we were expecting but better returns than what we were expecting at the beginning of the year. What I worry about from here Less so maybe for tech, maybe semis. I think they're talking about this is just margin compression next year. And what's interesting is, again, when you look at trends in earnings forecasts, we're seeing margin expansion expectations for 2027. And I've worried about margins before and I've been wrong. 00:16:18 Speaker 13: Companies have been able to maintain them. 00:16:20 Speaker 3: But I think now what we're in is this environment where you want to build, you want to build, and there's a shortage of products. There's complicated structures. You need this whole supply chain. Things are unavailable. Some of these are getting more expensive. 00:16:34 Speaker 13: That, to me, is margins. That's where the risk is. 00:16:37 Speaker 8: This market, the performance we've seen this year and maybe for a little bit longer, has been really driven by incredible earnings growth. 00:16:44 Speaker 12: Yes. 00:16:44 Speaker 9: I mean, just amazing. 00:16:46 Speaker 13: Strong earnings. 00:16:46 Speaker 8: So being a former analyst myself, if nothing else, the comps have to be tougher in 2027. 00:16:51 Speaker 9: How does the market adjust to that, do you think? 00:16:54 Speaker 13: So that's the question. 00:16:55 Speaker 3: Is a big earnings slowdown going to drive negative returns or just kind of meh returns? 00:17:02 Speaker 13: And our view is. 00:17:04 Speaker 3: The earnings slowdown itself is almost inevitable. You can't beat 50% growth or 35% or whatever we're tracking. But if you think about next year, the slowdown that we're forecasting is from 30% to 15%. 00:17:17 Speaker 2: Yep. 00:17:20 Speaker 3: And 15 is still a pretty healthy growth rate. So I think that's the question is, where do you see the biggest slowdown? 00:17:29 Speaker 6: I need to interrupt here. Bank of England, Sterling moves finally off of the announcement. They will not raise rates. Yes, we saw a little move in Sterling, but now it's more tangible. 00:17:40 Speaker 5: I have Cable. This is U.S. 00:17:43 Speaker 6: And Sterling, weaker now, testing a 133.63%. And Francine taught me how to look at Euro sterling, showing Euro. 00:17:51 Speaker 5: Strength as well. 00:17:52 Speaker 6: But we now have, for our European audience, we've now got a little bit of a move there. 00:17:57 Speaker 5: Paul Sweeney with Savita Subramanian. 00:17:59 Speaker 9: Savita, how do stocks perform? 00:18:01 Speaker 8: I guess what a lot of folks are telling us now, you better get used to these higher yields. 00:18:05 Speaker 9: Out there, the 10-year, maybe 5%. If that's, in fact, the case, how do stocks perform in that kind of environment? 00:18:12 Speaker 13: Yeah, I mean, it's interesting. 00:18:13 Speaker 3: I think that we've never been that worried about 5% as some kind of red line, even though it feels like that's the point of pain in the market. I think what's interesting is that when you look at large companies... even these tech companies that are levering up have locked in long-dated, generally low fixed-rate debt. So it's not necessarily anathema. 00:18:41 Speaker 13: I mean, back in 2007, I think half. 00:18:43 Speaker 3: Of the S & P 500 debt was floating. Today, it's 80% fixed. So I think that's the good news. Small caps might have a harder time. They've got more refinancing risk. some areas of leverage you have to be selective there. The consumer I think you know what we're seeing now is oil prices elevated and short rates moving higher. 00:19:06 Speaker 13: I don't know if that's enough. 00:19:07 Speaker 3: To slow down the consumer because we've had what I think has also been a surprise this year is that we talked about this at the beginning of the year. You're seeing a lot of benefits to lower income consumers kick in despite the fact that oil prices and gas prices are so high. 00:19:24 Speaker 6: You are more qualified with your call, which is a collared trade, folks, down to 7,400 SBX. And maybe we go up a little bit, like 7,800. 00:19:33 Speaker 5: It's a very tight range. 00:19:35 Speaker 6: The drama on Wall Street now, once again, generational, they rebrand it and all that, is call writing, where I own a portfolio and I sell calls against it and bring in income to enhance my dividend incomes. And if I get a pop, which you're not calling for, the equities can be called away. But if I have a collared trade, this can be a very successful strategy. Do you agree that call writing right now is a premium builder for people? 00:20:05 Speaker 3: I mean, you know, I'm not a derivatives expert, but I think that at some level. 00:20:09 Speaker 5: Uh, Excuse me. I think it's three degrees in mathematics. 00:20:13 Speaker 9: Thank you. 00:20:14 Speaker 5: Continue with the charade. That was for compliance, folks. 00:20:19 Speaker 3: But look, I think that, you know, we're... I don't know if the market remains in a very tight range. I wouldn't be surprised by big swings up and down. But I think the run rate for S & P returns from here is lower than what. 00:20:36 Speaker 13: We've enjoyed over the last 10 years. Yeah, so. 00:20:39 Speaker 3: You know, I think yield is very important. There's not a lot of dividend yield in the S & P, so you've got to get your yield elsewhere. One of my favorite areas, and I think where I would be sort of shifting allocations aggressively, and we've liked this for a few years, is large cap value. I think that's one area of the market that is under-owned, boring, nobody wants to talk about it. 00:21:02 Speaker 9: What's an example of a large cap value stock? 00:21:04 Speaker 13: So it's constantly changing. 00:21:06 Speaker 3: So large value we think of as financials, energy, and those are sectors that I think look pretty good. Large Financials and energy look clean, capital discipline, like kind of the opposite of tech. They've de-levered rather than levered up. But you're also getting some of the bombed out tech companies floating into the value index. 00:21:29 Speaker 13: So I think it's. 00:21:29 Speaker 3: Really a good place to hunt for cheap growth and quality. 00:21:36 Speaker 9: What is the AI call for you guys these days? It seems like a change. It's not on a quarterly or yearly, almost like a weekly basis. 00:21:44 Speaker 8: Right now we've got concerns about from some of these AI leaders themselves. 00:21:48 Speaker 9: Talking about the growth. So how do you guys think about that broadly defined? 00:21:51 Speaker 13: I think that it's. 00:21:53 Speaker 3: I mean, I'm not, calling, I'm not an apocalypse doomsayer, but I think that it might take longer than what everyone's expecting. 00:22:03 Speaker 13: And there might be little hiccups along the way. So, you know, when you think about. 00:22:07 Speaker 3: Building physical equipment like plant and property, You know, renovating your house always costs more and takes longer than what you think it will. And I think that's the same thing for this build cycle. So, yes, we think that it's a big priority. It's not going to stop. It's not going to get pared back. But it might just take longer and cost. 00:22:29 Speaker 5: A lot more. Savita, thank you so much. 00:22:31 Speaker 6: Savita Subramanian, driving all of equity strategy, the Bank of America. 00:22:38 Speaker 5: Stay with us. More from Bloomberg Surveillance coming up after this. 00:22:49 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:22:55 Speaker 1: Eastern. 00:22:55 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. 00:22:59 Speaker 1: Or watch us live on YouTube. 00:23:02 Speaker 5: It's going to be a one-hour interview. 00:23:03 Speaker 6: Latrin Anjithan with this ECRI, Economic Cycle Research Institute. 00:23:07 Speaker 5: They do it differently. He nailed the continued strength of the U.S. economy. 00:23:12 Speaker 6: And nailed this idea of inflation. Your note written yesterday before the meeting was absolutely blistering. Is this as good as it gets for the American economy? 00:23:24 Speaker 2: Yeah, it's not bad. I think we're flirting here with... dare I say, an inflationary boom. That's what you've been feeling, right? You've got great growth and you've got inflation that was, it's more than energy, right? So all our inflation cycle stuff kicked up before the hostilities in Iran. So we've got growth and inflation. Your nominal numbers blow out. 00:23:47 Speaker 12: Right. 00:23:48 Speaker 2: Okay. Feels pretty good, right? But you got 8% last quarter. You got 8% nominal. You got 1.5% real. All that stuff in there is inflation. So let's see what happens. 00:24:00 Speaker 12: Okay. 00:24:00 Speaker 6: Yesterday, I brought this up live, and Brambo and I were going back and forth on it. She didn't agree with me. Kevin Gordon had the beautiful chart here. That entire meeting is predicated out to 2029. Somehow the American economy doesn't slow down. 00:24:17 Speaker 5: You guys have been doing this since the 1930s. Yeah, I can't. At some point, nominal GDP comes in. 00:24:23 Speaker 2: Yeah, yeah, yeah. And then the squeeze happens, right? So either your growth falls off and your inflation is still high, so margins get squeezed, or inflation comes down, which means your profits aren't what they used to be. So this squeeze happens at some point. Look, trees don't grow to the sky, right? I can't see the 2029. I can look out a few quarters, and I could say it's holding up. There's no huge downturn. There's no big bump in the road here. And we have inflation still moving to the upside. Energy prices notwithstanding, the long end coming down a little bit because he hiked notwithstanding. Underlying cyclical direction of inflation, the trend... Mr. Warsh emphasized the trend. My only gripe with him is he's looking at the coincident data. I'm looking at the forward data. The trend in the forward data remains up. So... One and done? No. Now maybe everybody's adjusted to two and done? 00:25:30 Speaker 5: No. 00:25:31 Speaker 2: I think the history shows us they tend to do more than that. 00:25:35 Speaker 8: So, again, that's kind of where I wanted to go here. I mean, historically, it's not one and done. Historically, Fed does. two, three, maybe even more. 00:25:45 Speaker 9: Could it be more? 00:25:46 Speaker 5: Oh, yeah. 00:25:47 Speaker 2: Everything I'm saying is, yeah, totally. You should adjust to more. And when you look at where's the gap, right? I think people have come around to the economy's doing okay, despite the K, which is real. I just don't want to ignore the K. But I think it's the inflation expectations component. That's been pretty chill. relatively speaking. And that's where I think there's some opportunity for movement. 00:26:17 Speaker 8: The economy running, I guess you call it hot, right? 00:26:24 Speaker 2: Yeah, it's hot. 00:26:26 Speaker 9: How much of that is AI? 00:26:27 Speaker 8: Because that's one of the questions I have because I'm not sure of the answer. It feels like it's meaningfully contributing to economic growth and I'm not sure how long that. 00:26:37 Speaker 9: AI investment stage continues. How do you guys think about that? 00:26:42 Speaker 2: Look, it's all around us. But we have the solo paradox and the AI version of it, which is it's everywhere except in the productivity statistics, which have come down. Everybody got excited because productivity edged up towards 3%. Now it's closer to 2%. So it's not there, which gives you some inflation issue. You don't have a structural... Inflation break. I know Warsh wants that, but he recognizes he doesn't have that. And so when he's looking at the coincident data, he sees the trend is in the wrong direction. I'm telling you, we look at the forward trends, it's going to continue to go that way. 00:27:21 Speaker 5: One final question. 00:27:22 Speaker 6: Within the massive heritage of the economic cycle research, full disclosure, folks, my grandfather subscribed to ECRI. 00:27:31 Speaker 5: I remember seeing it. You know, they're in the smoke. Nice taste. His study. What happens after Trump? 00:27:39 Speaker 2: The cycle stays. Look, there are personalities. And for as big of a personality Trump is, he's not the first president to say lower interest rates and do this and do that and spend more money or whatever. I mean, that's what they all do. And there are variations on it. But at the end of the day, in a free market oriented economy, you're going to have Business cycles. As far as I can see, I've looked for centuries in the U.S., and I've looked around the world for almost a century, and the cycles persist. And right now, there's two big cycles, growth and inflation. They're both to the upside. So I'm leaning a little bit more towards inflationary boom, however you want to express that in your life. 00:28:22 Speaker 5: Thank you. Lachlan Atchithan with us. The Economic Cycle Research Institute. Stay with us. More from Bloomberg Surveillance coming up after this. 00:28:40 Speaker 4: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. 00:28:45 Speaker 1: Eastern. 00:28:46 Speaker 4: Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. 00:28:52 Speaker 6: This is an honor and extended conversation here to brief you in economics, finance, investment and all. Robert Hormat's with us. But first, Bloomberg Surveillance and this important conversation brought to you by Eisner Amper. Eisner Amper, they provide assurance, tax outsourcing, and advisory services to businesses that need more than a generalist. Whatever the challenge, we have a team for it. EisnerAmper.com. And we thank them for their support of all of our conversations. First, Bob, everybody wants to know, across the arc from the Fletcher School to Goldman Sachs, I mean, he won an award from the French Legion of Honor. 00:29:31 Speaker 5: I mean, they gave him a baguette. It was fresh. How are you doing? 00:29:36 Speaker 12: I am doing very well. Had a very good summer. Lots going on. I thought it would be. 00:29:40 Speaker 5: A quiet summer. 00:29:41 Speaker 2: I'll say so. 00:29:42 Speaker 5: What do we do? 00:29:43 Speaker 6: I mean, I haven't heard from Mr. Rubio, I think, in 90 days, I'm guessing. What does our diplomacy look like after President Trump? 00:29:52 Speaker 12: Well, our diplomacy looks, if you look at it in a very simple way... Like, we are weakening our alliances across the board at a time when we should be strengthening them if we want to strengthen our hand. 00:30:05 Speaker 5: Do we have the national ability to do that? 00:30:08 Speaker 6: In January, let's say, after the inauguration, whether Republican or Democrat, are you optimistic we could heal our diplomatic process? 00:30:19 Speaker 12: Not bring it back to where it was. I think you have two things going on. The Chinese are strengthening their relationships now. With Russia, with Iran, with Ukraine and the global south, we're weakening our relationships with the countries that were part of our bulwark in dealing with the Soviets during the Cold War, and we're going to be needing them to deal with the competition from China over the next 20 years. So they're moving in the direction of more solidarity among their allies. We're moving toward greater weakness now. among our allies, and I think it's a very bad mix and a very bad prognostication for the future. Not something I look forward to. 00:31:01 Speaker 8: Given that background, we have President Xi coming to the United States next week for a state visit with President Trump. 00:31:08 Speaker 9: How do you view this visit? What should be our goals, our objectives? How do you think this will play out? 00:31:12 Speaker 12: Well, I'm very glad he's coming. I'm very glad they're talking. I think the key issue, given all that's going on in the last couple of weeks, is do they address in a credible way the issue of AI? And that's not going to solve it. It's not going to be one big deal. But as you recall during the Cold War, an existential Cold War, where we were really almost at loggerheads on the Cuban Missile Crisis, we actually were able to find certain areas where we understood that we needed to work together because if we did not, You could have disaster for both sides. That was arms control and arms limitation. My view with China is that we're in a very competitive environment on AI for sure. We're not going to slow down competition in terms of new models they're going to develop. But we do need to find ways of minimizing risk, minimizing risk with respect to rogue actors. Chinese are worried about that. So are we. And minimizing risk with respect to autonomous actors. activities by AI as the kind we've seen that can be quite disastrous for both sides. So with all the intense competition during the Cold War, we could work together on certain things. On China, we ought to work together as well on the high risk factors that both sides are alarmed understandably about. 00:32:41 Speaker 6: Robert Hormats with us, folks, an extended conversation. We welcome all of you across America. internationally, and particularly this morning on Sirius XM Channel 121, the way you choose to listen to us, from Vancouver out to the area of Nova Scotia. Mark Carney, Council on Foreign Relations. Bob Hormats taught me everything about foreign relations. Have you spoken with the Prime Minister of Canada about the fact they will sing the Canadian national anthem, O Canada, at the Buffalo Bills football game tonight? 00:33:18 Speaker 5: How screwed up is this, Bob Hormats? 00:33:20 Speaker 12: I have not talked to him about it recently, about that. I have talked to him, of course, about a lot of things. 00:33:26 Speaker 6: What do our American listeners need to know about the Prime Minister of Canada? 00:33:31 Speaker 12: Mark Carney is a very able guy, very smart guy, very committed to U.S. 00:33:36 Speaker 5: Relations. 00:33:37 Speaker 12: I mean, this is a guy who lived here. We worked next to one another, literally next to one another at Goldman Sachs for several years. He wants to work with the United States. And I think the rupture in relations, as he's put it, is something deeply saddening to him and troublesome to us since it's our major partner. They were the country... that protected our hostages in Iran. They stood with us at Normandy. They were critically important to us during the Cold War. NORAD wouldn't work without Canada. It's our first line of defense vis-a-vis the Soviet Union, for instance, it was, and now against Russia. So it's a strategically important, as well as obviously an economic important, ally. And when you can't work with China, what signal does it give to the rest of our allies? 00:34:25 Speaker 5: The only positive thing I see, Paul, is the. 00:34:31 Speaker 6: Montreal Canadiens took Chris Kreider. That's the only thing I see constructive here. Paul Sweeney with Robert Hormats of Kissinger Associates. 00:34:39 Speaker 8: Bob, we're now, boy, seven months plus in Iran. Given your experience in five different American administrations, How do we get out of this? How do we kind of minimize the damage here? What's your view? 00:34:55 Speaker 12: I think we need a longer-term strategy. First of all, we've got to deal with the divisions at home. And when everyone sees our divisions at home, it makes us look ineffective abroad. Second, we need to develop much stronger strategic and integrative ties economically and politically. and militarily with our allies. The military part actually is working pretty well. The Pentagon is working with a lot of other countries. But in general, that's critical. The third is we have to figure out some endgame with Iran. I think keeping economic pressure and intensifying economic pressure on Iran is part of the game, because we're not going to put troops there. I mean, I've been to Iran. I've seen the terrain. You're not going to put American troops there. 00:35:42 Speaker 1: It's hostile. 00:35:44 Speaker 12: Politically and its hostile geologically, and then put pressure on Russia, on Ukraine, because Russia's not only bombing Ukraine, killing civilians, it's also now beginning to threaten these drones on the Polish border. It really has very aggressive tendencies, and unless you put maximum economic pressure on them, on their energy and on them economically, you're not going to bring Putin to the conference table for a rational dialogue and a rational answer. And that sends a lot of bad signals to our allies. 00:36:24 Speaker 5: Okay, so you're going to go to Boston. You're going to go up to your Tufts University, Fletcher School. They're going to sit there. You, Stravitas, will be there, a bunch of other muckety-mucks. 00:36:33 Speaker 6: And there'll be some 28-year-old kid who's the smartest person in the world on drones. What do you ask the drone experts, Bob Hormats, about this. 00:36:42 Speaker 5: Threat we all face? 00:36:45 Speaker 2: I think you. 00:36:47 Speaker 12: Do what you need to do, which is to continue to improve the quality and the precision and effectiveness of drones. We're doing that. 00:36:56 Speaker 5: We need to lead in the technology. 00:36:58 Speaker 12: We certainly need to lead in the technology area. We certainly need to lead in the AI area. But that's sort of a given. The fact is that on AI, the Chinese are going to keep competing with us. And so what we have to do on AI is recognize that with open weighting and the open models, the competition is going to continue and lots of other countries are going to get access to that, particularly open weight, because they can see the interstices of how the thing works. So what we need to do, I think, is work on defensive measures in a similar way to what we've done in the past to figure out how to deal with the risk to our systems, the risk of biotech terrorism, a whole range of things. And we and China both have an interest in doing that. We're going to compete like hell. on the technology, but we also have to work together on the risk factor, because they're the same. They don't want a disruption of their system. We don't want a disruption of our system, and we don't want these independent actors, autonomous actors. 00:38:10 Speaker 6: I got one more thing here, Paul. I want you to squeeze in one more. Paul Sweeney with Robert Hormats, Ambassador Hormats. 00:38:17 Speaker 8: Tom started the discussion by referencing Marco Rubio, our Secretary of State, and I believe he's still the Interim National Security Advisor Almost a non-presence in Ukraine, almost a non-presence in the Middle East, almost a non-presence in Iran. It's all President Trump and his acts of diplomacy. How much damage, if any, is being done to our State Department, our diplomacy worldwide? 00:38:44 Speaker 12: Well, morale there is not good. It's not good at all because traditionally, having worked for Kissinger, who would have been proactive on all three of these things, either as Secretary of State or before that when he was National Security Advisor, you expect the State Department to be the lead actor. Moreover, because they've had the experience and their people have had the experience. When you get people who are totally out of that sphere, who have been real estate negotiators, they may be very good negotiators, but they've been negotiating in a wholly different sphere and they don't have the historic background. And when you negotiate in the Middle East and when you negotiate with the Russians, you need to know the history and the culture to understand how to negotiate. It's critically important, that knowledge. 00:39:31 Speaker 6: I got three minutes here. This is so important. I'm honored to do this with you, Bob Hormats, with all we've done over the years. So I got a string of populism within the modern sphere. 00:39:42 Speaker 5: From Huey Long, 1935 to. 00:39:45 Speaker 6: Through McCarthyism, maybe George Wallace, maybe some Nixonian Spiro T. Agnew stuff as well. Maybe I'm out to the new populism today. How do you perceive America? after the final term of Donald Trump? Is it a populism event that drifts away? One word they use is it fractures into distillate parts of populism. What do we look like after Trump? Forgetting about warfare, Republican, Democrat. 00:40:16 Speaker 12: That's very hard to predict. I would say that you have to do what Eisenhower did after World War II. He assembled this so-called solarium group to look with people like George Kennan and others at the strategic interests of the United States. What are the strategic interests of the United States? Let's put everything aside, all the blame, all the finger-pointing, and say, what do. 00:40:39 Speaker 5: We need to do? 00:40:40 Speaker 12: And what do we need to do? We need to make sure that our internal system is functional and effective. That's one, because if it's not, it's a very bad example to the rest. Second, we need to find ways of working again with our allies. It won't be the same kind of alliance because we want Europe to play a greater role economically, and they're on the front line, and they know it. So that change in NATO that Trump helped to instigate actually is a good one. The alliance will be more balanced with Europe playing a greater role. Much the same will be true in Asia, but you still need that alliance. And third, you need to figure out ways of putting more pressure on the countries that are really adverse to our interests. Russia being one, China in some ways, but we also can find ways. of working with China, to have a break with China. It may sound good, but there's some areas where we have common interests and we need to pursue those with good negotiators with a lot of experience over a sustained period of time. 00:41:50 Speaker 6: Michael Barr emails in, he says, would you ask Robert Hormats at 79, what is he doing every day to be this sharp and this healthy? 00:41:59 Speaker 5: What's the Hormats secret? 00:42:01 Speaker 12: Well, I think keeping an interest in the issues is important. I spent a lot of time with people in the government now, people I've worked with. I teach at Yale. Teach one course at Yale. That keeps me students. 00:42:14 Speaker 5: Is AI ruin the students of Yale? 00:42:17 Speaker 12: No, actually, we figured out a way of integrating their their initiatives on their own. 00:42:22 Speaker 5: Are they all Democrats? 00:42:23 Speaker 12: No, no, they're not. Not only are they not Democrats or some are some are both, but we have a lot of foreign students. So we have the ability to attract foreign students, which is critically important. We need to also keep up with a policy of getting the best and the brightest from around the world. That's critically important. Our whole history has been based on that. We're not doing it now. We get the best and the brightest. It helps us in the technology and other areas, but keeping an interest in the key issues, and keeping your eye on the ball. What can you do using your experience? What can I do using my experience to help deal with the current issues and don't get bogged down in the past? Look to the past to figure out, does that have any answers for the future? 00:43:09 Speaker 6: Here's your assignment because you're slacking off at 79. You need to write a redo or at least an epilogue, prologue of The Price of Liberty. Because this nation, Bob and Romance, is so messed up versus when you wrote that classic book. 00:43:24 Speaker 5: I mean, the movie writes Paul. DiCaprio? 00:43:26 Speaker 12: Oh, sure. 00:43:27 Speaker 5: It was unbelievable. Robert Hormez, thank you so much. 00:43:30 Speaker 12: I'm actually doing an e-history of what I've done. 00:43:33 Speaker 2: Great. 00:43:34 Speaker 5: I will love to see that. 00:43:36 Speaker 12: Thank you. 00:43:37 Speaker 5: Robert Hermes, thank you so much. 00:43:38 Speaker 4: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. 00:44:04 Speaker 12: Thank you.