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
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Jim Kron of Morgan Stanley,
Speaker 2: saying he's not bearish but skeptical, writes in this inflation
Speaker 2: is creeping KaiA and puts further scrutiny on the fedsibility
Speaker 2: to cut interest rates. Tensions in the Middle East also
Speaker 2: create a potential for a more systemic type of risk.
Speaker 2: We can't forget that a bull in a candy shop
Speaker 2: is still just a bull, and bulls can be unpredictable.
Speaker 2: Jim joins us. Now for more, Jim, welcome to the program.
Speaker 2: Let's run with that analogy. If you will, Bill in
Speaker 2: a candy shelf, do you think we're a little too
Speaker 2: high on sugar right now.
Speaker 1: I think that's a good way to put it.
Speaker 3: I do think of it as a little bit of
Speaker 3: a sugar high. My concern is that we're pulling forward
Speaker 3: twenty twenty five earnings right now, and we're painting an
Speaker 3: almost near perfect picture going into the future. It's not
Speaker 3: that i'mbarrassed, it's not that I'm negative on the markets broadly.
Speaker 3: I just think that we're getting a lot happening really
Speaker 3: really quickly. In other words, we're getting this soft landing
Speaker 3: that everybody's been projecting, but we're getting it very very fast.
Speaker 3: Valuations reflect that, right, So if you look at two
Speaker 3: hundred and eighty dollars earnings, let's say for twenty twenty five,
Speaker 3: which is roughly consensus, you assign a twenty one or
Speaker 3: twenty two multiple to that, you're going to get an
Speaker 3: SMP somewhere close to around six thousand, and that's about.
Speaker 1: Where we are today.
Speaker 3: But if you take that valuation down a little bit
Speaker 3: and you get a little bit more normalized, to say
Speaker 3: maybe a twenty pe on those two hundred and eighty
Speaker 3: dollars earnings, then the sp is fit fifty six hundred, right.
Speaker 1: So it's lower than where it is today.
Speaker 3: It's not a disaster, but net we're talking about a
Speaker 3: few percentage points in either direction. I don't necessarily think
Speaker 3: that we're going to be in a very strong bull
Speaker 3: run from these levels or from these valuations. So that's
Speaker 3: where my skepticism is. I'm not saying that things aren't
Speaker 3: okay consumers strong, retail sales was good, you know, inflation,
Speaker 3: earnings GDI numbers are all good, so incomes are.
Speaker 1: Good, so people can keep spending.
Speaker 3: What I'm saying is how much can it continue at
Speaker 3: this rate of change.
Speaker 2: Well, let's take the valuation piece of it, Jim. This
Speaker 2: is what Cameron Dawson, a New Edge said over the weekend.
Speaker 2: You could have argued at any point over the last
Speaker 2: year the stocks were expensive. I'm sure you'd agree with that,
Speaker 2: but there needs to be a catalyst to change this
Speaker 2: much to ever higher multipoise multiples. It feels like, Jim,
Speaker 2: we're in this virtuous cycle right now looking for a
Speaker 2: disruptor to it. And Tilson's Slock of Apollo spoke to
Speaker 2: the same thing. The Fed cutting rates. They've got a
Speaker 2: bus to cut even more so, we've got a dubbish fed.
Speaker 2: We've got high stocks and high home prices. Private financing
Speaker 2: is wide open, as you can see, continue support from
Speaker 2: fiscal plans, low debt, servicing costs that are locked in
Speaker 2: for buzs, corporates and households as well. Jim, that's just
Speaker 2: fading on itself. So the outlook just keeps on improving. Now, Jim,
Speaker 2: from your perspective, do you have anything in mind that
Speaker 2: could disrupt that process at the moment, because that's the
Speaker 2: reason the reasons people are so bullish right now.
Speaker 3: Yeah, and I agree with those reasons, and it's why
Speaker 3: we maintain a bullish tilt in our portfolios as well,
Speaker 3: you know, moving more towards neutrals, not moving towards negative
Speaker 3: because we do think that there are some potential factors,
Speaker 3: you know, clearly tensions in the Middle East to flare
Speaker 3: up there, we could get some election uncertainty or some
Speaker 3: election volatility around this, But ultimately what we would need
Speaker 3: to see is damage done to the consumer and arise
Speaker 3: in the unemployment rate.
Speaker 1: So I think some of the.
Speaker 3: Damage that could come is that if we start to
Speaker 3: see some weakening of the labor market. Now we're not
Speaker 3: seeing signs of that yet, but we all know that
Speaker 3: the non farm payroll data has been heavily revised or
Speaker 3: over time, and if we do start to see that
Speaker 3: in a period where we start to see some margins
Speaker 3: starting to shrink across corporate America, that could create a
Speaker 3: significant or a faster move higher in the unemployment rate,
Speaker 3: and that would completely change the narrative. We're not there yet, Jonathan,
Speaker 3: and I think that's the and I think that's the
Speaker 3: most important thing to highlight. We're not there yet, but
Speaker 3: we do have to recognize that at these valuations and
Speaker 3: at these levels, that it makes it hard to have
Speaker 3: a positive surprise, and it makes it easier to have
Speaker 3: a negative surprise.
Speaker 4: One aspect of your argument is essentially kind of abnegating
Speaker 4: this idea of a cyclical tilt that you can get
Speaker 4: that rotation away from big tech and some of the
Speaker 4: arch behemoths other large stocks and really fuel this next
Speaker 4: leg of recovery. And I saw the same kind of
Speaker 4: sentiment for me Mateka over at JP Morgan. How much
Speaker 4: are you leaning against a cyclical move the idea that
Speaker 4: the equal way in the russels you've had and I have
Speaker 4: been performing.
Speaker 3: No, Actually, I mean I think it's a great question,
Speaker 3: and actually we're embracing the broadening of the markets and
Speaker 3: the cyclicals and even the defensives. So what the markets
Speaker 3: are kind of realizing right now is that this mag
Speaker 3: seven the tech in the larger cap and the growth
Speaker 3: names that are out there have done a very very
Speaker 3: good job this year, but.
Speaker 1: There may be more to the story. And this is
Speaker 1: going to be.
Speaker 3: Across the rustle, This is going to be across the
Speaker 3: broader base sectors of the markets. This is going to
Speaker 3: be across the equal way. One of the themes that
Speaker 3: we're putting forward as we move into twenty twenty five
Speaker 3: is how do you invest in what seems to be
Speaker 3: a fully valued market.
Speaker 1: You can't really play the beta. You can't just.
Speaker 3: Say, oh, well, the index is going to go up
Speaker 3: another x percent more or less. What you have to
Speaker 3: do is you have to start thinking about the different
Speaker 3: components of the markets.
Speaker 1: You have to find sectors in the markets that.
Speaker 3: Are well valued, that have lower pe multiples, good good
Speaker 3: balance sheets, good factors, good interest coverage ratios, and have
Speaker 3: some pricing powered, some controls, and you can find them
Speaker 3: in the other four hundred and ninety three stocks. And
Speaker 3: I think that's the stuff that we should be looking at.
Speaker 3: Those are the sectors. That's the management style that we
Speaker 3: need to start to move into, because I think it's
Speaker 3: going to be more about asset selection and investment selection
Speaker 3: as we move into twenty twenty five as opposed to
Speaker 3: just a target weight asset allocation into x percent equities
Speaker 3: or ex percent bonds. It's really going to matter how
Speaker 3: the constituency of your portfolio is made up, what sectors were,
Speaker 3: and what valuations.
Speaker 4: Is this a sort of one year timeframe of an
Speaker 4: adjustment and investment cycle, or do you see this as
Speaker 4: a ten year kind of timeframe, as maybe the overall
Speaker 4: index level returns don't look as great as they have traditionally.
Speaker 3: Yeah, I think this is something that probably adjusts over
Speaker 3: the next year or so, so let me call that
Speaker 3: short term. I don't think that we're always going to
Speaker 3: have this bifurcated market like we do today.
Speaker 1: I think there needs to be some coalescing and.
Speaker 3: That's where you get the broadening of the markets, where
Speaker 3: you get other sectors that haven't participated in the rally
Speaker 3: start to participate late. That's usually a late cycle thing
Speaker 3: to start to see, and then the markets tend to
Speaker 3: move in a more uniform way, beta up, beta down.
Speaker 3: So I don't see this necessarily as a long long
Speaker 3: term view, but I do say that twenty twenty five
Speaker 3: will be all about tacticals. Don't forget we're going to
Speaker 3: be talking about taxes and policy, no matter who the
Speaker 3: next president is. We're going to start talking about that
Speaker 3: on January of twenty twenty five, because that's when the
Speaker 3: decisions are going to start to get made that are
Speaker 3: going to have big influences on markets going into late
Speaker 3: twenty five and into twenty six when policies are likely
Speaker 3: to change.
Speaker 5: Jim, do you believe right now that the market is
Speaker 5: rotating into the Trump trade?
Speaker 6: Yeah?
Speaker 3: I think it is, and I think it was said,
Speaker 3: you know, nicely by Lisa earlier on the show that
Speaker 3: it's in some degree it's.
Speaker 1: A movement away from the blue wave. Right.
Speaker 3: So, I know, we've been talking about tariffs, and we
Speaker 3: call tariffs a tax, but taxes are also at taxed too, right,
Speaker 3: So if one candidate is talking about tariffs and another
Speaker 3: candidate is talking about higher taxes, they're both the tax.
Speaker 3: What does that mean to me as an investor?
Speaker 1: Inflation?
Speaker 3: And ultimately, no matter who the next president is I
Speaker 3: think it's going to be really hard to get inflation
Speaker 3: under control. And that's one of the reasons why I
Speaker 3: think you see yields starting to move higher.
Speaker 1: It's not so much just to.
Speaker 3: Trump trade or not, but I think it's a realization
Speaker 3: that we're moving to an area where.
Speaker 1: Deficits are still going to be high.
Speaker 3: There's still a large degree of spending that's out there,
Speaker 3: and the US deficit is too high, by the way,
Speaker 3: and all of this is putting upward pressure on rates,
Speaker 3: and I think this is something that we're going to
Speaker 3: have to deal with as we move into the next
Speaker 3: months ahead.
Speaker 2: Three seventy September eighteenth, on a tenure when the Fed
Speaker 2: cup fifty basis points three seventy this morning four thirteen, Jim,
Speaker 2: it's going to say, as always, thank you, sir, Jim
Speaker 2: Karner of Morgan Stanley. Dan Morris a BNP parapour writing
Speaker 2: US earnings are driving our performance at the equity market,
Speaker 2: still early in the season, but results are encouraging risk.
Speaker 2: If an I think is that growth is too strong
Speaker 2: and the market is too optimistic on the path of
Speaker 2: rate cuts, Dan joins us now for more. Dan, welcome
Speaker 2: to the program sir as always in good morning to you.
Speaker 2: Do you think there's too much a good thing going
Speaker 2: on right now? Then in the US economy, well.
Speaker 6: We probably should enjoy it.
Speaker 7: What at last, we know that bad things inevitably happen,
Speaker 7: we'll have some type of negative surprise and it won't
Speaker 7: be another six weeks or six months of continued gains
Speaker 7: for the market. But hardly speaking, if you look at
Speaker 7: the environment, at least in the US, it is pretty encouraging.
Speaker 7: Stocks reflect that we believe we're on a path to
Speaker 7: a soft landing.
Speaker 6: Rates are going down.
Speaker 7: We can discuss all day about how quickly that's going
Speaker 7: to happen and when the cuts are going to take place,
Speaker 7: But for now we're kind of waiting for what that
Speaker 7: negative shock might be.
Speaker 6: But the economy look resilient.
Speaker 2: Dan, you say self landing ubsas clients are asking us
Speaker 2: about a so called no landing. What's the difference between
Speaker 2: a self landing and a no landing and how from
Speaker 2: your perspective does your approach the capital allocation decision shift
Speaker 2: with either in mind?
Speaker 7: Well, if I think my interpretation of a no landing
Speaker 7: was that you actually don't get growth. Back to the
Speaker 7: long run average for the economy in the US, which
Speaker 7: would be say, one point seventy five percent, and clearly
Speaker 7: we're well above that now. The last I checked the
Speaker 7: Atlanta GDP now forecasts from the FED was three percent,
Speaker 7: So you know, we're quite a ways to go. And
Speaker 7: that's where we get into the dynamic of how quickly
Speaker 7: the FED is going to actually cut rates if growth
Speaker 7: stays that strong.
Speaker 6: So I think that's going to be the dilemma.
Speaker 7: That's where perhaps you have some mispricing in the market,
Speaker 7: too much optimism on the rate front, But from an
Speaker 7: equity point of view, that's not per se such a
Speaker 7: big problem.
Speaker 4: At a certain point, though, Dan, you have to wonder
Speaker 4: about whether the earnings ratify the sort of no landing scenario,
Speaker 4: and a number of different strategists pointed out that we
Speaker 4: have I've seen downward revisions to some of the forward
Speaker 4: looking projections, particularly for some of the cyclical companies. How
Speaker 4: much does that raise concerns about you as we pursue
Speaker 4: the earnings of the likes of auto companies later this week.
Speaker 7: Well, Lisa, I think the key thing to keep in mind.
Speaker 7: I mean, revisions clearly are important. Positive revisions are better
Speaker 7: than negative revisions, But we want to look at the
Speaker 7: absolute earnings growth that we think we're going to get.
Speaker 7: So even if you have negative revisions, but earnings are
Speaker 7: up a year from now, really the market should be
Speaker 7: up as well, So you want to keep it in perspective.
Speaker 7: Kind Of Inevitably, analysts tend to be too optimistic, so
Speaker 7: they were revised down those estimates.
Speaker 6: But if there's growth behind it, that's going to be
Speaker 6: what matters.
Speaker 4: Dan, how much are you trying to understand what the
Speaker 4: Trump trade is, what the Harris trade is, and how
Speaker 4: to really game that out at a time where maybe
Speaker 4: earnings matter, maybe the FED matters for right now, all
Speaker 4: the oxygen's been stuck out of the room for the
Speaker 4: next two weeks, well some.
Speaker 7: Degree at least over the next two weeks. Argue perhaps
Speaker 7: the opposite. I think the election outcome is so uncertain.
Speaker 7: I think it's it's challenging for a lot of investors
Speaker 7: to think about how they would try to play an outcome,
Speaker 7: particularly when what honestly I think is going to matter
Speaker 7: at least as much, if not arguably more, is what
Speaker 7: happens in Congress, because that determines what the victor will
Speaker 7: be able to do. If it's divided Congress, clearly you
Speaker 7: have much more limited scope if there's a sweep either way,
Speaker 7: and really anticipating that now, I think it would take
Speaker 7: a quite brave person.
Speaker 5: Daniel, given that the fact that we need to know
Speaker 5: the composition of Congress, and also the fact that if
Speaker 5: you look at these swing state polling, they're on a
Speaker 5: knife's edge.
Speaker 6: It's fifty to fifty.
Speaker 5: It's a coin flip when it comes to this election
Speaker 5: in two weeks time. Why do we do see the
Speaker 5: markets rotating though towards a Trump trade.
Speaker 7: Well, I guess, as you pointed out, it all depends
Speaker 7: how you interpret it. I guess our focus is more
Speaker 7: on the medium term outlook for the economy and really
Speaker 7: under kind of any scenario you think you have for
Speaker 7: the results of the elections, it is still a quite
Speaker 7: positive outlook. Now there's going to be difference on maybe
Speaker 7: what sectors do well or worse depending on the configuration,
Speaker 7: but at a high level where we're optimistic if you will,
Speaker 7: and have our overweight inequities in the US.
Speaker 5: So basically what you're saying is regardless of the US
Speaker 5: election compared to the rest of the world, especially when
Speaker 5: you look at what's going on in China and the
Speaker 5: data there and Europe. The US remains in this exceptionalism realm.
Speaker 7: Really, it is hard to find another major economy right
Speaker 7: now that can match the performance of the US. You know,
Speaker 7: we'll see how long that lasts, but for now, at
Speaker 7: least it does seem to be on a pretty positive trend.
Speaker 2: Hey Dan, it's good to hear from you, as always,
Speaker 2: Dan Morris there in London of bnpparentbou on the so
Speaker 2: called Trump trade, the d out there Bank for America
Speaker 2: Right in the following With the latest string of upside
Speaker 2: data surprises, client concerns have shifted from recession to reacceleration.
Speaker 2: In our view, the economy is resilient, but there are
Speaker 2: enough minor headwinds to make reacceleration unlikely. At ech joined
Speaker 2: just now for more at tcha. Good to see you,
Speaker 2: Thanks for having me. See you don't believe in this
Speaker 2: reacceleration story, so let's stand there.
Speaker 8: We underpins them view not yet, so we don't believe
Speaker 8: in reacceleration yet. Let's talk about the recent data flow.
Speaker 8: Start with jobs. Obviously, fantastic jobs report for September, right,
Speaker 8: but we would think of that more like a mediocre
Speaker 8: student who waste one test. So good job, but we're
Speaker 8: not there yet in terms of you know, have you
Speaker 8: turned the corner or is this really an A plus
Speaker 8: label market? I don't think it is just yet, right.
Speaker 8: And then if you think about the GDPGDI revisions, the
Speaker 8: revisions were actually more to the older data right from
Speaker 8: early twenty twenty three late twenty twenty two. So it's
Speaker 8: telling us a story more of a very resilient economy
Speaker 8: that's been holding on to around three percent growth in
Speaker 8: private domestic demand for six quarters. So it's not so
Speaker 8: much that we're reaccelerating, it's just that we've been growing
Speaker 8: well above what we thought trend was for an extended
Speaker 8: period of time.
Speaker 6: What would change your mind? What would convince you?
Speaker 8: So a couple of things could do it right. The
Speaker 8: first one would be signific fiscal stimulus, but potentially after
Speaker 8: the election, but that would have to be over and
Speaker 8: above just extending the tax cuts right because the tax
Speaker 8: cuts are status quo from the perspective of consumers and
Speaker 8: businesses right now. And then the other possibility is that
Speaker 8: you get a large negative supply shock. The economy is
Speaker 8: already running at potential. So with that negative supply shock,
Speaker 8: you could potentially overheat.
Speaker 4: What is that negative supply shock? Is that sort of
Speaker 4: code for something?
Speaker 8: Well, it could be a number of things, right, It
Speaker 8: could be geopolitics, It could be some significant disruption in
Speaker 8: terms of tariffs. Those are a few potential examples.
Speaker 4: So you talk about the R word, It used to
Speaker 4: be recession. Now it's reacceleration. Yes, And I love this
Speaker 4: because it sort of puts into cold relief the idea
Speaker 4: that maybe this market sees the tail risks increasingly reacceleration
Speaker 4: and not recession. Is that what you're seeing some of
Speaker 4: the baseline data and some of the baseline analysis that
Speaker 4: you see coming out of Wall Street.
Speaker 8: So the way we would talk about it is that
Speaker 8: two three weeks ago, before we got the jobs and
Speaker 8: the data revisions, we would have thought the risks to
Speaker 8: our outlook were slightly skewed to the downside, so more
Speaker 8: towards recession than reacceleration. Now we think the risks are
Speaker 8: pretty balanced. But the base case for US is still
Speaker 8: an economy that just softens up a little bit, doesn't
Speaker 8: go into recession, not even close. As inflation continues to
Speaker 8: move back down towards target.
Speaker 5: Pring this all together, what are you expecting on November
Speaker 5: seventh from the Fed?
Speaker 8: We're expecting a twenty five basis point rapecut. We are
Speaker 8: comfortable with that view. Basically, the last jobs report did
Speaker 8: the job, did the work of two jobs reports right
Speaker 8: in terms of really delivering job growth, and you had
Speaker 8: the upside revisions as well. You really had everything you wanted.
Speaker 8: So I think they'll be comfortable doing another twenty five,
Speaker 8: but they don't really have to do with fifty anymore.
Speaker 5: What if we get a really good jobs report before
Speaker 5: that FED meeting, is there a chance they don't cut?
Speaker 8: The bar would be very very high for that for
Speaker 8: a few reasons. Right, if you don't cut in November,
Speaker 8: you're basically admitting that you made a mistake in September
Speaker 8: by going fifty, and you've already told us that, Look,
Speaker 8: we can keep cutting for now with policy rates growth
Speaker 8: close to five percent, as long as inflation continues to
Speaker 8: move back towards target. The last inflation print wasn't great,
Speaker 8: but it wasn't terrible either, so they should be comfortable
Speaker 8: still cutting for now.
Speaker 4: So given the fact that essentially you're saying it's not
Speaker 4: that the economy is reaccelerating, but we're staying around a
Speaker 4: level that seems like it's above trend growth. How much
Speaker 4: are you saying that maybe we need to reassess how
Speaker 4: far the Fed can cut, you know, the sort of
Speaker 4: the target rate has to be substantially higher than we
Speaker 4: thought maybe two months ago.
Speaker 8: So this is exactly the question that I think everyone's
Speaker 8: wrestling with, right, So that there could be a few
Speaker 8: reasons why the target rate has gone up. The first
Speaker 8: one would be that inflation's just not behaving the way
Speaker 8: we want it to behave, right, but that that would
Speaker 8: be more of an overheating story. The other potential story
Speaker 8: is that trend growth has gone up. Right. That could
Speaker 8: be because of labor supply, but it could also be
Speaker 8: because of productivity. So the other thing that's happening on
Speaker 8: November seventh, by the way, which is a little at wonkish,
Speaker 8: is that at eight thirty we get the revised productivity data,
Speaker 8: which will include the GDP revisions.
Speaker 6: Right, nobody's spending.
Speaker 8: Attime to that because of the said and the election,
Speaker 8: But I think it'll actually be quite interesting because the
Speaker 8: story around productivity could change quite a lot, and that
Speaker 8: has significant implications for long term growth growth as well
Speaker 8: as the terminal rate.
Speaker 4: How much do you push back against people who say
Speaker 4: you can already see the trickle effects of the fifty
Speaker 4: basis point rate cut through the economy. You can already
Speaker 4: see mortgage rates coming down and bringing more people in.
Speaker 4: You could already see loan activity picking up on the margins.
Speaker 4: Do you reject that or do you actually say yes
Speaker 4: in a way on the margins it has been stimulative to.
Speaker 8: The extent that that's happening. It's got to be very
Speaker 8: very marginal, right, I mean they cut rates in the
Speaker 8: middle of September. We have some of the September data,
Speaker 8: right We don't have any of the October data right now,
Speaker 8: so we really wouldn't see it in any meaningful way
Speaker 8: in the data right now.
Speaker 6: Aha.
Speaker 2: Always got to catch up with you, sir At Makt
Speaker 2: of Thanks and America. This is the Bloomberg Surveillance Podcast,
Speaker 2: bringing you the best in markets, economics, a gio politics.
Speaker 2: You can watch the show live on Bloomberg TV weekday
Speaker 2: mornings from six am to nine am Eastern. Subscribe to
Speaker 2: the podcast on Apple, Spotify or anywhere else you listen,
Speaker 2: and as always on the Bloomberg Terminal and the Bloomberg
Speaker 2: Business app.