WEBVTT - Bloomberg Surveillance October 21, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.760 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.560 Terminal and the Bloomberg Business App. Jim Kron of Morgan Stanley, 0:00:37.600 --> 0:00:41.280 saying he's not bearish but skeptical, writes in this inflation 0:00:41.440 --> 0:00:44.519 is creeping KaiA and puts further scrutiny on the fedsibility 0:00:44.560 --> 0:00:47.280 to cut interest rates. Tensions in the Middle East also 0:00:47.360 --> 0:00:49.920 create a potential for a more systemic type of risk. 0:00:50.280 --> 0:00:52.400 We can't forget that a bull in a candy shop 0:00:52.640 --> 0:00:55.800 is still just a bull, and bulls can be unpredictable. 0:00:56.120 --> 0:00:58.280 Jim joins us. Now for more, Jim, welcome to the program. 0:00:58.400 --> 0:01:01.600 Let's run with that analogy. If you will, Bill in 0:01:01.640 --> 0:01:03.160 a candy shelf, do you think we're a little too 0:01:03.240 --> 0:01:04.759 high on sugar right now. 0:01:06.120 --> 0:01:07.319 I think that's a good way to put it. 0:01:07.640 --> 0:01:08.920 I do think of it as a little bit of 0:01:08.959 --> 0:01:13.920 a sugar high. My concern is that we're pulling forward 0:01:14.000 --> 0:01:17.240 twenty twenty five earnings right now, and we're painting an 0:01:17.280 --> 0:01:20.440 almost near perfect picture going into the future. It's not 0:01:20.480 --> 0:01:23.520 that i'mbarrassed, it's not that I'm negative on the markets broadly. 0:01:23.840 --> 0:01:26.280 I just think that we're getting a lot happening really 0:01:26.319 --> 0:01:29.160 really quickly. In other words, we're getting this soft landing 0:01:29.200 --> 0:01:32.520 that everybody's been projecting, but we're getting it very very fast. 0:01:32.920 --> 0:01:35.760 Valuations reflect that, right, So if you look at two 0:01:35.880 --> 0:01:38.520 hundred and eighty dollars earnings, let's say for twenty twenty five, 0:01:38.560 --> 0:01:42.520 which is roughly consensus, you assign a twenty one or 0:01:42.640 --> 0:01:45.119 twenty two multiple to that, you're going to get an 0:01:45.200 --> 0:01:49.320 SMP somewhere close to around six thousand, and that's about. 0:01:49.000 --> 0:01:50.160 Where we are today. 0:01:50.520 --> 0:01:52.920 But if you take that valuation down a little bit 0:01:53.000 --> 0:01:55.160 and you get a little bit more normalized, to say 0:01:55.160 --> 0:01:57.720 maybe a twenty pe on those two hundred and eighty 0:01:57.720 --> 0:02:01.280 dollars earnings, then the sp is fit fifty six hundred, right. 0:02:01.360 --> 0:02:02.840 So it's lower than where it is today. 0:02:02.840 --> 0:02:05.680 It's not a disaster, but net we're talking about a 0:02:05.720 --> 0:02:09.079 few percentage points in either direction. I don't necessarily think 0:02:09.080 --> 0:02:11.880 that we're going to be in a very strong bull 0:02:12.080 --> 0:02:15.519 run from these levels or from these valuations. So that's 0:02:15.560 --> 0:02:18.600 where my skepticism is. I'm not saying that things aren't 0:02:18.680 --> 0:02:21.760 okay consumers strong, retail sales was good, you know, inflation, 0:02:21.919 --> 0:02:26.200 earnings GDI numbers are all good, so incomes are. 0:02:26.080 --> 0:02:27.440 Good, so people can keep spending. 0:02:27.720 --> 0:02:30.560 What I'm saying is how much can it continue at 0:02:30.600 --> 0:02:32.360 this rate of change. 0:02:32.400 --> 0:02:34.720 Well, let's take the valuation piece of it, Jim. This 0:02:34.760 --> 0:02:37.040 is what Cameron Dawson, a New Edge said over the weekend. 0:02:37.360 --> 0:02:39.359 You could have argued at any point over the last 0:02:39.440 --> 0:02:42.280 year the stocks were expensive. I'm sure you'd agree with that, 0:02:42.440 --> 0:02:44.120 but there needs to be a catalyst to change this 0:02:44.240 --> 0:02:47.959 much to ever higher multipoise multiples. It feels like, Jim, 0:02:48.080 --> 0:02:50.600 we're in this virtuous cycle right now looking for a 0:02:50.680 --> 0:02:53.000 disruptor to it. And Tilson's Slock of Apollo spoke to 0:02:53.040 --> 0:02:55.520 the same thing. The Fed cutting rates. They've got a 0:02:55.520 --> 0:02:57.519 bus to cut even more so, we've got a dubbish fed. 0:02:57.720 --> 0:03:00.960 We've got high stocks and high home prices. Private financing 0:03:01.280 --> 0:03:04.000 is wide open, as you can see, continue support from 0:03:04.000 --> 0:03:06.880 fiscal plans, low debt, servicing costs that are locked in 0:03:06.960 --> 0:03:09.920 for buzs, corporates and households as well. Jim, that's just 0:03:09.960 --> 0:03:13.320 fading on itself. So the outlook just keeps on improving. Now, Jim, 0:03:13.480 --> 0:03:15.560 from your perspective, do you have anything in mind that 0:03:15.560 --> 0:03:18.360 could disrupt that process at the moment, because that's the 0:03:18.400 --> 0:03:21.160 reason the reasons people are so bullish right now. 0:03:22.040 --> 0:03:24.360 Yeah, and I agree with those reasons, and it's why 0:03:24.400 --> 0:03:27.400 we maintain a bullish tilt in our portfolios as well, 0:03:27.600 --> 0:03:30.520 you know, moving more towards neutrals, not moving towards negative 0:03:30.600 --> 0:03:33.480 because we do think that there are some potential factors, 0:03:33.520 --> 0:03:35.720 you know, clearly tensions in the Middle East to flare 0:03:35.840 --> 0:03:39.040 up there, we could get some election uncertainty or some 0:03:39.160 --> 0:03:43.800 election volatility around this, But ultimately what we would need 0:03:43.840 --> 0:03:46.760 to see is damage done to the consumer and arise 0:03:46.800 --> 0:03:47.920 in the unemployment rate. 0:03:48.200 --> 0:03:49.080 So I think some of the. 0:03:49.120 --> 0:03:51.800 Damage that could come is that if we start to 0:03:51.800 --> 0:03:54.520 see some weakening of the labor market. Now we're not 0:03:54.520 --> 0:03:56.960 seeing signs of that yet, but we all know that 0:03:57.000 --> 0:04:00.000 the non farm payroll data has been heavily revised or 0:04:00.000 --> 0:04:02.400 over time, and if we do start to see that 0:04:02.640 --> 0:04:05.400 in a period where we start to see some margins 0:04:05.440 --> 0:04:10.880 starting to shrink across corporate America, that could create a 0:04:11.000 --> 0:04:14.720 significant or a faster move higher in the unemployment rate, 0:04:15.000 --> 0:04:19.320 and that would completely change the narrative. We're not there yet, Jonathan, 0:04:19.520 --> 0:04:21.080 and I think that's the and I think that's the 0:04:21.080 --> 0:04:23.839 most important thing to highlight. We're not there yet, but 0:04:24.120 --> 0:04:26.480 we do have to recognize that at these valuations and 0:04:26.520 --> 0:04:29.200 at these levels, that it makes it hard to have 0:04:29.240 --> 0:04:32.160 a positive surprise, and it makes it easier to have 0:04:32.200 --> 0:04:33.159 a negative surprise. 0:04:33.400 --> 0:04:37.960 One aspect of your argument is essentially kind of abnegating 0:04:38.000 --> 0:04:40.160 this idea of a cyclical tilt that you can get 0:04:40.160 --> 0:04:43.440 that rotation away from big tech and some of the 0:04:43.560 --> 0:04:49.279 arch behemoths other large stocks and really fuel this next 0:04:49.360 --> 0:04:51.200 leg of recovery. And I saw the same kind of 0:04:51.200 --> 0:04:55.480 sentiment for me Mateka over at JP Morgan. How much 0:04:55.480 --> 0:04:58.440 are you leaning against a cyclical move the idea that 0:04:58.480 --> 0:05:00.320 the equal way in the russels you've had and I have 0:05:00.360 --> 0:05:01.440 been performing. 0:05:02.720 --> 0:05:04.920 No, Actually, I mean I think it's a great question, 0:05:05.040 --> 0:05:08.240 and actually we're embracing the broadening of the markets and 0:05:08.279 --> 0:05:11.640 the cyclicals and even the defensives. So what the markets 0:05:11.640 --> 0:05:14.880 are kind of realizing right now is that this mag 0:05:15.040 --> 0:05:17.760 seven the tech in the larger cap and the growth 0:05:18.400 --> 0:05:21.560 names that are out there have done a very very 0:05:21.600 --> 0:05:22.960 good job this year, but. 0:05:22.960 --> 0:05:24.800 There may be more to the story. And this is 0:05:24.839 --> 0:05:25.120 going to be. 0:05:25.160 --> 0:05:26.919 Across the rustle, This is going to be across the 0:05:26.920 --> 0:05:29.359 broader base sectors of the markets. This is going to 0:05:29.360 --> 0:05:31.680 be across the equal way. One of the themes that 0:05:31.680 --> 0:05:34.040 we're putting forward as we move into twenty twenty five 0:05:34.200 --> 0:05:36.680 is how do you invest in what seems to be 0:05:36.720 --> 0:05:38.159 a fully valued market. 0:05:38.440 --> 0:05:40.560 You can't really play the beta. You can't just. 0:05:40.520 --> 0:05:42.640 Say, oh, well, the index is going to go up 0:05:42.640 --> 0:05:45.720 another x percent more or less. What you have to 0:05:45.760 --> 0:05:47.840 do is you have to start thinking about the different 0:05:47.880 --> 0:05:49.360 components of the markets. 0:05:49.640 --> 0:05:51.320 You have to find sectors in the markets that. 0:05:51.279 --> 0:05:54.000 Are well valued, that have lower pe multiples, good good 0:05:54.000 --> 0:05:58.920 balance sheets, good factors, good interest coverage ratios, and have 0:05:59.000 --> 0:06:01.960 some pricing powered, some controls, and you can find them 0:06:02.000 --> 0:06:04.279 in the other four hundred and ninety three stocks. And 0:06:04.320 --> 0:06:07.200 I think that's the stuff that we should be looking at. 0:06:07.440 --> 0:06:09.800 Those are the sectors. That's the management style that we 0:06:09.839 --> 0:06:12.039 need to start to move into, because I think it's 0:06:12.040 --> 0:06:15.320 going to be more about asset selection and investment selection 0:06:15.480 --> 0:06:18.320 as we move into twenty twenty five as opposed to 0:06:18.480 --> 0:06:22.200 just a target weight asset allocation into x percent equities 0:06:22.279 --> 0:06:25.520 or ex percent bonds. It's really going to matter how 0:06:25.560 --> 0:06:29.920 the constituency of your portfolio is made up, what sectors were, 0:06:29.960 --> 0:06:31.080 and what valuations. 0:06:31.279 --> 0:06:33.640 Is this a sort of one year timeframe of an 0:06:33.680 --> 0:06:35.880 adjustment and investment cycle, or do you see this as 0:06:35.880 --> 0:06:39.200 a ten year kind of timeframe, as maybe the overall 0:06:39.240 --> 0:06:43.360 index level returns don't look as great as they have traditionally. 0:06:44.480 --> 0:06:47.360 Yeah, I think this is something that probably adjusts over 0:06:47.400 --> 0:06:49.920 the next year or so, so let me call that 0:06:50.000 --> 0:06:54.040 short term. I don't think that we're always going to 0:06:54.080 --> 0:06:56.400 have this bifurcated market like we do today. 0:06:56.440 --> 0:06:58.760 I think there needs to be some coalescing and. 0:06:58.680 --> 0:07:02.640 That's where you get the broadening of the markets, where 0:07:02.640 --> 0:07:05.360 you get other sectors that haven't participated in the rally 0:07:05.720 --> 0:07:09.360 start to participate late. That's usually a late cycle thing 0:07:09.440 --> 0:07:12.520 to start to see, and then the markets tend to 0:07:12.520 --> 0:07:15.520 move in a more uniform way, beta up, beta down. 0:07:16.040 --> 0:07:18.679 So I don't see this necessarily as a long long 0:07:18.760 --> 0:07:22.000 term view, but I do say that twenty twenty five 0:07:22.040 --> 0:07:24.520 will be all about tacticals. Don't forget we're going to 0:07:24.520 --> 0:07:26.680 be talking about taxes and policy, no matter who the 0:07:26.720 --> 0:07:29.040 next president is. We're going to start talking about that 0:07:29.760 --> 0:07:32.440 on January of twenty twenty five, because that's when the 0:07:32.440 --> 0:07:34.040 decisions are going to start to get made that are 0:07:34.040 --> 0:07:36.920 going to have big influences on markets going into late 0:07:36.960 --> 0:07:39.800 twenty five and into twenty six when policies are likely 0:07:39.840 --> 0:07:40.440 to change. 0:07:40.640 --> 0:07:43.120 Jim, do you believe right now that the market is 0:07:43.240 --> 0:07:44.760 rotating into the Trump trade? 0:07:46.240 --> 0:07:46.440 Yeah? 0:07:46.720 --> 0:07:48.400 I think it is, and I think it was said, 0:07:48.520 --> 0:07:51.800 you know, nicely by Lisa earlier on the show that 0:07:52.040 --> 0:07:53.880 it's in some degree it's. 0:07:53.760 --> 0:07:56.280 A movement away from the blue wave. Right. 0:07:56.360 --> 0:07:58.480 So, I know, we've been talking about tariffs, and we 0:07:58.600 --> 0:08:02.080 call tariffs a tax, but taxes are also at taxed too, right, 0:08:02.200 --> 0:08:05.200 So if one candidate is talking about tariffs and another 0:08:05.280 --> 0:08:08.560 candidate is talking about higher taxes, they're both the tax. 0:08:08.840 --> 0:08:10.600 What does that mean to me as an investor? 0:08:10.920 --> 0:08:11.400 Inflation? 0:08:12.120 --> 0:08:16.000 And ultimately, no matter who the next president is I 0:08:16.040 --> 0:08:18.520 think it's going to be really hard to get inflation 0:08:18.720 --> 0:08:21.800 under control. And that's one of the reasons why I 0:08:21.840 --> 0:08:24.080 think you see yields starting to move higher. 0:08:24.240 --> 0:08:25.320 It's not so much just to. 0:08:25.280 --> 0:08:28.680 Trump trade or not, but I think it's a realization 0:08:28.840 --> 0:08:31.160 that we're moving to an area where. 0:08:30.960 --> 0:08:32.480 Deficits are still going to be high. 0:08:32.720 --> 0:08:35.319 There's still a large degree of spending that's out there, 0:08:35.400 --> 0:08:37.400 and the US deficit is too high, by the way, 0:08:38.320 --> 0:08:41.400 and all of this is putting upward pressure on rates, 0:08:41.760 --> 0:08:43.839 and I think this is something that we're going to 0:08:43.920 --> 0:08:45.800 have to deal with as we move into the next 0:08:45.800 --> 0:08:46.360 months ahead. 0:08:46.679 --> 0:08:50.000 Three seventy September eighteenth, on a tenure when the Fed 0:08:50.040 --> 0:08:54.440 cup fifty basis points three seventy this morning four thirteen, Jim, 0:08:54.480 --> 0:08:56.400 it's going to say, as always, thank you, sir, Jim 0:08:56.440 --> 0:09:09.360 Karner of Morgan Stanley. Dan Morris a BNP parapour writing 0:09:09.480 --> 0:09:12.120 US earnings are driving our performance at the equity market, 0:09:12.400 --> 0:09:15.640 still early in the season, but results are encouraging risk. 0:09:15.679 --> 0:09:17.560 If an I think is that growth is too strong 0:09:17.840 --> 0:09:20.200 and the market is too optimistic on the path of 0:09:20.280 --> 0:09:22.679 rate cuts, Dan joins us now for more. Dan, welcome 0:09:22.720 --> 0:09:25.160 to the program sir as always in good morning to you. 0:09:25.200 --> 0:09:27.040 Do you think there's too much a good thing going 0:09:27.080 --> 0:09:30.680 on right now? Then in the US economy, well. 0:09:30.559 --> 0:09:31.760 We probably should enjoy it. 0:09:31.800 --> 0:09:34.760 What at last, we know that bad things inevitably happen, 0:09:34.840 --> 0:09:37.240 we'll have some type of negative surprise and it won't 0:09:37.280 --> 0:09:40.960 be another six weeks or six months of continued gains 0:09:40.960 --> 0:09:42.960 for the market. But hardly speaking, if you look at 0:09:43.000 --> 0:09:46.000 the environment, at least in the US, it is pretty encouraging. 0:09:46.040 --> 0:09:48.760 Stocks reflect that we believe we're on a path to 0:09:48.880 --> 0:09:49.640 a soft landing. 0:09:50.120 --> 0:09:51.040 Rates are going down. 0:09:51.120 --> 0:09:53.640 We can discuss all day about how quickly that's going 0:09:53.720 --> 0:09:55.400 to happen and when the cuts are going to take place, 0:09:56.040 --> 0:09:57.960 But for now we're kind of waiting for what that 0:09:58.000 --> 0:09:59.160 negative shock might be. 0:09:59.240 --> 0:10:00.800 But the economy look resilient. 0:10:01.040 --> 0:10:03.960 Dan, you say self landing ubsas clients are asking us 0:10:04.000 --> 0:10:06.839 about a so called no landing. What's the difference between 0:10:06.880 --> 0:10:09.880 a self landing and a no landing and how from 0:10:09.920 --> 0:10:12.880 your perspective does your approach the capital allocation decision shift 0:10:13.200 --> 0:10:14.040 with either in mind? 0:10:15.800 --> 0:10:18.240 Well, if I think my interpretation of a no landing 0:10:18.360 --> 0:10:20.600 was that you actually don't get growth. Back to the 0:10:20.600 --> 0:10:23.200 long run average for the economy in the US, which 0:10:23.240 --> 0:10:26.080 would be say, one point seventy five percent, and clearly 0:10:26.120 --> 0:10:28.839 we're well above that now. The last I checked the 0:10:29.000 --> 0:10:32.480 Atlanta GDP now forecasts from the FED was three percent, 0:10:32.600 --> 0:10:35.360 So you know, we're quite a ways to go. And 0:10:35.360 --> 0:10:37.720 that's where we get into the dynamic of how quickly 0:10:37.760 --> 0:10:40.199 the FED is going to actually cut rates if growth 0:10:40.200 --> 0:10:41.080 stays that strong. 0:10:41.160 --> 0:10:42.680 So I think that's going to be the dilemma. 0:10:42.679 --> 0:10:45.240 That's where perhaps you have some mispricing in the market, 0:10:45.800 --> 0:10:48.560 too much optimism on the rate front, But from an 0:10:48.600 --> 0:10:50.560 equity point of view, that's not per se such a 0:10:50.559 --> 0:10:51.160 big problem. 0:10:51.320 --> 0:10:53.240 At a certain point, though, Dan, you have to wonder 0:10:53.280 --> 0:10:56.559 about whether the earnings ratify the sort of no landing scenario, 0:10:56.679 --> 0:10:59.640 and a number of different strategists pointed out that we 0:10:59.720 --> 0:11:02.199 have I've seen downward revisions to some of the forward 0:11:02.240 --> 0:11:05.720 looking projections, particularly for some of the cyclical companies. How 0:11:05.800 --> 0:11:08.240 much does that raise concerns about you as we pursue 0:11:08.280 --> 0:11:11.160 the earnings of the likes of auto companies later this week. 0:11:12.679 --> 0:11:14.920 Well, Lisa, I think the key thing to keep in mind. 0:11:14.960 --> 0:11:18.640 I mean, revisions clearly are important. Positive revisions are better 0:11:18.640 --> 0:11:21.080 than negative revisions, But we want to look at the 0:11:21.120 --> 0:11:23.560 absolute earnings growth that we think we're going to get. 0:11:23.640 --> 0:11:26.120 So even if you have negative revisions, but earnings are 0:11:26.240 --> 0:11:28.880 up a year from now, really the market should be 0:11:28.920 --> 0:11:31.240 up as well, So you want to keep it in perspective. 0:11:32.000 --> 0:11:34.760 Kind Of Inevitably, analysts tend to be too optimistic, so 0:11:34.800 --> 0:11:36.720 they were revised down those estimates. 0:11:37.080 --> 0:11:38.880 But if there's growth behind it, that's going to be 0:11:38.960 --> 0:11:39.440 what matters. 0:11:39.640 --> 0:11:42.160 Dan, how much are you trying to understand what the 0:11:42.160 --> 0:11:44.920 Trump trade is, what the Harris trade is, and how 0:11:44.920 --> 0:11:47.400 to really game that out at a time where maybe 0:11:47.400 --> 0:11:49.760 earnings matter, maybe the FED matters for right now, all 0:11:49.800 --> 0:11:51.360 the oxygen's been stuck out of the room for the 0:11:51.360 --> 0:11:54.439 next two weeks, well some. 0:11:54.480 --> 0:11:56.920 Degree at least over the next two weeks. Argue perhaps 0:11:56.960 --> 0:11:59.480 the opposite. I think the election outcome is so uncertain. 0:11:59.520 --> 0:12:01.640 I think it's it's challenging for a lot of investors 0:12:01.679 --> 0:12:03.640 to think about how they would try to play an outcome, 0:12:04.160 --> 0:12:06.920 particularly when what honestly I think is going to matter 0:12:07.000 --> 0:12:09.720 at least as much, if not arguably more, is what 0:12:09.720 --> 0:12:13.079 happens in Congress, because that determines what the victor will 0:12:13.120 --> 0:12:15.439 be able to do. If it's divided Congress, clearly you 0:12:15.480 --> 0:12:18.120 have much more limited scope if there's a sweep either way, 0:12:18.679 --> 0:12:21.360 and really anticipating that now, I think it would take 0:12:21.360 --> 0:12:22.600 a quite brave person. 0:12:22.720 --> 0:12:24.640 Daniel, given that the fact that we need to know 0:12:24.679 --> 0:12:27.240 the composition of Congress, and also the fact that if 0:12:27.240 --> 0:12:29.280 you look at these swing state polling, they're on a 0:12:29.360 --> 0:12:29.880 knife's edge. 0:12:29.920 --> 0:12:30.840 It's fifty to fifty. 0:12:30.840 --> 0:12:33.079 It's a coin flip when it comes to this election 0:12:33.160 --> 0:12:35.640 in two weeks time. Why do we do see the 0:12:35.679 --> 0:12:38.040 markets rotating though towards a Trump trade. 0:12:39.840 --> 0:12:42.360 Well, I guess, as you pointed out, it all depends 0:12:42.400 --> 0:12:45.000 how you interpret it. I guess our focus is more 0:12:45.040 --> 0:12:47.160 on the medium term outlook for the economy and really 0:12:47.200 --> 0:12:49.440 under kind of any scenario you think you have for 0:12:49.480 --> 0:12:52.079 the results of the elections, it is still a quite 0:12:52.120 --> 0:12:54.360 positive outlook. Now there's going to be difference on maybe 0:12:54.400 --> 0:12:58.400 what sectors do well or worse depending on the configuration, 0:12:58.559 --> 0:13:01.960 but at a high level where we're optimistic if you will, 0:13:02.480 --> 0:13:04.559 and have our overweight inequities in the US. 0:13:05.080 --> 0:13:07.280 So basically what you're saying is regardless of the US 0:13:07.360 --> 0:13:09.720 election compared to the rest of the world, especially when 0:13:09.679 --> 0:13:11.079 you look at what's going on in China and the 0:13:11.160 --> 0:13:16.360 data there and Europe. The US remains in this exceptionalism realm. 0:13:17.240 --> 0:13:20.000 Really, it is hard to find another major economy right 0:13:20.040 --> 0:13:22.840 now that can match the performance of the US. You know, 0:13:22.840 --> 0:13:25.160 we'll see how long that lasts, but for now, at 0:13:25.240 --> 0:13:27.360 least it does seem to be on a pretty positive trend. 0:13:27.440 --> 0:13:29.320 Hey Dan, it's good to hear from you, as always, 0:13:29.400 --> 0:13:32.080 Dan Morris there in London of bnpparentbou on the so 0:13:32.160 --> 0:13:44.160 called Trump trade, the d out there Bank for America 0:13:44.240 --> 0:13:46.520 Right in the following With the latest string of upside 0:13:46.600 --> 0:13:50.640 data surprises, client concerns have shifted from recession to reacceleration. 0:13:50.960 --> 0:13:53.080 In our view, the economy is resilient, but there are 0:13:53.200 --> 0:13:57.280 enough minor headwinds to make reacceleration unlikely. At ech joined 0:13:57.360 --> 0:13:59.040 just now for more at tcha. Good to see you, 0:13:59.120 --> 0:14:00.760 Thanks for having me. See you don't believe in this 0:14:00.800 --> 0:14:03.120 reacceleration story, so let's stand there. 0:14:03.160 --> 0:14:06.240 We underpins them view not yet, so we don't believe 0:14:06.240 --> 0:14:09.439 in reacceleration yet. Let's talk about the recent data flow. 0:14:10.120 --> 0:14:15.320 Start with jobs. Obviously, fantastic jobs report for September, right, 0:14:15.400 --> 0:14:18.319 but we would think of that more like a mediocre 0:14:18.360 --> 0:14:21.760 student who waste one test. So good job, but we're 0:14:21.760 --> 0:14:24.120 not there yet in terms of you know, have you 0:14:24.160 --> 0:14:26.200 turned the corner or is this really an A plus 0:14:26.240 --> 0:14:28.720 label market? I don't think it is just yet, right. 0:14:28.800 --> 0:14:31.880 And then if you think about the GDPGDI revisions, the 0:14:31.960 --> 0:14:35.120 revisions were actually more to the older data right from 0:14:35.120 --> 0:14:37.560 early twenty twenty three late twenty twenty two. So it's 0:14:37.560 --> 0:14:40.840 telling us a story more of a very resilient economy 0:14:40.840 --> 0:14:43.520 that's been holding on to around three percent growth in 0:14:43.560 --> 0:14:46.360 private domestic demand for six quarters. So it's not so 0:14:46.480 --> 0:14:49.560 much that we're reaccelerating, it's just that we've been growing 0:14:49.640 --> 0:14:52.520 well above what we thought trend was for an extended 0:14:52.560 --> 0:14:53.160 period of time. 0:14:53.240 --> 0:14:55.600 What would change your mind? What would convince you? 0:14:56.040 --> 0:14:57.920 So a couple of things could do it right. The 0:14:57.960 --> 0:15:02.720 first one would be signific fiscal stimulus, but potentially after 0:15:02.720 --> 0:15:04.520 the election, but that would have to be over and 0:15:04.600 --> 0:15:07.440 above just extending the tax cuts right because the tax 0:15:07.480 --> 0:15:10.080 cuts are status quo from the perspective of consumers and 0:15:10.120 --> 0:15:12.920 businesses right now. And then the other possibility is that 0:15:12.960 --> 0:15:15.080 you get a large negative supply shock. The economy is 0:15:15.080 --> 0:15:18.760 already running at potential. So with that negative supply shock, 0:15:18.800 --> 0:15:20.040 you could potentially overheat. 0:15:20.280 --> 0:15:22.280 What is that negative supply shock? Is that sort of 0:15:22.360 --> 0:15:23.120 code for something? 0:15:23.720 --> 0:15:26.360 Well, it could be a number of things, right, It 0:15:26.360 --> 0:15:30.760 could be geopolitics, It could be some significant disruption in 0:15:30.840 --> 0:15:33.280 terms of tariffs. Those are a few potential examples. 0:15:33.480 --> 0:15:35.560 So you talk about the R word, It used to 0:15:35.560 --> 0:15:38.880 be recession. Now it's reacceleration. Yes, And I love this 0:15:38.960 --> 0:15:41.720 because it sort of puts into cold relief the idea 0:15:41.760 --> 0:15:46.520 that maybe this market sees the tail risks increasingly reacceleration 0:15:47.080 --> 0:15:50.040 and not recession. Is that what you're seeing some of 0:15:50.080 --> 0:15:53.200 the baseline data and some of the baseline analysis that 0:15:53.280 --> 0:15:54.920 you see coming out of Wall Street. 0:15:55.080 --> 0:15:57.000 So the way we would talk about it is that 0:15:57.400 --> 0:16:00.360 two three weeks ago, before we got the jobs and 0:16:00.400 --> 0:16:03.000 the data revisions, we would have thought the risks to 0:16:03.080 --> 0:16:06.120 our outlook were slightly skewed to the downside, so more 0:16:06.160 --> 0:16:09.680 towards recession than reacceleration. Now we think the risks are 0:16:09.680 --> 0:16:12.160 pretty balanced. But the base case for US is still 0:16:12.320 --> 0:16:15.000 an economy that just softens up a little bit, doesn't 0:16:15.040 --> 0:16:18.520 go into recession, not even close. As inflation continues to 0:16:18.520 --> 0:16:19.720 move back down towards target. 0:16:19.880 --> 0:16:21.800 Pring this all together, what are you expecting on November 0:16:21.880 --> 0:16:22.720 seventh from the Fed? 0:16:23.560 --> 0:16:26.520 We're expecting a twenty five basis point rapecut. We are 0:16:26.640 --> 0:16:30.960 comfortable with that view. Basically, the last jobs report did 0:16:31.120 --> 0:16:34.120 the job, did the work of two jobs reports right 0:16:34.200 --> 0:16:37.080 in terms of really delivering job growth, and you had 0:16:37.080 --> 0:16:40.080 the upside revisions as well. You really had everything you wanted. 0:16:40.120 --> 0:16:43.200 So I think they'll be comfortable doing another twenty five, 0:16:43.360 --> 0:16:45.600 but they don't really have to do with fifty anymore. 0:16:45.640 --> 0:16:48.160 What if we get a really good jobs report before 0:16:48.200 --> 0:16:50.200 that FED meeting, is there a chance they don't cut? 0:16:50.560 --> 0:16:53.280 The bar would be very very high for that for 0:16:53.320 --> 0:16:56.040 a few reasons. Right, if you don't cut in November, 0:16:56.680 --> 0:16:59.520 you're basically admitting that you made a mistake in September 0:16:59.560 --> 0:17:02.560 by going fifty, and you've already told us that, Look, 0:17:02.600 --> 0:17:05.200 we can keep cutting for now with policy rates growth 0:17:05.200 --> 0:17:08.320 close to five percent, as long as inflation continues to 0:17:08.320 --> 0:17:11.040 move back towards target. The last inflation print wasn't great, 0:17:11.320 --> 0:17:14.320 but it wasn't terrible either, so they should be comfortable 0:17:14.359 --> 0:17:15.640 still cutting for now. 0:17:16.040 --> 0:17:18.959 So given the fact that essentially you're saying it's not 0:17:18.960 --> 0:17:21.359 that the economy is reaccelerating, but we're staying around a 0:17:21.440 --> 0:17:24.480 level that seems like it's above trend growth. How much 0:17:24.480 --> 0:17:27.200 are you saying that maybe we need to reassess how 0:17:27.200 --> 0:17:29.040 far the Fed can cut, you know, the sort of 0:17:29.040 --> 0:17:32.639 the target rate has to be substantially higher than we 0:17:32.680 --> 0:17:34.040 thought maybe two months ago. 0:17:34.320 --> 0:17:37.119 So this is exactly the question that I think everyone's 0:17:37.160 --> 0:17:39.120 wrestling with, right, So that there could be a few 0:17:39.200 --> 0:17:42.080 reasons why the target rate has gone up. The first 0:17:42.119 --> 0:17:44.960 one would be that inflation's just not behaving the way 0:17:44.960 --> 0:17:47.560 we want it to behave, right, but that that would 0:17:47.560 --> 0:17:50.960 be more of an overheating story. The other potential story 0:17:51.240 --> 0:17:54.080 is that trend growth has gone up. Right. That could 0:17:54.119 --> 0:17:56.080 be because of labor supply, but it could also be 0:17:56.080 --> 0:17:58.399 because of productivity. So the other thing that's happening on 0:17:58.440 --> 0:18:00.600 November seventh, by the way, which is a little at wonkish, 0:18:00.760 --> 0:18:03.720 is that at eight thirty we get the revised productivity data, 0:18:04.080 --> 0:18:06.240 which will include the GDP revisions. 0:18:06.280 --> 0:18:07.240 Right, nobody's spending. 0:18:07.000 --> 0:18:09.399 Attime to that because of the said and the election, 0:18:10.080 --> 0:18:12.800 But I think it'll actually be quite interesting because the 0:18:12.840 --> 0:18:15.800 story around productivity could change quite a lot, and that 0:18:15.880 --> 0:18:19.399 has significant implications for long term growth growth as well 0:18:19.480 --> 0:18:20.720 as the terminal rate. 0:18:20.800 --> 0:18:23.040 How much do you push back against people who say 0:18:23.040 --> 0:18:25.439 you can already see the trickle effects of the fifty 0:18:25.480 --> 0:18:28.359 basis point rate cut through the economy. You can already 0:18:28.359 --> 0:18:30.840 see mortgage rates coming down and bringing more people in. 0:18:30.880 --> 0:18:34.080 You could already see loan activity picking up on the margins. 0:18:34.119 --> 0:18:36.480