1 00:00:00,120 --> 00:00:06,800 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,680 --> 00:00:15,480 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,720 Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day 4 00:00:18,760 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,440 --> 00:00:24,880 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,960 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,319 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,960 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,040 --> 00:00:38,199 Speaker 2: Terminal and the Bloomberg Business App. Mohammed l erna Queen's College, Cambridge, 10 00:00:38,200 --> 00:00:41,840 Speaker 2: expecting more data surprises, saying quote, last Friday's data surprise 11 00:00:41,960 --> 00:00:45,040 Speaker 2: relative to consensus expectations will not be the last one 12 00:00:45,200 --> 00:00:48,200 Speaker 2: unless economists resist the temptation to look through the shock. 13 00:00:48,520 --> 00:00:51,000 Speaker 2: What is needed in today's economy is to be more 14 00:00:51,040 --> 00:00:54,040 Speaker 2: open minded about why such surprises keep occurring and how 15 00:00:54,080 --> 00:00:57,480 Speaker 2: best to frame the accompanying policy regimes. Muhammedan pleased to 16 00:00:57,480 --> 00:00:59,720 Speaker 2: say join us again, Mohammed, Welcome back to the program sir. 17 00:00:59,800 --> 00:01:00,600 Speaker 3: Let's get into that. 18 00:01:01,000 --> 00:01:04,080 Speaker 2: Why was it the volatility between reports that stood out 19 00:01:04,080 --> 00:01:06,679 Speaker 2: for you and not just the strength in isolation. 20 00:01:08,120 --> 00:01:10,840 Speaker 4: Thanks for having me, John. Look, this volatility, or what 21 00:01:10,880 --> 00:01:13,760 Speaker 4: you've called ping pong narrative, has been with us for 22 00:01:13,800 --> 00:01:17,160 Speaker 4: a while, and there's a clash. There's a clash between 23 00:01:17,200 --> 00:01:20,480 Speaker 4: the mindset of most analysts that tend to think that 24 00:01:20,600 --> 00:01:24,559 Speaker 4: the economy is in a structural equilibrium and the reality 25 00:01:25,080 --> 00:01:29,200 Speaker 4: that we are going through major transition, both economic and 26 00:01:29,280 --> 00:01:32,280 Speaker 4: policy wise. So if you're thinking one way about the 27 00:01:32,319 --> 00:01:36,759 Speaker 4: economy but it's operating in another paradigm, you will get 28 00:01:36,880 --> 00:01:37,880 Speaker 4: these surprises. 29 00:01:38,319 --> 00:01:40,520 Speaker 2: So the obvious question with Bee Mohammad when you write 30 00:01:40,520 --> 00:01:43,560 Speaker 2: things like how best to frame the accompanying policy regimes, 31 00:01:43,680 --> 00:01:46,600 Speaker 2: what the Federal Reserve should be doing with this incoming information. 32 00:01:48,800 --> 00:01:52,080 Speaker 4: So, first of all, understand that were going through structural changes. 33 00:01:52,560 --> 00:01:56,480 Speaker 4: Luckily for us, these changes are favorable, unlike what you're 34 00:01:56,480 --> 00:01:59,520 Speaker 4: seeing in Europe, unlike what you're seeing in China. That's 35 00:01:59,560 --> 00:02:03,240 Speaker 4: the first thing. The second, it's not just about monetary policy. Yes, 36 00:02:04,320 --> 00:02:06,400 Speaker 4: the FED was the only game in talent, but that's 37 00:02:06,400 --> 00:02:09,360 Speaker 4: no longer the case. Fiscal policy is having an impact, 38 00:02:09,440 --> 00:02:12,560 Speaker 4: Structure reforms are having an impact, So think beyond the FED. 39 00:02:12,600 --> 00:02:15,680 Speaker 4: So what does it mean for the FED continue? In 40 00:02:15,760 --> 00:02:18,560 Speaker 4: what I sense, and I hope I'm right. I sense 41 00:02:18,919 --> 00:02:23,280 Speaker 4: is two evolution in how they are approaching policy, and 42 00:02:23,360 --> 00:02:26,080 Speaker 4: you see this a little bit in John Williams's interview 43 00:02:26,120 --> 00:02:29,680 Speaker 4: in the Financial Times. The first one is to be 44 00:02:30,160 --> 00:02:35,200 Speaker 4: less excessively data dependent and have a more balanced backward 45 00:02:35,240 --> 00:02:39,160 Speaker 4: looking forward looking approach. And the second one is to 46 00:02:39,200 --> 00:02:41,520 Speaker 4: get away from this notion that you can target a 47 00:02:41,600 --> 00:02:45,880 Speaker 4: specific outcome and have much more of an insurance mindset. 48 00:02:46,240 --> 00:02:48,720 Speaker 4: And I think that if these two evolutions are correct 49 00:02:48,720 --> 00:02:51,480 Speaker 4: and continue, it's good for the FED and would be 50 00:02:51,480 --> 00:02:52,320 Speaker 4: good for the economy. 51 00:02:52,720 --> 00:02:56,200 Speaker 5: Mohammed Just to that point, Adriana Kugler spoke yesterday too, 52 00:02:56,320 --> 00:03:00,520 Speaker 5: and so that she's monitoring both Hurricane Helene and geopolitical events, 53 00:03:00,800 --> 00:03:03,160 Speaker 5: but then goes on to say that the fear is 54 00:03:03,160 --> 00:03:06,040 Speaker 5: is that they could have an impact on American employment, 55 00:03:06,120 --> 00:03:09,320 Speaker 5: that risks escalate, uncertainty escalates, and that means that the 56 00:03:09,360 --> 00:03:12,080 Speaker 5: FED might have to move more towards neutral more quickly. 57 00:03:12,360 --> 00:03:15,400 Speaker 5: When you look at these exogenous shocks, is it still 58 00:03:15,680 --> 00:03:17,600 Speaker 5: a FED put is it a FED that's going to 59 00:03:17,639 --> 00:03:19,960 Speaker 5: come in and not cut And maybe isn't as concerns 60 00:03:20,000 --> 00:03:24,519 Speaker 5: about the inflationary risks of for example, targeting oil capabilities 61 00:03:24,560 --> 00:03:26,760 Speaker 5: by Iran Danny. 62 00:03:26,800 --> 00:03:29,880 Speaker 4: The hardest thing is when the external shock, whether it's 63 00:03:29,880 --> 00:03:33,320 Speaker 4: coming from oil crisis, whether it's coming from a supply 64 00:03:33,400 --> 00:03:36,280 Speaker 4: disruption in the port, or whether it's coming from this 65 00:03:36,400 --> 00:03:42,680 Speaker 4: awful hurricane down south. The hard thing is when it's stagflationary, 66 00:03:43,040 --> 00:03:46,880 Speaker 4: when it lowers, grows, and increases price pressure. That is 67 00:03:46,920 --> 00:03:51,000 Speaker 4: when the FED gets into a really difficult situation. Let's 68 00:03:51,040 --> 00:03:54,480 Speaker 4: hope that none of these potential external shocks. One of 69 00:03:54,520 --> 00:03:57,200 Speaker 4: them is resolved, but the other two are not. Let's 70 00:03:57,200 --> 00:03:59,280 Speaker 4: hope that they don't because it will make it very 71 00:03:59,320 --> 00:04:02,839 Speaker 4: hard for the FED to decide what to do. I think, 72 00:04:02,880 --> 00:04:05,880 Speaker 4: and I believe for a long time, that the economy 73 00:04:06,520 --> 00:04:09,880 Speaker 4: is fundamentally sound, so it can absorb shocks. What it 74 00:04:09,880 --> 00:04:12,560 Speaker 4: cannot absorb is a policy mistake, Muhammad. 75 00:04:12,600 --> 00:04:16,400 Speaker 1: When it comes to these potential policies and these exogged 76 00:04:16,440 --> 00:04:20,960 Speaker 1: shocks that Danny's talking about, the big unknown is obviously 77 00:04:21,040 --> 00:04:23,360 Speaker 1: the composition of Washington next year. 78 00:04:23,680 --> 00:04:24,440 Speaker 3: How should the. 79 00:04:24,360 --> 00:04:27,080 Speaker 1: FED be thinking about twenty twenty five when we might 80 00:04:27,160 --> 00:04:30,120 Speaker 1: have very different policies coming out of the White House 81 00:04:30,160 --> 00:04:30,799 Speaker 1: in Congress. 82 00:04:32,200 --> 00:04:34,440 Speaker 4: I think they have no choice but to do what 83 00:04:34,480 --> 00:04:37,599 Speaker 4: they said they do, which is, we will wait. We 84 00:04:37,640 --> 00:04:40,120 Speaker 4: will see what happens in the presidential election, we will 85 00:04:40,120 --> 00:04:42,480 Speaker 4: see what happens to Congress. We will see to what 86 00:04:42,560 --> 00:04:47,360 Speaker 4: happens to actual as opposed to stated policy approaches, and 87 00:04:47,440 --> 00:04:51,640 Speaker 4: then we will include this in our assessment. And Marie, 88 00:04:51,800 --> 00:04:56,440 Speaker 4: is very difficult to move earlier. If you were forced 89 00:04:56,480 --> 00:04:59,719 Speaker 4: to move, you'd be more cautious on the inflation side 90 00:05:00,160 --> 00:05:01,560 Speaker 4: for both candidates. 91 00:05:01,880 --> 00:05:04,200 Speaker 1: Is that why potentially we got this clear guidance today 92 00:05:04,200 --> 00:05:07,400 Speaker 1: from President Williams in the Financial Times basically saying follow 93 00:05:07,400 --> 00:05:10,960 Speaker 1: the dot plots, don't read into the fifty basis point cut. 94 00:05:11,000 --> 00:05:14,440 Speaker 1: That was the exception, not the rule, because on November seven, 95 00:05:14,520 --> 00:05:18,160 Speaker 1: they may be meeting without knowing the results of the election. 96 00:05:20,000 --> 00:05:21,880 Speaker 4: Yeah, I know. I think they want to pivot away 97 00:05:21,880 --> 00:05:25,000 Speaker 4: from the fifty because I think that if they knew 98 00:05:25,320 --> 00:05:27,560 Speaker 4: then what they know now, they wouldn't have done fifty. 99 00:05:27,720 --> 00:05:30,799 Speaker 4: They would have done twenty five, as many people proposed. 100 00:05:31,720 --> 00:05:34,400 Speaker 4: So they're trying to pivot away from the fifty and 101 00:05:34,480 --> 00:05:37,440 Speaker 4: get the conversation forward looking. And I think you see 102 00:05:37,440 --> 00:05:40,080 Speaker 4: that in commentary over and over again coming out. 103 00:05:39,920 --> 00:05:40,320 Speaker 3: Of the FED. 104 00:05:40,640 --> 00:05:44,560 Speaker 5: Muhammad still every FED speaker that talked yesterday back fifty. 105 00:05:44,760 --> 00:05:46,920 Speaker 5: No one tried to walk away from it. I mean, 106 00:05:46,960 --> 00:05:49,320 Speaker 5: of course they probably wouldn't make a mistake, But what 107 00:05:49,360 --> 00:05:52,800 Speaker 5: does that tell you about Chair Powell still hold on 108 00:05:52,839 --> 00:05:55,240 Speaker 5: this committee and to direct monetary policy. 109 00:05:57,240 --> 00:05:57,880 Speaker 3: Danny looked that. 110 00:05:57,920 --> 00:06:00,599 Speaker 4: They have no choice but to defend the fifty because 111 00:06:00,600 --> 00:06:04,040 Speaker 4: there was only one descending vote, so of course they 112 00:06:04,040 --> 00:06:05,920 Speaker 4: had to defend the fifty, saying what we knew then 113 00:06:06,520 --> 00:06:11,280 Speaker 4: okay led us to fifty. I think it's John who 114 00:06:11,360 --> 00:06:13,800 Speaker 4: called it a drugy moment, the first time we've really 115 00:06:13,800 --> 00:06:18,039 Speaker 4: had a drugy moment by chef, by Chair Powell. It 116 00:06:18,120 --> 00:06:21,200 Speaker 4: was an important moment that he got done, and he 117 00:06:21,279 --> 00:06:25,960 Speaker 4: was willing to tolerate one important descent. I don't think 118 00:06:26,000 --> 00:06:28,040 Speaker 4: he's going to play that card over and over. 119 00:06:27,960 --> 00:06:29,719 Speaker 3: Again, Mohammed. I love your thoughts. 120 00:06:29,839 --> 00:06:32,039 Speaker 2: A little bit deeper on what we saw from Kolby 121 00:06:32,080 --> 00:06:34,760 Speaker 2: Smith and John Williams in the Financial Times. I'll share 122 00:06:34,760 --> 00:06:37,239 Speaker 2: the quote with you, the direct quote. If inflation fools 123 00:06:37,279 --> 00:06:40,239 Speaker 2: even faster than expected, that would quote call for policy 124 00:06:40,240 --> 00:06:42,600 Speaker 2: to normalize a little bit more quickly. If inflation still, 125 00:06:42,720 --> 00:06:45,279 Speaker 2: that would call for interest rates to come down more slowly. 126 00:06:45,560 --> 00:06:48,599 Speaker 2: There's a bias there, Muhammad, is to reduce interest rates, 127 00:06:49,120 --> 00:06:51,159 Speaker 2: and it's a bias to reduce interest rates based on 128 00:06:51,160 --> 00:06:54,200 Speaker 2: what happens with inflation, not what happens with payrolls. 129 00:06:54,360 --> 00:06:55,680 Speaker 3: And I'd love your thoughts on that. 130 00:06:55,720 --> 00:06:57,640 Speaker 2: Because last week before we spoke to you, before we 131 00:06:57,680 --> 00:06:59,839 Speaker 2: had that data, we had some guest points out that 132 00:07:00,160 --> 00:07:01,360 Speaker 2: the inflation data. 133 00:07:01,600 --> 00:07:02,680 Speaker 3: Didn't matter anymore. 134 00:07:02,839 --> 00:07:04,760 Speaker 2: Do you think it's the inflation data will set the 135 00:07:04,800 --> 00:07:07,240 Speaker 2: tone for the pace of interest rate reductions over the 136 00:07:07,320 --> 00:07:10,120 Speaker 2: next three quarters, and maybe not so much payrolls. 137 00:07:11,200 --> 00:07:12,880 Speaker 4: So I think it's both, John, It's going to be 138 00:07:12,880 --> 00:07:17,000 Speaker 4: the inflation data and the employment numbers. I think the 139 00:07:17,040 --> 00:07:21,760 Speaker 4: bias you're sensing comes from where the neutral rate is. 140 00:07:22,160 --> 00:07:26,640 Speaker 4: The midpoint the range is really large, really large. But 141 00:07:26,720 --> 00:07:28,960 Speaker 4: if you look at where the midpoint is, it leads 142 00:07:29,000 --> 00:07:36,440 Speaker 4: to this narrative that we are very restrictive. That's where 143 00:07:36,480 --> 00:07:38,960 Speaker 4: that bias comes from. Now, as you know, my neutral 144 00:07:39,000 --> 00:07:41,400 Speaker 4: rate is higher than the average. People will differ on 145 00:07:41,480 --> 00:07:43,880 Speaker 4: where the neutral rate is. But that bias comes because 146 00:07:43,960 --> 00:07:47,520 Speaker 4: people just compare where neutral is and say, wow, we're 147 00:07:47,520 --> 00:07:49,280 Speaker 4: still very far away from that. 148 00:07:49,600 --> 00:07:51,800 Speaker 2: We we've made the argument that things have changed and 149 00:07:51,840 --> 00:07:53,720 Speaker 2: I think a lot of people on the FMC are 150 00:07:53,800 --> 00:07:55,880 Speaker 2: yet to be convinced. Could you lay up that argument, now, 151 00:07:56,240 --> 00:07:58,560 Speaker 2: what has changed over the last five years that's led 152 00:07:58,600 --> 00:08:00,800 Speaker 2: to a high neutral rate in and what are those 153 00:08:00,800 --> 00:08:03,320 Speaker 2: conditions while we in that regime for a long time 154 00:08:03,360 --> 00:08:03,640 Speaker 2: to come. 155 00:08:04,880 --> 00:08:07,400 Speaker 4: And you've heard it from others like Larry Summers, and 156 00:08:07,920 --> 00:08:11,640 Speaker 4: there's also a hint of it in the Williams interview 157 00:08:12,080 --> 00:08:14,800 Speaker 4: that we mentioned earlier. First of all, it has to 158 00:08:14,840 --> 00:08:18,440 Speaker 4: happen what's happened between investment and savings, and that gap 159 00:08:18,680 --> 00:08:22,440 Speaker 4: actually is getting bigger between investment and saving. The second 160 00:08:22,520 --> 00:08:25,360 Speaker 4: thing is, let's not ignore what's happening on the fiscal side. 161 00:08:25,920 --> 00:08:29,040 Speaker 4: And then the third thing is the fragmenting global system. 162 00:08:29,640 --> 00:08:35,640 Speaker 4: The system of global system is structurally becoming more sensitive 163 00:08:35,800 --> 00:08:40,000 Speaker 4: and more vulnerable to adverse shocks. So you put these 164 00:08:40,000 --> 00:08:42,920 Speaker 4: three things together and it suggests that the neutral weight 165 00:08:42,960 --> 00:08:45,480 Speaker 4: has migrated up, and not just by a bit, but 166 00:08:46,360 --> 00:08:47,440 Speaker 4: by a notable amount. 167 00:08:48,120 --> 00:08:51,720 Speaker 5: Martin, The language does continue to be gradual reductions. Do 168 00:08:51,760 --> 00:08:53,360 Speaker 5: you think that there's a sense on the FED that 169 00:08:53,400 --> 00:08:56,000 Speaker 5: they realized that this might be the case. In gradualism 170 00:08:56,080 --> 00:08:58,400 Speaker 5: is necessary to end at the right point. 171 00:08:59,720 --> 00:09:02,640 Speaker 4: That's the great point. But gradualism means different things to 172 00:09:02,720 --> 00:09:08,079 Speaker 4: different people. Gradualism, I think, to most of us, means 173 00:09:08,160 --> 00:09:12,040 Speaker 4: take small steps. You're still in the dark, the image 174 00:09:12,080 --> 00:09:14,000 Speaker 4: that chair Pal shed with us a few years ago. 175 00:09:14,120 --> 00:09:16,280 Speaker 4: You're still feeling around in the dark. You're not quite 176 00:09:16,320 --> 00:09:20,080 Speaker 4: sure why everything is, so take it easy. That's one 177 00:09:20,120 --> 00:09:23,800 Speaker 4: bit of gradualism, and that's the bit that I That's 178 00:09:23,840 --> 00:09:26,760 Speaker 4: why I think I thought twenty five basis points starting 179 00:09:26,760 --> 00:09:29,320 Speaker 4: in July was the right thing. Let's not do anything 180 00:09:29,640 --> 00:09:33,920 Speaker 4: big bold, because what ends up doing is it changes expectations. 181 00:09:34,280 --> 00:09:34,439 Speaker 3: Look. 182 00:09:34,480 --> 00:09:37,120 Speaker 4: Then there's a much bigger point, which is markets are 183 00:09:37,120 --> 00:09:41,839 Speaker 4: all over the place. In the last what fifteen days, 184 00:09:41,880 --> 00:09:46,720 Speaker 4: the probability of a fifty basis point cut in November 185 00:09:46,800 --> 00:09:50,920 Speaker 4: has gone from over sixty percent to zero. Think about that, 186 00:09:51,280 --> 00:09:54,560 Speaker 4: November is next month. That is how much uncertainty there 187 00:09:54,559 --> 00:09:58,600 Speaker 4: has been in this market. This market lacks anchors when 188 00:09:58,640 --> 00:10:01,120 Speaker 4: it comes to how it sees the interestate part. The 189 00:10:01,280 --> 00:10:06,360 Speaker 4: whole profile of raight cuts has moved up, meaning fewer 190 00:10:06,360 --> 00:10:09,520 Speaker 4: cuts by fifty basis points. You know, these are massive 191 00:10:09,640 --> 00:10:14,160 Speaker 4: moves based on data points, and until we restore some 192 00:10:14,200 --> 00:10:17,200 Speaker 4: sort of anchor you're going to have this volatility that, 193 00:10:17,360 --> 00:10:20,199 Speaker 4: as you know, I worry that at some point you 194 00:10:20,679 --> 00:10:23,680 Speaker 4: may expose a structural weakness somewhere in the system. 195 00:10:23,920 --> 00:10:26,440 Speaker 1: Well, when it comes to these anchors, how difficult it 196 00:10:26,559 --> 00:10:30,120 Speaker 1: is to understand what the FED views as neutral. You 197 00:10:30,200 --> 00:10:32,600 Speaker 1: mentioned Williams again, and he hinted that that in the 198 00:10:32,640 --> 00:10:35,560 Speaker 1: Financial Times article he said, we'll quote way above it. 199 00:10:35,600 --> 00:10:36,880 Speaker 1: What does way above it mean? 200 00:10:37,880 --> 00:10:40,760 Speaker 4: That's exactly it. They have to be careful with their words, 201 00:10:40,440 --> 00:10:41,560 Speaker 4: That's exactly it. 202 00:10:41,640 --> 00:10:41,920 Speaker 3: I mean. 203 00:10:42,520 --> 00:10:46,040 Speaker 4: I think that that there's going to be a lot 204 00:10:46,080 --> 00:10:50,720 Speaker 4: written on what went wrong with FED communications starting in 205 00:10:50,760 --> 00:10:54,160 Speaker 4: twenty twenty one, and why is it that now FED 206 00:10:54,240 --> 00:10:59,719 Speaker 4: communication amplifies volatility, which is not what it's supposed to do. 207 00:10:59,800 --> 00:11:03,199 Speaker 4: The whole point of forward policy guidance is to lower 208 00:11:03,240 --> 00:11:06,160 Speaker 4: the overall volatility of the path and what we are 209 00:11:06,200 --> 00:11:12,800 Speaker 4: living in this strange regime where FED communication enhances volatility, 210 00:11:13,360 --> 00:11:15,200 Speaker 4: and that is something that I expect a lot of 211 00:11:15,200 --> 00:11:17,080 Speaker 4: work is going to be done on as to how 212 00:11:17,160 --> 00:11:18,960 Speaker 4: not to repeat this mistake going forward. 213 00:11:19,360 --> 00:11:21,080 Speaker 2: We're lucky to speak to one of the authors of 214 00:11:21,080 --> 00:11:22,960 Speaker 2: those books yet to be written. Mohammed is going to 215 00:11:22,960 --> 00:11:24,520 Speaker 2: catch out with you this morning. Thank you, sir, I 216 00:11:24,520 --> 00:11:36,520 Speaker 2: appreciate it. Muhammad al Aaron of Queen's College, Cambridge, winnis 217 00:11:36,520 --> 00:11:38,720 Speaker 2: around the table logged into the Bloomberg terminal. 218 00:11:38,840 --> 00:11:40,880 Speaker 3: Mark Havanner of Bank for America. Mark is going to 219 00:11:40,880 --> 00:11:41,160 Speaker 3: see you. 220 00:11:41,280 --> 00:11:43,640 Speaker 2: Likewise, thanks for joining to guess what's changed from you 221 00:11:44,200 --> 00:11:46,080 Speaker 2: and your cause for the Federal Reserve based on what 222 00:11:46,160 --> 00:11:47,280 Speaker 2: happened on Friday. 223 00:11:47,520 --> 00:11:49,520 Speaker 6: Sure, we were in the fifty basiness point cut camp 224 00:11:49,559 --> 00:11:53,079 Speaker 6: for November. The data dictates that that is no longer necessary. 225 00:11:53,600 --> 00:11:55,400 Speaker 6: So we now think that they'll go twenty five, and 226 00:11:55,440 --> 00:11:57,520 Speaker 6: that they'll deliver a string of twenty five basis point 227 00:11:57,600 --> 00:12:00,400 Speaker 6: rate cuts until they get to March of next so 228 00:12:00,480 --> 00:12:03,000 Speaker 6: around four percent, and then they'll slow down to a 229 00:12:03,080 --> 00:12:06,400 Speaker 6: quarterly pace of cuts until they get to a trough 230 00:12:06,520 --> 00:12:08,079 Speaker 6: of three to three in a quarter. 231 00:12:08,240 --> 00:12:09,559 Speaker 3: At least that's the base case. 232 00:12:10,080 --> 00:12:13,880 Speaker 6: Now, I'll tell you that amongst our clients, there's a 233 00:12:13,880 --> 00:12:15,920 Speaker 6: lot of uncertainty out there right now. 234 00:12:16,000 --> 00:12:17,160 Speaker 3: The data has surprised. 235 00:12:17,480 --> 00:12:19,160 Speaker 6: It doesn't seem like the data is giving us a 236 00:12:19,200 --> 00:12:22,400 Speaker 6: particularly clear narrative on what's going to happen. And we 237 00:12:22,520 --> 00:12:25,280 Speaker 6: sense that investors are really shifting probabilities of what the 238 00:12:25,320 --> 00:12:28,600 Speaker 6: most likely economic outcome is there was a lot of 239 00:12:28,640 --> 00:12:30,880 Speaker 6: belief that we were headed to a soft landing with 240 00:12:31,000 --> 00:12:34,280 Speaker 6: elevated risks of a recession, or at least increasing risks 241 00:12:34,320 --> 00:12:37,800 Speaker 6: of a recession. Now soft landing is still the base case, 242 00:12:37,880 --> 00:12:40,160 Speaker 6: it seems, but the market is putting a little bit 243 00:12:40,160 --> 00:12:43,120 Speaker 6: more weight on the possibility that maybe there's a quote 244 00:12:43,160 --> 00:12:46,240 Speaker 6: unquote no landing type scenario, or maybe the Fed doesn't 245 00:12:46,240 --> 00:12:49,600 Speaker 6: need to cut much below four percent at all. And 246 00:12:49,679 --> 00:12:52,720 Speaker 6: so the market right now, we think, given that uncertainty, 247 00:12:52,960 --> 00:12:57,679 Speaker 6: is just trying to be a bit defensive rates Clients 248 00:12:57,720 --> 00:13:00,480 Speaker 6: don't want to extend too far out the curve right now, 249 00:13:00,559 --> 00:13:02,480 Speaker 6: especially given that we're just about a month away from 250 00:13:02,520 --> 00:13:05,400 Speaker 6: the election, and as a result of that, they're keeping 251 00:13:05,480 --> 00:13:07,920 Speaker 6: things nimble and light and kind of waiting for data 252 00:13:07,960 --> 00:13:08,959 Speaker 6: to try and guide a bit more. 253 00:13:09,000 --> 00:13:11,199 Speaker 2: We saw money pile into money market funds as well 254 00:13:11,280 --> 00:13:13,360 Speaker 2: ahead of that economic data. And I've asked this a 255 00:13:13,360 --> 00:13:14,960 Speaker 2: few times, what do you think is behind that move? 256 00:13:14,960 --> 00:13:15,760 Speaker 2: What's driving that. 257 00:13:16,600 --> 00:13:17,840 Speaker 3: Rates are still high? 258 00:13:18,280 --> 00:13:20,920 Speaker 6: And just because the Fed is cutting doesn't necessarily change 259 00:13:20,920 --> 00:13:23,719 Speaker 6: your behavior as a depositor. Ask yourself, what does your 260 00:13:24,160 --> 00:13:27,480 Speaker 6: retail bank deposit pay you, if it pays you something 261 00:13:27,520 --> 00:13:29,600 Speaker 6: close to T bill yield, you should tell me where 262 00:13:29,640 --> 00:13:32,200 Speaker 6: you bank, because I'd be interested in knowing that. But 263 00:13:32,400 --> 00:13:36,840 Speaker 6: for most retail depositors, they're offered something close to zero, 264 00:13:37,440 --> 00:13:39,920 Speaker 6: and so T bill rates are still well above that. 265 00:13:40,360 --> 00:13:42,520 Speaker 6: And so we do think that there's going to continue 266 00:13:42,559 --> 00:13:44,720 Speaker 6: to be a lot of inflows into money market mutual 267 00:13:44,720 --> 00:13:47,200 Speaker 6: funds even if the FED is cutting, because it's not 268 00:13:47,280 --> 00:13:50,080 Speaker 6: about whether rates are rising or falling, it's about the 269 00:13:50,160 --> 00:13:52,760 Speaker 6: overall level of interest rates. And work that we have 270 00:13:52,840 --> 00:13:56,200 Speaker 6: done says that you shouldn't expect to see really large 271 00:13:56,240 --> 00:14:00,160 Speaker 6: outflows from money funds unless the FED cuts to something 272 00:14:00,200 --> 00:14:03,040 Speaker 6: that is at or below two percent, and that seems 273 00:14:03,200 --> 00:14:05,760 Speaker 6: very unlikely based upon the data that we have at 274 00:14:05,760 --> 00:14:08,040 Speaker 6: hand and what the market is thinking about the FED 275 00:14:08,080 --> 00:14:08,760 Speaker 6: cutting cycle. 276 00:14:09,080 --> 00:14:12,360 Speaker 5: Market's also a tenure that's been going higher. Yields have 277 00:14:12,400 --> 00:14:14,800 Speaker 5: been going higher even since before the FED cut by 278 00:14:14,800 --> 00:14:17,200 Speaker 5: fifty basis points, and it's just continued on. 279 00:14:17,760 --> 00:14:18,760 Speaker 3: How much of that is just. 280 00:14:18,720 --> 00:14:22,160 Speaker 5: A factor of what you first started talking about, that unknowingness, 281 00:14:22,200 --> 00:14:25,480 Speaker 5: that vulnerability, and that volatility just adding a premium to 282 00:14:25,520 --> 00:14:26,480 Speaker 5: this bond market, Well, I. 283 00:14:26,440 --> 00:14:28,200 Speaker 6: Think it's a couple of things. Number one, I think 284 00:14:28,240 --> 00:14:32,880 Speaker 6: it's that rates investors do believe that a more proactive 285 00:14:32,920 --> 00:14:36,760 Speaker 6: FED today means a better economy tomorrow. 286 00:14:37,000 --> 00:14:38,840 Speaker 3: And think about on the day when. 287 00:14:38,720 --> 00:14:41,480 Speaker 6: We set, when we saw the FED cut fifty, you 288 00:14:41,560 --> 00:14:44,200 Speaker 6: actually saw long end yields rise because there was a 289 00:14:44,240 --> 00:14:46,120 Speaker 6: sense that the FED was going to be decisive at 290 00:14:46,240 --> 00:14:49,440 Speaker 6: quickly do what it takes to support the economy, and 291 00:14:49,480 --> 00:14:52,400 Speaker 6: then that should allow for better growth in the future. 292 00:14:52,640 --> 00:14:56,160 Speaker 6: That we think is arguably the biggest part of why 293 00:14:56,200 --> 00:14:58,640 Speaker 6: the back end has been moving up a bit. But 294 00:14:58,680 --> 00:15:03,200 Speaker 6: there's also supply demand concerns, and the election is a 295 00:15:03,200 --> 00:15:06,960 Speaker 6: big wild card. Certainly, it doesn't seem like fiscal policy 296 00:15:07,040 --> 00:15:09,920 Speaker 6: is going to be tightened in a big way after 297 00:15:09,960 --> 00:15:13,520 Speaker 6: the election, and so we can debate, well, how easy 298 00:15:13,560 --> 00:15:17,080 Speaker 6: will fiscal policy get based upon the election outcome. But 299 00:15:17,160 --> 00:15:19,360 Speaker 6: I think investors are just a little bit reluctant to 300 00:15:19,400 --> 00:15:22,320 Speaker 6: extend out the curve, knowing that you can get political 301 00:15:22,360 --> 00:15:25,760 Speaker 6: outcomes that would result in much easier fiscal policy and 302 00:15:26,160 --> 00:15:27,280 Speaker 6: more treasury supply. 303 00:15:27,600 --> 00:15:29,360 Speaker 1: As you're saying this, though, I'm thinking in my head, 304 00:15:29,400 --> 00:15:32,400 Speaker 1: who is the candidate for less fiscal spending? 305 00:15:33,280 --> 00:15:35,640 Speaker 6: So I don't want to get into the politics too much. 306 00:15:35,800 --> 00:15:36,880 Speaker 3: But it's a good response. 307 00:15:37,200 --> 00:15:42,400 Speaker 6: Thanks, I've been trained well, but via media people. But 308 00:15:45,360 --> 00:15:50,360 Speaker 6: investors right now do not expect that there's really any 309 00:15:50,440 --> 00:15:55,960 Speaker 6: party or any candidate that supports meaningful fiscal austerity, and 310 00:15:56,000 --> 00:15:58,240 Speaker 6: so therefore it's just a question of whether or not 311 00:15:58,320 --> 00:16:02,680 Speaker 6: the fiscal outlook gets a lot worse or a little worse, 312 00:16:03,360 --> 00:16:07,560 Speaker 6: and investors, knowing that the election is very tight, and 313 00:16:07,840 --> 00:16:10,480 Speaker 6: knowing that investors don't want to take a strong call 314 00:16:10,640 --> 00:16:14,240 Speaker 6: on that right now, are deciding to just stay a 315 00:16:14,280 --> 00:16:17,840 Speaker 6: little bit shorter duration. So some of the flows work 316 00:16:17,920 --> 00:16:20,600 Speaker 6: that members of my team do sees that they're very 317 00:16:20,600 --> 00:16:23,800 Speaker 6: sizeable inflows into fixed income funds, not too different from 318 00:16:23,840 --> 00:16:26,480 Speaker 6: the money market mutual fund inflows John that you referred 319 00:16:26,520 --> 00:16:30,120 Speaker 6: to earlier. But when those flows come in, they're generally 320 00:16:30,200 --> 00:16:32,680 Speaker 6: staying short on the curve, and that is due to 321 00:16:32,800 --> 00:16:36,320 Speaker 6: investors who just don't have a lot of confidence in 322 00:16:36,480 --> 00:16:39,600 Speaker 6: what the political or macro backdrop looks like in a 323 00:16:39,680 --> 00:16:42,760 Speaker 6: month or so. And as a result of that, these 324 00:16:42,840 --> 00:16:46,000 Speaker 6: positions are kind of de facto and steepeners. And when 325 00:16:46,040 --> 00:16:48,400 Speaker 6: you get really strong data like we had on Friday, 326 00:16:48,760 --> 00:16:51,960 Speaker 6: then that does create a bit of attension for investors 327 00:16:52,000 --> 00:16:53,680 Speaker 6: who have moved further in on the curve. 328 00:16:53,880 --> 00:16:55,480 Speaker 1: Jonathan and I were just talking about the fact that 329 00:16:55,520 --> 00:16:58,680 Speaker 1: if we might not have a decision days or even 330 00:16:58,720 --> 00:17:01,160 Speaker 1: weeks out, this could also drag on for months. This 331 00:17:01,200 --> 00:17:03,960 Speaker 1: could be contested. What are flows on the short end 332 00:17:03,960 --> 00:17:04,800 Speaker 1: look like then. 333 00:17:06,240 --> 00:17:09,520 Speaker 6: So it's a great question. I guess I would just 334 00:17:09,640 --> 00:17:14,560 Speaker 6: respond by saying that over recent weeks and months, we 335 00:17:14,600 --> 00:17:19,800 Speaker 6: have certainly seen that treasuries have regained their flight to 336 00:17:19,920 --> 00:17:24,280 Speaker 6: quality attributes. When inflation was high, let's say, rewind a 337 00:17:24,359 --> 00:17:27,240 Speaker 6: year ago or so, I think we could have debated 338 00:17:27,520 --> 00:17:31,560 Speaker 6: how much treasuries actually retained that flight to quality benefit. 339 00:17:32,160 --> 00:17:34,720 Speaker 6: But if there is acute uncertainty, whether it's due to 340 00:17:34,960 --> 00:17:38,520 Speaker 6: US politics or whether it's due to geopolitics, we do 341 00:17:38,560 --> 00:17:42,520 Speaker 6: think that treasuries will still retain that flight to quality attribute, 342 00:17:42,600 --> 00:17:46,520 Speaker 6: and we should expect to see cash move into treasury securities, 343 00:17:46,680 --> 00:17:49,840 Speaker 6: probably mostly at the front or belly of the curve 344 00:17:49,920 --> 00:17:53,280 Speaker 6: in those types of scenarios, but certainly for the asset 345 00:17:53,320 --> 00:17:56,440 Speaker 6: class overall, we do think that it will retain those 346 00:17:56,760 --> 00:17:58,840 Speaker 6: kind of risk off or flight to quality benefits that 347 00:17:58,880 --> 00:18:00,000 Speaker 6: we have historically. 348 00:17:59,600 --> 00:18:01,080 Speaker 3: So a lot about the front end. 349 00:18:01,160 --> 00:18:03,439 Speaker 2: You've talked about how that money and money market funds 350 00:18:03,440 --> 00:18:05,680 Speaker 2: could be quite sticky and less FED funds. Comes down 351 00:18:05,720 --> 00:18:08,040 Speaker 2: to something like to can we talk about the long 352 00:18:08,119 --> 00:18:08,800 Speaker 2: end and just finish that? 353 00:18:08,960 --> 00:18:09,200 Speaker 3: Sure? 354 00:18:09,280 --> 00:18:10,840 Speaker 2: What are you looking for the long end to curve 355 00:18:10,840 --> 00:18:12,399 Speaker 2: what kind of numbers? We had a guest from pagim 356 00:18:12,480 --> 00:18:14,399 Speaker 2: Yes THATDA saying we're in the buy zone four percent 357 00:18:14,480 --> 00:18:16,679 Speaker 2: for twenty five lock it in, get a second by 358 00:18:16,840 --> 00:18:18,240 Speaker 2: second opportunity, take it. 359 00:18:18,440 --> 00:18:19,199 Speaker 3: What's your advice? 360 00:18:19,359 --> 00:18:23,280 Speaker 6: Yeah, So we wrote yesterday that we do think at 361 00:18:23,359 --> 00:18:25,480 Speaker 6: least using the tenure as a proxy between four to 362 00:18:25,520 --> 00:18:27,680 Speaker 6: four and a quarter is a reasonable place to begin 363 00:18:27,760 --> 00:18:31,760 Speaker 6: scaling in. We're already there, obviously, But here's the framework 364 00:18:31,800 --> 00:18:34,639 Speaker 6: that we have used, and a number of folks on 365 00:18:34,680 --> 00:18:37,760 Speaker 6: our team have wrote recently written about this in slightly 366 00:18:37,760 --> 00:18:41,359 Speaker 6: different ways, but we called it two three four type framework. 367 00:18:41,840 --> 00:18:42,359 Speaker 3: The FED is. 368 00:18:42,359 --> 00:18:45,359 Speaker 6: Almost certainly going to cut to four percent, almost regardless 369 00:18:45,359 --> 00:18:45,800 Speaker 6: of the data. 370 00:18:45,840 --> 00:18:46,399 Speaker 3: Don't believe me. 371 00:18:46,440 --> 00:18:49,200 Speaker 6: Look at their dots in twenty twenty five, all dots 372 00:18:49,240 --> 00:18:52,439 Speaker 6: except the one or below four percent, So that seems 373 00:18:52,480 --> 00:18:54,879 Speaker 6: to be the recalibration zone. And that's maybe consistent with 374 00:18:54,920 --> 00:18:57,440 Speaker 6: quote unquote no landing, and so if the economy performs 375 00:18:57,440 --> 00:19:00,280 Speaker 6: really well, then four percent is probably where the they'll 376 00:19:00,359 --> 00:19:03,560 Speaker 6: end up. In a soft landing scenario. Using the fed's 377 00:19:03,600 --> 00:19:06,959 Speaker 6: own baseline, they'll probably end up closer to three percent. 378 00:19:07,240 --> 00:19:09,480 Speaker 6: That's the b of a house view. That's our economist's 379 00:19:09,560 --> 00:19:11,679 Speaker 6: view as well. And if there's a recession or some 380 00:19:11,720 --> 00:19:13,800 Speaker 6: type of sharp slowdown, then you can envision a two 381 00:19:13,880 --> 00:19:16,680 Speaker 6: percent or lower type of outcome. So then the question 382 00:19:16,760 --> 00:19:20,360 Speaker 6: is really how do you assign probabilities to those various outcomes. 383 00:19:20,720 --> 00:19:23,720 Speaker 6: And again, our base case is the soft landing. 384 00:19:23,880 --> 00:19:25,800 Speaker 3: That's all well and good, But if you. 385 00:19:25,800 --> 00:19:28,400 Speaker 6: Just look at ten year ois, let's say that's around 386 00:19:28,440 --> 00:19:31,040 Speaker 6: three sixty at the moment. If that gets up to 387 00:19:31,080 --> 00:19:34,520 Speaker 6: three seventy five or even higher, then clearly the market 388 00:19:34,560 --> 00:19:37,639 Speaker 6: is overweighting that four percent outcome. That's so called no 389 00:19:38,040 --> 00:19:41,560 Speaker 6: landing outcome, and investors can decide for themselves whether or 390 00:19:41,600 --> 00:19:44,840 Speaker 6: not they think that's reasonable. We think that's very optimistic, 391 00:19:45,440 --> 00:19:47,720 Speaker 6: and the world's a very uncertain place. The rest of 392 00:19:47,760 --> 00:19:50,320 Speaker 6: the world is maybe not as robust as the US is, 393 00:19:51,000 --> 00:19:52,600 Speaker 6: and so to think that we could slip into a 394 00:19:52,640 --> 00:19:56,160 Speaker 6: soft landing or a potentially harder landing is not unreasonable. 395 00:19:56,320 --> 00:19:59,639 Speaker 6: And again US rates and fixed income provide a hedge 396 00:19:59,720 --> 00:20:01,080 Speaker 6: again to those outcomes. 397 00:20:01,400 --> 00:20:02,359 Speaker 3: And therefore we do. 398 00:20:02,280 --> 00:20:04,840 Speaker 6: Think that if ten year OIS gets to three seventy five, 399 00:20:05,000 --> 00:20:08,760 Speaker 6: again be thinking the ten year close to for fifteen, 400 00:20:08,880 --> 00:20:11,280 Speaker 6: for twenty five. At that point, we do think that 401 00:20:11,280 --> 00:20:14,520 Speaker 6: it's a very reasonable opportunity to begin to scale in 402 00:20:14,800 --> 00:20:16,800 Speaker 6: and trust that it should perform at some point or 403 00:20:16,840 --> 00:20:19,200 Speaker 6: at least that your downside is very limited if you're 404 00:20:19,200 --> 00:20:20,479 Speaker 6: investing around those levels. 405 00:20:20,600 --> 00:20:22,920 Speaker 2: Mark appreciate it. Good having Thank you, sir, Mark A. 406 00:20:22,960 --> 00:20:34,879 Speaker 2: Banave of Bank of America. So here's the latest Goldman 407 00:20:34,960 --> 00:20:37,560 Speaker 2: Sachs upgrading the S and P five hundred target, predicting 408 00:20:37,560 --> 00:20:40,000 Speaker 2: the index will hit six k by year end as 409 00:20:40,040 --> 00:20:42,720 Speaker 2: six three hundred and twelve months time the team of 410 00:20:42,800 --> 00:20:45,679 Speaker 2: Goldman writing. The primary driver of the upward revision to 411 00:20:45,720 --> 00:20:49,440 Speaker 2: our twenty twenty five EPs estimate is greater margin expansion. 412 00:20:49,440 --> 00:20:53,960 Speaker 2: The macro backdrop remains conducive to modest margin expansion, with 413 00:20:54,080 --> 00:20:58,480 Speaker 2: prices charged outpacing input cost growth. Ben Sneyder Golmmet Sachs 414 00:20:58,720 --> 00:21:00,880 Speaker 2: responsible for some of these co joints just around the table. 415 00:21:00,960 --> 00:21:02,560 Speaker 3: Thank good to see you welcome to the program. Good 416 00:21:02,600 --> 00:21:02,960 Speaker 3: to be here. 417 00:21:03,040 --> 00:21:05,640 Speaker 2: Let's get to the margin expansion, the pricing power. Where 418 00:21:05,640 --> 00:21:06,880 Speaker 2: does that pricing power come from? 419 00:21:06,960 --> 00:21:07,840 Speaker 3: Right now? Who's got it? 420 00:21:08,119 --> 00:21:10,560 Speaker 7: I heard you just mentioned it this morning's results from PEPSI. 421 00:21:10,920 --> 00:21:13,600 Speaker 7: And basically the way we think about margins is price 422 00:21:13,640 --> 00:21:17,000 Speaker 7: inflation minus input cost inflation. And we've all been so 423 00:21:17,119 --> 00:21:20,000 Speaker 7: focused on price inflation and it has slowed, but input 424 00:21:20,080 --> 00:21:22,720 Speaker 7: cost inflation has slowed even more so. For example, if 425 00:21:22,720 --> 00:21:25,040 Speaker 7: you look at unit labor cost growth in the US, 426 00:21:25,280 --> 00:21:28,720 Speaker 7: which is wages adjusted for productivity, that grew at basically 427 00:21:28,880 --> 00:21:30,080 Speaker 7: zero percent last quarter. 428 00:21:30,800 --> 00:21:32,880 Speaker 2: Economists have been trying to figure out if layoffs come 429 00:21:32,920 --> 00:21:35,080 Speaker 2: next as they start to present margins just a little 430 00:21:35,119 --> 00:21:36,439 Speaker 2: bit more. How do you think about that as an 431 00:21:36,440 --> 00:21:38,000 Speaker 2: actuality strategist to the layoffs coming. 432 00:21:38,200 --> 00:21:40,199 Speaker 7: It's great you raise it in the context because I 433 00:21:40,359 --> 00:21:44,040 Speaker 7: view profit margins as a really useful leading indicator for layoffs, 434 00:21:44,040 --> 00:21:45,960 Speaker 7: and I think it's very intuitive. If you run a 435 00:21:46,000 --> 00:21:49,400 Speaker 7: business and your margins are contracting, that would probably lead 436 00:21:49,400 --> 00:21:52,040 Speaker 7: you to higher fewer employees, or maybe even lay some off. 437 00:21:52,280 --> 00:21:54,720 Speaker 7: But the good news is today margins are expanding, and 438 00:21:54,760 --> 00:21:57,520 Speaker 7: I think that really confirms the strong labor market data 439 00:21:57,560 --> 00:21:58,600 Speaker 7: we saw last week, And you. 440 00:21:58,640 --> 00:22:00,960 Speaker 5: Also write though by twenty twenty which, first of all, 441 00:22:00,960 --> 00:22:02,600 Speaker 5: hats off for having any idea. 442 00:22:02,359 --> 00:22:03,760 Speaker 3: What twenty twenty six looks like. 443 00:22:04,000 --> 00:22:05,919 Speaker 5: But by that time you start to have a limited 444 00:22:05,960 --> 00:22:09,400 Speaker 5: ability to expand margins. What's happening to corporate America over 445 00:22:09,440 --> 00:22:12,000 Speaker 5: the next few years where that can't continue? 446 00:22:12,480 --> 00:22:14,680 Speaker 7: Well, like everyone else, like the market, we're trying to 447 00:22:14,680 --> 00:22:17,879 Speaker 7: be forward looking. We could get surprised, but at the moment, 448 00:22:17,960 --> 00:22:20,040 Speaker 7: our view is that growth by then will be close 449 00:22:20,080 --> 00:22:22,720 Speaker 7: to trend and the labor market will have tightened a 450 00:22:22,720 --> 00:22:24,679 Speaker 7: little bit as opposed to the loosening we've seen over 451 00:22:24,680 --> 00:22:26,960 Speaker 7: the last couple of years. In that kind of environment, 452 00:22:27,320 --> 00:22:29,960 Speaker 7: growth can still be very solid, but typically it's harder 453 00:22:29,960 --> 00:22:31,880 Speaker 7: for companies to really expand margins. 454 00:22:32,160 --> 00:22:35,040 Speaker 5: So how uneven is that going to be? Because I 455 00:22:35,040 --> 00:22:37,080 Speaker 5: know you're talking about it on a headline level, but again, 456 00:22:37,119 --> 00:22:39,000 Speaker 5: John and I were just talking about PEPSI needing to 457 00:22:39,040 --> 00:22:43,040 Speaker 5: cut costs, feeling some volume difficulty. How even will the 458 00:22:43,080 --> 00:22:45,040 Speaker 5: ability to expand margins next year be? 459 00:22:45,800 --> 00:22:48,040 Speaker 7: It actually looks to us like the ability of companies 460 00:22:48,040 --> 00:22:51,560 Speaker 7: to expand margins is improving, not not getting more narrow. 461 00:22:51,800 --> 00:22:53,680 Speaker 7: One of the characteristics of the market over the last 462 00:22:53,720 --> 00:22:55,800 Speaker 7: couple of years is I'm sure most of our viewers know, 463 00:22:56,280 --> 00:22:58,840 Speaker 7: is that it's been a pretty narrow breath market. Technology 464 00:22:58,840 --> 00:23:01,200 Speaker 7: stocks have been able to grow more margins. Everyone else's 465 00:23:01,280 --> 00:23:03,800 Speaker 7: kind of struggled. But now with the economy in such 466 00:23:03,840 --> 00:23:06,000 Speaker 7: good shape, it really looks like more and more parts 467 00:23:06,000 --> 00:23:08,200 Speaker 7: of the equity market are able to raise profits as well. 468 00:23:08,359 --> 00:23:10,440 Speaker 1: Ben, Let's talk about the corporate tax right for next year, 469 00:23:10,480 --> 00:23:12,919 Speaker 1: we can have twenty eight percent or fifteen percent. The 470 00:23:12,960 --> 00:23:15,440 Speaker 1: Democrats took your recent note by you and the team 471 00:23:15,480 --> 00:23:17,080 Speaker 1: and really ran away with it because what it would 472 00:23:17,119 --> 00:23:19,800 Speaker 1: mean for growth, but ignored what it actually mean for 473 00:23:19,840 --> 00:23:22,919 Speaker 1: corporation's bottom line. What could we see with a twenty 474 00:23:23,000 --> 00:23:24,760 Speaker 1: eight percent corporate tax rate. 475 00:23:25,040 --> 00:23:28,320 Speaker 7: We've put those proposals through our models, and we estimate 476 00:23:28,359 --> 00:23:31,040 Speaker 7: that those could have, of course, a substantial impact on earnings, 477 00:23:31,040 --> 00:23:33,360 Speaker 7: just as we saw in twenty seventeen and eighteen under 478 00:23:33,400 --> 00:23:34,800 Speaker 7: the TCJA tax cuts. 479 00:23:34,920 --> 00:23:35,560 Speaker 4: But I think it's. 480 00:23:35,400 --> 00:23:38,200 Speaker 7: Important to note you mentioned fifteen percent twenty eight percent. 481 00:23:38,200 --> 00:23:41,000 Speaker 7: Those aren't the only options. It's always possible that tax 482 00:23:41,040 --> 00:23:43,400 Speaker 7: policy falls somewhere in the middle or just remains where 483 00:23:43,400 --> 00:23:45,399 Speaker 7: it is with the federal rate of twenty one percent, 484 00:23:45,640 --> 00:23:46,879 Speaker 7: and then of course there are a whole number of 485 00:23:46,920 --> 00:23:50,200 Speaker 7: other factors to think about as well. There's a fiscal expansion, 486 00:23:50,480 --> 00:23:53,320 Speaker 7: there's tariff policy, and then of course there's the primary 487 00:23:53,400 --> 00:23:56,760 Speaker 7: driver of earnings, which is GDP growth, and so ultimately 488 00:23:57,240 --> 00:23:59,919 Speaker 7: there could be a change to the earnings outlook post election, 489 00:24:00,240 --> 00:24:03,000 Speaker 7: but from our perspective, the much more important driver is 490 00:24:03,000 --> 00:24:05,320 Speaker 7: the strength of the economy, the margin story we were 491 00:24:05,359 --> 00:24:07,880 Speaker 7: talking about earlier, and so net net, we feel very 492 00:24:07,880 --> 00:24:09,320 Speaker 7: comfortable about the path going forward. 493 00:24:09,359 --> 00:24:11,560 Speaker 1: If there is a twenty eight percent though corporate tax 494 00:24:12,000 --> 00:24:14,919 Speaker 1: plan for the policy you say that can cut S 495 00:24:14,960 --> 00:24:17,080 Speaker 1: and P five hundred earnings by five percent, what would 496 00:24:17,080 --> 00:24:19,560 Speaker 1: that do to your twenty twenty five or to Danny's point, 497 00:24:19,680 --> 00:24:21,760 Speaker 1: if you can look into the future twenty twenty six 498 00:24:21,800 --> 00:24:22,639 Speaker 1: price targets. 499 00:24:22,880 --> 00:24:24,919 Speaker 7: Yeah, So keep in mind it's a one time shift 500 00:24:25,000 --> 00:24:28,719 Speaker 7: to earnings. And right now we're forecasting eleven percent earnings 501 00:24:28,720 --> 00:24:31,480 Speaker 7: growth next year, so if we were to subtract five 502 00:24:31,480 --> 00:24:33,959 Speaker 7: percent from that, we get about six percent earnings growth, 503 00:24:34,000 --> 00:24:37,280 Speaker 7: which coincidentally is where our forecast was last week before 504 00:24:37,280 --> 00:24:38,360 Speaker 7: we raised our estimates. 505 00:24:38,480 --> 00:24:42,280 Speaker 2: Habersis proposal is clean, at least compared to Trump's Propiesal 506 00:24:42,359 --> 00:24:45,440 Speaker 2: can we talk about that fifteen percent with a condition, 507 00:24:46,119 --> 00:24:48,720 Speaker 2: a manufacturing condition here in the unated snakes? How are 508 00:24:48,720 --> 00:24:50,399 Speaker 2: you and the say you considering that? How do you 509 00:24:50,400 --> 00:24:51,679 Speaker 2: put that through any kind of model? 510 00:24:52,119 --> 00:24:52,919 Speaker 3: It's difficult to do. 511 00:24:53,080 --> 00:24:56,240 Speaker 7: Fifteen percent is relatively straightforward, and we run those numbers 512 00:24:56,520 --> 00:24:59,840 Speaker 7: and then I think the question is uncertainty, And actually 513 00:25:00,000 --> 00:25:02,639 Speaker 7: that is the key dynamic that we've seen historically around elections. 514 00:25:02,640 --> 00:25:04,560 Speaker 7: You know, there's been a lot of discussion about tariffs 515 00:25:04,600 --> 00:25:07,439 Speaker 7: and tax but ultimately, if you look at every single 516 00:25:07,440 --> 00:25:11,040 Speaker 7: presidential election year, uncertainty is really the most important thing 517 00:25:11,040 --> 00:25:13,560 Speaker 7: for stocks. And it's this period the weeks before the 518 00:25:13,600 --> 00:25:16,440 Speaker 7: election when uncertainty tends to be highest. That leads to 519 00:25:16,520 --> 00:25:19,480 Speaker 7: higher implied volatility, a little bit of market weakness. But 520 00:25:19,560 --> 00:25:21,679 Speaker 7: of course the flip side of that is after the 521 00:25:21,720 --> 00:25:25,360 Speaker 7: election that uncertainty moves lower and stocks usually rise higher. 522 00:25:25,400 --> 00:25:27,679 Speaker 7: And as you mentioned earlier, we expect the SMP to 523 00:25:27,720 --> 00:25:28,840 Speaker 7: repeat that pattern this year. 524 00:25:28,920 --> 00:25:30,919 Speaker 1: What do you make also on impact, say to a 525 00:25:30,960 --> 00:25:34,000 Speaker 1: company like deer, the former president is talking about tariffs 526 00:25:34,040 --> 00:25:37,320 Speaker 1: on deer. If they move some labor and production to say, Mexico, 527 00:25:37,800 --> 00:25:39,920 Speaker 1: how do you envision all of us coming into plane 528 00:25:39,960 --> 00:25:41,840 Speaker 1: twenty twenty five if the former president is in the 529 00:25:41,840 --> 00:25:42,399 Speaker 1: White House. 530 00:25:43,000 --> 00:25:43,200 Speaker 4: Yeah. 531 00:25:43,240 --> 00:25:46,600 Speaker 7: I think basically my read from all of this policy 532 00:25:46,640 --> 00:25:48,840 Speaker 7: discussion is that it's much more going to be a 533 00:25:48,880 --> 00:25:52,040 Speaker 7: story of rotation within the equity market than a dynamic 534 00:25:52,080 --> 00:25:54,000 Speaker 7: that affects the level of the S and P and aggrogate. 535 00:25:54,280 --> 00:25:55,960 Speaker 7: And you can see this if you look at correlations 536 00:25:55,960 --> 00:25:58,560 Speaker 7: with prediction markets over the last few months. For example, 537 00:25:58,600 --> 00:26:01,440 Speaker 7: small caps tend to have perform better as you've seen 538 00:26:01,520 --> 00:26:04,959 Speaker 7: Republican odds rise in prediction markets. And so ultimately, depending 539 00:26:05,040 --> 00:26:07,280 Speaker 7: on the policies that are actually laid out by whoever 540 00:26:07,320 --> 00:26:09,840 Speaker 7: the next administration is, I think that will change where 541 00:26:09,880 --> 00:26:13,240 Speaker 7: we think within the market investors should invest. But in aggregate, 542 00:26:13,440 --> 00:26:14,960 Speaker 7: I don't think it's really going to change our view. 543 00:26:15,080 --> 00:26:16,920 Speaker 2: Let's get to sect the code then, Fankfoot place debate 544 00:26:16,960 --> 00:26:18,800 Speaker 2: within the equity market at the moment, where is it. 545 00:26:19,080 --> 00:26:21,280 Speaker 7: I think the key change that is happening right now, 546 00:26:21,440 --> 00:26:24,480 Speaker 7: no surprise, is the actual FED cuts and the market 547 00:26:24,520 --> 00:26:26,760 Speaker 7: is forward looking. We've seen the long end of yield 548 00:26:26,800 --> 00:26:28,400 Speaker 7: curve decline well in advance. 549 00:26:28,119 --> 00:26:30,760 Speaker 3: Of those cuts, but the actual cuts. 550 00:26:30,480 --> 00:26:34,080 Speaker 7: Themselves do seem to be having some impact on economic activity. So, 551 00:26:34,080 --> 00:26:37,000 Speaker 7: for example, mortgage applications have risen in the last couple weeks. 552 00:26:37,160 --> 00:26:40,080 Speaker 7: We've seen very very little housing turnover over the last 553 00:26:40,080 --> 00:26:42,000 Speaker 7: couple of years. I think you can imagine that as 554 00:26:42,000 --> 00:26:44,600 Speaker 7: the FED cuts, we'll see more housing turnover. And that 555 00:26:44,640 --> 00:26:47,400 Speaker 7: means if you're a broker, if you sell furniture, there's 556 00:26:47,440 --> 00:26:49,560 Speaker 7: a lot of potential earnings upside ahead. 557 00:26:49,720 --> 00:26:51,159 Speaker 3: Ben appreciate it. It's going to say it. 558 00:26:51,160 --> 00:26:53,200 Speaker 2: What did against say Ben Snyder, Thattic Golment sank some 559 00:26:53,240 --> 00:26:56,080 Speaker 2: of the election means for your equity market. 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