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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. Mohammed l erna Queen's College, Cambridge,
Speaker 2: expecting more data surprises, saying quote, last Friday's data surprise
Speaker 2: relative to consensus expectations will not be the last one
Speaker 2: unless economists resist the temptation to look through the shock.
Speaker 2: What is needed in today's economy is to be more
Speaker 2: open minded about why such surprises keep occurring and how
Speaker 2: best to frame the accompanying policy regimes. Muhammedan pleased to
Speaker 2: say join us again, Mohammed, Welcome back to the program sir.
Speaker 3: Let's get into that.
Speaker 2: Why was it the volatility between reports that stood out
Speaker 2: for you and not just the strength in isolation.
Speaker 4: Thanks for having me, John. Look, this volatility, or what
Speaker 4: you've called ping pong narrative, has been with us for
Speaker 4: a while, and there's a clash. There's a clash between
Speaker 4: the mindset of most analysts that tend to think that
Speaker 4: the economy is in a structural equilibrium and the reality
Speaker 4: that we are going through major transition, both economic and
Speaker 4: policy wise. So if you're thinking one way about the
Speaker 4: economy but it's operating in another paradigm, you will get
Speaker 4: these surprises.
Speaker 2: So the obvious question with Bee Mohammad when you write
Speaker 2: things like how best to frame the accompanying policy regimes,
Speaker 2: what the Federal Reserve should be doing with this incoming information.
Speaker 4: So, first of all, understand that were going through structural changes.
Speaker 4: Luckily for us, these changes are favorable, unlike what you're
Speaker 4: seeing in Europe, unlike what you're seeing in China. That's
Speaker 4: the first thing. The second, it's not just about monetary policy. Yes,
Speaker 4: the FED was the only game in talent, but that's
Speaker 4: no longer the case. Fiscal policy is having an impact,
Speaker 4: Structure reforms are having an impact, So think beyond the FED.
Speaker 4: So what does it mean for the FED continue? In
Speaker 4: what I sense, and I hope I'm right. I sense
Speaker 4: is two evolution in how they are approaching policy, and
Speaker 4: you see this a little bit in John Williams's interview
Speaker 4: in the Financial Times. The first one is to be
Speaker 4: less excessively data dependent and have a more balanced backward
Speaker 4: looking forward looking approach. And the second one is to
Speaker 4: get away from this notion that you can target a
Speaker 4: specific outcome and have much more of an insurance mindset.
Speaker 4: And I think that if these two evolutions are correct
Speaker 4: and continue, it's good for the FED and would be
Speaker 4: good for the economy.
Speaker 5: Mohammed Just to that point, Adriana Kugler spoke yesterday too,
Speaker 5: and so that she's monitoring both Hurricane Helene and geopolitical events,
Speaker 5: but then goes on to say that the fear is
Speaker 5: is that they could have an impact on American employment,
Speaker 5: that risks escalate, uncertainty escalates, and that means that the
Speaker 5: FED might have to move more towards neutral more quickly.
Speaker 5: When you look at these exogenous shocks, is it still
Speaker 5: a FED put is it a FED that's going to
Speaker 5: come in and not cut And maybe isn't as concerns
Speaker 5: about the inflationary risks of for example, targeting oil capabilities
Speaker 5: by Iran Danny.
Speaker 4: The hardest thing is when the external shock, whether it's
Speaker 4: coming from oil crisis, whether it's coming from a supply
Speaker 4: disruption in the port, or whether it's coming from this
Speaker 4: awful hurricane down south. The hard thing is when it's stagflationary,
Speaker 4: when it lowers, grows, and increases price pressure. That is
Speaker 4: when the FED gets into a really difficult situation. Let's
Speaker 4: hope that none of these potential external shocks. One of
Speaker 4: them is resolved, but the other two are not. Let's
Speaker 4: hope that they don't because it will make it very
Speaker 4: hard for the FED to decide what to do. I think,
Speaker 4: and I believe for a long time, that the economy
Speaker 4: is fundamentally sound, so it can absorb shocks. What it
Speaker 4: cannot absorb is a policy mistake, Muhammad.
Speaker 1: When it comes to these potential policies and these exogged
Speaker 1: shocks that Danny's talking about, the big unknown is obviously
Speaker 1: the composition of Washington next year.
Speaker 3: How should the.
Speaker 1: FED be thinking about twenty twenty five when we might
Speaker 1: have very different policies coming out of the White House
Speaker 1: in Congress.
Speaker 4: I think they have no choice but to do what
Speaker 4: they said they do, which is, we will wait. We
Speaker 4: will see what happens in the presidential election, we will
Speaker 4: see what happens to Congress. We will see to what
Speaker 4: happens to actual as opposed to stated policy approaches, and
Speaker 4: then we will include this in our assessment. And Marie,
Speaker 4: is very difficult to move earlier. If you were forced
Speaker 4: to move, you'd be more cautious on the inflation side
Speaker 4: for both candidates.
Speaker 1: Is that why potentially we got this clear guidance today
Speaker 1: from President Williams in the Financial Times basically saying follow
Speaker 1: the dot plots, don't read into the fifty basis point cut.
Speaker 1: That was the exception, not the rule, because on November seven,
Speaker 1: they may be meeting without knowing the results of the election.
Speaker 4: Yeah, I know. I think they want to pivot away
Speaker 4: from the fifty because I think that if they knew
Speaker 4: then what they know now, they wouldn't have done fifty.
Speaker 4: They would have done twenty five, as many people proposed.
Speaker 4: So they're trying to pivot away from the fifty and
Speaker 4: get the conversation forward looking. And I think you see
Speaker 4: that in commentary over and over again coming out.
Speaker 3: Of the FED.
Speaker 5: Muhammad still every FED speaker that talked yesterday back fifty.
Speaker 5: No one tried to walk away from it. I mean,
Speaker 5: of course they probably wouldn't make a mistake, But what
Speaker 5: does that tell you about Chair Powell still hold on
Speaker 5: this committee and to direct monetary policy.
Speaker 3: Danny looked that.
Speaker 4: They have no choice but to defend the fifty because
Speaker 4: there was only one descending vote, so of course they
Speaker 4: had to defend the fifty, saying what we knew then
Speaker 4: okay led us to fifty. I think it's John who
Speaker 4: called it a drugy moment, the first time we've really
Speaker 4: had a drugy moment by chef, by Chair Powell. It
Speaker 4: was an important moment that he got done, and he
Speaker 4: was willing to tolerate one important descent. I don't think
Speaker 4: he's going to play that card over and over.
Speaker 3: Again, Mohammed. I love your thoughts.
Speaker 2: A little bit deeper on what we saw from Kolby
Speaker 2: Smith and John Williams in the Financial Times. I'll share
Speaker 2: the quote with you, the direct quote. If inflation fools
Speaker 2: even faster than expected, that would quote call for policy
Speaker 2: to normalize a little bit more quickly. If inflation still,
Speaker 2: that would call for interest rates to come down more slowly.
Speaker 2: There's a bias there, Muhammad, is to reduce interest rates,
Speaker 2: and it's a bias to reduce interest rates based on
Speaker 2: what happens with inflation, not what happens with payrolls.
Speaker 3: And I'd love your thoughts on that.
Speaker 2: Because last week before we spoke to you, before we
Speaker 2: had that data, we had some guest points out that
Speaker 2: the inflation data.
Speaker 3: Didn't matter anymore.
Speaker 2: Do you think it's the inflation data will set the
Speaker 2: tone for the pace of interest rate reductions over the
Speaker 2: next three quarters, and maybe not so much payrolls.
Speaker 4: So I think it's both, John, It's going to be
Speaker 4: the inflation data and the employment numbers. I think the
Speaker 4: bias you're sensing comes from where the neutral rate is.
Speaker 4: The midpoint the range is really large, really large. But
Speaker 4: if you look at where the midpoint is, it leads
Speaker 4: to this narrative that we are very restrictive. That's where
Speaker 4: that bias comes from. Now, as you know, my neutral
Speaker 4: rate is higher than the average. People will differ on
Speaker 4: where the neutral rate is. But that bias comes because
Speaker 4: people just compare where neutral is and say, wow, we're
Speaker 4: still very far away from that.
Speaker 2: We we've made the argument that things have changed and
Speaker 2: I think a lot of people on the FMC are
Speaker 2: yet to be convinced. Could you lay up that argument, now,
Speaker 2: what has changed over the last five years that's led
Speaker 2: to a high neutral rate in and what are those
Speaker 2: conditions while we in that regime for a long time
Speaker 2: to come.
Speaker 4: And you've heard it from others like Larry Summers, and
Speaker 4: there's also a hint of it in the Williams interview
Speaker 4: that we mentioned earlier. First of all, it has to
Speaker 4: happen what's happened between investment and savings, and that gap
Speaker 4: actually is getting bigger between investment and saving. The second
Speaker 4: thing is, let's not ignore what's happening on the fiscal side.
Speaker 4: And then the third thing is the fragmenting global system.
Speaker 4: The system of global system is structurally becoming more sensitive
Speaker 4: and more vulnerable to adverse shocks. So you put these
Speaker 4: three things together and it suggests that the neutral weight
Speaker 4: has migrated up, and not just by a bit, but
Speaker 4: by a notable amount.
Speaker 5: Martin, The language does continue to be gradual reductions. Do
Speaker 5: you think that there's a sense on the FED that
Speaker 5: they realized that this might be the case. In gradualism
Speaker 5: is necessary to end at the right point.
Speaker 4: That's the great point. But gradualism means different things to
Speaker 4: different people. Gradualism, I think, to most of us, means
Speaker 4: take small steps. You're still in the dark, the image
Speaker 4: that chair Pal shed with us a few years ago.
Speaker 4: You're still feeling around in the dark. You're not quite
Speaker 4: sure why everything is, so take it easy. That's one
Speaker 4: bit of gradualism, and that's the bit that I That's
Speaker 4: why I think I thought twenty five basis points starting
Speaker 4: in July was the right thing. Let's not do anything
Speaker 4: big bold, because what ends up doing is it changes expectations.
Speaker 3: Look.
Speaker 4: Then there's a much bigger point, which is markets are
Speaker 4: all over the place. In the last what fifteen days,
Speaker 4: the probability of a fifty basis point cut in November
Speaker 4: has gone from over sixty percent to zero. Think about that,
Speaker 4: November is next month. That is how much uncertainty there
Speaker 4: has been in this market. This market lacks anchors when
Speaker 4: it comes to how it sees the interestate part. The
Speaker 4: whole profile of raight cuts has moved up, meaning fewer
Speaker 4: cuts by fifty basis points. You know, these are massive
Speaker 4: moves based on data points, and until we restore some
Speaker 4: sort of anchor you're going to have this volatility that,
Speaker 4: as you know, I worry that at some point you
Speaker 4: may expose a structural weakness somewhere in the system.
Speaker 1: Well, when it comes to these anchors, how difficult it
Speaker 1: is to understand what the FED views as neutral. You
Speaker 1: mentioned Williams again, and he hinted that that in the
Speaker 1: Financial Times article he said, we'll quote way above it.
Speaker 1: What does way above it mean?
Speaker 4: That's exactly it. They have to be careful with their words,
Speaker 4: That's exactly it.
Speaker 3: I mean.
Speaker 4: I think that that there's going to be a lot
Speaker 4: written on what went wrong with FED communications starting in
Speaker 4: twenty twenty one, and why is it that now FED
Speaker 4: communication amplifies volatility, which is not what it's supposed to do.
Speaker 4: The whole point of forward policy guidance is to lower
Speaker 4: the overall volatility of the path and what we are
Speaker 4: living in this strange regime where FED communication enhances volatility,
Speaker 4: and that is something that I expect a lot of
Speaker 4: work is going to be done on as to how
Speaker 4: not to repeat this mistake going forward.
Speaker 2: We're lucky to speak to one of the authors of
Speaker 2: those books yet to be written. Mohammed is going to
Speaker 2: catch out with you this morning. Thank you, sir, I
Speaker 2: appreciate it. Muhammad al Aaron of Queen's College, Cambridge, winnis
Speaker 2: around the table logged into the Bloomberg terminal.
Speaker 3: Mark Havanner of Bank for America. Mark is going to
Speaker 3: see you.
Speaker 2: Likewise, thanks for joining to guess what's changed from you
Speaker 2: and your cause for the Federal Reserve based on what
Speaker 2: happened on Friday.
Speaker 6: Sure, we were in the fifty basiness point cut camp
Speaker 6: for November. The data dictates that that is no longer necessary.
Speaker 6: So we now think that they'll go twenty five, and
Speaker 6: that they'll deliver a string of twenty five basis point
Speaker 6: rate cuts until they get to March of next so
Speaker 6: around four percent, and then they'll slow down to a
Speaker 6: quarterly pace of cuts until they get to a trough
Speaker 6: of three to three in a quarter.
Speaker 3: At least that's the base case.
Speaker 6: Now, I'll tell you that amongst our clients, there's a
Speaker 6: lot of uncertainty out there right now.
Speaker 3: The data has surprised.
Speaker 6: It doesn't seem like the data is giving us a
Speaker 6: particularly clear narrative on what's going to happen. And we
Speaker 6: sense that investors are really shifting probabilities of what the
Speaker 6: most likely economic outcome is there was a lot of
Speaker 6: belief that we were headed to a soft landing with
Speaker 6: elevated risks of a recession, or at least increasing risks
Speaker 6: of a recession. Now soft landing is still the base case,
Speaker 6: it seems, but the market is putting a little bit
Speaker 6: more weight on the possibility that maybe there's a quote
Speaker 6: unquote no landing type scenario, or maybe the Fed doesn't
Speaker 6: need to cut much below four percent at all. And
Speaker 6: so the market right now, we think, given that uncertainty,
Speaker 6: is just trying to be a bit defensive rates Clients
Speaker 6: don't want to extend too far out the curve right now,
Speaker 6: especially given that we're just about a month away from
Speaker 6: the election, and as a result of that, they're keeping
Speaker 6: things nimble and light and kind of waiting for data
Speaker 6: to try and guide a bit more.
Speaker 2: We saw money pile into money market funds as well
Speaker 2: ahead of that economic data. And I've asked this a
Speaker 2: few times, what do you think is behind that move?
Speaker 2: What's driving that.
Speaker 3: Rates are still high?
Speaker 6: And just because the Fed is cutting doesn't necessarily change
Speaker 6: your behavior as a depositor. Ask yourself, what does your
Speaker 6: retail bank deposit pay you, if it pays you something
Speaker 6: close to T bill yield, you should tell me where
Speaker 6: you bank, because I'd be interested in knowing that. But
Speaker 6: for most retail depositors, they're offered something close to zero,
Speaker 6: and so T bill rates are still well above that.
Speaker 6: And so we do think that there's going to continue
Speaker 6: to be a lot of inflows into money market mutual
Speaker 6: funds even if the FED is cutting, because it's not
Speaker 6: about whether rates are rising or falling, it's about the
Speaker 6: overall level of interest rates. And work that we have
Speaker 6: done says that you shouldn't expect to see really large
Speaker 6: outflows from money funds unless the FED cuts to something
Speaker 6: that is at or below two percent, and that seems
Speaker 6: very unlikely based upon the data that we have at
Speaker 6: hand and what the market is thinking about the FED
Speaker 6: cutting cycle.
Speaker 5: Market's also a tenure that's been going higher. Yields have
Speaker 5: been going higher even since before the FED cut by
Speaker 5: fifty basis points, and it's just continued on.
Speaker 3: How much of that is just.
Speaker 5: A factor of what you first started talking about, that unknowingness,
Speaker 5: that vulnerability, and that volatility just adding a premium to
Speaker 5: this bond market, Well, I.
Speaker 6: Think it's a couple of things. Number one, I think
Speaker 6: it's that rates investors do believe that a more proactive
Speaker 6: FED today means a better economy tomorrow.
Speaker 3: And think about on the day when.
Speaker 6: We set, when we saw the FED cut fifty, you
Speaker 6: actually saw long end yields rise because there was a
Speaker 6: sense that the FED was going to be decisive at
Speaker 6: quickly do what it takes to support the economy, and
Speaker 6: then that should allow for better growth in the future.
Speaker 6: That we think is arguably the biggest part of why
Speaker 6: the back end has been moving up a bit. But
Speaker 6: there's also supply demand concerns, and the election is a
Speaker 6: big wild card. Certainly, it doesn't seem like fiscal policy
Speaker 6: is going to be tightened in a big way after
Speaker 6: the election, and so we can debate, well, how easy
Speaker 6: will fiscal policy get based upon the election outcome. But
Speaker 6: I think investors are just a little bit reluctant to
Speaker 6: extend out the curve, knowing that you can get political
Speaker 6: outcomes that would result in much easier fiscal policy and
Speaker 6: more treasury supply.
Speaker 1: As you're saying this, though, I'm thinking in my head,
Speaker 1: who is the candidate for less fiscal spending?
Speaker 6: So I don't want to get into the politics too much.
Speaker 3: But it's a good response.
Speaker 6: Thanks, I've been trained well, but via media people. But
Speaker 6: investors right now do not expect that there's really any
Speaker 6: party or any candidate that supports meaningful fiscal austerity, and
Speaker 6: so therefore it's just a question of whether or not
Speaker 6: the fiscal outlook gets a lot worse or a little worse,
Speaker 6: and investors, knowing that the election is very tight, and
Speaker 6: knowing that investors don't want to take a strong call
Speaker 6: on that right now, are deciding to just stay a
Speaker 6: little bit shorter duration. So some of the flows work
Speaker 6: that members of my team do sees that they're very
Speaker 6: sizeable inflows into fixed income funds, not too different from
Speaker 6: the money market mutual fund inflows John that you referred
Speaker 6: to earlier. But when those flows come in, they're generally
Speaker 6: staying short on the curve, and that is due to
Speaker 6: investors who just don't have a lot of confidence in
Speaker 6: what the political or macro backdrop looks like in a
Speaker 6: month or so. And as a result of that, these
Speaker 6: positions are kind of de facto and steepeners. And when
Speaker 6: you get really strong data like we had on Friday,
Speaker 6: then that does create a bit of attension for investors
Speaker 6: who have moved further in on the curve.
Speaker 1: Jonathan and I were just talking about the fact that
Speaker 1: if we might not have a decision days or even
Speaker 1: weeks out, this could also drag on for months. This
Speaker 1: could be contested. What are flows on the short end
Speaker 1: look like then.
Speaker 6: So it's a great question. I guess I would just
Speaker 6: respond by saying that over recent weeks and months, we
Speaker 6: have certainly seen that treasuries have regained their flight to
Speaker 6: quality attributes. When inflation was high, let's say, rewind a
Speaker 6: year ago or so, I think we could have debated
Speaker 6: how much treasuries actually retained that flight to quality benefit.
Speaker 6: But if there is acute uncertainty, whether it's due to
Speaker 6: US politics or whether it's due to geopolitics, we do
Speaker 6: think that treasuries will still retain that flight to quality attribute,
Speaker 6: and we should expect to see cash move into treasury securities,
Speaker 6: probably mostly at the front or belly of the curve
Speaker 6: in those types of scenarios, but certainly for the asset
Speaker 6: class overall, we do think that it will retain those
Speaker 6: kind of risk off or flight to quality benefits that
Speaker 6: we have historically.
Speaker 3: So a lot about the front end.
Speaker 2: You've talked about how that money and money market funds
Speaker 2: could be quite sticky and less FED funds. Comes down
Speaker 2: to something like to can we talk about the long
Speaker 2: end and just finish that?
Speaker 3: Sure?
Speaker 2: What are you looking for the long end to curve
Speaker 2: what kind of numbers? We had a guest from pagim
Speaker 2: Yes THATDA saying we're in the buy zone four percent
Speaker 2: for twenty five lock it in, get a second by
Speaker 2: second opportunity, take it.
Speaker 3: What's your advice?
Speaker 6: Yeah, So we wrote yesterday that we do think at
Speaker 6: least using the tenure as a proxy between four to
Speaker 6: four and a quarter is a reasonable place to begin
Speaker 6: scaling in. We're already there, obviously, But here's the framework
Speaker 6: that we have used, and a number of folks on
Speaker 6: our team have wrote recently written about this in slightly
Speaker 6: different ways, but we called it two three four type framework.
Speaker 3: The FED is.
Speaker 6: Almost certainly going to cut to four percent, almost regardless
Speaker 6: of the data.
Speaker 3: Don't believe me.
Speaker 6: Look at their dots in twenty twenty five, all dots
Speaker 6: except the one or below four percent, So that seems
Speaker 6: to be the recalibration zone. And that's maybe consistent with
Speaker 6: quote unquote no landing, and so if the economy performs
Speaker 6: really well, then four percent is probably where the they'll
Speaker 6: end up. In a soft landing scenario. Using the fed's
Speaker 6: own baseline, they'll probably end up closer to three percent.
Speaker 6: That's the b of a house view. That's our economist's
Speaker 6: view as well. And if there's a recession or some
Speaker 6: type of sharp slowdown, then you can envision a two
Speaker 6: percent or lower type of outcome. So then the question
Speaker 6: is really how do you assign probabilities to those various outcomes.
Speaker 6: And again, our base case is the soft landing.
Speaker 3: That's all well and good, But if you.
Speaker 6: Just look at ten year ois, let's say that's around
Speaker 6: three sixty at the moment. If that gets up to
Speaker 6: three seventy five or even higher, then clearly the market
Speaker 6: is overweighting that four percent outcome. That's so called no
Speaker 6: landing outcome, and investors can decide for themselves whether or
Speaker 6: not they think that's reasonable. We think that's very optimistic,
Speaker 6: and the world's a very uncertain place. The rest of
Speaker 6: the world is maybe not as robust as the US is,
Speaker 6: and so to think that we could slip into a
Speaker 6: soft landing or a potentially harder landing is not unreasonable.
Speaker 6: And again US rates and fixed income provide a hedge
Speaker 6: again to those outcomes.
Speaker 3: And therefore we do.
Speaker 6: Think that if ten year OIS gets to three seventy five,
Speaker 6: again be thinking the ten year close to for fifteen,
Speaker 6: for twenty five. At that point, we do think that
Speaker 6: it's a very reasonable opportunity to begin to scale in
Speaker 6: and trust that it should perform at some point or
Speaker 6: at least that your downside is very limited if you're
Speaker 6: investing around those levels.
Speaker 2: Mark appreciate it. Good having Thank you, sir, Mark A.
Speaker 2: Banave of Bank of America. So here's the latest Goldman
Speaker 2: Sachs upgrading the S and P five hundred target, predicting
Speaker 2: the index will hit six k by year end as
Speaker 2: six three hundred and twelve months time the team of
Speaker 2: Goldman writing. The primary driver of the upward revision to
Speaker 2: our twenty twenty five EPs estimate is greater margin expansion.
Speaker 2: The macro backdrop remains conducive to modest margin expansion, with
Speaker 2: prices charged outpacing input cost growth. Ben Sneyder Golmmet Sachs
Speaker 2: responsible for some of these co joints just around the table.
Speaker 3: Thank good to see you welcome to the program. Good
Speaker 3: to be here.
Speaker 2: Let's get to the margin expansion, the pricing power. Where
Speaker 2: does that pricing power come from?
Speaker 3: Right now? Who's got it?
Speaker 7: I heard you just mentioned it this morning's results from PEPSI.
Speaker 7: And basically the way we think about margins is price
Speaker 7: inflation minus input cost inflation. And we've all been so
Speaker 7: focused on price inflation and it has slowed, but input
Speaker 7: cost inflation has slowed even more so. For example, if
Speaker 7: you look at unit labor cost growth in the US,
Speaker 7: which is wages adjusted for productivity, that grew at basically
Speaker 7: zero percent last quarter.
Speaker 2: Economists have been trying to figure out if layoffs come
Speaker 2: next as they start to present margins just a little
Speaker 2: bit more. How do you think about that as an
Speaker 2: actuality strategist to the layoffs coming.
Speaker 7: It's great you raise it in the context because I
Speaker 7: view profit margins as a really useful leading indicator for layoffs,
Speaker 7: and I think it's very intuitive. If you run a
Speaker 7: business and your margins are contracting, that would probably lead
Speaker 7: you to higher fewer employees, or maybe even lay some off.
Speaker 7: But the good news is today margins are expanding, and
Speaker 7: I think that really confirms the strong labor market data
Speaker 7: we saw last week, And you.
Speaker 5: Also write though by twenty twenty which, first of all,
Speaker 5: hats off for having any idea.
Speaker 3: What twenty twenty six looks like.
Speaker 5: But by that time you start to have a limited
Speaker 5: ability to expand margins. What's happening to corporate America over
Speaker 5: the next few years where that can't continue?
Speaker 7: Well, like everyone else, like the market, we're trying to
Speaker 7: be forward looking. We could get surprised, but at the moment,
Speaker 7: our view is that growth by then will be close
Speaker 7: to trend and the labor market will have tightened a
Speaker 7: little bit as opposed to the loosening we've seen over
Speaker 7: the last couple of years. In that kind of environment,
Speaker 7: growth can still be very solid, but typically it's harder
Speaker 7: for companies to really expand margins.
Speaker 5: So how uneven is that going to be? Because I
Speaker 5: know you're talking about it on a headline level, but again,
Speaker 5: John and I were just talking about PEPSI needing to
Speaker 5: cut costs, feeling some volume difficulty. How even will the
Speaker 5: ability to expand margins next year be?
Speaker 7: It actually looks to us like the ability of companies
Speaker 7: to expand margins is improving, not not getting more narrow.
Speaker 7: One of the characteristics of the market over the last
Speaker 7: couple of years is I'm sure most of our viewers know,
Speaker 7: is that it's been a pretty narrow breath market. Technology
Speaker 7: stocks have been able to grow more margins. Everyone else's
Speaker 7: kind of struggled. But now with the economy in such
Speaker 7: good shape, it really looks like more and more parts
Speaker 7: of the equity market are able to raise profits as well.
Speaker 1: Ben, Let's talk about the corporate tax right for next year,
Speaker 1: we can have twenty eight percent or fifteen percent. The
Speaker 1: Democrats took your recent note by you and the team
Speaker 1: and really ran away with it because what it would
Speaker 1: mean for growth, but ignored what it actually mean for
Speaker 1: corporation's bottom line. What could we see with a twenty
Speaker 1: eight percent corporate tax rate.
Speaker 7: We've put those proposals through our models, and we estimate
Speaker 7: that those could have, of course, a substantial impact on earnings,
Speaker 7: just as we saw in twenty seventeen and eighteen under
Speaker 7: the TCJA tax cuts.
Speaker 4: But I think it's.
Speaker 7: Important to note you mentioned fifteen percent twenty eight percent.
Speaker 7: Those aren't the only options. It's always possible that tax
Speaker 7: policy falls somewhere in the middle or just remains where
Speaker 7: it is with the federal rate of twenty one percent,
Speaker 7: and then of course there are a whole number of
Speaker 7: other factors to think about as well. There's a fiscal expansion,
Speaker 7: there's tariff policy, and then of course there's the primary
Speaker 7: driver of earnings, which is GDP growth, and so ultimately
Speaker 7: there could be a change to the earnings outlook post election,
Speaker 7: but from our perspective, the much more important driver is
Speaker 7: the strength of the economy, the margin story we were
Speaker 7: talking about earlier, and so net net, we feel very
Speaker 7: comfortable about the path going forward.
Speaker 1: If there is a twenty eight percent though corporate tax
Speaker 1: plan for the policy you say that can cut S
Speaker 1: and P five hundred earnings by five percent, what would
Speaker 1: that do to your twenty twenty five or to Danny's point,
Speaker 1: if you can look into the future twenty twenty six
Speaker 1: price targets.
Speaker 7: Yeah, So keep in mind it's a one time shift
Speaker 7: to earnings. And right now we're forecasting eleven percent earnings
Speaker 7: growth next year, so if we were to subtract five
Speaker 7: percent from that, we get about six percent earnings growth,
Speaker 7: which coincidentally is where our forecast was last week before
Speaker 7: we raised our estimates.
Speaker 2: Habersis proposal is clean, at least compared to Trump's Propiesal
Speaker 2: can we talk about that fifteen percent with a condition,
Speaker 2: a manufacturing condition here in the unated snakes? How are
Speaker 2: you and the say you considering that? How do you
Speaker 2: put that through any kind of model?
Speaker 3: It's difficult to do.
Speaker 7: Fifteen percent is relatively straightforward, and we run those numbers
Speaker 7: and then I think the question is uncertainty, And actually
Speaker 7: that is the key dynamic that we've seen historically around elections.
Speaker 7: You know, there's been a lot of discussion about tariffs
Speaker 7: and tax but ultimately, if you look at every single
Speaker 7: presidential election year, uncertainty is really the most important thing
Speaker 7: for stocks. And it's this period the weeks before the
Speaker 7: election when uncertainty tends to be highest. That leads to
Speaker 7: higher implied volatility, a little bit of market weakness. But
Speaker 7: of course the flip side of that is after the
Speaker 7: election that uncertainty moves lower and stocks usually rise higher.
Speaker 7: And as you mentioned earlier, we expect the SMP to
Speaker 7: repeat that pattern this year.
Speaker 1: What do you make also on impact, say to a
Speaker 1: company like deer, the former president is talking about tariffs
Speaker 1: on deer. If they move some labor and production to say, Mexico,
Speaker 1: how do you envision all of us coming into plane
Speaker 1: twenty twenty five if the former president is in the
Speaker 1: White House.
Speaker 4: Yeah.
Speaker 7: I think basically my read from all of this policy
Speaker 7: discussion is that it's much more going to be a
Speaker 7: story of rotation within the equity market than a dynamic
Speaker 7: that affects the level of the S and P and aggrogate.
Speaker 7: And you can see this if you look at correlations
Speaker 7: with prediction markets over the last few months. For example,
Speaker 7: small caps tend to have perform better as you've seen
Speaker 7: Republican odds rise in prediction markets. And so ultimately, depending
Speaker 7: on the policies that are actually laid out by whoever
Speaker 7: the next administration is, I think that will change where
Speaker 7: we think within the market investors should invest. But in aggregate,
Speaker 7: I don't think it's really going to change our view.
Speaker 2: Let's get to sect the code then, Fankfoot place debate
Speaker 2: within the equity market at the moment, where is it.
Speaker 7: I think the key change that is happening right now,
Speaker 7: no surprise, is the actual FED cuts and the market
Speaker 7: is forward looking. We've seen the long end of yield
Speaker 7: curve decline well in advance.
Speaker 3: Of those cuts, but the actual cuts.
Speaker 7: Themselves do seem to be having some impact on economic activity. So,
Speaker 7: for example, mortgage applications have risen in the last couple weeks.
Speaker 7: We've seen very very little housing turnover over the last
Speaker 7: couple of years. I think you can imagine that as
Speaker 7: the FED cuts, we'll see more housing turnover. And that
Speaker 7: means if you're a broker, if you sell furniture, there's
Speaker 7: a lot of potential earnings upside ahead.
Speaker 3: Ben appreciate it. It's going to say it.
Speaker 2: What did against say Ben Snyder, Thattic Golment sank some
Speaker 2: of the election means for your equity market. This is
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