WEBVTT - Home Depot to Buy SRS , Amazon-Anthropic Tie-Up 0:00:02.960 --> 0:00:10.840 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.880 --> 0:00:15.040 Bloomberg Intelligence podcast. Catch us live weekdays at ten am 0:00:15.080 --> 0:00:17.520 Eastern on Apple car Play and Android Auto with the 0:00:17.520 --> 0:00:21.440 Bloomberg Business App. Listen on demand wherever you get your podcasts, 0:00:21.640 --> 0:00:24.520 or watch us live on YouTube. 0:00:25.040 --> 0:00:27.760 One other stuff we're watching today is Home Depot. It's 0:00:27.760 --> 0:00:30.240 off by about one and a half percent. The company 0:00:30.240 --> 0:00:34.040 said it's going to buy building products distributor SRS Distribution, 0:00:34.159 --> 0:00:37.839 a roofing company, for about eighteen point twenty five billion dollars. 0:00:37.880 --> 0:00:39.440 So I want to get more on that, and who do 0:00:39.520 --> 0:00:41.680 we go to? The best guy in the housing industry 0:00:41.680 --> 0:00:45.160 when it comes to analysts, Drew Redding is Boomberg Intelligence 0:00:45.280 --> 0:00:47.920 US home building analyst joining us. All right, what do 0:00:47.920 --> 0:00:49.760 you make of the acquisition? The fact that stock's down? 0:00:51.960 --> 0:00:55.240 Yeah, So this deal eighteen point two five billion, is 0:00:55.280 --> 0:00:59.440 Home Depot's largest ever acquisition. Prior to this one, it's 0:00:59.520 --> 0:01:01.960 largest was the eight billion dollar deal it did for 0:01:02.160 --> 0:01:06.319 HD Supply back in twenty twenty as I did about 0:01:06.360 --> 0:01:08.680 ten billion dollars of revenue. So for a company as 0:01:08.720 --> 0:01:12.200 big as Home Depot, this is actually a pretty big deal. 0:01:12.240 --> 0:01:15.000 And we think it fits with their strategic plan of 0:01:15.040 --> 0:01:19.760 going after that professional customer. It's a very highly fragmented market, 0:01:20.240 --> 0:01:22.000 you know. Our view has been that if they really 0:01:22.040 --> 0:01:24.800 want to accelerate their growth, particularly in this segment of 0:01:24.840 --> 0:01:27.800 the market, they would probably have to do a couple 0:01:27.800 --> 0:01:30.160 of deals. They did a deal the one I mentioned 0:01:30.240 --> 0:01:33.520 HD Supply back in twenty twenty. They recently did a 0:01:33.560 --> 0:01:36.360 deal for International Designs Group, and now they added on 0:01:36.440 --> 0:01:40.160 with this one. You mentioned the stock is down, you know, 0:01:40.200 --> 0:01:41.880 as I mentioned, it's a pretty big deal, and I 0:01:41.920 --> 0:01:45.520 think the fact that people are still kind of hoping 0:01:45.720 --> 0:01:48.880 and waiting for that the underlying housing market to kind 0:01:48.880 --> 0:01:52.400 of return to growth, and that's really the primary driver 0:01:52.480 --> 0:01:54.600 of Home Depot's business. I think the fact that you're 0:01:54.680 --> 0:01:58.200 layering this on top of you know, those market expectations 0:01:58.240 --> 0:01:59.280 may be weighing a little bit. 0:02:00.320 --> 0:02:02.280 I'm looking at the structure of the deal. 0:02:02.320 --> 0:02:02.520 First. 0:02:02.520 --> 0:02:03.960 I go to m Go, which is the first thing 0:02:04.000 --> 0:02:05.960 I do for an M and A story, and to 0:02:06.000 --> 0:02:08.480 see who the bankers and lawyers are and ma Go 0:02:08.560 --> 0:02:11.040 does not have that information. I'm very disappointed. I have 0:02:11.080 --> 0:02:13.320 to talk to the people and it hasn't been disclosed. 0:02:13.919 --> 0:02:15.200 They're gonna go to the debt markets. 0:02:15.240 --> 0:02:15.400 Here. 0:02:15.400 --> 0:02:16.760 They do have a little bit of cash on the 0:02:16.800 --> 0:02:19.679 balance sheet here, but they're going to finance it with 0:02:19.760 --> 0:02:22.080 some debt. Is that okay with you and the credit 0:02:22.040 --> 0:02:22.919 analysts out there. 0:02:23.760 --> 0:02:26.520 Yeah, so their leverage is going to tick up even 0:02:26.560 --> 0:02:29.400 are about two and a half times. The goal going 0:02:29.440 --> 0:02:31.639 forward is to de leverage over the next twenty four 0:02:31.680 --> 0:02:34.120 months to get back to a kind of two times target. 0:02:34.120 --> 0:02:35.880 So it's it's not that much of a concern at 0:02:35.919 --> 0:02:39.280 this point. You know. In order to do that, the 0:02:39.960 --> 0:02:42.280 goal is obviously to accelerate growth, but at the same time, 0:02:42.320 --> 0:02:44.880 they're going to put their sherry purchases on hold in 0:02:44.960 --> 0:02:47.560 order to get that leverage back down in a timely fashion. 0:02:47.760 --> 0:02:49.680 Okay, well, there you go. That's why the stocks down. 0:02:50.160 --> 0:02:52.480 This is why I love angering with Paul because it's 0:02:52.520 --> 0:02:55.079 like two different perspectives. I'm like, what's the macro read 0:02:55.160 --> 0:02:57.240 and You're like, let's talk about how they're paying for it. 0:02:57.280 --> 0:02:59.320 This is perfect. This is why Paul's mean you so awesome. 0:03:00.440 --> 0:03:02.440 But to the point of like the why this is 0:03:02.480 --> 0:03:05.960 not like John Tucker renovating a closet to a bathroom, right, Like, 0:03:06.000 --> 0:03:07.919 it's not that like these are the real people. 0:03:09.440 --> 0:03:14.760 Yeah, these are the professional remodelers, so srs caters to 0:03:14.840 --> 0:03:20.480 especialty trade contractors. So think building materials primarily roofing, as 0:03:20.480 --> 0:03:22.960 well as landscape and pools. So building materials are about 0:03:22.960 --> 0:03:25.760 two thirds of their business and the pool and landscape 0:03:25.760 --> 0:03:30.280 pieces are about a third. Those are actually newer markets 0:03:30.320 --> 0:03:33.200 that they entered in through M and A. So Home 0:03:33.240 --> 0:03:36.480 Depot's main strategy is going after an untapped two hundred 0:03:36.560 --> 0:03:39.800 billion dollar market for what they call complex projects. And 0:03:39.920 --> 0:03:43.360 you think about a professional contractor who is typically juggling, 0:03:43.600 --> 0:03:46.320 you know, a handful of supplier relationships. For a larger 0:03:46.360 --> 0:03:48.880 scale job, they might have to go to one distributor 0:03:48.920 --> 0:03:51.120 for windows, they might have to go somewhere else for flooring, 0:03:51.200 --> 0:03:54.000 somewhere else for doors. Yeah, and so on and so forth, 0:03:54.000 --> 0:03:56.800 and so home depots goal and their strategy is to 0:03:56.880 --> 0:04:01.320 kind of consolidate the need for contractors to go to 0:04:01.400 --> 0:04:03.200 all those different suppliers. You want to become a one 0:04:03.240 --> 0:04:03.840 stop shop. 0:04:04.440 --> 0:04:06.040 Talk to me about just kind of the economics of 0:04:06.040 --> 0:04:08.120 that business, Like what's the Is there a difference between 0:04:08.200 --> 0:04:11.320 selling piece applywood to the John Tucker's of the world 0:04:11.400 --> 0:04:14.760 versus selling a peace applywood to you know, a local contractor. 0:04:16.040 --> 0:04:20.200 Well, professional contractors are typically higher spending. I mean, you 0:04:20.240 --> 0:04:24.200 see that if you look at the store productivity of 0:04:24.240 --> 0:04:27.039 a Home Depot compared to Lows after the last several years, 0:04:27.040 --> 0:04:30.159 you see the sales per square foot sales for store 0:04:30.800 --> 0:04:33.400 highly much stronger for Home Deep, And a lot of 0:04:33.400 --> 0:04:35.560 that has to do with the spending nature of that 0:04:36.000 --> 0:04:37.279 professional contractor. 0:04:37.800 --> 0:04:40.800 I see. Okay, I mean just look at Duhn Tucker, 0:04:40.880 --> 0:04:42.520 like he's definitely not going to be spending that high. 0:04:42.560 --> 0:04:44.359 He's not going to the high end place, but he. 0:04:44.360 --> 0:04:46.520 Does high quality work though I'm sure, oh. 0:04:46.360 --> 0:04:48.880 No, no, totally into the high quality work one d PC. 0:04:49.760 --> 0:04:52.719 So it sounds like you think this deal makes sense. 0:04:52.800 --> 0:04:54.599 Where does it put it then, in relation to Lows, 0:04:54.600 --> 0:04:57.000 which I must assume has to be trying to carve 0:04:57.040 --> 0:04:58.039 out its own niche in that. 0:05:00.120 --> 0:05:00.320 Yeah. 0:05:00.360 --> 0:05:04.200 So it's a good question. And the strategy, you know, 0:05:04.240 --> 0:05:07.000 in attacking the pro segment between Home Depot and Lows 0:05:07.640 --> 0:05:09.960 is a little bit different. As I mentioned, home Depot 0:05:10.040 --> 0:05:13.160 is targeting kind of that larger pro whereas Low's is 0:05:14.080 --> 0:05:17.120 kind of focusing on that small and medium sized, medium 0:05:17.160 --> 0:05:20.680 sized contractor. And this is kind of an area they've 0:05:20.680 --> 0:05:24.200 been emphasizing over the last couple of years because prior 0:05:24.279 --> 0:05:27.560 to twenty eighteen, when the new CEO, Marvin Elison came in, 0:05:27.720 --> 0:05:31.360 Lows didn't really have a dedicated pro strategy. It was 0:05:31.440 --> 0:05:34.159 kind of all over the place. So they're they're, you know, 0:05:34.160 --> 0:05:37.960 philosophy has Let's get back to the fundamentals of the business. 0:05:38.040 --> 0:05:39.800 Let's have the right brands, Let's make sure we have 0:05:39.880 --> 0:05:41.760 things in stock, Let's make sure we have the proper 0:05:41.839 --> 0:05:45.000 quantities and the right staffing. So they're kind of coming 0:05:45.040 --> 0:05:47.320 from a different position where they're getting back to basics, 0:05:47.360 --> 0:05:50.400 where home Depot already has that dominant position and they're 0:05:50.440 --> 0:05:52.480 looking to expand into an untapped market. 0:05:52.680 --> 0:05:56.039 All right, let's step back, Drew, talk to us about 0:05:56.040 --> 0:05:58.760 what's going on in the housing market. What's the elevator 0:05:58.800 --> 0:06:01.160 pitch you're giving to clients these days. How are investors 0:06:01.200 --> 0:06:04.200 approaching the housing market, because I don't see a lot 0:06:04.240 --> 0:06:05.400 of houses for sale, dude. 0:06:06.560 --> 0:06:09.200 Yeah, So, I mean we've talked before in the way 0:06:09.240 --> 0:06:11.200 we describe housing as a tail of two markets. We 0:06:11.279 --> 0:06:13.000 still think that the new home market is in the 0:06:13.080 --> 0:06:16.480 driver's seat, both from a supply perspective, and from an 0:06:16.480 --> 0:06:20.039 affordability perspective, the most important thing to remember is that 0:06:20.080 --> 0:06:22.960 builders are growing their community counts, they're bringing new products 0:06:23.000 --> 0:06:25.640 to market, and unlike what you see in the resale market, 0:06:25.720 --> 0:06:28.880 they're making financing more attractive, so they're buying down rates. 0:06:28.920 --> 0:06:31.120 So right now, if you if you look out there 0:06:31.120 --> 0:06:32.960 in the market, you're seeing something you know, in the 0:06:33.000 --> 0:06:35.960 six point nine seven percent range on a thirty year fixed. 0:06:37.200 --> 0:06:38.520 You know, if you go to the new home market, 0:06:38.560 --> 0:06:41.239 you're seeing something much lower. You probably have a five handle, 0:06:41.320 --> 0:06:43.680 so the math looks a lot better in the new 0:06:43.680 --> 0:06:47.680 home market. Interestingly, more recently, we have started to see 0:06:47.680 --> 0:06:50.480 a little bit more inventory come to the market and 0:06:50.560 --> 0:06:53.000 the resale side, you know, which which you mentioned has 0:06:53.040 --> 0:06:56.800 been kind of the the major theme permeating throughout the industry, 0:06:56.839 --> 0:06:59.359 So we could see that start to help volumes. We 0:06:59.400 --> 0:07:02.720 think that the the resale market starts to rebound later 0:07:02.800 --> 0:07:04.839 in this year and maybe sees a little bit of 0:07:04.880 --> 0:07:05.679 modest growth. 0:07:06.160 --> 0:07:09.080 I have a really dumb question if if I want 0:07:09.080 --> 0:07:11.000 to sell my apartment and I have a two point 0:07:11.160 --> 0:07:14.080 seventy five thirty or fixed, can I sell that rate 0:07:14.200 --> 0:07:19.640 along with the apartment. No, it's a harder. 0:07:20.040 --> 0:07:23.040 It's hard the buyer in your market is going to 0:07:23.080 --> 0:07:26.440 be coming with something significantly higher. Now, there there are 0:07:26.520 --> 0:07:30.480 ways where, you know, through various concessions, a seller can 0:07:30.640 --> 0:07:33.560 help buyer kind of lower that rate. You know, if 0:07:33.560 --> 0:07:35.960 the buyer were to pay points, and then you know, 0:07:36.040 --> 0:07:39.080 the seller can contribute to closing costs. That's one way 0:07:39.120 --> 0:07:41.400 to do it. But you know, as you mentioned, that's 0:07:41.440 --> 0:07:44.000 one of the well, that's the primary reason why people 0:07:44.000 --> 0:07:46.119 aren't putting their homes on the market. It's also what's 0:07:46.160 --> 0:07:47.920 what's keeping people from making purchases. 0:07:48.680 --> 0:07:51.280 Yeah, okay, well that that's very clear. Also, why would 0:07:51.280 --> 0:07:51.600 I do that? 0:07:51.720 --> 0:07:53.320 Yeah, yeah, there forever. 0:07:53.520 --> 0:07:55.240 No, I'm there forever. I'm for sure. This is not 0:07:55.320 --> 0:07:57.960 like a promo, like unless I win the lottery. 0:07:58.120 --> 0:08:01.520 You just know, way right, yes, because that interviraces. 0:08:01.080 --> 0:08:03.720 Just makes it it's unreal. It's also a condo, so 0:08:03.760 --> 0:08:05.200 then it can always rent it out, like if I 0:08:05.400 --> 0:08:08.720 move somewhere else or whatever. Like it's from that perspective, 0:08:08.720 --> 0:08:11.240 even a co op, though I wouldn't in a million years. 0:08:11.240 --> 0:08:13.840 He drew. Thanks a lot, really appreciate your reading Bloomberg Intelligence, 0:08:13.960 --> 0:08:16.400 US home building analysts and just so you're all clear 0:08:16.440 --> 0:08:18.480 that it is a two point seventy five percent thirty 0:08:18.560 --> 0:08:21.400 year fix that I got in twenty twenty. Just putting 0:08:21.440 --> 0:08:22.680 that out of there, I feel like. 0:08:22.640 --> 0:08:26.680 It's on the other handing in twenty twenty three March 0:08:26.680 --> 0:08:29.400 of twenty twenty three even six percent. 0:08:30.560 --> 0:08:31.880 But that now feels cool. 0:08:31.960 --> 0:08:34.280 Yeah, Like I felt like a complete knucklehead at the time, like, oh, 0:08:34.320 --> 0:08:35.640 you're supposed to be a Wall Street cat and you're 0:08:35.640 --> 0:08:38.280 just paying through the nose here on the rates. But boy, 0:08:38.320 --> 0:08:39.520 then they went up to seven. 0:08:39.440 --> 0:08:41.200 Yeah, no, no, yeah. I have a friend who's trying 0:08:41.240 --> 0:08:44.320 to buy a house first home home buyer, like you know, 0:08:44.480 --> 0:08:46.440 ground up, like thirty years old kind of thing, and 0:08:46.480 --> 0:08:48.800 it's it's really hard, Like it's really tough, and it's 0:08:48.840 --> 0:08:50.920 like when do you do that? The prices haven't really 0:08:50.920 --> 0:08:54.000 matched up with those higher rates. So anyway, there we go. 0:08:54.040 --> 0:08:54.800 I'm glad we got that. 0:08:54.760 --> 0:08:55.319 On out of the way. 0:08:56.840 --> 0:09:01.319 You're listening to The Bloomberg Intelligence Podcast US live weekdays 0:09:01.360 --> 0:09:04.600 at ten am Eastern on applecar Play and Android Otto 0:09:04.720 --> 0:09:07.520 with the Bloomberg Business Act. You can also listen live 0:09:07.600 --> 0:09:10.800 on Amazon Alexa from our flagship New York station. Just 0:09:10.840 --> 0:09:13.480 say Alexa play Bloomberg eleven thirty. 0:09:14.800 --> 0:09:16.800 All right to the markets we go. We're seeing a 0:09:16.800 --> 0:09:18.160 little bit of a sell off in the front end, 0:09:18.200 --> 0:09:22.000 yields up just a touch, despite some pretty hawkish ish 0:09:22.080 --> 0:09:25.679 messaging coming out from Chris Waller yesterday evening, where it 0:09:25.760 --> 0:09:28.440 seemed like it was we're gonna be waiting. We're gonna 0:09:28.440 --> 0:09:30.640 be waiting and waiting and waiting. Ira Jersey as Bloomberg 0:09:30.679 --> 0:09:35.000 Intelligence Chief US interest rate strategist, joining us. Now, Ira, 0:09:35.080 --> 0:09:37.000 I'll reach you the quote. In my view, it is 0:09:37.040 --> 0:09:39.880 appropriate to reduce the overall number of rate cuts or 0:09:39.920 --> 0:09:42.440 push them further into the future in response to the 0:09:42.440 --> 0:09:46.079 recent data. There's still no rush. These were to remark 0:09:46.160 --> 0:09:48.920 to the Economic Club of New York as of yesterday. 0:09:49.200 --> 0:09:50.400 What does that tell us? 0:09:51.440 --> 0:09:54.320 Yeah, well, it's a continuation of what some of the 0:09:54.320 --> 0:09:56.559 more hawkish members of the Federal Reserve have been saying. 0:09:57.600 --> 0:10:00.160 You know, we think that Governor Waller probably is in 0:10:00.200 --> 0:10:02.600 the two cut this year camp. So you know, there's 0:10:02.600 --> 0:10:04.720 an when you look at the dot plot and we 0:10:04.760 --> 0:10:07.640 only received it, you know, last week, so so it's 0:10:07.720 --> 0:10:10.280 very fresh. We think that he's one of one of 0:10:10.280 --> 0:10:12.920 the people in the two cut camps. So but but 0:10:13.080 --> 0:10:16.000 so that means that he's maybe kind of the spokesperson 0:10:16.040 --> 0:10:19.080 for the more hawkish members of the committee, whereas you know, 0:10:19.400 --> 0:10:21.199 it's still a bulk of the committee is in the 0:10:21.679 --> 0:10:22.480 three cut camp. 0:10:22.880 --> 0:10:23.319 I think the. 0:10:23.320 --> 0:10:27.600 Important thing about Governor Willer's comments is, you know, you 0:10:27.679 --> 0:10:31.719 can't you can't be assured of a June cut at 0:10:31.760 --> 0:10:33.600 the moment. Like, in order to get a June cut, 0:10:33.640 --> 0:10:37.280 you need to probably have a continuation of slowing economic 0:10:37.360 --> 0:10:41.320 activity and certainly a decline in inflation. And and you know, 0:10:41.360 --> 0:10:43.480 we put out a piece just this morning saying, look, 0:10:43.480 --> 0:10:46.439 if we keep getting you know, point two inflation prints 0:10:46.720 --> 0:10:48.720 for the next couple of months, that's not going to 0:10:48.760 --> 0:10:52.600 lower the year on year inflation number at all. So yeah, 0:10:52.640 --> 0:10:55.160 you know, so it's it's unclear to us whether or not, 0:10:55.480 --> 0:10:58.520 you know, June or July, or even maybe that the 0:10:58.520 --> 0:10:59.960 Fed might have to wait till November. 0:11:00.040 --> 0:11:01.200 And that's where you can. 0:11:01.080 --> 0:11:05.200 Get a lot of a lot of market pricing shifts 0:11:05.240 --> 0:11:07.640 if if we don't price in for a junior July 0:11:07.720 --> 0:11:10.240 cut anymore, and we wind up pushing things out even further. 0:11:11.080 --> 0:11:14.720 So Ira tomorrow, I'm not going to be here. Markets 0:11:14.760 --> 0:11:16.920 are going to be equity market's going to be closed here. 0:11:17.400 --> 0:11:19.400 Yeah, we get US bond markets closed too, there, Paul, 0:11:19.480 --> 0:11:21.800 what's that bond market is closed too? 0:11:21.880 --> 0:11:23.839 Okay, I don't want I don't want to speak for 0:11:23.880 --> 0:11:25.840 the bond market people. You guys have your own little 0:11:25.880 --> 0:11:29.360 club over there. PC deflator, we're gonna get some meaningful 0:11:29.400 --> 0:11:34.520 information tomorrow. Odd timing aside, how do you think the 0:11:34.559 --> 0:11:37.160 Fed's thinking about the data tomorrow? The PC deflator? The 0:11:37.160 --> 0:11:40.240 core deflator expected coming to zero point three percent? 0:11:41.200 --> 0:11:43.960 Yeah, so zero point three is a continuation of the trend. 0:11:44.000 --> 0:11:46.720 And yeah, you know, given that we have CPI, I 0:11:46.760 --> 0:11:48.720 think that PC will kind of take a little bit 0:11:48.760 --> 0:11:51.440 of a backseat to some of the other details that 0:11:51.440 --> 0:11:53.800 that we're going to parse through, particularly since the market's closed, 0:11:53.840 --> 0:11:55.720 so there won't be the same kind of knee jerk 0:11:55.760 --> 0:11:59.440 reaction you might get in in the US markets. Anyway, 0:12:00.040 --> 0:12:02.280 Europe will still be opened, so that'll or parts of 0:12:02.320 --> 0:12:04.440 europeill still be open, So that'll be interesting to see 0:12:04.440 --> 0:12:06.800 how they react, and that'll give you a clue as 0:12:06.840 --> 0:12:09.400 to how we'll open up at seven pm on Sunday 0:12:09.480 --> 0:12:13.640 night in the treasury market. The you know what, I'll 0:12:13.640 --> 0:12:15.920 be looking for in this in these numbers is a 0:12:15.920 --> 0:12:18.840 continuation of the actual consumption trends. Because remember, even though 0:12:19.080 --> 0:12:23.000 we get that very important PC deflator, so the inflation 0:12:23.120 --> 0:12:27.680 component of the PC report, you also get personal consumption numbers. 0:12:27.720 --> 0:12:31.000 So actually what people are spending their money on, how 0:12:31.240 --> 0:12:33.439 how things are growing, And what I like to look 0:12:33.440 --> 0:12:36.760 at is what's called the quantity the quantity indices, So 0:12:36.800 --> 0:12:40.400 these are basically real spending and how those are developing. 0:12:40.440 --> 0:12:42.600 And what you've seen of late is that even though 0:12:42.640 --> 0:12:45.360 you've had a little bit of a leveling off in 0:12:45.400 --> 0:12:49.240 people spending on durable goods, the number, the amount of 0:12:49.280 --> 0:12:51.880 money that people are spending on services continues to go up. 0:12:51.880 --> 0:12:54.640 And you even saw that today in the GDP report. 0:12:55.240 --> 0:12:58.240 All of the revisions of the fourth quarter GDP came 0:12:58.600 --> 0:13:02.520 because of higher consumption of services and that was revised higher. 0:13:02.840 --> 0:13:06.120 And as long as services continue to be a big 0:13:06.160 --> 0:13:09.760 focus and people are content to continue to spend on services, 0:13:09.559 --> 0:13:12.160 there's a feedback loop because that's where most of the 0:13:12.200 --> 0:13:14.679 people in the United States are employed. So as long 0:13:14.720 --> 0:13:17.400 as people are spending on services, that means that services 0:13:17.720 --> 0:13:19.719 are going to be making money and that people can 0:13:19.920 --> 0:13:23.560 request wage increases those wage increases, they go back and 0:13:23.800 --> 0:13:25.480 be spent again on services. 0:13:25.520 --> 0:13:25.679 Right. 0:13:25.760 --> 0:13:28.880 So I think that that those are the kinds of 0:13:28.960 --> 0:13:30.719 numbers and some of the detail that I think will 0:13:30.720 --> 0:13:33.120 be important as to whether or not, you know, the 0:13:33.200 --> 0:13:35.679 economy is really going to be starting to slow and 0:13:35.920 --> 0:13:39.120 if that will feed into then lower inflation, because even 0:13:39.160 --> 0:13:41.360 in the inflation components, what we'll be looking for is 0:13:41.640 --> 0:13:45.120 how much is services inflation versus goods inflation. Goods inflation 0:13:45.200 --> 0:13:47.839 has been zero basically for the last six months, and 0:13:47.920 --> 0:13:50.200 it's all everything. All of the inflation has really been 0:13:50.200 --> 0:13:52.400 coming from the services sector, so that that has to 0:13:52.440 --> 0:13:54.120 be everyone's focus right now. 0:13:54.640 --> 0:13:57.280 Oh sorry, it's that pesky button where I press off, 0:13:57.280 --> 0:13:59.720 but I mean on, And anyway, I wish my cousin 0:13:59.760 --> 0:14:02.840 Probed wishes he had that button. But anyway, what I 0:14:02.920 --> 0:14:06.480 was saying is that goods inflation too. The disinflation narrative 0:14:06.520 --> 0:14:09.040 around that is also coming into question. Potentially, when you 0:14:09.080 --> 0:14:12.360 have the Baltimore Bridge collapse, et cetera, you're still at two. 0:14:13.360 --> 0:14:15.360 Is the risk that you actually pair that down to 0:14:15.480 --> 0:14:19.440 one or zero or is the risk that it's actually three? 0:14:19.920 --> 0:14:22.720 Yeah, Well, I think that the well, the market's still 0:14:22.720 --> 0:14:25.640 priced for three cuts this year. Now you know what 0:14:25.680 --> 0:14:28.000 we were pricing just two months ago, six cuts, right, 0:14:28.000 --> 0:14:30.880 six one hundred and fifty basis points of interest rate cuts. Yeah, 0:14:31.120 --> 0:14:34.160 I think the risk is that the FED starts a 0:14:34.240 --> 0:14:36.920 little bit later, but the path looks very similar to 0:14:36.960 --> 0:14:40.080 what's being priced right now. So it's more that things 0:14:40.120 --> 0:14:42.960 get pushed forward and forward and forward. And keep in mind, 0:14:43.240 --> 0:14:46.440 you know, the market will often price for outcomes that 0:14:46.560 --> 0:14:49.360 aren't going to be realized, and that's where you know, 0:14:49.400 --> 0:14:53.480 we try, that's where strategists and portfolio managers can kind 0:14:53.480 --> 0:14:55.960 of you know, make their living in trying to determine 0:14:55.960 --> 0:15:00.240 what's kind of mispriced and what are the highest probability outcomes. Yeah, 0:15:00.280 --> 0:15:04.200 you know, interestingly, you know, to your point, you know, 0:15:04.240 --> 0:15:07.240 there is a risk that there's actually no cuts this year, 0:15:07.320 --> 0:15:10.040 and the market is actually pricing for upwards of a 0:15:10.080 --> 0:15:12.880 twenty percent chance of that if you look at options 0:15:12.880 --> 0:15:16.320 on short term interest rate futures like the futures on sofa, 0:15:17.480 --> 0:15:20.040 So our options model suggests that that you know, there's 0:15:20.040 --> 0:15:23.840 a pretty high prob possibility being priced that you know 0:15:24.240 --> 0:15:26.360 the Fed's on hold, and you even saw some activity 0:15:26.360 --> 0:15:28.840 this morning, you know ed Bollenbrook, who does a really 0:15:28.840 --> 0:15:31.880 good job with looking at flows in the short term 0:15:31.880 --> 0:15:34.880 interest rate markets for Bloomberg News. He even noted this 0:15:34.920 --> 0:15:39.760 morning that there were people buying buying puts on on 0:15:39.840 --> 0:15:43.440 these futures that suggest that the that the FED might 0:15:43.520 --> 0:15:46.520 not actually cut at all this year. So so I 0:15:46.600 --> 0:15:49.360 think that there is a there is a growing kind 0:15:49.400 --> 0:15:52.960 of community out there that's that's fearful that the economy 0:15:53.000 --> 0:15:55.240 won't slow down enough for the FED to actually cut. 0:15:55.560 --> 0:15:57.480 All right, we'll see Ira Jersey, thank you so much. 0:15:57.520 --> 0:16:00.240 We appreciate that. As always, Ira Jersey, easy you have 0:16:00.280 --> 0:16:03.800 his interest rate strategists for Bloomberg Intelligence. Joining us from Princeton, 0:16:03.840 --> 0:16:05.960 New Jersey via that zoom thing. 0:16:08.440 --> 0:16:12.320 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:16:12.400 --> 0:16:15.080 weekdays at ten am Eastern on Affle, car Play and 0:16:15.080 --> 0:16:18.080 Android Auto with the Bloomberg Business app. Listen on demand 0:16:18.160 --> 0:16:22.520 wherever you get your podcasts, or watch us live on YouTube. 0:16:23.240 --> 0:16:26.120 So let's get back to what Governor Waller talked about, 0:16:26.200 --> 0:16:28.840 and that was basically like we're just not there yet. 0:16:28.920 --> 0:16:30.920 Let's wait, let's wait, let's wait, and then it's raising 0:16:30.960 --> 0:16:33.960 the risk of maybe no cuts this year, which leads 0:16:34.000 --> 0:16:37.120 me to the market reaction. The overwhelming idea in the 0:16:37.160 --> 0:16:39.840 first quarter was that you're gonna have bonds outperformed stocks 0:16:39.880 --> 0:16:42.600 because we were gonna get cuts. That obviously didn't work 0:16:42.640 --> 0:16:44.080 out for you. So what do you do for the 0:16:44.120 --> 0:16:46.920 second quarter? Joining us now is David Kudla. He's founder, 0:16:47.040 --> 0:16:50.480 CEO and chief investment strategist over at Mainstay Capital Management, 0:16:50.840 --> 0:16:53.200 and he joins US now. David, is this going to 0:16:53.240 --> 0:16:56.240 be another quarter of stocks outperforming bonds? 0:16:57.760 --> 0:17:00.360 I think it will be. I think the stock in 0:17:00.440 --> 0:17:01.200 rally mode. 0:17:02.000 --> 0:17:06.840 We're almost in a melt up situation that the increase 0:17:06.880 --> 0:17:09.159 we've had in twenty twenty four a loan, the increase 0:17:09.240 --> 0:17:12.119 we've had now over the past five months has just 0:17:12.160 --> 0:17:13.640 been incredible. 0:17:14.119 --> 0:17:15.400 And the problem. 0:17:15.760 --> 0:17:20.360 The problem for bonds is that we keep you know, 0:17:20.760 --> 0:17:24.000 we've talked about six or seven FED rate cuts just 0:17:24.040 --> 0:17:26.680 a few months ago. We're down to two or three 0:17:27.680 --> 0:17:30.000 maybe one. They're getting moved out. They were March, got 0:17:30.000 --> 0:17:32.320 moved out to June, moving out as far as September. 0:17:32.480 --> 0:17:35.600 We may not see a rate cut this year. So 0:17:36.640 --> 0:17:40.199 that's problematic for bonds obviously, and we've seen what the 0:17:40.280 --> 0:17:42.359 ten year and the rest of bond's done because of 0:17:42.400 --> 0:17:45.359 that what we've done, where you do have opportunity in 0:17:45.440 --> 0:17:48.119 bonds though for your portfolio, for someone in a sixty 0:17:48.160 --> 0:17:51.560 to forty portfolio, they need that bond allocation. Stay ultra 0:17:51.680 --> 0:17:56.320 short on ultra short term bonds, so you have very 0:17:56.320 --> 0:17:59.280 little duration, very little indust rate sensitivity. But we have 0:17:59.320 --> 0:18:02.680 these high yield we're still getting with rates being this high, 0:18:02.720 --> 0:18:06.119 so that is an attractive part of the yield curve 0:18:07.119 --> 0:18:10.240 for a bond allocation. But you know, stocks I think 0:18:10.280 --> 0:18:12.879 continue to be en rolled. We we are due for 0:18:12.960 --> 0:18:16.000 a pullback at any time here of four or five percent. 0:18:16.040 --> 0:18:18.480 We've gone so long without as much as a two 0:18:18.560 --> 0:18:21.840 percent pullback in a day and any meaningful pullback. But 0:18:22.800 --> 0:18:25.800 you know, we're still very constructive on stocks and constructive 0:18:25.920 --> 0:18:26.919 relative to bonds. 0:18:27.680 --> 0:18:30.760 So, David, where are we in terms of valuation here? 0:18:30.760 --> 0:18:32.800 How do you think about the evaluations any equity markets? 0:18:32.840 --> 0:18:35.000 If you know, maybe we're in this melted up kind 0:18:35.000 --> 0:18:35.480 of mode. 0:18:36.320 --> 0:18:38.480 Yeah, so we're getting a little rich. 0:18:39.520 --> 0:18:43.560 We're at twenty point nine as let's call it twenty 0:18:43.600 --> 0:18:46.240 one forward price startings on the. 0:18:46.240 --> 0:18:47.280 S and P five hundred. 0:18:48.040 --> 0:18:51.800 The five year average is around nineteen, so we're you know, 0:18:51.840 --> 0:18:55.240 we're a little bit rich, not as not as rich 0:18:55.440 --> 0:18:58.280 as we've seen in the past. And you know, there's 0:18:58.320 --> 0:19:00.520 a lot of people referring to this as a bubble, 0:19:00.520 --> 0:19:03.600 and I think that people that think we're in a 0:19:03.640 --> 0:19:07.120 bubble for stocks haven't studied a lot of bubbles to know, 0:19:07.520 --> 0:19:09.080 you know what that really means when we look at 0:19:09.080 --> 0:19:11.760 the fundamentals. You know, we have some of these gross 0:19:11.760 --> 0:19:15.520 stocks and the megatech stocks trading at higher pees than 0:19:15.560 --> 0:19:19.399