WEBVTT - Bloomberg Surveillance TV: October 30, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.680 --> 0:00:15.480 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.720 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.760 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.880 from our global headquarters in New York City. We are 0:00:24.960 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.319 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.280 Terminal and the Bloomberg Business app. We begin this out 0:00:37.280 --> 0:00:39.640 with stocks in jin KaiA after getting a boost from 0:00:39.680 --> 0:00:42.600 better than expected Google earnings after the closing. About today, 0:00:42.720 --> 0:00:45.800 we're here from Meta and Microsoft. Katrina Tadlete of Franklin 0:00:45.840 --> 0:00:50.440 Templeton writing, people are worried, cautious, and generally bearish. We disagree. 0:00:50.640 --> 0:00:53.800 Tech company earnings continue to be strong. Katrina joins us. 0:00:53.800 --> 0:00:55.840 Now for more, Katrina Coomonich, Great, we would like to 0:00:55.840 --> 0:00:57.840 be bearish with alphabet numbers like the ones we saw 0:00:57.920 --> 0:00:59.800 after the closing value looking for more of the same. 0:01:00.040 --> 0:01:02.040 You know what, I actually wrote that statement before the 0:01:02.080 --> 0:01:04.560 Google the alphabet earnings came out, and I have a look. 0:01:04.560 --> 0:01:06.080 If you look at some of the earnings that are 0:01:06.080 --> 0:01:09.480 coming out of these technology stocks, it's really positive. And 0:01:09.600 --> 0:01:12.920 don't forget, it's positive surprises on top of earnings growth, 0:01:12.920 --> 0:01:16.759 which is very different versus like a positive surprise when 0:01:16.800 --> 0:01:19.240 you're expecting earnings to go down and they go down less. 0:01:19.280 --> 0:01:22.040 So I think it is actually very positive. But we 0:01:22.080 --> 0:01:24.160 are worried because everyone's. 0:01:23.720 --> 0:01:25.080 Bearish, you know. 0:01:25.200 --> 0:01:27.880 The soft landing is kind of like, well, that's fine, 0:01:27.959 --> 0:01:30.840 and I think that we are just generally more optimistic. 0:01:31.160 --> 0:01:33.360 Are you worried or does it give you confidence that 0:01:33.360 --> 0:01:35.479 you're actually on the right track. If everybody is verished, 0:01:35.480 --> 0:01:38.000 does that mean that actually there's more upside for you. 0:01:38.440 --> 0:01:40.240 I think that there is a lot of upside in 0:01:40.240 --> 0:01:42.360 the market, and some of the indicators that we're looking 0:01:42.400 --> 0:01:45.520 at is look at the productivity data. The productivity number 0:01:45.600 --> 0:01:48.000 was two point five percent, and we haven't seen that 0:01:48.040 --> 0:01:50.400 type of growth for a long period of time in 0:01:50.480 --> 0:01:53.920 terms of positive productivity. The bearish people are pointing out 0:01:53.960 --> 0:01:56.320 to the fact that it's immigration. We're not counting the 0:01:56.360 --> 0:01:59.320 immigration numbers, we're not doing that correctly, and they're driving 0:01:59.360 --> 0:02:02.160 all of that product activity. We take a slightly different bent. 0:02:02.240 --> 0:02:04.720 We actually think this is one of the outcomes of 0:02:04.760 --> 0:02:07.840 some of the supply chain shortages and some of the 0:02:07.920 --> 0:02:10.800 reduction in the labor and tightness in that labor market. 0:02:11.040 --> 0:02:13.560 People are actually doing more with less, and that is 0:02:13.600 --> 0:02:14.800 productivity people. 0:02:15.360 --> 0:02:17.640 Is this the tech companies or is this everyone? And 0:02:17.680 --> 0:02:19.440 I'm talking at a time when some of the earnings, 0:02:19.440 --> 0:02:23.239 particularly with auto manufacturers as well as certain consumer facing companies, 0:02:23.600 --> 0:02:26.120 have been eh, not great. They're not the same kind 0:02:26.160 --> 0:02:28.960 of blowout results that we're seeing from the likes of Google. 0:02:29.280 --> 0:02:31.160 And I don't like talking about this, but if you 0:02:31.200 --> 0:02:33.240 take a look at the low end consumer, that is 0:02:33.280 --> 0:02:35.720 where you're seeing a lot of this weakness show up. 0:02:35.800 --> 0:02:38.000 So you look at the McDonald's numbers and you look, 0:02:38.200 --> 0:02:40.880 obviously we had the Ecolla issue, but you combine that 0:02:41.000 --> 0:02:43.960 with the negative foot traffic. We are seeing the low 0:02:44.080 --> 0:02:46.920 end consumer under some degree of stress. And I think 0:02:47.280 --> 0:02:50.120 that's going to actually show up is potentially more in 0:02:50.160 --> 0:02:53.360 the election versus actually showing up in the stock market, 0:02:53.400 --> 0:02:55.800 because even though there's a lot of people in the 0:02:55.840 --> 0:02:59.480 low end consumer, it's not a big driver of US spending. 0:03:00.120 --> 0:03:02.920 So even though they are starting they are starting to 0:03:02.919 --> 0:03:05.880 see pressure I'm not necessarily sure that they're actually going 0:03:05.960 --> 0:03:07.240 to derail the economy. 0:03:07.280 --> 0:03:09.280 So this race is a question if you do see 0:03:09.280 --> 0:03:12.320 this over arching momentum, and that could lead to higher 0:03:12.360 --> 0:03:14.760 yields because essentially it can mean that a growth economy 0:03:14.800 --> 0:03:16.920 is really on the table for next year. At what 0:03:17.040 --> 0:03:20.320 point does that create some sort of downside valuations for 0:03:20.360 --> 0:03:22.400 equities or do you just ignore it and say start 0:03:22.400 --> 0:03:23.720 being so verished fun market. 0:03:24.600 --> 0:03:27.400 I think, first of all, we think in terms of valuation, 0:03:27.560 --> 0:03:32.480 the market's probably on a multiple basis, is reasonably fairly valued. 0:03:32.760 --> 0:03:36.040 What people are getting wrong is the earnings growth number. 0:03:36.200 --> 0:03:38.360 And so the fact is is that even if you 0:03:38.480 --> 0:03:41.600 just hold that multiple flat, if we continue to deliver 0:03:41.760 --> 0:03:45.280 better than expected earnings, the market can work because we'll 0:03:45.320 --> 0:03:48.680 still have that growth in actual underlying economy. So that's 0:03:48.720 --> 0:03:51.520 what we think the market is missing. They're so focused 0:03:51.520 --> 0:03:54.560 on the valuation level. We think that that higher valuation 0:03:54.720 --> 0:03:57.480 is a reflection of some of the benefits of the 0:03:57.560 --> 0:04:00.760 network effects, which just driving some degree of concentration in 0:04:00.800 --> 0:04:02.040 the market, which is positive. 0:04:02.200 --> 0:04:04.080 Is politics playing at all in your bullet view? 0:04:04.800 --> 0:04:07.400 So let's go to politics. When you were in the countdown, 0:04:07.880 --> 0:04:09.840 and I think it's an interesting thing. I think the 0:04:09.960 --> 0:04:13.200 non consensus view is actually coming. If we look at 0:04:13.240 --> 0:04:15.920 some of the quant data that's coming out, there's approximately 0:04:15.920 --> 0:04:19.200 a sixty six zero percent chance that we have one 0:04:19.279 --> 0:04:22.039 of these candidates with over three hundred electoral votes, which 0:04:22.040 --> 0:04:24.720 would be a landslide victory. The problem is it's too 0:04:24.800 --> 0:04:27.440 close to call which of the candidates is going to 0:04:27.480 --> 0:04:29.360 be that way. I know you've seen some of the 0:04:29.400 --> 0:04:32.320 betting data which is favorable to one candidate over the other. 0:04:32.520 --> 0:04:35.880 We're not necessarily trusting that data. I think though, a 0:04:36.000 --> 0:04:39.560 landslide victory would be really good for the stock market 0:04:39.640 --> 0:04:43.000 and the economy, and therefore it actually in terms of 0:04:43.200 --> 0:04:46.760 the November the November seventh FED decision, I think that'll 0:04:46.800 --> 0:04:47.600 also weigh in. 0:04:47.760 --> 0:04:50.840 A landside victory for who a red sweep. 0:04:50.560 --> 0:04:51.360 Or a blue sweep. 0:04:51.440 --> 0:04:54.760 That's the unknown. Unfortunately, I think that we will have 0:04:54.800 --> 0:04:57.320 a sweep, and I think that we'll have a fairly 0:04:57.400 --> 0:05:02.599 definitive outcome. Unfortunately, could swing either way, which, however, I 0:05:02.600 --> 0:05:04.280 think you need to stand back and look at the 0:05:04.320 --> 0:05:07.400 fact we're going to this election with so much uncertainty 0:05:07.800 --> 0:05:11.360 that just having the fact that the entire country coalesced 0:05:11.400 --> 0:05:15.160 around one candidate will be very positive in terms of 0:05:15.200 --> 0:05:17.320 bringing the country back together, and you think. 0:05:17.160 --> 0:05:21.600 That'll be positive regardless for stock markets, even though they 0:05:21.640 --> 0:05:24.000 have in some regards very different policies. 0:05:24.080 --> 0:05:25.960 Yes, so what does that mean if we have a 0:05:26.040 --> 0:05:28.560 trunk victory. Obviously we need to start looking at the 0:05:28.680 --> 0:05:32.800 language that he's put out there regarding tariffs. The bearish 0:05:32.880 --> 0:05:36.480 expectation is you take him at his would and that 0:05:36.560 --> 0:05:40.200 would be very negative in terms of the tariff levels 0:05:40.200 --> 0:05:42.320 that he's talking the ten percent and then the higher 0:05:42.400 --> 0:05:46.120 levels of tariffs on China. I think he's a negotiator, 0:05:46.400 --> 0:05:48.440 so we're probably in the camp. I think it is 0:05:48.480 --> 0:05:51.840 also within consensus the fact that he's actually just positioning 0:05:52.320 --> 0:05:54.560 and that he won't go that far in terms of 0:05:54.560 --> 0:05:56.679 what he's language. So I think that that in terms 0:05:56.680 --> 0:05:59.200 of outcome is going to be more positive. We don't 0:05:59.240 --> 0:06:03.320 see that negative downside scenario going to Kamala's policy. We 0:06:03.440 --> 0:06:05.160 go back. Do you want to start looking at some 0:06:05.200 --> 0:06:08.159 of those names which have been disproportionately and negative is 0:06:08.400 --> 0:06:11.200 impacted by exposure to the low in consumer If you're 0:06:11.240 --> 0:06:13.560 looking at McDonald's, you may want to start looking at 0:06:13.600 --> 0:06:16.200 some of those regional gaming companies as well, So there's 0:06:16.200 --> 0:06:19.360 definitely some beneficiaries. I think you just need to look 0:06:19.400 --> 0:06:21.640 for those beneficiaries in some unusual places. 0:06:21.680 --> 0:06:23.400 If we're talking about a sweep, though, we're talking about 0:06:23.400 --> 0:06:26.080 the difference between a fifteen percent conditional corporate tax rate 0:06:26.160 --> 0:06:28.200 or one going up to twenty eight percent, aren't we. 0:06:28.279 --> 0:06:30.000 I don't think necessarily think fifty. 0:06:30.160 --> 0:06:31.279 He likes round numbers. 0:06:31.360 --> 0:06:33.920 Okay, so we're at twenty one percent, but when he 0:06:34.000 --> 0:06:36.040 first talked about it, we were at thirty five. So 0:06:36.080 --> 0:06:38.280 the difference of going to thirty five to twenty one 0:06:38.360 --> 0:06:41.320 is significant. I think if he goes anywhere, it's twenty 0:06:41.360 --> 0:06:43.600 to twenty one down to twenty. As I said, he's 0:06:43.600 --> 0:06:44.279 a round numbers. 0:06:44.400 --> 0:06:46.400 What about twenty one to twenty eight On the Harris 0:06:46.400 --> 0:06:47.839 side blue sweep scenario, it. 0:06:49.320 --> 0:06:52.120 Will be a headwind to corporate earnings. I think that 0:06:52.200 --> 0:06:55.240 you cannot underestimate that. But offsetting that is her position 0:06:55.279 --> 0:06:58.279 on tariffs is quite as extreme, and then you have 0:06:58.360 --> 0:07:01.040 some of this support for the low in she's talking 0:07:01.080 --> 0:07:04.479 in terms of some of the transfer payment metrics. The 0:07:04.560 --> 0:07:07.440 concern that we have does the corporate tax rate increase 0:07:07.520 --> 0:07:10.720 come in fast enough to offset any of the increase 0:07:10.760 --> 0:07:12.760 in the fiscal deficit driven by her. 0:07:12.800 --> 0:07:14.120 You're looking forward to see in the bank of all 0:07:14.120 --> 0:07:14.920 of this next week. 0:07:15.680 --> 0:07:17.040 I'm actually enjoying it. 0:07:17.440 --> 0:07:21.080 I think it's interesting because this is what drives markets, 0:07:21.080 --> 0:07:23.680 and this is what makes our job so interesting. But 0:07:23.720 --> 0:07:25.880 you're right. If I come back, you're in a week's time, 0:07:25.920 --> 0:07:27.920 we're going to be talking about something else. We will 0:07:27.920 --> 0:07:29.400 be talking about twenty twenty five. 0:07:29.440 --> 0:07:31.320 Actually, I hope we are. I really do, and I 0:07:31.320 --> 0:07:32.960 hope we're still not sitting here trying to figure out 0:07:33.000 --> 0:07:35.240 who actually won the election. Equity futures on the S 0:07:35.280 --> 0:07:37.320 and P by a tenth of one percent. Katrina has 0:07:37.320 --> 0:07:39.440 going to see it. Thank you great as always, Katrina, 0:07:39.480 --> 0:07:52.000 don't be that a Franklin Temple said. So here's the latest. 0:07:52.000 --> 0:07:55.240 There's many investors leaning into Trump trades. Some warnings begin 0:07:55.360 --> 0:07:58.600 to build cities suggesting it might be time to take profits. 0:07:58.640 --> 0:08:02.040 Dirk Willer writing, despite investors concluding that Trump would be 0:08:02.120 --> 0:08:05.440 the victor, the polling bias is only moderately in his favor. 0:08:05.720 --> 0:08:08.480 We therefore take profits in some of our Trump biased 0:08:08.520 --> 0:08:11.640 election trades. That join us now for more. Welcome to 0:08:11.680 --> 0:08:13.880 the program sir, Let's get into those trades. First of all, 0:08:14.080 --> 0:08:16.360 which ones would you take off at the moment? 0:08:18.160 --> 0:08:19.280 Yeah, thanks for having me on. 0:08:20.960 --> 0:08:24.640 I think there's a lot of consensus among investors that 0:08:24.680 --> 0:08:28.520 Trump has already won, right and almost every post I think, listen, 0:08:28.600 --> 0:08:32.440 it's really very close to call still and therefore it's 0:08:32.480 --> 0:08:34.640 not really a focal conclusion, even though the odds are 0:08:34.720 --> 0:08:37.120 lart in this favor. So the trades we decided to 0:08:37.160 --> 0:08:40.520 take off our one hour long break even trade. As 0:08:40.520 --> 0:08:45.439 you know, there's a lot of concern that Trump administration 0:08:45.520 --> 0:08:49.600 would mean more inflation both or actually for several reasons, 0:08:49.640 --> 0:08:53.320 because of the immigration policies, because of the tariff policies, 0:08:53.360 --> 0:08:57.840 and because of physical expansion, and so the inflation market 0:08:58.160 --> 0:09:02.640 price meaningfully higher pretty much across the curve, and we 0:09:02.679 --> 0:09:06.200 think that is really quite mature, and that could have 0:09:06.280 --> 0:09:12.200 a meaningful backlash if Trump still virtual loose, And therefore 0:09:12.280 --> 0:09:15.120 we think that is really one that we would take off. 0:09:15.360 --> 0:09:17.760 The other one is in the dollar. People really piled 0:09:17.760 --> 0:09:19.959 into the dollar, and of course they piled into it 0:09:20.080 --> 0:09:24.040 for two reasons. One because the macro changed this and 0:09:24.080 --> 0:09:27.040 if p was very strong, and that changed the sentiment 0:09:27.080 --> 0:09:29.320 around the dollar. But the second thing was, of course 0:09:29.320 --> 0:09:34.320 Trump again, tariffs being bulluish, trump fiscal policy being bullish dollars, 0:09:34.559 --> 0:09:37.520 fiscal policy being bullish dollars, and that is also quite 0:09:37.640 --> 0:09:41.000 mature trade. And so we took off our euro downside structure. 0:09:41.520 --> 0:09:44.480 That's what makes it slightly more complex. We need to 0:09:44.480 --> 0:09:46.679 figure out what was driving the trades to begin with. 0:09:46.960 --> 0:09:49.880 Why do you believe this was more about Trump's prospects 0:09:49.880 --> 0:09:53.320 than just about fundamentals the economic data and monetary policy too. 0:09:54.440 --> 0:09:57.440 It is true, it's almost impossible to figure that out 0:09:57.440 --> 0:10:00.320 fully because even if you say, well the door just 0:10:00.360 --> 0:10:03.480 move with rates, well, rates moved with Trump, right, and 0:10:03.559 --> 0:10:06.280 so what is what is somewhat hard to say. But 0:10:06.920 --> 0:10:09.840 I would say the extent of dollar buying that we've 0:10:09.880 --> 0:10:13.000 seen was much more extreme than what you typically get 0:10:13.679 --> 0:10:15.360 if it's just and then a p print of it's 0:10:15.480 --> 0:10:18.400 just a change in the economic outlook. It really was 0:10:18.400 --> 0:10:19.320 was really quite large. 0:10:19.440 --> 0:10:21.120 You can also see where it happened. 0:10:22.120 --> 0:10:25.920 Investors bought most in dollar China. Door China is of 0:10:25.960 --> 0:10:29.559 course the single biggest Trump trade that there is. It's 0:10:29.720 --> 0:10:32.120 now a very big consensus trade. Now, I would say 0:10:32.520 --> 0:10:35.160 we have still a structure that would benefit from higher 0:10:35.160 --> 0:10:38.600 dollar China after an election, and we kept it. And 0:10:38.640 --> 0:10:41.840 the reason is that I think the PBOC is really 0:10:41.880 --> 0:10:46.479 a little bit investor's friend in calming down the volatility, 0:10:46.960 --> 0:10:51.959 in making sure dollar China doesn't overshoot too quickly, too fast, 0:10:52.280 --> 0:10:54.960 and so I think investors are are still able to 0:10:55.000 --> 0:10:58.160 add to dollar China for that reason. But in general, 0:10:58.480 --> 0:11:02.280 I to answer the question where this solid buying happened 0:11:02.400 --> 0:11:04.040 is a clear education that a lot of it had 0:11:04.080 --> 0:11:04.720 to do with Trump. 0:11:04.840 --> 0:11:08.079 How many of your clients are your compatriots, Derek, are 0:11:08.160 --> 0:11:10.680 curious about playing in the Trump media and technology group. 0:11:10.679 --> 0:11:11.240 In bitcoin? 0:11:13.200 --> 0:11:17.000 Yeah, I don't cover thing avities. Bitcoin is of course 0:11:17.040 --> 0:11:20.080 also Trump trade, and it's it's a little bit similar 0:11:20.080 --> 0:11:23.800 to gold. Gold also had had a very strong move. 0:11:23.880 --> 0:11:26.480 Of course, now that that gold is the Trump trade 0:11:26.559 --> 0:11:29.559 is really quite curious because usually and the same is 0:11:29.559 --> 0:11:32.040 true some same for bitcoin, if rates go up and 0:11:32.080 --> 0:11:34.760 the dollar goes up, that's a terrible environment for gold. 0:11:35.000 --> 0:11:36.840 Now this time around we have rates go up, dollar 0:11:36.920 --> 0:11:39.960 go up, and gold does great. And the reason is, 0:11:39.960 --> 0:11:44.280 of course, again these inflationary fears with the Trump administration, 0:11:44.640 --> 0:11:48.120 and even more so it's inflationary fears with a FED 0:11:48.320 --> 0:11:50.760 not going to do much about it if there was 0:11:50.840 --> 0:11:53.679 a higher inflation, and the combination of higher inflation and 0:11:53.760 --> 0:11:55.840 a double shad is of course a great environment for 0:11:55.880 --> 0:11:58.720 gold and also for bitcoin. So so I think that 0:11:58.800 --> 0:12:00.000 explains a little bit of paradox. 0:12:00.120 --> 0:12:00.320 Dirk. 0:12:00.360 --> 0:12:02.240 Why do you think the financial markets are taking their 0:12:02.280 --> 0:12:04.280 cues and the betting markets and not polling. 0:12:06.280 --> 0:12:09.680 I mean, I think what is happening is that markets 0:12:09.800 --> 0:12:14.240 love momentum, right, and the polls they are, of course, 0:12:14.280 --> 0:12:16.440 have moved in favor of Trump. They have showed some 0:12:16.520 --> 0:12:20.720 momentum and people just write that forward and they jump 0:12:20.760 --> 0:12:23.280 on the momentum train. And that is what we see 0:12:23.320 --> 0:12:25.800 in markets all the time. And that's I think how 0:12:25.880 --> 0:12:28.920 people use the polls. And it might be right. I mean, 0:12:29.000 --> 0:12:33.360 today is some momentum impulse and that is what we're seeing. 0:12:33.760 --> 0:12:36.600 And you know, at this stage, Trump of course has 0:12:37.000 --> 0:12:38.960 the upper hand, and I think there is clear both 0:12:38.960 --> 0:12:43.079 impulse and in betting markets. But the extent to which 0:12:44.040 --> 0:12:46.800 he has and the conferences you can have in the outcome, 0:12:47.080 --> 0:12:48.920 I think is somewhat exaggerated in markets. 0:12:49.040 --> 0:12:51.880 I appreciate your time so full pace, Thank you, sir. 0:12:51.920 --> 0:13:05.120 Timely took all avent f City joining us not to 0:13:05.120 --> 0:13:07.839 discuss as Claudia Sam of New Century Advice is a 0:13:07.880 --> 0:13:10.319 good friend of this program. Claudia, welcome back to the show. 0:13:10.559 --> 0:13:13.680 Let's get into this economic data. How would you characterize 0:13:13.920 --> 0:13:15.440 the economy in America? 0:13:16.920 --> 0:13:18.120 Good news is good news. 0:13:18.360 --> 0:13:21.640 I mean, this is excellent on the GP, particularly when 0:13:21.679 --> 0:13:23.160 you look at the consumer spending. 0:13:23.679 --> 0:13:25.920 It's not just one quarter. 0:13:26.240 --> 0:13:28.760 We have now put together four quarters that are about 0:13:28.800 --> 0:13:33.480 three percent growth in consumer spending inflation adjusted, and as 0:13:33.520 --> 0:13:36.840 Michael said, you put that together with business investment, like 0:13:37.000 --> 0:13:39.480 that's what we're looking for. Like, this is a really 0:13:39.520 --> 0:13:42.400 good report and it's not one to be afraid of. 0:13:42.720 --> 0:13:45.520 The FED is not going to be afraid of this report. 0:13:45.679 --> 0:13:48.600 We have a supply coming online, we have productivity higher. 0:13:49.080 --> 0:13:51.960 Like this really is good news, Claudia. 0:13:52.080 --> 0:13:53.760 They might not be afraid of the report, but they 0:13:53.760 --> 0:13:56.400 could be potentially a little concerned about the response to 0:13:56.440 --> 0:13:59.160 the report in markets. At what point does it get 0:13:59.160 --> 0:14:02.640 the Fed's attention that longer term yields keep climbing on 0:14:02.720 --> 0:14:05.559 the back of an ongoing string of better than expected 0:14:05.600 --> 0:14:07.560 economic data. 0:14:07.720 --> 0:14:09.400 The FED is going to be paying attention to what 0:14:09.440 --> 0:14:12.240 markets do, regardless of whether it's what they're expecting or 0:14:12.280 --> 0:14:15.800 what they're not expecting. You know, there's hard to play 0:14:16.160 --> 0:14:18.000 three dimensional chess with markets. 0:14:18.280 --> 0:14:20.360 There are a lot of factors that move markets. 0:14:20.400 --> 0:14:22.520 The FED is an important player in the mix, but 0:14:22.560 --> 0:14:25.280 it's not the only but it absolutely will be looking 0:14:25.360 --> 0:14:28.280 at interest rates, sensitive sectors, places where it could go 0:14:28.360 --> 0:14:31.760 in and if there needed to be some support, cut rates, 0:14:31.760 --> 0:14:34.520 get some support. But what that's not we're seeing right now. 0:14:34.520 --> 0:14:37.040 We're seeing a very strong economy and what the FED 0:14:37.120 --> 0:14:40.720 has to look for are any signs of it overheating? 0:14:41.200 --> 0:14:41.400 Right? 0:14:41.480 --> 0:14:42.680 Is that consumer spending? 0:14:42.760 --> 0:14:46.080 Is that demand that's really outstripping supply, And at this 0:14:46.240 --> 0:14:49.040 point we really do not see signs of it, and 0:14:49.400 --> 0:14:52.240 we have it for several quarters right like this, we 0:14:52.640 --> 0:14:55.800 are in a trend place that is much better than frankly, 0:14:55.840 --> 0:14:57.400 we went into the pandemic with. 0:14:57.720 --> 0:15:00.440 There are two different arguments here. One is this question 0:15:00.680 --> 0:15:04.280 of whether we're overheating and thus causing the FED stop 0:15:04.320 --> 0:15:07.040 cutting rates, And the other question is are we underestimating 0:15:07.360 --> 0:15:09.640 the neutral rate that we could potentially be looking at 0:15:09.640 --> 0:15:13.640 in an economy that keeps chucking along even with rates 0:15:13.640 --> 0:15:16.680 that the current FED says are significantly restrictive. 0:15:16.760 --> 0:15:18.400 So which is it Claudia, because. 0:15:18.160 --> 0:15:20.960 They are very different responses on the FED side to 0:15:21.000 --> 0:15:22.800 either of those two potential outcomes. 0:15:24.000 --> 0:15:25.720 At the end of the day, we want the neutral 0:15:25.800 --> 0:15:29.160 rate as high as absolutely possible, because a high neutral 0:15:29.240 --> 0:15:32.400 rate is a sign of a healthy economy. The low 0:15:32.440 --> 0:15:35.000 interest rate economy that we went into the pandemic with 0:15:35.280 --> 0:15:37.680 that was not a healthy economy. It created a lot 0:15:37.680 --> 0:15:40.520 of distortions, but it also was just assigned interest. 0:15:40.320 --> 0:15:43.080 Rates or a price. They are telling us something about 0:15:43.080 --> 0:15:43.760 the economy. 0:15:44.280 --> 0:15:46.680 And if it turns out that this economy comes out 0:15:46.720 --> 0:15:50.960 with higher productivity growth, higher underlying line trend, well we 0:15:50.960 --> 0:15:53.800 would expect that to show up with a higher interest rate, 0:15:53.840 --> 0:15:56.200 and it's an interest rate that we would tolerate. It 0:15:56.200 --> 0:15:58.200 wouldn't be restrictive, it just be we have a stronger 0:15:58.240 --> 0:15:59.400 economy now. 0:15:59.240 --> 0:16:02.000 It is true soon to say that is what we 0:16:02.120 --> 0:16:02.880 have moved into. 0:16:03.000 --> 0:16:05.920 This still could be you know, working through some of 0:16:05.960 --> 0:16:09.600 the temporary disruptions of the pandemic, and we could go 0:16:09.720 --> 0:16:12.280 back to a lower trend growth. And I think Europe 0:16:12.320 --> 0:16:14.720 is very much a cautionary tale, right. They are not 0:16:14.880 --> 0:16:18.080 having this conversation of have we gotten to this higher 0:16:18.080 --> 0:16:18.720 trend level? 0:16:18.880 --> 0:16:22.120 Is our star just so much higher. So there's still 0:16:22.160 --> 0:16:25.160 a lot in the mix. But again we don't where 0:16:25.200 --> 0:16:26.200 our star lands. 0:16:26.320 --> 0:16:29.160 I mean that high our star is perfectly fine, but 0:16:29.200 --> 0:16:31.440 we're in that process of discovery of like, is this 0:16:31.480 --> 0:16:32.840 good news going to stick with us? 0:16:33.000 --> 0:16:35.200 Well? When you say good news is good news? Does 0:16:35.240 --> 0:16:39.240 it marshally increase your base case? The best guess about 0:16:39.240 --> 0:16:41.000 where the neutral rate is? Do you think that it's 0:16:41.040 --> 0:16:43.240 more likely around four now than three and a half? 0:16:43.320 --> 0:16:46.240 Is a FEDCE projecting. I don't know if I go 0:16:46.320 --> 0:16:47.280 quite as high as four. 0:16:47.600 --> 0:16:50.440 I think, you know, into the solid three percent is 0:16:50.840 --> 0:16:51.640 what this looks like. 0:16:51.720 --> 0:16:52.800 In particularly again. 0:16:52.720 --> 0:16:58.080 If the implicit productivity growth that goes with this GDP 0:16:58.280 --> 0:17:02.040 number and a labor market that, while still solid, has 0:17:02.040 --> 0:17:05.000 slowed down quite a bit, right, so we're we're getting 0:17:05.040 --> 0:17:08.080 a lot out of the resources that we're putting into 0:17:08.119 --> 0:17:12.080 the economy, and so if that continues, then yes, I 0:17:12.119 --> 0:17:16.520 think something in the mid three percent probably maybe maybe 0:17:16.560 --> 0:17:19.080 even higher would make sense. But that's where I think 0:17:19.080 --> 0:17:21.840 the FED they have like their first hundred basis points, 0:17:22.160 --> 0:17:24.600 like the next hundred basis points I think are pretty 0:17:24.640 --> 0:17:26.600 safe in the like that's still restrictive. 0:17:26.600 --> 0:17:28.600 We can ship away at that, and then there really 0:17:28.640 --> 0:17:29.280 you do get. 0:17:29.080 --> 0:17:32.159 Into a conversation as you get past that of okay, 0:17:32.280 --> 0:17:35.600 is this is this where the economy wants to rest. 0:17:35.359 --> 0:17:37.840 If we're going to live at higher interest rates, what 0:17:37.840 --> 0:17:41.240 does that mean for the housing market? 0:17:42.240 --> 0:17:46.440 Again, a higher interest rate environment, when when it's behind 0:17:46.480 --> 0:17:51.600 it is productivity growth, you also have higher income growth, right, 0:17:51.680 --> 0:17:54.640 And so interest rates are a price just like house 0:17:54.680 --> 0:17:56.919 prices or another price that people face. And what at 0:17:56.960 --> 0:17:59.719 the end of the day matters is the affordability. Right 0:17:59.920 --> 0:18:04.000 you have the resources to afford those homes. Now, of course, 0:18:04.000 --> 0:18:06.199 the higher interest rates do run into the fact that 0:18:06.200 --> 0:18:08.879 we have had a housing underbuild for quite some time. 0:18:09.359 --> 0:18:11.200 And so if you think that if we're going to 0:18:11.240 --> 0:18:14.800 try and fix that underbuild just with market prices, so 0:18:14.920 --> 0:18:17.040 the adjustments of the interest rates, that one is going 0:18:17.119 --> 0:18:17.679 to be tricky. 0:18:18.000 --> 0:18:19.320 But I think there are certainly. 0:18:19.040 --> 0:18:22.240 Policy proposals on the table at various levels of government 0:18:22.600 --> 0:18:25.360 to try and work on housing supply and not think 0:18:25.400 --> 0:18:27.760 of it purely through interest rate mechanisms and what the 0:18:27.760 --> 0:18:29.960 FED might be doing. 0:18:29.880 --> 0:18:33.440 Right, but that could take years to come to fruition. 0:18:33.600 --> 0:18:36.479 So if you're sitting on a three percent mortgage and 0:18:36.640 --> 0:18:38.640 rates you say, are going to be higher for longer. 0:18:39.359 --> 0:18:42.520 What impetus is there for those individuals to give that up? 0:18:43.640 --> 0:18:44.000 There's not. 0:18:45.200 --> 0:18:48.600 I mean what you know, there are always if there 0:18:48.600 --> 0:18:50.679 are big shifts in the economy, there are going to 0:18:50.720 --> 0:18:53.679 be winners and losers in terms of where they sat 0:18:53.760 --> 0:18:57.919 on like the bet right on the information when everything changed. 0:18:58.320 --> 0:19:01.880 So you know that that's just a reality of how 0:19:01.880 --> 0:19:05.359 the economy works. It does mean the housing market went 0:19:05.400 --> 0:19:07.919 into the pandemic in a place of disruption because of 0:19:07.960 --> 0:19:11.080 the housing underbuild, and then it has been throughout this 0:19:11.320 --> 0:19:14.760 entire period in different forms of disruption, whether it was 0:19:15.359 --> 0:19:18.280 really fast paced demand, really low interest rates, whether it 0:19:18.320 --> 0:19:20.919 was no inventory of housing. You know, so that is 0:19:20.960 --> 0:19:25.480 an extremely disrupted sector, not just because of interest rates. 0:19:25.560 --> 0:19:28.199 And I agree with you, there is no there's no 0:19:28.320 --> 0:19:31.160