Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. We begin this out
Speaker 2: with stocks in jin KaiA after getting a boost from
Speaker 2: better than expected Google earnings after the closing. About today,
Speaker 2: we're here from Meta and Microsoft. Katrina Tadlete of Franklin
Speaker 2: Templeton writing, people are worried, cautious, and generally bearish. We disagree.
Speaker 2: Tech company earnings continue to be strong. Katrina joins us.
Speaker 2: Now for more, Katrina Coomonich, Great, we would like to
Speaker 2: be bearish with alphabet numbers like the ones we saw
Speaker 2: after the closing value looking for more of the same.
Speaker 3: You know what, I actually wrote that statement before the
Speaker 3: Google the alphabet earnings came out, and I have a look.
Speaker 3: If you look at some of the earnings that are
Speaker 3: coming out of these technology stocks, it's really positive. And
Speaker 3: don't forget, it's positive surprises on top of earnings growth,
Speaker 3: which is very different versus like a positive surprise when
Speaker 3: you're expecting earnings to go down and they go down less.
Speaker 3: So I think it is actually very positive. But we
Speaker 3: are worried because everyone's.
Speaker 1: Bearish, you know.
Speaker 3: The soft landing is kind of like, well, that's fine,
Speaker 3: and I think that we are just generally more optimistic.
Speaker 4: Are you worried or does it give you confidence that
Speaker 4: you're actually on the right track. If everybody is verished,
Speaker 4: does that mean that actually there's more upside for you.
Speaker 3: I think that there is a lot of upside in
Speaker 3: the market, and some of the indicators that we're looking
Speaker 3: at is look at the productivity data. The productivity number
Speaker 3: was two point five percent, and we haven't seen that
Speaker 3: type of growth for a long period of time in
Speaker 3: terms of positive productivity. The bearish people are pointing out
Speaker 3: to the fact that it's immigration. We're not counting the
Speaker 3: immigration numbers, we're not doing that correctly, and they're driving
Speaker 3: all of that product activity. We take a slightly different bent.
Speaker 3: We actually think this is one of the outcomes of
Speaker 3: some of the supply chain shortages and some of the
Speaker 3: reduction in the labor and tightness in that labor market.
Speaker 3: People are actually doing more with less, and that is
Speaker 3: productivity people.
Speaker 4: Is this the tech companies or is this everyone? And
Speaker 4: I'm talking at a time when some of the earnings,
Speaker 4: particularly with auto manufacturers as well as certain consumer facing companies,
Speaker 4: have been eh, not great. They're not the same kind
Speaker 4: of blowout results that we're seeing from the likes of Google.
Speaker 3: And I don't like talking about this, but if you
Speaker 3: take a look at the low end consumer, that is
Speaker 3: where you're seeing a lot of this weakness show up.
Speaker 3: So you look at the McDonald's numbers and you look,
Speaker 3: obviously we had the Ecolla issue, but you combine that
Speaker 3: with the negative foot traffic. We are seeing the low
Speaker 3: end consumer under some degree of stress. And I think
Speaker 3: that's going to actually show up is potentially more in
Speaker 3: the election versus actually showing up in the stock market,
Speaker 3: because even though there's a lot of people in the
Speaker 3: low end consumer, it's not a big driver of US spending.
Speaker 3: So even though they are starting they are starting to
Speaker 3: see pressure I'm not necessarily sure that they're actually going
Speaker 3: to derail the economy.
Speaker 4: So this race is a question if you do see
Speaker 4: this over arching momentum, and that could lead to higher
Speaker 4: yields because essentially it can mean that a growth economy
Speaker 4: is really on the table for next year. At what
Speaker 4: point does that create some sort of downside valuations for
Speaker 4: equities or do you just ignore it and say start
Speaker 4: being so verished fun market.
Speaker 3: I think, first of all, we think in terms of valuation,
Speaker 3: the market's probably on a multiple basis, is reasonably fairly valued.
Speaker 3: What people are getting wrong is the earnings growth number.
Speaker 3: And so the fact is is that even if you
Speaker 3: just hold that multiple flat, if we continue to deliver
Speaker 3: better than expected earnings, the market can work because we'll
Speaker 3: still have that growth in actual underlying economy. So that's
Speaker 3: what we think the market is missing. They're so focused
Speaker 3: on the valuation level. We think that that higher valuation
Speaker 3: is a reflection of some of the benefits of the
Speaker 3: network effects, which just driving some degree of concentration in
Speaker 3: the market, which is positive.
Speaker 5: Is politics playing at all in your bullet view?
Speaker 3: So let's go to politics. When you were in the countdown,
Speaker 3: and I think it's an interesting thing. I think the
Speaker 3: non consensus view is actually coming. If we look at
Speaker 3: some of the quant data that's coming out, there's approximately
Speaker 3: a sixty six zero percent chance that we have one
Speaker 3: of these candidates with over three hundred electoral votes, which
Speaker 3: would be a landslide victory. The problem is it's too
Speaker 3: close to call which of the candidates is going to
Speaker 3: be that way. I know you've seen some of the
Speaker 3: betting data which is favorable to one candidate over the other.
Speaker 3: We're not necessarily trusting that data. I think though, a
Speaker 3: landslide victory would be really good for the stock market
Speaker 3: and the economy, and therefore it actually in terms of
Speaker 3: the November the November seventh FED decision, I think that'll
Speaker 3: also weigh in.
Speaker 5: A landside victory for who a red sweep.
Speaker 1: Or a blue sweep.
Speaker 3: That's the unknown. Unfortunately, I think that we will have
Speaker 3: a sweep, and I think that we'll have a fairly
Speaker 3: definitive outcome. Unfortunately, could swing either way, which, however, I
Speaker 3: think you need to stand back and look at the
Speaker 3: fact we're going to this election with so much uncertainty
Speaker 3: that just having the fact that the entire country coalesced
Speaker 3: around one candidate will be very positive in terms of
Speaker 3: bringing the country back together, and you think.
Speaker 5: That'll be positive regardless for stock markets, even though they
Speaker 5: have in some regards very different policies.
Speaker 3: Yes, so what does that mean if we have a
Speaker 3: trunk victory. Obviously we need to start looking at the
Speaker 3: language that he's put out there regarding tariffs. The bearish
Speaker 3: expectation is you take him at his would and that
Speaker 3: would be very negative in terms of the tariff levels
Speaker 3: that he's talking the ten percent and then the higher
Speaker 3: levels of tariffs on China. I think he's a negotiator,
Speaker 3: so we're probably in the camp. I think it is
Speaker 3: also within consensus the fact that he's actually just positioning
Speaker 3: and that he won't go that far in terms of
Speaker 3: what he's language. So I think that that in terms
Speaker 3: of outcome is going to be more positive. We don't
Speaker 3: see that negative downside scenario going to Kamala's policy. We
Speaker 3: go back. Do you want to start looking at some
Speaker 3: of those names which have been disproportionately and negative is
Speaker 3: impacted by exposure to the low in consumer If you're
Speaker 3: looking at McDonald's, you may want to start looking at
Speaker 3: some of those regional gaming companies as well, So there's
Speaker 3: definitely some beneficiaries. I think you just need to look
Speaker 3: for those beneficiaries in some unusual places.
Speaker 2: If we're talking about a sweep, though, we're talking about
Speaker 2: the difference between a fifteen percent conditional corporate tax rate
Speaker 2: or one going up to twenty eight percent, aren't we.
Speaker 3: I don't think necessarily think fifty.
Speaker 1: He likes round numbers.
Speaker 3: Okay, so we're at twenty one percent, but when he
Speaker 3: first talked about it, we were at thirty five. So
Speaker 3: the difference of going to thirty five to twenty one
Speaker 3: is significant. I think if he goes anywhere, it's twenty
Speaker 3: to twenty one down to twenty. As I said, he's
Speaker 3: a round numbers.
Speaker 2: What about twenty one to twenty eight On the Harris
Speaker 2: side blue sweep scenario, it.
Speaker 3: Will be a headwind to corporate earnings. I think that
Speaker 3: you cannot underestimate that. But offsetting that is her position
Speaker 3: on tariffs is quite as extreme, and then you have
Speaker 3: some of this support for the low in she's talking
Speaker 3: in terms of some of the transfer payment metrics. The
Speaker 3: concern that we have does the corporate tax rate increase
Speaker 3: come in fast enough to offset any of the increase
Speaker 3: in the fiscal deficit driven by her.
Speaker 2: You're looking forward to see in the bank of all
Speaker 2: of this next week.
Speaker 1: I'm actually enjoying it.
Speaker 3: I think it's interesting because this is what drives markets,
Speaker 3: and this is what makes our job so interesting. But
Speaker 3: you're right. If I come back, you're in a week's time,
Speaker 3: we're going to be talking about something else. We will
Speaker 3: be talking about twenty twenty five.
Speaker 2: Actually, I hope we are. I really do, and I
Speaker 2: hope we're still not sitting here trying to figure out
Speaker 2: who actually won the election. Equity futures on the S
Speaker 2: and P by a tenth of one percent. Katrina has
Speaker 2: going to see it. Thank you great as always, Katrina,
Speaker 2: don't be that a Franklin Temple said. So here's the latest.
Speaker 2: There's many investors leaning into Trump trades. Some warnings begin
Speaker 2: to build cities suggesting it might be time to take profits.
Speaker 2: Dirk Willer writing, despite investors concluding that Trump would be
Speaker 2: the victor, the polling bias is only moderately in his favor.
Speaker 2: We therefore take profits in some of our Trump biased
Speaker 2: election trades. That join us now for more. Welcome to
Speaker 2: the program sir, Let's get into those trades. First of all,
Speaker 2: which ones would you take off at the moment?
Speaker 1: Yeah, thanks for having me on.
Speaker 6: I think there's a lot of consensus among investors that
Speaker 6: Trump has already won, right and almost every post I think, listen,
Speaker 6: it's really very close to call still and therefore it's
Speaker 6: not really a focal conclusion, even though the odds are
Speaker 6: lart in this favor. So the trades we decided to
Speaker 6: take off our one hour long break even trade. As
Speaker 6: you know, there's a lot of concern that Trump administration
Speaker 6: would mean more inflation both or actually for several reasons,
Speaker 6: because of the immigration policies, because of the tariff policies,
Speaker 6: and because of physical expansion, and so the inflation market
Speaker 6: price meaningfully higher pretty much across the curve, and we
Speaker 6: think that is really quite mature, and that could have
Speaker 6: a meaningful backlash if Trump still virtual loose, And therefore
Speaker 6: we think that is really one that we would take off.
Speaker 6: The other one is in the dollar. People really piled
Speaker 6: into the dollar, and of course they piled into it
Speaker 6: for two reasons. One because the macro changed this and
Speaker 6: if p was very strong, and that changed the sentiment
Speaker 6: around the dollar. But the second thing was, of course
Speaker 6: Trump again, tariffs being bulluish, trump fiscal policy being bullish dollars,
Speaker 6: fiscal policy being bullish dollars, and that is also quite
Speaker 6: mature trade. And so we took off our euro downside structure.
Speaker 2: That's what makes it slightly more complex. We need to
Speaker 2: figure out what was driving the trades to begin with.
Speaker 2: Why do you believe this was more about Trump's prospects
Speaker 2: than just about fundamentals the economic data and monetary policy too.
Speaker 6: It is true, it's almost impossible to figure that out
Speaker 6: fully because even if you say, well the door just
Speaker 6: move with rates, well, rates moved with Trump, right, and
Speaker 6: so what is what is somewhat hard to say. But
Speaker 6: I would say the extent of dollar buying that we've
Speaker 6: seen was much more extreme than what you typically get
Speaker 6: if it's just and then a p print of it's
Speaker 6: just a change in the economic outlook. It really was
Speaker 6: was really quite large.
Speaker 1: You can also see where it happened.
Speaker 6: Investors bought most in dollar China. Door China is of
Speaker 6: course the single biggest Trump trade that there is. It's
Speaker 6: now a very big consensus trade. Now, I would say
Speaker 6: we have still a structure that would benefit from higher
Speaker 6: dollar China after an election, and we kept it. And
Speaker 6: the reason is that I think the PBOC is really
Speaker 6: a little bit investor's friend in calming down the volatility,
Speaker 6: in making sure dollar China doesn't overshoot too quickly, too fast,
Speaker 6: and so I think investors are are still able to
Speaker 6: add to dollar China for that reason. But in general,
Speaker 6: I to answer the question where this solid buying happened
Speaker 6: is a clear education that a lot of it had
Speaker 6: to do with Trump.
Speaker 4: How many of your clients are your compatriots, Derek, are
Speaker 4: curious about playing in the Trump media and technology group.
Speaker 1: In bitcoin?
Speaker 6: Yeah, I don't cover thing avities. Bitcoin is of course
Speaker 6: also Trump trade, and it's it's a little bit similar
Speaker 6: to gold. Gold also had had a very strong move.
Speaker 6: Of course, now that that gold is the Trump trade
Speaker 6: is really quite curious because usually and the same is
Speaker 6: true some same for bitcoin, if rates go up and
Speaker 6: the dollar goes up, that's a terrible environment for gold.
Speaker 6: Now this time around we have rates go up, dollar
Speaker 6: go up, and gold does great. And the reason is,
Speaker 6: of course, again these inflationary fears with the Trump administration,
Speaker 6: and even more so it's inflationary fears with a FED
Speaker 6: not going to do much about it if there was
Speaker 6: a higher inflation, and the combination of higher inflation and
Speaker 6: a double shad is of course a great environment for
Speaker 6: gold and also for bitcoin. So so I think that
Speaker 6: explains a little bit of paradox.
Speaker 4: Dirk.
Speaker 5: Why do you think the financial markets are taking their
Speaker 5: cues and the betting markets and not polling.
Speaker 6: I mean, I think what is happening is that markets
Speaker 6: love momentum, right, and the polls they are, of course,
Speaker 6: have moved in favor of Trump. They have showed some
Speaker 6: momentum and people just write that forward and they jump
Speaker 6: on the momentum train. And that is what we see
Speaker 6: in markets all the time. And that's I think how
Speaker 6: people use the polls. And it might be right. I mean,
Speaker 6: today is some momentum impulse and that is what we're seeing.
Speaker 6: And you know, at this stage, Trump of course has
Speaker 6: the upper hand, and I think there is clear both
Speaker 6: impulse and in betting markets. But the extent to which
Speaker 6: he has and the conferences you can have in the outcome,
Speaker 6: I think is somewhat exaggerated in markets.
Speaker 2: I appreciate your time so full pace, Thank you, sir.
Speaker 2: Timely took all avent f City joining us not to
Speaker 2: discuss as Claudia Sam of New Century Advice is a
Speaker 2: good friend of this program. Claudia, welcome back to the show.
Speaker 2: Let's get into this economic data. How would you characterize
Speaker 2: the economy in America?
Speaker 1: Good news is good news.
Speaker 7: I mean, this is excellent on the GP, particularly when
Speaker 7: you look at the consumer spending.
Speaker 1: It's not just one quarter.
Speaker 7: We have now put together four quarters that are about
Speaker 7: three percent growth in consumer spending inflation adjusted, and as
Speaker 7: Michael said, you put that together with business investment, like
Speaker 7: that's what we're looking for. Like, this is a really
Speaker 7: good report and it's not one to be afraid of.
Speaker 7: The FED is not going to be afraid of this report.
Speaker 7: We have a supply coming online, we have productivity higher.
Speaker 1: Like this really is good news, Claudia.
Speaker 4: They might not be afraid of the report, but they
Speaker 4: could be potentially a little concerned about the response to
Speaker 4: the report in markets. At what point does it get
Speaker 4: the Fed's attention that longer term yields keep climbing on
Speaker 4: the back of an ongoing string of better than expected
Speaker 4: economic data.
Speaker 7: The FED is going to be paying attention to what
Speaker 7: markets do, regardless of whether it's what they're expecting or
Speaker 7: what they're not expecting. You know, there's hard to play
Speaker 7: three dimensional chess with markets.
Speaker 1: There are a lot of factors that move markets.
Speaker 7: The FED is an important player in the mix, but
Speaker 7: it's not the only but it absolutely will be looking
Speaker 7: at interest rates, sensitive sectors, places where it could go
Speaker 7: in and if there needed to be some support, cut rates,
Speaker 7: get some support. But what that's not we're seeing right now.
Speaker 7: We're seeing a very strong economy and what the FED
Speaker 7: has to look for are any signs of it overheating?
Speaker 3: Right?
Speaker 1: Is that consumer spending?
Speaker 7: Is that demand that's really outstripping supply, And at this
Speaker 7: point we really do not see signs of it, and
Speaker 7: we have it for several quarters right like this, we
Speaker 7: are in a trend place that is much better than frankly,
Speaker 7: we went into the pandemic with.
Speaker 4: There are two different arguments here. One is this question
Speaker 4: of whether we're overheating and thus causing the FED stop
Speaker 4: cutting rates, And the other question is are we underestimating
Speaker 4: the neutral rate that we could potentially be looking at
Speaker 4: in an economy that keeps chucking along even with rates
Speaker 4: that the current FED says are significantly restrictive.
Speaker 1: So which is it Claudia, because.
Speaker 4: They are very different responses on the FED side to
Speaker 4: either of those two potential outcomes.
Speaker 7: At the end of the day, we want the neutral
Speaker 7: rate as high as absolutely possible, because a high neutral
Speaker 7: rate is a sign of a healthy economy. The low
Speaker 7: interest rate economy that we went into the pandemic with
Speaker 7: that was not a healthy economy. It created a lot
Speaker 7: of distortions, but it also was just assigned interest.
Speaker 1: Rates or a price. They are telling us something about
Speaker 1: the economy.
Speaker 7: And if it turns out that this economy comes out
Speaker 7: with higher productivity growth, higher underlying line trend, well we
Speaker 7: would expect that to show up with a higher interest rate,
Speaker 7: and it's an interest rate that we would tolerate. It
Speaker 7: wouldn't be restrictive, it just be we have a stronger
Speaker 7: economy now.
Speaker 1: It is true soon to say that is what we
Speaker 1: have moved into.
Speaker 7: This still could be you know, working through some of
Speaker 7: the temporary disruptions of the pandemic, and we could go
Speaker 7: back to a lower trend growth. And I think Europe
Speaker 7: is very much a cautionary tale, right. They are not
Speaker 7: having this conversation of have we gotten to this higher
Speaker 7: trend level?
Speaker 1: Is our star just so much higher. So there's still
Speaker 1: a lot in the mix. But again we don't where
Speaker 1: our star lands.
Speaker 7: I mean that high our star is perfectly fine, but
Speaker 7: we're in that process of discovery of like, is this
Speaker 7: good news going to stick with us?
Speaker 4: Well? When you say good news is good news? Does
Speaker 4: it marshally increase your base case? The best guess about
Speaker 4: where the neutral rate is? Do you think that it's
Speaker 4: more likely around four now than three and a half?
Speaker 1: Is a FEDCE projecting. I don't know if I go
Speaker 1: quite as high as four.
Speaker 7: I think, you know, into the solid three percent is
Speaker 7: what this looks like.
Speaker 1: In particularly again.
Speaker 7: If the implicit productivity growth that goes with this GDP
Speaker 7: number and a labor market that, while still solid, has
Speaker 7: slowed down quite a bit, right, so we're we're getting
Speaker 7: a lot out of the resources that we're putting into
Speaker 7: the economy, and so if that continues, then yes, I
Speaker 7: think something in the mid three percent probably maybe maybe
Speaker 7: even higher would make sense. But that's where I think
Speaker 7: the FED they have like their first hundred basis points,
Speaker 7: like the next hundred basis points I think are pretty
Speaker 7: safe in the like that's still restrictive.
Speaker 1: We can ship away at that, and then there really
Speaker 1: you do get.
Speaker 7: Into a conversation as you get past that of okay,
Speaker 7: is this is this where the economy wants to rest.
Speaker 5: If we're going to live at higher interest rates, what
Speaker 5: does that mean for the housing market?
Speaker 7: Again, a higher interest rate environment, when when it's behind
Speaker 7: it is productivity growth, you also have higher income growth, right,
Speaker 7: And so interest rates are a price just like house
Speaker 7: prices or another price that people face. And what at
Speaker 7: the end of the day matters is the affordability. Right
Speaker 7: you have the resources to afford those homes. Now, of course,
Speaker 7: the higher interest rates do run into the fact that
Speaker 7: we have had a housing underbuild for quite some time.
Speaker 7: And so if you think that if we're going to
Speaker 7: try and fix that underbuild just with market prices, so
Speaker 7: the adjustments of the interest rates, that one is going
Speaker 7: to be tricky.
Speaker 1: But I think there are certainly.
Speaker 7: Policy proposals on the table at various levels of government
Speaker 7: to try and work on housing supply and not think
Speaker 7: of it purely through interest rate mechanisms and what the
Speaker 7: FED might be doing.
Speaker 5: Right, but that could take years to come to fruition.
Speaker 5: So if you're sitting on a three percent mortgage and
Speaker 5: rates you say, are going to be higher for longer.
Speaker 5: What impetus is there for those individuals to give that up?
Speaker 1: There's not.
Speaker 7: I mean what you know, there are always if there
Speaker 7: are big shifts in the economy, there are going to
Speaker 7: be winners and losers in terms of where they sat
Speaker 7: on like the bet right on the information when everything changed.
Speaker 7: So you know that that's just a reality of how
Speaker 7: the economy works. It does mean the housing market went
Speaker 7: into the pandemic in a place of disruption because of
Speaker 7: the housing underbuild, and then it has been throughout this
Speaker 7: entire period in different forms of disruption, whether it was
Speaker 7: really fast paced demand, really low interest rates, whether it
Speaker 7: was no inventory of housing. You know, so that is
Speaker 7: an extremely disrupted sector, not just because of interest rates.
Speaker 7: And I agree with you, there is no there's no
Speaker 7: magic wand in that market. It's going to take time
Speaker 7: and it's an extremely important one to get right sized.
Speaker 2: One thing I know for sure is that was personal
Speaker 2: to Amrie Claudia. She just wants to buy a house.
Speaker 2: That's what it's about. Is that what that was about.
Speaker 5: It feels like the boomers or those that time the
Speaker 5: market correctly at least are the winners, and then those
Speaker 5: that are younger trying to give in the housing market
Speaker 5: are the absolute look boom no, I said those I know,
Speaker 5: I called her a winner for timing in the market.
Speaker 1: I bought in April of twenty twenty. Isn't going to
Speaker 1: rub it in? But yes, why not?
Speaker 2: Why not? Since we're being personal here, Claudia, can I
Speaker 2: just have one personal note just quickly. We know you're
Speaker 2: in your own personal battle right now, and I just
Speaker 2: want to say on the behalf of all of us,
Speaker 2: and if I made the whole financial community as well,
Speaker 2: because I've had a ton of messages just before you
Speaker 2: appeared with us. We're all thinking of you. We're all
Speaker 2: thinking of you, and we appreciate your time. We're lucky
Speaker 2: to have you this morning. Thank you so much for
Speaker 2: being with us. Claudia Salm There of New Century Advisors.
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best
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