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
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. We begin with our
Speaker 2: top story, the Groat rotation taking a breather going into
Speaker 2: Microsoft earnings after the closing bow. Bob Dollar Crossmark writing
Speaker 2: this small cats typically outperform in the early stages of
Speaker 2: economic expansions. We caution against chasing these gains at such
Speaker 2: a late stage of the cycle, even though cheap valuations
Speaker 2: may offer some cushion. Bob joined us now for more Bob,
Speaker 2: what ift to catch up with you, buddy. As always,
Speaker 2: let's look ahead of the earnings later. Microsoft kicks it
Speaker 2: all off for the Max seven numbers that report this week.
Speaker 2: What are you looking for and how do you gauge
Speaker 2: what investors are woulding to reward and what they seem
Speaker 2: like they want to punish over the last few weeks.
Speaker 3: I think the bar is high for these companies, Jonathan,
Speaker 3: and they're going to have to make those numbers more
Speaker 3: likely exceed them for the stocks to be okay.
Speaker 4: People are looking for excuses to.
Speaker 3: Trim these names and oh they just reported, Yeah, I
Speaker 3: own some of them, let.
Speaker 4: Me trim it.
Speaker 3: I think that's the general trend in these names expectations.
Speaker 2: I Danives of Wetbush with even bigger expectations, is looking
Speaker 2: for an even bigger rally in big tech. We believe
Speaker 2: this week and the rest of two Q earnings will
Speaker 2: be a major positive catalyst for the tech sector. We
Speaker 2: expect tech stocks to be up another fifteen to twenty
Speaker 2: percent for the year, adding to the robust tech gains
Speaker 2: in the first half of twenty four Bob, what would
Speaker 2: deliver fifteen to twenty percent upside for tech stocks? Where's
Speaker 2: that going to come from?
Speaker 3: There in lies the debate that we're going to have
Speaker 3: to have a further leg in AI. We're going to
Speaker 3: have to have exceeding earnings expectations. Earning estimates moving up
Speaker 3: in my view, to get another fifteen to twenty percent.
Speaker 4: People own these stocks.
Speaker 3: It's not like they're undiscovered, so to buy more of them,
Speaker 3: we're going to need better news that it's hard for
Speaker 3: you and media anticipate.
Speaker 5: We should talk about the flip side of that, which
Speaker 5: is how much more downside could there potentially be in
Speaker 5: the tech sector. John was talking about Bank of America research,
Speaker 5: saying time to show monetization. Since the first quarter, there
Speaker 5: is nine dollars spended in capex revision for every one
Speaker 5: dollar in additional sales of hyperscalers. In other words, we're
Speaker 5: not seeing it translate into profits. So directly, are you
Speaker 5: seeing that as a reason to sell some of these
Speaker 5: stocks in an ongoing basis or do you think that's
Speaker 5: been basically what's behind the declines that we've seen so far.
Speaker 3: I think that's what's behind the decline. That doesn't mean
Speaker 3: there isn't more of that to.
Speaker 4: Repeat.
Speaker 3: The people have big profits in these stocks and they
Speaker 3: see other stocks beginning to move and sort of trim
Speaker 3: these to buy some of the others.
Speaker 4: I'm not convinced that rotation.
Speaker 3: Is over, which generally means for a sloppy market as
Speaker 3: we've seen this rotation here in the months of July.
Speaker 3: The market's kind of move sidewise as people are trying
Speaker 3: to figure all out. As you used the word earlier,
Speaker 3: it's confusing.
Speaker 5: Yes, that's the story of the entire year. In the
Speaker 5: past couple of years, there is this issue. You said
Speaker 5: that you're not convinced that the rotation is over. The
Speaker 5: rotation has been curious because it's been marked by the
Speaker 5: companies that are most leveraged to the economic cycle at
Speaker 5: a time when we're talking about weakening, we're talking about cooling,
Speaker 5: we're talking about companies disappointing, and talking about consumers that
Speaker 5: are very pre sensitive.
Speaker 6: How does that make sense?
Speaker 4: It doesn't in my view.
Speaker 3: I agree with your set of statements and trying to
Speaker 3: square the circle. Look, people have gotten very complacent. In
Speaker 3: my view, the economy is just fine. Earnings will be
Speaker 3: good to Fed'll get inflation down to two. I'll hold
Speaker 3: my nose and buy stocks at twenty two times forward
Speaker 3: twenty six times trailing earnings.
Speaker 4: That's our hard road for me to ride, I.
Speaker 2: Have to say, Bob, I think everyone once said both ways.
Speaker 2: When inflation was up and rates for climbing, we were
Speaker 2: talking about wider margins, better margins because they had pricing power.
Speaker 2: Doesn't the opposite apply here, Bob, that when you start
Speaker 2: to see disinflation, even more disinflation in our future, it
Speaker 2: just means a loss of pricing power, which goes back
Speaker 2: to the point you're trying to make, which ultimately is
Speaker 2: why by cyclicals here. Isn't that the biggest headwind to that?
Speaker 7: Bet?
Speaker 4: I think that's right.
Speaker 3: And the companies are waking up to the fact that
Speaker 3: they've moved prices up and they're starting to get resistance,
Speaker 3: particularly in the mead income consumers, and that's new over
Speaker 3: the last bunch of weeks.
Speaker 4: And that can't be sustained without more weakening. So what
Speaker 4: do they do.
Speaker 3: They say, we got to cut costs somewhere, and maybe
Speaker 3: we won't hire a worker or two, maybe we'll let
Speaker 3: it or two go. And that's why you're starting to
Speaker 3: get some sloppiness and the employment data.
Speaker 2: So we've got a decent idea of what you don't like,
Speaker 2: what you want to stay away from. Give us an
Speaker 2: idea of what you do like, but you gravitating towards I.
Speaker 3: Come back to the common factors of earnings, persistence, earnings predictability,
Speaker 3: and strong free cash flow. That's my defense, if you will,
Speaker 3: against the kinds of things we're.
Speaker 4: Talking about here. Those stocks have done fine as the
Speaker 4: market has moved up.
Speaker 3: I think they'll show their stuff even more if we
Speaker 3: get into a selling squall or some sort of sloppy
Speaker 3: sidewise action.
Speaker 5: Is there a reason why you just are focusing on stocks?
Speaker 5: Is that just because that was the conversation? Are you
Speaker 5: just trying to avoid bonds that stocks are both the
Speaker 5: risk factor as well as the havens factor depending on.
Speaker 3: Where you go, only because that's the conversation. I would
Speaker 3: own some bonds here. Look, the economy is slowing. While
Speaker 3: second quarter earnings have been just fine, third and fourth
Speaker 3: quarter earnings estimate revisions have been to the downside, So
Speaker 3: the sloppiness is kicking in. And when that happens, you
Speaker 3: probably won't want to own a bond or two.
Speaker 5: Which kind is this something that you're worried about in
Speaker 5: terms of longer term or a medium term is sort
Speaker 5: of the sweet spot? Or do you think that right
Speaker 5: now it's time to lock things in.
Speaker 3: I would own quality, meaning more treasuries than corporates and
Speaker 3: high yields.
Speaker 4: Look corporate highield spreads are pretty tight.
Speaker 3: As you know, and if and as the economy weekends,
Speaker 3: the questions about how long will that weakness last probably
Speaker 3: causes these very tight spreads to widen some and therefore
Speaker 3: the Gouvey's probably outperformed.
Speaker 2: Interesting boff. Thank you, sir. I appreciate the updates. It's
Speaker 2: going to say across smock you as well, sir. Think
Speaker 2: weake ahead. It's time to the election. With fewer than
Speaker 2: one hundred days until voters head to the polls. If
Speaker 2: re elected former President Donald Trump is why they expected
Speaker 2: to a point, a so called Capitol Hill cabinet full
Speaker 2: of congressman A potential shortlist includes Republican Senator Bill Haggerty,
Speaker 2: who is being floated as a pick for Treasury Secretary.
Speaker 2: The senator joins us right now, Senator, it's great to
Speaker 2: catch up me, sir. We tried to do this last week,
Speaker 2: so this is our second attempt. I think this one's
Speaker 2: going to work.
Speaker 8: Good to be back with you, Jonathan Lisa, thank you.
Speaker 2: Let's start with foreign exchange if we can, Sir. We
Speaker 2: caught up with the former president here at Bloomberg just
Speaker 2: a number of weeks ago, and in Bloomberg Business Week.
Speaker 2: He told us that he believes we have a bit
Speaker 2: of a currency problem in the United States for America. Senator,
Speaker 2: I would love your perspective on that, whether you agree
Speaker 2: with a former president on that issue, and what kind
Speaker 2: of policy tools do you think the government has to
Speaker 2: address it.
Speaker 8: We have a number of problems with the economy. I
Speaker 8: think the biggest one, however, and it's related is inflation,
Speaker 8: and inflation is driving higher interest rates. Of course, that
Speaker 8: has a direct impact on our currency. But President Trump's
Speaker 8: policies will have an immediate impact to bring inflation down
Speaker 8: because he's going to end this administration's war on fossil fuels,
Speaker 8: bring energy costs down, go back to a deregulatory construct
Speaker 8: as he did in the prior administration, taking the regulatory
Speaker 8: and compliance barriers. All of these will have a lowering
Speaker 8: impact on cost here in America. It will have a
Speaker 8: lower impact on inflation. Those will be directly beneficiary, and
Speaker 8: it basically help make the case then to bring rates
Speaker 8: down and therefore bring our currency into a different position.
Speaker 2: The Senator, there are two other proposals as well, which
Speaker 2: I'm sure you're familiar with. Much higher tariffs are much
Speaker 2: tougher stance on immigration. I'm not going to sit here
Speaker 2: and say whether that's the right or wrong thing to do.
Speaker 2: I just want to talk about outcomes and consequences. Deutsche Bank,
Speaker 2: like others on Wall Street, Senators you know, have pointed
Speaker 2: out the tariffs and their associated stronger implications for the
Speaker 2: dollar are significantly more likely to be the dominant market
Speaker 2: outcome than policies to pursue a week of dollar. Senator,
Speaker 2: my question to you would be, why wouldn't higher tariffs
Speaker 2: and a toughest stance and immigration ultimately just lead to stagflation.
Speaker 8: Look, I'm fully aware of the concerns surrounding tariffs. Will
Speaker 8: let me make this point. The United States of America
Speaker 8: has the lowest tariff barriers of any major economy in
Speaker 8: the world. The converse of that statement is that our
Speaker 8: major trading partners do not have the similar terroists. They
Speaker 8: have much higher tariffs. Therefore, we have a real lack
Speaker 8: of reciprocity. That's not fair. That's something that needs to
Speaker 8: be addressed. Many of these issues date back all the
Speaker 8: way to World War Two. But there's come a time
Speaker 8: and a place to step up an address than President
Speaker 8: Trump wants to see them addressed. We want to see
Speaker 8: more reciprocal and fair trading terms. The time has come
Speaker 8: to get that accomplished, Senator.
Speaker 5: From a market perspective, people are struggling with these two
Speaker 5: goals sort of national security fairness on one hand, and
Speaker 5: on the other hand, the idea of the advantage of
Speaker 5: a weaker currency for trade purposes, which takes permanence pre eminence.
Speaker 8: Well, I think it's something that always has to be balanced, Lisa,
Speaker 8: and I think you'll see any administration do their best
Speaker 8: to do it. I think President Trump did an excellent
Speaker 8: job of that during his first administration. The playbook is
Speaker 8: laid out there. We were strong, we were tough with China.
Speaker 8: At the same time, we brought economic growth that was
Speaker 8: twice the rate of any of the major economy at
Speaker 8: the same time here in America. So we can do both.
Speaker 8: We can walk and shoo them at the same time.
Speaker 8: I think that's the challenge. The most important thing, though,
Speaker 8: is that and Trump will come in and in these
Speaker 8: reckless policies domestically that have created inflation that has caused
Speaker 8: so many knog on effects. Again, back to energy independence,
Speaker 8: we need to get there. Not only will it be
Speaker 8: important for lowering inflation here, but it'll be an important
Speaker 8: geostrategic tool as we become much stronger allies who were
Speaker 8: able to export our energy to places like Europe and Asia.
Speaker 6: All right, let's go there.
Speaker 5: You've mentioned it a couple of times, this idea of
Speaker 5: war on fossil fuels, as well as the idea of
Speaker 5: not really achieving the goal of energy and dependence. We're
Speaker 5: pumping more oil in the United States. We're producing more
Speaker 5: oil than ever before, more than thirteen million barrels a day.
Speaker 5: This is something unseen before in terms of production from
Speaker 5: any other nation. How can you say that it's a
Speaker 5: war on fossil fuels at a time where it is.
Speaker 4: Record production at LISTA.
Speaker 8: It clearly is a war on fossil fuels. Because Joe
Speaker 8: Biden came in and took federal lands off the map
Speaker 8: immediately upon taking office. That's a quarter of our capacity
Speaker 8: right there. What you're not saying is that there was
Speaker 8: a trajectory that was much more rapid, much higher. We
Speaker 8: took ourselves off of that growth through and we flattened it.
Speaker 8: We continue to produce, but demand is outstripping it. Think
Speaker 8: about the demand for electricity here in America. If you
Speaker 8: think about what we're going to need for artificial intelligence,
Speaker 8: the electrification of the grid, We've got to get back
Speaker 8: into the energy production business full blast. We have the
Speaker 8: technology to do it. This administration has done everything they
Speaker 8: can to slow that down. We need to get back
Speaker 8: on a rapid growth path that'll put us on a
Speaker 8: trajectory to be not only stronger here domestically in lower inflation,
Speaker 8: but also stronger partners with our allies.
Speaker 2: So, Senator, right now, we're producing thirteen point three million
Speaker 2: powers of crude every single day, as Lisa points it out,
Speaker 2: that's a record. It's more than anyone on the planet.
Speaker 2: How much crude do you think America should be and
Speaker 2: can be produc sick?
Speaker 8: We should be producing more than anybody else in the
Speaker 8: world as we are. We need to produce more LNG
Speaker 8: and we need to become the strongest energy partner there is.
Speaker 8: You think about pipeline capacity and the difficulty of getting
Speaker 8: permits of this administration. You think about the difficulty beginning
Speaker 8: or refinery started here in America. All of these log
Speaker 8: jms and difficulties make it less possible for us, make
Speaker 8: it more difficult for us to be the best possible
Speaker 8: ally that we could.
Speaker 4: We need to expand it.
Speaker 8: We need to realize that this is a true source
Speaker 8: of competitive advantage for the United States of America.
Speaker 4: Let's exploit it.
Speaker 2: Let's talk about who is an ally and who isn't
Speaker 2: an ally. There's lots of conversations about what's going to
Speaker 2: happen we trade policy and China. I think we've sort
Speaker 2: of exhausted that conversation many times after the last few weeks, Senator,
Speaker 2: I want to talk about Mexico. I want your view
Speaker 2: on Mexico. We saw from Elon Musk of Tesla that
Speaker 2: he's holding back investment decisions in the country because he
Speaker 2: thinks there might be a change in the next year
Speaker 2: that makes it difficult to produce automobiles over in Mexico.
Speaker 2: We've heard similar thoughts from aller manufacturers elsewhere worldwide. What
Speaker 2: is happening in Mexico and what kind of changes would
Speaker 2: you like to see?
Speaker 8: Well, in twenty twenty six, the USMCA is up for renegotiation.
Speaker 8: I think one of the greatest concerns is the fact
Speaker 8: that Chinese ev makers are looking to in run the
Speaker 8: Usmcit in run tariffs and use the USMCA in Mexico
Speaker 8: market in particular, as it means to get into the
Speaker 8: US market and they're using their subsidized product destroy the
Speaker 8: US market. That's going to have to take a very
Speaker 8: solid look. I think also with respect to Mexico itself,
Speaker 8: we've seen some very concerning behavior there the prior administration
Speaker 8: there under Amlow actually nationalizing American company's assets.
Speaker 4: We've got to address that.
Speaker 8: I intend to speak with the new administration there very
Speaker 8: soon about what we can do to make certain we
Speaker 8: have much better and much stronger relationship there with Mexico
Speaker 8: in fairer terms.
Speaker 6: Senator.
Speaker 5: The last time we tried to talk, you were at
Speaker 5: a bitcoin conference, and this was our cryptocurrency conference, and
Speaker 5: that was where the former President Trump was speaking and fundraising.
Speaker 5: And we've been asking this question on the show.
Speaker 2: Why bitcoin?
Speaker 7: Why now?
Speaker 5: Why crypto assets? What's sort of the motivation to really
Speaker 5: embrace a network of crypto assets and become the preeminent
Speaker 5: network on the planet from a republican sort of stance.
Speaker 5: Is this something that is concrete and why, Lisa?
Speaker 8: I think this is something that has evolved over time.
Speaker 8: I first began looking into crypto in the previous administration
Speaker 8: in twenty eighteen. That was my first engagement. I initially
Speaker 8: started at a p of skepticism, as I think many of
Speaker 8: my colleagues do. But when I begin to understand the
Speaker 8: underlying technology and realizing the potential for dramatic productivity gains,
Speaker 8: what I thought to myself is, we need to make
Speaker 8: certain that it happens here in America. The last thing
Speaker 8: we want is to see what happened with the semiconductor
Speaker 8: industry where it got pushed off shore and weakened us
Speaker 8: from a geopolitical standpoint. We need to see this innovation
Speaker 8: happening here. I've been in many conversations with President Trump.
Speaker 8: His thinking is likewise involved, and he's embracing the fact
Speaker 8: that this has tremendous potential for America.
Speaker 4: We want it to evolve here.
Speaker 8: We want to create the ecosystem for it to thrive here,
Speaker 8: and the last thing we need to do is push
Speaker 8: it off shore. However, the current administration has done everything
Speaker 8: they can to attack this industry, to push it offshore again,
Speaker 8: to use the SEC, the CFTC, every tool at their
Speaker 8: disposal to come in and attack this industry and refuse
Speaker 8: to provide it with any time for a regulatory framework.
Speaker 8: President Trump made the statement at the Bitcoin conference that
Speaker 8: one of the first things he'll do is change out
Speaker 8: that the administration's leadership, Gary Ginzlury said will be fired.
Speaker 4: That brought people to.
Speaker 8: Their feet in al He's going to end Operation Chokepoint
Speaker 8: that's been taking place in the crypto industry here in America,
Speaker 8: and he's going to try to create the environment here
Speaker 8: where the industry can thrive, and we'll see the next
Speaker 8: wave of innovation happening right here in America.
Speaker 2: Senator, We've got to dance around the issue about your future.
Speaker 2: So this is how a frame mat. I've got twenty
Speaker 2: seconds left on the clock. Your favorite city to live
Speaker 2: in Nashville, Tokyo or Washington, d C.
Speaker 8: Which one, No, it has to be Nashville, Tennessee. And
Speaker 8: if you've been there at the crypto conference, you've ever
Speaker 8: seen the energy there. It is absolutely wonderful. What's happening
Speaker 8: broadly across my state. That's why so many people are
Speaker 8: moving there.
Speaker 2: Senator, thank you, sir. Beyond big tech investors also awaiting
Speaker 2: the FED decision. The fmc's two day meeting kicking off
Speaker 2: today fetcha jpower widely expected to give a soft signal
Speaker 2: for a September rate cut, to discuss Tiffany wildingger Pimco
Speaker 2: joint is alongside Stevehshutto of mis zero. To both of you,
Speaker 2: thanks for being miters. Tiffany, I want across to you
Speaker 2: first and get your thoughts on what we can't expect
Speaker 2: tomorrow afternoon. What kind of changes you're looking for in
Speaker 2: the statement of what you expect the Channel will emphasize
Speaker 2: in the news conference.
Speaker 1: Well, I think he's going to say that they are
Speaker 1: more confident that inflation is starting to move back towards
Speaker 1: their goal after progress had stalled in the first half
Speaker 1: of this year. Of course, the fact that shelter inflation
Speaker 1: has shown more progress and the last few inflation prints
Speaker 1: is going to help in that, you know. But I
Speaker 1: don't think that they're going to you know, I don't
Speaker 1: think they're going to be in a huge rush. We
Speaker 1: think they are going to signal a September cut. But
Speaker 1: the economy appears to be doing okay here, so you know,
Speaker 1: I think, you know, in terms of market pricing, you know,
Speaker 1: they're the FED is very focused on I think cutting
Speaker 1: maybe at a once a quarter pace, you know, taking
Speaker 1: it slow. At least at first, unless the economy appears
Speaker 1: to be rolling over more heavily, and I mean it doesn't, so,
Speaker 1: you know, I think he could actually come across as
Speaker 1: being a bit more balanced. Although we do think they
Speaker 1: are going to cut in September relative to what markets
Speaker 1: are priced.
Speaker 2: We don't get an update to their assumptions their forecasts
Speaker 2: this time around. We'll get them in September, I believe, Tiffany.
Speaker 2: I'm looking at their current forecast for unemployment. They've got
Speaker 2: that for twenty twenty four four percent. That's below where
Speaker 2: we are right now. You mentioned maybe them going in
Speaker 2: September and cunning once every quarter. What would your assumptions
Speaker 2: be in the labor market for unemployment, given that's your
Speaker 2: call for interest rights.
Speaker 1: Yeah, I mean so we think unemployment probably ends around
Speaker 1: where it is now, you know, for too, maybe a
Speaker 1: little bit higher.
Speaker 6: You know, the labor markets are are normalizing, you know.
Speaker 1: But we think the important fact here is that you
Speaker 1: haven't seen a lot of you know, actual layoffs. If
Speaker 1: you just look at the level of employment, employment you know,
Speaker 1: has not really declined. Those are usually the hallmarks of recession. So,
Speaker 1: you know, we think we're seeing a labor market here,
Speaker 1: which is easing. Certainly, we've had a lot of supply,
Speaker 1: more supply coming into labor market as a result of immigration, you.
Speaker 6: Know, and that appears to be the story to us.
Speaker 1: And I think that still allows them, you know, to
Speaker 1: kind of you cut and do it at a pace
Speaker 1: that isn't hurried like we see in a recession.
Speaker 5: Steve Should, I know that you're sympathetic to the view
Speaker 5: that they don't have to rush. You've been talking about
Speaker 5: the potential for no cuts being actually okay for twenty
Speaker 5: twenty four, given the fact that there's plenty of momentum
Speaker 5: under the hood. Do you still feel that way that, frankly,
Speaker 5: all this talk about even cutting rates tomorrow is premature,
Speaker 5: and that you think they should really hold off and
Speaker 5: be more patient than many people think.
Speaker 9: I mean to answer you a question real specifically, they're winning.
Speaker 9: They're winning without having done anything, which is the most
Speaker 9: interesting aspect of this. The promise of rate cuts has
Speaker 9: led to financial market conditions which are much more accommodative
Speaker 9: than the federal funds rate implies. So therefore there's a
Speaker 9: question as to whether or not they actually have to
Speaker 9: adjust the federal funds rate the reality is they run
Speaker 9: the risk if they do adjust the federal funds rate
Speaker 9: of people over anticipating what they will do. I think
Speaker 9: they would be very happy over the long term with
Speaker 9: a gradual reduction in rates. But you've got a federal
Speaker 9: reserve that is dominated by political economists who are very,
Speaker 9: very much sympathetic with a much more aggressive monetary policy reduction.
Speaker 9: And therefore the market reads that and is likely to say, Okay,
Speaker 9: once they cut, it's not going to be every other meeting.
Speaker 9: It's not going to be once a quarter, it's going
Speaker 9: to be every meeting.
Speaker 7: And that's why when you.
Speaker 9: Look at the forward structure of rates, for example, Sofa
Speaker 9: Sofa going out out over the next year or so
Speaker 9: is telling you that the market's assuming we're going to
Speaker 9: get to a two percent fed funds rate, where I
Speaker 9: think a lot of economists would be sitting there saying, well,
Speaker 9: maybe we get to three or maybe we get to
Speaker 9: three and a half. The reality is the market's priced
Speaker 9: in much more, which is why financial markets are so accommodative,
Speaker 9: which is why they're winning without doing anything.
Speaker 5: Stevie said political economists and that they're in favor of
Speaker 5: a much more aggressive rate cutting path. Can you tease
Speaker 5: that out, because some people might hear that and say, Okay,
Speaker 5: they want to cut rates that they say for an
Speaker 5: administration or another.
Speaker 6: Is what you're saying a little bit different?
Speaker 9: Yeah, I mean you've got people here who are policy wants.
Speaker 9: They want to play with the levers of monetary policy.
Speaker 9: They want the idea the administration likes to play with
Speaker 9: the levers of fiscal policy.
Speaker 7: This is a throwback to.
Speaker 9: The nineteen fifties nineteen sixties, where we had a group.
Speaker 7: Of economists that came in that thought they.
Speaker 9: Could use you know, monetary and fiscal policy to craft
Speaker 9: an economy more suiting to their liking. And we're trying
Speaker 9: to do exactly the same thing here again.
Speaker 4: Now.
Speaker 9: The results of what happened in the sixties and seventies
Speaker 9: was we wound up with a stagflation environment, which I'm
Speaker 9: not anticipating here because we had a world of excess
Speaker 9: demand there.
Speaker 7: We have a word of excess supply here.
Speaker 9: But the reality is you could wind up with a
Speaker 9: higher rate of inflation than the market is discounting. I
Speaker 9: think the biggest risk for the market is not at
Speaker 9: the front end of the curve. It's at the long
Speaker 9: end of the curve because yields at the long end
Speaker 9: of the curve and not back taking into consideration the
Speaker 9: risk that what these policy makers are doing runs the
Speaker 9: risk of creating an embedded higher inflation rate than is
Speaker 9: currently priced into the long end of the curve.
Speaker 2: Stapy suggests that there's more shants that tens trade in
Speaker 2: the fives next year than they tried in the threes.
Speaker 9: I think that's exactly the right scenario to think about.
Speaker 7: That is the risk reward trade.
Speaker 2: Yes, it's Tiffany, You're at the bombtause. What are even
Speaker 2: the team doing with Rickonsida? How are you thinking about
Speaker 2: the challenges to the long end of the curve in
Speaker 2: twenty twenty five.
Speaker 1: Yeah, I mean we we certainly think that over the
Speaker 1: longer term, markets can price in more you know, just
Speaker 1: more term premium, you know, as a result of the
Speaker 1: outlook for you know, for the for the US federal
Speaker 1: government deficits and debt.
Speaker 6: You know, clearly this is.
Speaker 1: We're on a you know, an unsustainable trajectory. That trajectory
Speaker 1: is the result of you know, social security, you know,
Speaker 1: liabilities in the future, you know, and these non discretionary
Speaker 1: programs the US those will have to be course correct
Speaker 1: at some point. Obviously, the big loser coming out of
Speaker 1: the pandemic was the government balance sheet with additional debt,
Speaker 1: you know, and at some point we agree that the
Speaker 1: markets will need to price in some we're term premium
Speaker 1: for that. But at the end of the day, I mean,
Speaker 1: you could get a steeper interest rate curve. But at
Speaker 1: the end of the day, you know, we think that
Speaker 1: government policy makers, maybe not this administration or the next,
Speaker 1: you know, eventually they will do the right thing and
Speaker 1: we will you know, get some course correction. And we
Speaker 1: think the markets are currently giving the US you know,
Speaker 1: that longer term fiscal credibility.
Speaker 6: So I mean, ultimately, I think it's nuanced discussion.
Speaker 1: We think the curve can steepen, so wre term premium
Speaker 1: can get priced, but we aren't expecting, you know, some
Speaker 1: messy volatility to result from this.
Speaker 5: Tiffany, what do you make of Steve's argument that these
Speaker 5: officials on the FED are political economists who harken back
Speaker 5: to sort of some of the philosophies of the nineteen
Speaker 5: fifties and nineteen sixties of fine tuning everything, so they
Speaker 5: are going to be more prone to trying to support
Speaker 5: a market being a put essentially the way that they're
Speaker 5: being treated in markets right now as sort of you know,
Speaker 5: either way it's going to be okay because they can
Speaker 5: come to the rest. You do you kind of find sympathy.
Speaker 6: With that view.
Speaker 1: Well, I mean, I think that now that inflation is
Speaker 1: has moderated quite a bit, you know, and now that
Speaker 1: people are more confident that you are still going.
Speaker 6: To get some additional moderation.
Speaker 1: It could be slow, probably will be bumpy, might not
Speaker 1: get core PC inflation all the way back to two,
Speaker 1: but could live.
Speaker 6: With it in a two point something zone.
Speaker 1: You know, the federal serve officials, as they should, are
Speaker 1: going to start to focus more on, you know, the
Speaker 1: labor market side of the mandate.
Speaker 6: And you know, the view over the.
Speaker 1: Last you know, several years, I would say, and even
Speaker 1: in the long Term Strategy Review that was completed several
Speaker 1: years ago. You know, the view is that if you
Speaker 1: let the labor market run a little bit hot, it's
Speaker 1: okay for the economy. It's actually good. You have people
Speaker 1: coming back to the labor market. You know, you have
Speaker 1: underserved communities you know that really start to benefit from that.
Speaker 1: And I think I think that's certainly the kind of
Speaker 1: policy views that people have, and as a result of that,
Speaker 1: you know, they will be quick to, you know, to
Speaker 1: start to drop interest rates. I think, you know, if
Speaker 1: you do see a labor market that's loosening or rolling
Speaker 1: over more than they expect.
Speaker 5: Steve, I want to just finish up with you, because
Speaker 5: there's this question about what the consumer is doing. Based
Speaker 5: on some of the corporate guidance that we've been getting,
Speaker 5: it's been sort of highlighting the pricing of the lack
Speaker 5: of pricing power at a lot of different companies and
Speaker 5: pointing to this question, as John's been asking repeatedly and
Speaker 5: rightly so over the past six months, is it weakening
Speaker 5: or week cooling or cool you know, are you changing
Speaker 5: your view on.
Speaker 6: Whether this is actually truly a.
Speaker 5: Less perhaps heated economy than you thought, say a month ago.
Speaker 9: No, I think the economy is still going to see
Speaker 9: an inflation right at the end of the year that's
Speaker 9: much harder than the federal reserves target. I think the
Speaker 9: hope that the currency continues to provide the ability for
Speaker 9: goods global goods deflation to dominate on or to have
Speaker 9: an impact on the favorable impact on the domestic inflation
Speaker 9: story is a risk. You know, foreign central bank policy
Speaker 9: decisions could have an important impact on the currency. It's
Speaker 9: not just the US and the currency has been one
Speaker 9: of the critical components here. If the dollar were to
Speaker 9: take a turn to the downturn downside, and you were
Speaker 9: to take, for example, your DXY measure, and you were
Speaker 9: to head it back towards one hundred from the one
Speaker 9: four to one five area it's been trading in, you
Speaker 9: could have a significant impact on goods inflation. And if
Speaker 9: you had a significant rebounding goods inflation, you would have
Speaker 9: a significant bounce in inflation. And therefore, it's not just
Speaker 9: the monetary policy decisions here, it's the monetary policy decisions overseas.
Speaker 9: And that's why you shouldn't rely on that component to
Speaker 9: be the component that drives your inflation story, especially when.
Speaker 7: You want to keep a labor market hot.
Speaker 9: This concept of a hot labor market gets to the
Speaker 9: question of, well, what is a hot labor market. The
Speaker 9: natural rate of unemployment had always been seen to be
Speaker 9: four point five percent. Now suddenly we've lowered the target
Speaker 9: for where the unemployment rate should be by the end
Speaker 9: of the year of four percent. That's a very significant
Speaker 9: downward adjustment in the unemployment rate. So the ES the
Speaker 9: Federal Reserve lowered the threshold to make it look as
Speaker 9: if the labor market is accommodative. We're becoming more available
Speaker 9: or the story of the left slack is developing in
Speaker 9: the labor market more quickly than is actually taking place.
Speaker 7: And this is a critical component.
Speaker 9: You look at the claims numbers, you look at the
Speaker 9: continuing claims numbers, You look at the number of job layoffs.
Speaker 9: People are not getting fired, and it's harder and harder
Speaker 9: to find skilled workers. Wage pressures aren't coming off the boil.
Speaker 9: It has been really an environment in here where global
Speaker 9: goods deflation has been pulling down the headline inflation.
Speaker 7: Just like gold. Global goods inflation moved.
Speaker 9: A lot of it up to the upside during the
Speaker 9: COVID environment.
Speaker 7: It's now reversed that.
Speaker 9: But by the same token, the service component is not
Speaker 9: coming down. And the service component is the domain a
Speaker 9: component within the US inflationary because we are much more
Speaker 9: of a service economy than we are a goods economy.
Speaker 2: Hey, Steve Tiffany, big week ahead, Thanks for giving us
Speaker 2: some time this morning. Steve a shooter there of Mizuo
Speaker 2: Tiffany Wilding of PIMCO, two of the very best in
Speaker 2: the world of economics. This is the Bloomberg Surveillance podcast,
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