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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
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Speaker 2: top story. CPI is about twenty six minutes away. That
Speaker 2: inflation print coming as the fmc's two day meeting comes
Speaker 2: to a close, likely determining what the dot plot looks
Speaker 2: like going forward. The former sen lewis FED president Jim
Speaker 2: Bullard saying he only sees one or two cuts on
Speaker 2: the table this year thanks to slow progress on inflation.
Speaker 3: Jim is with us here in New York.
Speaker 4: Jim, good morning to you, Good morning, good morning.
Speaker 2: Just fantastic to see you, sir. I want to talk
Speaker 2: about your dot plot from a long time ago. We
Speaker 2: all remember when it came out years ago and you
Speaker 2: said enough of this, You put your dot right at
Speaker 2: the bottom and left it there for the next couple
Speaker 2: of years. How do you approach the dot plot and
Speaker 2: how do you think these officials would approach it today?
Speaker 5: Yeah, I mean at that time I wanted to get
Speaker 5: the idea across that we had just switched to a
Speaker 5: low interest rate, low inflation regime and that we were
Speaker 5: unlikely to break out of that regime anytime soon, and
Speaker 5: so it was probably a better forecast just to say
Speaker 5: that you're going to stay in the regime. Now that
Speaker 5: the pandemic came along and up ended the global macro economy,
Speaker 5: it looks like we're in a different regime now, So
Speaker 5: maybe it would be a different dart today.
Speaker 3: Well, let's play it.
Speaker 2: Do you think it would be POSTDFC in reverse? Would
Speaker 2: you just leave it up there at five point fifty
Speaker 2: for a couple of years out?
Speaker 4: I think that's a little high.
Speaker 5: I'd like to see the your curve normalize here as
Speaker 5: a final piece of the soft landing, But I do
Speaker 5: think yields will be higher going forward than anything we
Speaker 5: saw between twenty nine and twenty nineteen.
Speaker 6: Do you think that the FED is accurately reflecting that
Speaker 6: in their current projections that.
Speaker 4: Rates will be higher for longer.
Speaker 5: They've got their long run dot at two point six.
Speaker 5: Maybe that'll shift up a little today. I think the
Speaker 5: idea that you're going to have that low of a
Speaker 5: policy rate, I don't know, that's getting a harder story
Speaker 5: to tell.
Speaker 3: I think, well so steeper.
Speaker 6: Shudo is on earlier and he said, essentially, there's a
Speaker 6: real test of the Fed's credibility right now at a
Speaker 6: time or some people are saying that we're essentially going
Speaker 6: to vacillate between two and three percent in terms of inflation,
Speaker 6: or even stay at three percent, given the feds proclivity
Speaker 6: to cut rates in the near term. Do you agree
Speaker 6: with that that essentially this is a three percent inflation
Speaker 6: target that just hasn't been enunciated by the Fed.
Speaker 5: No, the target is two percent, and if inflation stays
Speaker 5: above two percent, then policy has to be at least
Speaker 5: mildly restrictive to try to push inflation back to two
Speaker 5: percent over a reasonable time horizon. But a key thing
Speaker 5: is what what time horizon do you think you know
Speaker 5: it should take to get inflation back to target? And
Speaker 5: if you look at these projections, they're probably talking.
Speaker 4: Two years or something like that.
Speaker 5: So you've got eighty basis points to go on core
Speaker 5: PC inflation. You know, you can do forty basis points
Speaker 5: in one year, forty basis points the next year, and
Speaker 5: so it's not it's not the urgency that we had
Speaker 5: when inflation was much higher just two years ago.
Speaker 2: When you put in together these forecasts, how much collaboration
Speaker 2: is there on the FMC, I'll go off into a
Speaker 2: corner and just sort of plot it down.
Speaker 3: Do you do it ahead of science that's proping on
Speaker 3: it what it is?
Speaker 5: I have actually tried to call around my colleagues and stuff,
Speaker 5: but it's very time consuming to call everybody, and they've
Speaker 5: got their own staffs and their own stories to tell.
Speaker 5: So it works better just to give your own view.
Speaker 5: And and so there's a lot of communication by asthmosis
Speaker 5: to you kind of know what everybody's saying because you
Speaker 5: see them all the time and you hear their speeches
Speaker 5: and everything.
Speaker 2: Because we heard from someone yesterday that kind of implied
Speaker 2: basically said that for the Federal Reserve would be better
Speaker 2: if the implied cuts. This year, the median DOT for
Speaker 2: twenty four came down from three to two and not
Speaker 2: down to one at least when I would basically send
Speaker 2: to that individual.
Speaker 3: But what are you talking about.
Speaker 2: You're telling me that Chairman Pal is going to get
Speaker 2: on the phone and say, look, guys, we need to
Speaker 2: massage this and collaborate and make sure the median dot
Speaker 2: just shows two cuts for this year and not one.
Speaker 2: That's not how it works, is it.
Speaker 5: No, And people have strong views, so I don't think,
Speaker 5: you know, they take their role very seriously on the
Speaker 5: committee and they're not really willing to say, you know,
Speaker 5: I'm going to compromise my view just because of, you know,
Speaker 5: something that might happen on that particular day.
Speaker 6: Yeah, but this says raised this question of how do
Speaker 6: you message it perfectly? Is there a true consensus and
Speaker 6: what's the differential between consensus view and I dare say
Speaker 6: group think or something where people all to sort of
Speaker 6: are coalescing around this idea that inflation is maybe a
Speaker 6: little bit higher but not that much higher, that rates
Speaker 6: are restrictive even though the economy keeps chugging along.
Speaker 4: Yeah.
Speaker 5: I think one thing to keep in mind about this
Speaker 5: is that the board staff serves the whole Board of Governors,
Speaker 5: so they kind of have Thus they all see the
Speaker 5: same analysis and the same have the same projection, and
Speaker 5: then they may have a view relative to what the
Speaker 5: staff presents, and then they might deviate a little bit.
Speaker 4: But they don't have their own independent.
Speaker 5: Staff, whereas at the banks, all the banks have their
Speaker 5: own research teams and they might have very different views
Speaker 5: from what the board staff thinks. So so you know,
Speaker 5: the tendency for some of the dots to be clustered
Speaker 5: would be at the Board of Governors.
Speaker 6: You were on a FED in twenty twenty when you
Speaker 6: were dealing with some of these issues, and that was
Speaker 6: the last time that we had a CPI print the
Speaker 6: same day as a FED decision.
Speaker 5: Yeah, it's like a solar eclipse or yeah, yeah, business.
Speaker 6: So we're tearing into the sun, the political sun, and
Speaker 6: it's a solar eclipse.
Speaker 4: You're here for us.
Speaker 6: How much does it really alter the discussion?
Speaker 7: Yeah?
Speaker 5: I think I just caution viewers here and listeners that
Speaker 5: what happens is on this day of the meeting.
Speaker 4: This meeting will start at nine o'clock this morning.
Speaker 5: The first thing will happen is that the staff will
Speaker 5: come out and say here's what the CPI reports said.
Speaker 5: And most people will know the number, at least the
Speaker 5: headline number at that point, but they'll give a brief
Speaker 5: analysis of that. But the only thing that will matter
Speaker 5: is is it different from what the staff forecast? So
Speaker 5: did it come in hotter or colder than the staff forecast?
Speaker 5: If it came in about is expected, and the staff
Speaker 5: will say, well, this didn't change anything because we already
Speaker 5: expected this.
Speaker 4: So usually it's not big news at the committee. It
Speaker 4: would have to be some blowout difference.
Speaker 6: Do you think that it is correct that the balance
Speaker 6: of risks between inflation and slow down in growth is
Speaker 6: roughly balanced or do you think that it's more heavily
Speaker 6: weighted to one than the the.
Speaker 5: Well, inflation's been high, and I think you want to
Speaker 5: finish the job here and get inflation back to target.
Speaker 5: So I think that's still job one. And labor market
Speaker 5: seems pretty strong based on the jobs report you know
Speaker 5: last Friday, and other aspects of the economy seem pretty good.
Speaker 4: Atlanta fed GDP now.
Speaker 5: For the second quarter up over three percent at an
Speaker 5: annual rate, so it's daily it does. But I think
Speaker 5: if you're just tracking and just trying to make a
Speaker 5: statement based on the data that you have in hand
Speaker 5: right now, growth looks pretty good, labor market looks pretty.
Speaker 4: Good, inflation's still too high. Might as well stay a
Speaker 4: little bit hawkish, Jim.
Speaker 2: I've never seen people so skeptical of its two seventy
Speaker 2: two on payros as they were on Friday. Can you
Speaker 2: walk me through how you interpreted that economic dight butN
Speaker 2: the establishment survey and a household survey, and how you'd
Speaker 2: read into that, because when you say maybe we need
Speaker 2: to be holkish today, some people think based on that
Speaker 2: number of Friday, we should be dubbish. I mean, how
Speaker 2: would you incept but that economic tight set.
Speaker 5: Yeah, unemployment ticked up to four percent, and that's interesting,
Speaker 5: but it's still below pretty much everyone's estimate of the
Speaker 5: natural rate of unemployment. So they've been saying that, We've
Speaker 5: been saying at the FED that unemployment should probably be
Speaker 5: expected to run a little bit higher than it has
Speaker 5: and a four low fours or mid flors on the
Speaker 5: unemployment rate is a very good number still for the US.
Speaker 5: And then on the headline number, I was just thinking
Speaker 5: about this, so I plotted something that no one ever plots,
Speaker 5: which is the percent change year over year in nonfarm
Speaker 5: payrolls so if you look at that a year ago,
Speaker 5: you would have been at two and a half percent.
Speaker 4: Growth year over year.
Speaker 5: Now you're at one in three quarters year over year.
Speaker 5: That might so that does show the slowdown, but the
Speaker 5: one in three quarters would still be faster than so
Speaker 5: if you took that to be the run rate. We
Speaker 5: always go on the monthly number, which is so volatile,
Speaker 5: and you know, how are we supposed to interpret this?
Speaker 5: But other measures of the economy will go on a
Speaker 5: year or year rate and that controls a little better
Speaker 5: for seasonality and stuff like that.
Speaker 2: Francis doano to Manuel life alongside us as Wow, Francis,
Speaker 2: I want to get out to you and get your
Speaker 2: ready reaction to that CPI print.
Speaker 1: I literally breathed a sigh of relief. For a lot
Speaker 1: of reasons. I suspect your palladed too, for consumers who
Speaker 1: are not going to see as much month over month
Speaker 1: increase in prices. For all the economists out there with
Speaker 1: a September rate cut in their forecast, they're probably also relieved.
Speaker 1: But also a bigger picture, higher rates are working to
Speaker 1: bring down inflation. This was an increasing concern. Our rates
Speaker 1: restrictive enough? Do we keep them? This high. Why is
Speaker 1: inflation not moving downward? That said, John, this is one point.
Speaker 1: We have three more before the September meeting, And as
Speaker 1: exciting as this is this morning for a few hours,
Speaker 1: I'm more interested on the CPI print that comes out
Speaker 1: September eleventh, just one week before the FEDS September cut.
Speaker 1: That number may end up being much more important than
Speaker 1: this one, so we'll take it as a win. It's
Speaker 1: good news for consumers, for markets, for all. But it's
Speaker 1: one print and we got a lot of information coming through.
Speaker 3: Today, Francis.
Speaker 6: Jim Bollerer was also talking about the Pain speech in
Speaker 6: Jackson Hole that Jay Powell gave a couple of years ago,
Speaker 6: when he said that essentially, this is inflation that's running
Speaker 6: too hot, and we are going to get inflation back
Speaker 6: down and it is going to require pain in the economy. Francis,
Speaker 6: you are expecting to see that pain. We haven't seen
Speaker 6: it on a broad based level. Do you have a
Speaker 6: sense of whether this is inflation, is the immaculate type
Speaker 6: that we've been talking about, or whether this is just
Speaker 6: one dot in a series where things are kind of shifting.
Speaker 6: We're at a tipping point.
Speaker 1: I would hope that would be the outcome for the
Speaker 1: American people. At the same time, are leading economic indicators
Speaker 1: on the jobs front continue to show weakness ahead. We're
Speaker 1: at a four percent unemployment rate. I'm watching today to
Speaker 1: see from the Federal Reserve they already had four percent
Speaker 1: penciled in for the end of this year. Are we
Speaker 1: really going to go through the next six months without
Speaker 1: an additional tick up and the unemployment rate? And let's
Speaker 1: remember the simple rule of thumb is that it takes
Speaker 1: about two years for those rate hikes to work their
Speaker 1: way through the system. And we're two years and some
Speaker 1: change after that first rate hike. We're not at the
Speaker 1: end of the impact of rate hikes. We're at the
Speaker 1: very beginning. So while magnitude of the downside for the
Speaker 1: US economy is up for debate, the direction shouldn't be.
Speaker 1: There probably will be much larger slowdown in jobs than
Speaker 1: the second half of the year, and this is when
Speaker 1: the Federal Reserve will have sufficient data to begin cutting
Speaker 1: interest rates and bringing those rates down beginning we think
Speaker 1: in September.
Speaker 6: Jim Boy, what's their take on that, given the fact
Speaker 6: that it seems like something that feels like a stretch.
Speaker 4: The unemployment rate to stay where.
Speaker 3: It is for the foreseeable.
Speaker 5: I think it is immaculate disinflation. And again I think that,
Speaker 5: you know, by being credible and moving quickly, the FED
Speaker 5: was able to get firms to change their pricing strategies quickly.
Speaker 5: The inflation came down relatively quickly. And so, you know,
Speaker 5: one simple theory about how this works would be that
Speaker 5: the FED threatens recession, everyone looks ahead, they see that
Speaker 5: that might be a possibility, they don't want to raise
Speaker 5: prices into that, and the inflation goes away relatively quickly.
Speaker 5: So that isn't the most popular theory around here or
Speaker 5: on Wall Street, but that is, you know, that is
Speaker 5: something that you have to take into account because the
Speaker 5: anticipated effects can overwhelm sort of the mechanical effects and
Speaker 5: you get lower inflation right away. So this is something
Speaker 5: I was advocating for in twenty twenty two, that we
Speaker 5: you know, let's move quickly, let's try to quash the
Speaker 5: inflation quickly. And this report today is helping that story.
Speaker 2: Forgive me for going off pace, but just entertain me
Speaker 2: for a moment. French tenure yield's down by about seven
Speaker 2: or eight basis points right now, that CPI print was
Speaker 2: more important to the European bond market than anything Macrons
Speaker 2: had to say in the last twelve hours.
Speaker 6: The banker to the world, the reason why J. Powace
Speaker 6: would go on tour. But ultimately it does highlight how
Speaker 6: this is the market that everyone is watching, regardless of
Speaker 6: some of the external factors.
Speaker 2: Ara Jersey Blueberg Extelligence joins us. Now for a little
Speaker 2: bit on this bond market are the most important data
Speaker 2: point in global finance?
Speaker 3: Your thoughts on this one.
Speaker 8: Yeah, obviously better than some people had feared, you know
Speaker 8: it on the core CPI it was a low zero
Speaker 8: point two so it was actually under zero point two percent,
Speaker 8: and I think that that's something that traders have been
Speaker 8: able to kind of grasp on to. And like you noted,
Speaker 8: you know, this is pulling down you know, all global
Speaker 8: sovereign bonds at the moment where bond yields at the moment.
Speaker 8: So you look at German yielder down by six basis points,
Speaker 8: like you said, France down by seven basis points. And
Speaker 8: but remember the beta to that is only half of
Speaker 8: what's going on here in the US where you have
Speaker 8: five year yields off fifteen basis points at at at
Speaker 8: one point, and that just shows that you know, you know,
Speaker 8: we're now going to be pricing in for two fol
Speaker 8: cuts probably before the end of the year. And then
Speaker 8: as you get additional data, obviously the market's going to
Speaker 8: have to shift those expectations pretty dramatically.
Speaker 4: So Ira, I have a question for you. So the
Speaker 4: if you just took.
Speaker 5: Rebase where inflation is now, and you said point two
Speaker 5: every report through.
Speaker 4: The end of the year, you would get year over.
Speaker 5: Year core PC inflation on a twelve month basis at
Speaker 5: two point eight at the end of the year. So
Speaker 5: you started out at two point eight in January.
Speaker 4: On that metric, we'd end up at two point eight.
Speaker 4: So maybe that's not really enough. You need you need even.
Speaker 5: Better reports in order to be able to show progress
Speaker 5: through through this year, I.
Speaker 8: Think, But I think I think part of it, James,
Speaker 8: is the fact that we're you know, not increasing, right.
Speaker 8: So so a couple of months ago, when we had
Speaker 8: a couple of inflation scares, the market really dragged onto
Speaker 8: that and said, okay, what happens if the Federal Reserve
Speaker 8: doesn't cut it all this year or maybe even hikes
Speaker 8: Because keep in mind, in January, the market was pricing
Speaker 8: for almost no chance of the Fed staying on hold
Speaker 8: this year, and now we're actually pricing, or were pricing,
Speaker 8: I don't know where we are at the second, but
Speaker 8: we were actually pricing via options on short term interest
Speaker 8: rate futures for the about a twenty percent chance of
Speaker 8: potential hikes by the end of the year. I suspect
Speaker 8: that when you get if you get another print similar
Speaker 8: to this, where you have another well at zero point
Speaker 8: two again on the core, that people will say, like, hey,
Speaker 8: progress is being made. The federal Reserve is still more
Speaker 8: likely to remain on hold and or cut than they
Speaker 8: are to be even thinking about hiking interest rates before
Speaker 8: you June twenty twenty five at this point, so I
Speaker 8: do think that there is a sea change and it matters.
Speaker 8: And to your point, you know, I still think that
Speaker 8: the that the market is going to say, okay, what's
Speaker 8: the trend versus where we were as opposed to as
Speaker 8: opposed to just looking at okay zero point two forever
Speaker 8: is probably not going to be sustained.
Speaker 2: Ara Jersey of Flamberg Intelligence. Ara, thanks for that, appreciate it.
Speaker 2: If you want just joining us about thirteen fourteen, minutes ago,
Speaker 2: we got this data zero point zero percent month of
Speaker 2: a month headline inflation against the estimate of zero point
Speaker 2: one previous number point three stripping out food and energy
Speaker 2: Bramo zero point two percent was the number.
Speaker 3: Zero point three was the estimate.
Speaker 6: And Jim Bullard, a former Saint Louis Fed president, just
Speaker 6: moments ago saying that this is the immaculate disinflation that
Speaker 6: many people were looking for. Francis Donald's still with us,
Speaker 6: and Francis, I'd.
Speaker 4: Love your take on that.
Speaker 6: Do you see this as the friend as the immaculate disinflation?
Speaker 6: Can you bet on that and arrange a portfolio around it?
Speaker 1: Well, for June it feels like immaculate disinflation, or for
Speaker 1: May we had this really large decline or no change
Speaker 1: in inflation month over month and are pretty good non
Speaker 1: farm payrolls number. That's exactly what this immaculate disinflation would
Speaker 1: be defined as. So now it's about what do we
Speaker 1: see next. And on this front, I do see some
Speaker 1: downward momentum that is occurring in the economy. But let's remember,
Speaker 1: if you're sitting on a trading floor, you're managing portfolios.
Speaker 1: Numbers like this aren't just about changing your base case.
Speaker 1: It's not that something like this would make Q move
Speaker 1: from a December to November or even to a September
Speaker 1: rate cut. It can often be about reducing the balance
Speaker 1: of risks or the tails of the risks to your
Speaker 1: base case. So this number probably isn't going to change
Speaker 1: anyone's outlook as to what will happen next. That'll be
Speaker 1: based on their forecast. But it does reduce the chance
Speaker 1: that the said would, if you had it in your scenarios,
Speaker 1: have to hike again, or that they have to stay
Speaker 1: for a prolonged hold. So sometimes it's about reducing those
Speaker 1: fat tails on your outlook as opposed to the individual.
Speaker 1: That is tradable, but usually around the conviction of your
Speaker 1: trade or the balance of risks, or how much leverage
Speaker 1: you're putting onto it as opposed to the trade itself.
Speaker 6: We could J Powill say, Jay Francis would really move
Speaker 6: the needle in your book.
Speaker 1: Well, he could speak to some of his longer term
Speaker 1: concerns that aren't inflation or jobs for example. Well, he
Speaker 1: can't do it. But interest cots for the federal government
Speaker 1: are very high. They are about nineteen percent of revenue
Speaker 1: is going towards interest cocks. If you were to talk
Speaker 1: about and he probably wouldn't some of the risks of
Speaker 1: higher for longer that would move the dial. But we
Speaker 1: have three more inflation reports, three more just about everything
Speaker 1: until we get to September. The seat is in a
Speaker 1: holding period, the market is in a holding period, and
Speaker 1: each individual data point, each individual FED commentary will be
Speaker 1: far less important than the sum of all of their parts.
Speaker 1: So as much as this meaning we'll get a lot
Speaker 1: of attention, I'm sure we'll talk about it all day.
Speaker 1: I'm far more interested about the evolution over the next
Speaker 1: three months. That will be more important than any singular event.
Speaker 3: Francis one of the best. Thanks for faminess.
Speaker 2: Francis Doan with Emanualife City. Scott chron right in this
Speaker 2: the market appears to be pricing a first FED cut
Speaker 2: in December. Cities economists have confidence in a September cut
Speaker 2: predicated on desalrating macros. All told, the S and P
Speaker 2: five hundred continues to be influenced by the structural growth
Speaker 2: opportunity in generative AI as an offset to the mixed
Speaker 2: macro picture.
Speaker 3: Scott's with us.
Speaker 2: Now for more, Scott, I'm going to say it for
Speaker 2: you because you won't do single names on TV. But
Speaker 2: is this just another way of saying ignore the FED
Speaker 2: and buying video.
Speaker 7: I think it's another way of saying that Wall Street's
Speaker 7: much different than Main Street, and the fed's influence is
Speaker 7: mainly a Main Street issue. In terms of the economic activity.
Speaker 7: The underscores us equity fundamentals.
Speaker 2: We've heard it a million times that the equity market
Speaker 2: is not the economy. Is this S and P five
Speaker 2: hundred in its current form a pretty good example of that.
Speaker 7: So we've done some what we call Sandy Chuck work
Speaker 7: on this, and if earnings solely followed GDP over time,
Speaker 7: our back of the envelope is that the SMP would
Speaker 7: be worth forty six hundred. Okay, So what you're paying
Speaker 7: in current levels fifty three and above is going to
Speaker 7: tell you at some level what you're paying for the
Speaker 7: expectation for growth over and above economic activity. And clearly
Speaker 7: this is being influenced by the megacap component and the
Speaker 7: AI tailwind that it now has. What he basically says
Speaker 7: is that for those that think, my gosh, we're in
Speaker 7: an equity market bubble, I'd say, well, your downside is
Speaker 7: probably fifteen percent in that regard, and when you step
Speaker 7: back and look at it with a new growth driver
Speaker 7: that we do have regarding spending on AI and other
Speaker 7: metrics around that, the SMP is actually in a pretty
Speaker 7: good fundamental place.
Speaker 6: We've been joking Scott. The best bet right now, or
Speaker 6: the bet that everybody comes on and says, is they're
Speaker 6: having cash in video. And that's essentially the Barbell approach
Speaker 6: that they've been taking. Are basically tech and big tech
Speaker 6: stocks that are generating a lot of cash and then
Speaker 6: cash itself. And that's the approach to take in a
Speaker 6: macroeconomic environment that is highly uncertain. How concerned are you
Speaker 6: about this type of behavior leading to real crowding and
Speaker 6: a specific number of stocks.
Speaker 7: You know, Lisa, I think it's a really good point
Speaker 7: where obviously very concerned about crowding. But what I would
Speaker 7: say so far is that you look at valuations, got it.
Speaker 7: When you look at PEG ratios, which is your pe
Speaker 7: over growth, it turns out that your PEG ratios have
Speaker 7: actually come down. So what's been happening is that the
Speaker 7: underlying earnings expectations for these vega cap growers have actually
Speaker 7: been supporting the price action and the valuations now to
Speaker 7: your earlier point.
Speaker 4: Though.
Speaker 7: Whether you want to call it a joke, but I
Speaker 7: think it's reality is that you're right. What you have
Speaker 7: is a FED policy circumstance that is at risk of
Speaker 7: undertended consequences. So on main street, if you're a non saver,
Speaker 7: you've got issues. You've got higher inflation that presumably is
Speaker 7: coming down now, and now higher interest rates. That's a
Speaker 7: much different setup than if you're a saver and you're
Speaker 7: now earning a decent return on your cash, which is
Speaker 7: much different than prior to COVID. It's the same thing
Speaker 7: in corporate America. So the megacap growth tech part of
Speaker 7: the market does tend to carry lower debt, more cash.
Speaker 7: That's a market different discussion from looking at sectors like
Speaker 7: commercial real estate or real estate and utilities staples parts
Speaker 7: of industrials where they do tend to be more debt laden.
Speaker 7: So the fact here is that the FED, whether it's
Speaker 7: intended or not, is providing a different type of headwind
Speaker 7: and tailwind to different parts of the economy and different
Speaker 7: parts of the stock market.
Speaker 6: If the FED were to start cutting rates, would that
Speaker 6: make you more constructive on these other areas or would
Speaker 6: It kind of depend.
Speaker 4: It kind of depends.
Speaker 7: So the other work that we've done recently basically says,
Speaker 7: if you were to cut two hundred basis points of
Speaker 7: FED rates over the next year, that would create, all
Speaker 7: things equal, roughly one point seven percent earnings drag on
Speaker 7: the S and P five hundred. Essentially, those megacap growth
Speaker 7: companies would lose less, would lose more in their cash
Speaker 7: income than they would in what they pay on their debts.
Speaker 7: So you know, it's a bit of a circuitous argument
Speaker 7: on this. But as you go down cap, as you
Speaker 7: go down into small MidCap, this is where now you
Speaker 7: begin to trade more aligned with the underlying economy. You
Speaker 7: don't have that megacap influence in small mid by almost
Speaker 7: by definition or implication, you've got a lesser tech weight,
Speaker 7: you've got higher industrials exposure, you're more economically sensitive as
Speaker 7: the margin small MidCap would benefit from a rate shift.
Speaker 7: But the perspective here is that historically, when we've gone
Speaker 7: into more prolonged periods of fedes, it's usually been on
Speaker 7: the other side of recession, and during those recessions you
Speaker 7: tend to have a major drawdown in earnings. We don't
Speaker 7: think we're looking at that right now, so it is
Speaker 7: a more mixed picture this time, Lisa.
Speaker 2: Scope before you go, I just wanted to mention the
Speaker 2: post model set that even the Taine put out and
Speaker 2: pick out the s. An opportunity, of course to talk
Speaker 2: about the like great Tobias Leftkovich as well. Can you
Speaker 2: talk to us about where sentiment is right now, Scull,
Speaker 2: because it feels like on this program, one minute, Everyone's parish,
Speaker 2: the next minute the super Polish, and it changes date today,
Speaker 2: where are we.
Speaker 7: Well our seniment read we're in euphoria. We've been there
Speaker 7: for a couple of weeks now, We've been in and
Speaker 7: out right. So we went clearly into euphoria at the
Speaker 7: end of Q one. We had that April pullback pulled
Speaker 7: us back out of euphoria, and now we're back in
Speaker 7: the way we're spending it around, John, is that we're
Speaker 7: focused a bit more on your process evaluation work, which
Speaker 7: off of this recent rally, what it has done is
Speaker 7: begun to switch the cross asset valuation a little bit
Speaker 7: more in favor of bonds, and so the combination of
Speaker 7: that where we're trading versus our estimates of fair value
Speaker 7: for the SMP and the Lefkovich Index all suggests to
Speaker 7: us that we're looking at a market that's due for
Speaker 7: a bit of a digestion in here, but that that's
Speaker 7: a different discussion than the longer term fundamental setup, which
Speaker 7: we still think looks pretty good.
Speaker 2: Scott, you're one of the best. I appreciate your time
Speaker 2: this morning. Thank you, sir, Scott Croned there. This is
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