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 Amerie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Federal Reserve Governor Stephen
Speaker 2: Maron warning of a possible downturn in the economy if
Speaker 2: FED policy remains restrictive. Maron taking the most duvish side
Speaker 2: of a divided FED, casting the loan vote for a
Speaker 2: fifty basis point raycard at the Fed's October meeting. I'm
Speaker 2: pleased to say for his first interview broadcast interview since
Speaker 2: that conversation at the Federal Reserve, the Fed Governor Stephen
Speaker 2: Maron joins us now for more.
Speaker 3: Governor Maron, good.
Speaker 4: Morning, good morning, Thanks for having me.
Speaker 2: Hey, it's good to see you, as always, sir, So
Speaker 2: let's spend some time. How did you approach the committee
Speaker 2: meeting just last week and what was the argument for
Speaker 2: fifty basis points?
Speaker 5: So I approached it the same way approached the first one,
Speaker 5: which is that I think that the FED is too restrictive.
Speaker 5: I think that neutral is quite a ways below where
Speaker 5: current policy is, and given my rather more seguent outlook
Speaker 5: on inflation than some of the other members of the committee,
Speaker 5: I don't see a reason for keeping policy as restrictive
Speaker 5: for a long period of time as we are. The
Speaker 5: longer you keep policy restrictive, the more you run the
Speaker 5: risk that Montaro policy itself causes a downturn in the economy.
Speaker 2: What was interesting about last week, as you know, is
Speaker 2: that a send cup both ways. We also had this
Speaker 2: argument from President's Smith of Kansas City FED, who put
Speaker 2: out a long statement I've cherry picked a quote forgive me.
Speaker 2: I see the starts of policy as being only modestly restrictive.
Speaker 2: Financial market conditions appear to be easy across many metrics.
Speaker 2: When you heard that kind of argument, what was the
Speaker 2: counterpoint to what he's seeing in markets?
Speaker 4: Yeah, so I'd say a couple things.
Speaker 5: First of all, I'd say the financial markets are driven
Speaker 5: by a lot of things, not just montary policy. They're driven,
Speaker 5: of course in park by Montori policy, but there's a
Speaker 5: lot of things that drive financial markets. For example, I
Speaker 5: think on this program you probably spend a lot of
Speaker 5: time thinking about AI and new technologies. If you have
Speaker 5: AI or a new technology, it could push financial markets higher,
Speaker 5: which would look like an easing and financial conditions, But
Speaker 5: that doesn't necessarily tell you anything about the stance of
Speaker 5: monitary policy. Indeed, very often, in response to a supply
Speaker 5: shock or a positive supply shock, although of course it
Speaker 5: depends what kind of supply shock, you might think that
Speaker 5: the appropriate sense of monitary policy would be lower and
Speaker 5: not tighter all Lse eqal. But of course there's a
Speaker 5: lot of sort of what ifs and thinking about the
Speaker 5: type of the supply shock. But I think that it's
Speaker 5: a mistake to look at financial conditions and sort of
Speaker 5: conclude something automatically about the stance of monitary policy.
Speaker 4: And I also want to.
Speaker 5: Point out that some of the financial conditions that look
Speaker 5: the easiest, things like the stock market, things like you know,
Speaker 5: sort of various parts of credit spreads, you know, those
Speaker 5: are not necessarily the financial conditions that feed the most
Speaker 5: into economic activity. Yes, the stock marketing, credit spreads matter,
Speaker 5: they matter a lot, But then you sort of think
Speaker 5: about something like housing. I think housing matters a lot
Speaker 5: more for the cyclical position of the economy. And some
Speaker 5: of these things don't matter, But is that they're only
Speaker 5: part of the picture. And if you look at financial
Speaker 5: conditions that affect housing, I think they're quite You look
Speaker 5: at financial conditions that are affecting parts of the private
Speaker 5: credit market, that also looks tighter. And I wonder if
Speaker 5: what we're seeing now in some of the distresses that
Speaker 5: you see in private markets means that financial conditions have
Speaker 5: actually been tighter, but it's been masked by the fact
Speaker 5: that we don't get marks for those on a regular basis.
Speaker 2: So, Governor, I think I want to give you some time.
Speaker 2: I think we should give you some time on a
Speaker 2: central alignment of yours that this year you believe policy
Speaker 2: is actually passively tightened through twenty twenty five. And don't
Speaker 2: think that's an argument I've heard many people make you
Speaker 2: just spend some time fleshing that out.
Speaker 3: What do you mean by that?
Speaker 4: Sure?
Speaker 5: So my perspective is that there's been a number of
Speaker 5: shocks that have hit the economy, driven in large part
Speaker 5: by economic policy not from the FED, from outside of
Speaker 5: the FED that pushed neutral rates higher last year and
Speaker 5: lower this year. And so I think, if you look
Speaker 5: where my neutral rate is, it's not that I'm out
Speaker 5: of bounds for where the rest of the committee is unneutral.
Speaker 5: It's just that I flipped from having one of the
Speaker 5: highest neutral rates last year to now one.
Speaker 4: Of the lowest neutral rates.
Speaker 5: And that's driven by things like population growth, right, It's
Speaker 5: driven by things like fiscal deficits, and if you think
Speaker 5: about popularation growth, right, that's normally considered to be one
Speaker 5: of the biggest drivers of neutral rates, and it's part
Speaker 5: of the reason why people think that neutral usually moves
Speaker 5: very very slowly, because population growth changes only very very
Speaker 5: slowly as new technologies and cultural trends drive people to
Speaker 5: have fewer kids over time. But we experienced the last
Speaker 5: few years, thirty years worth of population growth change in
Speaker 5: only three years.
Speaker 6: Right.
Speaker 5: When you look at the rate of population growth, it
Speaker 5: changed more in the last three years than it did
Speaker 5: in the previous thirty years in both directions. It round
Speaker 5: tripped completely. And so if the drivers, if the drivers
Speaker 5: have changes, the neutral rate accelerate over time, it would
Speaker 5: only make sense to me that the neutral rate itself
Speaker 5: would change more rapidly over time as well, And so
Speaker 5: that's pushed neutral higher last year and lower this year,
Speaker 5: which means that policy is passively tightened. Because what matters
Speaker 5: for the stance of policy is where you are relative
Speaker 5: to the neutral rate, And if neutral is here and
Speaker 5: policies up here, you're very tight. If neutral's here and
Speaker 5: policies down here, you're very loose. But if you stay
Speaker 5: where you are and then neutral goes down, you've passively
Speaker 5: tightened because the neutral rate has shifted, and so policy
Speaker 5: has grown tighter over the course of the U year. Now,
Speaker 5: it's not the case that you would expect to see
Speaker 5: a significant downturn in the economy immediately as a result
Speaker 5: of that, because Montero policy works with lags. It hits
Speaker 5: the economy with long and variable lags, as we all know.
Speaker 5: But if you maintain that very restrictive stance of policy
Speaker 5: for a long period of time, you really increase the
Speaker 5: chances that those lags come to manifest In that Monterey policy,
Speaker 5: then itself induces a downturn in the economy.
Speaker 4: Why wasn't your decent bigger.
Speaker 6: You were talking about a fifty basis point cut that
Speaker 6: you would have preferred to see in the September meeting.
Speaker 6: Why didn't you go for a seventy five basis basis
Speaker 6: point cut descent last month?
Speaker 4: Of course?
Speaker 5: So look, you know, I think that we're I think
Speaker 5: that we're a fair way from neutral, and I think
Speaker 5: that we could get there a bit faster. I could
Speaker 5: imagine getting there in a series of fifty clips. I
Speaker 5: don't think it's the case that we need to get
Speaker 5: there and more than that, because I don't think that
Speaker 5: I don't think the economy is dysfunctional right now, I
Speaker 5: don't think that financial markers are dysfunctional right now. I
Speaker 5: don't think we need to move even faster than that
Speaker 5: for those for those reasons. If I did, then you know,
Speaker 5: I would have no problem voting for voting for your cuts.
Speaker 5: But I think sort of getting there in fifties instead
Speaker 5: of twenty five's is fine.
Speaker 6: So you would be open to dissenting again for a
Speaker 6: fifty basis point cut if the rest of the committee
Speaker 6: wasn't around for that next month or in December rather.
Speaker 5: Yeah, well, I don't want to commit to that because
Speaker 5: a lot can happen between now and the next meeting.
Speaker 5: We're getting a lot of data, I hope, between now
Speaker 5: and then, and only data about the near term, but
Speaker 5: data about the recent past as well that we don't have.
Speaker 4: So things could change.
Speaker 5: But if things play out according to my forecast, then
Speaker 5: yes I would Governor Do you think.
Speaker 7: Your advocacy for a fifty bait cut is hardening the
Speaker 7: opposition to cuts it all?
Speaker 4: I don't think so. I think everybody is.
Speaker 5: Everybody is doing their own analysis of the economy and
Speaker 5: inflation in the labor market and financial markets too, and
Speaker 5: coming to a conclusion. And you know, I don't think
Speaker 5: anybody is necessarily changing their mind sort of to not
Speaker 5: support a cut because I just because I want to
Speaker 5: cut more.
Speaker 7: Is there a lot of discussion at the FED about
Speaker 7: the fact that you're all doing your own analysis, but
Speaker 7: what data are you all using if we're in the
Speaker 7: miss still in the middle of a government shutdown thirty
Speaker 7: four days today.
Speaker 5: Yeah, so there's a lot of talk about that. Let
Speaker 5: me say a couple things about that. First of all,
Speaker 5: you know, it's my perspective that being excessively data dependent
Speaker 5: makes you backward looking, because the data are always backward looking,
Speaker 5: and because of collection lags, because the amount of time
Speaker 5: that you're doing comparisons over right, and given mantary policy
Speaker 5: takes lags to hit the economy, you want to be
Speaker 5: forward looking. So you want to make policy based on
Speaker 5: your forecast. Now, there are times when you might not
Speaker 5: have a lot of confidence in your forecast, and so
Speaker 5: you need to be data dependent. But you should be
Speaker 5: data dependent only to the extent that you don't have
Speaker 5: confidence in your forecast. My perspective is that we know
Speaker 5: the size of the shocks that have hit the economy
Speaker 5: this year, things like population growth. That's a known quantity.
Speaker 5: We know what it does to the economy, we know
Speaker 5: what it does to neutral we know the size of that.
Speaker 5: It's not a mystery. So therefore I have a lot
Speaker 5: of confidence in my forecast. And therefore, to the extent
Speaker 5: that we would get data that would make me change
Speaker 5: my forecast, I would then change my policy. I look,
Speaker 5: so the question is that am I missing data because
Speaker 5: of the government shutdown that would lead me to change
Speaker 5: my forecast. And given so much of my forecast for
Speaker 5: inflation depends on the housing market, and depends on the
Speaker 5: housing market, I would assume that I would see that
Speaker 5: in the reporting that Bloomberg and others do, even if
Speaker 5: I'm not getting data in the short term. Now, something
Speaker 5: like that lasts a couple of months, right, make Can
Speaker 5: I continue to sort of have this degree of confidence
Speaker 5: if we go six months with that data?
Speaker 4: Absolutely not so.
Speaker 5: I do think this is something people are attentive to.
Speaker 5: And there's also alternative data. As you guys are aware,
Speaker 5: I find the alternative data on inflation to be not
Speaker 5: super useful. I do find it to be more useful
Speaker 5: on the labor market. And when you sort of look
Speaker 5: at alternative data on the labor market, you see data
Speaker 5: that's consistent with continual ebbing of demand, which again is
Speaker 5: a signal that policy is too tight. If the decline
Speaker 5: in hiring was a result of negative supply shocks from immigration,
Speaker 5: you would see higher wages, and you would see and
Speaker 5: you would see firms and people giving answering surveys in
Speaker 5: a way that indicated that jobs were plentiful or it
Speaker 5: was difficult to find workers.
Speaker 4: From the firm perspective, you're not.
Speaker 2: Seeing developments in private credit as as well as evidence
Speaker 2: that we're restrictive. Perhaps it was the fault of our
Speaker 2: pairs that this didn't come up much of the news conference.
Speaker 2: I was somewhat surprised did it come up much in
Speaker 2: the meeting the two day meeting last week.
Speaker 5: Well, I mentioned it at the meeting as a reason
Speaker 5: why it was potentially a mistake to make to make
Speaker 5: very confident inferences from the stance of equity markets to
Speaker 5: the stance of monetary policy. But other than that, I
Speaker 5: think that sort of folks were focused on private credit
Speaker 5: as a financial stability risk and sort of thinking about
Speaker 5: how much do we care about this, what are the risks?
Speaker 4: You know, you know, what are the risks? Where could
Speaker 4: this go?
Speaker 5: Just sort of analyzing it from a financial stability perspective,
Speaker 5: Whereas I was making the point as well that there's
Speaker 5: a chance that because we don't get marks on these
Speaker 5: things very frequently, that distresses are actually greater than we
Speaker 5: thought they were, especially when you think about the share
Speaker 5: of credit that has been created in private markets in
Speaker 5: the last few years. You know, so it's slowed down recently,
Speaker 5: but over the last years it's been a greater share
Speaker 5: of credit that's been sent into the economy.
Speaker 4: So it could be that we're just not seeing it.
Speaker 2: Do you think we're missing something here because somebody guests
Speaker 2: come on the program and say it's idiosyncratic, just signs
Speaker 2: if isolated fraud, not a big deal, not systemic, not
Speaker 2: broad enough.
Speaker 3: Do you share that for.
Speaker 5: You so you know, look, I think that probably at
Speaker 5: the end of the day, that's what it is. However,
Speaker 5: I do want to make the point that when you
Speaker 5: get series of seemingly uncorrelated, non systematic problem sorry, non
Speaker 5: systematic issues like that, it can be an indication that
Speaker 5: montary policy is restrictive. We've seen this in the past,
Speaker 5: when you have a series of seemingly uncorrelated, uncorrelated credit
Speaker 5: problems that had been masked for a while and then
Speaker 5: suddenly come to light. Yeah, it tells you something about
Speaker 5: the stance of montary policy.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this
Speaker 2: self senching Kaya to kick off a new month of trading.
Speaker 2: Mike Wilson of Mark and Stanley Rights in the following
Speaker 2: We expect the uptrend in earnings revision's breadth to resume
Speaker 2: into year end twenty six. Third quarter earning season provides
Speaker 2: a strong stop picking environment. Mike John Just now for more, Mike,
Speaker 2: good morning, sir Morty, John, I want to pick up
Speaker 2: on a think a core view of yours for twenty
Speaker 2: twenty five going into twenty twenty six, recessions behind us.
Speaker 2: I think that's somewhat unique to you and a team
Speaker 2: at Morgan Stanley just built that out for us.
Speaker 8: Yeah, I mean, you know, we try to work six
Speaker 8: months in the future. I think you know, a year ago,
Speaker 8: I think remember we had this conversation after the election.
Speaker 8: You were saying, make you sound more optimistic than I've
Speaker 8: heard you in a while, and it was kind of
Speaker 8: we were thinking six months in advance. We thought the
Speaker 8: first half would be tough as they transition from the
Speaker 8: kind of growth negative policies to these growth positive policies.
Speaker 8: All this campex you're talking about is right in line
Speaker 8: with the big beautiful bill. I mean, they're trying to
Speaker 8: basically reduce consumption increase investment. Okay, it's a totally different economy.
Speaker 8: And what that is, it's a higher velocity economy. For
Speaker 8: all the companies that haven't been doing well for the
Speaker 8: last I would say three years, we've been sort of
Speaker 8: in a recession. I would argue strong, We've done the
Speaker 8: work on this, and you know, we've done it now
Speaker 8: with respect to the rolling recession that has been in
Speaker 8: place for I would say three years, most of the privatey,
Speaker 8: economy kind of suffering, government kind of carrying the water,
Speaker 8: and then we basically saw all of that come to
Speaker 8: fruition at the end in April. April capitulation day as
Speaker 8: I call it, was basically the government recession that was
Speaker 8: the final piece of the rolling recession. And if you
Speaker 8: actually look at the Challenger job cuts and you look
Speaker 8: at the revision data now on the on the NFL,
Speaker 8: on the payroll data, it clearly looks to me like
Speaker 8: a rate of change low okay in payrolls and a
Speaker 8: rate of change high in Challenger job cuts came in April.
Speaker 8: So the market's figured all this out. That's why revision
Speaker 8: breath has gone straight up.
Speaker 3: So roll in recovery. Where aren't we that s So.
Speaker 8: We deemed at the rolling recovery in April, and we're
Speaker 8: now seeing that, like these areas of the marketer, not
Speaker 8: everything's going to recover at once, because it's a it's
Speaker 8: an unorthodox recession. It's not like everything flushed at once
Speaker 8: and everything recovers at once.
Speaker 1: So it is going to be staged, and we've seen
Speaker 1: it in the market.
Speaker 8: We're still narrow quite frankly, AI campex is still is
Speaker 8: kind of one of early recoveries here, semiconductors being an
Speaker 8: early cycle group. But we're not seeing the other quote
Speaker 8: unquote early cycle groups recover the way they typically do
Speaker 8: in a new economic cycle. Why because the FED is
Speaker 8: behind a curve. The FED is way behind a curve
Speaker 8: on rates. They need rates much lower if you really
Speaker 8: want to get the private economy moving, rates are too high.
Speaker 6: Much lower? How much lower do you think that really
Speaker 6: is required to get that broadening out.
Speaker 1: Let's just start with the two year treasury yield.
Speaker 8: Okay, so my barometer is always the FED is behind
Speaker 8: the curve. If they Fed funds is above two year
Speaker 8: treasure yields, and in order to stimulate the private economy,
Speaker 8: I would say they need to be well below that.
Speaker 8: So that's fifty basis points just to get the neutral
Speaker 8: and maybe another one hundred plus to get to something
Speaker 8: that's more stimulative for the average company and the average consumer.
Speaker 6: Are you right now betting on that broadening out and
Speaker 6: expecting maybe AI to underperform going forward as they invest
Speaker 6: more in some of these debt sales and the infrastructure
Speaker 6: side and the rest of the economy plays catch up.
Speaker 8: Absolutely, think about the trickle down effect of this capital spending.
Speaker 8: I mean, it's not just going to be semidunter companies.
Speaker 8: There's there's a lot of infrat rushers, a lot of
Speaker 8: job creation. There's a lot of velocity in a real economy,
Speaker 8: and the lending channel starts getting going, perhaps for small
Speaker 8: medium businesses that job creation.
Speaker 1: Deregulation is another part of that story.
Speaker 8: Okay, so absolutely that's what should happen if things play
Speaker 8: out the way they could.
Speaker 1: Now, there's risk to that.
Speaker 8: Let's say that FED continues to say, hey, you know,
Speaker 8: we still think there's inflation risk. We don't like the
Speaker 8: inflation rate of three percent.
Speaker 1: We're not going to.
Speaker 8: Raise our targets there, and then we just kind of
Speaker 8: drag their feet.
Speaker 1: It's going to stay narrow.
Speaker 8: Then it's going to stay up the quality curve, and
Speaker 8: that's where we are right now. He says that people
Speaker 8: basically are trying to choose between those two outcomes, and
Speaker 8: I would say right now, most institutional community is still
Speaker 8: huddled into the high quality stocks. They haven't really made
Speaker 8: the transition yet. Well, we have in some of our guidance.
Speaker 1: Yeah. Absolutely, in order.
Speaker 7: For that transition to work, the FED has to cut though.
Speaker 7: That's what it's contingent on.
Speaker 8: It's one of the main things now. Drag is a
Speaker 8: big part of that. Okay, the capital.
Speaker 1: Spending is a part of that.
Speaker 8: Those can happen without the FED cutting significantly, but it
Speaker 8: would really, it would really.
Speaker 1: Solidify it for me.
Speaker 8: And if you go back and look at all these
Speaker 8: different economic cycles, small caps and you know, lower quality
Speaker 8: stocks typically don't outperform until the FED gets.
Speaker 1: Below two year treasury deals.
Speaker 8: We've documented this, so, by the way, doesn't mean these
Speaker 8: stocks can't work in absolute terms, it just means that
Speaker 8: relative outperformers you typically get in that early cycle rotation
Speaker 8: needs FED funds to be much lower.
Speaker 7: If you look at the FED next year, are you
Speaker 7: just expecting a federal reserve that's markedly different than it
Speaker 7: was today than it is today.
Speaker 8: Well, I think they're just I think they're being patient here,
Speaker 8: they're doing their job. I'm not wanting to sit here
Speaker 8: and criticize the Fed left and right. What I see
Speaker 8: is just a very weird economic cycle. And I think
Speaker 8: we've kind of we've sold the puzzle a little bit
Speaker 8: on this, and that's why I feel fairly confident that
Speaker 8: our narrative we laid out this year is played out.
Speaker 6: Now.
Speaker 8: I'm getting evidence in the marketplace, and I feel more
Speaker 8: confident in that narrative.
Speaker 1: And that's sort of the difference.
Speaker 8: I just think they're not there yet, you know, they're
Speaker 8: They're not where I am in my head. I could
Speaker 8: be wrong, but I'm pretty confident about that outcome.
Speaker 3: Can we finish on big tech?
Speaker 1: Sure?
Speaker 2: These companies are changing way used to companies that weren't
Speaker 2: investing tons ultimately that we giving it back to shareholders.
Speaker 2: We're seeen a subtle twist, I think from the likes
Speaker 2: of say Meta, who was spending tons and tons and
Speaker 2: tons and then coming to the debt market to fund it.
Speaker 2: That's not what we're used to with these names typically
Speaker 2: the asset like capital return heavy. You noticeing the same change?
Speaker 2: And how should we treat those companies differently, if at all?
Speaker 3: Because of that?
Speaker 1: So let's talk about the risks for the bullmarket.
Speaker 8: We think a bull market started in April new economic
Speaker 8: earning cycle.
Speaker 1: Okay, there are two risks.
Speaker 8: One is it the Fed drags their feet Liquidity streped
Speaker 8: funding market stresses kind of pop up. The second one
Speaker 8: is what you just talked about, is that the market
Speaker 8: starts to push back on the fact that free cash
Speaker 8: flow growth is actually decelerating for some of these businesses
Speaker 8: and the asset light story is being called into question.
Speaker 1: We haven't seen it yeto.
Speaker 8: The last week was the first sign we saw pretty
Speaker 8: diversion performance between some of these And that's a risk
Speaker 8: because if all of a sudden, the market starts to
Speaker 8: become a governing factor on those stocks. I can guarantee
Speaker 8: you that the management teams are going to say, well,
Speaker 8: maybe we weren't going to spend quite as much, just
Speaker 8: like we saw in the fall of twenty twenty four
Speaker 8: as we talked about the deceleration in campex, and also
Speaker 8: we saw that with you know, other times when these
Speaker 8: companies spend much money, the market is a governing factor.
Speaker 8: The management change their view how they're guiding.
Speaker 1: On the campex.
Speaker 8: Right now, they're getting rewarded for more campex the market.
Speaker 2: Is it welcome news that they're leaning on the debt
Speaker 2: market a little bit more, just as it s equity
Speaker 2: market starts to push back.
Speaker 1: Well, I think that, I mean I think it's a
Speaker 1: natural evolution.
Speaker 8: And just to be clear, in all these buildouts, whether
Speaker 8: it's railroads, electricity, uh, the internet itself.
Speaker 1: Okay, we got to we're now to the debt part.
Speaker 8: Okay, so now they just raised a ton of capital, Well,
Speaker 8: they're not going to send They're going to spend it.
Speaker 8: So like that's another reason to be excited on one hand,
Speaker 8: because we know that money is going to get spent,
Speaker 8: not going to sit there and collect dust. So so
Speaker 8: you know, typically it could last a year, two three,
Speaker 8: I don't know. I mean, but it's hard for me
Speaker 8: to believe that the spending cycles over when they just
Speaker 8: raised gobs and gobs of dollars.
Speaker 2: Do you think it japanizes comforitive return programs as these
Speaker 2: companies take on more leverage.
Speaker 8: Yeah, it's competing for the for the free cash flow.
Speaker 8: So whether it's camp and by the way, campex now
Speaker 8: is a percentage of free cash flow is pretty high
Speaker 8: for these businesses. But once again, I want to go back,
Speaker 8: this is this is by design. Okay. The tax bill
Speaker 8: is basically incenting these companies to do it. Now, I mean,
Speaker 8: the government administration is really encouraging businesses of all types
Speaker 8: to start investing for the first time in fifteen years.
Speaker 8: We've underinvested in so many things, not just you know, AI,
Speaker 8: but like infrastructure and factories and you know, automating production
Speaker 8: and robotics and things like that. I mean, this bill
Speaker 8: is designed to get that engine of growth moving.
Speaker 3: And it's happening. It's just putting all these pieces together.
Speaker 2: This was a core theme, I think, a core pillar
Speaker 2: for being long US equities for a long long time,
Speaker 2: and now it's changed. Is it still good? I think
Speaker 2: that's what I'm trying to get out here. Is this
Speaker 2: still an argument to buy US equities?
Speaker 8: I think that the valuation, you know, is telling you
Speaker 8: that the growth is going to be better than we think.
Speaker 8: My view is that earnings is going to be better
Speaker 8: next year than people expect.
Speaker 1: Now.
Speaker 8: On the other side of that, I do think we're
Speaker 8: in a different environment where we have these hotter but
Speaker 8: shorter cycles. Okay, so we're not in these ten year
Speaker 8: economic expansions anymore, and so it's two years on, one
Speaker 8: year off, two years on. When that's what we've had
Speaker 8: since COVID right twenty twenty, twenty twenty one, good, twenty two, bad,
Speaker 8: twenty three, twenty four good twenty four.
Speaker 1: To twenty five, and that's so good. Now we're into
Speaker 1: a new two year cycle.
Speaker 8: So you just have to understand that because inflation is
Speaker 8: right under the surface and now you have a higher
Speaker 8: velocity economy. That means you're going to have to treat
Speaker 8: it a little bit more. But right now I think
Speaker 8: it's you know, we're in a pretty good position.
Speaker 3: Stay with us. More Bloomberg Surveillance coming up after this.
Speaker 2: Turning to tech, Alphabet returning to Europe's debt market for
Speaker 2: the second time this year, looking to sell three billion
Speaker 2: in europe denominated bonds to fund this AI expansion. The
Speaker 2: announcement coming after Meta sold thirty billion dollars of corporate
Speaker 2: bonds just last week. Amount of line up a black
Speaker 2: Rock joined us Now for more, Amanda.
Speaker 3: Good morning morning. Thank you for having me.
Speaker 2: The amount of debt that's coming to market from tech. Yes,
Speaker 2: this is a big development. We need to track how
Speaker 2: are you going to see track and things?
Speaker 9: So thank you for having me. It is I would
Speaker 9: say it's a pretty big paradigm shift. If you look
Speaker 9: at data from deal Logic USIG tech issuance has already
Speaker 9: surpassed all of the full years on record so far
Speaker 9: in twenty twenty five, so this is something that is
Speaker 9: actually gaining further momentum. We think there's more room to run.
Speaker 9: There are a couple things that I would note. One,
Speaker 9: in USIG, we look at gross issuance and net issuance,
Speaker 9: and we also look at gross leverage and net debt.
Speaker 9: The reason I mentioned that is that a lot of
Speaker 9: these companies, not all of them, but some of the
Speaker 9: largest companies are actually still in a net cash position,
Speaker 9: so they're issuing debt, but they actually still have more
Speaker 9: cash on their balance sheet relative to debt. Now, the
Speaker 9: historical precedent for that was, prior to the twenty seventeen
Speaker 9: tax reform, a lot of that cash was trapped overseas,
Speaker 9: So USIG companies used to allow their cash to build
Speaker 9: overseas and then they would have to pay taxes on
Speaker 9: if it were repatriated. Now that's a different backdrop. I
Speaker 9: say that because there's a lot of focus on kind
Speaker 9: of the releveraging of the tech sector. But our view
Speaker 9: is that there is a very long way to run,
Speaker 9: because not only is gross leverage really modest in the sector,
Speaker 9: net leverage is actually negative because again they're still in
Speaker 9: a net cash position. So what that means is a
Speaker 9: lot of this capex will be funded by a combination
Speaker 9: of public debt markets US Europe, private credit, maybe some
Speaker 9: fiscal plans as well, but there's a lot of room
Speaker 9: to run. I think the binding constraint will be one,
Speaker 9: is there over the next few years a disruptive technology
Speaker 9: that kind of derails that, or is there ongoing true
Speaker 9: demand under the surface that kind of builds that productivity
Speaker 9: and that economic value added, and then the binding constraint
Speaker 9: will be the rating agencies. This actually reminds me a
Speaker 9: lot of the pharma industry back in two thousand and nine,
Speaker 9: there was a paradigm shift of a lot of mergers
Speaker 9: between pharma and biotech. A lot of companies actually took
Speaker 9: active downgrades to their debt ratings purposefully, and it actually,
Speaker 9: on a smaller scale, reminds me a lot of that.
Speaker 6: There's this discussion that's increasingly nuanced, which is there's not
Speaker 6: a fear that Meta is going to go bankrupt in
Speaker 6: the near term. There's not a fear that Amazon or
Speaker 6: Alphabet is going to really run into financial problems. There is, however,
Speaker 6: a feeling that they're an increasing number of related companies
Speaker 6: that are levering up in order to build out data
Speaker 6: centers or build out other types of infrastructure that are
Speaker 6: going to run into problems. I mean, how much are
Speaker 6: you worried about that leverage that is also building in
Speaker 6: tandem with the behemoths.
Speaker 9: Well, I think, again going back to the point, these
Speaker 9: are companies that are generating a significant amount of cash.
Speaker 9: They have a lot of liquidity on their balance sheet,
Speaker 9: and I think they're making a calculus that they have
Speaker 9: to invest in this paradigm shift, and they really don't
Speaker 9: have an option not to. So there may be winners
Speaker 9: and losers of this. Perhaps the folks that are investing,
Speaker 9: they may not be the biggest beneficiaries of the technology right.
Speaker 9: There may be other parts of the value chain that
Speaker 9: benefit more. But I think the fact of the matter
Speaker 9: is the market is comfortable.
Speaker 3: Again.
Speaker 9: It reminds me a lot of pharma and biotech. A
Speaker 9: lot of times, management teams are making bets on drug
Speaker 9: discoveries that haven't happened yet. They're issuing thirty or forty
Speaker 9: year bonds after patent cliffs expire.
Speaker 3: These are just.
Speaker 9: Bets on management teams that they will see through the
Speaker 9: new regime and have to navigate through it. But I
Speaker 9: think there's a lot of financial cushion in this sector
Speaker 9: and I don't think we're anywhere near the point where
Speaker 9: investors are thinking of stopping funding it because you can
Speaker 9: see the demand.
Speaker 3: From the new issues.
Speaker 6: Stephen Myron was just on FED Governor talking about how
Speaker 6: financial conditions don't necessarily tell the whole story and that
Speaker 6: they can mask a lot of pain that you're seeing elsewhere,
Speaker 6: and he pointed to the private credit space and he
Speaker 6: said that that has been the biggest growth area, and
Speaker 6: that is an area where you don't see visibility into
Speaker 6: the marks that you have currently. You could have some
Speaker 6: potential pitfalls, and we are seeing anecdotes to that degree.
Speaker 6: Not saying are there cockroaches that are going to undermine
Speaker 6: the whole system, but do you think that's a valid
Speaker 6: argument that hial bond spreads aren't going to be the
Speaker 6: canary in the coal mine. It's in the private credit
Speaker 6: sphere and it's not very visible.
Speaker 9: So I agree with this point that aggregate financial conditions
Speaker 9: are not representative of everything that is going on in
Speaker 9: the economy. I don't think it's limited to private credit. However,
Speaker 9: if you look at, for example, triple c's and high
Speaker 9: yield median interest coverage is already below one times, right,
Speaker 9: So that is a really non existent financial cushion in
Speaker 9: aggregate for a sector to navigate a higher cost of debt.
Speaker 9: You see it in commercial real estate. Parts of commercial
Speaker 9: real estate Class C office haven't kept up. You see
Speaker 9: it in consumer credit ages twenty to twenty nine cohorts
Speaker 9: with student loans. They're not homeowners, they're not equity owners.
Speaker 9: They're really struggling. So I think the point is is that, yes,
Speaker 9: financial conditions in aggregate using an input of five measures,
Speaker 9: have eased since the April peak. But under the surface,
Speaker 9: whether you look at leverage, loan borrow, wher's, high yield,
Speaker 9: private credit, commercial real estate, consumer credit, there are pockets
Speaker 9: that haven't kept pace.
Speaker 3: Again, it speaks to.
Speaker 9: The bifurcated and dispersed economy that we have. So I
Speaker 9: would agree that actually financial conditions in aggregate don't tell
Speaker 9: the whole story. I don't think it's isolated however, to
Speaker 9: private credit. I also think what he was pointing to
Speaker 9: is that private credit has changed the transmission of monetary
Speaker 9: policy through the economy. Private credit has stepped in historically
Speaker 9: when other traditional parts of lending have pulled back, bank
Speaker 9: C and I lending the debt capital markets, and our view,
Speaker 9: that's not a bad thing, right because private credit has
Speaker 9: filled a void. There are forty four thousand private companies
Speaker 9: across the US, the UK, and Europe, and so it's
Speaker 9: a significant economic opportunity to fund those companies.
Speaker 3: The counterargument's aord of v promo.
Speaker 2: If you really think about it, is it the boom
Speaker 2: in private credit cam in a rising interest rate environment?
Speaker 2: So can you really draw a link between FED policy
Speaker 2: and the direction of private credit Because it didn't work
Speaker 2: one way, what does it work the other?
Speaker 3: This is the issue.
Speaker 6: Right At a certain point, you could argue if they're
Speaker 6: feeling weakness, that's not a bad thing because you're still
Speaker 6: seeing it to play. I mean, Apollo in areas reported
Speaker 6: to earnings today and the earnings are doing great, so
Speaker 6: it's not as though they're about to struggle. You have
Speaker 6: to wonder that counter factual that you're just talking about,
Speaker 6: is it a positive in terms of the resilience of
Speaker 6: the economy.
Speaker 2: This is the point, Amanda, that Lisa has been really
Speaker 2: hitting the drama repeatedly. The use case of luring interest rates.
Speaker 2: What's it addressing? What's the channel?
Speaker 1: Right?
Speaker 9: Well, actually, I think it's a great point if you
Speaker 9: look at saying going back to the leverage loan market,
Speaker 9: leverage loan defaults peaked in November of twenty twenty four
Speaker 9: at seven point seven percent. That's a really high number.
Speaker 9: That's on pace with the pandemic, and that's issuer weighted
Speaker 9: moodies right. But the point is is that we've already
Speaker 9: had some incremental funding relief for floating rate barwers thanks
Speaker 9: to the one hundred and fIF basis points that the
Speaker 9: FED has already delivered. I do think there are pockets
Speaker 9: of the market that would welcome that. If you're a
Speaker 9: younger consumer, you have floating right credit cards, you have
Speaker 9: student loans. Yes, of course every incremental cut helps. But
Speaker 9: in general, I think we feel comfortable that we're kind
Speaker 9: of past peak interest rate headwinds, we're probably past peak
Speaker 9: trade policy uncertainty, and we think we're probably on scope
Speaker 9: for a reacceleration of growth, and that leads us comfortable
Speaker 9: with credit risk.
Speaker 6: Do you think that if the FED were to cut
Speaker 6: rates it would force you to take risk you're uncomfortable
Speaker 6: taking in order to get the same kind of yields.
Speaker 9: I do think there is a delicate trade off between
Speaker 9: the yield on off or in a wide range of
Speaker 9: corporate credit markets and investor demands. So, for example, USIG
Speaker 9: yields are now below five percent, high yield yields are
Speaker 9: now below seven percent in aggregate. I do think in
Speaker 9: a structurally higher yield environment there is a bit more
Speaker 9: demand for spread based product. But in terms of lenders
Speaker 9: kind of throwing caution to the wind because rates are falling,
Speaker 9: you have to keep in mind that, especially in the
Speaker 9: private credit market, these loans are made and are staying
Speaker 9: on those lenders balance sheets for the life of the loan,
Speaker 9: very different than say in the Financial crisis when they
Speaker 9: were syndicated out.
Speaker 3: So the risk calculus to me.
Speaker 9: Isn't going to be buffeted by an incremental twenty five
Speaker 9: or fifty bass points.
Speaker 3: Very coops stay with us.
Speaker 2: More Bloomberg surveillance coming up after this A week full
Speaker 2: of data. Don't get the usual suspects. No payroll stata
Speaker 2: this week, but you will get the MS ADP and
Speaker 2: job openings. Let's stick with the alternative data. Nancy is
Speaker 2: out of Piper Sander, writing look past the scary AI
Speaker 2: job destroying headlines, keep an eye on claims, n FIB, jobs,
Speaker 2: S and PPMI employment all showing incremental improvements in the
Speaker 2: labor market. Nancy joins us now for more. Nancy goodmrnic
Speaker 2: good morning. He's the worst of it behind us.
Speaker 3: Then I think so.
Speaker 10: I think we are at a positive inflection point in
Speaker 10: the economy. No question here in four Q with the
Speaker 10: government shutdown, you're gonna have a little bump in the road,
Speaker 10: but it's important to look at the trend and you're
Speaker 10: getting plenty of green shoots from all those indicators that
Speaker 10: you mentioned. Even on the job side, although Amazon is
Speaker 10: laying off people, claims are incrementally low. Amazon probably over
Speaker 10: hired during the COVID COVID crisis. They're just renormalizing. And importantly,
Speaker 10: the big guys don't create jobs.
Speaker 4: It really is.
Speaker 10: Eighty percent of jobs are created in companies with less
Speaker 10: than five hundred employees, and so that's why the increase
Speaker 10: in the NFIB index is so important. There's also the
Speaker 10: S and PPMI that comes out today. We already have
Speaker 10: a preliminary October reading for that. That employment component is positive.
Speaker 10: Conference Boards Jobs data we're a little bit more positive
Speaker 10: regional FED employment data, and it's important we're also positive,
Speaker 10: and it's important it's manufacturing. Manufacturing has a much bigger
Speaker 10: multiplier than the service sector, and so I'm actually excited
Speaker 10: that it's starting with the manufacturing space.
Speaker 3: Can I pick up on claims?
Speaker 2: Yeah, how instructive our jobless claims when they've been pretty
Speaker 2: stable through the year as payrolls have decelerates it quite
Speaker 2: aggressively since it' stand of twenty five.
Speaker 10: So first on payrolls, it's a misleading indicator. It should
Speaker 10: be reported mainly maybe once a coreter until they have
Speaker 10: a better sample sample size. They're trying to capture over
Speaker 10: twenty million companies in two hundred and fifty industry groups.
Speaker 10: That was just revised down nine hundred thousand after being
Speaker 10: revised down pretty consistently in each of the past four
Speaker 10: years on a monthly on a monthly basis, So lousy data.
Speaker 10: I would much rather look at the survey data that
Speaker 10: we've been focusing on, and claims. Claims obviously capture firings.
Speaker 10: What continuing claims show you our hirings, and so we've
Speaker 10: had limited firings, which is what claims show you. But
Speaker 10: companies are reluctant to hire as of now, given that
Speaker 10: they're trying to protect their profits, a lot of economic uncertainty.
Speaker 10: But we would look for as we go into twenty
Speaker 10: twenty six for continuing claims. That's going to be the
Speaker 10: key metric to watch as far as our company is
Speaker 10: getting ready to start to hire as of now. No,
Speaker 10: but with Blagg effect of the Fed easing cycle the
Speaker 10: Feds eased over one hundred basis points one hundred and
Speaker 10: fifty basis points over the past year, we would argue
Speaker 10: there already are plenty accommodative and that's improving corporate profits
Speaker 10: and that will get you re hired as we move
Speaker 10: into twenty six.
Speaker 6: I want to pick up on something that you noted,
Speaker 6: which is that there's a transformation underway in the economy
Speaker 6: where it's going from some of these white collar jobs
Speaker 6: where you are seeing layoffs and you're expecting to see
Speaker 6: hiring pickup in.
Speaker 3: The manufacturing sector.
Speaker 6: Is this a big transformation that you can really put
Speaker 6: your finger on and say, this is what's going to happen,
Speaker 6: this is the future.
Speaker 4: Maybe go to tech school.
Speaker 1: I'm thinking of my kids and.
Speaker 6: Get yourself you know some kind of degree in more
Speaker 6: of the manufacturing sector than anything else.
Speaker 10: One thousand percent. Pallunteer was in the news last week.
Speaker 10: They're hiring high school kids. Great idea, get a job,
Speaker 10: then see if you want to go go to college
Speaker 10: or if you need to go to if you need
Speaker 10: to go to college. Yes, I think this is transformational.
Speaker 10: It's actually been unfolding for about fifteen years. It started
Speaker 10: last cycle when capital spending started to come back to
Speaker 10: the United States. China just wasn't a hot, great place
Speaker 10: to do business anymore like it had been, and so
Speaker 10: we started to get on shoring. We started to get
Speaker 10: goods producing jobs increase through twenty nineteen. That's important because
Speaker 10: it's a huge multiplier. When you create factories, you need
Speaker 10: a support system around it. Other smaller factories, distribution centers,
Speaker 10: and then other services eventually eventually unfold. So I do
Speaker 10: think this is transformational, is healthy for the economy. Not
Speaker 10: everybody needs to go to college wants to go to college,
Speaker 10: and there should be other job opportunities. And yes, I
Speaker 10: think it is transformational.
Speaker 6: This is one fear that people have if there's a
Speaker 6: huge skills gap right now, whether it's AI and some
Speaker 6: of the technology that's coming to the fore that's making
Speaker 6: companies more efficient, or whether it's some of these more
Speaker 6: technical fields where people just don't have the training or expertise.
Speaker 6: Is there something that's going to be friction in this
Speaker 6: transformation that you see as a problem that's needing more
Speaker 6: easing from the FED, that's needing a little bit extra
Speaker 6: oomph to give it that support.
Speaker 10: No, I would say, no more oomph from the fat al.
Speaker 10: It is creating bubbles versus creating a healthy economic backdrop
Speaker 10: for Middle America. Those big easing cycles create great environment.
Speaker 10: I think one of your guests said that this morning
Speaker 10: for Wall Street, let's focus on let's focus on Main Street,
Speaker 10: where you can have maybe slow inflation, relatively low interest rates,
Speaker 10: and a solid job cycle.
Speaker 3: So train them.
Speaker 10: I visited a prison about six years ago where they
Speaker 10: were training inmates as they got parole in skills, and
Speaker 10: they would train them and they go out, they get
Speaker 10: on parole and they would get a job. So you
Speaker 10: can train people to work in factories. I grew up
Speaker 10: in a factory town. I saw it myself, and it's
Speaker 10: train them. That's not a big deal. Penny Pritzker was
Speaker 10: really focused on that early early last decade, community college
Speaker 10: system companies working with community colleges. No, I'm excited about it,
Speaker 10: rather than people depending upon the government where they can
Speaker 10: actually go out and get a healthy, good job.
Speaker 7: Do you think there's been fresh impetus on this because
Speaker 7: of the Trump administration trying to get manufacturing back into
Speaker 7: United States by using a Karen and stick approach with tariffs.
Speaker 10: Yeah, certainly that's reinforcing it. But I really want to
Speaker 10: emphasize the private sector first started to do it back
Speaker 10: in twenty ten. I listened to company and companies we're
Speaker 10: complaining about the difficulties in doing business stealing technology AI
Speaker 10: heavy hand from the government. And so this has been
Speaker 10: going on for ten years. And to be sure, I
Speaker 10: like your description the carrot and the sticks. Ap app
Speaker 10: absolutely and the thing on the carrot.
Speaker 3: It takes time.
Speaker 10: Same with a stick. It takes time to build these factories.
Speaker 10: And so we've seen a lot of announcements about forty
Speaker 10: forty five announcements this year of major companies announcing construction
Speaker 10: of new facilities. But to plan those facilities than to
Speaker 10: execute it. And that's what I like about it. It's slow,
Speaker 10: it's not fast, and it can create a sustained cycle,
Speaker 10: potentially even another one of those long business cycles that
Speaker 10: we saw in twenty ten through twenty nineteen if.
Speaker 1: We do get some layoffs.
Speaker 7: The Financial Times had a story about this, how companies
Speaker 7: are just going.
Speaker 3: To say it's AI.
Speaker 4: Do you think it really is down to AI?
Speaker 7: That is just politically easier and more beneficial than to
Speaker 7: blame something that they're going to have to deal with
Speaker 7: in a few years, So maybe not they're dealing with
Speaker 7: right now.
Speaker 3: It is probably a little bit of both.
Speaker 10: First, every business cycle upturn is led by technology. If
Speaker 10: you go back to ninety one, two thousand and one,
Speaker 10: two thousand tech, if you look at GDP tech capital
Speaker 10: spending has always led because it gives you productivity, profitability,
Speaker 10: and then you can get jobs. Classically, these upturns, you
Speaker 10: do have a slow job market because, yes, companies are
Speaker 10: trying to protect their profit margins.
Speaker 4: So maybe it's a little bit of excuse.
Speaker 10: But the capex were seen being spent on AI is
Speaker 10: leading the economy and it will give you old economy
Speaker 10: capex as you go through the year, So maybe it's
Speaker 10: an excuse. But at the end of the day, it's
Speaker 10: not unusual to have a sluggish upturn in employment going
Speaker 10: into a reacceleration.
Speaker 2: This is the Bloomberg Sevendics podcast, bringing you the best
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Speaker 3: Out Mm hmm.