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 Hordernt. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. We're stock centering lower
Speaker 2: with the slower earnings on Deck. Drew Madison met Life,
Speaker 2: writing in the absence of government data, the only information
Speaker 2: we have earnings mediocre. Nominal growth expectations are out of
Speaker 2: sync with earnings expectations. Drew joins us now for more,
Speaker 2: Drew good Mornick. Does something have to give?
Speaker 3: Something does have to give? Now what that's going to be?
Speaker 3: I'm going to guess it's going to be markets, because
Speaker 3: it's easier for markets to give than is for the
Speaker 3: economy to give. And if the economy gives, it's probably
Speaker 3: not giving. An unexpected acceleration and activity.
Speaker 2: This is just one contradiction. There are many more. We
Speaker 2: talked about lots of them. Employments dropped away, retail sales
Speaker 2: that's been really robust. People are still talking about a
Speaker 2: so called K shaped economy. Upper income okay, lower income struggling.
Speaker 2: Is one catching down to the other or the other
Speaker 2: going to catch up to the top.
Speaker 3: Well, just because someone's spending when they have money doesn't
Speaker 3: mean that they're doing fine. It doesn't mean that they
Speaker 3: feel like things are going to continue to be good.
Speaker 3: And when you look at the details of how income
Speaker 3: expectations are changing, particularly real income expectations, so accounting for
Speaker 3: the inflation component which you see, is actually that the
Speaker 3: upper income is beginning to feel a lot of pressure.
Speaker 3: I don't know whether it's what they're buying is just
Speaker 3: going up in price more aggressively, or whether they are
Speaker 3: beginning to worry about their jobs a little bit more.
Speaker 3: I suspect it's a combination of both.
Speaker 4: Where are you seeing this in particular?
Speaker 1: And I see this as we were looking at airline earnings,
Speaker 1: for example, and a lot of people are shelling out
Speaker 1: for those premium cabins.
Speaker 3: They show out for the premium cabins, but those premium
Speaker 3: cabins cost more, and so they're actually seeing their lifestyle
Speaker 3: requires a much more expensive payment structure now, and so
Speaker 3: then they have to give in other areas. And so
Speaker 3: what we're actually seeing is when you look at spending,
Speaker 3: for example, goods versus services, people are beginning to actually
Speaker 3: cut back on spending on services. And those are the
Speaker 3: things that you never cut back on. And so typically,
Speaker 3: if you're not buying a cup of coffee in the morning,
Speaker 3: you're not going to go out and buy a car
Speaker 3: in the afternoon. It just takes a little while for
Speaker 3: that to catch up across the income spectrum. And what
Speaker 3: we're beginning to see now is that upper income tier
Speaker 3: is beginning to feel pressure. They can still keep spending,
Speaker 3: but the pressure builds, and it means probably that you'll
Speaker 3: see the savings rate begin to decline, even though it
Speaker 3: probably should be rising based on where interest rates are.
Speaker 1: And maybe we'll get a holistic look at this when
Speaker 1: we get retail sales. Oh wait, we don't have any
Speaker 1: data coming out of the government. There is this feeling
Speaker 1: right now you need to parse through the earnings to
Speaker 1: get a better sense of it. Has there been anything
Speaker 1: in the earning so far that has ratified the view
Speaker 1: you have, or are there a couple of earnings reports
Speaker 1: that you're really keyed into to give you the ultimate
Speaker 1: sense of whether this really is the reality, this weakening
Speaker 1: in even the upper echelons of income owners.
Speaker 3: I mean to be frank, no, but I mean that's why,
Speaker 3: you know, That's why I get to do what I do,
Speaker 3: is because I have to make decisions based on kind
Speaker 3: of the limited amount of information that I have. What
Speaker 3: we are paying very close attention to our Federal Reserve surveys,
Speaker 3: you have to pay attention to the page book, You
Speaker 3: have to pay attention to the earnings reports. But even
Speaker 3: the earnings reports can see people transitting from one, you know,
Speaker 3: one kind of product to another, right from beef to
Speaker 3: chicken or from you know, who knows what people like anymore.
Speaker 3: I don't understand actually what people I am not the
Speaker 3: average consumer, and I am readily willing to admit it.
Speaker 3: And my tastes are not everyone's tastes. So it's hard
Speaker 3: to kind of figure out which direction everyone's heading. But
Speaker 3: I do know that people are shifting from what they're
Speaker 3: used to doing, and when people are ship thing from
Speaker 3: what they're used to doing that's happening because of a reason,
Speaker 3: and that reason typically isn't good. People are creatures of habit.
Speaker 3: They like to do what they did yesterday.
Speaker 5: If the high end consumers under pressure, what kind of
Speaker 5: economy are you describing, Because everyone continuously says we're in
Speaker 5: a K shaped economy. What you're describing does not sound
Speaker 5: like a K shaped economy.
Speaker 3: So when you do economics for long enough, which you
Speaker 3: realize is the top ten percent spends no matter what,
Speaker 3: the bottom ten percent spends no matter what, and there's
Speaker 3: the cohort in the middle is actually the one that
Speaker 3: moves around their spending because they've got some saving, some
Speaker 3: potential for savings. And so you really have to watch
Speaker 3: the movement into and out of the savings rate and
Speaker 3: whether or not people are feeling like they can spend
Speaker 3: money now. It gets complicated when inflation is present because
Speaker 3: oftentimes the way people make up for the increase in prices,
Speaker 3: at least initially is by cutting back on their savings, right,
Speaker 3: even if they're feeling a lot of pressure or worries
Speaker 3: about their job. And so things begin to break down.
Speaker 3: Those relationships begin to break down, and so you know,
Speaker 3: all the people using AI to model the economy right now,
Speaker 3: you know, it's a big new thing. Those models are
Speaker 3: incredibly complicated, and what you're going to see is that
Speaker 3: the coefficients on the front of each of each variable
Speaker 3: that you can use are probably shifting around, and they
Speaker 3: might be canceling each other out, and so your whole
Speaker 3: model might be breaking down. And you're probably not going
Speaker 3: to recognize that if you're using models that are to
Speaker 3: advance rather than looking at individual components of what's happening
Speaker 3: and the relationships between, for example, savings and interest rates.
Speaker 5: What are you most looking at this week next week
Speaker 5: when it comes to earning season to really understand how
Speaker 5: much that high end consumer is underpression.
Speaker 3: Well, as I said, it's difficult for us to kind
Speaker 3: of look at an individual company and figure out what's
Speaker 3: going on. Upper income consumers are going to continue to
Speaker 3: spend on things like airfare. They're going to continue to
Speaker 3: go on vacation. The question is are they going on
Speaker 3: vacation and instead of going to Europe, they're going to California,
Speaker 3: or instead of going you know, they're taking the slightly
Speaker 3: less expensive option. There are doubts. You know, everyone's got
Speaker 3: a lifestyle and certain things are downgrades for certain people,
Speaker 3: and it's easy for us to all kind of laugh
Speaker 3: about it, But for these people, it's actually a serious
Speaker 3: change in their lifestyle and it affects their perception of
Speaker 3: what it means to be rich. For example, what's it
Speaker 3: mean to be rich when you actually have to think
Speaker 3: about the airfare?
Speaker 6: Right?
Speaker 3: These are people who are not used to thinking about
Speaker 3: how much they spend on airfare. They're not used to
Speaker 3: thinking about, gee, you know, like I really like that hotel.
Speaker 3: It's in the center of the city, and it's my
Speaker 3: favorite hotel, because they have a favorite hotel in Europe, right,
Speaker 3: and now they're thinking, well, I can't afford my favorite
Speaker 3: hotel in Europe. I have to downgrade it. Actually, it
Speaker 3: comes with us as social costs. You don't have to
Speaker 3: cry for these people. Their lives are still really good
Speaker 3: and probably better than a lot of people's. But you know,
Speaker 3: it doesn't mean that they feel as good as they
Speaker 3: used to.
Speaker 7: Banks not failing as good as they used to.
Speaker 2: Often last week, let's talk about the financial with sion
Speaker 2: in the pre market is up by two point five percent.
Speaker 2: It was the focal point of a lot of people
Speaker 2: last week coming out and basically revealing some losts is
Speaker 2: tied to potential fraud. This isn't the first time we've
Speaker 2: seen this kind of thing. We've seen some other credit
Speaker 2: issues as well. You've got the credit issues on the
Speaker 2: one side and then radly robust standings on the other side,
Speaker 2: and we saw that from Zion overnight. How are you
Speaker 2: and what is your perspective on what is happening right
Speaker 2: now in this sector?
Speaker 3: Well, so people are nervous. If you look at credit markets,
Speaker 3: spreads are incredibly tight. So you're in this weird world
Speaker 3: where all in yields are okay. Right, you can get
Speaker 3: paid for is okay, but the actual premium you're getting
Speaker 3: paid to take risk is actually maybe a little too low.
Speaker 3: And so I think what you're seeing is just a
Speaker 3: nervousness around the economy that we don't really understand that
Speaker 3: everything's okay. We're waiting for that next shoe to drop.
Speaker 3: Jamie Diamond, you know, put it famously. What he's really
Speaker 3: expressing is not that he sees anything, but that he's
Speaker 3: expecting something. It's kind of like you live in an
Speaker 3: apartment in New York City and you might never see aproach,
Speaker 3: but they're there. You know they're in the wall, you
Speaker 3: know it, right, and so you don't food out. You
Speaker 3: do a whole bunch of different things when you live
Speaker 3: in New York. You know, there's things that you can
Speaker 3: do in suburban New Jersey where I live that are
Speaker 3: okay because you're not going to attract to animals act quickly.
Speaker 3: But if you do it in New York City, you're
Speaker 3: basically stunk. And I think the risk is is that
Speaker 3: people are really focused on, you know, what they're not seeing,
Speaker 3: And the fact of the matter is is with no
Speaker 3: economic data and with you know, earnings kind of you know,
Speaker 3: being okay for the most part, they're nervous that they're
Speaker 3: missing something, but they don't know what they're missing.
Speaker 7: It's actuary. Where are we?
Speaker 2: Are we in a grand house on Murray Hill infested
Speaker 2: we conchroaches? Are we in a nice Soho apartment?
Speaker 3: What is this? We might be trading down from a
Speaker 3: Soho apartment to something on the Upper East Side?
Speaker 7: Okay, does that mean you're de risking?
Speaker 4: We've been.
Speaker 3: We've been de risked for a while now. I mean
Speaker 3: to be honest with you. Since COVID, there have been
Speaker 3: kind of you know, there's been kind of one risk
Speaker 3: after another after another. Uh. And you know, to the
Speaker 3: extent that we've been able to kind of go up
Speaker 3: in credit, we've been going up in credit. I don't
Speaker 3: think that's a surprise to anyone. And I think you
Speaker 3: know everyone who's able to has been doing that. Or
Speaker 3: you've been looking to things like privates where you're taking
Speaker 3: maybe more liquidity risk which you can more easily define,
Speaker 3: but getting less credit risk on most sides of it,
Speaker 3: if you're doing your underwriting properly.
Speaker 7: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Let's turn back to warnings Chairs of General Motors jumping
Speaker 2: after the company be earnings and race guidance. The GM
Speaker 2: CFO Paul Jacobson joined us now for more all the
Speaker 2: stock is up by more than nine percent. We'll spend
Speaker 2: some time talking about the numbers, but I just wanted
Speaker 2: to take a step back with you, just for a
Speaker 2: brief moment. You've got real experience navigating volatile industries, experience
Speaker 2: in the airline business, and experience in the automaker business too.
Speaker 2: You took over a CFO in the pandemic. Can you
Speaker 2: talk to us about this year, Paul? Just how agile
Speaker 2: have you and the team needed to be and how
Speaker 2: volatile have things been too?
Speaker 6: Well, Jonathan, first of all, thank you very much for
Speaker 6: having us. It's a great day to be a GM
Speaker 6: and celebrate the success of all of our employees and
Speaker 6: partners worldwide. So really appreciate you being here today, having
Speaker 6: me today. So you know, at the end of the day,
Speaker 6: it's just another change. I mean, since coming to GM
Speaker 6: in twenty twenty, we've gone through COVID, we've gone through
Speaker 6: chip shortage, we've gone through tariffs, we've gone through ev
Speaker 6: pivots and so on. But what we've really tried to
Speaker 6: do is create a model that is resilient. And when
Speaker 6: you look at our balance sheet, you look at our
Speaker 6: inventory discipline and the way we've gone to market, there's
Speaker 6: a lot of things that have changed that allow us
Speaker 6: to be able to react to the world around us faster,
Speaker 6: and I think that's paid the way for us to
Speaker 6: have another really strong year in the face of a
Speaker 6: lot of macro changes.
Speaker 2: Pulled in order to increase resilience and maybe agility, Do
Speaker 2: you have to sacrifice long term planning?
Speaker 7: Is that something that becomes harder?
Speaker 6: Well, you know, I think what we've really done well
Speaker 6: as a team, I think is we've kept focus on
Speaker 6: that long term vision. So you know, for example, while
Speaker 6: we've taken a charge on reducing some of our ev
Speaker 6: capacity reflecting the demand that's out there, we still believe
Speaker 6: that evs are the future and we think that there's
Speaker 6: an opportunity for us to take a little bit of
Speaker 6: a pause in demand growth that we've seen over the
Speaker 6: last few years, structurally improve it, right size our capacity,
Speaker 6: and make sure that we can be successful as more
Speaker 6: and more customers adopted. So it's just an example of
Speaker 6: how we make sure that we're managing the short tem
Speaker 6: within the face of that longer term vision.
Speaker 1: So what of the big steps Paul, that you've taken
Speaker 1: in order to remain agile, particularly with supply chains and
Speaker 1: removing any kind of direct input from China in particular,
Speaker 1: how much have you rejiggered where you get your goods?
Speaker 6: Well, I think we learned a lot in industry from
Speaker 6: COVID and a focused supply chain that was really susceptible
Speaker 6: to individualized shocks, and I think we've taken the effort
Speaker 6: to try to make sure that we diversify our supply
Speaker 6: chain base We've made a number of investments, for example,
Speaker 6: in battery raw materials and other materials in the US,
Speaker 6: in addition to the four billion dollars that we've announced
Speaker 6: this year to increase our US manufacturing capacity. So I
Speaker 6: think it's been a case of making sure that that's balanced.
Speaker 6: And then when we went through the chip crisis of
Speaker 6: twenty twenty one, there were some more challenges about making
Speaker 6: sure that we expand the places where some of our
Speaker 6: chips are fabricated and our supply base that we use.
Speaker 6: So this has just been part of it. I think
Speaker 6: we've learned a lot of lessons over the last five
Speaker 6: years that have helped us and positioned us well to
Speaker 6: be able to thrive in ever changing circumstances like we
Speaker 6: see right now.
Speaker 1: All this costs a lot of money, and I'm just
Speaker 1: trying to get my head around.
Speaker 4: We've all been trying to get our head around.
Speaker 1: Where it comes from these extra costs in order to
Speaker 1: rejigger supply chains to offset any kind of increased costs
Speaker 1: that might come along the way. How much is coming
Speaker 1: from whether it's freezing labor forces or trimming around the edges,
Speaker 1: how much is coming from higher prices on consumer vehicles.
Speaker 6: Well, I think if you look at what GM has done,
Speaker 6: we've saved a lot of money by rationalizing our inventory balances.
Speaker 6: So we used to keep probably about forty percent more
Speaker 6: inventory on the ground at our dealerships around the country,
Speaker 6: and we've cut that down. That frees up a lot
Speaker 6: of working capital to be able to invest and redeploy
Speaker 6: back into the business. But it also makes sure that
Speaker 6: we can change much more quickly to changing demand around us.
Speaker 6: So our pricing has been stabilized, and I think that's
Speaker 6: given us a little bit more comfort to invest a
Speaker 6: little bit more than what we have historically, but still
Speaker 6: making sure that we're very disciplined with our capital allocation
Speaker 6: because we still have opportunities to pay down debt and
Speaker 6: also return capital to shareholders. So it's that balanced approach
Speaker 6: that I think has really paved the way for our success.
Speaker 5: Paul, you and your colleagues in the industry recently had
Speaker 5: a big win in Washington, a little of reprieve when
Speaker 5: it comes to the arrangement on the timeline for the
Speaker 5: tariff costs for imported auto parts. What else are you
Speaker 5: asking in terms of terrorfully from Washington?
Speaker 6: Well, you know, I think I want to praise the
Speaker 6: administration for really listening to the concerns of the industry
Speaker 6: and making sure that they're helping us to be positioned
Speaker 6: to be really successful as one of the largest US
Speaker 6: industrial producers that are out there. And the announcements that
Speaker 6: were made Friday essentially take what had already been done
Speaker 6: by the administration in the spring and expands it a
Speaker 6: little bit to be able to use those MSRP offsets
Speaker 6: on a wider variety of parts that we're bringing into
Speaker 6: the country. And as a result of that, we were
Speaker 6: able to lower our total tariff forecast for the year
Speaker 6: by about half a billion dollars from where we started
Speaker 6: the year. And I think it's that proactive partnership in
Speaker 6: terms of really making sure that we can remain competitive
Speaker 6: and help to drive more investment into the US, which
Speaker 6: we've done.
Speaker 5: Do you expect more reprieves, especially as the US goes
Speaker 5: into negotiations next year with Mexico and Canada.
Speaker 6: Well, I think what we're looking for is a little
Speaker 6: bit of stability. Obviously, this year has been a bit
Speaker 6: of a transition year for US. The handshake deal that
Speaker 6: we have with Korea. We're really eager to get that finalized.
Speaker 6: We do have some production of some of our lower
Speaker 6: cost models in Korea that help with some of the
Speaker 6: affordability concerns of our consumers here in the US, but
Speaker 6: also obviously Mexico and Canada are going to be really
Speaker 6: important to us. But as we look at those deals
Speaker 6: being finalized and we start to look into twenty twenty six,
Speaker 6: we think that there's actually an opportunity for us to
Speaker 6: do better in twenty twenty six and we've done in
Speaker 6: twenty twenty five and start to work our way back
Speaker 6: up to those eight to ten percent targeted margins that
Speaker 6: we set for ourselves before the tariffs were put in place.
Speaker 7: Well, just find me. Can we stay on Ja and
Speaker 7: finish on China?
Speaker 4: Pull?
Speaker 2: For a long time we've said on this program, this
Speaker 2: must be the most competitive market on the planet in
Speaker 2: any industry. How difficult is it to operate in that
Speaker 2: country right now? And how much hard is it going
Speaker 2: to get in the future for you as sort of
Speaker 2: make us like yourself.
Speaker 6: You know, about a year ago, Jonathan, we undertook a
Speaker 6: pretty ambitious restructuring program in China with the realization that
Speaker 6: you know, we were probably not going to be as
Speaker 6: big in China as we have been historically going forward
Speaker 6: with the amount of just tremendous competition that's in the
Speaker 6: country going forward. But you know, together with our partners,
Speaker 6: we were able to restructure that business and we've been
Speaker 6: profitable every quarter this year and look to be able
Speaker 6: to sustain that. So it's really about making sure that
Speaker 6: we're right size for where we are. We've got great
Speaker 6: products over there, we've got a long legacy, and we've
Speaker 6: got a good partnership that I think has really paved
Speaker 6: the way. And with that work that the team did
Speaker 6: in China, really proud of what they accomplished and think
Speaker 6: we can be sustainable there.
Speaker 2: Stay with us Multplomberg surveillance coming up after this, but
Speaker 2: it's around a table. Monica Querra of Moreke and Stanley Monica,
Speaker 2: good Mornic, good morning. China is flexed and is flexed,
Speaker 2: and the whole world has listened and arguably maybe even
Speaker 2: brought the likes of Australia and America closer together. Was
Speaker 2: that a strategic mistake going to get to negotiations like
Speaker 2: to this month.
Speaker 8: I think what's interesting about this deal is that China's
Speaker 8: response was actually constructive on paper, right. They were actually
Speaker 8: positive saying, you know, yeah, the join the party on
Speaker 8: on rare Earth. That was really surprising to me. That
Speaker 8: tells me that they're not worried that takes. It's going
Speaker 8: to take at least five to seven years, maybe longer
Speaker 8: to have this whole initiative ramp up. A lot can
Speaker 8: change in that time. Doesn't mean that this isn't going
Speaker 8: to be a positive for the US. I think more,
Speaker 8: you know, players at the table is ultimately long term
Speaker 8: of benefit. But this isn't a zero, you know, end
Speaker 8: game year.
Speaker 5: So going into this meeting, it sounds like do you
Speaker 5: think China has.
Speaker 8: To leverage I would say that both parties right each
Speaker 8: other when we're thinking about our combined economies. They don't
Speaker 8: want to one hundred percent tariff on all of their goods.
Speaker 8: That's an issue for them, but they don't really need
Speaker 8: to worry about this move on rar Earth. I think
Speaker 8: that they're going to be focusing on the other components.
Speaker 4: China is still.
Speaker 8: In charge of ninety percent or more right of that market,
Speaker 8: so this isn't a now issue. It's going to make
Speaker 8: them have to focus on all these other factors that
Speaker 8: could impact their import export relationship.
Speaker 4: To Jonathan's point, China.
Speaker 5: Though, flexing its muscles on rare earths, is it giving
Speaker 5: the Trump administration an excuse to continue making these deals
Speaker 5: where they take outright equity stakes in mining companies.
Speaker 8: I'm not going to speak to that right to that piece.
Speaker 8: I think you know, we were all surprised by the
Speaker 8: other outright stakes in US companies. Now, as far as
Speaker 8: the mining company component, we're going to continue to see
Speaker 8: foreign direct investment right directed out of the US in
Speaker 8: order to make these deals happen. What's going to be
Speaker 8: interesting is as we build out our relationship with Australia
Speaker 8: and China, it's like, where do we land on that
Speaker 8: on that final tariff number? And I think that again,
Speaker 8: when we go back to actually the beginning of the year,
Speaker 8: that you could see something that's in that thirty to
Speaker 8: forty percent range.
Speaker 4: If we're going to go back to those campaign promises.
Speaker 5: Do you think that's where we end to China, say
Speaker 5: twenty twenty six, we're kind of there now on some product, on.
Speaker 8: Some products, I think you know, you could see an
Speaker 8: increase on those Section three oh one tariffs. You could
Speaker 8: see more on you know, Section two thirty two The
Speaker 8: other piece here, right that we have to really appreciate
Speaker 8: is the US's reliance on that tariff revenue from a
Speaker 8: fiscal policy perspective, and the fact that we're in the
Speaker 8: middle of trying to even determine if we can have
Speaker 8: the IEPA tariffs in place, and once we get that,
Speaker 8: it's going to be that patchwork on Section three oh one,
Speaker 8: Section two thirty two and others to try to make
Speaker 8: US hold from a fiscal policy perspective. So I would
Speaker 8: say from China's lens, yes, maybe they have. They definitely
Speaker 8: have the advantage on rare earth. Is there some at
Speaker 8: stake for them big time right when we're thinking about
Speaker 8: that relationship, But the US also has to think about
Speaker 8: their fiscal policy future and trying to find that sweet spot.
Speaker 1: So given that concern and that hang up and that
Speaker 1: frankly support to the debt market, how much of a
Speaker 1: risk case is it It's Supreme Court over rules the
Speaker 1: tariffs that have been put on and forces the administration
Speaker 1: to scramble and cobble together another sort of regime of
Speaker 1: tariffs to plug that fiscal gap.
Speaker 4: Well, they're already working on it.
Speaker 8: So for example, Section two thirty two teriffs, you have
Speaker 8: to have studies put in place. Those prior to the
Speaker 8: shutdown were in the works, and so I think we
Speaker 8: need to get through this shutdown period in order to
Speaker 8: see some of those puzzle pieces come into play. I
Speaker 8: think markets are right to assume that there will be
Speaker 8: some terraff for revenue coming in at the end of
Speaker 8: the day. It's just how much. And that's going to
Speaker 8: be the big question. If you get a negative ruling,
Speaker 8: there will likely be a market response, right, that's natural.
Speaker 8: That's going to be a normal course of action, but
Speaker 8: soon to be backfilled with all those other tariff pieces
Speaker 8: that they've been working on heavily.
Speaker 1: We got GM earnings earlier this morning, and it showed
Speaker 1: that the tariff mitigation plans have been working and have
Speaker 1: offset a great deal of any extra cost. In general,
Speaker 1: earnings have been pretty positive across the board. Is the
Speaker 1: takeaway that the tariffs are manageable and that frankly, companies
Speaker 1: are adjusting and adapting, and it wasn't a big as big.
Speaker 3: Of a hit.
Speaker 1: Even if the tariffs go in and remain as such,
Speaker 1: it's not as big of a hit for the underlying
Speaker 1: profitability momentum of the United States is expected earlier this year.
Speaker 8: I think that the full pull through right of impact
Speaker 8: of tariffs hasn't been seen yet. So while I think
Speaker 8: that the GM reporting is a positive sign that we're
Speaker 8: finding a sweet spot here, one of the key things
Speaker 8: we have to focus on is this patchwork component of
Speaker 8: tariffs and what that's going to mean for the consumer
Speaker 8: in other areas. So while they might have found that
Speaker 8: sweet spot with GM and the auto industry, can they
Speaker 8: do it across the board When we're thinking about all
Speaker 8: goods and services that's to be seen, and you know,
Speaker 8: we'll get more information in November.
Speaker 2: What channel are you in a team focused on prices
Speaker 2: or through the labor market cost cuts?
Speaker 8: We're focusing on labor market right now, especially as it
Speaker 8: relates to the shutdown, because this is a really interesting period. Typically,
Speaker 8: when you have a shutdown, people get laid off and
Speaker 8: then they get brought back, and so that furlough period
Speaker 8: essentially get made a whole doesn't have a major.
Speaker 4: Impact long term.
Speaker 8: Now this is different because we don't know how many
Speaker 8: employees are actually going to be brought back, and so
Speaker 8: that could have an additional drag, especially when we're thinking
Speaker 8: about those inflationary factors.
Speaker 7: Stay with us.
Speaker 2: More Bloomberg surveillance coming up after this trader is locking
Speaker 2: in beds. The fat continues. It's easing cycle at next
Speaker 2: week's rate decision. El Davis OFBIMO seeing an increasing chance
Speaker 2: of a fifty basis point rac in December, saying the
Speaker 2: opackness and lack of transparency in private credit could be
Speaker 2: used to accelerate pieces. Oh, joined just now for more.
Speaker 2: Welcome to the program, buddy, So let's skip off toe.
Speaker 2: That's done, dusted. What's on the table for December?
Speaker 9: Well, December, our base case is still twenty five basis points.
Speaker 9: We just see the chance of a fifty has increased dramatically.
Speaker 9: And the reason why it's increased dramatically is because we've
Speaker 9: moved our possible terminal rate. We saw terminal around three percent,
Speaker 9: slightly higher than the market, to two fifty. And the
Speaker 9: reason why we see we've lowered it so dramatically is
Speaker 9: because of you know, your tricolor, your true rant. Basically,
Speaker 9: private credit in general, we believe that the private credit
Speaker 9: where the opaqueness comes in from, and the ownership of it,
Speaker 9: it's usually real money, pension plans and light so it's
Speaker 9: going to be a slow, sleeping, seeping credit move wider
Speaker 9: like things of wider. So it's binary whether they go fifty,
Speaker 9: but we see an increasing chance of fifty.
Speaker 2: Do you believe them based on the credit risk that
Speaker 2: you describe. Do you think it could lead to a
Speaker 2: broader tightening of financial conditions temporarily?
Speaker 9: Yes, we do believe it can. We don't believe it's systemic.
Speaker 9: And the reason why we don't believe it's systemic is,
Speaker 9: as I said, most of the holders of private credit
Speaker 9: are real money, so they could take the losses liabilities.
Speaker 9: They still have the liabilities to deal with, so it
Speaker 9: does have impact on the economy, but they could take
Speaker 9: the losses. Having said that, why we see it as
Speaker 9: a possible increasing chance of fifty is it basically took
Speaker 9: the safety off the gun of fifty eases. And the
Speaker 9: thing about fifties is central banks just don't do one
Speaker 9: fifties Otherwise they wouldn't do it. So that's why we
Speaker 9: lowered our expectation per terminal to two fifty by the
Speaker 9: end of twenty twenty six.
Speaker 1: So I hate talking about cockroaches this early in the morning,
Speaker 1: but there is sort of this irony that the reason
Speaker 1: why there are these fears of credit problems is because
Speaker 1: of the prolific FED policy that has enabled this, and
Speaker 1: the fact that monetary conditions used to be a lot
Speaker 1: lower to allow a lot of credit creation that may
Speaker 1: have overlooked a number of different underwriting standards. I'm just
Speaker 1: wondering if there's a bit of moral hazard here, the
Speaker 1: idea the economy isn't cracking and that the FED could
Speaker 1: respond to concerns in credit that we're done in pretty
Speaker 1: easy financing conditions.
Speaker 3: Yeah, we believe.
Speaker 9: I don't know if i'd use the word moral hazard,
Speaker 9: but there's definitely inflation hazard risk because you know, it
Speaker 9: has in our growth despite what's going on in credit.
Speaker 9: Our growth expectations have not changed for twenty twenty six,
Speaker 9: and it's because you know, big beautiful bill everything people
Speaker 9: are hearing, and we think it's very supportive of growth
Speaker 9: and growth will still be good. So then you're going
Speaker 9: to be in a very easy financial conditions market and
Speaker 9: we think there's a big risk for inflation, but the
Speaker 9: market's not focused on that. We're not focused on that
Speaker 9: right now. We think that's a late twenty twenty six story.
Speaker 9: One of the interesting things about inflation though, we do
Speaker 9: get a print Friday, and if we do get a
Speaker 9: higher than expected print, the market, you know, credit will widen,
Speaker 9: duration will go higher. We think that's temporary. We would
Speaker 9: use that as an opportunity to go longer duration and
Speaker 9: to go longer credit because we think the fifty base
Speaker 9: point eases are very much on the table.
Speaker 1: So if inflation is still a concern EARL, how do
Speaker 1: you get conviction to go into long term rates on
Speaker 1: FED cuts that affect the front end of the yield curve.
Speaker 9: Yeah, it's very easy. As I said, you know, I've
Speaker 9: been in this market for thirty years, and one of
Speaker 9: the things what the market is, it only focuses on
Speaker 9: one thing at a time, and right now inflation's not
Speaker 9: the focus. So it's determining what is the catalyst to
Speaker 9: get inflation back on the radar. And there's basically two catalysts.
Speaker 9: One is employment, Employment starts improving. We don't expect to
Speaker 9: see that until twenty twenty six, and you know there's
Speaker 9: no data or Tier one data coming out unemployment. And
Speaker 9: the second thing is geopolitical And what I mean geopolitical
Speaker 9: is an oil price spike that will see coming and
Speaker 9: we'll be able to adjust positions accordingly. And the reason
Speaker 9: why I say we'll be able to adjust positions accordingly.
Speaker 9: In a higher yield bear market, you don't get you
Speaker 9: yields higher by two or three or four or five
Speaker 9: basis points a day. You get yields hired by fifteen
Speaker 9: or twenty. Once you start getting a sense of that
Speaker 9: with a catalyst either being oil or employment, when that
Speaker 9: starts coming out, that's when you adjust duration to reflect that.
Speaker 9: Right now, it's an easing environment. There's no catalyst for
Speaker 9: that to turn, and our terminal, as I said before,
Speaker 9: has gone lower, which changes our view integration right now.
Speaker 5: Oh well, the government shutdown force the market just to
Speaker 5: focus on inflation.
Speaker 4: That's the data we're going to get.
Speaker 5: And what you hear from Washington is that they're expecting
Speaker 5: a prolonged shutdown, even potentially having congressmen and women come
Speaker 5: back to extend the date on the continuing Resolution because
Speaker 5: they're hunkering down for a long shutdown.
Speaker 9: Yeah, the market will focus on I think that's fair,
Speaker 9: but it won't be persistently focused on that because you'll
Speaker 9: get central bank speak once they're out of the blackout
Speaker 9: period or at the FMC meeting, and you'll get you know,
Speaker 9: people focusing back on employment, you know, and that's why
Speaker 9: we see it as a buying opportunity because that focus
Speaker 9: will be very short lived, very temporary. So so yes,
Speaker 9: it we'll focus on inflation, but you know, everyone's made
Speaker 9: clear that employment is the thing that the central bankers
Speaker 9: are looking at.
Speaker 7: Oh Davis, could I say one more thing?
Speaker 3: It's one more.
Speaker 7: Twenty seconds, so you can absolutely.
Speaker 9: Gold blue Jay's goal.
Speaker 8: NUS.
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