Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul Swinge. You,
Speaker 1: along with my co host Lisa Brahma wits each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: Podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. March nine will mark the tenth
Speaker 1: anniversary of the market bottom during the global financial crisis.
Speaker 1: On that day, the intra day low and the SMP
Speaker 1: five hundred touch six hundred and sixties six. Since then,
Speaker 1: the market is up over three So to give us
Speaker 1: a sense of kind of what has been driving the
Speaker 1: market and what to look forward to going forward, we
Speaker 1: welcome to Charlie bobrinsko A. Charlie's a vice chairman ahead
Speaker 1: of of the investment group at Ariel Investments with over
Speaker 1: close to fourteen billion dollars under management uh arials based
Speaker 1: in Chicago, but Charlie joins us here in our Bloomberg
Speaker 1: Interactive Broker's studio. Charlie, welcome to our studios. What looking back,
Speaker 1: what were some all the lessons that you guys at Ariel,
Speaker 1: you folks at Ariel, take from the financial crisis and
Speaker 1: then what's happened since over the last ten years. Yeah,
Speaker 1: some of its relearning old lessons. The biggest one is
Speaker 1: that you have to be greedy when others are fearful.
Speaker 1: And people were very fearful in two thousand and nine,
Speaker 1: and it was the best time to be a buyer,
Speaker 1: but boy didn't feel like it at the time. People
Speaker 1: felt great about stocks in two thousand and one, and
Speaker 1: it was a terrible time to invest in stocks. So
Speaker 1: by when others are selling, sell when others are buying,
Speaker 1: be greedy when those are fearful. Those are the lessons
Speaker 1: we relearned so and right now unfortunately possibly for investors, investors,
Speaker 1: for for those who are seeking those values, retail investors
Speaker 1: don't seem either particularly greedy or particularly fearful. They just
Speaker 1: kind of are following what's going on, and they're being
Speaker 1: almost dare I say it, prudent. I'm just wondering, from
Speaker 1: your perspective, is there alpha left? Is there a place
Speaker 1: for an active manager to really generate significant returns? So
Speaker 1: when we make presentations to investment committees at institutional investors,
Speaker 1: they're still pretty nervous. They keep asking questions about when
Speaker 1: is this going to end? Hasn't this rally going on
Speaker 1: too long? We're gonna have a recession here any day.
Speaker 1: There's been a shift to UM fixed income ld I
Speaker 1: investing at pension plans. We think the institutional investor is
Speaker 1: still pretty nervous. A lot of questions we get about
Speaker 1: our earnings recession coming the first two quarters, we don't
Speaker 1: see it. So I'm gonna just say that the market
Speaker 1: in general is still pretty nervous. So, Charlie, it's interesting
Speaker 1: because the markets up. The SMP is up over eleven
Speaker 1: percent this year, and one of the stats that that
Speaker 1: really caught my eye is just that this this round
Speaker 1: trip we've had since early December, that thirty seven percent
Speaker 1: move up roughly in SMP from the So when you
Speaker 1: think about that, one could argue that, gee, maybe today's
Speaker 1: now and now's the time to sell that kind of
Speaker 1: made eleven percent. Isn't that good enough? And what's your
Speaker 1: view for the remainder of this year? For example? Yeah,
Speaker 1: so are the flagship fund of arial is the aerial fund,
Speaker 1: which is actually up eighteen percent when the SMP was
Speaker 1: up eleven on Tuesday, and um, you know, I will
Speaker 1: say it was dirt cheap after the drop last quarter.
Speaker 1: At the beginning of the year we were at thirteen
Speaker 1: times forward earnings. We're not at dirt cheap anymore. We're
Speaker 1: probably close to fair value, but there are still pockets
Speaker 1: of cheapness and there's pockets of overvalued. We think there's
Speaker 1: still a safety bid of stable stocks are considered stable stocks, Utilities,
Speaker 1: high paying UM consumers, staples are still overpriced. What's not
Speaker 1: expensive are anything that's considered cyclical. You still have a
Speaker 1: lot of people thinking and recessions coming that global growth
Speaker 1: is going to close, is going to slow down. So
Speaker 1: we love the alternative asset managers KKR and Blackstone, which
Speaker 1: are considered high beta and cyclical, and they're very cheap
Speaker 1: right now, as are a lot of industrials. So I'm
Speaker 1: looking right now at SP five hundred, that's up more
Speaker 1: than eleven year to date including reinvested dividends. How much
Speaker 1: further does it have to go? What's gonna be the
Speaker 1: full year return? So we think neither we nor anybody
Speaker 1: else can have a good prediction on that. UM. We
Speaker 1: can at any given time give you a view on
Speaker 1: relati of value. But we don't think anybody's any good
Speaker 1: at at predicting the short term. We think of frankly,
Speaker 1: the secret to investing is focusing on the long term
Speaker 1: and not spending too much time worrying about the short term. However,
Speaker 1: at certain times, however, here is an exact number for
Speaker 1: the but it is actually true that that market multiples
Speaker 1: are a pretty good predictor of returns. And so when
Speaker 1: you had at the beginning of the year um our
Speaker 1: value stocks at around thirteen times, that was cheap and
Speaker 1: low p s do tend to produce high returns even
Speaker 1: in the short term. There's a great statistic that when
Speaker 1: the pe ratio drops by in the market, it's often
Speaker 1: a very good period of time to invest for even
Speaker 1: the next twelve months. Does Aerial invest all on I
Speaker 1: P O S uh Not usually UM, And the reason
Speaker 1: is because we want to UM investing companies that have
Speaker 1: a proven sustainable competitive advantage. UH. We're value investors, so
Speaker 1: we look at earnings. A lot of the companies are
Speaker 1: gonna becoming public this year have no earnings. People are
Speaker 1: talking about multiples of sales, So we would be very
Speaker 1: cautious on some of the valuations that we're seeing for
Speaker 1: companies that are coming. Charlie, why do you feel about concentration,
Speaker 1: because I've been hearing about more funds that are going
Speaker 1: in to say fifteen names, and that's it. Yeah, we're
Speaker 1: very concentrated. We believe in focus. Uh. We have in
Speaker 1: the Aerial Fund of forty stocks. Buffett talks about why
Speaker 1: it's so much better to invest in your top twenty
Speaker 1: ideas rather than putting money into your thirties best idea.
Speaker 1: We think it's if you're really diversified with a hundred stocks,
Speaker 1: very hard to beat the indexes after fees. So we
Speaker 1: believe in focus, you can know those names better. Uh. Frankly,
Speaker 1: there's stocks like KKR that are very cheap, and we'll
Speaker 1: put a lot of money into KR five percent of
Speaker 1: a position. When did you start that bet? In two
Speaker 1: thousand and thirteen when the US government downgraded Uh? Uh.
Speaker 1: When S ANDP downgraded the U S government from triple A,
Speaker 1: everybody thought the high yield market was going to close
Speaker 1: and kick Hare's stock went from eighteen to twelve, and
Speaker 1: it became a wonderful opportunity because of the two and
Speaker 1: twenty didn't go away. Um, but the stock got reduced
Speaker 1: in price by it's gone now from twelve to UH three.
Speaker 1: And then one of the reasons was it was a
Speaker 1: partnership that index funds can't buy and kk are converted
Speaker 1: into a sea corps and now everybody can buy them.
Speaker 1: Vanguard just bought eight percent of the company in the
Speaker 1: last quarter. Yeah, and I'm looking at the shares right now.
Speaker 1: KKR shares have risen more than sixty since March. Charlie Bobrinskoy,
Speaker 1: thank you so much for being with us a vice
Speaker 1: chair and head of the investment group and portfolio manager
Speaker 1: at Aerial Investments, which is in New York City, to
Speaker 1: celebrate the ten year anniversary of the financial crisis and
Speaker 1: rather celebrate what's after the financial crisis and the crisis itself.
Speaker 1: It wasn't so long ago that things were starting to
Speaker 1: look up a little bit for General Electric. There was
Speaker 1: a sense that there was going to be a restructuring,
Speaker 1: a path forward. What happened ge the shares having it's
Speaker 1: their biggest two day decline right now since November, in
Speaker 1: the red by more than four percent today. Karen you
Speaker 1: Blhart of Bloomberg Intelligence joining us here in our Interactive
Speaker 1: Broker Studios Karen covers industrials here. What's going on now? Uh, well,
Speaker 1: you know, we've had a lack of disclosure on so
Speaker 1: it has been anybody's guests. We've had no guidance for
Speaker 1: over nine months and we are a long awaiting the
Speaker 1: fourteenth where they would give us twenty nineteen. And yesterday
Speaker 1: Cult gave a little preview of what they're going to
Speaker 1: announce next week and said that negative, that cash flow,
Speaker 1: which was four point eight billion positive this year, was
Speaker 1: going to be in the negative column next year. And
Speaker 1: it was a total surprise. So what's driving this negative?
Speaker 1: Surprising casual? Which of the remaining businesses? I know, I
Speaker 1: know they've sold off a lot of businesses. They've really
Speaker 1: focused what's causing the problems now, good old power. But
Speaker 1: in addition to that, and this is one of the
Speaker 1: problems with the last year, they apparently got a billion
Speaker 1: plus in pre payments from their little renewable business, okay,
Speaker 1: which they didn't mention when cash flow was better than expected. Right,
Speaker 1: this year they have to start delivering that stuff. That business,
Speaker 1: that little tiny business is going to shift from a
Speaker 1: billion positive to probably you know, I don't know up
Speaker 1: to a billion negatives, So that's two billion of the shortfall.
Speaker 1: Why didn't they tell us there was a one time
Speaker 1: last year? But this, but this raises another question. Right,
Speaker 1: one sort of hallmark of general Electrics problems has been
Speaker 1: I don't know if accounting issues is sort of a
Speaker 1: strong way of putting it, but the inaccurate accounting statements
Speaker 1: or statements that have not fully disclosed the depth of
Speaker 1: the problems at the organization for a variety of reasons.
Speaker 1: Does this just sort of confirmed that nothing on that
Speaker 1: front has dramatically changed and that these surprises will keep coming. Well,
Speaker 1: that that is part of it. People are hanging their
Speaker 1: hat on you know, this is a this is a
Speaker 1: you know, an honest guy, a really good operator. He's
Speaker 1: gonna he's gonna, you know, give us, you know, the details,
Speaker 1: and uh, this was like dropping a bomb. And and
Speaker 1: but the second one is power. Power. You know it's
Speaker 1: gonna it's taking him longer to get his arms around it.
Speaker 1: I don't have any doubt that he will. But Power
Speaker 1: is going to be worse this year. And again some
Speaker 1: of that could have been disclosed. These are very long
Speaker 1: term contracts. They did very bad contracts over the last
Speaker 1: two years just to get orders on the books, and
Speaker 1: guess what now they've got to ship them and they're
Speaker 1: shipping very probably some some deals at losses and that's
Speaker 1: going to be a multi year workout, you know, kind
Speaker 1: of like an engineering construction company that gets a bad
Speaker 1: contract and takes years to work through the backlog. Right. Um,
Speaker 1: but then also, um, you know, the cost structure is
Speaker 1: not anywhere near in line with where revenues are today,
Speaker 1: and that's ongoing. He laid they laid off twenty four
Speaker 1: thousand people in that division a loan last year. They've
Speaker 1: cut a number of plants. It's not enough. So that's
Speaker 1: what he's telling us. They have to do more. Okay,
Speaker 1: so let's now they've they've done a lot in terms
Speaker 1: of the the M and A, the restructuring in the company.
Speaker 1: Do you think that they are done with that in
Speaker 1: terms of selling what I guess people would call non
Speaker 1: core assets. Are the assets that g has today is
Speaker 1: that it now they still have about fourteen billion in
Speaker 1: stock ownership of Baker Hughes that that business is already offline,
Speaker 1: it's it's being run independently, but they have a fourteen
Speaker 1: billion dollar ownership there. They have about another four billion
Speaker 1: that they can get out of the web tech business
Speaker 1: that they sold um, and then it's going to be
Speaker 1: smaller units I think from here. But even in the
Speaker 1: power division there's two pieces now that the non gas piece.
Speaker 1: There's stuff in there that they can sell um. But
Speaker 1: I think the big stuff is probably behind us. So alright,
Speaker 1: So of course, I'm sorry. I am very focused on
Speaker 1: the debt side of this, just because that is the
Speaker 1: nature of my d n A. That is I'm sorry,
Speaker 1: it is who I am. I'm looking right now. General
Speaker 1: Electric perpetual bonds UH five debt is the biggest loser
Speaker 1: among the investment grading universe today. Another decline in price
Speaker 1: that means higher implied borrowing call. How crucial is it
Speaker 1: the General Electric gets its act together and is able
Speaker 1: to give better disclosure and frankly, a better view into
Speaker 1: just how much more can sell in the valuations that
Speaker 1: will be able to achieve in order to avoid paying
Speaker 1: criminally high interest rates are prohibitively high interest rates and
Speaker 1: a potential downgrade. Well, I think they bought some time
Speaker 1: with that twenty billion dollar assets sale that they announced
Speaker 1: last week that will significantly help the debt burden. They're
Speaker 1: not going to get the money until the fourth quarter
Speaker 1: of next year. But uh, you know, there's a good
Speaker 1: shot that the credit agency agencies will say, look, we
Speaker 1: gotta get a lot of cash coming. And um, it's
Speaker 1: the deal with Danaher uh. And I think that really
Speaker 1: brought them time the sales at selling something for three
Speaker 1: billion or five billion or four billion, there was still
Speaker 1: a lot of worry. Um, and now this they got
Speaker 1: a chunk of change coming, which will I think alleviate
Speaker 1: some of that those fairs. The one risk is what
Speaker 1: if some of these these unknown liabilities are much bigger
Speaker 1: than we think. Right. There's a lot of lawsuits out there. Um,
Speaker 1: you know, there's a number, there's a long term healthcare
Speaker 1: insurance thing that do they really have their arms around that?
Speaker 1: So I think they're okay with this big asset sail
Speaker 1: if nothing big hits them, you know, unexpectedly. But there's
Speaker 1: room for that. There's room for the unexpected here. All right.
Speaker 1: Let's lastly, let's talk about the dividend. I'm looking on
Speaker 1: the Bloomberg terminal. Now there's a forty two um ascent
Speaker 1: dividend yielding about three point eight percent. Is that safe? No,
Speaker 1: they cut the dividend um to a penny because so
Speaker 1: so it's um they had and they're saving four billion
Speaker 1: dollars by doing that. Well, actually it's an eight billion
Speaker 1: annual cost that's now uh not like millions. So this
Speaker 1: this is not the GE we grew up with, building, growing,
Speaker 1: buying dividends for widows and orphans. That's that those days
Speaker 1: are gone, right. You know, he's said down the road
Speaker 1: he wants to be two and a half times leverage
Speaker 1: and and and a competitive dividend. But that's really quite
Speaker 1: a bit down the road. Count double hard. Thank you
Speaker 1: so much, uh, Karen Uberhart, senior industrial analysts been covering
Speaker 1: GE forever, not the age you She's our our best
Speaker 1: in Bloomberg Intelligence, so thanks so much. As usual, there
Speaker 1: is a lot of news in the healthcare space. First,
Speaker 1: we have the announcement that the FDA has approved Johnson
Speaker 1: and Johnson nasal spray that works to I guess alleviate
Speaker 1: symptoms of depression. We also have news that of the
Speaker 1: sudden resignation of the Food and Drug Administration's Commissioner, Scott
Speaker 1: gott Leaps. Help us break down all that's going on
Speaker 1: in healthcare, We bringing our friend, Max Nis and Max's biotech,
Speaker 1: pharma and healthcare columnist for Bloomberg Opinion. He joins us
Speaker 1: here in our Bloomberg eleven three year studios. Max, welcome
Speaker 1: once again. Uh this Johnson and Johnson News. The story
Speaker 1: seems like a big deal, is it? It definitely is.
Speaker 1: So it's the first kind of real novel depression medicine
Speaker 1: in more than a decade, and it's the first one,
Speaker 1: you know, in an even longer time that has kind
Speaker 1: of a genuinely different way of working on the brain.
Speaker 1: And then kind of the third differentiation factors that it's
Speaker 1: it's fast acting. What we have generally takes you know,
Speaker 1: weeks to kick in. You have to build kind of
Speaker 1: a concentration up over time. So this has the potential
Speaker 1: be used in a lot of interesting different ways for
Speaker 1: people that are kind of in you know, an acute
Speaker 1: moment of crisis or who just don't respond to existing therapies.
Speaker 1: And that that is a pretty big population. So you
Speaker 1: know what else is fast acting cocaine ventanyl? I mean
Speaker 1: is is this is ketamine? Is this potentially the next
Speaker 1: opioid crisis? So you know, it's it's a it's a
Speaker 1: relative of ketamine and a close one. And I think
Speaker 1: the potential for abuse is something that the FDA definitely
Speaker 1: considered as opposed to you know, whether it's the equivalent
Speaker 1: of just giving someone a party drug that they did
Speaker 1: run kind of you know, randomized you know, late stage trials,
Speaker 1: in control trials in really sick patients and it did
Speaker 1: have an impact. Well flipping on its head, right, have
Speaker 1: there been studies done of people who let's say, uh,
Speaker 1: it took katamine or took other party drugs, took ecstasy,
Speaker 1: and that that actually helped with depression? You know that
Speaker 1: there have been a lot of attempts to to study this,
Speaker 1: but not in kind of the scale and riggor of
Speaker 1: of this trial. And you know, beyond the fact that it,
Speaker 1: you know, has this kind of psychoactive effect that that
Speaker 1: people have chased, uh, there does seem to be some
Speaker 1: kind of you know, scientific evidence that there is an
Speaker 1: effect on the brain that you know, there's there's like
Speaker 1: a medical thesis that they're chasing here for why it
Speaker 1: might help people with depression. It's not let's give people
Speaker 1: a happy drug and let's see if they get happy.
Speaker 1: Known some mats, I know, the antidepressant market in general
Speaker 1: is a monster market. Is there a sense of how
Speaker 1: big this sub part of it is, so that that's
Speaker 1: the big question. You know, treatment resistant population is potentially
Speaker 1: millions of people. The question is how many of them
Speaker 1: are are going to end up getting getting Johnson and
Speaker 1: Johnson drugs. And that's that's a trickier question. This isn't
Speaker 1: you know, you just get a pack of pills and
Speaker 1: take them. You have to go to a licensed office,
Speaker 1: take it, and then sit there for two hours while
Speaker 1: you're monitors for symptoms of association and sedition. Then you're
Speaker 1: not supposed to operate heavy machinery for the rest of it.
Speaker 1: It's gotta find someone to give you a ride, so
Speaker 1: that that's a really hard thing for for people that
Speaker 1: are working to do. And then you know, this isn't
Speaker 1: something that your average psychiatrists is equipped to handle, so
Speaker 1: that that is likely to kind of keep it from
Speaker 1: reaching its full addressable market at least anytime soon. And
Speaker 1: I just want to be very clear. I mean, I've
Speaker 1: sort of been talking about this with a light tone,
Speaker 1: but it's really not frankly underscores how much the epidemic
Speaker 1: of suicides in this country has absolutely been exploding, especially
Speaker 1: among the younger populations. I do want to shift gears
Speaker 1: a little bit to the Food and Drug Administration UH
Speaker 1: or just basically the chief of the US Food and
Speaker 1: Drug Administration, UH, Scott Gottlieb resigned suddenly. It seems like
Speaker 1: there was nothing on toward it and why he resigned.
Speaker 1: There was no kind of push, It was a personal issue.
Speaker 1: How big of a loss is this and how much
Speaker 1: does it affect the industries? Yeah, I think it's pretty significant. Um,
Speaker 1: everyone likes Scott. He he you know that there's even you,
Speaker 1: even even me, Um, you know, obviously there's some such
Speaker 1: people that really like, you know, selling tobacco and vape
Speaker 1: pens less fans because he took kind of an aggressive
Speaker 1: regulatory stance on them. But he was seen as someone
Speaker 1: that that understood the industry, worked really hard and pushed
Speaker 1: on a lot of significant public health issues in a
Speaker 1: way that you hadn't really seen from previous commissioners. It
Speaker 1: can be a quiet job, and you know, it's a
Speaker 1: technical administrative post, but he turned into something that was
Speaker 1: a lot more communicative and and active on the policy front.
Speaker 1: So I think he he will bend, and not just
Speaker 1: by by drug makers who saw him as someone that
Speaker 1: was really pushing to modernize the agency and and make
Speaker 1: it easier for innovative therapies to make it to market,
Speaker 1: but but for further country as a whole. You know, Uh,
Speaker 1: it's really the exception when you have kind of a
Speaker 1: relatively drama free and competent um leader of an agency
Speaker 1: in this day and age of relative to the past.
Speaker 1: So is there any sense of who's going to replace Gottlieb?
Speaker 1: And and and just in general, the big farm and
Speaker 1: all their lobbyists, did they have an influence on who
Speaker 1: gets selected? Um? You know, I imagine we're we're not
Speaker 1: going to get someone that they really hate, just because
Speaker 1: that is a big lobby and and it's one that
Speaker 1: has a lot of influence in Congress. But but there
Speaker 1: is a chance that we could get a left field candidate.
Speaker 1: And I'm just thinking of you know, the people that
Speaker 1: were rumored to be considered alongside Scott Gotlieb. One of
Speaker 1: them was kind of a Peter theel affiliated investor who
Speaker 1: um has some some pretty um out of the mainstream
Speaker 1: I'll save views on on regulation of medicines, which is
Speaker 1: to say that they shouldn't be regulated very much. Uh
Speaker 1: that that's um a position that you might think that
Speaker 1: drug makers are in favor of, but actually would potentially
Speaker 1: be pretty chaotic, so that that's a potential negative. But
Speaker 1: we could just get you know, a pretty mainstream bureaucrat
Speaker 1: as well. It won't be as exciting as Gottlie, but
Speaker 1: probably won't cause any harm, So we'll see. You know,
Speaker 1: you started off talking about this with respect that tobacco
Speaker 1: companies and invaping companies were not that excited about him
Speaker 1: being there and are more excited about him leaving. We
Speaker 1: did see a pop in their shares. Do you expect
Speaker 1: that to last or do you think that any successor
Speaker 1: would would adopt the same kinds of policies. Uh, you know,
Speaker 1: I I wouldn't be too surprised if they at least
Speaker 1: continue got Leave's efforts. Maybe they won't be as kind
Speaker 1: of publicly energetic about them. Um, but you know, I
Speaker 1: don't think there's much of a push that these these
Speaker 1: companies can make to to kind of combat the general
Speaker 1: rise of of kind of further regulations industries. On the
Speaker 1: public health impact is is pretty obvious. You don't want
Speaker 1: people getting addicted to tobacco or or Nicktine products, one
Speaker 1: wear another and uh, it's the role of the FDA
Speaker 1: and one wear another to to take a role in that.
Speaker 1: So how is the FDA today? Is it generally perceived
Speaker 1: as a good bipartisan view or is it really And
Speaker 1: then then in the lap of big pharma or on consumers,
Speaker 1: where is you have to kind of proceed right now? Uh?
Speaker 1: You know, I think the god Leave FDA at least
Speaker 1: was was kind of respected to a certain extent by
Speaker 1: by people on both sides of the aisle, which is
Speaker 1: an achievement in itself. I think you'll find people that
Speaker 1: that do feel that it tends to lean too much
Speaker 1: in the way of of pharma. And and that was
Speaker 1: a criticism of god lea who who had some industry experience,
Speaker 1: But at the same time he did things that were
Speaker 1: kind of to the detriment of the industry, calling people
Speaker 1: out for kind of abuses of the generic approval system UM,
Speaker 1: for pricing things like that and UM. But on the
Speaker 1: other hand, you have people that want to push for
Speaker 1: the FT two more of an active role. Sulie Max,
Speaker 1: he said, thank you so much for being with us.
Speaker 1: Max Neson Biotech Fireman, healthcare columnist with Bloomberg Opinion. We
Speaker 1: always value your perspective. Good morning. Well it, as Lisa
Speaker 1: said earlier, the market seems to be discounting that the
Speaker 1: Fed is done raising rates, at least for the New
Speaker 1: York term. But there is an interesting column out this
Speaker 1: morning by former New York Fed President Bill Dudley that said,
Speaker 1: don't assume that there may be room for the Fed
Speaker 1: to perhaps even raise rates at some point later this year.
Speaker 1: Help us dig into this issue and outlooks for rates.
Speaker 1: We bring in Carl Ricka Donna. Carl's the chief US
Speaker 1: economist for Bloomberg Economics. He joins us live barely in
Speaker 1: the Bloomberg leven three studios here in New York. You're
Speaker 1: gonna take that sitting down very much alive. Just he's
Speaker 1: one floor way and he made it with the second
Speaker 1: of spirit. Thanks Carl. So what do you make, Carl
Speaker 1: of Bill Dudley's column about rates and the outlook for
Speaker 1: nineteen I agree with what the former New York Fed
Speaker 1: president is saying, and we've maintained that view as well. Uh,
Speaker 1: this is a pause, not a peak for interest rates.
Speaker 1: We can look at the you know, the the grand
Speaker 1: scope of history and the economy has never rolled over
Speaker 1: with interest rates as accommodative as they are at the moment.
Speaker 1: And so we look at real GDP growth relative to
Speaker 1: real interest rates, and real interest rates are essentially at zero.
Speaker 1: They have to rise significantly higher, maybe two hundred basis
Speaker 1: points higher, to actually be depressing economic growth. Alright, so
Speaker 1: let's take a little bit more into exactly what Bill
Speaker 1: Dudley said. He said that probably the economy would underperform
Speaker 1: for the first half of this year. He thinks that
Speaker 1: patients indicates the Fed won't be raising rates in the
Speaker 1: first half of ten. However, he expects the economy to
Speaker 1: re accelerate in the second half off and basically prompt
Speaker 1: the Fed to rethink its patience. Do you agree with that?
Speaker 1: I agree with that. And here's the story. So the
Speaker 1: economy grew about break it down. The economy grew about
Speaker 1: three percent last year. That's well above trend growth. And
Speaker 1: when you grow above trend, two things happen. One, the
Speaker 1: unemployment rate moves lower, and two you generate inflation pressure,
Speaker 1: so you get an acceleration and inflation. We saw both
Speaker 1: of those things last year. Uh, the economy is moderating
Speaker 1: this year, so we're going from two point nine or
Speaker 1: three percent growth down to my team is expecting something
Speaker 1: close to two point four percent, still above trend. So
Speaker 1: you get exactly what you got last You're just in
Speaker 1: a slightly smaller dose, and so that the expectation is right.
Speaker 1: The earning season is not looking that great. If you
Speaker 1: talk to our chief equity strategist, Gina Martin Adams, she'll
Speaker 1: say that that we may even be potentially contending with
Speaker 1: an earnings recession, not an economic recession, but an earnings recession,
Speaker 1: or at the very least a soft patch in the
Speaker 1: first part of this year. And so we have this,
Speaker 1: you know, equity market correction in Q four, a soft
Speaker 1: patch for corporate earnings, residual seasonality issues with the GDP numbers,
Speaker 1: where we get a soft print in Q one. Once
Speaker 1: we get to mid year and central bankers sit back
Speaker 1: and assess what's happening in the economy, they're going to
Speaker 1: see that we still have growth that is above trend,
Speaker 1: we have an unemployment rate heading into mid three, territory
Speaker 1: pressures running. It's the hottest of the cycles, and they'll say,
Speaker 1: in that environment, we're not done. We have to keep hiking.
Speaker 1: How surprised will markets be if when the Fed? If
Speaker 1: the Fed hikes again this year, well, the Fed doesn't
Speaker 1: want them to be surprised. So while the Fed kind
Speaker 1: of led the market to this point in terms of
Speaker 1: the rate increases we've seen, the Fed got burned in
Speaker 1: Q four. Uh. This means now the Fed is going
Speaker 1: to follow, not lead the market to interest rate. So
Speaker 1: the Fed is gonna let the market beg for it,
Speaker 1: uh and then be happy to oblige them. And by
Speaker 1: letting the market beg for it, it means that we'll
Speaker 1: see a steepening of the yield curve. The Fed lets
Speaker 1: the market price in more inflation expectations. You see a
Speaker 1: bare steepening of the yield curve, and then the Fed
Speaker 1: steps in and says, we'll help you address the inflation
Speaker 1: problem and layer some rate hikes in. Give us a
Speaker 1: sense of timing here, is this a third quarter type environment?
Speaker 1: Because I think if you look at them, I think
Speaker 1: the market's discounting really nothing for twenty nights, right. The
Speaker 1: market is saying nothing. Economists are saying they're still hikes coming.
Speaker 1: I like the market better than economists, but go ahead,
Speaker 1: that's that's you. But they're gonna beg for it. That's
Speaker 1: what they're going to go on. So the way the
Speaker 1: timing of this works out right, we have to wait
Speaker 1: until we have a sense that we're in the clear
Speaker 1: from this earnings recession, which means probably by the time
Speaker 1: we get the Q two GDP numbers, which would be
Speaker 1: the end of July. Uh, that would be the time
Speaker 1: where you'll start to see both market participants and FED
Speaker 1: policymakers say, Okay, the economy is still running a little hot,
Speaker 1: a little bit of additional accommodation is warranted, and so
Speaker 1: I think we see two hikes in the back half
Speaker 1: of the year, probably at the September meeting, in the
Speaker 1: December meeting. The December is a bolder call, and so
Speaker 1: you know, the risk is not symmetric around that. The
Speaker 1: risk is we would only get one hike this year.
Speaker 1: But we do have the view that you know, we're
Speaker 1: going to be contending with a still robust economic environment
Speaker 1: and the Fed's going to have to do more. They'll
Speaker 1: just speak really fast the meeting to indicate that they're
Speaker 1: not patient any longer. I just have to ask you,
Speaker 1: I just have to ask you, really, in thirty seconds,
Speaker 1: how much of the slowdown that we're saying in the
Speaker 1: first half is due to this trade skirmish that's been
Speaker 1: going on. That's an interesting question. I think second element
Speaker 1: to that, I think it's just a confluence of factors.
Speaker 1: I think we're we're blaming trade too much. Uh, and
Speaker 1: we'll realize that domestic economic fundamentals are still very strong.
Speaker 1: And I keep going back to that unemployment rate generating
Speaker 1: wage pressures that is a backstop to consumer spending, and
Speaker 1: the domestic economic outlook is still very robust. Cacadonna telling
Speaker 1: it like it is here in the Bluebergetter Active Broker Studios.
Speaker 1: Cara Kadona, chief you as economist for Bloomberg Economics, talking
Speaker 1: about that Bill Dudley column really interesting to me. Uh,
Speaker 1: the idea that the market right now has completely written
Speaker 1: off rate hikes and yet we have former Fed officials
Speaker 1: coming out and saying, you guys are being a little premature.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
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Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio