Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. Joining us now is
Speaker 2: Danid Peterson of the Conference Board, alongside Matt Dezock of
Speaker 2: Merrill and Bank of America Private Bank. Dana, can I
Speaker 2: come to you first, please and just get your response
Speaker 2: to jobless claims, the scare of a few weeks ago.
Speaker 2: Is it over?
Speaker 3: Well, we don't really know.
Speaker 4: But the thing is jabas claims are still extremely low,
Speaker 4: and as Lisa said, many companies are not letting their
Speaker 4: people go. They're holding on to their workers, they're hoarding them,
Speaker 4: and so we're probably not going to see much uptick in.
Speaker 3: The unemployment rate going forward.
Speaker 4: Jobs need companies need them, and also they're facing lots
Speaker 4: of people retiring, so I don't really see the labor
Speaker 4: market weakening significantly over the next year.
Speaker 2: Matt, to bring them into the convi sanction. Do you
Speaker 2: share those thoughts? Do you have that constructive view a
Speaker 2: year round?
Speaker 5: We do share those thoughts. On the employment market.
Speaker 6: Corporate health looks very good right now and today that's
Speaker 6: what's going to drive the employer market. How are companies feeling,
Speaker 6: How are they doing? So we do feel very good
Speaker 6: about that. We're not too concerned about it. But the
Speaker 6: idea that rate hikes don't work, the idea that it
Speaker 6: won't slow the economy somewhat, would be a little skeptical
Speaker 6: in those kind of arguments that we're hearing.
Speaker 7: Well, okay, just taking a step back. You are the one,
Speaker 7: and I think I misattributed this earlier saying that the
Speaker 7: FED pretends to be inflation sensitive but is actually employment sensitive.
Speaker 7: You say rate hikes work, it might just take a
Speaker 7: lot longer. Does that preclude the idea of a rate
Speaker 7: cut if they're employment sensitive and inflation is still too high.
Speaker 6: So we do believe our baseline forecast is will get
Speaker 6: one rate cut this year, probably in December. But to
Speaker 6: your point, it will take time to see these rate
Speaker 6: hikes work their way through the economy. John MONTEI policy
Speaker 6: likes like a year to two years tenure just peaked
Speaker 6: at October November of last year. It's about, you know,
Speaker 6: six months ago. FED funds rate just peaked about nine
Speaker 6: months ago, so we're not even in that twelve to
Speaker 6: twenty four month window.
Speaker 5: Come back to us in.
Speaker 6: Early mid late twenty twenty five to see these rate
Speaker 6: hikes work. So we do think we're starting to see
Speaker 6: some of that now, uptaking credit card delinquencies, up take
Speaker 6: and autodelinquencies, some slow down in consumer spending, Retailers that
Speaker 6: are reporting earning seeing a little shift and mix, and
Speaker 6: lower income guys pulling back a little bit. So we
Speaker 6: are starting to see those effects. We believe, we give
Speaker 6: it time, we'll get there.
Speaker 7: So Dana, can you weigh in on just sort of
Speaker 7: the odd discrepancy right now between what Matt was talking about,
Speaker 7: this slow down between the data that shows that jobless
Speaker 7: claims are not picking up and the fact that people
Speaker 7: feel really bad. I mean, do you have a sense
Speaker 7: of whether it will take actually getting laid off for
Speaker 7: them to spending entirely for that to actually crack the
Speaker 7: market in a more material way, or do you think
Speaker 7: that this steady softening will eventually just bring us down
Speaker 7: to that soft landing nirvana.
Speaker 3: Well, consumers have mixed feelings.
Speaker 4: For the most part, they're happy that they're working right now,
Speaker 4: but they are still very upset about inflation, and certainly
Speaker 4: when they look out six months from now, they have
Speaker 4: concerns about their incomes, employment prospects, and also business prospects.
Speaker 4: And so that's why we've seen some weakening in our
Speaker 4: consumer confidence measure. But when it comes to spending, we
Speaker 4: are seeing consumers pull back. Certainly, they're not buying homes,
Speaker 4: and once the FED raise interest rates and mortgage rates
Speaker 4: shot up, the housing market.
Speaker 3: Responded almost immediately.
Speaker 4: We also so that businesses stopped investing because the cost
Speaker 4: of capital was rising. And we see that consumers are
Speaker 4: pulling back on goods, and our consumer confidence survey suggests
Speaker 4: that they will continue to pull back on those big
Speaker 4: ticket items. The big question now is services. Can they
Speaker 4: continue to spend on services? And the thing is that
Speaker 4: right now consumers are run out of that excess saving,
Speaker 4: so a lot of the trips and things that they're
Speaker 4: going on then services they're consuming, they're putting it on
Speaker 4: credit cards, and we know the interest rates are very
Speaker 4: high for credit cards and the debt services rising. So
Speaker 4: I think that this is all part of the plan,
Speaker 4: and that we will continue to see consumer spending slow
Speaker 4: and that we'll probably have.
Speaker 3: A bit of a soft patch this year.
Speaker 4: But as long as consumers are continuing to work, I
Speaker 4: think the FED can continue to focus on inflation.
Speaker 2: I know how well aligned is consumer confidence with see
Speaker 2: business confidence.
Speaker 4: At the moment, well, businesses CEOs are I would say,
Speaker 4: cautiously optimistic. For about a year and a half they
Speaker 4: were very negative, and then in the last two quarters
Speaker 4: it ticked up above our fifty threshold in terms of optimism.
Speaker 4: But still businesses are saying, look, we're not having trouble
Speaker 4: finding qualified workers, we're not laying people off, we're just
Speaker 4: holding onto people.
Speaker 3: But we're not looking to invest much.
Speaker 4: And the thing is that we are still facing high
Speaker 4: costs from labor because they intend to continue to raise
Speaker 4: wages to hold.
Speaker 3: On to their people.
Speaker 4: But still they're very concerned about a number of risks,
Speaker 4: especially the implications of the elections coming up, and also
Speaker 4: a number of geopolitical issues. So I'd say CEOs are
Speaker 4: not as gloomy as they were last year, but they're
Speaker 4: still very cautious.
Speaker 5: Man.
Speaker 2: This is what we're trying to figure out. How the
Speaker 2: dominoes fall from here. We can identify this week some
Speaker 2: of these retailers have lost pricing power. That's clear. The
Speaker 2: CEOs are talking about it. What we're trying to understand
Speaker 2: is what happens next. How do they protect margins? They
Speaker 2: pull back on costs, what can they do? Do they
Speaker 2: lay people off? To Dana's point, do they hold give
Speaker 2: the experience coming down of the pandemic. What do you
Speaker 2: think the ultimate outcome will pay.
Speaker 6: We do think labor hoarding is probably going to continue.
Speaker 6: And again, when we think about this in a larger context,
Speaker 6: this is not pessimistic news.
Speaker 5: This is good news. This is what we want to see.
Speaker 6: We need to slow the economy somewhat to continue to
Speaker 6: bring inflation down. But the big picture inflation was nine percent.
Speaker 6: It's now down to, you know, three and a half percent.
Speaker 6: Core pcees already below three percent. We don't have to
Speaker 6: worry that much about getting them out to that exact
Speaker 6: on the screws two percent PCE number.
Speaker 5: We're in a much better place right now.
Speaker 6: If you look historically at equity market returns, it doesn't
Speaker 6: matter whether you're zero two percent inflation or two to
Speaker 6: four percent, you do just as well, and nominal just
Speaker 6: as well. In real This is a good news. What
Speaker 6: the Fed is doing will eventually work. They can keep
Speaker 6: rates about this level, maybe trim a little bit end
Speaker 6: of the year, and if they do that, we could
Speaker 6: have that mid nineties setup where everyone thought over session
Speaker 6: was happening.
Speaker 5: It didn't happen.
Speaker 6: Credit spreads stayed tight for a while, equity is absolutely
Speaker 6: ripped for the rest of that decade. So the slowdown
Speaker 6: we're seeing is optimistic, warranted, what we want to see,
Speaker 6: what the Fed's trying to encourage.
Speaker 8: So it sounds like you agree with Dana that this
Speaker 8: is just a soft patch, not going to be softer
Speaker 8: for longer. But to John's point, if these companies are
Speaker 8: having to cut costs, you don't think at any point
Speaker 8: that will mean letting off employees.
Speaker 6: Oh No, I absolutely do believe at some point if
Speaker 6: it continues on this trajectory, that's exactly what you see.
Speaker 5: But that is what you expect to see. So it's
Speaker 5: always a question of that starts to happen. What does
Speaker 5: the FED do?
Speaker 6: And as the show Gud said earlier, I believe it
Speaker 6: was and we completely agree, pretends to be super inflation sensitive.
Speaker 6: Now that eighty to nine percent of inflation fight is done,
Speaker 6: they're not. They're employment sensive. So when they start to
Speaker 6: see that more, which we're not yet but we will,
Speaker 6: then they'll adjust tech. Then hopefully they cut December, then
Speaker 6: they'll cut next year. Fine tune, keep the economic expansion going.
Speaker 2: Dan, and let's build on that. How does that influence
Speaker 2: your fed co for this year?
Speaker 4: Well, we have the FED cutting twice this year, probably
Speaker 4: at November, November, December meetings.
Speaker 3: But I have to disagree a little bit.
Speaker 4: I think the FED is still very inflation sensitive and
Speaker 4: they're probably a little less labor market sensitive.
Speaker 3: Why because you know they'll.
Speaker 4: Be okay if the unemployment rate rises a little bit.
Speaker 4: We have it topping out at four point two percent.
Speaker 4: That's extremely low. Most people want to work, will work.
Speaker 4: But the problem is that everyone experiences inflation, and they
Speaker 4: do want to get key and inflation they gauges back
Speaker 4: sustainably to the two percent target.
Speaker 3: Sustainability is important. They don't want to just touch it
Speaker 3: and then move off of it.
Speaker 4: And the thing is that they have to do that
Speaker 4: because of credibility purposes. They see their target is two percent,
Speaker 4: they want to get it there.
Speaker 7: Do you have a response, So.
Speaker 6: As we think about the inflation numbers, and again they're
Speaker 6: going to officially keep their target two percent, we believe that.
Speaker 5: And you'll have to be a math major for this one.
Speaker 6: If your inflation go to nine percent and never let
Speaker 6: it go below two, you're probably not going to average
Speaker 6: two percent. So they're already the facto kind of faded
Speaker 6: in that inflation target a little bit.
Speaker 5: Again, we don't find out to be a tremendous problem.
Speaker 6: Eight percent inflation problem, two to three andred percent inflation
Speaker 6: not a problem.
Speaker 5: Phenomenal GDP not a problem.
Speaker 6: And meanwhile, fixed income valuations are so much better now
Speaker 6: the tenuars round three percent, when seapowers running at nine percent.
Speaker 6: Now we've got the tenurebout four and a half and
Speaker 6: CPI pc below it. These are good valuation fixing investors.
Speaker 2: We'll get to the bone market in just a moment.
Speaker 2: You say, not a problem. What did Governor Walta give
Speaker 2: last month's reay to Saint plus If it's not a problem.
Speaker 6: To be fair, we're trying to be optimistic here with
Speaker 6: the bog gun, trying to be positive. There are problems
Speaker 6: within the inflation data, particularly as we've all talked about
Speaker 6: on the services side, and right now we're getting goods
Speaker 6: deflation or almost no inflation about zero percent. But you
Speaker 6: can't have an average inflation number of zero percent goods
Speaker 6: and four percent services, and we are seeing uptick in services.
Speaker 6: So there are definitely areas that they need to focus
Speaker 6: on a watch, and the fight's not done, but again
Speaker 6: they're much closer done than they have been and some
Speaker 6: fine tuning hopefully gets them there.
Speaker 7: Dan, I want to pick up on something that you said.
Speaker 7: You think that this FED is particularly inflation sensitive and
Speaker 7: less employment sensitive at a time where potentially we were
Speaker 7: speaking with Adam Posen of the Peterson Institute yesterday. He
Speaker 7: was talking about how a policy shift come December or
Speaker 7: January of next year could single handedly mean an increase
Speaker 7: in tariffs or potentially a change the immigration policy. And frankly,
Speaker 7: the extra immigration a lot of people are arguing has
Speaker 7: made put a downward pressure on inflation that otherwise would.
Speaker 3: Be in the system. Do you think that.
Speaker 7: Given potential inflationary policies that would actually put the FED
Speaker 7: in a really awkward position with a labor market seeing
Speaker 7: the weakness that you're expecting while also seeing inflation remains stickier,
Speaker 7: even inflect upward.
Speaker 4: We're already seeing inflationary pressures from policy, certainly industrial policies
Speaker 4: and the trade wars that we experienced back in twenty
Speaker 4: eighteen twenty nineteen that they are still going on. Those
Speaker 4: are all placing upward pressure on inflation.
Speaker 3: And so the FED is this is the new norm.
Speaker 4: The FED is going to have to operate in the
Speaker 4: world that it's in, and.
Speaker 3: As it sees policies.
Speaker 4: Or consumer behavior, or external events like climate events that
Speaker 4: are pushing up insurance costs, whatever it is, the FED
Speaker 4: is going to have to deal with that within the
Speaker 4: bounds of its mandates, right, And so I think that
Speaker 4: for this year, the FED probably will see that's slowing
Speaker 4: in inflation that it wants to see. It'll feel comfortable
Speaker 4: cutting rates one, maybe two times this year. But next
Speaker 4: year's another story, and they're probably going to have to
Speaker 4: take a more gradual approach to cutting interest rates next year.
Speaker 4: And I think where rates will land will be higher
Speaker 4: than what we saw during the period between the Great
Speaker 4: Financial Crisis and the pandemic, both in nominal and real terms.
Speaker 4: I think that's the new reality. Inflation pressures upward. Inflation
Speaker 4: pressures are the new reality that the FED is going
Speaker 4: to have to resist day in and day out, which.
Speaker 7: Matt really points to this reason why maybe people are
Speaker 7: so optimistic about equities right now because that environment is
Speaker 7: supportive of equity valuations if inflation is actually allowing them
Speaker 7: to increase profitability in some other revenues. As an investors
Speaker 7: chief investment officer, do you say it is a safer
Speaker 7: bet to go with equities at this point than certainly
Speaker 7: duration given that type of backdrop.
Speaker 6: We actually don't actually a slightly different view there. We
Speaker 6: do like equity risk here to be fair, where you
Speaker 6: are slightly overweight equities again two, three, four, even five
Speaker 6: percent inflation again, if you can grow your sales at
Speaker 6: that level thatout selling more goods or services, your earnings
Speaker 6: will do fine.
Speaker 5: Great for equities.
Speaker 6: We do want to take a little more macro risk
Speaker 6: in the portfolios who are slightly overoid equities. At the
Speaker 6: same time, if we look at the valuation picture on
Speaker 6: fixed income, you can easily build a diversified investi grade
Speaker 6: portfolio today of over five percent.
Speaker 5: You haven't seen that in twenty years.
Speaker 6: More importantly, in real rate terms two to two and
Speaker 6: a half percent real if we were talking January twenty
Speaker 6: twenty one, it was negative two percent. Right, for the
Speaker 6: privilege of giving your government one hundred dollars, you could
Speaker 6: get eighty dollars a purchasing.
Speaker 5: Power back in ten years. Thanks for that.
Speaker 6: Now you can give the one hundred and you get
Speaker 6: a hundred twenty dollars back in ten years. So again,
Speaker 6: that actually gets a bond guy excited. I know, maybe
Speaker 6: like you know, five percent yields. You know, if you're
Speaker 6: holding for a whole year, you can get half the
Speaker 6: return of a particular tech dot pre market. But for
Speaker 6: a bondfolk, that's actually interesting. And we have to build
Speaker 6: portfolios for right, joking around a little bit, but we
Speaker 6: have to provide for both those for as what happens,
Speaker 6: we don't expect, and we do expect that treasuries, investigraate
Speaker 6: corporates easie workings back. They will provide diversification, maybe a
Speaker 6: little bit in terms of praise for Reid to come down,
Speaker 6: but more importantly by steady reliable, predictable income year in
Speaker 6: a year. That's how they will diverse our portfolios. So
Speaker 6: we're actually slowly long duration.
Speaker 2: At the moment, it doesn't say much to make you
Speaker 2: happy after the previous decade with ray so low and negative.
Speaker 2: Matt's good to see you been too long. Thank you, sir,
Speaker 2: Matt dezoch there of Meryl and Bank of America Private Bank,
Speaker 2: alongside Dana Peterson of the Conference Board in Vidio soaring
Speaker 2: after delivering yet another beaten race. Sarah Hunt of Vampine
Speaker 2: Saxon words right in this margins look quite strong, although
Speaker 2: there will be a point at which the undersupplied market
Speaker 2: becomes less so in other industries, companies do not get
Speaker 2: as much credit when they are over earning. But the
Speaker 2: bloom remains on the rods for Nvidia here Sarah joins us.
Speaker 2: Now for more, Sarah, let's just start with those stat
Speaker 2: of numbers. Once again, the bar gets higher. They keep
Speaker 2: beating it. How impressive was that yesterday afternoon? I think
Speaker 2: it was.
Speaker 1: Pretty impressive, and I think that the concern was that
Speaker 1: there might be some slowdown in the change of you know,
Speaker 1: it's in the rapid change. Higher has been so fast
Speaker 1: that The question is that that slows down to people
Speaker 1: get worried. People are not worried, and I think the
Speaker 1: fact that they're able to absorb those when they have
Speaker 1: something new coming also tells you that people want to
Speaker 1: get into this game, and it doesn't matter if they
Speaker 1: have to wait for something. They'll take what they can
Speaker 1: get right now because they don't want to get left
Speaker 1: behind in their own development. So I think that it
Speaker 1: was a very strong report. It needed to be a
Speaker 1: strong report, like all Q one. The Brocks needed to perform.
Speaker 1: They did, and that is driving right now, which you
Speaker 1: can see as another series of potential all timeimes.
Speaker 2: Today you can see on the screen up seven percent
Speaker 2: in video broad come up to ADMD, up by three
Speaker 2: percent in the pre market as well, Sarah, When you
Speaker 2: go through these names, there's an AI theme. What is
Speaker 2: and what isn't driven by this theme in this equity
Speaker 2: market right now, given you tendencies are up by seven
Speaker 2: to white percent so far this month.
Speaker 1: I think it's a lot of the stock market is
Speaker 1: hanging on not just the idea of AI in and
Speaker 1: of itself, but the productivity gains that it's going to
Speaker 1: bring and the fact that that can help with its
Speaker 1: economic oath, and I think that's been the biggest question
Speaker 1: is what happens coming out of this pandemic and what
Speaker 1: is going to fuel the next leg of growth.
Speaker 3: In the economy.
Speaker 1: And this is at least giving the market a story
Speaker 1: to tell itself whether or not that's going to happen
Speaker 1: in the time frame that people are looking for. You know,
Speaker 1: if someone was talking about how long it takes to
Speaker 1: permit elect company changes, it's enormous. There's a long time
Speaker 1: frame that's going to take. But you've got an infrastructure
Speaker 1: build that's going to go on here. And I think
Speaker 1: right now, as we get more use cases, that seems
Speaker 1: like something that we can continue to think about. If
Speaker 1: it turns out that this doesn't work as well or
Speaker 1: it's not giving that productivity, that'll be a different story.
Speaker 1: But we're not even close to that discernment yet.
Speaker 7: What I find fascinating Sarah and John was alluding to
Speaker 7: this the idea that we talk about the said right
Speaker 7: hiking site that left rates the highest levels in decades,
Speaker 7: and why is this economy so insensitive to that? Will
Speaker 7: you overlay a super cycle that is completely secular, that
Speaker 7: is independent of the macrocycle with respect to Nvidia and
Speaker 7: all of the investments from big tech, how much can that.
Speaker 3: Keep going regardless of.
Speaker 7: What happens in the macroeconomic backdrop, regardless of whether there
Speaker 7: is a downturn in some of the areas that we're
Speaker 7: already seeing softening.
Speaker 1: Well, that's an excellent point, and that's exactly sort of
Speaker 1: when people start talking about is the economy rates sensitive
Speaker 1: the way it used to be in this particular sector,
Speaker 1: It isn't. In fact, higher rates for companies that are
Speaker 1: both cash generative and have a lot of cash sitting
Speaker 1: on their balance sheets is helpful to them because it's
Speaker 1: giving them some return on their cash, where for the
Speaker 1: last decade and a half they were getting nothing. But
Speaker 1: it's these giant cash generating juggernauts that are really fueling
Speaker 1: the spending boom, and that's not going to be effected
Speaker 1: by higher rates. So I think that there is you know,
Speaker 1: how does not come about the AI cycle? I think
Speaker 1: the market would be struggling because the question would be
Speaker 1: what's going to happen to the economy next. This is
Speaker 1: giving people the reason to say there's a lot of
Speaker 1: ways that we can see efficiencies here. Unfortunately, I think
Speaker 1: a lot of those efficiencies are going to end up
Speaker 1: being with less people working. But that's the question as
Speaker 1: we move forward. It's not a question right at this minute.
Speaker 1: Right now, we're building the infrastructure. And if I think
Speaker 1: about the build out for the Internet boom and how
Speaker 1: dark fiber and all these things that were ancillary to
Speaker 1: the Internet growing, You've had a lot of companies that
Speaker 1: were generating no cash. You had a lot of customers
Speaker 1: that needed to be financed. Right now you've got customers
Speaker 1: that don't need any financing. They've got plenty of cash,
Speaker 1: they're willing to spend it. And I think that that's
Speaker 1: it of itself, a cycle that is not necessarily very sensitive.
Speaker 7: We were talking earlier this morning with Duidi Bahugna about
Speaker 7: whether the sixty forty is kind of dead, and I
Speaker 7: would take that a step further and ask a question
Speaker 7: about whether some of these big tech stocks are the
Speaker 7: safety plays at a time where there's more uncertainty on
Speaker 7: the fiscal side, is more uncertainty on some of the
Speaker 7: voluntary policy than there is in just the ability for
Speaker 7: these companies right now to make bank even with their
Speaker 7: cash piles.
Speaker 1: Well, I think that that becomes a question of valuation,
Speaker 1: and there's been a lot of discussions about valuation and
Speaker 1: how valuation in and of itself doesn't stop cycles. There
Speaker 1: is a point at which that there is a higher
Speaker 1: risk to the reward, and I think in some of
Speaker 1: these names, you're starting to get there, just in terms
Speaker 1: of another kind of economic slowdown or some sort of
Speaker 1: hiccup in terms of some of these bottlenecks that we're
Speaker 1: talking about solving on the utility side and elsewhere, if
Speaker 1: you start to see companies having trouble getting data centers
Speaker 1: and getting room and data centers and getting them built,
Speaker 1: which I think that there's a discussion on the edges
Speaker 1: of right now, you could see some timing delays and
Speaker 1: that could put into question the high valuations right now.
Speaker 1: But in terms of the longevity of this cycle right now,
Speaker 1: just from what you're hearing from Nvidia and the discussions
Speaker 1: about what people need and the other companies that are
Speaker 1: trying to get into this, I think you've got a
Speaker 1: runway on the demand side. That's difficult to say there's
Speaker 1: going to be a problem unless.
Speaker 3: They are bottlenecks.
Speaker 1: Sarah.
Speaker 8: When you talk about the potential for AI disrupting the
Speaker 8: label market. John Authors recently wrote about this and talked
Speaker 8: about how Navidia's place is exactly so healthy. This would
Speaker 8: mean taking capital expenditure from other companies. This would potentially
Speaker 8: mean taking jobs away from the American workforce. When does
Speaker 8: that story actually start to bite well?
Speaker 1: I think all of technology has been a continuum of
Speaker 1: finding ways in which to make productivity better, which also
Speaker 1: very often requires letting people go or having less people.
Speaker 1: But I think that you know, man Thing had a
Speaker 1: great decessment yesterday about how annoying chatbots and all the
Speaker 1: other things that we've been looking at as AI have
Speaker 1: been to users, and how that experience is going to
Speaker 1: get better. So some of that's already happened. It's just
Speaker 1: you're going to start to see a better situation in
Speaker 1: places where you've already replaced people with technology. The question
Speaker 1: going forward for AI really is how much more how
Speaker 1: does that broaden out and to the extent that it does,
Speaker 1: how damaging is that to the labor economy? And I
Speaker 1: think that that's a question we don't really have an
Speaker 1: answer to yet.
Speaker 8: Is there a company now that you think could potentially
Speaker 8: get on the AI space that is not and that
Speaker 8: we have yet to see.
Speaker 3: Within the tech.
Speaker 1: World, I think everybody is trying to get into the
Speaker 1: AI world, and the question really is how can they
Speaker 1: use it? And this goes back to the use cases
Speaker 1: and whether or not they generate money. I mean, you've
Speaker 1: seen on the web hosting side, You've seen in Microsoft
Speaker 1: and chat GPT that there's money to be generated here.
Speaker 1: The question is are companies going to find it useful
Speaker 1: and are they going to continue to invest in it?
Speaker 1: And right now the answer is yes. Down the road,
Speaker 1: where does that end, I think every single company, I mean,
Speaker 1: we've already been using AI for the last decade or
Speaker 1: so in different ways. This is just the large language
Speaker 1: models make it an iteration better and makes everybody try
Speaker 1: to get into it in places that they weren't because
Speaker 1: they didn't like the use capers that were there before.
Speaker 1: So I think that there is not anyone who isn't
Speaker 1: going to be working into this space. The question will
Speaker 1: really be who ends up using it better? And I
Speaker 1: don't know the answer to that, and it may very
Speaker 1: well be that some of the old economy stocks start
Speaker 1: to get much better data and use it better. We
Speaker 1: don't know yet, but I think that's the promise and
Speaker 1: that's what people are.
Speaker 2: Expecting, Sarah, just quickly. As something Lisa mentioned a few
Speaker 2: times this week. We've talked about it before, how utilities
Speaker 2: are going to be perform at a down market, and
Speaker 2: we've got an experience of that yesterday that actually how
Speaker 2: lead the losses on the S and P five hundred
Speaker 2: given the way they've been bid up on this theme,
Speaker 2: are they defensive still in the equity market.
Speaker 1: I think it's hard to make the case that they're defensive.
Speaker 1: And as I said, with the utilities especially, you've got
Speaker 1: a lot of issues that go into permitting, you've got
Speaker 1: a lot of issues that go into spending. There's a
Speaker 1: lot of discussion about how we're going to have to
Speaker 1: build out a better grid, and we are that's not
Speaker 1: a question, but the timing is the question, and the
Speaker 1: regulatory backdrop is going to be the question, and how
Speaker 1: fast you can get things done, because there are awful
Speaker 1: lot of projects that people would like to do that
Speaker 1: get hindered with all sorts of nimby issues and everything else.
Speaker 1: So I think that there's a timing issue for that,
Speaker 1: and there's an extent to which those get bid up
Speaker 1: that are also.
Speaker 3: On the yield side.
Speaker 1: You put those two stories together and it makes them
Speaker 1: a bit vulnerable.
Speaker 2: Got it got to catch up as always, So hum
Speaker 2: there of our pint saxon words, full of those strong numbers.
Speaker 2: Once again from that name in Vidia, Augusmaning of Berenberg, writing,
Speaker 2: this may prefer to wait until after the election is
Speaker 2: out of the way. If either side wins a clear victory,
Speaker 2: US fiscal policy may become more expansionary once again, with
Speaker 2: significant new tax cuts from Republicans or further spending increases
Speaker 2: from Democrats. Holger joints around the table howl, good morning
Speaker 2: to see you. Good morning twenty twenty five, said, talk
Speaker 2: to me about the prospect of raat Heights next year.
Speaker 2: Adam Posen making a case yesterday.
Speaker 9: I don't quite believe it, because we rarely get in
Speaker 9: the US of an electric result which is so clear
Speaker 9: cut that one of the two sides could, in terms
Speaker 9: of fiscal policy, where Congress is in control, really do
Speaker 9: something dramatic. We had huge fiscal initiatives in the US
Speaker 9: right after the pandemic when everybody was kind of panicking
Speaker 9: we need to do something big. But now with that
Speaker 9: unual situation over, we will likely be in Congress in
Speaker 9: regardless of the election results, the precise details into the
Speaker 9: kind of usual gridlock where not much happens at That
Speaker 9: means the fiscal impulse, which is currently propping up the
Speaker 9: US economy, will weaken over time, and that argues for
Speaker 9: rate cuts next year rather than rate hikes.
Speaker 2: What kind of budget deficits you expected? We're running deficits
Speaker 2: of something like sixty seven percent with unemployment sound the
Speaker 2: four percent?
Speaker 3: What do you expecting?
Speaker 2: What's your base case?
Speaker 9: That's in a way a separate question. Even with the
Speaker 9: fiscal impulse sort of petering out, the US will likely
Speaker 9: have fiscal deficits in the range of seven six to
Speaker 9: seven percent for quite a while. But this is sort
Speaker 9: of no longer new Yeah, in a way, that's not
Speaker 9: a new fiscal impact. That's just continuing the strong fiscal
Speaker 9: strands which we've had. That's not new money giving you
Speaker 9: new growth. It's just supporting the economy at the level
Speaker 9: at is. So basically the case is we need to
Speaker 9: rebalance the US policy makes over time in and that
Speaker 9: means monetary policy less restrictive than it's now. We don't
Speaker 9: need to do it now, but we probably will have
Speaker 9: enough to do it in the coming years. Our call
Speaker 9: remains as it has been for quite a while. First
Speaker 9: cut in December.
Speaker 7: It sounds like you didn't make much of the minutes,
Speaker 7: that it didn't change your view, and that you think
Speaker 7: that maybe people are over reacting when you say this
Speaker 7: is a hawkish stilt is changing everything.
Speaker 9: Well, it is a hawkish tilt, yes, But first of all,
Speaker 9: we were not expecting a rate cut before December either,
Speaker 9: So for us, that's just confirmation. Okay, they're not close
Speaker 9: to cutting. They need a lot more evidence. And these are,
Speaker 9: of course the minutes which came before the latest economic data,
Speaker 9: which all sort of consistently show a bit of weakening
Speaker 9: of economic momentum. Plus that inflation for once did not
Speaker 9: surprise to the upside but to the downside. So in
Speaker 9: a way this is kind of past news.
Speaker 7: The minutes everyone was talking about us exceptionalism. I'm wondering
Speaker 7: how long it's going to be until we're talking about
Speaker 7: European sweet spot or European goldilocks. Considering the fact that
Speaker 7: we got but as an expected activity data, in particular
Speaker 7: at Germany, at a time where the ECB is basically
Speaker 7: committed all but committed to a June rate cut. How
Speaker 7: positive is that for the economy and the European rates.
Speaker 9: Well, goldilocks is possibly a big word, but indeed what's
Speaker 9: happening in Europe is the big Putine shock is over.
Speaker 9: That is, the search and energy and food prices which
Speaker 9: drove the economy into stagnation and drove inflation up. We
Speaker 9: are now returning with much lower still somewhat elevated, but
Speaker 9: much lower energy prices. We are now returning to normal,
Speaker 9: and normal does mean growth growth of close to one
Speaker 9: point five percent by the end of this year, and
Speaker 9: normal means inflation settling a bit above two percent. And
Speaker 9: as a result, the ECB no longer needs to think
Speaker 9: about inflation getting too sticky to permanent. They can afford
Speaker 9: to cut rates somewhat.
Speaker 8: When you look at the ECB, though, it's pretty much
Speaker 8: certain they're going to cut in June.
Speaker 3: What happens after.
Speaker 9: The ECB, in my view, will be in the slow lane.
Speaker 9: That is, we do not look for back to back cuts.
Speaker 9: We expect sort of quarterly moves in the next one
Speaker 9: September than December, early next year, because inflation will now
Speaker 9: probably hover around the current level, the economy will be
Speaker 9: picking up. It will probably be only late this year,
Speaker 9: when falling household prices for gas and electricity will probably
Speaker 9: bring headline inflation to or slightly below the target rate
Speaker 9: of two percent, and that's when probably the easy b
Speaker 9: will then do a lot more cutting at the moment
Speaker 9: they have pre announced the June cut, but they'll be
Speaker 9: in the slow lane for a while thereafter.
Speaker 8: Halger I like to circle back something you said in
Speaker 8: the beginning about how for this huge fiscal impulse you
Speaker 8: need to sleep of Congress, which Adam Posen also agreed with.
Speaker 8: But there's one area that could be inflationary that you
Speaker 8: don't need to sleep in Congress, and this is tariffs,
Speaker 8: and that would affect central banks around the world. How
Speaker 8: are you thinking about potentially a Trump administration putting a
Speaker 8: ten percent tariff ring around the United States and sixty
Speaker 8: percent tariffs on Chinese imports.
Speaker 9: Well, teriffs are bad. Sometimes there are good reasons for
Speaker 9: terrorists that can you ask There can be reasons if
Speaker 9: really there is too much of subsidies going on. Yeah,
Speaker 9: but basically tariffs are bad. Terriffs make all of us
Speaker 9: a little poorer. But the impact however, on us inflation,
Speaker 9: This is a huge domestic economy where imports play only
Speaker 9: a modest role. The impact on US inflation maybe in
Speaker 9: the zero point one zero point two percentage point range.
Speaker 9: I don't think that would really really make the crucial difference.
Speaker 9: It would be a bit bigger in smaller economies. If
Speaker 9: they protect themselves in inverted commas, protect with hugeffs, their
Speaker 9: impact on their prices would be bigger. So this is
Speaker 9: a huge concern the tariffs, but less so for the
Speaker 9: inflation outlook.
Speaker 8: But when you say tariffs are bad, are they bad
Speaker 8: if China is dumping supplies on European US markets and
Speaker 8: absolutely obliterating their own industries.
Speaker 9: Well, the first economists response to that is if they
Speaker 9: give us a little gift. Yeah, if we can get
Speaker 9: the electric vehicle, it's cheaper, the solar panels cheaper. Thank
Speaker 9: you for doing that. We don't have to spend the
Speaker 9: money on it. You in China spend the money on
Speaker 9: it with subsidies. The snag is, of course, if that
Speaker 9: core is too much of a disruption, Yeah, then of
Speaker 9: course you might want to slow down the process or
Speaker 9: if there are security concerns involved, and probably lesser for
Speaker 9: solar panels, but with cars electric vehicles, who is getting
Speaker 9: what data? Yeah, do I want China to know where
Speaker 9: twenty five percent of the European cars are currently parked?
Speaker 9: Probably not so. There are serious security concerns which need
Speaker 9: to be addressed with China. Doesn't have to be teriffs
Speaker 9: has to be, for instance, like forcing them to make
Speaker 9: absolutely clear who gets what data, or that the key
Speaker 9: data relevant components actually have to be produced locally in
Speaker 9: the US or in Europe. That's, in a way, I think,
Speaker 9: a better strategy than to have these blanket tariffs.
Speaker 2: Okay, you've got client meetings here in the US. How
Speaker 2: much daylight is that between the US perspective and the
Speaker 2: European one on this issue?
Speaker 9: Well, I think there is among clients, among economists not
Speaker 9: all that much disagreement. There are, of course more political considerations. Well,
Speaker 9: you have the election campaign over here which play your role.
Speaker 9: There are to some extent political considerations in Europe we
Speaker 9: also have this not quite as important European parliamentary election.
Speaker 9: But among I would say the majority of investors and
Speaker 9: economists there as a rough consensus basically tariffs are bad,
Speaker 9: but there are exceptions when you really sometimes have to
Speaker 9: strike back, and especially if you want the other side
Speaker 9: to offer concessions. You have to show your weapons. But
Speaker 9: after showing your weapons, you should sit down at the
Speaker 9: table and talk rather than just weird the weapons.
Speaker 2: We know the German economy better than most. What do
Speaker 2: you think the German auto make us want right now?
Speaker 2: The access to China.
Speaker 9: They'd be the most unhappy with any tit for tet
Speaker 9: trade war. Of course, no China, no doubt. Having said that,
Speaker 9: this is not the key concern I would say for Europe,
Speaker 9: and it's also not that much the key concern for
Speaker 9: the German economy. We have to distinguish between two things.
Speaker 9: The one is the profits that companies make who are
Speaker 9: listed on the German Stock Exchange. The other is what's
Speaker 9: actually the impact on the German economy, and that probably
Speaker 9: would be much less the impact on the German economy
Speaker 9: we have a shortage of skilled daybor for instance. Yeah,
Speaker 9: that would be much less than the potential impact on
Speaker 9: the profits of companies who do a lot of business
Speaker 9: in China and may do less business in China in
Speaker 9: the future, if what hopefully won't be the case, if
Speaker 9: this escalates.
Speaker 2: Interesting interesting perspective, Hoger, Thank you, it's going to see
Speaker 2: you as always. How are Sweden there of Breenberg on
Speaker 2: the latest out of Europe, the United States and least
Speaker 2: of the trajectory for policy.
Speaker 9: Two.
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