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Speaker 2: I'm Lisa A.
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Speaker 2: What gives?
Speaker 1: Let's ask that question to Michael Gabin, head of US
Speaker 1: Economics at Bank of America Securities. Michael, what is your
Speaker 1: reaction given the fact that markets seem to be a
Speaker 1: little put off by consistently disinflationary data.
Speaker 3: I think the market's head well first of fall. Good
Speaker 3: morning Lisa and Katie, thanks for having me on. I
Speaker 3: think markets had priced this in already. With the CPI
Speaker 3: data in hand and the PPI data in the hand,
Speaker 3: we can make a pretty good projection of where PCE
Speaker 3: should come in. And we did expect the headline to
Speaker 3: be down in tenth in the core to only be
Speaker 3: up at ten. So this number really wasn't a surprise
Speaker 3: to us. And if you do the implied CPI forecast
Speaker 3: from market prices, they're looking for pretty soft inflation over
Speaker 3: the next three to six months, so I think that
Speaker 3: the market had largely priced in this number, as we
Speaker 3: all know they're looking for about twice as many cuts
Speaker 3: this year as the FED has planned, So I think
Speaker 3: this was a status quo number for markets.
Speaker 1: That might be status quo. The durable goods orders, as
Speaker 1: Katie pointed out, not so much. It came in significantly
Speaker 1: higher than expected, and I wonder if on the margins
Speaker 1: there's some anxiety that it seems sort of incompatible that
Speaker 1: we get ongoing better than expected growth while still seeing
Speaker 1: that disinflation that everyone's been hoping for.
Speaker 3: Yeah, there's certainly a limit to that, right, So, so far,
Speaker 3: the narratives is that the economy can cool, growth can
Speaker 3: remain modest or moderate but away from recession, and we
Speaker 3: can experience both moderate growth and disinflation at the same time.
Speaker 3: That's our view. I think that's the FEDS view for sure,
Speaker 3: and why they've shifted to say a more balanced reaction
Speaker 3: function between bringing inflation down and wanting to support a
Speaker 3: soft landing. But you're right, there's a limit to that.
Speaker 3: There is a risk to shifting to a doubvish stance
Speaker 3: now coming out of the December meeting and tilting the
Speaker 3: outlook towards rate cuts because markets have reacted quite quickly
Speaker 3: and financial conditions have ease. So the risk is that
Speaker 3: maybe you gin things up too much and you don't
Speaker 3: make as much progress as you want on the inflation front.
Speaker 3: So no free lunch in that regard. We think the
Speaker 3: Fed's in a good spot. We do think rate cuts
Speaker 3: are coming, but you make a good point, too much
Speaker 3: easing too much using in financial conditions could ultimately mean
Speaker 3: inflation is stickier to come down, or maybe even rises
Speaker 3: a little bit and kind of puts off some of
Speaker 3: these rate cuts that the market is expecting.
Speaker 4: Well, let's talk about just the magnitude of the rate
Speaker 4: cuts that the market is expecting. Of course, one hundred
Speaker 4: and fifty bases points price into next year, a big
Speaker 4: goalf between that and what we saw on the dot plot,
Speaker 4: just seventy five basis points of cuts penciled. And when
Speaker 4: you take in totality what we learned today, when it
Speaker 4: comes of course to PCE, to personal income, to spending
Speaker 4: and of course those durable goods orders, where does this
Speaker 4: land in terms of what the market is expecting. Do
Speaker 4: those six rate cuts look justified at this juncture.
Speaker 3: I think the inflation data certainly support the idea that
Speaker 3: the FED can start in March. So assuming the data
Speaker 3: flow trends in the way that it has, with a
Speaker 3: lot of evidence of disinflation and modest growth but a
Speaker 3: cooling economy, we do think rate cuts can start in
Speaker 3: March a little earlier than the FED things. We would say,
Speaker 3: you know, curb your enthusiasm a bit for one hundred
Speaker 3: and fifty or maybe more rate cuts over the course
Speaker 3: of the year, because we do think inflation will be
Speaker 3: a little more slower to come down. So we agree
Speaker 3: on the start earlier than later. But our view is
Speaker 3: you get about one hundred basis points of cuts, so
Speaker 3: the market may need to reprice some of these as
Speaker 3: the data comes.
Speaker 4: In, So okay, maybe that process back to target will
Speaker 4: be slower than expected. Compare that to what we heard
Speaker 4: from Jerome Pell last week. He said that he was
Speaker 4: reluctant to say that the last mile of this inflation
Speaker 4: fight will be more difficult. Is that your expectation or
Speaker 4: just slower than expected sort of imply there's some pain ahead.
Speaker 3: No, I would agree that at least, you know, again,
Speaker 3: the composition of the data flow that we've been seeing,
Speaker 3: I think suggests we can enjoy modest growth and disinflation,
Speaker 3: and it does suggest that the last mile may not
Speaker 3: be overly difficult. Right, So that does come from supply
Speaker 3: side effects, both on goods and on services, where reemployment
Speaker 3: has really helped increase services outputs. That we're getting a
Speaker 3: supply side effect there. As everyone knows, core goods have
Speaker 3: been falling for six months. So we'll see if things
Speaker 3: like shipping issues out of the red seat change that narrative.
Speaker 3: But otherwise, the last three to six months worth of
Speaker 3: data suggests maybe we can you know, it's more likely
Speaker 3: than not that we can get down to two percent
Speaker 3: consistent outcomes without needing to generate significant pain in labor markets,
Speaker 3: which would be a great outcome for the FED, the
Speaker 3: you know, the average US household and the average US business.
Speaker 3: It would be a great outcome for the economy.
Speaker 4: Well, I want to talk about that a little bit
Speaker 4: more because inflation has been an enemy number one from
Speaker 4: the Fed's perspective for really the last couple of years now.
Speaker 4: But now as we continue to get this march lower
Speaker 4: when it comes to some of these figures. Does the
Speaker 4: Fed's focus shift here, do they start paying more attention
Speaker 4: to economic growth, to the labor market, et cetera.
Speaker 3: Yeah, I still think inflation bringing inflation down as the
Speaker 3: number one goal, given where inflation's been where it is,
Speaker 3: and you know the Fed's internal consistency about, hey, we
Speaker 3: really control inflation. We set that long run inflation objective.
Speaker 3: We determine long run inflation outcomes. So that's it's kind
Speaker 3: of you know, it's in their blood, so to speak,
Speaker 3: and in their DNA. So I still think that's issue
Speaker 3: number one, But a very close issue number two, if
Speaker 3: not closer to balanced, is hey, I think we can
Speaker 3: soft land this economy. We don't need to generate as
Speaker 3: much pain in labor markets as we thought we might
Speaker 3: have had to do six to nine months ago, so
Speaker 3: we should keep an eye out for that. So yes,
Speaker 3: it does make an argument that one of the reasons
Speaker 3: why the market has so many cuts priced in is
Speaker 3: both of those cases moving to a more balanced reaction
Speaker 3: function in an environment where the economy is cooling and
Speaker 3: inflation is flowing, that just increases the odds you're likely
Speaker 3: to get rape cuts. So I think the market is
Speaker 3: listening to that message.
Speaker 1: Michael, what's the gap between just weakening that is good
Speaker 1: and weakening that is bad? And I ask this because
Speaker 1: I'm trying to still understand the language at the cfo's
Speaker 1: office at Nike when they said that demand is cooling
Speaker 1: faster than they expected, revised downwards some of their expectations
Speaker 1: for sales, talked about cutting jobs. Is this something that
Speaker 1: is just an idiosyncratic business overlaid with a weakening economy
Speaker 1: in a good sense, or is this potentially something bad?
Speaker 2: Yeah?
Speaker 3: I think I would put that narrative probably inside the
Speaker 3: you know, the rotation story away from goods purchases back
Speaker 3: to services. The good side of the economy. The manufacturing
Speaker 3: sector has been kind of on the edge, if not
Speaker 3: in a mild recession for some time now, at least
Speaker 3: in terms of you know, production and inventory adjustment and
Speaker 3: so forth. So I think the good side of the
Speaker 3: economy is reacting in part to that rotation story. What
Speaker 3: still looks pretty solid is activity and employment on the
Speaker 3: services side of the ledger, which is, you know, two
Speaker 3: thirds or more of outputs. So I think, you know,
Speaker 3: the to use your phrasing the quote goods slowing and
Speaker 3: cooling is about the rotation story, the end of the
Speaker 3: COVID reopening impulse. Things should naturally slow down anyway. We
Speaker 3: need to provide an environment for the economy to do
Speaker 3: that while we bring inflation down without tamping on the
Speaker 3: brakes too hard. So you're right, there's a fine line
Speaker 3: between slowing that we think should happen as a result
Speaker 3: of a very unusual pandemic driven cycle and oops, we've
Speaker 3: got the monetary policy setting calibrated incorrectly. It's too tight.
Speaker 3: We have to back out of it more quickly.
Speaker 1: Does anything about the services inflation concern you, given the
Speaker 1: fact that it still is running above which you would
Speaker 1: expect for two percent consistent inflation.
Speaker 3: Yeah, certainly. Shelter and kind of the structural issues in
Speaker 3: the housing market without a lot of supply and inventory
Speaker 3: and available homes to contract for sale or purchase. So
Speaker 3: the shelter story, shelter is moderating. It is coming down,
Speaker 3: but it's coming down more slowly than our models would
Speaker 3: have suggested, So we think that there's stickiness there, and
Speaker 3: even non shelter services inflation has been more sticky. So
Speaker 3: this is where we would say, maybe you know, curb
Speaker 3: your enthusiasm. We have inflation for PCE coming down to
Speaker 3: around two and a half year and near by the
Speaker 3: end of this year where market implied pricing is closer
Speaker 3: to so it's easy to see how a stickier inflation
Speaker 3: path could mean some of these rate cuts are not realized.
Speaker 1: Michael Gape in a Bank of America security, joining us
Speaker 1: now as someone who's gotten it right all year at
Speaker 1: your Denny, president of your Denny Research called for the
Speaker 1: Roaring twenties, is leaning into that now talking about disinflation,
Speaker 1: we're seeing it now. What keeps you up at night, ed,
Speaker 1: considering that so far you've gotten a lot of things
Speaker 1: very right, Well, I've.
Speaker 5: Been sleeping pretty well quite honestly, I guess I do
Speaker 5: worry about the Middle East, the geopolitical situation, the fog
Speaker 5: of war. You never know how things unfold once a
Speaker 5: war starts, and we have this fairly contained localized war
Speaker 5: in Gaza, and that the risk is that it becomes
Speaker 5: a regional war and it affects the price of oil.
Speaker 5: But so far, the price of oil has been telling me,
Speaker 5: telling me that there's not going to be a regional
Speaker 5: war going on here anytime soon.
Speaker 1: So putting aside some of those tail risks, is the
Speaker 1: risk in your mind that people aren't bullish enough, considering
Speaker 1: that everyone's been upping their expectations for end of the
Speaker 1: year targets, but we're catching up to it really quick
Speaker 1: already it hasn't even been the end of the year.
Speaker 5: Yeah, I think that's true. At the beginning of the year,
Speaker 5: I was talking about forty six hundred, that wasn't bullish enough.
Speaker 5: We're already above that for the end of this year,
Speaker 5: and then I'm looking for fifty four hundred next year,
Speaker 5: and now there's more people talking about over five thousand,
Speaker 5: and then for twenty twenty five, I'm talking about six thousand.
Speaker 5: So I think I'm bullish enough. I don't think things
Speaker 5: can get much better than that. So that's kind of
Speaker 5: at the top end of the scale on an optimism
Speaker 5: I think. But I think in the near term here
Speaker 5: we've got everybody seems to be too happy, at least
Speaker 5: in terms of the sentiment indicators. So that's on a
Speaker 5: near term basis. I don't lose any sleep over it,
Speaker 5: but I do watch it.
Speaker 4: And with only what a week or so left until
Speaker 4: twenty twenty four, the fact that everyone is maybe too
Speaker 4: happy right now? Is that why you haven't boosted your
Speaker 4: year end target for this year? I believe that was
Speaker 4: at forty six hundred, and we're pretty firmly above that
Speaker 4: right now.
Speaker 1: Ed.
Speaker 5: Yeah, well, you know, I don't find you in my
Speaker 5: forecast that much because we are, as you said, we're
Speaker 5: only a week away, So what's the point of getting
Speaker 5: cute about it? Instead? I did talk. I am talking
Speaker 5: about fifty four hundred by the end of next year
Speaker 5: and six thousand after that, So that just puts me
Speaker 5: in the bullish camp pretty clearly. Yeah.
Speaker 4: If I, of course had to put out these forecasts,
Speaker 4: I think I'd revise on like December thirtieth every year
Speaker 4: and just nail it every single time. But I do
Speaker 4: want to talk a little bit about twenty twenty five
Speaker 4: because six thousand is a staggering number and twenty twenty
Speaker 4: five feels very very far away. What is the work
Speaker 4: that gets you there and how do you project that
Speaker 4: with a certain degree of confidence.
Speaker 5: Well, first, on a short term basis, looks like there's
Speaker 5: still some what I call die hard heard Landers who
Speaker 5: think that we're going to have a recession next year.
Speaker 5: I've been talking about a rolling recession for the past
Speaker 5: two years, and I think in the in the next
Speaker 5: two years we'll have rolling recoveries. Clearly, we're starting to
Speaker 5: see a rolling recovery in the housing market. I think
Speaker 5: we've bottomed in terms of retail merchandise. A lot of
Speaker 5: inventories pile up now. I think consumers are going to
Speaker 5: go back next year and buy some goods in addition
Speaker 5: to services.
Speaker 3: And I think.
Speaker 5: Commercial real estate will be in a rolling recession in
Speaker 5: this coming year, but then beyond that, I think there
Speaker 5: will be a recovery. So I think that's the way
Speaker 5: I look at the business cycle is sort of spread out.
Speaker 5: Most importantly, I think we've got a labor shortage, significant
Speaker 5: chronic labor shortage, and I think companies will use technology
Speaker 5: to increase productivity dramatically. Right now, we're averaging about one
Speaker 5: point eight percent over the past five years. I think
Speaker 5: by the end of the decade we'll be looking at
Speaker 5: three and a half to four and a half percent,
Speaker 5: which sounds far fetched, if not illusional, I admit, but
Speaker 5: that's the way productivity boom cycles have gone in the past.
Speaker 5: This one should do the same.
Speaker 2: Does it worry you at all?
Speaker 1: And I realized the anecdotes can't tell entire stories, and
Speaker 1: you can extrapolate out an entire research paper for one
Speaker 1: particular example. But let's take a look at Nike. They
Speaker 1: came out and they said that they're going to be
Speaker 1: cutting workers, They're going to be having cost cuts, and
Speaker 1: it is because, yes, they are working down their inventory,
Speaker 1: but because of weakness and weakness that they expect to
Speaker 1: continue going forward. Does that kind of contradict some of
Speaker 1: your optimism about the recovery and the retail space.
Speaker 5: Yeah, well, that's a good point, and that's why I
Speaker 5: think a lot of forecasters have missed the past couple
Speaker 5: of years and had this attitude that or view that
Speaker 5: the only way inflation could come down in the United
Speaker 5: States is if we have a recession. You mentioned the
Speaker 5: phrase immaculate disinflation, and I think that's what we've had.
Speaker 5: We've had inflation come down without a recession. And the
Speaker 5: reason for that is because the Chinese and the Europeans
Speaker 5: have done us a great favor. They've had the recession
Speaker 5: so on a global basis, particularly China has been exporting deflation.
Speaker 5: Their PPI is down on a year over year basis,
Speaker 5: even their CPI is down a little bit on a
Speaker 5: year over year basis. So I think the United States
Speaker 5: is going to benefit from the recession the property depression
Speaker 5: in China for a long time in terms of having
Speaker 5: a low inflation and I think Year of starts to
Speaker 5: recover from its shallow recession next year, which will help
Speaker 5: us on the export side.
Speaker 4: And let's bring this conversation to the bond market, because
Speaker 4: the reversal that we've seen there has been stunning, and
Speaker 4: of course you've done a lot of great work on
Speaker 4: deficits what that means for bonds and the demand for bonds,
Speaker 4: and it felt like for a while maybe the bond
Speaker 4: vigilantes were reappearing. Why did deficit concern seem to fall
Speaker 4: off the radar.
Speaker 5: Yeah, I've had the point of view for many years
Speaker 5: that I'll care about the deficit when the bond market
Speaker 5: cares about the deficit, and the past supply really hasn't
Speaker 5: been much of a problem because you get the biggest
Speaker 5: supply in recessions. When interest the Fed was cutting interest rates,
Speaker 5: we had this brief period where the bond vigilani is
Speaker 5: saddled up and started to move on concerns of fiscal excesses,
Speaker 5: and that period didn't last very long. Basically, from August
Speaker 5: to October we saw this monstrous increase in the tenure
Speaker 5: bond deal from basically four and a quarter percent to
Speaker 5: five percent, and here we are back below four percent.
Speaker 5: I think, you know, there's an expression, don't fight the Fed.
Speaker 5: Maybe we should also say don't fight Janet Yale. And
Speaker 5: now that she's a treasury because she was very cleverly
Speaker 5: cut back on the supply of long term bonds and
Speaker 5: notes and issued a lot of bills and the bond
Speaker 5: Vigilani said, Oh, if that's the way you're going to
Speaker 5: play the game, we can live with that. Meanwhile, I
Speaker 5: think the big story has been how inflation has come down.
Speaker 5: I mean, it's been only the past couple of months
Speaker 5: that the consensus really has become that we can't have
Speaker 5: immaculate this inflation. Even that Chair palin As press conference
Speaker 5: seemed to indicate that, you know what, we may actually get.
Speaker 1: It, and everybody let out a collective cheer. And you
Speaker 1: still hear that cheer today at your of your Dunny Research.
Speaker 1: Kim Wallace, head of Washington Policy Research at twenty twenty
Speaker 1: twenty two v Research, joining us here in studio for
Speaker 1: the holiday party for the holiday spirit fordy York City.
Speaker 1: Thank you so much for being with us.
Speaker 2: We really appreciate it.
Speaker 6: Morning, happy to be here.
Speaker 1: Good morning. I know that you put out an outlook
Speaker 1: for what to expect in twenty twenty four, and I
Speaker 1: want to start an industrial policy hinging off the latest
Speaker 1: news of US steel and some of the administration pushback
Speaker 1: to a Japanese conglomerate purchasing the largest steelmaker in the country.
Speaker 6: Well, you know, there's a lot of now's that will
Speaker 6: go into the ultimate reaction from the administration. Obviously, the
Speaker 6: Committee on Foreign Investment in the US will investigate the
Speaker 6: proposed merger. But when you break it down, the promise
Speaker 6: is made by Nipon probably upset a few people in
Speaker 6: the political side, but don't in my view at least
Speaker 6: imply disruption to the production of steel in the US.
Speaker 6: The deal proposes to combine globally number four and number
Speaker 6: twenty seven. So the first question for the competition policy
Speaker 6: reviewers is is it a global market you're defining when
Speaker 6: you review the deal of the national market. My sense
Speaker 6: is it'll be a global market. And if that's the case,
Speaker 6: we look at Japan as a strategic partner. It's difficult
Speaker 6: to imagine that if Japan can't close the deal like this,
Speaker 6: that anyone can close the deal like this.
Speaker 1: Do you think the Biden administration has been consistent with
Speaker 1: industrial policy? On one hand, talking about America first in
Speaker 1: some ways and talking about unionization, but not necessarily celebrating
Speaker 1: the fact that the United States is pumping a record
Speaker 1: amount of oil, which is really offset a lot of
Speaker 1: the prices, and kept gasoline low.
Speaker 6: I think they've been as consistent as you can be
Speaker 6: as a policymaker in this environment. A couple of points there. First,
Speaker 6: we have started from a very low point in industrial
Speaker 6: production and manufacturing. We gave away that base in the
Speaker 6: nineties in the first part of this century. Reclaiming it
Speaker 6: is going to take a long time. The report that
Speaker 6: the National Economic Council and the National Security Council put
Speaker 6: out in June of twenty twenty one quantified how far
Speaker 6: back the US is. The President then sought to make
Speaker 6: up a gap there. Congress joined them. This has been
Speaker 6: a bipartisan effort, particularly in infrastructure. So we are way
Speaker 6: behind the ball when it comes to in the US
Speaker 6: when it comes to infrastructure, when it comes to chips,
Speaker 6: semit conductors. We have a long way to go. Deals
Speaker 6: like this have to be reviewed from all of those
Speaker 6: perspectives we talked about, but ultimately what's best for the
Speaker 6: US in terms of short term supplies and then longer
Speaker 6: term building out of the industrial base. That's part of
Speaker 6: the President's proposal in the Emergency selplemental almost sixty billion
Speaker 6: dollars for a defense industrial base, three billion of that
Speaker 6: to build more submarines.
Speaker 4: And you bring up chips, and that's where I want
Speaker 4: to go because you think about the US China relationship.
Speaker 4: Obviously still a lot of tensions. There are a lot
Speaker 4: of that playing out in the semiconductor arena. But when
Speaker 4: you look over the totality of twenty twenty three, how
Speaker 4: has the US China relationship evolved.
Speaker 6: It has stabilized and the optics are better against the
Speaker 6: backdrop of severe competition, competition across a lot of platforms,
Speaker 6: and that's not going to change. We see that almost daily.
Speaker 6: We saw it this week in critical minerals. And so
Speaker 6: when China decides that it's not going to allow the
Speaker 6: export of processing technology for critical minerals, that's a shot
Speaker 6: across the bow. It again points to a deficiency in
Speaker 6: the US industrial base and something that it's hard to
Speaker 6: make this political if you look at it from an
Speaker 6: economic standpoint. Of course people will make it political, but
Speaker 6: making up for the deficiency will require decades, not just years.
Speaker 4: Well, in the context of critical minerals and of course
Speaker 4: the news that we saw this week, both on that
Speaker 4: front and also that US steal nip On deal. You
Speaker 4: talked about Japan as a strategic ally here and when
Speaker 4: you think about the arena of critical mirror not miracles,
Speaker 4: minerals and of course the competition going on there, how
Speaker 4: important does that make Japan potentially other partners.
Speaker 6: It's that last part, Katie, potentially other partners. Japan is
Speaker 6: critically important. There is no Indo Pacific strategy which is
Speaker 6: important to this administration without Japan, and that goes back
Speaker 6: to my saying if Japan can't close deals, then no
Speaker 6: one can. But it's the other players. What we saw
Speaker 6: at the beginning of the APEC week that didn't get
Speaker 6: a lot of attention was a national security partnership signed
Speaker 6: between Indonesia and the US Defense Technology Defense Know how
Speaker 6: Indonesia your promises to send critical min ruals. Eventually it's
Speaker 6: part of a very sophisticated program. Sophistication is necessary given
Speaker 6: how far back the US is in my.
Speaker 1: View taking a step back, you've gotten plenty of accolades
Speaker 1: for your research and for your view forward, particularly when
Speaker 1: it comes to politics, which recently has been a black
Speaker 1: box of absolutely impenetrable predictions. But I'm wondering next year
Speaker 1: what you see is some of the bigger market related
Speaker 1: risks stemming from Washington, d C. At a time where
Speaker 1: there's a lot on the table, not just industrial policy.
Speaker 6: I think there are a big four. The first quarter
Speaker 6: will be consumed by fiscal policy. What does Washington do
Speaker 6: around funding for FY twenty four and what does it
Speaker 6: do about the supplemental requests around WARS. I think that
Speaker 6: morphs into first second quarter. What's the result of the
Speaker 6: Fed's business over the last two years, How does that
Speaker 6: play out in the economy. Normalization at this part of
Speaker 6: the cycle means tightening. Normalization soon will mean the other side.
Speaker 6: That leads into, in my view, at least, concerns about liquidity,
Speaker 6: both official liquidity, private liquidity. It is the It's the
Speaker 6: topic very few people want to address in public, but
Speaker 6: something that pops up on a regular basis as a
Speaker 6: concern among traders all the time, both official and private liquidity.
Speaker 6: That morphs into the back end of the year and
Speaker 6: the elections and what's happening in terms of the outcome
Speaker 6: of the elections, what that implies for the country going forward,
Speaker 6: and for policy in twenty twenty.
Speaker 1: Five, and just in terms of the market risk there,
Speaker 1: meaning as liquidity titens, people be more focused on that
Speaker 1: and the potential deficit and the potential inability of the
Speaker 1: US to spend in all of those issues.
Speaker 6: Well, that and the issues around the federal Home loan banks.
Speaker 6: The administration is constrained the advances that they can make
Speaker 6: the member institutions. There's discussion about paying less for reserves
Speaker 6: at the FAD and forcing that money out into the
Speaker 6: economy somewhere else. There are As QT goes on, we
Speaker 6: have a lot of tightening of liquidity in the system
Speaker 6: to follow.
Speaker 1: Kim Wallas, thank you so much for being with us.
Speaker 1: Wonderful to see you in person. Kim Wallis, I'm twenty
Speaker 1: two V Research.
Speaker 2: Thank you.
Speaker 1: Joining us now. Deborah Cunningham, Global Liquidity Market CIO A
Speaker 1: federated her means not on that at all. Debraah, thank
Speaker 1: you so much for being with us. I want to
Speaker 1: start with this idea that people have been talking a
Speaker 1: lot about cash on the sidelines, and we've talked about
Speaker 1: this before, and how cash on the sidelines are going
Speaker 1: to start flooding into risk assets. Have you seen any
Speaker 1: evidence of that over the past couple of weeks.
Speaker 7: Not really, Lisa, It's not something generally speaking. People at
Speaker 7: the end of the year are trying to, you know,
Speaker 7: kind of allocate and close out their books in a
Speaker 7: normal fashion, and there may be some surprises, either cash
Speaker 7: in flows or cash outflows. Things closed, things don't close
Speaker 7: that we're supposed to, but ultimately it's not a great
Speaker 7: time in a normal situation for.
Speaker 2: You know, what i'd call reallocation.
Speaker 7: That happens more at the beginning of the year, So
Speaker 7: we have not been experiencing or seeing that type of
Speaker 7: market shift at this point and cash flow out.
Speaker 4: Well, I do want to get to what happens at
Speaker 4: the start of next year and in twenty twenty four.
Speaker 4: But I know I just said that AI and Ozempic
Speaker 4: have been really the stock market stories of this year.
Speaker 4: But I want to add a third thing, which has
Speaker 4: been the rush into money market funds. Of course, one
Speaker 4: of the big stories in markets this year about six
Speaker 4: trillion dollars sitting in money market funds right now. Where
Speaker 4: is that coming from. Is that investors saying, look at
Speaker 4: these high yields, I'm going to go there, Or is
Speaker 4: that people moving away taking money out of their bank
Speaker 4: deposits for example, and shifting into money market funds.
Speaker 7: I think the bulk of it is coming from the
Speaker 7: deposit market. It's coming as a retail trade, so it's
Speaker 7: a pretty steady trade. And if you look at what
Speaker 7: shifted out of retail deposits during the year, it's been
Speaker 7: about one point three t brillion, and about a trillion
Speaker 7: has gone into money market fund So it's hard to
Speaker 7: follow dollar for dollar exactly where cash goes, but you know,
Speaker 7: from all we can tell, I'd say at least eighty
Speaker 7: percent of that is coming from the retail deposit market,
Speaker 7: where rates from a banking perspective just didn't follow, you know,
Speaker 7: short term rates in the market upwards with the FED.
Speaker 7: Now there has been in the last quarter, just really
Speaker 7: since we've flipped into the fourth quarter October and November,
Speaker 7: a little bit more of a cash flow from an
Speaker 7: institutional type of customer, and I think that has to
Speaker 7: do with, you know, the flattening to you know, to
Speaker 7: some degree inverted yield curve where the shorter end of
Speaker 7: the curve is no longer as attractive necessarily as what
Speaker 7: a product that has some weighted average maturity like a
Speaker 7: money market fund does. So we're starting to see some
Speaker 7: of that trade. I would see more of I would
Speaker 7: expect to see more of that trade though, in twenty
Speaker 7: twenty four.
Speaker 4: So just amitt on that point a little bit longer
Speaker 4: that potentially eighty percent of what we've seen come into
Speaker 4: money market funds has been coming from deposits. How sticky
Speaker 4: is that money? Because it feels like one of the
Speaker 4: assumptions is that what we're seeing in money market funds
Speaker 4: that belongs to the equity market, that belongs to risk assets,
Speaker 4: and it's going to return there. But if that's coming
Speaker 4: from bank deposits, that logic doesn't quite make sense.
Speaker 7: That's exactly right, and certainly there is there are some
Speaker 7: risk assets that are in there as a hiding place,
Speaker 7: you know, a short term home, until they feel like,
Speaker 7: you know, their entry point back into their risk asset
Speaker 7: class is more palatable for them.
Speaker 2: But that's certainly not the bulk of what we've been seeing.
Speaker 7: Now, maybe that you know, will pick up again in
Speaker 7: twenty twenty four, but it's not been what we've seen
Speaker 7: mostly in twenty twenty three. It's come through the deposit market,
Speaker 7: through the retail trade, with the likelihood of that being
Speaker 7: very sticky. And I think the other thing that makes
Speaker 7: that a stickier trade than it has been even over
Speaker 7: the course of the last fifteen years is we as
Speaker 7: well as the market. And I don't think anybody out
Speaker 7: there expects the Fed to normalize at zero, where they
Speaker 7: have been you know, twelve out of the last fifteen years.
Speaker 7: The expectation is the normalization is back to you know, three,
Speaker 7: three and a half, maybe four percent, depending upon where
Speaker 7: inflation plays out. And so that again keeps that retail
Speaker 7: trade generally in the market.
Speaker 2: Rather than back rather than back in deposits.
Speaker 1: So do you just sort of reject Deborah this idea
Speaker 1: of cash on the sidelines flooding into markets once the
Speaker 1: federal reserve is cut rates one, two, three or even
Speaker 1: more times next year.
Speaker 7: Now, I don't reject it at all. I just don't
Speaker 7: think it's all coming out of money market funds. I
Speaker 7: think there. I think cash continues to come out of
Speaker 7: deposit products, and I think some some goes into the
Speaker 7: direct markets through that, you know, from that from that mode,
Speaker 7: and I do believe there will be some that comes
Speaker 7: out of money market funds, but I certainly don't think
Speaker 7: it's you know, it's it's the vast majority of what
Speaker 7: will you know, let's say, fuel the markets, the risk
Speaker 7: asset markets in twenty twenty four.
Speaker 1: Just real quick here, Debrah. Are you seeing money go
Speaker 1: out a short term and go into longer term? Is
Speaker 1: that a theme?
Speaker 2: It started?
Speaker 7: We run micro short and ultra short funds that are
Speaker 7: really just you know, a modest step out the yield
Speaker 7: curve in the one to two two and a half
Speaker 7: year sector, and we're starting to see positive cash flow
Speaker 7: in those products. But it's trickling, it's a it's certainly
Speaker 7: not any kind of a flood.
Speaker 1: Devra Coningham, thank you so much for being with us.
Speaker 1: I really want to get a sense of where we
Speaker 1: are heading into this, what kinds of disruptions we can expect.
Speaker 1: How people are paying for their travel, whether they are traveling.
Speaker 1: Brian Kelly, founder of The Points Guy, who did advise
Speaker 1: that I get rid of my points and spend them.
Speaker 1: Thank you for that, trying to work them down. What
Speaker 1: do you expect in terms of this particular holiday season.
Speaker 1: Are we going to see another Southwest episode? Are things
Speaker 1: looking like they're pretty orderly? Are people going to have
Speaker 1: a not really deep, deeply uncomfortable experience.
Speaker 8: Well, I'm an internal optimist and things are looking really good.
Speaker 8: Right So the Thanksgiving holiday in November we saw the
Speaker 8: most amount of air travelers ever two point nine million
Speaker 8: go through the TSA, and things work pretty smooth. And
Speaker 8: the biggest factor that I see would be weather, and
Speaker 8: right now there's no major weather patterns that I see
Speaker 8: that could upend our air travel system, so I am
Speaker 8: forecasting hopefully smooth sailing for the next ten days. We
Speaker 8: had two point five million people through the TSA yesterday,
Speaker 8: relatively low delays and cancelations, so fingers crossed. But I
Speaker 8: think this is going to be a good holiday travel season,
Speaker 8: and certainly much better than last year.
Speaker 1: Yes, especially given some of those delays. International, though, does
Speaker 1: face some potential headwinds. In particular, some of this strikes
Speaker 1: that we've been hearing about in the United Kingdom elsewhere
Speaker 1: in Europe is that on your radar at all or
Speaker 1: is that basically just sort of hand ringing as people
Speaker 1: have to find something to worry about if they're not
Speaker 1: eternal optimists like yourself.
Speaker 8: Yeah. No, you know, anytime you travel to Europe you
Speaker 8: have to worry about you know, strikes. It can happen
Speaker 8: any day. It's much different here than the US. But
Speaker 8: you know in Spain there will be strikes with Iberia's
Speaker 8: ground staff around the New Year holiday. Yesterday we saw
Speaker 8: the Eurostar have a surprise strike that displaced a lot
Speaker 8: of people. They're actually not even selling trains today between
Speaker 8: Paris and London. So but overall, there might be some
Speaker 8: German train strikers here there, but hopefully no widespread strikes
Speaker 8: that we're aware of.
Speaker 4: And so how should travelers think about that, say that
Speaker 4: they do have a holiday European vacation booked, I mean,
Speaker 4: should they be thinking about insurance here or how to
Speaker 4: best handle that?
Speaker 8: Yeah, So what most people don't realize is when you
Speaker 8: use your premium travel credit card, as I'm assuming many
Speaker 8: people watching this program, whether that's AMX, Platinum, Chase, Sapphire,
Speaker 8: Capital one Venture, those cars cards come with built in perks,
Speaker 8: and this is what people don't realize. I was traveling
Speaker 8: to Puerto Rico in May and my flight was delayed
Speaker 8: ten hours by United for a mechanical reason. United gave
Speaker 8: me one hundred dollars E gift card and told me
Speaker 8: to go away, but American Express refunded five hundred dollars
Speaker 8: for me to get a hotel, to get ubers to
Speaker 8: go out to dinner in old San Juan. So always
Speaker 8: go to your credit card company for compensation. And when
Speaker 8: traveling to Europe, there's a rule called EU two sixty
Speaker 8: one compensation. And if you're traveling to or from Europe
Speaker 8: and there's a flight delay for pretty much any reason,
Speaker 8: they are mandated by the government to give you compensation.
Speaker 8: So yes, go to the airline. But generally the airlines
Speaker 8: are pretty cheap when it comes to compensation. Your credit
Speaker 8: card is where it's at. The only time I really
Speaker 8: recommend travel insurance is if you're going on that mega
Speaker 8: trip on a big expensive cruise line, sofari you're bringing
Speaker 8: people who could get sick abroad where you might need
Speaker 8: that evacuation coverage. So but in general, your credit cards
Speaker 8: protect you a lot more than you realize.
Speaker 4: Yeah, so maybe you actually should read the fine print there,
Speaker 4: But what are you actually seeing in terms of where
Speaker 4: people are going when it comes to this holiday season.
Speaker 4: Are they going abroad or as much of the travel
Speaker 4: that you're seeing booked and happening right now within the country.
Speaker 8: Yeah, I mean most of the travel growth we're seeing
Speaker 8: is international. Is funny. I was looking up where are
Speaker 8: the deals for I was just searching from New York,
Speaker 8: and the best travel deals were in Miami Orlando. And
Speaker 8: a year or two years ago, we all knew Miami
Speaker 8: flights were like two thousand dollars each, crazy rates. So
Speaker 8: we've seen some of that demand from domestic travel. Now
Speaker 8: we're seeing huge increases. United Airlines just started flying NonStop
Speaker 8: from San Francisco to christ Church, New Zealand. They're betting
Speaker 8: big on the Pacific region, new flights to Tahiti, and
Speaker 8: so I think there are a lot of travelers who
Speaker 8: now feel cometerle traveling internationally, doing that big trip Japan.
Speaker 8: I'm going there in February. We're seeing huge increases in
Speaker 8: that type of travel. And also when it comes to lodging,
Speaker 8: we're seeing a huge increase. Hotels dot Com saw one
Speaker 8: hundred and twenty five percent increase in authentic lodging, So
Speaker 8: whether that's a reopen in Japan or staying at a
Speaker 8: riad in Morocco. I think travelers are sick of paying
Speaker 8: for overpriced cookie cutter hotels and are willing to shell
Speaker 8: out for those luxury experiences.
Speaker 1: Are they looking for discounts or is this still very
Speaker 1: much the experience world that's just continuing, and is this
Speaker 1: basically a sea change that has legs where experiences will
Speaker 1: keep seeing people pay up for some of these unique
Speaker 1: experiences even if they don't buy a shirt and an
Speaker 1: outfit that's fancied to accompany it.
Speaker 8: Yeah, people, you know, funny enough, discounts are happening domestically.
Speaker 8: Jeff Blues just ran a fifty dollars a fair sales Southwest.
Speaker 8: So the domestic airfare market and those carriers are ruggling.
Speaker 8: Where the premium cruise lines that are just launching, There's
Speaker 8: tons of new really exclusive ships. I just did. Expedition
Speaker 8: cruising is huge. I'm seeing more and more my friends
Speaker 8: go to Antarctica. I just went on swan Hellenic to
Speaker 8: Greenland and that was an incredible experience. So yeah, people
Speaker 8: are shelling out for unique bespoke experiences. That sector in
Speaker 8: the market cannot grow fast enough. And even I mean
Speaker 8: domestically theme park travels, Big Disney still continues to see growth.
Speaker 8: And it's not just Disney. Dollywood just increased prices and
Speaker 8: opened up new parts of their park, Mattel. So people
Speaker 8: really want to take their families not just to a
Speaker 8: beach vacation, but they want to go and experience the
Speaker 8: new Mattel theme park that just opened up in Arizona.
Speaker 8: They really want these unique experiences and that's a trend
Speaker 8: I can foresee happening more and more.
Speaker 4: And Brian, you are the points guys. So let's talk
Speaker 4: about some news that broke this week. It was first
Speaker 4: reported by Rorders basically about the Department of t Transportation
Speaker 4: in the early stages of looking into airline frequent flyer programs,
Speaker 4: really checking whether airlines have engaged in unfair or deceptive
Speaker 4: practices when it comes to some of those programs.
Speaker 2: What do you make of that?
Speaker 8: Yeah, I mean I think it's much needed. A lot
Speaker 8: of times there are changes that happen overnight, and you
Speaker 8: know it. Kennedy said that the airlines are banks nowadays.
Speaker 8: The airlines are making more money selling their currencies of
Speaker 8: frequent flyer programs to banks. So I do think there
Speaker 8: needs to be a little bit more consumer heads up, right,
Speaker 8: if you're going to have this multi billion dollar loyalty
Speaker 8: program that essentially is a bank where you know you're
Speaker 8: creating your own currency, you should give consumers notice when
Speaker 8: making negative changes. We saw this year Delta and American
Speaker 8: Express rolled out some pretty punitive changes to their credit cards,
Speaker 8: increasing fees, et cetera. And there was huge consumer backlash
Speaker 8: to mostly Delta on that one, and we saw them
Speaker 8: roll back some of their changes. Now, do I think
Speaker 8: the government needs to come in and regulate every aspect
Speaker 8: of loyalty programs? Probably not, but having some more consumer
Speaker 8: protections when those negative changes happens, I think are a
Speaker 8: good thing for everyone involved, because people are getting sick
Speaker 8: of just constantly changing and moving up the.
Speaker 1: Goldpost and waiting in line at the the lounge. I
Speaker 1: mean that might be part of the issue, yeah, I mean.
Speaker 1: Brian Kelly, thank you so much for being with us.
Speaker 1: Brian Kelly of The Points Guy. Thank you as always.
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