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
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify, or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Chris Harvey of Wells Fargo, writing,
Speaker 2: this growing crisis of confidence brewing. Stop market vigilantes will
Speaker 2: not be that patient or ignored. It probably needs to
Speaker 2: get worse before it gets better. Chris joins us now
Speaker 2: for more. Chris, good morning, Good to see you.
Speaker 3: Good to see you too.
Speaker 2: This is a really difficult one, So let's take a beat.
Speaker 2: Typically we sit here and think about the kind of
Speaker 2: threshold that it would take for a policymaker to step
Speaker 2: in and act as the circuit breaker. Time the policy
Speaker 2: maker is the source of the risk, maybe not the solution.
Speaker 4: How different is this as a moment for you and
Speaker 4: a team.
Speaker 3: It's very different.
Speaker 5: And the issue is, and we go back to green
Speaker 5: Span before the ER four tightening cycle, they said, we
Speaker 5: can raise rates, right, but what we need to do
Speaker 5: is we need to communicate that to you. We need
Speaker 5: to tell you how we're going to raise raids over
Speaker 5: what time periods so you can plan. If you're going
Speaker 5: to buy a house, you can speed up that house purchase,
Speaker 5: going to buy a car, you can speed that up.
Speaker 5: This administration is talking a lot, but they're not communicating
Speaker 5: a lot. This weekend, we had one person saying tarish
Speaker 5: and negotiable. We had somebody else saying they're non negotiable.
Speaker 5: What are they? What's your goal? What you're trying to do?
Speaker 5: What are we handicapping over what time period? You need
Speaker 5: to communicate better. The other thing is the market is
Speaker 5: sending a big signal. It's not a good idea to
Speaker 5: ignore that.
Speaker 2: China sending a big signal right now as well, So
Speaker 2: i'd love your thoughts on that too. Big Taris's coming
Speaker 2: from the US side overnight, China responding with eighty four percent.
Speaker 2: I think at the moment for a lot of investors
Speaker 2: they look at that head down and say, you know,
Speaker 2: what given how little we sell to China, that's not
Speaker 2: much for a big deal. But I think the bigger
Speaker 2: raid across, the bigger raid through at the moment, that
Speaker 2: makes it much much harder to get to the negotiating
Speaker 2: table with this president who's pushed back against China threatening
Speaker 2: to do exactly this.
Speaker 3: Yeah.
Speaker 5: So what people have realized is the weak spot for
Speaker 5: the US, the capital markets, and the economy. If they
Speaker 5: push back, right, we're going to lose and we are
Speaker 5: losing some negotiating leverage.
Speaker 3: What are we talking about.
Speaker 5: We're talking about recession, We're talking about job losses. We're
Speaker 5: talking about the negative wealth effect. We're talking inter recession.
Speaker 5: The deficit goes wider, not tighter. And people know that,
Speaker 5: so they're saying, Okay, fine, if we're going to do this,
Speaker 5: we're all going to We're just going to pull everyone
Speaker 5: down into the mark and what you're seeing is just
Speaker 5: not great.
Speaker 6: Well, I'm looking right now. China also added six more
Speaker 6: firms from the US to the unreliable list at the
Speaker 6: same time that we've seen incredible losses and the likes
Speaker 6: of Apple, which seems to be very much in the
Speaker 6: crosshairs of this. How much does this discourage you from
Speaker 6: going to the multinational companies actually at a time when
Speaker 6: they potentially could be the most exposed.
Speaker 5: Yeah, a Lisa, what we need to do is we
Speaker 5: need to figure out exactly what we're dealing with. And
Speaker 5: because it's a moving target, that's why it's so hard
Speaker 5: to That's why the markets are so fluid at this
Speaker 5: point in time. And you're right, where are the safe havens.
Speaker 5: The safe havens are at the front end of the curve.
Speaker 5: Safe havens are in low vold, they're in defensives, but
Speaker 5: even those are still that's a place where we've like,
Speaker 5: but it's still have it showing some stress, right, So
Speaker 5: it's very difficult to find a safe haven. It's very
Speaker 5: difficult to really preserve your money or your assets at
Speaker 5: this point in time.
Speaker 3: Yeah.
Speaker 6: The reason why is because ten year yields are up
Speaker 6: through four forty you're looking at thirty year yields now
Speaker 6: almost four point nine percent.
Speaker 4: They've absolutely been surging.
Speaker 6: What's going on, I mean, what are you doing with this?
Speaker 3: So there's lots of talk.
Speaker 5: One conversation is that out of Asia that they're selling duration, right,
Speaker 5: So they're selling longer bonds and buying shorter bonds for
Speaker 5: liquidity issues to send a message. There's other talk about
Speaker 5: basis trades.
Speaker 3: There's if you look at.
Speaker 5: What's happening nominals the last time I looked, nominals are
Speaker 5: going higher bud but it's being forced by reels. It's
Speaker 5: not being forced by at least in the last couple
Speaker 5: of days, by inflation expectation. That seems more like a
Speaker 5: liquidity issue, people moving around positions, not so much fundamental
Speaker 5: driven right The other thing is, obviously we've got issue
Speaker 5: INCE coming and there's more and more fear. Even though
Speaker 5: right now inflation expectations or break evens aren't moving, there's
Speaker 5: fear that that will continue in the future.
Speaker 2: Seeing some big moves right now, that's for sure. If
Speaker 2: you are just joining us, welcome to the program. Eighty
Speaker 2: four percent tariffs from China. China raising tariffs on US
Speaker 2: goods to eighty four percent, and the spillover immedia equity
Speaker 2: features down by one point six percent on the S
Speaker 2: and P five hundred, the rustle down by two point
Speaker 2: five the DAX is down by four full percentage points.
Speaker 2: And in the commodity market you're seeing crude rollover as well.
Speaker 2: On WCI and Don Brent were down by six percent.
Speaker 2: Bran CREWD fifty eight ninety eight, WCI fifty five eighty five.
Speaker 2: There will be some individuals in America making a lot
Speaker 2: of noise today off the back of this headline.
Speaker 4: I'm thinking the farmers in a few red states.
Speaker 1: Absolutely, because remember Trump one point zero. The farmers were
Speaker 1: the ones that got hit the worst because they didn't
Speaker 1: have the export market of China to go to, and
Speaker 1: then we the United States, had to bail them out.
Speaker 1: But Jonathan, you started this conversation this morning where you're
Speaker 1: look into policy makers for the answers for the solutions.
Speaker 1: When I asked the President directly the pain threshold he
Speaker 1: was willing to take on for the market, he said,
Speaker 1: sometimes you have to take medicine to fix something. They
Speaker 1: think the tariffs are the medicine. Well, what's going to
Speaker 1: be the solution and the medicine to what is happening
Speaker 1: right now? They'll fallout from these tariffs.
Speaker 2: Some big moves elsewhere as well. Apple's had a difficult
Speaker 2: run of things. That name is down by two percent
Speaker 2: in the pre market at the moment. Apple is down
Speaker 2: before today by more than twenty percent in just four sessions,
Speaker 2: the worst run for that name going back to two thousand.
Speaker 2: The year two thousand, the worst four day run in
Speaker 2: twenty five years for one of the biggest companies on
Speaker 2: the planet. Chris Harvey not to talk about single names exclusively,
Speaker 2: but we can talk about MAC seven. They had a
Speaker 2: difficult moment now and a bigger way than maybe we've
Speaker 2: ever seen for those names.
Speaker 5: So some yes, and obviously Apple is more of a
Speaker 5: focus beca because there the tariffs and what they manufacture
Speaker 5: in China.
Speaker 3: Right the rest of.
Speaker 5: The MAC seven, more of the communication names. They're in
Speaker 5: a little bit better space, but it's not as if
Speaker 5: anyone's in great space. It's not as if you can say, wow,
Speaker 5: this is a perfect spot, this is fantastic for these guys.
Speaker 3: Couldn't be any better.
Speaker 5: It's just relative who's worse, who's better, and who's going
Speaker 5: to get hurt a little bit more? Where's the defensive
Speaker 5: this right now? What we're doing is everything is across
Speaker 5: a risk spectrum, and which one has less risk?
Speaker 3: That's all you're doing.
Speaker 2: What's on your dashboard at the moment to establish where
Speaker 2: a tradable bottom might be.
Speaker 4: Is that impossible right now?
Speaker 3: For you?
Speaker 4: In the scene.
Speaker 5: Oh no, so John, this is what we're looking at
Speaker 5: because we see a setup. We don't see the bottom,
Speaker 5: but we see a setup.
Speaker 3: Right.
Speaker 5: We want to see one Q numbers reset. We want
Speaker 5: to see them cut. We want to see an inversion
Speaker 5: in the front end of the curve between two years
Speaker 5: and fed funds of one hundred bases points or more.
Speaker 3: That tells us.
Speaker 5: That the market's indicating we need to move fast, you
Speaker 5: need to hurry up, and potential monetary policies coming. In
Speaker 5: addition to that, we want to hear the conversation become
Speaker 5: more productive. We want it either to shift from tariffs
Speaker 5: to taxes or the acknowledgement that, oh, yes, everyone knows
Speaker 5: there's going to be pain, but the issue is they
Speaker 5: just don't know that the cure seems to be worse
Speaker 5: than the disease right now, or that's what the market's saying.
Speaker 5: You have to acknowledge that, hey, yes there's going to
Speaker 5: be pain, but there's there's light at the end of
Speaker 5: the tunnel. Here's what we're doing, here's our goals when
Speaker 5: we get there.
Speaker 3: This is what's going to happen in the meantime.
Speaker 6: Delta with Drew, It's guidance for the full year. Walmart
Speaker 6: reaffirmed us guidance.
Speaker 4: What do you do with this?
Speaker 5: So we actually had this conversation yesterday and I've been
Speaker 5: having this conversation a lot. We expect numbers to come down.
Speaker 5: It's going to range some people. We were talking to
Speaker 5: our audio analysts and he would not be surprised if
Speaker 5: there would be a suspension of guidance there. We were
Speaker 5: talking to others saying, and maybe it's going to be
Speaker 5: five percent, maybe ten percent. What we're going to hear
Speaker 5: is the cease going to say, out of an abundance
Speaker 5: of caution, here's what we're doing.
Speaker 3: We're lowering the top end of guidance.
Speaker 5: We're cutting five percent, we're cutting ten percent. Because of
Speaker 5: the uncertainty, we have to remove guidance. So it's going
Speaker 5: to be right across the board.
Speaker 3: And you're right.
Speaker 5: The example of Walmart DELT is a good one because
Speaker 5: you have the two ends of the spectrum.
Speaker 2: This is where we really start the conversation. Where does
Speaker 2: the circuit break come from? Could it come from Capitol Hill?
Speaker 3: It has to come from Capitol Hill.
Speaker 5: You have to hear the administration acknowledge what's going on
Speaker 5: and you have to have them acknowledge and communicate that
Speaker 5: they see it, they understand it, and you have to
Speaker 5: have them start to slow things down. This conversation about
Speaker 5: a thirty day pause, a sixty day pauses, a ninety
Speaker 5: day pause. Something has to happen. You cannot continually walk
Speaker 5: in and have more tarfs and more stress in the system,
Speaker 5: because the more you do that, the faster we go
Speaker 5: to a recession, the faster job losses come, and the
Speaker 5: faster this gets out of control.
Speaker 2: But right now it's just rhetoric.
Speaker 1: Do you actually see Congress pulling back the reins and
Speaker 1: trying to take control, giving less authority to the executive
Speaker 1: branch when it comes to trade policy, Yeah.
Speaker 5: Emory, I think if it continues, you go down that route.
Speaker 5: But that's a much slower route, right and the market's
Speaker 5: going to move much quicker. And this is a question
Speaker 5: of confidence. Does do the markets? Do business folks have
Speaker 5: confidence in the plan? And what's the spill out.
Speaker 3: From the plan?
Speaker 5: And right now the markets are saying we're losing confidence,
Speaker 5: and we're losing confidence quickly.
Speaker 1: So when it comes a circuit breaker, you think it's
Speaker 1: actually Republicans in Congress that could be the ones to
Speaker 1: put a stop to this. You don't see maybe it
Speaker 1: Shijing ping or Donald Trump himself blinking.
Speaker 5: I don't see in the conversation. So a couple things there,
Speaker 5: because that's a big question, right the situation between China
Speaker 5: and US. US appears to think that China.
Speaker 3: Is the existential threat.
Speaker 5: We can have that continue, and likely that does continue.
Speaker 5: But if we get positive news from the EU, from Japan,
Speaker 5: from other places where there is actually progress, then things
Speaker 5: can improve. China is towards the end of my concern
Speaker 5: this point in time. Can we get our allies to
Speaker 5: come on board, can we strike deals? Can we move forward?
Speaker 5: Can we make progress? If we're showing progress, the markets
Speaker 5: will react positively. If we do not show progress, the
Speaker 5: markets are not going to react.
Speaker 6: Possibly, there's a story in the Financial Times about how
Speaker 6: US ports are getting really crowded, that a lot of
Speaker 6: companies are delaying their car shipments and they're just holding
Speaker 6: them at the ports hoping that maybe in a couple
Speaker 6: days these tariffs will be removed. Maybe it'll take four days,
Speaker 6: maybe it'll take five days, and they're about to reach
Speaker 6: capacity at these ports. What will it take for both
Speaker 6: companies and for the markets to realize this is real.
Speaker 5: Listen, it's real, right, So the complexity of this you
Speaker 5: cannot turn around in a couple of days, in a
Speaker 5: couple of weeks, because you've basically tariff or taxed almost
Speaker 5: every single country out there in order to unwind that.
Speaker 3: It's no small feet. The other thing is governments do.
Speaker 5: Not move quickly, right, and because of what we've done,
Speaker 5: people want to protect themselves.
Speaker 3: So they're going.
Speaker 5: To have to talk to their lawyer, to their leaders,
Speaker 5: to their parliament or whoever before they take some action.
Speaker 5: We can have the conversation, but the actual action and
Speaker 5: execution is going to take a lot, I think a
Speaker 5: long period of time.
Speaker 6: What are we seeing in markets? Is this just the
Speaker 6: fear that this is going to have a suppression to
Speaker 6: growth or are we getting actually a sense of what
Speaker 6: markets are repricing as the new normal?
Speaker 5: Yeah, the markets don't really know the end goal, right,
Speaker 5: is it negotiation, is it revenue generation?
Speaker 3: Or is it something much bigger? Right?
Speaker 5: Do we want to change the way we do trade
Speaker 5: throughout the world and for.
Speaker 3: The rest of time. That's a big question.
Speaker 5: So the markets are just trying to figure out what's
Speaker 5: going on, and the markets are trying to send the
Speaker 5: message we need better communication. We need to understand the goal.
Speaker 5: When we get to the goal, what are you going
Speaker 5: to do? And how are we going to do it?
Speaker 2: To start that process, to engineer that supply side response,
Speaker 2: you've got to believe that these are the rules of
Speaker 2: the gang, and we're saying is this a negotiation or
Speaker 2: the rules of the game.
Speaker 6: I love how Chris puts it. The market is crying
Speaker 6: to the White House, we want better communication. Can we
Speaker 6: have a therapist come in here and try to clarify
Speaker 6: what the end goal is? Are we meant to be together?
Speaker 6: Are we meant to be apart?
Speaker 4: Is this therapy again?
Speaker 6: Well, it sounds like a lot of people are trying
Speaker 6: to get into the psychology of the moment.
Speaker 4: What do people say, cry harder?
Speaker 6: I think that that's what we're doing on every single market.
Speaker 2: I got to find some light humor in a moment
Speaker 2: like this one. We're down again by one point four
Speaker 2: percent on the S and P. A special thanks to
Speaker 2: Chris Harvey of Wells Fargo Richard Bernstein. If Bernstein advises
Speaker 2: writing the FED is caught between a rock and a
Speaker 2: hard place. GENP forecasts are being revised downward, but inflation
Speaker 2: expectations seem poised to accelerate. Richard joins us Now for more, Richard,
Speaker 2: welcome to the program. You put it in your not
Speaker 2: Everyone's got a plan until they get punched in the face.
Speaker 2: That famous strategist on Wall Street, my Tyson, how strong
Speaker 2: is that punched this morning?
Speaker 7: I think the punch is a real it's not a jab,
Speaker 7: it's a real roundhouse punch.
Speaker 3: And I think.
Speaker 7: John, look, you've been talking a lot about all the
Speaker 7: different uncertainties and all the different things that.
Speaker 3: Are going on.
Speaker 7: That's fine, but I think one also has to realize
Speaker 7: that we entered the year with investors historically confident, so
Speaker 7: this has a magnified effect on investors' confidence that they're
Speaker 7: being shaken. So that was my point about that everybody
Speaker 7: has a plan until they get punched in the mouth.
Speaker 7: Because everybody had a plan. They thought it was easy.
Speaker 7: They thought this was like, oh, you know, it's just
Speaker 7: buy an index funder, let's buy the mag seven. And
Speaker 7: all of a sudden they're realizing that was the unusual
Speaker 7: period and now we're going back to something that's much
Speaker 7: more uncertain and they're getting punched in the mouth.
Speaker 6: Richard Scott beston Treasure Secretary speaking with Henry our own
Speaker 6: here and saying that this then is not necessarily a
Speaker 6: MAGA problem, it's a mag seven problem.
Speaker 8: Do agree?
Speaker 6: Is that basically what you're seeing right now is the
Speaker 6: wine of an overvaluation of a crowded trade at the
Speaker 6: end of the last year beginning of this one.
Speaker 7: Well, well, Lisa, I understand where he's going with that question,
Speaker 7: But my response would be, why is the Russell two
Speaker 7: thousand and performing so dramatically here? If it were just
Speaker 7: a mag seven point? Why are the domestic the most
Speaker 7: domestically focused companies in America? Smaller companies are underperforming? Right?
Speaker 6: So?
Speaker 7: How is this just a large cap MAGA effect? Is
Speaker 7: clearly it's clearly not our mag seven effects. Sorry, it's
Speaker 7: clearly not the you know, I think this is a
Speaker 7: common The markets are are making a comment on the
Speaker 7: broad economy in the United States, and and you know,
Speaker 7: I think also the notion that this is an orderly
Speaker 7: processed that's fine.
Speaker 4: I would agree with that.
Speaker 7: But the process is not positive one. The markets are
Speaker 7: not giving a positive verdict on that. And that's kind
Speaker 7: of what I think people are still sort of missing here.
Speaker 6: Richard, how do you navigate a situation like this? The
Speaker 6: rules of the world may be be called into question
Speaker 6: over a longer period of time, and acid allocation potentially
Speaker 6: could look very different if the trends that we're seeing
Speaker 6: in markets today would hold. So how are you thinking
Speaker 6: about not just short term investing, but the one year,
Speaker 6: two year, five years ahead?
Speaker 7: Right? So, so, Lisa, I think in the short term,
Speaker 7: you know, you're using the word uncertainty. Everybody's using the
Speaker 7: word uncertainty. I shouldn't personalize it like that. Everybody's using
Speaker 7: the word uncertainty. So what that means is the scarcity
Speaker 7: in the marketplace is certainty. That's what that's what will
Speaker 7: command a premium through time is certainty. What does that mean?
Speaker 7: That means quality, That means more certain cash flows, it
Speaker 7: means dividends, it means near you know, really kind of
Speaker 7: focusing on near term fundamentals as opposed to long term
Speaker 7: growth stories. The second thing is, you know, what do
Speaker 7: you do for three years, five years, ten years, two years, whatever?
Speaker 7: And I think, look, the goal all of what's going on,
Speaker 7: returning industrial processing back to the United States and manufacturing
Speaker 7: back to the United States. I think that's a great goal.
Speaker 7: In fact, we've been talking about it in my firm
Speaker 7: at Richard Percy Advisors for ten years. I wrote an
Speaker 7: op ed in twenty eleven in the Financial Times about
Speaker 7: this topic and how important it was. This is the
Speaker 7: goal is real. However, the method that they're choosing to
Speaker 7: try and get to that goal, what personal opinion here
Speaker 7: for a second, is incredibly ham handed. There are many
Speaker 7: better ways to do with that. Do not place attacks
Speaker 7: on the US consumer.
Speaker 4: Richard.
Speaker 2: We had from one ECP official earlier on this morning
Speaker 2: that said, there's no reason for a rate cut right now.
Speaker 2: I think you refer to fifty basis point cons as ridiculous.
Speaker 2: Mary Daily, the San Francisco FED President, putting out a
Speaker 2: post on LinkedIn saying we have the time and space
Speaker 2: to deliberate our next moves. Lisa, that's what's different about
Speaker 2: this moment. These officials are these central banks on Russian
Speaker 2: to race in Russian to step in and provide support.
Speaker 2: Maybe they would have done a number of years ago and.
Speaker 6: For the correct reasons, which is this is a very
Speaker 6: different type of crisis that is not of the credit
Speaker 6: markets making. This is about policy uncertainty and the potential
Speaker 6: stagflationary shock that comes along with inflation. If you take
Speaker 6: a look at two year break even rates, they've actually
Speaker 6: hit the highest level going back to two thousand and
Speaker 6: two earlier this morning. It's shifting around incredibly volatile markets,
Speaker 6: but the signal it is not so clear in terms
Speaker 6: of how they should act, let alone.
Speaker 2: If Richard, are you thinking about where pockets and leverage
Speaker 2: might be? This has been a really unusual cycle hearing
Speaker 2: the UNATO styce and worldwide because of the support that
Speaker 2: was offered through the pandemic and through the recovery as well.
Speaker 2: When you think about where pockets of leverage might be
Speaker 2: this time around, how do you ask that question?
Speaker 7: So, John, that's related to you and Lisa were just
Speaker 7: hawking about. The FED was spoiled for many, many years
Speaker 7: decade two to two, three decades by globalization. Globalization was
Speaker 7: a massive disinflationary force on the US economy. Why because
Speaker 7: we were just increasing competition, and we all know when
Speaker 7: you increase competition, you put downward pressure on prices. So
Speaker 7: the FED could play the hero and ride in on
Speaker 7: the white horse and save the day. Now what we're
Speaker 7: seeing is de globalization. That whole disinflationary process is now
Speaker 7: being reversed, so it's now an inflationary process that ties
Speaker 7: the fed's hands, and the FED can't play the hero anymore.
Speaker 7: And I think that's one of the things that's happening.
Speaker 7: So where is the pocket of leverage. I don't really know.
Speaker 7: You know, one could argue that it's in the private
Speaker 7: market somewhere, because I think that a lot of their
Speaker 7: returns have been boosted by by leverage and the ability
Speaker 7: to borrow cheaply to make acquisitions. Maybe that's where it is,
Speaker 7: you know, it certainly you know not going to be
Speaker 7: I would argue it's unlikely to be in the big banks.
Speaker 7: The big banks, for all the all the their whining
Speaker 7: about over regulation, big bank balance sheets are pretty strong.
Speaker 7: It looks like the regulation has worked. But where is
Speaker 7: that leverage. It's in things like private debt and all
Speaker 7: of that. So the risk hasn't gone away, it's just moved,
Speaker 7: I think from the public markets to the private markets.
Speaker 7: It's an interesting monetary and fiscal question is that if
Speaker 7: there is some kind of problem in the private markets
Speaker 7: they're supposed to be private, will they come to the rescue.
Speaker 7: I would think they'd be very hesitant to do that.
Speaker 1: The Treasury Secretary this morning is saying really nothing to
Speaker 1: see here. I feel like I'm going to sound like Lisa,
Speaker 1: But how do you think this bond auction is going
Speaker 1: to go today? For the ten year?
Speaker 7: Well, a little outside my area of expertise, I just
Speaker 7: don't think. I think what we are seeing is a
Speaker 7: complete repricing of US assets with a higher risk premium.
Speaker 7: Right if you think about it, we've taken about five,
Speaker 7: maybe six multiple points off the SMP despite good earnings.
Speaker 7: We're seeing in a very short period of time the
Speaker 7: ten years sell off. But certainly bond volatility has gone up.
Speaker 7: Whether you grew with my statement about the risk pream renout,
Speaker 7: certainly bond volatility has gone up. And I think what's
Speaker 7: happening is US assets are being priced. You know, you
Speaker 7: mentioned before about you know, or are we a safe
Speaker 7: haven anymore?
Speaker 3: Maybe not?
Speaker 7: And that's kind of what we're seeing.
Speaker 2: I spy the Tottenham memblanm right behind you as well, Richard.
Speaker 2: Super depressing stuff for you, A I appreciate.
Speaker 4: The time as always, rough rough season.
Speaker 2: Thank you, sir, Richard Bernstein and Richard Burnstein Advisors, thank
Speaker 2: you very much. If you are just joining against these
Speaker 2: with the numbers. So basically what they've done is withdrawn
Speaker 2: their full year guidance, citing uncertainty around global trade. The
Speaker 2: CEO at Bastian saying, quote, it's very difficult to predict
Speaker 2: what policies may look like over the course of the year.
Speaker 2: That's for sure. The stock is up by one point
Speaker 2: seven percent, as Bastian ads that revenue has flatlined, joining
Speaker 2: us now to discuss as Sheila Coleu of Jeffrey's Sheila,
Speaker 2: welcome to the program. If mister Bastian can't offer any guidance,
Speaker 2: can you?
Speaker 8: I don't think we can either.
Speaker 9: We cut our estimates early your last week across the
Speaker 9: entire airline landscape, assuming flat domestic pricing for the year.
Speaker 8: What we're getting from.
Speaker 9: Delta's suspended guidance clearly, and that's probably the best.
Speaker 8: Strategic move from here, but it assumes something.
Speaker 9: Worse than that for Q two in terms of flat
Speaker 9: domestic pricing, and then a second half capacity is flat,
Speaker 9: So not great news out of the US's largest carrier
Speaker 9: in terms of what they're seeing.
Speaker 2: Shalbe, You've talked about this repeatedly. The high income bracket
Speaker 2: here in the United States holding up business for many
Speaker 2: of these airlines Premium, Long cal Shaba. Are you seeing
Speaker 2: building evidence that maybe we're seeing something we haven't seen
Speaker 2: over the last five years, that they're starting to take
Speaker 2: the hit here.
Speaker 9: I think Premium and Atlantic are International are actually still
Speaker 9: holding up. But we just got off the phone with
Speaker 9: Dan Jenkie Delta CFO. It seems like the bookings visibility
Speaker 9: there is decent. What you're seeing the contraction is is
Speaker 9: in the main cabin, which is where we would see it,
Speaker 9: but also notably corporate. Corporate really saw a move down
Speaker 9: in February and March. Industries that were particularly hit we're industrials,
Speaker 9: aerospace of course, and some other sectors, while financials and
Speaker 9: tech held in there. It seems so corporate is also
Speaker 9: taking a leg down. So corports are clamping up a
Speaker 9: little bit. Whether it's the tightness in just you know,
Speaker 9: cost cutting, or if it's the macro volatility that's causing
Speaker 9: that is to be determined.
Speaker 8: So that's where we're seeing the.
Speaker 9: Premium hit is really within the corporate customer chrending down.
Speaker 6: We are seeing some commentary from Ed Basti and the
Speaker 6: CEO of Delta this in the Wall Street Journal. He
Speaker 6: said he understands there's a role to play with tariffs
Speaker 6: and trade policy. It's just hard when you're trying to
Speaker 6: do them all at the same time. He also said,
Speaker 6: I don't think we're in a recession. I think we're
Speaker 6: in danger of talking ourselves into a recession. When you
Speaker 6: talk to executives, particularly from airlines, is there a level
Speaker 6: of frustration that the consumer does seem strong, willing to
Speaker 6: accept even price increases, still looking for experience. Is at
Speaker 6: the same time that there's a lot of gloom and
Speaker 6: doom on Wall Street and a potential regime shift that
Speaker 6: could just torpedo that.
Speaker 9: It's interesting because Delta's telling us they saw it within
Speaker 9: the consumer turned down really quickly, whether it was in
Speaker 9: February and March, in the first five to seven days
Speaker 9: of April.
Speaker 8: I'm actually in Atlanta right now.
Speaker 9: I'm at a trade show, an aerospace aftermarket trade show,
Speaker 9: and the ten executives we met with yesterday were so
Speaker 9: confident regarding tariffs. They don't think it'll have as much
Speaker 9: demand destruction as people assume, and.
Speaker 8: That pricing will actually be positive because.
Speaker 9: They could pass it through to the end user, which
Speaker 9: is of course the airline, which is of course the
Speaker 9: consumer in the US. So I think we're seeing that
Speaker 9: short cycle hit with Delta this morning, a massive change
Speaker 9: with what they previously guided. They had guided a capacity
Speaker 9: up or now it's flat, and pricing also taking a
Speaker 9: swing down down two and a half to down six
Speaker 9: and a half in their.
Speaker 8: Forward outlook for Q two.
Speaker 9: So we're seeing that major revenue cut only from a
Speaker 9: capacity perspective, but from a price perspective, and the airline
Speaker 9: is doing its best to stay populitable, show that it's
Speaker 9: you know, it's positioned well for this, but it's relatively
Speaker 9: well leverage. But they're only growing their net fleet less
Speaker 9: than one percent, so taking into account bowing air with
Speaker 9: deliveries and their retirements, that's less than one percent. So
Speaker 9: they're clamping down on their costs as well.
Speaker 6: This is a really fascinating dichotomy right now, Shila, because
Speaker 6: on one hand, you have the airline saying es sensibly
Speaker 6: they believe they have pricing power. They believe that they
Speaker 6: can raise prices and that you could shrink potentially just
Speaker 6: your flight schedule and keep prices where they are, go
Speaker 6: higher and offset any kind of change you're searing something
Speaker 6: so different from the likes of Walmart that want to invest.
Speaker 4: In price i e.
Speaker 6: Absorb some of the increase in prices. Is there some
Speaker 6: sort of structural change that gives airlines a strategic advantage
Speaker 6: to being able to have pricing power.
Speaker 9: So the airlines are clearly saying pricing is stalling. Pricing
Speaker 9: and capacity are stalling. The Aerospace Show imat is more
Speaker 9: than manufacturers and the maintenance providers to the airlines. They're
Speaker 9: still seeing that they have the ability to pass price through.
Speaker 8: One is a shorter cycle by.
Speaker 9: With an airline of consumer booking is maybe thirty to
Speaker 9: ninety days, and that's where we're seeing the hit with Delta.
Speaker 9: The Aerospace Show i'm at is probably thirty to.
Speaker 8: One year bicycle.
Speaker 9: So the shorter cycle is definitely seeing the market volatility
Speaker 9: impact its demand and it's pricing Sheila.
Speaker 1: Delta is a Virgin Atlantic partner on its North Atlantic routes.
Speaker 1: We saw Virgin Atlantic pull back some of those routes,
Speaker 1: especially when it comes to New York City, this major hub.
Speaker 10: JFK.
Speaker 1: Are you expecting more airlines to pull back some routes.
Speaker 9: I think International is the reader we're going to watch
Speaker 9: the most so to put it in perspective in terms
Speaker 9: of domestic, domestic is very important. Delta had previously seven
Speaker 9: thirty five of EPs. Every one point of domestic pricing
Speaker 9: is about eighty five cents to EPs. Internationally, every one
Speaker 9: point of pricing is maybe twenty cents.
Speaker 8: Internationally is still holding up. But what we're seeing there
Speaker 8: in the second.
Speaker 9: Half and in Q two and in the second half
Speaker 9: is actually a decent amount of capacity, whether it's Delta,
Speaker 9: whether it's United, whether it's American, capacity is amid single
Speaker 9: digits of four percent. So if you have a lot
Speaker 9: of capacity not a lot of demand, what happens your
Speaker 9: price gets cut. So Atlantic is still holding up strong
Speaker 9: in Q two. They're fairly well booked into April. I
Speaker 9: think ninety percent booked in April, sixty percent booked in May,
Speaker 9: and forty percent in June. And that's system wide, So
Speaker 9: internationally would be better than that.
Speaker 8: So right now International is still holding up.
Speaker 9: But again that's a longer sale cycle, probably ninety days
Speaker 9: instead of thirty days for the domestic side.
Speaker 2: Seva, I appreciate you time, thanks for jumping on busy
Speaker 2: morning for you, I'm sure.
Speaker 4: Shiva Kari of Jeffrey's outline of the morning.
Speaker 2: So far, the tariffs go on overnight as expected, the
Speaker 2: retaliation from China raising tariffs on US goods to eighty
Speaker 2: four percent.
Speaker 4: To discuss some place to say that joining US now
Speaker 4: is Russia. Shama A.
Speaker 2: Rockefeller International, Russia, welcome to the program, sir. We are
Speaker 2: trying to work out what this Federal Reserve should do.
Speaker 2: Should the policymakers be stepping in and providing support or
Speaker 2: should they watch and wait to see how this place out.
Speaker 3: Well, I don't think.
Speaker 10: There's any case for the Fed to cut into a
Speaker 10: streets given its dual mandages now, because as I wrote
Speaker 10: in my ft OpEd this Monday, which is that the
Speaker 10: Fed has missed its inflation target for five years in
Speaker 10: a row, it will do so again this year and
Speaker 10: the year after that, and possibly won't get to the
Speaker 10: target now for the next couple of years, even if
Speaker 10: it does nothing at this stage, and inflation is a
Speaker 10: big concern for Americans, and the horizon consumer prices over
Speaker 10: the last five to six years has been such that
Speaker 10: it has offset the entire undershoot of the two percent
Speaker 10: inflation target that we had last decade. So if you
Speaker 10: go back to the year two thousand over the last
Speaker 10: twenty five years. Now, what you will see is that
Speaker 10: over that time period, consumer prices today are higher by
Speaker 10: about sixteen percent than they would have been had the
Speaker 10: FED been meeting its two percent inflation target over the
Speaker 10: last twenty five years. So that's a serious miss on inflation,
Speaker 10: and I think it's aware of that, and given the
Speaker 10: fact that some infacient expectations are already elevated, to add
Speaker 10: fuel to that fire would be a mistake. So I
Speaker 10: think that the FED needs to be true to its
Speaker 10: mandate and it needs to sort of at the very
Speaker 10: least watch and so far there's been no evidence that
Speaker 10: its policy has been overly restricted.
Speaker 2: They push back that I've heard over the past week,
Speaker 2: and I'd love your response to it goes a little
Speaker 2: something like this, They should focus on the downside risk
Speaker 2: to growth and not the upside risk to inflation because
Speaker 2: anxiety around the labor market is so much higher, we
Speaker 2: don't have sufficient tightness in the hyper market that would
Speaker 2: drive those second round effects high wightes, etc.
Speaker 4: What would you sind back.
Speaker 10: To that, Well, you know, this has been the same
Speaker 10: easy money crowd which has been you know, which is
Speaker 10: always calling for lower interest rates, So I think that
Speaker 10: that's been the real problem. One of the basic problems
Speaker 10: of the US economy is that it's been fed on
Speaker 10: a diet of easy money for far too long, whether
Speaker 10: it's monetary policy or fiscal policy, and I think that's
Speaker 10: coming back to bite the US. And what's happening today
Speaker 10: is a demonstration of that, which is that I can't
Speaker 10: remember seeing a day in my memory where on the
Speaker 10: US markets all three major indicators are down, US docs,
Speaker 10: US bonds, and the US dollar. So there's a real
Speaker 10: loss of confidence happening here as far as the US
Speaker 10: is concerned. This is almost like the kind of scene
Speaker 10: that I see in emerging markets that you know, where
Speaker 10: you see cross assets declining together like this, And in
Speaker 10: emerging markets, I don't think any central bank would think
Speaker 10: about cutting interest rates in such an environment.
Speaker 6: Do you think that we're getting little ahead of ourselves
Speaker 6: with trying to give a narrative to the move in
Speaker 6: markets right now? Given that there are basis trades unwinding
Speaker 6: and hedge funds that are deleveraging.
Speaker 10: Well, it's still unprecedented. I agree that there's nothing that
Speaker 10: sort of extraordinary going on. If you look at the
Speaker 10: scenes we have seen in two thousand and eight that
Speaker 10: kind of market panic. We are far from that, but
Speaker 10: we don't want to get to that point. So I
Speaker 10: think that the whole issue here is the fact that
Speaker 10: let's acknowledge that we have seen a very unusual move
Speaker 10: and acid prices, and that this accident in a way
Speaker 10: was waiting to happen. As you know that at the
Speaker 10: end of last year, I had sort of called this
Speaker 10: the mother of all bubbles, this American exceptionalism trade where
Speaker 10: everybody was flooding into the American market as if there
Speaker 10: was no other market in the world to invest in.
Speaker 10: Eighty percent of all equity market flows around the world
Speaker 10: this decade went into just America. So it's this big
Speaker 10: unwind taking place.
Speaker 8: I think of that bubble.
Speaker 10: Now, you can argue that it would have happened regardless
Speaker 10: of Trump and Taris, but his moves up obviously precipitated this.
Speaker 10: But as someone put it, that the air is coming
Speaker 10: out of that balloon, but that air was put in
Speaker 10: the balloon before that. And as I've argued in the past,
Speaker 10: the combination of very easy monetary and fiscal policies is
Speaker 10: what has got us into this place today, how much.
Speaker 4: Further does it have to go?
Speaker 6: Then if that's the theory, that yes, this is partly
Speaker 6: because of what's going on right now with policy uncertainty
Speaker 6: and the actual policies putting and being put in place,
Speaker 6: but it also has to do with the build up
Speaker 6: over so many years that you call a bubble. How
Speaker 6: much further do we have to go to create a
Speaker 6: level that you feel more comfortable investing in?
Speaker 10: Well, I think that this marks a major regime shift,
Speaker 10: which is that the US market had outperformed the rest
Speaker 10: of the world for fifteen years, as you know, and
Speaker 10: in the last couple of years that reached what we
Speaker 10: call a parabolic stage where it just went completely vertical,
Speaker 10: where US markets totally disconnected from the rest of the world.
Speaker 10: They in fact was sucking capital out from the rest
Speaker 10: of the world. I think that this has many years
Speaker 10: to go, that what we're seeing today is the opening
Speaker 10: act of this major trend reversal and capital flows. But
Speaker 10: this is a multi year trend. You know that people
Speaker 10: love to say that don't bet against America. The American
Speaker 10: stock market eventually always comes back, and it's been a
Speaker 10: great performer over very long stretches of time. All true,
Speaker 10: But if you look at those very long stretches of time,
Speaker 10: which go back to year nineteen hundred, when we have
Speaker 10: data that the US stock market in six of the
Speaker 10: past eleven decades has in fact underperformed the rest of
Speaker 10: the world. And we've just had a fifteen year incredible
Speaker 10: spell of US market outperformance with both the dollar doing
Speaker 10: well and the US stock market doing well. I suspect
Speaker 10: for at least the rest of the decade both the
Speaker 10: dollar and the US stock market to significantly underperform the
Speaker 10: rest of the world. So I think that this is
Speaker 10: a regime shift precipitated by what Trump is doing, but
Speaker 10: something which predates it.
Speaker 1: In this regime shift, do you think we need to
Speaker 1: start working about potentially Affirm blowing up like Melvin Capital
Speaker 1: Management did in twenty twenty two, Well, I think, you know, there.
Speaker 10: Is a lot of leverage out there which we only
Speaker 10: know about when this happens. Like what are the marks
Speaker 10: today for private credit for example, have they, you know,
Speaker 10: started marking their assets down or not? Private equity? So
Speaker 10: I think that there is a lot of follow through
Speaker 10: action that we have to see. What we've seen so
Speaker 10: far is only in the public markets. My concern is
Speaker 10: that the longer this last, which I think it could,
Speaker 10: then you have to sort of start marking down private
Speaker 10: assets and then we have to see what really happens,
Speaker 10: because that's where a lot of the build up in
Speaker 10: excesses has taken place. So I think that yes, we
Speaker 10: are going to find out where all the leverage is,
Speaker 10: and that's what the fair should be doing now. It
Speaker 10: should be out there looking at where will this stress
Speaker 10: emerge of this big decline in public markets because so
Speaker 10: much of the frauth and so much of the excesses
Speaker 10: are lying in the private markets outside of the regular eye.
Speaker 2: We've heard that this morning. Russia Shama of Rockefeller International, Russia.
Speaker 2: Appreciate your time, sir. This is the Bloomberg Surveillance Podcast,
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