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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
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Speaker 1: Joining us now, I'm so pleased to say, is Stephen Meyer,
Speaker 1: chief investment Officer for the New York City Retirement Systems. Stephen,
Speaker 1: it's wonderful to speak with you as someone who has
Speaker 1: to be a sort of an adjudicator of the national
Speaker 1: policies of how we invest for public servants. How do
Speaker 1: you understand the confidence, the bullishness in a market that
Speaker 1: is really hinging on such a narrow leader ship.
Speaker 3: Well, I think if you look at the markets right now,
Speaker 3: you're right, there's no breadth, and clearly there are some
Speaker 3: real concentration risks. People talk about American exceptionalism. I think
Speaker 3: it's the artificial intelligence tailo effect that we saw last
Speaker 3: year spilling over to this year. So we look at
Speaker 3: it from a standpoint of it's really megacap exceptionalism.
Speaker 4: What we do.
Speaker 3: Though we're long term investors. We managed the versified portfolios
Speaker 3: that are resilient, made to perform in different types of environment.
Speaker 3: So we're more strategic than tactical. We're not actually trading.
Speaker 3: Having said that, we have recently done strategic gas allocations
Speaker 3: across the five plans. We are reducing our exposure at
Speaker 3: the margin to US equities large cap in particular, we're
Speaker 3: flat to maybe down a little less in non US
Speaker 3: equities to funded increased investments in private assets.
Speaker 4: Within those private assets, because I know you made announcement
Speaker 4: to start this year that you would start increasing your allocations,
Speaker 4: how are you thinking about real estate within that? Because
Speaker 4: there's still trouble, see I said, thirty eight billion dollars
Speaker 4: worth of office buildings. We're still in distress. Surely it's
Speaker 4: only going to be worse with stubborn rates and loans
Speaker 4: coming due. Have you pulled back your exposure on real
Speaker 4: estate specifically.
Speaker 3: Not necessarily, Danny. We have obviously diversified portfolio. We're non
Speaker 3: core and core real estate investments. If you look at
Speaker 3: our investment portfolio right now, it's about thirty one percent
Speaker 3: multifamily in real estate, probably about thirty six percent in
Speaker 3: industrial logistics, so we're diversified away. We have an underweight
Speaker 3: intentional underweight in retail and office space in particular. I
Speaker 3: think it's another two years and in terms of those
Speaker 3: situations working at at least.
Speaker 4: Another two years. So how do you want to be
Speaker 4: positioned for two years? I mean, do you pull out
Speaker 4: completely when that comes due? That is a scary prospect
Speaker 4: because again, what we've seen is this rolling default. It's
Speaker 4: not this one big event, it's this continued issue. So
Speaker 4: what does that look like in two years?
Speaker 3: Yeah, for us, it's more around putting money to work,
Speaker 3: putting new money into the sectors. So obviously we're not
Speaker 3: for sellers. We don't need to be a seller. We're
Speaker 3: long term investors again with a much longer term, and
Speaker 3: so we're not panicking, but we're also not stepping in
Speaker 3: at this point. I know there are some smart people
Speaker 3: out there that think, well, we're evaluations are on prices
Speaker 3: are it's probably close to bottom. I'm a little suspicious.
Speaker 3: I think that is a little more to.
Speaker 4: Go elsewhere, you know, if it is higher for longer.
Speaker 4: If it is we're not going back to a zero
Speaker 4: rate environment. Are there other investments that you've had to rethink,
Speaker 4: things that just frankly won't work in this environment going forward?
Speaker 3: Well, you know, I'd say we focus more on fixed
Speaker 3: income as a core holding in the portfolio. So if
Speaker 3: you look at the yields you're able to get both
Speaker 3: in private and public fixed income now it's you know,
Speaker 3: obviously more compelling than it was in a zero interest
Speaker 3: rate environment. I also think the zero interest rate environment
Speaker 3: was very negative for the markets. I think it actually
Speaker 3: leads to suboptimal investment decision. Over leverage another concern I
Speaker 3: have just where we are right now, we've got leverage
Speaker 3: around the world that what two hundred and twenty five
Speaker 3: to two hundred fifty percent of global GDP. I think
Speaker 3: that's going to be more of a challenge I think
Speaker 3: domestically and abroad.
Speaker 5: How concerned are you about the deficit? Then?
Speaker 6: Given your last point, are you in the Steve Eisman's
Speaker 6: camp of as Lisa would say, way the deficit?
Speaker 3: Yeah, I am concerned about the deficit. If you just
Speaker 3: look at the trajectory of the deficits that we're racking up.
Speaker 3: We've got about ninety eight percent of outstanding US Treasury's
Speaker 3: relative to GDP, expected to go up to about one
Speaker 3: hundred and sixteen percent of GDP by in the next
Speaker 3: ten years. Those are dangerous levels and just the amount
Speaker 3: of paper we need to roll consistently through the eauction process.
Speaker 3: I know, Lisa, you follow the auctions. We had a
Speaker 3: couple of good auctions those past month. We did tens
Speaker 3: in thirties one okay, three is not so well better
Speaker 3: than twos, five and sevens last month. I think it's
Speaker 3: worth watching because I think there's a lot of information
Speaker 3: coming out of those auctions, and I do think the
Speaker 3: size of the auctions are going to be a headwind
Speaker 3: for the markets. It's an a risk factor for investors.
Speaker 5: Can you give us some perspective.
Speaker 1: You said you just shifted your asset allocation to focus
Speaker 1: more on private assets.
Speaker 5: Was that away from equities?
Speaker 1: Was that away from bonds?
Speaker 5: Was it away from both?
Speaker 1: I mean, how does it sort of break down now
Speaker 1: versus say to.
Speaker 5: Your is it go?
Speaker 7: Yeah?
Speaker 3: So we were operating under somewhat of a constrained opportunity set,
Speaker 3: so we had a limit up to only twenty five
Speaker 3: percent in private assets. That's now been an increased to
Speaker 3: legislation of thirty five percent. So we were a little
Speaker 3: overweight in global equities. We pulled those positions back a
Speaker 3: little bit, mostly from US large cap in particular. But
Speaker 3: you know, we still see a lot of opportunities out
Speaker 3: in the private assets sector. We think that's a growing
Speaker 3: area of interest. A lot of people have pulled back
Speaker 3: because they've been overdone. We've seen opportunities in secondary sales,
Speaker 3: so we're actually you know, continue to put money to work.
Speaker 3: I think, very proactive in those spots. We like private credit.
Speaker 3: We think the private credit is actually compelling in terms
Speaker 3: of you know, obviously absolute returns in the base levels higher.
Speaker 3: Most of those obligations are floating. We've got the sofa
Speaker 3: through the sofa with five thirty four, so we have
Speaker 3: a seven percent actually assume raady to return or benchmark,
Speaker 3: and I'm proud to say so far fifth weeeear to
Speaker 3: date we're ahead of that. We got another eight or
Speaker 3: nine trading days, so we'll see what we want.
Speaker 4: There has been this widespread criticism of private credit that
Speaker 4: they've been in this extent and pretend mode that they've
Speaker 4: just been waiting for rate cuts and until that happens,
Speaker 4: they've been very lenient to those that they've been lending to.
Speaker 4: But at some point the music stops do share that concern?
Speaker 4: And how careful have you been picking managers?
Speaker 5: If you do?
Speaker 3: Great question, Danny, So, I think you have to be
Speaker 3: really careful. There's a lot of new entrants into the
Speaker 3: private credit markets. We tend to focus on the areas
Speaker 3: the Apollos, the okill advisors of the world. We do
Speaker 3: most of those investments through separately man's accounts, fors the GPS,
Speaker 3: or as a limited partner. We still see good opportunity there,
Speaker 3: but you really need to pick your managers. We also
Speaker 3: like more opportunistic funds that can toggle between public and
Speaker 3: private where they think the valuations are cheaper.
Speaker 4: Well, that gets to this other part of the industry
Speaker 4: that the small players can't survive anymore. That in private
Speaker 4: assets is just the big getting bitter as an asset
Speaker 4: allocated yourself.
Speaker 5: Is that what you expect?
Speaker 4: Do you expect that the smaller players are not going
Speaker 4: to have that demand and some sort of consolidation needs
Speaker 4: to happen in this industry.
Speaker 5: I don't know.
Speaker 3: I think obviously, because of our size, we have the
Speaker 3: privilege of managing at two hundred and eighty billion dollars
Speaker 3: in assets, we tend to gravitate to as the larger managers.
Speaker 3: I think the difference for us this year is there's
Speaker 3: been a lot of pullback on the part of other
Speaker 3: public pension plans and institutional investors, so we're able to
Speaker 3: get better access to the better managers and negotiate much
Speaker 3: better fees co investments in terms of averaging down the
Speaker 3: costs of those transactions.
Speaker 1: So just to say, today we're talking about retail sales,
Speaker 1: we're talking about FED speak. Do you watch any of that?
Speaker 5: Do care?
Speaker 1: Or is it sort of you know, noise as you
Speaker 1: focus on ways to uncorrelate yourself with.
Speaker 3: Lisa, I shouldn't watch that, but of course I watch that,
Speaker 3: and I'll tell you why. Obviously, our underlying beneficiars and
Speaker 3: participants watch that, and we get questions all the time.
Speaker 3: My trustees call me all the time and see what's
Speaker 3: going on in the market. People are concerned, how do
Speaker 3: you feel about things? So we watch it. We watch
Speaker 3: it also as a matter of of managing and monitoring
Speaker 3: the performance of the funds or the managing the expectation.
Speaker 3: But yeah, we focus on all that we're in the markets.
Speaker 3: But as I said earlier, we're not tactical and more
Speaker 3: strategic more long term, but we do care what happens
Speaker 3: in the short term as well.
Speaker 5: Steven Meyer, wonderful to see you. Thank you so much
Speaker 5: for being with us. Really great to hear what you
Speaker 5: have to say.
Speaker 1: Stephen Meyer of the New York City at Retirement Systems. Here,
Speaker 1: Jepperdson of Pantheon Macroeconomics, and Greg Daco of e Y Greg.
Speaker 5: I want to start with you. Both of you.
Speaker 1: Ian and Greg are talking about how the balance of
Speaker 1: risks is. We are seeing real weakness and this is
Speaker 1: just a tipping point that is going to deepen. What
Speaker 1: are these retail sales do to kind of edify that
Speaker 1: feeling of yours.
Speaker 8: I think what they indicate is an environment where you're
Speaker 8: seeing a bit of a more cautions, more prudence on
Speaker 8: the part of consumer. And this is not new. We've
Speaker 8: been seeing consumers be a little bit more careful, be
Speaker 8: a little bit more sensitive to higher prices. This cost
Speaker 8: fatigue that we've been talking about for a few months
Speaker 8: now is now starting to be visible in the data.
Speaker 8: We're seeing a little bit more caution when it comes
Speaker 8: to outlays. When you adjust outlays for prices, you're actually
Speaker 8: seeing a contraction in retail sales on a year or
Speaker 8: a year basis. Service sector spending is still relatively strong,
Speaker 8: but we are seeing more caution. And the key reason
Speaker 8: for that additional caution is the fact that you're seeing
Speaker 8: some softening in the labor market. Not a retrenching, nothing alarming,
Speaker 8: but a bit more caution in the labor market as well.
Speaker 1: What's the gap in between a bit more caution and
Speaker 1: true weakening given that this is two straight months and
Speaker 1: pretty negative downward revisions as well.
Speaker 7: Yeah, the diamond revision is disconcerting because it sounds to
Speaker 7: me like the control group now is essentially flat over
Speaker 7: the last couple of months and have been weakening before
Speaker 7: that as well in terms of the growth rate. So
Speaker 7: this is beginning to be stunt to look like an
Speaker 7: entrenched softening, I mean, not a rollover. You know, it's
Speaker 7: not a disaster by any means, but it's very different
Speaker 7: to what we saw last year. Remember the second half
Speaker 7: of last year. We're looking at constant upside surprises and
Speaker 7: the consumer's charging along a three percent reel through the
Speaker 7: whole second half of the year. We're not going to
Speaker 7: do anything like that in the first half of this year.
Speaker 7: And I think part of the reason here is as
Speaker 7: well as the lad market weakening, which is definitely real.
Speaker 7: You can see in the surveys that people are getting
Speaker 7: nervous about job security for the first time in this cycle.
Speaker 7: But they've also got less cash flow. You know, real
Speaker 7: income growth after tax is a lot lower than it
Speaker 7: was this time last year. Payroll growth is lower, wage
Speaker 7: growth is lower. There's just less cash around, and so
Speaker 7: people are just being a little bit more cautious at
Speaker 7: the margin. If you're a bit more cautious at the
Speaker 7: margin for a few months, it starts to build into
Speaker 7: something real.
Speaker 4: And what it really speaks to me is if we
Speaker 4: have this price fatigue, is do corporates have pricing power anymore?
Speaker 4: We have seen some of those margins start to thin.
Speaker 4: So if we're in a world where corporates are having
Speaker 4: thinning margins, you don't have that labor constraint that you
Speaker 4: once did. Is this as Ian as Jan Hatzias over
Speaker 4: at Goldman's access an inflection point for the labor market.
Speaker 7: It's an inflection fund for the lab market for sure,
Speaker 7: but it's also an inflection point for the inflation story
Speaker 7: as well, because that margin expansion that we saw during
Speaker 7: the pandemic and in the year afterwards was a huge
Speaker 7: driver of the increase in inflation, and most businesses have
Speaker 7: held onto those margins. But if they're starting to crumble now,
Speaker 7: so we're actually seeing them come down rather than just
Speaker 7: hang around the highs. If we start to see them
Speaker 7: come down, it really does change inflation picture because it
Speaker 7: was a really big part of the inflation story. That's
Speaker 7: not kind of widely appreciated, but it's why I think
Speaker 7: core inflation next year goes below the FEDS target because
Speaker 7: of margin compression and it's just beginning to creep in
Speaker 7: greg What.
Speaker 5: Do you think about that, Is this an inflection point?
Speaker 8: I tend to believe so as well for inflation in particular,
Speaker 8: because we have seen more pricing sensitivity on the part
Speaker 8: of consumers. We're also seeing markups fall. We're in deflation
Speaker 8: territory when you look at some of the PPI indices
Speaker 8: for consumer pass through, and we are still seeing some
Speaker 8: disinflationary currents in terms of the rent inflation side, and
Speaker 8: wage growth is also moderating. Put all that together, and
Speaker 8: all of the fundamental indicators in terms of inflation are
Speaker 8: pointing towards further disinflation. So if you have a forward
Speaker 8: looking perspective, that is the right type of mix that
Speaker 8: you want to see from a FED perspective in terms
Speaker 8: of easing monetary polsy, not to bring rates down to zero,
Speaker 8: but to recalibrate monetary polsy to today's reality.
Speaker 5: So does December make sense in that scenario?
Speaker 8: I think September makes sense. I would have actually thought
Speaker 8: that July made a lot of sense, even potentially June.
Speaker 8: You're not talking about cutting rates down to zero to
Speaker 8: stimulate the economy and prevent a recession. You're talking about
Speaker 8: how do you recalibrate monetary polsy for an environment where
Speaker 8: inflation PC inflation core PC inflation is within striking distance
Speaker 8: of the two percent target, likely to be around two
Speaker 8: point six percent in May. That is a point at
Speaker 8: which you want to start considering recalibrating monetary polsy to
Speaker 8: have the optimal framework in an economy. As Ian was saying,
Speaker 8: where the labor market is gradually cooling for wage growth,
Speaker 8: nper or growth are cooling and where inflation is moving
Speaker 8: in the right direction.
Speaker 6: We do hear from the New York FED President Williams
Speaker 6: also speaking right now action he's talking about that they're
Speaker 6: going to be data dependent.
Speaker 5: Well, they are data dependent. This is the data. Do
Speaker 5: you think they need to take another look at their dots?
Speaker 7: Absolutely? Greg and I are going to have an agreement
Speaker 7: fest here. But I honestly I wish they'd cut rates
Speaker 7: last week and they didn't, so I wish I'd cut
Speaker 7: them in July, but they probably won't. What worries me
Speaker 7: here is that they're very backward looking, and they're constantly
Speaker 7: talking about what the data have been doing, and there's
Speaker 7: not enough discussion from the FED about where the leading
Speaker 7: indicators of which the US has an abundance. I mean,
Speaker 7: we've got we have dozens of reliable indicators of the
Speaker 7: labor market, consumers, everything, and they seem to be resolutely
Speaker 7: ignoring them in favor of looking at the backward looking stuff.
Speaker 7: And if you carry on doing that, then by definition,
Speaker 7: you're going to be late when you start cutting rates.
Speaker 7: And the danger then is that you end up with
Speaker 7: the economy slowing more than it needs to for longer
Speaker 7: than it needs to. So I think a bit of
Speaker 7: courage here maybe, and to say, Okay, we don't have
Speaker 7: to wait UNTI we're one hundred percent certain inflation is
Speaker 7: going to get to the targets. But to be reasonably
Speaker 7: sure now, I think is a pretty solid case. You know,
Speaker 7: the coll PC over the next few months, you know,
Speaker 7: is going to be two something, and it's not a
Speaker 7: million miles away, and yet rates are still.
Speaker 5: At the highst if you are just joining us.
Speaker 1: We did get retail sales about nine minutes ago, and
Speaker 1: you can see they came in across the board lower
Speaker 1: than expected, with downward revisions across the board as well
Speaker 1: to the prior month. You could see the headline coming
Speaker 1: at zero point one percent versus the expected zero point
Speaker 1: three percent and a decline in the prior month of
Speaker 1: zero point two percent. Looking under the hood at exactly
Speaker 1: what was driving this, this is actually interesting and it
Speaker 1: speaks to some of the homebuilder story that we were
Speaker 1: talking about earlier. Furniture and home purchases were down one
Speaker 1: point one percent on the month. You can see building
Speaker 1: materials down zero point eight percent on the month.
Speaker 5: You could see this pretty much across the board.
Speaker 1: What are the parts that bolstered this retail report? Vehicles
Speaker 1: and parts zero point eight percent gain, auto dealers zero
Speaker 1: point eight percent gain. You could see gas prices going down,
Speaker 1: that's gas station zero two point two percent decline, but
Speaker 1: sporting and book costs two point eight percent. Glad to
Speaker 1: see that people are buying books. To me, that sort
Speaker 1: of raises this question greg about how much the suppressed
Speaker 1: housing market. Some people might argue the broken housing market
Speaker 1: is suppressing retail sales in a way that's distorting the data,
Speaker 1: and frankly, could rebound really substantially if rates come down,
Speaker 1: people buy homes again if they find it accessible. Is
Speaker 1: this sort of muddy data that's being skewed by otherwise
Speaker 1: kind of broken housing markets.
Speaker 8: So the housing market's certainly frozen, But I'm not sure
Speaker 8: you're going to see a massive reacceleration in the housing
Speaker 8: market unless you see one of two things or one
Speaker 8: of three things. One price is falling quite dramatically, two
Speaker 8: interest rates falling quite dramatically, or three income growth accelerating
Speaker 8: quite dramatically. As Ian was pointing out, we have real
Speaker 8: disposable income growth that's currently at one percent, that's a
Speaker 8: really low number. You have home prices that are still
Speaker 8: high and still coming up higher and higher given the
Speaker 8: lack of supply, and you have interest rates that are
Speaker 8: unlikely to fall back quite massively, given that the FED
Speaker 8: is likely to maintain this higher for longer monetary policy stent.
Speaker 8: So I don't see that as a potential for a comeback.
Speaker 8: And if you look at the underlying drivers of consumer
Speaker 8: spending here, you have income growth that is still moderate,
Speaker 8: you have a low savings rate, and you have wealth
Speaker 8: growth that is not accelerating as much at the same
Speaker 8: time as credit is tight. So you have this bifurcated
Speaker 8: outlook for consumers where the lower end, younger generations, more
Speaker 8: indebted consumers are struggling to make ends meet in this environment.
Speaker 5: And to the point of bifurcation.
Speaker 4: I wonder if we look at this data, if again,
Speaker 4: maybe it doesn't accurately capture things if there's this housing confusion,
Speaker 4: but also the bifurcation, if you're looking at the richest
Speaker 4: people who essentially just buy assets, they buy assets they're
Speaker 4: investing in this stock market, Does something like this give
Speaker 4: us the full picture or is it really just capturing
Speaker 4: what we know is already been under pressure.
Speaker 7: Yeah, I mean the lower end of the income distribution
Speaker 7: is now under stress in a way that they haven't
Speaker 7: been since way before COVID. I mean, the fiscal stimulus,
Speaker 7: the checks in the mail that we got through the
Speaker 7: pandemic was a huge support to consumer spending, and especially
Speaker 7: for that middle and lower part of the income distribution.
Speaker 7: You're right at the top end of the distribution. You know,
Speaker 7: cash flow is not really important. It's all about asset prices.
Speaker 7: But the variations in consumer spending are driven by the
Speaker 7: actions of the middle and lower and so if those
Speaker 7: people are now seeing much slower income growth than this
Speaker 7: saw last year, and they're beginning to worry a bit
Speaker 7: about job security. You know, the New York Fed survey
Speaker 7: asks people, do you think unemployment is going to go up?
Speaker 7: Are you worrying about job security? And those measures have
Speaker 7: both gone materially higher. So that's not a great combination.
Speaker 7: You know, that's a combination that tends to make people
Speaker 7: save more because of worry, but the saving more from
Speaker 7: smaller cash flow, which means spending gets hit harder. So
Speaker 7: this is you know, again we're not at the point
Speaker 7: where everything's falling apart. That's not the story here, but
Speaker 7: we are. I think we've got to get out of
Speaker 7: the mindset that you know, it's it's been constant upside
Speaker 7: surprises from the consumer, constant well not anymore.
Speaker 6: When you look at the bifurcation, and I know you
Speaker 6: pay atender to the surveys, do you see a real
Speaker 6: hollowing out of the middle class.
Speaker 7: I think that's probably going a little bit too far.
Speaker 7: You know, we've seen very strong job growth in the
Speaker 7: unemployment rates been very low, and you know, nothing is
Speaker 7: nothing is better for you for the middle of the
Speaker 7: income distribution than seeing sustained low unemployment and wage growth,
Speaker 7: although it's slowing, is still pretty good. You know, we
Speaker 7: had a long period after the crash in o Wait
Speaker 7: where wage growth was less than three percent, and we're
Speaker 7: way above that now. But you know, the price level
Speaker 7: shock from the pandemic has scared people and made them
Speaker 7: nervous and unhappy, and that's one of the reasons why
Speaker 7: the administration's poll ratings are so low. But actually real
Speaker 7: wage growth is at the moment is still positive, but
Speaker 7: it's probably going to get weaker, and as it gets weaker,
Speaker 7: it just makes people more cautious greg.
Speaker 6: When you look at these kind of retail sales, do
Speaker 6: you then expect potentially more companies to come out and
Speaker 6: have to say, I guess we need to start slashing
Speaker 6: more prices to make sure we can keep some of
Speaker 6: that market share.
Speaker 8: I think you're already seeing it. You're already seeing a
Speaker 8: lot of companies think about incentives as a way to
Speaker 8: drive consumers.
Speaker 5: To spend more.
Speaker 8: And as the end was pointing out, if you look
Speaker 8: at the different income quintiles, you're seeing the bottom and
Speaker 8: median income quintils being much more price sensitive.
Speaker 5: What does that mean.
Speaker 8: It means that they have to get greater focus on
Speaker 8: how to drive consumers to spend, but you have to
Speaker 8: do that at an affordable price, and in order to
Speaker 8: do that, you're probably going to need some incentives. What
Speaker 8: that means for the overall economy is slower consumer spending
Speaker 8: and ongoing disinflation because those price cuts in certain sectors
Speaker 8: are going to lead to further disinflation. This is actually
Speaker 8: a positive story. It's a positive story where the Fed
Speaker 8: has to be careful to recalibrate monetary policy and adjust
Speaker 8: to that environment and not be so backward looking because
Speaker 8: backward looking can be very dangerous in an environment where
Speaker 8: you have a lot of noise in the data and
Speaker 8: downward derisions a month later that show a different picture
Speaker 8: when it comes to retail.
Speaker 1: Sales well, and to your point about this isn't necessarily
Speaker 1: a negative story. This has been one of the key
Speaker 1: questions for equity markets. Is bad news good news at
Speaker 1: a time where disinflation can potentially be positive. You can
Speaker 1: see it this morning, taggling around how to interpret this.
Speaker 1: Basically lower at the moment of future is on the
Speaker 1: S and P although they were higher, you could see
Speaker 1: yields markedly lower across the board. This from Drew Mattis
Speaker 1: over at Mutlife, and I think it really crystallizes the
Speaker 1: fears that a.
Speaker 5: Lot of people have.
Speaker 1: He said, it may seems to have been the break
Speaker 1: months lower sentiment, lower retail, higher claims. The question is
Speaker 1: whether this is going to spiral downward and if so,
Speaker 1: when does the FED recognize it? Ian given that view
Speaker 1: that some people have, and I believe you are sympathetic
Speaker 1: to it, what is the chance of a FED error
Speaker 1: at a time where the FED is looking for December
Speaker 1: for a federate cut.
Speaker 7: Oh, the chance of a mistake is going up for sure.
Speaker 7: You know, monetary policy works as very very long lags.
Speaker 7: I can't stress enough how long it takes for the
Speaker 7: economy to respond to whatever the Fed does. It's you know,
Speaker 7: the economy is now clearly softening, but it's two years
Speaker 7: since they started raising rates. Two years and that means
Speaker 7: that if they start cutting rates tomorrow, it will be
Speaker 7: well into twenty five or even twenty six before we
Speaker 7: start to see the upswing triggered by that easing, And
Speaker 7: so between now and then, potentially we could be in
Speaker 7: for quite a long period of sluggish growth. I'm not,
Speaker 7: at this point not terrified of US downward spiral disaster,
Speaker 7: because the private sector's finances are in much better shape
Speaker 7: than you normally have at the start of recession. But
Speaker 7: I can see the risk that the FED presides over
Speaker 7: quite a long period of sluggish growth, which is probably
Speaker 7: unnecessary to get inflation out of the system, which is
Speaker 7: why I think sometime next year they'll end up with
Speaker 7: inflation below the target and monetary policy getting much easier,
Speaker 7: which so the equity market is kind of toggling between
Speaker 7: this bad news is good news because lower rates, and
Speaker 7: also bad news is bad news because low margins, So
Speaker 7: there's going to be a real kind of push and
Speaker 7: pull in stocks, I think over the next few months,
Speaker 7: where you know that the rate people are just buy
Speaker 7: because valuations and the margin guys are saying, well, hang
Speaker 7: on a minute. This is a loss of volumes margin
Speaker 7: compression at the same time.
Speaker 5: So if you get a bit sticky greg.
Speaker 8: Final word, I'll disagree a little bit with Ied for
Speaker 8: the first time, but I think there is a risk
Speaker 8: that the economy actually worsens more because of the self
Speaker 8: reflective interdependence between the FED and financial markets. You have
Speaker 8: this unhealthy environment where the financial markets are trying to
Speaker 8: price what the FED is going to do based on
Speaker 8: data which is backward looking, and you have the FED
Speaker 8: that's essentially looking at financial conditions to to try to
Speaker 8: evaluate how tight it's Vontary palsy is if you end
Speaker 8: up in an environment where there's a sudden pivot at
Speaker 8: the FED because of disappointing economic data that's backward looking,
Speaker 8: that could catalyze into something that's more pronounced in terms
Speaker 8: of financial markets seeing this as very bad news and
Speaker 8: thinking that the FED is seeing a recession down the road,
Speaker 8: and you could have this negative feedback loop that weighs
Speaker 8: on the economy, that's a potential downside risk via the
Speaker 8: financial markets channel.
Speaker 1: The game theory of what we see with the markets
Speaker 1: and the feder Reserve. Greg Ian, both of you, thank
Speaker 1: you so much for with us Ian Shepperdson of Pantheon
Speaker 1: and Greg Daco of EY.
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