WEBVTT - Bloomberg Surveillance TV: June 18, 2024 0:00:02.440 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.400 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.240 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:35.840 Terminal and the Bloomberg Business App. 0:00:36.200 --> 0:00:38.360 Joining us now, I'm so pleased to say, is Stephen Meyer, 0:00:38.440 --> 0:00:42.080 chief investment Officer for the New York City Retirement Systems. Stephen, 0:00:42.120 --> 0:00:44.319 it's wonderful to speak with you as someone who has 0:00:44.360 --> 0:00:49.400 to be a sort of an adjudicator of the national 0:00:49.479 --> 0:00:53.479 policies of how we invest for public servants. How do 0:00:53.520 --> 0:00:57.720 you understand the confidence, the bullishness in a market that 0:00:57.920 --> 0:01:00.400 is really hinging on such a narrow leader ship. 0:01:00.680 --> 0:01:02.400 Well, I think if you look at the markets right now, 0:01:02.480 --> 0:01:05.440 you're right, there's no breadth, and clearly there are some 0:01:05.440 --> 0:01:10.000 real concentration risks. People talk about American exceptionalism. I think 0:01:10.000 --> 0:01:13.199 it's the artificial intelligence tailo effect that we saw last 0:01:13.280 --> 0:01:16.000 year spilling over to this year. So we look at 0:01:16.040 --> 0:01:19.080 it from a standpoint of it's really megacap exceptionalism. 0:01:19.400 --> 0:01:19.880 What we do. 0:01:19.920 --> 0:01:22.839 Though we're long term investors. We managed the versified portfolios 0:01:22.840 --> 0:01:27.240 that are resilient, made to perform in different types of environment. 0:01:27.360 --> 0:01:30.720 So we're more strategic than tactical. We're not actually trading. 0:01:31.640 --> 0:01:34.959 Having said that, we have recently done strategic gas allocations 0:01:34.959 --> 0:01:38.840 across the five plans. We are reducing our exposure at 0:01:38.880 --> 0:01:43.360 the margin to US equities large cap in particular, we're 0:01:43.400 --> 0:01:45.800 flat to maybe down a little less in non US 0:01:45.880 --> 0:01:49.440 equities to funded increased investments in private assets. 0:01:50.080 --> 0:01:52.720 Within those private assets, because I know you made announcement 0:01:52.720 --> 0:01:55.560 to start this year that you would start increasing your allocations, 0:01:56.160 --> 0:01:58.560 how are you thinking about real estate within that? Because 0:01:58.560 --> 0:02:01.400 there's still trouble, see I said, thirty eight billion dollars 0:02:01.440 --> 0:02:03.800 worth of office buildings. We're still in distress. Surely it's 0:02:03.800 --> 0:02:06.200 only going to be worse with stubborn rates and loans 0:02:06.200 --> 0:02:09.080 coming due. Have you pulled back your exposure on real 0:02:09.160 --> 0:02:10.760 estate specifically. 0:02:10.280 --> 0:02:14.760 Not necessarily, Danny. We have obviously diversified portfolio. We're non 0:02:14.880 --> 0:02:17.800 core and core real estate investments. If you look at 0:02:17.840 --> 0:02:20.280 our investment portfolio right now, it's about thirty one percent 0:02:20.360 --> 0:02:23.760 multifamily in real estate, probably about thirty six percent in 0:02:23.760 --> 0:02:27.359 industrial logistics, so we're diversified away. We have an underweight 0:02:27.720 --> 0:02:31.600 intentional underweight in retail and office space in particular. I 0:02:31.600 --> 0:02:33.679 think it's another two years and in terms of those 0:02:34.120 --> 0:02:35.880 situations working at at least. 0:02:35.639 --> 0:02:37.480 Another two years. So how do you want to be 0:02:37.520 --> 0:02:39.760 positioned for two years? I mean, do you pull out 0:02:39.760 --> 0:02:43.160 completely when that comes due? That is a scary prospect 0:02:43.360 --> 0:02:46.280 because again, what we've seen is this rolling default. It's 0:02:46.280 --> 0:02:48.800 not this one big event, it's this continued issue. So 0:02:48.800 --> 0:02:50.120 what does that look like in two years? 0:02:50.240 --> 0:02:53.000 Yeah, for us, it's more around putting money to work, 0:02:53.080 --> 0:02:55.680 putting new money into the sectors. So obviously we're not 0:02:55.800 --> 0:02:57.839 for sellers. We don't need to be a seller. We're 0:02:57.880 --> 0:03:00.440 long term investors again with a much longer term, and 0:03:00.480 --> 0:03:03.480 so we're not panicking, but we're also not stepping in 0:03:03.480 --> 0:03:05.040 at this point. I know there are some smart people 0:03:05.120 --> 0:03:07.800 out there that think, well, we're evaluations are on prices 0:03:07.800 --> 0:03:11.320 are it's probably close to bottom. I'm a little suspicious. 0:03:11.320 --> 0:03:12.240 I think that is a little more to. 0:03:12.240 --> 0:03:16.400 Go elsewhere, you know, if it is higher for longer. 0:03:16.680 --> 0:03:18.640 If it is we're not going back to a zero 0:03:18.760 --> 0:03:22.680 rate environment. Are there other investments that you've had to rethink, 0:03:22.720 --> 0:03:26.040 things that just frankly won't work in this environment going forward? 0:03:26.520 --> 0:03:30.120 Well, you know, I'd say we focus more on fixed 0:03:30.200 --> 0:03:32.520 income as a core holding in the portfolio. So if 0:03:32.560 --> 0:03:34.519 you look at the yields you're able to get both 0:03:34.520 --> 0:03:37.320 in private and public fixed income now it's you know, 0:03:37.360 --> 0:03:39.720 obviously more compelling than it was in a zero interest 0:03:39.760 --> 0:03:42.680 rate environment. I also think the zero interest rate environment 0:03:42.720 --> 0:03:45.120 was very negative for the markets. I think it actually 0:03:45.560 --> 0:03:50.080 leads to suboptimal investment decision. Over leverage another concern I 0:03:50.080 --> 0:03:52.160 have just where we are right now, we've got leverage 0:03:52.200 --> 0:03:54.120 around the world that what two hundred and twenty five 0:03:54.160 --> 0:03:57.320 to two hundred fifty percent of global GDP. I think 0:03:57.360 --> 0:03:58.760 that's going to be more of a challenge I think 0:03:58.760 --> 0:03:59.960 domestically and abroad. 0:04:00.520 --> 0:04:02.400 How concerned are you about the deficit? Then? 0:04:02.680 --> 0:04:04.960 Given your last point, are you in the Steve Eisman's 0:04:05.000 --> 0:04:07.040 camp of as Lisa would say, way the deficit? 0:04:07.760 --> 0:04:10.080 Yeah, I am concerned about the deficit. If you just 0:04:10.080 --> 0:04:12.880 look at the trajectory of the deficits that we're racking up. 0:04:12.920 --> 0:04:16.440 We've got about ninety eight percent of outstanding US Treasury's 0:04:16.440 --> 0:04:19.520 relative to GDP, expected to go up to about one 0:04:19.600 --> 0:04:22.000 hundred and sixteen percent of GDP by in the next 0:04:22.040 --> 0:04:25.080 ten years. Those are dangerous levels and just the amount 0:04:25.120 --> 0:04:28.200 of paper we need to roll consistently through the eauction process. 0:04:28.440 --> 0:04:30.599 I know, Lisa, you follow the auctions. We had a 0:04:30.600 --> 0:04:32.960 couple of good auctions those past month. We did tens 0:04:33.000 --> 0:04:35.640 in thirties one okay, three is not so well better 0:04:35.680 --> 0:04:38.680 than twos, five and sevens last month. I think it's 0:04:38.720 --> 0:04:40.760 worth watching because I think there's a lot of information 0:04:40.839 --> 0:04:43.120 coming out of those auctions, and I do think the 0:04:43.160 --> 0:04:45.120 size of the auctions are going to be a headwind 0:04:45.160 --> 0:04:47.800 for the markets. It's an a risk factor for investors. 0:04:47.920 --> 0:04:49.040 Can you give us some perspective. 0:04:49.040 --> 0:04:51.440 You said you just shifted your asset allocation to focus 0:04:51.480 --> 0:04:52.600 more on private assets. 0:04:53.279 --> 0:04:54.719 Was that away from equities? 0:04:54.920 --> 0:04:55.919 Was that away from bonds? 0:04:56.040 --> 0:04:56.920 Was it away from both? 0:04:56.960 --> 0:04:58.640 I mean, how does it sort of break down now 0:04:58.800 --> 0:04:59.800 versus say to. 0:04:59.760 --> 0:05:00.360 Your is it go? 0:05:00.600 --> 0:05:00.800 Yeah? 0:05:00.839 --> 0:05:03.920 So we were operating under somewhat of a constrained opportunity set, 0:05:03.960 --> 0:05:06.040 so we had a limit up to only twenty five 0:05:06.040 --> 0:05:08.719 percent in private assets. That's now been an increased to 0:05:08.800 --> 0:05:11.400 legislation of thirty five percent. So we were a little 0:05:11.440 --> 0:05:14.800 overweight in global equities. We pulled those positions back a 0:05:14.839 --> 0:05:19.719 little bit, mostly from US large cap in particular. But 0:05:19.800 --> 0:05:21.760 you know, we still see a lot of opportunities out 0:05:21.800 --> 0:05:26.000 in the private assets sector. We think that's a growing 0:05:26.040 --> 0:05:28.520 area of interest. A lot of people have pulled back 0:05:28.560 --> 0:05:32.440 because they've been overdone. We've seen opportunities in secondary sales, 0:05:32.480 --> 0:05:35.719 so we're actually you know, continue to put money to work. 0:05:36.080 --> 0:05:39.159 I think, very proactive in those spots. We like private credit. 0:05:39.520 --> 0:05:42.240 We think the private credit is actually compelling in terms 0:05:42.320 --> 0:05:46.120 of you know, obviously absolute returns in the base levels higher. 0:05:46.279 --> 0:05:49.240 Most of those obligations are floating. We've got the sofa 0:05:49.360 --> 0:05:52.400 through the sofa with five thirty four, so we have 0:05:52.440 --> 0:05:56.000 a seven percent actually assume raady to return or benchmark, 0:05:56.760 --> 0:05:59.560 and I'm proud to say so far fifth weeeear to 0:05:59.640 --> 0:06:02.320 date we're ahead of that. We got another eight or 0:06:02.400 --> 0:06:04.080 nine trading days, so we'll see what we want. 0:06:04.240 --> 0:06:06.560 There has been this widespread criticism of private credit that 0:06:06.560 --> 0:06:08.880 they've been in this extent and pretend mode that they've 0:06:08.920 --> 0:06:11.320 just been waiting for rate cuts and until that happens, 0:06:11.320 --> 0:06:14.200 they've been very lenient to those that they've been lending to. 0:06:14.320 --> 0:06:18.120 But at some point the music stops do share that concern? 0:06:18.320 --> 0:06:20.400 And how careful have you been picking managers? 0:06:20.680 --> 0:06:21.160 If you do? 0:06:21.400 --> 0:06:23.600 Great question, Danny, So, I think you have to be 0:06:23.640 --> 0:06:25.960 really careful. There's a lot of new entrants into the 0:06:25.960 --> 0:06:29.520 private credit markets. We tend to focus on the areas 0:06:29.520 --> 0:06:32.200 the Apollos, the okill advisors of the world. We do 0:06:32.320 --> 0:06:37.000 most of those investments through separately man's accounts, fors the GPS, 0:06:37.080 --> 0:06:41.240 or as a limited partner. We still see good opportunity there, 0:06:41.240 --> 0:06:43.679 but you really need to pick your managers. We also 0:06:43.760 --> 0:06:47.640 like more opportunistic funds that can toggle between public and 0:06:47.640 --> 0:06:50.440 private where they think the valuations are cheaper. 0:06:50.520 --> 0:06:52.479 Well, that gets to this other part of the industry 0:06:52.480 --> 0:06:54.880 that the small players can't survive anymore. That in private 0:06:54.920 --> 0:06:57.640 assets is just the big getting bitter as an asset 0:06:57.640 --> 0:06:58.680 allocated yourself. 0:06:59.080 --> 0:06:59.960 Is that what you expect? 0:07:00.080 --> 0:07:02.480 Do you expect that the smaller players are not going 0:07:02.520 --> 0:07:05.159 to have that demand and some sort of consolidation needs 0:07:05.200 --> 0:07:06.240 to happen in this industry. 0:07:06.360 --> 0:07:06.719 I don't know. 0:07:06.720 --> 0:07:09.720 I think obviously, because of our size, we have the 0:07:09.720 --> 0:07:11.760 privilege of managing at two hundred and eighty billion dollars 0:07:11.760 --> 0:07:14.640 in assets, we tend to gravitate to as the larger managers. 0:07:15.600 --> 0:07:18.360 I think the difference for us this year is there's 0:07:18.400 --> 0:07:19.960 been a lot of pullback on the part of other 0:07:20.000 --> 0:07:23.240 public pension plans and institutional investors, so we're able to 0:07:23.240 --> 0:07:25.960 get better access to the better managers and negotiate much 0:07:26.000 --> 0:07:29.960 better fees co investments in terms of averaging down the 0:07:30.000 --> 0:07:31.960 costs of those transactions. 0:07:32.320 --> 0:07:35.680 So just to say, today we're talking about retail sales, 0:07:35.680 --> 0:07:38.200 we're talking about FED speak. Do you watch any of that? 0:07:38.360 --> 0:07:38.880 Do care? 0:07:39.080 --> 0:07:41.400 Or is it sort of you know, noise as you 0:07:41.440 --> 0:07:43.360 focus on ways to uncorrelate yourself with. 0:07:43.520 --> 0:07:45.920 Lisa, I shouldn't watch that, but of course I watch that, 0:07:46.520 --> 0:07:50.280 and I'll tell you why. Obviously, our underlying beneficiars and 0:07:50.320 --> 0:07:52.640 participants watch that, and we get questions all the time. 0:07:52.680 --> 0:07:54.360 My trustees call me all the time and see what's 0:07:54.360 --> 0:07:56.360 going on in the market. People are concerned, how do 0:07:56.400 --> 0:07:58.680 you feel about things? So we watch it. We watch 0:07:58.760 --> 0:08:01.880 it also as a matter of of managing and monitoring 0:08:01.920 --> 0:08:04.480 the performance of the funds or the managing the expectation. 0:08:05.440 --> 0:08:08.200 But yeah, we focus on all that we're in the markets. 0:08:08.800 --> 0:08:11.320 But as I said earlier, we're not tactical and more 0:08:11.360 --> 0:08:14.880 strategic more long term, but we do care what happens 0:08:14.880 --> 0:08:15.920 in the short term as well. 0:08:16.040 --> 0:08:18.160 Steven Meyer, wonderful to see you. Thank you so much 0:08:18.200 --> 0:08:20.200 for being with us. Really great to hear what you 0:08:20.240 --> 0:08:20.600 have to say. 0:08:20.600 --> 0:08:33.400 Stephen Meyer of the New York City at Retirement Systems. Here, 0:08:33.440 --> 0:08:40.000 Jepperdson of Pantheon Macroeconomics, and Greg Daco of e Y Greg. 0:08:39.880 --> 0:08:41.640 I want to start with you. Both of you. 0:08:41.840 --> 0:08:44.599 Ian and Greg are talking about how the balance of 0:08:44.720 --> 0:08:47.680 risks is. We are seeing real weakness and this is 0:08:47.760 --> 0:08:50.640 just a tipping point that is going to deepen. What 0:08:50.720 --> 0:08:53.600 are these retail sales do to kind of edify that 0:08:53.679 --> 0:08:54.439 feeling of yours. 0:08:54.679 --> 0:08:56.640 I think what they indicate is an environment where you're 0:08:56.640 --> 0:08:59.240 seeing a bit of a more cautions, more prudence on 0:08:59.280 --> 0:09:01.600 the part of consumer. And this is not new. We've 0:09:01.640 --> 0:09:04.560 been seeing consumers be a little bit more careful, be 0:09:04.640 --> 0:09:07.959 a little bit more sensitive to higher prices. This cost 0:09:08.000 --> 0:09:10.520 fatigue that we've been talking about for a few months 0:09:10.520 --> 0:09:13.400 now is now starting to be visible in the data. 0:09:13.480 --> 0:09:16.160 We're seeing a little bit more caution when it comes 0:09:16.160 --> 0:09:19.760 to outlays. When you adjust outlays for prices, you're actually 0:09:19.760 --> 0:09:22.280 seeing a contraction in retail sales on a year or 0:09:22.280 --> 0:09:25.960 a year basis. Service sector spending is still relatively strong, 0:09:26.120 --> 0:09:28.520 but we are seeing more caution. And the key reason 0:09:28.559 --> 0:09:30.880 for that additional caution is the fact that you're seeing 0:09:30.920 --> 0:09:34.640 some softening in the labor market. Not a retrenching, nothing alarming, 0:09:34.800 --> 0:09:37.160 but a bit more caution in the labor market as well. 0:09:37.240 --> 0:09:40.160 What's the gap in between a bit more caution and 0:09:40.240 --> 0:09:44.160 true weakening given that this is two straight months and 0:09:44.240 --> 0:09:46.200 pretty negative downward revisions as well. 0:09:46.520 --> 0:09:50.160 Yeah, the diamond revision is disconcerting because it sounds to 0:09:50.200 --> 0:09:53.040 me like the control group now is essentially flat over 0:09:53.080 --> 0:09:55.280 the last couple of months and have been weakening before 0:09:55.360 --> 0:09:57.360 that as well in terms of the growth rate. So 0:09:57.960 --> 0:10:00.480 this is beginning to be stunt to look like an 0:10:00.679 --> 0:10:03.680 entrenched softening, I mean, not a rollover. You know, it's 0:10:03.720 --> 0:10:06.920 not a disaster by any means, but it's very different 0:10:06.920 --> 0:10:08.640 to what we saw last year. Remember the second half 0:10:08.640 --> 0:10:11.520 of last year. We're looking at constant upside surprises and 0:10:11.760 --> 0:10:14.079 the consumer's charging along a three percent reel through the 0:10:14.120 --> 0:10:16.080 whole second half of the year. We're not going to 0:10:16.080 --> 0:10:18.480 do anything like that in the first half of this year. 0:10:18.720 --> 0:10:21.640 And I think part of the reason here is as 0:10:21.640 --> 0:10:24.040 well as the lad market weakening, which is definitely real. 0:10:24.080 --> 0:10:25.760 You can see in the surveys that people are getting 0:10:25.760 --> 0:10:28.360 nervous about job security for the first time in this cycle. 0:10:28.600 --> 0:10:31.000 But they've also got less cash flow. You know, real 0:10:31.040 --> 0:10:33.760 income growth after tax is a lot lower than it 0:10:33.840 --> 0:10:36.840 was this time last year. Payroll growth is lower, wage 0:10:36.880 --> 0:10:39.440 growth is lower. There's just less cash around, and so 0:10:39.760 --> 0:10:41.800 people are just being a little bit more cautious at 0:10:41.840 --> 0:10:43.640 the margin. If you're a bit more cautious at the 0:10:43.679 --> 0:10:45.960 margin for a few months, it starts to build into 0:10:46.000 --> 0:10:46.560 something real. 0:10:46.679 --> 0:10:48.720 And what it really speaks to me is if we 0:10:48.760 --> 0:10:52.240 have this price fatigue, is do corporates have pricing power anymore? 0:10:52.280 --> 0:10:54.320 We have seen some of those margins start to thin. 0:10:54.640 --> 0:10:56.160 So if we're in a world where corporates are having 0:10:56.240 --> 0:10:59.560 thinning margins, you don't have that labor constraint that you 0:10:59.640 --> 0:11:03.600 once did. Is this as Ian as Jan Hatzias over 0:11:03.679 --> 0:11:06.360 at Goldman's access an inflection point for the labor market. 0:11:06.640 --> 0:11:08.400 It's an inflection fund for the lab market for sure, 0:11:08.400 --> 0:11:10.800 but it's also an inflection point for the inflation story 0:11:10.840 --> 0:11:13.760 as well, because that margin expansion that we saw during 0:11:13.760 --> 0:11:16.360 the pandemic and in the year afterwards was a huge 0:11:16.440 --> 0:11:19.040 driver of the increase in inflation, and most businesses have 0:11:19.160 --> 0:11:22.439 held onto those margins. But if they're starting to crumble now, 0:11:22.480 --> 0:11:24.840 so we're actually seeing them come down rather than just 0:11:25.160 --> 0:11:27.280 hang around the highs. If we start to see them 0:11:27.320 --> 0:11:30.000 come down, it really does change inflation picture because it 0:11:30.040 --> 0:11:32.280 was a really big part of the inflation story. That's 0:11:32.320 --> 0:11:34.800 not kind of widely appreciated, but it's why I think 0:11:34.800 --> 0:11:37.760 core inflation next year goes below the FEDS target because 0:11:37.760 --> 0:11:40.240 of margin compression and it's just beginning to creep in 0:11:40.440 --> 0:11:40.839 greg What. 0:11:40.800 --> 0:11:42.440 Do you think about that, Is this an inflection point? 0:11:42.640 --> 0:11:44.880 I tend to believe so as well for inflation in particular, 0:11:44.960 --> 0:11:47.719 because we have seen more pricing sensitivity on the part 0:11:47.760 --> 0:11:51.200 of consumers. We're also seeing markups fall. We're in deflation 0:11:51.320 --> 0:11:53.719 territory when you look at some of the PPI indices 0:11:53.880 --> 0:11:58.000 for consumer pass through, and we are still seeing some 0:11:58.080 --> 0:12:01.800 disinflationary currents in terms of the rent inflation side, and 0:12:01.880 --> 0:12:05.320 wage growth is also moderating. Put all that together, and 0:12:05.440 --> 0:12:08.559 all of the fundamental indicators in terms of inflation are 0:12:08.600 --> 0:12:11.560 pointing towards further disinflation. So if you have a forward 0:12:11.600 --> 0:12:14.800 looking perspective, that is the right type of mix that 0:12:14.880 --> 0:12:17.360 you want to see from a FED perspective in terms 0:12:17.360 --> 0:12:20.640 of easing monetary polsy, not to bring rates down to zero, 0:12:20.880 --> 0:12:23.960 but to recalibrate monetary polsy to today's reality. 0:12:24.080 --> 0:12:26.080 So does December make sense in that scenario? 0:12:26.320 --> 0:12:28.560 I think September makes sense. I would have actually thought 0:12:28.559 --> 0:12:31.440 that July made a lot of sense, even potentially June. 0:12:31.600 --> 0:12:33.960 You're not talking about cutting rates down to zero to 0:12:34.040 --> 0:12:37.680 stimulate the economy and prevent a recession. You're talking about 0:12:37.800 --> 0:12:40.880 how do you recalibrate monetary polsy for an environment where 0:12:40.880 --> 0:12:44.920 inflation PC inflation core PC inflation is within striking distance 0:12:44.960 --> 0:12:47.120 of the two percent target, likely to be around two 0:12:47.160 --> 0:12:49.960 point six percent in May. That is a point at 0:12:50.000 --> 0:12:53.480 which you want to start considering recalibrating monetary polsy to 0:12:53.559 --> 0:12:57.000 have the optimal framework in an economy. As Ian was saying, 0:12:57.120 --> 0:13:00.000 where the labor market is gradually cooling for wage growth, 0:13:00.440 --> 0:13:02.920 nper or growth are cooling and where inflation is moving 0:13:02.920 --> 0:13:03.600 in the right direction. 0:13:03.920 --> 0:13:07.320 We do hear from the New York FED President Williams 0:13:07.360 --> 0:13:09.760 also speaking right now action he's talking about that they're 0:13:09.760 --> 0:13:10.640 going to be data dependent. 0:13:10.679 --> 0:13:12.560 Well, they are data dependent. This is the data. Do 0:13:12.600 --> 0:13:15.319 you think they need to take another look at their dots? 0:13:15.559 --> 0:13:17.640 Absolutely? Greg and I are going to have an agreement 0:13:17.640 --> 0:13:20.400 fest here. But I honestly I wish they'd cut rates 0:13:20.480 --> 0:13:23.280 last week and they didn't, so I wish I'd cut 0:13:23.320 --> 0:13:25.960 them in July, but they probably won't. What worries me 0:13:26.040 --> 0:13:29.000 here is that they're very backward looking, and they're constantly 0:13:29.040 --> 0:13:31.920 talking about what the data have been doing, and there's 0:13:31.960 --> 0:13:34.640 not enough discussion from the FED about where the leading 0:13:34.640 --> 0:13:36.720 indicators of which the US has an abundance. I mean, 0:13:36.760 --> 0:13:39.599 we've got we have dozens of reliable indicators of the 0:13:39.640 --> 0:13:42.800 labor market, consumers, everything, and they seem to be resolutely 0:13:42.800 --> 0:13:45.240 ignoring them in favor of looking at the backward looking stuff. 0:13:45.960 --> 0:13:48.360 And if you carry on doing that, then by definition, 0:13:48.640 --> 0:13:51.000 you're going to be late when you start cutting rates. 0:13:51.000 --> 0:13:52.319 And the danger then is that you end up with 0:13:52.360 --> 0:13:55.360 the economy slowing more than it needs to for longer 0:13:55.400 --> 0:13:57.360 than it needs to. So I think a bit of 0:13:57.400 --> 0:13:59.360 courage here maybe, and to say, Okay, we don't have 0:13:59.360 --> 0:14:01.520 to wait UNTI we're one hundred percent certain inflation is 0:14:01.559 --> 0:14:03.920 going to get to the targets. But to be reasonably 0:14:03.960 --> 0:14:06.560 sure now, I think is a pretty solid case. You know, 0:14:06.960 --> 0:14:09.280 the coll PC over the next few months, you know, 0:14:09.400 --> 0:14:11.840 is going to be two something, and it's not a 0:14:11.840 --> 0:14:13.840 million miles away, and yet rates are still. 0:14:13.640 --> 0:14:15.480 At the highst if you are just joining us. 0:14:15.480 --> 0:14:18.320 We did get retail sales about nine minutes ago, and 0:14:18.360 --> 0:14:20.320 you can see they came in across the board lower 0:14:20.360 --> 0:14:24.320 than expected, with downward revisions across the board as well 0:14:24.360 --> 0:14:27.360 to the prior month. You could see the headline coming 0:14:27.560 --> 0:14:30.880 at zero point one percent versus the expected zero point 0:14:30.880 --> 0:14:33.520 three percent and a decline in the prior month of 0:14:33.600 --> 0:14:36.640 zero point two percent. Looking under the hood at exactly 0:14:36.680 --> 0:14:39.160 what was driving this, this is actually interesting and it 0:14:39.160 --> 0:14:41.560 speaks to some of the homebuilder story that we were 0:14:41.560 --> 0:14:45.600 talking about earlier. Furniture and home purchases were down one 0:14:45.640 --> 0:14:48.520 point one percent on the month. You can see building 0:14:48.600 --> 0:14:51.560 materials down zero point eight percent on the month. 0:14:51.840 --> 0:14:53.760 You could see this pretty much across the board. 0:14:53.880 --> 0:14:57.080 What are the parts that bolstered this retail report? Vehicles 0:14:57.120 --> 0:15:00.320 and parts zero point eight percent gain, auto dealers zero 0:15:00.360 --> 0:15:04.320 point eight percent gain. You could see gas prices going down, 0:15:04.520 --> 0:15:07.800 that's gas station zero two point two percent decline, but 0:15:07.960 --> 0:15:11.320 sporting and book costs two point eight percent. Glad to 0:15:11.360 --> 0:15:13.680 see that people are buying books. To me, that sort 0:15:13.680 --> 0:15:17.040 of raises this question greg about how much the suppressed 0:15:17.040 --> 0:15:20.000 housing market. Some people might argue the broken housing market 0:15:20.080 --> 0:15:23.880 is suppressing retail sales in a way that's distorting the data, 0:15:23.920 --> 0:15:27.680 and frankly, could rebound really substantially if rates come down, 0:15:28.040 --> 0:15:32.000 people buy homes again if they find it accessible. Is 0:15:32.000 --> 0:15:36.400 this sort of muddy data that's being skewed by otherwise 0:15:36.760 --> 0:15:38.280 kind of broken housing markets. 0:15:38.520 --> 0:15:41.880 So the housing market's certainly frozen, But I'm not sure 0:15:41.920 --> 0:15:44.440 you're going to see a massive reacceleration in the housing 0:15:44.480 --> 0:15:46.760 market unless you see one of two things or one 0:15:46.760 --> 0:15:49.960 of three things. One price is falling quite dramatically, two 0:15:50.200 --> 0:15:53.920 interest rates falling quite dramatically, or three income growth accelerating 0:15:53.960 --> 0:15:56.320 quite dramatically. As Ian was pointing out, we have real 0:15:56.360 --> 0:15:58.960 disposable income growth that's currently at one percent, that's a 0:15:59.000 --> 0:16:01.760 really low number. You have home prices that are still 0:16:01.800 --> 0:16:05.240 high and still coming up higher and higher given the 0:16:05.360 --> 0:16:07.680 lack of supply, and you have interest rates that are 0:16:07.760 --> 0:16:11.160 unlikely to fall back quite massively, given that the FED 0:16:11.360 --> 0:16:14.320 is likely to maintain this higher for longer monetary policy stent. 0:16:14.400 --> 0:16:17.000 So I don't see that as a potential for a comeback. 0:16:17.360 --> 0:16:20.120 And if you look at the underlying drivers of consumer 0:16:20.200 --> 0:16:23.160 spending here, you have income growth that is still moderate, 0:16:23.280 --> 0:16:25.600 you have a low savings rate, and you have wealth 0:16:25.640 --> 0:16:28.000 growth that is not accelerating as much at the same 0:16:28.080 --> 0:16:30.880 time as credit is tight. So you have this bifurcated 0:16:30.920 --> 0:16:34.680 outlook for consumers where the lower end, younger generations, more 0:16:34.680 --> 0:16:38.560 indebted consumers are struggling to make ends meet in this environment. 0:16:38.840 --> 0:16:39.960 And to the point of bifurcation. 0:16:40.040 --> 0:16:42.120 I wonder if we look at this data, if again, 0:16:42.440 --> 0:16:45.320 maybe it doesn't accurately capture things if there's this housing confusion, 0:16:45.320 --> 0:16:48.080 but also the bifurcation, if you're looking at the richest 0:16:48.080 --> 0:16:51.440 people who essentially just buy assets, they buy assets they're 0:16:51.480 --> 0:16:54.360 investing in this stock market, Does something like this give 0:16:54.440 --> 0:16:56.880 us the full picture or is it really just capturing 0:16:56.920 --> 0:16:58.880 what we know is already been under pressure. 0:16:59.000 --> 0:17:01.840 Yeah, I mean the lower end of the income distribution 0:17:01.960 --> 0:17:03.720 is now under stress in a way that they haven't 0:17:03.760 --> 0:17:07.159 been since way before COVID. I mean, the fiscal stimulus, 0:17:07.320 --> 0:17:09.920 the checks in the mail that we got through the 0:17:09.960 --> 0:17:13.800 pandemic was a huge support to consumer spending, and especially 0:17:13.800 --> 0:17:15.600 for that middle and lower part of the income distribution. 0:17:15.640 --> 0:17:17.800 You're right at the top end of the distribution. You know, 0:17:18.160 --> 0:17:20.640 cash flow is not really important. It's all about asset prices. 0:17:21.000 --> 0:17:24.240 But the variations in consumer spending are driven by the 0:17:24.280 --> 0:17:27.440 actions of the middle and lower and so if those 0:17:27.480 --> 0:17:29.399 people are now seeing much slower income growth than this 0:17:29.480 --> 0:17:31.560 saw last year, and they're beginning to worry a bit 0:17:31.560 --> 0:17:34.000 about job security. You know, the New York Fed survey 0:17:34.000 --> 0:17:36.200 asks people, do you think unemployment is going to go up? 0:17:36.359 --> 0:17:39.000 Are you worrying about job security? And those measures have 0:17:39.080 --> 0:17:42.639 both gone materially higher. So that's not a great combination. 0:17:42.760 --> 0:17:44.879 You know, that's a combination that tends to make people 0:17:44.960 --> 0:17:48.400 save more because of worry, but the saving more from 0:17:48.640 --> 0:17:52.240 smaller cash flow, which means spending gets hit harder. So 0:17:52.800 --> 0:17:54.280 this is you know, again we're not at the point 0:17:54.280 --> 0:17:57.000 where everything's falling apart. That's not the story here, but 0:17:57.080 --> 0:17:58.760 we are. I think we've got to get out of 0:17:58.760 --> 0:18:01.000 the mindset that you know, it's it's been constant upside 0:18:01.040 --> 0:18:03.520 surprises from the consumer, constant well not anymore. 0:18:04.119 --> 0:18:06.040 When you look at the bifurcation, and I know you 0:18:06.080 --> 0:18:08.120 pay atender to the surveys, do you see a real 0:18:08.160 --> 0:18:09.520 hollowing out of the middle class. 0:18:10.280 --> 0:18:11.960 I think that's probably going a little bit too far. 0:18:12.080 --> 0:18:14.080 You know, we've seen very strong job growth in the 0:18:14.160 --> 0:18:17.320 unemployment rates been very low, and you know, nothing is 0:18:17.440 --> 0:18:19.560 nothing is better for you for the middle of the 0:18:19.640 --> 0:18:23.320 income distribution than seeing sustained low unemployment and wage growth, 0:18:23.359 --> 0:18:25.800 although it's slowing, is still pretty good. You know, we 0:18:25.880 --> 0:18:27.640 had a long period after the crash in o Wait 0:18:27.640 --> 0:18:29.600 where wage growth was less than three percent, and we're 0:18:29.640 --> 0:18:33.280 way above that now. But you know, the price level 0:18:33.320 --> 0:18:37.880 shock from the pandemic has scared people and made them 0:18:38.040 --> 0:18:40.040