This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
We are going to stay with definitely inflation and the inflation print today, so let's continue with it. We talked about on the headline and the core certainly an improvement, a cooling, if you will, So let's get to We've also heard from a lot of FED speakers, so let's get to. Bloomberg News International Economics and Policy correspondent Michael McKee on zoom from the Rocky Mountain Economics Summit in Idaho.
Yes he's had his hat.
We love, we Love, we Love, and Bloomberg News Economics editor Mollie Smith in our Bloomberg Interactive Broker student without our hat, but.
Still we love, we Love, we love.
All right, Mike, First of all, gosh, is everybody there talking about this? I mean, is every there yet?
Not everybody is there yet, but a good number of people are. And it's not that the data released itself, but overall business conditions that people have been talking about. And the interesting thing is that it sort of mirrors the story that's been told nationwide. I was sitting with a table of CEOs last night and they were all saying, business is really good, surprisingly good, but we can't find employees, and so a strong labor market is still going to
keep the FED worried. And that's one reason that we'll get this July rate increase, and it'll keep it on the table for the future unless we get some additional inflation information that really drops down. But I think the labor market strength is what is paramount for most of the people running companies in America today.
And I guess, Ollie. I was looking at ECFC the economic forecasts on the Bloomberg terminal, and it's showing that I guess economists are forecasting six months of negative non farm payrolls in a row starting in October. So is this thing going to turn around?
Big?
I find that really hard to believe where things are at right now, But don't hold me to it if six months from now I'm wrong. But I think you know, the only explanation I would really have for that is if you're really taking the FEDS unemployment forecast to heart, and that would really be the only way for them to materialize.
That you would have to have.
That much job like job many job losses between now and then to get to that kind of unemployment rate.
Mike, we talk about things being sticky, right, We've talked about this before when it comes to inflationary pressures. I'm just gonna tell everybody, I went to buy deodorant last night, nineteen dollars for once little stick I'm sure no, I was out of there. I was out of there. I am wearing deodorant, but I did not buy it. It was ridiculous. But some things, like what wages sheltered, they're sticky.
They are sticky, but a zero fault for buying that Kardash stuff. But yeah, sticky prices are what concerns the FED because the easy stuff has gone away. One reason we saw a big drop in the year over year numbers for CPI headline number is because energy prices have fallen so much that stuff has gone We're getting down into the range between two and three percent, which is
going to be much harder to bring down. Because prices are sticky, things don't come down as fast as they do in some other areas, but the Atlanta Sticky wage tracker does show some progress in that area, and other wage trackers have as well that we're not seeing declines in pay, but we're seeing a leveling off of what companies are paying, and I think that is going to contribute to the numbers on a statistical basis. And then the question becomes this was it was a topic today
at breakfast at the summit. Then it becomes how do people feel about the economy, And that's going to become a really interesting question because it will affect whether or not we have recession, but it also will have a big impact on the elections next year. So it's going to be interesting to see whether people start to feel better as these good numbers keep coming in.
You talk about sentiment a lot, man, Yes, I think sentiments really important, and I think the FED also pays very close attention, especially to inflation expectations.
Right, yeah, I think you know, to the point of how people feel about this, Like, of course, it's one thing when you see that inflation was nine point one percent a year ago and it's three percent today.
No one's like progress to me, pretty amazing, and.
No one's discounting that but that's not somebody's lived experience of inflation, right. The fact is that that hamburger that used to cost you sixteen dollars now maybe cost you twenty five dollars. And even though it's not going up five dollars a month, it's maybe still going up two dollars a month. So the fact is prices are.
The oldant was that I would.
Love to know native deodorant in those materials. It's like, yeah, but then I went to Amazon it was still sixteen bucks. It's not usually been that.
Checked out old spice.
Yeah, now I know actually likes old spies, but no, it's just it's kind of crazy. I agree, like you know, Molly, Mike, we Mike, I keep looking at you and I think I'm watching Yellowstone. I'm just gonna tell you.
That is a compliment.
It is a compliment. But so I don't know, Mike, So it does feel like things are still so expensive. Help me out here.
Well, that's that's the Fence issue, and it will be an issue for the Democratic incumbents in the Senate and for President and the Republicans on the House side. Is people relate to their own personal experience and their personal experiences. Either gas prices are going up or down, food prices are going up or down, and it takes a while for even those things to penetrate. People have been complating about food prices, but food prices are only up a
tenth of a percent this past month. And then you have the things that are stick here, and people don't realize that inflation doesn't getting rid of inflation doesn't mean prices are going to go back down. So you're going to go in and you're going to pay that nineteen dollars for the deodorant, and next year you're still going to pay that nineteen dollars, if not more. And so you're going to say, inflation's terrible, even though it's not rising.
It it is terrible. I mean, the price of a Jeep Grand Wagoneer that starts at ninety thousand dollars before delivery, No, thank you. That's why.
Yeah, that's why you buy a Tesla now because Tesla keeps cutting prices.
That's true, that's so true.
That's very a great story about Scott Painter. Yeah, I know I need to do Lomberg terminal because he started a business buying Tesla's and now he has an eighty five million dollar fleet that's only worth fifty seven million dollars.
Thank you you, Molly.
What do you and your team watch most closely as an indicator to tell you whether or not this economy is going.
To keep growing?
Because if you look at five hundred and twenty five basis points of rate hikes, you know at some point those long and variable lags are going to catch up and they're going to hit us pretty hard.
I mean, that's what people have been saying at some point for a long time now, and it still hasn't happened yet. I think, you know, really at the center of all this is still the labor market. That's what's really keeping the whole economy going right now. So that would be, you know, as a total, the leading indicator right now, whether you're looking at that based on payrolls,
on unemployment claims, job openings, the unemployment rate. So that would, for me, would be where the cracks really need to be substantially forming for us to get a slow down in consumer spending and therefore growth as well.
Mike, do you feel like Jay Pal's feeling pretty good though about this report and where things are moving well?
He has to feel pretty good about it, but he's also got to be wary. We've played and I think we mentioned this the last time we played Whackable with inflation, something goes down and then the next month that goes back up again. And what they want to see his things continuously going down. But I don't know if you saw Paul Krugman's column today in the New York Times, The headline was, Dude, where's my recession? Because people have
been predicting it for so long. And it was one year ago at this event that FED Governor Chris Waller said we can't have inflation come down without a big rise in unemployment. And if you remember, Larry Summers and Olivier blons Chard got really mad about that and they posted a paper that said Waller is wrong, and then Waller wrote a retort to that, and they went back and forth for a while. Well, I just spoke with a FED official here who grinned had said Waller's winning.
I love an economist fight. Yeahs, I'll take care. I'll take this curve and up one curve.
I just feel like you've got to give these lags time, right if they're supposed to take to twelve to eighteen months, it's only been a year or a year and a half of increases.
Yeah.
Well, I think another reason though to be wary building out what Mike was saying there is that, remember, this is where the so called base effects are going to start to get a lot less favorable going forward. We're right now at the peak of where we're comparing to June twenty twenty two when inflation was at the high.
So as long as all of those increases from June twenty two forward, we're lower, we're comparing to a lower year over year print, so we're not going to see as many of these big drops going forward.
To Mike, come on in, Well, I was going to just point out that Laurie Logan from the Dallas Fed just said this past week, but she thinks that the lags have already expired because the markets, now, with information being what it is, they started pricing FED rate increases before the FED started raising rates, So you already have an effect of higher rates on the economy.
And the St.
Louis Boys, Jim Bullard and Chris Waller, that's one of the arguments that they make for being more hawkish, because if we're at this level now and we've already had maybe eighteen months for the policies that they've done to hit, then that probably means they need to do more.
I'm going to take a guess a Goolsby and Bostic don't feel that way.
I know Raphael doesn't feel that way. I think Austin's been hedging his bets.
It's interesting. Then there was a guest on surveillance this more and talk about rate hikes right cuts like in the first half of the next year. I know, I know, I know, all right, Mike McKee and of course Molly Smith. Guys, thank you so much Gidea app. Mister McKee, this is Bloomberg.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or watch us live on YouTube.
Really exciting to you. If you got big bank earnings coming up, they start on Friday, they follow off into next week as well, common tax among them. So what's up with GS? Because as we do get ready for their results among the others, they seem to be working over time to lower expectations and to unimpress. This story is one our most read on the Bloomberg today. I think it's like number two or number one. It's kind of been going.
Back and forth.
Bloomberg News Senior financial Reproductriya Rajan wrote it, He's here in our Bloomberg Interactive broker studio what's up with GS?
And rightfully, they're working hard to try and lower expectation because the results that they will post next week will not be great. I mean that much is clear. They have dropped enough deliberate clues in the market in the last several weeks to highlight some of the issues. Some of them are things that affect the broader industry and some are very specific to Goldman Sax. What affects the industry the slowdown in the investment bank, investment banking, deal making, capital markets training.
They're not alone in that one.
They're not alone in that, but they are the best at what they at that part of the business better than anyone else. So when there is a slowdown in that space, it tends to have an outsized impact on Goldman Sacks. But when you step beyond that, there are also Goldman's own you know, missteps, if you may. The consumer banking expansion that they're trying so hard to unwind, they're going to take a hefty right down tied to this Green Sky lending platform that they're now looking to sell.
It was one of the biggest acquisitions in two decades when they bought it just over a year ago. There are big real estate markdowns that they'll have to take because not only does Goldman lend to that sector, it also has a lot of equity investments in that space where it uses principle from its balance sheet. So when you add all of those things together, it kind of
becomes a bit of a dismal quarter. And we had Mike may Or, the dean of banking analysts, tell us that there are about half a dozen things in Goldman's earnings this quarrel. They'll be weak, bad, or ugly.
Yeah, I saw that, and it made me sort of question, is Goldman just downplaying their results so that they can beat You know, companies have been doing that decades now, which is why seventy six percent of companies in the S and P five hundred routinely beat analyst estimates. Or is this a really bad quarter for Goldman or is it both?
It could be both, right, it could be a terrible quarter. Analysts could expect your profits to be down fifty percent and you're down just forty nine percent. Technically that is a beat, but that's nothing to write home about, right, Well.
Are we had they pre announced? Technically they really have it right, but it feels like it.
That's what Mike Mayo seems to think. And part of the reason why it's different is actually, if you look across the landscape, most other banks do a reasonably good
job of providing intra quarter guidance. The reason we found this surprising and it's actually interesting, it's clear after having spoken to a number of executives at Goldman Sachs, having spoken to a number of investors analysts who speak with Goldman Sacks, that it is a very concerted effort on the part of the bank to do something that they're
not used to doing. Because Goldman has been famously reticent about quantifying a trading performance, a banking performance it's mid quarter, or identifying how much of a hit they could have in certain this sector or that sector. They've never done that. They're doing that here, and you've got to think about the bigger picture. What happened in January when they reported earnings. It was bad performance for them for Q four twenty twenty two, But on the day of earnings the stock
was down six and a half percent. That is a lot for a bank stock. What made things worse the same day, Morgan Stanley there are trival reported earnings and that stock shot up six percent. That can easily make anyone's blood boil inside goldman sack. So that wasn't good them. Came around April. Their trading division, They're mighty trading unit,
didn't quite live up to expectations. But again the stock was punished, and if you look over the stretch of those four or five earnings days in April, Goldman significantly underperformed the rest of the market. So they want to avoid a trifecta of earnings day misery if you want, by guiding expectations lower, by making it clear to the market that there is no way that they're posting earnings
of eight dollars per share. It's going to be much lower than that, and you're likely seeing that when they report numbers on Wednesday.
Is David Solomon, Goldman's Bob Jaypek, I mean, did Lloyd blank Find, you know, win a five year version and David Solomon is the loser, or did blank Find set Solomon up for this? Was it blank Find's you know plans that sent Goldman into the I don't know if it's a tailspin, but into the situation that it's in.
So your first question, I'll ask you, is Bob Chapek a DJ and a kite surfer? I think not, So there is no comparison there, Matt.
So, I mean those things are awesome, right, I don't know is that is that taking too much of Solomon's attention away or is he working on No?
I think, look, those things stick out, but I think it would be unfair to say it's taking too much of a attention. Clearly he's focused on the business and he wants the business to do well when he took over five years ago. And this goes back to your other question, the more important question of whether it's blank Fine legacy or this is David Solomon's doing. We're five years into the tenure of David Solomon. There is very
little here that you could pin down on Lloyd blank Fine. Now, everything that happens at the firm David Solomon over well.
The consumer facing plans were laid by Blank, fined.
By Blank, fine, but David Solomon completely embraced it, double down on it. At one point said that they would be a leader in consumer banking just the way they are in investment banking and training. They had to do a big about turn on that, and you know what, perhaps that's also a sign of good leadership. Acknowledging your mistake, not sticking with it out of embarrassment, but willing to say, Okay, we've gotten too much heat on this. It's not doing
what we hoped it would. Let's cut our losses and sell a new story.
And that's what they're trying to sign. A good leadership. I mean more leaders should.
Do that, right.
Yeah, And they have now committed to a new strategy. The good news for them, perhaps is over the last five years, the stock never got re rated. They never got that higher multiple, which was one of David Solomon's goals when he took over as CEO in October twenty eighteen.
I'll tell you why that's important. Book value at that time, whatever it was, has expanded pretty well in the last five years because their core businesses of banking and trading did so well through the pandemic that allowed access earnings to flow into book value, expand their book value, and the stock kept pace with that. But what has not changed is on day one, David Solomon and his leadership team told you told investors to ADL analysts that are
priced to book multiple. There's no reason why we should be at like a one point one multiple to book value. It should be much higher multiple. Where are we today? We're below one, So clearly that rerating has not happened. And that's also where there lies a silver lining for Goldman Sachs that in five years of the stock has
not been re rated. You could argue that there is limited downside from here and on the opportunity app and if they actually go ahead and finally execute, even if it's five years too late, if they actually execute and convince markets that they can execute, you will also see them to pull expansion.
What's going on internally, and I bring that up you write this in the story. Larry Fink had a black Rock TV interview last week here at Bloomberg or I don't know if it was ours, maybe something was.
It was on Fox.
Sorry, okay, sorry. TV interview last week, he talked about a schism within the organization. Is that though something that has got to be fixed?
Is he right? First of all, this a is clearly a lot of noise. You know, a lot of the people we talked to clearly indicate there is a lot of internal squabbling, bickering, complaints about leadership. But that's not a story of the last two month. That's the story of the last two en off. It is surprising when someone as prominent as Larry Fink. That's why it's publicly willing to say, Look, it's obvious there is a schism within the organization that can never be a good look.
To be fair, he does go out and say that he's supportive of Solomon, thinks he's done a good job, thinks he's elevated the firm. But still when we heard that comment, when he goes on air and says, it's obvious there is a schism in the organization that makes you sit up and take notice. And that's what we've
heard from a lot of executives of the film. They're saying, when we're talking to clients, we're actually spending a decent junk of our time trying to explain the tensions inside Goldman Sachs instead of devoting all our time into discussing business.
If you said that, they'd start canceling interviews.
No comment.
No, it's just kind of interesting, And you know, you do wonder did David's oly pick up the phone? Hey, Larry, Hey got a problem to be so public and a voice like that to come out and say, it's kind of interesting.
We got a run. I'd love to say in Wall Street hierarchy, Larry Fingers died a few steps above mister David Solomon right.
Now, I would say so too. All right, Shinatarajan, thank you so much, senior finance reporter. Here at Bloomberg.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business App, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
We've been talking about this the last couple of days, Matt, Amazon Prime. Did you do any shopping? I did?
You can go home and do some shopping.
No, okay, because I'd already bought like everything the day before Prime did you really I don't know if I really would have gotten such discounts, such amazing discounts.
Well, consumer spending six point four billion online in the first twenty four hours of Amazon's Prime Day. That's according to Adobe, up six percent from a year ago, but apparently falling short of estimates. I guess people are hunting around for bargains. So we've got a guest on though, that has some thoughts on how to trade the event, or maybe trade the Amazon story.
So let's get to it.
Shaanahara is with US president at pacer ETFs, which has twenty five billion dollars in assets under management, on Zoom from Pennsylvania. Sean, nice to have you back.
How are you.
I'm great, Carl, Thanks for having me. It's nice to be here.
Yeah, nice to have you here. So talk to us a little bit about Amazon Prime Day. And you guys have two ets specifically that you think are great plays on kind of the Amazon story.
Walk us through it. Yeah.
So we identified a little over five years ago that e commerce was going to continue to accelerate in terms of adoption and usage, and so we launched an ETP that trades that owns the publicly traded real estate names that basically provide that mission critical infrastructure that allows for us to shop online. So you're thinking about logistics buildings and warehouses, and it sounds like a simple concept, you know, And when you drive by these big facilities on the highway,
they look so simple. They look like four big labs of concrete with a flat roof and a bunch of garage doors, but are actually quite technical, quite a bit
of technology involved. So we launched i NDS, which is sort of a differentiated way to play the e commerce trade, particularly for those people who are invested in real estate, because there are some potential pitfalls in the real estate market, most notably commercial, So shifting your focus to a part of the real estate market that has good, solid growth ahead of it. We're not going to shop less online. It's going to continue. We're still somewhat underbuilt in this area.
There's a lot of them investment going on, and so we think there's pretty good trajectory for that type of
an investment. So SRVR owns the mission critical real estate that makes e commerce in shopping online possible, and then last year, we had this idea that we would just sort of take that concept and go to the next level, which was we wanted to own some of the software and logistics names that you know, basically power this process because it's very complex to get something that you order today online there tomorrow or even later that day, so
there's a lot of technology involved in that. And then we also own sort of the name like GXO Logistics or SAP for example, big in that space. And then we own you know, the transportation names because there are going to be a lot of.
Them, right a lot of them ups FedEx, Norfolk, CSX, you.
Know, railroad and air freight. And so it's basically a one two punch for e commerce. It's not necessarily buying Amazon at its valuation. But if you believe the trend is a real trend, which we do, and we think we're all going to continue to shop more and more online, then this is as as I said, it's a differentiated to play it. You can play the real estate side of it, or you can play the logistics and transportation.
Side of it, and you've got decent year to date return in SHPP. I think it's up about seventeen percent. What's what's ion DS doing in terms of its performance? And by the way, how many assets do you have in these two ETFs?
So SHPP is fairly small, it's relatively new. We just launched it at i NDS I think is just a hair about over two hundred and fifty million, and it's outperforming the broad based real estate you know, the ny
READ Index year to date pretty substantially. Again because when you think about real estate, you know there's a lot of potential issues out there with commercial and you know, one point five trillion dollars worth of debt that has to be refinanced and rollover and it's going to be rolled over to eye popping numbers for some of these folks. And so we're not sure that, you know, we want
to be positioned there. But if you want to own real estate in a portfolio, because it's not correlated on real estate that has a good growth story attached to it, which is what IONDS does for us.
Though when it's not just Amazon though right it's just everything that we're own e commerce.
We actually don't own Amazon, but it's.
The logistical side of all of your commerce.
It's also supply chain oriented, right, So you know, we had a major disruption with COVID and so we kind of learned a few lessons around you know, how maybe fragile or supply chains were. And so you know, these buildings, as I said, they're not just all these big giants, they're sort of networks of buildings. They're like you know, big giant warehouses that sort of moved the product down the chain to that last mile. And so it's just
a different way to play the e commerce story. If you don't want to buy the retailer side of it or the Amazon Amazon side of it on publicly trade stops, you can own the real estate that empowers that it. We call it mission critical real estate can have e commerce without these types of buildings.
So traffic has done the best of this year of your ETF t RFK. That's just an AI play, I guess right, Well, that's just that's.
The the sibling story to I n DS. So we launched two real estate ETFs that this same time, over five years ago, SRVR, which owns the data centers and the cell phone towers, because we thought there was a big digital revolution going on, and there is, and you know now with the advent of AI becoming so prominent, it's going to gobble up more and more data. That data, so if you think about like streaming AI, the cloud, autonomous vehicles, e commerce sort of fits in there as well.
You have blockchain. All these sort of transformational technologies are going to be a big, big part of our economy and effect almost every one of us, But none of them can happen without that mission critical real estate. The data centers in the cell phone towers. We started there just like we did with I nds, and then we said, well,
let's pull all the guts out of the buildings. So we both pulled all the software devices, chip makers, everything that that makes those component parts of those giant servers and all of the networking work, and so that's traffic tr FK. So we sort of did the same thing we started with the real estate story. We said, e commerce is big, and we think data centers are big. We think this digital revolution is for real. Let's launch two specific real est state based etf that own public
trade of real estate names. They had success, and then what we said was right, Now, let's take it one step further. Let's figure out how to make that story a second iteration of that potential concept.
I want to just quickly ask about cows. It's my favorite, one of my favorite of all the ETFs. It's the cash cows, all right, and it's a mass a ton of assets. I think thirteen or fourteen billion dollars in assets. Yeah, how do you expect that to play if we go into a recession?
Here, Sean, Well, I think based on valuations, I think we would be better positioned than the broad market for sure. You know, if we have a recession, you know, the broad market earnings will slow, we think, maybe slow more than the names that we own, the names that we own in cows, even though it's traditional, we say it's value. They tend to grow their earnings faster than the broad based indexes. So I think we'd be fine there if
we have a recession. What's interesting about cows is it's, you know, again doing what it has been doing, which is beating its value benchmark. So far here to make the funny story or the good story.
About only got about ten seconds?
Go ahead?
Okay, well, we have a whole series of cows small cap. There is calf that one's doing really really well. Right, way to investment.
Where's five seconds? Where's most of the money flowing among your funds? Real quickly?
All across the cows platform.
Yeah, all right, good stuff, Sean b Wow. Sean O'Hara, president of pacer et f's twenty five billion in assets under management on Zoom from Pennsylvania, cows Calf with.
The dead ummac the journal.
How about you let me drive?
Oh no, no, no, no, please, going to.
Drive, honey?
Please? How do the riding gravel? Let's wat?
I want to drive.
It's a good question.
This is the drive to the Globes dot com for me.
I think, well, the Brier run.
Each other down on Bloomberg Radio.
All right, everybody, eighteen minutes left, just under getting ready to wrap up the Wednesday trade stocks around here. I do feel like Matt, it's really about the treasury trade though today, coming off that inflation print, because you have seen in less than a week quite a move down when you look at the twos, fives, and tens. Really the whole yield curve based on what we were where we were like last week.
Yeah, absolutely, and you're still seeing ninety basis points spread between the twos and the tens, so very inverted, but you are seeing investors buying bonds across the curve, even the twos right now, which are trading at four seventy four, so down thirteen basis points.
All right, So let's see what our drive to the closed. Guest has to say back with us, Tony Roth, CIO at Wilmington Trust Investment Advisors. It's the investment advisory arm of Wilmington Trust and M and T Bank joining us on zoom from Philadelphia. Hey, Tony, nice to have you here. It is an interesting day, interesting in terms of the inflation print. How does it, if at all change You're thinking about what the FED does then ultimately how it all impacts assets.
Yeah, guys, good afternoon. Things for having me. It does incrementally have an impact because we continue to see I think a pretty clear and definitive disinflationary environment, and I would describe it as broadly disinflationary. So earlier in the cycle we saw, of course the disinflation, if not deflation and goods. Then the FEDS focused on the so called supercore, which is the area of the inflation complex where the wage pressures were thought to be coming through most strongly,
which is essentially services non including shelter et cetera. There we got today a reading of zero in the supercore after readings of I think point one point two the last couple of months, So clearly we're not seeing wage pressures come through and impact companies. And then as the FED had brought them out to look at core inflation again, we saw areas like used cars and shell alter continued
away and we've seen significant a millienation there now. And so when you put it all together, I guess the best way I would frame it is, is it more likely that we have one more hike of the cycle or three more hikes this cycle? And I think that after today's data, I think it's more likely that we have one hike left, which is namely the July hike, than three hikes, because the inflation is in fact so definitively disinflationary and moving quickly towards the fed's target.
Tony, when do we start seeing damage to the economy that freaks people out? I mean not just negative GDP growth but job losses. Is that coming or can we avoid it?
Well, that's the sixty four thousand hour question, and it all is going to depend I think on the FED, namely how strong are the lag and variable effects are that are still coming. There are a lot of smart folks out there that do think a recession is largely coming, because it usually takes up to eighteen months from when the FED starts to cycle to when you really see those hikes start to bite, and it has been an
historically steep hiking cycle. But on the other hand, it's pretty clear that what the FED is engaged in right now is a cycle of insurance hikes because they don't want to start and stop. Really now those insurance hikes are becoming I think it's increasingly apparent that they're probably unnecessary. And so if the FED decides to not hike in November, if the FED were to hike every other time, the next hike after July would in fact be November. So
a lot of interviewing data. If that data continues to corroborate the narrative around strong disinflation, and on the business end of the data, not year over year, but month over month, three month annualized, really getting into that two percent arena, which I think we're going to be, the FED may have a strong case for backing off, particularly as the approaching election year next year, where it's not going to want to be perceived to be unduly impacting
the economy and pushing it into recession. So we don't know, is the answer. We don't know what the whether or not we're going to have that recession, but there's a good chance we want.
But is it smart to be right now having that conversation that maybe the Fed's overdoing it since there is that twelve to eighteen month lag and I'm assuming that's the twelve to eighteen months from the last FED rate increase, right, that's still a full year and then some a year year and a half, So there is the potential of the FED overdoing it.
Well, the way that we normally think about it is from the beginning of the cycle, it takes eighteen months before the FED is really able to see the full force of its rate increases on the economy. And so if you think about the cycle starting in earnest last year around mid year, we have until roughly speaking, the end of this year until you see the full force of the beginning of the rate hikes, and then of
course you'll see more as time goes on. And so if we're already in an area where three month annualized inflation has a two handle, and we already can see the precedents too much a weaker consumer spending, and specifically, we had over three trillion dollars of excess cash and
consumer balance sheets right after the pandemic. That number has been cut down to six hundred thousand as of March thirty first, and excuse me, six hundred million as of March thirty first, six hundred billion as of March thirty first, and it's even lower today. Of course, three or four months later is probably you know, two three hundred million, So the consumer could be reaching a state of exhaustion due to scarce resources, and we're seeing consumer credit start
to roll over as well. So for all those reasons, it's sort of a race to see whether or not the economy enters of recession before FED decides to try to do something about it and move to less restrictive monetary conditions.
Jamie Diamond already right in The Economist yesterday, releasing an interview in the predicting consumers will exhaust their pandemic savings by Christmas and warns of much greater threats than recession. But that reducing of the balance sheet. So I mean that's going to go.
I think he's right, and I think that he's being conservative, and I think that it's likely to happen before them.
So what happens to markets? I mean, we're looking at S and P five hundred at forty five hundred right now, it's just the rally continues. Is anything going to stop it?
Time to go to cash?
Yeah, so I think that's going to I think that when we think about markets, we think about the factors that drive markets in the short term. Momentum when you're in a scenario like this is always the most powerful factor. And so unless there's a trigger or a catalyst to reverse the market, I don't think you're going to see the momentum of bait. But I do think that you're going to see different players in the market perform over the course of the summer. You'll see the rally continue
to broad on out to lower quality names. I think that you'll see small small cap start to participate more strongly. It has a bit and fits and starts, but we really look at it from the beginning of the year, it hasn't done that well. And so before we arrive at a determination, possibly as early as September, that we're going to have a recession. I think that the market is going to have room to run within those specific areas.
But it is a stock keepers market, and I think that is important to be very selective and not play the broad indices, but find your spots.
All right.
Good lad there, hey Tony. Great to check in with you. Tony, Robbie's chief investment officer over at will maintain trust on zoom from Philadelphia.
This is the Bloomberg Business Week podcast. I'll a little Apple, Spotify and anywhere else you get your podcast. Listen live weekday afternoons from three to six Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.
M m HM