Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. Along with my co host Lisa Abramowitz. Each day we bring you the most important, noteworthy, and useful interviews for you and your money, whether at the grocery store or the trading floor. Find the Bloomberg pm L podcast on iTunes, SoundCloud and at Bloomberg dot com. It is that time of year when we are bombarded with different expectations for people are so optimistic and potentially wary about some of
the risks and pitfalls ahead. We have Jim Paulson, chief investment strategist and economist at Wells Capital Management with billion dollars under management, here with his expectations for the year ahead. Um, Jim, you know, I want to start out with one particular expectation of yours, which is that the US dollar surprisingly weekends. This is what our our analysts, our effects analyst, Vince Cinerella was talking about earlier in the program. So, Jim, why do you think that we're going to see a
weekending in the dollar? Well, I think the primary reason Li said that there's such a strong consensus about the dollar going straight northward here is because the Fed is going to raise interest rates, which I totally concur that that's going to happen. And if you look back since nine, during the five previous recovery cycles, every time the Fed embarked on it on raising interest rates during the recoveries, the dollar declined. It didn't go up and came down.
And I think it's going to happening in this time is the Fed commences on a titany cycle. And the reason, I think because you have to look at why they're raising interest rates. Interest rates are not don't go up in isolation. If that was the case and the FED just raised rates and nothing else happened, that'd be great
for the dollar, bring in foreign capital flow. But almost always the Fed starts to raise in truth because they're concerned about inflation, and rising inflation is a huge negative for the U. S. Dollar, destroying the purchasing power globally. And usually when the Fed's involved in the titany cycle, it means that inflationary expectations are rising, there's concerns about
being behind the curve, and the dollar is sold. Jim Paulson tell us your thoughts about treasuries specifically the tenure, and then also when I get your ideas about wage inflation and consumer inflation. Maybe some numbers, yeah, uh p M. I. You know, I think that we've got a backdrop as we had into this year, not only have a pickup
in US uh growth. You know, the reports just keep coming in every day a lot better than expected, and we're probably going to do three percent growth this year in the United States, but we got to pick up around the globe and manufacturing commodity price of recoveries happening everywhere, and I think we've got one of the rare synchronized bounces in globally, not the activity going on as we had this year, and it happens to come at the precise moment that the US has finally returned to full
employment in this recovery for the first time, so we're going to see the first acceleration on full full employeed economy. I think wages are gonna uh go up quite a bit in the next year, maybe three and a half to four percent year on year by the end of
the year. I think headline and co inflation maybe CPI moved towards three and I think that's gonna be a very uncomfortable situation both for the feder reserve, and for bond vigilantes, I wouldn't be surprised if we see the tenure yield spike about three and a half to three and three quarters at some point during the year. You know. There is an article article earlier this week on the
Bloomberg siting Paul Smeltzing. He's a PhD candidate at Harvard University, who said, looking back over eight centuries of data, I find that bull market was indeed one of the largest ever recorded history suggests this reverse will be driven by inflation fundamentals and leave investors worse off than bond massacres. And otherwise he's predicting a pretty dire circumstance this year for bonds. Do you agree, well, you know I do in this stance that you know, um, we pigged free
market prices throughout the United States history. We packed the dollar, you know much early post war period, we packed gold at thirty announced the said regularly pigs the funds rate in the implementation of monetary policy, but we have never I don't think in the history of the United States exercise this massive of an artificial pegging of an important
free market price. We're not just pigging the short term interest rate, We're pigging the entire sovereign yield bond curve across from cash to thirty years, and we're doing it not just in the United States, but we're doing it all over the globe. This is the mother of all pigs, and we are finally the elephant is going to lift off that peck. And in the balance of this recovery, we're going to start the process of the great unwind
of that artificial price setting. And I think because rates have been low for so long, because we've developed a population and culture worried about deflation, reversing that suddenly is going to be shocking for most participants, including bond and stock investors. And I do think there's gonna be some pain associated with the unwind of this great deal. Pick Jim, I want to continue with your animal theme, perhaps even animal spirits theme. You say that we are going to
enter or are in a bunny market. It's not a bullet, it's not a bear, it's a bunny market. Well, how do you profit from a bunny market? What do you invest in and what do you stay away from? Yeah, well you don't um. I think that the reason I say a bunny marks because I take a bear market HM is not like until the next recession, and I don't see that happening this year or maybe for the next few years. So I don't really think we're in a bear a bullmark and a lot of the foundation
of this bull has already been spent. Uh. We can't take p motibles from ten to twenty again, We've already done it. We can't lower yields from six to one, We've already done it. Uh. We we can't have chronic disinflation. We're going to deal with inflation challenging evaluation levels. We're going to have to have rising rates now and the Feds moving to the sidelines. A lot of the earning cycle is not going to be near as good going forward now that it's mature. So the bull camp two
is left. So what are you left If you're not in a bull, you're not in a bear. I would suggest a bunny. And what what the bunny is? It's an animal that hops around a lot but doesn't go very far, and I think that's what we're in. I still think we're gonna move higher over the next few years, but much much less on buy and hold than what we've done up till now. The best of the bulls behind many things you can do in this I think bunnies often happen in the in the second half of recoveries,
once you're reachable employment. They tend to have more inflationary and interest rate overtones about them um, and they also tend to be hoppy. So a little market timing, if the bunny hops up big, coming back to risk off, if the bunny hops down big, going back to risk on. Uh,
using a little bit of that makes sense. Overall. I think one way to deal with this is maybe to move away from the United States because I think much of the rest of the world is behind us in this recovery cycle, and they're not in the bunny market yet they might still be more in the bull phase. I don't know if people would really want to consider the the year of the bunny, do you think? I don't know. It's the year of the rooster, but it's also maybe the year of the bunny. Who knows? I
like that. Maybe we'll call him Jim Bunny Paulson. He is the chief investment strategist and economist for Wells Capital Management, helping to manage more than three and fifty billion dollars. Well, corporate debt has been rising at a pretty fast clip. Consumers have been holding off and really have not been incurring as much debt, at least on a proportionate basis. But perhaps this is about to change. I want to bring in Ellen Zentner, Chief US Economists and managing director
at Morgan Stanley. She has been named to Bloomberg Best's list of top forecasters for the U S economy with more than seventeen years experience as a FED watcher, Ellen, thank you so much for being with us. UM. Why do you think that US consumers are going to build their debtloads more this year? Well, I think one of the things that we look at is when you expect higher income in the future, it tends to dictate how we spend today UM. And the same can be said
for revolving credit credit cards. If you think a raise is coming, or in today's case, a tax cut is coming, UM, you might be willing to carry more debt levels, higher debt levels today with the comfort of knowing that you're probably going to be better able to pay that debt in the future. And so what we've seen is that when consumer confidence rises, and we've seen a pretty big rising confidence since the election, about six months later, revolving
credit tends to pick up. Uh. And so we think that's going to be some of the dynamics that we see play out this year as consumer has been more in anticipation of the tax cuts. Do you think that's going to be a bad thing? No? I I certainly don't want to see a return to pre crisis growth rates in consumer credit. I mean, first of all, the demographic trends don't support that kind of return to that
incredible pace of of debt accumulation. But also we've regulated away the ability of households to accumulate that type of debt or that level of debt burden. Uh, sort of saving saving us from ourselves, if you will, with all the regularation that's gone into place. But we certainly expect a healthy pickup. There's a healthy certain amount of debt to carry, um and with tax cuts coming better income prospects, consumers are heartened by that. The only risk there is
if tax cuts are not delivered right. But if they are, um then we expect that to be reflected in a faster pace of spending in the course of faster pace
of certain types of debt accumulation, like credit cards revolving credit. Well, I'm glad you mentioned credit cards because I'm wondering if the picture for an equity investor, try to imagine yourself walking the aisles of a home depot or a Lows store and using your Visa or your American Express or another charge card, is that the image that we should hold in our minds for successful investing in Well, I think that brings up a great point because there are
a lot of pitfall pitfalls in the retail sector, right and not all retail stores are are doing well. Uh. And so one thing that our our chief US equity strited just Adam Parker likes um is credit card companies as a play to capture that stronger consumer without specific retail risk um And so I think that that you know that that could be a nugget for equity investors this year. We've also done a lot of work around
where typically do consumers spin tax cuts. So rather than concentrating on does it benefit the low income consumer more, the high income consumer more, let's just concentrate on what products um benefit from tax cuts? And ironically, we saw auto sales sore yesterday. And one of the biggest categories that garnered those dollars when we get tax cuts is new autos, not used, but new autos, new cars and trucks, motorcycles,
other highly discretionary recreational goods. You mentioned home depot, you know, furnished furniture and home furnishings um. And so home improvement stores could do well uh in this environment. Uh. And travel, all right, this is also a stronger all are wrapped up in this theme. Uh. And Uh. It has increased the buying power of American consumers. And so we've seen foreign travel by US residents and just air transportation in
general UM typically garner a lot of those tax dollars. Uh. And so that's we're really encouraged about about the the those kinds of dynamics that might play out this year with broader tax reform. You know, I love that phim goes to where are the opportunities for equities and I'm thinking, wow, more debt. Let's think where the delinquency is going to pick up, and especially since we've already seen delinquencies pick
up among auto loans. You know, how what are you looking for to determine whether the level of debt is unsustainable? And a lot of people have come on this show and talked about how you know President elect Trump may not deliver on all of his plans that are that are going to be supposedly so stimulative. Well, I think one thing that we look at is, uh, debt obligations
as a share of income. So uh, you know, pre crisis, so leading up to the financial crisis, dead as a share of disposable income peaked at at a hundred and thirty five pretty incredible. Um. And since that time, we've cut debt so much and with incomes rising, Uh, we we've cut that back dramatically. Uh. And so we watch that very closely, right, we want to be able to
see that households are carrying their debt burden. Well, we also want to look at the household balance sheet how much of it is exposed to a variable rate, because, of course, when the Fed starts raising interest rates more quickly, Uh, you know, historically that interest expense incurred from the balance sheet has crimped income pretty quickly and causes a knee knee jerk reaction on the part of consumers, pulling back, Um, what we see today is an unprecedented household balance sheet.
We're only about ten percent of it is subject to a variable rate. Think of all those mortgages that have been refied through the government programs or through organic refined a very low fixed rates. Uh, you know, that's the majority of the household balance sheet, and unlike pre crisis, it's almost all fixed. I want to thank you very much for spending time with us. Ellen Zentner is the
chief US economist managing director for Morgan Stanley. I want to bring in Dave Wilson, Bloomberg Stocks Commas to tell us what's going on in the market. And Dave, I just look at retail and it is a wreck today, yes and no, pim. I mean, it's an interesting sort of contrast going on here. And I bring this up because sure, if you look at the department store chains,
they are taking quite the hit. Macy's down, Calls down eighteen percent, both those companies coming out late yesterday with the holiday sales figures that were worse than analysts were expecting. J C. Penny down seven percent as well, Nordstrom down eight percent. And and I bring this up. I was actually just looking at this for a market's block. We do here for the Bloomberg terminal. I'm one of the
contributors to the blog. The S and P five hundred Department Store index is now down four headed for its biggest loss ever. It is a component of the broader SNP five hundred retailing index, and you want to know
how that's doing. It's down two tents of percent. So basically what's happening is that the retailing index, the broader one, has Amazon dot Com, Amazon benefiting at the expense of the likes of Macy's and Coals and Pennies and Northstrom that stocks up, so it's actually helping to hold up the retailing index. And then you can throw in while you're at it, Netflix and price Line Group in terms of today's performance, and what do those companies have in
common with Amazon? You're talking about internet based businesses, So what's really happening here. It's another marker in terms of the broader shift that's going on in retailing. People don't want to go to the store. They want to go to the website, buy what they want, have it shipped to the house or maybe to uh, you know, one of the stores. Per pick up. But that's as far as it goes, and that's what's happening here, and we're seeing that play out in terms of the holiday sales figures,
and a whole lot of retail stocks are down, no question. Nonetheless, it's more of a transitional story than a people don't want to shop story. You know. Another part of this story is the dollar, and there was this incredible strengthening of the US dollar last year to the strongest level in more than a decade. A lot of people thought that this rally would only gain steam as President elect
Trump's policies were implemented. I want to bring in someone who's going to cast some shade on that, vincinere Ella, FX strategist here at Bloomberg. You wrote a piece about the five ways the dollar rally may end if Trump's policies do not get implemented as expected. So walk us through this sort of path of doom. Sure, and good morning to everyone. Well, I mean, five is a fun number,
but there are quite a few ways. Actually. I think one of the things that we need to look at is it's one thing for the president elect to have run the table in the Electrical College, and and one the election, it's another to run the table in the Senate, in a Congress and enact all the policies, particularly in the first one days, that he would like to do to stimulate the economy. One of the things that was
outlined was repatriation of corporate profits overseas. We have something of two and a half trillion dollars that is available to be brought home. It's meant to spur investment and economic growth. But in two thousand and four we try this once a tax holiday. Companies brought the money back, They paid down dividends, they repurchase shares, they streamline their operations, and actually fired people. So it actually hurt the U. S. Treasury,
not helped. So Evince, I'm just going to ask about whether we are at peak dollar, because you know, if we get a weaker US dollar, if we change the if somehow the strong dollar policy of the U. S. Treasury changes or at least goes mute for a while, that's going to be very beneficial to US trade and it could put the kind of pressure that is necessary
in order to get these trade negotiations on track. Because the one thing that you know, emerging markets have is that their currency is a weakening, and that means their products are more attractive to US consumers. Well, it is good for US trade, but it tends to be good for US multinationals, and those profits tend to stay once again overseas and then I brought back home necessarily to create jobs really here in the States. It actually creates jobs overseas. So you know one of the things that
that's jobs, but not the value of the dollar. I'm saying, is the dollar at a peak value right now? I would not be one to try to catch the following knife, so to speak, and say the dollars at a peak, But it certainly has turned the corner um since mid December, and it's definitely on a downtrend. And we've seen it
again and get hit overnight. Um, there are a lot of factors working against it, not us the things that i've I've outlined, but but certainly that whenever you have a currency that's moved in a broad sense very quickly, um, it tends to run out of steam and reverse. So, Dave, you were talking about Sears and ord strum, some of these big retailers, how much in their equation does the dollar factor? Well, I mean only to the extent that you know, we're talking about what does it cost them
to say import the products are going to sell. And by the way, I would take issue with the idea of Sears is a big retailer. It's the incredible shrinking retailer. I mean, it's comes in Florida. There are plenty of Sears still there, well still, but you know, they just came out and said they're gonna get rid of a hundred and fifty more stores. They're selling their Craftsman tool brand to Stanley Black and Decker for nine million dollars. That's why the Scots, all right, But the others, Okay,
the multinational retailers. Does this matter to them? How much? Is it certainly matters in terms of their ability to source products, you might say, and it matters, you know more broadly. Let's be honest, and I bring this up because we got results out of Constellation Brands today. You know, this is a company that's in the beer, win and
spirits business. Corona and Medello, those are the two. So we're talking about Mexico and certainly that's not a front and center when it comes to currencies at this point. And actually their earnings beat analysts average estimates and Bloomberg survey for the fiscal third quarter. Here's the thing, though,
was all about tax advantages from reinvesting foreign earnings. So you know, that's sort of really front and center, and the stocks down in the wake of their results, even though, like I said, they beat estimates and it's one of the worst performers on the day and the S and P five hundred down five points. Well, so, Vince, what are you looking for to sort of be a marker
for how much more the dollar could potentially fall? Well, I mean, one of the things that just a quick point on what Dave was saying is that one of the one of Trump policies is a consumption or a destination text if that isn't acted, and essentially what that does is will say where can where goods are consumed is where the tax will be applied. So if we bring product from Mexico, for instance, there will be a tax placed on it. It's the equivalent of a tariff.
Raises the price of goods, raises inflation essentially will weaken weaken international corporate profits, and that will weaken growth. Uh. That type of process is a quasi protection of protection is amendment and and would certainly weaken the dollar both the dollar gets weaker, Does that mean that the Federal
Reserve gets to normalize US interest rate? Well, one of the things about the dollar, it's a sort of a back of the envelope calculation, is that a four percent grade weighted move in the US dollar, either up or down, is equivalent to roughly twenty five basis points for the Fed. So if the dollar would drop by four percent, that essentially loosens financial conditions, makes the FEDS job easier. Thank you very much for joining us. Always a pleasure, Vincent Signarella.
He is an effect strategist for Bloomberg. He knows everything about currencies and he knows everything about stocks. Dave Wilson, Bloomberg Stocks calm Is. The description is that the United States under President Trump will abdicate its role as a global leader and there will be repercussions around the world. Here to tell us more, Willis Sparks. He is the director of Global Macro for the Eurasia Group. So Willis maybe explain that description and what you for it see
as being some of the consequences. Sure, I mean we're talking about uncertainty. You were just talking about, you know, the uncertainty of what role Jared Kushner and Ivanka Trump may play. That's that's a normal part of a transition, and we don't know how strong the Secretary of State will be or which advisers the new president will listen to. But this is much bigger than that in terms of
the uncertainty that's been created. We all know that Donald Trump is the first person ever elected president who has never served in government of the military. And frankly, there are a lot of people who voted for it because he doesn't have that experience, and that's fine, But the rest of the world is thinking what does this mean
for the role that the US intends to play? And Donald Trump, if you take him at his word, a lot of the things that he said his America First approach to US foreign policy will be one which looks out for American taxpayers the interests of American voters, without regard for the impact on broader stability around the world. In other words, the the idea has been for a long time that US presidents have an interest in creating a stable world because the stable world is good for
the world's only superpower. Trump's formulation is different. Trump's formulation is the U S investing and stability allies allows allies and rivals to free ride off the US, and I'm going to go out and get a better deal for the American people. Okay, So given that perspective, let's take a little look around the world at what the potential
responses will be from other world powers. What about China, What do you expect the response from Well, China is trying to figure out how to interpret Donald Trump's tweets. They take Trump absolutely but and they're trying to figure out when when the question is, is North Korea close to being able to put a warhead onto an intercontinental ballistic missile they can hit California? And Trump says he tweets not going to happen. If you're in Beijing, you're thinking,
I wonder what he means by that. Does he mean that he doesn't think the North Koreans are smart enough to pull this off? Or does he mean that he would invade North Korea before he would allow that to happen. They don't know what that means, and allies also don't know what Trump's intentions are. You know, NATO allies in Europe for example. So what you have is a lot of allies that are going to begin to hedge their
bets on US intentions. Yeah, but well, let's let me just push back on this to start with Europe for example. I mean, if you can accomplish with a tweet or speech an increase in military spending on the part of TELL allies, doesn't that come off as being a pretty shrewd move. Sure, if you can do it, well, haven't the European having certain European NATO allies already said that they are going to increase their contribution to the military budgets. They have said so, but they have said so in
the past as well. They have not lived up to the obligations that they've set in the past. So we'll have to see what they do. But you know, again, I'm not saying that this is all negative, but but there is a lot of uncertainty here and so a lot of allies are trying to figure out, well, will we get what we want from Trump if we promise to do more of what he asked us to do?
And that's not clear. If Russia starts to to to play with Lafia and Estonia the way that it's played with Ukraine, for example, will be you how will the US respond, Will it respond as it has in the past or not? And if not, are we wasting our money? It raises a lot of questions for which we don't have a lot of good answers right now. The point here is not to vilify Trump or to suggest that everything he's gonna do is going to be some kind
of mistake. But he certainly has different assumptions about what role US power should play in the world than pretty much all of his predecessors, and that's creating a lot of uncertainty in every region of the world among both US allies and rivals. Some uncertainty in certain regions, for example, in Europe has not necessarily been caused by President elect Trump,
as uch as the populist uprising there. I mean, a lot of people who I've spoken to are are more concerned about Europe frankly than they are even the US, just because of the fragility, frankly of the Union in light of the Brexit vote, as well as the Italian or friendom uh last year. What what do you see happening there? Well, Europe has got so many problems. I mean, really, if you want to describe the risk for Europe, it's it's the sheer number of different challenges that European leaders
are facing in a big election year in Europe. We've got presidential elections in France, followed by parliamentary elections both in the spring. We have elections in the Netherlands and Germany. We could have earlier elections in both Italy and Greece. In the Brexit thing is only getting started and it's probably not going to go very far because politicians in EU countries running for reelection have no incentive to seriously negotiate with the British until next year. But the negotiations
are going to take up a lot of time. Meanwhile, relations with Turkey are getting more complicated at a time when the migrant deal between the EU and Turkey is crucial for maintaining stability in an election year in Europe avoiding another wave of the migrant crisis. Russia maybe wanting to to to play some kind of undermining role in some of these elections in France and Germany, for example, if you believe that they've played that role in this country.
So yes, there are a lot of problems in Europe that have absolutely nothing to do with Donald Trump or Barack Obama or the United States. But it is compounded by the fact that in trying to figure out how to respond to these challenges, the US is no longer the predictable actor that it has been in the past. Well, it's is it worth noting that the United States maintains
about eight military bases in more than seventy countries? Sure? Absolutely, I mean that's you know, Britain, France, Russia, I think got thirty foreign bases combined. It's a compelling argument for Donald Trump to say, why on Earth do we allow countries as rich as Germany and Japan to outsource their security to the United States? And American taxpayers responded to that message. It is a very good question that deserves
a very good answer. But in this period of uncertainty, we're going to see a lot of governments that are not sure how to make decisions based on the new environment until they have some better sense of what Donald Trump will and will not do in response to conflict real and hypothetical around the world. So this was some of these risks were highlighted in Eurasia groups. Top risks for two thousand and seventeen. Going back the top risks
for two thousand sixteen, which of them came to fruition? Well, you know, I mean, I think at what we tried to do this year was to draw attention to the fact that there's been a move away from risk in the emerging market world back to the developed world. So I think, you know, we had a lot of focus this year on Europe. We didn't in the end, we did not believe Brexit would happen, but we knew it was going to be a close enough vote and there was a high enough likelihood that we've done a lot
of writing for our clients about preparation for that possibility. Um, you know, I think that what we're seeing is a continuation of that and maybe an intensification of that. End of the risks are really focused in Europe and the United States much more than they are in the emerging market world at the moment. Thank you so much. Willis Sparks, director of Global Macro at your AGIA Group, talking to us from New York. This is thanks for listening to
the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes. SoundCloud or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always at Catch us worldwide on Bloomberg Radio