Big Tech Earnings, The Fed, Inflation Data

Bloomberg Audio Studios, Podcasts, radio news.

This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global

They're critical to what we do in the markets. I think so much of what you try to do is in the cash market, but there's limited bandwidth. Broker dealer balance sheets, aren't what they used to be, And a lot of the balance sheet in the industry sits with investors like ourselves, and we tend to own securities until we change our mind. So we're not in the market

Is there about Michael, and I think of Ian Lingoln at BMO Capital. You're saying we're going to see price up, yield down. Is there a bet in the space now like what you believe that we will see as a regime lower yields.

Well, it's everywhere we liken the current environment. In nineteen ninety five, there's one critical difference. When the FED finished hiking rates from three percent to six percent in ninety five, the entire yeal curve was above the FED funds rate. Today, we think the Fed is done hiking rates, but the entire yeal curve is trading roughly one hundred basis points

Bob, We're sitting here at two year treasury almost at five percent. Here, I don't know, I'm going to park my money right there, and I'm going to feel fine. Is that a bad trade?

It's not a bad trade, but you may feel lonely compared to the money that's sitting in money market funds. You're willing to step out. But what we're looking at is over six trillion dollars of assets sitting in money market funds and they're feeling cozier at somewhere closer to

So what do you think our Fed should do? I mean, the economic data suggests that maybe there's no reason to cut rates. We've got I don't know, inflation still out there.

If I were at the Fed, everything looks so good, I would just sit in my hands for the next couple quarters see what happens into the election. And do nothing. You're looking at over two years of unemployment below four percent. I know we get PCE at the end of this week. There's a lot of debate. Is it going to be two seven or two point eight year every year? Is it a point two five for a point twenty seven increase?

So the stated system, is there leverage in the system? Is there that animal don't I don't want to say animal spirit, that that ancient animal instinct to leverage up when we're certain we know what we're doing. Is there that bet right now?

You're not seeing it to the extent that we saw it previously, either headed into the dot com bubble in two thousand or certainly into the Great Financial Crisis in two thousand and seven two thousand and eight. But there is a lot of borrowing going on out there. The most levered balance sheet are not businesses in household they're actually federal governments. Globally, when you look about the extension of credit into the system, bank balance sheets may have shrunk.

The heart of the matter. Going back to Rogueff and Reinhardt, this time is different. Is they took within their iconic study of debt that it's about public and private combination of debt. Would you suggest we're going to see a private debt issuance and build up and belief in debt, so we've got both public and private over indebtedness.

It doesn't feel like we're heading there. I agree, right right now, it feels like and I know you did a story that consumers are looking to do a bit more vacationing and a third of them are willing to put that, willing to go into debt to do that. Going into the financial crisis, one hundred and twenty percent of them would have been willing to have gone into debt to go on vacation. So there is some moderation.

Let's listen to our Latin tour guide here as we.

Go to Rome, Arma, we're room quay kind of troy I quy primus aboris.

That's great, and that's like Lisa Mateo's schedule to go to Rome. Here she's going deep into debt. Okay, and to go to loan so she can catch up with Bob Michael and the Latin. That's perfect, it's out there as well. It's going to happen.

Bob. What do I do here?

And if I want to take some credit risk here? Do I stay with investment grade? Do I go to high yield? Because high yield was the performer last year in the fixed income space? Where do we go in a credit space?

You hope that over the next week high yield pulls back a little bit further and then you go in without recession on the horizon. You have nothing to fear but yourself. If you stay out of the high yield market, you're you're picking up now yields of over eight percent. Wow, corporate profitability looks good. It's a much cleaner high yield market than anything I like time six percent of it washed away back in twenty twenty.

I guess I got to go to the FED meeting as well. The basic ideas, it's a snoozefest to get to June when they redo the dots and as a raging debate now Craig Trus with great leadership on this over the weekend about the FED almost over communicating. Is your world made more complex because there's too much communication from FED presidents, governors and leaders.

You know, Tom, the one dead language that I miss is FED speak. Remember in the days back in the eighties, when the FED wasn't always telling you every day what you were thinking.

I yearned for it.

You used to get the FED minutes, you used to get the listen to the Humphrey Hawkins testimony. You heard what Greenspan said, then you got out your secret FED decodering and interpretated what he meant was a value to that. And I think there is just way too much daily information coming, Paul.

The most important conversation I've had on this is someone that Bob Michael knows, Richard Berner, who drove the ship at Morgan Stanley for Steve Roach for years in the US economy, public service to the nation at Treasury. And what was so important here is there was just what mister Michael says. And then you would go see a president at a rotary club or some other economic club and they'd say, just as little at the breakfast is they were saying to us on the street.

Bob, you're head of the global fixed in home currency and Commodities group. Here, let's go currencies. What is there a bare case for the US dollar here? Or are we just all along the US dollar and letting everybody else deal with it.

There's a bare case for the dollar when the FED starts cutting rates. Until they do that, there's no sense fighting the strength and the dollar. If you look at when the dollar really started to gain strength, it's when the FED started hiking the FED funds rate at the start of twenty twenty two. Back then, yen was about one ten, not one point fifty. The entire strength and dollar yen has come from the FED hiking rates, not anything that's happened on the Bank of Japan's part.

So, and we see central banks around the world cutting rates, are or saying they will cut rates, signaling that they will cut rates. So I mean, does a FED, how does the FED think about the dollar when they think about their rate policy.

You're right, there have been seven thousand basis points of rate cuts in the emerging market central banks. So those central banks have been cutting rates for over a year, and I have to imagine they're starting to second guests whether they need to keep cutting rates. Here, I don't know that the FED thinks about the dollar all that much. If we go back, we were just talking about the FED speak of the nineteen eighties. I remember we used to look at the ten book, We used to look

Bob and the time we got left. I really want to focus here on end of the earning season in corporate issuance off of like ZV Body at Boston University, or there's a thing folks called eminem. It's not the candy, but it's a theory here and the allocation of your capital structure to debt. Are we underdebted right now in quality corporate America? Do they have not enough bills, notes and bonds?

I think we are. We have spent the last quarter trying to poke holes in corporate profitability in the markets and at JP Morgan with our credit research team, and they can't do it. And instead what they're seeing is a reacceleration in corporate profitability and businesses thinking about investing in cap X. Again, it looks pretty bright out there for corporate America. It does remind me in nineteen ninety five.

Do you suggest bond issuance will be the surprise of the next eighteen months.

I don't know. I think there's a shortage of corporate debt right now. We were looking out over the next couple quarters and there's money, more money maturing than there are planned.

At what you just heard there, folks, is classic John Templeton from Bob Michael. I'm sorry, Paul, I'm in this camp. There's a shortage of bonds. Nobody's looking at the Bob Michael world and it's a tangible part of how we do this, and it links into the equity market, and there's just a shortage of bonds. That's all there is.

I mean, Bob, you read you're JP Morgan Asset Management. You guys are pretty big. If you wanted to get out of a position change a big allocation. Is there enough liquidity on the street to kind of get that trade done to your liking today versus ten or fifteen years ago. How much harder is it, if at all, to kind of make major trades for you guys.

Right now. When things are relatively stable, you can do it. It will take a little bit of time, depending how large a position you're trying to move. There's a lot more in portfolio trading, so hundreds of line items all at once at a single price. That's a feature that didn't exist pre financial crisis. But when everyone is waried and everyone's pulling back liquidity and their balance sheet, then it is far more challenging than it was.

JP Morgan, you say, get that trade done for me, right? I mean, you guys are players.

You try not to do that because you are, You are reliant on a counterparty. I think that's a pre financial crisis.

Let me pin down the ten year yeld twelve months from now, just a vanilla media call here for animals like me.

I think we're going to be right around four percent.

Down, but not down with the drama that financial media.

Not a whole lot, Not a whole lot. I think the FED could probably get one hundred and one hundred and twenty five basis points of great cut.

So are you doing cliff notes now in FED speak? If you got Greek and Latin down from your undergraduate days. I don't are you looking at fed speakers.

I don't need to do. If they're telling us every ten minutes what they're thinking, you don't need cliff notes.

About Michael, thank you so much, just generous with his time here on a Monday that morning, he of course is with JP Morgan. This is what we like to do best. There's no other way to put it. We like to look at equities, bonds, currencies, commodities and shift from world class to world class. We do this with Bob Michael, J. P. Morgan and bonds and now one of my favorite people looking at It's called investment strategy,

So you know what, I think it's half full on expectations, but companies have to come through. And I have to tell you, Tom, I don't think I've ever been called twisted on a Monday morning, So I don't know if that's a good sign for the week, but I think what's going to happen this earning season. We've already seen it a little bit, especially with the financials, is that it's not just about the results. It's always about the guidance.

Yeah. And then the reason I say twisted, folks, is I got so far working off of Anthony Nodo with a real digital heritage. It's almost like a West Coast ethos here on like three zip codes in midtown Manhattan and list with that, how does a technology group look? I mean, maybe not individual stock if you don't want to give me a buy Hoed, Sell and Apple, although we're listening, but the basic idea here does the tech boom continue?

I think there's two things that we need to pay attention to in these results for tech companies. First and foremost investors should be aware that expectations for SMP earnings growth are positive marginally right low single digits, and all of that growth is coming from those tech companies or the expectations are coming from those tech companies, So we need tech to come through on these first quarter results in a positive way in order to carry the index.

All right, let's talk about valuations, Liz, give us your thoughts about how this market is valued. Here do I pull out the Magnificent seven and try to look at the market on that basis?

Where are we well given where yields have gone just over the past month. The market right now is valued for a pretty great environment. And when I say pretty great, I mean we've got fundamentals from an earning's perspective that need to deliver at least stay this strong or strengthen. And we would also need the economic fundamentals to stay this strong or strengthen, and we would need geopolitical risks to calm down or at least have the absence of

Yeah, we do absolutely on Friday, And Liz, that kind of goes to I guess the Fed. I mean, the market seems to be pricing out much fewer rate cuts this year. How much is the market being held hostage by rate cuts or the expectation of rate cuts at the moment, I.

Think the momentum in the market is absolutely held hostage by what the expectations for rate cuts are. So far, we've digested it pretty well. I know that there's been a correction, it's only a little bit so far. It just feels bigger because our muscle memory is for the market to rise uninhibited. But I think the rate cut mentality is starting to actually affect where markets are trading.

Bob Micah was there. He's looking for lower rates, but lis not much lower rates. There's not much drama from JP Morgan. Price up, yield down, Yeah, we get that if we yet, as you say, higher yields or renew regime, a higher yield reset or an our start to take it over to economics of two and a half two point six Dare I say three point one percent? How does that fold into the stock market three years out?

Well, I think that's what we're going through right now, is this digestion process of Okay, if yields aren't going to come down as dramatically as we thought by the end of this year, when will they come down now? What we're looking at is the reason that they're staying higher right now is mostly predicated on the idea that the economy is still strong, which has caused inflation to be perhaps more of a problem for a longer period

All right, Liz, what are some sectors that you think or maybe that you guys are looking at right now going forward for the back half of the year.

Well, there's obviously been a rotation that's been on and then the rotation has been off, and I think we're going to continue to see some of that volatility as the year progresses. Some sectors that I think will stay durable in those rotations, though, are energy. There has been a huge run in energy since the beginning of the year, so it could stall out a little bit as volatility

Well, you're talking to Anthony Nodo, it's so Fi with all of his great work on Wall Street. I'm fascinated. Do we need to see tech pay a dividend? Liz Young this whole idea. We're not going to do a dividend, it's a taxable event. We're only going to do share buybacks.

Where are you on that, Well, dividends are an important piece as a shareholder. We need to talk about shareholder friendly companies. But if you're looking you have to break

Liz, thank you. Just wonderful. Liz Young, thank you so much. How to investment strategy, it's so fine. I really can't say enough about a Bob Michael to Liz Young excellence there in bonds and inequities. Joining us now for a brief in the Philadelphia seventy six Ers, Eric bil chunis, how revved up is Philadelphia?

Oh, we're revved up. We enjoyed the you know, I had my first beer moment when the New York Knicks man just going up one to oh in invest of seven, we're like burning and beat Jersey. All these chants. They acted like they won this championship. That was fun. It should be interesting in Philly. We like to return the face.

Yes, what what?

What's the single thing that can allow the Sixers to do better than the pundits say?

Play more Kyle Lowry, who is just an animal in the clutch and play less. Tobias Harris who is way Philly is just over this guy. But he's like just assumed he's a starter. He plays a lot, he just misses a lot of shots.

And it's all comes down to Embiid it does.

He's a warrior and Embid I think against the next he'll show clutch gene. Sometimes Embiide has this thing with the Celtics. He just can't beat them in the end. But I think he'll do good against the next.

Time we had to do this, the owners in Belchunas would show up if we talked sixers basketball. So Eric Belchunis owns a high ground in ETF. So I want to make clear, folks, this is an earned high ground. He didn't do it with pr people, and he didn't do it with social media. He did it with two books that are absolutely meant, the Magic of John Bogel and all. So of course this ETF boom, it's there. I gotta go to the event over the weekend. A

Yeah, right now, it's a little bit of a holding pattern. The flows have been, you know, a little bit a couple outflows here, a couple inflows there. But that second wave I spoke of the past couple weeks has definitely died down. We'll see if we get a third wave. So right now we're holding at about net twelve point five billion since they launched, which to me, if that's all they get this whole year, that's a success. That's how big that number is. But we'll see what happens.

Double see the Grayscale.

Yeah, gbt the Grayscale Bitcoin Trust that converted with twenty eight billion. It's now down to I think twenty billion, but has seen sixteen billion of outflows. That's been a weight on this, but the twelve point five billion is net of those outflows. But GBTC seeing less and less is a good sign. But the nine new ones have also seen less and less inflows. So we're kind of at this sort of Like I said, it's just sort

Is Blackrock just gonna own this space too?

Yeah? I mean I just tweeted today they've now seen sixty nine straight days of inflows basically right out of the gate flows every day. That's basically in the top ten all time, and it's the most highest streak of any ETF by far that's active right now. So they're loving it. I mean, Larry Fink was on a different channel about two weeks ago and he was grinning ear to ear like a proud father about ibit. He's like, this is the greatest launching ETF history. Now, keep in mind,

Wow. Well, you know there's a generational thing going on here. Did you notice this Paul on the other side of Belchiunas and Lisa, they're like incredibly cut jesseled, Yeah, exactly, And I can barely keep in this your perspective on the death of the mutual fun business. Paul and I live this each in our own way. When did they roll up and go home?

Yeah, this is a very complicated sub It's complicated. It's complicated in most businesses. If you lose customers, you probably get acquired or you got a business like in a mall. If you sell candlesticks and the customer stuff's coming, it's over right, right, Maybe a month you have and then you're out. The thing with mutual funds is you can lose customers and still make more money if the market goes up. So you got all these mutual funds that came into this last bull market, will call since two

Are they successfully moving over to the ETF.

Space, Yes, but success means a little cannibalization, and some are more willing to do it than others. JP Morgan's a great example, got cheap quick and having huge success. I think the more diversified a company is, like JP Morgan has so much going on, Jamie Diamond might not even.

Be aware of what they're doing.

That those people hire an ETF person and they create a true ETF business. The tough ones are the mutual fund companies like say a federated where or mfs, where all they have is the mutual funds. It's harder for them to eat their own arm off.

Get so, I mean where other than the bitcoin space, What's where are we seeing fun flows these days? We just had Joanne Bianca on from the bomb blocks. They're seeing flows and going into high yield and so on and so forth. Where we are you seeing kind of the.

Yeah, let me give you a great example. So emerging markets. Emerging market's kind of been a little you know, out off lately.

Yep.

But there's one ETF that's taken in four times the flows of any other and it's a non obvious one. E MXC this is the I Shares Emerging Markets X China. This thing is now thirteen billion dollars. You know, this is like I said that, they grow up so fast sometimes. So if you have no China in your em your ETFs are flying off the shelves. If you have China in your E M, E T F, you can't sell it.

Wow.

Thank you, this is great, and thank you for the seventy six ers brief. Anytime I'm the rook I don't like Lisa and I were like, we don't know what we're talking about.

Sweeney's Kyle Lowry. The more you see him, the higher our chances are.

Eric Belchuns, thank you so much. The Philadelphia is seventy six ers. They play a team in New York. Here you look at the front pages Lisa all night or Sunday night, getting ready for the newspapers. What do you go?

I need another cup of coffee. Now that's what I need.

We're starting with the Wall Street Journal. They have this interesting look about how diversity goals. They're starting to disappear from companies' annual reports. So they did this analysis of ten K filings to the SEC. Now, some companies shortened descriptions, removed entire sections, others changed a few words phrases to cut out mentions of race specific hiring. But you know, it comes, you know as a lot of legal political

So the catalyst Paul for this was money. I think it started with Hollywood, where different Hollywood entities added up actual screen failures from somewhat of a diversity thrusts led by Disney. And one number I saw in variety was a billion dollars of losses on projects that were spurred forward by diversity. And now it's come over to other industries.

Yeah, I mean I've seen written in a variety of media over the last six months kind of phrases of peak DEI, peak wokeness. Have we passed the peaks and those types of things. I don't know. But again, here's something from the Wall Street Journal talking about diversity and any report a.

Woman would say, least as I had a shit going years ago where i'd interview a CEO. Usually they don't. They don't want to come on with me because you know, I asked like real questions, and you know, I would put up their annual report from three or five years ago, which read like it was in Sanskrit. Because there's always a vogue to be fair to everybody doing the hard work of diversity. There's always something in and two or three years later you look back and you go, did

Yeah?

It keeps changing.

Okay, this is about more Americans wanting to go on vacation right vacation season, but they're willing to go in debt in order to go on vacation. This is a Bank Greade survey. A little more than half say they're planning the summer vacation twenty twenty four. But of those, one in three say they are willing to go in debt.

Carrie put it on a credit card. They're willing to buy.

Now, pay later, borrow from family friends to go on vacation, even taking out personal loans, or just think.

There's a thing called uplift, which is the buy now, pay later for airplane tickets, and that's changed the world. And what I see there is people that would fly economy doing that buy now, pay later and buying premium economy, or people that would buy premium economy, buy now, pay later, slide into business class. And to me, that's been a profound It's one vehicle of what you're talking about here.

Well, we've heard from all like the cruise companies that they're fully booked and they're booking next year and bookings are great, and same thing for the hotels.

But Rich, help me out here, this is important.

Where's he going?

Rich?

Is our surveillance cruise reports. There's no cruises. He's even done the Alaska polar Bear thing like the are they booming? Boom? They're booming, like like you got a race to get a booking? Where's your next cruise ate Slavia? Can you see Rich? He's probably taken kind fellow or global technical director. Can you see Rich Truman at the parapet of the Game of Thrones castle in du Barberick looking out looking for the damn dragons? I can see it now.

The Yeah, okay, so we've been talking about Apple relying on China for and the iPhone for growth. Yeah, so Apple, what Bloomberg is saying, this is a really interesting report that they need to explore new ways to get back on track, like a lower grade iPhone, maybe in the two hundred and fifty dollars range. Don't know if that's possible, but the article really gets into how, you know, different ways Apple can go about doing that.

But it's really been trying.

I mean, they've been trying to put out you know, all in one services, a lot of accessories that hasn't worked. They tried to put out a cheaper iPhone, didn't really pick up too much.

But Bloomberg is saying, this is that target they need to hit. That tool.

I mean, this is re reporting by Mark German, So nobody knows Apple better than the course Mark Mark germant. But I've always kind of said, if they keep saying they point out India as in market for growth, given that maybe they want to pivot away from China, but if you want to be a player in India, don't you have to have a lower cost phone to appeal to that market?

Can you make the profit?

Apple is exactly that's You're right, I don't have.

In front of those ratios, But the amount of money Apple makes per phone versus Samson is shocking. It's shocking.

They delta, You're right, I do, I do?

Okay, So more workers or should I say some workers? They swear that ketamine, although there's psychedelics.

Can boost creativity and focus.

On the job.

I mean, we saw it.

Elon Musk says he takes it to boost his mental health. But the thing that's pushing is because it's becoming legal in some areas.

Like Oregon, Colorado.

So it's leggetting that lessening that negative field that people have. Yes, keying and psychedelics.

You listen to Disraeli gears and you know not that I know anything about that.

But no, not, of course not.

But the FDA says they ketamine is not good for mental health treatment.

They don't recommend it.

Psychedelics are beginning to find some adherents beyond Silicon Valley who say the drugs make them better at their jobs by expanding imaginations or taming doubts about their abilities, though supporting researchers limited.

Go figure.

Yeah, and this is an a Wall Street journal.

And it is so we'll see if it if it kind of picks up, but keta means more, thank you. More workers are kind of getting behind it and hopping on the train. We'll see.

Okay, Well, thank you, Lisa. That was your newspapers, Lisa Matello with our newspapers. This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our