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 headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business app. Joining us now, really looking forward to this. Rebecca Patterson here with a really wonderful heritage, yes, or to our duty of Bridgewater, but far more than that writing heard at Bessemer Trust
on Quiet Money. Rebecca, there was a point yesterday, as early in the press conference where I thought they could verbade him in and run it as a Saturday Night Live I've skit where the chairman was washing around the word data, we become data dependent, whatever the idiocy he was saying, the delicacies he was saying, how did we get in this spot where we are jaw boning a trend waiting for data and just trying to get through a press conference with gobbledegook. How did we get here?
Well, I think the pandemic and the post pandemic period created a lot of humility within central banks globally, including the FED, and so I think that's probably made them a little bit more cautious. I'm pounding any proverbial fists on the table in terms of where they're going with policy. Stick to the data releases. If inflation stays on track, if growth moderates softly, wonderful, we can get some rate cuts this spring. And if it doesn't happen, the FED
is allowed to change its mind. I think that's what I was getting at. But I think to the degree there was waltzing yesterday, so to speak, it largely is a reflection of what happened in the last few years and then realizing how complicated this particular economic cyclists.
And Rebecca, you know, the market seems to have heard what the FED said yesterday. If you look at the WRP function worp go, you know, in the March meeting there was a fifty percent odds of a rate cut. Now that's down about thirty five percent or so. It seems like the market's getting the message. Is that kind of your your take as well?
Yes and no.
I mean I obviously that the UH pricing in of March, down pricing in of May up now about ninety three percent odds of a cut in May. What was striking to me, though, is when we look at what's priced in for FED funds today versus before the meeting, is we still have about one hundred and fifty basis points of easing priced in for this year. That hasn't changed really since before the press conference, So it's just getting compressed into a shorter timeframe. And I still am skeptical
about that. I think you would have to see a lot of things go really perfectly right to get that amount of easing and get the double digit earnings growth that's still priced in for the SMP this year.
Rebecca Patterson with US our Tech Analysts this morning. Rebecca, I looked at the operating cash flow of Microsoft yesterday and this is with your tour duty at JP Morgan years ago. I think we really don't understand the size the scope to scale a fortress Diamond or frankly fortress such an Adela as well. Apple computer today pre pandemic they had fifty nine billion in free cash sule Paul. Basically they've done a double sure in like four or
five years. Do we understand the size of these companies, Rebecca, and how can we not own them? If they're that dominant?
I think you have to own them. The question is are you underweight benchmark weight overweight? And with the valuations today, with the expectations for growth as we've seen in the last few days, any disappointment versus what's priced in in their earning season get some profit taking. But if you take a longer term view and I try to on these things, I'm not day trading, you know, with that free cash flow, with the comparative advantages they have the motes,
they have, the technology, the personnel comparative advantage. Whether we're talking tech or you mentioned JP Morgan, I would argue they're in that camp too. It's very hard to see them taken down now this year, as you know, we're going to have some regulatory kurdles for some of the tech stocks, which probably don't end with the decision.
They'll go to the.
Court, so it'll drag out for a while. But that could be another impetus for some profit taking. I'd say if you get that kind of profit taking on the tech stocks, it's an opportunity to buy for a longer term position.
How do you feel about that?
You know, we're right smack in the middle earnings, Rebecca, how do you feel about what you're seeing here in earnings and what we're hearing from companies. It seems like the technology sector is still in pretty solid shape it.
You know, some of the others are still very cautious.
Well, we've seen that divergent in the divergence in the economy over the last few years. If you look at the business sentiment surveys, the PMIS, we've seen a manufacturing sector that you know, reflected in those surveys, has been modestly contracting for fourteen fifteen months now, and the service sector,
while strong, has been moderating. And so it's not surprising to me if you look across companies and sectors, you are seeing a difference between services, manufacturing, and then even within sub sectors.
And I think that's likely to continue.
Rebecca. We got to go to your wheelhouse, which is dollar currency, and Allison that what does the strong dollar the resilient dollar, what does that.
Signal well in the last twenty four hours.
It's simply a reflection of the March rate cut being pushed back some higher short term.
In the last six months, the last year, it's an extraordinary how we've seen resilient dollar and underperformance of international equities.
It's just yeah, running I agree with you, Tom.
You know, you have to remember that compared to when we started our careers and trade flows, where the dominant cross border flow. Today it's capital flows and where does capital go. Capital go goes where growth is stronger, and
ideally where valuations are attractive. Now, US valuations, we can argue are not so attractive, but growth is so much more attractive in the United States versus the rest of the world today, By and large, money keeps coming here and that keeps supporting the dollar and US stock market.
Sounds like Bob Sinch from years ago at bear Stearns. Okay, Bob Sinch or Rebecca Patterson. Great, except the great destabilizer is Japan. If we finally get Japanese instability, what does that mean for our YouTube viewers in America?
You know, Japan has been one of the few overseas developed markets out performing the US of late based on reflation, better growth, stronger inflation, but not too strong. And now the question is if the Bank of Japan pulls back from that aggressively easing monetary posture and you get a stronger yen, does that undermine exports in Japan? That's been a big engine of growth and a big engine of the reflation for that economy. So the stronger yen on
the back of less easy monetary policy higher yields. To your point, we don't know how big a destabilizer that could be. It certainly could pause the equity rally there for some time, again underscoring the attractiveness of being in US large caps, But I think it's going to Japan has shown that they're going to be very incremental, very slow about this. The last thing they want is a disruption.
Rebecca, just real quickly here geopolitics front and center of course for global Wall Street.
How does that factor into your outlook?
Here?
Do you buy some gold you try to head?
How do you do that?
I do think a small allocation of gold, and I'm talking about in a portfolio, probably something between two and five percent of the total is a good hedge not only against geopolitical risk, but also the possibility.
That we have a harder landing.
But I think in the case of geopolitical risk, what you always have to ask is, if this risk becomes reality, does it have a material impact on my view of the economy globally or in that region, and doesn't have a material impact on markets. Why the market doesn't react is because so far it doesn't change your broader economic thesis. If we do see that change, then the politics will matter a lot. And unfortunately it's the sort of thing
that happens quickly, so you have to plan ahead. You have to do your scenario analysis now because when it happens, you don't want to be reacting with the market moving against you.
Rebecca Patterson, thank you so much, greatly appreciate it. We're gonna turn serious here and I want to get to some mathiness here, so stay with me on this, folks. Where with sree Kamar, who we can always do a high level economics math shre to be honest and Ethan Ayris wrote a brilliant essay on trend out on LinkedIn a couple of days ago. I mentioned it yesterday with
Bill Dudley, the former New York Fed President. Richard Claire to the Vice chairman shre Kamar with us and Shre If we're on trend and the trends is disinflation, the probability is you're not going to stay on trend. And so the Fed is waiting to see if we trend a surprising employment or we trend to weak employment. When we finally get off trend, then what then what do they do once they have a data point that cuts either way off trend.
You're absolutely correct, Tom, that is the part of the problem in doing what I call seat of the pants analysis and policy implementation, because they don't have a fixed path. I have long been recommending something like a tailor rule, so that you have the formula in place and you follow it and you don't have the jerky moves pivoting from one to the other, which is exactly what you're pointing to. That is the risk taking. Look here in the near term, Tom, December thirteenth, there is Jero power
sending the market upwards like a rocket. Shire yesterday he pulls it back. What happened between December thirteenth and yesterday to cause a big change to hawkishness, Nothing, if anything inflation numbers came out more benign than expected. So this is what is the problem with not having a long term view on the part of the FED.
The problem tailor role, and it's beautifully done out in the Bloomberg terminal. I got the neutral real ray. Guess that CPI, I guess I can grab that. I got a Greek letter named alpha, we almost named vetno Alpha. Then I got a beta, I got an oken factor, and I got a nehbrew suit I've got to wear when I look at the tailor roll, come on street. This is mathematical mumbo jumbo. How do you use an algebraic stree Kamar rule when I got a pandemic in a triple stimulus? It doesn't compute.
You do it in two ways. One is the tailor rule is sufficiently flexible, meaning that it is not a fixed formula. And it basically says that when inflation is about target or below target, what you should what you should be doing, When GDP growth is above or below what you wanted to be, what you should be doing. And it allows you some amount of flexibility between those stuff. You don't have to go to the open rule. You
do not have to go to the others. If you follow any particular rule diligently, you would be a lot better off than what we are doing now, where we don't have any fixed principles. That's where I come out at. It doesn't matter what principle you use. Use something as a rule rather than just decide that morning what you're going to do with interest rates and quantitative tightening.
Shre.
We've had a number of guests on over the last several weeks, both academics and market practitioners, who say the Fed should be cutting rates now inflation is already whipped.
How do you view that kind of call?
That is the call all that we had in the nineteen seventies, and we know how it turned out to be, because when you cut interest rates significantly, and if you did that today, the markets would rally, consumer spending would increase the economy then temporarily go on a much faster growth seting, inflation will pick up, and then it will make it much more difficult for you to bring the inflation rate down. That is the risk of cutting down interest rates sharply today, Shre.
Are you surprised about how resilient the consumer is? I mean, we just had Royal Caribbean cruise lines take their guidance up. People are spending, They're going on cruises, they're going on trips, they're buying stuff. I'm actually kind of surprised how resilient the consumer is.
There are two reasons for that part. You raise a good point. First of all, I think there was an immense amount of fiscal stimulus that was provided to the economy. At the end of twenty twenty two, the estimate was one point five trillion dollars worth of excess savings were in the hands of the consumers. So it is being spent the last months of the Trump administration, the initial months of the Biden administration, the stimulus that came forth
is still being spent. That's one reason. Second, look at what has happened with the recent numbers on consumer disposable income and savings. Savings are rising much slower than consumer disposable income. Sorry, I should say the other way. Consumer savings are not rising. Consumers are essentially dipping into their savings in order to finance their spending, and that is going to cause it. Credit card loan defaults are increasing in the case of banks, and that is another way
in which the consumer spending is being done. You saw what happened with the banking problems in the last couple of days. I've been writing Paul that, especially with the consumers, that you're only seeing the tip of the iceberg. You're going to see a lot more in the next six to nine months.
So given that backdrop here, do you think the FED is the message? Yes, they was pretty clear or don't bank on us cutting rates in March. Do you think that's the right message? And do you think that message is subject to you know, if the data changes, maybe they'll change.
Uh. If I would say that, if they stick to March and if they wait for inflation to significantly come down before they cut rates, that is the correct policy. But if what your own power does is to switch messages from meeting to meeting, from December to this meeting with no change significantly happening in the economy, that is going to be a problem. It's going to cause volatility, it's going to cast uncertainty in markets. But unfortunately that's the way the FED operates.
I look sre and you know, we would like to talk to him for like an hor Yeah, you have no guess, lose Lisa, you know, lose.
Bar exactly, Senta Monica too straight.
There's a lot. Yeah, I know he's smarter than we are, yes, Sre. Just to wrap this up, is there a theory at the FED now or are they literally staggering from meeting the meeting.
I think it's the latter, Tom. I think they are staggering from meeting to meeting. Powell tells to you that they are data dependent, which means they act based on the latest data, and that may not be what is good for the long term, but unfortunately that is the FED formula right now. And you've heard it from the chairman, not just from me.
Sre. Thank you so much, Sri Kamar, or this here, this is some important conversation. It's fallen off the radar, but it is gospel from Margie Patel. She has been doing this for ages and she has been right, right, right, And one of the important things is she shifted from coupon to dividend growth in terms of a measured portfolio at all Spring Global Investments. Margie, it's really fallen off the radar in this great lift we've seen in the
equity markets, which is used to cash share buyback. We'll hear that from the tech companies today, but also dividend growth. One of our guests, Paul Sweeney, is apoplectic about this that Apple that Microsoft should install a responsible adult dividend policy. Margie, should they?
I really wouldn't be in a position to judge that. I think that, for example, Microsoft has been exceptionally strong in their capital expenditures, so I would really look for the long term and see that they're using their cash wives and to invest for future growth, not necessarily doing that.
Paul, I think you're onto something here. I'm going to jump in and say, I get all the rationalization of not doing a dividend, but there's something American about it that's as simple as I can put it.
Yeah, And it just goes to the issue of these tech companies. Mark, We're going to hear from some of the big tech companies after the close tonight, and we're just marvel at the free cash flow that these companies generate.
Here.
What are you looking for after the close here today? From you know, some of the real leaders in this marketplace, some of these big tech names.
Well, we saw some yesterday and I think we'll see more of the same today, which is they still have a strong, sustainable growth well into the future, and it's more a question of the markets nervous. The market wants to have a little correction. So we saw a negative reaction yesterday when the Big three reported. Maybe we'll see that tonight. I think the market will chop around here because it just wants to have a little bit of correction.
But still the fundamentals look great, so there's no reason why stock shouldn't go up all year.
In the discent holdings, well, you know, part of that I assume is going to be earnings.
They are going to have to come through here.
And I see kind of you know, high single little double digit earnings as I look forward on the Bloomberg terminal here for the next twelve eighteen months. Do you feel like there's earnings risk in some of.
Those I No, I think most of them, most of the big tech companies have a path for sustainable growth for as far as we can see. In other words, several years. And the surprises we've had a few of the negative some surprises have really come from other sectors with a healthcare, transportation things, industrials, things like that.
I mean, Paul, we got to frame this out, you know, I get hysterical about this. Paul absolutely nails at folks. In the brutal correction we've had, we're down one point nine percent in the standard ports in the peak. In my long term log exponential moving average is down a plunging two point nine percent in this bullmarket. That's a daily chart, Paul. We are addicted to going up every day.
It seems like it.
MARKI we heard from some Federal Reserve yesterday. It looks like, you know, get a hold steady here the Bank of England today holding steady. What's your interest rate outlook here for constructive equity market?
Well, really, to me, a four percent across the curve looks pretty constructive for the economy, and I think short rates will come down whether it doesn't seem like it's going to be marched. But really it's irrelevant to the strength we had last year in the economy. Very strong employment, consumers in good shape, business is in good shape. There's
no sector under stress. So in a sense, you might say, Federal Reserve next interest rate action is irrelevant to the equity market and to the economy overall.
Market market lifts here, market Pattel driving the market higher. Paul Sweeney nastick up half a percent off the courtage, I say.
Yesterday exactly all right, So Margie, we're gonna have some big tech numbers at tonight and presumably gonna be pretty solid, you know. And Tom King, of course was long magnificent seven, so he's just clipping coupons at this point.
What are the rest of us do who maybe have missed that trade here?
How do we kind of approach twenty twenty four in terms of trying to find some opportunities?
Well, I think you have to look at companies that have a path to above average future growth and really not be hung up on the fact that, well, this has been a great stock, great future, but it's up a lot over the last year, so therefore I'm not going to buy it. I think that's never a good reason to buy a stock because it's already been up.
Mark you. The yield market is speaking, and I'm going to look at the ten year real yield, which framed out about a one point eight zero and plunges the right word, folks, The inflation adjusted yield is now plunged to one point sixty five percent. On a chart. If it hits a one point fifty nine one point five
nine percent. That's a huge deal. What does a stock market do, mark you Peatel, if the inflation adjusted yield, that restrictive cost of money yield, if it really breaks down to a lower level.
Well, it just says to me, it's another positive factor for sustainable growth. And what's different with this cycle is companies use the last decad this consumers did to restructure take advantage of zero interest rates, so they really aren't very hurt by when the Fed raised rates. It really is not a big matter to them when the Fed cuts rates. It's more of what's their prospective return on investments.
So we had another little scare yesterday, Margie in the banking space with your community bank, and I think most analysts research that I've read says it's kind of specific to a New York community bank, maybe some of their loans and so on. Are you concerned about the financial system or do you think banks are a good place to go in twenty four.
Well, I think there's so much regulation. I think I'm pretty luke war about the banks as a growth vehicle. Personally, I think they should put back in the uptick rule because I think that's what's enabled people to applyle into a name and destroy sequity value and raise concerns about their going forward. And I think that that's really a problem. The FED was cut and raising short rates. It called the banks in and buying. As far as the assets.
In Margie, what do people do that didn't participate? I mean they went down in the pandemic. Maybe they went down. Maybe they're in triple leverage dog cash. Great, But what do the people do that didn't participate in the Margui Patel bull market of last year? How do you catch up?
Well, you can't catch up for the past ever, right, John, But you just have to say, from this point forward, are their attractive returns in the equity market compared to just full in cash? What's the condition to be called overall? And you have to be positive and say I'll make more money in equities than I will in term, even though short terms of say five percent.
Margi Patel, thank you so much, greatly appreciate it. With allspring today today's front page is Lisa Matteo. She had so many choices today it was an unlimited bounty, say a bounty of headline choices. Lisa, what do you have?
All right?
Since we were talking about Tesla. This is like the big story the Delaware judge rule must pay package was too much. I found a different angle to it. A story this is in the Financial Times that they's saying that the lawyers who represented the shareholders they could get a payout worth billions of their own Okay, so they're gonna add they may ask that Delaware court to pay them up to one third of how much value was
restored to shareholders. How much could that be? That's up to the quarter a right, But the stock base incentive package at issue. It was initially valued at two point six billion, but it grew to fifty five billion, as we knew, because Tesla hit those financial performance share price targets. So the lead lawyer of that firm, it's called Bernstein, Littowitz, Burger Grossman, they said it could be a few weeks before they submit that feever question, they haven't said what it's going to me.
Paul helped me here. But the basic idea is your Annia cell Express in Wilmington, you sort of it's off to your left as you go, Yes it is. But the answer is they really I don't care about image or media or PR. It's like the hard ball court. Yeah, that's how I looked, am I right.
Yeah, And it's you know, supposedly and I think for most cases it's very pro shareholder, and you know, that's kind of just what they're all about here. So the lawyers here are saying, Hey, we potentially save shareholders fifty five billion dollars or whatever the number is.
We want our piece. Yeah, exactly, good.
For the next all right, now, demand for air travel, it's not only return, but it is surpassed the pre pandemic levels. Yes, this is for New York City area airports, all right, one more than one hundred and forty four million passengers. That's what came through. We're talking LaGuardia, JFK, and Newark the breakdown. LaGuardia had a new high thirty three million passengers. JFK had more than sixty two million. Newark had a pretty good jump to nearly fifty million.
But then you have a lot of the construction. I mean you've been to the airports lately, right, You've seen terminal network yes, terminal AG yes. And now they're going to be replacing that that air train system too.
I went in the air train at Newark, like you know, it was like a nightmare. The thing is like ancient, like I'm looking down going, am I going to make it? They're going to replace that. They're going to replace it, and it's needed because when I'm there standing, there's like a stairwell, Paul, that goes down to nowhere. That's people going to another terminal on a bus.
I think, so, yeah, so they're doing it a terminal age grade. They're doing terminal B now. So they and the Guardian two they had gat job.
Yeah, they had the.
Delta Terminal City and then JFK. They're in the middle of it now there.
In the midst there they're going to be doing JFK forever forever.
Larry Summers once lost it, the one the former president of Harvard and doing so much with David Weston. Summers went mental at a conference I was at over terminal one at JFK. He said, this is a third world terminal.
Of course, all right, final, we're hitting the Wall Street Journal. This is a new dining drink.
I'm troubled by this one.
Yes, there they love the steakhouses, right, they like the am beyond the drinks, the peace people, but they don't want to get the steak. Steak's too expensive, that's the problem. Wholesale beef prices are up. A steak dinner's going to cost like one hundred bucks a person, so they don't want to dish out that. You know, they're they're sharing steaks, sharing plates. I have to admit, I.
Do it, do the sharing.
And they're they're offering smaller portions like four round steaks are coming on the menu pretty soon. But it's a health thing too, I mean, more people are.
Health if you're not even the steak you're getting what do they got? Lopster?
They have a lobster dish and then maybe a fish dish and that's it.
Chicken.
Yeah, yeah, I guess you don't go to the steak taken.
Okay, this is keen steakhouse where the pipes up top. No relation to me.
That's why it goes to place.
I sit to the right. Yeah, of the barber. It's sort of like lockovers in Boston. You look at miss years ago. Yeah, I got lamb chops. The legendary mutton shop is sixty eight bucks. The prime New York sarly And is sixty two dollars.
Yes, it did.
So if you got four people. Well you're popping two forty.
Before before you hit the one.
You know, I mean, it's a lot the appetizers here twice I'm getting hungry, twice baked Vermont blue cheese puffe. It used to be like eight bucks, nine bucks, nineteen dollars.
Now for the appetizer, you gotta dig in the wallet. If you're going to sneak.
That'd be fun.
You absolutely take shirt. They love me, you know, send the build of Retto Keeper. I'll be fine.
Lisa said, we had to go. So you split your steak? Do you get this?
I do do that sometimes because they give you these huge portions and they never finish it. Like the tomahawk is like the size of it, you know, it's huge. So we split it.
So they let you do that now because they charge restaurant or they charge you, charge.
You, but it's cheaper than getting two right now.
Do you have a household of people eat meat or do you have any non media No.
We're all carnivoro.
You love a steak, but they do have veganough.
Everybody at my ess. Even if that bill it's all tofu stuff. You know, it's all like Asian, you know, it's like tofu, and it's not even gluten free.
It's just tofu.
But you can bring steak leftovers to the dog.
Dog the third dog tofud you know, I mean, okay.
Thank you so much.
This is the 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 a m. Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app