Bloomberg Audio Studios, Podcasts, radio news.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business App. Jim Kron of Morgan Stanley, saying he's not bearish but skeptical, writes in this inflation is creeping KaiA and puts further scrutiny on the fedsibility to cut interest rates. Tensions in the Middle East also create a potential for a more systemic type of risk. We can't forget that a bull in a candy shop is still just a bull, and bulls can be unpredictable. Jim joins us. Now for more, Jim, welcome to the program.
Let's run with that analogy. If you will, Bill in a candy shelf, do you think we're a little too high on sugar right now.
I think that's a good way to put it.
I do think of it as a little bit of a sugar high. My concern is that we're pulling forward twenty twenty five earnings right now, and we're painting an almost near perfect picture going into the future. It's not that i'mbarrassed, it's not that I'm negative on the markets broadly. I just think that we're getting a lot happening really really quickly. In other words, we're getting this soft landing that everybody's been projecting, but we're getting it very very fast.
Valuations reflect that, right, So if you look at two hundred and eighty dollars earnings, let's say for twenty twenty five, which is roughly consensus, you assign a twenty one or twenty two multiple to that, you're going to get an SMP somewhere close to around six thousand, and that's about.
Where we are today.
But if you take that valuation down a little bit and you get a little bit more normalized, to say maybe a twenty pe on those two hundred and eighty dollars earnings, then the sp is fit fifty six hundred, right.
So it's lower than where it is today.
It's not a disaster, but net we're talking about a few percentage points in either direction. I don't necessarily think that we're going to be in a very strong bull run from these levels or from these valuations. So that's where my skepticism is. I'm not saying that things aren't okay consumers strong, retail sales was good, you know, inflation, earnings GDI numbers are all good, so incomes are.
Good, so people can keep spending.
What I'm saying is how much can it continue at this rate of change.
Well, let's take the valuation piece of it, Jim. This is what Cameron Dawson, a New Edge said over the weekend. You could have argued at any point over the last year the stocks were expensive. I'm sure you'd agree with that, but there needs to be a catalyst to change this much to ever higher multipoise multiples. It feels like, Jim, we're in this virtuous cycle right now looking for a disruptor to it. And Tilson's Slock of Apollo spoke to
the same thing. The Fed cutting rates. They've got a bus to cut even more so, we've got a dubbish fed. We've got high stocks and high home prices. Private financing is wide open, as you can see, continue support from fiscal plans, low debt, servicing costs that are locked in for buzs, corporates and households as well. Jim, that's just
fading on itself. So the outlook just keeps on improving. Now, Jim, from your perspective, do you have anything in mind that could disrupt that process at the moment, because that's the reason the reasons people are so bullish right now.
Yeah, and I agree with those reasons, and it's why we maintain a bullish tilt in our portfolios as well, you know, moving more towards neutrals, not moving towards negative because we do think that there are some potential factors, you know, clearly tensions in the Middle East to flare up there, we could get some election uncertainty or some election volatility around this, But ultimately what we would need to see is damage done to the consumer and arise in the unemployment rate.
So I think some of the.
Damage that could come is that if we start to see some weakening of the labor market. Now we're not seeing signs of that yet, but we all know that the non farm payroll data has been heavily revised or over time, and if we do start to see that in a period where we start to see some margins starting to shrink across corporate America, that could create a significant or a faster move higher in the unemployment rate,
and that would completely change the narrative. We're not there yet, Jonathan, and I think that's the and I think that's the most important thing to highlight. We're not there yet, but we do have to recognize that at these valuations and at these levels, that it makes it hard to have a positive surprise, and it makes it easier to have a negative surprise.
One aspect of your argument is essentially kind of abnegating this idea of a cyclical tilt that you can get that rotation away from big tech and some of the arch behemoths other large stocks and really fuel this next leg of recovery. And I saw the same kind of sentiment for me Mateka over at JP Morgan. How much are you leaning against a cyclical move the idea that the equal way in the russels you've had and I have been performing.
No, Actually, I mean I think it's a great question, and actually we're embracing the broadening of the markets and the cyclicals and even the defensives. So what the markets are kind of realizing right now is that this mag seven the tech in the larger cap and the growth names that are out there have done a very very good job this year, but.
There may be more to the story. And this is going to be.
Across the rustle, This is going to be across the broader base sectors of the markets. This is going to be across the equal way. One of the themes that we're putting forward as we move into twenty twenty five is how do you invest in what seems to be a fully valued market.
You can't really play the beta. You can't just.
Say, oh, well, the index is going to go up another x percent more or less. What you have to do is you have to start thinking about the different components of the markets.
You have to find sectors in the markets that.
Are well valued, that have lower pe multiples, good good balance sheets, good factors, good interest coverage ratios, and have some pricing powered, some controls, and you can find them in the other four hundred and ninety three stocks. And I think that's the stuff that we should be looking at.
Those are the sectors. That's the management style that we need to start to move into, because I think it's going to be more about asset selection and investment selection as we move into twenty twenty five as opposed to just a target weight asset allocation into x percent equities or ex percent bonds. It's really going to matter how the constituency of your portfolio is made up, what sectors were, and what valuations.
Is this a sort of one year timeframe of an adjustment and investment cycle, or do you see this as a ten year kind of timeframe, as maybe the overall index level returns don't look as great as they have traditionally.
Yeah, I think this is something that probably adjusts over the next year or so, so let me call that short term. I don't think that we're always going to have this bifurcated market like we do today.
I think there needs to be some coalescing and.
That's where you get the broadening of the markets, where you get other sectors that haven't participated in the rally start to participate late. That's usually a late cycle thing to start to see, and then the markets tend to move in a more uniform way, beta up, beta down. So I don't see this necessarily as a long long term view, but I do say that twenty twenty five will be all about tacticals. Don't forget we're going to be talking about taxes and policy, no matter who the
next president is. We're going to start talking about that on January of twenty twenty five, because that's when the decisions are going to start to get made that are going to have big influences on markets going into late twenty five and into twenty six when policies are likely to change.
Jim, do you believe right now that the market is rotating into the Trump trade?
Yeah?
I think it is, and I think it was said, you know, nicely by Lisa earlier on the show that it's in some degree it's.
A movement away from the blue wave. Right.
So, I know, we've been talking about tariffs, and we call tariffs a tax, but taxes are also at taxed too, right, So if one candidate is talking about tariffs and another candidate is talking about higher taxes, they're both the tax. What does that mean to me as an investor?
Inflation?
And ultimately, no matter who the next president is I think it's going to be really hard to get inflation under control. And that's one of the reasons why I think you see yields starting to move higher.
It's not so much just to.
Trump trade or not, but I think it's a realization that we're moving to an area where.
Deficits are still going to be high.
There's still a large degree of spending that's out there, and the US deficit is too high, by the way, and all of this is putting upward pressure on rates, and I think this is something that we're going to have to deal with as we move into the next months ahead.
Three seventy September eighteenth, on a tenure when the Fed cup fifty basis points three seventy this morning four thirteen, Jim, it's going to say, as always, thank you, sir, Jim Karner of Morgan Stanley. Dan Morris a BNP parapour writing US earnings are driving our performance at the equity market, still early in the season, but results are encouraging risk. If an I think is that growth is too strong and the market is too optimistic on the path of
rate cuts, Dan joins us now for more. Dan, welcome to the program sir as always in good morning to you. Do you think there's too much a good thing going on right now? Then in the US economy, well.
We probably should enjoy it.
What at last, we know that bad things inevitably happen, we'll have some type of negative surprise and it won't be another six weeks or six months of continued gains for the market. But hardly speaking, if you look at the environment, at least in the US, it is pretty encouraging. Stocks reflect that we believe we're on a path to a soft landing.
Rates are going down.
We can discuss all day about how quickly that's going to happen and when the cuts are going to take place, But for now we're kind of waiting for what that negative shock might be.
But the economy look resilient.
Dan, you say self landing ubsas clients are asking us about a so called no landing. What's the difference between a self landing and a no landing and how from your perspective does your approach the capital allocation decision shift with either in mind?
Well, if I think my interpretation of a no landing was that you actually don't get growth. Back to the long run average for the economy in the US, which would be say, one point seventy five percent, and clearly we're well above that now. The last I checked the Atlanta GDP now forecasts from the FED was three percent, So you know, we're quite a ways to go. And that's where we get into the dynamic of how quickly the FED is going to actually cut rates if growth stays that strong.
So I think that's going to be the dilemma.
That's where perhaps you have some mispricing in the market, too much optimism on the rate front, But from an equity point of view, that's not per se such a big problem.
At a certain point, though, Dan, you have to wonder about whether the earnings ratify the sort of no landing scenario, and a number of different strategists pointed out that we have I've seen downward revisions to some of the forward looking projections, particularly for some of the cyclical companies. How much does that raise concerns about you as we pursue the earnings of the likes of auto companies later this week.
Well, Lisa, I think the key thing to keep in mind. I mean, revisions clearly are important. Positive revisions are better than negative revisions, But we want to look at the absolute earnings growth that we think we're going to get. So even if you have negative revisions, but earnings are up a year from now, really the market should be up as well, So you want to keep it in perspective. Kind Of Inevitably, analysts tend to be too optimistic, so they were revised down those estimates.
But if there's growth behind it, that's going to be what matters.
Dan, how much are you trying to understand what the Trump trade is, what the Harris trade is, and how to really game that out at a time where maybe earnings matter, maybe the FED matters for right now, all the oxygen's been stuck out of the room for the next two weeks, well some.
Degree at least over the next two weeks. Argue perhaps the opposite. I think the election outcome is so uncertain. I think it's it's challenging for a lot of investors to think about how they would try to play an outcome, particularly when what honestly I think is going to matter at least as much, if not arguably more, is what happens in Congress, because that determines what the victor will
be able to do. If it's divided Congress, clearly you have much more limited scope if there's a sweep either way, and really anticipating that now, I think it would take a quite brave person.
Daniel, given that the fact that we need to know the composition of Congress, and also the fact that if you look at these swing state polling, they're on a knife's edge.
It's fifty to fifty.
It's a coin flip when it comes to this election in two weeks time. Why do we do see the markets rotating though towards a Trump trade.
Well, I guess, as you pointed out, it all depends how you interpret it. I guess our focus is more on the medium term outlook for the economy and really under kind of any scenario you think you have for the results of the elections, it is still a quite positive outlook. Now there's going to be difference on maybe what sectors do well or worse depending on the configuration, but at a high level where we're optimistic if you will, and have our overweight inequities in the US.
So basically what you're saying is regardless of the US election compared to the rest of the world, especially when you look at what's going on in China and the data there and Europe. The US remains in this exceptionalism realm.
Really, it is hard to find another major economy right now that can match the performance of the US. You know, we'll see how long that lasts, but for now, at least it does seem to be on a pretty positive trend.
Hey Dan, it's good to hear from you, as always, Dan Morris there in London of bnpparentbou on the so called Trump trade, the d out there Bank for America Right in the following With the latest string of upside data surprises, client concerns have shifted from recession to reacceleration. In our view, the economy is resilient, but there are enough minor headwinds to make reacceleration unlikely. At ech joined just now for more at tcha. Good to see you,
Thanks for having me. See you don't believe in this reacceleration story, so let's stand there.
We underpins them view not yet, so we don't believe in reacceleration yet. Let's talk about the recent data flow. Start with jobs. Obviously, fantastic jobs report for September, right, but we would think of that more like a mediocre student who waste one test. So good job, but we're not there yet in terms of you know, have you turned the corner or is this really an A plus label market? I don't think it is just yet, right.
And then if you think about the GDPGDI revisions, the revisions were actually more to the older data right from early twenty twenty three late twenty twenty two. So it's telling us a story more of a very resilient economy that's been holding on to around three percent growth in private domestic demand for six quarters. So it's not so much that we're reaccelerating, it's just that we've been growing well above what we thought trend was for an extended period of time.
What would change your mind? What would convince you?
So a couple of things could do it right. The first one would be signific fiscal stimulus, but potentially after the election, but that would have to be over and above just extending the tax cuts right because the tax cuts are status quo from the perspective of consumers and businesses right now. And then the other possibility is that you get a large negative supply shock. The economy is already running at potential. So with that negative supply shock, you could potentially overheat.
What is that negative supply shock? Is that sort of code for something?
Well, it could be a number of things, right, It could be geopolitics, It could be some significant disruption in terms of tariffs. Those are a few potential examples.
So you talk about the R word, It used to be recession. Now it's reacceleration. Yes, And I love this because it sort of puts into cold relief the idea that maybe this market sees the tail risks increasingly reacceleration and not recession. Is that what you're seeing some of the baseline data and some of the baseline analysis that you see coming out of Wall Street.
So the way we would talk about it is that two three weeks ago, before we got the jobs and the data revisions, we would have thought the risks to our outlook were slightly skewed to the downside, so more towards recession than reacceleration. Now we think the risks are pretty balanced. But the base case for US is still an economy that just softens up a little bit, doesn't go into recession, not even close. As inflation continues to move back down towards target.
Pring this all together, what are you expecting on November seventh from the Fed?
We're expecting a twenty five basis point rapecut. We are comfortable with that view. Basically, the last jobs report did the job, did the work of two jobs reports right in terms of really delivering job growth, and you had the upside revisions as well. You really had everything you wanted. So I think they'll be comfortable doing another twenty five, but they don't really have to do with fifty anymore.
What if we get a really good jobs report before that FED meeting, is there a chance they don't cut?
The bar would be very very high for that for a few reasons. Right, if you don't cut in November, you're basically admitting that you made a mistake in September by going fifty, and you've already told us that, Look, we can keep cutting for now with policy rates growth close to five percent, as long as inflation continues to move back towards target. The last inflation print wasn't great, but it wasn't terrible either, so they should be comfortable still cutting for now.
So given the fact that essentially you're saying it's not that the economy is reaccelerating, but we're staying around a level that seems like it's above trend growth. How much are you saying that maybe we need to reassess how far the Fed can cut, you know, the sort of the target rate has to be substantially higher than we thought maybe two months ago.
So this is exactly the question that I think everyone's wrestling with, right, So that there could be a few reasons why the target rate has gone up. The first one would be that inflation's just not behaving the way we want it to behave, right, but that that would be more of an overheating story. The other potential story is that trend growth has gone up. Right. That could be because of labor supply, but it could also be
because of productivity. So the other thing that's happening on November seventh, by the way, which is a little at wonkish, is that at eight thirty we get the revised productivity data, which will include the GDP revisions.
Right, nobody's spending.
Attime to that because of the said and the election, But I think it'll actually be quite interesting because the story around productivity could change quite a lot, and that has significant implications for long term growth growth as well as the terminal rate.
How much do you push back against people who say you can already see the trickle effects of the fifty basis point rate cut through the economy. You can already see mortgage rates coming down and bringing more people in. You could already see loan activity picking up on the margins. Do you reject that or do you actually say yes in a way on the margins it has been stimulative to.
The extent that that's happening. It's got to be very very marginal, right, I mean they cut rates in the middle of September. We have some of the September data, right We don't have any of the October data right now, so we really wouldn't see it in any meaningful way in the data right now.
Aha.
Always got to catch up with you, sir At Makt of Thanks and America. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, a gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.