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Terminal and the Bloomberg Business App. George Concrvis of MUFG writing, It's one thing to climb the wall of worry, it's yet another to be in denial of the reality still to come. We think broader financial markets have overshot again and are at risk of serious disappointment. George joins us now from More. George, Good morning, Good morning. Good that's a bearish way to start this morning, sir.
It's a bearis way to start you potentially Powell's last FED day, and we'll see if you can change that kind of bears us into some sort of optimism here. But I think it's the right call.
What do you think we're going to be disappointed by.
I think we're gonna be disappointed by a number of things. One, if you go back in the analogs of history and if you look at again, people don't like to go back to two distinct periods two thousand and eight and two thousand. People just don't like those two years. And you can have good news, and you can have markets and then a high note and then kind of top tick things, and so earnings really do have to deliver today, and you have a lot of optimism already priced in.
We have valuations again back to streaming high levels. It's all about the equity market. It's all about the tech sector within the equity market, and one could argue that that makes the economy much more fragile each time we do this. We are so dependent on stocks never going down.
A protiate A Giants legendary investor speaking Saint Patrick hashonas say in a podcast and saying this two thousand was the easiest band market I've ever seen in my whole life, went on to say, it's got so many similarities to right now. What are the similarities to right now?
The similarities are a concentrated kind of view, the four year around a new new technology like AI. Again, the sort of kind of liquidity that created meme stock like investing. All of this is kind of very similar. We use different ways of expressing what was happening back then, but it was bubble like conditions and there's I think a repeat of that happening now.
You said something that I find really interesting, which is this market going up is one of the big reasons why people keep being bullish. It's almost like a Ponzi scheme of bullishness, Right, the market goes up, so you feel bullish, so you put your money in the market
and it goes up. How big of a pillar is that to the overall recovery, to the resilience in the US economic data, to really underpin the justification to keep going into stocks that they can keep going up, that then propping up the economic condition.
Yeah, it is kind of a vicious kind of cycle up the question. We haven't really felt the vicious cycle on the way down, largely because there's really no net sellers or real sellers, and most large investors have to be fully invested to kind of participate with the upside, and when they do try to head they use they use the options market, which then creates these sort of squeezes on gamma on options like so it creates this weird dynamic that's kind perpetual until one day it's not.
We haven't felt that yet.
I guess the biggest counterpoint to that is potentially we've seen every single potential puncture point to that. I mean, well, you name it, high oil prices, high bond prices, uncertainty at the Federal Reserve, political uncertainty, hot wars, I mean, all sorts of concerns. Why hasn't any of that been enough?
I mean, like they think the market structure has clearly changed. I mean, there's been well documented the passive flow. That's why I've always looked at the jobs market as the most critical component. People have jobs that contribute to the four to one case. It keeps them the system going right.
I think that's why it's so critical that we're at this interesting inflection point potentially that if AI is really that good, it's going to hurt the jobs market over time, at least in the short term I think will meetium shortter meeting term, and as you retool the economy around that, you might lose like AI is not going to be contributing to four to one case. You know, they're going to be replacing, Like if you start like doing windfall
taxes at corporations. This is a really interesting crossroads. And I mean, you're the totality of all these things will start to be like a burden on the economy at some point. It's that last straw that brings the camels.
Bet aren't we already doing some of that when the President comes out and says tech companies need to basically subsidize consumer's energy bills.
Look, I mean, I think there's a there's going to be a need for it's kind of cost sharing load sharing for sure in the future, And.
You think it's going to be more of a burden on corporate America to check that out.
Look, ultimately, you know how this all shapes out. I really don't know. No one knows the future on how this works out. It's going to depend on future administrations more so than anything else. But I feel pretty confident both in this election cycle and in twenty twenty eight, AI is going to be on the ballot box.
What do you think it is this year before we get to twenty eight, the shape this market out of what you believe is denial.
I mean, I think look, I mean the front and center is the oil price, and I think just the fact that we've been into denial. The biggest denial is that somehow we can turn on and get production back, that we can kind of replace all this inventory that's been depleted. And as we're going through that process, I think it's going to really be a kind of rude awakening for markets, that it's going to be a drag on growth in the second half.
We speak to shoe A Kaiser said, Hey, this is something he's been talking about coming into this week, that the slow moving risk just keep on building, keep on building, keep on building, and then you break, you reach a hipping point. I have no idea if we're close to one of those, but some people think we are.
And what people are watching is that long dated oil contract and the fact that it's reaching almost ninety dollars on Brent crude for December. People are watching that and saying, hold on, it's going to cross some bogie where suddenly the stock market's going to wake up and say we're broken. We don't think we like this very much. And right now you aren't seeing that. Part of it is because the earnings keep giving that forward look that is more positive.
And at what point do you start to have to see some of this reflected in some of the rhetoric coming from the C suite.
George Yale's high now for different reasons or the same reasons we made those highs just a month or so ago.
I think yields are higher for a number of different reasons, and they've not participated in the broader risk rally because it is a pure macro kind of expression. So it is capture, you know, a longer kind of wait and see mode for central banks, not just in the US, because like the hawkish rhetoric that's been coming out from
overseas is also kind of pushed up US rates. The global kind of rate connection is there, and it's clearly an issue for the US bot market, and you know, fiscal concerns because I mean, we all know at some point if something does break, the government's going to come to the rescue. So I think there's a lot of different factors that are kind of at play.
But to John's point, earlier in the conflict, people were looking at higher yields as a result of rate hikes in direct response to oil prices, which was absolutely negative. Now suddenly it's because the economy is doing just fine. The consumer can keep spending. It's almost like yields are rising for the right reason. At what point, even if they're rising for the right reasons, does it become a breaking point for equity valuations.
I think markets, you know, get enamored around clear lines in the sand, five percent on the thirty year. If that breaks, you got above four to fifty on the ten year, and if you were to ever go back to four percent on the two year treasury, then the market I think the broader markets, like stocks, actually well careful.
What business does the two year have at four percent? So we asked that question repeatedly back in March. I think we have to ask it once again at three eighty five. What business does the two year have of four percent? When we, as far as we understand, the bar to hike at the federal reserve is incredibly high. What business does the two year year have treading above Fed funds?
I really think has very little business. So we're actually relatively constructor of the front end. We think that's the best sweet spot, highest risk reward for the bomb market is being long positive carry treasuries in the front end.
So right now, looking forward, what's the best hedge to something potentially breaking although it hasn't yet and could potentially keep going.
So unfortunately, it's been the trade that's been the hardest to kind of keep in place, which is when the curve steepener, you know, And that's the best macro expression that has to get reset every so often because it doesn't deliver until it.
Does stay with us. More Blindberg surveillance coming up after this. So here's the lakes. This this morning, the Defense Secretary PTE hagg Seth Handing's a Capitol Hill to defend President Trump's one point five trillion dollar defense budget as it faces bipartisan pushback down in Washington, d C. Joining us around a table. Good friend of this program, Libby control of Pimco. Libby, good morning, and Bernie, we've lost all
appreciation for how big these numbers are. What's their record of understanding whether one trillion goes never mind at one point five.
Yeah, I mean, I think, as Tyler said, I mean this is basically sort of reflective of the president's wish list. This is an opening bid, if you will. The budget is you know, kind of suggests what the president's priorities are. But we should also realize that it is going to the actual spend, the actual appropriation for defense come for
FY twenty seven is going to be much smaller. Historically this has been as amrino sort of eight hundred billion dollar you know, up to a trillion dollars of defense spending. As of last year, one and a half trillion dollars spent. Again, this is like pie in the sky kind of things. It's really to frame the negotiation. I think it does emphasize that what underscores how important the defense component is maybe surprisingly to this administration. So again I think we
should take this with a grain of salt. Our view is that we probably see maybe a small tick up in terms of defense spending that would land around a trillion dollars, obviously much short of the one and a half trillion.
Do they have to get this done before the midterms.
Yeah, it means look, as you know, the end of the fiscal year is as September thirtieth. Oftentimes they're operating in or something called a continuing resolution as we all know, which is basically just a stopgap funding bill. Does this get a lot harder and maybe they get to do it in the lame Duck, which is of course the period after the election, before the end of this Congress.
But look, I think that just in general, after the midterm elections, things are just going to get much more difficult for the Republican So any of these things that feel pretty ambitious, they should be trying to get done. The real story I think on Capitol Hill right now is just the lack of real progress in anything. Even though Republicans control both chambers of Congress, there is just, as you, very little movement on things that are faza
the Farm Bill. I mean, things are kind of like the blocking and tackling of Congress, but I think does represent the fact that it's really difficult to get things done with small majorities even when one party controls both chambers. Well.
Also, what's interesting about today is not just the defense budget request, but also Pete Haigseth is going to be really in the hot seat, and I've heard rumors that he's been kind of on thin ice. There's been mixed feelings about how Republicans in Congress feel about him. Do you think this is potentially a huge moment for him on whether or not the President decides to keep him on as his Defense secretary.
Well, look, I think you're absolutely right. He is going to get a lot of pressure. I think a lot of Republicans, while publicly they're supporting this Iranian conflict, privately there's some growing skepticism about how long we're in this, what the strategic objectives are, what the sort of framework for successes, And as you know, there's this War Powers Act that could require Congress to actually authorize this conflict
in Iran. So I think you're going to get a lot of pushback on him more just trying to get details about what the strategy is in terms of, you know, his future in the cabinet. I mean, it's it's an
open question for anybody and any administration. I will say, though, as you get closer to the midterms, and as we're looking at potentially either a narrow Republican margin in the Senate or even potentially the Senate flipping to Democratic control, there will be pressure for folks to go so the President can renominate people while the Republicans still you know, have the existing majority in the Senate still.
Trying to wrap ahead around one and a half trillion dollars, so forty four percent increase in the defense spending P. I mean, this to me highlights just how high the bar is to get anyone get scerned about fiscal issues. I mean, given the fact that our debt to GDP is right there behind Maldives, Bahrain, Greece and Sudan, here we are. So it just raises this issue. At what point where people start actually pushing back and saying, wait
a second, we're supposed to care about the deficit. When are we going to do that again.
I love the fact that you care about the deficit as much as we do.
It can go yeah.
I mean we talk about the deficits a lot, and we're talking about to our clients, of course, a lot about it.
You know.
I think, as we have said many times before, the treasuries benefit, Treasury bonds benefit from this idea of like the cleanest dirty shirt that like all of the you know, all of your shirts are dirty, and the sort of sovereign bond closet. But the treasuries continue to be the cleanest dirty shirt. And that is still true, right. The US still has the most mobile most dynamic, most innovative economy.
It's the most liquid and deep bond market. However, you know, we're hearing from clients both in the US and overseas of these sort of continued worries, not only in the US, of course, but in other developed countries. But in the US, you know, and as I've been saying, sort of Congress will keep on dancing as long as the music is playing. And if the bond market is not a constraint, then
what is a constraint. Not to get too wonky here, but I think one thing just to have on your radar is I would assume this would be an issue in twenty twenty eight because Social Security Trust Fund is supposed to go bankrupt, meaning will pay out less, and it brings in in twenty thirty three. That may feel like far away, it's really not, and so policy makers are going to have to start talking about this. I would be surprised if this is not a presidential election.
We still are heart that we actually start talking about deficits. But in between, then sixty seven percent deficits, you know, sixty seven six seven percent deficits is a percentage of GDP. I mean, this is very high, and we're not even in a recession and we're really not at war. So yes,
I mean, we hear you, we share your concerns. I feel hard, but again, I just don't think that unless the bomb market is going to be the constraint, and like you know, there's some concerns at the long end, but it really has not been that kind of that constrain.
How much is this a big point in the Kevin Worsh nomination and any kind of Fed Treasury accord, especially given the fact that the Treasury is shifting away from long term issuance issuing more on the front end and we're talking about ways to potentially lower rates on the front end.
Yeah, look, I mean, you know, I think we will be I think we'll just we'll have to wait and see. In terms of this accord, there's only so much, of course, that Kevin Worsh can do as chair. The chair is important, but not omnipotent, meaning like the power persuasion is important
in terms of the chair position. But he's only one vote, and as it relates to the balance sheet, he's only one vote of twelve, and he's obvious course only one vote of twelve on rates as well, so you know, we'll just sort of see what he can do in terms of the balance sheet. And then you know, the Treasury is increasing their buy back program. That is something that they have been doing. But there's also a limit there, right,
they do not have a balance sheet. It has to be balance sheet neutral, So there's only so much they can do in terms of you know, buybacks and what have you without really affecting the weighted average maturity of Treasury buck. So we're getting really walky here, you bis kist, just.
The basic question middle of May, does channel Pound step away?
You know, again open question. I think the Key will need to have every confidence in the world that this investigation, I think both at the FED in terms of the ig investigation and then also the do jay is put to bed.
You know.
My view, my guess, my speculation is it would make sense if he were to stay beyond the midterms just to sort of see what that. Again, I'm not I'm not trying to make news here. This is just this is just a guess.
Okay, but it.
Would But but but you think if you're worried about FED independence, you're going to really want to see what that Senate majority looks like and of course then it also gives you some time with Kevin worsh as well. So I just think that that the big point here is does it really matter? And I just that the FED is boxed in here in terms of the macroeconomic conditions and Kevin Warsh Fed a Powell Fed, I guess
in the next few months will look that different. I'm just not sure if the inflation numbers and the growth numbers will really allow them to do, you know, to just take too much of a different posture.
Appreciate your time, Thanks, thank you for the deficit therapy as well. Stay with us mult Bloomberg surveillance coming up off to this. So here's the liceis this morning investors looking for signals on how long the Central Bank will stay on hold what is likely to be Japowe's final meeting as chair, joining us now to discuss as former Kansas City FED president as the George esther warm welcome
back to the program. As always, at two pm Eastern time, we get a decision thirteen minutes later a news conference. What are you expecting to hear?
Well, good morning, Jonathan. I think it's clear the table is set for today's meeting, And the real question is not will they move rates. It seems likely they will remain on hold. But I think the question is how will they describe the outlook in this time of high uncertainty. Will they lean into the inflation issues that we've heard a number of the FMC members talk about, will they think about two sided risks if you will, to their mandates?
And of course the other part of the discussion, people are leaning in very heavily on trying to understand how the Chairman might be thinking about his future.
Role as the None of that is normal. That particular, that last point in particular is not normal. You know how this works. Typically they move aside, someone else comes on board, we move on with life. Why is this moment so different, Well.
Because it's been wrapped up in a bit of political fury, if you will. The chairman has.
Had I think we've lost that night to as the George the former Kansas City Fed President, on an important moment for the future of the Chairman of the Federal Reserve.
That's some way she doesn't want to talk about it.
I mean, I think no one wants to talk about it.
We should do that next time you ask me about it.
Maybe you guys will too.
Ultimately, it's a difficult moment.
Because people are used to talking about a difficult economic moment that we're in, and instead we're having to sell us out exactly whether it is going to be important for him to stay on, whether it'll matter to markets. Right now, the market seems to be incredibly calm.
She stopped and the shot was frozen. It was a technical issue, but when she was talking about political fury when it comes to j Powell and you know what this is going to do, right the conspiracy theorists out there in financial markets are going to be seeing that and they're going to say there was a reason why she was frozen.
The fact that we're even talking about this is a problem. It's a big problem. And understand, it's not just the chairman's responsibility to handle this issue. The blame layser the feet of this administration as well for introducing this as even a conversation. We've talked about this all the way. This could have been very straightforward. You've appointed your guy. Move on with life. Kevin Walsh runs the Federal Reserve, a new outlook for the Central Bank. We're here because
No one wanted to take the off ram. They just kept pursuing it, pursuing it, pursuing it. And I've mentioned this a few times. Twelve months ago, when we were looking at one year and we were thinking about what the future of this conversation would look like around the Federal Reserve, we were talking about a shadow fed chair the likes of a Kevin wash maybe getting firm daily. So we knew that he was going to be there
in the wings, and that was the ultimate story. This wasn't even a consideration the idea that Sham and Power would stick around to twenty eight on the board.
Part of the reason why we're talking about this so much is President Trump is a real estate guy. He's a real estate developer. He wants rates lower, and we're dealing with a significant amount of debt in this country and it is much more beneficial for the rates to be significantly lower. How do you accomplish that increasingly becomes the question in one supply chain shock after another that really does challenge the discussion, even though we are having
disinflation on other measures. So it is a complicated economic discussion that has been brought into the mainstream by President Trump and produced in utterly dramatic fashion so that everybody can really play a part in this bachelor fed style.
And he was fanning the flames throughout the entire year and into this year. I mean, I was in the Oval office that morning when there's reports that maybe he was going to fire j. Powell, and that was really mostly about the fact he didn't think he was doing a good job less so even about what was going on when it comes to the refurbishment than they went
to the referb member. This was a president who went to the FED, sat behind alongside the chair looking at all the work that was being done at the Federal reserves. So there's been a lot to this story.
I believe we've re established that connection and at risk of offering any fields conspiracy theories, I hope Pas that George is still with us, that we want you to complete your thoughts on the future of CHAM and pounem. Why this moment is so different, Well.
It's different, Jonathan, because again we have not seen this kind of political angst around a transition of leadership in the way that we have now. And of course this follows on a long period of badgering of the fed about its interest rates stance, and so it creates an
environment right now that is unusual. Having said that, though the institution I think is quite capable of carrying forward during this transition, and really, as I think about the Committee and what they're doing this morning, I suspect they are squarely focused on the economic challenges and deciding what their stance of policy needs to be.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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