Bloomberg Surveillance TV: April 3, 2024

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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

Eric, Good to see you, sir, Good to be here.

We're all trying to figure out how close are we to a point where a leader in America comes out with a set of policies and this market rejects it.

How close are we to that moment?

You know, it is so reminiscent of the discussion that we had even when I was on the hill, and if you look back even ten years ago, we were screaming the same thing that we have reached a point of unsustainable debt levels. We have to do something about it, and I certainly agree with what both Kim Griffin and Larry Frank Larry Fink have said that we are on

Isn't that the argument that the former administration led by President Donald Trump made that we can pile a more debt, but ultimately we're going to do it because we're pro growth.

Did that work out well?

No, because you've got to address both. I mean, there's no question that it is the demographics in our country and the healthcare costs and the increase in those healthcare costs.

Turbo charge now with higher interest rates. That's where this is.

This trifecta of a really toxic mix that we've got that is threatening I think the future. And I don't know if we're going to see the two candidates for president, the existing the incumbent and Donald Trump ever propose a fix to this.

But I think we know how to do it. We talked about how to do it when I was there.

It's interesting that you have both sides of this. You have from the policy perspective when you're in Congress, and you have now from the Wall shuep perspective when you're deciding how to invest and where to allocate. How convinced are you that this time is different, that the bond market is going to wake up to the risks that you see from the fiscal side.

Well, listen, I think on the deal making side at MOLAS, I mean, what we're seeing is client who really reacted over the last couple of years to this volatility and uncertainly around interest rates. Obviously, interest rates when you're in the deal making business are very, very impactful. So you know, I do think you know, at some point the market

But again, I always go back to the fact that we're.

Quote unquote the fastest killed on the block in this country. Where else are you going to put your money? And whether we're seeing signs of that now and diversification, I'm not sure yet. I'm not sure because when I look at it and you look at the you know, ADP.

Report out today, we'll get the jobs reported out later this week.

But you know, where else is there this innovation and dynamism. I mean, we're on a role in this country where you've got more small business startups than we've ever had before. That is a signal that people are optimistic about America.

If the market, though, was to push Washington's hand, because you know, Washington is not going to be the ones to come up with a plan for the fiscal deficit. Are the right people in place? You had a great relationship in twenty eleven with then former Vice President Biden. He's spoke glowingly about you able to work in a bipartisan fashion. Are the right people in place to actually come to the crisis.

Look, I think that the situation will demand that people, you know, step up and come up with a solution. And there's really to me if you want to fix the problem and send the signal to the markets that the country and the investors in the markets.

That the country is on the right path.

You know, it's a simple notion, but it's difficult politically. You know, you just take the steps to change the healthcare entitlement, the Medicare program from a defined benefit system to a defined contribution and basically off lay some of the risks to the beneficiaries. That's really really tough politically.

You could means test there are.

Some things where you could buy and the government could buy us decade plus in terms of the viability of these programs.

That just doesn't win elections. I want to talk about some of the proposals we are hearing from the candidates. Former President Donal Trump is talking about ten percent tariffs a wall, and then sixty percent blanket tariffs on China. We ran the numbers and that says PC be north of three percent. Yet again, do you think you would actually do that given the fact that this can mean such higher inflation, especially on everyday Americans.

Well, you know, I.

Think he goes back to that ammunition that someone had given back in sixteen. You know, don't take him literally, take him figuratively. Who knows, who knows what we can expect. I think the unpredictability is what he likes. And there's no question that his messages. We have been taken advantage of by others, in particular China, and we need to step up and gain some leverage when we try and

Happen when it comes to a deal making perspective. How much you're avoiding cross border deals because of some of these questions and concerns.

Well, you know, I think it's very interesting because so much of the sectors that investors will look to really we're shining in the US, and there's a lot of European, Asian Middle East investors who are looking to allocate their capital here in the US. But of course there are political ramifications to monies coming in, and we've seen that when it comes to countries that are not aligned with US, whether it's China or someone else who is just not on the favored list. You have to go through the

That's the world we live in right now. We were talking to Brian moynahan just the other week on the trading floor of Banks for America at a similar complaint. It was talking about the amount of deals that were being held back by the prospect of them just not being able to pass, not being able to go through, and no one wanted to be on the wrong side of that, being left to hung out to drive for a year without any idea of whether the deal will

You know, I do think and what I will say to decision makers, is that you know, if we're going to go forward, if there's going to be a deal to work, we're going to have to make sure that we allocate the necessary time, resources and commitment to get through that process.

But think about it, if we like.

To be the location in the world where capital flows to its most efficient use, where it's the most dynamic economy velocity of capital, we shouldn't have to do this.

And unfortunately, there is just an.

Overwhelming ideology that's infecting the policy in the current administration Washington that is not necessarily that favorable. But again, all the while you look to and say where else or is it any better?

Let me ask you this though, is that ideology effect in both parties? Because right on cue deal crosses the Blimberg terminal, We announce it, we talk about it, we go to the Twitter account of the Center of Massachusetts tweet shock.

Not surprised at all.

What is surprising is the amount of Republicans that agree with the Now that's a shift, and I'm trying to work out do we actually have a business friendly party in Washington anymore?

Does one exist?

Well? Listen, I always I'd say I'm a limited government, pro free market, pro national security, conservative Republican. But I agree, Jonathan, with your with your sentiment that Donald Trump has changed the nature of the Republican Party. We are, i believe, now perceived as the working class party, and the Democratic Party has done more to ingratiate itself with quote unquote the elite and the very and the very far left on the ideological spectrum, and somehow the extremes are meeting

With the support of both parties.

You look at the IRA Bill, certainly that was one party, that was the Democratic Party, But if.

You look at the Chips Bill, that look what that did.

I mean, that was industrial policy focus on a particular industry that folks in my party decided was a good thing for national securities. So let's let the government go all in. That is not sort of the limited government outlook that you see.

And so you're right there is a shift towards labor.

Labor is in the polling public polling this country at all time high in terms of favorability, and both parties you've seen it. How in the world can a white house go and join the picket lines.

That's what President Biden did, But you know what, so did Donald Trump.

So did several Republican senators joined the picket lines in Detroit.

Well to Jonathan's point, jd Vance, who is a VP shortless candidate, literally came out and said he thinks men a con is maybe the only effective person in the Biden administration. So say it was to be Trump, are you getting the same sort of DOJ same sort of FTC.

I see, And you know that's the real question.

As the weather, we're going to continue to see the extremity. I don't buy that because I still think there is a DNA.

We're a product of that extremity. You lost your seat because of that, in that populous wave that people said you were really the beginning of it.

But remember where the anger was.

The anger really was against the so called establishment. It wasn't necessarily towards you know it was it was towards everything we thought and probably assigned an over weight to the import of profligate spending in Washington. I think it was just more it is about the establishment, the system et cetera. I don't necessarily think people are going to the polls in November based on anti trust regulation.

I really so.

I think that where you're going to have manifests in a next Republican Trump administration is more of the DNA that's a little bit more balanced and not so punitive on corporates.

People might not be going to the polls, but you have to plan a business around it, and that's really one of the key questions. And we keep getting people in here saying, Lori Calvecina, it's like staring at the sun. How do you plan for something that feels like it is shifting and you don't know exactly. How is there any way that you are planning with the business and the deal making to get ahead of whatever kind of push we're going to get in November.

So I just think that we've got to be very mindful. In twenty twenty five, there will be the super Bowl of fiscal policy debate because you've got exploration of the Trump tax cuts and some would say, well, not all of them, Well yes, there will be. Everything will be on the table, and just to extend the lower the four hundred thousand dollars and under income bracket. That's a three point two trillion dollar issue.

You talk about the debt.

Fiscal year twenty three, we were at seven hundred and ninety one billion dollars of interest costs and we're going up, and so everything's going to be on the table IRA. The subsidies I can, I would say, if there's any anticipation and advice I would give for those who have been on the uptake in terms of.

These subsidies with the IRA, especially as.

It relates to evs and renewable industries, we better take a real look to see whether we think those will continue, because they're going to be on the table too. I believe my party will first up look at some of those subsidies and get rid of them.

So final question for you trying to work this sold out, because I think this is really really difficult. In twenty sixteen, we had a candidate, and I think if you could divorce the person from the policy, the policy you looked at was pro business, low taxes, comfrontation at some point with China, and then TikTok Campen in the last couple of weeks, and I was just thinking it's a Trump template from Vulge one applicable to Volume two. Do you think it is.

I do.

I don't think that he has changed much in terms of his career trajectory. He's always been anti China. He's always tried to go and getting some leverage in negotiations. He's a deal maker. I also think that he is focused on a growing economy. I think at the end of the day, with all the noise you see from J D Bands coming together with Elizabeth Warren and what have you, at the end of the day, the Trump administration next time will be pro business because he'll want to see a growing economy.

I could talkch you well day, this was great.

I stood against soon Eric, Thank you, Eric cantor that of mo listen, Michael Collins and PGM sank This defet's own projections indicate a policy rate of Nearty four percent by the end of twenty five, leaving a narrow margin of error for a ten yere yield in the low four percent area. Given the incoming treasury supply and inflation, the remains above target. Michael Collins on place to say is with us right now? Michael Collins said, I just hear a little argument there for high upon yields.

You know, Jonathan, just think about it.

If you're the Federal Reserve, why would you even think about cutting interest rates when the economy continues to be really solid, Inflation, as we just saw Lorettamester say, continues to be sticky and well above their target. The labor market is still rock solid, if not outright strong. The stock market has been hitting new highs, credit spreads are new lows. Financial conditions are the easiest they've been since just after the Fed started hiking, Why would you cut

So if I called you this morning and said ten year, four thirty seven, thirty year four fifty two, would you like some you'd say no.

You know, we're actually short a little bit, like the very front end, the two to kind of seven year part of the curve, because that's where all those cuts are priced in over the next year or year and a half. But Jonathan, over the long term, we're sticking to our guns. I'm looking at the twenty year today at four sixty, and this is what we're advising our clients. If you have a long term time horizon three years and out, you're supposed to buy long term interest rates

How much is that complete faith that the Federal Reserve will be overly cautious in terms of how quickly they'll cut rates? In other words, if they don't cut if they don't really follow through on that they do cut rates in June despite some of this strong data, would you move away from that long duration view now?

I think if they cut rates sooner, you know it.

Even Embolden's the view that those long term interest rates in the mid fours are too high. Right looking at the five year, five year markets pricing of what the Fed funds rate is going to be leased, So so that's like a really term expectation of the funds rate.

It's at three eighty today, all.

Right, So the markets are only pricing in about one hundred and sixty or so basis points of cuts forever, right, And that that's really why we have a stronger viewpoint on the longer term value in treasury yields right now, because I think the Fed funds rate is probably going to average well below three point eight percent a year for the next ten years.

Right.

I mean we're just really debating, you know, the next six to twelve months. But wow, over the long term, I mean, global growth is slowing, China is really struggling. You're seeing inflation in Europe continue to decelerate, right, So, I mean there are big picture signs globally that growth is going to continue to moderate and then inflation will ultimately come down. It's really the challenge has been in the US data.

Which is interesting because this is one of the key nodes of debate, which is basically, are we in a new regime post pandemic of higher inflation or to your point, are we not. Would a possible policy shift change that the potential for a more aggressive protectionist type of policy with higher tariffs and more sort of near shoring and on shoring of production.

Yeah, I mean the world Lisa had been pricing in and according to our models, the markets we're pricing in almost one hundred percent probability of this really weakflation soft landing scenario, and we thought, you know, that was too aggressive, meaning risk assets were maybe too a bullion, too optimistic.

And to us, that's a risk to the markets, that's a.

Risk to the economy, that's a risk to you know, credit spreads, if you will, well.

Let's talk about credit spreads, high yold spreads a little bit wider, still in at around three hundred basis points and then multi year tights.

Mica ah.

Custom we could come back to on this program, is that title's a reflection of strength or complacency. How would you describe it?

You know, it is a little bit of both.

I mean the fundamentals, Jonathan, and the credit markets, the fundamentals of corporations around the world are actually still really robust. I mean, we've expected profit margins to really come down. They really haven't. You know, profitability isn't great, but it's okay. Companies have done a really good job managing their balance sheets and their liquidity, and these higher rates really haven't hurt them so much. You know, credit to fault rates

So there's already this.

Big supply premium in treasury. So maybe it's the risk free rate that's too high, and the corporate bond yields are at the right level, So I think the spread there's this technical aspect to it, right, There's a ton of supply of treasuries and not a lot of supply of private sector credit debt, so that in and of itself causes these credit spreads to remain narrower than you would expect.

This was a clinic.

Next time Gannika got through the tunnel, get from New Jersey to New York, and we'll do this around the table for a whole lot longer. Michael, Thank you, sir Michael Collins, there a p Jim love it.

Thank you. Buddy.

Joining us to discuss is Eric Vile, the CIO and head of Global investments at Troe Price.

Eric, Good morning to you, sir.

Good morning.

Let's just talk about chev and Powe a little bit later. Have your expectations for the Federal Reserve this year shifted in quite the same way market expectations have.

We were never as excited about as many ray cuts as the Fed had him as the marketed priced in. I think one of the things that really stands out to me is if you go back to what Powell said very early on. He was a student of what happened in the seventies, And if you go back and you look at the mistake made then, it was cutting too early. And if you map the CPI to the very beginning of this cycle versus the last, it's following a similar curve.

And if they go ahead and they.

Start cutting now, I think they're in danger of making the same mistakes you perceive.

That's the biggest risk, then cutting too soon and not holding too long. I do what would that mean for bond markets If they did well, I.

Think you would see what would happen is the spike up, and then you would have to react to that in a way that would put them on their backfoot, and that would lose credibility and you would have a really big, a big issue for them.

I want to challenge one thing that you said, which is that Powell is a student of the seventies. Is he really because right now he sounds pretty much like the most dubbish member on that BBC. It sounds like he really wants to cut rates, and frankly, a lot of people are looking at that is the reason.

To buy stocks.

Are you saying that they have it wrong?

No, I'm not saying that they have it wrong.

I think I do think he is a student of history, and what he has to do is keep that group, you know, find the middle ground between that group, and present it in a way that presents consensus broadly within that committee and balance out the other speakers. So I think he's very much trying to do that right now. But again, I think as you look at the next several months, the idea of cutting when where we are from an economic perspective, just doesn't I think, make a ton of sense right now.

Which raises this question if you do think that this inflation is stickier and you think that the risk of a seventies type of scenario is greater than the risk of some sort of unforeseen downturn. You just buy commodities, buy stocks, avoid bonds at all costs because right now it's not clear that this FMC has the conviction to really make the right call and not have a policy.

Err well, I wouldn't go that extreme, right So, as we've unfortunately or fortunately said, we're right now in our asset allocation commune, we're actually dramatically neutral is the phrase that we've been using between stocks and bonds, which is not the most exciting fodder for the media, but that's

Going back to Powell and a student of the seventies, does the commodity pressure you think and the increase we've seen unnerve him because we heard him say that he can quickly they see labor market deterioration. But you're saying he's really leaning on inflation more than he is the labor market.

Look, I can't tell you, I know what's in his head.

I do think though that in the inflation numbers that we've seen have to give you some hause, right, just as a reasonable place to be if you were him, what would you do?

Right? And I think you have to look at that data.

Did you think we have sent a regime shift post pandemic versus pre pandemic? And if you do, how is investing in the next decade or so going to change relative to the previous decade.

Without a doubt, we have seen a regime shift post pandemic. And the issue is all about the absolute low rates that we had heading prior to the pandemic, where it was much more about the macro right, it was much more about all things up when a zero environment risk assets on. In this environment at higher levels, you have to be more. It's much more of a bottoms up world from our perspective, and it's not as easy in just a chase.

Well, let's get into that, because it feels like everything is up. Yep, so far this shire what shouldn't be up?

Interesting question? What shouldn't be up? We are right.

Now in a position where if you look across our portfolios, we tend to have some overweight positions in a few areas, so mostly in energy, in healthcare, we're relatively neutral and tech, and we've taken some of that from some of the areas like financials and a little bit in industrials where we're a little bit more neutrally positioned.

Well, there's a question here about whether sixty forty works in a new era, or inflation's a bigger risk than potentially stagnation or some sort of recession. How much are you shifting away from that with the idea of commodities being more of a ballast than say, bonds.

We still believe that there can be some benefit from diversification within bonds, for sure. We've also had a strong view that having a real asset sleeve within your portfolio matters and helps and provides really strong diversification from inflation in a way that many of our peers don't do in their asset allocation portfolios, and that's been a differentiator for us. So we have that component which has been really helpful.

You talk about financials that you're kind of not that excited about them, which raises this question, if you believe that rates are going to be higher for longer, why not.

Isn't that supposed to good for banks?

And weren't we supposed to see them both be able to clip coupons but also with more kind of robust market activity collect those.

Fees as well.

Yeah, So what matters, though, is the releti evaluation of that group. So I think what you just said is right, and part of that's already been factored in. Banks had a nice little pop and we were we were in there, and now we're taking some of that back so fully. Goward just about price level than it is about that.

Can I squeeze in a baseball question?

Of course?

Just your thoughts some of the new ownership at the Bottlemore Arioles super excited news.

We are both Look, they walked into Pickles Pub, which is the most important bar in Baltimore and opening day and bought around the drinks for everybody. So it doesn't get better than that.

John, They can keep bud drinks. And then it got deep podcasts keep tasking, all right, thank you, it's good to see you. Thank you, and Mike as well, and Mike it was actually Mike was it? Michael went around find as Yeah, there we got this is the Bloomberg seventans podcast, bringing you the best in markets, economics, an gie politics. You can watch the show live on Bloomberg