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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 Terminal and the Bloomberg Business app. We begin with the
big issue markets on hold ahead of Nvidio. Then as that one hundred under pressure as traders await tomorrow's results from the AI giant that's become a critical market driver for Camporadi of JP morgan Stein bullish with this to say, the concentration of stocks driving the market higher makes sense
to us. Given the ability for those companies to manage the current levels of raids as well as the earnings supporting valuations, we believe the momentum inequacies can continue, So joined us some moth folkemonitory.
Good morning, Let's get to some.
Of your cos I've a white US stocks, EM Japan high yield credit. What aren't you. I've a white right now in this mile kid.
Yeah, so we're not overweight cash. And I love your I love your quote that I saw on your on one of the monitors that said t bill and chill. That's like nails on a try I'll probably date myself with this reference, but that's like nails on a truck board for me. John, I'll tell you we still run into that problem. And I'm not talking about should you be in equies or should you be in cash? Okay, I'm a multi asset portfolio manager. I believe in diversification
and a diverse fied portfolio. Last year, when the FED wasn't cutting rates, was up sixteen cash was up five on the year. This year, this diverse five portfolio of sixty forty is up about eleven and cash is up about three and a half. So we're tripling the return on cash for folks that should probably be in diverse, fied portfolios. And I loved last Friday morning at ten am the time has come for policy to adjust. I mean that's like music to the ears of investors after
two very long years. Twenty twenty two was the economy is going to have to go through some pain in order for us to achieve our a dual mandate. I still remember pain. And then last year it was basically the message was we're either going to be high for
longer or even higher for longer. So I think what we're looking at when we believe the momentum equities can continue is that these cuts I think are going to grease the wheels for the soft landing and you know, the FED cutting without a recession and what we believe between four and five percent nominal GDP growth. Every investor should be raising their hand for that.
For a while. The sales team I imagine at JPLGAM, mccolon clents and saying, you ready should get out of cash, We've got this bond fund, allocate some long dated depth, go into credit, all sorts of things with Bob, Michael and co. Have some fun. Are they calling you now after Friday to make that move? How resistant have they been?
Yeah?
The credit story is still loud and clear, because the credit story for us is we'd rather play offense in fix income in defense. So the high yield story, while spreads aren't super wide and we're not going to get this crazy total return. We'll get the total return in equity, John, but we're going to out yield what we believe treasuries and just the core bond funds can do over time, which is a form of alpha. Less glamorous than Nvidia, but it is a It is a form of alpha.
But importantly, like this diversification story, what we've seen is that as soon as inflation hits three or below and we're a two point nine on CPI, you get the right way correlation back with bonds. So you can get a day like August fifth, the highest intra day volatility in the history of the equity market, my first day
of vacation, Thank you very much. And we can hold on to our overweight to stocks and credit in that environment because we believe that finally bonds are going to be the diversifier that we that we expect.
Them to be.
If that's the case, why I underweight US government bonds.
Because recession is not the base case. We're neutral or our benchmark okay in terms of duration, but we'd much rather play the high yield story, so spending the ash and high yield versus the egg.
But we don't want to be underweight.
We don't want to be underweight in an environment where bonds can protect us.
We were talking to Sebastian Page of tiro Price earlier and he was talking about how it's important to sort of hedge against the multitude of risks, including owning government bonds in case there is a bigger downturn and holding hard assets in case the inflation picks up more considerably. Why in your asset allocation are you overweighting so significantly the idea of a soft landing and a positive economic backjob.
So it still goes back to us, Lisa, that this is an economy that is interest rate insensitive. So you have an effective mortgage rate in the US right now at three point nine. The average effective mortgage rate when we had a zero interust rate policy from O eight to fifteen was four point three. So in effect, US homeowner with their biggest expense is paying less in their mortgage than they weren't a zero interest.
Rate policy least.
So so I think there's still interest rate insensitivity. And this we think is a cycle that has been trademarked by good behavior, not just a con Schumer who went out and refined in twenty twenty twenty one and early twenty two. But also the corporate balance sheet looks pretty good going forward, So again I don't want to give you the impression
that it's raw row above trend growth. A necessary consequence of a soft landing is a landing, right, so you have to slow down some and then that allows the FED to bring the easy cycle into focus. One hundred basis points by the end of the yearliest. I agree with you in your last statement that's a little bit too much. I mean, we were when people were coming into this year and we had one hundred and fifty priced in for the full year. People thought that was crazy.
Now we have one hundred priced into three meetings. I think that gets back to something that looks like one or two twenty five bas point cuts.
But you'll comfortable we can take some of that back and this market will hold up well. That means the leadership.
Yeah, I think we saw a snapshot of that in the April trade when you saw that that, you know, the repricing of the Federal Fund's futures market, John, I think that goes back to megacap tech, right, So you
have this small cap rally, the MidCap. All this rotation trade, I think that gives it up a little bit, and our highest conviction view is still cap weighted SMP, although our last trade was an equal weighted SMP, just because inflation is now at two point nine percent and that should expand some breath.
I just want to finish up with that last point, this idea of how leverage this market is to big tech and when do you get in video earnings tomorrow. How concerned are you that any kind of miss or not a significant enough beat could actually cause a bigger risk off moment for the market.
Yeah, I think it's I think that would be somewhat short, short dated, Lisa, getting back to the point that we're going to, this market is driven by fundamentals and it's not a gimmicky rally. Like if you look at the earning the returns of these companies, about half of the return has come from earnings and about half from multiples. If it was all multiples, I'd be right with you, right,
but it's not that. But we do believe that they do have to continue to put up the earnings to support the multiple.
What do you think of the moithe of regional banks just to sort of touch on that. What's happening with the financials?
Yeah, a lifeline has now been given.
You know how he gets a gimmicky rally.
I don't think it's gimmiy rally because I don't think it's a gimmicky easing cycle. I think we're actually going to be in the in the in the in the in the beginning innings of an easing cycle, just not one hundred base points by the end of the year. If that's the case, we have the wrong view on equities.
Got it, Phil? Thank you.
Basically he's saying they're not trash.
They're not trash. I've got that.
Yeah, it basically stopped saying that.
That was what he says, is that what feels time to make Yeah, trying to start fights rather the table of something. What's wrong with you?
We set out back together. I saw that.
Would you buy tickets? Yes?
I would? You would beat me to it?
Okay, would you like to go together? We can do the next summle? Might that happen? Phil? All right? Team outing Phil Campari a CHP mol Thank you. So here's the latest Trainer curtain, weekly jobless claims and next week's August jobs report. As key data points ahead of the fed's next meeting, as officials warn of potential harm to the labor market kitchase of self gen right in the following what the labor market is clearly loosening, There's still
huge uncertainty about how much it will slow. But for the FX market, after the dollar climbs so high, the mere fact of the slowdown will continue to see long dollar positions reduce. KIT joined us now for more KIT. So we've got the economy and then we've got your call on the central bank and foreign exchange. Can we just start with the economy first and ultimately the call on the central bank? Market participants were very excited at the start of the year about the prospect of a
lot of rate cuts. They took them all back, and now we've priced them all in again. What's different now compared to where we were at the start of the year.
A good question.
Look, I think the first pieces that even the FED is recognizing pretty clearly that the labor market is changing.
Jobs growth has slowed.
We've revised away a few jobs as well for the last couple of weeks, but it is slowing down. The signs of weakness and the having market still. So what the Fed has done is beginning to have an impact, But labor market is the center of it. That's why we've got more men than anything else at Jackson Hole. And we've seen one week labor market report, one downward revision in the benchmark revisions, and we are waiting for
more to provide any kind of confirmation. I guess I would say, though, that the chances that this is a slowdown are pretty strong. Now what kind of slow down? Much much much less certain, But there's enough in the labor market here to say this is now slowing.
It's okay.
With that in mind, are we two dubshly priced or two conservatively priced in the rates market at the moment?
Well, if you have.
Pushed me against a wall, I say, we're pricing for a faster pace of rate cuts than is likely unless things go pretty badly wrong. But the destination, which is looking at an eventual fall till three percent or somewhere near three percent in rates, that's not an excessive fall.
The last time the trough in rates were three percent was in nineteen ninety two, when you know, inflation expectations were an awful lot higher than they are our real rates were less distractive, and the economic recovery that we had when we got to that trough surprised everybody, and we called it the Great Moderation.
So the destination of three percent ish. I think it's fine.
The idea that we get as many rate cuts between now in the beginning of next year as a priced in that the data need to be pretty awful.
Kit I was wondering whether this was going to be sort of the dramatic salvos that could be heard across Wall Street during the fall, given the fact that so many people for most of this year had been so overweight the dollar. How offsides will this market be when it starts to adapt to the idea of the rate cuts that the market is pricing in. If we should get the kind of cuts that currently are being represented in fed fund's futures, how much dollar weakness could we end up seeing?
Well, a fair bit, I mean, that's my concern. There's a piece about the Chinese yuan that was the most read story on your Terminal overnight, citing Stephen jen who talked about an avalanche of money. But I've been struck for years the two big dollar at it's the really big one in the eighties that ended in eighty five, and then the big one in the nineties that ended two thousand and one. Both of them were completely reversed, the first without any kind of recession, the second with
a very mild recession. And there is this sense that we've seen, you know, not just carry trades, but foreign investors buying US equities, foreign investors buying US bonds, everybody buying American everything for years now, and that if people start taking those trades off, bringing that money home whatever it is they're doing with it, because they're a bit spooked, that you can have an outsized correction on the other
side over the course of the next few years. And I know, I for one, definitely never saw either how much the dollar was going to go up into eighty five or how much it would fall, and was continually perplexed by how strong it got and then how much it fell between ninety five and two thousand and four. So I'll be surprised again if the dollar goes all the way back, but I'm beginning.
To understand how it happens.
And it's this, if you like it, this avalanche, to use the term from the Bloomberg story, but of just money going home because it's had a great time being in America.
But the holidays are.
Over, kid, the holidays are over. But are they really beginning at other places? I hear John Pharaoh's voice in my head. Where do you want to go? Germany? Where do you want to go? China? I mean there is this question. I mean, how much confidence is there in one of these companies a lot of these investors to go home from the holidays.
And that's the really big challenge in a sense. You know, if I look at Japan and say if Dolly en purchasing power parity for Dolly yenn is now in the mid nineties, how far could that go on no money doing anything. That's a big current account surplus economy. If it doesn't want to ship money to the States, to the yen will appreciate enormous amount. I can't imagine you're
a dollar going miles. I think, let's put it this way that I am almost certain in my mind that we're going to see another cyclical lower high for the Euro after a series of them since two thousand and eight. So we did one six, we did one forty, we did one twenty seven, then we did one twenty three. I don't think we're getting close to one twenty three in the cycle, but I do look at history and say, you know, once a stone starts gathering momentum, it goes down.
Or put another way, what are the conditions for an avalanche? A lot of snow at the top of a mountain and a catalyst, where does the.
Snow go down?
It's not asking how attractive it is at the bottom of the valley.
It's just going. And there's a bit of that in this.
Okay, before you go, I've only got a few seconds least. I've got a note. Did you call Stephen and ask him about that call?
No? I haven't.
I've only got This is my first day into work. I'm as close to his office as I could usefully be in your studios in London.
But I have not spoken to Stephen yet.
Okay, let me know what your talent cat Jase's self gent first stupid A STIFL is looking ahead to twenty twenty five delivery expectations as the company built What's up inventory but joined us now for more. But I think we need to take a giant step back and talk about this overall company. The challenges for the incoming CEO. We've got commercial planes, Boeing Defense, and then we've got the venture into space and that's where the difficulty is
right now. Given the to do list, how long is that to do list for that new CEO.
Yeah, well thanks for having me on the program. You know, it's certainly a long to do list. You know, what we've been looking for over the last few months was first, you know, to get a successor CEO and the door and so sort of check mark on that and from here, you know, mister Orberg just started three weeks ago, and so he's in the process of you know, meeting with customers, trying to understand the problems and.
Sort of put forth a solution.
And so unfortunately, you've seen a couple of you know, negative headlines over the last two weeks, between the Triple seven X having a setback and then Starliner obviously over the weekend announcing that SpaceX is going to bring back
the two astronauts up there. But you know, maybe just to contextualize things, because I think it's important as you think about the Boeing story, you know, the BDS business which houses the space business, makes up about twenty five percent of the normalized business called it a thirty three percent of the business today, and within that business, fifteen percent of it is the fixed price development programs, of
which starline are is one of them. So this program itself is relatively small, which is why you tend to see a lot more focus on the BCA side, the airplane side, and within that a lot of focus on the seven three seven program.
There's also a lot of questions around why Boeing should keep their space program, considering how many losses they've posted for this. If Boeing were to announce that it was jettison ng it's fleet and it's sort of relationship with NASA, how much could this share price rally.
Yeah, I'm not it's an interesting question.
I mean the space program itself, you know, I think we think of it as the United Launch Alliance, which is a joint venture between them and Lockheed, which.
Has already been rumored to be potentially sold.
I think the number out there's three billion dollars, so they could be monetizing part of that. There's the Space Launch System, which is the SLS program. That's what's called a cost plus program, and so their risk there is much lower. The NASA takes the risk, and then you have the Starliner program and obviously engineering and other things that go into NASA. Boeing has been working with NASA for decades, so I guess the question would be, you know,
what they see from the space business longer term? Is this an area where they want to be exposed down the road or do they want to sort of tighten their focus, you know, on the commercial airplane business. I compare it to Lockheed. You know, they used to compete in commercial airplanes. They decided they were much better in fighters and satellites and weapons and they went down that
path and that was very successful for them. So, you know, I think if they got out of this business, investors would look at it as you know, potentially reducing a future cash trag, but perhaps at the expense of sort of reducing an opportunity in space down the road. So you know, it'd be an interesting decision, this interesting sort of thought process on how much worldper goes through this as he thinks about, you know, the future of Boeing.
They're taking a step back. So there's been this question of whether Airbus would be able to cape on some of the problems that we've seen on Boeing and whether they could really take the lead in a more meaningful way. I have been surprised that they have not, and one of the reasons why is because they're facing off for the same kind of supply chain issues that Boeing is maybe a little bit less publicized.
But I'm just.
Wondering whether we have fully emerged from the sort of post pandemic induced supply chain disruptions that's continue to plague the aerospace industry.
Yeah, it's a great point. Look, Airbus, I think everybody.
Thought after January Airbus is going to be in this position to take all this market share, and there's certainly been limits to what they've been able to do. But for airbuses, you know, a positive for Airbus to people I think overlook is you know, they have really high targets. So they're talking about getting seventy five on the eight
three twenty per month. Boeing is talking about getting to fifty on the seven three seven, So you know, Airbus is already close to fifty on their program, you know, maybe even certain months above that number. So they're progressing pretty well, but they've seen limits on their ability to get to their targets, and they keep extending that and part of that has been supply chain driven. You know, there are many tiers of the supply chain. There has
to be an orchestration and how they work together. There's been raw material shortages, there's been geopolitical issues, there's been labor issues, and so these things have compounded, and surprisingly, here we are, you know, four years past the start of the pandemic, more than that now, and we're still talking about supply chain. But you know, as we go into twenty five, I think there's a reason to be
optimistic about where the supply chain is heading. And that's part of why we think, you know, Boeing starts to look better. You know, where expectations are today is a lot lower where they were a year ago. And as the supply chain catches up, as Boeing stabilized, as production, they get back into a position where they can sort of, you know, stem some of the market share losses they've seen to date and then ideally start building more orders and sort of take away that potential advantage Airbus.
Would have had.
This is a tough question, and I don't know if we can actually get a real answer. But how much is Boeing in a better or worse position because it is the American darling, because it is a US company at a time of increasing fissures, especially as the likes of Boeing really has a huge presence in defense pending globally. How much is this really turning into sort of the fiefdoms of who your allies are in terms of who decides to do business with, say Boeing versus Airbus.
Yeah, you're right, that is a tough question.
You know.
Look, I think right now there's a third player that's emerging very early days, but it's called Comac. It's the Chinese backed aircraft producer, and they have a program called the C nine one nine which is going to compete with the seven three seven and eight three twenty and so, like I said, very early days, you know, using a lot of the same parts that we go into a Boeing and Airbus aircraft, but obviously.
Early on that journey.
So you know, the question is Boeing put out some sort of refresh numbers on what they think the China set up will look like longer term, and that is rising, and so.
The question will be does China.
Opt to purchase more Airbus aircraft and do they purchase more COMAC aircraft as you do down the road, and that limits an opportunity for Boeing. Outside of that, I don't think there's this major issue between which countries choose to do.
Business with Airbus or Boeing.
Airbus has certainly been the preferred partner of late, but the reality is, if you want a new eight three to twenty aircraft, the waiting list is now twenty thirty one to twenty thirty two, and so that is not an aircraft you're ordering the day to get in twenty seven or twenty eight. You know, with Boeing you could be getting that aircraft three to four years earlier, and so that's an advantage. And so I think airlines continue to look at, you know, what aircraft do we need
for our mission? When can we get those aircraft? What's the price of the aircraft, and what's our confidence in the company? Probably more so than that, But then there's the China question, and so that may be a benefit as we think about Airbus versus Boeing.
But how difficult is it for airlines to make capacity decisions when they don't know when they can get planes, and if they do want new planes, they've got to wait that long for them, and they've got no idea whether the economy or the market will be once they arrive.
Yeah, it's very difficult.
And what we've seen What typically happens is there's call it two to three percent of your aircraft globally get retired every year, and so that number has been quite low.
And what we've seen is the average of.
The global fleet has been about twenty percent higher than it was in twenty eighteen. And what that's meant is there's this whole industry called the aftermarket, which has benefited from selling parts and services because older aircraft need more parts and services.
And so what airlines have.
Had to do is take up their off x because they've had to use older aircraft. And they've also been limited in how much they can grow because they've been
unable to get their new aircraft. I mean, just for example, Southwest was supposed to get something like seventy nine aircraft this year and they're going to get closer to twenty and so that obviously has a huge change on what you're expecting to grow versus what you can actually grow, But it's actually probably been a good thing for the airline industry because it's sort of mandated more capacity, your
capacity to stay in check. Imagine had we not been in that position and airline's been buying more aircraft, you know, what we're seeing from a yield perspective, would be certainly a lot worse today if they were.
Growing fafter So it's been a positive from that perspective.
This was awesome, just a clinic. I appreciate it, sir. Thank you first saving there a Staples. This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, and 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.