Bloomberg Surveillance TV: August 30, 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 Terminal and the Bloomberg Business app. We begin with the

Yeah, Jonathan, In a way, it's almost been like this nostalgic push from both institutional and wealth clients, just viewing that hey, look I can actually get something from the shorter end of the curve, so I'm going to stay there. And I think that you know, we saw balances go up as high as ten ten and a half percent in cash, and that's really worked its way down to about four and a half or five percent across our

So that's been a positive. We think that probably continues for the next couple of months.

I think we just go with POST. I think just post just works. But whatever, Eric, when that cash position comes down from say ten to four and a half, five, how sticky is that four and a half, Because certainly people are lining up on this program, Tanning us that money is going to be deployed. If it's going to cut interest rates. Curve normalizes, you'll see that curve go out the curve and into equities nowsewhere beyond fixed income.

It's pretty sticky.

I think that the thing that would probably shift views out of that, Hey, let's get back into the broader macro ecosphere if you would probably be the idea of the back end of the curve really ripping high r That's something that your team has done a really nice job thinking about, like what are the factors would actually cause interest rates to go higher on the back end.

So just to put a bow on this, Eric and I think this there are all really interesting points to kind of challenge the idea that there's six trillion dollars of assets and money market funds just waiting for the FED to cut rates and then that's all going to be unleashed into longer duration bonds as well as into stocks. It sounds like you're kind of challenging that, and you're

Yeah, it's very, very succinct and much more eloquent than I put At least I think if you look at at fair value, we think for the ten years, probably closer like four percent.

We'd three eighty five right now.

So in a way, it's almost like duration is too expensive to buy more of, but it's not too expensive to sell.

We're kind of in that middle.

Ground, if you will, where tens, twenties, thirties, probably not a lot of issuance. Again, you did a good job of covering the auction yesterday if you look at the net participation of buyers across most auctions, it has not been foreign buyers. So who's going to be the marginal buyer of longer term paper. Probably not the usual suspects, if you will. So again, with a ten year at three eighty five, we think very valigant is closer to

To take this a step further, Michael hartnett Over at Bank of America is talking about swapping out commodities in place of bonds and the sixty four sixty forty portfolio because of some of the concerns that you're talking about. I don't know that you're going to say, you know, sixty should be all commodities or whatever it would have you. But there's a question of whether you start to on the margins shift more into inflation hedges in lieu of some of the bond holdings.

Yeah, at least I think it's a great point.

I mean, if you look at at the considerations on commodities when you're in an environment like this, again, we run relative performance money, and so you're giving up about thirty five or forty basis points a month if you're invested in commodities versus bonds. That's a pretty big hurdle for an investoral like us to think about.

Now. One of the things that has really not.

Worked, in fact, one of the few dislocations and markets right now is the petrochemical cycle. If you look at what's happening with with things like natural gas, which is effectively known as the widow maker for investors because it's so hard to trade, and also things like oil and other other components of petrochemicals, you know you're in an environment where the caring cost of being wrong is extremely high.

High, and that's the reason why some of maybe the forty percent of fixed income would go toward that, but not the whole thing when it comes to the sixty percent or maybe even higher. If you are bullish on stocks, I am wondering how you are cautious at a time where the risks are bifurcated in nature. What does that mean in terms of how you're approaching allocations right now?

There, Yeah, this is a space for you know, we are actually modestly overweight domestic equities and overweight equities overall. On our Portflois, we expressed that since late April in equal weight to S ANDP we were early, which means we were wrong. In the last couple of months we've been right, which is really again been a benefit. But we think this is an environment least when there's just

So we're cautious about taking really bold moves.

We do think that collecting income is an interesting thing to do for investors, so things like municipal high yield, things like non agency mortgages, even things like reinsurance and closed and funds. That's a good way to pick up carry and kind of wait for more specificity without taking a ton of directional risk, because there really isn't a lot out there from a market dislocation standpoint to pick through.

Besides, again commodities which just haven't done very well.

Equal Way has certainly been working just to put a bow on it all, Eric, we've been asking this question a week just to set us out for payros Friday this time next week, always just as vulnerable going into sept ten to sixth as we work against a walk a second or things changed.

You know, I think things had changed, Jonathan, in the sense of again that that the taps on the shoulders with the end carried trade positioning, those have already happened. Now again, investors have very short memories, and so we're not you know, naive enough to think that there isn't

The drive markets much lower.

That would be bad news, and that would be bad news.

Eric.

Thank you, sir Eric Friedman of US Bank. Have a good long weekend. Here's the latest, A little under two hours away from a fresh read on the US economy with core PCE and personal income and spending data due at eight thirty Eastern time. Claudia Salm of New Century Advisors writing, none of our output metrics point to a growth scare, and none argue against the FED rate cut either.

So I think this is what is always difficult with us consumers. We have a population that has very different, very different income and wealth and needs. And it absolutely makes sense that right now we are years into inflation that has been higher than normal, and it's going to hit people at the bottom hardest. So that's why it's so important in particular to keep the expansion going, to get the labor market, have the hiring rates, the jobs there.

I know. That's why one of the reasons why you happy with the shift from cham and Pale in the speech just last week. A question we've explored through this week is how much daylight that might be between him and other members of the committee. Do you see this whole committee moving in the same direction, or you're starting to see some division, some split, some cracks.

It's important for there to be differences of opinion and a robust and a bit among the committee. We should be most worried when they're all singing in the same song, right, Like, this is a really complicated question. Are we moving in the direction the chair Powell laid out? Absolutely? And I think you can even see that in the minutes from the last meeting before we started, before we got the July employment data that was so disconcerting. So I think

That's important.

That's why interest rates are high is to help get inflation down. We're making a lot of progress there, which means that can really pay attention to the slowing in the labor market and with maximum employment, what you want

Claudia said, get its footing back. Where do we have a sense that the labor market is losing its footing.

At this point when you see the job games have slowed. Most worrisome is the fact that the hiring rate so for people who are coming into the labor force, whether it's coming out of schooling in their first job or or you know that we have a larger immigrant workforce, at this point, it is harder for them to find jobs.

Claudia, you created the rule that so many people have been citing over the past few months from the Fed and Beyond the sum rule, which talks about zero point five percentage point increase in the unemployment rate over a six month period of time. We have seen that. What would give you much more pause in this upcoming report that we get next Friday, that maybe this is really truly a much more quickly deteriorating labor market than we otherwise had thought.

Is true. You one's got to take big picture view. A lot of the information we've gotten outside of the labor market looks pretty solid, right, So there's no one report that's going to be game changing in terms of how we think. Clearly, we're looking for the unemployment rate to maybe come back a little bit. Some of that was a temporary layoffs that you know, a blip in it. We want to see the payroll numbers stabilize things that look worse or we don't unwind some mutually is going

Claudia, were always lucky to catch up with you. Thanks for your time this morning. Clodia Sam of New Century Advisors on the labor market, on the consumer and a housing Tausei Advisory Group, maintaining and outperform rating following learnings, noting solid results and saying a reduced outlook comes there's no surprise against moderated expectations. Dan and joins us now for more. Good morning to you, Good morning, Thank you

We had twenty two companies this week. Don't tell me about a slow week this week. It was anything but slow. Because we now have the pulse of the consumer.

Let's pick up on that word slow. How slow are things things have slowed down.

You want to call it discerning, you want to call it more cautious, whatever it may be. July was a week month. August is definitely a little bit better. But the planning for the back half of the year has taken tick down. And you look at the fourth quarter where you have five fewer days between Thanksgiving and Christmas. Retailers have to plan cautiously. Some have called out, is that a three percent hit to sales in the fourth quarter because of those fewer days? It easily could be.

So this is the confusion that I'm having. You had personal consumption that was revised up in the second quarter. You have certain companies that are doing just fine. You see travel that still is going pretty strong. Where are we seeing.

The bulk of this weakness in a couple places? Look what you've seen with luxury spending. Luxury spending is slowed. You're not getting the international tourists come over. You're looking at discretionary spending in the department stores. Look at some of the Macy's numbers, the Dillard's numbers. They're weaker than expected. Look at urban outfitters. You have consumers that are intentionally

This might be a bridge too far, but is this a lot of people who are higher income searching for more value but the lower income families still actually really struggling.

In other words, are.

We getting a signal from the fact that off price places are doing well, but the dollar generals of the world are flat out of bax and can't get a break.

And it's a little bit of everyone. I mean, you take a look at the dollar generals, but look who's taking share. The Walmart's, the Targets, the Ross, the TJ's, the Burlington, they all did well. Some of the dollar stores they're cutting back on their raid and new store openings five below being one of them, so it's more competitive. You take a look yesterday Old Navy and that's search

Let's get alulu, why is it up in the pre market? Why is it running?

The reason why because when you take a look at the reset guidance, the stock's already been weak. It's taken into account this already, and frankly, the guidance they gave wasn't worse than some of the whisper numbers out there.

So it's beatable, which is what we've heard from other analysts as well. Let's talk about problems. Where are they having problems? Composition, execution? What is it?

It's the women's business. It is definitely a little bit of the execution of it. The newness in the product that's come out, and you can call newness in terms of colors, it's colors, prints, patterns. They need more of that it's going to come in slowly. They redid the merchandising structure, and it sounds like they'll be able to react faster and drive more newness into the assortment.

How low has the barrier to entry gotten? I mean we talk about competitors, we talk about Aloe or a Low or however you want to pronounce it. You've got beyond Yoga, You've got Vori, You've got some of these other brands that have more of the air of cool, and Lululemma no longer does. It's very sort of characterized in social society. Is like what it is, It's tight, it's a certain person, et cetera. Is this getting easier in terms of disruption that we're seeing more broadly.

I think there's always been competition. I think that all the competitors, everyone has their own personality, so to speak. I think of Alo as fashionable, I think of Lulu as technical functionality. I think as Sweaty Betty as affordable. So each of them has their own pulse, and you have to be able to cater to who stay in your lane and cater to it. The fact that Lulu didn't have that newness in women's impacted their ability to drive conversion.

There's is also a question going forward of how much is the weakness something that's just beginning at a time when we just got a note from Andrew Hollenhorst, a Vergity group talking about how he expects the savings rate to fall to an all time low. That essentially people are spending what they've got left. They've already spent up the pandemic savings. How much do you expect this to be the last gass rather than the weakest spot.

I don't think it's necessarily the last gasp. I think that their customer has money, it's where they're going to spend that money. Look at the experience versus goods element that's out there, the other thing that you have changing out there. Look at other categories that have underperformed. Look at jewelry. Jewelry has been a weak performer. So they'll go there. But they have to see something they don't have in the closet already.

You know, I think of when I think of Lulu Midtown uniform, I don't think a technical performance at all. I feel like that dined in the pandemic, didn't it.

No, I think that people are basically still wearing technical and functional. I think that some of Lulu's merchandise, particularly for men that ABC panned, that's showing up to work every day.

That was my point.

That was exactly it.

You picture the midtown uniform, you picture f leisure during the pandemic. You don't picture you know, incredibly, you don't picture Alvarez.

I sense you disagreed with it, but I just feel like there's been a real brand hit over the last few years that aspirational glosses sort of is off.

There's been more competition, They've gotten to a bigger base, so it requires more to.

Beat the bigger base. Got it, Danni, it's going to see you. Thank good to see you too, one of the best I know. Just incredibly busy week for you, so thank you. Thanks for dropping by any of TAOSI Advisory Group. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six