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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 our soft story, stocks rebounding from a three day global slump, Jim Carron and Morgan Stanley saying the self is a correction rather than the start of a bear market, writing, the magnitude is not unusual, but the speed at which is happening is. As long as we have a soft landing, then we think the self represents a reset of prices, a buying opportunity. But cautiously patiently, Jim joins us. Now
cautiously patiently, Jim, let's get into this. If we learn more about positioning than we did about fundamentals in the last couple of days.
Absolutely I think that this move in the market has a lot more to do with positioning over leverage in some cases volatility then it does the economic fundamentals. And look, you were just talking about it on the show. I mean, we have a yen carry trade that's going through, we have you know, other crowded positions. Now we have to recognize that the markets were in a period of very low volatility. I mean the Vicks you know, just a month ago was somewhere around you know, eleven or twelve.
Twenty four hours ago it went.
To sixty five, and effectively that is a significant move which causes people.
To de risk very quickly.
So many the low volatility period allowed people to build very crowded positions and actually get rewarded for them.
So I think what stops this, and this.
Is always the question mark, is when an asymmetry starts to appear, meaning that at there's more upside risks than downside risk, or the upside and downside risk components bounce.
Where is that level in the market.
It's hard to say, because, like you were saying, that there are many of these positions still probably need to get unwowed. So yes, we may have a reprieve today. Yes, we may bounce back today, but that only may give people the opportunity to sell again in order to get their positions and their volatility more squared. Even if you look at the put call ratios in the equity markets and everything, we're talking about moves. I mean you said
it earlier. I mean we had nineteen eighty seven, you know, for the Nikai, you know, type of the move, and then two thousand and eight. This is like the stock market crash of eighty seven. This is a financial crisis in two thousand and eight. These are the types of moves we're having today. I don't think the economic fundamentals justify nineteen eighty seven or two thousand and eight, to
justify these moves. And I think what people are looking at is they're looking at these moves and they're extrapolating from these moves a fundamental economic story. I think the fundamental component of this is very slow moving. Yes, things are slowing down, Yes, policy rates are high. Yes the Fed's likely to cut rates this year, But I don't think it necessarily derails you know where we were before. So I think that this is somewhat overdone. Doesn't mean
that we can't go down. But if it does, I still think that we.
Are in more of a secular bull market. This is not the.
Start of a bear market, and we are going to be looking at opportunities to add to risk. In fact, what we're doing on our team at Morgan Stanley Investment Management is we are going on a you know, you know, we're creating our list right We want to shop on sale. We want to find many of the positions that we weren't able to get into that have run away from us to high prices, that might be on sale and
might be looking interesting. So there are opportunities out there, but you've got to be cautious, patient, don't do it all at once.
Let's unpack some of that. Then, what's some sale right now has been on sale over the last few days that you've dipped a toWin soup, but you like him as starts to.
Well, I mean one of them has just been broadly the you know, the Nikai Japanese equities. I mean that, you know that's one and now we were along that now you know, don't get me wrong, I mean you know we got along that in March of twenty twenty three, so we've been riding that up quite a bit. But you know, like anything else that goes up, we weren't
long enough. So you know, with some of the set back, these are things that we started to take a look at other things like some of the semiconductor stocks and and those and those sectors start to look start to look relatively interesting to us. Looking at factors, so thinking about quality. So we like to think about buying quality
but at a reasonable price. So this is you know, these are balance sheet factors, strong balance sheet companies and in high quality factors, interest coverage, things like that are are still are just looking more attractive today, where even if we want to broaden out our portfolio, diversify it more away from large cap and big tech, I think that I think that there are some some good sect sgments of the market and some good quality factors that
are out there that actually represent you know that you know that can actually represent an opportunity. Now, what I do think is a little bit overdone though. To fund some of this is a bit of the move in the interest rate markets. I think the bond yields have priced in, you know, FED cuts going down to four percent, maybe even maybe even three and a half percent, depending on how you want to look at it. I think
the bond market has moved quite aggressively. And you know, even if you look at the bond market from point to point, if we if we look at the start of the year this year, ten year treasury yields are about four percent on January first, today they're at three eighty five.
Okay, So there's.
Been now clearly there's been moved up and yielding between then and now it's come back down and the speed of the move. But point to point, the bond market is actually relatively steady. It's it's giving you, it's giving you a nice little coupon, and returns are up around three percent in fixed income, which is okay, right, you know, and this is kind of what you want. But the point though there is that most of this right now, most of the return is now coming from is now
coming from the yield move lower. And I think that that might be a little bit on the overdone side. So we may fund some of our equity positions by selling some of our bond positions because interest rates went down so much.
And the price is appreciated quite rapidly, so okay, So if we're in the secular bowl market for equities, bonds have moved too far to three point five? What is more reasonable, Jim? What sort of an analogous trade to what you see on equities?
So I mean, you know, the way that I kind of think of it is as a range type of trade. So for me, the level fifty two hundred and the S and P five hundred, you know, represents the beginning levels that you would want to start to think about buying. And the reason I say that is, I hee everything off of what I believe is a level that's more
fair for equities today. If I look at the SMP of around fifty three fifty, and that's roughly nineteen and a half, you know, pe that's a nineteen point five multiple on two seventy five earnings pulling forward from twenty
twenty five. So if I think about the overshoot that we've recently had, you know that went up to fifty five hundred, fifty six hundred, and I think about that more symmetrically, it tells me that fifty one fifty to fifty two hundred on the downside, from that fifty three to fifty center actually.
Starts to look relatively attractive. So today it would look like we're a little above that.
But like I was saying earlier, with this rally in the market, what this may do is it may give some of those positions that still needs to be unwound the opportunity to sell it to some of the strength, and they could push prices back down. But that's where the asymmetry begins around fifty two hundred, around fifty one to fifteen in the S and P five hundred.
I believe the upside potential for markets relative to.
The downside, even if you have a deeper correction, inequities becomes more symmetrical. So that's where I start to pull out the buy tickets. And that's what we're looking to do at this point.
Now.
If I thought we were in a secular bear market, and if I thought this was going to be the start of something really big now, then I wouldn't do it. I mean I would think that, you know, the downside has a lot more room to go, But that's not where we are in my view. I think we're you know, the economy is cooling, it's not collapsing. Yes, you know, earnings may start to slow as forecasts come out, unemployment great rises, there's less strength from the consumer.
Certainly, that's going to be a little bit of a drag.
But you know, in many cases, I still think that the jobs market is going to maintain, you know, relative strength.
The people who are very bearish.
On the bond, I should say, on the equity markets are people who believe that the unemployment rate is going to five six percent, right that we're going to have this major adjustment higher.
There's going to be this big layoff spree that's going to come through.
Right now, layoffs aren't actually showing any real meaningful acceleration, yes, you know, I mean temporary workers aren't being hired, is you know, rehired as quickly. And there is some softening in the labor market. That's good for the FAD because it lowers wages in lowering wage inflation keeps inflation down. But I don't think necessarily it's an overall collapse in the market. I view it more as a normalization, and we have to draw that distinction. Is this a significant
negative change or are we just normalizing? And I think we're more or less.
Normalizing at this point.
But there's going to be overshoots to the downside, and I think those overshoots can represent buying opportunities.
And yet, Jim, here we are. I want to squeaze this in because I think this is so important. You say that what we've learned in the last few days is we've learned more about positioning than we have about fundamentals, and I think a lot of people might agree with you. I just want to reflect on what another gym said
earlier this morning over at Deutsche Bank. Jim read what a once in a lifetime GFC period could not do, and a liquid August day in twenty twenty four with one band weather related pay print for fuel did with Sumi's for a period of time yesterday. What would have happened if we'd seen a negative payroll print? Jim, I've got to ask this because I just wonder how franchile
this market actually is. So if you're saying this is just normalization and nothing nefarious, I wonder what happens to this market when we do have to confront something more nefarious. Just how unstable are things?
Jim, Yeah, listen, I think it's a good point.
I mean, if we have a material deterioration in the data, then I would argue that, yes, I mean, maybe there is something bigger that's going on. So if I compare that to the you know, to many of the crowded positions that are likely still out there, you know, look, you know, we could have another five to seven percent downside correction. It's not uncommon to have about a ten percent correction in the equity markets. I mean, this is kind of a normal thing that you know, that happens
on a regular basis. But but that you know, I think that kind of misses the point. I mean, if we start to get something inex of a twenty percent correction, that's typically.
The signal where you know where a bear.
Market might be starting, or there might be something bigger that's actually taking place.
But right now, when you look at.
Corrections eight, ten percent, eleven percent, you know, which is what we've which is what we've roughly had over the past forty eight hours, let's say, you know, Monday and Friday.
This isn't something that is overly unusual.
And I think that we as investors need to be patient and we need to take this in.
Stride a little bit.
And that's why I keep going back to this right We have to ask ourselves a fundamental question. Are is this the start of something bigger? And is this a bear market? Is that what's happening right now? Are we going to see an absolute collapse at this point in sudden stop and economic activity? Is that what's happening right now? If it's not, then I still think that the bull trend is intact and we want to be able to find places to buy.
Good at Jim enjoyed this.
Thank you, said Neil Data of Renmack right in the following. The time for debate is over. The FED needs to recalibrate policy now. Our call is that the FED delivers a fifty basis point cut in September, with at least another fifty basis points of cut spread across the next two meetings. Going more in September makes up for not going in July. Neil joins us now for more. Neil, I said the Fed's being cool, calm and collected. Some
people watching might say cool, calm and complacent. But you say the following, and I think you note in the last week following payrolls on Friday is an important one. You said they've stepped on a nail, not a bed of nails, and you went on to say this is easy to fix, Neil, Why is this so easy to fix?
Well, thanks for having me on, John. I think it's easy to fix because there's nothing structurally wrong with the US economy. Everything that ails the economy is a function of tight monetary policy. I mean, nobody's talking about a troubled asset relief program. No one's talking about a resolution trust corporation. So, you know, I think that that's important
to keep in mind. What we're dealing with is simply a function of the FED keeping rates too high, and that means that lower rates can be the solution to what ails the economy. You know, I think for the FED it's important. You know, they talk about not wanting to make one data point too important, but it feels like that's what they're doing. I mean, you already see this with the debate between fifty or twenty five in September. Well, you know, if the job's number comes in strong for
the for the August reading, we'll go twenty five. But if it does what it did last month, will go fifty. I mean, that's that's ridiculous. We already know the revisions to these numbers are negative, right, So whatever the number is, it's going to it's gonna be weaker, you know, in hindsight. And the unemployment rate continues to march higher, and we know that the momentum under the economy is weak, and we know that there's an asymmetry with respect to how
you know, firms deal with bouts of market volatility. Higher market volatility spooks them a lot more than lower volatility makes them feel good typically, So you know, I just think they I've been saying it, they need to get on with it. But I think the longer they wait, the more they'll end up having to do, which is why I say that not only will they go fifty, but I do think they'll go at least fifty more in the final two meetings of the year. So that's
sort of how I'm thinking about it. But as I say, I mean, I do think the markets will respond reasonably well to lower interest rates, and I think that that will, you know, help stabilize the economy.
Credit to you, Neil, You've been calling for this for a while. I just want to pick up on an important distinction I hear from you loud and clear, what you think they should do do you think they are dependent on that job support in August on going twenty five versus fifty? Do you think it comes down to that?
I mean it seems that way. Look at the Wall Street Journal this morning. You know, they had an article talking about how the next employment report is going to basically determine whether or not they go fifty or twenty five. But you know, Powell has also talked about how it's the totality of the data. What if core inflation comes out very soft in the next report for July. You know, I think that there's a reasonably good chance of that happening.
Giving what we know about the deflation in cars, the cracking in housing, rental inflation, and the ongoing weakness and non housing services, there's good reason to think that we'll get another dud on core inflation. So now not only is the employment figures weakening, but core inflation is converging on to two percent more rapidly than they thought after the first quarter. So it's also about the outlook, right John, I mean, what's the upside case for why employment will
pick up we get a weather bounce back. I mean, it's crazy housing is slowing. If you look at the number of new homes that have been sold that haven't been started that's down over thirty percent against last year. That's going to bleed into single family residential construction. It's unlikely that we get the kind of inventory investment rebound that we got in Q two in the back half
of the year. That's going to weigh on manufacturing and total hours worked in manufacturing already slowing over the last three months, and the fact that the labor markets have slowed means what incomes are slowing, which will take some of the upward momentum out of consumer spending, which the FED has been optimistic about. So it's not about just waiting for this data to come out. It's also about
thinking about what the outlook might be. You know, in my mind, the data already justify a fifty basis point move. I mean, the fact that the unemployment rate is up to four point three percent, that's thirty basis points higher than where they think it's going to be by year end. You put that into a standard kind of tail rom model, you get at least an additional sixty basis points worth of rate cuts. So it's not about just the data
as it's come in. Though they keep wanting to make it about that, it's also about the economic outlook, and you know, I don't think there's really a right tail for growth. I think the distribution of risks is skewed to the downside, and it's important for the FED to neutralize those downside risks by easing monetary policy.
Yet Neil mary Daily yesterday saying that risks are equal between employment and inflation. That does not sound like a woman who's ready to cut fifty basis points in September.
Well, so I said, And I mean, you're right, and I do think the FED has a role to play here and trying to get on the right side of the eight ball. But what's happening in the markets? I mean, leaving aside the sort of unwind of positionings and things, I mean, the big move in yields happened in the two days following the meeting. Why because the data was weak. You know, the risks aren't balanced. As much as they want to say, this is really about them. It's not
about them knowing something the market doesn't know. This is about them realizing something the market and most investors already do know. And that's why I think you know you're in this point now where if you get bad data, it's going to lead to bad market outcomes, because anything at this point that looks weak in terms of the economy will kind of fuel these bets at the Fed's behind.
The curve bad news.
The markets already know. The markets already know that the that the risk aren't balanced. Whether they say it or not is another matter.
Just waiting for the FED to catch up. Neil, it's going to hear from you nil down to that. Td camon raising its price target on shares of Walmart eighty from seventy five, and miss Oliver Chen saying the company is well positioned to continue momentum across a leading retail tech ecosystem that stuck is up by quarter of one percent, and we're lucky. Oliver Chen's in a studio with us, Oliver, good.
To see you, sir Green being here. Thanks John.
Does Walmart win and everyone loses? Is that what's handling here.
We're excited about Walmart because it's both defensive and offensive. On the defense side, it's a leading grosser every day.
Low price is a key strategy.
On the technology side, there's a lot happening to compete against Amazon, including digital marketing as well as advertising and marketplace models and platforms. So thinking about technology married with the basics of retail and features such as curbside pickup and getting a higher household income customer, and it's a low beta, defensive idea in this very choppy market.
I wonder as people trade down, if they trade down even more, and how big of a thread is you know, Teamu, she In some of those kinds of names to Walmart's business.
Yeah, you're bringing up a great point.
So consumer discretionary, unfortunately has been in a recession for.
Over a year.
Timu and Sheen are spending a lot on advertising that's impacting Amazon. And the consumer discretionary trends are negative at both Walmart and Target, but it's a smaller percentage of total because Walmart is about sixty percent food. So we're watching that and that's been happening. Target is more vulnerable. Target is also less expensive at thirteen times relative to
Walmart at twenty five times. But there's a revolution taking place ultra fast fashion and what these new business models are doing are something the whole retail industry is watching.
Do they have the capability to catch up to that to go on these trends that seem to change week by week of what people tell you to wear on TikTok.
Walmart's getting more fashionable, doing movies and upgrading the fashion.
They have a huge opportunity to.
Sell you more than just basics, more than just underwear and fashion. They're also upgrading private labels, so new labels like better goods as a cauliflower crusted pizza.
We're just looking at that.
And so we're seeing Walmart really intensely focused on merchandising.
That's a big positive too.
Also, they're getting a higher household income customer and we see that in our survey data too, because you don't even have to go in the store. You can get on the marketplace. You can also get Apple.
Products and Burberry Goddess the fragrance.
So we're seeing this whole transformation with merchandising getting more competitive, but Walmart really rising to the occasion.
If Walmart is taking some of these higher end consumers, where are they leaving to go to Walmart?
Well, they're taking share from many places. So I think trade down is occurring as our customers think about value and appreciate value. What's happening generally in supermarkets. It's quite fragmented, so the most pressure is at local chains and non national and others.
Are we starting to see this stress migrates a high income earnest because we're starting to see some bad results from luxury and I'm not convinced it's just execution from the guccies of this world. It seems to be pretty broad. What are you seeing from the luxury pliers?
Now, we're cautious, so our only big idea here is LVMH, which is a ninety billion dollar revenue company. But the big caution factors and the property market and that customer is so important. The other factor correlations are quite tight to the S and P five hundred performance. So the negative headwinds from the wealth effect on this pullback are going to be something to watch for sure. And we
see weakness and bridal trends, so we're cautiously optimistic. However, we're out this morning with a note on retail's reset, and we like structural long term growth opportunities on the pullback, including LVMH, ELF beauty and Alta.
Beauty has been a good sector.
I'm just thinking of certain consumers, certain companies that have started to pivot to premium over the last few years. It's always heard about coming down to the pandemic and which company is going to be caught offside the demands just not going to be there.
Who's vulnerable?
Well, we're still watching caring. You know a lot about the Gucci brand. That's a brand and transition, and we've talked about this before. Stealth, wealth, quiet luxury.
These no logo.
Trends, they're really working. There's winners and losers. We're most excited about LVMH, the powerhouse brands Dior and Louis Baton. They spend ten billion dollars in marketing that really matters. And Arna really protects his brands for the long, long term with very little discounting. Gucci's a brand and transition,
so we're hopeful, and Cardier we're not recommending Richemont. But hard luxury has been more timeless generally, and thinking about timelessness is a key factor of what new generations really care about.
Do you like LVMH because they have a service component. It's not just luxury goods, they also have hotels.
Yeah, I think the future is experiential and thinking beyond just collecting stuff. The core of the business is fashion and lever leather, but service and these fabulous stores that are much like churches around the world. To these brands are part of the magic. And luxury does have to be and offer you really that post purchase, pre purchase and the whole transaction being very special to really overpay a lot for great stuff.
People not getting married. What's up with bridal trends.
It's been a tough compare so Brail's been tough, and that's been tough on Tiffany.
I was just going to say it all happen. I mean, people will love.
Each other and get married, Thanks so much, But people are younger generations are generally getting married a little bit later.
Yeah, it's something we're watching.
In many ways to express love, from travel to other things.
Very true. And the blueberry pound cake at Costco. We love Costco. That's another way of expressing love.
People will still love each other. Thank you. All of a chance A TV count This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, angio 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 bloom Blog, Terminal and the Bloomberg Business out
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