Bloomberg Surveillance TV: December 12, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie 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.

Peter's share of Academy Securities coming back with us, saying, bottom line, the FED cuts by twenty five at the next meeting. It should be a neutral to mildly hawkish twenty five basis points as the underlying data away from the unemployment rate based on back to back bad months in the household survey, is likely to be deemed the outlier. Peter joins us. Now, Peter, thank you so much for being back with us. Want to get a sense of

No, I think everyone really has these animal spirits. I think everyone's trying to look through this and say, there is a real chance that Trump cuts a lot of red tape, that he reduces regulation, that he promotes business. I think you're seeing stimulus from the rest of the world. I think at some point we might get worried that the rest of the world's going to slow down enough that it drags.

The US down.

But for now, I think it's just that excitement that kind of all this not in my backyard gets thrown away and we actually see progress. We see investment done, we see buildouts here, and I think that's real. And that's what's outweighing even the moving yields.

Well, it might be outweighing the yield and the move it yields, but what is behind that yield, that move and yields Given the fact that basically we're counting on a federal reserve to cut rates by twenty five basis points next week, and you got central branks around the world so that are chopping away as quickly as they can.

Are not going to see a much lower inflation picture in the US. Partly companies are front running some you know, tariffere so there's been buying on that. And if we are going to build things in the US, which I think there's going to be a push quite frankly, it's going to be more expensive to do it here then it would be elsewhere. Otherwise we've probably been doing it here already, so I think there's going to be some cost associated with that. There's going to be a build

Yea.

I wonder with the housing market in Miami looks like right now, with after that bitcoin surge, getting back to the central banks of it all.

Though on the way up on.

The hiking cycle, there is this fear of diverging from the FED because you want your currency to stay strong enough that you could continue to fight inflation. The opposite is happening now, and you have concerns from different countries about the weakness and their growth. Do you think that this is going to be a divergent cutting cycle that you're going to see other central banks that want to get out in front of the FED and have bigger

Yeah, I think.

They want to do that. I think they need to do that again. In Europe is kind of a mess right now. In that Germany, which had been the juggernaut and real the anchor and support of everything, they themselves are struggling right now. So that's going to leave the

You also said something moments ago, though, you said that the animal spirits are dependent on everyone believe in weak growth elsewhere won't affect the US. At what point does that change?

You know?

Certainly probably not this month because everyone's kind of very focused on the holiday season coming up. But I think as you start looking at annual in February, okay, like how long can we continue? And again today I think I saw a headline from you that I think is going to be a bigger theme again next year is byd is Now I think outpacing Volkswagen in Brazil. And my view has all long been that China is trying to buy time to make sure they can sell their

I think the European weakness plays.

To China, right because if the walls go up on everyone, China's going to have to find a place to dump their exports. When it comes to this idea of potentially where animal spirits are trying to maybe wane, do you want to look elsewhere places like China, places like Europe.

Yeah.

I actually think the Chinese stock markets someone interesting. It's sold off after Trump one, but I think something that's going to be a mistake because a I do believe that they really have to continue with the stimulus. They have to get their things going, and they're going to do everything that they can to help their brands and therefore their stocks. I don't think it's going to be great for global growth. I think there was an opportunity in Chinese stocks as a trade, not as an investment,

Become kind of more and more of a theme.

I think, you know, work from home is winding down. I think you know, the dog or whatever it's called, is one thing. The dog is very convinced that and I think rightfully, so that all federal employees are still working from home will be pushed into office. So I think you can see a resurgence in that and yields while they go higher. Maybe you get to four to fifty on tens with potential spike to five.

You don't go below four.

I think a lot of commercial real estate can do well in that environment if you're.

A traveler and not a settler. In terms of the China stock market, how concern is if you that Congressman Wald, Senator Rubio, potential embassador Jamison Greer have all called for decoupling of China and the United States.

You know, I think we should be somewhat concerned. Then, on the other hand, Trump supposing invites you to come to the inauguration. So again, I think everything with Trump is a little bit of a game and a lot of negotiations back and forth. I think it's in China's interest to remain as coupled as possible. I think long term we'd probably be better decoupling, but I think we'll get sucked into doing short term trades that actually favored China over us in the long term.

Can you get into that more because you have a really fascinating view that you've been writing about for some time, that Trump could go for what looks like a win with China but actually gives China an advantage in the US.

So we see all the problems that Chinese economies having right and US companies do not want to invest in their US companies are kind of running their factories at a minimum there. So China the only way they're ever going to grow is by selling their products.

They need to buy time to do that, right.

They're struggling right now, and I think they will come up with some deal that looks attractive to us and say, oh, this is perfect, this solves our issues, and then three to five years down the road will regret it because it'll give in China time to continue to build up their manufacturing, to build up their chip industry, which I

Can we talk about timeline for this? What does a longer term horizon look like?

You know, I think they can think in terms of decades, But to me and something like AI and chips, this is a three to five year thing where they're trying to play catch up.

They're aggressively doing it.

They don't have access to ASML or some of the high technology. But two things are going on. One, they're able to make smaller chips than we would have thought possible. They make them very inefficiently, using old machines to make those, but they are getting those. And then the bigger advances that we're starting to see in the chip industry are coming from packaging and how these chips are layered in

While we're trying to restrict it.

And on top of that, we're seeing how easy it is to get around restrictions.

Anyways, Well, and that's.

Actually what I wanted to ask you. What do you make of Nvidia expanding its staff in China at a time where there are supposedly these restrictions, and they're trying to find ways to maintain their presence and their business in the region.

And I think that's going to be a really difficult thing, and I do think companies like that will unfortunately face some pressure from this administration. I think, no matter what Trump would like to do from a business side, I'm a complete believer that some high level of national security

Potentially, this is.

A real issue, and I think there that's going to be a struggle for all the companies trying to figure out what can be sold into China because it has to be and quite frankly, I've heard about eighty percent of the chips we sell into China come back into the US in various products.

So it's not an easy answer. But this is strict.

I think we talked about the other day China or zav starting to try and restrict some of the dual use chips that have been making their way into the Ukrainian drones. This is going to be messy and I don't see any way around that.

Peter Shaer, wonderful to talk to you as always. Thank you so much for being with us, Peter share of Academy Securities. Here's the latest, President Elect Donald Trump naming and Ferguson's incoming FTC chair to replace Lena Kahan the Moon, raising expectations for mergers and acquisitions under Trump's second administration.

Well, I think, first of all, we are definitely hearing it from the investment banking community, and you know, Paul has somebody I've worked with for a long time, and he certainly knows, you know, what's happening in the markets. What we're hearing from clients is that deals they talked about eighteen months ago, a year ago, they are now to talking about, Okay, now's the time to do it.

Because one of the.

Concerns under the current administration is that even if you've got approved, because ninety eight percent of the deals go through is it was taking six, nine, twelve months for deals that had no anti competitive aspects to it. So there was a real concern that you'd get tied up in the process and it would sort of frees you from a strategic financial point of view. So the view

A distinct minority.

Is there a clear sight of what will get blocked that there is a certain type of transaction that will come into focus, whether it's foreign money coming into say a steel company, or whether it's say a tech company looking to pick up another smaller firm.

Well, I think we have to remember that even in the Ronald Reagan era, which was pretty wide open in terms of merger clearance and antitrust generally, you know, there were deals blocked. So anti competitive deals have been blocked in every single administration, and I'm sure we'll get blocked.

Now. Which sectors will they look at more closely?

Certainly tech, you know, healthcare to a certain extent, retail things of that you know directly impact the consumer. Those things are definitely going to get looked at very closely.

What do you see the appetitean for foreign companies and is it driven by this carrotenstick idea of potential tariffs or is it because they want exposure to US exceptionalism.

I think we were going to going to see a lot of inbound M and A from Europe and Asia, particularly Japan, even if Harris was elected. The drive is that, you know, the US is growing, the markets in both Europe and Asia are fairly stagnant.

So that's first of all.

The second thing is if you're producing, if you're selling in the United States, you want to be producing here because the costs and the potential disruption in the supply chain. You know, it becomes more difficult, So we would have seen it anyway, but it's going to be increased.

So what would have been your advice for nip On Steel wants to overtake US steal manufacturing factories continued to be in the United States, but both Biden and Trump said that they would block this deal.

I think that's pure politics. Pennsylvania was the big state in play, and that's so.

Maybe just timing. Don't do it around a huge presidential election with the number one swing state in.

Le Hopefully that still happens, but we'll see.

I just wonder for companies that are or private equity are looking abroad and companies have international soply chains right now and they're faced with a potential reality of tariffs changing the entire cost of business. Is that putting deals on ice right now or things getting a second look because of the risks in twenty twenty five, You.

Know, I think people have been focused on supply chain issues, not necessarily because of tariffs, but since the pandemic, and that's really when we saw the first disruptions, which a lot of it is what led to inflation. So companies are very much focused on that. But you know, I think it's a driver of transactions as opposed to an impediment to transactions.

One of the other hopes for a driver of transactions was just a lower rate environment, and we've got that to some extent. But there's a fear right now in this market that the FED can only go so far. Maybe it's a cut next week and then a pause. What does that do to deal activity?

You know, first of all, interest rates are historically at historically low levels. I mean, we think about the last couple of years when they're extraordinarily low, but if you look at the Japanese economy where they've had close to zero interest rates and very stagnant business activity. I think if the economy is growing and you can build in a four percent interest rate or whatever, you can make

So I think that's a driver as well.

That said, valuations will basically take a hit as a result of a rate being higher now than say when companies got founded or were bought out by certain private equity companies. And arguably this is the reason why we haven't seen more exits, why we haven't seen more activity. How much will there be a reckoning and valuations even if some of these deals get back on the market.

Well, you know, one question is whether or not companies are going to be valued much longer term, So not looking at sort of the next twelve months, but really you know, two four or five years out, and so to the extent that you're doing an acquisition, I think you're going to be prepared to look at it much longer term. In terms of exits, I know, talking to you know, people in the VC and private equity world, they've not had a lot of exits the last few years.

And I think they're also.

Whether it's through sales or IPOs. And I think the IPO market's going to be hot as well. That's not my area, but I think it's going to be hot.

Paul Taubman said that it's going to be the fastest semina market in ten years.

Do you agree, yes, Frank Kikuila.

Thank you so much for being with us. Frank, Gequila, Sullivan and cromwellcome joining us now from JP Morgan Private Bank is Sam z Pas. He sits here and watches all of these headlines crossed. Sam, what's your impression.

I think you guys have really nailed it.

All of these central banks, between the FED, the SMB, and the ECB now are trying to ensure that inflation stabilizes a two percent, but how they're going about it is completely different. The FED is thinking about how do they inch down towards neutral, keeping policy restrictive enough because the economy is in a really good place and they

Does it go far enough because Robin Brooks of the Brookings Institute has been arguing that Europe desperately needs a weaker euro, that you're not going to get instituted anything that Droggy outlined of Europe coming together and spending more. The budget stand off in France shows that they have very little fiscal room and because of that they should be decoupling from the FED at this moment and be doing larger cuts. Do you think there's any credence of that argument.

Yeah, I mean whether it's because you know, I don't know if a weaker Euro is going to actually spur innovation and investment, which is what that Droggi report made.

But clearly the economic trajectories are very different.

The FEDS or the US's is arguably tilted to the upside. The economy is in a really strong place. European economic economic outlook is definitely tilted to the downside when it comes to growth. I don't think the Euro is the main policy tool there. I think it's interest rates. But there's room to lower interest rates, there's room to move further into accommodative territory. That's going to be the ECB's priority.

We do see the euro dropping after this decision below one point h five against the dollar.

Do you see parody next year?

Given the fact that it's a weaker growth environment in Europe and on top of that they're dealing with a Donald Trump administration, we definitely.

Wouldn't rule it out.

In the private bank, the lower end of our kind of euro range that we're looking at in twenty twenty five is one oh two. But you know, as an FX strategist, I know the difference between one oh two and parody is you know, going to a few days,

Given the political process we're seeing in France and Germany, given the fact that they are dealing with a tougher environment in terms of potential trade wars in twenty twenty five, the ECB is saying they're going to follow data dependent meeting by meeting approach. Is that correct or do you think Legard she comes out and gives her rhetoric and answers questions she's going to tilt war to the dubbish side.

I think the most interesting thing from the press conference that I'm going to be watching is so they've gone by twenty five basis points today, but the market is still pricing in about a thirty forty percent prob ability of a fifty basis point move at some point either in January or in March. Whether that there's some nod to the fact that that could be on the cards. They've so far been fairly let's say, cautious and guiding

Should we be talking about negative rates again like the SMB is.

So I would say that what they said. Just to be clear, is that, as you said.

No one likes them, but they're there and they work, particularly for a country that is really using let's say the currency as their main tool for monetary policy. I don't think that the SMB is going to go back into negative rates unless the ECB kind of forces them.

Right.

Think about when they went into negative rates last time. It's when the ECB went negative. The SMB felt like they needed to respond. I think that would take not just economic weakness in Europe to get the ECB to think about that, but really whether you want to call it a crisis or really deep recession if that comes to fruition, I have no doubt that that negative rate tool option is there in the European Union.

They've used it before.

Just to underscore that, the ECB dropped the reference to keeping rates restrictive in this latest memorandum, in this latest rate decision, How big of a shift is that, just to underscore in their rhetoric in their approach what previously they've been talking about inflation is really the pre eminent concern.

I think this is definitely the I mean, I think everyone knew that they were going back to neutral the market is already pricing some probability they go into accommodative territory.

With this divergence potentially widening, at what point do we have to worry about a strong dollar becoming an actual disruptive force in global markets.

So it tends to be the not just the strength of the dollar, but the magnitude of the moves. It's when you get really multi standard deviation moves over a month or two or three, that you start to see other central banks, whether they be in emerging markets or others, start to respond, whether they be through outright EFS intervention or trying to you know, not cut as much as maybe the market is pricing.

I don't think we're there.

The dollar is not as strong as it was in the second half of twenty twenty two, it's not as overvalued either, and I think again the dollars just kind of the byproduct of this divergence, and so at least at the private bank, we're continuing to lean into it.

We don't think that this strip is.

Over samzz If of a JP Morgan Private Bank.

Thank you ever.

This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, an gie 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.