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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortenn. 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.
Frend Judy of Northwestern Mutual Wealth Management joining us. Now, Brent, what's your first reaction to the CPI print. How much does it color how you see investing next year and the backdrop for the FED.
I think it certainly helps the parts of the market that you mentioned before, small caps that have been harmed by higher rates, and so if you think about the economy the past few years, it has certainly been bifurcated, as has the market. It's been narrow both in the economy and the markets where you've had heavy lifting done
by a few stocks tied to higher income consumers. And the AI theme I think as you look at twenty twenty six, we do see broadening where you see small caps doing better, where you see the average SMP stock doing better. I think it's a risk management tool, but it's also in twenty twenty six a return enhancement tool, and so that's my first thought. My second thought is what's happening underneath in the economy when you see inflation pull back this much, how the week is actually demand?
And you mentioned the labor market, which I think people are giving coastal clear because of non farm payrolls being around sixty thousand, which I remind you they were overstated by seventy thousand in the data going through to March of this year, and the thunder Reserve chair Palell mentioned he still thinks they're being overstated by sixty k so they are right around zero, and that's where I think there's some risks still out that are out there.
Do you think that the market response that if this gives the green light to cut rates, then that's positive for equities is correct? Or do you think that it's coming more from the labor market weakness that you were just referencing.
I think it's positive for a broader set of equities. That's where I think I come back to it. No one knows exactly what's going to happen in the next
six months. I think forecasting is always difficult, but there certainly is this odd kind of mix of policy that is out there, and I think you can see that through the Federal Reserve eyes, where if you had all nineteen voters voting, it would have been twelve to seven, and you see those descents, And that's where I just think it's hard to figure out what's going on in
the near term. But if I think about the long term, I do want to pay attention to valuation, and that's where I go back to those areas of the market that people have largely ignored. They haven't done as well because of the impact of higher rates. I think, pushing forward in twenty twenty six, you have valuation with you, and you have potentially the impact of rising earnings in those parts of the market for the first time in a few years.
Right, let's have some fun here with counterfactuals. You've opened the doors, so I'm going to drive my truck right through it. You know, I'm very curious if we'd gotten these data before the last FED meeting, how that conversation in the Equos building would have been different, if at all. I mean, we talked a lot about this being an insurance cut. There was certainly a lot of questions about whether the FED should move that or wait till January.
Do the data that we've got today give you any sense that it would have come the outcome would have been different last week had FED officials gotten them.
Potentially, But I don't think people's concerns about inflation longer term are going away. This could be a certainly tied to the government shut down with inflation coming down. It could certainly be tied to labor market weakening. Look, I think inflation is a longer term phenomenon. We have not yet returned to two percent. The FEDS dot plot doesn't show it returning till what twenty twenty eight, which is
seven years since. And this is where I think there's concerns about what happens next year when stimulus gets layered, on, what happens next year when we get a new Federal Reserve chairman, and what happens longer term to help pay back some of that debt. And that's just where I think inflation probably still is the longer term outcome, and that's where I think the concern of some of those people on the Federal Reserve would not have gone away.
Perhaps you would have swayed one or two more people, but I think there are still legitimate concerns and questions about do we get back to two percent inflation absence some sort of economic contraction in twenty twenty six, which no one is pricing in right now.
Brent.
The overlay here, of course, is this AI story. We've been tracking that day in and day out, all the ups and downs. Certainly micro on the latest kind of chapter in that narrative, we heard policymakers engaging more with this issue of productivity. What this is going to mean for the economy or could mean for the economy going forward.
How are you thinking about that in light of what you're talking about here, the kind of the persistence of inflation into twenty twenty six, the challenges facing this US economy going forward.
I mean, we'll see. On the productivity aspect of it, I think companies are still trying to figure out how to use it to increase employees productivity, and I think that's a prime question as you head into twenty twenty six, I think the reality is you are starting to see it move through different parts of the economy. So it started out in the picks and shovels, I guess, and
now it's moving along to companies like Micron. I eventually assume it will do much like the Internet did, which has increased the productivity and efficiency of all companies who actually use it. And so that's where I think you've seen winners and losers change. I think you will continue to see that in the future. And that's where I think anyone investing solely in AI right now, we're concentrating their portfolio, and it is taking risks they don't need
to be taking. I think there are opportunities as it continues to shift, as it continues to spread through the economy, for those companies and stocks that have previously been left out to start benefiting from it. And that's where you saw this broadening in two thousand through two thousand and seven.
That occurred post kind of the concentration in nineteen ninety eight nineteen ninety nine, which is eerily similar to today, where a few stocks did the heavy lifting for a few years, people concentrated in those unfortunately, and then the game change going forward, which I think is what's going to happen as you push forward into twenty twenty six and.
Beyond, stay with us Mulblomberg surveillance coming up.
Off to this, Eric and a jeriot of Ubs writing Biggs might be more motivated to close larger deals ahead of any potential shift in.
Power in Congress.
The first half of twenty twenty six could be a robust time for deal announcements. Erica, I'm so pleased to say, joins us now, Erica, great to see you. I'm not saying that open Ai and Vidio are going to merge, but there is this feeling that there is an acceleration in the deal space. Just how much pipeline is there behind that.
I think bankers are not going to have a fun Christmas season. I think they're going to be at their desk working because I think twenty twenty six is going to be the year of big you know, you know, I cover banks, so whenever we talk about M and A, we think about regional banks merging for synergies. But given the deregulatory framework, and given that you do have the midterms,
a sort of an important waypoint in time. You know, I think you could have banks and other companies across the space really thinking about where their strategic holes are and addressing it that way. So I think it's going to be more than just Okay, we're going to do deals to cut costs. I think they're going to use this as sort of a you know, once in a generation opportunity to redeploy capital in a very specific strategic way.
So because a lot of the deals we've seen have been really big, I mean, whether it be an IPOs, the medline IPO coming on the market earlier this year, with EA, the huge amount of numbers that are being put to that, whatever is going to happen with Warner Brothers Discovery. Maybe we add that in that whole hot mess of potato in with that too. How much of this and the resurgence of deals are about big size deals versus volume of deals.
I think you could get both right. So, first of all, the sponsors haven't really you know, exited much, so we're
waiting for that. You know, the market is at all time highs, breads are at all time tights, so it feels like now is the time and I was here last week when I had this analogy that this administration was going to put lipstick and contour on this economy to get it through the finish line for you know, to you know, through the November, you know, midterms, right, and so you could have sort of also a macro backdrop and maybe we get one or two rate cuts. That's quite favorable for this environment.
By the way, can I just say we should only start using makeup metaphors and no more baseball metaphors, no more innings, only lift sick in contour. I'm absolutely on board with that. Erica. How much of this though when it comes to strategics versus private capital, Because to your point, they're still sitting on a lot that they need to exit.
Are they willing to take a discount or is the environment gotten so good that things that they may be overspent on twenty one in twenty twenty two they can sell at a price that they agree to.
Well, I think you still have a pretty significant valuation disparity, and I think you also have you know, your deployment of capital is not going to be as you know, those investments are not necessarily going to be as good as those that you're trying to exit, right, So I think it's going to be, you know, continuing to be a challenge. But nevertheless, I think in particular, I think the advisory pipeline is going to be is actually quite strong, and you had the government shut down, so the fourth
quarter is going to look a little bit light. So that's going to have the effect of pushing a lot of these announcements into the first quarter. And so you're you know, every sort of Sunday evening or Monday morning is going to be boom boom boom in terms of announcement. I think when we kickstart the year.
Talk to me a little bit more about the financial m and A on the strategic side, what are the strategic priorities of an M and A for for banks at this point if it's going to happen in the first half of next year.
So scale and completeness, okay in my opinion, and additionally an edge in tech. So for example, you know, it's pretty clear that scale is getting to be even more important given the technological demands, the investments that are needed in AI and the like. Right, So that's number one. You know Number two, you know, you work at a
company that's very diverse for example, Right. And so the whole idea of a booming money center, complete money center bank, I think is you know, highly subscribed by the market. So let's say you're or an investment bank, maybe you're seeking more of a wealth aspect or you know, wells Fargo you know has you know mentioned potentially expanding in growth areas if it were appropriate. So these are sort of the strategic you know, points that I think are going to be addressed in the new year.
A lot of people are very excited about financials at the same time that they're very concerned about some sort of glut and private credit, some sort of excess that could potentially come to roost in twenty twenty six.
Is there a dissonance in this the.
Idea that people think that there is no credit risk in banks, but there is full credit risk in private credit.
You can't have an explosion without getting shrapnel, right, So I would say a couple of things. Number One, everybody is hyped about bank stocks, but bank stocks rarely outperformed the S and P two years in a row. Right. And when it's happened, it's happened on the back of a recovery cycle, right, think GFC or post the dot you know, the dot com bubble, right, So the bar is high. Second, we have to watch this sector rather than just say, okay, there's something you know out there
that we have to be nervous about. What do I mean? Is there froth and data centers is their frauth and you know other ads. So it's really a sector issue rather than structure. So really it's going to be you know, right, what the banks have done is they've indirectly lent to
financial institutions that then lent to the companies. Right. And we saw in the matter of the you know, First brands for example, that when you have you know, an explosion, you know obviously there's fraud, the banks will catch some shrapnel. So we'll see.
Well, Tom toierpoint from this point, I mean, how much are people understating some of the credit risks here given the concerns about the likes of Tricolor, our First Bryant brands.
I think what Eric is trying to drive out here too is the important piece of this. It can't be just private credits the issue and not the banks. I mean, let's just acknowledge that up front but as you're moving through this fraud, I think this the way you made the comment about the fraud is when we look back in history, guys, fraud is a bankruptcy. It's not a oh,
it's fraud that gets an asterix like we have. If we have these types of problems that are going to surface, I do think the banks will get tied down to that. So maybe Erica last question, as you separate these, which banks are best positioned into twenty twenty six if we were to hit a default cycle, just the well diversified banks or is there something to that were an angle that you focus on.
And by the way, it's not a coincidence that Tricol owned First Brands. We're in the same sector, right, So this this goes back to what I was saying. It
has to be a sector. Look, I really like Bank of America here, right, So all the things that you know, perhaps was a negative or Bank of America to directly answer your question, not growing as fast as others, you know, being a little bit more conservative in an environment where you know, there's a little bit more uncertainty, and maybe we are just band aiding the ACCO, you know, I think they could potentially perform well, and the valuation is
you know, not all that demanding. You know, a company like you know, Capital One. You know that lower end of the K has taken hits already, right. I Mean, we've talked a lot about the K shape economy, but who has been dealing with inflation since twenty twenty one. It's been the lower end of the K. So I think that you know, those two stocks that really well.
For twenty six stay with us multile IMPEG. Savannah's coming up off to this.
Joining us now.
Henrietta Trace, director of Economic policy research at Beta Partners. Henrietta, what was your take from the announcement at the speech last night.
Well, it definitely wasn't about the Christmas decorations. Ninety percent of Americans, according to the latest Tspool believe that inflation is the biggest.
Problem facing them.
And what's a little bit off putting is that the President tauday a lot of data sets that just are not resonating with American voters are factually accurate.
So anybody who's.
Turned on the news this year has seen AI and data centers driving electricity prices up thirteen percent for residential electricity prices nationwide on average. You know, if you tell me that the cost of drugs is dropping by four or five six hundred percent, which is what the President said last night, that means you're paying me to take drugs. And you don't have to be like good at math and know that.
That's not how drugs work.
And finally, I would say the eighteen trillion dollar investment that he touted from the trade wars that he's launched and the deals that he's reached is outrageous. I mean, this is like China's entire GDP. So you need to put some things in context that American voters can actually take with them to the grocery store.
And that's not what we got last night, Henriette.
And just that point, I mentioned this before that Scotland's a comb of Cato Institute was talking about the fact that this is the tenth thing that Trump has promised to fund with tariffs. I'm going to be honest, chat GBT help me with this list, but I was just looking at some of the things that were promised the military checks, tariff dividend, farm aid and targeted bailouts, childcare, social programs, tax cuts or elimination of income tax, foreign
or industrial subsidy funds, Henrieta. I know a lot of those are a wishless to Lisa's point versus actual policy. But what happens if he does try to fund some of these with the tariff income? Is that even possible with the amount of money coming in?
I mean, first off, find me the votes.
If you can find me fifty one votes in the United States Senate for a four hundred and fifty billion dollars, two thousand dollars check to the American public, I would love to see it. I can't count you the votes. I can't get you a reconciliation bill. I can't even get you a budget for physically your twenty twenty six. So the idea of even getting these things through is not realistic. And then the bond market, of course, is
counting on this. What CBO estimates is three trillion dollars revenue brought in by these tires over a decade, and we've already spent it.
We've more than spent it.
It's only been eighty nine billion dollars brought in by the AIPA tires going back to October. So I mean, the money is just not there. And the boats aren't there either.
Henrietta, It's a great point. I also want to get back to one of the other things you just mentioned too, this idea of the consumer feeling also the affordability pain of what's happening with their electricity prices. We saw the Blue Owl and Oracle deal. Part of the reason it crumbled was because of the politics in Michigan of lawmakers
pushing back against tax subsidies. Earlier in the week, we also heard from Bernie Sanders saying that there needs to be a moratorium on building on data centers, partially because of what you're describing with the prices. Is it likely as affordability becomes a bigger issue that lawmakers will really start to push back against some of the data center construction and spending that is happening in America.
Yeah, you can see it all over the place in terms of physical pushback. AOC had some tweets about it yesterday. I saw It's definitely a popular talking point. There's not going to be any legislation to prevent it, so this would have to be active boots on the ground, district led, you know, sort of protests against the construction of new data centers, and they're gonna have to conflict that with the job creation, which in many of these cases is the only job creation that you're seeing in say the
manufacturing sector. So it's a it's a pretty heavy lift to get something done legislatively and then certainly to have the protests be maintained in order to actually effectuate those pauses or stoppages.
Stay with US, multiple IMPERG surveillance coming up off.
To this.
Puja Kumra European and UK rate Senior strategy with with CD Securities joining us now for more. Puja, what's your take on this given the fact they did cut rates as widely expected, but what you did see was that fissure increasingly on the committee.
Yeah, no, exactly. It's surprising that the committee is still very has seen from the vote as well as when it comes to the guidance, they have not given a clear path with respect to the face of cuts or we know that boees in the upper end of the neutral, which is basically two to three point seventy five, but the guidance around how much below they want to go towards the neutral is really lacking, and I think that has come as a disappointment to markets after yesterday's week
CPI print, and that's why you are seeing gilts actually selling off. Even on the budget side, they consider it to add a point or two on growth. On inflation, they are still seeing medium tommentation to increase by zero point one to zero point two. So I think overall
the messaging is very mixed. Even if you look at Andrew Bailey's comments here, they are looking at the downward trend on labor market, but they still don't want to overreat into it, and same with inflation, they don't want to overreact into the numbers that we've seen last time. So overall, I would just say that the mixed messaging is something that's not changed. Markets were still worried about
the pace of easing by the BOE. You know, markets were pricing around the next cut around April, and the current messaging does not really change that situation.
There's just no pace.
Or what type of momentum in terms of cuts we'll see from BOE. And it's not been consistent as in the case of FED or in terms of ECB. But I think it's the data that will be speaking and if you do see that inflation and labor market easing. The next cut should be by Q one in our.
View and just to the point of the division Pooja in the not clear outlook. Part of the statement was that judgments on fur their easing will become a closer call.
How much room is there to.
Cut at this moment if the data stays similar to how it is now FOOTUA.
So Markets wie again there is not much room within. They're just looking for another cut from the BOE and the timing was around me and I don't think that changes right now to us again, like we also think that BUE definitely has room for one more cut. They will be still in the restrictive stance. If you see, the neutral range for them is as I said, is around two to three point seventy five, so they actually in the upper end of their neutral So there is
a lot of room to ease. But the evidence in terms of labor market and inflation has been very slow moving in ukn and that's why they want to keep the pleasing path slower than what should be the case. So we and markets are particularly looking for just one more cut, but I think the risk are for more cuts when it comes to UK.
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