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Vincent Reinhart of b n Y Intment Investments Vincent.
What do you make of this?
The GDP number rising four point three percent for the third quarter.
There's a lot of action in the rear view mirror, isn't there. I think part of what it does is make you wonder why the Federal Reserve felt the need to buy three quarters percentage worth of insurance by cutting rates in September. But that was more about employment. What it does is worse than the disconnect we're having between our view of aggregate demand growing at such a rapid rate and employment, which is pretty sluggish.
Do you think that given this information is so stale it's not going to make a difference. Or do you think FED officials will look at this and take this information on with them as they consider and recalibrate what they.
Should do in terms of interest rates in January?
Well, the important point you made was FED officials. Remember they're pretty divided that it was a close call in terms of the overall nineteen FMC participants about the last rate cut. That means that almost half of them can look at this data point and say, why exactly were we doing what we were doing. So I think it does matter, and what it does is just heightened this really split.
Within Federal Reserve official boom evins. I'm talking to my buddy, Joe Bruce Swailes.
He's an economist down in Austin at RSM, and he sees a decoupling between the strong growth numbers that we're seeing strong real final private demand and weak hiring as AI, you know, eats in eats up jobs and maybe we get robotics replacing people as well.
You know, longer.
Term, what can cutting rates do for that kind of slow down and hiring? I mean, if AI is taking jobs, even if you bring rates down fifty seventy five basis points.
Is it going to matter, Well, you do a little phone meeting in the runway.
The FED bought insurance. You're exactly right, and the question is how expensive is that insurance, And the cost of it is that it'll be a little longer to get for them to the goal of two percent inflation next year. Now, if you're facing this enormous supply headwind on output on rather labor andwind right a headwind on labor and tailwind for demand, there's not a lot that the overnight federal funds rate can do. And I think you are right.
Is two percent truly the Fed's target, because it doesn't look like they take that very seriously since we're fifty percent above it. I mean, CPI, I guess you could say came in lighter than that in the last reading, but there was so much noise it might as well be at three.
Well, they never admit that. You don't give up on your goal when you're far far away from it. So that's why chair pal vigorously defends two percent and denies any idea that they've changed their goal. I think two percent is a long run aspiration, and what we've seen over the last three months in particular, is that they're willing to put off that achievement to buy a little more insurance.
When it comes.
To this GDP data, we just got it' I'm already getting a lot of messages from viewers, Vincent who are talking about the fact that if it's possible that CPI was inaccurate, do you think that it's possible that GDP data also has some inaccuracies in as well.
The answer to the question are there problems with government statistics is always yes. And in this particular case, if we're not confident about prices that they may be softer in measurement than they actually are, then real activity is going to be stronger because you're dividing nominal activity, which you're pretty confident about by a mismeasured price level. So I think there was always an upside tail risk to this GDP print. It turned out to be even further upside.
I wonder what you make a policy that seems stimulative in the new year. Right, we've got the tax refunds coming from the one.
Big beautiful bill.
You know, we're dumping tens of billions of dollars out of helicopters on farmers in the Midwest because the Chinese aren't buying soybeans, and now President Trump wants to send I guess some kind of warrior dividend to soldiers did too, as well as a tariff dividend to most of most American people. While tariffs are pushing prices higher, that set us up for a bad inflation picture, and the FED cutting rates obviously a bad inflation picture.
In twenty twenty six, I do.
Believe that tariffs ultimately passed through to consumer prices. And two things have happened. One is we haven't seen all the pass through of the increase in tariffs we've already gotten, and that over the course of the year, the effective tariff rate kept rising. So you're exactly right, there's more tariff feed through the consumer prices. That's why in our own forecast we think that the insurance the feeder reserve
bought by cutting rates will be expensive next year. It's going to even further delay get into a two percent goal. But you know better, recognize, Matt, that Congress set up the FED for exactly this tension by giving it a dual mandate. It's supposed to foster maximum employment and stable in an environment in which, yeah, you're not happy with inflation. It's not at its goal of two percent, but it's a lot closer to two percent than it was previously.
It weighs deviations on the employment mandate a little more heavily, and in this case it's potential deviations. It's just worried about the slowness of the employment growth, the low hire, low fire labor market.
When it comes to inflation.
Though, we hear from the Treasury Secretary yesterday he said, once it's re anchored, there should be a discussion about targeting a range.
Do you think that's appropriate, Vincent?
So, in effect, the feeder reserves hasn't been at two percent in a long time, and only in passing. For a long stretch before two thousand and twenty, inflation was below the federal reserves goal. A range makes sense, it works for other economies. And you know, the reality is the federers are asserted two percent was its numerical definition of inflation, after getting frustrated that it couldn't have a good conversation with its leaders, i e. The Congress about
how to make specific the goal. So yes, I think if the Treasury is signaling it's time to think hard about what the federal reserve goal should be. That that should be welcome, Vince.
I wonder what your take is on where the tenure yield is going.
I keep having this.
Fight with chat GPT, which tells me that the bond vigilantes are back. But I'm looking at four seventeen on the tenure and like seventy points on the twos tens. It doesn't look that bad to me. Do you think yield are going to go higher?
So you know that's that's always a deep frustration, right. I come from a family in which we all worry about the federal debt and the untep tethered path for the deficits. We all worry about central bank independence, what's going to happen as the federals are changes next year. But the fact is you don't really see it much in inflation and inflation inflation expectations. Markets aren't really pricing
in a lot a lot of worries. I think we're in an environment in which employment is close to maximum, inflation is not that far away from the long run goal, and so we're pretty much priced for an economy that's performing well, we haven't been stressed, and what you worry about. What I worry about is exactly what will happen when we're stressed, and bond markets are are particularly good at pricing in an unknown future stress.
Stay with us multiple inpex Savanna's coming up.
Off to this.
Dan Scale of Morgan Stanley Wealth Management says the outlook into twenty twenty six remains constructive, supported by increased m and a broadening out of earnings growth, AI diffusion, deregulation and fiscal stimulus.
Dan, thank you so much for joining us to see Amy. I want to first get your reaction. What's going on with this GDP number.
No one was expecting this big of a print, this high of a print increase at four point three percent that followed three point eight percent growth. What's going on here? We actually seeing a robust economy. There's some data distortion, yes.
So I think what we're seeing is this paradigm shift continue. And we've seen this over the last several years where when you look at the majority of spending in the economy, what's driving the economy, it's AI spending, its services powered by high income consumers and all of those cohorts continue to hum along really strongly. So there's really been no change in that aspect of the economy.
We see the entire yield curve shift higher swing just off this report.
What does that mean for the depth asty So it's not particularly positive, and we may hear an update in the coming weeks related to the Supreme Court ruling related to the Emergency Power authority or not. And so look, I think be careful what you wish for Emory, because higher yields is not necessarily supportive of higher multiples.
But we I mean, I'm assuming the reaction is because this number is so high, there's much less of a chance that the Fed cuts rates in January. So you might as well buy the paper that's there now rather than the paper post cut.
Yeah, I think that makes sense, Matt, And it's good to see you as well. And look, we've been saying persistently that the five to seven year part of the curve is where we see value. We had been hesitant to extend that much out on the duration side of things. And look, I think on the equity front, just coming back to stock, I think it's going to be a continuation of this cyclical rotation that we've seen really in the past one to two months.
We do have increasingly bullish expectations for earnings in twenty twenty six. I mean, it's not like the FED is the only thing that drives markets, right. Obviously, the real economy is important, and I'm hearing from economists been talking to Joe Bruce wlis here in my IB chat that he still sees strong growth, strong final demand.
Listen, if we're running out of seven percent nominal GDP, we would hope that the average company is going to see revenues increase, right, because there's some correlation there. But I think the big catalyst for next year, Matt, is all about AI monetization. We've been waiting for good doo in terms of when does AI spread out from the mag seven to the rest of the fortune one hundred and Frankly, I think that's where we could see upside surprise.
Lys Can I just say that this goes along with Joe's decoupling theory. So if that's what's driving higher corporate profits, right, it's not going to help labor.
We're not going to see a lot of hiring on the back of that, No doubt.
It's an excellent point.
And look, we've observed over the last six months a huge divergence between jolts and jobs opening and the SMP. And so we do feel like in terms of that phrase again paradigm shifts that's going on in the equity market as well.
Ultimately, we think stocks follow earning.
So while we could see some marginal degradation on the labor front, we don't think it's going to matter as much this time around.
And you only have one FED cut baked in for next year. If we're seeing get unemployment rate that goes higher, how does the FED calibrate for that AI induced job losses?
Such a tough question.
And look, the FED is an uncharted territory, no doubt, the old playbook doesn't apply as much. When we talk about an economy that's powered by high income consumers, they're not as rayed sensitive. So by cutting too much, you run the risk of creating too much inflation, thereby hurting the ninety percent of the population that is inflation sensitive. And so look, Emery, if I think we're going to be surprised it's going to be that the FED doesn't cut as much next year.
How difficult is that going to be?
Politically, given the fact that the one question the President at least I have reporting on he asked last time around for individuals who wanted to become FED chair, was are you going to cut interest rates?
And look, I think it's very thorny issue. Obviously it's above my pay grade. But my speculation is whoever is in the chair is going to be Dubvish leaning. So the short end, no doubt, is likely to perhaps stay politically influenced, but it doesn't also entail the long end following, and so we may be kind of stuck in the mud in terms of this higher for longer long end.
Yeah, this is I think the concern of many that the long end will continue to rise towardston slock from Apollo putting out a chart this morning.
Everybody reads his charts showing.
That global yields could pull the US treasury yield higher. This is really a conundrum for the FED, for the administration, isn't it?
Absolutely?
And to your point on global yields, look at what's going on in Japan, right, So we're in a phase here where Japan is seeing two percent long bonds and that could have some upward drift higher and thus kind of take global yields along with it.
How does this stock market deal with I don't know what the correct phrase is, but an increasingly ca shaped economy, right because that sort of sounds like it's happening.
So it's an excellent question.
The stock market's response over the last several years has been increased narrowing up until this year. This is the first year where we've seen the mag seven go from a monolith everything up in tandem to a peloton where there's actual differentiation between the mag seven. Money center banks are leading, and finally you've seen healthcare leading as of
the last three months. So I think what the market is saying is that earnings matter more than ever right now, and even though we're in this extremely unique economic and kind of socioeconomic paradigm shift, I think earnings are going to be what drives stock prices.
What do you make of the potential policies we're going to get next year. I know we're going to get the tax refunds with the Treasury Secretary loves to talk about. You think that's going to be huge, But a lot of people say, actually, consumers know that that's coming, so they're spending now the President, though, is also talking about two thousand dollars.
If dividend checks.
Is this all going to create a more complicated picture when it comes to inflation, It could very well.
And frankly, going back to our earlier thread related to monetary poly monetary policy helping kind of middle income consumers, we actually do think it's going to be more on the fiscal side, And frankly, some of this may not coincidentally be timed in front of the midterms next year, where affordability and some of these other strains are starting to percolate in surveys and actual voting results, and so we think again, fiscal policy is going to run it hot next year.
Stay with US multile Impex Savanna's coming up off to this.
Stocks on pause after closing near record highs. Mona Mahajan of Edward Jones with a constructive outlook for next year, writing elevated tech valuations, improving liquidity and better earnings momentum across cyclicals, midcaps and international equity support a potential rotation, Mona joins US Now, Mona, what gives you the confidence that we're actually going to see a real rotation when it comes to equities because we have been here before, we have seen a lot of fall starts.
Yeah, it's a great call out.
Look, it's year three now of growth outperforming value of technology and AI leading the charge higher. But one thing that we watched carefully is, of course earnings growth and earnings growth for twenty twenty six. First we think continues to look like it will head towards double digits. But the good news is underneath the surface there is both tech and non tech parts of market that is driving
that charge higher. And that is a difference from what we've seen in twenty twenty five and really in the last couple of years, where it is the tech earnings that have driven most of the S and P corporate profits. So next year, more balance between growth, cyclical and value driving earnings growth higher. And by the way, as we think about a FED that is cutting rates, that is an environment where valuations tend to expand see that much scope for valuation expansion in the tech and growth parts
of the market. They've already seen some of that occur, but we do see potentially that scope for valuation expansion in that four ninety three. So a couple of factors that could drive that part of the market higher and drive that rotation.
Does the Fed need to be cutting rates?
I mean, if we're at three plus percent in terms of GDP growth, A lot of Republicans are saying maybe four. I saw Art Laugher on Fox yesterday say five percent and inflation is at three unless you believe the last set of CPI numbers that we got, Does the Fed really need to be cutting rates?
Yeah?
You know, look, we don't think that's a prerequisite for the markets to continue to perform. Well here we know that, in fact, the economy has grown. When the FED was at four and a quarter five percent, we have not seen, you know, some of those recessionary conditions over the last couple of years that many economists had been calling for.
So as we look towards twenty twenty six, where the Fed has brought rates down to under four percent, now we think the base case and what markets are pricing, which is one or two more potential rate cuts, is a reasonable kind of base case scenario for twenty twenty six if you think inflation kind of ends in this
two and a half percent range or lands there. Typically the FED likes to bring Fed funds rate about seventy five to one hundred basis points above that level, So kind of three and a half percent seems like a fair value for the Fed funds rate.
By the way, Mona, we've seen I think one hundred and seventy five basis points of rate cuts since September of twenty four, and in that time, the ten year yield.
Is up like fifty or sixty basis points.
And Tourist and Slock from Apollo out with a note today showing that we have German yields rising, Japanese Japanese yields rising, really highlighting the concern that a lot of people share global yields are going to continue to pull us longer term yields up. Does that worry you as well?
Yeah, you know, look, our outlook for twenty twenty six calls for a ten that stays in this four to four and a half percent range.
We think, you know, the long.
End of the yield curve will be driven by one better economic fundamentals in the US, but two global markets, as you noted, are also expected to see a real meaningful pickup in earnings growth next year as well. So there are global factors that are driving the US yield higher. Now, keep in mind four four and a half percent if you look over a fifteen year horizon, this is still towards the high end of a ten year yield versus that history.
And for investors that are.
In retirement near retirement, we're just looking for income. We're still looking at a pretty attractive value from an investment grade type bond market. Where you are getting four percent yield is close to you know, that six seven percent all in income that you'd like to see, and by the way, above the rate of.
Inflation as well.
So we think balanced portfolios make a lot of sense heading into twenty twenty six.
When it comes to inflation, the debate isn't over, As you mentioned in your nodes. What do you make of what we've heard recently from Beth Hammeck saying that she wants to maintain policy right now and she's going to be a voting member next year, maintain policy right now because she is concerned about inflation.
Yeah, you know, I think generally what we're seeing is two parts of inflation, as we know, the goods inflation and the services inflation. And the goods basket of CPI is about a third of the basket, and we think there is potential for upward pressure, especially in that first half the year, as some of those terror rates continue to flow through to the end markets and the end consumer and consumer prices. But on the other hand, we have the services inflation, and that's largely driven by shelter
and rent about seventy five percent of the basket. We think there is a reasonable case to be made that there could be at least some stabilization and even downward pressure there, especially as some of the trends we've seen recently in rent prices and home prices start to flow through the CPI basket. And so we remain comfortable that inflation hovers in this two and a half percent range. We don't see necessarily reaccelerating unless there is some exogenous
shock to the system. So we think two and a half to three percent remains a reasonable base case for next year on inflation. We think that still gives the Fed a little bit of room to bring rates, as we talked about to that three and a half percent Fed funds rate.
I think the consumer can hold up in that environment.
Yeah, you know, we think the consumer is held up in an environment even more severe than that over the last year or two, and as rates move lower that should be supportive of of course consumer borrowing costs and corporate borring costs, especially in the short end of the curve. But as we know in the US, you know, many have talked about this the ke shaped consumer or the bifurcated consumer, and we know that low and middle income consumer is still perhaps struggling a bit to keep up
after years of elevated inflation. But in the US, it is really the middle and upper income consumer that drive economic growth, and they of course have benefited from the wealth effects of better stock market prices, stabilization in home prices, in real estate, and so overall we're seeing the economic growth pictures stabilize and even improve in recent years.
Stay with us multiple impex Savannah's coming up off to this.
Warner Brothers reviewing Paramount's beefed up bid after receiving Larry Ellison's forty billion dollars personal guaranteed backstop the offer. The board, however, not modifying its position, continuing to support Netflix competing bid. Peter Subpino of Wolf Research joins us now for more.
Peter, I don't know where to start.
I cannot wait to watch the movie of how this saga absolutely unfolded.
Who do you think is actually going to win out in the end?
First, I want to crazy or not transition from obesity drugs to studios beefing up on buying each other. We think Paramount has a slight edge in what is a really tight horse race. These horses are neck and neck. The bids are tricky to compare. They're just a dollar apart if you adjust for the various ways you should adjust them. The Warner board seems to be thinking about this like a house sale. Pretend you're selling your house
and there are multiple bidders. Price matters, and certainty of getting the money matters, and that's where this process is hung up.
So where the money matters, though, if you have Larry Ellison not just backing this by forty billion dollars, they're also talking about an increased offer when it comes to the regulatory fee if this was to break down.
If this doesn't move, the board will anything.
So the board, in addition to being worried about price, is also thinking about the condition in which the business would exist if whatever deal they choose doesn't close. Both of these bids face regulatory scrutiny. It's hard to forecast. I mean, it's Trump and the plans for cost reductions with the among inside of these two bids are very different. So Paramount has planned six billion of cost reductions and
Netflix has planned three billion of cost reductions. And Netflix plan is much more focused on streaming and technology costs, while Paramount's plan is more focused on studio savings. And that's where the Warner board gains comfort from Netflix because they imagine if this deal were not to close, the studio business would be healthier a year or two in the future.
Peter, it does seem like the board doesn't matter as much if you're going directly to shareholders, right, And that's the one element that they didn't move. Paramount didn't move here. I mean, shareholders don't really care that much if there's a five point eight or a five point six or a five point nine billion dollar breakup fee, Like, give me the money, right, if it's thirty dollars a share
and make it thirty three. If that's not enough to make it thirty five, why don't they just raise their offer?
We think that they will, and the stock market, the arbitrage market, that is currently setting Warner Brothers price is saying that Paramount or somebody will increase the offer price in the meantime, though, the Paramount board needed to and did, at least to an extent, address the Warner board's concerns about certainty, and so the updated offer yesterday involved different language about the financial guarantee from the Ellison family, and
it also involved a different language about revocability, which is an arcane issue that matters to the Warner board. We wonder about the language relating to material adverse changes. The board also changed language about interim operating in financial controls by Paramount. So they're getting into the details of contract language to try to strike the best deal they can, and price probably comes next.
It's interesting that they're still trying to appease the board in a hostile takeover.
I wonder about the employees.
To your point, you know that Paramount wants to cut six billion in costs in Netflix only three billion.
Of course, Netflix is not looking at.
The entire asset, right that would be split off or the cable elements would be split off.
Michael Wolfe told me at one point.
That the creative community, though, is behind Paramount because they believe that David Ellison wants to make movies and show them in theaters, right, Whereas Netflix clearly has an adversity that they want to be streaming everything and if it goes to the theater, maybe for a week before streaming released or at the same time, so it's a very different scenario.
Theaters are a consideration for the Hollywood community, as is the existence of a third studio based streaming service. So imagine the streaming industry a few years from now, as linear TV continues its gradual but inexorable decline and streaming continues to rise. With this combination, it seems credible to expect the paramount Warner entity to compete head to head with Netflix and Disney among the streaming services that are
based in Hollywood. And then there's of course the native technology companies Apple, Amazon, YouTube, which are going to do their things. Their models are somewhat different. Without this deal. If Netflix follows up Warner, it's possible that that list of Hollywood based streaming services will end up being two major companies.
Matt, You've got very passionate there. Do you still go to the theaters? Have you seen any good movies recently?
I do.
I've seen one battle after another twice in the theater.
I've also seen that excellence.
I go to a lot of movies, probably once a week.
Peter.
On that note, if Netflix loses or Paramount loses, where do you think each of them will look, given the fact that they wanted these assets so badly, is there anywhere else they can go?
Well, I'm so glad that you asked, because we've been writing for years and with more intensity in the last year, that NBC Universal really needs to do something for a lot of the same reasons that Paramount needs to do something. And NBC Universal has a very comfortable home inside of the Comcast conglomerate, but as a media business, it is both a wonderful producer of films and television and theme parks and also quite subscale from a direct to consumer
distribution standpoint. And so whoever doesn't win, Warner Brothers ought to go out and try to do a deal with Brian Roberts, which is really difficult to do because Roberts has about thirty two percent of the votes at Comcast and the history of liking his conglomerate structure.
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This out
Mm hmm