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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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 this out with stocks on the brink of all time highs, with a sort of data on deck. Marvin Low of State Street, right, and the following we still find the current environment remaining conducive for risk. Rotate America, not South America, which puts treasuries and the dollar most at risk. Marvin joins us. Now for one Marvin, good morning. Fifteen percent for the year ahead. No, you're pushing back. I don't know what accounting he's using.
What a kind of genip figure is even the team looking.
Well, yeah, exactly exactly.
I mean trend growth is two percent, right, We're above trend growth for the last several quarters. We have a tendency to underestimate the strength of the US economy, but double digits.
You know why people are bullish, though maybe not that bullish, but bullish, And it's because we've already had write cups from the Federal Reserve. Sure, there's tanks free funds to come through the next several months. And we're looking at just four companies with campex intentions of six hundred and fifty billion dollars, and when they come to the debt market, the market's taking it down really really well.
Is it hard to find that story?
I think it is hard to fade the story.
You know, it might be hard to you know, plow more into it at this point, but I don't think you're fading that story. And ultimately, we are seeing the rotation that seems to be getting a lot of attention over the last couple of weeks as a healthy rationalization of where you're supposed to put your money into the markets.
I'm stuck on the fifteen percent and this idea that potentially not necessarily we're going to at fifteen percent, but it indicates the way that President Trump is some of the advices are thinking about the United States, which is in some ways an emerging economy. In some ways, this is a not developed market that sort of has a
staid growth rate. And I just wonder if there are broader implications of that kind of lofty goal for the way that US assets are treated, given some of the volatility and the fact that people have increasingly looked at some of the budget as well as the potential coordination between the Treasure and FED as emerging market behavior not necessarily a developed market.
One.
Yeah, I mean, that's a great analogy, and it certainly is a conversation that I think everyone's had over the last year, where you know, the developed markets have become the emerging markets in a lot of ways. The restraint that we see out of the emerging markets are making them the better behave children in the room if you will.
You know, it does speak to the risk parameters that you demand on assets in a market that is talking that way and administrations that ultimately want to try to push that type of agenda.
For sure, there is a cost for that volatility.
Not seeing it in terms of the bond auctions that we're getting. We're getting some treasury auctions this week We've got a lot of US companies that are raising debt overseas. It doesn't seem like that premium is getting baked in any mature way.
Is that going to shift?
Yeah? You know what, I do think that.
The dollar is weaker than one would normally expect with the type of growth environment that we're talking about, and long yields are higher than one would expect during a cutting cycle. You know, the fact that we're looking at ten year yields, particularly from a curve perspective, widening out into this cutting cycle is somewhat unique. But regime change wise takes time, and I think that you have the factors that might be driving it, but the catalysts have
yet to materialize. We're all watching it and we're waiting for whether or not we're really dealing with a new regime. But for the moment, you have to give the FED, the whole financial system the benefit of the doubt that you can't really avoid these asset classes.
Well, the President weighed in on Kevin Moosh last night that it was his runner up in the first time, and then when asked about what's going on with the DOJ investigation and whether it was worth it to have this investigation, it means it's holding up the nominations. He basically was like, nonchalant.
If it happens, it happens.
How are you thinking about a future Kevin warsh led Federal Reserve? Do you think he's going to come in and be dubvish?
You know what?
Everything That's pretty much the conversation that everyone's been having for the last couple of weeks.
His history is the.
Exact opposite the way I see it, whether it's the fact that policy setting occurs within the committee and he's one vote, and the balance sheet discussions and ultimately, you know, a Fed Treasury type of a cur accord where we talk about potentially less Fed buying at the long end, all of that is a higher yield. So you know, for me, it still is a duration neutral and potentially steeper curve type of discussion that comes out of all of this.
The President was also saying how he's been fighting with Senator Tom Tillis for a while, which is why he's retiring. Do you have any concern about independence of the Fed?
You know what, Yes, we always have concern, you know, having said that the Federal Reserve Act has what stood the test of time. You know, I do think that the market will quickly punish absolutely bad policy.
There's a difference in credibility.
If they're cutting by twenty five basis points, you know, and there's disagreement around it, that's not that's not necessarily independence. If you're actually saying that you're going to go to the zero lower bound while inflation is three to four percent and accelerating, that's bad policy. It gets punished, and it immediately makes its way into the financial market.
Sa'ce vess tens right now to seventy banksis points. There's some statements then not that state, what come, nun have you got in mind?
You know, I've got, I've got and I've had then this program in particular for for quite some time, somewhere around the one twenty range. Historically, that is not overly steep. And when we talk about regime changes, we really do need to think through several cycles, including before the GFC, when the carver was more naturally steep.
Is that driven by the front end or alone ent It's.
Driven by a bit of both, So a bear Stephen or a bear twist.
As part of that discussion, how quickly can you actually start seeing that come to fruition. So we hear this from a lot of different people. The yield curve should be steeper, you should have an extra yield premium on the long end. We haven't really seen it come to pass, especially when you see sort of how immune long end yield curve has been to even some of the volatility
we're seeing in Japan. So what sort of your explanation of what hope people are holding on too before that starts to really materialized.
I mean, I mean, treasuries are this incredibly interesting asset class within the world, and it's not as if anybody is incentive to sell aggressively around it. It's really a function of when they buy less. And I think we're starting to see those types of conversations emerge. Do we continue to see less foreign interest in the US markets because there are one hundred year bonds, I thinkuld buy elsewhere? That is kind of the iterative process around how we
get there. But it really does make it difficult if you're playing a trade and you expect a duration our performance because the FED is cutting we haven't had it and I wouldn't expect it.
Do you think alphabet exists in one hundred.
Years, the history of one hundred year bonds, and I haven't been around for all of them, but is not necessarily great.
Stay with us. More Bloomberg surveillance coming up after this.
The issue is for the president for the White House is that many of these issues built coming out of the pandemic. The problem they've got when you sit in the White House, you own it going into the midterms, and.
He's owning it now.
He's trying to sell it in the same way that they've sold it in the past, which is this is really great, this is excellent, and will it translate to how people feel about it?
John Labor, if your range A group has this to say, the primary season will be more unpredictable than usual. The national and environment for twenty twenty six looks very positive for Democrats. John joins us now for more, John welcome, there's the president of the Republicans have to runway the time to turn this around.
Probably not.
I mean, I think there's a world where there's a booming economy between now and November and that helps them save some of these marginal seats. But you know, Americans have to feel it, and they have to be convinced that it's the Trump administration's actions that are driving it. So you want to see lower unemployment, which is very difficult given how low it is already. You want to
see the presidents and poll numbers improving. And he's underwater on all the top issues the economy, inflation, immigration, and he's got to really change the narrative there. And I think importantly, you need Americans to feel like they can afford what they want. And I think that's the biggest challenge that face Biden. It's the biggest challenge that face Trump. You're not going to turn around the price of housing
between now and November. Maybe you can make a difference on groceries or some of the other things that people feel are too high priced energy, Perhaps college affordability is not going anywhere. These fundamental things that make most American voters unheal just aren't going to turn around. And like you said, John, you own it when you're the president. So if people don't like the direction of the country,
they blame you. Trump is personally unpopular and just hasn't proven the ability to expand his appeal really throughout the course of his political career. So it would really surprise me if the Democrats didn't take the House and potentially the Senate, although that's a lot less likely.
So for the remain of the.
Year, what can we see the White House do to try to turn this around. We saw a beef directive overnight looking at Bangladesh social media. They say that tariff rates are going to be cut. Are we going to see the President actually reverse some of his signature policies.
Yeah, I think tariffs are likely to come down between now and the end of the year. That's probably because of this court case and also because of the cost of living concerns. They're going to continue to push these stimulus checks. You know, they've got a number of other ideas about ways that they can lower the cost of living, But I think a lot of it's just going to be window dressing because the actual levers the White House
has to pull aren't that great. Look, the Biden administration looked at all these options, and it's not like there's a big ideological gap between what the Trump team is willing to do and what the Biden team is willing to do. In fact, Trump is embracing policies that even the Biden administration said, we're two interventionists for the government to think about capping interest rate fees and stuff like that. So all of these things have been looked at and rejected.
If the White House could do something about the cost of living, they would have done it by now. They can goose the economy. They're going to run it hot, and you heard Trump talk about that just now. But I don't think that helps address the fundamental concerns that are a wait for President Trump right now, John.
When it comes to the midterms, how bad do you think it is going to be Republicans? I know we had that state Senate seat in Texas that was a plus seventeen Trump district, But also over the weekend another unique election in Louisiana a House seat. This was another Trump district that a Democrat won. How bad is it going to be for Republicans?
Yeah, the Republicans have a structural issue, which is that the coalition that's formed over the coalition that they put together over the last ten years is a Trump coalition, and that means that a lot of those voters only show up to vote when Trump's at the top of the ticket. Twenty twenty was close. He won in twenty four, twenty sixteen, he was close. He almost won the popular vote, but in the off cycle elections they just aren't doing that well, and it's because their voters don't show up.
And I probably anticipate that this time around. So you're looking at you know, if you look at previous wave elections in the US. In twenty twelve, the Democrats picked up about sixty seats, and twenty eighteen, the Democrats picked up sorry, the Republicans picked up about sixty seats. In
twenty eighteen, the Democrats picked up about forty. And I think because of redistricting and jerrymandering and the way they're able to draw districts, even a wave election this cycle, where let's say the Democrats are ahead by three to five points in the national popular vote, which would be huge, I think there's a kind of a ceiling as to how far they can go because these districts have drawn
to be so friendly to Republican incumbents. So I would be looking for a twenty to twenty five seat shift. Anything less than that, of it's in the ten into fifteen range, is probably a good night for the Republicans. Anything more than that would be a real. I think massive wave for the.
Democrats House Republicans who are up for a re election. How much are they closely aligning themselves with President Trump and his agenda right now versus trying to distance themselves.
I think you align yourself with the president through the primary and you want to look like you're a problem solving guy or woman that gets things done, and aligning yourself with the president in the general could be helpful with that. Again, a lot of these districts are very, very safe, so you know, most members of Congress are going to say, hey, I'm a Trump Republican. I want to get this done for President Trump. You know there will be a few who are in these more marginal seats,
people like Mike Lawler in New York. You know Susan Collins in Maine who's not running. But you know they've got these people who are in these more moderate seats who are going to be looking to make distance from the president. But it's not going to be I don't think. I don't expect a jail break for Republicans between now and November.
Stay with us Multilinpex dividance coming up off to this Hi Rose tomorrow morning about twenty four an a thirty east in time. If you're just joined, I guess welcome a bit soften I'm expected. On retail sales, we were looking for positive zero point four and we got zero point zero. Greig dak e y John to snap them all, Greg and Mornic, good morning. What do you make of that downside surprise? How much wight would you put on it?
I think what's very interesting is that over the course of the past few months, we were trying to explain where the strength and consumer spending was coming from, and.
We were talking a lot about polarization.
We were talking about the wealthy doing more of their fair share of spending. We were talking about credit growth, we were talking about a savings dip, all of which are real. But the reality is that the averages are softer than we had anticipated. So what this tells us is that even with a savings dip and the saving rate having fallen two percentage point since April, even with credit growth being quite strong in December, and even with affluent consumers still doing more than their fair shit or
spending spending, momentum is softening. Why because the labor market is softening. This is the key pillar to income growth and in turn to consumer spending activity, and we are seeing that labor pillar start to slow and show slower income growth.
It sounds like you don't think tax refunds are going to send this story around.
Well, there was this proposition that tax refunds were essentially spent ahead of time, that people were banking on these tax refunds to spend. That's rarely the case, and even if they had done so, there was this question as to how much more fuel these could bring in the early part of twenty twenty six, with these tax refunds either being spent or used to reimburse credit or to replenish savings.
I think that story is one that we're going to.
Have to pay very close attention to, because yes, there will be larger tax refunds.
But who gets these tax refunds and how.
Are they being put to use in an environment where the labor market is in a deep freeze and where job opportunities are not as widely available as they once were, and where income growth is slowing. Real disposable income growth over the course of November and into December one percent consumer spending in November two and a half percent, and we're seeing as of today with the retail sales data that that momentum is slowing going.
Into twenty six.
We spent more than two hours on this program talking about the boom of the US economy and how we're going to see a run a hot type of environment right now with all of this hyperscaler spending, and then we see spending by the average consumer that comes in extremely disappointing and points to a completely different pricture.
If you watch what.
They do, not necessarily what they say. How do these two stories get reconciled.
Who benefits from the growth? That is the key question.
We are in an environment where not everybody is benefiting from growth.
We are seeing an environment where when you look.
At productivity growth, it's quite strong, and I think it's real.
It's not AI driven.
It's driven by businesses trying to do more in a high cost and life viarnment, So that is real. We're seeing the gains, however, benefit a few. It's a winner's takes all type of environment. It's an environment where a lot of the gains are accruing to capital.
And not labor. If you look at real wage growth.
Right now, and we're seeing with the employment costs in next that adjusted for inflation, we're very close to zero. It's an indication not that the economy is not benefiting from stronger productivity growth, but.
Instead that the gains are not split equally.
They're going to profit margins, they're not going to real wage growth, and that means that income is under pressure and that we have this fragile foundation to growth when it comes to consumer spending activity.
Is there a breaking point for this?
And I'm talking about in economic breaking point, not necessarily a political breaking point. We talk a lot about potential policies that are populists that come and redistribute the wealth, et cetera that could stem from this type of dynamic. But is there a market equalizing factor that comes from people not able to spend maybe on some of the goods that might be enabled by artificial intelligence. I mean, when does that sort of bridge gets broken through.
I don't know that there is one point at which something breaks, but the reality is that a narrow foundation to growth is less stable in terms of economic momentum. If you have more weight that is put towards higher income individuals that are doing more than their fair share of spending then as a result of that, any type of uncertainty on the financial market front can lead to
a pullback in spending from those individuals. And if the foundations in terms of income growth for the masses, in terms of consumers are softer than that means that they are more susceptible to pulling back and being more judicious when it comes to outlays.
Same thing is valid on the business front.
We often talk about a ca shaped economy on the consumer front, It's the same on the business front. A few businesses are driving business investment. It's not all businesses that are investing. And that means that when you look at profit margins on average, they're still very healthy and they are a good sign and a reassuring sign.
But look at small businesses.
They're struggling in the face of a number of these headwinds and they're not driving growth as strongly as the larger businesses.
Is it too soon to extrapolate, maybe potentially what also is going on here?
Are prices too high?
Are we seeing that people are just buying less or as we see in some of the consumer confidence reports and sentiment data, people are concerned about the job prospects, upcoming, so maybe.
They're not spending as much.
What do you make of actually what is going on in the psychosis of the American consumer.
I think the.
Split between labor and capital is really an example of how businesses and consumers are feeling this economy.
Anybody that benefits from strong income.
Growth, whether it's via the stock market or via wage growth, is going.
To feel relatively well.
But the masses that are not benefiting from these types of rapid wage growth and these types of strong job growth environments, they are the ones that are struggling. They are the ones that are being more judicious as to how they spend.
From a business standpoint, they.
Are the ones being more judicious as to who they hire, what skills they look for, what salaries they offer as entry wages, and how much growth they tolerate. And that is really the narrow foundation to growth that we're currently seeing, and that is why most people do not feel happy about the current economic environment. Yet average growth figures are still relatively healthy.
What are you expecting them for tomorrow when it comes to the first clean reate in a while for payrolls.
I don't know that we're going to get clean data for a few months in terms of CPI in terms of employment.
But what I do expect tomorrow cleaner is.
An environment where we see almost no job growth after revisions in twenty twenty five. Why because we're going to get the quarterly census of employment and wages that will show a strong negative revision to job growth through March of twenty twenty five, and the birth death model that is being used to forecast job growth over the rest of twenty twenty five will lead to job growth being
very close to zero in twenty twenty five. Yes, that may not matter because we can argue that there has been a significant negative shock from labor supply and reduced immigration. But it does matter for everybody that is looking for a job and that is reliant on income.
As a source of spending.
That weakness is something that we have to be very cautious of. The income story is going to be the key story in twenty twenty.
Why are some FAT officials less concerned about that than others?
I think it depends on what the weight is that you put on the employment side of the mandate versus the inflation side of the mandate. If you put more weight on the inflation side, of the mandate, which is.
What a lot of policymakers are doing right now.
You're seeing an environment where essentially inflation is still above the target around three percent when you look at the PC gauge. That is a concern because they do not want inflation to become un anchored to the upside and not come back down to the target. If you focus more as Governor Waller has been focusing on the labor side of the mandate, then you're more focused about a
potential downside risk to labor market activity. And when you look at a broad range of labor market indicators, they're not as reassuring as we may observe in some of.
The other data.
If you look at how people are feeling about their job prospects, if you look at the hiring rate, if you look at wage growth, which I find to be the best indicator of underlying labor market demand, it's softening, it's not accelerating, and real wage growth.
Is very close to zero.
Those are signs that the labor market is softer than what might have appeared up till now in terms of payroll growth and the unemployment rate.
It's hard to wake against that. That's the government want of camp as well. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, anngient politics. You can watch the show live on bloombag 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 Am