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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am 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. Brian Levitt of Investo writing, market drawdowns and volatility are almost always the result of policy uncertainty. Investors main need to brace themselves for additional volatility, but I suspect we know this drill. Frian joins us now for more Bran, good morning, I'm going to see you. Is the peak uncertainty behind us yet?
No?
I don't think the peak uncertainty is behind us. Although I don't want to be overly negative. I'm just reflecting on coming off of a period volatility had been quite low, so I think ultimately it'll be a good environment for stocks. But it's going to be a little bit more difficult. We have inflation at the upper end of the comfort zone, which isn't terrible unless the Federal Reserve thinks they may
have to take a different approach. And we still have to deal with the uncertainty around trade and industrial policies.
So there's more to come on this. I don't you know. Investors probably looked at.
What happened with Canada and Mexico with regards to the tariffs and said, Okay, all good. I suspect that's probably not the case. We'll have some volatility in here, but that doesn't change the fact that it's still a good backdrop for risk assets.
In the meantime, we're just eighteen ands and consensustrits to start twenty twenty five. In the FX market, the dollar is weak and not stronger. In the bond market, yields are lower, not higher. And if you look at equities on a geographic basis, Europe is outperforming the United States. Do you want to fight that or pile in?
I would pile in.
I think the reality is we've had such a prolonged period of us OL performance driven by a handful of names. What we've all been wan is some broadening out in these markets. Now, just because things like small caps or European stocks were cheap didn't mean that they were going to outperform.
You needed some catalysts. And what you have right.
Now is of course easing in different parts of the world. You have valuations a little bit more extended in the United States. You have high, higher nominal growth improving expectations in Europe. So yeah, it's a better backdrop you think from You remember that period we all remember at twenty nine through twenty nineteen where nothing could perform but US growth stocks. We were in a very low nominal growth world. So now we're in a better or improving nominal growth environment.
So the story you just told about Europe is not as exciting as a story that other people say, which is this is the beginning of actual spending of actual stimulus in addition to a disinflationary trend that can eventually allow ECB rate cuts. Are you basically saying you don't buy some of the optimism that this is really the moment that Europe could join together there issue euro bonds to support the bend stocks and inject some stimulus in the overall economy.
Well, We've seen this before, so you know, fool me wants shame on you fool me twice shame. I mean, it's that how goes So I don't so I'm not ready to say that this is the moment. The way I look at Europe right now is not good or bad. It's better or worse, and things are getting better than where they were. We had this long environment where things were generally getting worse. The fact that floating rate mortgages exist in a lot of parts of Europe wasn't necessarily helpful.
But now we've got this easing environment, sentiments picking up.
I would look at it.
More as a cyclical recovery in sentiment and a better policy environment, rather than necessarily viewing it right now as as a bigger structural story.
We need some proof on that.
There are some contradictions in the story. On one hand, if you have growth improving, doesn't that tie the hands of central banks in terms of how much they can cut rates, leaving benchmark borrowing costs to a higher pace, which typically pressure stocks.
Well, different parts of the world of different answers. I mean, I think in Europe, in the UK, we're going to need to see interest rates continue to move lower in the United States. The point I was getting at is I like inflation at the upper end of the comfort zone. You know, people have been wanting weaker, you know, rates to come down. In September, the FED Fund Implied Future said rates would be below three percent at the end
of this year. What would have happened between then in end of twenty twenty five that rates had to be below three percent. That's a bad economic outcome. So the fact that we've reassessed that now we're not pricing and tightening.
We've just backed out.
The rate cuts, which suggests that this is going to be pretty good growth environment. Inflation at the upper end of the comfort zone, to me, is a better environment than where we were for a decade where we couldn't get it into the comfort zone because higher nominal growth a cruise to corporate profitability. Now, the risk to all of this is, obviously if inflation jumps and the Fed has to tighten, we are clearly not priced for that.
That's where equity valuations get hit. That's end of cycle stuff. But I still think inflation's going to moderate. We saw it a bit with the producer price index. Seems like wages are moderating, shelters moderating, So I don't think it's as big of a concert CPI, what was that last Monday? I think that was a bit of an overreaction the market's recovered from.
But what about tariffs?
Could they be a hit to inflation to go above that range you seem too very comfortable with.
Yeah, I suppose they could be, except if it's a little bit of a different environment than twenty eighteen. But if you use twenty eighteen as an example, you saw one off price shocks in products rather than broad based inflation, and actually you started to get a hit to sentiment, and that hit to sentiment actually caused markets to start to think about a recession by the fourth quarter.
And you know, most people don't remember, as the Fed.
Actually was easing in twenty nineteen, not raising rates. Now it's a different environment because inflation's at the end of the comfort zone rather than in a deflation environment. But historically tariffs don't lead to broad based inflation.
What do you think causes more angst in the market. Is it the actual tariffs or is it the continued policy uncertainty about tariffs might becoming tariffs might be coming every single.
Week uncertainty, and that was the story of twenty eighteen, was that it was sort of a trade policy by tweet at that time, and each time each week we got something new and it was very difficult to had to respond to and business sentiment really got hit. If you look at capital expenditures back then in the beginning of the trade where they were positive year over year, by mid to late twenty nineteen they were negative year over year.
So that's the challenge.
The risk to this is just a prolonged period of policy uncertainty.
Tariffs, I think.
We could all agree lead to a less optimal economic outcome right almost by definition, but we can deal with that. Businesses just need to know the rules of the game in order to proceed with confidence.
FED Governor Chris Waller doesn't seem too worried at SOLL listening to him speaking over the long weekend. My baseline view is that any imposition of tariff's will only modestly increased prices and in a non persistent manner. Lisa going on to say, I favor looking through these effects. He's alluded to this before, reiterated it again.
Some people have agreed with him.
However, he has been an outlier as he did seem more hawkish last September and now seems to have shifted his tune, and some people are talking about maybe.
His conditions for FED chair.
That said, other FED officials have echoed this, both on the record and off the record, saying essentially, in the past they have been more of a suppressor of growth than they have been in ignition of inflation.
He's running.
I think we've said that before. A lot of people believe that's the case. Brant On Invesco so a Coronati City, saying, we do characterize ourselves as fundamental optimists, but we also recognize there's some important macro tail winds need to unfold which would transition us from a no cycle regime to something more like an early cycle. Bankdrop Scott joined us now from MOSK. Scott, Welcome to the program, Sir. I want to pick up a note. Pick up on a note that you put out just last week when you
said tamer tariff talk. Now, Scott, I want to understand whether you believe the tamer tariff talk is ultimately in the driving seat of what we're seeing take place across Stokes bonds and foreign exchange.
Well, I think we keep going from a threat to let's push things out and step back and better analyze the tariff situation, and that's been ongoing now for the past, you know, several weeks. What I think is important here, though, is that I think the market has been concerned regarding Trump red wave and tariffs for several months now, and I think it's been preparing for it psychologically, but probably not an actual positioning angle yet.
I think that's still out there.
But all told, what's happening is that you have ongoing tearff rhetoric, but at the same time, we're seeing a little bit more movement in terms of cost cutting initiatives, which are pretty apparent now, And what that does is begin to give you a more balanced effect of the aggregate Trump policy now versus what we were looking at, say a few months ago.
So translate that into positioning.
How much are you seeing essentially less growth from some of the cost cutting versus some of the pro growth measures that some people were talking about from the Trump administration than that that still needs to get priced into equities.
Well, at least it's a really good question. So I think what we're looking at here. Just looking at the S and P performance, you have about four percent year to date. Look at where your leadership's coming. First off, where's it not coming from? And it's not coming from tech and consumer discretionary. You're seeing broadening work under the surface. In fact, the SMP top fifty for the first time in quite a while now are no longer leading the
charge for the SMP. So broadening's happening. And I think what this reflects is a couple of things. An ongoing positive sentiment around the underlying economic direction, a little bit less concerned about tariffs in their own right now, and what that does do is begin to set up, I think, for a healthier S and P outlook as we go into the balance of the year.
Do you believe Scott As we were just talking to Bank for America Elis Galou's Galuu about that the faster inflation today than what we saw in twenty seventeen in twenty eighteen effectively ties the hands of the Trump administration to go really tit for tat into a full blown trade war.
I think potentially it does.
I think it's too soon to make that call, though, I think there's no doubt that when you're looking at tariffs. The part of this bigger program is that you at some point are going to need revenue offsets to be positive to contend with what happens from the deficit math as you go to extend TCJA and potentially lower corporate taxes in other places.
All totally.
What's happening here is that you've got a combination of forces that are at work that are going to need to be addressed. Inflation is going to at some level be a little bit of a hand tied to how.
Aggressive you get potentially with tariffs.
But our view with terriffs is, for a while now has been it's less about the concern with inflation, more about the concern with gross margins and other supply chain disruptions. So they're still in our view of moving conversation around where the inflation dynamic fits in here. We're comfortable with the current backdrop right now. We're comfortable with FED funds and the expectations for a cut or two this year. We're comfortable with ten years hovering in this four fifty range.
Scott, how do you start pricing in some of their talentation? Though we can see from other countries.
If those terrors that.
Trump has talked about, which besides China, we haven't seen them yet. But if the ones he's talked about actually come.
Into effect, well I think we're going to have to get there.
I think that's an ongoing concern.
Again, all told, we have to expect teriffs, you have to expect retaliatory actions by countries affected. But importantly, when we're looking at the aggregate tariff setup, be careful here. When you're looking at a teriff on Canada, Mexico, a more specific country related tariff that probably is a negotiating tool towards accomplishing.
Some other purpose.
When you get on the path of say ten percent across the board, that maybe maybe gets dialed back to some.
More balanced number, say five percent or so.
What ends up happening, though, is the importance of that is number one in our view. How it fits into the revenue generation deficit math. The retaliatory part comes into play. But here's where you also have to begin to factor in the fact that a strengthening dollar over the past couple of months may at some level begin to price some.
Of this in. We're certainly not immune to the issue.
We are at the margin, so quite concerned about it, but just trying to make the point here that identifying tariffs alone as an issue, I think probably is the
wrong way to look at this. The right way is that it's part of a bigger Trump package that's working its way through the system and through Congress right now and through the markets, and I think what the market is telling you is that it's pretty comfortable all told, with the balance that we're seeing between tariff's potential tax reform and then what's happening on the cost reduction front.
Well, Scott keyword, there is potential.
It might take months to see those tax cuts get on board when it comes to the House and the Senate in Congress. How is important for the markets to be able to have both at the same time, the tariffs but also the tax cuts.
Yeah, it's a good question, because tariffs presumably can hit sooner, Okay, so they get modeled in terms of our twenty five expectations. Tax reform probably is a twenty six issue. Again, for several months now we've said Trump We're at sweep. An issue we have is that you need to see some focus on the spending side because that deficit math continues to linger as an issue for this year. We've been talking about the bond market vigilantesection perhaps coming back into
the picture. We haven't seen that right yet, But I think the key point here is that the market is beginning to price a forward fairly aggressively where we think underlying earnings expectations go. That's a bigger issue for us right now, Emory, than are the terriffs themselves. Our concern is that the market is already pricing in fairly heady
earnings growth presumptions for the next several years. That in our minds, is not necessarily negative, but what it does do is put a really big focus on earnings growth to continue to deliver as we go into twenty five, twenty six and beyond. So, by no means is this a coast is clear environment. There are still many hurdles that we're going to have to be navigating. So I
think a big message for us is expect volatility. It's going to be a persistent feature of this market, and at this point we're we want to be conditioned to be buyers into said volatility.
Hi, Scott, appreciate your view, Sir Scott Kronavit City, more Ecoate and fired speak on deck after recent inflation and retail sales prints whipsaw trade US through the last week. Niina Richardson of ADP writes, and consumer strength is due in large parts of the solid job market, cracks are forming beneath the surface and threaten to spillover to the consumer. Nata joins us. Now for more naed a good morning. It's going to see you as always. Let's start with those cracks. Where are they?
Well, they're really in the good sector. But bigger picture, bigger level here, the consumer and the worker have been aligned.
They've been in lockstep.
The consumer's done well, the labor market's done well, and vice versa. Consumers are driving the labor market hiring. If you look at where the end is streets are taking off, it's in healthcare and leisure and hospitality. These are consumer oriented, consumer facing industries. So, yes, there's cracks. We saw them last week with the retail spending. If the consumer starts to folter, what does that mean for hiring in the labor market.
That's what I'm watching.
So that particular sector, the experiences sector, for you, will be the tell that this is truly a labor market that's turning over.
Is that correct?
It is one of the tells because when I also look at what else is happening in the labor market, business services aren't performing the way they did in the first half of twenty twenty four. We've seen a sluggishness in professional business services. So what carries the torch for this market? If the consumer's under pressure, the consumer feels the pinch, there's nothing to take up the slack, and that's the issue.
It's not good.
It's not manufacturing, it's not professional services. There's nothing left.
It's not tech, and we're seeing those tech layoffs consistently announced across the board. We were just talking about Southwest announcing their first round of involuntary layoffs in their fifty year history. Are these headlines just one offs or is this growing to become a trend that you're watching in terms of efficiencies and that turning to job cuts in a way that it.
Hadn't over the past couple of years now.
I've consistently said, and it's true that the labor market is solid. You're seeing solid overall growth. It's the craps beneath the surface that we're watching. For example, new hires. We tend to match at ADP individuals, but sometimes it's great to just look at the cohort of crops of new hires this year versus last. There's been no pay growth in this crop. Why well, companies are hiring less tenured,
less skilled workers now than they did last year. Is that a signal of a trend that more highly skilled workers are not as in demand as they were a year before. That's definitely we're something we're watching, and we see that across industries, especially in financial services and information. These are typically highly skilled industries.
You know, your research is at sixty percent of US workers live paycheck to paycheck. Last week we found out inflation is still quite hot. At what point do you see these workers, these consumers pushing back exactly.
We've been waiting for this. We've been waiting for consumer resilience to turn to consumer reluctance because of higher inflation. It has not happened, except last week we saw the beginning of that. Now, it could just be a cold weather month, but the broad based slowdown in retail sales suggests to me that it was more than just a really cold January. Something else could be afoot and it could be that these higher price levels are starting finally.
To make a dent.
We won't know until we get a little bit more data on.
That, though.
You said that the prices or the wages that people are earning when they come in are the same for the incoming class this year as they are last year. How much could that be due to the use of certain efficiency tools and I'm talking about machine learning to offset some of the roles that some of the highly skilled individuals coming in would have to have to hold. I mean, how messy is this data because of these bigger trends that are forming the labor market.
When you think about where the slowdown is happening in business services, those entry level jobs are increasingly those that can be automated. This is new for the knowledge worker skill base, and so that trend is something that could have a through line from cyclical to structural.
And that's what's.
Really hard about the labor market now. With all these technological advances and the demographic changes, we don't know how much of this is sticking and how much of this is just you know, because interest rates are higher than we'd like them to be, and that's weighing in on hiring decisions.
Earlier on the show, we were talking about the fund manager survey at of Bank of America, and right now the lowest number of people are expecting some sort of recession in at least three years. Based on your observations and the cracks. Do you think that that's miscast or that it should be a higher percentage?
You know, it's recession. To me, those expectations is like the rain. Unless you tell me the time and the location, it's meaningless because recessions happen on a pretty you know, regular heartbeat when you look at history. This last economic expansion was way longer than historical norms. But I don't think there's anything that suggests right now, with a four percent four percent unemployment rate, that we're heading to recession.
But there could be some slowdown in hiring. There's uncertainty and policy that would cause employers maybe to take a step back, not hire as robustly, not hire as aggressively as they had in previous years.
We'll see if any of this shows up in jompless claims on Thursday, particularly the government layoffs, were all focused on at the moment. Neither It's good to see you and so always thank you Nia Richardson that of ADP, we begin to sat with US stocks in jin Kai Kevin Gordon to child swap with this to say, one of the whole marks of the US stock markets run last year was minimal scouring at the index level. That is unlikely to continue this year. Kevin joins us now
for more. Kevin, that's a conversation we've had a few times with you. Beneath the surface, though, we're starting to see some real dispersion take place. You wrote in just last week about some of that dispersion within tech. We noted the moves we've seen in Meta. You pointed out the moves we've seen in Tesla. What makes sense from your perspective as to why that's happening.
Well, I think that you know, within some of the themes for a group like the mag seven, if you're going to look at it on a sector basis, you know there's three sectors that are represented there. It's consumer discretionary, it's communication services, it's tech.
And one of the things.
We've really been pounding the table on in the past couple of years is not looking at that group as a monolith. And I think a lot of that is starting to show. You know, you could kind of date it back to last summer when there were a lot more capex concerns when we got to earning season in
the in the late summer period. But now from a trade war standpoint and what the exposure is from a geopolitical perspective, there is probably a lot more being priced in there being reflected in the price there because if you look at even the split between consumer discretionary and tech versus communication services to point about the likes of Meta doing well versus the likes of Tesla or even you know, some of the hardware names, whether it's in video,
whether it's Apple in the tech space not doing as well, some of that is maybe reflective of the exposure to China or the exposure to the rest of the world and what a potential terofar trade war could mean for those companies.
How do you expect this to show up at the index level? This is all Benita surface. How do you expect to say this at the index level?
You know, to some extent you're seeing it where even if you look over the past couple of months, the S and P five hundred hasn't really moved much. It's been this really tough kind of grind higher at times, a grind higher, mostly a grind sideways. But there have been other sectors that have really been leading the charge and picking up the slack. Financials has kind of been,
you know, the standout there. So I think that from an index standpoint, you may not see as much excitement this year, but at the individual's stock level, or maybe at the individual industry level, you could see a.
Lot more excitement.
So it's kind of, you know, to the quote you pulled at the beginning of the segment, our theme around maybe not as much excitement as you saw last year because at the index level last year was great max draw down eight and a half percent, but the average draw out at the member level much worse twenty one percent.
Maybe that gets flipped this year or not that we expect some.
Imminent twenty one percent correction for the index, but there's just more of a churn kind of at the you know, at the index level, if there's not as much participation from some of the megacaps.
If this turn is sort of continued, I wonder how much that's the reason for this split that we're seeing in surveys where you have AIII coming out with the greatest degree of pessimism among retail investors going back three years, at the same time that institutional investors have the greatest degree of optimism in years, and you've got the lowest rates of cash going back to twenty ten. How do you put these two things together with some sort of conclusion.
Well, you know, this has become for us kind of a post pandemic phenomenon, especially when we talk to our investors and our clients, you know, which it's a great deal of people. It's more than forty million people, so we have a pretty good gauge of what sentiment is like, both on the attitudinal but also on the positioning side
of things. But what we've seen post pandemic is that that attitudinal you know, those attitudinal metrics are sometimes much more skittish and much more jumpy, and they don't necessarily reflect what's going on in positioning. So you talk about those two headlines kind of side by side. Yes, a huge pickup embearishness for something like AII, but not reflected
in equity positioning at all. To us, the attitudinal stuff probably becomes more of a useful, shorter term gauge as to when you get a washout and sentiment and when the market can kind of pick up and get back on its feet. You know, over the past several weeks, which we've seen from a behavioral standpoint, it kind of shows you that over the long term, we're still in
pretty frothy territory. Because you look at the household exposure to equities for the FED data that we have going back, you know, almost a century, you're still at near record exposure. The only other time you were at this level was in two thousand.
How much are some.
Of the headlines around policy changes affecting retail investors more than institutional investors who are looking through it until they get something concrete.
You know, it's fascinating.
Is for the first time since I can really remember, especially leading up to the election, when we were talking to clients and going around and doing events, and I was just speaking to a bunch of clients last week, first event ever where tariffs were not at all a part of the question. All of the questions were about
immigration policy. So I think that there is this interesting shift now at play where I think there's more meat getting kind of put on the bones as to what the potential growth hit is from a labor standpoint, And a lot of the focus tends to be or has been, on the inflation impact potentially from tariffs, But now it's shifting to what does this mean not only for inflation from a labor standpoint, but also what does this now
mean for a potential hit to growth. So it was a really interesting shift where clients are now starting to ask what are those sort of fundamental issues. Maybe if you go to the extreme end as to what's being proposed for immigration, what are.
Clients asking when it comes to tax cuts, do they want to see those tax cuts alongside potentially the hit from immigration and tariffs.
You know, it's a mixed bag.
I think tax cuts just kind of at the outset are at a headline level, garner a lot of attention and a lot of support generally. I think the tough part about this is that it's the struggle right now in Washington is just to get the extension of the TCJA. So it's really just maintaining the status quote. It's not
initiating this new wave of tax cuts. And the other hard part about this, and this is kind of where I struggle and scratch my head a lot from a policy standpoint, and what's contradictory coming out of Washington is tariffs and tariff revenue is kind of being poised as this driver of revenue to offset the extension of tax cuts.
But then every time the.
Tariffs get either delayed or peeled off, then the market sort of cheers it. But then I'm asking myself, well, where is that supposed revenue coming for the tax cuts. So it's a little bit of this vicious circle that's at play, where yes, you could have excitement for something like fiscal policy continuing to be relatively expansionary and accommodative, but at the same time you also have potential restrictions coming from aggressive tariff policy.
Right, and there's been a lot of bark, not a ton of bite except for one the ten percent of Chinese imports. You put it in your note projecting any kind of terror related hit to stock, So the degree of precision is impossible.
So then what do you project.
Well for tariffs?
You can't, I mean to that point, you can't project anything almost from anything policy related.
You can't make a projection because it changes every single day. So really, what you much of.
A hit to the market is just that constant turn of uncertainty.
Oh.
I think that's where a lot of the hit resides. And you know, I think that this is a lot of the focus, maybe rightly so, gets put on the actual policy. What's the dollar amount for the tariffs? You know, who gets hit, When does it happen, how is it phased in over time? I think that's important, but I think it also misses the point of the nature of this policy making is what creates this And I think I mentioned it last time.
I hear this, this real.
Thick fog of uncertainty where it's it's just harder for businesses to operate in that environment.
One thing that's been less and certain is that one of the cost savings is going to be driven by just cutting jobs.
I mean, we've seen that pretty much.
Across the board with the efforts of DOGE and reports about thousands of government workers being laid off. Do you see that being factored into any market valuations of companies that have contracts with governments, with the government, or any other kind of employer base that might be looking at this and taking its cues.
You know, it's early days, I think to see that the federal hit. Especially if you're going to just look at the overall labor market, the share of the workforce for federal workers is quite smaller in low single digits to me, and I think what is becoming a more material risk in it's not happening right now, but I think what's worth watching in terms of it being a material risk is the eventual hits the state and local you know, employment and if that because that's a much
larger share. I mean, you're getting into double digits in terms of the percentage of the workforce. So you talk about number one a big driver of job growth over the past several years, but number two just a big part of the total labor force in the country. If there is that connection and that eventual follow through from what's going on at the federal level, then I think you get to a little.
Bit more of a worrisome situation.
Fortunately, you know, it's not something that's happening, you know, right now and eminently, but a lot.
Of this is moving really quickly, so you do have.
The potent of seeing that show up maybe relatively soon in a job report.
Speaking of moving quickly, can we finish on Europe six weeks of gains on the euros Doc fifty. You talked about your clients, your client's getting interested.
Yeah, you know, I will say it's taken a long time, meaning years, for clients to get kind of fully on board with it. But you know, from especially if you're kind of talking about in factoring in some of these
risks from a policy standpoint. Are my colleague on the XUS side, Jeff Clientop, talks a lot about THESI, MCIIFA being more exposed to Japan and the UK to the extent you want to look at those areas of the world that are maybe less exposed to a trade or a tariff risk from the US side of things, you know, maybe there is a little bit more of a benefit there.
So we've been very vocal about kind of balancing things there, not just you know, back up the truck, dump everything US and then load up on you know, x US. But it has taken to your point, it's taken a long time for clients to kind of, you know, I would say, latch onto that or.
It's still early days, let's say, if it works out, But so far in twenty twenty five up double Ditch on the Eurostocks fifty Kevin Gordon there, child Swap Kevin. Always good to see you. I thanks, appreciate it, thank you. More headlines coming from that meeting taking place in Riad, Saudi Arabia. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six
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