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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. As turned to the economy, US consumer confidence seeing its biggest drop in nearly four years. The Confidence Board writing consumers became pessimistic about future business conditions and less optimistic about future income. Your lendership at Saver of the Conference Board joined us now for more. Can you Lena, good morning? Come morning now.
I respect the data, but the Conference Board consumer confidence figure doesn't usually move markets as much as it did yesterday. People are nervous, and the nervous about where the consumers at the moment, what's your rate on things?
I think probably the market moves comes after both the Michigan survey and the Consumer Conference survey both showed the same thing, so that is telling you the issue is a little bit more broad based. So I think, you know, the important thing is that expectations fail quite significantly. And what concerned me in that survey, in that particular survey, is that consumers are expecting fewer jobs available six months from now, so that is probably at the highest level
in more than a decade. That index is telling me that, you know, consumers don't see much availability in the job market, so we know the turnover is lower than it used to be, so you know, when you get laid off, when you get fired or whatever, you know, you are finding fewer and fewer possibilities, and consumers are concerned about that.
What's the difference between normalization and the economy and outright cooling.
So we expect normalization, so this is something like two percent growth in GDP by the end of the year. But if we see terriffs, and this is something we model at the Conference board, we see quite a big hit from the tariffs. If we get a combined impact from China, Mexico and Canada tariffs that have been discussed of about one percentage points on growth, So that would be a significant slowdown to a stall speed in the economy of around one percent, So that would be a disaster.
The reason why I ask is because on one hand, you could say, these numbers are pretty negative, all right, go to cash, sit in your mattress. On the other hand, you could say, we've actually been in a really robust growth kind of scenario with jobs being created in a significant way, and actually this reduces some of the inflationary risk that we had heard about maybe late last year. Why is it the former more than the latter.
So I think these numbers are not catastrophic, you know, the numbers that we saw in the Conference Board survey, because they're still in kind of a range, the bottom of the range, but still within a range that the index has been over the last several years. And over the last several years, what did we see. We saw consumers spending at quite a solid rate. So the problem here is that the declining confidence comes at the time when the savings rate is at a very low level.
At three point eight percent, this is very low by historical standards, and what usually happens when confidence declines, the savings rate starts to increase, and you know when your income is the same or even declining because of inflation. That means only one thing, and that thing is the decline in consumer spending. Consumers have always been the driver of economic growth, and at the time when we rely on consumers so much, that means slowed down in economic growth.
One of the big criticisms of the University of Michigan survey is that it's very political. How much political bias do you think is in the Conference Board survey?
Absolutely that has the same issue. And if you look at the breakdown by political party, obviously Democrats are more pessimistic. Even independence are more pessimistic than Republicans. But even in the Conference Board survey, the Republican sentiment is actually leveling off as well. So we saw it across the political spectrum in this survey.
When it comes to the right and responses, I love these because you get a sense of what's going on in people's minds. They talk about inflation and tariffs. Is anyone talk about the fact that there might be a tax hike if TCJA wasn't extended. Is that concerning any consumers?
I don't think we're they here. So what we see in the writings is the increase in policy concerns, in political concerns, in tariffs. Yes, so those things that we hear on the news every day. Inflation is still a bit concerned, but it's being kind of like replaced by all this political agenda that we're hearing. I don't think the taxes are on the agenda just yet.
Lena always got to catch ups, go to see it. I appreciate it, Lena, should I say at the conference, Bot joining us now, Brian Gardner, stayful to build on the conversation. Brian, welcome to the program sir. For people just waking up this morning, you want to ask somebody with the processes you and Tyler are, can you walk us through on where we are at the moment and how much longer this might take?
All right, so it's spring training for baseball. Let's put it in baseball terms, right, in terms of a nine in a game. We're in the first NY, It's that clear. It is very, very early in the process. This is an important step. Last night, it was a prerequisite for the rest of the debate that's going to play out through the rest of the spring, maybe into the summer, maybe into the fall. But we are really early in the process.
Given it so early in the process, what does it say to you that to get over the finish line we had to have President Trump act like the Speaker of the House, basically whipping votes last night.
I think that's an rhetorical question. I think it kind of answered it yourself. The fact that what should be a fairly easy vote just to get the process started and moving was essentially root canot last night and very very difficult to get enough votes to switch from node yes. And it kind of belies the difficulty that is going to be down the road because among the yes's were a lot of members who have concerns over the Medicaid cuts,
the potential Medicaid cuts. There's nothing formal in the bill yet, but they've been speaking to the to the leadership, to the White House. Their concerns are out there, and if those Medicaid cuts start to materialize and become part of actual legislation, those guesses are really at play. And on the on the flip side, as you as the report just mentioned the fiscal Conservatives, you know they went along
with it, but they want more cuts. Well, if they get their more cuts, then you're going to lose some of the other yeses like I just mentioned, who are concerned about the deepness of the cuts. It's a very difficult. The political capitalist is very very difficult.
And they have a razorsin majority when you talk about those like we saw last night. Yeah, when you talk about these medicaid cuts, it's not outright that they're talking about medicaid, But we're talking about eight hundred and eighty billion dollars that comes from the Energy and Commerce Committee. What else could it be if it's not medicaid?
And that's the issue, right, So for people who don't understand last night, what they voted on just has top line numbers. There's no legislative language. There's no policy language in that document, but it assigns eight hundred and eighty billion dollars in savings to the Energy and Commerce Committee. While you look at the Energy and Commerce Committee and see what they're what their jurisdiction is, and you get to medicate, Now, where can you find offsets elsewhere? Maybe
even outside of that committee. And what I have pointed out to clients is that when you look at the tax cuts, there may be some tough decisions coming down the road on maybe some items not being extended, or some current policies such as maybe a cap on the corporate salt deduction, maybe that comes into play. Maybe a stock buyback tax which is already in law, maybe that gets increased. So there's going to be very intense negotiations that have market impacts over the next couple of months.
Brian, the estimate from the Committee for a Responsible Federal Budget says that this current proposal will increase the federal deficit by nearly three trillion dollars over the upcoming years. Is that the base case for you going forward that this is essentially how much any kind of bill will increase the deficit roughly.
I think one thing that is happening, which is I think as a positive, is that we're getting back to a more sustainable trajectory on debt. Debt's not going to come down. We're certainly not getting to a balanced budget, but we're getting back to an historical norm which has really been we've been out of kilter with that during COVID and I think Scott Besson mentioned this in your interview with him earlier in the week, which was which
was absolutely fantastic. You know, just getting back to a sustainable trajectory on debt and deficits and then dealing with longer term problems after that, because longer term problems, longer term debt solutions have to include social security and Medicare, and those are off the table for right now.
Brian went to the World Series Oktober October ok taber Okay, Yank god it look.
I mean, you know, the speaker in the leadership they had a big win last night. Let's not let's not diminish that they've been talking about a very aggress an ambitious timeline of having this all wrapped up in the spring. I've always been a little bit skeptical about that. If they can do it, you know, hats after them, it would be an enormous accomplishment.
Changing.
Yeah, because of the negotiations that are going to go on. I think we're going to go on in the summer, and I think, Jonathan, we can be back here in September looking towards the playoffs at that point and still be talking about this as it gets closer to the finish line.
At that point.
Brank Ahma Stipil Bryant appreciate it. Sert Tech Malony, the CEO of FS investment management, seeing high quality companies outside of tech and right in the following market. Concentration is the most important theme in today's market. History has shown prolonged periods of concentration are followed by equally long diversification cycles.
Opportunities can often be found in recent lankets. To join us studio for mot ted, it's got to see it to be Are we moving out from a prolonged period of concentration towards right now beginning a long period of diversification.
Well, by its nature, it's almost impossible to think about specific timing around that. So I might have been wrong. I would have been wrong a year or two ago in thinking that the concentration was already at dangerous levels and due to online. So while we're not sure the last couple of months have been the beginning of an unwind, we are reasonably sure that the level of concentration is dangerous.
And I want to point out that's not desparing to come about any of the companies that make up the concentration. They're wonderful companies in some cases, with reasonable valuations under certain assumptions, But when you put them together, the level of concentration and you look back in history at times when we've been even remotely close to this, it's ended badly for investors who were over concentrated in those spaces.
When the stock goes up into the right on the chart, a lot of people don't think it's dangerous and talk to me about what's dangerous about it? And when you think about diversification, what does that actually mean in practice?
Well, what's dangerous about it is if one thing goes wrong for one of those companies, and because they're so interconnected, it would be likely to be a chain reaction across the companies. Not just the companies, but the equities that are incredibly highly valued. So diversification is, you know, famously one of the free lunches and investing. And it's interesting you have moments in time over history where people forget that because, as you say, they get enamored by up
under the right. And it's been really easy to make money and these seven stocks for the last couple of years, So I'm going to keep doing it. It's very hard to predict what will unwind it. It is reasonably reasonably high confidence bet that it will unwind at some point.
Yeah, there's been the sense that you actually are punished if you aren't necessarily heavily weighted in them because they've been the outperformers. I'm wondering how you position around that, whether you expect the unwined to be somewhat violent as it was, say in the two thousand period of time, or whether it could just be what we've seen over the past couple of months, which is, you know, a correction. It's kind of happened, but the rest of the market's done.
Fine, right exactly. And I think you approach it from two different angles. One bottoms up the idea of finding a number of other stocks and bonds that you can buy to balance out your portfolio and make sure that you've got good conviction and long term returns and there, and then top down thinking about risk management again, our portfolios that have the MAG seven in their benchmarks tend to own a decent amount of MAC seven. Were not
negative necessarily on the individual stocks or the space. What we're concerned about is a risk management question and managing risk at a portfolio level and looking at a small number of stocks driving all of the returns and most of the risk in a portfolio, which you think is dangerous.
It's notable that since December seventeenth you can see that correction in the mag seven even though the S and P equal weight is actually up on the period, so a lot of people are doing the same. You made another point that I thought was really interesting, which is that liquidity chain ideas can really shift at a time where everyone's talking about private markets as being the bastion
of hope and returns. You challenge that you actually think that in public markets there potentially is more opportunity.
Why Well, we said this quoint notion that overtime liquidity is a feature, not a bug, and you have moments in time where all the money will chase illiquids because of an appearance of higher returns or a value proposition that looks really compelling until people want to get their money. And we think it also depends on who the investor is right, So large, very sophisticated institutional investors with large pools of assets should have a meaningful part of their
portfolio in privates and alternatives. As it starts to become mass market, we worry about what that means for a mass market investor who might need access to his or her liquidity and might discover at the worst possible time that they don't have it.
We talked a lot about the United States and diversifying within the United States across various asset classes. Can you walk us through how you think about things internationally at a time where Europe has really started to outperform to stand the year, We've.
Always thought that having a global lens is the best way to invest, even if you're just focused on a given region, but certainly if you have the opportunity to invest across the world. We think that US exceptionalism, regardless of at this point, regardless of whether or not you believe that it's durable or not, it's priced in. So if you look around the world, you're paying a lot for the US exceptionalism. Be to work out, you're paying
significantly less in various pockets around the world. And that's across asset class that stocks that sponds, that's beyond that. So we think there are lots of opportunities outside the US, plenty of opportunities inside the US as well, And it's probably never been a better time to be a skilled manager thinking about risk at a portfolio level and being able to make those trade offs around the world.
Ted, this was smart. It's going to catch up with you.
Appreciate here.
Thank you, Ted Maloney, the of FS Investment Management. Let's get the market conversation. Megan Robson of BMP parabout joined us now for more meccan, Good morning, Marning.
Thanks.
We're seeing a little bit of nervousness in equities and my stress a little bit. We're still several percentage points away from all time highs. Are you seeing any concern and credit and credit spreads.
That so it aggregates, No concerning it. We've been extremely range bound since the US election, so within five to seven basis points for USIG for example, and really the key drivers. Despite all of the headlines that we've seen, you still have one very strong technical picture. Yield buyers are supporting the market. High yields prevent supply from rising
too much. And then fundamentals are still very solid. Look at fourth quarter we saw double digit earnings growth for ig issuers, and so I think investors for now are focusing on those two features rather.
Than tariffs less unpacked fundamentals first, and talk about fundamentals, what's the greatest threat to fundamentals at the moment, we.
Think it's a drop in earnings. So in order to really see high yield interest coverage get to a problematic level, which we think is around three point five times, it doesn't take just higher rates where we are now, you really need that drop in ibadav ten percent or so. So the combination would really be the perfect storm of having higher rates and also a drop in earnings. But we do think it's the growth slowdown is a bigger threat for credit than elevated rates.
I thought your point there was really interesting about the fact that rates are high enough that you won't see that supply shock that could potentially send yields or spreads much wider. I am wondering on the other side, though, the demand side, whether you're seeing some potential buyers from say Japan fall off the map a bit because yields are rising there. I mean, there's some interesting sort of divides that are reversing the trend that have been in place,
that has been in place for many years. Has that started to ebb some of the foreign demand?
So foreign demand, to your point, is a risk of this year as you continue to see the front end of the US rates curve elevated. So hedging costs for those Japanese investors are still quite high, and then jgb's are rising, so that trade off between USIG and local japan bonds is shifting a bit in favor of Japan. But for now we haven't seen selling of us I think it's a risk to watch, but not a trend that's taken hold.
One thing we've been talking about all morning is sequencing of policy, and right now we're talking about tariffs, We're talking about some of the potential cuts to the government
later this year. People are expecting that maybe we'll get the reprisal of those deals that have been put on hold, the sense that maybe that will come back to the fore Do you think that that could introduce a whole host of supply if there are a lot of mergers acquisitions that do get done, is that going to be funded through the credit market?
It could be.
I think one interesting point is in your discussion earlier about the negative sentiment, So credit markets are not pricing in risks of this, but you are seeing the uncertainty play out in some areas. So look at IG supply for February. This could be the first month where we are actually below consensus expectations. And what's really interesting about it is following the election, you saw this boost and optimism.
You thought you were going to see animal spirits, tons of M and A, and that really has not happened yet. So I think treasure CEOs are sort of holding back in that activity. Should we see more certainty later on in the year, I think some of that could pick up, but for now it's something that we haven't seen so far.
People are wanting certainty when it comes to tariffs. The President this morning is saying, just let it all happen. Talking about these tariffs potentially on the auto sector. What do you think in terms of industries are going to be the most vulnerable.
So we do think it's going to be a sector story. Our base case, we're assuming around a forty percent tariff on China, five percent rest of the world. Those would be implemented gradually, So in aggregate, we think that's manageable for credit. But there are certain sectors that really stand out, So I'll highlight two. In usig we think autos is very vulnerable, very intertwined with Canada. In Mexico, we don't think that's fully in the price. And then in the
high yield market building products. Think about tariffs on things like steal. It could be a tremendous challenge which is not in the price at the moment.
Can we finish on all its times? I won't name the name. How would you feel if an auto company came out and sanctioned a big buyback right now on the equity side, how would you feel about that?
Well?
Not definitely not my area of expertise.
For someone who's nervous about investing in auto credit without making more notice, sure, I think.
That you know, if we see releveraging and sort of people increasing their balance sheet in a way that is concerning, it just adds to the to the to the list of worries for.
The auto sector.
Trying to keep you out of trouble, all right, Megan Robson of bemppower By, I'm not trying to get you in trouble. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg terminal and the Bloomberg Business app.