Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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.
Let's turn to the stock market.
Mana Mahajana Edward Jones writing, we believe US corporate earnings are on pace to achieve double digit growth this year. We remain overweight equities relative to fixed income. Mona, Welcome to the program. This is slightly unfair because those headlines only just cross. So you're going to have to do this with me in real time. And if you don't
want to go there, don't go there. But what on earth would happen and everyone started to happening there four or one case to buy houses, what would happen to the stock market?
Yeah, you know, look, we'll have to wait for details from the President next week, but certainly I think the motivation here is to make sure that all households, whether you're in the upper income bracket, mid income, or lower income, have exposure to.
A diverse set of asset classes.
And I do think fundamentally that theory and consideration is the right one. We want to make sure that all households are thinking about investments from an early stage of their career, their family development, their homeownership development. So broadly speaking, we think if this starts a conversation of how should I position my assets, whether it's in equities, fixed income, or real estate, it's a good step in the right direction.
Well, let's start with where this is coming from.
So there is an affordability problem has been for a long time. This administration inherited it. Now they need to address it. The remedies to that affordability crisis. How do you think that's going to shape market outcomes in the year to come.
Yeah, you know, there's different ways the administration can force this or do this. If it's using blunt instruments like putting caps on credit card interest rates, that will have adverse incomes, outcomes for the broader economy and then certainly the players in that sector. Now, if you do this in a way, that is, let us do this in
a gradual way. Let us take an approach that offers you, whether it's tax relief, whether it's deferred tax payments, whether it's thinking about opportunities at lower rates depending on your income level. I think doing it in a graduated fashion makes more sense than trying to use the blunt instrument approach.
But I think overall, the affordability issue needs to be addressed, and certainly, as we are approaching a midtrum election year, makes sense that we're starting to think about this early on.
If you want to start thinking about affordability the midtrum election year, what do you want to be exposed to in the equity market?
Yeah, you know, and I think your earlier guests alluded to this as well. We do think that this is a year where diversification does matter. And I think, you know, we've come off of three years where AI and technology have really dominated leadership in the markets. If you did not have exposure to those themes, you really were underperforming.
Now this year, we think if you have exposure to both the AI parts of market, but you have some exposure to cyclical parts of market value, parts of market international and EM and by the way, have a little bit of fixed income exposure. That is the way that your portfolio is going to perform. And I think the combination of a steady economic growth picture, a FED that is likely going to cut on the margin, but also earnings growth that is accelerating this year supports that broading theme.
When you say the FED cutting on the margin, one cut is that.
What we're expecting for in twenty twenty.
Six, So you know, our base case is one to two cuts in twenty twenty six. We think they're probably towards the tail end of this rate cutting cycle. But nonetheless, we do think the FED is looking to get towards a neutral level. And typically, if you look historically, that neutral levels usually some somewhere around one hundred basis points
above inflation. So if you think inflation ends around or you know it kind of steadies out around two two and a half percent, a FED funds rate around three and a half percent to us makes a lot of sense as a.
Base case since we're on the federal reserve.
This week really kicked off with Sham and Powell coming out quite publicly and pushing back against the administration. That story's got old very very quickly, Mona. Do you see that as noise or news?
Yeah, you know, I think it was initially quite a bit of shocking news to hear that the Federal Reserve chair was under criminal investigation. But to your point, since then, we've seen not only FED Chair Drone Powell come out strongly, but old former FED chairs as well as congressional members from both sides of the aisle supporting this idea that
the FED independence is important. And what we've always said is if the market gets a sense that FED independence is being questioned or challenged, not only can you see mork of volatility, you'll probably see rates rise, especially on the long end, as that risk premium gets baked in. And that's squarely opposite of what this administration wants, which is lower rates. So there's a little bit of a counterintuitive,
you know, cycle happening there. But I think generally markets have made it clear that FED independence is important.
Stay with US multil Inpex surveillance coming up after this, John Labor of the Eurasia Grape joins US. Now, John, you heard it there from Tyler Amrie mentioned it as well. Gavna Shapiro at the White House, Is this just a new political reality that both parties have to confront.
Yeah, I mean, I think actually President Trump's trying to get out ahead of the curve here. We know affordability is probably the number one issue on voters' minds for twenty twenty six, and this electricity issue was a factor in some of the off cycle elections that we saw in New Jersey and Virginia last year. So you know, the data centers, it's a big deal. It's a big
part of Trump industrial strategy. They want the US to be the world leader in AI, and to be the world leader in AI, you need to consume a lot of energy and that's going to become an increasing political problem for people all over the country. I do think to your point, it's notable that Democrats are willing to play ball here with the administration. This reflects the power that only the White House has, and I think that this is going to be an ongoing theme that we see throughout the year.
Not just democratic governors willing to play ball, tech companies, Microsoft, Brad Smith. We're going to ask utilities and public commissions to set our rates high enough to cover electricity costs for our data centers. John, is this just another implementation of state capitalism?
Yeah.
I think that's exactly one way to think about it. I think Microsoft knows that the Trump administration is their biggest champion. They really need Trump to get the licenses that they need to have access to semiconductors. I mean, the administration has been extraordinarily aggressive in shaping how these tech companies sell chips by chips have access around the globe,
and they've been championing them. And I think the Microsoft sees the writing on the wall here, which is that this is a growing political story that they need to get ahead of, exactly the same as how the Trump administration's doing this. And I think this again, this is
going to be a big theme for the year. I think that electricity is a vulnerability for the president, and by doing this and by getting their partners like Microsoft to do this, it's an incredibly savvy way of saying he's doing something about the problem.
Not to get two in the weaves, but there is a law from nineteen thirty five, the Federal Power Act, which basically separates when it comes to the grid, how the states jurisdiction is over the federal government. Are we pretty much just resetting new rules of engagement between how the states deal with electricity.
You know, I'm not familiar with the rules of the electrical grid and how it works at the state level, but I do think federal intervention here is probably appropriate. And given that this is multiple states coming together to drive this new initiative and put this new electricity on the market, and it's affecting all these tech companies that
are trying to invest everywhere in the United States. This sets a tone for the entire country and tells these tech companies that they're going to need to be partners in solving this problem. And because of that, you're probably going to see more efforts to take advantage of a diverse source of electricity generation, including probably over time nuclear power, which had previously fallen out of favor in the United States, and now that the tech companies need it is going to be surging back.
John mentioned all what's going on in terms of the presidents laid his sol those on truth, social the defense sector, housing, credit card companies. What do you expect him to deliver at Davos?
Yeah, it's only been We're in the third week of the year, and it feels like we've lived three years so far, given all the stuff that's going on. Yeah, I think the Davos speech will probably be a chance for Trump as he does to air some grievances in front of a crowd that he probably thinks is hostile to him, but he still wants to get in front of He mentioned housing as one of the things he's going to talk about. I think there's going to be
other affordability things brought up. One of the big things on housing is long term rates. They've been attempting to use Fanny and Freddy in order to get long term mortgage rates down. I think that probably healthcare is going to be an issue that is focused in focus in this speech on affordability. There's still the live issue of these Affordable Care Act subsidies that's happening in Congress right now.
And then electricity, I think and energy costs are probably going to be a big piece of it, not just electricity, but also energy prices, I mean oil prices. That's one of the primary drivers, or at least it's the primary outcome of this Venezuela in addiction is that they're putting all these new barrels of oil on the market, and I think that keeping energy costs low is going to be a big theme.
John, Is there a home for people who support traditional conservative policy.
In the United States?
I mean no, You've got the Republican Party is, or at least under Trump, massively interventionists. And there are a lot of Republicans, many of whom have only been elected
in the Trump era. I mean over the half of the House of Representatives came into office after Trump was already here and have helped him totally reshape this party into a much more populous, much more aggressive, much more interventionist party that seems to have no limits to the kind of things that they're going to do to deliver
benefits for voters. So, I think the ara of small government is really over here, and you're going to see a government that's on both sides that's now reacting to the need for voters to want to see change in their life. And so I think both parties now are going to be much much more aggressive in how they try to do that.
How much daylight do you think they'll be between the two parties on economic policy?
By the time we get to twenty eight very little.
Probably tax policy will be the big one. There will probably be more lip service paid to the deficit from the Republicans. The Democrats will probably support a more larger tax increases in order to bring down the deficit. I think on trade you're going to see a lot of similarities. Labor policies probably another one where you see a big difference, but more divergence in the coming years. So you know, I think the parties are going to compete on cultural differences.
Immigration will probably be a big wedge issue in the upcoming election. But on economic policy, you know, these parties are looking more and more similar to each other.
Stay with US mult Blomberg surveillance coming up after this, and let's keep it on the federal reserve. Stephen Stanley of Santantie writing this, I look for the unemployment rate to stabilize. Inflation is likely to remain stubbornly high. I look for the FMC to remain on hold for all of twenty twenty six. Stephen joins the staffer or Stephen Goodmonick warning controversial call of the president's watching this morning, Good morning, missed the President?
Why not ray cuts for the year ahead.
Well, I think what we're seeing now as the FED has moved into pause mode and there are at least someone in the Committee that would like to move further.
I think.
But what you heard from Powin to summer I thought was really important, where he's said that the rate is now within the plausible range of neutrality, so there's no urgency to move. I think that pause turns into a full stop because I look for the economy to do better in twenty twenty six and most as sooning.
Okay, so we can sort of tease and unpack some of this. So the first half, I've got it. You mentioned chairman power, he's gone. Let's get to the second half. What you're essentially forecasting is whoever takes over the feder Reserve, and we imagine whoever it is is going to vote for interest rate cuts, given that this is what the President is looking for. They're going to be voted down by the Committee for every single meeting for the rest of the year.
Well, look, I'm going to take the optimistic teck on this, Okay. I've always assumed that whoever is the nominee for chair will operate more or less as the FED has always operated based on the data. So if look, if it's a close call, I'm sure that a very dubbsh new FED chair is going to kind of push in that direction. But they have to convince the entire committee, and if the data are relatively clear, I think that would be difficult.
I would also point out we're not talking about a big break here because Chairman Powell has been a dubvish FED chair and I think the December move was the latest side of that. I mean, he very much personally pushed that through right. That committee was very divided. The decision could have gone either way, and the fact that they moved in December, I think is clear evidence that Powell was pushing in that direction.
If that's your case, does this set up the new FED at very more of a frictious market relationship with this White House.
Friction between the FED and the Yeah, And if it is.
Someone like Kevin Hassett and you think they're going to operate independently.
Well, I mean, look, I think it remains to be seen.
I would say that if the economy is doing better, that is likely to reduce the level of ogita in the White House. Right, even if the FED is not cutting as the President has suggested he would like, if people are feeling better about the economy and the president, it's maybe feeling better at the margin about election prospects. In November, I suspect the heat will tamp down a little bit on the wa.
You're basically saying it all is predicated on polling numbers from the White House perspective. Yeah, I mean, no, man, how much they want to maybe jow bone the Federal Reserve, even if it is someone that the President has decided you wanted to put in because he thinks they're going to be a part of.
This lowering interest rate.
Well, we're you know, we've kind of we've moved into territory where I'm far from an expert. I'm not much of a political analyst. But look, the administration wants to do well in the mid term elections, and I think it's very clear from what we saw last November and kind of the just the general conversation around politics at the moment that economic issues are going to be very important to voters. Right, so our vote oters feeling good about things? Do they feel more confident in their job?
Are they feeling like inflation is less of a concern. Those are things that are obviously going to If things are moving in a good direction on that front, that's probably good for the President and for the Republican Party and vice versa.
So that's kind.
Of what I'm thinking there is that, you know, the reason I have the FED on hold is because I think the economy does better. Well, if the economy does better, then you know, maybe the sentiment around the economy also improved.
Let's say on that then the core if youel cool a better economy, what's driving it? What are the town wins that you go confiden scent?
Yeah, I think the biggest one is that, in my view, a big thing that held us back in twenty twenty five was uncertainty around policy.
I mean, Terris being one of the key pieces of that.
And you know, I've felt for a long time that businesses would re engage in twenty twenty six, not that the policy, not that policy and certainly goes away entirely. I mean that clearly is not going to happen, and there's always some level of uncertainty. But you're hearing a lot more FED officials who are communicating that their contacts are telling them that businesses are kind of getting ready to re engage.
A little bit.
So in twenty twenty five, investment spending was really just about AI, and if you were to strip out the AI pieces, business investment was probably negative in real terms to the first three quarters. I think you'll see a broadening out in twenty twenty six, reflecting the tax cuts that were put into place, the deregulatory push, and some of the other things, assuming that the administration kind of ties up some of the loose ends around terras.
Will that be accompanied with better payroll growth?
Yes, because I think the same dynamic that has businesses hitting the pause button on investment is also applicable to the labor market.
I think they're businesses who maybe.
Would otherwise have hired, who are holding off because of that uncertainty. The complication around that, I think is that now what we're hearing again, what we're hearing FED officials saying that they're being told by their contacts in their districts, is that there's also now a second feature, which is AI. And do I maybe want to hold off on hiring because I'm not sure if I'm going to need those workers A year, two years, three years down the line.
But I mean, you know, if the economy.
Is growing as it has, ultimately you have to grow your workforce to measure up to that. So I do think we'll see an improvement, not a drastic improvement, but some improvement in the pace of hiring enough that we should be able to get the unplantent rate down a little bit as we move into the latter part of the year.
Will that growth lift all both say the bottom part. If you do believe we're in a CA shaped economy.
That is a very real phenomenon.
There's no question that the folks at the lower end of the income scale are struggling more than the folks at the higher end. It remains to be seen whether that dynamic changes. I think that they're in some ways. What we're seeing over the last year or two is really just a normalization. I think the people at the lower end of the income scale benefited greatly. They got
most of the federal government money during the pandemic. We had mortgage foreclosure moratorium, student loan payments weren't due for four years, and the labor market was very tight and skewed toward lower paying jobs. Right because it was the retail and the restaurant, the high contact jobs during the
pandemic where we were seeing the highest pay raises. What we've seen over the last few years is kind of getting back to normal, which is that the folks at the lower end of the income scale are seeing slower wage gains than the folks at the top, and as always, they're not benefiting as much from higher asset prices.
Just quickly, where have you got Inflation at the end of the year.
Still in the high twos. I think it probably accelerates early in the year as more of the terrif related pressures get pushed through, and then maybe comes off a little bit as we move toward the end of the year. I think by the end of the year the run rate will be two and a half, maybe even a slight bit lower than that, but still above target.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, anngient politics. 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,