Bloomberg Surveillance TV: January 3, 2025

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and A 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

Sure? Well?

Then you excuse me when you look get their earnings picture for twenty twenty five. There are some pretty big reversals that are expected, and I think investors need to pay attention to that. We get so obsessed with this tech trade and focusing on whether or not we should be in a handful of tech names or all of tech, or certain.

Parts of tech.

But the second best sector in the SMP for earnings growth is actually expected to be healthcare this year. And then you look at things like materials industrials that are going to see these big reversals from what their results were last year. So I think there are opportunities out there that are not trading at all time highs.

How much are these opportunities torpedo if yields don't necessarily come down?

Well, so the question about yields, we know that this four and a half percent level on the tenure has been really critical to the.

Equity markets at large.

You'd start getting to that four and a half percent level, markets at large, indices at large start to struggle when

Than what it would be if that discount rate was lower.

So yields should put pressure on some of those growth names. That being said, I think investors are going to start looking for opportunities, growth of opportunities in different places, and some of those places might be pharma and biotech. Healthcare really legged the index last year. There's a lot of bad news priced in, bad expectations priced into healthcare right now. I think they're priced for a good opportunity in twenty five if investors need other growth options.

Liz, when you talk to investors, how receptive are they to this message? Or basically you've either had big techs that have continued to outperform or people are getting a little bit nervous and everything has just gotten a little bit elevated and want to hide out in T bills. I mean, how much are people willing to sort of look into the nuance at a time where some people are worried about peak sentiment.

Well, I think peak sentiment probably happened post election, and we baked in a lot of this optimism, but without policy clarity. So now we've gotten to a more rational level, we've had this little pullback. We've ended the year on a bumpy note. We sort of started the year on a bumpy note because we know that we need more clarity, we need more answers in order to actually trade those stocks for the long term. So how much are people

These big policies.

Also, when you look at a market that is so driven by momentum, people aren't looking at the nuances. We're looking at the momentum trade. We're looking at where sentiment is driving things. And a lot of times in those environments you have this fomo attitude and that does.

Ignore a lot of the nuances.

So I think as time goes on, and if tech continues to come under some pressure, and if there is, you know, perhaps a slow down in earning's growth, a slow down in the optimism, which doesn't necessarily mean a pull back, but just a slow down in the optimism, investors will start to look outside and have to be more nuanced about it. I think profit margins and earnings are going to be a really critical factor in investing this year, Liss.

When you talk about policy clarity, have you gotten any clarity over the past forty eight hours from Washington and mar Lago when it comes to the one big, beautiful bill and hopefully getting it done by May.

We've gotten a little.

But as you guys mentioned earlier in the show, the market doesn't seem all that upset by it at this point. I don't think, first of all, it's a surprise to say that we're going to see more tariffs this year. I think we know that, but we still don't know exactly when that's going to happen, how much it's going to happen, and all the different places where it might actually impact market. So again, it's sort of just reinforces

Now.

Of course, as they become more and more realistic, the stock market will price that.

In ahead of time.

But I think the message of today is that, Okay, we know there's going to be more tariffs coming. Maybe the message is a little bit different than what we thought two weeks ago, but it's still tariffs and we're still not sure, so we have to wait a little bit longer.

Well, if it's still terrorsts regardless, even if they're more narrow, is it now time for companies essentially raise prices.

I don't think that companies are going to get away with raising prices as much as they have over the last few years, because consumers now realize that inflation has come down. It was easier to pass through those costs and those price increases when inflation was rising wage growth was rising.

Now we've got cooling wage growth.

We've got CPI and PCE numbers that most people understand, or at least at a lower level than they were. Certainly not deflationary, but at a lower level than they were. So it's more difficult to justify a pricing pass through even with a tariff change.

Liz, can you help us with the week ahead? We have one hundred and nineteen billion dollars of dead auctions. We have the key labor report that comes out on Friday, with the expectation of one hundred and sixty thousand jobs printed in December, and then we have the potential for truth postings or any other utterances around the Trump camp. Of those three which were most important for.

You, I'm focused on the jobs report. We also have jolts this week. So when you look at just what the market had been focused on through most of twenty twenty four, it was jobs. We had turned our focus to the jobs market because it seemed as if inflation had been largely defeated. Now we've got this environment where jobs are still very important. Inflation has again become very important. So this week the story is going to be about jobs. I don't expect there to be any big surprises yet.

Expanding the labor market.

But one of the tenets of our twenty twenty five outlook is that we have low churn.

In the labor market right now. And what I mean by that.

Is low hiring, low quits, which means people just aren't moving around quite as much. So this idea of adding a ton of jobs every month, I don't think is something that investors are really looking for. What we're looking for is just no real deterioration in the labor market, because right now, as the Fed has mentioned, the labor

We will get a lot of labor markets data this week, including child's data tomorrow. Let's appreciate your time. It's going to say, let's young tell us that of sofi. David Malpass, writing in a wool streatch op ed, President Electrum was right last week when he raised the red flag over the debt limit. The outgoing government is leaving a Taylor made debt crisis for mister Trump that complicates his work to implement his mandate, cut taxes quickly and rebuild US strength.

That's right, this has been coming on for a year, for two years.

That kind of planned it so that the new president, the next president would have the problem. So Congress spent all the money, and so it's Taylor made for a crisis because if you don't raise the debt ceiling, you have a default on the national debt. What I've wanted them to consider is rewriting the debt limit so that it actually works. You've got to stop the spending before it happens, rather than after you've already spent it.

David, we heard over the weekend from my Johnson House Speaker that there is going to be one big, beautiful bill and it's going to probably come in April, and it will be put through by reconciliation to get all of Donald Trump's agendas in place. Where're speaking with Henrietta Trace, she said this could expand the deficit by some five

I think there's a strong will to reduce spending. One of the things going on is Biden is leaving the copboard bear as he leaves office. That means they've spent up as much as they can on the current fiscal year.

They've also they're in the.

Process of obligating every day that goes by. They're obligating huge amounts of money that can't be gotten back through the recision process. So if you make a grant and you obligate the funds, you can't get them back.

And then another way that they've.

The cupboard is bare, and then showing up in the bond market is they've kept the issuance of debt short term. So one of the biggest decisions facing the new administration will be what maturity to issue at and does the Federal Reserve buy back all of the long term debt?

You know, the Fed is this giant hedge fund.

It's owning all of the long maturity are a big chunk of the long maturity bonds. So I think over the last three months they've lost maybe six hundred and fifty billion.

Dollars just on having a bad bond trade.

You know, yields have gone up, so they're the big holder of long term yields. So the consumer feels okay, but the government itself is losing massive amounts of money until they find a way to slow down the spending machine.

Do you think.

Just to sort of build on that, David, that the reason why we've seen that rise in longer term yields is because of the death said, is this truly the bond vigilantes coming back to the table.

There's some of that.

The market looks ahead and says is do you have a mechanism to actually control yourself?

And so that you know, the bond yields are having multiple problems. One is the Fed's models are really broken. So the Fed is basically saying, if.

You have more growth in the economy, we assume it will be inflationary, and so we will have higher interest rates.

So it's a broken models problem.

But then second, as I mentioned, the duration of the government was held down. The FED was buying the treasury issued some long term treasuries, but then the Fed bottom back and so this is a major problem because you have to get over the hump. You can do that through confidence, and that means are you able to repeatably, you know, over and over again. Cut spending. Do you have a mechanism to act actually control what Washington spends.

That's yet to be seen, but I think they can do it.

David, I don't really see any restraint right now with the incoming Trump administration. President Trump talked about yesterday one powerful bill, border security, energy policies, renewing Trump airor tax cuts except making them better to include no tax on tips. And we're talking about a president who spent eight trillion dollars or edit eight trillion dollars to deficit during Trump one point zero. So where do you see the appetite of Trump to want to cut spending.

It's going to be a combination of increasing growth and production within the economy and making the existing spending more efficient. So if you get more from it and you have fewer people but fewer.

Obligated funds, that's going to be the trick.

But I want to really put emphasis on this idea of markets being forward looking and looking at the output of the economy. If you can change the inner system that means both the production but also the transmission of energy, that's going to have a big downward effect on inflation. The FED doesn't have that in its models that you know, each of the Fed's models are broken. One is on how you set interest rates. One is how you use

And then third is their regulatory policy. The FED has this massive control over.

Lending to small businesses and that hasn't been going well. But that can be repaired and fixed. You get more output, less inflation, and you can bring interest rates and bond.

Yields down, something you've talked about a few times, David. We'll have this conversation again in the near future, I'm sure. David Malpasta, the former World Bank President, the former New York Fed President, built downly calling for the Central Bank to improve its communication, writing The better the quality of the Fed's communication, the more accurately market participants can assess

I think the smary economic projections last month was confusing the people because there was a pretty big up for revision to the inflation estimates for twenty twenty five, Yet it was hard for pol to explain the sources of that. He noted that the participants don't operate from a common set of assumptions. Some were assuming effects of Trump tieroff and deportation policies, some weren't, and some didn't say whether

Bill is the issue for the FED right now communication or just not necessarily understanding which direction this economy is going to go in.

Both.

I think the problem is they're having trouble communicating how they're likely to react to the Trump policies.

Obviously, if terists are broad based, that is one effect.

If they're much more targeted, as the Watching Post report suggests, that has a different implication. So there's a lot of the I'm certainly about what Trump policies are going to be, and of course the FED is uncertain about how the economy itself is going to perform. You know, a key issue for the FED in terms of the economy is the labor market going to continue to weaken or not. Has been very clear that he thinks the labor market is still weakening and he doesn't want to weaken any further.

So that's why Friday's payroll and ployer report is so important.

When you talk about a reaction function. This has been one of the big quag buyers for people. What is sort of the scenario analysis that the FED is doing and how they're going to respond to it. Do you think that they have that scenario analysis or do you think that increasingly, by default, it is becoming an increasingly data point dependent federal reserve.

Well, there's definitely a scenario analysis that takes place before each meeting. The staff prepares what's so called tealbook, and in the Tealbook there's a baseline forecast, but there's also these alternative simulations which suggests how the economy might evolve if things happen differently.

I think that's another problem with the Summary of Economic Projections.

It's a modal forecast and it doesn't talk about at all about what could happen if things turn out differently than what FED officials expect. So I think one thing the FED could do is actually do what a lot of foreign central banks. Do is actually have a consensus forecast? Difficult to do with a committee of nineteen people spread all over the country, but you could actually start to publish the staff forecast.

There is a staff forecast available before.

Every meeting, and if you put that out there, you have a better sense of what the baseline assumptions of the FED are.

But Bill isn't.

One of the issues that's problems is because they don't want to or can't be seen talking about policy. Do you just think the FED should be more open about policy all of the members.

Well, clearly what happens on tarists and deportation is going to have a big effect on the commy in twenty twenty five, so I don't think you can avoid thinking about that in terms of making your economic forecast. I think the FED is reluctant to talk about it because he doesn't want to get self engaged into this political discussion, and I think they're worried that that will politicize the FED, so they're trying to think about it with how talking about it at the same time.

Is your main concern right now with the FED communications or would you do anything differently on policy?

I think they are in a pretty good place right now.

I think that they understand that the commy is doing okay, Inflation is a little bit sticky, so it makes sense to wait. They also understand that there's a lot of uncertainty about what policy is going to be forthcoming. And then Paul said when things are uncertain, to slow down. So I think that all makes a lot of sense. I think the big disconnect I think between markets and the FED is where is the FED heading over the medium to longer term. The Fed says we're heading to

But what did you do with your own forecast when you had Trump come aga? In Volume one? How did you change things? Did you anticipate the changes to policy beforehand or react once it was introduced.

I think I thought.

That there was more risk in the forecast, So I think the biggest change for me was to talk about risk and uncertainty going up. And I think that's what's happened today. I mean, I think the big transition from Biden to Trump is under Biden, we sort of knew exactly what the policies were, and in fact, over the last two years, there hasn't really been much in terms

That's what's got to get priced into markets.

That's one reason why I think the bond market has done poorly over the last few months.

Bill appreciate your time. As always built down to there, the former New York Fed President, looking out to twenty twenty five and beyond. 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.