Bloomberg Surveillance TV: July 11, 2024

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

Good morning.

Are you nervous about what we might hear from some of their customers later this earning season.

I think we're still in a player. I mean, it's interesting because I saw it. Note that I think Goldman put out on the fact that maybe they were spending too much and I'm thinking, how do you say that right now? It's a little bit early to say you're spending too much. It reminds me of, you know, just to date myself, the dark fiber discussion in two thousand about we're putting in too much dark fiber.

Well, the Internet absorbed it all. So the question is what is.

Enough infrastructure And I don't think we have the answer to that yet. It's just a lot of large numbers problem.

Now to build on that shit. We reward the Apples. This was ultimately Golden and Cole for having some big stock buy back or reward those that are investing all this money in the future, some big, big outlays that were seeing of the likes of Mets or other names too.

I think that's a little bit just trying to split the reality of you're rewarding the companies that have a lot of cash, what they do with that cash, as long as it's not something that seems absolutely ridiculous. Is still we have a lot of cash, and that's where

What do you make of us Constraang his argument that essentially there is a very positive story to tell with a lot of these AI companies and the sort of big techniqus, but sentiment has gotten so overinflated and people are expecting such big beats that in the near term it just seems nearly impossible for them to exceed those to the same degree.

Do you agree.

I think this is the difficult part right now, because there will come a point where all the spending on infrastructure will slow down, or the delta will go negative, and or you haven't got enough use cases for the other companies that are supposed to start getting more profitable on the back of AI. And I think when that happens, and I think it may happen, then you're going to

It feels like it's almost easier to speculate on whether AI is a bubble or not a bubble and what the potential is, rather than talk about the other four hundred ninety three names and how hinge they are to an economic cycle that's really questionable.

I want to go back to Delta. You mentioned Delta.

It was supposed to be the darling of a cycle that benefited people who have the money to fly around the world and are doing so in record numbers. Is that sort of a signal to you that there is some fundamental problem in consumers that will percolate to a broader number of potentially consumer facing companies.

Well, I'd love to look at the release because I didn't get a chance to go through it very carefully. But is the problem the revenue line is the problem? The cost line you mentioned earlier, the extra costs. This has been the question about what happens when inflation comes down to margins start to get squeezed. If this is more of an issue of margin squeeze, and it's not a problem on the economic front. It's more a problem on an individual company front because everyone's got to figure

Who asks price in power right now?

Why'd you see that? If you can pick it into stream right now?

Who has pricing power? We mentioned Costco earlier today putting up membership fees. Where do you see that pricing power?

I think the pricing power is coming through in the technology space. I think that Nvidia is getting better prices than they were getting before because they're the.

Only ones who have it.

I think any place where something is in short supply, you have some pricing power, and I think on the technology side you have more pricing power. I would argue that the airlines do have pricing power, having paid for airline tickets, but I would also say that it depends on where you're going, and it depends on the timing of that. But I think that in the end, any place where there is any kind of capacity constraint, you have pricing power.

What is it about airlines that everyone just left the rants about. I mean, I could join you too. It's cust a fortune and it's miserable. Why is it always miserable.

Because we are at a point where so many people are flying that even as they're increasing capacity the airlines, the airports can't handle it.

The airlines can't handle it. There's nowhere to sit. It's hot. I mean, I can go on and on.

I remember when I was a KIAUS to go to the Midwest frequently because my family lived there. We flew on Midwest Express which they had you know, glass little salt upper shakers and home baked.

It was a very nice experience.

Everything was first class and it went out of business. But you raise this question about how much you end up with cost structures that are.

Only now getting bigger.

Do you think that people are under mess estimating the margin compression that we could potentially see this cycle, because yeah, the pricing power is in Nvidia, but it's not necessarily in Delta. I mean it kind of is, but we thought it was, but it isn't. Necessarily it's some of these other areas that are also dealing with fundamentally higher costs that haven't come down.

I think that is we were concerned that there was going to be a margin compression earlier than there has been, So it might just be that there's a lag on that margin compression because the costs haven't really caught up yet.

Everything.

You know, we're such immediate people the price changes today. We can see this today in business cycles, things take longer, contracts take longer to play out, It takes longer for people to figure out exactly what their cost structure is going to look like. Fuel prices have come down, that should have been a help to them, but it also might be that because they were using fuel that they'd bought at higher prices, it won't come down until the

What are you more interested in today, CPI or the president's press conference at five point thirty.

Yes, I think that both of them are important, right.

I think that you had a guest on earlier today who said that one number isn't the most important thing. Well, it's not the most important thing unless it goes very much in the wrong direction, right, So CPI went very much in the wrong direction, it would be the most important thing. I think that there has been chaos since the original debate, and I don't think that that chaos is yet over.

I think all the discussions you were having earlier.

I mean, none of what anybody is saying is makes sense except tell me something I want to hear, And until I hear what I want to hear, I'm not believing what you're saying. And so that's where we seem to be. I don't know that that's going to make the press conference today is going to make that any different. I don't think to the extent I mean, it's it's unfortunate, But I don't think to the extent that you know, it's not wrong that age is not something you.

Can take away noise or news. Do you think it's real news for this market the considerations that are percolating over the last few weeks, to the to the.

Extent that we've seen both of these people as president, and the market has reacted well to both. I think I understand why people say whoever's president is noise, but political chaos is not just noise. And if it gets too chaotic, I think that that is going to take people's risk appetite down to some degree. But we don't know that yet, and we don't know what kind of you know, decisions people are facing right now.

We know where one side of the ledger is.

We don't yet know where the other side of the ledger is, even though he keeps saying he is that side of the ledger, and nobody seems to believe him.

We're waiting for him to make a decision.

Sarah, you know that, Sarah Hunt a vampid snackson words, Sarah, It's going to see it. I'm Maris in Washington with a special guest, the Democratic congresswoman Haidie Stevens of Michigan.

I am as I see you.

Thank you so much, John, and Congresswoman Miss Stevens, you're also going to be in Michigan tomorrow with Biden. Yes, I am a starch supporter of him, and you're not backing down.

Why.

I'm really enthusiastic about this campaign and what we've built in Michigan. I've been rigorously on it since the beginning of the year. Detroit is at its lowest levels of unemployment and fifty years we have manufacturing growth. I have a really popular governor, Gretchen Whitmer, who's endorsed this president, who's a co chair of his campaign, who's met with him since some of the debate fallout and is sticking by him.

And the commitment to stand up for.

Women's reproductive rights, to tackle our gun violence epidemic that has hit us pretty hard in Michigan, and.

There's a team right.

We have built an incredible ground operation and it's hard work with persuasion voters, with turnout.

I don't want to.

Turn away from this though now I want to keep going. Fifteen some weeks left, bring this over the finish line, and I believe and know that the Biden Hearris ticket is the one to get this done for us.

Do you think he's the best candidate though, I do. You see the polling today from Washington Post ABC, more than fifty six Democrats say six and ten independents that he should step beside. Is it that he's the best candidate at this moment or there's concern about basically telling a sitting president, the leader.

Of the party, that it's.

Time to go.

Look, the stakes are high. The other thing that the polling is showing you is that people are freaked out about Donald Trump coming back, what that means for young women, what that means for our economy that spiraled out of control when he was president during a global pandemic that was not well handled by him.

And the polling also shows people think Trump would be better when it comes to things like the economy, which our polling shows is still the number one issue.

It is the number one issue, and it's not just look at the facts today. Look, pulling is absolutely important. I have to look at pulling. And I have had polls that have led me down a path of success, and I've had polls that have led me wrong before. But what I know is that people are concerned about Trump. I mean, I hear that on the ground in Oakland County, Michigan.

I think the concern is not so much can he lead right now? It's what does the next four years mean? And you mentioned Governor Whitmer. She was on CNN last night and she was asked should he take a cognitive test? Her answer was it wouldn't hurt, do you agree with the governor.

Yeah, well, Trump joked around about his own cognitive tests and you know that he was some super genius and was spouting off things. Look, anything the president needs to do to reassure people. I have been recently with him when he announced tariffs on Chinese evs and critical minerals. I was in the Oval office with him for an extended period of time. I haven't seen one decision coming out of this administration under his leadership that concerns me. I also know that we have got a message for

We really do.

You've spent time with him recently, You're going to be with him tomorrow.

You said, there's not a.

Decision that makes you rethink this that's coming from President Biden. Not a decision you see that concerns you. But what about his speech, the way he walks actual deterioration is health.

Have you seen any of that?

Not?

Really, to be honest with you, I mean, look, I can't tell people to unsee what they saw on the debate I thought he answered it. Honestly, Look, it's not news that he is the age that he is. I look at this and I see flawless execution from this administration, COVID relief, infrastructure dollars, not just bills that have gotten passed, but things that are being executed flawlessly, like the Chips Act,

There is more to do.

It's promises made, promise is kept. There are more things that we need to accomplish here that are on the horizon. Paid leave, funding for our public schools, support for our educators, the next generation. This is a real campaign. And look, this is a tough moment. It's been quiet. We've had twenty four to seven Trump TV and his convictions and all that insanity. I don't want to go back to that. My voters in Michigan are terrified of going back to that.

Our own convention.

We got to stand up to this Trump leaders.

Our concerned Washington Post this morning, there was a behind the scenes meeting yesterday Sean Fain. President Biden went and stood on a picket line with this man. He is now voicing his concerns.

So when you're in Michigan.

And you're here from union leaders, Trump is chipping away at these people Michigan, potentially Biden can lose. That's what congressman' Slockin even said on a recent donor call.

Yeah, look, we want the win campaign and our union leaders they're deploying their members to knockdoors to evangelize this effort. And that's what you do in closed door meetings. You do say hey, what's our plan, how we're going to do this. We're the Democratic Party, you know, differing opinions, expression of opinions. I've had four to five Republican members of Congress from Michigan who've either left their party, impeached the former president, or.

Got voted out.

I mean, give me a break, Like, this is how it works in our party. It's a good and healthy thing. And I'm going to tell you something else that I know about Joe Biden. He is the ultimate comeback king. He's the most underestimated individual in American politics. He always has been. He's got a good north star. He's tapped into his faith, He's been through things that have tested him for this moment. And yes, he's our older, wiser president.

Commerceman Haley Stevens, thank you so much for your time.

With us around the table. Steve for Shudo of Missoo, I'm still with us. David Kelly of JP Morgan Asset Management. David just got this from Neil Data of Renmack. The Doves have what they need. It's time to cut get on with it. Do you agree?

No, I think they should go in September.

I think they just need to be steady as they do this because if they rush it, it's going to actually look like they're scared about something. And I mean, I don't think they should have gone this high in the first place, but now they're here, just us take it down easily. So I still think September, December, March June September December sixth rade cuts one and a half years.

Think that's what they should do.

Poulin, Central Portugal sent a strong labor market, gives them some time, the luxury of time. Do you think he has that time as well?

Yeah, I think so.

I mean there could be some cracks in private that could be some craxy and regional banks. I mean, we are concerned about things that are not set up for normal interest rates. But remember long term interistrates are kind of at normal levels here. A normal business ought to be able to operate here. So I think it's if it's shows the economy a little bit by not accelerating this, okay, but I'd rather they take their.

Time and I'll rush.

This because once they start rushing rate coats, then it's going to scare people.

See what's your impression.

I know that you've been on the Maybe they shouldn't cut at all. What about given how much inflation has come down.

Again, you've had an inflection point in the economy. We went from three point three percent last year with an economy that was clearly growing too strong, an inflation was not going down. You had to shift to a slower growth economy. This year two point two two point three percent. You've had some benefits of that in terms of a higher unemployment rate, a lower level of inflation. Is the economy going to stay a trend or is it going beyond that?

That's now the question they have to answer.

They also have to worry about the risk because, as David mentioned quite clearly, the concern is if they move too quickly, the expectational set in the market could get ahead of themselves. You know, you've already seen one or two of strategists on the streets saying they're going to cut rates eight times next year. So you've got this environment where if the market goes too far, they then have to think about well they then have to reverse policy.

So they really can't do a hawkish cut.

All they could do here is do a cut that fulfills the dots and the markets are likely to go well beyond that.

Okay, pause, this is something that people used to talk about. We have just gotten thirty seven record highs on the S and.

P five hundred this year.

Why is that not potentially problematic enough for them?

Why is that welcome?

You think it should be.

It should be, But this is a different FED. You have to take a look at the people at this FED. These are a bunch of political economists. They're not the old school anti inflation hawks. The political economists want to play with the levers. They've written their dissertations on playing with the levers. They want to play with the levers. They're gonna play with the levers. We're not arguing about if we're arguing about when and how the market will

They wouldn't. You'd sit back and wait.

The other thing about it.

You know, if there are parts of the markets which are over exuberant, it is entirely the full to the federal reserve for going ten years with raids at zero. I mean, if you make the carrying cost of crazy zero, then people do crazy things.

And so we saw that.

We saw then we've got momentum going in bitcoin and meme stalks and.

Even the mag seven.

And what's happening now is you've got a stable economy and people just.

Doubling down on the best that have worked.

But we want to see more fundamental investing rather than momentum investing. But they already they've sort of caused this momentum investing environment by keeping rate solo so long that you could get all these irrational bets going.

And now the problem is, well, how do you get out of that?

And I think you just returned to rational interest rates, which makes sense based on the economic fundamentals, and then over time markets can return to that rather than trying to manipulate markets by moving industrates too quickly.

Steve, what do you make of that argument that essentially if they adjust policy, that will help some of the names that haven't participated in the euphoria we're seeing Russell two thousand, which is underperformed, actually outperforming at rate kind of expectations, not necessarily in Nvidia, I.

Think there has been an environment in here in which basically the underperformance has been a function of the fact that earnings for a lot of these companies haven't been good. And the reason why earnings for a lot of these companies haven't been good is because their costs have gone up, and not only that, because of the discount or the slower growth environment that we've seen coming into this year, it's harder for them to pass those prices on, so they're getting squeezed.

The question is what is the next reaction to it.

I think the answer is if the Federal Reserve begins to cut interest rates and the market goes very aggressively, which I think the market will do. The market will overstate what the Fed is going to do because every time they cut, they go to zero. I guarantee you as soon as they cut, you are going to see zero hedge and you're gonna see a lot of news stories out there about there must be a collapse in the real estate market, there's something going on in the economy.

The most data's time for the economy is usually when the federal reserve sides are going to help us.

It's just the point you'll make it just on the timing that they wouldn't go in July because it would spook people.

Yes, I mean I think that. I think there is a cadence.

You know, there are four big meetings so they put out new sumary of Economic projections and four smaller meetings when they don't and I think a cadence of cutting rates at every as Summary of Economic Projections meeting, so this is September December.

It makes it predictable.

And you also get down to look our termal rate here is essentially a normal rate of about four percent or so in the federal funds rate. That's where we're headed until the economy actually need or financial markets in the economy need us to do something, but they shouldn't.

Try and micro manage the economy.

And because what they end up doing is causing bubbles and busts in asset prices.

I'd like the view from both of you on the following question. Are there political considerations at playing hair Do you think there are?

I believe they try very hard not to not to interact or make political decisions or virtually political decisions, because they don't want to come in back at them. You know, deep down, I know they prefer a government that lets them do their job because while I don't always agree with what they do, I think we would be infinitely worse if we had people from the other side of Washington telling them what to do. That would only make

Safe well, I think the answer is they want to maximize social welfare. We can argue is to the right way to maximize social welfare. The inflation hawks would say keep inflation at two percent on a sustained level. Let the economy find its own equilibrium on the real growth side. This Federal Reserve, on the other hand, wants to maximize social welfare by keeping unemployment very, very low. There's a

They run a lot of risk if they will cut interest.

Rates, and they may have to reverse it down the road because they've created this instinctive response in the marketplace. But I also think you have to keep in mind this Federal Reserve has been itching to cut rates. I think they'd be crazy to go in July and open issue as to whether or not we could talk about September. It's always been about not if, but when, and we'll see what the data shows us between now and then.

So what you're just saying is that essentially the most important number for them is the employment number, not necessarily the inflation number.

Is that correct.

They don't want to see a rise in unemployment, No, they don't want to see it. Keep in mind, the rise in unemployment we've had today goes back to something David said earlier, which is basically, the household employment is dipping and the payroll employment, Oh it isn't. The reality is, whenever you re benchmark these two series, guess what, it's the household employment that suggested to payroll. So the payroll

Well, I think it's I think it's it's almost like we've seen a micro economic change in the labor market rather than a macroeconomic change. Because if you go back to where we hit a trough back in April of twenty three, if you could fog a mirror, you've got a job. And frankly, there are a lot of people in America who shouldn't be employed. And what's happened is if you look at what's actually happened with the unemployment numbers from the Household Survey, it's.

The long term unemployed. They've gone up. And that's really interesting. In an economy we've got to eight million.

Job buildings, there are people who after fifteen weeks, after twenty six weeks, cannot find a job. That's not about the economy, that's about the you know, are these people employable? And so I think what's happened is we've actually I think Chairman Pal's right, we have actually returned to a kind of normal labor markets. At four point one percent unemployment. I don't think there's anything wrong with that. I don't

Of churn in businesses.

I don't think this has a much business new business creation as some of the data would suggest.

Just want to offer this up fed funds futures have just readjusted to about eighty five percent chance of September. So that sounds like it's a bit more in line with what I would expect given what we're seeing.

I'm curious, Steve, given.

What you're talking about, how you would see some of the earnings that we got today that indicated a real reduction in consumer spending and definitely less pricing power.

More broadly, I.

Think it indicated more the less broader pricing power environment. Beginning, we're still running an inflation rate well above two percent even with these numbers, so we're still a percentage point above. And if we're going to say, oh gee, the deceleration from three percent to two percent is a big movement on growth, okay, the movement from three percent to two percent on inflation has to be considered a big movement.

Though, So we're still in that environment.

So I think that the realities when we balance it and we look back at the data in general, we take a look, they're still well above their target on inflation, and there's still maybe a trend growth.

Okay, where we go from here? I think the reality is that you're.

Seeing an environment where cost pressures are squeezing companies and that's really their problem, and they will if you cut interest rates and you have a sharp rebounded economic activity, they will pass those price increases along and when that happens, then it becomes a problem for them. This is why go slow, take your time. You've got a winning hand. Why would you do anything today or potentially September to destroy that winning hand.

It makes no sense to me.

I just wanted to know if FuG and Merits was on the job description at JP Morgan.

That's all I want to know that.

I wanted to know what he was talking about.

Is it that you get close to it and.

Go yeah, yeah, yeah, you're checking.

Okay, okay, thank you, thank you. I'm just.

Watching.

They shout up to David Kelly of JP Morgan to both if you, thank you, Jent. It's just fantastic. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, anchient pol. 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.