Bloomberg Surveillance TV: July 30, 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

I think the bar is high for these companies, Jonathan, and they're going to have to make those numbers more likely exceed them for the stocks to be okay.

People are looking for excuses to.

Trim these names and oh they just reported, Yeah, I own some of them, let.

Me trim it.

I think that's the general trend in these names expectations.

I Danives of Wetbush with even bigger expectations, is looking for an even bigger rally in big tech. We believe this week and the rest of two Q earnings will be a major positive catalyst for the tech sector. We expect tech stocks to be up another fifteen to twenty percent for the year, adding to the robust tech gains in the first half of twenty four Bob, what would deliver fifteen to twenty percent upside for tech stocks? Where's that going to come from?

There in lies the debate that we're going to have to have a further leg in AI. We're going to have to have exceeding earnings expectations. Earning estimates moving up in my view, to get another fifteen to twenty percent.

People own these stocks.

It's not like they're undiscovered, so to buy more of them, we're going to need better news that it's hard for you and media anticipate.

We should talk about the flip side of that, which is how much more downside could there potentially be in the tech sector. John was talking about Bank of America research, saying time to show monetization. Since the first quarter, there is nine dollars spended in capex revision for every one dollar in additional sales of hyperscalers. In other words, we're

I think that's what's behind the decline. That doesn't mean there isn't more of that to.

Repeat.

The people have big profits in these stocks and they see other stocks beginning to move and sort of trim these to buy some of the others.

I'm not convinced that rotation.

Is over, which generally means for a sloppy market as we've seen this rotation here in the months of July. The market's kind of move sidewise as people are trying to figure all out. As you used the word earlier, it's confusing.

Yes, that's the story of the entire year. In the past couple of years, there is this issue. You said that you're not convinced that the rotation is over. The rotation has been curious because it's been marked by the companies that are most leveraged to the economic cycle at a time when we're talking about weakening, we're talking about cooling, we're talking about companies disappointing, and talking about consumers that are very pre sensitive.

How does that make sense?

It doesn't in my view.

I agree with your set of statements and trying to square the circle. Look, people have gotten very complacent. In my view, the economy is just fine. Earnings will be good to Fed'll get inflation down to two. I'll hold my nose and buy stocks at twenty two times forward twenty six times trailing earnings.

That's our hard road for me to ride, I.

Have to say, Bob, I think everyone once said both ways. When inflation was up and rates for climbing, we were talking about wider margins, better margins because they had pricing power. Doesn't the opposite apply here, Bob, that when you start to see disinflation, even more disinflation in our future, it just means a loss of pricing power, which goes back to the point you're trying to make, which ultimately is why by cyclicals here. Isn't that the biggest headwind to that?

Bet?

I think that's right.

And the companies are waking up to the fact that they've moved prices up and they're starting to get resistance, particularly in the mead income consumers, and that's new over the last bunch of weeks.

And that can't be sustained without more weakening. So what do they do.

They say, we got to cut costs somewhere, and maybe we won't hire a worker or two, maybe we'll let it or two go. And that's why you're starting to get some sloppiness and the employment data.

So we've got a decent idea of what you don't like, what you want to stay away from. Give us an idea of what you do like, but you gravitating towards I.

Come back to the common factors of earnings, persistence, earnings predictability, and strong free cash flow. That's my defense, if you will, against the kinds of things we're.

Talking about here. Those stocks have done fine as the market has moved up.

I think they'll show their stuff even more if we get into a selling squall or some sort of sloppy sidewise action.

Is there a reason why you just are focusing on stocks? Is that just because that was the conversation? Are you just trying to avoid bonds that stocks are both the risk factor as well as the havens factor depending on.

Where you go, only because that's the conversation. I would own some bonds here. Look, the economy is slowing. While second quarter earnings have been just fine, third and fourth quarter earnings estimate revisions have been to the downside, So the sloppiness is kicking in. And when that happens, you probably won't want to own a bond or two.

Which kind is this something that you're worried about in terms of longer term or a medium term is sort of the sweet spot? Or do you think that right now it's time to lock things in.

I would own quality, meaning more treasuries than corporates and high yields.

Look corporate highield spreads are pretty tight.

As you know, and if and as the economy weekends, the questions about how long will that weakness last probably causes these very tight spreads to widen some and therefore the Gouvey's probably outperformed.

Interesting boff. Thank you, sir. I appreciate the updates. It's going to say across smock you as well, sir. Think weake ahead. It's time to the election. With fewer than one hundred days until voters head to the polls. If re elected former President Donald Trump is why they expected to a point, a so called Capitol Hill cabinet full of congressman A potential shortlist includes Republican Senator Bill Haggerty, who is being floated as a pick for Treasury Secretary.

Good to be back with you, Jonathan Lisa, thank you.

Let's start with foreign exchange if we can, Sir. We caught up with the former president here at Bloomberg just a number of weeks ago, and in Bloomberg Business Week. He told us that he believes we have a bit of a currency problem in the United States for America. Senator, I would love your perspective on that, whether you agree with a former president on that issue, and what kind of policy tools do you think the government has to address it.

We have a number of problems with the economy. I think the biggest one, however, and it's related is inflation, and inflation is driving higher interest rates. Of course, that has a direct impact on our currency. But President Trump's policies will have an immediate impact to bring inflation down because he's going to end this administration's war on fossil fuels, bring energy costs down, go back to a deregulatory construct as he did in the prior administration, taking the regulatory

The Senator, there are two other proposals as well, which I'm sure you're familiar with. Much higher tariffs are much tougher stance on immigration. I'm not going to sit here and say whether that's the right or wrong thing to do. I just want to talk about outcomes and consequences. Deutsche Bank, like others on Wall Street, Senators you know, have pointed out the tariffs and their associated stronger implications for the dollar are significantly more likely to be the dominant market

Look, I'm fully aware of the concerns surrounding tariffs. Will let me make this point. The United States of America has the lowest tariff barriers of any major economy in the world. The converse of that statement is that our major trading partners do not have the similar terroists. They have much higher tariffs. Therefore, we have a real lack of reciprocity. That's not fair. That's something that needs to be addressed. Many of these issues date back all the

From a market perspective, people are struggling with these two goals sort of national security fairness on one hand, and on the other hand, the idea of the advantage of a weaker currency for trade purposes, which takes permanence pre eminence.

Well, I think it's something that always has to be balanced, Lisa, and I think you'll see any administration do their best to do it. I think President Trump did an excellent job of that during his first administration. The playbook is laid out there. We were strong, we were tough with China. At the same time, we brought economic growth that was twice the rate of any of the major economy at the same time here in America. So we can do both. We can walk and shoo them at the same time.

All right, let's go there.

You've mentioned it a couple of times, this idea of war on fossil fuels, as well as the idea of not really achieving the goal of energy and dependence. We're pumping more oil in the United States. We're producing more oil than ever before, more than thirteen million barrels a day. This is something unseen before in terms of production from any other nation. How can you say that it's a war on fossil fuels at a time where it is.

Record production at LISTA.

It clearly is a war on fossil fuels. Because Joe Biden came in and took federal lands off the map immediately upon taking office. That's a quarter of our capacity right there. What you're not saying is that there was a trajectory that was much more rapid, much higher. We took ourselves off of that growth through and we flattened it. We continue to produce, but demand is outstripping it. Think

So, Senator, right now, we're producing thirteen point three million powers of crude every single day, as Lisa points it out, that's a record. It's more than anyone on the planet. How much crude do you think America should be and can be produc sick?

We should be producing more than anybody else in the world as we are. We need to produce more LNG and we need to become the strongest energy partner there is. You think about pipeline capacity and the difficulty of getting permits of this administration. You think about the difficulty beginning or refinery started here in America. All of these log jms and difficulties make it less possible for us, make it more difficult for us to be the best possible ally that we could.

We need to expand it.

We need to realize that this is a true source of competitive advantage for the United States of America.

Let's exploit it.

Let's talk about who is an ally and who isn't an ally. There's lots of conversations about what's going to happen we trade policy and China. I think we've sort of exhausted that conversation many times after the last few weeks, Senator, I want to talk about Mexico. I want your view

Well, in twenty twenty six, the USMCA is up for renegotiation. I think one of the greatest concerns is the fact that Chinese ev makers are looking to in run the Usmcit in run tariffs and use the USMCA in Mexico market in particular, as it means to get into the US market and they're using their subsidized product destroy the US market. That's going to have to take a very

We've got to address that.

I intend to speak with the new administration there very soon about what we can do to make certain we have much better and much stronger relationship there with Mexico in fairer terms.

Senator.

The last time we tried to talk, you were at a bitcoin conference, and this was our cryptocurrency conference, and that was where the former President Trump was speaking and fundraising. And we've been asking this question on the show.

Why bitcoin?

Why now?

Why crypto assets? What's sort of the motivation to really embrace a network of crypto assets and become the preeminent network on the planet from a republican sort of stance. Is this something that is concrete and why, Lisa?

I think this is something that has evolved over time. I first began looking into crypto in the previous administration in twenty eighteen. That was my first engagement. I initially started at a p of skepticism, as I think many of my colleagues do. But when I begin to understand the underlying technology and realizing the potential for dramatic productivity gains, what I thought to myself is, we need to make

We want it to evolve here.

We want to create the ecosystem for it to thrive here, and the last thing we need to do is push it off shore. However, the current administration has done everything they can to attack this industry, to push it offshore again, to use the SEC, the CFTC, every tool at their disposal to come in and attack this industry and refuse to provide it with any time for a regulatory framework.

That brought people to.

Their feet in al He's going to end Operation Chokepoint that's been taking place in the crypto industry here in America, and he's going to try to create the environment here where the industry can thrive, and we'll see the next wave of innovation happening right here in America.

Senator, We've got to dance around the issue about your future. So this is how a frame mat. I've got twenty seconds left on the clock. Your favorite city to live in Nashville, Tokyo or Washington, d C.

Which one, No, it has to be Nashville, Tennessee. And if you've been there at the crypto conference, you've ever seen the energy there. It is absolutely wonderful. What's happening broadly across my state. That's why so many people are moving there.

Senator, thank you, sir. Beyond big tech investors also awaiting the FED decision. The fmc's two day meeting kicking off today fetcha jpower widely expected to give a soft signal for a September rate cut, to discuss Tiffany wildingger Pimco joint is alongside Stevehshutto of mis zero. To both of you, thanks for being miters. Tiffany, I want across to you first and get your thoughts on what we can't expect

Well, I think he's going to say that they are more confident that inflation is starting to move back towards their goal after progress had stalled in the first half of this year. Of course, the fact that shelter inflation has shown more progress and the last few inflation prints is going to help in that, you know. But I don't think that they're going to you know, I don't think they're going to be in a huge rush. We

We don't get an update to their assumptions their forecasts this time around. We'll get them in September, I believe, Tiffany. I'm looking at their current forecast for unemployment. They've got that for twenty twenty four four percent. That's below where we are right now. You mentioned maybe them going in September and cunning once every quarter. What would your assumptions be in the labor market for unemployment, given that's your call for interest rights.

Yeah, I mean so we think unemployment probably ends around where it is now, you know, for too, maybe a little bit higher.

You know, the labor markets are are normalizing, you know.

But we think the important fact here is that you haven't seen a lot of you know, actual layoffs. If you just look at the level of employment, employment you know, has not really declined. Those are usually the hallmarks of recession. So, you know, we think we're seeing a labor market here, which is easing. Certainly, we've had a lot of supply, more supply coming into labor market as a result of immigration, you.

Know, and that appears to be the story to us.

And I think that still allows them, you know, to kind of you cut and do it at a pace that isn't hurried like we see in a recession.

Steve Should, I know that you're sympathetic to the view that they don't have to rush. You've been talking about the potential for no cuts being actually okay for twenty twenty four, given the fact that there's plenty of momentum under the hood. Do you still feel that way that, frankly, all this talk about even cutting rates tomorrow is premature, and that you think they should really hold off and be more patient than many people think.

I mean to answer you a question real specifically, they're winning. They're winning without having done anything, which is the most interesting aspect of this. The promise of rate cuts has led to financial market conditions which are much more accommodative than the federal funds rate implies. So therefore there's a question as to whether or not they actually have to adjust the federal funds rate the reality is they run the risk if they do adjust the federal funds rate

And that's why when you.

Look at the forward structure of rates, for example, Sofa Sofa going out out over the next year or so is telling you that the market's assuming we're going to get to a two percent fed funds rate, where I think a lot of economists would be sitting there saying, well, maybe we get to three or maybe we get to three and a half. The reality is the market's priced in much more, which is why financial markets are so accommodative, which is why they're winning without doing anything.

Stevie said political economists and that they're in favor of a much more aggressive rate cutting path. Can you tease that out, because some people might hear that and say, Okay, they want to cut rates that they say for an administration or another.

Is what you're saying a little bit different?

Yeah, I mean you've got people here who are policy wants. They want to play with the levers of monetary policy. They want the idea the administration likes to play with the levers of fiscal policy.

This is a throwback to.

The nineteen fifties nineteen sixties, where we had a group.

Of economists that came in that thought they.

Could use you know, monetary and fiscal policy to craft an economy more suiting to their liking. And we're trying to do exactly the same thing here again.

Now.

The results of what happened in the sixties and seventies was we wound up with a stagflation environment, which I'm not anticipating here because we had a world of excess demand there.

We have a word of excess supply here.

But the reality is you could wind up with a higher rate of inflation than the market is discounting. I think the biggest risk for the market is not at the front end of the curve. It's at the long end of the curve because yields at the long end of the curve and not back taking into consideration the risk that what these policy makers are doing runs the risk of creating an embedded higher inflation rate than is currently priced into the long end of the curve.

Stapy suggests that there's more shants that tens trade in the fives next year than they tried in the threes.

I think that's exactly the right scenario to think about.

That is the risk reward trade.

Yes, it's Tiffany, You're at the bombtause. What are even the team doing with Rickonsida? How are you thinking about the challenges to the long end of the curve in twenty twenty five.

Yeah, I mean we we certainly think that over the longer term, markets can price in more you know, just more term premium, you know, as a result of the outlook for you know, for the for the US federal government deficits and debt.

You know, clearly this is.

We're on a you know, an unsustainable trajectory. That trajectory is the result of you know, social security, you know, liabilities in the future, you know, and these non discretionary programs the US those will have to be course correct at some point. Obviously, the big loser coming out of the pandemic was the government balance sheet with additional debt, you know, and at some point we agree that the markets will need to price in some we're term premium

So I mean, ultimately, I think it's nuanced discussion.

We think the curve can steepen, so wre term premium can get priced, but we aren't expecting, you know, some messy volatility to result from this.

Tiffany, what do you make of Steve's argument that these officials on the FED are political economists who harken back to sort of some of the philosophies of the nineteen fifties and nineteen sixties of fine tuning everything, so they are going to be more prone to trying to support a market being a put essentially the way that they're being treated in markets right now as sort of you know, either way it's going to be okay because they can come to the rest. You do you kind of find sympathy.

With that view.

Well, I mean, I think that now that inflation is has moderated quite a bit, you know, and now that people are more confident that you are still going.

To get some additional moderation.

It could be slow, probably will be bumpy, might not get core PC inflation all the way back to two, but could live.

With it in a two point something zone.

You know, the federal serve officials, as they should, are going to start to focus more on, you know, the labor market side of the mandate.

And you know, the view over the.

Last you know, several years, I would say, and even in the long Term Strategy Review that was completed several years ago. You know, the view is that if you let the labor market run a little bit hot, it's okay for the economy. It's actually good. You have people coming back to the labor market. You know, you have underserved communities you know that really start to benefit from that.

Steve, I want to just finish up with you, because there's this question about what the consumer is doing. Based on some of the corporate guidance that we've been getting, it's been sort of highlighting the pricing of the lack of pricing power at a lot of different companies and pointing to this question, as John's been asking repeatedly and rightly so over the past six months, is it weakening or week cooling or cool you know, are you changing your view on.

Whether this is actually truly a.

Less perhaps heated economy than you thought, say a month ago.

No, I think the economy is still going to see an inflation right at the end of the year that's much harder than the federal reserves target. I think the hope that the currency continues to provide the ability for goods global goods deflation to dominate on or to have an impact on the favorable impact on the domestic inflation story is a risk. You know, foreign central bank policy decisions could have an important impact on the currency. It's not just the US and the currency has been one

You want to keep a labor market hot.

This concept of a hot labor market gets to the question of, well, what is a hot labor market. The natural rate of unemployment had always been seen to be four point five percent. Now suddenly we've lowered the target for where the unemployment rate should be by the end of the year of four percent. That's a very significant downward adjustment in the unemployment rate. So the ES the Federal Reserve lowered the threshold to make it look as

And this is a critical component.

You look at the claims numbers, you look at the continuing claims numbers, You look at the number of job layoffs. People are not getting fired, and it's harder and harder to find skilled workers. Wage pressures aren't coming off the boil. It has been really an environment in here where global goods deflation has been pulling down the headline inflation.

Just like gold. Global goods inflation moved.

A lot of it up to the upside during the COVID environment.

It's now reversed that.

But by the same token, the service component is not coming down. And the service component is the domain a component within the US inflationary because we are much more of a service economy than we are a goods economy.

Hey, Steve Tiffany, big week ahead, Thanks for giving us some time this morning. Steve a shooter there of Mizuo Tiffany Wilding of PIMCO, two of the very best in the world of economics. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings