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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. Joining us now to discuss is the former Kansas City Fed President Esther. George Esther, Welcome back to the program. I remember your descent in twenty nineteen. I remember your descent. I think it was in twenty twenty two. You've got some experience. Can you describe for us what it's like entering the room, the committee has a conversation and you say, you know what, I disagree, I think we should be going in a different direction.
Well, it is and parcel of decision making in a large committee, in my view, and you approach those conversations, those decisions in a way that I think is respectful of what you're hearing around the table, that you've taken into account, agree with the chairman. You want to acknowledge that you are listening and understand what the arguments are.
But at the end of the day, decision making is difficult, and I would argue it is particularly difficult in times when the read of the data is not so clear across the table, and I always felt it was as much an obligation to the public to express.
Those views, to be.
Respectful again of what you've heard, but at the end of the day, to really voice how you see the economy and the appropriate stance of policy.
We saw a pretty big divide represented by the views of FED Governor Member Chris Waller as well as FED chair Jap Powell. Both have a very different view of the labor market, and John's been really good about accentuating the point that we only have two months of data. Do we have enough time to really bridge that gap between the two men to really understand whether this labor market truly is stable and solid or whether there are cracks.
Well, I heard earlier a comment on your program that talked about each time you finish up one meeting and think you have plenty of time to see the data for the next that.
Is never conclusive.
You will always face uncertainty around what the data is telling you and whether the trends you're relying on are about to shift or whether they will continue. And so that of course is going to be the focus in bringing these two views to some kind of consensus. I'd be surprised if two months resolves that, but obviously both we'll be looking very carefully to try to reconcile how the economy's unfolding by that time.
Is your sense there's quite a bit of disagreement on the ending point, because certainly on Wall Street there's a great deal of uncertainty about whether the neutral rate is something closer to four percent or whether it's closer to three percent. Do you get the sense that there's that type of disagreement just among FED members.
Well, at some level, Lisa, It is absolutely the issue at hand, because when you are trying to specify your policy, when you're trying to describe it, particularly after a time when you brought down rates by one hundred basis points, trying to calibrate around what is an equilibrium, what we should we be expecting that the endgame is and so you see that in a long run sense in the dot plots. But of course, for any given stage in the economic cycle, you'd be very hard pressed to know
exactly what you're looking for. So that I think, at the end of the day is really the question is this mildly restricted policy? Is it restrictive? Is it not restrictive at all relative to the outcomes we're getting? Is at the heart of what the committee is debating.
There seems to be disagreements on both sides of the mandate as the not just on the inflation story, but also on the labor market. We have payrolls tomorrow. We've heard from Governor Waller. He was pretty explicit. He came on this program and said the same thing. He thinks the labor market is on the edge. That was like day and night compared to what we heard from Chairman Pow yesterday when he talked about the labor market and
the Committee continues to call it solid. Can we get your opinion how you view the labor market at the moment and whether you'd characterize it as solid.
Well, I think this is a labor market that's shifting and obviously in a macro sense. This is a committee that is making macro policy has to rely on a macro number, which the chairman said is going to be the unemployment rate. So in that sense, they have explained clearly in a broad sense, what they're looking at as things move around. Though underneath the of that unemployment rate, I think you have to be mindful that the Fed's
reaction to that cannot be a direct response. In other words, if you're going to lower rates thinking you will arrest, the changes that are going on under the covers not likely to happen. And so in a time when your backdrop is coming off of high inflation trying to get back to that two percent target, it creates this weight and see it creates a real sense of having to have conviction around the next move in your policy rate to know what you are responding to.
Esther, thanks for sharing some of your experience with us this morning. We appreciate it as the judge that the former Kansas City FED president to extend the conversation. Jason Furman, the former economic advisor to President Obama, joins us now for more. Jason, welcome back to the program. The data seems to be okay. The Utning's from Corporate America better
than good. We're a few months into this process, and I just wonder, from your point of view, Jason, whether you believe it's premature to sound the or clear.
I don't think the data is that terrific.
In the first half of this year, the economy grew at a one point two percent annual rate, that is way below where we should be. Core inflation was a three point zero percent annual rate. That's way above where we should be. So no, it's not a catastrophe by any stretch of the imagination. But you know, there's more than a hint of stagflation in the numbers we saw in the first half of this year.
Looking at it together, it.
Was something Jason that Bob Michael was talking about. The key question for a lot of people is how big is the stag and how big is the flation? What are you looking for to determine the answer to that question.
Look, one of the confusing signals here is the disconnect between GDP growth, which has been weak. It was even negative in the first corridor, although some of that I think was furious measurement issue, and the job market, which if you look at the unemployment rate, which Jay Powell
rightly emphasized yesterday, has held up quite well. And you know, you see consumers cutting their spending back but continuing to get jobs, continuing to get raises, and that on the stag side of the ledger is making things even more unclear.
Well on the flation side of things right now, there's a question about the trickle out effects of the tariffs, whether we've seen the ramifications yet. A lot of economists have been saying, wait until the third quarter, wait into the fourth quarter, and see exactly how companies really managed
through this. Who do you think is a good example, or is there an industry that you think is a good example that might have given us an early look at how this trickles out and what consumer receptivity is to absorbing those price increases.
Look, some of the lowest margin businesses like toys, you see that passed on very quickly. At the other end of the spectrum, cars where you have the President telling them not to raise prices, their prices are very visible.
They've been reluctant to do it.
But it's not like General Motors is going to continue to sell cars at a loss indefinitely. They're eventually going to have to raise those prices.
Jason, do you see this being offset by what's developing in services inflation at the moment? How are you reading what's happening in one side versus the other?
I mean, services is continuing to come down, but we sort of always thought that was going to happen. That was our path to two percent. That was the part we were counting on. The problem is that the goods deflation has reversed, and now we have goods inflation again. And so one of those I take for granted doesn't seem to me like the news. The other one the good side. That's the unpleasant surprise here. Now, the idea that it's transitory is not at all crazy. I think
there's even a very good chance it's true. But if you're the Fed, do you want to bet everything on a very good chance when you're definitely not sure?
With that in mind, do you think two months of dankster is enough danta to draw any conclusions before you make a decision.
I mean, you.
Always think the two months from now everything's going to be clear, and then two months from now everything is still muddy, so it's going to be money two months from now, they're going to be getting conflicting data, but yeah, maybe it'll be a tiny bit clearer than it is now.
I keep going back to the way that John opened the show, which was Jay Who, and it raises the question implicitly about how relevant the FED is at a time of massive technological explosion, and we're seeing that in the tech earnings. I mean, how much does the advancement, the investment coming from some of the tech giants in the United States overwhelm some of this discussion has certainly overwhelmed the negative consequences from the tariffs, so a lot of people had expected.
It depends what you're talking about.
If you're talking about the stock market, Yeah, a lot of what's going on in the numerator, which is earnings, rather than the denominator.
The discount rate is what matters right now.
If you're talking about GDP, we're not seeing a lot of tech at least in the supply side. Frankly, we're actually seeing it more on the demand side right now, and so if anything, it might be inflationary. Upfront productivity growth is basically right on the track we thought it would be prior to the pandemic. So tech is helping the stock market quite a lot. I'm optimistic and hopeful it will help GDP, but right now it is not having any real material impact.
There, Jason, that's a strong fund of point. We'll leave it there, Thank you, sir, Jason Furman. That at the Harvard Kennedy School, Gagi Chantry with blankcropt writing, AI and Tech continues to lead here pushing back on the broadening out narrative yet again, as underpinned by strong beats from METSA, Microsoft, and Google. Gagie joint is now for more Gaki, good.
Monic, Hi, good morning.
Just phenomenal beats from these companies. How difficult is it to leave the US behind and just pile into this europe trade, pile into this everything else tride you now.
One of the things that we've been talking to clients about is the need for diversification, but at the same time not giving up on the US dec AI theme. And I think to the extent that investors have not had any international exposure or massively underweight. For those investors, having some exposure to quality international names does make sense. But so important, as was made evident by yesterday's earnings.
What you need in your portfolio is parts of the equity market that are continuing to have revenue growth, continuing to throw out amazing amounts of free cash flow. And Chathan, I think you made that point earlier that we're finally getting an ROI on all of the capex that has gone in over the last year, and we're seeing the world's largest companies grow growing revenue at the high double digits, which is amazing.
In some ways. The least interesting thing about this week is Tariff's at the trade deadline. Now, if you'd ask me that on hyproback in July, whether that would be the case July ninth, going into that deadline, I would have said, well, you're talking about tariff is like the story. Do you think that's going to reassert itself in a month's account.
I think we're all and I know I follow your show. You're focusing in it as well. Obviously, some of the headlines yesterday around copper, around India tariffs, those idiosyncratic stories are going to drive certain markets and eventually in time, when we realize what the landing zone of tariffs will be, whether that's closer to a fifteen percent or a twenty percent, Eventually we will see that feed through, and we're already kind of seeing that in goods inflation, certain components of
goods inflation. So it will appear, it won't disappear. It will appear in data, and it will appear in margins, or it will appear in certain foreign companies reducing their prices. But of right now, I think the bigger theme is the two things. Number one, the ROI on Capex coming through and large cap deck really a large cap deck and AI really being the story that's going to propel
us exceptionalism forward. And I think the second one, which is also less exciting this morning, which is that the Fed, while I think they're both quite hawkish, they're still telling us in their own way that if things wobble, especially in the unemployment rate front, they are here to start cutting rates. And I think that's something else that the market will eventually care about as well.
When you put these stories together, there's sort of this big question underputting the market. What are we going to get the trickling out of some of the benefits that the hyperscalers are experiencing to the rest of the market. When are you going to see a broadening out where their leadership isn't just a ballast amid a storm, but really something that is driving gains an efficiency and profitability across corporate America. How far away from that away?
So, I think depending on what people mean when they mean broadening out, I would argue you're seeing some and then at the same time you're obviously continuing to see the largest companies throughout the largest revenue growth. So when I say there is some amount of broadening out, I would say when you look at something like financials, when you look at different sectors or sub sectors within the equity market, this year, you are seeing more of those
sectors being in positive territory. That could be called one that could be one way of thinking about broadening. But at the same time, obviously you have the largest hyperscalers being the largest revenue growers, and I think that that probably pushes back against the broadening out narrative. I think the theme is clear. It is one of moving away from small cap, unprofitable companies to large cap quality companies.
And that's what we've been talking about and many you know, you guys have been having a lot of people on your show. They've talked about that theme of large cap. Perhaps it doesn't feel as comfortable to talk about it it being also talked about it last year, but it's still working and it will continue to work. I think the theme going forward for the next six month is finding pockets of diversification in your portfolio. In addition to this AI and tech trade, international plays a role there.
Fixed income plays a role there, assets like inflation link bonds, gold, and certainly market neutral strategies that aren't giving you too much beta but at the same time giving you alpha makes sense.
International plays role and John was alluding to this earlier. There was this belief that international was going to outperform the US earlier this year, and it did, and a lot of it was pegged the dollar, and when we saw the weakening, there's been a huge and violent about face. Do you think that there is staying power where the first half was the rest of the world and the second half is back to US exceptionalism.
I think that a lot of that violent move that you mentioned was very much around the underperformance, and obviously with July, with the dollar coming back, rallying back has led to a little bit of that reversal. I think the path forward a big part of that story will
be what happens with the dollar. Frankly, what we're seeing in flows and what we're seeing when we pull our investors and our clients is a recognition of the need to diversify away from a large gap because that's all they have, not because it's not going to generate returns, but because there is a need for getting that value component into portfolios and getting that from international to the extent, not just US investors, but global investors continue to move
away from US into going back to their home countries. So we look at European investors and APAC investors, and many of those investors are just being a little bit more diversified away from the US. To the extent that happens, I think that the international story can certainly have some legs, but not at the expense of US large cap quality and growth.
Let's just say, on the US, when you set diversify, you set diversify the equity. So if I'm in the US right now, I diversify my equity exposure to the international story. Given where we are right now with the dollar, is that something I need to currency hedge?
You know, that's an interesting question, like a lot of right now. The view for our firm is still that the dollar can continue to depreciate. Usually, what we've seen is that the dollar depreciations happen in these long cycles. It's not just for one month or a week. It happens over many months, eighteen to twenty four months, and we're just in the beginning of that. In that case, obviously you want some of those foreign exposures. You want that exposure to some of the you know em as
well as DM currencies. Fixed income, though, is another story, right So, usually what we've seen our clients do is in fixed income allegations not necessarily taking the FCS risk, actually hedging it back into US for that enhanced yield. And that's something that you know, some of our portfolio managers, especially in fixed income with products like bink, are doing taking advantage of the hedged costs for European and other areas credit markets.
Gaky appreciate it. It's got to see you. Thanks for breaking it down, Gagy Chuntry there of Black Crook, what pic of life Shed Partners has a neutral racing on Apple. He came out in front in the last few months or so, and so the tech gig I should also consider a new CEO. What joins us now for more Well, welcome back to the program. Let's talk about what you're expecting from Apple later on this afternoon.
Well, first, Jonathan, I just want to comment on your last segment. The two things about those high moving stocks is that they're investing in AI and that's really the issue that we have with Apple in terms of the quarter. You know, look there's a pull forward right and had to announced tariffs. I think people went out and bought
iPhones ahead of the time. We've already seen this commentary out of the major distribution channel for Apple, which is the wireless operators for Verizon AT and T T Mobile and others. So you are going to see a pull forward of iPhone revenue this quarter. So then the question, as it always is for Apple, is you know, what
is the guidance for next quarter? But again that's that focuses on I think, you know the near term where what investors are really wanting a note to know about is what is the AI strategy for this company for the long term because clearly the companies that are succeeding in the markets today and seeing investor dollars flow into them. Are those that have a clear AI strategy.
Well, this just points to the idea that we might see their expense costs go down because they've lost a couple of pretty high profile AI technicians and strategists to the likes of Meta, which is offering one hundred million dollar payouts. I just wonder how important it's going to be for investors to see spending by Apple, to see that they are working on getting back some of that promise from this latest technology.
I mean, there's two lines of spending.
You have capital investment, where they're investing in the stuff that supports in LLM. It's probably too late for Apple to do that now. But there's another line of spending, and that's R and D which is over thirty billion dollars a year that the company invests. In the old days, when they would have analysts on that would ask tough questions, you would have people ask and say like, hey, where
are you spending the thirty billion? There'd be some response in terms of the mix of R and D investment in new products versus old products, and there'd be some indication to give investors some hope that there would be new products or services incoming. Then we know what happened, right, Things like Project Titan that would have gotten them into autonomy were killed, and we saw other products products that came to market like the Vision pro that really didn't
find a market opportunity. So I think hopefully we have some analysts on the call tonight during that Q and A session that will ask about where are you investing that thirty billion in R and D, what are some of the new products we can invest in? What is the AI strategy for the company going forward?
Well, you've mentioned this a couple of times, so we have to go there. You think that the analyst community hasn't done a good enough job holding the feet to the fire of Apple at a time when it seems like maybe some of their strategies were overly complacent.
I think it's a problem with earnings calls in general. These days. We do, at lea Shay, we do a quarterly review of this.
We count the number of times analysts get on call and say great quarter, guys. I saw I heard it last night on another call again for a company that had a one million dollars in revenue, and an analyst was congratulating them on a great quarter. And they do that because they get on the calls right, and then when they get on the calls, they don't ask the tough questions that management need to be asked that investors want to here to figure out what that long term strategy is.
It's very frustrating.
Well, I see this with journalists too. How do we fix it?
I mean, investors themselves have to put pressure on there. I certainly never want for incremental regulation, but I think the investors, the people that actually own the stock, need to start pressuring the companies or you know, look to us or others to provide. Maybe Bloomberg should start doing their own quarterly review like we do, evaluating which analysts are getting on the call, which have buy ratings versus holds or sells.
For asking questions on these calls, Well.
Apple was an odd one. It's probably the most well researched company on the planet. There's only three cells on it. And to your point, it's a company in a difficult spot that should face some difficult questions later on this afternoon, and well maybe won't. The issue that I have with some of the balls is they often come on the program and talk about the same thing over and over again. They'll talk about growth that's coming further down the line.
They'll talk about an upgrade cycle that doesn't seem to be happening. Well, when do they capitulate on that? At what point do you think they have to?
I mean, to me, that's just laughable, right, I mean, you're exactly right, John. I mean, it's the five percent growth that it doesn't happen next quarter in the guidance, So they just say, oh, it's going to come the quarter after that or the quarter after that. But I think again, look at look at Apple's performance relative to the mag seven. You know, it's it still has a multiple that's a premium, right, It's still a good brand
in the market. There's still an opportunity I think for them to get out of this if they get more focused on products and developing, you know, some type of AI strategy. I've suggested that may require a change in the management, a change in the CEO specifically. There's others that think that they can be they can do it with the existing CEO and just give them another year. But the problem with that is a year from now,
what is the market going to look like? You know, what products are going to be in the market that are already disrupting Apple. The pace of innovation because of AI is faster than anything we've ever seen. Everyone agrees right more or less, that AI is going to be something that's have a bigger impact on our economy than even the Internet did. And yet you know, we're still not getting the questions asked of them and terms of you know, what's.
Going on with AI?
Why do I when I still use Siri today, why does it still work the same it did?
You know three years ago?
It's seemingly to me when I can pick up chat ept press their audio button and it works great.
Well.
Before I let you go, I'd love to hear your take on China and India and the manufacturing pathway for Apple. How much visibility do you think they're going to give? Will people be making iPhones in New Jersey?
I mean, there was some excitement about some shift of manufacturing to India, but there's there's been a great book I forget the name of the author, but that came out recently talking about how Apple has moved manufacturing to China has enabled that country to be a manufacturing powerhouse and the difficulty that exist in trying to move that, you know, to other countries, whether it's India, the United.
States or elsewhere.
So obviously that remains there's always these like existential or you know, existing risks, whether it's manufacturer in China. The twenty billion dollar plus that Google pays them for search, which is obviously under scrutiny of the government because it was it was used as a way to keep Apple out of search. There are these big ticket items in terms of events that can certainly you know, still happen.
That's not a way to invest on these break ticket items that you know that may or may not happen. We should be focused on at least where the AI strategy is. And look, you're right, like, you know, I don't know what they can update us on in China. How quickly they could get out of China. It's doubtful they would have anything that would make the market, you know, the concerns go away that all of a sudden, you're going to move this amount of volume out of China back to a different market.
Well, I appreciate your time.
Well PI sec of Lifshed.
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