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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 Terminal and the Bloomberg Business App.
Joining us now, I'm so pleased to say, is Stephen Meyer, chief investment Officer for the New York City Retirement Systems. Stephen, it's wonderful to speak with you as someone who has to be a sort of an adjudicator of the national policies of how we invest for public servants. How do you understand the confidence, the bullishness in a market that is really hinging on such a narrow leader ship.
Well, I think if you look at the markets right now, you're right, there's no breadth, and clearly there are some real concentration risks. People talk about American exceptionalism. I think it's the artificial intelligence tailo effect that we saw last year spilling over to this year. So we look at it from a standpoint of it's really megacap exceptionalism.
What we do.
Though we're long term investors. We managed the versified portfolios that are resilient, made to perform in different types of environment. So we're more strategic than tactical. We're not actually trading. Having said that, we have recently done strategic gas allocations across the five plans. We are reducing our exposure at the margin to US equities large cap in particular, we're flat to maybe down a little less in non US equities to funded increased investments in private assets.
Within those private assets, because I know you made announcement to start this year that you would start increasing your allocations, how are you thinking about real estate within that? Because there's still trouble, see I said, thirty eight billion dollars worth of office buildings. We're still in distress. Surely it's only going to be worse with stubborn rates and loans coming due. Have you pulled back your exposure on real estate specifically.
Not necessarily, Danny. We have obviously diversified portfolio. We're non core and core real estate investments. If you look at our investment portfolio right now, it's about thirty one percent multifamily in real estate, probably about thirty six percent in industrial logistics, so we're diversified away. We have an underweight intentional underweight in retail and office space in particular. I think it's another two years and in terms of those situations working at at least.
Another two years. So how do you want to be positioned for two years? I mean, do you pull out completely when that comes due? That is a scary prospect because again, what we've seen is this rolling default. It's not this one big event, it's this continued issue. So what does that look like in two years?
Yeah, for us, it's more around putting money to work, putting new money into the sectors. So obviously we're not for sellers. We don't need to be a seller. We're long term investors again with a much longer term, and so we're not panicking, but we're also not stepping in at this point. I know there are some smart people out there that think, well, we're evaluations are on prices are it's probably close to bottom. I'm a little suspicious. I think that is a little more to.
Go elsewhere, you know, if it is higher for longer. If it is we're not going back to a zero rate environment. Are there other investments that you've had to rethink, things that just frankly won't work in this environment going forward?
Well, you know, I'd say we focus more on fixed income as a core holding in the portfolio. So if you look at the yields you're able to get both in private and public fixed income now it's you know, obviously more compelling than it was in a zero interest rate environment. I also think the zero interest rate environment was very negative for the markets. I think it actually
leads to suboptimal investment decision. Over leverage another concern I have just where we are right now, we've got leverage around the world that what two hundred and twenty five to two hundred fifty percent of global GDP. I think that's going to be more of a challenge I think domestically and abroad.
How concerned are you about the deficit? Then?
Given your last point, are you in the Steve Eisman's camp of as Lisa would say, way the deficit?
Yeah, I am concerned about the deficit. If you just look at the trajectory of the deficits that we're racking up. We've got about ninety eight percent of outstanding US Treasury's relative to GDP, expected to go up to about one hundred and sixteen percent of GDP by in the next ten years. Those are dangerous levels and just the amount of paper we need to roll consistently through the eauction process. I know, Lisa, you follow the auctions. We had a
couple of good auctions those past month. We did tens in thirties one okay, three is not so well better than twos, five and sevens last month. I think it's worth watching because I think there's a lot of information coming out of those auctions, and I do think the size of the auctions are going to be a headwind for the markets. It's an a risk factor for investors.
Can you give us some perspective.
You said you just shifted your asset allocation to focus more on private assets.
Was that away from equities?
Was that away from bonds?
Was it away from both?
I mean, how does it sort of break down now versus say to.
Your is it go?
Yeah?
So we were operating under somewhat of a constrained opportunity set, so we had a limit up to only twenty five percent in private assets. That's now been an increased to legislation of thirty five percent. So we were a little overweight in global equities. We pulled those positions back a little bit, mostly from US large cap in particular. But you know, we still see a lot of opportunities out in the private assets sector. We think that's a growing
area of interest. A lot of people have pulled back because they've been overdone. We've seen opportunities in secondary sales, so we're actually you know, continue to put money to work. I think, very proactive in those spots. We like private credit. We think the private credit is actually compelling in terms of you know, obviously absolute returns in the base levels higher.
Most of those obligations are floating. We've got the sofa through the sofa with five thirty four, so we have a seven percent actually assume raady to return or benchmark, and I'm proud to say so far fifth weeeear to date we're ahead of that. We got another eight or nine trading days, so we'll see what we want.
There has been this widespread criticism of private credit that they've been in this extent and pretend mode that they've just been waiting for rate cuts and until that happens, they've been very lenient to those that they've been lending to. But at some point the music stops do share that concern? And how careful have you been picking managers?
If you do?
Great question, Danny, So, I think you have to be really careful. There's a lot of new entrants into the private credit markets. We tend to focus on the areas the Apollos, the okill advisors of the world. We do most of those investments through separately man's accounts, fors the GPS, or as a limited partner. We still see good opportunity there,
but you really need to pick your managers. We also like more opportunistic funds that can toggle between public and private where they think the valuations are cheaper.
Well, that gets to this other part of the industry that the small players can't survive anymore. That in private assets is just the big getting bitter as an asset allocated yourself.
Is that what you expect?
Do you expect that the smaller players are not going to have that demand and some sort of consolidation needs to happen in this industry.
I don't know.
I think obviously, because of our size, we have the privilege of managing at two hundred and eighty billion dollars in assets, we tend to gravitate to as the larger managers. I think the difference for us this year is there's been a lot of pullback on the part of other public pension plans and institutional investors, so we're able to get better access to the better managers and negotiate much better fees co investments in terms of averaging down the costs of those transactions.
So just to say, today we're talking about retail sales, we're talking about FED speak. Do you watch any of that?
Do care?
Or is it sort of you know, noise as you focus on ways to uncorrelate yourself with.
Lisa, I shouldn't watch that, but of course I watch that, and I'll tell you why. Obviously, our underlying beneficiars and participants watch that, and we get questions all the time. My trustees call me all the time and see what's going on in the market. People are concerned, how do you feel about things? So we watch it. We watch it also as a matter of of managing and monitoring the performance of the funds or the managing the expectation. But yeah, we focus on all that we're in the markets.
But as I said earlier, we're not tactical and more strategic more long term, but we do care what happens in the short term as well.
Steven Meyer, wonderful to see you. Thank you so much for being with us. Really great to hear what you have to say.
Stephen Meyer of the New York City at Retirement Systems. Here, Jepperdson of Pantheon Macroeconomics, and Greg Daco of e Y Greg.
I want to start with you. Both of you.
Ian and Greg are talking about how the balance of risks is. We are seeing real weakness and this is just a tipping point that is going to deepen. What are these retail sales do to kind of edify that feeling of yours.
I think what they indicate is an environment where you're seeing a bit of a more cautions, more prudence on the part of consumer. And this is not new. We've been seeing consumers be a little bit more careful, be a little bit more sensitive to higher prices. This cost fatigue that we've been talking about for a few months now is now starting to be visible in the data. We're seeing a little bit more caution when it comes
to outlays. When you adjust outlays for prices, you're actually seeing a contraction in retail sales on a year or a year basis. Service sector spending is still relatively strong, but we are seeing more caution. And the key reason for that additional caution is the fact that you're seeing some softening in the labor market. Not a retrenching, nothing alarming, but a bit more caution in the labor market as well.
What's the gap in between a bit more caution and true weakening given that this is two straight months and pretty negative downward revisions as well.
Yeah, the diamond revision is disconcerting because it sounds to me like the control group now is essentially flat over the last couple of months and have been weakening before that as well in terms of the growth rate. So this is beginning to be stunt to look like an entrenched softening, I mean, not a rollover. You know, it's not a disaster by any means, but it's very different to what we saw last year. Remember the second half
of last year. We're looking at constant upside surprises and the consumer's charging along a three percent reel through the whole second half of the year. We're not going to do anything like that in the first half of this year. And I think part of the reason here is as well as the lad market weakening, which is definitely real. You can see in the surveys that people are getting nervous about job security for the first time in this cycle.
But they've also got less cash flow. You know, real income growth after tax is a lot lower than it was this time last year. Payroll growth is lower, wage growth is lower. There's just less cash around, and so people are just being a little bit more cautious at the margin. If you're a bit more cautious at the margin for a few months, it starts to build into something real.
And what it really speaks to me is if we have this price fatigue, is do corporates have pricing power anymore? We have seen some of those margins start to thin. So if we're in a world where corporates are having thinning margins, you don't have that labor constraint that you once did. Is this as Ian as Jan Hatzias over at Goldman's access an inflection point for the labor market.
It's an inflection fund for the lab market for sure, but it's also an inflection point for the inflation story as well, because that margin expansion that we saw during the pandemic and in the year afterwards was a huge driver of the increase in inflation, and most businesses have held onto those margins. But if they're starting to crumble now, so we're actually seeing them come down rather than just
hang around the highs. If we start to see them come down, it really does change inflation picture because it was a really big part of the inflation story. That's not kind of widely appreciated, but it's why I think core inflation next year goes below the FEDS target because of margin compression and it's just beginning to creep in greg What.
Do you think about that, Is this an inflection point?
I tend to believe so as well for inflation in particular, because we have seen more pricing sensitivity on the part of consumers. We're also seeing markups fall. We're in deflation territory when you look at some of the PPI indices for consumer pass through, and we are still seeing some disinflationary currents in terms of the rent inflation side, and wage growth is also moderating. Put all that together, and all of the fundamental indicators in terms of inflation are
pointing towards further disinflation. So if you have a forward looking perspective, that is the right type of mix that you want to see from a FED perspective in terms of easing monetary polsy, not to bring rates down to zero, but to recalibrate monetary polsy to today's reality.
So does December make sense in that scenario?
I think September makes sense. I would have actually thought that July made a lot of sense, even potentially June. You're not talking about cutting rates down to zero to stimulate the economy and prevent a recession. You're talking about how do you recalibrate monetary polsy for an environment where inflation PC inflation core PC inflation is within striking distance of the two percent target, likely to be around two
point six percent in May. That is a point at which you want to start considering recalibrating monetary polsy to have the optimal framework in an economy. As Ian was saying, where the labor market is gradually cooling for wage growth, nper or growth are cooling and where inflation is moving in the right direction.
We do hear from the New York FED President Williams also speaking right now action he's talking about that they're going to be data dependent.
Well, they are data dependent. This is the data. Do you think they need to take another look at their dots?
Absolutely? Greg and I are going to have an agreement fest here. But I honestly I wish they'd cut rates last week and they didn't, so I wish I'd cut them in July, but they probably won't. What worries me here is that they're very backward looking, and they're constantly talking about what the data have been doing, and there's not enough discussion from the FED about where the leading
indicators of which the US has an abundance. I mean, we've got we have dozens of reliable indicators of the labor market, consumers, everything, and they seem to be resolutely ignoring them in favor of looking at the backward looking stuff. And if you carry on doing that, then by definition, you're going to be late when you start cutting rates. And the danger then is that you end up with the economy slowing more than it needs to for longer
than it needs to. So I think a bit of courage here maybe, and to say, Okay, we don't have to wait UNTI we're one hundred percent certain inflation is going to get to the targets. But to be reasonably sure now, I think is a pretty solid case. You know, the coll PC over the next few months, you know, is going to be two something, and it's not a million miles away, and yet rates are still.
At the highst if you are just joining us.
We did get retail sales about nine minutes ago, and you can see they came in across the board lower than expected, with downward revisions across the board as well to the prior month. You could see the headline coming at zero point one percent versus the expected zero point three percent and a decline in the prior month of zero point two percent. Looking under the hood at exactly what was driving this, this is actually interesting and it speaks to some of the homebuilder story that we were
talking about earlier. Furniture and home purchases were down one point one percent on the month. You can see building materials down zero point eight percent on the month.
You could see this pretty much across the board.
What are the parts that bolstered this retail report? Vehicles and parts zero point eight percent gain, auto dealers zero point eight percent gain. You could see gas prices going down, that's gas station zero two point two percent decline, but sporting and book costs two point eight percent. Glad to see that people are buying books. To me, that sort of raises this question greg about how much the suppressed
housing market. Some people might argue the broken housing market is suppressing retail sales in a way that's distorting the data, and frankly, could rebound really substantially if rates come down, people buy homes again if they find it accessible. Is this sort of muddy data that's being skewed by otherwise kind of broken housing markets.
So the housing market's certainly frozen, But I'm not sure you're going to see a massive reacceleration in the housing market unless you see one of two things or one of three things. One price is falling quite dramatically, two interest rates falling quite dramatically, or three income growth accelerating quite dramatically. As Ian was pointing out, we have real disposable income growth that's currently at one percent, that's a
really low number. You have home prices that are still high and still coming up higher and higher given the lack of supply, and you have interest rates that are unlikely to fall back quite massively, given that the FED is likely to maintain this higher for longer monetary policy stent. So I don't see that as a potential for a comeback.
And if you look at the underlying drivers of consumer spending here, you have income growth that is still moderate, you have a low savings rate, and you have wealth growth that is not accelerating as much at the same time as credit is tight. So you have this bifurcated outlook for consumers where the lower end, younger generations, more indebted consumers are struggling to make ends meet in this environment.
And to the point of bifurcation.
I wonder if we look at this data, if again, maybe it doesn't accurately capture things if there's this housing confusion, but also the bifurcation, if you're looking at the richest people who essentially just buy assets, they buy assets they're investing in this stock market, Does something like this give us the full picture or is it really just capturing what we know is already been under pressure.
Yeah, I mean the lower end of the income distribution is now under stress in a way that they haven't been since way before COVID. I mean, the fiscal stimulus, the checks in the mail that we got through the pandemic was a huge support to consumer spending, and especially for that middle and lower part of the income distribution. You're right at the top end of the distribution. You know, cash flow is not really important. It's all about asset prices.
But the variations in consumer spending are driven by the actions of the middle and lower and so if those people are now seeing much slower income growth than this saw last year, and they're beginning to worry a bit about job security. You know, the New York Fed survey asks people, do you think unemployment is going to go up? Are you worrying about job security? And those measures have both gone materially higher. So that's not a great combination.
You know, that's a combination that tends to make people save more because of worry, but the saving more from smaller cash flow, which means spending gets hit harder. So this is you know, again we're not at the point where everything's falling apart. That's not the story here, but we are. I think we've got to get out of the mindset that you know, it's it's been constant upside surprises from the consumer, constant well not anymore.
When you look at the bifurcation, and I know you pay atender to the surveys, do you see a real hollowing out of the middle class.
I think that's probably going a little bit too far. You know, we've seen very strong job growth in the unemployment rates been very low, and you know, nothing is nothing is better for you for the middle of the income distribution than seeing sustained low unemployment and wage growth, although it's slowing, is still pretty good. You know, we had a long period after the crash in o Wait where wage growth was less than three percent, and we're
way above that now. But you know, the price level shock from the pandemic has scared people and made them nervous and unhappy, and that's one of the reasons why the administration's poll ratings are so low. But actually real wage growth is at the moment is still positive, but it's probably going to get weaker, and as it gets weaker, it just makes people more cautious greg.
When you look at these kind of retail sales, do you then expect potentially more companies to come out and have to say, I guess we need to start slashing more prices to make sure we can keep some of that market share.
I think you're already seeing it. You're already seeing a lot of companies think about incentives as a way to drive consumers.
To spend more.
And as the end was pointing out, if you look at the different income quintiles, you're seeing the bottom and median income quintils being much more price sensitive.
What does that mean.
It means that they have to get greater focus on how to drive consumers to spend, but you have to do that at an affordable price, and in order to do that, you're probably going to need some incentives. What that means for the overall economy is slower consumer spending and ongoing disinflation because those price cuts in certain sectors are going to lead to further disinflation. This is actually
a positive story. It's a positive story where the Fed has to be careful to recalibrate monetary policy and adjust to that environment and not be so backward looking because backward looking can be very dangerous in an environment where you have a lot of noise in the data and downward derisions a month later that show a different picture when it comes to retail.
Sales well, and to your point about this isn't necessarily a negative story. This has been one of the key questions for equity markets. Is bad news good news at a time where disinflation can potentially be positive. You can see it this morning, taggling around how to interpret this. Basically lower at the moment of future is on the S and P although they were higher, you could see
yields markedly lower across the board. This from Drew Mattis over at Mutlife, and I think it really crystallizes the fears that a.
Lot of people have.
He said, it may seems to have been the break months lower sentiment, lower retail, higher claims. The question is whether this is going to spiral downward and if so, when does the FED recognize it? Ian given that view that some people have, and I believe you are sympathetic to it, what is the chance of a FED error at a time where the FED is looking for December for a federate cut.
Oh, the chance of a mistake is going up for sure. You know, monetary policy works as very very long lags. I can't stress enough how long it takes for the economy to respond to whatever the Fed does. It's you know, the economy is now clearly softening, but it's two years
since they started raising rates. Two years and that means that if they start cutting rates tomorrow, it will be well into twenty five or even twenty six before we start to see the upswing triggered by that easing, And so between now and then, potentially we could be in for quite a long period of sluggish growth. I'm not, at this point not terrified of US downward spiral disaster, because the private sector's finances are in much better shape
than you normally have at the start of recession. But I can see the risk that the FED presides over quite a long period of sluggish growth, which is probably unnecessary to get inflation out of the system, which is why I think sometime next year they'll end up with inflation below the target and monetary policy getting much easier, which so the equity market is kind of toggling between this bad news is good news because lower rates, and also bad news is bad news because low margins, So
there's going to be a real kind of push and pull in stocks, I think over the next few months, where you know that the rate people are just buy because valuations and the margin guys are saying, well, hang on a minute. This is a loss of volumes margin compression at the same time.
So if you get a bit sticky greg.
Final word, I'll disagree a little bit with Ied for the first time, but I think there is a risk that the economy actually worsens more because of the self
reflective interdependence between the FED and financial markets. You have this unhealthy environment where the financial markets are trying to price what the FED is going to do based on data which is backward looking, and you have the FED that's essentially looking at financial conditions to to try to evaluate how tight it's Vontary palsy is if you end up in an environment where there's a sudden pivot at the FED because of disappointing economic data that's backward looking,
that could catalyze into something that's more pronounced in terms of financial markets seeing this as very bad news and thinking that the FED is seeing a recession down the road, and you could have this negative feedback loop that weighs on the economy, that's a potential downside risk via the financial markets channel.
The game theory of what we see with the markets and the feder Reserve. Greg Ian, both of you, thank you so much for with us Ian Shepperdson of Pantheon and Greg Daco of EY.
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 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.