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Terminal and the Bloomberg Business app. Beck let's talk about it, and I want to refer to what you told us coming into twenty twenty four. It's important to go back. This market was priced for six or seven rad cuds. You were saying that was nonsense. We wouldn't see ray cuts until the second half of twenty twenty four. What were you looking at that ultimately has played out in the fashion you expected.
Good morning, It's so great to be here, John and Lisa. So back when we were here in December and we talked about the five or six rate cuts that were nonsense. Don't think that word was used, but certainly we felt that the market had priced in too many rate cuts. The view there was that inflation would remain sticky, and that's exactly what's played out. We've seen services inflation remained
very straight, sticky, still above five percent. We've seen shelter inflation coming down, but not quite at where we would have liked it to be. And then yesterday, I must say it was very interesting to hear chair Powell sounds so confident about the deceleration, you know, to your point earlier, Lisa, he did say he's not gaining greater confidence, but he still seems to be quite sure that this is just
a bump along the road. And for the most spot, he's focusing on the deceleration that we got in the second half of twenty twenty three and not so much on the acceleration in the first two months of the year.
He's not lost confidence, and I think it's probably the headline, particularly after we had upside surprises on inflation prints what is in the inflation but right now beneath the surface and all the detail that he can take confidence from.
So a couple of things that I was looking at yesterday is for us to get to core PCE at two point six percent, which is the revised core PCE, and you know, we kind of know what this month's data is going to be. Given the inputs on CPI and ppe PPI, I think the rest of the year, you'd have to be quite quite sure that you're going to get PCE at point one six or point one seven.
So I guess that's one thing that they're relying on that even if shelter inflation on CPI remains strong, that it's PCE, which obviously we know has a lower weight that saves them a little bit. So I think that's one thing they're looking at. I also think that he focused yesterday a little bit when he was asked pressed on this question that non housing services they expect that to decelerate, so again their super core measure that is still at point four to seven, imagining that they expect
that to come down. The one positive thing that I did see in this month's CPI print was, unlike the January print, the February every single services sector did not reaccelerate. We did see that in the jan print, which was scary to me this time around, when you looked at education and healthcare and medical services, all of those did come back to Trent, So I think that is a positive sign. And then finally, I mean Goods had that
aberration for U scars. I think that's something we can see moderated based on Mannheim prices.
So I understand why the front end of the yield curve would rally m hm. As John was mentioning this earlier, I have less of a clear sense of why you're seeing such a rally in the tenure with yields now at four point two percent, down from a high just earlier this month, a couple of days ago, over three and you've seen this come in around ten basis points
the past couple of trading sessions. Does this make sense to you if the feed is basically saying that they're okay with inflation running a little bit hotter for a longer period of time.
Yeah, to your point, I definitely agree that the front end makes sense. The rally that we saw made sense. I think on the tenure, look, it's just range bound, right, We've seen that four thirty one level a few times. We got there, we're coming back off. I think between now and the next important print, which most likely is going to be the non farm payroll that we get I think we trade in a little range of bound fashion over the longer the medium period of time. Can
we see yield curves steepen from here? Absolutely, I think that belly of the curve, looking at that three to seven year part, maybe even just a pittle of five year part, that's where you want to own fixed and come. I don't think you quite need to get to the tenure point. I think we can certainly see four thirty, maybe even four a little bit higher than that, But for now, I think it's range bound.
So this is why I think the gold rally is actually quite interesting, sort of where do you get that ballast if longer term treasuries don't have the same features at a time where the Fed is willing to ease even though inflation isn't back down to their target, is there a sense that longer term bonds don't hold the same kind of ballast that they used to just simply because this is an economy that will tolerate higher inflation.
I think that there is a sense that it's not just the inflation point, but the supply point. There is a sense that when you have this much supply coming to the markets and you have a yield curve that is still not pricing in enough term premium. There is a sense that you have better ballast in the value of the curve, so I don't think it's about fixed and CUM losing its ballast. We certainly have ballast here.
I think it's in the two to five year point where you're much better off stepping out of cash or just diversifying away from equities too, so you don't need to step out into tens, twenties, thirties. Get it in the five year, get it in the seven year, get it in ig credit about six percent, get it in bank, which is, you know, sort of getting you that income in fixed income market. So I think that's kind of what investors should be thinking about. And I want to
hit your point on gold. It's been interesting to see how equities and gold are making all time highs and I place a little bit of that in the inflation fear, but tips haven't done as well. So I think the way to play this might be an allocation into an asset class that actually appreciates with CPI, which of course is interesting link bonds, So just.
To cut through that again, you think the opportunity might be in tips, more than what is already rally in, which is stocks and gold.
Certainly, I think stocks can continue probably to do well, high quality stocks. So I think we might see a little bit of a small gap rally here, but what's going to work for the medium term is up in quality rally. And I think tips make a lot of sense. Front end tips, something like SDIP make a lot of sense.
So that's fixed income. You touched on stocks. Let's just finish on our creative weekend. What is it about small caps that you would like at the moment? Really big out performance yesterday continues this morning.
Oh, I was going to say that we don't think that small caps is going to be the output even though it did well yesterday for the longer period of time, you know, over the the next three to six monthstually large gap and quality that has done well, that has the earnings growth, that's going to continue to do well. I think the small gap is more of a rebound trade that's happening at the back of a dubbish fed, but I doubt how long it will last.
That rebound continues this morning by three quarters of one percent on the russo Ghaghi love it as always Gagi Chandry a black rock. Richard Burnst state of Richard burst in advice, is not expecting any reductions this year, even suggesting there's a chance of a hike Richard, and plays to say is with this around the table, Richard, good morning to you.
Good morning, John.
Let's start at a press conference. What did you make of that just yesterday?
I have the unfortunate view of kind of viewing him as a bartender still pouring drinks. I think we haven't heard last call yet. And as you said, that's causing speculative assets to go up. And that's the natural reaction that should go on when the FED is going to provide a lot of liquidity in an already liquid environment.
So what's the onset? Keep drinking, keep drinking, I suppose.
I guess my confusion is that there's as you said, everything's going up. It seems to me that we should be seeing the cyclical sort of pro inflation side doing much better, and I'm not sure that's actually happening. And so I think there's still very much a speculative fervor within the market, whether it's a magnificent seven, whether it's cryptocurrencies, anything like that. I think that's kind of the warning sign out there. But the more economically sensitive stuff should be doing well.
Well.
You point to some of the more speculative stuff and they say magnificent seven, fabulous five if you want to take out Apple and Tesla. I am curious though about why that is speculative if the earnings are there, And that's basically the justification that everyone comes on the show gives.
Right, I think it's not that they're bad companies. Right, there's always this notion that we have to worry that somehow these are bad companies. They're not bad companies. The question is are they you nique companies? And I don't think they are. Right in the latest reporting period, we have just for the S and P five hundred, one hundred and fifty companies growing earnings twenty five percent or more. Right, So what's and that only three of the Magnificent seven
passed that screen. So there's clearly a lot of choice out there. Why would anybody focus on the Magnificent seven? And history says then when profit cycles traf and you start getting this broadening of the earnings base, that the market starts broadening. And that's kind of happening in fits and starts, but is not happening.
The theory that we hear from a lot of strategists is that if the FED were to cut rates, that would actually allow the broadening out. It would allow some of the other four hundred and ninety five stocks to really gain some momentum, just because those are the most affected by high interest rates. Why do you disagree?
I don't disagree with that. I think where my confusion is more that why would the Fed want to spur a speculative aspect to the stock market and to the financial markets period? Right, cryptocurrencies, Because ultimately bubbles or very speculative period if you don't like the word bubble, bubbles are inherently inflationary.
Left the word bubble, I'm right?
Oh yeah, okay, okay.
And they're inherently inflationary because you misallocate capital within the economy, right, You allocate capital things you don't need, and you don't allocate capital things you do need, so ultimately you spur inflation. And I don't think the FED has thought that one.
For where are the signs of euphoria right now? How do you identify that in stocks of the moment?
I think if you look at just stocks for a second, if you look at the magnificent seven effect in environment where one hundred and fifty companies are growing earnings twenty five percent or more, that I would argue that to you. For you, that was the tech bubble. By the way, in nine nine two thousand, the profit cycle was accelerating the United States, but nobody cared. Everybody just wanted tech. Today, the profit cycles accelerating, nobody cares. They want seven stocks.
So I was in the stock market, I would say that's the place where you see it the most.
When you talk about how they're fueling a bubble or some kind of speculative fervor, there is a question of whether their policy matters at all with respect to inflation. Right, this idea that what's spurring the speculative bubble is not Fed policy at all, it's something else, maybe fiscal, and that the FED is trying to respond to what they can control, commercial real estate, some of these other aspects which have felt the bite of it.
Yeah, I think the key word and what you said there that I think is most iportant is the word respond That a lot of investors believe that the FED is somehow a leading indicator. The FED is a lagging indicator, always has been, maybe with it, maybe not the vulgar FED, but every FED has been a lagging indicator. You think about what they look at. They look at inflation and unemployment to lagging indicators, and they respond to lagging indicators.
So that's the thing that I think presents the opportunity right now is that you've got leading indicators that are starting to get stronger, so building permits the other day a leading indicator of the economy getting stronger, but the FED is still reacting to the lagging indicators. I think that presents a tremendous investment opportunity because it says that we're likely to have more growth rather than less when the leading indicators are heating up and the FED is
going to ease. That's that to me, says you're gonna see more growth raather than less, and that calls for cyclicals.
This isn't just a tactical coal from you. We've been talking for a while about this. This is a long term coal, a change of regime. If you will, can you just explain that.
Journal I think I think on top of what we're seeing with monetary policy and everything else. You've got the secular backdrop of globalization contracting, and I think that is the long term story. I know, all the excitement about AI and everything else, I think contracting globalization is the real story because the United States is now in the unfortunate position of having a massive trade deficit as globalization contracts.
That is a really bad combination, and it means that the United States is going to have to rebuild our own capital stock. You know, people call this reshoring, near shoring, friends, shoring, infrastructure. You know, there's so many words for this, but it's all the same theme that we have to rebuild the United States capital stock. I think that is the most important story out there now.
So what do you think is going to work this time in this site core that didn't work last time in a previous decade.
I think small cap stocks, in particular, the area that I think that people aren't paying any attention to, which I don't understand as small and MidCap industrial stocks. Small and mid cap industrial stocks have outperformed the S and P five hundred over the last decade, even though small caps have not. Small and MidCap industrials have, which I think is the beginning sign of this kind of deglobalization rebuilding the American capital stock.
Would you push back against people who say that bigger companies are better equipped to actually handle some of the volatility that we're seeing in inflation and just the global backdrop.
I find the love of large companies very interesting. When I started my career, which was too long ago to talk about now I hate talking about because it just
as I'm old. But when I started, senior analysts followed small companies because in the late seventies early eighties, it was a massive small camp rally and small comps were considered sexy, and so senior analysts followed small camp companies, and the big companies that were and that we're boring, we're followed by junior analysts because there was no excitement there. And as you go through the eighties and into the nineties and the investment banking cycle starts picking up, you
find that starts switching. And so now you have everybody loving large caps saying small capsure no place to be, and I think we've gone one hundred and eighty degrees. I think it's an amazing thing to see when I think the opportunities are. So the way I describe to people is are there really only seven growth stories in the entire world? Are there only seven growth stories in the entire US economy?
Of course not.
There has to be a lot more. That's where the opportunity is.
What if there only seven growth stories people care about? It doesn't matter how much you talk about it, it doesn't change things. Well, money's gone passive, the way we invest has changed, and the winners just keep on winning. How do you change that?
So, John, that's kind of the argument that people say, Well, value investing ever come back?
Right?
And my point is that everything in life is centered around Everything we do is centered on value. If I tried to sell you a Volkswagen for a Bentley price, you would not buy it.
Right.
We all understand value, but for some reason there's periods in the stock market where people say it doesn't matter. I think this presents a tremendous opportunity for value. Given that nobody cares about it anymore.
You're gonna be sticking with us. We'll continue this conversation. Richard Vanstein, that of Ape advises. Stephanie Roth of wolf Race sets joins us. Now for more, Stephanie, we need to begin that good morning to you need to start with those projections. What jumped off the page for you when you open that document yesterday, by far.
Was the GDP number. I mean, seeing that jump by seventy basis points in combination with inflation bumping by twenty basis points and the median dot being unchanged, that just tells you that we're seeing one a supply side dynamic in terms of GDP that's not going to bring too much inflation. And by the way, the inflation upward revision was kind of just a marked market and that's what Powers said yesterday.
So directionally it feels like a contradiction, but when you go into the details like that, you don't think it is a big contradiction.
Well, I think it tells you something a little bit about the reaction function. It's maybe shifted to some extent, and that well, maybe they can see slightly higher inflation and they'll be okay with it because they see the path coming down and they're not worried about strong growth anymore.
Last year, that was something that they were legitimately concerned about strong growth would bring inflation, and now they see strong growth as not necessarily inflationary because that's coming from the supply side of the economy.
So what's inflationary and how much control do they have over it.
Inflationary could still be the labor market. If that labor supply doesn't actually come through, then that's where you could run into some challenges. If you continue to see really strong payrolls growth and the labor supply doesn't come through, then that becomes a challenge. But the trends in terms of immigration is looking a lot stronger if you look at the recent CBO projections, there could be a lot more labor supply coming from immigration that could really help.
I guess I'm struggling to understand whether the Fed is had any influence over inflation at all, because essentially, if what we're saying is that it comes from other factors that are un related to interest rates, so that doesn't really matter if you move them up or if you move them down, then what are we even talking about with the FED care Like, what is their role in bringing down inflation If the inflation that we're looking at is not related to their policy?
I mean, some of it was transitory, and you had this conversation up here before. Is that they just had they had to in terms of risk management, they had to raise rates aggressively because in case that wasn't true, they would have been had a real problem. That would have been nineteen seventy style inflation. So they would have had a real problem on their hands. So it's hard to disentangle what was transitory and what was driven by
FED policy. Was probably a combination of both, but the transitory factor seemed to be perhaps some of the more important ones here.
This just raised an important question though, when the chairman is asked and when FED officials aroused, are we sufficiently restrictive? And they point to the labor market as evidence that they are? Are they right to point the labor market as evidence that they are sufficiently restrictive.
Well, that's a tough one, I mean, and Pwell talked about his models and it was, you know.
A very big we could sit here in all degree, there is a massive supply site dynamics taking place now that is leading to changes in the labor market. How can we draw a dot edline all the way back to the federal Reserve based on that?
I mean, I think that's a tough one. It's probably a combination of the labor supply or the labor market just coming back into better balance, partially because companies who have had excess demand for labor kind of satisfied that and productivity picked up. So a lot of it was a little bit of luck and a little bit of some of the hikes doing their job.
Some people were talking about the awkwardness of basically the FED fighting fiscal stimulus and that that was kind of going to be where we were this year, And it seems as though everyone's talking about spending that's still coming back into the market or coming into the market from the federal government and a FED that's okay with that and doesn't see that as inflationary and doesn't see the need to really offset that with materially higher rates for longer.
Does that ring true to you that basically they're on the same page with trying to stimulate not suppress.
I mean to some extent.
And last here was a good indication we still had a decently strong fiscal and pull certainly more so than people expected, partially related to play retention credits and all kinds of you know, funky things happening under the surface that weren't necessarily expected. The chip spending, which which the take up was really quite strong. So yeah, those two are in conflict to some extent. But as long as inflation is coming back down towards two percent, like that's kind of okay.
So how much are you upgrading your growth expectations just generally for the United States if this is basically the reaction function and the reality that we're in.
I mean, we were at two point four percent for this year and we've been expecting free cuts, So for us, we haven't had to change it. That said, from where we were six months ago before Powell pivoted, we were looking at one and a half percent GDP growth. So we kind of made that similar type of adjustment in anticipation of the FED being able to be dubbished for longer, partially because our expectation is inflation should come back down towards two percent with growth still being okay.
Well, the chairman says we're committed to getting inflation back to talk. It is he less committed now that mightbe was a company back in August twenty twenty two.
No, I think he's still just as committed. I think he's just convinced that inflation is on the right path. And to be fair, he talked about the seasonal problems and I very much agree with that. I mean, if you look back to core PC inflation in November, it was up nine basis points in December's fourteen basis points. That wasn't the trend either, and he highlighted that.
And that's fair, Mi McKay. Is not why you can call this a bump in the route. Destination has not changed.
This is what they've predicted all along. The only question is are they going to be right about the fact that it was transitory and then things start to fall back down again. There are some categories that are surprising used cars surprised this last time. And we have no idea what will happen with energy the way it's been bouncing around. But their view is we're going to get sort of a natural disinflation.
To continue the tea word agtrovites people.
I didn't use that.
You kind of did, think you did.
A presitory that's what we're talking about.
They're still still watching the cool belief of this feder reserve. Ultimately, it's just a word that that's scad of using.
Well, they got pilloried for using it. We were just coming out of the pandemic, and they weren't totally wrong. It was a question of timing. What is the definition of transitory? But a lot of things that went up in price because the supply wasn't there now have come down in price because supply chains have normalized.
Sephanie, what's not transitory? What are the aspects you're watching that give you some pause with respect to the steady pace down?
I mean of some of the.
Service sector inflation is still running kind of hot, and I still believe maybe the transitory is not the right word, because it's probably a function of the labor market having been strong. It's just a lagged effect of that. So I would say that's not necessarily transitory. It's real inflation that's happened. People are really traveling, And there are some areas within the service sector where you're continuing to see fairly firm inflation prints. But that as the labor market
has cool that should continue to slow down. But that's something that I'm keeping probably the closest eye on. And people were talking about the super core inflation, and for some reason they've stopped talking about it, But I still think that that's important. That's kind of what we're talking about here.
Meanwhile, I keep going back to Rick Readers' concepts around inflation and how it really isn't driven by Chair Powell. He says, in part is driven by Taylor Swift and the fact that we've been able to see some of these potential things. He didn't actually so that I'm putting words in his mouth, but he did talk about how there are some independent of the FED kinds of trends like the era's tour or you know, the message.
Message from Rick now just to say what is prime So looking apen, he just.
Used all of those things.
I mean, how much is the discretionary spending of consumers that it's still kind of a concern that they can shell out ten thousand dollars for a ticket.
Yeah, I mean, I think that that's the story that we've had over the past couple of years, is people have had a lot of discretionary income. Some of that was this excess cash that was saved up from the pandemic, and that's largely worked its way through Now it's only sitting in the top incomeerners. And you know that that's that's they're probably not going to not going to spend it to that same extent. But now that you're starting to see these things normalize, excess cash has slowed down.
Now we're looking in an environment where GDP growth should actually trend something like like two percent, which is what the Fed's looking for.
They're going on the Icon of the Seas, apparently to listen to theirs. Can't believe Sebastian Page went on the Icon of the Sea.
He was he was.
Sort of proud of it, and then very much backed away. That's the pedal against.
Seeing the ship that cruise liner. I kind of the seas three blocks touch a cruise, would you know? I saw that face look perfect?
How many adults they are doing it for themselves versus their kids. I mean, ultimately, if you can get a vacation where you don't have to actually cater to anyone and they can.
Just love it. Tom's gone on a cruise, sok Is loughing gift time of his life in Touch of Me yesterday, absolutely loving.
Does he like the water slide?
I'm not sure he went on the water slide.
Okay, good, we'll ask him.
It's live like, there's just some things that no one needs to say. Stephanie thank you, Thank you very much, Stephanie rothbare Wolf Research. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and gio politics. 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 Out