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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. Bob Michael the JP
Morgan asset management rights. In this the soft landing continues to unfold everywhere, with the tail risk of reacceleration or contraction looking equally balanced. What's the biggest risk FED policy error? Either they cut rates too soon or too late. Bob joins us now for more, Bob, good morning, good morning. Can you pick one for us? What is the biggest risk out of those two options.
That the soft landing continues to unfold for the next eighteen months and people are still stuck in cash And every meeting I have, and I've said this for the last several months, I've been here. That's the first question I get. I have too much cash? What do I do with it? Where do I go? Everything's gone up in price? What am I going to do? And I sit there and I wonder, how could everyone have more cash? Yet every asset price has gone up? Where the hell is it all coming from?
Truly, the everything rarey. We've seen it in bonds, We've seen it in stocks, We've seen it in commodities. You've seen it in gold. Come I ask you the question you've asked yourself. Where is it coming from?
I don't know, but I've lived through this before. And it was nineteen ninety five. We had our investment quarterly yesterday we talked about it. At the end of ninety four, it looked as though we were barreling into recession. The FED had doubled the FED funds rate, US Steel had defaulted, you had the tequila crisis, Orange County defaulted. Everyone was one hundred percent certain we were going into recession and everyone was risk off, and then we had that immaculate
soft landing. The FED took the edge off of things. They cut rates from something like six percent to five and a quarter percent, and the markets did fantastically well, and we were talking about well, surely going into that, credit spreads must have whined a lot, and Lisa Coleman, who runs Credit for Us, looked at me and said, you asked me this question every three months. Now, in ninety four, they were dead flat. They didn't move a single basis point, and we're seeing the same thing. The
demons are at work. People are worried about a reacceleration or we eventually will roll into recession. They're waiting for a better buying opportunity. Yet credit spreads are holding in and there's just still too much cash out there.
Which raises this question.
Have you shifted your stance a little bit on the margins? You used to say that the biggest risk was really a recession.
That was your call.
Is this a new call for you, the idea that it's equally balanced now with a reacceleration potentially a real inflation problem.
Thank you for reminding me that a year ago we were also certain that we were headed into recession. After all, the regional banking system did blow up and it looked as though and the FED still went ahead and hiked rates one hundred basis points in the first part of last year, and for sure it looked like recession, but in September we threw that away and went to more of the soft landing caps. So we've done reasonably well.
I sit here and we try to find where is the smoking gum, Where are the demons, Where is their legitimate proof that actually there's a frailty that will become manifest in the downside, And it's too hard to find. And actually there are more signs going the other way.
When we talked to the credit research teams, whether it's investment great or high yield, they're telling their companies just look better, that IBADA is starting to go up again, that actually companies are more confident about their cash flow and their earnings. So it actually feels that there's more of a stabilization than downside.
When you talk about where is the money coming from, I'm struck by all of my conversations this week and over the past couple of weeks about how much fiscal money has been pumped into the system and how people who received it and companies that received it aren't going to go out and spend it in some of the line items. They're going to invest in stock market, which is part of the reason why, and the bond market, which is part of the reason why there's this wall
of money just flooding in. Is there a concern on the government bond side that there's going to be some sort of coming home to roost with respect to the leverage being transferred from the private sector to the public sector.
I don't think so.
And we also looked at the amount of money in plans like ARPA that have yet to be distributed. There's still forty four percent of the trillion dollars that have been set aside that have yet to go out into the economy, so that's already a sunk cost, so to speak. And you're right, the policy stimulus was literally off the charge. You had to go back when you look at the combination of fiscal and monetary to World War two to have any kind of relative metric. But we had a pandemic.
It's what we needed. It got us through it, and now we're coming out the other side. It will take time to work down, but it doesn't seem to be a problem. We can't be concerned about the amount of treasury supply out there when the entire treasury curve is trading over one hundred basis points through the FED funds rate except for the very front end the two year, so there's still plenty of demand out there. There is no alternate reserve currency in the world other than the dollar,
so there will always be considering a bitcoin. Let's not go there this morning. It's too early for me to go there, so that there will be support for the dollar, and the quickest easiest way for a large official institution to maintain dollar reserves is to buy treasuries.
Were not worried, but to Lisa's point, do think down the road you'll ever have this concern of the path we're on in terms of the US deficit.
We are in a world of modern monetary theory where when there's a crisis, even you know the pandemic was a big one, the regional banking crisis, people want to say it wasn't a crisis, but only because the policy response was overwhelming. Governments borrow and the central banks helped to underwrite that. But it doesn't just disappear into the ether, right. The amount of physical stimulus you get actually goes into the system somewhere. There is a credit multiplier, a credit
extension effect to it. And that's helped to boost the economy, and we saw that early this year when the Treasury dialed back the expectation on the amount of issuance because guess what tax receipts were up, which is exactly what you want when you apply that amount of stimulus.
So let's put together some of the things you've told us so fast. So the economy is pretty decent. Biggest risk is upside risk and maybe the extension of this cycle for another eighteen months. You mentioned the version of the yield curve as well, So we've got a two year at the moment about four to sixty, a ten year at four twenty four. Given everything you've told us, how are you convincing clients to go further out along the curve to pick up less yield? What are you telling them?
Yeah, that's a really good question, because the Fed funds rate has to come down to four percent to legitimize the treasury curve where it is. And for sure, if it comes down to four percent, the front end the two year drops from four to sixty down to about four percent, but five tens thirties stay about where they are. It's not so much that it's looking out into the market, looking into the investment grade market, where you could pick up another close to a percent, Going into the high
yield market to securitize credit market. That's where you're starting to pick up yields that are in that five and a half and higher in high yeld close to eight percent range. And those are the kind of yields and credit spreads that will come down once the Fed starts its rate cutting cycle.
You mentioned there was so much cash coming in. Where is the cash going where you direct and get at the moment, what are the biggest things you're advocating for.
Well, we do like credit just because corporate America looks so good, and I myself have gone full circle on private credit. It's so big I accept it as a legitimate source of non bank lending into the system.
Okay, this has change. What's changed your mind?
Well, one, the fact that it's larger in size than the public high yield market, So that's pretty significant that it is getting out out there. It is lending to borrowers. Those borrowers aren't just sitting on it. They're actually hiring people, they're using resources, they're creating economic activity. Even if you think put some unimational default rate out there twenty percent.
That still means eighty percent is money good. And while there are problems that are ongoing right now, whether you want to call it an amend and extent or exchanges or restructurings, they're occurring. They're occurring, and they're happening without all the fanfare if they happen in the public market. So it's a strange form of reinsurance to the public credit market. So it's another reason we like the public credit markets because they just look so clean right now.
I love it. It's like, Okay, shoot a ribbons, that's okay, good morning.
My name is Bob and I am accepting private credit.
I love how everyone is that LASA just sitting there coming out with the biggest comeback for anyone who's feet as stop fum.
I think it's great.
And we finished basking you a simple one bump. When is it last time you were this bullish on your asset class? When was the last time you mentioned the mid nineties? When was the last time you were this bullish?
Oh gosh, you have to go back to the mid two thousands.
Wow, does that make you're comfortable or uncomfortable? It's slice the Static thousand and seven.
I feel great because I feel post financial crisis, we've sort of been in a la la land where there's there's been a lot of policy intervention along the way because it was needed to recover from what happened during the financial crisis. And hey, blame us, the baby boomers. We learned about leverage and housing never went down in price, and we figured out how to blow it all up, and it took over a decade to put Humpty dumpty
back together again. And we see that's what's happening. We see that the ninety one bursts are the largest population cohort. They're turning thirty three this year. They're the dominant earner spender saver. I think we can toss away the last fifteen or so years and look at the period pre financial crisis when there will be a demand for capital, there will be a cost to it, and there will be a productive use to it. So I'm very optimistic.
This was thoughtful stuff, Bob. It's craze to catch up with. Kick off this Friday morning and start to close out this week. Bob Michael of JP Morgan, Thank you, sir Peter Oppenheimer Goldman Sachs rights in this, we believe that there are many companies outside of the US that should be considered as part of a global diversified portfolio and should not be ignored simply because their base and listing
location is outside of the United States. Peter Oppenheimer joins, is now for more, let's get straight into this, because it's a really important theme. If it's winning, even if it's dominant, should I be concerned?
Well, the short answer, John is no.
I mean, the outperformance that we've seen of the US, which has really been particularly dramatic since the financial crisis, has been entirely based on solid fundamentals the US economy, but most importantly, profits have simply outgrown those of other regions. But as a result of that, its valuation has risen a lot compared to other parts of the world, and now we're finally seeing a bit of a narrowing in
the relative fundamentals. Actually profits are picking up outside of the US where the valuations are lower, and we think that the US market can still do pretty well, but there's some great opportunities outside and diversification makes a lot of sense.
And that's true at the sector and the stop level two, the PEP.
We can talk about those opportunities in just a moment, but can we also discuss what we're fighting. Are we fighting passive flows that just couldn't care less?
Yeah, to a large extent.
Look, passive investing has worked very well over the last decade or more in an environment of ever lower interest rates, where bigger companies are becoming increasingly dominant, and the usc D market itself has got the highest share.
Of the world market since the early nineteen seventies.
So what's been winning has continued to win and win over time, and that's been a great environment for passive investment. We think that as interest rates stabilize at a slightly higher level, sure they'll come down cyclically, but they won't come down structurally.
Returns at the index level.
Are going to be slightly lower, and that's an environment where the opportunity set is more attractive for active managers and also for more differentiation and diversification, and that means across regions, across sectors and styles as well.
Peter, when you talk about the case for international, I'm curious where you're looking in particular, and whether it's regional based or sector based as you are just noting.
Look, it's a little bit of both.
I mean, the US has done extraordinarily well, partly because it's had a very high exposure to the growth factor, principally dominated by technology, which has been the winning sector over the last decade.
We still really like technology.
We think that the dominant companies have been justified again in their dominance because of incredibly strong fundamentals. But we think that you've got better relative valuation opportunities outside geographically the US. And indeed, last year, rather quietly, the euros dot fifty was slightly stronger than the SMP. Many people don't acknowledge that year. Today Europe has outperformed not just the SMP, but the Nasdaq.
So is Japan. So it isn't that we don't like the US. It's gone up, it's done well.
But there are graphical opportunities to diversify, and I think that means also broadening out from technology.
We think technology is still going to be crucially important.
And do well, but as interest rates come down and we get this soft landing, the opportunity for broadening out into some more cyclical parts of the market is improving, but also into non tech companies. We put together a
list of what we call ETC's X tech compounders. These are global companies outside of the tech sector which have strong characteristics of reinvestment at a high rate, compounding high returns, and they tend to be somewhat cheaper and I think also offer good diversification opportunities.
Overnight, Peter, the City Group team, the equity team over there actually upgraded EU stocks with about six percent more upside here today in their view, and it's one of the highest in the street. This is the reason why more certainty on rate cuts. We've been talking a lot about that global growth you alluded to that and dollar weakness. How much is dollar weakness necessary for this call to work?
Actually, I'm less convinced on the dollar weakness part of that story, although I agree with the other comments that you made. The European economy is growing at a much weaker pace than the US. You know, we're looking at US growth this year around two point eight percent and
in Europe about point seven. But we shouldn't forget that the European companies that dominate the indices are very global and therefore they benefit from a recovery in global growth and in the global manufacturing cycle which is beginning beginning to happen. And I think actually that what we find for European stocks is that growth trumps currency. Growth is accelerating. European companies tend to do well even if the currency is actually stronger. Now it may well be weaker and
that will add to its relative competitiveness. But we don't think the currency is actually crucial part of this. It's much more about relative fundamentals. Our earning is improving, and there's growth improving, our interest rates coming down, all of those things suggest they are. And Europe is only trading at around thirteen thirteen and a half times PE compared
to something like twenty one in the US. The UK only trades around ten and a half time, is about half the valuation of the US, and so there is a valuation opportunity as well, which isn't really dependent I think so much on currency.
Peter.
When you look at India and China and you say India has good growth, China can be a value opportunity. A lot of people move to India because they wanted to get away from China. Why do you see something interesting in both markets?
Well, I think that India is a bit of a different story. It's got high growth rates, both in terms of the corporate sector and in terms of the economy. It's a relatively expensive market, but it's one that has good exposure to long term growth, and it is benefiting a little bit from diversification supply chains and indeed diversification of an investor focus away from China towards India. China is a bit of a different story. It is a valuation value play. I mean that the market trades at
around seven times earnings, much much cheaper. Of course, it has a lot more structural headwinds and a higher risk premium giving given current developments, and it's much less I think of a consensus than India, but for evaluation.
Led recovery, if we get.
Any policy stimulus, we think that there's a reasonable upside at least tactically in that market as well.
I've got to finish on Japan pet it's just been amazing ni K two twenty five year today up by something like twenty two percent. I think we had a move over the last year of something close to fifty percent PE when I buy the S and P five hundred market, cat weighted. I know what I'm buying. I'm buying megacat tech in a big way. When I buy japan Pee, what am I dying?
Well?
I think there's two things to say about this.
First of all, actually, just like the US, both Europe and Japan have seen an increased concentration by stock. So the biggest thirty companies in Japan, which are very global, are actually the biggest share of the thousand biggest that we've seen going back over several decades. So you are getting dominant, large cap globally exposed companies doing very well. I think that you know, the Japanese market is much
cheaper than the US. Of course it's gone up a lot, but we shouldn't forget it's only just broken through the level that peaked at last in nineteen ninety. And the fundamentals are finally very different because you're getting expanding nominal GDP with finally coming out of the deflationary stagnation that's dominated that economy over the last twenty five thirty years, but also quite a lot of restructuring store because of bottom up focus on improving return on investment from a
low level. So with rising margins, return on equity going up. That justifies a bit more of a high evaluation. But the dominant companies there really are global companies in areas around technology, high high value added manufacturing that benefit from a bit of a pickup and global manufacturing cycle as well, and we think they're pretty well positioned.
John pet always enjoy your thoughts. Thanks for being with us. Pinner up and handed the Mohammed. Let's talk about this. How interventionist is America becoming.
He's becoming more interventionist. I don't think there's any question about that. But the more interesting question is does it need to be more interventionist. There is a view which I must say I have some sympathy with that industrial policy is going to be really important in pivoting from all styles growth models to new style growth models. And you're seeing it not just in the US, you seeing it elsewhere as well well.
This is actually one of the reasons why when we're talking about don't fight the FED the Federal Reserve, but also don't fight the federal government, because this kind of industrial policy is going to be crucial if you want to shift away from some of these supply chains. I remember maybe a year ago when people thought this would be inflationary six months ago. People thought this would be inflationary three months ago, probably going to increase pricing. Now people don't care.
Why.
The reason why people don't care is because inflation has been coming down, and it has been coming down without a sacrifice and growth.
So it's not a top issue right now.
But it's inflationary.
Yeah, truly, it is inflationary.
Of course, it is all the restructions that's happening in the global economy other than AI life sciences are inflationary. The rewiring of supply chains for geopolitical reason inflationary. The rewiring of supply chains because companies want more resilience and not just efficiency inflationary. What's happening in the labor market in terms of mismatches between skills and what people have, that inflationary.
So you have all this going on. On the other side, you have the.
Promise of AI, you have the promises of life sciences, and people right now are completely focused on the promise and are willing to live with all these other instructions ongoing.
We post a question earlier on this week, and there was actually a really decent piece in the Wall Street Journal yesterday. I'm not sure if they've been watching Bloomberg surveillance through the week or not. For whether America is becoming more like China as opposed to an era where we believe China would become more like the United States. Is America becoming more like China?
That's like saying that I as all those are unfit as I am and becoming more like an Olympic athletes. You know, could I take a small step, yes, But am I becoming anything like that person?
No?
I'm not saying they're going to become full communist overnight in Washington, DC. There might be some Republicans worried about that in the Democratic Party. I'm not saying that. I'm just saying we look a little bit more like them than they do us in the last couple of years, and that's not what we expected.
Well, we look a little bit more like you.
We've realized that government has to play a bigger role in enabling the private sector, and we've realized that private public partnerships matter.
The Federal Reserve came out with a medium projection for twenty twenty four, unemployment, a little bit lower, growth a whole lot stronger, and PCACPI was revised a little bit higher, inflation expectations were firmer, yet still the median JOT showed three cuts for twenty twenty four. Now we were trying to work out if that was just a small contradiction that they can iron out. Chairmen start speaking in the news conference, and he didn't sing fussed by it at all,
didn't seem bothered by the optics of it. The substance nothing, What do you think we're going towards? And we mentioned the consequences. What are the consequences going to be the financial markets?
So jarathink the critical thing is when he said the story has not changed.
So we could have argued over three cuts versus two cuts, or you needed one more member to move, it's furious accuracy. But when the chair says the story has not changed, when you've had three hotter than expected inflation prints and you've revised up your inflation projection, I think that's a real message.
As the story changed for bond markets, then well we.
See it in what's happening in the bond market.
Yes, I mean the bond market is now realizing that finally the curve is going to steepen and it's realizing that we are going to tolerate higher inflation for a while, but that inflation is going to be well anchored.
That is a really consequential statement.
So this is important because we've been trying to figure out if this is good or bad for the long end of the curve. Shortend, If they want to come, we know what happens. It's influenced by the policy rate. I think Lisa was first to ask this question following the news conference. What does it mean for bonds? What does it mean for the longer end of the curve?
And I remember sitting here with three amsra and she said, don't take me there. I want to talk about the front end. I want to talk about the belluy of the curve. Don't take me to the long end because things get ambiguous when you get beyond five years.
Well, we're taking you there. What does it mean for the tenure?
So I think for this year, an average ten year yield of four to twenty five around where we've in is reasonable. We're going to be quite volatile around it, but that's going to be reasonable, and the excitement is going to be elsewhere in the curve.
Which raises a question, is this the correct move That basically it is important for the fad to have a little bit more flexibility, and two to three percent is a more simulative kind of environment for the economy to avoid the trap that we got into of disinflation for so many years.
So here you go full into the article. Now, okay, so.
Aaragraph here we go to answer your question.
It is not without risk, but it is the right move.
It is not without risk because at some point you could destabilize inflation expectations, but it is the right move because we live in a different macro paradigm. We're living in a paradigm where supply isn't flexible enough globally, and if you try to run a two percent inflation target, you will end up sacrificing economic well being unnecessarily.
So concern you that some people are speculating, just to your comment about how markets are not the economy, that a lot of the inflation is asset inflation. It's not real world inflation, because lower income families are the ones most likely to spend and are the ones who are most at least likely to really benefit from some of the rally that we're seeing in asset prices. How much does it just divorce financial markets from the fundamental economy in a way that could be potentially harmful.
I mean, that's been the story of QE. That's why there was a call for people's QI, the recognition that the generosity of the central bank was going to a very small group of people who owned assets.
Look, let's not.
HydroD or hind it. The low income people have not recovered from a nine percent inflation hit. Yes, their wages are going up more, but the cumulative impact of the inflation, which seems in twenty twenty one, has been significant. And if you don't believe me, go to food backs.
Have a look at what you know.
I took to one food bank in particular, and they're still seeing long lines of people. So underprivileged segments of a society have been hit hard by inflation. The good news is that wages at the lower levels are going up faster than they have been in the past. But the inflation hit was painful. And that also explains why despite US economic exceptionalism, it doesn't get reflected in President Biden's pause on the economy. It doesn't get reflected because
people remember inflation and for many people out there. When you tell them inflation is better, they'll say, well, prices aren't coming down. They think that if inflation is better, then prices should be coming down.
So well framed Muhammed. The second plug of the ft pace coming out Monday, Coming out Monday, Tuesday. Okay, Chuesday, Tuesday, They're going to stand so many car piece on Tuesday. This is the Bloomberg Sevenmans podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to
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Mm hmm