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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. Jonathan Pinkleer Ubs
is still with us. Jonathan, We've been talking about the effort the Federal Reserve needs to go to to get inflation back down towards target. How much of that is being offset by what's happening in treasury, The amount of issients we're getting, the amount of fiscal easing we've seen.
Yeah, you know, fiscal policy, you know, in our view, is a huge support to twenty twenty three. I mean, we all talked about, you know, the Biden administration programs at chipsacked the IRA and we're all watching sort of this extraordinary boom in chip manufacturing. A chip plant manufacturing construction, you know, all the related ev plant manufacturing construction. I mean, Structure's investment in twenty twenty three added roughly half a percentage point to year of year.
The Q four Q for GDP said, you know, three percent GDP.
You know, half a percentage point of that was the Structure's investment. Direct government spending and investment, the public sector investment add on a little bit of the deficit widening. It's a percentage point, so a third of the growth
that we saw. And you know, we generally think that the government as being somewhat you know, kind of interest rates insensitive, right, so this was definitely some a thrust that the FED was forced to fight in twenty twenty three with higher rates that you know, really wasn't going to be affected by by by by monetary you keep.
Saying twenty twenty three, can we talk about twenty twenty four. How sustainable is that? How much money is still being distributed every single day into the economy off the back of these programs.
A lot less?
I mean, if we think about it in terms of growth rates, you know, it's sort of like we moved up the level, you know, and now we've got these wider deficits and this level, but the level now is kind of staying the same for a while, and that means the impact on growth is essentially going to zero in twenty twenty four in our view, you know, And this is sort of a natural way of thinking about fiscal policy, right, you know, this is why it's countercyclical.
You widen the deficit in bad times to but we've ended up sort of widening the deficit in good times we've had the growth benefit, and now we've got sort of the wider deficit and the growth impetus is sort of fading at this point.
As an economist, do you think that the likelihood of the US Treasure Department more heavily weighting the issuance to T bills makes sense that basically you can basically capitalize on the demand for short term T bills T bill and chill what everyone's been talking about, and not lock in five percent yields over a longer period of time. Is that what we can infer from this announcement.
So, I mean, you know, the Office of Dead Management, they are trying to minimize the interest expense for the taxpayer, you know, based on their calculations and depending upon history and how interest rates may or may not unfold, you know, you do want some mix between between bills and coupon issuance. I mean, there was a long debate pre COVID whether or not the US should turn out its debt A lot and a lot of those models actually don't say terming out the debt is really the most cost effective
thing to do for the Treasury. But a lot of it's pretty uncertain too, right, I mean, it depends on the outlet for interest rates, inflation. You know, at this point, net interest payments are you know, more than defense spending. You know, you're talking three percent of nominal.
GDP is just paying interest.
It's almost twenty percent of federal governor government revenue. So you know, that could get a lot worse if rates stay high and inflation stays high, or it can get better if the.
Fed starts cutting.
I mean, in other words, on the way to frame this question is do you think that the Treasury is making a call that longer term interistrates are going to go lower? And if this isn't an opportune time to lock it in.
I can't peer into Janet Yellen's and I can dry. But you know, I do think though that the Treasury is trying to balance what they're seeing on the yield curve. I mean, if that's sort of what you're getting at, and I think that's probably an appropriate thing to do for short term funding needs.
Right.
We certainly have seen in the money market's a reasonable appetite for bills. I mean, you can see that in all of the money that gets parked at the reverse repo facility at the FED. I mean, the money markets are still relatively a wash in cash, high levels of reserves in the banking system, so that would indicate, all else equal, that there's a lot of capacity for bill issuance.
There.
You talked about fiscal policy, so there's more money coming out, but there's also more people, which is propping up this economy we're witnessing. How do you see this potentially changing next year?
Well, I mean, you know, I think the budget choices get hard, which is one complication, But the presidential election, you know, is a hugely consequential election for fiscal policy.
You know, if we think about what's unfolding and tax policy, most to the individual side of the twenty seventeen tax cuts expires at the end of twenty twenty five, and because that's written in the current law, you know there is something that Congress and the next administration are going to want to address because otherwise it's going to be roughly a almost three trillion dollar tax increase over the
subsequent ten years. The plans to pay for that are likely going to look very different comparing the Democrats to the Republicans. But that could have a huge amount of impact on fiscal policy as we look out to twenty five twenty.
Secretary Yen And got a gritting on this on Capitol Hill just yesterday. I'll bring a quote up from her from her statement, we can make these investments while reducing the deficit by three trillion over a decade through a combination of smart savings and tank proposals. I want to bring in my McKee Mike Dan in Washington, you witness some of that hearing. I'm sure what'shing the tape being played back. What did you think of the proposals coming
out in the administration. How do they do this? Make these investments while reduce the deficit by three trillion over a decade.
They haven't put out an exact plan yet, but The important point for the administration is they do not plan to increase taxes on anyone making four hundred thousand dollars a year or less. Biden didn't mention that when he tweeted that the tax bills need to sunset because the deficit is too high. So there was a big back and forth up on the Hill about whether they would do that or not, yell and insisting they will do that.
But there's going to have to be a way to make up some of the difference between the two sides, although we are going to have to also see, as Jonathan said, the results of the election, not only who's president, but who controls each House. If the Democrats are in charge of the House and send it, it's obviously easier to let the tax provisions expire. But if not, then we may end up with a real fight on our hands over how far they're willing to go.
Both sides got her grilling on this because when Biden's campaign tweeted about this, he left out the fact that he wants to keep the tax cuts for families making under four hundred thousand. But my disis come down to the point that they're going to pay for this by raising taxes on everyone else above that threshold.
Yes, what they've outlined in the past is that taxes go up for people above that threshold, of course, on a graduated basis, and business taxes corporate taxes will probably go up, but they won't go up to where they were before the original tax cuts.
They'll go part of the way there.
There was a hearing not long ago in which officials from the Biden administration were saying, look, the economy was fine with the tax We would be fine with tax rates that are a little bit lower, but not as high as they were.
We don't have to go all the way back. They'll try to sell it that way.
Jonathan Bingles still with us, and I am curious, Jonathan, is you listen to all these proposals, you listen to Jennie illens hearing yesterday and her speech coming later this week. How much dispersion is there about your potential outcomes for the economy based on the divergence and tax as well as tariff policy between the two candidates.
Yeah.
I mean we've written a fair bit on this, and it's it's a pretty big gap. I mean, you know, you know, in looking at some of the plans that have been put forward, and you know what we can glean from the campaigns. You know, it looks to us like, you know, essentially a Republican sweep. You know, so if former President Trump wins the presidency and the Republicans take both houses of Congress, that they would want to fully extend all of the tax cuts, potentially have some pay
for us, but also reduced some other taxes. And you know, the Biden administration, it means what you can glean both from you know not you know, both from the president's
budget prosals this year and last year. It is as Mike would say, you know, they would you know, fully extend the tax cuts for those making under households making under four hundred or potentially four hundred fifty thousand tax rise back to the old upper marginal the old marginal rates for those making over But then you could also work on corporate taxes, potentially raise the investment tax and maybe even capital gains taxes for upper income individuals. Those
are very different outcomes. I mean, you really are over a ten year budget window talking about you know, trillions of dollars in differences between you know, what the deficits would look like under one set of plans or potential compromise or another. And I think we get a you know, the historical template for that is the expiration of Bush tax cuts in twenty twelve, which was very much a
similar playbook. You know, the tax cuts expired for the upper income households were extended for those making under a certain threshold. So we sort of have run this playbook before, and we can see what sort of a divided government outcome might look like. But certainly the Republican wave offers a much different fiscal stance.
Potentially, when does a deficit matter then economically? When is it actually a drag on the economy rather than a boost and this sort of fuel for American exceptionalism.
Deficit, the deficit in some ways already matters. I mean, we saw a last fall, you know, term premium getting pushed around from the refunding announcements as we went from August,
you know, through November. And I think we could also make a case that you know, we're already making choices that are difficult constrained by our you know, budget pressures, whether it's our defense spending, you know, our geopolitical posture, you know, you know, our fiscal stance and fiscal position now I think is already starting to influence policy and the choices we're making for the.
Economy on this FED day. How seriously do you take proposals of eliminating the FED independence.
Well, I worry. My hope is that cooler heads would prevail. You know, I think, you know, Congress obviously would play a very important role in the ability of any administration, through appointees or through legislation, to try to alter the position of the Federal Reserve system. But you know, as a former FED staffer, I think that you know, monetary policy independence is absolutely.
Crucial for a well functioning.
Economy, but it's mandated by Congress. Something that potentially the president, former president, which maybe the future president could do unilatery as tariffs. And he talked about this extensively in the sit down with Time magazine, and he said potentially that ring around the country that he calls it could be more than ten percent. And he says, I also don't believe that the cost.
Will go up that much.
How inflationary is say a ten percent or bigger terriff for all around the United States.
Well, if it's on everything you know, you could imagine that you know, this is going to feed through, you know, pretty quickly and broadly to consumer prices. You know, it's really going to hinge on is it everybody is? Is it just imports from China? I mean, I think that's sort of the crucial question that we're all trying to grapple with, right whether or not they really are going to follow through with it, and whether or not, you know,
Congress could have a role in stepping in. They've delegated a fair amount of trade authority to the executive branch in the US through these various provisions national security, trade protectionism, et cetera. But you know, there is also a chance that you know, Congress could weigh on this issue as well and try to limit the amount and breadth of the terriffs because it would impact other treaty arrangements that we have.
He can do a ton with executive action, that's for sure. Jonathan is good to see Jonathan pingle thebias the Mosielle Davis writing quote, the FED wants to maintain optionality to ease in julyle September, but acknowledges the diminishing window, adding Twward's point to a test of five percent for ten yere yields. LL joined us. Now for more. Let's talk about those tailwinds towards five percent. Can you list them?
Yeah? Yeah.
We think there's a high probability and high confidence level that we hit five percent. And and part of that reason is there's three components to a nominal interest rate a ten year yield.
One is your break even inflation.
We see the inflation prints going higher, so break even inflation should go higher.
The other one is.
Your real rate or your tips, and that incorporates a couple things. It incorporates the future view of monetary policy, of which that's changing, especially with the partial pivot that we expect today. So that's higher yields there as well as the risk premium and the risk premium impacted by inflation and supply. So when you have all the components of a yield pointing towards higher yields and wirer yields, it increases the confidence level and.
Probability that you get to that level.
So that's how we're looking at it, and we do see a test of five percent coming up.
Test is an important word. What about sustaining that level? How difficult. Might that be?
That's a great question. In the short term it won't be difficult, but in the longer term it'll be difficult.
You know. This is one of the things where we will be buying at.
Five percent above and part of the reason is higher yield and the market discounting even higher yields than where the present is in the future in regards to forwards, higher yields will accelerate us towards the.
End of a business cycle. You know.
It's that reflexology of reflexivity of interest rate market. So we don't see us being sustainably above five percent, but we could go with a five and a quarter, But we do see lower rates by one year from this time.
This is something we hear a lot, both on the bond and stock side. That will be buyers into weakness, right, we'll be buyers into any kind of sell off. Are you a buyer now or are you waiting for that five percent level? Are you waiting to sort of see the whites of a five percent yield's eyes?
No great question. And actually last time I was on the shoal was early March, and.
We at that point in time we were tactically long we switched that over that time. We are short because our confidence level and hitting five percent is increasing with the numbers that we're seeing, as well as there's other tailwinds behind getting to five percent. You know, if you have Japanese intervention, that's possible treasury bond selling.
They're the highest holders.
Of treasury, so they do have a lot of US dollar on hand, but if they work through that any more US dollars, they sell treasuries. Combine that with a lot of technical aspects in the market in regards to no one has any higher yield hedges on to your point in your question, so people will panic as we get there, So we think it accelerates upon itself. So we are tactically short now and we will cover that at five percent and start going along.
You talk about some of the supply and demand dynamics behind this increasing conviction around five percent, You talk about the potential sellers. I want to talk about the idea of the US Treasure Department. We do get the refunding, the quarterly refunding announcement in about forty minutes time. We'll get some sort of details about how they plan to fund a deficit that is increasing how much is that plying into your call for a five percent yield.
It's significant and it's not just the refining announcement of what the next auction sizes will be, but it's a cumulative effect. You know, last week we had record two years, record five years, seven years, you know, and it's the whole curve of debt that's increasing. So that will definitely have impact. And what we haven't seen in.
Treasury yields is risk premium.
And part of what you need risk premium for is increasing supply because it has an impact on the dollar in the long term. So you want to make sure you're getting a return and your money back and to ensure that in this environment, you need more risk premium. And we don't have risk premium in yields yet, and treasury supply would be one of the reasons why we do start getting that.
Oh, do you see this competing for capital elsewhere? More specifically, is it competing for capital in credit? You seeinge any sign of that.
I'm going to answer it in two parts. The immediate answer is no, no signs at all. Like look at the boeing, is ten billion in bonds being new supply bonds being issued this week and eighty billion of bids. There is a lot of cash. So even if it does compete, there's.
Still so much cash there.
That was eight times oversubscribed on one of the largest issues in history of.
Bond issues, so there's room for it to compete.
But to the second part to this question, which is a really good question, it's the reason why we see higher tips and higher real yields. When your economy is so resilient and growing so fast, what the Treasury and what the Fed has to do is take the money out of the growth economy to slow it down. And the only way you do that is by high having
higher savings rates as reflected by your tips yield. So although we're at highs we haven't seen in probably fifteen years around, we haven't tested the high of last November. We're going to test that as well, but we'll probably make new fis in tips as well, because you have to take money out of the growth economy into the savings economy, and you only do that with higher real yields.
I'm looking right now actually at tenure real yields, and we're looking at two point three percent, as you said, the highest since last November. As you look out, I mean there's real divide about where yields are going to end up. You said, if we get to five percent, that will expedite the sort of tumbling down to another level that's a lot lower, simply because it will slow the economy. What is that lower level? How big could
that rally be? Versus say, not as much as people think, just because there isn't the same kind of disinflation that's down the pipeline in the same kind of way that there was pre pandemic.
Listen our call from December and we said it on surveillance as well as we see the range of ten year yields in the US at five percent to three and a quarter. So I think a move to five and a quarter accelerates that move back to a three handle. Do we see it this year? No, highly unlikely, but Q one next year, Q two next year, it's a very real possibility that we see three against three handle,
three and a half, three and a quarter. So we do see us possibly testing the lower end again, but first it takes higher yields to do that, to trigger that.
Oh, you've been absolutely phenomenal this year. I say every time I catch out with you just absolutely brilliant. This was a clinic once again. Oh Davis, there of beam up. We'll begin with that top story Marcus on edge ahead of the fat decision. US Equity's closing out a difficult April with the worst day since January. To discuss Tony Dispiritso of Blackrock joined us. Now for more, Tony, you describe yourself as actively bullish. Could you help us understand what that means in practice?
Sure?
So, John, What I mean by that is in terms of the market, I'm pretty positive, right, I think we're in a decent setup. We've got earnings that are growing quite nicely for the first time in a while, right, So you know, right now as are running a little above three percent. By the end of the quarter, by the end of the reporting season, we should be close to high single digits, close to double digits. So I
think the economy, I actually think is doing well. Yes, there's some bumps along the road, but generally the trajectory is quite positive. Earnings growth quite positive. So it's good for the market. But where I get really excited is the opportunity for active management. And I think about that as it's skill times the opportunity set, and the opportunity set is dispersion, and right now I see a lot of dispersion. I mean, I've heard you talk about that
this morning. Some companies doing really well, some companies doing really poorly, very big differences in valuations amongst companies. To me, that's a stock picker's paradise. And so that's why I use the word actively bullish, bullish about the markets, but particularly bullish about the opportunity set for skilled active managers in this market.
Tonny, what do you make of these big moves that were seeing Peter chiev Academy start at the week by asking whether the ten percent was the new one percent? Just in terms of inter day moves post earnings for megacamp names. What do you make of some of these moves? Just double digit moves here, there and everywhere.
Yeah, so you're right, the moves have been quite large. I mean part of that is, like, look, the market has changed a lot where you know, even though we had a a tough April, the market's still up twenty percent since the October lows, it's still up six percent year to date, and so I think, yes, there's some volatility under the scene. Again, volatility is good for a skilled stock picker, but generally the trajectory of the market is still quite nicely up.
Some people were talking about a rolling recession that's basically cleaned out certain sectors, and then we were from Pat max Ktner essentially that it's been a rolling Goldilocks and that basically you just have to lean into this goldilocks narrative. Is that what you see a rolling Goldilocks that's sort of going through different sectors right now is highlighting and putting a halo around AI and energy, and we'll roll somewhere else pretty soon.
Yes, I wouldn't use the Goldilocks word, but I do see this rolling recession recovery, so to speak. And I think that's a lot to do with the dance of COVID, the push and pull where we've seen you know, chip shortages, then chips surpluses for example, We've seen step changes in inflation, you know, auto costs, insurance, et cetera, and so all that's created this, as you put at, this kind of rolling recession. So twenty twenty two really tough year for
technology companies. They responded by cutting costs and then you know, twenty twenty three, you have a better cost base and improving revenues, and you have an earning you know, explosion, a positive earning explosion. You know, when I look at the market right now, the market's very concentrated in this Magnificent seven.
So to speak.
And if you look at the earnings estimates, the Magnificent seven, earnings growth has been quite hot, a lot higher than the rest of the market, and the valuations reflect that. What's interesting is if you look out at quarterly earnings estimates by the end of this year, the estimates for the Mag seven versus the rest of the market basically normalize, the equalize, and yet you're paying a lot more for
the Mag seven. Now, I think the Mag seven, the earnings will probably come out a little better than what the estimates are, but still it'll be pretty close to equal And I think that goes again to this idea of the market broadening out and that being an opportunity for stock pickers, and I think we will see that over the next several quarters.
How challenged is this broadening out thesis, not just from the FED holding rates where they are, but this idea that we're seeing a consumer that does seem to be pinched. I mean, we're talking about Starbucks, we're talking about McDonald's. We're also talking about Amazon. Apart from AWS highlighting a
real slowdown in terms of online purchases. How much do you see that as really hampering an ability to broaden out at a time where there really is a two speed economy, where there is a growing number of people really struggling.
So I actually think that's a healthy part of the process. What we're hearing when I speak to individual company CEOs, etc. What I hear is a consumer being more selective. And I think that's a function of this step change, so to speak in prices that we've seen. And I see that as a good thing because when I look consumer spending and consumer savings, I see a consumer that's been spending above at an above trend rate, meaning the consumer
savings rate is too low. It's hovering just over three percent. Normal is much more like six percent, right, And so I like the fact that the consumer is getting a little bit more selective, a little bit more conservative. I think that's good for the long run. The other positive I see that we haven't talked about is just productivity
growth and population growth. Both of those have surprised positively, and that's also helping to sustain the economy even though the consumer is being more conservative.
Tony, you spent a lot of time on your note talking about the election and the fact that actually companies aren't talking about it, even though many are saying that this is the most consequential election in our lifetime. Is that just because these two individuals are no knowns.
Yeah, it's pretty interesting, right, because we've gone back since the elections, going back to two thousand twelve, and you you know, using our AI techniques, have gone back in read through effectively conference called transcripts, and companies are talking less at this stage.
Now.
We would expect it to increase as we get closer election, but fewer companies are talking about the election. I agree with you. I think it's largely because we have two known candidates, and I don't think the you know, we also are going to have I think no matter how it comes out, we're gonna have a lot of close calls, whether that's at the presidency, whether it's at the House or the Senate, and so I think that means not big policy changes from here.
I think they all understand the pitfalls of talking about politics now as well, Tony, Tony, It's going to hear from you as always, Tony Dispirito of Black Rock There. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, an Giet 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 buck burst this out. Mm hmm