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Bloomberg Terminal and the Bloomberg Business App. Lisa Shamadana Morgan Stanley writes in this with equities having round tripped back towards first quarter ending levels, markets are anxious to move on from tariffs and attempts to anticipate FED policy. Lisa joins us now for more. Lisa good Mornick, Good morning. How many times have we asked this question? Was it all just a bad dream? Can we just move on? So?
Look, I think investors right now are weary and want to move on. They want to look through it. But I do think that things have fundamentally changed from the Nasdaq peak back on December sixteenth.
I think the.
First thing that has changed is it's really clear that top line growth among the MAG seven is decelerating, and growth investors typically don't like to see deceleration. The second thing is we're seeing this arms war with regard to cap X spending continuing. If we our latest update on looking at free cash flow yields shows MAG seven free cash flow years shrinking by about eleven percent. Typically these stocks don't tend to do particularly well when their free
cash flow yield is coming down. And look, we can pretend that the deep Seek news doesn't mean anything, but we fundamentally think it was the wake up call around global engineering, global innovation, and the fact that none of us know how the movie ends here on jen Ai, who the winners are going to be, how it's going to evolve, whether or not large language models very quickly become commoditized, and the next you know, phase of the
buildout is actually much lower data center intensity, much lower energy intensity because it's very application based. So nobody knows nothing. And I think, right now, this is a market where we've had you know, a lot of positioning, technical positioning where people felt, hey, you know, I was caught off guard. This was a massive surprise. You know, the effective China tariff rate is much lower than I penciled. I got
to plow back in. You've got you know, some of the private wealth money and retail money coming in from the sidelines. But I think we're going to stall out here. I think it's just hard to justify the numbers. You know, you've round tripped back to January first on market levels, and yet your earnings per share are down six percent.
So this move I'm fading. What would you rotate out of and what would you rotate into?
Yeah, so you know, we're continuing to uh, you know, recommend that folks take some profits in now the new leaders again uh in tech uh, and really focus on the beneficiaries of deregulation. And so we see that as you know, financials, we see it as energy, we see it as you know, some of the healthcare names. I know for viewers out there, that's gonna sound like a big value style bias, uh, but quite frankly, it is.
You know, while while we're not saying you've got to be overweight value, we do think you want value in this market because you want some risk premium. I mean, there are risks out there and you want to get paid uh to be in this market?
What risks do you want a premium to be paid for? And it sounds sort of existential, but it goes to the heart of the question of is it inflation or is it recession or is it both?
I think it's a little bit of both.
I think we're somewhat less freaked out about inflation than perhaps we would have been if the tariff rates would have held. I think what we're worried about is that we're no longer in a fore castable policy backdrop. Right as much as we all want to handwring about the FED, you know, for the last fifteen years, FED policy has been reasonably stable and reasonably well telegraphed, and there haven't
been massive surprises. I think when we shift to a fiscal policy backdrop with this administration, as we've seen, it's very easy to experience both negative and positive surprises on policy. And that's what I want to get paid for, is that at any point, you know, things can take a u turn based on the headline.
How much do the rest of the universe that you didn't mention big tech that you're selling on the margins or some of the financials and other value stocks that you're looking at that aren't exactly value. As you pointed out, how much do you think that it really will require FED cuts to get the rest of the universe involved in some sort of positive momentum.
I think the rate cuts are absolutely required for small cap mid cap I think that universe has suffered profoundly, you know, from the higher cost of capital By and large, the S and P five hundred, which is predominantly large in megacap companies have been pretty isolated. They have very healthy balance sheets and for the most part, they haven't been inhibited by rates where they are, which is why we have multiples where they are.
Well.
It raises this question, especially as the fiscal debate heats up in Washington, DC, and you alluded to this, and there's a question about as we find out how much the defthit is going to increase, how much bond markets are going to freak out. To use your sophisticated Carlans, but there is this question of at what level in a thirty year in a ten year yield it becomes prohibitive for stocks to really move higher from here and really inject some damage.
Yeah, I mean Look, I think for most of the last you know, six to twelve months that you know, four fifty on the ten year, a four point five percent on the ten year, you know, was kind of this stall out threshold. You know, the market seems to be battling with it a little bit this week. But look, I think if we back up, you know, if we get big, big, big deficit numbers coming out of this tax bill and that ten year moves into that four to seventy five range, I don't see how the market
has how equity valuations hold here. The math just stops making sense.
Lisa, It's going to see you as always. Thanks for dropping by, Lisa, said standing Andrew Homeholt of City writing, Wait and sy is the right strategy. The FED can now more comfortably stay patient, and we're pushing for the next rate cut to come in July and not in June as previously thought. Andrew joins us now for more. Andrew K. Mornic morning, the question is WHYK go from June to July? I should line why the summer?
Well, I think it's just going to take the FED seeing something in the data that makes them worried about.
What's going on with activity.
What's going on with the labor market. If you look at the soft data, the survey data, it's been misleading in the past, but I think it's sending the right signal now. I think the hard data are going to turn. When the hard data turn, we'll have the FED cutting. What exactly that happens, I don't know, but it could be July, it could be September. One of these upcoming meetings I think.
You'll discuss at the moment is July. Twice the weakening comes before July quite clearly, which made you expect to see it in the next couple of months. What gives you that belief that's going to happen.
So I think we're going to start to see things in the job market, and that's really what's going to be important for the FED. Of course, dual mandate. You have to worry about inflation, have to worry about employment. We're seeing a low hiring rate in the job market. We know now from surveys, from anecdotes that firms are pulling back further if anything, on their hiring. We know we're going to have some government job cuts. We know that unemployment picked up last summer, So you kind of
put all those things together. I think there's a good chance that we see that unemployment rate starting to move up again.
Why do you dismiss all the people who say that the job as claims have been low if they haven't really ticked up that much. You've seen some of the credit card data highlight that people keep sending pretty much in a significant amount to the way that they did before. Why is that not a leading indicator for you at a time where there are very few kind of lynch pins to truth along the way.
Yeah, I mean, I'm not dismissive of the fact that the job market has been pretty stable for the last six months. Six months plus and four point two percent unemployment rate is not about unemployment.
Rate to be yet.
I think the issue is that it's been stable, but it's been stable in a kind of fragile, uncomfortable way with this low hiring rate, with a low layoff rate, so you're not likely to lose your job, but if you do, it's hard to get hired again. And again we have these factors that are probably going to be putting people into unemployment, harder for them to get hired again. And then you start to see that unemployment rate moving home.
How do engage how much scarring there has been done based in the fact that.
We are at a higher teriff rate.
Than we were at the beginning of the year, albeit much lower than it was, say on April. Second, do you sort of communicate that the scarring is not that much less now than it was before the announcement that there was going to be a ninety day pause.
It's all a question about what's the point of comparison. I mean, to your point, if we compare this to when we had one hundred and forty five percent terrors versus China, it was effectively a trade embargo with respect to China, and then we were worried about really acute effects. Could you actually see less traffic at the ports, less jobs at the ports for that reason, less trucking jobs.
Now it looks like probably that's not going to happen, so you kind of take out that extreme acute downside risk, but you still have the uncertainty around terrors. We're still uncertain about how this is all going to turn out, and that we think is leading firms to pull back on their hiring decisions.
The prospective higher prices. Wilmot Basically, Sam, we're close, close to passing on higher costs. The Fetter Reserve needs to sit there in July be convinced that any kind of inflation is not going to be persistent. Is that enough time?
You know?
You can't wait until you have total certainty. I think that's a very general point that is important to make here. If you wait until you see all the data, by definition, you've acted too late. So the Federal Reserve is going to need to make a decision about where they think that trended inflation is STU coun chumpange.
Isn't that what they're communicating to us?
That is what they're communicating.
I don't just unbelief.
I don't believe them. No, I don't think that you can wait until you have perfect clarity on the economy, because John, you never have perfect clarity on the economy, you'd be waiting forever. They're not going to wait forever. They're going to look at that balance of risk. Look at the last two inflation reports. We have core PCE in the month of March zero point zero three percent
month on month. In the month of April, we think it's going to be zero point one three percent month on months, and these are two really soft inflation readings. They follow two really strong inflation readings in January and February. But that cooling and services inflation I think should be giving them a lot of confidence.
It is a question I wish the interviewers would hamm a FED officials on the difference between inflation being short lived and more persistent. How do you know and how long does it take to find out? How do you know? Well, I think you have.
To make a judgment based on where that inflation is coming from and what the underlying drivers of inflation are. And this is why the current scenario is so different from what we experienced after COVID.
After COVID, we.
Had a negative supply shock to the economy. Supply was constrained, but we had a positive demand shock. At the same time, we had lots of fiscal stimulus coming in. People could go out and spend. Now we're in a different scenario where you're getting the negative supply shock, but there's no positive demand shock happening. Wage growth is cooling, house prices have cooled, so you don't have that same inflationary backdrop.
Is there also the lack of belief in Fedshair J. Powell when he laid out in his speech yesterday that maybe the FED would look back to their previous framework where they truly were targeting two percent inflation, not a range, not an average over a period of time, talking about how higher real interest rates may reflect the possibility that inflation could be more volatile going forward, that we.
Could be in a period of supply shocks.
Do you just dismiss that as something that they're not going to follow through with emphasizing inflation even at the expense of the economy.
So I think they do need to think seriously about how you operate monetary policy in a world where you have these larger, more persistent supply shocks. That is a real issue that they have to contend with.
Now.
Having said that, that doesn't just mean that you keep policy rates at restrictive levels at all time. You assess the current situation, and again, I think we're in a situation here where we have, yes, a negative supply shock that's going to reduce growth, that's going to raise inflation, but we don't have that demand shock to make inflation persistent, and that's what they should be paying attention to.
Do you think that they will take an average of PPI and CPI, look at that core PCEE metric that you've just said is probably going to come in lower, and.
Just extrapolate that out.
Do you think that they're going to even without some sort of pain in a labor market?
Yeah, I mean you can't just extrapolate that out forever. I mean you need to look at what are the details of that inflation reading. Where is inflation really going here? I think they're looking at shelter inflation that's slowing. They're looking at non shelter services and wage growth that feeds into that that have slowed. I think that should all be reassuring. The question is what happens with goods. We're probably going to see some goods inflation because those terrorf rates.
But that's where you getting back to John's question. That's where you say, if the inflation is confined to goods, then we should be less concerned about it. That looks more like a one time move in the price level. That's what Governor Waller has said. I think he's about the only FED official that's come out and said.
Just the net close to making a mistake.
I think they could be I think they could be. I mean, I think they do have time here. They do have the luxury of a labor market that's been stable. But you can't wait for total clarity. You'll never have total clarity.
The problem is, you know, these mistakes are often borne out of the conditioning from the previous experience, and that's why we had to wait last time around, because their experience was actually downtime policy too soon, which meant they waited and then inflation ripped away from them. They made a mistake. This time around, they're going to waite for different reasons, and they could make a different kind of mistake because they could have moved sooner. The opposite way.
It could lead to a much faster deterioration in the economy, which is the reason why George Coknkalvas earlier was saying that they're going to be late and they're going to move a lot faster. This is what a lot of people think right now in markets. We're baking in two rate cuts for the remainder of the year because their cuts are going to come on the heels of good data of disinflation, not necessarily that pain in the economy that some people were worried about Andrew.
It's going to see us, sir. Thanks dropping by Andrew Honholst. The city does not believe FED officials when they speak. That's my takeaway. Turning from markets to the nation's capital, in fighting between House Republicans threatening to delay a much anticipated tax bill, the key issue salt Camp increases. One man at the center of all of that, among others, Congressman Mike Lawler of New York. The congressman joined us
now from Capitol Hill for more. Congressman, welcome back to Bloomberg Survellan, sir, it's good to see you again.
Thanks for having me.
Let's talk about progress made this week. Speak of Johnson keeps saying we're getting closer and closer. What's your assessment of how much progress we've made so far this week?
Well, finally this week we had the opportunity to sit down and go through real numbers and start to have a negotiation. And I think that it was long overdue. We had been pushing for months to have that conversation with the Ways and Means Chairman, with the Speaker, and so we finally began that process. And obviously, you know this is something that's going to have to be negotiated over the weekend to get to hopefully an agreement. When it comes to the issue of salt.
We understand the proposal a tripling of the deduction to thirty thousand. Could you give us a sense on how far apart you are right now?
Well, there's a number of issues. Number one, the marriage penalty and eliminating that for those filing jointly. Number two, you know, there is real concern about reverting to a ten thousand dollars cap, which none of us support. That is a real challenge. Number Three, The fact is, these income limits are a problem four hundred thousand. While it may sound like a lot in some areas, in an area like mine, that's you know, a cop and a teacher who are married and you know, have a combined income.
So the fact is, we have high property taxes coupled with high income taxes, and you'll blow right past a thirty thousand dollars cap without a problem. You look at my district, three of the four counties that I represent are in the top sixteen highest property tax counties in America, And so there's a real issue here in terms of the numbers, and so we're working through it. You know,
I've read the art of the deal. I'm not going to negotiate in public, but the fact is that, you know, we need to make some significant concessions to get to a number.
Congressman, what would you like to see cut to offset some of the increases to the salt tax deduction because ultimately cell cap, because that's a real concern right now for markets is how much does that alone increase the deficit?
Well, a few things. Number One, any cap is a savings okay, because the fact is that the cap on salt expires at the end of the year, so we are actually giving them a pay for by agreeing to a cap. That's number one, and people should recognize that as part of these negotiations. Number Two, there's a number of levers that can be dealt with here in terms of savings versus adjustments within the tax code. That's what
we're talking about. We're waiting to hear back from the Speaker and then be able to make a honest determination as to what we can.
Get to this issue.
Congressman that as this debate has raged on, there's been an argument that you have pioneered saying that moderates make the majority for Republicans, and that you need to be able to punch above your weight because without you, they wouldn't have the position that they actually have. How much is this sort of setting the stage for what's to come? How much do you see this as a theme that we're going to hear about quite a bit as we had to the midterms.
Well, listen, we have a two hundred and twenty seat majority and three of us one districts that Kamala Harris won. You lose the three of us and you're in the minority very quickly. So you know, look, I think the reality of this is math. And I certainly respect all of my colleagues. They're all here to represent their districts as am I and my district has different needs than some of my colleagues who are in safer seats, who are in a more Republican seats. That's just a reality
of life. And so to me, this is about a compromise. None of us are going to get everything we want in this bill or any bill, but all of us have to find a way to work together to keep the majority and make sure that we're delivering for the American people. And our districts, and that's what I'm doing in fighting for this issue, fighting to protect Medicaid. I have one of the highest district with one of the
highest number of recipients of Medicaid. There are people who rely on these critical programs, and I'm doing everything I can throughout this process to protect that, including blocking any changes to f MAP, per capita caps, block grants, dish cuts.
We've been able to do that throughout this process and make sure that those who rely on these programs receive the benefits that they need, while making sure that we eliminate waste, fraud, and abuse, prevent illegal immigrants from receiving Medicaid benefits, make sure that able bodied adults without dependence are working, we're going to school, and making sure that those who are no longer eligible are not continuing to
receive benefits. Those are common sense reforms that the vast majority of the American people's support.
A Congressman, you mentioned the out of the deal. Let's talk about the author of the out of the deal. The President's on its way back to Washington. Do you have plans to speak to him and you have a decent sense of what his position is.
I will be reaching out to connect with him for sure. I think he obviously had a very successful trip in the Middle East, brought back significant investment into the United States in agreements with Saudi Arabia, UAE, and Cutter, and that obviously bodes well for the American economy as we move forward. Is a great trip for the President. As chair of the Middle East and North Africa Subcommittee, certainly, I'm looking forward to getting a readout of more details
on what occurred on the trip. But I think it was a big win for the President, and so he comes back obviously on the prespoe of getting you know, one big beautiful bill passed, and so we have a little bit of work to do still. But I think, you know, it's been a very good week for the President.
I know you've been up all night. I just wanted to squeeze in one more question that I think is relevant to a lot of our audience. You've co sponsored the Trust Act Trusting Congress Act to banstock trading in Congress. Can I just say, Congressman, we all find it absolutely ridiculous that people in Congress have looser regulations restrictions to trade stocks that we do as financial journalists. Congressman, can we actually do something about that sometime soon.
Look, I am in full support. The fact is you're here to serve. If you want to make money, leave this to me is a very common sense reform to make sure that members of Congress or their spouses. We've seen some spouses who are prolific traders in recent years. The fact is they should not be benefiting from inside knowledge or information gleaned from meetings they have, committee hearings
they hold, or legislation that is pending. And it's just a reality of life that anyone in this position is provided with more information than the average person, and therefore it is imperative to make sure that members of Congress or their spouses are not benefiting from that information, and all of their assets should be put in a blind trust period.
If that that could have tried. Unless you's not a hedge fund, Congressman, appreciate your time, sir, Gonna have a busy weekend. I'm sure let's hopefully catch up against you in Congressman, like lawa there joining us not to extend the conversation, Mam McGinnis at a commitse for a responsible federal budget. My welcome back to the program. You've seen the policies on the table so far to debate and negotiations continue
into the weekend. Can you just put a number a price to the policies on the table at the moment?
Oh, well, if they're talking about bumping up the salt cap even higher than it already would be at thirty thousand, we are talking about massive amounts. Potentially nine hundred billion is what it would cost to bring it up to the sixty three thousand per individual that they're looking for, which, to put it in perspective, that is more than all of the new tax cuts in this bill, the no tax on tips and auto loans and overtime, all of
those things. So this request to bring it above thirty thousand, which i will make the cases already higher than it should be, is an expensive one and it could really cause the bill to fall apart.
Do you think it will cause a bill to fall apart? How much momentum is there based on your conversations with people on the hill to really get the budget under control, given some of the deficit projections that have the fiscal deficit going to something like six point four percent as a result of the current proposal.
That is the really central question here, because all of the members who are trying to pass this do want to extend the tax cuts and they do want to make good on the president's promises.
At the same time.
There is a large, a large group that has been talking about fiscal responsibility for a long time. They were kind of under the impression that this would be a bill that would do both extend the tax cuts and make the fiscal situation better.
That is clearly not the case, though, And now.
That they're seeing the numbers that a bill like this would add over three trillion dollars to the debt, it would bring up deficits by more than six hundred billion dollars in the early years.
Like this, this is doesn't hold together.
And so the people who care about the fiscal situation, many of them talk about it, but the ones who were wry about it are really really having heartburn, and I am not sure they'll be able to support this bill.
From where I sit, worrying about the budget deficits. They shouldn't.
They shouldn't be looking at anything that would actually make the fiscal situation worse. Instead, they should be focusing on bringing the deficits down, which this would not do no matter what the talking points are.
Maya, you've been worried about the deficit for a long time, and a lot of people have too. But you run an entity that really focuses on the fiscal deficit and how deep it's gotten over the past number of years. How different is this moment and this proposal in that trajectory in terms of worsening the deficit picture at a time when there's some people who are saying deficits can be fine as long as they bring in enough revenues to offset them.
Yeah, well, you asked the right question about the tenure.
Markets are starting to worry the amount of debt that we are issuing. Really, as Ray Dalio and others are saying, who'd exceed what the appetite for lending us money is? And that would be a huge problem because if interest rates go up even a little bit, because we already have so much debt, those interest payments that we owe for it start to snowball.
And that's where you get into a very serious situation.
I think markets have wanted tax cuts, and markets want fiscal responsibility, and the issue is nobody is willing to get behind the kind of savings spending cuts that would allow those both to happen at once. So tax cuts are going to worsen the situation. Even if they generate some growth, which they will, it will not be enough to offset the huge amount of barring that comes with this bill, and nobody seems to be willing to put
in place the kinds of spending cuts that will be required. Remember, the spending cuts that the House is talking about at two trillion dollars is out of a pool of possible of total spending over that same period of eighty six trillion dollars. So we are not talking about anybody who's willing to really put the savings in place that could bring the deficit down that's made worse by adding to it with the big tax cuts.
Mike, can you think of a proposal that would be both responsible and palatable for House Republicans.
Well, first, I think they should focus just on TCJA extending the tax cuts, not putting in a whole grab bag of new ones, particularly tax.
Cuts that expire after four years.
I mean, this is a bill where a lot of the tax cuts are put in place in the early years for four years and a lot of the savers don't start until after this presidential term would be over, so it's very backloaded in the savings. So I'd get rid of those, and I would talk about that separately. I would say there's no room in the budget to do any of those new tax cuts until we put
in place a dead deal. But secondly, they just need to look at a lot more savings, or they need to look at other ways to broaden the tax base ways and means oversees fifty trillion dollars. There are so many different areas of the budget that we can be talking about beyond just the things that the savings that they've put in place. I would look at broaden the tax space where the tax expenditures run through it.
It's spending programs.
Through the tax base, and that loses about twenty trillion dollars over the next ten years. So I go back to the drawing board. Incremental reforms are not going to make this structurally responsible.
I appreciate your time. As always, we'll be speaking soon, no doubt, might AGAINNIS of the Committee. Very responsible federal budget. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, Angiot 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