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Terminal and the Bloomberg Business app. Errent's with us around the table eron good morning to you, Good morning you send. The bar is a little bit too high. Maybe finnuations are a little bit too stretched straight side around this scene.
So I don't think that valuations are actually that stress that stretched at this point, and I think that that might be a little bit of a shock to say.
But at the same time, if you look.
At we're in the videos trading a couple of years ago, three years ago was treating at about thirty one times I was trading at that same valuation today. That said, there's a lot of attention with the stock up as much as it is year to date, all eyes have been on Navidia, and I actually think that there's opportunities outside of just Navidia to play the AI theme, and so I like looking under the surface more less discovered names.
Well, let's get to opportunities in a second. Let's talk about what people have been doing stateside. They've been looking to utilities. They're up eight percent month to day. Yes, when we think about what's at risk a little bit later on this afternoon, is it just the semis, the chips, the whole attack, or is it the whole of this market.
Well, so, the utility names that have been really the ones in the firing line for people buying right now have been the ones that are more IPPs, that are more independent producers, that have the ability to really lean into the AI theme, and that's really brought the entire utility market up. I actually think this is one of the sweet spots of the market's utilities have been under owned for a very long time. Throughout most of last year,
they've underperformed pretty significantly. I think now with rates starting to peak and with the FED likely starting to cut at least towards a up latter part of this year,
utilities will look really attractive. That said, yes, if Navidia goes down today, the whole market's going down, I think that that's probably a short term dip, and you likely buy because right now it's just about playing the expectations of the rollout of the next chip and the GPU for a Navidia versus what we know is going to be a very strong earnings picture over the next couple of years for the company.
I'm hoping Jensen Huang actually clarifies how you pronounce the name, because I hear people say Navidia and I hear people say in Nvidia, and it would be very nice for me to decide which one we're actually going to be talking about. You're talking about industrial policy fueling some of these ideas in terms of utilities, in terms of just
industrial stocks more generally. Has that trade basically been played in the US, and now it's really outside of this country that you're seeing new industrial policy put into place and not yet fully priced.
So the first answer is no, it has not been fully priced in the US yet. With respect to the utility usage, the power usage, the water usage that's going to be needed to fuel the AI revolution that the US is envisioning it's going to acquire a lot more infrastructure and build out into really the picks and the shovels of the AI trade. Who's going to be providing the grid lines, the power lines, the water for the cooling, all of that I think is still very early stages.
That said, while the US at least has some focus on this sort of industrial policy going forward, you look at Europe and you look at outside of the US, and we're in very very early stages.
So I think we are likely to see a.
Lot more investment and a lot more focus from a government side in terms of being able to provide the infrastructure in order to fuel the revolution that AI is coming.
Do you have any angst or concern that people are maybe getting a little too excited about infrastructure week on repeat, just this idea. We were talking to Jack Caffrey of JP Morgan earlier this week and he said, it takes years to even get the perm let alone the actual picks in the ground, and people are using this to play. They're using copper as a play, but we're not seeing the economic activity to back it up.
It probably won't for a very long time.
What's your fear factor with sort of overpricing at this point.
So I think that's a huge concern right now.
I think that the market in some respects has run ahead of itself on the cyclical impacts that this is going to be, not on the secular so I think they've probably frontloaded a lot of the performance this is likely to play out over not just the next three to five years, but really over the next ten to twenty years. And so yes, I think that there has been a lot of optimism priced in in the short end, but I think that you will see earnings continue to
inflect higher. You are starting to see real ramps in some of these new chips which are going to require a lot more power usage over the near term. And the challenges is that there's significant capacity constraints in terms of regulation hurdles in order to build out new power supply, and that's going to create I think prices keep prices
elevated over the short term. But certainly there's a lot of sentiment that's positive right now, and so we're being very selective in terms of being dynamic in terms of how we're trading these stocks right now.
You like the United States, you're looking at Europe, what about Asia where we see a lot of build out in the semiconductor supply chain and data centers.
Korea we think is a sweet spot for the markets right now. It's under owned, It's been you know, bought in the last couple of months, but broadly underperformed pretty significantly Visavi Taiwan over the last year or so. You're starting to see an inflection now in semiconductor exports that just went positive over the last two months coming out of Korea. We think that's a real sweet spot. China,
you know, we're cautious on still. Certainly we're starting to see some signs of the tides turning, but we think that China's stabilizing, not necessarily growing, And so I think that that creates a challenge for investors really meaningfully sizing their positions in China, just because the property marked that we think is going to continue to be a fairly significant overhang on overall GDP growth.
Looking at twelve months, as you look across the world, who do you think has the most favorable growth policy mix right now?
Who do you think it is?
So I think that the US still does just because of the fiscal overhang is going to continue to create divergence and economic growth in the US versus the rest of the world. I think you are starting to see an inflection stabilization in Europe, and so that means given how you know, sort of under owned and cheap Europe is you can start to look back into European.
Cyclicals in particular.
But I think the US by far is still going to be the outperformer with respective growth.
As that improves abroad. Do you want to play that through bonds effects or stocks? You mentioned equities? What do I do with fixed income?
So with fixed income, I think we like duration here, but really like European, UK Canadian duration. We think that they're going to be much faster in terms of the cutting cycle, and probably more extended in terms of the cutting cycle. Then what's currently priced into market when you really interesting when you look what's priced into markets right now across fixed income, they're all pretty much pricing in the same interest rate path, and so that to us is probably very mistaked.
Think that is.
I think historically you see convergence in terms of central bank interest rate policy. The FED them stillselves are still expecting this to be a fairly normal FED cutting cycle. Of two hundred and twenty five basis points between now and the end of twenty twenty six, with about seventy five basis points of cuts each year, that's a pretty normal FED cutting cycle. We expect that's likely going to be more of a mid cycle adjustment, and so you're going to probably see about half of those cuts than
what the FED is currently anticipating. And I think you're going to get some hint of that in the Summary of Economic Projections.
In June June twelve for the SEPA of the FED decision. Sanctaez the inflation print and it's been too long. We haven't done this in person for years. It's going to see it.
Thanks you see too.
Aaron Brown, a fincove.
To break it down to the very best in places, say joining us now, J Briceon of Wells Fargo alongside Adam Posen of the Peterson Institute.
Jay, can I come to you first?
I want to get your review of the assessment from Governor Wallach just yesterday. Given that inflation print from the last week or so, a C plus grade, would you give it the same grade?
You know, B minus C plus.
You know.
The good thing is it's coming down right, and I think we're going to continue to see that as we go forward. You know, the big sticky part here has been the service sector sort of inflation and what we know about the leading indicators of housing process. If you look at what's happening in rents in the economy, you're
going to continue to see disinflation there. And then when you look at wage growth, and when we saw this in the average hourly earnings print earlier this month, wage growth by measured by average earnings only up zero point two percent. If you look at that and you annualize that over the last three months, we're below three percent right now. So all that's pointing in the direction of inflation continuing to receive as we go forward.
Adam, to Jay's point, is the evidence building that things truly a downshifting.
Not really.
We hosted Governor Waller yesterday for the speech, and I think what was striking John was that he was trying to put a dubvish spin on what was actually a pretty hawkish message. I mean, he basically said, I have to see real slowing in the US economy before I want to cut and he ridiculed the fact I think rightly that you know they're parsing now the second decimal place on the inflation print, which I thought was very
well taken from Chris. So I think the message is no, they don't want to admit that there's a possibility they'll have to hike, but they are backing off cutting.
I love this feed speak is a Rushock test because earlier we had Andrew Hollenhorse saying that it was really aduvish message under the hood, because several could mean anything. You're saying that it's a hawkish message. Are you getting anything from some of the commentary considering that it really is sort of a choose your own adventure.
Adam Well I watched before I came over this morning.
Least I saw Andrew, and like me and Andrew, I mean, we've been both on the same side on the FED calling that they were going to hike a lot, and then calling they weren't going to cut a lot. And this is my first divergence with him in a while. I think, you look at Mester, you look at Collins, you look at Bostik, you look at Waller, you look at all this fed speak.
It's all back to Phillip's curve.
It's all back, even Chris who was the one who said you could have disinflation with vacancy dropping no unemployment rising, and yesterday he made very clear that at this point we're back on the flat part of the beverage curve and you would have to see unemployment rise. So I don't view it as dubbush at all.
Jay, Why do you sort of, I don't know, maybe disagree, or would you push back at all saying that actually there still is room especially if you get weakness maybe in the labor market.
Yeah, I certainly think that's true. I mean, things can fall apart really quickly. I'm not suggesting that's going to happen, but you were mentioning just earlier, you know, with when to look at Walmart and some of those other retailers. You're starting to see cracks in terms of the consumer. You know, delinquencies are going up. You know, monetary policy right now, measured by conventional sort of measures, real monetary policy, real rate still remains restrictive. And so I think you
will see continued slowing as we go forward. Now certainly not looking for a rate cut anytime soon. I think the Fed is going to hold the line on that and make sure that we're coming back to two percent on a sustained sort of basis. But things can you know, things can downshift here pretty quickly as we go forward, and particularly is what we're seeing in terms of the consumer right now.
Adam, Yeah, I think.
I mean, Jay, I know well, and he's made a legitimate point, but I think downshifting in the consumer after the run of the consumer, the Nvidia like run of the consumer for the last couple of years, is not necessarily for tending. In fact, is very unlikely before attending a massive down shift. But more importantly, what the Fed's not allowed to talk about, but you hear in surveillance and I and Jay and everybody can talk about is what happens after the election. Right you were talking a
minute ago, Lisa about whack them all and targeted policies. Right, So what happens after the election is probably we get fiscal boom, particularly under Biden, and if it's under Trump, we get a huge energy shift towards go go go drills or baby drill and internal combustion engines. Either way, you're gonna get probably an unsustainable boom in twenty twenty five. And I think the Fed's gonna have to start raising You.
Think they're gonna be hiking interest rights again next year?
Yeah, really, very reluctantly quickly.
And what's the lesson, say, of twenty sixteen, twenty seventeen, when we're all waiting for those tax cuts. The FED knew that we were coming, but they couldn't change their plans until they actually saw them.
It's that decent experience.
I think, John, that's a relevant example.
I mean, because they supposedly the tax is from twenty seventeen are going to expire by the end of twenty twenty five, and depending on who's in Congress and who's in the White House, there'll be a very protracted messing negotiation. But if you're Biden, you have to spend more on defense, you have to spend more on energy, you have to keep spending on the industrial policy. If you're Trump, you're
busy pushing out deregulation, tax cuts, whatever it is. Both of them are pushing towards a very big fiscal swing.
And whatever result.
We get on the taxes, it's by the end of twenty twenty five. It's not going to be tax rates jumping up.
I'm so pleased you've brought this up because I do think we're flying blind into twenty twenty five. I get the same finning, and you're the first person when he's come on this probagram and actually sort of la out where your thing's going to happen. Why you're finish Federal serve that's going to have to hike interest rights. So they said, I've not heard that before on this show.
I got something to talk about.
Well, yeah, I mean I'm sitting here thinking to myself, if you have a boom on top of what we've already had, that's a real boom for stocks and a real negative for bonds. Jay, what's your reaction to that?
Well, so what I would say is, you know, we're talking about President Biden, we're talking about potential President Trump. It's really going to depend on what the congressional makeup looks like as well. And so in order to get those big fiscal swings, you pretty much need to have Congress and the White House kind of aligned. And if we have a split decision come November, and nobody knows what's obviously going to happen, but you know, we'll see what happens there.
In terms of fiscal policy.
But between now and the end of the year, I mean we start looking at five months way of that, and I could potentially see a lot of downshifting here
in terms of the economy. And you know, if you potentially you could see some FED rate cuts at the end of the year, but a lot of it's going to hinge, as Adam points out, a lot of it's going to hinge on what happens in the election and again what the election outcome is in terms of not only the president, but in terms of what the congressional makeup looks like as well.
And jay is.
Juma's pointing out it's very hard to have any visibility whatsoever and what's going to happen. And it makes a very compelling case for why either way you'd get a fiscal boom. Either way, though, why would the Federal Reserve want to cut rates ahead of that, knowing that there could be some upside that could force them to reverse course.
Well, again, I'm not looking for them to cut rates anytime soon. I mean, I think the earliest, the potential early as you would see a rate cut, it depends on what was happening with the data between now and then would be in September. The election obviously complicates that a little bit as well. There's another fom seating meeting right after the election, two days after the election.
Do they cut rates there?
I mean, that's going to complicate things as well at that point, but they're really going to have to see how the smoke clears. And again, just because you're going to potentially get a fiscal boom, it's not going to happen right away. I mean, and so this is going to be legislated sometime in twenty twenty five. We're still at least a year out from things being legislated, and the federal will be responding to where the economy is at that point in time.
Jay, I'm glad you brought up Congress Adam, this kind of idea you have about the feed having to hike because of this fiscal spending is dependent on the makeup of Congress.
Biden, if he was going to.
Spend like that, would need a democratic House and a Democratic Senate.
Correct, Yes, and no, Emery, You're absolutely right, but I think less so than in the past because remember two things. First is that the bills already passed in IRA and CHIPS, they're mostly open ended subsidies. They do not require reauthorization from Congress. They can be interfered with if Trump comes in, but that spending goes second that the defense spending generally gets taken out and voted on separately and often bipartisan or at least more bipartisan.
So I think two of the big places.
Where you're going to get spending are not going to be subject to withholding by even a Republican Senate the way it might have been in the past.
Interesting, just when it comes back to you on this down shift that you're looking for, I'll ask you the question asked Andrew, can you put some numbers on it. With a three month roll in average on payrolls north of two hundred k, what are you expecting to see to this summer? What does that come down to? Andrew said, support fifty. What are you looking for?
Yeah, we're looking for roughly the same. I mean, if you look at our average for the third quarter, I think we're looking at one fifty and then slowing to roughly one hundred and twenty or so by the fourth quarter of the year. And we're also looking for the unemployment rate by the end of the year to be up to four point one percent, you know, and if you believe in the sal rule, if you get up to four point one percent, then the economy should be
tipping into recession. Now we're not looking for that, but we are looking for subtrend economic growth later this year. Prints of you know, less than two percent, not being dragged down by inventories, not being dragged down by a big import surge, being dragged down by downshift, and consumer spending it as well as investment spending that is lackluster at best.
Jay, this was great, super thoughtful, Ja Bryce in there of Wells Fargo, Adam Posen, they Institute for International Economic still with us around the table, Adam, I wanted to save sometimes talk about trade. Yeah, We've got some really strong thoughts on this, and I think it's going to be a valuable portion of this program this morning. Do you think we're turning on back on economic liberalization at a time when global challenges actually could benefit from it.
That's a great big picture question, John, and I appreciate the fact that you and Lisa and Marie keep coming back to this. It is a huge shift, whether it's Biden or Trump. Biden I think is drawing the line at some of the most crazy Trump tariff policies that are proposed, but he's done nothing to reverse and now added on some there's an anti China element which has
national security over hyped. But there is more about what this does to US relationships, business relationships, technology, market opportunities, investment flows throughout the world, and we've been writing on this at Peterson Institute. We just published two days ago a great new piece by Kimberly Classing and Mary Lovely on how the proposed Trump tariffs would be a huge hit to middle class and work especially working class family. So what they did was they looked at the proposals
through the lens of being taxes. So you had David malpes On talking about tariffs's taxes, which they are, and so they use the same apparatus people look at to look at tax increases for what's the incidents, meaning which parts of the income distribution get what and lose what on net, And the average American household would lose seventeen hundred dollars a year if the Trump tax cuts went through,
excuse me, if the Trump tariffs went through. And the distribution is highly regressive, so even if you continued the tax cuts from twenty seventeen, you would still on net be hurting the lower ten twenty percent of the income distribution even more.
And this just goes to what you were saying, Emory about.
How purchasing power of households, feelings of inflation, feeling of high prices, which sometimes gets muddled, but anyway is really core. And so Biden could make that better by cutting t arras that were left to him by Trump that are not national security, not China. He could do it through executive order boom increase people's purchasing power. But the worst thing is if they go crazy as convicted felon. Peter Navarro said in an interview that this is the policy
that Trump's going to do. If they actually do the policy they say they're going to do, they're going to cost American households.
We had David Malpas and you referenced that conversation. He was saying that lower taxes and targeted tariffs could be a growth policy that will actually get the US to a place that could allow the deficit to be manageable.
Do you agree, No.
That's essentially what the right wing populist governments tried in Latin America in the seventies, eighties, and nineties, and it was a.
Huge anti growth policy.
There's a reason the World Bank, which David used to run, has recommended against that for development for millions of people around the world. It's taking the US into Banana Republic territory. It is revenue positive for the treasure. I mean that is true, but when you're choosing how you're going to raise revenue, it's one of the most distortionary ways to raise revenue with the most negative impact and the most intrusiveness of government.
And mostly when people like David Malpass and.
Others talk about the Vangist task cuts, it's about getting government out of business this way. Tariffs are the most intrusive way you get government the people's.
Decisions, unlike concerns that you have about a fiscal boom next year, which is reliance to get a lot of those things you're talking about the makeup of Congress. Trump could come in and edit tariffs yep. Immediately, Yes, So how inflationary can those be that the Fed needs to start thinking about within days of a potentially Trump two point zero.
You're right to raise an emory and I think that's a key point that both Biden and Trump, but especially Trump, is able to do a lot of stuff through executive order. So he can change migration policy through executive order. He can raise terrorists through executive order. He can bar foreign direct investment through executive order. He can change energy regulations executive or all of which is boom and the levels
of inflation we're talking about if he does that. We're about to release some studies of this later in a few weeks, I hope, But you know, order of magnitude, you see a jump in inflation one to two percent
immediately just on the tariffs alone. If you do the kind of crazy and humane migration deportation policy they're talking about, we're seeing much bigger numbers because you're completely disrupting labor markets and causing shortages of certain types of labor beyond the human cost, and creating huge uncertainty for small business.
So you're looking at very large jumps in inflation, and the Fed may not want to explicitly address that because it's seen as political, but I would put the odds of them being able to do the cuts in twenty twenty five is very low.
Wow, we're gonna have a lot to talk about this year. Look forward to covenant with you, Adam Pous and that at they paid uson Institute for International Economics. President Joe Biden narrows the gap. The two are separated by no more than two percentage points in Michigan, Pennsylvania, and Wisconsin,
according to the latest Bloomberg Morning Consolet poll. Jennifer Flitton of Investigo righting this like twenty twenty, this presidential election will likely be decided by less than ten percent of voters in the battleground states of Arizona, Georgia, Michigan, Nevada, Pennsylvania.
And Wisconsin.
Jennifer joins us now for more Jennifer, going into year end, going into November, what are the policy options in the White House? Has left? What levers can they pull?
Well, I think they just did one this past week in announcing the release of oil reserves.
They're going to have to try to find some way of affecting those prices.
That people are feeling when they go to the gas, thing, when they pay for the food, when they're looking at their mortgage rates. Right now, the Fed isn't very hopeful, and so this administration is going to have to do things that at least allow for the feeling of the economy loosening right, for folks to feel like more is in their pocket because right now, compared to three years ago, everything just costs more.
Jennifer one policy lever.
Potentially the White House may pull again they did this morning, and this has to do its student day.
Does that resonate with the electorate?
I think it depends on who is affected, and sometimes it actually sort of alienates those who don't go to college.
We sometimes forget that there's a huge segment.
Of the population of people who don't go on and further educate themselves post high school, and those blue collar workers or small businesses, entrepreneurs. Sometimes those folks aren't affected by that, And sometimes there's a disconnect between those who feel like they're paying for those student payoffs and those who are actually receiving them.
Looking at Michigan, Pennsylvania, Wisconsin, it is very very tight in our latest polling data shows that amongst a slew of other polls have comeing out in.
The past few weeks.
How critical are these three states to Joe Biden? I mean, can he even win without holding the Blue Wall?
Yeah? That's an excellent point. That is exactly what he has to do. I mean, his.
Pathway to a second term is through the states of Pennsylvania, Wisconsin, Michigan, and then biting off one of those sun belt states.
And it's sort of the reverse for Trumps.
We're looking at these polls that his best route is probably through Nevada, Arizona, and Georgia and then biting off one of the Steel belt the northern states.
So this is where their focus is going to be.
And we're one hundred and sixty sixties away from the election, we know it's going to tighten, and it's going to tighten further once folks really start.
Focusing, which is when the kids go back to school in September.
Jennifer, A lot of people have been talking about not voting at all because of Israel policy.
At least.
We hear a lot of articles about that.
We hear a lot of.
People saying that vocally, are we overstating just how significant this issue will be to getting voters out or keeping them home in some of those blue state in some of those swing states.
Yeah, yes, I think once you do the cross tabs, I mean, you're going to find demographics, you're going to find people, you know, swing voters sometimes or those who are willing to swing.
Progressives, young people.
These are folks who aren't necessarily going to go and vote for Trump, but they may stay home, they may have their vote depressed. And that really matters when you're in a state like Michigan and you know you're ten twenty thousand voters that you're really pining for. But I think the fundamentals of this election are still staying true
when we're seeing this and pulling. It comes down to the issues of inflation and immigration, crime, and then on the other side, abortion and sort of that democracy chaos sort of issue on the democratic side.
Is there anything the Biden administration could do around inflation given the fact that it might be actually decelerating, but the inflation that's baked in isn't going to change between now and the election.
You know, Some suggest that it may be about messaging and having a better message and looking forward to the future. But I think you've you've hit on the question, and that's the question that the Biden campaign are wrestling wrestling with, you know, sort of constantly, and they probably will up to election day, especially if our economic circumstances and the way that people are feeling the economy stay the.
Same, Jennifer, forgive me for the hunk bus, but I want to talk about financial regulation and the future of it as well. The head of the FDI, say is stepping down. We can talk about the why the bank lobby or the common sense lobby seems to have won out over capital requirements potentially being unfound over the next several months as well. What do you think the future financial regulation is going to be regardless of who wins the White House come November.
Well, and I'll first say that mister Gruenberg has announced.
That he will resign, but only he'll step down only.
When his seat is filled by a confirmed new director, so our chairman. So I do think that we may have a little more time with him.
And then, of course, you know the bank lobby.
To your point, there is a real push to get a reproposal, and I think the FDI C and o c C would potentially just like to make some minor changes on the Basel three issue, but the Fed seems to be a little more open to reproposal and you're going to see Congress continue to push on this issue.
There have been some really interesting hearings where you've seen.
Some bipartisan concern with the proposal and the request for reproposal.
So I think this is going to continue to play throughout the rest of the year.
Do you think we'll see anything substantial when it comes to this ahead of the election?
Well, if I had to sort of armshore armchair, sort of look at this issue as the likelihood of the.
Time that we really have here in Washington prior to the election, I think it's unlikely. But I do think it's very possible that we see a reproposal.
I know that many folks downtown and.
Those who are on the hill are constantly working to.
See that happen.
Jennifer, I know you focus on policy, and one of the biggest policy fights next year is going to be taxes as well in terms of the financial umbrella. What are you expecting in terms of the extension of the Trump error tax cuts? At what level do you think they get extended?
Well, And no matter who is president next year, You're right, at twenty twenty five, we have a.
Number of provisions that are expiring from the TCGA was
passed in twenty seventeen. It's going to look very different depending on the makeup of Congress and the presidency so much as writing on this election as it relates to tax and so if you do have a say it's a Trump presidency with a majority in the House for a Republican and Senate, then you could have a much larger reconciliation package on taxes, something similar to twenty seventeen, and it's broad, right, But if it is a Biden presidency and you have a split Congress, it's really going
to have to be a negotiated package because you have a number of different provisions from salt to the individual tax rates and tax child tax credits. Those are all going to be part of the negotiation. So it's going to have to be a bipartisan package.
Jennifer, We're about eight minutes away from the expected release of target earnings, and this comes at a time when, just to go back to your point earlier, it's going to be really key at this White House to see what kind of messaging they can do to make people feel better about the thing of the fact that things are more expensive than they were four years ago, three
years ago. The White House came out with this on Monday, basically calling on grocery chains to lower their prices, welcoming the fact that Target had lowered prices, saying they are delivering. Is this what will win when it comes to messaging.
Yeah, that's a great question.
I think we saw this in the State of the Union, this whole idea of translation and sort of forcing the issue onto corporations, onto those who deliver services, onto those who deliver goods. I don't see that that is where Americans are focusing their concern and I do know that you know, as far as institutions go, grocery stores are pretty high in the support of the American people.
Institutions in Washington.
Much lower, So I think that might be a difficult one to selling.
The American people.
Jennifer, thank you Fearing for this morning. Jennifer Flytten there of Investco.
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