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Terminal and the Bloomberg Business app. Eric Friedman of us Mancasset Management right in this we used equity and commodity market weakness in April to add to risk assets and sell bonds, leaving us overweight domestic equities and real assets and underweight sixth income. Eric joins us now for more.
Eric.
Great to see you, sir. In your words, you've been training up a storm. Can you walk us through what you've been doing and why.
Yeah, we've been active, jarthan I think it's been an environment where we've been using price weakness to really bolster our thesis, if you will, that we think corporate earnings will deliver this year we also want to be protected
against that we think maybe an incipient inflation environment. So you know, we've looked at equal weight S and P is our more favorite choice right now, just with a viewpoint that we want to stay in large cap we want to stay domestic, but we also want to be more spread out, if you will, from a factor standpoint, so we think EQO WEID S and P is a good way to express that view. Also think that inflation
is going to be hanging around. In fact, it could reaccelerate as we get deeper into this year due to both the catalog costs if you will, shelter costs, but also just the considerations around comparable So we think that those are two spots. We're now looking for a shock in awe if you will, owe inflation, but we do think the gradual incremental increase is a risk that we want to make sure we have protection on in portfolios.
Your favorite sector is tech, energy, financials, midcaps. I'm putting this all together, Eric, this screen strong nominal GDP. What's your base case for this economy.
Yeah, we think the economy is still going to be really in the back of both a consumer which is starting to incrementally slow, but it's still in good shape Jonathan, and also think the corporate capex cycle remains quite robust. That's something that we've seen a lot through this earning season. The themes that you've seen in terms of spend remain, AI, remain cyber, remain big data. So those are things that
we think are more durable. To your point on nominal GDP, we are starting to see some participation from across the pond, which is a good thing in terms of the consumer really hanging in their financial is.
Also being in relatively good shape. So those are all things that.
We think still leave us more with an overweight position bias, if you will, but also a flexible mindset. I think this is an environment Jonathan, where if you don't have tight stops around your views, there's a level of hubris that we prefer not to have in this environment. So we think again more of a constructive bias, but also making sure that we're not risking too much in what's going to be very dynamic back.
Half of this year.
Perhaps part of that hubrius, Eric is also having protection for when things go wrong, for when your viewpoint doesn't play out, and for an economy that we're still unsure of. But when you look at things like the VIX of the VIX, there's nothing there. There's no one who is willing to go out and buy frankly, these cheap hedges. Eric, So what does work in this environment?
Yeah, Danny I worked alongside a Seti Ratchri who developed a VIX many many years ago, and it's something that I think is a great observation. Just because the vall or the volley of ball has been very, very limited. So we think during the following makes sense. Number one is that we're underweight fixed synechemist Jonathan mentioned, but we do own some what we consider a longer duration exposure. In the event that we're wrong. That's something that again
we think makes sense. In the event that there is a significant surprise with either the FED or a deflationary pickup, which again we are not forecasting as our base case, we think that makes sense. We also think again that commodity is exposure, which again is not energy related in terms of energy equities, but direct commodity exposure again and that broadening out of inflation risk that you're seeing in
everything from wheat to coffee to cocoa. Those are things that we want to make sure that we have in portfolio. So again having a view, having a tight stop around those views, we think that's going to serve investors well in this environment.
Well, Eric, you also said one of your views equal weighted S and P this is a market we're over the past decade. If you had said to someone valuations are too high, you shouldn't go, perhaps to a market weighted index, you would have been wrong because the expensive
companies could keep getting more expensive. John mentioned this. You look at something like an ARM earnings that is getting punished, and Eric, I wonder how much of that is down to expensiveness, something like ARM twenty seven time sales more expensive than Nvidia. Is this a market that cares once again about valuations.
Yeah, Danny, I think that's a really important observation. We think it absolutely is. In fact, one of the reasons why we went more equal weight is because that value factor. Again not that we always invest in factors, if you will, but because of our desire to want to stay large cap, we do think there's a risk of refinancing with small apps, as well as the improfitable nature of about a third
of that index. Even though it's certainly lagged. We'd actually prefer to be in a higher quality lagging index like equo weight.
S and P.
So you are seeing that stand and delivered type of market FROME companies right now. If you do not either have strong guidance or a good reason why you missed, this is a market which is quite punishing.
So we think that there's a level of.
Margin of safety if you will an equal weight that's certainly not the cheapest we've ever bought, but a space that we think is going to be well represented in a decent earning as climate for the next couple quarters.
Well it or gives you the value trade does well in a rate cutting cycle, or at least when we're in that trajectory getting to that trajectory. So how much of that is dependent on the FED actually delivering cuts?
Yeah, you know, we think that if there isn't one or at least I think it's been a great phrase that you all used this morning, which is the dubvish pause, if you will, if there isn't more of that dubbish pause type of language, or ultimately we think one cut and at least a signal for a bias towards more this is a market which is a bit more vulnerable, but.
Again for us, it's not so much. When do the rate cuts start.
We do think the market's starting to pay a lot more attention to the terminal value. And if you look at an expectations out through twenty twenty five, twenty twenty six, again for someone who's nobod who's having for dinner tonight, it's hard to look out that far. But this is an environment where you know the terminal rate, if you will, is becoming more important.
So some cuts this year with a signal.
And a bias for more than twenty twenty five are important, not necessary.
We think the terminal rate is much more important.
So again you know that two and three quarters the three in a terminal rate side we think would be a good place to anchor on. Higher than that would be an issue for this market.
Yeah, never mind twenty five. I'm starting this guy's beyond next week CPI retail sales. Eric, it's going to hear from you, Eric Friedman, the of US Bank Asset Management wait to the next big data point. Market momentum stalling as investors look ahead to next week's CPI print. Jpmulgan's David Libt's saying this for investors. So long as the Fed remains biased to cut rates at some stage, we think risk assets will remain supported. David joins us Now
for more. David goomonnits Yere, How is that the biason? Did it change last week in any way, shape or form.
So it's funny because when we think about and when we talk about what happened last week, you know, I would describe the market as almost spastic.
Right.
We started with a very hot ec I print and that everybody was pricing out cuts. The Fed's not going to be able to go this year. We ended with a non farm payroll report which was effectively goldilocks. So there was something for everybody last week, and you could see that in the way that the market was moving. I think the most important thing was what Pale said during the press conference and when he laid out the potential scenarios for interest rates this year. He didn't really
talk about hikes. He talked about staying on hold. He talked about easing policy. And we've actually done some work and looked at whether it's the stock of cuts that the market is expecting or more about the flow.
And as long as.
The market is continuing to price and cuts over the next twelve months. We think that that's going to keep long term rates in a range and likely leave equity is fairly well supported.
So let's stay some scenario. Have analysis. Christian mammani with San Yosi just yesterday and he was saying this two Well, it's this one way the economy's great in the fed con cup and it's basically one way the economy starts to sell f and in the fedcam. Is there a better outcome from malkets?
You know, I don't think there is. I think that the latter may be slightly better for the market. The market is clearly getting a little bit twitchy about this very robust pace of nominal growth. And the issue is you're getting the earnings coming through, but you're capped on multiples given the you know, subsequent outlook for rates, and so I actually think a little bit of softening in economic activity, maybe getting the Fed to acknowledge that easier
policy really is on the horizon. That could be the ideal scenario, you know very much, going back to a world that feels like the one we were in for the better part of the expansion post GFC, and you.
Can feel the market's desired to get back to that. We keep referencing back to that. But I wonder in what you were talking about about Powell laying out all these scenarios where very well could have said that would lead us to hike, he says that would lead us to not cut.
Is not the power put I think to.
An extent it is.
And I also think it's important to recognize what the issue is that they're dealing with. Right so, the Fed has this dual mandate for full employment and price stability. They don't really need to be worried about the employment situation, at least given the data that we've seen, and so
inflation remains public enemy number one. And what I think would lead the Fed to become more hawkish is if we saw that reacceleration in inflation, which in our view would be directly tied to a labor market that heats right back up. And so if we see non farm payroll prints go back to three hundred thousand, that could well give us a bit of pause. But it feels like the overall direction of the labor market and the wage data is supportive of some easing later on.
This year, and then we have a quiet week. We get some more of that data next week. But here's the thing is, it seems like we're in a bit of a no man's land during that data because earning season will be over, we'll get we won't have all those cues for corporations. Where far our ways out now from the next FED decision. So what does it mean for each of these data points when we're kind of in the middle of nowhere.
Well, it's interesting because to your point, it's really the level one data, right, the CPI numbers, the employment numbers that tend to move rates and subsequently equities in particular. You know, I actually think that it's not the worst thing in the world. We have a somewhat quiet week, the market can digest what it learned last week. I mean, we got a lot of data last week in the US around the world. The market can process that, and
the market can listen to what FED speakers have been saying. Right, we're seeing, you know, relative balance between those that are continuing to talk about easing later on this year and those that may be a little bit more hawkish, like the mister from the Man from Minnesota and his blog yesterday, and so you know, when we think about what the market is going to do this week, it's going to digest that data. And frankly, you know, the outlook for
the economy looks pretty good. Two Q growth is tracking nicely. We may see a bit of a deceleration in the second half of the year. But again back to where we started the conversation, I'm not sure the market would dislike that.
But the bar is higher. I'm going to need to talk about that data relative to expectations. So let's take the City Surprise Index. Looking at US economic data incoming relative to what we were expecting. It is no stiffed over the last month. It's turned negative in the last week. Do you think there are better opportunities abroad? Do you think we've reset the bar low enough abroad that we're starting to be expectations at the same time they're starting to deliver rank cuts.
So the international story is an interesting one. The thing I will say about the US economy before we move on to the rest of the world is we were thinking about the various kind of pillars of growth as being you know, assets or liabilities or neutral. There's a lot in the neutral bucket today, but that does skew a bit more toward the liability side than the asset side, and I think that that's supportive of slower growth in
the US during the back half of the year. Now, the counterpoint to that is the rest of the world is picking up. Right if you look at kind of the edge of the world being Southeast Asia, what's happening with semiconductor activity and overall technology exports. Things have picked up quite nicely. We're seeing some green shoots finally begin to emerge out of Europe, and that makes us constructive on a pickup in the overall global manufacturing in global
goods cycle. And you know, frankly, what we need to see is the European consumer come back. Because if the European consumer comes back and that source of demand re emerges, we'll see the inventory cycle pickup, we'll see that manufacturing activity reaccelerate, and we'll see Europe emerge from a relatively soft period of economic growth.
What is it about the phrase Europe and grain shades. I feel like you Saype grain shades for like ten years, same story exactly.
I think it's definitely become convention. But I think that the reality here is that you've seen an extended period here eighteen to twenty four months where manufacturing activity globally has been soft. You're not only seeing things pick up in Asia, you're seeing things pick up in Europe. You're even seeing things pick up in the US barring that most recent ism manufacturing print.
Okay, well, once we get the cuts coming out of Europe, what happens not to the landing, but after the landing.
I know you're seeing green shoots, but.
Is it enough to get some sort of growth coming back into Europe.
So I do think that we can get growth going in Europe again. And I think, you know, one of the bits that we've been really focused on as of late is the response to the pandemic. Right, So, in the US, you had, you know, money dropping from helicopters. People got laid off, but they got a stimulus check in the mail that created too much money chasing too few goods. Europe had a different approach, right, They furloughed their workers, they put them on a percentage of their
overall salary. And I think that that led the consumer to just retrench a little bit further. And so as we see consumer confidence begin to pick up, and as we see signs that the labor market is remaining healthy, that does make us more constructive on opportunities in Europe than we have been up until this point. The one thing I will say is that the folks who like to point to well, you know, you can invest in semiconductor producers in Europe and technology in Europe it's as
expensive as tech in the US. Right, So that's a completely different conversation. This is more about picking up the cyclical trade and jumping on board as things begin to accelerate.
It is so hard to remove the American bias and go overweight. Europe is now that time then.
So it's a good question. The thing that's really plagued that trade for the better part of the past decade plus has been the strength of the dollar. And so I think that the way to weigh this and to think about this is if the ECB is easing and the FED needs to stay on hold, what happens to the euro? Right, Because if we can get that euro's strength and then maybe the FED easing as well, that's going to be an additional tailwind for US based investors
in European markets. If we've a FED that keeps rates where they are in an ECB that starts easing, I think that even if you see a pickup in local market activity and local currency returns, the dollar may well work against you at.
Wait so scare those two former European growth is better go into not just the expensive tech. But at the same time, by all accounts, the FED is not going to cut as soon as the ECB dollar remains strong, which wins out.
So I think if the FED is able to ease, and our views that we will get one to two cuts before the end of the year, you will see some of that euro strength begin to come through, and you will be able to participate in a recovery across the bond.
And we've got lots of talk back. You're going to be sticking with us stifle if it's that FJP Molkan asset management.
John outlined some of these thoughts that you have going into next year, this perfect storm, the debt ceiling, the perennial spending fights that happened in Washington, and also this expiration, the Trump error tax cuts. Whether it's Biden or Trump, how should the next president be thinking about all of this morning?
And Marie and so you have to recognize what's been going on politically in DC, which is not making decisions, not really sorting out what to do about spending, about debt, about taxes, and so that's all pushed into twenty five, and that has an impact on businesses they wait to see. So the uncertainty, I think is what's prevailing within the economy.
I don't want to invest if there's going to be a big tax increase, but I can't see what they're going to do to avoid it, and so that's the time clock that's going on.
Now.
I'd like to talk about taxes because Ed Mills was on from Raymond James earlier this morning and he made a great point, which is the fact that yesterday we heard from the House Ways and Means Committee Chair Jason Smith coming out and saying there's actually some Republicans who want to see a higher corporate tax rate. Trump brought it down to twenty one percent from thirty five. Biden has pitched twenty eight.
Senator Joe Manchin has.
Said maybe twenty five is something we can all agree on. Where do you see Republicans and Democrats potentially having this equilibrium when it comes to the corporate tax rate.
It's a bit of a fight in the election itself. You've got a choice of do you want the economy to grow stronger and do you think tax rates matter? I think they really do in terms of the growth rate. If you raise the taxes, there's less investment going on in the corporate sector. We're already seeing it in the small business sector, just very hard for them to make the new investments needed to pull down or to improve the supply chain. So we're seeing this persistent inflation and stagflation.
So what do you make of Republicans though, coming out and saying that it should be higher.
You know, all through the party, unity is not as much in the Republican Party, So they've got to sort out what is the message of Republicans that you want Washington to be bigger. You know, it'd be fun for a lot of politicians in Washington to have a big debate over which taxes to raise. That pulls in a lot of political contributions. But what we should be looking at is which taxes affect growth the most, and you want to hold those down so that you can have
more jobs, more people back to work. After COVID, a lot of people are just staying out of the economy because it's not strong enough to bring them into the labor force.
Well, labor participation rate though is pretty high, and unemployment is below four percent. Most people would argue and would say, this is a very healthy labor market under four percent for more than two years.
The labor force, though, doesn't include the people that have opted out, and those are people that we need in the economy in order to really be catching up. In the meantime, China's numbers yesterday, they show their trade numbers. They're cleaning up by having a factories running at full speed. I'm from Michigan. What you see is the manufacturing inventories not building. You know, the whole US economy is waiting to see what's going to happen in terms of policy
in twenty twenty five. That's this fiscal train wreck, and they want to see how is that going to be resolved by Washington to get Washington out of the way. What we're seeing right now is this regulatory push that's going on. Day by day. You're seeing these massive new regulations come out of Washington as an endpoint to the current administration. Also, the proposals for big tax increases that
you're talking about. That, Yes, there's going to be some Republicans who say we need it, but I think the public recognizes if you give more money to Washington, it's just going to be spent. So it's not really going to help on the national debt front.
When it comes to the national debt and taxes, the CBO came out yesterday and said, if we were to see you extension the Trump era tax cuts four point six trillion dollars, so fiscally this would be incredibly challenging. How do you think about that? Would the bond market even allow that to happen?
This gets into what are the taxes and how do they affect growth. There's this tendency of people to do what's called static modeling, meaning they say, if nobody changes their behavior, then tax cut will just be added to the national debt. But the whole point of taxation is to raise revenue without stopping people from doing what they need to do, small businesses, reinvesting. I think we're over the laugh or curve right now in terms of small
business taxation. I don't know if you saw the statistics. As President Biden has proposed these big tax increases on capital gains and also on basis step up. It causes small businesses to just stop investing in their business. They look to sell to somebody big because they can't afford the taxes. So I challenge that for trillion statistic and say, look, you would get more growth out of the economy if you had better tax policies. You don't need to raise the corporate rate.
Okay, well that's going to be definitely day one something, and we already see committees being formed now in Congress to try to map out what this tax.
Policy will look like.
I want to also ask you about what potentially we could see under Trump two point zero. You were an economic advisor for him when he was campaigning in twenty sixteen, you joined the administration, you ran the World Bank. When the Wall Street Journal comes out with a report and says that Trump potentially wants to put his thumb on the scale when it comes to the FED and questions FED independence, do you think that actually would be happening.
I saw that story. There weren't any sources. I don't think that is the policy that would create growth. You know, the FED has I've criticized the FED for being too big for in itself into too many markets. The inner bank market has gone. Now the trading of FED funds that were so vital to the dynamism of the US economy, that's gone. The repoll market has been almost nationalized as you look at the amount that the FED is controlling
within that market. So I think we could have a smaller FED, a smaller balance sheet for the FED, and that would actually be very positive for growth. The commercial banks would love to be lending right now to small businesses, but the way the regulatory policy works, they can't do it. It's biased against small businesses. And that's true also of the borrowing that's done by Treasury and by the FED. They're borrowing in the short end of the curve, and
that's just crowding out small businesses. So I think that's the key dynamic going on.
But they're borrowing the short end of the curve because everyone thinks, why lock in rates this hiaka long end. We'll do that maybe in two years when they come down right, I mean, isn't that prudent?
No, that's not prudent. The yield curve is deeply inverted. So if you if you borrow at the short end, you're you're paying this five point four percent by the FED. They're borrowing every day at five point four percent to own bonds that yield substantially less. That's not prudent. What it does do is helps prop up the stock market for now. I think there's there's some end game going on within the economy where it's part of the kick the can is to say, well, let's just borrow short
term hoping for better in the future. But foreign, the global markets look at that and they're not voting for the United States on that. We're week at home in terms of the economy just one point six percent growth and CBO's forecasts are for weak growth into the future. And then abroad we've also got that the weakness that's leading to wars, wars and multiple parts of the world.
And so and they look at the fiscal situation in the US, the inverted yield curve, and say, why would I invest into that highest short term interest rate?
Two final quick ones, So one you think under Trump there would be an autonomous FED, and two would you go back into a Trump administration?
You know right now that's way premature. The issue is for people to sort out the policy differential. You've got a choice of week versus strong of growth versus stagflation. That's the decision for people to make, and Trump would have a whole array of people that could really implement a growth policy. I think that's quite possible, but it's the election cycle, so let's focus on that.
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