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Terminal and the Bloomberg Business App. Rick Reader is black Rocks CIO of Global Fixed Thing Come, and it's widely considered to be one of five contenders to replace fed share Jay Powell. He writes, the following moving interest rates lower is very much in line with what we do know today, which is that the labor market is clearly slowing to the point of potential store speed. Rick joins us now for more. Rick and Monick, thanks thanks for having us. Good to see my friend, it's been too long.
Thank you.
Welcome to the studio. We've got a labor market problem.
I don't and by the way, I don't think it's a cyclical phenomenon. I think there is the way at least, I think we have a productivity revolution that is pretty extraordinary, and people point to AI as an exclusive driver of that. If you look across what companies are doing, including second quarter earnings, their quarter earnings, if you only dynamic around around how do you think about logistics, freight management, predictive maintenance,
customer procurement, companies are doing more with less. And I think that is a secular dynamic that's going to be with us for a couple of years now. I think, I mean, we can talk about there's a bit of elevated inflation because of terras, but I think we're going to be dealing with something. By the way, you also put robotics, automation. You know, this to me is a structural dynamic. I think full employment will be the challenge for the next couple of years.
So we mentioned the spread between Ernie's growth fantastic, employment growth terrible. How are we closing that gap? If ever?
So, I think, by the way, I actually think that's not a coincident.
Those aren't coincident factors.
What's happening is companies literally the top line revenu is pretty good generally. But what's happening is they're cutting costs of good soul, they're cutting their SGNA costs, they're reducing their cost infrastructure. By the way, AI is a technology, there's historically been this dynamic of when you have new technology,
it moves people into other higher value jobs. And this technology, by the way, I put robotics and automation on top of that, autonomous driving, et cetera, is literally designed to replace human input.
You have a dynamic that is pretty extraordinary that I think.
You know, if you know, as at central banker or whatever is, you think about being anticipatory of where the world is going. That is where the world is going, and I think that is a challenge. Economy is doing fine, divergent and quite frankly only operating on a couple of cylinders, huge capex which we talk about from cloud, from infrastructure, from power. And you've got higher income wealthy savers they're
doing great and supporting consumption in the economy. And then you have the part of the economy that's interest rates sensitive that's really struggling. And that's part of why I think the interest rate tool needs to address low income small business housing and that that's where I think you square the circle.
So we've got to talk about this from two perspectives, one as a policy maker, the other as an investor, and one of course informs the other. Let's just sit on policy for a moment. You're talking about maybe the needs cut interest rates, but also the fact that some of the pullback we're sent in hiring is not cyclical. How can we address one with lower interest rates? Just explore that for us a little bit.
Yeah, So, first of all, if you came down from Mars and said, okay, so I've got five year inflation break even, so trade in the market, you buy as many as you want a two point three five percent and you said okay, now set the price, and you said, okay, two point three five percent inflation, and I clearly have a slowing labor market, you would say, gosh, I don't know if I set the rate at three, and then I talked about okay, so now what's equilibrium on the
mortgage rate to create velocity in housing? And they're directly related to what you said. Housing today is three quarters of the wealth by people in the countries in housing. We have a housing market that you know, you look at the earnings into your horton you look at Leonar By the way, I just saw an ISI builder survey that show the softness. If you actually get the mortgage rate down a bit, then what happens is all of
a sudden you get housing velocity. WHI is housing velocity important because you get labor mobility today you can't move, you lose your job.
You got to go somewhere else, you can't move.
Secondly, and I've set up before, for every home built in this country, we hire three point one people. It's pretty hard to ai building a house. So if you can get some real estate velocity. And by the way, it's a young people who are struggling today, young people who aren't savers, who are borrowers, that's the way they build wealth. That's the way you put people to work. And so I think it is all a related concept.
Point being is by the way, I mean, if we had to raise interest rates to where they were, but if you said to me today, what's equilibrium, I don't think it's where we sit today in the funds, right.
So how willing are you to allow or how willing would you be to allow inflation to run above that? Two percent target in order to run the economy hot to allow for more job creation.
Listen, it's a great question. I think. Every time you think about these things, and I think about the same thing, we take.
Risk, you sort of think about what are the quadrants of risk?
What are you willing to underwrite?
So today, when I think about those quadrants, if you were willing to take some labor and some overall inflation thing, you think about, Okay, what are the sticky drivers of inflation today? Healthcare, education, insurance. It's pretty hard use the interest rate tool to get insurance costs down. It's pretty hard to get healthcare, so the tool is not that robust. And shelter is a sticky part of inflation that if I actually get the rate down, I actually mitigate some.
Of that elevator. I'll mitigate the rental inflation.
So you know out there on one other thing, five year inflation expectations are two point three five percent if you were at two and three quarters. And by the way, core PCEE the six month moving average core PC is two point five. Let's say we're probably closer to three. If you take the whole full construct of inflation. Three is not an infectious. You know, you clearly don't see it in terms of where people anticipate in If you're
running four or five, then I'd say, gosh. Or if the three was trending higher on things and that the interest rate tool impacted, then I think you'd have to address that just to sort of.
Build on that this idea that three is okay, but above that maybe not so much. There's a feeler that there is an asymmetry in the timeframe of AI that right now the buildout is going to be inflationary because of the inflationary inputs of commodity costs, of just how much lending and money this is generating on a broad scale. The productivity gains that will cause disinflation will take a lot longer to come into play. So how if you were the head of the FED would you handle that?
So I take up morning.
So think about historically the way the interest rate tool worked. It was a modulator of capacs. So you think about it, go back sixties and seventies. The big spenders in manufacturing today. My guess is OPENII and Vidia, Google, et cetera. It's not the interest rate tool that is affecting CAPAX. They are going to put that capex in because there is a long run benefit for doing it, meaning the interest rate tool doesn't really do a lot.
So I think, at the end of the day.
Does that create a little bit of inflation in the areas you describe? I think so, But I think you have to say, you know where are we going? And I always say, being an investor for a long time, you know the concept of data dependence. If you are constantly in the rear view mirror trying to figure out how would you invest is probably the wrong way to do it. We are going through something that's very different.
We now are in a capex cycle. And then if you break down the economy and say, okay, what is driving GDP today. That's what's driving this capex and some consumption from hire income people.
The key pace of the inflation story. Shouter, you touched on it. You said something interesting. Interest rates down, shout, costs down. Just explain that for us.
Yeah, so, I mean we have an inventory problem in the country. And by the way, I mean look at every piece of data, it shows the same thing. And so, by the way, when the mortgage rate has come down a bit post this recent fed drop in interest rates, all of a sudden you're seeing an existing home sales pickup. So we just saw the prepayment report for mortgages, and all of a sudden you're seeing some acceleration, meaning you don't have to get the interest rate tool down that much.
If you got the mortgage rate into the fives I'd say mid to high fives, you would see some velocity of housing. If you saw velocity of housing today, I saw on deor Horton's numbers. They talked about they're doing one percent first year mortgage and then I think it's four point nine because they've got to subsidize the mortgage. Well, what if der Horton didn't have to do that, and what if the actual organically the rate was lower, they'd
build more houses. You create more inventory, You create more inventory, you take the pressure off of rental rates, and you start to bring inflation down. Plus the labor mobility that is not an insignificant part of that.
Do you think the FED needs to think how sound of the box beyond just interest rates? Is this something else we can do? Hey?
Yeah, I mean listen, I think there is. I think the FAT has a series of tools. The interest rate tool, by the way today, nobody really borrows off the overnight funding rate, the interest rate tool it used to be. They think about how banks borrow a short they lent long. Think we had a very different dynamic today the way we tranch the debt in the economy. Think about how we finance RESI, commercial asset box, credit cards, auto loans. It's trunched. The front end of the yield curve doesn't
really do a lot. How you think about you know, where is the ten year point? How do you think about your balance sheet? How do you think about all the other tools that are at your disposal, I think are really important. Plus you got to think about what is the effect of the currency etc.
Relative to that.
So anyway, I think the construct is much more complex and much more quite frankly, you have a lot of tools that create much more effectiveness. Then we're just going to move the overnight funds right every six weeks.
Like the balance sheet.
How much would you be open to see the Fed use the balance sheet a little bit more?
So?
I think the construct of the balance sheet is important. So I think people don't realize there's a notional dynamic, and there's a DVO one, there's a duration dynamic further out the yield curve. I am sympathetic to should we keep the balance sheet around the same level, but you
could be really effective. So today the US Treasury eighty nine percent of what the US Treasury finances is at the zero to two year point eighty And think about if you're a company, would you ever finance in the one year.
It's crazy, but that's where we are today, and it is what it is. So there's not that much float.
Actually, longer on the curve, there's reason why people put on steepeners. I think get squeezed out of steepeners because there's not that much float. You don't have to use that much balance sheet. But if you thought about, gosh, the construct of the balance sheet, if we used more of it further out the curve, we let runoff happen on the front. If you can keep the stability of the back end. So if you can keep the tenure, you know, we got to the tenure was three ninety.
If the tenure was three and a half to four stable and rate vault, rate volatility came down all of a sudden, you'd see mortgage spreads.
Could come in.
Then you'd get and by the way, deregulation the banking system, then you get mortgage velocity moving. So, by the way, I don't think we're that far away. And by the way, you know this concept that you have to get the rate down hundreds of basis points.
I just think we're not that far away. Just get it there and.
Keep volatility of the rate market at a stable level, and then you'll see a system that will operate pretty well.
Going back to the late eighties, how much fun you have in right now?
I mean, I mean I said before, this is the best investment environment I've ever seen. I mean not because stocks are going to go straight up. I mean you have diversions that is great for investing. You have technology that's changing, and so the ability to look at tech stocks, healthcare, tech, to look.
At you know, where some of the financials. How you create velocity in the system.
And then you know the earlier conversation and we were talking about the break like now at the income levels. As long as this interest rate stays here, you know what's ironic as commercially, you know, I prefer the interest rate to stay here because it's I mean, this is pretty good. We can create portfolios, we run the CTF called BINK and you know, creating six six in a quarter, we're running almost six thirty. Now you don't have to take a lot of risk, you don't have to go
out the yield curve. That's pretty good. So anyway, I think, and by the way, the options market, I think the best opportunities are in the options market rate options, equity options, and you could manage your CONVEXI so you can be long equities and then buy a lot of you can overwrite your single name stocks, you can buy downs. It's a fun environment.
Well, leslen into BINK. You mentioned here the ices, flexple active income ETF. What kind of things have you been doing over the past six months.
You know we've been you know, the cool thing about being active is you can move around because the regime shifts. And while I was describing earlier, like where do you think the interest rate should be? The true interestrates an't going to move very far. So you know we're keeping our interest rate duration. You know, in and around four years we've moved a little bit out of the very front end because it's pricing a lot now in terms
of where this FED is going to go. Then we've done we've shifted some of our credit into mortgages quite frankly, if you believe rate volatility is going to be down, mortgage has become interesting, and credit spreads have gotten pretty tight, particularly us investern grade has gotten pretty tight, so we've rotated out of that. We've bought a little bit of EM recently, I would say recently over the last six months.
We haven't bought a YM in a long time.
You know, if you believe the dollar is contained, EM becomes pretty interesting and the yields, you know, relative to high yield, the yields and EM are attractive.
So we've cut a little bit of high yield.
We've got a good amount of investment grade credit, and we've rotated. So today I think our average rating is AS, which is pretty good. So it gives us a little bit of room to do some things.
Like you said something that was interesting there, which is you don't have to go very far out the risk curve in order to get income now because yields are high. If the FED were to cut rates, does that make you more inclined to take more risk?
Yeah, I mean I have to say, you know, for two decades, part of why I'm so excited about where we are today. For two decades, it was like I got to buy high yield at three and a half and four and it doesn't feel natural. But now if you have the risk free rate, particularly in the front end here, gosh, I put a little bit of spread on it. Now I get what is ample yield. With default rates that are not that elevated. You are seeing some bubbling defaults in a couple of places.
So you know, I think the thing.
That we would do is, you know, I know what we would do is if rates come down. You know, I'm not a believer, and this is what blows you up. I'm not a Believer's gosh, I I got to keep that yield. I gotta get my risk up. You just have to absorb it and say, you know what, I'm going to run at run six twenty five or so. I'm going to run five and three quarters of six. But you know what will happen is the cash rate will come down and people say, gosh, you know what, cash is only getting me two and a.
Half to three.
That's any you know, inflation, even if inflation's three like, it's still pretty great.
Very few people on Wall Street they are saying, you know what, I can just live with less income.
It's okay, I won't stretch too far. I'll be disciplined and.
Maybe I'll just take less cash and I'll commit.
To the economy.
At what point can you imagine that things start to get a bit excessive, especially given the fact that there is a lot of cash right now looking for a home.
So, by the way, it's a funny thing is you say that, you know, we live in a competitive environment.
We can't just sit back. I mean, it is a tough business.
We have competitors and people that are out there say, gosh, I can get you more yield, and listen. I think one of the things you have to do is you have to keep your volatility as long as you always think about what's your yield per unit of volatility? Today equities, I think equities are are still going up fifteen to twenty percent from where they are over the next year. So I'm just trying to keep our volatility at a reasonable place.
What is excessive? You know, there's some things that are bubbling in the markets that are mostly in privates that.
Are gosh, I don't I don't get any cash.
Flow for two or three years. What's the multiple you put on that? Like that stuff is hard. There are some really good business models, you say, I see it and it's almost definitional, you know. You see some parts of it where people are stretched and in some of the credit markets where some of the levels get aggressive. Part of why we've rotated some of the investment preate. It doesn't do that much for us anymore at those
spread levels. But I don't, you know, I don't see like you saw before the financial crisis, excessive low you know, low covenant or easy covenants, high LTV financing.
I don't.
I don't see that yet today at the around the edges a little bit, but not not really.
Fifteen to twenty percent on stocks now the double digit Yeah.
You know, I don't. I think.
I mean, I think we're living through history because if we're what you asked about before, because productivity and roe is so spectacular. And by the way, I don't think it's five hundred stocks. I think it's by the way we were stat yesterday, if you take the S and P fifteen hundred, it's is this right that I heard it was twenty two percent off the highs. I thought that number of rust constrat to work with Dougleman that
I thought that was extraordinary. If you take the highest ROE businesses, you know, let's say it's thirty stocks, fifty stocks, tech, healthcare, attach some of the financials. They're doing really well. They throw off a lot of earnings. They're roe is high, and they buy back huge amounts of stock. You know, small cap don't really know, but there's enough stocks with enough market cap that I think will get you that sort of return.
Stay with market weight on the sm P five hundred. No, it's the concentration.
I mean, we're long.
I mean we're you know, we're you know, we've reduced a little bit of beta. When when equity volatility picks up, I have to bring my beta down a little bit, but I'm still running long. And you know, days like yesterday, you know, and you know single name you know, we get these earnings reports and single name vault is high because you know, if company does own hit these excessive numbers, they hit the stock. Yeah, so you can still do
some things to protect some downside. And by the way, interest rates, if you believe the FED is moving orbeit deliberately, interest rates actually act as a reasonable hedge. Again, so there's some correlation or rate that's allowing us to run a moderate.
Rom Stay with us. More Bloomberg surveillance coming up after this. Here's the view of Sarah House of Wells Fargo. Right in the absence of broad based layoffs suggests that jobs market is holding together even if the risk of a more meaningful slowdown cannot be ruled out. Sarah joined us now for more. Sarah, welcome to the show. Just to
pick upon those headlines from the Treasury secretary. If we start seeing two thousand dollars tax rebates, if we see significant relief early next year, how would that change your routelook?
Yeah, so I think already we're looking for a pick up next year just because you have some pretty favorable tax policy coming out where consumers are going to get pretty big refunds come the early part of the year, and so if you add two thousand dollars rebate checks on top of that, I think you would get a meaningful pickup in spending through the first few months of
the year that could help, I think balance out. I think more of the components of GDP that we're seeing where maybe it's at least temporarily a broader based increase in overall consumption rather than one that's being driven more by your asset owning higher income household.
Sarah, we saw a taste of this, and I know it's not the same thing, but during the pandemic era checks that people got, and a lot of people attribute the inflation that we saw in the pandemic era to some of those particular checks. Do you think that there'll be a similar dynamic or do you think these are too small and not regular enough.
To have that kind of transmission mechanism. Well, I think there are a couple important differences there. So yes, if you're injecting cash directly into households, especially your lower income households, they're going to go and turn around and spend that. But there's other sides of this that that are different, So you don't have the same degree of supply constraints.
You don't have. I think the labor supply issues that we had at that time, where it wasn't just the increase in demand that I think led to the pandemic air inflation, but it was some pretty unique supply factor. So I think overall rebate checks, even the larger tax refunds that we're expecting. I think that's going to make it harder for inflation to continue to grind lower. But I don't think that it would be something that would
necessarily respark ained a sustained pickup in inflation. Again, I think it would just more derail the path, or at least a slow the path of disinflation that's set for the second half of next year.
Sarah, the implication here is faster growth, potentially an expanded's fiscal deficit in order to finance a lot of the programs that are being proposed likely will be proposed heading into the midterms, not just by one party, Frankly, both parties talking about similar types of responses. How are you factoring that in your economic look at a time where there already have been some concerns raised about the US fiscal trajectory.
Right, So, I think, again, if we're talking about one off checks, this is only a temporary boost, So this is not something that's going to be fundamentally sustaining the
outlook for the consumer. And to the extent that it does increase the deficit, then you're going to be seeing some of that feedback into yields, which is also going to flow through to other things, so potentially mortgage rates, and so it's not a panacea for I think really reviving anot the sluggish pace of growth that we think we're hitting here in the fourth quarter, maybe in some of the early parts of the first quarter, given that there are going to be some feedback sides of this,
and in terms of what happens with borrowing.
Costs, Sarah, what should anchor our view of the labor market right now? I think that's the question of the year for the labor market. Employment growth is super low, the unemployment rate is also low as well. Do you think the employment growth maybe overstates the weakness or does the unemployment rate overstate the strength?
Yeah, so I think the hiring rate, I think it does overstate the weakness, given that some of this is supply. But I think we can't chalk it all up to the immigration story, for example, or just the ongoing population
aging where we are seeing demand continue to weakend. So look at indeed postings, look at the pmis, whether it's the ISMS or the FED still showing employment in contraction in contraction territory, and so I think there still is a demand problem here, and I think even if that break even rate is lower, that still portends something for what's happening with household income and therefore spending power. But when we step back, and I think that main point that we need to keep in mind it is where
we are in terms of that overall balance. That's what the FED is looking at, and I think there we are seeing some softening, but not in a material or quick way. So it's just this gradual, ongoing softening that's keeping the FED on edge, but not definitive in terms of the labor market really being in trouble here.
Sarah, what is your best guess for the federalserve on December.
Tenth, So we still have that they'll cut another twenty five basis points, So obviously that's a close call where it doesn't look like we're going to get even the November data that we usually would have had with the shutdown ending. I think the CPI we're not going to have that for November, so it's going to be a close call of whether you get November employment. But I think the overall position of look, we need to move
closer to neutral inflation. Yes, it's being temporarily held up by tariffs, but you're not seeing that spillover into services path there is still lower I think that still supports the argument of moving towards neutral. And I think when you look at the voter composition too, that some of the more outspoken hawks are the people who have come out and said, look, I'm having trouble supporting another cut.
They're not voter. So I think when push comes to shove, we'll get that additional twenty five basis point cuts in December.
Stay with us, multiple impex Savidans coming up off to this big question for all of us tracking the markets, when do we get the economic data? The National Economic Council Director Kevin has had this to send the last twenty four hours. I've been told that some of the surveys were never actually completed, so will never perhaps even though what happened in that month. What does that tell to you abound the October data that.
We're not getting CPI period full stop. I mean, or if we do, it's going to be so muddy that people are going to really struggle to understand what exactly.
It looks like.
We are going to get September jobs report that probably will be number one possibly early next week after that kind of a pot shot, whether it's retail sales, whether it's other peripheral data points to indicate inflation. But right now it seems like we're kind of going to be in that fog for maybe forever. When it comes to that one month period.
It's not going to be fun for the next few months. John Labor, if you're as your group joined us now for more, John, welcome to the program. What's your understanding of the data we will get and won't get in the coming weeks.
Well, the BLS and the BA are still shutdown, so we don't know exactly what their plans are. I'd expect to probably announce something by the end of this week or maybe Monday of next week. A timeline for when they will get these reports out some of them. They can collect the data. November is looking dicey right now because this is the reference week for payrolls. They could always push that back a week and collect the data next week and then release the November data a week
later in December. That's what they've done in previous shutdowns. But we really have no precedent for anything like what we've seen here in the twenty eighteen shutdown, the government was partially funded, so data releases weren't disrupted, And in twenty thirteen, which is the closest analog, you had a two week delay and then you had some delay in other some of these reports coming out. I do think it's right we'll just never know some of the things
from October. The employer survey, we probably can get some pieces of that from October. But the household survey, I think they probably just won't release anything and we'll be flying blind on that month.
John gave us a reality check. Come in New York, we come a financial markets. Obviously there's a home bus. So we think this is really really important. Even on the radar of people down at Washington d C.
No, this is not an issue that's come up, I think in any of the shutdown discussions.
It's a distraction.
This is about Democrats wanted to reign in the Trump administration. It's about healthcare costs, it's about a whole bunch of other things except data. I mean, these are kind of would be in Washington, would be considered extremely wonky issues, and nobody on Capitol Hill is walking out about this stuff.
Yeah, but there is a larger takeaway here, John and I was looking at the history of government shutdowns. There've been six since nineteen ninety. They're getting progressively longer. They were two to three days under Ronald Reagan and George W. Bush. Under President Clinton, it was as much as twenty one days under President Obama, sixteen days under President from one point oh thirty five days, and now here we are
at forty two plus days. I'm just wondering what this means about Congress's ability to get anything done and whether January thirtieth is the next D Day where we're going to get another government shutdown.
Yeah. I mean, I think you've hit the nail on the head here. The federal budget process is fundamentally broken. It's been broken for probably a decade now. And as it kind of creaks and cracks and Washington becomes more partisan and things become harder to do, I think the brokenness of the federal budget system becomes more obvious and starts having real world consequences. Congress hasn't completed the appropriation
cycle on time in years. The idea of even doing a budget for reasons other than doing a reconciliation bill is basically laughable, And I think what you're going to see is increased likelihood of shutdowns. Now in the past, what we've seen is that nobody really wins from a shutdown. Members come out of that saying gosh, I don't want to do that again. I'm not sure that's what you're going to see this time around, given how long everything
functioned just fine under the shutdown government. I mean, a huge portion of federal workers were considered essential meeting. They could do their jobs but not get paid. And it wasn't until flight delays really started kicking in and you had this issue with snap benefits that people started to really feel the real world pain. But I think that one of the lessons of this shutdown is that a week or two or longer shutting down the government really
isn't that big of a deal. President Trump can fly around the globe making peace deals, tearing down the East Wing, and it doesn't affect people's lives until you get much deeper into the shutdown.
Yeah, but John, to John's point earlier when he was talking about the fact that we may not get this data ever, in terms of data that was not collected during the reference period, Greg Daco over at ey Parthenon said that about twenty percent of the economic hit from the government shutdown probably will be permanent, just simply because
there is sort of this lost activity economic activity. I'm just wondering, does this change the landscape for investors, for corporations trying to maneuver in a world that is affected by a government shutdown, even if most people don't feel it.
I think that if you're thinking about the future and thinking about possibilities of what the future is going to look like, you've got to have a much wider range of outcomes on your radar and prepare for those outcomes. You could have an even longer government shutdown in January. There could be no government shutdown in January. You could have the Democrats take back the House next year, and then you get an even longer shutdown coming in twenty
twenty seven. So I think there's a lot of different possibilities here. You can't rule anything out. And I think that the fact is that the policymakers just aren't going to respond until their constituents are feeling pain. And right now, I mean, it's possible that this government shutdown. Everyone walks out of this and says boy that was more painful than we thought. And to your point, the data is that the economic pain is permanent. But I don't get
the sense that's happening right now. But we'll see how people feel in a few weeks.
John, things a change in dan in Washington, and can we just ramp things up by leaning on your experience? You know the Capital well, Nancy Pelosi is stepping a side, she's retiring, centered a sham er, is under immense pressure. You worked alongside. They form a leader Mitch McConnell longtime later of the Republican Party. What's left of Washington DC that you knew so well?
Very little?
I mean, I think you look at the committees on Capitol Hill. They don't do much anymore. They're not producing legislation. Lawmakers are no longer kind of growing. The senior lawmakers that are going to be running the show in the next five to ten years aren't ones that grew up in this era of bipartisan compromise where they came to Washington to do legislation and get bills done. There are people that came up in an age of Donald Trump and social media, and I think that creates a different
set of incentives for lawmakers. It makes lawmaking harder. Congress has abdicated a lot of its responsibilities, and the public doesn't take it very seriously. So I think on Capitol Hill at least you're going to get a much weaker generation of leaders and no disrespect to the people who are there.
Now.
This is just a broader trend, and I think it means that Congress takes itself out of the governing game and puts itself into a full time campaign mode. That's going to define more and more of the noise and policymaking. Your hearing out of Washington.
Stay with us. Multiple IMPERG surveillance coming up after this. Stok's rising invest as a way the end of the government's shutdown and the release of a lot I mean a lot of delayed data. Matt Meskin of John Hancock writing, bad news is bad news, especially when it comes to the jobs market and the FED being caukish. Regardless, markets have a trade. The headline's mentality that is far from fundamental. Matt joins us. Now for moret that last line, What did you mean by that?
Well, I was just talking about you guys.
Mentioning vibes here it's a vibe market, and it's all driven from settlement for the most part. And really what we're seeing is this jaws kind of presenting itself from the weaker economic data and the markets continuing to advance.
You know, at the end of the day's sentiment.
Is a very powerful short term market force, and we are seeing momentum investors.
Around the world really allocy.
Towards stocks because they're rallying even in these mornings. Now you're not even getting necessarily a narrative of why things are up other than it was up yesterday, and so we really see it even at the beginning of the week. On Sundays, it used to be Sunday Funday, and now it's Sundays are a time where markets open and there's usually some sort of headline that hits the markets first thing. So Monday morning we open stronger and that sets the
vibe or the tone for the week. In our view, this is a time where you want to think about more defensive or conservative options to four portfolios and not to really overweight risk and over your skis in terms of risk at these kind of levels. But it's been a very strong year for markets, and we'll take it.
So, Matt, let's unpack some of this and let's start with the data, the job's data. How relevant is the job's data to a market that's been driven by technology that is aren't could be holding back jobs data?
Yeah, John, I mean this is the circular feedback loop that everyone's really highlighting is. You know, it doesn't matter about the jobs because these companies are running more efficient.
The AI is helping them.
Increase earnings, and as long as those earnings are going up, that helps the stock market. It makes sense, right, Well, the missing lynchpin of this argument is that you need the US consumer to spend. There is no more powerful economic for us globally than the US consumer. And if the US consumer doesn't have a job, they can't spend. And that's where we struggle to find this feedback loop and why we think that the weaker job's data really is going to present weaker consumer spending.
You're already having weak consumer confidence.
Now to us, this means the FED will end up cutting more than the market thinks. Right now, the FED is actually, in our view, over compensating a bit because they think they're going to be more hawk Excuse me, dubvish into twenty twenty six, so they're being a bit more hawkish now. It is really fascinating to see stocks really kind of just float through that with minimal impact. But in our view, the weaker jobs data is very material for this economy and markets in time.
Matt, why do you reject the argument that in the beginning of next year we're going to get tax free and all sorts of other stimulative measures that really cause a boost to consumption.
Yeah, at the end of the day, the jobs market, like I said, is so important.
And when you look at these eight whether it's the Challenger layoff announcement, so the ADP data, and you look at prior periods when it rose or when it caused the initial jobs comes to arise, or the unemployment rates arise. It's usually about a month and a half lag time between the initial layoff announcements and when it hits the data.
And really, if you kind of time that out here, it's the beginning of twenty twenty six, when initial jobs claimed starts to rise, the unemployment rate starts to rise. And you think about this, the unemployment rate, the last data point we had was four point three percent in August at five percent. Usually that's a recession, and we're already likely ticking up. I mean, yesterday Goldman Sachs said that more likely than not, we had a fifty thousand
job decline here in October. If that was actually the release of that national non farm payroll, in our view, that would have been a shock to the system. And so that's what I struggle with, is if you're telling me that there's all these, you know, kind of good things coming in the pipeline, the other side of this is we're still going to be catching up on weaker data that really hasn't been released here in the last month or so.
Matt that our.
Word was kind of jarring for me because I haven't heard it in so long, and no one's talking about recession. I mean, that seems to be nowhere on any of the earnings calls from come corporate executives.
Across the specter.
We're not hearing mentions of an economic slowdown or anything like that. It really is coming at the slowest pace in terms of mentions of that. Going back to two thousand and seven, what does conservative mean in terms of investing? Does it mean just hide out in the tenure or does it mean actually high value companies that are also facing pretty elevated valuations in addition to yes, various steady cash streams.
Yeah, so at the end of the day, there are companies that are growing earnings. We do like higher quality companies. Quality has not been in favor of this year. It's been more of a low quality rally, but in our view we would position higher quality. In the equity space, we are looking at infrastructure related equities across Europe right now.
You're seeing Europe rally.
Some of that is infrastructure related, utility type businesses that are throwing off dividends. They've got great earnings, so infrastructure related equities is one way to do it. We are looking at in the bond market, like you said, I mean, we're still getting nearly a five percent yield here, and yields have come down this year, but if the tenure did drop a low four percent, which is support, we
think there's more return potential there. So there's still a lot of income and return potential out of the bond market in our view.
Though on the.
Equity side, we're more neutral on US large cap. We're overweight MidCap. To get more diversified exposure, better valuations, and we're underweight small cap because frankly, there's just so much nonprofitable businesses.
There, so it's a lot of playle lowering data.
Talk about vibes, the ultimate vibes. Try to the years Europe dressing up one percent GDP as if it's an next best big thing. Matt, you already want to stand Europe and equities into twenty six.
So we would look to trimin's strength here and it's been this year is probably years worth of returns and you look back over time, I mean whether it's Italy.
Or Spain, I mean Spanish stocks, who would have thought.
I mean, the economy is doing great, so congratulations on that front. But really the stock market there is trading almost like it's another entity. And a lot of these markets are trading almost like they're just ticker symbols versus a company or a country, And we want to be notified if we want to be mindful of that that we're not really just day traders here. We're not just trading these for momentum, and we want to look at the underline fundamentals. But yeah, Europe is on fire this
year European financials breaking out here and again. That is a sentiment and indicator. There's positive vibes globally right now.
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