Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
terminal and the Bloomberg Business app. And please to say that responding to this economic data now is the Minneapolis Fed President Neil Kashgari, President kash Scary.
Good morning, got to see you again, Good morning, good to see you.
Rate a cats shop.
I saw some comments from you yesterday, and for our audience that might have missed them, I'll share them with our audience.
Now we can pick up on them.
Then have to be a surprise on the inflation front to change the outlook so dramatically. If we saw inflation surprises to the upside between now and then, that might give us pause for December. It'd be hard to imagine the labor market really heat something between now and December.
That's just not that much time.
Inflation dates around just months ago, and I think in that to disrupt this easing bias that seems to have gripped the FED over the last few months.
Well, first of all, it's very fresh data, so I haven't had time to go through it in a lot of detail, but at least on the headline level, it seems to be confirming the path that we're on.
We've made a lot of.
Progress in the last year or so bringing inflation down. I need to go through the components of that release, which I have not done yet, but generally speaking, goods inflation is back down to where we want it to be where it was pre pandemic. Services inflation, which is tied to wages, is gently trending down. And then finally, housing inflation, we know is a lagging indicator. We know that it takes a couple of years for the new leases to turn over, and the new leases.
Are showing that we're headed in the right direction.
So right now I think that inflation is headed in the right direction.
I've got confidence about that, but we need to wait.
We've got another month or six weeks of data to analyze before we make any decisions.
One of the things that has been very noticeable the week is the change in investors' views about where you're going to end up. If you're looking at so for futures right now, the only price in about seventy five basis point cuts between now and the end of twenty twenty five. Are we entering a period because we don't know what Donald Trump's policies are actually.
Going to be.
Where the dot plot, the summary of economic projections are kind of off the table, can't really put a lot of faith in them, and that maybe you're in the layel brainer attenuation phase where you slow down everything and people should expect not a lot of guidance from the Fed.
Well, you know, the dot plot is something that I at times I'm glad we have it, and in times it's more of a frustration that we have to fill it out because there's so much uncertainty about the economic outlook. Over the past year or two, I've been surprised at the resilience of the US economy in the face of seemingly quite high policy rates. Yet the labor market has
stays strong and the economic growth continues to surprise. So for me, I've been asking questions about where's the neutral rate for the last year or two.
That's not about the election.
That's just about how the economy has been performing over the past year or two. And so you know, for example, there's been revisions that suggests that productivity is now higher that it had been in prior years. If that higher productivity environment is maintained, that would tell me we're probably in a somewhat higher neutral rate environment. Again, that's not about the election. That's just about how the economy has
actually been performing. And so for me as a policymaker, that's what's leading to my own uncertainty about where's our ultimate destination. And I think that people are raising questions about what is the new administration going to do, what is the new Congress going to do? I think that's also adding uncertainty about ultimately what's the growth trajectory of the US economy.
Well, Tom Barkin said yesterday your colleague from the Richmond Fed, that right now there's no way to know, so one has to just kind of assume that things are going to be maybe stuck inflation, stuck above two percent.
Would you join in that sentiment.
I'm not sure that I'm ready to say that inflation is stuck above two percent. I think it's right now running in the mid twes on.
A PCE basis.
And as I said earlier, goods inflation is backed down. Services inflation is tied to wages, and wages are gently trending down. And housing inflation, we know, is going to take a couple of years before completely before the new leases roll all the way through the housing inflation. So I have confidence that inflation is headed in the right direction. Is it headed there fast enough? Do we want it to get there more quickly? You know, we will see.
But ultimately that and the labor market are going to guide our policy decisions.
Well. Back in September, on the labor market, you said that the balance of risks had shifted towards a more weakening labor market. Do you think we've backed off that risk? Is it not as acute as it was since we've had the data since September.
Yeah.
We had seen some data piling up up until that September meeting, which was pretty much pointed in one direction, which was a softening labor market. We then had a surprise on the other way, the labor market looks stronger, but then a reversal in the subsequent good job report, and so I still think the labor market is softening. On four point one percent unemployment rate is a good unemployment rate.
It's a good labor market.
It's not as tight as it was a year ago or two years ago. So it's unquestioned that it has been softening. And right now we're in a good place in the labor market and we want to keep it there. You know, I do a lot of outreach to businesses large and small around my region, as well as labor unions around my region. Generally, what I hear is cautious optimism. People feel good about the outlook, but there are some trends that it's slowly softening, and we just want to watch that carefully.
Know the election, We've got to talk about the election, and I know it's a difficult moment for the Federal Reserve. I think it's a difficult moment for managty policy makers worldwide for that matter. The Chairman down with it in the news conference, and it's pretty clear. We don't speculate, we can't make assumptions, but you're in the risk management business, and you've been in the risk management business for a long time. It predates your experience at the Federal Reserve.
Do you think we've introduced two way risk in twenty twenty five, and when you think about the balance of risk, does that call for slow approach to any move in monetary policy one way or the other?
Well, two way risk, I think we've already had two way risks.
So we've got risks of the labor market continuing to soften and over softening, and then we've got risks of inflation potentially getting stuck. I'm not seeing a lot of upside risks yet we don't know what's going to get enacted. I'm not seeing a lot of upside risk that inflation is going to take off from here.
The bigger risk that I'd be concerned about.
In the inflation front is just if we're landing at around the two and a half percent level instead of back down to two percent level. I think that those risks existed before the election, and I think that there continues to be uncertainty now and we need to just be take our time, let the data come to us, and let that guide us. Ultimately, for me, this goes back to the discussion we had a moment ago about
where's the neutral rate. There's tremendous uncertainty in my mind about where the neutral rate is, and the longer the economy continues to exceed expectations, the more signal I take that we must not be as restrictive as I would have assumed.
FED staff analyzed though, during the first iteration of Trump the impact of the tariffs, and everyone coalesce around this idea that there was a one off increase in inflation.
You can look through it.
It wasn't going to be this vicious cycle and ongoing inflation threat. Did you agree with that assessment at the time, and do you still think that that's what tariffs could do in terms of inflation.
I agree with that assessment at the time.
I still agree with that, but I think your prior guest touched on it, which is it really depends on
what the other countries end up doing. If there ends up being a tit for tat and one country raises terifts, they respond and you go back and forth, and definitely that could lead to a longer term imprint on inflation and potentially inflation expectations and of course, we don't know what our own tariffs are going to be, let alone, what other countries are going to respond with, and so we just need to be patient and see.
I had a note come in from one of the Wall Street analysts that had a line that I thought was really valid, and that is that if you're going to forecast inflation, you have to have a theory of inflation and what's causing inflation. We've got relatively strong labor markets right now, and we've got concern about inflation. Real interest rates just keep rising and they're working in opposition
to your rate cuts. What's your theory of inflation and how come we're seeing this kind of real rate reaction.
Well, I've done a lot of soul searching on why I missed the inflation run up in the first place. I was surprised on the run up. I was also surprised on the disinflation that followed it. And the one thing that's been content is it was not the labor market.
On the run up or the disinflation.
It was mostly supply factors, and so you know, supply chains got gummed up.
That took a lot longer to.
Resolve the inflation took off, you the war in Ukraine, also pushing inflation up, and then many of those factors unwound or didn't get worse, bringing inflation back down. So monetary policy's role, in my judgment, in this episode, has been to keep long run inflation expectations anchored, and it has provided some gentle cool into the labor market. I don't think the supply factors are what have caused the labor market to gently cool. I do think monetary policy
has been doing that. And so you put all that together, it says that when I thought we were applying two feet on the breaks of the economy with monetary policy, we might only have been applying.
One foot on the break.
And so this goes back to where ultimately are we going to settle. We're going to have to let the economy guide us.
We are now paying as much attention to CPI again as we are to the labor market.
But the labor market.
Comes up in early December.
We had a really really strong September.
And a really really weak October.
What do you where is the labor market as far as you're.
Concerned, I think the labor market is in a good place right now.
Again, the anecdotes that I get.
I look at the data, the official statistics, which always have uncertainty. There's even more uncertainty about the labor market statistics, not just because of the hurricanes and the Boeing strike, but because of the large immigration flows, which are we're not exactly sure how big they are and their time varying.
So what is this month's.
Break even level of job growth? You know, your guest is as good as mine. So I look at the official statistics, and then I marry it to what we're all here in my colleagues and I from all of our contacts around the country. The labor market right now is strong. It's a healthy labor market. Jobs are available, businesses are feeling good.
We want to keep it that way.
And so as we get the data in, I'm going to continue to do my own outreach, and all of the other presidents are going to do their outreach to the businesses large and small, and labor groups to get a sense of is the labor market cooling slowly, is it heating up, or is it cooling quickly? And that will those will be important judgments into our policy deliberations.
Your former colleague, Bill Dudley wrote a Bloomberg opinion piece earlier this week basically saying that there's this possibility that Trump enacts policy quickly and forcedly in a way that doesn't give the FED enough time to respond and without the proper tools to respond. Is that a concern you also share?
I think fiscal policy is always an input into our deliberations and into our analysis and assessment of the economy. I don't think that's new now, and it's not just US fiscal policy. It's what happens with other countries, what happens with our trading partners, and so that type of uncertainty we're used to dealing with it. Obviously, we would
like to have less uncertainty. That'd be great, but it's the world that we live in, and we will take all the information we can as we get it and incorporate it into our thinking.
Speaking of uncertainty, there's been a lot of concern about what Trump two point zer would mean in tern of job voting, the FED, and how we felt about j.
Powell.
The FOMC had this plan during the first iteration of Trump that maybe they even move Powell to chair of the FOMC if he was going to take over the chairmanship of the actual FED. Would you basically all act as a group to potentially thwart anything that was coming at you that would negate the FED independence.
We are all.
Committed to our dual mandate goals.
Everybody around the table, all of my colleagues, stable prices and maximum employment. So number one, we're all committed to those goals. Number two, I don't think those goals are controversial. I think everybody across the political spectrum wants us to get inflation all the way back down to two percent and wants to keep a strong labor market.
So I think that also provides us a lot of support.
And then there's built in continuity into the structure of the FED that Congress designed governors serve up to fourteen year terms, the presidents are independent, the presidents of the twelve reserve banks.
These structures help us provide continuity.
I'm confident that between the people who are there are commitment to our dual mandate goals and the structures that are in place, I'm confident that we will do the right thing and focus on the economy.
The housing market.
How do you explain what's going on the fact that prices aren't coming down, and if you keep rates higher than anticipated, we've already seen mortgage rates go up since you started cutting.
The housing market dead.
Well, the housing market as I've studied it, and this is an issue all around the country, the lack of affordability, not just for low income workers, but for middle class families and more. It's really one that we've underbuilt housing for the last decade following the Great Financial Crisis. We just structure the underbuilt housing, so there's a sense of shortage. And as I think back to the notion of a
neutral interest rate, think about a neutral mortgage rate. If we have structurally underbuilt housing and there's a lot of demand for housing, what interest rate is going to clear that market? All else being equal, you would think a higher interest rate will clear that market. And so I think the housing market has its own unique dynamics that are going on that are driving these more than just a macroeconomic landscape and more than just monetary policy.
So the Fed raises its hands and says it's not something we can fix.
Yeah, we can't fix it.
I mean, if we said we're going to cut interest rates to try to support housing affordability, setting aside the rest of our goals.
What would that probably do? That would probably push.
Up the price of housing, and so would that actually improve affordability? And so I don't think monetary policy is well suited to address the structural issues that are going on in the housing market.
We've touched on absolutely everything. Can we finish on financial markets?
Sure?
You know them? Well? Are you worried about coming into an asset bubble?
You know when I always go back to when chair then Chairman Green spent in nineteen ninety five declared irrational exuberant nineteen ninety five, you declared it, and the stock market went out for the next four years. I look at that episode and think if the FED had tried to use monetary policy to address that bubble, it would have done more harm to the economy than the fairly
mild recession that followed when the tech bubble burst. And so I just think monetary policy is the wrong tool to try to address acid bubbles.
Do you think there's something that needs to be addressed?
Well, you know, bubbles are easy to spot in hindsight. If we really are in a higher productivity environment, if we're in a higher growth environment, and corporate earnings are going to continue to climb. One might look back and say, hey, these asset prices are not irrational. So it's hard to judge right now. If I knew where productivity was going, I'd be able to give you a.
More definitive answer.
Just look in the markets right now. Equity is very close to old time highs. We've got credit spreads that are at incredibly tight levels for investment grade tights than anything we've seen so farbus century for high YELD, I think you've got to go back to PREGFC and you know what happened next. We kind of get rights into that. We have authorities down in Washington, d C. It's some second administraction that could be kind of taxes going into
that as well. What is something you'll write down with regards to that, What would you watch to say, actually, something coming on here that may be we need to pay a little bit more attention to well.
From a financial stability perspective, traditionally, the biggest sources of financial instability are leverage and maturity transformation and the intersection of those two. That's why banks are inherently risky. Leverage tend to want or more they take overnight money and then they lend long into it. So, for example, a lot of people have looked at private credit and said, this is a huge growing asset class.
Isn't a scary as I've looked into it.
They seem to be much less levered than banks, and they generally have longer term funding. So in those two primary dimension of financial instability, leverage and maturity transformation, it doesn't seem to be riskier than banks, probably less risky than banks. So we continue to look for leverage, we continue to look for maturity transformation.
No small as I'm going to say it, good to see you, thanks me, No cash canry there. The Minneapolis Fed President, Johnny guess Now is the JP Morgan chief strategist from JP Morgan Asset Management. David Kelly, David Gamon, it's your thoughts on this. So were on course for a red cut in December?
I think we probably are.
I think the key thing here is the Federal Reserve is not going to assume or speculate or predict what policy on tariffs and fiscal policy is going to be. I think they've got an idea where we're headed here, but they're just not going to put it into their thinking, and I don't think they want to pick a fight at this stage.
They're going to have to have a fight.
At some stage with the administration, but I don't think they want to pick it right now. So what I think they'll do is, you know, the markets are pricing in a quarter points, So if markets are pricing in a quarter point, they'll they'll they'll.
Do the quarter point.
But I will say that Marcus at this stage are only pricing two more rate cuts next year, and so the market are stopping short of the dopplot. The dop plot says the Fed keeps going another four rate cuts second half of next year or early twenty twenty six, and the market saying, look, given this agenda, the different pieces of this agenda, there's going to be too much inflation potentially the system, and too much debt growth in the system to remake that a rational policy.
The e feed does not speculate, the market does. Which explains the daylight that's opened up over the past week or so, which you endorse that daylight opening gup?
Do you think there's a good reason for it.
I think the way that both the stock market and the bond market have acted is logical.
I think that.
We're I think the assumption is that we're going to get a big fiscal stimulus. Now it's going to have to go through the reconciliation processes. They don't have sixty votes in the Senate, So I think this is going to be a slow moving trade and everybody's going to be piling tax cuts on throughout next year, and so when it hits in twenty twenty six, it's a lot of fiscal stimus and just huge, massive deficits rising over the next decade.
I mean, it's good.
It is a really kind of scary thing, but that is. But that's not there yet. But what's going to happen over the next year. The thing that's really important here is tariff's just how aggressive and how quickly does it do we follow this this tariff agenda. Because the early smoke signal suggests that the new Trump administration is going to be very serious about putting in big tariffs fast.
Well, the market has decided to look through it and say, maybe we don't expect indiscriminate tariffs, that it'll be more selective. If you look at a market like that and you're concerned about it and you're concerned with some of the appointments. Do you want to push back on some of this market pricing?
Then yeah, I think i'd be I would be nervous just in terms of where people's portfolios are because if people have not rebalanced, there now way overweight US equity is a way of wait megacap US equities. So the market has got not only got richer, but it's also got more and more on balance over time. So I think this is a real time to think. Look, we moved from election uncertainty that's over to policy uncertainty, and there is a lot of policy uncertainty.
And I agree with you though, you know, the first.
Smoke signals suggests that the tariff approach is going to be very aggressive. But we'll have to see, because you know, there are people in American business who have got huge interests in being too aggressive. Here you've got trade agreements you've got to deal with and and you know, yeah, you're pushing up the price of stuff coming in. Everybody
likes the tariff on their competitors. Results gonna be tariff on your suppliers, and I think that that could, that could there's gonna be a lot of conflict.
Over these tariffs well in terms of the uncertainty personnel's policy, and so far Lightheiser has not been given the nod to go up to the Treasury Department, which many would view as antagonistic and aggressive. In terms of tariffs. We had tariffs, though in the first iteration of Trump the
Biden administration kept some of those tariffs on. Do you view them as a one shot head to inflation that potentially you see an elevated price level then you can look through it, or do you think this could continue in the when it comes to reacceleration of inflation.
Probably continues because you know, if you punch somebody who knows guess what, they're gonna punch you back. And so if we put on tariffs and they put tariffs on us, and you know, then I can't believe they put tariffs on. We're gonna put a bigger tariff in that, well you know I'm going cycle wells, yeah, I mean, that's why they call it a tariff war. You don't just get to unilaterally attack them, put tariffs on, expect nothing to happen to you. So the and by the way, it's
not just on inflation. It's also on growth because we sell, we export two trillion dollars worth of goods in this country and all that is going to be a target now for countries around the world say, well, you're gonna put terror from us, We're gonna putter from that.
Isn't that a bigger problem for Europe and China than it is in the United States? Relatively spake in Well, yeah, because we're on a trade deficit, So yes, it is.
But you know, a tarif for a tarwerf will make the whole world poor. It is.
You know, there are very few things that will that are sort of a stagflation elixir that can actually push inflation up and sew the economy down at the same time. I mean, I say this as an economist, and I think almost all people have been traded as economists over the years realize that both academically, you know, in theory and in practice, tariffs tend to slow down global trade. They make domestic columny companies inefficient, and they push up inflation.
And they also push up inflation on.
Lower income individuals because lower income households buy more goods, upper income households buy more services.
This is going to be on goods.
It sounds incredibly verish.
But you also started out with saying that the markets moves have been logical in stocks.
Well, yes, because there are all sets for stalks. One of them is that we could get a further cut in the corporate income tax and that has a huge impact on earnings, and nothing is more important for stocks than earnings. So if you do see a reduction in the corporate income tax rate from twenty one percent to fifteen percent for domestic production, that could have a big impact. And of course one of the other things beople going to be debating is what can I call this production?
And so there's going to be a lot of debate around that. But I think those tax cuts for corporations will be positive with stock.
Libby Cantrove PIMCO had a note about this last night, talking about how historically low and slim the margin is going to be. The Republicans in the House, no one.
Can take a day off.
The President Electrump might need to be careful who else he tries to pull from Congress to join his administration. Do you have conviction they will actually get that fifteen percent tax cut?
Quite possibly, because I think you've got to look at I mean, I think that the you know, I'm not a political observer, but it would seem to be the Democrats were prett dispirited here.
This is what the people have voted for, and.
Democrats will sign up for fifteen percent corperate text.
Right, Well, they don't have to in the House. You've just got to get you've just got to get fifty percent. And it looks to me right now if the vote stopped today, it will be two twenty two to two thirteen, So that's nine seeds.
That's enough to get the thing through.
Debad Kelly, A lot to look forward to over the next several years. It's got to see you, sir. Thank you, Devid Kelly there, JP Morgan, Kevin Gordon of Charles Swamp saying monetary policy might be hamstrung in twenty five. Much of the policy landscape is still to be decided. But if deficits widen out aggressively Hyatts Harris put upward pressure on inflation and immigration policy restricts labor force growth, it's plausible to see how the terminal rate might be raised.
Kevin John just now for more, Kevin good Mornick and and raising that rate maybe for bad reasons and not good ones.
Is that how you say things?
Yeah, And I think it's tough because, of course, you know, this is all a guess at this point as to what policies are going to be put in place. And the thing I struggle with right now is if you look historically more sort of less aggressive FED easing cycles, if they're not going at every single meeting, or if they're not cutting by fifty basis points, that actually tends
to be a healthier backdarp for the equity market. However, when you overlay all of the policy of uncertainty, especially from a tariff and a labor perspective, I think that introduces another set of risks. And you know the unfortunate part for the FED. I think you're talking about risks to inflation, but also risks to labor. It's not that the headwinds for the labor market have just gone away automatically.
It's the fact that now you have to start thinking about and I do think it's early, but you do have to start thinking about the fact or the reality or really the possibility that you could be in a position in twenty twenty five where there are still significant headwinds to labor, but then you have some reflationary forces building.
And I think the difference now is from a labor standpoint in particular, if that comes via more restrictions labor supply and you do get more of a sort of you know, fanning of the embers of from a wage perspective, I think that becomes a little bit more of an issue.
Ken you know how this works.
In moments of maximum uncertainty and low conviction, we all reach for a historical parallel. Yeah, we have a playbook the first Trump presidency. How useful is that playbook?
You know?
In some ways it's useful. In some ways it's incredibly not helpful. And I think the useful standpoint you could go back to, Yes, maybe the obsession with using tariffs as a tool, the obsession of looking at equity markets in particular and how they react to them.
You could use that as a playbook.
On the other hand, the economic environment could not be more different. I mean, you know, when Trump took office the first time, the uneployment rate still had more you know, to go to the downside. We were in that secular decline for the unemployment rate. You were in a relatively you know, healthy growth environment. You had twenty seventeen, which was basically the best you could get for across risk assets, where everything you know was sort of low ball and
everything was rallying. The volatility didn't start to show up until the following year. There's just such a different setup this time. So I think that, you know, it is a knee jerk reaction to go back to that one era and say, you know, this is exactly how things can play out, but we're just facing a different set of circumstances.
I would probably put.
More emphasis or most emphasis on labor in particular, because when you look at the gap that has been filled from a labor force perspective over the past four years, it has been from the foreign born labor force. It hasn't been from the native foreign labor force. So if you are putting some sort of restriction on that, or if you're taking a chunk of that out, not all at once, but phasing that in over time, that does
put some pressure on the labor market. From a growth perspective in terms of overall consumer spending and the power associated with it, but also from a wage and inflation perspective, too, But.
To your point, we kind of have no idea what that's going to actually look at, like what form, what pace would amount for all of the policies. So in the meantime for twenty twenty four, before we have clarity on any of that, can you stand in front of this bullish train or do you just want to hop on?
Well?
I think that, you know, momentum is a powerful thing. I was just looking at the SP five hundred momentum index. It's having its best year since nineteen ninety eight, since nineteen ninety nine, but now we've nudged up.
Just a little bit more.
So it's hard to fight against that trend, especially when you've got you know, close to seventy five percent of members in the S and P trading above their two undred day moving average.
Breadth has improved significantly.
Down the cab spectrum, especially for the RUST of two thousand in particular.
So you know, on the one hand.
I wouldn't want to fight the tape that way, but on the other hand, I think that you do have to to some extent start looking at these policy narratives that are that are flying around for twenty twenty five, and you know, I've yet to see a model that has not suggested that the tariff, you know, the tariff implementation as it stands right now, if all of it was to be implemented, would not be stagflationary where you wouldn't get hit a hit to growth and you wouldn't
get a boost to inflation. And that to me would be probably what comes first before you talk about sequencing earlier. I know, in the show of you know, potential fiscal stimulus, but also potential tariff policy from a unilateral perspective and not having to think about Congress, it would seem that everything unilateral from a tariff perspective probably comes first and you get maybe some sort of fiscal aid later down
the road. But that's also harder because you were discussing, you know, the slimmer margin in the House.
That may be, which is why shocking the market is pricing in these tax cuts, which do we actually get them if you have a one seat two seat majority.
Even this discussion about pricing things in, you know, I find it hard to believe that over the past week the market is pricing in the next four years, you know, I think to me, just because the overwhelming consensus heading into the election was that it was going to be this drawn out process where we weren't going to know
who the winner was for several weeks. The fact that you got such a decisive result, I think the market really treated as a clearing event and took that huge, you know, uncertainty chip off the table.
So I don't think that we should.
Be looking at, you know, the moves over the past week and thinkings that somehow suggests that this is what's going to be, you know, the dominant market force, or these are going to be the dominant parts of leadership within the market.
And you know, just as a as a as a store of.
Historical anecdote, if you go back to twenty sixteen, from election day to inauguration day of twenty seventeen, the market that we're rallying and that we're leading or are similar to what has been leading this time. But actually in the ultimate irony of it is that if you look at those groups and what their performance was in the following year, they ended up underperforming the so called Trump losers, which lagged from election day twenty sixteen to inauguration day
twenty seventeen. So not to say that we get a perfect repeat this time. But I think you have to sort of take a step back as an investor and not get caught up in the election narrative and focus more on what macro forces are at play.
Does that mean that this is a great opportunity to take some profits in some areas and where would that be?
I mean, we've been in the camp that, you know, starting Midsummer that if you had seen some opportunities from the high flyers that had done really well, not just year to date, but over the past several years, and at that point it was more in the tech communication services parts of the market, then it made sense to do so, especially if you're more nervous about higher valuation and valuations just looking stretched in general. Those were a lot of the culprits or a lot of the culprits
were in those sectors. So it had made sense from our perspective to start adding into maybe you know, deeper cyclical areas that hadn't done as well.
And you know, for sort of all of the.
Stress associated with the aggressive move in the market over the past week and how cyclicals have really started to rally, a lot of those areas were doing well before, so It's not as if there was this massive leadership shift where you now all of a sudden have to be concerned about what might do well in the next several months because the election somehow changed it.
That isn't the case. So I view that as a relatively constructive backdrop.
What do I do with the banks?
Everyone's built up, Goldman's up by fifty four percent year today, Morgan Stanley's up by more than forty. I mean, pick a bank right now. They've absolutely ripped as well over the last week. What's I do with those names now?
I mean, the momentum is strong for a sector like financials, The breadth is strong for a sector like financials, you know, for banks in particular. That's another area where I would be careful about drawing some sort of election related, you know, conclusion, because and again I don't want to just look at the first Trump administration and say it's going to be a similar or the repeat of what had happened, because the dynamic in the environment is different. But banks were
the sixth worst performing sector during his administration. So it's not as if you can just say, oh, it's a pro growth administration or it's an anti growth or pro regulatory, anti regulatory, and tie that to what sector or what industry is going to outperform. So I would pay attention more to the underlying environment. And right now things look
relatively strong. I think a year from now, if we do start to see more material hits from tariff policy or immigration policy, then I think it's a little bit.
But when it comes to the banks, Trump is winning. When there's a time where you see the regulators at play under a Biden administration, if Kamala Harris did win, do you think we actually would see these move in these banks.
It's out, you know, ultimate counterfactual.
I think that, you know, regardless of what the who the winner was, I do think that if it was as decisive, if it was still as decisive, even if it went the other way, you would probably still have a similar reaction, maybe not as strong in the bond market, but that that's still to me.
Is a really interesting move.
The initial knee jerk move with the rise and yields and the rise in equities. You typically don't see that kind of move inequities. If yields were you know, shooting up.
That much, and we can debank this because no one's wrong just by definition. We've got to look back and try and figure it out. At a guess, Harris Win a blue sweep, a big warrant influence. I don't think apollows up like almost twenty percent and six sessions, and I think you see that big run in region always all for the banks, Well, they would arrive that.
They'd be doubling down on regulation, not this idea that the valve is going to open and maybe there will be this m and a activity of what Jane Frazier said. They're all game on, waiting on the sidelines and excited to get in.
I think Kevin's absolutely right just clearing the event because the base case for a lot of people was this might take a while, and it didn't take it. While it was over by the time the sun rose the following morning.
It is quite remarkable to literally pull up any volatility index, any volatility index on any asset class, a straight nose dive down. That's basically a green light to say, if you are a bull and you want to buy, you're an asset manager and you were scared of volatility, you can jump in now. And that's what we've seen.
So what we saw overnight Kevin. It's good to see you overnight on election night. Just straight down, Kevin Golden. There of chowgh Swap. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, and gie of politics. You can watch the show live on Bloomberg TV weekday morning from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the bloom Blog terminal and the Bloomberg Business app
M HM