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Terminal and the Bloomberg Business App. David Bianco of DWS looking ahead to next year and writing this line, while a recession is not the base case, risks of overheating and macroeconomic concertainty remain. David joins us now for more. David, good morning, Good morning. Let's talk about that risk of overheating. How very real is that risk for next year?
Well, the economy like this STI is strong. I don't think it accelerates because things have been good in the Probably stas not about two and a half sent GDP growth. It's inflation being sticky, particularly because of services. That's a risk. So that's perhaps an overheating risk. The other thing is excessive fiscal spending. Now that's why with best in markets not just markets. You know, the equity side has been very excited about Trump ever since the win. But this
is good news for the bottom market. The Secretary Treasury to come is concerned about the deficits. That's welcome news. And the message of three three three, that's that's good messaging so far.
So let's get to the three three three three percent growth, three percent deficit. And I think also it's three million bounds a day of all equivalents, not just oil aill equivalents, And I think that's a really important point. Do you think that could be met? You think that can be achieved?
Right?
So three percent real GDP growth is within reach for the US economy with the right balance of things like tariff's versusy regulation and lower taxes. Three million barrels over a few years time, additional to the about fourteen million that's I would argue that's well within but that would hurt profits. But it's within reach. Now the three percent deficit, that's out of reach. But I'm glad he's reaching forward
and pointing to it. And I think the bomb market's excited to hear Secretary Treasury being concerned about these deficits.
How do you translate ideas and a muddied set of signals from some of the cabinet members who have gotten selected Scott Best catering to the market friendly crowd, others catering to the vaccine skeptic crowd, others possibly talking about ripping up the Justice Department. How do you put this together to understand whether you need to change your forecast for next year, whether Washington is just going to basically tamp down any extremes and keep things the way they are.
Well, it's still early on.
We're still learning so much about these policies. But I'm a markets guy, best in some markets person, so we're feeling good today. But this is an environment where who's to say where these policies are going to go and the right mix and balance of them, and how other countries in the world respond to our policies, particular things like tariffs. Is still a risky geopolitical world. So on one hand, oil prices might go down because of domestic supply,
but that's still under geopolitical threat. So are forecasting to be flexible and markets are likely going to be voluid over the coming year, but probably still upward.
Is this Treasury secretary pick though, really crucial when it comes to pinning the treasury market in particular, sort of pinning bond yields with somebody at the helm who is going to be very trained on what exactly the markets say.
Well, well, the candidates were all good candidates, so you know this is there. I don't think there's alarm in this area, but I do think that this is a selection that people like myself say, this makes sense. This is a thoughtful person and experience with markets. And one of the things that you know Secretary Treasury does is help deal with problems, particularly problems and markets for problems with funding. Keeping confidence in the in the US bomb
market is an important thing. So right person for the job.
He's been very critical of Secretary Yallen in terms of when comes to the front end and these bond auctions, do you think he will push that out to longer day to debt?
If you go back a couple of years ago, a few years ago, one ten year treasury years were where they were one percent, you know, everybody has to wonder why didn't you take more advantage of that, why didn't you do it? Mortgage borrowers did, But that's hindsight, and from here, I think the key is making sure that efforts are made to bring the deficit down or probably be seven to eight percent next year, but bring it down.
I think the deficit is almost like a very high pe multiple on a stock, and the only way to keep markets calm about that is deliver growth. So that's why I think delivering growth and that three percent on real GDP growth is also an important part of that three point strategy.
That three point strategy though, and you said that the one thing you don't think he's going to be able to accomplish is cutting the deficit by three percent, but he says by twenty three percent. Yeah, by twenty twenty eight. Though, if you were to get a deficit reduction by two to three percent, how long do you think it would take.
To get the deficit all the way down to three percent under the entitlements we have. It's very unlikely. Lot's ever, it's unlikely in my view if it's achieved over a handful of years or within the next four years. DeBie, Weston and Hamilton will go down in history has great Secretary Jursdays.
Administrations running seven percent deficits at a time when unemployment's close to four and GDP is really robust. The idea that we can get down to three anytime soon? Is it worthy?
Go?
Is it achievable?
Yeah? Well, this is the reason why people are skeptical of it. Whether someone can actually try to achieve it is also another question. What is your most contrarian call going into next year given that a lot of the goals to reduce the deficit and also to keep growth of three percent seem unattainable.
Yeah, being contrarian or even being skeptical has not been very useful the past few years. So what I look for are we're are good fundamentals still at a price that I won't bicker with, and I would say for the coming year that that's still financials. I wouldn't bicker
with those valuations quickly for big banks. Healthcare as an area that I think has still been overlooked for a long time because it's so much excitement and technology and digital, but very good earnings growth there, great long term prospects in tangible assets, innovation, very on demanding valuation. So healthcare,
financials and capital goods companies. That's what I like. So one of the things is that more oil perhaps lower oil prices, but it's good for everything combustion, whether it's oil services, refiners, but also diesel engines, natural gas turbines and jet engines, things like that.
Healthcare stocks have actually been down since the election because of some of the picks and some of the questions around how these departments are going to be overhauled. Do you lean into that at all or do you basically see it as an opportunity.
We see it as an opportunity. I mean, the healthcare sector has generated really good earnings growth through bigger challenges than this, including already the negotiated drug prices.
Now we know that with.
A Republican sweep they'll probably make some changes to some of these policies. But healthcare spending is going up and the innovation that we see at most medicine makers and even medical device makers, we're encouraged with that, and the valuations are undermanding.
Hey David, it's good to see you and see you in person as well. Thank you. Defin Bianco there of DWS, Adrian Ye of Barclay's writing this gamp is our top retail idea for a cyclical recovery into twenty twenty five as it shifts from solidifying operations to growth mode. Adrian joins us now for more. Welcome to the program. Let's start with GAB. Can you tell us what you think they're getting right at the moment what's leading to this big share game.
So what they're getting right is the value equation for the consumer. So if you look at the retailers that are sort of winning in this environment, it's those who are like Walmart, TJX, the off pricers told me in this particular case, and they truly are kind of giving back real value to the consumer. With regard to the Gap brand. Within the Gap organization, they're also finally starting to hit their stride on connecting with the consumer. So
it's been at least a couple of decades probably. You know, last time that we saw them do positive comps at the Gap brand was twenty eleven and twelve when it was kind of a skinny leg craze. And I think part of it is that really focused on the fundamentals. They've got the sub they've solidified their store based the cost basis, and we also for lack of you know, other things. They also have a silhouette shift that is a debt and base one and it's in their favor.
So you talk about creating value, and I think about the sort of pairing that idea the lowest prices with style and getting influencers to get wide legged genes that look like they are in vogue and get them out to the masses. What does value mean? Who isn't creating value?
Yeah, that's a great question. And we like to separate value versus cheap. So value is price paid for quality receives. So when you go to an off pricer or even if you go to Old Navy, you know, you think that you're getting, you know, you're paying something, and you don't mind paying fifty dollars for something that you think is probably worth more than that seventy five or one
hundred dollars even in off price. But what you do care about is paying, you know, cheap prices for something that you think is worth exactly.
That or less.
Right, And that's the huge differentiator here in this especially in this environment where CPI inflation across all these different products is eating away at that wallet. The consumers really looking for somebody who's going to provide them the ability to stretch their dollar and stretch.
Their wallet, Adrian, something that we woke up to this morning with suddenly in renewed focus on shipping costs and how that can come back to bite and for an e commerce type of organization, which a lot of these retailers seem to be coming. How important is minimizing shipping costs? How much is that becoming an increasing drag on some of the companies you cover.
So the e commerce piece of it exactly that last mile delivery what you're talking about, we should think about those like wages, they just perpetually go up. Remember the essence of kind of that shipping is going to be an employee base where their wages are going up, whether it's ups or FedEx, et cetera, any of these delivery companies. So you can kind of think about that as a
permanent inflator. And the way to combat that, frankly, because it's very much a variable expense is to get ever smarter and ever better about your inventory management, trying to buy and see what demand is and sell at full price. So it's a really really tough you know, you know, equation there, But just as on their store side, the store payroll will permanently go up. It's just about operating your entire omni channel business much more efficiently.
Drian just wanted to finish on this. I know it's not a company under your converage, so I won't name it by name. We'll just talk about the story in general terms. There's a company this morning where a single employee was responsible for small package delivery expense accounting intentionally made these massive, erroneous entries to hide about one hundred and fifty million dollars worth of expenses. How unusual is it for something like that to happen in a company like this?
It is, you know, it's a breakdown of the disciplines. It is pretty unusual, frankly typically. I mean, let's put it into perspective that one hundred and fifty million is on about four point three billion dollars worth of total delivery expenses. So it's a number, it's a real number since twenty twenty one, but it's about three percent of their delivery expenses. Not a great look for you know, said company. But what I will say that there's a
lot that goes on. You know, I've been in the retail industry that P and L has thousands of lines in it and thousands of employees that you have to assume are doing the right thing. And I think that there is a there was a breakdown in this particular instant of the oversight in that department, for sure.
Dan, appreciate your views on that story as well. Thanks for being with us. Drin Gident Fankles No, John will No, it's good to see you.
Good to see you.
Do you think that's the scenario we will be facing in twenty five?
I think so. I think so. I think there's you know, some euphoria obviously, Uh, we got the red wave. Everyone's looking to the to the pro uh positive parts of the policy. But we're going to get into a situation where, like I said, you know, the FED is easing into strength. Uh, you know, you have these fiscal issues, uh, tariffs, I think will be a big risk event. So I think those concerns come up in the first half of next year.
So what are you advocating full into next year?
Yeah, so I think I would probably take some risk off the table coming into next year. I also think the dollar will continue to grind higher. I think that it's sort of the the US will continue to be the cleanest dirty shirt, and I think we'll have probably lower global growth if we do get that tariff policy implemented.
This might be a dumb question, what is risk? What counts is that because some people are talking about risk in stocks, other people are saying risk is in duration and the chance that maybe there isn't necessarily any kind of controlling force and the deficit, and that you do end up, like Francis Donald said, with even rate hikes by the end of next year.
Yeah, so I think the biggest risk is in the long end of the curve. I think duration is you know, that's what you want to focus on taking off. I think equities, you know, they had a big rally right now. Like I mentioned before, it's it's sort of what's not to like? But you know, when we get into next year,
it's going to say, what is there too like? Because you're going to have overvalued equities, You're going to have this fiscal concern moving into next year, and then you're going to have a FED that's going to be forced to pause its policy.
So you're not buying the best in bump.
I'm not I'm not, you know, I think again, I don't want to go against it In the short run. I think you kind of ride the wave, maybe you get a Santa Claus rally, But once we get a little doser reality into twenty twenty five, I think that's when you want to start to take some risk off.
You say tariffs are the biggest risk. Do you view terrors so? Do you think this administration will view terras as a negotiating tool to reset the playing field when it comes to free trade or do you actually think they're going to use them as pay force for their tax cuts, which would then mean that the sequencing has to be in parallel.
I think it's the latter. I think that, you know, the administration perceives teriffs as a way to pay for some of the tax cuts that are going to come through. But I think what they forget is that, you know, tariffs are going to go one way. It's either going to impact the consumer, so companies will pass the cost on, or it will put some pressure on corporate margins. So I think that probably is a misguided sort of focused But I do think their perception is that it'll pay for some of the tax cuts.
So if you if this is your base case, what does someone like Scott beston't at the Treasury mean for that impulse that some other members of the administration might have when it comes to terror. Yeah.
So, I think the initial reaction is that he's more of a pragmatist. But we have to realize that Trump won the popular vote. So I believe from his perspective, he thinks he has a mandate and he, as he said before, his favorite word is tariff. So I think, you know, bessint, you know, his perspective is he would like to ease things in. But I feel like Trump is going to want to implement that policy at.
These towns a bigger problem for the rest of the world than they on the United States.
I don't think so. I think it's a problem for everyone because I think naturally you're going to get retaliatory reaction from other countries. I think when we look at the first administration, it actually the retaliatory tariffs actually impacted the US export disproportionately to the importers.
These are some of the fombing producing states agricultural commodities. They were the big focus. Then should we be focused on anything else?
I think because tariffs are across the board, I think everything should be a focus. I think it's going to be, you know, a real different sort of scenario. We're at a very different started.
Expecting those blanket tariffs that have impromised on a campaign trip. Do you think they could become reality?
I think so. He promised it. He won the popular vote. I believe you know, that's what he campaigned on. That's what what kind of drove him into the White House, and I think he's going to continue to focus on that path.
So just to sort of put a bow on it or underscore what you're saying, is that the dose of reality that you think will really curtail what could be a Santa Claus rally in this melt up?
I think so. I think you know, markets are sort of waiting for the clarity on that. I would augment that. Obviously with just the fiscal spending, we already have structural deficits. So all of that combined, that's something the Fed's going to have to focus on. And when they have to pause for that reason, they could cause some risk off.
Who's the biggest loser in a trade war?
I think the biggest loser probably I would say China initially because their economy is already pretty weak. You know, they've you know, planned for it. I'm assuming, but you know, they still are in a very vulnerable position. I would say outside of that, I think Europe is very vulnerable as well.
No, I appreciate your time. Thank you, sir. No dexon there, stay Street. This is the Bloomberg Surveillants podcast, bringing you the best in markets, economics, angiet politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business Am