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.
Stocks hovering around those record at high levels. Paul Christopher of olds Vargo writing this, based on our expectations for accelerating earnings, we believe the next twelve to fifteen months will favor US equities. Paul joins us. Now, Paul, let's start there the idea that people don't like buying into valuations like this, They don't like buying into consensus. They don't like doing it in a vacuum that is just because of government dysfunction. And yet it seems like that's
the only place to go. Can you explain how that is somewhat of a difficult trade yet and obvious one to many people, including yourself.
Yeah, I mean, surely it is uncomfortable for all the reasons that you mentioned, But you know, you have to sort of focus here on what i'd call the big rocks. The big rocks are that artificial intelligence is a trend, it has some momentum behind it, it's investable, and we need to take advantage of it. Now, there's smart ways to do that and not smart ways to do that, and we're going to try to stick with the smart ways, and I'm happy to talk about those.
Okay, so let's talk about them. The smart ways to do it. Is it investing in the hyperscalers or is it investing in energy companies that they are going to have to fuel this over the longer term.
The answer is yes. But look, you've got hyperscalers in comm services, communication services, and in information technology. All right, So you've got two sectors there. Do you want to buy them both or do you just want to buy one right now by the one that looks the least overpriced. And then let's sit there for a while. And then at the same time, let's try to diversify that AI exposure by going with what I would call adjunct trends
like the data centers. You know, you've got some of these two and three ton computers right now around the country sitting under tents, So they're going to have to build places for those computers to live, and they're going to have to build out the energy infrastructure not just to power them, but to cool them. Going computers off
and have cooling below the floor. So utilities and industrials look like two sectors US that are not as overpriced as in fact even abtractively priced compared to information technology and common services. And then a third way to diversify, or let's call it a second way to diversify, is to look for trends that aren't necessarily directly related to AI, but that play another big rock in the economy. And that's the fact that we think that the FED is we believe is going to cut two more times this
year and another two more times next year. That's going to take the short end of the yield curve lower. And with long rates we think hovering near where they are right now, that's a pretty good looking environment for banks. Right They're going to pay short term deposit rates which are going down, so their cost fall. At the same time, longer rates stay high and that's what they're going to
earn on their lending. So we can play different trends here in different ways that aren't as overpriced as the overall market. Over the hypers you know, the individual hyper six scalers, the mag seven. So I think that's the way to go here. You want to try to be as effective with your capital as possible. And look, there are going to be pullbacks, so we're going to get to earning season, They're going are going to be some disappointments and those firms will be punished. Those could be
buying opportunities. We'll have to see what transpires.
Well, I'm glad you.
Brought up the energy demand that it's going to be for this entire AI boom electricity demand. Do you think that could end up slowing this momentum because it might not keep pace with what these hyperscalers are trying to do.
Yeah, that's a good point.
I mean, look, there are always going to be constraints when you're going through a growing trend, a growing pains trend like this one. This is a very disruptive economic trend. We saw the same thing. If you go back to the nineties, right, there were shortages of things. If you go back to the forties and the fifties and the sixties, we were developing automobile, ship and air transport and there were constraints there. We eventually broke through those constraints, and
for investors, those constraints really represent opportunities. Right, So as long as you see electricity production and transmission being constrained, that means there's opportunities and utilities, there's opportunities in midstream energy. There's no opportunities in natural gas. For a long term investor, those constraints have to be worked through, and we believe they will.
Well, I want to know what you think of, basically, what you're doing in absence of US economic data. Christian Nolting from Deutsche Bank. Earlier the program was talking about how actually it's been easier without having the US economic data. What have you been relying on?
Yeah, it is easier in a sense you don't have the reports coming out every day. But look, let's go back to the idea of the big rocks. For a long term investor, what matters right here, right now is that the economy is still growing. I don't think anybody
doubts that, and that inflation is still moderate. I don't think anybody doubts that really, And those that combination, along with a labor market that's continuing to soften but is not generating a lot of new unemployment, that also tells us the FED is likely to cut, the economy is likely to grow. We think earnings come up to three hundred dollars per share next year on the S and P five hundred. Those are the big rocks that investors
really need to know about. The government shutdown. That's noise, it's distraction. Let's look through it.
Yeah, at this time.
At this point, though, you have to wonder whether the strength that we're seeing in corporate earnings pairs with this idea of a FED easing. We were talking earlier with Kadi Kaminski about this simplex and she said it is confusing to her that we're not seeing some sort of sell off in long term bonds as a result of the FED presumably cutting two more times this year in the face of real strength in the US economy.
How do you manage that risk?
Considering that we really haven't seen much of anything in the bond space in terms of volatility.
Well, that is one risk on the long end of the yield curve, the maturity spectrum, and we would agree that that's a risk. We would see other risks as well. Potentially the tariff revenue will not generate as much as many dollars as Congress thinks, and so you could end up with wider deficits going forward. So there is risk, we think on the long end of the maturity spectrum, and that's why we've been underweight there for some time.
For some months.
We're also underweight on the short end, expecting the FED to cut. So that really leaves us with a bullet strategy where what we really like is that intermediate portion of the maturity spectrum, the yield curve, those that three to seven year range, investment grade, investment grade munis and corporates,
that's where we would target. Look, you're going to get a yield in that three to seven year range that's not far off of what it is in the ten ten year but you're going to get a lot less duration risk, a lot less risk from fluctuating long term yield. So whatever the reasons are, yeah, well, we would agree that we want to be underweight long term debt at this point.
Are bonds still the diversifier that they have been traditionally?
Yes, over time they have been, And I mean we've done the work behind this to show the whether it's short term or long term. If in terms of the number of years you look at, bonds are consistently the best diversifier for equities, you.
Know, on a regular, on a regular and ongoing basis.
At the moment, there's lots of trends that are churning around fixed income. So there's you know, some buying in the in the fixed income space pushing yields down a little bit. That's also tending to push more money into stocks, but that that's just part of the normal give and take between those two markets. We would want people to hold both bonds and stocks because we don't want to try to predict when one is going to peak and the other one's going to troll.
Stay with us Mobile intex Savanna's coming up after this.
I want to rip up the script and go right to our next guy, Rajadaksha of Markley's, to talk about what we're seeing with respect to the international picture, how much that's edifying what we're seeing in the gold trade. But also how difficult it's been to really make some sort of international call when you take a look like Argentina. How much does that complicate the emerging market bet, I mean, how much does that complicate understanding what the calculus is there?
It does, but it depends on the asset class you're talking about, So on the bond side it does matter hugely. But on the equity side, remembered Lisa, you're talking about anamaquity asset class that is primarily dependent on what China does. You know, not so much, not so much, but not even at this point India. You know, Indian equities are basically treaded water for a while, but the Chinese equity market has been on a tear and that I think is the is the wind beneath EM's wings for the
forciful future. So there's noise, yes, but this is not going to upset the em equity rally.
This is fascinating because how much is China the wind beneath the sales of gold? We've been talking all about gold as being this debasement trade, but you're not seeing it necessarily in treasure healds because you are seeing some kind of demand at the auctions.
Is it really just central.
Bank buying led by China that's fueling in a narrative that's taking on a life of its own.
It is partly central bank buying, and it started in twenty twenty two and the West froze Russia's affects reserves. We saw an immediate pickup, you know, almost double the amount of buying in twenty twenty two from central banks loyalty to twenty twenty one, and it has not let up since. Central banks have bought over a thousand tons of gold each year starting in twenty twenty two. They used to be at barely three hundred to four hundred tons.
Part of it is also the lack of supply. Weirdly enough, despite gold prices basically tripling in the last five to six years, the amount of supply, you know, college geopolitical issues calledge geological issues, but the amount of supply really hasn't picked up anyone near as much as you expect. And then that is the third thing what I think you're referring to, which is just uneasiness about the global financial and montre order.
When it comes to that uneasiness and the central bank buying, what's the impact of that, because that means then they're not buying as many US treasuries.
That is actually a very clear impact. So for a first time, late last year, by our estimates, the amount of effects reserves globally held moved to a majority, not a majority, but more effects reserves were held in gold and US treasuries, which is not something that has happened
for a long, long long time. Like you guys just said, it is true that it's not shown up in a lack of auction demand, for example, but if you look at swap spreads and where they are right now, they still seem to be screaming that on a relative basis, you know, sovereign debt is still not as much in favor as all in yield levels would suggest.
Do you call this the world de dollarizing?
No, I think the world it's not so much one currency versus another, you know, because let's face it, that is not an alternative to the dollar. That nib is not an alternative. The euro has its own problems. The yen used to be a safe haven but has struggled in the last clear for the Swiss frank you know, quite frankly is very expensive too small, so it's not ded aularizing as in the world moving to other currencies.
But the world absolutely is worried about how much we are awash, both in fiat currencies as well as in the trillions of dollars of sovereign debt with the promise of trillions more to come. That that is the uneasiness that I think investors are turning to gold for.
You know, I wonder if we're just trying to create daves around a liquidity picture that people don't fully understand. And as the head of research at Barclay's, I'm sure you track the liquidity pictures and the idea that you're having the fiscal and the monetary engines kind of firing at the same time. How much do all assets end
up trading in tandem? And I know I shouldn't make too much about this, but the fact that stocks, pods and gold also sold off yesterday sort of hinted at this question around liquidity almost as much as some of the narratives that were trying to put around them.
So I'm less switted about, Oh, you're talking about too much liquidity in the system or.
And then being withdrawn and how much that ends up really kind of creating the dynamic and markets well beyond any question around geopolitics or loss in US exceptionalism, waket in growth beyond.
So I think yesterday just to address that, you know, small question first was not about the liquidity, partly because like you said, gold was so overbought. That is I've just never seen it. You know, something goes of fifty percent, it's not you know, easy for it to take a little bit of a breather. In equities, I would say the same thing. Bonds. We are running, according to the Atlanta FARED at a three point eight percent quarter on quarter growth number annualized for the third quarter. That is
a nominal GDP print of over six percent. At some point bonds are supposed to start to reflect that, and I think that is what they were doing. But I do think that the FED is laser focused on the amount of bank reserves it starts to take out of the system as it continues with QT. Now, the problem that they have is the way that you know there is a problem is when there is a problem, you know, we're all guessing at what is the correct level of
bank reserves. But if I had to guess I think they would err on the side of caution, meaning leave too many reserves are then too few, And that again is gold, bitcoin, silver positive.
So is it very difficult to be purish in anything right now? Considering that that's the backdrop of liquidity.
It's hard to be verished given the economic outlook. You know, we've turned you know, neither of you guys have asked me a single question on tarts. And there's a reason for that. You know, we've turned the page on what used to matter. There's this massive aye boom, which even if it ends up with you know, some problems along
the way. This amount of spending is there's names, Lisa that I never knew, Colossus, Rainiers, Target, these are all fantastical names, except that they are all gigantic data centers. Each one of them have the size of Manhattan. And that spending is not going to go away. And while that is going on, I just see no reason for a big pullback in most ACID classes.
Stay with US Moblin TEX Surviance coming up after this.
The partisans stalemate is dragging on in Washington, d C. With President Trump threatening cuts to democratic programs. Some federal workers are preparing for missed paychecks today as a shutdown continues for a Arkansas Congressman Frenchhill joins us Now, Congressman, thank you so much for being with us. Is there any progress being made, Is there a good faith effort to be getting in the room and talking about some of the details.
Well, good morning, it's nice to be with you.
I think senators are certainly having conversations about what they'd be willing to do in the appropriations process after the government reopens.
This is the issue.
The House passed a clean, bipartisan a continuing resolution to have all of government open, and just yesterday Chuck Schumer put a sign up saying We're getting stronger every day.
Well, you know who's not getting stronger.
People depended on the flood insurance program who are concerned.
About storms or floods.
People who are working in the military who know next week they get their last paycheck. People who are dependent on grant programs from the federal government to keep state child care programs open. That's who's not getting stronger every day. So I would just simply say, all the Senator has to do is pass the continuing resolution and keep the
appropriations process going. So the answer question is Yes, Senators are having conversations about what they want to do in fiscal twenty six spending, including on healthcare.
Cherman Hill, you just said the active service duty service members, the military members will get their last paycheck next week. Isn't your understanding they will get paid next week, because I think there's still been a question mark about that.
Well, I think that's the last paycheck that I'm aware of is the fifteenth, and.
Maybe that's maybe it's not.
But either way, this is why I decline my pay during this whole period, as I have in previous shutdowns. I don't think members of Congress, particularly the Senate, should be paid while federal workers are furloughed, and some federal workers may well lose their job when the simplest thing to do, Anne Marie, is to get this government back open. We were in the middle of discussing all of the spending for fiscal twenty six. The Senate had passed three
bills across the Senate floor. We had passed four bills across the House floor, and Susan Collins and Tom Cole have that process underway, and Schumer, I think, for internal democratic political purposes, chose to pick a fight with Trump and try to make a name for himself once again. So the Schumer shutdown starts.
In his office.
Meanwhile, we do see the executive branch continuing along on a number of foreign policy issues, including Argentina. I'd love to get your thoughts on this twenty billion dollar swap line. If they are using the ESF, isn't that taxpayer dollars going to Buenos Aires?
Over many many years, since the nineteen thirties, the US Treasury has used the Exchange Stabilization Fund when they think it's in American interest for geopolitical reasons, for global international finance stability reasons by both political parties. Treasury Secretary of Bessin's first trip as Treasury Secretary was to meet the
leadership at the Malay government in Buenos Aires. I visited Argentina in August to assess the IMF program, assess their progress for the first time of trying to return Argentina back to a market economy that people can be benefited from by low inflation, lifting kids out of poverty, created a private sector, dropping currency controls. So I think the Melee government is on the right track, and I think Secretary Besset is trying to carefully and prudently see how
they can encourage that success. If they're successful, they will rival the stories in Taiwan or Singapore or the Asian Tigers, and they will reverse the curse of one hundred and fifty years of mismanagement and finance in Buenos Aires.
But jare Hill I was with the traasch secretary when he went to Argentina in April, his first international trip. This is because of the midterm elections coming up, not some geopolitical issue.
I disagree completely with you.
I understand that President Melee is having national elections in Buenos Aires on October twenty six. That's true, and it's important that he keep the momentum going because they need legislative support for the reforms that they've made. But just in the first few months of his leadership, he's made substantial macroeconomic reforms that have improved the outcome and individual citizens have been improved.
So it's more than that.
Argentina is an important strategic partner to the United States in the Southern hemisphere, for national security purposes, for shipping purposes, for global open navigation purposes. So it's a much bigger issue than just the fact that they have domestic elections coming up.
Congressman, the market is shrugging off all of what's going on, whether it's geopolitically or whether it's the government shut down, and they're actually looking more to measures that you put forward in including some of the deregulation of banks, including some of what we've seen with respect to easing some of the ability for tie ups in the financial sector.
As someone who has been a part of the financial sector in the small banking area as well as who's been really a leader in this particular space, how much more do you see this continuing? Are you encouraged by what you're seeing? What kind of consolidation are you hoping for?
Well, it's not about consolidation. It's about right sizing the role of government supervision and tailoring bank regulations. This began under the first Trump administration when we passed a bipartisan bill that was signed into law by President Trump back in twenty eighteen, and in that effort, we wanted to tailor regulation and supervision of our financial institutions based on
their complexity, not just simply based on size. And that's been a theme that we've had for my first nine months of leading the Financial Services Committees, we want tailoring both in capital markets and in commercial banking, encourage banks to be able to stay successful, have the capital they need to lend to customers, whether they're building new homes
or starting new businesses. And that had gotten atropheed under the leadership by the Joe Biden FED who was too bureaucratic two paper intensive, and that's the focus that we've taken.
How much are you watching what's going on in financial markets? The unprecedented run in things like bitcoin, the mergers and acquisitions, the leverage buyouts that are starting to come back. Is starting to worry that maybe things will begin to get a little too far. Is that something that is in your purview in any way?
Well, I do think there is a return of animal spirits in the market. You see that in the equity and bond market spreads. You certainly see it in the number of initial public offerings that we've had, the largest in probably about five years. And so there are elements of that, and you've seen overturned to some merger and acquisition activity in some industries. All that is true, It's not something that I worry about instinctively. That it's happening,
but can it be overdone? Certainly, and that's the nature of markets. We want a regulatory and supervisory system both at the Securities and Exchange Commission and in the bank supervisors that make sense, that's focused on material financial risk, focused on information that investors need, Focus our CEOs and boards of directors at banks on material safety and soundness issues, and.
Not be distracted by.
Tertiary topics like is making this loan going to have an impact on climate risk?
Stay with US multile IMPEG Savannahs coming up.
Off to this, Sheila Coyelo of Jeffries joins US now and Sheila as somebody who might or might not be interested for personal reasons as well as otherwise. How much are we seeing delays really trickle through the airline industry.
We're seeing some delays, but you know, some select airports were closed yesterday for several hours, like Burbank. But in general, the airlines are telling us this is not going to impede travel demand and we're going to continue to see momentum in the airlines. So it's unfortunate for the consumer, not so much for the airlines and the workers who aren't getting paid.
Essentially, people have to get places, regardless of how much of a pain in the neck it is to get places, So it's not necessarily going to affect revenues for now. Nonetheless, does this kind of put a hitch in some of the airline's plans, particularly I'm thinking United that's from trying to really fight and counter some of the reputational risks around the likes of Newark.
Delta reporting yesterday and they gave us a range for Q four of up two to four percent, and I think that range puts into account how long the shutdown lasts. Last time it was only about a million dollars a day. This time, I think it's going to be less than that for the last nine days that they've seen. So Newark is always a highlight and a poster child for air traffic delays. So we'll see how United Southwest has slightly more exposure to government employees as well. But for now,
we don't think it's going to stop travel demands. I'm out all week next week traveling. I don't think I'm canceling my plans, So.
You can give us a personal update on next So if you're seeing delays, but we are seeing delays, and we're seeing staffing shortages across air traffic control towers around the United States, and we're ten days in. What happens when we're twenty thirty potentially days into this shutdown.
Yeah, we'll see more and more delays, but unfortunately, you know, we see one to two percent cancelations usually and about twenty percent delays. So it'll just have people stay at the airport a bit longer. But that's all we have for now.
Do you think this is a pressure point for Washington, DC? Because twenty nineteen, when we saw massive delays and big airports like Orlando and New York that day President Trump caved and then the government reopened. Could it come down to just you know, airlines and delays.
I think it's a lot more than that. I mean, if you look at the defense side of the business, a Secretary hexcep is talking about awarding the six gen Navy fighter. This is during a shutdown. So I think the government's trying, the administration's try to move forward. But we'll see what happens with the shutdown and how badly consumers are affected.
One thing that we've seen consistently through all the earnings reports has been and I'm just moving to what we got from Delta yesterday, aside from the government shutdown, is that the front of the cabin has been the real money driver, in the back of the cabin has been a laggard. And it sort of is a story, a tale of two airlines, the ones that are able to cater to the business class side of things, the ones
that are faring with the budget customers. Did we see a shift in tone yesterday from ed bastion of Delta.
I think on a number of fronts, not only the discrepancy between main cabin and premium, that pricing Delta gap even wider. That was the first corporate was up eight percent year over year. That was really solid. Cargo was up sixteen percent or so year over year. Their MRO business was up sixty percent. All these stats were pretty positive economically if you ask me. Some of it is market share gains on MRO and car Go, but still those were pretty high percentages.
That's where I wanted to go. Is this a read through to the entire industry or is what we're seeing a consolidation of market share and the likes of Delta United and American at the behest of some of the budget carriers.
I think both fronts, you're seeing United and Delta really outperform. They've picked the right strategy. We saw United add more routes to Europe yesterday. Europe would be the one area in Delta's report I would call out that was negative. The read through on pricing in Atlantic revenues were down in Q three. That means there was either too much
capacity or there was tariff impacted bookings. So people that were going to book summer travel in March decided not to travel into the US, So that would be the one data point I would call it as week. But going back to the airlines, it's the story of United and Delta winning the strategies of Southwest and American and Jeff Blue needing to refocus their areas.
Did you see any evidence the rest of the cabin the people who are sandwiched into economy are coming back that the recovery that you're seeing in demand is also coming from people at the middle income the lower income spheres of the population, rather than trust the people at the front.
You saw that a bit in the first half. We saw pricing for airfares down in Q three Delta's report was a turn positive and they're forecasting an improvement in Q four. So we really needed to see that positive inflection in the main cabin in Q three and we got that, and we're going to see more momentum into
Q four. Some of it is because airlines are cutting capacity, so you're having less routes, and some of it is because the consumer feels more confident, and that was evident in their close in bookings they saw more and more cash sales.
We're expecting from American and Jet blow based on what we've learned from Delta.
I think the Atlantic data point for American is one that we highlighted as potentially being weak. They're the third carrier in the Atlantic. If you have too much capacity not enough demand for multiple reasons, I think you'll see a weak report there. We're more bullish into United, but I think Delta put up a very clean and without any news, you know, any other items to muddy the waters.
What about the budget carriers, given the fact that Delta is saying, to Lisa's point, it's the entire airline, do you think the budget carriers are going to do well or those customers going straight to the big dogs.
You know, we lean into the network carriers. I think Southwest adding routes into cities like Las Vegas isn't going to necessarily help their pricing momentum. But United opening up a route to Bury or Bilboa in Spain or Italy, I think that, you know, that ignites demand that wasn't necessarily there. That's a route that nobody buys directly from
the US, and it could, you know, instigate demand. Last year they did Greenland, so this year they stuck a little bit more conservative with their routes.
This is the Bloomberg Sevendics podcast, bringing you the best in markets, economics, antient 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 all is on the Bloomberg Terminal and the Bloomberg Business out
Mm hmm