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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. Stock sliding as investors comed down to the start of earning season, Keith Lerner of truest Right in the following the current bullmarket likely still has further upside, underscoring the importance of staying focused on the broader trajectory rather than short term turbulence. Keith joins us now for more. Keith, Welcome to the program. Are you expecting some short term turbulence this earning season?
Yeah?
Well, first, great to be with you. I think it may be a little bit of a spookier October.
We didn't get the seasonal weakness.
A lot a lot of folks were looking for in August and September, and as you just discussed, like we have this big meeting, it's at the end of the month, the Fed's meetings at the end of the month.
I think earnings continue to be the north star.
But I will say heading into the earning season and we've had just one of the strongest six month rallies we've seen in history, expectations are somewhat high. You did see some complacency put the call ratios were really low going into this as well. And as I look at the overall market, you're just see in some minor cracks. So I just think this month is going to be
a bit more turbulence. We still think we're in a bull market, a bull market that deserves the benefit of the doubt, but I think this turbulence is likely to continue through this month.
Keith Imbory and Lisa, we're talking about the tension between the US and China somehow failing somewhat different going into negotiations at the end of this month, and I think you can see that in the price section. Yesterday's bound smaller than Friday sell off, and the sell off resumes again this morning. Keith, is there something different about things this time around.
Well, the biggest challenge from a market perspective is this that you're going into this with higher expectations.
You're at a twenty two multiple.
As I mentioned, you've had this big run, so you just have you're more vulnerable to bad news. Whether this actually from a political side is different, you know, we just don't know yet. I mean, that's just the reality.
We don't know.
I think what we've seen over the last you know, six months, is that when we start to have more tension in the markets, eventually, you know, coolerheads prevail. But as as just mentioned, we just made new highs in the market, So the question becomes, you know, how much how much of a move down do we need before
we start to see kind of a backup. And we're only a few percent from all time high, so I suspect that we actually still have some more work to move on the downside before investors start to focus back on what we think is the north store of this blow market, which is still earning.
So, Keith, this isn't a biable dip yet for you?
Is that correct?
This is not a place where I wouldn't say I would be aggressively buying here.
No.
I think you know, if we look back historically, we haven't had even a five percent pullback since April.
You know.
That's also we often talk about pullbacks or the admission price to the to the to the market to eventually higher prices. So you know, we're a few percent from an all time highs with these kind of a little bit of a craft. I like a little bit deeper of a pullback. And I'm not saying, you know, fifteen percent. I think something in the five to ten percent range would be something where we would say, potentially be more aggressive.
I wonder what your read through is going to be from the bank earnings that do kick off shortly. We are expecting based on what Jeffreys reported a while ago, this boom and m and A, this idea that there's more corporate confidence we're seeing that surveys. Does that do enough to alleviate concerns elsewhere and make you have conviction to buy in a more broad based manner?
Yeah, well, I do think that's important.
I think, you know, we're all looking at whatever economic data that we have, and there's certainly some divertencies between like say Atlanta GDP, which is well above three percent and the softening in the labor market, And it's really about what are the banks seeing, What are we seeing on credit, what are we seeing on lended on lending, you know, and I'll view, we're we're seeing it's still this kind of two speed economy where the high end
is doing well and there's more challenges, especially at the lower end. So I want to see if that continues. We did get you know, Delta last week, which was encouraging talking about, you know, an upgrade to their view based on the high end consumer. So I suspect that continues. But I think it is important And to be frank, we're not selling here. We're sticking with the underlying trend.
But for us to add more to risk at this point, we would prefer at least a little bit of a further pullback or more of a consolidation in time where you kind of chop around and kind of reduce these expectations. This morning, they'd be of a fund survey came out and we saw that sentiment or allocations or the highest since February of this year. That was prior to the setback which was exacerbated by the terriff and certanty.
Keith, when you're looking for catalysts to look at what actually be a pullback in the market to then buy more. Is it going to be this month as the tensions ratchet up between Washington and Beijing.
Yeah, I think I think it could be. And the other thing I've been looking for, Listen, I expect to have a good earning season. You know, one thing, as I mentioned, the north star of this bull market has been earnings. So I'll be really interested to see how stocks react to good earnings. Your last quarter, we went into the earning season and expectations were really low.
There's a lot of us certainty around terrace.
What's interesting about heading into this earning season is analysts have been raising their estimates into the earning season.
That's highly unusual.
Last time we saw that was in for the Q four twenty twenty one. So that just also means we have higher expectations and then it also comes down all.
You know, later on.
We'll come down to tech. Tech's the big part of this. Markeer Wistol bullsh on tech. Longer term, we still think the dominant theme is tech. But you know, I want to see how stocks react to good news because I certainly think we'll have a decent earning season of all.
So, Keith, we have seen these pockets are credit stress. I think we should explore it as well. First Brands, trick a Law, Tricolor. Have we decided which one is Brando Tricolor Tricolor.
If you go south of the border. I think that that's end.
Thank you, that's great, So, Keith, we've seeing those pockets are credit stress, whatever Lisa said, and First Brands as well. Keith, do you think that's a private market issue and the public markets are insulcted from what's happening there, particularly financial institutions. How are you in the team thinking about that situation.
For the most part, we do think it's idiosyncratic, but we have to keep an open mind. We have seen credit spreads over the last week and week or so really kind of rise for the first time in a while. We all know that credit spreads of you know, at the lowest in some areas since the nineties, and you know, Friday, in our view as a portfolio manager, was a good stress test for us to see, you know, does diversifications
still work? I mean, you know, we've got some questions for people why don't I own only tech or why don't I only you know, why don't own any bonds? And what we saw, especially on Friday is a good stress. As we show high quality bonds do well outperform, we show gold outperform, and then we show crypto actually underperformed. So basic diversification works.
Again.
I am paying attention to the credit marks. We have seen spreads move up, not even an alarming way, but something we should at least, you know, at least pay attention to.
Keith, you mentioned the Bank of America Fund Manager survey, and in that survey, it showed that fifty seven percent of all respondents thought that private credit private equity is the latest source or the greatest source of any kind of systemic risk or systemic credit event in the near future. That is the most conviction that we've seen in terms of a potential catalyst going back to twenty twenty two.
Do you agree with that?
Is that where you're looking for potential catalysts for some sort of disruption.
Well, a lot of times the issues in in the overle equity market begin with the credit market.
So is that the most concerning thing? You know?
I don't know, as I think about more of the public markets. You know, we have a lot of companies that have term you know, term dead, they have big you know, cash balances, Earnings have been relatively positive. So I don't know that we have like, you know, a big credit event unfolding here. But we all do know that there's been a huge amount of money into these private markets. They're more more opaque, and I think that's that's something that could kind of creep up more on investors because.
It's just like, you know, we have less information there. I think about, we have less information.
On the overall economy right now with without you know, some of these you know, these economic reports, government reports. So in the in the private credit markets, you just have less information. So when things, you know, start to unravel a little bit, you have less information to understand more broadly what's happening. But again, as I think about more of the public markets, it's not something that at this point, you know, we really see the systemic issue.
Stay with us, multiple IMPERG survanance coming up after this. John Cassidy of MBC Capital Markets Bank with us for a final word on things. So today we've heard from JP Morgan, Goldman City welst fago tomorrow. Morgan Stanley and Bank of America. What have we learned this morning and how does that inform your view of what we can expect tomorrow, John, I.
Think what we should expect tomorrow is the fact that the trading results from Morgan stillly in Bank America are will likely mirror what you saw today from the big banks, which were very good. You know, the FICK numbers in particular year of the year were strong, and we anticipate
that we'll see that for the others. Also, the investment banking results, as you pointed out already earlier in the show, we're also strong and we should expect that as well from Bank America and Morgan Silly and finally on Bank America since they've got a real deep dive into the consumer. The consumer numbers we've seen today, whether it's JP, Morgan City or Wells Fargo, all who were resilient, and we would expect Bank America's numbers to be resilient in any are as well.
And on the call that John was mentioning JP Morgan call the CFO of that bank saying that he's not really seeing any cracks in the credit market aside from a couple of vidiosyncratic areas, and says that for investment banking, all drivers are pretty much in place. I do wonder, though, that what we heard from the Wells Fargo on their call is that middle market clients are still cautious on borrowing.
How much to expect the success to be mirrored in smaller and mid size banks that are going to report that might be more leveraged to those middle market clients.
It's going to be interesting, Lisa, because certainly Wells has got a good read on the middle market of the US is predominantly a US bank, and the regional banks, though, could also benefit from the fact that the capital expenditures that we're anticipating due to the big beautiful bill that was passed in July, with the depreciation of one hundred percent of those capital expenditures in year one, could drive
commercial and industrial loan demand. It's interesting to know JP Morgan's long growth year of the year was seven percent. Wells was much lower, closer to two percent. So I think what you're going to see is that Wells is still coming out of that asset half.
It's going to take time.
They have indicated that and so I think the read to the regionals is still positive based upon what we saw from JP Morgan's long growth.
Gerard, I know that you probably don't want to pick favorites or winners, but so far it is early. Who do you think is winning the earning season right now?
Of the four that came out?
Obviously, JP Morgan's numbers were very strong across the board, so you probably have to put them up at the top of the leaderboard. City's numbers were also very good. They had a higher tax rate, which on the bottom line basis impacted EPs, so he probably put them up second. And then you know the other two Goldman and Wells are tied for third. You know, there's gold, silver, and bronze for everybody.
Stay on the Federal Reserve, Joe Davis a Vanguard Rights the follow up, We expect the Fed to ease once more in twenty five, with October that meeting being slightly more likely to join us now for more Joe, welcome to the program. What makes October more likely given we are lights on economic takes at the moment.
Well, I think it's just the slowdown we've seen in the labor market. Clearly there's a number of forces at work.
We've seen some supply come down materially over the course of this year, but the fact is demand and businesses have held back on hiring too, and so for that reason, you know, our assessment over for over two years is the Federal Reserve has been restrictive, perhaps not as restrictive as something, and so this is really getting them to that elusive neutral rate, which no one knows what it is, but I think their approaching where it should be.
Jomike McKee talked about it, the amount of division on the Federal Reserve. I assume you believe there is a consensus on how to move forward. I'm struggling to identify that consensus given the amount of different views I see in the FED speed What do you see?
Well, I think this is actually somewhat typical of the various fastest the ecomomy you could look at when you're actually close to let's call it appropriate. I mean, you have a GDP numbers that would at the margin say you shouldn't be easy at all. The inflation would point to that as well. But then you've got the labor market that would suggest that you've got to take a little risk management in these policy So I think with that depend upon how policymakers wait those various data feeds. Again,
we're going to have a lack of visibility here. I think that's actually par for the course where we're at now.
I just wonder how much they are prioritizing the labor market if they cut rates by another fifty basis points. I mean, what is the direct read through to actually supporting the labor market.
Well, I think that's the key issue. And actually the gap between where GDP is and where the jobs market is I think is the key issue for the next six or twelve months, because there's the gap close because protivity is starting the rise, and we'll start to see then a stabilization and perhaps the modest firming in the labor market.
That's case A.
Case B though, is that the labor market is simply of weaker growth ahead and then GDP would come down. That's a more recessionary impulse. We lean on the form or not the latter, but it's explaining that gap. That's the critical policy diagnosis over the next six months.
How much is this sort of quietly a federal reserve that is aware of the fiscal sustainability of the United States. And I say this with a lot of questions around FED independence, but this is an issue facing central banks around the world, the idea that there is just so much government debt outstanding that inflation concerns have to be paired much more with fiscal sustainability and paying back that
debt than they do, say anything else. I mean, how much is that coming into play here in the back of some people's minds.
I think it's in the backdrop, but it's increasingly will be in the forefront of the next several years. And you see that in the price of gold, which would seem inconsistent its rise with the S and P five hundred in our framework, it's not. I mean, what we have said for two years is that there's this coming tug of war between AI's transformative ability on a positive side, and then if it disappoints some of the deficit pressures, which again you're mentioning. You see a little bit that
in the so called the basement trade. We are just starting this sort of tug of war, and that is how the market is going to play out over the next three years.
Is that tension Joe air inflation concern is going to be more front and center for the FED at the end of the month, not just because we're going to get the CPI report, but also because the rationing up of tensions and rhetoric and sanctions between Washington and Beijing.
Yeah, I think they're still assuming and I think it's appropriate that although inflation has been sticky, some of the so called dare I say transitory factors are the tariffs, You have to look through some of that. That was our thesis that the Federal Reserve would start to ease policy, and its some one of the biggest rationales for us
expecting it in October, and I think it's appropriate. I think the FED will look at the financial markets, less so gold, but more break even inflation rates, term premium, the treasury market, and that's still somewhat reassuring that we don't have a material inflation problem, certainly not what we had in twenty twenty two.
Too.
The key question comes back to where's the labor market six to twelve months. In a federal reserve that has ease, then there would be a reassessment.
But when it comes to the recent trade rhetoric and the tit for tap between Washington and Beijing. If we don't get some sort of deal by the end of the month and this bleeds into twenty twenty six, how much more concerning does this story become for them?
How challenging?
Well, it becomes certainly concerning. Again, this is not a great shock if you're central banker, if you're an investor, to face right, because you have downward pressure on growth if tariff goes up even from the uncertainty, and you push up the inflation rates. So it's clearly stagflation area. It's a sort of card you don't want to be to have dealt I think you have a federal reserve. That's assuming the inflation is more temporary than the labor market.
There's a little bit of risk in that assessment, but I think that's fair for now. But the drag into twenty twenty six that would be I think unexpected should the trade rhetoric.
Accelerateed this more Bloomberg surveillance coming up after this. So here's the likes this morning, Americans feeling the pinch of the shutdown Stown May. President Trump promising to pay troops tomorrow but holding back checks from other federal workers. And I'm happy to say we can extend the conversation with New York Congressman Michael Laula Congressman. Welcome back to the program sir. The good news the military looks like it's
getting paid. Can you just walk us through how you would characterize current negotiations.
Well, the Democrats refused to do their job. You know, Ham Jeffries talks about getting permission. The reality here is that AOC and Zorn Mandani and the progressive left are who's driving this ship here. Chuck Schumer and Hakeem Jeffries have been petrified to do their jobs, and so they shut the government down for fear of a primary challenge from the left and to show their progressive base that they're quote unquote fighting back, resisting you know, President Trump.
And it's fundamentally wrong. They are holding the American people hostage. House Republicans passed a clean continuing resolution over three weeks ago to keep the government funded, to pay for all of these critical programs, to ensure that our troops are paid, to ensure that border patrol agents are paid. And yet Democrats have voted over eight times against the clean CR. And we'll see what Chuck Schumer and Senate Democrats do today.
But it doesn't look good.
And you know, when I was in Washington last week, I went and confronted Hakeem Jeffries to his face and pointed out that if he's serious about tackling the healthcare challenges in our country, sign on to the bipartisan legislation that would do that. And he refused. So this really is not about healthcare. It's not about a specific policy outcome. This is about Democrats showing their progressive base that they're fighting back against President Trump. Meanwhile, look at the juxtaposition.
President Trump on a twenty four hour trip to the Middle East secured peace and Democrats are playing patty cake here in Washington, DC, shutting the government down and holding the American people hostage.
Well, were two weeks. There's going to be some off ramp at some point. Would you support structural changes to the Affordable Care Act premium subsidies in exchange for an extension to get the government.
Back up and working well.
To be clear, the off ramp is the clean cr that's been sitting in the Senate for over three weeks with respect to the Affordable Care Act number one since Obamacare took effect in twenty ten, you've seen premium skyrocket across the and Democrats put in place these enhanced tax credits during COVID. They were slated to expire at the end of this year. Democrats knew that they passed it into law, and they knew that they couldn't extend it beyond that period because of the cost associated with it.
I have signed on to legislation to extend it by a year because we don't want Americans' healthcare premiums to spike. But it speaks to the fundamental problem with Obamacare, which is that it didn't actually do what it was intended to do, which is reduce health care cost in America, and in fact, it has exploded since its inception. So look, I am open to obviously solving the issue both short term and long term. We have to address the cost
of health care in this country. But Democrats just you know, pounding their fists on the table, stomping their feet and demanding their way is not the way to govern. You don't hold the American people hostage. And by the way, don't take my word for it. Go look at every quote from Chuck Schumer, Hakeem Jeffries, Nancy Pelosi and name
the Democrat. They all previously believed that you don't use government shutdowns to exert policy outcomes, and now fundamentally they have changed their view because Donald Trump is president.
Congressman. Also being held hostage right now is data which the financial services industry, the FED, we all rely on. You are on the Financial Services Committee. Do you think the White House should deem the BLS data like the jobs report we're still waiting on essential.
Look, obviously that information is critically important for the FED and others to do the work that is required. But this is the fundamental challenge. They're trying to figure out how to pay for, for instance, are troops, which is vital. They're trying to figure out how to pay for critical programs like Wick and Snap and so these are the very difficult decisions that any administration is put in because
of the incalcitrants of my Democratic colleagues. Here. Look, I've been opposed to government shutdowns, regardless of who has tried to do it. I criticized my Republican colleagues last Congress when some of them wanted to shut the government down over Joe Biden's disastrous open borders, while I agreed with them on the merits. The fact is shutting the government down wasn't going to solve that problem. And the same applies here. What the Democrats are doing is creating more problems.
The FED, to your point, needs to be able to do its job. They need to cut rates. They need the information with respect to jobs for instance, that is critically important. So yes, we want them to be able to get that information. The fastest way for all of this to come to an end, the fastest way to ensure that government does its job, is for my Democratic colleagues to go back to Washington today in the Senate and vote yes to open the government up and pass the clean cr The.
White House has also taken aim on projects in New York City, eighteen million dollars worth of New York City infrastructure projects. You are in a swing district and you are facing a lot of challenges. A lot of Democrats are lining up to try to flip that seat come the midterms. Are you concerned about potentially the pushback you're going to get from things like this billions of dollars being frozen right here in New York.
Look, I've already spoken out against the freeze on that project, and I've been in touch with the administration to get that project back up and running. Are they going to But again, the fastest way to do that is to pass the clean cr And that's the point that I've made over the last week to my New York colleagues to the press that these projects can easily come back online when the government is open and running. Gateway is a critical project for my district. We don't have a
one seat ride from Rockland County where I live. Gateway will provide that. So this is a critical infrastructure project, not just for New York City or New Jersey, but for the region. But this is something that I've fully supported in terms of getting the funding for that project and will continue to fight to do it. But again, based on conversations, it's not that hard to figure out if you open up the government, a lot of this stuff will be resolved.
This is the bloomberg S Events 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 always on the Bloomberg terminal, The Bloomberg bars this out.
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