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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. We're stock centering lower
with the slower earnings on Deck. Drew Madison met Life, writing in the absence of government data, the only information we have earnings mediocre. Nominal growth expectations are out of sync with earnings expectations. Drew joins us now for more, Drew good Mornick. Does something have to give?
Something does have to give? Now what that's going to be? I'm going to guess it's going to be markets, because it's easier for markets to give than is for the economy to give. And if the economy gives, it's probably not giving. An unexpected acceleration and activity.
This is just one contradiction. There are many more. We talked about lots of them. Employments dropped away, retail sales that's been really robust. People are still talking about a so called K shaped economy. Upper income okay, lower income struggling. Is one catching down to the other or the other going to catch up to the top.
Well, just because someone's spending when they have money doesn't mean that they're doing fine. It doesn't mean that they feel like things are going to continue to be good. And when you look at the details of how income expectations are changing, particularly real income expectations, so accounting for the inflation component which you see, is actually that the upper income is beginning to feel a lot of pressure.
I don't know whether it's what they're buying is just going up in price more aggressively, or whether they are beginning to worry about their jobs a little bit more. I suspect it's a combination of both.
Where are you seeing this in particular?
And I see this as we were looking at airline earnings, for example, and a lot of people are shelling out for those premium cabins.
They show out for the premium cabins, but those premium cabins cost more, and so they're actually seeing their lifestyle requires a much more expensive payment structure now, and so then they have to give in other areas. And so what we're actually seeing is when you look at spending, for example, goods versus services, people are beginning to actually cut back on spending on services. And those are the
things that you never cut back on. And so typically, if you're not buying a cup of coffee in the morning, you're not going to go out and buy a car in the afternoon. It just takes a little while for that to catch up across the income spectrum. And what we're beginning to see now is that upper income tier
is beginning to feel pressure. They can still keep spending, but the pressure builds, and it means probably that you'll see the savings rate begin to decline, even though it probably should be rising based on where interest rates are.
And maybe we'll get a holistic look at this when we get retail sales. Oh wait, we don't have any data coming out of the government. There is this feeling right now you need to parse through the earnings to
get a better sense of it. Has there been anything in the earning so far that has ratified the view you have, or are there a couple of earnings reports that you're really keyed into to give you the ultimate sense of whether this really is the reality, this weakening in even the upper echelons of income owners.
I mean to be frank, no, but I mean that's why, you know, That's why I get to do what I do, is because I have to make decisions based on kind of the limited amount of information that I have. What we are paying very close attention to our Federal Reserve surveys, you have to pay attention to the page book, You
have to pay attention to the earnings reports. But even the earnings reports can see people transitting from one, you know, one kind of product to another, right from beef to chicken or from you know, who knows what people like anymore. I don't understand actually what people I am not the average consumer, and I am readily willing to admit it. And my tastes are not everyone's tastes. So it's hard
to kind of figure out which direction everyone's heading. But I do know that people are shifting from what they're used to doing, and when people are ship thing from what they're used to doing that's happening because of a reason, and that reason typically isn't good. People are creatures of habit. They like to do what they did yesterday.
If the high end consumers under pressure, what kind of economy are you describing, Because everyone continuously says we're in a K shaped economy. What you're describing does not sound like a K shaped economy.
So when you do economics for long enough, which you realize is the top ten percent spends no matter what, the bottom ten percent spends no matter what, and there's the cohort in the middle is actually the one that moves around their spending because they've got some saving, some potential for savings. And so you really have to watch the movement into and out of the savings rate and whether or not people are feeling like they can spend
money now. It gets complicated when inflation is present because oftentimes the way people make up for the increase in prices, at least initially is by cutting back on their savings, right, even if they're feeling a lot of pressure or worries about their job. And so things begin to break down. Those relationships begin to break down, and so you know, all the people using AI to model the economy right now,
you know, it's a big new thing. Those models are incredibly complicated, and what you're going to see is that the coefficients on the front of each of each variable that you can use are probably shifting around, and they might be canceling each other out, and so your whole
model might be breaking down. And you're probably not going to recognize that if you're using models that are to advance rather than looking at individual components of what's happening and the relationships between, for example, savings and interest rates.
What are you most looking at this week next week when it comes to earning season to really understand how much that high end consumer is underpression.
Well, as I said, it's difficult for us to kind of look at an individual company and figure out what's going on. Upper income consumers are going to continue to spend on things like airfare. They're going to continue to go on vacation. The question is are they going on vacation and instead of going to Europe, they're going to California, or instead of going you know, they're taking the slightly
less expensive option. There are doubts. You know, everyone's got a lifestyle and certain things are downgrades for certain people, and it's easy for us to all kind of laugh about it, But for these people, it's actually a serious change in their lifestyle and it affects their perception of what it means to be rich. For example, what's it mean to be rich when you actually have to think about the airfare?
Right?
These are people who are not used to thinking about how much they spend on airfare. They're not used to thinking about, gee, you know, like I really like that hotel. It's in the center of the city, and it's my favorite hotel, because they have a favorite hotel in Europe, right, and now they're thinking, well, I can't afford my favorite hotel in Europe. I have to downgrade it. Actually, it comes with us as social costs. You don't have to cry for these people. Their lives are still really good
and probably better than a lot of people's. But you know, it doesn't mean that they feel as good as they used to.
Banks not failing as good as they used to.
Often last week, let's talk about the financial with sion in the pre market is up by two point five percent. It was the focal point of a lot of people last week coming out and basically revealing some losts is tied to potential fraud. This isn't the first time we've seen this kind of thing. We've seen some other credit issues as well. You've got the credit issues on the one side and then radly robust standings on the other side,
and we saw that from Zion overnight. How are you and what is your perspective on what is happening right now in this sector?
Well, so people are nervous. If you look at credit markets, spreads are incredibly tight. So you're in this weird world where all in yields are okay. Right, you can get paid for is okay, but the actual premium you're getting paid to take risk is actually maybe a little too low. And so I think what you're seeing is just a nervousness around the economy that we don't really understand that everything's okay. We're waiting for that next shoe to drop.
Jamie Diamond, you know, put it famously. What he's really expressing is not that he sees anything, but that he's expecting something. It's kind of like you live in an apartment in New York City and you might never see aproach, but they're there. You know they're in the wall, you know it, right, and so you don't food out. You do a whole bunch of different things when you live
in New York. You know, there's things that you can do in suburban New Jersey where I live that are okay because you're not going to attract to animals act quickly. But if you do it in New York City, you're
basically stunk. And I think the risk is is that people are really focused on, you know, what they're not seeing, And the fact of the matter is is with no economic data and with you know, earnings kind of you know, being okay for the most part, they're nervous that they're missing something, but they don't know what they're missing.
It's actuary. Where are we?
Are we in a grand house on Murray Hill infested we conchroaches? Are we in a nice Soho apartment?
What is this? We might be trading down from a Soho apartment to something on the Upper East Side?
Okay, does that mean you're de risking?
We've been.
We've been de risked for a while now. I mean to be honest with you. Since COVID, there have been kind of you know, there's been kind of one risk after another after another. Uh. And you know, to the extent that we've been able to kind of go up in credit, we've been going up in credit. I don't think that's a surprise to anyone. And I think you
know everyone who's able to has been doing that. Or you've been looking to things like privates where you're taking maybe more liquidity risk which you can more easily define, but getting less credit risk on most sides of it, if you're doing your underwriting properly.
Stay with us. More Bloomberg surveillance coming up after this.
Let's turn back to warnings Chairs of General Motors jumping after the company be earnings and race guidance. The GM CFO Paul Jacobson joined us now for more all the stock is up by more than nine percent. We'll spend some time talking about the numbers, but I just wanted to take a step back with you, just for a brief moment. You've got real experience navigating volatile industries, experience in the airline business, and experience in the automaker business too.
You took over a CFO in the pandemic. Can you talk to us about this year, Paul? Just how agile have you and the team needed to be and how volatile have things been too?
Well, Jonathan, first of all, thank you very much for having us. It's a great day to be a GM and celebrate the success of all of our employees and partners worldwide. So really appreciate you being here today, having me today. So you know, at the end of the day, it's just another change. I mean, since coming to GM in twenty twenty, we've gone through COVID, we've gone through chip shortage, we've gone through tariffs, we've gone through ev pivots and so on. But what we've really tried to
do is create a model that is resilient. And when you look at our balance sheet, you look at our inventory discipline and the way we've gone to market, there's a lot of things that have changed that allow us to be able to react to the world around us faster, and I think that's paid the way for us to have another really strong year in the face of a lot of macro changes.
Pulled in order to increase resilience and maybe agility, Do you have to sacrifice long term planning?
Is that something that becomes harder?
Well, you know, I think what we've really done well as a team, I think is we've kept focus on
that long term vision. So you know, for example, while we've taken a charge on reducing some of our ev capacity reflecting the demand that's out there, we still believe that evs are the future and we think that there's an opportunity for us to take a little bit of a pause in demand growth that we've seen over the last few years, structurally improve it, right size our capacity, and make sure that we can be successful as more
and more customers adopted. So it's just an example of how we make sure that we're managing the short tem within the face of that longer term vision.
So what of the big steps Paul, that you've taken in order to remain agile, particularly with supply chains and removing any kind of direct input from China in particular, how much have you rejiggered where you get your goods?
Well, I think we learned a lot in industry from COVID and a focused supply chain that was really susceptible to individualized shocks, and I think we've taken the effort to try to make sure that we diversify our supply chain base We've made a number of investments, for example, in battery raw materials and other materials in the US, in addition to the four billion dollars that we've announced
this year to increase our US manufacturing capacity. So I think it's been a case of making sure that that's balanced. And then when we went through the chip crisis of twenty twenty one, there were some more challenges about making sure that we expand the places where some of our chips are fabricated and our supply base that we use.
So this has just been part of it. I think we've learned a lot of lessons over the last five years that have helped us and positioned us well to be able to thrive in ever changing circumstances like we see right now.
All this costs a lot of money, and I'm just trying to get my head around.
We've all been trying to get our head around.
Where it comes from these extra costs in order to rejigger supply chains to offset any kind of increased costs that might come along the way. How much is coming from whether it's freezing labor forces or trimming around the edges, how much is coming from higher prices on consumer vehicles.
Well, I think if you look at what GM has done, we've saved a lot of money by rationalizing our inventory balances. So we used to keep probably about forty percent more inventory on the ground at our dealerships around the country, and we've cut that down. That frees up a lot of working capital to be able to invest and redeploy back into the business. But it also makes sure that we can change much more quickly to changing demand around us.
So our pricing has been stabilized, and I think that's given us a little bit more comfort to invest a little bit more than what we have historically, but still making sure that we're very disciplined with our capital allocation because we still have opportunities to pay down debt and also return capital to shareholders. So it's that balanced approach that I think has really paved the way for our success.
Paul, you and your colleagues in the industry recently had a big win in Washington, a little of reprieve when it comes to the arrangement on the timeline for the tariff costs for imported auto parts. What else are you asking in terms of terrorfully from Washington?
Well, you know, I think I want to praise the administration for really listening to the concerns of the industry and making sure that they're helping us to be positioned to be really successful as one of the largest US
industrial producers that are out there. And the announcements that were made Friday essentially take what had already been done by the administration in the spring and expands it a little bit to be able to use those MSRP offsets on a wider variety of parts that we're bringing into the country. And as a result of that, we were able to lower our total tariff forecast for the year by about half a billion dollars from where we started
the year. And I think it's that proactive partnership in terms of really making sure that we can remain competitive and help to drive more investment into the US, which we've done.
Do you expect more reprieves, especially as the US goes into negotiations next year with Mexico and Canada.
Well, I think what we're looking for is a little bit of stability. Obviously, this year has been a bit of a transition year for US. The handshake deal that we have with Korea. We're really eager to get that finalized. We do have some production of some of our lower cost models in Korea that help with some of the affordability concerns of our consumers here in the US, but also obviously Mexico and Canada are going to be really
important to us. But as we look at those deals being finalized and we start to look into twenty twenty six, we think that there's actually an opportunity for us to do better in twenty twenty six and we've done in twenty twenty five and start to work our way back up to those eight to ten percent targeted margins that we set for ourselves before the tariffs were put in place.
Well, just find me. Can we stay on Ja and finish on China?
Pull?
For a long time we've said on this program, this must be the most competitive market on the planet in any industry. How difficult is it to operate in that country right now? And how much hard is it going to get in the future for you as sort of make us like yourself.
You know, about a year ago, Jonathan, we undertook a pretty ambitious restructuring program in China with the realization that you know, we were probably not going to be as big in China as we have been historically going forward with the amount of just tremendous competition that's in the country going forward. But you know, together with our partners, we were able to restructure that business and we've been profitable every quarter this year and look to be able
to sustain that. So it's really about making sure that we're right size for where we are. We've got great products over there, we've got a long legacy, and we've got a good partnership that I think has really paved the way. And with that work that the team did in China, really proud of what they accomplished and think we can be sustainable there.
Stay with us Multplomberg surveillance coming up after this, but it's around a table. Monica Querra of Moreke and Stanley Monica, good Mornic, good morning. China is flexed and is flexed, and the whole world has listened and arguably maybe even brought the likes of Australia and America closer together. Was that a strategic mistake going to get to negotiations like to this month.
I think what's interesting about this deal is that China's response was actually constructive on paper, right. They were actually positive saying, you know, yeah, the join the party on on rare Earth. That was really surprising to me. That tells me that they're not worried that takes. It's going to take at least five to seven years, maybe longer to have this whole initiative ramp up. A lot can change in that time. Doesn't mean that this isn't going
to be a positive for the US. I think more, you know, players at the table is ultimately long term of benefit. But this isn't a zero, you know, end game year.
So going into this meeting, it sounds like do you think China has.
To leverage I would say that both parties right each other when we're thinking about our combined economies. They don't want to one hundred percent tariff on all of their goods. That's an issue for them, but they don't really need to worry about this move on rar Earth. I think that they're going to be focusing on the other components.
China is still.
In charge of ninety percent or more right of that market, so this isn't a now issue. It's going to make them have to focus on all these other factors that could impact their import export relationship.
To Jonathan's point, China.
Though, flexing its muscles on rare earths, is it giving the Trump administration an excuse to continue making these deals where they take outright equity stakes in mining companies.
I'm not going to speak to that right to that piece. I think you know, we were all surprised by the other outright stakes in US companies. Now, as far as the mining company component, we're going to continue to see foreign direct investment right directed out of the US in order to make these deals happen. What's going to be interesting is as we build out our relationship with Australia and China, it's like, where do we land on that
on that final tariff number? And I think that again, when we go back to actually the beginning of the year, that you could see something that's in that thirty to forty percent range.
If we're going to go back to those campaign promises.
Do you think that's where we end to China, say twenty twenty six, we're kind of there now on some product, on.
Some products, I think you know, you could see an
increase on those Section three oh one tariffs. You could see more on you know, Section two thirty two The other piece here, right that we have to really appreciate is the US's reliance on that tariff revenue from a fiscal policy perspective, and the fact that we're in the middle of trying to even determine if we can have the IEPA tariffs in place, and once we get that, it's going to be that patchwork on Section three oh one, Section two thirty two and others to try to make
US hold from a fiscal policy perspective. So I would say from China's lens, yes, maybe they have. They definitely have the advantage on rare earth. Is there some at stake for them big time right when we're thinking about that relationship, But the US also has to think about their fiscal policy future and trying to find that sweet spot.
So given that concern and that hang up and that frankly support to the debt market, how much of a risk case is it It's Supreme Court over rules the tariffs that have been put on and forces the administration to scramble and cobble together another sort of regime of tariffs to plug that fiscal gap.
Well, they're already working on it.
So for example, Section two thirty two teriffs, you have to have studies put in place. Those prior to the shutdown were in the works, and so I think we need to get through this shutdown period in order to see some of those puzzle pieces come into play. I think markets are right to assume that there will be some terraff for revenue coming in at the end of the day. It's just how much. And that's going to
be the big question. If you get a negative ruling, there will likely be a market response, right, that's natural. That's going to be a normal course of action, but soon to be backfilled with all those other tariff pieces that they've been working on heavily.
We got GM earnings earlier this morning, and it showed that the tariff mitigation plans have been working and have offset a great deal of any extra cost. In general, earnings have been pretty positive across the board. Is the takeaway that the tariffs are manageable and that frankly, companies are adjusting and adapting, and it wasn't a big as big.
Of a hit.
Even if the tariffs go in and remain as such, it's not as big of a hit for the underlying profitability momentum of the United States is expected earlier this year.
I think that the full pull through right of impact of tariffs hasn't been seen yet. So while I think that the GM reporting is a positive sign that we're finding a sweet spot here, one of the key things we have to focus on is this patchwork component of tariffs and what that's going to mean for the consumer
in other areas. So while they might have found that sweet spot with GM and the auto industry, can they do it across the board When we're thinking about all goods and services that's to be seen, and you know, we'll get more information in November.
What channel are you in a team focused on prices or through the labor market cost cuts?
We're focusing on labor market right now, especially as it relates to the shutdown, because this is a really interesting period. Typically, when you have a shutdown, people get laid off and then they get brought back, and so that furlough period essentially get made a whole doesn't have a major.
Impact long term.
Now this is different because we don't know how many employees are actually going to be brought back, and so that could have an additional drag, especially when we're thinking about those inflationary factors.
Stay with us.
More Bloomberg surveillance coming up after this trader is locking in beds. The fat continues. It's easing cycle at next week's rate decision. El Davis OFBIMO seeing an increasing chance of a fifty basis point rac in December, saying the opackness and lack of transparency in private credit could be used to accelerate pieces. Oh, joined just now for more. Welcome to the program, buddy, So let's skip off toe. That's done, dusted. What's on the table for December?
Well, December, our base case is still twenty five basis points. We just see the chance of a fifty has increased dramatically. And the reason why it's increased dramatically is because we've moved our possible terminal rate. We saw terminal around three percent, slightly higher than the market, to two fifty. And the reason why we see we've lowered it so dramatically is
because of you know, your tricolor, your true rant. Basically, private credit in general, we believe that the private credit where the opaqueness comes in from, and the ownership of it, it's usually real money, pension plans and light so it's going to be a slow, sleeping, seeping credit move wider like things of wider. So it's binary whether they go fifty, but we see an increasing chance of fifty.
Do you believe them based on the credit risk that you describe. Do you think it could lead to a broader tightening of financial conditions temporarily?
Yes, we do believe it can. We don't believe it's systemic. And the reason why we don't believe it's systemic is, as I said, most of the holders of private credit are real money, so they could take the losses liabilities. They still have the liabilities to deal with, so it does have impact on the economy, but they could take the losses. Having said that, why we see it as a possible increasing chance of fifty is it basically took
the safety off the gun of fifty eases. And the thing about fifties is central banks just don't do one fifties Otherwise they wouldn't do it. So that's why we lowered our expectation per terminal to two fifty by the end of twenty twenty six.
So I hate talking about cockroaches this early in the morning, but there is sort of this irony that the reason why there are these fears of credit problems is because of the prolific FED policy that has enabled this, and the fact that monetary conditions used to be a lot lower to allow a lot of credit creation that may
have overlooked a number of different underwriting standards. I'm just wondering if there's a bit of moral hazard here, the idea the economy isn't cracking and that the FED could respond to concerns in credit that we're done in pretty easy financing conditions.
Yeah, we believe.
I don't know if i'd use the word moral hazard, but there's definitely inflation hazard risk because you know, it has in our growth despite what's going on in credit. Our growth expectations have not changed for twenty twenty six, and it's because you know, big beautiful bill everything people are hearing, and we think it's very supportive of growth
and growth will still be good. So then you're going to be in a very easy financial conditions market and we think there's a big risk for inflation, but the market's not focused on that. We're not focused on that right now. We think that's a late twenty twenty six story. One of the interesting things about inflation though, we do get a print Friday, and if we do get a higher than expected print, the market, you know, credit will widen,
duration will go higher. We think that's temporary. We would use that as an opportunity to go longer duration and to go longer credit because we think the fifty base point eases are very much on the table.
So if inflation is still a concern EARL, how do you get conviction to go into long term rates on FED cuts that affect the front end of the yield curve.
Yeah, it's very easy. As I said, you know, I've been in this market for thirty years, and one of the things what the market is, it only focuses on one thing at a time, and right now inflation's not the focus. So it's determining what is the catalyst to get inflation back on the radar. And there's basically two catalysts. One is employment, Employment starts improving. We don't expect to see that until twenty twenty six, and you know there's
no data or Tier one data coming out unemployment. And the second thing is geopolitical And what I mean geopolitical is an oil price spike that will see coming and we'll be able to adjust positions accordingly. And the reason why I say we'll be able to adjust positions accordingly. In a higher yield bear market, you don't get you yields higher by two or three or four or five basis points a day. You get yields hired by fifteen
or twenty. Once you start getting a sense of that with a catalyst either being oil or employment, when that starts coming out, that's when you adjust duration to reflect that. Right now, it's an easing environment. There's no catalyst for that to turn, and our terminal, as I said before, has gone lower, which changes our view integration right now.
Oh well, the government shutdown force the market just to focus on inflation.
That's the data we're going to get.
And what you hear from Washington is that they're expecting a prolonged shutdown, even potentially having congressmen and women come back to extend the date on the continuing Resolution because they're hunkering down for a long shutdown.
Yeah, the market will focus on I think that's fair, but it won't be persistently focused on that because you'll get central bank speak once they're out of the blackout period or at the FMC meeting, and you'll get you know, people focusing back on employment, you know, and that's why we see it as a buying opportunity because that focus
will be very short lived, very temporary. So so yes, it we'll focus on inflation, but you know, everyone's made clear that employment is the thing that the central bankers are looking at.
Oh Davis, could I say one more thing?
It's one more.
Twenty seconds, so you can absolutely.
Gold blue Jay's goal.
NUS.
This is the Bloomberg Survandans podcast, bringing you the best in markets, economics, angio 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 app.