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Terminal and the Bloomberg Business app. Towston Slock of Apollo saying ten tail winds are increasing the likelihood that the FED will have to reverse course at its November meeting. Ensure the no landing continues. Torson' whe us around the table, Torston cad Mornic. When you say reverse course, do you mean pause or start gown the other way?
I mean pause?
You mean pause? Okay, share the ten tail winds with.
Us well, So the key tail winds, of course.
Not a memory test.
Pick five.
That's a lot of things that are supported for of course, first of all, most importantly, when the FED turn stubbage, financial conditions begin to ease. This has been a very strong tail in just in the last few weeks since the September meeting. Second, of all, underline the growth outlook, we also have the Chips Act, the Inflation of our Check, the Infrastructure Act. Those are also very strong tailwinds that
continue to provide support to construction of manufacturing facilities. We also have, on top of that a lot of spending on data centers on AI. I have not met anyone who is saying, oh, I'm not going to build a data center because the FIT just raised race twenty five basis points. On the contrary, this is a structural force. It doesn't matter what interest rates are doing. At the same time, we also have at the highest level, stock markets are rallying, credit markets are very tight, and at
the same time, consumers are still very strong. So overall, the tailwinds in the form of what will the outlook look like for the next level quarters just continues to not be surprising. Why we're getting still two hundred and fifty four thousand jobs. Why GDP growth in the second quarter was three percent and Atlanta VEGDPN now for the third quarter is three point four. I mean, you really do begin to ask the question where is to slow down?
And as we've been debating before, is monetary policy really restrictive? If it is so restrictive, why is the economy still doing so well.
They don't just believe it's restrictive. They believe it's sufficiently restrictive to get inflation back down to two percent of a certain period of time. Do you have your dance then.
True, Well, it becomes a bit of a semantics of what exactly does it mean, because it was for a long time the argument that when the fit funds rate is where it is at the moment at five percent, and if we're supposed to go to our style, which is three percent, that must imply, if you have that model in your mind, that we have very restricted policy.
But the incoming data across the board, if you look at the daily data on your Bloomberg screen for how many people go to restaurants are still very strong, how many people flying airplanes? Daily data also very strong. Debit card spending on my Bloomberg terminal, also daily data very strong, weekly day for retail sales strong. The number of people who are at the moment spending across basically most categories of consumption as we saw in the retail sales report
week also very strong. So in that sense, it's not even the case that there was a slowdown last week. It's still the case that things are still chugging along very nicely.
That said, you are seeing in surveys and talking to different executives that they're not really planning on hiring mass groups of people, that they're actually allowing attrition to shrink their workforces. You are seeing signs that there is sort of evening out in the labor front, and that seems to be the big concern for the Federal Reserve that sees that as a slower moving ship. Why do you think that isn't enough to really create a landing.
Well, if you look at the Chatlender Grand and Christmas survey of the announced job cuts, that's still very low. This is a monst the series where they go out and ask companies, are you're planning to do mass layoffs? And the answer to that at the moment is there's no increase in mass layoffs. In the dual survey, the layoff rate, meaning the percentage of people who lose their jobs,
is at one percent. So total employment in the US is about one hundred and sixty million people have a job, so the layoff rate means that one percent get involuntarily fired every month, so that's one point six million people. But that's been very flat for the last two years.
There's no increase in the lay off rate. So in that sense, there's a lot of worries, and there's certainly a lot of things on the horizon, including election, to your political risk, other things you can begin to think about. But the bottom line still is that the incoming data, it just continues to show that the economy is doing just fine. Job as claims, we had some hurricane issues,
but look at the next non found payrolls report. If we do get that at one hundred and fifty or two hundred thousand, we could easily get a scenario where they fit will basically have the reverse course and begin to stay on hold.
Are you saying that you're completely discounting the next jobs or forth that we get.
So I will say that I think the pain trade for the market is that if it's a lot better, because everyone is expecting it to be bad now, So that's why if everyone is speaks to be bad, then then well that could either be the economy slowing down or could be the hurricanes. But imagine if that comes in at one hundred and fifty or two hundred, then I think the market will say, whoa, maybe things.
Are not that bad.
So I think taking the totality of the data the mostsake of what's going on in the incoming data, it still tells me that we are in the no landing scenario. It's just really difficult to argue that Marsterrypolsi is restrictive.
How many moments of this do you need for the Federal Reserve to come around? See your view of the world. It's November seventh too early.
So I do think that the next employment report obviously is very important, but I think that everyone is expecting him now to be bad. So that's why I think it will not take much more than a little bit better than expected in poor report.
By the way, because you said one fifty might be sort of the pain trade.
Well, as you know from Tara Watson and Andy Whittlberg at the Handlson Institute at Brookings, they have been quantifying what is the level of employment growth that way, I've had so much immigration, and their estimates have said, well, we should be more like two hundred thousand. Now the question is, well, if we do get one hundred and fifty, well,
that would certainly be below that. But if you're correct for hurricanes and all the other things that are holding things down, well, then I would say a good report would certainly be even something at one hundred and fifty. Bad would be below one hundred thousand. But at the moment, again, the totality of the data that comes in, it completely justifies both why FITS pricing is changing and also why long rates are going on.
John asked a question about potential reinflation, which I think is a really important one because even as people see all of this robustness, they still see prices on a year over year basis continuing to come down, And that alone is enough to justify some of the FED moves. When you take a look at the panapoly of potential
policy that we could potentially get. When you start talking about manufacturing more in the US, when you start talking about tax cuts, how much does that actually feed into inflation? What are you models looking at?
Well, what's most important is what is the fiscal impetus? In other words, how much does it support GDP and Of course, if you look at it from the broadest perspective, the Trump tax cuts that are running out by late twenty twenty five become very important in that discussion. But that's still quite some time and way only in twenty twenty six. So the story here and now is still in the very near term that we still have tailwinds from the fundamental reasons why the economy continues to do
so well. But to your question LeadSA what really becomes important for inflation is that if this easing that now is being signaled by the Fed begins to mean that we still have more job growth, we still have more weights growth, which are very important drivers of housing demand. That means that the forty percent of the CPI basket that is housing, if that begins to reaccelerate, then we could have the risks that that inflation begins to move
higher again. So that's why we're watching very very carefully what's going on in the housing market at the moment, because there's already a number of indicators suggesting some most signs of life which could potentially begin to be that problem that inflation could begin to move higher because of housing inflation moving high, is that.
Just a vicious cycle. Basically, people think the Fed's going to cut more, so they start to potentially look at maybe getting on the property ladder, maybe going out and getting construction done on their homes.
Well, the FED has since December been signaling that now rates are going down. The pivot in December of last year was certainly after having said for several years rates are going up, up, up, So now say rates are going down and at the same time, the key drivers of housing demand, of course, are three things. Mortgage rates, of course they are a little bit up now again. But the two other key factors are wage and income growth, and at the same time job growth and waste growth,
and job growth still doing fine. So it's not prising that we're seeing the housing indicators begin to show more signs of life.
Let's talk about fiscal policy. You see in the bond market today. Some people come on this program saying this is down to a Trump trade.
Do you believe that. Well, if you look at your Bloomberg screen at the term premium both from the San Francisco Fed by YenS Christensen and also the New York Fed term premium, they have been going up quite a lot. And when it is start to go up. It started
going up exactly after the last employment report. So in that sense, I would say that most of the rise in the term premium we're seeing here, meaning most of the rise of why is it that people are now bidding higher rates to go up and why is the ould curves deepening is because of this issue that people are looking at it from that the business cycle is
simply a lot stronger than what we thought before. So there's probably a lot of people that are squeezed out of the short view, meaning that the economy is going down and maybe it's now not going down and therefore rates have to go up. But there's probably also a lot of people that are beginning to come to the conclusion that, hey, maybe Martins Harry policy is not as restrictive as the Fed has been saying, and as the market has been selling itself for quite some time.
Tour certain in your scenary or your look at the world as it is, does that mean that where rates are, even if they go to four and a half percent on the tenure, you could see a sustainable rally in equities that essentially this is a less bond sensitive equity market than a lot of people.
Think, well, I do still think that corporate earnings actually are still doing quite well. What really is the key issue for investors this here is that if yield level is higher, that means that private credit will continue to give you high yels, fixed income will continue to give you high yels, and for investors an asset allocation, the key message is we are not going back to zero.
So therefore capalis structures that were put in place when it's just raised for zero will continue to be vulnerable. Or put in different words, companies that have earnings continue to be attractive, both on the debt and on the equity side. And the reason why that's important is that that also means for equities that this discussion about small cap relative to large cap will continue to dominate the debate in the equity space because small cap will continue
to be vulnerable if rates are higher for longer. Because again, if I have a company with no revenue, no cash flow, no earnings, of course, when my debt servicing cars go up and stay higher for longer, of course I'm going to get in trouble before other companies that actually have earnings.
So that's why it is all about investing in companies out of earnings and looking at it both on the equity side, and that's why those parts of the equity and private equity world where you invest in companies with earnings will generally you tend to do a lot better.
Towston, this was a clinic. It always is. We appreciate it. We've had a healthy debate over the last few months on this topic of the data's moving your way, that's for sure. Towston's slock there of Apollo, Brent Shuley of Northwestern Mutuals saying this, Well, it maybe months before we know if the FED is able to cut rates fast enough to resuscitate weak areas of the economy. The bifurcated nature of the economy brings with it risk, but simply there is less room for error when only a fraction
of the economy is healthy. Brent joins us now for more brand welcome back to the program. Last time we had this conversation, we were debating whether this FED is too late. There are people around this table now saying that maybe this FED was too early. What'd you say back to them?
I think that highlights a difficult path going forward for the FED. Look investors, are way too optimistic that the FED is going to cut rates in a nice, neat and tidy way. There is the possibility they cut two rates too quickly, the possibility that they cut rates too late. They don't know, We don't know, and I think that's where the risk are is if there is the chance that the FED has cut too early already and that
inflation pressures are coming back. The narrative was the FED would cut rates, everything would be well, and it would alleviate the interest pain on certain parts of the economy. Well, the FED cut rates in the tenure Treasury sixty basis points higher, which has pushed mortgage rates higher, which has made housing more unaffordable for most every American in the country.
So, Brent, beant if you want to buy a house, where does it leave the equity market. You've a cautious last time around. You've a cautious on launch camps. I believe sol any more bullish on smalls. Has that changed?
No, that's the irony. I mean, you've had a bifurcated economy and a bifurcated market. At some point we have to get back to equilibrium. How do we do that longer term? I think is the question, and do we need a recession to do it, which historically has been the way.
That you've got an economy back into equilibrium.
I think the irony is there's opportunities in small and midcaps because yes, they are interest rates sensitive. Who doesn't know that. I could say, stay in quality for a while and it could continue to work. But think about the other side. What happened in July when we thought the other side was coming. There was a ferocious rally and small and mid which are historically cheap, And that's where I think any investor should think about right now.
Given that uncertainty, look to valuations, which tend to matter more over the intermediate time period as you're guiding light and guiding posts.
And that's where we're positioned right now.
Bret.
I'm trying to put these two things together, and I'm a little bit confused because if there is this risk of no landing and inflation being stickier than expected and frankly longer term yields rising, if the FED cuts more, why go into the more interest rate sensitive stocks that actually hinge and do better when you get more FED rate cuts, which don't seem like they'd be in the offing given some of the better than expected data and the performance that we've seen in bonds are.
Look, at the end of the day, the Fed knows how to get inflation down. It knows how to kind of stem inflation overall. We saw what had to happen back in the eighties. To me, it's always about what
happens next in marketing and what's not priced. If you look at nineteen ninety nine two thousand, which I think is a perfect example of where we're at, when the market was concentrated and we were in economic cycle, over time, you actually saw a small and middew better into that recession and thereafter because they had already priced in the fact that it was likely we're going to have a recession.
And that's where I think we're at right now.
And that's where I think, thinking beyond the next three six and nine months and thinking out to the next two three five years, that's where I.
Want to be a positioned because no one's thinking that way any longer.
One thing that you point out is and you keep saying, is valuations. That's one of the main drivers for you right now. Given how high valuations are, particularly in large caps. That's the area you like least. Why is an argument not valid? Would say investment grade bonds where spreads are pretty tight and valuations are pretty full.
So it is.
I mean, look, I agree longer term interest rates are likely to be higher, but I think the path is lower at some point, just because I do think you're going to have to have a recession to kind of clear the deck of all the abnormalities that are out in the economy, where you have the haves that are winning quite a bit and the havenots that are not. This is where I think we want to be more towards treasury debt, even though I do see longer term
risks there. I think there will be a flight to quality, much like there was back in July, believe it or not, and that's where I think we want to be positioned more so so, not so much out on high yield. I think investment grade high quality is still a place to be as you think about the reality that the FED will only be able to cut rates aggressfully if they do see a recession on the horizon.
Brent, We're fourteen days out from the US election, so I have to ask about how you're potentially your advice for positioning ahead of that. You like the small caps. Do you think that is a Trump trade that's on right now because of policy or because of economics?
You know, I think it's a bit of each. Look, I don't want to overweight the election too much. I don't think anyone knows what the outcome is likely to be, and therefore, if I don't know what the outcome is going to be, I don't try to position too much for it.
It certainly in the background.
I think the more important thing is the economic cycle, which I keep coming back to. Look, we are later in an economic cycle. Yes, the unemployment rate has risen, but it's still low. Where are we going to find the people to fill the supply that is needed if demand reaccelerates. And to me, that's where I think that's the most important thing. And no matter who wins, I think they are likely to preside over a recession in
the next four years. I think they're likely to preside over a market, especially large cap stocks that are historically expensive, that does less. That's where I think investors should be optimistic. On the other side, where things are cheaper and will do better. I think when we get to the other side of whatever lies ahead.
Get to the other side. Yeah, we're all looking forward to getting to the other side. When it comes to this idea of potentially your recession call could potentially the policy of whatever administration we get next further push the US in that direction, or do you think that is going to happen regardless.
I think it's likely to happen regardless. Look, you have a really unbalanced economy that has been demarketed by interest rates and ownership of financial assets.
It's not balanced.
The economy is being pushed higher by higher income and middle income consumers who have had a wealth effect at their tails. If you have debt and you don't own a house, you probably don't feel as.
Confident about what's going to happen going forward.
And so to me, I do think there are still risks that are out there, and that's all we're asking is that investors pay attention to those risks and importantly stay diversified, which does tend to pay off at the end of economic cycles, which I think is still out there on the horizon.
But what it sounds like to me is that in some ways you agree with this call that we heard from Goldman Sachs and that Cameron Dawson over at New Edges seem to agree with that equity returns on labarge caps are probably pretty muted over the next decade or so, and so you're basically trying to shift things around on a valuation basis with that expectation that there isn't going to be some sort of massive acceleration.
Is that correct one hundred percent?
I mean to me, evaluation does tend to matter. It does not matter in the short term. It's an imperfect timing tool, but I think about the regime change it's likely to occur. Look, every economic cycle back to the eighties has had new market leadership, and the prior leaders have become the next cycles laggards because the economy changes and those asset classes are typically priced for perfection at the end.
And that's where I think we're at.
And how do you transition from what worked in the past cycle to what we think will work in the future. That's the difficulty of trying to explain the positioning that we have. It's just that at the end of the day, valuation does tend to matter. I don't think valuation is dead. I hear that argument, I'll be doing this for thirty years. It typically gets loudest at the end of an economic cycle where people are really tempted to concentrate in yesteryear's winners.
Eventually that becomes losing strategy. And that's where I want investors to stay diversified, stay true to their plan, and think about the reality that asset classes don't die, they.
Just go to sleep for a while.
And that's where I think there'll be new winners in the opposite side of whatever comes in the next few months.
This wastfo frand we appreciate it. Thank you, sir, friend Shitty daf No Western Mutualice kurk Ryman of UBS, assigning a forty five percent chance Harris wins with a split Congress, writing a Democratic sweep would likely be the most negative outcome for equities. Markets would likely cheer a Republican suite for its lower taxes and lights of regulation, but this could be partially offset by concerns about the costs and
inflation impact. Some places say that in a studio Kirk John just now Kirk and Monitorer, it's good to be with you. You are in a fantastic seat because you sit on both the fixed income side of things, and you have to deal with the politics in this election over the next few weeks. Can you tell us how much of an election impact you think we're already seeing in fixed income.
I think there may be some of an impact, because it's not just happening in the bond market. You're seeing in some of the sectors within the stock market that would tend to favor a Trump victory in his numbers have improved in the paws least. But I think the bond market's also telling another story, which is at the front end of the yield curve was pricing in more
aggressive FED rate cuts than we thought was reasonable. But also the growth backdrop has improved, so we've seen a bit of a of a of a bare flattening of the curve over the past call it month or so. I think that move higher in yields is more about a growth pickup than it is about anything related to necessarily concerns about inflation. So if we get inflation leading to higher rates.
Then I'm concerned.
But at a four call it four fifteen, four to twenty yield on the tenure, that's looking more.
Attractive, So you don't think, actually, what the bond market is saying is Trump winning.
I think this is much more about the growth backdrop. I think the election outcome is very much a secondary factor because, let's face it, the polls are still very tight. This can go either way. The battleground states, the four of them are within a percentage point. So this is not an election that has been decided. We still have,
as you know, a couple of weeks to go. Because of that, it would seem unlikely that the bond market and the equity market would be pricing in today a more complete picture of how this election is going to unfold.
But as Jim Caram was saying, whether or not it's Harris or Trump, it could be inflationary. With Trump you get tariffs, and with Harris you get higher corporate taxes. Both of these could be very inflationary. Also, it's going to be tax cut for people like in the middle income. Why wouldn't the bond market just be pricing in that environment.
I think that's missing a big element of what we're seeing unfold in DC over the next administration, at least the next two years, and that is constraints on government. So you think about the Senate and the House. If you get a united government, you're going to have very narrow majorities. And the prospects for divided government under Harris are quite high because the Senate looks very likely to
shift Republican. So when it comes to all of the policy prescriptions that have been put out on the campaign trail, not a lot of them are going to get done. I think when it comes to personal income tax cuts and extending those, we'll probably get.
Most, if not all of them.
But on the corporate tax side, when you think about the current state of deficits and the debt load, adding another tax cut in the case of Trump is going to be hard to do with the fiscal hawks. And if you have divided government under Harris, well, I mean, then that's just a non starter.
So if you don't think that what we're seeing right now in the bond market is a Trump trade, are you saying that the market is not going to price in some of those fears of higher deficits, higher inflation, etc. In the direct aftermath if Trump does what? In other words, could you see yields climbing quite significantly in the immediate aftermath.
Yes, there's going to be the knee jerk reaction as there always is. We could get at a bear steepener of the yield curve in the event of a Trump victory. We could get the dollar appreciating quite a bit, even
though it's already very expensive. So you think about some of those reactions, Yes, but then I think the market's going to get back to what is the foundational elements of the markets that we're seeing today, which is that the economy is strong, that the Fed is cutting interest rates into the end of next year, and maybe even further than that. We've had strong earnings growth. We think earnings growth is going to remain strong next year. Where
are the concerns on a Trump victory. Yeah, sure, it's on tariffs, But then the question is is how strong will they be. They get more stagflationary the more that tariffs are raised, but then that has sort of cycles back on itself. If it becomes inflationary and bad for the economy, then maybe that'll be a signal to the administration that they want to do a deal or some kind of an adjustment.
Terry Wiseman was talking about how his key tell will be if the dollar weakends in tandem with yields going higher after this election. Do you see that as a possibility if international investors get concerned about the US deficit.
Yeah, I mean, I still think that deficits and debt are more of a secondary factor. They're not showing up in influencing where the bond market is headed. The bond market's principal direction is coming from the macroeconomy. It's coming from the decline and inflation rates, the sort of trend rate of growth in the economy or if you will, nominal GDP. I mean, we're sort of getting back there.
I also think though, that it's possible that the dollar could weaken, very likely because it is so strong right now. So the longer term view, and what we tell our clients is keep with the long term, keep the focus on your strategic portfolio weights, focus on it makes some tax trades if you can that you think makes sense. But for the most part, hue towards your strategic acid allocation.
Kurt, this was great. We've got to do it again soon. It's going to say and before the election two weeks ago. Kurt. Thank you, Kurt Ramming there of ubs. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angient 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 Out