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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. Gargy Shawdry of Black Rock writing this mid term volatility aside, this will create a fabulous opportunity for investors to move out from cash and lock in yield and the belly of the curve for equities. A brief pullback is likely, but eventually a rake Cunning cycle that ends without a recession tends to bode well for stocks. Gage joined us for more. Gargiy, Good monic, Good morning. Imagine you've had tons of cours.
I'm sitting in cash, the cup fifty on where they're going again and again, again and again?
What do I take? What do I take?
You step out of cash? I think that the signs that this FED meeting showed us all beyond the twenty five to fifty debate hawkish not hawkish, et cetera. Once we go past all of that, I think one thing is clear. This is a FED that is going to that is willing to surprise the market, that is going to do what it thinks it needs to do to make sure that the labor market and the broader economy
remains strong. And they will cut fifty basis points and maybe another fifty more or perhaps even more than that if they need to while growth remains solid. Right, while growth remains at two percent, And that is an amazing opportunity to own risk assets. So own risk assets in the fixingcume markets, own fixed assets or risk assets in the equity markets. I think seasonalities can get a little bit tough, but this is a great time to step out of cash.
Let's break cut the asset classes. To start with bonds. We'll move to stocks in fixed income. When you say take risk in fixed in cup and bonds, what do you mean?
So, first of all, I think making sure that you're very precise about where you want to target your interest rates sensitive at your duration risk. That's really important. We've been here before and talked about owning the belly of
the curve. What we've meant by that is really looking at that three to seven year part of the curve and not just owning treasuries, but owning high yield, owning securitized assets, owning income, really taking this opportunity of still locking in yields, especially when cashields are dropping fast, and earning income in the fixed income markets. And there are products that allow you to do that in an active manner,
in an index manner. But the time is here, the time has been here, but you're not too late.
Let's have a therapy session because a lot of people are feeling like they missed it, and a lot of people feel like you know, they're watching as valuations get that much more expensive, in stocks, in bands and working right now, credit spreads tightening even more, and the heels of this decision, how do you convince people after discussions the things have gotten so frothy and so expensive that now as things are even more expensive, it's the right time to buy.
So okay, separating out bonds and stocks again, I think for equity markets, this is a seasonally week period, we're going to have a couple of risk events. We're obviously going to have the election in a couple in six weeks or so, but more importantly before that, we're going to have earning season, and I think it could maybe make sense for equities to pull back just a little bit. I don't think you're supposed to step away. I think
you're supposed to add downside protection with buffer strategies. That's what we're telling investors, or move a little bit further up in quality. We've sort of told investors to stay away from the small cap trade. Obviously that's doing very well. It's hard for me to imagine that does well sustainably for the next eight to twelve weeks. Having said that, in the FIXTIONCME market, Pleace, I hear you. Yes, spreads are very very tight, but I think what investors have
gravitated towards. If we look at fixed and come flows this year, it is around yields that are available. So when we compare the yields today to what we were getting ten years ago, yes it's come down, but it's still very positive, and I think investors do want to lock that in, especially if we slow down even slightly from here.
You talked about some risk events, including the politics, and I know Emory is going to go there a bit in a second. There is this issue that every candidate is going to promise more and more and more to increase the deficit more and more and more. Does this create something of a risk event that is longer term, particularly for the long end of.
A I think it does. You've hit the nail right on the head. I think that's why being very precise about where you want to own duration is really important. So regardless of what happens in November, regardless of who's president in January, I think one thing that we can be sure of is that deficits aren't coming down in a rapid manner. And one of the ways in which that can play out in our markets, in the bond market is really in the very long end of the curve.
So I was saying earlier to on about you know, owning duration in that three to seven year part of the curve. You kind of want to stay away from them a very long and for now you're not getting that additional pickup and yield, So stick in the value of the curve and harvest some of the income that you're getting, and frankly, that's where investors are moving to
as well. I mean, when I have client conversations, people want to hear about the agg people want to hear about bank people want to hear about, you know, quality equities. That's what we're telling them to do because that's the regime for this.
Henrietta was just talking about how investors she's talking to you, especially those in the fixed income space, we're or interested to see what happens in Washington based on the timeline.
If you get some of these.
Tax cuts three four years out or if they go for say ten years, do you think it makes a difference.
For bond markets And I think it all makes a difference absolutely. I think we're in this period for the next six to eight weeks where we just won't know too much. We obviously won't know the outcome, and I think markets like certainty the most they want, which is why I feel like over the next couple of weeks, I think a little bit of a pullback despite this fifty basis point cut could come. And I think that's fine. You're supposed to stay invested, protect your downside. But I think,
of course it matters in the long term. Will it matter whether we get something for four years or ten years. Absolutely, I think the market can only pay attention to recruitter who's you know, as you guys know likes to say this, markets pay attention to one thing at a time. Right now, we're paying attention to all of the amazing opportunities that the FED cut has brought you.
Well, I know, but next we're going to be focused on the election and this idea of fiscal sustainability. Henriette also brought up the fact that maybe we'll see another Simpson Bowls commission. Does the market care about that or is that just all noise and talk for now?
I think the market won't really focus too much on that. I think we're going to focus a little bit more on, you know, what is the data telling us. What are some of the policies that we're going to get. What are some of the ways in which the earning seasons go to play out. I think that's going to be something that we're not talking about yet. We did see earnings, okay, we didn't see you know, there were companies weren't doing
as well on revenue. So I think we have to see where the companies can still find ways to cut expenses, and that's something we're going to be looking at. So for the near term, I think all of that is going to be much more important than if we get a commission, you know, twelve weeks down or twenty weeks down the lane.
Can we say that for now more Strata's sake of talking of the FED.
I think so.
I think I'm really excited that we can now focus on what's really important, which is the election. No, actually, because the opportunities that exist in the market for our investors to be invested and have a better financial outcome.
Katie, thank you one of the best the US. Enjoy it. Kuki Chantry of blank.
Rod, John Varlet now, John, it's going to see you, going to be here.
Thanks for having me. What does that right cut today? For this mark it?
I mean, I think look, rates are down ninety basis points from when Lennard last reported earnings in mid June. We know that demand has picked up. Toll Brothers reported in August that July was this is their may through a July quarter, that July was the strongest month, with strength continuing into August. Other builders have said the same our private builder channel checks have been very bullish. Demand is better than seasonal averages at this point.
Things are moving in the right direction.
So I think that you know that, coupled with think about new home sales in July up eleven percent month over month to seven hundred and thirty nine thousand single family starts yesterday nine hundred and ninety two thousand, up sixteen percent. Activity is picking up and that's a good thing. So I think demand is moving in the right direction.
Tell Brothers is for the fancy payper.
They don't need mortgages.
That's so cash. Can we talk about who this already helps? Which build is does this ready help?
I think it helps all.
You're right now thirty percent of TOLD tolls buyers pay all cash, So you could argue perhaps a little bit less of stimulus there. The lower end probably benefits the most. Drhort in lenar companies that really focus on that probably dart in the most on that entry level first time, those buyers are going to have more dollars in their pocket.
But keep in mind that the builders have been buying down mortgage rates all along, and so demand has been pretty good for the public builders all throughout this kind of interest rate volatility.
That's where I wanted to go.
Yeah, I don't get this market.
Basically, you have high rates, and that's good for home builders because nobody can move, no one wants to sell, so you know, if anyone actually wants to buy a home, you have to build it from scratch. Lower rates help them too, because lower rates are better and people can borrow money.
Which is it at what point is it just price go up period?
Lower rates are good for housing lease of regardless. I mean I think that that's kind of where we sit now. Your point's well taken, though, right. I think the lock in effect that has kept people from moving in reduced existing home.
Turnover has helped the builders, no question about it.
Now, lower rates are going to bring some more inventory back to the market, but keep in mind eighty percent of mortgages are below five percent, sixty percent of below four so there is still a lock in effect.
There's this question about if lower rates unlock a great deal of supply from existing homes but also from potentially home builders, won't that cause prices to potentially go down, not up, especially if mortgage rates are still well above the average that people are paying. Right now in their homes.
I think it would take an economic shock to bring back a glutt of inventory. I think the inventory return is going to be more sort of orderly, if you will, just given that lock and effect that I talked about. Now there will be more existing home inventory. But you know what, that also opens the pool of potential buyers, and so we think the supply demand from that standpoint will still remain strong enough where prices are not going to drop dramatically.
Jumpry, I was going to say, what do you make of all this being discussed on the campaign trail, potentially supply coming because of policy in Washington.
It's an interesting question. I think.
I think the Harris campaign's head is in the right spot that we need more supply, we need more housing. The actual execution of that is very challenging because it can't be done at the federal level. It's really the municipal and state and local you know kind of supply constraints in terms of land development, you know, entitlement, zoning, permitting, things of that nature that just can't be controlled at the federal level.
That that's where the real problem is.
And so you know, while they're you know, it's a good idea, very hard to execute a mole.
So some of these incentives you hit on the campaign trail you just believe ultimately going to lead to hut prices. Is that fair?
I mean, I think, you know, putting more money in people's pockets. So twenty five thousand dollars tax incentive, it will help demand, couldn't push up prices a bit? Perhaps I just don't see anything on the supply side really moving the needle.
At this point. What are you looking for in terms of taxes as well? We talk about the salt tax and what that does to property buying in places in the Northeast. We saw people leave the Northeast in response to that. Do you get the sense that if that salt cap was removed that you'd actually get more buying in those regions?
Yes, I think that that would certainly help.
That said, the offset is that there's just an in migration trend in the US that's occurring because that's where job growth is happening.
And think about the sun belop right, that's where the employment growth is.
The weather's a little bit better, folks are moving in that direction anyway. I like seasons, but going so I think yes, it would certainly, it would certainly help, But I think that the trend is still well ingrained.
So what's the number one market right now and to start building.
It's you know, I think, look, there's great markets in Florida, the Carolinas are very strong. Texas, most parts of Texas are very good.
So really the.
Traditional kind of you know, golden horseshoe states are still really positive.
Now.
It is market by market within each of those states, but I would say generally speaking that hasn't changed. Where those are where you want to be, and that's where the public builders are.
Just to wrap things up, the Voet's get a Mulke's right now thirty six around six percent effective mulke It's rights. So the average right on the which is out there right now, it's just short of four percent, still quite a big spread there of about two hundred basis points. How much of a difference does six make to the unlocking the lock in effect that we've seen grip this housing market over the last few years.
I don't.
I don't think it moves the needle all that much in the existing home side. It will help, for sure, but I think you know what the builders have talked about is five five and a half percent kind of being the sweet spot of where they're buying rates down to. So there's no magic number, but I think that that's probably a fairly good indication of where of where you have to be.
Just quickly for people who an't formiliar when you say buying rates down to, what do you mean?
What is that?
So the public builders are actually going out into the mortgage market securing forward commitments to buy down mortgages are below mortgage or average rates, which is allowing buyers to step into homes at much more affordable levels.
They've been working around this for the last couple of years then they've been very successful. Yeah, I know, John, Thank you, Seth. It's going to see you extra. I appreciate it. Johnavala, the of ubs On, relates to the housing market. Jot to us now to discuss this, Mark Sandy of Moody's Analytics Mark looking forward to getting into this with you.
So let's get to it.
How strong is this job's market still even with that rate cup?
Was it even needed? Oh?
Yeah, no, it was needed. I mean the job market's good, no doubt about it.
Recruiting well, a lot of jobs unemployment is very low, but all the trend lines were showing softness. I mean hiring us off, hours worked are down, tempt jobs are down. You know, the only thing that's really kept the job market together is those lay low layoffs. As you point out, the UI claim suggests that continue. So that's good news, but the trend lines here we are still a bit disconcerting.
So I think, you know, every sense in the world for the Fed to start cutting interest rates now, I mean more fundamentally, the Fed did what it needed to do. It got us back to full employment with inflation effectively at target. So if that they've hit their mandate, then why a five and a half percent fund rate target?
I mean, I think everyone can agree. You know, a lot of debate, reasonable debate about you know, what is the so called neutral rate, that rate where policies neither restraining or supporting growth.
But it's not five and a half percent.
So time to get that down and get that normalized as fast as possible, because you know, if you keep it there, something could break, and when something breaks, very difficult to get that back together.
And this is the reason why recalibrate, recalibrating and recalibrated were the words of the day yesterday when we heard j. Powell take the stand. A real question when you say, concerning trend lines in the labor market, do they fly on the face those trends of some of the enthusiasm that you're seeing in certain risk markets. Is people project this strength to the future, regardless of some of the clouds that maybe the FED is responding to.
Well, the markets investors are doing what they do. They forecast, they're forecasting, and they're saying, hey, look, you know, before the FED started cutting.
Rates, before the Jackson Hole speech and j Pell telling.
Us that he was going to cut rates, it felt disconcerting, and the forecast wasn't quite as good as it is today.
Today forecast is much better. You know, We've got fifty base point.
Rate cut behind us, and clearly a string of rate cuts ahead of us.
So you do the forecast, it feels like a soft landing.
Therefore, I'm going to go buy stocks and going to buy bond So, you know, I think it's a rational response.
I mean, at the end of the.
Day, just think about this for a second. The economy is really fundamentally in a pretty good spot, and therefore, the stock market should be in a pretty good spot. So it's not surprising where a record highs and moving higher. So I think they're consistent. I don't think they're inconsistent.
The one note of concern, perhaps you could argue in markets right now is this idea that maybe we are underpricing or under considering inflation. When you take a look at gold prices just hovering near those all time highs, and you take a look at the long end of the yield curve continuing to increase, particularly in the thirty year sector this morning, this idea that maybe we are
going to see some uptick in inflation. Mark, are there signs to you, and I'm looking at housing in particular as well as potentially other sectors, are there signs to you where you could start to see that inflation start to tick up?
No gold, Lisa, Gold, Really, that's that's what your pointing to do.
Come on, No inflation is back in the bottle.
I mean.
The thing that I think the most important to look at inflation expectations, and there's lots of different ways of looking at that. You can look at the bond market and what the implied expectations are go look at the surveys that are being done by the New York Fed, the Conference Board, inflation.
Expectations are all the way back in.
So, you know, as long as that remains the case, and I don't see the reason why that's going to change. I'm not worried about inflation and housing, absolutely not. You know, I don't think that's going to be the issue here
going forward. I mean, if anything, in the next twelve eighteen months, we should see further acceleration and the growth of the cost of housing services because there's such a long lag between what's going on in the rental markets and when that actually shows up in the inflation measures. So the next six twelve eighteen months, I think we're
going to see, you know, further deceleration. And you know, in terms of setting monetary policy and interest rates, I think you shouldn't even be focused on particularly owner's equivalent rent. That's the cost, the policy cost of home ownership. Lots of good research coming out of the FED saying that's, you know, probably something you shouldn't be focused on when trying to set policy, and I totally agree with that.
So set that aside.
You know, what inflation is CPI Core Inflation PCEE Cusumer Exponditi of inflation. It's it's well below too. It's kind of like one and a half to one point six one point seven percent, and it's been that way for more than a year. So that feels like to me the more salient, you know, measure of inflation, and that says not only are we you know, at target, where we could be beyond target.
So no, I'm not worried about mark.
Inflation back in the bottle. As you say, mission accomplished basically is what Jerome Powell didn't say, but basically alluded to yesterday. The President's going to come out and speak tonight at the Economic.
Club in Washington, d C.
He can't say that the real economy people are not feeling the inflation that you're talking about.
Yeah, no, absolutely.
I mean, you know, people are still still remember the run up in price back in second half of twenty twenty one, twenty two into twenty three.
I feel like for for staples.
You know, for for groceries, for ranness, you know, for for gasoline prices, and it's very hard to get buy that psychologically. In fact, it's very interesting you talk to folks and you say, you know, how you feel about the economy, seeing not so good? You go, why, It's almost like everyone has this one food item that they buy on a regular basis that's the litmus test for everything. So I was talking to one the social worker, my niece the other day, and she's not feeling good about
the connie Go. Why she's paying a lot more for kubacha tea. I think it's called kubatcha tea, so you know, or you know it's but yeah, sorry about that.
I knew I got that.
Obviously I don't drink it, but you know, it's talking about words I teach, of course in classic Wharton and talking to this young man and he's saying rom and noodle prices. So it's it's like everyone's got this thing and I get it. I get it, and so you have to be sensitive to that. You can't deny that. But I think the way to respond to that is say, hey, look, I hear you, and these are the kinds of things that we're doing to address, you know, to try to get the you know, the.
Cost of living down for you.
And I think that's what the president has to do, and that's what you know, the candidates have to do.
Max Sante, thank you, sir, with an old time clip that I'll be replying repeatedly over the next several years at LISTA.
Gould really really.
Max Sandy Mark appreciate it, buddy, Thank you very much. This is the Bloombergs Events podcast, bringing you the best in markets, economics, an gio 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.