Bloomberg Surveillance TV: September 20, 2024

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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

John, It's growing at almost five percent, which is more than twice as much as the number one economy in the world of the United States. And for all the doom and gloom and China look, as an investor, the question is what's in the price? And when you look at China performs equity.

Wise, if you look at the valuation.

My point is one example is Ali Baba right, the big tech SoC We're believers in a two tech stack thesis. China walling off its stack, US walling off tech and Ali Baba just announced that it now has the world's leading large language model, open source large language model.

It's buying backstock at record levels.

It trades at a fraction of the valuation of its US prs, and so to us, it's all in the price. And just note that k Web was up four and a half percent yesterday it broke back above its two hundred day moving average, and it's emblematic of what we want to do right here. You talked earlier in the lead up that I don't really care about a lot of what you and Lisa have been discussing. And you know that's not quite true, but it's truly mostly.

Do you want to come back on this show again?

And I would just make you two points before we talk about the investment opportunities that we see at TBW Advisory Number one.

Jay, it's not a presentation, just a step at a time. Let's just start with your views on China and then Brama wants a follow up, Well on.

A second, Jay, Actually, when it comes to China, I just have one word or one company to throw out at you. Mercedes Benz, how do you understand that with all of this optimism that you just expressed, Well, I.

Express optimism about the tech stack and Ali Baba, I didn't say anything about auto companies. Look, we're big, but you know we have a TPW twenty model portfolio which is focused on future.

Innovation and climate.

So we're very focused on the China's leadership in Queen energy, renewables and evs and the simple fact is that China is eating the lunch of pretty much everyone but Tesla in terms of EV production activities, sales, innovation, et cetera. China is the world's innovator in queen energy, and the European auto companies are just watching their market share in China, which is a critical market for them, just simply disappear.

So Jake, for people seduced by your view of the world, I know it's a multi year view and a way of expressing it is the commodity market iron ore off the highs of the year, base metals copper off the highs for the year. What kind of moves you're looking for in commodities.

Ja, Yeah, John, you know, surprise hit the nail on the head. That's where we want to focus right now. I wanted to mention the two strengths. One is in the global economy absorbing one of the most aggressive rate heights cycles in modern history without a recession. That's something

We have to respect the.

Fact that trends are powerful and they are moving in the right direction, both in the global economy and in the risk asset markets.

So what do we want to do here? How do we want to invest?

We want to sell the things that have done well on the idea that there's going to be a recession, because there's not. And so we don't like fixed income Lisa talked about, you know, three point seven percent on the tenure unattractive if the neutral rate is three percent. We want to focus on a long the context of a long cycle, sustainable soft landing equals sustainable equals our global macro blue sky outlook, which we've talked about twenty

Really attractive.

Baa pointed out allocations to commodities are at a seven year low. Hedge funds are their most short commodities they've been in a decade, So there's a real opportunity there. There's a real opportunity in buying the laggards, things like small cap things like the non US markets, which are still ten to fifteen percent off their highs. China is forty percent off its I'm not going to say it's going to go to a.

New high, but we want to be buying the laggards.

If this is going to be a long cycle, a sustainable growth path, a fed cutting through twenty twenty six, that's what investors need to be paying attention to. We wrote a piece several weeks ago, zoom out not in Jay.

All of this leads me to question what your view is and utility. It's one of the most loved areas out there, And I know that sounds like a hyper specific point with a lot of the calls you're making, but it seems like it's a one two punch. They've done really well just as a performance, but also they would benefit as a bond proxy both of those reasons. How much do you think that that very loved trade is not going to do so well well?

Utilities that argue have done well in part because they're viewed as a recession hedge, and in part because they are viewed as being in one of the hot sectors, which is power generation for the data center and data centers and AI revolution, which we're big believers, and we own an ETF called grid Grid as our way to employ this, and grid just broke out and is at a new all time high.

So that's the way we're playing it.

We don't really like the utilities at this point because they've been pretty well exposed, and we don't think rates are going lower, and we don't think there's going to be a recession rates on the long end, not on the short end obviously, So what we like is industrials, right. I think one of the surprises in the next couple of months is that the ism for manufacturing is going to break back up above fifty, and you look at what's leaving.

I made the point about markets at all time.

Highs, while tech is still well off its all time high, Industrials, financials, real estate. There are multiple sectors that are breaking out. And one of the things we like, in addition to industrials we just added a position is in consumer discretionary. You talked about FedEx, Amazon is very attractive.

Tests is very interesting here.

They make up forty percent of XLI, the consumer discretionary ETF and that's an example of where we're moving to as opposed to where we've been.

This was Jake Pilowski's TED Talk, brought to you by tpwj's good to see you as always your good friends. You're welcome back, Anton, appreciate it. Let's talk about rates. The ray Cut euphoria is failing as Marcus begin to wander about underlying economic weakness. Forronica Clark of City saying powpaired a fifty basis point ray cup with an emphasis on the low level of the unemployment rate and confidence on the path ahead. We disagree with the view that

Good morning.

This is not going to be a therapy session.

Don't worry.

I'm not going to make it. That won't insult you with that, But I do want to talk about how you and the team thought about this on Wednesday, and for our audience who might not be familiar with the work that you and Andrew do. You were out front on the fifty basis point call. You said it was data dependent. The data came out, the data wasn't bad, and you changed the caller twenty five. What were you thinking when that dropped on Wednesday.

Yeah, it's been a crazy couple of weeks. We did change our base case for Wednesday back to a twenty five basis point cut after we saw CPI a week ago stronger, you know details, stronger shelter inflation. Again, we were thinking maybe that was the easier compromise for the Hawks who are still concerned about inflation. But I think it, you know, on Wednesday, of course, when we got the fifty basis point cut, it is is definitely justifiable based

It's an important lesson for SILVI. So talk to us about what you'll be looking for between nine to m seven. What will guide the automate coal for you and the team.

Right, well, we'll have two monthly employment reports, so that's of course perils and the unemployment rate. Those were really the most important of course watching you know, all the labor market data, you know, weekly initial jobless claims. But we do think this is a weakening labor market. We've seen that more pronounced in the last three or four months. Of course, that's what got us to the fifty basis point cut this week. I think that trend will continue.

This to me is a really important point that you think that it's going to be just as aggressive going forward because of the weakness that we see. There's been a real question around just how well this transmission mechanism of the FED policy can actually help support the economy. Do you think that, given the reaction to this latest FED meeting, that will help stave off some of the weakness that you're expecting to see.

I don't know.

I mean a couple of months ago, the narrative was that the economy is so strong and the FED doesn't have to cut because of that, And now we're saying the economy is strong because the Fed is cutting. But what's changed in that period is the labor market data have weakened, and it just seems like that trend will will continue. These things are really hard to prevent. Once you do get raised substantially lower back to neutral, I think that, or maybe even a bit below neutral, I

Pauled out of it a VBS earlier, So they don't know anything that you don't know, So don't stop thinking that. It's not like there's some kind of sort of feeling underneath this fear of recession on the FED committee. How much do you think that that's true?

I think there may be a bit or at least maybe Powell is a bit more worried than he's letting on. I mean, we are all looking at the same data, and he is looking at you know, falling hiring rates like we are. You know, maybe some early signs that there are actually a pickup in layoffs. The transitions for the last couple of months of people moving from employed to unemployed have actually increased, the highest since twenty sixteen. And I think he's worried that once you do see large,

I'm going to take this conversation to the edge of ridiculous. But there were times I'm going to read the body language, now forgive me. There were times in that news conference where it found a little bit performative, it found a little bit false. The confidence things are great, Things are great, Ignore the fifty the size of it. This is a recalibration. Things are good. Okay, do not feel the same thing.

Yeah, No, I felt the exact same thing, because there was you know, in previous times, in previous news conference. Is he was less practiced, he fumbled more, he didn't seem to have the same kind of I don't know, polish in the same kind of way. This was someone who is acting as a lawyer, which was the reason why that Kit Juke's comment was so interesting earlier this week.

This was someone who was.

Making a case more than say, delivering a message. That was his true message.

It felt like a performance. Let's get back to race, Let's make a park there. Just let's get it out. It's out there now, Okay, let's get back to race. At least when I were talking about this earlier about whether how you view the rate cut path implied by the dot plot from here, whether that's a sailing or a flaw for interest rates. So Matt Hornback Morgan Stanley framed it better than I could. He said, if they're wrong,

Right.

Yeah.

Absolutely.

The last couple, you know, summary of Economic productions has almost felt like a marketing to market. This is where the market already is in terms of rate cuts. It's also a marking to market in terms of the unemployment rate. Obviously they had to raise that this week. And we're always, of course you first and foremost, basing our FED view

How much do you think that the reaction function of the FED is biased toward bigger cuts? I mean, how much do you think that that's what this signaled, rather than they wanted to start big and then move gradually.

I think I think it's a pretty low bar to get some more larger cuts. Just we are very far from neutral. Paul has said a number of times that there's ample room to be cutting if if something goes wrong, and you do want to quickly get back to neutral in a in a weakening labor market, not get back to neutral a year from now.

So media adults did this for this year and next year. The long dot did this came out just to touch How are you thinking about that long dot?

Yeah?

That is it is interesting. I do think there is that sense in which you know, maybe neutral way it's at least nominally are a bit higher. We wouldn't disagree with that, so sure, Yeah, three three and a half percent. I think that's probably fair. We essentially have them getting back to there, like a three percent kind of terminal rate, and I think that's fair. I would worry that, you know, even if that is a neutral rate, maybe they have to get a bit below neutral.

Even poltonovany VPS came out and said, what did the high rates achieve? Not a whole lot? What the low rates achieve? Even if you go back to below neutral? What are we stimulating? Yeah, part of the economics.

I mean, I think high rates did achieve, you know, bringing inflation down. I think, you know, mession contributes in the sense in that way. Yeah, we saw housing slowing. We should see shelter inflation slowing at some point because of that, demand of courses is much weaker. But of course, you know that also means that there has been this increase in non employment. You would expect lower rates to eventually,

What did po rents the fantasy?

I fan to see who we are?

Yeah, yeah, I love that.

I love the small rants, the sort of small frustrations.

Everyone who didn't go with the fifty exactly got something to, you know, get annoyed about. It's great, Veronica, can we finish on housing at the price shelter? We've had so many different views on this that ultimately, if you unlock all that inventory, that supply prices actually might go down as interest rates get cut. How are you thinking about the forces this channel for interest rights to work in the housing marketing.

Yeah, I think that is true eventually, but we're still a long way before we maybe get some kind of of supply response. I think we have seen rates coming down. Of course, mortgage rates have come down. We're watching, you know, the weekly data on mortgage applications filed for home purchases.

It's a final question. Next move twenty five fifty fifty fifty doesn't change it the city, it's going to see it joining us now and please to say Tom Becker of Black Rock, Tom, Good.

Morning, morning, it's going to see.

I feel like this narrative has gone back and forth for the best part of two years. Heard landing self heartblanding self, no lending, heartblanding self lending. What is it now?

So we've got a bit of a different view than kind of Veronica's view there. So we're still in the no lending camp. So this economy to us has been a five to six percent nominal economy pretty consistently for two years now, and so some quarters it looks like inflation's a little too hot, then another quarter growths a little bit hotter. But you've been trading off with this economy kind of operating in this notably higher nominal kind of range than it was a pre pandemic. We think

People termed up their mortgages.

A lot of the spending that we're seeing in industrials is coming from kind of a guns and butter two point zero what we're calling kind of you know, this fiscal policy reindustrialization on shoring, near shoring. That stuff is driving kind of interest rate insensitive spending back into the economy, and we think the consumer is actually really well set up here. They've got household balance sheets in really good shape in terms of wealth. They're earning much stronger wage

And I think at one point the interest right sensitivity is that symmetrical or asymmetrical. If we weren't sensitive on the way up, are we sensitive on the way down?

So I think if you just look at when people urn how much time people had to turn out debt, both corporate treasures households, they had all of twenty twenty all of twenty twenty one. That debt is still pretty fixed rate for a number of years here. So we don't think there's a lot of sensitivity for a lot of the spending. And that's kind of how the economies behave the last.

Couple of years.

So we think that's kind of set to continue their pockets of weakness, and I think, you know, a fifty point basis cut definitely is going to you know, bolster those parts of the economy that had been a little bit more. But overall, the economy is performing like it doesn't really get impacted by kind of these these swings and rates we've had the last.

Couple of years.

I want to put that on a real no landing hard lighting, soft linking, soft lighting, hard landing party. I think that was as so many last I mean, it was really absolutely perfect. It kind of brought back, you know, flashes. This idea of the no landing is a US specific story. I don't think that Germany is feeling no landing right now.

Yeah, sure, so I think you picked on the poster child of kind of the weak man of Europe. If we look broadly across Europe, the perferey is booming. Perfecy hasn't looked this good in decades. So look at Italy, look at Spain, They're doing great. Canada lagging a little bit more. Canada's more interest rates sensitive, Germany is more

So I agree with you completely.

So like the US does look well held overbought. Every time people kind of step out and go into foreign markets, there's a French election, or there's like the kind of the Bungled press conference and the boj so like, let me just go back to the US.

We think that that kind.

Of that creates opportunity and creates kind of pockets of you know, good pricing for us to kind of step into these strong global companies and strong industries.

No one's listening. Is it just that you look to go to places that you actually want to go to. It's sort of our fun to go to.

I feel like that's part of it.

I've been to Japan ten times. I've been to Greece check out their beaches and then invested, you know, I mean, is that basically what people are doing.

I think Americans have been spending in those places. So we just did a podcast on Taylor swift Era's effect in Europe and so much that you've got kind of countries like Sweden where they had all time high month month services inflation just because she did three shows in Sockholm.

So and that's a.

Lot of Americans flying over because they're like, oh, it's cheaper than going the meadow lands, and so I think that there is this People are spending differently. People are not behaving like they think their jobs are in danger. And I think the income this late last labor market report, you can say, oh, look the trend job, the kind of the creation of jobs a.

Little bit lower.

Hours are up, wages are up, and so that's money in people's pockets that they're spending. And I think in these foreign markets, nominal incomes are higher, so unemployment rates are low, and people are making more than they were in the last decade. We think they're kind of going to start spending it more and savings rates can come down in Europe and they can kind of unlock a consumer that they haven't had for years.

I had a great line the other day, and it was borderline insulting. It was don't invest in countries with grain and the flag. And Italy was part of that story. For a long time in Europe. The white people view Europe was that Germany is strong and Italy's wake, and it's the complete opposite it now on the continent, when you look to take that exposure you alluded to it just to touch. We used to talk about it through the currency, but now the currency is hound backed by

Buy the index. That's what we do.

We buy the local index, the foot cy mid get exposure to kind of the broad set of Italian companies. You've got banks in there, they're doing well, it's spreads coming in, but you've got a lot of kind of services based companies that aren't exposed to kind of Russian gas or to Chinese exports.

So that's the way we do it there.

Since we're top down macro investors, we focus on that country dimension. So we're going in the local you know, we separate the currency bet from from the local equity market bet, and so we can be underweight dollars, but we can also be kind of long a foreign kind of you know, local equity.

I've got a question on a on the Bloomberg terminal from the Bloombag subscriber. I think a lot of people might have a similar question. You keep referring to high normal with GDP. Of course, high prices have been a big factor in that. If you think things going to hold up at these kind of levels. What's your routlook for inflation? At least it's been talking about steeper curves and gold breaking out as well. What's your outlook for inflation?

We think we've settled in this new higher range. Three three is a new two.

I think two and a half to three here because we've had kind of a bit of a weakening after a strong Q one. But we think services inflation is going to really underpin higher inflation rates. You've got consumers consuming in a services based economy, but you've also got a lot of structural changes. Insurance markets are kind of a multi year repricing to kind of higher nominal valuations.

It's not just the US.

It's happening across all these developed markets, tight labor markets, people spending more of their wage growth, and that's feeding through the kind of sticky services inflation. So China can bring down goods inflation for a few quarters like it has and then you're like, oh, you know, false dawn, you know we've landed. But I think then it bounces back up if you get a surprise stimulus program, Drogy, I think a call to arms for fiscal In Europe, they always react too slow, but I think in Europe

This was one of the sharpest conversations we've had this week. Appreciate perspective.

Come back soon.

This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, an giet 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 Live bug terminal and look Bloomberg Business out

Mm hmm.