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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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.
Let's stick with tech.
McKinsey estimating that data centers will require six point seven trillion dollars to meet demand for computing power globally by twenty thirty. Private credit firms are allaying the groundwork to help provide the capital. Meta is said to have selected Pimco to help lead a twenty nine billion dollar financing for its data center expansion. I'm happy to say the Pimco CEO, Manay Roman, joins us now for more.
Mannic, good morning, Good morning, Johnathan, to see you.
It's good to see you, sir. How does a man like you deal with a three am alarm? Clock on the West coast. How does that work? You've got I make.
I make the best expresso known to mankind, you know, and you'll be hyppy triple espresso, triple expresso, and it feels good every day and happy to be at work.
Well, I'm happy to have you with us this morning. Let's get into some of these deals. I know, the certain deals you can talk about can't talk about. Want to talk in broad terms about the appetite here for the capital that we need to provide to this particular force, this growing force AI data centers. Where it's going to come from and where you and a team are going to fit in.
So I think it's I mean it's it's a huge super secular opportunity. There is an enormous need for funding and equity in data center we I don't know whether the six point seven trillion dollars from McKinsey is remotely right, but it's very, very big, and there'll be plenty of financing deals to be done, and there'll be plenty of construction to be done. And it's true in the US, but it's true in other.
Part of the world.
And the need also to have the infrastructure and the energy will come after that. So you know, we all talk about data center, but there's going to be a real rush for energy in terms of providing the right set up for this data center. And you know, that's one of the reason to be very bullish on natural gas.
We've reflected on one particular statement from one particular tax CEO over the last twelve months that I think was really quite important.
It was last summer.
It was the Alphabet CEO when essentially he said that the greatest risk here was under investing and not overinvesting. And I wonder how you think about that from the perspective as an asset manager. When you've got a group of companies that are willing to run the risk of overinvesting, how do you think about the risk around.
It in terms of I think what we will do is we will look at every single deal and we will say this makes sense for us, and this may make less sense, and I think I think we I think one of the one of the strength we have is to be to be pretty pretty focused on relative value and sort of think that you know, there may be a fantastic deal to be done which would be very very good for our investors and then we look at the next one in the full light of day
and decide whether it fits our portfolio and whether this is something we want to do.
I think it's important to build on this that Mark Rowan said recently. We are what we originate. When it comes to private markets, you are what you originate. It's quite labor intensive. It takes a lot of work when you think about scaling this and building this is an opportunity, How difficult is it in practice?
I think we have built it differently from ourk We have built it based on or experiencing fixed income or experiencing relative value. In a history of fifty four years in looking at all sorts of credit, we have fifty five credit analysts who looks at every single segment of the market. And I think we look at it from a value standpoint. Does it make sense? Is it's something we want to do. We shouldn't be originating for the sake of originating. And there's a lot of money. There's
a lot of money coming to this market. You know, some sectors would be very attractive and some will be less so. And I think you want to be very much on top of this and say I want to do this, and I want to do less of this.
There's a concern actually, as CEO say it's more important to be throwing enough money at this rather than being under invested. And then you have people like David Heinhorn of Green Light coming out and saying the numbers that are being thrown around are so extreme that it's really really hard to understand them. How difficult is it to invest in a market where people are throwing spaghetti at the wall to try to understand what's going to stick.
And there is a feeling of excess that continues to bubble up around that.
So my friend, my friend, Richard Thayler, who is an economic number price and consult for US, has this say. He says, you know, when you make long term product prediction, the degree of humidity and the standard deviation around the estimate should be very, very big. So when I hear an estimate like six months seven trillion dollars, I don't know what to make of it. David may be very well be right, but we'll take it one step at the time. I think six months horizon is about all
we can do in terms of the demand. And then you know, the environment may change dramatically you know, they are business cycles. Sometimes things are cheap, they expensive. If there's a recession, all of a sudden spreads world widen company may revisit what they're trying to do, and so on and so forth. So this is a difficulty.
How do you have a six month horizon when a lot of these investments are ten year buildouts, when there are ten year usage, when they are labor intensive and infrastructure projects by nature are a lot longer than six months.
So in terms of committing capital and in terms of finding the right opportunity with the right length of time, we totally find to have a very long term horizon. What I'm saying is I'm saying making long term prediction in terms of how big the market will be, it's very hard. I think you have some visibility over the next six months in terms of what the demand is, what the real demand is, and whether that slows down
or whether that accelerate. You just don't know. And I think you've got to have I think you have to be very humble about the six and just say, look, we will take it one step at the time and see what the market gives us. And by the way, there may be other opportunity which are more attractive. You know, you look, for example, in an asset backed finance business
aircraft leasing. Aircraft leasing is incredibly interesting and then nothing happens for five years, and then it becomes very interesting again. And you got to constantly set to yourself, are there better opportunity for me to deploy money? And what do I want to do? How do I think about the risk? How will I get out what's the right risk return profile?
You may have headline recently wanted to ask you about it. Private markets haven't been tested? Can you build that out a little bit more? What did you mean when you said that the private markets haven't been tested?
Well, my partner Dana versin and or cio of coursemit I have the chart and we will check the number of about twenty times because we kind of didn't believe it. But it shows the return on week single B which is a reasonably good proxy for direct lending. And what you see is you make money because the yield is higher, and then there's a recession and then you lose it all.
And so I'm old enough to to remember nineteen ninety one, I saw that, you know, there's a recession which came out of nowhere from you know, essentially SNL having too much high YELD nineteen ninety seven. The world is absolutely fine until there's an Asian crisis, and then you have ailit to CEM. Then things become very cheap. And so
you've got to remember these things. And we have been in a period since two thousand and nine of exceptionalism where you have had very strong equity return and very strong higher return. If you believe this is going to this is going to continue for the next fifteen years, then I think you should have the same position. But it may not be the case. And I think I think we bring that and say the data's a the data.
Do you see parallels between now and those periods.
Well, I think the initial condition where we are right now as search that equity markets are expensive by any measure. They may go higher because momentum is strong and credit market are tight in some part of the of the of the spectrum. And I think that's that's the reality.
And look, we've been in period where things things are expensive for a long time two thousand and five, two thousand and six, where such period where things remain expensive and become more expensive, and then something breaks and then all of a sudden you have you have a lot of work to be done manage.
Let's continue the conversation. We were having equity markets very close to all time highs, credit spreads near multi decade ties on investment, great high ye spreads near the ties of the year, and yet we've got a FED official sign that we're excessively restrictive year across a.
Range of funds.
You look across markets all the time and the economy with the team, do you see any signs that are excessively restrictive?
Well, I think rates are very high across across the globe right and I think I think you know, part of the reason why I get up so early and happy to go to work is because you know, the opportunity has never been better. And you know, we talk here about the US, but look at the UK UK where you're from is you know, ten year rates are four and three quarter. Australia looks really, really attractive. So when we think about the opportunity in a way, yes,
we do expect the FED to cut. How much they're going to cut next year, we meant to be to be proven. No one knows what's going to happen to the labor market. But the reality is the opportunity in terms of global fixed income is very, very big, and the opportunity to add alpha is quite high. I'll tell you a funny story. We have a pontner in Tokyo called Tomoya Messano, and you know, for the longest time,
there's not much happening in Tokyo. So you sort of call him and you have much out with him, and not much is happening, and then all of a sudden, the Japanese fixed income market becomes super exciting, and then there's a lot to do, and there's a whole generation of people who have disappear because they don't do it anymore. And so you have a lib market which hasn't supply fixed income investor because there was nothing to do for
the longest time. And so what I think is interesting is the difference of you, the difference of opinion, is also a source of incredible alpha. And you know, if you want to think about white performance has been quite good, it's partially because the alpha that has been given by the market is quite good.
I think it's interesting that John was talking about the FED and you talk about the international sphere, and I think that that's really telling about what people are looking to for that alpha, for that incremental extra year. Are those Japanese investors staying in Japan right now and not coming to the US for treasures even if the FED cuts No.
I think they're very big investors in US asset. And remember, one of the opportunity everyone has is to buy foreign assets and swap them back into dollars or swap them back into yen and so on and so forth, and so you can actually buy synthetic credit. You can buy synthetic dollar exposure by for US investors buying, for example, JGB and setting forward the yen into dollars and having a different credit risk with JGB than you have with US dollar. And so there's a lot to do.
Now.
We do that a lot in short term and longer term in terms of adding alpha, But all the time, you can do this sort of transaction and sort of mitigate your exposure or increase your exposure, or have different risk profile. That's a much smarter way of looking at it.
I'm looking at this sort of a blood instrument. So dumb do you like international more than the United ct That's really a wonderful nuance.
It has an enormous amount of money to put to work, and has is a nation of savers, and so there's a you know the reason. The thing that I always say is you need to put your money somewhere, and the reality is the US is the only place where you can actually put scale and when you want a thing. For example, of the Australian problem, there was a whole
delegation last week from the UN from Australia. They need to move capital all the way from Australia because they are a nation of savers and the Australian market is not big enough for them, and so they need to pivot too.
For a long time, Japan had to do the same thing. They didn't have to yield. To your point, the stories change. One thing we're trying to track is whether the Japanese bring the money home, Whether we see this great repatriation where it could leave markets vulnerable, what typically they deploy that capital, and thinking of certain European markets the US as well. You seeing any of that flow story start to turn, No, not so far. Would you expect it to change, honestly.
Not really. These things are very very slow to move and The reality is people keep on saving in Japan, and so it made you speed that the marginal dollar goes into JGB. But the credit markets are very underdeveloped, and if you want to buy, for example, cigole exposure, you much better off going to the US.
The conversation we had back in April was maybe the decline of US exceptionalism. The money was going to leave, it was going to go outsewhere. I want to understand where you are now six months later. What did you see at the time in April? Did we start to see that decay click into US exceptionalism? And I went back to where we were at the start of the year just six months later.
So I think we were dollar underweighted. We literally just square our for position. We're still very much like emerging market currency. We do like Australian dollars. There's plenty to do. But you know there was there was a short dollar position to be had, and you know it moved ten percent, and I think we decided to square our position.
You're talking a lot about rates and the era of income.
We've been talking a.
Lot about that, just based in the fact that yield has been higher, talking about private investiness through infrastructure. You're not mentioning equities, and this is a time where people are trying to fixed. I'm a fixing companion, no, I know, and you have sympathy with us, But I'm wondering how much a higher rate regime limits future equity returns.
We used to talk about that.
That was before our three years consecutive twenty plus percent returns.
I mean, at what point.
Will constrain the equity side of the portfolio. Even though some people are wondering what kind of buffer.
Bonds really provide?
Well, the Pinker view is that equity return in the US is going to be six percent for the next three years or something like this. I mean, we you know, we look at cape valuation. You know it's treading at twenty eight times earnings. It looks really, really high to us. We understand the excitement about the hyperscalo, but if you look outside of the hyperscalo, life in industrial America isn't great.
I mean, top line is not is not growing. And one of the question that we don't know is the impact of tariff and what will happen in corporate America in terms of how they're going to deal with either passing on prices or diminishing margin and so on and so forth, and we don't know that, and so there's a whole leg of the of the of the equation that we haven't really seen.
Stock investors have been trying to outpull each other this morning, and Max Katner was on earlier of HSBC and he was saying, look, he thinks that the FED is making a policy error by cutting more significantly, but they're along for the ride because it's just going to inflate the prices of assets significantly.
They want to gain from that.
Do you agree with that assessment? Well, I haven't. I haven't listened. I haven't listened to him, so I would not.
Be good initial punt.
I don't. I don't, I don't know. I have. We have a lot of trust in in the FED in terms of them doing the right thing, and I think that the FED usually doesn't know much more than we all do. They look at the same data, and so the decision is a very well thought out decision where they will decide what to do with the condition that they are being given. And if, for example, we were to see a very bad inflation print, it would be
very difficult for them to cut Now. They may argue that they have to look through inflation and so and so forth, But the FED is a very rational actor in the market and I don't think anything is going to change. And the same goes for the Central Bank in the UK and the ECB and so and so forth. And I think I think once you're in a job, you behavior changes also in terms of how you think about what the right thing.
To do is you are lindening to the new FET chair next to.
No, I'm just saying, it's like being a Supreme Court justice. You know, it's a very important job and I think people take their job very seriously.
It's a good change.
Next year there's going to be a new FEED chair. Do you expect to be to see any daylight between a FED chair selected by appointed by this White House and Chairman J Powell and this current leadership.
Do you know?
I was reflecting on this and what we're talking about is, I mean, every single fair share has been to some degree of political appointee. And you know, there's been a history of very good FED chair since the Burns and the Nixon presidency, and I see no reason why that would.
Change the list of candidates we've seen so far. We've said repeatedly, very credible names on that list from this White House on a treasury and it is, it is.
It is.
It is important to remember that it's in everyone's incentive to have a very credible feed share, because the market will not like a non credible feat share.
Stay with us more Bloomberg surveillance coming up after this to congressional leaders on both sides. We'll be meeting with President Donald Trump at the White House that discussed a short term spending bill in an effort to avoid a government shutdown. With the latest and with a special guest that Marie joins us now for more. Hamary, Hey, hey.
John, good morning.
We are looking like we are headed towards a government shutdown, even though the President United States will be sitting down in a bybartisan fashion with the top leaders from the House and the Senate. An individual who has been part of these conversations in the past, because we have been here before, is Patrick McHenry, former chair of the House Financial Services Committee chairman, former chairman. Thank you so much for joining us this morning, just going into this meeting
this afternoon at the White House. Do you think there is a chance of a breakthrough and this Congress can avoid a shutdown.
No, I don't have high hopes for this.
I think it's unrealistic to think that the incentives will change by simply sitting down with the President Trump. The incentive here right now is for congressional Democrats to find a way to fight. That is purely this is a mechanism for them to say that we are relevant. They're only relevant because they have the fill of us from the Senate and Republicans do not have a veto sorry philibus reproof majority in the Senate.
The Continent Resolution, which.
Is merely to keep the lights on in government for the next six weeks past the House now sits in the Senate and the minority party in the Senate, the Democrats have to say on whether or not the bill could be brought up, and they have blocked it last week. They are likely to block it this week. They need to show their base that they're fighting and this is their way of doing it.
Can this have any pushback when it comes to the midterms on Republicans given recent polling shows that when it comes to healthcare policy, which is the crux of the Democratic issue, right now when it comes to this extension of the government funding that they actually get favorable numbers.
They do, but the rest of the issue set favors Republicans, from the economy to law enforcement to immigration. Look, the field is tilted for Republicans on the policy front. The one sold lining for Democrats is healthcare, and this is what they want to highlight in the shutdown. The odd thing about a shutdown, and this shutdown that we're looking at right now has a lot of similarities to me of the twenty thirteen shutdown where congressional Republicans I was
a part of the group. This is why it hurts me to see what Democrats are doing right now. We said we wanted President Obama to repeal his signature healthcare initiative, Obamacare very popular. Our stance was very popular with the American people, And in shutting down the government, we got nowhere on the policy. We got nowhere on furthering the belief that American people thought that Republicans were right. I think this is what we're going to face with Democratic
leaders in the Senate and in the House. They're going to recognize this fight is not worth fighting, and in fact, a shutdown is in fact and continues to be a very dumb political lever here in Washington.
Twenty thirteen, when they finally came to an agreement, there was a little bit of concessions.
When it came to the Affordable Care Act.
Could we see concessions from Republicans and Democrats this time around to keep the government open?
Well, I think it's highly unlikely on this short term government funding. On the longer term one, which will take time to put together, I think you can see some modifications and there's a lot of wiggle room when you're funding a nearly two trillion dollar government, and so I think there is an opportunity there, but for them to actually for Congressional Democrats to go into a shutdown strategy,
this is their first time of trying this. What they're going to find is that this is not It does not give them what they think it will get them.
I think they're going to have to wait for their policy on.
A longer term spending bill and they pull this trigger at the wrong time.
How serious do you think the OMB is about when it comes to furloughs that usually happened during government shutdowns to actually making those job codes permanent.
Oh, I think, I think this is a plan.
The omb director Ross Vote has been steing for for a long long time. He has he's thought about this and thought about this and thought about him, and the White House strategy rests on ob OMB has enormous powers to carry out, especially in a shutdown, enormous powers over the executive branch and the functioning of the executive branch and Russ Vote. The OMBA director has a plan, and I think it's going to be a very devastating one for Democrats. And they're going to rue the day that
they actually gave ross Vote this enhanced power. It's going to be fascinating to see what what happens to the next week into the shutdown and for the weeks ahead.
Frankly, a key question for financial markets as the shutdown looms is whether or not we're actually going to get economic data. We're supposed to get the non farm payrolls report on Friday. If we're in a shutdown, will we get that report?
It's unlikely.
It's unlikely we'll get that report, but different this is also up to OMB. This is one of the things on whether it's deemed essential the funding streams or it's a complicated set of laws that O and B has the wide authority to implement. That that's one that's an open question, frankly. But also our governmental statistics are an
open question by the markets anyway. There's a lot of questioning of these statistics in the volity of them, and so you know, I think OMB may take the broader authorities than in previous shutdowns.
Stay with US.
Multiple Imberg surveillance coming up after this stop's inchin Kaya. As investors continue to navigate the AI boom nice curtain of HSBC, same things are looking up writing the broad based as price inflation is continuing full throttle, and we think this mode account Max joined just now for more Maxkimonic good. We were talking about you know you're published earlier this morning, so I think we should probably start there.
So here's the line. We still see clear signs of US and global growth reaccelerting in contrast to downbeat consensus expectations least a straight away bank. What's downbeat about consensus expectations into next year?
Look, I think when we look at both earnings actually earnings expectations and top down GDP expectations, they are still pretty you know, pretty down. We'd certainly not where GDP now is where all the high frequency data are both top down and bottom up. If you look at bottom up. Actually, you know, when we strip out tech earnings expectations Q
three versus Q two two are pretty much flat. So we're going into Q three earning season in a couple of weeks where you know, for most sectors, actually contends us saying earnings are either going to be flat or down quarter of a quarter sequentially, you know, in a quarter where probably growth has been really really robust. From a top down perspective, that doesn't make sense. If you look at Q four even GDP, what we're seeing is
it's barely one percent quarter over quarter annualized growth expected. Again, what we are not only seeing on the headline number that one percent, which is a quarter percent annualine and annualized, But when we look at the contributions to that, consensers are still saying there won't be any comeback off investment, and.
That doesn't make sense to me.
You can't say we've got a little bit less political uncertainty. We kind of know how to deal with this environment. Now we've got the big beautiful build coming through. We've got wealth gains coming through. We've obviously got you know, these Ai Kape story coming through. But at the same time, Consensus are saying, nope, all this terrift story. It's going to continue weighing on investment in particular, and that's really big upside for price.
I think the reason why both John and I were a little bit confused by this idea of consensus is because in the past couple of days, Brian Belski saying seven thousand for next year not necessarily high enough, Christian Malerk Glissman over at Golme Sacks upgrading their forecast, and gol Ma SAX keeps upgrading to the market repeatedly. John saltus the biggest ball on Wall Street. You see others just coming out of the woodwork talking about seventy seven.
Hundred on the SMP for next year.
How can you say that's a bearish outlook or not bullish enough.
Yeah, Look, actually what we are seeing now, that's sort of streak of upgrades.
That's the most bullish thing that you can imagine.
Because we run a series called Contensus GDP forecast diffusions where we actually look at the data that you guys produce, so all those contensus expectations around GDP once that shoots higher, So once you really see upgrades across the board for the major global economies, so for the you know, the likes of the US, Canada, China, Eurozone and so on, and that is really really bullish, right, particularly for for cyclicality, particularly not only for adding for equity. Is it not
just okay, it's a monetary different story. It's probably tech out performing, but really for cyclic cost to outperform. Now, on the other hand, let's not just focus on the expectations and on people upgrading their you know, the e're ahead forecast, but about the market action. When we look at the market action year today, and you look within the SMP, cyclicals are up pretty much the same as defensives.
So it's not like cyclicals are up twenty percent and defensives are like five, like, wow, this is all baked into price action already. No, both are up give it take nine percent. So it's not like, actually, price action is telling us, wow, there's so much hope into cyclicals baked in.
Not to be a negative nelly, but you could argue, well, all about a second not always I'm just contrarian Courtney.
We're looking forward.
Please bear with me.
Honestly, you could say, if things were looking so good, why is it.
That puting rates that makes it even more bullish?
If you're honest, sure.
But why should they cut rates?
They shouldn't, I mean, don't don't ask it. Don't ask a German why they should cut rates? Right, the German will always say they shouldn't be cutting rates. No, I mean, look, I guess the point is to bring it back to slightly more you know, serious topics. If we if we look at what the Fed can do, can they cut on the one or two times? Should fine? Should they necessarily with uber uber loosing and easy financial conditions?
Probably not.
You know, with threeish inflation, should they really be cutting a lot? Probably not. But at the same time, what we undeniably have is we have weakness in the economy. It's very different. You know, the economy is on two very different paths.
Let's be honest.
If we weren't market people, if we were people working in the labor department, we'd be talking about the economy very very differently. There is you know, there is there is absolute, absolute strains on the weaker part of the economy. We're talking about the Russell two thousand. John, you you were talking about the Russell two thousand. Let's go one steep down, one step down. Let's go to the smallest caps that are you know, that aren't actually listed. There
is very clear strain they can't get funding. You know, you look at credit card delinquencies, or to learn delinquencies, look at real wage growth high the highest wage growth percentiles versus the lowest ones. The lowest ones are already going to around zero percent real wage growth.
Tariffs, of course, are.
Eating into the lower and humor goods into you know, things like food and beverages that already have outstripped cumulatively inflation since COVID.
Now you add on teriffs. It's a clear strain on the.
Weaker part of the economy, and they need the rate cuts well. That of course for US sleans it's even better for our surprise inflation because you've got a reaccelerating economy and now you throw on rate cuts, which normally never happens.
That story you describe doesn't make you bearish. In fact, it makes you incrementally more bullish because they're going to have to respond to it. What would make you bearish is what LEASA is trying to ask it.
Yeah, I think, look, the it is very clear. Anything around let's say Supreme Court or government shutdown, that's like, yeah, can we get like one or two or three percent down? Shure right, a handful percent down. But at the end of the day, this is just by the dip opportunities. The reality is if we get a return to twenty twenty two, where the FED says, oh, we are you know, we're very wrong.
This is like twenty twenty two.
This is transitory.
If we say, oh, you know what, this is not just three percent, this is entrenched three percent, and three percent seems to be the loan now and now we're reacitlerating even inflation. We're not even done cutting. We're not even you know, we're not even stopping. We're actually the next move is a hike. Once we get that, that puts a stop to it. How far are we away from that minimum two quarters? You know, I mean I had last week, I still had conversations about, oh, they're
going to do fifty in October. You know, we're minimums two quarters away from that. Because let's let's Remember, we have had this reacceleration and the data that you know, not a lot of people were talking about a month and a half two months ago. You know, Now it's sort of creeping into people really and saying, hey, look, yeah, the US seems to be doing better from an aggregate growth perspective. But what we really need for a hawkish for a proper hawkish shift, is actually a reacceleration in
the labor market. And given that supplying story, given that really low brake even number, it's almost impossible to get that in the next couple of months, right, So that that makes it It sounds intuitively completely wrong, but it's
the best of both worlds. You get a sort of weakish labor market, but you've got rea tolerating activity data, which means good earnings but sort of sluggish consenders expectations low bar to beat, but at the same time rate cuts into a reacceleration, which, Lisa, to your point, is that a policy mistake? I think so. But of course you know that's probably a story we're going to play in twenty twenty six, not the next six months.
Stay with us.
More Bloomberg surveillance coming up after this trailer is looking ahead to payrolls data you had on Friday after stronger than expected economic data, Jim Bianco of Bianco Research, ranking the FED should not continue to cut rates. The economy is doing much better than the consensus. Jim joined us now for more. Jim, Welcome to the program, sir. I won your perspective first on the recent FED debate, the division that we're seeing from the Fed speak of the last week or so.
Where do you land on things, Jim?
I think some of that is political, and I think some of the Federal Reserve officials are running.
To try and replace j Paul.
And I might respectfully say that the quote you had from Jim Bullard is in that camp too, because it was very inconsistent what he said.
And I think some of it is genuine.
That there is some that are looking at the economy kind of like I do, and that is that it's doing okay, if not better. The Atlanta Fed GDP number is now nearly four percent. It's higher than every single estimate on Wall Street right now, and the inflation data is staying sticky, and the goods part of data, which would be tariffs, is really starting to show signs that it's moving higher. So for those that say, where's the
terrif inflation, it's right there. It's coming. It's it's underway in the CPI goods category.
Jim, how credible do you think this pursuit of two percent is? It's something that dominates in our conversation on decision day. Is this credible?
It's got a problem. And the reason it's got a problem is if you look at the inflation.
Expectations data I'm talking about, like the inflation swaps or the CPI I break even rates or the tips excuse me, break even rates, they're all above two and a half percent out till twenty thirty.
Well, I know, you know.
One of the best questions I heard during the press conference was from Mike McKee, where you pointed out that the Fed said we'll be at our target in two years, and you pointed out the last eleven years you've said you'll be at your target in two years, and you've yet to be at your target in two years for eleven straight years, and now you're going to try for a twelfth year, and the market is saying you're not going to be at your target for five more years
because out to twenty thirty, it's still got, you know, elevated inflation, not runaway, but definitely not getting anywhere. You're two percent, and the FED needs to address that, and they're really not at this point.
At the same time, Jim, can't you say that tacitly if they're accepting two point four percent, which is currently what break even rates are pointing out for the next ten years, is the likely inflation rate? If that is the inflation rate, isn't this market and isn't this Fed saying that's fine as long as we don't torpedo the labor market, as.
Long as we keep the economy chugging. Where's the problem? The problem comes, where's the neutral rate? If you're going to accept two and a half.
Percent or so as the inflation rate, with our star that's three and a half percent. If you're going to that would be a one percent premium above that. If you're going to accept two and a half percent as inflation, maybe our stars should be a little bit bigger. In other words, you're no longer moderately, you're easy at the market, You're probably at neutral, and if you cut one or two more times this year, you're going to be too easy in the market, and you're going to risk fostering
more inflation. So it really comes down to do you want to cut rates two more times? If you do, then you shouldn't be tacidly accepting two and a half percent as the inflation rate long term inflation rate, because you should be done cutting rates.
Then at this point, do you.
Get comfort Jim, from the fact that after the Fed cut rates, you aren't seeing a steepening of the yield curve, You aren't seeing a runaway at the long end of the yield curve like what we saw last year. That people are seeing there as justification economically for the Fed to be more aggressive.
Yeah, at least at this point.
But I I fear that we're in a holding pattern waiting for more data. And I also fear we're not going to get that data because we're going to have a government shutdown on Wednesday at midnight, and I'm talking about like the payroll report on Friday and next week the CPI report. Remember that they're the last government shutdown under Trump in twenty eighteen twenty nineteen, lasted thirty five days.
And the Fed is.
Effectively going to go into the October twenty ninth meeting with no more government data, which is what they rely on. Jaypop called it the gold standard then they have today, and they'll just assume that it's everything is as they understand it today, and they'll cut rates. And what I'm afraid of is when we get that data. Whenever we get that data, it's going to show a meaningful uptick in the economy.
And Jim, I want to build on that. We've been talking about this reacceleration now for a while. Marcus price for it into twenty six. Lisa mentioned NEIL data early this morning. This is what he said on the jobs market. If firms expect growth to per cup, it's curious they haven't ramped up hiring an hour's already. Jim, what do you sent back to that?
You know, I think the issue with the labor market is really the break even rate right now. We need to start to ask the other side of the question, which nobody wants to touch. Okay, we've created twenty nine thousand jobs over the last three months, how many should we be creating? And j Pol answered that towards the end of his press conference, he said maybe zero to fifty thousand midpoint of that's twenty five thousand. We've created
twenty nine thousand. I understand this is a number that we're not used to to say twenty nine thousand jobs over three months is just fine, that's all we need in this economy. But we've got the lowest population growth in almost one hundred years because of the closing of the border and increased deportations. And if that's the case, you have no population growth, you don't need to create that many jobs. So really this is the crux of
the labor market issue. It's not how many manufacturing jobs versus service jobs, versus healthcare jobs did we create last month.
The fundamental question is how many do we need?
And the answer might be not that many given low population growth.
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