Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. Joining us here is Na Seen teleb and Scott Patterson and celebration of a brutal book. I really can't say enough about this for Global Wall Street. I'm sorry. This is the adult of book Chaosis, Bill Cohen, William Cohen. He wrote a book about Duke Lacrosse. It was Bill Cohen, just says Scott Patterson. He's done it again, which he did in twenty twelve, and with Dark Pools and all that.
And the problem we got here, David is we can spend the next three hours of tleeb but you know we got to give some love here to Scott Patterson, who's only here because James Madison University beat Chapel. That happened your book. In full disclosure, I'm totally in that seems camp and knows that like Wicked in his camp. So when you set up your book, which is the TALEB team like JMU against the other teams, some French dude like unc, how did you set up that polarity?
Describe the tension of chaos kings?
Yeah, well, it seems belief is that you can't predict markets, so you just need to prepare for extreme events all the time, the black Swans, and I can't trast that with another character, a French econophysicist named Didier Sornette who uses advanced physics and other mathematical models to try to predict these big advance He calls them dragon kings, which technical term. Yeah, yeah, I call it Newtonian envy. So he's a math guy, right, Yeah, he's a math guy.
He uses some things that could be used to predict the explosion of rockets and transpose that onto financial markets.
You gotta be kid, here's the reality, folks now seeing tallav changed the world with John and nero and fooled by randomness. Everybody else would have retired to turks and caicos or whatever. He went on to do Black Swan. And then you and I sat on the stairs of Saint Bart's on Park Avenue, and you described anti fragile to me. Now, seeing where is the humility among the quants in this great boomer.
The point is you don't need humility. Humility actually is not necessary. I don't why people are arrogant. There's just got to be paranoid about the right things, namely, how much our error costs you when it happens that ruined problem, and and and and basically Scott's book is about ruined problems. Let's see. So you could be arrogant about everything, all right, You could be wrong all the time, doesn't matter. You gotta avoid You got to avoid ruin the big things.
You've got to be right about the big sources of risk, and and and the rest take care of itself.
Could could I get your having come out of the pandemic, your perspective on what happened there largely but within markets as well, the reaction to what we.
Saw, you mean, the pandemic, the reaction to it. Yeah, okay, we we were. I mean Scott discusses what happened in the pandemic and and and how we were sessing over it. I mean when we started the idea of universal. When Mark started Universal, I was a passenger, you know, I was a retired passenger. But the name universa means universal properties. And we're talking about some universality of these classes of tail uh processes that generate large tale events, and we
call them, I call them grace WANs. Hence that that's where the name universe came from. So the the we were, I was obsessing even when I wrote the blacks one about pandemics, and kept obsessing and they said, okay, I didn't remember the interview. Someone asked me, what what you have to worry about this? And that no, you can't. To worry. First thing about some germ traveling on air France. Air France, you get good food and if they're bad germs, they travel along British air or they get bad food.
So that was and sure enough nothing had happened since for one hundred years, or for close to one hundred years, right, So and people say, well, you know, just like financial risks, you know, people the perception for before the crisis say, oh, we don't have to worry about these they don't happen anymore. Sure enough, All.
Right, Scott Patterson, you've got you know, one of the sections is the Boston section that we could problem and the answer is flying blind. I mean, you've been doing this for fifteen years at the Wall Street Journal, trying to figure out the mathiness and the certitude. And I'm gonna wake up and win. We're gonna we're number six, We're gonna be number two or number one. What are we flying blind on right now?
I think that you know, right now, there's obviously a huge amount of complacency in markets. Yeah, you know, we're hitting records time after time, and yet you look outside Wall Street and it looks pretty crazy. So there's all sorts of things that can happen. And I know Naim wants to talk about China. I've been predicting China would collapse for two decades now, and they don't.
Right careful cash flow lives there. My oldest son speak care of China's not going to collect. Let's do this, We do China. David Gurr in the next section, Okay, we're go an extended conversation when NA see teleb and Scott Patterson Chaos Kings is a book. Okay, you know I asked that question to Scott. I seem to set you up here. We're flying blind, Na seeing teleb and private equity in private credit.
It's all the rage, Okay. The first thing I have to say that we have a that problem in the West. Okay, whether in the visual government, you know, you can have that. China has that, but you must grow. And the problem of the West is that we have an escurve of growth or GDP or per capita and look like we're at on the top right of that curve. So it's concave. And people have two cars, they have two homes, and what do they want, I mean, have perier watership to them.
I mean, so the incentive to grow isn't there. So here it's a serious problem when you have low growth and a lot of that. And the problem is that Western Uh. You know, economies have never had more debt in history as a time where gross became concave simply the nature of gross. You grow fast when you're China, because you've got to pull people out of the provinces and stuff and centers of living can still rise and make a difference now.
So they're not quants of credits sweet years ago. There, our listeners, our viewers there, they put their pants on one leg at a time. How did they hedge against your concave tensions that we're in right now? How do near mortals head?
Okay, the whole thing is, it's not you hedge. If you're investing without a tail headge, you're practically not investing because of the ruined problem. And that's what he discusses in the book. That's my first statement and the second one that people are way too static. They imagine either they have a memory that's that's either too short or or or has problems updating that they don't realize that, for example, what's happening in China that the Nature index
of publications that's very hard to gain. What China used to have one percent today it's in the twenties and rising so tells you that that's a leading indicator of what technologies may come out of China. So you realize that, get a look back before seventeen fifty around when the industry revolution started. Starting the show, so we're starting to shift and in eighteen thirty TRYINGA had eight times the GDP of Brittain. We're back there as soon it's gone.
So we're going back now in times like reversing the Dominus of the West, not because the West is doing poorly, but because it got one work.
David, We're going to China right now now seems to running the show. We're doing China here right now we'll do with the stock market opening your Foremanu's David Gern China with Scott Patterson. Well now seeing.
Steth, let me ask you more about you said you've been predicting the sort of dissolutionally been seeing for for twenty years. What stands out to you about this moment. We've spent the whole week talking about these kind of unprecedented actions, the way they were delivered by the PBOC in China. What that says about the actual state of
the economy there. Talk a bit about that and sort of your your vantage of it, and also just sort of how much varacity we can ascribe to the statistics that we're getting out of China.
Well as to the veracity of the statistics. Who knows, you know, they keep doing this, they keep they hit a slow down and then they you know, hit the accelerator.
They've pulled.
You know, after the GFC, a great financial crisis, China pulled the entire world out of that situation by stimulus. You know, who knows how long they can keep it up. It's a big mystery for me. You know, my focus these days is on climate and the dominance of China and climate technology is astonishing, and that's the future of energy, it's the future of vehicles, it's the future of batteries. And they're you know, light years ahead of everybody. We're
trying to catch up. Europe's trying to catch up, and that for China is a big, big advantage.
I got to do a shout out here with the Wall Street Journal this week with a stunning effort, China's newest nuclear submarine sank, setting back its military modernization. That was an incredible story. Out of your shop. Now on China again, continue, Aaron Friedberg for Foreign Fair says it's a Marxist Leninist regime. Nobody in Beijing read fooled.
By randomness now. But the point is the point is that China is in reverse. Is the reverse of Europe. If you're small in China, you can do whatever you want. If you're big, the government calls you up for a meeting.
Right.
So in Europe, if you're small, you're overregulated. You got you got like five tax inspectors breathing down your neck. You've got to get all these permits. If you're big, then you own the government, okay, particularly the case in France and Germany everywhere and practically everywhere in Europe. So
China is a reverse. So they say, okay, it's capitalism okay for the small and communism for the large, and its effectively it's not that much that there's you know, a centralized economy except for the top.
So what about America into our fractured election.
Okay, I don't know about whether the election makes it different and uh in many respects. But we have a problem. And that problem is that our death servicing is increasing, and I guess that you cross is more than military spending is more already okay, so and and it will continue to pay interest on that. Now you may say interest rates may be lower. I don't think we can go back to zero interest rate because zero interest rates gallas here, all right, so we're going to go back
to normal interest rates. So the death problem is not going to go away. That service is going to keep increasing. And and the problem is if the East becomes and that's just China, just the East in general becomes powerful and and becomes a target of you know, retirement money and stuff like that, then the dollar would be in trouble.
Michael Mobison with us two days ago and nussing teleb today was Scott Patterson and celebration of chaos King Scott, what's the other side of the story here the mathewness and certitude of Zurich, Switzerland.
Yeah, you're referring to Didder Sournett, the Dragon Kings guy. You know, I we were talking about China, predicting what happens in China. I just you know, after covering financial markets and talking to you know, hedge fund managers who twenty years ago were billionaires and now they're you know, buzzing tables at diners. I you know, this is where I come down on the Seams side is I don't
think you can predict markets. I think it's impossible. I think that they're you know, when you look at quant trading strategies are very short term, like over the course of a few minutes and seconds. Those are the only strategies that really survive long term. And even they you know, my first book The Quants showed how they almost blew up in the two thousands in a period of big d leveraging.
So basically they're basically getting a higher dimensional bit than mask.
Okay, yeah, they're trading.
Didn't asked very rapidly, and that's that's good strategy. But you know, trading making big bets on your prediction of what China is going to do next quarter, next year, or you know what the Fed is going to do, This is very very.
Hard to do. My humility or David Gray is it's a once in a lifetime event. And you know, years ago in the old world, which is where tab is from, you know, eleven Aine and all that, and over to the continent of Europe. You know, they're laughing at us about once in a lifetime event. You and I have gotten Gray doesn't eve any great. But the answer is there's a lot of once in a lifetime events.
David, I have a question about young people in this industry, and it's inspired by a conversation. I had to my and Robert Smith, who is at NPR. He's now running the Night Badge of program at Columbia. I said, I was gonna be talking to you today and he said, here's what you should ask him. He pulled up a
tweet that you filed more than a year ago. Now, the story we haven't covered this week is Caroline Ellison of FTX getting sentenced, going to spend two years in prison, and you tweeted about Sam Begmanfreed when everything blew up. He said, the problem with people like SBF is knowing the tiny bit of statistics to pairrot about it, but not understanding processes. That is dynamics, cross time. Shakespeare has survived nearly half a millennium by filtering by time. Then
you close, Sam Begnfreed worked at Jane Street. You're right to Jane Street. He would have flunked my job interview. What does the Naseem teleb job interview look like? What do you ask somebody's applying.
For understand some basics things like ruined problems and understand dynamics. So which is the same. You know that people if you have probability of losing money, eventually would go out of business, okay, over time. So if you're aware of it, that's fine. If you're not aware of it, you've got a problem. The other one is sizing comes from sizing. Also, if you have the edge, you still have probably one hundred percent of blown up if you don't size properly.
So sizing is very delicate. Two basic things, And the third one is about fat tales, the difference between tin tails and fat tails. That's pretty much the theme of the Black Swan, the remedy and anti fragile and discussion of white people don't understanding and skinning the game. Okay, so the difference between fat tail and thin tail finance is not Gaussian. Now everybody claims, yeah, we know that. Yeah, if you know that, then why are you using Gaussian tools?
What tools do you use? What do you suggest people in the street understand the parreto eighty twenty? It is very intuitive. You need to learn to know some mass, but not enough, okay to get to stuck to you know, if you teach people a little bit of math but not enough, they go to the coe.
This not Sing's laughing at me here right now because he knows it to Thudau, David, thank you, Kerr and I don't speak before the show. In fact we're not on speaking terms. But I'm so I brought that up.
Not seem fine, you know me on position sizing. Position sizing is everything, and right now we're living in a MAG seven world where everybody, whether they admit it or not, is Scott Patterson's four oh one k at the Journal is loaded up with Nvidia and all the rest of it not seeing tell out on Mag seven the anti position sizing.
Okay, so I let me give you one one thing since I don't have a lot of things. Yeah, I read. I wrote a tweet saying that if someone gave you twenty four hours in advance the newspaper tomorrow's newspaper, that you would go bust. And actually someone just tested it.
Victor Hagani Formative LTCN, who visibly no has long experience in the market, has tested it by giving people over fifteen years next day's the newspaper and tell and giving them you can trade that today's price, knowing towards newspaper, and people didn't do well. Why One of it is, of course sizing. They don't know how to size the
position right, whether whether they're right. They don't know how right they are because they can't figure out how much of it is noise, all right, and of course the sizing. So so the just you know, I heard of the paper yesterday because it starts with my tweet. It's interesting to have a tweet turning into a paper by someone else, like for someone lazy like me, it's perfect, right because tweets I don't an airport's typically right, So.
And that's not that's not how markets work. The markets work on anticipation of news events. Oftentimes, when you you know, you see the Fed cut interest rates, the marketer go down, Yeah, because it's already traded on that news.
There's a fact Tony story and anti a right, how people who anticipated the invasion of Iraq or the starting of the war against Saddam in nineteen ninety one, those what dissipated It went bust because guess what happened to oil prices? They collapsed, all right. So it's not figuring out the news. There's something more subtle about markets.
I want to get one more question in a kiss Kings and Nassin, then we've got to talk to you about it. Fractured your old World, your Europe with one, two three. They're calling them conflicts, but I think there was Skim Patterson, you have such a history of writing of the tension of Wall Street in your experience. Is anybody on Wall Street putting the tension and the outcome of it of your books into practice or we still what a to var which I know Nasim loves var.
Is anything changed on Wall Street?
I think that's it's funny. No, I don't think that we learn our lessons. I think people are still using value at risk even though it just got just I mean it was a laughing stock.
In two thousand and eight.
People looked at this and like this is insane. We're cutting out five percent of the worst days every year, and like that doesn't matter. So yeah, no, I don't think we learned less I wanted to come back to the question of an interview asking, you know at a hedge fund. Yeah. I spoke to a while back somebody who you know at Renaissance Technologies and the big quant Shop of Long Island. One of the questions they asked perspective employees is how does the toilet work? Which you
know you're talking about dynamics. I thought that that's an inod question interesting and the answer is to vacuum.
I want to devote the rest of the time with great honor to all the people from Lebanon that have assisted David ger and I and what we've seen over the last weeks, days and Indian quarters and years led by Jumana Bricchecci over in Dubai, who has been really helpful to us here. Her show is Horizon out of Dubai. Look for that now, seeing you have lived this, you were in your family or deputy prime ministers, you were
involved with it. Out of the Greek Orthodox Christian sphere of a Lebanon I remember with great prosperity, it is shattered. What did you not know?
I mean, I was in Lebanon two weeks ago, and I go to Lebanon, I reside there part of the time. So what you see in pictures isn't doesn't map to any when you hear about the economy, doesn't map to what's going on there. There've been a little slowed down by the slowed down by the Gaza War, some kind of rise and across all economic sectors in Lebanon On a more anti fragile basis. In other words, the collapse of the government of Lebanon economically gave rise to central
large municipal power and to a lot more entrepreneurship. Okay, because the central bank was conducting a ponzi and the ponzi went away, and then suddenly people recovered and four years later, you know, it's on amend and and you can see economic activity across all sectors. I mean, restaurants are all full, new restaurants opening up like every day, at least in my in my my neighbor is like forty to fifty past year, I mean every day every week.
So so you have you have. So what the perception of Lebanon from from the outside is quite distorted, given that I spent time there the this war, I think is I mean, there there is a problem. Okay, let's let's say there is a problem. The fighting is confined to Hizballah and the State of Israel. But but but
of course their side effects outside. But something tells me that that if you go to a bigger war, if Israel wants to drive the US and too a that war, and then then then think would would would blow up?
David? Yeah, David. One final question, how.
Do you engage the prospects of that happening.
I think that the Yes is resisting and the Iranians are trying to be nice, and there is a more considerate tone here, so we'll see, we'll see. I mean, from there, you can see how irrational would be for everyone to get involved in broader war, particularly that long term it's not going to help me, think about it. Israel had with his Balla in two thousand and six, they got stronger, they they had they occupied the southern
Lebanon and and has been stronger and stronger. So every every war is just like delayed training program for for his Ballad. So Israel doesn't have it's in its own interest. Okay, you can't destroy a you can't destroy you know, a ideology. You can you can destroy military installations.
Coughing on Ariston. We got to leave it there rather not seeing teller. Thank you so much. One of the protagonists of Chaos kings how Wall Street traders make billions in the new age of crisis. Scott Patterson, thank you so much for coming to today. This is a really really important book for global Wall Street. Not so much what to do, but what not to do. Scott Patterson's Chaos Kings setting up attension between two giants of investments.
Dying to talk to Lindsey Piggs up of Steve Wall she's really pushed against soft landing certitude, Doctor PAGs is thank you so much for joining Bloomberg's surveillance. How remote is a soft landing?
Well, I think it's still a possibility. It's still out there as a potential for the economy, but it is going to be challenging for the FED to achieve that. Remember, part of the soft landing is instilling price stability on a sustained basis, So getting us back to two percent, not just touching it, but maintaining that along with the prospect of avoiding a downturn. Now, I do think on the growth set, on the growth side, at least in hindsight,
the US economy remains on solid footing. But I'm not convinced that the FED has the focus, has the stomach to get us back to two percent. They feel they seem to be very complacent at this point with this very tepid, somewhat sideways and uneven movement in inflation.
At this point, I know they would beg to differ We have heard such adamant from the FED chair about that two percent target, but it raises this larger question of when do we get there. There will be no declaration of victory, of course, but what's it going to take for you to say, look, mission accomplished, Pick your trope. The FED has been able to win this fight.
Well, that's right. The Fed's forecast does not look for two percent on a sustained basis until twenty twenty six, so some two years from now. But in order for me to get an increased level of confidence that we will get there eventually, is further meaningful progress. Now, this morning's report was encouraging when we look at the headline number, but the core, after several months of sideways movement, has now ticked higher. So we're moving in the opposite direction
of that two percent price level. And you have to couple that with the lack of movement that we saw on the core PPI, the core CPI. So there's a number of key inflation metrics that are showing no further improvement, offering no further confidence to the FED that we are
on a sustainable disinflationary trend. So I do find myself in the camp of the sole descent into some Michelle Bowman saying, no, there's still inflationary risks out there, there's upside risk potential, and we need to stay focused on that inflation component of the dual mandate.
Lindsay, if you and I were in the Echos building looking at that dashboard, looking at all of these data in complement, what is what is or what are the types of data that stand out the most of you? Is most important here as we move ahead?
Well, I think as the FED is looking at the key data points are the inflation data and the reads on the labor market. But what's interesting is when we look at the labor market data, independent of any commentary from the FED or the media of the market, the labor market is still near full employment. The unemployment rate, yes, has ticked up from a low level, but we're still at four point two percent, well below what the FED designates as that full employment range, the desirable or sustainable
level of joblessness. Jobless claims have not ticked any higher. So the other side of the inflation excuse me, the other side to labor equation, job destruction, is not seeing any side movement. We're still talking about over seven million job vacancies, and on average we're still creating over one hundred and eighty thousand new payrolls month to month. So that's still indicative of a tight ish labor market.
If you're joining us, Lindsay, Pie is Steefel thrilled that she's with us today. After this report, it lifts the market quiescent CPI pce I should say price index futures up three now up nine, NASTAC up thirty five points two tenths of a percent, Small cap leads away up a solid nine tents of a percent. The fix comes in ever so slightly fifteen point twenty nine. Looking at the yield space ten year yield three point seven seven
and three basis points. I always look at the ten year real yield one point six to zero comes in two basis points, sort of inconsequential. It's now time for the math portion. We do this with pigs of Stepheljo.
You're gonna get a coffee.
Well, yeah, Lindsay, I'm going to cut to the chase from the cheap cheap to the high fed funds rate. We have a belief in eight nine ten rate cuts to come to get back to the center tendency two point eight ish, two point nine ish, maybe three percent as well. To me, it's wildly nonlinear. Aren't the next twenty five, twenty five or fifty base point sort of a non event and the real sweat for the FED comes, say, the spring of twenty twenty five.
Well, yes, in the longer term and in terms of the longer term timeline for getting us back to neutral. But I would push back and say that the next two meetings are going to be key in terms of setting the tone for the Fed's willingness to remain data dependent. If we see a stronger than expected labor report coupled with this morning somewhat disappointing move in the core PCE, I think the FED is going to have to respond with a much smaller rate cut or a potential snip
of a meeting. And if they don't, that's going to send the message to the that maybe they're less data dependent than they're indicating, and they are on somewhat of a blind sided focus to get us back to a particular position in policy, regardless of what the data is saying.
Across the history of the FED, and particularly the more modern FED, which labor statistic really matters. Is it non farm payrolls? Is it the unemployment rate? Is it something David Gerrin, Tim King don't understand.
I think the Fed is going to look at a number of factors, but if we had to look at one, it's going to be the unemployment rate. It's going to be that fluctuation into or are still away from the full employment range. Now, the non farm payroll number certainly seems to set the tone for market expectations, but when it comes to monetary policy, the Fed officials typically focus on that unemployment number to really gauge what the momentum is in terms of labor market conditions.
Sure, there're folks really really important, David, I'm going to segue you in. Folks again, we're commercial free for cross this hour on a PCE statistics. Market lifts on it as well. We thank all of our good sponsors for allowing us to do this. David Gerra anam Wong at Bloomberg Economics, and she pushes against doctor Piegso there's no question about that. She's got non farm payrolls three month
moving average one sixteen. She does a revision which is hugely controversial and lowers that number, and that's the polarity between Wong and Piegs.
Lindsey, let's marry these hard data with the softer ones. We had Dana Peterson on the show a little earlier in the week and talked about those consumer sentiment numbers that were softer than a lot of folks expected and I think spooked some folks in the market as well. How do you look at them in complement? And you were talking about what would happen if we saw a real sharp decline in employment, for instance, how the FED would react, how would both investors and consumers react to
that as well? Because that has to be front of mine for FED policy makers too. Yes, they're kind of looking at this in a very in this vacuum of looking at it from a policy perspective, but they have to be aware or cognizant of how people are going to react to what they're doing as well.
Absolutely, and we have to also be aware that not all the data is going to point in the same direction. This is not going to be an easy decision for the FED or an easy interpretation for the market by any means. But when we look at some of this secondary and tertiary data, what we're continuing to see is an ongoing resilient consumer. Now, as we saw this morning, somewhat softer income and consumption numbers, But looking at the Q two GDP report, we anticipated that we knew what
the third month was going to be. But when we look at that, on average, we're still talking about a three percent growth rate and a three percent spending rate. That's still very indicative of a solid economy and an economy that can withstand a very slow and patient removal of policy firming. So I go back to the Fed's
decision in September. The biggest risk of a fifty basis point move was always sending an inappropriate signal of concern regarding the state of the US economy the current level of weakness, as well as an inappropriate signal that the Fed is willing to rush back to a state of not just neutral, but accommodation to provide stimulus to an ailing economy, as opposed to simply removing their foot from the break and moving back towards neutral as the data begin to normalize.
WELLNZI. Yet one final question here, and this is a men's respect and part of the pigs a charm, folks, is she's out in the Midwest, you know, I mean she's putting up with cubs, white sox and all that. Lindsey. Seriously, the FED has to aggregate towards one policy. Can they not do that? Because the American labor economy and the personal income around this polarized economy is so split. Can they not succeed in aggregating?
Well, it is difficult. When we talk about the resilience of the consumer. It is dangerous to paint with a broad brush, because we do see that those at the middle and the lower end of the spectrum are having a much more difficult time faring in this environment amid higher borrowing costs, higher prices, the resumption of student debt payments than while those at the top are not necessarily feeling a pitch amid a growth of household net worth
over sixteen trillion dollars in the past year. So we do see two very different themes in the underlying consumer. And it's not a difference of hals and have nots, but asset holders and non asset holders. So that is complicating FED policy, But that's nothing new. We always see that bifurcation. But what we do see, which is new.
Is this growing divide among FED officials themselves. While the median is looking for fifty basis points by the end of the year, nine FEED officials say no, we're going to see maybe one twenty five basis points cut or no further adjustice is great. So that divide alone, I think underscores how difficult the December decision was and how difficult further decisions are going to be.
David. If Pigsa was a governor, she'd dissent at every meeting. She'd be the Catherine Man of American economicory. She'd be like pounding the table. Jay, no, Chay, no, don't do it. Lindsey, pigs thank you so much. It's Stifel there pushing against the soft landing, joining us on for Chicago, where she's interviewing to be the general manager of Chicago White Sox. John Adams, Gina. Martin Adams joins us here on your stock market, your bullmarket forward, Gina, I'm going to cut
to the chase. There's all this noise, China, China. Are we just discounting still double digit earnings growth?
I think it's a great point is the macro has oftentimes, oftentimes overwhelmed the earnings in terms of commentary, but ultimately earnings drive stock prices, and earnings have frankly continued to surprise the consensus. Right now, the analyst consensus is looking at close to ten percent earnings growth emerging over the course of the next year. I would say the stock market is pricing closer to five to seven percent earnings
growth just based upon what our macro models suggest. What's been so interesting about the last two years, and I think this persists is the macro has been closer to what the market price is, where the analyst consensus, even though they've been conservative, are still not bullish enough, and so that big divergence is what has created the uptrend in stocks. Is we persistently have this sort of negative undertone, this negative view that is embedded in the psychology, that's
embedded in prices. But kind of the reality on the ground from corporations is that things are still improving and have been improving really since twenty twenty two, and that doesn't appear to be changing. Analysts are slowly getting on board with that, so certainly they're you know, expecting better growth in the next twelve months than they did twelve months ago. But it is a slow climb.
Textbook Gino Martin Adams, and she combines us like Edheimen, with fundamental analysis, technical analysis, and a respect for the economic Gino Martin Adams. What does the bull market chart tell you?
Oh?
Well, I mean, look, the trend is your friend. The stocks are still up and to the right right, so very simplistically, when you're making new highs, and more than seventy percent of stocks they're still trading above their tu nity moving average. So contrary to popular beliefs, breadth is still improving. We're making new highs. Even small caps are showing some signs of clawing their way out of their bear market condition that has existed for the better part
of three years. There's just not a lot in the charts to complain about. If there is anything to complain about, it is really about leadership inside the market, where we do appear to be sort of grappling with a potential leadership change away from the MAX seven toward the four ninety three other stocks in the S and P five hundred, sort of away from predominantly growth towards some mored value oriented industries. There are a lot of sort of internal churn.
A lot of internal churning happening, but nonetheless, markets are still making new heights, especially the S and P five hundred, so there's not a lot to complain about from a technical perspective. The only thing that I would say from a broad charting perspective that we're watching with a really close sort of eye is what's happening with momentum. When we look at what's happening with momentum in the S and P five hundred, it's been struggling as a result
of this internal turn. It certainly has confirmed the recent rally off of those October sort of depressed lows, but nonetheless it's not as positive or not as strong as we would like it to see or like to see it, and I think that that's something to watch going forward. We do need to gather a bit more momentum to sustain the games that we've had.
Gina, great to talk to you, and I wanted to ask you about this China story that we've been falling over the course of the week and what it means for US investors. We talked a little earlier in the show about the PBOC put on Chinese equities. What does it mean for the palatability or attractiveness of Chinese stocks what the bank has done this week.
Yeah, I think it's been tough in China. Honestly, we've had, you know, a series of stimulus measures all year, from direct purchases of assets in the market, to changes in policy rates to the news of this week, you know, to the degree that it ultimately creates more stability in economic conditions, that's the thing that I think can draw
investors back into China. It's a wait and see approach though with respect to China, and it's been such a difficult run for the last several years as a global investor starting to think about investment in China that we've had a proliferation of EM equity products excluding China, just to try to get at where the other growth opportunities
are in EM. So, you know, I would say, we need to see this manifest itself in real economic conditions and even more importantly, real earnings growth prospects improving for China. That's a long time coming yet, because when you look
at EM equity revisions X China, they are surging. Equity analysts are getting much more optimistic about the outlook for earnings growth outside of China, and analysts are not telling us that things are getting better in China yet, So we need to see that momentum turn around there.
You know, I got to ask you this, Gina. I know you're not on speaking terms with Allison Williams, but the banks for end of Q three, what is their business plan for Q four? How bad are the cost cuts going to be? Yeah?
I think, first of all, I'm in great terms with Alison Williams, and I think she was a brilliant analysts in terms of all those H courses help Gina in terms of financials. You know, I think that it's going to be really interesting coming into this court because the banks spent so much of their time really cutting costs back in twenty twenty three that that's been a bit of a tailwind.
Right.
Remember twenty twenty three was the year in which we saw tremendous provisions, a lot of concern about loan losses emerging in commercial real estate, decent amount of cost cutting coming out of that sector because the yield curve was tremendously inverted. Right, We've come off of that deep inversion in the yield curve over the course of the last several months. That improves the outlook for an interest margin for some of the segments, but it's still tough going.
What was most interesting out of the second quarter is that financials, for the first time in a long time, feed on top line. We saw better revenue growth out of financials than we've seen in a very, very long time. That's what I'm looking for going into third quarter because that's what's been missing in financials for the better part of five years. Not just sort of short term what's
happening with a lot of cost cuts. When we get into October and then even more importantly in the January season, though, I think you do want to start looking for layoffs. Are we going to see a surgeon layoffs again? This sector has been a big persistent part of that story from twenty twenty two on financials as well as technology companies. Communication companies, to a slightly lesser degree, have led the layoff trend. They've kept costs very, very lean, and that's
enabling margins to continue to stay a float. There. So there are a lot of moving parks to watch for in financials. It's frankly one of the sectors that we've been watching most closely in this rotation because we are seeing much better growth start to emerge there and finally some investor interest, but I think that that's mostly related to the yieldcaper.
Okay, Gina, don't take the White Sox job unless you can clean out the bullpen. Gina Martin Adams from Chicago, where she's on a job interview at Kimiski Park, which I will always call it.
In a fact check this entime.
Grandpa took me to Komiski Park. I saw Nellie Fox a few years ago. Only Michael Barr on the planet knows who Nellie Fox is. This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our
global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.