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Joe Davis joints us here, global chief Economists and Global head of Investment Strategy, a little shop down here in Philadelphia called Vanguard. Joe, what did you make of FED Chairman Jpal's comments about rate policy maybe the December meeting. What's your takeaway from yesterday?
Well, I think he's trying to really thread a needle.
I mean, we've clearly downshifted on the labor market. Not all of it is because of weaker demand, but you got inflation sticky, and in a third factor that I don't think you know they're talking enough about, but probably will, and that is the prospect of asset price inflation. You look at the equity market. So I think they're trying to feel a way here in a data bline spot.
So what about that duel?
Mandy, We're talking about inflation and the stabilization and prices, but then also maximum and unemployment or maxim unemployment.
Rather, how are you viewing this right now?
Well, again, I did you know?
Our view was that that they would weigh the job market over the inflation. This is has been generally a modestly dubbish institution, at least in recent years.
Not a criticism. I think it's just a reality.
And you also have to you have to at least make some assumption that some of this tariff induced inflation, you know, will dissipate.
But the risks are growing.
I think that's why you're seeing, you know, some of the sense at the Federal Reserve. It's actually somewhat commonplace once you get too close to where you think you should be. And we're definitely in that zone.
Hey, Joe, we've we're right in the middle of tech earnings and the numbers continue to really impress us in terms of how much money these companies are spending on on AI. Is that how does that impacting the broader economy? Do you guys kind of take a stab at that?
Well?
Yeah, so, in fact, we've spent over three years really looking deep a where the economy how could it be affected as AI broadens and it's you know, it's not a foregone conclusion. But I think in two or three years, in our data driven framework, there is a possibility that we're growing at three percent real GDP, which I have
not seen many firms or economists talk about. And again I'm not you have to you have to be cautious, right, there's going to be over investment in this cycle, even if AIS is transformative as we think, So we have to feel your way here. But we are not in bubble territory and this could really accelerate over the next two years.
So caution is in the corporate tech space. What about consumers? How are we thinking about terror for related inflation? Are you seeing any of that right now?
You definitely see it in households, particularly those at the lower at the lower income rackets.
That that's not new, It's been there.
It's where you also see you know, some of the wage growth that had slowed for a time. Yeah, you have hire income households, which again is not new, really supported by just the past five years. The increase in wealth in housing as well as the equity market.
Is really a source of cushion.
But you do see that bifurcation, and I don't think that's going to change in the near term. What's going to be key is do we see a firm firming in the labor market in twenty twenty six. That's our expectation, That's what our own indicators of vanguards show right now, given our proprietary data. But again there's there's still some tarif uncertainty to work through here.
And Joe on the labor front, you know, I'm one of those people these early, early, early stages of AI. I just feel like AI is going to be net negative for the US labor market in terms of absolute bodies needed in it to fuel this economy. I know it's early, but do you guys have an opinion on that?
Yes, yes, again, we we've we started to work, believe it or not on AI in the future work. I can't believe it's almost a decade ago. What we continue to find and expect it's been a learning process for all of us, is that roughly one in five occupations over next three to five years. I'm not going to sugarcoat it. You're going to see jobs start to decline, but for every job that declined, there's going to be three that benefit. But this is going to be disruptive
in our baseline expectation. We see the most disruption in terms of how we spend our day at work changing in at least twenty five years, and so there's going to be anxiety along with some of these efficiency gains. More workers will benefit than not, but there is going to be some disruption here and that's a clear result from our work.
I mean, how are you thinking about job opportunities coming from that or potentially lack thereof. I mean, if you think about the tech space right now, you hear people who are coder is even concerned about being replaced by AI. How are you thinking about that on the long term.
Well, again, to my you know, I'm not going to sugarcoat it. There's going to be some industries where you're in occupations, you're going to see some pressure. But again it's almost I give to pick like which which issue to effectively deal with. The fact is is for the past ten or fifteen years in the US economy and most developed markets, we've had a lack of automation, which is why growth has generally been low and some of
the wage growth outside of COVID was fairly tepid. And so you know, if disruption comes the prospect for productivity, higher wages. But but but that comes with that with change. I mean we've seen that throughout history, and so like pick, we have to we have to think about which world we're entering. It's more likely going to be a disruptive one higher growth, but it's not all not all boats will be lifted at the same time.
And you know, it's just I'm not going to I mean, it just is what it is. That's clearly the diagnosis. Jo.
How are you guys dealing with the fact that you're not getting a lot of government supplied economic data with this shutdown? Are you just kind of trying to find the best alternative data points out there?
Yeah?
Yeah, I mean, like like everyone, you know, we're where we have our own indicators. We know, for example, job growth because if you're in a four one K plan, uh and if we're the administrator through auto enrollment like for your for your actual retirement plan, we have some sense of new jobs being created, even promotion rates in
real time and clearly an anonymoused way. It's not perfect because we clearly are not the only four one K provider, but nevertheless it's another indicator that we can look at it. And again there's other data points out there from other from other firms, a job hosting websites, So I think we always look at it as a distillation. So again it's right now, those indicators that we have are holding constant. You know, they're not super rosy, but they're not negative.
And so that that would that would point us to that the labor markets should firm here. But that that's the key indicator for the next few months.
Now, if you're wondering why Joe is this such a smart guy here any sense, is because he gets got his man there's n his PhD at Duke University. See what I did there, So you needed an.
UNDERGRADUA, I knew you're going to work that in. You got to say, Duke.
Absolutely, Joe Davis, thanks so much. We appreciate it. Joe Davis, Global chief Economists and Global head of Investment Strategy at Vanguard.
Now, when you're a.
Graduate student at Duke, no matter what school you're in, you don't have to camp out at night for Duke tickets. You just do it once the beginning of your graduate school career, one night, and then you get to keep those season tickets for your entire graduate school career. You don't have to do it every year. So if you're one of these PhD people will like philosophy. It takes stretch out over eight years. You got your season tickets care.
It's all the undergrads have to sleep every.
Sleepout for every game. Oh, we just have to do it once. That's because we're professional graduate space. So that's kind of earns it. Do they hate us for that? The undergrad so that we get a lot of agree for that. Stay with us. More from Bloomberg Surveillance coming up after this.
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Heidi Crebo Rehticker. She's Adjunct Senior Fellow at the Council on Foreign Relations. She joins us here. Heidi, thanks so much for journey us here. A lot of headlines, a lot of tweeting coming out of Asia here. It was a long it was a long trip. A week in Asia, many countries, concluding maybe highlighting with a meeting yesterday with Shijing Ping and President Trump here, what's your takeaway from President Trump's Asia trip?
So first, I think that there that it was a very positive trip all the way around. So this is a big feel good moment for Trump, and it takes the temperature down on trade, particularly you know, with with the meeting with Shijinping. You know, no big surprises in the in that that agreement. The contours of the framework agreement were pretty well telegraphed. But I think, you know,
short term, good trip. Longer term, I always pay attention to this strategic direction of travel in the US China relationship, and I don't think that has changed. So as long as, for example, China keeps supporting Putin's war machine and threatens not only Taiwan but other Into Pacific partners, and we're going to have a bumpy ride ahead for the rest of the presidency and beyond. So we always have that
issue of dual use technology. And even though the China Hawks in this administration have been pushed back, I think, particularly around around export controls, as long as as long as China continues a trajectory with swamping global markets with manufacturing and dialing up or dialing down, but dialing up the export their own export controls on rare earths and related technology. It's it's going to be a complicated relationship. And so I think in the longer run, uh, we
have a clear direction of travel. It's it's not going in the right direction.
So a short term fix here or band aid, if you will, But what are some of those other deeper structural issues between the US and China that you believe need to be resolved here over the long term.
So I think we have I mean, they're they're the deep structural tensions in the commercial and economic relationship that we have with China. And you know, they're they're flying ahead in terms of their their innovation and capacity to uh to actually really implement a lot of the strategies and advanced manufacturing that you know, they they've just doubled down on the on you know, with this with this latest five year plan, on their desire to just be
an even greater giant on the world stage. And the export controls on rare earth. You know, I was in Shanghai last week for the Blend Summit, Global Summit. They're global, those export controls they're here to stay. And the Chinese are very, very confident they're enjoying this checkmate moment, and so I think we'll see again these export controls on rare Earth's dial up, dial down, its asymmetric leverage. They have the ability to shut down industries of basically every
country in the world with manufacturing. So I think that is that is the big picture moving forward on this. On the strategic side.
Heidi, it seems, I don't know, maybe over the last ten years, maybe even longer, kind of a development of a technology cold war between China and the West. And at one point it seemed like the US's policy was let's a lot ally ourselves with everybody else out there against China and transpecific deal. Then it seemed to be a little bit of America first and we'll take it on solo. How do you think America and the West should deal with China going forward?
So there were there were a lot of European experts, economists, financial leaders at this at this summit in Shanghai last week, and they were distancing themselves from the US and saying that they want no part of these export controls on them, on the on them. In the in terms of how the US moves forward, we have obviously taken at the You know, the Trump administration is not multilateral and its approach to really anything except for critical minerals and rare earths.
So there is no way to do to develop any kind of capacity without friends and allies. We've seen big deals with Australia, We've seen the you know, the initiation of deals with Ukraine, d r c H. The one big missing pieces in Japan. The one big missing piece is Canada, which of course could be our you know, one of our greatest, our greatest friends when it comes to the critical minerals puzzle. So you know, I do
think you'll see this on the G seven agenda. You'll see investment in technology to sort of leap frog some of the China choke holds.
But we can't do that by ourselves. So what's your.
Takeaway on the soybean purchase A situation I see here you say that it was symbolic but made good mewed music.
It talk to me about that.
So I do think that. I mean, so far, the volume that we know about has been been minimal. You know, we don't know what the details of what Trump's massive amounts agreed actually mean. So we have to wait and see where, you know, where that goes in terms of how much and whether or not the Chinese actually followed through. Really important to US farmers to actually to really get this fixed, and the shipping fees that we had the
tariffs on on Chinese ships. If we're moving agricultural products to China, we don't actually we use Chinese ships to actually ship a good deal of our products because they dominate.
So I think it was it was symbolic.
They wanted to, you know, Bijing wanted to create a constructive atmosphere for negotiations, and you know, I think, you know, they did get tariff relief and some renewed agricultural trade. But we have to see what exactly what's in that deal. China already is well stocked for agricultural goods in South America is really set with a strong harvest. So we'll have to see where we have whether it's near term upside for US soybean producers or whether it's just you know, whether it'll be durable.
I'm not even sure I know soy being if I tripped over one but not a very important twelve million metric tons twenty five million metric tons I don't know what's.
Got a thousand times all all right, morning.
All right, Heidi Creboat Hticker, thank you so much. We really appreciate getting your thoughts there. Heidi Krebo Reticker. She's the adjunct Senior Fellow on the council at Barn Relations. Stay with us. More from Bloomberg Surveillance coming up after this.
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We've got earnings coming in pretty darn strong. That's a good thing for risk assets, I would think, So what are we doing here? Let's talk to somebody who has he gets paid to think about that stuff, Adam Farstrup. He's had a multi asset for the America's wor else for Schroeders. Adam, it seems like we've got a pretty constructive backdrop for risk assets here again with earnings. Yeah, with presumably an accommodative federal reserve. How are you guys
thinking about allocating assets? Yeah, I mean I think it's in some ways.
I talk about being a broken record, because really since Liberation Day it has been right to be long risk assets, particularly equities. Yep, we had at the beginning of this year, you had a bit of the Cell America trade, right, we saw Europe really doing well.
That shifted to emerging markets.
Emerging markets continue to do well, but the key shift was over the summer coming back into the US equity market. And from here we still see strength coming through the US and actually emerging markets where earnings are supporting things. So the valuations clearly not something that makes you really comfortable at night, but as long as we continue to have these earnings come through, we think investors should stay risk on.
So what about the fact that data has been sparse? How have you all been navigating that given the fact that we're experiencing a government shutdown.
Yeah, you know, I think our economists are wondering what they do with their day because that data to come in.
They keep canceling meetings with us.
Now we're really focused on the same kinds of alternative data sources that you see the FED talking about. You look at we still have high quality pieces of information coming out from say Atlanta FED, the GDP now which is showing you that the economy continues to grow. And even if GDP now is not always the most accurate assessment, you look at that sort of bracketing almost four percent growth for the quarter with consensus estimates around two percent. Let's say that GDP growth is falling.
Somewhere in between.
There.
That tells you you're still in a supportive growth environment. And we're not seeing the unemployment data really tick up at this point yet, but it's a real knife edge for the employment market. I think that's one of the challenges we have right.
Now in the market's in the equity markets. One of the concerns is equity market concentration. I'm looking at your notes that says it's higher than we saw in the tech bubble. But I like this. We think investors should be wary and not fearful. What do you mean by that?
So we think in these period is of technological change. It's not unusual when you look through history to see concentration in markets. So the concentration within the US equity market means you need to be active. You need to understand the companies that you're investing in. Would be leery of just buying beta right now as opposed to having a view on the stocks that you're buying in the market.
So that's point number one. But point number two that I think the concentration we're more worried about is the degree to which capital markets are oriented towards the US right now, and that has been kind of the big challenges a multi asset investors, an asset allocator is how do you diversify without being dramatically underweight what has been
a high roe, high returning market in the US. And so we think looking towards global approaches capturing some of the real dynamics in emerging markets where if you say you want to play AI and you think that that trend, that technological change is going to continue, the place to play it Europe.
It's emerging markets. That's the other strength outside the US.
So where in.
Emerging markets are you looking? Where do you see the most opportunity?
I think it depends whether you're talking about debt markets or equity markets. So in equity markets there is you know, China is a real complex situation right now. The domestic consumption in China is still weak. The economy is being managed I think to some different inns than we would traditionally see in the US. But if you look at exports are picking up out of China. We just had the deal overnight announced between the latest deal announced between
the US and China. We think that that starts to push out into countries like Taiwan and Korea where they're sort of involved in that supply chain. The tech names within China are very interesting to US as bottom up investors. You know, talking to the bottom up teams with in Schroeders, they get very excited about that. When you talk about the debt markets here, what's interesting is you've seen very high yields in a co enemies where the monetary policy
has been managed in a very traditional way. They've been on top of the inflation pressures, and so we have this this monetary supportive cycle that is backing investors in Latin America in particular, where we see a lot of opportunities for real yields.
I like Evany's multi asset pros because he can ask about anything. Whatever it sticks on the wall here, growth call on gold here. It just had this incredible rip up the forty three hundred. We've had a little bit of a pullback here we're saying just below what some folks will tell me as a kind of support level around four thy thirty nine to ninety. What do you guys make of what's happening gold this year?
Yeah, I think gold is highly related to the fears about what might happen and change in policy in the US right. And so when we talk about diversification away from the dollar, it's not that the dollar suddenly loses its reserve status. It's really that we see a need to for central banks to diversify their holdings. We're seeing demand for physical gold in places like China and India.
So we just think this is a consolidation into the next leg of a rally as investors see gold being very valuable in portfolios for resilience, not a hedge.
Lis Matteo buying gold at Costco's. Adam, thank you so much for joining us, Adam Farstrom. He's had a multi asset allocation there at America's for Schroeders. Stay with us. More from Bloomberg Surveillance coming up after this.
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See what we're doing in the credit markets these days. Megan Robson, Head of US Credit Strategy for BNP, Harry Bob. One of the great greatest offices in Paris is the BNP Parry bo office. Is just awesome. Megan, thanks for joining us here in our Bloomberg and a rich studio here. What did you take away from the FEDS actions yesterday?
Yeah, so I think that the commentary from Chair Paul, as you said, it was a bit more hawkish. So you came in and the market was pricing a very high probability of getting a second rate cut in December, and you know, he said, it's not a foregone conclusion that we're going to do that. There's still you know, haven't had much data with the government shutdown, and so he did leave things a little bit up in the air and indicated the committee is a bit divided for
credit though. I think, you know, investors are still just focused on the broader easing bias. So they did announce an end to quantitative tightening, which would start December first, so that you know.
That's a positive.
That's that's easier conditions, And whether we get a cut in December or January, I think still still positive for credit market. So not a huge driver of price action for US I expect, so not as.
Much data that we've received this month as we been in the government shutdown. But how is your team thinking about the balance between inflation risks and growth concerns as we really think about assessing, you know, credit spreads for instance.
It's it's a great question.
So I think with the last CPI print, we did get a little bit of relief, and there's some indications that inflation is not yet accelerating, and the FED has told us that they want to prioritize the growth pillar. And so in our view, we think that the FED, even if inflation does look a little bit sticky, is going to prioritize that and let things run hot. And for credit that's actually a very bullish, a very bullish outcome. You potentially have front end rates coming down and then
letting the economy run a little bit hotter. So it would be positive for the credit markets.
All right, where are we taking credit risk at there? Megan, I look at them, looking at the end go function, which they've reconfigured, so now have to relearn this one. But we do some really positive returns there in the corporate ac set point eight seven percent for the Bloomberg US corporate aggregate in next we own it great returns and.
FIXT we so we have a preference right now for high yield over investment grade. And you know, as you've also probably seen, there were some headlines related to recent credit bankruptcies that that came across, and I think we think those are idiosynocratic, but they really harmed high yield credit spreads a bit more than investment grade. So you're
seeing those spreads UH trading a little bit wider. Single bees in particular, we think look wide and if we do see earnings as a good indicator of growth ahead, I think that that segment could could really outperform.
Our corporate balance sheets still resilient or are we starting to see cracks there?
So far?
Leverage has been very stable for a few quarters, and that's that's that's been supported by two things. One, debt growth has been relatively low, so you have these high rates and and issuers all else EQL are less likely to borrow more debt and then the second pillar is earnings. Earnings has been very strong and we thought by now that potentially you would see some of this tear, that the tariffs start to pass through to margin, start to harm the bottom line, but so far we're not seeing it.
Earning earnings broadly has been quite strong, so leverage, corporate leverage that we focus on, cash to debt all very strong metrics. I think the question for twenty twenty six will be do we see a pickup an M and A. Do we see some of this AI capex funded through the debt market and have that story change? But for now, balance sheet's still very resilient.
How do you guys allocate to private credit?
So private credit exposure, you can get exposure through the business development companies, so there are some publicly traded BDCs that investors can gain exposure to credit. Our view is that we like the debt of BDC, so they sell bonds, you can buy the credit. And then there's also the
equity component. The equity has struggled recently because of rate cuts and also some of these headlines around single name credit, but in our view, we think that the credit spreads of BDC's look attractive here and are worth considering to add risk?
What sectors are looking most vulnerable to you in terms of you know, maybe potential refinancing risks, especially given the high rate environment.
So I think we're we are watching the K shape recovery. I think sectors that are more exposed to lower income consumers, so think about auto lenders, subprime consumer lenders. Some of the retail sectors are a bit more exposed, and we are seeing, you know, the few defaults that we have seen recently in the headlines have been in those areas, So we like avoiding those areas. In areas that we like more, we do like exposure to cyclicals. So one of our top trades is in overweight to US autos.
That's that's done very well. We think if we do have this kind of hotter economy scenario that we're talking about cyclicals, that cyclical premium should tighten.
Where's the risk out there in the credit markets here from your perspectives, I haven't really seen it. I mean, if credit quality seems pretty solid, liquidity seems okay, what's the concern for you.
At the Yeah, I think you know, we would watch for a growth slowdown. I think you know, Ernie says, really been booing everything up, and so that would be one scenario we're worried about. Or you know, to the discussion on inflation, if we saw a reversal and really an acceleration of inflation, if it changed the Fed's posture on easying and we ended up getting great hikes, I think that that would be something that would also concern credit markets.
Megan, thank you so much for joining us. Really appreciate it. Megan Robson, Head of US Credit Strategy at BNP.
Harry Bob This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Easter and on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal