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Joining us right now.
Phil Corporeal is with JP Morgan as well.
Your midyear review.
You got to be coming out with fifty sixty seventy pages. What's the paragraph that you most debated about? You get twenty people in a room. What was that single paragraph on page thirty two where there was JP Morgan collegial debate.
It had to be the federal reserve over the next six to twelve months. I mean there's still a camp for us that believe that it's a federal reserve that's going to be on hold. And then there's still a camp that believes that this inflation could be a little bit stickier that would have to force them to move and that has acid allocation implications. Tom. But I will say there's been so much headline around how much is their price to move? Nine of the eighteen last week
believe that they should be moving rates higher. I keep going back though, to the fact that this market, via the ten year note, which I think is the most important rate on the whole Yell curve, has given the Federal Reserve a vote of confidence in terms of them achieving their price stability mandate. The ten year Treasury rate today right now is lower than where they came out
on last Wednesday when they were supposedly hawkish. Now they moved the che year note up, for sure, but again I think the ten year note is the most important rate on the curve, and then the volatility of that rate, the move index is back to where we were before r N. And if you think about capital market activity, confidence, even the housing market, low volatility on the ten year note, I think is a really good backdrop for taking risk.
Bulls out there will suggest that we've seen peak great peak inflation.
Yes, are you in that camp? We are, so, we believe primarily from the fact that we sit here today on June twenty third, and oil prices are around seventy five dollars, and they got as high as one hundred. Gas prices were up at four dollars and fifty cents. They're now down at about three dollars and ninety cents. So that move alone, Paul, leads us to believe that we saw a peak.
Now.
Could there be some stickiness in service sector inflation? Sure, I mean that's why the Federal Reserve is an easing policy like they thought they were three months ago. But I think that's okay. Service sector inflation is okay if it's emblematic of a resilient consumer. And Paul, as you know, the US consumer is the most important thing to get right. If you can get the US consumer right, you can get all of your acid allocation right.
Just filled up the VESTPA over the weekend three dollars and eighty seven cents for both gallons two gallon.
That's going to take me for the rest of the summer.
Exactly. So what are we doing here as to maybe kind of asset allocation here as we think back that, you know, the back half of the year here.
Yeah, So, Paul, we still believe in the AI trade irrespective of what's happening in places like Korea overnight. I keep going back to that stat that there's a thirty percent increase in the supply for semiconductor chips and a seventy percent increase in the demand, Right, that's economics one. One that those earnings we think are sustainable. But at the same time, one of the things that's becoming front and center is a sector that's actually negative year to date,
that little sector called financials. So financials for US, three things really point us that way in terms of the acid allocation and the rotation. The first an inflection and earnings. Second is a buyback and a dividend story that looks really unique. And then the third goes back to the consumers. I just mentioned loan growth and if we're putting geopolitics in the rear view mirror, okay, that's one of the assumptions we have to make here. That then gives you know, that long world story.
So Gale and Greenspan nineteen seventies. Loan growth, how is long growth?
Yeah, so in terms of what the growth the overall economy.
I mean, it's such an old school thing to say, is there demand for loans?
Yeah, so that we think that there is going to be incremental demand for loans because the US consumer stays afloat. That's what it comes down to. So if they're demanding that, and again this goes back to the tenure. Note this goes back to the volatility of rates. Capital markets activity
happens when people aren't nervous about moves higher and rates. So, Tom, if we're of the view peak rates, peak inflation in the second quarter, and that means you can see some incremental loan growth into the back half of the year in a sector that again is negative year to day. So that's the relative value opportunity Tom, that we're looking for.
What are we doing in a fixed income market here? I just sit in a two year and get four spot two on a two year treasury? I mean, do I take credit risk.
Above and beyond that? Yeah, So that's a really good question. We think that the ten you note probably settles at the end of the year around four and a half to four point six percent, So basically where we are where we are today. The real problem for me is people believing that they're getting the risk free rate, the federal funds rate in their checking account savings, got some
money market funds, Paul. The average yield on checking savings and money markets in this country is fifty two basis prides right, fifty two bases much you could throw a dart at any asset class this year and beat fifty two basis points, so within fixed income. Again, if we saw peak rates, if we saw peak inflation in the second quarter, extending out of cash into anything you mentioned the two year and old. Okay, even even short duration credit makes sense.
I'm looking at Cathay Pacific, just out, folks. This is the giant Hong Kong. I had a huge affiliation with him years ago when I used to go there all the time. Paul Cathay Pacific to cut fuel search charges for flights July Rar, I mean the micro data where this keeps going. And to me, Phil, it's a calendar item. We mentioned this with Robert Teeter. I'm sorry, nine days before the end of every single quarter. Everybody has a Bart Simpson cow about earnings and revenues. It's not if
a sophisticated but it's a calendar item. OMG, We're all gonna die. That's the basic idea.
Yeah, so that's that's one hundred percent the case. By the way, speaking of earnings, Tom, six straight quarter of double digit earnings. Yeah, it's like the opposite of the model again that going forward we do have doubleged earnings growth into twenty seven, but six straight quarters we're not modeling. We're not modeling that, Tom, but it's kind of the opposite of a bubble. Like if I just look at the S and P five hundred pe ratio, it's lower
today than where we were coming into the year. Earnings have completely dominated the total return on both the index level as well as the information technology level. So it's pretty nice fundamental story combined with the evaluation Sloy. We have to match those two things up to be bullsh on the market.
Sill Cam Pouriel, Chief Investor Strategy is GP Morgan Wealth the Management. Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
Shuning so Ellen Fraser a partner and energy expert burringa partners out of the United Kingdom. Ellen, can you just say simply we remove the peak and petroleum prices and we have a new regime now of getting back to normal.
Yeah, soundy?
That would be the hope. I think there is so much economic and political pressure to make sure from all sides, frankly, that Straight stays open and all of the trade flows get back to normal. Certainly, the markets are pricing in an expectation that we're getting back to some level of normal. Let's be real about it. There's quite a rocky road ahead.
We've seen that in the last couple of weeks. We've seen that, you know, persistently over the last few months around a deal or no deal, straight open or straight not. And it's really, you know, really critical that we get back to reliable flows given where stock levels are more generally but trending in the right direction, I think, is the overall summary.
Ellen, what do we know about damage done to some of the energy infrastructure in that part.
Of the world.
Yeah, the energy infrastructure damage was quite early on in the conflict, so we saw ras Laffan taking a hit, we saw some other facilities taking the hit even actually the Sidi pipeline took a hit at one point as well, and that Sidi pipeline being quite important because it's the one of the key routes out of the Strait should they actual straight be closed. It's an overlandpe line into the Red Sea, so it offers a bit of an
alternative flow. Some of those areas of damage will be relatively easy to get restored, and there will have been activity on that already some of them. However, and certainly you know that the Razlafan timings they quoted when it first happened three to five years to get that facility back up and running. Now every bit of pressure, economic pressure and political pressure will be on them to get that up and running more quickly, So that three to
five year timeline is probably worst case scenario. But there's absolutely no doubt there has been some structural damage and that will take time to get back to normal.
Well than all your knowledge found in physics at Manchester, Alan, can you say that we underestimate their ability to rebuild and heal and frankly to do new projects as well. I mean, basically the history of these people is so they have to build something, they get it done, don't they.
That's exactly right. You know, a very very resourceful set of nations over there, and frankly, they have significant assets behind them, and they have significant incentives to get that oil back on the water, get the gas back on the water, and all of the other products that have been impacted as well, and they can pour resource into it, and they're happy to buy resource from elsewhere as well.
We've seen that, you know, even just simple things like the World Cup, the amount of effort that went into building the infrastructure in very short timelines, sometimes with some negative consequences in terms of human rights, etc. But you know they will get it done, you know, at quite an interesting pace.
Ellen, Thank you for the brief. Alan Fraser with us from Brewing of Partners. Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoon from seven to ten am Eastern Listen on Apple Karplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.
We now commence a three hour interview. Gary Gensler joins us now. He's a former chairman of the Securities Exchange Commission, a modest tenure of duty at the Gulben Sachs as well and critically long ago and far away writing legislation sarbains Oxley is well well well over twenty years ago. Gary,
I've been dying to talk to you. I read all the wonderful comments on this life of Alan Greenspan, and I get the criticism about interest rate dynamics in two thousand and five, two thousand and six and that, But I'm going to go to a guy that you have a nodding acquaintance with, one S. Johnson up at MIT.
I've quoted this many times, folks, Simon Johnson and his magisterial thirteen Bankers the SEC not Gainst's sec Final Rule Alternative net capital requirements for broker dealers that are part of consolidated supervised Entities August twenty, two thousand and four. Gary Gensler. We can criticize Chairman Greenspan, but he had a lot of help in screwing us up into the financial crisis, didn't he.
Well, there was a broad miss I don't know how else to say it. Policymakers across the spectrum and the American public paid the price, and we exported by the way that crisis around the globe. But in terms of Allen himself, I worked with them closely in the late nineteen nineties. Actually met Allen in the nineteen eighties at a wonderful dinner at Larry and Billy Tish's house in the mid nineteen eighties, and Alan was a dedicated economist, a dedicated public servant, and looked none of us get
everything right. And yes, in those key years going into that OA crisis, there was too much leverage being built up in the housing market, too much leverage being built up in the financial markets.
One final question in Sherman green Smith, just is Paul and I feel the news flow right now. Gary Gensler is just so important. He was in my estimated market economist. I love what Greg Yips said, more accountant than theorists. Do we need more central bankers steeped in trucking data in Nebraska? I mean, do we need a more of a tinge of Alan Greenspan in our future economist types?
Well, I'll tell you the other thing about Alan, having worked closely with him for three or four years, maybe not as closely as others. He also was really steeped in the financial market. So there's all sorts of different types of economists.
And we've had leaders of the Federal Reserve that were lawyers.
We've had leaders of the Federal Reserve that have come from all sorts of places. William McChesney Martin famously, from the nineteen fifties and sixties had run the New York Stock Exchange. Alan understood markets. He was a young guy. He used to trade futures in the old Chicago Mercantil
type of futures markets. And I remember conversations with Alan about futures in the nineteen nineties, and then when I took the role at the Commodity Futures Trading Commission, Allan and I would sometimes get on the phone and he said, well, this is how futures markets really work, and this is how energy markets and he'd beg into the backwardization of the markets. That was remarkable about Alan. I think he
had a sense of financial markets. He had too much of a trust, though in them to right themselves when they were in balances, and there were big imbalances he navigated during the Internet enthusiasm, but he didn't quite navigate that on the house markets.
Paul Sweeney, you get lucky. You have Gary Genslron and moments ago across the Bloomberg is a five trunch SpaceX benchmark, dead offering right, perfect timing.
Gary, We're at a time here in the markets here where we're getting just these mega IPOs SpaceX, you know, they went public, and we've got Anthropic and Open Aiet's send a signal to you and to others about where we are in this market cycle.
Well, I think so you used the word signal. I use the word Tell Simon Johnson, who you mentioned earlier. He and I do this podcast and we just put one out on the mega IPOs just this morning on power and consequences. And I think the overall equity markets, like Alan kreen Spence nineteen nineties, equity markets is funding this big burst of infrastructure built in AI seven hundred and fifty billion dollars this year, up threefold in just two years. And to scale that, that's about two and
a half percent of our gross domestic product. And so then you have like Space Echo public and maybe Anthropic and Open AI.
We'll see.
I think that's somewhat of a tel Google raising eighty five billion, and the markets have to digest this, and then there's valuation questions. You know, I at one hundred and one hundred and forty times revenues without earnings. So this will all sort out, but it also might be
six months from now we look back. It was fine, but there's an equal and better chance that six months from now we look back, we say, as all those venture capitalists and sovereign wealth funds starts selling those shares, that you see a downward pressure on the not just SpaceX, but the whole market.
You're up there at MIT, Gary, and as I understand, there's some pretty good engineers and computer geeks up there as well. What is kind of your understanding? What's the understanding up there at MIT just about AI today? Because initially we in the marketplace, we just said, let's just buy the chips, but there's more to it than that. Market seems to be trying to discern some winners and losers. How do you guys think about that?
Look, there's thousands of remarkable research scientists and faculty here, so I can speak for.
Just maybe myself, and I think.
AI is the most transformative technology of our times. But we've had this before. If you go back over the last two hundred years from canals to the Internet to this and what happens, and Ray Dalio talks about this too. We get an over enthusiastic financial market support, and then at some point we build so much infrastructure we have a reckoning and I think that's what you learn from history,
is that we tend to have reckonings. Now, is it a calamitous reckoning like with railroads in the eighteen seventies where we had disastrous recessions? Is the reckoning like after the nineteen twenties we had a big boom on.
Electrification mostly in utilities.
Or is it like the Internet where you have a modest reckoning, still a recession. And that's so AI is transformative.
One last thing, Paul, I think of.
It a little bit like a parlay bat. You know those the prediction markets. You have to have two things. You have to have AI hyperscalers and open AI be able to build the revenues. Right now they don't have the revenues. And two, you need to build productivity in the economy enough for the capital markets to overlook all the disruption, all the companies that are going to be disrupting value with a successful AI.
We continue with Gary against the former chairman of the Securities Exchange Commission as commitment to Sloan, where he's won a couple like student trophies. Is that right, I didn't fall asleep in his class trophy.
Doesn't wonderful. Tom, You're two kind.
He does a wonderful podcast as Simon Johnson. I want to go two questions here very quickly.
A lot of people.
Went retail on bitcoin and they enjoyed buying it one hundred or one hundred and ten. What do you say to the retail crew that have losses in bitcoin?
Look, markets both trade on sentiment and fundamentals, and the challenge for those purchasers who are is what are the fundamentals we were just talking about that is with SpaceX. But there's a real business there. I mean Elon Musk has built a real business. It's just a question of where do you value it?
Here?
The EBB and flow of any purchaser of bitcoin has to think, all right, what are the real use cases? And particularly to be even more careful with the rest of that asset class crypto. It's like meme stocks. You have to be very careful that you're not trading just on sentiment.
I'll refrain from editorial lensing here for Tom. I've got to chart from Jeff Jacobson. Thank you zero Hedge for this. Gary Gensler, to me, it's manipulated. They do an IPO which is five percent of the SpaceX float. They trunch it out August eleven, twenty one, September ten, September twenty five, they get fifty percent of the stock out October ten. They finally get out to sixty percent of the stack
out December ninth. Is it just a manipulation of folding the trend the stock into the public in a way that keeps the fervor up. It doesn't seem like the old days where a company went public.
Well, so here's the other thing. Nasdaq made an accommodation in how they do their index, the NASTAK one hundred and Once there's thirty percent of that stock outstanding, which might happen as soon as mid August after the earnings release. Once that happens, the entire free float is count it into the indexes, which put out Elon's forty fifty eight percent might fold into the indexes, and then there's a buy. But here's the other side. I caught the great rebalancing
all those venture capitalists and sovereign wealth funds. They're going to want to take risk off the page. I mean, Tom, They're not going to want to just leave their profits in and say, let's let's go for more. They got to take you know, a third, a half, maybe three quarters of the risk off the page, and so there's going to be a lot of selling pressure too as these lockups come off.
Gary, as we think about the continued rollout of AI across the economy, what do you think the regulatory framework should be going forward?
Look, I think with any great technology, a society adapts and says, listen, there's public goods and we have to promote them.
We call it responsible AI.
I started doing work on this years ago and tried to move the ball on that even at the Securities and Exchange Commission. I think the most it's happening is at the States about protecting people against bias, protecting people's privacy. Of course, the accuracy of it, but when the algorithms are making decisions on our behalf, who gets healthcare, who gets a job, who gets credit, it's important that they
are accurate. And I think that right now this current president is more into let's just support a competition with China. Let's you know, as they say, just take off the regulatory guard rails. And yet I think society is reacting and starting to say, what about my kids? What about addiction, what about the use of this, what about my lost job potential?
Maybe?
And so it will be a very interesting next several years in terms of the politics.
Of all this, Paul, what's it like working Simon Johnson? I mean, I've known him for years, We're quite close, et cetera. But I'm not in the trenches where gunstlers to walk in the room with the Nobel Laurier. What's it like working He's Johnson?
It's fabulous. He's a very gracious colleague. He's got a fertile mind, I mean his mind just I mean, how did he come up with those ideas in the nineteen nineties working with Drona s and Oaklow and Jim Robinson. It led to that Nobel prize. But it's a remarkable collaboration. Sometimes sometimes we in the classroom have to make room for each each of us. And he's he's a remarkable chalkboard teacher as well.
This is a secret of his.
But he loves being at the chalkboard and summarizing things and then bringing students into that conversation.
Here at MIT, Stanley Fisher has a great story. Gary of Samuelson was so angry at his incompetence that he ripped the chalk out of Stanley Fisher's heads threw it across the room. Some of that some of the intensity at the Massachusetts Institute of Technology. Their next podcast will be how to Fix the Red Sox. Gary Gensler is a former chairman of the SEC, and we greatly appreciate remembrance for the life of Allen Greenspan. Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Apple Karplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.
William Dudley is a different FED president, Yes, of the New York Fed and all, but far more. He built Goldman Sachs Economics with Ed McKelvey and the rest of Young Yanah. At the time, Bill Dudley joins us this morning to me Bill Dudley, and the phrase I've always used is chart paragraph, chart, And it was a people like Hymen and Yardnni at CJ. Lawrence. It was the Bear Stearns combine with mail pass and writing, but more
than anyone. It was Goldman Sachs chart paragraph chart. Alan Greenspan loved that at the end of the day, he was a market economist, a ween to data.
Do we have anyone that can be like.
Alan green Span in our future or was he a one off in the history of our economics?
Well, if you're here, it takes up a long potential times of I'm sure we'll see someone similar to green Span in the future. But you're right. He was a different type of FED chairman because not only was he very knowledgeable about economics, but he wasn't academic, and so he was basically going from the data to the decision making rather than from the model to the decision making. And so sometimes when the world changed, he got it
right before anybody else did. The best example, of course, was the late nineteen nineties when there was the three Boom and greenspand held off on tightening entree policy. So I think he was, you know, an exceptional exceptional chairman, both in terms of his understanding of economics, his openness to data, his willingness to you know, change his mind and update is his forecast. I think the only really you know, blind spot was really his views about financial
stability and regulation. His view was always, you know, we can't identify bubbles in real time, so all we can clean up after the fact. And obviously the Great Financial Crisis showed that cleaning up after the fact is always it's not always the right approach.
Well did you get into your excellence at Berkeley and to say, okay, it is about the regulation decision. Are we making the same mistakes today that the critics say were made in five six?
I don't see the same kind of problems. Number one, in terms of, you know, the market having a lot of assumptions that will ultimately turn out to be wrong. I mean, if you look at two thousand and six, two thousand and seven, there was all these assumptions triple A CDOs are safe housing, markets can never decline on a national basis. You know, you know, there were just a lot of assumptions that turned out some prime lending is not risky. All those assumptions turned out to be
dramatically wrong. So I think, you know, I think there's risk of financial stability today, obviously in the non bank financial sector. But the other thing is we have a much more robust regulatory regime. I know, I know we're in the process of dismantling that to a degree. I think it's important that we don't throw the baby out
with the bathwater. But you know, we did learn a lot of good lessons from the financial crisis that I think means that the financial system fundamentally is stronger than it was back then. All that.
Putting all that together, Bill, what do you think the legacy is for mister Greenspan? With our little bit of a hindsight.
Here, I think he's obviously going to go down in history as a great central banker, also go down as someone who was really politically adept. I mean, he navigated through democratic and Republican administrations really well and didn't have the kind of conflicts that a lot of other central bankers have run into, like J. Powell, for example. So I think that combination of good economic intuition, reliance on data, ability to navigate through Washington really well is pretty special.
I just wish he'd done a little bit better on the financial stability regulatory side. If you did that, he sort of get straight.
A's let's fast forward to today, mister Walsh. We did hear from Kevin Walsh last week for the first time as chairman of the FED.
What were your takeaways?
Well, I think the big takeaway is number one that it's going to be a different regime under Kevin Walsh. You know, so the regime change that he promised is in the process of happening. You just tell it right off the bat with the very very much shortened statement, I think, and the getting rid of four guides I think is completely appropriate.
But I'm pretty.
Nervous about his views about not communicating at all about how the FED is likely to react if the economic circumstances has changed. This reliant on the markets views to sort of guide policy, I think is a mistake. The FED Reserve needs to set monetary policy, not financial markets. And then if you're relying on the on the markets, how do you make the decision? Markets basically don't price to what they think the FED should do. They priced to what the Fed what they think the Fed will do.
So if you're relying on the market, you're sort of you have this indeterminacy about what you should do. So I think so I think that's a mistake. I think, you know, I think transparency, I think it is very helpful in terms of the conduct of monitary policy, because you do want markets to think along with the FED when you know strong economic report comes out. You want the markets to reprice in terms of their expectation about the monetary policy path. But to do that well, you
need good community, good communication. Market understand the fed's Monterrey policy reaction from you. So I think the risk here is Kevin is throwing out the baby with the bath water. I have no problem getting rid of afford guys, but don't throw out information about the Fed's Monterrey policy reaction function at the same time. And I think he did that at the press conference because he was asked very explicitly, what would how you didn't want to tighten Nentre palsy,
and he really want to answer the question. I mean, obviously, obviously answer would be if inflation stays longer for higher than I expect, then we'll obviously have to tighten Mantrey palsy. Or if the economy is stronger than what we expect, then obviously I'll advise up my estimate of a neutral mantary policy. But he refused to answer those questions, and I think that's maybe okay for the first press conference, but I don't think that can be sustained over time.
Dudley fired up. That's what we're saying right now, William Dudley with it. Soon we continue, the former president of the New York Fed. You're sitting there, Bill, all fired up, and everybody knows I agree with you on this. I mean to be polite about it. The heritage of your shop called Goldman, Sachs and Hosius has carried this forward. Is a disinflation narrative? Is the big shock after this war with West Texas? Intermediate to seventy one forty nine?
So I could get with constructive news is sixty nine handle. Here are we prepared, Bill Dudley for the disinflation narrative that could come.
Well, there's going to be a disinflation narrative really next month, rightway, when we get the PC and CPI data for June. Because obviously oil prices and gasoline prices have come down this month. But I think that you have to look in the broader context, what's the pressure on resources? More broadly, we still have a lot of price pressures, like for example, chip prices going up really rapidly. And I think the fundamental question really for the Mantre policy. Outlook is the
question is Mantre policy actually restricted today? And my own personal view is that there's not much evidence of that. I mean, we've had the Mantre policy at this setting or tighter for three years, and yeah, we're still at an unplaying rate consistent with full employment. So if Madre policy isn't restrictive, then why do you need to cut rates?
What's the next data point bill that you think the market should really be focusing on.
I think the layer market is really important here. I mean, I think if the economy is strong enough to keep the payrolls growing like the pace they've done over the last few months, the unemployment rates flat to declining, you know, that's going to continue to push the FED in the direction of thinking that they need to tighten Mandre policy.
I don't know, I'm a little uncertain about, you know, how fast Madre policy is titan it's likely to occur, or what that probability is, because it's not clear how much commitment Kevin Walsh has to actually doing it. I mean, the talk is cheap. Of course, everybody's in favor of price stability, but the question is what are you actually prepared to do to achieve that outcome, and I don't think we really know that at this point. I mean,
you couldn't you couldn't have obviously said the opposite. I'm not in favorite price stability, so it's not really clear that there's a lot of content in that statement.
Just valuable. Thank you so much, Bill Dudley with as a former president New York Fed in remembrance of the life of Alan Greenspan.
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