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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. We need voices, we need people with experience. And they said, well who, And I said, can you get that young Miller kid who was with George Schultz and James Baker just a few years ago, like Aaron David Miller thirty years ago, joining us now, a bit wiser, a bit older, Aaron David Miller out of Tulane and of course definitive at the Carnegie Endowment for International Peace. I want you to
tell me how the facts change, Aaron David Miller. If I go directly west of Jerusalem, almost to the Mediterranean, to I think it's genera.
I don't have it in front of me.
A little village thirty one thousand people directly south of Tel Aviv, where a missile took out a school in the dead of night.
No one was hurt. But how does that.
Missile, Aaron David Miller landing on that school in a small town, how does that change the dialogue?
Yeah, it has a ton of caderra and whether that was a strike or a shrapnel from an interceptor is unclear.
But look, I think there are two things.
And by the way, thanks for having me and I really appreciate that the kudos. Number one. What happened yesterday is virtually unprecedented, certainly in the air of Israeli Iranian Israeli conflict. Iran Locke launched one hundred and eighty plus ballistic missiles, and unlike cruise missiles, these take only twelve minutes roughly to travel from Iran to impact to an Israeli airspace. And it was a saturation attack. It covered
much of the country. Yes, it was directed primarily at several military bases and most out headquarters, but I've been to most out headquarters. It is not in some isolated area so this could have been, to say the least, a catastrophe, and yet Israel's an early air defense Iron Dome David sling Arrow managed to intercept most the US two destroyers shut down a dozen or so. The Jordanians contributed as well, and I think that's the good news.
That Iran may have three thousand ballistic missiles, but it took a huge shot yesterday and it essentially failed. At the same time, this is the second direct attack Aaron on Israelia. One was a thirteen fourteen. Israelis are are going to respond. I don't think there's any doubt. They cannot allow a quote new normal to be created. And even while they're degrading to his balla to a point where it is a hollowed out shadow of itself, they
are They're going to respond. Biden's going to talk to to Ntagnell shortly before the beginning at Rossia Shano, which.
Okay, see Aaron, just because of the time, because I know Paul wants to gain her. I got one more question. Paul's got a bunch of important questions.
Robert T.
Kaplan air and David Miller would say, get out the map from Armenia down to the tip of the Persian Gulf is five hundred miles and then it's another five hundred miles one thousand miles total across from Dubai. That's the western border of Iran. Where should Israel attack, Well.
I think the strikes will be multiple. I think there will be economic targets, there will be strategic conventional military facilities. They'll be IRGC command and control facilities, the nuclear sites. I'm sure there's an argument being made that now is the time Isabella is weakened and no longer has the deterrent capacity. Amasa's organized military structure has gone. Iran's defenses
are weak, So do it now. I'm taking a fire here, but I think the Israelis this time around will avoid Non Taz and the enrichment facilities.
Okay, because I mean Aaron. I think a lot of folks just were coming up to the one year anniversary of the October seventh attack here, and the scope and the aims of this response from Israel gone from decapitating Hamas and getting the hostages back to something much much broader in the region, And as you suggest, perhaps the thinking is, if not now, when do we deal a really severe blow to Iran. What are the chances of that in terms of the nuclear facilities do you think?
You know?
I think the argument can be made us elections coming, the Israelis have more margin for maneuver and operational capacity now. They probably will never have a more provicious moment. Question is whether or not this would be coordinated with the United States. Again, I'm assuming they'll be. The Iranians are going to respond to whatever the Israelis do. Most likely there may be ample opportunities. But again I'm thinking opportunity
or not, Israeli can set the program back. They do not have the capacity to fundamentally destroy it and permanently prevent its rebuilding. And remember, iran Is nuclear rimes told State they don't yet have a clear weapon, and I think that has to be taken into the mix.
Aaron, I've got to get this in with great respect to your public service. Back thirty years ago, what would it zach Rabin say right now?
Raben would not have handled October seventh the way this current Israeli government would have handled it. Raben would have responded, probably as forcefully. But during the course of that conflict, this man who had a sense of strategy, understood the relationship between the application of military force and achievable political endgames.
Rabina would have understood that Israel's involved in three wars of attrition, one with Hamas, one with his bow, and obviously one with thereon, and I think he would have begun to understand and to work with or rather rather than not against the United States and other regional allies, the amidies that by Rainy's Saudi's, I'm trying to figure out a way to create an alternative to Hamas in Gaza,
and an alternative political reality over time in Lebanon. That's the difference I think between this is rarely prime minister on trial for bribery, fraud and reach of trust, and it drew from this court whose entire world is driven largely by his political future or the absence of one, if he should be convicted and have to cut a plea deal by prison time.
That's the difference.
This has been wonderful, Aaron David Miller, thank you for your contribution. With Carnegie, there's no other way to put it. His wonderful book years ago out as well, The much too Promised Land, Aaron David Miller.
With US now is someone who runs some.
Money in charge of all the dividend complex, a federated Pittsburgh and also an author. I've said a lot about the immense intellectual challenge of Daniel Parris's The Ownership Dividend. It is a dense short read on what's really interesting about how equity stocks became in This is a quote from the book. US stocks began moving in the direction of becoming nearly cashless investments. Wonderful to have you here. You mentioned buybacks. Maybe we've reached a peak. Can Apple
just keep buying backstock? Mathematically? Why can't they just keep giving profits buy in backstock?
Thank you having me on the show, Tom and Paul. You know, I would dispute the notion that they're buying back, that they're giving profits back to shareholders. I can take a different view of buybacks. But right now buybacks are very, very popular. They're going to continue to do it. I think their last authorization was one hundred billion dollars. It's
a stunning amount of money. We're heading towards a trillion dollars in buybacks this year in fiscal or calendar twenty twenty four, dividends from the s and P five hundred will be about six hundred and six twenty or so
six twenty five. So buybacks are just wildly acceptable from a shareholder perspective, though a business owner perspective, investing through the stock market, buybacks don't really work for with fewer shares if you do now, most companies announce share backs very loudly, but the amount of the share capital that they take out of circulation is always lower because they're issuing shares out the back door, and they're timing of buybacks. You know, the market center all time high. The timing
of buybacks is generally fairly poor. Companies initiate buybacks when they are flushed with cash. It would be better if they did it when they were in the swale of their cycle, not at the peak. So there are lots of reasons why the backboard math of buybacks, which in the academy is neutral to a dividend. I write books and books and books, and why that's not the case, but why that's just not the case in the market.
I got to bring in our guest here because we go into a three am meeting. Bloomberg Surveillance and Sweeney's like a robot get parason, Get parason, Get parason, Paul, this is your guest exactly.
Hey, Dan, I mean you know when I was a research channels to Wall Street that you know, had my income model, I had my balance sheet model, but by far the most important model for me was my cash flow model. I wanted to know where the cash was coming from and where it's going. So, when you sit down with a management team, do you have a preferred strategy of Hey, you've got x dollars of free cash fl overy year, we think this much to go to buyback,
this much to go to dividends. Do you have a policy you like to talk to management teams about it.
We are not in the interest of starving companies of capital. That is the number one acquisition made against business owners in the stock market, Minority business owners in the stock market seeking a cash payment for the capital. It is not that we're trying to bankrupt these companies. But there is a reasonable allocation for the US stock market for decades. US economy for decades, indeed, better part of two centuries was able to grow very, very rapidly and have a
dividend payout ratio of approximately fifty percent. So we're able to build an industrial juggernaut and still pay out cash dividends. Now you have tech companies and others saying, oh, if I pay a dividend, I won't be able to grow. The fact is they're using the money for other purposes. But I would say that we've been around a third
for a while, for the last decade or two. I think the more appropriate level for a business owner approaching the stock market as an opportunity to own businesses over the long term is something closer to about half. And that's free cash though, as you know, that earnings payout of nominal book earnings at this point is so polluted with the accounting challenges and the Shenanigans of adjusted EPs and so forth, that we really at free cash flow.
So for you know, our stock market has been for a couple of decades at least driven almost entirely by big technology companies. Even more so over the less few years. They'll give you a token dividend Apple Meta, you know, less than one percent. What do you say to those management teams who have literally almost countless free cash flow every single year?
Yeah, And so this year we saw a couple of companies move in that direction symbolically token, no more than that, so I don't want to discourage that behavior. But they're not part of the dividend universe yet because the cash flows simply aren't there to the minority shareholder. So we like the movement in that direction, but it's not material yet,
and so it's a journey, not a moment. It would be stunning if one of those large companies were to announce a dividend payment that amounted to three or four percent of their share price of their market capitalization, and announced that they were backing off of the buybacks, but that would get our attention.
Discuss Duke Energy. Good morning, Tim Cook.
I know you're listening in your commute today out in Coopertino. Duke Energy with a three point six percent yield. Their persistency of excellence over twenty years is jaw dropping, coming out to about a ten percent return, but their five year dividend growth is two point zero two percent, which matters more the yield or the dividend growth.
I'm not going to discuss individual securities, but I will answer the question. When you operate with a high yield, the hard part is dividend growth. So the US stock market has a yolda around one point three percent. We target in our portfolios a gross yield between four and five percent. Duke meets that standard. Other companies do as.
Well at that level.
The hard part's dividend growth, where we spend almost all of our time is trying to figure out those companies that do have a reasonable cash flow pad are they in a position to grow better? You ask about utilities in general, they have been among the less rapidly growing dividend companies are the last couple decades. However, watch out
over the next couple decades. The demand for electricity is finally stopped being flatlined, its kicked up, and these companies are well positioned to benefit from them.
Okay, so Totel of Paris, I mean, I don't want you to go into the individual stack, Paul, but I got a five point one percent yield in a dividend growth like Duke energy of three point five percent. When do you know you're a yield hog or a dividend hog versus doing something intelligent like Paul does.
In his five oh one k.
So Total has its enter its analyst day today in New York. I'm heading to that right after we sign off, and so we will find out what they're announcing, but they do that company can't discuss individual securities, but I can say the numbers that you presented have a reasonably good balance of dividing yield and dividend growth. But your question again, where the risk of being a dividend investor in a stock market is exactly what you identify, Tom, and that is the risk of being too yielding and
not enough dividend growth. And that's what we work on sort of every day in the portfolio.
So what is that balance for you?
I mean for us, it's roughly fifty to fifty, meaning we are looking for an even four to five percent yield at the portfolio level, not individual securities, and roughly the same and dividend growth and the harder part, I will tell you, in a one and a half percent yielding market which is all oriented towards buybacks and flashy, shiny new objects, the hard parts of the dividend growth and that's where we spend most of our times.
Thank you so much.
Great to have you in our studios here from Pittsburgh Baseball Park in America.
A question about that with the Pirates, the.
Book is the ownership dividend is he manages the dividend portfolio.
It federated.
Daniel Paris, thanks so much for being with us this morning. With the tensions of the world, maybe a little bit of Erning's as well. Nike and Humanna very difficult this morning. Future is negative ten to futures negative one forty one.
The VIX out over twenty nineteen point four five. Right now on.
The VIX Paul Sweeney's yield the two year yield three point six y one percent. Higher yields three point seven six percent. You had a three ninety nine to thirty year now four point one one, so a higher set of yields across a full faith and credit curve.
On oil, Brent crued up two point eight.
Percent, up of full two dollars. It's gone negative two standard deviations out the plus two standard deviations eloquently, It's seventy five point six zero.
There was a debate last night.
Different I did not, but I got the highlights this morning. Much like you would go to ESPN for sports highlights, I went to guess some most highlights. It seemed pretty reasonable. They'd act like reasonable adults. There's some politic.
Aed Mills they were polite, cordial, deferential, joining us now the polite, cordial, deferential Ed Mills, policy analyst.
At Raymond James.
I was thunderstruck Ed Mills by the decorum almost to the edge of Kennedy Nixon just a few years ago, ed before your time. Is that where we're going in five years when all of this anger recedes?
Tom?
I hope.
So you know, I was struck, and I have folks on my team who are kind of somewhat newer, kind of I don't go back to Kennedy Nixon, but I've been watching for my adult life the all of the debates, and it's been remarkable. You go back to twenty sixteen, you go back to twenty twenty, and it seems like
this is the conversation we had. The more substant to debate was at the vice presidential level, and when you turn on the commentary afterwards, there is a lot of conversation of would the American people prefer these as their candidates. I do think it's nice to actually have a debate where you have candidates turned to each other and say, I actually agree with what you said, but here's my vision. And we had that multiple times last night.
So Ed, I mean, the reality is vice president debates have little impact generally on the broader general election. As we make this sprint here towards No. Fifth, what is the goal of each campaign do you think?
Yeah, Paul, I think that that's absolutely correct. What we wrote in our note at Raymond James was the goal of a vice presidential candidate is to get the American people to have comfort with him or her on whether or not they could be president. And I think both of those candidates clearly cleared that bar last night.
As we look to your question and.
What the sprint is to the end of the month here into November fifth is trying to get momentum back for the Trump vance team and trying to maintain the momentum for the Harris Walls team. And I continue to believe we have seven swing states, but as I do my maps, it's very hard to see one side winning
unless they capture Pennsylvania. So it's going to be essentially all four of those candidates should take up residency, either in Philadelphia or in Pittsburgh and see what they can get out of that state to see who can win this election.
So Ed, I mean, you know, Tom and I by it, by our math, we think there's forty two people maybe in state of Pennsylvania that are going to decide this selection. I just don't recall it ever being so tight. It seems like a new world of campaigning, a new world of politics seemingly gets tighter and tighter. What in fact can be done between now November fifth by either side?
Well, I think it's an important question because we do have the fact that we are just started the month of October, and we have a list of potential October surprises. So for Harris, I think it is about trying to contain those surprises, trying to contain some of the momentum that she's had since she's announced.
As a candidate.
And for Trump, what we're watching is back in twenty sixteen and twenty twenty he had a surge at the end. Is he able to capitalize on this and get that surge once again?
Yeah?
I mean Walter's note out at Cook Political Report at this morning is jaw dropping on the closeness of this and the dynamics here. She takes undecided in swing states from ten percent down to five percent at Mills twenty twenty NPR quote just forty four thousand votes in Georgia, Arizona, and Wisconsin separated Biden and Trump from a tie in the electoral College? Are we closer now?
Potentially?
And I look at that and I say, if it does come down to Pennsylvania, Tom, there's a law in Pennsylvania that does not allow you to open up ballots that have been mailed in until seven pm on election night. And so it's very possible that we would have the repeat of twenty two twenty in Pennsylvania where same day votes favor Trump. You have an election if and it
hinges on Pennsylvania. What I am concerned for from a market perspective, from a voters in the American people accepting the outcome of this election is I don't want to come down to one state and have that lead windle as kind of votes get counted and then a doubt set in.
And a civis question.
With your expertise here and folks at Mills for decades, legislative experience and of courses work at Raymond James, when someone says to you mail order votes are shady, uncountable, whatever.
Other language you want to do, how do you respond to that?
I point to the literature that shows that they are incredibly kind of safe and easy way of doing it. We have a couple of states Utah, Washington State that kind of almost.
Exclusively vote by mail.
When I started in campaigns, it was the exact opposite. It was disproportionately Democrats that showed up on the same day, and a lot of conversations was how do we shift that kind of politically one way or another, depending upon which side you're working on.
So it's pretty remarkable.
It's only in recent years where you've had those concerns pop up into our conversation.
Ed, what should we be looking for down ballot for each of these parties? Here are there certain states, certain seats that you're focusing on.
Yeah, So in the House of Representatives, I think the switch from Biden to Harris has probably had the biggest impact. Something I'm looking at there is that Democrats need to pick up about three or four seats in the House
of Representatives to win the majority. There are eight Republicans in New York in California who are labeled as toss ups, and so to the extent that the Democratic base has been energized since Harris has gotten into this election, those Republicans have a tougher kind of road ahead for them. On the Senate side, you look at the fact that Tester and Montana probably could decide who has a majority in the Senate in testers underwater. So Democrats have moved
into Texas, moved into Florida. The question there is is that a recognition of they are very much underwater in their attempt to keep the majority.
I think at thirty seconds, John from just east of Newark, New Jersey, asks, is assault tax going to get fixed.
If Democrats win?
I think the salt tax expires in resets to being unlimited. I think that there is a Republican sweep. It stays as if is if Republicans win, but there is a Democratic House, look for a compromise at twenty thousand dollars versus ten thousand dollars and an income threshold of five hundred thousand dollars to qualify for that higher twenty thousand dollars tax deduction.
John, thank you for that response. Ad Mills brilliant with Raymond jameson.
You know how much I hate the fed parlor game, except Paul, this time is different.
You gotta look at the parlor game.
Stephanie Roth with a brilliant note at Wolf Research really frames it out the many different opinions. Stephanie, critically, you say the three months trend is not one hundred and sixty sixteen. One hundred and sixteen thousand is published. But as a higher statistic, why is that many disagree with you?
Totally fair?
So when you look at the three month averages, it's been reported, sure that it's one hundred and sixteen thousand, but what you've seen historically is that August tends to get revised up so by actually the forty nine thousand by the third print. So if you incorporate those types of revisions, which we expect to see on Friday, and
of course we'll see whether that's right or not. But if we got a forty nine thousand upward revision to the month of August, in your three months ten is closer to one hundred and thirty five.
And what's amazing about this, folks one over the square root of n is she got Bucknell mathematics here along with masters and statistics from really Glumbia University. Like the other day we're talking to Sebastian Page about Gaussian and bluss on distribution.
Stephanie's all over this, She's all a master's and statistics. Oh my goodness. So Stephanie, people are telling me I really have to pay attention to this labor report this coming Friday. Is that because the Fed's really focused on that.
Yeah, this is the most important payrolls report of the year. Wow, for a couple of reasons. One this is we're now starting to get concerned about the labor market. We have seen a deceleration in momentum in terms of jobs, and Powell said this, it's not about the level of the labor market, but it is about the speed. And the next couple of prints are going to be really noisy
outside of this one. So once we get the October print printed in November, we're going to have the impact of Boeing Strikesotentially, we're gonna have the potential impact of port strikes. We're gonna have the hurricane, and that could last for a couple of months. So this is one of the cleanest reads. We're going to get in a point where the labor market is the most important thing here.
So stepping back from that, I mean, how how do you kind of view this labor market. Again, some people are saying, hey, if you look at the absolute levels, it's in good shape. Four point two percent whatever the unemployment rate, that's kind of full employment. But there are others saying, boy, the most recent trends are troubling. How do you kind of view it?
Yeah, and the recent trends certainly point to a deceleration. And this is kind of what a soft landing looks like. Right at some point, soft landing and recession look kind of similar because you get that deceleration, and the question is where you stabilize.
So what we're seeing right now is the labor market is fairly healthy. Claims are not picking up.
We're seeing job openings even yesterday that kind of stabilize. So our base case is that the labor market is going to stabilize at a level that's similar to what we saw in twenty nineteen, which is a healthy labor market. One reason to believe that is forgetting about the labor market data. But if you look at consumer spending, that
rain is really healthy. It's running at about a three percent real realized pace, which is which is better than most folks would have expected, especially if you're concerned about the labor market. This is just another economic data point that tells you that economy is really doing just fine.
Stephanie.
Gobensax came out where I believe a three point two percent run rate statistic and real GDP, which dovetails with your optimism on a labor economy. Do we still have a legitimate real wage?
Yeah?
Well, yeah we do.
We certainly do, and that's one reason why the consumer is still able to be spending. And now that you have inflation slowing back down, you know pretty considerably. Now you your wages are on your real wages are at least in positive territory, which is which is a good thing. For a period of time, that wasn't the case because inflation was running so high. But now your inflation rate is running at or even below two percent if you look on a six month basis, so consumers are actually
able to be in a better position. And then we didn't even talk about interest rates which are now starting.
To come down.
So you're having an easy and financial conditions at a point where inflation is not running back down towards two percent.
So that's good impetus for the consumer.
So let's step back and what is your view of the consumer. We've had a lot of companies kind of calling out the lower end of the consumers really struggling here. Whether you look at the numbers out of a Walmart or Targe or the dollar stores, how do you view the consumer here?
The consumer's okay, And that's been the case for a while.
We've had for the past year and a half, we've heard heard companies come out and talk about the decelerating lower end consumer, and that's absolutely been the case. There has been a divergence between the middle and higher end consumer.
Versus the lower end.
But now there's a good reason to believe that actually that lower end consumer could start to do a little bit better. Their credit card interest rates are going to be coming down, and you know, it turns out the savings for the broad based economy is actually a bit better than what was previously reported. We just got GDP revisions last week that told us the savings rate is culture to five percent rather than three percent.
So the consumer actually has a bit more buffer than we previously thought.
And Powell talked about this the other day, highlighting exactly the same concept that you know, now maybe the consumer's a bit healthier than we thought, so, Yeah, you know, you might still hear a little bit of softness on the lower end, but we should actually start to see an inflection point where things get a bit better.
For the consumer, usually valuable folks. This is what it's all about.
The distinction of our conversations on Bloomberg Surveillance. Stephanie Rore out there pushing against the caution on the American labor economy.
Stephanie Roth is with Wolf.
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. Listen and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.