Spiraling US Debt and Its Impact on Interest Rates

This is the Bloomberg Surveillance Podcast. I'm Lisa A.

Bromwoyd's along with Tom Keen and Jonathan Farrow, join us each day for insight from the best in economics, geopolitics, finance and investment.

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On demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. And right now, I don't want you delay a great conversation coming up. Bloomberg's owner Yusef Gamela Aldin is joining us, sitting by with Jennifer Johnson, President and CEO of Franklin Templeton In Riad.

Let's head over, Yousef, Hey.

Hey Lisa.

Yeah, So let's pick up on the big debate on the health of the US economy and a few other angles as well. Jenny, thank you for making the time so we had Jamie Diamond come out strong. He's saying there should be a lot more humility from central banks. They got all their forecasts wrong. Ray dallyus pessimistic. I want to know where Jenny Johnson stands in this debate.

Well, I mean I have a little concern about US

The debt, So I think that can weigh on the economy.

And when do you see interest rates going then?

I mean, two weeks ago you still had to view that there's one more hike in the in the plan.

You still stand by that.

I think Pell kind of came out and said, probably won't do it in November, but he's watching the data, so I think, you know, maybe he'll do December.

I think he'll be data driven. Uh, maybe he'll just kind of leave it for where it is and see how it plays out.

I think the bigger story has been around the ten year and I think that's more of an issue around the you know, US debt.

I mean, you've seen the volatility and treasury yields and of course some of the you know, prolific commentators, let me put it that way, including mister Actman and many others. Uh, do you think that we're gonna start consolidating now at the current levels?

I mean, what's going to bring them down?

Because there was a big debate on what's going to carry them up if they are going to go down from here?

Where you know, what's gonna push them down?

I mean, honestly, there's a lot of things.

You know.

I think that the Fed has done a good job on kind of jamming on the brakes and raising rates and slowing things. But you know, there's tremendous headwinds to slowing inflation. Oil prices are inflationary. Uh. You know, some of the union wage negotiations are inflationary.

Uh. So there's factors that makes it tough.

The the you know, spending on things like renewable energy, government spending and incentives on renewal energy, and things like the Chipsack are all pumping money into the system. That becomes a headwind to somebody who's trying to tamp down inflation.

One of the stories that's been trending the last twenty four hours on the terminal is about six hundred billion dollars worth of client cash that it's headed for the exits from some of the bigger investment funds, and it raises the question, how does Franklin sort of thrive amid a shift to more passive solution.

Well, first of all, let me take on the back on the passer active. Right, anytime you have a full momentum market where you've literally had central banks printing money right and interest rate zero, the only place to go is the equity markets. Have pumped the equity markets up but today right, And first of all, nobody ever talks about market beta or passive as going up or down a risk.

The day Tesla was added to the S.

And P five hundred, market beta became more risky, right, and we don't talk about that.

Now you're sitting here today, You've got a market where you.

Look at it and say it's up thirteen percent, but actually most of it that's because of seven stocks and Magnificent seven, you're seeing the highest concentration.

You know, at the peak ofthe dot.

Com ten stocks and count for twenty five percent on market cap today that's thirty percent, so you're thirty two percent, right, so you're even higher from a concentration usually doesn't end well after that. And from the return standpoint, top five stocks have a PE ratio of forty nine and the rest of the market has a PA ratio of like fourteen. So you know those are really different from a risk scenario.

I think it's a time for app Yeah.

That's that warrants its own debate. I want to get to your meetings here in Saudi Arabia. Talk to me about the opportunity set here and where you could sort of lock in additional growth.

Yeah.

So you know, I'm here at FII, and you know one of the reasons to be here is because you can you have Franklin Templeton's a global company. We have clients in one hundred and sixty countries. You come to FII, you can meet your clients from Asia from the US, from Europe, from and all Africa, all over the world, and so it's a great place to.

Convene and efficiently meet with clients.

But it's also I mean, I tend to think energy transition.

A lot of the.

Innovation is coming out of this region, and I know that sort of sounds counterintuitive, but what you find is a mentality of multiple generations, thinking about how do we position ourselves for generations, and a recognition that at at some point oil goes away, we.

Better diversify the economy.

And you see initiatives like in Saudi Arabia where by twenty thirty they want fifty percent of their energy.

Coming from renewables.

UAE, I think has said by twenty fifty they want fifty percent. This is a region that has the will and the capital to actually focus on that innovation.

We're closely monitoring what's happening with the Israel Gaza conflict.

That's a human tragedy in the first instance.

In terms of sort of second round effects capital markets, what extent is that going to take away from some of the ambitions that the golf has as an investment destination longer term.

Well, first of all, I mean it's an absolute humanitarian crisis.

It is a terrible, terrible situation.

It's very difficult to watch it unfold, and it's awful. If it stays contained, it probably won't have longer term impacts other than in obviously tremendous impacts in the areas in both Israel and Gaza. But as long as it's remains, you know, contained, then I think it doesn't slow things down.

And honestly, I think, you know, places like.

Saudi and the UAE are so motivated to try to come up with a resolution because they don't want to derail the progress that they're making on their visions, you know, and trying to attract capital into the region.

So closing question on broader strategy, you've been acquisitive, what's sort of next.

On the purchase list? How much are you willing to allocate?

Well, we've been very open about the fact that we think sort of the last area that we'd love to fill is infrastructure. I think the spending on infrastructure, whether it's energy transition or even just updating infrastructure.

Across the globe because so many.

Of the develop markets have aged infrastructure, is a great opportunity. So that would probably be the last area that we'd feel we need to complete sort of our product capabilities.

Denny, great to touch base. Thank you very much.

Less of luck with your meetings over the next couple of days. It's Jenny Johnson, the CEO of Franklin Templeton joining me now.

Is mendeep seeing senior tech analysts for Bloomberg Intelligence.

It's a relief to see me rather than the other three.

Ah okay, so we're going to get a few more tech results. Part of Magnificent seven are going to get delivered today. Talk to me about Google owner, Alphabet, Google, whatever weight run.

Do you like to look at it?

Are they more immune just simply because I've got to advertise on the platform relative let's say Mata or to Snap. I mean, that's the consensus in the story.

Do you believe that?

Yes?

And also the divergence and expectations. So Meta is expected to grow twenty one percent, Google ten percent, and when you parse through their business segments, you know the search will likely be resilient. We know they're not losing any share to Open AI and bing and YouTube. I mean that ten percent is a low bogie, so you probably should expect some upside there cloud another big segment for them, And you mean we really.

Used to get very obsessed. Well not uc are obsessed, but we are absolutely obsessed. What happens in cloud at Amazon, what happens in cloud with Alphabet, How has that grown and where can that get to and how important is it?

Yeah?

So, think of the three hyperscalers Amazon, Microsoft and Google. That makes up about one hundred and eighty billion in cloud revenue, and they were growing at north of thirty percent. This year, the growth has decelerated to about eighteen to twenty percent. So what everyone is looking for that acceleration next year because these are the companies that are buying all the nvidio GPUs and if that doesn't translate into

That those hyperscalers are also critically important to Amazon as well, aren't they? And Amazon's going to be a lovely insight into how strong we are or not on the consumer side as well.

Yeah.

So Amazon is the largest player in the public cloud one hundred and eighty billion dollar revenue that I mentioned, it's about forty five percent. Microsoft is the second big player, and in the case of Amazon, everyone is thinking they are behind in that generative AI race and the other two are ahead, but clearly you know they are the largest player in cloud and if anything, this generative AI wave is going to accelerate that shift to cloud because

Are you going to be on AI workkind in this reporting season and magnificent seven, I mean, it's all you got to do is print those two letters and you're off to the races.

Well, now I think the time has come.

To guide to make it a bit more discerning, and.

The twenty twenty four guide is very important.

So that's where you are going to see companies that actually guide to that lift from GPU revenue on the cloud. That's where you're going to see, you know, the multiples and the estimates go up.

But so far it's been a huge investment here.

Everyone is hoping twenty twenty four is when it translates into revenue.

And then if I talk about Microsoft, Microsoft is interesting for all of the aspects that We've just touched on a little bit of AI, a great deal of cloud, but also for them there's the hardware sign of this as well. Where does Microsoft fit into the Magnificent seven.

Well, Microsoft clearly had that early open AI partnership and that helped them, you know, in terms of publishing that generative AI leadership. But I think the PC side is still weak and you're seeing that decline in that Windows revenue. Clearly that hasn't changed. Everyone is calling for a PC bottom this quarter, but we don't know.

If that's going to be the case. And in the case.

Though dine next year, it could be that Microsoft takes the bigger hits perhaps out of this grouping.

Well, so Microsoft has a lot of application software revenue, and if they don't, you know, add those co pilots to really complement that, and if there is actually real destruction from generative AI, I would argue Microsoft is at risk. But nobody doubts that office you know, will continue to be strong because they added these copilots and that will be a nice add on to you know, what you already have from the office suite.

So Europe is under pressure.

Technically, we can argue about recession China. You can debate whether they're going to make five percent growth or not, but it's tough in China at the moment with those two global markets very much under pressure. Sure, who is perhaps the weakest link in the Magnificent seven vicariously exposed to the China story.

I mean, I would say Apple, no doubt about it.

To buy a new Apple fix revenue perspective, twenty percent revenue and the supply chain exposure is huge, So there is a big risk that clearly lies with Apple. The other ones are somewhat insulated because they don't have a lot of revenue exposure. And that's where the Internet names like alphabet and Meta, I mean, they have no exposure at all. So clearly Apple is the one to watch out for in terms of that geo revenue exposure.

Okay, and then of course we have the friends showing on shore and let's see what the numbers are when they drop. Thank you so much for stopping buy That is Mandy sing on All Things Technology.

Mans Cranny and Cameron Dawson CIO at New Edge Wealth both with us right now in Marcuts.

We can see a bit of a lift. We do see those.

Earnings coming out and Cameron, it's just been catching my eye.

Everything has been beating.

Yeah, much better than expected when it's looking at the consumer, better than expected, some industrials better than expected. We just got share. When Williams come out, they raise guidance significantly. That's a housing related stuff, right, it's paint people spending more in their houses. So clearly the consumer in these earnings is holding up better than expected, somewhat confirming that better retail sales that we got in September.

Do you think the whole narrative, the whole story about excess savings running off is we're overplaying it when you look at the wealth report that we both all three of us looked at yesterday. So do you think the xcess savings narrative dropping so aggressively is folly?

You should be. You know, the resilience of the consumer is a bind in these numbers.

I think that it's a fading tailwind, but it's not a headwind because the consumer balance she is healthy.

The risk is it turns into a head too in twenty twenty four. That's the debate, isn't it.

Certainly, But if you look at things like consumer credit card as a percentage of disposable income. They're just back to their twenty nineteen levels, meaning that it's gone up a lot. Consumers are using more debt, but it's not nearly where it was during the Great Financial Crisis. So ASTs have been growing faster than liabilities pretty much consistently for the last seven years. The consumer balance sheet still is healthy, even though at the margins it's deteriorating.

So there's a real sort of bigger picture question about composition. And we're talking about this with Tom Sousaurus yesterday when it came on and said, what you're seeing is that the Fed policy rates have really affected lower income individuals as smaller businesses disproportionately.

You have seen this again and again.

So when do they start to have a bigger impact on the overall general narrative, or can you see this dispersion and continue where the overall averages keep chugging along.

Well.

The thing that lower income individuals and smaller businesses have in common is that they tend to have more of that floating rate debt. It's bigger companies and higher income people who are a to turn out their debt borrow at thirty year mortgages or issue thirty year bonds, and so it's those larger borrowers that have not been pinched by these higher interest rates. It's why small caps and microcaps are underperforming so much, they have more floating rate debt.

But this was the we were just talking about this in the break, as Gina left I said, I thought we were supposed to run into some kind of a significant debt cliff moment for corporates refinancing.

They have refinancing.

Now, we haven't made a huge deal out of anybody missing the refinancing yet, but as you look at debt costs going forward, and you look at the returns going forward with debt costs, surely that begins to impinge as well well.

Certainly because eventually you have to refinance that debt. And if you look at the corporate treasury market, a lot or corporate bond market, a lot of them have average yields that are less than the entirety of the treasury curve. Entirety of the treasury curve. So eventually you will have to refinance at these much higher rates. And that's the reality of higher for longer starting to bite.

This is what everyone thought, Okay, and this to me, I'm so glad you brought this up. Mannis, because to me, there's been this sort of overhang. Back in twenty fifteen, twenty sixteen, we were.

Talking about beer goggles.

Dallas FED President Kaplan came on and said, everyone's looking at this world with beer goggles of low rates, and that's why they're buying anything. Anything can look beautiful when you go out and you take a little assets with low rates, with zero rates, and now you're expecting armageddon because you've had a world refinance at that and you haven't.

I think we're just now starting to see the pinch come through because we've been in this for eighteen months a little almost two years now. That's allowed extend and pretend you can try to push off the refinancing as much as possible, because remember we're also conditioned for the FED to come in and cut rates really quickly, and the Fed's telling you they're not going to do that. So it's the reality setting in that, Hey, I've delayed

So have you shifted your views over the past couple of weeks.

Yeah, So we have been underweight duration for the entirety of the year, thinking that there was this floor under interest rates because of that higher for longer and an upward bias to interest rates. But now we're starting to see a world where the risk reward simply looks better. If you take a one hundred basis point move higher in yields versus lower in yields, at least you have

It's almos going to give cameras are like her introductor drum drum roll, because she's in good company and she used got wayly from Black Walk. She's got Alliance Alliance alongside you. So what goes through my mind and I'm just going to I'm going to slightly combat you there, which is isn't it just fear of being left behind that you've got to pivot on your duration call?

Certainly, of course we don't want to be too cute with it with the timing, but we're long term investors. And if you think of it just in terms of asset liability matching and thinking.

So aplication you're shifting, is it a dramatic shifting in you're taking a duration or is it incremental manners? In other words, we see an opportunity and we add incrementally.

It's incremental because tactically we have not made this call that we say we've seen a peek and yields. We still see this supply and demand issue where we do know we have higher deficits and that is increasing supply at the same time that demand is falling. Hue is not here to save the day. We don't have the flight to safety bid. Yet We'll have to see how data emerges, and we shouldn't forget we have this big unknown about the Bank of Japan and potential changes to

Do you think that that could have been underpinning some of the wild moves over the past couple of days.

You can track the ownership of treasuries by Japan and it's actually gone up slightly. They've sold more corporate bonds, so I don't know if that's necessarily, but it is the fear that they could be less buyers on the margin.

Like just I'm wondering though, just going forward, when you talk about how you are legging in just on the margin to duration, is it out of equity risk because we heard this yesterday from Katie Nixon.

Yeah, you have to do it in a very tax efficient way, because if you're selling equities with big gains and layering into bonds, that may not be the best trade. One of the ways that we've been doing it is saying, if we have dibbitting income, instead of reinvesting into equities, we'll reinvest into fixed income. Because at the end of the day. If you can get your same return at

Listen, you know what, when you get to my juncts used to say, you know what, ten year paper actually doesn't look too bad.

Maybe at five percent.

Well that's what a lot of people seem to say. Basically, it got five percent. The market basically said we reject that.

No, you know, we're going to pounce on that, but it.

Comes Actually, you're back into sort of general historical norms. If I'm not wrong, I mean, you know, we are many people out there are flum ex by rates at five percent, paranoid at the risk of five and a half percent. The reality is, when I took my first mortgage in nineteen ninety four, it was not seven percent. In the United Kingdom. I have lived through seven percent and fifteen percent. So for me, okay, it was free money as zero. It was free money at zero. Now I'm choking at eight.

I've got to be honest, these conversations, when people say this kind of stuff, they kind of bug me a little bit.

Wow, no offense.

But just because the world was so different then prices were different. They were more adjusted to a seven percent rate. How much to the prices of assets change the scenario when you have high prices that were backed by low rates and then all of a sudden you've got to deal with the rate going back to where it used to be.

Yeah, you were able to see house prices go up twenty percent coming out of the pandemic shutdown simply because the average mortgage rate did not reflect that because mortgage rates were falling so much or the average cost of paying for that mortgage. So now when you add very high prices to very low interest rates, that's where it becomes simply on the floor.

Beat O.

No, you can come back at me next time, because honestly, you are correct, and I think that it's a valid point. But so many people have come on here and said right around, Well you.

Weren't around, but I remember I took out a mortgage tech. Well you know, come on.

It's a little bit of a different scenario. Paul Jacobson, CFO of General Motors joining us. Now, you did report earnings earlier this morning. You beat estimates, but you withdrew your fourteen billion dollar profit forecast because of the uncertainty due to these strikes. Do you think that it will materially affect the outlook given the contours of where negotiations are right now of twenty three to thirty percent increase.

Well, good morning, Lisa, and thanks for having me. You know, just before I start, I would like to just give a big thank you to the entire GM team for an outstanding quarter across the board, including the employees that are working every day and producing the high quality vehicles that our customers love. It's a strong testament to everything

Can GM make a profit with a twenty five percent raise for the UAW like Sean Fayin has requested.

You know, what we need to do is obviously strike a balance. We've said from the beginning that we really want to reward our people for the quality work that they're doing at each and every plant, each and every day, and that's a testament to the demand that we've created for the vehicles that we're producing, which I think is

Just twenty five percent allow you to strike that.

Balance, you know, I think it does. We're not going to sign a deal that doesn't allow us to be competitive. You know, there are obviously challenges that the teams responded to over the last few years, whether it be COVID or the semiconductor shortage or supply chain issues. The team's been remarkably resilient, and I think this is another challenge, but one that we can rise to, and I believe that we can still hit our goals.

Paul, very good morning to you. You've withdrawn the guidance. We've cleared that away. I'm curious to know if you're withdrawing guidance. Is there any risk to anything to do with dividend, any guidance on that. Obviously, dividend and buybacks were re insteaded just last year after two year hiatus, So is there any any quirk there?

Well, Manics, I would say that, you know, our balance sheet is incredibly strong right now, with about fifty billion dollars in total liquidity available to us. We went out and we got an additional line of credit about a month ago to make sure we're prepared, because while the uncertainty and while the team is working at the bargaining table in order to try to find a deal, we've got to make sure that the business continues to run.

As I was sort of getting more familiar with the dynamics of this strike, I've just landed in this country after five years some more else. The question that goes through my mind to close these strike deals and to deliver on pensions, it's a very British thing. I'm curious, do you have a number that you will have to

Well, our defined benefit plan, which has been frozen for quite some time, is actually funded very very strongly right now, and we feel good about that. You know, the participants participate in a defined contribution plan where under the current agreement we contribute six point four percent before an employee

If you had Elon Musk in front of you and I and you were talking about prices, I bet you wouldn't be having a nice conversation. I mean, how how brutal have his price cuts been for your plans for twenty twenty four?

In ev.

Well, when you when you look at what our average trends action prices have done this year, they've actually been remarkably stable. In the midst of it. Now that's primarily the internal combustion engine portfolio, which I would say is not necessarily a direct competitor with evs, although evs do work to try to disrupt ice vehicles as much as they can, So it's one that we've been really competitive.

Well, do you think that the prices of vehicles are going to go up because of the strikes.

Well, you know, we've seen some tension, and obviously when you look at the inventor levels, there's a little bit of challenge. We saw some increases in the used car market in particular leading up to the labor stoppage, so we're watching that closely. Obviously, the consumer has seen a lot of pressure on monthly payments as a result of higher interest rates over the last couple of years. But

How much is demand starting to wan though, especially you talk about taking out loans and how much interest rates have gone up, and we've seen that subprime auto loans are seeing delinquities at rates that are unprecedented in data going back to the early nineteen nineties. How much is that impacting How much do you expect demand to grow going forward.

We really haven't seen much of an impact lease on that demand. It's been pretty consistent. So when you look at our average transaction prices actually up year over year. Wholesale volumes were up about two percent in the third quarter. They've been up about eight percent year to date, and inventory hasn't built, so we're moving the vehicles that we're producing despite the fact that that monthly payments have gone

Just real quick here, Paul Ken of us truly compete with China when it comes to EV production, when it comes to EV.

Sales, well, I think when you when you when you look at what Tesla has done, when you look at the infrastructure that we're building, not just in the in the battery joint ventures, but also in the raw materials, we believe we can be competitive with China. And our vehicles that we've gotten now the customers love them, and we think there's a lot more to come from the General Motors team.

Paul Jacobs in General Motors CFO, thank you so much for being with us. The International Energy Agency was created fifty years ago in the wake of price fikes and all sorts of geopolitical violence. Today, we're facing a similar type of moment. Joining us right now Fadi b Role, Executive Director of the ie A, and Fadi I want to start there even as you put out your report, which has a lot of really interesting projections, how is today similar to nineteen seventy four?

Thank you Aman. The main similarity is once again a major geopolitical crisis in a Middle East and once again a oil marqus risk to provide major shock with a high and volatile oil prices, oil securities at risk is the But one third of the global oil exports come from the region, especially for Asia, so there are some similarities between now and fifty years ago.

Fatty, good morning.

Every time there is a moment of real angst than we are at the moment of war here. So it's not just angst, it's war between Hamas and Israel. The question is the boundaries, the risk, the risk to Iranian crude moving, the risk to the rest of the Persian Gulf from this Israel Gaza crisis.

How do you look at that right now?

And what is the risk of major escalation in your view and the risk of the oil market.

So if one or more oil major oil producing exporting countries are involved in this crisis, we have all the reasons to expected the process will go up, not only in terms of production export supply cuts, but there is a strait, the state of Homos, which is responsible about bantward of the global oil transit and the major part of the global energy natural gas transit. We may well see substantial impacts on the oil and natural gas markets.

One of the narratives that is either at the moment is that obviously you still have unilateral counts from Saudi Arabia and from Russia. No back has made a care. It's too soon to talk about what they would do in November. If there is a significant escalation, is that step one of an immediate release five to the market, of where Siety and Russia may well put out some narrative in regards to the unilateral cuts or indeed act before the November meeting.

It's a good point in fact, when we look at the station today, even before the crisis, is this geopratical crisis started. We hit oil prices around ninety dollars, very high prices compared to averages. Why we have it for two reasons. One, global oil demand is strong, mainly is a result of the rebound in the Chinese economy after

Can we zoom out a little bit and talk about your long term views on what's going to happen in the energy complex. I mean, we've got this great World Energy Outlook report out today from your organization talking about in the long term, global fossil fueld demand will peak by twenty thirty.

As we see the transition occur.

Does that presume that the geopolitical tensions is what are the presumptions behind that peak forecast by twenty thirty.

Now we are an agial organization, We cannot focus what geopoltical context. But the reason that we see, for example, oil were talking about oil demand to peak in the next five for six years is the following. There is a big move on the transportation sector, which is a big chunk of the global oil consumption. Electric cars. When you look at the electric cars two years ago, one out of twenty five cars sold in the wort was electric.

But you only have a minute left. But this is a really important point.

Are you saying that even if China has an economic boom, it is not going to increase the demand for oil based on the changes in that economy.

I mean, China may have growth in the economy as a result of studness a year or so, but the structure Chinese economy, when you look at the structure, the balass in the Chinese economy, the cement production, the idens cry production, the household stocks, they all come to a situation on a decline, China wouldn't need major amount of energy. So China will be determinated next year's the fate of fossil fuse. And also at the same time, of course, clid energy. Is there a champion that as.

Well Fatty by role of the International entertain Agency. Thank you so much for taking the time.

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