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We're just going to move on to bonds, and we do that with Mark Cambana.
He is one of our favorites here at Bloomberg Surveillance, head of US rates Strategy at Bank of America in the hallmark here as he writes with clarity and avoids bs and so you lead your note with one of the all time jargon words of the moment, resilience. Everybody out there, the Boston Red Sox are showing resilience.
What a bunch of boloney.
Translate your use of resilience to the real world of fixed income.
Well, I think it's a generous characterization of the Red Sox. But what we mean by this is that the economy has really shown that it has been relatively insensitive to higher interest rates so far. We all thought that we would see the unemployment rate tick higher. We thought we
would see fixed investment drop by more. We thought we would see financial conditions tightened more substantially as a result of all of the rate hikes that have been delivered so far and that are expected either in the future or that are expected to remain elevated for a while. And what we've seen is that the economy is really held in and that has challenged at least some perceptions at BAVA about how much we would expect to see the economy turn. Our economists just last week changed their
base case from a recession to a soft landing. Now that's a maybe mindor distinction, but nonetheless it implies less of upward pressure in the unemployment rate. It implies an economy that can continue to grow for longer, and it implies that the FED is going to probably have to
adjust accordingly. And the way that we think that that adjustment takes place is not necessarily through a higher overall terminal rate, But for a FED that does indeed remain higher for longer, and by cutting slower than the market anticipates, certainly higher for longer can mean that you hold the terminal rate for an extended period of time, or it can mean that you maybe cut once a quarter, which is now our economist base case, as opposed to the
almost every meeting rate cut that the market is anticipating once it gets started.
So would you push back against the people one after another who've come on this show and said we're buying long term bonds because we think it's great to lock in four percent yields. It's going down to three and a quarter three and a half percent on the tenure.
So we're still reasonably constructive on duration. We do recommend that clients trade the back end of the rates curve with a tactical long bias. You've got to respect the range, which looks intends to be around three seventy five to four to twenty five now. And we think that because we just believe that long end rates look somewhat asymmetrically skewed to the downside. It's a lot more difficult for us to envision tends at five than it is tens
at three. And with a FED that's cutting slow, No, you're not going to maybe see as significant of a bond market rally. You're not going to see as rapid of a yield decline. But we still think that yields will be moving lower in time as the FED does indeed move to cuts, but just cutting slower perhaps than the market anticipates.
I want to just ask about the consequences of holding rates at this level for a longer period of time. Are people adequately understanding how restrictive that becomes as growth slows and as companies have to start refinancing.
Yeah, it's a great question.
I heard you come on earlier about credit and Torsten Slock and what he is saying about underlying fundamentals there. Look, we do think that the credit markets are going to be okay if the FED ultimately delivers on what's priced for cuts in the forwards, because as you have a lot of maturities that come do the FED will be lowering rates and that's going to soften the blow to
some extent. The challenge will be if the FED does indeed remain higher for longer and if you start to see some of those refinancings occur at higher rates and see companies begin to adjust how they're going to manage that cost factor into their own calculus. But it's a part of what I think the FED is looking for. They need to slow the economy somewhat, and they need to ensure that inflation does indeed remain around two in our economist's new profile for growth. They do think that
inflation just falls slower understandably. Right You're going to be averaging two point eight percent next year, almost two to two and a half percent in twenty twenty five, and the Fed's going to have to move rates slower, allow for more restrictive monetary policy over time in order to ensure that that's sticks.
We're tight in time, But the questions too important. Can price give way? Is yield moose higher? If I look at the Bloomberg Total Return Index, I got a Pennant formation. I'm really on support right now? Can price break through that price down yield up?
What we think you need to see is that you need to see some type of economic driver for that. We know that supply demand in the treasure market is really quite daunting right now. You had a surprise from
the US Treasury on supply last week. The number one question that we get right now is who's going to buy the b and so what you really need to see is that you need to see the economy provide cover for investors to justify that long duration bias that we've been recommending that they appear to be holding, especially on the real money side, and thus far you haven't
really had it yet. CPI tomorrow should hopefully move us in that direction, but you really need to see signs of a broader economic moderation, and right now the growth data is not providing that because the economy continues to re accelerate.
CPI tomorrow, morning, Mark, this was good as alwise, Mark about it. Thank you, sir, of Thanks for America right now.
If Kathleen bus Johnson joins US chief economist at Nationwide Mutual, katy Am, I right that the public here doesn't really care about all this microdata analysis. They're looking at the one year, the two year, the three year pandemic inflation and it's killing them.
Well, good, good morning. Time'm happy to be with you Lisa and Mike this morning. I think that weighs on the Fed Reserve, not just ways on consumers, but it is something in the back of all the Fed officials, you know mind when they think about inflation. Yes, they're looking at the most recent print and they're doing the three month annualized, six month annualize, but they know that this inflation is really attacks on consumers, especially lower income
and middle income households. So you know, Chairman Pale wants to make sure that you know, when he looks back and his legacy is assessed, he's not seen as leaving with high inflation. He missed right, The Fed thought it would be transitory. You don't really want to leave and move on and still have high inflation, you know, as you ended your tenure.
There, Kathy, are you in the camp who believes that the CPI report will be really important in order to determine whether the Fed hikes or stays put, or are you in the camp that probably it will not give us a whole lot of information. It might even be a head fake for reinflation that we see later this year.
Yeah, so timing is always difficult. I think for now we are in a disinflationary trend, and I do think tomorrow's report and the subsequent report after that will be important as the Fed convenience in September to decide whether you know, to keep you know, raise rates again or to be on hold. But you're right when you look out. The problem is there's quite a long lag. So we look at home prices. They lead the rental inflation by
about a year and a half in our modeling. So yes, eventually could start to turn back up, but it's a long time before that. But yeah, we are concerned about that. You know, what I'm also concerned about is the fact you were talking about this earlier with GDP growth. We seem to be accelerating, right we two percent Q one to four Q two and now you know at least three percent. We're not quite at the four percent they Atlanta Fed, as Mike rightly said, that's kind of a
snapshot of current data. But the economy accelerating or not certainly not soling below potential what the Fed wants. I think it's tough for to bring down inflation from an economic perspective.
We were talking about wage inflation with respective particularly to the union organization and what we saw with ups and some of the wages. John wants to get one hundred and seventy thousand dollars job driving a truck, as he informed us this morning, does that factor into your estimates of wage inflation of the dynamic of how much you could get an acceleration in the economy as wages continue
to increase. Is that something that you're looking more closely at as you do hear more of these organized labor discussions.
Yeah, I'm concerned, you know, I'm concerned that not that wage growth is the strong wage growth is causing inflation, but that it's a barrier to lower inflation. Certainly, it's great for workers to get their share of the income PI, but it comes at a time where we had these inflation pressures, and again it's just a barrier to lowering it. So I think it makes it more difficult, keeps the Fed more in a hawkish tone or mood, and may even lead them to raise rates further.
Kathy went from rent and housing.
That's what we talked to, particularly in New York, were really focused on at twenty four to seven. What's food inflation doing, what's auto inflation doing?
Yeah, So food and inflation has come down quite nicely since the peak, especially right after the Ukraine the outbreak of the Ukraine Russia War, and that's encouraging. Now there's still concerns, right if there's some kind of blockade and what happens with wet prices and just in general there's still I think a fragility and uncertainty about you know, if there could be disruptions. But in general food inflation we should be key, as Mike said earlier, inflation slowing,
but we're not seeing outright declines. Now the auto sector is different. We are seeing used car prices outright decline, and that's welcome news for consumers and also for inflation measures. But you know, how far that goes is key. You know, we may see some outright declines, but we're still seeing a supply demand imbalance in the auto sector. Meeting auto companies when they do produce and supply comes online, we're seeing demand exactly match that. So I think there's still
upward pressure. Again, resistance in the auto sector, especially for new autos.
Remind us as we end this Kathleen mus Johnsick. The inflation series that matters to Chairman Powell, which is it?
So it is core inflation, and I would say it's super core inflation. So that's core inflation less the rent and the reason being that rental inflation even when we model that should come down very short. We think it goes from eight percent at the peak to about five percent by year end, but that is bigd then they want to see what's happening the service prices elsewhere, you know, outside of rental Kales, great.
Brief, Kathy Beson Thick, thank you so much.
Victoria Fernandez, is whether it's around the table, Chief Market Strategistic, Crossmark Global Investments, Victoria, good morning, Good morning. Not going to ask you rupert in this morning. Let's talk about your price target on the S and P five hundred. It's amazing for me that we've seen this day to come out of China and typically years ago what we would have seen on the morning like this morning through this week, it's just an aggressive running in the bond market,
yields much lower. We'd be talking about China exporting deflation to the rest of the world. What's changed, Well.
I think we have to look under the hood a little bit on this China data. Yes, the headline numbers are down and we're seeing deflation, there are disinflation, but the core number is actually the highest it's been since January. It's the food prices in China that brought down that headline number. You had port prices up twenty six percent in June of last year. They're flat this month, so we have to look a little bit more and see
what is driving it. Typically you would see a response, but I think because that underlying core inflation, which is the concern here in the US, what is that core inflation going to look like? Is that going to remain sticky, especially with wages? That's going to be the concern.
I'm so happy you're here. Cross Mark has such a pulse on what people emotionally are doing with their money right now, institutional, high high networth and the whole thing. What's the fear level out there meeting to meeting at cross Mark.
Yeah, it's gone up definitely over the last quarter. Each meeting that we have. People are concerned because we've been telling our clients we think there's going to be some choppiness here. We think we're going to see a pullback in the fourth quarter of this year, so we need to be prepared for that. So they're getting a little concerned. What we've seen as of late, though, is more people
wanting to go into the bond market. They see these yields, they think that we're probably at peak close to peak in bond yields. You know, we were what floor in a quarter in October of last year. We think that's the peak for the cycle. So if those yields start to come down, they want to add some duration in their fixed income markets. So we're seeing that there. But they like the fact that we're being cautious a little bit.
In the equity market. We're invested, we're in there, we're getting them a good return, but we're being a little bit cautious as to where we invest.
So I just want to go through the chronology of this year. It was, I believe a soft landing than a no landing. Then it was a hard landing in March. John, you've been very good about documenting the different charctershifts.
You're tracking it. Now we're in soft landing.
Do you buy it?
Are you basically leaning in that there is this idea just to you divine a soft landing that we could get back down to near two percent inflation without unemployment rates really rising all that much.
I don't think so. I don't think we're going to be able to have whatever the magic is, the sparkle dusk that's going to make that happen for us. I mean, we assume that the Fed people were close to peak FED funds.
Are we there?
I don't know.
I wouldn't be surprised to see the fedgo another twenty five or fifty basis points. When you look at some of the inflation numbers, you look at average hourly earnings over the last three months, it's up about five percent on an annual basis. If you look at just the goods producing sector over the same timeframe, up seven percent.
We've got the UAW their contract ending in September. If we could have wages go even higher than so, I think there's some underlying pressure on inflation that's going to continue to be there. And you have an economy that is doing pretty well because the consumer is there, because the labor market is strong. So at some point we're going to have to pay the piper for everything that
we've seen up until now. I think we could start to have a consolidation around a forty two hundred to forty three hundred on the SMP take us back another five percent to us, that's your opportunity to get into the market.
Are you staying away from companies where there as strong labor negotiations or a potential risk there for either shutdowns or a significant incre in some of their compensation costs.
Yeah, I wouldn't say we're staying away. We're not pulling out of those names completely, but we could be a little underweight in those names. And if we start to see more pressure ramp up, especially with the auto makers, then yes, we could come out of those names to avoid some you know, some choppiness.
Jeah, And I think this is insane. We are down six percent standard and pores five hundred from the peak of late twenty twenty one. We are down one point five percent from the recent peak of days weeks months ago. I think it's literally August financial media hysteria going on. And I don't mean just TV and radio, I mean print in the whole. We got nothing better to do, so let's talk about SPX down five.
Days in a row or what.
Yeah, that's anyone suggesting this, Cinama, get somewhere, Dan, like.
I think the tone is out there a lot.
Oh you think you think this is ready next to the correction. You think the comfort to the last week is that negative. I haven't found that.
I don't think at Bloomberg. I think we're just reporting the statistics. I mean, pretty group is always.
Very negative, but you're blaming the media organization.
No, I'm just saying there's a hysteriaut there among our listeners and viewers over OMG, we're not going up two percent a week.
You are seeing some capitulation along that line.
This you capitulated a negative one per four four.
Percent because people have been so positive and I don't think anything has been.
Priced in the market off of October.
That's exactly right.
Let's compare multiplese now compared to the start of the year. Just how much multiple growth has to been.
Well, the gains that we've seen in earnings are all pe expansions, right, It's not the earnings itself that are really driving it. And we're actually in what the third month of an earnings recession going on here, So I think we have to be very cautious. It's one of the things you look at. Valuations are too high, especially for the level of inflation that we're at, so we're going to have to see something give, and I think it's probably going.
To be pees.
Well.
The question we could to ask is where does the endings acceleration come from. It's next year West, not coming from He's driving that.
Yeah, I don't know we're not seeing it really and truly. Is it going to be more hope? Is that what's going to get us there? To me, that's pretty shaky ground if that's what you're betting on.
So what's your top kind of shift heading into the last couple of months of the year.
Well, we've always been cautious this year, and we've talked about that story. But adding some cyclicality to your portfolio along with some of your more value focused names, I think is really smart to have that balanced approach, and so I think you need to do that. Have some
cyclical names. Look at the finance names. Banks have taken a hit obviously just because of the headlines over the last few days, the downgrades coming out of Moody's and then Italy as well, but financial services should do quite well. A Visa, a MasterCard, maybe an amor prize names we own just for full disclosure, but I think you can find pockets. The correlation between stocks is very low right now. That tells us it's a stock pickers market.
I don't care what I want to know. The reason we had you up here, Thank you so much for coming in. Can you explain Astro's rangers rivalry. I think for north people like us. Yeah, it's like a it's like literally a foreign country. Is it a big deal Astro's Rangers baseball, it's.
A big deal, but I'd say it's not as big a deal now as it used to be. But look Houston Dallas, there's a rivalry on everything there. So even though we're in the same state, we are world on the road trips.
Labor Day weekends September fifth. Yeah, Astro's Rangers, and I think it's in near Dallas.
Which is the team that chased Arlington.
Oh, listen to yours.
It runs the won the World Series twice.
Yeah, all right, that's the same that chiefs. Okay, Victoria, thank you, it's good to see you. I need that Victoria. If not is a cross smock club and investments.
This is too important.
It's a two hour conversation with Michael Nathan's senior Research Channel's.
Moffatt Nathanson, expert on Disney.
Michael, I'm going to go back a few years to the summer of two thousand and three where you were a young Buck analyst and you were forced to watch Finding Nemo Pirates of the Caribbean bringing down the House in Freaky Friday all back to back. Disney was riding a high.
It was a.
Double digit layup, and it's been the mother of all disappointments. What does Aiger do today and in the next ninety days to write the ship.
Tom He has a long checklist of things he has to fix, right.
He has to.
Your content, your content pipeline that you spoke of. It's broken. It will not be ninety days and better. It has to work on trying to figure out why they misfired so much on the film side, maybe changing some leadership there. He has to work on getting ESPN some new partners, as you talked about, maybe finding a partner to invest in ESPN and potentially getting that off his books.
He needs to then figure out what to do with his cable network.
Maybe he needs to sell those as well. And he has to work with Comcasts to buy in the Hulu thirty three percent stake that is coming to him next year. And he asked to worry about DeSantis in Florida. His checklist is enormous, right, so he is very busy ninety days ahead of him and probably in the next two years to fix re has to text.
Might be easier to find the question the following way. What isn't for sale?
Michael, Right, Well, it isn't for Selle John is the parks right?
Like, I think what's happening here is that the Parks are taking over leadership of this company, and as long as the US economy does not weaken materially, the park story should hold pretty well. And our thinking is that this company's in transition from what Tom described as an ip led company for Parkside company right with streaming attached to it. So I think we're in the beginning of a real transition of Disney's app set to a more targeted company.
Michael asked how long is this going to take? Because as a leadership question embedded in that, how long will this take?
It take the next two years? And that's why he's been re extended, right, it's they need to make some very tough decisions.
Which he's hinted about.
Our point is like, look, we've been negative about a linear networks and we started talking to you know, the weakness is apparent.
It's here. He wants to get those businesses office books. It's not gonna be easy, it's not.
Gonna be very ACCREEDO to do that, but he needs to get those office books. He needs to change leadership, you know, in the content side. To fix streaming. It's going to take time.
It really is.
When you talk about some of the units for sale. I wonder how the deal that was announced yesterday with ESPN and Pen Entertainment factors into that this idea that ESPN is going to be going into sports betting, which isn't completely congruent with the sort of family friendly image that the rest of the parks kind of cater to. Do you think that this is sort of a predecessor to a spinoff.
I think it is. I think they decided the past two years that the US perception on gambling had changed and their perception had changed. Visited a deal where ESPN gets a billion and a half dollars and some some warrants. But I do think it's a processor to finding new partnerships and trying to reposition ESPN off of their books in partnership with other companies. Right, so the ESPN's troubles
to me are not easily fixed. Perhaps you can find some ancillary businesses like gambling, maybe e commerce.
You have to build a new streaming business for them.
So I think you'll see ESPN, you know, spinning off of being spun off of Disney, maybe even taken in private for the next couple of years.
So that could be done off stage somewhere.
When it comes to fixing the content issues on the streaming side, how much of the focus is going to be on art of intelligence creating content that is less dependent on some of the talent, the writers, the actors, et cetera, versus just streamlining everything and having a more targeted package and then selling off the rest.
Lisa, That's that's a really good question. I think in the near term it's about streamlining. I think they would say, and he said this, that they've just made too much content. They've been stretched too thin at Marvel, Lucasfilm Pixar has the own issues. But I think in the near term it's trying to figure out the optimal set of content choices, trying to look at the leadership of some of these verticals. Longer term, the AI question is hanging over this entire industry.
It's a potential risk, right if also in the Barrett's and Entry have dropped so much that you know, your kids could start making Disney Movies.
Michael, I got eight ways to go here, eight ways to go here. We could do a two hour conversation on this. We're thrilled here with us the botto.
I'm going to go financial.
I got sixty percent plus dot pharamount, sixty plus debt at Warner Brothers Discovery disaster. I've got thirty plus debt at Fox. Whatever in Disney's debt lessoncumbered twenty one percent on the balance sheet is debt Eiger salvation to merge for scale.
It's a good question.
I think. I think his salvation is getting cached cash. So you know it's Tom he theycsually generate ten billion of cash flow a few years ago. Now they generate about four billion of cash flow. I think his opportunity is really to focus you on the park business and fix and streaming. You know givesn't to your point, because he owns parks, his balance sheet is not the same risk of the other companies you mentioned right that those balance sheets are going to be the story the next
couple of years. I think Disney can work the way out of it by focusing on parks and fixing profitability on streaming.
So to your point.
He has flexibility here, and I do think the story is if you look at the value of a resort assets where they moved to, Disney stock is cheap. If you think about it as a different type of company led by resorts and hotels and parks.
That's what I think Bob's looking at the next a couple of years.
Mike, I've got a squeeze to send. You're in the perfect seat to ask this question. It's het in November twenty twenty two. Everyone hates Facebook Meta and Mark Zuckerberg. Yep, it's now in the summer of twenty twenty three. Everyone loves Facebook Meta and still hates Mark Zuckerberg. Is there something that the world Disney Company can announce in the same way that Zuckerberg did a early November to talk about the Year of Efficiency, to turn this name around more quickly?
Yes?
And John, you remember I was on air with the guys defending Facebook and Metal the whole time.
Right, Well, you've got thirty seconds to tell me now.
Yes, because the reality is their streaming businesses lose too much money.
Netflix is worth two hundred billion dollars. Disney steaming businesses are worth ten billion. Dollars right.
The focus is a fixing profitability of streaming. You know, let parks continue, but fixture and profitability, get those leading numbers. Talk your books and people look at this and say, wow, this stock is really cheap. So we've been buying Disney. I think next twelve months we come back to a litmus stocks hire from here because of what.
You said, Michael, Thank you, sir. That's what you said, not what I said. Michael, Thank you. Michael Nathan sent of s We beam up at ninth and cent.
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