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Ralph Ankompora, Edward Yardenni of Yale CJ. Lawrence is his own shop. On top of it, get into the stock market in October of last year, and on the economic side of why weel C plus I plus G plus NX. Was Neil dudda very lonely at Renaissance Macro a year ago. We're really coming out a year ago, Neil, from your arch call, let's review. What did you see in September of twenty twenty two.
Well, thanks for that intro, Tom.
You always make me look better than I actually do, so I appreciate it, but you know, I think it was for me. It boiled down to something very simple, which is wage inflation. Was hanging in there while price inflation was coming down. I mean, that was the principal risk of the economy. In the spring of twenty twenty two, you had a very aggressive FED. You had rising food and energy prices that shocked household incomes due to the
Russian invasion of Ukraine. Of course, as we got towards the end of the year, a lot of that shock had gone away, while the labor markets were still kind of hanging in there, So real incomes were climbing, and that meant stronger consumer spending ultimately, and that's why the economy.
Sort of.
Remember early in the year, tom everyone was betting on a FED pivot and we saw a very you know, we saw a modest decline in mortgage rates as a result of that, but that modest drop elicited a fairly robust response in housing market activity. So there's a lot of pent up demand there for housing, and so I think, you know, when housing is working, it's difficult to be very verish on the economy.
If we have disinflation or leveling of inflation. What does nominal GDP do, Because top line GDP, your real GDP optimism with whatever inflation is linked into revenues of corporations. What's the data nominal GDP call.
I mean, it's at least six percent if you believe the If you believe the last employment report. When you look at aggregate weekly income, aggregate weekly payrolls sort of the sum product of jobs, hours and earnings over the last three months, that number is upset seven percent at an annual rate. So you know, the labor market sort
of impulse phenomenal growth is quite strong as well. So we have an unsustainably strong economy still, and this is happening at a time when the FED is taking, you know, steps to the exit door. So you know, to me, I think the risk and this is what I think makes me not an optimist, is that the risk is that you know, the FED is prematurely declaring victory. I do see a lot of cyclical momentum in the economy
right now, and the FED stepping back. I think that could set ups up for a problem as we go into twenty twenty four.
Yeah, the fact that you said an unsustainably hot economy, an unsustainable level of growth in the US raises this real question, what's going to make it unsustainable? Is it the inflation story that you see as researching. We've talked about this before and the fact that the Fed's not there or is it just that you cannot continue in a vacuum, So at some point it's going to implode on itself.
Well, I don't know that it will implode on itself without the FED doing something about it. And of course, you know, the problems for markets are always when there's a disconnect between what the FED wants to do and what they should do. That's when the problems come up. And you know, I think the FED should not be signaling rate cuts next year. I mean that to me is a bear. You know, that's like an easy first thing that they should do is not signal rate cuts.
They need to maintain a tight monetary stance because frankly, real GDP growth is running last I checked six percent at an annual rate over the last three months. Now, you can talk about revisions, you can talk about you know, that's not where the underlying growth rate is. But if you look at monthly GDP as of July, over the last three months ending in July, it's up six percent at an annual rate.
I know that's not the underlying trend. It's above trend growth.
Well, and this is the reason why a lot of people are talking about the same thing that you are. We heard from Katie Kaminski over at Alpha Simplex basically saying the same thing that you are, in different ways, and she's bearish on bonds because she sees this coming to the foe and yields having to remain higher for longer. There is a question, though, embedded in Goldman Sachs's discussion of the long and variable lags, and maybe this is an economy that can shrug off a five percent FED
funds rate and it's not going to matter. So at what point do you see higher bond yields as not inconsistent with higher stock prices, with higher valuations, with it a continue rally in the equity market.
Well, I mean, I think right now the.
Combination is reasonably good for stocks, right because the FED is backing off and you have strong growth and that's you know, so the Fed's sort of off your neck. I think at least through the end of the year. I mean, if they're going to hike again, it'll probably be in December. So I don't really think we have to worry about the FED you know, until then, and this is happening at a time when there's cyclical momentum
in the in the economy. The fact is is that goods spending, consumer spending on goods is up over three percent against last year, and during that time, non farm inventories have been contracting around half a percentage point on average per quarter. Again, that's an unsustainable draft on an inventory. So what are you going to se You're gonna see inventory's restock. That's going to booy manufacturing production again cyclical industries.
So that should be good for equities. The question is when does the FED wake up and realize that, you know, long and variable lags are not working out as neat and cleanly as they have in their in the Fervist model.
Based on they.
May have to step on the brakes even more.
So what does that mean?
Right?
And that's exactly where I was going to go. How high do rates have to go in order to curtail some of what you see as unsustainable growth in the US?
Yes, I mean to me, I think that they you need to keep the possibility on there for them to start to hike again in the first half of next year at a minimum, they're.
Going to price.
I mean, I think they have four rate cuts priced into the summary of economic projections right now. It's hard to see that surviving in September. So, you know, I think let's start there.
Neil in an economics textbook, chapter twenty three or twenty four links all of Ziconobabbel into the stock market. Take the Dutta optimism and the corporations they are going to have to deal with an improved real rate, they're going to have to deal with a high nominal rate, you know it, three years, five years as well. How does a stock market respond to that? How does a stock market react to an overweighted optimistic Dutta world.
Well, so I think you could call it sort of an inflationary boom. I think that might be what we're returning to. And if that's the case, that's an environment where stocks can work. But I mean, it's unambiguously bad for bonds, but for stocks, I think it's an environment where you should see continued positive returns, maybe not, you know,
somewhat below the historical norm. Obviously, if you have higher real interest rates that hurts equities, But if you have continued growth in the economy, that means that actual and projected earnings will hang in there.
So just because of time, you know, I got to get this in. How is an inflationary boom different now from the horror of the sixties.
Well, that was obviously well the horrors of the sixties and the sixties were a reasonably good good period for stock market turns in the economy. An inflationary boom again, as I say, is something that where equities can work. What you don't want is is stagflation like conditions where productivity is coming down, where you have repeated supply shocks.
That's an environment where bond returns are horrible, but but stock returns are is because you know, companies can't can't find a way to make to make money in.
That Neil, your Q four GDP number right now, we got to get Bramo going, what's your Q four real GDP number.
I mean, we're running so strong right now, I mean, but I think we've probably slow to something like two and a half in Q four. I think what the consensus is missing right now is that we're going to have a very robust inventory restocking on our hands that's going to bleed into measures of factory activity.
You'll go to congratulations on your economic works of the renaissance macro research as well.
Katy Commitsky chief Research strateg just to Alpha Simplex joins us. Now Katie, short question, just to open up. Are you still show at the treasury market?
Yes, first time guests, you gotta got.
No, no, no, there is a follow up. It's okay, we welcome short answers. Kitie. Let's elaborate on that. We saw four thirty six on a ten year, we got back to five point one percent on a two year. What exactly you're looking for? Why is the juice worth the squeeze?
Well, I love that.
You asked this because everyone keeps saying, let's be bullish the bond market.
But look at the price. Look at the price all summer.
It has continued to go up and yield so yields even though they pulled back last week, they continued on Friday and they're continuing today.
And what we're seeing is we need to see a flatter yield curve.
And everyone's really much, really really ready for there to be a pause, and there's probably a pause, but I think it's going to take a while before we see a flatter yield curve and before we see a situation where inflation has come down, thus we're going to see higher yields for a little bit longer.
What does it mean to be bearish at a time or yields are jumping all over the place. Are you outright short or are you just not buying the stuff?
So in the futures markets, the techechnical signals have been outright short for two years, and that sounds interesting, but it really means that they're in some sense in contrast to what you would think about most fundamental traders have been thinking about the bond market.
But we've started to.
See a lot of fundamental traders as well saying that they're also short at the bond market, which means that they're shorting bonds expecting that we're going to need to see a flatter yield curve, that we're going to need to see a higher yield return on longer term debts. And this makes sense because maybe we need a duration premium back in the curve.
For the short term.
When people ask you for some sort of fundamental explanation for why longer term bond yields to remain high, putting to the idea that we're probably going to go back to some sort of normal that we saw pre pandemic of slow growth and slow inflation. What do you say, is it just technical, is it foreign buying? Is it something about just the debtload of this nation.
That's a really good question.
I mean, I think it's a combination of either a preference for holding that long term debt either as a hedge for potential deterioration and financial conditions. A view that we could have rate cuts faster than they might occur.
Is the two common ones I'm thinking about.
So a lot of people are thinking, well, hey, things look good, the.
Fed's going to come in and cuts.
But my concern is that they think that, but now it's looking like twenty It was originally going to be twenty twenty three. Now they're saying twenty twenty four. Who knows when it's going to be twenty twenty five. My view is that we're going to take time to get to that point with the Fed, and thus interest rates have to stay higher for longer, and if you're going to hold a long term bond, you need to have that duration premium over the shorter term return of holding shorter term debt.
So in that sense, it's a fundamental view.
In that sense, Catchy, that might be an argument for why YO should stay high. What's the argument for why they will be higher.
So why they will be higher is that I think that it's not priced in that it could take longer to get to cuts, and so people are assuming that you know, things are going to go back to normal, and thus shorter term rates will go down and we'll have a healthier curve. But if in fact they have to stay higher for longer in the short end, that means that longer term rates have.
To go up.
And it's a simple question when people start to realize, wait a minute, I'm getting five something percent for two years. If I'm going to hold something for ten, maybe I want.
A little bit more.
Catherine, let's talk trending. Let's talk Katie on the great Giant Wells Wilder. If I look at Brent Crode, I have a nascent up trend like I had three four years ago as well on ADXDMI, on parabolic SAR, on exponential climate moving averages. Is Brent crude trending higher?
Yes, And that's the biggest thing we've been focusing on.
So if we want to connect this inflation story, the thing we're watching is the oil mark it because we're looking for catalysts, something that might give us another wave of uptick for upside risk in the inflation numbers. Those are the things that are going to cause the FED to be more cautious.
And also we're.
Seeing signs of that outside the US. Of course, we saw it right, yeah, exactly, Katie.
Come on, it's the beginning of the year, the beginning of the business year. What's your point figured target on brent crude right now? Over one hundred.
I don't have the exact number, but we're definitely seeing that's one of the biggest growing trends in terms of our signals. The signal, the signal strength for brent crude has been one that's been ticking up lately. It did revert a little bit in August based on some data on China and other The dollar also weakening a little bit, so we started to see some dollar strength dollar weekening messing with some of that trend. But in general, that
has been the trend to watch more recently. And the reason that is important is because that is one of the indicators at least when we i've seen inflation data down the pipeline. Brent crude has been one, for example, in twenty twenty two. That tends to be something to follow as a catalyst into where you start to see inflation numbers take up later in the year.
Catty, thank you for the update. Kady Kaminski Alpha simplex on a bond market.
We're going to be complete right now with Wendy Scheller, director of the Tubbin Center of American Politics and Policy at Brown truly one of our most popular guests. We get a huge response when she's on. Wendy, let's go to the images that we saw on radio. It was the President doing what it does, marching around the mic baseball cap on hearkening to a union that he knew in eastern Pennsylvania long ago and far away. Don't they vote for Trump? Now?
Well, there's a lot of mixed voting in terms of unions, right So if you think about the Team Stairs, for example, they lean a little bit more Republican in their voting, but a lot of other private unions built in the local level vote for Democrats because they believe Democrats will spend money on things like infrastructure, which means construction, which means jobs for them. So it depends on the sort of local balance on where.
The jobs are.
In terms of private unions, You're absolutely right, that's seven percent. A little over seven percent of the private sector is unionized, but public sector is still in the thirties in terms of the unionization, and that can really matter in.
Some of those key swing states.
When Republicans go after unions, go after labor, they go after public employee unions, you know, that can cost the votes. So Biden' sort of skirting a line private labor but also public labor unions are very important coming down.
To the election politically.
Do you see a rekindling or rejuvenation of unions moving from that seven percent statistic hire or is that just wishful thinking on the part of union types.
Well, I think there seems to be a concerted strategic effort for unions to branch out things like college campuses, for example, unionizing undergraduates, unionizing graduate students.
You may they go, well, that may not matter on the margins. However, that's a group that.
Is still really ripe for picking in terms of votes, and it's certainly a group that the Democrats need more than the Republicans to get out the door. So every time you have a new union agreement or a new new people coming into the union sphere, you know, that's a pretty much guaranteed vote because unions are excellent still at getting out their.
Base to vote.
Wendy, it seems like yesterday's speech did a number of things. It did highlight the union membership. It also highlighted the fact that there has been more union action recently without the strikes that could potentially be a liability. But this is also what Biden said, We're turning things around because of you. When the last guy was here, you are shipping jobs to China. Now we're bringing jobs home from China.
How much is President Biden trying to galvanize his campaign by going after former President Trump with the assumption that he will be the person he's facing off, Well, Lisa.
I he hasn't done that enough yet.
And also, just to show Biden out on the trail, you know, you can walk, you can talk.
He's clear, he was energetic.
I mean, you know, given the most recent polling that has people really doubting his age and doubting his capability, the more he can get out and show that he's still vibrant.
You know, the more he can mitigate those kinds of concerns.
So I think that's a really important part of this strategy. And also, if you think about some of the things in the most recent polling about Trump's job performance in office, it's relatively positive. So you know, the COVID after effect, which some people argue costs Trump the presidency in twenty twenty, that seems to be diminishing for Trump. So you know, absent the indictments, there might be a rosier glow on how Trump's presidency went among average voters or independent voters.
That's a real concern for the Democrats that real conserve Pi Biden. He's got to remind people of what the administration really was like and why they rejected it in twenty twenty.
Does President Biden have any chance of winning if he's not facing off with the former President Trump?
At LISTA? That is, you know, that is the Republican Party essential question.
You have to believe that the negatives associated with Trump, particularly among independent voters in swing states. I remember some of these swing states have swung a little more of the Democrats in recent elections. At least at the couventorial level and the Senate level. When you think about that, that's their issue. You know, would they do much better if Nicki Haley is the head of the ticket, or even Ron DeSantis even if he looks shaky, or even Tim Scott.
I'm not sure if a.
Brahmaswamy is the guy to go to sort of Trump light. So I'm not sure that doesn't for them. But if they didn't have the liability of Trump, would they be doing and polling much more strongly among independence than they are now?
Professor Shawer Jeff Stein with the article of the weekend on the nation's deficit again burgeoning out x number of trillion. Ever, Dirkson and I have lost track of the billions and trillions. Is the debt of concern to an academic like you? Or is it just the usual debt angst not understanding the mass, the size, the scale of America.
Well, I think the parties have long abandoned really seriously worrying about the debt.
The Republicans and the Democrats, all the Republicans use it.
I think solving the debt limit crisis, I think that was as we saw something that both parties understood they had to finish and had to get done.
But you'll see this rhetoric tom absolutely.
In the next four weeks while the Republican Party they're gonna claim we spend too much money. They're gonna want big cuts, and Biden's gonna have to hold the line, which may lead to a government shutdown a couple of days after the second Republican Party debate.
And that hurts in the end of the day. It hurts Biden.
In a lot of ways because he's the incumbent, and because the incumbent is supposed to run the government smoothly. If you couple that with another strike, another union strike, if we see the autoworker strike, I think that creates real uncertainty and concern among voters about the Biden administration.
So it's a real risk for them.
Wendy Schiller at Brand University.
Right now, we're going to burst into tears of David Rubenstein. He joins us, of course, of the Carlisle Group, his philanthropy, including completely stacking the Duke football. We have to stop the show. After talking to guard Jay Pulaski, Duke twenty eight, Clemson seven, how did you contribute to this win.
I was calling the signals in from the sideline, and that's what Duke did. They if they listened to my hand signals earlier, they would have been a better team all along. But they just started listening to him.
Is this Rubenstein making Duke football a new d one resurgence story.
It's great. We haven't had victory as big as this.
We're kind of hand signals.
That's how coach k won all of his championships. I was sending hand signals from the sidelines. He didn't want to tell people that.
David Rubinstein, Jeremy Green. I know Jeremy for Ages. I have a huge respect for him in his philanthropy speaks volumes. In your conversation with mister Grantham, how did you address the three year the four year caution he's had on the American financial experiment.
For those who don't know, Jeremy Grantham is a man who is a very distinguished an analyst financial analyst, and he's been quite prescient in predicting bubbles bursting, and he's really good at that, and he's predicted many bubbles that actually subsequently burst as a result. He's got a really terrific record as an investor, but now he's spending most of his time investing in climate change, in climate tech.
He thinks the greatest challenge in the world now is the climate problem we have, so most of his money isn't a foundation that goes towards that. But he likes to call bubbles, and he's said, maybe artificial intelligence is a mini bubble, but we're now coming out of the tech bubble, and that tech bubble he forecast and he was not involved in tech, and therefore he did pretty well for his investors. He built GMO many years ago.
He's a British citizen initially, but lived in the United States after Harvard Business School, and he built one of the better money management firms in the Boston area. And he's quite well known for his philanthropy, but also for predicting bubbles. And he also says the FED is almost always wrong in predicting recessions. The FED is not predicting recession now, but he thinks we will have a recession for sure.
Does he think that it's harder to see a bubble now than in the past. Is it more difficult to spot bubbles in an arrow where people have been grown up have been raised through the financial crisis and through the big short and all the glory around bubbles.
Well, you don't really know you're in a bubble to it bursts typically, and he's actually pretty good at predicting bubbles, but nobody's perfect at it. And the reason we have bubbles, he would say, is that there's the phenomenon that everybody is afraid that their neighbor's going to get rich and they're going to miss out on it, so they pile in when things keep going up, and ultimately at burst, they they're disappointed. Pointed out for example, Sir Isaac Newton,
one of the smartest men ever. He got into an investment, thought it was pretty good, made doubled, his money, got out, and then he saw it kept going up and up, so he mortgage his house, took all of his money, put it back in, and he lost at everything. He went bankrupt.
Physics and market timing maybe don't go exactly together all the time. I let's just say that, right, But there is this question going forward, especially at a time where people are trying to game out where the fed is of just the cross currents and the uncertainties and how much the US can continue to diverge from other places.
Does he seem to think that that's overplayed based on the AI bet that that sort of people are not looking at history and that they need two more to really understand this well.
I think looking at history would be something he thinks is a good idea, because if you look at history, you'll see that when you have these kind of inflated bubbles, they are inevitably they're going to burst. And so we've had many bursts at dot com bubbles where he really made his name because he was in effect predicting that would happen in nineteen ninety eight, nineteen ninety ninety two thousand, and his firm did quite well avoiding the tech bubble
that existed. Then he's actually a legendary least smart person about predicting follies of the markets. And he's not afraid of telling you that you're not smart, you're stupid, you're doing something wrong. He's not afraid of actually going against the conventional wisdom. Very often people don't want to offend other people by telling them they're not that smart. But he's willing to say you're wrong about this.
But this is why this conversation is so important, folks, nine pm tonight. Rubinstein Grantham, David, you're one of the congenital optimists out there. You have put money where mouth is on the artifacts, the heritage of the American financial experiment, the magnet cart purchase that you made, any others. I'm not going to say you're the polar opposite of mister Grantham,
but there's a built in Rubinstein optimism. Do you maintain that even with the not perma bear but the perpetual caution that we witness with Jeremy Grantham.
Well, he is much more bearish and much more negative on things than I am personality wise. Probably, but you know that takes a lot of courage. When you're telling people they're wrong all the time. That's not easy to do. So I am probably not as good at telling people they're wrong to their face as he is. But he's willing to tell people you're wrong. Can a big mistake.
All of us rocked by the climate change stories of the summer. You know this that the other thing? What is his prescription to have America address facts of climate change?
Well, he thinks we're not doing enough for sure. Now he can't solve all that problem himself. But what he's doing is taking most of his money now and investing in green tech companies, venture capital kind of company, small ones, hoping that one thing will come along that will actually make a big difference. But he's not trying to influence our government policy by going down lobbing. He's past that.
But he's actually a very very clever person who now has made his main focus in life climate tech and investing in things that are going to maybe help with climate.
You've said several times he's not afraid to tell people to their face that they're wrong.
Has he said that to.
You, Well, he hasn't said to me, I'm wrong, but necessarily, but I think generally when you're predicting people, you're predicting bubbles are going to burst. You're telling people ninety percent of the people they're wrong. And he's not afraid of telling people they're wrong's you got to have to have a certain kind of personality. Probably he's better at it than I would be.
The idea of investing in niche companies sort of what thom is talking about, whether it's climate change or whether it's some of the venture capital the other people are doing. Is that a more sure bet from your point of view now, at a time where there is such a high degree of uncertainty on a.
Macro level, well on climate tech just.
In general broadly, this sort of niche concept of just going at things very specifically with a smaller pool of money, is that a sure bet to make bigger returns.
There's no sure bets anywhere, of course. I think the biggest concern that I would have is that we're not quite past the point where we know there's not going to be a recession. I don't think we will have a recession, but nobody knows for certain. You don't know it until you get into it. Right now, the conventional wisdom in Washington is that we've gone past the likelihood of a recession. And there are some people like Jeremy Grant and who thinks that we may have a recession,
but it maybe next year, not this year. As you know what, there was a prediction of a hard landing maybe by the end of this year, but now most people would say, probably not going to be a hard landing by the end of the year, but as the next year, that's when Jerry mcgrantham thinks there will be a recession sometimes next year. And again, predicting recessions is a fool's err and it's very difficult to do.
They have a good time for one more question, it's really important. The quarterback for Duke is just totally irresponsible. He had late homework and they had to do a whole video asking the professor to delay. Is, you know, to get his homework in so you get a quality see Riley Leonard of Duke University. I mean, is he destined for Carlisle Internship? I mean where are we on this? I need to make some news today. Help me?
Well, I think in college football and college basketball today you can make more money playing college basketball and college football then going to private equity fund.
Did you think of the Citadel internship the salaries there again? Did you see that last week they were making Jane Norms money.
Well, Citadel is a great firm and that's got a great leader and they're making a lot of money, and I guess they're paying out a lot of monye. They want to get really smart people and they can pay up for it.
But this what was the first what was your first internship in finance? You walked in the door and said, I'm just glad, can I get you?
I didn't have an internship in finance. I think my first job was probably selling magazines door to door or something like that, but I didn't have a finance internship.
Really, David Rubinstein here, Riley Leonard, if you're listening this morning, called one eight hundred Rubinstein and you get that Carlile internship going. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always
I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg