Surveillance: Economic Data Is Decelerating, Golub Says

you're the first person to say that. I totally agree. Let's bring in Michael mcaplin Bag International Economics and Policy correspondent. Your thoughts, Mike, Well, let maybe the second person to say that it could easily bring forward the decision. The problem that they have is what are they going to do, which tool are they going to use, and how are they going to set that up? Presuma believe they've been

working in that for some time. But the hope was that Jogging could float some ideas and see how they would play and see what kind of impact that might have in the markets, and they would have to forego that sort of preliminary testing period if they go ahead and move it, But you're right, the numbers so bad. German manufacturing the flash p m I forty three, and that signals significant contraction in manufacturing. That is definitely going

to be a drag on growth there, Mike. The parallel of the analog to the United States is a linkage of the service sector economy to what's clearly a manufacturing recession. Is there service sector economy the same as our service sector economy. Well, they're manufacturing is a much bigger component of the German economy. But yes, they have a large services uh component to their economy and the services sector

is hanging in there. Um. Their p m I for services fifty four, that's a trivial change from what it was a month ago. Uh, it's not services, it's manufacturing. A lot of that has to do with trade. Germany is one of the biggest trading nations in the world, and with China shut down and the US engaged in the trade war with them, You've got a lot of other nations that are engaged in many trade skirmishes. It's

tough for Germany. Those trade talks can't begin fast enough for the likes of Germany in Europe, the United States and officials heading over to Beijing. I believe ka which is significant in and of itself. The Chinese are basically saying trade is trade. Let's keep it out of politics for now, because the politics between the US and I'm sure Bob will know more about those. Politics between the

U S and China not very good right now. But if they can focus on the trade numbers and the trade negotiations and try to work on that, it does signal there may be farther away from getting somewhere, but at least they're starting. Let's bring in Bob Homa, shall we kissing your associates? Vice Chair, Bob, you know a little something about Germany. I'd love your thoughts on it.

We're now looking at the water levels in the river Rhine, which which to anyone outside of Europe sounds absolutely ridiculous, but the weather is being so dry, so hot over in Europe that it's actually becoming an economic issue. Bob, your knowledge on the country, your knowledge on that area, just walkestry has significant. That is well, it is a significant.

I live for summer in bun which was then the capital of what was then West Germany, and the Rhine is really the major artery for a lot of trade that goes from the western part of Germany through to Rotterdam and other ports and then to other parts of the world. So the Rhine is very important, and the trade link with China that Mike talked about a moment ago is also critically important. We talked in this country

blithely about decoupling and delinking with China. China is an integral part of the manufacturing network in Europe and in the United States as well. And a weaker China, which we've seen their growths diminishing rather substantially, not disastrously, but certainly lower than it was, and that affects their demand for manufactured goods from Europe and from the United States

as well. So some normalization of economic relations and alleviation of the threat of higher tariffs, and perhaps even reducing the tariffs um and improving the investment environment in China would be very helpful to the Europeans. It would take time, but it would have an impact on the market. The limited time that we have with you today, ambassadors extraordinary. I I am really taken them back by the diversity of the proposed cabinet or speculated cabinet of Prime Minister Johnson.

It truly to me seems to be a generational shift in the United Kingdom. Yes, well, he's got an interesting agenda. One is he is and if you look at the Tory Party there it is a much more diverse party than it was ten years ago. When he wants to be able to pick people who represent various elements of the Tory Party. But basically on one issue he's going to get a lot of levers, people who want a bregsit and so he's going to be diversified ethnically and culturally.

But on the question of Brexit, he's gonna want to have relatively hard line. But John it's extraordinary. An Indian family that went to Uganda thrown out of anyonever it was. We've got a Pakistani possibly appointed times actually just for pulling the headline, crossing the bloom bag that Sage Javid may be the chancellors. To many people, that's story news.

But for Americans, the diversity proposed is unprecedented. There's no equivalent. Actually, the Conservative Party has done a really good job of bringing minority figures into the full front of the party and we could well see that in the Boris Johnson cabinet quite a big way. Yeah, and it's healthy for for Britain and I think it's healthy for Britain in the world because it enables them to have these links with other countries. How does Boris Johnson attend to the

President of the United States. We've heard in the last hours they may visit three times to September. Well. I think Boris Johnson wants to a demonstrate with people that he can work with the United States. Be He's gonna want to develop some closer economic ties with the EU, even if there is a heart break that he wants to sure that there's some kind of trade deal. But if he cannot get that, then he's going to have to have some deal with the United States on trade.

They're gonna need them. He sold his candidacy in part on the idea that we can leave the European Union with no real ill effects because will immediately be able to put together a trade deal with the United States. They haven't been legally allowed to negotiate because they're still part of the EU, but they've still been talking on the sidelines for quite some time. It's still it's still true that Europe's biggest trading partners. So finding some deal

or trade with Europe's important. But if he can work with the United States, it's anthan's his leverage with the Europeans, and if he can't get a deal, he's gonna want a good deal with The question is will the United States, in the way it negotiates, give him a really good deal, and that's going to be a challenge. We're going to continue five hour discussion with Robert Harman's today. We'll try to get to death as well Alicia Levine with this bn y mel and Alicia, I want to go right

to the terminal rate. Everything squeezing down. John mentioning of negative negative rates in Europe as well. You're supposed to flip the reciprocal and get a higher pe. What's the new twelve multiple? I mean value stocks were very twelve. Is it fifteen or is it eighteen? So I'm not going to put a number on it, but it's come on, come on, you look for a bank put a number on it, not the sales side. Um, you know, look

it's higher. It's clearly higher. When your rates are lower, you discount rate as ower, your multiple as higher, and markets go up. And we see that not just in the US but also globally, which is why markets don't feel frothy. They feel more or less fairly valued, but not frothing four L four, not level five, Level four. I was listening to Andrew Sheets of Morgan Stanley quite recently and he makes a really interesting point. They make it very simple over at Morgan Stanley. We're going to

get easing. That is the consensus view in the market right now. What is the accompanying data. Does it continue to weaken, does it stabilize, or does it accelerate? And that's the real judgment call here as to what is about to happen with risk assets and right now the Andrew Sheets take on this, and at least sure I'd love your insight on it as well. Is that if this market was bettering beyond just easing and to something

like sustainable economic growth, why inflation expectations higher? Why commodities rallying across the whole complex? And why aren't long end rates pushing higher as well? Why aren't we factoring then those things? If we believe these central banks can end genia about a growth picture, Well, it's a great question, and we've had this discussion now for several weeks, which is what actually is the transition mechanism between lower rates

and economic growth. And if you look at Germany and you look at Europe and the e c B, it's that's the perfect example of the muddy nature of it and how it's not actually direct transmission, because if you look at the p m I is coming out of Germany today, it's very clear that negative rates actually have not helped the economy or manufacturing, or investment or anything of the sort. So we come back to America and ask the question, what can the central bank here do

by easing. Clearly it's going to be in the interest rate sectors, interest rates sensitive sectors of the economy, housing and autos. Autos have their own issue because there's a structural change going on in auto ownership. We can see that in right sharing, but we should see it there first. The other issue is on the on the yield question.

If we think growth is stabilizing and turning, you can not escape the global negative yield here in the US, and you have thirteen trillion dollars of negative yielding debt and that's going to come into America and you can't you can't engineer your way out of it. It's capital flows. Let's talk about earnings quickly as well. Caterpillar delivering results. I believe in about eight minutes time looking at the semi Semmy's have had a massive run over the last

couple of days. Taiwan Semmy I believe last week came out with some pretty decent numbers relative to an ugly expectation looking forward. I believe Texas Instruments did the same thing after the close yesterday. You'll take on that area of the market right now. I think it's interesting what what the semis are telling you is that cyclicals are the play here and the u S data is interesting because the u S data in June clearly was better than than April or May. So you have a turn

here in the US. The semis are saying that you play the cyclicals because they're the forward looking that they're the forward looking sector. This is really the interesting thing here. While everybody is so worried about growth falling apart, corporates are coming in pretty decent. Are you happy advising clients for not to add a little bit more sticklaricality to that portfolios? Given the economic data we're seeing a swell. I am actually, and I am because you don't. You

don't fight central banks. So you have the FED, you've got the e c B, you've got other central banks already easing as of last week, so you have to play into that. Your multiple is higher. You support corporates. You can't go bankrupt in Europe. How are you gonna go bankrupt? The ECB is buying every bond out there. We're too short. We've got to come back Alicia for another visit here soon out there and darkening the door right now. Timthey O'Brien spiriting with David Shipley all that

his Bloomberg opinion. Many of you have seen him waxing philosophical in Washington, and this morning we begin by speaking to Mr O'Brien about these Mueller hearings. The photo this week out on Twitter of a lieutenant in vian and there was another photo the President doing whatever he was doing at the time. Do we really know who Robert Mueller is? I mean, do we have a clue who's actually gonna be the focus of attention in Washington this morning? Yeah? Yeah,

Robert Mueller is a by the books prosecutor. He's he follows the rules. Uh, you know, he's a long standing classic Republican conservative. Um, he's well, why can't this president get along with him? Well, because it's not about politics. You know. Trump doesn't like the fact that Mueller's steward an investigation that potentially could have gone into into an exploration of Trump's finances, but certainly looked obviously at what happened in the twenty sixteen campaign and Trump's UM teen's

interactions with Russians. He didn't like any of that because it was an existential threat. So Tim, we have two herrings today. One starts rather readly for Washington. The House Judiciary Committee hearring beginning hasn't been up to so early in three months. Tim's in New York here at Blomberg. Tim is still getting up early. Don't worry about you know, I'm not going to pay attention to Tom. Can you ask me a question, please, let's talk about it. What

are you expecting? What are you expecting from this? Because so many of our listeners it just thinking about this. So I've got hours of testimony. Perhaps do I tune in? Well, here's the thing. The MULA report is an extraordinary document. Its fourty eight pages long, and it is one of the most incriminating documents ever put together about a sitting president. Here's the other reality. Most of the country and most politicians have not read it. So one of the things

that's important about today is its political theater. This is the power of TV and radio to broadcast something that people aren't reading on with the idea that they might engage with it. So to the extent that this brings the Mala Report into people's living rooms, it's important and we've seen that before over the last year. We saw it with Kavanaugh's confirmation earrings for the Supreme Court. We saw with Michael Koh's hearings UM people really engaged with those.

Having said that, I do feel like a little bit of light has run out of the lamp. I think people have had are sort of in a PTSD state with Trump, and I don't know how much more generally people want to absorb. So I think this will be a litmus test of that today. But let's explore that a little bit further. The idea that this is about almost defining the perceptions or shaping the perceptions of the Muller Report. You've written this morning the role that Attorney

General William Barr has had. You've written about that this morning, that he's almost defined. He shaped the perception, perhaps more so than the individual that wrote it. Just walks us through the important self. That's him. Yeah, you know, this isn't Bill Barr's first rodeo. He was. He was an attorney general for George H. W. Bush in the early nineties when the Orian contrainvestigation was underway, and he was very shrewd about how we protected the president during that investigation.

So he had been there before, and I think he came into this with a playbook, and I think his playbook was he was going to define what the report was about before Bob Muller or anyone else did, including the Democrats. And what Bill Barr said was, um, there's no collusion, there's no criminal conspiracy. The president wasn't fully exonerated, and Bob Mueller made no ruling on obstruction of justice,

so I will he didn't obstruct. And that basically became, you've gotten a clean bill of health, Mr President, even though that's not what the report says. And moll and Bar really stayed by that. You know, when the report was finally released in full. He had a press conference to day came out and he said a lot of misleading things about what was in the report. So you know, bar has been an ally of the president and has really running interference for hmat. Is Mr Mueller a private

citizen today? Is he uh employee of the government? Is he a legacy to the Department of Justices or code? Did he has to? I think he had a personal code. There is not an institutional coach. It's not a d J code er fl he he resigned in May. They shut his office down, I believe in late May, so he's no longer implied by the employed by the Justice Department. Um this letter he sought this week from Justice Department

offering guidance about what he could say. My colleague No Feldman, who knows about all things legal, said that it's not a legally binding letter. I think Mueller asked for it because it's yet another indication that Mueller really wants he does not want to testify in public about what he regards as a private investigation. What are these shining lights of our American politics gonna do? When he says it's not gonna be the drama? I plead the Fifth Amendment.

But he's gonna say, I don't want to answer that, correct. So I think what they're gonna have to probably do is ask him to read passages from the report. And there's some really extraordinary passages in there where Trump is asking, is they're going to force Mr Mueller to do that. He's a citizen, he's appearing before the Congress. He should do what they asked him to do, include read from

the document. And now beyond that, of course, this is going to dominate the headlines in Washington, d C. Something that's attracted a little attention from our listeners here at Bloomberg Tim is what is happening with the d l J and big tech. Some people are struggling to get their head around the idea that the United States is involved in a trite dispute with the Chinese and also simultaneously going off to some of the big tech firms

here in the United States. Two things for us, well, you know, as a you know, as as business journalists, I find the schizophrenia in the Trump administration curious and it and it often feels to me like where they are on policy is a little bit shoot from the hip. And you don't know who where the inputs are coming from. You know, as you just said, he came into office

as a champion of business. He had a you know, a tech council meet at Trump Tower with the head of the Fangs and other and other another leading CEOs. Now he's authorized it would appear in anti trust investigation. You are considered Timothy O'Brien the expert on the president's

previous finances. I believe in the last twenty four hours he's saying I want my state tax returns to be private in New York is reasserting that he doesn't want his state tax returns, not only saying that he's suing as a private citizen to prevent that as the same as the federal return they're not. They don't have the same depth as the as the federal returns, but they

have a lot of the same information directionally. Obviously, I think what people want to see is what kind of income he has from abroad and in any possible malfeasance that might be inside the documents to be Governor Cuomo past legislation to allow this. The President is saying, no, is a citizen. We're not going to do this, what would you suggest will be the outcome? I don't think the courts are going to be on the President's side

and this. You know, they've made a similar, you know, slate of arguments about access to his financial records and other records. And his argument has been these are political efforts and therefore they should be knocked down. And the Congress has said, we're exercising oversight per the Constitution. The courts have tended to decide with Congress on that. What will you look for the rest of the summer from the president we've and talking you're about has been almost

two administrations. In the first term, there's been such turnover and all, what's sort of your crystal ball into the cooling months of September and October. Um, well, he doesn't have cooling months, so we meet with Prime Minister Johnson. I mean you know that. Yeah, I think and I think that I think that, you know, Iran, and and and North Korea have to remain sort of front and center in people's minds. Uh, the southern border remains unresolved.

What's gonna happen with immigration policy there? And then I think obviously he's positioning and um, you know there's gonna be some key issues that the Republicans have to pull together on to have an agenda behind and beyond just Trump the showman. And I think they've got to figure out where they are on healthcare, where they are in immigration, and and and make sure that the fruits of their

tax cut are apparent to their support. We're gonna stay and listen to the testimony live here in Bloomberg Radio. I want to watch you translated for me. Tom. I would that that we supported if you read the document. Full of school, I was sure, I have not read. I have not read the document, So you guys should not host a show about an event if you haven't

read the document. Really, I don't think the members, honestly, I don't think every day there was all these this jockeying in Washington about who would get to ask questions, and they were postponing the hearings, and my feeling was only let the people ask questions who've actually read the moment when I agree with that that, right, it's it's interesting.

Jim O'Brien, thank you so much, of course, with Blueberg opinion and driving so much to the smart that the every day right now on the equity markets, John, why don't you bring him? Mr Golub who has been persistently in the markets through gloom, thick and thin, joined just from Credit Swacee, the chief US equity strategist. It's been a while, John, it's quite a catch. Elby. Let's talk about earning season so far. What are you looking at? What's your school can't John, it's you know, it's it's

pretty good. If you look at the the level of earnings surprises, you have something like three cores of the company's beating expectations, and the beats are coming in more than six percent, which is really strong. The level of the earnings growth is quite weak. We'll probably by the time this is over only have about two EPs growth and when you take out the buybacks, that's pretty close to zero. But but compared to expectations, things are coming

in pretty well. What's the guidance like at the moment for the rest of this year going? UM? I think the guidance is finding what we knew we were going to get was um, you know, comments about about trade and potential headwinds, and so I'm not sure we're seeing anything that's um that's out of the ordinary. But you know, Prepsy, the more important issue here is that the media company, the typical average company and portfolio is doing much better

than the weighted number when people quote the SMP. And the reason for that is simply that mega cap tech is having a harder time with respect to growth and that's bringing down the averages even though typical portfolio managers doing a little better. Okay, investing one oh one, your most sophisticated hedge fund client or somebody in wealth management

at credit Suites. I just did a laddered return year to date, six months to day, three months to date, one month to date, and the answer is it's all double digit, pretty nice returns. Everything said and done. Do I get out of the market and enjoy what I've done the first six months or do you stay in the market even if you get an incremental single digit

return to the end of the year. Alright, So, Tom, I'm I'm gonna disappoint you a little bit because I've been super bullish for the last six years, and I'd say, is it's not that embarished, But I'm more cautious. If you look since the September high, so roughly about ten months, the SMP is up only two. The reason that the market looks so great since let's say late December or year to date of the last six weeks was because we had such a lousy fourth quarter and we've gotten

it back. So stock multiples are fine at seventeen, which but that's roughly where they were, um, you know, ten months ago. So the market doesn't look particularly expensive, even though it's run up recently. The earnings outlook for for next year you're probably gonna get something like a load of mid single digits, which is not brilliant, but is fine. Um. The thing which we really need to see to propel the markets further is exactly what Jonathan was talking about

a moment ago. You don't want to be um putting yourself out there with respect to equities when the economic data is decelerating. We need that to turn around. Um. The other thing is if anyone believes that that falling interest rates are good for stocks, that is not going to be the case between now and the end of the year. That last line, that is not just a throwaway statement from the team, a credit slace. I know you've done a lot of work on it, so explore

it a little bit. Further, for us, there is this just sort of generous general surface level belief that level rates great for stocks. What do you know, what do you see in the data? Well, I mean, so there's a couple of things we we we've mechanically, we've gone through and said what happens to stocks when on days where interest rates fall and days where interest rates rise, and when days were interest rates rise, what you have is better news. And those are the days where the

stock market makes virtually all of their games. This has been the case for virtually the entire recovery cycle. It's a very consistent way to to invest. So that's really the simple bottom one. So for people, the reason that the market wants to fed or was expecting to fit to cut is because the short end of the curve is is inverted. Basically, you can get a higher interest rate on one month bonds than you can on a

two year bond. But in general speaking, if we have lower interest rates at the end of the year, we will have lower stock prices. John the value in American banking, you're with a Swiss bank, so it's a little easier for you to talk about this than others representing too big to fail banks. How a bunch of a steel is that cash flow of too big to fail American

banking right now? It's it's amazing Tom that right now, if you if you look at the return of capital, dividends and five backs together, the US banks are yielding ten percent, thank you. And this is an environment where you can get barely over two percent on a government bond. And not only that, but the banks are much much less risky today than they've been because the government has forced them to take less risk. So um, I'm shocked

that investors aren't more enthusiastic about that. What's so important here, John is Yesterday Gabriela Santos of JP Morgan was saying blended SPX is a two percent share buy back, and Mr Galub just said the banking too big defail banking sector is a five factor of that. Well, they've been juicing aps with the buy backs. We saw that with the results just the other week. John, talk to me about the financials at the moment and the level rate story, the FED on the brink of an easing cycle. I

don't know how deep it goes. It could be one cut, two cuts, three cuts, four That kind of environment what does it mean for US financials now, considering the shift they've made to their business models in the last decade. Well, and it's it's a it's a great point. First of all, and this is a big difference between US banks and non US banks is the US banks make more of their money from fees, which means that they hold up much better even in environments for that where interest rates

aren't kind of working in their favor. Um. But what right now, if you can get a higher interest rate on a one month CD, then you can get on a to year government bond. It's very hard for banks to make money when they're borrowing costs which which our deposits is higher than what they're gonna lend out um for two or three years. So if the FED can brings down the short end of the of the curve, a short end of short term introduce, then then bank

profitability should do well. So what the what the banking sector wants is a steepio curve where the tenure bond is above the two year yield. And that's what the markets expecting. The reason the market's expecting four moves is because they do not believe the FED will let the curve stay inverted at the short end. Is there right now? Two oh five and the tenure one eight one on the two year Jonathan Gollop credits. Thanks for listening to

the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.