Surveillance: Economy Could Use More Fed Support, Memani Says

While the why behind that, Tom is a high pressure which was up over the northeast this weekend was what was steering Dorian into the northwestern Bahamas. That system has moved off shore. We've actually had a coal front move across the northeast, so there's nothing helping to push that storm along. What's going to happen is coal front in

the western Great Lakes. It's a fairly strong one. It will drop down kind of start to draw Dorrian north northwesterly later today, to the north tomorrow and then kick it out to the northeast as we head through Thursday and Friday. Is it is it a hurricane still and when does that shift with the erosion of the energy and the power of the inertial force. When does it shift to a tropical storm when it gets into the North Atlantic. It is going to remain as a hurricane

the entire time. Yeah, it's spun down now to a hundred and twenty miles an hour sustained, but that's still a Category three hurricane, major hurricane. It's lashing on the northern side of Grand Bahama Island that has been doing so since yesterday morning. The devastation there is going to be horrific. The good news is the track should keep the strongest wins just east of the Florida coast, the

Georga True Coast, and the South Carolina coast. I think the best chance for a potential landfall and the continent of the United States would be around Cape Hatteras early in the morning on Friday. So this is something that people have been talking about. The Florida and South Carolina not totally out of the woods, yex. It would just take a little shift to send the eye directly to make landfall. What are people looking for? When will we have a better sense of of what could potentially get

hit well? The good news is lisaid the fact that the storm isn't moving right now, is what the model suggested. What happened, so we're not seeing anything unexpected. What we're waiting for now is that movement in the north and northwest today and the north later today. That'll start to give us some confidence that those stronger winds are gonna remain off shore and not impact the Florida coast at all. You know, Rob, I got three networks right now here

in our studios. Folks were all wired up worldwide, all the Machendra for Bloomberg Television right now in the Green and Parliament. But in America we got three guys were in Patagonia standing on the shore getting splashed. And you know, we love Rob. You don't do that. Forget about the drama and all that. What have we learned about your business since Andrew of decades ago? Ah, the potential for

these very small hurricanes to do horrific damage. Uh, Andrew was the same type of storm and same type of season, Andrew being the A storm was the end of August. We had had a very quiet summer that year, and not a whole lot had gun on This being the d storm ends up being a hundred and eighty five mile hour hurricane with two it only takes one storm

to do horrific damage. And again, I can't imagine what it's going to look like on Grand Bahama Island tomorrow morning when they finally get a chance to get some TV crews in there, just to push this forward. Rob, what does it look like in terms of the rest of the hurricane season and the other storms that meteorologists have been keeping their eye on, Well, it's gonna get much more active than it's been, Lisa. We see conditions

getting ripe in the Atlantic. In fact, we can see that this morning there's the potential system that may develop in the western Gulf of Mexico. Um it may end up being a tropical storm. And then there's a wave off the coast of Africa on thirty one west that may become a depression within the next couple of days. So it's certainly gonna be much more busy in the Atlantic over the next month than it's been the previous

three months. Rob, your pro thanks so much. He is our Bloomberg meteorologist for all of our weather storms, snow and the rest of it. This is a joy and to start this Tuesday, you know it's like New Year's in the business world. Every you know, it's like a happy Tuesday kind of time, and it is wonderful. To start with Lorie Calvacina of OURBC on the equity markets. There's a lot of naval gays in this weekend, Laurie about what to do all this other noise, bonds, currencies,

sterling under one nineteen, et cetera. I guess steadfast and an equity call or have you amended things? So I would say the only thing that's really changed in our view over the past, you know, stay a week week and had since we had that awful Friday where the trade war escalated again, is you know, I would say, in the short term, at least we have more conviction that we're going to see a full on ten percent pullback, and we've said that the risk of having that pulled

back morphed into what we call a growth scare. We think the risks there have risen. It's not our base case. By growth scare, I mean something my took what took us to the loads of eleven or twenty sixteen, where you saw basically like a fifteen to pull back in the market. That's not our base case, but we do think the risks has risen significantly, So Laurie, a ten percent pull back would that be across the board, and just sort of talking about correlations, everything going down at once,

or they're going to be certain sectors hit harder. So you know what we always see on these really bad days, and you don't necessarily see it in the weekly data or the monthly data, but we do tend to see some of the names most heavily owned by hedge funds, particularly in the T I M T complex, the software space, I T services, things that might not necessarily be associated with the trade war directly, but that are simply widely held on big proxy for equity exposure among the hedgepunk crowd.

Those are things to watch out for. I mean, you know, we we still like things like utilities, reaps, consumer staples. Were not necessarily saying that they will go up in a pullback. We think they go down less. Lauria, we're jargon free, particularly one of Brammo Wosis in the room. What is T I M T tech, Internet media and telecoms. So I'm a child of the tech bubble. I came into the business back in two thousand and that's how

we used to talk about it then. And what we find is, you know, gigs has moved around the sector a little bit over the last year. That's really how a lot of hedge funds and a lot of growth investors do their tech allocations. They lump media and telecomm and yeah, we call that. Those of us of a later vintage, at least they called that. Stocks with no

profits continued, well, some of them do. But it is interesting to see what you were talking about, Laurie, that the idea that hedge fund ownership is a recipe for volatility. And I'm wondering what you're increasingly telling and advising clients to look at hedge fund ownership of stocks and then saying stay away. It's it's something that we've looked at for a long time. Um, we have one product that

we put out. We put this out in August, and you know, we do go through and we look at the names that are most heavily owned by hedge funds, both in terms of dollar value in terms of market cap exposure percent of market cap owned by hedge funs. What we've actually found is if you go back and you look at last year in the second half of When you flipped over into the second half of the year,

it was like flipping a switch. And the names most heavily owned by hedge funds, just the biggest market CALF names um underperformed pretty uh steadily until you got to basically kind of early December, and then they were kind of in line performers. But we saw those stocks start to break down before the market did. One thing that I'm wondering and that LORI, I know that you've embarished for a while. The amount of bearished sentiment in the market is getting to be sort of growing. Din at

what point is that a positive indicator for stocks? So you know, it's interesting. We have a scorecard where we monitor different drivers for equities and one of those drivers is investor sentiment and positioning, and we consider it to be mixed, and the mixed is on the negative side. We still have positioning, which we think has been quite euphoric and in the process of unwinding. If you look at CFTC data, it's telling you that it's starting to

catch up with where sentiment itself already is now. Sentiment it has been quite bearished, and on some metrics if you look at AII, the American Association of Individual Investors. Retail sentiment is quite bearished. That's usually a good bye signal. But the positioning, especially on the institutional side, which is what you're seeing with that CFTC data, it's been lagging a bit behind. It's catching up to where that Parish

sentiment already is. Thank you. We will continue with thrills that she could be with us for a substantial uh time here this morning she's at RBC Capital Markets. Dana i On is joining us now. Dan On BNP PARIBA chief US Economist and ahead of Marcus three six in North America at former U S. Department of State Chief Economist, and Dan I want to start there with your experience

in UH the State Department. Considering the fact that so many economists have basically written off the likelihood of a deal, I'm wondering, as we see the increasing expectations for a US recession, how much would those get absolutely annihilated if there were some trade deal? In other words, you know, could the U. S. Economy grow substantially if we remove some of these trade tensions? All Right, it's a pleasure

to be on and that's an excellent question. Um I think actually the weakness that we're seeing in the U. S economy and in fact around the world. UM, it's not driven solely by trade tensions. This was a cycle that in manufacturing that began before the trade tensions really accelerated them. So even a removal of the trade tensions UH may not be enough to, you know, cause the

the U S and the global economy to rebound that strongly. UM. That But that said, there are I think tentative signs that perhaps both sides are recognizing the the economic damage that this is inflict upon themselves as well as the rest of the world. UH and uh. UM. While it's really challenging to predict exactly the twists and turns of the trade tensions, UM, I think the prospects for a

ceasefire UM are still there. Okay, So Dan, I'm just wondering, given the fact that there are still some chances for a ceasefire, what's the likelihood of the US recession the next twelve months? So UM. Obviously much will still depend upon, uh, how well the trade talks go in September and beyond. UM. But I think it's premature to talk about the R word right now. It's Uh. Yes, you know, there are some important signals, notably the yield curve, which are pointing

toward UM, toward a recession. But and clearly a deceleration and a slowdown in US growth UM is already happening. UM. But the you know, the U. S consumer which comprises the economy is still strong. UM. There's only tentative signs that sentiment maybe shifting. So I think we need to see some more data UM coming before we know for sure that the consumer is turning. The doctor on your note is remarkably global. As you pull it all back to the U. S. Economy, I want you to fold

in Japan right now. You've got a fabulous chart buried in your note of the slowdown uh in their domestic machine orders versus what else is going on in Japan? Is Jerome Powell the central bank or did Japan? Right now? Yes?

And unfortunately he's in a position where, with so much of the rest of the economy and particularly emerging markets, I would say, as well as other developed markets hinged upon US monetary policy, he is de facto acting as a central bank of the world, even if his mandate from Congress is of course just the US focused, and of course, uh, they're people in washing d C who want him to be even more uh solely focused on the US rather than the rest of So does that

do for September eighteen? Lisa? What is it? The fourth authority? Today? Third third? So we're like fifteen days away from a FED meeting? What is what is the global nature of this mean for the chairman? Is he looks to September eighteen? Yeah? So, um. Chair Powell has definitely mentioned external conditions as one of

the three reasons why he has already started cutting rates. Um. He believes that this is part of a risk management strategy, UM, where the fundamentals themselves may not quite justify already moving into an easy cycle. Um, but there's are reasons, including as you said, external external global economic weakness that justifies

rate cutting. So I think he will use similar justifications, UM, because the reasons, the three reasons are all still there, uh, weak economic conditions, trade tensions, and a muted inflationary outlaw

uh to support further cuts. So you were saying that it's too early to start talking about the R word, And whenever anyone says the R word, it makes it sound that much more ominous, But we are seeing that yield curve, whether it's two tens, whether it's three month tenure, wherever you want to slice and dice it, you're seeing the inversion persist. Is this time different? Does this sort

of mean nothing? Yeah, it's always perilous for economists to say this time is different when so many times it's not actually the case. But I actually do think that this time it's a little different. There are reasons to believe that structurally, long term interest rates have been depressed lower. I mean, in the end of the day, yield curve inversion is basically a prediction that short term rates are going to continue to fall um and that has always

been correlated with the recession UM. But you know, but the causal channels are complex, and with rates already at a relatively low rate, it doesn't take because much this time around for the yield curve to invert. You know, part of your charm as you took a finance degree with an economic degree as well, what is the causal transmission of negative interest rates that wasn't in your studies? Was it? No? And it's an ongoing area for for

research right now. Um, and uh, the latest I think in academic thinking is that yes, you know, we can move somewhat into negative territory. We've already seen that with you know, with Switzerland, with some of the Spinavian countries and so on. But there reaches a quick point, a point where once you depress interest rates, uh in negative

territory too far. You know, other mitigating strategies like hearing et cetera can only do so much before this actually trying to be bad for the economy rather than good for the economy. And now, as a point, folks, where we go. Academic Marvin good Friend at Carnegie Mellon would suggest a braver approach on negative interest rates, which deals with the amplitude of a difference equation. I mean, if you yield with the amplitude and pushed down negative rates

as we're seeing in Germany right now. In Switzerland, I mean, we had a record load tenure yield two hours ago, folks. Dr Ron, If we if we boost the amplitude of negative interest rates, doesn't that provide instability by definition when you recover. Yeah, we were certainly kind of on the

other side of the looking glass here. Um, none of the standard kind of theories sort of accepts that negative interest rates are even possible, and yet here we are Uh so, yeah, we are in uncharted territory and that is always dangerous for for policymakers. Uh and uh and for academics. Uh. Maybe kind of exciting for academics, but uh, it's it's uncharted territory here. So uh um, I mean

bottom line. Uh, you know, we can quibble about exactly what is the right kind of negative interest rates that should be set, but I think the big picture here is that at um, the headwinds faced by the global economy are not monetary and and uh and credit related in nature, and so there's only so much that you can use actually a monetary tool to fix non monetary problems. You sound like Bill Dudley. I didn't mean that. Dr Ron, thank you so much, greatly appreciate it. With BP joining

us now, Lindsay pegs act. She is Steple chief economist, and Lindsay I want to talk about manufacturing. So we've got a bunch of readings out from Europe and from Asia and they painted the same picture. Factories are producing less and it does not seem to be getting better anytime soon. Is this something specific to the industrial sector, or does this represent a broader, more sustained slowdown that will happen regardless of whether the trade tensions are resolved.

You're right, we have been saying this very steep downward trend in manufacturing global manufacturing. Now. I do think that at the heart of this weakness is deteriorating trade relations, but we were beginning to see weakness bubble underneath the surface independent of these trade negotiations. So I do think that it's a dual pathway that's really compounding this negative implication. So in other words, that you think that it's not

just simply the new trade regime. And given that, do you think that it signals some sort of global recession or a sort of deepening of the downturn, or do you think that we're seeing things kind of peek out here at the bottom. I don't think we can blame just trade in terms of the weaker fundamentals that we're seeing. And this is something that the Federal Reserve pointed out

as well. Think, yes, trade negotiations and these tensions have exacerbated this downward trend, but we were beginning to see the end of a credit cycle, the beginning of again these weakening factors already become evident independent of these trade

negotiations or deteriorating trade negotiations. That being said, when we look at the weakness abroad, when we see struggling growth in Europe's key economy Germany, Italy, France, China of course slowing to the weakest pace of expansion in decades, and of course the US still positive but seeing very clear signs of weakness and deteriorating composition of growth. I think this does sell maybe not a global recession, but certainly

a non accelerating economic period. What's global economy? What's the trended inflation right now? What are the differentials between service sector inflation call it two point eight percent and goods inflation barely above zero granted recovering, but what are the dynamics of inflation you see? Lindsay, Well, that's one of the problems, and that's one of the issues that the Federal Reserve has struggled with, the fact that there's really

two tales of inflation. When we look at goods inflation, this is primarily reflecting the fact that this is a global economy, and when we see the goods to produce at a cheaper level overseas, we import that deflation and here in the US, and that's restraining goods prices. But of course services are harder to export overseas, and what we're seeing is more of an inflationary environment, okay, which

has been trending well above two percent. But of course monetary policy can't be two different types of policy to combat those those different lindsay, I cooked a barbecue this weekend, cater by shake check and and and in doing it you go real Simply is the inflation what our listeners feel translated service sector inflation like books Brandy Melville and tuitions, or is the inflation a lower statistic? Which is it? Well, remember, as consumers, we feel the brunt of that, regardless of

whether it's goods inflation service inflation. We feel the composition of that because we're paying for those goods and services. But from a monetary policy standpoint, the set has to be very careful and the FETE has to look at the differences that we're seeing. And we still are seeing very stable services cost while above or should say well anchored above two percent versus goods costs, which again can reflect some of those international pathways and and flows of

capital and goods. So the FED doesn't want to overreact to one category of declining prices. But I think more broadly, when we look at the PC, both the headline and the core, they're well below two percent, and the FED was appropriate to act. In July, lindsay, I'm glad we brought up the consumer. How long can can the consumer

stay strong with business confidence declining? There to the degree that it has been well, it's it's shocking really that the consumer has been able to stay this strong for this long, not only with confidence speaking, but it was really a lack of meaningful wage gains. We have seen wage games pick up to be abso to be fair, more recently, but we're talking about minimal tenth of a

percentage point ten years into the recovery. If we were honestly talking about such a pronounced improvement in the labor market with such a minimal amount of slack, we would easily have been talking about four or four and a half percent wage games on a sustained basis. So it's very surprising to me that the consumer has been this resilient without meaningful wage gains. Okay, okay, the wage gains aren't there or is it? They're all skewed to the

upper x per cent? I mean, is there a part of America getting a seven, eight, twelve percent wage gain and there's another part of America flat on our back? Actually, you're exactly right. We're not seeing these wage games expand across the entire economy. And in fact, I think the biggest divide. But I think the biggest divide is between

the skills havevers and that those that appropriate skills. And so when you're looking at manufacturing wages, mining, how about the service sector, You're struggling to keep up with inflation in terms of your wage games. But if you're lucky enough to have a job and engineering i t. Computer science, you could actually be experiencing five six wage games. So there's a very clear divide between the specific skills and

employers want and those that that employees have. Lindsay Piezka, Thanks so much, Lindsay pieza step chief economist, joining us to talk all things economics. It is the new year. It is all I was. I was pulling out Reminiscence of Stock Operator, like you read it every September. I know Christian Maman he's read it like fourteen. At times he's with Invesco and with a wonderful perspective on what to do and not to do in the market creation.

If I take my Bloomberg terminal and I put my hand over the equity markets and look at everything else in the terminal, there's no way I would suggest this resiliency and equities. Let's start with the why of August and the why of the summer. Why have equity has been so resilient? Well, so, equities have been resilient because the overall profitability of US companies, despite what you may have heard from people, is actually quite good, and interest

rates are quite low as well. So that combination of good profitability and other alternatives being not so not so hot, I think keeps people focused on equities. So is clearly the issue for just financial markets in general, risk assets in particular has been the uncertainty about trade. How are you kind of factoring that into your overall outlook for markets? Well so for the US markets anywhere, the trade remains

the central issue. And just to be clear, if things get far worse, I think the markets are going to suffer. Having said that, I think in the current context, when we are simply talking about tariffs. That is the Trump administration implementing certain tariffs on virtually all of Chinese exports. We know what the implication of that is. That is effective financial consolidation. That is a tax on US consumers, And we know what the impact of that is going to be. You know, it's not good, but it is

not going to be catastrophic. Be you know, there's enough momentum in the economy from jobs and income growth for for people to live through that. If somebody's equity international domestic because somebody told him to do that at the margin, now are you stable or increasing international ownership or you migrating at the margin over the US domestic ownership. So US valuations relative to international valuations are substantially worse in

that US equities are meaningfully more expensive. So I think, at at the margin, despite the fact that it may take a while for all of this to play out, the incremental allocation from my perspective, is really going into emerging markets because valuations in the emerging markets are extraordinarily attractive, and the trend for inflation and rates and emerging markets is lower. So Christian as we think about you know,

the the trade uncertainty in the marketplace. It kind of puts the FED in even a more difficult position here to may perhaps think it might have to kind of be a bull work a little bit against what some of the negative effects of uncertain trade. What do you expect the FED to do over let's call the next several quarters and and do you think it will be enough? Well so, I think Chair Powell actually indicated in his jackson Hole speech as to what he's going to going

to be doing. You know, despite his characterization of a mid cycle recalibration, after the July meeting, it becomes it has It has become quite clear to me that if the markets, or if the economy not the markets, if the economy needs it, I think they will be providing more supportant I think the economy could certainly use that

support for it to carry through whatever on. Certainly the Trump administration has created so my expectation is they are probably going to cutting in September, and they probably cut in October, and and perhaps one more time in December. Again, there's enough momentum, but I think providing that support and environment where there's no inflation is probably the right thing

to do. What is the catalyst for international improvement relative to standard and is it financial earnings based revenue growth catalyst or is it all political? I think it is at the moment it is all political. It is trade wars, it's a Brexit. It's these things that are dominating the conversation. I think there's the profitability of international companies, and especially in the emerging markets is good enough. It's just that in the current context, nobody wants to buy any of

these because tomorrow they could be some or cheaper. On the other hand, if you have a five tenure investment horizon, this may be the opportunity that you have been waiting for for quite some time. So Christian, one of the things that's certainly been supporting economies around the world, but certainly the US has been the consumer. We're gonna get some more jobs data ended this week. What's your sense

of the consumers? You know, really overall underlying strength. So if you if you look at kind of real time data for months of August, and we're talking about August jobs data coming in September, that the activity level actually has been relatively stable, and you can kind of piece all of that together looking at all the other indicators. So from from that standpoint, the near term outlook for

jobs and income growth is quite good. Uh. You know, the if the current uncertainty persists, the challenge is really going to be more in in uh maybe by November December of this year, or more likely in twenty. So right now there's enough momentum in the enemy. Jobs growth would be good, income growth is going to be good, and therefore consumption is going to be supported. Christian on the banks, please help us and domestic banks and international

large camp banks, where's the best opportunity now? Well so, you know, but the domestic banks in in general, actually banks in general, in my mind, have been the ultimate value trap. That is, you know, if they have a great deal of profitability, but their current business model in the environment today of rates and all the disruption that is taking place, is just not conducive enough to meaningful growth in that profitability, and that is going to be

a challenge for the sector for the foreseeable future. Having said that, they're really good value and if you want to kind of take up take a value approach to things, thanks representing especially US banks represented quite good value. But they're not going up anytime soon. You're You're there. Dividends more than anything. El Christie, thank you so much. 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