Surveillance: Fed in Extended Pause, Kasman Says

kick off the program. Bracecast somebody. Brace. There'll be a spare mike in about two minutes if you want to take it. The chief economist at JP Morgan, good morning to you, Bruce. Good morning. One hundred straight months of gains for payrolls. Why they expected in January? One hundreds straight months of payroll gains in America? How much longer

can we do this for? I think we can continue to do this for a while, especially since we now have a FED who seems to be on a extended pause, and you know, I think we have to absorb some of the weakness coming from abroad, and we do have some risks, but I don't think this expansion is close to ending. So I don't see why we can't keep going for a couple more years at least. John's really important question. I didn't know that, John, that was a

hundred months in a row. John, wouldn't you agree as we look at all the economis who speak to it was a great Miscall of the of the recovery was two hundred plus thousand a month. Everybody was suing a couple of years ago. Everybody said, get ready for two to slow, get ready for it to slow, and it didn't happen. So brace if this can continue for the time big, can it continue at the clip that it

has done through with what you set me up. I'm a little bit cautious and saying I do think job growth is is going to slow here because we've been running an economy that's been supported by a stimulus and that is starting to fade, and I think the global economy softer as well. So we think job growth today is gonna be a hundred and seventy thousand. I think as we moved through the rest of the year, we

slow into the fifty range. If we're if our broad forecast on growth being close to two percent is right, Uh, that's still pretty good, and it's still gonna put a downward pressure on the on the unemployment rate, and that I think ultimately becomes your call. The FED is basically saying, hey, we don't think we're going to see inflation anytime soon, so we could signal a longer pause. I would agree with that. I don't think the problem is going to be inflation moving up, but I do think wages are

gonna get higher. And I think the problem as we go through the next year, year and a half is the compression in corporate profit margins that we begin to see how will companies respond to decelerating nominal growth and compressing margins. How would they respond to that just in

terms of hiring. Well, I think they're gonna bend a little, and that's the forecast we have, but I don't think they're gonna break, especially given that it has come against the backdrop of what was a really good two year run in terms of core for profits and margin expansion. So our call as the corporate sector pulls back modestly on both jobs and business spending, and we have an economy that slows down to about a two pace. Here if you're just joining US force casmin with j Pete Morgan.

I want to go back to the theme of the week out of the San Francisco Feed, a brilliant paper, thanks to Jim Edwards, a business decider, for really pushing it forward. Uh, involuntary part time employment? Are the jobs were creating? Are they full time? For the most part? They are? I think what we have seen all time with medical benefits is that is that part is that assumed. I don't know the data on how many people have medical benefit but clearly today there's more people with health

insurance than there were five or six years ago. Part of that is Obamacare and some other things that have gone on. I think the issue on this economy is not that we're creating bad jobs. It's that we are still sitting with a part a utilization rate, of layer participation rate which is still very much lower than where it was before the expansion. We're still sitting with wage inflation which was lower, as we talked about earlier, where it was in the previous expansion. So the labor market

is tight, but we only partially recovered. And that's one reason why I think the FED is willing to give this experiment some time to work, to see how far we can go before inflation becomes an issue. I mean, maybe the FED will and maybe it won't. I think the consensus view at the moment is that they've got to the right place in terms of policy. But how we got here, Bruce, was an absolute mess over the

last couple of months. Actually asked this question a couple of times yesterday to try and get a better picture of where people think the FED is actually going. So we sit here now with what many people assume is the right policy setting for this economy and the amount of uncertainty abroad. But then someone turned around to me yesterday and said, well, hang on a minute, the journey does matter. How we got here was a total mess.

And how do you know that in a couple of months time, after a few payrolls prints that are really, really strong, that this FED won't introduce the likelihood of another rate hike. Well, I think in the next couple of months, if you take the signal and its entirety on Wednesday would be it would be a mess if they would shift back that quickly, even if the data

flow is good. What I would argue about this is that the last three or four months you have to realize the Fed had been on a path to get to some level that was close to neutral, and they were basically signaling they were relatively insensitive to the incoming news. They actually welcomed some adjustment in financial conditions as they did that, and then that began to snowball on itself and they had to make a change. Also, they got

rates up into the mid twos. So I wouldn't characterize it a mess, and I would be characterizing it as a mess if we in two months time with better economic you see the Fed kind of backtrack on the statements so that they made on Wednesday, but linking in jobs here, and this is important. The one off of a weaker first quarter g d P. The JP Morgan house call is we go back to Richard Claire to

solid economy. Um, yes, solid economy, but not the economy who had in two thousand and eighteen, which was clearly everybody, even the president it was because he wants more of that. So we come back to a solid economy. We continue to see job growth, we continue to see wage inflation move higher, but core inflation sticks it around two percent.

And the question is does the Fed have any reason to move and I think they're telling us that that's probably not going to be enough to get them to move as we go through the next I think I think my frustration with the Federal Reserve is, is you describe this economy. Of course it was goosed through, it was going to slow down in Everyone was saying the

same thing. You all saw it on the horizon, and then the Federal Reserve behaved like it was a corner it didn't see in the road, a turn it didn't see in the road, and it's sliding the back end of the car route. I mean, I don't understand why the Federal Reserve has done this abrupt turn when so many people saw this coming through eighteen into nineteen that growth was going to slow. So why didn't the Federal

Reserve start making the adjustment in December? Why was it only after the December news conference that all the troops were sent out from the f O m C to start pledging patients. I didn't hear it in the chair Ammond's news conference in December. I didn't hear any of what I heard a couple of days ago from him.

This is an abrupt term, Bruce in six weeks. I do think we had a shift in December which basically signaled to us that the March meeting was off the table, that this sequence of moving every quarter had been broken. But what they were signaling us in December was a pause and a tightening cycle that had not been completed on their point in time, and certainly market participants were frustrated by that, at least some. Uh. There's also issues

around how they're talking about the balance sheet. UM. Again, I'm going to defend the Fed a little bit here, which is that I think they've made an important shift uh this week, a shift that we didn't expect in the magnitude of it. Um. But they have been gradually moving against an economy that you know, has continued to grow,

has seen risk build pretty quickly. Basically, it started to rise in October in terms of the financial market adjustments, in terms of the deceleration, and it took them three months against the backdrop of a four or five month event. It's you know, you could argue it's slow for market time, but it's not actually that slow in real time in terms of what the data has been showing us. Bruce, always get your insight on the economy, and of course

on the Federal Reserve as well. Bruce Cassman, the chief economist that Jake P. Morgan let us digress over the equity markets here. I've got some good guests coming up on the labor economy. John Gallop joins from Credit speech as well. John, you have a killer chart which answers a lot of questions of our listeners. If you take the stock market and you rip out Apple with all of its emotion and effect, and you rip out Energy with all the dynamics of that goofy sector, you get

a different look. What's the look of the equity market? Ex? Apple x Energy? Well, when you look good morning time, When when you look at the earnings UM picture UM, things are coming in exactly in line with long term averages if you x out Apple and Energy stock with respect to UM stock price revisions. And the reason this is so important is because the headlines are reading that these results are coming in horribly and that that earnings

expectations are being flashed, and that's just really not the case. John, What do you say to people that say, well, this is easy to strip out the weakness, and of course you'll end up with some stress. Why Why is this? Why? Is this a useful exercise, John John John John Galub has done that for fifteen years. That's oh. You know. The funny thing is when I when I do, when I strip out things that make things look better. Um, people say that you're trying to juice the numbers, but

at the same works in the opposite direction. Let me give an example of in the first three quarters of the earnings grew at about a ridiculously good number. I said, wait a second, that you can't count that, because first of all, you have all these tax games, which tax benefits,

which aren't gonna continue into the future. You have a whole bunch of one off items, and when you actually look at the underlying trend, you're left with something probably closer to ten percent, which is still healthy but importantly potentially sustainable. And that that's the way you have to look at it with John. John Ferrell brings up a really important point. A lot of people think having the confidence to be in the market, to participate is an

easy task. You've been brilliant about participating in the market. State the faith this morning, somebody's going on this weekend, and as they get ready to root for the patriots to get it done, They're gonna go. Should I be in the market state the case for people to think it's a simple exercise, Well, well I don't think right now, Tom, it is such an easy exercise. I'll tell you why. The first thing is is that the economy is legitimately going to be slower in in in teen and than

it was last year. And the earnings as a results are gonna be not They're not gonna be horrible, but they're also gonna be weaker. But here's the key. We're not going into recession. We're gonna hear from today that that jobs are still expanding, UM in this uh, in

this country. UM. The FED. The the consensus belief on Wall Street is that the Fed is entirely done raising rates for this cycle, so that they're no longer a headwind and we're still reaping the benefits of the fact that in the fourth quarter of last year you had stock prices get smacked down really hard, and stocks are are really inexpensive compared to where there were a few months ago. So, John, I want to bring you a quote from Andrew Sheets of Morgan Stanley, who we caught

up with a little bit earlier. He basically said, if you look back at the history when the feed has got a more dovish because of weakening data, that's been a bad time for investors. It's helpful the FED is helping, but it doesn't solve some of these bigger issues. What do you think about that, John, Well, here's what happens, Johnson, Typically is the FED stops raising rates when they've screwed up and gone too far and and really done some damage. And it's it's somewhat rare that they pull off a

soft landing. And right now it kind of looks like that's where we are, that the FED has gone from zero rate policy to two and a half percent on FED funds when most other major countries in the world are still at zero or negative UM. But I don't believe that they've done the kind of damage that they

have in the past. So perhaps this time is the magic bullet there, and this is that that soft landing that everybody helps, which I actually think I think it is many people reflecting on the nine nineties kind of playbook the midnineties going into the late nineties of the framework for thinking about this market. Is that a useful framework to use? John, You know. I think that we always try to to say what's the thing which looks closest to this, and I'm not sure that we can.

And I think that the most important difference right now is I think that the overall long term trend here is on slower economic growth, and it doesn't mean recessionary, It just means um a little bit more slug me. I think that if you the most likely period this is gonna mimic, do I own the belieguerd to have them come back, or given your slower model, do you

value more highly marginally better growth. Which is it? I think in this environment, um companies that generate lots of cash flow, companies that have lower fixed overhead, companies that generate growth that doesn't need the economy, which means that in this environment, heck companies look good, healthcare companies look good.

And maybe as importantly, the US market I still think looks better than the rest the world because our businesses are are more resilient, just because of the industries are in. Is Amazon resilient? I mean they come out with earnings own you know they're down two two three percent, whatever thing was more than that, you know they're down and there's all that, But how do I know? You don't do individual stocks, But what do you do, John Gallup with a double digit revenue grower in your lower revenue

growth environment. If that revenue growth, if it was an energy company that had had double digit energy growth because of the commodity, I'm not that interested. If it's a double digit grower, because they're taking share from everyone else around it. They've been taking share whether the economy was a little stronger a little bit weaker. You have to like those kind of companies. The stockdown four percent In case you're wondering home in the pre market, did you

have any more questions? Have plenty of questions for Jonathan Gollup. I wanted to pick up on his point about buy America versus the rest of the World's interesting. There are some people John excites it now that fed us back to way and seemingly we may well get a trade

deal that the opportunity will lie outside of America. What's your message to those the you want to buy outside of the US when you have a an accelerating economy, and you want to buy in the US when the economy is more stagnant, and the reason for that is that the US, the U S SMP is more services,

they're more businesses that are not as industrial base. And so if the economy slows over the next year or two, as not only I expect, but as a consensus view is, then the US tends to do better in that environment. It's not about the US economy being being better, It's really about the environment being one that that tends to favor s. Thank you so much. Really, really, you know what's great about Gala you going to this research on John There is always that one thing that shots you

and you did that X Apple X energy thing. It's a whole different look. The street always always helps me. Inc it was six, it was a summer. I have the clearest memory of the shock of the Iceland summit, the Ravick Summit of Reagan and Gorbachev. Are Michael McKee was there. Michael is down in Washington today knee deep in the jobs report. But we're doing better. Margaret Brennan with US. Of course, I host to Face the Nation Seat on CBS all of their network affiliates coast to coast.

UH Sunday morning, you can hear at a two pm on Bloomberg Rady I'll tell you about that in a minute. But Margaret, you're actually way knowledgeable on this. What is the import at the Secretary of State and the President United States are gonna walk away from Raya vic Well, this is significant. The iro n F treaty, it's one of those nuclear arms control agreements that tried to put a cap on the pulled up end of this pools that could develop direct these nuclear weapons at each other.

What strategically the Trump administration says this does quietly says this does is that it allows them to build up in response to China. It frees them from the constraints

there to address a new threat within Asia. But it also and what they're saying publicly is that the they say, a response to Russia breaking the rules anyhow, if they Russia has already been developing missiles outside the agreement, and therefore if this thing wasn't effective in the first place, but this gives us six months they could change their minds if Russia comes into compliance. But very few people

think that will actually happen. In the Chinese there's this illusion of Republican and Democratic party support for the outrage over Walwi whatever. That's separate issue. Is there any kind of Republican and democratic support of what Secretary Pompeio's proposing, uh, in terms of the I n F treating treating Excuse me, Yes, there is. There's a lot of support actually, and in that Intelligence Chief exchange you saw on Capitol Hill earlier this week, you heard some of that from republicans. Um

certainly as Sara Marco Rubio center Tom Popp. They want to see the administration get quote unquote tougher on Russia. They like that signaling, and they also like the re orientation towards China, so they cheer it on. So the question is really, uh, you know, it's interesting how much Russia and Putin are given air time beyond their actual impact. But you know, are they actually undermining us in other ways?

You know, we may be dealing with a treaty, but when they're doing things like social media manipulation and other things, are they actually more effective at using the new tools rather than the old ones. Margaret Bennan, you're the only one I know that actually counts the number of residential tweets per day that completely shifts face the nation. On Sunday, I'm going to take a real risk here that maybe

Trump Pelosi leads a charge frame face the nation. For this Sunday morning on CBS, we will be speaking with President Trump, continuing this tradition of a Super Bowl time. Okay, stop stop, stop, Margaret Rams or patriots to see if we continue. Look, I'm a Connecticut Yankee, but you know, I guess I'm supposed to be neutral in this one. You gotta be neutral because you're with CBS. There you go. What are you gonna say to President Trump this weekend?

I mean, it is a great tradition of the Super Bowl. It's also a really serious interview. How will you approach this interview with the President of the United States, Well, you know, we will talk about a range of things including you know, we know he's a patriot, Patriots fan.

We want to talk to him a little bit about the fun stuff, but also a lot of serious stuff including, um, the chances of another shutdown in three weeks less than three weeks now, uh, whether he intends to bypass Congress to get funding to build this border wall that he's still arguing with Congress about Democrats about um. But also look at some of the security threats, whether it's Venezuela. He's tweeting this morning about Syria and Afghanistan and again

vowing to bring our troops help. What does that look like, particularly when you have seen the vast majority of Republicans in the Senate rebuke him, tell him he's endangering national security by going through the percipitates withdrawal from the battlefield. Margaret Brennan, thank you so much. Really looking forward to this interview of the weekend. Without question, Margaret Brennan and

President Trump, it has been an extraordinary October. The Peace of November, what a December, and in the January, and the house call that one last year by a country mile was the shop known as Morgan Stanley. There, Ellen Zetner, way out front, way out front, on a fed that would slow down, would demur from higher interest rates. She nailed that. And Michael Wilson nailed the struggles of the

equity market. He is their chief US equity strategist of Michael Wilson joins us this morning from our interactive broker studio, the Bloomberg Interactive Broker Studio. Mike, you've got a re appraise after down thirteen percent. Whatever the math is, how do you position into this new month. Thanks Tom. Look, I think, as you said, we've just had this crazy move both down and up. I mean, clearly December we

think overshot on the downside. We expected things to bounce back, Like pretty much everybody, you know, nobody's really ever sure how far it's gonna snap back. And I think obviously price momentum makes people feel more boa just like negative price momentum makes them feel more bearish. And I think that I think that that's a little bit of a

mirage at the moment. So if you're if you're actually intellectually honest here, I would say, what's going on is the Fed made an absolute pivot in earlier in January, and they followed it up on Wednesday, was kind of confirming they're not going to raise rates anytime soon, and they may even start to address the balance sheet in a way that I mean, did did Jim Gorman give Ellen's that in her tickets at the fifty yard line? I mean, els like ten rows up, but she should

get something that's for sure? Absolutely, yeah, yeah, absolutely, and and and so look, I mean, but that's why stocks are up. Okay, stocks are up because the FED changed um and and that was one of our reasons we were negative last year's that fed it was tightening a little too quickly. Okay, So that's that's good, okay. And stocks are rallying on bad news, and I think folks are somewhat misinterpreting that that means that all the bad news is priced fun fundamentally. But the reality, Tom is it.

And we're equity and estra analysts. You know, the earnings revisions are terrible, okay, And what I mean by that is that the forward arranging estiments are coming down even more rapidly than we expect it. And we've been calling for an earnings recession in two thousand nineteen for a while. So that does not make us feel very comfortable. And we think, here, this is probably the bad trade. This is not the time to be chasing. We think we're

going to get a pull back. I don't think we're going to get a full test anymore of December, but I think we'll get a very substantial retraintment, at which

point then stocks will be attractive again. But you know, I think it's you know, this up and down nature that the market is still trying to figure out examply what the right, what the right prices, and you know, from our standpoint, it's sort of fair or expensive again, So Michaelson, anything in the jobs report today that causes you to change your view or change what you think the Fed will do? Uh? Here in the first half

of the year, it's interesting. Uh. You know, clearly Ellen's had a more bearish calling the economy than the consensus for this year, to see a deceleration in the economy towards one percent by three Q. Of course, payroll numbers were very strong. Headline peril numbers make people kind of question, well, is that really what's going on? I would argue yes, because there was a big revision last month downwards, so

the headline number is not as big. And if you look at the unemployment rate, you know, uh kind of perplexingly is it's actually up now two months in a row, and the U six is up five tenths. So I think the underlying jobs market may be actually weakening more than what the headlines might be suggesting. So I I think Ellen's got it right. I think we're going to

continue to decelerate on growth. That doesn't mean we'recession. And I think there's a good reason for that companies earnings are not as strong, so they're not going to be hiring as rapidly. So Mike, what's given we do have a dovish fed at the moment, the economy seems solid to two and a half percent, what would get you a little bit more aggressive as it relates to equities price, So you know clearly in December we're pretty vocal that was right at our bare case target. That's a great price.

I would be a very attractive price too, and by the way, it's stocked by stock. So what I don't like right now is that the market's kind of going back to some of these high flying stocks and paying probably too high and multiple. So we're being very sensitive evaluation. And there's definitely things out there that we like that are properly priced, But I think you need to be

disciplined about your entry points. You don't have this big tail wind at your back anymore of accelerating growth, and you know, easy monetary policy when you when you look at all your analysts Acrosse and I don't know how many research annelsts you have, but it's an island nation. When you look at your research annelists, what do they say down the income statement and can corporate officers adapt

to the new lower revenue prospects. I mean, is there a wiggle room there for them to hold margins and maintain free cash flow? Well, Tom, there's there's one thing we know about corporate America is that they're very good at cutting costs and that probably know it's world class, that's what that's what American companies do well, and they will absolutely react quickly if the topline prospects start to deteriorate. And I think as once again, I think we're starting

to see some of that. If you actually peel back the onion on some of his labor numbers, I'm not sure that that's not what's going on already. I think we're starting to see companies reevaluate cap X potentially. You know, Um, one of the reasons why Amazon stock was down overnight because they're spending more money than maybe people expected. Well, if they're going to do that in the face of lower revenues, by the way, they have missed revenues for

a couple of quarters. Now, um, then that's gonna have a margin impact and then ultimately they'll have to cut back if that doesn't change. So companies will absolutely respond, uh, in spades, if if if top line is short. So, Mike, are there any sectors at the moment that you feel attractive? Let's take Thanks for example, they lead the market down in December, leading it back up here in the first quarter,

real quickly. How to view those Well, I mean, fang is not really a sector, but I know what you're saying, so high multiple you know, kind of software internet, Uh, you know, maybe secular growth type companies. Uh, that is, that is what has really served investors well in the era of KIWI and fiscal austerity, right, low growth world. You want to you want to pay them for growth. And we made a call last year that we think that era is kind of over, meaning those docks are fine,

those are great companies. Okay, you just gotta be careful what you pay for them. And I would argue in December they were on sale and you should have been buying them. But here a lot of these things have come back to the point now where I think they're probably overpriced. I would be okay, they're offering better value. Mike Wilson with US of Morgan Stanley. 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