Surveillance: Fed Pause with Carpenter

take this data? It's maybe the province of Ellen Zanner, but we'll take it on a more global scale with Seth Carpenter, Chief Global Economist, hit Morgan Stanley. Seth, I want you to fold and I know you're gonna read Ellen Zanner and their team here as they analyze e C. I, but I want you to fold it into the great China Call, which Morgan Stanley back to Steve Roaches, expert on is China a three percent story or is it a five percent story that could make things more complex

for the chairman of the Photo Reserve. Wow, that is a fantastic, fantastic question. Clearly, the China reopening story is the big narrative going on right now in markets, and you know we've been bullish there. I think we're above consensus five and three quarters percent, maybe a bit more in terms of how much growth will get for for China this year. Very bullish for US. The reopening is

UH is notable. I think though, when you talk about Billover's back to the US, when you think about what it does for Chair Powell, UH, they're probably a little bit less dramatic than you might otherwise think. Clearly a big story for people who are investing in China and the region, but the spell back to the US, you know, in terms of inflation isn't going to be quite so

big right now. We import a lot of consumer goods from China, but we know that consumer goods prices have actually been falling for the past a couple of months as people have pulled back and redirected their spending. We also know that China had done a lot during COVID zero to shield some of that production for exports. So the first order impact on inflation for the US is

actually gonna be a little bit muted. The surgeon demand there in China domest expending, especially domestic consumer spending on services, so the read through this time around the cycle a little bit less South. I want you to dovetail a Morgan Stanley stunning five point x percent China growth call with US disinflation you and I follow Edward S. Hyman of c J. Lawrence and Evercore. I s I and Ed Hyman's dovetailing a China call like you with substantial

U S disinflation. Do you agree with that premise? I think substantial probably overstates it a little bit. We are optimistic about inflation coming down in the US. We have a getting to below three percent by the end of the year. And just a quick shout out, you mentioned Ellen's and are fantastic US economist. Robin Shing is our stupendous China economist and luckily they're both on the same

page here. Um, the disinflationary push from goods inflation is clearly there in the data, and China is a part of that. But like I said before, the difference is going to be smaller than I think you might otherwise. Thank. It really is this retrenching, and we saw it for

example in automobiles. First Tesla announced they were cutting prices Ribby and followed Ford announcer following it on electric vehicles, Adam Jonas our our autos analysts points out that in the current situation, electric vehicle prices tend to drive pricing for new cars. So a lot of the disinflation that's going on from goods was already they're already starting. China helps at the margin, but I don't think it's going

to be the defining story of the disinflationary tread. What's the response set that perhaps people get over zealous by the decelerating inflation, the disinflation that we're seeing so far this year, take the FED off the table. The FED does pause with rate hikes, and then inflation stays sticky and they're forced to reignite and raise rates once again. I think that is a risk that a month or

so ago was dramatically underappreciated. We've tried to flag that risk a few times uh in our in our pieces um and so yeah, the scenario you lay out, I think is a plausible one. It's not at all the highest probability event, but it's you know, the next couple of months are very benign, but then non farm perils go back up to two and inflation doesn't break through below three and a half percent. I think it's a risk. I'd say it's not a very very high risk, but

it's one that investors have to keep in mind. And the only way we're going to oversure is monitoring the data in the meantime as we get the drip drip drip of the data, as you talk about, what are you looking at in terms of the components, the underlyings of some of the employment cost index, or what we get with payrolls on Friday to get a sense of how sticky this disinflation is. Yeah, I think I think all of those plus the CPI data our first order important,

especially for the FED. So we've actually got a house view that's a little bit dubish relative to markets, like everybody, we expect twenty five basis point at this meeting, but after that we think they're going to be done at

the FED. The only way that happens, but we think it is the path that will happen, is if we get farm perils coming down well below two hundred and looking like they're going to a hundred thousand, and in fact below a hundred thousand is I think we we described now is not in the textbooks are coming out of all the pandemic and supply side dynamics that maybe we're getting back to a more traditional monetary analysis and around that is not the question is Jerome Powell's central

banker to the world, But more nuanced is in what way is the chairman of the Federal Reserve central banker to the world. Yeah, I mean a few things. It's clear that what the FED does matters, and it matters a lot for the global economy. Um. Interestingly enough, this cycle was a little bit different in a number of ways.

If you think about some of the e M economies, especially in America, we saw, for example, this Brazilian central bank start to raise rates and anticipation of the fed's hiking cycle, they got out a little bit in front of it. Some of the other em central banks have been similarly defensive, and so there's actually been a little bit less of the negatives bill over to other economies than you might have expected in some preceding cycles. But there are no two ways about it. We saw the

end for a while depreciate really aggressively. We saw the euro depreciate very aggressively. What the FED does has critical importance for the rest of the world. So let's talk about what you expect the FED to do. You said that you could see jobs go down to say sub a hundred thousand in the next couple of months, allowing the FED to pause with the raid hikes. What are you seeing in the fundamentals in the corporate earnings to give you a sense that we are going to see

that massive and sudden drop off in job creation. Uh, excellent question. And first I want to preface it that even though we think this week's FED meeting is going to be the last rate hike, I don't see any way at all that share Powell and colleagues are going to indicate that it would be the last high. In fact, I suspect they believe it will not be the last hike, and it's going to take the data coming in as soft as we think that they will before the committee

actually starts to change its mind. So the rhetoric I think stays on the hawkish side, which which is I think is similar to what Mike had said just before the segment um. So then what else is going on? Again? I don't think the slowdown that we're calling for in non farm perils is all that dramatic. The last print was two thirty or so it's been this consistent decline in non farm perils that we think continues and gets

down to a really soft run. Ring Pal keeps talking about wanting the economy to grow below potential for a while, and that's what if we think it takes. So Thank you so much. Seth Carpenter is with Morgan Stanley. This is an important interview for Global Wall Street, arguably our most important interview of the day, because hey, he nailed

it last time. He was on about the lift here a sense of optimism from Stewart Kaiser was City Group head of US equity trading, but far more than that, head of a derivative thought, what's a bet right now? In all the literature Steward Kaiser? It's okay? Kaiser was right six seven percent bounce up we go, But it's just short covering where people go, oops, I got it wrong. It springs up, but there's no umph to break out. What say you about the idea of there is umph

to break out and move higher? I go more Tom and wait too much credit for thank you. Look, I think the year two so far, if I had described it would just be um, you know, events that didn't didn't play out essentially right, Like, you came to the year with very low expectations across the board from both macro results as well as single stock earnings and and frankly, that data just has been negative enough to justify the low positioning we had coming into the year. Um, So

how do you keep moving higher? Um? I think you get a continuation on Thursday, in particular of large cap tech earnings coming through, and the FETE is hawkish, but they're sort of reiterating a message that the market has already kind of gotten comfortable with. And on Friday we don't get an average average healthily earnings number that scares us. And if those things happen, then I think the market

can continue to move higher. But I still think you need to approach this very tactically, kind of like a month by month basis basis. This is not a hey, I can be long for this next three to six months. Silster in city groups securities analysts who talk talk to you all the time about their revenue dynamic. If we get the disinflation, the City Group and others are talking about, what does it due to the revenue line? Yeah, I mean, look,

that's that's the issue. I think that's that's been a big challenge for the bear case that earnings were going to get revised aggressively lower. Is that you had positive revenue growth that kept earning is a little bit higher than expected. Um. Obviously, if revenue start to ease, then we're really focused, as least mentioned, on the margin story. And you know, so that that that's where the debate all kind of center, right. It won't be on top

one EPs. It will be on the quality of those that EPs and whether investors are willing to pay a premium for quote unquote lower quality earning. So it is an issue, but frankly, I think that's an issue we'd like to have, um. You know, you know, relative to our expectations have been. We talk about recession as if it's an event. It's a process. And in that process you start to get companies defending margins and we start

to see that ready at somebody's big tech firms. Is that bullish enough for you for somebody's names to have a juitable town went through the rest of the year, To see them defending marches, to see them kind of close in the way they are, I think it is, and I think investors have kind of rewarded that to

some extent. I think people are willing to look through a quarter or two of pressure if you if a company can give them guidance that two to four quarters out the margins are going to kind of normalize a little bit and look all this again, I think is expectations driven. You had such low expectations for earnings and such a barrisfew on where they can get to. I think even you know, by hook or by crook, if if a company can produce the earnings, people are gonna

generally respond positive to, at least tactically. I think, you know, now that we're back above four thousand on the SMP, the question to get a little bit harder, um, you know, related to that. But but yeah, I think if if companies can can show that they're making these cost cuts and that is going to have you know, a visibility into where margins are going to get over the next couple of quarters, I think I think companies, excuse me, I think investors will respond possible to. You know, the

earnings haven't been great. People say that the resilience has been pretty widespread. Better than expected kinds of results they haven't been They've been worse than expected at a higher pace than at any time going back to two fourteen, with the exception of March of those three months. So at what point do we look at the earnings and start to see maybe big Tech is reckoning with some of the margin pressure, but the rest of the universe is facing it in a much more significant way that

hasn't been fully priced in. Look, I mean, I would go back to I guess his price action on that. You know, coming into the week, we had about two hundred fifty large cap stocks we'd we'd been tracking those fell on earnings a hundred fifty rows on earnings. So even though the earnings haven't becoming a great you know, the price action I think is telling you that expectations were washed out enough where it didn't it didn't take

much um you know. You know sometimes if a company cuts numbers down to where the bi side is, that stock is then quote unquote clean and people can kind of own it. So, yeah, I think expectations again, I hate to keep using that word, but I think that has a lot to do with it. Do you think that there's a clean read on tech because of how much bad news there has been priced in. But on the rest of the industrial complex it isn't so clean, with a lot of disappointments leading to some pretty big

price action. Yeah. Look, I mean stock by stock, you know, we could you know, we could certainly find something in some ways it poised to do better because of how much pain was priced in and how much of a house cleaning there's been. That's our view, you know, Frankly, is that earlier last year it was it was a valuation story on tech, right, you know, the stocks are very expensive, rates and inflation were hired and you got

that that huge valuation headwind. UM. Third quarter earnings were a little bit different, where companies started talking about cost cuts, pressure on earnings, things of that nature, and that's when I think expectations started to really ratchet lower for the tech space UM. And you know, our view coming into this quarter was was not to sarty that the results were going to be all that great. It's just that expectations were so low that it just put risk reward

to the upside. Expectations were low, positioning were low, so in in that sort of combination, it doesn't take a whole lot to get the stocks moving higher. So again, this could be a quote unquote low quality rally, which which we think it's been. If you look at what's driven the rally, it hasn't been the best and the

brightest um. But but we do think relative to expectations, you know that That's where we said again, I think you have to reevaluate that now that you enter February, because you're on a fourth thousand handle after a rally, that that's different than being a thirty, thirty and fifty coming into the earth. And we talk about this rally as if it's only been going on for a month. For the lacks of Caterpilly, it's been going on since the end of September. That stock is up by more

than six since then. They've just delivered the first earning smiths since the pandemic back in I keep hearing everyone talk about how do I want to play the chine of reopening story, and I keep going back to this, Well, it's been playing game for three months in the minors. In Caterpillar abroad. You've seen that. You've seen that story in fact, for the banks of in Europe has been playing out since the summer. They have absolutely ripped. When you Hito, who say things like how do I play

the China reopening story? What are you telling them? Well, I think you're right, it's got in stages. I think at the beginning a lot of people were using options to just get high pay out owning said let's say the Chinese index. Right then it became what you're describing as more of that infrastructure play. I think right now the question is how much how much of a consumer spending, you know, impulse can we get out of China as you fully reopened? And I think that started to focus

people on things like, I don't know luxury brands. You know in Europe, I think you know, German equities have really benefited from this as well because they have a lot of export exposures. So there's still a group of the investment community I think that isn't really comfortable owning China equity directly at outright, just given some of the policy challenges. So what people are looking for is what

is that that second order trade? And I think it was metals and minding and things like that, and then it involved just like a consumer spending or tourism story. So your mom will be over at Caterpillar, makes the mensus no words, and the near one hundred year history of Caterpillar. Last year was one of their best years ever. We have on radio and tv P both stratified by this eco fed debate, all the uncertainties, and they're not

in the market. How do they participate in Stuart Kaiser's optimism so they can possibly enjoy Caterpillars near best year in a hundred years. Look, I think from from an owning stocks perspective out right, you know, as you know, we've been focused on more of these high quality stocks that you can kind of own through a recession. UM. So that's you know, high quality stocks that are buying back a lot of a lot of their shares um

don't have as much you know, downside earnings risks. So we've been sort of pointing people in that direction, UM, and I think we're still of that view, Tom. It's it's most investors that I've spoken to, even though the markets rallied, and they haven't really changed their baseline core positioning or portfolio, which still remains pretty defensive. So what they've been doing in this rally is using ETFs or or options to just kind of add to their exposure

around the edges. But I think if when you sit down with them, they're not saying, oh wow, we rallied for a month, my whole view has changed. It's more, Yeah, I'm still conservative. I still want to sit in this this portfolio. What I need to do is kind of risk manage around it. So I still think you're in this larger, larger cap, higher quality you know, share buy back, you know type story, and then you're just trying to adjust risk around the edges. And we haven't touched out.

You also have a lot of folks that are saying, why don't need to be in equities? I can be in credit or I can be embossed. The second it wasn't a month ago. Definitely just came on the show and said, sit out the front half. It's going to be ugly. Still get his second half? Yeah, now, and in June this this line in the center. Then if it just starts running and now it's you missed it, sorry it's over, that could be actually nice too. It's good to see it. Thank you a City group. Right

now we're gonna look at China. This is an important Leland are you guys done? Thank you? Leland Miller co founder and CEO of China base book with us right now. I'm truly excellent on the micro data of China. Leland, I'm confused. I've got Bloomberg Economics and a fabulous article out today, really Mustard. I'll get it out on Twitter and occur and shanks you. Joran von Roy who was just on the program. I put you to his name on the program as well, and tom Orlick and they're saying,

forget about it. We're looking at three ish up to five ish g d P in China, and yet institutions have a much more cautious view on this noodling around three percent. Who's right, Well, I think this is one of the stories that's gonna have to play out during the year. The China recovery is set up to be a very nice cyclical bounce back. But this could be a cyclical bounce back of a quarter or two or it could be longer, depending on one whether consumers jump in,

which is a huge if. And second huge if is if there's more policy support than or. I guess the policy port that people think. There's this assumption that the government is gonna jump in and start stimulating on top of what's already an organic recovery. You know, we're 're quite skeptical that, but we're watching the indicators and trying to see, you know, where where the government's head is on this. My experience, Leland is always centers around a

bed all out of real estate. Let's call it healing real estate. Are they going to heal real estate with cash infusions from Beijing? They're not gonna heal real estate. But what they have been doing is calling the herd, and now they are going to ventilate the sector. So basically, what they've been trying to do is take out the weak firms without killing the healthy firms, diminish property as

a growth driver for China going forward. They've been doing that, but now you've got the potential for contagion because the numbers are have been so unbelievably bad. Are December data are que for data, some of the worst property results we've ever seen. So they're stepping in the providing credit lines. They're they're they're you know, lowering mortgage rates. Uh, they want to make sure they give a little bit of to the sector. But this is very different from the

game changer it's being made out to be. Across the street gonna be very cautious on what this actually means clan. Where is the money actually going where a consumers spending? Is it all domestic? Are more people getting on planes? Are you seeing those flows go into commodities to travel around or is it going into staples and just activities in the region. Well, it's too early to see the trends for the entire year because you had this first month skewed by cod COVID and skewed by the Lunar

New Year holiday. You know, the this month, all the pops in the data were around where you'd expect, which is travel. You know, restaurants, hospitality, people were traveling again, people were moving around again, and so you saw a big, big pop in that data. Going forward, you know, the question is our consumer is going to come back. There's this a subject that Chinese consumers are going to revenge

s bend. You know, they probably will a little bit, but the idea they're gonna go do this and drive a recovery for the entire year. We've never seen anything like that. So again we're gonna watch the data because this is not the type of thesis we've ever seen playoff before. Where's the data. What's it pointing toward in terms of fossil fuel combustion, the idea of crude and natural gas, and what's going on with the coal imports from Australia, some of the stockpiles, how depleted are they?

How much is China going to have to import and forward? Well two was awful, So there's gonna be a lot of things going on, particularly on early in three, which you're going to lead to greater commodities demand. A lot of it has to do with how much policy support

continues on through the year. Are we going to see them double down into some infrastructure and some other things, Because look, if you're talking about the consumer driving you know, the recovery this year, which again we're quite skeptical of. But if you are, then you're not leading to two huge tons of oil demand skyrocketing. You'll see it from a jet fuel if there's more travel. But you know, people are mixing their their investment thesis here because they're

so bullish on the China recovery. But you know that doesn't necessarily mean there's gonna be a jump in oil demand throughout the year. So we have to be a little bit cautious on that. I'll make a joke of it, Leland, because that's what we do on a Tuesday before feed day. But the joke is just China do work from home. But really what it comes down to are they back to work? I mean, with the advent of co COVID, are people back to work in those manufacturing plants and

all of the ancillary businesses to it. Are they back to work? And are they taken home a paycheck? Uh, they're not back to work yet because you know, the COVID situation still has a calm down. Maybe March they're back to work. Right now, they're traveling for they're either sick or they're they're traveling for Lunar New Year. So manufacturing hasn't you know, looked better. But we gotta keep in mind from a year ago level, it's way down.

You can't see it when you look at the p m I because the p m I can't track data from year to year. But things have been up from the end of last year, but they're down on year. They're down from two years ago. So manufacturing is not seeing this this this you know, superstar recovery just because the p m I had an upside surprise, it's gonna be understand that manufacturing is not going to drive growth

this year with a global economic recession potentially looming. You know, it just happens to be one good month in the data Leland. How much you watching what's happening in Washington and a sudden re reprising of some of the animosity that US politicians have towards China and the potential ban of exporting supplies to Huahwei. How much is that factoring into your outlook for China. Well, it's never gone away,

you know. I think people make too much of these meetings when she and Biden, you know, shake hands, and you know, Tony Blanken and and and and Jenny Yelling are going over to China, and a lot of people read into this saying, oh, the relationship must be getting much better. Well, it's good that tensions are calmed down in a short term, you know, in a short period, uh,

you know, during a short window. But but this does not mean we're not heading in one direction in terms of tighter export controls and and and more more more tense uh policy back and forth. So this really hasn't changed our outlook at all. I think people have to understand that the relationship is going to get more fraud over time, not less fraught. And this is just another head wing between for the economies of both countries. And then we've got a lot to talk about for the

year ahead. That's for sure, little bit of that of the China base book. What we're gonna do right now is talk to a C class officer of a different cloth. He's out of Auburn and Vanderbilt, but very different. He's the only one in the automobile industry to try to go to a quieter industry. He was at Delta Airlines for years and the volatility of everything aviation. Paul Jacobson is the chief financial officer of General Motives, and Lisa is gonna grill him on her need for an electric car.

You need a GM electric. I'll let someone else do the sales pitch for Paul. I am curious starting with the airline industry and the price wars of your are we entering into a new price war of the electric vehicle? Ilk Well, First of all, Lisa, Tom, thank you for

having me on. And Tom, I wore my Auburn tie today just for you, but I just want to say thanks to the to the GM team for everything that they did, overcoming tremendous levels of adversity, huge inflation results over five billion dollars of inflation to deliver the results that we saw in two And you know, vehicle demand for our vehicles remains quite strong, for our evs and and for our ICE portfolio as well. So UM, you know, as we look at the business, UM competition is no

no stranger to us. We We've been in the business for over a hundred years and I think the team is really really good at competing and where we see UM, consumer demand for our vehicles at our price points is really strong. We just need to make sure we get production up to be able to meet that demand. So are you're saying, basically you're not going to cut prices because you don't need two People still are really requiring

your cars regardless of what the price is. Yeah. We we have waiting lists for for all of our vehicles as we roll out, and we expect production to ramp up pretty quickly as we get, especially into the back half of twenty three to meet our goal of delivering four hundred thousand evs by the first half of four and a million evs annually by we believe the demand

is there and strong. So how does this really pair with the story that we're seeing out of auto sales with sagging sales one of the worst years last year going back in a number of decades as a whole, and people are talking about demand waning on the margins. Why is GM seeing such a different picture? Well, I think you know a couple of things. One, the quality of our launches and the new vehicles that we've brought to market UM are really being received well by our

our consumers. I think are our engineering manufacturing teams partnered with our supply chain teams did a great job of increasing production last year by UH and UH, and we've been seeing vehicles move very very quickly once we get once we get them to dealers, we have seen some challenges in the outbound logistics, so this is after we finish a vehicle and getting it to the dealers. That's caused our inventories UH to increase a little bit. We're

up to about fifty days of inventory. But if you look at the vehicles that are on the laws at dealers, there about a third of what they were in UH. Some of that is going to be I think permanent synergies. But some of that just speaks to how quickly vehicles are turning when they get delivered to dealerships, and that's a testament to the to the quality of the products we produce. Paul, the aviation business that you were part of had a big turnaround where they started to be

responsible about free cash flow, responsible to shareholders. We lost the volatility, the huge volatility, the craziness of aviation pricing. The fact is the automaker's trade a single digit price to earning multiples. You can use every other metric you you have. Is there any pressure in the boardroom of GM to get a more persistent free cash flow that

earns a higher pe multiple by the street. Well, thanks, thanks for thanks for that question, Tom, And you know, thanks for highlighting kind of some of the work that we had done back in the airline industry. And what I would tell you is we we we UM spent a lot of time with a board on freak out flow in particular. You know, cash from operations and the cash generation of the business is what's funding our journey,

and we've been very clear about that. UM SO a strong ice portfolio and a strong vehicle portfolio through the transformation is critically important to us. And you know, there's probably there's a lot of things. I'm proud of the GM team for what they've done. But when you look at free cash flow generation on the backs of near record capital investment in two I think it speaks to the focus that we have ten and a half billion

dollars last year. We think we're going to generate another five to seven billion dollars in free cash flow in three UM and that's with a couple of billion dollar increase in capital expenditures at eleven to thirty billion dollars this year. I don't want you to be Apple here reporting on Thursday, but are you at a point where you can take use of cash in reward shareholders to garner a higher price to earnings multiple versus the ancient back to Mr Sloan of piling it back into the

business US. So there we have a very balanced and prescribed capital allocation process. Tom. So, you know, the first thing that we're doing is investing in the business, and we have a lot of transformation work to do. Is you can see from the capital that we've put in,

but as we start ramping up e V volumes. As you start to see production of our ultium cells at Sell Plant one and then sell plants too in three coming online, you're starting to see the benefit of that, because I think we're going to be incredibly well positioned for the growth in the EV market. But once we've invested in the business, we also have to make sure

we maintain a strong investment grade balance sheet. Uh. And you know, at the end of the year and even early this year, we've early redeemed some bonds um as with that cash flow to help strengthen the balance sheet and fortify that. And we also in the in the back half of the year returned two and a half

billion dollars back to shareholders. I think it's important to strike that balance because you know, what we invest has to earn a return on invested capital, but our share holders and our and our bond holders have to see tangible results from that. And uh, you know, I hope to see more consistency in that across the board, Paul. Just to wrap up, we've been talking a lot about how the pressures between the fissure between the US and China are really creating some headaches in the c suite.

From your perspective, are you looking to reduce GMS dependency both on infrastructure, on supply chains coming from China as well as sales into that nation. Well, you know, first of all, our our China team has done a remarkable job. They had a lot of challenges in two with the zero COVID policies, and we're obviously seeing you know, a lot of some COVID slowdowns in UH in late two and in THEE. But the team is really focused on that.

We've got strong partnerships there. We've got strong GM vehicles UM coming to that market as well, and I think

it will be an important piece of it. UM. That being said, you know, with the with the deal that we announced today with Lithium America US, and with work that we've done with controlled Thermal Resources and live in in the Lithium space and PASCO and others UH, you see a much more geographically diverse supply chain building for some of those battery raw materials and UH, and we're gonna we're gonna be able to take advantage of that. I think, because of our size and scale and our

willingness to work creatively with our partners. Great to catch up stalks up this morning by full point enough to subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday, starting at seven am. Easter. I'm Bloomberg dot Com, the I Heart Radio app tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always

I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg