Surveillance: Hawkish Cut From Fed, Luzzetti Expects

Where do you fall on that debate right now? That's the big one of the last couple of weeks that maybe peak pessimism is behind US treasury yields of bottom the bottoms are in. What are your thoughts? And it's probably right. You've taken a lot of tail risk out of the market the last month. You've made progress on trade, and it's not a permanent deal, but it will at least alleviate some of the tension. The risk of a

hard break exit has gone down. The economic numbers appear to be stabilis and you're having a decent earning season, so you know, going into a seasonally strong part of the year. It's not on reason. We'll say you probably have seen the loan bond yields for the year. I'm

gonna give a credit to Jeffreys. I believe there's an outlier call that maybe they won't do something here at this meeting tomorrow and that they'll wait out to December because we see so much good that we see so much good in the equity market as well to find a lousy economy. The survey, the surveying, excuse me, the Bloomberg statistic is one point six percent. I hear people at one point eight percent g d P and on and on and on. How bad does the economy need

to be for further rate cuts. Well, I think you've got to compare to what's trend these days. And let's call a two percent growth, because you know there's a little rounding are around all of this. Two percent is trend. You know, we're in an environment where demographics are very different than thirty or forty years ago. To get to the type of three and a half percent growth that was normal back then, you need the sugar high of the type of taxica we had in two thousand seventeen.

Without that, two percent is a about normal. I mean, I just looked to be sure the number hadn't moved from yesterday were still at one point six GDP growth, many others at one point eight. I mean, does that cleared the solid economy you mentioned Jeffreies. Jefferies will be joining me on the TV show a little bit later this morning. Properties looking forward to catching up with them on that call of no rate cup potentially coming tomorrow. Russ, I'd love to get your insight just a little bit

more on this topic at the moment. How vulnerable is that call that the worst this behind us? Because it seems to have picked up with some written enthusiasm over the last couple of weeks without much data to back it up. Well, I think there are a couple of things. I mean, one of the reasons people are comfortable with the calls that we know manufacturing is struggling. You're arguably in a global manufacturing recession. But people, I think, justifiably

feel very good about the U. S. Consumer. And whether you look at real earnings, whether you look at the savings rate, whether you look at debt levels, everything tells you the consumers in decent shape. Now, if you started to see a slow down and hiring and that started to transmit to confidence, you might have to revisit that call, but that's not our base case. I think as long as the consumer is still growing at the pace it is, you can be reasonably confident we're not on the cusp

of a recession. Let's get some capital allocation calls. We've seen these kind of levels a few times through en We've tested three thousand a couple of times, three times through nineteen, high yield spreads sitting right on top of the tights of the year at three fifty four basis points tights of the year three forty six. We've seen this level a few times this year. We haven't been able to hold it. Why is this time different? We

have and I think it's it's a great question. Look, you know it's still you have to the market has got to prove that you can break out of this range. And this range is really now going on almost two years. We set the boundary at least the high back in

early eighteen, at least globally. My guess is you've got a little bit more support this time because some of the things that have inhibited the rally over the last year and a half two years of starting to fade, most importantly trade, If you get a truce that's been one of the things that's been inhibiting the market from breaking out. That's one factor that might let you move on to new hives. And again, I think signs that the global economy is stabilizing. We're not talking about a

sharp search higher. That should also help kind of edge higher through the remainder of the year. What do you say about the breadth of the market. If you look at the value line geometric index, which is great mathematics on the median stock of the median equity market, the trend ain't so hot compared to the big fangs. The big tech move we've seen is well, and there's been

a sharp split there. Over the last year. There has been a slip, and I think this is indicative of a couple of things, one of which is we're still very much in a winter take all economy where you've got some businesses, including some of the fag businesses that are in secular growth mode, whether you're talking about cloud computing, internet retail, and you've got large parts of the market up.

Let's take multi line retail that are just challenged from a long term basis, and these tra is are probably going to stick with us for some time. A Russ great to catch up with you, Russ Coastrick blank Rock Global Allocation Fund portfolio manager on the lacest in markets. Lisa would love your insight on what's happening in fixed income right now. How yield spreads half tightened up, but there are still some cracks within high yield and within

leverage loans. That's exactly what I was going to UH to talk about. I mean, honestly, you're seeing Fitch, for example, increase their default forecast over the next twelve months for leverage loans from two to three and a half percent, which is a pretty big jump, and it's on some specific problems. But you are seeing a certain loans, certain bonds fall out of bed today. With Submarine Energy file for bankruptcy protection. This is a private coal miner, the

biggest one going bus. Despite some of the rescue plans from President Trump, you're seeing uh PG and E bonds absolutely getting crushed in the wake of the potential for more damages from the fires in California, disrupting the currency, bankruptcy, the current bankruptcy plan, and you know, you're seeing some banks getting stuck with with leverage buyout loans on their

book because people don't want to buy them. The question is how I don't want to use the word because I think that this might be a drinking game right there? Right you wait for the drinks. Do we have time to go back to costric on this? Let's go really quickly here. The bottom line is Lisa brilliantly brings up as idiosyncratic versus systemic risk at epsilon out the back of every equation. Is the epsilon out there right now? Is this systemic or is it all idiosyncratic the fourteen

things Lisa mentioned. I think it's largely adiosyncratic. I mean, there are pockets of the market where you do want to be worried about credit. But most of the instances, and again it's probably not a coincidence. We're talking about a coal company. They tend to be more idiosyncratic. That's called six everybody, can I just explain what this what? This game is? A drinking game? On Bloomberg surveymance is when the guests says idio and cradic shot can we there?

And not just a shot? I was laid there? We say good morning worldwide to the monkey bar. See a monkey bar and he's three. It's pretty good, pretty good. The shots there are the size of an old fashioned class. Is that what we're going to do on this show? I hope not. It could be futures this morning down about a tenth of one percent. Russ Greater catch up with you. Let's bringing Peter Dixon Shower. We commus Bank Global Equities of columists, Peter Greater, catch up with you.

European out performance got people lining up around a corner telling me about that here in the United States. Now, Peter, why does that make sense? Well? I guess it makes sense because you know, the europe house surprised on the outside for for such a such a long time that, you know, given that we're seeing the global equities locomotive being pulled by the US, um you know the scope

for Europe to catch up. But I have to say that given the concerns that many people have regarding the economic outlook in the euro Zone, particularly, well, you know, you might find that that European performance doesn't actually materialize. So I think it'd be a bit careful about that one. Well, let's talk about it, Peter. The sentiment has certainly shifted, are you saying the data won't back it up. Yeah,

I mean, I think that's where we are. I mean, basically, the European economy looks very slugly, certainly compared to the United States. Um, it's likely that the data out in a couple of each time will show that a second

consecutive quarter of the contraction in German GDP. Now, I guess that on the positive side, you could argue that because European markets have been hammered by the US China trade dispute, the expectation or the hope that we are past the worst there might provide Europe with a bit of a list. But you know, we're not out of was yet. In my Peter, one of the great charms

here with your economics is the global scale. Basically, all the money's moved to large cap us is a stereotype, and internationals left and left and left and left behind. Is now the time for an international call? Should we go long large cap international? Should we go along? E m uh long e M. I mean, I think at the moment, as long as the federal reserve is in play,

it doesn't make a lot of sense. So I think I probably want to stay clear of the in from now, we don't you have more clienty, but whether he fed girls in and beyond, that's the time of which you might want to do it. You still you know what to do anytime soon. With regard to European large caps again, I mean I just read what I said before. Um, it's not yet the time to get to those more. It's because I think there's too much volatility there are

still think there's too much bad needs to come. The corporate earning season is it's look okay, but the downside is that they're still downside. Let me cut to the chase. Are you selling into this strength? I mean, as John Farrell mentioned earlier, on a range bound basis, were buttressed up against the top of the range even with sp

X highs. Are you selling into this good news? It's probably not about idea because you know, the COVID towards the end of the year, I think a lot of equity managers or fun manchers wants to realize the best games they can. So it's entirely possible that over the course of becoming weeks wants the good news from the union seasons out of the way. You know, we start to see you where I selling, and certainly, you know, I feel a little bit uncomfortable with stock hitting record

highs given all of the economic concernancy. So I know that you're in the equity space on a macro level, but just taking a look at the micro with beyond meat, I think that that's a really interesting story, and I want to know whether it's wait for it, idiosyncratic or whether it's endemic of something larger. They actually reported better than expected earnings and yet their stock still fell in early trading because it had just gotten run up so much.

Is that something that we are going to see sort of the hopium of future growth getting wiped out of the market in increasing pockets, particularly in the tax space. I think that's entirely possible. I mean, you know, on meats, as you said, it is your syncratic stock which has yet to show that it can take its products and broaden it to a wider audience, but it has a

lot of potential. Probably is when you've got to stock like that, which um you know, which still have potential but you know, is trying to get very slow to deliver. Once you start to get a big lot of momentum behind it, you do find a lot of willing sellers when when the when the price which is a certain level,

and are rather suspectable. That's going to be one of the features going forward over the next few weeks, particularly as you said in the text space, where there are a lot of outfits which have done very well, but there are question marks against their you know, their future performance. Peter, where do you think the leadership comes from in this leg of the rally of it continues? A key question? Good question, indeed. I mean it's going to come from the US and not outs about that. I mean, I

think the market overall, um. You know, although I say that there are potential for downside, don't I think for the moment at least it's probably going to hold up for now, um. And I think so long as it does hold up, investors will start to looking at the pockets of the world, particularly Europe and say, actually, no, the US is holding up. Maybe it is a bit time to for for a bit of a double But if I've just cautioned you know, that could easily turn around.

And I guess the question is to what extents to you know, investors generally rather than you know what I think investors think about the US. Peter Dixon, I just have to ask one more economic question before we let you go. We've seen the pageantry of dragging, handing off the brass bell or whatever it is to Madame lendguard is, Well, how critical is this December twelfth meeting for that equity

confidence in Europe? Is the December twelve ECB meeting one that they just get through and move on or could it actually have substance? Well, I think it's definitely one that they just have to get through because basically to see that God has been handed a legacy that she has to deal with, it's very difficult to know exactly you know what she's going to be differently to draw. So I think Marcus look at this meeting and saying, well, let's hope she doesn't drop the ball um the like

is she wants. She's a very experienced operator, but she's not gonna do anything visible once she's got it. It's just a question if you know the pitfalls. Peter, Thank you so much. Peter Dixon and Commerce Bank this morning on the equity markets, p M E S is a reason to bring in Matthew Lozetti of Deutsche Bank because his front and center. He's got that chart to cut to the Jape, Matthew, and then we could talk to

you for two hours this morning. The first and second derivatives of global p M s are not pretty, are they. I think you have seen some stabilization in the global PM eyes. If you look at global manufacturing, it's been kind of bouncing around it at low levels over the past few months. I think you will continue to see that.

You've seen US data on the sentiment side a bit mixed recently, but the I s M we think bounces back a little bit um later this this week as well on Friday, which would be an important data point. All told, I think what we're seeing for the US growth outlook is you you still have a deceleration built in. The Phase one deal we got in place at this point was not enough, I think to flip that second derivative in a more positive direction. What's the second derivative

of the chairman's press conference tomorrow? I mean, it's extraordinary you people nail the mid cycle importance of this. How can we mid be mid cycle umpteen years into a lift? It's it's a good question. I think there's a emerging view. I think that pal is going to orchestrate a hawkish cut um tomorrow. We think that he does raise the bar for another cut. I think when you look at the committee, they have framed this as as three great cuts. But I think it's far too early for him to

take December off the table. We still have on knees on the trade front and Brexit. The data has continued to decelerate and the market is only pricing about six basis points at this point, so the Fed doesn't really need to actively push against that pricing. John, if we start a band, can we please call it hawkish cut? We can call it what did God's name, Matthew? Was a hawkish cut or a dovish hike? For our listeners that have just tuned in, this is the Fed coal

From Deutsche Bank's chief US economist, Mattenzeti. Go On continued that that is that's definitely the prevailing market view. Uh, the idea that they will cut but guide towards less likelihood of cuts over the next few months. I think that the market has gone a little bit too far on that point. You know, on on these uncertainties that that they've been worried about. They're still there, as you noted,

global growth remains low in the U S data. You know tomorrow for US GDP we're likely to print we think at one point UM with equipment spending and capex being actually negative in that that story, so that I think in an environment in which he'd be and the COMMUNEY should be reluctant to to firmly back off about

the Dovish guidance. Do you think that at this point the Fed has the capacity to allow inflation to increase or is that totally out of their purview given the fact they have been unable to do so until now. I don't think it's totally out of their purview, UM, but it is significantly outside of what they can control. The San Francisco Fed has done this nice analysis about

pro cyclical versus a cyclical UH components. We've we've done some work UM which I think suggests that the FED can influence even more than what the San Francisco Fed thinks UM. But the the extent which they can do that is is very limited, particularly in a world where healthcare inflation is a key driver UM and is largely dictated by healthcare policy. Not necessarily the business. When you ex out healthcare, what's the inflation run rate? We've got

Cleveland and Dallas trimmed up, up up. Everybody listening to this program across America knows that higher inflation rate they're living, think tuitions and down below you've got this core number of guys like you are looking at X out healthcare. What's the disinflation right well, in in for core pc it's actually pretty close to what the core cp reading

is showing. For course, CPI is actually a much different story because there you've had health health insurance inflation has been rising ten percent year on year or sorry, year on year, uh, and it's adding about thirty basis points of the core CPI index. So if you x that out of course c p I, we're we're closer to two point two. One. Of course, CPI I haven't been

the current reading that we were seeing. This has been great, Matte, Thank you so much, really really appreciative, brilliant work from Deutsche Bank. Right now. This is a really fascinating interview, and it is a fascinating story that's always been a little bit of that Florida hype. It is auto nation peaking in two thousand and fifteen. It's been a challenge since then giving way to their esteem of finance professional. Her name is Cheryl Miller out of James Addison and

joins us today on three auto dealerships. Everybody knows it's a fractious, wonderfully visceral company as well. What was the first day like taking over? How many phone calls did you get from? How many dealers are? I need this, I need this, I need this now? What was the first day like? The great thing about the first day was twenty six thousand people emailed me, the associates of Auto Nation and a lot of our field leadership teams,

associates in the stores. That was amazing. Everyone from the industry who I had known for years emailed me and said what are you going to force? And and it was fantastic. And I was right there with Mike Jackson, are amazing executive tare now and so it was a really great current. This is this is Its been a great first day. But this has been controversial as a roll up when isn't getting all that you're ago? It's a roll up of the auto industry. I got a

number of ways to go here. First the business and then the financials. What what I really want to know into me? The history is always wants on the lots, what's the inventory look like? Of course your dealerships right now it looks seven thousand units lower than it did last How did you do that? On price? Move them out? So we we actually we did. We did a combination thing, so we we priced smartly and if you look at our new vehicle sales, you've got an optimal balance between

units and pricing. So we had pretty solid pricing. But we also ordered smart so we centrally ordered and we really manage that. So if you think about our day suppliance at fifty five days versus sixty three last year, then where would that have been ten years ago? You know, giving you slow downcially, fifty five to sixty five would be the normal balance of what you want in automotive new and when it gets to seventy eight five you start to get nervous your business down. The income statement

is a five cents on the dollar business. I mean you've got net income if you come up a little bit the market. You know, it's like a grocer your store business almost how are you holding margins? And on a differential basis trying to improve margins right now, how do you s this? So the great thing as a retailers, we have a service component to our business, so margins,

so you're charging more for our for my portion. What is an hourly cost on a Porsche to service it at automation depends what you need done on it, so we we blend the labor. So if you need to blend the labor while you blend me the free coffee. Right. Yeah, if you need an oil change, we're not going to charge you the same as if you need a skilled tech.

But if you're working on a complex vehicle, if you're working on a nine eleven, or if you're working autonomous, we we don't usually give our blended right, but don't give your blended rates. I got the blended right the other day. Yeah, I would say it depends what you need done, and the blended rate barries depending on what we're working on. I'm not going to not at least

to take over here with Sheryl Miller of automation. I'm not going to ask about your detailing and your rims, that you got a near on your car or we need to get him another one. I mean they all say services great, and then effect as you get the bill and you're like, WHOA, well it might be great, but you know, great digital and transparency. It's a great point. I'm curious about sort of how you're getting consumers to buy. Are you extending more loans at this point in order

to finance those purchases. So credit is healthy, and the reality of our industry is the majority of vehicles are purchased on credit. I feel good about the state of credit. So I was just meeting two weeks ago with the CEO of one of the largest lenders in the country, and his indication was credit looks solid. So you hear some noise sometimes out of the industry about it, but it's actually in pretty good shape right now. So we

feel good about the consumer. We feel good about affordability generally, understanding that people are opting for nearly new so not everyone is able to afford news it's a nice use. But when you think about the traditional use, sometimes you think about a twelve year old years vehicle. We're talking about a three year old w pioneered this. They came out with certified cree end Yes, ified pre on. That's

the future. Isn't have you priced most of America out of the average cost of an average car that people aspire to Well, I would say BMW probably isn't. Isn't just the average. So if you think about it, we offer thirty one brands and so we offer something for everyone. So if you have children and you need a third row seat, we have it. If you want to go with something smaller with better fuel econo, we want the car with no children. Yeah, so you're definitely, we definitely

have something for both of you. Well, I'm trying to understand if you're not concerned about consumer credit, even though we have seen delinquencies and serious delinquencies among auto loans pick up quite a bit. Uh, and you're seeing robust demand, what is a potential risk that you have your eye on. So I would say, just to be clear, you're seeing

an increase from historically low rates. So as people talk about delinquency rates, they hit such a low point that yeah, they're certainly increasing, but they're not increasing to the point where it's completely concerning. It's something we always keep our eyes out on. And I would say from a consumer perspective, we are in plateau. So if you think about new vehicle sales were definitely in plateau. You did see the strength in use vehicle sales. So total market is fine.

Customers are employed, so when consumers come in the stores, they have jobs. They need to get to those jobs with via. Nothing worries you. There's a number of things that that worry me. But I'm not nowhere near as worried as I was at the end of last year. So now that I have to interest rate cuts rather than three hikes, I feel like there's a little bit of a tail in, but definitely healthy consumer. There's been some volatility out in the broader landscape, and you have

to be worried about it. Let's go away from the fancy cars and F one I just put on your wonderful website and in there, I mean, it's the vanilla of Vana. How do you make profit on these trucks that Detroit tells us is where all the profit is? And do you make the profit by the price you buy it from the automakers? Do you make it on add ons and all that? Where's the profit come from? It's a great question. So the F one F one fifty is the top selling vehicle in America. And it

continues to be so. So we make money some money on the front of selling that vehicle. But the good thing for customers pricing wise is dealers don't don't charge a lot of markup on the front of that. We do make money for arranging the financing. We also make money on the services. Is really what it's become, right, Yeah, it's a lot. A lot of our profitability is from service. Do you need immigrants to keep your service going? I mean, where are you on immigration and the emotion of that

in Florida? Yes, So what we need to keep our service business business going is amazing. Technicians and technicians are harder to combine. We get them from all different places. We get them from the military. The military is a great source for technicians. We get them from trade schools and we also build them internally. So we train people internally. Should I tell with the day I put the screw down the Barracuda Chrysler Distributor cap engine, I want to

hear this. I don't know that you're qualified to be one of our technic Really, you don't think so? My father said, used the magnetic screwdriver. No, I didn't. Sweeney knows this story. I mean used the magnetic screwdriver. Now if you lift the hood these days, it's really hard to work on the vehicles. And if you think about our relationship with Weymo so Alphabets independent subsidiary and autonomous vehicles, we're doing the servicing for them and we've been doing

that in Phoenix forever two years now. Sure, Miller, thank you so much. Is with Auto Nations three dealers worldwide. They do such a job at the bent leypol We're going to keep it in Tophan, honestly detailing. It's just right now we're going beyond no not going out to the McDonald's on Third Avenue. We'll breaking barriers, were defying convention, Paul. We are shattering expectations, and it's just gotta be beyond meat crumbles, their beefy what is it dog food? I

mean there we are beyond meat. They got they got everything, it seems like, and they had a beyond It was a very good quarter last night. Yet the stock features are down, something about a lock up period expiring or beyond meat, Mediterranean skewers, they got it all. Jen bartashes Bloomberg Intelligence, joins us on the phone. Jen covers all the restaurants and the consumer stuff, and uh, she really knows this Beyond Meat story. So Jen, give us a sense.

I thought they had a pretty good quarter, actually a very good quarter last night. What's going on with the stock? Good morning? Yeah, So Beyond Meat actually did have a really good quarter last night. Um. They had positive net income for the first time in their company's history. And one of the concerns around the company is, you know, the path to profitability um, and they made great strides

towards that. Um. You know what's swaying down the stock you as you mentioned, Paul, it's it's about the expiration of the buck up period from the I p o UM, the opportunity for those initial stakeholders to sell some of those shares UM, as well as increased concerns about the competition and some of the big players that are getting into this space. Well, the competition story, I know that was that's been out there is risk number one from

day one. I'm just kind of wondering what's changed. What did they get on a call yesterday maybe spook people with some commentary about competition. Well, I think they were trying to head off concerns about about competition, But you're right,

it has been there from the very beginning. And I think one of the things that that Beyond Meat has to its advantages is that when people try something that is a brand new kind of product, UM, when they adopt it for home at home consumption, they generally stick with the one that they've tried. UM. It's it's harder to get people to just explore and go into a

new product without any experience with it. And so that is one of the advantages Beyond Meat has against some of these bigger CpG companies that are bringing their own products to market. UM that they've had the chance to try it in a restaurant, um and and then have a comfort level preparing it at home. I mean, I got to look at this thing from sixty feet and Jen,

you know you're you're very good at this. The moonshot of expectations took it up to a price to sales of sixteen and with growing sales, as you say, they're delivering on the dream. Great, they're almost downded to reality seven times eight times price to sales. I mean, when does this thing get priced more as a traditional food analysis versus all the hooplah. Well, it's a good question, and I think part of that is there's a little

bit of time to go. You know. Part of what's interesting about this this particular company is that it's more like a technology company than a food company, and that's part of what sparked so much of the interest in it is the innovation and the fact that they're bringing something to this this sector that is revolutionary and hasn't really um in an industry that really hasn't changed that

much over the year. So I think that you're the answer to that question is that it's still going to be a little bit of time before it settles into being considered a troop here to some of the other companies in this space. So gender we have a comfort level as investors in this new space that this is not a fad, that this represents the synthetic food, synthetic meat represents a real long term category within I guess

the food sector. Well, the underlying trends and the demographics of who's buying, you know, who are buying these products really suggest at this point that this is a long term trend and not necessarily a fad. Um You've got, it's a younger generation. It's a more affluent generation that tends to to to purchase these products UM. Families tend

to purchase these products UM. And at the same time, at the other end of the demographic spectrum, you have baby boomers who are starting to retire and are paying more attention to health concerns, and many people are looking for an opportunity to make a small improvement in the way that they eat on a regular basis. And if people feel better about slugging out meat for one meal with a meat alternative, UM than than that helps sustain this long term trend. Yeah, I'm looking at the technical

chart here. It's a fancy log chart with a bunch of fancy moving averages and the fancies self the vector is self. Is there a pressure to turn around the share performance now or they just go on with their business plan? Well? I think I think from a management perspective, their plan is to continue on course as you're laid out. Uh, you know, whether whether investors are expecting some kind of

alteration from that course, It's stil early to tell. Can I ask a dumb question, what's the price versus a hamburg? I mean, you know, all these food variants they've got. Is it cheaper than meat? Not yet? And that is one of the things that Beyond Meat is is focused on is bringing their products closer to price parody with meat. Um there's still there's still it's still more expensive and many of the retail stores it's about twenty more expensive

um on a per pound basis um. And but part of what Beyond Meat was talking about is the plan to make investments to help bring that price skep lower and and that will also help sustain in that long term trend. Beyond beefa Telian meatballs. That's not American. I think there's sausage is hot, It's it's everywhere. Jen bartashes, thanks so much for now. Yeah, I'm on the Jen, I'm on the edge of Wigel's anger. Here's Wiggle's the best hot dog in the world. Good morning, Rochester and Buffalo,

New York. Beyond sausage, Chicago Dog. You're put the names Chicago in with beyond me? Jen? Are you? Are you going to bring us up with the CEO today? We are. Jen's gonna be taking notes. I know what she's get sending me some questions. He Ethan Brown. He has a president Dog five teen Today on Bloomberg RADI go beyond Sausage. Portland Dogs a fade dog. It's not a Chicago dog. It's a fade dog. Jen Bark. She killed that, Bloomberg.

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