This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot com, the Bloomberg Terminal, and the Bloomberg Business App. For those of you gloomy. This is the interview of the day.
There have been optimists. They are congenital optimists, and they're also reasoned optimists. And one of them is Neil Duddy. He's out of US economic research at Renaissance Macro and has been extraordinary, not over the last three months, six months, but frankly the last two years of saying this is America the resilient. The data chart is out there, Neil, and it is finally we have legitimate income growth. Will we sustain that?
I believe so, Tom, thanks for having me on. Obviously, there's a lot of disinflation in the pipeline, at least over the next you know, you could say three to four months. The most obvious is used cars. We know that wholesale auction prices have been coming down. That's going to bleed into consumer prices for use cars and trucks.
Supply chains are improving, that's going to take some pressure off of core goods outside of vehicles, and there's still some disinflation and train with respect to shelter looking at new lease growth. At the same time, we know the labor markets are holding up and that's going to support real incomes. And if real incomes are rising, ultimately I think consumers are going to go out and spend that money. So I think that's sort of the lynchpin for why things are holding up better than expected.
Atlanta has a GDP now numbers. We came in at a two percent statistic Q one, and all of a sudden we're migrating one one point a two ish on Atlanta GDP whatever it is, I really don't care what the number is.
But my question is to the Gloom, what statistic of positive GDP in America is a so called growth recession? Is it half a percent point five? Do you have that number in your head?
Well, I would define a growth recession as a situation where the economy is has a you know, GDP has a positive sign in front of it, but that growth is not strong enough to keep the unemployment rate from rising. So typically in a growth receession, you'd see the unemployment rate go up. So it's effectively a below potential growth state, Tom,
But that's not what we have right now. I mean, you mentioned the Atlanta Fed that that number is tracking two point four percent, you know, with very little contribution from consumer spending. I suspect that probably builds over the summer, frankly, but wow, but you know, look, there's more upside to the economy than not. But we're growing above potential and that means that whatever un employment rate increase you see sort of bobbing around three and a half percent, I mean,
it's probably going to be short lived. Not on a situation where we're going to see above four percent unemployment.
Goldilocks seems to be the moment that we're in. That's a lot of people are saying, how long can goldilocks last?
I mean, talk to me in the fall, Lisa, I mean, that's what I'll say. I mean, I think it's I'm sort of I'm sort of in the goldilocks for now. Camp. I mean, I do think that there are reasons to be somewhat suspicious about how long this can last, about whether this is a durable sort of sustainable moderation and inflation. I think that's a question that needs to be answered.
I don't think we can answer it just yet. But you know, to me, when you think about economic scenarios, I think the risk of recession has receded dramatically, and so now it's a question for investors about where do you put these other percentages?
Right?
I mean, do you? I mean, I think the markets are right to kind of allocate a little bit more to the soft landing story. But I think you know, you could. I think you can make a good case, and maybe we're getting a little bit over our skis here and we should probably put some more potential on the resurgence of the inflationary boom scenario.
Okay, Well, I wanted you to double down on that because you were just saying that people are perhaps a little too sanguine about the steady disinflation that they expect to see. Where is it that you see reinflation coming back down the pike, especially if you hear all these people saying that FED policy hasn't worked its way through the financial system and still has more restraining to do well.
Home prices are rising again. They're actually arising for the for four months in a row. We get weekly data from redfin and you know that's more up to date, and that shows continued to increases in home prices over the summer, even after seasonal adjustment. So you know, to the extent that home prices go up, and you know, obviously, for a landlord and the underlying value of your asset is rising, You're not going to go around saying up,
I'm going to start cutting your rent. So it leads me to believe that we could see some upward momentum in housing rental inflation in the CPI statistics sometime you know, let's say in the first or second quarter of next year. So that would be the most obvious area. But you know, more broadly, I mean, let's take a step back, and you know, what are we talking about here. We're talking
about real growth improving. Real growth is improving over time, that that erotes physical capacity, and that forces economic actors to bid up wages and prices. So I have a little bit of skepticism in terms of how far we can push this kind of immaculate disinflation story just real quick.
Here, Neil, Given that, how far do you think the Fed could go? I mean, do you think that people are pricing out future rate hikes after this month and that that's inaccurate? That you think that that's wrong?
I mean, who am I to say what's right and what's wrong? But I would just if they were me. I mean, I think the probabilities of a high you know, after July are probably somewhat higher than the markets are currently expected.
Neil Doda, They are extraordinary on this two percent American real GDP is with Renaissance Macro.
And I hand joined us now equity strategist over at wels Faco and a good morning to you. Great to have you with us, say in New York, let's start with this. You were looking for ten percent mode for ten percent correction. You throw in the town on that over the last month. What's gone right for you in the team?
Well, I'll say one of our biggest calls being tied to that AI trend, you know, one of our largest calls coming to this year median entertainment, and that's actually kept up with a tech sector, if not outperformed it. I think that call we came in because we wanted to see that pivot of spending from really the gird opal goods into something more services, a little more of that away from home trade. But at the same time you see this kind of networking cable, these media groups
still having that poll. We thought that might be that sweet balance. That was one of our largest calls, and right now as we see it, we've stepped off that pole back call. Well, you know, we'll throw in the towel andmit ourselves on that one. But something we're still watching here is you know, what is going to be the pace of this rally in the back half this year and can this AI and really uber top led rally continue. I think that's what's really weighing on people's minds.
Your mathwiness informs your research node. I'm fascinated what you think about what revenues are going to do made up of unit and price and the calculus jargon here is the partial differentials of units and revenues. How do you see that playing out over the next year.
No, that's very important. Right when you have this top line figure, it's important to figure if that is declining you know, how much can margins really increase to make up for it? And if it doesn't, then what about prices versus volumes? We've seen volumes declining. Those volumes are declining, and price elasticity returns to normal, then what happens to that bottom line? These margins continue to be pressured, continue to be compressed, But so far the market seems to
look through those things. Perhaps they're trading already on next year's earnings or expectations. What we've seen is not just the one and done, but what if we get rate cups? That easing also trickles into investors' minds and helps look at equity valuations above what perhaps we expected.
So do earnings matter or do you just basically look at what the returns have been and then just say we're going to keep buying because everybody else is.
You know that momentum trade is always interesting. You know, do we stay on the train? Who's going to be the first to leave the party? But no one wants to be the last. I think with earnings, the more important is directional than really the figure. Like Tom mentioned earlier, you know, is it two hundreds, it two ten? What is it? But it's more the sentiment of how much contraction are we seeing, if it's going to be light enough for investors to look through and really what is
driving it? Is it the consumer and your need or pulling back sharply, that's not what we're hearing. Even with bank earnings early in the season, we see that consumer still remains resilient, rages remains resilient, Labor markets are supporting that. But that general slowing tells us things are cooling a bit.
But if the Fed is able to give us that goldilocks almost that pow put in terms of not just equities but really economic consumer spending, then that's a kind of a happy scenario for a lot of people.
It's a confusing market for people who are trying to look at facts and extrap laid out some sort of price target. From your vantage point, how bullish can you get just with a momentum trade even as you see some of the earnings come in softer than you'd like to see.
Well, the mollentium trade actually has been flipping a little. You know, what we've seen was market leaders, and you're seeing the momentum factor. The top top leaders aside from those AI names have actually started to rotate, and that rotation could also bring a little churn in volatility. So when we think about how long the market can ride on momentum, quite long, no doubt, But what leads that momentum,
who those momentum leaders are. I think that continues to have some mean reversion to it, and that's what we use to look at technicals and think about where we want to position.
Shine a light on your client conversations if you can, do you sense capitulation after the last couple of weeks.
I don't think we're sensing that just yet. I think right now the beginning of this year burned a lot of people. A lot of people came in more conservative. You know, you were mentioning that etf earlier. We're worried about protecting against losses. People were happy to take four percent five percent in some sort of a bond investment, and now they've missed out on twenty percent in the first half of this year. So that kind of mentality, I think they have to remain strong the rest of
this year. But in what underweight names have been most painful. That's going to be the hard part is when do they capitulate on that and we have not seen that.
This is what lace is getting at. Really, if you've sat on cash and you've missed out on this rally and you feel foolish, are you chasing the winners? Big tech? Where you going to places where you haven't seen the games? When you have those conversations, what they sound like?
You know, I will say, you know, we're not bringing out the tissue boxes. Yes yet it's not full tears. But it is a difficult conversation. You want to be thank you, you want to be chasing in some ways you you really believe that I've got to make up for this. I've got to get back on this train the same time when that trains left. Look for growth opportunities in other parts of the market, someplace where maybe valuations are a little more friendly. And if we do get this growing, where as a.
Friendly valuation out there, enlighten me. Where's a friendly a friendly valuation?
Well, we can look for actual sustained grow photos autos. I think autos given the economy we expect in this slowdown, that's a little bit of a hard sell for people.
I thought you were going to say, Cavan, Well, friend evaluations and combinations.
Walmart's trading to twenty four times earnings.
That's not that friendly.
I don't know, I've never seen it. That's absolutely nuts.
And to thank you one wis aneha was Faga, I.
Think Amanda Linum joins us now how of macro credit research at Blackrock. But there is an equivalent overlay here, and that is mister Solomon and others, including mister Fink, have to deal with a new interest rate regime which hearkens back sixteen years, twenty years, twenty five years. And as you brilliantly say in your note of macro credit research, there's a new higher cost of capital. Have we adjusted to it or are we in early innings?
I think in good morning, thank you for having me, I think we're in the early innings of adjusting to that.
And I think one of the really interesting things from my perspective, and looking through the regional bank earnings even yesterday and earlier last last week, was that companies are taking reserves against intra sensitive pockets of the market like commercial real estate, for example, but they're saying that they'll need those reserves even if there is a soft landing, and so it's not necessarily reserves in the event of a worst case downturn, but it's reserves even if we
kind of get an okay outcome. And I think that's true for areas like leverage loans, for example, where we expect the default rate to outpace that for hiled bonds. And I think it's also true for areas like commercial real estate, where we, as you know, Tom wrote that we think we're in the early innings of that distress cycle. And I think what's really challenging in this pocket of the market is that there's going to be a new
sense of price discovery. So maybe the LTVs and the cap rates that the market has used in previous periods to kind of understand where the floor is on commercial real estate, they might not be as relevant this time around. And so rather we'll look at cash flow of assets. We'll look at the basis to require to be bringing those properties up to market, and that's very heterogeneous, and I don't think we know the answer to that.
For how a ring fence do you think that pain might be, how I slate do you think it will be in credit?
I think for I think we're expecting most of the pain to be on the smaller banks that the data just tells us have had bigger exposure over time. We're also seeing that's where a lot of the reserves are being upticked. But I don't think it's limited to those areas.
And I think in some ways the cash is fungible across the system, and so if that's a reason for certain parts of the banking system to pull back on their lending, then that may be felt in other areas of the market that aren't necessarily directly related, but impacted nonetheless.
And even as as is right now, we're seeing a big contraction in auto lending as well as others aside from the credit card alone area, which seems to be on fire, how much do you expect that to accelerate and pressure credit in other areas.
Yeah, I mean, you guys were talking about it earlier this morning with some of the restructuring news, and I think it's interesting that companies are already restructuring some of the maturities that are coming out twenty twenty five, twenty twenty six, twenty twenty seven, and so I think on the corporate side that's definitely going to be a pressure point.
On the consumer side, I think it was really interesting you had mentioned that the Federal Reserve data for the Center of Microeconomic Analysis earlier this week, there was a chart in there that showed financial distress, and it showed the percentage of consumers that thought they might need two thousand dollars coming up over a period of time and those who thought they would be able to get it, And those numbers are moving in the wrong direction, and
so I think for those for the consumers at the low end of the of the economic spectrum, I think there's going to be a pressure point. That being said, I view it as more normalization as opposed to deterioration in the consumer That's.
Where I was going to go with this, especially at a time when some people are saying we've only seen a small part of the ramifications from the FED tightening cycle. How far do you expect the deterioration to go and how will be expressed in your credit markets?
So I think, you know, the first half of twenty twenty three has surprised us to the upside in the terms of the resilience of the corporate credit market. Specifically when you look at the highield market and the leverage loan market that hasn't extended though, all the way down
to the very low end of the capital structure. So if you were to look at the current level of the high yield index, so three hundred and eighty basis points at that level, you would think that triple C spreads would be tighter than where they are now, around one hundred one hundred fifty basis points tighter actually, So
we're not seeing that. So I think there's a limit to investors comfort with over leveraged deteriorating fundamentals that probably extends, and so there's a lot of talk about kind of the equity market rally broadening. What I actually think is there's probably some scope for resilience still at the high end of the high yield spectrum, specifically because supply has been so low technicals, which are really important as you know in the credit market, have been so friendly. But
I think that's probably a near term issue. Over time, I would expect there to be a bit more weakness in that market as we see defaults flow through, as we see risk premiere rebuild. Importantly, we don't view a recession a necessary ingredient for an uptick in defaults. So similar to how these banks are talking about, you know we'll need these commercial real estate reserves even in a soft landing. I think enough damage has been done in the cost of capital environment that Tom alluded to that
we'll see an uptick into faults. Regardless, it won't be broad based. It'll be more focused on, for example, the leverage loan market on a relative basis. But I don't think we're immune.
Let's cut to the black rock chase. The bottom line is Globen Sachs has a page on commercial real estate. Tionelle covered that Allison Williams alluded to that we're talking this morning. We've got our wonderful offices at Queen Victoria Street in London, and there's a Motel six. I stay out across the street. It's like two blocks away, and in between our office and the Motel six is this office building. It's a b property and it's in the media this morning. Basically it's at half its value. I'm
speaking as an amateur. Maybe it's forty percent, sixty percent discount. That seems awfully pervasive in each and every city. How to black rocks, how to black stones? How to black this black that? How do they adjust to that over say two years, over a reeficicycle.
Yeah.
So I again, I think we're early in the innings of this distress cycle, and I think what's really important is the price discovery. I think one of the other points of conservatism that are it's really going to be relevant in this particular cycle is that we look a lot at kind of Class A, Class B, Class C properties, but the market is evolving so quickly that those Class A properties may be reclassified lower.
This is going forward.
This is important.
And I think just because something is Class A today, as it becomes older in ages and there's more competition and there's more price discovery, probably lower in competing assets, that may get all.
Turned on its head.
That's that's that's that's.
A tech hose of fifteen years ago. When I hear you say things like that.
It really is.
I'm not saying it's as scarial will be, just you know, some similarities, that's in parallels.
I think it's going to be a longer default cycle. In the financial crisis, we know that was a multi year cycle. Perhaps it gets frontloaded a bit.
I don't know.
I don't I don't think it is priced in it because of that. Price discovery is.
Last discovery phrase.
Excellent as silly clinic on commercial way to stay.
Right now, we're gonna have a conversation that we did not have with Shnelli Bassek and Allison Williams. They are in the heat of the earnings coming out the numbers, the PowerPoint and the ratios. But with Strina o Rogen of Bloomberg News, we can sit back and actually look at the discussion that's being had. Sre I'm looking at
a board. I'm gonna go all William Cohen on you here, David Vinnier who live two thousand and seven, two thousand and eight, Peter Oppenheimer who we talked to all the time, Kimberly Harris, a new board member, Kevin Johnson. What's the spirit of the board if they look and it's too much to say the train wreck, but just simply the tension and complexity of the underperformance of Goldman Sachs, how's a board respond?
And don't forget the new incoming board member, Tom montag at Goldman Sachs for over two decades, then at Bank of America and now returning to Goldman Sachson.
Well will be the response to the board.
I think they will tell you that the stock does not fall off a cliff. They're okay, they're not getting ANTSI because over the last five years, since David Solomon took the seat October one, twenty eighteen, too today Goldman stock has done well. They will tell you they've done extraordinary well. The reality is they're middle of the pack, and middle of the pack is not a crisis.
And this is critical now. And I'm thinking of David Vinnier. I have the clearest memories of him and I going back and forth on librar Ohis August of seven, and here that huge responsibility running the ship essentially financially at gold and Sacks. The collective memory on the board at Golden Sachs, including mister Montag, how do they respond to this? Is there like sharp words or is it like a McKenzie meeting where everybody's planning in a complex way to move forward.
I think reality is no one on the board is going to be very comfortable seeing all the noise on the headlines coming out of Goldman Sachs. But what they ultimately want to see is stock performance. They want to see that they're on target to achieve some of the goals they've set out. There's obviously been strategy turnaround some one eighties they've done on their retail banking strategy, but they have committed to a new, new new strategy. As long as they can deliver on that, the board will
be content. And okay, it doesn't look like anyone on the board is thirsting to make a change right about now.
Where's the growth going to come from in the new new strategy?
Well, that's important. A lot of analysts, some of the analyst at least, have called this a kitchens in quarter. Try and throw out all the bad stuff in this quarter because the numbers are really bad. Return on equity four percent? How does that compare to some of the peers? It's the worst among the big banks. You have JP Morgan posting twenty percent return on equity, so that's not good.
And you've had a few consecutive quarters of Gorman missing on its profitability goal, which is a mid teens ROI. So the question is where does the growth come from? You know, and we heard James Gorman talk about this yesterday. Gorman said, investment banking the trophy, and investment banking has arrived.
It's going to look up going forward. When that when capital markets reopen, when deal making goes up again, you can be rest assured that Goldman will be in a good place, and they will look to point out the increasing durable revenue growth in their asset management business.
It seems as though the banks that are most diversified and largest have been benefiting the most from the recent enthusiasm, at least over the past few weeks of bank shares. How is Gorman going to try to appeal to this or are they going to say, no, we essentially are a niche markets focused bank. We try a for a into consumer banking. It didn't work.
No, they'll certainly not say that they tried a different tack. They said, we're very we're very good investment bank in trading and banking, but we're going to expand into retail banking. We'll make that as good as our investment banking franchise. That clearly didn't happen. You wasted a few years going
deep into that space and now trying to retreat. But now they are talking about the two pillars, the investment bank and the asset and wealth management business, and that is the one place that they can hope to show growth going forward.
I think it was at page six of the presentation very clearly laid out. Commercial real estate has challenges. What is their uniqueness in commercial real estate versus the other major banks?
Quite a few important things, right, investments where they have operational control. They're mostly tied to commercial real estate, about ten billion dollars of investment there. They took a half a billion dollar hit there. They have equity investments, a lot of it through principal investments, from office to warehouses and everything else that falls under the commercial real estate rubrics.
They have about twenty eight billion dollars in loans in the commercial real estate space, so that's about fifteen percent of their total loan portfolio. So they've taken some hits there. They've taken hits on their equity investments and also on what they call their consolidated investments. That's contributed to about
a billion dollar hit this quarter. Their hope will be they're not taking any more write downs going ahead, and that's really important for them and not entirely in their control as well.
A head count has gone down by about five percent, I believe based on the latest assessment. How much more does it have to fall.
Five percent year to date, eight percent is probably another figure to look at, because that's year on year doesn't include the new analyst batch intake. One would think that they've done the biggest exercises needed. They haven't come out and explicitly said that, and if they do need to take more action, that tells you there's a lot more bad news to come out of there. So they will certainly be hoping that they do not have to take
any more head actions. They've already done three different rounds of the last year, and that doesn't show great management.
Frankly, just taking a step back, we did just wrap up the earning cycle in the big banks, and it seems as though the themes are deposits cost something. Particularly if you're a smaller bank, Credit is contracting on the margins and credit cards are the sweet spot. How would you wrap that together to push it forward and say where this is going for the next quarter.
Yes, all of those points are true. Credit is perhaps contracting, but look at the commentary that we've gotten from some of the big consumer bank. Look at what JP Morgan kept telling us. Charge of rates are going up. It'll probably end the year at two point six percent on their credit card portfolio. They keep repeating, this is a normalization, not deterioration. This is normalization post the pandemic. They're not
that concerned. So if you zoom out, the economy is not as bad, or at least the trajectory does not appear to be as bad as three or four months ago. So if that holds up, the consumer is okay, Main Street remains okay. Wall Street opens up with the return of capital markets, that'll only mean continued good news for the big banks going ahead.
You're gonna be out of the US Open tennis open. Here there's like the Gray Goose Pavilion or whatever it is. Shreeholds court there for like three weeks or whatever it is. What's going to be the chat at the Gray Goose Pavilion at the Open about what would Tom montag do. Here's this force of nature. I've dealt with him at Davos, Love him to death. What an interesting guy is he? Like? Is this just like a moment or is this going to be a big deal where he steps in?
He's a force of nature. We've obviously seen a lot of commentary around this reality is at least based on our reporting, and I know some other people disagree, but Goldman had been in conversation with Tom Montag for several months months a conversation.
This is Solomon dialing one eight hundred, save us.
It's at least Solomon dialing one eight hundred. Tom Montag, he's in the past only he's one of the greatest partners at Goldman Sachs. He's made an effort to quote Tom Montag over the park few years, brought him back into the famous Goldman Sachs Retired Partners dinner is something that Montag had been avoiding for several years. And David Solomon's certainly brought him back into the fold. And in the last several months he's led the effort to bring
him onto the board. And remember he is a big prominent voice when it comes to risk expertise, and that is still a big engine in Goldman Sacks.
Shure not Orogen, thank you so much. Look for Bloomberg Reports should not Orogen here on Goldman Sachs and on the rest of the banking season. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks
for listening. I'm Tom Keen, and this is Bloomberg
A