Surveillance: Hollenhorst on the Fed

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People are like.

Not and yet you reaffirm the FED higher this morning, don't you.

I think if you just look at this economic day, the MIC's over here.

Come on, all right, I'm starting the first time on the show.

Yeah, thanks to If you look at the economic data, I mean, it just keeps coming in showing a tight labor market. We keep getting these numbers strong spending. I agree with Mike, I don't think we're going to get five to six percent GDP this quarter, but we're probably going to get at least two percent GDP and maybe three percent GDP growth. And I think you did hear some of that coming out of Jackson Hole. You look at the core inflation numbers, they've slowed for a couple months.

Wages are going to drive harder.

Your academics and frankly it goes to Catherine Mann now at the Bank of England as well, is a real humility about what we don't know. Olivier Blanchard calls it other factors. What are the other factors that the low yield people, the rate cut people get wrong.

Yeah, So I think the other factors that we have at play here in the US economy includes some of the domestic strength that I was talking about, which is not just the tight labor market, but also the tight housing market. And this is an odd one, and I think you described the cycle as being odd, and it certainly is. Usually you would think mortgage rates move higher, we get to slow down in housing, and we get

Yeah, there's just no inventory in the existing home market at all, is in the new market, which is why

Yeah, and don't forget student loan repayments restarted yeah October. Yeah, so there are some headwinds that the consumer is facing here. I think what has happened, though, is we had such an extended period of low interest rates, such an extended period of ample liquidity. You saw credit card debt go down significantly during the pandemic, and now those levels have built back up. Now you're seeing delinquency rates that are getting back to more normal delinquency rates that we would

So if we do get that recession in twenty twenty four, but you still don't get two percent inflation, is the Federal Reserve going to tolerate the pain ultimately? Do you think?

So?

That's a really tough scenario for the Fed. I think if you get a significant enough slow down, you will see some deflationary pressure. But we could have a period of time, and maybe it's going to be an extended period of time where you see the economy slowing, and to some extent, you see this with the credit that is tightening already. Right we have some signs that things are going to slow down eventually. If inflation was stably at two percent, then the Fed might be a lot

Richard Clarita is identified with this thing DSGE. All you need to know on a Labor Day Thursday is we're not going to do the math either.

I can't do the math. It's that fancy.

But the bottom line is I mentioned actually on of it earlier, that article from years ago beyond DSG models, where he and a team really go after the math, the math certitude, the mathiness of the Andrew Hollenhorst world. Do we have operative models right now? Do we in God's name know what we're doing?

So I think that is one of the big challenges here. What is the theoretical framework that we're using to assess the economy and to assess monetary policy. And you heard Powell point to that uncertainty in his comments there's a non economist as a non economist, Yeah, and so he talked about this, you're navigating according to the stars under a cloudy sky. And what does he mean by the star the underlying neutral rate of interest that would neither

Yeah, setting monetary policy can be a tricky business in an environment like this one. Can I just quickly ask you about fiscal policy as well, because we hear a lot about we have not yet seen things like the Chips Act, Inflation Reduction Act that actually being realized in the economy and making a difference. At what point does what theoretically could be a driver actually become a drive because the FED might have to respond to those new injections. How are you thinking about that?

Yeah, it's a great point. We're starting to see some things in the data that are at least suggestive. Then maybe you're seeing some of this showing up. We did see stronger investment in manufacturing. Maybe that's related to the Chips Act. But you're right, these things are going to take a long time to actually play out. Is going to take time for that money to come into the economy. At the end of the day, the FED is not going to kind of look at fiscal policy and then

Andrew honor.

John stelfhis chief Investment Strategies to Oppenheimer Asset Management Joints us Now, John, wonderful to have a bull on the program. Let's talk about why you're still so bullish and reflect on the economic take of the week, sir, if we can. There is a feeling that bad news is somewhat good news. Is there a tipping point when bad news just becomes bad news.

Well, thanks for having me on the show. John, It's always great to be on surveillance. Have to say, you know, when we look at.

It, things are to continue to get better, offsetting negativity.

That's why bad Nudes has been good news.

In essence, we're seeing the economy is genuinely slowing some, but it's not falling off the cliff, whether it's the consumer, whether it's jobs, whether it's it's our Q two earnings, even though you had to drop in earnings for the S and P five hundred least. I looked at my Bloomberg a few minutes ago, but negative six percent on the quarter. It's three sectors have the negative earnings growth.

John, you've been one of the great bulls. You've been one of the great great bulls. Where are you right now? For four thousand and one, forty nine hundred for the end of the year remains our target.

We did lower our projection to what earnings will look like for this year from two thirty down to two twenty, but overall we're looking more support to the S and p.

Five hundred to remain remarkably strong.

What do you need to do to get to five thousand? I mean, I got to make some news here today. What do you need to do to up that the five thousand time?

You're egging me on, you know, I think we need to do to have some remarkable news related to the feds achievements against inflation and a real clear signal that it's the end of the cycle with a pause, not because the economy is falling apart, but rather than it's achieved its goal.

I don't think that happens this year. I think that happens twenty twenty four.

Well, And in twenty twenty four is when this market increasingly and earlier is expecting the FED to start cutting rates. So if we do get to forty nine hundred or potentially even five thousand, John, can we stay up there? If the reason they're cutting is because things have turned south and the tightening has taken perhaps more effect than they would have wanted to if they overshoot.

Well, I think the key word there, the awkward word, is if things have turned south. It's if things have basically gone so that we really are are entering a period of sustainable economic growth at a at a slow or moderate case, I don't think that we'll be seen the FED cut drastically, and this might be one of those, just because when we look at it, the inflation is caused by overstimulation and fiscal policies. What we look at we think of two administrations, and they did that.

They were concerned.

About the effects of COVID on the economy, and likely all that stimulation is what is enabling us to get through this period of a FED fund's hip cycle as well as we are. So we think at this point, we think this is it continues to be a workout market, and a workout market is always has considerable uncertainty to it in terms of its outcome. But we wouldn't bet against the American consumer, and we wouldn't bet against American business, the American economy.

We think we're.

The sunlight is at the end of the tunnel, not an oncoming locomotive.

Well, John's hope that's the case. The colodiale will for the same way he said the consumer. Don't bet against the American consumer. Plenty of retailers have flaked up plenty of issues over the last couple of weeks. What you read into that.

Most certainly, and yet consumer discretionary as the sector is doing very well. I think it reflects the services end of the economy versus the goods. A lot of that is related to at this period in the cycle and still the experiential adventure for the consumer.

In many ways the consumer has slowed.

And then if you look at the individual retailers, it really has to do it. Who is balancing e commerce and bricks and mortar or ecarmas and some kind of touch with their consumer and meeting the consumers.

And so you know that's John.

What do you do with big Tech? I mean, let's say I own shares have got a big gain. I mean, do you have a a rationalization of owning those big seven stocks where you just take a terminal value three years, five years, hold your nose and say let's go.

I think you know it's not quite hold hold your nose.

It's take a look at look at the companies and consider what businesses they have that are deeply embedded in the lives and both the consumer as well as in business.

And amongst those Big seven.

It's a fairly recurring trend that you see or a trend that keeps rolling forward in an upward direction. They remain companies that are very deeply embedded in our lives, both as consumers and as business people, and so revenue growth is likely to continue. It'll ebb and flow at different points that you know, it's trees don't grow to the sky at all, but a general.

Trend looks like this is parallel.

To where the automobile was in the early twentieth century after Ford had, you know, essentially improved.

The manufacturing process to.

Increase the ability of the automobile in terms of quality and lower the price.

Technology easily accessible.

That makes it deeply embedded in our lives, and it's profitable.

So, John, what role does that small group of stocks play in the four hundred point gap between where we are now and where you think we're going to get in forty nine hundred. Considering that they have been the biggest point contributors to the games we've seen this year, can they continue to provide that leadership?

Well, you know, I think in essence, when we look at it, you've got to realize that technology is not unto itself. Rather, it contributes to all eleven sectors. So within the eleven sectors. I mean, we own some industrial stocks. I can't mention the name. The firm doesn't allow me to pitch one. Got that, but but but we own stocks in the industrial sector, in consumer discretionary, uh and uh, within within the space of other sectors that have done remarkably well.

Uh.

And it just has to do with UH.

It's it's a combination of alpha generation as well as as playing the broader sectors.

John, I get you can't do single names, but can you just describe in great detail what's within consumer discretionary, given that it's such a broad space within.

Consumer discretionary, you know, it has to do again with leisure stocks. It has to do with stocks related to gaming to travel, has to do with the the electrification of the automobile and the process of that transition that's reflected within all kinds of products that are sold in stores.

Uh.

And it also has to do there's there's a certain element here coming up where there is a back to the office trend that is not back to the office like we used to be, but certainly where people are coming out of the caves, going back to going back to a more normalized environment where they show up at the office three days a week.

Hey, John, get to hear from you as it wise. John stelf Is of Oppenheimen.

Cameron Dawson joining a cio at Red Bull Formula one Racing, joins us this morning. Thank you so much for your patience with Max for stepping greatly appreciate it. You've got one single sentence and you go right to the heart of it. September is the worst month, and yet you're hardwired optimistic.

You got to be in the market.

Do you go to cash in September?

No, because September being the worst month is just because it's below average returns. It's not necessarily that it's all going to employ. And even the correction that we had in August was below average, meaning it was so small in its magnitudes, so it doesn't really warrant making big

Ian lingn Be months ago, we just played the clip he said, screaming by ten years. It's actually my words that I put in his math, but we agreed with it. Do you agree it's a screaming by.

Well, if the ten years are screaming by, then credit is a screaming cell, and equities, at least the riskiest parts of equities would be a screaming cell. Because we think that for the tenure to go back to three percent, you would actually have to see much weaker economic environment. You'd need to see the whites of the eyes of a recession, and that likely means then that those economic or those earning productions for twenty twenty four, which have

Do you see that recession not wives of the eyes?

No, not yet, though you know there's all this discussion about GDP versus GDI and if GDP will catch down and really what is the underlying growth rate. But for right now, we don't see enough evidence that a recession is emminent, and there's still our calls that will enter one in the fourth quarter. We think if we do have one, it's much more of a twenty twenty four scenario, which just means that it's not being priced in yet.

If we don't have one, though, couldn't that also be bad news if the landing is too soft, couldn't that mean the FED has to do more and then eventually has to force it.

Anyway, Yeah, it is very peculiar because that is actually what's happened in twenty twenty three. The Fed has had to do more than what was projected. The bond market has had to price in more hikes less cuts. You've seen yields go up. Yields since or the pricing of the December twenty twenty three FED rate has gone up one hundred seventy basis points since the March low. Since that time, the Nasdaq PE multiple is up thirty six percent.

We talked a few days ago about the cost of real estate renting, the struggle for a huge body of America to find a down payment for real estate We had a huge response on that discussion. Do you advocate margin here within this bull market? This question doesn't come up enough. I think everybody's out there selling the idea of leverage up margin, options, margin, future's margin, margin margin. Do you advocate using margin within the growth sphere?

Well, margin is a heck of a lot more expensive than it was just a few years ago, given rates are higher, So you have to factor that into the equation. We have seen. You can see measures in finrid data about the usage of margin debt and that's come off of the twenty twenty win peaks, which is not surprising. But the real question is how much of that is being replaced by options, which are a form of margins roughly, and so you've seen so much option activities, surging call options,

Memories sometimes that can go back.

Cameras just nailed them.

Can we talk about a different kind of margin? Profit margins? At Dollar General, they've come out and basically said earnings are going to tumble as much as thirty four percent on a share basis during the current fiscal year. It's pretty brutal stuff. They're not alone. Are you taking what the retailers are saying seriously? Is this more important than what the hard data is tanagus right now, which is retail consumption is better than good.

Well, there's some retailers that have pricing power and some that don't. And I think that Dollar General probably falls into that category where the elasticity of the demand of their customers is much different than the higher end retail where they can continue to push price, they can continue to pass on those higher costs to their customers. So the areas where you don't have pricing powers where you're seeing the margin pressure.

Yeah, And of course, when we're talking about the different areas within discretionary in pricing power, travel airlines, they've been able to exercise pricing power in such a material ways we've seen demand recover out of the pandemic. And John you earlier this week pointed to when we got the consumer confidence data, which was weaker, people were still willing to.

Travel, planning vacations, put it on their credit card. Now, I don't know whether to believe that dates or not. I'm wondering whether They just saw Instagram posts and were like, I'm planning one too, right. I wonder how that data is put together. We're going to see that vacation boom continue.

Yeah, the fomo is real. And there's all this talk about all of the summer that we've had with the concerts, the hot girls summer. If that's coming to an end. I think at the end of the day, the question going forward is can the consumer continue to live beyond means. We've seen credit usage go up, but it's that savings rate that's coming down, and in the savings balance that has been whittled down.

Did you see how chill just.

Came into our offices here at seven point thirty one. I saw hollendhorse walk by Andrea.

It's like the black Colt Loud of high interest rates.

Because the lights on in the corner.

The room when Hollendhorst shows up. If we get an Andrew Hollenhorst world of higher interest rates, what does that do to your stock portfolio?

Well, I think it does increasingly create a challenge. But as we just just talked about, is that we have seen this divergence of yields and growth valuations. For example, in the past, we would say that if yields continue to climb higher, we should be concerned that growth valuations

The aerostour has been the most mainingful electric experience of my life so far. I'm I of a joy to Tandy that will be coming to the big screen soon starting October thirteenth, to experience the concert, film and theaters tom in North America?

Do you like that?

This is Taylor Swift?

John? I need definitely is a direct?

Do I need a friendship bracelet?

What's a friendship something?

Have you seen this, Cameron? Have you seen miss Swifts to.

Buy them on beaches?

No?

No, I'm we're looking.

At Paris tickets. Paris tickets in May of next year. A decent seats nine hundred bucks and somewhere back near Lyon is seven hundred dollars.

Cameron, Thank you, Cameron Dawson. New watch.

Someone is esoteric and wonderful as maxt for staff and Sean Patrick Byner is in frankfort here any no Swiss banking. He's worked within the banking racket and provides journalistic services to Bloomberg News. Were you surprised by these announcements? John, I mean, come on, you buy the bank. It's a shotgun marriage, you know how that's funny accounting and all that. Am I supposed to be surprised at twenty nine billion dollar statistic?

No?

Absolutely not.

That's accounting, Shenanig, And we all know that they bought credits with on the cheap when it comes to the pure purchase price, and there are a lot of risks that associated with the years of the twenty nine billion number is not not very surprising, but what you can be surprised about a little bit, or at least I was, and I feel like some market participants as well. It's like how firm the management of UBS already is in their idea and their vision on how they want the merger to play out.

That's very unusual. As you said, it was a shotgun marriage.

It was just barely six months ago, and I feel like they're giving us really good content and good ideas on how they want to shape up this merger where they want the bank to position, And that's a very surprising thing to me that they're able to do this.

When you're popping a twenty euro bowl of soup and brasserie lip, you people are gossiping about who from Credit Suite survived? Did many people from Credit SUITEE survive?

Well, for the time being, that is still the case.

I mean, we heard that they are cutting three thousand jobs in in Switzerland, and as you mentioned before, that's probably not the end of the of the of the number here and we will get something much much higher, and they will like feed this to the market and to the politicians, to the general public, especially step by step, not to lose their the cover for the merger or

So there's clearly still work left to be done. What timeline realistically are we looking at? How much longer is this going to take?

Well, it's still going to take years, that's that's for sure. But again as is doing the right thing here in terms of that they are giving us like step by step and on every meeting they are speaking, they're giving us something to deal with and to see like in which direction the bank is heading the whole merger until we get like the final picture is probably still going to be next year or even like twenty twenty five,

If they have good news, Where are the potential opportunities for bad news? What are the biggest risks here?

Yeah?

Yeah, absolutely, and there are plenty.

And it was funny again the CEO saying on the call that they are are not naive and they are not like painting a blue sky scenario here.

There are obstacles along the way.

One is like with the risk weighted assets that they have now outsourced into the so called noncre and legacy unit, that's fifty five billion dollars, So that's a lot of stuff that can potentially blow up.

They said it won't, but you never know.

The other thing is like they still don't know how the clients will behave It's looking pretty solid right now in terms of clients coming back to the combined lender, but we need at least like two or three more quarters to see if, like if this trend is sustained. And also like they were very short on details on telling us like how do you want to win back the clients, how do you want to align your business

Now that they're one. Who's their arch competitor?

I mean, obviously I'm going to say Deutsche Bank, but inform me who are they competing against other Swiss banks I don't know, or Deutsche Bank or JP Morgan.

Who's you bees competing against?

That's a very good question. I mean, like they have nobody like on the same level here in Europe. But of course you have a lot of niche players or small wealth management players will try to get a share and who will try to benefit of that client behavior where clients lost certainly not going to have like a concentration risk from their assets at credits with and ubs. So I guess like everybody will try to get a

I would say, yeah, isn't this unique though? Didn't they get a dance partner essentially for free?

Well, I mean, yeah, you could come to that conclusion, I would say, of course. I mean the price was very cheap. But again, like there are still risks associated with this merger. It's not a done deal yet. It's looking pretty well for the time being. But again you could see, like the final quarter results that we had from credits Is today had a ten billion dollar loss in it, sorry, ten billion Swiss Franks loss in it. So there's still like a huge burden that they now

So it's looking good right now. They're doing the right things.

But this is not in dry papers now and there could still go something wrong. So I would say like telling them this was for free and of course this is going well.

Is too short?

Well said then? Patrick? Thank you, said them, Patrick Bounder. I've blown back on evs Max with Stappan of Red Bull Racing Joint us right now. Max, good morning buddy. It's great to catch up with you, sir. Nine wins in a row just phenomenal. You're trying to make it ten at Monster. How special would that be?

Yeah, I mean, of course it's something that I never even you know, told about that that is even possible. Right, But now that we have one nine in a row, tying the record, of course you want more, and I think we have a we have a good opportunity. But if on reasons are never straightforward, a lot of things that can can happen. But yeah, I'm excited, of course for the weekend.

Max.

Let's go back a couple of decades. Tell me back to the days when you're in a go car and you've got to be around people like Michael Schumacher and your father for that matter as well. Is that where this hunger desire comes from to dominate even after you get win after win.

Yeah, I think it's.

I mean, of course you need you you you really want it from a young age. But I think also the way I grew up, you know, having the experience with my dad by my side. Yeah, for sure, from a at a young age, I think you you know, get prepared in a in a different way, I guess. And yeah, for me, it's never good enough, you know, even you try to, you know, look for the little

Max, Tom and I were talking about Marco van Bastard retiring from football at twenty eight, and I always hear people talk about you. They say things like he's going to get bored, he's going to get bored by this or potentially step away. Do the records that Shu Mack has set and they worth sticking around for you, Max, is that's something that drives you.

Like I never really targeted like records. I of course really enjoy what I'm doing now and for me at the moment is the opposite. This for me is not boring. This is really exciting. Like I'm always very motivated to get to the track. I think it's more when you're not winning anymore, and there is also no real plan in place or a few where you see yourself winning again, then probably you get bored. But I think retiring at twenty eight for me is probably a bit too soon.

Max John Faraoh is steeped in all that you do. He grew up in England and lives Formula one. I'm your ugly American. I'm new to this. I'm the one you need at Las Vegas, you needed Austin, Miami, wherever. And in reading about this, and I go to the great journalist Peter Windsor on this, he says, you do corners and k turns like nobody. He talks of silverstone in the three turns of Maggots and Becketts.

How do you approach the tight.

Turns of Formula one? Peter Windsor says, that's the difference.

I think, you know, everyone has their own driving style, but also I think what is key in our sport is that you're able to adapt to whatever is needed. So you know, every year we have a new car, different looking car, and every single car drives a bit differently, and I think, yeah, you always have to adapt and learn and try to grow, try to be different, try

Do you wish for a smaller, lighter.

Car, Of course that would be ideal, but you also have to be realistic. I think with the safety standards that are always improving every single year, that is not always possible to go lighter. But I'm sure you know we are looking into the future regulations as well to try and make it better.

Maxial Glasses. Thinking about the commercial stuff, we caught up with Christian Horner. It's great to talk to Christian a month or so ago, and we were talking about the race Canada and how many races are now in new places like in the United States, like in Vegas. For a man like yourself, can you compare say a Monza to a Miami a Las Vegas and mactually get excited about it, when for some people the purists might complain

Well, the beautiful thing is is that we have a lot of different Grand Prix still, and I think it would be very boring if they're all the same, right, And yes, I am very aware that you know, we shouldn't go to all the let's say, the commercial places, but I think also Las Vegas gives you a unique opportunity and then time will tell you know if it's the right way to go or not. But for sure, from my side, you know, I like the pure racetres.

Max. They're always trying to rework the format. When a car a team goes through a period of dominance. I remember when it just used to be qualifying thirty minutes, fastest driver, fastest car. They get polled and they try to make qualifying more interesting. Do you think tweaking the format with sprint racing in one weekend not the other? Is that something that frustrates she was a driver.

Yeah, I'm not really excited by these things because I think when something works really well, why do you need to try and tweak it? And yeah, this is I think a constant discussion and for sure that some things got well, some don't. But yeah, for me, trying to keep it like it is, you know, probably is the best thing forward because I always thought the qualifying format and you know, before you get into the single race, I think is very exciting.

Max. I agree with you.

I'm a complete hack at this, but I totally agree with you. The sprint thing is ridiculous. I just don't understand it. I love the qualification thing the day before. I love to tune into that.

Max.

For step, and are you in a place is completely dominant in the sports, involving all the money and the egos. Where can you control the future of who your teammate is? I understand there's autosport gossip in all that, but are you in a position now, Max where you can dictate, discuss or say who a future your teammate will be?

Well, this is always up to the bosses and the team.

I mean, of course, I'm a team member now for a long time, and of course things. You know, you talk about stuff, but I'm not the one who is telling them what to do or deciding things. At the end of the day, I need to focus on my job and try and drive as quick as I can every single weekend.

We do a good job at that, Max, A good job of that, but particularly this season, Max, how close are you with Checko?

Yeah, we are very close. Honestly, I think we are very similar in a way. Also how we're approaching our life outside of Formula one. And you know, he's a real family person. Of course he has his kids as well, and yeah, I'm pretty similar.

I think it's good to.

Try and you know, sometimes switch off and just you know, not think about Formula one. And I think that's where we can really relate.

You know, what people are like. They like to stir up gossip and tell stories. And Max, you've been reluctant to get involved in the Netflix series, which has been massive here Stateside. Max, what's behind that reluctance? Why don't you like doing those things so much?

I mean, I think at one point, you know, certain things are also a bit more private. Privacy for me is very important, and you know, I like things to be portrayed like they actually are and not with a lot of let's say spice to it. But you know every year now, I mean we had a good chat every year.

I do.

I do have an interview and I explain my side of the story, and I think that's important. I know how Netflix is in a way, of course to try and attract new fans, but of course you had it's important also to to really see the reality of the sport.

John, I'll let you ask.

I mean, we're in London, we come back, and that gives us just enough time to go to Las Vegas. I want to November, but you know, if Max can pull some strings for us, I think possibly we could be all Las Vegas with Red Bull.

You want to ask him yourself, I'd let you please. Max would prefers to ask Christian Horner and we'll ask christin a little bit later.

Max.

I wanted to squeeze this in. I wanted your side of the story. I don't want to talk about the last race. I want to go back to Austria. Final lap of the Grand Prix. You have the opportunity to set the fastest lap. You make the call to make a pit to put on fresh tires and go around and set the fastest lab for a single point. Max. From your perspective, walk me through the thinking. There is

Max?

Yeah?

I mean I always tried to maximize everything I can, and you know, I saw the opportunity for the extra points, so I was like, well why not. Of course, there's always a bit of a risk with these kind of things, but at the other hand, no risk, no fun, right, So that's what was also going through by am my head at the time.

Max. Good luck for race weekend during the team fantastically catch up with you, sir, Max for stepping a red bull racing.

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