This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best an 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 Gogie.
Chadberg, how if I share his investment strategy at Black Rock Gagy in the morning? Good to see you. Let's just start with this simple question. A colleague of mine asked it this morning, and then we've all asked it a few times over the last week. What takes your fancy this week? Central bank decisions or the tech earnings? What's your focus all of it?
Central Barker warnings actually, ECI, I think that's going to be a big one at the end of the week, and PC so lots from the micro and the macro front.
But I think probably what Tom was saying this earlier, if you're not in the market, it's probably what impacts you most, and what you should focus on is not the twenty five decisions but actually how they signal what's coming after so how much they can, how much the FED can keep their optionality open, and that's what really determines the outcome of FED from here on.
I'm assuming you'd guess that this Wednesday and the news conference, the Chairman will try and retain that optionality the threat of an additional rate hike. From here they should.
I think they're going to try very hard not to lock themselves in into another September hike. Hopefully, what they'll do is acknowledge that there has been some softening in the path of inflation, because that is factually correct. But at the same time, it's too early to call victory on the inflation fighting battle. And after that, what I think they should do is just leave all doors open
so they can go again in November. Or this can be the end if this is truly the beginning of what I think is a deceleration path of inflation, not back to two percent, but back to a much more palatable three or three and a half. On course CPI, this could be the last one, last hike, and I think they should leave that door open.
Summer races on. I had to buy the books this weekend for after thoughts school reading. It was like, you know, three big figures. It was amazing, She's like seven books to read? What's that about? But what the answer? Summer's moving on and there is sell and May and go away and you write about by at the end of May. Something happened March twenty four, twenty five, twenty excuse me, May twenty four, twenty five, twenty six. What happened the end of May.
What happened was we saw the equity market started broadening out. We all know and talk a lot about the Big seven that has driven much of the performance UTTEL date, and what we've seen over the course of June and July is that it has broadened out. If you look at something like the MSCIIHAW has equal weighted index EUSA that has started keeping in pace with the broader And why what happened in the macro? I think Number one, the growth data started not disappointing so much. The growth
data started getting better. If you think about housing, if you look at retail sales, if you look at durable goods, if you look at initial jobless claims, all of that started sort of remaining resilient. I think resilient is the word of the summer. And then second most important, and perhaps even the most important, is that inflation finally took a little bit of a breather. And that was of course more of a July story.
Okay, more of a July story. But the bottom line is people in cash now, people that have missed this, including a huge part of institutional Wall Street. What's the to do list? Buy now. So at the margin, I catch you up into November and December.
You know, I think very tactically, if you think that this is about of good data that we're getting is going to be with us for some time, and if the FED is closer to being done, so call it one more ratetike at most after this week, I think you can play for that quick catch up trade with something like an equal weighted basket. I think that does make sense, and we've seen flows into that from in the ETF space where investors are playing for that catch
up trade. Number two, I think still focusing on quality. I think still looking at companies that obviously we'll find out more about this and earnings this week, but looking at the profitability. We actually saw how much the companies that missed on their profit margins got punished. So I think that's something else to focus on.
Institutionally. What's interesting here is the is the discontinuous trends here that I see in one is big cap small cap. Somebody who's out there over the weekend, saying back to nineteen seventy nine. I'm going to give Lizae Saunders credit. I was Gena Martin Adamscuse me, Gina Martin Adams. Large and small caps partition goes back to nineteen seventy nine. Do you load the boat at Blackrock on small caps?
Not yet?
I think that. I mean maybe for a week or so, But I think broadly the.
Which is the last gardy's day trading today?
Well, no, listen, this is the environment where you have to be more nimble. I don't think it's about day trading. It's about recognizing that the data can change and we have to be nimble enough to change our minds if every four or six weeks the data is telling us a new story. And right now, I don't think it's time to load the boat with small caps.
No.
Can we have a quick small cap catch up trade for ten days?
Sure?
But do you load the boat the answer still remains no.
You say, maybe time to get defensive. Everyone's got their own opinion on what defensive is. What's defensive to you.
Defensive to us is quality companies. Defensive to us is dividend companies. Defensive to us is actually may maybe a little bit of minimum volatility so that if you do have that downturn, you're still remaining invested with you know, with a little bit less votility. But defensive does not
mean leave the markets and go to cash. Defensive means staying in the parts of the market that are likely to outperform, like the large gaps, like the quality companies, in that in a slightly higher volatility environment.
Where does AI fit into this? Because I know you personally are actually quite constructive on the theme. Most people are, but given a run we've seen in some of these names, there's some doubt now on how you should play it.
I know, I definitely think that this earning a season. One of the things that we will probably see is every company trying to make them out to make themselves out to be an AI company. So I think it's choosing between which companies are actually using AI to gain efficiencies, to gain productivity versus not. And I think the theme of AI and we're talking about this as we call
it mega forces, Mega soon in our midiar outlook. The reason we put it that way is that this is going to be with us for a long time, but it's already obviously impacted performance this year, and you can play this through equity, through fixed income, but remembering that this is not tomorrow straight, but this can stay with us for the medium time, so AI remains with us.
Thinking about how AI can impact inflation and productivity I think is important and looking at AI enablers and developers is going to be the next leg of the trade.
John, is AI just a branded technological progress from another time and place. I mean that that was a brilliant answer, Gargey, But she says it's out there farther.
I get it.
But is AI what we used to call technological progress?
I think it's part of technological progress.
Sure.
The problem that we've got right now, and I think Gudly identified it perfectly, is that everyone's going to go on the call disc earning season and say we're doing AI exactly. It's going to mean twenty different things, twenty different people.
I want to go back to a simpler world like beach Ken beach Ken.
I just want to go back to where you can with this this morning.
Well, I've seen I saw Barbie three times.
You watched this movie?
I saw three times? It went back. I had to go with each kid.
You know, have you actually watched this movie?
Yeah?
You know, I thought Beachking beach Ken was you know where we should be.
I don't believe you. Khaki, thank you, Khaki, Chatter and black Rock.
Did you see the movie?
I did?
Oh good, there's a nerdfest here.
I'm camp Oppenheimer.
Are you if you've seen that?
I am going to today?
Okay, great, there we go. Great people go to the movies on a Sunday night at ten thirty that was sold out last night? How did they do that?
So I had to be here this morning.
Goes off for like three hours and amazing, they've got lives.
Gocky Kathleen bus Johnsik joins us right now of course with Nationwide with a very clear view on the American economy, Kathleen, as Mike always does, he goes to the heart of the matter, which is the disaggregation of the American economy. Do you sum it? Together into one economy or do you have to look at America as separate sets.
Well, good morning time. I'm happy to be with Mike as well, So certainly you do both, right, you look at the top down, but then you have to disaggregate. I really look at it across the sectors of the economy.
And it's been a very interesting, uh post COVID. You know, first it was a recovery, and now the expansion completely unique, and we've seen these rolling recessions and the question is does this culminate into you know, a broad based and a real recession that the National Bureau of Economic Research would claim, yes, we we have recession.
To the dual mandate. Are we a fully employed America?
Oh yeah, we're We're over employed, which you know sounds great right if you're an employee, but but problematic for the Federal Reserve right as they try to balance that against inflation pressures, and also for corporations had trouble still fighting qualified worker and feeling that wage pressure all during this period.
Kathy, let me go back to what you said about rolling recessions, because that was a theme of kind of what happened in twenty fifteen sixteen with manufacturing, and now we seem to be seeing it again. And we saw housing slow down, it's picked up, certainly for new home construction. We saw slow down in autos sales, now they've come back.
Is this what we're going to go through for the next year or so, or do we get an overall as kind of forecast by a lot of people, decline in economic activity for the whole economy.
Well, that's the key question. It's been quite difficult right to gauge that and the timing. So we're still in the camp that we're cautious and think that the conditions are there for a full blown recession, but we have always argued that it would be moderate on the moderate side. But you're right, you know, housing was the first sector, as it usually is, to feel the pinch of higher
interest rates, right, it's very interest rates sensitive. But now we're coming back at least for construction and new home sales because you basically can't find enough supply in the existing market and builders, you know, anegoally, we're hearing reports that are offering subsidized mortgage rates. You know, five percent, you know is a lot better than seven percent. So that's what's helping on the housing market. Autos is dancing to its own tune. That should be a very interest
rate sensitive sector, but it's not. Because of that long shadow of COVID, there's been a restraint of supply and there's still pent up demand. Now maybe auto dealers also like the fact that they have pricing power and they're kind of continuing that shortage of supply and purpose manufacturing like as you said, globally, we're seeing a manufacturing recession and it seems to be getting worse right in Europe,
and China has been a disappoint with its reopening. In the US, is is still you know, we've had eleven months straight fully FED showing contraction, so you know, time will tell. Certainly the labor market a consumer has been resilient enough to offset those other factors. But we think even the Fed's done tightening, which we expect on Wednesday, the last rate height to this cycle, we think restrictive rates, you know, eventually going to pinch this economy and we're going to see a.
Slow down, a slow down, But do we actually go negative? Is that based on the idea that Americans are just going to stop spending because now we've got real wages rising faster than inflation.
That's right.
I mean, right now the consumers finally getting overall some real income gains.
But I think the key here.
Is what happens with the corporate profits and balance. Yout If inflation continues to trend lower, which is what we expect gradually, corporations lose pricing power at the same time we're seeing upward wage pressures remain. In fact, there's going to be a number of strikers comeing on, probably with ups and maybe in the auto sector.
So that means you've got.
Sticky wages that that's a profit printer, and usually that leads to less employment. So I think ultimately that's where the consumer feels. The negative hit is just from less employment.
Kathy ben Laidler, market strategist, was on earlier and said he's riveted on a constructive economy that loses steam on inventory dynamics. Lecture us on marginal inventories. I think that's off the radars for so many listeners and viewers. Do you see where marginal inventories won't assist real GDP forward?
That is a great point in inventories many times seem to be working in the background, but when they swing can be a powerful force in the business cycle dynamics. It can be a very large dreg or maybe an ad to GDP. Say right now that companies have gotten their inventories to sell ratio in better shape, but I would still say there's elevated inventories, and it doesn't mean we're going to see a lot of ad going forward. So that's a headwind for GDP growth. Just like you
know student loan debt repayments coming online. You know that's a headwind if we have a strike, So that's going to be headwind. So one of the things I would say is that you know, certainly the data has been stronger and it does give some support to a soft landing camp, but the economy still be soft. You have a couple hits and shocks, it's not hard to get us into recession. And that's where we remain still cautious.
Well the stock market adapt to this or is the stock market removed from American economic slowdown?
Well, historically the equity market is not immune to recessions or a downturn. The question is do we get that already? That correction and now you know is you know the equity market in better shape. I would argue that valuations are quite high. Certainly I understand the tech sector and the AI story, but you know, if we have a recession profits go down, then that you know, it looks a bit rich right now for us, So we would be cautious and we don't think it is immune to a recession in that case.
Wednesday, the general feeling is the Fed could just sort of stipulate what it's going to do, but what they tell us about the future is what's going to matter to the market. So what do you think they tell us about the future. Do they keep going after one more?
Yeah, it is what the FMC provides and forward guidance at what Sherman Pal you know, tells us or guides us in the press conference is going to matter. I mean, the twenty five basis point seems to be a sure bet at this point. I think there's a lot of uncertainty. Last time they added, you know, two dots right to the interest rate doc blot saying two more rate hikes,
but the data's coming better than expected. I think Chairman Pal is going to back off that a little bit less aukish, but I think still be said fast and still, you know, be cautious because they don't want inflation, which is starting to go in the right direction, to reverse gears. They remember, well that base effect, right, and so inflation is going to pick up because the base effect is going to be less favorable going forward.
What's your statistic real GDP statistic for this second quarter? You know we're going to get data out here. We're into the third quarter now, but for ending June thirty, what's the best JON six statistic?
So we have slightly about two percent two point two percent. We start strength resilience in the consumer. Also, I think non residential investment of is going to be additive and quite strong, and we're going to have less There's the first time in a quarters two years we're not going to have a drag from residential investment because housing has stabilized.
So we look, that's going to be above the Fed.
Remember the Fed wants growth to be below the potential, which is one point eight percent of the potential estimate. They want to see several quarters of growth has to be well below two percent. They're not going to get that for the second quarter.
Kathleen, But Johnsick, thank you so much. She's chief economists nationwide with some wonderful perspective there. Let's save ourselves right now from X with Matt Burrow, we do this head of North America Investment, Great Credit and Investgo as well.
Matt.
It's sort of in a no man's land between high yield. Everybody's all over high yield spreads and all that, and full faith and credit. What do you learn in quality US corporate credits right now? How do you see them out on yield or total return six months a year?
Hey goo more and Tom, Yeah, we've been looking at total returns for Investment, Great Credit and everybody's comparing cash versus actual fixed rate bonds and they're up about three and a half percent year to day, which is kind of coupon plus, so maybe a little bit ahead of where cash and T bills are. But going forward, we continue to think there's a pretty good path for them. The inflows have been there. We've seen about seventeen straight
weeks of inflows and that's all yield driven. So spreads are kind of neutral over the range, but yields are extremely attractive in the low fives, and that's continuing to draw money in out of cash little by little people are still really hanging onto those T bills, but little by little they're continuing to step out the curve, which is creating a pretty good technical and I think we're setting up for a good six months of total return.
Here is investco. Do you see corporate issue ince? I have no idea what they can do. I notice Apple's like ten, you know, way underdebted. But are you going to see a lot of corporate issuance here or do the CFOs actually clamp down and pull it back. Yeah.
So for the most part you're seeing the typical corporation is saying this is fairly expensive. I don't really want to borrow at five and a quarter five and a half percent, so they're not levering up. There's been less m and A over the near term. You know, we'll see if if people kind of adjust to this new rate environment. There has not been a lot of debt
coming doe. So for most corporations, you know, they have two three percent bonds little by little or rolling off, but they haven't really felt the full shock of the rate curve going higher yet.
So we'll see.
For the typical industrial within the bank space, banks have been borrowing more. Just in the last week we saw Morgan Stanley bar about seven billion, Wells Fargo did about eight and a half. So you're getting the big banks borrowing, but the regional banks are on the sidelines kind of looking at this way saying, Wow, this is just too expensive. I'm not ready to issue yet.
So Matt, I'm interested in when they have to borrow, not when they want to borrow, Matt, when do they need to I remember a great quote from Jeff Gundlack a double line, and he asked this question. He said, has a high yield bond ever really matured? Because they just come out and issue a new one, Matt, and I just wonder, where's that window, that horizon, that maturity will the technical speed where is it?
Yeah, so for the IG market, that really is no maturity wall. They kind of that's not really an issue there. But the iel of market get about three percent coming do the rest of this year. You got nine percent due in twenty twenty four, but then his spike's a little bit to something like fifteen percent twenty twenty five, so they'll probably work to address that to make sure. You know, to Goodlock's point that that doesn't come around
to maturity, they'll they'll pre refinance that. But yes, the wall is very very controlled or very low for the next two years, and then it comes a little higher from them, but then it goes back to that point. I was making this a little bit ago that no one's really felt the full effect of this higher yields yet because they have not had a lot of debt roll off. If and when that comes, the larger percentage of their debt will be at eight nine percent than
where it is today. I do think this is very good for fixed rate borrowers though, that they've been able to lock in yields for longer term. Is you feel the pain right away if you're in the floating rate type of borrower, though.
Matt, has it ever been this wide the difference between a coupon payment for a company, pick any company and what it would cost them to borrow in a secondary market right now? Has there ever been a big difference like this?
Yeah, not since you know, the the eighties, or you know even the early eighties, late seventies, really since you've seen this. So they're normally the bond rolls off at four percent, you replace it anywhere between three and a half and four and a half. But that's just not the case right now. But you know, I will point out Tom mentioned something like Apple. Apple was boring at one one and a half percent for a long time, just simply because they could. You know, I think they'll
keep that in their capital structure. But a lot of these tech companies, you know, they may just choose to pay it off. They may just say, you know what, that five and a half six percent, it doesn't make any more any sense anymore. We'll have to see, you know, clearly, when they're growing at the speed they are, that's still a creative to earnings. But it does change the dynamics at these higher rates.
Met brio, delicate question. I don't want you to get in trouble with your general counsel, but it's a bit off your remat, but I've got to go there. Splashed across the Monday's guys, thanks to the FTV on this is challenges in the leveraged loan market. How bad is it?
Well, it hasn't been bad yet, simply because the economy is going so strong. As I was stating earlier. If a floating rate borrower does steal the effects immediately rather than a fixed rate borrower. So in the loan market, you know they're going to get hit right away when rates go up. And now you've got some companies borrowing at eleven, twelve, thirteen percent. That can be very attractive to the to the lender, but it can also be
very punitive to the borrower. As long as the economy stays as strong as it is, they're going to be fine. But if you start to see a hard landing, you know you could be in more trouble in that particular area of the of the fix of the debt markets.
I Matt, thank you Mike for the update on credit mapro there of Investco.
Our clinic. Now on wheat in the news with Conor Haik, head of research at ED and f Man ConA to began first principles. Is there a global price to wheat like there's a global price to Brent crude?
Yeah, the CBOT wheat futures is probably the best benchmark. That's probably the global Berench mark, but you also have a MATIF futures in Europe for Paris two I think are the best?
Is wheat? A singular news item on Ukraine, the Black Sea and such, or does it link in the other soft commodities.
Both. To be honest, right now I think we should all be talking about wheat. We have one of the world's largest wheat suppliers who's just been choked off its main archery in terms of experts of the world, just as it's about to reap a pretty decent harvest. They just don't know how to get out of the country.
Russia is strategically now blocking you'll obviously they've come out of the grains corridor Black Sea, Green Steel, But on top of that, the escalation of fighting there, the fact that any ship's coming into that port is deemed as a military threat, all of this makes it very very hard for any shipments to come out of that region. And alternative routes are not going to be anywhere near as effective. They're going to be higher in terms of
transportation costs and slower in terms of coming out. And this is at a time when globally food prices are still pretty elevated.
You kind of help us work through this then in very simple terms, and you did a bit of it just then. So Russia has killed the grain deal. They've been attacking a desk so we've seen highlights of that, headlines of that overnight once again, which is really compromising these transport routes through the Black Sea. You mentioned alternative routes.
Can you describe what those alternative routes actually are and why they're more expensive than say, just going through the Black Sea like they typically would.
Yeah, so the alternative wood would be via the rivers, So the port of Danube, for example, the River Danube has various ports and by the way, those are also being attacked overnight, but those require smaller barges, so it's smaller tonnage that can go through. They're probably more costly, you know, compared to loading a massive Panamax or a handy sized built dry block vessel. We're talking small amounts of quantities at each time, and it's going through different routs,
which is again not as effective. The fact of the matter is, you know, no one's going to ensure a ship coming into the Black Sea region. It's just too risky for them. And also it also helps Russia because what they can do. Russia also is sitting on a massive wheat harvest. They're going to now try and grab the market share that Ukraine is not able to get there. So Russia will now take advantage of this and try and get to the big importing nations like Africa, South Asia, Egypt.
These are the countries that we're relying on Ukrainian wheat and grains. Now they might have to just revert.
To Russia meet now, Kono. How are other exporting nations, exporting nations specifically responding to this, So they're becoming protective going through the route with more protectionism around, maybe some of their goods to stock up things at home. What are they doing.
So far?
We haven't seen too much of that, only because in the years since Ukraine was last attacked, we're first attacked by Russia back in February twenty twenty two. The high spike in prices did lead it to a lot of planting, so we have seen stocks build up to a certain extent, so the panic is not quite there. But if this the black seat is cut off for too long, you will start seeing a little bit of panic set in. One thing we are noticing is well, although it's not
typically wheat and grains. Rice in India has just been given a ban on exports, and India is the world's largest rice exports. So I think that's one thing which I'm seeing. You're seeing a bit of a reaction by different governments. Although it's not necessarily grains, it is potentially a substitute because it's a massive, massive staple. Probably for the half of the world's population rely on rice, the other half would rely on greed grants.
This is so important. I'm as guilty of this as anybody. I'm the ugly American and I look at wheat, I go, what's it mean for a loaf of bread at the fancy grocery store in New York City has completely removed from reality. Explain what wheat price dynamics mean to the people of Tunisia across the Mediterranean, to the people of Egypt. Give us the scope and scale that we in the fancy West don't understand.
Yeah, so it's just the fact that they are emerging markets. By that we mean economically, they're not as advanced as us in the West, which therefore means that most of their disposable income gets spent on food items and staples. So in their typical basket of consumption on a daily basis, food ranks very highly, and within food the staple is bread or rice, but in Tunisian EGI, it would be bread.
So yeah, we are facing situation and suddenly most of the disposable income is now spent on one or two items and that's really affecting their cost of living. And there you know, it does impact them economically. And if you remember back in the mid two thousands or late two thousands, two thousand and eight, shall I say we did see food riots in North Africa. It's politically quite a hot topic which I think in most governments will want to avoid. You could argue the Arab Spring happened
because of Tunisian food riots, you know. So I think this is something which governments will be watching carefully. Food inflation is something that most governments would avoid, like a plague colone.
I wouldn't expect you to comment on the politics, but just the final one from US. Russia has very few friends on the international stage at the moment. Perhaps you could describe Turkey as an intermediary between Russia and the rest of Europe. China has been a friend on the international stage relatively speaking, over the last couple of years. Where would this leave China's grain imports and Chinese food prices given what's the I think at the moment tame question.
So China actually has a disinflation problem. They're actually not suffering from inflation at all. They were very clever and good in terms of an organized in terms of buying just when grain prices were quite low, so they've stocked up to a certain level. I think they're fairly comfortable at any rate. China and Russia are on friendly terms, so they will be able to get everything they need from Russia very easily, So that's not going to be
a problem. But in terms of rice, which is by the way, there's not a futures commodity in the market for that. Rice is done on the spot market. Rice is something that China's got a problem with because their yields have been affected by the heat wave, and their neighboring countries India and Thailand have also seen the rice heals fall. So I think that's something that they may need to look at a little bit more carefully.
Kind of this was a clinic thank you kind of hacking of ed and f men on the latest in self commodities.
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. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg