Surveillance: Infrastructure Investment Needed, Swonk Says

will still materialize or global growth bottoming? Isn't that dependent on a tray truce? Which one is it? So look, I think, um, there is a little bit of leap of faith here that at least ahead of the US election at the end of next year, that we will certainly not um create a greater shock on the trade front, that there is a good deal of hope still there, but not utter arity that we will pull down the

terrorists which we impose on ourselves for example. But you know, the I think the larger economic story is is that we had a true, um severe You'll see it in the data in a couple of months inventory correction, that we have been producing uh fewer goods for export that are actually being demanded uh, and that if we were to stall here and simply hold these tariffs, we would rebound, we would grow through this. So I think it's still important for the direction of markets. You know, if you

look at yesterday's market action. Today, I think the fact that again, like you said, if we can't even agree on uh, you know, the level of soybean exports, uh, that this is not a done deal, and that's going to impact market sentiment more than almost any of the other news. Well, what's the message to invest us to our listeners this morning? When stokes are still narrow time highs, the wit is weak, the trite soulks have quite clearly hit a series of road bumps, and yet we are

still narrow time high. Markets are telling us where the economy is going. And I think it's important again that the way that we have set this up, that with the an absence of a severe pullback and inflation rise in inflation, if we don't have um over levered consumers that just have no capacity to grow, uh, and if we've just been cutting factory output, the economy can rebound. We're going to have a new all time high and profits next year. Okay, tell me if I'm wrong next year. Uh,

and the will share prices going up to all time highs. Well, you know, like a lot of things. Uh, this is where things go in terms of in terms of nominal returns. Let's get out the crystals and pyramids right now and zone right in with Stephen White against City Group. You're in Timor, Thank you Alec Tansy for bringing me that important note. You're You're gonna Timor rather up at Fidelity with a hugely bullish note this morning on the end of the drawdown. As you just said on inventories. We

had Steve Chivaron in here yesterday with freder Rated. He's single pointing up. Whatever your number. I don't need a number, Stephen. I'm looking at that technology stock Walmart up year to date well and up three four to make it four, make it five dollars right now? Off of this earnings report.

How do you have a bull market, this bull market this long in this cycle, Well, you know, simply not having a massive collapse and earnings, a big rise in unemployment, any of those things that don't seem to be necessary when we have a low inflation. At least this goes back to Tony Dwyer one oh one, which is if

you don't have a recession, it is tough to get negative. Well, you could also say this is just a massive a bout of fear of missing out with the SMP up, which is a great that's not a great reason to be investing right now. Okay, what was a team? All right, you out of the triple leverage cash but yet no, no, there you go. Okay, So two thousand eighteen was the biggest valuation drop that we've had. Now again, you had

a down market last year with sharply up earnings. This year we have sharply upmarket with flat earnings, and you know, in the end we made some progress here. But our two year return is not really dramatic. I think again the big returns, uh, the when I when I'm optimistic on the economy in two thousand twenty, that's reflected in the stock market this year. So next year it's going to be a more moderate return environment. It's gonna be a somewhat more volatile environment for lots of reasons that

you can guess. But people who are zooming, for example, to the end of I don't know for certain who's going to be president. I don't know for certain how Brexit is going to be resolved. They're going to ignore the economy's performance at their peril. Let's put some capital to work. Then what do you do state? So, look, I think we have gone and tilted from being UM overweight global bonds as of August to now underweight UM.

I don't think it's an extreme position. I don't think you're gonna lose a lot of money in bonds in the in the next year. But we've tilted from defensive equities, you know too again to realign to get a little bit more cyclical explosure. UM. That's work so well recently that you know, when I think about the full year twenty UM, I have some doubts that cyclicals are just

going to race through the full year twenty UM. So if you want to think about again investing and really holding a position for the full year twenty I want, you know, stocks that provide current income and grow current income.

Now that sort of these you know, show me with current performance, uh, that these types of equities are you know, a good UM allocation for a world in which global bond yields, including emerging markets on high yield you know, are down near one and a half percent back to neutral? Would it be fat to sell get back to neutral?

Just incentive white things? This is uh yeah, and uh, you know, I think that we are reasonably more optimistic on where we will be going uh in trade sensitive cyclical equities, you know, over at least the near term um our longer term massive allocation aimed at twelve to eighteen months, you know, again is not expecting any kind of you know, repeat of twenty nineteen returns. What happens if no trade deal? Um I think that you'll take

a setback in markets. You'll see the dollar strengthened. Uh, you'll see equities weekend a bit on this, But I don't think it ends this card expansion and that eventually you make up for that when we continue to grow through it. Stephen Wayne, thank you so much. Thanks with the group this morning. Here's what you need to know Fred Burgston when he invented the Peterson Institute and along with Adam Posen's excellent leadership, like secuity, the secret is

on the Delta Shuttle, the American Airline shuttle. Is they read Mary Lovely. Her reports are exceptionally acute at the Peterson Institute about the trade war and John uh very Lovely of Syracuse and the Peterson Institute really has a wonderful bar chart of the profound effects across computer and electronic products, electric equipment, apparel and accessories, machinery, accept electrical

There's a detail here that's profound. And I'm pleased to say that Mary Lovely joins us now Peterson Institute nonresident Senior Fellow. Mary. Great to have you with us on the program. For a long time now we've been told to phase one trade deal is close. We had a good friend of this program on yesterday, Terry Haynes of Pangaea Policy talking about enforcement enforcement, enforcement. Is that where

the hangup is at the moment? Well, good morning, Yeah, I'm sure the enforcement is part of it, but also is the schedule for the purchases of agricultural products and what what the timetable will be. So I think we're really hitting the rocky parts here getting sort of these top line promises on the paper, and a lot of us are are very nervously watching how this develops. Mary, Trade deals take a long time to get on paper. Is that what we're seeing develop here or we're seeing

something that you think you can conclude. Maybe this doesn't get done. Well, we're worried about it. Um. I think as many people do that there's enormous economic and political good sense to getting a trade truth here, uh and get some of these purchases back on, you know, back rolling in the marketplace. So um. You know, it is difficult to make these kinds of deals, and it really depends on how much they're trying to get done in this Phaze one. When we're talking about enforcement, we could

be looking at some of the more difficult issues. I think it's going to be very difficult to get done in a short pressed time period. Is enforcement an issue with soybeans or other Phase one items? Surprisingly yes, because of the amounts of purchases that have been promised by the president. Uh in an uncertain marketplace, Uh, there are going to the US is going to be concerned about how many will be purchased. Okay, this is great. How how one way is enforcement? Do the Chinese one enforcements

so they can count soybeans in Fargo? The Chinese don't want to buy well to be kind of cute a pig and of hope they don't want to know this is surveillance, the kind of cute works, Professor Lovely. They don't want to be buying things, they don't need prices that are too high. Uh So, and they also know this is their key leverage over the Americans, so they are going to try to uh not make very specific

deals on paper. But the Americans want quarter you know, monthly quarterly targets that will have to be met by the Chinese for them to be in compliant. All this tells us that some tarofts will remain, and certainly the threat of tariffs being snapped on or increased in any time will remain. So they'll still be a lot of uncertainty for businesses trying to figure out where they're supposed

to invest in this new environment. Yeah, overnight Chinese economic data, industrial put rising, less than expected, retail sales, fixed accent investment all disappointing. Who has the bigger incentive China? Are the US to make a trade deal sooner? Hi, Lisa Um, I think they both have incentives, but you know, the Chinese system is different than ours. The really full I

think Unpresident Trump's political calculations regarding this trade war. Clearly there are many people who are happy to see the United States standing up to China UH and giving them hell, as they say. On the other hand, there are a lot of people that are beginning to be very badly hurt by this UH, and I think that's got to be a concern to the President and his team. So I would say that the US has a lot here. China, clearly though, would like an end to this. Unfortunately, we're

not going to see an end to conflict. We know that there's a lot of issues coming in the technology space between the two countries. The so called pushed a d couple, so we're not going to see an And no matter what happened, who's in charge of saving face right now? I mean, if we've got to get through the next literally days, weeks, months, and you're you know, marry your expert at this, who's in need of saving

face the most? Wow? I'm not sure that I'm an expert in that part of it because it's really political and um, you know, I think that President Trump has been able to sort of spin this the way he wants at least to some part of the American population, and he will have the ability to say that if a deal isn't reached you know, he hung in there, he hung tough. He didn't go for a you know, a cheap shot deal. Um. I think the Chinese have much bigger issues that they're dealing with. Many of them

are their own creation, Hong Kong, shin Jung. They have to slow it out in their own economy due to their reigning in of credit. So I would say that, um, it really is going to fall down to who thinks they have the more political gains to make by having a deal here. I personally think it would be very

wise for the President to make a deal. I think we're seeing that these tariffs now have broad coverage, the rates are higher, They're starting to hit a whole bunch of American products that are really going to hurt consumers. This is a consumer led economy, so I'm hoping that the us UH negotiating team is able to find a way forward. Mary, you mentioned Hong Kong and some of

the domestic issues in China at the moment. Help us understand that just a little bit better, how something like Hong Kong can spill over to these broader macro issues, and why there might be a problem for some of our listeners in the markets at the moment. How are you framing that, Mary Well, I am particularly framing in terms of people's perceptions of China and domestic support for a trade deal with China, and also moving forward this

idea of technology uh decoupling. I think that if we see China take a very strong hand in China, if we see a lot of bloodshed, even if things just been out of trolling ways they don't want, it's going to to have vague replications here in the Congress and among the American people. Very lovely, thank you so much for the Peterson in studio. We greatly appreciate your perspective. With Bloomberg surveillance, A house can have a house call

and it can be pretty cautious call. They really colors every conversation in every tone worldwide when they have a more cautious call. John Farrell, can we state that PIMCO has a cautious call? I think we can, particularly on the corporate credit side, I think we can say that, and we can probably say that on US growth relative to expectations going into as well, if you go on that most recent cyclical outlook. I'm happy that I don't have to speak for them that Nicol lam is with

us pimco's sovereign credit analyst. So let's do that. Nicola. Let's talk about and your expectations relative to what you see as the consensus for you. Yeah, so um, I would say that, Yeah, we have been on the more cautious side. We do expect some kind of reacceleration in growth next year on the back of two things. I mean, first, trade tansions stabilizing and secondly monetary policy getting some traction.

But on the whole, we think it's going to be a pretty slow reacceleration, partly because the trade tangions will keep simmering, and partly because yeah, I mean, the monetary policy is hitting its limits when it comes to a sicacy. We've already had a lot of stimulus before. Let's talk about what that means for markets. This is something you

wrote around about a month ago. Monetary stimulus is likely to prove insufficient and largely ineffective in raising depressed inflation expectations, and for that reason, the longer end is expected to remain supported. That's Germany. The long end right now, a ten year negative thirty two basis points. Nicola, we duck at these levels stand, I would say that, yeah, I see duration globally and especially in Europe, it's pretty anchored here.

Even though the levels look extremely low, I just see it as very difficult for the ECB to actually be able to raise inflation without the help from the fiscal authorities, and dragging has clearly before leaving, been calling for them very clearly. But we're not seeing enough of a shift in the German political space to to see that changing. So so yeah, I would say the long end is pretty pretty anchored. So the extent of the sell off

in bonds is done. Um. I mean, it's obviously hard to have to call a very near term move in duration, but but generally speaking, we think we've seen a decent move here, and we are you know, we're pretty neutral at these levels. We don't have a very strong conviction on the duration vita these levels. Someone said, the levels we're seeing on bond yields indicate much slower growth than equity valuations would imply. Do you think that equities are

wrong here? And I've gotten ahead of themselves with pricing and the re acceleration that you're expecting. Well, you see, I see the things as linked in that you know, equity prices have done well partly because central banks have been extremely accommodative. So so the very kind of like the rally and duration and in interest rates, frisk free

interest rates has been pushing up equity prices. You know, if you if you look at our outlook, I would say that risk valuations in terms of equities, in terms of credit spreads and so on, do look fairly elevated. UM So, so yeah, we're pretty cautious when it comes to risk assets at this point. So you're gonna grab a coupon this year, how do you defend against price

decline while you grab a coupon? So, I mean the way we the way we try to make alpha, the way we make out for it is to be very selective. So it doesn't mean not that we don't take any risk at all, but we go very focused on sectors and areas that we like. So, for example, financials we think offer good opportunities in the UK, but not only We think that securitized assets like mortgage securities in the US, where where households have been delivering a lot, offer good value.

We think real estate assets more generally offer offer decent value UM. And on duration. You know, we we have some duration in our portfolios, especially U S duration, which we see as a good hedge for for having some credit risk um and also it still has positive yield. Nicole, Thank you so much. Nicole, and my with Pimcole greatly appreciate it. With a cautious view, Diane Swunk with us with Grant Thornton, Diane, do we have room for fiscal place in America? Rates are abnormally low on a real

phenomenal basis. Are we under a pleat delusion about our fiscal flexibility? We're not under a complete delusion at the moment. Deficit doesn't matter until it does, and then it matters very rapidly. And I think that's why you saw J. Powell sort of caution on policymakers yesterday and step into

the space that many of his predecessors have. J. Paul is an old deficit hawk and say, hey, you know, we need to worry about fiscal sustainability because next time we hit a downturn, we will need fiscal studious We have limited tools here, and I think it is very important about thinking about at least I'll be disappointed if this is not front and center at the Budget Committee. I know there's a lot of politics today, but sure Paul's got to step out his misswant ventions. He is

a deficit hawk, but not all fiscal stimulus is the same. Dan, what could we see they would actually be fruitful at this stage in the economic cycle. You know, that's a really great question. I mean, clearly that keep focusing on task cut. This throught about a story that we've kind of played over and over again and that really worked at this latest stage in the stycle. What we really

really need is, of course, infrastructure investment. Aren't the investment investment that will have productivity growth with it down the road and will change the equation across the board for the American economy, not just for individuals that get those temporary tax because that's what's really important at this stage of the game, is to think about the long term potential at the economy to grow and long term investments at these low industrates, investments in our infrastructure do actually

makes sense. So the playoffs, you're issuing cheat bonds and getting some productivity down the road. So p p i UH inflation coming in below expectations. If you strip out food, energy, h and trade weighted items. I'm trying to figure out what we're seeing here and how concerning this sort of

decelerating inflation is. Well, you know, it's interesting because there's the what came up yesterday in share and powers questioning was also the gap and inflation between low income households and high income houseless And this is something that's not gotten enough attention. Is the head munity in the data. You know, we look at the economic I ever get them and say, oh, we'll worried about this inflation or worried about to low inflation. There's legitimate reasons to worry

about that. That said, lower income houses in many households are saying, we don't see the low inflation. What are you talking about because the things they're paying for not only do they not have the market power of higher income households, they also have a sixth basket of goods costs that costs more that they're sort of don't have as much wiggle room. And this is really hard for the FED because at that point in time, do you say you want to run the economy hotter and get

more inflation, hopefully from wage games. So what if you don't get those wage games. Then you're left out and getting hotter inflation, especially for lower income housholds, and not getting it spread across the economy. Even like Diane the lengthest communication from the Federal Reserve echoed once again from Cham and Pal yesterday, likely to do the same thing today on growth. What they would need to see to introduce another right reduction of material reassessment in the outlook.

What constitutes a material reassessment in the outlook a major escalation in trade with China. I mean, part of the reason they stepped to the sidelines it felt like they're done for a while, is that they're hoping for this phase one deal with China, which now again looks in jeopardy, and not a further escalation tariffs in December fifteenth. If we can get over those hurdles to settle, feel more comfortable and staying on the sidelines longer and holding their

powder dry. I myself, of course, I'm worried about the trade war and wish they would have helped that one rate cut a little a little bit back and then waited for when the big bang for the dollar was greater. But it is something that is really front and center is the trade war. We're trying to China having more weakness in their economy again reporting in Alaskay, Diana swank

too short. We'll do it again, Diana swank with gran Thornton of course, always giving us help here on FED Day, with perspective, and of course out of Chicago where the real Midwest feel as well. I can't focus, Paul, because I'm looking at the Ninjas Super a kitchen blender system with food processor b L seven eighty from Walmart. That must mean it's time to talk to Sarah Hall sec Sarah.

If I want to buy a Ninja Super kitchen blender system with food processor Comma b L seven eighty, why am I going to buy it from Walmart and not from Amazon? So Walmart has been making a lot of progress in the e commerce division sales or in the latest quarter um and they are really you know Amazon. Of course, there's a splashy news that they were moving

to one day shipping a lot of prime orders. Walmart has answered that with not quite as large an assortment as Amazon is offering one day shipping on but um basically on all the sort of most commonly purchased in items and so um, and you don't need a prime membership right Prime cost a hundred nineteen dollars a year Walmart ship format, So if you're going to buy your bonner, that that would be the reason to do it. Well, rom on Ninja blender because I want total crushing technology.

Rusha's ice whole fruits and vegetables in seconds. Okay, great, Sarah. What portion of Walmart is their future Amazon? I think the most important part of Walmart success going forward is its grocery division. This accounts for of their US sales, and it's a key traffic driver to the rest of the departments, and it's an area where they really do have an advantage against Amazon. They had this really well developed fresh supply chain, moving perishables to customers doorsteps into stores.

It's just a whole different enchilada than moving books or sweaters, right um. And Walmart has the infrastructure to do that nationwide much better than Amazon does. And they've had a lot of success with their online grocery pickup program and they've now rolled out delivery from fourteen hundred stores, and Amazon to me just seems to be increasingly incoherent in

the grocery space. Right They plunked down all this money for Whole Foods, you know, just two and a half years ago, and now they're starting a second grocery chain they've confirmed week. Now, this is important, Paul. You can get the old Passo Enchilada dinner kit fourteen ounces for six dollars fifty cents. That's if you want the hall Zack Whole Enchilada, all right, and I get the hall Zack discount, of course, I'm sure, so, sir, talk to us about a little bit about the stores, the actual

Walmart starves. Are they still opening news stores? No, they've

really backed away from that that. I mean, there may be an occasional you know, they might open say ten stores in a given year, but really now it's more about remodeling the fleet that they already have, making sure those store environments are inviting, and most of their capax at this point is going into online shopping, right, is building out that warehouse infrastructure, UM and software and all those kinds of things to really be able to take

the fight to Amazon in the digital space. So I'm looking at the the Bloomberg terminal, the p g O function for Walmart. It gives us kind of this cool revenue breakdown by geography, So I think about of their revenue from Walmart International talked to us about their international strategies that they see growth going forward. Yeah, so Walmart, particularly in markets like Mexico, that's an important market for them, where things have been strong and where they see some

good runway for growth. Other international markets are more uncertain. You know, they had tried to sell their as a division earlier this year in the UK or blocked blocked by regulators from doing that. Um and clearly the UK with breaks that looming is a is a market um that where there's a lot of uncertainty and where the customer has been a little bit more challenging for them to reach. So international is important, but US is still the bulk of the operating income and is where investors

are really focused. Sarah Onto the filter system for Walmart dot com I put under a Hall sec typed it in Angara has a Black Friday sale a classic ruby and diamond necklace and fourteen carrot white for sixties six thousand dollars on Walmart. Walmart is selling sixties six thousand dollar necklaces. So Walmart has made a big effort in the last couple of years to expand its third party marketplace. Um,

we're much like how Amazon. A lot of the merchandise you see for sale on that website is not actually held in an Amazon warehouse or sold directly by Amazon. Walmart is trying to get into that same space, just sort of make sure it has a wide assortment to compete with the Everything store. And I my best guess is that that's where that sixty bling is coming from. It's pretty solid there, Tom, It's just it's just one click away time click. You look under Hall Sick and

there it is. Sarah. I'm looking at the stock here up thirty this year, two week high today, Sarah, Are there are the bulls just saying, you know, the consumers in good shape. Walmart's figured out this online shopping thing. They're not. Walmart's not putting them out of business. Is that kind of the bowl case for Walmart? Uh, That's

a lot of it. And then I think the other thing is that if we do go into a recession, um, if there is an economic downturn, or if the trade war continues to be a problem for the retail industry, Walmart is perhaps better insulted from all of that than anyway, if we get into a recession, folks tend to trade down, right, and where do you trade down to? But Walmart, um, so they tend to Actually, you know, two thousand nine was actually a quite good year for them, um as

folks were pinching pennies and same with tariff. Obviously, it's a very uncertain environment around that right now. But because of Walmart's sheer scale, uh you did to negotiate with suppliers's pretty unmatched in the industry. You've been great about that, Sarah. Let's frame that right now. Revenue is half a trillion dollars. They take six cents down to the operating income line. The line like we all know, Walmart is a three

cents on the dollar business. You walk to the store and they pocket three cents of every dollar you spend. As a generalization from where you said, and you know, Sarah, this is maybe too financial, but let's go with it. Anyways, are they going to become a more blue chippy company where they rotate from use of cash to build build build out the legit dividend growth. I mean, are they at a tip point where the family says, let's start

acting like a mature company. I mean, I think Walmart has been acting like a mature company for some time, with the exception of, you know, having to incubate this e commerce business from scratch, from within, you know, from within a very different kind of business. Um. But I think they're you know, they have a new CEO of

their US business, John Furner, who's a Walmart lifer. But we'll bring sort of a new eye to running the US business specifically, and I'm sure he'll be doing so with an eye towards kind of bridging this sort of new part of the business, the ecomic with the legacy, the more mature part of the business, the physical stores that they know how to run so well. You know

something Sarah that works for the office. You can tell Mr Hall SX Sarah some things the fourteen Carrett yellow gold two thousand dollar bracelets as you, Sarah will set giving us wisdom on Walmart really an extraordinary story. Thanks are listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide I'm Bloomberg Radio