Surveillance: Investment Time with Kelly

Which best describes your family's financial situation? Falling behind Democrats Republicans a big majority, sixty two percent. That's a good leading to David Kelly, chief Global strategist at JP Morgan Asset Management. So let's dove tell this into tomorrow's inflation report. David Kelly, when does inflation ebb away to help the sixty two percent of republic who say they're falling behind. I think inflation has already peaked. I think it is

going to gradually full. We're looking for a six tenth or maybe even seven tenths tomorrow because of a rebound in energy. But on a year of year basis, we might be down to seven point nine or an eight, and by March I think we're going to be down to something with a five handle on the year of year basis. Inflation is falling, but to your point, nobody's going to notice, because if you look at political leaning in this country redetermines how people feel about the economy.

People are, you know, if your Republicans always feel worse about the economy when there's a Democrat in the White House and vice versa. Um Americans believe the economy is in recession, even though if you talk to any economists, they will tell you, well, that's not actually true right now. Might be next year, but it's not true right now.

So how people feel about the economy and what it actually is doing are two completely separate things, David, among the wealthy and among the halves and decidedly a broad part of America that have not they've got to recover from a bear market, disinflation and a decided bear market and bonds. What's your two thousand twenty three strategy to

begin a financial recovery. Well, I mean it's certainly that people are being you know, have been hurt by the rise of price that we've seen and also a fiscal drag and things have sowed down a lot. So there's a lot of hurt out there in main street for investors. Though the most important thing that happened this year isn't inflation, it isn't fiscal drag. It's in fact, the prices fell. Prices fell for bonds, prices felt for stocks. So we're

just putting out a long term capital market assumptions. We just released some yesterday. Uh and you know, we're looking for about an eight percent long term gain out of equities in the US, more than ten percent in Europe, emerging markets in Japan. So I'd say this is a time to be overweight equities for a long term investor. Uh. And you know, I think bonds are back. I think it makes sense to have a you know, a slightly below average allocation, but a pretty strong allocation fixed inco

So this is time to get invested. I know people feel miserable, but as I said, there's a difference between what's actually going on the economic dynamics and what people feel given the extraordinarily partisan nature of news coverage in this country. David, do you think that there is anything in tomorrow's CPI report from the United States that could have changed your assessment to go long bonds to go along equities. Well, I've been looking. I'll be looking at

service sector inflation outside of the housing market. So if we see a big bump in things like uh, you know, inflation and restaurants inflation, food in general, in a lot of household services, that that would worry me a little bit. But I think that they know we're looking at all these numbers, and what they're telling us is that outside of shelter, inflation is gradually falling here. So that makes it very it's very hard for me to be positive

on or to worry about bonds that much. And the one other thing, you know, the one thing that's coming out of this all is there will be no fiscal stimulus before so at some stage of this economy weakens a falls into recession, the only game in town will be the Federal Reserve cutting interest rates to stimulate the economy.

And I think that's that's the big takeaway from gridlock is gridlock means a more um more dovish fed and down the road if they choose to count if they choose to turn dovish, and this is going to be the big debate through next year. David, Thank you, so much, sir, as always David Kelly, a JP Morgan Asset Management. Right now we dive to tomorrow morning at eight thirty and an incredibly important inflation report. We do this this measurement

of the deepest market foreign exchange. Ibramabari joins his chief currency strategists. It's city group inflation. I get disinflation. Abraham, what will that do to the resilient dollar? Well, we think it's a key driver for the dollar and for broader markets as it's as it's been all year, and we've seen this really big shifting sentiment on the dollar relative to last week, even between Thursday and Friday last week,

and all eyes are now on on tomorrow's reading. Our economists have a slightly lower forecast than than the consensus. Something like a point four month on month increased in in core CPI after two point six is about the tenth below the consensus forecast if that was to to pass. We we we think that recent dollar seller has further to go. So we've had two and a half percent. We think that you can get another two hustle down in the dollar as global even in framing around a

major pair. Let's take Euro dollar I mean yen as its own beast right now. But an euro dollar is it a big figure move? If we get a disinflation in America, how many parts of the euro will go through parody? And up up? One oh one, one, o two, one five. Absolutely, So, as as you just highlighted, we're hanging above parody again, and we think that if we get a low inflation lumber tomorrow, we will easily pass

through one oh one. But I think one or four is probably the next the next place to focus in

in that in that scenario. So really quite a different picture from where we were last week, and it's reflecting a little bit more China optimism again, the idea that maybe the Fed can take the foot off of the gas peddle, but really also the luxury of looking into next year and and sort of allowing allowing investors, we worked this from David Kelly just now, allowing investors to maybe see a little bit more downside risk in the

dollar over time as the global economy normalizers. And we think that's premature, but nevertheless, I think that will be the theme if we get low inflation tomorrow. Abraham, let's getting the ways just a little bit I'm not convinced that the end of hiking is the same as the end of technic And the reason I say that is because even if they end hiking interest rates and they pause, but the economy rolls out and they don't do anything, Abraham,

isn't the FED still tightening in that environment? Isn't that ultimately the story when you really think about it. Absolutely, we're exactly on on the same page. And that's particularly relevant for the equity market. Usually have these two phases of the bear market. The first one is monitor policies tightening, and you get the D rating the seconds earnings compressed, and we get more and more signs of that, and you see the continuation usually the majority of the of

the bear market, and that's very much our expectation. Now. When it comes to effects and and rates, you also have two stages. And the first stage is when do global rates peak or US rates peak? And that's usually around the time of the of the last FED rate tips. So I think that last FED rate type does have

importance for rights markets. Usually also is a tradeable dollar correction, but it's usually not the dollar turn that comes much later when you see a turnaround bottoming and growth expectations. Is that source for the dollar turn abroad then, and not domestic? That's a it's a it's a very it's a very good question, and I think right now we

may think so. Again, we think it's it's premature, but the focus has of late being maybe some expectation of an easing of restrictions and not really reopening, but a gradual easing of restrictions and the bottoming of sentiment around China. There is maybe a little bit of hope that some of the market concerns around conflict related tensions could also debate over time. So I do think that when it comes to the durable turn, the emphasis will be outside

of the US. When it comes to the tightening, the FED is obviously the most important factor globally. Just to underscore the point that you just made, ever him, are you saying that this election at gridlock does not do anything one way or another to the dollar and that ultimately it has to be the drivers of the FED, but more so even the stockpiles of national casts over

in Europe. Yes, generally, generally, I would agree. We think that inflation, broader risk sentiment, global growth of far more important drivers of the dollar than this specific or even more generally political considerations in the US. Historically, the dollar did appreciate post midterm elections into into year end. It is a it is a risk preview for US assets

that tends to dissolve. You do tend to see an equity price increase as well, but we don't think we'll see a particularly decisive outcome, and this year isn't like most. We have much bigger developments in the macro landscape outside of US politics, and again inflation is probably the first in global growth the second. So we don't think that there will be durable implications from the midterm elections, even when we know the full results, and of course waiting

because some important ones. Ibriham, We're speaking with Mark McCormick of TV Securities yesterday and he was talking about the same thing that you were, some of the rumors of China perhaps reopening that have just been that rumors, right, that have not really come to fruition in any meaningful way. He was saying that if there is some sort of material reopening, you could see a five to six percent weakening in the dollar through year end and even more

through the remainder of three. How likely do you see that scenario, And in the off chance that it happens, do you see a commensurate type of weakening. So we don't. We don't expect a breakthrough in reopening into year end and and even seasonally that would be that would be hard to imagine. That being said, I think that idea that investors position for next year, and generally speaking, particularly longer term investors would like to be exposed to cheap

assets and and maybe high high carrying assets. So from both of those perspectives that the dollar doesn't look as attractive as it has has a year. So if inflation and the FED allow investors to position in that way, then we could see again a continuation and maybe not five or six percent, but at least the two or three that I mentioned could follow from a soft soft CPI reading. But I do also want to emphasize what we've seen over the last week, particularly with China related assets.

BO wasn't so much counting on a big reopening in the short term. It was pricing out some of the extreme pessimism that we've seen, and when it comes to China specifically, obviously the big asset price declines that followed the latest China Party Congress, and that's a bigger theme across markets, big risk reduction away from the big themes

that we saw this year. And there was obviously all the strength people declined in equity markets, but even in rates markets, we've seen rates volatility come down and at the margint rates come down over the last two days. So it's it's mostly risk reduction so far. Abraham Fancy for Familist today, Abraham Rachmary there of City, Let's drive it forward. I want to do this through the show today, even as we look to inflation tomorrow and of course

what we see an economics financial investment. On this global day we go to Washington. Henrietta Trades, director of Economic Policy. Vada Partners has helped so much in the recent days. Henrietta, we all have our individual statistic mind comes from the wonderful Associated Press Exit Pulse service that they do the depth of it. Then, in Florida, Latinos voted fifty two percent for the GOP. Is the Latino expansion happening much

much quicker than anybody believed. Good morning, Thanks for having me. I think that in Florida you're seeing that expansion but it's not necessarily the case elsewhere. I'm appoint to Arizona and Nevada, um as two states that also have signs of Latino populations that are not mirroring mirroring that trend right now. So I think it's isolated work, considering basically that every Republican on the East coast moved to Florida

over COVID, and that's what you're seeing right now. Very positive for the Santas, is very positive for Rubio, but not necessarily for Republicans elsewhere. What does your capital look like a month from now, well even two months, let's go out past the lame duck session. What does the Washington you know so well look like they're gonna be tired? Because the Lame Duck is going to be insane? Is my expectation, UM, now that Republicans have uh not one in a red wave, I wouldn't even call it a

red ripple at this point. It was the worst showing for a minority party that I can think of, um since two thousand and two, and that one required an Act of war. UM. I think that the two thousand and twenty three Congress is gonna be lucky if they have a decided speaker and it's gonna be very difficult to govern. So that's optimistic for the lame duck session. We could now possibly see the dead ceiling, but it's gonna be tough. And Lisa, you brought this up earlier.

I'm assuming McCarthy's a shoeing I'm wrong, right, Well, that's what I was gonna ask Henrietta. How much is this really up for grabs? What is the big question in your mind? We don't have the final votelies in the House yet, but he could be as many as eight vote shy of becoming speaker next year. It requires two hundred and eighteen votes no matter how you get them. Um, and it could be that some Democrats cross the line

to vote for him. I sincerely doubt that the McCarthy, he's going to have a lot of people coming from his thought, namely Jim Jordan's. What does this say about Donald Trump as a leader of the Republican Party that the American voters are not going to vote for him the third time either? I think this was a very problematic night for Donald Trump. UM. I know he's set to declare on the fifteenth or that's what he's been saying. But I wouldn't be surprised if he reassesses um after

he makes any kind of declaration. He's got ten days to file with the FBC if he wants to seriously campaign again. He is down on fundraising against the Santis. He's down in a in Republicans support by seven points versus the last time he ran. He's down by twelve points with independence. Uh, it would be ill advised, and I imagine he'll be hearing that from a lot of folks today. When you looked at the exit polse Henrietta,

everyone was concerned about the economy. That was the first and foremost concerned, inflation being the pre eminent issue there. How much does this really speak to other drivers of people to the polls, potentially some of the social issues or other concerns, not necessarily what typically people vote for, which is the pocket book exactly. I mean, you're looking at a percent inflation five dollar gasoline and you're still going to keep the majority party in Congress. It is

a huge referendum. Republicans need to focus on serious issues and have serious answers to the American public about how they're going to get bring gas prices down. It's not enough to just rail against whatever the Democrats try to do. The spr release obviously has worked to an extent, and voters are a lot smarter than I think Republicans are giving them credit for um, and that's gonna be something

that Republicans need to reassess today. Again, if you're gonna come in to an election as the minority party and not win the Senate outright or the House outright, and perhaps have the lowest show out in an a percent inflation environment, you need to really reassess your message. And we had it just quickly. What time does Biden announced

that he's running. Here's the question of the I'll be honest, I think if Donald Trump does not run, Biden will also not run, and we could be facing a situation in America that is unprecedented where we have two human beings that could run again the both choose not to. I think Biden's decision depends on Trump's decision, and like they said, I think there will be some serious reassessing

going on a Team Trump today. There should be. That decision comes in November fifte at least we're expecting it to Henriettes, Are you suggesting that it might not come about at all? I mean, I know I'm wildly out of consensus on this, but it's been my view for a while that the polling and the fundraising dollars are sending a message that President Trump cannot win again. I think last night proved it again. I think he's facing

serious threats from De Santis. Um. We saw his uper Secretary State, Mike Pompeo come out in favor of De Santis in his own way. We see the Vice President Pence is also preparing to run. The very next day, he's dropping his book and holding a town hall. Um. I think there's gonna be a lot of challenges within the Republican Party. And readA thank you Henridda tries that invite of honestly or someone expert at this is Laura Ray, In,

chief US economist at FS Investments Law. I really want to drill on inflation as we've been doing politics all morning. Do you presume that disinflation is rapid and suddenly or is there going to be a duration to our disinflationary trend. I definitely am in the camp where I think inflation may have peaked, but boy, the descent is going to be gradual, and it's going to be far from steady. Um. I think at the end of the day, you're looking at key components which are now sort of the cat

is out of the bag. They are significantly higher. You're seeing it across sectors. It's not just sort of one uh, you know area the weekend cherry pick like it was on the way up. I think maybe that's the best way to express it. On the way up, we were able to really pick out clear single drivers. On the way back down, the picture is much more uneven and

much more uncertain. Should the fellow reserved care about rent and home ownership statistics because that's the kind of inflation that makes people go to their bosses and say, my rent just one up ten percent. I want a ten percent increase. And even if that number has come down to five, even if it's come down to three percent, that is significantly higher than inflation and their target inflation.

I think increasingly, going forward, while we will still focus very heavily on the CPI numbers, we're gonna start focusing on the wage numbers. You know, that's already something everybody is watching, but you know, there's no way to declare victory on inflation when wages are at four or five percent. That also is much higher than the FED wants to see. Laura, we were just speaking with Emory Herdern about the election and she was saying, yes, inflation was at the forefront

of people's minds, but they still have jobs. They still aren't concerned about their chances of being employed. When does that change? So this is one of the key issues that I get all the time. How's the economy doing? And while people look at growth that feel like it's stagnant on the jobs front, we are so racing ahead on all cylinders with an incredibly strong jobs market. So I think that, you know, the jobs market is the lagging indicator. I think the jobs markets stays strong until

the middle of next year. I put the economy on solid footing for the first half of next year, and I think the FED is going to have to continue to raise rates past what markets currently anticipate is their sort of finish line a little over five percent. For the FED, I think they may have to go further, and I think they're gonna want to wait and see the labor market really break here's the problem. Given the last downturn, the company is are going to be more

cautious about laying off workers. And you know, you have what the headlines in in Silicon Valley right now is very different from what you're seeing across small businesses, across every business really on a week by week basis in

the US. And we were just speaking actually with Neil Richardson of ADP about exactly this, that the tech companies are a very small subset, and we've been arguing about whether this is the beginning though of something broader, or if this really is just a specific issue to the tech sector. Where do you see the job losses broadening out in the middle of next year. How substantial will that be given the reluctance that you just spoke about

of companies to cut staff. I think, you know, when you look at the fact that we've lost so many of the sort of lower product we're still hiring back a lot of the quote unquote lower productivity jobs. I think one of the problems there has been significant migration due to the pandemic. You still have localities where so many people have moved. You can't get the service jobs hired fast enough. To accommodate the fact that some of

these populations have really swelled. So I think that this match continues to keep pressure on the labor market to stay very strong. I mentioned this in one of the recent hours Laura, let me do it again? And the AP exit polls, which are voluminous and really really informative, they show this massive divide over the question are you confident you can get the next job? And Republicans are less confident. Let's call it rural, let's call it exurban, whatever you want to call it. But is there two

America's that are a job economy? And does the FED have to react to two America's or one America? So, you know, this is a critical question. First of all, the unemployment rate is low all over the place. And when I say that, obviously there's divergence in localities between the unemployment rates, but overall it's lower than it was, uh, you know, during the pandemic, and it's really come down significantly,

matching where we were a pre pandemic. I think the real issue is that the FED doesn't have the luxury of possibly considering two America's. Their policies are not targeted enough, so at the end of the day, they're looking at this, you know, broad average, and I think that what they have shown that they want to do is to keep the job market strong enough so that hopefully it can over time pull some of the localities that may be

struggling in line with some of the better localities. But you know, it's hard to say if that if that focus on a really strong labor market's going to change. I think they've shown that it has to if they want to be on top of inflation. At least. We saw this yesterday with Welcher Vermont. If you go across route for through the ski districts and all that, and if you end over in White River Junction, you ended over in a near depression years ago. It was run

down in brutal. Their unemployment rate is two now and shift and you've seen this pretty dramatically. But I was thinking about large, as said Tom, and this idea that if you start to see the layoffs in the middle of next year. Since we're in Washington, d C. Talking about politics, what does that do to shape the narrative heading into it will be to me that and this goes to the idea of what will Biden do what will Trump do, but it will be tick by tick

by tick. Well, you know, but Lara is talking about and Lara love your sense of this that you don't think that the unemployment rate could rise all that much. Where do you think it's headed? Where where do we need to go? What kind of pain threshold are you expecting the FED to acknowledge in order to get inflation back to their target pretty significantly higher? Um, I think

we're headed to somewhere around five cent um. The FED is notoriously bad at micromanaging where the unemployment rate goes. But just simply, you know, we are in a different labor market than we were twenty years ago when the FED started fine tuning the wage Phillips curve models that they have and that they so closely linked to inflation.

The reality is that you know, markets have have had to in companies that had to come to terms with the fact that you can't just flip a switch and get these employees back in the seat, and that I think,

you know, Tom was talking about demographics earlier. I just think it's the often ignored tectonic plates that drive a lot of these factors, and I think it's one reason why it's going to cause the risk of a FED overshoot because they are going to continue to have to step on the break much harder to move that unemployment rate in the labor market conditions. Laura, Thank you, Laura Ryan the of FS Investments. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and Internet sational relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg