Surveillance: Investors Brace for Fed Rate Decision

Chief Global Equity strategistic Goldman Sachs. Peter, everybody's talking about the step down for the Federal Reserve, maybe a shift from seventy five to fifty to twenty five. Can we talk about the step down that you're expecting in earnings an EPs, going back from twenty one to two to three. Yeah, absolutely, John, I think this is really going to be a crucial factor that investors going to have to take into account.

We've seen some of the optimism building up again about the prospect for the rate rises to start to moderate, but on the other side of that, we're seeing a deterioration in earnings just as been a not a disastrous earning season, but certainly not nearly as strong as we've

seen previously. And The key thing that's happening, and we've been arguing this for some time, is that margins are starting to come under pressure as a result of these higher input costs, and that means that the forward looking earnings are also deteriorating. Revisions are starting to come down, and I think it's too premature for markets to be really pricing peak interest rates without taking to account the lower earnings and growth that's coming on the other side

of that. Appear to the seismic change for next year is we have a risk free rate, we have brevity, as Tellub says it, Do you assume more transactions in truly more combinations is stacks as corporations confront a reality from decades ago. Yeah, absolutely, this is this is an overwhelming shift that's happened. I mean, we have to take into account that it was only at the beginning of last year that the markets were only pricing one or two rate rises this year in the US, nothing in

Europe until next year. And we've seen now a whole range of significant rate increases with more to come. And you know, just over a year ago, a quarter of all government debt around the world had a negative yield. People were paying for the privilege of lending to governments. Now you're getting around four percent for US tenure treasurers. This is a big shift, and it requires valuations of

financial assets to moderate. We've seen some of that, but probably not enough given the scale of that shift in the cost of capital, and that's why we think there's more downside in the near term on on valuations and market pricing. We're talking in general, but I was looking at a Fang plus index that is down fort pent from its recent peak. I mean, some of the declines

in specific sectors have been extraordinary, Peter. Have we've seen the bulk of the pain in some of the high flyers and some of the tech names or is it still broad based? Is it really a more general kind of rerating repricing that still needs to take place. Well, I think that what you've really seen is the rise and interest rates hitting the longest duration assets most aggressively. To begin with it, things like unprofitable tech, which had

its route earlier in the year. Profitable tech companies, cash generative tech, and during long duration companies have held up reasonably well, but they're now coming under pressure because they are impacted by the gravity of rising rates and indeed some slow down in the earnings you know as well.

So I think it's really about the broad index adjusting valuations two levels which are consistent to a new normal in terms of in terms of interest rates having settled that, what we have seen is a bit of a reversal of that ten or twelve year trend that preceded this year, where growth was hugely out performing value, supported by record low rates and phenomenally strong earnings in the growth sectors.

This year has been a year predominantly of value out performance, and I think that probably has some further to go. So the aggregate valuations probably still need to adjust downwards, but we are seeing a you know, a shift in the mix. And it's pretty extraordinary that despite the hit that we've seen to some of the really big tech stots through this earning season, the broader now for example,

has continued to do very well. And I think that's a reflection of this shift in leadership within the market. I'm so happy that Peter that Tom wasn't listening at the end there. Peter Oppenheimer of Government Sex Right Now for Global Wall Street Lean Forward because Edward Morris joins us his global herd of commodities research at City or priamisra of TD Securities. I think of with the real yield John, There's been other calls that we've seen through

the year. Mike Wilson and equities and Ed Morris nailed oil, there's no question about it. When it was over a hundred of barrel, he said, uh, maybe not and here we are under a hundred dollars a barrel at Morris. To cut to the chase, if China reopens, many say that will give a demand that will get oil back above a hundred of barrel, even to one ten, one twenty. Do you agree, um, Actually, we don't agree it. It

depends on a lot of other things. The only way to get oil back to a hundred and ten or a hundred and twenty is to have a bunch of supply disruptions from places like Libya, Nigeria and maybe even Iran and Iraq. Uh. It's it's a supply side phenomenon to get above And yes we have you know, okay plus thinking that they need to put a floor into prices and they can work with that a little bit, but now trying to demand coming back. Well, of course, have an impact on the market. But uh, we're in

a world where demand is slashing down. Work around the world, whether you look at the U S or Europe and shining Yeah, as the third biggest economy in the world had low demand. But look at where they've been in the last two months. Since the middle of the summer. They first went up a million barrels a day and imports. Now there are up two million barrels a day on imports. Uh. And we're having oil since the last okat Clus meeting,

you know in the sideways little dance. It's not going anywhere. Uh. So I think this ample supplying the market for us to not have a big impact from trying to coming back. So at why are we training the SPR Does that make sense to you? Uh? Yeah, I'm on the side of those who think these are unusual times. We're actually in what Fiona Hill, as you know, calls World War three. Um. And the instruments are basically economic instruments. Some of them are used foolishly, like the pace price cap that you

were just discussing. Some of them I think are a bit wise. Uh. And let's look at the SPR. So if we look at the world date, UM we've had an inventory built year. Today that inventory built accelerated and now the inventory build as we measure it is bigger than the spr elers. So the SPR least was there to tide over times when we had a first warfare reaction to Russia and Ukraine with oil embargos imposed on Russian oil and there was a bidding up of the price of Brent and w t I as a result.

We have another potential round of that coming up by December five, which is associated with the potential oil cap or the price cap. But we're gonna have this bidding up our rent, and we're already seeing the bidding up and the SPR is playing an important role in it. So we have so far in the world year to day, as in the middle of last week to thee we can measure it an inventory build of of of some uh a hundred and all billion barrels UM and the SP well, the SPR is a big chunk of that.

Actually the build has been two hundred and seventy three million barrels here today SBR is two d and thirty million of that. But if we look at the last two months of beginning about the SPR on a combined you know, from September to the middle of October, oil on land has risen by thirty million barrels. But more telling, the oil in the water has risen by eighty two million barrels. It's oil in transit, and a lot of

that is coming actually from the US. The last last week's data printed a US export number of an astonishing eleven point two million barrels a day, the highest one record. And we've been, you know, playing with ten million barrels a day for the last three months. So the US has really been supplying the world and taking the edge off of what would have been you know, a difficult distortion with the with the with the yeah, with the conflict that we saw with respect to Russia in vadeing Ukraine.

Given that backdrop, do you think that we're ever going to get back down to that seventy two dollar a barrel kind of level that the US administration has said they would really start buying barrels to refill the spr Are we going to get there the next year, for example? I think we could get there, depends on the nature of the recession and how how reactive people are. We have to remember that this is a world with a lot less open interest in futures and options than we

had before. So volatility levels are you know, very high, and we have ten or fifteen dollar moves that have become the normal in this high volatility world. So I would not I would not exclude seventy dollars. I would also note that the administration has not nail day particular number that giving a range um that ranges in the kind of eight, and you get the seventy by by

looking at the sixty eight range um. Uh. And the increasing thing of this is that we have the US government range that you know, averages as you say, seventy dollars for buying spr to put a floor under prices, and we have OPEC whereas the dollar range. It's intriguing that China also has a range with the bottom and the top. Then they activate policies if oil gets belower above that range, they ride by strategic stocks, but they freeze prices at home, or they sell strategic stocks by

freezing prices at home at the upper level. So, uh, you know, we we have sensitivity now to not going back to negative pricing, not going back to you know, twenty dollar pricing because of what it does to the productive production side. Uh and uh and uh. It's a it's kind of a new world when you have the largest economies along with OPEC plus on the producer side and by the way, the largest oil producing country naming the US. Thinking about what the floor again again on

a game at most a city. One of the very best at Thank you so white. Our good news is Michael Gabon's with us, the chief US economist the Bank of America. Thrilled he could be with us. He's from the University of James Bullard also known as Indiana University, and of course with work at the International Monetary Fund as well. Thank you so much, Dr Gavin for joining us today. I want to cut right to the chase you and I give Chris Lowe at f t N

credit for this as well. There's a massive allusion to the American economy Jeroan Powle faces today, and that is within the core equation. Net exports are holding us up. How poor our domestic final sales, so final sales to domestic purchasers, which would be g d P less trade and inventories grew at four tents in the third quarter, and it was two tents I believe in the second quarter is that a recession indicating no, it's It would essentially be the FED soft landing where growth is positive

but not you know, still below trend um. So the interest rate sensitive sectors of the economy, housing structures, we're we're really what weight on activity in the third quarter. I think the inventory rebuilding cycle is also largely behind us. So, yes, we got the boost from trade in the quarter, but it accounted for all of the growth in the quarter.

Underneath that, the economy is cooling down. We've been talking about the lag time, right the lag the variable effects, the lag time that the VET is watching right now. How long would you estimate it takes before the full effect, the dampening effect of the rate highs that have been executed so far take effect. The cumulative effect, probably as long as twelve to eighteen months. You see the initial signs of it, maybe six to nine months out like

we are now. The interest rate sensitive sectors tend to respond first. If financial conditions tightened in March and April, you'd expect by the third quarter of the year it's going to show up. And it is the cumulative fact. It's kind of matriculate all the way through the rest of the economy twelve to eighteen months. How high does unemployment need to go to get inflation down? This is the number one question that the sentence us have right now.

What kind of damage is this FED going to do to achieve his ultimate objective of getting back to two. So our forecast is that it will be a little higher than the FED thinks. We're we're up to about five and a half percent is where we think the unemployment rate may go. The FED, as you know, isn't looking at about a percentage point rise to the mid fours.

Let's say consensus is probably around five. So somewhere between the four and a half to five and a half range seems to be what what we're all thinking the Fed. Your points exactly spot on the FED saying we need to remove imbalances in the labor market to bring inflation down. That's a bit of a euphemism for we think the unemployment rate has to rise better balanced supply and demand. Um, that is the number one question right now. We say a little more than than others. Your research was cited

by Senator Warren. I'm sure you're aware of that. She put it in her letter to Chairman Bank of America expects the unemployment will pick at five point six percent, implying in any two percentage point jump in the unemployment right over the next year and the loss of more than three million jobs. The question they're asking Chairman Pal, is this the price we need to pay? Is it

worth paying this price to get inflation down? Now? I don't expect you to do Chairman Pal's work for him, but there is this line you can if you want, This line that he used in Jackson Hole, and I'd love to get your thoughts on it. He said, of failure to restore price stability would make far greater paint. Can you elaborate on that a little bit for us might how people understand what would happen if they didn't

tackle this. So the FEDS believe I'm wired the same way is to think that the economy performs best over the very long term when we're not spending an hour talking about where is inflation and where is it going? You want to remove that variable off the table, so low and stable inflation gets you the best macro outcomes over the long term. I think there's a we make

a mistake right now. When we think, oh, the FED is going to overtighten and make up policy error, I think that the fetus saying no, no, no. The policy error is not getting inflation down to two. Now. We don't know if we need a recession to get us there, but if we do, if that is ultimately what's needed, the FED would say we should pay that price now because to your point, waiting and paying it later history says, well,

we're gonna have to pay a lot more. So we don't like to be in the position that we're in, but we need to remove imbalances in in the labor market, and we wanted We think we need to get to that sooner than than later. So the true policy mistake is not getting inflation down to two. It's not. The mistake is not creating some pain in the labor market to get there. If that makes sense. You know he's in their office right now. So chem and powmaking nuts.

In the news conference where you asked the question, I read that the Senator Warren letter carefully. Senator Warren did not site Mark Cabannah. I don't know what that is about his side and gaping, but not Cabannah. Just the stuff on the banag sheet sheet. I'm wanting you know, but you know my cap in their banks America. David Rubinstein will speak with the Surgeon General of the United States, that is VIVENK. Murphy, and he joins David here for

a peer to peer conversation. Look for that nine PM tonight. Mr Rubenstein joins us right now on this most unique physician, David. What I love about Dr Murphy is twenty years ago at Yale, he basically invented something called healer's art. He seems to have been a generation ahead on the mental health challenges that we have all lived in a pandemic. What did you learn about him about the persistency of

the challenges we face. Well, he's very concerned about the mental health problems that our country has coming out of COVID and obviously for school children as well. And he's also concerned about the isolation many young men have and the mental health problems associated with that. We've seen some of that recently obviously. Um So he's worked hard on that. The Surgeon General of the United States is a position that is not known to a lot of people about

what it actually is. It's a position where he's designed to talk about healthcare issues. Advised the president and overseas six thousand healthcare UH professionals around the country. He's been the surgeon General under President Obama and then, to his surprise, was reappointed under President Biden. He's the first person to

do it twice under two different presidents. He's a very talented person, the son of immigrants from India, grew up in Florida, valugatory of his class, went to Harvard Yale Medical School. Very very talented person. What does he say about COVID who he mentioned there in the comments? It's still Germaine. But have we deluded ourselves that COVID is over under four hundred deaths per day? Yes, you've got

three to four hundred deaths per day. And these people who are dying are dying, his view, because they're unvaccinated or they haven't up to date with their vaccinations. So I just came through COVID myself and the first time I had it, and I'm up to date on my vaccines. But I probably could have gotten a booster more readily than I probably did the most recent one. But maybe

that's why I got it. But his point is that people are not vaccinated at all, they are really in danger of being one of the three to four hundred a week or dying. And so we're not completely out of the woods here in large part because about a third of our country doesn't want to be vaccinated. Well, and David, I'm glad that you're feeling better, uh, and a lot of people have been going through it right now.

Just pairing the two ideas that we just have been through a pandemic that caused real fissures in the social fabric that have exacerbated some of these mental health issues. Did Dr Morthey talk about that about how the pandemic and some of the responses really did exacerbate the mental

health problems in the nation. Yes. What happens is when you stay at home, you think, Okay, I'm going to be safe, but actually you are deteriorating your and your ability to relate to other people, and ultimately, for many people who become so isolated, they have mental health challenges. His biggest concern is the mental health isolation right now

in the country. There are a lot of healthcare problems, obviously, opioid addiction, cancer, whole bunch of other problems, but right now his particular focus is healthcare mental health, and that's something he's focused on his whole career. Yeah, with respect to loneliness really and what that does to people as well.

I'm wondering what this says with respect to any kind of response from a government like the United States to additional pandemics or other health problems, if there is this add on of the mental health component afterwards, which could be just as pernicious, if not more so, certainly in certain communities and among certain certain kids who are actually having to resocialize going back to school. Yes, you don't really know what the impact is going to be until

much later. In other words, if you get COVID, you can see the impact right away. But if you're isolated and you have a mental health problem, you and I picked that up for four months, five months, six months, and he might not get the kind of treatment you needed. And one of the things he points out is that mental health problems don't get reimbursed by insurers or the federal government quite the way that physical health problems do.

And so there's certain stigma associated with mental health. There always has been, but the stigma hasn't gone away, and the insurers still don't reimburse you for mental health treatment that you might need, David, is a surgeon general job, if you will. Is it political? Is it? Do they just try to find somebody with major chops in medicine or is it a political football from Republican to Democrat

to Republican. Well, I wouldn't say it's a political football, but I would say that you want, you need to be a healthcare professional. But clearly you are appointed by

a president and you're confirmed by the Senate. And the first time around, when he was appointed by President Obama, he had a difficult time being confirmed because he had said that there was a problem with guns guns in our country and that was seen as the healthcare problem him and many people didn't want to confirm him for that. He did get confirmed this time, it wasn't so complicated. I would say nothing in Washington is a political and

I would say there's still some political nature to it. David, Now, thank you so much. David, greatly appreciate it. With Carlisle Group, the Code chairman and of course the host of the David Rubenstone Show, period of your conversation here on medicine and something gripping all of us, regardless of our politics, the mental health of the nation's Surgeon General, Vive Murphy with David rubensteinmar for that. 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 international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomer