This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow 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. Right now, he was an outlier, He's not anymore. Andrew hollen Horst
has led it's City Group. He's our chief US economist on one two right AX, all of a sudden with a number today, Andrew, I'm intersted in September twentieth, and I just I'm absolutely my head is spinning over restrictive? Are we close to restrictive in our complex mathematics of this economy?
I mean, I don't know that you need to go into the complex mathematics. We can, and that's important, But if you just step back and you look at this labor market data in particular, we've surprised month after month to the upside. We continue to see these jobs numbers coming in stronger, and I think Mike g have all the right caveats around ADP employment. There's a lot of reasons that that can differ from the official payrolls reading,
and we have some big seasonal adjustment issues. All of that I think is right, but just take a step back look at these jobs numbers. Hundreds of thousands of additional jobs relative to expectations that have been created. That's a signal that maybe we're not at appropriately restrictive rates.
Is that an appropriate signal? Is that a lagging indicator?
Andrew, That's the big issue is the FED is making policy now looking at data that is going to depend on their lagged policy making. And I think the bank issue, the credit tightening, that's something that probably still is going to be working its way through the economy, slowing things down. The concern though, is that some areas have already been worked through. If you look at the housing sector, we bottomed in housing, we've come off that bottom, and we
didn't lose construction jobs. And that's a great thing for construction worker is a good thing for the economy. But if the FED is looking to loosen the labor market, we're just really not seeing that in the data.
Can you hap me with that That's been a key question for me in the last twenty four hours, and I'll keep digging into this too with other guests later on Bloomberg TV and on Bloomberg Radio. When you look at the surprise indicators, that index is the highest been since twenty twenty one. So that's the incoming information relative to the estimates before that economic data. Is that because things are better than expected or are things getting better? Are they actually improving?
I think it is better than expected, And this is really theory versus data, and the theory would tell you interest rates are higher, real interest rates are higher, that tailwind from lagged fiscal stimulus should be coming off. All of those things should be slowing the economy, and we think we see some signs that some of that slowing
is happening. But job growth has slowed down. It used to be running a million a month, and it was running five hundred thousand a month, but it slowed to somewhere around three hundred thousand a month, and that's just a lot fat than anyone would have expected at this point.
The arch issue here is Edheiman looks at a very very weak economy and yet we've got service sector doing this and that does City Group look at this as a weak economy after two percent GDP AD justin in the first quarter.
I think this cycle is just so different that some of the standard indicators of weakness are not working the way that they have historically. One example, John was talking about before manufacturing manufacturing ism showing contraction. That's usually a good leading indicator of recession. The housing sector being in contraction, that's usually a good leading indicator of recession. But this cycle is different. We have this transference to services fact and the continuum.
Here are we, as constant just mentioned from Azuo, Are we where it's a pandemic supply side analysis or is it a demand side demand driven analysis? For the FED?
I think you have to do them together. And I think that it's a commonly made statement now that well central bank should be focused on the demand side, not the supply side. You have to focus on where is the demand side relative to the supply side. And unless you think the shock to supply is some very transitory issue and a lot of the issues that we have on the supply side now are structural and we'll be
with us for some time. Central banks need to recognize that supply side and then adjust demand accordingly.
I'm looking forward to bookmark in the address from Chairman Pound and Jackson Hole next month with the address from last year and comparing where unemployment was down and where it is now, because i was looking for that to come into three point six percent, which is basically where it was where he was dressed in the public talking about course in pain and potentially pain in the labor market.
I'm in the camp alocentra that this isn't in the textbooks, as Andrew alludes to post pandemic. It's both sides, supply and demand, and we're we're just making it up as we go. Michael McKee, we're waiting for claims. How to claims Michael McKee dovetail into the ADP report.
Well, I can tell you they come in a little bit higher than anticipated, to two hundred and forty eight thousand. That is higher than the initial report of two thirty nine last week, but it is also higher than the anticipated two forty five, so a bit of a rebuild in claims. Now, this is a tough time of year to get claims right because you have a couple of
things going on. We had a juneteenth holiday that was in the last report, which is now revised down to two thirty six, and that's a new holiday, so hard to.
Seasonally adjust for that.
And then you've got the auto industry shutdowns that come around every summer. So I wouldn't put too much on the actual number, but the level change is a little bit stronger, but it's still nowhere near telling you that we have a big layoff problem going on. One million, seven hundred and twenty thousand continuing claims. That's down from one seven thirty three the week before.
So the people who.
Are getting benefits has fallen back, which tells you so thing as well. So that's two out of the three or two out of the four. Today, we'll get jobs, the Jolts numbers, and we'll get the services employment numbers coming up, and then watch that two twenty five survey for payrolls tomorrow.
That may change. The survey may change before the jobs.
Before the jobs report, because if we get all this strength, people might start to build some of that into their anticipated numbers.
Futures to tier eight negative thirty three on the sp Futures were at a stick on the VICS fifteen point two at nine the two year yield's got a life of its own, up thirteen basis points five point zero seven percent. Think with that money market funded City Group is going to do. We have the honor of continuing from City Group, where he is a seven point two percent six month CD Andrew Holland Horst is with us,
they're chief US economist. I want to go to what matters in the textbooks, which is not the yield of the ten year four point zero two percent up nine basis points, but a ten year inflation adjusted yield measurement of one point seven seven percent, Given the hollend Horse rate structure, given the Bill Dudley rate structure, given the Mohammed Alarian rate structure, where's a comfortable real yield that we can live with.
I think you're going to the right place, Tom, which is that ten year inflation adjusted yield that's going to control the level of activity in the economy. And what we've seen historically is those level of real yields need to get up above one percent, maybe even above two percent, to really slow the economy. So that's the first thing to keep in mind on the real yield story. The second thing is what is the inflation number that you're subtracting.
That's really the key question. If you're subtracting two percent inflation, then an approximately four percent your treasure yield is going to be a two hundred basis point real yield. If you're subtracting four percent inflation, then we're at zero real yield. So that that's really the question. I think the question is where is inflation going to run strong?
And you see one there what you got from Holland or she's got three statistics, she got the nominal yield. Take away the inflation, right, that's movable, and that gets you to a real yield of the residual off the back end. One of the themes we're hearing going to show from smart people is the stickiness of our disinflation. What
is your call on disinflation? Do we get to three percent whereas Jim Bianco states, we could actually reverse or stay there for a good amount of time, what's your call on inflation?
Yeah, so we have some positive dynamics over the next few weeks actually in the inflation data, where you should see used car prices coming down, shelter prices should be slowing. So there are reasons to think we're going to slow into the end of the year, probably get down to something like a four percent underlying core PCE pace, maybe into the high threes. That's all good news for the FED.
The issue is looking further into twenty twenty four. Now, if this housing rebound continues, if house prices continue to rise, if the labor market stays tight, then it's really hard to tell the story where inflation is disflace further and you have risk that inflation actually increases. So that's not our base case outlook, but I think those risks are becoming a lot more material.
There's July twenty six, and then there's Jackson Hole. Does all this chick might change what you believe you'll perceive at Jackson Hole? Not so far.
I mean, I think a lot of depend on tomorrow in the sense that if we get something like half a million jobs created, they're going to raise rates. They're probably going to raise rates in September, and Jay Powell will explain it to us all in Jackson Hole. But if it comes in more like the two twenty five that's anticipated, then you've got open questions about September. So let me throw that out to Andrew here when you start to model out what happens over the next six months.
Let's just get to the end of twenty twenty three. Do they go to or do they just go one in hold? Are they on every other month? How should people anticipate what the Fed's going to be doing.
Yeah, I don't think there's a strong presumption towards every other month. We saw in the minutes as well in comments from Chair Powell that they want to moderate the pace, but they're not really telling us that that's necessarily every other meeting, and they want to keep this kind of very data dependent approach. So I think it's exactly what you said. They're going to look at the labor market data, They're going to look at the inflation data, Like I said,
core inflation. The next couple prints maybe are going to be a little bit softer, So that should be somewhat encouraging for FED officials. On the other hand, this research and activity story and this two percent growth that is continuing longer than expected, job growth that stays stronger than expected, that might end up being pivotal for whether they make
that September hike or not. I agree with you. If we see anything approaching what we saw in ADP and the NFP reading, then that's probably a strong signal that they will go ahead in September.
I'll get Tom all excited here because he loves to talk about our star. But part of the calculation going forward, you mentioned the two percent growth that goes on longer than expected. Do you think that the neutral rate is higher and will stay higher than it has been or are you in the John Williams fed camp says we're going to go back down to two percent and rates can fall down as well.
I mean, I guess maybe you could say I'm in the Louboch John Williams camp, which is a paper that the two co authors wrote that suggests that you should have this kind of very slow moving update to where that our start is because we really don't observe it. What we do observe is where's inflation, where's growth? And if inflation and growth are coming in stronger than expected, then you should start revising that up. So I am kind of slowly starting to adjust higher where that our
star might be. I don't think we've come a long way there yet. We have to see more data to really know where we end up. If you look at the FED stots. Remember that long run our star in their dot plot came down significantly over the last decade that they had the dot plot. We're starting to see some of those dots move high, and I think that's just appropriate given the data that we.
Say, just joining us, it is twenty three hours of chaos. That's all on the way to put it. Michael McKee is focused on the Jolt survey tomorrow will bring you the unemployment data tomorrow, the job the two jobs reports. This off the shock of ADP in a market on the move, the equity space down thirty two points on the SMB futures, the vic's out a stick fifteen point two eight and the yields. I'm not going to take a lot of time here, but I'm out nine basis
points higher ten year real yield. The two year yield is a five point zero eight percent, really remarkable, and to Hollanoards. I just brought up the City Group mortgage rate and it's something like a published seven point zero seven percent. What do these yield moves do to housing? And it's to me, we're right on the edge of a jump condition in the cost of money to affect real estate.
Right, Higher mortgage rates are going to slow the housing market, and we've seen that over the past few quarters. But that mortgage rate actually peaked back in September October of last year when ten year yields peak. Now we're getting back to those levels again, so you can see those same kind of mortgage rates. The issue that you've had is that reduced demand for housing, but it also now has reduced the supply of housing in the sense that if you have an existing home, you don't want to
put that home on the market. You don't want to lose that three percent mortgage rate. So we're seeing the housing data is a really interesting development where we're actually getting more activity in new housing starts. You're getting prices that are moving higher because demand is lower, but like we were talking about before, the supply is also lower, and as that market adjust to that, you're actually starting to see some renewed price pressure.
As a general statement, if businesses live in the nominal space the top line space, sook's not the inflation adjusted space I'm looking. I'm sorry, it's a jump condition and fourteen basis points in the two year yield five point zero nine percent. How does the business appetite change with a shock of this Thursday morning?
Yeah, we definitely will see this feeding through to broader credit conditions. You see that in the Senior Loan Officers survey will be interesting. We'll get another look at that soon. And you see lending conditions broadly that are tightening. This is just going to take time to go through the banking system and the credit system.
We had a viewer question, but I never get the viewer questions. McKee's the only one that gets the viewer questions. View you're getting is this from which governor? Is this start going? You get all the questions, is this crossing emailing it?
Well, it's a pretty simple question, and it's probably something I should have thought of to ask you as well. You guys are at one seventy for tomorrow, and that's below the consensus. Do you change based on any of this data? How are you going to put it together?
Yeah?
I don't think we'll change based on this. And the issue there is what you mentioned, Mike, which is the seasonal adjustment issues. The reason we're lower on tomorrow's number is because this data is so difficult to seasonally adjust, and that seasonal adjustment tends to differ between ADP and NFP, So when we go back and look at this data, I think we probably will end up being weaker on NFP than we were on ADP, and we'll end up attributing that to seasonal adjustment issues.
I look at it, my head spinning. You're going to go back to the office today, do you guys rip it up? Or do you just have to wait to see what eight thirty tomorrow is?
You know, every day it's like we're starting over again. I mean, the cycle has just been so different than anything we've seen. So we take the data as we get it.
And that I'm going to suggest describe as the central Bank of the United States right now. To me, they're wildly ex post as I've never defined in my mind before.
Yeah, I think that's right, a very reactionary, and.
I saw that at CenTra. I think all four people they were all struggling to come up with theory. There's no theory here.
Yeah, there is a sense in which the data have just diverged so much from the theory that everyone has become more empirical and more reactionary to the data.
Thank you so much for joining us. Can we see you the Marday thirty. If we get a bang up number like this, we get six hundred thousand non farm payrolls. Yeah, pick up the phone. Andrew Hollinhurst with this was City Group, long ago and far away. I was in Tokyo and a gentleman from Credit Sweez came up to me and said, thank you so much for telling people about our world
class literature. We say this now, of course, with the death of credits and all of that effort was led by Neil Sauce, who got me really really help jumpstart everything I do here. And under Neil saus was a guy named Dominic Constant. He and Ira Jersey led a world class team synthesizing all of this mumble jumble together, which you are joined by doctor Constam now at Missoula, America's Dominic. Coming to cut to the chase you invented
super restrictive. Does Jerown Powell want to become super super restrictive?
Well, I think he He's obviously already super restrictive, and I think the only reason why they would be willing to unwind that will be either if you get a faster fall in inflation or you see the labor market beginning to loosen up materially, which you know, the combination of both we think will happen. I think the panic, if you like, back in March going into of April May, when rates were very low, the curve steepening. People are
focused on the banking crisis. That panic has obviously subsided, thanks a lot to what the policymakers did, But there's still a scar on the economy that I think you're going to see coming through.
John, and they are opening. You mentioned this the idea of March and we forget the bank trauma. While you were gone, we had stress tests, and you'd think we'd move beyond trauma. I'm not so sure.
Drink sure, that's our new drinking game while you were gone.
Yeah, but it's Jenny Cremel. That's what we're using.
Okay, nothing too hard because you're mentioning it so much. Just to build on that. You said the scars are there and they're going to start to come through. That indicates that you believe a process did begin back in March. Could you shine a light on that a little bit more done? What are you seeing that it's taking place at a moment you think will come to the surface.
Well, we know that credit conditions have tightened a lot in the survey data, and that anyway works through to a lag in terms of a lending growth itself slowing down, and you can see in the weekly data lending growth doesn't look particularly good, particularly for the larger banks. So
that's sort of one issue that's already in place. The other issue is really the net interest margin story that so you're going to start getting the bank earnings and nims are going to get released, and you can model nims, you know, relatively straightforward, and they're going to deteriorate. They're clearly going to deteriorate. The curve is a very inverted
NIM compression, i would argue, is very much in place. Again, it takes a few quarters to properly see through, but we're talking about a swing of a few hundred billion dollars potentially as much as that in terms of what could be taken out of bank earnings essentially, and that's just from the sort of top down macro view. And then of course the issue is how that's distributed across the banks. You know, some banks are going to be much better place than other banks to deal with this.
The ones that really had to fight for deposits, if you like, are going to be the ones that will come back into focus. So the policymakers have done a lot, I think, to put you to ring fence the crisis in terms of sort of a banking systematics or a problem.
But that's all going to sort of feed through still into weaker lending growth, and that collides with what we think is going to be a loosening up for the labor market because people are kind of there's too much labor hoarding going on, not yet enough labor shedding going on. But that transition I think will take place in the fall.
So we've had obviously a bit of a round trip in markets, but I think the fundamentals behind the outlook for the economy are still a little bit you know, very much concerning if we can get a soft landing, fantastic, but a hard landing is very much still on the radar.
I think, Tom, we need you to build on that just a little bit more. You mentioned how some of those banking issues might be distributed across the banking system. How that will be distributed across banks small through to large will have implications for how it's distributed through the economy. Can you give me that element of it. Dom How do you think this will show up in the broader economy. Is it just small sections of the economy that starts to struggle or is it a broader issue.
No, I think it's gonna it's gonna be it's going to be a little bit like what we've already seen. I think it's going to be the combination of the banks that perhaps you haven't had the benefit of of earning uh at i e. R rates at the FED. You know, they haven't had the excess reserves perhaps, so they've had to you know, on their income side, it's been you know, it's been a bit more difficult. And
in addition, they've had to fight for their deposits. So uh and and and you know that that's going to be probably the same sort of thing that we saw before. Uh and and and you know, in terms of the economic impact, uh you know, you can just look at the sectors that where there's clearly been sort of over employments. I mean, you know, technology is obviously one. So I think that's kind of you know where you'll probably see the stress years ago.
Dominic, the most famous chart you generated was how everybody was consistently wrong predicting higher rates. And there are these little wisps and a Credit suitee model of wrong wrong, wrong, wrong, wrong over time, and much saying you were wrong. I'm saying the entire street was wrong. What's the chart now that indicates how wrong we are? What's the chart now that just we're just getting it wrong?
Well, I mean, I guess you know the way in which the FED expects if you're going to look at the same kind of hair charts we used to call them, whereby the market had always consistently overestimated what the FED was going to be doing. You can certainly argue that the market has tended to underestimate the commitment of the FED to sort of maintain rates at an elevated level
and keep pushing through. So if you go back a year, you know, we were pricing four cuts, and you know, come this year and obviously the market is not there now, so it's been running on the other side of that.
That's where we're dovetailing you with Hollandhorse some city group here. We're getting two different views. If we get an Andrew Holland Horse market with two rate increases, how does our world change?
Well, I mean, every time they hight rates, I think the market is not going to be convinced that they're going to have to do even more. I think it's more like they hype, but you know that's the last one sort of thing. Well, at least they reduce the probability of the next hike. So the market is very much and that's just a function of the super restrictive. I mean, there's no way you can look at the market in any kind of sort of context and say that the Fed isn't very very restrictive in terms of
where real rates are. And it's just a question really of what your view of inflation is. If inflation is coming down, if the Fed doesn't do anything, they become
even more restrictive. And that's very important to it to realize that even if you know the FED does sort of get rates up to say five and a half or even six percent and keep them there, unless you think inflation is also going back up again, then that policy will become just even more and more restrictive, and they're going to have to unwind those rate hikes very quickly otherwise they will collapse economy, and when we look at inflation, I actually think the inflation picture in the
US is looking pretty good. The core services side has come down and the good side is bad because of used cars. But you know what, no one's actually buying that many used cars in real terms. The real purchases of used cars has been going down for the last couple of months, but that's because the price has been going up, and that's just the sort of supply side issue, and that's not really, in my view, what the central bank should be really focused on. That they should be
focused on demand side inflation. They can't really help the supply side. So that's why we get into this sort of concern around this really restrictive sort of policy, and why the you know, you get this tail risk of a harder landing when it all goes wrong, it's going to go wrong pretty quickly, and that's why the FED may have to reverse course very very quickly.
Amazing dumb constant there be Mazoo America's let's get to Emily Rowland Co Chief investment strategist John Hadcock Investment Management. Emily, wonderful to hear from you. As always, Tom and I were just talking about it. You've got some people on Wall Street forecasting recession, other people saying things set to improve. Where are you and the team?
Yeah, this is a very very tricky late cycle environment where things often look pretty great right before they're not. And you had the great Ed Hyman on yesterday, you know, talking about this how this late cycle environment's lasting a long time. And we would define that as a period in between when the leading economic indicators go negative and through the recession, and that typically only lasts about six months.
But we're on month ten eleven, and in the six seven example, you know, we went to eighteen months there. So these are periods where you're seeing a lot of chop in the economic data, a lot of chop in yield. Do you want to participate in the market because risk
assets can see these big swings higher. But you guys were talking about the I think it was the European Grand Prix earlier on the show, and it got me thinking about how you want to participate in this market and and sort of like drafting in car racing, you don't necessarily want to be out front here taking on too much risk. You want to participate by owning things like higher quality assets and leading into bonds.
I mean, I mean I look at Emily, where we are and the zeitgeist just by quality, by persistent free cash flow, I get all that. I just want to know, do I want to be in the market or not giving them away? My head spinning with the data. Are you participating in equities?
Yeah, you definitely want to be there right now? As I said before, you can see these massive swings higher and risk assets as you almost see investors celebrating, as John mentioned earlier, this idea that the economic data have come in a lot better than expected in many cases, So you want to you also want to think about this kind of almost pivot party that's going on right now as investors celebrate the idea that the FED is
getting to the end of its tightening cycle. We've only got one more rate big priced in than a hole then cuts in twenty twenty four. So the pivot party can be a pretty powerful one. You want to go to it, but you might want to think about, you know, sipping on a light beer and instead of reaching for the tequila because you might have you know, sort of fewer regrets the next day.
Let's see a fair level four John there if you haven't reached for the light light beer, John, I was weaned on course and you and young Roland don't know what cores three two beer. Is the only one that knows that we talked is David Malpass.
So it's me about.
David Malpass had a keg of course three two beer in his room at Colorado College years ago. It was some moralistic Midwest evangelical thing. I don't know where this is all before light beer. And so you were too young. You were you know, you were getting shot in Vietnam, but you were too young to have a bud So you had a course three two beer, which is think of it like like a course light. Put a glass of water in it and now oh yeah, oh yeah.
Mal Pass had a.
Keg of course three two beer in his room at Colorado. That's all we got through physics.
How do you think buds hose data over the July fourth holiday?
Let's actually it's a really reportable issue. It's maybe not what we do early morning, but you know, I think in terms of marketing and advertising, the tobacco a bud light really needs to be studied by every institution.
Look what you said, Emily let's move on from that. Talk to me about stokes that you do like, sectors you do like right now, and sectus you want to avoid.
Yeah, so we continue to lean into quality. That's companies with great balance sheets, lots of cash, a limited need to tap the capital markets in order to grow. That does lead us to the technology sector. It leads us to the US, which of course has an abundance of technology stocks compared to the rest of the world. So you know, we do recognize that tective course is run a lot. We started to see that market leadership broaden.
We're worried about valuation risk as well, so we want to look to parts of the market that can help protect portfolios from that. Mid cap stocks in the US mid cap value in particular, one of the only areas that's trading at a discount not only to its own large cap piers, but also to its own history. That's another area that we're looking at in portfolios to diversify and again leaning into bonds. You're getting five percent on high quality bonds right now, investment grade corporate bonds up
in the credit spectrum. That's another place we think that there's a great mix between risk and return.
If I remember correctly, Emily, and correct me if I'm wrong, you didn't jump on the international bandwagon in the way of the state at the stand of the year. I mean, why was that?
Well, I think that there's an idea out there that there's going to be this immaculate economic cycle where you know, somehow, potentially the US goes into a recession, but the rest of the world avoids one. And that's just never been the case, and we continue to believe that we're going to see a global economic recessions. You just look at the PMIS on the manufacturing side. You know, Germany's at forty two, and meanwhile you're seeing European equities.
At all time times.
To us, the macroeconomic fact drop just simply doesn't match with a cross asset performance. And also when you think about owning European equities, it's very cyclical, high data. They tend to do better early in an economic cycle, and right now we think we're in a late cycle environment. So we think that you want to wait. We do have some of it in portfolios or overweight Europe versus emerging market equities, but we think that the better time for Europe is going to be in the future.
Emily, wonderful to hear from you as always, Emily Rodland, John Honkok Investment Management on boost sport that Joe can convice joining us now, how is us macro strategy over at m U f G. George, wonderful to hear from you, sir. We all read the minutes yesterday, some of us did, at least, I think TKK that's what I miss for George. I think the question I've got to ask you is how significant is the division emerging on the FMC.
Look, I don't think it's a significant yet. I mean the commentary that we got after the minutes probably mattered more. I mean they're going to most likely unless something really he rails it from here untill then. But I do think there was some important pieces in the midst that
are worth mentioning. And they're starting to focus on, you know, although inflation is you know, they're highly attentive and that's the main focus of their continues to be but they are starting to focus on some of the growth factors, like the fact that GDI is diverging from GDP. I I'd never expected to see that in the FED minutes, and the focus on like the BLS data, maybe's over counting jobs. So I think the FED starts to think about how robust is this recovery at this stage.
George thrilled to have you on today. Just the right guest at the right time. I want to focus on the inflation andjusted yield our listeners and viewers. It's not a common statistic. It's at one point seventy three ballooning up for one point five to eight. Where is your pre pandemic pre pandemic normal on the real ten year yield?
On the real ten yearield. I think we're surpassing it. I mean we're actually getting back to levels that we're seeing pre GFC. I mean, if we were to make.
A move towards to agree, so, what is the level here where the tension or it begins to fall apart?
Look so in any other time period. Because we've been operating with these huge lags that have been kind of this liquidity buffer has been allowing markets to ignore the real rate. But if the real rate continues to move marech higher like it has been, I think that financial markets will take notice pretty soon.
George, you were spent in a hike then in several weeks, just to be clear, just to start there.
Yes, I think I do think that given the language as well as what's priced into the market, it will take a lot to derail a hike.
And the next one after that. George, you expected another one after that, because there's a lot of people that think maybe they're go in July, perhaps they're done. Others look at the FMC and what the committee is communicating right now and see another one in our future, the one that follows me.
I think it's really going to be about financial conditions. I mean, we're starting to see more tightening, and I think this real rate channel is important that Tom's highlighting. So I think if we were to continue to see the overall rate structure move higher, let's not forget that since the being really since last year, the ten year in general has treated well under the Fed funds market.
So if we get a kind of normation or a ketchup, even if it's a brief catch up like an anti seasonal rise in rates which people call a bear steepener, which we have a little bit of that yesterday and a little bit this morning, I think that really matters.
That will be where.
Tightening takes place. Because we've had rates under and that's really helped out the housing market. So if we were to continue to see a rise in five year ten year rates, I think that would be a game changer.
Well, Joyce, let's build on that. Let's go further out the curve. The Federal Reserve right now is communicating a couple more hikes. You seem to be on board. Potentially that's going to develop. The Federal Reserve is also communicating at the same time, simultaneously, a mild recession potentially in the second half. What should a ten year be doing in the world of the Federal Reserve is projecting.
Well, I mean it depends what kind of inflation kind of a recession we get. I mean we have this, you know, we have about fifteen to twenty percent risk of a statflation, which has never been really in the
cards for US economic forecasting. But I think that you know, stackflation rists are out there that at some point, you know, if the FAT can't really get inflation under control, I mean, you're seeing similar situations with the BOE could raise rates to ten percent and it might take longer to get inflation down, and all you're going to do is crush the economy, So I think, I mean, it really comes down to like a stacklation recession nuance.
How does a yield curve disinvert? What is the what are the threads of threat like that? John, thank you, one of the threads of information that allow us to disinvert, say from negative one oh five to say negative forty, negative thirty.
So traditionally it's always been the FED cuts rates. I mean, if the Fed work cut rates two hundred basis points, the two year would move much faster than the ten yure for sure. You know, bear steepeners are kind of like unicorns, really hard to find. They're very rare when they happen, they're short lived, but they're very painful. So arise in long term rates. We haven't really seen that happen on a consistent basis, so it would have to come from the fine end.
This is critical, George. And you know, with MUFG and the Japanese affiliation, you've got first order knowledge on this domain knowledge on this. If the long term yields are lower, is that pricing up yield down by foreign buyers of full faith and credit US paper at this juncture?
Really, and you look at the actual public flows and see what's going on. This has really been a domestic driven the bomb market. It has been for quite some time. We've seen less and less foreign influence for years and so, and especially in the last number of months. I do think that most of this will have to be taken down. The supply that the US government's bringing to market a lot of people have to be taken down by domestic investors.
I mean, foreign investors obviously play a critical role, but I just think that given where funding costs are and everything else that's going on, and more importantly, now, the US Treasury has competition from other markets. Other sovereign markets are yielding higher as well. So and we don't know what the BOJA is going to do with its own policy,
which then might make jgbs more attractive at home. So I think that the level of rates, the curve maintaining its steepness is something that I think is going to be critical, even when the FET starts cutting rates later on.
What is your strategy as a bond portfolio take a full faith and credit portfolio. What is a duration strategy? Do you barbell? Do you a ladder? To you a single point? Do you go to cash? What do you do, I mean think.
You have a bias of a ladder, but with a misweighted I do think that you know at some point you know, if that keeps raising rates, we have an attractive front end. So I mean your risk reward is how much downside can you get if rates were to moving out of twenty five fifty versus them going down one hundred or two hundred. Right, So the risk reward has changed and you have to look for plays that are more convex the mortgage, your mortgage rates and mortgage markets.
Mortage bonds specifically as rates rise would also be much more attractive.
George, this was fun anything but boring right now in the bottom market. Jeorge can converse there of m uf J. The conversation outside of the cross asset analysis and financial markets very much on the spat between Ala Musk and Mark Zuckerberg. And it gets real overnight with the unveiling of well they calling threads over Instagram a direct challenge to Twitter Tom for Joonmy.
This is a non event, but unfortunately it's so important. I think John, we got to get right to it.
I would do that right.
Nash is an important voice on this. Dan Ives has earned the credibility. I'm going to say eight months ago, he was the dumbest guy in the block. How dare you think we're going up? And we have had a dan ives market from the third week of October twenty twenty two. I got to get the threads. But what did you see in October of twenty two the rest of us did not see.
I think it was fundamentals that were going to be a lot more stable than I think why the skeptics thought what we were seeing specifically in cloud, in enterprise, and even when it comes to consumer with names like app we just felt like the bark was worse than the bite. And then starting in the fall, that's when we started to do our AI research, and in my opinion, it was gonna be the biggest transformational trend that we've
seen in tech. And I think as that's played out that combo is sort of where we are.
I got any other questions, but we've got this idiocy this morning. Threads canna get critical mass.
I think it's gonna be very difficult to get critical mass. I think right now the name of the game for Zuckerberg and Meta is just further expanded Instagram based in terms of the cross sell opportunity eventually advertising. They're trying to strike while the iron's hot, given some of the issues we've seen with Twitter and Musk, but getting the scale is going to be difficult. But Musk has left
open opportunity here. We saw what happened this weekend. There's a lot of frustration building and I believe this is just a drum roll to what's going to probably be the cage match this fall.
Looking forward to that cage match too, Let's dig into that define critical mass. What is that? What's the number?
Well, I think you really have to start to get to something i'll call thirty forty million users. You know, when you start thinking about where.
You've got, they're going to have that by the end of away.
But thirty forty million users.
You need engage. It's not just about the users. That's the one thing. You'll see sign ups in the first seven hours, ten million, twenty million. It's about you get to forty to fifty million, then scale to one hundred million plus in the next call it six to nine months. But engagement on the platform's key.
That often is about that down But I wonder why because Instagram already has this pre loaded base they can port directly. I did a sign up yesterday. There's no friction there. It's always really easy to execute. Why do you have doubts?
It's really because if you look at anything that's tried to challenge Twitter in terms of any of the other platforms, it's been very difficult to scale. Now Here, for Zuckerberg, you got a billion plus users you could tap into. They've had women of success I think scaling other standalone apps, and I think right now the question is how much resources are they going to put into this. Is this just sort of a moonshot type project or something that
they really want to scale? And look, I think for Zuckerberg, there they went from a position of massive weakness, going back to you know when you talk about eight nine months ago to now to flex the muscles moment from for Zuckerberg, sure, you're especially going towards You're not on here yet.
I'm not what do you wait?
Come on you d I'm waiting till I'm wait. I was waiting for you. But so now that Pharaoh and Keenron, I'll go on.
Mark Zuckerberg says this, I think there should be a public conversations out with one bidon plus people on it. Twitter has had the opportunity to do this, but as of now did a lot of people have had the opportunity at Twitter to do this and they failed? What did they get wrong? And we're still trying to work this out? And why is Mark Zuckerberg the man that might be able to do it?
Yeah?
I think it's it's minisation. I mean, if you look with Zuckerberg has been able to do. Obviously with the meta platform, monetizing has obviously been key. Ultimately that's been the issue for Twitter. That's been the uphill battle. They're trying to get it from verification, subscription, every which way. I think that's been the big challenge for them, especially in this essential arms race that's going on in the space to find.
That you know, Lizzie Sunders has just done. We all agree it's been a multiple expansion. How does a growthy guy yet like you, an Apple fanboy, how do you adapt to the multiple expansion of the various and Sunday wunderstocks of the last year.
Yeah, I mean I view it especially when I look at a name Mike Apple, where you're going into a mini super cycle with iPhone fifteen. I think multiple expansion is really about the increased opportunity to monetize an install based It's all install based based.
So it's as ecosystem belogna.
And but that's why what's happening in Redmond? What's happening Cooper Tino? I think it's really been what's on the other side of the mount And I think that's really the key.
Are we just running our terminal value out? If the cfass five years seven years, are we all buying Apple because we think it's an nine year terminal value.
By That's that's exactly my view. I did. Okay, look, you're you're the professor and the tactician of MAK and I.
Think when you look at Cooper that time could come back.
But that's why we believe three trillion. This train just doesn't stop.
The biggest problem. You don't see this on radio, but he dresses conservative for us because conservative. He's got like it's a clash, Like the shoes are outrageous. He goes on Wapner and he's dressed like you know, it's party time. Friday afternoon, four pm.
They dressed down over that the Stalk Exchange.
Oh, they don't dress down. They just dressed. It's like a cultural thing. He dresses. He might as well wear a tuxedo.
When I'm with such debonair, like the way like someone like I need to dress a little down and then waiter. I'm just gonna go on threads.
Apple, Bye, Target, give me some update here. We're coming in an earning season.
They're going to do it again to twenty based too fifty bullcase. I think this now starts to to four trillion. In my opinion, I think it's gonna be another trophy case, not just quarter, but in terms of what we're seeing going into iPhone fifteen into September for Cook and Cooper Tino, which is why I believe this is really just the start of this.
Is a secret on ives. He actually knows the data. How many people like John Tucker and Bloomberg Radio have an iPhone that's four hundred years old or they're gonna bite for the new toy.
It's John Tucker in two hundred and fifty million other individuals that have not upgraded their iPhone in four plus years. That's the key, and that's ultimately why right now Apple continues to short to own it and everyone else paying rent.
I'm hold enough the upgrade At the moment, I just don't see anythink in the new iPhone that I particularly one.
I'm a data book to me. It's a technology. He is this this new phone?
Is it quick?
Don't buy it? Don't buy it? You buy it just for the battery?
Is the camera?
Which is the camera's battery? Yeah, you buy it for the battery.
That's exactly why I end up up griding because they killed the battery. They get in that the new phones got what more?
Wisban?
You know what they do?
Man? You talked to German.
Look and ultimately what I believe here it's not just about technology we're going to see on the camera side, we're going to see on the chip. But I think it's really going to be at the software because I believe this is really the start of what's going to be the AI ecosystem being built out in Cooper Team.
I've asked you this before. You've got to have a better answer this time. It didn't like the last one. What are you talking about with Apple and AI?
What is it?
What it is on steroids?
No, Because ultimately twelve eighteen months from now, you are going to have a separate app store for Apple that's AI apps only within the within the ecosystem, and I believe for developers and in terms of the sum of the parts, that could ultimately add forty to fifty dollars per share that we see for Apple, and that I think that's the next leg of the stool along with the Apple Car in twenty twenty.
Six, twenty twenty six for the Apple Car, that's a cool.
Yeah, And I believe it's a matter of when, not if. And it just shows as much as the haters continue to fire and a crowd theaters innovations done at Apple. Yet again, the continued innovate. And that's why Cook is Hall of Fame CEO tactician like he is.
Okay, that nice of white Push. Thank God to see you great the good update.
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 on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg