Surveillance: Longer and Higher with Chiavarone

that federated at her as Steve. Wonderful to catch up with you bearish for so long, Steve. If I asked you this question this morning, do you chase this rally or thank this rally? How do you answer it? Yeah, we got on the other side of it right at the beginning of the year. I think there are opportunities for this rally to go longer and fire than you would expect. And you've got inflation it's likely to come down. Given the year your comps earning season expectations were so poor.

The market was looking for this kind of first half procession. But the labor market is going to take a much longer time to to kind of decelerate, so you know, we think that this strength can go higher. You traditionally have rallies when you have fed pauses, those are usually suckers. Rallies usually um and so I think it's premature to cancel the recession. I think there's so many signs that the economy is likely to head into recession, but it's

going to take a while. And that's been the hallmark of this whole cycle. Every stage has taken longer and gone farther than you expect. We think this rally could last us through mid year, but ultimately we still do have those concerns about recession. We just think that's a kind of second half story. And in the meantime, you've got to play this. So stay told to me about how you playing games through international? Is it through US tech?

A combination of both. It's exactly what we did. We didn't want to jump on the tech train at the beginning of the year. We think earnings they're still vulnerable. We think valuations are still very much too expensive. We get that they're gonna run on this kind of rally, but we decided to do it internationally. We did it both and developed and e m international. But again, this is a rally that we're dating. It's not necessarily one

that we're marrying, at least not yet. So how do you know that the dates over and to break up? You gotta keep following the fundamental the fundamentals. If it turns out that the market is moving higher or in the you know, four thousands, let's say, by midyear, yet earnings are still coming down, yield curves are still inverted, the labor market is continuing to slow. You know, people look at this and they're confounded by the labor market.

Unemployment doesn't rise before a recession. It rises in one. And in fact, it takes usually six months to go from the low and unemployment which we just hit, to the start of a recession, over which time the unemployment rate really barely rises, maybe by two tenths of a percent. And so I think you have to look at those emerging layoff announcements see if the labor market continues to weaken, and if it does, you're gonna need to fade this when you go into it, it doesn't the different story.

But when you when you go into emerging market Steeve, how much is this really a story about China and the reopening there, and just entirely riding that until we get more concrete data on just the contours of what that looks. I mean, it's certainly a big part of it, but it's not it's not the entirety of it. I'd say the other key factors here. You know, you do have a FED that's likely to pause. Emerging markets in general tend to do better when the Feds not hiking.

You've got a dollar that's weekending, and I think it may weaken right where you were just talking about, maybe the ECB is gonna be a little bit more aggressive than the Fed this year in terms of rate hikes. You have to expect at some point Japan might have to abandon yield curve controls, and so you may have this scenario where a weaker dollar, no more rate hikes, plus a China reopening gives you, you know, a decent window here. The stocks are certainly reacting to that safe

Let's get to the Fed on Wednesday. If I'm in that news conference and I was a journalist, this is the question I would ask, do you believe we've seen an unwarranted aising of financial conditions? Very simple let's see how he answers it. How do you think he will approach that question, because it's very likely to be host I mean, I think they've got to be frustrated, John.

I mean, if you look relative to a year ago, not not necessarily the peaks mid year, but one full year ago, the labor markets incrementally hotter than it was faelve months ago. Inflation is as hot, if not as hot, as it was twelve months ago. Now it's it's coming down. So I don't I don't want to discount that. But financial conditions are much looser um, and they've spent so much political capital trying to defend this median dot, you would think that they're going to have to see it through.

I don't think that you're going to have a recession or not because of you know, an extra five basis points. So my guess is if they go to year, they might do two more at least get to that median dot. And I would expect that he would push back against these financial conditions. Some that being said, I have not had the best luck at predicting what Pal is going to say. I've had a much better job predicting what

he's going to do. UM, So we'll say, I'll be watching along with you, and we'll see how he responds. But you know he's gonna get that question. See if can you pair that idea with your bullishness right now? The riding of the rally? Why is it not going to be successful if the FED does try to job bone down this market? Why? Well, because I think that the data is going to look encouraging, and the data on the road to a soft landing doesn't look very

different than the data on the road to recession. Right. Inflation is going to come down. You know, earnings are gonna come down. You would expect that in a soft landing, but maybe not catastrophically. You expect the labor market too slow. And so you've had a market that for the better part of a year has wanted a rally on any sign of good news. I think they're going to get data that that can be construed that way. Um. Ultimately,

I think that is on the road to recession. It would be a historical anomaly to have this much of the yield curve and birded. And but I could go through all the various different statistics and not have a recession. But if you go back every cycle the market has a big hurrah rally like that. It did it in nineteen, it did it in two thousand and six, and so

I think that that's those are the powerful forces. The market's going to see what they want in this rare stark test, and there's been a bullish lean for the last year, and usually the last one is the biggest one. And I think that's you know, at least what we're in it can last six months, it could, and so you know, if you're a long term investor, you might be able to ignore that. But if you're trying to manage, you know, through the markets is our charge, I think

you have to be cognizant of that risk. Right here, it's lasted four weeks so far this year and twenty three. Steve gads catch up, but he has always Steve Chevron there a federated is getting you set up for the Federal Reserve this coming Wednesday. Pay rolls, the FED, the e c B, the Bank of England and learnings in between joining us now to discuss I'm really pleased to say, is Ken trope In, the founder and chairman of Graham

Capital Hedge Fund with eighteen billion dollars under management. Can fantastic to catch up with you, sir, Thanks for being with us. Let's start the amount of central bank tighting we've seen over the last twelve months. There is a feeling that we can get away with something mild, something short, and then just move on. Can do you share that feeling that view? I think that's too optimistic personally. Um. You know, if you think about how the nineteen to

that twenty two compared to the previous decade. UH In the period between the end of the financial crisis two thousands ten two thousand twenty one, we saw a total of thirteen bases point equivalent rate hikes between the ECB, the Bank of England and the FEED. In two thousand twenty two, one year, we saw forty basis point rate moves. Obviously some of them came in fifty or seventy five

at a crack. So you've seen an enormous sea change in financial conditions and I don't really think the market reflects that necessarily um in epuity valuations, So how would you lean against it? But would you basically move against some of the tech rally? Would you just go more into bonds um, you know, I think it's a good time to be um very conservative. I think one of the things that I think about is that for the last eleven years prior to twenty two, you were sort

of rewarded for buying every dip in equities. I think that is the psychology of investors broadly. I think that psychology probably needs to shift. I think good ten percent rally so far this year in equities seems um like Okay. There was a big sell off last year and people wanted to get back in with the sense that the Fed was gonna start easing in the second half of the year. We're not so convinced that they're going to

ease in the second half of this year. And there's still a lot of eight hikes price then between the Fed the e c BE in the Bank of England. So I would be really cautious personally. What does it mean to be cautious Canada time? When last year the fort didn't work and frankly the bonders proponent, a component of the portfolio, had the worst year on record if you look at certain denominations. Is this a new time of that being haven trade or is that still really

a difficult area. I think that's a difficult area. I like the two year you know, you've got the yield cerve really inverted here, and so I think to be in one year notes and and and be patient makes a lot of sense. As you said, last year was the worst year for a sixty forty portfolio since in thirty seven years. I mean, it's crazy kind of you thinking inflation is going to be stick here then people anticipate. Is that what your position? Somewhat stickier? Yes, I mean

it is definitely cooling. But you know, uh, energy prices haven't gone down that much. They've come off the highs. But if you think about the world where in uh, you know, there's not any energy development in the United States, green policies, which we probably need because of global warming, really discourage more energy to development. So resources are tight in inflation. Uh. If you look at labor, certainly their softness and tech and finance. On the other hand, CBS

and Walgreens are limiting hours because they can't get enough employees. So, UM, I'm not convinced that we're gonna see inflation get anywhere near target. UH, as soon as the market would like. Again, what does that leave for you curve right now deeply inverted. Some people think we can get that return of the bull statement because the Federal Reserve is going to cut safe the day deliver that statement that we traditionally get. Can of you push them back against that too? Then

I think that your curves moved a little too much. Uh. You know, for all of the years I've been in finance, UH, there was term premium and duration risk priced in the bombs. There is none today. It's the opposite. That doesn't make a lot of sense to me. Uh. If you think we have some inflation that may be around longer than another six or twelve months. Can We've been talking a lot about anecdotal science of weakness in the labor market, whether it's big tech or even the big banks that

have been cutting jobs on the margin. From your experience, do you think that those anecdotes reflect a real softening in the labor picture or do you think that there is more sustained strength than people realize. I think it's bifurcated. I think UM and high income UH and in UH jobs such as tech and finance ans and what have you, there's definitely softness. And I think in the service sector or uh, you know, in more blue collar jobs not

so much. And I also think we have the psychology of a lot of employees who are younger who have never uh you know, endured a recession, and so they're being very patient about looking for jobs if they're laid off. That's a new phenomenon. I think you can just to find a word from you your favorite trade this year, and you do not get to say the two year because you've said that already. What is it, kent, Well, the two years not a trade, It's just a good

place to be consecutive. Uh. I think if I had to pick one thing after stocks have got up ten percent, I probably would lean short. You've gotta shot right now. We're mixed are Some of our quant systems are long equities, while our discustiony traders are basically short. It's a part of the equity market can that you think needs to be shorted more than most. Um. I think, well, if you look at the Hank Sing that's gone up an enormous amount in the last three months, that looks really

expensive to me. And I think broadly, uh, in the US, if we are going to see a recession, sometime this year. I don't think that's pricedons to the SMP at all. Can this was great? Is it nice to mac Rows back? Ken? Don't you agree it was the most exciting time to be in macro in fifteen years. There's so much going on between what's happening uh in the Ukraine, what's happening

in inflation, all of these rate hikes. Um, you know, it's kind of h a lifetime opportunity or who knows, You never know exactly what happens, but it's really exciting to be in Macro. Well, Can is exciting to talk to you, and let's do this more often. Fantastic as always.

Kentrop in the of Graham Capital, a hedge fund with eighteen billion a u M. Laura Raim, the chief US Economists FS Investments Joints US right now, So, Laura, this is the question going into Wednesday in that news conference, if it's not addressed in a statement, the recent easing,

the recent easing of financial conditions warranted or not? And Laura, I wonder how you think one he'll answer that question and to whether this market and market participants will actually listen to him, you know, whether they're warranted is really a reflection of the fact that the markets have been trained, in part by the FED to look so far ahead of the curve on the economy that I think they can be too hasty. And in this case, there was so much talk about a recession at the beginning of

last year, recession at the beginning of this year. To me, you know, you really need to look for the timing of this almost a year after the FED stops raising rates, which is why I've penciled in late for an economic slowdown. And it means that at earliest the FED would really not consider sort of lowering the head curve and cutting rates until much later in the year. And for all of those you sort of paint that macro backdrop, and it means that markets who are pricing in three rate

cuts this year are have just gotten too aggressive. That's pulled down the front end. And look at what we've had. Mortgage refinancings have reignited again. We're about to see the housing market come back to life. The set hasn't really broken anything. They have put a pin in all of these interest rate sensitive sectors of the economy. And guess what when raids come down, those all reflare, and I think that's what the push and pull we're going to see over the next year, and really it's going to

start this Wednesday. Lots to unpank that, Laura. Can I just pick up on your call that you don't think the waitness comes until the year end? Laura, what guides that view? Okay, you have to take out a microscope to find weakness in the labor market. We've had upsetting headlines on in some key industries like the tech sector, but the reality is these are set or is that over higher during the pandemic. They're trying to right size

that right now. And to me, when you look at the broader initial claims, the unemployed rate and three point five percent jold state of the vacancy rate, I mean, go down the list, Jonathan, pick anything. It is just very difficult to find any signs of outright weakness, normalization, cooling, all of that is actually healthy. And then on the consumer side, I would argue there's a similar situation. There's a been a lot of talk about delinquencies picking up

and consumer banks are being cautious. That is their job. I think at the end of the day, when you saw the earnings from MasterCard, from all from American Express. The consumer is healthy with jobs where they are. I think the household can continue to spend and lower inflation has a role to play in that too. It's not a strong growth picture, it's a grind, but I think

it stays positive. Laura, you said the FEN hasn't broken anything, and then you talk about all these pockets of strength that could keep inflation hotter than the FED would like. Is the implication here that the FED has to break something and then what is it that they have to break? Well, that's what a recession is at the end of the day. It means that they have taken something and pushed it too far. Our economy doesn't like to contract, so it needs something to be not working right to to really

fall into contraction. So you know, they have talked a lot about the labor market. They've talked a lot about wages, and you know, we need wages to come down pretty significantly, and I'm just not sure that's going to happen given the limited number of job availability. That at the end of I think when they think about targeting something to really slow the economy at a broader level, it often is the labor market. But I think right now they're

content with some broader slowing. They just see the need to continue to raise rates. I don't think that's going to change. It's time for them to slow down, no doubt about it. I think they're doing the right thing over the next several meetings. So a lot of people took us some signal from the Bank of Canada, which has been on the front foot when it comes to their moves in their central bank, and they just indicated

they're going to go twenty five basis points. They went twenty five basis points and they potentially will hold indefinitely. Why is the Fed not going to do that since it doesn't seem to bother them that much the financial conditions keep easy, I would I would push back that it may bother them somewhat. I mean, I think they see it. I think they recognize that UM, when long term magistrates come down, it undoes some of their rate

hike activity. And UM, while I think that they're going to continue to monitor this, I think they recognize that they can't only focus on it because it's not their main mandate. Their mandate is inflation, and until we see it, not just hit two percent, but hit inflation persistently at two percent, they have wiggle room to manage expectations, and finance conditions are going to be a big part of that. I think they are going to keep watching financial conditions

very closely, especially over the next six months. We catching up with Gimpianco Bianco Research a little bit later this morning, and in this recent note he said, I think the narrative and attention should now turn to how far down we're going to go, not whether inflation has paid a lot of Can you speak to that? Are we coming down to four Are we going to find it difficult to get down toitude? Yeah, the inflation numbers are going

to look so choppy. This is just because year on your base effects are going to make the headline number just really come down very fast. I think, you know, we've now sort of contorted ourselves in the monthly CPI numbers of looking at you know, services wages that are excluding shelter. I mean we've gotten I think to micro on the CPI data. We need to step back and

we need to include wages in that conversation. We need to include sort of numbers that are in the medium term, for is just the near term inflation expectations are part of that too, and those have been stickier. So to me, it's really a more holistic inflation picture, and I think the FED is going to be very focused on more than just one piece of cp I, and the labor

dynamics are very critical to that. That's what their medium term models key off of, Laura, what are you watching most closely this week in terms of the economic data the FED meeting as well as earnings. I mean, nothing beats the payroll reports, Lisa. You have to pay a ton of attention to those, so to me that we're really going to end with the bang on that. I think the employment cost index numbers are going to be really important this week as well. It's fascinating joint to

us not to talk about the earnings. Tom Fort, the City of Research analyst at DA Davidson, not to I have some sympathy for you, sir, because the earnings camenda for big tech, the big names in the space of what fortun Now, Tom, I won't ask you to pick your favorite babybe Bob. If you had to pick one endings report right now that I could give to your tomb, what would it make So if I had to see ear news report right now, the one that I want

to see is Amazon. So I'm curious. The term I think that you're going to see this quarter is beaten layoff. So to what extent are these big technology companies laying off employees but still outperforming against expectations? So I think that these layoffs put these companies in a position where it's more difficult for them to show better than expected sales and profits. Because if they had better than expected sales and profits, why are they cutting head council significantly.

It's a really important question, tom, So let's ask the question as to why Apple isn't cutting head count. So Apple will cut head count, they'll do it in one of two ways. If you look back to Amazon between the first quarter and second quarter of last year, they cut about a hundred thousand heads, mostly at the fulfillment center level when they acknowledge that they were overbuilt for the current level of demand. So Apple could cut by

attrition much like Amazon did. They've been one of the companies who's been in the news for wanting their employees to return to the headquarters, um to return to office for a greater period of time. They could assist on that and then have some attrition there. They could also layoff their employees at the retail level. So I do believe that Apple, while they haven't done so yet, like everyone else, they will adjust their headcount for the current

level of demand. So far this year, tom any kinds of announcements of layoffs has been met, usually with a rally in the shares of the company. With this feeling of cost cutting that would allow growth to continue to accelerate. At what point is that not true anymore? For the tech complex? So the question is are they cutting fat? Are they cutting muscle? And I think to some degree

a lot of the cuts have been fat. These companies were bloated in terms of headcount, especially bloated given the low level of demand for e commerce today for digital advertising. So the question is at some point are they cutting muscle and not fat. That remains to be seen, but I think that the reason you're seeing the starch react favorably to the head count moves is on the expectation that on a near term basis, it will results in higher margins on lower expenses. There are a couple different

strains of ideas for the economy. Within these tech earnings. There's a business side, particularly with cloud computing and the spending that you've seen or not with a disappointed tank outlook for Microsoft, which potentially we might see repeated by Amazon's a WS. And then there's a consumer side, the consumer still buying and the Apple continuing to be strong on that level, Which prong do you think has the greatest weakness? Are we seeing some of the bigger softening? Yeah.

The greater concern, and this pertains to Amazon from their third quarter results. Wasn't that their mature e commerce business was slow growing? Is that they're faster, higher margin units cloud computing and advertising. We're starting to feel the negative impacts of an increasingly challenged macro economic environment. So to the extent we see more signs of that when Amazon reports. I think that's the greater concern, given that it's higher revenue,

higher margin for Amazon. Let's build on that um variants right about this this weekend. I think it's the question to ask for these tech names right now, are we seeing some of these names face just a little bit of a cyclical test. Are we seeing some of the structural story that's dominated these names and delivered monster gains over the last five years or so, are we seeing that structural shift, a change in the underlying trend tom that could be with us for years to come to

gardless of the cycle. I'll go at the structural shift. I think that gone are the days where you can get up and expect Amazon, Apple, Alphabet Meta platforms to out perform against NASDA automatically. I think you need to see some company specific initiatives or in the case of Alphabet and Meta, a rebound in digital advertising on a strengthening economy, so those shares to outperform the NAZA even over short goods of time. So I would say it's

more structural. I think it's a change in dynamics, and I think it's something that's going to continue to play out over the next cold months. I tell him, how does that influence your thoughts somehow we should be thinking

about valuing these companies with that in mind. Well, the channels for Amazon long term is in order to maintain its premium multiple, they essentially have to outgrow the contraction in their multiple from an earning standpoint, which is why you're seeing such a significant shift in focus to services to hire margin efforts for Amazon. But The question for all these companies and big tech is can they outpace the contraction in their multiple perhaps by having their profits

grow to higher an expected rate. And I think it's gonna be a challenge across the board. What's going to happen to the unprofitable tech companies? And I think about snap for example, as they report earnings tomorrow, is this going to be the beginning of the end? All? Right? To two things. One of the good news is that you're seeing a bid so a lot of the companies this year are getting positive performance in their share price, even if you're seeing a pullback in some of their

projections for earnings. But for the company's like Snapchat, for companies that are losing money today and maybe you don't have a great balance sheet, they're basically an embrace against time. Can they get incremental capital well as the capital markets reopened before they run out of money? And in many instances is to be determined. I tell them this was great, Hopefully we can do this again, like to this way. When these numbers start to drop up some Florida there

of da Davidson. 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 I Heart Radio 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 Lisa Abravo. It's and this is Bloomberg