Welcome to the bloombergs surveillance podcast. I'm Tom Keane. Along with Jonathan Ferrell and Lisa Brownowitz, daily we bring you insight from the best and economics, finance, investment and international relations. Find Bloomberg surveillance on Apple podcast, soundcloud, Bloomberg Dot Com and, of course, on the Bloomberg terminal. It is a morning
of fear. It is also a morning of revision, and it has been a week of revision for Wall Street strategists across the board, with Goldvin ZAC slashing as year end target for the SMP. Five hundred thirty six hundred previously had been dred of pretty big revision. Julian Manuel, equity, derivatives and quantitative strategistic. Ever, core I, S I, has been out ahead of some of what we have been seeing. Julian, have you reset some of your expectations based on the
Fed meeting this week? Oh, we certainly have. Looking we're calling for earnings next year, UH, basically to be flat year on year. Uh with this year and frankly we were a below consensus and continue to be below consensus for two as well. And obviously, uh, we slashed our price target and it's one of these years. That now, actually Wednesday, has ushered in the emotional phase of this bear market, which, frankly, every bear market does tend to
have an emotional phase. UH, simply because when you look at what the Fed Chair said and the projections, and importantly it's that unemployment number projected to be four point four percent next year. Uh, where the rate of change? There's never not been a recession following hard upon that kind of change, and all of that has caused the emotion to come into the markets and subsequently, of course, these types of revisions. You know, Julian, I mean rising
Boun yield's, higher commodity prices. These have been the two dominant factors that are impacting US equity earnings. I'm wondering the piece of equity earning downward revisions are are we comfortable with that? I mean is it going to accelerate over the next few months? Well, it's actually less about the pace than the band of uncertainty. So if you look at estimates for next year, they range from a hundred and eighty five on the low end to two
fifty five on the high end. That's absolutely unprecedented and it speaks to the uncertainty in all asset markets. And again, frankly, when you think about and you see the screen, uh, you know, everything is read today, and that tells you that uncertainty really is approaching those critical levels. Well, Julian, on the earning side, we have been having the conversation for some time now that there is inflationary pressure, higher input costs, it's going to weigh on corporate margins. They
aren't going to be able to pass it on. And yet it's been actually okay to this point. Why would things change now, as we're seeing some of those inflationary pressures winding down a bit? Why is it now, timately that those margin pressures are really going to come through? Is it just an inability on the demand side to
be passing those costs, costs onto the end customer? So, Kayleef, if you think about this year, it's been very unusual in that the sentiment data on the consumer side has been, you know, subdued, you know, worse than subdued, the entire year because of the consumers sort of internalizing, uh, the idea of inflation. But yet the spend has been, you know,
really quite reasonable. When you think about it, that in our view is about to change because, frankly, conditions are really warranting, uh, a little bit more of a button down type of attitude. And to that point, that's where the attack on margins, the attack on, you know, volumes comes in and again, the risk in markets. But the story is that this is part of the feds calculus. The question being, though, are we in the process of
potentially breaking something? Well, Julian, to that point, let's begin where we started. Let's end where we started, rather where you said. This marks the emotional phase of this bear market. What are we currently pricing in? How long will the recession be? How deep? The idea of a soft landing or LISA's shallow recession? Is that kind of off the table?
It's not entirely off the table. What we think the Fed may have been missing, uh, and, and it's our view that inflation is actually starting to come in, whether you measure it by break evens, you know, there's a disconnect between the fact that embedded inflation expelications simply aren't there.
And in this respect, this is not the nineties seventies, uh, and in our view, we think the data over the next couple of months will reflect that is that going to happen quick enough for the Fed not to do fifty or seventy five on November two? Possibly not, but frankly, uh, we think that that type of reckoning is out there in the future and that's the kind of psychology that could forestall or make any recession in a more shallow event. Julian Emmanuel of ever core I s I adrivatives and
quantitative strategist. At what point does the rest of the world's problem become the US is problem, as a dollar strengthens and the rest of the world grapples with not only the same backdrop but also the imported inflation of a weaker currency? It already is. Okay, look, we know what the inflation numbers are here and, frankly, we heard from corporate America last week there was one very key, uh pre announcement that basically the recession is being imported
into the US. And so, from that perspective, we are at that point. The thing that is different about the last several days is that clearly the Fed has been guiding the markets in terms of what it expects, what it wants, how it wants this to unfold. But the last couple of days again, as I said earlier, entering
the emotional phase. We're now likely at the point where the markets are going to start guiding the central banks and that flips the script and that, frankly, is sort of the danger that you get into in September and October, but ultimately for us will provide at some point the buying opportunity. Julian, everyone is just so barrassed this morning. It's just unbelievable. I mean my question for you is, what is the upside risk to global growth? You know,
what are the markets not seeing here? Is it China reopening? Is it rushing Ukraine, the escalation? I mean, how should investors even try to position for some of that? So that's the challenge, because the tail outcomes on both sides or potentially large. The expectation is that zero covid will end sometime early in the spring next year. Um obviously the new is coming out of Russia and Ukraine has been more favorable. We don't know what that outcome could be,
but certainly the pressures are beginning to build there. As an investor, whether you do or you don't use options, you have to have an optionality mindset, realizing that without notice. You could get that kind of upside and frankly, that plays against the fact that sentiment, however you measure it, is about as pessimistic as it gets at a time of year, September and October, where you do tend to
see tradeable bottoms. Well, to that point, Julian Bank of America publishing this morning saying investor sentiment is unquestionably the worst it has been since the crisis of two thousand and eight, noting that we'd SAI inflows into cash in the week through Wednesday, a thirty point three billion dollars, people fleeing equities running into the safety of a cash haven. Is Are we at the point where bearish is no
longer actually bullish, it is just straight up bearish? UH, for a time, for a time, and and look, well, let's be frank about it. Think about it this way. There has only been one bull market in two and that's the bull market for cash. Uh So, so, from that perspective, we need to see that moderate and we would say that the initial signal. Look, think about it. The Fed Chair has told you that the base case
is a recession, inflation break evens. Are telling you that the market doesn't actually believe in the persistence of inflation in the long run. So in that environment you could make the argument that for us, after three years, uh, long dated yields in the US start to offer value. That's what we're gonna want to see at some point. Okay. So what is that trigger point, Julia, just to sort of put a bow on all of this, when you talk about at some point there will be a buying opportunity,
what is that trigger? Uh, it's the typical we're gonna need to see higher volume, like a move in the in the vix towards forty, and then again, and you've spoken about this on and off of the morning, the credit markets starting to internalize a bit more stress, consistent with the kind of moves that we're seeing in the dollar. Julian Emmanuel of ever Crys, I thank you so much for all the time this morning. How much will the
reduction in activity reduce the demand for commodities? Right now we're looking at someone who has reset their expectations, along with the rest of Wall Street this week, although it's not perhaps because of the feds. So clearly, Stephen England, or global head of G ten fx research at Santard chartered bank, joining myself, Kaylee lines and Damian Sassaur this morning. I am wondering, Steve, what caused you to reset and
raise up your expectations of a fed funds rate. Well, luckily, we still expect the Fed to moderate the pace of hikes once it becomes clear that the labor market is beginning to topple over and that the economy is clearly under pressure. We expected that to happen Um, around this time by now, and it hasn't happened Um, so we're
stepping back. We think it's possible that one of the side effects of lower oil prices is, paradoxically, that by putting more money in people's wallets, it's supporting non oil consumption and and kind of boosting demand for, you know, core CBI type of products and preventing those from coming down. So there's kind of looks to be kind of a trade off between headline inflation and core inflation, with one, you know, going close to zero but the other one's
staying elevated. And in that world that the Fed is just going to keep on hiking, you know, and then we just had to get out to that reality. Well, it seems like we're all on board now with how much the Fed is going to hike and we have an idea, maybe a better one, of what term and was ultimately going to be. You're at four and a half percent, like many others. Yet you still think they're going to start cutting by the end of next year by twenty five basis points. That's not the message we
got from the dot plot or the chairman. Why do you think that? I think once the unemployment rate starts going up, the idea that, you know, you control the unemployment rate like you control the you know, the flame underneath your omelet while you're cooking it, I think is uh, hopeful, to say is the least. and Um, we think that, given the pace of hikes, that once it becomes clear that they've hiped enough to get unemployment going Um, they'll say look, we we we don't have to go that
much further. So we're you know. And then at some point they started say, well, we're clearly well above neutral. We don't have to be that far above neutral. We you know, we can be a little bit you know less about you know, above neutral. But you know it doesn't mean dovish, because it's still, you know, basically our que or two, you know, queue four forecasts. It doesn't
change all that much. It just means that they Um, you know, they're hawkish and they're modulating their hawkishness according to the circumstances. Steve, my colleagues at Bloomberg economics place the probability of a recession over the next twelve months of roughly. Do you think the Fed can actually engineer a soft landing or is that ship sailed? You know, I I think a soft lending is um it's something that you want, it's you know, it's not something that
you would ever count on as a central banker. I think that Um, you know, it's a way of making the the hawkishness and the tightness more palatable. But, you know, it's like discussions we had about escape velocity a couple of years ago and so on. It's just like so hard to grasp that. I think that the risk is that if you get you know, you have to slow the economy enough to get inflation down. The odds are heavily if you're doing that, you think, to have a recession.
You know, a few months back, Steve, if you recall, we were speaking at the hub to a bunch of China watchers. And so my question. What was that, Damien? Can you just do that? I'm sorry, sorry here. And Yeah, so we're talking a bunch of China watchers. We were talking about China US yield divergence, we were talking about dollar U on and we were talking about the P B o c s reluctance to cut rates because of capital outflows. I wonder can you just share your thoughts
on that? I mean, do you see the PBOC continuing to cut rates in the face of what's going on here? You know, look, when you make the case for sort of having some restrictions on capital mobility, I think being able to run your domestic economy somewhat independently the rest of the world is the most powerful element of this,
assuming you're you're running, you know, the correct policy. So I think that the Um you know, given that the economy is soft and has surprised on the downside, it looks like they're good to continue to maintain Um, you know, kind of easy money. I don't think that they're going to Um, you know, be super soft. I think the eyes still is towards easy money. There Um you know, and and yeah, Stephen, before we let you go, I just have really a simple question for you. Would you
buy the pound today? Um, no, okay, why not? I mean basically, how much further does it have to go? Well, you know, they're really rolling the dice on this. I mean this this will be the greatest experiment ever run if it succeeds in stimulating the UK economy. But I think there's a real question mark about applying a lot of fiscal to an economy which is facing a lot of supply constraints. We, you know us, tried that in
one and we saw what happened. And you know, I think the market is, you know, watching the budget and just kind of digesting this. Um The most I'd say that the range of views is dire to you know, cross your fingers and light some candles and, you know, if it work, it's great, but I don't think anyone really has confidence that this is a policy that's going to really get growth going again. It up as a
weak pound. We just have about thirty seconds. But if lighting candles doesn't work and saying a prayer, where we headed for the pound dollar cross? We'll have to see. I mean you know the look, the Um, there's the Bank of England and you know the markets marking up what the B O e is doing. I think it's gonna be very delicate because raising rates Um harshly in this environment could lead to even more pressure on the currency. It's a market just sees these things are incompatible. It's
it's a very tough situation. Stephen, leader of Standard Chartered Bank, thank you so much joining us now, Dan Suzuki, always a brilliant mind. Wd C I O at Richard Burnstead Advisors, who has been ahead of the game for a long time, being highly barished, seeing really no upside. Right now the world is coming to your view. Are you starting to be a little bit more positive, or do you feel even worse? Uh, well, good morning, Lisa. You know I don't. I don't think there's any real reason to sort of
change the view. I mean, we're happy to be cautious here, I think right now. I mean what we've been saying is there's only two certainties for the foreseeable future. It's that profits growth is going to continue slow and probably surprised. The downside relative to people still pretty you know, elevated expectations and liquid is going to continue to tighten and
that's the worst possible combination for market. So unless you see signs that either of those things is reversing course or at least stabilizing, it's hard to get really bullish here. Do you think, Dan, that the market has now properly, properly appropriately priced the Fed? And if we have done that, is the next thing going to be properly approached pricing in the corporate profit downturn? You think we'll see, and what does that look like? Yeah, Kelly, I think that's
a that's a very good summation of my view. I think Um, right now, Um, you know, the market for for most of this year people were very skeptical, skeptical about inflation initially, and then there are skeptical about the Fed's reaction to inflation. Now people have come around to believing the feds. So I do believe a lot of
that's priced in. So as you price in the next stage of this cycle, which is that slowing growth environment you mentioned, I think that's gonna have a very different impact on on rates, particularly the longer end of rates. So I think, you know, this one of the big transitions we're probably gonna be you know, faced within the next month or so or in the next coming months? Is that shift of, you know, a tighter fed? Up
until now I meant higher longer term rates. You know, perhaps you know a tighter fed going forward is going to actually mean lower rates because it means lower long term growth, lower long term inflation. Dan, you've often highlighted the difference between an economic recession and a profit recession. I'm wondering you know what sectors offer protection from a profit recession? Are we talking consumer staples, Health Care, utilities?
Where are your thoughts there? Yeah, I mean, at the end of the day, what we tell people is that the cycle is driven by cyclicles, and so, you know, the stuff that's going to hold up better when, when growth is slowing is are those stable earnings growth sectors such as everything you mentioned. You know, staples, utilities, healthcare.
They're just less economic sensive. You'RE gonna still go out there and buy toothpaste and you're still gonna go out there and buy your meds, and that's why their earnings are going to hold up on a relative basis much better. Now, depending on how bad the slowdown gets, you can still see, you know, negative growth rates for a negative. You know, price performance, you know, but it's a relative game. In that type of environment, I love it. Invest in toothpaste
and toil of paper. That seems to be the trade. The other trade is exactly perhaps people will continue with that. Hopefully. Uh. There are the other issue, as ever, core I s I is Juliana Emmanuel was saying there has been only one bull market in two and that's the bull market for cash. How much are you invested still in cash or cash like instruments as real yields continue to climb? Yeah,
I think this a great point. I mean right now we have probably one of the highest, you know, exposures to cash and cash like investments that we've had in
the history of the firm. So I think that, you know, there's a there's a lot to be said for the safety the income and being able to capitalize on this you know, higher rising short rate of environment that we're in the midst of Um but where right now, as I mentioned, we're kind of a barbelled between you know, that cash position, which is very high, and, you know, exposure to long term treasuries, which is if if we're right about the growth outlook and we're right about how
the market's going to have to interpret that growth outlook. You know you could actually see meaningful upside uh in these areas that have gotten crushed this year, particularly the long end of the curve. Can you give us a sense down of what that means in terms of the biggest cash allocation in the history of your fund and sort of the progression over two in terms of how
you've built that holding? Yeah, you know, we've held a decent cast cash position for a while in terms of cash like investments, but it's certainly in increased over the last, you know, three to six months. You know right now
you know of our multi asset flagship portfolio. You know it's approaching and it's probably about so the portfolio is in cash and cash like investments and I think you know it's a lot, but it gives you a lot of dry powder, it gives you a lot of safety and again, you also get to capitalize on these higher rates that the Fed is providing. Most Dancey Zuki of Richard birdsteed advisors. Thank you. People are concerned that the market, that the economy, or not the market. The economy is
not deteriorating quickly enough. It is highly uncomfortable for economists to be looking at that, including Janice Everley, who has incredible and extensive experience in administrations as the chief economist to the White House from two thousand and Leve two thousand thirteen. She is currently senior Associate Dean and professor of finance at the Kellogg School of Management and she joins us now. Jenn Everley, thank you so much for
being here. When you take a look at this backdrop in markets, what is your fear for how this translates to the economy? Good morning, Lisa. It's great to be with you. Um. You're right that there's a lot of market turmoil. The feds initial announcement of the seventy five
basis points, of course, wasn't the surprise. It was the surrounding messaging that included, you know, the feds not only willingness but their expectation that rates would be above four percent by the end of the year going into and stay higher for a longer period of time than they had previously conveyed. So that clearly increases the likelihood of a downturn uh and potentially the severity of any subsequent recession.
So that's what's really created the volatility in the markets because it puts much more pressure on the supply side of the economy and what we might be looking for for on the on on that side, on the real side of the economy. Jan The message from the Federal Reserve is we're not going to blink, we are going to look at the unemployment weight rising and we are going to tolerate and keep doing the job until the
job is done. Do you buy that narrative or do you think unemployment may reach a level in which the Fed has no choice but to turn the other way? They've been abundantly clear that. The chairman said in Jackson Hole, and he reiterated this uh in in his news conference this week, that the message hasn't changed. What changed was the quantitative message that came out. So it gives much less room for interpretation and the quantitative message reflects that.
The message to the economy that the Fed and and markets had had some optimism that the supply side might soften and make a dramatic, aggressive move on the Fed side less necessary, but that hasn't happened so far and so the Fed message is clear that they cannot and will not wait for the supply side to move favorably, that they are acting aggressively now, and you know that
that gives us this exposure. If the Fed is not going to be a shock absorber, what's going to happen on the real side, in commodities, in energy and in housing, for example? We'll get to housing in just a minute, but if I could just ask about the inflation target first, when the chairman says it will be enough, we are going to get inflation down to target, is a two percent inflation target still realistic in this new world, or is the Fed going to have to change its definition
of success? Well, bringing inflation down is a long process, right. So they're focused on that two percent target because that's what they committed to announce, what's in their mandate. Um, but the inflation process, which and and the transmission of monetary policy through to inflation, relies on a much slower cadence of households pulling back on auto purchases, on housing purchases, firms pulling back on investments because they're more expensive. Um,
that moves in a much slower way. So you know they're not thinking we're going to get to two percent immediately, that that will take time. Inflation moves out of slower cadence than market reactions. Dr I believe the thirty year fixed mortgage rate is now at six point five. That's the high since March of two thousand two. I mean housing starts picked up slightly in August, but I mean building permits are down. You know, new pending, everything, you
know decelerating. Just how bad can things get in US housing market? That the housing market is acting in in in some ways, in a counterintuitive and and counterproductive way to the inflation story. Um Rents and and housing costs are both an important part of the inflation indicries that we use UM and they're also the biggest part of households budgets. So people really feel those increases in costs.
The way to bring those costs down durably is to increase the supply of available housing, so to have more construction, more building of homes and apartments, uh, for for people to to rent and and and to buy. But the increase in costs, as you know, to the higher mortgage costs. That increases the carrying costs of real estate and it
also increases the cost of building and construction. So the higher interest rates in this market can actually be counterproductive because they're reducing supply and that puts upward pressure on praises, not downward pressure on praises, which is what we'd like to see. So it's a reminder that, you know, it's not an argument for lowering rates, but it's a reminder that bringing inflation down in a market like housing Um takes a lot of time for the market to to
cool off and and normalize. And it's not just about monetary policy, which we should also remember. Monetary policy is really powerful, but it's not a Swiss army knife, you know, it's not a multipurpose tool and we still have to do the hard work on the real side of building homes, continuing to innovate, investing in our productive capacity so that we have a strong economy that's set for growth going forward.
We just have about a minute left. But given that, how much bond prices have gone down, how much yields have risen, how much can the United States and, frankly, other nations around the world really invest in the way that they maybe, perhaps need to in the upcoming years given the punitive borrowing costs? So there there's two parts to um the building. There's having productive projects, good ideas
going forward, and and I think we have those. The other part is the financing, which can be from borrowing, but it can also be from other sources, UM, including cash on hand. So so firms are pretty well finounced now, especially in the US, the rising costs around the world you see. You saw central banks move in concert yesterday
to raise rates. Some of that is that they're facing the same inflationary pressures that we're facing in the US, but some of it also is the relative value of the dollar Um it's got, as you mentioned, the movements
in in currency markets. That's very difficult for many economies to Um to to manage and to deal with, because the higher value of the dollar increases the costs of their imported goods as their currency falls, also increases the cost of their debt payments if they have dollar denominated debt themselves. So that puts extra pressure on them to raise rates and and not let the US get too far ahead of them. Jan Everley of the Kellogg school,
thank you so much. Also, formerly of the White House, from two thousand and eleven two thirteen, as the chief economist at the Treasury Department. 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 Bloomberg