Surveillance: No Market Bottom, says Rosenberg

world at parsing inflation. I will not mince words about it, David and the Bloomberg I can look at CPI inflation back to World War One and the average over the many hundred and ten years is three point one percent. Part of that are the spikes up which are hugely stochastic and come down quickly. Will we disinflate rapidly? I think we will, Tom, and I think that you are you sing it and a lot of indicators I'll mention

three uh. Commodity prices are well off their highs, even though all prices have hung in in the past couple of weeks. They're down more than from the peak. Base metal prices are down, Um, you know, you've got lumbers down more like seventy so the commodity complex which hasn't shown up yet. You know, in that chunk of the CPI called goods, you know the stuff that you can see such and feel commodities are are deflating. You've got freight costs across the board. I mean, look at the

Baltic Dry Index. Yes, yes, yes, I want to stop there. The most dollar is up twelve percent year every year. Does anybody in the world think that you see in all the pass through from the strength and the dollar into goods prices? And the answer is no. This will all show up with the next twelve months. David Lizian Saunders featured Baltic Dry Index US to explain to our global audience of symbolism of the cratering of the Baltic

Dry Index. Well, I think a lot of it is the byproduct of the fact that global demand is coming under downward pressure. I would also say that we are seeing, notwithstanding the ongoing war in the Ukraine, which doesn't seem to make the fun pages of the paper anymore, you are starting to see and unclogging in a lot of the port congestion globally, and so you're seeing the supply

side thought out. You know where you're seeing that most evidently, tom is in the survey data on supply delivery delays, which have come down dramatically across every single survey Richmond FED, Kansas City FED, Philly FED, New York Empire. And you know, it's very interesting from a FED perspective, is that you know, about five months ago J. Powell said that, you know, we're gonna operate policy blindly relative to what's happening on

the supply side. The FED made a decision five months ago that we're just going to concentrate on the man destruction, getting or getting demand growth below supply, which I think is a wise policy. But you see, the supply side is finally taking hold and creating the disinflation before you've even seen any of the lagged impacts that the FED has already done, you know, through rates and QT on

the demand side. So you have the supply curve actually becoming more elastic at a time when the Feed is engaging in a policy that's going to really kill demand. So explain to me, as we get the chalkboard out, then you draw these demands supply curves, how does inflation not absolutely collapse in the next year? You know, I say that's to my clients. They look at me like

I'm crazy. Not all of them do. Megan Soyber over at Bank of America would not look at you like you're crazy, because she's still expecting rate cuts next year. And it's not because she doubts the reaction function from the Fed, but she also sees the prospect of inflation coming down very rapidly as we head into the second half of three. At what point, and this is really headspinning, does this become in some ways good news for the market because they can start to price in a softer

touch or a softer approach from the Federal Reserve? Well, so, what's going to happen at some point? And who knows when? With this fat in particular, I mean, when Neil cash Carry becomes the biggest hawk on the f O m C, you know you're in a whole new world altogether. So what happens historically is the Fed pauses, and a tightening cycle always ends, just like an easing cycle always ends. And then with the pause you get a relief rally.

But then what happens is that the recessionary pressures take hold. Then what happens is the Fed cut rates and we've seen this so many times in the past, and you get another relief rally. Uh, and then once again the recession pressures take hold. When when they pause, you want to be very wary about the relief rally. You can rent it, you can't, don't it. And even if the after the first rate cut in the recessionary bear market, the market doesn't bottom after the first break cut, you know,

in the market bottoms. The market bottoms after the last rate cut. After you get the last rate cut and the market sees the whites of the eyes of the recovery, that's the fundamental low. You know that might be that might be twelve months from now, So be where the pause will generate headline news. You folks report on the pause. Then they'll cut rates and then we'll have a pop in the market and everybody will think that you know,

the bull markets right in front of us. But no, no, no, no no. If you want to pay attention to the historical record, and we know that history rhymes, the time to go super long the markets to understand when the fundamental low is is actually after the last rate cut, when the Fed re steepens the yield curve usually a two stands curves plus huntern forty basis points meeting and mean by the time the market bottoms, we are so

long away from that right now, it's not even funny. Well, but David, to John's point earlier in the show, when he was talking to Sebastian Page, he said, is being bullish fighting the FED right now because exactly what you pointed to Neil cush Cary coming out in saying he was disappointed to say that the market was rallying after that Powell speech, and that he isn't terribly unhappy and maybe even happy to see that the market is selling

off in response to the latest guidance. How much are we looking for a weakening in the h it's heightening in the financial conditions in order to satisfy the FET's desire in terms of transmitting their policy. Right Well, that's the question. Um. I'm paying attention to what the FETE is telling us. I think they're wrong. I think that Powell has already told us we are operating policy without focusing on what's happening on the supply side of the economy.

Of course, after sixteen months, the grand total of sixteen months which in the annals of economic history is still transitory. The FETE has given as valuable information we are operating policy without actually focusing on what's happening in the supply set anymore. They're they're not relying on the fact that these bottlenecks pressures are going to continue to ease, although all the data are showing that they are. Reason So

they're focused on the demand side. So the question becomes, um, given where the FED thinks sees of the supply curve going, how far do they have to contract demand? How far do financial conditions have to tighten to get to that holy grail? In their model, I would say, and I've tried to copy their model, it's the lowest the smp okay and high yield spreads or seven basis points. That's

that's the matrix. That's the combination that we'd have to get to to make make has scary more comfortable with where the market you're there's a little bit of the Rosenberg humor there this morning, David Off of Jackson Hole in the codification of two is the goal is the idea that it's not one America. I've been talking all morning about a heterogeneous America heterogeneous outcomes. It's a challenge

for any central bank. What does the FED do about two, three and even four America's Blanche Flower is apoplectic over the oddities of the America in labor market. Do they need to look at us is one America or can they study two three or even four America's Now, I'd say that monetary policy has to be a national policy. You can't carry out a policy based on uh couple of segments of the economy or a couple of socioeconomic segments. I know, look this time last year, j PLA will

sending more like a social worker. You really have to take a national approach. And I'd be the first to say, by the way, that you know, with the unemploy rate where it is, the participation right where it is, that's obviously on the fads mind, is the tightness of the labor market. This is so bizarre, Tom that we would have had a year whether you okay, the debate about g d I and GDP is a complete waste of time.

Let's take both measures together and just come to a conclusion that the economy is flat whether you look at it from an income perspective, in real terms or spending. It's basically a flat economy. And here the consensus is three hundred thousand on non foreign payrolls on Friday. Does anybody stop to think, why would a flat economy need to be adding any jobs at all? That's the oddity unless you think, unless you think potential is negative, which

to me is ridiculous. Um So I think at some point, let me just say, at some point, and this is where the tightening policy by the Feds kiboshed is. When you start to see the erosion at the labor market, I think that's really what they're waiting for. David, you just touched on it. I'll be a little bit more diplomatic. The Chairman in the past is demonstrated that sensitivious to the political mood in the moment. If unemployment starts climbing,

do you expect to see the same Chairman Pound again. Well, I don't know if we'll see the same Chairman Powell again. But do I think that the Fed will respond to a loosening in the labor market. I think they're waiting for that. I think all of us have been waiting for at least the participation rate to start going up. I mean, nobody want us to see outright job loss, but the big surprise has been in and maybe there's maybe there's something to this long COVID story in terms

of how it's impairing the participation rate. Nobody wants to see employment go down. You can actually see the unemployment rate actually go up if the participation rate starts to go up. So that's going to be very critical. But do I think that if the unemploymentrate goes up three, four or five tenths where it is today, that they're done. I think that's all it would take. In fact, usually when you get three or four tenths of an increase in the unemployment rate, the lagging indicative that it is

the recession has already started. So that's yes. So I think that I think that would be enough to push the Powell pivot back on the front burner. We appreciate your for you. So why Stephen Rosenberg that of Rosenberg Research. Let's get to set page sow Sebastian page join us nowt's he wrote price c IO and head a global multi asset Sebastian awesome to catch up. I'll ask that question I asked of Lisa. If I'm buy stocks, am I fighting this FED? You know, Lisa said that the

FED expects a gang buster economy. I don't think that's the case. I actually think that not only is the FED put gone, but there's a FED call in the sense that any good news gets taken away by the FEDS need to tighten. So yes, I think you are fighting the FED. If you're bullish. It's hard to find anybody that's bullish now on your show. I saw you

try with prior guests. Today. I just came back from a trip to Australian Japan, meeting with the world's largest some of the world's largest pools of capital, and I couldn't give anybody to say anything optimistic about the economy or markets. Said, I'm not going to mince words for our listeners and viewers. This is the most important conversation of the day because of your book Beyond Versification. Peter

Lynch called it diversification. Given the cards we have into the autumn into two thousand twenty three, what character of diversification should we be right now? Over diversified or a more focused effort to guess the right instruments? You know, Tom, I love that question. And the number one question around diversification is will bonds treasuries in particular diversify stocks if we're heading towards recession risk, and I think they will, and in fact, we've closed their underweight bonds to go

back to neutral. We've had a year where diversification between stocks and bonds is completely disappeared. The draw down in bonds has been unprecedented, and the code draw down between stocks and bonds has shaken investors worldwide. So we do need to rethink portfolio construction. Tom I would say we're going through a paradigm shift in terms of portfolio construction and the role bonds will be diminished, but to the extent we get growth shocks, you still want to own

some treasuries, So it's a bestion. I want to clarify what I was trying to get at earlier when I was talking about the FED. Basically, there is a belief that the economy is so strong that it can withstand and requires a big dose of pain in terms of how high rates go and how long they have to hold them there. That was sort of the message from Jackson Hole, and then they still reiterated this soft landing

scenario in one FED official after another. The bull argument, ironically is pushing back against that, seeing the deceleration already here, that things aren't that strong and it won't require as much pain as executed by the FED. Do you believe that? I mean, basically, do you think that that's what people are doing right now and that you should lean against that and believe what they're saying, and that basically bet

on a hard landing right now. Look, I always say you should stay invested no matter what if your horizon and say longer than twelve months. But we are underweight stocks at the moment we're watching this. We're not ready to get back in again. We are in stocks for the long run, but we are underweight. There are ways to play a more sort of soft landing scenario from

a tactical assocation perspective, for example, through small caps. I think small caps are already pricing in a very deep recession, and so to the extent you get a recession, maybe they will go down with the market. And to the extent that you get anything that's not as bad as that, a soft or softest landing, then maybe you have some upside at some point with small caps. It takes some

courage to lean in. But the valuation spread. Look, large caps are in the nine persentile of their historical valuation relative to small caps, so large caps expensive relative to small caps. That you get a strong dollar, which tends to be more of a headwind for large caps. So there are ways to play offense. But I call it. I don't call it offense. I call it playing aggressive defense. And one thing I would say says there is no doubt the tone was hawkish. In fact, there was no

new information at Jackson Hall in the speech. It was a short speech, no messy press conference to mix up the message, but definitely a hawkish tone. With you mentioned the word pain resolved, unconditional. Powell mentioned price stability ten times. How many times did you mention unemployment? Zero? That changes? It was in the case of the cost of bringing inflation down. Yeah, Sebastian Page price step well said buddy

on a number of things. Jones just about walked off the camera, joining us now from Charles Schwab, the chief fixed incomes strategist, Cathy Jones, Cathy, where the bonds fit in the portfolio? Help me here? It's August. I'm reframing for the Q four, I'm reframing for ownership of fixed income into two thousand twenty three, and I'm sorry, I'm lost.

Where does it fit to a portfolio? Yeah? Tom, I you know, obviously it's been a very tough year and there's been a lot of questions about whether bonds can deliver that revlicification benefit that they have for so many years. But I would argue this that you still get capital preservation and now you're actually getting income and fixed income, So I think there's still a valid reason to have

fixed income. Obviously, you need to be pretty strategic about the amount that you have and the type that you have. We like have a higher credit quality, and um, we're moving out in duration as yelds move up so that we can capture some of that income screen longer term. Kathy, what is credit fit in given the difficulties we could face it to this year. Yeah, we're very cautious on credit,

particularly how yield. Um. You know, the spreads move up, then it came down and started to move up again, but we just don't think how yield is price to deliver the kinds of returns we'd like to see in a slowing economy of mental recession scenario. So I would be pretty careful on high yield investment grade that you know, we think it's okay, We wouldn't take the hig amount of duration risk, but some of the bigger companies with

solid balance sheets should be able to deliver. And you can get decent income in investment grade corporates right now and locking some of that in and even a five year duration is going to even north for four percent, which is which is not bad for an income investor.

When you look internationally, Cathy, and you look at some of the projections for the ECB raising rates possibly by seventy five basis points next month, how much does that change your outlook more broadly considering the regime that we've seen and considering how much pain we have seen it

transpire in the euro project. Yeah, you know, our premis conviction this year is that the yield curve will will invert, and that inversion will deepen, and the harder the central banks go in that direction in terms of raising rates fresh inflation. But more likely we are to see that

in virgin continue. So it doesn't really change the scenario that actually, I guess reinforces the idea that if the ECB heightens aggressively into a very weak economy on top of the FAT and all the other simple banks, it's really hard to see that we avoid sto global recession. And that should mean more and more envision in you so, and that means also the reason why you're more enthusiastic

about duration. What does that mean in terms of the likelihood of the credit declines that you expect not only in the US but also in Europe. When you're talking about being very cautious on high yield, what's the magnitude of the potential losses that you see versus just simply strategically being away from them as you wait for this to play out. Yeah, it's one of a strategic decision um. Obviously,

triple siege, you know, the very lowest credit quality. We're always a little conscious on that, but particularly that's a pro cyclical position and this is not the time to be in the lowest credit quality. So we think, you know, you could see UH spreads wide in a hundred and fifty basis points of so in the high yield area, and there's just not a lot of potential reward for the risk that you're taking in that that area. Now,

that's my grade looks a little bit stronger. You know, a lot of these companies have turned out their debt over long term, so we don't see quite as much risk there. But it's definitely credit is pro cyclical, and this is not the time to be overweighting credit. Yeah. Well, I think I agree with that when I look at the charts, Kathy. I just looked at a vanilla corporate piece of quality name everybody knows, and I'm sorry, it's had an ugly August. And I look at the Bloomberg

Total Return the index. It's now down fourteen even fift from the peak. But it concerns me, Cathy, is in the last week it's rolled over again. It's a lower price, higher yield. What are the ramifications if that index breaks through the let me get the date, John, if it breaks through the June low, I mean, I mean, it's stunning. Yeah, you know, I think what we're reflecting here is this combination of fear of federate hikes and deteriorating economic growth.

So we break that low. I don't know that there's a huge significance to it. I don't think that We're still going to say huge amounts of flows in and out based on you know levels anymore. Um, anybody who wanted to exit fixed income where the credit markets, it's probably done so already at this stage of the game and moved to very short term treasuries. But you know, if it continues to wear on this, uh, the total return in portfolios overall, you know, not making money in

stock and I'm making money in bonds and uh. And I think that people just will tend to want to be in safer and safer assets. So compro Cathy Jones, Cathy love catching of you, Mr the Piano, Mr Piano, Really do do you see? Lizzie Byrden yesterday time with the piano behind her told the sur Fatmans rules that if you turn up with the piano but a plane, she said it wasn't in tune. Yeah, well that's a good John the piano in tune. It sounds like it's

not in tune. Jeffrey You, joins, a senior email market strategist at B and Y Melan It is a jumble. In August, Jeffrey You, if you were having the next cup of coffee with Jerome Powell, what would you say, he needs to watch globally for September. Globally for September. Look at what your peers are doing. Are they going to follow you and say, not only our raids going to go up, but they're going to go up for a sustained period. Europe is next. What are the BOE

going to do for so much? For such a while market has been pricing in a quick aggressive move by the b o E and then cuts towards the end of twenty three or maybe early twenty four. Is that going to happen now? Because if Europe is now looking at sustained high rates for some time, then that's going to constrain global growth. And then you just ask where is the growth going to come from? Jeff, on your tour meeting clients, do you meet any bills because we're

struggling to find them. No, Well, I am in Europe, you know right now, So within Europe until there is a plan to deal with the energy situation that sounds like behind the scenes, no plans are being formulated, then we'll just go and revisit, you know, once we see what the plans are. But then again, you know, being the UK, where you know let's just say there is a bit of a vacuum, you know, at the very

top right now, we're waiting for plans. It's really hard to know, you know, what the outlook is when there is just no plan. At some point things get better and they come in better than expected. Jeff, do you think the market position for that kind of story? Have we seen that wash out in any way, shape or form from from your perspective? Well, I always go back to positioning, you know, just looking at how markets have their assetlication right now in some of your risk assets.

So you're still relatively overweight US as set, just still overweight the dollar. So there's only one direction to go. You want to wait for that trigger. So if I want to construct a positive narrative, you know, maybe China is no. Not right now, we probably could use a bit of a bit more disinflation from China. But heading into next year, just as the world you know, needs a bit of a growth kick, that external demand may

come from China's normalization story. So that's something I'm holding out for maybe six months or further down the line, but at this point, best to stay conservative, go back to positioning. We're positioning is lightest and risk where you're

going to see the brace of positivity. You have another way of asking what John was getting at, is have we praised in fully a recession in Europe, a downturn that flows with the recession, or is one in the United States, and a sub three GDP handle on Chinese growth? Have we already price set in to global markets? So we've certainly priced in recession in Europe just looking at how the euro's treading was around parity right now three

you know China. Uh So it really depends on which day, because if I look at now how Chinese equities are performed, espessially the tech space, I think markets actually looking for positivity, looking for some relief on the regulatory side. You looking for perhaps down the line some normalization in societal restrictions

as well. So actually, in China three percent maybe headline growth investment driven, but the Chinese consumer, the household probably not as bad and you are certainly not a recession and yet as as long as the labor markets and rude health. But let's see after Friday, maybe that could

change as well. So Jeff, if that's the case, what would you have to see it to not be quite as bearish, right to not be quite as conservative if the positioning right now is pretty gloomy, so to not be bearish, I think we'll be a peaking in inflation numbers, because that then you know that the household started to

show some restraint. And then on top of that um as Chen Powell has already said, and probably global central banks they're going to keep rates high, probably for a little longer than then you have that dual problem approach whereby growth is going to come off, So you need to be like the end of the tunnel. But inflation expectations,

that's the bossom mine. Jeff, You, you and I were trained that in finance four standard deviations is a substantial move, and we learned that in medicine six standard deviations is maybe equivalent. Because of the resiliency of the human body, German inflation is reported moments ago off. The long term trend is a really elegant study of nine standard deviations. We have never seen this. How do we extricate ourselves from a nine standard deviation move? Well, let me tell

you how our days are shown. The euro is trying to position itself for that. We are at three and a half times usual level of euro holdings short within our position days, especially for the main does anything beyond one and a half times short or long, then I set up and take notice. Euros at three and a half already. So do you chase that? What do you fade it? You know sore right now, It's like hearts

has faded. But head said you probably, well you don't want to chase it, but you certainly don't want to go against that right now. So the market is pushing this. They want to see how low things can get before we get a policy reaction and more importantly a plan you know, from the European Commission, from the Energy Minister, from the energy ministers. But going back to your stand nine standard deviation movement markets are really close by Euros

standards to forcing that case, Jeff. Some of these numbers this from Goldman this morning, just reading this note that inflation could top next year in the UK if natural gas prices remain elevated in the coming months. So city last week that would be the peak for UK cp I for them bankving that's got it a thirteen, Jeff. Can you get your head around that kind of number

in the UK? Well, it really is going to be a struggle for the b o E to you know, try to communicate that and to be frank, you know, looking at the consumption days in the UK right now, we aren't exactly you know, seeing that retrenchment you know in spending. So that's like the household is actually doing okay, So is there a gap between reality and what's going on the ground. So we need to see some convergence at this point. Until we get that convergence, you know,

we will be painful then, I'm sorry. The central back message is going to be very, very fierce, you know, hold back right now. She's going to get out of control. Jeff, you disterling trade weighted reach, the jan major weaknesses of so very a lot to try to make those comparisons because there was a deep pegging involved, you know, at

that point. But put it this way, right, if they want to you know, limit the fallout you know from an exchange rate and the collapse, and then we need a plan in right now that cooked up as early as next week, right to match the euro at least to save the household, especially on the lower income side. That is absolutely necessary at this pin and the market's anticipating that if the new government comes short, you know, then I think comparisons with are going to be drawn.

So let's we visit Hi, Jeff, you, thank you, sir and y Mellen. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern. I'm 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