Surveillance: No Recession in 2020, Emanuel Says

into stocks. Joining us now, John Riding, chief Economic advisor to breen A Capital, joining us here in our Living three oh studios with his party head on, ready for the new year's celebration. Um, what do you think? Do you think that we're going to see an accelerating or

re accelerating economy next year or or the opposite? You know, at least I find it very interesting chim re accelerating economy because if you look over the last ten and a half years of this expansion, economic growth has averaged two point three percent, and it has been the most stable period of economic growth on record. And this year that we are ending today, we'll see growth in line with that ten year trends of growth hasn't gone anywhere.

What has changed is perceptions of where growth is going to go. And we came into twenty nine on this tremendous fear of recession and the yield curve was inverted. And you know, even thee you go to a gas station and maybe people that you the gas standard talking about inverted deal care foods. There probably no idea when but that's not true that actually go to a gas station and hear people talking about absolutely true, absolutely true.

You had people people talk about cocktail party conversation. You know, you just just overhear people talking about it and did you new Jersey all the time. And we are now entering into where there's no fears of recession. Um, there's no fears for the market. We remember the debacle on Christmas Eve setting the you know, the end of a almost a bear market. It was really a very valid correction in stocks. So where are we now as we going to go into I mean, our growth numbers are

around two and a quarter percent. May an acceleration we two and a half percent. A bit acceleration is very difficult because we don't have the people to employ to three and a half percent unemployment. Right, there's a story out this morning that about slowing population growth, and just had the slowest population growth in the centery in the US, and that continues for a while, and we haven't yet

seen the big pickup in productivity growth. So pencil in another year of two and a quarter percent or so economic growth, maybe two and a half, two and three quarter percent on the on the high end um. The risk is to the downside if we don't get profit growth going again, and that's a really big issue for the US. John, can you put in the context for our listeners, what a ten or eleven percent I'm sorry,

ten or eleven year expansion economy? How unusual is that? Well, it's unprecedented, so I guess unprecedented would make it pretty unusual. So what so, how do we think about that? Is that? Is that good? Is that the new normal? Is that? I mean? Are we poised for some significant correction in

the economy. Well, if you step back and you look at all of the recessions and expansions since the uh in the post war period, so you have seen in the last two or three decades expansions become longer recessions were becoming short and then of course we had the Great Recession. Though not quite sure what's so great about it, but nevertheless we had the Great Recession. But now the Great Recession I set the stage for a ten and

a half year economic expansion, with expansion expected to continue through. So, whether it's the new norm or not, it's the environment in which we are in. Well, here here's the thing. I mean. If you talk about the fact that we're probably in for more of the same, we're not in for re acceleration. We're not in for a big decline or recession. As the people in the gas station we're talking about the inverted yield curve six months ago are no longer doing so. Evidently I'm wondering, you know, is

that consistent with valuations where they are in equities? That is great question, and my fear is not. Let me explain. If you look at the we use very simple model. We take level profits and we discounted by the level of corporate bond deals and bondials are very low. But even on that calculation, the market looks a little bit overvalued. Now,

what's the major problem for the market. Wage growth has been exceeding the sum of profit growth certain the sum of price gains plus productivity gains, and so profit margins have been squeezed, and they have been squeezed now for about five years. We need to get profit growth to pick up because we can't simply have a risk on

rally from here. What we can for a while, but it would end badly because in an environment where the trade deals have done, the risk is off the table and we just run the market higher because we are at risk on um and we don't have the profit gains. Then then bond heels rights and that actually reduces the sort of fair value of the equity market, so that everything hangs on price increases and on productivity gains and on rekindling capital spending. So that's the key thing I

would like. Do we start to see signs that we're going to see vigorous growth in capital spending because that was the most disappointing part of the economy When looking for part of the economy that did crater and does need to re accelerate its capex. We need to move to an economy which is more capital spending to support

stronger productivity gains, to boost the economy. How much of John, do you think the take extent we've had a contraction or just a a pairing back of capital investment, How much of that is due to just the cycle or in any economy versus the uncertainty associated with all the trade issues. I think it's the latter. I don't just think it's trade. Look December, we had corporate tax reform. We had the corporate tax cut. The US was no

longer uncompetitive from a tax perspective. We had a number of tax incentives in place, and we started to have a pickup in capital spending. And then in the middle of eighteen it just just stopped and we haven't had growth. The one area we've had growth in is an intellectual product. That has been the strong area of capital spending, but in terms of plant equipment buildings, it's been very very weak. Um so I you know, we're going to have a

test trade on certainty is reduced. Are people not going to commit or are they going to say twenties an election year. Let's wait till after the election, and then we have another year of black capital spending. And I'm hopeful, but it's a very difficult thing to forecast. That we do start to see a pickup, but it's not there in the numbers yet. John writing, thank you so much for being with us in Happy New Year. Trying writing, chief Economic advisor to Breen Capital or do you plan

on going to Times Square? Um? No, but Breen Capital's offices are at three Times Square? So does that mean you're going to be avoiding them or heading there? Um? Well, I decided not to have the opportunity to watch the ball drop, but I think I'm gonna stawn home. My mom's over from England. She's ninety and I think she deserves me to be there. Well, cheers, cheers to your mom, and happy New Year. What do you plan on doing, Paul, uh, staying close to home, which is not Time Square? Yeah,

I know, I know. We've heard lots about the new Jersey cross ways right now. One of the more interesting stories when we woke up this morning is the story about Carlos Gone, the fallen automotive Titan. He's facing trial for financial crimes. He fled the Lebanon to escape what he called Japan's rigged justice system. To get the latest, we welcome Donna cra She is a reporter for Bloomberg News based in the Middle East. Donna, thanks so much for joining us. What do we know about Mr ghones

whereabouts right now? Hi? So we know he is in the Lebanon. We don't know exactly where he is. Um. I went to his house in Beirut earlier in the day, like in the early hours of the morning when we heard the news, and um, there were no security and it wasn't clear if gold was at the house. Um some of the window or the windows were opened, some of them were closed, so it doesn't seem that he

was inside or anything. Um, we know that. Also one of the Lebanese ministers said that he entered Lebanon legally through his French passports and a Lebanese I d um and he also said this minister said that he tried to convince Japanese officials to send him to Lebanon to be tried here, but you know, he wasn't very successful. So we know he's in Lebanon, but we don't know

exactly where he's staying. And just to sort of set this up, so Carlos gone Uh said that he Uh is fleeing Japan's quote rigged justice system, that he was not fleeing justice but rather injustice, and he of course has been accused of financial misconduct. Meanwhile, there is a question Lebanon, where he did grow up and has citizenship. He was formerly the head of Nissan and Renault UH. There is a question about extradition and the fact that

they cannot, that Japan cannot extradite him from Lebanon. What have the authorities in Lebanon set up to this point? Um, They have been a little bit tight lipped about this, but the Lebanese officials, ever since um Going was arrested, Lebanese officials have said that they will support him and they will extend as much help as UH as needed for foregone. As you know, Going is seen as a

national hero here. Um. When he was first detained, billboards in support of him sprung up across the nation with his with his pictures everywhere. People see him as one of the immigrants that you know, made it big outside of Lebanon. So he's he's a national hero. And they've repeatedly said that they will support and help him, but they weren't very specific about how this support would materialize. Donna any sense of what Mr Going might do next? I mean we some said that he will hold a

press conference, but did not specify when that will be. UM. Given that UM, his his word about are unknown still in Lebanon, it's hard to tell. UM. Some reports that said that he met the president upon arrival, but we later had some people denying this to us. So he hasn't seen anyone. We We talked to a friend of his, a longtime friend friend of his, earlier in the morning, and he said that he didn't know that Going had arrived, but that um, he was happy he was here with

his family home for a new year. So just to sort of give some perspective. In news reports this morning, a lot of people were saying, uh, go and will probably never return to Japan because he would simply be re arrested if he were to do so. Given the fact that you actually went to his house in Beirut, can you give us a sense of what it's like. I mean, basically, is he living in the lap of

luxury by moving to Beirut and never returning to Japan. Um. The house is in one of the capital's most posh areas. It's very known. UM it's like a light pink house to painting is light pink with light blue windows. It looks like an old house that's been recently renovated. Um, you know there are some small shops around. Everyone knows that's Scarletts Ghn's house. Um, if you just drive through the street, there are all these bally posh buildings around.

So the area is really nice and um, everybody knows that that's Ghn's house. Danna, thanks so much, or Donna, thanks so much for joining us. We appreciate your your reporting from Beirut. Donna Bloomberg News reporting from Beirut about this really just amazing story. It's kind of a James Bond Jason Bourne type of situation, kind of escaping from Japan uh to return to Lebanon. Fairness, he didn't necessarily tunnel his way exactly. It's unclear. Yeah, it's unclear how

he actually made the trip from Japan. I mean obviously on a private jet, but how that all came about, given that he was out on bail. I'm trying to get a too. Is he right? Is it injustice what Japan is doing to him? I mean, I don't think people think he is completely clean when it comes to financial malfeasance, but there's a question about whether the potential penalty and the way that the Japan is going about it.

It has been fair. What a year to look back on for Yeah, and we were asking the question how long can the rally in both bonds that are considered safe and stocks continue And it seems like there is a profound inconsistency here. Julian Emmanuel just graced the door. The door. Tom Kane would say, VT I g chief equity and derivative strategist who has gotten it right with the stock rally for years. And you called me out.

I remember what I was once talking about how cash was looking better, and you're like, you're crazy, you were right. I was wrong. Um, what do you think for next year? Is one of the acid class is going to emerge superior? But you still couldn't get Tom Keen to get out of his triple leverage, right, No, but occasionally he'll he'll jack it up to quadruple leverage if you feel really risky. So so when we look at next year, it's not a continuation of the same because this year was, you know,

very dramatic. Obviously it was not looking great in January. It was difficult to stick to our guns. Our view was that the FED was going to help out. They helped out a lot. We also didn't see recession. We don't see a recession in the biggest difference coming into into this next year is we think the bond market really really did turn back in September, probably a very significant bottom in global yields, and in fact this is the point in the cycle where higher yields are likely

to feed into more optimism with regard to equities. Certainly we saw that in the fourth quarter UM But for us, the the challenge, the interesting thing will be after ten years of a bull market that has been fought sort of tooth and nail. You've seen it in terms of the lack of flows into equities for the last five years, does the public finally get a little bit more interested in stocks and start committing funds. We think the answers yes,

and we think that drives bond yields higher. So as we think about the market the performance in twenty nineteen, I would argue, more than most people were anticipating, is it primarily the Fed? Is that the primary thing in that investor should focus on. Well, Actually, the FED would prefer that you don't focus on them at all, and

they've been successful. Actually, for the past few meetings, they've been incredibly boring and and J. Powe would love it to be that way for the entire rest of the year, which is why we also think that they were very, very forthright in getting front of of this turn of the year UH liquidity UM in the repo markets, given the spike we had in September, we think they've done a great job of managing it. We think they'll do

a great job over the next several weeks. For us, it's very much um can confidence, which is turned, can the yield curve continue to steep in, which props confidence? And is their fear of valuations, which we think, you know, really they're expensive slightly but not overly. So you said something that piques my interest dramatically, which is the idea that treasure yields can rise and that that will be

looked at is a good thing for stocks. That has not been the case for a while, or there is a threshold for how high treasure yields can go before it's considered a bad thing when it comes to valuing equities. What's that tipping point? Well, so if you look at the last several years, the tipping point had had been ten year yields in the US going over three percent. Obviously, we're a very long way away from that. UM. We

happen to have a higher yield forecast than most. We're looking for two point three nine right now, right right, which if you think about it, isn't terribly aggressive if we're if in in into an election year and you think about politicians being incentivized to create upside risk to economic performance, which at you know, sort of one eight one nine is a rather subdued number UM for US.

The tipping point in terms of where bonds become problematic is quite a ways a way in our view, likely north of two and a half percent UM, and that would require a material re emergence of inflation, which we think, you know, we'll sort of peek its head through, but

not become problematic. Julian, you mentioned earlier evaluation. I think about twenty nineteen again, a percent move up in SMP with little to no earnings growth in where are invaluation just feels like the market should be at the higher higher end and I should be concerned about valuation well on metrics such as price to sell. As you are at the higher end, we sort of tend to keep it simple. Um, it's obviously worked in terms of the

story on on Pe. You really are only at the midpoint slightly above the range of the last thirty years. And if if our earnings estimates hundred and seventy five for twenty are realized, um, and that growth rate slightly under seven percent is very consistent with an economy chugging along and margins not necessarily being pressured anymore. Um, thirty four fifty are your end target basically gets you around nineteen points six times, which is perfectly reasonable. What about tech,

big tech? And how much longer I can kind of drive the gains that we're seeing in the US. It certainly has been quite a month for tech, hasn't it. Yes, it has I think for certain box uh in in the fan group, it's been quite a decade in the course of one year along point. Yeah, well, I know, I mean, like, is fang really appropriate here? Facebook, Apple, Amazon, Netflix, and Google? Shouldn't it be like Microsoft Oracle? Well we can you know acronym them all day, fam G and

so on and so forth. But uh, look, the long run drivers of growth in those names is absolutely intact, is likely to be intact even if the government uh really gets more intense coming into an election year in terms of regulatory scrutiny, data privacy issues. The long term

story is intact. That keeps us neutral um in. In the medium term, however, what we would say is that if we're right in our view that you have a shift out of bonds and into stocks led by more public interest, the public will end up being a buyer of technology. The public is comfortable with technology, understands it, and is likely to be a buyer. Lisa is also comfortable with technology. Doubling down, I'm more valuation sensitive. Do

I dip my toe in? Yes? You are okay? In energy? Um, you know some of the sectors that maybe healthcare, that have lagged and might suggest kind of we have a valuation call here. What we do think it's valid to look at at some of those laggards. Um again going back to this psychological turning point in confidence in bond

yields sort of triggering uh. You know this this potential move towards more value and and and when you look at it again, Look, we're very sympathetic to the idea that over the long term UH, the move towards E S G investing and move towards a uh you know, the green initiative is likely to continue to pressure energy

share ownership. But again end over the last several years, nothing moves in a straight line, and we think it's basically time that people are going to look at an area where you know, it's you're under five percent of the weight in the S and P five all right, what could go wrong that would make you inaccurate in your forecast that keeps you up at night. To us, the lynchpin of of the you know, particularly late cycle

is confidence. It was very important that not only consumer confidence, which is utmost because I think we'd all acknowledge that the consumer has been the driving force of the last number of years. We do not expect that to change. But importantly, after a year and a half of sort of you know, being in the trenches on the trade war, CEO confidence turned um over this last quarter as well.

To us, confidence needs to keep continuing to move forward if there are geopolitical upsets, if they're our domestic US political upsets, and certainly the risk it does exist for for both of those um, that's you know, you look back at this time last year and the government shut down at the same time you're fed was hiking rates at the same time the markets were cratering and confidence took a hit. We you know, we don't want to

see that happen again, not a do we. Julian Emmanuel B. T i G, Chief Equity and Derivative Strategy, Thanks so much for joining us coming here in our Bloomberg Interactive Broker studio. Right now, Paul has gone to the corner and is practicing his lunges ahead of going skiing, because that is what he is interested in, rather than talking about the REP market, which I've got to say, is it really interesting to me? In heading into your end? It was supposed to be potentially volatile, the sort of

storm that few people were expecting. The storm turned out not to be. At least there is a storm in the Midwest that's heading toward these but it's not in the REPO market. Alex Harris has been covering this all year for us super well. She was talking about how there are potential nodes of contagion. Yesterday here she is. She comes into the office and she says, nothing's happening now we know. We gotta looked at each other and said, oh,

things look relatively calm. You know, the rates sort of normalized. It's bouncing around a little bit, but well within the target range that you know the FED is laid out for short term rates. So I think everyone's feeling like, Okay, we're here, we can close the chapter on your end. Let's turn the calendar to and a whole new set of problems for the market. And mainly it's if you're the Federal Reserve, how do you extract yourself from the

repo market? Because I think at the end of the day, they don't want to have this big of a footprint. What would you say to somebody who looks at the fact that saw the repo operation that the FED has been doing undersubscribed on the final day of the fact that you're seeing nothing exciting going on in the repo market heading into your end despite some of the gloom and doom warnings that we heard. Isn't this a victory for the FED? Can't the FED go out and say

we have this? I think you do. But at the end of the day, one of the things that I know Jerome Powell had said back in a post f MC press conference on December eleventh, was you know there should be volatility in the market, that's okay, a short term rates should be volatile. They always have, and I think, you know, it's trying to balance for them. I think, you know, what level of volatility are they comfortable with?

How much are they they comfortable with letting the Fed funds rate rise within their target range um and not breaching it and causing some questions about their credibility. And so this is what I think is going to be about for them, is you know, finding, okay, well, what's the appropriate level of intervention in these markets from from

letting them become mon ruly. And that also means taking a look, you know, at the regulatory picture and saying, how do we allow these markets to move more efficiently so we don't have to be in there all the time. And these are not questions that are going to be answered in the span of a couple of months. I mean, they've been talking about reserve levels and what the ideal target level reserve level is for like a year and they still couldn't get anywhere before this all blew up.

So there's a lot for them to discuss here, and yes, things have calmed down, but do you really does the FED really want to be pledging half a trillion dollars in overnight or in liquidity for the end of the year. Do they want that big of a footprint or any sort of idea that this is what they could be providing. So, Alex, how did we kind of get here? I want to get a sense of what's new about what we've been dealing with with the FED and the repo market since September.

How is that different from what we've historically done? Um, Well, you know, it's not even that it's all that different. You know what they call these overnight or term repo operations or or what the street calls system rps, they've been they've done those before, they did those before the financial crisis. It was definitely, um it was the way in which they actively managed reserves and they actively managed

the FED funds rate. And then you know, QUEI happened, and you know, there was this huge stockpile of reserves and they didn't feel like they needed to come in and manage the FED funds rate because you know, they had such excess reserves that it wasn't necessary. And so now what the issue is is the FED has to figure out, Okay, what is our ideal level of reserves?

And if we're under that, are we going to come in again and do these repo operations on a more regular basis to help manage you know, the FED funds rate and manage those reserves. And that's what you know, they say they don't want to, but you know, I think what everyone's really unsure about and can't get a read on from the Fed is okay, well, what's their ideal level of reserves? And is it too low? Is it too high? I know the market thinks it's more

like one point seven trillion. You You've had people at the FED like New York Fed President John Williams say, you know what, it's probably more like one three. Back to where we were, we're about one five and and it's still I think some people feel like it's a little low because again, you know, reserves are very fluid. I know the FED only provides a weekly snapshot, but they move quite a bit, and and you know they're

devoted to things for regulatory purposes. So you know, everyone, we gotta figure out this year we gotta figure out what this ideal level is and then the Fed can go from there in terms of setting its policy and how it wants to proceed with the front end. All Right, it is the final day of trading for twenty nineteen, which means it's a perfect time to gaze at our navels and and talk in big abstractions. Uh, it's always a good time to do that. But why don't we

do that now? Anyway? Um, could you give us a sense of what the big takeaway from twenty nineteen REPO disruptions really is? I mean, what is sort of when somebody thinks about this other than oh my god, I need to go do my stretches. Um, you know what, what should they think? You know? I think the takeaway is the Central Bank was woefully unprepared for this. I

think they were completely caught off guard. I think there were warning signs as far back as April that there were issues and the market was starting to reflect it when month ends, every month end started to look like a quarter and people are saying something's not right here, something's broken, And you know, I it just took like was seemingly innocuous day of settlements in the treasury market to to really push us over the edge here that you know, there was something broken a long time before

we hit September, and you know there were a few people keeping an eye on it and watching it. And I think it just comes to show you that the federally took a hit here, and you know, people are really questioning their ability to see this and what they're actually you know, reading and understanding and what the market's telling them, what the streets telling them and dealers are

telling them. But I think they missed. I mean, they've recovered and again they've they've made sure that your end is gone smoothly, but they really missed here, and they think it was just a sign that they were really unprepared for what was to come and really underestimated what the what the big issues were here. When do we expect to get some type of longer term I guess fix from the Fed? It's been a while, right, are we?

I mean in order for them to kind of rehability, maybe their reputation in the marketplace, do they need to come up with a longer term fix? Oh, Paul, that's the million dollar question or a trillion dollar question. Really, I mean That's what everyone wants to know is that they really don't have a long term plan in place, and that includes, you know, they need to figure out what their ideal level of reserves is and then they need to figure out, okay, how are they going to

extract themselves from the repo market? You know, what's their role in this going forward? Are they going to put a more permanent facility in place or are they just content doing these or do they feel like they have to do nothing because they're going to have be at this perfect level of reserves and we're going to be okay. So there's really a lot that they need to clear out regulatory as well, which you know, same to someone, I'm like, what are the chances that we get anything

from the Fed this year? You know, that could help make the plumbing run a little bit smoother, because Jeron Powell at his press conference was saying, oh, well, we can implement things, but it's going to require you know, sending out comment and like waiting for the common period to close and getting that feedback and then you know, sort of calibrating according to the comment, and you know that could take a year, Like we could still be in this situation talking about regulatory It is a year

from now and I won't be surprised. So there's just there's a lot on their plate they need to work through. And you know, minutes from the December meeting are out on Friday, and I don't even think that's going to give us much of a sign of anything. I think they're just they tend to be a little bit more methodical and a little slower to act on things. Also at the end of the year, and why would they give us anything to talk about Alex Harris, I mean really,

I mean this isn't hypothetical. I mean honestly, they want to be boring. They will be boring. Alex Harris, who covers all things rates and Repose for us year at Bloomberg News. Thank you so much for being with us. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio