Surveillance: Positive Outlook with Golub

five and the equity gloom back then. Someone who's studied that he's way too young to remember. Jonathan Gollub joins US chief US equity optimist at Credit SUITEES. We're thrilled he could join swarning. I'm gonna get to your revisions, your mark down and earnings in that. But the answers after seventy four, I believe it was we went up thirty eight percent the next year and critically that the

year after that we went up another eight percent. Is that the great surprise out there is an equity liftoff out there somewhere, Well, you know, I think it gets to something that that Lisa was saying, is what's good news. I mean right now, the backdrop is just becoming much more positive with respect to this idea that there's no recession coming in the next two or three quarters, and the market getting their head around that, which is why the vix has fallen and why stocks are racing ahead. Now.

The problem is, eventually this does bite us in terms of two things. First of all, um companies are as inflation is falling, companies are losing pricing power, and that's not good for margins. So resilient consumer is actually a little bit of a headwind for profit margins, which is strange. And ultimately, this inflation doesn't magically go away, which is also a problem. You mark down earnings, Okay, you're doing tweaks here in the outlook. You got a page outlook.

I didn't read it all. I read part of it. Do you know you know that you know the watermark that they have for us so that we don't steal their research. Do you know what this water mark said? I if this research gets out, we take away my egg nog. I couldn't believe Credit Suis did that. The compliance department in Credit Suez did that. I want to know if profits a place to hide. You were way out front in the bull call of selecting certain sectors certain stocks. Does profits save me if I have to

own stocks? I don't think that's the way you should be looking at. And you're talking about, you know Gina's comment that what happens in the economy doesn't necessarily happen in the stock market. What happens last year corporate profits the outlook improved throughout the year, and the stock market had a terrible year because um, you know, interest rates rose and you know other factors like that. I think this year is gonna be a little bit different. I

think that you actually have margins. I'm sorry, margins are going to get squeezed, and I think it's gonna be tougher on profits. But I think the stock market is going to be a little bit better on it. Like how much better double digit or weeks? A slow day, I need to make some news, let's go. No. I think it's gonna be a more modern returning year because I think that you're looking at something like down four or five profit growth, even if you don't have a

recession because of a margin squeeze, it's coming. Have the companies that have already done the layoffs, and I'm thinking of tech, I'm thinking of certain industries. Even the banking industry is starting to do some bigger rounds of layoffs. And of course the semiconductor industry. Are they going to be in a better position or are they just a

tea leaf for what's to come first? All when you look at and a lot of guys on Wall Street talk about all these layoffs because they're looking at tech and financial financials, but but in reality that the job market is just swimming in an unfilled you know, jobs and demand is incredibly i but what the story is is on tech in particular, is that and you know Thomas talking about profits, it's not one profit picture the

tech universe. If you include the Amazons and the Googles and the facebooks and like, it's been a horrific environment. They've substantially lagged the market. Their their estimates are being revised lower and lower, and they're missing the lowered estimates as a group. And their outlook for growth, you know, it was weak. This is since the iPhone came out in two thousand eight. This is the worst year for

tech related companies um that we've seen. The expectation is that next year we're gonna get this big bounce in tech earnings as we get for you know, we had this big pull forward. We're all staying at home. We're buying you know, stuff that in a lull afterwards, is gonna last longer than we think. Are you telling me to sell Apple? I mean, I don't know me. I'm in the triple leverage all cash fune. We know that. But are you telling people to sell Apple along with

all the other challenges, Cathy? Is what what I'm saying is I think that this problem that we've had in tech is not a sentiment problem. It's an earnings problem. And it doesn't last for three or four quarters. It last for six or eight quarters. And a lot of these big tech companies that two or three years ago we said they have modest, they're impenetrable, and we talked in those terms. Um, a lot of those companies are are getting closer to totally addressable market, whether that's in

hand sets or advertising or other things like that. So how do we get to forty fifty by the end of next year, given that you're expecting perhaps a bit more softness and techno leading. Well, there's other areas. So I think that energy where this this expectation that you're going to have a weakness in energy profits, I think

is going to be totally um wrong. I mean we're seeing this right now that in the in the last six months, the earnings estimates for the energy sector are keep getting revised higher and higher, even though oil prices are falling. So like, where's the magic there? And it's a lack of refining capacity. And if we do end up with oil prices rising, you know a bit, because the economy is a little bit stronger and China reopens, then these companies source. So I think that's an area

of strength that's probably underestimated. Tech on the other hand of the down I didn't know this. I mean, folks, years ago, Credit Suite was absolutely definitive on energy infrastructure in the United States. His name was Mark Flannery. He's over with Steve cohen By in New York mets bodies at point seven. To you guys on the high ground, I don't think a lot of people know this. What does the subsets you have of energy tell you about

the great energy vet in the stock market? Well, I mean, and we're talking, you know, it's interesting if you look at US Energy company in North American UM Energy, that you have each of the pieces separately. So you have companies that do refining, a companies who do distribution and MP. If you're looking at the big majors in Europe, they're just big, fat, all companies and you have less of that granularity that you see, you know, that thing in

the US with with with our big integrations. But but we have a lot of and you can see that those you know, those refining businesses are just levitating on lack of refining capacity and nobody is putting it in. So if you do have oil lift off and then you actually get some upside in the more commodity sensitive stuff like the MP name and the service name, the sector is going to be a really big surprise. It's

absolutely a topic. The second area at least we're talking about is is the consumer um just thinking about what's going on. Their wages are staying higher, and the inflation on the things they're buying is falling, and there's an abundance of jobs. Consumer confidence. We've seen this now since June and July. The consumer confidence data is ripping and people aren't appreciating that the consumer is going to spend a lot more money. It's going to keep us out

of recession. And that's another area optimism. Yeah, but that's exactly it, right, I mean, even with optimism, the case is converging on some of the bearish sentiment that we're seeing from elsewhere. I will say America is gonna shop. That's basically the takeaway that I had heard. They've got money, they're going to spend it. Good John, thank you so

much right now. And this is really import And as we talked to John Gobub earlier, there are two nine thousand people at the Bank of America and Mr moynihan called in this morning. Only Mark Command is working today for the Bank of America. He's global ahead of US short rate strategy at Bank of America. Thrilled he could find time creeping into the holiday. Let me go to short rates first, Mark, what is the efficacious way to play the fixed income market into next year? If I'm

scared stiff? How do you do it? If you're a feared Yeah, well, we think that the path of least resistance is still going to be for the market to try and nudge up the terminal rate at the front end. The market right now is about twenty five basis points below where the Feds thought for the end of twenty three will be. And if you're a little worried about the outlook, we think that you want to be leaning

along in the back end. We think that that is going to be a way to protect yourself against the slowing economy uh likely uh the funds in employment likely higher unemployment rate, moderating economy, and that's going to give the curve still a bit of a flattening bias, at least in the near term. We do think that go ahead, well your charm as you speak in English, there's a lot of people in fixed income where you can't understand

it lining up behind uh brmo. Here. The number one question I get from people on the street is how long is it gonna take to make up a fifteen or eighteen percent loss in fixed income? And you've got an encyclopedic knowledge on this, is this a twelve month exercise? In eighteen month exercise? How do I get to back to break even on fixed income? How long will it take? Well,

it depends on what your benchmark is. Um but look, we do think that fixed income is going to have increased value for investors over the course of the next twelve maybe twenty four months, and that simply because again you're gonna be seeing yields that are probably going to be moving lower. You're gonna be seeing yields that have value in portfolio and portfolio again as they serve as

a hedge to risk off moves where it yields. When we see risk off will go down as opposed to up, some prices will increase, not decreases we saw over the course of two and that is going to mean that investors should be thinking more constructively about fixed income broadly, simply because you're gonna see that risk off of value return to fixed income, which it really lost over the

course of two with very very elevated inflation. As inflation moderates, we do think that increases the attractiveness of fixed income and portfolios. And the way that we've been recommending clients play that is by being long towards the long end

of the curve, viewing the long end more constructively. You could still see yields rise at the front end to some extent if the FED has to keep hiking over the course of next year, but we do think that the long end you're going to be somewhat protected because we expect that most yield increases are going to be bought by investors who see long end yields is increasingly attractive.

Around three seventy five or should we push back close to four percent, we think that there's gonna be a lot of in risk from fixed income investors around those levels. If the word of the year one was transitory, the word of the year in two probably was pivot or step down or whatever you want to call it. When everybody groaned, you could argue there a couple other words in there. What's the word of the year in that everyone's going to kind of hang onto is the holy Grail? Yeah?

I mean, I think the market is looking for a pause from the Fed. Um. That's going to be at least what the market is looking for from the Fed. Uh. The word of the year will probably be recession or maybe not a recession. Uh. Certainly, it's quite consensus that we're going to see the US economy and like that the global economy slowed down over the course of next year. And how quickly or slowly that happens is going to

really be the focus in markets right now. The market is looking for a turn from the Fed, looking for a turn in the economy, it seems around the middle of next year UM. And whether or not the labor market cooperates, we think, is really the question of three.

So Michael Harton at your colleague over a Bank America put out a note day where he was talking about the sixty portfolio hanging in there, how he likes small cap stocks, and he talked about how bonds should do well in the first half and not so well in the second half. And it sort of coheres with this idea that stocks will do badly in the first half

and better in the second half. What happens to that call if the recession is pushed out, if there is this momentum driven by consumer sentiment that has come in much stronger than expected, Yeah, then the value of fixed income is going to be deferred for a time. UM. Certainly, if we see the economy that continues to do reasonably well again, you're going to see the front end continue to sell off. Is to fet is bias to keep hiking, keep moving, terminal more elevated, and with that you'll probably

see the back end nudge up a little bit. The curve will become more inverted in that type of environment, and you'll have to wait a little while to really see that performance and fixed income that we anticipate. Um look at the market believes that the FED is going to be successful in engineering a slowdown. It's just a matter of how high does the terminal rate and have to go how long does it take to achieve that outcome.

But we all they think they will be successful, and that's why we continue to have a constructive view on long end duration. Continue to think that tens are going to be rallying to about or so by the end of next year, and it may take more time for long end fixed income to really perform well, but we do think that you're going to see that performance over the course of three We certainly saw it in the last few weeks of two. Mark. One more question, if I can buried in your note, is really the tone

of the moment. I'm really taken back by this from fixed income strategists. You guys are recoming closet economists. You're looking for quote labor cracking. Have we ever done this before? Have we ever modeled our fixed income space off the dynamics of the American labor economy. UM. You know, I think that probably implicitly we have in the past. But what's different about today in three is that we're all anticipating a recession. We're all anticipating a slowdown in the

economy and the labor market. And in order to really see the front end of the curve start to perform, in order to see FED rate cuts that are going to be pulled forward and justified, you really need to see the labor market moderate, and that's not happening yet. So in many ways, this is the most expected, most anticipated recession ever, um, And really you need to see the labor market begin to moderate in order to think that the FED will be able to pause and eventually

then move towards rate cuts. Markabata, thank you so much. With Bank of America. Right now, we continue on Washington, but digress from where Ane Marie Harden was on this historic moment yesterday, and we look forward to the domestic, ugly politics of which Henrietta Treys is truly expertus director of Policy Research at VEDA Partners. Henrietta Senator Schumer out with headlines here off the morning shows, and they've got to get business done. What actually happens in those ms

on December three? What is the horse trading that actually goes on? Yeah, absolutely great question. They're working with the parliamentarian right now and trying to coordinate with Senator Mike Lee, Republican out of Utah to get an agreement on something called Title forty two, which is a controversial immigration component that President Trump put into effect back during the height

of the COVID crisis and which expires. So they're trying to horse trade a vote on that amendment and exchange for passage of a one point seven trillion dollar omnibus spending bill. And every Senator and every House member what's that? And they're stocking this year. I expect they'll get it, but these fights take until the bitter end. Um. I'm hoping that votes. So to the imagery that we see in the South and state, folks, I'm as guilty of

this as anyone removed from my life. But the imagery that we're seeing down south is shocked Washington and frankly shocked the nation of all political persuasion. How does that story change once this agreement is made? What is the new immigration policy? Dare I say? Of December. That's a

great question. I mean, honestly, speaking with staff on both sides of the aisle, Democrats and Republicans, there are a handful of bills out there, and all of the business and community and every economist is looking at the labor shortage and saying we need everything from seasonal workers too high skilled workers, and there are bills out there to accomplish all of those things while simultaneously addressing the border.

But we are too far into unfortunately presidential election cycle to even get close to having an immigration bill passed in the next three days, let alone the next two years. So quite frankly, I don't think there's gonna be a material change at the border. UM. I imagine they'll find some sort of convenient off ramp to get around Senator Lee's amendment. UM, but it probably will not change a

whole lot. And I am not anticipating anything material to come out of reform, whither at the executive level or the allegious lation on immigration before this year is out, and then again, as I mentioned, probably not for the next two years either. Henrietta. After them internal elections, people were talking about a move to the center, that there would be more of a collaborative kind of feel, more of a rejection of the truly hyperpartisanship of Washington d

C over the past decade or two or three. How much does that actually fly in the face of what's actually happening as we count down to a deadline and are getting grid luck. I mean, right now we're gonna get bipartisan deal on the surface, but you're going to see this bell passed with almost exclusively Democratic support in the House and hopefully something in the range of about seventy votes in the Senate. So the Senate will be bipartisan,

the House will not be. And you know, if you want to tie it into the speech yesterday, UM from President Zelinski, it is notable that there were only eighty five Republicans members of the House. There there are two d and thirteen of them at least. That incredible event, coupled with partisanship at its most extreme, I think was really well illustrated. And that's what next year is gonna look like as well. Um, they're trying to tie in

Department of Homeland Security funding. Um, they're going to be impeachment trials. I'm not expecting any legislation will pass. It's remotely material until we get to the Farm Bill, which will have material implications for snap benefits UM, and then the debt ceiling, which will have to deal with around

September and will probably be a very ugly fight. UM. And the reason we're getting this omnibus now is so Kevin McCarthy can wait to deal with the debt ceiling until September instead of having to fight that fight right out of the gate. Inwree. I'm glad you mentioned the debt ceiling debate. It has particular poignancy as you see

borrowing costs rise to the degree that they have. How much do you think that that will actually get a growing number of Congress members on board to reduce the deficit, to really pull back on some of the issuance. None. Uh, there, There's no way you're gonna see any physical austerity actually come to pass. There will be no spending cuts. There will be a lot of job owning about it. They'll talk about it extensively, I imagine, there will be headline

skin will probably get down to the wire. But when you talk with staff, it's pretty clear they already know the path forward and it's not even gonna be via finding a new number to replace the thirty one point four trillion dollars in debt ceiling authority Treasury currently has.

We already know it's going to be a suspension, which was a Banner era development that would um suspend the debt ceiling, give Treasury blank check to operate through X date because it's a lot easier to vote for a date than it is to vote for a thirty two trillion dollar debt ceiling. And they don't want those optics. So I'm not inspecting any of start from this, Henry. I think you said the presidential race has already started for two years from now. You're a grizzled veteran at this.

When do we hear from President Biden? When do we hear from President Trump? And when do we hear from another ten worthies? Or is that really what January awaits? I think so my latest conversations with administrative staff, excuse me, administration staff, we're suggesting that right after the holidays, President Biden is geared up and read to announce. Um. That's contrary to what my original expectation was. I thought President former President Trump would not announce on that President Biden

would therefore also not announced. But the incredible showing that Democrats had in the midterm elections has materially changed that trajectory um and from everything I see Democrats and President Biden in particular or geared up to to launch right after we get back from the holidays, Henrietta, thank you so much. Henria Trey's Vada partners here as Congress staggers is typical, I should say to a year end closes. It has been an interesting two thousand twenty two for

Andrew hollen Worst and Veronica Clark economists. It's City Group. They were way out front on a terminal rate above five percent. I give them credit with Anna Wong of Bloomberg Economics as well, and they reaffirmed that this morning. Veronica Clark, I don't know if you've seen this data. We've been chatting about it, but to be very or direct, this data confirms the Holland Horst rate, doesn't it. Yeah, Yeah, it's a bit interesting to see markets move on a

third release of GDP. You know, we've gotten this data a couple of times already. These are revisions, but they were pretty big revisions on both headline growth number stronger consumption, you know, that's all where you want to see the strength and activity is consumption and investment um. And then I think especially that core PC number revised higher. Um. You know, markets are really hoping to see a softer

inflation now and we're really not getting it yet. What is your interpretation where the chairman desperately needs a lousy labor market, he's not getting it. But what is the study that you have of the disinflation path forward? Do you see a greater disinflation everything considered? Yeah, I mean I think we will get you some overall softer inflation prints three um, but it will be because initially because

of things like goods prices that are much weaker. Um. We know that shelter prices and inflation measures should be softening with housing market that's already softer. Um. But yeah, you really do need to see a listening in the labor market to be convinced that that that third component, that non shelter services you know, will come back down to two pc, because we really don't see your path for that to happen until the labor market loosens. And

we were talking about this with leafarage. There's a real disconnect here between your outlook for what's going to happen, between his outlook for what's going to happen, between the Fed's outlook with what's going to happen next year and what the market is saying. And I'm almost surprised that the market didn't respond more. Albeit this is the third read of a GDP for third quarter, and this is

also initial jobless claims. But still the evidence keeps coming in that you are seeing strength, you are seeing resilience, and that the Fed will make good on what they're saying. What will it take to trigger a reset in terms of market expectations? Focused on the last two CPI reports, right, you know we've had you know, to software reports. You know, if you just listen to the CPI data, it would tell you that the FED was going to be more

hawkish than they thought, than than what most economists we're thinking. Um, So maybe that's the right move now, but I would really caution against that because you know, we get into and you know, we'd still have some upside risks, even things like used car prices which wholesale measures are rising again there, um, and you do have a lot of upside risk to those non shelter services. If you look at where wage growth has been, it's telling you that

those those prices should be higher. Still. I'm glad you mentioned used cars. We've been talking about it all morning because CarMax came out with their earnings report well below what people were expecting. You're seeing those shares plunge. It's also raising concerns about it's pure Carvana and other used car dealerships and just generally this idea. This is where you're getting the disinflation prices for used cars that were sky high, where some people were saying, we're a bubble,

are disinflating, are deflating? How much further does that have to go? Is that a twenty two story or will that deflation continue next year? Yeah, this is a really tricky component because you know, it's not necessarily telling us, you know, much about underlying inflation trends. You know, this was the supply driven type of inflation that we had as early as one UM, and we have had you know, pretty big declines for the last two cep I reports.

That's been a big reason why we've run below you know, point forwards or you know that we were running I mean you see some of that, I think again in December. Um, but the best measures we have of where of where these car prices are going or some of these wholesale measures. We got data earlier this week from the Mannheim Index that showed those actually are starting to increase again. UM. So it's not to clear downward trend as we're getting

into tree. I think the issue there is, you know, inventories of cars are just still very short, and that's keeping dealers from cutting prices to dramatically. Vernica if we get a Hall and Horse rate. There's just this belief out there the world ends as we know it now. I know City Group Economics doesn't believe that, But what does our world look like with a five plus terminal rate? I think into the outlooks of next year, there's a huge mystery to that. Yeah, I mean, I think our

our rate of five to five fifty. Um. You know it's not necessarily the most dire situation. You know, we do have the unemployment rate rising. Um. You know that is enough of as a high enough rate to cause a mild recession. Um, but we're not talking you know, seven eight percent unemployment. We've got it getting too bit about do you see an evidence of a labor market troubled? I just don't. I don't see the evidence other than the flash of tech and maybe the flash of every

financial institution except City Group. UM. Yeah, I just don't see the evidence. No. We we wouldn't yet either. Um. But I think you know, if you start with the assumption that the FED will do what it takes to control inflation. Um, in our view, that's getting rates at

least to five fifty potential upset. Still, that means that they need to see a loosening in the labor market, and we're not seeing it yet, you know for sure, But as we're getting into the middle of next year, we would expect that you're seeing starting to rise in the Unflowers, Veronica, stay with US radio and television. Good morning to you. An economic set of data at a thirty here that moved the markets, no question about that. Yes,

it's a Thursday before the holiday. Yes it's boring. No, it's not futures to tier eight negative twenty futures less or so I'm gonna call it down nastic on seven tests percent. Excuse me there? Twenty point three six on the VIX and Lisa, you earmarked now at three basis points a two year yield higher yield four point too. I guess it's a Jerome Powell. He is going to

raise rates. Feel. It's a feel that perhaps we can't be complacent in this bet that we're just going to continue with a disinflationary impulse in Veronica, and we start going into the granularity underneath it, it becomes very interesting because we can see that some of the disinflation and goods changes course next year. Are there other areas like that where some of the the aspects of the inflationary that have brought down inflation this year will reverse and

go the other way next year. I think about oil prices, gasoline costs, I think about what you're talking about with used cars. Are there other components as well to cause more goods inflation next year than people are currently accounting for? Yeah? I think there There definitely are still some underappreciated maybe upside risk to goods prices. I think most people expect that, you know, supply chains have been correcting goods demand as much softer. Yes, commodity prices are lower too, um, and

that means you know, softer core goods prices. But there are some upside risks, you know, if we're you know, getting into a cold winter, you know, higher energy costs, um China reopening. You know, if there's you know a lot of people who are are falling ill and not being able to work, and that creates new supply issues. You know that there's definitely some upside risk to goods broadly, not just cars. Veronica, thank you so much, greatly appreciated,

Veronica Clark wus A City Group. 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