Surveillance: Purchasing Power with Meyer

a joy. Michelle Meyer I was discovered with her expertise on the consumer and housing a number of years ago. She had a sterling career with Global Wall Street and now gives us an information knowledge with their economics that you can only get at MasterCard. With the MasterCard Economics Institute. Chief US Consumer expert, Michelle Meyer joins us this morning. Michelle, you get the data like no other market economist in

the game. What is the state of the American consumer? Um? Yeah, Tom, So, we are absolutely looking at the consumer with a high level of detail, and what we're seeing, and what we have been seeing for a while, is that the consumer is out there, able and willing to spend. And this speaks to the inflation data. It speaks to the labor market data that the consumer still has purchasing power. Right

you have a labor market that's still expanding. Income growth is out there, aggregate income growth in particular, there's still some savings buffer and there's still access to expand um the balance sheet. So to underestimate consumer has been um you know, has been a problem without without getting into the Vatican secrets. Are you seeing massive credit card usage? And how do the higher interest rates of credit cards

fold into your optimism on the consumer. Look, what we're saying about the consumer is that they are using all of their sources of purchasing power, and the news is that they still have a lot of purchasing power coming from the labor market from job creation. So at the moment, you still have a lot of income flowing in a disposable income which is supporting that spending in real time, so consumers don't necessarily have to rely as much on

other sources. It's not as though the consumer is strained right now. They're doing a really good job being able to navigate what has been for the last year some pretty high prices um and that is what fuel the inflationary numbers that we have seen all throughout last year UM. But yes, the consumer of course is utilized savings. The consumer of course has um increased credit card used as well.

You've seen, you know, from the Federal Reserve G nineteen data UM revolving credit outstanding has been on the rise after the post pandemic period where consumers paid down their debt. Michelle, I'm looking right now. We just got a number of data points from the United States government and the markets are slow to respond, but they are starting to respond a bit more. You see the naztack down now near session lows around down one per and ahead of the open.

Do you get the sense that people have bought into the disinflation story too much that we could see even another bout of reinflation that sends cp I even higher. So to me that the useful way of looking at inflation is to understand the different drivers of inflation. So the good news on the disinflationary storyline is that the supply side has really um come back, right. You've seen this, this repair of supply chains. You've seen the restocking of retailers.

So inventory levels are back to normal and retailers have been able to return to just in time. Inventories which makes UM pricing much easier, much more transparent, and during the holiday season we did see UM consumers enjoy a

lot more promotions and discounts. So on the good side of the equation, I do think there is a disinflationary story UM for services, which is going to be more tied particularly the super core which takes out housing, UM is going to be more tied to the labor market, and there we know there's still some wage pressure, we know there's still a lot more stickiness. So that's just

gonna take time. So I do think it's really important when you're looking at inflation is to be able to separate the different parts of the inflation narrative based off of those drivers of inflation. So I don't think the disinflationary story is over, but we have to be aware that it's going to take time. So what's your sense of where the market is wrong. I'm looking right now to your break even, So are close to two point nine percent that in two years from now you're going

to get a three percent essentially inflation? Right? Is that rate? Is that bang in line with your expectations based on the consumer spending and the consumer spending power that you see in the granular data. I think over that time frame that does seem pretty reasonable because if again, if you think about the core goods components prior to the pandemic, those were deflationary components. They were seeing price reductions, and then you have this dramatic increase in the level of

price this which does not seem sustainable. So a mean reversion back to more normal levels or more of a of a disinflationary tendency for those categories seems right. And the labor market, we know is not going to be able to continue at this rate forever. And the FED is committed to cooling down the labor market. So if you believe in the Fed's resolve, which I think we should, and they're communicating that we should, then yes, inflation should

ultimately come down. It's just going to take time. This whole cycle is taking time, and that's what we have to remember. Mishelle Mayer has been too long. Thank you so much MasterCard Economics with us at this morning pit a cheer, good morning to you, get to see you. The head of Actress Strategy of Security. I said, thank you. I think obnoxious arts or something, and Bloomberg, I gotta admit that. Okay, let's get a light shot on the door when he came out mark a kind of a ship.

JP Morgan made some headlines in the last twenty four hours. He's had a difficult time calling this market over the last twelve eighteen months, the USA could market anyway, and yet this phrase volmer getting two point oh and in it was this acronym zero d T E zero days to expire. And I think a lot of our audience are hearing more and more about those options. Can we have a bit of a clinic here, can you define for all of us what is zero D T E

and what is it doing to this market? So every day now they create options that expire either that day or the next day. So there's a huge volume in that, and there are weekly options as well, So single stocks tend to be more weakly. Ets tend to have the daily and volumes have just been driving through that, and I think it has a couple of repercussions. One is people are really literally gambling and you can sit there. There's a Bloomberg screen called m OsO, which is the

most active traded. It's almost like watching a horse race. You'll see the spy four twelve calls and the Spy four thirteen calls Spy fourteen. It's almost this laddering. So I think people are treading a lot of this. Volumes have exploded heard as much as equity volumes can be related and tied back to the hedging of these single day options. So it's a very massive driver, and I think it's why we're seeing, you know, moves just that

are amplified. So maybe something that would be a half percent move based on the news becomes a one and a half to two percent move, and it's going in both directions. You touched on it briefly. Can you explain how this becomes self fulfilling for the people that Let's say I am an institution and I sell you some of these very very short dated, cool options. What do I have to do on the other side which leads

to this becoming somewhat self fulfilling. Yeah, So let's say the day starts spy at you know, four hundred, and someone buys a four or five call way out of the money right one and a quarter. All of a sudden, as it starts going to four or three, whoever sold that call has to start buying spy, which tends to exaggerate the price move. Then it starts getting to four

or five. They've got to buy more. And then what we're seeing happen is someone starts buying the four oh eight calls and that starts putting pressure and you see almost the lattering type trade and it occurs over and over, and I think it reminds me a lot of what we are seeing about a year and a half two years ago, where you kind of had those gamma squeezes and that was very much individual stocks. It started on Monday with people buying the weekly options, and now it's

moved down to this daily option. And so the other reason I think Vix is kind of irrelevant to me. So Vix only calculates options with twenty seven to thirty five days of expiration. As more and more people gravitate towards these daily options, yeah, and the volatility doesn't get picked up in that. So I think that's where the surprises are going to come. People are looking at Vicks for the hedging. It's all occurring this daily and weekly options. Let's do iron shoals. One is a rule of thumb

options that drived out of four times leverage. Futures drive out at ten times leverage. With these short dated options, what is their leverage equivalent? It's got to be way higher, way higher. I think it's the hundreds to one. You know, people like fture, you do the regulator step in here. This is a train wreck waiting to happen. You and I know it. You know, I think people are going to start looking at this. It's really hard to figure

out what just fis this. You're starting to see again all like the meme stock type things where my Twitter feeds filled with people who promised to make a thousand dollars into a hundred thousand dollars because it's truly gambling. Um, there's no binomial model or anything that's going to predict this, right, you buy something out of the money and you hope

it triggers. And what we're also seeing, I think if you look in the background on the days calls are working, people really push hard on some of the most shorted stocks and vice versa. So stay away from the jargon. Gama, folks, is basically a form of acceleration. What is going to happen is we're gonna have a level change due to news whatever equities are going to go up or down. What will then happen to the people playing a one

day duration in a leverage way out past ten to one. Well, the people who get it right are going to make a lot of money. They're going to keep pushing out the others. That's where you'll see liquidity start playing back. And I think that's what happens now is you've got all these algos kind of with this full level of liquidity, right, they're all trying to scalp a tiny bit, and as these moves start, they do you believe there's there's risk here on major Wall Street firm usks. I don't think

it's there as much as individuals though. I think it's really has started gravitating more and more towards um you know, retail, not just retail traders, but institutional traders are gravitating this. You're not getting these types of volumes because it's mom and pop or you know, the kids playing. This is definitely at the big institutional desks as a trading strategy.

What's the larger consequence of this? Is it a matter of just really muddied signals from a market that doesn't really cohere with any of the larger economic trends, or is this something that's a more significant whipsaw waiting to happen in a sort of unexpected downdraft that could happen suddenly. So I think the first thing is it's just much harder to get a good read on the market. Right

These moves are amplified, so you can't see that. You've got to be watching these things or else you're gonna miss signals. I think the most obvious day was the Thursday after the f O m C when NASDAC was up five points. You could just see this really trading through these zero day expiration options, So you've got to be watching this. It dilutes information, and I think you just have to be prepared that whatever you think it

can move. If you think it's a one to move, you could get five to ten percent, I think much easier. So is it just a matter of volatility or does it also affect the trajectory sort of the directionality and also the persistency of a rally because of the self fulfilling aspect. I think it can. It can make things extend a little bit, because you it just makes it if we live in a world where there's kind of almost windshield white browt goes. You're looking to who you

can stop out, shorts or long. It makes the chances that they hit triggers higher, and then you keep pushing it higher and higher, right, and you get these much more exaggerated moves, which forces everyone who's short to close out. And now I think you switch back. And the other thing I think it was really done is as a contrarian, you're always trying to figure out, Okay, what's market positioning you want to bet against that. I think market position now turns on a dime, the ability to move huge

amounts of risk through relatively short dated options. I think it's changed that risk position so it used to take weeks to a month for every and ago from over bought to over sold. I think these things happen in days or weeks now. So what's your projection of how this plays out? We've all these cute narratives trying to pin off the heels of certain market action. How does this play out as you see the boiling of the frog with respect to higher rates in the front end.

If it's like everything else, I think what we'll see is one down day where we go through some of the triggers that you know, stop the exchanges, and then regulators will pay attention because no one ever pays that

much attention when the bias tends to be higher. I think it's going to take a big down day where no one can explain why it says we start hitting all these triggers on the NASDAC and New York's doctors changes understand the Vulmageddon two points of the mark I was talking about it repeat a kind of repeat a yeah, and I read a bit of his I think it's a little bit off there because the one thing that we had in team is people trading the vix directly.

There were all those vix E t n s and they had that ability to actually trade the vixed futures and there were really interesting trigger points at four to four fifteen PM that let people push that. Yeah, I think we'll see this, and I think you're gonna see how I look at liquidy, whether it's in the bond

market or equities. Again, it's all these little out goes fighting around and as soon as they start losing money, they start shutting off and bid off off for goes wider and that's why you're going to see these exaggerated moves. I hear now annoyed to cheering. Cheer better to be cheerful. Have you watched Top Gun before? Of course they haven't. I don't know if you saw. But ahead of it, one of our generals and animals I work with, um General Wallace was actually a Top Gun instructor. So that

was pretty stories about that. What did he say watch the movie? He said that the movie was fairly realistic. There were all sorts of people at this and there were some people who are just phenomenal pilots, not necessarily great people, but phenomenal pilots, and there were others. There were great people. And it really was because I think it was in the Vietnam War our kill rate had gone down so much they felt the need to train better. Pay.

This was awesome. Thanks Abamitous, you come back in three days when we look at Cheer. What we've got to talk about with pay is the object's been shot at the sky. I mean, Academy security is perfectly placed to have this conversation. Probably we have a lot of time that I know you have. Peter, thank you as always pitter cheer of Academy Security, John Nan Russ Coastrick Global Allocation Fund portfolio manager over a black Rock Russ, let's

start there. The closing low on the two year I think was January just north of four four point zero eight percent. We're higher by about fifty basis points since then. Over that same period, we've seen the nastag absolutely ripped. Russ.

What gives good more and Joathan you it's it's interesting because when you think about last year, last year was very driven by rate beta, in other words, the sensitivity of the stock market, particularly growth stocks and even more than nay early growth names to both nominal and real rates. And exactly as you point out, you know, we've seen

this move higher rates and the nastack is ripping. My guess is the simple answers You've had a reversal from really extreme positioning in the end of twenty two, and that hasn't clearly ended yet. You had massive tax laws selling in the end of twenty two, you had massive shorts in a lot of these names. As people have come into the new year, that that pressure is abated, I don't think that can carry us throughout the year.

I don't think you know, meme stocks and early growth of what leads us in twenty two parting in twenty three. But a lot of us has been a reversal of that very tough year you had, particularly at the end in two RUSS beneath the radar. Really not even reported in the western press was Japan g DP. The nominal

GDP of Japan was sub two percent. Is that the great miscall in the markets now is we don't understand the impact of an elevated and more persistent nominal GDP in the United States, and as John Farrell mentions as well, in war torn Europe. Well, I think this is actually really important point. Tom. You ask why is the stock market up? And let's leave the meme stocks out for a moment. You know, the glass is half full argument

is exactly what you're alluding to. So you had a view three or four months ago about a hard landing, you know, let's call that, you know, the economy contracting one or two percent, and now you've got a better and better likelihood off either soft or new landing. So if you have one percent growth in twenty three, which doesn't seem outlandish right now, in three or four percent inflation on top of that, that's four or five percent

nominal GDP. That is a much bigger tailwind for earning his growth in the US, probably to some extent in Europe as well, that investors are expecting six months ago. And that's one of the reasons, probably the right reason them or the stock market has been as resilient as it's been, you know, at Lisa, this is really important. Nominal GDP across the pandemic from a high seventeen percent, that's a boom economy, you know, fear missing out down

to ten percent, down to nine percent. Phenomenal GDP in America seven point three percent versus under two percent. And you pen and we're wondering why stocks are going up, Well, there's a spirit out there in the U. S. It's it's irrefutable. And this really goes to the question rus and I'd love your take on this. How much of the rally that we've seen, the sort of rethink of what we saw last year is justified based on better than expected economic data. Well, I think it is justified.

You know, again, I think the stocks can have a decent year, you know, but the mystery is less wire stocks up up versus why are parts of the market leading that really shouldn't be leading in environmental races are still climbing. But I do think we have an environment we're look, we're getting to the clot We're getting closer to the end of that FED cycle, and maybe it goes a quarter point more than the market thanks right now, but we're still seeing the end of that process. We

do have a better economic outlook with better nominal GDP. Uh. None of this means we're going straight up and you chase every momentum stock out there. But I think the reality is in an environment where you avoid a recession, where nominal GDP is let's call it four or five percent, and rate volatility is probably going to be lower by the end of the year, that's not a bad environment and it probably leads stocks higher by the end of the year. Okay, So based on that, how would you

play this? Would you basically sell tech stocks by the rest and perhaps not have as much in cash as people expect because this is an opportunity in other assets that people are discounting it too much. Well, you know, and it's probably right now, you know, cash actually doesn't look so bad right now, at least compared to UH, some of the other parts of the curve, just given the fact that you are getting a lot to sit out. But yes, I do think you want to go back

to something that is, you know, judiciously embracing risks. Now, I don't think it's all about growth first value. Matter of fact, in our portfolio, what we've been doing is we've been emphasizing two things. We're still going for quality UH and that's because we're in an environment where again the economy, we don't think it's going into recession, but there will be some deceleration, and we're splitting the difference

on the growth value debate. We're going for garth. GARP is a style growth at a reasonable price that tends to do really well when you have an economic deceleration, but not a contraction. So yeah, I think it's more about picking your spots, having companies with strong cash flow rather than making these big bets on tech or not tech catch up and Bryce Semitistan with the rust strict that of blan Croft just because of time and it's

huge popularity, people lean forward on Global Wall Street. For the gentleman from Penn State, they threw him out of State college years ago. Yes, too many curious questions. Dan Ives joins US now equity analysts at Wedbush. Dan I was talking about Scott Galloway and the four earlier. Let's call it the ives for the four big companies a year from now, Bloomberg models three billion dollars free cash flow. What's the quality of the predictability that persist stancy of

the Big four's free cash flow? Oh, I think right now we're looking visibility and more. I think that's the big difference to what even when you go back a few years ago, and that's what you've seen coming out of Coupertino. It's what's happening in Redmond and well as big tech, and I think that's been a big sort of headline during earnings. You know, better than feared, and I think investors as under investment in tech going into the years I've seen these two thousand and nine. Should

Tim Cook fear China? I think ultimately he embraces China. I mean, like a Cook is able to navigate China as well as any CEO in the world, understand that the hearts and lungs of the supply chain, but also that's of demand terms of iPhones, and I can tell you even as of this week, iPhone demand looks strong in China and globally, and that's really what I believe continues to move Apple higher. Dan. Last year, we talked a lot about the interest rate sense of ativity of

the tech space. Are you saying that it's less interest rate sensitive? Now? Look, I think the New York City cab driver at this point has sort of factored that into the stock go he's going into earlier this year. I think now when you look, investors have sort of gotten used to it. Dave factor that in in terms of what the Fed's gonna do. We're in the eighth ninth inning, and now it just comes down to valuations relative to the last five years based on growth is

as good as we've seen. That's why I think right now at these tech names continue move higher because what we see with fundamentals demand holding up, and you have all that beaked into the stocks, which is why these stocks have moved up on lowered guidance and what I would say B plus type of earners. You said that

that people have gotten used to it. It's basically been baked in, and yet there has been a pretty market shift in the market since the beginning of the year in terms of where the expectation for race is, how far the FED will have to go. At what point does it start to change the discussion around the factor the feature in the tech shares that we've seen here

to date. Yeah, at least it's a great question. I just think from a tech investor perspective, the CPI PPI white knuckle print these macro I feel like, well, that's in the rearview. I mean, investors understand you could have another twenty five. Obviously things can move around from a FED perspective, but either way likes the end of the tunnel. And now we're starting to get to an investor environment where a soft landing or no landing looks like what

we're seeing across tech earnings. Dan, I want to ask a question that we've gone over many times before, but it always bears review and Rana at Bloomberg Intelligence has a vision of where the cloud is going? What does the IVES cloud look like five or dare I say

ten years out? These big tech juggernauts, do they have degrees of freedom to move larger in revenue, larger in market share, larger in global imprint footprint, I should say they look I think right now, and you think I'm moving to the cloud, only forty of Workwoods moved to the cloud. And I think that when I look at the vision, it's really going to be about artificial intelligence and about that data. And that's why you're seeing this game of thrones playoff between Microsoft, which is top of

the race. Google obviously the debacle last week. But you're gonna see Amazon, You're gonna see Apple and others dive into deep end of the pool because that's gonna be an eight hundred billion dollar market in a minimum that we see him the next five or six years. Yeah.

I looked in and I walked by the Apple store yesterday and Fifth Avenue, and I pointed to Mrs Keane where I stood in the sidewalk with the wonderful Lawrence Haverty, Larry Haverty, who taught us all how to do securities analysis on these tech companies, and he and I did a stand up interview a decade ago, twelve years ago, thirteen years ago over the death of Apple. Is that gloom still out there? I think it's the same that

said Mahomes was never gonna win another super Bowl. I I think it's just it's you just continue to ultimately have an install base that's increasing. They're gaining share in China and now you have one point two billion iPhones worldwide, yet nine is seventy five million eighteen months ago. And that which is why, in my opinion, this is a

rocket Gibraltar. Tech stock haters will continue to hate, but I think again it will be a three trillion dollar market at So we talked last year a lot about the winners and the losers of the tech space and that there would be bifurcation, and yet it seems like there isn't bifurcation, and that that story has basically gone out the window. What do you make of that? The fact that Apple is being lumped in again with Meta

or Facebook. Look, I think what you're starting to see is the head counter cuts and you've seen that with Zuckerberg and when Meta has done that's really, along with activism, put a bottom on a lot of these stocks in terms of you know, and now you're gonna start to see I think over the next six and nine months more of a deviation at least fundamental between winner and losers.

But the one thing I point out, is that any of the frothy names that continues to get sold off, you have significant emanate dry powder, but financial and strategic as well as active as they're going to swell across the board. Salesforces a perfect example. Yeah, you know so many that hate it. You know, if you go back forty five days ago and now I think there's a stock that a significant upset because of activism and because of ultimately numbers better than fear. Are we now comparing

my homes to Apple? Is that what we're doing now? Down? U mean? I look, I think for Apple you got to start to go to Montana level, for great quarterback, for Kansas City, just not my homes Queer Hall of Favorite book. I mean in terms of what Cook and Cooper Tino have done, Tom Brady like, again, that's better, that's better. My homes didn't hit in quite the same way.

Wet Bush Stamp. Thank you. Subscribe to the Bloomberg Surveillance podcast sun, Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the I Heart Radio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg