Surveillance: Rising Prices with Weinberg

the screen. Here features at negative four Carl Weinberg Joints. He's chief economists Aday Frequency Economics and Carl, you had such a stunning note and it's off our radar. We have not mentioned Japan today, but for our American viewers and listeners maybe not schooled in this, guys like you say, Japan is really really important and the tension point is not yield curve control. In their experiment out to ten years, it's a dead out past ten years and that is

deteriorated priced down and dramatic yield up. What does that part tend for Japan? Hi, Good morning, Tom, So the Bank of Japan has work to do, the end of the fiscal year is now just a few weeks away March thirty first, and there are substantial capital losses on what I'll call the ultralong segment of the JGD market, the part where they haven't been trying to control the

yiel curve. So those yields are up about seventy basis points compared to where they were at the end of the last fiscal year, and that implies oh between thirty and sixty trillion yen worth of capital losses, which are big enough to wipe out the balance sheets of a lot of the institutions. So the Bank of Japan and the Finance Ministry are going to be out there in size over the next few weeks buying up this asset. Encouraging by the asset, they're going to move the market lower.

They'll do it, but it'll be quite a challenge for them. How close are they, and I don't mean to an absolute the bond market, but on a trendline or a glide path to owning the bond market. Where is the Bank of Japan? Maybe use a baseball analogy. Are they in the third inning or the eighth inning of buying every bond that's issued in Japan. Well, at the short end of the Yale curve between out to ten years, they own I think the number is about sixty five

to seventy percent of the market. And then at the ultralong end they own a lot less because their target has been to control yields from overnight out to ten years, so they still have scope to buy at the ultralong end of the market. But yes, you're right, and Bank of Japan Governor designatet Uleta said this in testimony the other day. The boj can't buy bonds forever and some

point this has to come to an end. When it does, there will be capital losses in the bond market, and yes, I think that will imply that will generate some institutional risk. The odd monetary experiment of Japan aside, the rest of the world is grappling with deeply entrenched inflation, at least by all accounts, and what we saw this morning out of Europe with respect to Germans nine point three percent

February CPI read year over year. Carl, you've ascribed to this idea that we will see inflation rollover, perhaps at prices stabilize at a higher rate. How do you hold that conviction if we're just not seeing it in the data. You know, let me let me frame my handswer in terms of the interview that you just a broadcast with mister Noggle. All right, I was so glad to see

him talk about quantitative tightening. All Right, the inflation adjusted money supply in Europe is still four and a half percent higher than it ought to be given the current level of output in recent trends. So sure, there's too much money chasing too few goods, and that's pushing up prices. I view this as a price adjustment that will run its course when real money supply is deflated back to where it should be by a combination of quantitative tightening

and by rising prices. So we still have more price increases to go, but there is an end insight to this process. This is not the spiraling inflation that we saw in the seventies. I don't think interest rates matter nearly as much to the ECB and to the course

of inflation in Europe as quantitative tightening does. So aside from just to understanding the quantitative tightening, which I do want to get into, since that is something that's being raised by the German Central banker, how much are we looking at what you view as an overreaction by central banks to something that is perhaps stickier but not inevitably

protracted and spiraling. Well, I think that they're chasing the wrong thing with higher interest rates, which is not to say that I don't think this rise in interest rates isn't a good thing in the longer run. We've had negative real interest rates in Europe since the financial crisis, and it's time to straighten that out so that investment doesn't get misallocated and so the economy can grow in

a healthy way. That's a good outcome here. But as they move much beyond two hundred basis points or three hundred basis points above inflation expectations, it'll become restrictive and they'll start to make recession that are already going on even worse. Carl, You know, and I could go for two hours this morning on your wonderful heritage of Latin America, which is falling apart, Argentine pay so, but I really

got to stay on Europe. Here. A lot of people publishing right now and cooling commerce banking modelity to Bono over at Pantheon, and Carl, the basic idea is, Look, there's EU inflation, and I know our listeners and viewers are saying, do we import that what happened? Do we bring their inflation at the margin over to give us a lesser disinflation? Well, I mean, surely at the margin. You know, what happens in Europe does transmit to us through trade prices and other forms of arbitrage. But it's

really quite at the margin. The price increases we're seeing in the United States are coming about, in my opinion, because we've got excessive cash balances in the United States. Also, cash balances are over two trillion dollars higher than where they ought to be given trends in the growth of the and and until that gets sorted out by a one time rise in prices and or by quantitative tightening, we're still going to see prices going up here. That's

that's the main event. That's the show. Tom, Carl, thank you so much. Carl Weinberg have frequency economics, senior investment strategist at Edward Giants. Let's start with this equity market. You like quality growth? What is quality growth? Yeah? Hi, John, thanks so much. You know, look, I think we started this year looking at a market that was driven by

better than expected economic data. We saw strong January jobs or poor we saw better than expected retail sales, and we certainly saw inflation at least towards the back half of last year's starting to move lower. But I think the trade into what we'd call more cyclical parts of the market probably happened too fast, too soon earlier on this year. So to your question, as we get through this year, we need to see a couple of things before we can kind of revisit that recovery playbook or

that cyclical playbook. We would still need to see one, of course, inflation move meaningfully lower. Two, we'd like to see the Fed actually step to the sidelines at some point, probably middle of this year. And then three, we are starting to see earnings being revised meaningfully lower. At this point for twenty twenty three, we haven't seen that bottom yet. So until those conditions are in place, we'd say probably the market is going to take a more defensive tilt.

We could see continued volatility, but at some point when those conditions are met, maybe towards the back half of this year, we do think that investors should think about diversifying into those more recovery parts of the market. That includes quality growth that means growth that is not negative earnings yielding, probably not as speculative parts of the market. And then of course areas like cyclicals, even parts of small caps international interesting as well. So all part of

a recovery playbook that could happen down the road. Money. You've got a wonderful single sentence in your note which I totally agree with, which extrap lation right now is very dangerous to your net worth if it's an extrapolate free two thousand and three, if you have a faith to be in the market, how far are you reaching over to the next horizon? Are you looking out a year? Or dare I say, is the new extrapolation out to three years? That's interesting? John and Tom? Sorry, and to

your point, you can call me Lisa as well. That's happen. I love all three of you. So I do think January data it's very dangerous, as you noted, to extrapolate the strength we saw, certainly in the labor market, certainly in the consumer to the rest of the year. You know, keep in mind the labor market does tend to be

one of the lagging indicators. You know, we have leading indicators, we have coincident indicators, then we have lagging indicators, and the labor market tends not to usually be the first shoe to drop, perhaps towards one of the last shoes

to drop. But to your question on time horizon, we do still think a twelve month time horizon, although we've been talking about twelve to twenty four months because that's really when we can see this cycle go through a bottoming process and then markets can then start looking towards a recovery process. And we do think, you know, investors have a very unique opportunity in the twelve months ahead, and that you know, we know beer markets don't happen

all that often, one every four to five years. But in history, the good news is every beer market has ended in every beer market has been followed by a potential bull market. So we look out twelve to twenty four months, we do think investors are position for better opportunities ahead. What's the leadership going to be in that

next bull market? Yeah, it's a great question. And look, I think when we look the last ten years or so, the ten years after the financial crisis, that was an environment that was characterized by bed funds rate towards the zero bound. Growth outperformed value for much of that period because investors were pushed out the risk spectrum. We think about the next ten year curator, so we don't necessarily

see yields back at the zero pound. Certainly the Fed funds rate could go from this five five and a half percent back to more neutral territory. But in that environment, we do think investors have to consider a balance between value and growth and think about a more diversified picture and leadership going forward. So that's interesting for the next

longer term period. I do think over the next twelve to twenty four months or so, we think we'll go from a more defensively oriented tilts from more offensively oriented tilt. As we noted earlier, that recovery playbook does come into play when we use this word defense. I discussed this yesterday. I'd love your insight on it be hugely valuable. To me. Defense is usually just what works when things are bad. And last year defense was energy because that's what works

when things were bad. What is defense in twenty twenty three. Yeah, And it's a great point because the energy is not usually always the defensive part of the market, but we think more traditional defensive sectors healthcare staples in particular, if we do go into any sort of economic downturn, slow down those sectors which have underperformed thus far this year, we may see some you know, some interests and some more leadership come out of that more traditional recession proof

and even to some extent inflation proof part of the market. What's interesting, I think this time around, defense is also your shorter duration CD one to two year treasury bond space as well. Of course, what's notably different this cycle is that cash and cash like instruments are yielding anywhere from four to five percent plus, and that is an environment where, you know, if investors do want to hang out, think about a recovery playbook, but in the meanwhile put

their money in very attractively yielding assets. That is a place that we're seeing a lot of defense right now. This was great as always. Manahajan of Edward johnsna Mahajan on defense and basically, Kesh, let's get to this right now,

and it's perfect time. He's been digesting this. German Data Global Head of macro Strategy, Wells Fargo, Michael Schumacher joins us this morning, Mike is well, forget about transitory, but are we get are we moving away from disinflation to actual price stability or outright inflation very sticky inflation time. And I think that's really the challenge. I think the point about Germany and core Europe reacting viscerally to inflation

is excellent talking to clients over many, many years. That's always been the big fear in Germany for obvious historical reasons. So this just doesn't work. It doesn't fly, whether it's sticky, whether it's accelerating, it's just simply too high. Mike. When you look at what's taking place in a bond market off the back of this, it's been orderly so far in places like Italy, and Mike, Lisa, Tom and myself

we all talked about this moments ago. If you told us that this ECB was going to go to four, I think we would all have said, the Italian bondmark is not going to survive that. Mike, We're going to have real trouble. Mike. Have you've been surprised by the stability on the periphery and are we getting to a point in your mind where things could become a little

bit more troublesome. It has been surprising John, and I think the comments about fragmentation, about the periphery, we haven't heard much about them in the last month or two, and I think now it's because the ECB has the main challenge right in front of it. It simply has to get inflation down. It's going to have to tolerate some volatility and peripheral spreads. It's a little bit surprising as and come up previously, but I think that's why

it's not There is a larger issue though, Mike. We were talking for years about how we couldn't really exit the zero rate regime, this negative rate regime without more ripples, without more consequences in financial markets. Now we're talking about a four or five six percent regime, depending on which nation you look at, and we're not seeing the ripples in terms of difficulty and borrowing questions around the validity

of stock valuations in any kind of existential level. What's going to cause this to change at a time when people seem to be just resetting their understandings of the interest rate sensitivity of this global economy. I think it's going to happen les says a couple of things. Number one is governments are going to have some difficulty over time, but not yet. And secondly, when you think about corporate borrowers,

there's a bit of a leg function. Probably takes a couple of quarters for corporate to fall rates to go up meaningfully, but it's very likely going to happen here in the US. You probably look at something like a seven percent to fall ready, for instance, in high yeal this year. That's material, but it takes a while to get through the system. We've been talking about how difficult it is to really game out the macro data and then to understand what the market's reaction would be to

set macro data. When you take a look at inflation coming in hotter than expected on consecutive days France, Spain and now Germany, what do you do with that information? How much does that shift your view or your trades that you're recommending. Yeah, for us, one thing we've been looking at quite a bit, as you can imagine, is relative pricing for the various central banks, So for instance ECB versus FED, and usually we'd fade the ECB, and right now you just can't do it. So I've been

more in the camp the ECB would not deliver. But after seeing this parade of very nasty inflation prints, I think you've got a lean towards the ECB. Going fifty this month is virtually a lock, and fifty next month looks more and more likely, So very tough to fade Thec'd be very tough to fade the euro. Right now. Let's take that further. Do you think there's more chance the ECB gets the four than the Fed getting to six?

Tough call. I'd give the Fed the edge there, John, So if you look at market pricing now it's called a twenty percent probability. Look at an option pricing the FED as it six at the end of the year, so a little bit higher than that in terms of terminal rate. I'd leaned slightly toward the Fed. But it's a tough call right now. Wow, the fact that that's even a tough call, just that conversation, not even sitting listen. Four is ridiculous. Six is nuts. But ra actually taking

that seriously just tells you where we are. My shoemaker of Weils FACA, thank you, Mike. As alwaysa we speak with jam Securities. Devin Ryan with years of following the travails of Wall Street, Devin, I know you memorized all one hundred and eighteen pages. You know what I did. I went to the money chart. It's on page sixty eight. Enterprise Partnerships, disciplined growth, and the Hope and a Prayer

out two years is on the consumer area. The net revenue goes up and the change in net reserves comes down. The Hope and a Prayer is a two year path to a better consumer bank. Were you sold on that? Were you convinced yesterday? Eight morning? Tom? So? Yeah, it's a it's a it's a road here that it's gonna be a little bit complicated on consumer. But you know, I think you have to give them some credit. You know,

they had their first yesterday three years ago. They hit all their targets they laid out there, you know, least in terms of ROE and efficiency ratios and the key drivers. I know we're talking about consumer here, but the key drivers are what they're doing in the investment bank and asset management, and consumer is one piece. It looks like they're gonna look at some strategic alternatives there and maybe

even look to sell some of those assets. But Yeah, we think they're going to hate their targets as they did over the last three years. So I feel pretty good about that. Is there an Eaton Vans out there to buy? How do they jump start this olive fortress? Gorman? Yeah, so, yeah,

they've been doing some small talking asset manager acquisitions. You know, really the big focus in asset management is in alternatives, and you know, they've already raised you know, pushing two hundred billion dollars of the last a few years here. They're going to raise another fifty billion or so over the next two and so they're seeing you know, thirteen percent revenue growth KAGER on their asset management fees and I think that's going to continue here. So they've made

a really credible pitched there. I don't think they need to do inorganic things, but yeah, I think they're going to look opportunistically. That is an area where I think they could look to do some M and A and Tevin at times he was described as getting flustered. You were there, How would you describe his performance? Yeah? I think, well, first off, you know, the stocks up one hundred and

ten percent since the beginning of twenty nineteen. You know, he took over in twenty eighteen, so they've they have two x the SMP, so I think I've got to give him a little bit of a passer, and they've hit their targets over the last three years. I think he's frustrated with some of the narrative in the market, and I think the company's sharing more than I've ever

given before. And you know, they're not hating everything, and I think they're they're clear that you know, there's been some missteps here, and I think that's frustrating the pushback that they're getting. But he did mention that their partner headcount, you know, the turnover there is it a low since twenty fourteen, and their employee turnover is it a five year low. So they're not seeing a mass exodus in

any way. And you know, again, their book values grown what was forty percent since their last invest today, and the stock has outperformed the SMP by more than two x since that day. So I think they deserve a little bit of a past year. And I do think they're executing, just not hitting on all cylinders. It's just in the problem is that they're not Morgan Stanley, and he's not James Coleman. Yeah, well, listen, I mean Morgan Stanley.

You know, there's only one Smith Barney, Morgan Stanley. It did that deal, and that's been kind of a transformational opportunity for them, and they've made some good decisions and so yeah, Morgan Stanley is outperformed in some areas. I think, you know, Goldman Sachs is saying, listen, we've outperformed in a lot of other areas, and so, you know, I think it's a slightly different business mix, and the last few years, the business mix has definitely been towards Morgan

Stanley's favor. But the Goldman Sachs, you know, they had a phenomenal outperformance in twenty twenty one, did better than anyone else in the industry. Twenty twenty two, you know, we're talking about the most recent year. Twenty twenty two was a really tough and I would argue abnormally difficult backdrop and we get some mean reversion. I think Goldman Sachs will be right back in the in the running and people probably stop giving David Saloman a hard time.

There have been a lot of discussions about repairing some of the mistakes that Goldman Sachs is perceived to have been made and this is really focusing on the consumer banking unit. There was a discussion yesterday about finding strategic alternatives for a number of different units, including green Sky, the specialty lender, as well as the credit card partnerships with Apple and others. Do you think that this is

a good move on their part. Do you think that trying to offload big parts of that consumer credit business is the way to go? You know, I think that based on new directive and consumer which is to be more profitable and more targeted, it makes sense. Obviously you have to have the right buyer and right transaction if that's what they're going to do. Yeah, but I think Goldman in their ethos came up yesterday. But you know, when they have a bad trade, they normally don't sit

on it. And I think this is a situation where, you know, they get a little bit of mode by making a mistake in this one area, but they need to move on and get themselves in the best position. And this is a small part of the story in

our thesis. But I do think that, you know, potentially looking to exit some of those businesses could make sense at the right price, and it will just kind of take away also some of this I think overhang that's getting more attention than you probably deserves, but that they would like. That's the theme of this conversation Devon, that maybe they are getting too much criticism than perhaps they deserve.

As you looked across the coverage of this name, the stock that you cover both in the media and from the analyst community, from your peers as well, Jeff get the sense of this is personal, it's actually just about him, the individual. You know, I don't know that it's personal.

I think it's you know, Goldman Sachs for you know, really it's history has delivered you know, I think outstanding performance, and so I think it's just kind of human nature that when you know firms are really performing well, people want to, you know, fight areas to knock them down. And you know, Goldman, you know, before David Solomon came in,

was really a black box. And last three or four years they've given a lot of transparency and they've given a really detailed roadmap on their expect patients and how they're going to get to their targets. And so when you do that, you're always going to find things to critique, and this consumer area is one thing that they haven't

really delivered on. But also the market mentality shifted. You know, people don't want to subsidize anything losing money, whether it's a Goldman or tech company or fintech, and so that's really for the mood. And so yeah, I don't think it's just David. I think it's more of a you know, Goldman's done well, people want to nitpick here, DEMI, thanks for that. Devin. Run there MP securities on the Lightist

with Goldman and they're invest today. Subscribe to the Bloomberg Surveillance podcasts on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg