Surveillance: Slowing US Growth

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I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app o. Lindsay Pigs is a joining us now from Stefel here to distill this and move forward as well. Let me ask you the same question good Morning, good

When do we get them, like a month out?

Do we get a second look exactly? We'll get them periodically throughout now going forward for this next several weeks. But I think to your point, this is going to set the tone. So the first look is very important. Yes, we do expect some revisions, there always are, but this's the tone for what the expectation of the US economy was at the start of the year. And it tells us two things. One, we're losing momentum from what we

And we've seen this consistently throughout a lot of the earnings. I mean, I feel like a broken record. The Productor and Gamble price increases of ten percent. Consumers have absorbed it, and you can see on the margins companies actually saying we'd rather raise prices even if we lose volume.

How long can that last?

Well, it can last for another month, two months, maybe longer. Because when we look at the household balance sheet, so we're looking at debt relative to disposable personal income, we're talking about.

A decade low.

So I'm not necessarily advocating for consumers to take on new amounts of credit card debt, but if that's where they need to go, there's quite a bit of additional room to grow that household balance sheet before that becomes a red flag that the consumer needs to cut.

Back, and the real break in the cycle is when jobless rates start to go up, and that's the reason why people if it waiting for that to happen as sort of a signal, and we aren't really seeing it, at least not in the initial jobless claims. Yet what Michael McKee was talking about with business spending coming down, that was the reason for the weakness that came into GDP. How long will that take before that translates into job cuts.

Well, what's interesting is, yes, we saw business investment come down, but we also saw a drawdown in inventories. So if the consumer continues to prove resilient going into the second quarter, we're going to have to see a build back up of inventory growth, which will significantly then contribute to Q two GDP.

So we will have to.

Keep an eye on that. But I think broadly speaking, businesses are anticipating a slowdown in the economy. They're anticipating a recession to come in the second half of the year, and they responded in kind across the first three months of the year.

Let me just throw these please went quickly on inventories. I got the dollar figures here. Inventories grew in the fourth quarter by one hundred and thirty six and a half billion dollars. They shrank by one point six billion dollars in the first quarter, which is extraordinarily unusual. So business basically stopped producing stuff and started selling out.

Of their war So, Lindsey, can you weigh in on this basically, as this company's more bearish than the consumer is letting on that they were prepared for an environment that was not as bleaking nearly as consumers approved.

Well, I think it's businesses and economists alike. We were anticipating the consumer to have a significant pullback at the start of the year, but we found that consumers were increasingly willing to turn to credit cards draw down the last of that pandemic savings.

And we also saw.

An unexpected sputtering of state and local stimulus filter into the economy that provide that additional support to the consumer.

Nomenal GDP.

I'm going to go back a year here, long ago and far away, eight point five percent, big inflation, big real GDP seven point seven percent, six point six percent, and now I observe five point one percent. Do you ascribe to a diminished real GDP? A diminished inflation, where nominal GDP gets back to I'm going to say a four percent normal.

I would suspect that the longer term run rate of real GDP is sub two percent. I would suspect that it's around correct, around one point eight percent longer term, once we smooth out some of these cyclical movements, the FED gets inflation under control, the US economy falls into a downturn or outright recession, and we see recovery. The long term trajectory of the US economy I do see as a real rate of under two percent.

The business people listening here, the animal spirit of the country overlay that, say two percent real GDP or less on your inflation guest, is this nominal GDP decline from the pandemic in place where we get a four percent top line GDP absolute.

Two percent real place two percent inflation two there's our four percent nominal GDP, and I do think that that's a realistic expectation. Without a significant growth in productivity, we're going to struggle to see a real rate of activity above two percent for quite some time.

So this is really the conundrum that markets have been struggling with.

And this is sort of you know, you want.

It to be good, but not too good, because if the FED comes it to play in. Right now, we're pricing in a four point two percent FED funds rate come January of next year. Is that consistent with what's required to bring that inflation given the economy you just portrayed.

No, it's certainly not that we know from history, from history historical cycles, that the FED is going to need to raise rates above that peak level of inflation, and so, as we've long advocated, the FED is likely to need

Were a summer here from Michael mckee're on what page fourteen of the report.

Well, it looks like this was in large measure inventories and cut back in business spending. As Lindsay was talking about what exports imports, exports and imports were little changed, so we didn't get a major contribution either way. A little bit of an addition to GDP. Not much.

Help, Lindsay, Help here, what is inventory?

Well, when you produce goods, but they're sitting not being purchased yet, So just as you would expect, it's the inventory of production the consumers haven't yet absorbed.

Yeah, it's the value of the goods that have been produced that then haven't they're sitting in the warehouse.

Yeah.

Well, just the easiest way to think about it is all the cars that are parked outside the automobile Manu facturers waiting to be shipped off to dealers.

And Tom, just to sort of confirm the theme of the morning, which is that businesses have been too pessimistic based on where consumers really are. Caterpillar CEO comes out with this, twenty twenty three will be better than we previously anticipated. Time and again, Tom, they didn't have as much inventory as they needed to meet the demands. They're drawing down from it, raising questions about how much more they're going to have for to produce later.

That's going to be the big issue that'll be debated around the FED conference table. They don't have the big Mahogany table anymore, but they're going to be talking about this because if consumer spending is remaining strong and there's not enough goods a that contributes to inflation, and B that could luger a big increase in production in the next.

Couple of quarters.

It's all going to depend on what businesses think is going to happen.

I like this tech team, Lindsay Jiggs and Michael McKee. This is really good.

Let's talk to a security analyst about this, John in this big move. Michael Nathanson joins us. How different than David Kirkpatrick. Maybe not the author of the Facebook effect, but he's looked at the new Zuckerberg effect as well. You nailed it in your note, Michael. And what I see here in terms of the maturity of this generation is mister Zuckerberg wants to be a serious technology company. Is this a systemic Silicon Valley shift?

I think it is.

Tom.

It's interesting that I asked him last year if his mote was his social graph that he had built, and he's like, no, our moat is that we are a technology company that moves fast and changes things right. And John I over the years talked about Meta and the Stockers in the dumbs and they had to pivot away from a couple of things that were hurting them, and very quick order they did. It's because they are a

Out of cost base in six months. And that's extraordinary.

Right.

So the combination of accelerating a revenue and then cost cuts the story.

I mean, Stock's is gonna keep going.

I think it's three dollar stop.

You really do, Michael, I want to look at this on a broader basis. Maffatt Nathanson is iconic.

Onest.

We had your colleague in crime, Rich Greenfield on the other day. You guys have followed these children from out of their dorms to the modern era. Is right now when these guys grow up, as it appears Zuckerberg has grown up.

Oh, with that doubt.

I think having a founder who his entire life work is tied up in this, that's the pay if you're getting right. He was not going to let this company die, and he took aggressive steps, and that's you're right, Tom, Like, this is the evolution of his leadership.

It's a great point.

We forget, Lisa, he's thirty eight years old. We forget that.

You know, we're talking like he's six fifty or sixty's thirty eight years old.

He's a kid.

We've known this, and now he's proving himself in the actual bread and butter earnings. Michael, you increased your price target to two hundred and ninety five dollars from two hundred and seventy five dollars. Where is that extra profit going to come from? Based on the earnings we just saw.

Lisa, it was a revenue story, right, So if you look at their guide to the next quarter on revenue growth, it was between two percent and ten percent on the upside. We're at five, so we're smack in the middle of that. So we took our revenue numbers up to eight percent next quarter, and if you look at the rest of the year, you have probably doubled digit revenue growth by the end of the year.

So that's what drove art.

I mean, we were always above the street and here's our price target, but now we're close to three hundred dollars because the revenue story is now starting in KKA.

Is there a dirty secret that it's been exposed by the earnings of some of these tech giants that have been cutting staff that they didn't need as big of a footprint, They don't need as many bodies, and so they're are that much lower.

That's a great point. That's a dirty secret.

You know, back when.

We cover media, if there was a great ad cycle at CBS, they didn't hire more people. If you look at what happened in twenty and twenty one twenty two, as revenues were ramping, they hired more people and there wasn't there was not a benefit to that, right the ad.

Revenue came through.

So now these companies are going back to pre pandemic staffing levels and the revenue base is coming back. So, I mean, we sound crazy, but we cannot be more bullish on meta and alphabet as well, just because of what you said, and they all learned a lesson which is they overstaffed and they can cut, cut, cut, without really hitting the top line.

Michael, given the fact that you did increase your earnings, how much does that include the potential banning or sale of TikTok and the read through implications for Meta for Snap.

No banning of TikTok in our in our thought process. You know, TikTok's about ten billion.

US revenue base.

It would flow to Meta a little bit Snap, It's not our numbers.

That would be a that'd be a home run, obviously, but you know, we've not contemplated that because it just seems so far removed. But what they've done though, you know, with Reels, is that they quickly adopted the best part of TikTok, right, So they saw weakness in their business model, short form video and a quickly engineered solution, and now they're starting to monetize that solution.

So you know, TikTok exists today.

I believe they're taking share from TikTok given what they've just accomplished.

This is just amazing story. This was an eighty eight dollar name in ears, and you've got Michael Nathanson talking about three hundred.

But JOHNA.

We stuck by this thing, and some people did because was the revenues were self destroyed. They had basically where they're hit by Apple. Remember Apple changed their IDFA signifiers on their mobile system, and then these guys had introduced reels, which was not monetizing, right, But what killed the stock was just believe that Thuckerberg was an empire builder and women cut costs. Go back to that October conference call. Some folks jumped on through because like, look, this guy

Right.

That was what was so interesting is that this was not fickical.

It was in a way because twenty twenty one.

Was so good.

They had a hard time lapping twenty twenty one, and then IDFA hit from Apple and then reels occurred, So it was like just all these waves were hitting the stock.

So Michael, squeeze this in because they've only got about forty five seconds left. I apologize. There will be some people who don't hold this name who look at this as some kind of cyclical signal. You just said that maybe last year wasn't cyclical to some extent, is the success this morning cyclical? Is that a broader signal about the cycle.

Because Alphabet is a bigger company that's inserching YouTube and their results were okay, but they're not like this. This is this is a separate cycle tied to Meta and what they were trying to do last year.

Michael, just perfect and great coal buddy for sinking by this name at a difficult time.

Michael, m SVB.

John, I want you to bring in Andrew slim And this guy has decades and decades of experience, and I'm gonna guess he's going to say, to your good questions, he's never seen.

It like this, Andrew SLIMM. And that's where we are joined.

Just now have more than Stanley Investment Management portfolio manager. I guess we should start there than Andrew. Have you ever seen it like this before?

Yeah?

I mean Tom said, all right, my head is spinning. It's a it's a tough environment, but it's all tough, right. The markets are never clear. The light never shines, you know, it's green light, all clear to invast, So is it? Yeah, it's definitely a consumer consumer you know, confusing I think Lisa said it best, which is the consumer says remarkably resilient. But look, financial conditions are tightening and that's going to affect many businesses.

And that's the push pulls.

Which do you lean towards a consumer or tightening financial conditions? That determines your you know, really outlook for the economy. You had a number of lead in people talking about as slow down in the economy except the S and P sits at forty one hundred.

You know, that's incredible to me.

What's transpired since beginning of March.

You've been bullish though, so are you getting more bearish now?

Well, you know, I've been bullish since the beginning of the year only because we came off a bad last year. Pessimism you know, I wrote a piece pessimism is rampant, and I think the market predicted a down earnings year this year. But you know, the market has had a good first part of the year. We're moving into the summer. I could see a stall out, but there's no question in my mind the earnings collapsing scenario that's going to

Of the year.

I just think, you know, it's been a pretty good move and we just don't know this, you know, what's going on the next leg of this bank crisis.

And just someone you were at Pennsylvania studying Larry Summer's father in economics a few years ago, and I'm sure you went through the nifty to fifty and all that. If we got a nifty seven or a nifty twenty right now, do you run a portfolio less diversified.

Scared of the but Jesus out of me time. I mean, this is the you know stocks, you know, acid price of tricky. You know, you know, there's an area of the market that's getting extreme relative to the rest of the market. But it looks over the last couple of days and days to included, it's going to get more extreme. I know, over time, very very big companies have a hard and hard time growing companies don't stay top five in the S and P forever.

Because it gets tougher to grow.

Governments begin to cause problems and getting.

Approvals on acquisitions.

Hello, you know, those are all the seeds that bring down these top companies. But that's not happening yet. So it's tricky. You need to own some exposure. But I think you got to look under the surface because the rest of the market has been left behind, and they're pretty cheap.

So Charles Canter's in the other day with newburg or Berman big love of big tech and so Apple. Are you predicting, Andrew that with the Apple somewhat exponential growth trends in the income statement, that the government will step in, say in a eurosque way against big Dech.

You're already starting to see it, you know, not anyway, you're already starting to see it where they're they're questioning the dominance of these companies. But that doesn't mean these docks can't do spectacularly well for the next quarter.

This is a longer term issue.

I just know that when you have such a waiting of these large companies and with the government starting to turn against them, uh, that's a bad combination.

But It doesn't.

Necessarily mean they'll they'll be brought down, and I'm always mindful of you know, look, let's look back General Electric, at and t ibm Exon, Bethlehem Steel. You know, they all got to be the big dogs, and you know, something happened, and you know, I remember my dad saying to me a long time ago, why would I ever sell General Electric.

Which is a similar kind of statement today for the tech Andrew, I'm curious you mentioned the C word crisis in the banking sector. Does that become the driving factor once again in markets that seem to have one eye on it but not all that closely all the time.

Yeah, I mean that's fascinating. So you know, you had this crisis early March. The market dropped to you know, kind of thirty eight hundred and thirty eight to fifty and then lo and behold the economic data X. The banking crisis wasn't so bad. The market runs to forty

Do you remember the start of the year, wasn't it first half dip and second half rip from the consensus? It seems like, boy.

Boy was that? And I questioned that, I remember we were on it that.

Talks about that anymore. Do you remember that it was like guest stuff the guests, apart from enter of course.

And then and then and then it became the rip, and then it and now it's the rip and the rip. It's a little light and little lighter rip, and then you know, eventually.

Some stealthy rallies there, you know.

And Andrew, thanks for doing this, by the way, Andrew slim and standing, Thank you, buddy. Yes, looking forward to it. Bob Dollars as well. He joined us now the CIO at Crossmark Global Investments. Bob, good morning to you.

Audi.

Let's look at the numbers so far. Double digit price increases at Kibley Clock, Docter and Gamble Coke, PEPSI take your pick. Looking at the numbers from Tech cloud spending still pretty decent, Microsoft at spending, pretty decent.

Meta. What recession?

Great question?

Is the most anticipated one we know in history. I'm disappointed that full year estimates for the S and P of five hundred are not going up after all this good news. Maybe they've stopped taking the numbers down, but they're not moving up. Estimates are still too high, is what that points out. You give me more than I expect. In the first quarter. I don't change my number. That means I'm taking something out At Q two, three and four,

I don't see how we escape it.

And you've adequately the systemic risk and the financial system handicapping that is very difficult. But I want to come back also at John two what you said earlier, McCarthy pulled a victory that you know, only losing four Republicans was pretty amazing. So now the burden is on the Democrats to come to the table and have a conversation.

We'll see how that goes.

In our ut, there was a nifty to fifty. Now we've got the nifty five as well. Can I hide out in the Bob Doll caution in big tech?

Yeah, that's certainly a way to do it. But with the multiples where they are not just for tech, but you mentioned the soft drink and the staples companies, you know, Coke and Pepsi, their multiples are in the mid twenties.

Right, as we point to the future. You mentioned McCarthy, So let's go there. Let's sit on that for a minute. Does that deal that we saw in the house, even though it has basically no chance of making it and seeing the light of day, does that give you confidence that the US can avoid a debt ceiling enough to price it out as a potential tail risk.

I think, Lisa, it definitely increases the probability we get something done. Had that failed yesterday, we're kind of nowhere. Neither party has anything on the table.

Now.

The Republicans, with an incredible victory, put it on the table. The Democrats have to come back with some kind of conversation, which probably raises the probability we get something done. In the eleventh hour, the twelfth hour, maybe the thirteenth hour.

You say they have to see no indication overnight that they will do.

No, it never happens until it has to happen. We've seen that before. I don't think either party wants to be blamed for default or decline in the dollar because of a potential default. So all I'm saying is the onus is now in the Democrats to have a conversation.

Is it your impression of things that you think that the Democrats in this White House are looking to see some market pressure build to gain some leverage over Republicans.

Is that what they're waiting for?

Very possible. You know, a couple of folks in Congress have said that in the last forty eight hours, gim give us a smack in the face and the markets and maybe we'll come to the table sort of thing, so.

That market participant. Do you find that really frustrated?

Yes, very much.

It drives me.

It drives me absolutely insane. I'm with you and with politicians are willing to let that to involve financial markets and use that as a position to rich.

A little toy, isn't it, Tom.

Don't you find that ridiculous.

And I know we've been doing this for a long long time, but I just find it's so irresponsible that that's the direction of travel. And by the way, that's not a political statement. It's politician on both sides of the aisles trying to play games with markets.

Can you see in the First Republic too, the key I think it's an adverb, but maybe an adjective. I flunk grammar, John, But the key word in every report on First Republic, which goes to the politics of the nation is wealthy. The basic idea that everything we do with First Red Republic is wealthy clients, jumbo mortgage is we know the drill, But there's a huge politics in our day to day newsgrind and finance, and also in how the stock market's treated.

F I saved trying to bounce up by one point six percent. Let's just finish that briefly. Both there is a fear and we talked about some of the robust nature of the numbers of the earning so we can pick several indicators about tag financials whatever. Looking forward, lead indicators are terrible. You look at First Republic right now, and there's a big debate at the moment, it's that a First Republic problem or a broader banking issue that's going to lead to some kind of credit crunch.

Where are even the team on that now?

The systemic risks are always there, they're just a lot higher than usually now. Remember the FED took grates from zero to four and three quarters percent in twelve months. There are consequences. It's not just okay, Silicon Valley Bank its signature and we get up and dust ourselves off and ride off into the sunset. There are more consequences. Might it be another financial institution or two could be. My view is it will include a mild recession. Hopefully it's only mild.

Joining us to rodd Cassidy with decades of experience and practice and the quiet of a management and boardroom where there are tough decisions to make. Use with RBC Capital Markets, Gerard, I've never seen anything like this. The lack of communication of the management team at First Republic, the conference call non event, and even their communicating of dialogue with the government and other more solvent bankers.

Are you surprised by their silence?

Tom, thank you for having me on the program, And I would say that obviously there is at a critical stage right now. They're being advised by some very smart people, and I think it's a strategy that they have chosen.

It's hard.

I was surprised that, as you put it out on their earnings call, that was a fifteen minute call. I think a better strategy a matter it would have been just to release the earnings and not you know, have that fifteen minute call. So certainly talking to the public is not something that should be pursued, and they're.

Not doing that.

But hopefully they are talking to very high level officials in the government at the char Federal Reserve to try to resolve this issue.

From the time of Bill Isaac, Robert McTeer and others on other bank failures that you lived and died with Gerard Cassidy, just very simply here have the rules changed where the government doesn't have a function here like we were trained in school, Tom.

I think they've evolved.

I think the government always has a function because there's a regulated industry. The government, as we all know, guarantees deposits up to two hundred and fifty thousand dollars per account. So there's always going to be government involvement because the government's guaranteeing those deposits. But it has evolved and changed over the years, maybe when Todd Conover was the OCC head of the OCC back in the early eighties.

So what's the challenge for the US right now? If they bail out FRC in some capacity, even if it's just guaranteeing the potential losses on their loan portfolio to facilitate a sale to a private buyer, they will essentially be bailing out the banks that they had come to the table and deposit thirty billion dollars with the First Republic. If they don't, this bank collapses and prolongs the story of regional bank with weakness, which is worse.

It's a really tough dilemma for them, and they're stuck between a rock and a hard place, the FDIC and the Federal Reserve, because, as you point it out, at least there, you know, the choice is not very favorable, and so it's something that they have to weigh which is going to have the least negative impact to the banking system into the economy. And clearly, you know, shareholders and bondholders in these situations like we've seen with Silicon

JROT on a larger point here, we've seen this tug of warre in markets, whether it's the tech giants that are apporting fantastic earnings and other discretionary companies, or then on the other side, there's this overhang of potential weakness in regional banks that could continue. Is that enough to

The DEFED has been very clear that they're in monetary tightening since April of twenty twenty two. You know, deposits in the banking system were down almost a trillion dollars. You might remember during QE during the pandemic, the fed's balance sheet went from just under four trillion dollars to almost nine trillion by the first quarter of twenty twenty two, creating over three trillion of deposits in our estimate to

Just to find a question for me, maybe slightly unfair on First Republic, just to be really specific, is there a real risk here they lose access to some of the FEDS funding vehicles.

There's a possible ability to that.

You never rule anything out, and so certainly in their public statements they have indicated they still have access.

They still have loans and securities to pledge.

We have not heard anything official from the Federal Reserve saying that they wouldn't do is closed to them. So from their public documents, they still have access there, but it is limited because there's only a limited amount of loans and security that are remaining that could be pledged for that type of borrowing.

Jared, from your perspective, what would lead regulators officials to close that access to them?

What would lead it there is if they think the situation is so dire that it's best off to stop allowing them to have access to that source of funding because it will cause less losses to either the.

FDAIC or the Federal Reserve.

That would be potentially one of the reasons for them doing it.

Feeding based on our reporting that maybe we're getting closer to that moment.

Jed, Thank you for being with sir.

Thank you, Jeff Cassidy of MBC the Markets on the financial set of My Mind.

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