Surveillance: Soft Landings with Carpenter

and others over the years. Seth Carpenter joins us this morning. Seth, I'm gonna go to the Morgan Stanley way, which is you guys under roaches, leadership, codified, a vision, visible argument. What is the number one thing your team is arguing about as we enter two thousand twenty three. Gosh, what

sorts of things that were not arguing about. Let me say I I heard you all just the where the segment talking about the ADP data and the labor market and whether or not the economy is slowing in one place where we have um tried to hold our ground. Ellen Sander, as you know, as our chief US economist, she and I have been steadfast and saying we think the economy is clearly slowing, but boy, we're not calling

for a recession in three. We're still there. I don't think we're actually in the majority with that view, but the fact that the economy is holding up is part of our view. There you mentioned the initial jobless claims data. Uh, what we're thinking is going to happen, and this is consistent with the anecdotes from the minutes, is that businesses will try to hoard labor, and so what we're likely

to see is slower and slower and slower. Non farm perils will get tomorrow's data obviously where we're looking for about five thousand UM, but we're looking for us slowing down and hiring. We're not looking for a wave of picking out that territory is going to be is where we've been. We've alluded to the seventies. You two on to remember the embarrassing Lapel's Michael McKee and I wore years ago. What actually happens to our economy, frankly, the

global economy. If we got a Neil cash cary five point four percent, a board six point seven whatever percent, do we all fall apart and die? Or I mean we we move forward, right, I mean, I do think we move forward, but you know, we are looking for a soft ish landing, if I can steal that phrase from share pol. I do believe that the committee right now is feeling their way. They are close to being as restrictive as they need to be. It'll be up to the next several data points to figure out exactly

when they call it quits on hiking. But then it's going to be a question for them how long to stay restrictive like that. And I think that's the part that the market really needs to internalize, is that the FETE is not trying to trash the economy now to bring inflation down next year. They're trying to slow the economy down over a multi year process, and that really is going to be the difference I think between now

uh and the seventies. And for the record, I was alive for all of thee that there is this issue of how much do you actually listen to what FED officials say and do what they say, versus take that as signaling that's playing some game theory to try to get the market to a place so that they can then say, look, we're all good and we don't have

to raise rates as much as we previously thought. I say this as Kansas City FEDS esther George speaks and start talking about how she raised her forecasts for our FEDS rates will ultimately end up. This is kind of what Neil Kushkari was talking about a bit yesterday. Does that guide you in any capacity? Do you trust them or do you push back against them with the rest

of the market. Uh So I trust them in the in the following sense, they are talking about what they think they would do based on the availability of information right now. Uh. And so then what we have to do is overlay well we think is actually going to happen with the actual data, what's going to happen with jobs,

what's going to happen with inflation? And if inflation keeps coming off as it has been, and if job creation continues to slow, then I think what they're going to say is, Wow, we have got the traction that we wanted from restrictive policy, and we were seeing this sloan that we want, so we'll be able to step back.

So I don't think they're going to get to the heights with the funds rate that some of the members of the Committee have pointed to because I think the data will slow enough to give the core of the committee that sort of comfort that they can stop. The problem is is that the data on the goods inflation has slowed, that you are seeing some disinflation there, but you're not seeing that in jobs. And this is where we go. Let's let's really end where we began here.

This is the big dilemma. Will the Fed keep hiking rates in the face of strong labor market data even if there are signs of disinflation elsewhere? Yeah, I think if it is continued very strong labor market, then then I think they keep going. You know, we're looking for another step down tomorrow. The ADP data came in. I tend not to look at their numbers, but I do spend time looking at the commentary that comes through, and they are pointing to a little bit of easing of

wage pressures as well. So I do think we are seeing signs that were going in the right direction, that things are slowing. But there's no sense in which right now things are weak. If we went back up to three hundred thousand jobs per month and stay and then there's no question they keep hiking Before we let you go, Seth. I want to mark a funeral for negative fielding debt. It is gone, it is dead. It is over. The

last negative field in coupon has gone. Well, the consequences of the end of the negative yielding era be born out over the next decade, over the next year, or have we already seen it in what we experienced last year? Oh? I think there's I think there's any number of repercussions

to come. And if if we're right and the feed is able to stick with their strategy of not just hiking until they're restrictive, but staying there for at least the balance of this year, then then those higher rates are going to be have have an effect for some

time to come. I think the other interesting question that will come up and will be a topic of discussion is going to be one of fiscal sustainability because as those interest rates go open player and governments have increased their dead totally entertainment that they're making is going to have to go up as well. So I've been nice at Ollen Sentner, you know, but just you know, New Year's resolution, don't be so argumented like Steve Roach was

years ago. Seth carpenter of the fractures Margan Stanley team as well. Here's the line from Anon Sender right from Morgan Stanley, financial conditions aren't too easy, reflecting a misperception among investors of the fetes reaction function. Let's get Russ cos tricks view on that. The portfolio manager for the black Rock Global Allocation Fund Russ. Would you agree with that line from Annon Sentmocan Stanley, Well, good morning, Jonathan. I think i'd agree with the fact that there's clearly

this tension right now within the Federal Reserve. This is not a new thing. This is what you rail the market back in August, where you're concerned about the market eating ahead of itself, whether that's a function of the stock market going too high, credit markets getting too tight. There is that concern that the financial conditions ease off too much. Is that going to hamper their fight against inflation? And I look for us where we are, and we

have to piece this together. You have the responsibility to piece it together with portfolio allocation. How are you reallocating? So honestly, you know, Tom, we are pretty much going into twenty three the way we left twenty two up. We're not making a major change right now. So what does the portfolio look like. We're underweight equities, were underweight bonds. Were emphasizing carrying the portfolio because in a market that's range bound, we want to be able to earn some

income for our clients. We're focused on quality stocks. Now. I do think we're gonna get to a point later in the year, probably in the first half, were closer to a FED pivot. At that point, evaluations are where they are a bit lower. I think you can get a very good tradeable bottom. But this is not the point where I think you want to load up on risks. Are the the cost cutting is going to be efficacious as every corporation and every sector goes out and recalibrates.

Here as we see from tech and all that. I don't mean to micro call it, but are thinking to be efficacious and helping their margins, are they actually going to have impact? Well, let's over a couple of things. I mean, tell him, I think you raised a very important point. You know, a few minutes ago, you know Big check is ridiculously profitable. You know, if you look at most of the companies in the NASTAC one hundred, particularly the megacap tech names, their cash flow, their profitability

is enormous. Margins just still close to a record high. So yes, companies are gonna trying to manage costs that arguably climbed up a little too much during the the euphoria post pandemic. But the reality is these are still very profitable companies. We're not talking about two thousand when you had Banhastic one D and barely any offit ability. Ross I can't let you get away with saying the

word pivot without really pressing into what that means. You think that with all of this backdrop and the potential pain that we're seeing in terms of layoffs, there will be a pivot. What does pivot mean? Does it mean cuts? Does it mean a pause? I think it's more of a pause. I think the FED has been very clear and again conditions can change, and they reserve the right to change their minds. But it's not necessarily practical to expect cuts this year. The question is where where's the

turninal FED funds rate? Is it five five and a quarter market right now? Is uh? You know, forecasting someone in the zip code to five or the conditions force them to go much higher than that to five and a half five and three quarters. I think that's the question the market right now is trying to resolve. Is you see signs of deceilration and inflation as you see some salt in the labor market, and you get clarity around that. That I think is when you get a

more tradeable bottom in financial markets. Can we get to a pivot, Russ if we don't get a significant sell off in equities, if we don't get the tightening for financial conditions that the FED has been looking for, Yes, I think you can. I think the FED is clearly financial conditions are are front and center. But at the end of the day, they've told us what they're focused on, And if I had to focus on one factor, it's

going to be the labor market. Because we know that headline inflation is coming down, goods inflation is coming down. What has been remarkably resilient has been the labor market. And that's where I think the FED is going to focus not necessarily and whether the S and P five hundreds at thirty seven hundred or thirty nine, Russ, can you help me understand what's going on with the labor market. So I looked at the quits right yesterday got the

jobs report. Job openings, quits are up, Quits picked up for the first time since February. That screams confidence in the labor market. Job opening still about one point seven openings for every single unemployed American. Again, that screams a tight labor market. Then, Russ, I see this news from Salesforce, from Amazon, from others as well. Russ, We're trying to work out what should I believe here we the corporations in one industry, autnemy or what the official data is

telling me month a month, weay come weak. Well, I think I think you hit it. It's what the its industry by industry, and that is why this is such a difficult labor market. Absolutely, we're seeing layoffs in tech, We're seeing solignated in parts of the professional class. But if you look at other parts of the labor market, hospitality, restaurants, healthcare, these segments of the economy lost hundreds of thousands of

workers during the pandemic that have never come back. They're still missing workers, which is why the quit rate is still high, and that's why the labor market may remain somewhat resilient, at least in those parts of the market that are playing catch up with all of his dislocations that happened during the pandemic. I rush, this was great. We appreciate it happen to year to you in the same thank you breast constrict typing of black Tom Forte

with us. He's senior research unlest did d a davidsonboat It really is is a guy encyclopedic on what goes on at Amazon. The background story we don't hear of. I love how you end your note. Tom. You talk about revenge travel. Bramo owns that, and you also talk about we're all going to see Taylor Swift. You've gotta be kidding me. Did Amazon just blow this with a blowout growth track to the end of the pandemic? Sure? So, e commerce companies in general overestimated demands for the current

state of the pandemic, not just Amazon. You see it at Wayfair, you see it at Shopify. So I think that what what happened was initially, when the stores were closed, consumers leaned into e commerce to such extensive levels that there was an expectation that those levels would hold. And first what happened is consumers return to physical stores. Then they had inflation, so they had more money spent on food and on energy, and then they had Revengie Travel,

and then they had Taylor Swift. So I think you are seeing a return to live events. But from Amazon's vanage point, as well as Wayfair and shopifies, people are not shopping on e commerce and that's a problem at least. So this is just as shattered the A and R screen on the Bloomberg there's fifty five buys, three holes in one cell the streets, just violently against what Jesse is doing. Yeah, clearly they don't see this is being

a massive downside. In fact, this might just be just the medicine the Amazon needs to have the same kind of profitability that they're pricing in. I do wander though, Tom eighteen tho corporate jobs cut. Does that indicate a much broader wave of job cuts among the rank and

file in the months to come? Yes, So I think part of what you're seeing is so if you look at Salesforce laying off ten thousand, you look at you know, big tech company to your with more layoffs, is that to some extent there was some element of bloated headcount. So you had a very tight job market, especially in the technology area, and you have companies that ramped their headcount very significantly. Some of it was a miscalculation of demand, but I think some of it is turning out to

be bloated headcount. So I think that there is a possibility that you could see some margin improvement in Amazon and some of these other big tech companies from scaling back their headcount. But I do think it is worrisome again for the current state of demand for e commerce. This is kind of bizarre to me. Tom. Basically, this is like Tom going to the bobs and asking for

a hairdcunt. Someone pulls out of teas. Tom, this is even a big problem, and they're not dealing with it, or it's not a big problem, and that just doing something small. I didn't get it. Tom. If I've got one point five median people on the books, then what is eighteen thousand? So so think of it as two ways. Amazon basically has two workforces, the blue collar workforce that

employs that the fulfillment center. They had a hundred thousand quiet production and headcamp between the March quarter and June quarter of last year. As they basically didn't hire back on attrition. And then the white collar workforce. And what we're talking about here is a white collar workforce eighteen thousand jobs and a ten thousand jobs, and I think that is an indication of software demand and a greater effort for cost controls. So two different labor forces in Amazon.

Here we're talking more about white collar job layoffs. That's impulland climsy tumpson. Can you tell me where the other leavers are and whether you think they might have to be pulled in the year ahead. The big challenge for Amazon in the third quarter wasn't that their e commerce was slowing. It was that their higher margin, higher growth cloud computing and advertising business. We're starting to feel the

negative impact of challenging macroeconomic environment environment. So to the extent that you consider, you see more weakness than ten thousand could become eighteen thousand could become thirty thousand. Will see how they continue to manage costs as the demand, especially for cloud computing and advertising, remains in flux in a challenging macro tom what is Jesse gonna do about the ginormous headache the logistics of the last mile for Amazon?

They got all those boxes piled up, and it just seems like getting the last mile, getting the last four miles, getting the last four hundred yards in New York City is the ultimate battle. Are they going to fix that? I think this is their strength. So if you look at the duopoly of FedEx in UPS, one of my favorite moments in UH tech was within the last three months when FedEx said we're about to enter a global recession.

Second statement, we're raising prices. So I see an opportunity for Amazon to use their first party delivery efforts for all retailers. They could break the duopoly of FedEx and UPS. So I see that as actually an opportunity for Amazon, and I think that that's something that seven percent of units sold an Amazon were third party that could grow to sever time. Leveraging their delivery effort is what will

enable them to do that. That's fascinating clinic from some FOTA at Day, I send him what he thinks it's gonna happen with Amazon. We thought we would get some perspective on the madness in Washington now. And there's no one better than Wendy Schiller, who owns a high ground at Brown University on American politics. Wendy, I'm gonna cut to the chase. You and I were channeling the great Alan Evans on Grover Cleveland and a time from another place, and there was a guy from Maine, Tom Reid of

Bowden College, who changed the rules. What did Zuri do in eighteen eighty five or whatever that matters to Mr McCarthy today, it's it's very similar. He changed the Rules Committee. The Rules Committee is the gateway put legislation on the floor, and when you get through the Rules Committee, they determine which amendments you can offer and who can offer them, and how long you debate the bill. So read basically

stacked the deck. He took control of Speaker of the Rules Committee and then gave the Rules Committee and the Steering Committee the opportunity to shape legislation and cut out individual members and members gave him the power to do that precisely what you just mentioned, Tom. The McKinley Tarift Bill, they all wanted to get it past a big industry.

Republicans were united. They needed to get it through, and they needed a uniform process to squelch all the opposition, particularly Southern Democrats who want to free trade that's not here today. They don't seem to have a kind of agreement in the Republican Party singular policy calls. Pelosi had Louise slaughter, She went with an iron grip, handled the

rules committee in a McCarthy house. Does he have a rules committee when maybe Greg Valier says he's going to give it up to one vote could throw him out of office? This isn't This is an even Pelosi slaughter of five years ago, is it? No? But you know they're clamoring for more open legislative process, you know, and in the midst of all the opposition and name calling, you know, in the Senate, the same thing. The parties

have really consolidated leadership. Senators complained they can't do anything on the floor of the Cannel far amendments. The legislative process isn't really there anymore for for either chamber. So they're making a valid point that they want a bigger stay. And what happens, the problem is they don't share the same ideological viewpoint or policy goals, so they will obstruct

and with such a slim margin, it really paralyzes the House. Wendy, the Democrats are remaining quiet, probably wisely so to allow this to play out without their input. I am wondering, though we had expected after the holidays to hear from President Biden about whether he would run again, he hasn't announced and talked about that at all. When is he going to discuss that more in full? Do you get any scuttle butt about what's going on on that behind

the scenes? Well at LISTA, that's a great question. It seems to me since the State of the Union address will be earlier this year than it was last year, most likely makes sense to take that unique opportunity do it as a neutral, you know, bipartisan leader of the country event uh, and then announced you're gonna run. And if you do it beforehand, then everything about the State

of the Union is tainted by that announcement. So my guess as he waits till after the State of the Union and does announce that he's going to seek the presidency, particularly if the Republicans look like they're in disarray, it really stomps on whatever momentum some of these challengers like Rhonda Scientists, Donald Trump have going into to look ahead to twenty four. Some people would argue the opposite that President Biden said that he would run again if former

President Trump was in the running. Sure, he's in the running, but he's kind of taken a back seat when it comes to leadership, certainly with this latest House speaker nomination and vote that we've seen go down in d C. At what point does that factor into what President Biden does? Where does the leadership go for the future in the Democratic Party. Well that's a really great question. But right now Biden is like he's got a lead in sports analogy, He's got to lead in the game. He's sitting on

the lead. They out team doesn't have their acting together. Why would you step off the field, Why would you give up the game? You know, He's gonna go forward. He's got some good cabinet members, got some good governors in the wings. I think given today's political environment, people can ramp up pretty quickly to run for president. So

I don't think it hurts the Democratic Party. And as long as they stay solid and united, that's the message they put forward, while the Republicans appeared to be at the moment in disarray. You know, and I'm looking at Wendy and the Tuesday lunch bunch at Brown University is something having to do with pizza and Providence. There's the moderates of the Tuesday lunch Bunch, now the Republican Government's Committee in Washington. I don't think enough is being said

here about what I'm gonna call. I know I'm gonna get a lot of hate mail on this normal non Maga Republicans. How did they move forward? Well, and Tom, that's a great point because there's two hundred of them. You know, McCarthy can say he's conservative and people sort of believe them. But you know, when you're from California, it's a tough sell if it's not to be a really red Republican. But there are two dred Republicans who want McCarthy to be speaker. So how they come to

the table. Maybe Steve Scalise, you know, second in command. Louisiana Republican is different from Midwestern Republican and they all one closer racist than they expected, and they want to win again. So I think this is a really big problem for them. They're not just gonna lie down and let these twenty kids, if you want to call them that. So I don't mean to interrupt, running out of time, if they're not gonna lie down. What do they do when this, this this clown show is over, Well, I

think that they have to stay. What they should do right now is stick together. They shouldn't relent. McCarthy shouldn't quit too soon, because that's that's their exercise of power. The two wonders that want McCarthy shouldn't throw in the towel today or tomorrow. Make this go on, make them fill a buster this for a longer period of time, and certainly go out to contributors and say, listen, don't give these people any money anymore, even though that's what

they complain they want to be protected from. You know, make sure that you stay solid, to signal to them that you're not going to roll over today, You're not going to roll over six months from now. I don't know if they can do it, but that's what I would recommend to hold their power in the Republican Party in the House. Wendy. A lot of investors trying to be politically agnostic. I'm not sure if that's achievable or not, but they at least try, and I think they're probably

wondering watching this play out, what is this consequential for me? Wendy, how long can this go on for before it's truly consequential. I think it can go on for a long time. Actually, unfortunately, it's consequential today. You know, when the leader the free world of the United States is the leader, and our economic and political powers are tied together, and if one of our chambers is grossly dysfunctional, then the world starts to wonder if they should invest in the United States.

So if we want to issue new treasuries to fund that debt, you know, we have to get more stable. So I think it has implications starting today. The rest of the world is having some issues too in their legislatures, but nonetheless it matters today. Whether that matters to Matt Gates or Lawren Boberg or you know, Chip Roy. The people who are leading this charge, I'm not sure they're not particularly international in their focus. But that's where the

business community, to me, has stayed too silent. Right now they have to weigh in and they have to say, listen, we give you a lot of money and we want the thing settled, so get it done. Wendy, Thank you, Wendy, Si Brand Universty. This is the Bloomberg surveillance podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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