Surveillance: Standing Markets with Slimmon (Podcast)

too shy to talk about his results. They're out in little percentile analysis by Morgan Stanley. But the answer is the M S I f US Core portfolio is on the edge of act of God. Andrew Slimmon joins us to this morning to speak gospel. He's senior portfolio manager managing director at the ninety three and nine percentile for folio. Of the duration it matters, Andrew, your idea of short

term is three years. For those who can't get out there, how do they get the courage to invest forgetting about one week or one year action and say I want to invest for three years so I can get a ninety three percentile, Like Andrew Slimon, Well, I mean looking from a market standpoint, when the markets down tent uh, you look out three years, the returns are phenomenal. And uh, I think that's what people are missing when people say recession.

Now recession, I said, markets down twenty percent, We've built in a lot of bad news here, and then from you know, getting to a high percentile. When the markets downcent you can't go buy defensive stocks. You have to start looking for good quality companies that are down more than that. And I just think there are a lot of companies down forty fifty sixty percent and that's embedded a lot of bad news into their into their sock price. Nobody from Morgan sent is watching this morning, Andrew, give

me some names. Well, I think the consumer discution. I mean, look at University of Michigan. Consumer sentiment is at a forty four year low. You all have to think about which is the direction of change. And at that level, it's so bad that eventually it's going to improve. And I think gas prices coming down, optimism is going to improve. And when I think about what is where are stocks reflecting that very low sentiment, it's in the consumer area, home,

home apparel, home furnishing, home retail, home builders. Those socks have been crushed, and I think that's very, very attractive. And usually when I mentioned socks like that, people tell me all the reason why they're down already by that amount. And I think you just have to think things could get better from here. It's they priced in a lot of bad news, so you have to think things could get better from here. But isn't the conversation we're having

on the economic growth front. Things are going to get worse, that we're going too slow as the FED tights room, no question, no question. Look, and at the market level, the market there's a battle going on. On the one hand, the bar was so low going into this earning season. I mean, Tom Kayley, how many how many strategies have come on your show and said guidance is going to be lower. I mean everyone expected a bad earning season, so the setup was deliciously wonderful for you know, beating

a low bar. That's a good news. The bad news is the Fed's not done raising rates, and I think we can't be too optimistic at the market level for that for that reason. But when you start to search for stocks, which is what I do, there are a lot of stock down a lot more than the than the market, and I think there's a lot of quality stocks down a lot more than the market. Well, Andrew, you talk about how everyone's expectation seems to be that

guidance is going to be disappointing. It also seems that there's a lot of cohesion around the idea that the dollar is going to be a big theme as well the starning season. We've already seen it a warning from Microsoft, We saw it show up at IBM and J and J results yesterday. How large a headwind really is the dollar strength that has faded over the last few days. Yeah, So look number one is there's really no evidence that when the dollar goes up a lot it leads to

weak stock market over time. There's really no evidence. In fact, if you look at the last time ten times the markets up over ten the dollars up over ten percent in a year, the market is actually higher three six

months later. So there's no evidence of that. But I think the reason for that is a lot of times the stock market says, well, you know, it's the dollar, and the market looks through that dollar weakness because the dollar gyrates, it's an incredibly difficult to call the market based on you know, where your perceptions of where the

dollar is going. So I just wouldn't do that. Other than the extent, I think you have have to think about going into earning season, how we have stock spen and how low is a bar, and right now the bar is really really low. So I think what you're gonna see is some of these companies are gonna say, yeah, you know, earnings aren't great because the dollar is too strong. And I question whether the stocks are going to go down on that because a lot of that's already embedded

in the stock prices. Do we need a Catharsis? I mean, it's as simple as that. The Bear crew saying we've got to get out Vicks forty cart, Catharsis, Andrew Slimon, you know, Ages, Grace Further, et cetera. Do we need that? Yeah? I mean that is a very good point time, which is usually when you have these types of sell offs, they end in some you know, cathartic event. There are some type of bad financial you know, some somebody, I hate to say it, but somebody flows the surface and

is that? Is that what's happening? Cryptocurrency and some of these vendors. Is that enough. It's hard to think that's the case. So again I do go back to the I'm just not sure. I think the markets in a kind of in a standing mode where on one hand, you know, again earnings are okay by on the other hand, the Fed's tightening and usually that ends lows end and some cathartic event maybe that happens, you know, earlier this fall.

I still think the market will be substantially higher by year end, but I just think it's too soon to get too optimistic at the market level. And so I swear that you would definitively perished the last time we caught up as something started to change it. So you well, I think what's what's changed is that everyone thinks earnings are gonna be horrible. I mean, the one side of the boat is so crowded guidance is earnings are expected to be so weak that I think that presents, you know,

a very intriguing opportunity. And the other thing is I'm always very nervous. I mean, I've been on this show. I'm always nerve. Is going into the summer, bad things happened to the market in the summer, and I think, you know, we're in the earning season. We're getting a lift out of earning season. But in the but the Fed's going to raise rates and what's gonna happen next month where it's all going to be about how many more times the beds raising rates? And I and that

gets me nervous. Any time the conversation pivots from individual stocks, which is what we're doing right now, to the market overall, I think the market becomes more val Usually people get nervous coming on the show because I don't know what song's gonna ask him and could be anythick Andrew Slim in their Morgan Standing Investment Management, Andrew, thank you. Lorena. You reaches us economist of tro Price UH with a

really different outlook. And what we haven't talked about this morning, Lorena is a labor market, and I want to talk about all the gloom that's out there amid three point six percent unemployment. You lead with that in your note. Absolutely, I think I'm taking a lot of signal from the health and strength of the US labor market. It's surprised us consistently to the upside this year. Job creation at three hundred fifty k per month on a three month

average basis. We know the FED looks at this it's pretty strong, and the unemployment trade is all the way down to pre pandemic levels when we had we know we had a hot and very strong labor market. I think the labor market will matter a lot for the outlook of the US consumer and their confidence to continue spending in the coming quarters. So from that, I think the doom and gloom on recession is a little bit exaggerated. At the moment. We parse inflation as services and goods.

How do you parse the labor economy? Is it? The recovery that we saw on restaurants and bars was a theme a year year and a half ago or so. Where is that persistency of good news and labor now? What part of our labor market? So what we're seeing is a broadly based growth in job creation, and I think this is what kept job growth going for so many months. Now, this could turn around quickly, especially if

we talk ourselves into a recession. But for a moment, I think let's pay attention to what we're hearing from companies. They're hiring intentions over the coming few months, and right now we're seeing hiring freezes or a small job cuts predominantly in the tech and finance sector. I think if we see this being more broadly based in other sectors of the economy, this is when we need to start getting worried about the outfit for the US job market.

Can we talk about the housing market as well, because we've had a series of data points that just point to a really dramatic cooling and Diane Swag who's now chief economist over at KPMG, was talking about how we saw mortgage demand dropping to a twenty two year low in data this morning. She says, the canary in the coal mine has lost its song. The correction in housing, the most interest rate sensitive sector, is leading the economy

into a more significant slowdown or worse. Should we be more worried about how quickly the housing market is cooling off? I think this is a great question. We should focus on two things. In the housing market, we're seeing a deterioration because of bad affordability. Homes became very unaffordable for households because of the very fast home price appreciation post pandemic,

and because of higher interest rates. We know the housing market is one of the most interest rate sensitive sectors of the US economy, But we should be careful to extrapolate what's happening with house home sales to the broader economy.

We know this is one of the most interest rate sensitive sectors, but UM at this point not convinced that this kind of dramatic slowdown is going to spread spread to consumer spending because of how healthy their bound sheets are, how healthy the labor market is, and their ability to absorb some of the inflationary hits in the cash pafort

that we know that accumulated. But given that, doesn't that mean that the federal reserves job in trying to rein in demand in order to get inflation down is then that much harder? Is the U S consumer too resilient for them to be effective in doing that. I think there in lies the problem for the FED. We have a very strong economy and they're trying to walk this tide rope of bringing inflation down while the unemployment rate

only picks up a little bit. Because this will be absorbed in the job openings that are at record highs at the moment, I think we should be prepared for the for a FED that needs to hike more than the markets are anticipating right now rending. Your job at ro price is to talk to portfolio managers about sector bets and even individual stock bets, and it starts and ends with unit dynamics and price dynamics of the revenue line. What are you telling them about what revenues will do

over the next twelve months. So I focus a lot on the US consumer, and we've spoken a fair bit about it already today, and so I think what happens with consumer spending over the coming months will be key for revenues. Of course, we're going to have a correction from the levels that we saw last year that was

unsustainably high spending for the US consumer. But we're shifting our view to focusing more on the services sector, where we think the economy is going to rebalance and towards those staples as activity normalizes and all the pent up demand on goods and services gets absorbed. Focus on those necessities and nondiscretion respending for the consumer, well, the consumers there. And I see Atlantic Atlanta GDP now Atlantic Atlanta GDP

statistics that are really quite gloomy. Should we trust those statistics or is the resilient consumer going to surprise all. I think we with every data report, we should really look under the hood and see what the details of that report are telling us. And what we're seeing in the net accounts in the GDP numbers is that a lot of this weakness and volatility is being driven by inventory restalking and de stalking by next trade, two components

that tend to be very volatile. So over the coming months, we're going to sit here and discuss at rate length the signal from GDP versus g d I data. Should we focus on personal consumers and domestic sales? And I think there's gonna be a lot of debate on this, but ultimately we should focus on consumer spending, and we should focus on how fast jobs are being created in

the economy. Well, something else we're likely to debate over several months is what size FED hike we're going to get at any given month, But perhaps the more important conversation is where we ultimately are going to get. We've heard from Blackstone in the last twenty four hours saying could be close to five percent on FED funds, when all of a sudden, dungeon Bianco agreed with that take. So I guess kind of a three part question, how high do you think we get on FED funds, at

what point do we reach it? And for how long do we stay there before the cuts follow? So I think that we probably get to four percent interest rates by the end of this year before the FED takes an opportunity to pose and see the effects of tightening financial conditions on the labor market and on inflation. And then I think risks for next year are pretty wide.

If the economy continues to grow and surprise us to the outside five percent interest rates, it's not unthinkable if the FACT thinks this is necessary to bring inflation down, they will go ahead and do that. They've told us they really prioritize price stability. At this point, when I look at market pricing, I think they are being a little bit too sanguine about the FED cutting interest rates already.

Next year, I don't think it's going to be as simple as out in this business cycle, So no design. Franklin Templeton sent pretty much the same thing to us recently. Lurin you reachi that the US economy is the trod price echo, and some of that from Sonolan J Jim Bianco, president of Bianco Research, jim you know the recent theme. I don't even know it's recent. It's been gone on for months. Fight the inflation story, Fight the inflation story. Jimmy, you push him back against that. Yeah, I am, but

I am this. Uh, this year's people that are calling for inflation peaked are last year's people that called inflation transitory. And it goes to a broader theme in the market that there's a very difficult understanding of what inflation is. Look, the chairman was right, we've understand now what little we understand about inflation. And the same thing applies to Wall Street, and the story continues that inflation is a problem and it's going to stay a problem, and those that think

it might have peaked at nine point one. I am kind of on the on that. But more to the point, it isn't going to come down fast anytime soon, and the Fed's gonna have no choice but to stay aggressive. And the last thing is, I still think that all the talk about whether we're in a recession, and I happen to think we are, is of secondary importance. What's a primary importance is inflation. If it doesn't come down, the Fed's not going to stop. And in a recession.

I don't think it's going to stop them. Jim Bianco, your beloved Cubs are going back to the nineties seventies and their level of mediocrity through the baseball season. In the seventies, we were all nominal. You allude in your research note to the idea of nominal inflation analysis, nominal GDP analysis, the nominal analysis of corporate revenues in a

new inflation world discussed that. Yeah, so a lot of people talking about whether or not we're having a recession are asking the question, well, if we created three seventy thousand jobs, how can we have a recession? If we've got a bunch of positive economic reports, how can we have a recession? The answer is not whether or not it's positive or negative. Is is it faster than the inflation rate? And the answer for a lot of this

is no, it's not. And that's why the first quarter GDP was negative, and that's why you're hearing more and more calls, including the Atlanta Fed GDP for this second quarter GDP to be negative. Yes, on a nominal basis, it will have expanded, it just won't beat the inflation rate, and that gives you negative real growth, and that is the very definition of a recession. Well, as we talk about you think the US economy already in a recession, you don't think it will stop the Federal Reserve and

it's fight against inflation. Where is that going to put FED funds when because you had Blackstone out overnight saying we're getting a five percent next year potentially, Yeah, that's yes, that every FED rate hike cycle has ended, every one of them back to nineteen fifties with positive real yields. In other words, interest rates above the inflation rate. Now, that doesn't mean we have to go to nine percent

on the funds rate. The inflation rate will come down, but we have to see the funds rate go above the inflation rate. Now, take Wall Street, Wall Streets most optimistic scenario is that the PC rate, which about a half a percent lower than c p I, will hit four percent by the end of next year. Well, that's gonna put the funds rate over four maybe near five. So I think people have to realize that rates have

to go a lot higher. Now. The only thing that changes that is if we have a bad recession and that kills demand and that brings down prices quite a bit, but then we have a bad recession at that point. So I don't see the idea of a September pause that the FED is done after July as being in play right now unless something dramatically turned south in the economy. Jim, I'll give you a fund of what the a c BA tomorrow. What are you looking for from President of

the count President Laggard? Uh, you know, finally getting off this night and hiking rates. I suspect that they're going to be like the e c B and they're gonna go twenty five and they're gonna be very considered and very slow moving. And all the talk about fifty is while I think they should do it, they won't. Don't move very slow, President Languette, Do you like that time? That's a new one, President Languett, There we go, gim Pianco Pianco Research. Thank you, Jim. It's going to catch

up you. We count of get down to a big ECP decision tomorrow. We can do that with our Seleniosity, global head of effect Strategy at URBC outside tomorrow, am I trading the ECB or north stream one? Oh? There's so much event risk, isn't there? But it does feel like we've got a lot of the clues for the event risk actually coming all together yesterday. So sources suggesting that North Stream will be reopened, albeit remains to be

seen that what capacity. And then sources again suggesting the CB is considering fifty beats, and um, we're getting some hints of what the antifragmentation looked to al might look like. So for all the kind of build up into tomorrow, and there's still a lot to watch, we have certainly seen a lot of the hints and clues coming ahead of time. We're looking for the theory of fragmentation ELSA, and then there's the application of the theory. Does it

sound doable to you? Whatever plan they come up with, explain to me how it's doable. So there are a few big questions. I mean, clearly what's been talked about or the sources been suggesting something that would be pretty monumentous in terms of size and scope, talking about very loose conditionality mainly country sticking to the growth and stability pack.

But of course there are two biggests. One will that get past the German constitutional court As we know when t was challenged all the previous programs have been challenged, they passed, but this would be a further step. And the second is what happens on the political front, because it's all very well saying a country needs to be abiding by the growth and Stability pack, but there's certainly a lot of populist parties across Europe that have no

intention of doing anything of the sort. As we talk about the euro, obviously it has been substantially weaker at the same time that the dollar has been stronger, and there's a question of cause and effect. ELSA on this program yesterday we were speaking with Andrew Sheets and Morgan Stanley, and he said he thinks the dollar index could go out to one twelve in the third quarter, which was

kind of a wow call. John asked the question yesterday, where does that put the euro if the dollar strengthens to that extent. I mean, there are certainly a lot of scenarios where euro dollar could weaken materially from here. Um, they're they're more extreme scenarios. You know, we're talking about total gas cut off from Russia to Europe, deep European recession, and under those conditions, of course, you'd expect to see euro dollar trade quite a bit weaker. It's not our

base case scenario. We actually started the year with a call for parity um and that was the kind of forecast from December, and so being where we are now, it kind of feels like the bulk of the move is behind us um. Our target at the moment is something around the ninety level. But of course, if some of those more extreme tel risk scenarios pan out, then yes, you know, rodollar could be trading even to a native

something handled. So every single morning I keep seeing more and more news about Europe, whether it's the e c B or Vladimir Poocha and nord Stream one. Not enough on China Alsa, What is going on in China with the mortgage market, this growing lone boycott and what on

earth does it mean for foreign exchange markets? Yeah, you know, I heard you guys talking about at the start of the program, and it's fascinating what's going on because it's so different to the way mortgage markets work here in the UK or in the U S where homeowners or home perspective owners are actually paying for an apartment before it's even being finished being built. So um, I think there are kind of two sides to it. One is we're watching for what it means on the economic front.

I mean, clearly we're seeing some downward pressure coming on commodities and that's having a knock on impact across the world. But from a currency perspective, the remember it it's still such a heavily managed currency that there isn't that direct link you would see um in in the rest of the world. There's still this widespread expectation that the the government will be delivering the substantial stimulus ahead of October.

Um was still pretty cautious on on how far that can go given the zero COVID policy, And so in general, I think, you know, investors, particularly as the FED hikes, are kind of shying away from the remember somewhat, how so wonderful to catch up with you aheaded tomorrow, Asselin say as MBC. This is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple Podcast SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene and this is Bloomberg