Surveillance: Tech is Tricky, says Kaiser

It dropped from City in the inbox and it read as follows. Timing is the key word for markets. He went on to say, for data, will inflation crest before growth deteriorates? And let the FMC deal with those risks to its mandates separately? For markets, how long an investible window is there between those two waves of economic risk? To which joins us? Right now? Just do awesome to catch up. Let's start there. I think it's really important.

I've heard a couple of times after last week. Now the sequencing of what happens growth and inflation and what rolls over more quickly and what rolls over first? Where are we now? It's a great question. Good morning, you know I think the challenge here is I think when the Fed started hiking, they were hoping inflation would sort of already have crusted by now and they would sort of, you know, be able to deal with the growth weaknesses.

It came at Leasta mentioned housing you started to slow down. That's kind of one of those early indicators that growth is going to slow it down in the future. You know. I think what the Fed is hoping and markets are

hoping is we had a softer print last week. We'll get a softer print hopefully in December, and that will be evidence that that inflation started to come down at the time when unemployment still sub four percent, right, And that's kind of a really nice balance for the Fed, especially because based on lags of monetary policy, we haven't seen their rate hikes really hit the economy yet, right, So they really need this inflation problem to get under

control before that starts to happen. You mentioned that investable window. Is that basically the window before growth collapses essentially? Yeah, I mean I think it is right. It's it's the window between Hey, inflation looks like it's peak, the FED can back off on rate hikes and oh, you know, the unemployment rate is rising in other other forms of

economic growth are slowing. Exactly how well can you actually time this market though, if you're looking at something that's flip flopped by you know, ten percent in a week. I mean, I don't think you can. And I think that's why the investable windows are really really short. Um, that's why you know you're not taking victory laps, are kind of riding positions too long. I think clients are in and out of position as quickly as possible, you know,

just for that reason. Um, it does feel like the markets moving data point to data point at this at this time, And I think that's why right now are people are already asking what are non fond payroll is going to look like in early December? What is that

inflation pretty going to look like? In December? The markets are pricing almost at two point eight percent SMP move on the CPI in the middle of December, So it just gives you a sense of how much risk is priced for that day already, you know, sitting here and we're not even Thanksgiving, is it easier to look longer term, especially at the leadership and we're talking to Lori Calvacina about the leadership and the rally that we've seen in big tech recently over the past couple of sessions, and

she sees that it could be sustainable to you agree that there is some sort of return the rise of the big tech behemoth as leaders. You know, I don't think we're I don't think I'm behind that fully. Yet there could be, it could not be. I think it's just it's impossible to tell me. Look, tech should work if the pressure from rates eases a bit. I think the challenge with tech for me at this point, it's

the beginning of the year. This was a valuation discussion, right, We're gonna push yields higher, that's gonna push PE's down. For the NASTAC third quarter earnings were not about valuation, right. Those are about actual fundamentals and what's going on in growth, what's going on with Amazon, Facebook, everybody laying off employees.

Seeing The question here for tech is if I take that pressure off from rates, do I get evaluation rerating or do people take a step back and say, I need to see how this this cost cutting initiative plays out, Which is why it's I think tech is a really tricky trade right here, just for that reason. I keep going back to this Brian Chesky tweet. John, I mean,

you brought this up, and I keep thinking about it. Yeah, it feels like we were in a nightclub and the light's just turned on, And I keep thinking about this in terms to tell me what happens when Yeah, because you have no idea clearly so obviously very true. I'm curious, though, what else is there that's going to get exposed? John? Well? How how big is the iceberg? Is basically what I'm trying to work out and everybody's trying to work out.

And I saw all those comments over Twitter over the weekend. How big is the iceberg? Let's talk about crypto for instance, And I think this is the big question right now, to what degree if we had widespread institutional adoption with that in mind, how much scope is there for contagion

from that asset class across to traditional asset classes. And the number one question I'm filled in right now is for people that never touched crypto, never touch bitcoin, and they want to understand what does it mean for me? What does it mean for me? And what are the risks around these stories right now? What are they? What are your telling clients, well, I think I think that question rule relates to what is the FED going to break? Essentially,

you had ten years of easy monetary policy. You've now hiked massively over a short period of time, and I think a lot of clients are think, well, if they're able to hike this motor over a short time, not create a hard lending in the economy and not break any asset classes, that's gonna be you ouplishment of a lifetime. So, you know, Crypto was one of that people have pointed to and that was a beneficiary of easy money. Um, you know, is that is that the evidence? Is it

something like again, is it? Is it easy credit? Is it housing? And this is why it's it's just very hard to sort of step in and say, over a medium term horizon, I'm comfortable owning risk here because we haven't had sort of that moment, right, that moment where an asset class that you didn't expect to kind of come under pressure has So it's it's a great question how big is it? I mean, you've you've seen the

size of the balanty. You know, you've seen you know, negative rates in Europe, um, you've seen Cryptogo where it went. You've seen tech performance where it was. I mean, if there's an iceberg, it's fairly big, right, because all of these trends have been extremely powerful and for an extended

period of time. So I think that's why a lot of clients haven't fully re risked and why they're not fully bought in yet, because there's a sense that there's something out there that that hasn't worked itself out yet. We hear from economists that we haven't built up that much access. We've been asking on this program, what are you talking about the excess of the last two years or the excess of the last decade? What is the excess we need to unwind the last two years or

the last ten? I mean I has to I would say it's the last ten, right, I mean those are two two separate times. It ain't the last two years to me is much more a fiscal discussion of how much money the government spent the last ten years. Is much more monetary discussion in terms of in terms of you know, easier monetary policy. So I mean you have to unwind all of that. Probably not, but you do have to unwind I think a portion of it. And

the question I think they're for equities. That was a discussion about valuation, particularly of growth stocks and tech, and a lot of that got sort of dealt with earlier in the year. I think what a lot of clients struggle with is who have been the biggest beneficiaries of easy monetary policy? Um, you know, what have they invested in? And have we seen what they've invested in? Kind of

re rate itself, and there's some questions out there. Real estate in particular, I think is one people are really really focused on UM And ultimately, yeah, we're just gonna have to see how this plays out. But again, this is why I think it's hard to say, yeah, all clear once inflation peaks were good to go, because again, if monetary policy acts with somewhere between the six and eighteen month leg depending on who you talk to, what was the FED doing twelve months ago? Right? The Fed

was at zero twelve months ago and they were buying bonds. So, you know, while we've hiked a bit, the real estate market has weakened a bit. You know, there's a case to be made that a very small partition of this portion of this tightening has hit the markets. Um, other than maybe f c I, which is just the market itself anyways, thought, um, if it wasn't holiday season, it won't you know, I was just gonna say, I think that he hasn't written his review and he's not going

to and he's just basically coming on. He would explain why you're ahead of you is not necessary and he can go home and enjoy his holidays. Right the year I had outlook in March, I say all the time. Just at the end of the first quarter, the new poecasts Stuart Kister City, Stuart's great to see you again in person in the studio. Doan Swamp Chief Economists the KPMG and charts with following some of the Fed speak Dank.

We start with Governor Walla yesterday evening in Australia. What did you make of these lightest comments and a pushback seemingly against the market action. I think we're going to see more of it. I think what you see with the Fed is, you know, they've agreed to do more measured rate hikes, but there as they close in on a terminal rate, but they still think that terminal rate, the peak in short term rates is higher than they did just a few months ago. And they're going to

stick to that kind of language for some time. I think we're going to also see when we see the PC index because of that weird medical cost deceleration in the c p I, the PC index, which is a day before the FED meets in December, that when that's released, it's going to show a little hotter corese c p I, and the Fed's going to feel pretty justified about continuing to raise rates, although at a fifty basis point pace

instead of a seventy five basis point pace. And the FED also doesn't like to see financial market conditions easy right now when they're still trying to tighten I know that sounds strange, but the bottom line is this is undoing much of the forward guidance that the FED has worked so hard to establish. It was like that summer rally on repeat, and I think Governor want to alluded to the problems that come about from that. We put some numbers just on the SEP that might come out

in the middle of December. In fact, it will come out in the middle of December. We put some numbers on that. Diane. We saw the SEP and the dot three moved from three to four sixty I thought that was a major jump. It was a big jump. Are you expecting something similar, something similar in the December meeting

four sixty two? What Well, we did have six participants at that meeting that had five percent as the high end of that um that range, and so I would expect to see those six participants to move above five And we could see that SEP the high end of that rate move slightly above five percent as well. Our expectation now is that the high end of the range is five and a quarter percent, which is five point one to five in the middle of the target range.

But I think that's important to remember is that we already had six participants at the meeting in September are looking to go higher than what the SCP was telling us. Ian you mentioned the medical costs, and I don't want to get too far in the weeds, but there was a glitch or a strange confluence of numbers in the latest CPI report. If you back out that health care and component, what does cp I look like? But the cp I, certainly the underlying inflation members numbers look like

they're beginning to peak, which is the good news. And I'm actually much more optimistic that we're going to see a disorderly or a welcome sort of deceleration in shelter costs as we get into three much more quickly than the Federal Reserve expects. That said, this is still a number that's too hot for the FED and not low enough for the Fed to feel like, you know, the

war is over. And I think that's very important that the Fed still feels like they still have to go higher on rates to cool inflation, and it's still too hot of an inflation right for them to stop thinking about the pain that might accompany it, which is a rise in the unemployment rate. We're just talking with drum Schneider of PIMCO about how this feels like it could be a prolonged downturn, even if it's shallow, it's going

to last a long time. Do you adhere to that kind of view that perhaps the worst case scenario of a severe downturn seems taken off the table a little bit more, but that it could be a very long time before we see meaningful growth at levels that we've seen over the past decade. I think it's going to

be you know, every recession is different. Our own expectations are for a moderate recession of a couple of quarters without a robust rebound in the second half of three, and then really gaining momentum in the end of four. So as a prolonged period of weakness, that is what we are seeing. That said, we're only talking about high in the unemployment rate, nipping close to six percent. That

is really low for an unemployment rate for recession. There's a lot of reasons for that and none the list of which is the aging of the population and the loss of participation by those over sixty five. Those are going to be holding the participation ratedown and the overall unemployment rate down. But this is a very different kind of recession, disproportionately hitting housing, some spill over into consumer spending,

business investment will be hit, but unevenly. We've got the ramp up of electric via electric battery pants going on. We've got subsidies for chip plants going on. Those are ramping up much more quickly than the infrastructure spending bill, which was passed sooner, and that's not going to hit until we get into well into and just out of interest. If the Democrats hold onto the House, and they may well to do. I've got no idea what happens here.

Everyone's still talking about gridlock, but ultimately things have shifted the other way more recently. But that changed your round look at all. I think the biggest change in the outlook is the risks of battle over the debt ceiling and what that would mean at a time when the Fed still raising rates. You know, we already had the debacle of two thousand eleven and the debt ceiling debate back then. To take that off the table, I think is good news now. Whether or not it means more

stimulus or more stimulus if we hit a downturn. I still think that we're limited in fiscal space, so I'm not sure that it actually means more steamless out there. It's certainly I don't think they're going to have an easy path to any kind of changes in policy, which is a bit unfortunate because we need to make some major decisions on policy that I believe need to be bipartisan in scope, and I don't see that no matter what the outcome is either way, Dian, fantastic as a

white to catch up with you. Dian Swunk, the of KPMG Prams rejoins us now they had a level of right strategy of TV securities prayer. It's the question that every strategist face right now. Has the twenty three outlook coming along? Oh gosh, you know every year it's tough, but I would say this year we're debating economic outload, inflation growth. I actually think that the growth outlook will become more interesting as we go into twenty three, and

the FED reaction function. We normally don't have uncertainty on all these aspects, plus a fairly liquid market positioning. I mean, just look at the reaction on Thursday. I think it tells you it's It's never easy, but I think this year is particularly hard. You're supposed to take these outlooks with a pinch of salt or a fistful of salt and be nimble. So but but we're all going to be writing it over the next you know, a couple of weeks. Do you have any convictions whatsoever prere you know?

I do think I think liquidity is important, um, you know, so I think making sure that you've got enough liquid assets so that you're not forced to sell what you don't want to sell. I think that is I would say a theme that we've had this year. I think that continues. The other big conviction I have is I know that the data right now is still strong. Um, you know, we think inflation is going to be it's it's less about the peak, it's how quickly it's going

to decline. So I think we're going to move from whether we speak to that pace of decline. If the pace of decline is shallow, which is actually our our call here, the fat's going to stay restrictive for longer, and and so a recession is almost a done deal. So we've got these views around sticky inflation, recession. It's timing that, treating that that's going to be hard. I still like ten your treasuries. I mean, I don't know why we move thirty basis points on Thursday. So that

can absolutely be undone a little bit. But I think owning some duration risks, which has been shunned by investors all through this year, I think it's actually it actually makes sense to start to position for duration coming back. Um, you know, the tenure should not be around four percent if you're heading into a recession. I'm not going to let that go. I have no idea why it rallied thirty basis points on Friday or on Thursday rather Friday the bottom market was closed. So what do you do

with these types of moves? How do you understand them in terms of positioning a liquidity standpoint and what that means in terms of coming up with some sort of trade. So, as Governor Wallace said, you know, to become to to breathe that. I think that's actually good advice. The market has been extremely volatile. You know, when we track standard deviation of tenure changes, this is the highest we've seen including the seventies in terms of how much the tenure.

When the risk free rate moves that much, you can just imagine positioning the importance of flows. I think understanding that the market is not as liquid, dealers have constrained capacity. I think that's important, which is why you're supposed to keep some cash. I think bills are actually attractive. You keep money in the front end, UH to make sure that if the moves are excessive, you don't have to sell. There's no fire sale. You can potentially put money to work.

I think being nimble, I think all of this is you know, we shouldn't see this as a one off maybe positioning was was particularly exaggerated. I see it as a structural issue and something I think we have to get used to, particularly because we have a data dependent FED. It's very different from when forward guidance was there. You could actually expect volatility to stay low. I think volatility stays high all through next day. It's just the market

focus will shift from in lation to growth. With that in mind, prayer how much influence that this FED have on the long end, on the ten year? You know, I actually think they do. I don't know why they don't talk as much about QT. They're letting about a hundred billion of treasuries and mortgages run off the balance sheet every single month. I think that's the reason why the long end of the treasury CLUVE has underperformed. There's a lot more supply, there's mortgages, which also long duration,

and the market is looking for that marginal buyer. So I do think that they have control. Um. You know, at some point, I do think QUT is going to end once they start to ease. We actually have them starting to ease. I know, I just talked about sticky inflation, but if the unemployment rate is at five percent or higher and inflation is getting down to three percent. We actually think then the tradeoff will look will start to

skew the FED towards rate cuts. And I think if the Fed starts to put trade, they're going to stop QUT. And so while people think that's really a front end trade. Now, if quantitative tightening stops, I think the tenure has a lot more room to go. So I do think that they have control over along end. They just don't talk about that control a whole lot. When you press send on the outlook, come and see us right, premisra of TV Securities, Thank you. Lori Canvassino had a US acurity

strategy at NBC Capital Markets. Laurie, Mike Wilson, and Morgan Stanley talking about the volatile path back to thirty after maybe testing something like three K in the first quarter. Laurie, earnings risk. Can you walk us through where you see the earnings risk in the economy right now for corporate America and why you expect that to land? Sure, it's a great question, John, and let me let me say, Look, I don't think we're out of the woods on earning yet.

That being said, I do think it's possible that markets put in the ultimate low in October because three to six months before you get the final earnings downgrades is typically when the stock market bottoms and big sort of challenge periods. But just kind of backing up from that, I think we're at too oh wait for next year on earnings. I think the consensus is still tracking around, say to thirty three. Um, you know, what we really have baked in is moderating inflation, which is really taking

our of a new number. It doesn't really end up helping margins. We find that margins are really more of a function of wages, where we've still got some wage growth baked in on things like productivity pricing. I think as inflation moderates, that hurts pricing power as well. So we've really got a ratcheting down of earnings and kind of you know, flatish the slightly down levels with what

we saw last year in the SMP five hundred. This is very similar in our minds to the backdrop where we just kind of don't really go anywhere on earnings for a few years. Um. But I think honnestly, John, I don't think the street really has a good understanding of how much moderating inflation is going to hurt earnings because of that link to revenues. How much are we going to see the leadership change, Laurie in a sustainable

way over the next year. So I think this is a great question, Lisa, and I think that's probably, you know, one of the bigger challenges to figure out for next year. Frankly, typically when you are in a sluggish economic growth backdrop growth stocks outperformed, so that would point you to things

like technology, communication services, consumer discretionary. And one of the things our economists have been talking about is that if you when you kind of get out of the short shallow recession, we're going to see pretty sluggish GDP for a while. I do think though, that there's a big leadership change of foot here, so I'd be very very selected in looking at some of those growthy parts of the market. We like tech, but we don't like the others.

If you think though about kind of the value oriented sectors, we're starting to hear some people make a growth case for them, things like energy, things like industrials, and you're starting to see some pretty good out performance in sectors like that over the past month or so. Freely energy has been doing great all year, but now we're starting to see that broaden out to some of the other

value oriented sectors. So I would say, stay pretty balanced, have a little bit of growth, have some value exposure. I think that's gonna work better in the near term anyway, Be balanced and try to be more selected within those buckets as opposed to just leaning into one big bucket for the longer term. Lore you, it brought up something about how you are leaning into big tech potentially, and this is one of the big questions over the past week. With the tremendous rally. Does it have legs? Can it

reassert itself? Are you really in the camp that it can in terms of the rally? You know, look, I would say i'd probably share Wilson's view that we're going to be volatile for a bit longer on One of the things we've pointed out is that markets in two are really trading on the two thousand two paths um and if you look at you know sort of what happened back then. We had a January peak, a summer low,

a big October low. We rallied back pretty fiercely into Thanksgiving, and then we turned around and gave most of it back going into a new low in March, and so. On the one hand, I do see the potential for the rally to continue a little bit in the longer term. I think, frankly on things like the election that's already baked in. Um. You know, I think there's a lot of people who think the FED moves have been exaggerated.

We can save that for another segment. Um. But I do think that we're going to chop around, and I think you know, whether or not you think the rally can continue, Sure, I think I can continue a bit in the short term, but I do think there's a tremendous risk that we do give a lot of it back in the first quarter. We won't save it for another segment. You can't bring up the FED and not

talk about already. Let's talk about it now. Jennis Monic of The New York Times yesterday was life blocking Governor Water speech down in Australia, and this is what Governor Water had to say. The markets seems to have gotten way out in front. We're going to need to see a continued run of this kind of behavior before we really start to think about taking off foot off the break, Laurie, is the FED still in charge of where this market goes and how far this rally can go to the upside? Well, look,

I think I think it was really interesting. You know, we said in our weekly, John that you know, we liked what we saw in the CPI print, but the thing we didn't like is we knew the FED was going to come out and quite a quation with harsh rhetoric, and that's exactly what we ended up getting with waller Um. And look, I think that, you know, to some extent, maybe they are losing a little bit of control. Um. I think that they are trying their best to clamp

down on the enthusiasm. But I'll tell you, John, I don't think the peak inflation, peak FED narrative ever really went away. I think that those people just got really really quiet over the last month or so because they were tired of having their heads ripped off. So I think when we yeah, where they're allowed now. Because when we saw that CPI print came out, there was a massive sigh of relief. There was a massive sort of

uncoiling of enthusiasm. And I sympathize with those who say the market went too far but at the same time, having talked to a lot of usters that you know, have been doing work on used car prices, another all the all these other components of inflation coming down. You know, I understand the release that happened. I understand that relief valve that occurred. Lorie. Final question, what are you telling clients about what's happening in crypto and what it means

for them, even if they're not in the asset class. Yeah, so it's a great question, John. You know, I don't cover it. Um We we sort of leave that to other people at the firm. But one of the things we have talked about is the extent to which the

average retail investor, you know, is involved. And I know I saw a Good Morning consult pole recently that said about nineteen percent of those that they surveyed owned crypto, um, you know, which tells me that perhaps it's not as pervasive as some fear in terms of the impact to the average investor. We're going to have to see. We're getting a lot of information right now. But as I've talked to some of my friends sort of in the

wealth management community. Remember I speak mostly with institutions, but as I've talked to some of my friends in the wealth management community over the past year or so. You know, I've heard things like, well, my clients aren't really involved in crypto. Their kids and grandkids have tried to get them involved, um, but they said no. So, you know, for the moment, I still view this as a contained implosion,

but we do have to watch it. There's a tremendous correlation between the SNP and bitcoin, and we do view bitcoin as a risk barometer for stock stocks have been sort of defined the carnage that we've seen in that space recently, but we'll have to keep an eye and you know, frankly, just just see how bad this is. It's something we've got to watch. Laurie Bridians catch up as always that's told before year end Laurie campass into

that of MBC Capital Markets. 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 one.