Surveillance: The Fed's Dramatic Pivot with Citi's Mann

Arthur Burns pipe. It's it's become a parlor game. And the good news is we have the right guest to try and parse the silliness of this. Joy James Sweet. Just credit Sweet, chief Economist dropping by the studio. Great to see it, James, try and make sense of this for us. What on earth has happened with FED speak in the last twenty four hours. Well, everything I say is part of an academic speech and has nothing to do course of course. Um yeah, I think the Fed

has signaled that they're going to cut. I mean we expect him to cut by um. The market speculation is maybe they'll do fifty. Ironically, the data says maybe they should do zero. But but the marketers really debating whether they're going to do twenty five or fifty, and the comments from from President Williams yesterday really moved the market sharply towards expecting fifty. And then he brought that back

later in the day. Did he bring it back because they're not going to do fifty and he doesn't want to market miss priced, or did he bring it back because they're gonna do fifty. Anyone surprised the market and have everyone excited about a dubble shock from the Fed. I'm not sure. But you know, again, I don't think the data really supports any cut at all, So we're

going to continue to forecast. The heart of this discussion is we're asking too much from one institution forrest about the names of the people, governor pharaoh, you know, you know, whatever, nobody needs. That just we're asking too much of economists who have a toolkit that everyone agrees, including Vice Chairman Clarada, with world class research, which is prone to probabilities and likelihoods. Right.

I think that's fair and I think even you know a lot of the presidents, including Mr Williams, were past um research heads at their local feds UM, and you know, very competent monetary policy experts UM, but you know certain kind of people may be prone to a certain kind of thinking. And lots of papers about this scary zero bound. Let's go to the inertial force. Here is it linear? They cut let's forget about fifty basis point they got, then they cut another. Always see the date I get

all that is it. That's a measured green spanning and linear move. I don't buy it for a minute. When does the umph click in? Well, I think when you when you need a sharp move, um, you know you can, you can deliver that. But really the question is do you need it? Governor Ferrell was saying yesterday. Know, I think most people don't think you need it right now. I think the communication we've had quite clearly from the FETE, though, is that they think they need to get ahead of it.

They need to do more with less, they have limited ammunition. Don't wait for it to materialize, James. I think that's why so many people find it so confusing at the moment, because they look at the heart day in America and they say things are okay. Then they listen to the feed and the communication and they're wondering what's wrong, Well, the real tailor rule probably should have p M eyes and forward break evens in it. And it feels like

it's a good point. Yeah, it feels like that's what they're responding to, because I think the tailor rule that has forward actual inflation and you know, forward actual unemployment based on really what you can see now, it doesn't really suggest a breakdown of inflation or or arise in unemployment. So you have to have a pro you have to be forecasting something meaningful in the absence of cuts to

justify cuts, and we're not. Is there value to the five year five year forward's looking at five years and then five years for it from that? Is there too far up? It's not. There's not really much value because it's it's basically very correlated with oil prices, and it's really telling you whether the ten year and the thirty year going up and down or not. So what's the X axis of tools that would be useful for them? And the answer is, I'll a p M E S.

It's shockingly short, isn't it. Well, the p M I S I don't. I think they do definitely respond to and we've done some some thorough empirical work showing that both the ECB and the FED tend to react to sharp moves down in in P M I S. But the problem is the labor market tends not to react to sharp move downs in PM. You and I did thorough empyropical work. Was that over those beers. Paul Sweeney out is over for Budweiser's and we did her oracle work.

And right, James, just thinking about things at the moment. The research that you guys have done on industrial production worldwide and manufacturing. You came out quite early and said that there are some one off factors behind the manufacturing recession we are seeing as it was gaining momentum, and you think they're fading. And what I find really interesting is not where we are right now, where will be month end? Were set to get an interest right cut.

It's what the economy looks like going into the back end of this year. And your base case with a right cup without a rate cut is things are going to improve. So just walk me through that because I think it's important, right well, I I really separate the real economy into global manufacturing trade industrial production, which of course, as a US component and labor market, households in developed economies,

so on. On the first, on industrial production, basically, trade uncertainty tariff fears caused a sharp, sharp slowdown towards the end of last year, centered on a drop in imports in China. UH. And so from October to March you had really bad global industrial production growth, and the Chinese industrial production data, for mysterious reasons, didn't really reflect it. But um, but I think, you know, I I think we had a really big slump. It wasn't a U

S slump, but it was a big slump. March to May, we actually had some recovery. Um. Since since the tariffs went up, it's likely that we're back in that slump in manufacturing activity. UH. Investment is likely to be pretty soft in manufacturing globally. But meanwhile, the labor market in the US, nothing has happened. Inflation in the US nothing has happened either. Financial services inflation, which they can't measure,

came down a little bit. Basically, the rest of the inflation data are stable, and if anything, core inflation is likely to rise. So so you know, basically you've got two things. You've got a manufacturing slump, which should really get no worse, but not really, you know, we don't see robust growth and inflation and and and unemployment where basically still nothing is happening. I've never seen Sweeney is

fired up. What solid mean? Do you? When when the when these fancy guys at these institutions say it's a solid economy? What solid you? Because right now, I mean unemployment is at three six three seven GDP. Growth for the first half of the year is going to be mid two's um you know, corporates the flow of credit to just about anyone who wants it in the US, it's pretty good right now. So what's not solid? Really?

The straight James Sweeney with se does David Blanche Flowers no doubt listening up in the handover thew Hampshire going he doesn't know he's talking about he wants. Do you think Danny wants fifty beats? I'm not sure I actually I haven't spoke to him for a couple of weeks, but imagine it's up there at the fifty level. I think he wants a big adjustment. You too short of

is it now? A chapterin Man of City Groupe The Chief Economists and always kept a man on international economics, except we're not going to do that on a New York Friday. We're going to talk domestic economics with Dr Man. What is the research that you see with your vast team at City Group? Is it an economy that justifies no decision? I guess an out front basis point cut or Catherine, can you get all dramatic today and tell

me we need a fifty basis point cut? Well, you know, I think that there's been um, some real challenging communications

that the FED has been uh presenting to us. I think your person who is on before talks about fresh clues as if you know, we're trying to uncover the true FED, and I think we're The real challenge here is that there was a very dramatic pivot from language that used the vocabulary of patient monitor data dependence to change to language and vocabulary of preemptive, preventive, large and bold moves. And so you know, it's like, Wow, how do we all of a sudden move from patient and

monitoring and data dependence to something completely different? Because the incoming data for the United States do not warrant change in tone, and so it's what happened? What what did we see? In? Frankly, the incoming data from the foreign economies as well, does not warrant the type of market pricing in of dramatic action of you know, fifty basis

point to mark. The market UM is pricing in much more than the data warrant, and they are effectively pricing in this recent language change, which is also a puzzle because the language change is dramatic without the data being with it being dramatic, Doctor man, how did we get to the point where we're preemptive? And if you read melts or three volumes or Timberlake of the Georgia School or Bernanke and the rest of it from academics, where's

the evidence of preemptive works? Well, we can go back to the you know, the long and variable lags UH story about monetary policy, that it does take a long time for monetary policy to work through um the real side of the economy, because in the olden days, that was the channel you changed monetary policy. Banks reacted, then you had to change in the cost of capital uh to cost of credit, and then and then that followed

through the real economy. And so so you did need to look very far forward, uh to prospects for the economy and adjust monetary policy appropriately in light of the change in economic activity. And then of course also we cared a lot about inflation um and that also had

long and variable lives to affect inflation um. But we're at a time right now where what matters more or seems to be much more of the dynamic is the market expects something to happen, for the FED to move in a particular way, and then if the FED does not deliver on what the market expects, then that yields an implied tightening. The market believes the implied tightening, even if there's no change at all, the implied tightening generates a real tightening, or they believe so, and that real

tightening has consequences for the real side economy. And and you know, we can argue about whether or not that's that's appropriate or to consider, but it means the transmission mechanism is very different. So, Katherine, I'm just looking at one of your recent notes and the charts that you find interesting. I'm looking at the one on job growth. I mean, you know, you look at some of the data. This is a data dependent FED. The jobs growth would suggest that the FED can maybe sit this one out,

But that's not what the language seems to be. Well, that's right. I mean, as I say, we when the you know, the language uh was patient, monitor and data to pantheons uh and then it and then then it really really pivoted very rapidly to this notion of needing to have insurance guns or preventive cuts, preemptive uh cuts UH.

And I think that they're you're getting very different language from from different members of the broad body, not just the f o MC that there is, the voting body, but the broad body that addresses the state of the U S economy, state of the global economy and how it impacts the US economy as part of the decision making process. So you are starting to you know, you are seeing quite a range of views uh in in

the in the commentary. But but the market had definitely tended to um focus quite a bit more on this preemptive, preventive, large and bold moves that have come out in in the most recent testimony and other commentary of the past several days too short of visit, Dr Man, thank you so much for joining us. Really wonderful to get a briefing from City Group chief economist Catherine Man this morning.

It's rare, Paul, that we have someone dark in the door who has a degree in natural philosophy from William and Mary, which is so no, but I mean, I mean in physics right now, William and Mary. It's the William Smallhow small was Thomas Jefferson's iconic mentor, Like Jefferson always said, this guy is a guy that jumped started in, Lisa Ellis with us. What was it like doing physics where you're supposed to do history. You go to William Mary to do American history and you got out of

slide rule? Yeah, yeah, that's right. Well when the Mary is beautiful as you highlighted, steeped in history. I was actually there during the three hundredth anniversary and the institution and um. But it's the natural sciences are strong too. There's a lot of um. The NASA has a big and wrong that barely describes the physics program as one of the best in the country. Paul, why don't you bring it from offa Nathan's and Lisa Ellis here on a on a three year old computer company that ain't

get done? You know, I was saying earlier. I pulled up the five year chart on IBM, and it's returned to whopping negative one point two percent over the last five years. Just looking at the stocks at LASA, I know they reported earnings. What's what's the key takeaway here? I know you're not really constructive on the stock here, but what was the takeaway you took out of the earnings? Yeah,

there's they were mixed results. That's the overall takeaway. The two that this strong the big positive and the strong negative pretty bipolar. Actually. UM on the on the positive side, the software number, which is a lot of what tends to move the stock on earnings, was quite good five point four percent for their software business. That's a very profitable business, very important to the sort of perpetuation of the franchise. UM. On the flip side, however, their cloud

number was terrible. It was five percent in the quarter. That's down from twelve percent growth a last quarter. And this was a business that just in as of two thousand seventeen was doing. And obviously you compare that to you know, Microsoft to just reported and for Microsoft Azure, they're putting up numbers like an excess of sixty percent growth. So alright, so that brings us to red Hat. Red Hat, as I recall, was a big acquisition presumably going to

help them in the cloud. What can you tell us about red Hat You think that is going to do what IBM needs to be done to their cloud business? Well, it it definitely helps UM, you know, within the scale of IBM. Unfortunately, just from a financial perspective, it doesn't move the needle that much just because of the difference in scale UM. But from a competitiveness perspective, it helps them. The real area where IBM is struggling right now in cloud is in the platform as a service business. That's

where they would compete with like a Microsoft Azure. Red Hat has one of the leading products in that space, their open Shift product. Again, financially not a big deal, it's only a few hundred million in revenue, but more strategically it should help IBM positioning in that space where IBMS product, uh you know, has been lagging those piers. I look at the vectors of their income statement and frankly, if you didn't know what was IBM their constructive EBITA

manage rising, free cash flow manage rising. The revenue line is an unmitigated disaster at the board level. Are they just simply managing IBM to be a smaller company? Uh, realistically, yes, I mean they are in you know that sort of like shrink to grow type of mode. Does that work in your experience at Mackenzie years ago? Does Mackenzie do

shrink to grow? What is that? Well? I mean meaning there are pieces of IBM that are in areas of of of I T that are in structural decline and they've got to work their way well the challenges that you know, IBM is really about major large customers where they are selling almost like an all you can eat. They sell hundreds of millions in software servers services. Microsoft does that as as well. That's true, but they the

point is you can't really break apart those pieces. It's like the you know, it's like these large customer situations. So they sort of have to just manage manage through that, you know, runoff of some of the declining area. Do not know this? They have three employees? Yeah, wow, that's right. It's because they still are the within IBM um they have over forty you know, over half of IBM's revenue

is in services. They actually are still although Accenture is inching up on them, the single largest I T services player out there. That's why they that's the hundreds of thousands of employees are there services. So at least I see on August two they're having an investor webcast. They're not even gonna bring you in for the rubber chicken. It's just a webcast. So what do they need to get across to the street on this August two kind

of webcast with this kind of their investor meeting. The UM Well that the key thing in the immediate term for the street is going to be numbers. There is some uncertainty around how red Hat because it's a software company, there's this purchase Accounty Dynamics is going to fold in. So they're going to give new twenty nineteen guidance. They're also going to give some new medium term guidance around the revenue and earnings and free cash flow impacts on

the business for the street. Honestly, a lot of it will be about that, but I think to get the stock to move positively, they'll need to give more tangible UM nearer term meaning twenty type of time frame synergies from Red Hat and they talk a lot about the concept of the synergies, but not a lot about the numbers for ten years. I mean they're all concept. I mean, you know the stock is up this year. Let's give a little bit of a break. Okay, there are one

your targets one right, that's right. How soon do we get to your target? I mean is this by next week? Or uh no, we would we I mean our price targets are when your price targets, so that would be a one year time frame. Um, the big, the big question marks are going to be you know, the this you know will Will red Hat. Really it can't just

be red Hat folded into IBM. Red Hat has to make the broader IBM businesses be better to really change that long term, like you said, that long term negative trajectory on the revenue, and that's what we'll all be watching for. Just does that cloud number get better? Right now? Cloud number five percent versus azure at sixty three I think percent or sixty seven was the number they put up. You know that those growth rates need to start normalizing.

You're sit in the same room with Moffatt Nathanson. Do you have to hear them? They do? They sit right to write down the hall from me and you just you just all day. It's media, media, cable. What's the content? Very quickly, what's the content of IBM? It's a Nathanson question. What's the content of IBM, meaning like what what's their future? What's the code? Yeah, that means cloud software at services. That's I mean they there with the d n A

and the specialty is infrastructures. Is is big enterprise I T infrastructure services like the platforms that run business software. So this includes everything from the servers, the storage, the middleware layers, the service you know, the labor that wraps around that. And that's what's moving into these cloud models and they need to be a leader there. Lisa, thank us. Lisa Ellis Moffatt Nathanson with a cell on international business right now out of Stanford, and not a body joins us.

She has been just superb on questioning banks in the shadows of the shadows within our banking system were under the professor body join us this morning. Wonderful to have you with us. Professor you're right about the leverage ratchet effect. Are we leveraging up a global system as we did

in two thousand five? In two thousand six. Yeah, I think that basically the system continues to be built on piles and piles of that, and we you know, it all worked wonderfully with leverage on the upside, but there's leverage on the upside. Is a character of the leverage build up this time? Is it different than what we saw twelve years ago? You know, they're they're always variations on exactly what it is that that's the underlying assets. But fundamentally, you know, that is that you invest in

various things. You call them, you know, loans or other real world, real world economy firms, our small businesses, you know, leverage loans. They now call them covenant light loans, you know, not subprime mortgages, um where households are as indebted. But yeah, that is a huge part of the economy. So, professor, just ten years after the financial crisis, wonder if you could just give us a sense of or your sense of kind of the state of the US financial system.

Is it safer than it was pre crisis? I don't think it's fundamentally safer. I think, uh, it's you know, you could imagine where the next big shock will come from. Will it come from from you? Know, business or corporations default or will it come from I'm kind of scared of any kind of cyber problem. Uh, any many hacking or some systems crashing and all of a sudden, uh,

you know, if a fragile system collapses. So I think that it's still remains very difficult to see through a system that's so connected and so global and so uh. There is a lot of debt, and a lot of debt that we don't see it off balance sheet commitment, things that can sort of trigger all kinds of contagion mechanisms that we saw. So I'm not I'm not feeling

that it's much different. Professor. In your paper, you have a wonderful literature review of thinking about our behavior when we leverage up and you go back to you know, I love the paper from the late eighties Jacob Frankel Folks now the chairman of JP Morgan International, Michael Dooley legendary and Peter Wickham as well, and I remember that paper is being foundational to the fact that we leverage and then we're successful, so we feel good, So we

leverage more and we feel successful, so we feel good, which everybody would say, well, that's a normal human condition. What's changed now from the time of Frankel, Dooley and Wickham not much. Our paper that you're referring to, for me was a revelation because for a long time we you know, we teach basic corporate finance and we teach about that and equity funding, and we have a very

static way of thinking about it. You know, you sort of put in place that and equity and then the world ends, at least in the story we tell, and we talk about how the risk gets split between that and equity and all of that. But if you look at it for a living, breathing, you know, firm, what ends up happening is that there's a very uh over time because you keep making decisions both investments exactly balancy, you become sort of addicted to it. And that's what

we explored. And it's interesting because a while ago, when I got into banking, someone us talking about why about leveraging exactly what you're saying that if you gamble with board money and you succeed, then you think leverage is wonderful and that you're smart. Yeah, you're jenous. So now thank you so much, and automounting with us from Stanford,

the leverage, ratchet effect. Me A Feynman joins us. Now the curator in photography at the museum, with an ample history of massaging black and white film, and she joins us, Uh, now me a congratulations on your show. Have you been stunned by the turnout? I visited a couple of days ago and it was packed. Is it had a genuine interest? Oh? Hi Tom, Uh Yeah, it's been a very popular show. Uh,

but I did expect that. I mean, everybody likes the moon, you know, it's and and with the anniversary, there's just so much going on around Apollo Leap and thinking about IP. I love the imagery and then you slam it at the end with the TV set, the old antique nine TV set of Walter Cronkite. Why did you do that? Why did you go from the still photography all the way through the imagery, the paintings and then right at the end, boom, there we were in ninety nine. Um, well,

we thought it would be. We had to show the video in some way because it really was the first worldwide media events that everybody tuned into and that's how most people experienced this moment. And so we felt that putting it on a vintage television set and letting people watch the CBS news footage, uh and see Neil Armstrong's first steps on the moon was a way of bringing

that experience to life in a visceral way. There are imageries within all of our past about science, and of course the huge up or now of some would say the death of science. We think New Jersey Institute of Technology for their commitment on Bloomberg surveillance to science. But you know, I think of Peter Coyote and the keys clinking and et and they're just these these images that we have, and so much of that comes from Tom Hanks,

the actor. He wrote the introduction to your book. Explain how Tom Hanks looks at your Moon show in this moment of Apollo history. Well, Tom Hanks's introduction is really beautiful and poetic, and he sort of steps back and, uh, you know, looked at the big picture of you know what the mystery of the moon and how this mysterious shining orb in the sky has always fascinated human being

from the very beginning of time. Um and looks at the different ways you know, sort of talks thinks about the different ways that people have interpreted the Moon, you know, as a goddess um as you know, and and you know, up into the space age where we actually were able to um get human beings there to another planet in time and putting the chronology together, what was the biggest surprise for you, I mean your expert in you know, the derogatypes and the photography and the film and all

that in the art and the other exhibit as well, But what was the biggest surprise for you in that chronology? Um? Well, I had never really thought about the far side of the moon, the decide that we never see and how that is always been the ultimate mystery, something that human eyes had never seen until nineteen nine when the Soviets sent an orbiter around the Moon with the camera inside

of it, and then they sent some pictures back. And this photograph that's in the exhibition is the first time anyone, any human being has ever seen this. And that that I found kind of moving and and and you know a little thrilling, you know. So that was that was a surprise for me. If you're joining us on this day of a pottle eleven Mia Fineman with us with a spectacular show at the Metropolitan Museum of Art of the imagery of the Moon and goes back to Friederich

painting that we all grew up with. Yeah, everything, But did you do you have a copy of good Night Moon in there, the children's book that everybody grew up. We've got that in the gift shop. The gift shop. You couldn't get a first edition a good Night to show the literature of it. There's so much popular culture around the Moon, um. And you know, if we if we had, like you know, another few galleries could have

gone down that road. But we just we had to make a lot of hard decisions about what to include and what not in the in the exhibition itself, and some very good decisions. Well, Mia, Fireman, thank you so much for joining us an incredibly busy week, a successful show at the Metropolitan muse uh Museum of our Apollos mus The Moon in the age of photography really can't say enough about it as well right now with my

past in his past, Robert Moon shows up. Of course he has provided huge leadership for surveillance on the STEM Report every morning and the science of it. And you and I go way back on this to the absolute sweat Bob Moon and it's seen in Mia Fireman Show. We didn't know what we were landing on, did we know? Not until we finally clue. We finally put some sort of spacecraft up there to take high resolution pictures. And you know, you and I were kids. We wore kids once.

It's hard to believe. I bow tie on the boats and uh. And when I was a kid, my mother worked for Hughes Aircraft and they built the Surveyor lander and uh. And I remember all the while she was doing the wiring, she was doing the harnesses that held all the wires that ran the cameras and and that sort of thing. I remember her telling me what she was doing and not quite really understanding the significance of

it and what's great about it. Whether it's surveyor, which my father was hugely excited about, he did not it was an ranger, which was as a kid, was so exciting because they're going to fly it right into the moon and they'll be that last photo before and this, folks, this is way before nine. It's like five six, seven years before is it was all bolts and steel. You know, you think about it, directors, how did we, in that

very short amount of time get to the Moon. And I think about all these stories, like my mom's story, of all these people all across the country having a role in getting us there. I mean, she had a personal role in finding out if we could even land on the surface of the Moon by helping to build that spacecraft. People built the rocket engines, people built the lander that Neil Armstrong and Buzz Aldrin used. That was a Grumming product, and and all of those different things.

Indulge me with just a quick bit of family folk clues. When I was growing up, I came home from school one day a little kid, and there was a Manila envelope sitting on the living room table, and I asked my mom, what's that? And she showed it to me. She pulled out a picture of herself. It was a glossy picture of her in a one piece piece bathing suit, right,

And I what's that? She said, Well, they needed to test the cameras for the surveyor, and so they took this picture to the resolution studies and that sort of thing. And I didn't know whether that meant that her picture was going to be on the Moon. To this day, I think that I looked at the schematic for the surveyor. There's a little little part of the surveyor that says focusing target, and I wonder if my mom is up there there's a focusing target. I got a million anecdotes

of this, folks, and I'll just give you one. When I was fifteen, I couldn't go to Germany. There was a stamp in my passport that I was not allowed to go to Germany. That's how tense it was. It was really as you know it, Hughes. My father was with the Eastman Kodak company up in the land of genesc and uh, it was, you know, within all the remembrance of it, it was really serious time, wasn't it was? It wasn't We were in a race. We were in a race to the moon, and it was serious. Thank

you so much for those remembrances. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio