Surveillance: The Pessimism Is Overdone, Normand Says

trying to understand what's behind it. What's behind it? It's a few things. It's, uh, the macroeconomic data continuing to remain weak globally, even though they're not so weak in the US. It's the messaging from the feed that they could be moving to restrictive over the next year. And it's the very near term focus on on Q three earnings and and this guidance the corporates are giving about the impact of tariffs. So it's it's just kind of a very unfavorable confluence of events right now. You use

the word globally. Um, that's been the story through so far and for much of the year. US equities, US markets, US risk really hold up against that that's changed over the last couple of months. Why it's changed, I think because the earnings guidance is becoming more negative, and so because markets are always going to respond to to catalysts, you're you're finally getting something a little more concrete to

pull down earnings expectations in the US. I don't think this is the definitive turning point lower in in US equities because I think what we're adjusting to is a much more normal earnings environment of nineteen, where earnings growth might be nine percent in stead of we've seen this year. And if you have nine or ten percent earnings growth, if you have UH interest rates which are kind of at neutralish levels, I still think the path for equities

over the next three, six, twelve months is higher. But the handwritings on the wall from the FED, you know, the cycle doesn't have a whole lot of longevity left to It's maybe got another one year of good growth and then a much more challenging year of in late nineteen.

When do investors really starts to price in that much more challenging growth story of late well, I think when you look cross asset, the messages that investors have been doing this progressively all year, So you're right that it's US equities that have been the standout, our performer. But this is really the only asset class globally outside of maybe US HI yield, which has given you positive returns. So non US equities are down, whether you're looking at

d M equities or EM equities. Credit in the US and Europe is down if you're focusing on on high grades. So I think there's been this progressive skittishness that's getting discounted across markets. It's a bit overdone to me, but I think there is a message there. People are quite nervous. So Morgan Stanley and Mike Wilson, the ce IO over there, has talked a lot about this rolling is this other bank? Is this other bank ran by a man called Mr Gorman? But we don't have to talk about that right now.

The rolling bear market that they've used to sort of characterize and frame these markets, is that something that resonates with you. Then it resonates as a simple description of the price action. It doesn't resonate with me as the proper way to invest over the next six to twelve months, because to me, the idea that every market should be underperforming. Cash except for US equities is something you should really only see if you think you're going into a recession

in the next twelve months. So I think there is actually scope for that that wrecking ball to kind of roll backwards a bit and give you some more positive returns on some non US equity markets. Most of that will be in particular e M s. It could be done some d MS later, So I think the pessimism is is basically over. Donna John, you write a very sophisticated research note for the less sophisticated like me. I'm in the double leverage all cash fund, But what is

the allocation of stock, bond and equity. If you're on the efficient frontier, how efficiency is your efficiency right now? I think the allocation needs to be modestly overweight d M stocks versus d M bonds. I still think the scope for positive returns exist in a particular sector. It's too early towards the end of the business cycle to be this defensive. I think there are pockets of opportunity in certain emerging markets, mainly Latin America, over the next

three months or or six months. So you know, if if you if you look at that kind of a ray, there's not a lot to choose from, but I think it's the broadest set than what you know returns over the past year have delivered. John and I hear interview after interview that all pros across all asset classes are watching high yield bonds is an indicator of where we're heading, and they're confident when they see that performance, that resiliency

of the price of high yeld bonds. Do you share that idea, But I think that's too narrow a market depend one's cyclical view on. I think if you really want to get the message for what's going on cyclically, you should look at credit more broadly. And that's been worsening all year. Whether you look at price DOWNE yield up, price down ye the spreads wider. I mean that that tells you something about a slow erosion in in economic fundamentals. It's not the kind of thing that gives you a

crash in equities this year. That's sustainable, but it is kind of a reminder that we're laid in the business cycle. John Norman, Late in the business cycle does not necessarily mean peak markets. Is that essentially what you're trying to communicate this morning exactly because there's a difference between um peak in return momentum and peak in prices, and markets are clearly peaking in price, and I think that's overdone.

What they should be uh delivering is just much more moderate gains on on equities and to a lesser extent than some bits of credit. Like yell, I just want to get stuck into the intraday price action. I don't think you can read into any given day to sort of extrapolate out what may or may not happen in the future. But it's kind of interesting this morning, John, that you have equities in the United States really soft, and Europe holding up, and not just holding up with stocks,

but holding up cross asset. Italian bonds are rallying, buttons aren't really doing anything at all, and European equities are wrapping quite a significant way against the backdrop what US is really unto performing. What do you make of that this morning? Uh? To me, it says that there's just already a decent amount of pessimism baked into Europe because you look at the macro data that came out of

Europe today, these disappointing p m eyes. Normally that should have implied um wider spreads, much weaker equities and and a much weaker currency. All you're getting is the weaker currency. So I think it just reflects differences in positioning where people have risk. It is more in the US right now. John Norman, thank you so much. With JP Morgan usually in London, visiting today in New York at our Interactive

Broker Studios, which is a good thing. George Friedman of Geopolitical Futures and without question one of our great students of the Saudi US alliance. How broken is the alliance this morning, George, I don't think very. I think you know, it's interesting to see how little has happened asside from the rhetoric, but we have a basic interest with the Saudis. We have the Iranians spreading out over the Middle East

in Iraq and Syria and leathern Yemen. A coalition is formed between really Israel, Saudi Arabia, the United Emirates to block it. If we were to break with Saudi Arabia, uh that that coalition would be gone and we would have a very hard time containing the Iranians. So the last thing we want is to have this turn into a kind of breakdown in our strategy. So everybody is talking, everybody is saying things it is appropriate that they do so, but actions are not being taken. Within the word action

is the action. Domestically, we all read our Robert Lacy years ago the history of the Saud family, and you know, I can go back inside it as amateurly as anyone out there. This isn't the movie Lawrence of Arabia. This is a reality. What's the reality for the royal family? And would you expect the crown prince to be shown the generational door? Well, remember the Western media was lauding

him over six weeks ago. Yeah, liberalization of women, driving of his you know, really ambitious plans or transforming Saudi Arabia from a producing country alone. Uh, he was the hero. Uh. He had enemies in Saudi Arabia. He had people who were appalled at his liberalization. He had within the royal family, people who did not want to see this transformation, didn't trust him, who saw him as a thirty year old kid, he had no grounding. So he's got serious enemies inside

of Saudi Arabia. And the interesting thing is that this killing, which appears to be about you know, liberals in the West appalled at what kind of regime this is actually plays out by strengthening the conservatives inside of Saudi Arabia potentially, But to this point, Um, you know, he's had a weird photo op with the son of the person was killed, and we've seen inside the Kingdom him pulling button. He

seems not to lost power. George, what is your knowledge or experience of being at the King Fodd Air Force Base and the mom Uh Saudi Arabia are the Eskin Village Air Force Base in within Riod, as well the any number of US facilities there, the King Khalead Air Base and Commas Mushayat, Saudi Arabia. These are operational and running air bases for whom, well the Saudis use him for their The United States Air Force and contractors are

supporting that Air force Uh. And to be clear, and to be clear, George, they can't do their air force without our contractors right pretty much. So they've gotten better over the past years, but they still can't sustain them. And we want them to have an operational air force. We don't want to be carried on missions and Yemen for example. So you know there's a symbiotic relationship not only between the United States and Saudi Arabia, but a

very important one would between Israel and Saudi Arabia. By reports to Saudis have purchased and a rarely air defense system called Iron Dome to protect themselves. Well, tell us about iron Dorm. I mean, you know I've covered it here live the missile attacks and what appears to be genuine fear of the people of Riod Iron Dorm. Dome protects them from what missiles from Yemen. It would protect them from a class of fairly low of flying missiles

that could devastate their cities. Uh, the missiles out of Gaza, we're knocked down by Iron Dome. Potentially attack from his Bullah and Lebanon would be well. Attacks from Yemen, but more important attacks from Iran on Saudi Arabia would be dealt with by this. Remember, the real game in the region is um Iran. Iran is expanding and George George Freeman with his folks geopolitical futures thrilled to have them, particularly dovetailing off in Stephen Cook the other day with

the author of false Dawn. Okay, great, everybody agrees Iran is the first order condition here, except none of the newspaper articles. Mr. Arid, Juan speech and the rest discusses it. We're looking at the Shoggy murder as a distinct and discreet thing. Do you bring those two events together. I don't understand the murder it makes. First of all, Kashogi, who is he? Yes, he is a liberal writing for the Washington Post. He was also the nephew of add

Non Koshogi, a major armed dealer in the region. He worked for Turkey al Phis solid one Point, who is the head of Saudi intelligence. He had interviewed Assan bin Laden on various ecasions, which was a different ticket to get, difficult ticket to get. Uh So, he certainly had close ties into the conservative wing of the party. He was an enemy of k of the Prince. He was opposed to him. But in the West we always assume that anyone who opposes a repressive regime wants a liberal regime.

They might just want another repressive regime. In this case, he appears to have changed. He appears to have transformed his views. I'll accept that it's genuine, But why would you send fifteen people to kill him. I mean normally want to be subtled in these things. It's if you know, Salomon decided he liberally wanted to test Saud East to know that something was coming on. As they came through Istanbul Airport, it was hard to miss them and the airport.

It just makes no sense. George, I've got to apologize. Anthony from Sparta emails in and says the pronunciation of the Saudi Air Force base I butchered commies move shaite, Anthony, thank you so much for that clarity, as I mispronounced an important air basis for Saudi Arabia in the United States, George Freeman, in the time that we've got left, what should be the response of the president, what should be the response, particularly of someone considered a lame duck Secretary

of Defense General Madison. Well, they've given the response, which is they're shocked and appalled, and they're not going to change anything in our relationship. That's pretty much what Urduuana said to He's horrified, he's shocked. He's going to bring the individuals to justice, but he said, think about breaking relations with Saudi Arabia or anything else. So what happened. Here is a really shocking murder. It's hard to understand the murder. Uh. And no one is going to change

their basic identivities because they're over writing things. One final question, do you have an understanding of who the replacement would be for the crown prince? Is there an air apparent to be the second position of the Remember, the king has to be replaced. Uh. And replacing the king has happened in the past, has happened by assassination over the past half century century. UM. It is not a clean process.

The king is the king, So to replace King Solomon's father would be a wrenching event inside of Saudi Arabia. It would lead to unknown instability at a time when most of the region and the United States really don't want instability there. George, Thank you so much, George Freeman, with a terrific briefing, Founder Chairman Geopolitical Futures. We continue, Pim Fox and Tom Kenyan with us. Diane Swak of Grant Thorn and Diane are wonderful to speak to you.

I guess there'll be another day of a president going after the head of the Central Bank. At some point. This reaches somewhat of a critical mass. Are we near there? I hope we're not. UM. I think we're not there yet. What worries me is that UM some people have debated whether or not it's worse when an administration goes after a central banker from within the administration or publicly. Well, we know historically that when they've actually succeeded to do it,

it has been through public means. Actually, the Nixon administration threatened Arthur Burns by planting a false story in the newspaper that don got him to acqui us and Ease to pour the two elections, which contributed to stagflation. So we do know that it can have an impact. That's

not something we wanted to have. UM. Certainly, we've already seen Vulker's remarks about how the Reagan administration was pressuring him on interest rates at a time he wasn't going to raise interest rates anyway, so it worked to his advantage. I think what's important is that we don't get too much perception that the administration could influence indust rates. That's where the critical issue is is because much of the Fed's power is actually in the perception of its independence,

not um its actual actions. There's as much perception as reality of rate hikes that affects of FED and I think that's very important. Diane Swank, why is anybody's surprised, particularly coming from President Donald Trump. I wouldn't imagine people are surprised, And hopefully that means that you know, much like other things that we hear noise out there from an administration, we often discount it when it comes to financial markets as that we hope happens. But the reality

is that we know that actions can become policy. UM. In the trade war we are in the trade war with China that doesn't seem to be going away. Hopefully we will see the meeting with she and the President going more productively and back off and get China to acquiesce in some of the things we like them to do without going to a full blown trade war in January. But these are things you know. Unfortunately, it's not clear when things the noise should be a paid attention to

and when it shouldn't be. UM. We know that the president can't fire the Federal Reserve chairman, and the Federal Reserve has a long history of being independent. It's also important to remind people that this rate Hikeney cycle started in December. Off, it goes back to the Obama era that the economy was already firming enough for the FED

to raise rates. And I think it's really important for certainly your audience knows this already, but it's important to remember that the FEDS raising rates as an affirmation of the economy strength, not as a means to kill the economy. So is there some political move on the part of the president ahead of the midterm elections? Well, you know, I mean, who knows. I mean, I can't judge that. Um, it probably is. This is all all people in politics

are political by definition, I would assume. I think the more important issue to focus on is what is decided likely to do. Um, the set is going to react to the data, and this bet is going to raise rates again in December. I think very likely. I put a ninety eight percent chance on that occurring, barring some major collapse in finishing markets between now and none. Dan, thank you so much, too short of notice today, and we greatly thank Diane Swark for her commitment to our

FED coverage as well. Pim Fox and Tom Keenan on politics. Now we go to Craig Gordon, in charge of all of our political coverage in Washington. To say the least, he is so discerning. He understands the distinctions between Ben's chili bowl up on you Street versus the for that it is at Reagan International Airport where I dine before a ship out on the Gulf Stream. Craig, wonderful to

have you with us this morning. Right now. Measure force the tone of the nationalists you're covering versus the corrupt, power hungry globalists. You're covering language of the president who's got the upper hand. Uh here, this few number of days before the election, I still think I'd be rather be playing the Democrats hand than um, the Donald Trump's hand. I think there's a lot of energy out there, uh

in in out on the hustings. As they say. A lot of Democrats are pretty upset about how that Kevin I hearing went down, pretty upset with the way Trump talks and acts. And I think that they have a lot of energy behind him, and also they also have the mathematics behind him. They only want to three seats to take the House, so that's actually not such a high health of client. Since forty some odd Republicans have actually retired, so those are open seats and obviously easier

to win. So Democrats still seem to have the upper hand. There is the politics of the North the day. But I of course it is not the politics of the moment, is it about? It is about suspicious packages and our political leaders Washington, Creig Gordon has too much memory of

this just within the Beltway, don't they. Yeah, no, absolutely, and we all know that very you know, senior political officials mail gets screened, and I think today we learned why because in this case, a suspicious package is thought to be potentially explosive devices were found in mail headed to Hillary Clinton in Westchester County, where of course she has a home with book Clinton, and then to Barack Obama. We believe that one was here was headed to his

perhaps his home or his office here in Washington. So, um, you know this is not just political rhetoric now, this is this is scary stuff and in this case is he could service stop these packages. This of course comes just a day after a package was found at the home of George Soros, also opened Westchester there. So um, look, this is where the political rhetoric that gets heated turns into something a little more sinister um and obviously pretty

alarming for any of us who cover these folks every day. Well, just for a little bit more detail here, the Secret Services the packages were immediately identified during routine mail screening procedures. They were identified as potential explosive devices and were appropriately handed handled as such. One of them was a device addressed to Hillary Clinton, while another addressed to former President Obama.

They were intercepted by Secret Service personnel in Washington, d C. The agency and the statement said that the U. S. Secret Service has intercepted two suspicious suspicious packages addressed to Secret Service protectees and the Newcastle Police Department assisting the FBI and Secret Service, as well as Westchester County Police Craig Gordon. Does this mean that there are going to be increased security in place for the midterm elections and

for campaigning. I mean, you know, security round the president already quite high. It's hard to imagine this doesn't cause the Secret Service to a like a little bit more on some of its procedures. You know, I'm not sure individual House candidates out there again in the in the four and thirty five seats that are have a lot of the Secret Service protection. IM sure they have sort

of private security. But look, anytime something like this happens, people tighten up a little bit and they gets they have to think a lot harder about how they're doing this. And I mean, we already know the political environment is is quite toxic. There's a lot of very rough language on both sides being thrown around. Sometimes again it takes us a more sinister turn in the way it did with these packages, presumably, UM, but I think I think people are already on alert, and I think believe would

be more so after this news today. Greg Gordon, thank you so much and short notice as we follow the story these suspicious packages, uh, and some of our political leaders, John Lieber joins us on text policy with p WC. Is all John, wonderful to have you with us, with maybe a more pull called till today then policy, uh, killed Craig Gordon. They're talking about, well, you know, the Democrats may still get it done in the House, although

I'd say that's emotion is swinging around right now. Even if the Republicans were to win, would it be a new gridlock in Washington? You know, it's hard to doing any kind of legislation these days. Um, you've got a sixty boat threshold and the Senate, which means anything you do have to be bipartisan. And there's not a lot of bipartisan uh Kumbaya moments happening that right now. So it's really hard to do anything at all. And so

who knows even a Republicans get hold the House. Um, you may see not a lot of happening in the next two years. Well, just can you explain why? I mean, this is not like we're talking about thousands of people, right, I mean, you've got a hundred Senators, you've got the congressmen and women, and you have the executive branch. Why is it so difficult to get under a thousand people to agree on things that milly of Americans seem to agree on. Well, you know it's not just the you know,

foreign and dirty five members of the House. How do member of the Senate. You've got each one of them representing very diverse constituencies, and you know, to win an election these yeah, but they're wait wait wait, wait but there but their their constituencies aren't that diverse. Just because of what you said that we've got this huge polarization that they're each just representing very single minded supporters. Right.

So the question is who's coming out to vote? And if you look at who's coming out to vote in recent elections, it's the base that's winning the election. It's not the middle of the road independent voter who's coming out he's persuaded by your arguments. It's people who you're there to fight for them, and they want to beat

the other side. And that's what the senators and the members are responding to, and that's why it compromises so hard, John Leever, and particularly with your experience with Senator McConnell. Frank Newport of Gallop was riveting yesterday about the quiet little thing nobody talks about, which is this will be a success if thirty six or thirties seven or thirty eight percent of eligible voters vote. It's stunning the lack

of turnout in mid terms, isn't it. Yeah? I mean, I think if you had a broader turnout, if people were more informed, you might get a different result. But this is the system we have. You know, you can't. We don't have mandatory voting in this country and we probably never will. Um. You know, people who have lives, they're not paying attention to the elections the way we are. You know, I think it's hard to people to feel informed about what's actually going on in Washington and get

all the information they need. And because of that, I think that, you know, it turns people off from voting, and the people who do vote to the ones who are most exercised about a very narrow set of issues. And you see, you know, that's an incentive the politicians are responding to. Do you see the possibility of the Senate becoming a Democrat majority or do you contend that what the polls indicate currently that it will remain in

the Republican control. You know, I think it's possible. I think the fact that you've got racist like Tennessee pulling away, you've got the Democrats are suspending so many seats right now that it just would be unlikely. They'd have to have almost a pitch, a perfect game basically in order to make that happen, and not just you know, you can't rely on that. That's called that's called doing a red sox just in case exactly, you know, you can't count on that. John Lieber, thank you so much, greatly

appreciate it. This morning, just really wonderful perspective. 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