This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Ferreroll and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App.
Jending and Manuel, chief equity and contsative strategist over at ever Court, Jennian fantastic, catch up with you, sir. Good morning.
Oh it's great to be here.
Let's talk about that pullback in this secuity market. Is it time to buy?
It is?
So you hit on two very important themes just now. The first the concept of a bit of tension. Okay, the wall of worry that was almost non existent in July as Ai was leading us to the new world and then suddenly started getting rebuilt at the top is now fully rebuilt. And how do we know that because basically, if you look at the market yesterday, there was a very very noticeable change when the UAW came out and lowered their offer, making the bid offer spread twenty one
to thirty as opposed to that original forty. And that's when bond yields turned lower, and that's when stocks turn higher, and we think there's a lot more to go of that type of action in the force.
So they say, equity col you'll make it is essentially a bond market coll correct.
How can it be otherwise When you look at the action in the last year and a half, the two are positively correlated. It's a new world.
I want to talk and I'm fired up this morning because I got great and worthies running around the world spout in economics and it just drives me absolutely nuts. Let's get back to common sense. You work for the most famous market economist in the world, Edward S. Hymen invented the game. I want to get from Ed Hyman to Julian Emmanuel. What is that linkage across the high and predicted disinflation?
So Ed's call again disinflation. It has been very consistent. And what's interesting about the current environment is it's very rare that you see oil prices ratcheting higher the way they have, whereas copper prices have been going lower. That tells you that what's going on is more geopolitical than an entrenched inflation psychology that's going to continue to unwind,
likely a slowdown. But the commonality here is when you look long term, the reason the market is likely on better footing in the fourth quarter is because earnings are going to continue to grow next year.
Tell me about the character of nominal GDP the animal spirit hymen. He's looking at freight cars, he's looking at pickup trucks. He knows what Taylor Swifts going to drink at the football game this weekend. AD's omniscient. Okay, take his research and bring it over to nominal GDP into the top lying revenue growth the general enthusiastic.
Well, the first thing you got to say is it's interesting because now there's a reason to watch the Jets game live for maybe the first time in years, because Taylor Swift may or may not be there. Look, the fact is is that again, part of why this environment has been so difficult is because the economy is so incredibly diverse. And actually, when you look at at AD and OSCAR surveys, what we've seen was the trucking survey telling us that we should have been in a recession
for the last nine months. But because the manufacturing side is so much smaller than the services side, and the airline survey has been on fire literally for years. We all know how difficult going through airports are, and we all know how much prices have gone up. Is that the economy again, this diversity is likely going to get us through so that even if we get a downturn, it's mild.
I never took you for a swift, ye, I just am throwing that out. There wasn't really on my radar. What are you buying then? Because if there is this bifurcation in the markets between different industries that are going through recessions at different times, what's going to lead the drive back to forty four to fifty by year end?
So we think you need to be really thematic and really focused here. The energy story is absolutely going to continue to play out again, this is geopolitics more than anything. But geopolitics is going to keep the oil price elevated we think certainly until next November. So it again the only sector that basically is pricing in a recession healthcare, which is actually immune to geopolitics and interest rate girations. Very good secular story and what we like again, the
generative AI. It's not just the arms merchants, know, the stocks that we thought that armed the Internet in the nineties, It's not just those, but it's the companies that have been front foot forward in terms of implementingative AI. And we're going to be paying very close attention to Earning's conference calls in the month of October to see who's doing what and to see what kind of ideas they have in terms of implementation. Those stocks will outperform long term.
Right now, as you take a look at the idea of more volatility heading into a really potentially fraud election cycle, how much does that actually make you favor bonds because typically you have to adjust for a higher risk premium in the more volatile instruments. Are bonds less volatile than stocks in this kind of environment.
Well, they certainly haven't been for most of the last year and a half. But again, look, we know the FED is likely about the pause. Maybe there's one more high left and that QT will continue to run in the background, so we don't really have to worry about what the messaging is there. But it comes back to this whole idea that when you look at the energy complex. It is sort of off by itself, and so therefore the case for bonds becomes a little bit more interesting to us.
Two of the most powerful quotes in the past week come out of Bank of America. The CEO, the CFO needs to be talked about way more, Brian more and hat we won't have a recession. The CFO, it's difficult to see a recession when the consumers spending four percent more year of a year. Can you identify any evidence of a slowdown that's going to lead to a recession anytime soon.
Well, you actually did see the consumption number ease a little bit yesterday. But frankly, when we look at again, the weekly jobless claims number is the thing that we're focused on, and it is very strong. But here's the thing we know there are some of these things building in the background that have traditionally seventy years been pretty
good indicators of recession. L EI's loan officers survey, the yield curve, etc. It doesn't mean that the recession is eliminated in our you, this is a case of the economic cycle because of all the money we threw out being elongated.
The value to growth ratio is there a record, essentially a record low values never underperform growth like it has recently. Do you just stay with growth or do you buy the value trip?
Now?
I think you have to again be very very targeted because if you think about it.
Well targeted, what freak help me out here? Free?
Well, it's a different story right now. There's evaluation edge in areas like energy, which you're throwing off ridiculous amounts, I mean insane amounts of free cash low and healthcare, which you know, despite regulation, continues to be a one way ticket because of the demographic tailwinds. And again, anything that is associated with generative AI is likely to be a company that's also throwing off good free cash flow.
How you got into the jet sky this weekend?
No, my Minnesota vikings have made a misery of professional Have.
We confound whether the Titus Swift is attending set game?
Take a clerk to Scarlett Fool last night, Celerity loads, let's need surveillance and Foo was working the phones all day with Taylor's people. They have led the way to this higher rate regime that we are living. Veronica Clark with Andrew hollend Horse leads from City Group, what are you writing this week in Verona, cut to the chase. We need a surveillance out front. Look, what are you going to publish for Monday?
Yeah, I mean we've had a lot of data. Of course this week.
We had GDP revisions yesterday, all the spending and inflation data today. Overall, it doesn't really change the picture that much. I mean, growth seems pretty resilient. Yeah, we've had some slowing and inflation, but we did get revisions higher, We're coming from a higher rate.
There's really not that much to change.
A pretty solid growth backdrop, inflation that's still high, you know, really not much to change. The message from the Fed, which we heard last Wednesday is higher for longer, and so I think that's that's the outlook, Veronica.
When you take a look at credit card spending, a number of people are saying anecdotally you are seeing a significant decrease in activity, that people are being a little bit more frugal and a little bit more discretionary with their income. How much do you reject that in your thesis that you're seeing almost a reacceleration in certain areas that could fuel inflation.
Yeah, we've absolutely seen that in goods spending.
You know, a lot of the story of the last couple of years has been people were shifting spending away from goods and back towards services, you know, as things were reopening. But the last couple of months, you know, we've absolutely seen retail sales spending you know that's on goods tick up.
We've seen strong durable goods orders.
So it's not you know, entirely that the people are shifting their slowing spending. It's maybe that things are shifting relative to the patterns of the last year. You know, growth is not just supported by services consumption anymore. It's really much more broad than that. You know, it's good spending, its investment and those types of components.
So if you take a step back, you listen to all these people saying that consumers are slowing but not that much, and that you are seeing the economy slow but not that much, and you're going to get this disinflation. It's going to lead to a perfect soft landing. What's your main pushback about why inflation is going to remain sticky and why this is going to become a persistent problem that the Fed's going to have to address more aggressively.
Yeah, absolutely.
I mean it really does come down to you know, when we're doing inflation forecast, we're looking at the different components and the drivers of it, and a lot of different components like what I mentioned in goods.
You know, those prices are kind of tacking up again.
You know, we've that's been a lot of the disinflation of the last year, you know, from supply chains correcting and commodity prices falling. Well, those stories have kind of reached an end, and commodity prices are rising again. And you know, if we look at the current disinflation, you know what we expect to see in the next couple of months. A lot of that will come from components like shelter inflation, and that's just reflecting that home prices
fell in twenty twenty two. Rents have slowed, but the last four months of home price data, you know, we've seen those prices rising again. So there's a lot of reasons to believe that, you know, we're not slowing enough. If we're not, you know, in a scenario that looks like a recession, well then you just get some inflation coming right back and you're just stably at something like three to four percent.
When you talk about market action and at what point the FED is actually transmitting their policy through the long end of the yield curve? Veronica, how much has the yield move higher that we've seen the highest levels going back to two thousand and seven created a greater pressure that could actually knock inflation down more versus actually being sustainable and something that we see over a longer period of time.
Yeah, I mean the moves of course and longer ideals that we've had in the last couple of weeks are tightening financial conditions, you know, that will help slow things down. You know, we do still have a recession in our base case for next year because of this tightening of financial conditions. And yeah, the transmission of higher rates really didn't you flow through with the normal four to six
quarter lag that we were expecting. And maybe that's because you know, you know, corporations have turned out their debts. You know, people are just not as sensitive to high rates. But that doesn't mean that they won't be as those kinds of factors fade. So I think you can still expect some some slowing at some.
Point from from higher rates.
But the FED Zone forecast, you know kind of incorporated that higher for longer narrative, but you really didn't see it in their growth forecast. You know, the FED is still very much on this, you know, ideal soft landing kind of path.
To be clear, veron a cut which measurement of disinflation do you and Andrew use? Are you wedded like I am to three months annualized because it was beaten into me as a young child, or do you use another measurement here of the gradient of disinflation?
Yeah, I think something like a three month, three month annualized is a good way to look at the current trend. You know, obviously there's been a lot of focus the last year or so on on the core non shelter services. You know, those are the services like recreation or transportation, you that are tied really to tight labor markets and strong wage growth.
So we look at all of those measures.
But in the end, you know, the you know, the most important measure is the one that the FED will be targeting, and that's total PC inflation. And of course they'll look at core inflation and all of those components do matter, you know, the path for goods, prices or shelter it all does matter.
It all is measuring you know what people are spending.
Veronica, thank you so much. Veronica Clark with City Group joining us now to save the show. Alan Ruskin, Chief International Strategists, do you bank, joint your bank? And we're thrilled he could join us this morning because he has an incredible note out on American exceptionalism. Ala. I just love what you say about the good and the bad of where we are within this market oil. There's a whole feeling on a Friday. Wait, we're American, will persevere,
will get through this? Describe how America is different given the bond instability we see.
Tom, Look, I think there's plenty of good. A lot of it relates to longer term growth factors. The US is very competitive in an array of different industries, new and old. The geopolitics, I think is very helpful as well in the defense industry, in semiconductors as just two industries.
But on the negative side and perhaps not focused on all that much until very recently, has been what's been going on the public sector deficit and a cyclically adjusted general government deficit of minus six percent of minus seven percent, as far as the eye can see, would not be seen as sustainable for any country.
Other than perhaps the the United States.
With a Putin invasion. David Falkartzlando was out front on this. Now, we had in America what Olivier Blanchard calls the Biden stimulus, a series of stimuli, and folks, we know we got to the last one and the way we went, we don't have that crutch anymore on Roscin. How are we going to get the fiscal support that your colleague David Falkartzlando talks about.
Well, hopefully we won't need the fiscal support to the extent that what you're seeing on the public sector side does have a mirror image on the private sector side. So the deficit on the public sector side is offset to a large extent by the surplus on the private sector side.
And that's why the current.
Account, which usually is the sort of thing that's flashing red, particularly for foreign exchange guys, that has not been flashing red at this point in time. To me, the problem that you're seeing right now is more about the financing of the public sector deficit. And you're seeing that, you know, sort of disconcerted movement in the bond market, I think
is reflective of that. The fact that the Fed's doing qt the fact that China and Japan are not necessary buying all the onus and burden is falling on the household sector, which normally, you know, in directly only holds about ten percent of outstanding treasuries. That is a unique set of circumstances, and I think it's draining liquidity from the banking sector as the household sector shifts from deposits into treasuries, and it's exacerbating the banking sector problem.
And I wanted to bring up something Steve Major mentioned over HSBC that I think contributes to this conversation, and he made the point that what's important here is not just the deficit. It's the deficit at a time where we have an expansion and not a contraction in the US economy. How vital is that point?
Allan, Yeah, And I think that's exactly why we sort of cyclically adjust these things, so we kind of like, you know, you know, you might have somewhat better public sector data right now, but when you cyclically adjust that, you allow for measures like output gaps, et cetera, you get a better sense of the trend. And the trend is very poor.
Really.
I think that's you know, that's that's the key point. You know, I think most estimates suggests the general government deficit of sixty seven percent, but those numbers that I just mentioned are reasonable.
Is there any chance, Allen, then you could see some sort of weakening cycle in the dollar following the incredible strength that we've seen over the past few months, simply because the backdrop is deteriorating and some data is coming out better than expected from the likes of Europe and even China on the peripheries.
Yeah, I think you know, what you're seeing on this side, at least from the financing side, is initially whilst fine hills are backing up, it's actually you know, quite positive for the dollar. It can be very positive for the
dollar versus em and commodity currencies. I think, you know, when you get too much of a good sort of good thing, at least in foreign exchange terms, and you know, bond hills back up more than the Fed would wind, you could get into a situation where the Feds are sent actually lost ConTroll of the back end of the curve, and the economy is slowing, and then they have to cut rates much more aggressively at the front end, and when you reach any of that sort of points where
the yield curve is starting to steepen sharply, you know, and it's a front end that's leading the steepening, that would be a major dollar negative. I think that's a story that could be around for the second half of twenty twenty four. It's not a story for the end of twenty twenty three.
Alan just to sort of build on that, are you saying that right now it seems like the FED is losing control over the long end of the yield curve, that what we're seeing seems a little unmoored and not good for the FED officials that are watching it.
Not yet, I would say, and you're seeing this in terms of FED officials are not really talking about excessive financial conditions tightening. I think at this point in time they recognize that perhaps it wasn't sufficient tightening from financial conditions led not least by a very well behaved bond market.
But I think we're seeing the beginnings of an unraveler, and we watched we have to watch this very very closely because the financing element is truly in a unique phase in terms of this dependence on the household sector.
And I'm really wanted a word on the BOJ and what's happened in the JGB market the BOJ stepping in. Do you get the impression that the Japanese authorities are more concerned about the bond market move than maybe they are the feign exchange move.
I think they're sort of straddling a fine line here. I don't think they want, you know, Dolly yen much above one fifty or above one fifty at all. There's I don't think it's a firm line in the sand. I think they've used the bond market. They've effectively allowed the JGB heels in the tenure sector to drift up
to protect the one fifty level of late. So it might look like a contradiction right now in terms of intervening of the bond market, but I think the tendency over time will be for that tenure heel to drift up. It's just going to have to drift up slowly, I think, in terms of you know what the BOJ is signaling.
And thank you sir for the update this morning, and great on the BLCHI yesterday as well. Enjoyed that rate And I'm Ruskin at deoutsche Bank.
I'm joining us now Patrick Anderson of Michigan, Founder, chief executive officer Anderson Economic Group. But far more than that, arguably the greatest student of how Detroit became Detroit, what Detroit is now, and maybe the hope in prayer of
what Detroit will become. Patrick, thanks so much for joining. Again, we're talking before the segment here on the chaos of the industry, Like GM can't build a muscle car, so they had to go to Holden of Australia to build the Pontiac GA because they didn't have the knowledge to do it in Detroit. How chaotic right now are the manufacturing processes of these auto companies who are being very silent within this strike.
They were well running right before the strike and in fact you what you saw with Detroit was low inventories. As you mentioned, they were highly profitable. The only chaotic portion was the big investment in evs, where both Ford to General Motors were losing two or three or four billion per year, which works out in some cases to fifty thousand dollars a copy for an electric vehicle. That was really the only difficulty going on in Detroit before the strike.
If they are profitable, why can't they give some of that to their valued labor?
They absolutely can.
And if you look at the Anderson Economic Group preview of this, we said that these autoworkers, like everyone else, were suffering from inflation.
They didn't create the inflation.
You have to expect that they're going to get wage increases, and in fact, that's what the automakers have offered. The sticking point, and I wouldn't call it just at point, because it's more than a point, is that the UAW
demands now are for far more than wage increases. They include things that represent actually bankruptcy risk for the automakers, such as a return to the notorious Jobs Bank and having a defined benefit pension, which were two of the things that led to GM and Chrysler's bankruptcy a decade ago.
In the meantime, what is the ripple effect of what we've seen from the strikes? I know your organization and you've been doing incredible work trying to quantify it.
Where are we.
First week cost was one point six billion dollars and those are one point six hard numbers lost, most of which was wages, and a fraction of that was the automakers. A lot of it were UAW and a lot of it were non UAW suppliers. The second week estimate, we're going to have that on Monday, but I can tell you it's going to be bigger than one point six billion, because strikes become more expensive over time, not less expensive.
And in particular, what happened in the first week is you.
Can expect some inventory to basically just be sopped up, and pretty much everyone in the industry, dealers, suppliers, manufacturers anticipated some kind of strike for at least one automaker.
So they were ready for a few days. Were they ready for two weeks, three weeks? Were they ready for Sean Fain?
The answer to that is no, they were not ready for the kind of disciplined, focused strategy that the UAW president has brought forward. That's not to say that demands are reasonable, but clearly the leader of this is not the Big Three, it's the president of the UAW.
They do have inventory still, and so there is a question about whether this will actually lead to higher priced cars. Do you have a sense of how quickly the inventory is coming down at what point this does raise costs in the near term? On auto purchases.
I don't have a question about that anymore. We pointed out before the strike that the inventory in the industry was about a quarter this time what it was in twenty nineteen, so inventory is much smaller, and in fact, which you've got is higher prices already. So if anything, prices had moderated a little bit before the strike. And here the UAW strategy, which is surprising, but again Sean Fain and the UAW are really leading setting.
The terms of this include hitting.
Parts facilities and strategically picking assembly plants, so they are starting to affect prices. I think this is something to look for in week three. And one of the things to look is what is going to be announced today. Are we going to stay with the plants that we have assembly plants you mentioned earlier, the F one fifty Right now, Ford's assembly hasn't been hit very much. We estimate that we lost twenty five one thousand production units in the first ten days, almost all of which were
profitable vehicles that would have been sold. So they've lost a lot of production already and they're going to lose more.
Patrick, we don't have time for a Patrick Anderson forty five minute dissertation on where American auto manufacturing's heading. But in the time we have, we're moving to things that have fewer parts, evy vehicles that are simpler made on a unit basis, on some form of Anderson productivity basis. Does everybody understand there's just going to be fewer warm bodies making these things.
This is a subtext of this particular bargaining session.
It's the wild card out there.
Until just recently, it wasn't even mentioned except kind of in hush tones and in the second or third ten minute session of an investor call.
But a big issue.
In this is are we going to continuous taxpayers to subsidize plants that are producing vehicles that require fewer labor hours at wages that are less in plants that are in many cases joint ventures with Chinese companies or self green companies or other companies, and actually substitute that for profitable vehicles that consumers want. That's something we outlined before the strike is a serious issue, and that is at this point completely unresolved.
Have you got an answer to that? What is your base case at the moment? Patrick? If you just had to take a guess, what would it be?
I don't know what is going to happen.
And the fact that President Biden came to the assembly line and said, yeah, well they should get at least a forty percent increase, and then said nothing about whether we were going to continuous taxpayers to subsidize the battery plants and actually pay for the conversion. And that's actually the word that the Department of Energy uses. We pay for conversion of plants that are making vehicles that are now being sold profitably to electric vehicles that are growing, but growing very slowly.
There's not a base case out here that works.
I'm being sold to a high end consumer as well currently pantry. Does that complicate the effort?
Absolutely.
I've got a battery electric vehicle out in my garage, but fortunately I have another car I can drive. And the fact is that seventy two percent, according to our Anderson Economic Group.
Assessment, of these electric vehicles are luxury cars, which is perfectly fine.
But when you have government policy and taxpayer money and contracts and internal subsidies and regulations that are pushing for forty or fifty or sixty percent of the vehicles to be those that are primarily favored by wealthier people in metropolitan areas. We have a serious problem, both as an end and as a society, and that is an unresolved issue for which there is no base case for success.
Patrick, it was woner Folcus to get your insight. Thank you, sir Patrick Anderson of Anderson Economic Crep.
Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern im Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg