Surveillance: US GDP Exceeds Forecast

are we near recession? I think we are teetering towards a recession now. Of course, the fourth quarter number does look pretty good, particularly against the backdrop of an even stronger rise in the third quarter, But when we look at what's happening with the consumer, which is the backbone of the US economy, we are seeing a clear loss

of momentum. And without the consumer happy and healthy out in the marketplace, we simply cannot expect to maintain positive growth, let alone more robust growth similar to what we saw this morning. So I do think that as the Fed continues to raise rates, savings are depleted, real income remains negative fiscal support fades, there is going to be an additional burden on the consumer that leads us into or

near negative growth. Lindsay Long, you're going far away under the religion and the kool ai of Peter Lynch of Fidelity Domestic final sales reign Supreme. Michael McKee just mentioned that that trend, that tendency there away from the back and forth of imports, exports and the rest is a pretty Mouldi number. Do you have a belief here that a slowdown in domestic final sales brings on the reality

of recession. It certainly does, because just like when we look at inflation, we strip out the more volatile components of food and energy. That's what we're doing when we look at that real final sales number to domestic purchasers, were stripping out the volatility of inventory. We're stripping out the volatility of trade. And what we see is a more clear defined downward trajectory of growth slowing from up near four percent to down here one percent at the

end of the year. Again, still there was enough resilience in the US economy to maintain positive momentum in Q four. But the bigger question is are we able to maintain that momentum as we turn the calendar page, and most of the data suggests that we do not lendy? Do you think that the market is wrong because we are seeing consumer stocks do really well as they look forward.

I think the market is severely under appreciating the amount of tightening that the FED is going to have to embark on in order to reinstate price stability, and thus under appreciating the amount of pressure that is going to be put on consumers and businesses and the overall economy. When do you start to see the data to actually prove that before thinking, well, maybe the FED is going to be on the side, you do you see inflation coming down and we're going to get that soft landing

that everybody is talking about. I think we're already seeing it in the data when we look at retail sales negative in November, negative in December, consumer spending still positive. But when we look at overall goods and services, that too is trending down. Production now in in contractionary territory housing taking a sizeable hit. There are multiple, multiple data points that are suggesting the U S economy is not going to be able to maintain this momentum in the

new year, and Lindsey, thank you so much. Lindsay with stiff step right to it now as we speak to liz Ane Saunders about the reality of the equity markets, would take a broader view with Philip Camporel portfolio Manager, JP Morgan Asset Management this morning, I love, love, love your notes, single sentences, observations, weaving it together. And your major weave is the epsilon in the back of the equation. Uncertainty is going to be less uncertain and we're gonna

get to certainty. When does J. Powell have certainty? He has it right now, Tom, I and I think the key to our view is, first of all, good riddance to two thousand twenty two. Because as an ascid allocator, Tom, what Powell and his friends did last year was create really, really tough ways to manage risk. As an ascid allocator, we love that if stocks go down, you better have bonds as your defense on the other side. And the most risky balanced funds last year were the more conservative ones.

And when do we ever say that? Right? So, the thirteen percent draw down in the Barkley's a glad The Bloomberg gagery and I'm sorry, was was the was the worst to hear that we've ever had. Now going forward, you asked me the question when does Powell have certainty? It's right now because they're going twenty five basis points in February one, and we have been able to say that for a long shirt that Lisa showed there, i'm PC inflation. We see that as we see that, I'm sorry,

magnificently shows the one off of this pandemic. Ye does JP Morgan across all your platforms suggest we are beyond the pandemic or be on the pandemic highs and inflation for sure? Right, So that's why we're going to this step down in the aggressive in the aggressive tightening sense. Tom. Last time I was here, it was at the end of you know, the at the end of the third quarter, and I told you we had a record high in our fund in cash. That is not the case anymore.

We are putting money to work all over the world. We only have two percent in cash right now. We're stopping short of saying that we're going to see an earnings acceleration or or reign every ignition of the cycle, but we are putting money to work in the U S. Specifically, we have a twenty percent allocation to invest in great corporate bonds. That's the most we've ever had in our portfolio. And we have about a nine percent relative value trade between US stocks and non U S stocks and we

we haven't had that since two thousand seventeen. Tom like, this is about being active and taking advantage of opportunities. Again, after last year, invest in great bonds in the US have gained about four percent so far this year. That is akin to what we've seen in the SMP five hundred. At what point do you know the trade is up, that the gains are in that basically you've been on it, You've written a good ride, it's over. Yeah, So Lisa, we are we are looking for it more for carry.

What does that mean? It means a yield story. If we were really optimistic about the US, we would be in the US equity market because we have that option as a balanced portfolio manager, rather than in invest in grade credits. So the credit story, Lisa, is to get us more yield than our index. What I'd say where we're trying to get total return is the non US equity equity market, So the way that we would go back into US equity would be Okay, core PC is

falling like a rock. The federal funds rate doesn't need to be a five percent anymore. And what the FETE is saying for two twenty four is going to happen in the back half of this year. That is not what we're saying. Does that mean that in the US when people do start going back, energy is going to be the leadership continue to uh sort of reductive last year because that is also a yield story that is also a dividend play. Yeah. So, um, I think if people were to go back into the US equity market,

it wouldn't be in those yield places. It would be in the total return beta stories. You know that the growth stories that were played last year, which interest rates moving high here. So when people continue to go back into the US equity market, I think it will be at a time when growth stocks are back, because we're not again we're not talking about a re acceleration of growth. We're talking about a more subdued growth environment. And then in that environment, I think to make keptech stocks can

do pretty well. You talk about core PC dropping like a stone, and there was a mantra or the past decade, don't fight the FED. This year it's fight the FED because the Fed is wrong. Do you buy that they're not wrong? I think they go another fifty basis points and then they go on hold right so that they cut rates by the end of this year, which is what we're seeing. So we're not willing to say that

yet least. I think that's a little premature, and I think Jerome Powell, to your question earlier, Tom, I think Jerome Powell may push back on that with open mouth operations on February one, which could be a risk, which, again, Lisa, is about why we're more in the I G credit side than in US equity. The opportunity for equity is overseas. There's a constant theme of the people that we have conversation with that the market is out front of the FED.

What are JP Morgan clients ex really doing? Are they are they telling you they want to be in the market, or are they, as a generalization scared stiff. Tom. Every conversation that I'm having right now is about should I be looking outside the US? And it's like it's like zone because We've been asking people to do that for a long time, and right now I think the opportunity is listen. As Yogi Bearras said, you'd rather be lucky

than good. And in Europe they have a three standard professor at for when you come to the road exactly. So Europe at TOM you had a three standard deviation warm winner. This is the warmest winner they've had a decade. You mentioned that, and you know we just did with Damian says are e M commodities, copper, Chili and paces out. It's a three standard deviation move negative to standard deviation, strong dollar week, Chile and pay so bombing through to

a plus one? Does e M pause here or is there an urgency to get on board e M and international? So listen. E M is the most volatile asset class on planet right that we deal with, So I think the ways that you manage risk in EM we're just buying calls on the index. So if it goes up like it did this year, we're going up with the market. But if the market tanks, then we're gonna we have we have a limited downside without premium, so we're buying calls on the That's the way that we're controlling for

near term volatility. But remember in two thousand one, when everybody was talking about how great the equity market was doing, e M got crushed in two So there's still even with the rally of value, a longer term valuation component run out of time. I want to talk to you

about Toyota and investment in Japan. You gotta come back and do that, you know, you know, bring you a Jampan his team in Toyota, Lisa Toyota down in US dollar terms from the beginning of last year, like twelve months train we can talk about him coming up because bank in Japan is even moving phil temporally. Thank you so much that j people. We're going to asset management wanting you about this one episode. I think European effect

strategy city you do that for cilious. Let's talk about effects, and let's talk about a difference right now between people constructive on the U S economy and people who are less so. The people who are less so are clinging to sub fifty pm mice the people who are constructive. Look at a jobless claims data which comes out in about two AUS thirty minutes, which is in and around two hundred thousand. Which one is it? Well, I think, as it frequently is the situation, we're somewhere in between.

There is a slowing in the U. S. Economy, and there's definite that's definitely visible in the manufacturing sector, especially as you mentioned in the soft surday they did. But then again one has to contrast this with an extremely tight and a historically tight labor market. So therefore this is not going to be an easy one for the FED. I mean, currently the market is pricing four point nine percent,

it's called it five ternal rate. I think we could reprise a bit higher um, but to the extent that we only reprice modestly higher. I don't think that, say, twenty five basis points of repricing higher. It's going to be neither here nor there for the dollar. Because I think we've switched regime. The fair has become a far

maturing theme. We're getting close to the peak. And now the driving sayies global growth expectations, and this has been you know, reignited by the Chinese reopening, and this is what is driving the markets. If you if you approach this statistically, you can actually say that during the first quarter, the first three quarters of twenty two US yields explained around the dollar variation. Right now they explain about fifteen percent, whereas if you go back and you look at underlying

fundamental surveys, they are now in the lead. And that's because expectations are being related higher. So I'm not trieding rights anymore on treading copper. Is that a fair wealth again? I think, well, there's certain extent. Yes, I think there's definitely going to be some increased demand for commodities. I mean it will vary from um one commodity to another. But but the bottom line is that we are talking about a country who has been shut from the rest

of the world. Were about for more than one thousand days. Of course there was trade going on, But right now I think there's going to be some significant aspects of pentempt demand that are going to start showing, and therefore Chinese imports and therefore upside pressure on commodities is going to manifest. This is the third year of pandemic economics. That's what Tom Das and I have been sold about

now for the last couple of weeks. Every single year of those three years, particularly the last two, we've got rank the consensus to you has been terribly of course, can you tell me what you think we're under pricing right now with regards to Chin to reopening? Well, I could, I could see both ways. I don't think right now if you look in the currency market that we have

reached levels that pricing fully relatively smooth Chinese reopening. For example, if I look at the euro dollar market, arrestimates fair value between one seventeen where one or nine, very important level. I suspect if, sorry when more than if we break it, we're going to see a lot of real money demand and demand from corporates as well. It's going to push

it higher. And historically what you tend to see is that when you are in periods of a significant undervaluation and then you start correct towards fair value, you don't just correct there and you sit there. We typically overstood it. So my point here is that I think we still have some way to go in order to reprice um the Chinese reopening. How much of an imflationery impulse do we import from China? And see another states this is

uh in China. I think China is going to be much more relevant for Europe compared to for example, the the US. But I think this is an element about the upside pressure on commodity price and therefore inflation that has come up very frequently with clients. And my only observation to this is that what is driving inflation is extremely important. So um in twenty one and parts of two it will supply side driven. So you had muted domestic activity and you had inflation squeezing and already damaged

the economy. But this time around, if inflation is being driven by the demand side of the economy, by Chinese imports, then it will still create challenges for central banks. But it's not the same gameplay. It's a more traditional way of dealing with inflation. You have increased demand and therefore you have some side pressures on prices and that prompts central bank response, but not to the extent that it will squeeze incomes as it did during the course of

should lead to stronger currency in Europe. So you're at all right now one or nine? Can you run me through some numbers what you're thinking about it in the next three six months? Right? So I think one or nine is, as I said before, is very important. I think potentially next week is going to be a catalyst

for the euro to break invincingly higher. And I say this because I expect this bit to be hawkish, and I think the Fed will deliver twenty five basis points, although there are some focus risks into that meeting as well. Um and if we break that, it will become particularly painful for a really money account of corporates who have not participated UM in the big move to chase the currency higher. And I think then you know, we could converge to one fifteen and even potentially higher, absent of

course black swans. I mean, there are a lot of risks into that sun. Outside the studios, this was great. The sarchin act is there? What are nine looking for a break that potentially Tom Gun it's the e CP next week. Hawaen Becker is where the senior research Analystic cow And Bureau describes it. She and Kivan Rumor owned the franchise for decades of cow And and she provides leadership forward. Helloine, I've got an answer. I use as

a proxy New York to Paris. But even that price is down from the insanity of six months or eight months ago. It's still stupid money, but it's less stupid? Is international starting to rationalize in the aviation business, we're seeing um tom very strong international business travel um less so maybe on the leisure but I suspect leisure travel will pick up um mid February and then increased through

the summer months. The demand is still very strong, and the further we get away from the more comfortable people feel about going outside the country. Elline, how much is this a story of international travel just to compensate for what we saw versus a whole l returned to the way it used to be. Yeah, I think, um so. I think there are two things going on here. The

first is with respect to supply chain. Are supply chain issues right from from Boeing and Airbus being delayed on delivering aircraft so you don't have a lot of capacity coming in, which props up price. But then on on international business travel, um after all these zoom calls and people taking calls at midnight or one in the morning, I did a call with a client earlier this week and it was midnight in his time zone. I don't

think that can continue indefinitely. And I think you're going to see an increase in international business travel this year and especially you know, as more people feel comfortable traveling and COVID becomes people continue to think of it as being more endemic. So Helen, what is the new model? Is it basically having half the plane is business travel and the rest sandwiched into the back as you try to get some sort of profitability overseas and then domestic

travel just the ongoing mess that it has been. Yeah, so I think, um to your point, I think the front of the cabin is going to get bigger in the sense of business travel that that cabin, and then

you're going to get a bigger premium economy. And when you're thinking about long haul, it's the old lean back seats, the reclining seats versus the life flats um and then you're going to get a smaller section in main cabin And what we're seeing in terms of pricing, to Tom's earlier point is the prices that would have been in main cabin um before pre pandemic are seemed to be a little lower, but prices in premium economy seem to be equal to what business travel prices used to be,

and business seems to be more like the old first class pricing. So I feel like the price points are going up and um and the mix of shifting, which is good, Helene, you're killing me. True story. My father died on a twelve hour notice. I had to get on a plane and I flew economy for the first time since time began. The seat was so small. I flew Hallane to Portland, Oregon NonStop, sitting on the edge

of my seat. But the whole So then there's this issue, right, I've travel economy all the time, and there's the economy, and then there's the economy where you have to bi a soda for your kids if you want them to have any sort of drink on a four hour flight.

I'm just wondering, Helene, for the discounters, whether it's Jet Blue, which is traditionally the front of that, or Frontier, which I was talking about, what's the future for them if the prospects of domestic travel seemed to be diminishing with the economic cycle. Yeah, so so, Tom, I'm sorry about your dad first. But the other thing, in terms of the the outlook for for those guys, Um, they're gonna slow their growth. They're gonna have no choice. They're not able.

It's it's not that the hiring part. It's the retention part that's an issue. And then the aircraft. They have to keep growing UM and they can't get the aircraft. So I think there's always going to be a market for a deep discounter, right, there's some market if you think about hotel change, there's the market for Ritz and there's a market for Motel six UM, and so I

think you're always going to have that differential. And I think people will who have got used to traveling will continue to want to travel because that's UM, that's what they do m versus buying lots and lots of things that they don't really need anymore. So I think we're I think those guys will be okay. I just think the growth will slow and I think American, Delta and United are going to see very strong international growth and growth in business this year. And I would just pivot

as I'm thinking about investments to those names. Holding Becker with his folks on radio and television, thrilled they have you here on a big, big earnings day. She is with count Helene. Just for the record, I keep track of the business to economy ratio of a given flight from l A. It was nine to one which I never thought i'd see nine dollars of business ticket for one dollar of economy. It's down to six point three

to one right now. Is my busy con ratio. That's Newark to to U L A X and everybody else has their other ratios. With that said, what is the domestic constraint for Kirby, for Bastion and the rest is there? Is there constraint. Gates is a new airports like the magnificent New LaGuardia. What's their biggest headache to get us

back to some kind of normal thirty six months from now. Yeah, So the biggest one is infrastructure issues and the fact that at the busiest airports there's just no space physically to put more aircraft and we're not building more runways that you know, look at you look at Newark Airport, um the two parallel runways are too close together to allow for simultaneous operations on bad weather day, so that

airport wines up taking extensive delays. And and weather is in blue sky every day you have rain as you did yesterday, and operations per hour decline, and then infrastructure issues there. The government doesn't want to talk about this, but they did not train air traffic controllers for eighteen months during the pandemic, and you've got a lot of

controllers retiring. And I get very passionate about this because the airlines have a hard time talking about it because obviously they're they're they're dependent on the government for a GC. But the FAA should handle safety and security and and and private corporation should handle air traffic control, and you'd get more investment and we'd be in the twenty first century instead of in the century with the righters in North Carolina. Holy one final question, John from London emails

in and says, what's your single best buy? What's your single best buy right now at Cowen Yeah, Um United u A L is our top pick. UM. It out performed in two and we think because of their international exposure, it will outperform again. In a Becker Thank you so much, terrific brief there on a day of earning. She is with cow And. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live

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