Surveillance: Weakening Growth With LaVorgna

dot com, and of course, on the Bloomberg terminal. Joseph Labornia joins US within taxas C. I'd be their chief economists for the America's in this public service at the White House recently, Joe Lavorgnia, I want to talk to you about the mystery of this August. The mystery in the Q four is is, well, how opake is your Q four right now? It's somewhat opake. The look the economy has done very well in the past four quarters.

GDP growth has been over twelve. But I've been of the view that the economy was at peat growth around Q two and things are going moderate. But even so, Tom, I it's hard to see growth still not being really robust in the fourth quarter. I'm more worried about growth in two and that's what the US bond market and global bond markets are sensing that growth is going to weaken. Quite sharply with his bull flattening and inflation will be transitory.

That's what the markets are telling us. That's what the markets are telling us. And is it a weakening back to potential GDP or let's say three percent? Me what's the level of weakening the scale you would presume this year growth WHI thought coming in we have growth seven maybe even eight percent. But next year I'm thinking growth is only two percent, maybe even less, which isn't far

from the administration's longer term forecast. And that reflects the fact that we're borrowing from the future because we've had people that have been unable to spend until recently because of the pandemic, they've been locked up. They brought spending forward. We see that in goods purchases, which are about four to five points above their long term GDP trend, and it's been predominantly con sumption led consumption. In the last

fourteen quarters. If you look at fourteen months rather tom from when the savings right went from thirty percent now down to nine, we've had annualiance consumption gains of real that's amazing. It's mostly in goods, So we're borrowing from the future. And that's why growth next year will slow and slow quite sharply. John. Let's take your view of the world and I'll ask you buys the question, how do you think the Federal Reserve operates in the kind

of environment that you've just described. They don't do anything, Jonathan. They stay on hold, They continue to pump liquidity in the system. They don't tape or they don't tighten. What we've seen continually since those March late March early April highs and tenure yields is the market pricing the terminal

rates significantly lower. That five year five year oh I s we've talked about was around two forty back in back in early April, thinking the market would basically or the FED rather with tighten rates like they did in the last cycle. And just the other day we were below one fifty. So the market thinking that Fed does nothing. My guess is we don't get it tightening until after

the next presidential election. John. And then this goes right to the heart of what you mentioned before, which is a gentleman from St. Louis disagrees, just flat out disagrees with Joe. LaVar asked us the form ahead of research I'm menching for the Saint Louis FED as well on the other side of that. Try. I imagine you don't mind,

not at all. You said, no tidening, no tapering. You don't think we get a taper here, Joe, that's not until we know what the contours of of a budget deal look like, because the federal treat a lack of a deal as being contractionary. And even though we're in the midst of of debating what happens on the infrastructure side, the bigger part of the packages is family welfare bill, and we're not gonna know what that looks like if we get it, and it will likely be to reconciliation

until maybe mid October early November. So no, I think the Fed's gonna sit and wait and see how things evolve. And it's gonna be really hard, Jonathan, for the FED to taper in a slower growth environment, and especially if over the next few months and the job growth slows, which I expected. Fascinating at least this one't be lost on you. No tapering the other code there, no right

hike until after the next election. Yes, that's why. One of the things you know that sounds aggressive but if you look at the last two cycles, the average time from the last rate cut to the first rate hike with seven years, So this isn't really that unusual if you look at the last couple of cycles. So, Joe, why are some people wrong who are saying that the balance of risks is too much higher inflation, especially with the FEDS so devish and so willing to wait. What

is wrong with that call? Because it seems like you disagree. Yeah, Well, the thing is, we've never had a basically a global lockdown of the economy where we've gotten these bottlenecks, and of course demand has been much stronger than people expect that the government has provided a tremendous amount of assistance, So it's easy to see why prices are rising if there's a concern on inflation, and if I'm wrong on inflation, it's because perhaps we we just spend too much, is

a sort of the Larry Summer's argument, and maybe evidence of that is seen in what the CBO next year was saying. The output gap looks like there's forecasting an output gap of all two and forty basis points, meaning the economy is two points above its long term potential that's the highest in seventy one. So it is possible if we get more fiscal stimulus, you could build this

inflation dynamic in the system. But I think most people just aren't fully appreciative of the unique situation where and the fact that much of the liquidity we've had to this point has gone into assets, both equities and of course real estate. Jo I had to use the word transitory. But let's talk transitory and at what point you start to look past some of the near term influences on

the economy. I'm talking about supply chain disruptions. The gentleman from St. Louis, as Tom said, was highlighting this is one feature that forces monetary policy makers to be more nimble. How do you factor in some of these disruptions that seem overly persistent and persisting longer than many people had expected. Yeah, I would just say I would just give it time. I mean the thing as we saw with lumber, for example, which was the poster child for bottlenecks, where prices have

basically collapsed as the mills were able to reopen. And I've argued we're going to see that more on the semiconductor side and other parts of the economy. It just needs to take time. The expectation side, if it's important, and we look at and when we look at the tips curve, that tips curve is actually inverted. So it's not saying the markets are always right. There's just no evidence that anybody believes this is permanent. And because expectations

oftentimes can be self feeding and self sustaining. Uh, those expectations are very likely to keep inflation low and then as supply comes on, you'll start to see those prices moderate. Joe, None of this is in the economic textbooks, Advass. This is all absolutely original that we're dealing with right now. How do you interpret the real yield? Are you looking at the nominal rate? Are you taking out the inflation expectation? Which of those two dynamics will adjust the real yield? Well, this,

I would say, just focus on the real yield. The real yield has been falling as inflation expectations have edged up of it, and that sort of evidence tom right there. The market does not believe that you're gonna have very very strong growth going forward. It's the I hate to say these words, but it's the secular stagnation thesis. That's really what the market saying, and you see it more broadly just in the slope of the curve, as you highlighted both in the US and Germany and elsewhere, you've

got a bull flattening of the yield curve. So that's really not an inflation story. It's a growth story. And of course equities benefit from the fact that there aren't any alternatives, and it's a tremendous amount of liquidity in the market. Jo fantastic to catch up some really interesting things.

Really gets ahead from you said that takes a c I being chief economists for the Americans joining us now on the Dow Jones Industrial average of Michael Holland with Holland and Company and their chairman, knowing that the standard force is more indicative of what's going on Michael Holland. I want to ask you lu U Kaiser question, and I say this with great respect to the sweat of Wall Street week years and years ago when fear was ascended. The way we saw fear in our equity ownership is

to extrapolate out what successful companies do. How far out are you extrapolating right now on the companies you believe it are you out six months? Are you out six years? More like the years than the months time. But I think there are fewer and fewer companies that one can zero in on and say I think this is worth the risk of losing money because the potential for the

upside is so significant. There is enough cacophony around about the economy, the FED, China, COVID and on that companies like Tyson what you were just talking about are indicating the world continues to change under our feet. Yet in the markets, because of the the tsunami of cash that has come over the markets over the best few years, we have pricing that we've lost price discovery, we've lost a real rate of return to use, free rates of

return to use for econometric modeling. So the fet is flying, it's flying, is the rest of us? Interesting to me? Michael, how willing investors seem to be just isolated problem a problem emerges, they can put it over there to one side and say it won't bother us too much. And a great example of this you mentioned China. This is what Dan Ives of wet Bush had to say. My producer Jamie Ping this across to me in the last

couple of minutes. This is what Dan I've says. We believe these dynamics will yet again bode well for US tech stocks, as the favorable backdrop and rotation away from Chinese tag into US tech creates an avana set up. So, Mike, we used to say a couple of years ago, what hurts some would hurt everyone because we're all buying the same basket of goods. Now we've got people saying, what hurts China will actually benefit US Tech. Let's rotate even harder into them. What do you make of that dynamic?

Either dynamic is reflective of the market that has gone a negorably upward, Johnathan over the last several years. And I think the looking for the positive outcome is something that I'm always prepared to do. And in the case of China, I think, uh, it would be a fool

there and to to ignore what's going on. They're a wonderful piece in Bloomberg Intelligence yesterday on the ternal about the thing that's different about China today in contrast to the last forty years and most of which I spent going over there, is that they now remember that their communists.

And when they remember their communists, you end up with a situation where you're not doing things as as they've been doing for the last which which created Ali Baba, which created the opportunity for people make tons of money, but now are now becoming political and warrior like. So Michael folded into an investment thesis. If price discovery has gone away, if we have China that matters more broadly,

what are you doing right now? Being very careful and Lisa and and actually we've we've kidded before about the all Weather portfolio. But I think the as you the three of you opine daily, they're things that don't make a lot of sense, can't be explained in terms of where prices are. You have a five percent earnings yield the flip of the reciprocal of the price earnings on the markets in the US, and less than a two percent ten year treasury with inflation looking like it's going

to be sticky. It's somewhere around four to five to six, and or maybe two to three to four. But these things don't make sense. So what what what I do is try to identify properties that are useful. Tom asked the question about weeks and months or Jonathan as well, Um,

you buy properties. I would say that the companies like General Motors, which I've been looking at recently in the last several months, I have have a plethora of things that could could go right, but evaluation that doesn't reflect the overall markets, so the risk, but there are fewer of those. They're just it's hard to do. Michael Holan, do you do some of the parts analysis on companies

that have different sections they're not lying tempko vote? Michael, you, you and I are the only ones listening for watching that no what l t V is. But if they're not linked Tempo vote, do you still do some of the parts, say on Amazon, Apple or some stock. I don't know absolutely. It's it's interesting that you even have

to ask the question, because that's what value is. If the three of us and the four of us, I should say, we're looking at something to buy in the in the private market, we look at what is it worth? What are we willing to pay for it? And and in the public market people have gone away from do we just which you describe. Jimmy Ling and the LTV

crowd figured figure that out a long time ago. That but prices were so low back then in a lot of cases that you could find out that if you look at you listening to as genteral motors today, if you look at the the uh, the different kinds of businesses they're in um in technology, any individual one of those a few years from now could be worth a gazilla amount of money. But they're trying to do that

to further the businesses. But but yes, uh, you do still have companies like General Morris that afford that opportunity to look at maybe they're some of the parts it's really worth a lot more than what the market's paying for them. But not too many of them anymore. Micro legend and it's always great a cant shop. We appreciate your time, Michael Holling that Holland and Couch chairman and I have joined us now whilst founder Security is equity strategist,

So and let's talk about that. What does it mean for an equity investor the incoming economic data at the moment, I think what it means for us is that it can be interpreted sort of how you want to see the picture in the eye of the beholder. What I mean by that is that sometimes you look at the economic data, you can be really concerned it's growth slowing down. Is the amplitude of future economic GDP growth slowing down? Will that extend the cycle? And in that case is

that of concern? And why it? Maybe yields are pulling back because people have a concern about whether full employment can be reached sooner. On the other hand, there are a lot of still bright spots in that economic data that support this reflation trade. I think it depends which camp you're in. And your research note is fascinating and its physics where you talk about amplitude, I want to take it over to an even larger idea of magnitude

for the bulls out there in the equity market. What are the magnitudes that get you out to the emotion of sp X five thousand or the emotion of DALT forty thousand. You know, those are big, beautiful round numbers, Tom, and people love those shiny numbers. I think to get there, what you really need to see maybe two fronts. One is that when you have these kind of yields retreating, you see this kind of natural effect for a discounting

model for equity growth, for equity earnings. But on the other hand, that comes with this sort of ominous side of book growth is slowing down? Is it sustainable? But to get that yield, people may be reaching into equities on the other hand, to really push equities. And I think what's been driving it more recently is expectations and estimates. As we've gone through earning season, you've seeing corporates very focused on what do these input costs mean from my margins?

And for the companies that are able to pass along that price and those margins can remain fat, then you see that they're able to continue seeing some price appreciation. I think it's that upward expectation and estimate revisions that we're really keeping an eye on to get there and specifically, just to dig in a little bit more. Anna, you noted in your recent research the earnings estimate revisions continue

to entire, especially for value sectors. So why is this not being reflected in our performance of these particular areas where you see growth surge ahead over the past month or so, I think growth surgeons recently has been a bit of that move in nominal yield. And what's interesting is that nominal yield move has been driven by real yields, but the inflation expectation baked in at least the tenure has remained more rather steady, So you see this growth

trade has had resurgence and zeals pulled back. The question for these value stocks is is this reflation going to be a concern? And that uncertainty I think still weighs on it, that additional risk premium that you have to bag in. But when you look at estimates, you're right, these value sectors are really what's pushing the estimate revisions.

And if that continues, and if that expectations or these revisions can continue outpacing what investors want out of it, I think you will see that eventual appreciation later down the road. And what leads to the downdraft you entertain With Chris Harby looking for thirty eight fifty on SMP, we've had the forty seven view just about an hour ago.

What's the thirty eight fifty view. Well, if you remember us coming into the year, we talked about low volatility and defensive strategies come summer, and look what's happened in the recent month. We recommended a tactical pivot into low volatility strategy in the style because a pullback in yield could cause some of that volatility, and for us right now, it's not that necessarily our longer term view on reflation has yet changed, but we like to say be careful

of perception becoming reality. Once the market really starts to doubt the potential for reflation, the potential for growth, that can kind of spiral out of control. So for us, the reason we remain cautious is that we're seeing signs of concern and that can really have a sort of

uh negative and spreading effect amongst investors. So it keeps us a little bit more cautious than on our toes earlier this year, and we were pointing to retail investors is the potential swing trader when it came to certain big moves in equity markets. Are they still players or have they all gone back to taking vacations and not dealing with the robin hood accounts? Well, I think they are definitely still a player, and they may be even

growing as we go several years forward. However, for now, I think a lot of the flows you're seeing, and that's been dominating more on the fixed income markets has been our institutional side has been your bigger fishes or whales in the ocean here. But when you look at equities, a lot of this sort of risk taking, a risk um seeking was pulled back last month given the additional concern about potential for full employment to be a bit further down the road, and as at risk appetite wanes.

I think you may see the retail crowdbe a little quieter and maybe be a little may sit down a little bit in the stands and it gets to catch up. Always good to hear from you and I hand there of wilst Fargo's equity strategist with Chris Harvey, and that's saying this is an important conversation and it may surprise you that it's our conversation of the day. We're trying to recalibrate equities and economics into the litmus paper of

the system, which is yield. And John Farrell, you've talked about global yields as being as important in their interdependencies as the US tenure benchmark. Yeah, let's get some part of Gavy on that song. Hanji had a global jet and strategy part. Oh, let's talk about ten year year old so they shouldn't be down here in the treasury market. Then you look to Germany, and yesterday the whole curve below zero, beneath zero. Part of how important is that dynamic,

the European dynamic, that gravitational pull yield to lower. Oh, it's absolutely vital, it's it's it's I mean, this is an incredible set of circumstances. But you can't get away from the fact that the treasure yield is the global bounchmark. And as we're sitting here today, we're looking at that tenuere heading towards and towards one was sent. And I think the big lesson here for Europe is and Europe never really recovered from the global financial crisis as measured

by monetary policy. I mean, it's just still negative. Jewey is as aggressive as it's ever been. The only hole for Europe is that the US manages to repeat what it did post the Great Financial Crisis. Stop buying government bonds, raise rates, get back to suns some elements of normality. Is what I see in Europe is a loss of hope because if the US can't do us, how can your do what I haven't done it before? A loss

of hope? And is that the message from the sixteen point five trillion dollars of negative yielding debt, the highest volume globally since February. Is this representing a loss of hope? You know what, You've got to break this out as to whether the market discount is telling us something about the future or whether the market is being pushed there by an excess demand for fixed income. And I think it's a bit of both. In a sense, there is a loss of hope because we've got to accept that

the marketplace, the bond market, is a discount function. But at the same time, we know center banks are huge buyers of government bonds, persistent virus of government bonds, and that's a major catalyst behind this fallen yields. Everybody wants to be on the same side as a center bank, and as long as central banks are buying bonds, that's the side want to be on. Hence we find ourselves in this incredible situation, very deviant from where microcircumstances are park.

You know, we're all talking yield here, but this is a time where I flipped a price and the answer is there's a massive bid on all this paper. Is it similar to two thousand five, in two thousand six, or there a different character to the bid, the insatiable desire to move price up on fixed income. There's a whole series of players out there tomb that are buying

fixed income. And you know it's not just guys buying bombs, it's also corporate setting up fixed rate receivers where they swapp from paining fixed to pain floating because they feel that by pain floating they're going to get the cheapest funding and the the the the prognosis in terms of rate high risk is really quite dim. So um, what I see is an excessive amount of treasuries and we see a lot of buying out of Tokyo for example.

And you know I've said it before, if you're sitting in Tokyo, you don't care what US inflation is as long as it's not yields um. And that's the stuff I mean. If if the simplest explanation, where we where we are as an excess of the amount of supply for fings income. But it poses problems that the FED has have not spoken about this, but they will not be happy to see the ten year approach and one

per saon it makes life very difficult for them. They should stop buying tips then shouldn't they park and we stopped talking about real year, It wouldn't we wouldn't we have an adjustment? No, I mean I'm asking you the question, how how distorted that market is right now? Well, the the the the entire spectrum of racists is the stort. I mean minus a hundred basis points is an absolute distortion. M one percent potentially for the tenure is a distortion.

And here's the thing. Uh, the Fed wants to hide rates, not now, but they will want to hide rates. You can't hide rates for the tenure of one percent as you're you're just gonna win breath the curve. So they want to get that ten year up to two percent. Ideally, the way to do thus here and now is don't taper, just stop stop flying government moms. Will they do that? Unlikely, but that's what they probably should do. Probably he's gonna catch you up. Auntie had a glove with dead and

write strategy. This is a joy, and it is a joy, John, when you are weaned out of Indiana as part of my family was David ricks Is with Eli Lily, their chairman, their chief executive officers, celebrating his twenty five year with the company. The ricks Era going back to his first day darkening the door is ninth excuse me, twelve percent per year in the last ten years of stock is Home Depot and Apple like per year. It has been an extraordinary move, David, David Ricks, I want to talk

about where you are now with COVID. There's some sensitivities here with the antibodies and that when you're meeting with your head of research and science Daniel Skovronsky as well, when you look back at the last eighteen months on COVID and you look forward to the next eighteen months with this horrific pandemic, what have you learned and what's that to do right now for Eli Lily in this

horrific pandemic. Yeah, Tom, thanks for having me on and Dan's a key partner for us, and as a science driven company, you know that those meetings happen a lot. As we were talking offline, um COVID. We've had a lot of ops and downs with COVID. You know, last year we had a lot of unknowns about where how this would progress, and we set to work to create therapies because that's what we do. We're not a vaccine company that could be helpful, and we did that. I

think we're very proud of that. We launched Neutralizing Antibodies UM, both a single and then a combo UM. And we also have developed one of our anti inflammatory medica aaitions, Alluvian or Barrasitani, which actually today we read out results that in those on ventilation or ECMO, the most advanced patients in the hospital reduced death by over UM. But we just wanted to, you know, put our tools to work to be helpful. You know, our ongoing business is

about treating other diseases. Were not a virology company UM, and so as as the the pandemic has ebbed and waned UM, those businesses have come back strongly UM as treatment for diabetes and cancer has improved. What's doctor's office is open UM. You know, we don't think about ourselves as as a COVID company, but we were happy to make a boy contribution and this year you know that

that ended up in a fair amount of sales. Although in the second half you mentioned the guidance being narrowed on the on the year, that's really about reducing COVID related antibody sales and increasing UM. The performance of our underlying business. We do expect that as these waves happened, they will begin to subside, each one will be lower and a new sense of normalcy will set in. Right now, we have a problem in the US, but but you know, we think there's a way to fix it. Get everyone back,

diep Ricks, tell me about Alzheimer's. An absolute uproar in Washington about the need for a solution, the whole FDA thing. I get that. Fine, you guys going back to insulin. Get these horrific diseases correct. What are you gonna do to help our listeners and viewers with Alzheimer's? Yeah? Thanks. This is an area that's very personal to many of us that Lily and our scientists have been working for over thirty years to try to create a medicine that

could slow the progression of this disease. You may know this, but it's the sixth leading killer, it's a fatal disease, and it's the only one in the top ten without a medication that slows it down. Um. Recently, UH the f d A shifted their policy. They said, look um showing an ultimate benefit and a slow moving, difficult disease that we don't fully understand has been hard to prove drugs on This is really important, Mr Ricks, do you

support that shift in f d A policy. So, look, the regulator needs to make that decision about risk and benefit. But of course we believe that amyloid reduction leads to slowing of the disease. We've been betting on that for some time and put billions behind it in research, and now we have a leading product in that area, don't atom ab which had the first ever clinical trial and

humans read out positive in Q one. So we have launched a bigger study and we said in Q two we're planning to submit this year under that new policy, and we think patients deserve access to that medication, but we're going to prove its worth just in the following year. We have a huge study going on that we just

said is is almost enrolled and we'll prove that benefit. David, the biogen drug was incredibly controversial when it came out, in large part because of its price, in addition to the f d A policy which did seem controversially if within the FDA panel, how do you plan to be different with your Alzheimer's drug in terms of the controversy in terms of the pushback and frankly in terms of

the price point. But we're not gonna announce the pricing today, but I'll just point out I mean, we we tend to compete aggressively in all the markets were in and that benefits patients. And we compete by creating better molecules, better medicines themselves with different properties. In this case, are medicine works very rapidly to clear plaques. By one year, almost the vast majority of patients in our study no longer needed to take the drug. They had cleared all

the plaque in their brain. UM. That's different from all the other antibodies being studied, which are really lifetime therapies. UM. Secondly, we compete on data and this is important here, and I think the source of the controversy. Few argue that the approved drug might have worth. I think the big argument is did they prove they had worth? Um? Did it really affect the disease? UM. Of course, we aremitted

to complete the study. That's that's now basically enrolled. Will we'll finish enrollment this quarter UM, and we'll have that date in twenty three, which is pretty short period of time. In the trajectory of drug development. And finally, we will compete on value in the marketplace. And when we hopefully get our approval sometime next year, we'll we'll talk about our our our prices. Just quickly a minute on the clock. Are you requiring your employees to be vaccinated? Not? At

this time, we're not. We believe we have very high rates of vaccination in our population. But we're tracking that issue very closely. And of course, new information just released in the US about the transmissibility of the delta virant variant um from those that are actually vaccinated is of UH concerned. We're analyzing that as we look at our policy today. We've had a very few, if not zero, in many of our facilities, uh transmission of the disease and and so it hasn't been a real problem force

in h running our business. But we want to look at that and stay abreast of the latest information. Is going to catch up and get your view this morning, NY Chairman, CEO you as well. Seven. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television. Each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg