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Joining us now.
Francis Donald, Chief Economist RBC, the Royal Bank of Canada and just outstanding work on the equation that is gross domestic product. I'm fascinated by the Coca Cola earnings where they basically had no unit growth and it seemed like good organic revenue growth was all pricing power. Is pricing power going to evaporate? Is nominal GDP evaporates.
Pricing power is already becoming more difficult, and that's because the general state of the consumers becoming more difficult, and most importantly, the general state of the low and middle income consumers is becoming more difficult. Very little excess savings left much less real wage growth, especially because that group is spending more on the higher inflation areas like food and energy, and those low and middle income households just
haven't had that boom coming from stock market gains. They have less than five percent of their portfolio there, So back two years ago you could have pricing power because there was money to go through. That money is evaporating, and the spread between the haves and the have nots is becoming much larger, depending on what you sell and to who. That's either good news or bad news.
Well, the federal government seems to be responding. They're cutting interest rates. From a fiscal perspective, lots of spending plans out there from the government. Is that enough to sustain to lift this economy, including I know you're bringing back the K shaped economy discussion for the folks that have not been participating. Is that enough to help those folks?
Do you think?
Well, it depends where it goes. And I can't believe we don't talk every single day about federal spending. It has been so extraordinarily disruptive to every single economic model that exists, and it has changed the way that we have to evaluate the cycle. But problematically, we see these deficits rise in spending increase, but net interest spending is now larger than defense spending. And if we're spending government money and it's going to pay treasury holders outside of
the United States, that's not helping everyday Americans. It's not boosting growth, and it's not actually inflationary either. So it isn't just about the amount of government spending, which is just chaotic in terms of how it's changing the way the economy operates. It's where it's going, and defense, net interest spending, even entitlements is not going to be the juice that fuels this extended, continuous, resilient aggregate economy.
I agree with a concern about the federal debts and deficits and all that, but a lot of folks will come back to me and say, hey, interest rates are still relatively low. People are buying our debt like crazy. Don't worry about it.
Well, I don't worry about it so much from the oh, there's going to be a bond market collapse moment. I mean, the risk of that just empirically has to be higher now than it was when we didn't have mere record levels of debt to GDP. What concerns me is that at a certain point we're going to hit up against limits and if the main support, the main pillar that is driving the so called soft landing is government spending, sometime in the next four years, we're going to have
to take a step back. And if the FED is not focusing on this and the fact that they actually probably can't keep rates super high it will lower future government spending, then I would do really.
But are they two data dependent?
You and I shared a stage and I think it was Toronto, I can't remember, but you know, the bottom line, Francis Donald is we're addicted to the parlor game. We're addicted to data dependency. And all I can say, Paul, that hasn't worked out.
No, it hasn't aproach. We cannot be month to month data dependent. And I know the market runs off of this, but there's a couple reasons why. First, we have huge election uncertainty. It has paused business decision. We see this in surveys, small business surveys, ism manufacturing companies are saying we're just holding off, so that's a pause. We have really low response rates on a range of our economic data.
And then related we have sizeable revisions. So we're seeing these sizeable market moves, perhaps even policy decisions that are coming off of month to month movement. We are in the dark, or at least the moment of the day where the dusk comes in we cannot see fully, So the Federal Reserve is going to have to focus on that six to twelve month view, and what they're likely seeing is the unemployment rate has been creeping higher since
January of twenty twenty three. Inflation looks relatively contained, Inflation expectations are all right, low income, medium income consumers expressing concern about the labor market. They have to calibrate policy back to that more neutral level. And I hope they're not looking at month to month data and that they're looking more at three to six month trends. If they are, it's a continued easing cycle, at least down to four percent, maybe beyond that towards.
Three what's your view of the US economy here? Is it resilient or do we really still have to think about a recession?
Can I be bold and ask which US economy? Because I'm having trouble just thinking about one US economy right now. If I aggregate all of the parts, real difficult to get two quarters of negative GDP, in part because of how much government spending is coming through. So I can't be in the recession camp because that's not formally a recession. But if I look at manufacturing. Manufacturing has been contracting in the US since twenty eighteen. Industrial production is smaller.
Existing home sales are thirty percent below where they were before COVID. They're at the level they were in the Great Financial Crisis. Small businesses, who employ eighty percent of the population are the most negative they've been since the Great Financial Crisis. So on aggregate things look good, supported by a really strong high end and CEOs, but the rest of the economy is nice.
Here Francis, we don't care.
All we care is that the Rangers scored with fifty four seconds and that Brazinski scored.
At two oh five.
That clocked years in my Montreal Canadians seven to two. It's another difficult year, isn't it. It's a rebuilding year.
A rebuilding year is a good way to think about it. I would agree with.
You, Tom.
You should see the RBC tickets at the forum. Oh it's why she went to RBC.
Yeah, I couldn't possibly comment, Francis.
Thank you so much with RBC.
I can't say enough about her at research get that from the Royal Bank of Canada RBC. At Capital Markets, we protect the copyright of all of our guests.
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David Kelly joins Chief Global Strategist at JP Morgan Asset Manage you with decades of experience, David, eighteen months ago, you established a responsible vector that we would see non farm payrolls come down various employment statistics in the emotion of maybe a negative non farm payrolls.
We didn't get there.
But can we revisit this and say we're in the process of worser labor statistics.
Well, the problem, Tom is you've got a very good memory for bad forecasts. There was always a risk that we would see a negative employment number because really we've seen very great deal volatility in payrolls, and so asian months ago we did see some weakness. We still never thought.
We didn't quite call for recession last year. We're still calling for a recession right now, and we could you know, the payroll report we get at the end of next week that's going to be also because of weather issues also, But to me. The most important thing, please, is it next week we're going to publish a GDP number of about three percent or maybe more than three percent in annualized growth in the third quarter, following a quarter of
three percent growth annualized in the second quarter. And that tells me the comm's got plenty momentum, and so an average should still generate positive player growth. So I'm a little bit more optimistic than that old headline would suggest.
This is I love about the show, Paul, the classics that come out. It's a tough business.
You got to make a call, and David made a call in first fire. I'm concerned out the X axis. He's going to be right at some point. But just three percent GDP. No one saw this coming.
No one saw this coming. So David, let's think about this. I mean, when I you know, JP Morgan asset Management, nobody more global than you. Guys, where do you see kind of the best opportunities here? When you sit down with your clients and you sit down on your portfolio managers, where you seeing the best opportunities globally here?
Well, I think it's I think this is a time when people all need to think about protecting the down side. And it's not because of any concern about the economy, global economy or the US economy. I mean, and you know there are global economies mixed. The US economy is doing pretty pretty well, but valuations are very high, so you know, I think the opportunity is in diversifying into areas that are not overly expensive right now.
But really that is more.
It's also much about finding another way to goose out returns, which honestly have been great. It's really a way of protecting portfolios of this stage by making sure you're not too concentrated after such an extraordinary bill market of the last two years.
What needs what do we need out there to sustain this bull market? I've got it fit a reserve that is cutting rates on U sure to what degree or what? You know, how quickly? I think I've got a pretty decent earnings outlook here, at least here in the US. Is that enough to continue to push risk assets higher?
Not quite.
I think we need a relatively benign outcome from the
election because there is a danger. I mean, obviously it's greater potential for a Republican sweep than Democratic sweep, but a sweep in either side would mean more aggressive fiscal policy, which could push up long term interustrates, and already seeing that to some extent, in as former President Trump's polling numbers have improved slightly, we've seen long term rates go up because there's the thought that if you have a Republican sweep, you're going to have a much more aggressive
fiscal policy along with the trade war, which could push up higher could cause higher inflation. So I think there is a danger of a policy mistake, not so much of the Federal Reserve, but from the federal government here, and that I think is an investgy to think about.
Why did we all get three percent GDP wrong?
What of Why will C plus.
I plus G plus net exports? What got us from two point x out to a legitimate six months of three percent?
There are two things going on here. The most important is consumer spending. Consumer spending sixty eight percent of demand. We think that it's going to go up by more than three percent in the third quarter, maybe three and a half percent. What's going on is two things. One,
the wealthy are doing extremely well here. We've seen a fifty point one trillion dollar increase in net worth in the last five years, just explosive gains in wealth, both in terms of housing wealth and stock market wealth, and that is fueling the spending of upper income consumers. And second, we've actually seen some better real income gains for our lower middle income households. We've seen just in the last month, we've seen average hourly earnings growth exceed CPI growth for
the seventeenth straight month. So even though the public mood is pretty grumpy, actually lower middle income households are also seeing gains. And that's shopping up in higher food spending and higher clothing spending and the retail sales report. So overall, the consumer still has got some fuel here, and that's the biggest thing. And then the other thing is is just a lot of core spending on AI, which I think is helping investment spending overall.
So when you read Michael Feroli, which I know is torture, but when you read JP Morgan economics, are they telling you it's a productivity overlay?
Well, yeah, I read it very closely, but there is some productivity gains also going on. I don't think the productivity gains are really AI driven here, but if you look at the GDP numbers, productivity gains since the start of this decade have actually better than the last decade, so that's going well too. So you know, in the big aggregate numbers, the US economy is doing fine. I mean, four point one on the unemployment rate, two point four
on CPI. That sums to six point five, which I used to call the misery index, to some of unemployment innovation. That's better than it's been eighty seven percent of the time over the last fifty years. So the economy is doing fine. I just worry that individual investors may be sort of caught off side here if they're overweight the overpriced within these markets.
You know, yeah, I mean just sorry, sorry, Paul.
No, I was just gonna say, that's exactly how I feel. I mean, it seems like things are generally pretty decent out there, but that's probably tom to a reasonable level reflecting in.
The markets, and it folds right into the election, yep, of an election of politics of habs and have not. Look to Kaylee Lines and Joe Matthew for their coverage of that heating up here in three hours. David Kelly, thank you so much. With JP Morgan can't say enough about the bodywork.
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Let us dig into the tariff debate Ernie Tedesky. First of all, Ernie came out of the Stanford combine, and he's of course been at the White House CEA and he's written an incredibly historic treatment on tariffs. Ernie, first of all, did you study with John Taylor? Like when you and as Stanford. Did you have to sit there in a lecture hall with John Taylor dressed up like a raisin?
I missed out. I demanded my tuition back. I was there when John Taylor was on sabbatical.
There you go.
My econ one was taught by somebody else.
Unfortunately, when you look at the foundations of economics, you look at history, and you have nailed it with your Bloomberg opinion piece. Right now, the average tariff is two point five percent. I would think most Americans to get hire. We could go back to World War two eighteen ninety nine, or dare I say, to the shocking tarriffs of about eighteen twenty, what are Harris and Trump going to do? So?
I think Harris is going to basically keep business as usual right now, very much like Biden has done. Biden kept the Trump tariffs, increased a few of them, but you know, basically rearranged some of the tariffs, mainly on national security grounds. What Trump has done or has proposed, and what we looked at in our Budget lab report that was the basis of my Bloomberg opinion column is he's proposed, you know, a bunch of different expansion ideas
for tariffs, and they've been all over the place. And so what we did in our report was we you know, we listened to his remarks over the course of the campaign, and we tried to piece together twelve different scenarios that captured the spirit of what President Trump has talked about, and we created a range of different proposals, you know, on the low end, ten percent on all countries, sixty percent on China but exempting all countries with which the
United States currently has a free trade agreement, and on the high end, twenty percent on all countries, sixty percent on China and two hundred percent on Mexico. So that gave us a bookend of ranges for different ideas.
So, Ernie, what did the textbooks tell us that tariffs are designed to do? And then the question is do they work?
Ok?
Yeah, so the textbook tells us that tariffs are designed to protect domestic industry from outside influence and to let domestic industry grow. I think that there has been this sort of historic argument that tariffs were good when America was young, like in the eighteen hundreds, and that was sort of accepted wisdom. I will say that over the last twenty years there's been more and more challenges to
that accepted wisdom. You know, you've seen more and more historic American economic research that says that America grew in the eighteen hundreds despite our really high tariffs. Tariffs in the eighteen hundreds were upwards of forty or fifty percent in average effective rates back then. But that was sort
of the rationale. But then the textbook tells you that as you know, as your country matures, as its domestic industry becomes more competitive of with global markets, you know the advantages of having you know, having inputs and and and and capital and labor, you know, compete on a on an even playing field in a global market. Outweigh the protectionism of of of throwing up uh protectionist tariffs
on your border. And you know the what we have, you know, the evidence of what we have seen is that you know, tariffs nowadays, you know, don't work as advertised in terms of creating jobs. And that doesn't mean that if you throw up a tariff, you know, we're not saying that in no cases, you know, no jobs
are created. What we're saying is that net net you know, the you know, the bad outweigh the right that that the you know exactly that that that the cost to factories of you know of of increased part parts coming in, you know, for laying off workers outweighs you know, any actory that creates it.
Okay, Ernie, because the time, I want to cut to the chase here. President Trump, in his conversation with John mickels Wade of Bloomberg News, was adamant that he's talking about a magnitude of tariffs that will create a jump condition of labor formation in America. I don't want to go politics on this.
I want to go.
Is there any history taught it's Stanford or Berkeley, that is Barry Keen Green or Brad DeLong going to tell me that if I get a magnitude tariff leap, I will create American jobs. Is there any evidence? No?
You know, what we found in this report is the magnitude of tariffs that President Trump has proposed means number one, higher prices, you know, on the order of one and a half to five percent for consumers. So that's two thousand dollars to seventy six hundred dollars for consumers. So that creates hard choices for consumers. Have the substitute to.
But is there any evidence? Is there any evidence that it will create jobs in America? My problem, and I'm thinking of William Klein. If the Peterson Institute is definitive on this, Paul, it's feel simple. They're going to raise tariffs to go after Mexico, so the jobs are gonna move to Vietnam.
I don't yeah, I know, I don't know how that plays out. I don't have but yeah, no, no, And Ernie's probably the other thing we hear probably most often, and I don't know if this is true. Are tariffs a tax on the US consumer.
That's right.
Now.
There's probably nothing else more studied in trade literature than who bears the burden of tariffs. And it's very clear it's it's the US consumer and businesses that pay the tariffs in the end, so it's not the other country. US consumers pay it at the end of the day. And so you know, that's what US consumers need to weigh. You know when they hear this rhetoric about consumers is that they're going to end up paying it.
At the end of the day.
And it's net. It's not going to create a job. Okay, huge clarity, Ernie, Thank you so much, Ernie.
Today Shi.
This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.
This is the most important interview of the day. Look in the mirror tomorrow morning and say.
Hey, where am I with my wealth?
Creation in the trench? Is Alicia Manel the giant at Boston College announcing a retirement. Were efforting doctor Manell to have her on just a huge victory lap for all of her retirement work. Pulling the short straw for Jane Fraser at City Group was Kristin Bitterly. They said, Kristen go out there to professional organizations and help them try to get retirement. Kristin Biddley had a wealth at work. It's City Group. How bad is it you walk into
a fancy law firm they're hiring City Group. What percentage of partners associates? What percentage are behind the eight ball?
Well, I would say the good news is that we have been covering law firms for over fifty five years. So we're celebrating our fifty fifth anniversary just in a couple of weeks, and so we have long history working with over nine hundred firms, many of the am law two hundred firms, and so I think where we're involved, the strategy has always been we're following people through their career journey, starting from entry level associates through two senior partners standing right now.
Alexia Minel would say, Roger Ferguson would say, we've completely screwed this up. How many fancy people at fancy law firms are behind the eight ball.
I'm going to offer another angle on this. I would say not behind, but I think what happens is we don't teach financial litter in this country. So you what we see very commonly, whether it's at law firms, whether it's at corporations, whether it's at you know, professional services firms. You're someone who's been focused so much on your career, so much on your family, and then you basically find yourself in a situation where you have all of your
savings in a savings account and you're underinvested. So the question there is it's never too late to start. But the first thing you have to start with is making sure that one do I have the right estate plan in place? Only one out of three Americans have a will in place? And two do I have a financial plan? Only one out of three Americans have a financial plan in place. So when you combine that, Tom with your question around okay, retirement assets, you have around sixty seven
percent of Americans with some type of retirement asset. However, only thirty percent feel prepared. So there's a big.
Seventy percent of America, seventy percent of Sullivan and Cromwell, I'm just picking on them.
I mean, Paul, it's amazing. It's like the national topic. It is a big topic.
So where do you start if you have your initial meeting with that client, where do you start?
So you have to meet them where they're at in their journey, first of all, and it's never too soon to start. So the reason why a lot of people fail to plan is they think they're not wealthy enough, they're too busy. We could come up with all of the various excuses, and so early on in your career, it's really creating that financial plan to say, when can I be prepared to buy a house? How am I thinking about taking on debt to do that? A lot
of purchases, this is another kind of shocking stat. Seventy percent of purchases are emotional. People will go in and buy a home or a vespa or a vespa. Yes, Tom, that too, I saw that photo.
That was great.
But I think, like you know, when you have that plan and you kind of then say, okay, where should I be investing? How should I be maximizing certain accounts? How can I take advantage of actually the structuring and planning. So we talk about financial literacy within this country, but we've also added a lot of complexity in the sense that.
Okay or zag over at Lazard now when he was at Brookes, he said, look, we got to do an automatic buy in on four oh one K.
I mean, it's all there is to it.
Are we getting anywhere nearer to where we approximate Paul Sweeney's dinormous multi eight figure four oh one K?
I mean, look, I think we One of the other data points that is important is I do think we're getting closer in the sense when you look at the boomer generation and you look at the anticipated wealth transfer that we're going to experience over the next two decades, it's anticipated it's going to be ninety trillion dollars over the next twenty years. So there is massive wealth creation and generation for those who are homeowners, for those who
have exposure to the stock market. Clearly there's been benefits within that. But I think the key thing for our clients is the unifying factor is they're busy professionals who are trying to make it in their career, and they're trying to take care of their families simultaneously, and sometimes what's best for you takes the back seat, So just taking that moment to come up with a plan and discipline, you will be way ahead of the game.
What are you.
Telling your clients these days about where to go? Stocks, bonds, alternatives?
I mean, the.
Markets had a great year this year, bonds have actually had a positive return. What are you telling them about these markets?
So the first thing is I think when you're looking at what was, what is what could drive markets right now? You could say the economy, you could say elections, you could say earnings, and geopolitics to a certain extent, I think there's a lot of people trying to trade around elections. Our advice is policy, not politics, is going to drive markets. So we are not making any significant portfolio changes on the back of that. I think there are and I
know a lot of people have been discussing this. There's always an excuse not to invest. There's always something to be worried about. But when you look at the tailwinds that we have right now, cash on the sideline six and a half trillion dollars, you have a fed that okay, whether it's another twenty five basis points to twenty five basis points. They are cutting rates, their strengthening the consumer
based on stock market prices, home prices. So I think there's actually a lot of positive tailwinds for risk assets.
Christ and Biddley with your experience at City Group, what's the level of exuberance right now? I am thunderstruck by the lack of taxicab talk over what do I do with Nvidia?
I don't see And.
There's some mathematics on this YARDNNY and others have said, Look, the exuberance just isn't there. When you go into a given institutional client to do wealth at work, are they foming at the mouth to buy the mag seven?
No, I think they're looking actually for much more balanced approaches to it.
Well that actually will that balanced approach get it done.
So what I will say is it's better than not being invested. So the first step get invested, right. You could have a debate around passive versus active. It's first being invested is better than not being invested. I think when it comes to the balance of conservative assets versus risk assets, you've seen a skew towards cash with rates where they met massive skew towards cash. So that's another common conversation. Let's ship some of that risk if.
David Baylan was its city group and he aged.
David Balin aged because everybody stayed in cash.
He said, Tom, I'm pulling my hair out.
I mean it's I mean, how do we get from from where we are to optimism to enthusiasm about owning a balanced SPX portfolio?
Even away from Microsoft?
I think you have to get away from the market time and conversation. You and I have talked about this, and it is something that market people believe. Just like I said, there's always a reason not to invest, There's always a reason that there could be a risk. It feels good to stay in cash on the sidelines, but look, if you stayed in cash on the sidelines year to date and you miss this twenty percent plus rally with inequities,
you are significantly underperforming. I think another thing that is actually a really positive We talk about this all the time longevity. People are living longer. The population over eighty is expected to triple, the population over sixty five is expected to double. What does that mean in terms of how your money has to work for you? It has to work longer. Not just about risk assets, it's actually about and your previous guests spoke about this alternatives as well.
You need those assets to work harder for you.
Why it's still working? What how about you go to some of your associates, to some of these law firms. I'm guessing they have a lot of debt that maybe we didn't have from education. That's got to make it tough on the younger folks.
I think it makes it tough on younger folks in all industries. And so you have to look at your balance sheet analysis. And I'm bringing this full circle to planning, looking at any type, looking at the interest rate on that debt. Not all debt is bad, right, So I mean if you were someone who locked in one of
those thirty rate fixed mortgages, you won the lottery. So looking at debt not as necessarily bad in and of itself, but in terms of high rate, low rate, and trying to optimize your balance sheet and then finding liquidity for where you can invest and where you can make those those important investments for your family as well, such as owning your home.
I mean, I got to look back here. Notre Dame be produced sixty six to seven.
They're good. I thought it was a fluke.
We'red is a powerhouse this year I don't think there's any other football team other than the Notre Dames.
Kristin Bitterly that won as big as they've won this year.
They ranked twelfth in the country, but they're ginormously.
We had an unfortunate loss early on in our season, which was a little heartbreaking. But you know, I'm an avid Notre Dame fan, and yeah, I'm going to be an optimist here.
Northern Illinois.
Yeah, Northern Illinois. Yeah, it happened our second game, tom It was after beating Texas A and M.
So after that was shots at tequila.
Right, mescal for me.
But yeah, ok, yes, I mean, I mean the work you're doing, this is God's work, folks. I mean, this is really serious stuff. Listen to Roger Ferguson, the former vice chairman Tia Kraft. I mean, I'm sorry, this is the most important interview of the day.
The percentage of.
Americans cratering in retirement and financial planning is off the chart. Christian Bitterly with Jane Frasier at City Group welt it.
We're Christian, Thank you.
This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal