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the Bloomberg Terminal, and the Bloomberg Business App. Lori Kelvisina joins us this morning with all of our good work. Lori Kelvisina, of course with RBC Laurie. I'm gonna I've just cut to the chase, many would say, in this odd rebound, this ten day hillacious horror, and through that there's been a massive shortcover on small caps. Are you committed to small caps this morning? Hi?
Tom? So, Look, you know, I hate to say it, but I still feel pretty neutral on the small caps. Now, that's in regards to a relative call versus large. I do think the market is at large small caps included probably did see the lows for the pullback we experienced
on August fifth. But when I think about relative performance, look, I think one of the things that's really been pushing people into small caps, and that's been generating some of these short term out performance pops is when the absolute valuations of the Russell two thousand or cheap, so that weighted media and forward pe is below average. And guess what, as we updated the weekly at the end of last week, it was sitting right smack dab on top of the average.
So we don't have, you know, sort of the same kind of compelling valuation set up. Similarly, if I look at positioning on the CFTC data, we recently pulled up to three year highs kind of post COVID hives, and we've started to ease back from those, but they don't look under owned at this point in time. And then I layer in the economy, I neither think we're about to tip into a recession that's usually a really big springboard for small caps. And I also don't really see
a hot economy. I see kind of a you know, a good, solid, fine economy, But small caps really either need the springboard coming out of recession where you get really fast growth rates off the bottom, or you need a really kind of hot, above average economy to outperform it. I just don't have that right.
I have fourteen questions of Paul jump in here. I just I just don't get it.
Hey, Lourie, I mean, we're pretty much through the earnings season here, We've got some retailers are reporting this week. What did you take away from this earning cycle? Good, bad, or and different?
So I was pretty solid, you know, I do think in some ways it got ignored with all these sort of macro gyrations, you know, sort of debates over the consumer and the jobs, and then the yen carry trade unwined, which I know we'd all kind of like to forget right now. But I do think if you looked at the stats, we saw an uptick on the percent beating
consensus earnings estimates. The revenue beats also picked up. The earnings beats kept out pacing the sales beats, and that just means companies are doing a good job of, you know, kind of defying gravity so to speak, and really managing margins. So that was all good.
I thought the.
Commentary was pretty balanced. You know, there was maybe a bit more negativity on the consumer than what we saw last reporting season, But I came away with the impression that while the pressures from rates and inflation, consumers are reacting to that in a more profound way. Companies went out of their way to sort of say, you know, we think the consumer is still healthy and that they're managing through. So I thought it was I thought it was pretty solid, to be honest.
Solid enough to support the valuation where we are in this market. How do you guys think about valuation of this market these days?
So we look at valuations a lot of different ways. If I'm looking at, you know, sort of a forward pe, what I really like to do is separate the top ten names and look at a bymarket cap and look at a medium pe there that's still trading around twenty six times. It got as low as twenty four, It was up round thirty two one point. Doesn't look great,
but it's off the boil. If I look at, you know, sort of the rest of the market, we've been sort of, you know, really trading closely around kind of the seventeen times mark. The average is around, you know, sort of I think around like fifteen or so, so we're a bit above average, but we're way below pass peak. So I think valuations, you know, look pretty good for the rest of the market. If I look at a trailing PE analysis, that's where I kind of come away with
the idea valuations are full. And I'll spare you all the details on the model, but I basically take inflation and interest rates in the FED, do regressions with with trailing pees going back to the sixties, and we figure out where should the PE be at the end of the year. If you think X, y and Z is going to happen on rates and inflation, fifty six hundred is already baking in, you know, sort of three or
four FED cuts and PCE down around two. So I feel like we've already baked in a lot of good news on the rates and inflation front, know, on the s and P multiple itself in.
That regression equation, how do you plug in and presumed lower real rate the oomph the economy gets from a lower real yield.
So you know, we've got kind of all the bits and pieces there, right, We've got the ten year, We've got the FED funds, we've got the inflation rate. I'll tell you Tom and this, I may lose some of your viewers right now, so I apologize if we do that. But I did experiment with this model at one point in time, having GDP baked into the model. I finally, you know, sort of threw it out of the model.
It didn't have a huge impact on the outcome. But I found GDP behaves differently relative to interest rates in different decades. So inflation, the FED ten year yields pretty much always inversely correlated GDP, sometimes inverse, sometimes positive. I don't want to mess with that.
Yeah, Lurie, thank you too much, math Lori, Kelvis, thank you so much. Kelsey Burou joins US executive director Fixed Income and JP Morgan thrilled with us today your arch call with Bob Michael is yields are coming in tenure yield. You know you're talking below. I mean Ian Lincoln's out there and the other strategists with calls. But the basic ideas we come down, Paul. I'm looking at the corporate chart yield the worst back to vulgar. It's the great moderation,
the great disinflation. We're out three standard deviations right now, folks, which means we've never been here, and a regression to the mean Kelsey Barrow, just get your price up yield down? Is that all JP Morgan's talking about is a regression to a great moderation?
Mean, So I'm looking at the same chart you you are in terms of investment grade deals right now, five percent right a yield to maturity on the on the investment grade index right now. You know, I think what's amazing about that? And that's come down pretty significantly. You know, from the highs was above six percent. That's actually still in the eightieth percentile of the last ten years.
On the show, we call that three standard deviations right, another way of saying it.
So, you know, I think the big question people are asking now is, you know, have we missed the move? Because you know, we're now thirteen months from the last rate hike and if you look at one to five year credit for example, that's about two hundred basis points ahead of cash right now and the Fed hasn't even started cutting rates. But that we do also know that the market is pricing in significant amount of rate cuts, eight to nine rate cuts. So you know the question
is what's the risk reward from here? Now there's two tails that I'm thinking about. One is the reacceleration risk. One is the risk that we go into a harder landing. I think what the data has been telling us more recently. You know, we can debate about the risk of recession, the risk of rolling over. The data is very mixed on that. But the one place where it's really clear is that the reacceleration tail risk has come down quite a lot. And that's really the big risk for bond investors.
And that's the good news for fixed income is that we've really been able to credibly reduce that tail risk of a reacceleration in inflation.
So if I'm the FED, I go out to Jackson Hole with all the you know, the monkey MUCKs end of this week, including mister Tom Keen.
What do I say?
I mean, I don't think you really need to say that much. I mean, it's really interesting you think about the price action this year, and it's really not been driven by the FED speak. It's been driven by the data.
Right.
The market has reacted to the data. When the data suggests that there's risk of upside on inflation, the market reduces the amount of rate cuts for this year. When that unwinds, the market prices in more rate cuts.
So I actually don't think that.
Chair Palal needs to say that much. That being said, though, I think it should be clear that if you look at simple policy rules, they would suggest, and this is regardless of your view on the labor market, simple policy rules would suggest that the appropriate policy rate right now is probably about one hundred basis points lower than it is today. And that's just onflation coming down alone. Because the Fed, they don't see the Fed funds rate static
for the last thirteen months. They actually see the real Fed funds rate has risen one hundred and fifty basis points in the last thirteen months.
That's equivalent to.
Five more rate hikes. So policy has been getting incrementally tighter for the last year, and they recognize that it's time to kind of start to move away from that regime.
So when the Fed begins to cut rates, let's say it's September, as the market discounting, how did they do it? They do it every meeting, every other meeting, twenty five basis points fifty basis points to their front load.
How are you guys thinking about that?
So I think for now it's still a gradual adjustment. So you could plug in those simple tailor rules on your Bloomberg term all and see that. Okay, you know the policy rate maybe should be closer to three and a half to four. But they're not going to do that instantaneously, right I don't. I actually think that they are more likely to go twenty five basis points per meeting maybe for the next few meetings and then switched
to quarterly. But you know that's all assuming status quo, and we don't know where the economies going to go next.
Crystal Ball, do you have a crystal Ball in your office?
No, we don't have a Cristal the new.
Office, Tom and to go into the new offices, the.
New offices of a crystal ball. Yep, what. I got a huge response to this out of YouTube. The basic The basic idea here is if I get Abob Michael Kelsey Barrow Market, and I don't get down to reversion to the mean, I just get down to a long term trend one standard deviation above the mean. I have a total return vehicle at JP Morgan. Are you investing in fixed income for an assumed total return or are you clipping a coupon?
Well, so far, it's been a little bit of both, is what we've gotten so far. Right, you got a little bit of total return more recently and then more more so, the majority of what you're vetting is clipping the coupon. But I do think you know, over time you are going to see that fixed income is going to continue to outperform cash as the FED continues and starts that easing cycle.
I mean, Paul, to me, this is huge. Nobody has in their minds fixed income is a total the giant damn fuss at Luma's sales. Nobody's thinking as a damn manner.
Yep, I'm looking at Kelsey.
I end going a Bloomberg terminal Bloomberg Index browser the best returning fixed income space.
US corporate high Yield. Where did that come from? I thought we were having a recession. I mean, how's high gild doing so well?
Yeah?
So, I mean, I think really that's that's a combination of the fact that the economy has continued to do well, and that's really a story of clipping coupons. The index with the highest yields has performed with the greatest total return so far, and that's because spreads have been relatively stable. So if you think about what our core thesis was for this year in terms of base case for investing, it was soft landing and the key part of that
was inflation coming down. You need inflation to come down for any of these things to work right in the box market with about that, you can't have you can't have any of it.
What's for really telling you?
Well, you know, I think what we're seeing in the data is that the disinflation is becoming much more broad based and outside really two categories left in inflation, which is a shelter and auto insurance. Pretty much the rest of the CPI basket is running like it was pre COVID.
One final question, because you've got to throw you out because of Detroit Tiger's at the Yankees, Kelsey. The heart of the matter is what are people doing with their money right now? Is any of the cash being deplored into the Michael Barrel world or same thing? Are people extending duration?
I think they are, and I think the ways you can see it you can see it in fun flows, but I think you could also see it in the continued demand for corporate credit. You know, supply has really been pulled forward this year ahead of the elections.
And that's like the fourth time we've heard football.
Yeah, people.
And people are very interested in extending and you know, snapping up that credit because companies in general, they were preparing for a recession.
The recession didn't happen.
But the good news is is that their balance sheets are in a very good place.
Help me here, why is it big Tech? They make one phone call. They don't call James Diamond, They called Bob Michael. Let's be honest, they're going to make Big Tech's going to make one phone call and they're going to do gazillions of debt issuance. And how many people does JP More gonna have to call to get that deal done?
Like for people, well, they just call upstairs the devestment manager people and then they say the demand.
I think it's going to be a frenzy if we get some form of reversion to the Great moderation. Do you see that? Yeah?
I mean, and you think about it. You know, you've already seen institutional investors, you know, exten duration. But this has happened without an actual cut, right, Like money market rates have not moved yet. But I think when they move, you're going to see a lot more people start to know.
Okay, Kelsey Barrow, thank you. So I'm a terrific brief Kelsey Barrow working with Bob Mike on the team at fixed income at a small bank on Park Evan. I greatly appreciate her attendance. We're doing audible here with Henrietta Trece. Thrilled that she's with us today. She's been a huge help to Bloomberg's surveillance and identifying the trends. Henry, I usually start with some you know, mumbo jumbo in the zeitgeist in that, but I think we have to address
the Chicago protests. And the difference is in nineteen sixty eight, after the Ted offensive, there were clear, visible The word I use is substantial divisions within America. To you is a grizzled pro How narrow is the Palestinian Israeli debate in the Palestinian protests talked about in Chicago? It's not nineteen sixty eight, is it.
It's definitely not nineteen sixty eight. Thanks for having me, Tom. I think the first thing to note is that the protest is going to be about a mile long.
They have moved it away from the Convention. I'm sure you know.
I know that the Democrats have anticipated these protests. I think that the biggest area of concern for them is the state of Michigan, which there is a big population about two three hundred thousand people who are even in the range of focusing on this the way that the protests would suggest. And in general, this is a really small subset of the Democratic voter base, and I don't think that it's going to move into in terms of polling or ultimate.
Election outcomes, but it is there. It is present.
Kama Harris making clear that she stands with Israel but doesn't have the same baggage that the Biden administration has on this, and I think that's going to help her.
I mean, Paul, the reason I bring this up, besides that, you know, the analog back to nineteen sixty eight and all is I'm looking at outside adults like Q Research Trust or the great work at Cook Political Report. What Henrietta does it Vida Partners, Greg Juro at Bloomberg and is she mentions Michigan's unique Okay, But other than that, I can't find a critical mass of protest in America. I mean, we can protest the Red Sox.
Middle relief exactly.
That's got the biggest say Yankees losing interesting Henrietta, what would be or what will be or what could be a success for the Democrats this week in Chicago.
Honestly, a continuation of the success is maybe talking about the more popular part of Kamalhiris's economic plan. Get that out there into the ether for voters who don't have a strong sense of her policy. To the extent that any concerns about her policy positions are a problem for voters, We've seen in the Poli data so far is that she's risen anywhere between five to eight points in all
of these swing states. So voters aren't really concerned about the policy, and they're very primed to be opposed to Donald Trump, which is why he's lost every election since twenty sixteen. So I think getting a little bit of a message about out on policy but not too much is probably the strategy keeping the good energy going. President
Biden will speak tonight, We'll keep forward with that. I think there's a lot of folks waiting to see where Michelle Obama comes out, but Barack Obama will be there, Hillary, Bill Clinton. It's just a big Rah Rah, and I expect that polling will continue to reflect the boost that either party gets from a DNC or an RNC, which is two to three points, and that point basis, once it gets tacked on the polls next week, is going to be sufficient to put her outside of the margin
of error in all these states. And that's a big problem for Trump right now.
How concerned is Donald Trump? And I guess more importantly the Republican Party at.
This point very concerned from House members who were hoping to pick up all ten of the toss up races in the House of Representatives, the senators that are not in Ohio and Montana are really concerned. And then at the top of the ticket, I think you can see it from the change up that they're doing at the campaign staff. I think maybe they finally seized on a campaign message trying to tie kaval Harris to her economic
policies that she rolled out on Friday. But one thing I'd really point out there, and where I've spending some time digging into the data, is that when inflation was nine percent a month later, Democrats went on to keep House Republicans to the lowest majority wins of any majority party excuse to be a minority party in one hundred years. So I don't know that the inflation stuff is going to beat out all the rest of it.
And that's what history has suggested. In the midterms and the twenty twenty general.
What do we vote? I mean, I know we don't vote on foreign policy, but do we vote on border debates, immigration debates? Do you buy the cliche it's all about economics.
Man, It's really tough because twenty twenty was not about economics. I think that Biden narrowly won because of COVID and because of Donald Trump's the President Trump's response to COVID at the time, and sort of the chaos of that administration.
And then in twenty twenty.
Two, as I suggested, I mean, inflation was seven eight nine percent that summer, just two months a month before the actual election, and Democrats somehow still held the United States Senate, which was shocking. So I think voters are quick to say that it's the economy. It's perpetually the number one issue. Inflation is right up there, but it's followed very closely by immigration and abortion and turnout is
really the name of the game. The gender gap is where you should probably pay attention to that issue.
Give us a window into Florida politics. I read cook political report. Amy and David had a really interesting study of I think it was five of the districts, including the tippy tip of western Florida where it gets his but give us the red blue Henrietta Trey's view on a key state like Florida.
It's funny, you're speaking my language.
I was just in Seaside last day with where Matt Gigs's dad lives in his district, so I feel you there's a lot of Trump supporters down there.
It's very Maga nation.
There's buildings with huge billboards and property owners willing to pay the fees for having political propaganda up year round. I mean, it is definitely a little insular world right there.
But Florida.
You know, look at Rick Scott, the senator there, who has poured money into his campaign. I believe the latest campaign donation he gave to his own cycle was over one hundred million dollars, and he has an underwater approval rating with both Republicans and Democrats in the state. And of course, as you know, in Juval County, in the Jacksonville area where my parents live. You have a democratic surge in the down Vallery is in the.
Mayoral candidates, et cetera.
So I think Kamala Harris is trying to spook Republicans into spending a lot of money in Florida.
I think that's a smart strategy and.
That that's the goal right now is just make Republicans play defense in that state.
Henrietta Trees, I'm sure we'll talk to you later this week. Thank you so much for your commitment to show the value aid from Vader Partners. You're actually prepared today, Lisa, because you didn't visit Costco.
I didn't.
I saved myself five hundred bucks, that's what I did. So, yeah, summertime, there's not much going on. I had, I had broke a sweat.
Looking for newspaper stories.
Okay, but this one stood out to me. This was in the New York Times. You know around New York City, the horse drawn carriages right all of New York City. You love them, yes, everybody loves them, but there's controversy behind them.
You know, the animal.
Disagree, there's disagree, right, So in Brussels they're actually switching to electric drawn carriages. Instead of the horse drawn carriages. They became the first European capital to do this, offer those daily tours, and the carriage operators they're telling the Times that they're just tired of getting these angry marks from tourists about animal cruelty. A lot of them are selling the horses, using that profit to buy electric carriages. They say, hey, now they don't have to pay the
high cost of taking care of the horses. They also don't have to worry about canceling tours because it's too hot for the horses. And they're saying they're getting just as many people signing up for the electric cars as a horse drawn I can't disagree with that.
I mean, I was was fortunate enough to live in the varied climbs where I could hear the horses clip clop, clip clop, and in my you know, idiot Victorian fantasy, it was wonderful. But why not you know, why.
Not have we still have them in New York?
Right? We still have horr I didn't know that, Yeah, we still have in the city. I actually, long story short, I was got engaged in want of the horse drawn.
Years later, Paul, we should be taking notes, boy, quickly, okay.
Wall Street Journal, they were talking about how these discount airlines like Spirit in Frontier, they're now offering a lot of these bundle packages. They're calling it, well one flyer called it the poor man's first class. So they have all these different packages where you can pay one price to get like in flight Wi Fi, your check bags,
for free, extra leg room, cocktails, priority boarding. So this is the way that they're trying to get more people because it's getting so competitive out there, so they're trying to do these bundle packages, like for one hundred bucks you could get this. They have a business bundle, they have a go big bundle that a costume, maybe two hundred extra to include all these things. So they want to be a little bit more transparent to That's the other thing.
Where are airfares these days? In general?
I have not booked a flight and like forever, so I'm not even sure where airfares are Tom price is Paris daily daily.
But they're saying that's competitive about it.
The regular inlines are starting to drop their prices, and now these discount carriers are saying, well, we got to do something funny.
You should ask I had to do as New York thing this year get for one of the offspring, and I was surprised. Now there's economy like Bearbone's economy. You're taking you know, a little bag on and then a substantial markup to like have a suitcase. So that's that all a card things going on.
It's crazy.
I don't yeah, it's crazy. It's I don't get it. But that's a new level.
I'm finding to Doublin next month and it's not business. It's the first time I've gone to Europe, not business, first class in like my lifetime.
I don't know how this is going to go, but it's going to be good.
It's gonna yeah.
Yeah.
So we talked about Disney right revealing their plans for theme parks. So now Universal Destinations, they're the theme park business owned by Comcast. They've acquired like five hundred acres, is a potential site for Europe's largest theme parks. So they're saying, you know, they're going through they're talking with UK officials about tax other infrastructure incentives, but sources saying Comcasts could look into other sites in Europe elsewhere in
the world. But they're saying it could bring a lot of significant money. Also a lot of jobs to the area, so it's interesting kind of coming and expanding in Europe.
I'd say the theme park business for both Disney and Universal which owned by Comcast, as you mentioned, Lisa, they're getting huge investments. I mean, Disneys can put in I think like sixty billion dollars over the next ten years just in the theme park and cruise business, launching boats and new theme parks, and Comcasts doing the same thing.
It's a good business.
Does your radar up on them? Yeah? To me, it's everybody's on board.
Everybody's kind of on board.
But these are these are the two biggest players in the world, Comcast and did the Disney. So but people are spending, you know, all these types of things.
Jonathan emails and thank you Jonathan for your interest in the show. How does Costco deliver twenty four percent returns, Lisa Matteo, Yes, exactly.
Next, I'm not sure if you noticed during some of the preseason football games, but some of them are wearing those guardian casts.
Yeah, what are those the pasage?
They put it over the helmet, so it's more added protection protection, it's protection, yeah, extra production. So the difference why you're seeing it now is because the NFL said that some players there can wear them during the preseason games. But a lot of players now are saying, hey, we might wear these during the regular season. So that's kind of the talk going on now, is should these helmets
be worn during the regular season games? Because now since they said they can wear them during the preseason, there was one cold safety Rodney Thomas a second. He tells the Washington Post, you know what I might do it, I might start wearing these during the regular season.
Again, there's head injuries.
I mean, you know, oh extraordinary, and they're just long and lasting, long term.
I don't know how they deal with that.
I mean, I know they've been making advances with these helmet technologies for seemingly forever. But I guess there's no you can't be too careful, I guess, And.
I personally, I had a concussion in the hockey where I was like seven years old. I remember it clear as a bell with a Bologna helmet on. But there was a thing called a Cooper sk twenty and the few and players that actually wore a helmet at the time. We're not maligned, but it was not manly to do it. J. C. Trumlay of the Montreal Canadians was an early adopter, and many others. And I'm sure Rich knows someone in the Rangers. And the answer is now we look back and it's
just foolish. I mean, could you imagine the game now? I mean, you know, the game is different, the high sticking is different than it used to be because you could really hurt someone. But why not wear some puffy cushion thing on your head.
Well, some players say they don't like the look the feel. It could affect their performance. That's the other side of it.
Yeah, We've had my family some experience with concussions and I was shocked to learn how much doctors.
Don't know about concussions. They really don't.
I mean they kind of go in there and this could be last a week, it could last a like.
I'm like, that's it. That's what you got for.
Good morning to Jeff up in Connecticut, who I skated with. He's done very well in Connecticut in business and he had to stop playing hockey at twenty years old. I mean, that's all there is to it. This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am
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