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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from 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 Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. I will not mince words on Global Wall Street. With great respect to Cliff Astness and a few other worthies, there is no one that does the math like way lead at Blackrock. She joins us this morning, partiers from Cambridge, but far more acclaim in her China. Wait thrilled to have you
on right now. I look really at where we are, and my question to you is, when you correlate equities, bonds, currencies, commodities, do you see a stable global system or is there enough instability out there to give you concern?
Good morning, Thank you so much for having me. So when we look at cross asset correlation, you look at apply bond correlation in the US, you look at apply bond correlation in Europe, they have been going steadily from negative. It's a very chan for portfolio diversification. We have gone from the period of this inflation and our environment for
a period of persistent inflationary environment. And as such, duration and the role of duration as balanced in your portfolio construction is severely challenged, which is why we need to really rethinkful for your construction in his current environment, right to really kind of think about diversifying your diversifiers.
Well, let's diversify the diversifiers, because we know Waylee bought in video three years ago when I did not spell it. Wait, how do you diversify the diversifiers with big tech again on this Thursday moonshot?
Yeah. Actually, it has been a very concentrated actuality market already in the US.
I need to interrupt, and I need to interrupt and say way Lee has said just shut up and own it and say thank you. I want to say that she's been onboard. Let's continue doctually.
We still like, we still like the magnificent world, not seven maybe it's six, maybe it's five.
But if you look at.
Their earnings right like, so, yes, the media has done extraordinarily well, up five hundred percent and more since last year, but it's forward earnings has gone up just as much, and they're beating those very high levels of earning expectations. And it's not just in media, right you look at tech sectors as a whole, it's really carrying the earnings momentum in the US. So we're still very comfortable with our Nvidia call, with our tech sector call, but we
also see kind of momentum broadening out. If you look at kind of margin expansion in the US ACTE market, eight out of eleven sectors managed to grow their margins the last earning season, which gives us confidence behind our US actly overweight. But the AI theme in our review has a significant runway to play out as we think about other sectors kind of starting to extract profitability and benefit from that.
Willie.
We had some central bank movement recently, the Swiss National Bank cutting their interest rates, the Bank of England holding their rate steady. How do you get you handicapped? The US Federal Reserve here is maybe behind the curve a little bit in cutting rates here or do you think they should in fact hold study.
I think this environment where the FED is later than the other central banks is highly unusual, right, So the Easy be going before the Fed, and BOE likely going before the Fed as well. I think this is highly unusual. It's also highly unusual because we're talking about an environment where central banks are looking to cut rates when inflation is way above target, when growth is not really tittering around recession.
Right.
So this is all very very extraordinary in terms of the environment for central banks, which is why we are of the view that even when the FED starts cutting later this year, which is our expectation, one or two cuts for twenty twenty four, which is not really contrariant.
But even when they start cutting, we're talking about an environment of high for longer, not going to be able to cut as much as before to come to the rescue of the economy because of the broadly inflationary environment given structural forces such as the low carbon transitions such as aging population pushing inflation higher. But even AI, you know, people think about AI as deflationary because of the productivity
boost that we are all hoping for. The market to some extent pricing in but before it becomes deflationary through productivity boost the copex spent, the enormous copex spent actually means that AI will have to be inflationary first before it can be deflationary. Right, So, because of all of this, we're talking about high for longer for central banks. That applies to the fact that applies to the BOE, that applies to the ECB as.
Wet Wellie, thank you so much and thank you for being in the market and explaining it to us. Joining us right now. Turston Slock of Polyglobal Management, hugely read on Wall Street. Of course, off of is a kind of work at Deutsche Bank, is well Turston. Twelve months forward, where's real GDP.
With still mildly hot economy, mildly hot weather, but with a risk that we may have some slow down coming maybe twelve months, but more eighteen months into the future.
The fear you can have is that higher for longer ultimately begins to bite harder on LeVert balance sheets for consumers, on LeVert balance sheets for firms, and LeVert balancets in the banking sector, and that could potentially create that dreaded recession that we've been worrying about for so long, but so far for the next seven quarters, we still think that the tailwinds to growth are very strong from fiscal policy and from easy financial conditions.
Torsten, you've been pretty consistent here in your call that this federal Reserve doesn't really have to cut rates in twenty twenty four. Do you still believe that, and if so, why.
I still believe that because of what I think. I mean. The first test is, well.
If we literally just a quote unquote look out of the window and see how things going in the incoming data, non farm payrolls at two hundred and seventy two thousand, that's a really strong number.
There's some debate about whether.
Some of that maybe is driven higher because of immigration, when the Edelburgh and Tara Watson at the Brookings Institute wrote a very important paper suggesting that maybe the equilibrium growth in non farm payrolls is about one hundred thousand
higher than normal because of immigration. But I still think that strength in the numbers across the board, where a little bit of weakness may be in retail sales earlier this week, but at the same day we also had industrial production was very strong, so jobless claims also looking good. It's just hard to see where that slowdown is that so many people are worried about. So because of that, we just don't see the urgency for the FAT having to cut rates.
Are you surprised that the higher rates haven't impacted the consumer more? I mean, it's it's tough to get a plane seat, it's tough to get a seat on a cruise ship, it's tough to get a seat at a restaurant. Talk to just about how the consumers reacting.
Yeah, this is very important pole.
So I think it's very critical in that discussion is that the transmission mechanism of mortary policy was actually working last year, exactly as the textbook would have predicted. The FED raise rates in March of twenty twenty two, and the most highly leveled consumers started responding because you saw the Linguagy rates go up on credit cards.
The Linguagy rate codes about auto loans, especially.
For consumers that have more debt, which generally are consumers that are younger also and consumers that have lower five coats goals. Same thing for corporates. You began to see the four rates go up for high yield, the fall rates.
Go up for loans.
So in other words, balance sheets that had a lot of debt were first hit by the Fed raising rates.
But what really is unique at the moment, that's.
Just the answer to your question, Paul, is that for consumers, they have locked in during the pandemic. Mortgage rates, as we all know, ninety five percent are thirty year fixed at very low levels. Like Wise, for corporates, the vast majority of credit markets is IG and IT companies locked in and termed out also very low interest rates.
And as a result of that, the transmission maganism has just been weaker than what it normally is.
And that changed with a fit pivoting to Duvish because then on top of that, not only was the transmission making week, but we also got a tailwind from easy financial conditions with S and p up as much as we have seen.
Turstan, you've led on this and it's your best chart of the many charts you put out ten years ago. Folks, the share of mortgages below four percent, Paul, was thirty percent, is it for the conversation is doubled. I mean, I mean the number of mortgages below four percent is doubled in ten eleven years and Turston. That goes directly into the transmission mechanism. You know, I'm very negative on the dots. Do the dots of the FED have they adjusted to the slock slower transmission mechanism.
Well, I do think what is very important in the last if I'm seeing meeting, and you have also talked about that on a surveillance radio, because what we saw was, of course that the FED went from instead saying three cuts in twenty twenty four to now saying one cut. That on its own is an admission that we were wrong at the FED. We thought that we would have three cuts. Now we think we're to have one cut.
So in some sense, the FED is coming quote unquote back to the view that maybe there is no strong arguments for being in this urgent drag pace having two cut rates.
As quickly as they thought just six months ago.
We're thrilled you with us for the entire half our Turst and Slock. You know, We're gonna go to Michael barn News, but I'm gonna really come up on beating his folks. I haven't mentioned this on area yet, but it's a symptotic twenty twenty four.
What is he talking about?
Come on Tourston all the assim Tote discussion. Ethan Harris retired from Bank of America leading the charge on this. A few others as well. Well, they're lost and they're extending out the axis as far as they can. It's that simple, right, I agree.
I think that what is very important here is that we have unleashed some fairly significant powers with inflation going up. And one point that's also very critical in this discussion is that if you look at Michigan five to tenure inflation long term inspectations.
The median is still very well behaved.
So the median household still thinks inflation will be three point one, which is where it's been for the.
Last several years.
But if you look at the mean, you will see a significant increase in one half of the population expecting that inflation is going.
To be dramatically higher than the other half.
And if you look at the sub questions in the University of Michigan, who is it that's expecting inflation to be higher, it is generally speaking, the bottom thirty three percent of household incomes, meaning low income households to expect much higher inflation than high income households.
And it's generally also people with high.
School or less education that expects inflation to be a lot higher. So you're beginning to see some divergence in inflation expectations.
And this is opening up a very important.
Debate in the Phillips curve that you and I, Tom and I talked about for years, where if inflation expectations for half of the population are very very high, what does that mean for when.
The fits is that inflation expectations are under control.
Yes, the media may be under control, but there's a significant part of the population they're still worry about inflation.
To us and talk to us about what concern do you have about this? Maybe the commercial real estate market in this country. It feels like it's there's still a big shoe or two or three to drop, but maybe not. How do you think about that risk here as we look around to some of these big cities and see a lot of vacant office space.
I think the important data point first to keep in mind is that the price per square foot for office nationwide is down more than forty percent from the peak. So if we think about what that means, that of course, means that there's a lot of office that has been reset at a lower level. Now, there's an important differences as the country, of course, with the Sun Belt, with the West Coast relative to East Coast, relative to metropolitan areas.
But the bottom line is really that well, when an act price goes down more than forty percent, and in particularly when the financing of that asset price is something that normally is reset every five years, then we still have a maturity wall in commercial real estate, in particular in office that is really really steep. For other types of commercial real estate, things look a lot better. So of course you have warehouses, industrial, you have apartments, multi family,
shopping malls of course, also have data centers. There's some very idiosyncratic stories across the different types of commercial real estate. But the main issue still that we should all be watching is office because that is just still where most of the downward drift.
Is towards another economic issue that's really been or I guess this discussion point over the last eighteen months as we look around the world as this concept of American exception from an economic perspective, you know, the commercial rule state issue. Notwithstanding, how real is that the US economy strength vis to be the rest of the world, or how do you explain that.
Yeah, this is really important.
So there is a structural discussion exactly about is the US exceptional and the US, its course is exceptional because of large capital markets, much more spending and broadly speaking across the board, in including on defense, including also on the role of.
The US consumer.
So simply because the US as the biggest economy in the world, playing this very substantial role, it does generally speaking attract capital. On top of that comes the most cygnical arguments, namely that the US business cycle just happens to be a lot stronger than the business cycle in Europe, the business cycle in Japan, Canada, Australia, emerging markets, and of course also China.
And when the US is stronger, then that.
Means, of course, as we're seeing and as we're talking about, then breaks will be higher for longer in the USA that elsewhere. That's of course what we saw with EACV cutting rates. They being in today is staying at hold, but now signaling clearly the rate cuts are coming. All that argues for still more upward pressure on the dollar. Because the US is exceptional not only from a structural perspective, but also at the moment exceptional from a cyclical perspective.
So with that background, when will that exceptionalism from the cyclical perspective change? When the fat begins to cut rates, then we could begin to see the dollar begin to turn really south in a most more substantial way. But given that's still now being pushed out repeatedly, then I still think the dollar will be going up, and the exceptionalism does play a very important role, both on the structural side and on the cyclical side.
Tourst then one more question. We've got to go to breaking news. But I think this is too too important. Back to the idea of an x exis it goes out forever in the new idea percolating of an assim tote, I guess down to two percent? Is the assump tote a smooth lide path down to two percent out there somewhere or is it two point x percent?
So if you mean inflation, of course, then the issue is that inflation at the moment, as you know, is three point three. The FEDS target is that it should be two. Three point three is not two. So that's why if I'm seeing members repeatedly talk about, well, maybe we do need to wait a little while longer before we start cutting rates. And to your question, will we have an asymptotic move down from three point three to two points zero?
I think that the answer to that is absolutely not. We still have.
Significant tailwinds from fiscal policy, the Chips Act, the Inflation Reduction, infrastructure and all policies that designed to lift growth over the next several years. Likewise, we have a very strong tail wind from easy financial conditions. As long as the AI story and the stock mirk goes up, we still will have, like we saw this early season, strong demand
for airlines, hotels, restaurants, concerts, sporting events. So the short answer to your question is I worry that inflation is not going to come down in a straight line to two percent from the three point three percent where we are today.
Ristin Sluk, thank you so much. Okay, what we're supposed to do here is give Anastasia Ameroso of IICAP a massive victory lap nine months ago. Whatever, just shut up and get in the market and buy big tech. She absolutely nailed the twenty twenty four We were talking about AI and you are the chat GPT queen. I mean, let's be honest here, you're glued to it. How do you use chat GPT for our entire audience?
It's like what, Well, it.
Is a game changer, and I think it's a huge productivity boost. And if you haven't used, not to make any product endorsements here, but if you haven't used the Microsoft Copilot, I think you're really missing out the next wave of how search is going to be done, and whether it's preparing for an interview, whether it's preparing for a client meeting, whether it's needing a quick synopsis of a particular topic.
It is amazing what you can do with about five seconds.
Or need seven pages of I capitol brilliance. You're at O'Hare, you're planes delayed two hours, You're on a laptop with chet GPT. How does it help you create that research note?
Well, you know, first of all, it's a quick prompt.
It's a question that you ask, please generate five hundred words, and here they are. And by the way I have done this, I do not publish the chat GIPT as the research. But if I need a quick synopsis of a particular topic, that's the perfect way. I also do happen to do a lot of interviews with a lot of our asset managers, and what a great way to prepare and know the key points going into it, whether it's about the firm, about the investment strategies. So I think you can use a qu across.
What's great Paul when in the stage is at O'Hare, she's at Stanley's Blackhawk kitchen and tap she's chat GPT to get the correct craft.
So a station. How do we bring that into our investment thought here? I mean because for really eighteen months AI has been one of the key themes driving this market higher. Is that justified in your minds? Are you kind of as an investor all into that story and looking for ways to play it?
Yeah?
I think it's one hundred percent justified. And I know a little bit before we came on ere we were talking that maybe not a lot of people are actually using this across their functions right now, but I think.
A lot of people will in the future.
I think what's happening right now is the race to invest in artificial intelligence by hyperscalers, but also by other companies, you know, across different industry verticals.
I think there's a grave realization.
By companies if you're not going to focus on investing in AI now, you are going to be left behind. So why would you continue to hire the same amount of you know, workforce when you can automate certain tasks and boost your margins. So I think that's a universal sort of understanding right now, you know, from corporate development departments. That's what's driving the investment cycle and artificial intelligence.
That's why I don't.
Think it's a coincidence that the likes of Nvidia and Broadcom and you know, actually a whole suite of semiconductors are benefiting from the build out of the backbone of artificial intelligence.
You know, do I.
Think the momentum is a little bit stretched at this very point?
You know?
Do I think some exuberants crept into a stock like Nvidia. Yes, But at the same time, if the data center sales are growing four hundred percent plus year over year, that's fundamentals.
So all right, so in Nvidia, check I got that. How else are you suggesting to your clients that they maybe get some exposure to this It is, in fact a long term trend.
Yeah, it's a huge trend.
And in fact, the total adressable market for AI is going to double in the next several years, and it's comprised of, you know, a couple of different pillars, which is of course the hardware, the semiconductors, but actually the biggest chunk of who's going to benefit from AI is software. And it makes sense why everybody is chasing the semiconductor trade because you have to have the chips in place in order to trade the algorithms.
We get that.
Well, once you do, Tom, you know, what are the applications going to be beyond the copilot that are leveraging AI to boost your Okay, So.
I know this is brilliant. I know you're not going to talk about individual stocks, so I'll bring up Adobe is the kind of software mix as well. Take the fifty adobees out there, where do you see their income statements in five years?
Well, I think they're going to reflect the benefit of artificial intelligence. One thing Tom, that has recently happened to software. It was everyone's favorite sector just you know, a bit ago, but now that's not the case. For example, you have seen software revenues grow at twenty twenty five percent per year back during COVID times that is decelerated to about ten percent today, and valuations have derated very meaningfully. But I think that's an excellent entry point into a lot
of these software stocks. To your point, five years from now, they should That's what's going to catalyze the next growth wave in software is monetizing AI A.
Derating Paul is Anastasias speak for south south. The stacks have gone south, they've.
Derated well well, well, to be fair, some of them have gone side where some have gone south. But if you look at the multiple when from twenty times to five and that's back to those pre COVID normalized levels. So that's why I like that as an enter point.
Adobe growth twenty two percent in the heart of the pandemic revenue growth right now eleven.
Percent, yes, cut absolutely all right, So what I hear a lot is US versus non US, big cap versus smaller cap. But still some of the valuations in Europe still seem so attractive. But you know, I guess the concern is you just don't want to get in that value trapped there. How do you think about Europe and opportunities there?
Well, I think you have to look at the valuation but we also have to realize what the catalyst might be. And for the last couple of years has been really tough in Europe because you've got higher electricity costs, you've got meaningful of higher mortgage expenses.
And now I actually think the peak.
Pain of high mortgage rates is behind us in Europe. And I don't just mean because the ECB is cutting interest rates. I mean a lot of mortgages in Europe were floating rate mortgages or floating ray mortgages depending on the country, seventy or eighty percent of them. So that's a lot of you know, pain that the consumer had to absorb. But that's turning the.
Other way around.
And so I now think the real disposable income for the European consumer is likely to grow in this year and next, and business confidence, you know, French elections now with Stanley, has recovered quite a bit. So I like the valuation, I like the positioning, and now I think we have the Summer of Europe catalyst.
So what is the capital new money allocation right now in the American.
Market, Well, for the public markets, what I would say is, I don't chase the AI trade right here, right now, let's see a little bit of a pullback, but I would be reallocating to parts of the market they have seen some consolidation top and that's consumer finance for example. I think the consumer is just fine as an aggregate. I would be looking at consumatist questioning financials as well
as industrials. That's the public market side of it. But to your point, the other big part of the allocation is within the private markets and looking at things like growth equity, buyout, private equity, private credit, and of course infrastructure.
That's where we see some of the flows going.
This has been great. Thank you so much for the ch GPT. I've never used it.
Try the copilot, that's the game.
I'm signed up for it, but I never used it. Chat GPT how to get afterthought to empty the dishwasher?
Right?
What are they going to say? Anastation? Thank you so much for right capital.
Ah, Yes, I love this.
It's because it's about the finance bros. They're not six five, are they?
Blue Eyes?
But they are sparking a popular dish specifically made for them at Chipotle. Okay, it's called the Chipotle Boy Bowl. It's double chicken, and it's white rice. Okay, and it's Chipotle says it's specifically for them because they put out
this post and guys, yes, it's for finance guys. It's called the Chipotle Boys Starter Pack because they showed a picture of it on X and it had aviators, AirPods, MacBook, a glove box full of Chipotle napkins, and yes, the popular puffy vests that apparently they all wear.
That it's July, it's like a heat wave, and Damien's in the Patagonian puffy vest.
So they're saying, these guys have sparked an interest in this particular bowl with the double chicken and the white rice, so they decided to make this limited time edition just them. But you have to go to the app to get it. It's a place you can get it.
You have to be digital to.
Get it, Yes you have. You can't.
It's not on the menu post in the restaurant. Nope, Nope, you got to go in the app. It's called the Chipotle Boy Bowl. The Finance broke.
They didn't call it the Trust because that's what you have to go. You go to Sweet Grease to get like four meals for the kids.
Right to Trust fund yep. Exactly.
Check out next for that.
This one's the deal. I like your music.
Do that more often. I know it.
He likes it.
It's a good like little all right. Personality hires. This is the latest workplace trent. So they're they're going away from skills and they're going to personality. So what we're talking about with personality hires, those are have like that certain charm that juno sequa. You know, they they know how to talk to people. Yes, they they're they're warm and fuzzy. They're saying because camaraderie is hard because of
the hybrid schedule. So what's happening is that it's causing this animosity with the coworkers because they're saying they have to pick up the slack for these personality hires because they're not doing enough work. So it's this tension now in the workplace that's happening.
Trying show next week from HR it's sensitive.
Time correct correct.
I would say it's out in the literature. It's amazing how there's a lot of major shot at the Stanford University who's really thinking about this. But there are many many others. I mean, there's a lot of cross currents here. In the dead of summer as we go to the launch of the business seasons. You're killing me. Here can I remote? Like, if I'm up on HR, can we do a zoom remote for the show? Lisa go away? What do you got next?
Okay?
Taylor Swift, you know, she sparked you know everything. You know when she's at football games, you know, the ratings go up where she's everywhere, everything sells out. She's helping out the economy in certain countries. Okay, So now the Washington Post is saying TikTok is building this entire like InApp experience around Taylor Swifts so users they can get
these digital profile frames. They have these in app friendship bracelets and if you complete like certain tasks, you get the all limited edition Swift themed profile frame that everyone wants from your prism.
And we cover this, I think on Tuesday as well, where the social influencer thing sort of is off the bloom are the kids is glued the social influencers like they were.
Oh yeah, oh most definitely.
I mean that's how I hate to say, but that's how my daughter gets all her beauty products from watching what these other people post. But it just goes to show you that they have the influence, like Swift has more than thirty two million followers on her TikTok account, right, But it does spark this this cause for other people to buy products or to want things that they want. But here the thing you have music producers who are saying that it's taking away from the emerging artists who
were trying to get on take care. But I mean emerging artist Taylor Swift, it's hard.
I had the clearest memory when she was an emerging artist, and people forget that she was there. She did a thing. She was Paul I think sixteen years old and came out def Leppard's playing and this tall blonde girl comes out from the back. No one knew who she was, Who is this? And she had like one country hit or whatever, and she was literally I think sixteen, and it was to see her and Joe Elliott work and the rest of def Leppard, it was like, who is this?
This person is different. That's it the newspapers today, Lisa, I'm going to tell you there. This is a 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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