This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Jeffrey Rosenberg,
portfolio manager, Systematic Multi Strategy Fund at Black Crack. I don't know which way this is going to cut, you know, Jeff. We talked to Steve Major of HSBC at Bloomberg today and there's this whole idea of okay, we've had this move, Now which way does it cut? Are you betting here on a direction in the yield market, particularly off a quiescent jobs report.
Yeah, Tom, I think when you look at this report, it's there are some comments, as Jonathan was just talking about, between the wages, but the headline is really a story of gradual labor market normalization, and gradual labor market normalization basically continues the market expectation that the hike of the last meeting was the last hike, and and that's the big change in the in the yield market outlook is that we're seeing the effects of normalization in the labor market. Yes,
wages will follow, maybe not. That remains the uncertainty. But you look at the ECI report, you look at some of the other broader reports, what do they show you? They show a gradual slowing in wage inflation, and so that feeds into this narrative that the FED can be done, they can wait. And so for the for the yield outlook,
it's it's really about the shape of the curve. What we saw this week the steepening, and I think that remains to be the message that that's our our main focus in terms of our position.
Your broad mandate, which spread gives you the most information right now? Which comparison of two yields gives you the most information?
You know, you can look at lots of different measures. We tend to like the five year five year forward. You know, it's a it's a nice measure. It captures both the level and the shape of the curve. And it's moving. And you know, we've seen a significant move this week, and and for good reason. The back end of the curve is definitely a bit more challenged when you look at historic levels a five year, five year forward.
If you look at I think you're showing here, you know, we look at the two ten spread, and I think that's really where the market pricing is a little bit vulnerable. When we look at all of the information that we saw come out this week, you know, and and away from kind of the monetary policy focus, it's it's really
about fiscal policy. We had the refunding announcement, and you see very very compressed term premium both in real and inflationary space, and that's I think the vulnerability that we're looking at.
Jeff, I have to go back to something that you're saying that what people basically are assuming is if FED is done, they're not going to raise rates more.
And that's what you're seeing today where.
There's a little bit of a move at the front end, but really the move that you're seeing is at the tenure yield once again reaching four point two percent, the highest levels going back to November.
This is the key question.
Is the FED going to take their foot off the break at a time when we're still seeing wages go up? Is that basically the assumption of markets now looking at a FED comfortable of three percent inflation over a longer period of time and not needing to get down to two percent so quickly.
Well, it's a really good question, Lisa. What does taking the foot off the break mean. Does it mean not doing another hike that they signaled last meeting two men days ago, or does it mean just simply leaving rates unchanged. Or does it mean as the bond market is anticipating that they move to cutting interest rates? And I think as we progress this debate, we're going to increasingly talk not about the next FED hike, but how much inflation
decline if we continue to see that decline. How much inflation decline you need to see before the Fed has to start cutting rates, Because as inflation declines and the Fed stays pat, real interest rates, the real Fed funds rate, which is the transmission mechanism for monetary policy, that begins to actually increase. So how much actual breaking does the FED tolerate, not by their action, but by further declines
and interest rates? And that's going to be the metric that Poul is really telling you about in the press conference from last week, that was really the story is that as inflation comes down, their policy gets tighter, and how much how willing are they going to be to
see that tightening in policy? Again, this is all predicated on this expectation that will continue to see further declines in inflation, and obviously that changes, the whole story changes, but that is kind of the natural breaking that occurs without the FED having to do anything.
Just quickly here, Jeff, it seems like there's been a narrative shift over the past couple of weeks. We're higher for longer is more acceptable as well as a soft landing type of scenario.
How much are you leaning into this and.
Adjusting your expectation of yields being higher for longer, but also risk acids continuing to chug along in the meantime.
Yeah, I mean, part of the problem with adjusting too much is that the market pricing for so many risky assets is already there. So when you look at is there a lot of opportunity in credit markets, for example, for the soft landing being realized, you see that you're pricing in many cases mid expansion type levels for expectations. You know, you look at the high bond market, for example,
it has been on a tightening tear. It has never really reflected the same degree of recession fears and recession probabilities that you see, say, you know the consensus economics profession now you know moving away from pushing down recession probabilities. You never really had that price into the credit markets, this huge disconnect between you know, the sluice, the credit indications in the surveys, and what's pricing the market. So
there is an opportunity. It's really about carry rather than price appreciation because a lot of that price appreciation already happened off of the November loads of last year.
Jeff Rosenberg, thank you so much with black Rock this morning, right now on this jobs day, with all that we see in the market's futures of fractionally up as well, without question, the conversation of the day on having the courage to be in this market given the sum of all our fears. Edward Yard Denny joins as president of your Denny Research. I can't say enough about his prescience
once again across many decades. In October of last year, reaffirm ed Yard Denny how a bull acts and moves forward given them many fears.
That are out there well, I've been thinking that we've been in a recession since early last years. We've discussed before it's just been a rolling recession. Now I think we're in a rolling recovery, and I think increasingly the markets obviously have discounted that, and the so called Godeaux recession still hasn't shown up. It may show up at some point, but with regards to the market, my year end target for the S and P five hundred is forty six hundred.
We got there a.
Few days ago, so I'm thinking I'm not going to raise my target forty six hundred.
I'm going to keep it there.
I think it's going to turn out that the expectations at the beginning of the year was that we would have a pretty lousely first half of the year and a good second half of the year for the market.
I think it's going to be the reverse of that.
I think we've clearly had a very good first half, and I think the second half is just going to be challenging. I don't think it's going to be a big downer. I think it's going to be kind of sideways. September is coming, and that obviously could create some problems but by year end, I think we'll be at forty six hundred, which is where we were a few days ago.
How much are you buying in to this idea that we're going to see higher rates for longer particularly in duration in ten year notes, in thirty year notes.
Well, I've thought that on short term rates that the FED was pretty clear what they wanted to do, and I took them at their word. I know there's always skepticism and the feeling that the FED isn't.
Going to get it right, but they've been saying.
They wanted to get the short term rate up to a restrictive level. I think they're there at five hundred quarter percent. I don't think they have to do anymore. I think they're just going to leave it there. What is interesting is, my friends, the bond vigilanti seem to be settling up, and I thought we'd hold around four percent, But here we are back at the November high of.
Four point two percent.
So it's looking a little dicey on the bond side, and I think suddenly we have to take into consideration that while the Fitch rating agencies downgraded the US government debt was sort of the event that focused everybody back on the deficit. The fact of the matter is, we've all known that the deficit is a problem. We've known that fiscal policy is profligate. It's just the market cares about it now. So if the market cares about it, I've got to care about it.
At a certain point.
Ed, when does the higher rate structure at the long end, at the ten year, at the thirty year end, not on the short end threaten your bull thesis.
Well, I think that it already done its damage in the one area where the rolling recession is hit, and that's in housing. But even there we've seen of late the housing markets holding up pretty well, at least in terms of prices, and there really is a shortage.
The real issue is the consumer.
Will higher long term rates knock down the consumer? And I don't think that's necessarily the case at this point. The consumer obviously depends on a certain amount of consumer debt. But the key is employment. The key is wages. And while employment we can somewhat, it can always be revised
one way or the other. We know that the waging number at four point four percent well exceeded the Well, let's make it zero point four because we're doing month to month, so zero point four, we know that it exceeded the CPI, and so real wages are increasing, and consumers have a lot of wealth in their houses. The baby boomers have a lot of wealth. They're retiring and
spending it. So all in all, I'm not quite sure how a increase in the bond yield knocks the consumer down, unless that you just get some sort of banking crisis event again as a result of that.
Just quickly then ed.
How much are you thinking that the FED is still gone enough even if we are seeing this and sticky inflation and wage pressures.
Well, it looks sticky, but I think the productivity numbers are starting to come through. Yesterday we had a remarkable increase in productivity of three and a half percent. It was so remarkable that even a bullleg myself didn't quite believe it because it also indicated that employment was flat, which wasn't really the case as we know based on the monthly data. But I think productivity is going to make it come back, and we may very well see wages rising faster than prices.
And long ago and far away on a Friday evening, lou ru Keiser would sit there with you on the couch, and he'd say, what's it look like? Long term? Modern day long term is nine months, maybe it's a year at Yard Denny for the mere mortals watching and listening, where long term is three years or five years. Frame out the growth you see in revenue of our equities. It seems to be pretty darn good, like four percent whatever. Give us a yard Denny three year perspective.
Well, I actually like to do a decade decade perspectives. And this decade, I think started out with all sorts of problems.
At the very.
Beginning of the decade, before the pandemic hit, I started talking about a possibility of the Roaring twenty twenties with productivity making a big comeback, and that looked absolutely delusional there for the past couple of years. But it's looking like it might be a reasonable way to think about the rest of the decade. Just but robotics, automation and lots of technologies there that are going to boost productivity.
So I think from a revenue perspective, you know, revenues tend to increase along with nominal GDP if we get a productivity boost here. There's no particular reason why revenues grow five to eight percent.
Should we fear the concentration of seven, eight, nine, ten mega names The meganames have reported two of them in the last twenty four hours. How should we interpret the durability of what we see from these names?
Well, first and foremost, I personally try not to get too emotional about the markets. I mean, it's it's easy, it's easy to save and hard to do, and I do go on the same roller coaster as everybody else. But if you try to control your emotions, you just have to deal with the facts. And the fact is
we've got I call them the megacap eight. We got eight companies that account for twenty seven percent of the market cap of the S and P five hundred and they are great companies, as Amazon demonstrated with its latest journeys report, and I think they're going to continue to have an outside impact on the market capitalization of the market, which means we have to accept the pees higher because they're you hire.
Ed your dorney, Thank you so much on a Friday morning, mister Yourrdney research friendly kids listening.
Barbie still has legs to confirm that just confirming, Oh my god, Tom forday just now, Tom's going to catch up. Catching up yesterday was really revealing as well, some insightful comments you made on Apple where you essentially said, and you've written about this, you think maybe the stock had gone too far. We're down this morning by one point eight percent. You're aware of the bullish thesis, Tom, there's this upgrade cycle, lots of people sitting on old phones.
They're all going to upgrade and buy new ones. Where is the upgrade right now going into the new launch of new products in a month or so.
So the most concerning statistic from Tim Cook on the call yesterday was that consumers more than half are already paying for their.
Apple product on an installment basis.
So I think the low hanging fruitsman picked to the extent that that was the opportunity for Apple to get you to go from buying your iPhone or having your iPhone essentially fully subsidized by the carrier, to now having the consumer.
Pay for it on an installment basis, often with no interest.
And I also am concerned that the carriers are going to subsidize the fifteen to a lesser degree than the fourteen or thirteen. Yes, they want more consumers on their five G networks where they've invested billions, but their times are tough too right now, so that comments on the iPhone are concerning, and I think that's what's weighing the stop.
Time away from your neutrin call and to go to the Apple fanboys and all that. The bottom line is, it's an ugly June. Ugly July. It happens every year. We have to wait for September. Somebody with a black turtleneck walks out on stage and tells us the second coming of Apple, and OMG, the stock goes up. Why is that going to be different this time?
It's going to be different this time because I think that they just told us that the September quarter, where they're going to tell us about this new wonderful iPhone, is going to have negative revenue growth, and that while the iPhone will have an improvement from the negative two point four percent it did in the June quarter, it'll
likely be negative as well. So yes, they'll be touting the every new feature on the iPhone, but they're promising made about the financial impact are pretty disappointing.
The Open Prayer Services picks it up and crosses how far out do you go where services catches up and advances and overcomes iPhone dynamics. Is it a three year lookout, is it out ten years? How far out is that magic point where services become really important?
So the mass suggests time more like five years when you think of the relative growth rate of services to everything else.
But if you look at the.
Quarter, hardware was down, iPhones were down, iPads were down, laptops were down.
Services was up. That's great news. And I do believe over.
The long term, Apple is a service is real possibility. You pay two hundred dollars a month, you get the latest and greatest iPhone, You probably get Apple TV and other things, and then you're not thinking about the fact that you're essentially paying two thousand dollars for that new iPhone. You're just thinking about the two hundred dollars a month and getting the latest and greatest iPhone.
I think that that's the.
Opportunity long term, But mathematically, I think it's more than five years out before services is more than half revenue.
So, Tom, you did decrease your price target for Apple, but you increased your price target for Amazon after they delivered much better than expected results and suddenly everyone's heralding Andy Jasse as.
The hero of Wall Street.
How long can this be the case for him to keep cutting and keep beating on the top and bottom lines across the board.
My best answer right now is that this is twelve months.
So they just had their good June quarter, their good outlook for the September quarter. They'll have a good December requorder and a good March quarter. I am very concerned that at some point reality sets in and to the upset that these cost cuts are making them less customer centric. That's going to slow the flywheel price convenience selection. So I think the next twelve months they're good. Day one of the next year.
I'm concerned some people might argue that the cloud business is going to take overall. It has done the heavy lifting for all the profitability of this company, and it showed signs of picking back up. There'll be questions about whether it's gaining market share versus Microsoft Azure. How long can that really be the main flag bearer for the company?
I mean, is not enough to really.
Offset what you see down the line on the customer service side, in the sort of retail side of things.
The answer is not long enough.
So we're cheering a twelve point two percent growth rate compared to a fifteen point eight percent growth rate, and they werefore in the March quarter. Though it is better than the ten point eight they suggested the month of April. That's the slowest growth rate since AWS was launched in two thousand and six. Andy Jase is bragging about double digit growth as if it's.
Not going to be sustained.
So a lack of double digit growth for one of their most important profit centers is hugely problematic, especially given.
The current state of an e commerce business.
Amazon collectively needs something like three point four billion for an incremental basis point or a percentage point revenue growth. They're going to need advertising, they're gonna need video, they're gonna need healthcare. They're gonna need something else to come in to take the baton from AWS.
Over long term, it's on.
Can you describe how service on the e commerce side has deteriorated over the last year?
Yes, So the best example is anecdotal.
So I had a defective smoke alarm that I purchased on Amazon not that long ago.
They would say, Brosar it's defective.
Will send you a replacement, put the whole one on your porch and UPS to pick it up for free. Now they want seven to ninety nine for UPS to pick it up, or they want me to go to Whole Foods Wightline of Whole Foods to return it. So that to me is one example. What's going to happen is I'm going to start thinking more about going to Target. I'm going to think more about going to Walmart, to Costco, to other retailers. And I think that's hugely concerning for Amazon, something I'm monitoring closely.
It's anecdotal, but I had the same thing from so many PayPal Tom Tomfode if Aidavis and greatco on Apple got into the Innix.
Let's turn to politics right now, the politics of the United States of America. We do this so much for our international audience. Wendy Schiller has advised us with Brown University, the Tommins Center for American Politics. Wendy, I want to go to the word culnulative. We're using it in economics now in the FED we have culnulative indictments. What is the difference between this single event of yesterday and the fact there's been one, There's been two there's been three,
and dare I say there could be. What's the difference?
The distinction It depends on the audience.
Tom's a great point is for Trump supporters, you know, really very loyal people who've stuck with the former president, this just emboldens them, keeps them more loyal. You know, their team is losing and they're going to basically be on that team and nothing is going to shake.
Them, So they get more emboldened.
But I think it continues to turn off independent voters who were the swing voters and some of these key states that former president Trump lost in twenty twenty. So the audience that gets disgusted by sort of three indictments that that audience was leaving anyway or already left.
They're not going back to Trump.
But the Trump base, particularly coming up into the primary, is more emboldened and wants to defend their president. We'll see if these donations keep coming in, the small money donations that he's been using to pay its defense funds, that's going to get more expensive. Does that money keep flowing in right.
Well, Professor shul I want to find fascinating here is the zeitgeis Oh in the last twenty four hours. There's one idea of how small the Trump audience is yet obviously very loyal and all that, Where are what are the other Republicans doing? Are they waiting? Are the Republicans moving to independence? Are they moving to a relative conservative like Biden? I don't believe they're going to move to
a liberal democratic stance? But what are those Republicans doing right now that have had it over the indictments?
The Republicans that are not for the former president are just holding their breath, I think, and thinking, Okay, what do we do? I mean, Republicans are really good about coming home to the party nominee.
The exception was twenty twenty, But typically.
Even when there's division, as we saw on twenty sixteen, Republicans come home to the nominee and they get out the door and they.
Vote in presidential elections.
Right now, the question is will anybody, including desantists, come up and challenge the president enough to make it worth investing in somebody else, either with money or work with your votes months from now?
But essentially I think that's the stance right now.
Is this person really going to make it like the House Republicans already all in on Trump.
I mean, that's it.
That game is over so there with Trump, But the actual rank and file we have to wait and see for six months, you know, when the reality that this man will be the nominee again and that he could be president again really hits home. Do we see any diversion in some of these Republican Party voters?
And that seems to be what Elaine came Mark of Brookings said yesterday that she doesn't think that Donald Trump will be the nominee in the end, and that essentially people will move away from him as it becomes clear that he will not.
Win the general election.
From your vantage point, what's sort of the tipping point and who is the likely person to emerge at a time when yesterday we were talking about Tim Scott and how he has become the Wall Street darling in some ways, at least when it comes to fundraising.
Yeah, you know, Elaine's been politics a long time and knows what she's talking about.
But I've shifted.
I thought you wouldn't get the nomination, and now I just don't see enough people getting out the door to vote in the primaries coming up six months from now to get knock him off.
His perch.
I think we have to see the.
Iowa polls seem to be shifting a little bit. DeSantis seems to be gaining some ground. If DeSantis can gain a little bit of ground in the next couple of months, then he becomes worth a second look for primary voters and investors, campaign contributors. So we just have to see if he can get any momentum, even if he's losing to Trump. Momentum will probably you know, reignite his campaign.
Then he becomes sort of the obvious option.
But he's got some real liabilities in the general election as well, So I'm not sure the electability factor for DeSantis actually you know, gets him over the top and defeats Trump and the primary.
One thing I keep thinking about is that the entire pitch for President Biden to run again is that he is the only Democratic candidate who could win against Donald Trump. This though at a time when his grassroots fundraising is really lackluster, He's not getting the small donations that really indicate a healthy popular campaign, and his popularity ratings have flagged. Does it look less and less likely that he can win reelection if he's against anyone except for Trump.
Yeah, I mean, I think that's the that's a big question, Lisa.
But you know, when we look at the economy, which at the moment seems to be settling it down, and the doom and gloom and DIYer predictions seem to be diminishing on employment stays relatively low, inflation gets under control, a year from now or more than a year from now, voters are going to say, Okay, things are pretty good, things are pretty stable, and if Trump is the nominee, then we go back to chaos. I think that, in the end is literally what saves Joe Biden and gives him a reelection.
Wendy Shita, Thank you, Wendy. Wendys you at a brand university this morning.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can watch us live on Bloomberg Television and always on the Bloomberg Term. Thanks for listening. I'm Tom Keen, and this is Blumber