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Turston slock a 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?
I still think it's strong.
But I do think that the weather report you just had 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 balance sheets 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 several quarters, we still think that the tailwinds to growth are very strong from fiscal policy and from easy financial conditions.
I'm 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 are 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, with 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 FED having some cut rates.
Are you surprised is 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 languagey rates go up on credit cards, the languagey rate go 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 goes same thing for corporates. You began to see the full rates go up for high yield, the
full rates go up for loans. So, in other words, balance sheets that had a lot of debt were first hit by the FED racing rates. But what really is unique at the moment, that is the answer to your question, Paul, is that for consumers, they have locked in during the pandemic, mortgage rate, as we all know, ninety five percent are thirty five fixed at.
Very low levels.
Likewise, for corporates, the vast majority of credit markets is I G and IT companies locked in and turned out also very low interest rates. And as a result of that, the transmission making has just been weaker than what it normally is. And that changed with a FED pivoting to dubbish 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.
Tursan, 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 conversations doubled? I mean, I mean the number of mortgages below four percent is doubled in ten eleven years. And touristen, 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'll 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 rag pace having two cut rates as quickly as they thought just six months ago.
Were thrilled you with us for the entire half our tourist and slock. You know, we're gonna go to go to Michael barn News, but I'm gonna really come up on beating this 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 as a few others as 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 Unversity 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 expect much higher inflation than high income households. And it's general 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 fit say 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 some important differences across 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 asset 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 estate, in
particularly 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, multifamily, 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 exceptionalism from an economic perspective, you know, the commercial rule state issue notwithstanding, how real is that the US economy strength visa 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 it's closed. It is exceptional because of large capital markets, much more spending and broadly speaking across the board in occluding 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 sot 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 brakes will be higher for longer in the US than elsewhere. That's, of course what we saw with easy b cutting rates they being ends today is staying at hold, but now signaling clearly the rake 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 FED 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.
Turst 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 xxis that goes out forever in the new idea percolating of an assm tote, I guess down to two percent. Is the assump tote a smooth glide 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 moved down from three point three to two point 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 in all policies that designed to lift growth over the next several years. Likewise, we have a very strong tailwind from easy financial conditions.
As long as the AI story and the stock market goes up, we still will have like we saw this early season, strong demand for airlines, hotels, restaurants, concert 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.
Tristin Sluk, thank you so much. It's with Apollo