What If the ‘Powell Put’ Fails?

for the first time in a decade. Then Wednesday and Thursday saw more trading volume midday than at any other point in President Trump announced fresh tariffs, and on top of all of that, it's been the most hectic period of the second quarter earning season. Right. And if all of that is not crazy enough, uh, don't worry. We still will have our traditional the craziest thing I ever saw in markets this week? And Sarah, as you know, I get excited on podcast today, I'm especially excited today.

And you know why why we have a new hotline, What goes Up Hotline. So if you saw something in crazy in markets, please give us a ring and leave a voicemail with what you saw. Sarah, I of course forgot the number. Hopefully you have the number handing, Oh have it on hand. I memorized it already it's six or six three two four three four nine zero, So feel free to give us a call, leave us a voicemail of the craziest things that you guys have seen in markets, and if it's good enough, maybe we will

even play it on the show. That's right, Well, two things that are not crazy are two guests this week. First guest is joining us from Footstee Russell. He's the managing director of Global market Research, Alec Young. Welcome to the show. A great to be here, guys, And also joining us from Bloomberg Television. He's an achorman and a reporter. Romaine Bostic and Sarah. I just want to paint a

picture for the listeners who don't watch TV. I think Romaine is widely considered the best stress man on on Bloomberg, no doubt. Actually like I try, I try. We don't have a hotline on our show, though, I'm already to you know, two minutes into this podcast and I'm already jealous. You're gonna have a bigger budget, not a bigger clothing budget. I'll tell you that a Romaine dresses like he belongs on TV. I dressed like I should be selling TVs down at the mall, you know, like, hey, how about

a six an zenith for you? Anyway, we got notes from Alec and his people about, you know, some of the research and stuff he's been up to recently. I gotta say he really nailed it. I gotta give you a round of appause, Alec. I just want to read a couple of the talking points from from your notes here. Now, remember this is a week where the Fed cut rates,

but uh, did not really signal a full on easing campaign. Uh. You know, Powell referred to it as a mid cycle adjustment kind of signaling maybe one or two cuts, not a full blown easing campaign. That disappointed a lot of people. The next day we got President up announcing new TIFFs. Let me just read you some of the notes Alec wrote before all this happened. Uh. One, don't confuse the recent US China trade truths within all clear and clearly

it's not check. And also, markets maybe over extrapulating both how much the Fed will ease and how much it will help. Now they definitely over extrapolated how much power is planning to ease. Now, the question is how much will it really help? Is that sort of a top of mind thing for you, Alec is you know, will these race cuts really be what the market needs to see?

This data economic data firm up? Yeah. I mean I think the markets have been such a one way bet for for months, um really buoyed by this idea that of the power put and fundamentals are a little bit shaky, but it's okay. You know, the Fed's got our back that you really have to scrutinize, you know, kid, the market be over extrapolating things. And I think on a couple of fronts, One, will the Fed just numerically cut

as much as expected? If we look at Fed fund futures, they're still pricing in about one eight on the two year note in a year versus there are the two year notes at one a d excuse me, and the Fed funds is two and a quarter. So the markets pricing in about forty five basis points of additional easing over the next year. So that's that's two more cuts. And and I think Gairman Powell's statements were more like

we did an insurance cut, we're gonna watch. We're not ruling out further cuts, but don't confuse this with you know, a month after month rate cutting cycle, So the market may have gotten a little ahead of not only the amount of the cuts, but then, as you said, what's the impact, because things like housing will respond very favorably to lower rates, a lot of the traditional economic metrics will, but a lack of capex due to trade related anxiety.

I'm not sure that that's the kind of metric you know, um CEO CFO competence. I'm not sure that that's the kind of metric that is as sensitive to modest reduction in the FED funds rates. So, given how much markets have run on the back of one positive catalyst, there's quite a bit to lose if the markets maybe overshot at skis a little bit on the positive impacts there, Alec, you've also called this a quote unquote show me market.

Some of the latest data that we've got and has been some of the I s M data which came in, it wasn't It wasn't great by any means. Mis expectations still not in contractionary territory prices paid or lower as well at this point in time for it to be a show me market, now that trade is back in play and people are waiting for the Fed to ease. Is it better if economic data is good but not that good or at this point do you need a little bit rougher rougher economic dad to come out. Yeah.

I think in the current macroeconomic environment, it is safe to say that bad economic news may be interpreted in a positive way by investors, given that, you know, additional FED easing is so important to the macro backdrop right now. We even saw that with the latest I S M report. It was a little soft and stocks actually welcome that news, so that we're in a very tricky environment right now.

I call it a show me market because we've run up so much on hope versus actual you know, fundamental facts. The global leading economic indicators are soft. Earnings growth. While coming in better than expect it is still pretty weak. It's only up low single digits year over year. Valuations aren't through the roof, but we're about seventeen eighteen times forward earnings, So you need to see investors want to show me these great profits because on trailing earnings the

markets much more expensive. So um, I think we're in that that show me phase. To really build on this rally, we need to see that investors positive hopes are coming to fruition that their their hopes are being fulfilled. Now, Romane, you spend a good part of your day talking to really smart investors, analysts, strategies. What is sort of the consensus out there is what Alec is saying? Does that ring true to to what a lot of the people you're hearing from? You know, what is sort of the

what's the word on the street from Romans? Well, I think a lot of people. I mean, the cut itself wasn't really a disappointment. I think most people weren't really expecting more than that. But I definitely think the communication that we got during the press conference, Uh, you know, it created a lot more confusion. Uh, there were a lot of folks banking on this idea that we were that this was more than an assurance cut that we were embarking on, uh a little bit more of a prolonged,

if even short, but still prolonged easing cycle. Remember the communication that we were getting out of FED members even in July Bullard clarata or early July was pretty much made it clear that we could potentially get, first of all, more than twenty five basis points in one fell swoop but that we were released going to get more than

twenty five basis points this year. So a lot of people walked away from Wednesday's press conference with this sense of or confusion, I should say, of whether we were going to get maybe another twenty five basis points later in this year. Something in the market is largely priced in not only a twenty five, but really they've been They were pricing in about thirty basis points uh prior to the meeting, uh, and then once the meeting ended, you kind of saw a lot of fluctuations as people

were trying to figure it out. I don't know if and I want to go back to a point that Alec made too about just sort of the impact of the rate cut, because there was this sense to that, what is Powell really trying to do here? If this was about a reigniting inflation or reigniting inflation expectations, he clearly failed on that level, at least in the short term.

If this is about sort of reigniting business confidence, which is, let's face it, probably the weak spot of the economy right now, what does twenty five basis points do for capex? I mean, cost a capital hasn't been really an issue for companies. This is a confidence game for companies right now, and the confidence really has nothing to do with the FED. It has to do with what's going on in the White House. And I'm not sure that monetary policy can

fix that, you know, Alec. A lot of people are clearly making the connection to the mid nineties, when the mid cycle adjustments from the FED a few two or three rate cuts to sort of, uh, you know, react to the Asian financial crisis, long term capital management, that type of thing. Do you see that parallel in this case?

I mean, is that a valid comparison to make? I think, to really to know if if just one or two insurance cuts is all we need, you kind of have to have the answer to how does the whole trade situation play out? How does the deterioration in Europe and China? You know, is that about to bottom or is it

just sort of getting started. There's a lot of unknowns, and I think, um, you know, sometimes people do a few things when they read the FED tea leaves One they I think, over extrapolate how much more the FED knows than the rest of us. Not to take anything away from them, but at the end of the day. They all have their Bloomberg terminals and they're doing what a lot of professional investors that scrutinize them so closely

and reporters are doing so. You know, they're not omniscient scions, right, UM. And the second thing is, I think, unfortunately Chairman Powell seems to be maybe overly sensitive to the markets when the markets were very volatile. The more volatile the markets are, the more devishes commentary just in currently seems to be markets had recovered. To get him in front of the microphone, he doesn't sound as dublished. I think that seems to be the pattern. He's he's very he he's not a

PhD economis. He comes from a market background, very popular in the in the financial community. I think, more in tune with market dynamics than maybe some of his predecessors, less of a formally trained economist. UM. So I'm very confident that UM, if we need further insurance cuts, the FED will be there to deliver them. The problem I

don't think. I think the market was getting comfortable today with the idea that the UM, the FED is still has their back, even though the communication post meeting could have been a little bit better. The wild card here is trade, which people thought was on the back burner. They're continuing to talk no imminent breakthrough, but it's not. It's not deteriorating. That's obviously changed. Um So, I think I think it's really it's not so much on the

insurance side. It's on the growth side of the ledger that investors are are struggling a little bit now. You know, I wonder if you sort of put yourself in the shoes of Jeromee pal Uh and even if you're thinking, well, we really are going to do a full on easing campaign,

is there a danger in signaling that right away? I mean, is it the type of thing if you have a hungry kid in front of you and you're trying to get them neath the their broccoli, you don't want to let them know that there's ice cream coming up behind it, right I mean? Is it is there a danger in cutting a quarter point now and signaling more to come where it's sort of differs that behavior that you're trying

to influence down the line. It can be self fulfilling, and there's always that risk that the markets will think, well, maybe the Fed knows something we don't. Maybe it's worse than we thought. It can also you know, give false incentives and get people to take you know, undue risk in the market. So you know, there's no perfect answer. But I think the bottom line is that for most of this year, the trend and risk assets has been up because the feeling has been that the Fed is

going to be very supportive. I think now the narrative is shifting to growth risks. The focus is squarely on US China trade. Both sides wanna save faced domestically. I don't see China backing down from this latest news from the President. So if we don't see that, if they don't try to diffuse this, the next conclusion is, well, maybe they do something confrontational. How would the markets take that.

I think, given the markets have really priced in global growth is bottoming, trade will be favorably resolved largely because of policy accommodation. I think that has to unwind a little bit at the margin. Policy accommodation underwhelmed the little The Feds a little less deverish than expected, admittedly from a that's relative to very devish expectations, and on the trade front, clearly things are a little worse than expected.

So it's sort of a double whammy for for risk assets, whether it's equities, US are globally, probably more so globally, a bigger negative globally where they have less of a strong consumer to playoff. And for credit um, for high things like high yield, it's really um. It's really an incremental negative. Your insurance isn't as strong as you thought it was going to be, and the risks the reason you need that insurance is a little greater than you

thought it was gonna be. When we came into the office Thursday morning, the probability of a rate cut for September was around Then President Trump dropped the tweets saying that tariffs on three billion dollars of extra imports from China we're going to go up to as September one, and that probability shot up to more than romaine. How do you see the relationship between trade and the Fed

playing out here? Well, I mean, the market was largely pricing in this idea that the best case scenario, and part of that best case scenario was predicated on two things. Is that the FED would be there as a backstop quickly if things really went south, and that the trade dispute is still largely in the hands of one man who could turn on a dime tomorrow if you really

wanted to and resolve this. And so there was always this this sort of faith that the President would only go so far that if the markets, uh, you know, got two out of whack, where the economy was getting too out of whack from the trade war, that somehow Trump would pivot. Now, I think that might have been a little bit wishful thinking, and I think somewhat of the reaction that you're seeing in the market right now is this idea that they are going to try to

test the FED. They are going to try to test uh, the White House and and and the legislators as well, uh to sort of, you know, create some sort of resolution to all of this. And I think this tantrum that you could potentially see in this market has the potential to sort of create a really bizarre feedback loop where Powell and companies sort of still have to sort of look at the data and not really sort of just give in and you know, give the market their

pacifier every time they start whining. But at the same time you have to understand that right now, this economy is and the markets are intertwined in a way that I don't think we've really seen, at least in sort of you know, this current generation. Now it's a great point because when you think of how we started the week, it was with some Trump tweets about oh, maybe this won't be resolved until after the election, and they'll they'll

deal with sleepy Joe Biden. What do you think that's just posturing or yeah, you know, I don't know what China's position is, but but I can tell you, I mean, I think Trump has made it clear what he wants. I also think you can read from the t leaves with regards to the Trump administration that they are in

tune to what's going on in the markets. They are in tune to what's going on with the economy, and that potentially they would make some sort of concessions if they thought that the damage was going to be severe enough to damage the economy and obviously damage Trump's re election champers to switch gears a little bit. Uh Roman. One of the things I don't envy you is when an earnings report comes out and you're reading it live

on TV. They're trying to trying to make the sense out of headlines on an earnings release right as they hit. But I'm curious if you if you step back a little bit. I mean, we have almost three quarters of the markets reported for the second quarter. Any big takeaways for you that maybe we've missed well, I mean, the big takeaway here is that we are seeing declining earnings,

uh period declining earnings. We're seeing declining revenue growth. Uh. These companies are still growing, and I think you're seeing sort of almost sort of a you know, this sort of corner being sort of uh notched out into the market where you have companies that are still able to grow, they still have a healthy demand from their customer base.

That's where investors are flocking to. But I don't think you see a lot of confidence amongst investors in a lot of these earnings releases that this is something that is sustainable. And I'm just talking about an aggregate. There are there are some clear exceptions to this, but an aggregate.

And I think that's why you're seeing this sort of rotation into defensive and then back into cilic and then back in defensive, because people are really trying to figure it out, you know, so we're half almost halfway through the earning season, and I think you have a clearer picture that this sort of rebound that a lot of people are expecting in the second half of the year, if it does materialize, it's certainly not going to be

as strong as some thought in the first half. You look at the performance that we've seen this week, and it's clear that defensives are back at the driving seat. You look at those at the top of the leaderboard. It's real estate, it's utility, is consumers, stables, communication services, alec coming back to you. A lot of strategists year and forecast. We saw Goldman Sachs raise their forecast earlier

this week. Much of that is predicated on multiple expansion valuation growth because we're not seeing it in actual corporate profits. Seeing where everything with the trade situation is going, and seeing the situation that we have with the FED as it stands, do you see multiple expansion growing even further from where we're at now, not based on the current macro environment. So something would have to give, most specifically

on trade. I think the one thing we should focus on and maybe tying into what romains are saying about the earning season is that the increase on September one, a new ten percent tariff on three hundred billion and currently untariffed Chinese imports will be immediately um diluted to earnings. So we have a situation where companies manage the earnings process. They're beating expectations by about two or three hundred basis points,

which they do on average every quarter. The problem is that the consensus numbers out the fourth quarter, first quarter. They're kind of like icebergs. They tend to melt. As you get within a couple of months, you have a better sense of a realistic number. You know it will

be beaten if you apply that type of analysis. We're in a five six percent at best earnings growth environment here and we're trading at seventeen and a half times with with the the earnings numbers naturally tend to go down for numbers as analysts get more realistic and advise them. You put the tariff um macro dilution on top of that.

No way you're gonna get multiple expansion. You're getting multiple expansion when people are thinking, oh, the Fed's gonna cut, the macro is going to improve, that's over FED is disappointing or at least a poor communicator, and the macro is visibly deteriorating now via Twitter. Right, no, no, no, you're not. We We took three cracks at thirty and a quarter on the SMP and couldn't break it before this latest that we're we're done. I mean, whether we

can drop back, consolidate, recharge and take another shot. You know, we all know in this business things could look very different in October November. So I think you're in targets are a little bit of of a fool's earned and but but I think Goldman would probably want to have that one back. Yeah, maybe a little bit of bad timing. But looking even deeper to this next chaunch of terras, sure it's ten percent, which is a lesser rate than the percent that we've seen on the two fifty billions

so far. But considering that this next list, the three billion, is going to be more so on consumer good, does a ten percent rate on that larger amount worry you more than we've seen so far. As you said, it's going to be more consumer centric. Apple doesn't have an exemption as of yet, and we know air pods and wearables were big part of um, you know, their their growth, and that's the kind of thing that gets that gets hit. So on the other thing is the president is the

ultimate poker players. So it's ten percent now there's currently in place on the old money imports that were being tariffed. He's leaving himself room to go to twenty five on the new batch, you know, in the next round of of of poker, of betting as it were. So just because we're only going to ten now doesn't mean that

the final resting stop isn't um isn't twenty five. I mean, it's pretty clear that his people came back from the Chinese negotiations this week and briefed him, and he didn't like what he heard, and so he's trying to and I don't know if you read his tweet word for word, but he's trying to be very He's saying, we look forward to engaging with you and get yeah, we're gonna he said, we're gonna put a small additional tariff on you. So this is clearly um, you know, gamesmanship and deal making.

So I think the market is going to be worried that, um, you know, we're not stopping at ten Luckily, there's a finite amount of imports coming from China, so there's a finite universe of the dollar amount of Chinese imports that can be tariffed. But the President's made clear he's willing

to look at other places. The last point I would make on this, as you mentioned that FED fund futures once this news broke, um started a much more aggressively priced into September quarter point ease, and yet the markets still soft. So I think the smart money takeaway here is that don't get long around the FED that's priced in. That can't help you anymore. When something's been this talked about and beaten to death, that can no longer move markets.

So a dovish FED can't help you. And and at the margin the growth outlook, which is the reason you need a dovish FED in the first place. You need growth to be short. That's that's melting away a little bit. And President Trump has the potential to do a lot of damage very quickly, or at least get people to extrapolate that in their minds, because he's very vocal and

he's very bold. So when you add it all up, I think the momentum has shifted very quickly and violently from the bulls to the bears this week, and I think I think it's um it would behoove investors to sort of step back and not do the thing that's been working recently. The Pavlovian instinct is to just buy the dip. So Alec, you sound very cautious to me. I think that's a common, you know, feeling right now

among investors. But you know, if you're someone who needs to remain invested in equities or you know, we all know the dangers of trying to time the market get in and out. It's very confusing now, as Romaine pointed out, what is a good defense to play right now? Like you you mentioned, you know, in a low rate environment, reads the bond proxies, utilities do well. But there's almost feel like a crowded trade now with utilities high pees.

Another place people had always sort of assumed would be a safe haven from the trade wars small caps, just because they're more domestically focused, but as you point out your your note, they're heavily uh weighted towards financials. Large caps are more tech weighted with the larger earnings growth, So you know, boil it all down. Where is a good place to play defense if you want to stay fully engaged in the stock market right now? Sure, and just the point out, I mean, we try to give

some tactical insights. So just because there's a cautious tone, certainly not suggesting major allocation changes. Most of our institutional clients do have, you know, all equity mandates or um asset allocations that they have to maintain on an evergreen basis. It's more just about expectations setting, you know. And we are still up I think nineteen and a half percent for the year. You know this is but we we do want to set expectations because a lot of people

think past this prologue. There's a lot of the recency bias from the behavioral work, and we think, um that I call it a gear shifter or day. But there are times when the tone changes and the direction shifts, all those things have an inflection point, and I think we've just hit one, UM And I think if you look at the July performance, everything was clustered around up about two percent. There were a few outliers on either side,

but everything is participated on the way up. I don't think there's gonna be any great place to hide on the way down, UM, other than maybe cash. And that's why people do have cash allocations is so that they can put dry powder to work in these kinds of UM situations. But again just cautioned that the biggest thing that's helped risk appetite has been the Dovish fed and I think we've stretched that rubber band as far as we can and if the margin it underwhelmed a little yesterday,

I don't think that helps you. And then on the growth side, which has been the big source of anxiety, UM, the president's UM trade news flow has meant that that that's deteriorated. So when you add it all up, I think the path of least resistance tactically is is lower for for stocks. Alright, Well, on that downbeat, I think we have to end living it up a little bit, living it up a little bit with the the craziest thing we're not we're not all going triple leverage cast

a right now. If I can triple casts, I think what kind of what kind of rates you get on your leverage? But Romaine, let's start with you. Have you witnessed anything? I mean, Okay, look, we witnessed, all witness a lot of crazy things, right, what's the craziest thing? Okay, aside from j Pale's press conference? Uh, you know, actually the thing I it wasn't sort of witnessed, but it was a great story actually, Uh in Bloomberg Business Week about oat milk. Are you into this this night? And

I've been meaning the reading and I haven't read it. Well, it's pretty good. It's a it's a well, okay, that's all. That's a that's a matter of but but but it's a fascinating read about how this something that was pretty much obscure just a few years ago. Swedish company, uh totally makes this thing and they came to the US a couple of years ago. They just built this gigantic facility in New Jersey. They're building another facility in Utah.

They can't keep this stuff in stories. And Bloomberg has this great sort of breakdown of a how it's made the milk um, which you know isn't the most appetizing process, but you know, apparently it has you know, the same mouth feel of milk apparently and uh yeah, the texture of mouth feel of milk, but you don't have, you know, if you have issues with you know, eating animal products or something, or you just or again, or you just can't tolerate arey, this gives you that alternative. And I

just see this popping up everywhere. And we talk a lot about you know, plant based meats. They'll obviously the surge of you know, beyond meat and and impossible foods. It's just kind of an interesting phenomenon. And for somebody who's still you know, just drinks regular milk and eats you know, regular beef, I find it very fast. There's no oat milk in the Bloomberg pantries. If you haven't seen it yet, have seen it. I've tried it. I know I'm still a regular Burger. Read are we caveman?

I mean, I don't know, We're dinosaurs? Were going, well, my crazy thing kind of ties in. But but Alec, let's go, let's go with tears first. What's your crazy thing for the I'm probably gonna stick to the market. I thought that was you guys wanted the craziest thing in the market, So that's kind of what I can. I think they did, Alec, but I just I don't read it. And that was good room and we needed to kind of, you know, lighten it up a little bit.

But I would just sticking with the markets. We've had a few choices. You mentioned the press conference, which was definitely a little bit you know, offbeat. But I think the President and his tweets. I mean, he's been tweeting for years, So I think when we look back and we rank all of the praise president's wild tweets, especially related to financials markets, that's going to be quite a list. Thursdays is going to be right up there. Alright, Sarah,

what do you got? Alright? So mine mine actually also in a way goes off of Romaines Oat milk because it has to do with Beyond Meat. And that is because there is an e t F and it's ticker is f n G. It's known as the Thing E t F And what its title actually is, it's the Advisor Shares New Tech and Media e t F. Now you might not expect this. It holds Amazon, but the fund no longer holds Facebook, Netflix or Google. However, this

week about shares of Beyond Meat. So not quite sure how Beyond meat stock fits into a media a New Technology fund um, but they're going after it all right, Well I guess this new technology, Yeah, I guess all right, Well I'm gonna go with some old technology. You guys are familiar with the Canada Goose company. The nine Jackets. Romans probably has three of them with and it's warm and it's the best suit is Canada Goose, right right.

The animal lovers up there are very upset with Canada Goose because part of their UH selling point was that they were treated the geese very fondly when they took took the feathers for the day, and they used kai odie fur, and they promised that we only hunt coyotes that are pests and and threatening pets. Well, you're gonna tell me all this is, it's not exactly so uh.

Canada Goose Shares took a beating on Thursday when The New York Post got its hands on a video that the People for Ethical Treatment of Animals had UH filmed of Canada Goose suppliers basically grabbing the geese by their necks and stepping on them. This is actually probably the saddest thing in markets this week. We were livening it up and then he just had something really bring it back down. If you have a complaint about any of this, you can call us on our hotline number and uh

or Stars direct number. I think it is better. Oh, no one has my direct number, so you have to stick with the hotline ring. I thought it was gonna ring. Now it's like we weren't going to get like, you know, Joe from Nassau County ask us how the Knicks are gonna do this? This that he's a real good to guy for a crazy market series. And if you want to share any of your craziest things with us, you can also tweet at us at podcasts, or you can

also leave us a voicemail at our Bloomberg Podcast hotline. Also, if you have any questions for us, feel free to give us a call and ask away. That number is six or six three to four three for nine zero and we may even play your question or tip on the show. Um Alec Young, Romaine Bostick, thanks so much for joining us today, pleasure, Thank you, what goes out. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever

you get your podcasts. We'd love it if you took the time to rate and interview the show on Apple Podcasts, so more listeners can find us, and you can find us on Twitter, follow me at at Sara Ponzeck, Mike is at Reaganonymous, Romaine Bostick is at Romaine Bostic, and you can also follow up with flet See Russell at Footsie Russell and Bloomberg Podcast, as I mentioned, is at Podcasts. What Goes Up is produced by Tofur Foreheads. The head

of Bloomberg Podcast is Francesca Levie. Thanks for listening, See you next time.