January 10, 2025 • 36 mins
- Mohamed El-Erian, President of Queens' College, Cambridge and Bloomberg Opinion Columnist
- Ed Mills, Washington Policy Analyst at Raymond James
- Stephanie Roth, Chief Economist at Wolfe Research
- Jeffrey Rosenberg, Portfolio Manager - Systematic Multi-Strategy Fund at BlackRock
Mohamed El-Erian, President of Queens' College, Cambridge and Bloomberg Opinion Columnist, joins for an extended discussion on the US economy and inflation and previews today's jobs figures. Ed Mills with Raymond James talks about some of the policy implications of a second Trump term. Stephanie Roth of Wolfe Research and Jeffrey Rosenberg with BlackRock react to today's nonfarm payrolls report.
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Episode Transcript
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and Amrie Hordern. Join us each day
for insight from the best in markets, economics, and geopolitics
from our global headquarters in New York City. We are
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anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business App. Mohammad al Erin of
Queens College, Cambridge staying focused on the bond market and
writing some label twenty twenty four as US brink in
the return of bond Vigilantes. This greater focus on debt
and political stability is likely to continue into twenty five,
as will the extent of dispersion between the United States,
the Eurozone and Japan. Please to welcome a good friend
(00:56):
of all of ours, Muhammad al Aerian Muhammad, Good morning,
Good morning John, and a happy new year to years.
The final Derby Concerts January tenth, So say it, oh there,
Rose of Bloomberg Survivance Mohammed. Are the bond virgiliancies back
and if so, what's changed? Why are they back?
Speaker 3 (01:09):
They're back because of three issues, as you know, John,
One is consistently stronger than expected US economic data. Two
is the understanding that inflation will be sticky, and three
is as we needed focus now on debt and deficits.
Put these three things together, the US leads a global
(01:29):
bond sell off, and then what that sell off does.
It picks vulnerabilities in the system and weaknesses, and it
wouldn't have been good afternoon Britain. Would have just been
afternoon Britain because they are facing the combination the emerging market,
combination of higher yields and lower currency, which is really
bad news for them right now.
Speaker 2 (01:49):
How much of that is in their own control.
Speaker 3 (01:51):
Some of it is in their own control, and it
is a golden opportunity for this government to redouble or
westart is economic approach, which has lost its way a
little bit in the last few months. But they will
be looking at the US jobs report and critically the
CPI coming up. You know, it's not so long ago,
(02:14):
Lisa that we used to say, okay, forget about CPI.
Inflation's under control all that matters the jobs report. Now
suddenly we've realized that both are in play, inflation and
the employment spot.
Speaker 1 (02:25):
So when we say afternoon in Great Britain, because no
one's saying it's particularly good right now, what is better
for them an upside surprise to labor markets or downside
surprise at a time when potentially that could spur some
sort of risk off move, at a time when even
in the United States people really questioning the sustainability of
what's going on.
Speaker 3 (02:45):
Yeah, and that's the if in the US you really
want an upside surprise, if we had the choice between
the two, you take an upside surprise. If you're in Britain,
you take a downside surprise. Yields have got to stabilize
otherwise you're risk triggering these dynamics that can really hurt.
So they would look, they would hope for a downside
surprise that brings yields down here and puts down the
(03:07):
pressure on their yields.
Speaker 1 (03:08):
When you talk about bond vigilantes and how they find
the most vulnerable spots, how long is it before they
find the United States particularly vulnerable? And this sort of
goes to the heart of the question that Torsten Slock raised,
which is, it is highly unusual to see the long
end yield rise by one hundred basis points after a
series of one hundred basist points are very cuts from
the Federal Reserve. Do you have a sense that maybe
(03:30):
the US is one of those vulnerable spots at this
point in relative terms? No?
Speaker 3 (03:34):
You know, you've heard me say over and over again,
the good, the bad, and the ugly. The good is
the US, The baddest China, and the UK is Europe,
including the UK. The ugly is Europe, including the UK.
So US, China, Europe, including the UK. They'll focus on
the ugly first and then they'll creed pop.
Speaker 4 (03:55):
The US has.
Speaker 3 (03:57):
A particularly a good spot because higher yields here associated
with stronger growth. That is not the case in Europe.
Speaker 2 (04:03):
So why do you think the Federal Reserve is so confused?
At least they sound confused by some on these conference
back in December.
Speaker 3 (04:10):
How much time do we have?
Speaker 2 (04:11):
We've got enough time to get through it all.
Speaker 3 (04:13):
Okay, So they've been confusing their analysis, they've been confused
in their communication, they've been confusing their approach. When you're
data dependent and you're just looking at the future through
the lens of the past. You will get more and
more confused as we go through these changes. And we
haven't even talked about policy uncertainty, which adds is the
(04:33):
reality is right now we could solve at different levels
of employment and inflation. Whatever scenario you had for recession,
soft landing, no landing, whatever probabilities you had, now each
of them is associated with different levels of inflation, and
that is new. So the Fed, and you've heard me
say this for a long time, has got to get
(04:54):
more strategic in this approach and has has got to
stop being excessively data dependent.
Speaker 2 (05:00):
They say this word, this phrase that you use policy uncertainty,
and when I hear it, I just think Donald Trump.
Well they actually mean to say it's Donald Trump. And
you saw that in the minutes, and I think we
heard that in the news conference with Chairman Poal. I'm
struggling to understand this, and I'd love your opinion on this.
Why some officials on the Federal Reserve are willing to
preemp policy changes and factor that into their observations and
(05:20):
their forecasts, but unwilling to do so. When it was
Biden in the White House and he was pushing through
massive fiscal stimulus into a supply constrained economy, and they
sat there and let inflation rip. What explains the difference
between the behavior and response and the approach to two
different presidents.
Speaker 3 (05:36):
No, you've got to ask them. We thought we understood
what the FED. How the FED approached this when Chapau said,
quote something along lines that we don't speculate, we don't predict,
and we don't assume anything about policies. So everybody assumed,
you know what, let's wait and see and what we're
hearing from the FED does not incorporate forecasts about policy changes.
(05:59):
And then the whole thing got modeled, and now some do,
some don't.
Speaker 4 (06:03):
You're not quite sure what.
Speaker 3 (06:04):
And I think this is part of a bigger issue,
which is FED communication has gotten really confused. Bill Dudley
had a really good piece in Rumor Opinion about this.
And it does matter because the FED is supposed to
reduce volatility, not contribute to volatility, and for the last
few years the FED has contributed to volatility.
Speaker 1 (06:23):
How do they not contribute to volatility when they are
facing off with policies that offer up profoundly different contours
of inflation and growth?
Speaker 3 (06:31):
So first of all, they've got to either take the
approach of this is what we think the baseline is,
we are gonna check it every single day against more
signs out of DC. Alternatively, we're not incorporating any new policies.
Sometimes you need a top down, you need the chair
to say this is the approach we're going to take
for now, because the muddled middle causes all sorts of
(06:55):
spillover effects that are not helpful at all to them.
Speaker 1 (06:58):
So let's talk about the spillover effects. We've talked before
about how their at risk of maybe allowing inflation to
creep higher than have to hike rates later, the idea
of not recognizing inflation enough. There's the other side of things.
If they hold rates too high for too long, they
could cause a deterioration and dramatic iteration in the economy
right now, which is the bigger risk.
Speaker 3 (07:19):
So the only reason we talk about the inflation risk
is because we compare it to an arbitrary target that
I'm willing to bet if we were to set today,
we would not set at two percent. We'd set at
two and a half to three. Every other indication of
inflation suggested inflation expectations are stable. It just was structurally
(07:40):
happening here and in the rest of the world, means
that you're going to run the economy for now at
a higher equilibrium inflation rate than before, and it's not.
Speaker 4 (07:50):
So.
Speaker 3 (07:50):
The reason why we're getting in this whole thing is
because we are judging ourselves against a target that itself
is not only arbitrary, but would not have been the
target we would have chosen today. I don't worry, honestly
about inflation until I have evidence that inflation expectations are
the anchored, and there's no evidence of that at all.
I do worry that if the FED truly believes that
(08:13):
it has to achieve two percent and wants to do it,
it's going to have to hike rates this year. And
if it hikes races this year, it's going to pull
the rug from under US growth. It's going to pull
the work from under US investment. This is how important
it is. So my expectation is that fudge they'll say,
we continue to pursue two percent, but down the road
(08:34):
they'll stick with a two and a half percent target
forecast for now, saying on the way to two percent,
but we will basically be living with a high inflation target.
Speaker 2 (08:42):
Mohammed, We're lucky to have you. I'm Marie joins Us
now from Washington with admires of Raima James Amory.
Speaker 3 (08:58):
I would see a good morning, Jonathan.
Speaker 5 (09:00):
The clock is literally ticking for TikTok and today they're
going to have their day at the Supreme Court to
try to combat this bill and they will either be
banned unless they divest away from Byteedance, this Chinese company.
Speaker 6 (09:14):
What do you think happens ed I think on January nineteenth,
TikTok ceases to exist here in the United States. I
think the wild card here is that under the law,
the President of the United States has an ability to
extend one time for ninety days. So the question that
I have is, come January twentieth, the next day, does
(09:35):
Trump activate that ninety day extension and is there a
deal worked out?
Speaker 5 (09:40):
It sounds like he's going to because he's flip flopped
since his first time in office in the Oval Office
when he talked about the security concerns of TikTok that
now he thinks actually, in an interview with my colleagues
over the summer, talked about the fact that we if
you don't have TikTok, then Meta is too big, and
he understands a lot of individuals get their news from there.
It seems like he wants to keep it around. So
(10:00):
what are the options even if there's an extension.
Speaker 6 (10:02):
So after the ninety days, one of the things we
went through the statute at Raymond James yesterday published a
report about this, and ultimately it is up to the
president to declar that what has happened with the divestment
or for foreign ownership has met the needs of the law.
And so as long as the president declars, it's okay.
(10:23):
The problem for Trump, though, is that if there is
not a divestment, a five thousand dollars per user fee
gets kicked in. And I don't think the app stores
at Apple or Google or Oracle's hosting of this wants
to exist because when you look at the number of users,
I add that up to about an eighty five billion
dollar fine. And unless you change the law or you
(10:46):
have this divested, it will cease to exist, assuming it
is upheld by the Supreme Court.
Speaker 5 (10:51):
Who can buy this. This isn't even like Elon Musk
buying Twitter. This is an incredibly expensive company.
Speaker 4 (11:00):
I assume the money would be there.
Speaker 6 (11:01):
The bigger question for me is will the Chinese government
allow it to be sold, Because ultimately, if you yeah,
because you can open up the hood, you look in
in everything that the national security folks have said about
keystroke capture, about geolocation, about the algorithm potentially manipulating the
(11:22):
users of TikTok, all of that will be very apparent,
and we will know even more of how the Chinese
have been spying on Americans using a very popular app.
Speaker 5 (11:32):
Trump will also be breaking with his national security advisor
and a secretary.
Speaker 6 (11:36):
Of State, and I mean like Trump will break with
his administration whenever he wants. I do think it's important
that you highlight the kind of animis that he's had
towards Meta and towards the potential benefit to Instagram. Because
of this, it does look like some of that animis
might be reduced over the actions by Meta by Mark
(11:56):
Zuckerberg in recent weeks trying to get him okay.
Speaker 5 (12:00):
Concerns grow on a daylight today when CNN comes out
and says that Chinese hackers breach Siphius in December, not
really as surprise, as Jonathan said, because we do know
that there was Chinese hackers breaching the Treasury Department, but
isn't this doesnes has become even more of a national
security concern And what's going to be the response from
Trump two point zero to Beijing.
Speaker 6 (12:19):
Yeah, I mean, I think it is a extraordinary act
that we knew that there were Chinese hackers that access Treasury.
It was downplayed by Janet Yellen recently, but for them
to have hacked into Siphius, the Committee on Foreign Investment
into the United States, there was a deal that was
pending me Bon Steel trying to buy us steal. We're
(12:40):
looking at all of the potential national security concerns about
that me Bon's operations within China. For them to be
looking for exactly what was happening at Cyphius at that
time is a huge concern. And that's why I've always
said almost everything in DC related to China is bipartisan.
The only place you'd don't want to be is being
(13:01):
seen on being on China side.
Speaker 5 (13:03):
Well, except for potentially one we are waiting for a
Commerce Department to come out and this was a bloomberg scoop.
Speaker 4 (13:10):
But I know you've been.
Speaker 5 (13:11):
Writing about it for months about Ai chips from Nvidia
and all roads really lead to China when it comes
to wanting to make those export controls tougher.
Speaker 4 (13:19):
Correct.
Speaker 6 (13:20):
Yeah, So as early as today, and it's going to
happen between now in January twentieth, there's going to be
a final export control rule that comes out from the
Biden administration. This is going to be focused on the
number of AI chips that are going to countries that
we have concerns about. Now we've blocked almost everything going
to China or to Russia. We're going to allow everything
(13:41):
to continue to go to our closest allies, but there's
going to be a tier two company or country list
where we're going to put caps on how much can
the Middle East get, how much can Southeast Asia receive. Now,
generally speaking, I would have expected this to be bipartisan,
but you have Ted Cruz tweeting out last night strong opposition.
You have Nvidia coming out with strong opposition. So the
(14:04):
question I.
Speaker 5 (14:04):
Have is as going to allies or because the time.
Speaker 6 (14:07):
No, because they're going to restrict it going into some
Southeast Asian in Middle Eastern countries. The real issue here
is almost all of our export controls usually deals with
the physical location. But when you're developing data centers and
you can access that via the cloud, it might not
matter if that AI chip can't go into China. If
you build that data center in Malaysia or you build
(14:29):
that data center in the UAE, if they have that
cloud access to it, they've essentially had that technology. So
the chips are going to be limited, and there's going
to be new rules related to data centers to make
sure that they are certified and verified that they're not
giving this technology to China.
Speaker 5 (14:46):
So if you have Republicans already coming out and saying
we don't want to see this happen, Biden administration is
doing it on literally their final days in office. Does
Trump reverse it?
Speaker 6 (14:55):
I think it's going to be hard for him to reverse.
What they're going to do is it's an interim final
rule DC speak to It goes into effect immediately, but
there's an opportunity for the Trump administration to put the
final tweaks on that. If the caps are too low,
look for foreign governments to be very transactional. I think
Saudi Arabia will put a lot of pressure that if
their cap is too low, Other Gulf countries, other kind
(15:17):
of parts of the tariff conversation. This could be a
tit for tat hey, I'm willing to do X, Y
and Z to avoid tariffs, including trying to remove these
these AI caps. Is actually going to give Trump a
new tool in his negotiations globally in terms of what
does the US have someone that these other countries want.
Speaker 5 (15:38):
I just want to finally end on this point. You're
talking to everyone on the Hill about the process of
how his agenda gets accomplished. The bond market, though, is
focused on the price.
Speaker 3 (15:48):
What do you think we're going to.
Speaker 5 (15:49):
See in terms of how big this bill is going
to be?
Speaker 6 (15:52):
Yeah, So I put the over under as it relates
to both an extension of the tax cuts and if
we do an immigration energy defense bill at one point
point nine trillion, why do I do that? Because that
was the cost of the American Rescue Plan. I don't
see Republicans doing a bill bigger than build back better
for Biden, and so I do think that we're on
the under of that.
Speaker 5 (16:13):
But extending the tax cuts is yes.
Speaker 6 (16:15):
Ten years of the tax cuts is four point six
trillion dollars. Four or five years of the tax cuts
is about one point five trillion. What would you do?
I probably see it goes to four or five years.
The original was eight. You say, hey, we did about
half as good in trying to get those other things.
People have been too focused on the ten year extension.
I think it ends with a much shorter extension.
Speaker 5 (16:35):
Ed Mills, thank you so much for joining me in
the studio this morning. From DC Jonathan a long list
of issues that the incoming Trump administration is going to
deal with, TikTok, export controls, and of course trying to
get this agenda through which ed Mill says could be
under true trillion dollars.
Speaker 2 (16:50):
I might a freie time thank you with this amount
of tybe with Stephanie Roth the Wold Race, said Stephanie,
and wanted, that's quite a number.
Speaker 7 (17:06):
What you might here is I mean, first of all,
it is quite a number, but average early earnings were
point two eight. So this is kind of a goldilocks
type of report, and this in a way, of course,
markets are training it as a hotish print, but the
reality is that wages are growing at below four percent,
even with job gains running the strong.
Speaker 2 (17:24):
So we don't have to stop talking about interests, right
hikes anytime soon at the Federal Reserve.
Speaker 7 (17:28):
I don't think we have to be talking about hikes,
but we have to start thinking about when is the
FED going to be pausing?
Speaker 4 (17:32):
That's in the real question.
Speaker 1 (17:33):
Well now, I think that that's what people are saying, right,
they're on pause period.
Speaker 4 (17:38):
I think the question is where they're going to revive.
Speaker 1 (17:40):
I want to go to the point that you're making
about inflation and that this does sort of question just
how much inflationary pressure is under the hood of some
of these gains. How accurate I have the average hourly
earnings actually been when it comes to inflationary pressures. Because ultimately,
if people have jobs, they have been shown the willingness,
particularly of millennials and paying premium form seats on airplanes
(18:01):
and other things. I mean, there still is the impetus
to spend if you have a job.
Speaker 7 (18:05):
Yeah, I mean it all comes down to the labor market.
If the labor market remains healthy, then people are going
to go out and spend. The thing is that wage
growth is still running, you know that four percent, which
given where productivity is, the FED can kind of accept
something like that. So, and the FED has said this
a couple of times that they don't believe that the
labor market is really causing significant inflationary pressures. So now
the question is just that can the fence they stay
(18:27):
on pause from here or can they cut one.
Speaker 4 (18:28):
Or two more times.
Speaker 3 (18:30):
So Wednesday's ADP numbers on earnings showed a difference between
four percent wage increases for those who are on the
same job seven percent for those who are changing jobs.
And the question becomes, if we continue to create so
many jobs, if vacancy is awaited a six month high,
at what point do earnings become the lagging indicator? At
(18:54):
what point do earnings respond to what's happening in terms
of the quantity of jobs.
Speaker 7 (19:00):
Yeah, and that's that's the trend that we saw, you know,
in twenty twenty two and twenty twenty three, and the
labor markets are to heat heat, heat up. Is that
there was that d differentiation between job switchers and job stayers,
and that is something to keep a close eye on.
But as of now, the you know, the wage data
have been fairly contained and if we didn't see a
a wage price spiral on twenty twenty two and twenty
twenty three, it's very unlikely we'll see at this time
(19:21):
around that was the the real strength in the labor market,
and it didn't really unfold into something that was out
of controlled wage inflation. So this time I don't anticipate
that will be the case. To get to your your
your question earlier, how accurate is is the wage data
from month to month?
Speaker 4 (19:35):
Not great?
Speaker 7 (19:35):
This this probably was had some calendar effects that pushed
down some of the data, but on a year of
a year basis, it's in line close to to what
the ECI is saying, which is kind of the gold
standard anyway, So I would say, y, you know, yeah,
maybe it was uh artificially depressed by some of the
calendar effects, but the reality is wage growth is running
a something close to four percent, which is somewhat tolerable.
Speaker 4 (19:53):
For the FED.
Speaker 3 (19:54):
So how confident can we be that we don't get
these second round effect because some economists will tell you
it's not surprising. We didn't get it two twenty twenty
three because people had no memory of inflation, so they
didn't think that they needed to adjust. Now three years later,
people have a fresh memory of inflation. So can we
be as confident that it's just one off? We don't
(20:16):
get the anticipatory wage demands. We don't get anticipatory price increases,
I mean.
Speaker 7 (20:21):
And that's gonna be the challenge for the Fed of
just probably why they're going to have to sort of
wait this out for a little while. And with tariffs,
of course, that makes it a little bit more challenging.
But I think at the end of the day, we'll
see that the inflation is probably gonna, say, sticky somewhere
between two and two and a half percent. But I
don't think we're risking three four five percent like we
saw last time. So I think this challenge is the
(20:42):
narrative that inflation is gonna easily get back down towards
two percent, but something that we saw the last time
has to be driven by supply chain issues, which we
currently don't really have.
Speaker 2 (20:51):
If you want just join, I guess welcome to the program.
Just moments ago, a big upside surprise on a pay
roaster pull coming in at T fifty six the estimate
one to sixty five unemployment drum them back as well,
to four point one percent from four point two. Off
the back of that, some big moves in the bond market,
particularly the front end of the curve. The two year
up by double digits. Off the back of that, as
you might expand some dollar strength. Euro dollar getting closer
(21:11):
and closer to break in one oh two. And if
you check out the equity market, equity features down across
the board on the S and P five hundred, down
by point eight on the rustle of small caps, negative
by one point seven percent. We'll see if all of
this sticks. We are on five percent watch on a
thirty eight yield Lisa. The higher the session four ninety
nine eighty one, and.
Speaker 1 (21:29):
We're pushing back the potential for our first rate cut
of twenty twenty five from the federal Reserve to at
one point October. Now we're back to September, but really
pushing it back. This is where we start to wonder,
particularly the small cap area, how much this becomes restrictive
for a small subset of companies. And I think about housing,
I think about mortgage rates and how much that can
(21:50):
remain dissonant from the rest of the strength from elsewhere.
Before you know it actually calls into question some of
these dynamics.
Speaker 2 (21:57):
Joining us now is Jeff Rosenberg of Blank Rock. He's
got thoughts on this market, and I'm sure Jeff first
the votes you, Sarah, and welcome to the program. Your
reaction to that number you from twelve minutes ago.
Speaker 8 (22:06):
Yeah, well, clearly it's a strong number, and that's the
that's the market reaction. That's the first point. Second thing
is the retail component here. It's worth kind of like
thinking about what's going on here. So it's it's having
kind of an effect in two parts of the report.
The retail numbers are underlying are stronger because of the
shift between November being negative because of the lateness of
(22:29):
Thanksgiving and Black Friday, so you're seeing a little bit
of a flattering on the headline number. The other thing
is that that average hourly earnings which your last guest
was talking about, which is kind of like the oh,
it's maybe not so strong.
Speaker 4 (22:41):
We don't have to worry about inflation.
Speaker 8 (22:43):
Because it's you know, a weaker average hourly earnings print.
You gotta be careful. And the question was, you know,
how reliable is it on these monthly payroll reports. The
problem is the mixed shift really can mess with that
number and the boost to retail this month, maybe factoring
in those tend to be lower paying jobs, and so
it may be actually understating the average hour of the earnings,
(23:05):
which if you didn't have that mixshift, this may actually
be even a stronger picture, which is then the third point.
You know, this is just financial conditions tightening because it's
less need for the FED to cut. You know, we
priced out most of that, Most of that shift happened
in the FOMC December meeting. But this is even further
pushing it along the way. Now, Jonathan, you asked, you know,
(23:26):
does that mean, you know, when do we start talking
about the FED having to high rates?
Speaker 4 (23:29):
No?
Speaker 8 (23:29):
No, no, this is pricing out any need for the
FED to be cutting and pushing on my long standing
you know refrain every time I come on the show.
It's just financial conditions are really undermining the fed's view
that their policy is really that tight, and so they
don't need to be worried about.
Speaker 4 (23:49):
How tight their policy is.
Speaker 8 (23:50):
And so this is pricing out some of those future
cuts for twenty twenty five, not that we had that
many priced in to begin with.
Speaker 1 (23:58):
Jeff, you've asked and answered most of the questions we had,
So I do want to go to this question of
what do you do with this?
Speaker 7 (24:02):
Right?
Speaker 1 (24:03):
I mean, are you does this make you more bearish
on equities or does it actually make you more bullish,
because ultimately you're not going to find the value in
fixed income. It is going to come from the growth
and the strength that we just saw reflected. Yeah.
Speaker 4 (24:14):
Yeah, and you touched on it as well.
Speaker 8 (24:16):
You know, it's a good report, and Muhammed's first point
was like, hey, this is good news. Is American exceptionalism.
This is a strong economy. You know, that should be
good for stocks and risky assets. And I think that
ultimately is the case. I think the market and the
valuations have to get over the idea that you're facing
some higher interest rates.
Speaker 4 (24:36):
I think from the fixed income lens.
Speaker 8 (24:37):
The higher interest rates are actually bringing value relative value
back to fixed income. You know, we've really shifted the
pricing of how much do we need the FED to support.
You talked in the earlier segment about the asymmetry. I
very much agree with that that the asymmetry is now
kind of more in favor of fixed income in terms
of how much war rates can go higher versus the potential.
Speaker 4 (25:00):
For them to go lower.
Speaker 8 (25:01):
And we priced out a lot of that expectation of
the support from the FEN. I think that's helpful to
the pricing of the bond market and the kind of
the selloff that we're seeing here in the front end,
you know, leading, I think that has reinforced the attractiveness
of yield in the front end of the yield curve.
Speaker 3 (25:19):
Jeff, it seems that we're very comfortable with the notion
that this pushes back whatever weight hikes, who weight cuts
we're going to get and we're going to get fewer,
et cetera. But the minute someone mentions a weight hike,
everybody gets really really uncomfortable. So no, no, no, we're not
there yet. What does it take to get there? I
(25:39):
think it takes a lot to get there.
Speaker 8 (25:42):
I mean that's a very big swing, and obviously what
it takes to get there, Muhammad, And you know this
is it's inflation, and not just like the somewhat unease
of sticky inflation, but a complete change in the narrative
that for all the forecasting of the underlying opponents and
the imputed data and our understanding of inflation, that we've
(26:04):
just gotten that so wrong. And there's a reacceleration in inflation.
I think you have to have a reacceleration, not the
slowing in the movement to two percent, to shift the
FED and the markets expectation that this goes to tightening,
I think it's a very high bar to get there,
and we're really just pricing out the last few expected cuts.
Speaker 4 (26:26):
In twenty twenty five.
Speaker 2 (26:27):
Well, Jeff, let me put it another way, then, how
high is the boun to cut again given what we've
just seen over the past few months.
Speaker 8 (26:33):
Yeah, you know, I don't think the bar to cut
again and to change the expectations on cuttings that high either.
I mean, look at what we went through last year
in terms of the swings in market expectations on what
the FED would do and the FED zone forecasting on
what it would do, and the extreme data dependence here.
So the bar to more cutting is we're seeing that
(26:58):
stabilization in inflation, not the risk on inflation, and for
whatever reason, obviously not the story today. You're seeing that
slow down that the FED is feared in the labor markets,
and a couple of data points on labor markets again,
now what we're seeing today sub one hundred, you know,
pictures increases in unemployment rates. You get two reports in
(27:20):
a row of that, you can very quickly shift the
narrative back to O, the Fed's got to cut two
maybe three because of this extreme data dependence that we
have the FED driving market expectations.
Speaker 1 (27:33):
I see Stephanie Ross nodding along. I do want to
just point out that briefly the thirty year yield did
hop above five percent before coming back down, but it's
right now four point nine up there, it is five percent.
Once again, you're shaking your head. Do you agree with
what he's saying?
Speaker 7 (27:46):
Yeah, I agree. The Fed's been data dependent, but like
very much on every data point right, So to the
extent that we have another couple of prints that are
a little bit softer in the beginning part of you know,
in the next couple of months, then the narrative can
shift to some extent. We've seen every three months in
the market has been swinging from soft landing, the hard
landing to no landing, and realistically you're probably somewhere in between.
So base case at this point is that you know,
(28:08):
the narrative is gonna continue for a while, then you're
gonna have the Q one inflation seasonality problems again. So
it's probably gonna be towards the middle part of the
year when the when we could start talking about potential
cuts again.
Speaker 3 (28:18):
So Stephanie said, the data. The FED is data dependent,
not only overall, but every single data point, which of
course power would push back on you and say no, no,
And that makes us all data dependent, right, and it
makes us all add volatility to a market because we
all we get swung around. Doesn't that bother you? Doesn't
it bother you that everybody has become so data dependent.
Speaker 4 (28:40):
It does.
Speaker 7 (28:41):
Nobody should be caring about the unemployment rate to three
decimals and averagellit yearning to the same kind of thing.
I just had that conversation with Tom Keane earlier. It
makes us uncomfortable, but we all have to We all
are in this, in this environment, even though they're trying
to steer us away from that. In theory, the FED
continues to get swung around by every data point, So
then we all have to focus on the same thing
and figure out every new once within every single print.
(29:04):
The retail thing is a good point in the sense
that it was minus twenty nine last time and now
it's jumped back up forty three. Realistically, that drove some
of the strength and you know, you probably should smooth
that out but we're in an environment that it's going
to be tough, and by the way, next print, we're
gonna be impacted by all of the fires, and that's
going to be a really messy data point as well.
Speaker 3 (29:22):
Do you think of any fed that got swung around
as much as this feed is getting swung around? I mean,
I think back of the financial I mean I think
back of so many bigger episodes.
Speaker 2 (29:31):
To go post pandemic, post pandemic. This Federal Reserve allowed
the administration of the time to come out with huge
fiscal plans and the supplying constrained economy and just say.
Speaker 4 (29:41):
We'll look through it.
Speaker 2 (29:42):
We'll look through it. They weren't dated data dependent. Then
they waited the change in behavior on the f WEMC.
I hear a lot of economists present company excluded a
lot of economists who are more keen to defend the
institution that provide critical analysis of it. That's really problematic
for me. For economists on Wall Street who are held
bent on making sure that their friends at the FMC
(30:05):
still give them access to have conversations at NAPE, etc.
They're actually just calling things out for the way they
see it. This Federal Reserve has behaved very differently under Biden,
and it's changed when Donald Trump has come into power.
They've opened the door to those accusations themselves with that
news conference back in December, without a doubt.
Speaker 3 (30:26):
Do you agree, No, I agree that now we have
a FED that's navigating two things, the monetary policy landscape
and the political landscape.
Speaker 4 (30:34):
It's not navigating one thing anymore. It's not navigating two things.
Speaker 3 (30:37):
And we just have to keep.
Speaker 4 (30:38):
That in mind.
Speaker 2 (30:39):
Why wasn't it navigating the political landscape two three years ago? Well,
it's clear that fiscal policy was in the driving sea.
Speaker 3 (30:45):
I think two three years ago they were asleep and
the worsh to call inflation transitory. Ignoring the policy side,
ignoring all the uncertainty was a big mistake. And because
of that, they became extremely data dependent and they don't
even want to look forward anymore. And it's ironic because
we're dealing with markets that are supposed to be looking forward.
(31:07):
We're supposed to be discounting the future, right, and yet
we've all become completely dependent on what's just happened.
Speaker 4 (31:13):
It's absurd, but that is what happens.
Speaker 3 (31:15):
When the institution, with the printing press in the basement
decides that it will become excessively data dependent. It turns
us all into extreme data dependence.
Speaker 2 (31:25):
They may again at the end of this month, we'll
get two more data points before then. CPI is one,
the inauguration is another. What's this news conference, this mating
rather going to look like at the end of this month.
Speaker 3 (31:35):
Yeah, I mean I.
Speaker 7 (31:36):
Think we're going to well, let's first talk about maybe CPI,
because that we're looking for something that should be a
little bit more soft, something Z point two four percent
on core, which you know should should be Okay, I
don't think it's going to change anybody, especially after this print.
This print made the CPI a lot less important. And
then we're going to have to see from the Trump administration,
what are we what's going to happen in terms of immigration.
(31:57):
That's going to be one of the biggest things that's
going to happen, probably right off the bat. How M
how much or how M how how aggresive are they
gonna go? It's probably gonna be at the uh A
Y a lot of a lot of you know, I'll
bark at the beginning, and then realistic, we're not gonna
see that much deportations because that's gonna require funding that
they don't have, and it's probably just gonna be people
rolling off the humanitarian parole uh in TPC. But that's
(32:18):
gonna be a big thing to watch out for. And
then the second is what a w what's gonna happen?
From a tariff perspective, we haven't really heard much specifics. Uh,
you know, we're we're we're l we're winding back to
the announcement on Canada and Mexico. Are we gonna get
more of that? Probably not, and we're not hearing much
of it. But those are the two things we're looking
out for most from him tariffs and uh uh tariffs
and uh what we're h hearing from integration perspective.
Speaker 1 (32:41):
Jeff, as an investor who has to take a longer
term view, how do you remain independent from the successive
data dependence? So we were just talking about how do
you have any conviction with calls at a time where
people are talking about how much the parameters could change
based on whether it's CPI or whether it's Jan twentieth
and the inauguration.
Speaker 8 (33:03):
Yeah, it's really recognizing, you know, the things that you
think you can forecast and recognizing the things.
Speaker 4 (33:09):
That are just not forecastable.
Speaker 8 (33:11):
And we have a little saying if you can't forecast,
and I would put all of the policy uncertainties that
were just described in that category, then you have to observe.
And so you just kind of like know what you
can kind of control, and know what you can't control,
know what you can forecast, know what you can't forecast,
try not to overreact to every data point. But on
(33:34):
the fiscal policy, I mean that is that is basically
the story for the twenty twenty five outlooks is uncertainty
and unforecastability. So we're gonna have to kind of recognize
that and we're going to sit back, We're going to
be patient, We're going to observe, and then you know,
as the information becomes more clear, that's when you can
take action in your portfolio.
Speaker 4 (33:55):
Is to try to do it ahead of time.
Speaker 8 (33:57):
I think you just have to recognize that it's a
very difficult exercise both forecasting what is going to be
the policy and equally forecasting what is going to be
the market reaction to that. Getting both of those rights
very unlikely. So you're going to have to sit back
and wait for the data to reveal itself.
Speaker 2 (34:16):
Hey, Jeff, appreciate your time, sir. As always, Jeff Rosenberg,
there at blankrupt will take a step back and a
big deep breath and look ahead to see PI next Wednesday,
as well as some bank earnings too.
Speaker 4 (34:26):
Mohamma.
Speaker 2 (34:26):
Just a final thought around the table. We came into
twenty five thinking about US exceptionalism and global divergence. And
Lisa and I've been talking about this for a number
of days now, number of weeks. The extent to which
we can keep stretching that rubber band, how far can
we take that, How much oxygen is left in that
story before we get these negative feedback loops and things
start to move in the other direction.
Speaker 3 (34:48):
I mean, that's a great question, and I'm not sure
I can answer that, but I can tell you that
the theme of dispersion is really important because there's a
limit to how long you can run a system with
significant dispersion. And we have two main discerssion issue US
visay the rest of the world. The hope is the
rest of the world comes up to the US. The
fears of the rest of the world drags the US down,
(35:10):
and then within our economy, low income versus the rest.
Low income is the struggling right now. We must not
forget that, and these numbers cannot make us not also
consider what's happening at that end, because at some point
that we can can migrate up. So the theme we're
going to be talking about a lot is forget about averages,
(35:33):
look at sectors, and that is in the marketplace. We've
gone from a market focus to a theme focus, and
now it's going to all be about individual names.
Speaker 2 (35:42):
This is the Bloomberg Surveillance podcast, bringing you the best
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Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and Amrie Hordern. Join us each day
for insight from the best in markets, economics, and geopolitics
from our global headquarters in New York City. We are
live on Bloomberg Television weekday mornings from six to nine
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anywhere else you listen, and as always on the Bloomberg
(00:34):
Terminal and the Bloomberg Business App. Mohammad al Erin of
Queens College, Cambridge staying focused on the bond market and
writing some label twenty twenty four as US brink in
the return of bond Vigilantes. This greater focus on debt
and political stability is likely to continue into twenty five,
as will the extent of dispersion between the United States,
the Eurozone and Japan. Please to welcome a good friend
(00:56):
of all of ours, Muhammad al Aerian Muhammad, Good morning,
Good morning John, and a happy new year to years.
The final Derby Concerts January tenth, So say it, oh there,
Rose of Bloomberg Survivance Mohammed. Are the bond virgiliancies back
and if so, what's changed? Why are they back?
Speaker 3 (01:09):
They're back because of three issues, as you know, John,
One is consistently stronger than expected US economic data. Two
is the understanding that inflation will be sticky, and three
is as we needed focus now on debt and deficits.
Put these three things together, the US leads a global
(01:29):
bond sell off, and then what that sell off does.
It picks vulnerabilities in the system and weaknesses, and it
wouldn't have been good afternoon Britain. Would have just been
afternoon Britain because they are facing the combination the emerging market,
combination of higher yields and lower currency, which is really
bad news for them right now.
Speaker 2 (01:49):
How much of that is in their own control.
Speaker 3 (01:51):
Some of it is in their own control, and it
is a golden opportunity for this government to redouble or
westart is economic approach, which has lost its way a
little bit in the last few months. But they will
be looking at the US jobs report and critically the
CPI coming up. You know, it's not so long ago,
(02:14):
Lisa that we used to say, okay, forget about CPI.
Inflation's under control all that matters the jobs report. Now
suddenly we've realized that both are in play, inflation and
the employment spot.
Speaker 1 (02:25):
So when we say afternoon in Great Britain, because no
one's saying it's particularly good right now, what is better
for them an upside surprise to labor markets or downside
surprise at a time when potentially that could spur some
sort of risk off move, at a time when even
in the United States people really questioning the sustainability of
what's going on.
Speaker 3 (02:45):
Yeah, and that's the if in the US you really
want an upside surprise, if we had the choice between
the two, you take an upside surprise. If you're in Britain,
you take a downside surprise. Yields have got to stabilize
otherwise you're risk triggering these dynamics that can really hurt.
So they would look, they would hope for a downside
surprise that brings yields down here and puts down the
(03:07):
pressure on their yields.
Speaker 1 (03:08):
When you talk about bond vigilantes and how they find
the most vulnerable spots, how long is it before they
find the United States particularly vulnerable? And this sort of
goes to the heart of the question that Torsten Slock raised,
which is, it is highly unusual to see the long
end yield rise by one hundred basis points after a
series of one hundred basist points are very cuts from
the Federal Reserve. Do you have a sense that maybe
(03:30):
the US is one of those vulnerable spots at this
point in relative terms? No?
Speaker 3 (03:34):
You know, you've heard me say over and over again,
the good, the bad, and the ugly. The good is
the US, The baddest China, and the UK is Europe,
including the UK. The ugly is Europe, including the UK.
So US, China, Europe, including the UK. They'll focus on
the ugly first and then they'll creed pop.
Speaker 4 (03:55):
The US has.
Speaker 3 (03:57):
A particularly a good spot because higher yields here associated
with stronger growth. That is not the case in Europe.
Speaker 2 (04:03):
So why do you think the Federal Reserve is so confused?
At least they sound confused by some on these conference
back in December.
Speaker 3 (04:10):
How much time do we have?
Speaker 2 (04:11):
We've got enough time to get through it all.
Speaker 3 (04:13):
Okay, So they've been confusing their analysis, they've been confused
in their communication, they've been confusing their approach. When you're
data dependent and you're just looking at the future through
the lens of the past. You will get more and
more confused as we go through these changes. And we
haven't even talked about policy uncertainty, which adds is the
(04:33):
reality is right now we could solve at different levels
of employment and inflation. Whatever scenario you had for recession,
soft landing, no landing, whatever probabilities you had, now each
of them is associated with different levels of inflation, and
that is new. So the Fed, and you've heard me
say this for a long time, has got to get
(04:54):
more strategic in this approach and has has got to
stop being excessively data dependent.
Speaker 2 (05:00):
They say this word, this phrase that you use policy uncertainty,
and when I hear it, I just think Donald Trump.
Well they actually mean to say it's Donald Trump. And
you saw that in the minutes, and I think we
heard that in the news conference with Chairman Poal. I'm
struggling to understand this, and I'd love your opinion on this.
Why some officials on the Federal Reserve are willing to
preemp policy changes and factor that into their observations and
(05:20):
their forecasts, but unwilling to do so. When it was
Biden in the White House and he was pushing through
massive fiscal stimulus into a supply constrained economy, and they
sat there and let inflation rip. What explains the difference
between the behavior and response and the approach to two
different presidents.
Speaker 3 (05:36):
No, you've got to ask them. We thought we understood
what the FED. How the FED approached this when Chapau said,
quote something along lines that we don't speculate, we don't predict,
and we don't assume anything about policies. So everybody assumed,
you know what, let's wait and see and what we're
hearing from the FED does not incorporate forecasts about policy changes.
(05:59):
And then the whole thing got modeled, and now some do,
some don't.
Speaker 4 (06:03):
You're not quite sure what.
Speaker 3 (06:04):
And I think this is part of a bigger issue,
which is FED communication has gotten really confused. Bill Dudley
had a really good piece in Rumor Opinion about this.
And it does matter because the FED is supposed to
reduce volatility, not contribute to volatility, and for the last
few years the FED has contributed to volatility.
Speaker 1 (06:23):
How do they not contribute to volatility when they are
facing off with policies that offer up profoundly different contours
of inflation and growth?
Speaker 3 (06:31):
So first of all, they've got to either take the
approach of this is what we think the baseline is,
we are gonna check it every single day against more
signs out of DC. Alternatively, we're not incorporating any new policies.
Sometimes you need a top down, you need the chair
to say this is the approach we're going to take
for now, because the muddled middle causes all sorts of
(06:55):
spillover effects that are not helpful at all to them.
Speaker 1 (06:58):
So let's talk about the spillover effects. We've talked before
about how their at risk of maybe allowing inflation to
creep higher than have to hike rates later, the idea
of not recognizing inflation enough. There's the other side of things.
If they hold rates too high for too long, they
could cause a deterioration and dramatic iteration in the economy
right now, which is the bigger risk.
Speaker 3 (07:19):
So the only reason we talk about the inflation risk
is because we compare it to an arbitrary target that
I'm willing to bet if we were to set today,
we would not set at two percent. We'd set at
two and a half to three. Every other indication of
inflation suggested inflation expectations are stable. It just was structurally
(07:40):
happening here and in the rest of the world, means
that you're going to run the economy for now at
a higher equilibrium inflation rate than before, and it's not.
Speaker 4 (07:50):
So.
Speaker 3 (07:50):
The reason why we're getting in this whole thing is
because we are judging ourselves against a target that itself
is not only arbitrary, but would not have been the
target we would have chosen today. I don't worry, honestly
about inflation until I have evidence that inflation expectations are
the anchored, and there's no evidence of that at all.
I do worry that if the FED truly believes that
(08:13):
it has to achieve two percent and wants to do it,
it's going to have to hike rates this year. And
if it hikes races this year, it's going to pull
the rug from under US growth. It's going to pull
the work from under US investment. This is how important
it is. So my expectation is that fudge they'll say,
we continue to pursue two percent, but down the road
(08:34):
they'll stick with a two and a half percent target
forecast for now, saying on the way to two percent,
but we will basically be living with a high inflation target.
Speaker 2 (08:42):
Mohammed, We're lucky to have you. I'm Marie joins Us
now from Washington with admires of Raima James Amory.
Speaker 3 (08:58):
I would see a good morning, Jonathan.
Speaker 5 (09:00):
The clock is literally ticking for TikTok and today they're
going to have their day at the Supreme Court to
try to combat this bill and they will either be
banned unless they divest away from Byteedance, this Chinese company.
Speaker 6 (09:14):
What do you think happens ed I think on January nineteenth,
TikTok ceases to exist here in the United States. I
think the wild card here is that under the law,
the President of the United States has an ability to
extend one time for ninety days. So the question that
I have is, come January twentieth, the next day, does
(09:35):
Trump activate that ninety day extension and is there a
deal worked out?
Speaker 5 (09:40):
It sounds like he's going to because he's flip flopped
since his first time in office in the Oval Office
when he talked about the security concerns of TikTok that
now he thinks actually, in an interview with my colleagues
over the summer, talked about the fact that we if
you don't have TikTok, then Meta is too big, and
he understands a lot of individuals get their news from there.
It seems like he wants to keep it around. So
(10:00):
what are the options even if there's an extension.
Speaker 6 (10:02):
So after the ninety days, one of the things we
went through the statute at Raymond James yesterday published a
report about this, and ultimately it is up to the
president to declar that what has happened with the divestment
or for foreign ownership has met the needs of the law.
And so as long as the president declars, it's okay.
(10:23):
The problem for Trump, though, is that if there is
not a divestment, a five thousand dollars per user fee
gets kicked in. And I don't think the app stores
at Apple or Google or Oracle's hosting of this wants
to exist because when you look at the number of users,
I add that up to about an eighty five billion
dollar fine. And unless you change the law or you
(10:46):
have this divested, it will cease to exist, assuming it
is upheld by the Supreme Court.
Speaker 5 (10:51):
Who can buy this. This isn't even like Elon Musk
buying Twitter. This is an incredibly expensive company.
Speaker 4 (11:00):
I assume the money would be there.
Speaker 6 (11:01):
The bigger question for me is will the Chinese government
allow it to be sold, Because ultimately, if you yeah,
because you can open up the hood, you look in
in everything that the national security folks have said about
keystroke capture, about geolocation, about the algorithm potentially manipulating the
(11:22):
users of TikTok, all of that will be very apparent,
and we will know even more of how the Chinese
have been spying on Americans using a very popular app.
Speaker 5 (11:32):
Trump will also be breaking with his national security advisor
and a secretary.
Speaker 6 (11:36):
Of State, and I mean like Trump will break with
his administration whenever he wants. I do think it's important
that you highlight the kind of animis that he's had
towards Meta and towards the potential benefit to Instagram. Because
of this, it does look like some of that animis
might be reduced over the actions by Meta by Mark
(11:56):
Zuckerberg in recent weeks trying to get him okay.
Speaker 5 (12:00):
Concerns grow on a daylight today when CNN comes out
and says that Chinese hackers breach Siphius in December, not
really as surprise, as Jonathan said, because we do know
that there was Chinese hackers breaching the Treasury Department, but
isn't this doesnes has become even more of a national
security concern And what's going to be the response from
Trump two point zero to Beijing.
Speaker 6 (12:19):
Yeah, I mean, I think it is a extraordinary act
that we knew that there were Chinese hackers that access Treasury.
It was downplayed by Janet Yellen recently, but for them
to have hacked into Siphius, the Committee on Foreign Investment
into the United States, there was a deal that was
pending me Bon Steel trying to buy us steal. We're
(12:40):
looking at all of the potential national security concerns about
that me Bon's operations within China. For them to be
looking for exactly what was happening at Cyphius at that
time is a huge concern. And that's why I've always
said almost everything in DC related to China is bipartisan.
The only place you'd don't want to be is being
(13:01):
seen on being on China side.
Speaker 5 (13:03):
Well, except for potentially one we are waiting for a
Commerce Department to come out and this was a bloomberg scoop.
Speaker 4 (13:10):
But I know you've been.
Speaker 5 (13:11):
Writing about it for months about Ai chips from Nvidia
and all roads really lead to China when it comes
to wanting to make those export controls tougher.
Speaker 4 (13:19):
Correct.
Speaker 6 (13:20):
Yeah, So as early as today, and it's going to
happen between now in January twentieth, there's going to be
a final export control rule that comes out from the
Biden administration. This is going to be focused on the
number of AI chips that are going to countries that
we have concerns about. Now we've blocked almost everything going
to China or to Russia. We're going to allow everything
(13:41):
to continue to go to our closest allies, but there's
going to be a tier two company or country list
where we're going to put caps on how much can
the Middle East get, how much can Southeast Asia receive. Now,
generally speaking, I would have expected this to be bipartisan,
but you have Ted Cruz tweeting out last night strong opposition.
You have Nvidia coming out with strong opposition. So the
(14:04):
question I.
Speaker 5 (14:04):
Have is as going to allies or because the time.
Speaker 6 (14:07):
No, because they're going to restrict it going into some
Southeast Asian in Middle Eastern countries. The real issue here
is almost all of our export controls usually deals with
the physical location. But when you're developing data centers and
you can access that via the cloud, it might not
matter if that AI chip can't go into China. If
you build that data center in Malaysia or you build
(14:29):
that data center in the UAE, if they have that
cloud access to it, they've essentially had that technology. So
the chips are going to be limited, and there's going
to be new rules related to data centers to make
sure that they are certified and verified that they're not
giving this technology to China.
Speaker 5 (14:46):
So if you have Republicans already coming out and saying
we don't want to see this happen, Biden administration is
doing it on literally their final days in office. Does
Trump reverse it?
Speaker 6 (14:55):
I think it's going to be hard for him to reverse.
What they're going to do is it's an interim final
rule DC speak to It goes into effect immediately, but
there's an opportunity for the Trump administration to put the
final tweaks on that. If the caps are too low,
look for foreign governments to be very transactional. I think
Saudi Arabia will put a lot of pressure that if
their cap is too low, Other Gulf countries, other kind
(15:17):
of parts of the tariff conversation. This could be a
tit for tat hey, I'm willing to do X, Y
and Z to avoid tariffs, including trying to remove these
these AI caps. Is actually going to give Trump a
new tool in his negotiations globally in terms of what
does the US have someone that these other countries want.
Speaker 5 (15:38):
I just want to finally end on this point. You're
talking to everyone on the Hill about the process of
how his agenda gets accomplished. The bond market, though, is
focused on the price.
Speaker 3 (15:48):
What do you think we're going to.
Speaker 5 (15:49):
See in terms of how big this bill is going
to be?
Speaker 6 (15:52):
Yeah, So I put the over under as it relates
to both an extension of the tax cuts and if
we do an immigration energy defense bill at one point
point nine trillion, why do I do that? Because that
was the cost of the American Rescue Plan. I don't
see Republicans doing a bill bigger than build back better
for Biden, and so I do think that we're on
the under of that.
Speaker 5 (16:13):
But extending the tax cuts is yes.
Speaker 6 (16:15):
Ten years of the tax cuts is four point six
trillion dollars. Four or five years of the tax cuts
is about one point five trillion. What would you do?
I probably see it goes to four or five years.
The original was eight. You say, hey, we did about
half as good in trying to get those other things.
People have been too focused on the ten year extension.
I think it ends with a much shorter extension.
Speaker 5 (16:35):
Ed Mills, thank you so much for joining me in
the studio this morning. From DC Jonathan a long list
of issues that the incoming Trump administration is going to
deal with, TikTok, export controls, and of course trying to
get this agenda through which ed Mill says could be
under true trillion dollars.
Speaker 2 (16:50):
I might a freie time thank you with this amount
of tybe with Stephanie Roth the Wold Race, said Stephanie,
and wanted, that's quite a number.
Speaker 7 (17:06):
What you might here is I mean, first of all,
it is quite a number, but average early earnings were
point two eight. So this is kind of a goldilocks
type of report, and this in a way, of course,
markets are training it as a hotish print, but the
reality is that wages are growing at below four percent,
even with job gains running the strong.
Speaker 2 (17:24):
So we don't have to stop talking about interests, right
hikes anytime soon at the Federal Reserve.
Speaker 7 (17:28):
I don't think we have to be talking about hikes,
but we have to start thinking about when is the
FED going to be pausing?
Speaker 4 (17:32):
That's in the real question.
Speaker 1 (17:33):
Well now, I think that that's what people are saying, right,
they're on pause period.
Speaker 4 (17:38):
I think the question is where they're going to revive.
Speaker 1 (17:40):
I want to go to the point that you're making
about inflation and that this does sort of question just
how much inflationary pressure is under the hood of some
of these gains. How accurate I have the average hourly
earnings actually been when it comes to inflationary pressures. Because ultimately,
if people have jobs, they have been shown the willingness,
particularly of millennials and paying premium form seats on airplanes
(18:01):
and other things. I mean, there still is the impetus
to spend if you have a job.
Speaker 7 (18:05):
Yeah, I mean it all comes down to the labor market.
If the labor market remains healthy, then people are going
to go out and spend. The thing is that wage
growth is still running, you know that four percent, which
given where productivity is, the FED can kind of accept
something like that. So, and the FED has said this
a couple of times that they don't believe that the
labor market is really causing significant inflationary pressures. So now
the question is just that can the fence they stay
(18:27):
on pause from here or can they cut one.
Speaker 4 (18:28):
Or two more times.
Speaker 3 (18:30):
So Wednesday's ADP numbers on earnings showed a difference between
four percent wage increases for those who are on the
same job seven percent for those who are changing jobs.
And the question becomes, if we continue to create so
many jobs, if vacancy is awaited a six month high,
at what point do earnings become the lagging indicator? At
(18:54):
what point do earnings respond to what's happening in terms
of the quantity of jobs.
Speaker 7 (19:00):
Yeah, and that's that's the trend that we saw, you know,
in twenty twenty two and twenty twenty three, and the
labor markets are to heat heat, heat up. Is that
there was that d differentiation between job switchers and job stayers,
and that is something to keep a close eye on.
But as of now, the you know, the wage data
have been fairly contained and if we didn't see a
a wage price spiral on twenty twenty two and twenty
twenty three, it's very unlikely we'll see at this time
(19:21):
around that was the the real strength in the labor market,
and it didn't really unfold into something that was out
of controlled wage inflation. So this time I don't anticipate
that will be the case. To get to your your
your question earlier, how accurate is is the wage data
from month to month?
Speaker 4 (19:35):
Not great?
Speaker 7 (19:35):
This this probably was had some calendar effects that pushed
down some of the data, but on a year of
a year basis, it's in line close to to what
the ECI is saying, which is kind of the gold
standard anyway, So I would say, y, you know, yeah,
maybe it was uh artificially depressed by some of the
calendar effects, but the reality is wage growth is running
a something close to four percent, which is somewhat tolerable.
Speaker 4 (19:53):
For the FED.
Speaker 3 (19:54):
So how confident can we be that we don't get
these second round effect because some economists will tell you
it's not surprising. We didn't get it two twenty twenty
three because people had no memory of inflation, so they
didn't think that they needed to adjust. Now three years later,
people have a fresh memory of inflation. So can we
be as confident that it's just one off? We don't
(20:16):
get the anticipatory wage demands. We don't get anticipatory price increases,
I mean.
Speaker 7 (20:21):
And that's gonna be the challenge for the Fed of
just probably why they're going to have to sort of
wait this out for a little while. And with tariffs,
of course, that makes it a little bit more challenging.
But I think at the end of the day, we'll
see that the inflation is probably gonna, say, sticky somewhere
between two and two and a half percent. But I
don't think we're risking three four five percent like we
saw last time. So I think this challenge is the
(20:42):
narrative that inflation is gonna easily get back down towards
two percent, but something that we saw the last time
has to be driven by supply chain issues, which we
currently don't really have.
Speaker 2 (20:51):
If you want just join, I guess welcome to the program.
Just moments ago, a big upside surprise on a pay
roaster pull coming in at T fifty six the estimate
one to sixty five unemployment drum them back as well,
to four point one percent from four point two. Off
the back of that, some big moves in the bond market,
particularly the front end of the curve. The two year
up by double digits. Off the back of that, as
you might expand some dollar strength. Euro dollar getting closer
(21:11):
and closer to break in one oh two. And if
you check out the equity market, equity features down across
the board on the S and P five hundred, down
by point eight on the rustle of small caps, negative
by one point seven percent. We'll see if all of
this sticks. We are on five percent watch on a
thirty eight yield Lisa. The higher the session four ninety
nine eighty one, and.
Speaker 1 (21:29):
We're pushing back the potential for our first rate cut
of twenty twenty five from the federal Reserve to at
one point October. Now we're back to September, but really
pushing it back. This is where we start to wonder,
particularly the small cap area, how much this becomes restrictive
for a small subset of companies. And I think about housing,
I think about mortgage rates and how much that can
(21:50):
remain dissonant from the rest of the strength from elsewhere.
Before you know it actually calls into question some of
these dynamics.
Speaker 2 (21:57):
Joining us now is Jeff Rosenberg of Blank Rock. He's
got thoughts on this market, and I'm sure Jeff first
the votes you, Sarah, and welcome to the program. Your
reaction to that number you from twelve minutes ago.
Speaker 8 (22:06):
Yeah, well, clearly it's a strong number, and that's the
that's the market reaction. That's the first point. Second thing
is the retail component here. It's worth kind of like
thinking about what's going on here. So it's it's having
kind of an effect in two parts of the report.
The retail numbers are underlying are stronger because of the
shift between November being negative because of the lateness of
(22:29):
Thanksgiving and Black Friday, so you're seeing a little bit
of a flattering on the headline number. The other thing
is that that average hourly earnings which your last guest
was talking about, which is kind of like the oh,
it's maybe not so strong.
Speaker 4 (22:41):
We don't have to worry about inflation.
Speaker 8 (22:43):
Because it's you know, a weaker average hourly earnings print.
You gotta be careful. And the question was, you know,
how reliable is it on these monthly payroll reports. The
problem is the mixed shift really can mess with that
number and the boost to retail this month, maybe factoring
in those tend to be lower paying jobs, and so
it may be actually understating the average hour of the earnings,
(23:05):
which if you didn't have that mixshift, this may actually
be even a stronger picture, which is then the third point.
You know, this is just financial conditions tightening because it's
less need for the FED to cut. You know, we
priced out most of that, Most of that shift happened
in the FOMC December meeting. But this is even further
pushing it along the way. Now, Jonathan, you asked, you know,
(23:26):
does that mean, you know, when do we start talking
about the FED having to high rates?
Speaker 4 (23:29):
No?
Speaker 8 (23:29):
No, no, this is pricing out any need for the
FED to be cutting and pushing on my long standing
you know refrain every time I come on the show.
It's just financial conditions are really undermining the fed's view
that their policy is really that tight, and so they
don't need to be worried about.
Speaker 4 (23:49):
How tight their policy is.
Speaker 8 (23:50):
And so this is pricing out some of those future
cuts for twenty twenty five, not that we had that
many priced in to begin with.
Speaker 1 (23:58):
Jeff, you've asked and answered most of the questions we had,
So I do want to go to this question of
what do you do with this?
Speaker 7 (24:02):
Right?
Speaker 1 (24:03):
I mean, are you does this make you more bearish
on equities or does it actually make you more bullish,
because ultimately you're not going to find the value in
fixed income. It is going to come from the growth
and the strength that we just saw reflected. Yeah.
Speaker 4 (24:14):
Yeah, and you touched on it as well.
Speaker 8 (24:16):
You know, it's a good report, and Muhammed's first point
was like, hey, this is good news. Is American exceptionalism.
This is a strong economy. You know, that should be
good for stocks and risky assets. And I think that
ultimately is the case. I think the market and the
valuations have to get over the idea that you're facing
some higher interest rates.
Speaker 4 (24:36):
I think from the fixed income lens.
Speaker 8 (24:37):
The higher interest rates are actually bringing value relative value
back to fixed income. You know, we've really shifted the
pricing of how much do we need the FED to support.
You talked in the earlier segment about the asymmetry. I
very much agree with that that the asymmetry is now
kind of more in favor of fixed income in terms
of how much war rates can go higher versus the potential.
Speaker 4 (25:00):
For them to go lower.
Speaker 8 (25:01):
And we priced out a lot of that expectation of
the support from the FEN. I think that's helpful to
the pricing of the bond market and the kind of
the selloff that we're seeing here in the front end,
you know, leading, I think that has reinforced the attractiveness
of yield in the front end of the yield curve.
Speaker 3 (25:19):
Jeff, it seems that we're very comfortable with the notion
that this pushes back whatever weight hikes, who weight cuts
we're going to get and we're going to get fewer,
et cetera. But the minute someone mentions a weight hike,
everybody gets really really uncomfortable. So no, no, no, we're not
there yet. What does it take to get there? I
(25:39):
think it takes a lot to get there.
Speaker 8 (25:42):
I mean that's a very big swing, and obviously what
it takes to get there, Muhammad, And you know this
is it's inflation, and not just like the somewhat unease
of sticky inflation, but a complete change in the narrative
that for all the forecasting of the underlying opponents and
the imputed data and our understanding of inflation, that we've
(26:04):
just gotten that so wrong. And there's a reacceleration in inflation.
I think you have to have a reacceleration, not the
slowing in the movement to two percent, to shift the
FED and the markets expectation that this goes to tightening,
I think it's a very high bar to get there,
and we're really just pricing out the last few expected cuts.
Speaker 4 (26:26):
In twenty twenty five.
Speaker 2 (26:27):
Well, Jeff, let me put it another way, then, how
high is the boun to cut again given what we've
just seen over the past few months.
Speaker 8 (26:33):
Yeah, you know, I don't think the bar to cut
again and to change the expectations on cuttings that high either.
I mean, look at what we went through last year
in terms of the swings in market expectations on what
the FED would do and the FED zone forecasting on
what it would do, and the extreme data dependence here.
So the bar to more cutting is we're seeing that
(26:58):
stabilization in inflation, not the risk on inflation, and for
whatever reason, obviously not the story today. You're seeing that
slow down that the FED is feared in the labor markets,
and a couple of data points on labor markets again,
now what we're seeing today sub one hundred, you know,
pictures increases in unemployment rates. You get two reports in
(27:20):
a row of that, you can very quickly shift the
narrative back to O, the Fed's got to cut two
maybe three because of this extreme data dependence that we
have the FED driving market expectations.
Speaker 1 (27:33):
I see Stephanie Ross nodding along. I do want to
just point out that briefly the thirty year yield did
hop above five percent before coming back down, but it's
right now four point nine up there, it is five percent.
Once again, you're shaking your head. Do you agree with
what he's saying?
Speaker 7 (27:46):
Yeah, I agree. The Fed's been data dependent, but like
very much on every data point right, So to the
extent that we have another couple of prints that are
a little bit softer in the beginning part of you know,
in the next couple of months, then the narrative can
shift to some extent. We've seen every three months in
the market has been swinging from soft landing, the hard
landing to no landing, and realistically you're probably somewhere in between.
So base case at this point is that you know,
(28:08):
the narrative is gonna continue for a while, then you're
gonna have the Q one inflation seasonality problems again. So
it's probably gonna be towards the middle part of the
year when the when we could start talking about potential
cuts again.
Speaker 3 (28:18):
So Stephanie said, the data. The FED is data dependent,
not only overall, but every single data point, which of
course power would push back on you and say no, no,
And that makes us all data dependent, right, and it
makes us all add volatility to a market because we
all we get swung around. Doesn't that bother you? Doesn't
it bother you that everybody has become so data dependent.
Speaker 4 (28:40):
It does.
Speaker 7 (28:41):
Nobody should be caring about the unemployment rate to three
decimals and averagellit yearning to the same kind of thing.
I just had that conversation with Tom Keane earlier. It
makes us uncomfortable, but we all have to We all
are in this, in this environment, even though they're trying
to steer us away from that. In theory, the FED
continues to get swung around by every data point, So
then we all have to focus on the same thing
and figure out every new once within every single print.
(29:04):
The retail thing is a good point in the sense
that it was minus twenty nine last time and now
it's jumped back up forty three. Realistically, that drove some
of the strength and you know, you probably should smooth
that out but we're in an environment that it's going
to be tough, and by the way, next print, we're
gonna be impacted by all of the fires, and that's
going to be a really messy data point as well.
Speaker 3 (29:22):
Do you think of any fed that got swung around
as much as this feed is getting swung around? I mean,
I think back of the financial I mean I think
back of so many bigger episodes.
Speaker 2 (29:31):
To go post pandemic, post pandemic. This Federal Reserve allowed
the administration of the time to come out with huge
fiscal plans and the supplying constrained economy and just say.
Speaker 4 (29:41):
We'll look through it.
Speaker 2 (29:42):
We'll look through it. They weren't dated data dependent. Then
they waited the change in behavior on the f WEMC.
I hear a lot of economists present company excluded a
lot of economists who are more keen to defend the
institution that provide critical analysis of it. That's really problematic
for me. For economists on Wall Street who are held
bent on making sure that their friends at the FMC
(30:05):
still give them access to have conversations at NAPE, etc.
They're actually just calling things out for the way they
see it. This Federal Reserve has behaved very differently under Biden,
and it's changed when Donald Trump has come into power.
They've opened the door to those accusations themselves with that
news conference back in December, without a doubt.
Speaker 3 (30:26):
Do you agree, No, I agree that now we have
a FED that's navigating two things, the monetary policy landscape
and the political landscape.
Speaker 4 (30:34):
It's not navigating one thing anymore. It's not navigating two things.
Speaker 3 (30:37):
And we just have to keep.
Speaker 4 (30:38):
That in mind.
Speaker 2 (30:39):
Why wasn't it navigating the political landscape two three years ago? Well,
it's clear that fiscal policy was in the driving sea.
Speaker 3 (30:45):
I think two three years ago they were asleep and
the worsh to call inflation transitory. Ignoring the policy side,
ignoring all the uncertainty was a big mistake. And because
of that, they became extremely data dependent and they don't
even want to look forward anymore. And it's ironic because
we're dealing with markets that are supposed to be looking forward.
(31:07):
We're supposed to be discounting the future, right, and yet
we've all become completely dependent on what's just happened.
Speaker 4 (31:13):
It's absurd, but that is what happens.
Speaker 3 (31:15):
When the institution, with the printing press in the basement
decides that it will become excessively data dependent. It turns
us all into extreme data dependence.
Speaker 2 (31:25):
They may again at the end of this month, we'll
get two more data points before then. CPI is one,
the inauguration is another. What's this news conference, this mating
rather going to look like at the end of this month.
Speaker 3 (31:35):
Yeah, I mean I.
Speaker 7 (31:36):
Think we're going to well, let's first talk about maybe CPI,
because that we're looking for something that should be a
little bit more soft, something Z point two four percent
on core, which you know should should be Okay, I
don't think it's going to change anybody, especially after this print.
This print made the CPI a lot less important. And
then we're going to have to see from the Trump administration,
what are we what's going to happen in terms of immigration.
(31:57):
That's going to be one of the biggest things that's
going to happen, probably right off the bat. How M
how much or how M how how aggresive are they
gonna go? It's probably gonna be at the uh A
Y a lot of a lot of you know, I'll
bark at the beginning, and then realistic, we're not gonna
see that much deportations because that's gonna require funding that
they don't have, and it's probably just gonna be people
rolling off the humanitarian parole uh in TPC. But that's
(32:18):
gonna be a big thing to watch out for. And
then the second is what a w what's gonna happen?
From a tariff perspective, we haven't really heard much specifics. Uh,
you know, we're we're we're l we're winding back to
the announcement on Canada and Mexico. Are we gonna get
more of that? Probably not, and we're not hearing much
of it. But those are the two things we're looking
out for most from him tariffs and uh uh tariffs
and uh what we're h hearing from integration perspective.
Speaker 1 (32:41):
Jeff, as an investor who has to take a longer
term view, how do you remain independent from the successive
data dependence? So we were just talking about how do
you have any conviction with calls at a time where
people are talking about how much the parameters could change
based on whether it's CPI or whether it's Jan twentieth
and the inauguration.
Speaker 8 (33:03):
Yeah, it's really recognizing, you know, the things that you
think you can forecast and recognizing the things.
Speaker 4 (33:09):
That are just not forecastable.
Speaker 8 (33:11):
And we have a little saying if you can't forecast,
and I would put all of the policy uncertainties that
were just described in that category, then you have to observe.
And so you just kind of like know what you
can kind of control, and know what you can't control,
know what you can forecast, know what you can't forecast,
try not to overreact to every data point. But on
(33:34):
the fiscal policy, I mean that is that is basically
the story for the twenty twenty five outlooks is uncertainty
and unforecastability. So we're gonna have to kind of recognize
that and we're going to sit back, We're going to
be patient, We're going to observe, and then you know,
as the information becomes more clear, that's when you can
take action in your portfolio.
Speaker 4 (33:55):
Is to try to do it ahead of time.
Speaker 8 (33:57):
I think you just have to recognize that it's a
very difficult exercise both forecasting what is going to be
the policy and equally forecasting what is going to be
the market reaction to that. Getting both of those rights
very unlikely. So you're going to have to sit back
and wait for the data to reveal itself.
Speaker 2 (34:16):
Hey, Jeff, appreciate your time, sir. As always, Jeff Rosenberg,
there at blankrupt will take a step back and a
big deep breath and look ahead to see PI next Wednesday,
as well as some bank earnings too.
Speaker 4 (34:26):
Mohamma.
Speaker 2 (34:26):
Just a final thought around the table. We came into
twenty five thinking about US exceptionalism and global divergence. And
Lisa and I've been talking about this for a number
of days now, number of weeks. The extent to which
we can keep stretching that rubber band, how far can
we take that, How much oxygen is left in that
story before we get these negative feedback loops and things
start to move in the other direction.
Speaker 3 (34:48):
I mean, that's a great question, and I'm not sure
I can answer that, but I can tell you that
the theme of dispersion is really important because there's a
limit to how long you can run a system with
significant dispersion. And we have two main discerssion issue US
visay the rest of the world. The hope is the
rest of the world comes up to the US. The
fears of the rest of the world drags the US down,
(35:10):
and then within our economy, low income versus the rest.
Low income is the struggling right now. We must not
forget that, and these numbers cannot make us not also
consider what's happening at that end, because at some point
that we can can migrate up. So the theme we're
going to be talking about a lot is forget about averages,
(35:33):
look at sectors, and that is in the marketplace. We've
gone from a market focus to a theme focus, and
now it's going to all be about individual names.
Speaker 2 (35:42):
This is the Bloomberg Surveillance podcast, bringing you the best
in markets, economics, antient politics. You can watch the show
live on Bloomberg TV weekday mornings from six am to
nine am Eastern. Subscribe to the podcast on Apple, Spotify
or anywhere else you listen, and, as always on the
Bloomberg terminal, bloom Bag bestess out, mhmm.
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