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Core US Inflation Picks Up, Presidential Debate · Bloomberg Intelligence

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Speaker 2: All right, let's get back to the market's here. So
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Speaker 2: equities continue to roll over. Bond market quite interesting. You
0:28
Speaker 2: had a sell off right when those CPI numbers hit.
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Speaker 2: You had a spike in the two year yield, and
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Speaker 2: then once the cash market opened for the equity market,
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Speaker 2: bonds continued to really roll over, with yields moving significantly lower. Now,
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Speaker 2: Ira Jersey, Bloomberg Intelligence Chief US interest rate strategist, it joins,
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Speaker 2: us I shouldn't say significantly lower, but compared to where
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Speaker 2: they were, it was quite a move. What are we
0:47
Speaker 2: making of the move today?
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Speaker 3: Yeah, so, you know, after the CPI report came out,
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Speaker 3: the market was thinking, oh, well, maybe the Fed is
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Speaker 3: less likely to do a fifty basis point rate cut
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Speaker 3: next week, and so we're going to readjust that front
1:01
Speaker 3: end yield. Once the you know, equity started to roll over,
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Speaker 3: you also have seen a pretty big rally in European
1:08
Speaker 3: rates this morning our time, in the afternoon their time.
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Speaker 3: And I think that that treasuries of have you know, one,
1:14
Speaker 3: have a flight to quality bid from the risk off
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Speaker 3: in the US markets, but also are being pulled down
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Speaker 3: a little bit by the global rate environment as well.
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Speaker 3: So again, not huge moves on a day on day basis,
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Speaker 3: but like you said, Alex, you know the fact that
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Speaker 3: we were off by six basis points in two year
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Speaker 3: yields and then you know, now we're essentially unchanged. You know,
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Speaker 3: I think that's meaningful enough that the market is, you know,
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Speaker 3: not one hundred percent sure right now and certainly has
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Speaker 3: certainly been not priced for, you know, just the twenty
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Speaker 3: five basis point cut next week.
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Speaker 4: So how do you think our friends at the Federal
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Speaker 4: Reserve will read this inflation data today?
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Speaker 3: Yeah, So our view is is that this solidified the
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Speaker 3: idea that a twenty five basis point rate cut is
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Speaker 3: in the cards. You know, again, fifty is not impossible,
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Speaker 3: and certainly the market doesn't think so either. But at
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Speaker 3: the same time, you know, point two in point two
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Speaker 3: percent inflation print is still above the Fed's target. So
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Speaker 3: even though they want to cut interest rates because they're
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Speaker 3: worried that the economy is starting to slip, and you know,
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Speaker 3: certainly they've been focused more on employment than inflation in
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Speaker 3: recent months, that they can start a slow rate cut cycle.
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Speaker 3: I know some some houses on the street think that
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Speaker 3: they could go twenty five and then fifty basis points
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Speaker 3: for a couple of meetings there after, I suspect at
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Speaker 3: the end of the day they're going to go twenty
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Speaker 3: five basis points at every meeting. So the market maybe
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Speaker 3: has gotten a little bit ahead of itself when you
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Speaker 3: look at pricing for say January FED funds futures, or
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Speaker 3: even two year yields for that matter.
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Speaker 2: Yeah, So it seemed like what happened is once they
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Speaker 2: got the print that that fifty bases point potential cut
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Speaker 2: moved more to December. Rather than pricing it out, it
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Speaker 2: just kind of pushed it off a little bit. Does
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Speaker 2: that need to be pushed out even more and or
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Speaker 2: is it taken out all together?
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Speaker 5: Well?
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Speaker 3: I think as a base case in the way that
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Speaker 3: I'm thinking about how the economy might develop, and then
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Speaker 3: what the FED reaction function and therefore the jusuring markets
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Speaker 3: reaction function to that new economic news is that the
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Speaker 3: economy is going to continue to slow, but not very quickly.
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Speaker 3: So therefore the Federal Reserve will be able to be
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Speaker 3: patient and go in twenty five basis point increments and
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Speaker 3: then maybe at some point it might do a fifty,
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Speaker 3: but I don't think that the Fed necessarily wants to
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Speaker 3: because and certainly as a first and we've been saying
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Speaker 3: this for months now, is that if the Federal Reserve
3:31
Speaker 3: were to start with a fifty basis point in rate cut,
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Speaker 3: you know, that would be like a shock and awe
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Speaker 3: kind of event. And I think that would show, you know,
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Speaker 3: the market and maybe just that you know, main street
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Speaker 3: main street businesses and households, that the fedce panicked and
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Speaker 3: they see something maybe that's much weaker than most of
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Speaker 3: the economic data that's coming in suggests. So I think
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Speaker 3: that that would show some panic. And that's another reason
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Speaker 3: to think, hey, they'll go twenty five's unless and until
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Speaker 3: you wind up having you know, negative payroll print or
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Speaker 3: even fifty thousand person payroll print. What would be enough
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Speaker 3: for them to say, hey, the economy's you know, not
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Speaker 3: growing anywhere near potential, so we really have to cut
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Speaker 3: interest rates significantly. But until we get to that point
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Speaker 3: in the data, I think that the Fed's going to
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Speaker 3: go twenty five basis points. And you know, look, this
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Speaker 3: is all like short term interest rate trader minutia quite frankly,
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Speaker 3: and for the I think for the broader markets, you
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Speaker 3: have to say, Okay, the Fed's an easing mode. The
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Speaker 3: question is how fast and how far not necessarily are
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Speaker 3: they going to be cutting rates?
4:36
Speaker 6: A right about thirty seconds left here the election.
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Speaker 4: The treasury market, I don't think I heard the yield
4:42
Speaker 4: curve mentioned last night at the debate. But how do
4:44
Speaker 4: you guys frame out kind of the political risks here?
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Speaker 3: Yeah, so we put out our We put out a
4:50
Speaker 3: note on what we thought the big impactful things for
4:53
Speaker 3: the treasury market will be based on the election. Most
4:56
Speaker 3: of those are not expecting a big reaction on election
5:00
Speaker 3: day one way or the other, but nuanced things like
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Speaker 3: who's the next FED share going to be that's going
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Speaker 3: to matter if President Trump wins election again, it won't
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Speaker 3: be Powell. Maybe for Kamila Harris it will be Powell,
5:12
Speaker 3: and if not, or probably someone else, and who was
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Speaker 3: maybe a Biden appointee to the Fed. So those are
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Speaker 3: the types of things that matter. And then of course,
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Speaker 3: things like budget deficits. Neither of these candidates is likely
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Speaker 3: to be a deficit hawk, so therefore you're likely to
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Speaker 3: continue with relatively large budget deficits, and that obviously has
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Speaker 3: an effect on pricing in the treasury market.
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Speaker 2: Airah, Always a pleasure, Always great to catch up with you.
5:36
Speaker 2: Ira Jersey joining us. He is Bloomberg Intelligence, a senior
5:39
Speaker 2: US interest rate strategy.
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Speaker 2: So we got through the risk events, we got through
6:02
Speaker 2: the debate, we got through CPI, We were headed towards
6:05
Speaker 2: the FED. It looks like markets are now pricing in
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Speaker 2: that twenty five basis points in September. So what do
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Speaker 2: you do in that scenario? Nicole Webb Senior vice president,
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Speaker 2: Financial advisor at Wealth Enhancement Group, and she joins us. Now, Nicole,
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Speaker 2: does this take fifty off the table or does it
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Speaker 2: push the fifty out to like a November or December.
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Speaker 5: You know, we were of the camp that the FED
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Speaker 5: probably wasn't going to step into this cutting cycle with
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Speaker 5: fifty basis point cut, and so for us, the CPI
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Speaker 5: today was largely in line with expectations obviously across the board,
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Speaker 5: and for us it just didn't bear terribly much weight
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Speaker 5: in the short term.
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Speaker 4: So what are the key drivers here then, do you
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Speaker 4: think of these markets going forward? Again, as Alex was
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Speaker 4: just mentioned, we've gotten through a number of kind of
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Speaker 4: external events here. What do you look to be kind
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Speaker 4: of a driver for markets going forward?
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Speaker 5: Yeah, Paul, I think you know, the market response over
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Speaker 5: the last couple of weeks has really been and I
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Speaker 5: would say even maybe this is some of what you're
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Speaker 5: seeing this morning after the CPI, which, as I just mentioned, was.
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Speaker 7: Largely in line.
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Speaker 5: But it's this need for all of the fundamentals to
7:13
Speaker 5: hold up in support of equities. And so when you
7:16
Speaker 5: think of part of that being the disinflation story, part
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Speaker 5: of that being the release of the pressure valve on
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Speaker 5: the consumer, and then also you layer in the need
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Speaker 5: for policy to go the right direction, corporate earnings, you know,
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Speaker 5: to continue to perform. It really just puts a lot
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Speaker 5: of weight on the market where you have valuations, high consensus,
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Speaker 5: long equity, and then you also have a cooling economy,
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Speaker 5: not just here but also globally, and so it's just
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Speaker 5: going to be a lot of digestion we expect over
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Speaker 5: the next couple of weeks, if not months.
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Speaker 2: Yeah, talking about globally. I was talking to an oil
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Speaker 2: trader today and he was at a conference over in Singapore. Yeah, no,
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Speaker 2: it's a shocker, and he was saying that everyone used
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Speaker 2: to think that China was just going to be a
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Speaker 2: property issue, and now everyone, even the Chinese, are like,
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Speaker 2: oh no, no, this is a real broader economic problem
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Speaker 2: in China, just to talk about the weaknesses there. So
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Speaker 2: what's the playbook, Nicole.
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Speaker 5: Yeah, I think when you have a market that's digesting,
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Speaker 5: to your point, Alex, the why it begs a question
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Speaker 5: why are we slowing?
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Speaker 7: And then does it change? And China's not a.
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Speaker 5: Quick reversal, so that likely isn't changing in the short term,
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Speaker 5: and we know that they're greater than fifteen percent of
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Speaker 5: global GDP.
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Speaker 7: That has a big ripple effect.
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Speaker 5: And then you think of the restrictive policy landscape in
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Speaker 5: the US, even a normalization of rates. To your point
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Speaker 5: about not knowing exactly what that neutral rate is, it's
8:39
Speaker 5: going to take some time.
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Speaker 7: And then you have excess savings declining.
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Speaker 5: And so the last leg of that then being my
8:45
Speaker 5: fourth point, which is all doesn't sound overly optimistic, but
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Speaker 5: you have the acceleration of earnings from the mega technology
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Speaker 5: companies as they continue to increase that cap spent. And
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Speaker 5: so when you think then about where we're going to
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Speaker 5: invest money, still under this long bold thesis, we really
9:03
Speaker 5: are looking for places where you can expect earnings acceleration
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Speaker 5: forward looking, where it's an environment that isn't necessarily in
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Speaker 5: demand of global growth accelerating, but instead, if we normalize
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Speaker 5: or we're okay with on trend, what are those pockets?
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Speaker 5: And so you're already hearing this a lot that healthcare pocket,
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Speaker 5: utilities pocket, the rep pocket, all of that votes favorably
9:28
Speaker 5: in the forward looking landscape over the next six months.
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Speaker 4: You know, yesterday we had some big moves into the
9:34
Speaker 4: downside for some banking stocks led by JP Morgan and
9:37
Speaker 4: JP Morgan's.
9:38
Speaker 6: Week again today.
9:39
Speaker 4: So I guess calling into question a lot of industry
9:41
Speaker 4: leaders at a recent conference about the profitability for the
9:44
Speaker 4: upcoming quarter for the banks, how do you think about
9:46
Speaker 4: the financials as a whole.
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Speaker 5: Here, Yeah, I think first when we think about the banks,
9:51
Speaker 5: we have to remember that it was only a couple
9:53
Speaker 5: of weeks ago that we were at fresh fifty two
9:56
Speaker 5: week high on bank stocks, and so.
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Speaker 7: Know that in and of itself, again going back to kind.
10:02
Speaker 5: Of where we are from evaluation and consensus perspective, the
10:06
Speaker 5: conversation around ANII, you know, it's expected to deteriorate. So
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Speaker 5: the response there to some of the comments yesterday was,
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Speaker 5: you know, again kind of to be expected and perhaps
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Speaker 5: shouldn't have.
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Speaker 7: Been new news.
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Speaker 5: And then again curiosity around even though we were talking
10:24
Speaker 5: about delinquencies, there has been a consistent flatlining to delinquencies.
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Speaker 5: We're not seeing an acceleration and growth and delinquency. And
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Speaker 5: so again I think this goes back to where I
10:34
Speaker 5: kicked things off today, which is that we need a
10:37
Speaker 5: lot of fundamentals to stay in support of equities, and
10:40
Speaker 5: anything that looks like it's a deterioration of any of
10:43
Speaker 5: those fundamentals when you do have valuations as high as
10:46
Speaker 5: they are is going to put pressure both on sectors
10:50
Speaker 5: and on the index as a whole.
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Speaker 2: Was really that decline yep, that's been in that decline
10:55
Speaker 2: was really confusing, Like we knew we knew it was
10:58
Speaker 2: going to be happening with rates, which was so odd.
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Speaker 2: Tech last two days has been the quote unquote outperformer.
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Speaker 2: That's safety trade, if I can say that right, you
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Speaker 2: had the bit into bonds yesterday, you had the dollar
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Speaker 2: moving hire as well, and you had that bit into tech.
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Speaker 2: Is tech going to be that safety rotation trade?
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Speaker 5: It's hard when you see pullbacks in the tech area
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Speaker 5: where I mean we've been talking now for a few
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Speaker 5: weeks that they were no longer the leader for calendar
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Speaker 5: year twenty twenty four. That does look like an opportunity
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Speaker 5: to be a buyer.
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Speaker 7: In that space.
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Speaker 5: Yes, we don't know in the short term what that
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Speaker 5: return on invested capital is or how quickly we start
11:39
Speaker 5: to see those earning surprises to the upside on that
11:42
Speaker 5: investment made. But if you have a long thesis, if
11:45
Speaker 5: you are a long term investor, not a trader, these
11:48
Speaker 5: pullbacks do look like a time to deploy fresh money
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Speaker 5: into that sector.
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Speaker 4: Fixed income here we've had yields pulling pretty dramatically just
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Speaker 4: on the tenure. We've gone from five percent to now
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Speaker 4: today around three points six percent. Here, what are you
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Speaker 4: doing in fixed income space? Are you taking credit risk?
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Speaker 7: Yeah?
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Speaker 5: You know, when it comes to fixed income, I think
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Speaker 5: the probably the thing that we have spent the most
12:11
Speaker 5: time on recently is just are you almost better off
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Speaker 5: on a one year staying in a money market? So
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Speaker 5: if you don't believe there's going to be an acceleration
12:22
Speaker 5: to cooling and that the FED doesn't necessarily have to
12:25
Speaker 5: go into a rate cutting cycle as we think of
12:28
Speaker 5: it traditionally, but more into kind of this shaving rates
12:31
Speaker 5: down as we normalize the interest rate environment on a
12:34
Speaker 5: twelve year or a twelve year twelve month forward, you know,
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Speaker 5: could you actually outperform a one year treasury sitting in
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Speaker 5: a money market? And so there's kind of some of
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Speaker 5: this playing around. But fixed income, we do think is
12:48
Speaker 5: going to continue to be a really valuable part of
12:51
Speaker 5: the portfolio, and we also expect to see a lot
12:54
Speaker 5: of flows into that sector. When you think just about
12:56
Speaker 5: where the concentration of wealth is in this country and
13:00
Speaker 5: the ages, it seems like a period in time in
13:03
Speaker 5: which you're going to see flows start to move away
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Speaker 5: from some of that shorter duration investment into some of
13:10
Speaker 5: these longer including credit exposure areas of fixed income, and
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Speaker 5: so from a flows perspective also, we think that will
13:17
Speaker 5: be favorable.
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Speaker 2: It's interesting. Paul JP Morgan talked about how you won't
13:22
Speaker 2: see the money move from money market fens until the
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Speaker 2: FED starts cutting more aggressively, like until they're deeper into
13:27
Speaker 2: the rate cutting cycle. So we're all like waiting for
13:29
Speaker 2: that rush. We might have to wait a little bit
13:32
Speaker 2: until that happens. For you, what's the next catalyst? Is
13:35
Speaker 2: it just gonna be the FED meeting or is there
13:36
Speaker 2: something else that you're looking at?
13:40
Speaker 5: Yeah, I mean to us, the first catalyst, Alex to
13:45
Speaker 5: your point would be, you know, post FED meeting, and
13:49
Speaker 5: is the dot plot? So what do we see, you
13:52
Speaker 5: know from members in terms of the trajectory of the
13:57
Speaker 5: rate cutting cycle we're entering. So if it is our
13:59
Speaker 5: first cut, what does that look like, you know, on
14:02
Speaker 5: the next twelve months?
14:03
Speaker 7: And I think even more importantly.
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Speaker 5: Is how the FED speaks about the economy following the meeting.
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Speaker 5: And what I mean by that is there's so much
14:12
Speaker 5: weight right now on is it twenty five, is it fifty?
14:15
Speaker 5: Is the second cut fifty basis points? And a lot
14:19
Speaker 5: of that has to come from how they talk about
14:22
Speaker 5: the setup of the economy beneath these cuts, and I
14:26
Speaker 5: think there will be a big fear response if you know,
14:29
Speaker 5: they aggressively start cutting, which really does signal that we
14:33
Speaker 5: are far too restrictive and the economy requires stimulation versus
14:38
Speaker 5: we're we're on a trajectory of normalization. And so you
14:42
Speaker 5: know that piece of it. And then the response from
14:45
Speaker 5: the housing sector in accordance to how the cuts go.
14:49
Speaker 5: We know we're under supply and housing. That's a huge
14:52
Speaker 5: catalyst for expansion in the markets if we do start
14:55
Speaker 5: to see a drive towards equilibrium in supply versus on
15:00
Speaker 5: going demand for housing.
15:01
Speaker 7: And so those.
15:02
Speaker 5: Two things have a pretty high correlation, we expect, and
15:07
Speaker 5: kind of we'll kind of handle the sentiment of investors
15:11
Speaker 5: as we enter the end.
15:11
Speaker 1: Of the year.
15:13
Speaker 4: Very good, Nicole web Thank you so much for joining us.
15:15
Speaker 4: Nicole Webb, senior vice president, financial advisor with Wealth Enhancement Group,
15:19
Speaker 4: joining us from New York via zoom.
15:20
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15:37
Speaker 2: Joining us now is Henry Detris, a managing partner and
15:40
Speaker 2: director of Economic policy at Beta Partners. She's joining us.
15:42
Speaker 2: She's in New Orleans. Actually, so hey, just real quick,
15:46
Speaker 2: are you safe? Is it okay? Is the storm coming?
15:48
Speaker 5: Like?
15:48
Speaker 2: Are you bracing for it?
15:51
Speaker 8: Probably right when I get off here, it'll come just
15:53
Speaker 8: at the end of this interview. It's expected to hit tonight,
15:56
Speaker 8: but it won't be too much of a big deal.
15:58
Speaker 8: So I'm not surprised that oil stocks aren't moving too much.
16:01
Speaker 8: We're used to this. This is what we prepare for.
16:03
Speaker 2: Okay, fair enough, all right, so we got that part done. Clearly.
16:06
Speaker 2: You were up late watching the debate with the spin
16:08
Speaker 2: and all the like, what's your pitch? What's your two minute,
16:12
Speaker 2: two minute, one minute, two sentence takeaway?
16:17
Speaker 8: I think that Harris clearly ran away with the debate.
16:20
Speaker 8: Trump missed a number of opportunities to stick to a
16:23
Speaker 8: script and stick to policy, and I think that was
16:27
Speaker 8: a mistake for him, and he could potentially have to
16:29
Speaker 8: correct it with the second debate. I doubt one will
16:32
Speaker 8: take place, but if the polling data starts to turn
16:35
Speaker 8: against him, as Kamala Harris's sort of appeals to moderate
16:39
Speaker 8: voters last night, should that work, he may have to
16:42
Speaker 8: commit to another debate.
16:44
Speaker 4: Henry, I'm just reading through your notes here, and you
16:46
Speaker 4: make a point here about ninety five percent of the
16:49
Speaker 4: electorate has already decided how they'll vote in November.
16:53
Speaker 6: Did I read that right? And if so, is that
16:56
Speaker 6: normal or is that crazy?
17:00
Speaker 4: Yeah?
17:00
Speaker 8: No, almost everybody has decided how they're going to vote.
17:03
Speaker 8: There's only about five percent of the electorate that's undecided
17:06
Speaker 8: right now. They're not you know, they're actively trying to
17:10
Speaker 8: ignore politics, but they're going to engage post debate. They're
17:13
Speaker 8: going to see clips from last night and start to
17:15
Speaker 8: make a call. There was, interestingly, fourteen percent of viewers
17:19
Speaker 8: last night thought that they maybe questioned their prior, their priors,
17:24
Speaker 8: They thought they might, you know, be willing to change,
17:26
Speaker 8: but then ultimately only four percent of them did. So
17:28
Speaker 8: we have a really sticky, very partisan America and that's
17:32
Speaker 8: going to make this election close until.
17:33
Speaker 7: The very end.
17:35
Speaker 2: What do you think can move the needle now? I mean,
17:37
Speaker 2: in some ways, this was the public's first introduction to
17:40
Speaker 2: Vice President Kamala Harris. President Trump is still unknown. Quantity.
17:45
Speaker 2: But nonetheless, how do they then further this if there's
17:48
Speaker 2: no second debate?
17:51
Speaker 8: Right twenty three percent of Americans are still looking to
17:54
Speaker 8: learn more about Kamala Harris's policies. Most of Americans already
17:58
Speaker 8: know all of Donald Trump's policies. The real uphill battle
18:01
Speaker 8: is on Kamala Harris's side right now. As my adds suggests,
18:04
Speaker 8: Trump is winning this race. The electoral College favors him
18:08
Speaker 8: in most swing states and within the margin of error
18:10
Speaker 8: in every single swing state. So it's really up to
18:12
Speaker 8: Harris to convey her home buyer tax credit and her
18:15
Speaker 8: position on abortion, her thoughts on capital gains rates, corporate
18:19
Speaker 8: tax rates, and sell that message to the American public.
18:21
Speaker 8: And I would suggest that the onus is on her
18:23
Speaker 8: to get that done.
18:24
Speaker 4: Just on Bloomberg Radio on television, Henriette, just before we
18:27
Speaker 4: came to you, we were listening to Canter Fitzgerald CEO
18:31
Speaker 4: Howard Lutnick, who is a strong Trump supporter, make the
18:34
Speaker 4: point that we've heard from a lot of folks that
18:37
Speaker 4: VP Harris should be more accessible to the media, should
18:41
Speaker 4: do interviews, should do town halls, press conferences.
18:46
Speaker 6: What do you think about that?
18:49
Speaker 9: I'm sure that she will as we go forward.
18:51
Speaker 8: The next major event is not until October first, with
18:55
Speaker 8: the vice presidential debate.
18:56
Speaker 9: I think there's twenty.
18:57
Speaker 8: Some odd days between now and then for the Hires
19:00
Speaker 8: campaign to take a sit down with a major editorial
19:04
Speaker 8: board and do more live town halls. What I think
19:09
Speaker 8: Republicans want to see is her stand alone as opposed
19:12
Speaker 8: to with Tim Wallas, which is of course what the
19:14
Speaker 8: interview with Dada Bash on CNN was a few weeks back.
19:17
Speaker 8: So I expect that she'll get out there, and the
19:19
Speaker 8: fact that American voters want to know more about her
19:21
Speaker 8: policies means that it is in her best interest to
19:23
Speaker 8: do that as well.
19:24
Speaker 2: What I also was noticing when I was reading a
19:26
Speaker 2: lot of takes on independence who just weren't clear, is
19:29
Speaker 2: that a lot of them are the people who go
19:31
Speaker 2: to the store, buy stuff, come home and like it's
19:35
Speaker 2: rough and economically it's really hard, and that the debate
19:38
Speaker 2: last night didn't speak to that didn't speak to that
19:40
Speaker 2: inflation or the economics. And you take a look at
19:43
Speaker 2: the inflation data today, right, it's kind of a mixed
19:46
Speaker 2: bag for everyone, But some of those core things like
19:48
Speaker 2: eggs are still a lot higher, and those prices are
19:51
Speaker 2: still a lot higher. How do the candidates really tackle
19:55
Speaker 2: that in a meaningful way where people who are truly
19:57
Speaker 2: undecided can get some clarity.
20:00
Speaker 8: This is why debates are so important for the challenger
20:03
Speaker 8: or the other candidate in this case, Donald Trump, to
20:06
Speaker 8: really hold her feet to the fire and say answer
20:08
Speaker 8: these questions speak to inflation, and Harris has to her credit,
20:13
Speaker 8: they will have a great track record to say it
20:15
Speaker 8: was seven eight nine percent two years ago and now
20:18
Speaker 8: it's down to under three percent. So there is a
20:21
Speaker 8: message that can be delivered from both sides, but they
20:24
Speaker 8: just weren't sticking to that script last night. Another reason
20:27
Speaker 8: why I think Trump would benefit from a second debate
20:30
Speaker 8: is because he could hammer those points home, which he
20:32
Speaker 8: should have done last night. I do think also, just
20:35
Speaker 8: to speak to the inflation data, gas prices still being low,
20:39
Speaker 8: to bring it back to the beginning of our conversation,
20:42
Speaker 8: is really important here. Gas prices factor into the American psyche.
20:46
Speaker 8: I would say, more than the price of eggs, So
20:48
Speaker 8: that being low I think does help Harris.
20:50
Speaker 4: So what is the role of the vice president candidates here?
20:55
Speaker 4: Did they move the needle all on a major election?
20:58
Speaker 9: I mean usually not.
21:00
Speaker 8: It's a much smaller audience that watches the vice presidential debate.
21:03
Speaker 9: They're not viewed as the leader of the country.
21:07
Speaker 8: We used to say that it's the least or the
21:10
Speaker 8: most like thankless job in DC. Obviously, Kamala Harris and
21:13
Speaker 8: Joe Biden's dynamic this year upended all of that. But
21:17
Speaker 8: in general, device presidential debate is not a blockbuster affair.
21:20
Speaker 8: They're usually pretty sleepy in fact, and a couple of
21:24
Speaker 8: cycles in the past few presidential election cycles you get
21:27
Speaker 8: fewer than fifty million or even thirty million viewers.
21:30
Speaker 2: October surprise, it does happen? Could there be one?
21:34
Speaker 7: Now?
21:34
Speaker 2: Like, let's look ahead. If there's not another debate, you
21:37
Speaker 2: want everyone wants Kamala Harris to speak more. What could
21:40
Speaker 2: an October surprise be?
21:42
Speaker 8: I think it would be ridiculous for anybody in a
21:44
Speaker 8: seat like mind to say that there won't be an
21:46
Speaker 8: October surprise in a year like this. I think at
21:49
Speaker 8: this point what I try to hone in on for
21:51
Speaker 8: investors is that it could very easily be foreign policy related.
21:54
Speaker 8: Israel Gaza, I think presents a stark opportunity for some
21:57
Speaker 8: sort of shock event that could be a problem, particularly
22:01
Speaker 8: for the Harris campaign since Joe Biden is the incumbent.
22:04
Speaker 8: I think the immigration data, the numbers have come down
22:07
Speaker 8: so rapidly since December via executive order. I don't see
22:10
Speaker 8: that changing a government shutdown is probably something that should
22:13
Speaker 8: be on people's radar. Trump tweeted about this last night,
22:16
Speaker 8: supporting a government shutdown that could be disruptive, but historically
22:19
Speaker 8: Republicans get blamed for that, so I don't think it's
22:21
Speaker 8: in his best interest.
22:22
Speaker 6: Thirty seconds, Henriette Taylor Swift endorsement. Does that mean anything?
22:27
Speaker 9: I think it does.
22:28
Speaker 8: We want to see his voter registration spikes, particularly in
22:31
Speaker 8: the twenty nine and under demographic.
22:33
Speaker 9: We've already seen that go through the roof.
22:35
Speaker 8: I believe it's eighty seven percent hyped up since twenty twenty,
22:38
Speaker 8: and of course you have three times higher registration rates
22:42
Speaker 8: for Black women, one hundred and forty seven for Latino women,
22:46
Speaker 8: and I think eighty seven percent is the number for
22:48
Speaker 8: all women. So that registration spike is what you'd want
22:50
Speaker 8: to watch, all.
22:51
Speaker 6: Right, Henrietta, thank you so much. We appreciate that.
22:53
Speaker 4: Heny toa Triz managing partner, a director of economic policy
22:56
Speaker 4: at Veda Partners joining us via Zoom from Louisiana again
23:01
Speaker 4: in the path of that incoming hurricane. So hopefully Henrietta
23:04
Speaker 4: and all the good folks down in that part of
23:06
Speaker 4: the world stay safe over the next twenty four hours.
23:10
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
23:14
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23:17
Speaker 1: Auto with the Bloomberg Business app. You can also listen
23:20
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23:24
Speaker 1: Just say Alexa Play Bloomberg eleven thirty.
23:28
Speaker 4: Alex Oopaul Sweening live here in on our Bloomberginner Actor
23:30
Speaker 4: Brokers studio. Streaming live on YouTube as well, So editver
23:34
Speaker 4: YouTube dot com and search Bloomberg Podcast, and that's where
23:36
Speaker 4: you will find us. As Charlie is just reporting, we've
23:39
Speaker 4: got some selling in the stock market here today, perhaps
23:41
Speaker 4: on the back up a little bit higher than expected
23:43
Speaker 4: core inflation.
23:45
Speaker 6: Let's check it out with a professional here.
23:47
Speaker 4: Kim Farst, founder and Chief Investment Officer of Bouquet Capital Partners,
23:52
Speaker 4: joining us from Pittsburgh, PA via that Zoom thinks again
23:55
Speaker 4: more technology.
23:56
Speaker 6: How about that?
23:57
Speaker 4: Kim, Thanks so much for joining us here.
24:00
Speaker 6: Make of today's trading here and maybe the last two
24:02
Speaker 6: two or three days to trading been a lot of volatility.
24:05
Speaker 10: Sure, yeah, I think you know, as always, investors are
24:11
Speaker 10: pulled between the two poles of fear and greed, right,
24:15
Speaker 10: and I think this year has taught us that even
24:20
Speaker 10: with ho hum kind of economic data, that the market
24:24
Speaker 10: can go higher. And I think that is what keeps
24:27
Speaker 10: the greed into the market right now, is that we
24:31
Speaker 10: look at our recent past and say, hey, you know,
24:34
Speaker 10: Nvidia eclipsed all other stocks and then dragged six other
24:38
Speaker 10: stocks with them, you know, starting somewhere in the second quarter,
24:42
Speaker 10: and you know, portfolios turned out pretty good. But I
24:46
Speaker 10: guess wisely people are looking at the Fed and saying,
24:50
Speaker 10: are they too late?
24:52
Speaker 7: Should?
24:52
Speaker 10: You know, we know they're going to lower interest rates,
24:54
Speaker 10: that's pretty clear, but how much and how fast? And
24:58
Speaker 10: I think too fast would indicate that the Fed is
25:01
Speaker 10: seeing trouble ahead and on either one of its mandates
25:07
Speaker 10: that it's supposed to take care of, and that would
25:10
Speaker 10: be stable prices and full employment. So you know which
25:15
Speaker 10: you put those two together, you have the whole economy, right,
25:17
Speaker 10: what else is there in the economy? But no investors
25:22
Speaker 10: are afraid that the FED is too late, too slow,
25:28
Speaker 10: and that we're going to get a hard landing. Now,
25:30
Speaker 10: as somebody who has seen a hard landing. In nineteen
25:33
Speaker 10: ninety three, Pittsburgh had a seventeen percent unemployment rate because
25:38
Speaker 10: of inflation and the steel market being forever changed. And
25:42
Speaker 10: I don't think we are headed for that kind of
25:44
Speaker 10: hard landing. Just to set expectations.
25:48
Speaker 2: So, Kim, I hear you, and then I look at
25:50
Speaker 2: what's happening with bank stocks, and I'm confused. I mean,
25:53
Speaker 2: regional banks are getting really hit. Broader big banks also
25:57
Speaker 2: getting really hit by news that we already knew, right, Like,
26:01
Speaker 2: we knew that rates were coming down, and in theory,
26:05
Speaker 2: if they come down less quickly, that should be better
26:07
Speaker 2: for their net interest income. Right, So are banks telling
26:10
Speaker 2: us something else right now?
26:12
Speaker 10: Well, I think they're really concerned about the consumer and borrowing,
26:16
Speaker 10: and specifically consumer borrowing. I don't know that regional banks
26:20
Speaker 10: would be all that much affected by it. It's usually
26:22
Speaker 10: credit cards, and I don't think that would see a
26:25
Speaker 10: whole lot of you know, housing issues because most of
26:30
Speaker 10: the borrowers have very low interest rates, and the most
26:35
Speaker 10: recent borrowers, you know, they're they're as everybody's been pointing out,
26:41
Speaker 10: the housing market is slowing and has slowed, So I'm
26:45
Speaker 10: not quite sure why the smaller banks are being sold off.
26:51
Speaker 10: Maybe it's you know, continuing commercial real estate issues, of
26:56
Speaker 10: which you know, nobody can pretend that they're not there.
26:59
Speaker 10: We don't to work five days a week anymore. You
27:02
Speaker 10: need less footprint. It's an issue, and it's something that
27:06
Speaker 10: remains unresolved.
27:08
Speaker 4: So Morgan Stanley's Mike Wilson saying that the AI trade
27:14
Speaker 4: may be fading here in this market and calls into
27:17
Speaker 4: question what will be the leadership for this market?
27:19
Speaker 6: How do you feel about that thought there?
27:21
Speaker 7: Sure?
27:22
Speaker 10: Well, I think it's a pretty good bet that most
27:23
Speaker 10: investors have overplayed their hand on the timeline of AI
27:28
Speaker 10: rollout and how deep and pervasive it is. You know,
27:32
Speaker 10: as somebody that is an ex technologist in AI, I
27:36
Speaker 10: don't see the killer app that are going to make
27:40
Speaker 10: Corporations and certainly not individuals pay for access to it.
27:44
Speaker 10: So right now it's a free service, but that could
27:47
Speaker 10: change in the future. It's probably going to change in
27:50
Speaker 10: the future, but we don't know how long of a timeline.
27:52
Speaker 10: You know, Wall Street wants it yesterday, not tomorrow, so
27:56
Speaker 10: and it's a pretty few or pretty many tomorrow's and
28:00
Speaker 10: in the future where we think AI is going to
28:02
Speaker 10: be a player. But you're right, where is the next area?
28:08
Speaker 10: I would say that investors that need to put money work,
28:12
Speaker 10: money to work, and we all do because we're saving
28:15
Speaker 10: in our four to one case, they should look at
28:17
Speaker 10: the smaller companies, the unloved companies that have good products.
28:22
Speaker 10: And I love the medium sized companies over a billion
28:27
Speaker 10: to maybe like twenty billion, because especially if they have
28:32
Speaker 10: great products and a stable balance sheet, they are able
28:35
Speaker 10: to live on through tough times. But also they are
28:40
Speaker 10: acquisition candidates, and as rates come down, we will see
28:45
Speaker 10: more mergers and acquisitions because the big need to have
28:49
Speaker 10: new products or the product growth, so they will do
28:53
Speaker 10: it either organically or by acquisition. And I think it's
28:57
Speaker 10: a pretty good idea to look at smaller companies, but
29:01
Speaker 10: not the smallest companies for addition to your portfolio.
29:06
Speaker 2: Okay, so the question where do you buy the dip?
29:10
Speaker 10: Where do you buy the dip? Well, that's market timing,
29:13
Speaker 10: isn't it. And I think we're all warned about that.
29:16
Speaker 10: So I think it's on a case by case basis
29:19
Speaker 10: that you have to look at each company and say,
29:22
Speaker 10: is this a good deal? If it goes ten percent lower?
29:25
Speaker 10: Am I going to be angry about having bought it?
29:27
Speaker 7: Right?
29:28
Speaker 10: Give yourself some kind of wiggle room and understand that
29:32
Speaker 10: you know, companies can go lower on all sorts of news.
29:36
Speaker 10: So I think you have to do it on a
29:38
Speaker 10: case by case basis. And you know this wasn't in
29:41
Speaker 10: my note to you guys earlier, but maybe energy is
29:44
Speaker 10: an area as well. It seems to be especially selling
29:47
Speaker 10: off hard. And I would certainly put energy as even
29:50
Speaker 10: bigger companies as well as the small to medium sized
29:54
Speaker 10: companies on your list on your shopping list, and look
29:57
Speaker 10: at them daily and say, is today the day I'm
30:00
Speaker 10: going to buy whatever it is? It is that simple, Kim.
30:04
Speaker 6: How about valuation?
30:06
Speaker 4: It's obviously it's important when you know in the securities
30:10
Speaker 4: business that you're in, But how do you employ valuation?
30:13
Speaker 4: How high is it on your list of you know,
30:16
Speaker 4: decision factors for buying or selling security?
30:20
Speaker 10: Well, actually I don't look at it in just in isolation.
30:25
Speaker 7: Right.
30:26
Speaker 10: I'm a growth ish manager. I have growth at a
30:29
Speaker 10: reasonable price. So I'm always thinking that the company that
30:32
Speaker 10: I'm going to buy is going to grow, and it
30:34
Speaker 10: will grow more into its valuation, So I will look
30:37
Speaker 10: at pees that other value oriented managers probably will not.
30:44
Speaker 10: But that being said, you also have to understand in
30:47
Speaker 10: a declining rate environment, you should expect to pay a
30:51
Speaker 10: higher PE. And that's because of the math behind the
30:54
Speaker 10: whole discounted cash flow equation, which we're not going to
30:57
Speaker 10: go into at this point. But I also think it's
31:01
Speaker 10: extremely important not to look at them in isolation, but
31:04
Speaker 10: to their competitors and to their industry, because each industry
31:08
Speaker 10: has a different PE profile where it's merited most because
31:14
Speaker 10: the balance sheets are completely different, right, Like a software
31:18
Speaker 10: company is different than I don't know, a cement making
31:23
Speaker 10: or a steel making company that has a lot of plant,
31:25
Speaker 10: property and equipment. So those are the kind of things
31:28
Speaker 10: that change your perception of a PE, whether it's rich
31:33
Speaker 10: or you know, fairly valued.
31:36
Speaker 2: And this is a great setup into talking about last
31:39
Speaker 2: night's debate because from the way you invest in stocks
31:41
Speaker 2: and how you look at structural trends, even in cyclical
31:44
Speaker 2: areas of the market, how do you think about who's
31:47
Speaker 2: going to be running the White House over four years?
31:49
Speaker 2: Like what are there areas that that actually impacts how
31:53
Speaker 2: Kim Forest looks at the market.
31:56
Speaker 10: What does but slowly because I don't know. I have
31:59
Speaker 10: this quaint idea that the president, regardless of who it is,
32:05
Speaker 10: actually is the executive of the government, and that Congress
32:10
Speaker 10: gives them a budget. So things like I don't know,
32:14
Speaker 10: housing grants of twenty five thousand dollars that still has
32:17
Speaker 10: to go through a Congress, and that is a very
32:21
Speaker 10: slow process. So I am glacial, and I try to
32:25
Speaker 10: look for bigger trends that eclipse politics. So I'm not
32:29
Speaker 10: terribly concerned about what's going to happen other than taxation.
32:33
Speaker 10: Taxation is one of those things that can come in fast,
32:37
Speaker 10: but any of the more spending of the government and
32:42
Speaker 10: areas in which they spend, it's more glacial than we
32:47
Speaker 10: ever want to consider.
32:50
Speaker 6: All Right, Kim, thank you so much for joining us.
32:51
Speaker 4: Kim Forrest, Founder and chief investment Officer, Boca Capital Partners
32:55
Speaker 4: from Pittsburgh, PA.
32:59
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
33:03
Speaker 1: weekdays at ten am Eastern on applecar Play and Android
33:06
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33:09
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33:12
Speaker 1: Just say Alexa play Bloomberg eleven thirty.
33:17
Speaker 2: We're broadcasting to you live from Interactor Broker Studio right
33:20
Speaker 2: here in Midtown Manhattan. The headline that truly truly caught
33:24
Speaker 2: my eye today was UniCredit finally making a move on
33:27
Speaker 2: Commerce Bank. This is something that I that I've heard
33:29
Speaker 2: rumors about four years and UniCredit building a nine percent
33:32
Speaker 2: stake in the German Bank and apparently has planned to
33:35
Speaker 2: enter into talks with the lender, raising the possibility of
33:38
Speaker 2: a takeover that could truly reshape Europe's banking landscape. Joining
33:43
Speaker 2: us now for Morris Philip Richards, Bloomberg Intelligence Senior analyst
33:46
Speaker 2: for European Banks, Philip, would the German government let this happen?
33:51
Speaker 1: Yeah?
33:51
Speaker 11: Hi, it's an interesting one. As you say, this is
33:53
Speaker 11: not a new boomed deal. It's been going on for
33:56
Speaker 11: lit you well over a decade now. In terms of
33:58
Speaker 11: big cross boarded deal. The simplication mains any big cross
34:01
Speaker 11: bordered in transaction among European banks still hasn't happened in
34:05
Speaker 11: the last fifteen years since the crisis. So will it
34:07
Speaker 11: happen now? Yes, it's possibility, but there's still a lot
34:10
Speaker 11: of hurdles I'm left in terms of the German government
34:13
Speaker 11: allowed specifically when it would flag is the German market
34:16
Speaker 11: is very different to all the other European markets, so
34:18
Speaker 11: it's got a very big cooperative or mutual society. They've
34:21
Speaker 11: got the Sparkas and the Landers banks. So actually the
34:24
Speaker 11: private banks Deutsche Bank and Commerce Bank are a much
34:26
Speaker 11: smaller part of the overall market, and therefore could they
34:30
Speaker 11: take out the second biggest German bank? I think it
34:32
Speaker 11: is possible on that front.
34:34
Speaker 6: Would it be a good deal for Unit Credit?
34:37
Speaker 4: I guess what I'm asking is how good of a
34:39
Speaker 4: management team, how good of a franchise is UniCredit?
34:43
Speaker 1: Well?
34:43
Speaker 11: Is it a good deal? I mean that will come
34:45
Speaker 11: down to the price. And one good thing about Commerce
34:47
Speaker 11: Bank is is pricing is a low level. Even after
34:50
Speaker 11: rallying twenty percent about today, is still trading about half
34:53
Speaker 11: book value in terms of what you get for it. Yes,
34:56
Speaker 11: the earnings have been very, very weak for the last
34:58
Speaker 11: fifteen years, one of the low return and equity of
35:01
Speaker 11: all banks in Europe, but they have increased massively with
35:03
Speaker 11: rate risers across Europe. Of course, the flip pide to that,
35:06
Speaker 11: of course is great interstrate's now going down, So the
35:09
Speaker 11: question becomes what will happens to Commerce Bank's earning is
35:11
Speaker 11: going forward? And frankly they're probably going to be going
35:14
Speaker 11: down and therefore that's where the pressure on them will lie.
35:16
Speaker 11: So are they getting a good deal or they're paying
35:18
Speaker 11: almost at the top and terms of their earning potential?
35:21
Speaker 2: What what company would that make UniCredit like, would this
35:24
Speaker 2: be a giant investment bank and a giant retail bank.
35:30
Speaker 11: Well, they will become the third largest European bank if
35:33
Speaker 11: they did the deal in terms of a market cap basis.
35:36
Speaker 11: Obviously Commerce Bank is almost entirely now a retail and
35:39
Speaker 11: commercial bank is sold or the investment banking operations that
35:42
Speaker 11: had after the financial crisis, So this is amount of
35:44
Speaker 11: case of expanding in terms of that retail commercial space.
35:47
Speaker 11: UniCredit have a big presence in Germany already through hyper
35:50
Speaker 11: Variants Bank, so one of the attractions sort of deal
35:53
Speaker 11: for them would be combining that so Commerce Bank and
35:55
Speaker 11: hyper Ryans and therefore trying to get the cost and
35:57
Speaker 11: neues out of them. But say it's lament on a
35:59
Speaker 11: commercial retail side rather than invest in banking.
36:02
Speaker 4: So Philip talked to us about I mean just the
36:05
Speaker 4: German banking market right now in general from a competitive
36:09
Speaker 4: landscape that does there need to be consolidation.
36:14
Speaker 11: Does they?
36:15
Speaker 8: Yes?
36:15
Speaker 11: I mean it's probably the least consolidated market in Europe
36:18
Speaker 11: in terms of as you said, you've got this huge
36:20
Speaker 11: number of cooptive banks or sparkasms, et cetera. So it
36:23
Speaker 11: is a very difficult and diluted market. But the fact is,
36:26
Speaker 11: you know, Commerce Bank yourself has got a sub ten
36:28
Speaker 11: percent market share. So even if you've got it, did
36:31
Speaker 11: buy it and combined hypervides with them, they're still probably
36:34
Speaker 11: just getting over about that ten percent mark. So will
36:37
Speaker 11: it change the dial in Germany? Not at all, you know,
36:39
Speaker 11: because we're only talking in a thirty percent subsector in
36:42
Speaker 11: terms of the private banks, with seventy percent or so
36:44
Speaker 11: off the market you know, is in this mutual side.
36:48
Speaker 2: So you were talking earlier that this has been rumored
36:49
Speaker 2: for ten years. I remember talking about this at least
36:51
Speaker 2: six plus years ago. Also, why do you think that
36:55
Speaker 2: now could be actually the moment?
36:58
Speaker 11: Well you asked us about you know, what they get
36:59
Speaker 11: into Commerce Bank. We heard last night actually the CEO
37:02
Speaker 11: of Commerce Bank said he were not renew as tenor
37:04
Speaker 11: which miss farres at the end of next year, so
37:07
Speaker 11: you know that does open a hole at the top
37:09
Speaker 11: of the bank would obviously be in traction for them.
37:11
Speaker 11: There's one potential way of doing it. Who would have
37:13
Speaker 11: bought Commerce Bank given the excessive risks they had, say
37:16
Speaker 11: three or four years ago, where we had the commercial
37:18
Speaker 11: real estate risks, we had the bank trading at point
37:20
Speaker 11: three times book value. We had earnings are very very low,
37:24
Speaker 11: So in a way the risk has gone away a
37:26
Speaker 11: lot of Commerce Bank because simply because the earnings are
37:28
Speaker 11: much stronger now because of those rate rises. Also, the
37:31
Speaker 11: German state government took a big stake in the bank,
37:35
Speaker 11: so as they sell that further and further down, that's
37:37
Speaker 11: part of the way Munichledate built their state. Today that
37:40
Speaker 11: obviously becomes more and more attractive because it comes more into
37:43
Speaker 11: the private sector. So there are a number of more
37:45
Speaker 11: reasons why it could happen, but doesn't mean anything will
37:47
Speaker 11: happen then.
37:48
Speaker 4: No, is this going to ignite maybe a little bit
37:51
Speaker 4: more discussion about more across M and A trades just
37:53
Speaker 4: broadly defined across Europe.
37:55
Speaker 11: Without any doubt it will trigger more EMINECE spectation today
37:58
Speaker 11: and I think The fact that you said the temperate
38:00
Speaker 11: stake and yet the share then rally twenty percent shows
38:03
Speaker 11: that the market doesn't think this is the end of
38:05
Speaker 11: the story, and there's going to be more of a
38:06
Speaker 11: deal and the potential by bid for Commerce Bank is possible.
38:10
Speaker 11: That said, you know, why has there been no big
38:12
Speaker 11: m and a across the sector now for fifteen years?
38:15
Speaker 11: And because a number of the regulary hurdles are main
38:17
Speaker 11: You know, there's not a single rule book across Europe,
38:20
Speaker 11: government interference, people don't want to leave their biggest banks
38:22
Speaker 11: and be taken over by a foreign institution, et cetera.
38:25
Speaker 11: All these hurdles and nothing's actually changed on that front.
38:28
Speaker 11: That's all the still the same today. So you know,
38:30
Speaker 11: no big deals have happened. Could this be the first, Yes,
38:34
Speaker 11: but it's by no means certain it will thirty seconds.
38:37
Speaker 2: If the deal does happen, would the bank be able
38:40
Speaker 2: to like, lend more and do stuff.
38:43
Speaker 11: I think I would have said yes three years ago
38:45
Speaker 11: just because of the week of financial position that Commerce
38:47
Speaker 11: Bank was in. I think because of the eight hikes,
38:49
Speaker 11: now is in a much stronger position. It's got a
38:52
Speaker 11: service capital position itself, so there's no real barriers in
38:55
Speaker 11: terms of the supply side, their potential to lend more.
38:58
Speaker 11: What's restraining them from growing Actually more the week at
39:00
Speaker 11: Germany econmy and we're hearing more about that over the
39:02
Speaker 11: press in the last few days, and that's what's being
39:05
Speaker 11: hold them back. And thrankly nothing changes with this unique
39:08
Speaker 11: credit deal there those heard will still remain. So no,
39:11
Speaker 11: I don't think this would really help in terms of
39:12
Speaker 11: the lending or the growth potential. It's much more think
39:15
Speaker 11: about the synergies in terms of the cost takeout potential.
39:17
Speaker 2: So maybe that like the framing of the deal could
39:19
Speaker 2: have changed versus like six years ago. All Right, thanks
39:21
Speaker 2: a lot, Philip Richards, Bloomberg Intelligence, Senior analyst for European banks,
39:24
Speaker 2: on that nine percent stake the UniCredit now has in
39:27
Speaker 2: Commerce Bank.
39:28
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