Latest / Bloomberg Intelligence / Three Percent Inflation Looks Likely, Leuthold's Paulsen Says

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Three Percent Inflation Looks Likely, Leuthold's Paulsen Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now,
• 0:32
  Speaker 1: I want to turn our attention back to markets, in
• 0:34
  Speaker 1: particular how to invest. James Paulston joins US now. He's
• 0:38
  Speaker 1: chief investment strategist at the looth Hold Group, which oversees
• 0:41
  Speaker 1: about one and a half billion dollars and is based
• 0:43
  Speaker 1: in Minneapolis, Minnesota. James, thank you so much for joining US.
• 0:47
  Speaker 1: I want to start with Risk your Credit because we've
• 0:50
  Speaker 1: been speaking with some money managers who've been saying they
• 0:53
  Speaker 1: have started reducing their allocations to US hiled bonds as
• 0:57
  Speaker 1: well as more so even in Europe. Europe UH. The
• 1:01
  Speaker 1: list includes Jpmorg and Asset Management, Double Line, uh Alean's
• 1:06
  Speaker 1: Global Investors, Deutscha Asset Management. Do you agree, well, I certainly,
• 1:12
  Speaker 1: UH bonds in general, I would still be underweight. Um. Well,
• 1:16
  Speaker 1: the bonds are I mean bonds could be government bonds,
• 1:19
  Speaker 1: which are haven investment and would be you know, it
• 1:22
  Speaker 1: would hinge on inflation and growth. But if you have
• 1:26
  Speaker 1: risk your credit, you're looking more at the credit worthiness
• 1:28
  Speaker 1: of companies and also the pretty high valuations that we're
• 1:32
  Speaker 1: seeing in the market right now. Yeah, I would, I
• 1:35
  Speaker 1: would stay overweighted, uh there at least. I think that
• 1:40
  Speaker 1: the risk for that is when do you think the
• 1:42
  Speaker 1: next recession is? And I don't think that's real near
• 1:48
  Speaker 1: and if it's not, I think in the balance of
• 1:51
  Speaker 1: this recovery, I think the bond investor is going to
• 1:55
  Speaker 1: need a yield buffer because I do think before the
• 1:58
  Speaker 1: next recession comes, we're going to reset interest rates higher. Um.
• 2:03
  Speaker 1: Probably this recovery is going to end the way most
• 2:06
  Speaker 1: post war recoveries have ended, that is in some sense
• 2:08
  Speaker 1: of overheat. At some point. I do think wages and
• 2:12
  Speaker 1: inflation probably rise above three and um, I think that's
• 2:16
  Speaker 1: going to cause a major reset and the tenure yield
• 2:19
  Speaker 1: probably above three percent as well. And unless you have
• 2:23
  Speaker 1: some yield buffer, whether that be from credit or whether
• 2:25
  Speaker 1: it be from structure, I think it's going to be
• 2:28
  Speaker 1: a very damaging position to be in and just nothing
• 2:32
  Speaker 1: but high quality paper. The other thing about spreads is typically,
• 2:39
  Speaker 1: although they're tight today, and I would agree with that, um,
• 2:42
  Speaker 1: I think that they probably stay relatively tight until the
• 2:46
  Speaker 1: recession risk gets pretty close. Um. And so even if
• 2:50
  Speaker 1: they don't tighten further from here, um, you could still
• 2:54
  Speaker 1: have excess return and in a buffer against rising yields. Um,
• 3:00
  Speaker 1: even if they just hold at the at the current
• 3:02
  Speaker 1: you know, tightness of spread that they possessed today. So, Jim,
• 3:08
  Speaker 1: you just said something that was actually incredibly radical. You
• 3:11
  Speaker 1: said that, uh, that you think inflation is going to
• 3:15
  Speaker 1: pick up to that's radical and very different from what
• 3:19
  Speaker 1: a lot of people are saying. What gives you confidence
• 3:22
  Speaker 1: that that will happen? Well, Um, you know, the range
• 3:27
  Speaker 1: on inflation that we've had over the last quarter century
• 3:30
  Speaker 1: almost has been very narrow. It's one of the great
• 3:34
  Speaker 1: accomplishments in the United States is we've had very low
• 3:37
  Speaker 1: inflation volatility. Not only low inflation, but it's been very
• 3:42
  Speaker 1: low volatility over the last ten years. Now. One standard
• 3:45
  Speaker 1: deviation about the current inflation rate at one is above
• 3:50
  Speaker 1: it is three percent, and blow it is about thirty
• 3:52
  Speaker 1: basis points. It wouldn't take a lot of inflation to
• 3:56
  Speaker 1: shock people that are used to low and stable inflation,
• 4:00
  Speaker 1: and I think three percent inflation looks very likely. Wage
• 4:04
  Speaker 1: inflation year on year is already least have been at
• 4:07
  Speaker 1: two point nine percent inflation in this year on year
• 4:10
  Speaker 1: in this recovery, we're still hanging at two five Medium
• 4:14
  Speaker 1: wage inflation is already at three three UM. The the
• 4:18
  Speaker 1: other labor indicators suggest private wage pressures. UM if the
• 4:23
  Speaker 1: unemployment rate, just like the claims number this morning, falling
• 4:26
  Speaker 1: to almost its lowest level of the recovery, suggesting we're
• 4:30
  Speaker 1: gonna have continued job growth, I think it's very likely
• 4:32
  Speaker 1: we're gonna get wages over three. And if we do,
• 4:35
  Speaker 1: I think companies are going to be forced to raise
• 4:37
  Speaker 1: selling prices, and that puts your CPI above it. One
• 4:41
  Speaker 1: other thing that's at play right now is the US
• 4:44
  Speaker 1: dollar is very close to breaking below a thirty one
• 4:48
  Speaker 1: month trading range. It's been down about ten per year
• 4:51
  Speaker 1: to date, but I think it could If it breaks
• 4:53
  Speaker 1: that range, it could fall even further, which would also
• 4:57
  Speaker 1: put some life back into crude oil and other come
• 4:59
  Speaker 1: o of the prices aggravating or least elevating inflationary expectations.
• 5:07
  Speaker 1: So right now I'm looking at a tenure treasure yield
• 5:09
  Speaker 1: at two a little bit more than that, but it's
• 5:12
  Speaker 1: down on the year. Given your expectation for a surprising
• 5:17
  Speaker 1: amount of inflation and possibly three UH wage growth. Where
• 5:24
  Speaker 1: are you seeing this tenure yields at the end of
• 5:26
  Speaker 1: this year. Well, I'm not sure this will. All you
• 5:29
  Speaker 1: know happened before the end of the year. Indeed, I
• 5:31
  Speaker 1: think that one of the reasons I'm positive on stocks
• 5:34
  Speaker 1: right now, Lisa, is that I think we're in a
• 5:36
  Speaker 1: sweet spot with inflation where we're growing. The economy of
• 5:39
  Speaker 1: the City Group Economic Surprise Index has been rising against
• 5:42
  Speaker 1: since late June in the United States, reports have been
• 5:46
  Speaker 1: getting better, but we're not aggravating inflation and interest rates.
• 5:49
  Speaker 1: As long as we stay in that sweet spot, I
• 5:50
  Speaker 1: think stocks move higher. Eventually. If we aggravate those, and
• 5:54
  Speaker 1: I think we will, that could be what ends the
• 5:57
  Speaker 1: stock market rally as well as the bond rally. But personally,
• 6:00
  Speaker 1: I think that's probably a two eighteen event now, um,
• 6:04
  Speaker 1: but I would get prepared for it, and I certainly
• 6:07
  Speaker 1: wouldn't be hanging out and overweights in a in a
• 6:09
  Speaker 1: two in your treasury because I think the terminal level
• 6:14
  Speaker 1: is going to be probably more like three and a
• 6:15
  Speaker 1: half percent before this recovery is over. Jim Paulson, thank
• 6:18
  Speaker 1: you so much for joining us. Jim Paulson is chief
• 6:19
  Speaker 1: investment strategist with the luth Hold Group in Minneapolis. One
• 6:34
  Speaker 1: other area that we are watching is in currency is
• 6:37
  Speaker 1: particularly the Euro. It fell at one point the most
• 6:40
  Speaker 1: since December, although it's recovered some of the losses after
• 6:44
  Speaker 1: ECB European Central Bank officials said that they're worried that
• 6:46
  Speaker 1: the Euro might strengthen more than justified by the economic upturn.
• 6:51
  Speaker 1: And with us to discuss is Doug Barthwick. He's managing
• 6:54
  Speaker 1: director and head of f X at Chapelen and Company. Doug,
• 6:59
  Speaker 1: I first want to just get your thoughts on the
• 7:02
  Speaker 1: knee jerk reaction by the market of selling the euro
• 7:07
  Speaker 1: based on this com these comments by the e c B.
• 7:10
  Speaker 1: Do you think the ECB would and could take actions
• 7:13
  Speaker 1: to devalue the Euro. No. I don't think they'll take
• 7:16
  Speaker 1: access to divide the year. I think this is a
• 7:18
  Speaker 1: really job owning, a job owning effect, and I think
• 7:20
  Speaker 1: that the market maybe has taken it a little the
• 7:22
  Speaker 1: wrong way and that euro strength can be shown not
• 7:25
  Speaker 1: just against the dollar, but against many other currencies. The euro,
• 7:29
  Speaker 1: you know, trading around this one set four, it's so
• 7:32
  Speaker 1: much lower than one sixty it was back in two
• 7:35
  Speaker 1: thousand nine, or even one thirty seven in September two fourteen.
• 7:39
  Speaker 1: And so when you look at your who does the
• 7:42
  Speaker 1: Europe export to only coming to the US. So if
• 7:45
  Speaker 1: you're concerned about their exports and the strength of the Euro,
• 7:48
  Speaker 1: it may not be just against the US, but certainly
• 7:50
  Speaker 1: against China. So euro China, which has retraced about of
• 7:54
  Speaker 1: it's high to low going back to two, certainly looks
• 7:59
  Speaker 1: like the euro maybe a little bit overvide or maybe
• 8:01
  Speaker 1: overdone there. But against the dollar, if you were to
• 8:04
  Speaker 1: go sixt one above the loans, they're we're looking at
• 8:07
  Speaker 1: one and the euro. So I think that the euro
• 8:09
  Speaker 1: still has further moves higher against the dollars. Certainly because
• 8:13
  Speaker 1: while the ECB may be anxious about the strength of
• 8:16
  Speaker 1: the Euro, that's US administration sift with the Trump administration,
• 8:20
  Speaker 1: it's very concerned about dollar strength. But not only is
• 8:23
  Speaker 1: the U S concerned about it, the b I S
• 8:25
  Speaker 1: and the I m F, both around these levels, have
• 8:27
  Speaker 1: said that they believe the dollar to be ten over valued.
• 8:31
  Speaker 1: In other words, you've got the U S and uh,
• 8:34
  Speaker 1: you know, talking against the ECB. No one wants to
• 8:36
  Speaker 1: have a strong currency. But I think it's the U
• 8:39
  Speaker 1: S that's really in the driving seat here, and that
• 8:41
  Speaker 1: the Euro still is under vied relative to maybe where
• 8:44
  Speaker 1: it should be, and I think that's probably around the
• 8:47
  Speaker 1: level well before we get to the dolls. So do
• 8:49
  Speaker 1: you want to get your thoughts on the dollar. I
• 8:51
  Speaker 1: just want to stick with the e c B for
• 8:52
  Speaker 1: one second, because to me, the implication here is, even
• 8:56
  Speaker 1: if this is just jaw boning, the e jerk reaction
• 9:01
  Speaker 1: on the part of ECB officials would be to hold
• 9:04
  Speaker 1: benchmark rates lower for longer and to move more slowly
• 9:08
  Speaker 1: as far as removing accommodation in order to keep the
• 9:14
  Speaker 1: economy kind of in this place where the Euro is
• 9:18
  Speaker 1: sort of stabilized, even as as as the economy grows, right,
• 9:22
  Speaker 1: I mean, because I don't really see what other moves
• 9:24
  Speaker 1: easy B could take. Well, the the CP would have
• 9:27
  Speaker 1: to keep on doing something at a at a greater
• 9:30
  Speaker 1: level than the FED is doing it. Now. We can
• 9:32
  Speaker 1: look at the Fed, right, and I believe that maybe
• 9:34
  Speaker 1: there's one more rate rise this year, and certainly e
• 9:37
  Speaker 1: CP won't be raising rates. But even if you look
• 9:39
  Speaker 1: at the ten year yields and the US tenure yields
• 9:41
  Speaker 1: are unchanged in the year, but tenure yield let's say
• 9:44
  Speaker 1: for Germany or maybe city basis points higher, So the
• 9:47
  Speaker 1: yield differentials moving more in the favor of Europe than
• 9:50
  Speaker 1: it is in the US. And remember, when you look
• 9:52
  Speaker 1: at currencies, you look have to look at, well, what's
• 9:54
  Speaker 1: the FED doing versus what's the ECB doing. The e
• 9:57
  Speaker 1: c B going forward into two thousand nine is maybe
• 10:01
  Speaker 1: going to have Bidman in charge. Widman is much more
• 10:03
  Speaker 1: of a hawk and would like to see rates get
• 10:05
  Speaker 1: a little bit higher in the year zone, whereas you
• 10:08
  Speaker 1: may have Cone coming into the FED in the US
• 10:10
  Speaker 1: who's seen as being a dove. And so longer term,
• 10:13
  Speaker 1: we're still looking at the US maybe having lower yields
• 10:16
  Speaker 1: for longer and the ECB moving out of the lower yields.
• 10:19
  Speaker 1: Plus the e c B is now running out of
• 10:21
  Speaker 1: products they can buy in the market. You know, there's
• 10:24
  Speaker 1: only so much you can buy in terms of big
• 10:26
  Speaker 1: income in Europe, and they begin to really fill their coffers.
• 10:29
  Speaker 1: Already with respect to the dollar, the dollar did strengthen
• 10:34
  Speaker 1: a touch today after falling quite a bit yesterday. Uh,
• 10:39
  Speaker 1: basically just due to some of the turmoil, particularly having
• 10:42
  Speaker 1: to do with the Economic Council and the CEO stepping
• 10:45
  Speaker 1: away and this idea that possibly, uh, there could be
• 10:48
  Speaker 1: less progress made on tax or form and other policy issues.
• 10:51
  Speaker 1: But I have to wonder what your view is. Do
• 10:54
  Speaker 1: you think that the dollar has further to fall? It
• 10:56
  Speaker 1: sounds like you do. I certainly do. I think that
• 10:58
  Speaker 1: the dollar is going to be on this weekending stands
• 11:00
  Speaker 1: really going off over the next couple of years. I
• 11:02
  Speaker 1: think that a weak dollar policy are certainly a step
• 11:04
  Speaker 1: away from the strong dollar policy is the new US term.
• 11:09
  Speaker 1: And so based on that, I think that what folks
• 11:11
  Speaker 1: are worried about more globally is not how far the
• 11:14
  Speaker 1: dollar is going to weaken, but just how I mean,
• 11:17
  Speaker 1: what's the pace of that? And I think that when
• 11:19
  Speaker 1: we get more of a sense at Jackson Hole. But
• 11:21
  Speaker 1: certainly there is a very strong belief and understanding in
• 11:24
  Speaker 1: the US that in order to keep equity markets as
• 11:27
  Speaker 1: bit as they are, you need to have the dollar
• 11:29
  Speaker 1: continue to weaken, because remember, for every one percent that
• 11:32
  Speaker 1: the dollar weakens, that that moves into a half a
• 11:35
  Speaker 1: percent rise in terms of the earnings per share for
• 11:37
  Speaker 1: the SMP five. So as the US, you know, the
• 11:40
  Speaker 1: US dollars to we can buy you's here and per
• 11:43
  Speaker 1: share go up by ten percent. And so that's now
• 11:45
  Speaker 1: that that's considerable. And still within the US, we still
• 11:48
  Speaker 1: have this issue where you have underfunded pension plans. You've
• 11:50
  Speaker 1: got you know, government engine plans that are sitting there.
• 11:53
  Speaker 1: They're very underfunded right now, and the way the boost
• 11:56
  Speaker 1: them is by having equities boosted. The way to do that,
• 11:58
  Speaker 1: certainly would be to have the dollar week considerably. Dog
• 12:01
  Speaker 1: borth birth Wick, thank you so much for your comments.
• 12:03
  Speaker 1: Dog Borthwick as managing director and head of FX at
• 12:06
  Speaker 1: Chapter Lane and Company. Well, today Walmart posted its best
• 12:23
  Speaker 1: grocery sales growth in five years for the second quarter
• 12:28
  Speaker 1: of This is really important because the grocery business accounts
• 12:32
  Speaker 1: for more than half of Walmart's overall revenue. It beat
• 12:36
  Speaker 1: estimates and yet its shares are down. To get a
• 12:39
  Speaker 1: little bit more perspective about why and whether this decline
• 12:42
  Speaker 1: will continue, I want to bring in my colleague Sarah
• 12:45
  Speaker 1: How's act. She's a retail columnist, a Bloomberg gad fly
• 12:48
  Speaker 1: bloombergad Fly is a fast commentary section with a smart
• 12:51
  Speaker 1: and analysis of breaking news. Sarah, what was your take
• 12:56
  Speaker 1: when you saw there sort of tepid X diectations going
• 13:01
  Speaker 1: forward paired with this pretty impressive performance. Yeah, Look, I
• 13:06
  Speaker 1: think Walmart is doing the right things that needs to
• 13:08
  Speaker 1: do for the long term. What investors seem to be
• 13:12
  Speaker 1: skittish about was the fact that this third quarter guidance
• 13:15
  Speaker 1: wasn't quite as high as they hoped it would be.
• 13:18
  Speaker 1: But Walmart is in a position right now where it
• 13:20
  Speaker 1: really needs to spend big if it's going to in
• 13:23
  Speaker 1: a serious, full throated way take the e commerce fight
• 13:26
  Speaker 1: to Amazon. And so if it's not spending this money
• 13:29
  Speaker 1: um and pressuring its profits, it's hard to see how three, five,
• 13:33
  Speaker 1: ten years down the road it's a viable competitor in
• 13:35
  Speaker 1: the digital space. So how much money is it spending
• 13:38
  Speaker 1: and where exactly is it spending? Yeah, it's spending several
• 13:42
  Speaker 1: billion over the next few years, and a big part
• 13:44
  Speaker 1: of that investment is in supply chain. What it wants
• 13:47
  Speaker 1: to do is to have fulfillment centers that are more
• 13:49
  Speaker 1: state of the art so it can get orders to
• 13:52
  Speaker 1: people more quickly. And it's also experimenting with different kinds
• 13:55
  Speaker 1: of tactics for reaching shoppers in a more profitable way. So,
• 13:59
  Speaker 1: for example, on millions of items now Walmart is giving
• 14:02
  Speaker 1: you a discount if you buy the item online but
• 14:05
  Speaker 1: pick it up in store. That's a more profitable transaction
• 14:07
  Speaker 1: for them, and so they want to reward that. You know,
• 14:10
  Speaker 1: I have to wonder Walmart's not alone in shelling out
• 14:14
  Speaker 1: as much money as they can to try to boost
• 14:15
  Speaker 1: their online operations and their uh digital distribution. I'm wondering
• 14:20
  Speaker 1: if a things are getting a lot more expensive and
• 14:23
  Speaker 1: because of the demand from Walmart and Target and everybody else, uh,
• 14:27
  Speaker 1: and and be whether they're behind the times already. I mean,
• 14:32
  Speaker 1: we were talking yesterday about how if they didn't impress today,
• 14:37
  Speaker 1: it was going to be a really rough next two quarters.
• 14:41
  Speaker 1: Do agree, Yeah, So I think there is something to
• 14:44
  Speaker 1: the fact that they are a little bit behind the
• 14:47
  Speaker 1: curve here, and they probably should have been making these investments, uh,
• 14:51
  Speaker 1: quite a bit earlier. But at least they're trying now, right,
• 14:54
  Speaker 1: And I think it's also encouraging that they're thinking creatively
• 14:57
  Speaker 1: and inquisitively. I mean, we've seen them pick up jet
• 15:00
  Speaker 1: dot Com, They've also bought the Nobo's, They've bought Modcloth,
• 15:03
  Speaker 1: and their reports out there now that they might be
• 15:06
  Speaker 1: looking to buy birch Box, and so at least they're
• 15:09
  Speaker 1: they're thinking in different ways about how they might boost
• 15:12
  Speaker 1: their e commerce muscle by bringing in sort of acquahiring, right,
• 15:17
  Speaker 1: bringing in some different talent to help them think differently
• 15:20
  Speaker 1: about this problem. One other problem that I am facing
• 15:25
  Speaker 1: right now is that the margins are much smaller on
• 15:28
  Speaker 1: online sales for Walmart just simply because, uh, the amount
• 15:33
  Speaker 1: that they have to pay to fulfill the order and
• 15:36
  Speaker 1: process everything is higher at this point. If they're trying
• 15:40
  Speaker 1: to move more of their business online and they make
• 15:44
  Speaker 1: less money from it and they're spending more, Uh, this
• 15:47
  Speaker 1: equation doesn't seem that rosie. That means they have to
• 15:50
  Speaker 1: make it up on volume. Do they address that? Not
• 15:54
  Speaker 1: that specifically. But I think the hope is that as
• 15:57
  Speaker 1: over time things get better on the profit ability front,
• 16:00
  Speaker 1: because theoretically, once you have a network built out right,
• 16:03
  Speaker 1: once you have these supply chains that have all the
• 16:06
  Speaker 1: right fulfillment centers excuse me, they have all the right
• 16:09
  Speaker 1: technology and place once you're not building those from scratch,
• 16:13
  Speaker 1: that you can start to have some you know, more
• 16:14
  Speaker 1: scale benefits there, and that's sort of a similar argument
• 16:17
  Speaker 1: that Amazon makes, and the investors seem more convinced when
• 16:20
  Speaker 1: Amazon makes it right, We're plowing all this money into
• 16:23
  Speaker 1: building out our supply chain and that will benefit us
• 16:25
  Speaker 1: on the back end. And I think Walmart is hopeful
• 16:28
  Speaker 1: that the same thing will happen for them. And Walmart
• 16:30
  Speaker 1: still is very much a brick and mortar operation, and
• 16:33
  Speaker 1: there were were a lot of complaints in the past
• 16:35
  Speaker 1: few years about shelves being unstalked, about staff being inattentive.
• 16:41
  Speaker 1: Do they talk at all about better kind of operations
• 16:44
  Speaker 1: within stores as well as what the increase in wages
• 16:49
  Speaker 1: that they did deliver has done to their bottom line
• 16:52
  Speaker 1: and what they expect going forward. Yeah. So they've said
• 16:55
  Speaker 1: for the last several quarters that they've seen improving customer
• 16:59
  Speaker 1: score when they survey them about the experience that they're
• 17:02
  Speaker 1: having in stores, and that likely reflects that they have
• 17:06
  Speaker 1: made all these efforts on making sure stores are better stucked,
• 17:09
  Speaker 1: making sure produces fresher and deploying staffers in the right
• 17:13
  Speaker 1: way so that you're getting good customer service. So they
• 17:16
  Speaker 1: have now had twelve straight quarters of positive comparable sales,
• 17:20
  Speaker 1: and I think almost the same number of straight quarters
• 17:22
  Speaker 1: of positive traffic to the stores, and so that's a
• 17:26
  Speaker 1: good sign that some of those investments are working for them.
• 17:29
  Speaker 1: You know, I'm struck by what you're saying, which is
• 17:31
  Speaker 1: which is wise? You know, I mean, at some point
• 17:33
  Speaker 1: they're going to have to spend, so they should spend
• 17:35
  Speaker 1: sooner than later. Uh, And yet it's just the shares
• 17:38
  Speaker 1: are just not forgiving. Investors are not being forgiving right now.
• 17:42
  Speaker 1: Do you think that they will come to some kind
• 17:45
  Speaker 1: of uh Kumbaya moment where they say, you know what,
• 17:48
  Speaker 1: we believe in you, or do you think that they're
• 17:50
  Speaker 1: going to sort of go into a show me mode
• 17:52
  Speaker 1: for the rest of the year. I think there for
• 17:55
  Speaker 1: at least for the short term, there could be a
• 17:56
  Speaker 1: little more show me, because it's hard for me to
• 17:59
  Speaker 1: see how just in the next one quarter or quarter
• 18:02
  Speaker 1: after that they do something that really meaningfully changes their
• 18:06
  Speaker 1: narrative to investors on this question of profitability. Um. But
• 18:09
  Speaker 1: over the long haul, if they really continue to deliver
• 18:12
  Speaker 1: this strong e commerce growth, uh, maybe investors will start
• 18:16
  Speaker 1: rewarding them for it. Sarah Hols like, thank you so
• 18:18
  Speaker 1: much for joining us always a pleasure. Sarah Holsing is
• 18:20
  Speaker 1: a retail columnist at Bloomberg. Gad Flies are fast commentary group.
• 18:26
  Speaker 1: You can find it at Bloomberg dot com, slash gad fly,
• 18:29
  Speaker 1: on the web or on the terminal at n I
• 18:33
  Speaker 1: space Gadfly Go. Yesterday was a pretty big day, uh,
• 18:49
  Speaker 1: in turmoil Land. For politics. We have President Trump generating
• 18:53
  Speaker 1: controversy after his press conference and some comments from Republicans,
• 18:59
  Speaker 1: and then you had the disbandment of the Council of CEOs.
• 19:03
  Speaker 1: This matters to markets arguably because it raises some questions
• 19:07
  Speaker 1: about how quickly President Trump can move on his policy agenda.
• 19:11
  Speaker 1: And here to talk about that is Mike McDonough. He's
• 19:14
  Speaker 1: Global director of Economics Research and chief economist at Bloomberg Intelligence,
• 19:18
  Speaker 1: and he joins us in our eleven three oh studios. So, Mike,
• 19:21
  Speaker 1: how much does all of this actually make an impact
• 19:26
  Speaker 1: on these policies? I mean, are you getting sense? Yeah? So,
• 19:30
  Speaker 1: I think you know, the the the actual resignation of
• 19:32
  Speaker 1: the CEOs and disbanding of the Council's Uh, that's somewhat
• 19:36
  Speaker 1: more symbolic than meaningful in a way, because I mean
• 19:39
  Speaker 1: I actually said this. I think that no one, Not
• 19:42
  Speaker 1: many Americans, if any Americans could name any successes the
• 19:45
  Speaker 1: Council has had. But you know, as of twenty four
• 19:47
  Speaker 1: hours ago. But it was always symbolic. It was never
• 19:50
  Speaker 1: anything but symbolic. So this is the extent that it
• 19:52
  Speaker 1: was a symbolic vote of support that gave people confidence.
• 19:54
  Speaker 1: Is now the opposite? Well, you know, like I said
• 19:57
  Speaker 1: that every everyone could now name at least once CEO
• 20:00
  Speaker 1: who's quit from this panel. Where it makes more of
• 20:02
  Speaker 1: a difference is infrastructure is one area where both the
• 20:05
  Speaker 1: Republicans and Democrats needed agree it needs to get done.
• 20:09
  Speaker 1: They have some differences on how. But when you're going
• 20:12
  Speaker 1: when you're coming out and saying, Okay, this is the
• 20:14
  Speaker 1: infrastructure press conference, I'm gonna do something, you should leave
• 20:17
  Speaker 1: with everyone applauding, everyone joining hands and saying, finally something
• 20:20
  Speaker 1: is getting done. Uh for the press conference to derail
• 20:24
  Speaker 1: as it derailed, and you've basically, you know, shifted from
• 20:27
  Speaker 1: infrastructure to these divisive comments where you have Republicans coming
• 20:32
  Speaker 1: out and and coming coming out against you. Now you
• 20:35
  Speaker 1: basically have gone from something that should have had a
• 20:37
  Speaker 1: really good outcome to where it's increasingly difficult to see
• 20:41
  Speaker 1: how he's going to be able to get any of
• 20:43
  Speaker 1: his agenda done, and it's incredibly important that he does
• 20:46
  Speaker 1: get some of this stuff done. Infrastructure is needed, tax
• 20:49
  Speaker 1: reform is needed. I don't see how it gets done.
• 20:52
  Speaker 1: And this is maybe the nail on the coffin for
• 20:54
  Speaker 1: a lot of that. So, but how much was it
• 20:56
  Speaker 1: his agenda to start with, because as you just said,
• 20:59
  Speaker 1: it was Wilkins and Democrats who wanted to come together
• 21:01
  Speaker 1: and come up with some infrastructure plan. I mean, can't
• 21:03
  Speaker 1: they do that anywhere? Or does he have to be
• 21:05
  Speaker 1: leading it? Well? I think, you know, the president has
• 21:09
  Speaker 1: to lead that sort of. I mean, maybe it's possible
• 21:14
  Speaker 1: some of he gets out of the way and let
• 21:16
  Speaker 1: some of his cabinet handle it, but I mean it's
• 21:18
  Speaker 1: going to be hard for him to get must or
• 21:20
  Speaker 1: any the type of support needed because you know, while
• 21:23
  Speaker 1: I said, both sides agree this needs to get done,
• 21:25
  Speaker 1: they differ on how it should be then, you know,
• 21:26
  Speaker 1: be it from public private partnerships versus how much the
• 21:29
  Speaker 1: government should fund on the infrastructure side, and then on
• 21:32
  Speaker 1: the tax reform who who should have benefit? Right should it? Well?
• 21:35
  Speaker 1: So on the Bloomberg I think in the past, the
• 21:39
  Speaker 1: past week or so, there was a story about two
• 21:42
  Speaker 1: thirds of economists surveyed. I think that the current administration
• 21:47
  Speaker 1: will get some kind of tax plan passed by the
• 21:50
  Speaker 1: end of the year, but that the effects won't take
• 21:53
  Speaker 1: place until after after the year after, possibly next year
• 21:58
  Speaker 1: as well. I'm that that that ratio surprises me. I
• 22:01
  Speaker 1: think that the idea of there's two things we need
• 22:04
  Speaker 1: to look at. One is the probability of tax reform,
• 22:07
  Speaker 1: comprehensive tax reform that seems like it's zero percent. It
• 22:10
  Speaker 1: seems like it's been zero percent for a while. Uh.
• 22:13
  Speaker 1: Then there's the probability for tax cuts. That's probably what
• 22:16
  Speaker 1: the economists and this survey we're referring to. I mean,
• 22:19
  Speaker 1: I think there is a chance you could get some
• 22:22
  Speaker 1: tax cuts, but I don't think I would be in
• 22:24
  Speaker 1: the two thirds thinking something could happen. And keep in
• 22:26
  Speaker 1: mind that survey was probably done before yesterday, in the
• 22:30
  Speaker 1: past weeks, for sure. But I have to wonder how
• 22:33
  Speaker 1: much where I was going with this is how much
• 22:36
  Speaker 1: is this optimism about the policies, uh that President Trump
• 22:40
  Speaker 1: espoused during the campaign. How much has that optimism been
• 22:43
  Speaker 1: baked into markets already and it hasn't been already beaten
• 22:47
  Speaker 1: out that still needs to sort of come out of
• 22:50
  Speaker 1: the market should we really fail to see anything materialized.
• 22:53
  Speaker 1: So I think you saw euphoria fading a bit. Uh
• 22:56
  Speaker 1: in the rates market. In the dollar equities is a
• 22:59
  Speaker 1: place where you haven't seen it come out as much.
• 23:02
  Speaker 1: And I think that's partially because, uh, you know, it
• 23:04
  Speaker 1: did start to get baked in, but then once people
• 23:06
  Speaker 1: started baking it in after the election, you had a
• 23:09
  Speaker 1: series of better than expected earning seasons, so that kind
• 23:12
  Speaker 1: of helped catalyze the view that that was going to happen.
• 23:14
  Speaker 1: So I think that, uh, you know, if if you
• 23:16
  Speaker 1: look at the reaction of the market this morning to
• 23:19
  Speaker 1: the rumor that Gary Cohne may have been resigning, I
• 23:22
  Speaker 1: think that's kind of an indication of what could happen
• 23:24
  Speaker 1: if the market sees no hope of any of this
• 23:27
  Speaker 1: stuff getting done. I have to wonder, though, I mean,
• 23:31
  Speaker 1: what is do you really believe that? Do you buy
• 23:33
  Speaker 1: that that that if Gary Cohen were to resign that
• 23:37
  Speaker 1: the market would tang? You have to think about it.
• 23:39
  Speaker 1: It's it's it's not just meaningful because he's he's the
• 23:42
  Speaker 1: National Economics Council director, he's also the front runner to
• 23:46
  Speaker 1: take over the FED. So the market needs the price in,
• 23:49
  Speaker 1: you know, the impact on Trump's physical agenda. But then
• 23:53
  Speaker 1: it also has to kind of look at, well, what
• 23:55
  Speaker 1: could the monetary policy implications be if he were to
• 23:58
  Speaker 1: actually resign. So it's not just simply saying this is
• 24:01
  Speaker 1: his current job. You have to look at the fact
• 24:03
  Speaker 1: that he is a front runner to replace Yelling in February.
• 24:06
  Speaker 1: So what impact might that have? Right, He's a he's
• 24:09
  Speaker 1: probably like Yelling, a kind of low interest rate guy.
• 24:11
  Speaker 1: The market likes that. Who could the possible um, you know,
• 24:16
  Speaker 1: replacement B if he were to step down to be
• 24:18
  Speaker 1: the front runner, you know, would it increase the likelihood
• 24:20
  Speaker 1: that Yelling uh stays in the job. You know, these
• 24:22
  Speaker 1: are all questions that the market had to momentarily begin
• 24:25
  Speaker 1: answering this morning. But an ego boost, you know, it's
• 24:28
  Speaker 1: like if someone someone leaves the whole market tanks, you
• 24:30
  Speaker 1: know that it might be film pretty good fo um.
• 24:33
  Speaker 1: Mike mcdonna, thank you so much for joining me. As always,
• 24:36
  Speaker 1: Mike mcdonna is Global director of Economic Research and Chief
• 24:40
  Speaker 1: Economist at Bloomberg Intelligence in New York. Thanks for listening
• 24:46
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 24:49
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
• 24:53
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
• 24:57
  Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
• 25:00
  Speaker 1: one before the podcast. You can always catch us worldwide
• 25:03
  Speaker 1: on Blueberg Radio