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- Katrina Dudley, Franklin Templeton Public Markets Senior Investment Strategist
- Dirk Willer, Citi Global Head: Macro Asset Allocation
- Claudia Sahm, New Century Advisors Chief Economist
Katrina Dudley of Franklin Templeton says technology stock earnings are really positive. Dirk Willer of Citi says there is concern "a Trump Administration would mean more inflation." Claudia Sahm of New Century Advisors believes, "We are in a trend place that is much better than frankly we went into the pandemic with."
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stocks in jin KaiA after getting a boost from better than expected Google earnings after the closing. About today, we're here from Meta and Microsoft. Katrina Tadlete of Franklin Templeton writing, people are worried, cautious, and generally bearish. We disagree. Tech company earnings continue to be strong. Katrina joins us. Now for more, Katrina Coomonich, Great, we would like to be bearish with alphabet numbers like the ones we saw after the closing value looking for more of the same.
You know what, I actually wrote that statement before the Google the alphabet earnings came out, and I have a look. If you look at some of the earnings that are coming out of these technology stocks, it's really positive. And don't forget, it's positive surprises on top of earnings growth, which is very different versus like a positive surprise when you're expecting earnings to go down and they go down less. So I think it is actually very positive. But we are worried because everyone's.
Bearish, you know.
The soft landing is kind of like, well, that's fine, and I think that we are just generally more optimistic.
Are you worried or does it give you confidence that you're actually on the right track. If everybody is verished, does that mean that actually there's more upside for you.
I think that there is a lot of upside in the market, and some of the indicators that we're looking at is look at the productivity data. The productivity number was two point five percent, and we haven't seen that type of growth for a long period of time in terms of positive productivity. The bearish people are pointing out to the fact that it's immigration. We're not counting the immigration numbers, we're not doing that correctly, and they're driving all of that product activity. We take a slightly different bent. We actually think this is one of the outcomes of some of the supply chain shortages and some of the reduction in the labor and tightness in that labor market. People are actually doing more with less, and that is productivity people.
Is this the tech companies or is this everyone? And I'm talking at a time when some of the earnings, particularly with auto manufacturers as well as certain consumer facing companies, have been eh, not great. They're not the same kind of blowout results that we're seeing from the likes of Google.
And I don't like talking about this, but if you take a look at the low end consumer, that is where you're seeing a lot of this weakness show up. So you look at the McDonald's numbers and you look, obviously we had the Ecolla issue, but you combine that with the negative foot traffic. We are seeing the low end consumer under some degree of stress. And I think that's going to actually show up is potentially more in the election versus actually showing up in the stock market, because even though there's a lot of people in the low end consumer, it's not a big driver of US spending. So even though they are starting they are starting to see pressure I'm not necessarily sure that they're actually going to derail the economy.
So this race is a question if you do see this over arching momentum, and that could lead to higher yields because essentially it can mean that a growth economy is really on the table for next year. At what point does that create some sort of downside valuations for equities or do you just ignore it and say start being so verished fun market.
I think, first of all, we think in terms of valuation, the market's probably on a multiple basis, is reasonably fairly valued. What people are getting wrong is the earnings growth number. And so the fact is is that even if you just hold that multiple flat, if we continue to deliver better than expected earnings, the market can work because we'll still have that growth in actual underlying economy. So that's what we think the market is missing. They're so focused on the valuation level. We think that that higher valuation is a reflection of some of the benefits of the network effects, which just driving some degree of concentration in the market, which is positive.
Is politics playing at all in your bullet view?
So let's go to politics. When you were in the countdown, and I think it's an interesting thing. I think the non consensus view is actually coming. If we look at some of the quant data that's coming out, there's approximately a sixty six zero percent chance that we have one of these candidates with over three hundred electoral votes, which would be a landslide victory. The problem is it's too close to call which of the candidates is going to be that way. I know you've seen some of the betting data which is favorable to one candidate over the other. We're not necessarily trusting that data. I think though, a landslide victory would be really good for the stock market and the economy, and therefore it actually in terms of the November the November seventh FED decision, I think that'll also weigh in.
A landside victory for who a red sweep.
Or a blue sweep.
That's the unknown. Unfortunately, I think that we will have a sweep, and I think that we'll have a fairly definitive outcome. Unfortunately, could swing either way, which, however, I think you need to stand back and look at the fact we're going to this election with so much uncertainty that just having the fact that the entire country coalesced around one candidate will be very positive in terms of bringing the country back together, and you think.
That'll be positive regardless for stock markets, even though they have in some regards very different policies.
Yes, so what does that mean if we have a trunk victory. Obviously we need to start looking at the language that he's put out there regarding tariffs. The bearish expectation is you take him at his would and that would be very negative in terms of the tariff levels that he's talking the ten percent and then the higher levels of tariffs on China. I think he's a negotiator, so we're probably in the camp. I think it is also within consensus the fact that he's actually just positioning and that he won't go that far in terms of what he's language. So I think that that in terms of outcome is going to be more positive. We don't see that negative downside scenario going to Kamala's policy. We go back. Do you want to start looking at some of those names which have been disproportionately and negative is impacted by exposure to the low in consumer If you're looking at McDonald's, you may want to start looking at some of those regional gaming companies as well, So there's definitely some beneficiaries. I think you just need to look for those beneficiaries in some unusual places.
If we're talking about a sweep, though, we're talking about the difference between a fifteen percent conditional corporate tax rate or one going up to twenty eight percent, aren't we.
I don't think necessarily think fifty.
He likes round numbers.
Okay, so we're at twenty one percent, but when he first talked about it, we were at thirty five. So the difference of going to thirty five to twenty one is significant. I think if he goes anywhere, it's twenty to twenty one down to twenty. As I said, he's a round numbers.
What about twenty one to twenty eight On the Harris side blue sweep scenario, it.
Will be a headwind to corporate earnings. I think that you cannot underestimate that. But offsetting that is her position on tariffs is quite as extreme, and then you have some of this support for the low in she's talking in terms of some of the transfer payment metrics. The concern that we have does the corporate tax rate increase come in fast enough to offset any of the increase in the fiscal deficit driven by her.
You're looking forward to see in the bank of all of this next week.
I'm actually enjoying it.
I think it's interesting because this is what drives markets, and this is what makes our job so interesting. But you're right. If I come back, you're in a week's time, we're going to be talking about something else. We will be talking about twenty twenty five.
Actually, I hope we are. I really do, and I hope we're still not sitting here trying to figure out who actually won the election. Equity futures on the S and P by a tenth of one percent. Katrina has going to see it. Thank you great as always, Katrina, don't be that a Franklin Temple said. So here's the latest. There's many investors leaning into Trump trades. Some warnings begin to build cities suggesting it might be time to take profits. Dirk Willer writing, despite investors concluding that Trump would be the victor, the polling bias is only moderately in his favor. We therefore take profits in some of our Trump biased election trades. That join us now for more. Welcome to the program sir, Let's get into those trades. First of all, which ones would you take off at the moment?
Yeah, thanks for having me on.
I think there's a lot of consensus among investors that Trump has already won, right and almost every post I think, listen, it's really very close to call still and therefore it's not really a focal conclusion, even though the odds are lart in this favor. So the trades we decided to take off our one hour long break even trade. As you know, there's a lot of concern that Trump administration would mean more inflation both or actually for several reasons, because of the immigration policies, because of the tariff policies, and because of physical expansion, and so the inflation market price meaningfully higher pretty much across the curve, and we think that is really quite mature, and that could have a meaningful backlash if Trump still virtual loose, And therefore we think that is really one that we would take off. The other one is in the dollar. People really piled into the dollar, and of course they piled into it for two reasons. One because the macro changed this and if p was very strong, and that changed the sentiment around the dollar. But the second thing was, of course Trump again, tariffs being bulluish, trump fiscal policy being bullish dollars, fiscal policy being bullish dollars, and that is also quite mature trade. And so we took off our euro downside structure.
That's what makes it slightly more complex. We need to figure out what was driving the trades to begin with. Why do you believe this was more about Trump's prospects than just about fundamentals the economic data and monetary policy too.
It is true, it's almost impossible to figure that out fully because even if you say, well the door just move with rates, well, rates moved with Trump, right, and so what is what is somewhat hard to say. But I would say the extent of dollar buying that we've seen was much more extreme than what you typically get if it's just and then a p print of it's just a change in the economic outlook. It really was was really quite large.
You can also see where it happened.
Investors bought most in dollar China. Door China is of course the single biggest Trump trade that there is. It's now a very big consensus trade. Now, I would say we have still a structure that would benefit from higher dollar China after an election, and we kept it. And the reason is that I think the PBOC is really a little bit investor's friend in calming down the volatility, in making sure dollar China doesn't overshoot too quickly, too fast, and so I think investors are are still able to add to dollar China for that reason. But in general, I to answer the question where this solid buying happened is a clear education that a lot of it had to do with Trump.
How many of your clients are your compatriots, Derek, are curious about playing in the Trump media and technology group.
In bitcoin?
Yeah, I don't cover thing avities. Bitcoin is of course also Trump trade, and it's it's a little bit similar to gold. Gold also had had a very strong move. Of course, now that that gold is the Trump trade is really quite curious because usually and the same is true some same for bitcoin, if rates go up and the dollar goes up, that's a terrible environment for gold. Now this time around we have rates go up, dollar go up, and gold does great. And the reason is, of course, again these inflationary fears with the Trump administration, and even more so it's inflationary fears with a FED not going to do much about it if there was a higher inflation, and the combination of higher inflation and a double shad is of course a great environment for gold and also for bitcoin. So so I think that explains a little bit of paradox.
Dirk.
Why do you think the financial markets are taking their cues and the betting markets and not polling.
I mean, I think what is happening is that markets love momentum, right, and the polls they are, of course, have moved in favor of Trump. They have showed some momentum and people just write that forward and they jump on the momentum train. And that is what we see in markets all the time. And that's I think how people use the polls. And it might be right. I mean, today is some momentum impulse and that is what we're seeing. And you know, at this stage, Trump of course has the upper hand, and I think there is clear both impulse and in betting markets. But the extent to which he has and the conferences you can have in the outcome, I think is somewhat exaggerated in markets.
I appreciate your time so full pace, Thank you, sir. Timely took all avent f City joining us not to discuss as Claudia Sam of New Century Advice is a good friend of this program. Claudia, welcome back to the show. Let's get into this economic data. How would you characterize the economy in America?
Good news is good news.
I mean, this is excellent on the GP, particularly when you look at the consumer spending.
It's not just one quarter.
We have now put together four quarters that are about three percent growth in consumer spending inflation adjusted, and as Michael said, you put that together with business investment, like that's what we're looking for. Like, this is a really good report and it's not one to be afraid of. The FED is not going to be afraid of this report. We have a supply coming online, we have productivity higher.
Like this really is good news, Claudia.
They might not be afraid of the report, but they could be potentially a little concerned about the response to the report in markets. At what point does it get the Fed's attention that longer term yields keep climbing on the back of an ongoing string of better than expected economic data.
The FED is going to be paying attention to what markets do, regardless of whether it's what they're expecting or what they're not expecting. You know, there's hard to play three dimensional chess with markets.
There are a lot of factors that move markets.
The FED is an important player in the mix, but it's not the only but it absolutely will be looking at interest rates, sensitive sectors, places where it could go in and if there needed to be some support, cut rates, get some support. But what that's not we're seeing right now. We're seeing a very strong economy and what the FED has to look for are any signs of it overheating?
Right?
Is that consumer spending?
Is that demand that's really outstripping supply, And at this point we really do not see signs of it, and we have it for several quarters right like this, we are in a trend place that is much better than frankly, we went into the pandemic with.
There are two different arguments here. One is this question of whether we're overheating and thus causing the FED stop cutting rates, And the other question is are we underestimating the neutral rate that we could potentially be looking at in an economy that keeps chucking along even with rates that the current FED says are significantly restrictive.
So which is it Claudia, because.
They are very different responses on the FED side to either of those two potential outcomes.
At the end of the day, we want the neutral rate as high as absolutely possible, because a high neutral rate is a sign of a healthy economy. The low interest rate economy that we went into the pandemic with that was not a healthy economy. It created a lot of distortions, but it also was just assigned interest.
Rates or a price. They are telling us something about the economy.
And if it turns out that this economy comes out with higher productivity growth, higher underlying line trend, well we would expect that to show up with a higher interest rate, and it's an interest rate that we would tolerate. It wouldn't be restrictive, it just be we have a stronger economy now.
It is true soon to say that is what we have moved into.
This still could be you know, working through some of the temporary disruptions of the pandemic, and we could go back to a lower trend growth. And I think Europe is very much a cautionary tale, right. They are not having this conversation of have we gotten to this higher trend level?
Is our star just so much higher. So there's still a lot in the mix. But again we don't where our star lands.
I mean that high our star is perfectly fine, but we're in that process of discovery of like, is this good news going to stick with us?
Well? When you say good news is good news? Does it marshally increase your base case? The best guess about where the neutral rate is? Do you think that it's more likely around four now than three and a half?
Is a FEDCE projecting. I don't know if I go quite as high as four.
I think, you know, into the solid three percent is what this looks like.
In particularly again.
If the implicit productivity growth that goes with this GDP number and a labor market that, while still solid, has slowed down quite a bit, right, so we're we're getting a lot out of the resources that we're putting into the economy, and so if that continues, then yes, I think something in the mid three percent probably maybe maybe even higher would make sense. But that's where I think the FED they have like their first hundred basis points, like the next hundred basis points I think are pretty safe in the like that's still restrictive.
We can ship away at that, and then there really you do get.
Into a conversation as you get past that of okay, is this is this where the economy wants to rest.
If we're going to live at higher interest rates, what does that mean for the housing market?
Again, a higher interest rate environment, when when it's behind it is productivity growth, you also have higher income growth, right, And so interest rates are a price just like house prices or another price that people face. And what at the end of the day matters is the affordability. Right you have the resources to afford those homes. Now, of course, the higher interest rates do run into the fact that we have had a housing underbuild for quite some time. And so if you think that if we're going to try and fix that underbuild just with market prices, so the adjustments of the interest rates, that one is going to be tricky.
But I think there are certainly.
Policy proposals on the table at various levels of government to try and work on housing supply and not think of it purely through interest rate mechanisms and what the FED might be doing.
Right, but that could take years to come to fruition. So if you're sitting on a three percent mortgage and rates you say, are going to be higher for longer. What impetus is there for those individuals to give that up?
There's not.
I mean what you know, there are always if there are big shifts in the economy, there are going to be winners and losers in terms of where they sat on like the bet right on the information when everything changed. So you know that that's just a reality of how the economy works. It does mean the housing market went into the pandemic in a place of disruption because of the housing underbuild, and then it has been throughout this entire period in different forms of disruption, whether it was really fast paced demand, really low interest rates, whether it was no inventory of housing. You know, so that is an extremely disrupted sector, not just because of interest rates. And I agree with you, there is no there's no magic wand in that market. It's going to take time and it's an extremely important one to get right sized.
One thing I know for sure is that was personal to Amrie Claudia. She just wants to buy a house. That's what it's about. Is that what that was about.
It feels like the boomers or those that time the market correctly at least are the winners, and then those that are younger trying to give in the housing market are the absolute look boom no, I said those I know, I called her a winner for timing in the market.
I bought in April of twenty twenty. Isn't going to rub it in? But yes, why not?
Why not? Since we're being personal here, Claudia, can I just have one personal note just quickly. We know you're in your own personal battle right now, and I just want to say on the behalf of all of us, and if I made the whole financial community as well, because I've had a ton of messages just before you appeared with us. We're all thinking of you. We're all thinking of you, and we appreciate your time. We're lucky to have you this morning. Thank you so much for being with us. Claudia Salm There of New Century Advisors. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg terminal and the Bloomberg Business opp