Bloomberg SurveillanceMohamed El-Erian, President of Queens' College, Cambridge says traders are overplaying the prospects of an aggressive series of Federal Reserve interest-rate cuts before the end of the year
Victoria Fernandez, Crossmark Global Investments Chief markets strategist, says we're still looking at an economic slowdown coming, but not a recession.
Sen. Ron Wyden discusses the focus on price gouging in the economic plan of Vice President Kamala Harris
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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 with our top story stocks on pause, with all eyes on Jackson Hole traders looking for ray cut clues from fed share Jay Powell when he speaks tomorrow, Muhammad al Erin of Queen's College, Cambridge, saying the stakes are high, writing in a Bloomberg opinion piece quote, it is critical for Powell to take advantage of the golden opportunity he has this Friday to regain control of the economic and policy narrative. Muhammed joins us now from more Mohammed, good morning.
It's good to see you.
Good morning, John.
Thanks for that is for the next ninety minutes, so We've got plenty of time to work through these issues. I went through the piece on Bloomberg Opinion, pretty extensive, and a long list of ours for Chairman Power Tomorrow. I'm going to go through another quote that you wrote. It is particularly critical that people come away from Wyoming with a clearer picture of the new equilibrium policy rate that neither restraints nor fuels economic activity, the path to that rate, and what a sustainable two percent inflation target means in practice. Now that's what you want you expecting to get it this week.
I hope I'll get one of those three, if not two, John. It is critical because, as you and Danny have been discussing this morning, it's not just about price volatility. It has been narrative volatility. People have moved violently in terms of their narrative of the economy in terms of what the FED should do on the basis of high frequency noisy data, and that tells you that we're lacking anchors in this economy. We're lacking a robust growth anchor, lacking a robust policy forward guidance, and we're lacking a robust technical anchor. So we should hope for the fair to start restoring the policy anchor. The way you do that is you tell people where you see the destination and how you think you're going to get there. That's what I think he should do. Whether he does or not, I'm not sure. Well, let's talk about what complicates it. The second anchor, forward guidance. You yourself, this is your language and your pace. You call it an ocean of genuine uncertainty. How do you provide forward guidance in an ocean of genuine uncertainty? The same way we do everything in life is that you say, this is where I think it is right now. This is why I think our star is as opposed to saying I'm not going to talk about it. This is why I think it is. It is dependent on these variables, and I will modify it if in mid course correction is needed.
Do you think it's important that they discuss how they view the size of cuts, how they view twenty five versus fifty basis points?
I think it is important, but the second order importance, So the first one is what is the destination look like? And secondly, how are we going to get there? It is problematic in my mind that the market is pricing in so many weight cuts right now, and Danny said it right this morning, is that there's this contrast between what the bond market thinks and what the equity market thinks. And this notion, and I love the way both of you have framed it of a hard landing policy response to achieve a soft landing that has got to be reconciled one way or the other. So I think the problem the market is overdoing it. I don't think we're going to get two hundred basis points of cuts in twelve months. I don't think we're gonna get a hundred basis point of cuts this year. I think we're going to get seventy five and one hundred and fifteen total. But the market is going to have to adjust at some point.
A few people looked at the minutes that WILL released yesterday, and so the fact that several of them discussed cutting in July, maybe is them implicitly realizing that they are behind and that they need to be more. Did you come away with that from with the same idea.
So when I read the notion that several several, not some several thought that in July cut was plaus and I thought to myself, what about the press conference? What happened in the press conference? Why didn't we hear that? And then when I heard both of you discuss the fact that a lot of people are discussing is are the minutes massage in some way after the meeting to reflect what has happened, since we won't know until we get the transcripts. Okay, but it is interesting that they put that in the minutes.
Well, there's two options. Either the fedschaed does allows each job of reflecting consensus in the news conference, or they massage the minutes. You're quite critical, more critical than me of this federal reserve, poor forecasting, confusing communication, and lapses in bank regulation as well across those three things, and you think that maybe this could have some really large consequences. There's a quote in this piece that jumped off the page to me, Mohammad. The FED could further risk, damaging its policy effectiveness and reputation, and countries around the world would look for more ways to de risk both their economies and their financial systems from a FED that no longer responsibly anchors what is still a dollar dominated international monetary system. Now that's not something you just write lighthearted that's not just you sort of writing that down and expecting us to ignore it. That's important. Do you think that's what's a risk here?
I do, and I really worry about it. John, The US, at the core of the system, has been able to inform and influence outcomes all over the world, and it has been able to lead policy coordination where needed. Why Because the US seem to be a responsible steward of the global economy that started to be undermined in two thousand and eight, it was undermined even more in twenty seventeen, has been undermined even more in twenty twenty one twenty two with the transitory inflation mistake. And what we're seeing is are people starting to hedge away from the dollar. Look at the price of gold, record after record after record, Look at central bank buying of gold around the world. They're divers flying away from the dollar. So I do worry that unless we gain policy credibility, that you're going to start seeing the system fragment, not just for geopolitical reasons, which we know is fragmenting, but fragmenting because there's less trust in the way the system is managed.
Well, that's why I actually wanted to ask you when that exactly where I wanted to go. Is that driven by one half of day, say, or the other or both? And how much of it is driven by one and maybe not the other, because in my mind another paper's minds, they might be listening to this and saying, well, that's about sanctions, that's coming from the government, that's coming from outside of the world of monetary policy. How much of it is about that versus say, the things we're talking about right now.
We have never seen the amount of volatilating the two year that we have seen recently. The two years supposed to be anchored by the FED forward policy guidance. The longer end can do all sorts of things, but at least you know the which the two to five year, lots and lots of stuff gets fries off that internationally and it has been a roller coaster. So jaeopolitics has a big influence. But what we have to minimize is giving you another reason for PEP to diversify away from the system, because they're diversifying not to another system, they're diversifying to fragmentation. They're diversifying to a system that builds little pipes around the center and doesn't solve as well as it should otherwise, and the world will suffer as a result.
The things you're talking about, they are structural changes that central banks are undergoing. And I just wonder if Powell is able to wrestle back control, if government concerned doesn't erode it further. Can it be undone or is this point we're at, has the damage already been done and you basically can't put the pace back in the tube.
So I think the economic side can be undone. You can go back, You can put the pace back into the tube. As you said it, it's a matter of being somewhat less backward looking and having the courage to be strategic as well. We are excessively data dependent. In fact, the FED being excessively data but dependent has led the analyst community to be excessive data dependent. Look at how probabilities are recession have moved on high frequency, noisy data that shouldn't happen, you said earlier, jobless claims has suddenly become this incredible number. Anybody who has been following that series for a long time knows it is incredibly noisy, and yet it can turn markets, and it can turn narratives.
Are you confident the federal change though, I mean the language that we've heard it still is one of data dependents. It still is one of looking for the next payrolls print to try to get an idea of where they should go. How much confidence do you have that they'll actually adopt what you're recommending?
And the word confidence is so important because it's in every FED narrative the word confidence. My confidence is growing. I mean they are now willing to shift their focus on both elements of their mandate. I think a little bit worried that the market has forgotten about the inflation part of the mandate and the market is only worried about the employment part. So I think they're a little bit worried about that, but they're willing to shift the man. I think they're going to get that. I think they're getting more confidence now that inflation is below three percent on this CPI, and I know that that's not what they look at, but that's what everybody else looks at. So I think they're gaining more confidence. So I am, too, gaining confidence that they're going to be able to get out of this phase of excessive data dependence that were caused by the big policy mistaken.
Twenty twenty one, Victoria Fernandez of Crossmark Global Investments joined us. Victoria, last time we caught up, you were worried about a slowdown in the second half. Are you seeing evidence of that or evidence to the country.
Now.
I think we're still looking at signs that are telling us a slowdown could be coming. I know that the idea of a recession has really been taken off the table for most people, but I think a slowdown in the economy is there. I mean, look, you've got small caps outperforming large yesterday, but yet forty percent of the wrestle two thousand hasn't even.
Had a profit.
They haven't reported a profit over the last twelve months. You've got the difference between the two year and the FED funds at extreme levels typically that you only see when you're in a recession. You have saving rates coming down while delinquencies are going up. We know the consumer, even though they're spending or being very cautious and what they're spending.
And I think when we look at the.
Labor market and wages and earnings and margins for corporations, we could see that start to tighten up a little bit, and I think a good sign.
You were just talking about the housing market.
Mortgage rates are down eighty basis points and we aren't even seeing a bump in the housing market. We've seen refies go up applications, but not home buyers. So I still think there's some struggling going on in this economy, and I think we'll continue to see it in the second half of.
The year, enough of a struggle to validate what's been priced into Federal Reserve rate cut expectations.
Look, the Fed, in my opinion, is going to go very slowly. So your last guest talked about two rate cuts this year. That's where wes mark are as well. Twenty five in September, twenty five in December. I don't think they're going to go more than that, which means we may see a little bit of a repricing in the bond market. Two years you were just mentioning a rite back up close to four percent. We could see yields start to go back up as some of that is priced out of the market, some of the cuts people are expecting. I mean, what are they pricing in now three and a half four cuts.
It's similar to what we saw.
At the beginning of the year when everyone was expecting five or six, they had to come back and reprice the market. So in our fixed income portfolios, we've gone close to neutral duration.
We're not ready to go long yet at this point.
Victoria's a said that goes slow with data that's getting weaker but not necessarily weak. Is that also consistent with gold priced twenty five hundred dollars an ounce?
You know, it's very interesting data because you're seeing this differentiation coming now between gold and bitcoin, where they had been going together for quite a long period of time. So I think people are going to You're seeing the dollar come down. I know it had a little bit of a bounce yesterday, but the dollars down pretty significantly. If the Fed is starting to lower rates, we'll see that happen more so people going into gold for a safe haven play.
And we're seeing a lot of gold buying coming out of Asia as well.
So not surprised gold is moving higher, not surprised we're seeing the dollar come down. I think that fits with a story of a FED slowly removing some of the tightness that's there. I think one of the things I like to say is the FED is not really being a commodative over the next few months.
I think they're just going to be less restrictive.
I just wonder what you think the success is in doing that. As using gold as a hedge. David Rosenberg at Rosenberg Research Things, he's it's going to go to three thousand simply because people don't trust bonds as a hedge right now. They don't trust central bank policy, they don't trust the guidance. So gold is where you hide out, Victoria. Gold hasn't had the best track record of being the place that you can hold out over long periods of time, So is it now the time? Can now be the time that you can you can hold on to Gold is something that protects you instead of something like bonds.
So it hurts my heart a little bit, Danny when you say people don't like bonds, because I do manage taxable fixed income here at Crossmark, So I think you need to have some allocation to bonds in your portfolio. Look, it's a cash flow component, right, So maybe it's not a safe haven in the sense that from the time of purchase to the time of maturity, you don't.
Have market value volatility.
You will but you get a steady cash flow coming from that. Is it okay to have a little bit of gold as a hedge in your portfolio. I think that's fine. Do you do a huge allocation shift to that. I think that's a little much. I don't think there's anything in the economy that's telling us we have to make that drastic of a move.
There is one thing that you've been saying, though, that runs contrary to what we've heard from a lot of people in fixed income, and I understand they've got something to sell. So there is sort of a bias in all of this too. You're still saying that just sit there and learn cash, earn money on cash, sit there at the front end, take you five percent, Victoria. Other people, as you know, are coming on the program, is saying you've got to lock in what's available at the long end right now, because that's not going to be there in several months time. Why's your approach a little bit different?
Well, I think they need to look at it from a Barbell approach, Jonathan. I mean, look, yes, you can get some of that locked in on the short end. We know the Fed's going to lower rates. We talked about the difference between the two year and the FED funds being quite extreme.
That's going to have to narrow.
At some point. So do the short end of the curve, do those yields come down? Yes, so you get in now, you get a little bit of price appreciation in that because you will have lower yields going forward, So lock some.
Of that in.
But I agree, go out a little bit on the curve. Add some of that on the longer end.
If you can still get four four and a half five percent in quality investment grade we're talking a double A rated not even having to go into triple B rated bonds, go ahead and put that in there as well. Again, it's part of that cash flow story and sets you up, especially if you're trying to match liabilities with the assets in your portfolio, and puts you in a good place the next five to seven years.
Detoria, I've also got to ask you, because I know you see wages and how it relates to consumption as one of the canaries in the coal mine for this economy. Given that, what did you make of some of these retail earnings we've gotten the success of a target and the lack of it for someone like Macy's.
It's an interesting kind of bifurcation that we're seeing. Obviously, Walmart did really well. I think some of the reason you're seeing a name like Walmart do well is because they have captured a much.
Larger audience than they used to have.
We know that a lot of high income spenders have actually moved into Walmart, so they're gaining traction there.
Target was interesting. We know that they're comps.
They have pretty easy comps because they have been underperforming for quite a long period of time. Glad to see them coming back. You're seeing better pricing in some of those elements. I know they said clothing was up, so that's good, and they also had a big boost from e commerce, so again different elements that are helping support. But Macy's been struggling for a while. They are that middle income consumer that is really having to pull back on discretionary spending as some of their more non discretionary items like food continue to move higher. So definitely a bifurcation that we're seeing in retail. Some of your low cost providers are gaining share and doing better, while that middle income consumer store is really starting to struggle.
It does come down to wages. Wages is the driver of.
Consumption, and I think as we see margins start to compress and earnings start to come down a little bit in the next six months or so, we can see wages start to stagnate.
That's going to hurt the consumer.
Why did you allat us go to a Macy's, Victoria? How long ago was it?
It's been a while, We'll say.
I've been to Bloomingdale's across the street from you guys, but Macy's. It has been quite a few years since I have stepped foot into Macy's. And it's probably why they're closing a lot of their stores right now.
Yeah, Bloomdale so close you can accidentally fall into it walking down Avenue.
I get it. I get it.
It's convenient, Victoria, Thank you, Victoria Fernandez cross my global investments, I feel the same. It's local.
Oh.
For the DNC in Chicago, the main event coming this evening with a keynote addressed from the Vice President Kamala Harris at the DNC is am Marie AMH.
Kibonic.
Good morning, John, And ahead of that keynote address from Kamala Harris, where we know the economy has been the top ish of this election. I'm now joined by the chairman of the Senate Finance Community, senior Senator from Oregon, Senator Ron Wyde, and thank you so much for joining.
Me, Thanks for having me so sing.
Your colleague, Senator Mark Warner called next year twenty twenty five tax armor, Geddon and you've been working already on tax issues. Where do you see room for compromise in twenty twenty five.
Well, first of all, we showed in twenty twenty four we wanted a bipartisan approach. You know, I put together a build out, a child tax credit and hundreds of thousands of units of house and help for small business and senior Republicans just didn't want to do it. I mean, the fact was jd Vance wouldn't even show up for work. So we had a bill that was fully paid for according to the Joint Committee on Taxation, would have been a big shot in the arm for family sixteen million kids would have been helped, four million small businesses, and Republicans were just day long.
Well.
Jd Vance was campaigning at the time, and even many Democrats would say this was a show vote. They knew they didn't have the votes yet Republicans want to wait till twenty twenty five. So that is why I think he would say he didn't.
Show up for that.
I understand that if he had been there, if he'd shown up, we could have gotten this past.
It would have gone to the President. Would have been a huge shot in the arm to the economy.
You know, we're talking about interest rates now looks like the Fed's going to lower interest rates. This is something that would really help families, because you got to understand that working families when they get these kind of kind of breaks, they go out and buy food and clothing and the like. What do the Republicans want to do? They want class war on working people. They want to hit them with tariffs, and tariffs are taxes on them.
Okay, so let's talk about what colotentially be renegotiated for next year. We know Republicans will sign on for an expansion of child tax credit. Jay Vans Trump, I believe in that. What about the corporate tax? Kamala Harris is twenty eight percent? Look, do you think that's the opening salvo.
Let's remember that the Republicans consistently in campaigns talk about things that they are going to say their interest in for working people, and then they go out and write these bills that are trickled down economics and give most of the breaks to the will to do. Now, let's talk about where we are on things like corporate taxes. I want to make sure that we have a reasonable rate that's going to allow us to compete in tough global markets. We know this is a challenging economy. This twenty one percent Donald Trump pulled out of nowhere. Nobody had any discussion about that in the Senate Finance Committee. And I can tell you a lot of my colleagues on both sides of the aisle, including some Republicans, they don't think the twenty one percent fits are definition of a reasonable rate.
So what do you think is reasonable?
I think that Western civilization isn't going to end with Kamala Harris's proposals. We're going to work in the committee to get a reasonable rate and one that will keep our companies competitive.
Okay, So that sounds to me maybe like twenty five percent, which I've been hearing as something maybe there could be a negotiation around twenty five percent.
There was a lot of interest in twenty five percent rate tied to increased opportunities to do business in the United States.
Look at the big pharmaceutical companies.
They generate a lot of their sales in the United States, you know, a lot of senior citizens, and then it go overseas to get a cheap tax break.
Let's talk about American business. Part of Kamala Harris's economic plan has been this idea about price gouging, going after these individuals in the corporate world that are hiking up prices, and many are viewing that as potentially is this going to usher in price controls? What is your take on this issue and can you name a company that is currently price gouging.
I'm glad you asked about this because I think the Vice President's moving in the right direction.
We believe in markets.
I'm the chairman of the Senate Finance Committee. I believe in markets. I believe in marketplace for since that's always the best way to go. But when markets are breaking down, you need some guardrails, and that is what the Vice President is talking about.
Now I'm going to be going home.
We're going to be flying all night to have town hall meetings in rural Oregon. You know what folks are going to ask me about They're going to ask me about the biggest grocery merger in American history, you know, Kroger's and Albertsons.
Do you think it should go through?
Well, what I've said is, I think we ought to kind of take a time out. I've been part of the effort with congress Woman Jayapaul to say let's have kind of a recall on this decision for a while and.
Think through how to come up with a fair agreement.
But what I can tell you is, when you know milk is four dollars a gallon and a lot of places meet ten dollars a pound, a lot of people are saying, get us a fair shake. And the concentration and consolidation we've seen in these food markets, I think is what we got to deal with.
But prices have come down, Walgreen's Target, all these places, Walmart slashing their prices. They see hiring consumers actually trading down to some of their softer prices, and that was welcomed by the White House. Isn't this all caused by inflation, not corporate greed?
Well, certainly we're coming out of COVID. There are a bunch of factors, but what I can tell you in my state, we're losing choices. For example, even for buying medicine. You know, we have only a couple of big pharmacies now they consolidate, and that's anti consumer. I'm a market's oriented democrat. I want to come back to that, but I think when markets aren't going very well, we need to have some guard rails and make sure we protect the consumer center.
Ron Widen, thank you so much for Jim for joining Bloomberg TV.
Jonathan.
Of course, he's also the chairman of the Senate Finance Committee. He will be key to next year's twenty twenty five tax fate.
I have no idea the people of Oregon with that interest in anti trust and competitive issues.
Amra, Thank you.
Mh Aver in Chicago. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, an gio 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 app.
