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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. Andrew Honhorst of City has got a different idea on things. He's looking for one twenty and a very different unemployment rate. And Andrew joins us now for more. Andrew go mornig. Let's start with unemployment. You think that's the bigger issue. What's your call?

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. Andrew Honhorst of City has got a different idea on things. He's looking for one twenty and a very different unemployment rate. And Andrew joins us now for more. Andrew go mornig. Let's start with unemployment. You think that's the bigger issue. What's your call?

I think that's a more important issue.

I think that's a more important issue.

We're calling for four point four percent on the unemployment rate, which is not as big a mover as it sounds like. And this is maybe the silliness of what we're doing here, but I have to get into the hundreds of a percentage point on the unemployment rate. We're at four point two four percent unrounded right now, So that means if we just move up by a little bit more than a tenth, right, a tenth and one hundredth, then you're up at four point four.

We're calling for four point four percent on the unemployment rate, which is not as big a mover as it sounds like. And this is maybe the silliness of what we're doing here, but I have to get into the hundreds of a percentage point on the unemployment rate. We're at four point two four percent unrounded right now, So that means if we just move up by a little bit more than a tenth, right, a tenth and one hundredth, then you're up at four point four.

Why are you not dissuaded from your more bearish outlook on the employment market when you see things like the Jolt State of the job opening stata that come in hotter than expected, with actually the inflationary read through of ism coming in at the hottest level since twenty twenty three.

Why are you not dissuaded from your more bearish outlook on the employment market when you see things like the Jolt State of the job opening stata that come in hotter than expected, with actually the inflationary read through of ism coming in at the hottest level since twenty twenty three.

Yeah, I think when you look at some of this data, and this is the issue we're all dealing with, economists, the market, the FED, there's so much noise in the data, and there are different details of the data you can look at and tell different stories. So the Jolts report is a great example of that. If you look at the level of job openings, that's stabilized at a higher level than where we thought it would have stabilized at, So that looks quite healthy. If you look at what people are doing, which I think are the more relevant statistics in that report, you see layoffs are low, so that's very good news for the job market, but you also see that the high rate is quite low. And that actually surprised us to the downside. Yesterday, that got a lot less attention. It was low in October. October, we know we had the strikes, we had hurricanes, but then in November it actually continued to move lower.

Yeah, I think when you look at some of this data, and this is the issue we're all dealing with, economists, the market, the FED, there's so much noise in the data, and there are different details of the data you can look at and tell different stories. So the Jolts report is a great example of that. If you look at the level of job openings, that's stabilized at a higher level than where we thought it would have stabilized at, So that looks quite healthy. If you look at what people are doing, which I think are the more relevant statistics in that report, you see layoffs are low, so that's very good news for the job market, but you also see that the high rate is quite low. And that actually surprised us to the downside. Yesterday, that got a lot less attention. It was low in October. October, we know we had the strikes, we had hurricanes, but then in November it actually continued to move lower.

You look at the quit rate.

You look at the quit rate.

Are people feeling comfortable quitting their jobs?

Are people feeling comfortable quitting their jobs?

And this is kind of goes back to what you were.

And this is kind of goes back to what you were.

Talking about with companies bringing workers back five days a week. People are not feeling as comfortable now that they can find a new job if they leave their job. So those are the kinds of signs of softness that we're seeing in the data that we think are going to continue to feed through and lead to a higher unemployment rate.

Talking about with companies bringing workers back five days a week. People are not feeling as comfortable now that they can find a new job if they leave their job. So those are the kinds of signs of softness that we're seeing in the data that we think are going to continue to feed through and lead to a higher unemployment rate.

Yeah.

Yeah.

Just talking about the quits rate that was one point nine percent. It was tied with the lowest rate going back to twenty twenty, talking about that DYNAMICEM I just wonder how offsides do you think this market is. How much pushback you get, and what you say to people who say you've been out of consensus for a while. The data has been surprising to the upside. Why aren't you capitulating?

Just talking about the quits rate that was one point nine percent. It was tied with the lowest rate going back to twenty twenty, talking about that DYNAMICEM I just wonder how offsides do you think this market is. How much pushback you get, and what you say to people who say you've been out of consensus for a while. The data has been surprising to the upside. Why aren't you capitulating?

Yeah, so, I mean if you look at how much we've moved it's really been incredible over the last six months, over the last three months. In September, after we had the week jobs report and the FED was cutting fifty bases points and the FED was quite worried about unemployment picking up. Then we have had a run of better data since then. We're trying to look at the underlying trends and not kind of change the view every month based on where an individual data point is coming in.

Yeah, so, I mean if you look at how much we've moved it's really been incredible over the last six months, over the last three months. In September, after we had the week jobs report and the FED was cutting fifty bases points and the FED was quite worried about unemployment picking up. Then we have had a run of better data since then. We're trying to look at the underlying trends and not kind of change the view every month based on where an individual data point is coming in.

And I think and I don't blame the market.

And I think and I don't blame the market.

Because I think, like I was saying, there's been a lot of noise in the data. The FED is reacting to that noise in the data. So that means we've had ten year treasure heels that have been all over the place. We've had two year treasure heelds that have been all over the place. I think we're just going through a phase now where we've seen some better numbers. That unemployment rate at four point two four percent, It would be four point six percent if not for the participation rate dropping, and I think we'd be in a very different discussion right we'd be having a different discussion right now if we were at four point six percent.

Because I think, like I was saying, there's been a lot of noise in the data. The FED is reacting to that noise in the data. So that means we've had ten year treasure heels that have been all over the place. We've had two year treasure heelds that have been all over the place. I think we're just going through a phase now where we've seen some better numbers. That unemployment rate at four point two four percent, It would be four point six percent if not for the participation rate dropping, and I think we'd be in a very different discussion right we'd be having a different discussion right now if we were at four point six percent.

So it just shows how quickly the narrative can change.

So it just shows how quickly the narrative can change.

What would you maybe change your mind January twentieth, is the president elects immigration policies that he's talking about going to mean a tighter labor marking.

What would you maybe change your mind January twentieth, is the president elects immigration policies that he's talking about going to mean a tighter labor marking.

So this is part of the issue with trying to do a forecast here, is that these policies do matter quite a bit. That's why the market is moving so much on each of these headlines. And we'll continue to move. And it's not necessarily January twenty if when everything is going to be answered, because yes, we probably should get some answers on immigration. I'm really interested to know what does this reconciliation package look like. What's in this fiscal bill. If it's just extending existing tax cuts, that's not a big new fiscal stimulus to the economy, that's just extending what's already there. If we're getting no tax on overtime pay and these other kinds of things that could push the deficit higher, then that is more stimulus.

So this is part of the issue with trying to do a forecast here, is that these policies do matter quite a bit. That's why the market is moving so much on each of these headlines. And we'll continue to move. And it's not necessarily January twenty if when everything is going to be answered, because yes, we probably should get some answers on immigration. I'm really interested to know what does this reconciliation package look like. What's in this fiscal bill. If it's just extending existing tax cuts, that's not a big new fiscal stimulus to the economy, that's just extending what's already there. If we're getting no tax on overtime pay and these other kinds of things that could push the deficit higher, then that is more stimulus.

That would change the FEDS view, That would change my view.

That would change the FEDS view, That would change my view.

Let's see what happens just quickly in about fifteen seconds, if you can. If we get four point four percent this Friday one twenty, is that sufficient to cut right to the end of this month.

Let's see what happens just quickly in about fifteen seconds, if you can. If we get four point four percent this Friday one twenty, is that sufficient to cut right to the end of this month.

I think they may still pause. Even in that event, I think they have to see something In addition to that. It probably sets them up to continue cutting later this year. But they've really signaled towards this pause in January.

I think they may still pause. Even in that event, I think they have to see something In addition to that. It probably sets them up to continue cutting later this year. But they've really signaled towards this pause in January.

My Schumacher of Wells Fargo saying that if we get that four point four percent that Andrew and the team are looking for, it would be ugly and we'd see the tenure yield falling twenty basis points. In that scenario, We've had a big move in the other direction over the past few months. Andrew, it's going to see us, sir, Thank you, Andrew. Homenhoorst there a city. Let's turn back to politics. Republicans in Congress gearing up to negotiate an extension of Donald Trump's twenty seventeen tax cuts. A group of House Republicans we're invited to meet with Trump this weekend at marri Laco and are expected to push to include an expansion of salt tax deductions in Congress's upcoming package and place to say that joining us now is one of those House Republicans. Congressman Michael Awler of New York Congressman fantastic to catch up with you once again, sir, I just want to know, from your perspective, how many friends you have outside of New York in the House that would be on board with the stafford.

My Schumacher of Wells Fargo saying that if we get that four point four percent that Andrew and the team are looking for, it would be ugly and we'd see the tenure yield falling twenty basis points. In that scenario, We've had a big move in the other direction over the past few months. Andrew, it's going to see us, sir, Thank you, Andrew. Homenhoorst there a city. Let's turn back to politics. Republicans in Congress gearing up to negotiate an extension of Donald Trump's twenty seventeen tax cuts. A group of House Republicans we're invited to meet with Trump this weekend at marri Laco and are expected to push to include an expansion of salt tax deductions in Congress's upcoming package and place to say that joining us now is one of those House Republicans. Congressman Michael Awler of New York Congressman fantastic to catch up with you once again, sir, I just want to know, from your perspective, how many friends you have outside of New York in the House that would be on board with the stafford.

A lot more than people realize.

A lot more than people realize.

Obviously, New York, New Jersey, and California three of the high tax states where this has most acutely impacted. Certainly we have a coalition, and given our small majority in the House, it's certainly a powerful coalition. But there's other states and members across the country in which you know, over the last seven years they've seen their own taxes rise up against that ten thousand dollars cap. So quietly there's a few more members than people would realize, but would realize. Look, the cap consalt was a pay for for the twenty seventeen tax Cuts in Jobs Act.

Obviously, New York, New Jersey, and California three of the high tax states where this has most acutely impacted. Certainly we have a coalition, and given our small majority in the House, it's certainly a powerful coalition. But there's other states and members across the country in which you know, over the last seven years they've seen their own taxes rise up against that ten thousand dollars cap. So quietly there's a few more members than people would realize, but would realize. Look, the cap consalt was a pay for for the twenty seventeen tax Cuts in Jobs Act.

That's it.

That's it.

It was used as a pay for to pay for other provisions within the tax bill. The ten thousand dollars cap is woefully insufficient. It's had a negative impact on states like New York. Now we can get into how New York excessively spends. They've increased their state budget by sixty one billion dollars in the last four years, for instance, that.

It was used as a pay for to pay for other provisions within the tax bill. The ten thousand dollars cap is woefully insufficient. It's had a negative impact on states like New York. Now we can get into how New York excessively spends. They've increased their state budget by sixty one billion dollars in the last four years, for instance, that.

Needs to change.

Needs to change.

But taxpayers should not be penalized by living in a eye tax state.

But taxpayers should not be penalized by living in a eye tax state.

This is double taxation.

This is double taxation.

And for those of my colleagues that say this is somehow a subsidy, the fact is New York contributes more to the federal government than it receives, and more than some of these states in which my colleagues will claim that they don't want their taxpayers subsidizing New York.

And for those of my colleagues that say this is somehow a subsidy, the fact is New York contributes more to the federal government than it receives, and more than some of these states in which my colleagues will claim that they don't want their taxpayers subsidizing New York.

But the reality is it's the other way around.

But the reality is it's the other way around.

Congressman, you certainly don't have a friend, though, and someone like Lindsey Graham, the center of South Carolina, who said, why should I from South Carolina pay for what's going on in some of these blue states? And he's pushing for this one big sorry for the two bill approach because he doesn't want to talk about taxes. He thinks it's going to take too long, and he doesn't, frankly want to sign up for salt. How are you going to convince the president this weekend that you should do one bill together and make sure salts included.

Congressman, you certainly don't have a friend, though, and someone like Lindsey Graham, the center of South Carolina, who said, why should I from South Carolina pay for what's going on in some of these blue states? And he's pushing for this one big sorry for the two bill approach because he doesn't want to talk about taxes. He thinks it's going to take too long, and he doesn't, frankly want to sign up for salt. How are you going to convince the president this weekend that you should do one bill together and make sure salts included.

Well, Respectfully, South Carolina is one of those states that gets more back, certainly percentage wise, than New York does. So you know, if we want to talk about subsidies, we can go chapter and burst through everybody's subsidies that they get.

Well, Respectfully, South Carolina is one of those states that gets more back, certainly percentage wise, than New York does. So you know, if we want to talk about subsidies, we can go chapter and burst through everybody's subsidies that they get.

Look with respect to one versus too.

Look with respect to one versus too.

The President has already made clear he is moving forward on one big bill. We need to deal with taxes, the border, energy debt, among other issues. And the fact is, given our small margin in the House, we're going to need everybody's vote and everybody on board. Two track bills are going to make that harder. So while it may take a little bit more time to get one bill negotiated, it is necessary if we're going to get all of these issues addressed. And I think the President understands that. I think that's why the President made clear last week one bill, and that's how we are proceeding forward in the House. And look, ultimately, our Senate and House Republican majorities are going to have to work together. Nobody's going to get everything they want out of this. There's going to have to be a good faith negotiation if we had any chance of passing a reconciliation bill.

The President has already made clear he is moving forward on one big bill. We need to deal with taxes, the border, energy debt, among other issues. And the fact is, given our small margin in the House, we're going to need everybody's vote and everybody on board. Two track bills are going to make that harder. So while it may take a little bit more time to get one bill negotiated, it is necessary if we're going to get all of these issues addressed. And I think the President understands that. I think that's why the President made clear last week one bill, and that's how we are proceeding forward in the House. And look, ultimately, our Senate and House Republican majorities are going to have to work together. Nobody's going to get everything they want out of this. There's going to have to be a good faith negotiation if we had any chance of passing a reconciliation bill.

I was one of those individuals who watched your festivus airing of grievances during the Christmas week and you did a little bit of a wink at your potential future maybe becoming the governor of New York to make sure you could potentially go down that path, do you need to secure a higher salt tax break.

I was one of those individuals who watched your festivus airing of grievances during the Christmas week and you did a little bit of a wink at your potential future maybe becoming the governor of New York to make sure you could potentially go down that path, do you need to secure a higher salt tax break.

Look, regardless of whether or not I run for governor, this was a promise of mine, and it's said top priority for my district. I represent one of the highest tax districts in the country, inclusive of Westchester and Rockland Counties number one and number two highest property tax counties in America. So this is critically important to lift the cap on salt. Ten thousand dollars is woefully insufficient. And you know this is something that I said I would deliver on, and we're going to as part of this reconciliation bill. Long term for New York, this is critical. We lead the nation in out migration. Our tax base is eroding, in large part because of the disastrous policies of Kathy Hochel and Albany Democrats. One party rule in Albany has been an abject disaster, whether you're talking about the affordability crisis or public safety. People being burned alive on subways, pushed in front of oncoming subway trains. Kathy Hochl now scamming New Yorkers out of twenty five hundred dollars a year for the privilege of driving to work while spending billions of dollars of taxpayer money on free thousand clothing, food, education, and healthcare for illegal immigrants. New York needs change, there's no question about that. But from a federal perspective, we should not be penalizing New York taxpayers because of the disastrous decisions of Cappy Local and Albany Democrats.

Look, regardless of whether or not I run for governor, this was a promise of mine, and it's said top priority for my district. I represent one of the highest tax districts in the country, inclusive of Westchester and Rockland Counties number one and number two highest property tax counties in America. So this is critically important to lift the cap on salt. Ten thousand dollars is woefully insufficient. And you know this is something that I said I would deliver on, and we're going to as part of this reconciliation bill. Long term for New York, this is critical. We lead the nation in out migration. Our tax base is eroding, in large part because of the disastrous policies of Kathy Hochel and Albany Democrats. One party rule in Albany has been an abject disaster, whether you're talking about the affordability crisis or public safety. People being burned alive on subways, pushed in front of oncoming subway trains. Kathy Hochl now scamming New Yorkers out of twenty five hundred dollars a year for the privilege of driving to work while spending billions of dollars of taxpayer money on free thousand clothing, food, education, and healthcare for illegal immigrants. New York needs change, there's no question about that. But from a federal perspective, we should not be penalizing New York taxpayers because of the disastrous decisions of Cappy Local and Albany Democrats.

And just to be clear, when it comes to the salt cap, how high are you looking for it to be raised?

And just to be clear, when it comes to the salt cap, how high are you looking for it to be raised?

Look, I've introduced legislation, you know, my marriage Penalty Elimination Bill reintroduced to raise it to one hundred thousand dollars for individuals two hundred thousand dollars for married couples.

Look, I've introduced legislation, you know, my marriage Penalty Elimination Bill reintroduced to raise it to one hundred thousand dollars for individuals two hundred thousand dollars for married couples.

This is going to be a negotiation.

This is going to be a negotiation.

My colleagues and I are looking forward to sitting down with the President having a discussion about it, hearing obviously what his priorities are as part of the tax bill, and working to a consensus. At the end of the day, my objective is to provide tax really to hardworking Americans. It's incumbent upon everybody to negotiate in good faith because here's the reality. If we do not pass a tax bill number one, salt comes back unlimited, but it is accompanied by the largest tax increase in American history. So it is important that we actually negotiate a fair tax deal for the American people in August.

My colleagues and I are looking forward to sitting down with the President having a discussion about it, hearing obviously what his priorities are as part of the tax bill, and working to a consensus. At the end of the day, my objective is to provide tax really to hardworking Americans. It's incumbent upon everybody to negotiate in good faith because here's the reality. If we do not pass a tax bill number one, salt comes back unlimited, but it is accompanied by the largest tax increase in American history. So it is important that we actually negotiate a fair tax deal for the American people in August.

I just want to end on this.

I just want to end on this.

You are one of these individuals that wrote a letter to the Speaker talking about that you didn't want the repeal of energy tax credits with the IRA. This is something that president like Donald Trump wants. Are you going to be trying to assuage him of your view over this weekend in mar Lago.

You are one of these individuals that wrote a letter to the Speaker talking about that you didn't want the repeal of energy tax credits with the IRA. This is something that president like Donald Trump wants. Are you going to be trying to assuage him of your view over this weekend in mar Lago.

Look, many provisions for the IRA absolutely need to be repealed. What we signed on to a letter is that we were not going to just sign off on a wholesale repeal. There needed to be a discussion and again a negotiation. Companies make decisions based on tax provisions and they need certainty. And there's already been significant investment, including in New York, based on some of these energy tax credits, and so we want to make sure that any changes are done smartly and not just wholesale repeal. So that'll be part of the discussion and conversation as we move forward. And you know, again, I think the key here is to come up with a reconciliation bill that increases domestic production of energy, ensures the American people have a good, smart tax bill to reduce their taxes, reduce the cost of living here in the US, and ultimately secures our border. It's a lot of a lot of important issues that have to be included in this reconciliation bill. It's going to require negotiation, and it's going to ultimately require every Republican supporting the final product.

Look, many provisions for the IRA absolutely need to be repealed. What we signed on to a letter is that we were not going to just sign off on a wholesale repeal. There needed to be a discussion and again a negotiation. Companies make decisions based on tax provisions and they need certainty. And there's already been significant investment, including in New York, based on some of these energy tax credits, and so we want to make sure that any changes are done smartly and not just wholesale repeal. So that'll be part of the discussion and conversation as we move forward. And you know, again, I think the key here is to come up with a reconciliation bill that increases domestic production of energy, ensures the American people have a good, smart tax bill to reduce their taxes, reduce the cost of living here in the US, and ultimately secures our border. It's a lot of a lot of important issues that have to be included in this reconciliation bill. It's going to require negotiation, and it's going to ultimately require every Republican supporting the final product.

A Congressman as we speak, Bonyotza climbing. And we've we've seen quite a significant move since September when the Federal reserves standing it's right cutting effort. We've moved one hundred basis points. And I certainly don't expect you to follow the ins and outs of fixed income on any given day, but I wonder whether you and your colleagues are sensitive to some of the pressure that is starting to build in the US dept market.

A Congressman as we speak, Bonyotza climbing. And we've we've seen quite a significant move since September when the Federal reserves standing it's right cutting effort. We've moved one hundred basis points. And I certainly don't expect you to follow the ins and outs of fixed income on any given day, but I wonder whether you and your colleagues are sensitive to some of the pressure that is starting to build in the US dept market.

No question, Look, our debt at thirty six trillion dollars total and counting, is a major problem, and this is something that everybody in the Republican Conference is in agreement on. We have to tackle our debt. We have to reduce our deficit spending. We have to right size the federal government. Spending is out of control. Joe Biden's disastrous first two years gave us record inflation. It despite the cost of living, and we have to unwind a.

No question, Look, our debt at thirty six trillion dollars total and counting, is a major problem, and this is something that everybody in the Republican Conference is in agreement on. We have to tackle our debt. We have to reduce our deficit spending. We have to right size the federal government. Spending is out of control. Joe Biden's disastrous first two years gave us record inflation. It despite the cost of living, and we have to unwind a.

Lot of this.

Lot of this.

You look at a state like New York, it is floundering because of some of the economic pressures.

You look at a state like New York, it is floundering because of some of the economic pressures.

And just think about this.

And just think about this.

The MTA has more debt than eighty percent of the states in the country. So debt is a major problem. It's something that we have to deal with across the board. We cannot continue to print and borrow money at the levels that we have.

The MTA has more debt than eighty percent of the states in the country. So debt is a major problem. It's something that we have to deal with across the board. We cannot continue to print and borrow money at the levels that we have.

Do you think we can afford to extend CCJA, which baseline is something like four to five trillion? Do you think we can afford to include an expansion of cell tax deductions? In Congressman, I wouldn't push back against anything you said about the effort that needs to take place. I swear I'm just wondering how much fiscal space you and your colleagues believe we actually have at the moment.

Do you think we can afford to extend CCJA, which baseline is something like four to five trillion? Do you think we can afford to include an expansion of cell tax deductions? In Congressman, I wouldn't push back against anything you said about the effort that needs to take place. I swear I'm just wondering how much fiscal space you and your colleagues believe we actually have at the moment.

Look, tax policy is critical to economic growth, but it's one part. We need to increase domestic production of energy, which will help generate more revenues. Energy policy is also critical, not just domestically for cost, but for national security. You were talking obviously about the threats to Europe from Russia. Europe is still buying gas from Russia. It's idiotic. It makes no sense that they're helping fund the very war they're trying to stop. So there is a lot that has to be done here, including reigning in federal spending. Obviously, as we work through the tax cuts, we will look to help offset some of the cost through spending reduction. So this is going to be a comprehensive approach to how we right size the American economy.

Look, tax policy is critical to economic growth, but it's one part. We need to increase domestic production of energy, which will help generate more revenues. Energy policy is also critical, not just domestically for cost, but for national security. You were talking obviously about the threats to Europe from Russia. Europe is still buying gas from Russia. It's idiotic. It makes no sense that they're helping fund the very war they're trying to stop. So there is a lot that has to be done here, including reigning in federal spending. Obviously, as we work through the tax cuts, we will look to help offset some of the cost through spending reduction. So this is going to be a comprehensive approach to how we right size the American economy.

I do think it's possible.

I do think it's possible.

It's going to be one of the most critical things any of us ever do in our careers in government, and so we all have to be committed to the final cause.

It's going to be one of the most critical things any of us ever do in our careers in government, and so we all have to be committed to the final cause.

Here, and we're certainly looking forward to continue in the conversation with you, sir, in your current capacity and maybe in the future. Is the next government of the Great State of New York. Mike Laondad Congressman. Thank you, sir, appreciate it. We begin this side with stock steady investors taking stock of an equity and bond market sell off in the last twenty four hours. Mike Wilson and Morgan Stanley saying equities are right sensitive once again, which is another reason to stick with quality. Rates are the most important variable to watch in early twenty five. Mike joins us now for more. Mike Wilson, Good morning, Happy New Year, Good morning John. It's going to see you, sir. Let's start with the bond market and the importance of it. What is driving these yeld hire and how important is the why to the equity market.

Here, and we're certainly looking forward to continue in the conversation with you, sir, in your current capacity and maybe in the future. Is the next government of the Great State of New York. Mike Laondad Congressman. Thank you, sir, appreciate it. We begin this side with stock steady investors taking stock of an equity and bond market sell off in the last twenty four hours. Mike Wilson and Morgan Stanley saying equities are right sensitive once again, which is another reason to stick with quality. Rates are the most important variable to watch in early twenty five. Mike joins us now for more. Mike Wilson, Good morning, Happy New Year, Good morning John. It's going to see you, sir. Let's start with the bond market and the importance of it. What is driving these yeld hire and how important is the why to the equity market.

Yeah, that's the right question.

Yeah, that's the right question.

It's not just rates are going up, but why are they going up? I think Lisa mentioned a few things that are driving in an our view, which is some of the fiscal sustainability questions. We have a new administration and while it is the second version of Trump, it's still uncertain, right, It's a new administration. There's a lot of new cabinet members we just don't know. And usually the first the first quarter after a new president and new administration comes in, the markets typically don't do that well, right, we rally into the election, have a relief, and then we have these variables that we don't know. So the main risk that we talked about a month ago was probably US dollar strength and rates, and that was always our view going into the election that Trump would be good for stocks and probably not as good for bonds, and that's exactly what's playing out. So we had this euphoria around the election. We're getting a pullback on that. There's two things that are driving rates now. I think it's more about inflation and physical sustainability than it is about growth, and that's the key, and that's why the rate sensitivity now matters. For equity multiples. We tracked this closely, right, The correlation between multiples and rates flipped negative again when we crossed over four point five percent, almost exactly what we thought because that's what we experienced last year in April, so it makes perfect sense. So this is the issue. We don't know how it's going to resolve itself. But until this does resolve itself in a favorable way, meaning rates go back below four point five percent and term premium comes down, right, that's the other part of the variable. So term premiums up seventy seven to eighty basis points somewhere net range. That's a massive move, I mean in a very short period of time. So I'm actually surprised that multiple seven come down more. Okay, Now, part is because the high quality stocks are where people are crowding into still, not only in the US but globally, and that's probably keeping the S and P multiple a little higher than it would be normally. But this persists, multiples are going to come in more.

It's not just rates are going up, but why are they going up? I think Lisa mentioned a few things that are driving in an our view, which is some of the fiscal sustainability questions. We have a new administration and while it is the second version of Trump, it's still uncertain, right, It's a new administration. There's a lot of new cabinet members we just don't know. And usually the first the first quarter after a new president and new administration comes in, the markets typically don't do that well, right, we rally into the election, have a relief, and then we have these variables that we don't know. So the main risk that we talked about a month ago was probably US dollar strength and rates, and that was always our view going into the election that Trump would be good for stocks and probably not as good for bonds, and that's exactly what's playing out. So we had this euphoria around the election. We're getting a pullback on that. There's two things that are driving rates now. I think it's more about inflation and physical sustainability than it is about growth, and that's the key, and that's why the rate sensitivity now matters. For equity multiples. We tracked this closely, right, The correlation between multiples and rates flipped negative again when we crossed over four point five percent, almost exactly what we thought because that's what we experienced last year in April, so it makes perfect sense. So this is the issue. We don't know how it's going to resolve itself. But until this does resolve itself in a favorable way, meaning rates go back below four point five percent and term premium comes down, right, that's the other part of the variable. So term premiums up seventy seven to eighty basis points somewhere net range. That's a massive move, I mean in a very short period of time. So I'm actually surprised that multiple seven come down more. Okay, Now, part is because the high quality stocks are where people are crowding into still, not only in the US but globally, and that's probably keeping the S and P multiple a little higher than it would be normally. But this persists, multiples are going to come in more.

That mix is toxic for risk ampetsite. The way you've laid out things, we have Tolston slock and you'll see yesterday from Apollo who raised the risk of a repeat of twenty twenty two. Would you share that fear a year in which stocks and bonds do poorly?

That mix is toxic for risk ampetsite. The way you've laid out things, we have Tolston slock and you'll see yesterday from Apollo who raised the risk of a repeat of twenty twenty two. Would you share that fear a year in which stocks and bonds do poorly?

Yeah, I think that's I think that's fair. I only I mean nearly a severe. I mean the Fed's not raising rates. I mean in twenty twenty two, I mean they raise rates four hundred basis points and that's not happening. So I think that's a little extreme to say that, you know, bonds are not going to sell out that much. Okay, that's point number one. Point number two though, is that multiples are much higher coming into this year than they were, say in twenty twenty two, relative to where bond yields are, So in other words, I've been surprised. I think a lot of people have been surprised that multiples have gotten this high in the face of rates at four four and a half five percent, I mean, that's where we've been from the last year. That's probably been the single biggest miss by any most people, then multiples could be this high. So you have more give, i think, and multiples to come down even if rates just stay in this range. They don't have to go up hundred basis points for multiples to come in ten percent. And that's what we're trying to figure out. So what do you do in that environment where you still stay at the quality curve? Okay, that's typically what works. And if you look at what happened by the way in the fall, the low quality stocks absolutely when bonkers, So that has to come out of the market. That's where we would be most concerned or most kind of area we'd be most avoiding for the next sort of three to six months.

Yeah, I think that's I think that's fair. I only I mean nearly a severe. I mean the Fed's not raising rates. I mean in twenty twenty two, I mean they raise rates four hundred basis points and that's not happening. So I think that's a little extreme to say that, you know, bonds are not going to sell out that much. Okay, that's point number one. Point number two though, is that multiples are much higher coming into this year than they were, say in twenty twenty two, relative to where bond yields are, So in other words, I've been surprised. I think a lot of people have been surprised that multiples have gotten this high in the face of rates at four four and a half five percent, I mean, that's where we've been from the last year. That's probably been the single biggest miss by any most people, then multiples could be this high. So you have more give, i think, and multiples to come down even if rates just stay in this range. They don't have to go up hundred basis points for multiples to come in ten percent. And that's what we're trying to figure out. So what do you do in that environment where you still stay at the quality curve? Okay, that's typically what works. And if you look at what happened by the way in the fall, the low quality stocks absolutely when bonkers, So that has to come out of the market. That's where we would be most concerned or most kind of area we'd be most avoiding for the next sort of three to six months.

What's interesting to me is how much the narrative has shifted around which area of the equity market is most rate sensitive. At one time, it was considered the high flying tech stocks that would be really hit hard. Now you're talking about actually some of the rest of the index that you think you're going to have to come in. Is that how you'd frame it that? Essentially, tech stocks are not nearly as rate sensitive as a lot of people used to think they were.

What's interesting to me is how much the narrative has shifted around which area of the equity market is most rate sensitive. At one time, it was considered the high flying tech stocks that would be really hit hard. Now you're talking about actually some of the rest of the index that you think you're going to have to come in. Is that how you'd frame it that? Essentially, tech stocks are not nearly as rate sensitive as a lot of people used to think they were.

Well, let's be clear, not all tech stocks are created equal. Okay, so we're you got to separate the ten magical stocks whatever you want to call them, versus everybody else. If you look at the average tech stock, right, you look at the equal weighted Tech index, it's been lousy, right, it hasn't performed that well relative to the overall market.

Well, let's be clear, not all tech stocks are created equal. Okay, so we're you got to separate the ten magical stocks whatever you want to call them, versus everybody else. If you look at the average tech stock, right, you look at the equal weighted Tech index, it's been lousy, right, it hasn't performed that well relative to the overall market.

Looks like the average stock.

Looks like the average stock.

So once again, you know, we're talking about monopolies here, Okay, monopoly businesses, high quality businesses, and it's not just tech stocks, right, there's just about thirty forty fIF types of these businesses. They will typically hold up until growth becomes a serious problem. Like that's not where we are right now. We're not in a recession. We're not in a situation where growth is going to really disappoint like it did in twenty twenty two. That was the big difference I think in twenty two versus today is at twenty two, we had a massive earnings recession. Okay, I mean it led by the magnificent seven. By the way, that's not what we're forecasting right now. So that's what probably keeps a bid into some of the higher quality parts of the market.

So once again, you know, we're talking about monopolies here, Okay, monopoly businesses, high quality businesses, and it's not just tech stocks, right, there's just about thirty forty fIF types of these businesses. They will typically hold up until growth becomes a serious problem. Like that's not where we are right now. We're not in a recession. We're not in a situation where growth is going to really disappoint like it did in twenty twenty two. That was the big difference I think in twenty two versus today is at twenty two, we had a massive earnings recession. Okay, I mean it led by the magnificent seven. By the way, that's not what we're forecasting right now. So that's what probably keeps a bid into some of the higher quality parts of the market.

Now.

Now.

Having said that, if we go through five percent and term premium continues to go, yeah, the exposure and the equity market is in that space and those stocks will eventually get clipped the hardest. But that's not We're not quite at that threshold yet.

Having said that, if we go through five percent and term premium continues to go, yeah, the exposure and the equity market is in that space and those stocks will eventually get clipped the hardest. But that's not We're not quite at that threshold yet.

Mentioning Dorson Slock a number of other guests yesterday, we're talking about how important it is to have an increasing allocation to cash at a time when there is going to be a lot of volatility and there is great uncertainty about rate sensitivity as well as fiscal policy in Washington, d C.

Mentioning Dorson Slock a number of other guests yesterday, we're talking about how important it is to have an increasing allocation to cash at a time when there is going to be a lot of volatility and there is great uncertainty about rate sensitivity as well as fiscal policy in Washington, d C.

Do you agree with that cash.

Do you agree with that cash.

Is great right now?

Is great right now?

I mean you're getting a really good real return, you have no duration risks, Like what's wrong with cash doesn't mean you have forty percent cash, but like we're still very much short duration right. So when I say cash, it's like two years an in. I mean, that's a cash management. By the way, that's what most clients have been doing, you know, having a barbell of kind of your equity portfolio, your risk assets, and then within your fixed thinking portfolio, they've basically shortened their duration. So that's essentially where how people are positioned cash heavy and then maybe taking a little more risk in their equity portfolio. That's not that barbells work quite well, and I don't see why that's going to change.

I mean you're getting a really good real return, you have no duration risks, Like what's wrong with cash doesn't mean you have forty percent cash, but like we're still very much short duration right. So when I say cash, it's like two years an in. I mean, that's a cash management. By the way, that's what most clients have been doing, you know, having a barbell of kind of your equity portfolio, your risk assets, and then within your fixed thinking portfolio, they've basically shortened their duration. So that's essentially where how people are positioned cash heavy and then maybe taking a little more risk in their equity portfolio. That's not that barbells work quite well, and I don't see why that's going to change.

You said, one thing that's different now than in twenty twenty two was the Fed was raising rates. We just had Adam Posen on who thinks that Defen's going to be forced to raise rates this year though, because of what's going on policies in Washington, c and sticky inflation. Do you think there's no chance at the FED raises rates this year?

You said, one thing that's different now than in twenty twenty two was the Fed was raising rates. We just had Adam Posen on who thinks that Defen's going to be forced to raise rates this year though, because of what's going on policies in Washington, c and sticky inflation. Do you think there's no chance at the FED raises rates this year?

No, of course there's a chance. I mean, I mean, I mean, I it' cent our house call. But if things continue to move in this direction, and it's let's say, let's say we get an oil risk, you know, to the upside. Oil's kind of making a move right now, I mean, that could cause the FED to raise rates twenty five basis points. But even if we say that, okay, we're not raising four hundred basis points, that I'm very comfortable saying the chance that is zero. So that's how I think it's different than twenty twenty two. In that sense, I don't think there's as much a downside for rates, but that doesn't mean there could be, you know, ten ten percent downside for many stocks just if rates stay.

No, of course there's a chance. I mean, I mean, I mean, I it' cent our house call. But if things continue to move in this direction, and it's let's say, let's say we get an oil risk, you know, to the upside. Oil's kind of making a move right now, I mean, that could cause the FED to raise rates twenty five basis points. But even if we say that, okay, we're not raising four hundred basis points, that I'm very comfortable saying the chance that is zero. So that's how I think it's different than twenty twenty two. In that sense, I don't think there's as much a downside for rates, but that doesn't mean there could be, you know, ten ten percent downside for many stocks just if rates stay.

At this level.

At this level.

It's only the second week of twenty twenty five and already we've had multiple narratives on fiscal expansion, on tariffs. What's one thing you would love to have clarity on to understand the market this year?

It's only the second week of twenty twenty five and already we've had multiple narratives on fiscal expansion, on tariffs. What's one thing you would love to have clarity on to understand the market this year?

Well, I think clearly tariffs is going to be the one that is the most that's for equity investors, that's going to be the biggest focus because that can affect earnings probably the most severely. In growth right immigrant, I think is going to be a kind of a push and take. And I think the other one is taxes. Are they going to try to get more tax cuts through are they just going to try to extend the existing tax cuts or you know, the current tax law, and that will affect. I think that will affect race. So it's really terriffs and taxes. I don't think we're going to know about taxes for quite a while. I think tariffs we're going to know quite a bit in the next month or two. And we've said this for a while, we said, I think we think the first half is going to be is going to be choppy. Okay, second half if things, if they can execute in all these policies and we can kind of get to a point where the markets get comfortable with this, the second half of the year could be much much better for equities.

Well, I think clearly tariffs is going to be the one that is the most that's for equity investors, that's going to be the biggest focus because that can affect earnings probably the most severely. In growth right immigrant, I think is going to be a kind of a push and take. And I think the other one is taxes. Are they going to try to get more tax cuts through are they just going to try to extend the existing tax cuts or you know, the current tax law, and that will affect. I think that will affect race. So it's really terriffs and taxes. I don't think we're going to know about taxes for quite a while. I think tariffs we're going to know quite a bit in the next month or two. And we've said this for a while, we said, I think we think the first half is going to be is going to be choppy. Okay, second half if things, if they can execute in all these policies and we can kind of get to a point where the markets get comfortable with this, the second half of the year could be much much better for equities.

What do you like? Where are the opportunities? And there's hiding out in quality stocks, But is there anything that's getting you actually excited?

What do you like? Where are the opportunities? And there's hiding out in quality stocks, But is there anything that's getting you actually excited?

Well, I think the area we've been most wellish is financials. I do think that's an area where there's it seems to be a lot of a coalition around deregulation. There is pent up demand for M and A, there's pent up demand for other capital market activities. So I do think financial is an area we continue to think there's value there, and.

Well, I think the area we've been most wellish is financials. I do think that's an area where there's it seems to be a lot of a coalition around deregulation. There is pent up demand for M and A, there's pent up demand for other capital market activities. So I do think financial is an area we continue to think there's value there, and.

That's that's a global call.

That's that's a global call.

The second one is probably energy and commodities and materials, these parts of the market that we can't do. All these things everybody wants to do, like build data centers, you know, add you know, add infrastructure, you know, robotics and all these things. You need materials, you need energy for that. So I think those are areas that have been underlooked, overlooked by the market, underappreciated by the market, that could be quite interesting this year.

The second one is probably energy and commodities and materials, these parts of the market that we can't do. All these things everybody wants to do, like build data centers, you know, add you know, add infrastructure, you know, robotics and all these things. You need materials, you need energy for that. So I think those are areas that have been underlooked, overlooked by the market, underappreciated by the market, that could be quite interesting this year.

Mike, got to see you enjoyed the night to start the week as well, My Wilson that Morgan Stanley, thank you. This is the Bloomberg Sevenance podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on bloomblog 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 bloom Blog terminal and the Bloomberg Business app

Mike, got to see you enjoyed the night to start the week as well, My Wilson that Morgan Stanley, thank you. This is the Bloomberg Sevenance podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on bloomblog 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 bloom Blog terminal and the Bloomberg Business app