Show notes
Tiffany Wilding, PIMCO Economist, expects growth to stagnate next year as the Fed's policy drags continue to build. David Bailin, Citi Global Wealth Chief Investment Officer & Global Head Of Investments, says there's opportunity in rising earnings as markets begin to normalize. Randy Kroszner, Univ. of Chicago Professor of Economics & Former Fed Governor, says continued wage growth makes the Fed's inflation goal unlikely. Paul Sankey, Sankey Research Founder & Lead Analyst, says he's concerned that Saudi Arabia may dump the oil market as prices continue to drop. Terry Haines, Pangaea Policy Founder, recaps a fiery Republican presidential debate.Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full transcript: This is the Bloomberg Surveillance Podcast. I'm Lisa Abramoids along with Tom Keane and Jonathan Farrow. Join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Right now, I've been out a few days, but I really want to reset here on the American economy, and there's no one better to do that than Tiffany Wilding, economist at Pimco. Tiffy, I'm going to go beyond the labor reports. We'll circle back to that. What is your real GDP growth for twenty twenty four? Yeah, I mean, so we think that the good news from twenty twenty three, the resilient story, the you know, two and a half percent kind of above trend GDP growth, you know, that's probably squarely behind us. You know, the saying kind of goes you can't go to heaven twice, and we think some of the factors that led to that, you know, we're still some of these excess savings sloshing around from the pandemic and other supports, and you know, and those kinds of things in our and under our estimation are going away next year. And when you when those things go away, what you're left with is still tight monetary policy, you know. And obviously we have a Federal Reserve that is telling us they're going to remain on hold. So those policy drags are continuing to build. So overall, we think growth probably is closer to something, you know, the stagnant. You know, whether it's slightly positive or slightly negative, I think is anyone's guest. But we're kind of a stagnant situation next year. So are you basically saying that we're in heaven and that this is the Goldilocks and that you can't go there again it's over? Yeah, I mean, so we do think there's a lot of good news this year with the US economy. There's a lot of surprising resilience in the growth numbers, of course, you know, and and so we think, you know, the supply picture, as the Federal Reserve has also pointed out, has also helped that, you know. But again, if you looked at twenty twenty four, you have demand which is potentially coming down, you know, but some of the things that added to supply, like supply chain normalizations. You know, we have the labor force participation rate for the prime age folks that are now you know, it's back to pre pandemic levels. You know, we're just not convinced maybe that you're going to get as much on the supply side next year. Now. Of course, immigration has been a story here, and that's why we've also seen you know, the unemployment rate rise because some of those labor market inflows aren't getting absorbed by just a strong labor demand. But again, overall, all of those signals kind of point to us of something that's closer to more stagnant. More stagnant economy. Baked into this is this assumption that you're going to have higher yields for a longer period of time. You said, what we're going to be left with is just tighter financial conditions, and yet it's unclear whether that's going to be the case. There have been a lot of people calling for pretty substantial rate cuts by the Fed, by the ECP in response to inflation coming down significantly. Do you agree with the paradigm or oil prices stay lower than they have and keep inflecting lower because of production, because of supply, you start to see a re engagement of global trade, forget deglobalization, and you start to get more people come into the workforce. It's basically everyone that people use. It's the opposite of the this time is different narrative that we heard this year. Yeah, well, I mean, I'm not exactly sure in terms of labor market inflows. You know, higher participation rates for that prime age cohort, you know, I'm not sure that that's going to continue to increase. I do think there's some potential for immigration flows to stay high in twenty twenty four. That's been a story not only in the US but across the developed markets. Obviously geop elevated, you know, geopolitical risks and conflicts are are contributing to that as well. But overall, you know, I guess what we would say is is that, you know, the Federal Reserve has told us that they are still worried about the last mile problem on inflation. In order to really ensure that inflation's back to target, you know, I think we think, you do, you need to see some more labor market loosening. Marketing's coming back here in equity's, bonds, currencies, commodities, a little bit of adjustment off the claims, and we've come back in a little bit. I call it noodling. As we staggered to tomorrow morning at eight thirty, Tiffany, one of the great responsibilities you have is to stagger down the rows at PIMCO, tripping over the antique Monroe traders and looking at people's Bloomberg screens. And the two minute drill is what is a short space going to do, the Jerome Schneider space, And what's it going to do in terms of the wall of money that's out there that's off your remit? But your remit is what are the economic conditions that make cash finally move? Can you come up with a scenario where cash finally moves? Yeah? Absolutely, I mean I do think it's it's certainly this quote soft landing scenario, right, you know. And I think that the fact that the Federal Reserve as well as other central banks have signaled that they're at the top of their cycle, you know, along with this coinciding shock to term premiums, just made bond market valuations look really attractive and as a result, those higher yields just didn't stay around that long, and you are starting to see cash I think, come off the sidelines, go into the bond market now, you know, I think there's a question around the equity market, you know, riskier assets. I mean, certainly the soft landing will be helpful, but when we look at valuations, you know, for equities, for example, we are more cautious. Equity risk premiums are still within their historical range. They're not pricing in a lot of recession risk in our view, and we don't think were out of the water yet or out of the woods yet. There's still a lot of uncertainty here, and we just don't know that you're paid for it going out the risk spectrum. The quality of a lower GDP reset off of the shock of what happened in two thousand and three, two thousand. Listen, ma, I'm decades away. Lisa helped me here twenty twenty three. To me, what's so important, Tiffany, is the productivity discussion of the last ninety days. Give us the PIMCO brief on the efficiencies of the American economy. Yeah, well, you know, I think if you look more, you know, kind of a more broadly, there was a lot of noise around the productivity statistics during the pandemic because you had unproductive sectors that were effectively shut down then they reopened, and so there was kind of a mixshift, if you will, in terms of economic output that impacted the productivity data. But if you look more broadly, it looks like it's on trend at a low level, you know. And I would say that there is you know, probably good news in terms of the productivity outlook that's embedded in you know, AI and large language models and things like that. But if we look at research that you know, just kind of estimates how long it takes for those types of technologies to puller for it, obviously that time has come down, but it's not twenty twenty four. It's still likely a quote secular horiso three to five year time horizon that you're really seeing the productivity gains from something like that. And the last thing I would just highlight is that, you know, we saw PCs or the internet, you know that it took you know, quite some time for us to actually see productivity gains in the nineties to come from that. So you know, at least from a twenty twenty four perspective. You know, we're not as convinced that you really start to see that in the data. But I think there's you know, room for encouragement on a secular timeframe. Just quickly, Tiffany, you seem to be pushing back against market expectations for rate cuts next year. Do you think that we will get rate cuts by the Fed? Do you think that they'll be in the first half or do you think that they're going to be squarely in the second half and not that many? Yeah, well, I mean, look, I do think it depends. I mean the real side of the economy. You know, it does need to slow in our view, and it needs to slow, and you need to see a little bit more you know, loosening of the labor market, we think, in order for central banks to really feel confident that inflation is more sustainably at their target and you know, looking at you know, I think there's definitely some still resilience in the economy and we could see central banks lag worried about that outcome. You know, Powell has very clearly stated, you know, that he wants to be a vulgar you know, and Nana Burns, and so you know, we think they could be laggy in terms of when they start to cut, you know. But but nevertheless, you know, obviously the market's going to price a balance of risks here, and the inflation data certainly has been good over the last couple of months. Tiffany, thank you so much. Tiffany World. With pimcoll they manage Bill's notes and bonds out of Newport Beach, California. I think David Fann is doing what every other guest is comes on this program over the last ten years, does trying to work out the first question that Tom's going to ask, because no one's got any. I got two. It's a double bear. I hear it from guests all the time. I thought he was going to ask me what devis was. That's where I was leaning over David Baale and CIO and head of investments at City Global Wath with this in just a moment, let's turn to the price section equities on the S and P five hundred shaping up as follows, t K positive by point one yields up five basis points four fifteen fifty two on a US ten yet audible question to Baalen, you worked with John Henry years ago, the owner of the Boston Red Sox. How in God's name is John Henry let one Soto go to the New York Yankees and not the Boston Red Sox. And if you I won't answer that question, but tell me how it is that John Henry, as a trend followers won three World Series when the Yankees have only won one. And that's said very nicely finased, Thank you, very much, very good. Let's go to cash. I mentioned at the Bramo. It's in your review here the mystery here of all this cash and you talk about there's just too much cash out there. What do we do with our cash? Next year? You've laid out actually an incredible introduction to our what we're writing for this next year. We're just called slow then Grow, And the idea is that you are going to see a slowing economy at the beginning of the year. A lot of the concerns at LISTA just talked about, you know, actually could come to bear right, which is the economy slows down, but it does not crash. We do not have a recession, we do not have a v shape recovery. And because we don't have a clear signal to investors. They sit there in cash five point eight trillion dollars worth of cash at this point in overnight funds. It's extraordinary. And yet when you take a look at all the different parts of the economy, right, you take a look at the average stock in the US hasn't done that well. Ten stocks have done incredibly well. Bond market's already started to move, energy is down. You are seeing real signs that inflation is not an issue and that the FED will hit their target of two to two and a half percent by the end of the year. So if that's true, right, what you then need is a boost of earnings, right in order to believe that all of this comes together. And this is where I think the story is being missed by the average investor, is that in the US you're going to see ambient like earnings up by probably five percent this year and then eight percent in twenty twenty five. And that sets us up for a thing where you know, an opportunity where a balanced portfolio. Right, you put your money in bonds, and you put your money in stocks, and you sit there and you're patient, and over the next eighteen months you can get yourself a fifteen or twenty percent total return. Now you're giving me the skeptical look, Lisa, Right, and here here's there's the here's the here's the here's the interesting data point. In nineteen thirty one and in nineteen sixty nine, the last two times we had stock and bond markets down for an entire year, if you looked out just two years later, in each of those periods, you know the A balanced portfolio sixty forty was up more than twenty percent. And while that's not statistically significant, what's interesting is we've already had incredible negativity in the stock market and incredible negativity in the bond market this year. Okay, you point to Tom, but this to me is really a question of can you bet on the grow before we get the slow? Right? Well, the grow is already the grow is the is really the is the coming off of it? Was good? One sec. Did you just make that up? Because that's correct. But that's essentially what we're asking is can you bet on the expansion before we get any kind of slow? I love that. That's awesome. Okay, so we have to answer the question that please stake. So let's let's take a look along real estate, right, which, right, has already been in a recession. We've had manufacturing already been in a recession. We've had parts of the you know, parts of our economy like healthcare, right, negative earnings for the first time in fifteen years this last year, lots of these you know parts of our economy. Forty or fifty percent of our sectors are going to be having very positive earnings relative to twenty twenty three. And then the average stock which has gone virtually nowhere this year, you know, has the opportunity to rise. You know, one of the things we put into our portfolios is the most boring investment we've added, which is sn P equal weight. If ten stocks have done well, you want to own the other four hundred and ninety. So I just think that this is where people have sort of missed it is that we haven't seen the overall market rise yet. And that's what twenty four is going to be about in terms of earning. So the double digit percentage point game that you think we can get next year, that's the equal weight and not the market can't whites it index. That's right, Okay, that's right, And I think that's you know, that's the opportunity, is this rising earnings because you've had you know, large portions of the US economy are coming out of a recession. Now,…
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