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00:00Stocks ended a chaotic week and month on Friday as investors weighed big tech earnings and the decision-making of
00:05the Fed under the guidance of new chairman Kevin Warsh.
00:08New York Times is reporting that Warsh may be considering cutting down the number of committee meetings each year, undoing
00:13decades of precedent.
00:14With us in studio to analyze all of this is Michael McKee, Bloomberg's international economics and policy correspondent, and Jonathan
00:19Golub, chief equity strategist at Seaport Research Partners.
00:22Great to have both of you with us. Mike, let me start with this report from the New York Times.
00:25Colby Smith, Ben Castleman, reporting last night, citing for officials involved in the meeting that took place over the course
00:30of the last week here.
00:31Mr. Warsh raised the idea of changing the frequency of FOMC meetings at the Fed's gathering this week.
00:36Warsh left the impression that a revised schedule could be decided on before the next meeting in mid-September, even
00:41if the changes would not be carried out until later.
00:44Obviously, lots of knock-on effects here. You would travel to Washington less. The market would get less information.
00:49Fewer seller points. It's very unfortunate.
00:53Talk to us a bit about the ramifications of this.
00:55This is a new Fed chair who has not made a secret of the fact that he wants to change
00:59the way in which the Fed communicates.
01:00What would it mean for folks like you who cover the institution, for markets, for economists as well?
01:05Well, for people who cover the institution, it's not going to make a big difference.
01:08But the question is, why do you want to do this?
01:12The Fed went to eight meetings a year during the Volcker years.
01:16And so it's become the pattern that markets and companies are used to.
01:22And if you have fewer meetings, you would have fewer opportunities to at least have a planned move in the
01:31markets.
01:32I mean, you can always do a surprise move.
01:33But unless you really want to surprise people, and I don't know why you would, it doesn't make a lot
01:39of sense to me on the top.
01:40Now, I haven't talked to Kevin about this, but I would like to.
01:43But for people who are in the markets, companies who are making spending plans, having fewer opportunities to see where
01:50interest rates are going is not going to be good.
01:52It's less planning, less efficient.
01:54So I'm not exactly sure what he thinks he's going to get out of this.
01:57Jonathan, what's your take on that?
01:58Because, I mean, legally, they're only required to do four per year.
02:01Is that all that's really necessary?
02:04Or, you know, as Mike was talking about, this is a time when people are looking for stability.
02:08Why throw any kind of disruption into the system?
02:10Well, it's very parallel to the conversation we're having in equity land about having, you know, companies not reporting quarterly,
02:17reporting semi-annually.
02:18And when people ask me about it, it's the same thing.
02:21Give me a company that's going to go from four reports a year to two, and I'll give you a
02:26company whose stock price is down.
02:27The market does not like the additional uncertainty or the moves are going to be more clumpy.
02:33If the Fed wants to raise or lower rates, they're going to have to move less frequency in bigger amounts.
02:39The speculation around that goes up.
02:41The volatility goes up.
02:42And the value of assets, whether it be equities or bonds, is lower in that kind of an environment.
02:48Jonathan, we're going to talk about earnings.
02:49I know you want to talk about that.
02:50But let's talk about the distinction that we saw in Stark Relief this week when the Fed chair was talking
02:54reports.
02:54So there's forward guidance, and then there's kind of clarity on what the reaction function is of this Fed.
03:00What were your impressions as you watched and listened to the Fed chair this week?
03:04We saw markets react strongly to what was happening.
03:07Yes, more so in the fixed income space.
03:08But what did you make of the way that he's approached the position there in that second meeting?
03:12So, you know, my take on how important the Fed is different as an equity guy.
03:17What matters most in order of importance is not short rates, but number one is what is a credit spread?
03:23What is our belief that companies are going to make good on their debt payments?
03:28And in the last few days of the month, credit spread substantially widened out, which meant that the market sees
03:35greater risk.
03:36The second thing is what is the long end of the curve doing?
03:40And that steepened out further.
03:43So putting aside what I thought about the short end of the curve, which really doesn't matter, the long end
03:49of the curve and credit spreads were a really big negative for stocks.
03:53Mike, I want to ask you, last time you were here, we were talking about how it was Warsh's first
03:57big meeting and holding everybody together.
03:59And there seemed to be some consensus.
04:01But he said he was open to having these debates.
04:03And we're going to play you some sound about what he said about possible family fighting.
04:08I asked for a good family fight and I got one.
04:11Most of our discussion were on the big questions that matter to the conduct of monetary policy.
04:17We we didn't sort of hide from them.
04:19We weren't scared of them.
04:21There was a lot more interaction between and among my colleagues.
04:24It was a real family fight.
04:26That's the better way to get policy right.
04:28That's our North Star.
04:30But for now, they're holding rate steady.
04:33Does that fight get a little more cantankerous if they decide to actually change policy?
04:38And can he navigate that?
04:39Well, I'm not sure what he means by a family fight.
04:42This isn't La Cosa Nostra.
04:44It's not.
04:44What would hope?
04:46I mean, my last name is Rafini.
04:47So thank you for making a reference.
04:48I understand.
04:49Carry on.
04:51Because they have these discussions every meeting.
04:53Yeah.
04:53And they've been doing it for decades.
04:55It's part of the gig, right?
04:57Yes.
04:57There's probably more arguments now because Warsh wants to make a lot of changes.
05:01But the real issue is who's on what side.
05:05And at this point, it looks like there are more and more people at each meeting who are
05:09thinking about wanting to raise rates.
05:10We got the late story from the FT yesterday that Alberto Musalem believes as they do.
05:15And we know that Jeff Schmidt believes as they do.
05:18So we've got six people, at least, who are at this point thinking that maybe you need to
05:23raise rates, which will drive market trading between now and September 18th.
05:28The data that we get will probably be more important, but people are going to be discussing
05:32this.
05:32And that creates volatility, as Jonathan was saying, that the markets don't like.
05:37Let's move to earnings if we can.
05:39The Fed a huge component of this week, but a lot to make us exhausted and prompt us to
05:43exhale here on this Saturday morning.
05:44So Jonathan, we've had all of this agenda about AI.
05:47What's this spending leading to?
05:49And so from the companies that reported this week, and there was this stark divide between
05:52those who seem to be making money and making hay out of all of the investments they've
05:56made and those who haven't, what clarity did you get on that question of whether or not
06:00there is reason to be concerned or worried about how many billions of dollars are going
06:04into this space right now?
06:05Well, let's frame what earnings season looks like.
06:08This is by far the best earnings season ever in history.
06:13Outside of tech, across the board.
06:14No, no, no.
06:15Forget about tech.
06:16It is the best earnings season we've ever had, except in periods where you're bouncing
06:21out of a recession and you're comparing against broken numbers.
06:24So just to put things in perspective, overall, earnings are expected right now to be up 50%
06:30compared to a year ago.
06:32I can't even describe how insane that is.
06:36I think in the post-pandemic period, the average has been 9.5% growth.
06:41Some of that is funky things that are happening with the numbers related to passive investments
06:47in AI companies.
06:49If you strip those out, you're left at 30%.
06:52But let's look at the real big surprises.
06:55We went into earnings season.
06:57The banks were expected to grow less than 8%.
07:00Right now, the expectations are the banks are going to finish with 22%.
07:05The oil companies related to the war in the Middle East, well over 100% on earnings growth.
07:12And for the most part, the rest of the universe outside of tech is fine.
07:16So it's huge.
07:18A lot of this, however, is related to the same thing.
07:21Why are the banks making money?
07:22Because they're lending into, you know, there's more capital markets activity and the like.
07:26So there is one big ecosystem around this stuff.
07:29One quick follow-up here just about kind of the integrity of the so-called Magnificent 7.
07:34Again, I brought up that kind of divide in terms of how these companies are doing.
07:36Is that still a useful kind of categorization for you?
07:40Is the Magnificent 7 dead, I guess, is my stark question.
07:43I don't know if you would define the most important.
07:46Or slightly less magnificent.
07:47Well, no, no, not even slightly.
07:48I mean, if you take a look, like the average company in the S&P is expected to grow 12%,
07:53is 12%.
07:55Yeah.
07:56And the overall is, you know, 50%, as I said.
08:00So there's a huge bias by these big tech companies.
08:04But you'd have to, today, you'd have to throw other names in there.
08:07You know, Broadcom, you'd say, well, does that really belong part of the pack?
08:11Probably.
08:11Right now, in terms of companies that are most important, would you throw Micron in the memory company?
08:15So it's a slightly broader list of those.
08:18But it's still Megacap Tech is, you know, is a horse that's pulling the wagon.
08:23Like, I thought about you yesterday when we were interviewing these governors.
08:27Not just because they were wearing excellent hats, but because they were talking about task forces.
08:32And this has been a big thing where she's got all kinds of task forces.
08:35And you asked them about one specifically when it comes to the AI question.
08:38We're going to play some sound.
08:39What vetting did you do of the people that you appointed to the task forces?
08:43In particular, given Marc Andreessen's substantial political spending,
08:48$25 million in just the past year to back candidates who oppose stricter AI regulation,
08:54how can the public be confident that a committee he co-chairs will provide an independent assessment of AI's economic
09:01effects
09:01rather than one aligned with the interests of the AI industry?
09:04Yeah, so I selected 15 incredible subject matter experts to tackle five of the most important questions.
09:17That if we get the answers right, we're going to do a far better job in delivering.
09:22And if we get the answers wrong, we have a problem.
09:24The comfort that I can give you and your listeners is we're the decision makers.
09:30The chairman of the board of the Federal Reserve and the members of the board and the FOMC.
09:36We will be the consumers of the outputs from five different committees.
09:43The judgments we're making will be informed by, but not at all determined by these outside groups.
09:49Was that a satisfactory answer to quell some of the criticism here?
09:53It's probably the only answer he could give because obviously Andreessen comes into it with a point of view
10:00and they're going to get that point of view.
10:02And he basically said, we know that we're going to get that point of view.
10:05Now, you have to also know that Marc Andreessen is a longtime friend of Kevin Walsh's.
10:10They went to school together at Stanford.
10:13So that's another reason that he would be on the committee.
10:15But it's a little less worrisome in the AI space because it's not something the Fed really regulates.
10:24Or it's more like, how could this affect the economy?
10:27But it's still a question when you have somebody who is so blatantly on one side of an issue
10:33of what kind of advice they're going to be given.
10:36Walsh says, I know that.
10:38Jonathan, you mentioned the activity we've seen in capital markets.
10:41And we had the SpaceX IPO.
10:43We had the ADR of SK Hynix.
10:46How are you feeling about the prospects of the other companies going forward?
10:49We had a couple of consumer IPOs this week and kind of branching out,
10:52as we've been talking about here, beyond just these big tech names.
10:54It's a really big deal.
10:56I mean, at the end of the day, it's not only an AI story.
10:59This is a CapEx story and a capital raise story.
11:03The amount of money that's being spent is extraordinary.
11:06And companies need to raise that capital from somewhere.
11:09And the market, at some point in time, gets really uncomfortable with that.
11:14I mean, companies, in many cases, are raising money that they don't even need,
11:18given their cash flows, because right now the capital markets are open.
11:23But bond investors are looking at this and saying, you know,
11:28am I going to get an appropriate return?
11:31In many cases, you have a data center that is a 15-year life.
11:35And that's a really long commitment to make on technology for a couple hundred basis points
11:40over Treasury.
11:41Mike, I just have a question for you as it relates to this, you know,
11:45Warsh conversation.
11:46Is now the time right out of the gate to be talking about procedures when there's all this debate?
11:51You know, inflation is higher.
11:52Budget deficits are higher.
11:53Oil prices are higher.
11:55You know, they're soliciting Congress for more budgets.
12:00And then you're talking about how many committees you're having and how many meetings you're having.
12:03Is it tone deaf?
12:05And does the market look at that and say, look, are you listening to what the debate should be?
12:09As Alberto Moussala put it to the FT, yeah, Mr. Market is sending a message that they don't like this.
12:16The chair has come out, the new chair has come out and said over and over and over again
12:19that our goal is to bring down inflation and we're going to get to the 2% target.
12:24But then all he's talking about are these task forces.
12:26And it's almost as if they invented the Fed right when his first meeting was.
12:31It's not like the Fed hasn't been talking about all of this stuff and what needs to be done.
12:36And if the rest of the committee doesn't have views on this for some time, for years perhaps.
12:43So I'm not sure why he's – I can understand why he wants to do something at the beginning of
12:49his term,
12:49but why to make that front and center as opposed to monetary policy?
12:53Great to have both of you with us.
12:54Really appreciate this.
12:55Michael McKee, our chief of international economics and international policy economics correspondent,
12:59and Jonathan Golub of Seaport Research Partners joining us here on set in New York.
13:01Can I ask some questions?
13:01You can come have my job next time.
13:03No, no.
13:03I'll get a copy.
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