Equities, Bonds, and AI

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0:12Speaker 3:This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

0:27Speaker 4:What a wonderful time to speak to Alicia Levine, CIO, BNY. at Wealthier who has enjoyed this bull market. How has this bull market changed over the last 12 months?

0:39Speaker 5:Well, it's been a jarring 12 months. I think in the last two years, we came into the year expecting one thing. We got disruption. It's sort of end of first quarter, early second quarter, and the market stabilized. And that sort of echoed the first two years of this administration. And yet the market is fine. Look, the market today is echoing the market. from 2023 and some of 24, which was the top line index is being carried by a handful of names and everybody's wringing their hands that it cannot continue when in fact it can continue. And if you simply own the S & P, you've been fine throughout the All the policy discussions, the rate sell off, the hawkishness of the Fed, chaos in the European bond markets.

1:32Speaker 6:And, you know, you've been just fine.

1:34Speaker 5:And there's a very simple reason for that, which is that growth keeps on exceeding expectations as normal.

1:41Speaker 6:As do earnings.

1:43Speaker 5:And it seems very simple, but that has been a very resilient place to be.

1:46Speaker 6:So the question for us now is, where do we go with all this?

1:50Speaker 5:We're back to 15 stocks driving the market higher. Very interestingly, the semis and software are rallying together. The Mag7 are rallying. You've seen something of a seesaw. When semis have been moving better, the software is down and vice versa. Right. And so what you're seeing is growth is winning in a market where rates are higher and it's very hard for the market to price in the Fed reaction function. But we assume higher for longer that essentially investors are going back to growth.

2:25Speaker 7:Is growth winning because companies are spending ridiculous amounts of money on A.I.? Because not even the growth story is diversified, or there's no breadth in the growth story.

2:34Speaker 5:There's no breadth in the growth story. Look, there's competition for capital. We had news this morning about raising new capital for a company that just went public.

2:44Speaker 3:SpaceX.

2:44Speaker 5:What are you doing with all the cash that you raised? But in the end, there's demand for it. And as we know, and we've had this conversation about deficits, if there's demand for the debt, it's fine. The dollar amount is eye-popping, but if there's demand... Then you can place it. And so move on next. And that's kind of where the market is now. Is there a price at which that doesn't happen? But we think we think the 10 year can easily get to.

3:07Speaker 6:Five and a half.

3:08Speaker 5:That works with nominal growth at six point two, six point three percent. There's kind of a boom out there in the industrial economy. You see it in wages. You see it just on the manufacturing. The line straight up. And that's what's causing the 10-year to move higher, really.

3:24Speaker 4:Alicia Levine with us, BNY at Wealth here on the Equity Markets. A lot of discussion today across the show on the Equity Markets as I celebrate my essay of the year. I'm catching Alicia blind on this, which is okay because she's so good at the game. Rob Arnott, Cam Harvey and team out of Duke and out of Research Affiliates.

3:45Speaker 8:This is for the CFA Institute.

3:48Speaker 4:And what they basically say, Alicia, which is Alicia Levine 101, is stop looking at expensive price ratios, GARP and the rest, and get back to fundamental analysis. And the distinction they have is down the income statement, don't go too far down. This is like 19th century. Look at gross profit here. That's the heart of the AI matter.

4:11Speaker 6:Correct.

4:12Speaker 8:These people.

4:14Speaker 4:You know, the Dario on Saturday Night Live folks, they're popping massive gross profit. We don't even understand the magnitude, do we, Professor Levine, of the gross profit.

4:26Speaker 7:She's looking at us like, duh.

4:29Speaker 2:Yeah.

4:29Speaker 6:Yeah. So, I mean, look.

4:32Speaker 1:Oh, Paul, I miss you so much.

4:35Speaker 5:As they say at the University of Chicago, y'all. I mean, look, you know, like, let's keep it simple. Like, what is the engine here?

4:42Speaker 6:The engine is growth.

4:42Speaker 8:The engine is profit.

4:49Speaker 5:But massive profit generation because margins keep on moving higher. Look at the margin of the S & P over the last 20 years. We've been on a margin walk much higher.

4:59Speaker 6:It's structural. It is not just what's happening this year.

5:02Speaker 8:Alexis wants to get into your relationship. One more quick question then.

5:05Speaker 4:What's the efficacy of looking up the income statement away from all the noise of taxes and interest?

5:12Speaker 6:So you spot the opportunities better, right?

5:16Speaker 5:Because what happens is if your revenue line is growing very fast, it's just a matter of time for that to be passed down to the bottom line and for the company to become more efficient. And actually, if you think about it, if you have a fixed cost... situation, the higher your growth rate, you know, the exponential growth on the bottom line. That's where you can grow at 12%.

5:38Speaker 8:It's sick. We could go for an hour with it.

5:40Speaker 7:I love our conversations with Alicia.

5:42Speaker 6:It's math. It's our math conversation.

5:45Speaker 8:Saving the interview, Alexis Christophers.

5:47Speaker 7:Math conversation, not my kind of conversation. I'm going to go down the road less traveled and talk about deeply distressed U.S.

5:54Speaker 4:Loans.

5:54Speaker 7:There's a great story on the Terminal about this today, rising to the highest level since the pandemic. Value of loans trading below 60 cents on the dollar. These are a lot of loans that are held by software companies in particular, some of the AI trade involved in this. Are we turning a blind eye to things we shouldn't be? Are things percolating in the background that are going to be real challenges for this market that we're not paying attention to?

6:17Speaker 5:It's a great question because in the end, markets always trade on the margin, and that's what's happening on the margin, that the weaker companies that borrowed at lower rates and funded through maybe some of the private credit a few.

6:28Speaker 6:Years ago.

6:30Speaker 5:Outside of the traditional financing system, but in the alternative capital, providers are showing some stress.

6:37Speaker 6:That is what you would expect, but it's also.

6:38Speaker 5:Like a normal part of the cycle that, you know, the weaker are going to show the problem first when you have 145 move, basis point move in the 10 year and a Fed that looks to be a lot more hawkish than the market priced in six months ago.

6:53Speaker 7:So Darwinism is alive and well.

6:55Speaker 5:Darwinism is alive and well. Not all of those distressed trades are priced at the right place. And there are distressed marketplaces for this. And there are distressed players that are coming with capital to take care of some of that. I mean, that's what a market is. But it's no surprise that we're here. The cutting cycle... we've had for the last two years, again, we talk about go for the goodness.

7:23Speaker 6:It hit a lot of badness.

7:25Speaker 5:And so now we're going to see who can get refunded and who can.

7:29Speaker 6:Am I worried about it? I'm not worried. It's what I would expect.

7:33Speaker 5:But I'd say the strength is really those who are levered to using AI tools to expand their business and expand their margins. And you're going to get a lot of operating leverage from in many, many companies as a result of it.

7:45Speaker 4:Alicia Levine, thank you so much. With BNY Wealth this morning, there's CI. Oh, there's some really, really interesting dynamics there, folks, as she and I were going back and forth on the income statement, like where to look at revenues all the way down to the traditional net income. Alicia Levine reading 1934 Graham Dodd when she was 15 years old.

8:05Speaker 8:This is known.

8:11Speaker 7:Did you know this about yourself, Alicia?

8:14Speaker 6:I read it later.

8:16Speaker 9:Okay, okay, very good.

8:18Speaker 8:This is, this is, no, wait, that was me.

8:22Speaker 4:Stay with us. More from Bloomberg Surveillance coming up after this.

8:33Speaker 3:You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

8:39Speaker 1:Eastern.

8:39Speaker 3:Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

8:43Speaker 1:Or watch us live on YouTube.

8:45Speaker 4:Our interview of the day, without question, Chuck Clow is a legend. If you look at his bio, his resume, these are names from the past. Colonial of Boston. Donaldson, Lufkin, Jen Redd. That young whippersnapper, Tom Gelvin, was there. at the knee of Chuck Clow ages ago in studio with us with a hugely optimistic note. I'm sorry, Chuck, this is a glass half.

9:12Speaker 8:Full note that you're writing right now.

9:15Speaker 4:Why can we rely on productivity gains to drive equity shares higher?

9:23Speaker 10:Well, productivity equals profits was probably the simplest answer of all. I think there are reasons to be positive about the financial markets, and the fact that financial markets themselves are giving a lot of evidence of that. Stocks are strong even in the face of a hawkish Fed. Quality spreads still stay narrow. They widen a bit, but they're still pretty narrow. And the dollar, a year or so ago, the overriding consensus was the dollar was in a lot of trouble because of heavy government borrowing.

9:54Speaker 9:The dollar's held up fairly well.

9:55Speaker 10:And of course it's strengthened with just really a modest increase in interest rates. So I think the market are telling you that they're okay, and inflation is there because of a series of shortages, and everybody understands that. But the one thing I want to bring to the discussion is, why is the dollar so strong, and why was it strong even before.

10:17Speaker 9:The recent interest rate rise? Please.

10:20Speaker 10:I would argue because everybody focuses on government funding and, of course, government's in a deficit. But the private sector borrowing, if you total it up, it's larger than total government borrowing. And as a percentage of GDP, private borrowing has been declining. Household borrowing has been declining since 2009. And corporate borrowing now has been declining since 2022. We're a nation whose population isn't growing very now.

10:46Speaker 9:The capital stock is pretty well built. I would argue that if you look at.

10:51Speaker 10:Total debt outstanding, which is what creates dollars, as a percentage of GDP, it's been declining now on the private sector for years. And even relative to GDP, even government debt growth is leveling off.

11:06Speaker 4:Across the arc of Chuck Clow from your evenings with Lou Rukeyser years ago, I went back and did a chart of nominal GDP. And this is highly unusual. this buoyancy that we have in a boom economy. Ed Yardeni, a close colleague of yours, talks about the roaring 20s. How do you interpret, how do you analyze this boom economy that we're in now?

11:32Speaker 10:Well, productivity has been rising for some time. A lot of it is technology-based. But I think, like I say, I think the disconnect is that directly translates into profits. And The more productivity grows, the higher profits will grow. In an important way, I think the market's telling you that final demand will slow, and it's telling you that by virtually every cyclical sector has been under pressure for a long time, whether it's autos, even the big retailers, even McDonald's is fighting tailwinds. People adjust to inflation very quickly, even in the airline industry.

12:10Speaker 9:We all know there's a.

12:11Speaker 10:Shortage of narrow-bodied aircraft, But airlines are already beginning to extend the time that.

12:17Speaker 9:They hold older aircraft.

12:18Speaker 10:So there's enough adjustments going on in the economy right now that these are supply shocks. But there's plenty of liquidity and plenty of investment capital in the economy to solve it. The best example is insurance.

12:31Speaker 4:I would editorialize here, Alexis, that this is classic Chuck Clowell. that the economy in its microcosm adjusts along the way where all the media blather is a certitude about where we are, static versus a dynamic analysis.

12:48Speaker 7:Chuck, do you think that the U.S. is still the best place to be right now when you look at the international markets and including the emerging markets like China, if we want to call it an emerging market?

12:59Speaker 9:Well, for a while, it's been the only place to be.

13:04Speaker 10:Europe is regulating itself into a no-growth environment, certainly a no-profit growth environment, and now you're beginning.

13:10Speaker 9:To see breaks in society there.

13:13Speaker 10:I'd say the only area in the world that I think.

13:15Speaker 9:Is becoming more interesting is Latin America. We've had a number of.

13:21Speaker 10:of elections that have brought more conservative in Argentina.

13:25Speaker 9:A few years ago and, of course, Brazil lately.

13:29Speaker 10:It's resource rich. The rule of law is becoming more intense across Latin America. I think China is uninvestable right now. And the other markets are too small to even think about. So I would say that the U.S. is the place to be. And if you look at overall investment flows, especially corporate investment flows, they're coming here. They're moving from Europe to the United States. So that's one of the reasons the dollar is so strong as well.

13:58Speaker 4:You and I go back far enough to remember when the Boston Red Sox were actually.

14:02Speaker 8:A good team.

14:04Speaker 4:I mean, we go back that far. How do you fold the politics into... and optimism to invest. When you look at the midterms, or on the Wednesday in November, we start a presidential campaign.

14:18Speaker 8:Is that just noise to you?

14:21Speaker 1:Most of the time, it is.

14:22Speaker 10:And in fact, if you look at fiscal policy, markets don't usually respond to fiscal policy. They respond to monetary policy, but not fiscal policy. So yeah, politics can be overemphasized.

14:35Speaker 9:I would say this. Markets love. That's the word I'm trying to grasp for. Congress can't get anything done.

14:43Speaker 8:Gridlock.

14:44Speaker 9:That's the word I'm grasping for. Markets love gridlock, and it sure looks like.

14:47Speaker 10:We're heading for a gridlock-causing election here.

14:50Speaker 9:So I wouldn't worry about the political side.

14:53Speaker 10:And quite frankly, I think there's way too much emphasis on translating what's going on in the war to a permanent inflation. It is not a permanent inflation. It's inflation raised on a supply shock, and there's plenty of investment capital to fix it. I wanted to use the example of the insurance industry. Um, if we were here 15 months ago, uh, property insurance rates.

15:14Speaker 9:Would be soaring.

15:14Speaker 10:And that would be the, if you Google it, you find property insurance rates are now down between nine and 30% year over year because a hold of capital ran into the insurance industry and, and, and, and pricing is beginning to be beginning to break there. Um, so I, I, I think that's the way to look at it. These are supply shocks. The underlying reality is demographically demographically based. The private borrowing will continue to decline. Government borrowing has plenty of room to do what it needs to do, but it's not a long-term effect on the capital markets here.

15:46Speaker 7:So you think this disinflationary environment is going to continue for some time? I was reading your note. You say you wouldn't be surprised to see short-term interest rates go to 1% to 2%. What's going to get us there?

15:58Speaker 10:Well, interest rates and inflation went down for 40 years, from 1982 until the COVID hit.

16:05Speaker 9:And of course, the The government response was enormous.

16:08Speaker 10:Not only tremendous liquidity environment caused by the Fed, but heavy fiscal stimulus as well.

16:17Speaker 9:It takes a while to work that off.

16:19Speaker 10:And then see we've had a series of shocks since then and I suspect that if you look at what were the reasons why interest rates and inflation came down they really three of them one is demographics the baby boomers are starting to retire biggest bending and sparring demographic in history short rates are rates are Quality rates are narrow which means the corporate sector is this basically structurally very healthy and And three, the dollar is strong, which means investment is coming here. So the real question is, if private borrowing continues to decline, what happens to the financial sector?

16:55Speaker 9:Now, I'll try to make my point this way.

16:58Speaker 10:The relative capitalization of industries can change dramatically. The energy industry represented 33% of the S & P 500 in 1981.

17:06Speaker 9:It's three today.

17:10Speaker 10:So you can have massive changes in that. The financial sector, I think, is too large. I think spreads may be good for a while, but that's not really what's happening. There's consolidation throughout the financial sector. The financial sector was 33% of the S & P 500 in 2006.

17:24Speaker 9:If you include balance sheets of General Electric, Ford Motor, it was 37%.

17:26Speaker 4:It's 13% today.

17:37Speaker 10:So the profitability of the financial sector is shrinking, and as it does, the financial sector, we're already seeing it in the banking industry. That means, think of what the short rate is. Other than the Fed, the most important determinant of what the short rate is, what is the financial sector willing to bid for its own liabilities?

17:57Speaker 9:A deposit or commercial paper or asset-backed security.

18:00Speaker 10:And if it shrinks, the bid for that liability is going to go down.

18:05Speaker 9:It's going to go down.

18:06Speaker 10:And it may take a while until some of these supply shocks have worked their way out. But that short rate is a very vulnerable number.

18:13Speaker 4:Chuck Clough, thank you so much for coming. We'd love to do this. I'd love to do this on a monthly basis. John, we've got to get Chuck Clough down here on a monthly basis.

18:21Speaker 8:All right, Chuck. You into it?

18:22Speaker 9:Can I do that from my bedroom?

18:23Speaker 1:You can do it from anywhere you like.

18:25Speaker 8:Chuck Clough, thank you so much. Chairman Clough, Capital, Concord, Massachusetts.

18:31Speaker 4:Stay with us. More from Bloomberg Surveillance coming up after this.

18:42Speaker 3:You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

18:48Speaker 9:Eastern.

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18:53Speaker 1:Or watch us live on YouTube.

18:55Speaker 8:The way it.

18:55Speaker 4:Works in the street, you have an investor's day. And, you know, people just think it's sort of cushy and there's horse divorce and, you know, beverages of your choice and all that. Fatima Bulani was up till 2 a.m. You know, the last people here on Investor's Day. She joins us, I hope, Cogent, from Citigroup today, because this is like serious stuff.

19:15Speaker 8:People make jokes about it. How many people were your investor day, Fatima?

19:22Speaker 2:The investor day was packed to the gills. So we had Zscaler. It's one of the lesser known but leading and more preeminent cybersecurity companies. They don't necessarily get talked about in the same breath as the Goliaths, CrowdStrike and Apollo.

19:39Speaker 6:But yeah, it was packed.

19:40Speaker 1:To the gills.

19:40Speaker 2:There's a lot of interest.

19:41Speaker 4:What is the interest to get away from 12 stocks everybody knows?

19:46Speaker 8:Do people are.

19:47Speaker 4:They really searching for a deeper breadth of this ai revolution You.

19:53Speaker 2:Know, what we've broadly seen, and this kind of harkens back to the last discussion you were having around this chasing for growth, right? So there has been an absolute interest, focus, and concentration on some of the largest assets in their representative industries. So really the willingness to pay a pretty hefty premiums for marquee assets in their space. So again, CrowdStrike and Polo and cybersecurity, those are known entities. They've, uh, you know, uh, produced an excellent track record of, of execution.

20:26Speaker 2:And so, you know, investor sentiment and mentality has generally been, Hey, let the winners win more.

20:32Speaker 1:So, uh, there.

20:33Speaker 2:Absolutely has been this bifurcation of, of haves and have nots. And, uh, that sort of compounded over the last year.

20:41Speaker 7:Zscaler, coming off the investor day, I'm just taking a look at the stock market cap, $ 34. 5 billion. Not too shabby. Year-to-date, though, the stock is down nearly 6%. What was your big takeaway from investor day?

20:53Speaker 2:Look, there were two major areas that I think the management team did a very solid job on, right? Number one, providing us with a financial framework over the next several years on what the growth trajectory of the business is going.

21:05Speaker 4:To look like.

21:07Speaker 2:You know, I don't have to tell you that we are in an absolutely generational period for cybersecurity risks, cybersecurity investments, but at the same time, you know, a lot of dizzying amount of change that organizations have to you know, batten down the hatches around, right? So, you know, articulating a financial set of targets around that. And then secondarily, this idea of leveraging what their core principles around effectively being a communications switchboard and applying that to agents, right?

21:41Speaker 4:Right?

21:41Speaker 2:I think three to five years from now, no one is going to bat an eyelash. If I say agents are going to be my teammates, agents are going to be undertaking important business processes, completely autonomously, completely unmediated by humans. And so who's going to govern those exchanges and who's going to govern those interactions. And, you know, I think they mounted a pretty compelling vision and architectural strategy around that. And, you know, at the end of the day, tying this back to valuations feel stretched, the expensive names and the high quality names continue to be bid up. This is one that sort of is interesting, right? There's a little bit of a valuation arbitrage, right? So a diamond in the rough strategy in a market where, you know, things feel sort of instantly and instantaneously priced in.

22:29Speaker 4:We continue with Fatima Bulani, co-head software equity Citigroup, having the privilege of working with Heath Terry. I believe Heath's on our schedule. at some point here in the coming days as well. Fatima, I want to go off script here. We just did a thing on MetaMoose. I know Ron Josie follows Meta. I don't need a buy, hold, sell on Meta. But Fatima, I mean, folks, you got to understand, Fatima was 15 years old at Thomas Y. Sell like a million years ago. I mean, she started out, she was like a junior in high school, I think, when she was getting her CFN.

23:03Speaker 2:They called me a child prodigy.

23:07Speaker 6:Those aren't my words.

23:09Speaker 4:But Fatima, I look at this and the heart of the matter within a conversation we had earlier is they want us to give them our financial data, our personal data. Claude needs to look into my computer. Muse wants to know this, this. Are you kidding me, Fatima? Nobody's going to do that.

23:31Speaker 2:Well, you know, I think data privacy and consumer data privacy is certainly going to be a very topical matter.

23:40Speaker 6:And, you know, this puts me out of my depth.

23:43Speaker 2:You know, there's likely going to be, you know, political standoffs about this and around this. But, you know, I love going off-roading with you on this, Tom. But Muse has very interesting implications as it relates to commerce and e-commerce at large. Right. And so, you know, to the extent you and I were browsing and shopping, well, we're going to, in an ideal world, have Muse or some of its competitors who act as personal.

24:10Speaker 6:Agents do that.

24:11Speaker 2:And at the end of the day, organizations have to prepare for that eventuality.

24:16Speaker 11:Right.

24:17Speaker 2:You know, I think there may be an impasse and a scuttle there. around some companies just saying, no, bots and agents can't transact on my website.

24:25Speaker 6:It has to be an authentic human.

24:28Speaker 1:But by and.

24:28Speaker 2:Large, there is going to be a movement around, hey, I can dispatch Muse to pick up my morning smoothie for.

24:36Speaker 6:Me at Joe and the Juice, right?

24:39Speaker 2:And so agentic commerce becomes So much more of a multifaceted and interesting topic to discover, right? And we've been spending a lot of time thinking about, hey, now the burden of managing that digital experience for the end customer falls on the company, right?

24:59Speaker 8:Exactly.

25:00Speaker 2:And who wins there? So there's going to likely be more investment there.

25:04Speaker 5:Right.

25:05Speaker 2:Oh, by the way, you're going to have agents trawling your website. You ought to have the right, you know, gates and firewalls put up. And, you know, there's investment opportunities there. And, you know, Cloudflare and Datadog are the ones that we've thought of very highly in this sort of incremental opportunity.

25:22Speaker 4:Oh, by the way, Compliance at Citigroup just emailed me and said you nailed that answer. You know, there's all sorts of, you know, ranchos.

25:29Speaker 2:My handlers are proud.

25:31Speaker 6:So good.

25:32Speaker 8:Right. Fatima, thank you so much.

25:34Speaker 4:Fatima Boulani, co-head of software equity research at Citigroup. Stay with us. More from Bloomberg Surveillance coming up after this.

25:50Speaker 3:You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

25:56Speaker 1:Eastern.

25:57Speaker 3:Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube.

26:03Speaker 4:This research note is extraordinary. And it is the work that you have to do to glean BLS, Bureau of Labor Statistics data, to come up with a state of America. Kyra Ficteau is with Wellington Management Boston. are titled Fixed Income Portfolio Manager, which barely describes the depth of this memo. And I love what you say about experienced inflation. The haves have inflation and they're like, and the rest of America, I get more mail on this than anything else. How bad is it for half of America?

26:42Speaker 6:Thanks.

26:42Speaker 10:Yeah.

26:43Speaker 11:Thanks for having me, Tom. I look, I think the way inflation was supposed to crush the consumer by now, and people are sick of talking about the K-shaped economy, but the reality is that under the hood, dispersion continues to grow. And because the inflation that we see in headline numbers is not really the inflation that consumers are experiencing. The BLS puts out a consumption basket for consumers that assumes that we consume the same types of products as everybody else. But the reality is that people on a lower income spectrum are more exposed to food and energy inflation than consumers on a higher income spectrum. sector. And so when I dig into the data and really rip it apart, what I observe is that cumulative inflation over the last six and a half years in the post-pandemic era was upwards of 30%. But that lower income people experienced more inflation than higher income people.

27:43Speaker 8:Do you have a statistic on that? From 30, did they do 40 or 50?

27:47Speaker 11:So we're talking about points and when you actually strip out shelter inflation, which is the biggest issue, right? Like, Two-thirds of this country are homeowners. Forty percent of people in this country own their home outright. They were exposed to zero, zero shelter inflation over the last six and a half years. If you strip out shelter inflation and adjust for the inflation consumers actually experience, I would suggest that consumers experience six points less. less inflation than what headlines suggest. And over the course of a couple of years, you annualize that. The numbers are much smaller.

28:20Speaker 8:There's talk about we need a better new inflation.

28:23Speaker 4:I don't have the research in front of me, folks. I'm sorry I can't cite it. But basically, PCE misses the grocery store is a stereotype of what I'm talking about. Does the Fed or does Wellington management need a better analysis of inflation?

28:38Speaker 11:Well, that's what we're doing, right? For the last several years, I've been pounding the table saying, look, the data that we've all been trained to observe, the metrics that we're taught to predict the economy are becoming less relevant. And you see this in affordability, too. We talk a lot about affordability. It was all over surveillance this morning.

29:01Speaker 6:Mortgages are up. The mortgage rates are up to 7.5%.

29:03Speaker 1:You listen to us? I have to prep.

29:06Speaker 8:Sorry, we're up to 42 listeners. Yes, continue.

29:09Speaker 1:Yeah.

29:10Speaker 11:You know, mortgage rates are high, of course, but we're forgetting that so many people are locked into extraordinarily low rates.

29:19Speaker 8:Yes, we call that Paul Sweeney.

29:20Speaker 1:Yes.

29:22Speaker 7:And John Tucker, apparently.

29:23Speaker 8:Pick it up here, Alex.

29:24Speaker 9:Hello, three and a quarter.

29:25Speaker 6:But....

29:27Speaker 7:In the same breath, you've got people using buy now, pay later more. You've got, you know, so many people squeezed borrowing against their credit cards. Is credit stress starting to seep up that ladder to the consumer now and in a worrying way?

29:44Speaker 11:So catch the chase, not in a worrying way, but we are absolutely seeing credit stress migration up the quality spectrum.

29:50Speaker 6:So where it was.

29:51Speaker 11:Isolated more to your subprime and near prime borrowers, we are seeing it migrate up into the prime spectrum. However, Credit extension, so the amount of credit that consumers have on balance sheet is at historic low levels.

30:06Speaker 8:Nobody believes what you just said.

30:08Speaker 11:I know, I know, but you've got to look at the data.

30:10Speaker 8:The only one that believes that is Michelle Meyer over at MasterCard. Really? Are credits at historic lows?

30:18Speaker 11:The amount of credit that consumers have on their balance sheet is at historic low. The amount of dollars they have in their money market accounts is at historic highs. The amount of equity that they have in their home values is at historic highs.

30:33Speaker 7:We're at delinquency rates, though, I wonder.

30:35Speaker 11:Delinquency rates are climbing, and we are seeing a swelling in what we call roll rates, so the amount of transition from 30- to 60-day delinquent to 60- to 90-day delinquent. I like to call that the pressure cooker that is going to stay contained as long as the labor market continues to do what it's doing. If jobs go, all bets are off.

30:58Speaker 4:Kyra Ficteau with us with Wellington. The only reason she's here is you should see the Wellington box at TD Gardens for the Bruins game.

31:07Speaker 8:Unbelievable, the angles.

31:11Speaker 7:I haven't gotten an invite.

31:12Speaker 11:It's even better when it's.

31:15Speaker 8:Canadians and Bruins. It's even better.

31:17Speaker 4:Kyra, you come down below your experienced inflation, and I love what you're doing here on experienced wage growth.

31:25Speaker 8:It's at least two, if not three, Americas, isn't it?

31:29Speaker 7:It really is.

31:30Speaker 11:And so, again, when you pull apart the numbers and adjust inflation for what consumers actually experience, how much energy they experience, how much shelter they experience, and that varies based on their income cohort and their consumption patterns, what we observe is that when you apply that to wage growth, what we observe is that real wage growth for the top 60% of income earners is still positive and healthy at 1%, where lower-income cohorts, your bottom 20% and even now migrating up to the bottom 20% to 40% is actually in negative or approaching negative territory. So those consumers are in a bad way, and they need some help in terms of higher wages and or slowing inflation from the things that matter most to them, like energy.

32:19Speaker 7:We started our show today with David Rosenberg in the seven o'clock hour, and he was talking about how inflation is a little overblown. I don't know if you agree with that, but are we, if that is the case, are we, or maybe it's not the case, but are we underestimating weakness in the job market?

32:36Speaker 11:So that's exactly what I'm saying here is that we, I think we're, consumers have actually been less burdened by inflation as headline numbers would suggest. However, they're, And there are things that are coming up that would suggest that this could be persistent and then continue to erode consumer health, particularly.

32:55Speaker 6:For the lower end.

32:56Speaker 11:You know, I don't I'm not a meteorologist, but you did have one just on the show now. And I mean, El Nino is a real thing and it's and it's going to affect crops and food and food inflation is going to go higher. And that's something that is also going to hurt those income cohorts that that are already that are already struggling.

33:12Speaker 8:Thank you.

33:13Speaker 4:Cara Factor with us, the Wellington management, Boston. fixed income portfolio manager, but just a brilliant note. And the number one thing I get in my mail is on the two Americas out there.

33:24Speaker 3:This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.