Show notes
Sheila Kahyaoglu, Jefferies Senior Equity Research Analyst, discusses the latest on Boeing and the airlines sector amid a nationwide grounding of the 737 Max 9 aircraft. Seema Shah, Principal Asset Management Chief Global Strategist, expects a positive nominal growth environment and a continued fall in inflation. Kathy Bostjancic, Nationwide Mutual Insurance Chief Economist, says a mild recession is still a possibility despite strong economic data. Matthew Bartlett, Darby Field Advisors Principal & Republican strategist, previews the final GOP debate before the Iowa Caucuses begin on Monday. 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 Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an 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. Where are Boeing Aircraft made? I believe it's Renton, Washington where they were tuned into the college football game here a while back. The seven thirty seven comes out of Reton, Washington. An expert on that is Sheila Kiglu, senior equity research analyst at Jeffreys and joins us this morning. Have you been to Reton, Washington? I have. There's three production lines. The third one just opened up, so if you think about it, each one of those turns out fifteen to seventeen max's per month. The fourth one will open next year and ever at about an hour and a half away from Renton. So I want you to speak and I don't want you to talk about all your leverage finance work at JP Morgan and your wonderful work at Jefferys, your award winning work and institutional investor forget about it. Our listeners and viewers want to know where's the problem and is it easy to fix? Is it rent in Washington or is it the fuselage riveters in Kansas. I think the problem is the pandemic deteriorated their aerospace workforce not so much. And I mean the problem is in Renton, not only at the Boeing factory, but the small Tier three, Tier four suppliers around there. They're seeing strain on their workforce. The problem has been really focused over the last year in Spirit in Wichita, with three incidents either on the Max or the eight to seven involving quality issues. So there's been management changes there to address those quality issues, and I think that's really the focus item. Given we've seen small improvements in the engine manufacturers and the Tier three, this sounds absolutely shocking when I start to hear about this, At least for ask this question earlier in the week. I'd love your response to it. Are we suggesting that things are safe but not as safe as they were before the pandemic? Now in this industry, I think the industry is having a tough time recruit you know, getting back up to post pandemic levels, and you know we're manufacturing. In September, we were only manufacturing in the teens a month on these max is when we were supposed to be at thirty eight a month. So we essentially, you know, in December deliveries were forty four. Half of that was out of inventory, half of it was actual production. So we basically doubled output in three months, right, we were trying to double output. So there's a stream, given air traffic is back to one hundred percent of twenty nineteen levels, to get this aircraft production back, and it was very constrained over the last three years. You've now did demand at Boeing isn't the problem, it's deliveries. We had Ryan as Michael O'Leary sit in your seat actually at the end of last year, complaining about the delays to the seven thirty seven max getting delivered to Ryanair how Osawi to further delays and ultimately canceled orders because of what's tanking place. I'm sure he was more entertaining than me, and this seat, I will tell you that he's more entertaining than I Am, don't worry about it. You know, what we've seen is that we've seen a delivery slip. We delivered about one thousand aircraft in twenty two. That number was fifteen hundred post pandemic on the narrow body. So we've seen that happen already. But we're not going to see cancelations. We're seeing the order brook stretch out twenty eight twenty nine. Everybody wants to get in line, and even Ryanair, who's been the most outspoken against Boeing, has talked about wanting that aircraft sooner and pricing being better for them, Pricing being better for Boeing on some of the Ryan Air aircraft because they want the aircraft sooner. What's the opportunity here for Airbus? I mean, I mean just as simple and tou luise I got to play this low. It could be them. I get the whole dance. But is this a huge strategic opportunity in the United States of America for unit sales for Airbus? Not so much. I think the opportunity was from twenty nineteen to twenty three twenty two, when the Max was essentially grounded, not delivering to China as well, where we're forgetting about that China element. But Airbus had their market share opportunity. So what we see in twenty five as Boeing produces fifty max is a month and Airbus does seventy five maybe in the twenty twenty six time frame is more likely to be honest. So they already have that market share game. And let's not for Yes, Airbus has its own issues. The Airbus aircraft is mad has two engine options, either the ge leap option and the Raithyon GTF option. We know the GTF has a contaminated powder in it, so they're basically grounding forty percent of the GTF engines in the first half of this year to do inspections on them. So Airbus is not short of its issues as well. Okay, some of this is the complexity of the engineering across all of aviation. Are we at a point now and then, I mean, I get the COVID idea. I think that's brilliant, But are we at a point where these things are becoming too complex? Some areg you, it's not complex enough, not enough fuel efficiency, not enough energy efficiency, two pilots to by the plane. So I think that what we've seen in the aircraft industry is no new models really, this is the twenty twenties are just an upgrade of the existing models and efficiency. Are they still trying to do a one pilot plane. I think that's off the books for now. The focus has really been on the engine, the fuel efficiency, and what kind of engine we get in the twenty thirty five twenty forty time frame and how that aircraft takes us over the next two to three decades. The sitting of the jet back and forth on the wing was due to fuel efficiency, right, should we jettison? Fuel efficiency is an engineering mandate, that's what we're aiming for. But clearly the engine OEMs have had a lot of trouble, not only in production but the efficiency that they're getting. So not calling out GTF only with the raytheon issues. Not only do they have the contaminated powder, they've needed to do upgrades to get their engine up to par so is leaps. So that's what we're calling fence building. Let's finish on the regulator. This is a difficult one. How do you expect the regulator to respond to this? How do authority step in here? Given what could have taken place on Friday. So, John, you started off very stark contrast with Dave Calhoun yesterday, and I think the regulators took that same message. NTSP is solely focused on the accident. Well, no, in twelve to eighteen months, what really happened? The FAA said Grounding twelve hours in, so did Yassa. So I think that they're taking a stark stance. Boeing has this directive out on how to inspect the aircraft, and I think we could see the aircraft back in the air by the end of next week. The end of next week. That quickly. The directive said four to eight hours to inspect the aircraft. You think about just the pr element of it. An extra week when you hear from the regulator. Of course, they have to start out really broad, actually have all options open, t K consider everything, Shila. Do you get the sense that they've narrowed this investigation down already? Then, given your expectation, we'll be back up in the air next week. So the NTSP, I think, will take a year to come to a conclusion on exactly what happened and what the cause was. But the FAA seems pretty confident that the directive came out so quickly, thirty seconds normal conversation. What's your single best buy right now? Oh, this amazing company called Higo. When I started covering it's called Hiko. Hiko. Yes, twenty one billion market cap fifty one times PE. But when I first started covering this stock, and I won't tell you when that was, the market cap was two billion dollars. They are a generic aircraft parts manufacturer and they supply the aftermarket. The more we don't get new aircraft deliveries, the more Hiko benefits because the old planes get serviced. Interesting. I thought we could have rund out that conversation sort of long bowing, but we didn't. Shada, thank you, it's good to hear. Free me. Just fantastic, real depth to that conversation. Shada kyli that of Jeffreys. Let's catch out with say Mishap the chief club was strategistic principal asset man wish and seem pleased to say joined us right now. Seem a greater catch up two part story this year for you, first half, second half, first half, volatility, second half rally. I have to say it reminds me of some of the outlooks that I got last year for twenty twenty three, saying, what is it about twenty twenty four where you think that story could actually take place? So I think that Look, if you think about where we were at the end of last year, where you had I think a price per perfection, you know you couldn't get better news in the idea that the FED would start cutting it early in this year. You would have a soft landing, et cetera. Now, I'm not saying that that's not all going to come true, but at the beginning of this year, you're already seeing the market push back on some of those original expectations about early FED cuts. You're seeing ecod basilience that is creating a wobble, and I struggled to see what is going to be the catalyst to drive another leg up in the near term. Yourys need to see a bit of a pullback as the market starts to question their raid expectations. And then as you get towards the middle of the year and you get closer to that actual rate cut date, you see an economics slow down, but it doesn't turn out to be too damaging. That to me is that greed signal four and a more prolonged rally. Yes, seem a dovetail nominal GDP. Now that combination of real GDP plus the inflation with the IMS call of a beleaguered, slow global economy out four years to twenty twenty eight, where are we in that continuum as we go into twenty twenty four? Is there an animal spirit within our nominal GDP or is it going to drift away? So, look, we are anticipating a bit of a global growth slowdown. You know, if you look across the US, Europe, China, it's not particularly exciting, but you do have a couple of bright spots around the globe. But we're not anticipating a very prolonged economic weakness. So I think this is a fairly decent nominal growth environment. But along with that comes the idea that we don't necessarily see inflation coming all the way back down to two below two percent like you saw in previous years. So from a real rate, which I know you've been focused on, it is a slightly more challenging environment than we've seen in previous years, and I think investors need to start taking that into consideration as they're starting to position their portfolios. What does the real rate do this year the ten year inflation adjusted rate in the United States, So we're expected to come down slightly, but not too much. If I give you an idea, you know, we're expecting the FED to color three times twenty five basis points each time, so it's not very significant. We are expecting inflation to come down to around the two point four percent level, so it's not too far from where we are today. That is a little bit still quite restrictive, so you're not in a fantastic environment for risk assets, but there is a lot of cyclical factors that we can take into consideration. It's just if you're thinking about your portfolio, you're looking at a higher cost of capital than you've had in the last decade or so, so you need to be kind of screening your stocks a little bit closer. You need to be start thinking a little bit more about bonds as well. You know, in terms of it's great in inflationary, it's or in a disinflationary scenario. But in an inflationary scenario where inflation doesn't come all the way back down to what maybe was accustomed to before, bonds don't necessarily perform as well as you would have expected. I wonder what your call is then on consumer discretionary. I'll share with you what we heard from Lori Cavasina of RBC overnight, greating discretionary to market way and saying this, Seema, We're wary of being underweight going forward, given the tendency of this sector to outperform when interest rates are falling. They're two sectors at the moment that are kind of leading the pact to close out last year. And whenever we rally, it's discretionary, it's tech. Where are you on the format and for that matter, where are you on the latter. So actually on the consumer discretioning, I'm not too negative. I do think there are challenges coming for consumers, but I don't think there is significant as maybe a lot of people, including myself, were worried about at the end of last year. There's just a lot going for consumers at the moment. I mean, as long as the labor market is holding up as strong as it is, and I think consuming discretion can do well. On the tech side, I still have good, I guess solid expectations for tech. I do worry though about whether the expectations from the market is going to be fulfilled. So whereas I wouldn't want to go negative or underweight technology, I think there are other parts of the market which are a little bit more interesting for twenty twenty four. If, as you said, you're going to see FED cuts and soft learning, I think there are other parts of the market can do well. We'll talk to me about the other parts. Then what's the big call for you? Banks? Where do they fit in? Give me we get earnings on Friday. I think banks can do pretty well. I think you know, as you're going to see in a lot of parts of the market, there are headwinds in the first half of the year, but as you get through to the second then I think banks can do well. The other part of the market, which I think should be gaining interest, there's going to be a bit of a warble in the first quarter at least bit small caps, I think the evaluations are very attractive. Typically, when you get a fed cutting cycle and it's accompanied by a kind of a return to or at least solid growth, that is typically a very good signal for small caps. And when you're looking at that valuation gap between the large and the small cup, it is very attractive so I think this is the time that investors start thinking about it and maybe edging into those positions. If youels come down, is the is the flow of money out of money market funds it's assumed. Is it linear or does it all come in one great surge. I think that's it's really difficult to say in terms of how the investors sentiment is going to go. What I do think though, is one is that those money market funds, they do have the potential to create a pretty strong rally once some of the questions that investors have hanging over them are answered. So those questions would include when is the going to start reducing interest rates? And the second thing is is there could be an economic slow down? And if there is an economic slow down, how devastating is it going to be. I think all three of those questions are going to be answered fairly from in a positive tilt in that there's a slowdown, but it's not too devastating at all. And I think once you have some of these questions answered, then money market funds that trickle is going to move towards those risk acids, which is one of the reason do you think investors should be positioning for a stronger second half of the year. Russ Coastrick at Black Crog said something similar in Raka Semath thank you. Going to hear from your Sam a Chant of Principal Asset Management right now to further discussion and the American economy. Kathleen bus Johnson joins his chief economists Nationwide Mutual Insurance. Kathy, what's the state of the consumer? Good morning, Tom and John Happy to be with you. Well, the consumer has been really resilient and not really reflective of the labor market continue to be quite strong. We've got employment growth that continues to kind of outpace the monthly estimates, and wage growth continues to be buoyant. So you know, put that together, you still have you know, income wherewithal of the consumer to keep spending. Now, it's not going to be the buoyant spending that we had in the past. You know, most much of the of not all of the pandemic related savings has been run down. But you know, until we see a slow down a labor market, the consumer can continue to run Here. The character of our wage growth is compared to a declining inflation is something the optimist speak of. Is it normal? Is it a normal dynamic now or do you put an asterisk around what that means? It's getting more normalized. I mean wage growth. If you look at the average earlier earnings numbers running four to one, you know you would probably in a more normal time see that around three and a half. So you're seeing wage growth is still a bit you know, buoyant there, but inflation is not back to two percent yet either. So I think in the mix, what you're seeing is real wage growth that is steady. You know, it's not stellar, but it's not negative either, So you know that that helps to you know, kind of keep the consumer buoyant. But we do think there's some slowing underneath the headline and employment numbers, and I do think we are going to see The question is do we see you know, just a soft patch in growth in the middle part of the year, or do we get a mild recession. We're still thinking that mild recession is possible, but you know, certainly recognize that the data have come in stronger than expected and that could continue. Kathy, how would you expect John Williams, the New York Fed President, to address some of those issues this afternoon? Yeah, very much. Looking forward to his comments, you know, and to put into perspective like they kind of we're talking about ray cuts. Well not really, but you know, and the Minute's helped us out a little bit there. But I do think they're at an interesting time now. I mean, in a way it's better than they thought, right, but it's still complicated. It's better because inflation has come down much quicker than they thought, the labor market has been more resilient. But now that the idea is well, it's not just about lowering inflation, but can we stabilize the economy to avoid, you know, a harder landing. So I'm very interested to see how he kind of threads out. I think one message you'll probably deliver is the bond market is still a little too optimistic in the start of the timing of rate cuts. But to be honest, we're looking for May May June market sort of pricing and high odds and marks not all that different. The fact is the Fed's is going to be cutting rates this year unless something on inflation starts to turn around in a very ugly way. Well, Kathy, not all rate cuts are created equally, and I think that on the surface, it's almost contradictory to talk about maintaining a restrictive stance and entertain the surgical rate cuts at the same time with a focus on real yields. Do you think they can entertain both iteas simultaneously and communicate effectively and clearly. Well, communication has not been there, you know, the top bright spot here really to be honest, you know they need to communicate clearly. But I you also think your point is well taken. Are you just removing some of that restrictiveness but still want to hang on to it because you're not quite one hundred percent confident infleetion's getting back to two percent? Or do you say, you know what inflation? We do have a high degree of confidence. You're getting to the point with you know Mike's interview with Lorettemester. You know how confident they are we're going back to two percent? And how does that real rate, you know, play in to the mix of things, because right now the real rate is higher. Right the fact that it can't in Columbus, Ohio nationwide is on your side, and all that the unemployment rate is two point eight zero percent. Help me with Senator Warren from the Commonwealth of Massachusetts. Shouldn't we be up on the tables pop and champagne and celebrating an unemployment rate of two point eight zero percent. Yes, I mean we should be celebrating that this economy is is quite good, and you know, inflation is coming down. You know, maybe that is why consumers overall and maybe there's not as much exuberance out there, but inflation's coming down eventually. If it's going to be cutting interest rates at some point this year, you know, that's that's a very positive mix. And to your point, and employment rate certain parts of the country, like Columbus, very very low and very positive. So I think we need to applaud a lot of that, and that sort of gets overshadowed by all of our concerns. Kathy, just quickly, where do you have unemployment your end? Yes, so we see the unemployment rate drifting a bit higher, but because we have a mild recession, it doesn't even get above five percent. So you're looking at something around four point seven percent or so at the high so let some of the air out of the economy, but certainly does not crush the labor market. Interesting, Kathy, Thank you appreciate the insight. Kathy Chance it that of nationwide. Matthew Bartland knows each and every ward in Nashua, New Hampshire. He is hardcore in New Hampshire. Enjoins us this morning Darby Field Advisors, a Republican strategist with service in the Trump administration until a certain January date. I got to go there first, Matthew, as you joined surveillance for the first time. What was it like on January sixth when you said, Sea, Yeah, you know, thanks Tom. Listen. It was a very very hard day here in this town in Washington, and I remember walking home it was during COVID and crossing the Capitol and just seeing the utter mayhem and feeling utter discussed and made what was just the easiest decision I've ever made my career, which was, dear mister Secretary, I hereby resigne immediately from the State Department. Decisions will be made in this excuse me, decisions will be made in Hampshire, Mass Bartlet what's the tone you see right now among Republicans? Well, exactly, it's January, and you know the business community that the country is looking at a lot of those those snow covered roads right now. It's not Davos might be Davenport, Iowa, might be dover New Hampshire. And you know, we are looking at what is either the beginning or maybe the end. President Trump has a significant lead. There are really two battlegrounds right now. It's Iowa, which he may have locked up, and it's a question of expectations. And then it's over in New Hampshire, the Granite State, my home state, where Nikki Haley may be putting together some puzzle pieces with her granite heels on climbing the mountain and may shock the Trump campaign, may shock the world. And if so, then we have a race. But if President Trump really blows it out in both states, I think this nomination might be wrapped up and wrapped up ptty quickly. Well, Matthia, talk about that. You've been on the ground with every candidate I believe in the field, Matthew, do you see anything on the ground. It's difficult to reconcile with what we all see in the polls. Oh sure, right now. Polls. You'll see a lot of national polls. Those poll polls are certainly, you know, lagging indicators. It is the state polls that are the leading indicators. The nomination process is not a you know, as we know, a national election, it's a state by state event, and right now in Iowa and in New Hampshire, the race is not nationalized. Rather it's personalized. People get to go and meet the candidates upfront, hear from them directly, unfiltered from you know, free from from media, free from ads, get to ask questions, and that's really where where people can can can make their stake. And I think that's what we see Nikki Heley do to to a very high degree. What's the number one issue that you think is attracting voters to the likes of Nicki Hailey? You know, I think it's probably a mix of policies of you know, maybe the Biden administration, whether it's foreign policy, domestic spending, inflation that have kind of pushed people away from you know, their vote maybe twenty twenty or away from the Democratic Party, but more importantly looking back towards what people see, as you know, a firmer Republican party that maybe is absent some of them, mayhem, some of the personality deficits that former President Trump has displayed for the better part of a decade. Now. Matthew Barlow. Terry Hayes visits often from Pangaea, and he made a common a number of months ago where he said, there's a complete misjudgment about the number of GOP who really aren't in love with the former president. In political Jonathan Martin the headline where are all the anti Trump Republicans? Where are they? Matthew? And are there any conquered New Hampshire? Oh, certainly, you know, if you look at New Hampshire, it is the only purple state, maybe the only swing state. In addition to being an early state. Republicans can only vote in the Republican primary, Democrats can only vote in the Democratic primary. But independence, of which there are more than Republicans or Democrats, can vote either one. So right now, the independence of New Hampshire, those that actually decide the general election are going to have a significant role in choosing the Republican nominee, or at least impacting that. Right now, it looks as if they are going to Nicky Haley. There is a Trump fatigue factor. In fact, when you go to her town halls, one of the biggest applause lines you hear. She's quite candid, she says, listen polling says Donald Trump might be up one to four points on Joe Biden, but I'm up seventeen points. So I think a lot of strong conservatives look at that as a resounding, you know, rationale for her candidacy, and a lot of independent voters, you know, find her to be the Goldilocks King. What does President Biden need to do to garner those GOP diss affected votes. Does he need to communicate with him like his communicating with a Pentagon. Yeah, I think communications a good start, you know, putting priority that you see, you hear, you listen to those that it is a warm place. Maybe some of his policies have been rather progressive. He's been for the past four years really attuned to the left wing of his party. Now, as we turn a corner into a potential you know, general election, he really needs to make sure that that coalition that he built in twenty twenty stays with him, that they do not feel deflated. And that's from the left on certain issues which may be a little more sensitive. Maybe it's foreign policy issues as we're seeing in playout in Michigan. But again, those disaffected voters who thought Trump, you know, maybe they liked his policy, but they just thought his personality was just too much. Now it's going to be yet again a choosing time potentially between Trump and Biden and who can swing those voters right back. Let's get to TV programming later on the seven and just to wrap things up math nine pm Eastern time. I believe you've got Run versus Nicky on CNN and then you've got the former president kind of programming on Fox News. What's the approach from Nicky im Ron going to be they going after each other or going after the former president. I mean, listen, it's gonna be both, you know, more than anything right now, the Republican Party wants somebody with attitude and swagger, and that is certainly why Donald Trump has had a command over the party, not just over the past few months, but over the past few years. So it is a performance. It is how you take a punch, how you land a punch, how you come back from a punch. Nicki Haley has really made her bones in this race by lighting up vivek Ramaswany like a pinball machine at debates, and it seems their voters appreciate that. Look for more of that tonight. Let's continue the conversation for this month. Matthew Greta catch out Matthew Bountle at the f Danby Field Advisors. Subscribe to the Bloomberg Surveillance Podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every week starting at seven am Eastern. I'm Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is BloombergSee omnystudio.com/listener for privacy information.