Yields, Caterpillar, Euro, and the Fed

Ira Jersey, Chief US interest rate strategist for Bloomberg Intelligence, discusses yields, the Fed , and the US Treasury. Chris Ciolino, with Bloomberg Intelligence, joins to break down Caterpillar earnings . Ken Monaghan, co-director of high yield at Amundi US, joins to discuss high yield, credit markets, and central banks. Tim Craighead, Director of Research and Senior European Strategist at Bloomberg Intelligence, joins to discuss Euro contraction and a 3Q midseason takeaways for Europe. Lukasz Tomicki, founder and Managing Partner at LRT Capital Management, joins to discuss the outlook for markets and gives his stock picks. Claudia Sahm, founder of Sahm Consulting, joins to talk about the Fed, bad economic data, and outlook for a recession. Hosted by Paul Sweeney and Matt Miller. FULL TRANSCRIPT: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller. Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news. Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's talk to our Jersey here, chief US interest rates strategist. I just saw Michael McKee leaving here. He's gonna hop on the Assella train, get down and washing it in DC for that FED meeting tomorrow where you can heckle the chairman with some questions. What do you want to hear from FED Chairman Jpal tomorrow after the release of the results there? Well, what I'd like to hear and what we're not going to hear is wind up being what's the Fed's reaction function and for when they might cut or raise interest rates? Obviously, if inflation accelerates meaningfully, they'll raise interest rates again. They've already mentioned that that they might have to do more if inflation does except right, although we got some data today that seems like maybe it is going to moderate a little bit, but really, you know, what will it take for them to cut? And I think that the idea that they're going to remain at the peak for some time, which they've hounded on, it would be helpful for them, I think, to basically be a little bit more explicit, like, look, we're not cutting unless the unemployment rate is you know, three four percentage points higher than where it is and inflation is close to our target. Right, So saying something like that, which isn't completely explicit, is but it still has some meaning around it for markets. I think that that would be helpful for the FED to maintain monetary policy at this page. Close to our target is weak talk week talk weak sauce, right, I mean, do you want a hawkish Why don't they say, like, we want to get to two percent two hour target? You know, I mean at least for six months or a year. I mean, weren't they trying to average long term average two percent? And how many decades would that take? Yeah, well, that was our old framework. It wouldn't take you know, it wouldn't take that long because we remember we were at under two percent at least for quite a while in the last decade. I think the the thing for the FED though, is that if look, if inflation is two point seven percent, two point six percent, two point five percent trending lower, and you had a real spike in unemployment, then everyone would be forecasting inflation to be significantly lower, right. And I think that's the reason why they can say like near our target or approaching our target, right, something like that. So the FED doesn't like to be as explicit as saying, look, we will cut interest rates if the unemployment rate is above five percent and unemployment and inflation is at two percent if they won't be as explicit as that, because they want to leave themselves flexibility in case there's a crisis, if there's you know, massive corporate defaults for example, and unemployment spikes, but you still have you know, year of a year inflation hasn't fallen off a cliff. Yet they always want to leave some of that flexibility. But you know what's interesting about the FED is it's that little minution detail. It's going to matter because the Fed's probably not going to do anything tomorrow. The Treasury Department, though, at eight thirty in the morning, is going to give us some information that might actually be market moving. So yeah, I mean, yesterday we heard from I guess Treasury that they need about what eight hundred billion dollars in this quarter seven hundred and seventy six billion in this quarter of of net debt rays. Effectively, that's a little bit higher than what our expectation was, a little bit lower than most expectations, and the reason is is that they want to keep this pretty big cash balance. They want to keep a cash balance of around seven hundred and fifty billion dollars. So in order to do that, with Social Security payments coming and additional additional payments for medicare as well as just just general government deficits, not to mention interest payments on the debt, they're going to have to raise, you know, quite a lot of money. Now. Interestingly, remember that seven hundred and seventy six billion dollars is what they're selling to the public. It's actually not the total debt that's being raised because there's non marketable debts, so debt from the Social Security Trust Fund and some other trust funds that are being paid down. So what you'll see is a deficit for the quarter of around half half a trillion dollars. Round five hundred billion dollars. But you'll but the actual debt that they need to raise is much more than that because of the things that we've known for thirty years. Right, the Sochi Security Trust Fund is is a is a net negative and that has to be funded out of out of general revenue. So it's it's you know, it's all the problems that we've seen over the last twenty five years, and we said we're going to be problems for the government debt are actually coming home to roost right now. So I right, I mean, nobody likes to ignore treasury auctions more than me. Will you tell me i'd have to pay attention to this. Well, they've been important, they've been market moving events. When you look at auction demand the last couple of weeks, they've they've started to slip a little on on on average. We last week, for example, we had pretty weak auctions for two year debt and five year notes, but the seven year on Thursday one. Okay, But I would say that demand is much more mixed. Prior to this past month or so, we actually had pretty decent demand at auctions people, where I think we're taking advantage of the selloff. We you know, hit five percent on ten year notes, and people had, you know, taking a little stab at maybe owning a little bit more on at auction. So, yeah, we need to see if demand is maintained, particularly since tomorrow morning with all of that seven hundred billion dollars of debt that needs to be raised, there's going to have to the government's going to have to increase the size of auctions almost across the board. So I'm looking at the two tens. That's another thing you got me looking at. Unfortunately still inverted, but you know, much less than it was before, not only about you know, twenty basis points or so are we going to get to a point where we actually have longer term yields higher than shorter term yields. Yeah, I think I think we will, and it will probably happen early next year. I think it really depends. Though. The important nuance of that is, is it because two year yields go down a lot, So do we have a weakening economy? As Ana Wog and the Bloomberg Economics team correct, And if we do have a meaningful slowdown in the economy, we could probably see two year yields go down, you know, twenty five fifty basis points and ten year yields go down less than that, and that's how you wind up getting that positively sloped yield curve. On the other side, if the if the economy stays reasonably robust, but only because we have all of this debt issuance, you could see, you know, ten year yields maybe up above five percent, up to five point two five five point three percent, and that could you know, uninvert the yield curve, And that would not surprise me at all. In fact, we actually think that we're we are in the process of completely uninverting and we do expect to see a positively slope yield curve sometime over the next twelve months. You raise an interesting point that Treasury Secretary Janet Yellen last week she said, the reason we have high yields is not to do with the debt and deficits, nothing to do with that. Look away from there, don't look there. It's because of the strength of the economy, because of Bidenomics, from the middle out, from the what is it middle out, and I can't remember, he says, he has a catchphrase that he uses bottom up and middle out. That's what it is So is that the case? And will we know from you know, the refunding how much of the rise in yields is due to you know, the high debt and deficits, and how much of it is due to the speeding economy. Yeah, these are only things that can be estimated. But our estimate is that around ninety two percent of the move from the July FED meeting to present in the tenure yield has been due to the shift in FED expectations. And so if you go and you look at what the expectation is that the market's been pricing. We were pricing for two and a half percent FED funds rate in twenty twenty five, We're now pricing for four percent in twenty twenty five. So that's a huge move, right, I talk about a one hundred and fifty basis point move up in where the FED is going to cut to or you know, where the market thinks it's going to cut to. So that had to manifest itself all throughout the treasury curve, and in particular in the longer end, because the longer end was anticipating rates to be much lower and policy rates to be much lower a few years from now, so I think, I think the debt dynamics have do have some effect, and they certainly have effect on liquidity, but I forget to just leave it there. But we appreciate that. Ira Jersey, Chief US Interest Rate Strategies for Bloomberg Intelligence. You're listening to the teenth Ken's Are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts. Caterpillar they make the big tractors and all that kind of good stuff back hose. They reported some numbers today which were in line, I guess, pretty solid. But it's all about the outlook for these long cycle industrial companies and that's what's got some investors spook here. As John mentioned, is stocks down about five percent here today. Let's break it down with the man who knows what's happening with this company, Chris Chield. You know he covers the big industrial companies for Bloomberg Intelligence. He's located down in Princeton, New Jersey, the HQ if you will of a Bloomberg Intelligence. Hey, Chris, talk to us about Caterpillar you've been calling on I know in the last a few quarters we've been speaking to you about Boy, these companies are putting up great numbers, but investors are really looking forward and they're a little bit concerned that seemed to come to fruition here today. What'd you see, Yeah, I mean to your point, I mean, the quarter was fine, actually was quite good, with better than expected margin performance and earnings. You know, pricing continues to be really strong, but what we saw was a pretty broad deterioration when it comes to their leading indicators, you know, backlog fail for the first time in three years. Implied orders also dropped sequentially in year over year, and they're fourth quarter sales outlook was somewhat kind of disappointing and below normal seasonality and consensus, and there was a fair amount of trepidation about the macro backdrop heading into the print. And I think these softer orders and backlog trends that we saw aren't necessarily encouraging and what was likely to be a softer economic environment next year and really just kind of intensify some of those concerns around the duration of the cycle. Yeah, So we saw the year on year decline of one point nine billion dollars in the backlog. What exactly does that mean? Does that mean you know exactly what I think it does that they had orders that were that much lower? I mean, how much were there was the backlog in total? Yeah, So I would say the moderation in the backlog wasn't necessarily surprised, and I think it was somewhat to be expected, just giving normalizing supply chains and some of the lead time shrinking with some of the product availability. But I think the magnitude of the decline was kind of what spook people, particularly on the order front. Orders were down about fifteen percent versus prior year and twenty percent sequentially. So I think that sheer magnitude and just the optics of But what's the magnitude of the Is a one point nine billion dollar drop a ten percent drop in the backlog? Or is it a fifty percent drop in the backlog? No, it's it's an eight and a half percent decline sequentially. So while not but it's the first time we've seen backlogs essentially peaked. This is the first time sequentially We're not talking about the year over year drop. Yeah right, Yeah, that's I could see how that was spook people. What's Kat saying about, like, which, are there any particular customer segments that are maybe weaker than expected? What are they saying about kind of where this might be coming from. Yeah, I think I'll actually maybe start on the construction side. I think that was one positive surprise, particularly in North America. North America continues to be quite resilient, and end user demand continues to be pretty strong really across their business. The energy and transportation business came in a little bit weaker than we had anticipated, and it's some there was some softness on the mining side on the top line, it seems to be some timing issues, but also there was some weakness in the aftermarket business, which was a little surprising just given the age of the fleet and utilization still remains quite high. So those bear kind of watching going forward here. So it give us a sense of a cycle here for like a Caterpillar. I mean, you said, this is the first time in three years they've had down order. Sequentially, that sounds like a pretty good cycle, But is it our downcycles similarly like in length? No, as much as we like to think every cycle is the same, they tend to be different. And I would say, you know, even though backlog had peaked here, you know, we are still at historically very elevated levels and there is really above average production visibility as we look forward to next year. But the optics are I mean, you have a really a cyclical company with declining orders a declining backlog. It doesn't just the optic of that are not a favorable setup for the company moving into next year. How about the Inflation Reduction Act. Isn't that like lots of Caterpillar type stuff you need? So it is, And I guess one of the caveats with this cycle is it's different because we just have an immense amount of fiscal stimulus coming through the pipe, and I'd say a lot of that has really kind of yet to materialize to the financial results of a lot of these companies and as part of what's propping up the backlog here. So I think that does help provide an offset. I think some of the decline is certainly attributable to the normalizing supply chain and shrinking lead time, So maybe a little bit of an overreaction, but yeah, this will certainly provide a multi year tail wind for the company and really probably provides a little bit more of a favorable outlook for a lot of the construction machinery producers relative to some of the other machinery and markets. What are the biggest competitors and do they face a threat there? I mean, I look through all the on the r V page on the Bloomberg and I don't see anything that really stands out as you know, a household name other than maybe Mitsubishi. But you know, who are they facing off against? Yeah, so, I mean, they're the undisputed leader in the construction machinery space. When it comes to mining, it's essentially a duopoly with them in Kamatsu, and Kamatsu is a pretty significant player on the construction side as well. Everyone else tends to be subscale. They do compete with Deer also on construction. They're starting to grow their construction business, so I would expect them to be a more formidable competitor in the years to come. But really it's kat and Kamatsu. Those are the dominant forces in the market. How about geographies, Chris, particularly China. What's their exposure to China and what are they saying about China China's weak and continues to weaken really no signs of a turnaround yet. So you know, historically China has been roughly ten to ten five to ten percent of consolidated sales at Caterpillar. This year, we're going to be well below the five percent in the lowest and quite some time. Not really hearing any sort of optimism coming out of that region. And how about Europe, because I know I can see here on the p GEO page that's EAM is about twenty percent of revenue. What are they seeing out of Europe? Because I know people are concerned about that, those economies over there. Yeah, and you know that actually held up a little better than I had anticipated. We're just starting to hear this earning season from a number of number of other machinery producers that there had been some weakening and the sentiment over in Europe and even some softer orders. Didn't really get that coming out of cat and some of their retail sales trends didn't seem to suggest a significant deterioration there yet. So again another item worth kind of monitoring moving forward. We just saw the Eurostat growth figures, by the way, Paul, so the European economy contracted zero point one percent in the third quarter, and we were looking for just a segnation, So it's getting smaller there. I guess consumer prices are coming down, which is good. They got a two handle on them, two point nine percent in October. Okay, yeah, hey, Chris, just looking ahead a little bit. My good friends at John Dear the nice Green Tractors are reporting in a few weeks here, and you know, I always load to look at the Deer results because it gives you a great handle on kind of how the state of the farmer out there, how are things at Deer. So I think Deer is going to have a more challenging setup into twenty twenty four relative to Cat. We think the egg market is already peaked, so we're kind of anticipating mid digit volume declines next year. Now, remember Deer, we'll report their fiscal four Q results later in November, so they'll provide the kind of first look at twenty twenty four. But we're certainly expecting a lower volume market. On the ag side, we're coming off a number of strong years, but you're starting to see commodity prices. Is a rural crowd often quite a bit farmer income is going to be down twenty five percent this year, so really i'd say a less favorable outlook on the ag side in twenty twenty four and the farmer. I mean, when the farmer has cash, he or she goes out and buys tractors and stuff like that. But it's it's a cyclical business, so the flip side is true. Right, Yeah, any the magnitudeers sound pretty draconian, but I think we'll still be, you know, second or third highest all time in terms of that farm income. So we'll be down from a peak in twenty twenty two. It's still going to be historically strong. But I would just expect farmers to dial back some of the spending just given what's going on with some of the farm fundamentals and again the weaker crop prices that we've seen. All right, great stuff, I'm just gonna deer right now in the stocks off about fifteen percent year to date, so there's the market discounting good twelve to eighteen months in the future. On that name, Chris Chierlino, we always appreciate getting a few minutes of his time. He's the industrials analysts at Bloomberg Intelligence. You're listening to the tape. Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. Looking at Ingo that is the Bloomberg Index browser kind of gives you the performance your day, month to day of all the big indexes out there, and for the fixed income space in the US it is red with one exception, US corporate high yield up four point three eight percent. Why is that? Let's check out with our next guest, Ken Monaghan, co director of high Yield at a Mundi US. He's based in Durham, North Carolina, but up here in New York. Ken twenty twenty two, as we've talked about before, was the mother of all disasters for fixed income investors. This year is not much better through the first you know, nine ten months. What's going on in the corporate high yield mark? Why is that showing some positive returns? You're right, Paul, I think it's been a reasonable year considering how bad we've had in the past, it's a decent year, and it's a year where risk is outperformed. Now. October thus far has been miserable for risk. But if you're looking at the year to date, we see the triple C credits are up, you know, really threefold what double b's are. So we've had a fair amount of spread compression. So but I mean, everybody's been telling Matt and I that we're going to have a recession any day now. If that's the case, why are people taking incremental risk that they need to that they do when they tie the threads. I mean, if you're paying me, I get it. But if you're not paying me, why am I buying it? Well, if you look at spreads where they are right now, arguably they're only at the five and ten year averages, so they're not looking particularly cheap. On the other hand, that the economy has done pretty well, and I think that that's really what's been driving spreads is you know, we'd all been waiting or expecting a a recession, whether it was in the later half of the back early part of the first half of the year, or then the back half of this year, and then people are forecasting it for early twenty twenty four, and thus far the economy continue to power through, and I think that's what's been driving spreads. But aren't you worried that defaults are going to start to pick up? Well, interestingly enough, if you look at the Moody's estimates, they're expecting defaults will peak sometime or the spring of next year, but at a fairly reasonable rate. But let's remember when Moody's puts out its number is it is an unweighted number, So they count one hundred million dollars default the same way they count a billion dollar default. If you look at it on an adjusted basis, where they're using waitings based on the amount of debt outstanding. The default rate for this year is still running under two percent. Now they're expecting the default rate to rise into the mid to high fours. But that's a pretty big differential. So what it tells us is the companies that are getting into more difficulty tend to be smaller companies rather than larger ones. At this point, it's a new issue market. Like I used to love throwing out some high yield from my clients back in the day because I love the media, cable paper what's the what's the new issue market like these days? It's pretty soft right now. Not surprisingly, I think we had a pretty robust calendar coming into September and that there were a number of companies that had financings, whether it was M and A related or LBO related that needed to get done, and they got those done. But since then, obviously, treasuries have risen fairly dramatically, and then on the back of the fifty beeps treasury move we've had in the last four or five weeks, we've had about a seventy five basis point widening of high yield. So I think companies have taken a step back and said, let's wait a minute here, let's hope that spreads get tighter, or hope the treasury rates come down and moderate, and we'll find a better financing opportunity. Now, the problem with that, from our perspective is if you wait too long and we are right and we do see more of an economic slowdown in twenty twenty four, which is what our expectation is, that would imply, as you're suggesting, that spreads ought to be wider, not tighter, And if spreads are not wider, then the FEDS likely to keep its foot on their break pretty hard, because that says the economy is powering along too strongly and they're going to have to react or else you're playing along too much. You need to get a little bit more vigilante, don't you know? What can you do? By the way, in terms of, you know, pivoting your strategy, you can't. Can you go up in quality if you're a co director of high Year, Sure, yeah, and we've been doing a fair amount of that, and I think then the other thing you do is you go into sectors where you have a greater degree of certainty. So you know, we look at affluent consumers are still spending. Cruise ship companies happen to be doing extremely well, and actually if you look at their bookings through twenty twenty four, they're solidly booked. You know, we've seen some softness in the airline space, but the cruise ships happen to be different. You know, even if you're looking at something like homebuilders, you would say to yourself, well, how could homebuilders be doing well in this kind of environment? Well, right now, you know, secondary or home sales have dried up because anyone that's got a three and a half percent mortgage or four percent mortgage, isn't going to sell their house and buy something new unless they absolutely have to because they're moving, for example, to a whole other state. So the only game in town right now is buying a new house. And the margins on the home building industry over the last several years have accelerated in a significant way, so they've got room to play around and offer extra financing support for the first two or three years. They can bring down the quality or going to put carpeting in instead of hardwood floors. They've got room to maneuver. But the homebuilders are actually doing quite well. How about the cable slash telecom space, big big issues in the high healed space historically. How about those you guys have exposure there and what do you like or don't we? We do? We do? You know? The cable sector. You know, if we look back and you look at some of the names in the space on the equity side, over the last couple of years, they've been under pressure ye big time. And I think that that's reflecting a couple of things. And one is the competitiveness of wireless alternatives yep. And then there was. Cord cutting is obviously going on, but I think we've seen some changes in the last several months. They always pay their interest in principle, though, they are always paying their interest in principle, and I think, you know, think about how many of us are still working from home, at least part time, maybe not in the office every day of the week, and those people need that average office professional in Durham, North Carolina, what are they doing how many days a week back in the office. I'm going to say we're in at least three days a week, and I'm going to say that's what most people are doing. That's the new normal, man. Yeah, no, I know it's the real world. That's what the real people are doing. Well. I think bosses are trying to change that, but employees are fighting back. Yeah, we just need a good recession, all right, real quick, What do you expect from your Federal Reserve tomorrow? I think it's going to be a quiet day from the Fed. I think that there's you know, there's reasons why they may go the other way and raise rates, but I don't think that that's in the cards right now. I think we're in a holding pattern all right. Again, Looking at the then function of Bloomberg Index Browser, US mortgage backed securities, US aggregate, US government credit, US Treasury, US universal all down two three four percent year to date. The one exception, US corporate high Yield a positive four point three eight percent return. But as you mentioned, Ken, on the month, down one point four percent of all the bonds. If you look at JNK or HyG, they're not doing that great. Yeah, yeah, so interesting stuff there, but positive for the year, not positive for the year. And on Friday we'll talk with Joe Meisek talked about the immunis bond market. I'm very much looking forward up to that. Ken Monahan, thank you so much for joining us. Ken Monahan, co director of High Yield for a Mundi US based in Durham, North Carolina. You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app, and the Bloomberg Business App, or listen on demand wherever you get your podcasts. We're right smack in the middle of earnings, Marcus digesting them on a daily basis. Got some some more earnings after the close today AMD then of course Apple after the close, we want to go across the pond and see how things are over in Europe with earnings, with markets, where's the performance, where's the risk? And we do that with one Tim Craig at He is a director of research and he's also a senior European strategist for Bloomberg Intelligence, joining us from Queen Victoria Street, the global European global headquarters of Bloomberg and it is the smoking hot building, just crazy the building over there. Hey, Tim, thanks so much for joining us here, give us the headlines. Just step back thirty thousand feet for our listeners and viewers, or maybe aren't really up to date on how the European markets have been performing this year. Yeah, well, we have been behind the US from the standpoint of market performance. We don't have the big tech that's driven the S and P five hundred back up over the course of into autumn. That said, we also don't have the big tech that's been under pressure since the July August peaks. And so while the US has certainly taken a pumbling and we've sold off, we've not sold off as much. So that's sort of the quick synopsis. So we've taken a pumbling, you've sold off, but not as much. Today. We learn though that your third quarter showed a contraction in growth and we were growing five percent. Buddy, Hey, there you go. No, I mean, you know, obviously backward looking isn't what matters. And as Caterpillar I think proves today people really care about the outlook. As if we didn't know that already. How is the outlook for European earnings compared to US earnings? So, Matt, I think it's really interesting thinking about the ernience picture, you know, again, the compared and contrast. You know, the US went through a few quarters of Ernien's contraction while Europe was still gaining a lot of that. Ernians contraction in the US was big tech oriented, and what we're feeling now in Europe and we will see in earnings decline again this quarter, is actually a lagging impact of the decline that we've seen in things like energy and metals prices, which are really big over here, much more so than they are in US markets. The thing I don't think either market has necessarily felt is the full impact of the spike in interest rates that we've had and how that's going to have an impact on consumer and businesses as we go into twenty twenty four, which does play into an awful lot of the earnings commentary that we're hearing through the reporting period. Just to give you a couple of numbers, we're about halfway through here in Europe, a little behind where you are where you are in the US. It sounds okay that we've got about fifty percent of the companies that have beat earnings expectations, about thirty five that have missed, But in fact that's the worst performance from the standpoint of beats versus misses that we've had since the pandemic low. So I would categorize this it's a pretty disappointing earning season. Hey, Tim, talk to us about valuation. Where are you guys over there in terms of valuation right now? Yeah, So you look at the broad European market where twelve and a half times forward earnings, it's down from a recent highs of thirteen ish, clearly far below where the US trades. You can find markets like the German Docks index that's retraced all the way to ten times forward earnings, and that's with a heavy dose of the big German auto companies that are facing increasing pricing competition and ev competition from China. So you know, it's clearly there's a value tilt from the standpoint of an absolute multiple across the European markets. But I would also say, and you know it's true from a US perspective as well, with interest rates being as high as they are, and they've certainly ratcheted up here market by market over the course of the autumn. You know, that does take a toll on what you're willing to pay in terms of market valuation. So what would seem cheap from an absolute level ten times twelve times a year ago now isn't quite so cheap on our fair value work because interest rates are simply higher. Yeah, I wonder how important China is to European earnings. And I know they haven't fully penetrated the entire continent, but when I was over there, you know, they had made their way up through Africa and straight to the tip of Italy. You know, is it a bigger driver of well, let's say, revenue growth China than it is for US companies significantly? So the recent analysis we did looking at the stock six hundred eighty of the six hundred have got overtly easy to define significant contribution. If you add it up, it's about four hundred and fifty billion in revenue. These companies aggregate to be about thirty percent of the European market in terms of index weight, So any way you want to cut it, there's a lot of companies. They're big companies, and it's a lot of revenue. And what we're seeing in the third quarter maybe no surprise given the faltering, stuttering economic growth in China is that business is also faltering a bit. They already mentioned the German autos as a case in point. Contrast that with Stillantis today, which doesn't have so much China exposure but more US exposure, and it was a little bit better. The luxury good companies have talked about weakening China economic activity, and there are several others that are showing that they're signs of weakness. Now two things other to mention on China, this was still an easy comparison for three Q. Remember they didn't open back up until October and November last year, so it's really the fourth quarter that is going to be a more difficult comparison. And on into the first quarter. Of next year, So if things are still stuttering, that business is going to be more of a challenge. And the other thing, obviously, thinking about twenty twenty four, the more pressure there is on the economy, the more likely there's going to be fiscal and monetary measures to stimulate the economy, which might all of a sudden turn this around as we look into the back half of next year, and clearly the markets will discount that. Right now, everybody's focused on current weakness that may be short lived. Hey, Tim, you travel all around the continent, all around your speaking to institutional investors. What did they want to know? I mean, what's kind of the common question, top question you get asked? Yeah, you know, Paul, I guess a couple things come to mind. It was just in an event last week in Frankfurt, And at this point it really is all about the macro outlook and what's going on with monetary policy, When is the pivot going to happen, and how much of that pivot does then translate into a reduction in things like ten year yields because it's not an immediate feed through, but that's that's crucial because the higher we are, the longer we are on interest rates, the more of an impact there is on business and consumer and you know that's a huge pressure point for the twenty twenty four outlook. All right in suburban London near your pad? What's a good pint going to cost me? A good pint when I go for Halloween today? Paul, there we go? Thank you? Is gonna be about seven pounds for a pint? Wow? Seven pounds? And do you do you do like Guinness extra cold or do you have them pull you an actual ale from one of those old school taps? Oh? I like I like the cast ales definitely. See which delicious? Best best thing is a Trappist dale though from from Belgium that that's the best beer, that's the best beer. Hey are you? Are you still avoiding the congestion tax in London by riding your bike to the office? I do. I rode this morning. See he's one of those people that I'll write, I'll ride home this afternoon. See that's smart. I'm gonna avoid the congestion charge in New York by getting a garage on sixtieth Street. Yeah, we're gonna get John Tuckerolle bike. Yeah, I'm going to ride my bike in the morning the Lincoln Tunnel in the morning. I don't think they allow bikes in Lincoln, all right, Tim, thanks so much for joining us, as I always appreciated. Tim Craig Eddy is the director of research over there in London, uh and he's a senior European strategist for Bloomberg Intelligence. Ton tons of experience in the equity markets. Morgan Stanley did a little hedge fund work, and then we nab them at Bloomberg Intelligence back in the day. You're listening to the tape. Cat's a our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. Let's take a look at these markets. Where do we go from here? With Rightsmack in the middle of earnings, people starting to think about next year, where to be positioned. Our next guest thinks about that stuff as well. Lucas to Mickey. He's a founder managing partner of LRT Capital Management. Lucas, thanks so much. For joining us here, give us just let's start off by just getting a sense of how you guys deploy capital LRT capital management kind of what's your strategy that you guys deploy. Hey, Matt, thanks for having me. Yeah, to give you a quick overview. Are really trying to focus on business quality and business resilience. So to us, quality means free things. It means some kind of durable competitive advantage. It means the ability to grow and reinvest capital at high incremental rates of return, and it means management teams that have demonstrated a good, good track record of allocating shareholder capital. All right, So looking at all those variables, what do you like? Well, I think you know, from a macro perspective, we're likely heading towards an economic slow down, if not an outright recession. And so today, you know, the theme for me is really investing in resilient companies. So the free companies that we like most today are Chemed, which is kind of an odd business. They own two businesses within it. We also love Elevans and trying it. All right, let's start with Kem here, tell me the kind of what business they're in. I'm looking at the stock here. It's it is an eight and a half billion dollar market cap company. Stock stocks up about ten percent year today. So tell us about the call there. What do they do and what's the investment call? Yeah, so Chaman is a very odd company in that they own two businesses that are completely unrelated to each other. They own Vitas, which is a hospice care provider, and Roto Router, which is a commercial and plumbing service. Yeah, I don't see the connection, but go on, No, there's no connection on the surface, but the real connection is that these are very resilient businesses from macroeconomic perspective. So Vitas or Vitas provides end of life care effectively, and Medicare of course is the largest customer. And so for most people, you know, the statistics say you're spending somewhere between twenty five to thirty percent of your entire life's healthcare cost just in the last few months. You know, when you're effectively dying in the hospital, get very expensive care, very expensive treatment, and that's a very big cost for Medicare. And frankly, you know, not everyone sees the benefits of that. So many people opt for hospice care, which is effectively palliative care where you end treatment and you're just receiving medication to manage pain and you know, improve your comfort of life. And obviously that saves costs, and frankly, you know a lot of people see that as a more dignified way to go. And you know, just just looking at this, Lucas, you just don't see many corporate structures like this anymore, just pure holding companies, particularly the ones that that own just two businesses. What kind of attracted you to the company? Well, I followed it for a long time, and I don't think I'm the only one. But what frankly attracted me to their company is up until a few years ago, their website looked like it was straight from the nineteen nineties. And that might sound counterintuitive, but that that was to me very odd signal that this is a company that's really focused on business operations and not promoting things. And so generally speaking, we like non promotional, you know, down to earth kind of management teams. And it's up, yeah, eighty seven percent over the past five years, of ten percent this year, eighty seven percent of the past five years total return. It's done well. The roto Router business also you know, these are two businesses that people are never going to not need. If I can split my infinitive just to make the point, and I get that, do they spin off at some point one or the other? Do they break into two? Do you think? I think that's long been a theme and the thinking, I frankly don't have a problem with the business the way it is. They have opportunities to deploy capital, primarily in the roto router business by buying out franchisees from some of their territories, and then they have opportunities to buy back stock and the shares you know, are trading down, and as you mentioned, the stock is up a little bit this year, but that's largely happened last week on the back of good earnings. So you know, you're gonna have ups and downs, but it's a very resilient business. They've grown about four percent per year in terms of revenue, but they managed to translate that into a fourteen percent EPs growth over the same you know, last ten years or so. All right, how about E l V. Elevans Health another healthcare name. Yeah, so this is Elevants. This is the former Anthem insurance business. You know, so you may have sort of them. They rebranded themselves. We love the industry, broadly speaking, the health insurance industry. It's a very consolidated business. There's five players that command the majority of the market, a couple of smaller ones. And you know this is this company is called a health insurance company, but that's really a misnomer. Only about ten percent of what they do is tied to carrying risk. The majority of their business is managed care for the government, manage Medicare, Medicaid, and corporate accounts in which companies self insure, and so there's very little insurance risk in this space. It's really a health administrator, if you will. And it's so regulated that they're frankly not allowed to even you know, the amount of profit they're allowed to make is regulated as well. And you see that between all the companies there's very limited competition. And call it GDP plus growth largely tied to the growth and healthcare costs. Yeah, we get that one. Let's get to t neet try net. It's also kind of an employee benefits company, right, Yeah, so this is slightly different. It's a very small company, about a five billion market cap. So this is a company that serves and medium sized businesses that are looking to get employee benefits. And employee benefits may mean many things, primarily HR health insurance, disability insurance, etc. But in practice ninety percent of what drives their business is health insurance. So what they do is they effectively get a bunch of small employee or employers with small employee numbers. They get them together and using their bulk purchasing power, acquire health insurance at better rates, pass the savings onto their customers, and keep, of course a small part of those savings for themselves. Hey, Lucas, thanks so much for joining us. Appreciate listening to some of your thoughts there on the stocks that you guys own. Some pretty interesting names, some good performers. Lucas Tomickey. He's a founder and managing partner of LRT Capital Management. One of those folks is putting money to work. Who, as Tom Keen would say, has the courage to be in the market. SMP five hundred pretty much unchanged on the day nasdak off about three tenths of one percent, but at the index level, not a lot happening there, of course, a lot of movement under the surface there's company's report earnings for the next week or so. In size you're listening to the tape Cat's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty. Claudi Assam is the founder of Some Consulting. She is obviously a former Federal Reserve economist. We'd love to talk to her both here and on Bloomberg Surveillance. She is also the creator of the Sam Rule, which is a recession indicator, and a Dennison University graduate. So the Dutches, you guys, are the fight. I'm from Grandville, Ohio, so you know, for me, that's a big deal, and it's a Dennison fighting. They're the big read I think they read all. It's not really a sports thing, but more of a fun school. It was a fun school then it became a very serious school in the nineties when I was living there, although I did see fish there which was pretty awesome. Claudia joins us to talk about the economy obviously, and not her college experience. And you also wear a column Claudia about Americans basically, you know, trying to answer the question that we're asking every day, which is why are the numbers so good? And Americans feel like the economy is so bad? You know, five percent GDP and yet everyone says a recessions around the corner, how's that going to happen? Right? And to be clear, there's a lot of reasons to be gloomy. Inflation is high, there's a lot of uncertainty. The question is why are the extra gloominess right? And things are as you said, there are a lot of good things. Unemployment is low, it's been low for almost two years, under four percent, Like that's really good. And if you ask people how's it going? What kind of news have you heard about? The economy is as bleak as when you go back to the nineteen seventies and early eighties. Right, it's very hard to say, oh, that totally makes sense. There's these bad things happening in the economy. Is that extra kick? And frankly, that's the piece we want to understand because it could really be telling us something bad is around the corner. People have been doing that for two years and then it's like, Okay, what else is going on here? Well, we can't underplay the importance of inflation to a normal American who is living paycheck to paycheck anyway. You know, economists love to look at core inflation measures, which take out all the stuff that we spend our paycheck on. Right food is expensive right now, cars are incredibly expensive. Plus financing has climbed. Houses are even not even you don't want to talk about because that's not even affordable if you can find one. So is that the main price problem that Americans have. Inflation has always been something that people would get riled up, but rightly so right and the price tags are legitimately higher and they're not coming down. What we've seen this year is it's slowing down. Inflation is coming down. That is a form of relief and that it could have been a lot worse. And there's lots of different pieces of good news that don't come up. We found out last week that household net worths for the typical family jump thirty seven percent pre pandemic to last year, and that was across income groups, demographic groups. You just saw these big increases, and that matters. Living paycheck to paycheck has been a problem in the US economy for decades. Many people have bigger paychecks, and there's a lot of people who have a little bit of a buffer that have never had it. So it's tough to see all those pieces come together and then have this absolutely bleak outlook for the economy. Well, Claudia, how much of it is the income inequality? Wealth inequality in this country where you know, the top ten percent are doing fine, actually better than fine, but the rest are really struggling with inflation, you know that that type of thing. How much is that to kind of account for it? This is the rarest of post recession periods in that we've seen often the bottom do better than they have coming out of any recession. I mean, the top's always going to be fine, right, Wealth inequality. Income inequality has been a problem in the United States for decades and decades. We actually saw some compression of that inequality, so it's shrinking some. I mean you can't hardly see it on the graph, right, it's it's you know, it's still big, So that inequality is out there. People tend to focus on what's in front of them, like what they need to do to put food on the table, roof over their head, and there are some service If you ask people about their own finances, they're more upbeat than when they look out at the economy. And so that's why in my I've written two pieces now at Bloomberg about this extra pessimism, trying to explore what it could be, and often it points to things that go beyond the economy, because we're asking people big picture about their outlook and there are other factors at play. We went through COVID and the war in Ukraine is ongoing. We've had so much bad news since the pandemic began, and then we do have features of how we transmit that bad news out into the public, and that's something that's different than the nineteen seventies. Yes, social media is what you're I assume what you're talking about here, and I think we all know now that the way for Elon Musk and Mark Zuckerberg to make money is for people to get angry and hateful on social media. That drives engagement and at the end of the day, the bottom line. So it kind of amplifies everything that's bad doesn't it right, And we've always had the case that bad defense happen. The news comes out, it has a bias towards the bad. There's research news organizations, right, it's more negative that leads, it leads, right, So this is not new. But what happens is once it gets on platforms, social media platforms, it can spread far and wide and really fast. So it makes this bad news very personal because it can be conveyed by real people and not necessarily you know, print media or you know, on the TV. And it absolutely is the case that not only does negative spread faster, it gets absorbed fast. Like we're just there's a human tendency towards the negative. So it's like you put these three factors together, really bad events. News has a bias towards the negative. People love the negative, and then we can spread it really fast. So that's one way to think about it that you could get this extra kick. But absolutely we talked about a lot of economic factors that may not be captured and maybe different in the past that could be in there too. So it's really important to kind of pull this apart and figure out what's going on, because if people are really down beat, it can create a self fulfilling prophecy in that they pull back and they get more downbeat, and then before we know it, we're in a recession. So, like, this is an important question. People could be right. I mean, we could really be in a bad place in the next year or two. Well, and a lot of times when we get into a bad place, our leaders will hopefully come together and pull us out of it. And currently doesn't look like that's a possibility in this climate in Washington, with you know, the the lack of any kind of bipartisan In fact, you'll be thrown out a speaker of the House if you reach across the aisle to make a deal. And deficits continue to climb. Now the latest, uh, the latest look is about two trillion dollars. Does that affect people's outlook? I mean they say that, you say they're doing well at home, but they're gloomy about the economy. Could it be because they see, you know, the USA government train kind of running off the tracks. They're in some of these sentiment surveys they ask people about government economic policy. It probably doesn't surprise anyone that the government scores pretty low and has for some time it's not clear to me that that's changed dramatically. You see it do move in like debt ceiling moments and the path like where people get more negative. It's more of that reality, like what happens if we were to go into a recession. Typically there's this saying we're all Knesians in a fox hole. So the money would go out, like the stimulus checks have gone out. But what's what would be problem is if it were a severe recession I mean we will hopefully never see anything like COVID again, is that it wouldn't last real long, and that ends up hurting people at the bottom the most right because they probably aren't recovered right away. So a government that doesn't have it all together will cause problems for people. Real people are going to suffer in the case of an economy going down. So where are you right now, Claude with with your economic outlook? It's tough. I wrote some on my substack last week, you know, really like we got to celebrate the winds here. We've saen inflation come down pretty notably, whether you're looking at core or yeah. I mean I tried to like, hey, there's some good stuff out here. Knowing that this wasn't going to amplify through social media. It's kind of hopeless. But there are plenty of dark clouds on the horizon. Interest rates are they've gone up a lot, and you are starting to see it. And when you ask businesses with their investment plans in some of the consumer credit quality measures, like the delinquencies they fell during after the pandemic, because again, we gave people so much relief, they're moving up and we could be moving back to quote unquote normal or there's just a certain level or this could be a sign that it's getting like people are in a more precarious place. And yet, like we've been kind of saying that at different times over the last two years. Right, the recession is always coming and it will someday, Like we don't escape these over the long term, but it's things have been better than we thought or people were saying or businesses were saying, so we we could still balance it out, moderate some things and keep going. But it's not it's not what should happen, right, What should happen is that we go into a recession. That's not my base case, but I know that's the reality of everything that's lined up all right, Claudia, Thanks so much, Je for joining us. I just appreciate getting a few minutes of your time, Claudia, Sam founder and independent economists at some consulting. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three. And I'm fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio. See omnystudio.com/listener for privacy information.