'Bloomberg The Open' Full Show (12/20//2022)
Live from New York City this morning. Good morning. Good morning. Four day losing streak on the S&P 500 down 5 percent over those four days. Cameras snapped that. The countdown to the open starts right now. Everything you need to get set for the start of us trading.
This is Bloomberg, the open with Jonathan Ferro. Live from New York. We begin with a big issue, another central bank's surprise, Governor Kuroda shifting that the O'Jays cap on yields, government bonds drop and the yen surges as the widow maker finally delivers the shot. Shocked by the moves overnight, Japan tend to like surprises. No, no, no, no. And then, bang. Here we go.
You get the move. The genie is out of bodily. Genie is out of bottle. This is the first step of many very sharp reaction in the market and could lead to real shocks day after day and week after week. Upward pressure across the board. We're seeing these yield rises. The pressure on Treasury yields is going to be higher. We're looking for 4 percent in this case. People might risk reading a little bit
too much into it. Yields will need to rise in Q1. Every central bank around the world is really adding developed market volatility. We're on the pathway to normalization and the market is going to be pretty volatile as we that on their part. It's a tough, tough road to travel. Investors tremendous reaction to that story overnight. If we can't get down to the opening band, I'm really pleased to say that joining us around the table is Mohammed Al Shery Ahn of Queens College, Cambridge, and of course, a blend like opinion. Mohammed.
Good morning. It's finally happened. It is the start of a process. Yes, it is. Finally. You want about it back in October in a column in the Financial Times. I believe it was right at the very end of October. You said this looms large over the
market. We have a new range, a new band for the BMJ, the upper range. The upper limit of that band is now point five. We haven't tested that today. For me, this hasn't had the reaction I thought it would have in global markets.
You think this is what would take place based on what you've seen so far? Yes. Look, what they're trying to do is an orderly, slow exit from an unsustainable monetary policy regime. Now, they can't say that, but that's what they're trying to do. So they did two things today that were quite smart. First, they increased QE. They're basically telling you, if you
want to test the 50 basis points, come to me and I can absorb as many bonds as you want to sell. So the first thing they're trying to do is no immediate testing of the ceiling. Second, they've chosen a low liquidity period to do this again. Pretty smart. Now, the good news for them is I think they can control the process. That's actually good news for global markets because it doesn't force selling by Japanese institutions. However, over time, even this approach
becomes unsustainable. There's a ton we need to work through. The question I was asked all morning and you've heard me ask it. So let me ask it to you. Do you believe this is a step towards normalization or is just to be OJ? And that's what they're trying to signal communicate this morning, basically resetting policy on a more sustainable path. They're very different things.
Which one is it? It's absolutely the former. There's no doubt in my mind that this is a step towards normalization, but they're trying to make it a weekly long process as unexciting as possible so that it doesn't force selling forced by Japanese institutions. That's the big risk. And they've learned it from what happened in the U.K.. They've seen what happens in the U.K. When you shock the government bond market, when people have already optimize a low yielding environment, they don't want this to happen.
So, yes, this is the beginning of the process. The genie is out of the bottle, whatever you want to call it. Right. You've heard that phrase all day, but it's going to be they're going to attempt a very slow process.
I've heard pretty much everyone said the same thing on this. And it's interesting to me because the firms that were short, the JCB market looking for this move, they're still short. You hear that from Schroders. So to say the market will now pressure to be okay, we're adding to our short position in building opposition in the end. This has more legs. We're on it. Blue Bay said the same thing on Bloomberg TV this morning, although it's a small shift in the band.
The genie is out of the bottle. There it is again. We will stick with our short JCP possessions for the moment. Can you walk me through how you think this plays out from here? Is this a market, the test, the limit of the Alpha Band or respects it and waits for the next move? How do you think this plays out? So I think in the very short term, it respects it.
But there's a problem drawn, which is that they are breaking the government bond market. So the notion of taking on more and more GDP on the balance sheet is not a sustainable notion at all. Already they own, as you know, a very high percentage of their government bond issuance, and that wakes one of the most critical markets in your ecosystem. So over the short term, I think that they can withstand testing. But over the long term, they're going to exit and they're going to there's a risk of a disorderly exit. Well, let's talk about what a disorderly exit looks like. What do you think that looks like?
How does that play out when you say it's breaking? What does that actually look like? So think of a system that has optimized very, very low yields forever and you start shocking it by higher yields. So how do you optimize the low yield? You basically lever some other risk factor in the U.K., the pension system levered the interest rate. Indeed, Japan. They have levered foreign credit. So if you look at ownership of all sorts of foreign securities, high ownership in Japan. So what everybody is worried about is the forced selling by Japanese institutions as they have to cut back on some. Because the KGB side of the trade is
losing money, go on. So. So I think this is what you have to look at and you have to understand what they're holding. And you have to understand the contagion. But it's not going to play out quickly. It's going to play out all the time. There is a phrase that used in your
piece in late October. What happens in Japan stays in Japan. And I want to read out the quote for the audience at home that may not have read that piece. Japan's influence on the global economy and markets gradually declined. What happens in Japan stays and Japan became the mantra for many. But this could change if the Japanese authorities do not prepare well for what increasingly looks like an inevitable exit from its yield curve. Control policy now yield curve control stakes, but it shifts what happens in Japan, stays in Japan.
I can already hear you pushing back against that. So this year we've had 200 basis point plus move on a US 10 year German 10 year UK 10 year before today. The Japanese 10 years been totally unchanged. Do I think of this as the Japanese 10 year playing catch up or is that Japanese move push those others as well? Both. So you think of it as Japanese playing
partial catch up. They're not going to move to on a basis points their economy in a completely different place compared to the US in particular, but it is going to push other yields higher. And that's a problem for the marketplace.
We had a very orderly process. We thought this year about interest rate risk. We'd get it out of the way. The Fed catches up. The ECB catch up and now we can get rid of interest rate risk. And next year will be about credit risk,
about recession. What we're now learning is interest rate risk is not out of the way at all. And now we have to look at next year and navigating both interest rate risk and credit risk. And that is why markets have been so jittery over the last few days. Let's talk about 2023 and the interest rate risk that still exists. I've got the greatest quote this morning, and I can't share with you who it came from because they won't allow me to.
But I'm happy to share the quote. This individual said to me over the Bloomberg terminal to me, the OJ move whenever it came and it happens to be today marks the end of the free money trade. The VHA went first in its the last out. My initial reaction to those words is okay, but does it stick? Is this something we accept from and live in a brand new world and stay there for a while? Or is that we just gone all the way back to where we came from? Pre pandemic? What is it? We are not going back to where we came from.
We're not going back to where we came from for many reasons. One was the unintended consequences of a ridiculous regime of very low interest rates and infinite QE. So we're not going there. Inflation is not going to come down in an orderly fashion. We're going to get sticky inflation when we get to 4 percent. That's going to be a major decision to be made by society as to what to do next. So, no, we are not going to the old
regime. We are exiting one regime and entering another regime of money being priced more appropriately. The House of Wells Fargo talked about the last mile from 5 percent down towards 2 percent. But making this move from close to
double digits to 7 back to 5, they feel like he heard or was disinflation here. But Michael Barr JP Morgan said something interesting recently. I'd love to get your response to it. He said it's the recent disinflation
transitory. Do we get down to like five? And then we were sitting there staring at that final mile and realizing how tough it is to get back down to. Is that how you see this playing out? Yeah, I don't know if it's five, but but certainly four. So. So you've gotta understand the inflation transition. It started out as very concentrated in energy and food. Then it shifted to the goods sector.
At that point, the central banks could have controlled it, but they didn't. They were late. So now it's gone into the service sector. So two things happen. One is the goods sector. This inflates for now, but that's going to stop at a certain point. Meanwhile, service inflation is much
more stick. It is much less sensitive to interest rates. So what you get is that this disinflation is in fact, transitory. His right.
And then the service and wage inflation becomes an issue. That is the transition we're looking at next year. And that suggests that we're going to get stuck at around 4 percent. So if it says mission incomplete projects 5 percent, Fed funds market, same rate cuts. Which one do we get? Yeah. And that's that's the big, big question
mark. And that goes to the recession call. Do you believe the recession will be short and shallow? If you believe the short and shallow, then you would opt for the Fed 5 percent. If you believe that when if we fall into recession, which we're likely to be, it will not be short and shallow, then the marketplace is more correct than that. We're going to see a change in the interest rate regime. It all comes down to your second call. What are you leaning into? I don't know. Just like I warned against people saying inflation was transitory.
I warn against people immediately saying, oh, if we enter recession, be short in trouble. We have to understand the behavioral aspects of this. If I deliver bad news to you, the very first thing you'll do is try to reframe it as good news.
So last year it was inflation is going to be a problem. No, don't worry. It's transitory. Now people are saying recession. Gonna be an issue. The answer is, don't worry, you're gonna be. Shall we all know there's lots of open questions. We simply don't know what a recession will look like.
So in February, the feds got to set policy. They don't know either. What's the optimal policy response given you don't have a clue either. What next year looks like. So they've got to get inflation under control. I mean, they have no choice. They will be collateral damage.
There will be undue undue damage to the well-being of society because they are so late. But I agree with Trev Paul that the risk of not doing enough exceeds the risk of doing what you need to do. Do you think he still believes that? I do, because I've got a sense that that balance of risk for him is shifted in the last couple of times he spoke.
Do you still think that the risks of that asymmetric into next year? Do I think. Yes. I think the Fed thinks that, yes, when you have 17 out of 19 FOMC participants predicting a Fed funds rate of over 5 percent. Yeah, that that has a lot of information content. We've got to talk about the price we're going to pay for this. You mentioned some of the pain. Chairmen have warned about it at the end
of August. Neil Ferguson wrote a piece on Bloomberg opinion and I'll say this so you don't have to. But Neil's pieces are like two hours longer.
Got through it. And there was an interesting line in there from Neil. There always is one. The second fastest hiking cycle since World War. The prices that we can have to pay for that both on the market side and the economic side. Can we start the markets first? I'm struggling to get my hands around the idea that you can have 400 basis points of tightening in nine months. And the price we're going pay for
blowing up a decade of loose policy is 20 percent on the S&P, just 20 percent on the S&P. And that simply we move on. Things get better next year. Do you believe that that's the price that we going to pay for a tightening cycle this fast? This quick? So first, as an investor, you've paid more than that. You've paid your loss on your risk assets. You've paid a complete erosion of any risk mitigation in a diversified portfolio.
That is big John. The fact that there was nowhere to hide for a whole year, that's a big issue. And then you've also had unsettled volatility, unsettling volatility, which makes people do silly things. So it's not just returns as it returns correlation and volatility that have hit you in a big way. Is it done?
No, it's not. That's why I'm saying, you know, the hope had been that interest rate risk would be behind us. But we are paying for the consequence that we're paying the consequences of the Fed being late. The front loaded interest rate cycle is a big deal. You cannot shock the system. With such front loaded rate hikes without collateral damage. Just remember that you gonna stick with
us for the hour? I am. This is good. You get to read a couple of teases along the way as well. I'm looking forward to that. Coming up, why Morgan Stanley thinks we're about to confront real profit paying. The spread between our forecast now and what the consensus is modeling for next year is as wide as we have seen since the summer of 0 8. We're looking for an earnings recession.
That conversation. Up next, where J.P. Morgan's Jack Cafferty might Schumacher of Wells Fargo and the wonderful the brilliant Mohammed al area. The spread between hard work has now and what the consensus is mainly for next year is as wide as we've seen since the summer of 0 8. We're looking for an early recession and we're just putting this warning out for folks to sue. The market is never good. The market typically doesn't know these types of marriage declines before they have been the thirty three thousand thirty three hundred range and we think that's still up. And I would say that we now believe we can get the lower end of that past. Morgan Stanley saying earnings pain
ahead, warning of a potential decline back down to 3000 on the S&P 500. Strategist taking that position for next year. The media year end target for the S&P 500, 40, 75, less than 300 points away from current levels. Joining us now to discuss is JP Morgan's Jack Caffrey, alongside Mike Schumacher of Wells Fargo and Mohamed El-Erian are with us around a table here in New York. Jack, I wanna go first to you.
Can you envision a scenario that sees a lower 3000 on the S&P early next year? I can. It tends to be a nightmare. 2:00 in the morning and I wake up screaming, but you know, ultimately this comes down to where I think part of the issue that you get there is we do need to find something new and shocking. I don't have enough fixed income experience to know if one Bank of Japan is doing to us this morning qualifies in that new and shocking. But it does involve, in all likelihood, some sort of substantial disruptive issue. And I would think it comes out of what has historically been perceived as a safe asset. So I'll come back to government bonds
behaving like they're not a safe asset, A, and then B, a potential push through inflation that becomes perceived as on controls. Well, Mike Wilson felt a massive earnings warning in there as well. So you've got an earnings warning and couple it with this, Jack. This from Mike Schumacher. From Mike, I don't know if Jack's going to find this shocking, but I want your view on why you got here. The 10 year real yo, do you see back at 175 in three months? Mike, you go on to say that nominal yields on a two year get back to the high for us on a 10 year, get back to 425.
My share, Mike, how do we get that? Made some progress that way today, John. So the Bank of Japan helped out joining the party perhaps a little bit late. And the other way to get there is an inflation comes down. I think we'd all accept that, but remains fairly sticky. You know, Mohamed had a great discussion about equilibrium rates.
They turned out to be three and a quarter, 350 or 275 in the US at last mile that Sarah has referred to is critical. And if it turns out to be three plus, the Fed's got a lot more work to do that pushes up real yields across the curve and sends the 10 year skyward. So, Mike, add to that your growth outlook.
What do you think growth looks like next year for the U.S.? Every country, Mohamed is in a mild recession camp and it's a consensus. It's a little too comfortable, I think, for a lot of people. So I have concerns about that. And I think that the thing we've all
learned this year is humility is the order of the day. So I like to think of it in terms of a risk management type of scenario. Is there a chance the U.S. escapes pretty well in the rest of the world? Does, I suppose, deserve a decent chance, also a tail risk that it's much more severe? Yes. And I think the tail risk is going to
drive markets. Mohammed, you've talked about that humidity, the name Frank, and it said 2023. It's been the lesson of the last couple of years, hasn't it? Oh, absolutely. I think we've understood that there's many potential outcomes. Which takes me to Jack. Jack, the last thing I want you to do is to wake up at 3:00 in the morning.
But when you hear Mike, don't you worry that you will be waking up at 3:00 in the morning. Why is Mike wrong? I don't know that Mike is wrong. I would say in my career, 30 years of trying to earn the spray hair in most of my life, the first 20 years of that long interest rates for similar to nominal GDP. And even in that scenario, Mike's interest rate forecast for the tenure looks relatively low against a certainly a shallow referred inflation.
Certainly when I look at the equity market, you are seeing some interesting toggles between how traders are trying to position for their recession call. Look at the relative weakness of bank stocks versus the relative strength of homebuilding stocks. When you do see certainly very bombed out sectors, stocks that are trading at three times earnings and 75, 80 percent of book value, you start asking, you know, is this cheap enough? Does this reflect enough? You look at banks, they look cheap ish. But there's a question of what do credit losses look like? And unfortunately, we're probably in a corporate quiet period for the next two to three weeks. Actually, probably the next month before we actually get some real commentary out of companies what their year looks like, not their quarter. And I think investors will probably get
a set of equity. Investors love Saddam pins, needles to get some better calibration of what that earnings risk might look like, Jack. That's why they know it since it's so important to so many people, because we have January 6, which is payrolls, the 12th CPI, then the banks kick things off on a 13th DAX. You get the feeling we get that kitchen
sink moment that my voice and is looking for. Is that kitchen sink moment going to be to late next year? Equity investors generally prefer the kitchen sink. And then they can say, OK, we're done. It's it's it's for us to look through. I do think that we're gonna have I'm going you know, we think you valuation pressure. There's what is the what's the E?
And then what's the P? You want to put on money. And I think that's the question where equity investors have certainly preferred. Kitchen sinking results. Is a long history of it. The challenge, though, is we're much better as a group of human investors when you get one kitchen sink, not five or six companies kitchen sink on the same day.
And I think that's where the front loaded nature of a earnings beat bank earnings being relatively earning will make the earnings season very interesting. And that gets you that setup that I think many strategists are calling for, which is, you know, a three to four hundred point gain from here. But there's a general view that there's a lot of hate in that first quarter, if not first half of the year. Anything like also puts itself in that category as well. Mike, can can drag sleep better because it's not just about absolutes, but it's also about Wellington. And when you look at the U.S., we are
the cleanest dirty shirt around the world. We don't have this DAX and we pressures DAX Europe is going to face. We don't have the complicated exit from 0 Covid that China has, the exit that form yoke of controls that Japan has. So if you look in relative terms, the U.S. looks more attractive and that avoids Jack having to wake up at 3:00 in the morning. What do you say to that? It's a fair point, Mohammed, but it's interesting when you think about the market reaction after the ECB, Christine Lagarde was awfully hawkish. It sent shockwaves through both verbal
markets for sure, certainly into the US that tells where the US is not insulated. So, yes, it may be the cleanest dirty shirt is probably a good metaphor, but it doesn't necessarily mean it's a shirt you want to put on right now. I think that probably has to go through the rent cycle a couple more times, maybe a way to March or April, something like that, and then get more comfortable.
So it's too soon for that. It might happen. Mike, amazing kills my shame of that. And Jack Cafferty, Mohammed's going to stick with us. Mohammed, president of God. Where did that come from last week? That was the year the whole class went.
Wasn't it? It was. No, Mike is absolutely right. It really had an impact on U.S. markets all big time. Coming up, the money comes in later. Earnings estimates still remain too high.
That's the warning from Sarah Hunt of Alpine Saxon Woods. That conversation coming up shortly. About five minutes away from the open about equities down just a third of one percent on the S&P. Let's get you some want, of course. First up, J.P. Morgan downgraded Whirlpool to neutral, saying margin concerns will continue due to the highly promotional environment.
The second call from Deutsche Bank Democratic Spirit Airlines to hold expecting the stock to be range bound until regulators approve its JetBlue merger. That stock down about 1 percent. And finally, Evercore and Mizuho cutting their price targets on Tesla. The analysts both citing demand concerns that stock down another 2 percent. Coming up, Sarah Hunt sounded the alarm on U.S.
profits. Joining a growing chorus on Wall Street. That conversation. Up next. If I told you the debate between county lines, Mohammed and myself and a commercial break, you wouldn't believe your equity market right now. Down two tenths of one percent on the S&P, on the Nasdaq, down a half of 1 percent coming in see today, down for four straight sessions on the S&P 500 over that time period, down about 5 percent. You have a battery switch at the point and get to the bond market.
Tender yield shaken up as follows on a 10 year at the moment, up by 10 basis points on a 10 year treasury to 368 81. And the affects market Eurodollar one 6 15 crews up a half of 1 percent to seventy five fifty five. I have to say, so far, no trauma. Even with that move in the bond market, I have tons of reaction to the conversation we had around the BMJ a little bit earlier. I'll quote an individual off the plane
back has written in. They say you're right. The issue is more about the second order effects of markets that were leveraged to a low and stable yield environment and low yielding traits. How long is that going to take to play out? Could with blowing things up. This year is that story we have to
reckon with in twenty three. I think we have to reckon with it, but not to the extent that we did this year. I mean, we're going to see a lot of this in the private market segment that hasn't repriced yet compared to what has happened in public markets. So this is a continuing issue, not as intense as this year, but it's not fully done yet. One to watch in twenty three once stocks to watch or on the up and down.
It's Nike earnings coming after the closing bell with a host of results coming in throughout the week. Nike not the only one who has more money, Gabby. Hey, John. Well, yes, this is a key report after the bell today.
And it's an important earnings report for a couple of reasons. First, it will provide an important tell or look on the U.S. consumer. It's also going to provide a key critical look at China. So starting out with the China piece, that's about 25 percent of their sales in the last couple of quarters, if you recall, have been challenging. Growth has slowed to about 13 percent down from the high teens. This on, of course, the Covid zero
policy really hitting consumer spending there. So folks wondering will improve. Is there going to be a more positive rate now relative to the U.S.? It's a similar situation outside of the Covid policy. It has more to do with whether or not the U.S. consumer has spending really slowed amid inflation. What does this mean for inventories?
Because it's really pretty amazing. Their inventories at basically record levels really ballooning like so many other companies there. It's not all negative, though, John, at least some analyst, Jefferies, including saying that they are cautiously optimistic, that they think the estimates are achievable, easing lockdowns in particular, China could actually be a bright spot, their move to digital, the woman's category, and then again, China, because it has been down in a trough, maybe that is going to be what can bolster their outlook to some degree John. Abby, thank you. Nike wants to watch FedEx, another one. Reporting after the close. Who remembers this from three months ago? The company's CEO laying out the challenging conditions back in September.
Writing, quote, Global volumes declined as macroeconomic trends significantly worse and later in the quarter, both internationally and in the U.S.. Deutsche Bank called the results last quarter the worst miss they've seen in their 20 years of analyzing companies and CAC. We're wondering whether we get a repeat. Yeah, if we get spooked once more, because we definitely saw a big spooking of investors three months ago when FedEx warned about those worsening business conditions in multiple markets. And since then, in the months that followed, other ship and shipping companies have come out and warned about macroeconomic headwinds and waning consumer interest in e-commerce. So this is going to be a really key tail on a key shipping season. FedEx ahead of these results, down about
1 percent at the opening bell. And of course, it's already down 35 percent this year, underperforming the broader market. The focus really this quarter is going to be on profitability and margins, which have narrowed due to the cost pressures that FedEx is facing on everything from fuel to labor. And that is why progress on cost cuts is going to be something we're looking for. About 700 million dollars in savings are
expected in this quarter. The company began furloughing employees parking planes, part of a multibillion dollar long term cost cutting plan. All of that kind of on the expense and supply side. But we have to deal with the demand side as well. And that is where we look at anticipated shipping volumes. They are expected to drop across the board.
Ground seemed down about 4 percent. Freight just a little bit more and express, which is critical. It's the largest revenue contributor made up about half of sales last quarter is expected to see the biggest decline, down nearly 11 percent is what analysts anticipate John. Okay. Inquiring minds want to know. So let's share it. So take a case.
Never seen trading places. Never was rocky. What else was there? Never watch Top Gun or Titanic, for that matter. Rifle and Katie Mohammed to having a conversation in the break as to whether Leo could have fitted on that piece of wood. What was it?
A doll he shared with Kate Winslet in Titanic? I think the correct argument is not if he could have fit. There was room. It's if it would have floated, had joined her in the clouds turn. And that is what I think. I don't think we would clearly Caylee Casey lines totally agree. OK, leave that there. Kelly, thank you. When? Disagree, obviously.
But what? Four minutes into the session, equities look like this on the S&P with down a quarter of 1 percent on the Nasdaq down a half of 1 percent. Five day losing streak on the S&P 7 about point Saxon words warning that earnings estimates are still too high. Consensus estimates still show about 5 percent growth. It is difficult to see how we get that if we get the recession we all seem to be looking for. And the self lending that is the best case scenario seems to be predicated on little or no damage to earnings in twenty three. Sarah, I'm pleased to say, is with us
right now. So, Sarah, I had this conversation with Mike Wolfson of Morgan Stanley yesterday. We're all talking about it seems to be well understood. Why isn't it priced? That's an outstanding question, because consensus estimates are made up of everybody's estimates.
That gets pulled together by Bloomberg and by other of the financial press. Why aren't people taking their numbers down? This is not. You see some of the strategies taking their numbers down, but overall, individual company numbers are not coming down, which is what feeds off into the S&P estimate. And until we start to really see that, I
think it's difficult to feel comfortable with a multiple when you don't know what the earnings is. Forget about not pricing the risk free rate. We also don't know what earnings are going to be. And I think that 5 percent growth next
year just seems like a big stretch to me. So walk me through the arc of earnings next year. They get announced in mid-January. You expect in that kitchen sink moment. Jack Cafferty and J.P. Morgan is talking to us about it moments ago. Is that what you're looking for in a
twenty three? Well, what's really interesting about the way that twenty twenty three is shaping up is that we've got this narrative now that the first half is going to be very weak. In the second half is going to be better. But the first half starts in like nine days.
And unless we get a lot of more weakness in the next month or two, it may be that you don't really see that until you get into the spring. So maybe not until we get first quarter earnings. I expect to see some expectations of full year earnings as we get through fourth quarter because nobody wanted to get projections at the end of third quarter. But it's going to be hard to pin people down. And I think that the difference is going
to be when you start to get into that first quarter, are people still south? Are consumers still buying? Are things still going fairly well or does that earning problem come later in the year as opposed to right directly in the first half of it? I don't know the answer to that, but I do know that I'm I'm hard pressed to believe that earnings are going to be as unexpected as it looks like consensus has right now. So, Sara, do you think companies are going to be warning us in a big way in this earnings season and if they do? Is that the tipping point? I think it's really going to depend on how the first few people come out of the gate. Right. We start with the financials, and that's going to have a difference.
There's been a lot of volatility. So there's been a lot of trading. There's going to be a little bit of a difference there. I think at some point that they will try to kitchen sink it. I'm just not sure it's going to be at the very beginning of the year. And if it is, then that gives us that first half, hopefully catharsis.
But if it isn't, then we still have to wait for that earnings shoe to drop. And I think that that's going to be part of what's going to be difficult about 2023, et cetera. Is it still too early to talk about leadership of a recovery trade and what lates it through next year? I don't know that it's too early, but I think it's it's difficult to figure out exactly what it is. You've seen a big move in the
industrials on the hope that, you know, the global economy doesn't have a big recession. I think it's hard to see exactly where that's going to come from. I used to think that it was going to be the profitable technology companies, but they have really suffered a lot more than I expected it to. Through all of this, and I think that we
really need to see what part of the economy is doing OK. I think that because the labor market is so strong, the consumer stays a little stronger than expected. And this is part of the tension the Fed is feeling now. How do I impact the labor market without crushing consumers? And it's I don't know what the answer to that is, but we're going to need to find some sort of leadership.
I don't think we have it yet. So sorry. Let me ask you a question. This year was all about the change in the liquidity regime and that played out in multiples. Next year is all about the economy. Do we get a recession? What does it look like? And that plays out in earnings.
Take me to the stage after that. Do we get back to multiples at all or do we just go through multiples earnings and then is a clear pathway? Well, I think part of the reason that you're OK with higher multiples is that the earnings have been higher. So I don't think that just earnings alone doesn't also impact multiples, because at some point there's an aspect of I see the earnings picture getting worse and worse and I'm still paying 15 times. Well, that 15 times that number has changed. So now I'm paying 15 times a smaller number. I'm not sure that it's easily as clean as that. But I also think that this is where
everyone is looking to get through this so that we can see what comes out on the other side. But we're not even through it yet. The Fed's not even finished raising. You just added Japan to the mix and companies in countries that are adding to the tightening of global monetary conditions and how that plays out through the economy and through earnings is still a question mark. So I hesitate to say that the multiple
pictures completely finished yet because that also ties into interest rates and I'm not quite sure we're done. Sarah, wonderful, as always, Sarah Hunt there have that pint Saxon words on the latest, Mohammed, let's reset. You and I talked about this a million times this year. I'm going to butcher this, correct? By all means.
I think it was crisis in AM. It was recession in Europe, stagflation in the US. Is that what you were expecting this year, looking out to next year? Little fires everywhere in here, not crisis in the end, but little fires everywhere.
You still base case, thankfully, election in America next year. Yes. If if if deflation part is compared to the 2 percent target. Yes.
But but we are we are getting through it. I mean, that's encouraging thing. We are getting through it. And the damage is not as bad as you would have expected based on history. So that's the good news. I'm trying to work out where the Fed is in all of that. You heard Sarah say, I think it is
really important. It goes back to something we talked about all year together. How do you price risk if you can't price the risk free rate? And if you have massive volatility around the risk free rate as well? Appears to me that people are getting more comfortable with this idea that that's done with now, that maybe they push towards 5. But the next 50 basis points, next hundred basis points of tightening isn't all that important. Let's focus on the cuts. Do you think that's a mistake? So I think when a mistake comes in is not understanding that when you make a big policy error at the beginning of a process is almost impossible to get back into a world of first best. So the Fed made two big policy errors
coming into this. First, a transitory inflation core and then not moving fast enough. So now it's forced into a very front loaded and it's trying to push markets to a place that markets don't want to go. And that is the issue is we cannot get back to first best policy world. So you've got to worry about the unintended consequences of the policy regime. And I think that that is what the markets haven't quite understood yet.
What mistakes you think it's fair to make at the moment? I think they're going to tighten and they're not going to acknowledge that in a world in which the supply side has became the main issue. A 2 percent inflation target doesn't make total sense. It doesn't mean you change it, but it means you know where I'm going next.
Right. They can't change it. I mean, it is impossible to increase an inflation target that you've missed consistently. Credibility. Argentina tried that. You don't want to go there. Look out. Worked out.
Right. But what they're gonna to try and do is is try and convince us that we can have stable inflation at 3 to 4 percent and it's not at the end of the world. DAX got into the ISE do that. What happens if they try and do that? I think that's what's gonna have to do because the alternative of crushing the economy is much worse. And they can't explicitly increase the inflation. Look, they're in trouble. I wrote an article saying, you know,
you've had two horrible years for the Fed and tried to get back on side. It's not that easy when you've had two horrible years. It's hard to answer this question if they tolerate three to four without explicitly changing the target. Is that constructive for risk going into next year? If we can get to a stable inflation at 3 to 4. Absolutely. Okay. But you've got to get there. But that's a real different market paradigm.
Regime shift from what we were used to pre fantastic, isn't it? What's the character of that versus what we've experienced the last 10 years? It's the reality that the last 10 years was about the demand side and now it's about the supply side. So I can sit with you and give you a whole list of the functioning of the labor market, the change in globalization, rewiring our supply trains. It's all about the supply side. And when it's all about the supply side, you've got to tolerate slightly higher inflation. Otherwise, you cause undue damage to economic well-being. Are you thinking about a new floor in rates then? Because we could go back to zero repeatedly over the last 10 years.
What is it now? We're not going back to zero. You said that, but what do you think the new floor is? I'm not I don't know what it is because I don't know what the recession is going to look like if we fall into recession. I don't know what it's going to look like. I think this is a very important moment
in time where we are not looking at a well behaved bell distribution in normal distribution. We're looking at multiple possible outcomes. And that's what you've got to navigate through. And it's a different mindset. You've got to be much more open, much more humble, because there's so many potential outcomes. This was great.
You want this tease. You've got to read it. Then paused for the sound and it sounds going to play. And then you just say that conversation up next will be perfect. You've got this going. Coming up, the drama surrounding Enron
must continue with the mortgage overhang on cash. That is Twitter compared to 44 billion dollar epic mislead by March. This is a Category 5 storm that's most inflicted. Elon Musk is now the hot potato in Washington. That conversation still ahead.
This is Bloomberg's The Open. I'm Lisa McHale, live in the principal room. Coming up, former U.S. Treasury Secretary Jack Lew. That conversation at 12:00 p.m. in New York, 5:00 p.m. in London. This is Bloomberg. The biggest overhang on tested is Twitter.
I mean, to 44 billion dollar epic mistake by most pension focused on Twitter as this twilight zone continues to go on and on. And that's really been, I think 70, 80 percent of the show or so is Twitter. It's hoped the brand of month, which has hurt the brand, the customer, because Musk is so casual this month. This is a Category 5 storm that's most inflicted. They Twitter drama continuing to unfold on Wall Street and on Capitol Hill. Both sides of the aisle taking their shots. The RNC resurfacing a complaint, running
in a statement. Twitter has a scandalous history of censoring our voices to benefit Democrats. We demand a re-examination of our complaint. This after Democratic Senator Elizabeth Warren voiced her concern in a letter to the Tesla board. Let's get some team coverage for you.
Amy, I stand in DC at Ludlow over in London. Ed, walk us through the latest place. Yeah. I mean, CNBC reporting citing unnamed sources that Elon Musk is actively searching for a new CEO of Twitter. I would say not hugely surprising, logical and in line with what Musk has previously said, you know, prior to the transactions closed. He did say that he would only lead or be the CEO of Twitter up until the point that he felt it was on its own two feet and that he found the right person again.
John, I reiterate what I said to you 24 hours ago that I've written to Elon Musk and asked him to confirm if he is going to go through waves honoring the results of the poll. We just don't know. Interesting. The reaction in Tesla shares, they did initially pay some of their declines following that report, then accelerated again that bouncing it down, bouncing down once small.
Mizuho is the latest to cut his price target on Tesla. But there was just a single line in that report stating that Twitter deleveraging overhang with Elan selling Tesla shares twenty two million shares in the month of December alone, 20 million back in November. It's still downward pressure on the stock and everyone is very much in wait and see mode. But that stock, Jon Tester now lowest level since November 20 20. I am sure everybody has something to say about this in Washington, D.C., specifically, Senator Warren, why the letter to the board recently basically asking whether Elon Musk and its involvement in Twitter was hurting Tesla shareholders.
Elon Musk said this The United States has definitely been harmed by having her as a Senator Lott. Can you walk us through. Much. This is playing out in Washington. Yeah. Well, Elon Musk is always finding himself in hot water in Washington, really almost with both sides. They all want a piece of him and because they really want a piece of what's going on on Twitter. So the latest from Senator Warren was
about the potential risks his now dual jobs can pose to Tesla. She also pointed to the fact that there could be also conflict of interest. You have a Tesla competitor like Audi that has advertisements on Twitter. But, John, again, this is a long list of complaints from Capitol Hill on Twitter. You had Chuck Grassley recently, a top Republican.
He wrote a letter to the former Twitter CEO, now saying it to Musk, please. We want to know what's going on in terms of security controls at Twitter. You have the RNC re upping their letter to the FEC in 2010 about the fact that they think Twitter was squashing some conservative media. You also have from the senators like war, like Warner, and you have also from Senator Murphy, who talked about the fact that from must to make this play on Twitter, he was able to have funds from Saudi Arabia and Cutter's foreign foreign sovereign wealth fund. There is a number of issues on Capitol Hill, John. And just today, the latest is about his
his dual roles being a Tesla and a Twitter. I mean, we other than a very long list of complaints. Is there anything that Congress can do to change behaviors at Twitter or at Tesla? Or is this just a situation where they complain and that's it? Well, I think there's two things that we could potentially see, and this is something that we heard from treasury secretary. And actually, she really backpedaled on this. And CBS, she said she didn't think there'd be a national security review needed for CPS to take this review. And then recently, when Yellen sat down with the deal book conference, she said that she misspoke and there potentially could be some national security concerns. So that's something CPS can look into,
the national security concerns potentially of Twitter, the money coming in and potentially if there's like countries like Saudi Arabia or Qatar putting pressure on or using their relationships with Elon Musk, who actually was just in Doha. And then, of course, Congress can call him down for questioning. There recently was another letter sent to Musk about the rise in hate speech and the vitriol since he's taken over the top job. Now, Musk has said all of that hate speech has actually calmed down since he's taken over.
But these two Democratic representatives would argue that actually has not. And it's actually spiked and ISE. They say wonderful, I always see that as well. I friend London.
Thank you. Let's some sector price action. This equity market breaking down just a little bit in the last 20 minutes is happy. Hey, John. Well, yeah. We are looking at a fifth down day for the S&P 500, the worst five days since late September. So there is some serious selling, not surprisingly, today.
More sectors are lower than not led by real estate. Consumer, discretionary and tech, all of those sectors being hurt by rising rates. That's the story of the year. There is only one sector this year, as you know, John, that's higher. That is energy up more than 50 percent. Take a look at the mega cap tech sectors all down about 30 percent or more. Lots of pain. I want to move here today. Abbi, thank you.
Up next, the trading tower and a final word from Mohammed. What a moment for Leon Massie, touching down with Argentina back home a little bit earlier in the last 24 hours, Mohammed capping off what an amazing career that man has had and it continues. And I'm so happy for him. And I'm I'm really happy that he's not retiring because I think he has more to contribute to football.
Just absolutely pretty. And speaking of football. New York Jets just got this question over the Bloomberg terminal subscriber. You've got to ask Mohammed his quarterback's preference going forward.
Zach Wilson, Mark White, Mike White. Not quite a sit down. We had a whole hour, but you had to bring it up and you had to wait until the very end. You got the opportunity to leave now. But thank you for having a thank you for being with us. Wonderful this year, Mohammed, and looking forward to coming to market with you for 2023. Thank you, sir. The brilliant Mohamed El-Erian from New York City this morning. Good morning. This was the countdown to the open.
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