Bloomberg Surveillance TV: October 21st, 2025 | Bloomberg Surveillance
Summary
Market Outlook: Drew Mattis from Metife suggests that current market conditions are unsustainable, with markets likely to adjust due to mediocre nominal growth expectations not aligning with earnings forecasts.
Economic Insights: The discussion highlights a K-shaped economy where upper-income groups are beginning to feel financial pressure, impacting their spending habits and potentially leading to a decline in the savings rate.
Consumer Behavior: There is a noticeable shift in consumer spending from services to goods, with high-income earners adjusting their lifestyles due to rising costs and economic uncertainties.
Company Performance: General Motors reported strong earnings and raised guidance, attributing success to agile management and strategic supply chain adjustments, despite global economic challenges.
Financial Sector Concerns: The podcast discusses tight credit market spreads and potential risks within the financial sector, with a focus on the nervousness surrounding economic stability and the anticipation of unforeseen issues.
Federal Reserve and Monetary Policy: The possibility of a 50 basis point rate cut in December is discussed, driven by concerns over private credit markets and the need for the Fed to manage inflation and economic growth.
Global Trade and Tariffs: The conversation touches on the impact of tariffs on US companies, with GM's successful mitigation strategies serving as an example of how firms are adapting to trade challenges.
Geopolitical Dynamics: The podcast explores China's strategic positioning in global trade, particularly in the rare earths market, and its implications for US economic policies and international relations.
Transcript
Bloomberg Audio Studios podcasts radio news. [Music] This is the Bloomberg Surveillance Podcast. I'm Jonathan Pharaoh along with Lisa Abramitz and Amarie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg television weekday mornings from 6:00 to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg terminal and the Bloomberg Business app, stocks edging lower with a slew of earnings on deck. Drew Mattis of Metife writing, "In the absence of government data, the only information we have are earnings. Mediocre nominal growth expectations are out of sync with earnings expectations." Drew joined us now for more. Drew, good morning. >> Good morning. >> Does something have to give? >> Something does have to give. Uh now what that's going to be uh I'm going to guess it's going to be markets because it's easier for markets to give than it is for the economy to give and if the economy gives it's probably not giving in an unexpected acceleration in activity. This is just one contradiction. There are many more. We talked about lots of them. Employment's dropped away. Retail sales has been really robust. People are still talking about the so-called K-shaped economy. Upper income okay, lower income struggling. Is one catching down to the other or the other going to catch up to the top? Well, just because someone's spending when they have money doesn't mean that they're doing fine, right? It doesn't mean that they feel like things are going to continue to be good. And when you look at the details of how income expectations are changing, particularly real income expectations, so accounting for the inflation component, what you see is actually that the upper income is beginning to feel a lot of pressure. Uh I don't know whether it's what they're buying is just going up in price more aggressively, um or whether they are beginning to worry about their jobs a little bit more. I suspect it's a combination of both. Where are you seeing this in particular? And I see this as we were looking at airline earnings, for example, and a lot of people are shelling out for those premium cabins. >> They shell out for the premium cabins, but those premium cabins cost more. And so they're actually seeing their lifestyle requires a much more expensive uh payment structure now. And so then they have to give in other areas. And so what we're actually seeing is when you look at spending, for example, goods versus services, uh people are beginning to actually cut back on spending on services. And those are the things that you never cut back on. And and so typically, if you're not buying a cup of coffee in the morning, you're not going to go out and buy a car in the afternoon. It just takes a little while for that to catch up across the income spectrum. And what we're beginning to see now is that upper income tier is beginning to feel pressure. They can still keep spending, but the pressure builds. And it means probably that you'll see the savings rate begin to decline even though it probably should be rising based on where interest rates are. >> And maybe we'll get a holistic look at this when we get retail sales. Oh, wait. We don't have any data coming out of the government. There is this feeling right now. You need to parse through the earnings to get a better sense of it. Has there been anything in the earnings so far that has ratified the view you have or are there a couple of earnings reports that you're really keyed into to give you the ultimate sense of whether this really is uh the reality this weakening in even the upper echelons of income earners? >> I mean to be frank no uh but I mean that that's why you know that's why I get to do what I do is because I have to make decisions based on kind of the limited amount of information that I have. What we what we are paying very close attention to are Federal Reserve surveys. You have to pay attention to the beige book. You have to pay attention to the earnings reports. But even the earnings reports can see people transiting from one, you know, one kind of product to another, right? From beef to chicken or from, you know, who knows what people like anymore. I I don't understand actually what people I I am not the average consumer and I am readily willing to admit it. Um, and my tastes are not everyone's tastes. So, uh, it's it's hard to kind of figure out which direction everyone's heading. Um, but I do know that people are shifting from what they're used to doing. And when people are shifting from what they're used to doing, that's happening because of a reason. And that reason typically isn't good. People are creatures of habit. They like to do what they did yesterday. >> If the high-end consumers under pressure, what kind of economy are you describing? Because everyone continuously says we're in a K-shaped economy, but what you're describing does not sound like a K-shaped economy. >> So when you when you when you do economics for long enough, what you realize is the top 10% spends no matter what. the bottom 10% spends no matter what. Uh, and there's a the cohort in the middle is actually the one that moves around their spending because they've got some sav potential for savings. Uh, and so you really have to watch the movement into and out of the savings rate. Uh, and whether or not people are feeling like they can spend money. Now, it gets complicated when inflation's present because often times the way people make up for the increase in prices, at least initially, is by cutting back on their savings rate. uh even if they were feeling a lot of pressure or worries about their job. And so things begin to break down. Those relationships begin to break down. And so, you know, all the people using, you know, AI to model the economy right now, uh you know, it's the big new new thing. Those models are incredibly complicated. And what you're going to see is that the coefficients on the front of of each um of each variable that you can use are probably shifting around and they might be canceling each other out. And so your whole model might be breaking down and you're probably not going to recognize it if you're using models that are too advanced rather than looking at individual components of what's happening and the relationships between, for example, savings and interest rates. >> What are you most looking at this week, next week when it comes to earning season to really understand how much that high-end consumer is under pressure? >> Well, as I said, it's it's difficult for us to kind of look at an individual company and figure out what's going on. upper income consumers are going to continue to spend on things like airfare. They're going to continue to go on vacation. The question is, are they going on vacation and instead of going to Europe, they're going to California or instead of going, you know, they're taking the slightly less expensive option. There are down, you know, everyone's got a lifestyle and certain things are downgrades for certain people. And I it's it's easy for us to all kind of laugh about it, but for these people, it's actually a serious change in their lifestyle and it affects their perception of what it means to be rich, for example. What's it mean to be rich when you actually have to think about the airfare, right? These are people who are not used to thinking about how much they spend on airfare. They're not used to thinking about, gee, you know, like I really like that hotel. It's in the center of the city and it's my favorite hotel because they have a favorite hotel in Europe, right? And now they're thinking, well, I can't afford my favorite hotel in Europe. I have to downgrade it. It actually it comes with a social cost. You don't have to cry for these people. Their lives are still really good and probably better than a lot of people's, but you know, it doesn't mean that they feel as good as they used to. Drew, banks aren't feeling as good as they used to after last week. Let's talk about the financials. Zion in the pre-market is up by 2.5%. It was the focal point of a lot of people last week coming out and basically revealing some losses tied to potential fraud. This isn't the first time we've seen this kind of thing. We've seen some other credit issues as well. You've got the credit issues on the one side and then really robust earnings on the other side and we saw that from Zion overnight. How are you and what is your perspective on what is happening right now in this sector? >> Well, so I people are nervous. Uh if you look at credit market spreads are incredibly tight. So you're in this weird world where all in yields are okay, right? the amount you can get paid for is okay, but the actual premium you're getting paid to take risk is actually maybe a little too low. And so, um, I I think what you're seeing is just the nervousness around the around the economy that we don't really understand that everything's okay. We we're waiting for that next shoe to drop. Jamie Diamond, you know, put it famously. Uh, what he's really expressing is not that he sees anything, but that he's expecting something. It's kind of like you live in an apartment in New York City and you might never see a roach, but they're there. You know they're in the walls. You know it, right? And so you don't leave food out. You do a whole bunch of different things when you live in New York. You know, there's things that you can do in suburban New Jersey where I live that are okay because you're not going to attract animals that quickly. Uh but if you do it in New York City, you're basically stunk. And I think the the risk is is that people are really focused on um you know what they're not seeing. And and the fact of the matter is is with no economic data and with, you know, earnings kind of, you know, being okay for the most part, uh they're nervous that they're missing something, but they don't know what they're missing. >> So, Drew, where are we? Are we in a grand house on Murray Hill infested with cockroaches, or are we in a nice Soho apartment? What is this? >> We might be trading down from a Soho apartment to something on the Upper East Side. >> Okay. Does that mean you're d-risking? >> Uh, we've been we've been derisked for a while now. Now I mean to be honest with you since co there have been kind of you know there's been kind of one risk after another after another uh and you know to the extent that we've been able to kind of go up in credit we've been going up in credit I don't think that's a surprise to anyone and and I think you know everyone who's able to has been doing that uh or you've been looking to things like privates where you're taking maybe more liquidity risk which you can more easily define um but getting uh less credit risk on on most sides of it if you're doing your underwriting properly. Stay with us. More Bloomberg surveillance coming up after this. [Music] Let's turn back to earnings. Shares of General Motors jumping after the company beat earnings and raised guidance. The GM CFO Paul Jacobson joins us now for more. Paul, the stock is up by more than 9%. We'll spend some time talking about the numbers, but I just wanted to take a step back with you just for a brief moment. You've got real experience navigating volatile industries, experience in the airline business and experience in the automaker business, too. You took over as CFO in the pandemic. Can you talk to us about this year, Paul? Just how agile have you and the team needed to be and how volatile have things been, too? >> Well, Jonathan, first of all, thank you very much for having us. It's a great day to be at GM and celebrate the success of uh all of our employees and partners worldwide. So, really appreciate uh you being here today. uh having me today. So, you know, at the end of the day, it's it's it's just another change. I mean, since uh coming to GM uh in 2020, we we've gone through COVID, we've gone through chip shortage, we've gone through tariffs, uh we've gone through EV pivots and and so on. But what we've really tried to do is create a model that is resilient. And when you look at our balance sheet, you look at our inventory discipline and the way we've gone to market, um there's a lot of things that have changed that allow us to be able to react to the world around us faster. Uh, and I think that's that's uh paved the way for us to have a uh another really strong year in the face of a lot of macro changes. >> Paul, in order to increase resilience and maybe agility, do you have to sacrifice long-term planning? Is that something that becomes harder? >> Well, you know, I think what we what we've really done uh well as a team, I think, is we've kept focus on that long-term vision. So, you know, for example, while we've taken a charge on uh reducing some of our EV capacity, reflecting the demand that's out there, we still believe that EVs are the future. Um, and uh we think that there's an opportunity for us to take a little bit of a pause in in demand growth that we've seen over the last few years, structurally improve it, rightsize our capacity, and make sure that we can be successful as more and more customers adopt it. So it's just an example of how we make sure that we're managing the short term within the face of that longerterm vision. >> So what are the big steps Paul that you've taken in order to remain agile particularly with supply chains and removing uh any kind of direct input from China in particular? How much have you rejiggered how where you get your goods? Well, I think we learned a lot um in industry from COVID and uh and a focused supply chain that was really susceptible to individualized shocks. And I think we've taken the effort to try to make sure that we diversify our uh our supply chain base. Uh we've made a number of investments for example in battery raw materials and and other materials in the US. Uh in addition to the $4 billion that we've uh announced this year to increase our US manufacturing capacity. So I I think it's been a case of making sure that that's balanced. And then when we went through the chip crisis uh of 2021, there were some more challenges about making sure that we expand the places where some of our chips are fabricated and our supply base that we use. So this has just been part of it. Um I think we've learned a lot of lessons over the last 5 years that have helped us and position us well to be able to thrive in uh everchanging circumstances like we see right now. All this costs a lot of money and I'm just trying to get my head around, we've all been trying to get our head around where it comes from these extra costs in order to rejigger supply chains to offset any kind of increased costs that might come along the way. How much is coming from whether it's freezing uh labor forces or trimming around the edges? How much is coming from higher prices uh on consumer vehicles? Well, I think if you look at um what GM has done, we we've saved a lot of money by rationalizing our uh inventory balances. So, we used to keep probably about 40% more inventory on the ground uh at our dealerships um uh around the country. And uh we've we've cut that down. That's frees up a lot of working capital to be able to invest and redeploy back into the business. But it also makes sure that we can change uh much more quickly to changing demand uh around us. So, uh, our pricing has been stabilized, and I think that's given us a little bit more comfort to invest a little bit more than what we have historically, but still making sure that we're very disciplined, uh, with our capital allocation because we still have opportunities to pay down debt and also return capital to shareholders. So, it's that balanced approach that I think has really paved the way for our success. >> Paul, you and your colleagues in the industry recently had a big win in Washington. a little bit of reprieve when it comes to the arrangement on the timeline for the tariff costs for imported auto parts. What else are you asking in terms of tariff relief from Washington? >> Well, you know, I think I want to praise the administration for really listening to the to the concerns of the industry and making sure that they're helping us to be positioned to be really successful as uh one of the largest US industrial uh producers that are out there. And the announcements that were made Friday uh essentially take what had already been done by the administration in the spring and expands it a little bit to be able to use those MSRP offsets on a wider variety of parts that we're bringing into the country. And as a result of that, we were able to lower our total tariff forecast um for the year by about half a billion dollars from where we um uh started the year. And I think it's that proactive partnership in terms of really making sure that we can remain competitive uh and help to drive more investment into the US, which we've done. >> So, do you expect more reprieves, especially as the US goes into negotiations next year with Mexico and Canada? >> Well, I think what we're looking for is is a little bit of stability. Obviously, this year's been a bit of a transition year. Um, you know, for us, the uh the the handshake deal that we have with Korea, we're really eager to get that finalized. Um, we do have some production of some of our lowerc cost models um, in Korea that that help with some of the affordability concerns of our consumers here in the US. Um, but also obviously Mexico and Canada are going to be really important to us. But as we look at those deals being finalized and we start to look into 2026, we think that there's actually an opportunity for us to do better in 2026 than we've done in 2025 and start to work our way back up to those 8 to 10% targeted margins that we set for ourselves before the tariffs uh were put in place. Paul, just finally, can we stay in Asia and finish on China? Paul, for a long time, we've said on this program, this must be the most competitive market on the planet in any industry. How difficult is it to operate in that country right now? And how much harder is it going to get in the future for US automakers like yourself? >> You know, about a year ago, Jonathan, we we undertook a pretty ambitious restructuring program in China with the realization that, you know, we were probably not going to be as big in China as we have been historically going forward with the amount of just tremendous competition that's in the country going forward. But, you know, together with our partners, um, we were able to restructure that business and we've been profitable um, every quarter this year and and look to be able to sustain that. So, it's it's really about making sure that we're rightsized for where we are. We've got great products over there. We've got a long legacy and we've got a good partnership that I think has has really paved the way. And with that work that the team did in China, really proud of what they accomplished and think we can be sustainable there. >> Stay with us. More Bloomberg surveillance coming up after this. [Music] With us around a table, Monica Quer of Morgan Stanley. Monica, good morning. >> Good morning. >> China's flexed and it's flexed and the whole world has listened and arguably maybe even brought the likes of Australia and America closer together. Was that a strategic mistake going into negotiations later this month? I think what's interesting about this deal is that China's response was actually constructive on paper, right? They were actually positive, saying, you know, yeah, join the join the party on on rare earth. That was really surprising to me. That tells me that they're not worried. That takes it's going to take at least 5 to seven years, maybe longer, to have this whole initiative ramp up. A lot can change in that time. Doesn't mean that this isn't going to be a positive for the US. I think more, you know, players at the table is ultimately long-term a benefit, but this isn't a zero, you know, end game here. >> So, going into this meeting, it sounds like, do you think China has the leverage? >> Um, I would say that both parties, right, need each other. We're thinking about our our combined economies. They don't want a 100% tariff on all of their goods. That's an issue for them. But they don't really need to worry about this move on rare earths. I think that they're going to be focusing on the other components. China is still uh the in charge of 90% or more, right, of that market. So, this isn't a now issue. It's going to make them have to focus on all these other factors that could impact their import export relationship. To Jonathan's point, China though flexing its muscles on rare earths. Is it giving the Trump administration an excuse to continue making these deals where they take outright equity stakes in mining companies? Um, I'm not I'm not going to speak to that, right? To that piece. I think, you know, we were all surprised by the other outright stakes in in US companies. Now, as far as the the mining company component, we're going to continue to see foreign direct investment, right, directed out of the US in order to make these deals happen. What's going to be interesting is as we build out our relationship with Australia and China is like where do we land on that on that final tariff number? And I think that again when we go back to actually the beginning of the year that you could see something that's in that 30 to 40% range if we're going to go back to those campaign promises. Do you think that's where we end with China? Say 2026. We're kind of there now on some products. >> On some products I think, you know, you could see an increase on those section 301 tariffs. You could see more on, you know, section 232. The other ang piece here, right, that we have to really appreciate is the US's reliance on that tariff revenue from a fiscal policy perspective. and the fact that we're in the middle of trying to even determine if we can have the AIPA tariffs in place and once we get that it's going to be that patchwork on section 301 section 232 and others right to try to make us whole from a fiscal policy perspective. So I would say from China's lens, yes, maybe they have they definitely have the advantage on rare earth. Is there something at stake for them big time, right? When we're thinking about that relationship, but the US also has to think about their fiscal policy future and trying to find that sweet spot. So given that concern and that hang-up and that frankly support to uh the debt market, how much of a risk case is it if the Supreme Court overrules the tariffs that have been put on and forces the administration to scramble and cobble together another sort of regime of tariffs to plug that fiscal gap? Well, they're already working on it. So for example, section 232 tariffs, you have to have studies put in place. Those prior to the shutdown were in the works. And so I think we need to get through this shutdown period in order to see some of those puzzle pieces come into play. I think markets are right to assume that there will be some tariff revenue coming in at the end of the day. It's just what how much and that's going to be the big question. If they get a negative ruling, there will likely be a market response, right? That's that's natural. That's going to be a normal course of action, but soon to be backfilled with all those other tariff pieces that they've been, you know, working on heavily. We got GM earnings earlier this morning and it showed that the tariff mitigation plans have been working and have offset a great deal of any extra cost. In general, earnings have been pretty positive across the board. Is the takeaway that the tariffs are manageable and that frankly companies are adjusting and adapting and it wasn't a big as big of a hit. Even if the tariffs go in and remain as such, it's not as big of a hit for the underlying profitability momentum of the United States as expected earlier this year. I think that the full pull through right of impact of tariffs hasn't been seen yet. So while I think that the GM reporting is a positive sign that we're finding a sweet spot here, one of the key things we have to focus on is this patchwork, you know, component of tariffs and what that's going to mean for the consumer in other areas. So while they might have found that sweet spot with GM and the auto industry, can they do it across the board when we're thinking about all goods and services? That's to be seen and you know we'll we'll uh you know get more information in November. >> What channel are you and a team focused on prices or through the labor market cost cuts? >> Um we're focusing on labor market right now especially as it relates to uh the shutdown because this is a really interesting period. Typically when you have a shutdown, right, people get laid off and then they get brought back. And so that furlow period you essentially get made whole. Doesn't have a major impact long term. Now, this is different because we don't know how many employees are actually going to be brought back and so that could have an additional drag, especially when we're thinking about those inflationary factors. Stay with us. More Bloomberg surveillance coming up after this. [Music] Traders locking in beds. The Fed continues its easing cycle at next week's rate decision. and L. Davis of Beimo seeing an increasing chance of a 50 basis point rate cut in December saying the opaqueness and lack of transparency in private credit could be used to accelerate eases. Joined us now for more. Welcome to the program, buddy. So, let's skip October. That's done dusted. What's on the table for December? >> Well, December, our base case is still 25 basis points. We just see the chance of a 50 has increased dramatically. And the reason why it's increased dramatically um is because we've moved our possible terminal rate. we saw terminal around 3% slightly higher than than the market to 250 and the reason why we see it we've lowered it so dramatically um is because of you know yourricolor your true brand basically private credit in general uh we believe that the private credit where um the opakeness comes in from and the ownership of it it's usually real money pension plans and like so it's going to be a slow sleeping uh seeping credit uh move uh wider like things wider. Um, so it's binary whether they go 50, but we see an increasing chance of 50 in. >> Do you believe then based on the credit risk that you describe? Do you think it could lead to a broader tightening of financial conditions >> temporarily? Yes, we do believe it can. We don't believe it's systemic. And the reason why we don't believe it's systemic is, as I said, most of the holders of private credit are real money. So, they could take the losses. Uh, liabilities, they still have the liabilities to deal with. So it does have an impact on the economy but they could take the losses. Having said that why why we see it as a possib increasing chance of 50 is it basically took the safety off the gun of 50 eases. And the thing about 50s is um central banks just don't do 150 otherwise they wouldn't do it. Um so that's why we we lowered our expectation for terminal uh to 250 by the end of 2026. So I hate talking about cockroaches this early in the morning, but there is sort of this irony that the reason why there are these fears of credit problems is because of the prolific Fed policy that has enabled this and the fact that monetary conditions used to be a lot lower to allow a lot of credit creation uh that may have overlooked a number of different underwriting standards. I'm just wondering if there's a bit of moral hazard here. the idea that the economy isn't cracking and that the Fed could respond to concerns in credit that were done in pretty easy financing conditions. >> Yeah. No, we do believe um I I don't know if I'd use the word moral hazard, but there is definitely inflation hazard risk. Um um because you know it hasn't our growth despite what's going on in credit, our growth expectations have not changed for 2026 and it's because you know big beautiful bill everything people are hearing. We think it's very supportive of growth and growth will still be good. So then you're going to be in a in a very easy uh financial conditions market and we think uh there's a big risk for inflation but the market's not focused on that. We're not focused on that right now. We think that's a late uh 2026 story. One of the interesting things about inflation though we do get a print Friday and if we do get a higher than expected print the market you know credit will widen duration will go higher. We think that's temporary. We would use that as an opportunity to go longer duration and to go longer credit because we think the 50 basis point uh eases are very much on the table. >> So if inflation is still a concern, Earl, how do you get conviction to go into long-term rates on Fed cuts that affect the front end of the yield curve? >> Yeah, it's it's very easy. As I I said, you know, I've been in this market for 30 years and and one of the things with the market is it only focuses on one thing at a time. And right now inflation is not the focus. So it's determining what is the catalyst to get inflation back on the radar. And there there's basically two catalysts. One is employment. Employment starts improving. We don't expect to see that until 2026. And you know there's no data or tier one data coming out on employment. And the second thing is geopolitical. Uh and what I mean geopolitical is an oil price spike. Um that we'll see coming um and we'll be able to to adjust positions accordingly. And the reason why I say we'll be able to adjust positions accordingly in a higher yield bare market, you don't get, you know, yields higher by two or three or four or five basis points a day. You get yields higher by 15 or 20. Once you start getting a sense of that with a catalyst either being oil or employment when that starts coming out, that's when you adjust duration to reflect that. Right now, it's an easing environment. There's no catalyst for that to turn. And our terminal, as I said before, has gone lower, which changes our view on duration right now. >> Earl, will the government shutdown force the market just to focus on inflation? That's the data we're going to get. And what you hear from Washington is that they're expecting a prolonged shutdown, even potentially having congressmen and women come back to extend the date on the continuing resolution because they're hunkering down for a long shutdown. >> Yeah, the market will focus on inflation. I think that's fair, but it won't be persistently focused on that because you'll get central bank speak once they're out of the blackout period or at the FOMC meeting. Uh, and you'll get, you know, um, people focusing back on employment, you know. Um, and that's why we see it as a buying opportunity because that focus will be very short-lived, very temporary. Um, so, so yes, it will focus on inflation, but you know, everyone's made clear that employment is the thing that the central bankers are looking at. El Davis of Beimo. Thank you. >> Can I say one more thing? Can I say one thing? >> 20 seconds, sir. You can absolutely. >> Go Blue Jays. Go. Thank you. >> My god. >> Nice. >> This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6:00 a.m. to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always on the Bloomberg terminal and the Bloomberg Business app. [Music]
Bloomberg Surveillance TV: October 21st, 2025 | Bloomberg Surveillance
Summary
Transcript
Bloomberg Audio Studios podcasts radio news. [Music] This is the Bloomberg Surveillance Podcast. I'm Jonathan Pharaoh along with Lisa Abramitz and Amarie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg television weekday mornings from 6:00 to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg terminal and the Bloomberg Business app, stocks edging lower with a slew of earnings on deck. Drew Mattis of Metife writing, "In the absence of government data, the only information we have are earnings. Mediocre nominal growth expectations are out of sync with earnings expectations." Drew joined us now for more. Drew, good morning. >> Good morning. >> Does something have to give? >> Something does have to give. Uh now what that's going to be uh I'm going to guess it's going to be markets because it's easier for markets to give than it is for the economy to give and if the economy gives it's probably not giving in an unexpected acceleration in activity. This is just one contradiction. There are many more. We talked about lots of them. Employment's dropped away. Retail sales has been really robust. People are still talking about the so-called K-shaped economy. Upper income okay, lower income struggling. Is one catching down to the other or the other going to catch up to the top? Well, just because someone's spending when they have money doesn't mean that they're doing fine, right? It doesn't mean that they feel like things are going to continue to be good. And when you look at the details of how income expectations are changing, particularly real income expectations, so accounting for the inflation component, what you see is actually that the upper income is beginning to feel a lot of pressure. Uh I don't know whether it's what they're buying is just going up in price more aggressively, um or whether they are beginning to worry about their jobs a little bit more. I suspect it's a combination of both. Where are you seeing this in particular? And I see this as we were looking at airline earnings, for example, and a lot of people are shelling out for those premium cabins. >> They shell out for the premium cabins, but those premium cabins cost more. And so they're actually seeing their lifestyle requires a much more expensive uh payment structure now. And so then they have to give in other areas. And so what we're actually seeing is when you look at spending, for example, goods versus services, uh people are beginning to actually cut back on spending on services. And those are the things that you never cut back on. And and so typically, if you're not buying a cup of coffee in the morning, you're not going to go out and buy a car in the afternoon. It just takes a little while for that to catch up across the income spectrum. And what we're beginning to see now is that upper income tier is beginning to feel pressure. They can still keep spending, but the pressure builds. And it means probably that you'll see the savings rate begin to decline even though it probably should be rising based on where interest rates are. >> And maybe we'll get a holistic look at this when we get retail sales. Oh, wait. We don't have any data coming out of the government. There is this feeling right now. You need to parse through the earnings to get a better sense of it. Has there been anything in the earnings so far that has ratified the view you have or are there a couple of earnings reports that you're really keyed into to give you the ultimate sense of whether this really is uh the reality this weakening in even the upper echelons of income earners? >> I mean to be frank no uh but I mean that that's why you know that's why I get to do what I do is because I have to make decisions based on kind of the limited amount of information that I have. What we what we are paying very close attention to are Federal Reserve surveys. You have to pay attention to the beige book. You have to pay attention to the earnings reports. But even the earnings reports can see people transiting from one, you know, one kind of product to another, right? From beef to chicken or from, you know, who knows what people like anymore. I I don't understand actually what people I I am not the average consumer and I am readily willing to admit it. Um, and my tastes are not everyone's tastes. So, uh, it's it's hard to kind of figure out which direction everyone's heading. Um, but I do know that people are shifting from what they're used to doing. And when people are shifting from what they're used to doing, that's happening because of a reason. And that reason typically isn't good. People are creatures of habit. They like to do what they did yesterday. >> If the high-end consumers under pressure, what kind of economy are you describing? Because everyone continuously says we're in a K-shaped economy, but what you're describing does not sound like a K-shaped economy. >> So when you when you when you do economics for long enough, what you realize is the top 10% spends no matter what. the bottom 10% spends no matter what. Uh, and there's a the cohort in the middle is actually the one that moves around their spending because they've got some sav potential for savings. Uh, and so you really have to watch the movement into and out of the savings rate. Uh, and whether or not people are feeling like they can spend money. Now, it gets complicated when inflation's present because often times the way people make up for the increase in prices, at least initially, is by cutting back on their savings rate. uh even if they were feeling a lot of pressure or worries about their job. And so things begin to break down. Those relationships begin to break down. And so, you know, all the people using, you know, AI to model the economy right now, uh you know, it's the big new new thing. Those models are incredibly complicated. And what you're going to see is that the coefficients on the front of of each um of each variable that you can use are probably shifting around and they might be canceling each other out. And so your whole model might be breaking down and you're probably not going to recognize it if you're using models that are too advanced rather than looking at individual components of what's happening and the relationships between, for example, savings and interest rates. >> What are you most looking at this week, next week when it comes to earning season to really understand how much that high-end consumer is under pressure? >> Well, as I said, it's it's difficult for us to kind of look at an individual company and figure out what's going on. upper income consumers are going to continue to spend on things like airfare. They're going to continue to go on vacation. The question is, are they going on vacation and instead of going to Europe, they're going to California or instead of going, you know, they're taking the slightly less expensive option. There are down, you know, everyone's got a lifestyle and certain things are downgrades for certain people. And I it's it's easy for us to all kind of laugh about it, but for these people, it's actually a serious change in their lifestyle and it affects their perception of what it means to be rich, for example. What's it mean to be rich when you actually have to think about the airfare, right? These are people who are not used to thinking about how much they spend on airfare. They're not used to thinking about, gee, you know, like I really like that hotel. It's in the center of the city and it's my favorite hotel because they have a favorite hotel in Europe, right? And now they're thinking, well, I can't afford my favorite hotel in Europe. I have to downgrade it. It actually it comes with a social cost. You don't have to cry for these people. Their lives are still really good and probably better than a lot of people's, but you know, it doesn't mean that they feel as good as they used to. Drew, banks aren't feeling as good as they used to after last week. Let's talk about the financials. Zion in the pre-market is up by 2.5%. It was the focal point of a lot of people last week coming out and basically revealing some losses tied to potential fraud. This isn't the first time we've seen this kind of thing. We've seen some other credit issues as well. You've got the credit issues on the one side and then really robust earnings on the other side and we saw that from Zion overnight. How are you and what is your perspective on what is happening right now in this sector? >> Well, so I people are nervous. Uh if you look at credit market spreads are incredibly tight. So you're in this weird world where all in yields are okay, right? the amount you can get paid for is okay, but the actual premium you're getting paid to take risk is actually maybe a little too low. And so, um, I I think what you're seeing is just the nervousness around the around the economy that we don't really understand that everything's okay. We we're waiting for that next shoe to drop. Jamie Diamond, you know, put it famously. Uh, what he's really expressing is not that he sees anything, but that he's expecting something. It's kind of like you live in an apartment in New York City and you might never see a roach, but they're there. You know they're in the walls. You know it, right? And so you don't leave food out. You do a whole bunch of different things when you live in New York. You know, there's things that you can do in suburban New Jersey where I live that are okay because you're not going to attract animals that quickly. Uh but if you do it in New York City, you're basically stunk. And I think the the risk is is that people are really focused on um you know what they're not seeing. And and the fact of the matter is is with no economic data and with, you know, earnings kind of, you know, being okay for the most part, uh they're nervous that they're missing something, but they don't know what they're missing. >> So, Drew, where are we? Are we in a grand house on Murray Hill infested with cockroaches, or are we in a nice Soho apartment? What is this? >> We might be trading down from a Soho apartment to something on the Upper East Side. >> Okay. Does that mean you're d-risking? >> Uh, we've been we've been derisked for a while now. Now I mean to be honest with you since co there have been kind of you know there's been kind of one risk after another after another uh and you know to the extent that we've been able to kind of go up in credit we've been going up in credit I don't think that's a surprise to anyone and and I think you know everyone who's able to has been doing that uh or you've been looking to things like privates where you're taking maybe more liquidity risk which you can more easily define um but getting uh less credit risk on on most sides of it if you're doing your underwriting properly. Stay with us. More Bloomberg surveillance coming up after this. [Music] Let's turn back to earnings. Shares of General Motors jumping after the company beat earnings and raised guidance. The GM CFO Paul Jacobson joins us now for more. Paul, the stock is up by more than 9%. We'll spend some time talking about the numbers, but I just wanted to take a step back with you just for a brief moment. You've got real experience navigating volatile industries, experience in the airline business and experience in the automaker business, too. You took over as CFO in the pandemic. Can you talk to us about this year, Paul? Just how agile have you and the team needed to be and how volatile have things been, too? >> Well, Jonathan, first of all, thank you very much for having us. It's a great day to be at GM and celebrate the success of uh all of our employees and partners worldwide. So, really appreciate uh you being here today. uh having me today. So, you know, at the end of the day, it's it's it's just another change. I mean, since uh coming to GM uh in 2020, we we've gone through COVID, we've gone through chip shortage, we've gone through tariffs, uh we've gone through EV pivots and and so on. But what we've really tried to do is create a model that is resilient. And when you look at our balance sheet, you look at our inventory discipline and the way we've gone to market, um there's a lot of things that have changed that allow us to be able to react to the world around us faster. Uh, and I think that's that's uh paved the way for us to have a uh another really strong year in the face of a lot of macro changes. >> Paul, in order to increase resilience and maybe agility, do you have to sacrifice long-term planning? Is that something that becomes harder? >> Well, you know, I think what we what we've really done uh well as a team, I think, is we've kept focus on that long-term vision. So, you know, for example, while we've taken a charge on uh reducing some of our EV capacity, reflecting the demand that's out there, we still believe that EVs are the future. Um, and uh we think that there's an opportunity for us to take a little bit of a pause in in demand growth that we've seen over the last few years, structurally improve it, rightsize our capacity, and make sure that we can be successful as more and more customers adopt it. So it's just an example of how we make sure that we're managing the short term within the face of that longerterm vision. >> So what are the big steps Paul that you've taken in order to remain agile particularly with supply chains and removing uh any kind of direct input from China in particular? How much have you rejiggered how where you get your goods? Well, I think we learned a lot um in industry from COVID and uh and a focused supply chain that was really susceptible to individualized shocks. And I think we've taken the effort to try to make sure that we diversify our uh our supply chain base. Uh we've made a number of investments for example in battery raw materials and and other materials in the US. Uh in addition to the $4 billion that we've uh announced this year to increase our US manufacturing capacity. So I I think it's been a case of making sure that that's balanced. And then when we went through the chip crisis uh of 2021, there were some more challenges about making sure that we expand the places where some of our chips are fabricated and our supply base that we use. So this has just been part of it. Um I think we've learned a lot of lessons over the last 5 years that have helped us and position us well to be able to thrive in uh everchanging circumstances like we see right now. All this costs a lot of money and I'm just trying to get my head around, we've all been trying to get our head around where it comes from these extra costs in order to rejigger supply chains to offset any kind of increased costs that might come along the way. How much is coming from whether it's freezing uh labor forces or trimming around the edges? How much is coming from higher prices uh on consumer vehicles? Well, I think if you look at um what GM has done, we we've saved a lot of money by rationalizing our uh inventory balances. So, we used to keep probably about 40% more inventory on the ground uh at our dealerships um uh around the country. And uh we've we've cut that down. That's frees up a lot of working capital to be able to invest and redeploy back into the business. But it also makes sure that we can change uh much more quickly to changing demand uh around us. So, uh, our pricing has been stabilized, and I think that's given us a little bit more comfort to invest a little bit more than what we have historically, but still making sure that we're very disciplined, uh, with our capital allocation because we still have opportunities to pay down debt and also return capital to shareholders. So, it's that balanced approach that I think has really paved the way for our success. >> Paul, you and your colleagues in the industry recently had a big win in Washington. a little bit of reprieve when it comes to the arrangement on the timeline for the tariff costs for imported auto parts. What else are you asking in terms of tariff relief from Washington? >> Well, you know, I think I want to praise the administration for really listening to the to the concerns of the industry and making sure that they're helping us to be positioned to be really successful as uh one of the largest US industrial uh producers that are out there. And the announcements that were made Friday uh essentially take what had already been done by the administration in the spring and expands it a little bit to be able to use those MSRP offsets on a wider variety of parts that we're bringing into the country. And as a result of that, we were able to lower our total tariff forecast um for the year by about half a billion dollars from where we um uh started the year. And I think it's that proactive partnership in terms of really making sure that we can remain competitive uh and help to drive more investment into the US, which we've done. >> So, do you expect more reprieves, especially as the US goes into negotiations next year with Mexico and Canada? >> Well, I think what we're looking for is is a little bit of stability. Obviously, this year's been a bit of a transition year. Um, you know, for us, the uh the the handshake deal that we have with Korea, we're really eager to get that finalized. Um, we do have some production of some of our lowerc cost models um, in Korea that that help with some of the affordability concerns of our consumers here in the US. Um, but also obviously Mexico and Canada are going to be really important to us. But as we look at those deals being finalized and we start to look into 2026, we think that there's actually an opportunity for us to do better in 2026 than we've done in 2025 and start to work our way back up to those 8 to 10% targeted margins that we set for ourselves before the tariffs uh were put in place. Paul, just finally, can we stay in Asia and finish on China? Paul, for a long time, we've said on this program, this must be the most competitive market on the planet in any industry. How difficult is it to operate in that country right now? And how much harder is it going to get in the future for US automakers like yourself? >> You know, about a year ago, Jonathan, we we undertook a pretty ambitious restructuring program in China with the realization that, you know, we were probably not going to be as big in China as we have been historically going forward with the amount of just tremendous competition that's in the country going forward. But, you know, together with our partners, um, we were able to restructure that business and we've been profitable um, every quarter this year and and look to be able to sustain that. So, it's it's really about making sure that we're rightsized for where we are. We've got great products over there. We've got a long legacy and we've got a good partnership that I think has has really paved the way. And with that work that the team did in China, really proud of what they accomplished and think we can be sustainable there. >> Stay with us. More Bloomberg surveillance coming up after this. [Music] With us around a table, Monica Quer of Morgan Stanley. Monica, good morning. >> Good morning. >> China's flexed and it's flexed and the whole world has listened and arguably maybe even brought the likes of Australia and America closer together. Was that a strategic mistake going into negotiations later this month? I think what's interesting about this deal is that China's response was actually constructive on paper, right? They were actually positive, saying, you know, yeah, join the join the party on on rare earth. That was really surprising to me. That tells me that they're not worried. That takes it's going to take at least 5 to seven years, maybe longer, to have this whole initiative ramp up. A lot can change in that time. Doesn't mean that this isn't going to be a positive for the US. I think more, you know, players at the table is ultimately long-term a benefit, but this isn't a zero, you know, end game here. >> So, going into this meeting, it sounds like, do you think China has the leverage? >> Um, I would say that both parties, right, need each other. We're thinking about our our combined economies. They don't want a 100% tariff on all of their goods. That's an issue for them. But they don't really need to worry about this move on rare earths. I think that they're going to be focusing on the other components. China is still uh the in charge of 90% or more, right, of that market. So, this isn't a now issue. It's going to make them have to focus on all these other factors that could impact their import export relationship. To Jonathan's point, China though flexing its muscles on rare earths. Is it giving the Trump administration an excuse to continue making these deals where they take outright equity stakes in mining companies? Um, I'm not I'm not going to speak to that, right? To that piece. I think, you know, we were all surprised by the other outright stakes in in US companies. Now, as far as the the mining company component, we're going to continue to see foreign direct investment, right, directed out of the US in order to make these deals happen. What's going to be interesting is as we build out our relationship with Australia and China is like where do we land on that on that final tariff number? And I think that again when we go back to actually the beginning of the year that you could see something that's in that 30 to 40% range if we're going to go back to those campaign promises. Do you think that's where we end with China? Say 2026. We're kind of there now on some products. >> On some products I think, you know, you could see an increase on those section 301 tariffs. You could see more on, you know, section 232. The other ang piece here, right, that we have to really appreciate is the US's reliance on that tariff revenue from a fiscal policy perspective. and the fact that we're in the middle of trying to even determine if we can have the AIPA tariffs in place and once we get that it's going to be that patchwork on section 301 section 232 and others right to try to make us whole from a fiscal policy perspective. So I would say from China's lens, yes, maybe they have they definitely have the advantage on rare earth. Is there something at stake for them big time, right? When we're thinking about that relationship, but the US also has to think about their fiscal policy future and trying to find that sweet spot. So given that concern and that hang-up and that frankly support to uh the debt market, how much of a risk case is it if the Supreme Court overrules the tariffs that have been put on and forces the administration to scramble and cobble together another sort of regime of tariffs to plug that fiscal gap? Well, they're already working on it. So for example, section 232 tariffs, you have to have studies put in place. Those prior to the shutdown were in the works. And so I think we need to get through this shutdown period in order to see some of those puzzle pieces come into play. I think markets are right to assume that there will be some tariff revenue coming in at the end of the day. It's just what how much and that's going to be the big question. If they get a negative ruling, there will likely be a market response, right? That's that's natural. That's going to be a normal course of action, but soon to be backfilled with all those other tariff pieces that they've been, you know, working on heavily. We got GM earnings earlier this morning and it showed that the tariff mitigation plans have been working and have offset a great deal of any extra cost. In general, earnings have been pretty positive across the board. Is the takeaway that the tariffs are manageable and that frankly companies are adjusting and adapting and it wasn't a big as big of a hit. Even if the tariffs go in and remain as such, it's not as big of a hit for the underlying profitability momentum of the United States as expected earlier this year. I think that the full pull through right of impact of tariffs hasn't been seen yet. So while I think that the GM reporting is a positive sign that we're finding a sweet spot here, one of the key things we have to focus on is this patchwork, you know, component of tariffs and what that's going to mean for the consumer in other areas. So while they might have found that sweet spot with GM and the auto industry, can they do it across the board when we're thinking about all goods and services? That's to be seen and you know we'll we'll uh you know get more information in November. >> What channel are you and a team focused on prices or through the labor market cost cuts? >> Um we're focusing on labor market right now especially as it relates to uh the shutdown because this is a really interesting period. Typically when you have a shutdown, right, people get laid off and then they get brought back. And so that furlow period you essentially get made whole. Doesn't have a major impact long term. Now, this is different because we don't know how many employees are actually going to be brought back and so that could have an additional drag, especially when we're thinking about those inflationary factors. Stay with us. More Bloomberg surveillance coming up after this. [Music] Traders locking in beds. The Fed continues its easing cycle at next week's rate decision. and L. Davis of Beimo seeing an increasing chance of a 50 basis point rate cut in December saying the opaqueness and lack of transparency in private credit could be used to accelerate eases. Joined us now for more. Welcome to the program, buddy. So, let's skip October. That's done dusted. What's on the table for December? >> Well, December, our base case is still 25 basis points. We just see the chance of a 50 has increased dramatically. And the reason why it's increased dramatically um is because we've moved our possible terminal rate. we saw terminal around 3% slightly higher than than the market to 250 and the reason why we see it we've lowered it so dramatically um is because of you know yourricolor your true brand basically private credit in general uh we believe that the private credit where um the opakeness comes in from and the ownership of it it's usually real money pension plans and like so it's going to be a slow sleeping uh seeping credit uh move uh wider like things wider. Um, so it's binary whether they go 50, but we see an increasing chance of 50 in. >> Do you believe then based on the credit risk that you describe? Do you think it could lead to a broader tightening of financial conditions >> temporarily? Yes, we do believe it can. We don't believe it's systemic. And the reason why we don't believe it's systemic is, as I said, most of the holders of private credit are real money. So, they could take the losses. Uh, liabilities, they still have the liabilities to deal with. So it does have an impact on the economy but they could take the losses. Having said that why why we see it as a possib increasing chance of 50 is it basically took the safety off the gun of 50 eases. And the thing about 50s is um central banks just don't do 150 otherwise they wouldn't do it. Um so that's why we we lowered our expectation for terminal uh to 250 by the end of 2026. So I hate talking about cockroaches this early in the morning, but there is sort of this irony that the reason why there are these fears of credit problems is because of the prolific Fed policy that has enabled this and the fact that monetary conditions used to be a lot lower to allow a lot of credit creation uh that may have overlooked a number of different underwriting standards. I'm just wondering if there's a bit of moral hazard here. the idea that the economy isn't cracking and that the Fed could respond to concerns in credit that were done in pretty easy financing conditions. >> Yeah. No, we do believe um I I don't know if I'd use the word moral hazard, but there is definitely inflation hazard risk. Um um because you know it hasn't our growth despite what's going on in credit, our growth expectations have not changed for 2026 and it's because you know big beautiful bill everything people are hearing. We think it's very supportive of growth and growth will still be good. So then you're going to be in a in a very easy uh financial conditions market and we think uh there's a big risk for inflation but the market's not focused on that. We're not focused on that right now. We think that's a late uh 2026 story. One of the interesting things about inflation though we do get a print Friday and if we do get a higher than expected print the market you know credit will widen duration will go higher. We think that's temporary. We would use that as an opportunity to go longer duration and to go longer credit because we think the 50 basis point uh eases are very much on the table. >> So if inflation is still a concern, Earl, how do you get conviction to go into long-term rates on Fed cuts that affect the front end of the yield curve? >> Yeah, it's it's very easy. As I I said, you know, I've been in this market for 30 years and and one of the things with the market is it only focuses on one thing at a time. And right now inflation is not the focus. So it's determining what is the catalyst to get inflation back on the radar. And there there's basically two catalysts. One is employment. Employment starts improving. We don't expect to see that until 2026. And you know there's no data or tier one data coming out on employment. And the second thing is geopolitical. Uh and what I mean geopolitical is an oil price spike. Um that we'll see coming um and we'll be able to to adjust positions accordingly. And the reason why I say we'll be able to adjust positions accordingly in a higher yield bare market, you don't get, you know, yields higher by two or three or four or five basis points a day. You get yields higher by 15 or 20. Once you start getting a sense of that with a catalyst either being oil or employment when that starts coming out, that's when you adjust duration to reflect that. Right now, it's an easing environment. There's no catalyst for that to turn. And our terminal, as I said before, has gone lower, which changes our view on duration right now. >> Earl, will the government shutdown force the market just to focus on inflation? That's the data we're going to get. And what you hear from Washington is that they're expecting a prolonged shutdown, even potentially having congressmen and women come back to extend the date on the continuing resolution because they're hunkering down for a long shutdown. >> Yeah, the market will focus on inflation. I think that's fair, but it won't be persistently focused on that because you'll get central bank speak once they're out of the blackout period or at the FOMC meeting. Uh, and you'll get, you know, um, people focusing back on employment, you know. Um, and that's why we see it as a buying opportunity because that focus will be very short-lived, very temporary. Um, so, so yes, it will focus on inflation, but you know, everyone's made clear that employment is the thing that the central bankers are looking at. El Davis of Beimo. Thank you. >> Can I say one more thing? Can I say one thing? >> 20 seconds, sir. You can absolutely. >> Go Blue Jays. Go. Thank you. >> My god. >> Nice. >> This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6:00 a.m. to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always on the Bloomberg terminal and the Bloomberg Business app. [Music]