摩根士丹利：高名义GDP支撑美股，利率或维持高位

Bloomberg Audio Studios podcasts, radio, news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Our interview of the day on fixed income, James Karen. Jim Karen joins us uh with Morgan Stanley, CIO Cross Asset Solutions. Jim, you know, I love your note where you review nominal GDP.

When you talk to your accountants, your economists, excuse me, when you talk to your economists, do you see a sustained nominal GDP or can it come down from the 5% level?

Well, good morning, uh Tom and Paul. Um listen uh you know nominal GDP is is really if I'm talking to my accountant he sees only nominal dollars right we all get paid in nominal dollars right so what we observe in the world is a nominal world we don't observe like we don't get paid in real dollars so you know the fact that nominal GDP first quarter of this year was running at 6% which is significantly above the average over the last you know many years which was closer to four and in the second quarter uh nominal GDP, if you look at the GDP deflator, nominal GDP was running closer to 7.9%.

If you use PCE as your inflation measure, it's closer to 6 1/2%. But the point here, Tom, is that if you're in a higher nominal GDP world, you tend to get higher earnings. No surprise there. We can take a look and see what's going on with second quarter earnings and even with first quarter earnings. And that's the kind of connection that we should draw. So when I talk about higher nominal GDP, think about that as higher equity earnings and earnings per growth and and and earnings per share growth.

So Jim, how does our Federal Reserve adapt to this type of economic environment and growth environment?

Well, I mean, you know, part of this is is is the inflation element to it, right? You know, so nominal GDP is real growth plus the inflation. So you know what's driving the higher nominal GDP is that we are living in a higher inflation world somewhere around 2 and a half 3% let's say we'll I guess we'll find out more on Wednesday. Um so you know the question is is inflation accelerating higher? Can we sustain a 2.5% inflation to 3% for the time being until it settles back down?

Yes. I I I don't think that that is going to be overly corrosive, you know, for the Fed as long as they believe that inflation and inflation expectations are not becoming ingrained where it becomes, you know, something that uh, you know, becomes more destructive going forward. But so at this point right now, I think it's sustainable, but you know, I guess we'll find out more on Wednesday with CPI.

How do you expect here um just kind of interest rates in general? It just feels like we're higher for longer here. Jim, is that the world you think we're in or are we going to see some moderation?

Yeah, I I I do think that we're in a higher for longer uh in in environment. So, you know, one of the correlations that you can draw and you can go back over a long period of time is nominal GDP versus the 10-year yield. Those two usually sit pretty close to each other. And I'm not calling for 10ear yields to go up, you know, significantly. I think that we're primarily in a range and we're going to go pretty much sideways into the end of the year.

But, you know, the the ability for rates to move down sharply right now, particularly at the back end, outside of having a recession or some really sharp slowdown in the economy, I think is somewhat limited. Um, because, you know, in the environment that we're in, you know, at the current moment, it just seems that nominal growth is going to be higher, which means that it it just it just alleviates the risk of of yields moving down sharply.

So the Jim the gloom crew is going to step in and say okay there's all this fancy Jim Karen talk but the question is the fiscal state we're in. How do you pull in our debt and our deficit into that ancient worry oops price down yields up bigly.

So so this is a great question Tom. So so let's connect the dots on this. So the idea is that if you have higher nominal growth, which we do, that's what pays down your deficit, right? That is the number one thing that pays down your deficit. So you're absolutely right. The deficit is too high. It's around 6% of GDP. It's been coming down. It's by some measures, it's it's slightly under six. Um I'm sorry, that's the fiscal deficit, not debt to GDP.

Debt to GDP is, you know, is still a little bit high depending on what what metric you're using around 120%. Now, that's likely to come down as long as you have higher nominal growth. That's what brings that down the fastest. That's what we did after World War II, right? We had yield curve control. We capped, you know, 10-year yields at 2.5% and we allowed nominal GDP to get above six and that's what paid down the deficit after World War II.

So, in some ways, we're doing something similar to that right now with higher nominal growth. Jim, how is this kind of world of higher economic growth, has that changed your asset allocation at all?

Yeah, absolutely. So, basically, if you're at a higher nominal world, you you're likely going to favor more equities over fixed income. So, when you think of 6040, I I would say, you know, 60% equity, 40% fixed income is a traditional balanced portfolio. I would say that the 40% in fixed income becomes somewhat challenged right now just because you don't have the ability to to generate high levels of return without rates moving down very sharply.

So so the equity markets tend to have higher valuations when you have inflation somewhere around 2 to 3 1/2% which is where it is today. Valuations tend to be higher and sustainably higher. Companies have margins, they have pricing power, they they generate higher earnings. Um, so equities tend to be the asset class that is in favor in in a higher nominal growth world. So it it tilts me more towards the equity spectrum and a little bit away from fixed income.

So do you look in terms of use of cash is dividend growth and share buyback to be a constructive yield equivalent forward three or five years?

Yeah. Be yes. You know, absolutely. Because look, you know, dividend yields are real yields, right? You know, that's the yield you get after all the expenses and inflation is a cost, right? That's what you get back from the, you know, the, you know, the the stock that you bought. So, what what you want to have are higher real returning assets, real yields. And I as I always like to say that you know equities are are are are a are a nominal asset with real returns because with equities you get the return after all the expenses.

Inflation being one of those expenses. So whether it's dividends or if it's buybacks or whatever the case may be, that's where you're likely to see the appreciation, the most appreciation in your investment is likely to come from the equity side of the ledger as opposed to the fixed income side. That doesn't mean fixed income is not important. You still need that as a hedge and as a good source of income in your portfolios, but you have to balance it properly.

Jim Karen, thank you. Terrific Monday morning brief with Morgan Stanley. Jim Karen. Stay with us. More from Bloomberg Surveillance coming up after this. You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10:00 a.m. Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business App or watch us live on YouTube.

Joining us now, John Galla writes a wonderful earnings update all through the quarter as well with Seapport at Research Partners. You are in the surveillance timeout chair. A 66-page PowerPoint is an October event. Now you have an August 66-page PowerPoint. What are you, Mary Maker? Which is the most important slide in your 66 page PowerPoint? There is one slide righ