WEBVTT - Q2 and Turkey Votes 0:00:00.080 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.960 --> 0:00:15.560 This is the Bloomberg Surveillance Podcast. I'm Tom Keene along 0:00:15.600 --> 0:00:18.960 with Paul Sweeney. Join us each day for insight from 0:00:18.960 --> 0:00:23.160 the best in economics, finance, investment, and international relations. You 0:00:23.160 --> 0:00:26.520 can also watch the show live on YouTube. Visit the 0:00:26.520 --> 0:00:31.280 Bloomberg Podcast channel on YouTube to see the show weekday 0:00:31.280 --> 0:00:34.320 mornings from seven to ten am Eastern from our global 0:00:34.360 --> 0:00:39.000 headquarters in New York City. Subscribe to the podcast on Apple, Spotify, 0:00:39.360 --> 0:00:42.920 or anywhere else you listen, and always I'm Bloomberg Radio, 0:00:43.080 --> 0:00:44.199 the Bloomberg. 0:00:43.800 --> 0:00:46.280 Terminal, and the Bloomberg Business App. 0:00:46.479 --> 0:00:49.879 This is an important conversation and perfect to start the 0:00:49.920 --> 0:00:54.080 second quarter. David Sowerby is out in Detroit with Encora. 0:00:54.240 --> 0:00:56.680 We're thrilled to join us today and looking really at 0:00:56.760 --> 0:00:59.880 mid cap, small cap and now on lovely are David, 0:00:59.880 --> 0:01:03.200 I think this is something everybody, including me, has wrong. Okay, 0:01:03.280 --> 0:01:06.200 I didn't buy Nvidia, Sweeney owns it. I didn't buy 0:01:06.240 --> 0:01:09.800 the other magnificent for whatever. But the answer is large 0:01:09.840 --> 0:01:12.960 cap over the last decades up twelve thirteen percent a year. 0:01:13.480 --> 0:01:17.800 MidCap is terrible, lagging way behind Beloney. It's up eleven 0:01:17.880 --> 0:01:21.800 percent per year the Vanguard MidCap fun Why are midcaps 0:01:21.840 --> 0:01:26.920 so on, love David sowerby. 0:01:25.400 --> 0:01:28.240 Tom I think it's because they sit a little bit 0:01:28.319 --> 0:01:32.240 in no man's land. You have small cap stocks that 0:01:32.280 --> 0:01:36.800 are trying to graduate to MidCap, large cap stocks that 0:01:36.920 --> 0:01:39.520 sometimes are on their way to mid cap. And if 0:01:39.560 --> 0:01:42.760 you think about as you position portfolios, the small cap 0:01:42.800 --> 0:01:45.280 manager is going to own names and continue to have 0:01:45.319 --> 0:01:49.120 conviction at migrate up. Large cap managers are going to 0:01:49.200 --> 0:01:53.120 migrate down in cap, and sometimes that exclusive MidCap manager 0:01:54.160 --> 0:01:57.120 gets forgotten. That's why I like something like smid small 0:01:57.160 --> 0:01:59.880 and mid combined small and midcom. 0:02:00.320 --> 0:02:02.800 I think about kelen Nova. I don't know where you 0:02:02.840 --> 0:02:06.280 put that. I mean, that's a twenty billion dollar market cap. Yeah, 0:02:06.320 --> 0:02:10.880 I have to spun off from Kellogg's because cheese It's Tom's, 0:02:10.919 --> 0:02:12.880 and we like cheese. Its here at seven we do, 0:02:13.000 --> 0:02:14.200 like Jesus, yes we do. 0:02:14.320 --> 0:02:17.120 That's the official food of Bloomberg Surveillance exactly. 0:02:17.320 --> 0:02:20.720 So David talked to us about a company like kelen Nova. 0:02:22.760 --> 0:02:26.519 Sure don't don't forget pop Tarts and pringles of course, Well, 0:02:26.600 --> 0:02:31.280 of course they're growing internationally, Bottle creep and in both 0:02:31.360 --> 0:02:36.680 cases yes, and and Kellogg, the old Cereal play is 0:02:36.720 --> 0:02:38.560 having a good run as well. If you look at 0:02:38.600 --> 0:02:42.160 the Bloomberg Spinoff Index, it's up twenty five percent year 0:02:42.200 --> 0:02:44.840 to date. Over the long term, one of the best, 0:02:45.120 --> 0:02:49.600 if not the absolute best formula for unlocking value in 0:02:49.639 --> 0:02:53.520 that small MidCap area is to buy the spinoffs. And 0:02:53.560 --> 0:02:57.360 they're back on their on their treadmill again in twenty 0:02:57.480 --> 0:03:00.640 twenty four. And that's why I think the ability for 0:03:00.680 --> 0:03:04.560 a small MidCap manager to outperform their benchmark is going 0:03:04.639 --> 0:03:09.800 to come buying spinoff stocks like Kelenopa, like Era Mark, 0:03:09.840 --> 0:03:13.200 which spun off it's its uniform business and now it's 0:03:13.280 --> 0:03:20.400 just food at sports venues, universities, hospitals. I like spinoffs. 0:03:20.400 --> 0:03:23.760 In our great final four appearances, it looks great. Bloomberg 0:03:23.800 --> 0:03:29.240 Spinoff Index, Paul Sweeny bn SPI N b N SPI 0:03:29.600 --> 0:03:32.400 N is the index. It's on the Bloomberg terminal in 0:03:32.440 --> 0:03:35.360 your car and next to your YouTube remote control. 0:03:35.600 --> 0:03:38.480 Exactly right, all right, David, So we step back and 0:03:38.560 --> 0:03:42.320 we think about this market here. The first quarter was 0:03:42.400 --> 0:03:44.840 just such an extraordinary performance and really coming off those 0:03:44.840 --> 0:03:47.520 October lows, you know, up over twenty five percent for 0:03:47.560 --> 0:03:49.960 the s and P five hundred. Do you get concerned 0:03:50.080 --> 0:03:53.280 that this market might be overextended here a little bit, 0:03:55.360 --> 0:03:56.000 not so much. 0:03:55.880 --> 0:04:00.320 Over extended, but maybe that pause that refreshes. And even 0:04:00.320 --> 0:04:02.640 though the market had that ten percent gain in the 0:04:02.680 --> 0:04:05.800 first quarter, the median S and P five hundred stock 0:04:05.840 --> 0:04:09.040 the median was up about seven percent, So I think 0:04:09.040 --> 0:04:11.800 there's more room to go. You're able to find companies 0:04:11.800 --> 0:04:15.560 that are generating favorable free cash flow margins, growing the 0:04:15.600 --> 0:04:18.520 dividend that close to a double digit pace, and I 0:04:18.520 --> 0:04:23.480 think there's more room to go. Recognizing that, ever elusive, 0:04:23.640 --> 0:04:25.560 we will get that ten percent correction. 0:04:25.720 --> 0:04:26.520 You just got. 0:04:26.279 --> 0:04:29.400 To fight and grind through it because taking too much 0:04:29.600 --> 0:04:32.000 evasive action trying to predict it. 0:04:32.400 --> 0:04:38.320 Feudal Crane ce xt currency printing presses. 0:04:38.440 --> 0:04:41.280 I'd been to their factors was a rite of passage. 0:04:41.279 --> 0:04:44.760 You went to Crane stationary and et you were bored. 0:04:45.040 --> 0:04:46.919 If you fell over, you'd fall into a vat and 0:04:47.000 --> 0:04:48.280 die exactly. 0:04:48.920 --> 0:04:51.440 So, I mean, I haven't thought of Crane seext in 0:04:51.480 --> 0:04:54.200 a long time. Talk to us about that story. 0:04:54.440 --> 0:04:58.159 Well, it's a spinoff from Crane, the industrial company that 0:04:58.240 --> 0:05:01.960 has one hundred year history. So what we're seeing is 0:05:02.080 --> 0:05:04.880 not just currency demand in the US, as the FED 0:05:05.400 --> 0:05:09.159 was on this twenty five to money supply growth rate, 0:05:09.440 --> 0:05:12.760 but we're seeing it internationally and there and there's more 0:05:12.800 --> 0:05:17.320 concern about fraud, so that plays into their ability to 0:05:17.360 --> 0:05:20.680 print currency and avoid fraud. And that's a global story, 0:05:20.760 --> 0:05:22.360 and it's a spinoff story as well. 0:05:22.680 --> 0:05:22.880 Yeah. 0:05:23.040 --> 0:05:25.560 I look at this, David, and it's a great bullmarket, 0:05:25.600 --> 0:05:27.120 and I'm going to take it off the what I 0:05:27.160 --> 0:05:31.400 call the kompor yard Denny Low of October two ago. 0:05:32.240 --> 0:05:34.839 What happens in a second leg of a bull market? 0:05:35.040 --> 0:05:38.520 I mean, you know, you're a trustee of some serious money. 0:05:38.880 --> 0:05:42.440 What's our behavior we should expect in this second leg 0:05:42.480 --> 0:05:43.360 of a bullmarket? 0:05:45.000 --> 0:05:48.160 I think it's it's still that the micro is going 0:05:48.240 --> 0:05:53.039 to trump the ever concerns over the world is a 0:05:53.080 --> 0:05:57.560 more dangerous place macro uncertainty. Companies are going to grow 0:05:57.560 --> 0:06:01.360 their free cash at about fifteen percent in twenty twenty four. 0:06:01.800 --> 0:06:06.480 Valuations today for US stocks large cap and small cap, 0:06:06.760 --> 0:06:08.960 I think bode over the next three to five years 0:06:09.000 --> 0:06:12.040 to compound at a seven to eight percent price gain 0:06:12.120 --> 0:06:15.200 and in the dividend, and it's hard to beat that 0:06:15.320 --> 0:06:18.000 anywhere outside the US. So I think continuing to migrate 0:06:18.040 --> 0:06:21.680 into US stocks and for those small cap stocks, maybe 0:06:21.720 --> 0:06:24.480 a little less money into private equity given the leverage 0:06:24.720 --> 0:06:27.080 and deploying that in small cap makes sense too. 0:06:27.440 --> 0:06:29.800 David, thank you. A great way to start the second quarter. 0:06:29.880 --> 0:06:33.000 He is mister Sarby. David Sarby. He's a huge fan 0:06:33.080 --> 0:06:47.840 of the undefeated Detroit Typers. The closest ball Sween and 0:06:47.920 --> 0:06:51.320 I got to five beta Kap was a cliff notes. 0:06:52.000 --> 0:06:54.120 Greek remember Greek one on one in the school. 0:06:54.200 --> 0:06:56.160 It was like a one week course. Then you took 0:06:56.240 --> 0:06:58.359 Latin one on one and that was it. That was 0:06:58.360 --> 0:07:01.679 just because five Beta Cap was a great sorority. She's 0:07:01.720 --> 0:07:04.520 the real deal. Lori Calvissina, for years of credits we 0:07:04.600 --> 0:07:10.320 sent unto RBC, has delivered intelligence on something nobody wants 0:07:10.400 --> 0:07:13.080 to talk about, which is small cabs. Paul, you guys 0:07:13.080 --> 0:07:16.440 can explain this. Small cabs like every ten years they're 0:07:16.480 --> 0:07:19.680 in right and then they go on hiatus. Yeah, she's 0:07:19.720 --> 0:07:20.720 the smartest in the block. 0:07:20.760 --> 0:07:22.239 There's no other way to put it exactly. 0:07:22.400 --> 0:07:25.920 Lri Cavalsina joins us here in our Bloomberg Interactive Broker studio. 0:07:26.160 --> 0:07:27.760 She does a mill it in Lori Cavalsina is the 0:07:27.760 --> 0:07:31.200 head of US equity strategy for RBC Capital Markets. LOURI 0:07:31.240 --> 0:07:34.800 were up twenty five percent since those October lows. I mean, 0:07:35.680 --> 0:07:38.840 what's going on out there? I don't see earnings, you know, 0:07:38.960 --> 0:07:40.560 rising twenty five percent in terms. 0:07:40.440 --> 0:07:42.480 Of looking at the small caps specifically. 0:07:42.520 --> 0:07:43.640 Yeah, I mean it's just amazing. 0:07:43.760 --> 0:07:45.120 So look, I think there are a couple of things. 0:07:45.120 --> 0:07:47.720 I think the big move in November December they were 0:07:47.760 --> 0:07:50.160 over sold. You saw it on valuation data. You were 0:07:50.160 --> 0:07:53.280 close to sort of recession type lows on forward pees 0:07:53.320 --> 0:07:56.000 in the space, and positioning data wasn't at all time lows. 0:07:56.360 --> 0:07:58.320 But back in twenty twenty two you had been down 0:07:58.360 --> 0:08:01.080 around recession type lows. So they were starting to climb 0:08:01.080 --> 0:08:04.360 out of the hole. I think when people were ready 0:08:04.360 --> 0:08:06.760 to put on the FED rate cut playbooks, that's what 0:08:07.120 --> 0:08:10.240 sort of sparked the November December rotation. You evaporated those 0:08:10.280 --> 0:08:13.160 oversold conditions. I think where they sit today, they're due 0:08:13.200 --> 0:08:14.680 for a bit of a catch up trades. You've got 0:08:14.720 --> 0:08:17.440 average valuations three year high, but not all time high. 0:08:17.480 --> 0:08:20.200 On positioning. There's been some debate right about what the 0:08:20.200 --> 0:08:21.720 Fed's going to do and when they're going to cut 0:08:21.720 --> 0:08:23.320 and if they're going to cut, but it seems like 0:08:23.360 --> 0:08:25.360 we're still leaning in favor of that right now in 0:08:25.400 --> 0:08:28.280 the market consensus, So I think that's causing people to 0:08:28.280 --> 0:08:31.120 look at them again. And there's been some stealth stabilization 0:08:31.280 --> 0:08:34.040 there right now, as many people are talking about it lately. 0:08:34.640 --> 0:08:37.920 The thing that's happening now right is that economic expectations 0:08:37.920 --> 0:08:40.480 are being revised up in a hurry. So you got 0:08:40.480 --> 0:08:43.160 the rate cutpeede and piece in place, You've got the 0:08:43.200 --> 0:08:46.280 cyclicality starting to develop. And if we get allows the 0:08:46.360 --> 0:08:48.959 unemployment rate, I don't really care because small caps tend 0:08:49.000 --> 0:08:51.640 to outperform around the same time the unemployment rate starts 0:08:51.640 --> 0:08:52.040 to move out. 0:08:52.120 --> 0:08:55.000 Now, I just looked at a small cap called draft Kings. 0:08:55.040 --> 0:08:57.160 They took all my money on my final one. 0:08:57.640 --> 0:09:00.040 It's my final one and right doing that. 0:09:00.800 --> 0:09:05.080 But most small caps don't have thirty five people following 0:09:05.120 --> 0:09:10.880 them like the popular DraftKings. Is your world removed from 0:09:11.040 --> 0:09:14.800 the financial world because so few people follow small caps, 0:09:15.000 --> 0:09:15.360 so there. 0:09:15.240 --> 0:09:17.640 Are fewer people. I mean, frankly, you know, just over 0:09:17.920 --> 0:09:20.640 start doing small cap in two thousand and seven, and 0:09:21.040 --> 0:09:23.040 I would I can't even calculate how long I've been 0:09:23.040 --> 0:09:26.560 doing it, but I think I did notice as ZSG 0:09:26.800 --> 0:09:28.439 really took off. I saw a lot of my small 0:09:28.440 --> 0:09:32.120 cap portfolio managers repurposed as ESG investors, you know, kind 0:09:32.120 --> 0:09:34.400 of move from an area that was struggling a little 0:09:34.400 --> 0:09:36.840 bit to a hotter part of the market. So there's 0:09:36.840 --> 0:09:40.040 a been a big etfhysation of the small cap world. 0:09:40.120 --> 0:09:42.320 And you know, in terms of the au WIM that's there. 0:09:42.360 --> 0:09:44.760 But the active managers, you know, they're still out there 0:09:44.800 --> 0:09:47.600 doing good work. They really try to be out of consensus. 0:09:47.640 --> 0:09:51.640 They try to find hidden gems and I think, you know, 0:09:51.679 --> 0:09:54.280 there are some benchmark issues that make it kind of tough, right, 0:09:54.400 --> 0:09:56.880 But in general, you know, I think a lot of 0:09:56.880 --> 0:09:59.000 the small cap pms I see, you know, they are 0:09:59.080 --> 0:10:01.079 talked to. They just feel a lot of opportunity out 0:10:01.080 --> 0:10:03.640 there because frankly, there are fewer eyeballs on. 0:10:03.600 --> 0:10:05.959 The space you mentioned ESG. How does that figure into 0:10:06.040 --> 0:10:08.839 kind of your work in general? How does RBC think 0:10:08.880 --> 0:10:09.880 about Yeah, you. 0:10:09.880 --> 0:10:12.720 Know, I had a phenomenal associate. Her name was Sarah Mahaffey, 0:10:12.800 --> 0:10:15.199 and we spun her out I think in twenty twenty, 0:10:15.280 --> 0:10:17.880 twenty twenty one to be our ESG strategist. Okay, So 0:10:17.920 --> 0:10:20.440 to be honest, we've just really it became such a 0:10:20.440 --> 0:10:22.400 big thing it didn't make sense as part of my 0:10:22.440 --> 0:10:24.560 product really, and she was just doing a phenomenal job 0:10:24.600 --> 0:10:26.839 with it. So I really do feel like it's kind 0:10:26.840 --> 0:10:28.599 of its own world, the same way Small Cap was 0:10:28.640 --> 0:10:30.360 its own world for me back in two thousand and 0:10:30.400 --> 0:10:33.719 seven or so. It comes up less in my conversations 0:10:33.760 --> 0:10:37.160 for general equity strategy. I think people who are going 0:10:37.160 --> 0:10:39.240 to incorporate it into their process have done it, and 0:10:39.240 --> 0:10:41.079 they've got their system set up and they go talk 0:10:41.120 --> 0:10:42.880 to Sarah because she's still the real, you know, sort 0:10:42.880 --> 0:10:46.160 of expert on it. But that's very different from maybe 0:10:46.280 --> 0:10:48.480 say five years ago, when everyone was trying to get 0:10:48.480 --> 0:10:49.040 smart on it. 0:10:49.000 --> 0:10:49.520 In the US. 0:10:49.800 --> 0:10:51.720 Right, it seems like maybe in the US it's it's 0:10:51.800 --> 0:10:53.160 kind of waned a little bit, whereas I know in 0:10:53.200 --> 0:10:55.840 Europe it's still the place to be. Where do you 0:10:56.120 --> 0:10:59.560 see opportunities here? I'm not sure if it's mark a cap, 0:10:59.600 --> 0:11:01.800 it's if it's factor, if it's sector, where are you 0:11:01.800 --> 0:11:03.920 seeing opportunities right here? Because a lot of folks are saying, poay, 0:11:03.960 --> 0:11:05.520 this market's moves pretty aggressively. 0:11:05.559 --> 0:11:08.760 You know, Look, I make sector calls, I don't talk 0:11:08.760 --> 0:11:10.920 about them quite as much in my meetings the last 0:11:11.000 --> 0:11:12.640 few months. You know, we've been talking a bit about 0:11:12.720 --> 0:11:16.080 energy utilities recently. But the reality is it's mag seven 0:11:16.160 --> 0:11:21.920 versus everything else. And everything else can include small caps, financials, energy, healthcare. 0:11:22.080 --> 0:11:24.480 There's a lot of stuff that looks really interesting out 0:11:24.480 --> 0:11:25.640 there in your meetings. 0:11:25.640 --> 0:11:28.440 And you're a worker bee and you're in all sorts 0:11:28.480 --> 0:11:30.760 of meetings where I'm sure people are saying, look, I 0:11:30.840 --> 0:11:34.920 miss this. I missed last October, I missed two octobers ago. 0:11:35.400 --> 0:11:39.319 Forget about nvidiing all that, LORI kelvisina. How do I 0:11:39.480 --> 0:11:41.920 catch up? How do I enter the market? You're not 0:11:41.960 --> 0:11:44.320 going to give me dollar cost averaging right right? 0:11:44.400 --> 0:11:46.560 And look what I'm telling people is, let's start on 0:11:46.640 --> 0:11:49.280 why we missed it. What I think essentially happened in 0:11:49.320 --> 0:11:52.120 twenty twenty two is we had something really really close 0:11:52.160 --> 0:11:56.400 to a recession two negative GDP quarters any valuation metric 0:11:56.480 --> 0:11:59.360 and small cap or just general sentiment barometer. I can 0:11:59.400 --> 0:12:01.079 look at to recession type. 0:12:01.160 --> 0:12:02.520 Without without the stimulus. 0:12:02.520 --> 0:12:06.120 I think everybody's right, And you know, why did people 0:12:06.120 --> 0:12:06.760 feel so bad? 0:12:06.840 --> 0:12:06.960 Right? 0:12:07.000 --> 0:12:09.559 You look at the Michigan's Consumer Sentiment index, it went 0:12:09.600 --> 0:12:12.160 down to recession type loos or worse than a recession 0:12:12.320 --> 0:12:15.240 as inflation spike. So the misery index did what it 0:12:15.280 --> 0:12:17.280 does typically in a recession, but it did it because 0:12:17.280 --> 0:12:20.760 of inflation spiking, not unemployment spiking. So I think you 0:12:20.840 --> 0:12:23.439 have to look at recovery traits. Small caps are part 0:12:23.480 --> 0:12:25.720 of that, cyclicals are part of that. Financials are part 0:12:25.720 --> 0:12:27.679 of that is kind of the plumbing of the economy, 0:12:28.000 --> 0:12:30.840 and you look for things that have these recovery aspects 0:12:30.880 --> 0:12:32.840 that still have some good valuations in them. 0:12:33.200 --> 0:12:35.400 How about energy. I got wt CUD oil. 0:12:37.400 --> 0:12:39.679 I look this week and it's amazing how x on 0:12:39.800 --> 0:12:40.240 is behind. 0:12:40.360 --> 0:12:42.920 Yes, I filled up the ride this weekend. Then there's 0:12:42.920 --> 0:12:45.400 a sure three dollars and twenty cents a gallen. What's 0:12:45.400 --> 0:12:46.040 going on with energy? 0:12:46.120 --> 0:12:48.319 So look, energy is a cheap sector. Despite the move, 0:12:48.360 --> 0:12:50.679 it still looks cheap, both large cap and small cap. 0:12:51.000 --> 0:12:53.240 If the oil prices continue to be strong, then we'll 0:12:53.240 --> 0:12:55.600 see the earnings revisions come. They haven't really yet, But 0:12:55.640 --> 0:12:58.520 I think this sector is one in inflation edge, and 0:12:58.720 --> 0:13:01.080 two I also think that it's just a different sector 0:13:01.120 --> 0:13:03.679 than five ten years ago, the ESG concerns have kind 0:13:03.679 --> 0:13:06.320 of fallen by the wayside. The dividend yield is the 0:13:06.400 --> 0:13:08.520 highest of any S and P sector, and it's also 0:13:08.840 --> 0:13:11.520 very very high relative to history. So in an S 0:13:11.559 --> 0:13:14.240 and P five hundred world where very few companies offer 0:13:14.280 --> 0:13:16.319 a dividend yield and access and the ten year treasury, 0:13:16.480 --> 0:13:18.040 you can find a lot of that and energy if 0:13:18.080 --> 0:13:19.080 you're an income seeking in. 0:13:19.400 --> 0:13:21.560 My theme quickly, my theme two years ago was a 0:13:21.640 --> 0:13:24.120 roll up, the great zombie roll up, and it can 0:13:24.160 --> 0:13:27.160 be zombies or frankly, can be quality companies. Is that's 0:13:27.200 --> 0:13:28.760 what's coming this year, as we're going to see a 0:13:28.840 --> 0:13:31.720 roll up a small cap in a mid, mid into large. 0:13:31.840 --> 0:13:33.200 I don't know if you're you know, I've had some 0:13:33.320 --> 0:13:35.360 questions on M and A and if it's coming back. 0:13:36.080 --> 0:13:36.240 You know. 0:13:36.480 --> 0:13:38.600 One PM I talked to recently was talking about how 0:13:38.600 --> 0:13:40.480 the and the small k PM's all right, look at 0:13:40.480 --> 0:13:42.559 their portfolios end of the year. How many takeouts did 0:13:42.559 --> 0:13:44.720 I have? But one guy tell me it was as 0:13:44.760 --> 0:13:46.880 low as he's seen it in the history of his career, 0:13:46.960 --> 0:13:48.920 and so he's sort of wondering if it's coming back. 0:13:49.520 --> 0:13:51.480 The only thing that gives me a little bit pause 0:13:51.559 --> 0:13:53.480 in saying that it is is that I do think 0:13:53.520 --> 0:13:55.520 one of the things that pushes M and A is 0:13:55.559 --> 0:13:58.960 the idea that economic growth is lacking and economic growth 0:13:59.040 --> 0:14:01.480 forecasts are picking up in a hurry. So I'm not 0:14:01.480 --> 0:14:04.079 saying he's wrong, but I don't know that the need 0:14:04.120 --> 0:14:05.880 to go out and buy growth is all that strong. 0:14:06.040 --> 0:14:07.080 Lori Kelvistine to thank you. 0:14:07.120 --> 0:14:10.520 Soone's terrific brief back to back David Sawerby and Lori Kelvisina, 0:14:10.640 --> 0:14:14.479 inspired by the surveillance scenes inspired. 0:14:14.520 --> 0:14:16.600 I mean, it's a nut back there. And that's somebody 0:14:16.600 --> 0:14:21.160 who's this weekend. 0:14:22.360 --> 0:14:25.920 Ian Bremer's smartest guy in the block. He stole from 0:14:25.920 --> 0:14:29.320 Bloomberg News. Emery Pakar who joins us now, who was 0:14:29.560 --> 0:14:33.160 definitive in corporate finance, and you know the crash and 0:14:33.200 --> 0:14:36.280 all that seven eight oh nine, and now is on 0:14:36.320 --> 0:14:39.080 the Turkey Watch for Eurasia Group and we're thrilled at 0:14:39.080 --> 0:14:42.960 memory in short notice could join us this morning. The 0:14:43.000 --> 0:14:47.080 shock of this election emirate and I look at Airdawan 0:14:47.240 --> 0:14:51.800 saying this is my roots. I was the mayor. Istanbul 0:14:51.960 --> 0:14:55.840 is my heart. But he's lost. Istanbul. What does it 0:14:56.000 --> 0:14:59.320 signal for someone? Twenty two years on the watch. 0:15:00.080 --> 0:15:02.560 Yeah, thanks for having me on, Tom, great to be 0:15:02.680 --> 0:15:08.120 on show. So I think it says two things. The 0:15:08.240 --> 0:15:11.520 first and groundshaking one is that add On and the 0:15:11.560 --> 0:15:15.880 AKP's dominance of Turkish politics is over. As you will 0:15:15.920 --> 0:15:19.360 well know that people used to call the teflon ardon right. 0:15:19.600 --> 0:15:25.440 Nothing bad stuck to him ever, including very bad economic circumstances. 0:15:25.800 --> 0:15:28.120 But going forward to add On and the AKP will 0:15:28.120 --> 0:15:30.800 have to fight two cent nail for every vote that 0:15:30.840 --> 0:15:34.840 are down to thirty five percent now, which is roughly 0:15:34.840 --> 0:15:37.240 where they started when they first found the party in 0:15:37.280 --> 0:15:40.560 two thousand and one. The second point that I'd like 0:15:40.600 --> 0:15:43.000 to highlight is that despite more than a decade of 0:15:43.040 --> 0:15:48.040 political polarization, values, social issues, etc. At the end of 0:15:48.040 --> 0:15:50.680 the day, people are still voting with their pockets. And 0:15:50.720 --> 0:15:53.440 this was Turkey's version of it's the economy stupid. 0:15:53.640 --> 0:15:56.760 What does he do with his new central bank team, 0:15:57.000 --> 0:16:00.280 with his i'll call a chance of the exchequer? What 0:16:00.320 --> 0:16:03.000 does he do to stop Paul what did you say, 0:16:03.040 --> 0:16:04.240 eighty percent inflation? 0:16:04.520 --> 0:16:06.840 Something like that? Yeah, what does to do Emory to 0:16:07.000 --> 0:16:07.480 turn the. 0:16:07.480 --> 0:16:11.560 Ship around other than a lira devaluation? 0:16:12.000 --> 0:16:14.040 I think it sticks to the game plan in the 0:16:14.080 --> 0:16:17.600 short term. Right Treasury and Finance Minister man At Shimshek 0:16:17.720 --> 0:16:23.440 has been administrating the bitter pill in slow but increasingly 0:16:23.480 --> 0:16:28.160 harsher doses since June of last year when he came 0:16:28.200 --> 0:16:32.760 back to government took over the reins's economiz are. The 0:16:32.800 --> 0:16:37.720 Central Bank is working in very close coordination with Shimshek. 0:16:38.520 --> 0:16:42.400 We don't anticipate that to change, especially in the short term. 0:16:42.760 --> 0:16:45.960 Ardon's comments last night also suggests that he's wedded to 0:16:46.000 --> 0:16:51.240 this economic policy rebalancing normalization effort, but he will want 0:16:51.280 --> 0:16:55.119 to see results. So if a don't had done better yesterday, 0:16:55.520 --> 0:17:01.640 Shimshek would have a much greater maneuvering room now. Adam 0:17:01.760 --> 0:17:05.800 will want to see results from summer onwards, once we've 0:17:05.880 --> 0:17:09.920 hit peak inflation and swaited around seventy five percent in May. 0:17:10.880 --> 0:17:14.280 If Shimshik doesn't deliver, then I think we're in a 0:17:14.280 --> 0:17:19.639 bit of a tight spot from fall onwards. And in 0:17:19.720 --> 0:17:22.159 terms of what he will do, we spain him to 0:17:22.200 --> 0:17:25.040 continue quashing consumer demands, so it's very bad for the 0:17:25.080 --> 0:17:29.320 households and then selective lending to export oriented businesses, but 0:17:29.440 --> 0:17:31.640 a lot of SMEs are going to be hurting from. 0:17:31.480 --> 0:17:34.560 This, so right, just give us a little history lesson here. 0:17:34.560 --> 0:17:38.080 How do we get to this point with the Turkish economy. 0:17:39.520 --> 0:17:43.920 Let's see twenty eleven. Aard on Secure's re election as 0:17:44.000 --> 0:17:49.400 Prime Minister calls it my master period and starts banging 0:17:49.440 --> 0:17:52.440 on about the interest rate lobby and says high rates 0:17:52.480 --> 0:17:56.560 cause high inflation. I want low rates. A succession of 0:17:56.600 --> 0:18:03.480 central bank governors play magical realism, create these interest rate corridors, 0:18:03.600 --> 0:18:07.800 do backdoor tightening while loosening at the front the banking 0:18:07.880 --> 0:18:12.280 authority undermines what they're doing. Fiscal and monetary policy don't 0:18:12.320 --> 0:18:15.320 speak to each other, and in the end Adam puts 0:18:15.440 --> 0:18:18.640 all the burden on very loose credit to keep consumer 0:18:18.720 --> 0:18:23.240 demanded going. You have that, especially on the back of 0:18:23.240 --> 0:18:26.600 the global financial crisis and the period that followed with 0:18:26.640 --> 0:18:31.440 all the qunitive easing, extra lease monte policies, negative real rates. 0:18:31.640 --> 0:18:33.879 He got away with it for years and years and 0:18:33.960 --> 0:18:38.359 years until he couldn't and it really accelerated under the 0:18:38.440 --> 0:18:42.520 first executive presidency terms starting in twenty eighteen, when he 0:18:42.600 --> 0:18:46.040 got rid of all the capable policymakers in his cabinet, 0:18:46.400 --> 0:18:49.280 appointed his son in law to run the economy who 0:18:49.320 --> 0:18:51.520 proceed to sell more than one hundred and twenty five 0:18:51.560 --> 0:18:55.199 billion dollars in reserves to keep the currency stable. And 0:18:55.240 --> 0:18:55.880 that's where we. 0:18:55.920 --> 0:18:56.720 Ended up camera. 0:18:57.000 --> 0:18:57.480 That's a lot. 0:18:58.320 --> 0:19:00.479 Yeah, in the time we got left and there's any 0:19:00.520 --> 0:19:02.159 ways to go here. But let me call us at 0:19:02.200 --> 0:19:05.000 around the US response. I don't want to do a 0:19:05.040 --> 0:19:07.399 clinic now. And how smart I am on Turkey, I'm not, 0:19:08.080 --> 0:19:10.400 but I look at someone like you, and that would 0:19:10.440 --> 0:19:14.639 be Sonar Kagopte in his wonderful book Erdowan's Empire was 0:19:14.640 --> 0:19:17.560 my book of the summer X years ago and his 0:19:17.640 --> 0:19:21.399 new book is Assaultant in Autumn is erediwan in his 0:19:21.680 --> 0:19:24.880 Autumn Facing Winter or it's seventy years old. 0:19:25.320 --> 0:19:26.280 He just keep going. 0:19:26.800 --> 0:19:30.119 I think you will find it increasingly difficult to keep going. 0:19:31.280 --> 0:19:33.919 Folks that I talked to in Anka and also in 0:19:34.040 --> 0:19:38.520 Istanbul who are close to the president always say that 0:19:39.600 --> 0:19:43.200 add On is no different than any other successful, strong 0:19:43.240 --> 0:19:48.399 Turkish leader. He will be at it until the very end. 0:19:48.640 --> 0:19:53.240 So I don't anticipate add On to willfully step down 0:19:53.400 --> 0:19:59.800 from any powers of positions of power. That said, yes 0:20:00.080 --> 0:20:04.440 Day's election results, the makeup of parliament currently, the economic 0:20:04.560 --> 0:20:08.680 challenges these are the worst circumstances he's ever faced since 0:20:08.720 --> 0:20:12.760 coming to power two decades ago. So I'd absolutely agree 0:20:12.800 --> 0:20:16.200 with Sona's take that this is add On's autumn. Maybe 0:20:16.280 --> 0:20:20.000 we're still in the September mid September face, so there's 0:20:20.040 --> 0:20:24.000 a way to go, but it's not going to be 0:20:24.119 --> 0:20:24.720 easy for it. 0:20:25.359 --> 0:20:30.879 How should mister Biden in any future administrations respond to 0:20:31.000 --> 0:20:32.840 our NATO allies. 0:20:32.480 --> 0:20:36.679 New vote business as usual? I think what the Biden 0:20:36.720 --> 0:20:40.760 administration has succeeded in doing is very important, which is 0:20:40.880 --> 0:20:47.960 reinstitutionalize relationships with Turkey. I anticipate that to continue because 0:20:48.040 --> 0:20:51.840 Aardon also needs stability on the foreign policy front to 0:20:51.920 --> 0:20:55.879 continue his balancing act between NATO Allies, Russia and the 0:20:55.960 --> 0:20:59.920 Ukraine War in the Middle East, given the Israel Hamas War, 0:21:01.119 --> 0:21:04.199