1 00:00:00,840 --> 00:00:04,000 Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 2 00:00:04,080 --> 00:00:05,240 Speaker 1: my co host Matt Miller. 3 00:00:05,640 --> 00:00:09,600 Speaker 2: Every business day we bring you interviews from CEOs, market pros, 4 00:00:09,720 --> 00:00:13,600 Speaker 2: and Bloomberg experts, along with essential market moven news. 5 00:00:14,160 --> 00:00:17,279 Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever 6 00:00:17,400 --> 00:00:20,520 Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast. 7 00:00:21,120 --> 00:00:23,920 Speaker 1: You know, the market's got a little dicey here in 8 00:00:23,960 --> 00:00:26,840 Speaker 1: the last five six weeks here, people get starting to 9 00:00:26,840 --> 00:00:28,120 Speaker 1: build up a little bit of a wall. We'll warr 10 00:00:28,160 --> 00:00:30,320 Speaker 1: as it relates to that higher for longer type thing. 11 00:00:30,320 --> 00:00:32,479 Speaker 1: And then if that's not enough, then you've got a 12 00:00:32,520 --> 00:00:34,519 Speaker 1: government that might be on the verge of dysfunction. You 13 00:00:34,520 --> 00:00:37,160 Speaker 1: don't have a speaker on the verge of yeah, yeah, 14 00:00:37,520 --> 00:00:39,600 Speaker 1: we have a dysfunctional government. We have a dispatch on 15 00:00:39,840 --> 00:00:41,440 Speaker 1: Let's just go there, Let's see how the pros are 16 00:00:41,479 --> 00:00:43,280 Speaker 1: kind of putting it all together. Phil Taves joins, the 17 00:00:43,360 --> 00:00:47,120 Speaker 1: CEO of Tave's Asset Management. Phil, I mean, how do 18 00:00:47,200 --> 00:00:50,760 Speaker 1: you put this situation that we've got down in Washington 19 00:00:50,800 --> 00:00:52,479 Speaker 1: with the House of Representatives, How does that kind of 20 00:00:52,520 --> 00:00:55,000 Speaker 1: weave into your investment outlook here? 21 00:00:56,160 --> 00:00:59,600 Speaker 3: Well, we've already gone defensive over the last three weeks, 22 00:00:59,640 --> 00:01:04,360 Speaker 3: we've made into a fully, fully defensive posture. What you guys, well, 23 00:01:04,400 --> 00:01:07,360 Speaker 3: you may remember that we actually can move fully out 24 00:01:07,440 --> 00:01:09,800 Speaker 3: of equities onto the sidelines and T builds. So that 25 00:01:09,840 --> 00:01:12,280 Speaker 3: for eighty five percent of our roughly a billion dollars 26 00:01:12,319 --> 00:01:16,679 Speaker 3: is in T bills, but what's not a lot of 27 00:01:16,720 --> 00:01:20,000 Speaker 3: it has full notional value of put hedging. So that 28 00:01:20,080 --> 00:01:23,880 Speaker 3: means defensive, not just like defensive stocks. But here's what 29 00:01:23,920 --> 00:01:27,240 Speaker 3: I find so interesting is that, you know, if you 30 00:01:27,240 --> 00:01:29,520 Speaker 3: look at what happened with the debt ceiling negotiations and 31 00:01:29,520 --> 00:01:34,800 Speaker 3: then the recent budget impass, is that the market has 32 00:01:34,840 --> 00:01:38,360 Speaker 3: tended to just ignore it. Right, So we were shocked 33 00:01:38,400 --> 00:01:41,920 Speaker 3: at the debt ceiling negotiations that markets weren't freaking out. 34 00:01:41,920 --> 00:01:45,000 Speaker 3: We were, but the markets weren't. And I here's the 35 00:01:45,000 --> 00:01:47,440 Speaker 3: way I think it looks. I think that you know, again, 36 00:01:47,480 --> 00:01:51,280 Speaker 3: it's sort of a I was expecting, Wow, did disarray 37 00:01:51,320 --> 00:01:53,760 Speaker 3: in the house. Markets are going to open very negative 38 00:01:53,800 --> 00:01:56,520 Speaker 3: this morning. Obviously that didn't happen. And I think the 39 00:01:56,560 --> 00:01:59,640 Speaker 3: way this looks in terms of a government dysfunction is 40 00:01:59,680 --> 00:02:05,520 Speaker 3: that we have more that same thing until until and 41 00:02:05,760 --> 00:02:09,520 Speaker 3: if we reach a point where the dysfunction really is 42 00:02:09,680 --> 00:02:12,360 Speaker 3: full on and plays into the fact that, wow, we're 43 00:02:12,440 --> 00:02:15,440 Speaker 3: just going to have the government be closed for you know, uh, 44 00:02:15,760 --> 00:02:18,400 Speaker 3: maybe ten days, maybe thirty five days like we've have 45 00:02:18,520 --> 00:02:20,880 Speaker 3: in the last twenty years, or maybe longer. And then 46 00:02:20,960 --> 00:02:23,959 Speaker 3: I think, then I think, potentially you'll have some real 47 00:02:24,240 --> 00:02:27,480 Speaker 3: market movement, just as we did when you know, they 48 00:02:27,480 --> 00:02:31,320 Speaker 3: were trying to negotiate the debt ceiling under Obama and 49 00:02:31,440 --> 00:02:33,800 Speaker 3: the leaders agreed to something and all of a sudden, 50 00:02:33,840 --> 00:02:35,520 Speaker 3: the legislature said, no, we're not going to do that. 51 00:02:35,560 --> 00:02:38,200 Speaker 3: So I think, yeah, the market is just going to 52 00:02:38,240 --> 00:02:40,840 Speaker 3: be sanguine about this until it's obvious that things are 53 00:02:40,880 --> 00:02:43,600 Speaker 3: just so broken that it's going to be very bad 54 00:02:43,639 --> 00:02:44,520 Speaker 3: scene for markets. 55 00:02:45,040 --> 00:02:50,480 Speaker 2: So let's talk about holding treasuries here. How painful is 56 00:02:50,520 --> 00:02:53,600 Speaker 2: it if you know, the two year goes from five 57 00:02:53,639 --> 00:02:56,480 Speaker 2: to eleven to five twenty or five thirty, like, if 58 00:02:56,840 --> 00:02:59,079 Speaker 2: these rates keep on rising And I will admit I 59 00:02:59,080 --> 00:03:01,400 Speaker 2: didn't think they could go any higher last week or 60 00:03:01,400 --> 00:03:03,720 Speaker 2: maybe even two weeks ago, but it seems like they 61 00:03:03,760 --> 00:03:08,200 Speaker 2: continue to do that, not today, But you know, how 62 00:03:08,480 --> 00:03:11,120 Speaker 2: how rough is it if you're holding two years and 63 00:03:11,160 --> 00:03:13,000 Speaker 2: they move up twenty basis points. 64 00:03:13,600 --> 00:03:16,240 Speaker 3: Yeah, so I think you need zero duration basically as 65 00:03:16,280 --> 00:03:18,280 Speaker 3: close close as zero as you can get. So across 66 00:03:18,320 --> 00:03:20,639 Speaker 3: our platform, we're just in one to three month, right, 67 00:03:20,680 --> 00:03:22,120 Speaker 3: so you really want to be on the very very 68 00:03:22,120 --> 00:03:24,200 Speaker 3: short end of the curve. There's no you know, the 69 00:03:24,240 --> 00:03:26,080 Speaker 3: worst trade ever I was, you know, I was talking 70 00:03:26,120 --> 00:03:28,560 Speaker 3: to a massively big advisor about two months ago and 71 00:03:28,560 --> 00:03:30,840 Speaker 3: he said, I think it's time to go really long duration, 72 00:03:30,919 --> 00:03:32,800 Speaker 3: and I said, maybe you should wait on that. Well, 73 00:03:32,840 --> 00:03:35,200 Speaker 3: that was a really bad trade. So you need to 74 00:03:35,200 --> 00:03:37,640 Speaker 3: be in T bills at this moment because the breakout 75 00:03:37,760 --> 00:03:41,240 Speaker 3: is really the most important thing that's happened obviously over 76 00:03:41,280 --> 00:03:44,280 Speaker 3: the over the last thirty days. And you know, I 77 00:03:44,280 --> 00:03:46,640 Speaker 3: think it's just the fact that you have this relentless 78 00:03:46,640 --> 00:03:51,160 Speaker 3: advancing yields that that keeps bringing the markets lower. Now 79 00:03:51,160 --> 00:03:52,760 Speaker 3: we have a little bit of a reprieve today on 80 00:03:52,800 --> 00:03:55,600 Speaker 3: the ten uere you know, thank goodness for that. But 81 00:03:56,360 --> 00:03:58,320 Speaker 3: there's you know, if we could be at five percent, 82 00:03:58,480 --> 00:04:01,760 Speaker 3: I think it'll be interesting to see though. So if 83 00:04:01,760 --> 00:04:04,200 Speaker 3: we reach five and then we pause, I mean, if 84 00:04:04,240 --> 00:04:07,240 Speaker 3: we can just stop increasing and stop the breakout, it'll 85 00:04:07,280 --> 00:04:10,440 Speaker 3: be interesting to see if markets can sort of regain 86 00:04:10,520 --> 00:04:13,600 Speaker 3: their their stability here. But as long as we're moving higher, no, 87 00:04:13,760 --> 00:04:15,800 Speaker 3: not two years, not five years, not ten years, good 88 00:04:15,880 --> 00:04:18,680 Speaker 3: Heaven's not like twenty years bring it into one to 89 00:04:18,720 --> 00:04:20,039 Speaker 3: three months in our opinion. 90 00:04:19,760 --> 00:04:23,840 Speaker 2: Although TLT has seen massive inflows. Right, that's a ETF 91 00:04:23,920 --> 00:04:27,719 Speaker 2: with twenty years plus. Like everyone's been going out the curve. 92 00:04:28,000 --> 00:04:32,840 Speaker 2: Everyone's been buying these elong duration bonds as we get 93 00:04:32,920 --> 00:04:36,680 Speaker 2: higher and higher on the on the yield, and you expect, 94 00:04:36,920 --> 00:04:39,760 Speaker 2: like if you buy the thirty year right now, you're 95 00:04:39,800 --> 00:04:43,280 Speaker 2: getting four point nine percent, So you know, as long 96 00:04:43,279 --> 00:04:45,599 Speaker 2: as you're holding it to maturity, that seems like a 97 00:04:45,600 --> 00:04:47,480 Speaker 2: good trade. Right. 98 00:04:49,520 --> 00:04:51,920 Speaker 3: But yeah, right, so like hold that hold that thirty 99 00:04:51,960 --> 00:04:53,800 Speaker 3: year two maturity, that would be a that would be 100 00:04:53,839 --> 00:04:54,520 Speaker 3: a great plan. 101 00:04:55,040 --> 00:04:57,919 Speaker 2: Well look, well I wonder I mean if it turns 102 00:04:57,960 --> 00:05:00,240 Speaker 2: around now, if this is the peak, But what do 103 00:05:00,240 --> 00:05:01,200 Speaker 2: you think the peak is? 104 00:05:02,960 --> 00:05:04,880 Speaker 3: I just I just don't know. But I don't think 105 00:05:04,960 --> 00:05:08,640 Speaker 3: you know, you know, you've got the acronym BFF. I 106 00:05:08,680 --> 00:05:10,160 Speaker 3: don't think you want the long gone to be your 107 00:05:10,600 --> 00:05:12,240 Speaker 3: I think you went the short term, very short term 108 00:05:12,279 --> 00:05:15,440 Speaker 3: to be or BFT, which is your best friend temporarily right, 109 00:05:15,920 --> 00:05:20,240 Speaker 3: and and you just you just can't work against a 110 00:05:20,279 --> 00:05:24,200 Speaker 3: trend like we see happening right now. You know, look 111 00:05:24,240 --> 00:05:27,239 Speaker 3: at look at the stock market for the last three years, inexplicable. 112 00:05:27,360 --> 00:05:30,920 Speaker 3: All of the moves have been inexplicable, like the advance 113 00:05:31,000 --> 00:05:34,560 Speaker 3: this year, the advance during the pandemic. You know, So 114 00:05:34,839 --> 00:05:36,839 Speaker 3: it's just not possible to call the market. So why 115 00:05:36,839 --> 00:05:38,479 Speaker 3: would you make that trade? Why would you make that 116 00:05:38,560 --> 00:05:42,400 Speaker 3: trade until until a trend comes along where you've got 117 00:05:42,400 --> 00:05:45,520 Speaker 3: an opportunity. And look, so in terms of the long 118 00:05:45,600 --> 00:05:49,480 Speaker 3: gone what we're you know, salivating at the possibility about 119 00:05:49,520 --> 00:05:51,680 Speaker 3: because we're defensive now and we're in t bills. But 120 00:05:51,760 --> 00:05:54,480 Speaker 3: if the trend changes and all of a sudden things 121 00:05:54,520 --> 00:05:56,760 Speaker 3: fall off a cliff in terms of stock market, things 122 00:05:56,800 --> 00:05:59,359 Speaker 3: look very bad and you actually see a change in 123 00:05:59,400 --> 00:06:01,880 Speaker 3: direction of yields, there are going to be that's an 124 00:06:01,920 --> 00:06:05,599 Speaker 3: amazing opportunity, and not just long bonds, but in just 125 00:06:05,640 --> 00:06:09,000 Speaker 3: even conventional bonds like aggregate bonds. So we're waiting for that, 126 00:06:09,480 --> 00:06:10,919 Speaker 3: but it's not right now, and I don't think you 127 00:06:10,960 --> 00:06:11,919 Speaker 3: make the trade at this moment. 128 00:06:12,240 --> 00:06:14,400 Speaker 1: Do you have to wait for the FED? Actually the 129 00:06:14,520 --> 00:06:16,360 Speaker 1: signal rate cuts are coming. 130 00:06:17,000 --> 00:06:18,359 Speaker 3: No, I think what you do is you watch the 131 00:06:18,400 --> 00:06:20,400 Speaker 3: trend of yields and you watch the trend of just 132 00:06:20,440 --> 00:06:23,400 Speaker 3: the price of these of these bonds. That's what we do. 133 00:06:23,600 --> 00:06:26,279 Speaker 3: So we just really ignore everything else and so that 134 00:06:26,440 --> 00:06:29,240 Speaker 3: you know, typically what you see is the market. You know, 135 00:06:29,279 --> 00:06:32,840 Speaker 3: this bond market will about a month before you see 136 00:06:32,880 --> 00:06:34,880 Speaker 3: any FED movement or you hit actual peak rates, you 137 00:06:34,880 --> 00:06:36,719 Speaker 3: start to see a change in direction of those bonds. 138 00:06:36,720 --> 00:06:40,159 Speaker 3: So watch the price of these bonds more than anything else. 139 00:06:41,480 --> 00:06:45,080 Speaker 2: So in terms of you know, I guess you got 140 00:06:45,200 --> 00:06:46,760 Speaker 2: to wait until you see the whites of its eyes. 141 00:06:46,880 --> 00:06:47,040 Speaker 4: Right. 142 00:06:47,160 --> 00:06:50,560 Speaker 5: That's been the same thing with any government shutdowns. If 143 00:06:50,560 --> 00:06:51,080 Speaker 5: you think that's going. 144 00:06:51,080 --> 00:06:53,800 Speaker 2: To be horrible for markets, well it doesn't seem to 145 00:06:53,800 --> 00:06:56,919 Speaker 2: be until things go overboard. 146 00:06:57,320 --> 00:06:57,479 Speaker 4: Is that? 147 00:06:57,560 --> 00:07:00,120 Speaker 2: Do you feel the same way about the broader you know, 148 00:07:00,200 --> 00:07:04,080 Speaker 2: government debt picture, because right now, you know, thirty three 149 00:07:04,839 --> 00:07:10,080 Speaker 2: trillion and counting, we know entitlements like won't be funded 150 00:07:10,120 --> 00:07:13,640 Speaker 2: for probably more than another decade. Does that not matter 151 00:07:13,680 --> 00:07:17,720 Speaker 2: to markets until we get to you know, pass the deadline. 152 00:07:18,080 --> 00:07:20,280 Speaker 3: Yeah, So that's the most important thing that we think 153 00:07:20,360 --> 00:07:22,600 Speaker 3: is going on in the markets. I'm here in Austin, Texas, 154 00:07:22,600 --> 00:07:24,360 Speaker 3: you're getting ready to fly out back to New York. 155 00:07:24,680 --> 00:07:26,960 Speaker 3: And yesterday I spoke again at a broker dealer conference, 156 00:07:26,960 --> 00:07:29,320 Speaker 3: and I talked about the hidden implications of global debt. 157 00:07:29,640 --> 00:07:32,840 Speaker 3: So you've got this situation where the lender of last 158 00:07:32,880 --> 00:07:35,560 Speaker 3: resort right always saves the day, and so over and 159 00:07:35,600 --> 00:07:38,160 Speaker 3: over again we go through these market crises and then 160 00:07:38,240 --> 00:07:39,720 Speaker 3: and then the FED comes in. Well, we all know 161 00:07:39,720 --> 00:07:41,280 Speaker 3: the FED over the short term isn't going to come 162 00:07:41,320 --> 00:07:43,240 Speaker 3: in and save the markets. But I think what you 163 00:07:43,280 --> 00:07:45,160 Speaker 3: have to ask a question about is is if you 164 00:07:45,200 --> 00:07:47,960 Speaker 3: actually tip into a recession, if it's a hard landing, 165 00:07:48,880 --> 00:07:52,120 Speaker 3: then you've got the potential for decreased GDP at a 166 00:07:52,160 --> 00:07:55,480 Speaker 3: time when death of GDP is already high, the possibility 167 00:07:55,520 --> 00:07:58,520 Speaker 3: for increased need for fiscal stimulus, which gets you to 168 00:07:58,560 --> 00:08:01,880 Speaker 3: the point where all of a sudden, this all maybe 169 00:08:01,920 --> 00:08:05,240 Speaker 3: looks unsustainable. And so the giant wave that we are 170 00:08:05,360 --> 00:08:07,560 Speaker 3: ignoring right now that could be upon us at some 171 00:08:07,720 --> 00:08:10,560 Speaker 3: point is the fact that you know, just as we 172 00:08:10,600 --> 00:08:12,360 Speaker 3: saw in the UK last year, that was the most 173 00:08:12,520 --> 00:08:16,200 Speaker 3: most I think like poignant data point to look at 174 00:08:16,200 --> 00:08:19,120 Speaker 3: when treasuries collapsed last year, when when all they did, 175 00:08:19,480 --> 00:08:23,120 Speaker 3: guys is they they they passed a bill that decreased 176 00:08:23,120 --> 00:08:25,960 Speaker 3: taxes and increased spending. So who cares about that, right 177 00:08:26,040 --> 00:08:29,320 Speaker 3: normally in the US. But but you know, it start 178 00:08:29,400 --> 00:08:31,360 Speaker 3: to you know, if you ever have a situation where 179 00:08:31,360 --> 00:08:34,400 Speaker 3: you've got to start to have soft auctions or treasuries. Now, 180 00:08:34,400 --> 00:08:37,600 Speaker 3: I know it sounds like conspiracy, crazy stuff, but really 181 00:08:37,880 --> 00:08:40,160 Speaker 3: it's just you're kind of not there and then you 182 00:08:40,160 --> 00:08:42,480 Speaker 3: all of a sudden are But if you get to 183 00:08:42,520 --> 00:08:44,240 Speaker 3: the point where instead of one hundred percent or GDP 184 00:08:44,360 --> 00:08:46,280 Speaker 3: or one and ten hundred and twenty hundred and thirty, 185 00:08:46,840 --> 00:08:49,120 Speaker 3: that's the big questions like what do you do with 186 00:08:49,679 --> 00:08:52,800 Speaker 3: this lender of last result resort all of a sudden 187 00:08:53,320 --> 00:08:56,400 Speaker 3: not being an effective tool anymore. That no one really 188 00:08:56,440 --> 00:08:59,200 Speaker 3: talks about that, No one thinks about that. But that's 189 00:08:59,320 --> 00:09:00,920 Speaker 3: if you look out five or ten years from now, 190 00:09:00,960 --> 00:09:03,079 Speaker 3: I think we'll look back and say, wow, what were 191 00:09:03,080 --> 00:09:04,240 Speaker 3: we thinking of We were. 192 00:09:04,040 --> 00:09:04,640 Speaker 4: Already you know. 193 00:09:04,679 --> 00:09:07,000 Speaker 3: That's this is dwarfs the mortgage crisis dwarfs it. 194 00:09:07,920 --> 00:09:10,000 Speaker 1: Hey, yeah, yeah, on that note, Okay, there you go, 195 00:09:11,600 --> 00:09:13,560 Speaker 1: leave you right there, Phil Taves, thanks so much for 196 00:09:13,640 --> 00:09:17,439 Speaker 1: joining us. As always, Phil Tave's CEO, Tave's Asset management 197 00:09:17,960 --> 00:09:22,080 Speaker 1: eighty five percent of their portfolio in T bills T bills, 198 00:09:22,080 --> 00:09:24,640 Speaker 1: not even eaten like notes or T bonds T bills, 199 00:09:24,800 --> 00:09:29,720 Speaker 1: so ultimate short term there, that is a cautious portfolio. 200 00:09:29,760 --> 00:09:33,480 Speaker 1: That's almost like a doomsday portfolio. But I appreciate getting 201 00:09:33,520 --> 00:09:34,680 Speaker 1: his thoughts as well. 202 00:09:35,760 --> 00:09:39,160 Speaker 6: You're listening to the team Ken's are Live program Bloomberg 203 00:09:39,240 --> 00:09:42,600 Speaker 6: Markets weekdays at ten am Eastern on Bloomberg dot com, 204 00:09:42,679 --> 00:09:45,800 Speaker 6: the iHeartRadio app and the Bloomberg Business app, or listen 205 00:09:45,880 --> 00:09:48,000 Speaker 6: on demand wherever you get your podcasts. 206 00:09:50,320 --> 00:09:52,719 Speaker 1: Jamie Patten joins us, she's some TCW. They know what 207 00:09:52,720 --> 00:09:56,720 Speaker 1: they're doing over there when it comes to the markets. Uh, Jamie, 208 00:09:56,760 --> 00:09:58,880 Speaker 1: the last time we talked, we were talking about or 209 00:09:58,920 --> 00:10:01,079 Speaker 1: maybe the discussion of the market a place with soft landing, 210 00:10:01,120 --> 00:10:04,560 Speaker 1: hard landing, no landing. But boy, you took it another 211 00:10:04,600 --> 00:10:08,880 Speaker 1: step forward with your aviation knowledge. Where are we now? 212 00:10:09,400 --> 00:10:11,640 Speaker 1: Do you think as we kind of feel a little 213 00:10:11,679 --> 00:10:16,000 Speaker 1: bit more comfortable with higher for longer, I guess, and 214 00:10:16,040 --> 00:10:16,960 Speaker 1: we our. 215 00:10:16,880 --> 00:10:19,960 Speaker 7: Views are unchanged, so we understand how the markets have 216 00:10:20,240 --> 00:10:22,840 Speaker 7: been willing to give into this no landing view. And 217 00:10:22,920 --> 00:10:25,400 Speaker 7: just as a reminder, I think it's a really terrible 218 00:10:25,440 --> 00:10:28,200 Speaker 7: analogy because it defies the laws of physics airplanes run 219 00:10:28,200 --> 00:10:28,800 Speaker 7: out of gas. 220 00:10:28,920 --> 00:10:31,400 Speaker 8: I'll keep saying that until people stop using the analogy. 221 00:10:31,960 --> 00:10:34,160 Speaker 8: But this kind of things are different this time. 222 00:10:36,480 --> 00:10:39,520 Speaker 7: It speaks to the underlying optimism that higher rates will 223 00:10:39,520 --> 00:10:43,040 Speaker 7: simply just be absorbed without any effort. Things are different. 224 00:10:43,480 --> 00:10:46,079 Speaker 7: The economy is no longer leverage, is no longer rate sensitive, 225 00:10:46,080 --> 00:10:49,920 Speaker 7: and at TCW we completely disagree with that. We understand 226 00:10:49,920 --> 00:10:52,959 Speaker 7: that it's exasperating to wait for the proverbial shoe to drop. 227 00:10:53,200 --> 00:10:56,360 Speaker 7: Market participants are tired, they're impatient. It's been almost nineteen 228 00:10:56,360 --> 00:10:59,280 Speaker 7: months since the fed's first rate hike. Nothing has gone 229 00:10:59,320 --> 00:11:02,959 Speaker 7: around yet, but we still think it's early. It's only 230 00:11:03,160 --> 00:11:05,760 Speaker 7: not even nineteen months from the fed's first rate hike, 231 00:11:05,800 --> 00:11:09,240 Speaker 7: and of the prior thirteen hiking cycles, only one has 232 00:11:09,280 --> 00:11:12,400 Speaker 7: turned into recession less than nineteen months after the start 233 00:11:12,440 --> 00:11:14,880 Speaker 7: of a hiking cycle, so a recession today would still 234 00:11:14,880 --> 00:11:17,920 Speaker 7: be early. We're still relatively early in the cycle. Even 235 00:11:17,920 --> 00:11:20,120 Speaker 7: though we're approaching the end of the FED hiking cycle, 236 00:11:20,320 --> 00:11:23,920 Speaker 7: we're still relatively early in the economic cycle. And we 237 00:11:24,000 --> 00:11:25,880 Speaker 7: talked about it last time, but we still have the 238 00:11:25,960 --> 00:11:30,079 Speaker 7: view that lags between the fed's interest rate hikes and 239 00:11:30,360 --> 00:11:33,440 Speaker 7: the impact of the economy are longer now for many reasons. 240 00:11:33,840 --> 00:11:36,439 Speaker 7: So while nineteen months is early historically, we think it's 241 00:11:36,440 --> 00:11:39,959 Speaker 7: even earlier from the perspective of lags are longer. 242 00:11:40,320 --> 00:11:41,760 Speaker 9: Yeah, Jamie, with all that in mind, where are you 243 00:11:41,760 --> 00:11:44,080 Speaker 9: guys putting money to work? Then, just given if you're 244 00:11:44,480 --> 00:11:46,880 Speaker 9: kind of taking that point of view, that it's still 245 00:11:46,920 --> 00:11:47,800 Speaker 9: early in the cycle. 246 00:11:49,040 --> 00:11:52,720 Speaker 7: So at TCW, we really like duration longs. We've been 247 00:11:52,760 --> 00:11:55,160 Speaker 7: adding to them. We don't claim to know exactly when 248 00:11:55,160 --> 00:11:56,839 Speaker 7: the top or the bottom of the yield range is 249 00:11:56,880 --> 00:11:58,720 Speaker 7: going to hit. So we dollar cost average in and 250 00:11:58,760 --> 00:12:00,880 Speaker 7: we like them the last time we talked, we like 251 00:12:00,920 --> 00:12:02,800 Speaker 7: them even more now, so we've been adding to our 252 00:12:02,840 --> 00:12:06,200 Speaker 7: long positions. We also think that the curve will be steeper. 253 00:12:07,520 --> 00:12:09,960 Speaker 7: Monetary policy will continue to be the big driver for 254 00:12:10,080 --> 00:12:12,560 Speaker 7: rates in the economy, especially at this point towards the 255 00:12:12,640 --> 00:12:15,760 Speaker 7: end of the FED high type the FED hike cycle, 256 00:12:16,400 --> 00:12:18,800 Speaker 7: the FED is likely to overtighten. That gives us even 257 00:12:18,840 --> 00:12:21,440 Speaker 7: more confidence in our long duration positions. If you want 258 00:12:21,480 --> 00:12:23,520 Speaker 7: to keep going with the flying analogies that can give 259 00:12:23,559 --> 00:12:27,760 Speaker 7: you one comparing the economy today, and it gives us 260 00:12:27,760 --> 00:12:31,360 Speaker 7: more confidence in our long duration position. But the National 261 00:12:31,440 --> 00:12:35,120 Speaker 7: Transportation Safety Board always writes these crash reports after every 262 00:12:35,120 --> 00:12:38,280 Speaker 7: airplane flying accident. And as a side note, and I 263 00:12:38,280 --> 00:12:40,200 Speaker 7: promise I'll connect this to the markets and the second 264 00:12:40,240 --> 00:12:44,120 Speaker 7: books amazing. They read like a novel, So JFK. Junior's 265 00:12:44,120 --> 00:12:48,800 Speaker 7: infamous flight crash into the Atlantic Ocean. The NTSB report 266 00:12:48,920 --> 00:12:51,360 Speaker 7: starts twenty years prior to the crash. It talks about 267 00:12:51,360 --> 00:12:53,319 Speaker 7: when he got his license, he had a broken ankle 268 00:12:53,320 --> 00:12:55,640 Speaker 7: from a hang gliding accident, why he left for the 269 00:12:55,640 --> 00:12:57,760 Speaker 7: airport late, the traffic he got stuck in, he didn't 270 00:12:57,760 --> 00:13:00,840 Speaker 7: get a weather briefing. The point is that the accidents 271 00:13:00,960 --> 00:13:04,520 Speaker 7: aren't caused by just one thing, and it's a confluence 272 00:13:04,520 --> 00:13:08,280 Speaker 7: of everything combined, one thing you can recover from. So 273 00:13:08,320 --> 00:13:10,440 Speaker 7: when we look at the markets today, it's beginning to 274 00:13:10,520 --> 00:13:13,319 Speaker 7: read just like a crash report. If you were going 275 00:13:13,360 --> 00:13:16,000 Speaker 7: to write an NTSP crash report about today's economy, it 276 00:13:16,000 --> 00:13:19,240 Speaker 7: would probably start back in the nineteen seventies when Arthur 277 00:13:19,280 --> 00:13:21,040 Speaker 7: Burns reverse course on. 278 00:13:21,040 --> 00:13:22,160 Speaker 8: Rate hikes too early. 279 00:13:22,640 --> 00:13:26,440 Speaker 7: That resulted in this conventional wisdom that cas Burns is 280 00:13:26,440 --> 00:13:29,719 Speaker 7: not wise or strong enough to keep rates as high 281 00:13:29,720 --> 00:13:32,640 Speaker 7: as they needed to be. Then Vulgar is glorified for 282 00:13:32,720 --> 00:13:35,280 Speaker 7: having the courage to relentlessly keep rate hikes. 283 00:13:35,640 --> 00:13:37,120 Speaker 8: And then you have paul A. 284 00:13:37,120 --> 00:13:40,560 Speaker 7: Powell, four decades later, carrying around the Vulgar Memoirs talking 285 00:13:40,559 --> 00:13:42,960 Speaker 7: about how that's a great lesson it should be required reading. 286 00:13:43,280 --> 00:13:48,520 Speaker 7: Combine that with a global pandemic, fiscal policies arguably helicopter money, 287 00:13:48,760 --> 00:13:52,120 Speaker 7: a surging deficit, increased treasury supply. So now you have 288 00:13:52,360 --> 00:13:55,360 Speaker 7: global central banks raising rates in the front end in 289 00:13:55,559 --> 00:13:59,200 Speaker 7: uniform almost across the whole world. Meanwhile, you have longer 290 00:13:59,280 --> 00:14:02,160 Speaker 7: rates going high for all the aforementioned reasons. All of 291 00:14:02,200 --> 00:14:05,120 Speaker 7: a sudden, you're like, you know, oh, don't forget about 292 00:14:05,520 --> 00:14:07,520 Speaker 7: a leadership vacuum in the house, raising the ads of 293 00:14:07,559 --> 00:14:10,400 Speaker 7: a government shut down. So you can kind of see 294 00:14:10,440 --> 00:14:13,400 Speaker 7: how these things are all coming together and creating a 295 00:14:13,440 --> 00:14:17,880 Speaker 7: really hazardous environment for financial markets in the economy. 296 00:14:18,040 --> 00:14:20,680 Speaker 9: Jamie, you mentioned a potential government shutdown. It seems like 297 00:14:21,000 --> 00:14:23,960 Speaker 9: the chatter is back about a potential downgrade on the 298 00:14:24,000 --> 00:14:26,440 Speaker 9: back of that. Given right now, it seems like all 299 00:14:27,400 --> 00:14:30,480 Speaker 9: signs indicate a shutdown in mid November. How are you 300 00:14:30,520 --> 00:14:32,640 Speaker 9: positioning that and what are you thinking about in terms 301 00:14:32,680 --> 00:14:35,480 Speaker 9: of a potential government shutdown and what would happen if 302 00:14:35,560 --> 00:14:37,800 Speaker 9: we were to see the US get downgraded. 303 00:14:39,080 --> 00:14:42,320 Speaker 7: We think that's a very high possibility. We expect the 304 00:14:42,360 --> 00:14:44,400 Speaker 7: government is much more likely to shut down now than 305 00:14:44,440 --> 00:14:47,480 Speaker 7: it was before yesterday's events, and Moody's already came out 306 00:14:47,480 --> 00:14:50,960 Speaker 7: on Monday and said they're considering it. Seems like it's 307 00:14:51,040 --> 00:14:53,600 Speaker 7: more likely that they'll downgrade. US treasuries are a little 308 00:14:53,600 --> 00:14:57,360 Speaker 7: bit strange in this aspect, where yields tend to go lower, 309 00:14:57,560 --> 00:15:00,520 Speaker 7: not higher, when the treasury gets down great, so it's 310 00:15:00,520 --> 00:15:03,600 Speaker 7: the opposite of a more of a credit risk asset, 311 00:15:03,880 --> 00:15:06,000 Speaker 7: where it's a flight to quality. In terms of the 312 00:15:06,080 --> 00:15:09,680 Speaker 7: economic impact, we don't think that it will be We'll 313 00:15:09,720 --> 00:15:13,760 Speaker 7: see a contraction with that quarter's GDP growth, but typically 314 00:15:13,800 --> 00:15:16,600 Speaker 7: we get that back the following quarter, so we don't 315 00:15:16,640 --> 00:15:19,600 Speaker 7: see it as as big of an economic impact as 316 00:15:19,600 --> 00:15:25,680 Speaker 7: we do just more uncertainty, more spending. More markets just 317 00:15:25,720 --> 00:15:28,800 Speaker 7: don't like this kind of like lack of organization, lack 318 00:15:28,840 --> 00:15:32,320 Speaker 7: of structure, lack of getting anything done, more spending. So 319 00:15:32,520 --> 00:15:34,640 Speaker 7: on the margin, we think it's bad for risk, but 320 00:15:35,000 --> 00:15:37,800 Speaker 7: from our long duration position perspective, we actually think on 321 00:15:37,840 --> 00:15:40,080 Speaker 7: the margin it would be a positive for that. 322 00:15:40,920 --> 00:15:45,080 Speaker 1: So do you expect the FED next year to cut rates? 323 00:15:45,120 --> 00:15:46,440 Speaker 1: And if so, when. 324 00:15:48,040 --> 00:15:49,920 Speaker 8: We do, the. 325 00:15:49,880 --> 00:15:54,280 Speaker 7: Fed's own forecast only has them cutting rates maybe two 326 00:15:54,320 --> 00:15:59,840 Speaker 7: times next year. That's assuming this perfect soft, immaculate disinflation landing, 327 00:16:00,120 --> 00:16:02,200 Speaker 7: and that's not necessarily our view. We think that they're 328 00:16:02,240 --> 00:16:06,040 Speaker 7: going to have to cut harder and more than expected, 329 00:16:06,400 --> 00:16:10,040 Speaker 7: But the timing is relatively uncertain. Maybe at some point 330 00:16:10,200 --> 00:16:12,400 Speaker 7: in the second half of twenty twenty four when we 331 00:16:12,440 --> 00:16:17,600 Speaker 7: see this sort of financial accident or a bigger hit 332 00:16:17,640 --> 00:16:20,440 Speaker 7: to growth, a bigger hit to risk assets because it 333 00:16:20,520 --> 00:16:24,240 Speaker 7: comes in the form of more of a bigger accident, 334 00:16:24,280 --> 00:16:25,480 Speaker 7: a bigger slow down in growth. 335 00:16:25,520 --> 00:16:26,400 Speaker 8: It's harder to. 336 00:16:26,400 --> 00:16:29,480 Speaker 7: Predict the exact timing, but we do think, I mean, 337 00:16:29,520 --> 00:16:32,160 Speaker 7: even just if you take out everything else, just the 338 00:16:32,160 --> 00:16:36,000 Speaker 7: fact that we have such higher, flatter inverted curves that 339 00:16:36,040 --> 00:16:39,600 Speaker 7: in and out of itself is a negative impact for investment, 340 00:16:39,600 --> 00:16:43,120 Speaker 7: consumption and employment, which just by itself can lead to 341 00:16:43,160 --> 00:16:46,840 Speaker 7: this negative self reinforcing downturn. So they're kind of all 342 00:16:46,880 --> 00:16:49,040 Speaker 7: these aspects that are combining together. And we don't claim 343 00:16:49,080 --> 00:16:51,520 Speaker 7: to predict the future, but we see all these reasons 344 00:16:51,800 --> 00:16:54,280 Speaker 7: why the economy could take a turn, and yet another 345 00:16:54,320 --> 00:16:57,440 Speaker 7: reason we like buying duration and being long bonds in 346 00:16:57,480 --> 00:16:58,200 Speaker 7: this environment. 347 00:16:58,480 --> 00:17:00,720 Speaker 9: I'm looking at it soft right now that odds are 348 00:17:01,000 --> 00:17:03,360 Speaker 9: slowly dropping about another hike. Do you think we could 349 00:17:03,400 --> 00:17:04,400 Speaker 9: get another hike this year? 350 00:17:05,440 --> 00:17:10,159 Speaker 7: Our base cases probably we don't need it. It probably not, 351 00:17:10,400 --> 00:17:12,240 Speaker 7: but we still think it's fifty to fifty. The FED 352 00:17:12,280 --> 00:17:14,600 Speaker 7: told us that they're data dependent. The data between now 353 00:17:14,640 --> 00:17:17,399 Speaker 7: and the end of the year could shift on the 354 00:17:17,480 --> 00:17:20,760 Speaker 7: margin towards one more hike. The FED zone forecast is 355 00:17:20,800 --> 00:17:22,800 Speaker 7: that they have one more hike, so we could definitely 356 00:17:22,840 --> 00:17:24,520 Speaker 7: see it, although it's not our base case. 357 00:17:25,320 --> 00:17:29,480 Speaker 1: Jamie, you're a pilot in the Los Angeles area, Yes, 358 00:17:29,800 --> 00:17:32,000 Speaker 1: how find an airspace and not get like run over 359 00:17:32,040 --> 00:17:33,920 Speaker 1: by these jumbo jets coming into LAX. 360 00:17:35,200 --> 00:17:37,639 Speaker 7: You stay away from the LAX airspace, So there's actually 361 00:17:37,680 --> 00:17:41,479 Speaker 7: a corridor through LAX that you can fly just visual 362 00:17:41,520 --> 00:17:44,320 Speaker 7: flight rules as a private pilot, and you're kind of 363 00:17:44,359 --> 00:17:45,679 Speaker 7: guaranteed to avoid all that. 364 00:17:45,720 --> 00:17:46,879 Speaker 8: But yeah, it's pretty busy. 365 00:17:47,200 --> 00:17:48,880 Speaker 7: And I would just also like to say, while we're 366 00:17:48,880 --> 00:17:51,239 Speaker 7: talking about my personal life, that all of this, like 367 00:17:51,520 --> 00:17:53,960 Speaker 7: Jamie knows all about hard landings, because she's a pilot. 368 00:17:54,000 --> 00:17:56,200 Speaker 8: It hasn't been great for my pilot brand. 369 00:17:56,520 --> 00:17:59,479 Speaker 7: So I want to emphasize that I know about this 370 00:17:59,520 --> 00:18:02,400 Speaker 7: from reading things like NTSB crash reports. In my own 371 00:18:02,840 --> 00:18:06,600 Speaker 7: pilot record is perfect. So just to put that out there. 372 00:18:07,240 --> 00:18:09,600 Speaker 1: Excellent. No, I know I need you've got this. You 373 00:18:09,640 --> 00:18:11,320 Speaker 1: know you've got this hobby. You like to read these 374 00:18:11,520 --> 00:18:13,560 Speaker 1: accent reports. But that's a great way to learn what 375 00:18:13,640 --> 00:18:14,000 Speaker 1: not to do. 376 00:18:14,080 --> 00:18:17,280 Speaker 8: I guess yeah, in financial markets as well. 377 00:18:17,600 --> 00:18:19,480 Speaker 1: Very good, Jamie. Always great to talk with you. A 378 00:18:19,520 --> 00:18:21,600 Speaker 1: lot of interesting stuff, a lot of fun along the 379 00:18:21,600 --> 00:18:25,840 Speaker 1: way as well. And good luck with your flight instruction, 380 00:18:25,960 --> 00:18:27,600 Speaker 1: I mean flight career. 381 00:18:28,040 --> 00:18:31,160 Speaker 6: You're listening to the tape cans are live program Bloomberg 382 00:18:31,240 --> 00:18:34,800 Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the 383 00:18:34,880 --> 00:18:36,960 Speaker 6: tune in app, Bloomberg dot Com. 384 00:18:36,680 --> 00:18:38,120 Speaker 4: And the Bloomberg Business App. 385 00:18:38,160 --> 00:18:40,959 Speaker 6: You can also listen live on Amazon Alexa from our 386 00:18:41,000 --> 00:18:46,040 Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty. 387 00:18:46,400 --> 00:18:49,080 Speaker 1: I'm looking at the Bloomberg Index browser. 388 00:18:49,400 --> 00:18:51,880 Speaker 5: I d go, well, I was just looking at that too. 389 00:18:52,040 --> 00:18:54,560 Speaker 1: Wow, great minds think to like, I mean, the only 390 00:18:54,600 --> 00:18:56,000 Speaker 1: thing I'm looking at, you know, look at the bond 391 00:18:56,040 --> 00:18:58,720 Speaker 1: market here. The indices here in Nexus. 392 00:18:58,400 --> 00:19:02,320 Speaker 5: Sorry is official Bloomberg style, I understand. 393 00:19:02,400 --> 00:19:04,719 Speaker 1: And the only one that's positive for the year is 394 00:19:04,760 --> 00:19:07,639 Speaker 1: the high yield corporate Corporate high Yield index. 395 00:19:07,680 --> 00:19:09,760 Speaker 2: So I was looking and I saw so US treasure 396 00:19:09,800 --> 00:19:14,160 Speaker 2: or treasuries in general, right, Ye, that index is down 397 00:19:14,200 --> 00:19:16,720 Speaker 2: four point seven percent this year. And remember it was 398 00:19:16,800 --> 00:19:20,119 Speaker 2: down seventeen and a half percent last year, and the 399 00:19:20,200 --> 00:19:23,200 Speaker 2: year before that it was down six and a half percent. Yeah, 400 00:19:23,560 --> 00:19:28,120 Speaker 2: so if your long treasuries into the pandemic, you got 401 00:19:28,400 --> 00:19:29,280 Speaker 2: a thwacking. 402 00:19:29,720 --> 00:19:32,639 Speaker 1: Whacking that is a CFA level term. Let's see what 403 00:19:32,640 --> 00:19:34,639 Speaker 1: the quants are doing out there about these markets here. 404 00:19:34,680 --> 00:19:38,840 Speaker 1: Hugh Roberts joins US head of analytics at quant Insight. Hugh, 405 00:19:39,320 --> 00:19:42,240 Speaker 1: what are your models telling you about these markets here? 406 00:19:42,280 --> 00:19:45,080 Speaker 1: We had a huge move up and yield the call 407 00:19:45,119 --> 00:19:48,960 Speaker 1: seems to be higher for longer. That's making the stocks 408 00:19:49,000 --> 00:19:51,520 Speaker 1: kind of problematic out there? What are your models saying? 409 00:19:54,280 --> 00:20:00,720 Speaker 10: Yeah, so agree with the facking comment. Basically, all macro fundamentals, 410 00:20:00,760 --> 00:20:04,480 Speaker 10: which can be distilled into three broad buckets, economic fundamentals, 411 00:20:05,000 --> 00:20:10,040 Speaker 10: measures of financial conditions, measures of risk appetite, are doing 412 00:20:10,040 --> 00:20:12,119 Speaker 10: a very good job of explaining most things at the 413 00:20:12,119 --> 00:20:17,600 Speaker 10: moment across bonds, currencies, and equities, and the primary trend, 414 00:20:17,640 --> 00:20:21,159 Speaker 10: the kind of momentum of our models remains unchecked. So 415 00:20:21,240 --> 00:20:24,439 Speaker 10: even though there's some kind of anecdotal stuff around in 416 00:20:24,480 --> 00:20:26,639 Speaker 10: the last couple of days that maybe we're reaching a 417 00:20:26,640 --> 00:20:29,440 Speaker 10: bit of a capitulation phase, if we look at our 418 00:20:29,480 --> 00:20:33,199 Speaker 10: model value for treasury yields still pointing higher. If we 419 00:20:33,240 --> 00:20:35,720 Speaker 10: look at our model for say dollar yen, even though 420 00:20:35,720 --> 00:20:39,439 Speaker 10: there's intervention risk around, still points to higher. If we 421 00:20:39,480 --> 00:20:42,040 Speaker 10: look at our model for Nasdaq, it's had an amazing 422 00:20:42,119 --> 00:20:45,119 Speaker 10: for what it's fallen twenty percent in the last month, 423 00:20:46,000 --> 00:20:48,399 Speaker 10: courtesy of actually what you guys were just talking about, 424 00:20:48,440 --> 00:20:51,639 Speaker 10: a mixture of rate vol which we use as a 425 00:20:51,640 --> 00:20:55,959 Speaker 10: measure of qt QE expectations, and the moving credit spreads 426 00:20:55,960 --> 00:20:59,119 Speaker 10: that you guys just alluded to. So the basic messages 427 00:20:59,200 --> 00:21:02,239 Speaker 10: is that the the tightening of financial conditions that has 428 00:21:02,280 --> 00:21:05,960 Speaker 10: been engineered since that last FED meeting is just having 429 00:21:05,960 --> 00:21:08,640 Speaker 10: a rolling effect, and for the time being, at least 430 00:21:08,640 --> 00:21:13,600 Speaker 10: from a pure macro modeling perspective, we don't see any change, 431 00:21:13,640 --> 00:21:14,119 Speaker 10: I'm afraid. 432 00:21:14,960 --> 00:21:18,000 Speaker 2: So my takeaway from all that is, you see yields 433 00:21:18,040 --> 00:21:21,920 Speaker 2: going higher from here, I mean how much higher? 434 00:21:22,119 --> 00:21:25,480 Speaker 10: Well, so what we do if we because when modeling 435 00:21:25,520 --> 00:21:28,680 Speaker 10: all these things in real time, we're kind of capturing macromnum. 436 00:21:29,200 --> 00:21:32,679 Speaker 10: So there's two key outputs that we produce. One is 437 00:21:32,960 --> 00:21:35,920 Speaker 10: word of macro conditions, say things should be right now, 438 00:21:35,960 --> 00:21:39,480 Speaker 10: whether it's spoos, ten year yields, dollar in whatever. And 439 00:21:39,520 --> 00:21:42,520 Speaker 10: then secondly we then compare that to where things are trading, 440 00:21:42,680 --> 00:21:44,840 Speaker 10: so you can see if there's a valuation gap. Because 441 00:21:44,840 --> 00:21:48,720 Speaker 10: obviously some asset classes lead, sometimes they lag. There's these 442 00:21:48,760 --> 00:21:52,960 Speaker 10: gaps that create short term tactical trading opportunities. So right 443 00:21:53,000 --> 00:21:56,320 Speaker 10: now we have ten year yields and the model value 444 00:21:56,400 --> 00:21:58,480 Speaker 10: is pointing higher, has been for several months, but is 445 00:21:58,560 --> 00:22:03,560 Speaker 10: accelerating the good new yield did the compensation uses that 446 00:22:03,640 --> 00:22:07,000 Speaker 10: the market is simply keeping track with the move in 447 00:22:07,119 --> 00:22:11,560 Speaker 10: macro warranted fair value, so there is no valuation gap. 448 00:22:11,640 --> 00:22:13,320 Speaker 10: Of note that they're kind of sitting on top of 449 00:22:13,359 --> 00:22:15,480 Speaker 10: each other. Ten year yie olds are where they should 450 00:22:15,520 --> 00:22:17,840 Speaker 10: be given the prevailing macro environment. 451 00:22:18,400 --> 00:22:20,560 Speaker 2: You when I look at this, when I look at 452 00:22:20,600 --> 00:22:23,440 Speaker 2: the government, you know, when I look at the strikes, 453 00:22:23,840 --> 00:22:26,920 Speaker 2: even when I look at basically consensus for a soft landing. 454 00:22:27,320 --> 00:22:30,240 Speaker 2: I feel like this economy is going to creater. 455 00:22:31,520 --> 00:22:35,520 Speaker 5: Don't you want to hold to hold. 456 00:22:35,359 --> 00:22:40,119 Speaker 2: Treasuries, even longer duration treasuries if that's the case, if 457 00:22:40,160 --> 00:22:41,720 Speaker 2: we go into a deep recession. 458 00:22:43,840 --> 00:22:46,200 Speaker 10: Yeah, I get that argument, But I guess that's why 459 00:22:46,240 --> 00:22:48,280 Speaker 10: the balls have been loaded up on duration since the 460 00:22:48,280 --> 00:22:48,960 Speaker 10: start of the year. 461 00:22:49,720 --> 00:22:49,840 Speaker 4: Now. 462 00:22:49,920 --> 00:22:52,359 Speaker 10: I know there's different surveys telling you different things, but 463 00:22:52,440 --> 00:22:55,159 Speaker 10: you know, the Commitment of Traders report will tell you 464 00:22:55,200 --> 00:22:57,600 Speaker 10: the asset managers have been long for that kind of 465 00:22:57,600 --> 00:22:59,840 Speaker 10: recession call for the last nine months. 466 00:23:00,119 --> 00:23:00,280 Speaker 4: US. 467 00:23:01,200 --> 00:23:03,800 Speaker 10: The same report says hedge funds are short, but we 468 00:23:03,840 --> 00:23:07,680 Speaker 10: know a big part of that is polluted by basis trades. Now, 469 00:23:07,680 --> 00:23:09,280 Speaker 10: I know there are other surveys that will point the 470 00:23:09,320 --> 00:23:11,600 Speaker 10: other way, so you can pick and choose your data 471 00:23:11,680 --> 00:23:15,800 Speaker 10: on that. I guess the better answer to your question 472 00:23:16,000 --> 00:23:19,080 Speaker 10: is is it's not obvious at this juncture that actually 473 00:23:19,080 --> 00:23:21,639 Speaker 10: treasuries are trading as a growth dynamic. It's not obvious 474 00:23:21,680 --> 00:23:24,879 Speaker 10: that they're going to give you that recession hedge that 475 00:23:25,000 --> 00:23:28,640 Speaker 10: actually what they're trading off is the sense that rates 476 00:23:28,680 --> 00:23:30,679 Speaker 10: are going to be higher for longer that you know, 477 00:23:30,720 --> 00:23:34,080 Speaker 10: we're kind of removing the two thousand and nine period 478 00:23:34,160 --> 00:23:38,520 Speaker 10: on the new normals, reverting to the old PREGFC normal, 479 00:23:39,040 --> 00:23:42,639 Speaker 10: that treasuries are focused on budget deficits, They're focused on 480 00:23:42,680 --> 00:23:46,320 Speaker 10: shenanigans in Washington in terms of the ability of politicians 481 00:23:46,359 --> 00:23:48,640 Speaker 10: to stay on top of this stuff, and they're focused 482 00:23:48,640 --> 00:23:51,480 Speaker 10: on the fact that the deficits with the supply needs 483 00:23:51,520 --> 00:23:56,760 Speaker 10: that that implies is buffering up against QT rather than 484 00:23:56,840 --> 00:24:02,160 Speaker 10: QE from the Fed, foreign central banks stepping back from buying, 485 00:24:02,720 --> 00:24:05,560 Speaker 10: you know, just the normal sponsors of bond yields at 486 00:24:05,600 --> 00:24:08,720 Speaker 10: these point, they can afford to step back and wait 487 00:24:08,760 --> 00:24:12,080 Speaker 10: for better entry levels. So at some point what you say, 488 00:24:12,080 --> 00:24:14,960 Speaker 10: I think will be spot on. I'm just not sure 489 00:24:15,000 --> 00:24:16,639 Speaker 10: that this is that point. Q. 490 00:24:17,680 --> 00:24:20,840 Speaker 1: You said, we're probably not there. On capitulation. What do 491 00:24:21,000 --> 00:24:26,000 Speaker 1: you look for as signs of potentially capitulations? Which markets 492 00:24:26,040 --> 00:24:28,160 Speaker 1: do you look at? Which will we be looking for. 493 00:24:29,600 --> 00:24:29,800 Speaker 6: Now? 494 00:24:30,119 --> 00:24:32,960 Speaker 10: All markets? I think, you know, when you get to 495 00:24:33,440 --> 00:24:35,960 Speaker 10: the kind of environment we're seeing at the moment, and 496 00:24:36,000 --> 00:24:37,840 Speaker 10: then the old adage about you know something's going to 497 00:24:37,920 --> 00:24:41,359 Speaker 10: break is very true. So you can then draw up 498 00:24:41,359 --> 00:24:43,600 Speaker 10: a list of potential candidates. You know, probably top of 499 00:24:43,640 --> 00:24:45,879 Speaker 10: a lot of people's lists will be commercial real estate. 500 00:24:46,680 --> 00:24:48,560 Speaker 10: So you can draw up a watch list of you know, 501 00:24:48,640 --> 00:24:53,199 Speaker 10: kind of ETFs like the Reach ETF or individual names 502 00:24:53,320 --> 00:24:55,600 Speaker 10: like you know, the Vornadoes or the Boston properties, and 503 00:24:55,680 --> 00:24:58,360 Speaker 10: use those as your canaries in the coal mine. If 504 00:24:58,440 --> 00:25:00,399 Speaker 10: CRE is going to go, what does that say about 505 00:25:00,840 --> 00:25:05,320 Speaker 10: balance sheet? So let's keep kbre kre in Europe the 506 00:25:05,440 --> 00:25:09,640 Speaker 10: SX seven E future. Keep that on your radar. There's 507 00:25:09,720 --> 00:25:12,040 Speaker 10: some kind of nice proxies. I like to watch for 508 00:25:12,160 --> 00:25:15,359 Speaker 10: private equity because there's a lot of theories that ten 509 00:25:15,400 --> 00:25:19,000 Speaker 10: plus years of easy money have encouraged private equity to 510 00:25:19,400 --> 00:25:23,000 Speaker 10: lever up, and that might be one potential kind of 511 00:25:23,680 --> 00:25:26,200 Speaker 10: swimmer who's left naked. To use the buffet to speak, 512 00:25:27,720 --> 00:25:31,320 Speaker 10: there's something called business development companies and BDS is the 513 00:25:31,320 --> 00:25:33,520 Speaker 10: ETF that you can track to follow those as a 514 00:25:33,520 --> 00:25:36,399 Speaker 10: loose proxy for that side. There's lots you can watch, 515 00:25:37,720 --> 00:25:39,680 Speaker 10: and I think that the main point that jal This 516 00:25:39,840 --> 00:25:42,240 Speaker 10: is a very subjective. This is not the quant side 517 00:25:42,280 --> 00:25:45,520 Speaker 10: of QI speaking at all. It's just me. But I 518 00:25:45,520 --> 00:25:47,920 Speaker 10: would say for the last month plus what we've seen 519 00:25:47,920 --> 00:25:51,160 Speaker 10: has been pretty orderly. It's actually only been this week 520 00:25:51,240 --> 00:25:54,400 Speaker 10: we're starting to see the first signs of capitulation, and 521 00:25:54,440 --> 00:25:57,960 Speaker 10: I would cite Monday's price action in utilities that's smacked 522 00:25:58,000 --> 00:26:02,400 Speaker 10: of capitulation to my mind, dollar yen and obviously what's 523 00:26:02,400 --> 00:26:05,960 Speaker 10: happening on FX with potential intervention risk and then just 524 00:26:06,000 --> 00:26:08,520 Speaker 10: look at some of the mat d's and the RSIs 525 00:26:08,320 --> 00:26:12,439 Speaker 10: on TLT or the thirty year bond, so that there 526 00:26:12,480 --> 00:26:13,840 Speaker 10: are straws in the wind yep. 527 00:26:14,080 --> 00:26:17,040 Speaker 1: You always great to talk with. You get your insights, 528 00:26:17,200 --> 00:26:19,520 Speaker 1: a lot of great stuff as always. Hugh Roberts, he's 529 00:26:19,560 --> 00:26:22,240 Speaker 1: head of analytics at quant Insight. 530 00:26:23,720 --> 00:26:27,119 Speaker 6: You're listening to the team Ken's are Live program Bloomberg 531 00:26:27,160 --> 00:26:29,520 Speaker 6: Markets weekdays at ten am Eastern. 532 00:26:29,200 --> 00:26:30,720 Speaker 4: On Bloomberg dot Com, the. 533 00:26:30,760 --> 00:26:33,919 Speaker 6: iHeartRadio app and the Bloomberg Business app, or listen on 534 00:26:33,960 --> 00:26:35,960 Speaker 6: demand wherever you get your podcasts. 535 00:26:38,200 --> 00:26:41,040 Speaker 1: So let's talk to somebody who does this for a living. 536 00:26:41,280 --> 00:26:45,680 Speaker 1: Margie ptel Joins, a senior portfolio manager at Allspring Global Investments. 537 00:26:45,920 --> 00:26:48,960 Speaker 1: Mark you put all the cross currents together out there. 538 00:26:49,359 --> 00:26:51,000 Speaker 1: We've got an update in the market today, but you 539 00:26:51,000 --> 00:26:53,000 Speaker 1: put all the cross currents out there, whether it's the 540 00:26:53,040 --> 00:26:57,520 Speaker 1: interest rate environment, whether it's a political situation in Washington. 541 00:26:57,600 --> 00:27:01,560 Speaker 1: You put it all together. How constructive are you guys 542 00:27:01,640 --> 00:27:02,960 Speaker 1: on markets right here? 543 00:27:04,400 --> 00:27:05,040 Speaker 11: Well, I think the. 544 00:27:05,000 --> 00:27:07,399 Speaker 12: Market is going to have a strong finish to the 545 00:27:07,520 --> 00:27:09,320 Speaker 12: end of the year after we get through this little 546 00:27:09,320 --> 00:27:12,240 Speaker 12: seasonal weakness. I think people are just putting too much 547 00:27:12,240 --> 00:27:15,439 Speaker 12: emphasis on interest rates as a determinant. 548 00:27:14,920 --> 00:27:16,000 Speaker 11: Of economic growth. 549 00:27:16,200 --> 00:27:18,560 Speaker 12: If interest rates go up, the economy has to go 550 00:27:18,600 --> 00:27:21,399 Speaker 12: into recession, and that has simply been wrong for the 551 00:27:21,520 --> 00:27:23,000 Speaker 12: last two year and three quarters. 552 00:27:23,040 --> 00:27:26,160 Speaker 11: I think you'll continue to be wrong. In an absolute sense. 553 00:27:26,240 --> 00:27:29,679 Speaker 12: Rate to store pretty low, especially compared to inflation, and 554 00:27:29,880 --> 00:27:31,879 Speaker 12: companies are in good shape, so I think we're going 555 00:27:31,920 --> 00:27:34,920 Speaker 12: to see a pretty decent growth in the third quarter 556 00:27:35,000 --> 00:27:37,600 Speaker 12: reported and for the fourth quarter, So that's pretty good 557 00:27:37,600 --> 00:27:38,200 Speaker 12: for stocks. 558 00:27:38,600 --> 00:27:42,760 Speaker 2: Why are you so optimistic, Margie when we have you know, 559 00:27:43,840 --> 00:27:46,400 Speaker 2: rate sensitive companies that have led to charge These tech 560 00:27:46,440 --> 00:27:50,480 Speaker 2: companies typically should not benefit from a rising rate environment. 561 00:27:50,600 --> 00:27:54,359 Speaker 2: And as I mentioned to Paul earlier, you know, a 562 00:27:54,359 --> 00:27:58,240 Speaker 2: lot of companies had expanding margins due to the inflation scenario, 563 00:27:58,359 --> 00:28:02,720 Speaker 2: and now we're seeing that turnaround, hopefully, and we're starting 564 00:28:02,760 --> 00:28:06,080 Speaker 2: already to see companies come out with margin pressure due 565 00:28:06,119 --> 00:28:06,880 Speaker 2: to disinflation. 566 00:28:08,960 --> 00:28:11,960 Speaker 12: Well, I think that companies have fundamentally changed how they 567 00:28:12,000 --> 00:28:15,439 Speaker 12: operate in the last say, five ten years or more, 568 00:28:15,800 --> 00:28:18,320 Speaker 12: so that they have a much more flexible way of 569 00:28:18,359 --> 00:28:19,600 Speaker 12: controlling their costs. 570 00:28:19,800 --> 00:28:21,800 Speaker 11: So I think, again, you are not going to see. 571 00:28:21,640 --> 00:28:23,680 Speaker 12: The sort of margin pressure we saw in the past 572 00:28:23,760 --> 00:28:27,080 Speaker 12: that when inflation goes up, margins get squeezed and they 573 00:28:27,119 --> 00:28:30,520 Speaker 12: lose margins when rates go down too. I think companies 574 00:28:30,520 --> 00:28:33,280 Speaker 12: are going to maintain those margins. They've done that even 575 00:28:33,320 --> 00:28:36,840 Speaker 12: with fluctuations and interest rates before. What's more important is 576 00:28:37,240 --> 00:28:40,440 Speaker 12: are their revenues growing and can they control their costs 577 00:28:40,440 --> 00:28:42,479 Speaker 12: so that they can maintain their profit margin? 578 00:28:42,720 --> 00:28:44,479 Speaker 11: And I think they will. I think they'll continue to 579 00:28:44,480 --> 00:28:46,760 Speaker 11: do what they've been doing. And keep in. 580 00:28:46,680 --> 00:28:49,280 Speaker 12: Mind that companies are not over levered as a whole. 581 00:28:49,640 --> 00:28:53,240 Speaker 12: Companies restructured the balance sheets when interest rates are near zero, 582 00:28:53,680 --> 00:28:57,760 Speaker 12: so they really aren't sensitive to borrowing costs going up 583 00:28:57,920 --> 00:29:00,640 Speaker 12: by short term rates going up. In fact, it's benefited 584 00:29:00,680 --> 00:29:03,240 Speaker 12: in many companies because they have large amounts of cash 585 00:29:03,280 --> 00:29:06,560 Speaker 12: balances on their books that they raise proactively, so they're 586 00:29:06,600 --> 00:29:09,280 Speaker 12: actually benefiting a little bit from higher rates and those 587 00:29:09,400 --> 00:29:11,600 Speaker 12: very low fixed costs that they used to borrow over 588 00:29:11,680 --> 00:29:12,560 Speaker 12: the last decade. 589 00:29:13,680 --> 00:29:16,680 Speaker 1: So let's talk valuation here, Margie. I mean there's a 590 00:29:16,720 --> 00:29:18,120 Speaker 1: couple of ways to look at it. I guess if 591 00:29:18,120 --> 00:29:20,120 Speaker 1: you just look at the headline, pe multiple closes that 592 00:29:20,200 --> 00:29:23,160 Speaker 1: twenty here, maybe nineteen ish, But if you back out 593 00:29:23,160 --> 00:29:25,840 Speaker 1: some of those magnificent seven it looks a little bit 594 00:29:25,880 --> 00:29:28,920 Speaker 1: better fifteen sixteen times. How do you guys think about 595 00:29:28,960 --> 00:29:31,600 Speaker 1: valuation at this point, Well. 596 00:29:31,480 --> 00:29:35,240 Speaker 12: I think valuation is not an impediment to stocks going higher. 597 00:29:35,280 --> 00:29:37,880 Speaker 12: I think the valuations are more or less within the 598 00:29:37,960 --> 00:29:41,480 Speaker 12: average range. The average average is, of course pulled up 599 00:29:41,520 --> 00:29:43,720 Speaker 12: because of a handful of growth stocks that have very 600 00:29:43,800 --> 00:29:45,960 Speaker 12: very high pees price earnings ratios. 601 00:29:46,360 --> 00:29:48,120 Speaker 11: But for many many stocks that. 602 00:29:48,080 --> 00:29:52,360 Speaker 12: Have growth, their PE is really pretty competitive with their 603 00:29:52,440 --> 00:29:55,680 Speaker 12: cash flow yield with short term treasury. So we think 604 00:29:55,720 --> 00:29:58,800 Speaker 12: as long as earnings move ahead, we think companies can 605 00:29:58,840 --> 00:30:01,440 Speaker 12: actually have higher stock crisis And who's to say we 606 00:30:01,520 --> 00:30:04,680 Speaker 12: can't have an expansion in price serviance ratios if people 607 00:30:04,680 --> 00:30:07,280 Speaker 12: feel a little bit more optimistic about economic growth. 608 00:30:08,200 --> 00:30:12,080 Speaker 2: How much of a competitive environment the rates offer here? 609 00:30:12,320 --> 00:30:15,000 Speaker 2: I mean, when you see a ten year at four 610 00:30:15,040 --> 00:30:18,920 Speaker 2: point nine percent, you know, how does that compete with 611 00:30:18,960 --> 00:30:19,880 Speaker 2: the S and P yield? 612 00:30:21,160 --> 00:30:24,600 Speaker 12: Well, I don't think it's a lot of competition because 613 00:30:24,800 --> 00:30:27,200 Speaker 12: the SMP yield is now about one point three, so 614 00:30:27,320 --> 00:30:30,080 Speaker 12: that's not very high, but there are many stocks that 615 00:30:30,200 --> 00:30:33,000 Speaker 12: have dividends above that and that are raising the dividends 616 00:30:33,000 --> 00:30:37,000 Speaker 12: every year. And again, if you have capital appreciation as 617 00:30:37,080 --> 00:30:40,480 Speaker 12: a company has rising revenues, I think that a five 618 00:30:40,560 --> 00:30:43,760 Speaker 12: percent is really a pretty low hurdle for stocks to 619 00:30:43,880 --> 00:30:46,160 Speaker 12: climb over and equal or do better. 620 00:30:47,240 --> 00:30:48,840 Speaker 1: How about on the fixed income side, We had a 621 00:30:48,840 --> 00:30:51,840 Speaker 1: guest on earlier today, you know, at a big, big 622 00:30:51,880 --> 00:30:54,840 Speaker 1: bond shop on the West Coast, saying you know, they're 623 00:30:54,880 --> 00:30:59,240 Speaker 1: going out longer term duration. They are very bullish there. 624 00:31:00,000 --> 00:31:02,120 Speaker 1: How do you think about kind of just fixed in 625 00:31:02,160 --> 00:31:03,040 Speaker 1: the fixed income space. 626 00:31:05,040 --> 00:31:07,280 Speaker 12: Well, I think that if you look at say the 627 00:31:07,360 --> 00:31:11,400 Speaker 12: average bond, I think that corporate bonds off offer more 628 00:31:11,520 --> 00:31:14,480 Speaker 12: value than treasuries. In fact, if you look this year 629 00:31:14,560 --> 00:31:18,200 Speaker 12: and last year, many people felt the best place to 630 00:31:18,200 --> 00:31:21,560 Speaker 12: be was treasuries because they were safe, and actually investment 631 00:31:21,600 --> 00:31:27,400 Speaker 12: grade bonds and high yield bonds, junk bonds outperformed treasury bonds. 632 00:31:27,440 --> 00:31:29,080 Speaker 11: They continue to do that this year. 633 00:31:29,640 --> 00:31:32,200 Speaker 12: So I think that to be longer duration and to 634 00:31:32,240 --> 00:31:35,480 Speaker 12: be in the high yield space a lower quality space 635 00:31:35,560 --> 00:31:38,840 Speaker 12: is going to continue to provide more return than treasuries. 636 00:31:40,280 --> 00:31:42,960 Speaker 1: All right, So on the equity side, here, are there 637 00:31:43,240 --> 00:31:47,840 Speaker 1: some sectors that you guys like or are you more factors, 638 00:31:47,880 --> 00:31:50,640 Speaker 1: whether it's you know, some of the factors investing that 639 00:31:50,720 --> 00:31:51,720 Speaker 1: kind of you have liked. 640 00:31:51,680 --> 00:31:53,640 Speaker 5: The Magnificent magnificence. 641 00:31:53,840 --> 00:31:56,800 Speaker 2: I can't get this Magnificent seven And by the way, 642 00:31:56,840 --> 00:31:58,440 Speaker 2: I think it's a horrible name. So well, yeah, it 643 00:31:58,440 --> 00:32:02,640 Speaker 2: doesn't roll the Big seven. You know you've gone along though, 644 00:32:02,800 --> 00:32:05,320 Speaker 2: So do you stick with that trade? 645 00:32:06,880 --> 00:32:07,080 Speaker 8: Well? 646 00:32:07,120 --> 00:32:07,560 Speaker 11: I think so. 647 00:32:07,640 --> 00:32:11,640 Speaker 12: As long as those names continue to have above average growth, 648 00:32:12,160 --> 00:32:15,080 Speaker 12: they will continue to be boarded with a higher price 649 00:32:15,120 --> 00:32:18,520 Speaker 12: earnings voltible, and I think investors will be rewarded. We've 650 00:32:18,560 --> 00:32:21,719 Speaker 12: seen that when some of those companies have reported disappointing 651 00:32:21,720 --> 00:32:24,800 Speaker 12: earnings and stocks get hit. But I think really, when 652 00:32:24,800 --> 00:32:26,959 Speaker 12: you look at a world where we may have slow growth, 653 00:32:27,160 --> 00:32:29,560 Speaker 12: they're still going to be premium for growth stocks and 654 00:32:29,640 --> 00:32:31,880 Speaker 12: we may see some rotation, but we still like the 655 00:32:31,920 --> 00:32:35,600 Speaker 12: technology sector as a whole, not just that handful of stocks. 656 00:32:35,600 --> 00:32:38,920 Speaker 12: A communications sector and even some of the industrials which 657 00:32:38,960 --> 00:32:42,040 Speaker 12: we think are benefiting from a capital expenditure cycle that 658 00:32:42,160 --> 00:32:44,040 Speaker 12: probably is going to last a little bit longer than 659 00:32:44,040 --> 00:32:47,200 Speaker 12: people think, so we think there's some good opportunities. The 660 00:32:47,240 --> 00:32:49,720 Speaker 12: defensive areas, I think are going to continue to be 661 00:32:49,760 --> 00:32:52,400 Speaker 12: disappointing as they've been now for a year. 662 00:32:52,280 --> 00:32:52,800 Speaker 5: And a half. 663 00:32:53,680 --> 00:32:56,880 Speaker 1: Hey, Margie, we're going to have earning season upon us 664 00:32:57,160 --> 00:32:59,320 Speaker 1: sooner than we think, and you know, a week or so, 665 00:33:00,040 --> 00:33:01,560 Speaker 1: what are you going to be kind of looking for 666 00:33:01,680 --> 00:33:04,800 Speaker 1: here as we start to hear some of these companies report. 667 00:33:04,520 --> 00:33:08,880 Speaker 12: Their earnings, well, number one is are they still seeing 668 00:33:08,880 --> 00:33:11,200 Speaker 12: good demand? I think that's really going to be the 669 00:33:11,240 --> 00:33:15,080 Speaker 12: driver of stocks. And number two is really what's happened 670 00:33:15,160 --> 00:33:20,040 Speaker 12: to company's business with China, because we've seen some surprises 671 00:33:20,080 --> 00:33:23,240 Speaker 12: so far where companies that have a big share of 672 00:33:23,280 --> 00:33:26,560 Speaker 12: their business and growing business with China have been disappointed 673 00:33:26,600 --> 00:33:29,000 Speaker 12: because the band there is really slowing down. So I 674 00:33:29,000 --> 00:33:32,040 Speaker 12: think that'll be an interesting take to see what companies 675 00:33:32,080 --> 00:33:35,400 Speaker 12: are heard as Chinese grow slow down. But basically, I 676 00:33:35,400 --> 00:33:38,160 Speaker 12: think we're looking for modest, moderate growth. 677 00:33:38,440 --> 00:33:39,880 Speaker 11: And next year's an election year. 678 00:33:39,960 --> 00:33:42,040 Speaker 12: It seems like we've been in one for four years anyway, 679 00:33:42,240 --> 00:33:45,160 Speaker 12: and I think that'll be another decent year for the market. 680 00:33:45,480 --> 00:33:47,880 Speaker 1: All right, Margie, thanks so much. For joining us as always. 681 00:33:47,880 --> 00:33:52,400 Speaker 1: Margie Bettell, Senior portfolio manager at Offspring Global Investments. 682 00:33:52,760 --> 00:33:55,880 Speaker 6: You're listening to the tape Can's our Line program Bloomberg 683 00:33:55,920 --> 00:33:59,760 Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, Tune 684 00:33:59,800 --> 00:34:01,680 Speaker 6: in Bloomberg dot Com. 685 00:34:01,360 --> 00:34:02,840 Speaker 4: And the Bloomberg Business App. 686 00:34:02,840 --> 00:34:05,680 Speaker 6: You can also listen live on Amazon Alexa from our 687 00:34:05,680 --> 00:34:10,680 Speaker 6: flagship New York station. Just say Alexa play Bloomberg eleven thirty. 688 00:34:11,120 --> 00:34:14,440 Speaker 1: Our c sweet conversation of the day is we're talking decking, 689 00:34:14,800 --> 00:34:16,680 Speaker 1: you know, like the deck on the back of your house. 690 00:34:16,920 --> 00:34:19,960 Speaker 1: And here's a data point from Bloomberg Intelligence drew readings 691 00:34:19,960 --> 00:34:24,200 Speaker 1: then also covers tricks half. I guess there's sixty million 692 00:34:24,280 --> 00:34:26,799 Speaker 1: decks in the United States and maybe half of them 693 00:34:26,880 --> 00:34:29,680 Speaker 1: need to be replaced. Mine is not one of them, 694 00:34:29,680 --> 00:34:31,600 Speaker 1: I'm going to say right now, but we have the 695 00:34:31,600 --> 00:34:34,400 Speaker 1: CEO of Treks right here with us today, so we 696 00:34:34,440 --> 00:34:37,640 Speaker 1: want to get right to it. What do we got here, 697 00:34:37,680 --> 00:34:39,320 Speaker 1: Brian Fairbanks, He's the CEO of Tricks. 698 00:34:39,440 --> 00:34:39,600 Speaker 4: Now. 699 00:34:39,600 --> 00:34:41,719 Speaker 1: This is in New York Stock Exchange listed company t 700 00:34:42,000 --> 00:34:45,959 Speaker 1: r EX is the ticker. This is a six point 701 00:34:45,960 --> 00:34:49,279 Speaker 1: four billion dollar market cap company. The good news is 702 00:34:49,320 --> 00:34:51,040 Speaker 1: stocks up forty percent year to date. It is off 703 00:34:51,080 --> 00:34:53,400 Speaker 1: about twenty percent off of it's high of just a 704 00:34:53,400 --> 00:34:55,120 Speaker 1: couple of months ago, but a lot of the markets 705 00:34:55,120 --> 00:34:57,360 Speaker 1: pulled back. But Brian, thanks so much for joining us 706 00:34:57,360 --> 00:35:01,319 Speaker 1: here in our Bloomberg Interactive Broker Studio Decks. I got 707 00:35:01,360 --> 00:35:03,120 Speaker 1: to think that's a good business. I got to think 708 00:35:03,239 --> 00:35:06,279 Speaker 1: during the pandemic, people built a lot of decks. Talk 709 00:35:06,280 --> 00:35:08,120 Speaker 1: to us about the state of your business right here. 710 00:35:08,200 --> 00:35:10,919 Speaker 13: Yeah, thanks for having us back on again. Absolutely, through 711 00:35:10,920 --> 00:35:14,000 Speaker 13: the pandemic, there was definitely a surge of people interested 712 00:35:14,040 --> 00:35:17,960 Speaker 13: in outdoor living and wanting to expand their ability to 713 00:35:18,040 --> 00:35:22,680 Speaker 13: spend time outdoors with their family. Even leading into the pandemic, 714 00:35:22,760 --> 00:35:26,520 Speaker 13: we had seen that there was a significant opportunity to 715 00:35:26,560 --> 00:35:29,080 Speaker 13: be able to really appeal to those families looking to 716 00:35:29,160 --> 00:35:32,120 Speaker 13: add on a low cost way to add on space 717 00:35:32,480 --> 00:35:36,800 Speaker 13: to their homes. Within the repair and remodel indecks, approximately 718 00:35:36,840 --> 00:35:40,560 Speaker 13: thirty percent of it is associated with outdoor living and 719 00:35:40,640 --> 00:35:42,600 Speaker 13: so we really sit in the sweet spot of that. 720 00:35:43,080 --> 00:35:46,080 Speaker 1: And what's unique about the decks you make is you 721 00:35:46,120 --> 00:35:48,359 Speaker 1: don't use wood. What do you use? 722 00:35:48,600 --> 00:35:52,360 Speaker 13: Right, So we're very unique in that ninety five percent 723 00:35:52,400 --> 00:35:54,960 Speaker 13: of the material that goes into our deck boards is 724 00:35:55,000 --> 00:35:59,560 Speaker 13: recycled and reclaimed. Last year alone, we recovered six hundred 725 00:35:59,640 --> 00:36:03,319 Speaker 13: million pounds of material that otherwise would have potentially gone 726 00:36:03,400 --> 00:36:07,440 Speaker 13: into landfills. So this is the form of polyethylene, plastic bags, 727 00:36:07,520 --> 00:36:11,360 Speaker 13: stretch wrap, and wood dust. We combine those with a 728 00:36:11,440 --> 00:36:14,320 Speaker 13: number of additives to make a deck board that will 729 00:36:14,800 --> 00:36:17,919 Speaker 13: last basically if your lifetime. Our warranty runs anywhere from 730 00:36:18,000 --> 00:36:20,640 Speaker 13: twenty five years and our entry level products up to 731 00:36:20,719 --> 00:36:22,719 Speaker 13: fifty years. On our premium products. 732 00:36:23,120 --> 00:36:25,640 Speaker 1: All right, So, one of the issues that I'm sure 733 00:36:25,640 --> 00:36:28,160 Speaker 1: you're feeling, like a lot of businesses are, is just 734 00:36:29,040 --> 00:36:32,920 Speaker 1: is the consumer slowing down? Is inflation cutting into the consumer? 735 00:36:33,200 --> 00:36:36,000 Speaker 1: So in your retail channel in particular, are you seeing 736 00:36:36,040 --> 00:36:38,360 Speaker 1: any of that, Because we had home depots, we had lows. 737 00:36:39,560 --> 00:36:41,719 Speaker 1: They're seeing some softening trends and some of their big 738 00:36:41,719 --> 00:36:44,560 Speaker 1: ticket discretionary items. Are you seeing that in your business? 739 00:36:44,640 --> 00:36:48,200 Speaker 13: The consumer has remained remarkably strong in twenty twenty three. 740 00:36:48,360 --> 00:36:51,200 Speaker 13: Coming into the year, we did expect to see more 741 00:36:51,280 --> 00:36:55,240 Speaker 13: weakness from that consumer. We originally expected to see flatsh 742 00:36:55,360 --> 00:36:59,160 Speaker 13: to down single digit type numbers for the year. We 743 00:36:59,200 --> 00:37:01,480 Speaker 13: saw that in the first quarter and then through the 744 00:37:01,600 --> 00:37:05,600 Speaker 13: second quarter. Second quarter we saw mid single digit increase 745 00:37:05,840 --> 00:37:08,759 Speaker 13: in our guidance for the third quarter assumed roughly a 746 00:37:08,800 --> 00:37:12,359 Speaker 13: low single digit type increase in the consumer, So we've 747 00:37:12,880 --> 00:37:16,399 Speaker 13: been happy with the resilience of that consumer. The other 748 00:37:16,480 --> 00:37:19,120 Speaker 13: thing that plays well for Treks is our consumer tends 749 00:37:19,160 --> 00:37:21,279 Speaker 13: to be at the higher end of the income spectrum. 750 00:37:21,400 --> 00:37:24,800 Speaker 13: We're focused on those households over ninety thousand dollars average 751 00:37:24,840 --> 00:37:29,480 Speaker 13: type income, so not quite as heavily impacted by some 752 00:37:29,520 --> 00:37:31,840 Speaker 13: of these short term changes in the economy. 753 00:37:32,160 --> 00:37:35,080 Speaker 1: So it's fascinating reading the research note from Drew Redding, 754 00:37:35,080 --> 00:37:38,200 Speaker 1: who covers your stock your company for Bloomberg Intelligence. He's 755 00:37:38,200 --> 00:37:42,000 Speaker 1: at in there the recyclable segment or is only twenty 756 00:37:42,000 --> 00:37:46,960 Speaker 1: four percent of total sales in the industry. So you, guys, arguably, 757 00:37:47,000 --> 00:37:48,760 Speaker 1: where do you think that number can go eventually? 758 00:37:48,960 --> 00:37:53,400 Speaker 13: Right, So composite decking of the old positive overall industry 759 00:37:53,600 --> 00:37:56,400 Speaker 13: is twenty four to twenty five percent of the volume sold. 760 00:37:57,000 --> 00:37:59,640 Speaker 13: One of the strategies that we've been executing since two 761 00:37:59,640 --> 00:38:03,800 Speaker 13: thousand nineteen to really go after that buyer who otherwise 762 00:38:03,840 --> 00:38:06,400 Speaker 13: would have been going to would and take that instead 763 00:38:06,440 --> 00:38:08,920 Speaker 13: of being at twenty five percent, take that up to 764 00:38:08,960 --> 00:38:12,880 Speaker 13: fifty percent. When we started on this strategy in twenty nineteen, 765 00:38:13,080 --> 00:38:16,160 Speaker 13: it was about nineteen percent of the marketplace. So the 766 00:38:16,200 --> 00:38:20,200 Speaker 13: strategy with those products to convert roughly two hundred basis 767 00:38:20,239 --> 00:38:22,960 Speaker 13: points a year has been quite effective and we expect 768 00:38:22,960 --> 00:38:23,520 Speaker 13: will continue. 769 00:38:23,600 --> 00:38:27,600 Speaker 1: So does your company actually go to the someone's home 770 00:38:27,600 --> 00:38:29,000 Speaker 1: and build a deck or do you just sell to 771 00:38:29,160 --> 00:38:31,120 Speaker 1: the people who actually build a deck. 772 00:38:31,360 --> 00:38:33,040 Speaker 13: We sell to the people who are building the deck. 773 00:38:33,280 --> 00:38:35,319 Speaker 13: We will sell to Home Depot and Lows. We have 774 00:38:35,360 --> 00:38:38,600 Speaker 13: our product on the shelf at both of those DIY centers. 775 00:38:38,840 --> 00:38:41,560 Speaker 13: We also sell to we call the pro channel. So 776 00:38:41,600 --> 00:38:44,600 Speaker 13: these are locations that would be selling directly to the 777 00:38:44,680 --> 00:38:47,759 Speaker 13: contractor as well as homeowners and contractors. 778 00:38:48,280 --> 00:38:51,160 Speaker 1: So who do you compete with most directly? How does 779 00:38:51,200 --> 00:38:52,240 Speaker 1: that work in your business? 780 00:38:52,440 --> 00:38:56,120 Speaker 13: We have it's a pretty concentrated industry. Our second competitor 781 00:38:56,719 --> 00:38:58,920 Speaker 13: is about twenty five percent of the industry, and then 782 00:38:58,960 --> 00:39:03,920 Speaker 13: a competitor number three they are roughly twelve to fifteen percent. 783 00:39:04,160 --> 00:39:09,400 Speaker 13: So it is a concentrated industry and everybody makes great products. 784 00:39:09,440 --> 00:39:12,239 Speaker 13: It's able to service the market and really provide a 785 00:39:12,480 --> 00:39:17,960 Speaker 13: much more superior experience for that consumer. Versus installing wood, 786 00:39:18,040 --> 00:39:20,480 Speaker 13: which you'll have to maintain every year, and then as 787 00:39:20,520 --> 00:39:23,120 Speaker 13: you started out with the piece, in a number of years, 788 00:39:23,160 --> 00:39:25,000 Speaker 13: it'll have to be completely replaced again. 789 00:39:25,320 --> 00:39:28,520 Speaker 1: All right, So what's a typical I don't know what's 790 00:39:28,520 --> 00:39:29,800 Speaker 1: a typical deck cost? 791 00:39:30,120 --> 00:39:30,319 Speaker 4: You know? 792 00:39:30,360 --> 00:39:32,919 Speaker 1: I mean, like, what's a typical Homer spend on a deck. 793 00:39:33,080 --> 00:39:36,000 Speaker 13: If we talk about a wood conversion type deck, that 794 00:39:36,120 --> 00:39:38,960 Speaker 13: deck's generally three hundred to three hundred and fifty square 795 00:39:39,000 --> 00:39:41,279 Speaker 13: feet and probably going to be in the twelve to 796 00:39:41,320 --> 00:39:44,560 Speaker 13: fifteen thousand dollars range. The material cost is not the 797 00:39:44,560 --> 00:39:47,600 Speaker 13: biggest part of it. Wood you'll spend about one thousand 798 00:39:47,600 --> 00:39:50,680 Speaker 13: dollars for just the decking part of the wood, whereas 799 00:39:50,760 --> 00:39:53,720 Speaker 13: our entry level treks that's going up against woods roughly 800 00:39:53,760 --> 00:39:56,640 Speaker 13: seventeen hundred dollars. The biggest cost is going to be 801 00:39:56,760 --> 00:39:59,600 Speaker 13: building that structure out in the labor that comes along 802 00:39:59,640 --> 00:40:02,440 Speaker 13: with it. As I mentioned, our customer tends towards the 803 00:40:02,480 --> 00:40:05,200 Speaker 13: higher end of the income spectrum. Those that are buying 804 00:40:05,280 --> 00:40:09,480 Speaker 13: our treks, Transcend, Transcend Lineage and signature products tend to 805 00:40:09,480 --> 00:40:12,120 Speaker 13: be building much larger decks, and those average five to 806 00:40:12,160 --> 00:40:15,960 Speaker 13: six hundred square feet and can range thirty thousand dollars 807 00:40:16,040 --> 00:40:20,080 Speaker 13: up to We've got contractors building complete outdoor living rooms 808 00:40:20,080 --> 00:40:24,000 Speaker 13: that include couches and TVs and kitchens three four hundred 809 00:40:24,040 --> 00:40:25,800 Speaker 13: thousand dollars outdoor living areas. 810 00:40:26,320 --> 00:40:28,640 Speaker 1: All right, So what I'm just looking at your income 811 00:40:28,640 --> 00:40:31,759 Speaker 1: statement here, you get got gross margins kind of in 812 00:40:31,800 --> 00:40:34,360 Speaker 1: the high thirties forty percent kind of range. What are 813 00:40:34,400 --> 00:40:37,440 Speaker 1: the levers really on the cost side for you guys. 814 00:40:37,840 --> 00:40:40,200 Speaker 13: We've got a number of levers that we're pursuing, we 815 00:40:40,360 --> 00:40:43,320 Speaker 13: have been pursuing, and will continue to pursue. First is 816 00:40:43,360 --> 00:40:47,319 Speaker 13: our capacity utilization. Every one hundred million dollars of additional 817 00:40:47,360 --> 00:40:50,479 Speaker 13: sales that goes into our existing capacity is worth about 818 00:40:50,480 --> 00:40:53,360 Speaker 13: one hundred to hundred and fifty basis points of margin. 819 00:40:53,800 --> 00:40:58,080 Speaker 13: We also have a strong continuous improvement program within the organization. 820 00:40:58,640 --> 00:41:02,040 Speaker 13: We've got a group of people pacifically dedicated not only 821 00:41:02,080 --> 00:41:04,800 Speaker 13: to building the pipeline of what are those cost actions 822 00:41:04,840 --> 00:41:08,120 Speaker 13: we're going after, but actually implementing and tracking that. We're 823 00:41:08,160 --> 00:41:11,000 Speaker 13: seeing the cost savings coming through. And then the last 824 00:41:11,000 --> 00:41:13,600 Speaker 13: opportunity is going to be SG and a leverage. As 825 00:41:13,640 --> 00:41:16,520 Speaker 13: we continue to grow as a company, that fixed portion 826 00:41:16,600 --> 00:41:19,040 Speaker 13: of our SG and a can be leveraged. 827 00:41:19,560 --> 00:41:21,520 Speaker 1: Brian, thanks so much for joining us. Really appreciate it. 828 00:41:21,520 --> 00:41:27,520 Speaker 1: Brian Fairbanks, he is the CEO of Trecks, the composite 829 00:41:27,520 --> 00:41:29,919 Speaker 1: deck builder out there, so for those that are thinking 830 00:41:29,920 --> 00:41:32,719 Speaker 1: about putting on a deck or replacing a deck, you 831 00:41:32,680 --> 00:41:34,480 Speaker 1: can think about the composites part of the business. 832 00:41:34,640 --> 00:41:37,719 Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can 833 00:41:37,719 --> 00:41:41,520 Speaker 2: subscribe and listen to interviews on Apple Podcasts or whatever 834 00:41:41,600 --> 00:41:45,320 Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter 835 00:41:45,520 --> 00:41:47,439 Speaker 2: at Matt Miller nineteen seventy three. 836 00:41:47,920 --> 00:41:50,240 Speaker 1: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. 837 00:41:50,400 --> 00:41:53,080 Speaker 1: Before the podcast, you can always catch us worldwide at 838 00:41:53,080 --> 00:41:54,839 Speaker 1: Bloomberg Radio