Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moven news.
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Speaker 1: You know, the market's got a little dicey here in
Speaker 1: the last five six weeks here, people get starting to
Speaker 1: build up a little bit of a wall. We'll warr
Speaker 1: as it relates to that higher for longer type thing.
Speaker 1: And then if that's not enough, then you've got a
Speaker 1: government that might be on the verge of dysfunction. You
Speaker 1: don't have a speaker on the verge of yeah, yeah,
Speaker 1: we have a dysfunctional government. We have a dispatch on
Speaker 1: Let's just go there, Let's see how the pros are
Speaker 1: kind of putting it all together. Phil Taves joins, the
Speaker 1: CEO of Tave's Asset Management. Phil, I mean, how do
Speaker 1: you put this situation that we've got down in Washington
Speaker 1: with the House of Representatives, How does that kind of
Speaker 1: weave into your investment outlook here?
Speaker 3: Well, we've already gone defensive over the last three weeks,
Speaker 3: we've made into a fully, fully defensive posture. What you guys, well,
Speaker 3: you may remember that we actually can move fully out
Speaker 3: of equities onto the sidelines and T builds. So that
Speaker 3: for eighty five percent of our roughly a billion dollars
Speaker 3: is in T bills, but what's not a lot of
Speaker 3: it has full notional value of put hedging. So that
Speaker 3: means defensive, not just like defensive stocks. But here's what
Speaker 3: I find so interesting is that, you know, if you
Speaker 3: look at what happened with the debt ceiling negotiations and
Speaker 3: then the recent budget impass, is that the market has
Speaker 3: tended to just ignore it. Right, So we were shocked
Speaker 3: at the debt ceiling negotiations that markets weren't freaking out.
Speaker 3: We were, but the markets weren't. And I here's the
Speaker 3: way I think it looks. I think that you know, again,
Speaker 3: it's sort of a I was expecting, Wow, did disarray
Speaker 3: in the house. Markets are going to open very negative
Speaker 3: this morning. Obviously that didn't happen. And I think the
Speaker 3: way this looks in terms of a government dysfunction is
Speaker 3: that we have more that same thing until until and
Speaker 3: if we reach a point where the dysfunction really is
Speaker 3: full on and plays into the fact that, wow, we're
Speaker 3: just going to have the government be closed for you know, uh,
Speaker 3: maybe ten days, maybe thirty five days like we've have
Speaker 3: in the last twenty years, or maybe longer. And then
Speaker 3: I think, then I think, potentially you'll have some real
Speaker 3: market movement, just as we did when you know, they
Speaker 3: were trying to negotiate the debt ceiling under Obama and
Speaker 3: the leaders agreed to something and all of a sudden,
Speaker 3: the legislature said, no, we're not going to do that.
Speaker 3: So I think, yeah, the market is just going to
Speaker 3: be sanguine about this until it's obvious that things are
Speaker 3: just so broken that it's going to be very bad
Speaker 3: scene for markets.
Speaker 2: So let's talk about holding treasuries here. How painful is
Speaker 2: it if you know, the two year goes from five
Speaker 2: to eleven to five twenty or five thirty, like, if
Speaker 2: these rates keep on rising And I will admit I
Speaker 2: didn't think they could go any higher last week or
Speaker 2: maybe even two weeks ago, but it seems like they
Speaker 2: continue to do that, not today, But you know, how
Speaker 2: how rough is it if you're holding two years and
Speaker 2: they move up twenty basis points.
Speaker 3: Yeah, so I think you need zero duration basically as
Speaker 3: close close as zero as you can get. So across
Speaker 3: our platform, we're just in one to three month, right,
Speaker 3: so you really want to be on the very very
Speaker 3: short end of the curve. There's no you know, the
Speaker 3: worst trade ever I was, you know, I was talking
Speaker 3: to a massively big advisor about two months ago and
Speaker 3: he said, I think it's time to go really long duration,
Speaker 3: and I said, maybe you should wait on that. Well,
Speaker 3: that was a really bad trade. So you need to
Speaker 3: be in T bills at this moment because the breakout
Speaker 3: is really the most important thing that's happened obviously over
Speaker 3: the over the last thirty days. And you know, I
Speaker 3: think it's just the fact that you have this relentless
Speaker 3: advancing yields that that keeps bringing the markets lower. Now
Speaker 3: we have a little bit of a reprieve today on
Speaker 3: the ten uere you know, thank goodness for that. But
Speaker 3: there's you know, if we could be at five percent,
Speaker 3: I think it'll be interesting to see though. So if
Speaker 3: we reach five and then we pause, I mean, if
Speaker 3: we can just stop increasing and stop the breakout, it'll
Speaker 3: be interesting to see if markets can sort of regain
Speaker 3: their their stability here. But as long as we're moving higher, no,
Speaker 3: not two years, not five years, not ten years, good
Speaker 3: Heaven's not like twenty years bring it into one to
Speaker 3: three months in our opinion.
Speaker 2: Although TLT has seen massive inflows. Right, that's a ETF
Speaker 2: with twenty years plus. Like everyone's been going out the curve.
Speaker 2: Everyone's been buying these elong duration bonds as we get
Speaker 2: higher and higher on the on the yield, and you expect,
Speaker 2: like if you buy the thirty year right now, you're
Speaker 2: getting four point nine percent, So you know, as long
Speaker 2: as you're holding it to maturity, that seems like a
Speaker 2: good trade. Right.
Speaker 3: But yeah, right, so like hold that hold that thirty
Speaker 3: year two maturity, that would be a that would be
Speaker 3: a great plan.
Speaker 2: Well look, well I wonder I mean if it turns
Speaker 2: around now, if this is the peak, But what do
Speaker 2: you think the peak is?
Speaker 3: I just I just don't know. But I don't think
Speaker 3: you know, you know, you've got the acronym BFF. I
Speaker 3: don't think you want the long gone to be your
Speaker 3: I think you went the short term, very short term
Speaker 3: to be or BFT, which is your best friend temporarily right,
Speaker 3: and and you just you just can't work against a
Speaker 3: trend like we see happening right now. You know, look
Speaker 3: at look at the stock market for the last three years, inexplicable.
Speaker 3: All of the moves have been inexplicable, like the advance
Speaker 3: this year, the advance during the pandemic. You know, So
Speaker 3: it's just not possible to call the market. So why
Speaker 3: would you make that trade? Why would you make that
Speaker 3: trade until until a trend comes along where you've got
Speaker 3: an opportunity. And look, so in terms of the long
Speaker 3: gone what we're you know, salivating at the possibility about
Speaker 3: because we're defensive now and we're in t bills. But
Speaker 3: if the trend changes and all of a sudden things
Speaker 3: fall off a cliff in terms of stock market, things
Speaker 3: look very bad and you actually see a change in
Speaker 3: direction of yields, there are going to be that's an
Speaker 3: amazing opportunity, and not just long bonds, but in just
Speaker 3: even conventional bonds like aggregate bonds. So we're waiting for that,
Speaker 3: but it's not right now, and I don't think you
Speaker 3: make the trade at this moment.
Speaker 1: Do you have to wait for the FED? Actually the
Speaker 1: signal rate cuts are coming.
Speaker 3: No, I think what you do is you watch the
Speaker 3: trend of yields and you watch the trend of just
Speaker 3: the price of these of these bonds. That's what we do.
Speaker 3: So we just really ignore everything else and so that
Speaker 3: you know, typically what you see is the market. You know,
Speaker 3: this bond market will about a month before you see
Speaker 3: any FED movement or you hit actual peak rates, you
Speaker 3: start to see a change in direction of those bonds.
Speaker 3: So watch the price of these bonds more than anything else.
Speaker 2: So in terms of you know, I guess you got
Speaker 2: to wait until you see the whites of its eyes.
Speaker 4: Right.
Speaker 5: That's been the same thing with any government shutdowns. If
Speaker 5: you think that's going.
Speaker 2: To be horrible for markets, well it doesn't seem to
Speaker 2: be until things go overboard.
Speaker 4: Is that?
Speaker 2: Do you feel the same way about the broader you know,
Speaker 2: government debt picture, because right now, you know, thirty three
Speaker 2: trillion and counting, we know entitlements like won't be funded
Speaker 2: for probably more than another decade. Does that not matter
Speaker 2: to markets until we get to you know, pass the deadline.
Speaker 3: Yeah, So that's the most important thing that we think
Speaker 3: is going on in the markets. I'm here in Austin, Texas,
Speaker 3: you're getting ready to fly out back to New York.
Speaker 3: And yesterday I spoke again at a broker dealer conference,
Speaker 3: and I talked about the hidden implications of global debt.
Speaker 3: So you've got this situation where the lender of last
Speaker 3: resort right always saves the day, and so over and
Speaker 3: over again we go through these market crises and then
Speaker 3: and then the FED comes in. Well, we all know
Speaker 3: the FED over the short term isn't going to come
Speaker 3: in and save the markets. But I think what you
Speaker 3: have to ask a question about is is if you
Speaker 3: actually tip into a recession, if it's a hard landing,
Speaker 3: then you've got the potential for decreased GDP at a
Speaker 3: time when death of GDP is already high, the possibility
Speaker 3: for increased need for fiscal stimulus, which gets you to
Speaker 3: the point where all of a sudden, this all maybe
Speaker 3: looks unsustainable. And so the giant wave that we are
Speaker 3: ignoring right now that could be upon us at some
Speaker 3: point is the fact that you know, just as we
Speaker 3: saw in the UK last year, that was the most
Speaker 3: most I think like poignant data point to look at
Speaker 3: when treasuries collapsed last year, when when all they did,
Speaker 3: guys is they they they passed a bill that decreased
Speaker 3: taxes and increased spending. So who cares about that, right
Speaker 3: normally in the US. But but you know, it start
Speaker 3: to you know, if you ever have a situation where
Speaker 3: you've got to start to have soft auctions or treasuries. Now,
Speaker 3: I know it sounds like conspiracy, crazy stuff, but really
Speaker 3: it's just you're kind of not there and then you
Speaker 3: all of a sudden are But if you get to
Speaker 3: the point where instead of one hundred percent or GDP
Speaker 3: or one and ten hundred and twenty hundred and thirty,
Speaker 3: that's the big questions like what do you do with
Speaker 3: this lender of last result resort all of a sudden
Speaker 3: not being an effective tool anymore. That no one really
Speaker 3: talks about that, No one thinks about that. But that's
Speaker 3: if you look out five or ten years from now,
Speaker 3: I think we'll look back and say, wow, what were
Speaker 3: we thinking of We were.
Speaker 4: Already you know.
Speaker 3: That's this is dwarfs the mortgage crisis dwarfs it.
Speaker 1: Hey, yeah, yeah, on that note, Okay, there you go,
Speaker 1: leave you right there, Phil Taves, thanks so much for
Speaker 1: joining us. As always, Phil Tave's CEO, Tave's Asset management
Speaker 1: eighty five percent of their portfolio in T bills T bills,
Speaker 1: not even eaten like notes or T bonds T bills,
Speaker 1: so ultimate short term there, that is a cautious portfolio.
Speaker 1: That's almost like a doomsday portfolio. But I appreciate getting
Speaker 1: his thoughts as well.
Speaker 6: You're listening to the team Ken's are Live program Bloomberg
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Speaker 1: Jamie Patten joins us, she's some TCW. They know what
Speaker 1: they're doing over there when it comes to the markets. Uh, Jamie,
Speaker 1: the last time we talked, we were talking about or
Speaker 1: maybe the discussion of the market a place with soft landing,
Speaker 1: hard landing, no landing. But boy, you took it another
Speaker 1: step forward with your aviation knowledge. Where are we now?
Speaker 1: Do you think as we kind of feel a little
Speaker 1: bit more comfortable with higher for longer, I guess, and
Speaker 1: we our.
Speaker 7: Views are unchanged, so we understand how the markets have
Speaker 7: been willing to give into this no landing view. And
Speaker 7: just as a reminder, I think it's a really terrible
Speaker 7: analogy because it defies the laws of physics airplanes run
Speaker 7: out of gas.
Speaker 8: I'll keep saying that until people stop using the analogy.
Speaker 8: But this kind of things are different this time.
Speaker 7: It speaks to the underlying optimism that higher rates will
Speaker 7: simply just be absorbed without any effort. Things are different.
Speaker 7: The economy is no longer leverage, is no longer rate sensitive,
Speaker 7: and at TCW we completely disagree with that. We understand
Speaker 7: that it's exasperating to wait for the proverbial shoe to drop.
Speaker 7: Market participants are tired, they're impatient. It's been almost nineteen
Speaker 7: months since the fed's first rate hike. Nothing has gone
Speaker 7: around yet, but we still think it's early. It's only
Speaker 7: not even nineteen months from the fed's first rate hike,
Speaker 7: and of the prior thirteen hiking cycles, only one has
Speaker 7: turned into recession less than nineteen months after the start
Speaker 7: of a hiking cycle, so a recession today would still
Speaker 7: be early. We're still relatively early in the cycle. Even
Speaker 7: though we're approaching the end of the FED hiking cycle,
Speaker 7: we're still relatively early in the economic cycle. And we
Speaker 7: talked about it last time, but we still have the
Speaker 7: view that lags between the fed's interest rate hikes and
Speaker 7: the impact of the economy are longer now for many reasons.
Speaker 7: So while nineteen months is early historically, we think it's
Speaker 7: even earlier from the perspective of lags are longer.
Speaker 9: Yeah, Jamie, with all that in mind, where are you
Speaker 9: guys putting money to work? Then, just given if you're
Speaker 9: kind of taking that point of view, that it's still
Speaker 9: early in the cycle.
Speaker 7: So at TCW, we really like duration longs. We've been
Speaker 7: adding to them. We don't claim to know exactly when
Speaker 7: the top or the bottom of the yield range is
Speaker 7: going to hit. So we dollar cost average in and
Speaker 7: we like them the last time we talked, we like
Speaker 7: them even more now, so we've been adding to our
Speaker 7: long positions. We also think that the curve will be steeper.
Speaker 7: Monetary policy will continue to be the big driver for
Speaker 7: rates in the economy, especially at this point towards the
Speaker 7: end of the FED high type the FED hike cycle,
Speaker 7: the FED is likely to overtighten. That gives us even
Speaker 7: more confidence in our long duration positions. If you want
Speaker 7: to keep going with the flying analogies that can give
Speaker 7: you one comparing the economy today, and it gives us
Speaker 7: more confidence in our long duration position. But the National
Speaker 7: Transportation Safety Board always writes these crash reports after every
Speaker 7: airplane flying accident. And as a side note, and I
Speaker 7: promise I'll connect this to the markets and the second
Speaker 7: books amazing. They read like a novel, So JFK. Junior's
Speaker 7: infamous flight crash into the Atlantic Ocean. The NTSB report
Speaker 7: starts twenty years prior to the crash. It talks about
Speaker 7: when he got his license, he had a broken ankle
Speaker 7: from a hang gliding accident, why he left for the
Speaker 7: airport late, the traffic he got stuck in, he didn't
Speaker 7: get a weather briefing. The point is that the accidents
Speaker 7: aren't caused by just one thing, and it's a confluence
Speaker 7: of everything combined, one thing you can recover from. So
Speaker 7: when we look at the markets today, it's beginning to
Speaker 7: read just like a crash report. If you were going
Speaker 7: to write an NTSP crash report about today's economy, it
Speaker 7: would probably start back in the nineteen seventies when Arthur
Speaker 7: Burns reverse course on.
Speaker 8: Rate hikes too early.
Speaker 7: That resulted in this conventional wisdom that cas Burns is
Speaker 7: not wise or strong enough to keep rates as high
Speaker 7: as they needed to be. Then Vulgar is glorified for
Speaker 7: having the courage to relentlessly keep rate hikes.
Speaker 8: And then you have paul A.
Speaker 7: Powell, four decades later, carrying around the Vulgar Memoirs talking
Speaker 7: about how that's a great lesson it should be required reading.
Speaker 7: Combine that with a global pandemic, fiscal policies arguably helicopter money,
Speaker 7: a surging deficit, increased treasury supply. So now you have
Speaker 7: global central banks raising rates in the front end in
Speaker 7: uniform almost across the whole world. Meanwhile, you have longer
Speaker 7: rates going high for all the aforementioned reasons. All of
Speaker 7: a sudden, you're like, you know, oh, don't forget about
Speaker 7: a leadership vacuum in the house, raising the ads of
Speaker 7: a government shut down. So you can kind of see
Speaker 7: how these things are all coming together and creating a
Speaker 7: really hazardous environment for financial markets in the economy.
Speaker 9: Jamie, you mentioned a potential government shutdown. It seems like
Speaker 9: the chatter is back about a potential downgrade on the
Speaker 9: back of that. Given right now, it seems like all
Speaker 9: signs indicate a shutdown in mid November. How are you
Speaker 9: positioning that and what are you thinking about in terms
Speaker 9: of a potential government shutdown and what would happen if
Speaker 9: we were to see the US get downgraded.
Speaker 7: We think that's a very high possibility. We expect the
Speaker 7: government is much more likely to shut down now than
Speaker 7: it was before yesterday's events, and Moody's already came out
Speaker 7: on Monday and said they're considering it. Seems like it's
Speaker 7: more likely that they'll downgrade. US treasuries are a little
Speaker 7: bit strange in this aspect, where yields tend to go lower,
Speaker 7: not higher, when the treasury gets down great, so it's
Speaker 7: the opposite of a more of a credit risk asset,
Speaker 7: where it's a flight to quality. In terms of the
Speaker 7: economic impact, we don't think that it will be We'll
Speaker 7: see a contraction with that quarter's GDP growth, but typically
Speaker 7: we get that back the following quarter, so we don't
Speaker 7: see it as as big of an economic impact as
Speaker 7: we do just more uncertainty, more spending. More markets just
Speaker 7: don't like this kind of like lack of organization, lack
Speaker 7: of structure, lack of getting anything done, more spending. So
Speaker 7: on the margin, we think it's bad for risk, but
Speaker 7: from our long duration position perspective, we actually think on
Speaker 7: the margin it would be a positive for that.
Speaker 1: So do you expect the FED next year to cut rates?
Speaker 1: And if so, when.
Speaker 8: We do, the.
Speaker 7: Fed's own forecast only has them cutting rates maybe two
Speaker 7: times next year. That's assuming this perfect soft, immaculate disinflation landing,
Speaker 7: and that's not necessarily our view. We think that they're
Speaker 7: going to have to cut harder and more than expected,
Speaker 7: But the timing is relatively uncertain. Maybe at some point
Speaker 7: in the second half of twenty twenty four when we
Speaker 7: see this sort of financial accident or a bigger hit
Speaker 7: to growth, a bigger hit to risk assets because it
Speaker 7: comes in the form of more of a bigger accident,
Speaker 7: a bigger slow down in growth.
Speaker 8: It's harder to.
Speaker 7: Predict the exact timing, but we do think, I mean,
Speaker 7: even just if you take out everything else, just the
Speaker 7: fact that we have such higher, flatter inverted curves that
Speaker 7: in and out of itself is a negative impact for investment,
Speaker 7: consumption and employment, which just by itself can lead to
Speaker 7: this negative self reinforcing downturn. So they're kind of all
Speaker 7: these aspects that are combining together. And we don't claim
Speaker 7: to predict the future, but we see all these reasons
Speaker 7: why the economy could take a turn, and yet another
Speaker 7: reason we like buying duration and being long bonds in
Speaker 7: this environment.
Speaker 9: I'm looking at it soft right now that odds are
Speaker 9: slowly dropping about another hike. Do you think we could
Speaker 9: get another hike this year?
Speaker 7: Our base cases probably we don't need it. It probably not,
Speaker 7: but we still think it's fifty to fifty. The FED
Speaker 7: told us that they're data dependent. The data between now
Speaker 7: and the end of the year could shift on the
Speaker 7: margin towards one more hike. The FED zone forecast is
Speaker 7: that they have one more hike, so we could definitely
Speaker 7: see it, although it's not our base case.
Speaker 1: Jamie, you're a pilot in the Los Angeles area, Yes,
Speaker 1: how find an airspace and not get like run over
Speaker 1: by these jumbo jets coming into LAX.
Speaker 7: You stay away from the LAX airspace, So there's actually
Speaker 7: a corridor through LAX that you can fly just visual
Speaker 7: flight rules as a private pilot, and you're kind of
Speaker 7: guaranteed to avoid all that.
Speaker 8: But yeah, it's pretty busy.
Speaker 7: And I would just also like to say, while we're
Speaker 7: talking about my personal life, that all of this, like
Speaker 7: Jamie knows all about hard landings, because she's a pilot.
Speaker 8: It hasn't been great for my pilot brand.
Speaker 7: So I want to emphasize that I know about this
Speaker 7: from reading things like NTSB crash reports. In my own
Speaker 7: pilot record is perfect. So just to put that out there.
Speaker 1: Excellent. No, I know I need you've got this. You
Speaker 1: know you've got this hobby. You like to read these
Speaker 1: accent reports. But that's a great way to learn what
Speaker 1: not to do.
Speaker 8: I guess yeah, in financial markets as well.
Speaker 1: Very good, Jamie. Always great to talk with you. A
Speaker 1: lot of interesting stuff, a lot of fun along the
Speaker 1: way as well. And good luck with your flight instruction,
Speaker 1: I mean flight career.
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Speaker 1: I'm looking at the Bloomberg Index browser.
Speaker 5: I d go, well, I was just looking at that too.
Speaker 1: Wow, great minds think to like, I mean, the only
Speaker 1: thing I'm looking at, you know, look at the bond
Speaker 1: market here. The indices here in Nexus.
Speaker 5: Sorry is official Bloomberg style, I understand.
Speaker 1: And the only one that's positive for the year is
Speaker 1: the high yield corporate Corporate high Yield index.
Speaker 2: So I was looking and I saw so US treasure
Speaker 2: or treasuries in general, right, Ye, that index is down
Speaker 2: four point seven percent this year. And remember it was
Speaker 2: down seventeen and a half percent last year, and the
Speaker 2: year before that it was down six and a half percent. Yeah,
Speaker 2: so if your long treasuries into the pandemic, you got
Speaker 2: a thwacking.
Speaker 1: Whacking that is a CFA level term. Let's see what
Speaker 1: the quants are doing out there about these markets here.
Speaker 1: Hugh Roberts joins US head of analytics at quant Insight. Hugh,
Speaker 1: what are your models telling you about these markets here?
Speaker 1: We had a huge move up and yield the call
Speaker 1: seems to be higher for longer. That's making the stocks
Speaker 1: kind of problematic out there? What are your models saying?
Speaker 10: Yeah, so agree with the facking comment. Basically, all macro fundamentals,
Speaker 10: which can be distilled into three broad buckets, economic fundamentals,
Speaker 10: measures of financial conditions, measures of risk appetite, are doing
Speaker 10: a very good job of explaining most things at the
Speaker 10: moment across bonds, currencies, and equities, and the primary trend,
Speaker 10: the kind of momentum of our models remains unchecked. So
Speaker 10: even though there's some kind of anecdotal stuff around in
Speaker 10: the last couple of days that maybe we're reaching a
Speaker 10: bit of a capitulation phase, if we look at our
Speaker 10: model value for treasury yields still pointing higher. If we
Speaker 10: look at our model for say dollar yen, even though
Speaker 10: there's intervention risk around, still points to higher. If we
Speaker 10: look at our model for Nasdaq, it's had an amazing
Speaker 10: for what it's fallen twenty percent in the last month,
Speaker 10: courtesy of actually what you guys were just talking about,
Speaker 10: a mixture of rate vol which we use as a
Speaker 10: measure of qt QE expectations, and the moving credit spreads
Speaker 10: that you guys just alluded to. So the basic messages
Speaker 10: is that the the tightening of financial conditions that has
Speaker 10: been engineered since that last FED meeting is just having
Speaker 10: a rolling effect, and for the time being, at least
Speaker 10: from a pure macro modeling perspective, we don't see any change,
Speaker 10: I'm afraid.
Speaker 2: So my takeaway from all that is, you see yields
Speaker 2: going higher from here, I mean how much higher?
Speaker 10: Well, so what we do if we because when modeling
Speaker 10: all these things in real time, we're kind of capturing macromnum.
Speaker 10: So there's two key outputs that we produce. One is
Speaker 10: word of macro conditions, say things should be right now,
Speaker 10: whether it's spoos, ten year yields, dollar in whatever. And
Speaker 10: then secondly we then compare that to where things are trading,
Speaker 10: so you can see if there's a valuation gap. Because
Speaker 10: obviously some asset classes lead, sometimes they lag. There's these
Speaker 10: gaps that create short term tactical trading opportunities. So right
Speaker 10: now we have ten year yields and the model value
Speaker 10: is pointing higher, has been for several months, but is
Speaker 10: accelerating the good new yield did the compensation uses that
Speaker 10: the market is simply keeping track with the move in
Speaker 10: macro warranted fair value, so there is no valuation gap.
Speaker 10: Of note that they're kind of sitting on top of
Speaker 10: each other. Ten year yie olds are where they should
Speaker 10: be given the prevailing macro environment.
Speaker 2: You when I look at this, when I look at
Speaker 2: the government, you know, when I look at the strikes,
Speaker 2: even when I look at basically consensus for a soft landing.
Speaker 2: I feel like this economy is going to creater.
Speaker 5: Don't you want to hold to hold.
Speaker 2: Treasuries, even longer duration treasuries if that's the case, if
Speaker 2: we go into a deep recession.
Speaker 10: Yeah, I get that argument, But I guess that's why
Speaker 10: the balls have been loaded up on duration since the
Speaker 10: start of the year.
Speaker 4: Now.
Speaker 10: I know there's different surveys telling you different things, but
Speaker 10: you know, the Commitment of Traders report will tell you
Speaker 10: the asset managers have been long for that kind of
Speaker 10: recession call for the last nine months.
Speaker 4: US.
Speaker 10: The same report says hedge funds are short, but we
Speaker 10: know a big part of that is polluted by basis trades. Now,
Speaker 10: I know there are other surveys that will point the
Speaker 10: other way, so you can pick and choose your data
Speaker 10: on that. I guess the better answer to your question
Speaker 10: is is it's not obvious at this juncture that actually
Speaker 10: treasuries are trading as a growth dynamic. It's not obvious
Speaker 10: that they're going to give you that recession hedge that
Speaker 10: actually what they're trading off is the sense that rates
Speaker 10: are going to be higher for longer that you know,
Speaker 10: we're kind of removing the two thousand and nine period
Speaker 10: on the new normals, reverting to the old PREGFC normal,
Speaker 10: that treasuries are focused on budget deficits, They're focused on
Speaker 10: shenanigans in Washington in terms of the ability of politicians
Speaker 10: to stay on top of this stuff, and they're focused
Speaker 10: on the fact that the deficits with the supply needs
Speaker 10: that that implies is buffering up against QT rather than
Speaker 10: QE from the Fed, foreign central banks stepping back from buying,
Speaker 10: you know, just the normal sponsors of bond yields at
Speaker 10: these point, they can afford to step back and wait
Speaker 10: for better entry levels. So at some point what you say,
Speaker 10: I think will be spot on. I'm just not sure
Speaker 10: that this is that point. Q.
Speaker 1: You said, we're probably not there. On capitulation. What do
Speaker 1: you look for as signs of potentially capitulations? Which markets
Speaker 1: do you look at? Which will we be looking for.
Speaker 6: Now?
Speaker 10: All markets? I think, you know, when you get to
Speaker 10: the kind of environment we're seeing at the moment, and
Speaker 10: then the old adage about you know something's going to
Speaker 10: break is very true. So you can then draw up
Speaker 10: a list of potential candidates. You know, probably top of
Speaker 10: a lot of people's lists will be commercial real estate.
Speaker 10: So you can draw up a watch list of you know,
Speaker 10: kind of ETFs like the Reach ETF or individual names
Speaker 10: like you know, the Vornadoes or the Boston properties, and
Speaker 10: use those as your canaries in the coal mine. If
Speaker 10: CRE is going to go, what does that say about
Speaker 10: balance sheet? So let's keep kbre kre in Europe the
Speaker 10: SX seven E future. Keep that on your radar. There's
Speaker 10: some kind of nice proxies. I like to watch for
Speaker 10: private equity because there's a lot of theories that ten
Speaker 10: plus years of easy money have encouraged private equity to
Speaker 10: lever up, and that might be one potential kind of
Speaker 10: swimmer who's left naked. To use the buffet to speak,
Speaker 10: there's something called business development companies and BDS is the
Speaker 10: ETF that you can track to follow those as a
Speaker 10: loose proxy for that side. There's lots you can watch,
Speaker 10: and I think that the main point that jal This
Speaker 10: is a very subjective. This is not the quant side
Speaker 10: of QI speaking at all. It's just me. But I
Speaker 10: would say for the last month plus what we've seen
Speaker 10: has been pretty orderly. It's actually only been this week
Speaker 10: we're starting to see the first signs of capitulation, and
Speaker 10: I would cite Monday's price action in utilities that's smacked
Speaker 10: of capitulation to my mind, dollar yen and obviously what's
Speaker 10: happening on FX with potential intervention risk and then just
Speaker 10: look at some of the mat d's and the RSIs
Speaker 10: on TLT or the thirty year bond, so that there
Speaker 10: are straws in the wind yep.
Speaker 1: You always great to talk with. You get your insights,
Speaker 1: a lot of great stuff as always. Hugh Roberts, he's
Speaker 1: head of analytics at quant Insight.
Speaker 6: You're listening to the team Ken's are Live program Bloomberg
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Speaker 1: So let's talk to somebody who does this for a living.
Speaker 1: Margie ptel Joins, a senior portfolio manager at Allspring Global Investments.
Speaker 1: Mark you put all the cross currents together out there.
Speaker 1: We've got an update in the market today, but you
Speaker 1: put all the cross currents out there, whether it's the
Speaker 1: interest rate environment, whether it's a political situation in Washington.
Speaker 1: You put it all together. How constructive are you guys
Speaker 1: on markets right here?
Speaker 11: Well, I think the.
Speaker 12: Market is going to have a strong finish to the
Speaker 12: end of the year after we get through this little
Speaker 12: seasonal weakness. I think people are just putting too much
Speaker 12: emphasis on interest rates as a determinant.
Speaker 11: Of economic growth.
Speaker 12: If interest rates go up, the economy has to go
Speaker 12: into recession, and that has simply been wrong for the
Speaker 12: last two year and three quarters.
Speaker 11: I think you'll continue to be wrong. In an absolute sense.
Speaker 12: Rate to store pretty low, especially compared to inflation, and
Speaker 12: companies are in good shape, so I think we're going
Speaker 12: to see a pretty decent growth in the third quarter
Speaker 12: reported and for the fourth quarter, So that's pretty good
Speaker 12: for stocks.
Speaker 2: Why are you so optimistic, Margie when we have you know,
Speaker 2: rate sensitive companies that have led to charge These tech
Speaker 2: companies typically should not benefit from a rising rate environment.
Speaker 2: And as I mentioned to Paul earlier, you know, a
Speaker 2: lot of companies had expanding margins due to the inflation scenario,
Speaker 2: and now we're seeing that turnaround, hopefully, and we're starting
Speaker 2: already to see companies come out with margin pressure due
Speaker 2: to disinflation.
Speaker 12: Well, I think that companies have fundamentally changed how they
Speaker 12: operate in the last say, five ten years or more,
Speaker 12: so that they have a much more flexible way of
Speaker 12: controlling their costs.
Speaker 11: So I think, again, you are not going to see.
Speaker 12: The sort of margin pressure we saw in the past
Speaker 12: that when inflation goes up, margins get squeezed and they
Speaker 12: lose margins when rates go down too. I think companies
Speaker 12: are going to maintain those margins. They've done that even
Speaker 12: with fluctuations and interest rates before. What's more important is
Speaker 12: are their revenues growing and can they control their costs
Speaker 12: so that they can maintain their profit margin?
Speaker 11: And I think they will. I think they'll continue to
Speaker 11: do what they've been doing. And keep in.
Speaker 12: Mind that companies are not over levered as a whole.
Speaker 12: Companies restructured the balance sheets when interest rates are near zero,
Speaker 12: so they really aren't sensitive to borrowing costs going up
Speaker 12: by short term rates going up. In fact, it's benefited
Speaker 12: in many companies because they have large amounts of cash
Speaker 12: balances on their books that they raise proactively, so they're
Speaker 12: actually benefiting a little bit from higher rates and those
Speaker 12: very low fixed costs that they used to borrow over
Speaker 12: the last decade.
Speaker 1: So let's talk valuation here, Margie. I mean there's a
Speaker 1: couple of ways to look at it. I guess if
Speaker 1: you just look at the headline, pe multiple closes that
Speaker 1: twenty here, maybe nineteen ish, But if you back out
Speaker 1: some of those magnificent seven it looks a little bit
Speaker 1: better fifteen sixteen times. How do you guys think about
Speaker 1: valuation at this point, Well.
Speaker 12: I think valuation is not an impediment to stocks going higher.
Speaker 12: I think the valuations are more or less within the
Speaker 12: average range. The average average is, of course pulled up
Speaker 12: because of a handful of growth stocks that have very
Speaker 12: very high pees price earnings ratios.
Speaker 11: But for many many stocks that.
Speaker 12: Have growth, their PE is really pretty competitive with their
Speaker 12: cash flow yield with short term treasury. So we think
Speaker 12: as long as earnings move ahead, we think companies can
Speaker 12: actually have higher stock crisis And who's to say we
Speaker 12: can't have an expansion in price serviance ratios if people
Speaker 12: feel a little bit more optimistic about economic growth.
Speaker 2: How much of a competitive environment the rates offer here?
Speaker 2: I mean, when you see a ten year at four
Speaker 2: point nine percent, you know, how does that compete with
Speaker 2: the S and P yield?
Speaker 12: Well, I don't think it's a lot of competition because
Speaker 12: the SMP yield is now about one point three, so
Speaker 12: that's not very high, but there are many stocks that
Speaker 12: have dividends above that and that are raising the dividends
Speaker 12: every year. And again, if you have capital appreciation as
Speaker 12: a company has rising revenues, I think that a five
Speaker 12: percent is really a pretty low hurdle for stocks to
Speaker 12: climb over and equal or do better.
Speaker 1: How about on the fixed income side, We had a
Speaker 1: guest on earlier today, you know, at a big, big
Speaker 1: bond shop on the West Coast, saying you know, they're
Speaker 1: going out longer term duration. They are very bullish there.
Speaker 1: How do you think about kind of just fixed in
Speaker 1: the fixed income space.
Speaker 12: Well, I think that if you look at say the
Speaker 12: average bond, I think that corporate bonds off offer more
Speaker 12: value than treasuries. In fact, if you look this year
Speaker 12: and last year, many people felt the best place to
Speaker 12: be was treasuries because they were safe, and actually investment
Speaker 12: grade bonds and high yield bonds, junk bonds outperformed treasury bonds.
Speaker 11: They continue to do that this year.
Speaker 12: So I think that to be longer duration and to
Speaker 12: be in the high yield space a lower quality space
Speaker 12: is going to continue to provide more return than treasuries.
Speaker 1: All right, So on the equity side, here, are there
Speaker 1: some sectors that you guys like or are you more factors,
Speaker 1: whether it's you know, some of the factors investing that
Speaker 1: kind of you have liked.
Speaker 5: The Magnificent magnificence.
Speaker 2: I can't get this Magnificent seven And by the way,
Speaker 2: I think it's a horrible name. So well, yeah, it
Speaker 2: doesn't roll the Big seven. You know you've gone along though,
Speaker 2: So do you stick with that trade?
Speaker 8: Well?
Speaker 11: I think so.
Speaker 12: As long as those names continue to have above average growth,
Speaker 12: they will continue to be boarded with a higher price
Speaker 12: earnings voltible, and I think investors will be rewarded. We've
Speaker 12: seen that when some of those companies have reported disappointing
Speaker 12: earnings and stocks get hit. But I think really, when
Speaker 12: you look at a world where we may have slow growth,
Speaker 12: they're still going to be premium for growth stocks and
Speaker 12: we may see some rotation, but we still like the
Speaker 12: technology sector as a whole, not just that handful of stocks.
Speaker 12: A communications sector and even some of the industrials which
Speaker 12: we think are benefiting from a capital expenditure cycle that
Speaker 12: probably is going to last a little bit longer than
Speaker 12: people think, so we think there's some good opportunities. The
Speaker 12: defensive areas, I think are going to continue to be
Speaker 12: disappointing as they've been now for a year.
Speaker 5: And a half.
Speaker 1: Hey, Margie, we're going to have earning season upon us
Speaker 1: sooner than we think, and you know, a week or so,
Speaker 1: what are you going to be kind of looking for
Speaker 1: here as we start to hear some of these companies report.
Speaker 12: Their earnings, well, number one is are they still seeing
Speaker 12: good demand? I think that's really going to be the
Speaker 12: driver of stocks. And number two is really what's happened
Speaker 12: to company's business with China, because we've seen some surprises
Speaker 12: so far where companies that have a big share of
Speaker 12: their business and growing business with China have been disappointed
Speaker 12: because the band there is really slowing down. So I
Speaker 12: think that'll be an interesting take to see what companies
Speaker 12: are heard as Chinese grow slow down. But basically, I
Speaker 12: think we're looking for modest, moderate growth.
Speaker 11: And next year's an election year.
Speaker 12: It seems like we've been in one for four years anyway,
Speaker 12: and I think that'll be another decent year for the market.
Speaker 1: All right, Margie, thanks so much. For joining us as always.
Speaker 1: Margie Bettell, Senior portfolio manager at Offspring Global Investments.
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Speaker 1: Our c sweet conversation of the day is we're talking decking,
Speaker 1: you know, like the deck on the back of your house.
Speaker 1: And here's a data point from Bloomberg Intelligence drew readings
Speaker 1: then also covers tricks half. I guess there's sixty million
Speaker 1: decks in the United States and maybe half of them
Speaker 1: need to be replaced. Mine is not one of them,
Speaker 1: I'm going to say right now, but we have the
Speaker 1: CEO of Treks right here with us today, so we
Speaker 1: want to get right to it. What do we got here,
Speaker 1: Brian Fairbanks, He's the CEO of Tricks.
Speaker 4: Now.
Speaker 1: This is in New York Stock Exchange listed company t
Speaker 1: r EX is the ticker. This is a six point
Speaker 1: four billion dollar market cap company. The good news is
Speaker 1: stocks up forty percent year to date. It is off
Speaker 1: about twenty percent off of it's high of just a
Speaker 1: couple of months ago, but a lot of the markets
Speaker 1: pulled back. But Brian, thanks so much for joining us
Speaker 1: here in our Bloomberg Interactive Broker Studio Decks. I got
Speaker 1: to think that's a good business. I got to think
Speaker 1: during the pandemic, people built a lot of decks. Talk
Speaker 1: to us about the state of your business right here.
Speaker 13: Yeah, thanks for having us back on again. Absolutely, through
Speaker 13: the pandemic, there was definitely a surge of people interested
Speaker 13: in outdoor living and wanting to expand their ability to
Speaker 13: spend time outdoors with their family. Even leading into the pandemic,
Speaker 13: we had seen that there was a significant opportunity to
Speaker 13: be able to really appeal to those families looking to
Speaker 13: add on a low cost way to add on space
Speaker 13: to their homes. Within the repair and remodel indecks, approximately
Speaker 13: thirty percent of it is associated with outdoor living and
Speaker 13: so we really sit in the sweet spot of that.
Speaker 1: And what's unique about the decks you make is you
Speaker 1: don't use wood. What do you use?
Speaker 13: Right, So we're very unique in that ninety five percent
Speaker 13: of the material that goes into our deck boards is
Speaker 13: recycled and reclaimed. Last year alone, we recovered six hundred
Speaker 13: million pounds of material that otherwise would have potentially gone
Speaker 13: into landfills. So this is the form of polyethylene, plastic bags,
Speaker 13: stretch wrap, and wood dust. We combine those with a
Speaker 13: number of additives to make a deck board that will
Speaker 13: last basically if your lifetime. Our warranty runs anywhere from
Speaker 13: twenty five years and our entry level products up to
Speaker 13: fifty years. On our premium products.
Speaker 1: All right, So, one of the issues that I'm sure
Speaker 1: you're feeling, like a lot of businesses are, is just
Speaker 1: is the consumer slowing down? Is inflation cutting into the consumer?
Speaker 1: So in your retail channel in particular, are you seeing
Speaker 1: any of that, Because we had home depots, we had lows.
Speaker 1: They're seeing some softening trends and some of their big
Speaker 1: ticket discretionary items. Are you seeing that in your business?
Speaker 13: The consumer has remained remarkably strong in twenty twenty three.
Speaker 13: Coming into the year, we did expect to see more
Speaker 13: weakness from that consumer. We originally expected to see flatsh
Speaker 13: to down single digit type numbers for the year. We
Speaker 13: saw that in the first quarter and then through the
Speaker 13: second quarter. Second quarter we saw mid single digit increase
Speaker 13: in our guidance for the third quarter assumed roughly a
Speaker 13: low single digit type increase in the consumer, So we've
Speaker 13: been happy with the resilience of that consumer. The other
Speaker 13: thing that plays well for Treks is our consumer tends
Speaker 13: to be at the higher end of the income spectrum.
Speaker 13: We're focused on those households over ninety thousand dollars average
Speaker 13: type income, so not quite as heavily impacted by some
Speaker 13: of these short term changes in the economy.
Speaker 1: So it's fascinating reading the research note from Drew Redding,
Speaker 1: who covers your stock your company for Bloomberg Intelligence. He's
Speaker 1: at in there the recyclable segment or is only twenty
Speaker 1: four percent of total sales in the industry. So you, guys, arguably,
Speaker 1: where do you think that number can go eventually?
Speaker 13: Right, So composite decking of the old positive overall industry
Speaker 13: is twenty four to twenty five percent of the volume sold.
Speaker 13: One of the strategies that we've been executing since two
Speaker 13: thousand nineteen to really go after that buyer who otherwise
Speaker 13: would have been going to would and take that instead
Speaker 13: of being at twenty five percent, take that up to
Speaker 13: fifty percent. When we started on this strategy in twenty nineteen,
Speaker 13: it was about nineteen percent of the marketplace. So the
Speaker 13: strategy with those products to convert roughly two hundred basis
Speaker 13: points a year has been quite effective and we expect
Speaker 13: will continue.
Speaker 1: So does your company actually go to the someone's home
Speaker 1: and build a deck or do you just sell to
Speaker 1: the people who actually build a deck.
Speaker 13: We sell to the people who are building the deck.
Speaker 13: We will sell to Home Depot and Lows. We have
Speaker 13: our product on the shelf at both of those DIY centers.
Speaker 13: We also sell to we call the pro channel. So
Speaker 13: these are locations that would be selling directly to the
Speaker 13: contractor as well as homeowners and contractors.
Speaker 1: So who do you compete with most directly? How does
Speaker 1: that work in your business?
Speaker 13: We have it's a pretty concentrated industry. Our second competitor
Speaker 13: is about twenty five percent of the industry, and then
Speaker 13: a competitor number three they are roughly twelve to fifteen percent.
Speaker 13: So it is a concentrated industry and everybody makes great products.
Speaker 13: It's able to service the market and really provide a
Speaker 13: much more superior experience for that consumer. Versus installing wood,
Speaker 13: which you'll have to maintain every year, and then as
Speaker 13: you started out with the piece, in a number of years,
Speaker 13: it'll have to be completely replaced again.
Speaker 1: All right, So what's a typical I don't know what's
Speaker 1: a typical deck cost?
Speaker 4: You know?
Speaker 1: I mean, like, what's a typical Homer spend on a deck.
Speaker 13: If we talk about a wood conversion type deck, that
Speaker 13: deck's generally three hundred to three hundred and fifty square
Speaker 13: feet and probably going to be in the twelve to
Speaker 13: fifteen thousand dollars range. The material cost is not the
Speaker 13: biggest part of it. Wood you'll spend about one thousand
Speaker 13: dollars for just the decking part of the wood, whereas
Speaker 13: our entry level treks that's going up against woods roughly
Speaker 13: seventeen hundred dollars. The biggest cost is going to be
Speaker 13: building that structure out in the labor that comes along
Speaker 13: with it. As I mentioned, our customer tends towards the
Speaker 13: higher end of the income spectrum. Those that are buying
Speaker 13: our treks, Transcend, Transcend Lineage and signature products tend to
Speaker 13: be building much larger decks, and those average five to
Speaker 13: six hundred square feet and can range thirty thousand dollars
Speaker 13: up to We've got contractors building complete outdoor living rooms
Speaker 13: that include couches and TVs and kitchens three four hundred
Speaker 13: thousand dollars outdoor living areas.
Speaker 1: All right, So what I'm just looking at your income
Speaker 1: statement here, you get got gross margins kind of in
Speaker 1: the high thirties forty percent kind of range. What are
Speaker 1: the levers really on the cost side for you guys.
Speaker 13: We've got a number of levers that we're pursuing, we
Speaker 13: have been pursuing, and will continue to pursue. First is
Speaker 13: our capacity utilization. Every one hundred million dollars of additional
Speaker 13: sales that goes into our existing capacity is worth about
Speaker 13: one hundred to hundred and fifty basis points of margin.
Speaker 13: We also have a strong continuous improvement program within the organization.
Speaker 13: We've got a group of people pacifically dedicated not only
Speaker 13: to building the pipeline of what are those cost actions
Speaker 13: we're going after, but actually implementing and tracking that. We're
Speaker 13: seeing the cost savings coming through. And then the last
Speaker 13: opportunity is going to be SG and a leverage. As
Speaker 13: we continue to grow as a company, that fixed portion
Speaker 13: of our SG and a can be leveraged.
Speaker 1: Brian, thanks so much for joining us. Really appreciate it.
Speaker 1: Brian Fairbanks, he is the CEO of Trecks, the composite
Speaker 1: deck builder out there, so for those that are thinking
Speaker 1: about putting on a deck or replacing a deck, you
Speaker 1: can think about the composites part of the business.
Speaker 2: Thanks for listening to the Bloomberg Markets podcasts. You can
Speaker 2: subscribe and listen to interviews on Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
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