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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Leye.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Anyways.

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Speaker 1: Silvermen joining us now obviously capital markets equity to the

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Speaker 1: revative strategist and he great to catch up with you.

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Speaker 1: Are we at risk of trying to justify the unjustifiable

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Speaker 1: looking at this equity market and where it is right

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Speaker 1: now yet? Question? Um? You know, honestly, it's probably a

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Speaker 1: little bit that. What gives me hesitation, especially as as

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Speaker 1: an options person, is you know, we've seen this phenomenon

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Speaker 1: over and over this summer where the markets go up

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Speaker 1: and volatility goes up to we refer to that as

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Speaker 1: the bought up flash ball up dynamics. Um. But you know, intuitively,

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Speaker 1: you can think of it as when the markets go up,

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Speaker 1: the people in the market are getting more nervous rather

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Speaker 1: than less nervous, which is, you know, which is not

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Speaker 1: the traditional way the relationship should work and should definitely

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Speaker 1: give investors some pause. Should our viewers and listeners, Amy

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Speaker 1: should they ignore the pros in their derivative strategies right now?

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Speaker 1: You know, it's funny because, um, we we look at

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Speaker 1: a lot of data and part of what we've seen

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Speaker 1: as a lot of historical relationships break down. And when

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Speaker 1: that happens, you know, you get a lot of exubrants.

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Speaker 1: So to give you an example, I think part of

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Speaker 1: what has happened is in kind of the last few months,

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Speaker 1: retail has really been right in saying, look, these these

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Speaker 1: traditional relationships don't make sense. You know, you get the

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Speaker 1: vault fill up and you get the calls up and

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Speaker 1: the market goes up, and that's okay. But the reality is,

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Speaker 1: over time they do all normalize. It's just very, very

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Speaker 1: tricky to to say when the music will stop. But

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Speaker 1: you know, when you look at twenty thirty year time periods,

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Speaker 1: when these relationships look like this, they almost always revert again.

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Speaker 1: So I guess the answer to your question is is

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Speaker 1: always one of timing. Well, Amy to that point, talking

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Speaker 1: about the little bit of softness today after a completely

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Speaker 1: solid run that's seen a risk rotate into the most

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Speaker 1: speculative areas of markets, do you see this as a

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Speaker 1: lasting trend that will be with us through the end

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Speaker 1: of the year and through the November volatility of the

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Speaker 1: presidential silly season, as Tom likes to say, or do

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Speaker 1: you see this as a blip? As Tom was saying

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Speaker 1: this idea that this is going to be a momentary

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Speaker 1: by the dip moment, the dip being tiny, you know.

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Speaker 1: And here's how I think about the timing um through

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Speaker 1: the election. Right now, the options market is extremely bid um.

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Speaker 1: But at this point, I honestly think volatility through November

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Speaker 1: is probably fairly priced, if not a little bit expensive.

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Speaker 1: What what I actually think is the really interesting part

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Speaker 1: of the term structure right now is when we get

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Speaker 1: a vaccine that is one that everyone is comfortable with,

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Speaker 1: one that is accessible, and you know, you can pretty

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Speaker 1: much say, okay, this this coronavirus pandemic has effectively been solved.

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Speaker 1: I think when that happens, you're going to get a

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Speaker 1: very interesting divergence in the market where this narrowness of

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Speaker 1: breaths we've seen where really it's only seven or eight

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Speaker 1: stocks driving up the whole market, you know, they start

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Speaker 1: to stuffl up hard, and you get a really weird

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Speaker 1: situation where in that sm P five hundred you've got

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Speaker 1: four dred and nineties stocks rallying, but the industries are

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Speaker 1: actually down because of what's happened with the overweighting in

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Speaker 1: the market cap. So I think we get this very

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Speaker 1: strange um situation where the broader multitude of companies are rallying,

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Speaker 1: but you actually get headline industries down um despite its

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Speaker 1: being a good thing. And that's where we think a

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Speaker 1: lot of these outperformance trades between different industries come into

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Speaker 1: play in an interesting way. I mean, what do you

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Speaker 1: make of the fact that equities have carried on rallying

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Speaker 1: through the month of August into September and how yield

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Speaker 1: spreads have stopped tightening. Yeah, you know, I think that's interesting.

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Speaker 1: I think a little bit of what's been happening, at

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Speaker 1: least on the equity side, has been driven by the

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Speaker 1: derivatives market, and so there is more technicals at play. UM.

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Speaker 1: We've really really seen that in the tech side, where

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Speaker 1: you know, we've seen more than a billion of premium

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Speaker 1: bought in terms of tech upside calls and called spreads

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Speaker 1: and kind of across the board ten of the biggest

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Speaker 1: megacap names. And so what's happened with that is it

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Speaker 1: has exactly surbated some of the second order drives effects

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Speaker 1: and that you know, tends to drive the market up

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Speaker 1: in these names. And what's that. And the problem is

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Speaker 1: these names are such heavy weights in the indusseries that

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Speaker 1: it is thereby driving at the industries um. But what

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Speaker 1: I thought was interesting is in the last week or

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Speaker 1: so we're starting to see the positioning in the options

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Speaker 1: market actually flipped to the downside that we're seeing in

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Speaker 1: the March and equal tenners of next year actually downside

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Speaker 1: and texting spot as opposed to the near term upside

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Speaker 1: being bought. And so I think you do start to

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Speaker 1: see that reversion coming in Amy. I thank you so much,

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Speaker 1: Amie with Silverman whether US, with OURBC Capital Marcaus. Right

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Speaker 1: now Lisa Brands, Janfer and I simulcast Bloomberg Radio, Bloomberg Television.

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Speaker 1: We welcome all of you coast acroast across America. That

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Speaker 1: is clearly and has always been over retailed. We are

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Speaker 1: facing that now with the engine. Steve sadof joins us

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Speaker 1: of course MasterCard senior adviser and so much part of

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Speaker 1: the merchandizing of his Sex Fifth Avenue for many many

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Speaker 1: a year. See Steve sadof What have you gleaned in

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Speaker 1: the last number of weeks about retail America from Walmart

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Speaker 1: in the big boxes up to the empty luxury stores

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Speaker 1: on Madison Avenue. What's the new news for you? Well,

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Speaker 1: I think Tom, the MasterCard data would tell you on

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Speaker 1: the recovery insights that you're starting to see a recovery.

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Speaker 1: If you go to the depths of the of the pandemic,

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Speaker 1: you were in March, we were looking at a minus

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Speaker 1: fourteen percent in the total consumer spending. It's improved dramatically

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Speaker 1: over the number of months, but the rate of growth

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Speaker 1: has been slowing. So we went from that minus four

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Speaker 1: team to now we're at a low single digit level.

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Speaker 1: That has stayed at that low single digit level for

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Speaker 1: the last couple of months. If you look at retail,

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Speaker 1: retail has been a little bit in the middle of

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Speaker 1: the epicenter that of that, and what's happened is that

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Speaker 1: the retail has not died, it's shifted. So you've seen

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Speaker 1: a doubling in the amount of Internet sales basically, and

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Speaker 1: you've seen that the retailers who have been omni channel,

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Speaker 1: who have been contactless, who have been home related, who

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Speaker 1: have been the ones that have been opened during the

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Speaker 1: pandemic have been the winners. Those are the home depost

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Speaker 1: the lows of the targets. But the reality is you're

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Speaker 1: starting to see green shoots in other retail, travel and entertainment,

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Speaker 1: which had been dead in the water. Over the last

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Speaker 1: several months. You're starting to see an improvement in travel

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Speaker 1: and entertainment, and that to me is what's interesting coming

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Speaker 1: out of the recovery insights in Europe. You've seen some

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Speaker 1: recovery and travel and entertainment. You've also seen people starting

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Speaker 1: staying closer to home, stay vacations, Gasoline is up. You're

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Speaker 1: seeing lodging starting to improve. So it's not just about

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Speaker 1: retail in terms of the home decorating the hardware. Now

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Speaker 1: you're seeing it evolving so that the restaurant trends are improving. Clearly,

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Speaker 1: your Tom your comment about the number of stores you're

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Speaker 1: gonna see a massive number of losers coming out of

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Speaker 1: You've seen it in terms of the number of bankruptcies

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Speaker 1: on the retail sector. Steve, how are we going to

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Speaker 1: clear that market? If there are quote a massive number

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Speaker 1: of losers, how in retail do you move them aside

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Speaker 1: so you can move on. Well, look, I think that

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Speaker 1: there's gonna be a repurposing in malls. As an example,

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Speaker 1: you already see it. So a number of the anchors

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Speaker 1: are either closing or going bankrupt. You're going to see

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Speaker 1: them repurposed into their healthcare, education, fitness. This is going

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Speaker 1: This is the normal evolution of retail. But have remember

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Speaker 1: overall retail coming into the pandemic was about plus four percent.

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Speaker 1: My I'm not going to be doing any forecasting, but

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Speaker 1: even as we sit today, we're in that low single

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Speaker 1: digit decline. Internet omni channel is going to continue to grow.

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Speaker 1: We have too many stores in the United States. Everybody knows.

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Speaker 1: It's probably three times per capita than what you see

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Speaker 1: in Europe. So we've got to see a closing of

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Speaker 1: the number of stores. It's gonna it's a reset that's

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Speaker 1: going on with the landlords. The rents are gonna are

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Speaker 1: coming down, and you're going to see in number. You've

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Speaker 1: go to Madison Avenue, you go there all the time,

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Speaker 1: the vacancy rate is or more. You're gonna have to

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Speaker 1: see your reset relative to the store base. So stay

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Speaker 1: see if you have people shift away from spending money

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Speaker 1: in the brick and mortar stores, they are spending online.

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Speaker 1: They have supported this economy. They continue to do so.

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Speaker 1: Can they afford the purchases that they're making that they're

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Speaker 1: charging on their master cards? Oh? No question. I mean,

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Speaker 1: first of all, you've seen a luxury consumer that's coming back.

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Speaker 1: You saw a Mazie's reported yesterday that their high end

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Speaker 1: luxury businesses are doing well. Sacks made comments that they

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Speaker 1: were positive in their overall trend. The luxury consumer has

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Speaker 1: not been traveling UH internationally as an example, So there, Uh,

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Speaker 1: there's have the spending capacity at the lower end of

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Speaker 1: the market. The government support programs over the UH since

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Speaker 1: the pandemic started has supported spending. So I think that

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Speaker 1: clearly there's a question right now there's a bifurcation between

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Speaker 1: Wall Street and Main Street, and that the consumer is

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Speaker 1: not growing at the rate that we're seeing the stock

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Speaker 1: market growing. On the other hand, there is a wherewithal

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Speaker 1: to US spend, and the consumer has been spending largely

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Speaker 1: on nesting home basics for the first several months. But

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Speaker 1: now as you look at this travel entertainment data, you

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Speaker 1: see it in Europe, you see it in the US

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Speaker 1: that the consumer and restaurants spending improving even department stores

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Speaker 1: which have been in that minus fIF six numbers have

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Speaker 1: sown improvement over the last couple of months. So as

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Speaker 1: the economy is opening, you're starting to see that spending.

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Speaker 1: Come me back, stay fully five seconds on the clock

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Speaker 1: just to find a question from me. Not just about

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Speaker 1: where they're spending and how much they're spending. Let's talk

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Speaker 1: about how they're spending. What can you guys do to

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Speaker 1: get contactless payments up in America? Oh, I think that

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Speaker 1: it's what the consumer needs and wants, and the progressive

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Speaker 1: retailers and I'm looking at the walmarts that targets, the

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Speaker 1: home depots, the big boxes have made the investments to

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Speaker 1: be able. They have the scale to be able to

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Speaker 1: do the contactless spending. Uh. The MasterCards of the world

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Speaker 1: are providing some of the capabilities to do what others

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Speaker 1: are also and that's gonna be the future longer, longer term.

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Speaker 1: Smaller businesses I worry about because they need to be

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Speaker 1: able to make the investments and right now they're strapped. Yeah,

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Speaker 1: and it's expensive to install those machines. Sometimes they've grit

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Speaker 1: to catch you up. Fulmer sax Cyo and master Card

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Speaker 1: Sadia Advisor right now though, Sema Sean, this is an

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Speaker 1: important conversation with Principal Global investors. They're chief strategists with

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Speaker 1: a real focus on the equity market. Seema writing this

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Speaker 1: morning for Principal Global, thinking about this market, what is

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Speaker 1: the key distinction of these equity markets? Hi, thanks for

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Speaker 1: having me on the Well, you know, as you said before,

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Speaker 1: this equity market is still riding really high. Um. It's

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Speaker 1: been driven by a couple of factors. There are some

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Speaker 1: things that really do concern me about it, and that's

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Speaker 1: in the last few days. There's real emphasis on the vaccine.

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Speaker 1: You know, we know, of course you've heard the news.

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Speaker 1: In November is a likely date. But the question is,

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Speaker 1: you know, how realistic is that, How effective is a

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Speaker 1: vaccine going to be, and how much of people are

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Speaker 1: going to really adapt it? And if it isn't as

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Speaker 1: good as we're expecting, then that support mechanism really falls

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Speaker 1: away from the market, and then I think that we're

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Speaker 1: looking at some potential disappointment which could be very dangerous

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Speaker 1: for investors who are looking at here. What does dangerous mean?

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Speaker 1: I mean how big of a fallery talking? Well, okay,

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Speaker 1: so let's let's break it down. So when we look

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Speaker 1: back to what has a rally up till now being

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Speaker 1: been driven by. Before the news around the vaccine is

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Speaker 1: being driven by stimulus, It's been driven by the release

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Speaker 1: of pent up demand. Now that pent up demand, we've

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Speaker 1: already had the easy gains, but now people want to

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Speaker 1: feel like they are comfortable going out needs around the vaccine.

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Speaker 1: I think one of the reasons we're seeing some of

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Speaker 1: the more cyclical stocks performing better is just hope that

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Speaker 1: people can go about the normal business. If we don't

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Speaker 1: have that, then the rally that we're expecting, especially in

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Speaker 1: the economy through Q four starts to fall away. And

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Speaker 1: then you know, as we know, the ECUT market already

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Speaker 1: looks very frothy, so we're looking at potential falls at

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Speaker 1: that point. Seema, I sound like a broken record. I've

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Speaker 1: been talking about this a lot. The fact that people

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Speaker 1: back in August early August, we're saying, if we don't

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Speaker 1: get an additional round of fiscal support, we are going

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Speaker 1: to see a reality check in markets. It is September three.

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Speaker 1: There is no fiscal support on the dark get. In fact,

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Speaker 1: it is unclear whether they will have one even to

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Speaker 1: think about thinking about next week. Why are equity markets

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Speaker 1: not responding. That's a great question. Is something that our

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Speaker 1: clients keep but keep asking us. And I think the

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Speaker 1: thing is is that we actually have economic data which

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Speaker 1: has surprised on the upside. So the economy has been

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Speaker 1: stronger than we anticipated. And I think what the one

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Speaker 1: thing that many many people have done over the last

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Speaker 1: few months is I think we catastrophized a bit too

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Speaker 1: much and we underestimate into how much human it just

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Speaker 1: wants to go back to normal. So look, we can't

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Speaker 1: go completely back to normal unless we have that vaccine,

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Speaker 1: but there is something there. So the economic recovery has

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Speaker 1: been stronger, and I think because of that, market is

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Speaker 1: starting to think do we really need this fiscal stimulus package?

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Speaker 1: Seem when corporations, big corporations, publicly traded corporations, when they

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Speaker 1: cut one percent, two percent, even four of people, what

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Speaker 1: does that do down the income statement twelve months out right?

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Speaker 1: And you know, again the unemployment issue is so significant,

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Speaker 1: and we keep hearing news. I mean in London there

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Speaker 1: are continuous news flow of big companies making significant redundancies.

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Speaker 1: These people really need to have those fiscal packages. So

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Speaker 1: I buy into the idea that the market is starting

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Speaker 1: to think it's less important than maybe it was. But

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Speaker 1: to me, this is really what's going to sustain the

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Speaker 1: recovery going forward if we have that fiscal Stimmus package.

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Speaker 1: If we don't, then those people who are going to

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Speaker 1: be facing job losses or even facing the risk of

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Speaker 1: job losses, they're the ones that are going to struggle

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Speaker 1: and there will be an impact further down the line. Seemen,

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Speaker 1: did you ever think that you could make a decision

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Speaker 1: if you had enough money, that is a decision to

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Speaker 1: either own a company like Apple or the whole foot

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Speaker 1: to you one hundred and have a half a trillion

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Speaker 1: dollars to spare? Did you ever anticipate a situation like that? No,

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Speaker 1: And you know, I don't think anyone could have foreseen

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Speaker 1: the movement that we've had. At the same time, they

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Speaker 1: look the trend and big tech is not new, right.

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Speaker 1: We have seen it drive markets since the GFC what

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Speaker 1: happened over here. Of course it's accelerated, so it's been magnified.

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Speaker 1: We have some genuine belief in the strength of big

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Speaker 1: tech and the belief that it could continue you to

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Speaker 1: perform well, to produce good results. But I just don't

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Speaker 1: think that having the rally so narrow is a healthy thing.

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Speaker 1: And I think investors really need to be aware that

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Speaker 1: unless we get a full ecoment recovery and we get

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Speaker 1: a vaccine, that until we have that, you just don't

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Speaker 1: have a sufficiently strong recovery to keep the gun that

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Speaker 1: you need. That you need to have enough confidence. Sam

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Speaker 1: Great to catch up, Get to catch up, as always

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Speaker 1: say Michelle out of Principal Global invest This someone wonderful

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Speaker 1: at tying these pieces together is Michael Clority. For decades

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Speaker 1: he has been looking at the fixed in Kingdom market

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Speaker 1: and we are thrilled he could be with some ubs today.

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Speaker 1: Micro Clority, how do you sum this together to stagger

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Speaker 1: to the jobs report tomorrow? Right? So in general jobs report,

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Speaker 1: you know, the labor market data has been a little

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Speaker 1: bit brighter than we've been in anticipating lately, so good news.

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Speaker 1: That said, you know, we're likely to see the unappointment

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Speaker 1: any drop below ten percent. Um, Yeah, it's still awfully

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Speaker 1: close to ten percent, so we're still a long long

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Speaker 1: way from normalcy. Markets continue to trade much more prospects

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Speaker 1: for vaccines than uh any labor market or other economic

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Speaker 1: data because it a little bit more forward to looking um,

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Speaker 1: but you know it's it's been right news. But you know,

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Speaker 1: starting from a very grand place so long ago, want

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Speaker 1: to get back to normal. Michael, you are legendary for

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Speaker 1: writing detailed notes about core fixed income principles. Help us

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Speaker 1: where with where the nominal yield is right now minus

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Speaker 1: burgeoning inflation expectations over to the focus on the residual

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Speaker 1: the real yield, the real yield, the real yield? Which

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Speaker 1: of those are you focused on? Well? And I think

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Speaker 1: one of the right now fixed income seems priced for

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Speaker 1: perfection from the pet So if we look inflation expectations

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Speaker 1: have been creeping higher. We're still below their target, but

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Speaker 1: you know, back up to about one and three quarters

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Speaker 1: per cent, so you know, back to where we were

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Speaker 1: before the virus hit. Um. You know. Meanwhile, we've seen

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Speaker 1: real yields fault below one percent, so we're about negative

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Speaker 1: basis points. What that's telling you is markets expecting the

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Speaker 1: FED to be reasonably successful in getting inflation back up,

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Speaker 1: but markets assigning virtually no risk that there's any possible

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Speaker 1: overshoot in inflation. The causes that did have to go

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Speaker 1: back to the tight side of the policy framework. Um.

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Speaker 1: You know, so if you if you if they get tight,

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Speaker 1: you'll have higher real yields at a point in the future.

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Speaker 1: So tank youre really capture that potential for future tightness.

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Speaker 1: So I think, you know right now we're we're price

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Speaker 1: pricing for FED perfection. I think we need to see

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Speaker 1: some more risk premium of inflation overshoot in the marketing here.

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Speaker 1: I think we're gonna see that real yield start to

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Speaker 1: climb a little bit um so it'll still stay low

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Speaker 1: by historical standards, but we're just much too low right

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Speaker 1: now because the markets, you know, has perfect faith in

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Speaker 1: the FED. Here, Michael helped me out with the Federal Reserve,

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Speaker 1: I just didn't understand the fanfare in the last week

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Speaker 1: around Chairman Powell. All he did was formalized what they've

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Speaker 1: been talking about for the last twelve eighteen months. We

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Speaker 1: already knew everything he said, because it's already leaked into

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Speaker 1: the reaction function of the Federal Reserve. Now he's written

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Speaker 1: it down on the speech, is codeified, formalized. Fantastic. Now,

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Speaker 1: what are they going to do about it? They want

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Speaker 1: to tolerate higher inflation, Okay, it's not just gonna happen

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Speaker 1: like that. How do they generate it right, and that's

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Speaker 1: the problem. So that's why you didn't see a huge

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Speaker 1: market reaction. Lots of words written all about it, but

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Speaker 1: market reaction relatively muted. So you know the issue. Here's

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Speaker 1: Beds trying to sound a lower for longer signal, but

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Speaker 1: we have already been priced for lower for longer markets

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Speaker 1: saying that you know, FED funds rate for the next

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Speaker 1: five years is going to be twelve basis points if

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Speaker 1: you believe that rates can't go negative, which I very

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Speaker 1: very strongly believe that. Um, there's just not a lot

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Speaker 1: of upside. The market again is assuming that the Fed

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Speaker 1: is going to be lower for longer. So this this

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Speaker 1: sort of twist interesting intellectually, but from a practical standpoint

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Speaker 1: on on how the Feds are going to behave it

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Speaker 1: doesn't tell us anything that wasn't already priced into the market. Michael,

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Speaker 1: you're a longtime Fed watcher. You've been looking at it

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Speaker 1: from the rate side and talking about the latest low

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Speaker 1: rate policy and formalizing it. I want to pair that

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Speaker 1: with this idea that Mike uh, Mike, Mike McKee I

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Speaker 1: always said Mike Economy because that's his Twitter handle, was

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Speaker 1: just talking about the fact that twenty nine million Americans

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Speaker 1: are on receiving some sort of jobless benefits. Is there

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Speaker 1: anything that the Fed can do at this point to

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Speaker 1: lower the jobless rate or are they basically impotent in

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Speaker 1: achieving that goal? Right? So, I mean, all they can

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Speaker 1: do is keep rates low and trying and buy some time.

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Speaker 1: I think, you know, new year term change is really

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Speaker 1: more about whether we get more stimulus or not. Um,

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Speaker 1: you know, whether another studulus package is coming. That's the

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Speaker 1: critical point to look for in the coming months. Um.

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Speaker 1: You know the Fed, I think you know pretty much

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Speaker 1: all they're left with here is to keep meeting just

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Speaker 1: saying lower for longer, and then we do think they'll

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Speaker 1: shift down and buy the long end of the curve

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Speaker 1: a little bit more than they have been. But again,

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Speaker 1: what what they're gonna buy is peanuts relative to what

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Speaker 1: the Treasury issuing out there. If you look at the

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Speaker 1: average coupon auction size, it's gonna be up more than

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Speaker 1: fifty from March to October. So, you know, a short

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Speaker 1: little strategy, you've grown by more than I mean. It

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Speaker 1: is just a staggering amount of supply coming from the treasury.

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Speaker 1: The Fed can absorb all of that Michael cried to

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Speaker 1: catch up. As always, Michael Clotty, Dad have us. Thanks

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Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen

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Speaker 1: to interviews on Apple Podcasts, SoundCloud, or which of a

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Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane

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Speaker 1: before the podcast. You can always catch us worldwide. I'm

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Speaker 1: Bloomberg Radio