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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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Speaker 1: Surveillance Podcast. Catch us live weekdays at seven am Eastern

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Speaker 1: on Apple car Play or Android Auto with the Bloomberg

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Speaker 1: Business App. Listen on demand wherever you get your podcasts,

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Speaker 1: or watch us live on YouTube.

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Speaker 2: Joe Davis joints us here, global chief Economists and Global

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Speaker 2: head of Investment Strategy, a little shop down here in

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Speaker 2: Philadelphia called Vanguard. Joe, what did you make of FED

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Speaker 2: Chairman Jpal's comments about rate policy maybe the December meeting.

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Speaker 2: What's your takeaway from yesterday?

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Speaker 3: Well, I think he's trying to really thread a needle.

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Speaker 4: I mean, we've clearly downshifted on the labor market. Not

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Speaker 4: all of it is because of weaker demand, but you

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Speaker 4: got inflation sticky, and in a third factor that I

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Speaker 4: don't think you know they're talking enough about, but probably will,

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Speaker 4: and that is the prospect of asset price inflation. You

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Speaker 4: look at the equity market. So I think they're trying

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Speaker 4: to feel a way here in a data bline spot.

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Speaker 5: So what about that duel?

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Speaker 6: Mandy, We're talking about inflation and the stabilization and prices,

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Speaker 6: but then also maximum and unemployment or maxim unemployment.

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Speaker 5: Rather, how are you viewing this right now?

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Speaker 3: Well, again, I did you know?

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Speaker 4: Our view was that that they would weigh the job

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Speaker 4: market over the inflation. This is has been generally a

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Speaker 4: modestly dubbish institution, at least in recent years.

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Speaker 3: Not a criticism. I think it's just a reality.

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Speaker 4: And you also have to you have to at least

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Speaker 4: make some assumption that some of this tariff induced inflation,

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Speaker 4: you know, will dissipate.

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Speaker 3: But the risks are growing.

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Speaker 4: I think that's why you're seeing, you know, some of

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Speaker 4: the sense at the Federal Reserve. It's actually somewhat commonplace

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Speaker 4: once you get too close to where you think you

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Speaker 4: should be. And we're definitely in that zone.

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Speaker 2: Hey, Joe, we've we're right in the middle of tech

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Speaker 2: earnings and the numbers continue to really impress us in

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Speaker 2: terms of how much money these companies are spending on

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Speaker 2: on AI. Is that how does that impacting the broader economy?

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Speaker 2: Do you guys kind of take a stab at that?

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Speaker 3: Well?

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Speaker 4: Yeah, so, in fact, we've spent over three years really

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Speaker 4: looking deep a where the economy how could it be

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Speaker 4: affected as AI broadens and it's you know, it's not

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Speaker 4: a foregone conclusion. But I think in two or three years,

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Speaker 4: in our data driven framework, there is a possibility that

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Speaker 4: we're growing at three percent real GDP, which I have

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Speaker 4: not seen many firms or economists talk about. And again

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Speaker 4: I'm not you have to you have to be cautious, right,

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Speaker 4: there's going to be over investment in this cycle, even

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Speaker 4: if AIS is transformative as we think, So we have

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Speaker 4: to feel your way here. But we are not in

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Speaker 4: bubble territory and this could really accelerate over the next

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Speaker 4: two years.

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Speaker 6: So caution is in the corporate tech space. What about consumers?

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Speaker 6: How are we thinking about terror for related inflation? Are

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Speaker 6: you seeing any of that right now?

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Speaker 4: You definitely see it in households, particularly those at the

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Speaker 4: lower at the lower income rackets.

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Speaker 3: That that's not new, It's been there.

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Speaker 4: It's where you also see you know, some of the

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Speaker 4: wage growth that had slowed for a time. Yeah, you

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Speaker 4: have hire income households, which again is not new, really

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Speaker 4: supported by just the past five years. The increase in

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Speaker 4: wealth in housing as well as the equity market.

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Speaker 3: Is really a source of cushion.

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Speaker 4: But you do see that bifurcation, and I don't think

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Speaker 4: that's going to change in the near term. What's going

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Speaker 4: to be key is do we see a firm firming

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Speaker 4: in the labor market in twenty twenty six. That's our expectation,

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Speaker 4: That's what our own indicators of vanguards show right now,

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Speaker 4: given our proprietary data. But again there's there's still some

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Speaker 4: tarif uncertainty to work through here.

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Speaker 2: And Joe on the labor front, you know, I'm one

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Speaker 2: of those people these early, early, early stages of AI.

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Speaker 2: I just feel like AI is going to be net

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Speaker 2: negative for the US labor market in terms of absolute

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Speaker 2: bodies needed in it to fuel this economy. I know

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Speaker 2: it's early, but do you guys have an opinion on that?

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Speaker 4: Yes, yes, again, we we've we started to work, believe

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Speaker 4: it or not on AI in the future work. I

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Speaker 4: can't believe it's almost a decade ago. What we continue

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Speaker 4: to find and expect it's been a learning process for

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Speaker 4: all of us, is that roughly one in five occupations

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Speaker 4: over next three to five years. I'm not going to

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Speaker 4: sugarcoat it. You're going to see jobs start to decline,

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Speaker 4: but for every job that declined, there's going to be

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Speaker 4: three that benefit. But this is going to be disruptive

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Speaker 4: in our baseline expectation. We see the most disruption in

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Speaker 4: terms of how we spend our day at work changing

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Speaker 4: in at least twenty five years, and so there's going

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Speaker 4: to be anxiety along with some of these efficiency gains.

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Speaker 4: More workers will benefit than not, but there is going

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Speaker 4: to be some disruption here and that's a clear result

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Speaker 4: from our work.

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Speaker 6: I mean, how are you thinking about job opportunities coming

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Speaker 6: from that or potentially lack thereof. I mean, if you

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Speaker 6: think about the tech space right now, you hear people

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Speaker 6: who are coder is even concerned about being replaced by AI.

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Speaker 6: How are you thinking about that on the long term.

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Speaker 4: Well, again, to my you know, I'm not going to

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Speaker 4: sugarcoat it. There's going to be some industries where you're

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Speaker 4: in occupations, you're going to see some pressure. But again

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Speaker 4: it's almost I give to pick like which which issue

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Speaker 4: to effectively deal with. The fact is is for the

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Speaker 4: past ten or fifteen years in the US economy and

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Speaker 4: most developed markets, we've had a lack of automation, which

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Speaker 4: is why growth has generally been low and some of

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Speaker 4: the wage growth outside of COVID was fairly tepid. And

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Speaker 4: so you know, if disruption comes the prospect for productivity,

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Speaker 4: higher wages. But but but that comes with that with change.

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Speaker 4: I mean we've seen that throughout history, and so like pick,

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Speaker 4: we have to we have to think about which world

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Speaker 4: we're entering. It's more likely going to be a disruptive

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Speaker 4: one higher growth, but it's not all not all boats

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Speaker 4: will be lifted at the same time.

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Speaker 3: And you know, it's just I'm not going to I mean,

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Speaker 3: it just is what it is. That's clearly the diagnosis. Jo.

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Speaker 2: How are you guys dealing with the fact that you're

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Speaker 2: not getting a lot of government supplied economic data with

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Speaker 2: this shutdown? Are you just kind of trying to find

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Speaker 2: the best alternative data points out there?

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Speaker 7: Yeah?

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Speaker 4: Yeah, I mean, like like everyone, you know, we're where

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Speaker 4: we have our own indicators. We know, for example, job

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Speaker 4: growth because if you're in a four one K plan,

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Speaker 4: uh and if we're the administrator through auto enrollment like

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Speaker 4: for your for your actual retirement plan, we have some

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Speaker 4: sense of new jobs being created, even promotion rates in

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Speaker 4: real time and clearly an anonymoused way. It's not perfect

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Speaker 4: because we clearly are not the only four one K provider,

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Speaker 4: but nevertheless it's another indicator that we can look at it.

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Speaker 4: And again there's other data points out there from other

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Speaker 4: from other firms, a job hosting websites, So I think

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Speaker 4: we always look at it as a distillation. So again

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Speaker 4: it's right now, those indicators that we have are holding constant.

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Speaker 4: You know, they're not super rosy, but they're not negative.

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Speaker 4: And so that that would that would point us to

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Speaker 4: that the labor markets should firm here. But that that's

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Speaker 4: the key indicator for the next few months.

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Speaker 2: Now, if you're wondering why Joe is this such a

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Speaker 2: smart guy here any sense, is because he gets got

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Speaker 2: his man there's n his PhD at Duke University. See

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Speaker 2: what I did there, So you needed an.

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Speaker 3: UNDERGRADUA, I knew you're going to work that in. You

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Speaker 3: got to say, Duke.

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Speaker 2: Absolutely, Joe Davis, thanks so much. We appreciate it. Joe Davis,

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Speaker 2: Global chief Economists and Global head of Investment Strategy at Vanguard.

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Speaker 3: Now, when you're a.

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Speaker 2: Graduate student at Duke, no matter what school you're in,

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Speaker 2: you don't have to camp out at night for Duke tickets.

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Speaker 2: You just do it once the beginning of your graduate

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Speaker 2: school career, one night, and then you get to keep

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Speaker 2: those season tickets for your entire graduate school career. You

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Speaker 2: don't have to do it every year. So if you're

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Speaker 2: one of these PhD people will like philosophy. It takes

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Speaker 2: stretch out over eight years. You got your season tickets care.

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Speaker 5: It's all the undergrads have to sleep every.

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Speaker 2: Sleepout for every game. Oh, we just have to do

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Speaker 2: it once. That's because we're professional graduate space. So that's

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Speaker 2: kind of earns it. Do they hate us for that?

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Speaker 2: The undergrad so that we get a lot of agree

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Speaker 2: for that. Stay with us. More from Bloomberg Surveillance coming

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Speaker 2: up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live

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Speaker 1: weekday afternoons from seven to ten am Eastern Listen on

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Speaker 2: Heidi Crebo Rehticker. She's Adjunct Senior Fellow at the Council

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Speaker 2: on Foreign Relations. She joins us here. Heidi, thanks so

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Speaker 2: much for journey us here. A lot of headlines, a

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Speaker 2: lot of tweeting coming out of Asia here. It was

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Speaker 2: a long it was a long trip. A week in Asia,

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Speaker 2: many countries, concluding maybe highlighting with a meeting yesterday with

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Speaker 2: Shijing Ping and President Trump here, what's your takeaway from

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Speaker 2: President Trump's Asia trip?

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Speaker 8: So first, I think that there that it was a

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Speaker 8: very positive trip all the way around. So this is

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Speaker 8: a big feel good moment for Trump, and it takes

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Speaker 8: the temperature down on trade, particularly you know, with with

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Speaker 8: the meeting with Shijinping. You know, no big surprises in

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Speaker 8: the in that that agreement. The contours of the framework

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Speaker 8: agreement were pretty well telegraphed. But I think, you know,

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Speaker 8: short term, good trip. Longer term, I always pay attention

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Speaker 8: to this strategic direction of travel in the US China relationship,

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Speaker 8: and I don't think that has changed. So as long as,

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Speaker 8: for example, China keeps supporting Putin's war machine and threatens

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Speaker 8: not only Taiwan but other Into Pacific partners, and we're

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Speaker 8: going to have a bumpy ride ahead for the rest

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Speaker 8: of the presidency and beyond. So we always have that

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Speaker 8: issue of dual use technology. And even though the China

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Speaker 8: Hawks in this administration have been pushed back, I think,

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Speaker 8: particularly around around export controls, as long as as long

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Speaker 8: as China continues a trajectory with swamping global markets with

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Speaker 8: manufacturing and dialing up or dialing down, but dialing up

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Speaker 8: the export their own export controls on rare earths and

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Speaker 8: related technology. It's it's going to be a complicated relationship.

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Speaker 8: And so I think in the longer run, uh, we

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Speaker 8: have a clear direction of travel. It's it's not going

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Speaker 8: in the right direction.

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Speaker 6: So a short term fix here or band aid, if

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Speaker 6: you will, But what are some of those other deeper

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Speaker 6: structural issues between the US and China that you believe

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Speaker 6: need to be resolved here over the long term.

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Speaker 8: So I think we have I mean, they're they're the

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Speaker 8: deep structural tensions in the commercial and economic relationship that

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Speaker 8: we have with China. And you know, they're they're flying

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Speaker 8: ahead in terms of their their innovation and capacity to

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Speaker 8: uh to actually really implement a lot of the strategies

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Speaker 8: and advanced manufacturing that you know, they they've just doubled

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Speaker 8: down on the on you know, with this with this

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Speaker 8: latest five year plan, on their desire to just be

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Speaker 8: an even greater giant on the world stage. And the

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Speaker 8: export controls on rare earth. You know, I was in

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Speaker 8: Shanghai last week for the Blend Summit, Global Summit. They're global,

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Speaker 8: those export controls they're here to stay. And the Chinese

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Speaker 8: are very, very confident they're enjoying this checkmate moment, and

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Speaker 8: so I think we'll see again these export controls on

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Speaker 8: rare Earth's dial up, dial down, its asymmetric leverage. They

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Speaker 8: have the ability to shut down industries of basically every

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Speaker 8: country in the world with manufacturing. So I think that

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Speaker 8: is that is the big picture moving forward on this.

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Speaker 8: On the strategic side.

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Speaker 2: Heidi, it seems, I don't know, maybe over the last

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Speaker 2: ten years, maybe even longer, kind of a development of

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Speaker 2: a technology cold war between China and the West. And

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Speaker 2: at one point it seemed like the US's policy was

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Speaker 2: let's a lot ally ourselves with everybody else out there

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Speaker 2: against China and transpecific deal. Then it seemed to be

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Speaker 2: a little bit of America first and we'll take it

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Speaker 2: on solo. How do you think America and the West

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Speaker 2: should deal with China going forward?

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Speaker 8: So there were there were a lot of European experts, economists,

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Speaker 8: financial leaders at this at this summit in Shanghai last week,

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Speaker 8: and they were distancing themselves from the US and saying

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Speaker 8: that they want no part of these export controls on them,

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Speaker 8: on the on them. In the in terms of how

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Speaker 8: the US moves forward, we have obviously taken at the

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Speaker 8: You know, the Trump administration is not multilateral and its

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Speaker 8: approach to really anything except for critical minerals and rare earths.

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Speaker 8: So there is no way to do to develop any

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Speaker 8: kind of capacity without friends and allies. We've seen big

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Speaker 8: deals with Australia, We've seen the you know, the initiation

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Speaker 8: of deals with Ukraine, d r c H. The one

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Speaker 8: big missing pieces in Japan. The one big missing piece

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Speaker 8: is Canada, which of course could be our you know,

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Speaker 8: one of our greatest, our greatest friends when it comes

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Speaker 8: to the critical minerals puzzle. So you know, I do

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Speaker 8: think you'll see this on the G seven agenda. You'll

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Speaker 8: see investment in technology to sort of leap frog some

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Speaker 8: of the China choke holds.

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Speaker 2: But we can't do that by ourselves. So what's your.

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Speaker 6: Takeaway on the soybean purchase A situation I see here

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Speaker 6: you say that it was symbolic but made good mewed music.

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Speaker 5: It talk to me about that.

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Speaker 8: So I do think that. I mean, so far, the

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Speaker 8: volume that we know about has been been minimal. You know,

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Speaker 8: we don't know what the details of what Trump's massive

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Speaker 8: amounts agreed actually mean. So we have to wait and

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Speaker 8: see where, you know, where that goes in terms of

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Speaker 8: how much and whether or not the Chinese actually followed through.

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Speaker 8: Really important to US farmers to actually to really get

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Speaker 8: this fixed, and the shipping fees that we had the

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Speaker 8: tariffs on on Chinese ships. If we're moving agricultural products

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Speaker 8: to China, we don't actually we use Chinese ships to

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Speaker 8: actually ship a good deal of our products because they dominate.

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Speaker 2: So I think it was it was symbolic.

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Speaker 8: They wanted to, you know, Bijing wanted to create a

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Speaker 8: constructive atmosphere for negotiations, and you know, I think, you know,

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Speaker 8: they did get tariff relief and some renewed agricultural trade.

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Speaker 8: But we have to see what exactly what's in that deal.

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Speaker 8: China already is well stocked for agricultural goods in South

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Speaker 8: America is really set with a strong harvest. So we'll

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Speaker 8: have to see where we have whether it's near term

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Speaker 8: upside for US soybean producers or whether it's just you know,

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Speaker 8: whether it'll be durable.

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Speaker 2: I'm not even sure I know soy being if I

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Speaker 2: tripped over one but not a very important twelve million

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Speaker 2: metric tons twenty five million metric tons I don't know what's.

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Speaker 5: Got a thousand times all all right, morning.

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Speaker 2: All right, Heidi Creboat Hticker, thank you so much. We

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Speaker 2: really appreciate getting your thoughts there. Heidi Krebo Reticker. She's

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Speaker 2: the adjunct Senior Fellow on the council at Barn Relations.

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Speaker 2: Stay with us. More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live

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Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on

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Speaker 1: Applecarplay and Android Auto with the Bloomberg Business app, or

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Speaker 1: watch us live on YouTube.

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Speaker 2: We've got earnings coming in pretty darn strong. That's a

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Speaker 2: good thing for risk assets, I would think, So what

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Speaker 2: are we doing here? Let's talk to somebody who has

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Speaker 2: he gets paid to think about that stuff, Adam Farstrup.

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Speaker 2: He's had a multi asset for the America's wor else

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Speaker 2: for Schroeders. Adam, it seems like we've got a pretty

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Speaker 2: constructive backdrop for risk assets here again with earnings. Yeah,

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Speaker 2: with presumably an accommodative federal reserve. How are you guys

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Speaker 2: thinking about allocating assets? Yeah, I mean I think it's

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Speaker 2: in some ways.

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Speaker 9: I talk about being a broken record, because really since

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Speaker 9: Liberation Day it has been right to be long risk assets,

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Speaker 9: particularly equities. Yep, we had at the beginning of this year,

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Speaker 9: you had a bit of the Cell America trade, right,

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Speaker 9: we saw Europe really doing well.

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Speaker 2: That shifted to emerging markets.

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Speaker 9: Emerging markets continue to do well, but the key shift

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Speaker 9: was over the summer coming back into the US equity market.

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Speaker 9: And from here we still see strength coming through the

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Speaker 9: US and actually emerging markets where earnings are supporting things.

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Speaker 9: So the valuations clearly not something that makes you really

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Speaker 9: comfortable at night, but as long as we continue to

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Speaker 9: have these earnings come through, we think investors should stay

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Speaker 9: risk on.

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Speaker 6: So what about the fact that data has been sparse?

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Speaker 6: How have you all been navigating that given the fact

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Speaker 6: that we're experiencing a government shutdown.

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Speaker 9: Yeah, you know, I think our economists are wondering what

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Speaker 9: they do with their day because that data to come in.

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Speaker 2: They keep canceling meetings with us.

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Speaker 9: Now we're really focused on the same kinds of alternative

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Speaker 9: data sources that you see the FED talking about. You

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Speaker 9: look at we still have high quality pieces of information

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Speaker 9: coming out from say Atlanta FED, the GDP now which

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Speaker 9: is showing you that the economy continues to grow. And

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Speaker 9: even if GDP now is not always the most accurate assessment,

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Speaker 9: you look at that sort of bracketing almost four percent

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Speaker 9: growth for the quarter with consensus estimates around two percent.

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Speaker 9: Let's say that GDP growth is falling.

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Speaker 2: Somewhere in between.

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Speaker 7: There.

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Speaker 9: That tells you you're still in a supportive growth environment.

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Speaker 9: And we're not seeing the unemployment data really tick up

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Speaker 9: at this point yet, but it's a real knife edge

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Speaker 9: for the employment market. I think that's one of the

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Speaker 9: challenges we have right.

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Speaker 2: Now in the market's in the equity markets. One of

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Speaker 2: the concerns is equity market concentration. I'm looking at your

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Speaker 2: notes that says it's higher than we saw in the

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Speaker 2: tech bubble. But I like this. We think investors should

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Speaker 2: be wary and not fearful. What do you mean by that?

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Speaker 9: So we think in these period is of technological change.

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Speaker 9: It's not unusual when you look through history to see

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Speaker 9: concentration in markets. So the concentration within the US equity

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Speaker 9: market means you need to be active. You need to

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Speaker 9: understand the companies that you're investing in. Would be leery

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Speaker 9: of just buying beta right now as opposed to having

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Speaker 9: a view on the stocks that you're buying in the market.

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Speaker 9: So that's point number one. But point number two that

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Speaker 9: I think the concentration we're more worried about is the

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Speaker 9: degree to which capital markets are oriented towards the US

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Speaker 9: right now, and that has been kind of the big

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Speaker 9: challenges a multi asset investors, an asset allocator is how

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Speaker 9: do you diversify without being dramatically underweight what has been

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Speaker 9: a high roe, high returning market in the US. And

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Speaker 9: so we think looking towards global approaches capturing some of

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Speaker 9: the real dynamics in emerging markets where if you say

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Speaker 9: you want to play AI and you think that that trend,

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Speaker 9: that technological change is going to continue, the place to

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Speaker 9: play it Europe.

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Speaker 2: It's emerging markets. That's the other strength outside the US.

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Speaker 5: So where in.

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Speaker 6: Emerging markets are you looking? Where do you see the

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Speaker 6: most opportunity?

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Speaker 9: I think it depends whether you're talking about debt markets

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Speaker 9: or equity markets. So in equity markets there is you know,

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Speaker 9: China is a real complex situation right now. The domestic

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Speaker 9: consumption in China is still weak. The economy is being

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Speaker 9: managed I think to some different inns than we would

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Speaker 9: traditionally see in the US. But if you look at

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Speaker 9: exports are picking up out of China. We just had

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Speaker 9: the deal overnight announced between the latest deal announced between

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Speaker 9: the US and China. We think that that starts to

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Speaker 9: push out into countries like Taiwan and Korea where they're

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Speaker 9: sort of involved in that supply chain. The tech names

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Speaker 9: within China are very interesting to US as bottom up investors.

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Speaker 9: You know, talking to the bottom up teams with in Schroeders,

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Speaker 9: they get very excited about that. When you talk about

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Speaker 9: the debt markets here, what's interesting is you've seen very

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Speaker 9: high yields in a co enemies where the monetary policy

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Speaker 9: has been managed in a very traditional way. They've been

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Speaker 9: on top of the inflation pressures, and so we have

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Speaker 9: this this monetary supportive cycle that is backing investors in

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Speaker 9: Latin America in particular, where we see a lot of

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Speaker 9: opportunities for real yields.

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Speaker 2: I like Evany's multi asset pros because he can ask

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Speaker 2: about anything. Whatever it sticks on the wall here, growth

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Speaker 2: call on gold here. It just had this incredible rip

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Speaker 2: up the forty three hundred. We've had a little bit

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Speaker 2: of a pullback here we're saying just below what some

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Speaker 2: folks will tell me as a kind of support level

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Speaker 2: around four thy thirty nine to ninety. What do you

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Speaker 2: guys make of what's happening gold this year?

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Speaker 9: Yeah, I think gold is highly related to the fears

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Speaker 9: about what might happen and change in policy in the

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Speaker 9: US right. And so when we talk about diversification away

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Speaker 9: from the dollar, it's not that the dollar suddenly loses

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Speaker 9: its reserve status. It's really that we see a need

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Speaker 9: to for central banks to diversify their holdings. We're seeing

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Speaker 9: demand for physical gold in places like China and India.

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Speaker 9: So we just think this is a consolidation into the

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Speaker 9: next leg of a rally as investors see gold being

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Speaker 9: very valuable in portfolios for resilience, not a hedge.

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Speaker 2: Lis Matteo buying gold at Costco's. Adam, thank you so

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Speaker 2: much for joining us, Adam Farstrom. He's had a multi

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Speaker 2: asset allocation there at America's for Schroeders. Stay with us.

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Speaker 2: More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live

407
00:21:39,160 --> 00:21:42,320
Speaker 1: weekday afternoons from seven to ten am Eastern listen on

408
00:21:42,400 --> 00:21:46,080
Speaker 1: Applecarplay and Android Auto with the Bloomberg Business app, or

409
00:21:46,200 --> 00:21:47,560
Speaker 1: watch us live on YouTube.

410
00:21:47,720 --> 00:21:49,760
Speaker 2: See what we're doing in the credit markets these days.

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Speaker 2: Megan Robson, Head of US Credit Strategy for BNP, Harry Bob.

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Speaker 2: One of the great greatest offices in Paris is the

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Speaker 2: BNP Parry bo office. Is just awesome. Megan, thanks for

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Speaker 2: joining us here in our Bloomberg and a rich studio here.

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Speaker 2: What did you take away from the FEDS actions yesterday?

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Speaker 7: Yeah, so I think that the commentary from Chair Paul,

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Speaker 7: as you said, it was a bit more hawkish. So

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Speaker 7: you came in and the market was pricing a very

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Speaker 7: high probability of getting a second rate cut in December,

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Speaker 7: and you know, he said, it's not a foregone conclusion

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Speaker 7: that we're going to do that. There's still you know,

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Speaker 7: haven't had much data with the government shutdown, and so

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Speaker 7: he did leave things a little bit up in the

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Speaker 7: air and indicated the committee is a bit divided for

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Speaker 7: credit though. I think, you know, investors are still just

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Speaker 7: focused on the broader easing bias. So they did announce

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Speaker 7: an end to quantitative tightening, which would start December first,

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Speaker 7: so that you know.

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Speaker 2: That's a positive.

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Speaker 7: That's that's easier conditions, And whether we get a cut

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Speaker 7: in December or January, I think still still positive for

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Speaker 7: credit market. So not a huge driver of price action

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Speaker 7: for US I expect, so not as.

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Speaker 6: Much data that we've received this month as we been

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Speaker 6: in the government shutdown. But how is your team thinking

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Speaker 6: about the balance between inflation risks and growth concerns as

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00:23:05,960 --> 00:23:09,920
Speaker 6: we really think about assessing, you know, credit spreads for instance.

438
00:23:09,600 --> 00:23:10,760
Speaker 2: It's it's a great question.

439
00:23:10,840 --> 00:23:14,560
Speaker 7: So I think with the last CPI print, we did

440
00:23:14,600 --> 00:23:17,480
Speaker 7: get a little bit of relief, and there's some indications

441
00:23:17,520 --> 00:23:21,560
Speaker 7: that inflation is not yet accelerating, and the FED has

442
00:23:21,680 --> 00:23:25,320
Speaker 7: told us that they want to prioritize the growth pillar.

443
00:23:25,640 --> 00:23:27,960
Speaker 7: And so in our view, we think that the FED,

444
00:23:28,359 --> 00:23:31,119
Speaker 7: even if inflation does look a little bit sticky, is

445
00:23:31,160 --> 00:23:34,399
Speaker 7: going to prioritize that and let things run hot. And

446
00:23:34,440 --> 00:23:38,040
Speaker 7: for credit that's actually a very bullish, a very bullish outcome.

447
00:23:38,040 --> 00:23:42,040
Speaker 7: You potentially have front end rates coming down and then

448
00:23:42,119 --> 00:23:44,879
Speaker 7: letting the economy run a little bit hotter. So it

449
00:23:44,880 --> 00:23:46,560
Speaker 7: would be positive for the credit markets.

450
00:23:47,480 --> 00:23:49,640
Speaker 2: All right, where are we taking credit risk at there? Megan,

451
00:23:49,680 --> 00:23:51,840
Speaker 2: I look at them, looking at the end go function,

452
00:23:51,880 --> 00:23:55,479
Speaker 2: which they've reconfigured, so now have to relearn this one.

453
00:23:55,720 --> 00:23:58,679
Speaker 2: But we do some really positive returns there in the

454
00:23:59,040 --> 00:24:02,520
Speaker 2: corporate ac set point eight seven percent for the Bloomberg

455
00:24:02,920 --> 00:24:06,400
Speaker 2: US corporate aggregate in next we own it great returns and.

456
00:24:06,320 --> 00:24:08,919
Speaker 7: FIXT we so we have a preference right now for

457
00:24:08,960 --> 00:24:12,359
Speaker 7: high yield over investment grade. And you know, as you've

458
00:24:12,560 --> 00:24:16,040
Speaker 7: also probably seen, there were some headlines related to recent

459
00:24:16,080 --> 00:24:19,199
Speaker 7: credit bankruptcies that that came across, and I think we

460
00:24:19,240 --> 00:24:23,600
Speaker 7: think those are idiosynocratic, but they really harmed high yield

461
00:24:23,640 --> 00:24:26,000
Speaker 7: credit spreads a bit more than investment grade. So you're

462
00:24:26,000 --> 00:24:29,359
Speaker 7: seeing those spreads UH trading a little bit wider. Single

463
00:24:29,359 --> 00:24:32,879
Speaker 7: bees in particular, we think look wide and if we

464
00:24:32,920 --> 00:24:36,600
Speaker 7: do see earnings as a good indicator of growth ahead,

465
00:24:36,640 --> 00:24:40,240
Speaker 7: I think that that segment could could really outperform.

466
00:24:40,359 --> 00:24:43,840
Speaker 6: Our corporate balance sheets still resilient or are we starting

467
00:24:43,840 --> 00:24:44,720
Speaker 6: to see cracks there?

468
00:24:45,440 --> 00:24:45,920
Speaker 2: So far?

469
00:24:46,600 --> 00:24:49,600
Speaker 7: Leverage has been very stable for a few quarters, and

470
00:24:49,960 --> 00:24:53,480
Speaker 7: that's that's that's been supported by two things. One, debt

471
00:24:53,520 --> 00:24:55,960
Speaker 7: growth has been relatively low, so you have these high

472
00:24:56,080 --> 00:25:00,359
Speaker 7: rates and and issuers all else EQL are less likely

473
00:25:00,400 --> 00:25:03,359
Speaker 7: to borrow more debt and then the second pillar is earnings.

474
00:25:03,440 --> 00:25:06,080
Speaker 7: Earnings has been very strong and we thought by now

475
00:25:06,119 --> 00:25:08,320
Speaker 7: that potentially you would see some of this tear, that

476
00:25:08,400 --> 00:25:10,800
Speaker 7: the tariffs start to pass through to margin, start to

477
00:25:10,800 --> 00:25:13,080
Speaker 7: harm the bottom line, but so far we're not seeing it.

478
00:25:13,119 --> 00:25:17,240
Speaker 7: Earning earnings broadly has been quite strong, so leverage, corporate

479
00:25:17,359 --> 00:25:20,680
Speaker 7: leverage that we focus on, cash to debt all very

480
00:25:20,720 --> 00:25:23,240
Speaker 7: strong metrics. I think the question for twenty twenty six

481
00:25:23,280 --> 00:25:25,240
Speaker 7: will be do we see a pickup an M and A.

482
00:25:25,880 --> 00:25:28,880
Speaker 7: Do we see some of this AI capex funded through

483
00:25:28,880 --> 00:25:31,280
Speaker 7: the debt market and have that story change? But for now,

484
00:25:31,760 --> 00:25:33,160
Speaker 7: balance sheet's still very resilient.

485
00:25:33,720 --> 00:25:36,280
Speaker 2: How do you guys allocate to private credit?

486
00:25:37,160 --> 00:25:41,679
Speaker 7: So private credit exposure, you can get exposure through the

487
00:25:41,720 --> 00:25:45,520
Speaker 7: business development companies, so there are some publicly traded BDCs

488
00:25:46,400 --> 00:25:51,439
Speaker 7: that investors can gain exposure to credit. Our view is

489
00:25:51,480 --> 00:25:54,560
Speaker 7: that we like the debt of BDC, so they sell bonds,

490
00:25:54,600 --> 00:25:56,960
Speaker 7: you can buy the credit. And then there's also the

491
00:25:57,000 --> 00:25:59,919
Speaker 7: equity component. The equity has struggled recently because of rate

492
00:26:00,080 --> 00:26:03,399
Speaker 7: cuts and also some of these headlines around single name credit,

493
00:26:03,480 --> 00:26:06,479
Speaker 7: but in our view, we think that the credit spreads

494
00:26:06,520 --> 00:26:09,879
Speaker 7: of BDC's look attractive here and are worth considering to

495
00:26:09,880 --> 00:26:10,320
Speaker 7: add risk?

496
00:26:11,160 --> 00:26:14,119
Speaker 6: What sectors are looking most vulnerable to you in terms

497
00:26:14,119 --> 00:26:17,480
Speaker 6: of you know, maybe potential refinancing risks, especially given the

498
00:26:17,520 --> 00:26:18,440
Speaker 6: high rate environment.

499
00:26:18,760 --> 00:26:23,160
Speaker 7: So I think we're we are watching the K shape recovery.

500
00:26:23,200 --> 00:26:27,000
Speaker 7: I think sectors that are more exposed to lower income consumers,

501
00:26:27,000 --> 00:26:31,879
Speaker 7: so think about auto lenders, subprime consumer lenders. Some of

502
00:26:31,920 --> 00:26:35,000
Speaker 7: the retail sectors are a bit more exposed, and we

503
00:26:35,080 --> 00:26:37,800
Speaker 7: are seeing, you know, the few defaults that we have

504
00:26:37,960 --> 00:26:41,000
Speaker 7: seen recently in the headlines have been in those areas,

505
00:26:41,040 --> 00:26:43,720
Speaker 7: So we like avoiding those areas. In areas that we

506
00:26:43,920 --> 00:26:47,360
Speaker 7: like more, we do like exposure to cyclicals. So one

507
00:26:47,359 --> 00:26:49,840
Speaker 7: of our top trades is in overweight to US autos.

508
00:26:49,880 --> 00:26:51,960
Speaker 7: That's that's done very well. We think if we do

509
00:26:52,080 --> 00:26:55,800
Speaker 7: have this kind of hotter economy scenario that we're talking

510
00:26:55,800 --> 00:26:58,560
Speaker 7: about cyclicals, that cyclical premium should tighten.

511
00:27:00,000 --> 00:27:02,239
Speaker 2: Where's the risk out there in the credit markets here

512
00:27:02,240 --> 00:27:05,560
Speaker 2: from your perspectives, I haven't really seen it. I mean,

513
00:27:05,560 --> 00:27:09,160
Speaker 2: if credit quality seems pretty solid, liquidity seems okay, what's

514
00:27:09,200 --> 00:27:09,760
Speaker 2: the concern for you.

515
00:27:09,760 --> 00:27:11,920
Speaker 7: At the Yeah, I think you know, we would watch

516
00:27:12,000 --> 00:27:14,800
Speaker 7: for a growth slowdown. I think you know, Ernie says,

517
00:27:14,840 --> 00:27:18,080
Speaker 7: really been booing everything up, and so that would be

518
00:27:18,080 --> 00:27:21,679
Speaker 7: one scenario we're worried about. Or you know, to the

519
00:27:21,800 --> 00:27:24,720
Speaker 7: discussion on inflation, if we saw a reversal and really

520
00:27:24,720 --> 00:27:28,200
Speaker 7: an acceleration of inflation, if it changed the Fed's posture

521
00:27:28,280 --> 00:27:30,800
Speaker 7: on easying and we ended up getting great hikes, I

522
00:27:30,840 --> 00:27:34,000
Speaker 7: think that that would be something that would also concern

523
00:27:34,040 --> 00:27:34,760
Speaker 7: credit markets.

524
00:27:35,000 --> 00:27:36,879
Speaker 2: Megan, thank you so much for joining us. Really appreciate it.

525
00:27:36,920 --> 00:27:40,760
Speaker 2: Megan Robson, Head of US Credit Strategy at BNP.

526
00:27:41,280 --> 00:27:47,199
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527
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