Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is the.
Speaker 1: Bloomberg Surveillance Podcast. Catch us live weekdays at seven am
Speaker 1: Eastern on Apple CarPlay or Android Auto with the Bloomberg
Speaker 1: Business App, Listen on demand wherever you get your podcasts,
Speaker 1: or watch us live on YouTube.
Speaker 3: Please to start with Mike Green with a good view
Speaker 3: of the FED in economics and the system. Sort of
Speaker 3: a total all in look at what we're doing. But
Speaker 3: today we have to celebrate that is simplify asset management.
Speaker 3: High yield ETF has five stars from morning Star and
Speaker 3: that's That's what's unusual in the category that Mike plays
Speaker 3: in the pond, six hundred and thirty one investments, and
Speaker 3: I don't think I've ever seen this in umpteen years.
Speaker 3: Your single percentile, what are you doing? I mean you're
Speaker 3: not offered death style, You're to date you're one percent
Speaker 3: tile a year ago twenty two percentile, which is phenomenal.
Speaker 3: What are you doing different than others in the highyeld sandbox?
Speaker 4: Well, first of all, thank you for saying that. It's
Speaker 4: really kind of you. We are doing a couple of
Speaker 4: different things. We've designed the product to take advantage of
Speaker 4: many of the theories you've heard me talk about the
Speaker 4: impact passive investing, the strategies that are out there. The
Speaker 4: product is the way we access the high yield market.
Speaker 4: We're using a synthetic exposure all sorts of credit funds
Speaker 4: short the HyG in order to amplify their single security picks.
Speaker 4: We relieve the balance sheet from the banks when they
Speaker 4: do that, so we get the securities lending fees, so
Speaker 4: we pick up out one hundred and fifty basis points
Speaker 4: of excess returns simply by doing that.
Speaker 3: We then apply an.
Speaker 4: Overlay that I've used for the past decade that is
Speaker 4: designed to smooth out credit hedges and just find designed
Speaker 4: to smooth out credit spread widening. The impact of that
Speaker 4: in this year has been fantastic. That's really what accounts
Speaker 4: for our.
Speaker 3: Is it a one offer, is it something you can
Speaker 3: persist over three, five or ten years? We've been using it.
Speaker 4: I've been using this strategy for about ten years. The
Speaker 4: Simplify strategy has been live now. It just hit his
Speaker 4: three year track record, which is what was required to
Speaker 4: get that five star rating, and it's managed to deliver
Speaker 4: in twelve separate tightening and widening cycles. Now for credit
Speaker 4: so we've actually been really fortunate.
Speaker 5: You come out of Teal Macro as well, you know,
Speaker 5: the manage the assets of Peter Teal a few years ago.
Speaker 5: What did you learn there? What did you learn from him?
Speaker 4: Well, you know, Peter is incredibly famous for asking the
Speaker 4: key question, what do you believe that nobody else believes?
Speaker 4: Or what you believe is true that nobody else believes
Speaker 4: is true? Or what do you believe is false that
Speaker 4: everybody else believes is false? And when I met Peter
Speaker 4: several years ago, I introduced him to my ideas around
Speaker 4: the impact of passive investing, and honestly, that I think
Speaker 4: was one of the most important things that he encountered
Speaker 4: his influence, I think the dynamics of how he's taken
Speaker 4: his company's public and how he's behaved.
Speaker 5: When you say passive, do you mean traditional the way
Speaker 5: that retail investors think about passive investing? Five hundred index
Speaker 5: funds two basis points to buy vo.
Speaker 4: Absolutely, So that's really what we're hitting on. Unfortunately, there
Speaker 4: are incredible flaws in the construction and understanding of this.
Speaker 4: I've actually spoken on Bloomberg with Arry Ritholtz about this
Speaker 4: dynamic passive is not passive. The actual definition of passive
Speaker 4: is you never trade.
Speaker 3: You always hold. That means it's impossible to get in.
Speaker 3: It means it's impossible to get out.
Speaker 4: In around twenty sixteen, a very smart individual, Loss Peterson
Speaker 4: at AQR wrote a paper called Sharpening the Arithmetic of
Speaker 4: Active Management, which you noted on index reconstitution that they
Speaker 4: had to trade and therefore that created an opportunity. My
Speaker 4: contribution was to recognize that every time you, as an
Speaker 4: individual investor contributing to your four oh one K, you
Speaker 4: are creating a trading environment. So it turns out that
Speaker 4: passive is not passive at all. It's a systematic, algorithmic
Speaker 4: strategy that simply says, if you give me cash, then buy.
Speaker 3: So translate this into what our listeners and viewers are
Speaker 3: living when they buy a passive fund on a zero
Speaker 3: to one hundred scale, how active is it? Is it
Speaker 3: ten percent active?
Speaker 4: Well, it really depends on what you defind. So the
Speaker 4: minute you're putting that money in, you are one hundred
Speaker 4: percent active. Once you've transitioned in short position, you become passive.
Speaker 4: That in and of itself, though, creates its own dynamics
Speaker 4: because you're not really passive in the classic sense. You
Speaker 4: are hoddling, right. It's the same phenomenon we saw on bitcoin.
Speaker 4: If you're not willing to sell, the next player has
Speaker 4: to pay a higher price. And because what we have
Speaker 4: seen is just an extraordinary inflow into passive strategies, which
Speaker 4: now represent about forty five percent of the market cap
Speaker 4: of the United States, we've actually just seen a continual
Speaker 4: upward pressure in valuation and prices that a lot of us,
Speaker 4: unfortunately think is the up and to the right phenomenon
Speaker 4: in markets.
Speaker 3: And your community across the nation. And this fad day,
Speaker 3: a lot of good voices coming up. Kati Kaminski will
Speaker 3: be with us the absolute best on trend investing of
Speaker 3: the shattering of trends. Right now, as Tim Stenovick mentioned
Speaker 3: that we've got a nice lift to the market off
Speaker 3: a bombshell Switzerland announcement, the United States and China will
Speaker 3: meet and they will speak. Futures up thirty seven points
Speaker 3: right now, we said good morning on YouTube, Tim.
Speaker 5: Does that mean we're all handling our retirement incorrectly? If
Speaker 5: we're thinking about funds that are based on age, based
Speaker 5: on retirement, these target date funds that are mostly passive Unfortunately.
Speaker 4: I think that's correct, and I think that the first
Speaker 4: of all, I want to be very clear, all and
Speaker 4: incorrectly are very broad and subjective terms. Right, it's a
Speaker 4: system that has worked extraordinarily well, but unfortunately has Ponzi characteristics.
Speaker 4: The new entrance into the system are inflating the wealth
Speaker 4: of the existing holders. What we don't know yet and
Speaker 4: unfortunately you mentioned when we're from Peter Teel, the trade
Speaker 4: that gave me notoriety was the Vollmageddon events the XIV.
Speaker 4: What became very clear there was that was a systematic
Speaker 4: algorithmic strategy that had become too large for the market.
Speaker 4: We're seeing similar characteristics in the broader market with the
Speaker 4: S and P today. The way that that manifested itself
Speaker 4: is when a significant outflow occurred a crash.
Speaker 3: Hey, where's the shadow right now? I mean those of
Speaker 3: us of a certain vintage understand we learned how to
Speaker 3: spell portfolio insurance in October of nineteen eighty seven. There
Speaker 3: was a leverage of LTCM in that where's the shadow
Speaker 3: in the system? Now? Is it just simply and I'm
Speaker 3: speaking folks on a physics basis, the mass of the
Speaker 3: passive market that has.
Speaker 4: A huge component to it. So when I did the
Speaker 4: XIV trade the Volmageddon event, I had done the analysis
Speaker 4: that basically suggested that the passive or systematic algorithmic strategies
Speaker 4: had risen to about seventy percent of the daily trading volume.
Speaker 4: If we look at the impact of passive today and
Speaker 4: the broader market, it's very, very similar. Once you factor
Speaker 4: in the way money the way market making is done,
Speaker 4: which is effectively index arbitrage. We're trying to make ETF's work,
Speaker 4: we're trying to keep prices tight.
Speaker 3: All of that trading is tied.
Speaker 4: Around many of the same phenomenon and so you know, unfortunately,
Speaker 4: my work suggests that we're getting closer and closer to
Speaker 4: a point at which it becomes an inevitability rather than
Speaker 4: a probability.
Speaker 3: And would tell I would say, is you set yourself
Speaker 3: up for not a three standard deviation but a four
Speaker 3: or six standard deviation, surprise, some form of shock, and
Speaker 3: that's a trigger. Is it as simple as that there
Speaker 3: will be a trigger point outside our beliefs and certitudes
Speaker 3: that will allow for the magnitude move.
Speaker 4: Will you hit on a really key phase a belief?
Speaker 4: And I would argue that a key component of what
Speaker 4: we're experiencing right now is that belief right. So the
Speaker 4: up unto the right phenomenon encourages people to put money
Speaker 4: in when it's down right now, they're putting it into
Speaker 4: the industries. We saw this very specifically in the events
Speaker 4: coming after April eighth, when the market made its recent low.
Speaker 4: A trigger was hit what's called a threshold trigger within
Speaker 4: many target date funds that forced them to rebalance.
Speaker 3: When they rebalance, what do they do?
Speaker 4: They have to sell bonds by equities, And unfortunately, when
Speaker 4: that coincides with Trump making a speech, President Trump making
Speaker 4: a speech saying it's a good time to buy, it's
Speaker 4: a force Listen.
Speaker 3: Would you get the surveillance cork and it at my mouth?
Speaker 3: So Tim save me. Well, I can't say enough, folks,
Speaker 3: how I agree with mister Green. I'm rebail. It's like
Speaker 3: deaf to go. Mike.
Speaker 5: You have just a fascinating post out from your newsletter
Speaker 5: earlier this week. It talks about President Trump in the
Speaker 5: historic context of other leaders in the past. Franklin Roosevelt.
Speaker 5: You even bring up Roman leaders in there, in the
Speaker 5: context of where we are as a country, where we
Speaker 5: are as perhaps an empire. Where do you see it?
Speaker 5: What do you see this moment? As well?
Speaker 4: I've been talking about this for a long time, and
Speaker 4: as you know, I think all American men think about
Speaker 4: Rome at least five times a day, so.
Speaker 5: We've heard that.
Speaker 4: There's nothing particularly unique about my insights there. Look, we
Speaker 4: often talk about the fall of the Roman Empire. We're
Speaker 4: not an empire. We're a republic, and where we seem
Speaker 4: to sit, unfortunately, is towards the fall of the republic,
Speaker 4: And if anyone really wants to dig into it, I
Speaker 4: would strongly encourage them to read Mike Duncan's book The
Speaker 4: Storm Before the Storm, which is about that transition period
Speaker 4: between the Roman Republic and the Roman Empire. I draw
Speaker 4: analogies to the idea that Trump could be viewed as
Speaker 4: a graucus, could be viewed as the Grocy Brothers, etc.
Speaker 4: As a reformer. Unfortunately, I just think he lacks the
Speaker 4: mental plasticity at the advanced stage that he's at that
Speaker 4: a Franklin Roosevelt had. Franklin Roosevelt was not a communist
Speaker 4: and was not a socialist, and was not a redistributionist
Speaker 4: in his early stage. It was only after he saw
Speaker 4: the effects of the Great Depression in the late nineteen
Speaker 4: twenties early nineteen thirties that he saw a different path
Speaker 4: and he redefined the relationship. Now, I'm not suggesting that
Speaker 4: the answer to this is more government. The answer is
Speaker 4: more effective government, and that is a very hard challenge
Speaker 4: in this current environment.
Speaker 3: I just put it on Twitter, The Storm before the Storm,
Speaker 3: the book by Mike Green Robert T. Caplan with a
Speaker 3: book somewhat equivalent to that written last year off of
Speaker 3: Yale University Press. I'll try to get that out as well.
Speaker 3: My answers watched the what was it like fifteen twenty
Speaker 3: years ago? They had a whole It was like when
Speaker 3: they invented streamings serials and they add a TV show
Speaker 3: called Rome. You know, I don't have to read the book,
Speaker 3: do I can just watch just now.
Speaker 5: You just open chat GPT and ask it whatever you
Speaker 5: want and then it'll do it for you.
Speaker 3: Well, yeah, that's a whole separate story, you know, Mike,
Speaker 3: I think this is really really interesting. I want you
Speaker 3: to fold it over to how people should prosecute something
Speaker 3: as boring as a retirement plan. How do you bring
Speaker 3: this over to the mundane?
Speaker 4: But Tom, we could have an hour long discussion before
Speaker 4: I get it.
Speaker 3: Can we clear the deck here? Are you willing to
Speaker 3: give up newspapers for Mike Green?
Speaker 5: That's the right answer.
Speaker 3: That is the right answer. How do we bring this
Speaker 3: over to we mere mortals trying to decide what percentage
Speaker 3: to be in the market.
Speaker 4: The quick answer is there is no right percentage, right,
Speaker 4: It's going to depend on everyone's individual component. The key
Speaker 4: thing that I would highlight is that when you think
Speaker 4: about investing for retirement, when you think about those, focus
Speaker 4: on what you need, not what your neighbor wants, right,
Speaker 4: And this is a really key component. We tend to
Speaker 4: get ourselves caught up in the fomo type framework. We're
Speaker 4: in an environment in which you can if you're worried
Speaker 4: about inflation, you can buy real yielding tips with a
Speaker 4: positive yield for the first time in over a decade.
Speaker 6: Right.
Speaker 4: That is something that would argue people are ignoring. I
Speaker 4: would broadly suggest that fixed income in a lot of ways,
Speaker 4: because it has what I refer to as indogenous liquidity,
Speaker 4: significant coupon payments, and an ultimate payment of at maturity,
Speaker 4: has very different characteristics than the Ponzi like characteristics associated
Speaker 4: with equities, where you are always getting your value from
Speaker 4: what somebody else pays, and so those are ways that
Speaker 4: you can separate yourselves. They're not immune.
Speaker 5: I have to be clear.
Speaker 4: This is a systemic issue. But they are a better
Speaker 4: way to think about the opportunity.
Speaker 3: So brilliant, Mike Green, thank you so much. She's chief
Speaker 3: strategy to Simplified asset Management.
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
Speaker 1: Applecarplay and Android Otto with the Bloomberg Business app, or
Speaker 1: watch us live on YouTube.
Speaker 3: We continue forward with some huge academics from the London
Speaker 3: Business School, her doctor at Crystal Rondo. The Linz stops
Speaker 3: by when she is in America. She's a Vauntabelle asset
Speaker 3: Management of Europe. You walked in the room and you said,
Speaker 3: I don't talk about it as fed stuff. I want
Speaker 3: to talk about allocation, which is great because I don't
Speaker 3: talk enough about allocation. What's the biggest mistake, given chaos,
Speaker 3: given day to day uncertainty, what's the biggest mistake people
Speaker 3: make an allocation?
Speaker 7: Do you think that they know to be honest? Having
Speaker 7: been an active investment manager for all my Caurier before
Speaker 7: becoming the because just like.
Speaker 3: That in the English, because it wasn't there having been
Speaker 3: an active manager in enjoying losing money.
Speaker 7: And not at all, not at all, actually not at all,
Speaker 7: my friends should still be on your Bloombergh platform. No,
Speaker 7: but very seriously, there's a lot of uncertainty, and what
Speaker 7: it means is there's a lot that we don't know,
Speaker 7: and you need to recognize that and not go for
Speaker 7: extreme allocation. So neither extreme bullish, which nobody is tempted,
Speaker 7: nor extreme verish. That is the number one mistake is
Speaker 7: to actually go on the limb.
Speaker 5: Are we passed a little bit of the chaos, a
Speaker 5: little bit of the uncertainty Given what we found out yesterday,
Speaker 5: a US China meeting will take place this weekend in Switzerland.
Speaker 5: It will center on de escalation.
Speaker 7: No, I don't think we passed the uncertainty. Yeah, morehead,
Speaker 7: I think so. I think it will continue because you know,
Speaker 7: this is not a straight path to a deal, nor
Speaker 7: is it a straight path economically with the political environment,
Speaker 7: so uncertainty is here to stay.
Speaker 5: Breathing a sigh of relief that the conversations are at
Speaker 5: least happening.
Speaker 7: Yes, definitely, definitely for growth and for inflation. Right, the
Speaker 7: one thing that we do know, so let's start with
Speaker 7: what we do know now is everything else equal. If
Speaker 7: you put on tariff, however low they are, but on
Speaker 7: a large scale, you will get lower growth and higher inflation.
Speaker 7: So that is one part we know, and that again
Speaker 7: has implication for Ustelic nation.
Speaker 3: Nine point two five percent of our audience, particularly here
Speaker 3: in America Good Morning, around the world and on YouTube,
Speaker 3: looks at Europe and has basically mentally discarded it for
Speaker 3: I'll say five years or ten years in investment. Is
Speaker 3: there a new Europe?
Speaker 7: I hope I can answer yes, there's Certainly Europe has
Speaker 7: certainly gotten a wake up call. I think the proof
Speaker 7: is in the pudding. Europe has disappointed for quite a
Speaker 7: long time. So what's changing is the fiscal spending. I
Speaker 7: do believe it will happen, indeed in Germany. So that's
Speaker 7: a positive and relative term for growth. But look, some
Speaker 7: of the weakness of Europe has been the inability at
Speaker 7: times to act together and that.
Speaker 3: But then on a micro basis at the company and level,
Speaker 3: are the CEOs thinking differently in whether it's two boards
Speaker 3: in Germany or one board wherever that they have supported
Speaker 3: the board to be. You know, the stereotype is to
Speaker 3: be more anglocentric. Are we are we seeing that now?
Speaker 7: I'm not sure I understood your question.
Speaker 3: I think because you don't want to hear it.
Speaker 8: Yeah, no, no, no, no, no I do.
Speaker 7: But I mean Europe has always been quite looking towards
Speaker 7: the west, right, so Anglo centric if you want to
Speaker 7: go with that.
Speaker 3: But yeah, the stereotype of our global Wall Street audience, yes,
Speaker 3: is there's a there's a locking individual take on CEOs.
Speaker 3: Let's go at Disney at Uber this morning. Tim Uh,
Speaker 3: They're out there, they're going, let's go, let's fix this,
Speaker 3: let's fix our margins. Let's go, let's go, let's go,
Speaker 3: and everybody in years going at a slower speed. Is
Speaker 3: there a change there or is it business as usual? No?
Speaker 7: I think there is a change. I think there is
Speaker 7: a change. Whether it delivers, I don't know. That's why
Speaker 7: I said proof is in the proof is in the pudding.
Speaker 7: Is that you now we now need to go get
Speaker 7: it in Europe in a sense a line?
Speaker 3: You know the other day, fall off my chair, Royal
Speaker 3: Duchess once again looking at a British patrolum talk about dinosaurs.
Speaker 5: What's all as new again?
Speaker 3: You know?
Speaker 5: I wonder to what extent this idea of Europe being
Speaker 5: pushed close together or becoming closer is the result of
Speaker 5: the US in this America First policy? Is that what's
Speaker 5: happening here? The US is saying essentially, okay, America First
Speaker 5: is not America alone. Investors don't necessarily agree with that,
Speaker 5: but it makes Europe say, okay, we have to rely
Speaker 5: on each other more for defense spending, we have to
Speaker 5: become closer together, and we have to unite more. Is
Speaker 5: that what happening?
Speaker 7: I think that's part of it. That definitely part of
Speaker 7: it is just like I mean, that's with everything in life.
Speaker 7: You get adversity and that pulls you together. Right, So
Speaker 7: the adversity. The first thing that brought Europe together was COVID.
Speaker 7: That Ino sense really helped from that perspective in bringing
Speaker 7: the countries to pools it together. And I think, yes,
Speaker 7: there's a reaconing that that they better pull together.
Speaker 5: It didn't happen from a fiscal perspective during COVID that
Speaker 5: was a huge issue. I mean, you saw Europe as
Speaker 5: a whole recover in a more slow way than the
Speaker 5: US did. The US sort of stood out over the
Speaker 5: last three years. Yes, in its quote unquote exceptionalism compared
Speaker 5: to the rest of the world. Is that era behind us?
Speaker 7: No, I think there's I mean, there's a few things
Speaker 7: that are impacting right now. I don't think it's I mean,
Speaker 7: let's say I've been structurally bullish on the US economy.
Speaker 7: I continue to believe it's the strongest economy, but a
Speaker 7: few things are denting or impacting US assets right now.
Speaker 7: The pressure that we're seeing on the dollar, I think
Speaker 7: is a structural downward pressure. Europe has a chance to
Speaker 7: pick itself together by uniting. They see the need and
Speaker 7: that's why I come back to we need to see
Speaker 7: the proof in the pudding. Is it happening and is
Speaker 7: it delivering?
Speaker 3: With us from Vulntable this morning, thrilled with this crystal
Speaker 3: under the land all I've lived and I was in
Speaker 3: Switzerland I was fifteen years old. Magical is the appreciation
Speaker 3: of the Swiss franc. Tell us how Switzerland adapts to
Speaker 3: the new strength of Swiss franc. Will there be a
Speaker 3: different approach among the cantons and among the federal government.
Speaker 7: Well, look, I mean as a Swiss, it's almost like
Speaker 7: you're born with it, with the chocolates and the mountains,
Speaker 7: you're born with a strong Swiss franc. So it's part
Speaker 7: of it. So the SNB, it's the I mean, it's
Speaker 7: a headache for the SNB, for the companies. They've learned
Speaker 7: to be competitive, to be honest. So this this is
Speaker 7: one aspect because it's part of it. Nominally it appreciates
Speaker 7: because inflation is low and for the foreseeable future that's
Speaker 7: still going to be happening. On the real level, you
Speaker 7: see less of an appreciation trend, but you know, in
Speaker 7: the end, nominally is is a lot of what matters.
Speaker 3: You're too, unimputed deflation in Switzerland because of the appreciation.
Speaker 7: Yeah, we could drink, yes we could.
Speaker 3: We could. Apple did a coupon a couple of years
Speaker 3: ago three quarters of a percent for like a zillion year.
Speaker 5: We're all pretty much free.
Speaker 3: Are you seeing travel to Switzerland changing with the trade wars,
Speaker 3: with the terror force?
Speaker 7: Well, I mean I'm not. Let's say, I'm not on
Speaker 7: a line post to see people coming in and out,
Speaker 7: but we do read, including from from esteemed Bloomberg, that yes,
Speaker 7: we do see more, you know, more asks for for Switzerland,
Speaker 7: for people looking to come over, whether it's traveling, whether
Speaker 7: it's relocating. So that's wait for numbers.
Speaker 3: Yeah, rto keeper of the MX. Yeah, it is very
Speaker 3: big on Switzerland. He wants me there on twenty four
Speaker 3: to seven.
Speaker 5: One more question there, see I want to start and
Speaker 5: where we started. It has to do with asked allocation.
Speaker 5: Tom asked about the number one mistake people are making.
Speaker 5: If people are saying, okay, I should go look at
Speaker 5: my portfolio right now, think about its construction. Yes, where
Speaker 5: should people look closely? Is it in the equity side,
Speaker 5: is in the fixed income side? Is in the alternative side?
Speaker 7: I think it's it's across everything. I think you do
Speaker 7: want to be diversified. If you don't know what you
Speaker 7: don't know and how things are going to pan out, again,
Speaker 7: don't lean out of the window. So you do want
Speaker 7: to make sure that you're diversified, that you're sticking to
Speaker 7: what you are trying to achieve. You obviously go for
Speaker 7: stuff that is less sicklical sectors that have all pricing power,
Speaker 7: because if you all things equal, lower grow bigre inflation.
Speaker 7: Infrastructure to me is a segment that stands out right
Speaker 7: less cyclical, has cash flows that are normally indexed to inflation.
Speaker 7: And you want to think about the dollar, and particular
Speaker 7: in the asset classes that have lower volatility. If you're unhedged,
Speaker 7: I'd look at a hedge, to be honest. So these
Speaker 7: other things that are on my mind.
Speaker 3: Thank you, Thank you so much for visiting Crystal Ronde.
Speaker 3: Where this is Vanderbilt Zurich in today with this whole
Speaker 3: new view of Europe.
Speaker 2: This is the Bloomberg Surveillance Podcast.
Speaker 1: Listen live each weekday starting at seven am Eastern on
Speaker 1: Apple Corplay.
Speaker 9: And Android Auto with the Bloomberg Business app.
Speaker 1: You can also listen live on Amazon Alexa from our
Speaker 1: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 3: More than any other guest when she is on, I
Speaker 3: will get emails. Who was that? Who was that? Who's
Speaker 3: she with? With RBC Capital Markets. Francis Donald on the
Speaker 3: economics of the moment of America. Francis into this FED meeting.
Speaker 3: Do we have looking at the dual mandate looking at growth?
Speaker 3: Do you have vectors in place? Is there a Francis
Speaker 3: Donald inflation vector, an unemployment rate vector, a real GDP vector.
Speaker 3: Do they exist?
Speaker 10: I mean, sure, they just look very different than they
Speaker 10: have historically.
Speaker 11: But I got to tell you Tom listening to come
Speaker 11: into this segment, he said, it's FED day, and I
Speaker 11: had to say, oh, yes, it's FED day. Which is
Speaker 11: not because I'm sleeping at the wheel. It's because I
Speaker 11: spent the morning doing things I've never done on FED
Speaker 11: days before, which is scan geographic photos for ships on
Speaker 11: the West coast to see if we're still getting supply
Speaker 11: to come in. I'm looking at some old school pandemic charts,
Speaker 11: open table restaurant reservations. Are we seeing any week to
Speaker 11: week change in the data there? And of course reading
Speaker 11: every headline we can see for insights into are we
Speaker 11: going to see some trade de escalation from China? And
Speaker 11: my sense is that probably the Federal Reserve is doing
Speaker 11: very similar things this morning, and that is because they
Speaker 11: are trying to determine their own vectors for inflation and
Speaker 11: employment and they just don't have enough data or insights,
Speaker 11: just like most economists don't right now to determine.
Speaker 10: The path ahead.
Speaker 11: So extraordinary and certainty heading into this meaning it is
Speaker 11: going to be a fold of course, We're always looking
Speaker 11: for any type of insight from FED share Powell as
Speaker 11: to how they would react to certain situations and what
Speaker 11: they think will happen next. But the data is going
Speaker 11: to leave the Fed, as it always does, and we
Speaker 11: have very limited visibility from traditional data points.
Speaker 5: Right now, I hear you talking about the alternative data
Speaker 5: such as open table reservations, looking at satellite images of
Speaker 5: ships that are coming into port. It sounds like we're
Speaker 5: talking in twenty twenty one one. Save for the China
Speaker 5: comment that you made about potential progress on a trade deal.
Speaker 5: The Federal Reserve has a very limited toolbox when it
Speaker 5: comes to what it can do to achieve its dual mandate.
Speaker 5: How does it navigate a situation of uncertainty such as this, Well.
Speaker 11: It doesn't, or it waits for the data to turn,
Speaker 11: and for that reason, they will by necessity be late.
Speaker 11: I think their issue is going to be a sequencing issue,
Speaker 11: which is that the inflation data is likely.
Speaker 10: To pop much earlier than the labor data.
Speaker 11: And I've been on the show many times to talk
Speaker 11: about how even though we see a very weak economic environment,
Speaker 11: we only have the unemployment rate rising to.
Speaker 10: About four to eight or high fours. Traditionally, that would
Speaker 10: be a very strong labor market.
Speaker 11: That would be something we associate with a boom time,
Speaker 11: not a recessionary type period. And that's because this labor market, well,
Speaker 11: America does not need jobs. America needs workers. It's going
Speaker 11: to keep this labor market very tight. That's very different
Speaker 11: than what we saw in twenty eighteen, the first time
Speaker 11: that we saw tariffs coming through. It's going to make
Speaker 11: the FEDCE job a lot harder because I don't think
Speaker 11: they're going to see a material weakness in traditional indicators
Speaker 11: of unemployment over the course of twenty twenty five, even
Speaker 11: as the economy software.
Speaker 3: So here's the core question. Francis, back at Queen's University,
Speaker 3: I mean, you were fourteen or whatever taking your undergraduate there.
Speaker 3: But Francis, back at Queen's University then, was a six
Speaker 3: percent unemployment rate the same as a six percent unemployment
Speaker 3: rate now? I don't think that the same? Am I wrong?
Speaker 10: One hundred percent?
Speaker 11: And just a little plug here, Queen's University in Canada,
Speaker 11: we call it the Harvard of the North, just so
Speaker 11: you know, just caliber.
Speaker 3: I thought Harvard was a Queen's of the South.
Speaker 11: We'll go with that one too, so that's exactly right.
Speaker 11: The nature of this job market is changing. We have
Speaker 11: the most amount of those over the age of sixty
Speaker 11: five the US has ever seen. Over one in five
Speaker 11: Americans is over the age of sixty five, most amount
Speaker 11: of retirees ever, and so economists.
Speaker 10: Are scratching their head.
Speaker 11: Why are higher rates but also fire rates down and
Speaker 11: quick rates down. This is a job market that is
Speaker 11: acclimating to a demographic bus that's occurring in real time.
Speaker 11: Demographics are traditionally something that you look at when you're
Speaker 11: five or ten year forecast, when you're forced to do
Speaker 11: something that difficult.
Speaker 10: They're not something we take to hear now.
Speaker 11: And this is why when I talk about uncertainty, a
Speaker 11: lot of folks are saying we're going to get more
Speaker 11: certainty on trade in the coming week. But a lot
Speaker 11: of the customers, a lot of the folks that we
Speaker 11: talk to in the United States are also paying very
Speaker 11: close attention to immigration policies that come through and how
Speaker 11: this government is going to support or not support what
Speaker 11: is a very shifting labor dynamic.
Speaker 10: Now.
Speaker 11: Ftter Reserve is going to have to talk about this
Speaker 11: at some point, probably not today, when they're looking at
Speaker 11: something like a high fours unemployment rate, and that's going
Speaker 11: to be enough for them to start cutting.
Speaker 3: Well, you just heard their folks bottle it, because that's
Speaker 3: the discussion of the next eighteen months. I'm sorry when
Speaker 3: I look at the kids having trouble getting jobs, on
Speaker 3: and on and on, this is a new unemployment rate
Speaker 3: where it's not equivalent to our memory of what that
Speaker 3: number is.
Speaker 5: Yeah, I think Tom brings up a good point, which
Speaker 5: is who is having trouble getting jobs right now? And
Speaker 5: given in the context of the president's immigration policy, this
Speaker 5: administration's immigration policy, how are you looking at the job
Speaker 5: market given that we've heard anecdotally challenges from new graduates
Speaker 5: in those folks looking for jobs, versus some emptiness in
Speaker 5: the pipeline when it comes to folks in the trade,
Speaker 5: for example, you.
Speaker 11: Got to go sector bisector more than we have in
Speaker 11: the past. So think about three sectors that have driven
Speaker 11: a lot of job growth. Healthcare, well, there's a skills
Speaker 11: matching issue happening there. Government, we know that's going to
Speaker 11: be declined. That's the one area where you will see
Speaker 11: shedding of activity. And then retail and accommodation that's where
Speaker 11: traditionally you would see what economists called new entrance or
Speaker 11: immigrants being more impactful there. So sector bisector stories are
Speaker 11: going to become incredibly important.
Speaker 10: But underlying the.
Speaker 11: Surface here, a lot of folks will say, well, the
Speaker 11: labor force participation rate is quite low. It's been falling
Speaker 11: since two thousand and one. Could prime age workers in
Speaker 11: the United States twenty five to fifty four. They have
Speaker 11: one of the highest labor forced participation rates we've ever seen.
Speaker 11: So the labor market is very tight. This is very
Speaker 11: different than twenty eighteen. It's even different than twenty twenty two.
Speaker 11: It's going to change a dynamic of this recessionary conversation.
Speaker 11: We don't have a formal recession in our outlook, although
Speaker 11: I really begrudged that recession or no recession call. It's
Speaker 11: still a very problematic outlook for the US. And part
Speaker 11: of that is we think the labor market is actually
Speaker 11: going to in old school terms, stay strong, but it's
Speaker 11: not strong in the traditional ways.
Speaker 10: Tom. That's the problem.
Speaker 11: This is a labor market that we're going to have
Speaker 11: to reassess and measure with different types of instruments than
Speaker 11: we have historically.
Speaker 3: We got to get you out again. So soon soon,
Speaker 3: Francis Donald, thank you so much. I got like eight
Speaker 3: more questions as well with RBC Capital Markets. Francis Donald.
Speaker 2: This is the Bloomberg Surveillance Podcast.
Speaker 1: Listen live each weekday starting at seven am Eastern on
Speaker 1: Apple Corplay.
Speaker 9: And Android Auto with the Bloomberg Business.
Speaker 1: You can also watch us live every weekday on YouTube
Speaker 1: and always on the Bloomberg terminal.
Speaker 3: Which starts Strong, Strong Strong. Vishal Kanjuja joins us now
Speaker 3: from Morgan Stanley had a broad market's fixed in Kim.
Speaker 3: I love the first sentence of your note. Jobs Day
Speaker 3: stole the thunder from the Fed completely. What did we
Speaker 3: learn in the buoyant Jobs Day that adjusts this meeting
Speaker 3: this afternoon.
Speaker 6: Morning, Tom, thanks for having me on completely stole the thunder.
Speaker 6: Hot data is not at all anywhere close to the
Speaker 6: soft data which we've been talking about, you guys have
Speaker 6: been talking about very clearly. As while the FED knows
Speaker 6: this very clearly, I think today the market is going
Speaker 6: to be very clearly looking for a repeat from the
Speaker 6: Fed for their reaction function that they are still focused
Speaker 6: on growth.
Speaker 8: Down sites and they are willing to take.
Speaker 6: Less of a deeper look into the inflation upsides that
Speaker 6: we are talking about.
Speaker 3: Synthesizes with Seth Carpenter's team, Allen Zentner over at Wealth Management,
Speaker 3: and the others. I guess we got a nominal GDP,
Speaker 3: it's actually pretty good because of stagflation, But then do
Speaker 3: you see nominal and real GDP coming out.
Speaker 8: Through the year exactly?
Speaker 6: So I think that is where we think that the
Speaker 6: demand destruction on the back half, and we are talking
Speaker 6: about quite a bit of uncertainty. We've seen it in
Speaker 6: the base report, We've seen it from all the earnings
Speaker 6: that we've seen through the corporations as well. But the
Speaker 6: persistence of uncertainty the time period that we are going
Speaker 6: to sustain here is going to definitely show up with
Speaker 6: that demand destruction on the back half of the year.
Speaker 5: So then what does the FED do if it knows
Speaker 5: demand destruction is coming given its dual mandate.
Speaker 6: I think it has two precedents that it has laid
Speaker 6: out in the past of but it intervenes or comes in.
Speaker 6: One very clearly their dual mandate is at.
Speaker 8: Risk and data shows it they step in.
Speaker 6: Or the second is that the financial market functionality is
Speaker 6: breaking down that they have to intervene none of that
Speaker 6: has happened right now, so they need to be patient,
Speaker 6: look through the data, and they have quite a bit
Speaker 6: in the toolkit to act.
Speaker 5: What do you what's in the toolkit to act?
Speaker 8: Four hundred and fifty basis points? Vase still about if.
Speaker 5: We're in a stackflationary environment, then what do we do?
Speaker 5: What do they do?
Speaker 6: I think, in principle, tariffs are going to be one
Speaker 6: time price increases. Consumers and corporations are going to adjust.
Speaker 6: I know we've already seen that supply and demandshock play
Speaker 6: out in twenty twenty two. This is the opposite of
Speaker 6: that that is happening here.
Speaker 5: He almost said transitory, Tom, but he didn't say transitory.
Speaker 5: You said one time price increases. What makes you confident
Speaker 5: that that will be the case? And I should I
Speaker 5: should look, Actually, I'm going to change my question. I
Speaker 5: don't think we don't do that in the morning. I
Speaker 5: don't think consumers. I don't think consumers understand how inflation
Speaker 5: is measured. I think they understand inflation in the context
Speaker 5: of gas prices going up and then coming back down.
Speaker 5: They'd understand that it's change in price over a period
Speaker 5: of time. They think high prices come down they don't
Speaker 5: come down.
Speaker 8: I think that's what it is this time.
Speaker 6: I think the balance sheets, yes, are very very strong
Speaker 6: in terms of consumer and corporates, but I think the
Speaker 6: moment you start to see margin compression in corporates meaning
Speaker 6: consumers pushing back on services or small business pushing back
Speaker 6: on prices, that's where I think you start to see
Speaker 6: the hit on labor.
Speaker 8: That's when you start to see the demand destruction show up.
Speaker 8: And that's why we have quite high degree of confidence.
Speaker 8: But we've covered our.
Speaker 6: Underweights and credit. We've covered some of our underweights and
Speaker 6: duration during this time, but we are not long. We
Speaker 6: still think that spreads could be widening out as that's
Speaker 6: tax platary freear could go through in the next two months.
Speaker 3: I'm sorry, well, I mean I go back to Mary
Speaker 3: Poppins and the famous bank scene with Dick Van Dyke
Speaker 3: and the tuxedos. We are always to India, but you know,
Speaker 3: I go back to librar or ois. I don't know
Speaker 3: why we got rid of library. I thought it was great.
Speaker 3: Now I got something fancy called so for sof R.
Speaker 3: When you look at sofur swaps, which is what Arid
Speaker 3: Jersey tells me to look at a little bit of
Speaker 3: deterioration the last five days. Is the short term market
Speaker 3: getting out front of the joy and saying at some
Speaker 3: point this becomes difficult.
Speaker 8: It does, absolutely it does. I think we are less focused.
Speaker 6: I think our conviction level with the amount of information
Speaker 6: that we are getting at the moment is much lower
Speaker 6: to call the exact date that these guys can.
Speaker 8: Cut the FEN. But our conviction level increases as we
Speaker 8: go out the next eighteen months.
Speaker 6: And that's why I think our focal point of duration
Speaker 6: is still that three to five year mark.
Speaker 3: So what is full faith and credit ten year ye'd
Speaker 3: do out eighteen months?
Speaker 8: I think it's lower. I think we breached that.
Speaker 3: For me, three point sixty five percent is my recollection
Speaker 3: for the ten year yield? Can you get a nicely
Speaker 3: under four percent?
Speaker 8: Nicely under four percent?
Speaker 6: I think we were four to five percent when we
Speaker 6: wrote our outlooks in November, and we thought that it
Speaker 6: will travel that range, and it did almost travel that entirely.
Speaker 3: The dynamic ASCO forobose one on one on a dynamic basis,
Speaker 3: if I get price up yield down, does that signal
Speaker 3: a good or bad event for our listeners or viewers.
Speaker 6: That means the fixed income has served its dual mandate price,
Speaker 6: total return and negative correlation to risky assets, and it
Speaker 6: will be poised to deliver.
Speaker 5: How much of what you're saying depends on the US
Speaker 5: successfully negotiating trade deals in the next eighteen months.
Speaker 8: Quite a bit of the long end depends on that.
Speaker 6: The twenty and the thirty year we need a sustainable, credible,
Speaker 6: bought into deficit reduction plan, and then that will decide
Speaker 6: the demand and supply of the twenty and thirty year
Speaker 6: part of the market as well. I think that is
Speaker 6: one part of the market that we are nauseous about,
Speaker 6: to be very honest and staying away from on that part.
Speaker 6: Coming back to your question on demand destruction, quite a
Speaker 6: bit depends on the next probably ninety two hundred days,
Speaker 6: maybe this weekend as well.
Speaker 3: Does things get funded. We're going to move on now
Speaker 3: to the airport, the airline catastrophe in America, But does
Speaker 3: infrastructure get funded? Does Morgan Stanley see businesses u usual
Speaker 3: for the issues of megapaper.
Speaker 6: Businesses are getting funded very comfortably throughout this entire April
Speaker 6: volatility that we had seen. The markers that we see
Speaker 6: for liquidity for funding for corporations and healthy balance sheets.
Speaker 6: We're still in the green. Treasuries were getting issued very clearly.
Speaker 6: Concessions we're building up but then getting bought into. Yesterday
Speaker 6: also we had one of them, and then IG Corporate.
Speaker 6: We exceeded the supply marker over subscribe books and deals
Speaker 6: went really well.
Speaker 3: When Tim Cook issues bonds, does he call you? But
Speaker 3: do you get a phone call from Tim Cook?
Speaker 8: Definitely? Our traders are getting the phone call from the healers.
Speaker 3: Thank you so much. Rasha Ken jud with us with
Speaker 3: Morgan Stanley driving all of their fixed gun Learn a
Speaker 3: lot there that was very, very informative.
Speaker 2: This is the Bloomberg Surveillance Podcast.
Speaker 1: Listen live each weekday starting at seven am Eastern on
Speaker 1: Apple Corplay.
Speaker 9: And Android Auto with the Bloomberg Business app.
Speaker 1: You can also listen live on Amazon Alexa from our
Speaker 1: flagship New York station and just say Alexa play Bloomberg
Speaker 1: eleven thirty.
Speaker 3: We're gonna do the newspaper, so I had to shot
Speaker 3: up missus Keane all over it last night, she said.
Speaker 3: Lisa Matteoe nailed it by getting Zandaia front and center
Speaker 3: and then met Gala. Missus Kean agree with you.
Speaker 12: Zandia just was the That's why I wore my full
Speaker 12: white yesterday. But we do hat and everything.
Speaker 13: I mean, who topped it off?
Speaker 11: It was very good.
Speaker 3: Congratulations again to all to Anna Wintour and all at
Speaker 3: the Metropolitan Museum of Art Spectacular event in New York City.
Speaker 3: What do you got this morning?
Speaker 12: Okay, we've heard a lot of stories about the tough
Speaker 12: job market out there, right, but the Wall Street Journal
Speaker 12: has this article saying that high school juniors they're getting
Speaker 12: close to seventy thousand dollars a year job offers. And
Speaker 12: you asked, okay, and what, Well, it's the skilled trades.
Speaker 12: It's companies looking to shop class to find new hires
Speaker 12: because the baby boomers are retiring, so that's the issue.
Speaker 13: So they're looking to this kids. And this kids say they.
Speaker 12: Feel like top athletes like being recruited by you know,
Speaker 12: pro teams, like they feel.
Speaker 3: Like Rockstar's a huge deal.
Speaker 13: It's a huge deal.
Speaker 12: And the high schooler noticing because they're investing more money
Speaker 12: into their shop classes, they're teaming up with companies to
Speaker 12: offer you know, to come in the classroom and talk
Speaker 12: with the kids too, offer them part time work credits.
Speaker 3: I grew up in a house hugely supportive. It was
Speaker 3: called vocational or something I can't remember back a million
Speaker 3: years ago. But Ian Why yesterday with Huntington National Bank
Speaker 3: Shers was brilliant about how the younger cohort there's no
Speaker 3: skilled workers, and they're going to really incentivize it quickly. Right,
Speaker 3: they don't have a choice.
Speaker 12: Right, they're going to either how much seventy seventy thousand starting,
Speaker 12: but you have consolation energy, which we all know they
Speaker 12: offer high school graduates without four year degrees as much
Speaker 12: as six figures started.
Speaker 5: I love this. I mean, I think this is also
Speaker 5: something that's lost in the conversation about immigration, when you
Speaker 5: think about the skilled trades and who's coming in and
Speaker 5: doing these jobs. We haven't had a pipeline here in
Speaker 5: the US to these careers because so much emphasis has
Speaker 5: been placed over the past couple of generations on college.
Speaker 5: I think we're starting to have that conversation now.
Speaker 3: I love it.
Speaker 12: That's an amazing point I think about that one. Okay,
Speaker 12: So men is Mark Zuckerberg. He's been making the Rounds podcast, interviews, conferences,
Speaker 12: and there seems to be a theme when he looks
Speaker 12: into the future.
Speaker 13: So he says that most of your friends will be AI.
Speaker 5: Hey, come on, okay, speak for yourself, Mark, most of
Speaker 5: your friends will be AI.
Speaker 13: But you also have AI therapists and AI business agents.
Speaker 13: So we're gonna be talking to real people less.
Speaker 3: I know.
Speaker 5: Okay, I'm gonna be the contrarian here. I've been using
Speaker 5: dual Lingo a lot, which is the language learning. There's
Speaker 5: an AI agent in there, Lily, and you can practice
Speaker 5: conversation with her, and it makes what I'm doing Spanish
Speaker 5: with my son, he thinks it's he and and because
Speaker 5: he's only six, he thinks that Lily is a real person,
Speaker 5: which is weird to me.
Speaker 13: That's what the next generation is gonna think.
Speaker 3: I think, so, I mean music AI. But the idea
Speaker 3: that AI is going to replace a business agent, yes, nuts.
Speaker 13: Next, it can source all this information and it knows
Speaker 13: you so well.
Speaker 8: Yeah, okay.
Speaker 12: So, after seventeen years underground, the annual Cicada Cousins says
Speaker 12: Brood fourteen, they are ready to emerge. Yes, these are
Speaker 12: the cicadas. The Boston Globe says. They started making their
Speaker 12: way out of the ground in April from down South.
Speaker 12: They've started coming out in Massachusetts, Cape Cod, Plymouth County.
Speaker 12: A few fun facts if you didn't know about this specific.
Speaker 13: Group of cicadas.
Speaker 12: They come out in the thousands, right, They come out
Speaker 12: in the evening after dark. They don't sting or bite,
Speaker 12: so you don't have to be scared of them.
Speaker 13: Even though they look a little bit scary.
Speaker 10: They do uh.
Speaker 13: They're not dangerous to plants and trees. And they die
Speaker 13: about three to four weeks after they come out of
Speaker 13: the ground.
Speaker 5: Every so I thought this, I feel like we hear
Speaker 5: this story every three or four year.
Speaker 13: Yes, well those are the annual ones.
Speaker 12: These are the cousins, the brude ex that comes after
Speaker 12: like about seventeen fifteen to seventeen years.
Speaker 8: So they emerge.
Speaker 12: So they've been underground like.
Speaker 3: And they're gonna be like in Central Park.
Speaker 13: Well eventually, yes, but they're in mass Chusetts right now.
Speaker 13: They've been down south. Now they're mass Chusetts. So yeah,
Speaker 13: they'll start to make and that at nighttime they'll start
Speaker 13: to like come out this.
Speaker 5: Summer in New York. It sounds like, okay, you've been
Speaker 5: watched Wild Kingdom.
Speaker 3: With you look at the videos.
Speaker 13: Oh no, there's a katas they're they're not, Oh the
Speaker 13: Curtus looking things.
Speaker 3: Listen Mateo. Thank you so much for the newspapers as well.
Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify,
Speaker 1: and anywhere else you get your podcasts. Listen live each weekday,
Speaker 1: seven to ten am Eastern on Bloomberg dot com, the
Speaker 1: iHeartRadio app tune In, and the Bloomberg Business app. You
Speaker 1: can also watch us live every weekday on YouTube and
Speaker 1: always on the Bloomberg terminal