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Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Ferroll and Lisa A. Brawmowitz Jaily. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. To find Bloomberg Surveillance on Apple podcast, SoundCloud,

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

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Speaker 1: Right now, an incredibly important conversation. Gregory Peters joins us.

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Speaker 1: He's co chief investment officer in PJEM fixed Income, but

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Speaker 1: someone with decades of perspective from Morgan Standling to PGIM

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Speaker 1: of the ups and downs of the Golden age of

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Speaker 1: fixed income. Greg thank you for joining as a blended idea.

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Speaker 1: We're down twelve percent on price on bonds. You write

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Speaker 1: of a golden age and saying it's over. Can we

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Speaker 1: get a hail married for the bond market like we

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Speaker 1: did from out to the is an our disinflation four

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Speaker 1: in five years later where it's big price up, yield down.

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Speaker 1: So I still think we have a little ways to

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Speaker 1: go on this one, honestly, as there's all this talk

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Speaker 1: around uh peak inflation and peak concisness, and I think

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Speaker 1: those two terms are being conflated in here, as you

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Speaker 1: can have this peak inflation uh and then not go

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Speaker 1: peak hawcagness. And what I mean by that is that

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Speaker 1: there's all this sensitivity in the market where inflation is

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Speaker 1: going to ultimately show signs of coming down, and that

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Speaker 1: means the bullmarket begins for bonds, which means the FED

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Speaker 1: doesn't have to tighten as much. But I think it's missing.

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Speaker 1: There is the persistent nature of inflation that might actually

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Speaker 1: cause the BED to actually hike even more than participate. Greg.

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Speaker 1: Let's stick into that a little bit. In other words,

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Speaker 1: you think that people are underestimating how sticky this inflation

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Speaker 1: is and how committed the FED really is to not

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Speaker 1: getting the inflation rate down to three percent as that

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Speaker 1: imposed and says, but down to two in short order.

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Speaker 1: So I'm sure where inflation will land ultimately. I think

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Speaker 1: that's the challenge, that's the difficulty. But I'm pretty sure

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Speaker 1: that the FED is extremely focused on inflation, and I

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Speaker 1: think that's what investors have missed this entire period, which

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Speaker 1: this is a votre asked type of FED or they

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Speaker 1: are clearly focused on getting inflation down and they are

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Speaker 1: not going to throw away forty years of credibility, which

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Speaker 1: we know actually matters a lot, or the medium belong term.

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Speaker 1: They're not going to throw that credibility away just because, um,

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Speaker 1: you know the markets are telling me so, Greg, just

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Speaker 1: to tell you that a step further, does that mean

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Speaker 1: this FED won't tell to write anything to financial conditions

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Speaker 1: anytime soon? And what does that mean for how you

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Speaker 1: put money to work? Well? So, I think someone perversely

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Speaker 1: this the financial condition picture has been much stronger than

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Speaker 1: I think the FED anticipated. So so um, I think

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Speaker 1: financial conditions have to worsen. I think that's the natural

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Speaker 1: path here. Yes, you've had really big moves thus far.

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Speaker 1: I understand that there's more value in the market today

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Speaker 1: than there was you know, six months ago. Absolutely, But

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Speaker 1: for example, we just had this internal call that we

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Speaker 1: conducted with over three hundred of our investment professionals, and

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Speaker 1: seventy six of those folks believe that will have a

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Speaker 1: hard landing. And in Europe it's almost believe there's a

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Speaker 1: hard landing. So the point being that there's still a

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Speaker 1: lot of risk out there. Um on this hard landing camp,

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Speaker 1: I just want to pick up on that line, correg

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Speaker 1: financial conditions have to worsen. Can you give me an

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Speaker 1: idea of what that would look like and when to

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Speaker 1: look for it. Also, I think it's the national items

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Speaker 1: of stocks. I do believe risk assets have to cheatmen

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Speaker 1: up more. I know that focusing on earnings that should

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Speaker 1: be the focus. But we're coming off this margin type

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Speaker 1: of environment, all this operating leverage embedded in these capital structures. Uh,

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Speaker 1: that cuts both ways. So if you actually see a

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Speaker 1: slowdown in revenues, that's going to have, you know, the

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Speaker 1: opposite benefit that we saw coming out of the pandemic.

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Speaker 1: So I worry about risk assets, both equities and credit

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Speaker 1: in here. I think there's more room to go. It's

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Speaker 1: such a high probability I think at least high probability

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Speaker 1: of a hard landing. I'm not convinced we're price for

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Speaker 1: that um in a scenario based web. So how much

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Speaker 1: cash you carry in at the moment? Correct? Just give

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Speaker 1: me a picture of what you've been doing, what your

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Speaker 1: picture looks like coming into the end of the shire. Yeah,

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Speaker 1: So for us, it's not so much about cash. We

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Speaker 1: have increased or cash levels on the margin. Uh, It's

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Speaker 1: more around the liquidity in the market, which is something

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Speaker 1: that you could be focused on as well. So you're

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Speaker 1: seeing liquidity and fixed income, which is always fraud, but

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Speaker 1: you know, much more kind of volatile uh equity picture.

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Speaker 1: So we're getting more defensively. Having getting more defensive, we

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Speaker 1: have taken our long duration investment great corporates down, where

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Speaker 1: we continue to move our high old exposure down. We've

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Speaker 1: been decidlate kind of muted and underweight on emerging markets.

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Speaker 1: And where are quote unquote hiding out in a short

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Speaker 1: duration spread product UH and UH and structure products. But

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Speaker 1: I think the the ultimate trade here, the sequencing of

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Speaker 1: the trade is long duration. Before your long discusses UH

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Speaker 1: and so the volatility makes it really difficult to pick

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Speaker 1: your points. But to me, UH, the the duration trade

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Speaker 1: is going to be the best trade here. Fascinating stuff.

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Speaker 1: As a white buddy, thanks for being with this. Gret

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Speaker 1: paitis that of page in fixed incompany right on. This

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Speaker 1: is an important conversation. She's head of equity's capital market

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Speaker 1: advisory at bny Melon Wealth Management. Alicia Levine always on

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Speaker 1: the edge of enthusiasm and I'm sorry, Alicia buried in

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Speaker 1: your note is the outlier what if which is a

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Speaker 1: multiple for the market out of another time and place

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Speaker 1: can you actually multiple a gloom twelve times multiple on

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Speaker 1: the market? Uh, that would be our extreme left tail risk,

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Speaker 1: but it is out there as a very low risk

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Speaker 1: scenario when it goes something like this. And it's similar

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Speaker 1: to the conversation you've been having this morning, which is

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Speaker 1: that you know, earnings for the second quarter are expected

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Speaker 1: to be up about four and a half percent, but

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Speaker 1: for the second half of the year, earnings are still

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Speaker 1: up on expectations ten and a half percent the second half,

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Speaker 1: which I think it's probably not believable. We expect margins

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Speaker 1: must come down here, and the way that stimulus, you know,

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Speaker 1: increase the revenue side, it also increase the operating margin side,

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Speaker 1: where a record record margins that has to come down.

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Speaker 1: So as earnings come down, the multiple will start looking higher.

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Speaker 1: If the market just stays where it is, and in

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Speaker 1: a recessionary scenario, you could be down on earnings ten

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Speaker 1: to thirty and with that the multiple goes with it.

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Speaker 1: So I would say an average recession multiple is fourteen

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Speaker 1: times whatever those new earnings are. Expect it to come

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Speaker 1: down seven to ten percent from here, and then you

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Speaker 1: put the average recession fourteen times, you're about thirty four

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Speaker 1: hundred about as a first stop before we can think

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Speaker 1: about moving higher here, So we're in the church. I

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Speaker 1: think the rally in the last week or so is

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Speaker 1: an expectation that that PC data that we're getting on

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Speaker 1: Thursday is going to show some peak inflation. But once

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Speaker 1: we've rallied six or seven or even ten percent into it,

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Speaker 1: then where do you go? Even if it is slightly peaky? Alicia,

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Speaker 1: that scenario you just painted it, is that just a

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Speaker 1: barish scenario? Where is that your base case? That is

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Speaker 1: not our base case? That is a that is that

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Speaker 1: is a bearish scenario, But you have to start thinking about, well,

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Speaker 1: if the worst case happens, where does it go. We

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Speaker 1: actually think there's a chance of recession in the next

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Speaker 1: twelve months, So there's that bumpy that bumpy landing that

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Speaker 1: really a soft one, but a bumpy landing about fift

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Speaker 1: recession on the other side of that. But we do

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Speaker 1: think the recession will be mild, meaning the job market

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Speaker 1: is so strong, an activity is pretty strong in the economy.

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Speaker 1: We don't think we'll see anything deeper. The wild card,

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Speaker 1: of course, is if there's some kind of contagion in

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Speaker 1: financial markets. So if we get if we get a

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Speaker 1: market dislocation event, of course that could make it worse,

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Speaker 1: but right now we're seeing this as a slowdown, an

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Speaker 1: earning slow down, a mild recession, and then thing we

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Speaker 1: can build out of here. But I agree with your

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Speaker 1: previous guests that that tightening financial conditions is part of

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Speaker 1: the Fed's solution to the inflation problem, which means, of

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Speaker 1: course the market will go lower as part of the plan.

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Speaker 1: So which equities do you see is probably bearing the

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Speaker 1: brunt of the pain, And I'm thinking in particular of

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Speaker 1: Goldman's call and retailers that are facing perhaps extreme margin

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Speaker 1: pressure in the face of inventories and other factors that

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Speaker 1: are much more volatile. Look on the consumption side. On

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Speaker 1: the consumer side, it's all about the inventory to sales ratio.

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Speaker 1: If you think sales are moving lower, and then we

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Speaker 1: know the inventory levels are up thirty to fifty percent,

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Speaker 1: so the margins are going to come down pretty quickly

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Speaker 1: and it will hit earnings pretty quickly. So I would

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Speaker 1: say that's pretty much ground zero too for where we

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Speaker 1: see earnings revisions. Right here on that discretionary side, the

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Speaker 1: stocks are acting like if you look at the staples

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Speaker 1: versus versus discretionary. Uh, you can see the vast out

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Speaker 1: performance on the staples side, so that where you should

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Speaker 1: see the multiple compression and the earnest compression first, and

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Speaker 1: you'll see it in the second quarter earnings as well. Alicia,

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Speaker 1: have we already reached the point at which it's time

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Speaker 1: to start selling out of the energy positions? The idea

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Speaker 1: that we've already seen that wager kind of roll over

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Speaker 1: and now people are more worried about recession and lack

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Speaker 1: of demand and so to will the stocks reflect that?

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Speaker 1: So that's a great question. I mean, it's something we

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Speaker 1: have to think about. We are bullish on energy stocks

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Speaker 1: with w t I staying above ninety, so on a

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Speaker 1: technical level, over means the energy stocks should probably still

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Speaker 1: work here. We do think there's a structural issue. There's

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Speaker 1: some cyclical component in the in the movement on the

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Speaker 1: energy sector, but it's more structural and as you've pointed out,

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Speaker 1: energies managed to move this high with China with one

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Speaker 1: third of Chinese lockdown. So to the extent that there's

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Speaker 1: any any demand from China coming out of a COVID

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Speaker 1: lockdown situation, it should help support energy races and therefore

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Speaker 1: the stuck. You're probably not going to get that parabolic move.

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Speaker 1: You know, we always talk about how parabolas don't make

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Speaker 1: great technical charts, but we think it's too early to

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Speaker 1: sell out here, Alicia, Thank you now. An important conversation

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Speaker 1: and a brief for all of Bloomberg Surveillance by James

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Speaker 1: Travidas to say he is Vice Chairman of Global Affairs

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Speaker 1: at Carlisle Group. Barely touches upon his public service to

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Speaker 1: the United States Navy and America. The effort to risk

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Speaker 1: it all is out each chapter important on admirals that

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Speaker 1: had courage. Admiral Strevidas, thank you someone for joining us

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Speaker 1: this morning. The Turkey Sweden relationship is extraordinary. It goes

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Speaker 1: back to seventeen thirty. The Great Northern War was not

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Speaker 1: the Toronto maple Leafs in the Montreal Canadians. It was

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Speaker 1: Sweden and Turkey against Russia. And once again they're trying

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Speaker 1: to recalibrate that relation. What will be the price to

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Speaker 1: get Mr Aritawan to allow Sweden and neighboring Finland to

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Speaker 1: be part of NATO. Well, first and foremost um, this

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Speaker 1: is a win for NATO, a huge one to bring

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Speaker 1: those two high tech militaries very capable. They deployed troops

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Speaker 1: under my command to Afghanistan. I know these military as well.

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Speaker 1: They'll be very welcome and very capable in NATO. In

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Speaker 1: terms of the price, what we're seeing as President Urdawan

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Speaker 1: Uh negotiating, if you will. He wants to squeeze two

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Speaker 1: principal concessions out. He wants more attention paid to the

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Speaker 1: Kurdish issues. He feels there's UH some level of Kurdish

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Speaker 1: activity in Sweden in particular, he wants a cap placed

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Speaker 1: on that. And then secondly, at a larger scale, Tom

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Speaker 1: he wants more high tech military capability in the hands

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Speaker 1: of the Turks um export controls lifted on. Some of

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Speaker 1: the system gets very technical very quickly. But I think

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Speaker 1: bottom line, these are both points that can be negotiated.

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Speaker 1: I think we will see Sweden in Finland in the

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Speaker 1: Alliance by the fall the bus risks it's nineteen miles

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Speaker 1: maybe it's two or three miles wide at the absolute maximum.

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Speaker 1: When you see it, folks, it's shockingly narrow. How does

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Speaker 1: the submarine go up that canal very carefully? And UH

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Speaker 1: on the surface would be the two answers. And at

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Speaker 1: the end of the day. Turkey's control over that very

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Speaker 1: narrow straight It is important part of the functionality of

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Speaker 1: NATO in the Black Sea and tom as you know,

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Speaker 1: and we were just talking about getting grain out of

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Speaker 1: Odessa in Ukraine is going to be critical to global

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Speaker 1: food security. We're gonna have to open that either uh

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Speaker 1: with negotiations with Russia, which is blockading it, or put

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Speaker 1: some level of escort system in place, much like we

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Speaker 1: did at oil tankers in the nineteen So the Bossphorus

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Speaker 1: will be more of a conversation I think in the

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Speaker 1: weeks and months to come and Admiral Steids. This is

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Speaker 1: all about NATO's position versus Russia, once thought as not

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Speaker 1: necessarily an adversary, but that's obviously changing. I know my

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Speaker 1: it comes to this NATO meeting because I'm completely focused

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Speaker 1: on what they talk about with China. This idea of

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Speaker 1: potentially labeling China a systemic challenge. How big of a

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Speaker 1: shift is this and how much muscle is there behind

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Speaker 1: huge shift in the sense that if you go back

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Speaker 1: to the previous strategic concept came out in when I

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Speaker 1: was Supreme Allied Commander in China, didn't appear. Cyber barely appeared.

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Speaker 1: Russia was postured at that point as a potential UH

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Speaker 1: nation that NATO could work with. That's all changed, and

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Speaker 1: Russias will be the top headline threat. UM. China is

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Speaker 1: being categorized as, as you said, a systemic ch olenge UM,

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Speaker 1: but significantly going to be four observer nations from the

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Speaker 1: Pacific at that Madrid summit. That would be Japan, South Korea, Australia,

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Speaker 1: New Zealand. UM. That is very significant to see them

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Speaker 1: coming to Madrid. It speaks to NATO's concerns about China. Well,

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Speaker 1: you know, but when you talk about Russia being the

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Speaker 1: number one threat, they're perceived as the aggressor. So it's

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Speaker 1: a little bit less risky to do so considering that

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Speaker 1: the conflict is already very much in full force. How

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Speaker 1: much are we looking at an aggressive position versus China

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Speaker 1: poking the bear in a way it's going to prompt

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Speaker 1: some sort of response versus just getting together the allies

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Speaker 1: with some sort of plan. How big is the distinction? Um?

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Speaker 1: The distinction is enormous at this point, and i'd categorize

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Speaker 1: at Lisa as with Russia. It's in many ways it's tactical.

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Speaker 1: It's very focused on the Ukraine situation. We're going to

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Speaker 1: get to an outcome there Um and I think NATO

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Speaker 1: is is standing together very strong, like that's why the

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Speaker 1: updraft you just heard from the Secretary General from forty

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Speaker 1: thousand in the ready force to three hundred thousand. That's

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Speaker 1: about Russia. We're not going to have land forces engaged

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Speaker 1: with China at any point. With China, it's a strategic

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Speaker 1: set of challenges, including territoriality in the South China Sea,

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Speaker 1: I think will be a significant one for NATO. But

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Speaker 1: at the end of the day, the philosophy with China

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Speaker 1: is going to be confront China where you must South China,

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Speaker 1: see human rights, but cooperate where you can. So it's

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Speaker 1: a very different field between the two, the two nations

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Speaker 1: of Russia and China. Always wonderful to hear from USA

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Speaker 1: as Alwise, that was James. The three is that of

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Speaker 1: the group. I think institutions need to be very prudent,

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Speaker 1: focusing on liquidity, dry powder. It's a time to protect capital,

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Speaker 1: not to shoot the lights out to some great return.

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Speaker 1: Right now, we're in Um, you know, I do think

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Speaker 1: we're going into her session, and that's a totally different playbook.

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Speaker 1: Paula Well, she is the giant of Bowden up in a,

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Speaker 1: Maine and she has moved to Rockefeller University chief Investment

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Speaker 1: Officer after early years at Yale University under the late

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Speaker 1: great Mr Swinson. David Rubinstein in conversation with Paula, this

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Speaker 1: is a really really important conversation for endowment and institutional

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Speaker 1: well set. David. This is a woman with a trek

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Speaker 1: record second to none in investment management. Trace the trail

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Speaker 1: from Yale to the stunning brilliance at Bowden and now

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Speaker 1: to the challenges of Rockefeller University. Paula was trained as

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Speaker 1: an art conservator, and she basically was an art conservation

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Speaker 1: She decided to go to Yale Business School Yale School

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Speaker 1: of Management, and while there she did an internship for

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Speaker 1: David Swinson, which running the Yale Endowment. She was real

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Speaker 1: he liked by him. She helped write his outstanding book

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Speaker 1: on portfolio management, and then she got a job at

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Speaker 1: Bowden where she managed the endowment. And at Bowden the

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Speaker 1: last ten years there she outperformed the IVY League in

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Speaker 1: every single um category in terms of return of every

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Speaker 1: other IVY League manager including David Swenson UM and she

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Speaker 1: did a spectacular job in the twenty years she was

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Speaker 1: at at Bowden and Unbowden, her chief the chairman of

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Speaker 1: her investment committee was Stan Drucca Miller, So she's been

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Speaker 1: a kind of protege of both David Swenson and Stan

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Speaker 1: Drucon Miller. What's interesting here is the backdrop is the

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Speaker 1: worst bond market that you and I have ever seen.

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Speaker 1: It's been one of my missions of the last ninety

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Speaker 1: days to go hello everyone down twelve percent, maybe down

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Speaker 1: eighteen percent. How do people like her and how was

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Speaker 1: she at Rockefell University adapting to yield up price down? Well,

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Speaker 1: she's very cautious. Her view is we're probably heading into recession,

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Speaker 1: and her view is she don't try to uh knock

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Speaker 1: out the lights by going for super returns and getting

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Speaker 1: the high flying tech kind of companies. That's not what

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Speaker 1: she does. She's protecting her downside. And I think she's

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Speaker 1: a very cautious investor. Remember, over the last ten years

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Speaker 1: she outperformed every single Ivy League endowment and last year

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Speaker 1: alone before she left Bowden, she had an intern rated

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Speaker 1: return of over fift for for the last years she

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Speaker 1: was managing Boden's endowment. So she's quite compressive, and Rockefeller

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Speaker 1: has done very well to get her to be the

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Speaker 1: chief investment officer. David. One of the big distinctions for

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Speaker 1: endowments where people have been seeing out performance has been

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Speaker 1: their use of private markets, their use of alternative capital.

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Speaker 1: How has she folded that into the call of a

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Speaker 1: traditional sixty forty to get that kind of internal rate

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Speaker 1: of return? Well, of course, the Swinson approach or so

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Speaker 1: called portfolio approach, is to use a lot of private investments,

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Speaker 1: and she did that as well. Uh. The trick she

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Speaker 1: had was that getting into these best funds because Bowden

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Speaker 1: wasn't as famous as some of the organizations or universities,

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Speaker 1: and she tried to talk her way into some of

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Speaker 1: the best funds. Inevitably, the marks will come down for

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Speaker 1: some of the venture funds, and probably therefore she and

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Speaker 1: some of the other Ivy League endownmets won't have as

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Speaker 1: good a return UH this year as they had last year.

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Speaker 1: On the other hand, her returns are so good it's

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Speaker 1: not likely to go down all that much. In my view,

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Speaker 1: how much is she actively trading into a time of

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Speaker 1: such uncertainty versus having a long term view post recession

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Speaker 1: that she sees and sort of sticking to her guns

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Speaker 1: on it. Um My view is that she doesn't think

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Speaker 1: she should try to knock out the lights by going

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Speaker 1: for things at the absolute bottom of the market. She's

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Speaker 1: very cautious conserving some cash. Um. She's in some very

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Speaker 1: good funds now. But now she's remaking the Rockefeller portfolio

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Speaker 1: because she inherited it from somebody else but who was

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Speaker 1: very good as well. But she's remaking the portfolio into

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Speaker 1: something that is more comfortable for her. Tell us about

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Speaker 1: Rockefell University, this is not the normal school. I think

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Speaker 1: of David Baltimore and my mute and what he did

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Speaker 1: with m RNA in virology onto the miracle of what

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Speaker 1: Fiser and Moderna did as well. It's not is it?

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Speaker 1: It's not Duke is it. They don't have a basketball team,

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Speaker 1: do they. I don't think Rockefeller has a basketball team

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Speaker 1: that I know of. But it's in New York City

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Speaker 1: on the East Side. It basically is an organization that

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Speaker 1: does medical research and health related research research right and

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Speaker 1: it's a high, highly intensive place. A lot of Nobel

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Speaker 1: Prize winners have been there and are there. Um. It's

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Speaker 1: a highly specialized organization, and it depends to some extent

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Speaker 1: on its endowment because the Rockefeller family is not now

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Speaker 1: putting in a lot of more money. So the endowment's

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Speaker 1: very important to that organization. David, Given the fact that

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Speaker 1: you work in the private markets and you talk to

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Speaker 1: these investors all the time, perhaps, uh, you know, big

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Speaker 1: and small, how much do you get the sense that

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Speaker 1: they are following in the same kind of path as

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Speaker 1: as what we heard just now. Well, everyone is recognizing

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Speaker 1: that the market is down at whether it's a bear

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Speaker 1: market or recession or whatever you wanna call it, it's

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Speaker 1: obviously down from from the peaks, and people are debating

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Speaker 1: how much longer it's going to be down before we

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Speaker 1: goes back up. People who are very cautious are basically

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Speaker 1: not trying to to uh set records right now. They're

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Speaker 1: kind of seeing where the market is going. But there

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Speaker 1: are some people who see there are great values in

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Speaker 1: the market, and they're so called value investors are now

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Speaker 1: seeing that we're touching near the bottom in their view,

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Speaker 1: and they're going back into the market. So I don't

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Speaker 1: really think the market is likely to go down that

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Speaker 1: much further from where we are, and I think that

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Speaker 1: there's enough cash on the sidelines to go back into

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Speaker 1: the market and keep the prices of some of these

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Speaker 1: stocks at reasonable levels. But we're we're a long way

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Speaker 1: away from being out of the woods in my view.

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Speaker 1: David Reubintson, thank you so much for joining us, and

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Speaker 1: of course this is an important conversation critical for anyone

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Speaker 1: with an institutional Wall Street in the endowment world and

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Speaker 1: Bloomberg Wealth look for that. This is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live weekdays from seven to

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Speaker 1: ten am Eastern on Bloomberg Radio and Bloomberg Television each

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Speaker 1: day from six to nine am for insight from the

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Speaker 1: best in economics, finance, investment, and international relations. And subscribe

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Speaker 1: to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course on the terminal. I'm Tom Keane and

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Speaker 1: this is Bloomberg