WEBVTT - Stocks Slip on Trade Concerns

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<v Speaker 1>Welcome to the Bloomberg Penl Podcast. I'm Paul swing you

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<v Speaker 1>along with my co host Lisa Brahma Waits. Each day

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<v Speaker 1>we bring you the most noteworthy and useful interviews for

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<v Speaker 1>you and your money. Whether at the grocery store or

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<v Speaker 1>the trading floor. Find a Bloomberg Penl podcast on Apple

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<v Speaker 1>podcast or wherever you listen to podcasts, as well as

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<v Speaker 1>at Bloomberg dot com. One of the biggest consensus trades

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<v Speaker 1>heading into next year is betting on reflation of steepening

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<v Speaker 1>in the yield curve. This concept of perhaps better than

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<v Speaker 1>expected earnings coming out of companies that have pretty weak

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<v Speaker 1>comps to to beat. Basically joining us now is Ben

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<v Speaker 1>Emmon's Medley Global Advisors Global macro Strategy, and Ben, I'm

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<v Speaker 1>looking right now at what might be the initial phases.

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<v Speaker 1>I don't want to see the death of their inflation trade,

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<v Speaker 1>but the death of the inflation trade. You're seeing the

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<v Speaker 1>yield curve continue to flatten, and you're seeing a measure

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<v Speaker 1>of forward inflation five year five year up break even

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<v Speaker 1>rates dropped near their lowest levels since two sixteen. What

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<v Speaker 1>do you make of that? I can only say thanks

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<v Speaker 1>for much for having us Um, well, there's obviously uncertainty

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<v Speaker 1>has creeped in since the speech from Trump in New

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<v Speaker 1>York last week when he started to voice his word

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<v Speaker 1>about substantial rising tears as the deal doesn't happen. So

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<v Speaker 1>I think the bond market listened to that closely and

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<v Speaker 1>saw like, okay, you know, there's always a risk that

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<v Speaker 1>there will be no deal or will be delayed, and

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<v Speaker 1>then people are looking at these December fifteen tears as

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<v Speaker 1>the first one of the substantial rise. I think this

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<v Speaker 1>is what's in the market's mind right now, that that

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<v Speaker 1>risk isn't totally abated yet, right. You know, the real

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<v Speaker 1>reflationary trades you spoke about that happened in sort of

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<v Speaker 1>mid October was only idea that the tears would be

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<v Speaker 1>de escalated. So that's now been taken a little bit back.

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<v Speaker 1>At least the market seems to be cautious that that

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<v Speaker 1>that that the escalation may not happen so quickly. So

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<v Speaker 1>therefore I think this is why the YUK flattened. In

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<v Speaker 1>addition to that, what we have had in the meantime

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<v Speaker 1>is really soft inflation data, right, whether you look at

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<v Speaker 1>PPI data for example aland Germany today or import price

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<v Speaker 1>in next last week in the US all shows very

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<v Speaker 1>global disciplationary pressure from the trade wars. I think that

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<v Speaker 1>too presses down on the UK whoy I get this flattening. So, Ben,

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<v Speaker 1>if we do get a Phase one type of deal

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<v Speaker 1>on schedule as we head into would you want to

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<v Speaker 1>be you know, more exposure to the US or maybe

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<v Speaker 1>have a little bit more of a global exposure. How

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<v Speaker 1>do you view that? Yeah, I'm definitely on that idea, Paul,

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<v Speaker 1>because you know, if you look at the performance, then yes,

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<v Speaker 1>the US has outperformed this mostly this entire time in

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<v Speaker 1>the trade war. And the areas that have been effected

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<v Speaker 1>most by the trade war are an, Asia, Pacific in Europe,

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<v Speaker 1>and so there is of course a valuation difference there

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<v Speaker 1>that that you would presume that if the Phase one

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<v Speaker 1>deal happens and as some confidence coming back that trade

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<v Speaker 1>in particularly global trade, which seems to be pretty depressed

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<v Speaker 1>at this point. Take for example, the export import data

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<v Speaker 1>from Japan overnight is a good good indicator of death

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<v Speaker 1>and that could see be some some rebound there and

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<v Speaker 1>I think then countries that are very sensitive to the

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<v Speaker 1>global trade are going to benefit from that. I think

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<v Speaker 1>days where the value is as opposed to the U

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<v Speaker 1>stock market, which could to perform, but maybe not as

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<v Speaker 1>much as relative to those you know, undervalued markets. If

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<v Speaker 1>if you, if you will, right like so, I think

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<v Speaker 1>that is probably your trade next year, of course, condition

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<v Speaker 1>upon that this Space one deal successfully gets completed. One

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<v Speaker 1>thing I'm struggling to understand. Yesterday, at around I don't know,

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<v Speaker 1>six fifteen pm Eastern time, Wall Street time, there was

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<v Speaker 1>the headline about the Hong Kong Bill that was passed

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<v Speaker 1>by the Senate, and this is basically UH saying that

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<v Speaker 1>the U s stands in alliance with the Hong Kong

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<v Speaker 1>protesters in asserting freedom and pushing back against Beijing. Beijing

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<v Speaker 1>has come out vehemently against this. There was concern that

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<v Speaker 1>this would impede or torpedo any potential for a Phase

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<v Speaker 1>one trade deal. Come now, Uh, you know, several hours later,

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<v Speaker 1>people are not even thinking about it or talking about it.

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<v Speaker 1>It's and largely dismissed as no ways and being sort

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<v Speaker 1>of symbolic more than anything else, not leading to any

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<v Speaker 1>serious disruption. What's the right narrative here? Well, I think

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<v Speaker 1>that is the right narrative at leastaid that that yes,

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<v Speaker 1>it's an important signal by the Senate of course, to

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<v Speaker 1>take a stance on pro democracy in Hong Kong. And

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<v Speaker 1>that's that is I think well known out there and

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<v Speaker 1>I think markets understand it. But the link between that

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<v Speaker 1>bill and the progress in the trade talks that may

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<v Speaker 1>be not so strong, and and probably the reason really

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<v Speaker 1>is that the retaliation that China talks about may not

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<v Speaker 1>just necessarily happen so quickly. I think one of the

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<v Speaker 1>the news items that can out this morning is actually

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<v Speaker 1>making the comparison to other measures that the US has

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<v Speaker 1>threatened with or or even done, like the UAHWE case,

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<v Speaker 1>that that China has not retaliated on those situations either.

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<v Speaker 1>So I think this is probably what creeping into the

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<v Speaker 1>market's mind of that this is an important bill and

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<v Speaker 1>it matters, but it may not matter as much for

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<v Speaker 1>the trade deal from here. With more matters is of course,

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<v Speaker 1>ultimately the agreement on what is the there rollback going

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<v Speaker 1>to be about and what is the agricultural agricultural purchase

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<v Speaker 1>is going to be about to make this deal actually happen.

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<v Speaker 1>In other words, will the deal phase one be really

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<v Speaker 1>the sixty that Trump talks about, or will be less

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<v Speaker 1>than six? I think that's ultimately with a market will

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<v Speaker 1>trade on if it is a lot less than six,

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<v Speaker 1>I think then you get more uncertainty about the future

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<v Speaker 1>of the trade deal that you know phase two. So Ben,

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<v Speaker 1>if we do again I'm operating assumption that mean we

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<v Speaker 1>do get a Phase one deal on schedule. Is that

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<v Speaker 1>my signal to maybe to dip my toe into emerging markets? Yeah,

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<v Speaker 1>I mean that is I think the general consense out

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<v Speaker 1>there that again, where is the value at the moment

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<v Speaker 1>if you compare the US to other markets? Right? And

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<v Speaker 1>that and that is indeed Asia specific or Europe and

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<v Speaker 1>some parts of emerging markets. That's that's I think the

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<v Speaker 1>catalysts that people feel confident that if Phase one is completed,

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<v Speaker 1>it's in writing we really have a base for we

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<v Speaker 1>can work off the more structural issues over long term.

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<v Speaker 1>And what most of all that matters is that people

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<v Speaker 1>probably discount that there will be a level of de

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<v Speaker 1>escalation from the tears have been put in place over

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<v Speaker 1>course in time next year into into that would have

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<v Speaker 1>an economic impact, and that I think is why investors

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<v Speaker 1>are pre positioning themselves on that Phase one complete. There's

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<v Speaker 1>opportunity in these undervalued marketss Ben Emon's thank you so

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<v Speaker 1>much for joining us. Bend is uh metally Global Advisors,

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<v Speaker 1>global macro strategist, giving us some thoughts on kind of

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<v Speaker 1>how this could play out. Trade still very much front

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<v Speaker 1>and center for investors in the question is I have

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<v Speaker 1>probably is you know, it seems like the consensus is

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<v Speaker 1>a phase one deal is coming. Is there downside if

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<v Speaker 1>it doesn't come? You know, and what is that downside?

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<v Speaker 1>And trying to uh, you know, kind of put a

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<v Speaker 1>handle on that. But there's certainly some arguments for taking

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<v Speaker 1>on a little bit more risk should we get that

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<v Speaker 1>phase one deal. What a year nineteen has been for

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<v Speaker 1>equity markets, double digit increases across the SMP, the doll

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<v Speaker 1>and NASDAK. Where do we go in? Phil Orlando, chief

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<v Speaker 1>equity market strategist and had of client portfolio management at

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<v Speaker 1>Federate Investors, I'm sure has some answers. Phil, thanks so

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<v Speaker 1>much for joining us. You know, one of the discussions

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<v Speaker 1>we have, you know, almost daily here is this is

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<v Speaker 1>kind of the bull market that nobody really loves or trust.

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<v Speaker 1>What is your sense of the market here given where

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<v Speaker 1>we are at, you know, close to twenty thousand on

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<v Speaker 1>the Dow. No one loves or trusted. This is the

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<v Speaker 1>most hated bull market in the history of civilization. There

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<v Speaker 1>you go, remember that that a year ago and after

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<v Speaker 1>that waterfall decline that we saw that that ended in

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<v Speaker 1>Christmas Eve because the market was pricing in with absolute

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<v Speaker 1>certainty the fact that recession had you just started, it

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<v Speaker 1>was about to start. Stocks were trading at fourteen times earnings.

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<v Speaker 1>We had a very different view that that we did

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<v Speaker 1>not believe that there was any near term risk of

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<v Speaker 1>recession in twenty eighteen or twenty nineteen or twenty we

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<v Speaker 1>still believe that multiples at fourteen times forward earnings in

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<v Speaker 1>our view, we're way too pessimistic because you had very

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<v Speaker 1>benign levels of both interest rates and inflation. Core inflation

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<v Speaker 1>the PC sitting at one point seven percent right now.

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<v Speaker 1>So the multiple at eighteen times earnings, where it was

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<v Speaker 1>a year ago October was exactly where it should have been.

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<v Speaker 1>In our view this year is that we would spend

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<v Speaker 1>the year sort of grindering our way back to that level.

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<v Speaker 1>So we're probably in around I don't know, seventeen seventeen

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<v Speaker 1>a half times earnings right now. We're not quite there yet,

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<v Speaker 1>but we have hit our thirty one hundred full year forecast, um,

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<v Speaker 1>you know, six weeks before the end of the year. Indeed,

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<v Speaker 1>so what drives things are here? Um, the consolidation that

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<v Speaker 1>we saw on corporate earnings this year was was absolutely

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<v Speaker 1>understandable because we were up twenty in calendar eighteen. That

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<v Speaker 1>that's not sustainable. So we're gonna get back onto a

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<v Speaker 1>growth trajectory for earnings next year. LI So we think

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<v Speaker 1>maybe something in the eight percent neighborhood, give or take,

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<v Speaker 1>we're gonna get a little bit more multiple expansion because

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<v Speaker 1>inflation and interest rates are still relatively benign. So if

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<v Speaker 1>we do a hundred and eighty dollars and earnings next year,

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<v Speaker 1>which is our forecast, and and we get a multiple

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<v Speaker 1>that's in that eighteen eighteen and a half times earnings neighborhood,

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<v Speaker 1>we get to our thirty five hundred forecast on the

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<v Speaker 1>SMP five hundred. Now we're sitting at thirty one hundred.

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<v Speaker 1>Now that's not a huge move, but like you said

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<v Speaker 1>at the very beginning, Paul, where we're up you know,

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<v Speaker 1>thirty two percent or something like that in the last year,

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<v Speaker 1>and and uh, if we can do another ten or

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<v Speaker 1>fifteen percent next year, that ain't bad. That ain't bad. Indeed,

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<v Speaker 1>I'm trying to figure out that what the leader is

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<v Speaker 1>going to be here because it's really been tech driving

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<v Speaker 1>a lot of the games that we've seen in Can

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<v Speaker 1>You to Be Tech? So they understand what's going on

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<v Speaker 1>as a result of of the reduction in tax rates,

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<v Speaker 1>the repatriation of two point seven trillion dollars back into

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<v Speaker 1>the United States and we've we've only brought a trillion

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<v Speaker 1>dollars of it back so far, and the automatic expensing

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<v Speaker 1>of cap X. We are going through, in my opinion,

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<v Speaker 1>one of the most significant technology upgrade cycles we've seen

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<v Speaker 1>since the White two K build up back in the

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<v Speaker 1>late nineties. That that trend ought to continue through at

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<v Speaker 1>least the end of next year. So you look at

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<v Speaker 1>you say, well, texts had a pretty good year the

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<v Speaker 1>last year or two. They should have had a good year,

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<v Speaker 1>and we should have another good year as companies continue

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<v Speaker 1>to you know, upgrade their software and whatever else they're

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<v Speaker 1>doing in order to fix up their their technology platforms.

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<v Speaker 1>So so you've been absolutely on it on this equity call,

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<v Speaker 1>this bullish call here. Where could you be wrong in

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<v Speaker 1>your here? Well, I think there's a very significant uh

0:11:10.000 --> 0:11:12.800
<v Speaker 1>swing factor here and that's the results of the presidential

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<v Speaker 1>election in in t I mean, our base case is

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<v Speaker 1>that we get good election results that allow the market friendly,

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<v Speaker 1>economic friendly, investor friendly fiscal policies that we've seen the

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<v Speaker 1>last couple of years to continue. But that could be wrong.

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<v Speaker 1>We we could have a very radically different set of

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<v Speaker 1>fiscal policies, uh waking up to in calendar twenty one.

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<v Speaker 1>And and the market is a forward looking discounting mechanism

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<v Speaker 1>is going to price that in early based upon polling

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<v Speaker 1>or based upon the the actual election results in November

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<v Speaker 1>of next year. If if it looks as if there's

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<v Speaker 1>gonna be a radically different change in fiscal policy approach

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<v Speaker 1>and therefore economic growth, corporate earnings growth, and everything else.

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<v Speaker 1>Phil Orlando, thank you so much for that. Phil Orlando

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<v Speaker 1>is cheap equity market strategist at Federated Investors. Always wonderful insights.

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<v Speaker 1>Interesting to think that tech will continue to drive the

0:12:11.960 --> 0:12:16.920
<v Speaker 1>market towards that goal for the SMP five hundred and ten.

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<v Speaker 1>That ain't bad. He's been right, He's been right. Let's

0:12:36.640 --> 0:12:40.040
<v Speaker 1>shift gears a little bit to healthcare and what some

0:12:40.080 --> 0:12:44.480
<v Speaker 1>people are calling a drug shortage, which is incredibly ironic

0:12:44.640 --> 0:12:49.200
<v Speaker 1>considering the focus on the costs of certain drugs catering

0:12:49.280 --> 0:12:53.200
<v Speaker 1>to specific niche diseases. Michael al kare joining us here

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<v Speaker 1>in our Interactive Broker Studios, President of Premier Inc. Healthcare

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<v Speaker 1>Management Company, and I'm wondering from your person, Factive, what

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<v Speaker 1>is this shortage all about? Yeah, thank you for having

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<v Speaker 1>me first. First of all, the drug shortages pertain to

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<v Speaker 1>a certain part of the pharmacy market. So it's it's

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<v Speaker 1>related to generic drugs. So as you are well aware,

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<v Speaker 1>in the sort of the evolution of a drug, a

0:13:17.559 --> 0:13:20.720
<v Speaker 1>drug comes out typically it's a branded and then um,

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<v Speaker 1>after a number of years, that drug goes to a

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<v Speaker 1>generic status. What happens then is obviously the price goes down.

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<v Speaker 1>And I'll just use an analogy. It starts at a

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<v Speaker 1>hundred bucks, it sometimes ends up at two bucks. Along

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<v Speaker 1>the way, you have various producers of that product that

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<v Speaker 1>have to exit the market because they can't make margins.

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<v Speaker 1>So some may have high cost and at fifty bucks

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<v Speaker 1>to share they exit. Some have to exit at twenty

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<v Speaker 1>and then you know, when the market sort of settles out,

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<v Speaker 1>you may only have one or two suppliers. When you

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<v Speaker 1>have either a monopoly or a duopoly. That's when obviously

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<v Speaker 1>drug prices actually go back up. Uh. And then our

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<v Speaker 1>job at Premiere is to figure out ways to create

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<v Speaker 1>health markets. So the focus of a company that we

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<v Speaker 1>just launch called provide g X is to bring new

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<v Speaker 1>entrance into the market when you have a monopoly or duopoly.

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<v Speaker 1>So we'll actually invest capital in new companies that we

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<v Speaker 1>think have a history of high quality manufacturing to create

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<v Speaker 1>a healthier market, healthier supply. So what are some of

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<v Speaker 1>the drugs or treatments that are experiencing shortages? Now, yeah,

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<v Speaker 1>it's pretty crazy because there's some just basic stuff that

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<v Speaker 1>our healthcare systems need that will be uh in a

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<v Speaker 1>shortage situation in any point in time. Think of sailing solutions,

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<v Speaker 1>So those are the those are the the therapies that

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<v Speaker 1>are being utilized by I V s. UH. Think of nutritionals,

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<v Speaker 1>just basic nutritionals. If you're in the hospital for a

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<v Speaker 1>longer term stay and you need nutritionals. You know. Those

0:14:49.680 --> 0:14:53.480
<v Speaker 1>are drugs that oftentimes are in short supply. Things like

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<v Speaker 1>morphine have been on the shortage list. Probifle that's the

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<v Speaker 1>drug that allows you to go under anesthetic that has

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<v Speaker 1>been under a shortage. UH. There was a very very

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<v Speaker 1>important drug that focused on um toxic shock. Uh and

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<v Speaker 1>there was a Jamma article written in two thousand and seventeen.

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<v Speaker 1>UM And because we didn't have access to this drug,

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<v Speaker 1>the Jamma article sort of proved out that uh it

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<v Speaker 1>increased mortality because we didn't have that drug by three

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<v Speaker 1>point seven percent during the time that that drug was

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<v Speaker 1>in a shortage situation. UH. And it was a uh

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<v Speaker 1>EF the epene from family, so it really helped to

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<v Speaker 1>sort of treat low blood pressure when your body entered

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<v Speaker 1>into shock. So we think there was about thirteen billion

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<v Speaker 1>dollars of costs associated with that. Alright, So going forward,

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<v Speaker 1>I'm trying to just understand from a big picture standpoint,

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<v Speaker 1>what can be done to put the emphasis on creating

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<v Speaker 1>more and affordable generic drugs at a time when the

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<v Speaker 1>pharmaceutical companies in large part are focused on the cancer

0:15:59.800 --> 0:16:02.760
<v Speaker 1>drug rugs that are sort of hot, and they're and

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<v Speaker 1>they're very they can be priced at very high points,

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<v Speaker 1>but don't necessarily take care of this need. So great questions.

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<v Speaker 1>So what we want to do uh and again through

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<v Speaker 1>um that company I mentioned provide g X, we want

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<v Speaker 1>to actually go out to smaller manufacturers who are actually

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<v Speaker 1>are in the market to produce drugs today UH and

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<v Speaker 1>help them expand either their production or help them get

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<v Speaker 1>additional and s, which is the approval from the s

0:16:29.920 --> 0:16:33.880
<v Speaker 1>the f D eight actually UH to actually manufacture the drugs.

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<v Speaker 1>So that's number one. Number two and this is something

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<v Speaker 1>that keeps me up at night is we have issues

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<v Speaker 1>with the active pharmaceutical ingredient, that's the raw goods that

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<v Speaker 1>go into manufacturing these generic drugs. UM. Little known fact

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<v Speaker 1>of these raw goods for generic drugs are actually done

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<v Speaker 1>in China, manufactured in China. So what keeps me up

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<v Speaker 1>at night is the ability of potentially China to weaponize

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<v Speaker 1>you know this this and balance sort of in the

0:17:03.480 --> 0:17:07.320
<v Speaker 1>supply chain. So think of a p I s for antibiotics,

0:17:07.640 --> 0:17:13.359
<v Speaker 1>think of things around UM cancer drugs, things around UM acid,

0:17:13.400 --> 0:17:18.040
<v Speaker 1>reflectious basic drugs that our population needs. I do worry

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<v Speaker 1>about having such a dependence on that raw material being

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<v Speaker 1>produced in one country. Michael Alcary, thank you so much

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<v Speaker 1>for joining us. We appreciate you coming in. Michael's the

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<v Speaker 1>president of Premier Healthcare coming talking about healthcare shortages which

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<v Speaker 1>are more pronounced and I probably would have guest. Thanks

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<v Speaker 1>for listening to the Bloomberg P and L podcast. You

0:17:34.680 --> 0:17:37.359
<v Speaker 1>can subscribe and listen to interviews at Apple Podcasts or

0:17:37.400 --> 0:17:40.720
<v Speaker 1>whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter

0:17:40.800 --> 0:17:43.399
<v Speaker 1>at pt Sweeney. I'm Lisa abram Woids. I'm on Twitter

0:17:43.480 --> 0:17:46.439
<v Speaker 1>at Lisa Abramoids. One before the podcast, you can always

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<v Speaker 1>catch us worldwide. I'm Bloomberg Radio