1 00:00:00,120 --> 00:00:02,840 Speaker 1: Let's take a closer look at these markets with our guest, 2 00:00:02,920 --> 00:00:06,720 Speaker 1: Kamal shree Kumar. Here is president of Shree Kumar Global Strategies, 3 00:00:06,760 --> 00:00:09,280 Speaker 1: on the line from Los Angeles. Tree. Thanks for being 4 00:00:09,320 --> 00:00:11,080 Speaker 1: with us. It seems if you look at the price 5 00:00:11,080 --> 00:00:13,400 Speaker 1: action in the bond market, this collapse that we're seeing 6 00:00:13,560 --> 00:00:19,160 Speaker 1: yields recession is an inevitability, isn't it, Yes, Doug, the 7 00:00:19,760 --> 00:00:23,840 Speaker 1: yields have come down quite significantly. The market does fear recession. 8 00:00:24,560 --> 00:00:28,400 Speaker 1: But I would point to two factors. First, this is 9 00:00:28,440 --> 00:00:30,960 Speaker 1: not the first time we have seen the bond deals 10 00:00:31,000 --> 00:00:33,519 Speaker 1: come down, and over the last year, when I was 11 00:00:33,600 --> 00:00:37,200 Speaker 1: looking for it to go significantly higher, we were met 12 00:00:37,240 --> 00:00:40,159 Speaker 1: from time to time with weeks of it going actually 13 00:00:40,200 --> 00:00:43,040 Speaker 1: in the opposite direction. So the yield does not go 14 00:00:43,920 --> 00:00:47,960 Speaker 1: up uniquely. It does in a jagged fashion, and that's 15 00:00:48,000 --> 00:00:52,680 Speaker 1: what we are seeing take place. Second, there is inflation. 16 00:00:52,800 --> 00:00:56,319 Speaker 1: Expectations are lower because of the five to ten year 17 00:00:56,360 --> 00:01:00,120 Speaker 1: expectations have come down. But what I think that is 18 00:01:00,160 --> 00:01:02,920 Speaker 1: to take into account, Doug, is the fact that a 19 00:01:02,960 --> 00:01:06,360 Speaker 1: good chunk of the inflation is beyond the Fed's control. 20 00:01:06,959 --> 00:01:10,400 Speaker 1: It's coming from oil prices. And if tomorrow you would 21 00:01:10,520 --> 00:01:13,959 Speaker 1: you had put in decide to cut back even further 22 00:01:14,080 --> 00:01:17,640 Speaker 1: on natural gas exports or to shut off oil exports, 23 00:01:18,000 --> 00:01:20,600 Speaker 1: then the inflation figure will rise up again. So there 24 00:01:20,640 --> 00:01:23,360 Speaker 1: are too many unknowns for me to throw in the 25 00:01:23,400 --> 00:01:28,160 Speaker 1: towel on the bond yields. Yet, so what about the 26 00:01:28,280 --> 00:01:31,120 Speaker 1: equity market? To what degree is that reflecting all the 27 00:01:31,240 --> 00:01:34,800 Speaker 1: unknowns that are out there. The equity market does not 28 00:01:35,000 --> 00:01:38,280 Speaker 1: reflect that yet, Paul, I think the equity market is 29 00:01:38,319 --> 00:01:43,040 Speaker 1: pretty sanguine. Partly, I think the expectation is that things 30 00:01:43,080 --> 00:01:46,400 Speaker 1: will work out. They think even if there is a recession, 31 00:01:46,440 --> 00:01:49,480 Speaker 1: the companies that they are looking at would still do 32 00:01:49,640 --> 00:01:52,160 Speaker 1: quite well. Some of the corporate turnings have been good 33 00:01:52,240 --> 00:01:56,200 Speaker 1: over the past week. That is affecting the equity side. Uh. 34 00:01:56,280 --> 00:01:59,440 Speaker 1: And second, there is a complacency, and we saw that 35 00:02:00,000 --> 00:02:02,559 Speaker 1: again and again. We saw that in two thousand seven. 36 00:02:03,040 --> 00:02:05,120 Speaker 1: We didn't know that we were in a Great recession 37 00:02:05,400 --> 00:02:08,240 Speaker 1: up for about eight to ten months after we entered it. 38 00:02:08,840 --> 00:02:12,799 Speaker 1: So equity market is not a good indicator. October two 39 00:02:12,880 --> 00:02:16,640 Speaker 1: thousand seven, two months before the Great Recession began, the 40 00:02:16,760 --> 00:02:20,160 Speaker 1: SMP five reached a peak. So if you go by 41 00:02:20,160 --> 00:02:23,240 Speaker 1: the equity market to give you an indication of a recession. 42 00:02:23,360 --> 00:02:26,120 Speaker 1: It's not going to give that to you. And let 43 00:02:26,160 --> 00:02:29,239 Speaker 1: me add one more thing, Paul, and I think Doug 44 00:02:29,320 --> 00:02:34,200 Speaker 1: spoke earlier this afternoon about the Janet Yellen statement about 45 00:02:34,240 --> 00:02:36,639 Speaker 1: the recession not being in the cards, but just in 46 00:02:36,680 --> 00:02:40,520 Speaker 1: the economic slowdown. I would say, who was the last 47 00:02:40,880 --> 00:02:45,120 Speaker 1: Treasury Secretary of FED chair who predicted a recession? Nobody, 48 00:02:46,120 --> 00:02:49,280 Speaker 1: So I think it's a meaningless comment. And again her 49 00:02:49,360 --> 00:02:52,160 Speaker 1: forecast in the past have been wrong. Last year she 50 00:02:52,240 --> 00:02:55,919 Speaker 1: said bigger is better on spending. Inflation is not going 51 00:02:56,000 --> 00:02:58,440 Speaker 1: to pick up, And the question is do you want 52 00:02:58,480 --> 00:03:01,360 Speaker 1: to take her word that there will not be a recession. 53 00:03:02,080 --> 00:03:05,320 Speaker 1: The real problem here is you're not facing just a recession. 54 00:03:05,400 --> 00:03:09,280 Speaker 1: You're facing a stag inflation because some prices are going 55 00:03:09,320 --> 00:03:12,320 Speaker 1: to keep ricing. This is similar to the late seventies, 56 00:03:12,639 --> 00:03:16,760 Speaker 1: and if that happens, then you're talking about much higher yields. 57 00:03:17,000 --> 00:03:20,400 Speaker 1: So you mentioned the equity market. Microsoft is among the 58 00:03:20,440 --> 00:03:23,160 Speaker 1: companies reporting this week. We've already heard from the company 59 00:03:23,160 --> 00:03:25,960 Speaker 1: that the dollar, the strength of the dollar, represents a 60 00:03:26,040 --> 00:03:29,160 Speaker 1: pretty substantial headwind for them. And I'm wondering whether or 61 00:03:29,160 --> 00:03:31,880 Speaker 1: not you think we're at peak dollar right now, I 62 00:03:31,960 --> 00:03:35,000 Speaker 1: don't believe we are that. I think the reason is 63 00:03:35,040 --> 00:03:37,480 Speaker 1: that the world is still a very uncertain place. The 64 00:03:37,600 --> 00:03:40,280 Speaker 1: US is going to continue to be a safe haven. 65 00:03:40,920 --> 00:03:42,760 Speaker 1: And if you were to look at the d x 66 00:03:42,920 --> 00:03:45,560 Speaker 1: Y index, yes, it backed off a little bit from 67 00:03:45,560 --> 00:03:48,680 Speaker 1: a hundred and eight level two hundred and seven, but 68 00:03:48,760 --> 00:03:51,040 Speaker 1: I won't be surprised to see the d x Y 69 00:03:51,160 --> 00:03:55,360 Speaker 1: going over hundred and ten, and similarly a similar increase 70 00:03:55,400 --> 00:04:00,920 Speaker 1: in the Bloomberg Spot Dollar Index. So that doesn't end 71 00:04:01,520 --> 00:04:04,400 Speaker 1: until the bond yield stopped going up in the United 72 00:04:04,440 --> 00:04:08,000 Speaker 1: States and until the world becomes a safer place than 73 00:04:08,040 --> 00:04:10,680 Speaker 1: it is today. Those are the two requirements for the 74 00:04:10,760 --> 00:04:15,200 Speaker 1: dollar to weaken very quickly. Sree Uh. The oil price 75 00:04:15,240 --> 00:04:17,480 Speaker 1: has walked back a little as well, but prent during 76 00:04:17,520 --> 00:04:21,120 Speaker 1: do you think that's going to be twenty seconds? Twenty seconds? 77 00:04:21,279 --> 00:04:23,919 Speaker 1: I think that is temporary A Paul, I would expect 78 00:04:23,920 --> 00:04:27,719 Speaker 1: oil prices to be significantly higher if you give me 79 00:04:27,800 --> 00:04:32,919 Speaker 1: six months time. And sure, obviously the Fed continuing to tighten. 80 00:04:33,000 --> 00:04:34,960 Speaker 1: But on the other side of the Pacific, different story. 81 00:04:35,040 --> 00:04:37,880 Speaker 1: Conditions are very easy in China and Japan as well. 82 00:04:38,120 --> 00:04:42,400 Speaker 1: Is this a good place to look for opportunities right now. Well, yes, 83 00:04:42,480 --> 00:04:45,880 Speaker 1: you have easy conditions in both China and Japan, as 84 00:04:45,880 --> 00:04:50,000 Speaker 1: you mentioned, Paul, But first of all, that is because 85 00:04:50,000 --> 00:04:53,800 Speaker 1: there are other risks which are increasing. And in China, 86 00:04:54,520 --> 00:04:57,760 Speaker 1: the problem is with the Chinese risk in terms of 87 00:04:57,960 --> 00:05:03,360 Speaker 1: US China relationship, the cross a straight relationship, and the 88 00:05:03,440 --> 00:05:06,880 Speaker 1: Chinese government intervention in the various sectors of the economy 89 00:05:07,279 --> 00:05:11,039 Speaker 1: has cost I think the investment to slacken, and that's 90 00:05:11,040 --> 00:05:16,040 Speaker 1: why you have You're seeing the easier monetary policy take place, 91 00:05:16,360 --> 00:05:19,320 Speaker 1: and we have seen that time and time again. In 92 00:05:19,360 --> 00:05:22,280 Speaker 1: the case of Japan, I would say that the easy 93 00:05:22,360 --> 00:05:25,240 Speaker 1: monetary conditions are not going to make up for what 94 00:05:25,440 --> 00:05:29,520 Speaker 1: is Japan's fundamental issue, which is demographic in nature, the 95 00:05:29,640 --> 00:05:33,240 Speaker 1: aging of the population, and what it needs is the 96 00:05:33,360 --> 00:05:37,920 Speaker 1: third arrow of the late Prime Minister Shin Saabs are 97 00:05:38,000 --> 00:05:42,680 Speaker 1: dynamics in terms of allowing for more immigration, more people 98 00:05:42,760 --> 00:05:45,719 Speaker 1: to come in. That is the only way to make 99 00:05:45,760 --> 00:05:48,440 Speaker 1: the inflation rate go up and to not to depend 100 00:05:48,440 --> 00:05:52,080 Speaker 1: on monetary policy for that purpose. So, yes, China and 101 00:05:52,160 --> 00:05:56,440 Speaker 1: Japan both have easier monetary policy, but I don't think 102 00:05:56,600 --> 00:05:59,279 Speaker 1: that alone makes them preferable to the rest of the world. 103 00:05:59,400 --> 00:06:01,560 Speaker 1: We know the such ouation of the property market in 104 00:06:01,720 --> 00:06:06,440 Speaker 1: China right now. China Evergrand may deliver a preliminary restructuring 105 00:06:06,480 --> 00:06:08,719 Speaker 1: plan this week. We'll have to wait and see on that. 106 00:06:09,040 --> 00:06:13,080 Speaker 1: Away from the credit that is being tarnished by the 107 00:06:13,160 --> 00:06:16,520 Speaker 1: problem with many of these property developers, not just ever Grand, 108 00:06:16,560 --> 00:06:18,520 Speaker 1: but there are a few more. I'm wondering whether or 109 00:06:18,560 --> 00:06:22,120 Speaker 1: not there is another problem that seldom gets highlighted, which 110 00:06:22,200 --> 00:06:24,440 Speaker 1: is the Belt and Road initiative, and a lot of 111 00:06:24,480 --> 00:06:29,520 Speaker 1: the death that is outstanding that may sour very quickly 112 00:06:29,560 --> 00:06:32,880 Speaker 1: and go in very bad. Yeah. I think that is 113 00:06:32,920 --> 00:06:35,560 Speaker 1: a serious risk. And it is a risk because, as 114 00:06:35,600 --> 00:06:39,320 Speaker 1: you said, Doug, there has been a significant increase in 115 00:06:39,360 --> 00:06:42,960 Speaker 1: credit to that area, almost as if that was going 116 00:06:43,040 --> 00:06:46,560 Speaker 1: to be the panacea for the world in terms of infrastructure. 117 00:06:47,279 --> 00:06:49,560 Speaker 1: So a lot of money was spent and I believe 118 00:06:49,680 --> 00:06:54,200 Speaker 1: quite a chunk of it simply disappeared. So the debt exists, 119 00:06:54,440 --> 00:06:57,000 Speaker 1: the people to pay do not have the capacity to 120 00:06:57,040 --> 00:07:00,719 Speaker 1: do it. And not only does it involve May England China, 121 00:07:00,800 --> 00:07:04,000 Speaker 1: but it involves a number of countries to the north 122 00:07:04,560 --> 00:07:07,280 Speaker 1: west of the country as well, where the Belton Road 123 00:07:07,560 --> 00:07:12,560 Speaker 1: initiative was structured. So the countries that China has lent 124 00:07:12,680 --> 00:07:15,800 Speaker 1: some money to are also going to have issues, and 125 00:07:15,840 --> 00:07:19,640 Speaker 1: we saw that for example with this is not Belton 126 00:07:19,760 --> 00:07:23,360 Speaker 1: Road per se, but the ports in Sri Lanka which 127 00:07:23,360 --> 00:07:25,320 Speaker 1: are going to suffer as a result of the fact 128 00:07:25,400 --> 00:07:29,040 Speaker 1: that the country has a serious economic crisis at the 129 00:07:29,120 --> 00:07:33,960 Speaker 1: problem of unpaid debts is not only the property sector DOUG, 130 00:07:34,320 --> 00:07:38,920 Speaker 1: but also elsewhere, as you correctly noted, Yeah, on that topic, 131 00:07:39,160 --> 00:07:41,680 Speaker 1: we have mentioned we're waiting on the immigrants or structuring 132 00:07:41,680 --> 00:07:44,160 Speaker 1: plan today, but it is coming against that backdrop of 133 00:07:44,240 --> 00:07:47,760 Speaker 1: mortgage boycotts. How do you see this all playing out 134 00:07:47,840 --> 00:07:54,120 Speaker 1: and can the risk of contagion be contained the mortgage Clearly, 135 00:07:54,160 --> 00:07:57,200 Speaker 1: the mortgage rebellion that is taking place in China is 136 00:07:57,280 --> 00:08:01,920 Speaker 1: because the economy is tight inning, the credit has fallen off, 137 00:08:02,600 --> 00:08:06,239 Speaker 1: and then the mortgages are still payable. So I think 138 00:08:06,440 --> 00:08:08,840 Speaker 1: that is clearly an issue that is going to cause 139 00:08:08,920 --> 00:08:12,680 Speaker 1: more social tensions. Um and this is something which comes 140 00:08:12,680 --> 00:08:15,480 Speaker 1: at a very bad time politically for China in the 141 00:08:15,560 --> 00:08:19,400 Speaker 1: sense that it comes before the National Party Congress, which 142 00:08:19,440 --> 00:08:23,560 Speaker 1: is going to give President hijin Being another five year term. 143 00:08:24,160 --> 00:08:26,840 Speaker 1: I think they will find ways to paper over it. 144 00:08:26,920 --> 00:08:31,360 Speaker 1: We talked about easing of credit, perhaps excusing some of 145 00:08:31,400 --> 00:08:33,960 Speaker 1: the debts in that area. But it is going to 146 00:08:34,000 --> 00:08:35,920 Speaker 1: be a long term problem. I think it is going 147 00:08:35,960 --> 00:08:38,760 Speaker 1: to show up more in coming years than you will 148 00:08:38,760 --> 00:08:43,240 Speaker 1: see in twenty two. All right, come out just before 149 00:08:43,280 --> 00:08:46,560 Speaker 1: I let you go fifteen seconds. What's your greatest risk 150 00:08:46,880 --> 00:08:49,600 Speaker 1: at the moment? What keeps you awake at night? What 151 00:08:49,760 --> 00:08:52,400 Speaker 1: keeps me awake at night is the energy the fact 152 00:08:52,400 --> 00:08:55,720 Speaker 1: that I will turn around and find that suddenly, because 153 00:08:55,760 --> 00:08:59,840 Speaker 1: of Russia or elsewhere, some five to six million battles, 154 00:08:59,840 --> 00:09:02,400 Speaker 1: that day of oil is just not coming to the 155 00:09:02,480 --> 00:09:06,520 Speaker 1: market and trying to shoot up. All right, Kamal Shri Kumar, 156 00:09:06,640 --> 00:09:09,720 Speaker 1: thanks as always for joining us on Bloomberg Daybreak. Agent 157 00:09:09,800 --> 00:09:12,760 Speaker 1: Shre is President at Shri Kumar Global Strategies.