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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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

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Speaker 1: us here in New York State Wanted City, Private Bank,

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Speaker 1: Global Chief Investment Strategist. Good morning, Yester morning. Let's talk

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Speaker 1: about the United States. There was so much concern about

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Speaker 1: everywhere else. Now that's just a little bit more anxiety

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Speaker 1: relatively speaking as to what is happening here in the

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Speaker 1: United States. Your view, Steve well Um, the three point

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Speaker 1: two percent growth rate of GDP that you saw on

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Speaker 1: the first quarter is probably the weakest three to I've

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Speaker 1: ever seen. We had slowing investment, down, consumer durable spending,

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Speaker 1: a decline in housing investment. UH, and you know basic

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Speaker 1: we are in a year post tax cut where we

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Speaker 1: should be seeing some slowing Now. I think that the

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Speaker 1: turn of the year economic data were incredibly weak UH,

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Speaker 1: and we've rebounded some from that, but we will have

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Speaker 1: a slower growth year UH than two thousand eighteen, and

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Speaker 1: that needs to be understood by by investors, we probably

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Speaker 1: don't want to take any big chances here with shocks

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Speaker 1: with the yield curve inverted. So looking at the data,

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Speaker 1: the new orders POMP, the new orders component of the

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Speaker 1: p M I contracting. Are you saying what we're experiencing

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Speaker 1: here is an inventory overhang from the last couple of months.

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Speaker 1: We've got to work our way through that a little bit.

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Speaker 1: There was a strong inventory component gain in the first

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Speaker 1: quarter of the year. I think that, you know, underlying

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Speaker 1: all of this, consumer demand is not immediately weak. It's

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Speaker 1: not uh so unusual, But there's nothing dramatic coming around

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Speaker 1: here on the demand side of the American economy unless

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Speaker 1: you know, we push some of the levers down, and

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Speaker 1: those levers could be financial conditions credit um. You know,

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Speaker 1: Fortunately enough we moved away from some of those shocks.

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Speaker 1: I have no doubt that the American economy could continue

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Speaker 1: to grow through the year, but we have a few,

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Speaker 1: uh you know, places to avoid. That's great, and you've

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Speaker 1: got an institutional message where it's like, remain common and

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Speaker 1: you've got to stay invested. I get in and all that.

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Speaker 1: The fact is in the last number of days, even

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Speaker 1: weeks here and then over there and then over there

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Speaker 1: we've seen discrete economic data which shows substantial slowdown. Maybe

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Speaker 1: it's Korea exports or this, that or the other thing.

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Speaker 1: Are you looking at idiosyncratic signal data points for concern

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Speaker 1: or is it unmanageable slowdown where I stay invested with confidence?

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Speaker 1: So it's really an issue of regime. And James Boward,

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Speaker 1: what do you mean? What I mean by that is

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Speaker 1: that the there are certain data points that we used

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Speaker 1: to see whether or not we've sort of broken the

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Speaker 1: current cycle. Things like lending availability, so the the strength

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Speaker 1: at which banks are willing to lend to consumers and businesses,

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Speaker 1: financial conditions, credit markets, these true leading indicators like the

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Speaker 1: yield curve. Those things matter. And then the pace at

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Speaker 1: which production looks relative to demand is telling us what's

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Speaker 1: going on right now in the economy. So, yes, we

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Speaker 1: will slow down from a three percent growth rate in

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Speaker 1: the first quarter of the year UH in the United States,

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Speaker 1: China's six four was going to have some UH difficulty,

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Speaker 1: particularly on the the export side. And you know, those

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Speaker 1: are issues about sort of the pace of growth. But

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Speaker 1: you're still talking about a pace of growth. You're not

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Speaker 1: talking about breaking the expansion. And we were at risk

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Speaker 1: of that for the first time since the global financial crisis,

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Speaker 1: you know, at the end of last year, I think

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Speaker 1: we moved away from that that risk. And so the

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Speaker 1: U s economy is going to grow two to three

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Speaker 1: percent literally every year unless it's negative to unless it's

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Speaker 1: a recession. Uh. And you know, despite the fact that

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Speaker 1: we've had this big rally in the treasury market, I

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Speaker 1: think a recession would penned, you know, on making some

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Speaker 1: significant policy mistakes here Stave. Overwhelmingly there is a consensus

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Speaker 1: view that the US outperforms. What are the risks around

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Speaker 1: that very very consensus view through For example, we're underweight

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Speaker 1: small cap US stocks. You know, they've had the best

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Speaker 1: performance of any asset class, any major asset class over

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Speaker 1: the last decade. Uh, they have more leverage balance sheets. Sure,

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Speaker 1: valuations have come down some, you know, but the whole

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Speaker 1: notion that the American economy can grow as rapidly as

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Speaker 1: it did, you know, from a deep depressed state ten

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Speaker 1: years ago, is a mistake in view in my point

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Speaker 1: of view, Now is it time to invest everywhere else

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Speaker 1: where valuations are much lower and business cycles are less progressed,

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Speaker 1: you know, particularly emerging markets. The time will come. We

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Speaker 1: are optimistics, certainly in the long run view, but we've

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Speaker 1: got to get through this period of strength in the

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Speaker 1: US dollar UH and the risks that the United States

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Speaker 1: poses to those very markets themselves. So Stephen Klon comes

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Speaker 1: to you in the last couple of days and they

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Speaker 1: put that dilemma towards you. They pose the dilemma, the

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Speaker 1: investor dilemma. I want to be present for the optimal

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Speaker 1: outcome and prepared for the worst. It's really important if

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Speaker 1: we simply took the best twenty days out of each

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Speaker 1: of the last two decades and say, you know what,

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Speaker 1: well time markets, but we're not. We actually missed, just

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Speaker 1: simply the best twenty days out of a decade, you

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Speaker 1: turn the best performing asset class, equities into a negative

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Speaker 1: return asset class. That's how severe the problem of market

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Speaker 1: timing is. So what do we do. We combine fixed income,

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Speaker 1: where we're overweight short duration US fixed income in particular,

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Speaker 1: and you can make an argument again we're fully fully

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Speaker 1: waited long duration. But if you put bonds and stocks together,

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Speaker 1: your ability to endure for retrenchments in the markets is

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Speaker 1: much much better. Folks, you just heard there is the

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Speaker 1: insight of the week. It is so important. We're gonna

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Speaker 1: do it again. Brought to you by Capital Guardian Trust

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Speaker 1: Company Los Angeles and the Investment Company of America. In

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Speaker 1: a decade, do if you go to cash and you

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Speaker 1: miss how many days? Just twenty days out of three thousand,

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Speaker 1: six hundred fifty days, rough fish, you do what to

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Speaker 1: your return? You go from a solid high single digit

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Speaker 1: return to a small negative return in US equities Again,

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Speaker 1: fantastic best performance means a class of the last two

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Speaker 1: decades you would have still had a negative return. So

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Speaker 1: that's the problem is that when the biggest gains and

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Speaker 1: losses in markets are clustered together, you know, you the

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Speaker 1: market drops, you're worried about more, you sell out, and

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Speaker 1: then the market rebounds because they're very closely clustered together.

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Speaker 1: I can't convey John how important I mean. I mean

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Speaker 1: a literally a business capital group Los Angeles was built

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Speaker 1: on what Mr Whiting just said, Steve wanting us on

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Speaker 1: the progress this morning. Steve enjoyed a long weekend. Thank

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Speaker 1: you City private bank level chief investment strategist to the UK.

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Speaker 1: Now where an emotional prime Minister man. Now she will

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Speaker 1: quit as Britain's leader after admitting that she had failed

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Speaker 1: to deliver the one task that defined her time in office,

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Speaker 1: taking the country out of the EU. It is and

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Speaker 1: will always remain a matter of deep regret to me

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Speaker 1: that I have not been able to deliver Brexit. An

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Speaker 1: emotional prime minister just hours ago from ten Downing Street.

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Speaker 1: I'm pleased to say that Bloomberg's Anna Edwards joins us

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Speaker 1: now and a walk us through the process for the

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Speaker 1: next couple of weeks, perhaps several months, to select a

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Speaker 1: new leader of the Conservative Party and ultimately a new

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Speaker 1: Prime minister. Yeah, good morning to Tom and John. There's

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Speaker 1: a helicopter circling. It's been a very emotional morning here

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Speaker 1: in London to Resa may as you say, giving that

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Speaker 1: emotional address, the may Bot finally showing some emotion, the

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Speaker 1: Maybo the name she gained for not showing much emotion.

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Speaker 1: And so the process now from here is that gone

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Speaker 1: are strong and stable. Gone is breakfit means breakfitt. So

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Speaker 1: we need to find a new slogan, and we need

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Speaker 1: to find a new leader for the Conservative Party and

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Speaker 1: a new Prime minister. We start that on June the tenth,

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Speaker 1: That's when the firing gun had started. If you like

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Speaker 1: for the leadership contest, and that usually takes you six

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Speaker 1: weeks or two months. Perhaps it will be a little

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Speaker 1: bit less than that. This time called on by business

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Speaker 1: to get it done quickly, but it could take some

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Speaker 1: time to narrow down the field. And Edwards, I saw

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Speaker 1: the Downton Abbey movie trailer last night. The Royals show

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Speaker 1: up and down Abbey and they have to bring in

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Speaker 1: the old butler to say the day and all that

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Speaker 1: Prime Minister May has got the same disaster. In eight

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Speaker 1: or nine days. The President's going to show up with

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Speaker 1: the first Lady a Vanka, Jared Don Jr. Eric Laura

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Speaker 1: and maybe Kimberly and toe, and she's gonna sit there

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Speaker 1: and shake hands. How do you envision the horde from

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Speaker 1: Washington showing up and greeting a lame duck prime Minister. Well,

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Speaker 1: I suppose there's always the Queen. And throughout the Brexit drama,

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Speaker 1: the Queen has been that consistent force, hasn't she keeping

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Speaker 1: well out of the Brexit drama, I should say? But

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Speaker 1: she is going to be meet doing and lots of

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Speaker 1: the meeting and greeting the President Trump. So that might

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Speaker 1: take some of the fresh offs. But you're right, that

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Speaker 1: this is going to be an incredibly heightened time attention

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Speaker 1: in UK politics. And adding to that President Trump, who

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Speaker 1: we already know right back, one of the riders in

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Speaker 1: this competition, Boris Johnson, that's going like she's just joining

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Speaker 1: us worldwide Bloomberg surveillance as we look at the resignation

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Speaker 1: of the Prime Minister of the United Kingdom. We now

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Speaker 1: go to our Midlands expert John Farrell with Anna Edwards

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Speaker 1: to the both of you, how does this play outside

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Speaker 1: the suits and Times pad from Downton appeas Okay, well, John,

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Speaker 1: how does this play north? Okay? Important question Wales? How

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Speaker 1: does the next leadership connect with the Brexiteers and ultimately

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Speaker 1: that could be where this pendulum swings so and the

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Speaker 1: kind of leader that this Conservative Party ultimately wants now,

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Speaker 1: is it a Brexiteer? Is it be someone that connects

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Speaker 1: emotionally with the people in a way that say Prime

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Speaker 1: Minister May has not? And is it therefore it mean

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Speaker 1: to take both boxes? It's Boris Johnson, right. I mean,

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Speaker 1: there's there's going to be a fine line that this

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Speaker 1: that these leadership can candidates are going to have to

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Speaker 1: tread over the next weeks ahead. First they have to

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Speaker 1: try and appeal to the party. And that's not just

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Speaker 1: the Brexiteers and the party, that's all of the party.

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Speaker 1: You can expect them to all try and behave like

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Speaker 1: states statesmen and states women and try to bring the

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Speaker 1: party together. But then once they've made it through to

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Speaker 1: the final two, they go in front of the party membership,

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Speaker 1: who we know are much more pro Brexit and much

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Speaker 1: more in fade rather no deal Brexit. So that's where

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Speaker 1: the markets get a little spook to when you get

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Speaker 1: into the final part of this of this process, and

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Speaker 1: they're all trying desperitly to appeal to what is probably

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Speaker 1: quite far right of the Conservative Party. Edwards at the

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Speaker 1: times of London Oliver Righteous rates and the headline is

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Speaker 1: if the past two years were stormy, get ready for

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Speaker 1: the hurricane. What's the hurricane to come? I mean yeah

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Speaker 1: that there could be many hurricanes that steal ahead of us.

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Speaker 1: Couldn't let tom the hurricane? That is? Can we how

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Speaker 1: on earth do we get to October thirty one and

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Speaker 1: do some kind of deal? What if the EU says

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Speaker 1: no to an extension? What if that is the view

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Speaker 1: that the EU takes, And then that creates some sort

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Speaker 1: of economic hurricane for the UK, we could end up

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Speaker 1: with the general election. That's still all very much in

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Speaker 1: the mix. What tools will Parliament pull out as the

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Speaker 1: bag to try and stop a no deal brexit? We

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Speaker 1: know they don't want one at the moment, but if

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Speaker 1: the Government doesn't table any emotions that are amendable, what

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Speaker 1: tools will they have to use to try and express

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Speaker 1: that to try and stop no deal breakfit from happening.

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Speaker 1: Will that mean that they declare no confidence in the

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Speaker 1: House and that we go to a general election? All

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Speaker 1: of those things are still possible. And to catch out

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Speaker 1: with you blood Sannah Edwards joining us from just going

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Speaker 1: to go hard to care right now? Why don't you

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Speaker 1: bring in our next guest because you can pronounce her

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Speaker 1: name correctly. It's not difficult. Gambiada Santos, johnic Us now

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Speaker 1: from JP Morgan. Great to seeing you, Thank you very much.

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Speaker 1: Let's talk about that day to twenty four hours and

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Speaker 1: a little bit of anxiety around that stronger U S

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Speaker 1: economy that we've all gotten used to over the last

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Speaker 1: decade or so. What are your thoughts on the recent

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Speaker 1: dates we've had from America? So this is the April

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Speaker 1: data before the trade tension flare up, and I think

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Speaker 1: very clearly there was a deceleration taking place in the

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Speaker 1: economy relative to last year. We always said last year's

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Speaker 1: three percent growth pays was temporary, and we had already

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Speaker 1: seen even in first quarter GDP. If you look beneath

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Speaker 1: the surface, you saw that the economy was decelerating back

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Speaker 1: to what it was doing before stimulus, which was much

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Speaker 1: closer to two pers on growth. Now we inject some

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Speaker 1: of this trade uncertainty, and the risk is to the

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Speaker 1: downside for the U s economy. So we can't be

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Speaker 1: fooled uh into thinking that trade only matters for China

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Speaker 1: and Europe and Japan, it also matters for US economy

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Speaker 1: that was already decelerated. The consensus you Gappy, as you know,

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Speaker 1: is that the US outperforms, that the US economy remains

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Speaker 1: relatively speaking, resilient compared to the impact that tried to

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Speaker 1: be will have on the rest of the world. Is

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Speaker 1: it too early to challenge that consensus view. I think

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Speaker 1: it's fair to say that the rest of the world

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Speaker 1: is more export dependent. That's very true for China, Japan,

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Speaker 1: in Europe, so in relative basis, they might suffer more,

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Speaker 1: but we can't say that the US won't suffer at all.

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Speaker 1: The U S economy will feel the effects as well.

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Speaker 1: For the the entire half, ourch is wonderful. I want

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Speaker 1: to talk I M with you later because the markets

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Speaker 1: are moving, John Fer, I want to open this up

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Speaker 1: to you, and it really goes to the real yield

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Speaker 1: today and the importance of looking at bond markets. John,

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Speaker 1: to you first, the ramifications of a twos tend spread

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Speaker 1: finally breaking down is that in the market, I don't

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Speaker 1: think it's the two tens spreads a little bit misleads

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Speaker 1: because actually actually it's widened a little bit as treasuries

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Speaker 1: of rallied because we've had this aggressive move at the

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Speaker 1: front end, but it's coming back just in the last

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Speaker 1: ten minutes. Well, I would be much more focused on

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Speaker 1: just how much the front end of the yield curve

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Speaker 1: is actually fillying and beginning to price in a right

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Speaker 1: price up yeng the yield coming in even more so.

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Speaker 1: We're in around two fifteen at the moment on a

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Speaker 1: US two year yesterday. We've in love within that, I

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Speaker 1: mean from the entire JAPE people are going to platform.

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Speaker 1: We've basically had stasis in the vanilla yield curve since

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Speaker 1: December of last year. What are the ramifications if we

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Speaker 1: actually break down to a flatter difference in yield between

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Speaker 1: the two and the tenure. Yeah, So the yield curve

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Speaker 1: two s tens and even the three month tenure is

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Speaker 1: something we look at to get a gauge of where

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Speaker 1: we are in the business cycles in the US. It's

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Speaker 1: one of the indicators. So we take it, especially this

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Speaker 1: time around, with a little bit of a grain of salt,

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Speaker 1: given a little bit of the artificial anchors there, I

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Speaker 1: got one, two, three, four, five, six, seven, eight nine

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Speaker 1: data points. If fifteen or sixteen basis points, if we

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Speaker 1: break down under that, are we prepared for that? I

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Speaker 1: think ultimately the message I take from the yield curve

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Speaker 1: here in the U s is that we are late cycle.

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Speaker 1: It is a late cycle economy from late cycle to

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Speaker 1: end of cycle. I don't think we can say with certainty,

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Speaker 1: even looking at the yield curve how long that will take.

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Speaker 1: So ultimately, what it's saying to us is we should

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Speaker 1: be right sizing portfolios now for a late cycle economy,

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Speaker 1: but without being tempted to call the exact end of

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Speaker 1: on this Friday. I want to get the e M

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Speaker 1: in our next section on this Friday, do you look

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Speaker 1: at the US market is a minor correction blended SMP

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Speaker 1: five hundred or do you pay attention to corrective even

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Speaker 1: bear market tech some like conductor, the ones that have

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Speaker 1: fallen more, the bages that have fallen more? Which do

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Speaker 1: you focus on right now? So we're focusing first in

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Speaker 1: the market as a whole. Uh And I say that

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Speaker 1: because when we look at the p ratio of the

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Speaker 1: market as a whole for the SMP fire still at

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Speaker 1: average levels right It's fallen a little bit from the

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Speaker 1: record highs we were at, you know, three weeks ago,

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Speaker 1: but it's still hanging in there. And I think the

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Speaker 1: trade tension matters a lot for fundamentals in the US

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Speaker 1: in an economy that is already late cycle. So if

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Speaker 1: indeed we do get the probability of trade escalation going further,

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Speaker 1: then this multiple for the market as a whole is

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Speaker 1: set to fall further. So we are paying very very

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Speaker 1: close attention to that. It does not feel like the

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Speaker 1: market is pricing in that trade escalation probability to the

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Speaker 1: extent that we think is actually happening. Gabriella Senseis of

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Speaker 1: JP Morgan. I believe he's going to stay with us

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Speaker 1: till Gabriella Santos with us to the interview of the day,

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Speaker 1: the week, and the month on e M. She is

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Speaker 1: JP Morgan Asset Management Global Strategist. You changed your view?

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Speaker 1: What did JP Morgan change on e M? So, Tom,

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Speaker 1: I think important right away to mention that our structural

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Speaker 1: long term view for e M has not changed, meaning

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Speaker 1: we still think it's an asset class, especially on the

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Speaker 1: equity side, that will deliver superior returns to US equities

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Speaker 1: in the medium term. And I mentioned this upfront because

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Speaker 1: we feel that American investors across the board don't seem

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Speaker 1: to have enough emerging markets in their portfolios compared to

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Speaker 1: European investors. So, just off the bat, about ten percent

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Speaker 1: of an equity portfolio we think structurally should be emerging markets. Now,

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Speaker 1: if we imagine we're already there, and we think so cyclically,

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Speaker 1: should I be overweight, neutral, underweight? About three weeks ago,

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Speaker 1: we felt like the pieces were falling in place to

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Speaker 1: be overweight and we're erging markets for it to really

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Speaker 1: outperform by a lot in the short term. And then

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Speaker 1: the trade came and then the trade came along. We

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Speaker 1: saw the fire turned up higher unfortunately, and the odds

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Speaker 1: have gone up that it's turned up further in the

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Speaker 1: second half of the year, and I think in that

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Speaker 1: environment e M will underperform it. If I'm researching this weekend,

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Speaker 1: I've got a two oh one K. I'm loaded all

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Speaker 1: us and agree with you. Most Americans are underweight international.

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Speaker 1: Do I want to look is a general statement at international,

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Speaker 1: I know the name's blue chip, or do I want

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Speaker 1: to go esoteric with countries smaller cap less familiar names.

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Speaker 1: So I think within the international space there's emerging markets

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Speaker 1: and Europe and Japan. We feel particularly strongly short medium

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Speaker 1: term for emerging markets, I would say relative even to

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Speaker 1: Europe and Japan. Within emerging markets, I think, um, you know,

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Speaker 1: there's some really interesting stories there we really want to

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Speaker 1: take a look at. That would be consumer related stories,

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Speaker 1: So not the old school emerging markets commodities and those

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Speaker 1: kinds of you're not going to buy a concrete company

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Speaker 1: in Thailand, You're going to buy You're going to buy

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Speaker 1: a consumer related theme, and consumer related is pretty broad,

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Speaker 1: so it can encompass banks. Right, if you're all of

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Speaker 1: a sudden going from having no money to actually having

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Speaker 1: some money, You open up a bank account, you buy

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Speaker 1: insurance products. So financials is one way. Another one is

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Speaker 1: just consumer discretionary, consumer staples and emerging markets. You have

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Speaker 1: some really competitive brands there in places like China, India, Brazil. Uh.

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Speaker 1: And then lastly it's a technology theme as well, which

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Speaker 1: is very, very big and prevalent in Asiah of course. Okay,

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Speaker 1: I'll go with that. Um Within this is the arch question.

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Speaker 1: Do I hedge I mean foreign exchange? I mean e M?

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Speaker 1: Do you subscribe after reading John Norman to a strong

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Speaker 1: dollar theology where you've got a hedge. So in the

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Speaker 1: short term, because of the trade related tensions, I do

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Speaker 1: think a strong dollar is likely, and in that scenario

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Speaker 1: EM does struggle, uh even local performance as well. So

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Speaker 1: that's why perhaps our view has changed from overweight e

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Speaker 1: M to more of a neutral call. But really what

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Speaker 1: we find medium to long terms the currency ends up

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Speaker 1: being a wash for emerging markets. Ultimately, what drives EM

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Speaker 1: performance medium to long term is not the currency. It's

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Speaker 1: not even valuation, it's earnings growth. Okay, so I want

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Speaker 1: you to partition just one final question, and I know

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Speaker 1: you've got to run off. You've been very generous with

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Speaker 1: your time today. I want to partition US ownership with

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Speaker 1: familiar big EU Japan names, like saying nest Lee as

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Speaker 1: the mother of all big comesumer companies, with the esoteric

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Speaker 1: world of Gabriela Santos. What are my percentages there in

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Speaker 1: a portfolio? Fifty? You know, seventy ten ten? Is? It's six?

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Speaker 1: How do you mix that up? So within the equity

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Speaker 1: piece for US just neutral would be about six US.

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Speaker 1: It always makes sunds if you're a US based investor

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Speaker 1: to have a little bit more of a home bias

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Speaker 1: totally um about then add about ten percent of that

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Speaker 1: for emerging markets and leaves us about five percent for

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Speaker 1: Europe in Japan. Okay, Gabriel scientists, thank you so much

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Speaker 1: for JP Morgan as they, uh, like a lot of

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Speaker 1: other people, adjust over the last two weeks to the

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Speaker 1: trade outcomes, and of course they are still in flux.

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Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and

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Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

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Speaker 1: platform you prefer. I'm on Twitter at Tom Keane. Before

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Speaker 1: the podcast, you can always catch US worldwide, I'm Bloomberg

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Speaker 1: Radio SA