WEBVTT - BlackRock's Koesterich: Fed Doesn't Feel A Need to Rush (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business flag from Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie. Hello, We've got thirteen minutes to go ahead

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<v Speaker 1>of the close on a Thursday's stocks are pairing their losses,

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<v Speaker 1>and this update is brought to you by National Realty

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<v Speaker 1>realty investments. See them at n r i A dot net.

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<v Speaker 1>Right now, the SMP five hundred index down a point

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<v Speaker 1>at two thousand ninety seven, falling one tenth of one percent,

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<v Speaker 1>and as stack is up eighteen points again of four

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<v Speaker 1>tenths of one percent. Down Industrial is up twenty six

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<v Speaker 1>points again of two tenths of one percent. Gold down

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<v Speaker 1>six sixty, the ounce the thirteen sixty and dropped there

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<v Speaker 1>of five tenths of one percent. The yield on the

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<v Speaker 1>tenure one point three eight percent. The tenure down five

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<v Speaker 1>thirty seconds. And crude now at would he five eleven

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<v Speaker 1>for a barrel of West Texas Intermediate down four point

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<v Speaker 1>nine percent. I'm Charlie Pello. That's a Bloomberg Business Flash.

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<v Speaker 1>You're listening to Taking Stock with pin Box on Bloomberg Radio.

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<v Speaker 1>Will they or won't they? Will the Federal Reserve a

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<v Speaker 1>raise interest rates one time this year twice this year? Well,

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<v Speaker 1>what is the Federal Reserve going to do based on

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<v Speaker 1>votes in the UK to leave the European Union and

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<v Speaker 1>sluggish economic growth around the world. Well, let's find out

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<v Speaker 1>from Russ Coster. Achie's head of asset Allocation for black

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<v Speaker 1>Rocks Global Allocation Fund, helping the manage over four trillion dollars,

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<v Speaker 1>joins us from San Francisco, Russ Coster, which thanks very

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<v Speaker 1>much for being with us. All right, so give us

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<v Speaker 1>your outlook for the Federal reserves policy. Well, I think

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<v Speaker 1>the near term it's probably more of the same, which

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<v Speaker 1>is remaining on hold. Uh. The Brill exit is a

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<v Speaker 1>bit difficult at this point. Really, what it's about is uncertainty.

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<v Speaker 1>What does it mean for the US economy? Arguably not much,

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<v Speaker 1>But if if things do get rougher in Europe, that

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<v Speaker 1>could affect consumer confidence, it could affect business confidence, and

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<v Speaker 1>I think the set is gonna want to sit back

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<v Speaker 1>for a bit and assess that before they raise rights. Well, then, boy,

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<v Speaker 1>that that really does seem to me as if you

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<v Speaker 1>think about it, that could easily then mean that they're

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<v Speaker 1>going to be assessing at the end of the year

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<v Speaker 1>because the negotiations between the UK and the EU are

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<v Speaker 1>going to take a while. Number One, markets will settle down, right,

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<v Speaker 1>But um, unless they're just mainly looking at financial contagion

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<v Speaker 1>and and tightening financial conditions, maybe that sorts itself out

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<v Speaker 1>by this autumn. But if it doesn't, then they could

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<v Speaker 1>I guess they could say even if the economy picks up,

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<v Speaker 1>they're just gonna sit there. Well, certainly this is something

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<v Speaker 1>that's gonna linger for a long time, and Kathleen, you're right,

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<v Speaker 1>this is not going to get settled in a couple

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<v Speaker 1>of quarters. We're gonna be dealing with the uncertainty for

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<v Speaker 1>many years to come. I think the way to frame

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<v Speaker 1>it is, is there enough pressure in the domestic economy

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<v Speaker 1>to give the FED conviction that even as things do

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<v Speaker 1>become a bit unstable in Europe, the US economy is

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<v Speaker 1>going to be all right. And it's worth remembering the

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<v Speaker 1>last labor market report we had was disappointing and suggested

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<v Speaker 1>maybe some of the momentum is coming out of the

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<v Speaker 1>US economy. Maybe it's coming out of you with labor market,

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<v Speaker 1>and in that context, I don't think the said feels

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<v Speaker 1>the need to rush. Now if we've seen an improvement

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<v Speaker 1>in the data, well, if there's enough of an improvement,

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<v Speaker 1>that may trump the uncertainty from overseas and we may

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<v Speaker 1>wind up getting a hike by the end of the year.

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<v Speaker 1>But at this point it still needs to be proven.

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<v Speaker 1>Russ Costrich. If you're talking to people that invest in equities,

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<v Speaker 1>they're looking at return to the SMP five hundred of

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<v Speaker 1>about two and a half percent so far this year.

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<v Speaker 1>Should they continue to buy equities or should they just

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<v Speaker 1>hold off on rebalancing perhaps and continue to buy fixed income,

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<v Speaker 1>which has been the major performer. Well, I think you

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<v Speaker 1>prefer equities over bond. Certainly within the global allocation fund,

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<v Speaker 1>you know we've got not not neither one is presenting

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<v Speaker 1>a great value right now. But between the two, US

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<v Speaker 1>stocks do look cheaper than bonds. The problem is we've

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<v Speaker 1>had the seven year bullmarket, with a lot of that

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<v Speaker 1>being driven by multiple expansion people willing to pay more

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<v Speaker 1>for dollar earnings. Bonds in the US have never been

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<v Speaker 1>as expensive. So what it means is that if you

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<v Speaker 1>look at a typical portfolio with stocks, maybe bonds, you've

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<v Speaker 1>got to assume lower urns going forward that we've had

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<v Speaker 1>over the past five years, and maybe even we've had

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<v Speaker 1>over the longer term. Well, how about the job support tomorrow?

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<v Speaker 1>Because Dave Wilson are stocks that made then the simple

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<v Speaker 1>clear point. You know, it's simple, but it's so true

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<v Speaker 1>that ultimately, as you start looking ahead to earnings and

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<v Speaker 1>you're looking down the road, maybe not just for a

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<v Speaker 1>quarter or what I purchase and invest in, but for

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<v Speaker 1>the longer term, if you don't get much growth, it's

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<v Speaker 1>going to be tough for a lot of companies to

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<v Speaker 1>post better earnings. Right. So, uh, when you look at

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<v Speaker 1>the report tomorrow, what is going to be the linkage

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<v Speaker 1>between higher number than forecasts lower? When we look first

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<v Speaker 1>of all the training reaction tomorrow in stocks and then

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<v Speaker 1>down the road, well, I think the training reaction tomorrow

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<v Speaker 1>is really going to come to Is it a good

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<v Speaker 1>enough number that it gives you some conviction that the

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<v Speaker 1>recovery is on track, but not so strong that's going

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<v Speaker 1>to scare the Fed. So something in that one range

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<v Speaker 1>that's probably a market friendly number. It's close to consensus.

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<v Speaker 1>It makes you feel that may was a bit of

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<v Speaker 1>an apparition, but it's not going to scare the Fed

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<v Speaker 1>into getting aggressive longer term. You know, I think the

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<v Speaker 1>importance of these numbers is, as I said, we've had

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<v Speaker 1>a bull market largely based on multiple expansion. It's gonna

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<v Speaker 1>be hard for you, as companies that are already very

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<v Speaker 1>profitable to grow their margins. Is stocks are going to

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<v Speaker 1>rise from here, they need to rise on higher earnings,

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<v Speaker 1>which needs to happen on the basis of higher revenue.

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<v Speaker 1>And for that to occur, the economy has to accelerate,

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<v Speaker 1>and unfortunately we've been stuck into slow growth mode for

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<v Speaker 1>a very long period of time. Effert rust, doesn't it

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<v Speaker 1>really take increased buying to move stocks high? I mean,

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<v Speaker 1>it doesn't really matter what the companies do. You can

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<v Speaker 1>have companies that don't make any money and people will

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<v Speaker 1>still buy the stock. You've just got to have willing buyers,

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<v Speaker 1>and they don't seem to be appearing on the market. Well,

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<v Speaker 1>and in him, I think you've nailed it. We don't

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<v Speaker 1>have willing buyers. We've got a lot of money. We've

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<v Speaker 1>got a lot of money on the sidelines, and honestly,

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<v Speaker 1>if you're put any new money to work. It's less

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<v Speaker 1>exciting doing that when the S and P five is

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<v Speaker 1>trade in at nineteen and a half times trailing earnings

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<v Speaker 1>versus four or five years ago, when the multiple is

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<v Speaker 1>a lot lower. If we're going to get the games,

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<v Speaker 1>we can't rely on as much of people constantly willing

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<v Speaker 1>to pay more for dollar of earnings. We've got to

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<v Speaker 1>see that companies are starting to raise their estimates and

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<v Speaker 1>there's some acceleration in the earnings they can generate. So

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<v Speaker 1>if we want to gettle more specific about this kind

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<v Speaker 1>of world Brexit uncertainty, Uh, it takes some time to

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<v Speaker 1>play out. Fed Maybe uncertain don't learn know about the economy.

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<v Speaker 1>You go to something solid, like me the healthcare industry.

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<v Speaker 1>Do you turn to come of these some of which

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<v Speaker 1>look like you know they even though there's been a

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<v Speaker 1>lot of alatility lately, they've hit bottom, they're moving higher.

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<v Speaker 1>Where do you go first? I think there are a

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<v Speaker 1>couple of things we do like health care. I think

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<v Speaker 1>health care is one of those parts of the economy

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<v Speaker 1>where you're going to see secular growth. We know we're

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<v Speaker 1>all getting older, the country is getting older. People are

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<v Speaker 1>spending more in healthcare less on things like apparel. So

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<v Speaker 1>that's a it's a long term structural shift that I

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<v Speaker 1>think benefits the sector. Second, Kathleen, you mentioned commodities. You know,

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<v Speaker 1>the one asset class that has been doing well for

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<v Speaker 1>what I think are obvious reasons has been gold. And

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<v Speaker 1>if we're in an environment in which the Fed and

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<v Speaker 1>other central banks are going to keep pushing real interest

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<v Speaker 1>rates to zero or below zero, that's an environment where

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<v Speaker 1>goal typically does well. So that's another asset class to

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<v Speaker 1>think about if we're stuck in this world for a

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<v Speaker 1>while longer. Yeah, but Russ, if you if what you

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<v Speaker 1>say is accurate that the central banks are going to

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<v Speaker 1>continue to push interest rates even lower, why not just

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<v Speaker 1>go out and buy some bonds. Looking at the tenure

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<v Speaker 1>if you bought the tenures Treasury at the beginning of

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<v Speaker 1>the year, you would have made well. The rallying bonds

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<v Speaker 1>has been extraordinary. Certainly, it's nothing that many people predicted,

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<v Speaker 1>and I think bonds have a legitimate role in the portfolio.

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<v Speaker 1>The question is how much, uh you know, Certainly some

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<v Speaker 1>of the longer duration bonds you are getting some pick

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<v Speaker 1>up from what you get on the shorten the curve

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<v Speaker 1>and The other advantage of that asset class, which is

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<v Speaker 1>why I think you do own some of them in

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<v Speaker 1>your portfolio, is they have proven a very effective hedge

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<v Speaker 1>when stocks them and going lower. On the other hand,

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<v Speaker 1>are you really going to pile into bonds with the

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<v Speaker 1>ten you're yielding one point for eight percent? You know

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<v Speaker 1>for a taxable investor for most of us that pay taxes,

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<v Speaker 1>and that means that you're after tax income is actually

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<v Speaker 1>going to be below the rate of inflation. So what

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<v Speaker 1>I'd like to know about technology in here, because sometimes

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<v Speaker 1>it seems to be in its own orbit, and of

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<v Speaker 1>course you've got everything from ship makers to social media

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<v Speaker 1>to you know, old line companies like Microsoft, anybody you

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<v Speaker 1>like in there. In this kind of environment, they have

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<v Speaker 1>some of those companies, for example, become almost sort of

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<v Speaker 1>above all this or apart from that, because there's so

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<v Speaker 1>much on their own trajectory. Well, I think it's a

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<v Speaker 1>really interesting point. And certainly there parts of technology that

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<v Speaker 1>have have demonstrated that they're going to keep growing earnings

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<v Speaker 1>even in a slow growth world. And technology is one

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<v Speaker 1>of the sectors we like. And it sort of goes

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<v Speaker 1>back to the argument and made a moment ago about

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<v Speaker 1>health care. You know, in a slow growth world, you're

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<v Speaker 1>not getting that lift that we normally received from a

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<v Speaker 1>growing economy. But there are segments that are benefiting from

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<v Speaker 1>greater wallet share. We're all spending more money on technology,

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<v Speaker 1>just like we're spending more money on healthcare, and that's

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<v Speaker 1>like that they continue and that's one of the reasons

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<v Speaker 1>I think that sector can continue to do relatively well.

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<v Speaker 1>RUSS anything to do with hard assets. So you mentioned

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<v Speaker 1>gold briefly, but I was thinking for example of real estate. Boy,

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<v Speaker 1>I mean, if you can actually borrow the money, you're

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<v Speaker 1>almost getting the real estate for nothing. Well, that's a

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<v Speaker 1>that's a great point, and I think real estate is

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<v Speaker 1>a little bit harder to access. Certainly there's liquidity issue,

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<v Speaker 1>it's it's not as easy to sell. But any real

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<v Speaker 1>estate that has income generating properties, I think that's another

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<v Speaker 1>place and investors want to look and and the reason

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<v Speaker 1>it's not hard to understand anything that can generate income,

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<v Speaker 1>whether you're talking about a piece of real estate or

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<v Speaker 1>you're talking about a dividend pain stock where you're talking

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<v Speaker 1>about a bond, uh, let's say a corporate bond. People

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<v Speaker 1>are flocking to those asset classes because the traditional sources

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<v Speaker 1>of income cash, government bonds. Municipals are just paying a

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<v Speaker 1>fraction of what they paid ten or twenty years ago. Well,

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<v Speaker 1>RST Custards, thank you so much for joining us. You've

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<v Speaker 1>really set the table for us at the stage for

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<v Speaker 1>the job support tomorrow. Do you think with the uncertainty

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<v Speaker 1>of Brexit, the feder Reserve and so much more rest

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<v Speaker 1>as head of asset allocation for black Rocks, a global

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<v Speaker 1>allocation fund. Well, we're heading into the clothes now, will

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<v Speaker 1>be joined by Dave Wilson our Stock Center to look

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<v Speaker 1>at the movers and shakers. Got the Dow actually down

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<v Speaker 1>two tens thirty two points at seventeen thousand, eight eighty

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<v Speaker 1>six s and P five hundred down about a tenth

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<v Speaker 1>two and a half points at twenty ninety seven. The

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<v Speaker 1>Nasdaq is up a third of a point sixteen to

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<v Speaker 1>forty eight seventy five. This is Bloomberg