1 00:00:00,080 --> 00:00:13,040 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 2 00:00:13,480 --> 00:00:17,560 Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:34,000 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. I'm 5 00:00:34,040 --> 00:00:35,600 Speaker 1: really pleased to say that Kate Moore is in the 6 00:00:35,640 --> 00:00:38,879 Speaker 1: studio with us here in New York, Blank Rock Investment Institute, 7 00:00:38,960 --> 00:00:42,880 Speaker 1: chief equity strategist, Stocks over Bonds. I'm sure she does, 8 00:00:42,960 --> 00:00:44,360 Speaker 1: and we're going to get into that in a moment. 9 00:00:44,400 --> 00:00:46,520 Speaker 1: I just want to begin Kate with saying good morning, 10 00:00:46,880 --> 00:00:49,320 Speaker 1: Good morning, welcome to the crazy house here in New 11 00:00:49,400 --> 00:00:52,960 Speaker 1: York and Brussels, to Bloombag Surveillance right here. It's worth Tom, 12 00:00:53,000 --> 00:00:56,640 Speaker 1: I don't always say stocks over bonds. There are environments 13 00:00:56,680 --> 00:01:01,240 Speaker 1: where I can imagine fixing commertine return being okay. But 14 00:01:01,320 --> 00:01:03,440 Speaker 1: you know, for most of the investors that we speak 15 00:01:03,480 --> 00:01:06,160 Speaker 1: to you you over the time horizons they invest in, it 16 00:01:06,240 --> 00:01:09,640 Speaker 1: pays to kind of weather their volatility in stocks and 17 00:01:09,720 --> 00:01:11,360 Speaker 1: to really you know, if you're going to shift in 18 00:01:11,400 --> 00:01:14,280 Speaker 1: sort of tilt your portfolio more towards quality and more 19 00:01:14,319 --> 00:01:17,360 Speaker 1: in certain times it just still pays to stay invested. 20 00:01:17,440 --> 00:01:20,920 Speaker 1: So um, you know, we are continuing to recommend stocks 21 00:01:20,920 --> 00:01:24,600 Speaker 1: over bonds, although as we noted in the surveillance, lower conviction, 22 00:01:24,760 --> 00:01:27,039 Speaker 1: let's just develop your framework for thinking about the global 23 00:01:27,040 --> 00:01:30,119 Speaker 1: economy and the global market at the moment. This isn't 24 00:01:30,120 --> 00:01:32,520 Speaker 1: the story of the last month. It's the story of 25 00:01:33,040 --> 00:01:36,840 Speaker 1: eighteen for the global economy. Deceleration in Europe, deceleration in 26 00:01:36,920 --> 00:01:39,400 Speaker 1: China as well. Do you see that catching up with 27 00:01:39,400 --> 00:01:41,360 Speaker 1: the United States? I don't see it in the data yet. 28 00:01:41,360 --> 00:01:43,320 Speaker 1: Do you see it in the data next year? Well, 29 00:01:43,520 --> 00:01:46,000 Speaker 1: deceleration from some of the gride of growth we had 30 00:01:46,040 --> 00:01:48,160 Speaker 1: in two thousand eighteen, but nothing that's going to really 31 00:01:48,240 --> 00:01:50,880 Speaker 1: raise a flag. Look, you know, as much as people 32 00:01:50,920 --> 00:01:54,280 Speaker 1: like to wring their hands and have great debate over 33 00:01:54,880 --> 00:01:57,880 Speaker 1: you know, recession probabilities over the next twelve months, it 34 00:01:57,920 --> 00:02:01,360 Speaker 1: seems extremely unlikely in our view and also in our 35 00:02:01,880 --> 00:02:05,320 Speaker 1: analytical assessment that the U S could enter in any 36 00:02:05,320 --> 00:02:08,560 Speaker 1: types of recession in the near term. That said, we 37 00:02:08,600 --> 00:02:11,520 Speaker 1: are talking about a slower growth rate next year and 38 00:02:11,520 --> 00:02:14,760 Speaker 1: that has implications. So you know, our view is that 39 00:02:15,120 --> 00:02:17,560 Speaker 1: you have to be much more thoughtful about how you 40 00:02:17,560 --> 00:02:20,280 Speaker 1: construct your portfolio over your head, that you need to 41 00:02:20,280 --> 00:02:22,560 Speaker 1: be a little bit more tactical and that you're gonna 42 00:02:22,600 --> 00:02:25,000 Speaker 1: have to be taking advantage of opportunities when prices and 43 00:02:25,000 --> 00:02:27,920 Speaker 1: things get dislocated. Okay, but if you have a slower 44 00:02:27,960 --> 00:02:31,680 Speaker 1: growth rate, which I would suggest of our audience agrees 45 00:02:31,720 --> 00:02:35,720 Speaker 1: with you on Kate more, does that make growthiness of 46 00:02:35,800 --> 00:02:41,000 Speaker 1: a greater premium and value? Look, our biases that yes, 47 00:02:41,000 --> 00:02:43,000 Speaker 1: there's still going to be a bid for assets that 48 00:02:43,040 --> 00:02:45,760 Speaker 1: can grow even in a slower growth environment. You know, 49 00:02:45,840 --> 00:02:47,840 Speaker 1: the funny thing is that we've had this like almost 50 00:02:47,840 --> 00:02:51,400 Speaker 1: ten year period where growth has continued to have a 51 00:02:51,400 --> 00:02:54,360 Speaker 1: bid and value has not really been able to catch 52 00:02:54,360 --> 00:02:56,480 Speaker 1: a lot of attention. The truth of the matter is 53 00:02:56,560 --> 00:02:59,200 Speaker 1: that what falls into value today, some of it is 54 00:02:59,240 --> 00:03:03,080 Speaker 1: structurally in hair and not everything that's cheap is cheap unfairly. 55 00:03:03,320 --> 00:03:05,240 Speaker 1: Some of the stuff that's cheap deserves this. So let 56 00:03:05,240 --> 00:03:07,720 Speaker 1: me ask you this question of banks part of that story. 57 00:03:07,760 --> 00:03:09,680 Speaker 1: Do they deserve to be where they are? Because this 58 00:03:09,880 --> 00:03:12,440 Speaker 1: quiet vicious sell off happening and I don't think enough 59 00:03:12,440 --> 00:03:15,400 Speaker 1: people are talking about It's city is on a seven 60 00:03:15,480 --> 00:03:18,919 Speaker 1: day losing streak coming into today's session. It's done about 61 00:03:18,919 --> 00:03:24,080 Speaker 1: fourteen over those seven days. That is brutal. It's that justified. 62 00:03:24,440 --> 00:03:27,799 Speaker 1: It's totally brutal, in part because I had been significantly 63 00:03:27,800 --> 00:03:30,840 Speaker 1: overweight the banks and here, yeah, I know, I had 64 00:03:30,880 --> 00:03:33,800 Speaker 1: good company and getting this dead wrong. And you know, 65 00:03:33,840 --> 00:03:36,000 Speaker 1: it seemed like there was this perfect environment from growth 66 00:03:36,040 --> 00:03:38,840 Speaker 1: and policy and less regulatory pressure and better cash return, 67 00:03:39,040 --> 00:03:42,120 Speaker 1: and you know, none of that seemed to really matter. 68 00:03:42,560 --> 00:03:45,040 Speaker 1: And today, you know, despite the fact that we are 69 00:03:45,080 --> 00:03:47,920 Speaker 1: in what we think is the very worst case scenario, 70 00:03:48,000 --> 00:03:51,640 Speaker 1: stable growth but likely I continue to expanding economy. The 71 00:03:51,680 --> 00:03:54,160 Speaker 1: regulatory pressure is still easing. These banks are still in 72 00:03:54,280 --> 00:03:58,560 Speaker 1: very good shape. Their balance sheets look awesome. No one cares, 73 00:03:58,560 --> 00:04:01,760 Speaker 1: and they're getting sold off vision slee as the expectation 74 00:04:01,800 --> 00:04:04,200 Speaker 1: that the FETE is going to pause that really takes 75 00:04:04,200 --> 00:04:06,520 Speaker 1: hold across the investor base. So the story to be 76 00:04:06,520 --> 00:04:09,400 Speaker 1: bullish the banks, I keep getting told the same story, 77 00:04:09,400 --> 00:04:11,920 Speaker 1: to be bullish the banks. And my question really is 78 00:04:12,040 --> 00:04:14,320 Speaker 1: when our investors are going to start responding differently to 79 00:04:14,360 --> 00:04:17,279 Speaker 1: the same story they experienced in they don't necessarily have to. 80 00:04:18,560 --> 00:04:19,919 Speaker 1: I think we're going to go back to the question 81 00:04:19,920 --> 00:04:21,880 Speaker 1: you just asked me a moment ago. Does growth continue 82 00:04:21,920 --> 00:04:24,960 Speaker 1: to get a bid in this in this environment. And 83 00:04:25,000 --> 00:04:27,120 Speaker 1: I think that's right, Like, even though the banks are 84 00:04:27,120 --> 00:04:29,719 Speaker 1: in good shape, they're not going to be shooting the 85 00:04:29,800 --> 00:04:31,800 Speaker 1: lights out when it comes to growth. And so I 86 00:04:31,839 --> 00:04:33,719 Speaker 1: think there's gonna be a preference for sectors and for 87 00:04:33,760 --> 00:04:37,800 Speaker 1: industries and companies that can really put up stronger numbers, 88 00:04:38,120 --> 00:04:41,240 Speaker 1: not just solid numbers, but stronger numbers at this point 89 00:04:41,279 --> 00:04:43,200 Speaker 1: in the cycle. And I'm not sure banks are there 90 00:04:43,680 --> 00:04:46,760 Speaker 1: kit more. What is a mergers and acquisitions type to do? 91 00:04:46,920 --> 00:04:49,440 Speaker 1: What's a CFO to do? I mean, if you're gonna 92 00:04:49,440 --> 00:04:52,680 Speaker 1: have slower growth, you've got to buy revenues. So this 93 00:04:52,800 --> 00:04:54,919 Speaker 1: word synergy comes up for next year. I mean it 94 00:04:54,960 --> 00:04:56,880 Speaker 1: just keeps on going, right. Well, I think if you 95 00:04:56,880 --> 00:04:58,680 Speaker 1: have slower growth, you've got to do a couple of things. 96 00:04:58,800 --> 00:05:02,160 Speaker 1: Maintain control of your costs, be really thoughtful about your 97 00:05:02,200 --> 00:05:06,320 Speaker 1: investment program, make sure your allocated capital internally to those 98 00:05:06,880 --> 00:05:08,719 Speaker 1: parts of your business that they had the ability to 99 00:05:08,800 --> 00:05:11,320 Speaker 1: grow through all parts of the cycle. And You're right, 100 00:05:11,400 --> 00:05:13,760 Speaker 1: in some cases you're gonna have to think about acquisitions. 101 00:05:14,080 --> 00:05:17,040 Speaker 1: And valuations have come down across the board. I would 102 00:05:17,040 --> 00:05:20,040 Speaker 1: suggest that valuations and private markets have not come down 103 00:05:20,520 --> 00:05:23,880 Speaker 1: as much, so if you're thinking about acquiring assets, um, 104 00:05:23,920 --> 00:05:26,680 Speaker 1: you'd have to think about you know, public looking at 105 00:05:26,720 --> 00:05:28,359 Speaker 1: it a bit more of a discount than the private 106 00:05:28,400 --> 00:05:30,560 Speaker 1: stuff at this point. Okay, more great to can't shop 107 00:05:30,600 --> 00:05:34,560 Speaker 1: with you Blank Look Institute Investment Institute Chief Equity Strategists. 108 00:05:34,560 --> 00:05:36,479 Speaker 1: You have a wonderful Christmas. If we don't see you before, 109 00:05:36,600 --> 00:05:52,360 Speaker 1: Thank you, Mary, Mary. I want to bring in David 110 00:05:52,400 --> 00:05:57,159 Speaker 1: Sowerby and Cora Managing director and portfolio manager. David, it 111 00:05:57,240 --> 00:06:02,080 Speaker 1: feels like a growth scare. At how different is it? 112 00:06:02,080 --> 00:06:05,320 Speaker 1: It's very similar to late two thousand fifteen early two 113 00:06:05,360 --> 00:06:09,640 Speaker 1: thousand sixteen. Stock prices are trading about the same valuation 114 00:06:09,640 --> 00:06:12,039 Speaker 1: as they were in February of sixteen at the bottom, 115 00:06:12,320 --> 00:06:14,640 Speaker 1: whether it's on a price to earnings or as Tom 116 00:06:14,680 --> 00:06:16,919 Speaker 1: knows quite well, how I want to value it on 117 00:06:16,960 --> 00:06:20,360 Speaker 1: a free cash flow yield basis. Sentiment is getting very 118 00:06:20,440 --> 00:06:24,040 Speaker 1: washed out. The dollar was strong in in two thousand 119 00:06:24,160 --> 00:06:27,560 Speaker 1: fifteen and then it retreated. It is similar, and I 120 00:06:27,600 --> 00:06:31,680 Speaker 1: think because it's similar, it's becomes an interesting buying opportunity. John. 121 00:06:31,720 --> 00:06:34,080 Speaker 1: That's equity talk that you're hearing there. It's different than 122 00:06:34,120 --> 00:06:35,920 Speaker 1: what you cover on the real we can can see 123 00:06:35,960 --> 00:06:38,200 Speaker 1: the equity, so you can talk about you can do 124 00:06:38,240 --> 00:06:40,240 Speaker 1: that with David Sarby. I also want to point out 125 00:06:40,279 --> 00:06:44,960 Speaker 1: the press gathered here in Brussels awaiting Prime Minister May 126 00:06:45,040 --> 00:06:48,920 Speaker 1: the British flags and one EU flag as well, position 127 00:06:49,000 --> 00:06:51,680 Speaker 1: behind the lectern and a blue backdrop, and we'll look 128 00:06:51,680 --> 00:06:54,200 Speaker 1: for that from Prime Minister May here in a moment. 129 00:06:54,279 --> 00:06:57,480 Speaker 1: David Sarby, we always talk about the focus, focused, focus 130 00:06:57,560 --> 00:06:59,960 Speaker 1: of all of the media, and that's the big stuff. 131 00:07:00,320 --> 00:07:02,400 Speaker 1: You love to go mid you love to go small. 132 00:07:02,800 --> 00:07:05,680 Speaker 1: I want to talk about mid caps. Have mid caps 133 00:07:05,680 --> 00:07:08,880 Speaker 1: and joined the correction or have they shown their usual 134 00:07:09,080 --> 00:07:13,400 Speaker 1: historic resiliency. They have more bruises this year than large 135 00:07:13,480 --> 00:07:16,520 Speaker 1: cap the Russell two thousand to go even smaller down 136 00:07:16,680 --> 00:07:20,280 Speaker 1: six percent year to date, mid caps a similar number. 137 00:07:21,360 --> 00:07:23,560 Speaker 1: It's been a it's been a tough environment. Yet at 138 00:07:23,560 --> 00:07:26,520 Speaker 1: the same time, when GDP growth is better than three 139 00:07:26,880 --> 00:07:30,480 Speaker 1: on an inflation adjusted basis, that's a good backdrop for 140 00:07:30,560 --> 00:07:33,400 Speaker 1: earnings and a good backdrop for the small caps to 141 00:07:33,600 --> 00:07:38,080 Speaker 1: re emerge. Do you agree that cash is an asset? No, 142 00:07:38,960 --> 00:07:40,760 Speaker 1: not in a long term and a long term time 143 00:07:41,160 --> 00:07:45,160 Speaker 1: cash is trash. It is a dragon portfolios, but two 144 00:07:45,160 --> 00:07:48,600 Speaker 1: thousand eighteen will be that year when cash beats everything 145 00:07:48,840 --> 00:07:53,080 Speaker 1: large cap, small cap, US, non US bonds. Cash is 146 00:07:53,320 --> 00:07:54,960 Speaker 1: a nice thing to have this year, but in the 147 00:07:55,040 --> 00:07:58,480 Speaker 1: long term cash is trash. It's interesting the justice Payperl 148 00:07:58,600 --> 00:08:00,760 Speaker 1: stots to fall in love with cash, and my colleague 149 00:08:00,920 --> 00:08:04,160 Speaker 1: Luke Care of Bloomberg brought this up as well. Cash 150 00:08:04,240 --> 00:08:06,800 Speaker 1: was heighted at the start of the year in January, 151 00:08:06,880 --> 00:08:10,400 Speaker 1: and then that was the thing that outperformed. Now everyone's 152 00:08:10,400 --> 00:08:13,960 Speaker 1: in love with cash, and now duration starts to outperform. 153 00:08:14,120 --> 00:08:18,120 Speaker 1: So here's the here's the key. In January, investor sentiment, 154 00:08:18,280 --> 00:08:21,960 Speaker 1: individual investor sentiment was more than fifty bullish when nobody 155 00:08:22,000 --> 00:08:27,080 Speaker 1: liked cash. As of yesterday, investor sentiment was forty percent barrish, 156 00:08:27,160 --> 00:08:30,160 Speaker 1: above the long term average. When people want more cash. 157 00:08:30,400 --> 00:08:33,840 Speaker 1: From a contrarian perspective, it's a good time to be 158 00:08:33,960 --> 00:08:38,080 Speaker 1: a selective, selective net buyer. So selective, Well, let's be 159 00:08:38,160 --> 00:08:40,520 Speaker 1: more specific. Do you like the banks here? The banks 160 00:08:40,520 --> 00:08:42,960 Speaker 1: have been totally hammet of the last couple of weeks 161 00:08:43,000 --> 00:08:47,480 Speaker 1: has been pretty ugly mediocre. How's that for a portfolio 162 00:08:47,520 --> 00:08:51,120 Speaker 1: manager view? Uh? Citizens financial? I think that that's a 163 00:08:51,200 --> 00:08:54,679 Speaker 1: regional bank that has good loan growth, lower charge offs. 164 00:08:54,720 --> 00:08:57,360 Speaker 1: That that's interesting. But for the most part, the bank 165 00:08:57,480 --> 00:08:59,840 Speaker 1: story this year, which was to call everybody wanted to 166 00:08:59,840 --> 00:09:04,760 Speaker 1: make hasn't worked. David, with with your experience and and 167 00:09:04,880 --> 00:09:09,120 Speaker 1: particularly with your institutional service to pension funds and giving 168 00:09:09,160 --> 00:09:14,040 Speaker 1: them advice. How do you handle a General Electric? Let's 169 00:09:14,080 --> 00:09:18,040 Speaker 1: say you own it, you've enjoyed the losses, how do 170 00:09:18,080 --> 00:09:20,160 Speaker 1: you do that. I'm not talking about some trade or 171 00:09:20,240 --> 00:09:23,000 Speaker 1: somebody like Doug Casts. It's in and out and all that. 172 00:09:23,120 --> 00:09:27,880 Speaker 1: I'm talking about mom and pop they own ge oops. 173 00:09:27,920 --> 00:09:32,360 Speaker 1: How do you handle that? It's I think it's it 174 00:09:32,400 --> 00:09:35,839 Speaker 1: goes back to two thousand when when a high profile 175 00:09:36,160 --> 00:09:39,840 Speaker 1: CEO leaves a company on a high note, that's usually 176 00:09:39,920 --> 00:09:43,800 Speaker 1: a better time to sell than buy hindsight, but that's 177 00:09:43,800 --> 00:09:45,720 Speaker 1: been the story with General Electric. You and I have 178 00:09:45,760 --> 00:09:49,200 Speaker 1: talked about other conglomerates which have been better return on 179 00:09:49,320 --> 00:09:53,959 Speaker 1: capitol companies. Honeywell that that's been a so much better 180 00:09:53,960 --> 00:09:56,480 Speaker 1: play than than General Electric. And I think that's still 181 00:09:56,520 --> 00:09:59,160 Speaker 1: the story today. Okay, so u T Actually NIT of 182 00:09:59,160 --> 00:10:02,719 Speaker 1: Technologies has to break up into three David Sowerby companies 183 00:10:03,080 --> 00:10:05,080 Speaker 1: for you that's a good thing. Do you buy all three? 184 00:10:05,160 --> 00:10:07,280 Speaker 1: What do you do well? One thing you want to 185 00:10:07,280 --> 00:10:10,400 Speaker 1: watch is where does the CFO go in the breakup? 186 00:10:10,440 --> 00:10:13,440 Speaker 1: And and where the CFO goes is usually because they're 187 00:10:13,440 --> 00:10:16,640 Speaker 1: pretty got some good inside baseball that that's a good 188 00:10:16,679 --> 00:10:18,559 Speaker 1: place to be. And in the case of Honeywell, they 189 00:10:18,559 --> 00:10:24,679 Speaker 1: spun off their their home security business Residio symbol are easy. 190 00:10:24,800 --> 00:10:27,400 Speaker 1: I I think that's an interesting play as a spinoff 191 00:10:27,480 --> 00:10:31,200 Speaker 1: on on Honeywell. What do they do? What does residy 192 00:10:31,320 --> 00:10:34,560 Speaker 1: they are? You can control your heat, you're you're lighting 193 00:10:34,600 --> 00:10:37,440 Speaker 1: in from a remote in your house. They're very good 194 00:10:37,440 --> 00:10:40,760 Speaker 1: on home security for a person like me who writes 195 00:10:40,880 --> 00:10:44,600 Speaker 1: checks and doesn't do it himself. Residio uses professional service 196 00:10:44,640 --> 00:10:46,640 Speaker 1: people to put that all together. And there are a 197 00:10:46,679 --> 00:10:50,360 Speaker 1: recent spinoff out of Honeywell. When was the last time 198 00:10:50,400 --> 00:10:55,120 Speaker 1: you can't about Brexit? I remember when Brexit the vote 199 00:10:55,160 --> 00:10:57,840 Speaker 1: the day after the market went down initially and then 200 00:10:57,880 --> 00:10:59,880 Speaker 1: and then it got right back on its bicycle and 201 00:11:00,080 --> 00:11:04,040 Speaker 1: continue to do well. And I think this is maybe 202 00:11:04,040 --> 00:11:09,120 Speaker 1: too simple. No wonder the UK wants to depart that 203 00:11:09,200 --> 00:11:13,079 Speaker 1: they don't want to be dictated by uncompetitive countries. Whether 204 00:11:13,120 --> 00:11:17,120 Speaker 1: it's Belgium, France, Italy, you name it, and the u 205 00:11:17,200 --> 00:11:20,520 Speaker 1: K is is the eighth most competitive country on this 206 00:11:20,679 --> 00:11:23,760 Speaker 1: planet and the rest of their peers there are simply 207 00:11:23,800 --> 00:11:27,320 Speaker 1: not maybe Germany or Switzerland. That's what they have an 208 00:11:27,360 --> 00:11:30,680 Speaker 1: issue with. John. The single most important conversation I've had 209 00:11:30,679 --> 00:11:33,160 Speaker 1: on this junket was with a guy that runs the 210 00:11:33,280 --> 00:11:38,480 Speaker 1: national health system. Uh. My recollection is Matthew Hancock is 211 00:11:38,520 --> 00:11:42,520 Speaker 1: his name, and he was heated John that he's a remainer, 212 00:11:42,640 --> 00:11:45,640 Speaker 1: he's an elitist London, you know, the usual thing in 213 00:11:45,679 --> 00:11:49,040 Speaker 1: his case, directly supporting the Prime Minister. And he says 214 00:11:49,080 --> 00:11:53,560 Speaker 1: the vast majority of his district, his constituency is leaf 215 00:11:54,320 --> 00:11:56,679 Speaker 1: that's the problem the MPs half he was he has 216 00:11:56,720 --> 00:12:00,760 Speaker 1: a single most important conversation I've had, other than trying 217 00:12:00,800 --> 00:12:03,480 Speaker 1: to figure out Waterloo Street of Brussels. A very thin 218 00:12:03,559 --> 00:12:07,160 Speaker 1: majority of the United Kingdom who did vote voted to leave. 219 00:12:07,520 --> 00:12:11,120 Speaker 1: There is an overwhelming majority within Parliament to stay within 220 00:12:11,160 --> 00:12:14,880 Speaker 1: the European Union. The officials don't seem to represent what 221 00:12:14,960 --> 00:12:18,040 Speaker 1: their constituents want, and I think that's the political problem 222 00:12:18,080 --> 00:12:21,000 Speaker 1: these parties have. On top of that, the parties themselves 223 00:12:21,040 --> 00:12:23,640 Speaker 1: aren't just divided by party. They're divided by the one issue. 224 00:12:23,880 --> 00:12:27,119 Speaker 1: So the Labor Party has divided, the Conservative Party is divided, 225 00:12:27,320 --> 00:12:30,080 Speaker 1: and the Labor Party is offering very little alternative to 226 00:12:30,080 --> 00:12:32,720 Speaker 1: what the Prime Minister is bringing home from Brussels again today, 227 00:12:32,760 --> 00:12:35,040 Speaker 1: which is the same things she had last week, but 228 00:12:35,160 --> 00:12:37,480 Speaker 1: not to run a survey here and they'll be pulling 229 00:12:37,520 --> 00:12:40,959 Speaker 1: and all that coming up. With all this uproar, John Ferrell, 230 00:12:41,000 --> 00:12:45,160 Speaker 1: would you suggest there could be even a greater Leave constituency. 231 00:12:45,400 --> 00:12:47,000 Speaker 1: I've got no idea, to be honest with you, Tom, 232 00:12:47,440 --> 00:12:48,880 Speaker 1: and I hate to call it. And every time I've 233 00:12:48,880 --> 00:12:50,720 Speaker 1: offered a view on Brexit, I've been wrong five minutes 234 00:12:50,800 --> 00:12:55,240 Speaker 1: later and have to Brexit. When you let our coverage 235 00:12:55,240 --> 00:12:58,240 Speaker 1: the day after Brexit, was I wrong five minutes, every 236 00:12:58,240 --> 00:13:00,880 Speaker 1: five minutes, every four minutes was I have to say 237 00:13:00,920 --> 00:13:03,240 Speaker 1: that someone that did stand up and did lead was 238 00:13:03,320 --> 00:13:06,760 Speaker 1: Governor Connie Um. It helped his reputation for about twenty 239 00:13:06,760 --> 00:13:08,360 Speaker 1: four hours because he has had a tough time. I 240 00:13:08,360 --> 00:13:10,559 Speaker 1: have a since tone well, I and this is so 241 00:13:10,600 --> 00:13:12,760 Speaker 1: important and we can go to David sar beyond this 242 00:13:13,520 --> 00:13:16,160 Speaker 1: right now, David, I thought Mr drog yesterday showed the 243 00:13:16,240 --> 00:13:21,480 Speaker 1: limited degrees of freedom that central bankers have given global 244 00:13:21,559 --> 00:13:25,720 Speaker 1: slowdown and given the realities of price change, do you 245 00:13:25,800 --> 00:13:29,240 Speaker 1: look for next year Chairman Powell to have a limited 246 00:13:29,720 --> 00:13:32,880 Speaker 1: choice se versus what was thought of six months ago. 247 00:13:33,559 --> 00:13:37,360 Speaker 1: I had no problem with Chairman Paul's comments in October 248 00:13:37,400 --> 00:13:41,080 Speaker 1: when he said my mission is FED chairs as it 249 00:13:41,160 --> 00:13:44,320 Speaker 1: always should be, as low inflation and price stability. And 250 00:13:44,400 --> 00:13:47,160 Speaker 1: maybe maybe he retreats from that somewhat, but as long 251 00:13:47,200 --> 00:13:49,040 Speaker 1: as the FED is committed to that, I don't have 252 00:13:49,080 --> 00:13:52,640 Speaker 1: a problem with two or three rate hikes, uh, even 253 00:13:52,679 --> 00:13:55,480 Speaker 1: a little bit more, because real FED funds are still 254 00:13:55,520 --> 00:14:00,679 Speaker 1: effectively zero and ultimately that's great for finance traw markets, 255 00:14:00,679 --> 00:14:04,040 Speaker 1: but it hasn't showed up yet, but it can be inflationary. 256 00:14:04,240 --> 00:14:08,640 Speaker 1: Are there mid caps David Sarby? In Europe? There are? 257 00:14:09,360 --> 00:14:12,079 Speaker 1: I'm getting out of my wheelhouse a little bit in 258 00:14:12,080 --> 00:14:15,559 Speaker 1: in uh in that space. So turning back to the US, 259 00:14:15,640 --> 00:14:20,120 Speaker 1: I talked about Residio as an example, Windham Hotels, which 260 00:14:20,160 --> 00:14:24,160 Speaker 1: has spun off. It's it's travel business there and they're 261 00:14:24,640 --> 00:14:27,640 Speaker 1: right there, right in the sweet spot of Ramada days. 262 00:14:27,680 --> 00:14:31,960 Speaker 1: In Howard Johnson's to go back in time, that is 263 00:14:32,000 --> 00:14:34,240 Speaker 1: I think a good play in the mid cap space. 264 00:14:34,280 --> 00:14:37,120 Speaker 1: It's about a five billion dollar market cap, and I 265 00:14:37,120 --> 00:14:41,640 Speaker 1: think that's that's really interesting for again believing in the 266 00:14:41,680 --> 00:14:45,320 Speaker 1: long term you're gonna make money buying spinoffs. Windham has 267 00:14:45,440 --> 00:14:48,440 Speaker 1: nine analysts who follow it. I like that. You know, 268 00:14:48,520 --> 00:14:50,160 Speaker 1: someone run into me yes today, Salm and I think 269 00:14:50,200 --> 00:14:52,000 Speaker 1: it's a subject that we can perhaps talk about now 270 00:14:52,040 --> 00:14:53,880 Speaker 1: between the three of us. And they said, the economy 271 00:14:53,880 --> 00:14:57,080 Speaker 1: has been so strong through and if things have been 272 00:14:57,120 --> 00:14:59,680 Speaker 1: as good as this administration and the Federals of site, 273 00:15:00,280 --> 00:15:02,840 Speaker 1: why does this market fall out of bed every time 274 00:15:02,920 --> 00:15:07,160 Speaker 1: real rights breach one percent? Why? Why is it should 275 00:15:08,240 --> 00:15:12,440 Speaker 1: it shouldn't. I think the key is put interest rates 276 00:15:12,600 --> 00:15:16,320 Speaker 1: and inflation together. And if interest rates are going up 277 00:15:16,360 --> 00:15:19,520 Speaker 1: because the economy is stronger, loan demand is higher, I 278 00:15:19,760 --> 00:15:23,200 Speaker 1: s M Index closer to sixty than fifty. That's not 279 00:15:23,280 --> 00:15:25,240 Speaker 1: a bad thing. But when interest rates are going up 280 00:15:25,280 --> 00:15:28,119 Speaker 1: because we're way behind a curve on inflation, and inflation 281 00:15:28,200 --> 00:15:30,840 Speaker 1: is pushing not at not at two percent today, but 282 00:15:30,920 --> 00:15:33,880 Speaker 1: closer to fork, then we've got serious problems. But I 283 00:15:33,920 --> 00:15:36,280 Speaker 1: think it rises a much bigger issue since the financial 284 00:15:36,320 --> 00:15:39,240 Speaker 1: crisis has our tolerance. There's a global economy and a 285 00:15:39,240 --> 00:15:42,440 Speaker 1: global market place. Our tolerance for higher interest rates has 286 00:15:42,480 --> 00:15:46,280 Speaker 1: it diminished to that degree that we can't get away 287 00:15:46,280 --> 00:15:51,960 Speaker 1: from one percent real I think ultimately that as long 288 00:15:51,960 --> 00:15:55,080 Speaker 1: as your return on capital is greater than your cost 289 00:15:55,120 --> 00:15:58,880 Speaker 1: of capital, and return on capital is more like five percent, 290 00:15:58,960 --> 00:16:01,480 Speaker 1: cost to capital is more like three, that's a good 291 00:16:01,480 --> 00:16:06,560 Speaker 1: spread for the backdrop for equity investors, and good good 292 00:16:06,600 --> 00:16:10,080 Speaker 1: luck forecasting interest rates. You're wrong more than you're right, 293 00:16:10,560 --> 00:16:12,560 Speaker 1: but but I think they're still going to go higher. 294 00:16:13,000 --> 00:16:17,840 Speaker 1: The expectations is incredibly dovish the economists that I'm reading 295 00:16:17,880 --> 00:16:20,440 Speaker 1: ahead of next week's decision is a dovish interest rate hike. 296 00:16:20,560 --> 00:16:23,400 Speaker 1: And my response to that is doubbish to what dovish 297 00:16:23,400 --> 00:16:27,520 Speaker 1: relative to walk Because expectations right now are already so dovish. 298 00:16:27,560 --> 00:16:30,120 Speaker 1: I would say it's a high bar govern into next 299 00:16:30,120 --> 00:16:33,560 Speaker 1: week for the Federal Reserve and what we're to deliver 300 00:16:33,760 --> 00:16:38,200 Speaker 1: already very very dovish expectations for what the Fed's going 301 00:16:38,200 --> 00:16:42,320 Speaker 1: to deliver in nineteen chair, and I'll please keep your 302 00:16:42,320 --> 00:16:45,120 Speaker 1: independence and don't pay attention to the tweets and know 303 00:16:45,200 --> 00:16:48,320 Speaker 1: what your mission is and will do just fine, and 304 00:16:48,320 --> 00:16:51,200 Speaker 1: and for and for interest rate forecasts. As a former 305 00:16:51,240 --> 00:16:55,280 Speaker 1: bank economist, economists are notoriously wrong on forecasting interest rates. 306 00:16:55,360 --> 00:16:58,640 Speaker 1: That's why I manage money, and I'm not an economist anymore. David, 307 00:16:58,640 --> 00:17:01,280 Speaker 1: what's the polish you see away from the elites of 308 00:17:01,360 --> 00:17:04,760 Speaker 1: New York City on the West coast and Washington the 309 00:17:04,800 --> 00:17:06,560 Speaker 1: rest of it? What's the pulse you see out in 310 00:17:06,600 --> 00:17:10,199 Speaker 1: your Midwest? It's what you affectionately refer to as the 311 00:17:10,240 --> 00:17:14,399 Speaker 1: flyover zone in the Midwest. It's just fine. Michigan's unemployment 312 00:17:14,480 --> 00:17:18,719 Speaker 1: rate is less than four percent, down from fourteen percent 313 00:17:18,960 --> 00:17:23,240 Speaker 1: in two thousand and nine. Is this boy in economy 314 00:17:23,320 --> 00:17:26,280 Speaker 1: filtered down to the broad part of America? Or has 315 00:17:26,320 --> 00:17:31,040 Speaker 1: it been a make America great again? Elite growth, wage growth, 316 00:17:31,240 --> 00:17:34,720 Speaker 1: income growth for the last year has started, has been 317 00:17:34,840 --> 00:17:38,520 Speaker 1: better for middle income earners now growing better than three 318 00:17:38,960 --> 00:17:41,440 Speaker 1: So it has it has filtered down. That's why I 319 00:17:41,480 --> 00:17:45,000 Speaker 1: think a window name works because of the the properties 320 00:17:45,040 --> 00:17:48,359 Speaker 1: they own. Ramadas right days in We're not talking about 321 00:17:48,359 --> 00:17:51,000 Speaker 1: the Riz, Carlton, We're talking about more medium price points 322 00:17:51,040 --> 00:17:55,280 Speaker 1: to stay at. That would sound wonderful. Thank you always 323 00:17:55,320 --> 00:18:12,720 Speaker 1: always great to catch How you thank you didn't count it? 324 00:18:12,800 --> 00:18:16,480 Speaker 1: Joining us Macro risk advises the volatility of the last 325 00:18:16,480 --> 00:18:19,359 Speaker 1: couple of weeks day and what do you make of it? Yeah, 326 00:18:19,359 --> 00:18:22,520 Speaker 1: I think it's the markets are grappling with a bunch 327 00:18:22,560 --> 00:18:25,800 Speaker 1: of different cross currents at once. Um, You've obviously got 328 00:18:25,880 --> 00:18:29,399 Speaker 1: tariffs as the overriding story with the markets, but you know, 329 00:18:29,480 --> 00:18:31,560 Speaker 1: below the surface, there's a bunch of other things going 330 00:18:31,600 --> 00:18:35,119 Speaker 1: on as well. There is concerns that the sort of 331 00:18:35,400 --> 00:18:38,880 Speaker 1: firm handshake that the markets and the FED had agreed 332 00:18:38,920 --> 00:18:41,520 Speaker 1: upon for for many years in the Bernankeian and Yelling 333 00:18:41,600 --> 00:18:44,800 Speaker 1: era is is coming to a close in the sense 334 00:18:44,840 --> 00:18:49,919 Speaker 1: that Jerome Powell is effectively having to take back some 335 00:18:50,000 --> 00:18:53,280 Speaker 1: of the assurances that his predecessors were able to give 336 00:18:53,320 --> 00:18:57,359 Speaker 1: markets because he just doesn't know. And so the markets 337 00:18:57,359 --> 00:19:01,400 Speaker 1: are trying to understand where the FED is heading from here. Um, 338 00:19:01,440 --> 00:19:03,560 Speaker 1: So that that's one of the markets and FED talking 339 00:19:03,600 --> 00:19:06,600 Speaker 1: past each other. And then I'd say the second one is, Look, 340 00:19:06,640 --> 00:19:10,320 Speaker 1: markets are discounting mechanisms, and there are concerns that global 341 00:19:10,320 --> 00:19:14,480 Speaker 1: growth has peaked, and that some of the quote overbuilding 342 00:19:15,000 --> 00:19:18,440 Speaker 1: that occurs during very benign cycles, especially in the credit markets, 343 00:19:18,920 --> 00:19:21,639 Speaker 1: is starting to kind of come home to roost. So 344 00:19:21,720 --> 00:19:25,400 Speaker 1: there's a lot of uh, sort of pricing of distress 345 00:19:25,480 --> 00:19:27,359 Speaker 1: that's in markets, and and you know, we're gonna in 346 00:19:27,359 --> 00:19:30,400 Speaker 1: some ways have to wait and see whether the economic 347 00:19:30,400 --> 00:19:32,920 Speaker 1: fundamentals are strong enough or the markets right that things 348 00:19:32,920 --> 00:19:35,480 Speaker 1: are actually starting to slow. Well, let's get into that day. 349 00:19:35,640 --> 00:19:37,879 Speaker 1: The market is trying to get ahead of something. Some 350 00:19:37,920 --> 00:19:40,560 Speaker 1: people are trying to figure out whether it's overshooting, is 351 00:19:40,600 --> 00:19:44,800 Speaker 1: it it's it's so difficult to say. I would I 352 00:19:44,800 --> 00:19:48,080 Speaker 1: would comment that the markets and the economy are very 353 00:19:48,119 --> 00:19:51,679 Speaker 1: distinct things. And then for quite a long time, actually 354 00:19:51,760 --> 00:19:55,000 Speaker 1: what the benefit to the market of a weak economy 355 00:19:55,119 --> 00:19:57,800 Speaker 1: was that the Fed state in town for longer and longer, right, 356 00:19:57,880 --> 00:20:02,960 Speaker 1: the justification for ongoing FED policy that was very supportive 357 00:20:02,960 --> 00:20:05,320 Speaker 1: to the market was in fact a weak economy. And 358 00:20:05,359 --> 00:20:08,320 Speaker 1: now it's almost that the reverse is occurring. That the 359 00:20:09,119 --> 00:20:11,080 Speaker 1: at least for the U. S economy, that the strength 360 00:20:11,080 --> 00:20:14,520 Speaker 1: of the economy, uh, that the Feds looking forward and 361 00:20:14,600 --> 00:20:19,000 Speaker 1: trying to ascertain whether inflation is headed higher uh via um, 362 00:20:19,040 --> 00:20:22,240 Speaker 1: you know, diminished slack in the economy. Um, that's Fed policy. 363 00:20:22,359 --> 00:20:25,560 Speaker 1: That's um uh you know, indicates that things are actually 364 00:20:25,600 --> 00:20:27,480 Speaker 1: going well, but it may not be supportive to the 365 00:20:27,520 --> 00:20:30,600 Speaker 1: markets as we try to understand how much of you know, 366 00:20:30,600 --> 00:20:32,440 Speaker 1: how much of asset prices were a function of low 367 00:20:32,520 --> 00:20:37,000 Speaker 1: rates Dan currnet. How should our audience use the VIX? 368 00:20:37,160 --> 00:20:41,000 Speaker 1: The VIX is n twenty long term average. Boy, these 369 00:20:41,000 --> 00:20:45,320 Speaker 1: are odd times different times. Is the one VIX now 370 00:20:45,680 --> 00:20:47,919 Speaker 1: the same as a twenty one VIX and two thousand 371 00:20:48,040 --> 00:20:53,440 Speaker 1: six or One of the things that is important to 372 00:20:53,520 --> 00:20:55,919 Speaker 1: understand is that the VIX has used to be just 373 00:20:56,000 --> 00:20:59,000 Speaker 1: an index that we observed. The VIX is the price 374 00:20:59,680 --> 00:21:03,760 Speaker 1: of insurance for one month options on the SMP five hundred. 375 00:21:03,800 --> 00:21:06,520 Speaker 1: It's a measure of implied volatility, and it's something that 376 00:21:06,560 --> 00:21:09,320 Speaker 1: we just looked at. It was a calculated figure. Uh. 377 00:21:09,480 --> 00:21:13,440 Speaker 1: Now it is a vastly traded instrument. There are vixed futures, 378 00:21:13,480 --> 00:21:17,760 Speaker 1: there are VIX options, all of which trade with substantial 379 00:21:18,080 --> 00:21:22,040 Speaker 1: UH liquidity and find their way into the portfolios both 380 00:21:22,040 --> 00:21:25,400 Speaker 1: from an offensive and defensive standpoint. Um if you look 381 00:21:25,440 --> 00:21:29,000 Speaker 1: actually at the realized volatility of the VIX itself, so 382 00:21:29,080 --> 00:21:31,200 Speaker 1: this is in some ways a measure of the vowel 383 00:21:31,359 --> 00:21:34,440 Speaker 1: of the vol uh. It starts to rise right around 384 00:21:34,520 --> 00:21:37,760 Speaker 1: two thousand four, and with some ups and downs along 385 00:21:37,800 --> 00:21:41,639 Speaker 1: the way, it's it's generally risen for the last fourteen years, 386 00:21:41,760 --> 00:21:46,359 Speaker 1: and it it almost corresponds exactly with the introduction of 387 00:21:46,440 --> 00:21:50,080 Speaker 1: VIX futures and options. So the financialization of the product 388 00:21:50,160 --> 00:21:53,880 Speaker 1: is what makes now different. It's not in an observation 389 00:21:54,280 --> 00:21:57,159 Speaker 1: of index. It's a traded asset that people wanted to 390 00:21:57,280 --> 00:22:01,120 Speaker 1: get into an out of what is de incurrent average VIX. 391 00:22:01,200 --> 00:22:05,240 Speaker 1: I'm assuming it's not twenty anymore. Well, listen, the VIX 392 00:22:05,400 --> 00:22:09,000 Speaker 1: is really just uh, it's very correlated to the the 393 00:22:09,080 --> 00:22:12,960 Speaker 1: movement back and forth in in markets. UH, and by 394 00:22:12,960 --> 00:22:16,920 Speaker 1: that I mean, UM, if if you look at realized volatility, 395 00:22:17,359 --> 00:22:21,040 Speaker 1: so just the HVG function on on the terminal, you're 396 00:22:21,040 --> 00:22:26,520 Speaker 1: going to see that. UM. Since October, the realized volatility 397 00:22:26,600 --> 00:22:30,040 Speaker 1: SMP has been slightly north of twenty UM. So it's 398 00:22:30,040 --> 00:22:33,040 Speaker 1: actually no surprise that the VIX is sitting here at twenty. 399 00:22:33,040 --> 00:22:35,800 Speaker 1: In fact, many would say that options, even with the 400 00:22:35,880 --> 00:22:38,359 Speaker 1: VIX up here, are actually a pretty good deal. They're 401 00:22:38,400 --> 00:22:42,639 Speaker 1: justified by the much more substantial not not just close 402 00:22:42,720 --> 00:22:46,560 Speaker 1: to close movements, which is what uh most of most 403 00:22:46,600 --> 00:22:49,240 Speaker 1: folks look at. Uh, if you look at the intra 404 00:22:49,359 --> 00:22:54,240 Speaker 1: day movements, they're actually illustrating a almost far greater level 405 00:22:54,320 --> 00:22:57,000 Speaker 1: of volatility than just close to close. It's these it's 406 00:22:57,040 --> 00:22:59,800 Speaker 1: these back and forth intra day they're actually painingful with 407 00:22:59,840 --> 00:23:02,359 Speaker 1: the sspect to option pricing. Did you get all that? 408 00:23:02,480 --> 00:23:04,320 Speaker 1: I got some of it and I wanted to follow up? 409 00:23:04,359 --> 00:23:07,160 Speaker 1: If that's I think if you asked money people right 410 00:23:07,200 --> 00:23:11,400 Speaker 1: now whether downside protection was expensive, they might answer yes, 411 00:23:12,320 --> 00:23:17,600 Speaker 1: is it? Yeah? So again it's uh, when we look 412 00:23:17,640 --> 00:23:21,080 Speaker 1: at options, we uh, we're looking at two things. We're 413 00:23:21,119 --> 00:23:24,120 Speaker 1: looking at the the cost. Uh, just the So we're 414 00:23:24,119 --> 00:23:26,520 Speaker 1: going to score the price of the option in the 415 00:23:26,560 --> 00:23:30,600 Speaker 1: context of its history. So. Um, to answer your question 416 00:23:30,640 --> 00:23:33,720 Speaker 1: the first way, Jonathan, relative to last year, at this time, 417 00:23:33,800 --> 00:23:38,239 Speaker 1: these options are vastly more expensive. Remember last December, Uh, 418 00:23:38,359 --> 00:23:43,680 Speaker 1: the vix's was closing very consistently below ten. The realized 419 00:23:43,760 --> 00:23:46,800 Speaker 1: volatility in the SMP was he was sort of half that, 420 00:23:46,920 --> 00:23:50,480 Speaker 1: about five percent. Uh. Now you have the realized volatility 421 00:23:51,080 --> 00:23:54,040 Speaker 1: about twenty, so up fifteen points from a year ago, 422 00:23:54,600 --> 00:23:57,439 Speaker 1: and the options are up about ten points from a 423 00:23:57,480 --> 00:24:00,280 Speaker 1: year ago. Um. So so in some ways this is 424 00:24:00,280 --> 00:24:04,520 Speaker 1: the paradox. In some ways, options at twenty VIX right 425 00:24:04,560 --> 00:24:09,199 Speaker 1: now are in some ways less expensive relative to the 426 00:24:09,240 --> 00:24:12,800 Speaker 1: realized volatility than they were last year. Last year the 427 00:24:12,880 --> 00:24:16,160 Speaker 1: VIX was ten, but the realized was only five UM 428 00:24:16,440 --> 00:24:18,800 Speaker 1: And so it's it's a tricky it's a tricky thing 429 00:24:18,840 --> 00:24:21,600 Speaker 1: to answer, Um, what what do we need to sustain 430 00:24:21,680 --> 00:24:24,760 Speaker 1: a VIX of twenty? You need movements in the SMP 431 00:24:25,840 --> 00:24:29,600 Speaker 1: of about one point to one point three percent a day. 432 00:24:29,640 --> 00:24:31,480 Speaker 1: So you need to run, you know, through through a 433 00:24:31,480 --> 00:24:35,400 Speaker 1: bunch of SMP handles. But frankly, that's what's been happening 434 00:24:35,400 --> 00:24:38,679 Speaker 1: with a great degree of just to jump in and 435 00:24:38,720 --> 00:24:41,480 Speaker 1: make it clearer, to make the judgment that implied vols 436 00:24:41,560 --> 00:24:44,560 Speaker 1: cheap versus realized vol you have to believe that it lasts. 437 00:24:45,880 --> 00:24:49,040 Speaker 1: That's exactly right. You when when you look at options 438 00:24:49,040 --> 00:24:51,359 Speaker 1: and you compare and applied to realize, you're just looking 439 00:24:51,920 --> 00:24:54,920 Speaker 1: backwards at the data that's already occurred. That's the realized 440 00:24:55,359 --> 00:24:59,320 Speaker 1: And then, as you said, you're asking yourself, is this sustainable? Um? So, 441 00:24:59,440 --> 00:25:02,280 Speaker 1: a couple of things. They're one. We are about to 442 00:25:02,320 --> 00:25:06,880 Speaker 1: head into this late seasonal period where we've got Thanksgiving 443 00:25:06,920 --> 00:25:10,119 Speaker 1: and i'm sorry, Christmas and New Year's that tends to 444 00:25:10,160 --> 00:25:13,359 Speaker 1: be a pretty bad time for volatility. Folks if they 445 00:25:13,440 --> 00:25:15,880 Speaker 1: can try to shut it down and get away from 446 00:25:15,880 --> 00:25:18,600 Speaker 1: the down. UM. Not not much to expect there, but 447 00:25:18,600 --> 00:25:20,840 Speaker 1: but of course you've got these these headlines that keep 448 00:25:20,920 --> 00:25:24,040 Speaker 1: hitting the markets uh as well, and those have been, 449 00:25:24,119 --> 00:25:26,600 Speaker 1: you know, an engine for volatility. This has been wonderful. 450 00:25:26,600 --> 00:25:29,400 Speaker 1: We're gonna try to get this out on our podcast today, 451 00:25:29,520 --> 00:25:33,560 Speaker 1: UH because it bears really listening for those trying to 452 00:25:33,600 --> 00:25:36,480 Speaker 1: figure out the dynamics and the Greek letters of the 453 00:25:36,520 --> 00:25:40,280 Speaker 1: option system. Mr Kurnitt is with maccar Risk Advisors, Dean 454 00:25:40,359 --> 00:25:57,760 Speaker 1: Kern right now, while Sweeney in New York. I'm Tom 455 00:25:57,840 --> 00:26:00,840 Speaker 1: keenan Brussels and joining us. There's someone who can give 456 00:26:00,920 --> 00:26:04,159 Speaker 1: us great perspective on I'm gonna call it sort of 457 00:26:04,200 --> 00:26:07,879 Speaker 1: the zeitgeist beat at the moment. Gabriel Santos is with 458 00:26:08,000 --> 00:26:12,600 Speaker 1: JP Morgan and Gabriel it's become so fashionable in the 459 00:26:12,680 --> 00:26:16,680 Speaker 1: last ten weeks to say get back into e M. 460 00:26:16,720 --> 00:26:20,480 Speaker 1: I get it, e M bad market down and I 461 00:26:20,560 --> 00:26:23,440 Speaker 1: guess it becomes a value, but I'm not sure I 462 00:26:23,480 --> 00:26:26,600 Speaker 1: see the economic data that tells me that whether e 463 00:26:26,840 --> 00:26:30,240 Speaker 1: M A your JP Morgan. Yeah, Tom, So it's great 464 00:26:30,240 --> 00:26:33,680 Speaker 1: to be here with you. Um, definitely a much more 465 00:26:33,720 --> 00:26:37,159 Speaker 1: difficult ear for emerging markets than we expected. Uh. And 466 00:26:37,200 --> 00:26:39,760 Speaker 1: I think really you just see that reflected and sentiment 467 00:26:40,040 --> 00:26:43,480 Speaker 1: very very clearly. We've seen multiples contracting a lot for 468 00:26:43,520 --> 00:26:47,560 Speaker 1: emerging market equities, we've seen currencies weakening. So sentiment is 469 00:26:47,600 --> 00:26:50,679 Speaker 1: just incredibly negative right now when we look at the 470 00:26:50,680 --> 00:26:54,639 Speaker 1: actual data, UM, we are not in crisis mode in 471 00:26:54,680 --> 00:27:00,880 Speaker 1: emerging markets, unlike back in UH, I'm not sure it's 472 00:27:00,920 --> 00:27:04,920 Speaker 1: necessarily a twelve with twelve month window we're talking about 473 00:27:04,920 --> 00:27:07,879 Speaker 1: here right for emerging markets, that tends to be a 474 00:27:07,920 --> 00:27:11,240 Speaker 1: fee store famine. I like to think it more over 475 00:27:11,280 --> 00:27:14,120 Speaker 1: a multi year process. Uh. And there I think if 476 00:27:14,119 --> 00:27:16,520 Speaker 1: you still don't have a lot of exposure to emerging markets, 477 00:27:16,560 --> 00:27:19,199 Speaker 1: as a lot of US based investors tend not to, 478 00:27:19,840 --> 00:27:22,119 Speaker 1: then now is a good time to slowly add back in, 479 00:27:22,200 --> 00:27:25,800 Speaker 1: but with a multi year window in mind here, So, Gabriela, 480 00:27:25,840 --> 00:27:28,879 Speaker 1: back here in in in the US, UM, the R word, 481 00:27:29,000 --> 00:27:32,040 Speaker 1: as in recession is being bannied about it seemingly increasingly 482 00:27:32,080 --> 00:27:36,440 Speaker 1: every week. Is a recession in your forecast for nineteen? 483 00:27:36,880 --> 00:27:39,439 Speaker 1: If not, what what are some of the risks that 484 00:27:39,480 --> 00:27:42,440 Speaker 1: could push us into recession? So it's also become I think, 485 00:27:42,520 --> 00:27:46,360 Speaker 1: very fashionable to talk about recession in the US these 486 00:27:46,440 --> 00:27:49,159 Speaker 1: days and to try to ascribe a specific year and 487 00:27:49,359 --> 00:27:55,680 Speaker 1: month to it, with late becoming UH consensus. I think 488 00:27:56,200 --> 00:27:58,879 Speaker 1: our view though, is when you look at the actual data, 489 00:27:59,040 --> 00:28:02,400 Speaker 1: it does not sport that kind of call, especially when 490 00:28:02,400 --> 00:28:04,560 Speaker 1: you look at the consumer, which of course is seventy 491 00:28:04,960 --> 00:28:07,200 Speaker 1: of the US economy, who just got some very strong 492 00:28:07,200 --> 00:28:10,920 Speaker 1: retail sales this morning. UH. Consumption has been very strong 493 00:28:11,000 --> 00:28:14,720 Speaker 1: here in for next year. We can't sustain that kind 494 00:28:14,760 --> 00:28:17,000 Speaker 1: of pace of consumption. It's been three three and a 495 00:28:17,040 --> 00:28:20,560 Speaker 1: half percent, four percent in the second quarter. We have 496 00:28:20,720 --> 00:28:23,760 Speaker 1: to slow down, but you can still see consumption growing 497 00:28:23,800 --> 00:28:27,760 Speaker 1: at two percent next year with with difficulty in seeing 498 00:28:27,800 --> 00:28:30,680 Speaker 1: what can really knock that off course absent let's see 499 00:28:30,680 --> 00:28:33,919 Speaker 1: a spike in inflation or a big shock that all 500 00:28:34,000 --> 00:28:36,920 Speaker 1: of a sudden leads businesses to, you know, go into 501 00:28:37,000 --> 00:28:40,200 Speaker 1: layoffs for example. UH. So for US we acknowledge where 502 00:28:40,240 --> 00:28:42,440 Speaker 1: later on in the cycle the probability goes up of 503 00:28:42,480 --> 00:28:45,000 Speaker 1: a recession over the next few years. But I think 504 00:28:45,000 --> 00:28:46,960 Speaker 1: it's very hard to say that it has to be 505 00:28:47,080 --> 00:28:51,720 Speaker 1: in given such a strong consumer. Right, So, given that 506 00:28:51,880 --> 00:28:57,920 Speaker 1: fairly constructive outlook for where are you advising your clients 507 00:28:57,920 --> 00:29:02,120 Speaker 1: in terms of asset allocations at when these versus fixed income? Yeah, 508 00:29:02,200 --> 00:29:04,440 Speaker 1: and so the clients that we speak to an asset 509 00:29:04,480 --> 00:29:07,120 Speaker 1: management tend to have a longer term horizon in view 510 00:29:07,320 --> 00:29:10,920 Speaker 1: right there, planning for retirement, for paying for college, for 511 00:29:11,040 --> 00:29:14,440 Speaker 1: things like that. Um, So in that environment, we would 512 00:29:14,520 --> 00:29:17,800 Speaker 1: still tend to prefer to be slightly overweight the equity 513 00:29:17,840 --> 00:29:20,719 Speaker 1: piece to the fixed income piece. But we have been 514 00:29:20,760 --> 00:29:23,720 Speaker 1: talking to our clients about slowly dimming the dials a 515 00:29:23,720 --> 00:29:28,120 Speaker 1: little bit and what we need. What does that mean 516 00:29:28,800 --> 00:29:33,720 Speaker 1: mean by that tom um is slowly starting to bring 517 00:29:33,840 --> 00:29:35,840 Speaker 1: risk down. So let's say, you know, when I was 518 00:29:35,880 --> 00:29:38,200 Speaker 1: sitting here with with you, let's say a year a 519 00:29:38,240 --> 00:29:40,320 Speaker 1: year and a half ago, we were saying, we're very bullish, 520 00:29:40,680 --> 00:29:45,280 Speaker 1: go very very overweight the equity piece, let's call it EUC. 521 00:29:45,800 --> 00:29:48,840 Speaker 1: We're not in that kind of conversation anymore. It's probably 522 00:29:49,000 --> 00:29:53,720 Speaker 1: closer to your to your neutral uh closer, And I 523 00:29:53,720 --> 00:29:55,680 Speaker 1: think it's it becomes more important also to take a 524 00:29:55,680 --> 00:29:58,760 Speaker 1: look beneath the hood, right really taking a look at 525 00:29:58,760 --> 00:30:01,239 Speaker 1: actual quality company is taking a look at the kind 526 00:30:01,280 --> 00:30:03,720 Speaker 1: of leverage companies have. We're starting to see that really 527 00:30:03,720 --> 00:30:06,880 Speaker 1: play out this year is single digit in our minds. 528 00:30:07,000 --> 00:30:09,000 Speaker 1: Yet we keep talking about this in the media, and 529 00:30:09,080 --> 00:30:12,520 Speaker 1: experts like you talk about single digit. I don't buy 530 00:30:12,520 --> 00:30:14,720 Speaker 1: it for a minute. People are addicted to twelve percent 531 00:30:14,760 --> 00:30:18,080 Speaker 1: a year, and that is a conversation. We tend to 532 00:30:18,120 --> 00:30:20,960 Speaker 1: have a lot um. You know, you look at returns 533 00:30:21,000 --> 00:30:23,200 Speaker 1: over the last ten years, you have had you know, 534 00:30:23,240 --> 00:30:26,160 Speaker 1: double digit returns and equity markets, so that feels normal. 535 00:30:26,760 --> 00:30:31,040 Speaker 1: That's because Paul Sweeney bought Netflix at two. That feels 536 00:30:31,080 --> 00:30:34,960 Speaker 1: like something one should be counting on for the next decade. However, Tom, 537 00:30:35,000 --> 00:30:36,680 Speaker 1: we really do think it is more of a mid 538 00:30:36,720 --> 00:30:41,160 Speaker 1: single digit world, whether it's equities or sixty portfolio. What 539 00:30:41,280 --> 00:30:43,720 Speaker 1: we pencil in for the next decade is closer to 540 00:30:43,760 --> 00:30:46,800 Speaker 1: five and a half annualized. So that's much lower, I 541 00:30:46,840 --> 00:30:50,080 Speaker 1: think than what people do in their mental math. So 542 00:30:50,280 --> 00:30:51,760 Speaker 1: you know, we've got to be more active about it. 543 00:30:51,760 --> 00:30:55,200 Speaker 1: You've got to have emerging markets, um you should. You know, 544 00:30:55,240 --> 00:30:57,680 Speaker 1: also can think about adding some alternatives to try to 545 00:30:57,720 --> 00:31:00,240 Speaker 1: boose that and also just save more. I think compare 546 00:31:00,320 --> 00:31:03,440 Speaker 1: to perhaps when people have penciling in their minds. Gabriel 547 00:31:03,480 --> 00:31:06,200 Speaker 1: Sensi thank you so much. Greatly appreciate it with JP Morgan. 548 00:31:12,960 --> 00:31:17,200 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 549 00:31:17,240 --> 00:31:22,560 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 550 00:31:22,600 --> 00:31:26,840 Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before 551 00:31:26,880 --> 00:31:30,720 Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg 552 00:31:30,800 --> 00:31:31,080 Speaker 1: Radio