Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. I'm
Speaker 1: really pleased to say that Kate Moore is in the
Speaker 1: studio with us here in New York, Blank Rock Investment Institute,
Speaker 1: chief equity strategist, Stocks over Bonds. I'm sure she does,
Speaker 1: and we're going to get into that in a moment.
Speaker 1: I just want to begin Kate with saying good morning,
Speaker 1: Good morning, welcome to the crazy house here in New
Speaker 1: York and Brussels, to Bloombag Surveillance right here. It's worth Tom,
Speaker 1: I don't always say stocks over bonds. There are environments
Speaker 1: where I can imagine fixing commertine return being okay. But
Speaker 1: you know, for most of the investors that we speak
Speaker 1: to you you over the time horizons they invest in, it
Speaker 1: pays to kind of weather their volatility in stocks and
Speaker 1: to really you know, if you're going to shift in
Speaker 1: sort of tilt your portfolio more towards quality and more
Speaker 1: in certain times it just still pays to stay invested.
Speaker 1: So um, you know, we are continuing to recommend stocks
Speaker 1: over bonds, although as we noted in the surveillance, lower conviction,
Speaker 1: let's just develop your framework for thinking about the global
Speaker 1: economy and the global market at the moment. This isn't
Speaker 1: the story of the last month. It's the story of
Speaker 1: eighteen for the global economy. Deceleration in Europe, deceleration in
Speaker 1: China as well. Do you see that catching up with
Speaker 1: the United States? I don't see it in the data yet.
Speaker 1: Do you see it in the data next year? Well,
Speaker 1: deceleration from some of the gride of growth we had
Speaker 1: in two thousand eighteen, but nothing that's going to really
Speaker 1: raise a flag. Look, you know, as much as people
Speaker 1: like to wring their hands and have great debate over
Speaker 1: you know, recession probabilities over the next twelve months, it
Speaker 1: seems extremely unlikely in our view and also in our
Speaker 1: analytical assessment that the U S could enter in any
Speaker 1: types of recession in the near term. That said, we
Speaker 1: are talking about a slower growth rate next year and
Speaker 1: that has implications. So you know, our view is that
Speaker 1: you have to be much more thoughtful about how you
Speaker 1: construct your portfolio over your head, that you need to
Speaker 1: be a little bit more tactical and that you're gonna
Speaker 1: have to be taking advantage of opportunities when prices and
Speaker 1: things get dislocated. Okay, but if you have a slower
Speaker 1: growth rate, which I would suggest of our audience agrees
Speaker 1: with you on Kate more, does that make growthiness of
Speaker 1: a greater premium and value? Look, our biases that yes,
Speaker 1: there's still going to be a bid for assets that
Speaker 1: can grow even in a slower growth environment. You know,
Speaker 1: the funny thing is that we've had this like almost
Speaker 1: ten year period where growth has continued to have a
Speaker 1: bid and value has not really been able to catch
Speaker 1: a lot of attention. The truth of the matter is
Speaker 1: that what falls into value today, some of it is
Speaker 1: structurally in hair and not everything that's cheap is cheap unfairly.
Speaker 1: Some of the stuff that's cheap deserves this. So let
Speaker 1: me ask you this question of banks part of that story.
Speaker 1: Do they deserve to be where they are? Because this
Speaker 1: quiet vicious sell off happening and I don't think enough
Speaker 1: people are talking about It's city is on a seven
Speaker 1: day losing streak coming into today's session. It's done about
Speaker 1: fourteen over those seven days. That is brutal. It's that justified.
Speaker 1: It's totally brutal, in part because I had been significantly
Speaker 1: overweight the banks and here, yeah, I know, I had
Speaker 1: good company and getting this dead wrong. And you know,
Speaker 1: it seemed like there was this perfect environment from growth
Speaker 1: and policy and less regulatory pressure and better cash return,
Speaker 1: and you know, none of that seemed to really matter.
Speaker 1: And today, you know, despite the fact that we are
Speaker 1: in what we think is the very worst case scenario,
Speaker 1: stable growth but likely I continue to expanding economy. The
Speaker 1: regulatory pressure is still easing. These banks are still in
Speaker 1: very good shape. Their balance sheets look awesome. No one cares,
Speaker 1: and they're getting sold off vision slee as the expectation
Speaker 1: that the FETE is going to pause that really takes
Speaker 1: hold across the investor base. So the story to be
Speaker 1: bullish the banks, I keep getting told the same story,
Speaker 1: to be bullish the banks. And my question really is
Speaker 1: when our investors are going to start responding differently to
Speaker 1: the same story they experienced in they don't necessarily have to.
Speaker 1: I think we're going to go back to the question
Speaker 1: you just asked me a moment ago. Does growth continue
Speaker 1: to get a bid in this in this environment. And
Speaker 1: I think that's right, Like, even though the banks are
Speaker 1: in good shape, they're not going to be shooting the
Speaker 1: lights out when it comes to growth. And so I
Speaker 1: think there's gonna be a preference for sectors and for
Speaker 1: industries and companies that can really put up stronger numbers,
Speaker 1: not just solid numbers, but stronger numbers at this point
Speaker 1: in the cycle. And I'm not sure banks are there
Speaker 1: kit more. What is a mergers and acquisitions type to do?
Speaker 1: What's a CFO to do? I mean, if you're gonna
Speaker 1: have slower growth, you've got to buy revenues. So this
Speaker 1: word synergy comes up for next year. I mean it
Speaker 1: just keeps on going, right. Well, I think if you
Speaker 1: have slower growth, you've got to do a couple of things.
Speaker 1: Maintain control of your costs, be really thoughtful about your
Speaker 1: investment program, make sure your allocated capital internally to those
Speaker 1: parts of your business that they had the ability to
Speaker 1: grow through all parts of the cycle. And You're right,
Speaker 1: in some cases you're gonna have to think about acquisitions.
Speaker 1: And valuations have come down across the board. I would
Speaker 1: suggest that valuations and private markets have not come down
Speaker 1: as much, so if you're thinking about acquiring assets, um,
Speaker 1: you'd have to think about you know, public looking at
Speaker 1: it a bit more of a discount than the private
Speaker 1: stuff at this point. Okay, more great to can't shop
Speaker 1: with you Blank Look Institute Investment Institute Chief Equity Strategists.
Speaker 1: You have a wonderful Christmas. If we don't see you before,
Speaker 1: Thank you, Mary, Mary. I want to bring in David
Speaker 1: Sowerby and Cora Managing director and portfolio manager. David, it
Speaker 1: feels like a growth scare. At how different is it?
Speaker 1: It's very similar to late two thousand fifteen early two
Speaker 1: thousand sixteen. Stock prices are trading about the same valuation
Speaker 1: as they were in February of sixteen at the bottom,
Speaker 1: whether it's on a price to earnings or as Tom
Speaker 1: knows quite well, how I want to value it on
Speaker 1: a free cash flow yield basis. Sentiment is getting very
Speaker 1: washed out. The dollar was strong in in two thousand
Speaker 1: fifteen and then it retreated. It is similar, and I
Speaker 1: think because it's similar, it's becomes an interesting buying opportunity. John.
Speaker 1: That's equity talk that you're hearing there. It's different than
Speaker 1: what you cover on the real we can can see
Speaker 1: the equity, so you can talk about you can do
Speaker 1: that with David Sarby. I also want to point out
Speaker 1: the press gathered here in Brussels awaiting Prime Minister May
Speaker 1: the British flags and one EU flag as well, position
Speaker 1: behind the lectern and a blue backdrop, and we'll look
Speaker 1: for that from Prime Minister May here in a moment.
Speaker 1: David Sarby, we always talk about the focus, focused, focus
Speaker 1: of all of the media, and that's the big stuff.
Speaker 1: You love to go mid you love to go small.
Speaker 1: I want to talk about mid caps. Have mid caps
Speaker 1: and joined the correction or have they shown their usual
Speaker 1: historic resiliency. They have more bruises this year than large
Speaker 1: cap the Russell two thousand to go even smaller down
Speaker 1: six percent year to date, mid caps a similar number.
Speaker 1: It's been a it's been a tough environment. Yet at
Speaker 1: the same time, when GDP growth is better than three
Speaker 1: on an inflation adjusted basis, that's a good backdrop for
Speaker 1: earnings and a good backdrop for the small caps to
Speaker 1: re emerge. Do you agree that cash is an asset? No,
Speaker 1: not in a long term and a long term time
Speaker 1: cash is trash. It is a dragon portfolios, but two
Speaker 1: thousand eighteen will be that year when cash beats everything
Speaker 1: large cap, small cap, US, non US bonds. Cash is
Speaker 1: a nice thing to have this year, but in the
Speaker 1: long term cash is trash. It's interesting the justice Payperl
Speaker 1: stots to fall in love with cash, and my colleague
Speaker 1: Luke Care of Bloomberg brought this up as well. Cash
Speaker 1: was heighted at the start of the year in January,
Speaker 1: and then that was the thing that outperformed. Now everyone's
Speaker 1: in love with cash, and now duration starts to outperform.
Speaker 1: So here's the here's the key. In January, investor sentiment,
Speaker 1: individual investor sentiment was more than fifty bullish when nobody
Speaker 1: liked cash. As of yesterday, investor sentiment was forty percent barrish,
Speaker 1: above the long term average. When people want more cash.
Speaker 1: From a contrarian perspective, it's a good time to be
Speaker 1: a selective, selective net buyer. So selective, Well, let's be
Speaker 1: more specific. Do you like the banks here? The banks
Speaker 1: have been totally hammet of the last couple of weeks
Speaker 1: has been pretty ugly mediocre. How's that for a portfolio
Speaker 1: manager view? Uh? Citizens financial? I think that that's a
Speaker 1: regional bank that has good loan growth, lower charge offs.
Speaker 1: That that's interesting. But for the most part, the bank
Speaker 1: story this year, which was to call everybody wanted to
Speaker 1: make hasn't worked. David, with with your experience and and
Speaker 1: particularly with your institutional service to pension funds and giving
Speaker 1: them advice. How do you handle a General Electric? Let's
Speaker 1: say you own it, you've enjoyed the losses, how do
Speaker 1: you do that. I'm not talking about some trade or
Speaker 1: somebody like Doug Casts. It's in and out and all that.
Speaker 1: I'm talking about mom and pop they own ge oops.
Speaker 1: How do you handle that? It's I think it's it
Speaker 1: goes back to two thousand when when a high profile
Speaker 1: CEO leaves a company on a high note, that's usually
Speaker 1: a better time to sell than buy hindsight, but that's
Speaker 1: been the story with General Electric. You and I have
Speaker 1: talked about other conglomerates which have been better return on
Speaker 1: capitol companies. Honeywell that that's been a so much better
Speaker 1: play than than General Electric. And I think that's still
Speaker 1: the story today. Okay, so u T Actually NIT of
Speaker 1: Technologies has to break up into three David Sowerby companies
Speaker 1: for you that's a good thing. Do you buy all three?
Speaker 1: What do you do well? One thing you want to
Speaker 1: watch is where does the CFO go in the breakup?
Speaker 1: And and where the CFO goes is usually because they're
Speaker 1: pretty got some good inside baseball that that's a good
Speaker 1: place to be. And in the case of Honeywell, they
Speaker 1: spun off their their home security business Residio symbol are easy.
Speaker 1: I I think that's an interesting play as a spinoff
Speaker 1: on on Honeywell. What do they do? What does residy
Speaker 1: they are? You can control your heat, you're you're lighting
Speaker 1: in from a remote in your house. They're very good
Speaker 1: on home security for a person like me who writes
Speaker 1: checks and doesn't do it himself. Residio uses professional service
Speaker 1: people to put that all together. And there are a
Speaker 1: recent spinoff out of Honeywell. When was the last time
Speaker 1: you can't about Brexit? I remember when Brexit the vote
Speaker 1: the day after the market went down initially and then
Speaker 1: and then it got right back on its bicycle and
Speaker 1: continue to do well. And I think this is maybe
Speaker 1: too simple. No wonder the UK wants to depart that
Speaker 1: they don't want to be dictated by uncompetitive countries. Whether
Speaker 1: it's Belgium, France, Italy, you name it, and the u
Speaker 1: K is is the eighth most competitive country on this
Speaker 1: planet and the rest of their peers there are simply
Speaker 1: not maybe Germany or Switzerland. That's what they have an
Speaker 1: issue with. John. The single most important conversation I've had
Speaker 1: on this junket was with a guy that runs the
Speaker 1: national health system. Uh. My recollection is Matthew Hancock is
Speaker 1: his name, and he was heated John that he's a remainer,
Speaker 1: he's an elitist London, you know, the usual thing in
Speaker 1: his case, directly supporting the Prime Minister. And he says
Speaker 1: the vast majority of his district, his constituency is leaf
Speaker 1: that's the problem the MPs half he was he has
Speaker 1: a single most important conversation I've had, other than trying
Speaker 1: to figure out Waterloo Street of Brussels. A very thin
Speaker 1: majority of the United Kingdom who did vote voted to leave.
Speaker 1: There is an overwhelming majority within Parliament to stay within
Speaker 1: the European Union. The officials don't seem to represent what
Speaker 1: their constituents want, and I think that's the political problem
Speaker 1: these parties have. On top of that, the parties themselves
Speaker 1: aren't just divided by party. They're divided by the one issue.
Speaker 1: So the Labor Party has divided, the Conservative Party is divided,
Speaker 1: and the Labor Party is offering very little alternative to
Speaker 1: what the Prime Minister is bringing home from Brussels again today,
Speaker 1: which is the same things she had last week, but
Speaker 1: not to run a survey here and they'll be pulling
Speaker 1: and all that coming up. With all this uproar, John Ferrell,
Speaker 1: would you suggest there could be even a greater Leave constituency.
Speaker 1: I've got no idea, to be honest with you, Tom,
Speaker 1: and I hate to call it. And every time I've
Speaker 1: offered a view on Brexit, I've been wrong five minutes
Speaker 1: later and have to Brexit. When you let our coverage
Speaker 1: the day after Brexit, was I wrong five minutes, every
Speaker 1: five minutes, every four minutes was I have to say
Speaker 1: that someone that did stand up and did lead was
Speaker 1: Governor Connie Um. It helped his reputation for about twenty
Speaker 1: four hours because he has had a tough time. I
Speaker 1: have a since tone well, I and this is so
Speaker 1: important and we can go to David sar beyond this
Speaker 1: right now, David, I thought Mr drog yesterday showed the
Speaker 1: limited degrees of freedom that central bankers have given global
Speaker 1: slowdown and given the realities of price change, do you
Speaker 1: look for next year Chairman Powell to have a limited
Speaker 1: choice se versus what was thought of six months ago.
Speaker 1: I had no problem with Chairman Paul's comments in October
Speaker 1: when he said my mission is FED chairs as it
Speaker 1: always should be, as low inflation and price stability. And
Speaker 1: maybe maybe he retreats from that somewhat, but as long
Speaker 1: as the FED is committed to that, I don't have
Speaker 1: a problem with two or three rate hikes, uh, even
Speaker 1: a little bit more, because real FED funds are still
Speaker 1: effectively zero and ultimately that's great for finance traw markets,
Speaker 1: but it hasn't showed up yet, but it can be inflationary.
Speaker 1: Are there mid caps David Sarby? In Europe? There are?
Speaker 1: I'm getting out of my wheelhouse a little bit in
Speaker 1: in uh in that space. So turning back to the US,
Speaker 1: I talked about Residio as an example, Windham Hotels, which
Speaker 1: has spun off. It's it's travel business there and they're
Speaker 1: right there, right in the sweet spot of Ramada days.
Speaker 1: In Howard Johnson's to go back in time, that is
Speaker 1: I think a good play in the mid cap space.
Speaker 1: It's about a five billion dollar market cap, and I
Speaker 1: think that's that's really interesting for again believing in the
Speaker 1: long term you're gonna make money buying spinoffs. Windham has
Speaker 1: nine analysts who follow it. I like that. You know,
Speaker 1: someone run into me yes today, Salm and I think
Speaker 1: it's a subject that we can perhaps talk about now
Speaker 1: between the three of us. And they said, the economy
Speaker 1: has been so strong through and if things have been
Speaker 1: as good as this administration and the Federals of site,
Speaker 1: why does this market fall out of bed every time
Speaker 1: real rights breach one percent? Why? Why is it should
Speaker 1: it shouldn't. I think the key is put interest rates
Speaker 1: and inflation together. And if interest rates are going up
Speaker 1: because the economy is stronger, loan demand is higher, I
Speaker 1: s M Index closer to sixty than fifty. That's not
Speaker 1: a bad thing. But when interest rates are going up
Speaker 1: because we're way behind a curve on inflation, and inflation
Speaker 1: is pushing not at not at two percent today, but
Speaker 1: closer to fork, then we've got serious problems. But I
Speaker 1: think it rises a much bigger issue since the financial
Speaker 1: crisis has our tolerance. There's a global economy and a
Speaker 1: global market place. Our tolerance for higher interest rates has
Speaker 1: it diminished to that degree that we can't get away
Speaker 1: from one percent real I think ultimately that as long
Speaker 1: as your return on capital is greater than your cost
Speaker 1: of capital, and return on capital is more like five percent,
Speaker 1: cost to capital is more like three, that's a good
Speaker 1: spread for the backdrop for equity investors, and good good
Speaker 1: luck forecasting interest rates. You're wrong more than you're right,
Speaker 1: but but I think they're still going to go higher.
Speaker 1: The expectations is incredibly dovish the economists that I'm reading
Speaker 1: ahead of next week's decision is a dovish interest rate hike.
Speaker 1: And my response to that is doubbish to what dovish
Speaker 1: relative to walk Because expectations right now are already so dovish.
Speaker 1: I would say it's a high bar govern into next
Speaker 1: week for the Federal Reserve and what we're to deliver
Speaker 1: already very very dovish expectations for what the Fed's going
Speaker 1: to deliver in nineteen chair, and I'll please keep your
Speaker 1: independence and don't pay attention to the tweets and know
Speaker 1: what your mission is and will do just fine, and
Speaker 1: and for and for interest rate forecasts. As a former
Speaker 1: bank economist, economists are notoriously wrong on forecasting interest rates.
Speaker 1: That's why I manage money, and I'm not an economist anymore. David,
Speaker 1: what's the polish you see away from the elites of
Speaker 1: New York City on the West coast and Washington the
Speaker 1: rest of it? What's the pulse you see out in
Speaker 1: your Midwest? It's what you affectionately refer to as the
Speaker 1: flyover zone in the Midwest. It's just fine. Michigan's unemployment
Speaker 1: rate is less than four percent, down from fourteen percent
Speaker 1: in two thousand and nine. Is this boy in economy
Speaker 1: filtered down to the broad part of America? Or has
Speaker 1: it been a make America great again? Elite growth, wage growth,
Speaker 1: income growth for the last year has started, has been
Speaker 1: better for middle income earners now growing better than three
Speaker 1: So it has it has filtered down. That's why I
Speaker 1: think a window name works because of the the properties
Speaker 1: they own. Ramadas right days in We're not talking about
Speaker 1: the Riz, Carlton, We're talking about more medium price points
Speaker 1: to stay at. That would sound wonderful. Thank you always
Speaker 1: always great to catch How you thank you didn't count it?
Speaker 1: Joining us Macro risk advises the volatility of the last
Speaker 1: couple of weeks day and what do you make of it? Yeah,
Speaker 1: I think it's the markets are grappling with a bunch
Speaker 1: of different cross currents at once. Um, You've obviously got
Speaker 1: tariffs as the overriding story with the markets, but you know,
Speaker 1: below the surface, there's a bunch of other things going
Speaker 1: on as well. There is concerns that the sort of
Speaker 1: firm handshake that the markets and the FED had agreed
Speaker 1: upon for for many years in the Bernankeian and Yelling
Speaker 1: era is is coming to a close in the sense
Speaker 1: that Jerome Powell is effectively having to take back some
Speaker 1: of the assurances that his predecessors were able to give
Speaker 1: markets because he just doesn't know. And so the markets
Speaker 1: are trying to understand where the FED is heading from here. Um,
Speaker 1: So that that's one of the markets and FED talking
Speaker 1: past each other. And then I'd say the second one is, Look,
Speaker 1: markets are discounting mechanisms, and there are concerns that global
Speaker 1: growth has peaked, and that some of the quote overbuilding
Speaker 1: that occurs during very benign cycles, especially in the credit markets,
Speaker 1: is starting to kind of come home to roost. So
Speaker 1: there's a lot of uh, sort of pricing of distress
Speaker 1: that's in markets, and and you know, we're gonna in
Speaker 1: some ways have to wait and see whether the economic
Speaker 1: fundamentals are strong enough or the markets right that things
Speaker 1: are actually starting to slow. Well, let's get into that day.
Speaker 1: The market is trying to get ahead of something. Some
Speaker 1: people are trying to figure out whether it's overshooting, is
Speaker 1: it it's it's so difficult to say. I would I
Speaker 1: would comment that the markets and the economy are very
Speaker 1: distinct things. And then for quite a long time, actually
Speaker 1: what the benefit to the market of a weak economy
Speaker 1: was that the Fed state in town for longer and longer, right,
Speaker 1: the justification for ongoing FED policy that was very supportive
Speaker 1: to the market was in fact a weak economy. And
Speaker 1: now it's almost that the reverse is occurring. That the
Speaker 1: at least for the U. S economy, that the strength
Speaker 1: of the economy, uh, that the Feds looking forward and
Speaker 1: trying to ascertain whether inflation is headed higher uh via um,
Speaker 1: you know, diminished slack in the economy. Um, that's Fed policy.
Speaker 1: That's um uh you know, indicates that things are actually
Speaker 1: going well, but it may not be supportive to the
Speaker 1: markets as we try to understand how much of you know,
Speaker 1: how much of asset prices were a function of low
Speaker 1: rates Dan currnet. How should our audience use the VIX?
Speaker 1: The VIX is n twenty long term average. Boy, these
Speaker 1: are odd times different times. Is the one VIX now
Speaker 1: the same as a twenty one VIX and two thousand
Speaker 1: six or One of the things that is important to
Speaker 1: understand is that the VIX has used to be just
Speaker 1: an index that we observed. The VIX is the price
Speaker 1: of insurance for one month options on the SMP five hundred.
Speaker 1: It's a measure of implied volatility, and it's something that
Speaker 1: we just looked at. It was a calculated figure. Uh.
Speaker 1: Now it is a vastly traded instrument. There are vixed futures,
Speaker 1: there are VIX options, all of which trade with substantial
Speaker 1: UH liquidity and find their way into the portfolios both
Speaker 1: from an offensive and defensive standpoint. Um if you look
Speaker 1: actually at the realized volatility of the VIX itself, so
Speaker 1: this is in some ways a measure of the vowel
Speaker 1: of the vol uh. It starts to rise right around
Speaker 1: two thousand four, and with some ups and downs along
Speaker 1: the way, it's it's generally risen for the last fourteen years,
Speaker 1: and it it almost corresponds exactly with the introduction of
Speaker 1: VIX futures and options. So the financialization of the product
Speaker 1: is what makes now different. It's not in an observation
Speaker 1: of index. It's a traded asset that people wanted to
Speaker 1: get into an out of what is de incurrent average VIX.
Speaker 1: I'm assuming it's not twenty anymore. Well, listen, the VIX
Speaker 1: is really just uh, it's very correlated to the the
Speaker 1: movement back and forth in in markets. UH, and by
Speaker 1: that I mean, UM, if if you look at realized volatility,
Speaker 1: so just the HVG function on on the terminal, you're
Speaker 1: going to see that. UM. Since October, the realized volatility
Speaker 1: SMP has been slightly north of twenty UM. So it's
Speaker 1: actually no surprise that the VIX is sitting here at twenty.
Speaker 1: In fact, many would say that options, even with the
Speaker 1: VIX up here, are actually a pretty good deal. They're
Speaker 1: justified by the much more substantial not not just close
Speaker 1: to close movements, which is what uh most of most
Speaker 1: folks look at. Uh, if you look at the intra
Speaker 1: day movements, they're actually illustrating a almost far greater level
Speaker 1: of volatility than just close to close. It's these it's
Speaker 1: these back and forth intra day they're actually painingful with
Speaker 1: the sspect to option pricing. Did you get all that?
Speaker 1: I got some of it and I wanted to follow up?
Speaker 1: If that's I think if you asked money people right
Speaker 1: now whether downside protection was expensive, they might answer yes,
Speaker 1: is it? Yeah? So again it's uh, when we look
Speaker 1: at options, we uh, we're looking at two things. We're
Speaker 1: looking at the the cost. Uh, just the So we're
Speaker 1: going to score the price of the option in the
Speaker 1: context of its history. So. Um, to answer your question
Speaker 1: the first way, Jonathan, relative to last year, at this time,
Speaker 1: these options are vastly more expensive. Remember last December, Uh,
Speaker 1: the vix's was closing very consistently below ten. The realized
Speaker 1: volatility in the SMP was he was sort of half that,
Speaker 1: about five percent. Uh. Now you have the realized volatility
Speaker 1: about twenty, so up fifteen points from a year ago,
Speaker 1: and the options are up about ten points from a
Speaker 1: year ago. Um. So so in some ways this is
Speaker 1: the paradox. In some ways, options at twenty VIX right
Speaker 1: now are in some ways less expensive relative to the
Speaker 1: realized volatility than they were last year. Last year the
Speaker 1: VIX was ten, but the realized was only five UM
Speaker 1: And so it's it's a tricky it's a tricky thing
Speaker 1: to answer, Um, what what do we need to sustain
Speaker 1: a VIX of twenty? You need movements in the SMP
Speaker 1: of about one point to one point three percent a day.
Speaker 1: So you need to run, you know, through through a
Speaker 1: bunch of SMP handles. But frankly, that's what's been happening
Speaker 1: with a great degree of just to jump in and
Speaker 1: make it clearer, to make the judgment that implied vols
Speaker 1: cheap versus realized vol you have to believe that it lasts.
Speaker 1: That's exactly right. You when when you look at options
Speaker 1: and you compare and applied to realize, you're just looking
Speaker 1: backwards at the data that's already occurred. That's the realized
Speaker 1: And then, as you said, you're asking yourself, is this sustainable? Um? So,
Speaker 1: a couple of things. They're one. We are about to
Speaker 1: head into this late seasonal period where we've got Thanksgiving
Speaker 1: and i'm sorry, Christmas and New Year's that tends to
Speaker 1: be a pretty bad time for volatility. Folks if they
Speaker 1: can try to shut it down and get away from
Speaker 1: the down. UM. Not not much to expect there, but
Speaker 1: but of course you've got these these headlines that keep
Speaker 1: hitting the markets uh as well, and those have been,
Speaker 1: you know, an engine for volatility. This has been wonderful.
Speaker 1: We're gonna try to get this out on our podcast today,
Speaker 1: UH because it bears really listening for those trying to
Speaker 1: figure out the dynamics and the Greek letters of the
Speaker 1: option system. Mr Kurnitt is with maccar Risk Advisors, Dean
Speaker 1: Kern right now, while Sweeney in New York. I'm Tom
Speaker 1: keenan Brussels and joining us. There's someone who can give
Speaker 1: us great perspective on I'm gonna call it sort of
Speaker 1: the zeitgeist beat at the moment. Gabriel Santos is with
Speaker 1: JP Morgan and Gabriel it's become so fashionable in the
Speaker 1: last ten weeks to say get back into e M.
Speaker 1: I get it, e M bad market down and I
Speaker 1: guess it becomes a value, but I'm not sure I
Speaker 1: see the economic data that tells me that whether e
Speaker 1: M A your JP Morgan. Yeah, Tom, So it's great
Speaker 1: to be here with you. Um, definitely a much more
Speaker 1: difficult ear for emerging markets than we expected. Uh. And
Speaker 1: I think really you just see that reflected and sentiment
Speaker 1: very very clearly. We've seen multiples contracting a lot for
Speaker 1: emerging market equities, we've seen currencies weakening. So sentiment is
Speaker 1: just incredibly negative right now when we look at the
Speaker 1: actual data, UM, we are not in crisis mode in
Speaker 1: emerging markets, unlike back in UH, I'm not sure it's
Speaker 1: necessarily a twelve with twelve month window we're talking about
Speaker 1: here right for emerging markets, that tends to be a
Speaker 1: fee store famine. I like to think it more over
Speaker 1: a multi year process. Uh. And there I think if
Speaker 1: you still don't have a lot of exposure to emerging markets,
Speaker 1: as a lot of US based investors tend not to,
Speaker 1: then now is a good time to slowly add back in,
Speaker 1: but with a multi year window in mind here, So, Gabriela,
Speaker 1: back here in in in the US, UM, the R word,
Speaker 1: as in recession is being bannied about it seemingly increasingly
Speaker 1: every week. Is a recession in your forecast for nineteen?
Speaker 1: If not, what what are some of the risks that
Speaker 1: could push us into recession? So it's also become I think,
Speaker 1: very fashionable to talk about recession in the US these
Speaker 1: days and to try to ascribe a specific year and
Speaker 1: month to it, with late becoming UH consensus. I think
Speaker 1: our view though, is when you look at the actual data,
Speaker 1: it does not sport that kind of call, especially when
Speaker 1: you look at the consumer, which of course is seventy
Speaker 1: of the US economy, who just got some very strong
Speaker 1: retail sales this morning. UH. Consumption has been very strong
Speaker 1: here in for next year. We can't sustain that kind
Speaker 1: of pace of consumption. It's been three three and a
Speaker 1: half percent, four percent in the second quarter. We have
Speaker 1: to slow down, but you can still see consumption growing
Speaker 1: at two percent next year with with difficulty in seeing
Speaker 1: what can really knock that off course absent let's see
Speaker 1: a spike in inflation or a big shock that all
Speaker 1: of a sudden leads businesses to, you know, go into
Speaker 1: layoffs for example. UH. So for US we acknowledge where
Speaker 1: later on in the cycle the probability goes up of
Speaker 1: a recession over the next few years. But I think
Speaker 1: it's very hard to say that it has to be
Speaker 1: in given such a strong consumer. Right, So, given that
Speaker 1: fairly constructive outlook for where are you advising your clients
Speaker 1: in terms of asset allocations at when these versus fixed income? Yeah,
Speaker 1: and so the clients that we speak to an asset
Speaker 1: management tend to have a longer term horizon in view
Speaker 1: right there, planning for retirement, for paying for college, for
Speaker 1: things like that. Um, So in that environment, we would
Speaker 1: still tend to prefer to be slightly overweight the equity
Speaker 1: piece to the fixed income piece. But we have been
Speaker 1: talking to our clients about slowly dimming the dials a
Speaker 1: little bit and what we need. What does that mean
Speaker 1: mean by that tom um is slowly starting to bring
Speaker 1: risk down. So let's say, you know, when I was
Speaker 1: sitting here with with you, let's say a year a
Speaker 1: year and a half ago, we were saying, we're very bullish,
Speaker 1: go very very overweight the equity piece, let's call it EUC.
Speaker 1: We're not in that kind of conversation anymore. It's probably
Speaker 1: closer to your to your neutral uh closer, And I
Speaker 1: think it's it becomes more important also to take a
Speaker 1: look beneath the hood, right really taking a look at
Speaker 1: actual quality company is taking a look at the kind
Speaker 1: of leverage companies have. We're starting to see that really
Speaker 1: play out this year is single digit in our minds.
Speaker 1: Yet we keep talking about this in the media, and
Speaker 1: experts like you talk about single digit. I don't buy
Speaker 1: it for a minute. People are addicted to twelve percent
Speaker 1: a year, and that is a conversation. We tend to
Speaker 1: have a lot um. You know, you look at returns
Speaker 1: over the last ten years, you have had you know,
Speaker 1: double digit returns and equity markets, so that feels normal.
Speaker 1: That's because Paul Sweeney bought Netflix at two. That feels
Speaker 1: like something one should be counting on for the next decade. However, Tom,
Speaker 1: we really do think it is more of a mid
Speaker 1: single digit world, whether it's equities or sixty portfolio. What
Speaker 1: we pencil in for the next decade is closer to
Speaker 1: five and a half annualized. So that's much lower, I
Speaker 1: think than what people do in their mental math. So
Speaker 1: you know, we've got to be more active about it.
Speaker 1: You've got to have emerging markets, um you should. You know,
Speaker 1: also can think about adding some alternatives to try to
Speaker 1: boose that and also just save more. I think compare
Speaker 1: to perhaps when people have penciling in their minds. Gabriel
Speaker 1: Sensi thank you so much. Greatly appreciate it with JP Morgan.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio