Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best an economics, geopolitics, finance and investment.
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Speaker 1: of Apollo Global Management was on Williams R. Start Torston
Speaker 1: I was absolutely thunderstruck by the responses capmany out at
Speaker 1: four percent, leaf Farage in a three handle, and even
Speaker 1: you going all un anchored on Williams and suggesting we
Speaker 1: go from this two percent nirvana up to something higher
Speaker 1: under three percent, but something higher. How does our world
Speaker 1: change if we get a new interest rate regime out
Speaker 1: there somewhere.
Speaker 2: Well, I do think a very important implication is that
Speaker 2: then the cost of capital will be higher, The cost
Speaker 2: of capital will be higher for companies, the cost of
Speaker 2: borrowing for consumers will be higher, and all that will,
Speaker 2: of course imply that we're going to have more of
Speaker 2: a significant impact, at least in the near term, on
Speaker 2: not only consumption, but also on corporate spy price.
Speaker 1: Do we see asset price reduction because they got yield
Speaker 1: up price down in a simplistic way.
Speaker 2: Yeah, because your equacy risk premium model, if you change
Speaker 2: the risk free rate and you permanently increase that for
Speaker 2: whatever recent demographics, interdy transition, less immigration, whatever it might be,
Speaker 2: if you have the discount rate going up in any
Speaker 2: finance model on page one in your textbook, would tell
Speaker 2: you that then risky assets are going to become less
Speaker 2: attractive relatively.
Speaker 3: This has been a fascinating week because we've seen the
Speaker 3: fastest pace of issue once this year when it comes
Speaker 3: to investment grade bonds, the third busiest post labor day
Speaker 3: couple of sessions going back to twenty ten. Companies are saying, Okay,
Speaker 3: rates are going to be higher for longer. We're going
Speaker 3: to sell debt because you know what, we're going to
Speaker 3: have to just absorb these higher costs. Isn't this a
Speaker 3: positive sign that they're actually able to absorb these costs
Speaker 3: and able to access the credit markets and things keep
Speaker 3: going even if at a more expensive rate.
Speaker 2: Well, I mean, broadly speaking, of course, September is mainly
Speaker 2: having a lot of issues because the summer normally has
Speaker 2: relatively low levels of issue. So first there's a seasonal
Speaker 2: issue why issuance has been so high this week. But
Speaker 2: the other issue is also that well, we're at the
Speaker 2: same time in the background seeing that the high yield
Speaker 2: default rate is actually moving up quite quickly. In the
Speaker 2: last six months, we're now at least on the Moody's
Speaker 2: default rate, we are at around four percent.
Speaker 4: And if we keep rates at these levels.
Speaker 2: You know, every day on the Bloomberg Term and Lucy
Speaker 2: stories about their companies that cannot get a new loan,
Speaker 2: companies that cannot roll low on existing loan, in particular
Speaker 2: for lower rated companies with higher leverage, and especially when
Speaker 2: it comes to interest covers ratios. Insuest covers ratios, which
Speaker 2: measure earnings divided by interest expense, is coming down both
Speaker 2: for ig quite quickly and also for high yields. So
Speaker 2: it is not the case that all firms just have
Speaker 2: locked in long duration of lending. It is the case
Speaker 2: that we're actually seeing interest covers ratios going down.
Speaker 4: Both are the IT and HIGHAL index.
Speaker 3: This is fascinating. The spike up that we're seeing in
Speaker 3: high yel defaults I'll be it from really low rates
Speaker 3: and I'll be it still at historically low levels when
Speaker 3: you part, when you pass that out, are you basically
Speaker 3: model the next six months, the next sex twelve months.
Speaker 3: Do you end up with an acceleration of these defaults
Speaker 3: or does it kind of plateau. Are we seeing the
Speaker 3: pain now as some of the rate hikes come into
Speaker 3: the market.
Speaker 2: Well this is really important because so far the soft
Speaker 2: landing document is that it has been very orderly the
Speaker 2: slowdown in the label. Mind, it's been very orderly, the
Speaker 2: slowdown in inflation. So what's the problem. Well, the problem
Speaker 2: is that in the background, if you have this increase
Speaker 2: in default rates, especially in high yield, and remember the
Speaker 2: high yield industry basically has employment of roughly eleven million
Speaker 2: people in the economy, so it's not small. So the
Speaker 2: conclusion is if high yield default rates are going to
Speaker 2: continue to move higher because companies cannot get financing, well,
Speaker 2: then the if will be that maybe at the moment
Speaker 2: these are names that many people tell me or we
Speaker 2: haven't heard about. Well just wait until you get the
Speaker 2: fault in a name that actually everyone has heard about.
Speaker 2: Then that industry, that rating, that type of interest covers ratio,
Speaker 2: that type of leverage is going to be much more vulnerable.
Speaker 2: And that's to change sentiment potentially quite quickly in particularly
Speaker 2: in highyel but also in IG.
Speaker 3: And just across the board in terms of what kind
Speaker 3: of rate structure is going to be important going forward.
Speaker 3: As we were hearing from Stephen Major of HSBC in
Speaker 3: particular that catalyst event. From your vantage point, how does
Speaker 3: this play out the barecase? Is it some sort of
Speaker 3: deep recession, is it some sort of fissure in the
Speaker 3: credit markets, or is this just a recession the one
Speaker 3: that everyone was calling for earlier this year.
Speaker 2: So I do think that it will be a continuation
Speaker 2: of what we're seeing the FED. They're stepping hot and
Speaker 2: hot on the brakes, and this is not just about
Speaker 2: the change in interest rates. This is about the level
Speaker 2: of interest rates. And as that process continues, if you're
Speaker 2: on your Bloomberg screen type ECFC, go have a look
Speaker 2: at what nonvum payrolls are telling you about Q one
Speaker 2: of next year. The consensus is expecting that non van
Speaker 2: payrolls in January, February and March will be twelve thousand.
Speaker 2: So you now lean back and say, well, if we're
Speaker 2: getting non van payrolls in six months that will be
Speaker 2: close to zero for three months in a row. How
Speaker 2: do you think risk will trade on that? And if
Speaker 2: that process of slowing the economy down as a result
Speaker 2: of the feed having raised the cost of capital continues,
Speaker 2: we should expect to see an ongoing slow down ahead
Speaker 2: of us. And I do think that ultimately that we'll
Speaker 2: create a risk of a hot landing.
Speaker 1: In the last eighteen months coming out of COVID with
Speaker 1: all the original economic framework that we have, the supply shock, etc.
Speaker 1: We've had so many things wrong. We got the recession wrong,
Speaker 1: we got before that transitory wrong, We've got four other
Speaker 1: things on the red sox. You know, we thought they'd
Speaker 1: have a good year, it didn't work out and Harry
Speaker 1: Kane would never leave Tottenham. What right now that's a
Speaker 1: consensus call. Do you think we're going to sit back
Speaker 1: a year from now eighteen months ago?
Speaker 4: God, we got that wrong.
Speaker 2: What I think is truly fascinating is that we did
Speaker 2: go into this year all of us expecting as shop
Speaker 2: a slowdown. Then what we saw and because effects as
Speaker 2: savings in the household sector, this just took a longer time.
Speaker 2: More people have been traveling on airplanes, staying at hotels,
Speaker 2: eating in restaurants. The service sector, which makes up eighty
Speaker 2: pcent of GDP, has just been a lot stronger. So
Speaker 2: it is a bit ironic that this process of slowing
Speaker 2: things down has continued. The FED has kept on raising rates,
Speaker 2: cost of capsule continues to go up, the linquagy rates
Speaker 2: for credit cards and orderlones continue.
Speaker 4: To move higher.
Speaker 2: And just as all these things finally started appearing, everyone said, wow,
Speaker 2: now we're not going to have more off a slowdown.
Speaker 2: Now it's just goldilocks and we'll have a soft landing.
Speaker 1: So you think goldilocks right now is the thing that
Speaker 1: we're getting wrong.
Speaker 2: I do think that the risk is that this process remembered.
Speaker 2: Think about what the FED is doing. The FED is
Speaker 2: raising interests face because they want us to spend less
Speaker 2: money on our credit casts. They want us to buy
Speaker 2: fewer casts, they want us to buy fewer homes. That's
Speaker 2: the whole idea. So we're slowing things down.
Speaker 1: Off of Jonathan Spence's classic work, an orbal Shell, published
Speaker 1: like I believe it was in the Telegraph, is staying
Speaker 1: corrected if that's wrong. Orbitshell writing on China. What I'm
Speaker 1: getting out there right now basically is the death of China.
Speaker 1: All my raiders up, tour stin roll down this morning.
Speaker 4: That is a major risk.
Speaker 2: And the FED had a working paper a few years
Speaker 2: ago where they tried to quantify what is the impact
Speaker 2: on the US of correction in Chinese GDP, and they
Speaker 2: found a relatively modest impact that a one percent decline
Speaker 2: in GDP only had a zero point two percent in China,
Speaker 2: had only zero point two percent impact on the US.
Speaker 2: But this is now to be tested because China is
Speaker 2: not only slowing for cyclical reasons, meaning exports are going
Speaker 2: down because US is slowing and Europe is slowing. They
Speaker 2: also have two other issues, namely, the housing situation is
Speaker 2: getting more serious, and on top of that, they also
Speaker 2: had the demographic situation that's getting more serious. So all
Speaker 2: that combined is generally going to drag down GDP growth
Speaker 2: in China and also have implications in particular for Europe
Speaker 2: but also for the US.
Speaker 3: But just one of the big counterpoints to the barish
Speaker 3: argument that you're making is that growth has surprised to
Speaker 3: the upside and it continues to albeit at a slowing pace,
Speaker 3: and that companies are still doing well. How do you
Speaker 3: understand that surprising resilience?
Speaker 2: Yeah, well, the nuance to that is that growth and
Speaker 2: employment has continued to slow down. And also when it
Speaker 2: comes to our companies really doing well. But why default
Speaker 2: raised then going up so much? Why interest coverage ratio
Speaker 2: going down so much? All these things that credit conditions
Speaker 2: are tightening in the background, interest rates are essentially, as
Speaker 2: the FIT want it, biting harder and harder on consumers
Speaker 2: and biting harder and harder on corporates, and combining that
Speaker 2: with student loan repayments coming back, and also households running
Speaker 2: out of excess savings. At least according to the San
Speaker 2: Francisco FIT, you can't begin to worry about the next
Speaker 2: few months having a continuation of what the.
Speaker 4: Federals to see. It's so slocky in gloom seeing the
Speaker 4: slowdown continue going ahead.
Speaker 3: What would you have to see to change your view?
Speaker 2: So what we need to see is essentially the cost
Speaker 2: of capsule coming down, because the first domino brick in
Speaker 2: this process of the data that we're all watching across
Speaker 2: the board is that the FIT has raised the cost
Speaker 2: of capsule. And as Tom was saying, maybe there are
Speaker 2: some reasons why the cost of capsule might not be
Speaker 2: permanently higher. And the fact is that all this higher
Speaker 2: cost of capsule is having an impact across the board
Speaker 2: in particular consumers corporates, but of course also again on
Speaker 2: high you have the fault rates moving high on.
Speaker 1: The Trystan slack with us, it's great to have Steve
Speaker 1: Major with us with HSBC, and they have Earl Davis
Speaker 1: with us today with a heritage with BEMO Asset Management
Speaker 1: in Canada, Bank of Montreal, it's just great to have
Speaker 1: Earl with us. Earle, I love the pedigreed. It's your fault.
Speaker 1: The Toronto maple leafs are terrible. You were in Ontario
Speaker 1: teachers for years. They used to own the maple leafs.
Speaker 1: They're the ones that buried them into obscurity. You've been
Speaker 1: on the investment side of debt and also of course
Speaker 1: working with Bemo Asset Management right now and your code
Speaker 1: here is longer. We are going to be longer longer.
Speaker 1: How longer is longer for Earl Davis?
Speaker 5: Yeah, I think we'll be higher for longer for you
Speaker 5: know what, most likely until twenty twenty five. Don't foresee
Speaker 5: any cuts next year for two reasons. One is all
Speaker 5: central bankers are telling you that, and I think we
Speaker 5: have to believe them. The other thing is you see
Speaker 5: the economic numbers, the resilience. Even though I know you
Speaker 5: guys were discussing discussing jobs and the decline there, but
Speaker 5: there's still excess demand for workers.
Speaker 6: It's still positive.
Speaker 5: So the question is not whether things are declining, is
Speaker 5: whether they're declining fast enough. And I believe some of
Speaker 5: the secondary data that we're getting is telling us no.
Speaker 5: And that means if they're not going to hike too
Speaker 5: much more because they have to wait to see the
Speaker 5: cumulative effects of rights, they have to hold on for.
Speaker 1: Longer, accumulate US across twenty twenty four to year twenty
Speaker 1: twenty five, how does fixed income react to a longer
Speaker 1: that most people aren't predicting like you are.
Speaker 5: Well, the interesting thing is we don't believe there's hikes
Speaker 5: next here. We believe they're a whole next year. So
Speaker 5: what happens in that environment is that the longer end
Speaker 5: of the curve starts doing the fight against inflation, you know,
Speaker 5: and that comes through the market doing the fight against inflation.
Speaker 6: So there's two things.
Speaker 5: That have to happen first one is the market right
Speaker 5: now is discounting eases in the two year volondo all
Speaker 5: throughout next year. I think there's four or five yusas
Speaker 5: discounted in the US. That has to be work itself out,
Speaker 5: and that means higher yields across the board. But we
Speaker 5: believe we'll have steepening before because people are scared of
Speaker 5: the UAW negotiations. What's the impact of that, because let's
Speaker 5: say there is you know, for argument's sake, of twenty
Speaker 5: five percent increase in wages. That does not show itself
Speaker 5: immediately in inflation, but it will show itself in six
Speaker 5: months as car prices go up because your cost are
Speaker 5: going up, and this is happening across a number of industries.
Speaker 5: So we believe we are in that wage price spiral.
Speaker 5: We've seen a number of wage gains this year. You
Speaker 5: know your pilots. We saw ups significant wage gains, which
Speaker 5: doesn't show up in inflation until people start paying and
Speaker 5: buying stuff with that increased income. So we believe we're
Speaker 5: in that spiral. That's why I'll be higher for longer,
Speaker 5: and we don't foresee cuts until twenty twenty five at earliest,
Speaker 5: late Q four twenty twenty four, but I don't anticipate
Speaker 5: that at this point in.
Speaker 3: We talk a lot about the long and variable lags,
Speaker 3: and there's a huge disagreement about whether they've already basically
Speaker 3: impacted on the economy or if they are yet to come.
Speaker 3: Aside from just the treasury market, when you take a
Speaker 3: look at credit, are you seeing companies being able to
Speaker 3: absorb some of the higher rates and all of the
Speaker 3: debt sales that we've seen over the past couple of days,
Speaker 3: or is there something else going on that makes you
Speaker 3: think it's going to bite in a more material way.
Speaker 5: Well, they could easily absorb that the debt hikes from
Speaker 5: where they're refinancing. And the reason why is, let's look
Speaker 5: at US tenure bonds. Let's say a company issues US
Speaker 5: corporate credit at what say one hundred above above overnight
Speaker 5: above ten year yields. They're still earning a positive return.
Speaker 5: They're not paying because of the inversion of the yield
Speaker 5: curve and where overnight rates are, so it's not costing
Speaker 5: them as much as people think, especially the ones who
Speaker 5: issued last year or the year before and still have five, six, seven,
Speaker 5: eight years left on this debt. I think This is
Speaker 5: part of the story and part of the reason why
Speaker 5: we're seeing the resilience in the market that we're seeing,
Speaker 5: especially from corporates. There's no earnings recession. There's no margin
Speaker 5: compression at this point in time, and that's something that
Speaker 5: has to change for inflation to come.
Speaker 3: Down as well, if you do have some sort of
Speaker 3: wage price spiral. Are you saying, Earl, that we're on
Speaker 3: the cusp of a reacceleration of the US economy that
Speaker 3: people are not foreseeing, and that that's slow sort of
Speaker 3: soft landing and decline is not an accurate portrayal.
Speaker 5: It's a great question. The answer is, it depends, and
Speaker 5: it depends on what the FED and FOMC reaction to
Speaker 5: that is. You know, it's our belief it's going to
Speaker 5: be very difficult for them to hike in twenty twenty
Speaker 5: four because of the election, and I know they're independent,
Speaker 5: but it does impact popular opinion when politicians are talking
Speaker 5: about hiking when things are turning. So depends on the
Speaker 5: reaction function of the FED. If the FED chooses to
Speaker 5: counter that reacceleration, if it does happen, then no, we'll
Speaker 5: be all right. But if they choose to wait because
Speaker 5: of the cumulative effects and because of other reasons, then
Speaker 5: we could see some ongoing volatility in the bond market,
Speaker 5: especially that ten to thirty year sector.
Speaker 7: Oh that word. But can I pick up on that?
Speaker 7: They're independent? But I've always struggled with that. Well, they're
Speaker 7: either independent or they're not. There's no butts about it.
Speaker 6: Why is that always I'll give you the butt. Let
Speaker 6: me answer that question.
Speaker 5: Show they are independent, but the politicians Congress, Senate, they
Speaker 5: could change the mandate of the FED in five years.
Speaker 5: So they're independent now. But the reaction function in five
Speaker 5: years in regards to the ongoing mandate, that's that's subject
Speaker 5: to change.
Speaker 6: That's not perfect. Interesting.
Speaker 7: Oh you think that might change?
Speaker 6: Then I didn't say that. I'll just tell it.
Speaker 5: That is in the cards, so that has to be
Speaker 5: taken into account. Let me look at it.
Speaker 6: Rephrase it.
Speaker 5: I'm a fixed income trader. I look at net present value,
Speaker 5: so which means you're cash flows over next ten years.
Speaker 5: When they font see makes a decision, they have to
Speaker 5: look at what's the impact, not just immediately but next year,
Speaker 5: two years, three years, four years, by years. Part of
Speaker 5: that calculus is what I'm saying, and that's what you
Speaker 5: have to distill back to ensure that you have longevity
Speaker 5: in what you do. And that's how we kind of
Speaker 5: see the game theory of monetary policy, fiscal policy, and
Speaker 5: that's how we put our risk on. We look at
Speaker 5: this and we incorporate that into our risk taking.
Speaker 7: That's fascinating. Oh, thank you, thanks for the explanation. Oh
Speaker 7: Davis the of BMO Asset Management, pretty good, right.
Speaker 1: To it right now. This is an important conversation. Pierre
Speaker 1: Farragu has been just brilliant and decidedly not an Apple fanboy.
Speaker 1: He is global technology infrastructure head at New Street Research. Pierre,
Speaker 1: I love your phrase, the silicon wall. I'm going to
Speaker 1: give you credit for that, the Faragu silicon wall. That's
Speaker 1: attention this morning. Is there a silicon wall identifiable between
Speaker 1: America and China.
Speaker 8: Well, I don't think we see the wall yet because
Speaker 8: China is buying about twenty twenty five percent of any
Speaker 8: you know, Western tech company or any Western semiconductor companies,
Speaker 8: so they still China is still a very big market.
Speaker 8: But what we see that both sides are we think
Speaker 8: very very actively at building up that ball with the US,
Speaker 8: you know, increasing restrictions China doing their best to develop
Speaker 8: their own, their own supply chain, and you see like
Speaker 8: with Quawi this week announcing like their first you know,
Speaker 8: high end phone power.
Speaker 6: By a homegrown chip.
Speaker 8: These moves are very important and are setting the foundations
Speaker 8: for the world in some ways.
Speaker 6: And that's that's the way we think about it.
Speaker 8: And you know, it took like a few centuries to
Speaker 8: build them the Wall of China, and it's probably going
Speaker 8: to take a decade or two to to build the
Speaker 8: Silicon Wall as well. It's going to take a very
Speaker 8: long time for China to be able to be more
Speaker 8: autonomous and for you know.
Speaker 6: Their ability to replace Western supplies.
Speaker 1: Your note, Pierre, your note is extremely constructive on short
Speaker 1: term for Apple in China. What is the power this
Speaker 1: way that Tim Cook has over the Chinese government and
Speaker 1: over the Chinese manufacturing establishment.
Speaker 8: So let's yeah, I think you raise a good point
Speaker 8: that you know, China has to you know, be very
Speaker 8: careful to what they do with Apple because China depends
Speaker 8: on Apple for many things that even more important in
Speaker 8: the upstream of apples than the downstream of Apple.
Speaker 6: That's a very good point.
Speaker 8: But even if you take a step back, you know,
Speaker 8: let's talk about learn instead of talking about team and
Speaker 8: see what happened. In twenty twenty one, China banned the
Speaker 8: use of tests like gas for similar like a similar
Speaker 8: scope of Chinese Chinese officials and Chinese military state owned companies,
Speaker 8: And how is TESTA doing in China's His day is
Speaker 8: pretty well.
Speaker 6: So you know these bands, the direct impact.
Speaker 8: Of this band is very, very like and to be honest,
Speaker 8: actually invisible. You don't even see it. And so that's
Speaker 8: the reason why I'm going to be constructive on the situation.
Speaker 8: You're like, this band is not going to affect that
Speaker 8: good in the near term. Of course, it's a wake
Speaker 8: up call for investors. They're like, oh my god, Like
Speaker 8: this situation with China is not getting well.
Speaker 6: And I think the ban is one thing. The one
Speaker 6: way phone is another one.
Speaker 8: And it's not a coincidence that we see the two
Speaker 8: things popping up in the in.
Speaker 6: The in the same way.
Speaker 8: So the way I see it, whether it's Team Cook
Speaker 8: or even mess, these guys have a good ability to
Speaker 8: engage with Chinese authorities understand the importance of China as
Speaker 8: a market.
Speaker 6: China understands the importance of having.
Speaker 8: Them building factories leveraging the Chinese supply chain, and so
Speaker 8: you know, nobody is going to mess the Apple cart
Speaker 8: in the near term, but in the longer run, I
Speaker 8: think you have to keep in mind the second wall
Speaker 8: is building up, and slowly but surely China is going
Speaker 8: to get out of the mix of the revenues of
Speaker 8: an Apple, of the Tesla, of an Intel, of all
Speaker 8: Western technology.
Speaker 3: So at what point are you looking to see how
Speaker 3: much Tim Cook heads over to New Delhi to Mumbai
Speaker 3: to really have a discussion about expanding production in India.
Speaker 8: Yes, you know, exactly, very similar, very slow moves that
Speaker 8: are going to play out over years and years. So
Speaker 8: it took China like a few years, you know, to
Speaker 8: be able to pull out a chip that could power
Speaker 8: a phone that could more you know, compete with a kniphone,
Speaker 8: but still like well behind. And you know, like revenge
Speaker 8: is a is a dish that is better, that tastes
Speaker 8: better cold.
Speaker 6: And now China is.
Speaker 8: Starting to put up is putting up this phone and
Speaker 8: in a position to start like pushing back on the iPhone,
Speaker 8: and Tim Cook and Steam are very clearly you know,
Speaker 8: cognizant of that, and they're making sure they're lowering that
Speaker 8: dependency on China as well.
Speaker 6: So that's that's the world building slowly but surely.
Speaker 3: I have to say, this is a frustrating conversation to
Speaker 3: be having, not because anything that you're saying is frustrating
Speaker 3: or not incredibly interesting. It's more just going forward that
Speaker 3: it feels like we have all these geopolitical headlines and
Speaker 3: then we have people coming on and predicting with really
Speaker 3: no basis of whether this is something meaningful or something
Speaker 3: this isn't. How do you just deal with this? You
Speaker 3: just discount all of the geopolitical headlines as near term
Speaker 3: noise and look at the fundamentals and say, longer term maybe,
Speaker 3: but we have to really wait and see.
Speaker 6: Yes, you know, I.
Speaker 8: Wish I had started a hedge from twenty four months ago,
Speaker 8: just like buying the deeper favorite geobietic headlines.
Speaker 6: And I'm pretty sure we have made a lot of money.
Speaker 8: China the Silicon roll like tensions between China and the West.
Speaker 8: The way I like to frame it is the following.
Speaker 8: Let's say China is an average twenty percent of Western tech,
Speaker 8: and let's say in a decade or two from now,
Speaker 8: in fifteen years from now, China is out of the picture.
Speaker 8: That means Western tach is going to lose barely a
Speaker 8: point of growth every year over the next fifteen years.
Speaker 6: So yes, you can reflect that in your this year's
Speaker 6: valuation and things like that and begin to give you.
Speaker 8: Like a single digit, you know, headwind on your valuation
Speaker 8: if you're a fundamental investor. But at the end of
Speaker 8: the day, it's not a big it's not We are
Speaker 8: ready for that. And because the market is what it is,
Speaker 8: every time there is a piece of news, it's massively
Speaker 8: over reacting on something that is going to play over
Speaker 8: fifteen years. So yes, I tend to see each of
Speaker 8: this reaction as a buying opportunity.
Speaker 7: Yeah, I'm happy to look at opening that fun with you.
Speaker 7: Look forward to working together new Stream Research per Thank you, buddy,
Speaker 7: always great to get your perspective. I'm pleased to say
Speaker 7: that my good friend on my side, Steve Major, joins
Speaker 7: us right now glob I had to fixed income Research
Speaker 7: at HSBC Steve wonder for to catch up with you, sir,
Speaker 7: We're going to park the football. We're going to talk
Speaker 7: about this bond market. You are bullish. What do you
Speaker 7: think the bear Steve have got wrong? About the outlook
Speaker 7: for this bond market in America.
Speaker 9: Well, a way to start. I think that the list
Speaker 9: is getting longer and longer. When I look at valuations,
Speaker 9: absolute and relative valuations, treasuries just stand out. We completed
Speaker 9: our monthly ass allocation this week, and most of my
Speaker 9: colleagues have reined in their enthusiasm on other bond markets
Speaker 9: because they're not attractive. I mean, I'm struggling to find
Speaker 9: a single em raids market that I want to buy
Speaker 9: right now. Much of the total turn's come through effex anyway,
Speaker 9: Credit is tight, Treasuries are standing out versus equities. But
Speaker 9: at some stage people are going to start moving from
Speaker 9: bills into bonds because they're gonna start thinking about the
Speaker 9: opportunity cost. So I'll tell you that I think that
Speaker 9: yields today, okay, tenure yield to one hundred basis points
Speaker 9: higher than they were in the early summer, but they're
Speaker 9: the same level as they were in October twenty two,
Speaker 9: and since then, the Fed tyked by two hundred and
Speaker 9: twenty five basis points. So something's going on to contain
Speaker 9: that ten year yield, and I think it's difficult to
Speaker 9: see it going much higher. So I look at it
Speaker 9: and think it's asymmetric. Maybe nothing much happens. We go
Speaker 9: sideways for a bit, but when the yields moved, they're
Speaker 9: going to move down.
Speaker 6: And a lot.
Speaker 1: Steeven you and ags we see are hardwired the end
Speaker 1: of the China slow down, the knowledge of China, the
Speaker 1: dynamic of their GDP. If we do get some form
Speaker 1: of new diminished Chinese economic growth, is that a disinflationary
Speaker 1: impulse that assists in driving yields lower fixed income prices.
Speaker 9: Up, well, quite possibly, yes, it's it's not good for
Speaker 9: many markets. I mean, the EEM tends to quite like
Speaker 9: a soft dollar and a strong China. It's got the
Speaker 9: opposite right now. So the channels through which China might
Speaker 9: matter to global fixed income are many. It could be
Speaker 9: through capital flows, it could be through trade and therefore GDP.
Speaker 9: It could be through FX, it could be through some
Speaker 9: form of contagion, some kind of financial stability incident. I mean,
Speaker 9: there's so many that the list is long, and it
Speaker 9: seems that already there's some influence. But what kind of
Speaker 9: policy maker is ever going to say, But what's really
Speaker 9: happening We're going to find out afterwards. So I think
Speaker 9: that the already you've got a big gap between the
Speaker 9: yield levels offered by China and many other markets compared
Speaker 9: to the US, and that's the thing I'm focusing on
Speaker 9: at the moment. It's very difficult to determine exactly what
Speaker 9: the channel and the process is going to be, but
Speaker 9: I think it matters.
Speaker 3: How do you understand, Steve, why we haven't seen yield
Speaker 3: go lower this year, why they've seen so sticky and
Speaker 3: persistently so with economic data surprising to the upside that
Speaker 3: we've we've.
Speaker 9: Just completed the most aggressive tightening phase in four decades.
Speaker 9: It looks like the momentum of the tightening is definitely fading,
Speaker 9: and I think that we're, you know, we're entering a
Speaker 9: very important period here where there's probably going to be
Speaker 9: a handoff from the focus on inflation onto the really
Speaker 9: colomby data, and it's going to be a slow process.
Speaker 9: But I think that you know, I repeat what I
Speaker 9: just said, Yields probably go side ways for now, but
Speaker 9: when they make the next big move, it's very unlucky
Speaker 9: to be up. The next big move is more likely
Speaker 9: to be down, and therefore you're better to be long.
Speaker 3: Are you saying that the risk right now is for
Speaker 3: some sort of systemic event and that you see one
Speaker 3: on the horizon versus the upside growth surprises that we
Speaker 3: have been seeing, which is like a lot of people
Speaker 3: to say that, really the asymmetry goes to the other side.
Speaker 3: The growth could actually reignite. And I've heard this even
Speaker 3: from FED officials themselves.
Speaker 9: So the GDP now a is a notoriously volatile series.
Speaker 9: It's been goosed up by the fiscal loosening, and the
Speaker 9: trend GDP is still what one seventy five, one eighty.
Speaker 9: The smart people, I believe recognize that the R star
Speaker 9: is unchanged from before the pandemic. So the policy rate
Speaker 9: is more than double what the equilibrium rate is going
Speaker 9: to be. So it says to me that we are
Speaker 9: at or very close to the peak in the.
Speaker 1: So given that, Steve, where do you how do you
Speaker 1: place a bet here out a year or two? Are
Speaker 1: you you know, on a retail basis, are you laddered?
Speaker 1: Do you barbell? What's the major strategy that's to go
Speaker 1: press up, yield down?
Speaker 9: Yeah, that's now the key question. I've got much more
Speaker 9: comfortable with just outright long of ten year plus rather
Speaker 9: than trying to play anything fancy with the curve. If
Speaker 9: you if you start buying twos versus tens and players steepener,
Speaker 9: you've got too much carry to overcome, and so so
Speaker 9: the strategy favors taking duration over yield.
Speaker 6: Curve expressure.
Speaker 1: Right now, I can't say enough John, how important it
Speaker 1: is to see a bullet approach from a major bank.
Speaker 1: You don't see that nowadays. Everybody wants to do ballet
Speaker 1: fancy fancy CFA garbage and major just says, shut up
Speaker 1: and buy it.
Speaker 7: We're talking about treasury, says Steve. Let's talk about that
Speaker 7: trade relative to what you expect to happen in the
Speaker 7: UK in Europe is a similar story, Steve, Or is
Speaker 7: it different?
Speaker 9: Well, the UK might be leading things today. At least
Speaker 9: happens occasionally, doesn't that. I think for every hundred days,
Speaker 9: maybe there's five to ten days when the UK and
Speaker 9: the Eurozone can pull the US around, and today might
Speaker 9: have been one of those. The front end of the
Speaker 9: UK got some life into it. Seems like the UK
Speaker 9: could be at the peak. The data is supporting that,
Speaker 9: so it's all connected. I just think that at the moment,
Speaker 9: the relative value between treasuries and boons and guilt and
Speaker 9: Ossie Canada it favors treasuries. Just just run a spread
Speaker 9: series of the markets. And that's what struck me is
Speaker 9: that it's a relative argument, not just an absolute one.
Speaker 7: Stay final question, Top four west Ham. What does James
Speaker 7: ward Prows have to do to get a call up
Speaker 7: for the national team?
Speaker 9: Hasn't he been great?
Speaker 6: What a joy?
Speaker 9: Surely he must be on the list.
Speaker 6: It's been a joy to watch.
Speaker 7: Just snubs by Southgate continuously.
Speaker 1: I'll get it, kay. I read the press on this,
Speaker 1: Henry Wonder and all that, and you guys are vicious
Speaker 1: over there. I mean, we don't have this.
Speaker 7: It's pretty brutal stuff. Yes stuff, Yeah, the tamploid the
Speaker 7: sports pages. Steve, thank you sir for the update on
Speaker 7: the bond market and a sneak peak of some of
Speaker 7: the football chat as Wallow for an England Steve Major
Speaker 7: of HSBC.
Speaker 1: Right now working with Ian Bremer at Eurasia Group is
Speaker 1: Anna Ashton, director of China Corporate Affairs. On of course
Speaker 1: this relationship with US and China. We need a brief
Speaker 1: this morning as well, and I'm going to cut to
Speaker 1: the chase. I see a lot of hysteria, and we've
Speaker 1: had some good voices calm us down a bit, take
Speaker 1: us away from the immediate hysteria of China to clear thing.
Speaker 1: How are you thinking clearly about the domestic challenges of China.
Speaker 10: Well, Tom, it is quite a challenge to be the
Speaker 10: one who's supposed to come up with the positive take,
Speaker 10: because you know, China really is facing some serious economic
Speaker 10: hurdles right now, and they're different from hurdles in the past.
Speaker 10: The slowdown is systemic, the real estate crisis is affecting
Speaker 10: lots of sectors. But at the same time, you know,
Speaker 10: it is important to remember that while China may be
Speaker 10: growing at this present moment more slowly than the United States,
Speaker 10: which is odd, and it's still growing and it is
Speaker 10: an enormous country that is also growing in population with
Speaker 10: a middle class that is set to grow. So there's
Speaker 10: a ton of opportunity that remains.
Speaker 1: I think.
Speaker 10: One of the issues that is kind of separate from
Speaker 10: the slowdown but also makes it harder and harder for
Speaker 10: foreign firms to do business successfully, and has nothing to
Speaker 10: do actually with regulations either, is just the fact that
Speaker 10: there's more competition in the Chinese market from domestic companies
Speaker 10: than there used to be.
Speaker 1: If I look at the domestic companies, it comes back
Speaker 1: to the soees, the state owned enterprises like the waves.
Speaker 1: Every eight years, we're going to de emphasize them, We're
Speaker 1: going to re emphasize them.
Speaker 4: Or that.
Speaker 1: What is a relationship of those state owned enterprises now
Speaker 1: with the nu Xi regime in Beijing.
Speaker 10: Well, definitely Shijinping is more of a state sector man.
Speaker 10: He has definitely moved away from his predecessors in re
Speaker 10: emphasizing the role of the state and in his you know,
Speaker 10: pretty firm belief that the state needs to be involved
Speaker 10: in directing which parts of Chinese China's economy are going
Speaker 10: to be emphasized and are supposed to grow. But you know, interestingly,
Speaker 10: that seems to be the direction that US politics is
Speaker 10: going to a lesser extent as well.
Speaker 3: Anna, we had Pierre fergu on earlier and he was
Speaker 3: saying that he wants to start it or he wished
Speaker 3: he had started a hedge fund to buy every dip
Speaker 3: in some of the names that are most affected by
Speaker 3: the geopolitical headlines in particular about US and China relationships.
Speaker 3: Souring is this time different.
Speaker 10: On the one hand, I would agree with him. You know,
Speaker 10: how many times has there been a prediction that China
Speaker 10: was becoming collapse of China? But China had reached the
Speaker 10: end of its miracle of growth and development. But so
Speaker 10: I tend to err on the side of China. We'll
Speaker 10: figure it out, because there have been all of these
Speaker 10: times in the past when we thought it was different too.
Speaker 10: But there are some serious differences here. A big one
Speaker 10: is that there's really no way for China to try
Speaker 10: to come in and bail out the economy and rescue
Speaker 10: growth with a huge stimulus the way it is done
Speaker 10: in the past without reinflating the real estate bubble. And
Speaker 10: if they did come in with a stimulus, it wouldn't
Speaker 10: necessarily do what they truly needed to do, which is
Speaker 10: increase consumer and private sector confidence so that there's more consumption,
Speaker 10: and that that really is a change.
Speaker 3: Do you also think that there needs to be or
Speaker 3: that there will be more of a response from the
Speaker 3: US in light of the fact that the new development
Speaker 3: in the Chinese phone was released during the Commerce Secretary's
Speaker 3: visit to China, And you know, Ramondo is there the
Speaker 3: timing very much trying to sum the nose at the
Speaker 3: US government and that there seems to be a much
Speaker 3: more direct tit for tat.
Speaker 10: There's definitely a much more direct tip for tat. And
Speaker 10: you know, we've seen that play out in a number
Speaker 10: of different forums in the last few days. So there
Speaker 10: was Gina Raimondo's statement on Face the Nation about not
Speaker 10: necessarily wanting to apply the word trust to the relationship
Speaker 10: or improved trust after her visit, but saying, you know,
Speaker 10: we really need to see action. And there was you know,
Speaker 10: sort of similar tone from Vice President Kamla Harris when
Speaker 10: she was at the Avion Summit and the East stage
Speaker 10: of the summit talking about the need for China to
Speaker 10: not not you know, percee these grad zone activities in
Speaker 10: the South China Sea.
Speaker 1: All right, go ahead, Well, thank you and I greatly
Speaker 1: appreciate too short a visit today. Let's do it again,
Speaker 1: someone we will with China so much in the news
Speaker 1: and Ashton with us with Ian burmersh to raise your group.
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