Speaker 1: Ye. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. 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. It
Speaker 1: is great to have Brown wife scene at the Mite
Speaker 1: with us now. Morgan Stanley Investment Management, Head of Global
Speaker 1: fixed Income Brown, we have come a long day, a
Speaker 1: long year, a long way, yields down and now we've
Speaker 1: had a little bit of a bounce off around one
Speaker 1: forty in the last couple of months. Back up to
Speaker 1: what are your talent clients now? Not to expect rates
Speaker 1: to go up that much, but they're still too low.
Speaker 1: It's amazing. I think you're right that ten year notes
Speaker 1: went from three to one forty. Unloved the whole time.
Speaker 1: I think I was with you when when they were
Speaker 1: loved to think you and uh, and we discussed that
Speaker 1: was too low. Listen to five seems like a good
Speaker 1: ceiling for now. Central banks don't want to ease, but
Speaker 1: rates do seem low. You're confident we've come out of
Speaker 1: this growth scale. No, we wish we were and there's
Speaker 1: a hundred reasons to be optimistic, but you really haven't
Speaker 1: seen a lot of data that shows it is. Um Listen,
Speaker 1: the markets are expecting p M I is to go up,
Speaker 1: the markets are expecting employment to be okay. The danger
Speaker 1: is that that it doesn't come through. At this point,
Speaker 1: our bonds linked to equities now, yes, it looks like
Speaker 1: it us. I mean if you told me, what if
Speaker 1: you ask me what's the most dangerous thing for equities?
Speaker 1: I would think it could be meaningfully higher rates. I
Speaker 1: think it would. It would ruin the narrative that you
Speaker 1: have to find yield, you have to move out the
Speaker 1: curve that you have to We've been looking for meaningfully
Speaker 1: higher rates for what fifteen years at least? I mean,
Speaker 1: do do you? Can you guys? You guys have made
Speaker 1: some really important calls. Ellen sentor Mike Wilson and the rest.
Speaker 1: Can you make a call that we range out and
Speaker 1: break through to higher yields? I don't hear that. No,
Speaker 1: it's hard to make that call. You don't see inflation,
Speaker 1: you don't see growth breaking out. It would take some
Speaker 1: other policy movement I think to break out. I'm watching
Speaker 1: European bond markets because we're focused on the US market,
Speaker 1: But frankly, uh, European bonds have actually had a much
Speaker 1: bigger sell off, and I want to get a sense
Speaker 1: of this being capitulation. The negative yields a haven't worked,
Speaker 1: and that be the ECB has no more ammunition. Are
Speaker 1: you more concerned about the European debt market right now
Speaker 1: than the US? No? Not not really. I think to
Speaker 1: say negative fields haven't worked is is you have to
Speaker 1: break it down a little bit more granularly. Obviously, if
Speaker 1: you're borrowing at higher rates, like some of the periphery
Speaker 1: was lower rates and negative rates been very important. Do
Speaker 1: you think Italy would issue a sixty basis point bond today?
Speaker 1: They should they? I mean should they be able to?
Speaker 1: It's a it's a great question, but that they are,
Speaker 1: it's great for them, it's great for for risk assets.
Speaker 1: So listen, I think European heels are going to stay low.
Speaker 1: I don't think they're going to give up on the
Speaker 1: negative yield experiment. Um and and and yes there's been
Speaker 1: a sell off, but they're still pretty negative. So I
Speaker 1: don't think a forty or fifty base point moving European
Speaker 1: yield from negative seventy. Negative thirty or to zero is
Speaker 1: what's going to break the card. With the policy right
Speaker 1: at negative fifty basis points, it's hard to construct an
Speaker 1: argument the front end of the yield curve in Europe
Speaker 1: is going to sell off massively with the policy rate
Speaker 1: where it is. Brian totally totally agreed, And as I said,
Speaker 1: I wish I could give you a magical high interest
Speaker 1: rate call, but it's not. It's that doesn't seem like
Speaker 1: it's in the cards. Markets are telling you a story
Speaker 1: about the future. The fundamentals continue a very different story
Speaker 1: in German Germany right now. Arguably we're in a recession
Speaker 1: in Germany, yet the decks in is up around about
Speaker 1: and button yields have had a massive move. What do
Speaker 1: you make of the spread between sentiment and fundamentals at
Speaker 1: the moment. The one thing I'll say about equity markets
Speaker 1: is that there was a big swoon between October November
Speaker 1: of last year and today. So I think the SMP
Speaker 1: from the October highs is only up about six percent,
Speaker 1: depends how you measure it. So, yes, equities are done well.
Speaker 1: I think the I think go back to what Tom said,
Speaker 1: which is that I think that this promise of lower
Speaker 1: yields is driving people in equity markets. And even though
Speaker 1: people don't feel great about the world, it's an unloved
Speaker 1: equity market. Uh, they're still slowly trickling in and and
Speaker 1: levels keep going higher. Extraordinary the market action yesterday, just
Speaker 1: the sector by sector diffusion and the dynamics of it. John,
Speaker 1: I can honestly say I've never seen all time high
Speaker 1: on the natstack, on a Dow and on the SMP
Speaker 1: five hundred as well. The outperformance yesterday coming from energy industrials, financials,
Speaker 1: the value sectors that many people have been waiting for
Speaker 1: this rotation into and waiting for tracery yields to move
Speaker 1: with it. Your call now going into year end? What's
Speaker 1: the conviction call now for you? Brian? The conviction call
Speaker 1: for us is that that some of these unloved sectors
Speaker 1: are going to find some love. So you can see
Speaker 1: them in fix income too. Right, if you look at
Speaker 1: what's underperformed emerging markets, and and and the energy sectors
Speaker 1: in high yield, a few others, So we'd buy triple
Speaker 1: cities in high guild. Well it's not that simple, right,
Speaker 1: A bunch of those triple cs are actually really bad.
Speaker 1: So you can't just go and buy the triple C index,
Speaker 1: but you can certainly find names that in there that
Speaker 1: that are Okay, It's not easy, I'll be honest. Fixed
Speaker 1: income valuations are are are are not obviously wide. For
Speaker 1: the benefit of our listeners, I asked that question smiling
Speaker 1: quite a lot because I know how complex that is
Speaker 1: in that space. Right now, By a second, I want
Speaker 1: to just give a little statistic. Yesterday the one day
Speaker 1: move in triple C rated bond yields, they went from
Speaker 1: eleven point two percent to ten point nine percent. Bam.
Speaker 1: It was just a massive rally in the triple C space,
Speaker 1: and it was really on the heels in particular of
Speaker 1: the energy rally that we saw. But really interesting to
Speaker 1: see people going back into that. There are so few
Speaker 1: things that you can pick fixed income. They have that
Speaker 1: type of coupone. So it's funny, well, the well, the
Speaker 1: fundamentals and the and the technicals separated. In other words,
Speaker 1: will you buy what's terrible just to get the yield
Speaker 1: for a little while. It's definitely a danger right here,
Speaker 1: yea Aprom, We appreciate your time this morning, thanks for
Speaker 1: running back into the studio, But I'm staying the Stanley
Speaker 1: Investment Management head of Global fixed Income, Phoenix Klein, now
Speaker 1: with us, it was sock Jen as we look at
Speaker 1: emerging market, Phoenix, can you link a better China directly
Speaker 1: into a better e M or is it a discreete
Speaker 1: matter right now? I think the Chinese story has become
Speaker 1: a huge part of the e M overall story, and
Speaker 1: I think that's one of the reasons why you know,
Speaker 1: our our views and e M is grossly intricately tied
Speaker 1: to what happens to China over the course of the
Speaker 1: next month. Is it a broader dollar coal head, Phoenix?
Speaker 1: Is it a broader dollar coal here? Yes, So so
Speaker 1: that in terms of the dollar call, you know, we're
Speaker 1: expecting for dollar c n y to go towards seven
Speaker 1: point five by the end of the third quarter and
Speaker 1: years so, you know, within twelve months UM, and that's
Speaker 1: going to likely to lead to further EM weakness UM
Speaker 1: across the M complex. So uh, So far, we've gotten
Speaker 1: a number of pm I data industrial production data out
Speaker 1: of merging markets, particularly in Eastern Europe, and it does
Speaker 1: appear that there is at least some bottoming out or
Speaker 1: getting a whole host of p M I s this
Speaker 1: week as well from other developing markets. What are you expecting?
Speaker 1: How important are those figures? Those figures are quite essential
Speaker 1: in reflecting the state of the economies, especially in Eastern
Speaker 1: European markets. And as we've seen in the numbers released
Speaker 1: yesterday from Poland, there is spill over from the weakness
Speaker 1: coming out of the German manufacturing complex. And that's still
Speaker 1: I think a long term story ahead for this economy's
Speaker 1: um and and that's likely to weigh on the economic
Speaker 1: growth picture and and still hold back the overall region.
Speaker 1: So I think that's still going to impact currencies in particular.
Speaker 1: So how tied is a slowdown in industrial production to
Speaker 1: what we're seeing in China, I mean just sort of
Speaker 1: connecting it back to the U N Yeah, So I
Speaker 1: think that this is part of a much bigger global
Speaker 1: trade story, and China's slowdown has certainly impacted other regions,
Speaker 1: and Germany's linked into that intricately. Um And I think
Speaker 1: that's that's kind of the global slowdown that's being reflected
Speaker 1: across the manufacturing in the season in particular, and unless
Speaker 1: so in the services and season, do you partition e
Speaker 1: M bigger more sophisticated big cap companies away from other
Speaker 1: e M stocks or is it all one basket? Now,
Speaker 1: there's there's a huge amount of videos incre seas and
Speaker 1: diversity across the e M world, So I think there's
Speaker 1: there's lots of ways to partition its um. And certainly
Speaker 1: you know some of the countries as well as well
Speaker 1: as bill functioned by blocks, still functions by regions. And
Speaker 1: then there are the videos and that we hear from
Speaker 1: time to time. We'll give us an idiosync at a
Speaker 1: sock gen view. What what where is that opportunity right
Speaker 1: now geographically on a nation's basis? Where where would you
Speaker 1: suggest the opportunity is for someone that believes these ill
Speaker 1: winds will clear and that we will have a better market.
Speaker 1: But that goes against the core sucks and dow which
Speaker 1: is quite bearish in nature in fact, and because in
Speaker 1: terms of new US growth for next year, we're expecting
Speaker 1: for US to print only zero point seven present GDP
Speaker 1: versus consensus at one point seven. So um, yeah, I
Speaker 1: think what you are kind of the standouts in terms
Speaker 1: of the market, in terms of how bearished we think
Speaker 1: the economy will perform um And in that context, you
Speaker 1: know our our views are along the lines of still
Speaker 1: being very bullish bond various currencies. Yeah, very good. We
Speaker 1: gotta get you back on that Phoenix. Kalin will be
Speaker 1: appearing with us every three months here on a zero
Speaker 1: point seven g d picle. I mean, John, that's extraordinary.
Speaker 1: It is famous. Kind that is I'm gonna call that
Speaker 1: a hundred and twenty basis points South, director of a
Speaker 1: M strategy gun into. One of the great things you
Speaker 1: can do is drive across the fabric of the country
Speaker 1: and outside Des Moines there's a sign five and eighty
Speaker 1: miles Denver, and that's where Eastern coast people like me go, oh,
Speaker 1: it's a big country out there. Joseph Fricketts lived in
Speaker 1: He's the second most famous person out of Nebraska City, Nebraska.
Speaker 1: Greg Whorton, football player, is the most famous. Joe Ricketts
Speaker 1: joins us. The book is the harder you work, luckier
Speaker 1: you getting. Yes, we will talk a merry trade, and
Speaker 1: yes we will talk cubs. At some point. What was
Speaker 1: Nebraska City like in World War Two? And I bring
Speaker 1: that up because we have a president nostalgic for the
Speaker 1: smallness of America of the forties, of these sixties, what
Speaker 1: was it. I was born in forty one, so I
Speaker 1: was a baby during the war. I remember though, the
Speaker 1: anxiety that people had. I felt it as a baby.
Speaker 1: But coming out of the war, which is when I
Speaker 1: started to become a child and grew up through the
Speaker 1: late fifties, Nebraska City was the perfect place to grow up.
Speaker 1: I had the freedom to room, to ride my bicycle
Speaker 1: in the morning, and the summertime, my wife or my
Speaker 1: mother would give me a zack lunch and I didn't
Speaker 1: come back. And you capture that in your book and
Speaker 1: the fabulous photographs as well. We have a president who
Speaker 1: you support, President Trump, who has a nostalgia for what was.
Speaker 1: How do we take our belief in what was and
Speaker 1: drag it forward into the modern America. I I don't
Speaker 1: know how to answer that question correctly, accept to say
Speaker 1: that if we don't keep the free enterprise system, our
Speaker 1: society is going to change dramatically for the worlds. So
Speaker 1: that one of the reasons why I wrote the book
Speaker 1: was to encourage young people, if they have an entrepreneurial band,
Speaker 1: to start a business. And suggested John, we don't have
Speaker 1: a vote here for Senator Warren. Let's let's talk about
Speaker 1: it carry on, please do we No, no, no, I'm
Speaker 1: stunned at the conversation that's that's in the arena today
Speaker 1: with this presidential election coming up. Our greatness comes from
Speaker 1: pre enterprise. Every society that has tried socialism has failed,
Speaker 1: and there is poverty and despair that comes out of socialism.
Speaker 1: Senator Warren says, she's a capitalist. She just wants markets
Speaker 1: to work more efficiently. Do you believe that? No, not
Speaker 1: at all, not when you listen. What is it that
Speaker 1: tells you that she's not what she says she is
Speaker 1: Because all the benefits that she says she as the
Speaker 1: leader of the government is going to provide to society
Speaker 1: is going to read ware that she changed society dramatically
Speaker 1: and not in favor of for enterprise. She says, all
Speaker 1: she needs to do to get Medicare for rule is
Speaker 1: tax the billionaires. The billionaires are the only people that
Speaker 1: are going to be paid more. And last count I
Speaker 1: think Forbes had six hundred and seven billionaires in the
Speaker 1: United States of America's still quite a rare think, isn't
Speaker 1: it joke to be that it's a very that much money,
Speaker 1: very rare thing. And these are the people that make
Speaker 1: society work. If you'll look at that list with the
Speaker 1: top four billionaires, they're all people that are in business
Speaker 1: that are providing jobs and providing benist society. Did you
Speaker 1: ever think did you ever think they're becoming a billionaire
Speaker 1: would be seen as a sign not of success but
Speaker 1: of market failure. Never never dreamed of it. No, not
Speaker 1: at all, Joe. We got to bring in and introduce you.
Speaker 1: Lisa Abrahamo. It's her great claim to fame is at
Speaker 1: the University of Chicago. She begged Richard Taylor to go
Speaker 1: to the Cubs game with him, but it never worked out. Dude,
Speaker 1: when you said when you said your claim to frame,
Speaker 1: I got this wave of nervousness come over me. I
Speaker 1: had no no clue where you're going with that. But
Speaker 1: the number of the number of Nobel laureates that darkened
Speaker 1: the door of really field is just something to talk about. Yeah,
Speaker 1: And I could never get them to go with it
Speaker 1: with me to a Cubs game. But I will ask you, Um,
Speaker 1: you talk about free enterprise, and that brings me to
Speaker 1: the business of TD merrit Trade, which you founded. Uh.
Speaker 1: Increasingly it's moving toward free trading of assets, and I'm
Speaker 1: wondering can you connect that the idea of uh, sort
Speaker 1: of the availability and the ease of which people can
Speaker 1: buy and sell securities without paying anything. Do you think
Speaker 1: that that is a good thing. I'm not sure. I
Speaker 1: think it has to play out. I I am hesitant
Speaker 1: to say it's a good thing. First of all, is
Speaker 1: the culmination of what happened in so we've had all
Speaker 1: of this time for the discount brokerage industry free evolved
Speaker 1: to come to this point. But the thing that we
Speaker 1: need to be careful with f from my point of view,
Speaker 1: is we don't want to equate I in a stock
Speaker 1: with betting on a football game. That and if that
Speaker 1: kind of goes there, it's going to turn out to
Speaker 1: be a bad thing. Do you think that that's sort
Speaker 1: of implication of having no fees on these transactions. I
Speaker 1: don't know. We have to see it play out. That's
Speaker 1: my hesitation. That's what I don't know. That's what we're
Speaker 1: gonna have to see. We don't want the wrong type
Speaker 1: of volume in the business. I would point out, the
Speaker 1: harder you work, the lucky to get. Joe Rickerson back
Speaker 1: of the book says it all he's got. George will uh,
Speaker 1: channeling branch Rickey, X of the Cardinals, a guy named
Speaker 1: Diamond in the banking business, and one of your arch
Speaker 1: competitors Charles Schwab as well. You invent a t DA merritrade.
Speaker 1: I remember the wonder of it off of Mayday in
Speaker 1: all that, but has it become a barbell business where
Speaker 1: it's adults holding equities forever essentially versus the micro hyper trading?
Speaker 1: Does that industry that you invent do they now live
Speaker 1: and die on that hyper trading? Uh, that hyper trading segment.
Speaker 1: A lot of them do, but a lot of them
Speaker 1: also don't. We have evolved out of Merritorde just from
Speaker 1: providing trades to providing a lot of other services that
Speaker 1: the customer can pay for, which include financial planning. So
Speaker 1: there's an evolution that has come about it. So there's
Speaker 1: spectrum of traders that are in the customer base of
Speaker 1: our merritrade, but there's also the buy and hold people
Speaker 1: your silence. I mean, look, I think that it's an
Speaker 1: interesting point, this idea of uh, you know, whether removing
Speaker 1: the difficulty of entrance, the barriers to entry in the
Speaker 1: market will encourage imprudent behavior and will encourage people to
Speaker 1: trade more and not necessarily be deep dive investors. But
Speaker 1: in some way, don't index funds already do that. They do. Yes,
Speaker 1: they trade often, and they provide a lot of volume
Speaker 1: to the business, which is good. It's help the market
Speaker 1: grow in depth. Uh So, it's not so much that
Speaker 1: they're going to harm the market, is that they may
Speaker 1: not help themselves. I want to ask you about the
Speaker 1: title of your book, the Harder you Work, the Lucky
Speaker 1: You Get, which is an ethos of Pete Peterson's Nebraska.
Speaker 1: You're in Nebraska as well, and it speaks to a
Speaker 1: massive body of disaffected Republicans who have had it with
Speaker 1: this president. What do you say, and your family is
Speaker 1: raised funds for President Trump, what do you say to
Speaker 1: the group of the Grand Old Party out there? It
Speaker 1: doesn't like this guy's style. I really don't feel like
Speaker 1: I have to talk to them, but I can tell
Speaker 1: you this. All you have to do is look at
Speaker 1: the figures. Look at the employment figures, look at the
Speaker 1: gross national product, look at our factories. I thinks are
Speaker 1: reviving in a fresh way in the United States. We
Speaker 1: gotta come on, Joe, we gotta we gotta run rate
Speaker 1: of one point nine g d p of for lucky
Speaker 1: on a trade ward that this guy invented. I mean,
Speaker 1: what does that trade war doing to a farmer? Forget
Speaker 1: about that. My distance is wrong, John, I think New Jersey.
Speaker 1: What is this due to a farmer four hundred and
Speaker 1: seventy miles west of Omaha on the way to cose It?
Speaker 1: What's it due to him? I think that in the
Speaker 1: short term is you I know what I read in
Speaker 1: the papers. It's it's caused them some harm, but he's
Speaker 1: given them some help and now he's got one of
Speaker 1: the biggest trade arrangements for soybeans that the United States
Speaker 1: have ever had with China. I don't you worry about
Speaker 1: that though, that that help came from the government. The
Speaker 1: farm is increasingly depending on handouts. I prefer society without handouts,
Speaker 1: but sometimes there needs to be some help for a society.
Speaker 1: I know that my grandfather had one of the most
Speaker 1: successful farms near Manly, Nebraska, and he went broken during
Speaker 1: the depression and he moved to a house in Nebraska
Speaker 1: City to work in the packing house, into a house
Speaker 1: with dirt floors. I mean, there was no social programs,
Speaker 1: So there needs to be some where you where you
Speaker 1: draw that line is the big question. Can do a
Speaker 1: surveillance correction, Joe, in honor of you in Nebraska? I
Speaker 1: mentioned four and seventy miles west of Omah, that would
Speaker 1: be Sydney, Nebraska out I eighty. I was wrong Cosad's
Speaker 1: in closer to Omah than I recall, okay years ago.
Speaker 1: That's our surveillance correction for the Dayphy. The harder you work,
Speaker 1: the luckier you get get you know him from merri Tree.
Speaker 1: The family's got a night and acquaintance with Anthony Rizzo
Speaker 1: in the Chicago Cubs as well, and we thank him
Speaker 1: for coming in today. Uh truly. And I think John,
Speaker 1: in the history it's forgotten. They revolutionized the business. John,
Speaker 1: I've really been looking forward to this, this serious bontom
Speaker 1: dynamics to discuss, really really happy to site it. Joining
Speaker 1: Lisa Tom of myself is Lally too of j O H.
Speaker 1: C Mly Good morning to you, Good morning, big day
Speaker 1: yesterday for credit spreads, some real tightening. What do you
Speaker 1: make of the moves with staying at the moment? Complacency
Speaker 1: is a beautiful thing, isn't it? Is that what you
Speaker 1: think it is? Complacency at the moment? Well, look e
Speaker 1: t f are getting inflows. And when e t f
Speaker 1: s have gone inflows, uh, they're just buy. That's just
Speaker 1: the rule of the game. And if you actually look
Speaker 1: at the active manager cash holdings, it's been steadily rising.
Speaker 1: What I mean my complacency is everybody's hiding out in
Speaker 1: the same trade. Everybody's long double bees. That's just the
Speaker 1: name of the game. When is it not complacency? Uh,
Speaker 1: if you're getting returned so far, you're to date on
Speaker 1: higail bonds of twelve point one percent, I mean at
Speaker 1: a certain point, they're right, it's right. But when you
Speaker 1: cash in and just say, you know what, going forward,
Speaker 1: because you got to look forward, not backwards. So going forward,
Speaker 1: what's the best you can make out of double bees today,
Speaker 1: which you'll three point eight percent? I think it's interesting
Speaker 1: that you're delineating double bees, which have a much lower
Speaker 1: yield and have had a much bigger rally versus triple
Speaker 1: cs versus single bees. Is now the time to either
Speaker 1: take big risk or go home, go into the triple
Speaker 1: cs or not by high yield. I'm going home? Are
Speaker 1: you coming home? Are you d risking? At the moment,
Speaker 1: we we have been um so remember we run a
Speaker 1: comingal portfolio between equities and credit. When you look at
Speaker 1: the restroared ratio, to me, equities seem a lot more
Speaker 1: interesting if you think the growth is going to recover
Speaker 1: than than credit from here, and if you think we're
Speaker 1: gonna sell off. Look, I think people forget credit is
Speaker 1: a risk asset class. It is not a hedge against equities.
Speaker 1: If you want to hedge, you go by treasuries, you
Speaker 1: don't go by credit. Well, in your research note, you've
Speaker 1: got something pro which I want you to explain to
Speaker 1: the public, which is how much of bonds are trading
Speaker 1: the first call. This is a really important idea of folks.
Speaker 1: This goes way back to the Bloomberg y a screen
Speaker 1: where you have language like yield the worst, yield, the
Speaker 1: first call, et cetera. What is yield the first call? Me?
Speaker 1: I mean, I know, yield the last call, you know,
Speaker 1: but what is yield the first call? So, unlike investment grade,
Speaker 1: high yield bonds are always callable, and they're typically callable
Speaker 1: three to four years first year after the issuance, and
Speaker 1: the way the call is calculated is a function of
Speaker 1: the yields and the spreads. So if it's cheaper for
Speaker 1: the company to refinance. Today where the things are trading,
Speaker 1: it is likely that the call then will come forward.
Speaker 1: And when you look at the high yield market today
Speaker 1: between the double bees and the and even the single bees,
Speaker 1: majority of the market close to somewhere like I would
Speaker 1: say three quarters of the market is trading into the
Speaker 1: first call and in some cases trading at above prices
Speaker 1: the first call. This is so important, folks, because another
Speaker 1: way to say this is yield to refinance or yield
Speaker 1: to rollover. It's just assume the liquidity is out there,
Speaker 1: is theirsty out there to do the refive three to
Speaker 1: four years out. Well, today is the belief of it is?
Speaker 1: I mean today it's there, right, liquidity, You know, I
Speaker 1: joke about it and I say, like, liquidity is kind
Speaker 1: of like having a line as a pet. Right. It's
Speaker 1: really nice when they're calm, but once no whilecomes and
Speaker 1: just molds you. Um, So today we're in that calm period.
Speaker 1: But when I hear things like investment grade managers are
Speaker 1: looking at triple A CLO spreads to add a little
Speaker 1: bit on the margin. Insurance company is going to look
Speaker 1: at buying stubs of bonds that haven't been tenders, so
Speaker 1: they can earn extra twenty BIPs. But but here's the
Speaker 1: problem with that. And I'm sympathized with that view as
Speaker 1: as someone who enjoys the sensational kinds of headlines. But
Speaker 1: the reality has people have been doing this for a
Speaker 1: while and they've been winning. So the question is when
Speaker 1: is this imprudent? What are you looking for that indicates
Speaker 1: this can't keep going? Sure, and we've been winning as well,
Speaker 1: and there's nothing wrong with winning. You just have to
Speaker 1: know when it is time to pack your bags and
Speaker 1: call it a day. Um, and I think we're slowly
Speaker 1: getting to that point. I'm just on a risk adjusted basis. Look,
Speaker 1: if I have an extra dollar to to spend, I'm
Speaker 1: not telling you don't put it anywhere in the markets.
Speaker 1: I'm just saying I rather put it in the equities
Speaker 1: and the cyclicals, where I think I can make almost
Speaker 1: two extra money and by the way, earn a dividend
Speaker 1: yield that probably two x what you can earn on
Speaker 1: the treasury then basically hiding out in the double b.
Speaker 1: So it's just a function of how you want to
Speaker 1: craft your portfolio. And now you don't like me talking
Speaker 1: about your performance too much. But for anyone that's interested,
Speaker 1: you can't go on the Bloombow terminal and take you look,
Speaker 1: look yourself. It is a really really good year, Arlo.
Speaker 1: Let's talk about where else is crowded. You've mentioned the
Speaker 1: double bees part of high Yield. Where else is crowded
Speaker 1: at the moment that you think if people are in,
Speaker 1: they should be considering getting out, regardless of the performance
Speaker 1: at the moment. I mean broadly, I think the credit
Speaker 1: asset is I really struggle with making heads or titles
Speaker 1: out of it. And I know I wrote this like
Speaker 1: long email tea. I was trying to justify myself. But
Speaker 1: look at the triple C's right, because I mean the
Speaker 1: math has to matter at some point in time, and
Speaker 1: this is the flow of averages. Everybody looks at the
Speaker 1: averages and they look at this high you'll spread that
Speaker 1: has been exceptionally well behaved. They say, you know what,
Speaker 1: four hundred spread. It doesn't look that bad. I can
Speaker 1: still earn it when you start digging into it. It
Speaker 1: just tells you a different story. If you assume half
Speaker 1: of the triple sees default just half of the triple seeds,
Speaker 1: which is not outrageous because they tend to default. That's
Speaker 1: fift of the market at seven and a half percent.
Speaker 1: The fault rate, the average high you'll spread should be
Speaker 1: around six hundred. It's not the triple sees that I
Speaker 1: think are miss priced. It's the double bees and this
Speaker 1: defensive that everybody is hiding out in that is grossly mispriced.
Speaker 1: I think the call point is really interesting because it's
Speaker 1: also indicating that people are buying bonds at prices that
Speaker 1: are higher than where the company can buy it back
Speaker 1: from them at right, So it's basically guaranteeing a loss
Speaker 1: if the company chooses to refinance. I'm just wondering you're saying,
Speaker 1: if triple cees see like half of them default, are
Speaker 1: you see any fundamental signs of deterioration? I mean the
Speaker 1: easiest one. So there's two things you can look at.
Speaker 1: One is just look at the ratings, upgrades and down grades.
Speaker 1: You are now on a trend. You're seeing more down
Speaker 1: grades broadly speaking, than upgrades. The other part you see
Speaker 1: is it's you know, look at the volatility both in
Speaker 1: the loan and the high yield market. Right a company
Speaker 1: reports good earnings, maybe the bonds go up half a
Speaker 1: point to a point, you report bad numbers. I mean
Speaker 1: we've seen three, five, ten, in some cases twenty points
Speaker 1: of downside. It's insane, like bonds are not supposed to
Speaker 1: be like that. Like at the moment. If we let
Speaker 1: you go right now, many of our listeners will think
Speaker 1: you're this uber bear who's sound in the alarm on
Speaker 1: global markets. That's not the case. Let's wrap things up
Speaker 1: with the opportunities in front of you. In the equity market.
Speaker 1: You've been doing wow this year. I imagine that's coming
Speaker 1: a lot also from your equity investments. What are you
Speaker 1: doing at the moment in stocks, I mean equities. We
Speaker 1: we always look at it from a portfolio castilation and
Speaker 1: and think of it where where are we in credit
Speaker 1: and where are we in equities? In context? So we
Speaker 1: we like some of the cyclicals, we like some of
Speaker 1: the you know, European financials is something that we've looked at.
Speaker 1: Um it's and and really Europe and Asia are the
Speaker 1: two areas where everybody has just thrown in the towel,
Speaker 1: and sometimes you can find quite interesting companies have been
Speaker 1: around for a long period of time that you know,
Speaker 1: it's already pricing in a pretty bearish scenario. That doesn't
Speaker 1: mean you can't go in a lower but people are
Speaker 1: already assuming pretty much the worst. What a negative interest rates?
Speaker 1: Due to your world you're removed from full faith and
Speaker 1: credit Europe, but nevertheless there it is. Does that change
Speaker 1: the dynamics of the non full faith and credit market?
Speaker 1: I you know, simplistically, I don't think. I'm not a
Speaker 1: believer that negative rates work. It doesn't work anywhere else.
Speaker 1: And I think if you are company, including Mr Solomon
Speaker 1: speaking to our Matthew Miller today in Berlin, you know,
Speaker 1: I think if the US were to go negative too,
Speaker 1: I mean you may perhaps can think of an example,
Speaker 1: but I can't think of an example where the entire
Speaker 1: world with negative of UM Today, I think it kind
Speaker 1: of works because US is not negative, it's positive. You
Speaker 1: can still do relative trades, and I think that's part
Speaker 1: of the that's part of the challenge. You know, there's
Speaker 1: a lot of influence coming into the US because we're positive.
Speaker 1: You know, everybody is long US dollars, US exposure, US swaps.
Speaker 1: I mean, follow the money trail. It's actually pretty scary.
Speaker 1: Nice great to see you. M U sad fund manager
Speaker 1: in New York City, so smart. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
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