1 00:00:00,080 --> 00:00:03,160 Speaker 1: Let's get to Ellen Hazeen, our guest for the half hour. 2 00:00:03,279 --> 00:00:06,480 Speaker 1: Ellen is the chief market strategist at f L. Putnam 3 00:00:06,519 --> 00:00:10,319 Speaker 1: Investment Management. She joins from Boston. Ellen, thanks for being 4 00:00:10,360 --> 00:00:12,440 Speaker 1: with us. I want to begin with a bond market today, 5 00:00:12,440 --> 00:00:15,000 Speaker 1: because these were big moves right across the curve. We 6 00:00:15,000 --> 00:00:17,360 Speaker 1: were down in the case of both the two and 7 00:00:17,400 --> 00:00:21,599 Speaker 1: the ten by roughly fourteen basis points. The data was soft. 8 00:00:22,560 --> 00:00:25,319 Speaker 1: We know that. Does it bring you any closer to 9 00:00:25,400 --> 00:00:28,680 Speaker 1: this idea that maybe maybe the Fed is succeeding in 10 00:00:28,800 --> 00:00:32,839 Speaker 1: reducing demand and cooling inflation and perhaps they won't be 11 00:00:32,920 --> 00:00:38,520 Speaker 1: as aggressive and tightening. Well, they are certainly flowing the economy. 12 00:00:38,720 --> 00:00:41,440 Speaker 1: If you look across the board, you can see signs 13 00:00:41,440 --> 00:00:44,400 Speaker 1: of economic flowing. Whether you look at corporate margins where 14 00:00:44,520 --> 00:00:47,760 Speaker 1: started getting compressed in this earning season, whether you look 15 00:00:47,840 --> 00:00:51,440 Speaker 1: at housing um where housing inventory has started to grow 16 00:00:51,520 --> 00:00:54,600 Speaker 1: and new housing starts have started to decline, whether you 17 00:00:54,640 --> 00:00:58,440 Speaker 1: look at the consumer who is shifting more toward credit 18 00:00:58,520 --> 00:01:01,680 Speaker 1: and away from debit. And according to JP Morgan, the 19 00:01:01,800 --> 00:01:06,759 Speaker 1: average balances um have shrunk across every cohort income cohort. 20 00:01:06,840 --> 00:01:10,959 Speaker 1: So you're seeing things slow across the board. Absolutely Now 21 00:01:11,040 --> 00:01:15,040 Speaker 1: whether or not the FED can navigate it so carefully 22 00:01:15,040 --> 00:01:19,640 Speaker 1: and precisely that they land this seven seven on an 23 00:01:19,640 --> 00:01:23,400 Speaker 1: aircraft carrier, which is what would be required in order 24 00:01:23,440 --> 00:01:26,479 Speaker 1: to have a soft landing. The jury is still out, 25 00:01:26,760 --> 00:01:29,560 Speaker 1: you know. The tools that they have are so imprecise, 26 00:01:30,120 --> 00:01:33,200 Speaker 1: and the data lags, so I think it will be 27 00:01:33,319 --> 00:01:36,520 Speaker 1: very difficult until after the fact to understand whether they 28 00:01:36,520 --> 00:01:39,240 Speaker 1: have pulled it off. But I do think that at 29 00:01:39,280 --> 00:01:42,600 Speaker 1: the July meeting they should take note of so many 30 00:01:42,760 --> 00:01:45,640 Speaker 1: of these indicators that have turned sharply negative just in 31 00:01:45,680 --> 00:01:49,040 Speaker 1: the last few weeks um and perhaps put things on pause. 32 00:01:49,800 --> 00:01:52,120 Speaker 1: So the jury is still out some whether that soft 33 00:01:52,200 --> 00:01:54,760 Speaker 1: landing can be navigated. Were you sitting on the jury, 34 00:01:55,000 --> 00:01:57,000 Speaker 1: what would you think? What would you be your temptation. 35 00:01:57,080 --> 00:01:59,200 Speaker 1: Do you think it's a possible ability or as a 36 00:01:59,280 --> 00:02:02,920 Speaker 1: recissions looking like the most likely base case. I think 37 00:02:02,920 --> 00:02:05,520 Speaker 1: a recession is the most likely base case. Of course, 38 00:02:05,600 --> 00:02:08,440 Speaker 1: I hope that that will not happen, but as I 39 00:02:08,480 --> 00:02:12,160 Speaker 1: see more and more evidence come in, it becomes fairly 40 00:02:12,960 --> 00:02:16,959 Speaker 1: undeniable that unless they really pull a rabbit out of 41 00:02:17,000 --> 00:02:18,919 Speaker 1: a hat there, they're going to have a tough time 42 00:02:18,960 --> 00:02:21,040 Speaker 1: avoiding a recession. We had a negative quarter in the 43 00:02:21,080 --> 00:02:23,000 Speaker 1: first quarter. It looks like we might have a negative 44 00:02:23,040 --> 00:02:24,840 Speaker 1: quarter in the second quarter if you look at the 45 00:02:24,880 --> 00:02:31,799 Speaker 1: Atlanta now UH tracker, and and what with the increases 46 00:02:31,840 --> 00:02:35,560 Speaker 1: in input prices and the declines in demand, whether we're 47 00:02:35,560 --> 00:02:39,639 Speaker 1: seeing housing demands often, but also gasoline prices are coming down, 48 00:02:39,720 --> 00:02:42,959 Speaker 1: people are driving less, so it's really flowing down across 49 00:02:43,000 --> 00:02:45,800 Speaker 1: the board. Then we had the ECB kind of stepping 50 00:02:45,840 --> 00:02:48,200 Speaker 1: up to the plate here and and knocking it out 51 00:02:48,200 --> 00:02:50,360 Speaker 1: of the park with a fifty basis point rate high. 52 00:02:50,440 --> 00:02:53,280 Speaker 1: That strengthened the euro weekend the dollar. I mean that 53 00:02:53,400 --> 00:02:56,640 Speaker 1: had a positive impact as well. Are we nearer to 54 00:02:56,639 --> 00:03:00,079 Speaker 1: to peak dollar do you think? I think it is 55 00:03:00,080 --> 00:03:03,519 Speaker 1: going to be very difficult for the Euro to strengthen 56 00:03:03,639 --> 00:03:07,320 Speaker 1: against the dollar structurally. It is true that the ECB 57 00:03:07,480 --> 00:03:10,520 Speaker 1: is catching up in terms of their policy rate, but 58 00:03:11,040 --> 00:03:13,160 Speaker 1: at the press conference, I thought it was it was 59 00:03:13,280 --> 00:03:17,320 Speaker 1: pretty unclear exactly how the t p I would work, 60 00:03:17,720 --> 00:03:21,280 Speaker 1: whether or not we could avoid a Italian or other 61 00:03:21,320 --> 00:03:26,160 Speaker 1: peripheral country doom loop. And I think that it's going 62 00:03:26,200 --> 00:03:29,960 Speaker 1: to be very difficult to get that implemented in a 63 00:03:30,000 --> 00:03:34,720 Speaker 1: way that doesn't um cause of recession UH, and that 64 00:03:34,720 --> 00:03:39,720 Speaker 1: that doesn't drive Italian UH debt service UM into a 65 00:03:39,720 --> 00:03:42,840 Speaker 1: pretty high number relative to g d P UH. So 66 00:03:43,040 --> 00:03:45,800 Speaker 1: I think the dollar has been really strong. It's due 67 00:03:45,840 --> 00:03:50,680 Speaker 1: for an exhale from a technical perspective, but fundamentally, despite 68 00:03:50,720 --> 00:03:54,160 Speaker 1: the fifty basis point move today, I don't think we're 69 00:03:54,160 --> 00:03:56,280 Speaker 1: looking for the Euro to strengthen from here on a 70 00:03:56,320 --> 00:04:00,640 Speaker 1: secular basis and ellen The investing landscape a bit more 71 00:04:00,720 --> 00:04:03,040 Speaker 1: challenging now that it has been over the past decade 72 00:04:03,160 --> 00:04:05,600 Speaker 1: or so. So if you're looking for a decent return 73 00:04:05,680 --> 00:04:07,280 Speaker 1: at the moment, where do you put money to work? 74 00:04:08,480 --> 00:04:12,600 Speaker 1: We're looking for companies and assets that pay near in 75 00:04:12,920 --> 00:04:16,240 Speaker 1: cash LIS, so we're shortening duration in both the equity 76 00:04:16,320 --> 00:04:21,039 Speaker 1: and the fixed income portion of our client's portfolios. We 77 00:04:21,160 --> 00:04:23,960 Speaker 1: think rates are going to continue to rise. We think 78 00:04:24,040 --> 00:04:27,440 Speaker 1: real rates are going to be positive at all points 79 00:04:27,480 --> 00:04:30,560 Speaker 1: at the curve going forward, and that means that we 80 00:04:30,600 --> 00:04:33,520 Speaker 1: need to be much more careful about not overpaying for 81 00:04:33,640 --> 00:04:37,680 Speaker 1: companies that have earnings sometime in the future but right 82 00:04:37,720 --> 00:04:40,360 Speaker 1: now aren't generating. So we're very much looking for real 83 00:04:40,440 --> 00:04:44,680 Speaker 1: cash flow, real dividends, real earnings now UH and and 84 00:04:44,760 --> 00:04:49,000 Speaker 1: high quality companies that are uh, not too expensive. So 85 00:04:49,040 --> 00:04:51,119 Speaker 1: when it comes to the rates story, are you saying 86 00:04:51,120 --> 00:04:54,040 Speaker 1: that the market has yet to fully discount what you're seeing. 87 00:04:57,560 --> 00:05:00,800 Speaker 1: I think that the Fed will continue to raise rates 88 00:05:00,960 --> 00:05:04,160 Speaker 1: and shrink the balance sheet, and that's gonna that's gonna 89 00:05:04,160 --> 00:05:07,920 Speaker 1: cause long rates to go up. Um. They may pause 90 00:05:08,200 --> 00:05:10,200 Speaker 1: as they see the economy slowing, but I don't think 91 00:05:10,200 --> 00:05:13,960 Speaker 1: they're going to completely reverse direction. Brian was giving us 92 00:05:14,080 --> 00:05:16,480 Speaker 1: a wrap up a moment ago of how earnings have 93 00:05:16,640 --> 00:05:21,240 Speaker 1: been today. How's it looking to your We're seeing negative 94 00:05:21,279 --> 00:05:23,960 Speaker 1: operating leverage across the board. So just if you look 95 00:05:24,000 --> 00:05:26,400 Speaker 1: at the companies that reported in the last couple of days, 96 00:05:26,400 --> 00:05:30,040 Speaker 1: you saw a negative operating leverage at the rails in America, 97 00:05:30,240 --> 00:05:34,000 Speaker 1: with Union Pacific having earnings growth slower than revenue growth. 98 00:05:34,040 --> 00:05:37,240 Speaker 1: You saw in the materials with Dow Chemical also having 99 00:05:37,240 --> 00:05:41,880 Speaker 1: negative operating leverage. You saw negative operating leverage in the airlines, 100 00:05:42,720 --> 00:05:45,280 Speaker 1: even in insurance in travelers. And of course last week 101 00:05:45,320 --> 00:05:47,920 Speaker 1: we saw many of the bank's report and they're also 102 00:05:48,000 --> 00:05:51,920 Speaker 1: showing higher than expected costs. So I think everybody knew 103 00:05:52,279 --> 00:05:55,640 Speaker 1: that estimates were too high for the second quarter, but 104 00:05:55,800 --> 00:05:58,520 Speaker 1: now the estimates are actually beginning to decline, and they're 105 00:05:58,560 --> 00:06:01,159 Speaker 1: lowering guidance for third core er and in some cases 106 00:06:01,200 --> 00:06:04,599 Speaker 1: that's already in the stocks, but in some cases it's not. 107 00:06:04,880 --> 00:06:07,919 Speaker 1: So I think we need to watch carefully UM which 108 00:06:07,920 --> 00:06:12,120 Speaker 1: companies actually can see positive operating leverage UH, and they're 109 00:06:12,160 --> 00:06:16,000 Speaker 1: fewer and farther between. I'm wondering if now is the opportunity, 110 00:06:16,000 --> 00:06:17,920 Speaker 1: maybe it's late to the game to look off shore 111 00:06:18,080 --> 00:06:22,120 Speaker 1: for areas of the global market that you feel may 112 00:06:22,200 --> 00:06:25,479 Speaker 1: represent a little bit of upside. I'm thinking primarily about Asia. 113 00:06:26,320 --> 00:06:27,960 Speaker 1: You know, you could make the case right now that 114 00:06:28,000 --> 00:06:29,640 Speaker 1: some of the eco day that we have seen for 115 00:06:29,800 --> 00:06:32,760 Speaker 1: China gives us a slight tilt toward a little bit 116 00:06:32,800 --> 00:06:34,720 Speaker 1: more stimulus. Do you want to be a part of 117 00:06:34,720 --> 00:06:38,120 Speaker 1: that story, the stimulus story in China and a recovery there. 118 00:06:39,960 --> 00:06:43,839 Speaker 1: If I had confidence that the debt problem UM had 119 00:06:43,880 --> 00:06:48,080 Speaker 1: been fully addressed, then I would consider that. But of course, 120 00:06:48,160 --> 00:06:52,120 Speaker 1: having been scarred by the US mortgage crisis, I'm carefully 121 00:06:52,120 --> 00:06:55,200 Speaker 1: watching what's happening with real estate and mortgages in China, 122 00:06:55,400 --> 00:06:58,800 Speaker 1: and it seems that the degree of leverage and overbuilding 123 00:06:58,960 --> 00:07:01,960 Speaker 1: has not yet clear of the system, and until it does. 124 00:07:02,520 --> 00:07:05,599 Speaker 1: I think it's it's difficult to be optimistic and any 125 00:07:05,800 --> 00:07:09,720 Speaker 1: fiscal stimulus or other forces forms. The stimulus might give 126 00:07:09,760 --> 00:07:12,080 Speaker 1: you a short term trade, but I don't think it's 127 00:07:12,120 --> 00:07:14,280 Speaker 1: going to actually fix the problem. It's it's a more 128 00:07:14,320 --> 00:07:17,640 Speaker 1: structural problem that will probably take some years to play out. 129 00:07:18,520 --> 00:07:19,960 Speaker 1: We've got about a minute left. I just want to 130 00:07:20,040 --> 00:07:22,000 Speaker 1: quickly get your thoughts on Japan as well. The b 131 00:07:22,240 --> 00:07:25,280 Speaker 1: J sending a pretty clear signal that it's ultra easy 132 00:07:25,320 --> 00:07:28,160 Speaker 1: policies on going anywhere. I've got a very weakend at 133 00:07:28,160 --> 00:07:30,040 Speaker 1: the moment as well. Is this the time for some 134 00:07:30,160 --> 00:07:36,720 Speaker 1: baggin hunting in Japan? Uh? It could be. UM. The 135 00:07:36,920 --> 00:07:39,800 Speaker 1: certainly the easy policy is going to stay, and it's 136 00:07:39,800 --> 00:07:42,480 Speaker 1: probably the only central bank in the world where that 137 00:07:42,640 --> 00:07:45,800 Speaker 1: is the case. UM. I think the key risk as 138 00:07:45,800 --> 00:07:48,200 Speaker 1: a US dollar investor is whether or not you can 139 00:07:48,240 --> 00:07:52,560 Speaker 1: make money on it um from this side of the pond. UM. 140 00:07:52,640 --> 00:07:56,680 Speaker 1: So I think we'll see how that happens. All right, 141 00:07:57,040 --> 00:07:59,840 Speaker 1: Allen Hasen, we will leave it there. Allen Hasen is 142 00:08:00,040 --> 00:08:03,640 Speaker 1: Chief market Strategies at f L Apartment Investment Management.