Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jai Ley.
Speaker 1: 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 Right Now.
Speaker 1: On politics, Greg Bellier with us thrilled he could be
Speaker 1: with us today, GF. He grew up in Cancut, New Hampshire,
Speaker 1: so we're great. Then Mr Belly can give us a
Speaker 1: little perspective there and look forward and is really important
Speaker 1: research note this morning, Kevin surreally with us as well?
Speaker 1: Uh and let us dive in right now Kevin onto Nevada?
Speaker 1: Who goes to Nevada with up? Is it Clobisher doing
Speaker 1: better last night? Or is it really Bernie Bernie Bernie
Speaker 1: as a land in Las Vegas? Bernie Bernie Burnie Look
Speaker 1: and Clochart now has some new mom Madam. She's had
Speaker 1: it to New York City to a tom to meet
Speaker 1: with her donors. She says, hey, she's got got the
Speaker 1: checkbook out because she's got some momentum after a strong
Speaker 1: third place showing she beat Elizabeth Warren. Remember this is
Speaker 1: a nearby Massachusetts. In New Hampshire, Elizabeth Warren finishing ahead
Speaker 1: of former Vice President Joe Biden, who had a terrible
Speaker 1: night last night. He went right to South Carolina. But
Speaker 1: the big takeaways this is Buona Judge, Buona Judge and
Speaker 1: Bernie Sanders. I mean, think about it for a second.
Speaker 1: No one was even knew who Pete Buddha Judge was
Speaker 1: a couple of years ago, and now the fact that
Speaker 1: he finished in second place behind Bernie Sanders. I think
Speaker 1: we've we've got some data from Iowa and New Hampshire.
Speaker 1: I'm learning every moment by Kevin Cirelli. Let's go into Nevada,
Speaker 1: Manushi or Greg you're gonna love this as well. You
Speaker 1: can put in your research note. Uh, this is office
Speaker 1: se Really, this is the morning moustid out of Vox.
Speaker 1: Let's bring it up right now. It's real simple. This
Speaker 1: is Saturday. The twenty's really working seven days a week.
Speaker 1: The idea that the the early voters will not be
Speaker 1: physically present to Part two some paid in the Nevada Caucus.
Speaker 1: They will be asked in advance to rank up to
Speaker 1: five candidates by their Iowa like order of preference. Each
Speaker 1: precinct location will be given an unopened deck of cards.
Speaker 1: That deck then has to be shuffle at least seven
Speaker 1: times by Kevin Seilli, and then each candidates group will
Speaker 1: draw a card. The high card wins a delegate. Kevin,
Speaker 1: You've gotta be kidding me. Well, you know, look, I
Speaker 1: know my friend Gregg Valley is about to say that
Speaker 1: we're going to have a broker convention, But I I respectfully,
Speaker 1: am going to say that that all of my reporting
Speaker 1: would lead me to indicate otherwise. And here's why. For
Speaker 1: as complex as this process is, this is exactly that
Speaker 1: I know there's differences between the way the Democrats and
Speaker 1: the Republicans see their business, but this is exactly the
Speaker 1: conversation that we're about that we had in For as
Speaker 1: complex as the process is, Bernie Sanders and pet Buda
Speaker 1: Jedge are still getting the most votes. And for all
Speaker 1: of the most America who are not as politically obsessed
Speaker 1: with this process as people like the three of us are,
Speaker 1: a win is a win, and you get to those votes,
Speaker 1: you win, you get momentum, and you go on greg
Speaker 1: push against us. I mean, Warred's gonna drop out, Biden
Speaker 1: is going to drop out, Styre is going to drop out.
Speaker 1: How do you get a brokered convention with only two
Speaker 1: or three candidates left? I'm not sure Biden drops out
Speaker 1: quite yet. He could do okay in the Vada, he
Speaker 1: could win South Carolina, he could win a plurality of
Speaker 1: delegates on Super Tuesday. A little too early to write
Speaker 1: him off, but it's worth noting he has never won
Speaker 1: a primary in three presidential campaigns, so so moving forward,
Speaker 1: I do think that there will be two or three
Speaker 1: serious candidates. Not sure there's going to be a brokered convention,
Speaker 1: but I do think there'll be a disputed convention where
Speaker 1: the first ballot winner is not clear when they get
Speaker 1: to Milwaukee. Greg, I have like twenty five questions here
Speaker 1: in like two minutes. So first, why is Biden so
Speaker 1: much trouble? And how does he get back energy? Doesn't
Speaker 1: have enough energy, doesn't show enough energy. It's it's as
Speaker 1: simple as that, right, But you can't, I mean, how
Speaker 1: do you get that? I mean this is a personality, right,
Speaker 1: I mean he's you know, Bernie Sanders is an energetic
Speaker 1: seventy eight year old. Biden there's not an energetic seventy
Speaker 1: seven year old. And people know this so I I
Speaker 1: do think he's pretty much finished. I think Elizabeth Warren
Speaker 1: is pretty much finished. But you there's one name we
Speaker 1: haven't mentioned. We've got to mention, and that of course
Speaker 1: is Michael Bloomberg. I know you have to do a disclaimer,
Speaker 1: but with his resources, I think Super Tuesday could be
Speaker 1: really pivotal for him. Okay, the disclaimer is that Michael
Speaker 1: Bloomberg is the founder and majority owner of Bloomberg News,
Speaker 1: including of course Bloomberg LP. So, Kevin, what happens next?
Speaker 1: What what's the next step that we're actually looking out for?
Speaker 1: And why is everything swapp in the air. I mean
Speaker 1: we're talking about broke convention. We're talking about you know,
Speaker 1: no clear winner. Is there a democratic problem right now?
Speaker 1: But I mean it's a dysfunctional family, both of the
Speaker 1: political parties. Are we do we go through this every
Speaker 1: four years? Frenz, you know, no offense. I mean here
Speaker 1: in America you know that that we're kind of used
Speaker 1: to that. But here's what I'll say with regards to
Speaker 1: what Greg Valley said about Michael Bloomberg. Joe Biden has
Speaker 1: competed in Iowa and and lost. He competed in New
Speaker 1: Hampshire and lost. Michael Bloomberg hasn't competed yet. And as
Speaker 1: this moves forward to Super Tuesday, you're gonna hear some
Speaker 1: sharpened political attacks. We've already heard them, and based upon
Speaker 1: my reporting, point blank, you're going to be hearing aggressively
Speaker 1: more political attacks against the former New York City mayor.
Speaker 1: And and that's gonna happen over the next three weeks.
Speaker 1: We're gonna have some some new guidance over the next
Speaker 1: three weeks. But again, Buddha Judge competed, he won. Bernie
Speaker 1: Sanders competed, he won, And a win is a win. Kevin,
Speaker 1: thank you so much, big. One final question, with all
Speaker 1: that you've done for us over the years, Concord, New
Speaker 1: Hampshire is in your soul. New Hampshire is so so,
Speaker 1: so different than the rest of the world. Why do
Speaker 1: we put such a focus on your conquered New Hampshire. Well,
Speaker 1: a lot of think sensible voters who really get into
Speaker 1: it and follow it carefully. I have to think the
Speaker 1: final point that a lot of these voters are depressed
Speaker 1: this morning because as one faction or another leaves Milwaukee unhappy,
Speaker 1: it's a good story for Donald Trump. This has been
Speaker 1: wonderful and fan scenes right, we had a million questions
Speaker 1: as well, so Greg Valuer with us and we say
Speaker 1: thank you so much, and Kevin so really thank you
Speaker 1: as well. As we come out of the New Hampshire primaries,
Speaker 1: we send it to Sanders on top. It's on to Nevada.
Speaker 1: Johnny us now Kate more ahead of thematic strategy at
Speaker 1: black Rocks Global Allocation Investment Team. Could mon uchucate, good morning.
Speaker 1: Just a quick note on politics. I don't know if
Speaker 1: it's complacency, comfort or otherwise, but on Wall Street, no
Speaker 1: real worries about Senator Sanders. Either it's too early to
Speaker 1: start caring. They don't believe he can win the general
Speaker 1: or they believe if he does, he can't govern and
Speaker 1: he can't get things done if he's in the White House.
Speaker 1: Which one is say it right now, So I'm voting
Speaker 1: for option three on this one, which is, you know,
Speaker 1: there is some skepticism that Bernie's second actually make it
Speaker 1: through to the White House, But the real conversation amongst
Speaker 1: market participants right now is that even if he does,
Speaker 1: he won't be able to enact a lot of the
Speaker 1: policies that he has laid out so you know, we
Speaker 1: saw this a lot in this administration as well, a
Speaker 1: lot of talk, a lot of headlines in this case,
Speaker 1: a lot of tweets, but you know, much more challenge
Speaker 1: actually enacting radical policies than would otherwise have been feared
Speaker 1: or suggested. Within the fear is And I read CBO
Speaker 1: yesterday the summer on the new trillion dollar deficits modeled
Speaker 1: up to one point three and I know the president's budgets,
Speaker 1: a political document, etcetera. Within your thematic investing, do you
Speaker 1: care about trillion dollar deficits? You know, we have to
Speaker 1: think about our time rising on this one. The deficits
Speaker 1: certainly matters, but over shorter time periods, and by that
Speaker 1: I mean measured in quarters, not necessarily years or decades,
Speaker 1: they're much more interesting themes for us to invest around
Speaker 1: dynamic changes happening across a rye, the of sectors and
Speaker 1: in consumption patterns. Remember late last year people saying that
Speaker 1: at the end of this year there would be turmoil
Speaker 1: volatility heading into elections. Right now, it sounds like everyone
Speaker 1: is shrugging off anything. Nothing matters. The elections don't matter
Speaker 1: because nothing will get done. The deficit doesn't matter. Because
Speaker 1: in the short term, easy money will cure all what matters.
Speaker 1: What's the sort of potential uh is sort of downside
Speaker 1: here that could cause some volatility that people are looking at. Yeah,
Speaker 1: I mean, I think the big thing to watch here
Speaker 1: is going to be whether or not companies are able
Speaker 1: to continue to generate earnings growth throughout a lower growth environment.
Speaker 1: I say that because, well, we do expect that there
Speaker 1: might be a little bit of multiple expansion in the
Speaker 1: equity market given incredibly low bond yields. I think the
Speaker 1: majority of the returns from the equity market this year
Speaker 1: have to come from earnings, and this is going to
Speaker 1: be the big question mark. Now, I'm pretty constructive on this.
Speaker 1: I think in sensus actually is more in line and
Speaker 1: we're not going to see as dramatic of a downward
Speaker 1: revisions two earnings X by stations as we have in
Speaker 1: previous years. And I've been pretty encouraged by the stability
Speaker 1: in fourth quarter earnings even during a fairly rocky period
Speaker 1: around trade and concerns around politics. So I don't want
Speaker 1: to sound Pollyanna, but I do expect that we're going
Speaker 1: to end the year higher from here, John, are you
Speaker 1: laughing and I'm smiling because when we talk about earnings,
Speaker 1: I'm just wondering whose earnings. We're talking about Microsoft as
Speaker 1: an Apple right now almost ten and they matter. They matter,
Speaker 1: I know they matter. They matter a whole lot more
Speaker 1: than they did a number of years ago. So when
Speaker 1: we talk about earnings, whose earnings? One sector, A couple
Speaker 1: of companies, a handful of companies. Yeah, okay, this is
Speaker 1: a completely fair point. What another thing I've been focused
Speaker 1: a lot on is what what companies are giving us
Speaker 1: in terms of guidance, not just for first quarter twenty
Speaker 1: but also for full year. And if you look at
Speaker 1: where guidance has come in the vast majority of the
Speaker 1: more positive guidance in consensus is coming from technology and
Speaker 1: communications and technology enabled companies across a variety of different sectors.
Speaker 1: So you know, you're right to point out some of
Speaker 1: those big behemoths. They are driving a lot of the
Speaker 1: you know, the bottom line growth. That said, I think
Speaker 1: if we have stability and growth, low interest rates, and
Speaker 1: people don't really worry so much as we were just
Speaker 1: mentioning around politics and geopolitics, then there's going to be
Speaker 1: I think a broader swath of consumer companies that that
Speaker 1: hold up. We also like things like consumption demand around
Speaker 1: home builders, for example, have you done? And this goes
Speaker 1: to Bed Laylor being with this very bullish the other
Speaker 1: day and James Bevan and C. C. L a very
Speaker 1: bullish this morning, and you, I think have a very
Speaker 1: constructive tone as well. When you take out the five
Speaker 1: glory stocks, X out the the trillion dollar valuations, what's
Speaker 1: the actual multiple of growthiness out there right now? It's
Speaker 1: not as elevated as we think, is it. Well? Look,
Speaker 1: I think people pay up for the liquidity and the
Speaker 1: bound sheet of some of these bohemoths. We know that's
Speaker 1: the case, but they also frankly deserve the higher multipa.
Speaker 1: The pe on Amazon is seventy six, and if you
Speaker 1: take it out presence, if you x that out in
Speaker 1: eight other stocks like that, you've got a more reasonable valuation, right,
Speaker 1: a more reasonable valuation. But Tom, you gotta remember I
Speaker 1: grew up in emerging markets, and at that time, if you,
Speaker 1: if you were really valuation sensitive, you would never have
Speaker 1: owned something like by Do in its early stages, which
Speaker 1: consistently traded at eight times forward. So you have to
Speaker 1: be evaluation awhere. What brings that up? I didn't own
Speaker 1: by Lisa, loaded the boat on by do Off. Oh yeah, clearly,
Speaker 1: how's that that regret room going? The regret we're all
Speaker 1: cash today with the Amazon on its way to done, Cassie.
Speaker 1: I'm trying to square the picture that you're talking about here,
Speaker 1: Okate with this sort of developing story that we're seeing
Speaker 1: reflected by bonds and by oil prices, and we're just
Speaker 1: seeing OPEC just now slashing forecast for global oil demand,
Speaker 1: blaming the coronavirus, but oil prices were under pressure anyway.
Speaker 1: How do you sort of pair these stories of slowing
Speaker 1: global growth with robust earnings and earning square? At what
Speaker 1: point does this dissonance become too much to handle? And
Speaker 1: one kind of takes the upper weight here. Yeah. So
Speaker 1: there's a lot of focus, i think, at the headline
Speaker 1: level around some of the older drivers of the economy
Speaker 1: or the older signals we would have. We've been talking
Speaker 1: a lot about what is oil telling us, what is
Speaker 1: copper telling us? What are all of the base metals
Speaker 1: telling us? In this environment where people are worried about
Speaker 1: the growth impacts of the coronavirus, they're not asking themselves, Hey,
Speaker 1: how much gaming revenue? Um are the Chinese tech companies
Speaker 1: getting as a result of everyone being quarantined at home.
Speaker 1: They're not asking you know, what kind of media spend
Speaker 1: are we getting as a result of people not being
Speaker 1: able to go out and spend in retail stores. We
Speaker 1: are sometimes asking the wrong questions. You remember how much
Speaker 1: we used to focus on, say, pre crisis and immediately
Speaker 1: following the Baltic dry index? Is that even relevant anymore?
Speaker 1: We fall back into these patterns of looking at these
Speaker 1: indicators or the pricing around certain old economy um metrics
Speaker 1: that I just don't think are are telling us where
Speaker 1: we're going. Larry from Blackrock emails and some still Kate's
Speaker 1: on today. Kate's not on the Talk markets, folks. She
Speaker 1: is the official surveillance Westminster Dog Show critic as well. Indeed,
Speaker 1: the Retriever, as you have Cora, made the finals like
Speaker 1: the seven finalist dogs, but the Fu Foo Poodle took
Speaker 1: the trophy. Again. It's an outrage, isn't it. I don't
Speaker 1: want to insult the Foo Foo poodle owners, but I
Speaker 1: will say that Retriever should have taken the prize. Its gorgeous,
Speaker 1: good looking dog, beautiful confirmation. Why what has happened to
Speaker 1: this hundred and forty four year institution that they can't
Speaker 1: go with Arthur Levitt's labrador Winthrop or vet Bill something normal.
Speaker 1: Wait a minute, vet Bills foofoo. Oops, here's what can
Speaker 1: what happened to a retriever winning the trophy? You know,
Speaker 1: we have a little byes against the popular dogs here.
Speaker 1: We need to be conscious of the ser spaniels. I
Speaker 1: mean things things dogs that are amazing, pets that are
Speaker 1: very well owned, seem to not really resonate well with
Speaker 1: the judges. I think that's a little unfair. I'm getting
Speaker 1: a comment to from Larry from Black Rock. He's writing
Speaker 1: it right now, and he's he's mentioning that he really
Speaker 1: likes the analysis and thinks that this really affects the
Speaker 1: broad investment strategy. It's great. I'm really glad to hear.
Speaker 1: Did you really buy a Gucci leash? I mean Gucci
Speaker 1: put out her rings today and they killed it. Do
Speaker 1: you have a Gucci lease? The core is not that
Speaker 1: foo fit. Okay, what I will tell you she's a
Speaker 1: big fan of up country. For all of you dog
Speaker 1: owners who know, she has many ribbons, ribbons leashes for
Speaker 1: a different season. I can't and where we got the
Speaker 1: hearts we do. Indeed, thank you for your dog ate
Speaker 1: more a black rock. Right now, let's do this. Let's
Speaker 1: get into an important discussion how you find comfort. And
Speaker 1: just like in the old days owning and stock, James
Speaker 1: Bevan runs very serious money for c c L a
Speaker 1: conservative money, boring money, and they're you know, got all
Speaker 1: the fears and the worries that we all have. And
Speaker 1: yet he says, stay invested. State the bull case. Now, James,
Speaker 1: state why quiet money can become comfortable in equities. I
Speaker 1: begin with the premise that the benefit from equity ownership
Speaker 1: is about long term participation in an underlying business, paying
Speaker 1: a sensible price and therefore in effect expecting an earner.
Speaker 1: And I look at the price that you receive in
Speaker 1: terms of the forward rist premium for being in the
Speaker 1: extra market. I think we think that's too high. And
Speaker 1: in the context of the alternative places where one can
Speaker 1: have one's money, the cash market, the bond market, the
Speaker 1: real estate markets, I think the valuations of EU are
Speaker 1: too low. I think valuations should be materially higher though
Speaker 1: for people should sit with equities. Okay, this is really critical, James.
Speaker 1: I'm gonna go off c f A on you here
Speaker 1: right now. In a dividend discount model, there's an exit
Speaker 1: access and you go out five years, seven years to
Speaker 1: a terminal value. Have we extended out our timeline to
Speaker 1: value equities that are we looking out instead of three
Speaker 1: years five years or instead of seven years? Are we
Speaker 1: valium ten years now? Because of this is great disinflation? Tom.
Speaker 1: What I what I think any investor can do is
Speaker 1: they can lift the consensus numbers from IBS or any
Speaker 1: other entity. Bloomberg runs a very good service of consensus
Speaker 1: data collection, and take the five year market numbers and
Speaker 1: then assume that after the first five years companies get
Speaker 1: linear participational in nominal economic growth. So that's that's been
Speaker 1: the terminal growth. If you then toss up all those
Speaker 1: cash flows and say what's the discount rate that takes
Speaker 1: those cash flows back today's price, Well, that number at
Speaker 1: the moment is six spot three in excess of the
Speaker 1: long government bond yield. Now, that to me is a
Speaker 1: huge payment for risk. I think that we can also
Speaker 1: consider what is the fair payment in the content next
Speaker 1: of lead indicators and current credit spreads, and I think
Speaker 1: that's no more than five so I would be expecting
Speaker 1: the discount rate in effect to fall because prices have risen.
Speaker 1: So I am set and expecting that fair value is
Speaker 1: materially above You're getting a clinic their folks on institutional
Speaker 1: equity valuation. Then how can James bevan by the marginal
Speaker 1: share of Amazon with a forward pe of seventies six? Well,
Speaker 1: I I look at the valuation of Amazon, and I
Speaker 1: look through the price endings multiple to the free cash
Speaker 1: lay yield and the long term great for that free
Speaker 1: cash lay yield, and I still see a share price
Speaker 1: that is below what I calculate to be the their
Speaker 1: value for the company. That allows me to believe that
Speaker 1: the citcall very expensive stocks are actually structurally cheap and
Speaker 1: indeed are cheat in the context of what people have
Speaker 1: been prepared to pay in prior peaks of expensiveness. So
Speaker 1: I've looked at prior periods where growth stocks have done well,
Speaker 1: so periods of relatively slow growth, low inflation, and low
Speaker 1: money rates, and I see valuations that are ranged between
Speaker 1: forty five times and seventy two times. On that basis,
Speaker 1: Amazon is demonstrably cheap. The second issue is that if
Speaker 1: you deduct the relatively expensive six stocks that dominate market indices.
Speaker 1: The valuation of the residual SMP five falls from eighteen
Speaker 1: and a half times that many have described as expensive
Speaker 1: to sixty seven times, which I think looks arguably way
Speaker 1: too cheap in the context of the growth and so
Speaker 1: many other world class companies in that market. You John
Speaker 1: have to translate spot is for point for our American banks.
Speaker 1: Thanks Tom, Thank you very much, Chimes, I always forget
Speaker 1: that that it doesn't translate well, sorry, into America. Let's
Speaker 1: move on links to everything you've said. How great is
Speaker 1: the pressure to one US megacaps stocks right now? I
Speaker 1: think that the short term performance the UK megacaps are
Speaker 1: absolutely supported by a following wind. I mean, when one
Speaker 1: looks at the financial results who came out for the
Speaker 1: Big five excluding Netflix, I look at a beat against
Speaker 1: Q four earnings forecasts, that is something in the order
Speaker 1: of fourteen spot three earning surprise with twenty one and
Speaker 1: a half percent in round figures year on your earnings growth.
Speaker 1: That compares with the rest of the index excluding those
Speaker 1: top names, with surprise of three point nine percent and
Speaker 1: earnings growth of zero spot five percent. Now, why would
Speaker 1: one not want to own fabulous growth companies on valuations
Speaker 1: which are arguably reasonable. If you subscribe to the view
Speaker 1: that I do, the bondiles are staying low. Cash rates
Speaker 1: are only like to get lower in the context of
Speaker 1: what Jerome Pile has been saying, and that both gross
Speaker 1: and inflation again to remain very modest japs. There is
Speaker 1: a question about whether the FED model still works, whether
Speaker 1: bonds and stocks can be compared in the same way,
Speaker 1: And this is a question that is increasingly important as
Speaker 1: people use the low bond yields to justify their purchase
Speaker 1: of stocks. I mean, at the end of the day,
Speaker 1: and earnings yield is not the same as the yield
Speaker 1: or the coupon that you get on a bond, and
Speaker 1: there is risk embedded in at the stocks that is
Speaker 1: not there for bonds. Yeah, you're absolutely correct, and I
Speaker 1: do think that there has been a significant shift in
Speaker 1: the way that the market thinks about debt and sustainable
Speaker 1: levels of debt interest costs. And if you subscribe to
Speaker 1: the view as peddled by the central banks that sustainable
Speaker 1: equilibrium bond yields are lower, it doesn't mean you're going
Speaker 1: to make more money because those bond yields are stock
Speaker 1: at those ultra low levels. So the journey of making
Speaker 1: the path to those lower yields, which obviously means higher prices,
Speaker 1: is over. But it does mean that the arithmetic in
Speaker 1: favor of equities is thoroughly supported and well placed. James
Speaker 1: always got to catch up the really really thoughtful, insightful
Speaker 1: stuff on some of the big names in the US
Speaker 1: econmy market after a monster rally through last year that
Speaker 1: continues into this year and climbs a wad of worry.
Speaker 1: James Bevan the c c L a investment management Chief
Speaker 1: investment Officer. And Neil Sharing is a Capital Economics just
Speaker 1: an outstanding group of economic analysis. John, let me bring
Speaker 1: him in here and you can go what wisdom on him.
Speaker 1: And what's so importantly is is Neil before he was
Speaker 1: a Capital Economics was with his Majesty the Treasury, was
Speaker 1: an economic advisor and worked on the Sussex's finances before
Speaker 1: they went to Canada. And you're trying to get some
Speaker 1: people in trouble something like that. Neil Sharing joins us
Speaker 1: here on the Economy journe Neil great to catch up
Speaker 1: with the Capital Economics chief economist. Now let's talk about
Speaker 1: some data out of America didn't get a whole lot
Speaker 1: of coverage in the last twenty four hours, but job
Speaker 1: opening just started to go the wrong way. What do
Speaker 1: you read into that now, Well, it's obviously only one
Speaker 1: month data at at this point, and the payrolls, the
Speaker 1: numbers that we had at the start of this month, Um,
Speaker 1: we're pretty strong in the labor market itself. UM seems
Speaker 1: to be in reasonable shape. And the revisions that we
Speaker 1: were expecting to the back series of that payrolls and
Speaker 1: number that that series little bit better than the rather
Speaker 1: less less than than we had feared. So I wouldn't
Speaker 1: read too much into it at this point. I still
Speaker 1: think that we're in this goldilocks period of low but
Speaker 1: positive growth, no inflation as far as I can see,
Speaker 1: at least in consumer prices, and therefore low interest rates.
Speaker 1: Of course, that continues to bid up asset prices. Uh.
Speaker 1: And if I was worried about the future, I wouldn't
Speaker 1: be worried about the labor market. Now, I'll be worried
Speaker 1: about the long term consequence to continued melt up in
Speaker 1: a surprise, and you know the political tension that we
Speaker 1: see frankly in Germany, in Ireland, in Irish elections we've
Speaker 1: barely touched on and what we saw last night in
Speaker 1: New Hampshire. You know, and it's a gold Lacks period.
Speaker 1: But within all of what Roger Boodle and you have
Speaker 1: kept economics do, how goldilocks is it? I just don't buy.
Speaker 1: It's a Goldilocks period for so many Americans. Well, it's
Speaker 1: a Goldenlocks period. If you're in the market, it's a
Speaker 1: Goldilocks period. If you're a fun manager managing equities of bonds,
Speaker 1: we call that an American neil they have, Yeah, what
Speaker 1: about your find? But underlying this, of course is the
Speaker 1: fact that although the pie has been growing, the share
Speaker 1: of the pie going to labor has been squeezed and
Speaker 1: the share of the pie going to capital has increased.
Speaker 1: And that's why it's a goldlock experience. You're right, it's
Speaker 1: gold loxperience of a surprises. It's less of a goldenlock sperience,
Speaker 1: far from it for for labor, which is why we've
Speaker 1: seen this long squeeze on on on labor sharef income
Speaker 1: in the US. We've seen real real incomes, real wages
Speaker 1: in the UK and other parts of Europe struggling to
Speaker 1: go anywhere. So Neil, At what point does the data
Speaker 1: that we get shake us out of the Goldilocks period?
Speaker 1: Which data set really has the pattern shire to do that? Well,
Speaker 1: if we run with this idea that there's a Goldilocks
Speaker 1: period for a surprise is not labor. There's two things
Speaker 1: I think that go wrong potentially to upset This. One
Speaker 1: is in the short term, a fear in the markets
Speaker 1: that inflation is starting to return or is just around
Speaker 1: the corner, or indeed that central banks themselves may start
Speaker 1: to try and actually actively target higher, higher inflation. Don't
Speaker 1: think We've got policy reviews and by the FED but
Speaker 1: also the ECB this this year. So a fear of
Speaker 1: the return of a return to inflation would be the
Speaker 1: short term thing that would be most likely I think,
Speaker 1: to to spook financial markets. Don't think it's particularly likely myself,
Speaker 1: which leads me to the second thing, which is over
Speaker 1: the longer term you get a continued period of very
Speaker 1: low interest rates. A commonis monetary policy. You've already ten
Speaker 1: years into this very very period of over loose monetary policy.
Speaker 1: At some point we're putting a lot of faith in
Speaker 1: markets to allocate capital efficiently. Um and I think at
Speaker 1: some point something breaks because there's a bubble in Chinese property,
Speaker 1: in US car loans, in leveraged loans, whatever it is.
Speaker 1: You know, we all know the familiar uh points of
Speaker 1: the potential stress. But at some point something breaks and
Speaker 1: we get another as surprise collapse. And we know from
Speaker 1: the last two downturns that it's as surprise force that
Speaker 1: that caused the big, big economic problems. Has no appetite
Speaker 1: to do anything with rates to tackle this issue. Are
Speaker 1: we going to hear a whole lot more about macro
Speaker 1: podential policy in America? I suspect we will, And I
Speaker 1: suspect I mean we we're doomed in this In this sense,
Speaker 1: I think to keep fighting yesterday's battles, macro economic policy
Speaker 1: will be targeted. Predential policy will be targeted in terms
Speaker 1: of preventing another houseing bubble. And I suspect the next
Speaker 1: problems won't be in the house and market. There'd be
Speaker 1: somewhere else. Um, just give us an idea, what was
Speaker 1: the corporate that would be the first place I would
Speaker 1: look at. Corporate credit spreads are incredibly narrow and eye
Speaker 1: close to the lows that we saw, and they run
Speaker 1: up to the eight crisis We've had even the I
Speaker 1: m F signing off about that MRS average loans. Small
Speaker 1: part of the market that could go wrong. Chinese Chinese property.
Speaker 1: That's the place I mean, if you're looking for black
Speaker 1: swan events from the coronavirus, property sales in China of collapse,
Speaker 1: and it's the one part of the economy that's extremely
Speaker 1: over Leveraged developers in particular look vulnerable. That could be
Speaker 1: the next black swan. When you talk about the corporate
Speaker 1: debt market, we did get a warning from the Federal
Speaker 1: Reserve last week. They said that they were going to
Speaker 1: increase their stress test parameters, particularly for leveraged loans as
Speaker 1: well as corporate debt more broadly. So it does seem
Speaker 1: like that is an area of concern. But going back
Speaker 1: to the real economy, I'm wondering what could tip the
Speaker 1: scales with respect to earnings, with respect to the fundamentals
Speaker 1: that actually causes some sort of default cycle that we
Speaker 1: really haven't seen. There's nothing on the horizon at the moment.
Speaker 1: If you look at if you think about previous um
Speaker 1: substantial economic dantas, what's caused them, inflation shops, warranting policy
Speaker 1: tightening by central banks, as we just discussed, the FED
Speaker 1: looks like it's happy to set on the sidelines for
Speaker 1: now big fiscal contractions because as a fiscal a budget crisis,
Speaker 1: that doesn't look particularly likely. They're bond markets that like
Speaker 1: the tolerant of higher levels of deaths and deficits at
Speaker 1: the moment um. Oil price shocks again, that doesn't look
Speaker 1: particularly likely on the horizon, and then asset price collapses
Speaker 1: and at the moment particularly if you look at housing,
Speaker 1: which is a big one, doesn't it doesn't look cheaper,
Speaker 1: it doesn't look very expensive. Thing doesn't like a bubble um.
Speaker 1: So it's difficult when you scan the horizon right now,
Speaker 1: I think to see the obvious signs that something is
Speaker 1: fermenting on the horizon. But I think you run the
Speaker 1: plot forward twelve eighty months, two years, three years, and
Speaker 1: I think those risks factors will start to we'll start
Speaker 1: to return. And Neil, before we let you go, just
Speaker 1: one quick final question, day two for the Federal Reserve chairman.
Speaker 1: Anything left for you to ask the FED chair What
Speaker 1: would you like to hear today? Well, I really want
Speaker 1: to hear is you know we know the fedest target
Speaker 1: has this two per cent inflation target and full employment?
Speaker 1: How real is that? What are they really targeting? Are
Speaker 1: they going to tolerate much higher rates of inflation? Because
Speaker 1: we know that in a world where inflation were interest
Speaker 1: rates rather are at their effective lower bound, a period
Speaker 1: of deflation UM is a much bigger risk. So do
Speaker 1: they trying to tip the balance the other way? Start
Speaker 1: tolerating or even targeting the higher rates of inflation, either
Speaker 1: explicitly or implicitly. UM, And that has a big importantion markets,
Speaker 1: but also other things, other assets. You know, that's brilliant.
Speaker 1: Are we going to have an implicit monetary policy guessing
Speaker 1: future inflation? Yeah, we may well do because of us
Speaker 1: that I don't This policy review won't change the Fed's mandate,
Speaker 1: Nor will the Policy Review need c v DCB change
Speaker 1: its mandate. UM. I don't suspect, but it could be,
Speaker 1: like you say, it's implicit, that the fair actually says,
Speaker 1: you know what, we're gonna allow the economy to run
Speaker 1: a bit hot for a while ago because we actually
Speaker 1: want inflation and inflation xtatians to be higher, because we
Speaker 1: know that if we've got rates at one and a
Speaker 1: half two percent, there's almost realm for us to cut
Speaker 1: them um if the economy, If the economy does no
Speaker 1: great to catch up with the other. This morning, no
Speaker 1: share in the capital economics chief economist driving for the
Speaker 1: discussion on the equity markets? Who do that with Anthony
Speaker 1: Dwyer of Canicord Jenuity. Right now, state the case, Anthony,
Speaker 1: what you would do right now? It's been a great
Speaker 1: bull market you've participated. We've had Ben Ladler with his
Speaker 1: great call up December of two thousand eighteen. He's ratcheted back,
Speaker 1: but he's still bullish. Have you ratcheted back the enthusiasm
Speaker 1: from the index level time? I have actually adopted back
Speaker 1: on January twenty. It's a more neutral view because the
Speaker 1: market had gotten kind of so euphoric and ahead of itself.
Speaker 1: Now some of that optimism, an excessive overball condition has
Speaker 1: been warped off. In other words, you know, when it
Speaker 1: goes up in a straight line, it doesn't do it
Speaker 1: forever and it has to pause. And I think internally,
Speaker 1: although the record the market indicries are making records, I
Speaker 1: think internally it's kind of going through a correction on
Speaker 1: the back of global growth fears with a coronavirus. So
Speaker 1: what am I doing right now? I'm really not doing much.
Speaker 1: I'm not trying to force it until there's better signals
Speaker 1: as to what it actually means to the global growth.
Speaker 1: So Tony, give us a sense of valuation here. Tom
Speaker 1: and I we discuss often about you know, we looked
Speaker 1: at the move of the market equity markets had in
Speaker 1: ten with little to know earnings growth. Where are we
Speaker 1: evaluation and kind of how critical is it this for
Speaker 1: this for the C suite to deliver corporate profits in well,
Speaker 1: I think it's going to be Obviously, it's always critical.
Speaker 1: The market correlates most directly to the direction of earnings,
Speaker 1: so ultimately he's got to be positive. But Paul, this
Speaker 1: is one of the most misquoted things I think that
Speaker 1: exist in finance. When people look at the for example,
Speaker 1: of price to earnings multiple, the historical average you're meeting
Speaker 1: is somewhere around fourteen and a half to fifteen times,
Speaker 1: so twenty times earnings pre nineteen to twenty times earnings.
Speaker 1: People would say, oh my god, it's so overvalued, But
Speaker 1: you really have to break that down based on where
Speaker 1: inflation and interest rates are. So when you have very
Speaker 1: high inflation, you have a very low market multiple. You know,
Speaker 1: eight to nine to ten times. When you have very
Speaker 1: low inflation and interest rates, you have a very high
Speaker 1: average market multiple. So when the core inflation rate is
Speaker 1: where it is today, you know, right around two percent, historically,
Speaker 1: you trade at nineteen times. So I would I would
Speaker 1: say it's fair. Have you figured out ratios? If you
Speaker 1: take out the you know, all the stocks that you
Speaker 1: single handedly pulled up the trillion dollar valuations, if you
Speaker 1: take out the five to six, the eight, whatever it is,
Speaker 1: stocks that are ginormous, what does the market cheapness look like?
Speaker 1: Then I don't do that time because that's data mining,
Speaker 1: because it's sort of like, you know, I got asked
Speaker 1: the question yesterday, you know, is inflation under or overstated?
Speaker 1: And for me, I don't care. It's what I know
Speaker 1: what the FED uses, right, And it's the same thing
Speaker 1: with the pe multiple. Then if I do it today,
Speaker 1: I have to go back over the course of the
Speaker 1: last bazilion years and figure out what stocks drove it then.
Speaker 1: And I just don't think it's fair. I just think
Speaker 1: the valuation of the market is fair. It's not really expensive,
Speaker 1: it's not really cheap based on interest rates and earnings
Speaker 1: are unclear because of the global growth environment with a
Speaker 1: coronavirus outlook that's being made evidence because what time. What's
Speaker 1: interesting are these huge mega cap stocks that everybody's you know,
Speaker 1: watching drive the indices to high levels. They're actually now
Speaker 1: considered defensive stocks. That's that is a huge When I
Speaker 1: say that out loud, it stains and sounds insane, but predictable,
Speaker 1: strong growth with good liquidity is considered defensive now. So
Speaker 1: we're in this environment that this could get really weird
Speaker 1: where the induicries do nothing, but there's an offensive trade
Speaker 1: underneath it, meaning you know, you're buying the banks, the industrials,
Speaker 1: and the non software technologies. Tony, are you concerned that
Speaker 1: there is a narrative out there that you know, what
Speaker 1: we're seeing an equity markets where across financial markets in
Speaker 1: general is really liquidity driven with just so much easy
Speaker 1: money out there in the marketplace. It is, but it's not.
Speaker 1: It's you know, people have this perception and it's portrayed
Speaker 1: in the media like the FED is providing all this
Speaker 1: liquidity that's buying stocks and it's not. What's happening is
Speaker 1: low inflation is equaling lower interest rates. Lower interest rates
Speaker 1: means that banks not banks, means companies and individuals can
Speaker 1: borrow money at extraordinarily low levels. So instead of having
Speaker 1: a you know, I my original mortgage and I know
Speaker 1: time you know, since you know he's a little bit
Speaker 1: older than me, just to touch um, you know, my
Speaker 1: first interest rate was eight percent on my mortgage and
Speaker 1: I had to pay points to get it. Today, if
Speaker 1: you're getting three you know, you do three pc on
Speaker 1: a bad market. So, you know, the low level of
Speaker 1: inflation is really driving the liquidity. I think it's it's
Speaker 1: easy to and it's frankly a little bit lazy to say, oh,
Speaker 1: the Fed's providing this liquidity. It's really low interest rates. Well,
Speaker 1: to go back to the first time I did a mortgage,
Speaker 1: which is you know, you know, I think it was
Speaker 1: st Is something like that. It was the nifty fifty.
Speaker 1: Are the six stocks this time are nifty six? Yeah?
Speaker 1: I think so, Tom, And I think that's really I
Speaker 1: think that's the messages that you've gotten this. You've gotten
Speaker 1: this bump up in the in the S and P
Speaker 1: five hundred and the other major industries on these mega
Speaker 1: cap trillion dollar stocks. The rest of the markets just
Speaker 1: kind of been sitting there right now, you know, from
Speaker 1: when I beat myself up when I you know, I
Speaker 1: feel like I've not given the right advice. Right. So
Speaker 1: when I go newtral you know, I'm thinking, wow, what
Speaker 1: had dummy to markets to an all time high? But
Speaker 1: then when you look at the small cap stocks, to
Speaker 1: semic conductors, the banks, they're below where that would have been.
Speaker 1: So the market has been correcting. So there's this real
Speaker 1: shot that that nifty kind of thought process holds the
Speaker 1: into she's flat while the underlying stocks that can start
Speaker 1: to get a little better. Okay, the theme today, Tony
Speaker 1: away from the equity markets is one did camp get expensive?
Speaker 1: Do you remember when camp was cheap? Like, you know,
Speaker 1: you get through a small check at a camp and
Speaker 1: said here take you know, junior for two weeks or
Speaker 1: three weeks. I mean, buddy, don't you remember My camp
Speaker 1: was my mom and dad saying go out and play
Speaker 1: in the woods, play your camp, watch out for the snakes.
Speaker 1: And then you would go to woods and there were
Speaker 1: no snakes. But Tony Dwyer, thank you so much. Camping
Speaker 1: as a child in the dangers the weeds of New Jersey,
Speaker 1: Anthony Dwyer can courtinuity. Thanks for listening to the Bloomberg
Speaker 1: Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio s