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Speaker 1: Yeah. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. We

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Speaker 1: begin with our top story. According to people familiar with

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Speaker 1: the matter, President Donald Trump is considering pushing back the

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Speaker 1: deadline for imposition of higher tariffs on Chinese imports by

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Speaker 1: full sixty days as the world's two biggest economies try

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Speaker 1: to negotiate a solution to their trade dispute. JO want

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Speaker 1: to us here in New York and please to say

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Speaker 1: is Chris Marangia, Belly Funds CO Chief investment Officer. Good

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Speaker 1: morning to Chris, Good morning, glad to be here. Let's

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Speaker 1: talk about the prospect of a grand bargain that we

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Speaker 1: the Chinese and the United States. Your view unlikely. UM.

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Speaker 1: I think we get a a minor bargain, perhaps that

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Speaker 1: kicks the can down the road, avoids the tariffs coming

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Speaker 1: in in March one. Um, but beyond that, I don't

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Speaker 1: I don't think we get nearly the scope that the

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Speaker 1: President is looking for. Something we've discussed on this program

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Speaker 1: over the last couple of days, is how difficult it

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Speaker 1: is to position yourself for the political story in financial markets.

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Speaker 1: It seems to me that short term sentiment is somewhat

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Speaker 1: geared to whatever comes out of the president's mouth next

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Speaker 1: on trade or perhaps even the government's shut down as well.

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Speaker 1: How difficult is it to price the politics of Washington,

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Speaker 1: d c. And should you even bother trying? Yeah, those

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Speaker 1: some politics are always part of the investment mosaic. They've

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Speaker 1: been a little bigger part of the investment mosaic over

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Speaker 1: the last couple of years, a couple of months in particular. Um,

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Speaker 1: but yeah, the market is clearly looking to put the

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Speaker 1: trade issue behind it, whether we get a grand bargain

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Speaker 1: or not, and move on to the fun, the real

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Speaker 1: fundamentals of earnings. Let's get to the earnings. An earnings recess,

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Speaker 1: that is the base case for a few people out

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Speaker 1: there looking ahead to the earnings in the United States

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Speaker 1: of America. What is your base case, Chris? Some sensitive earnings.

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Speaker 1: So we're, you know, about halfway through the fourth quarter

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Speaker 1: earning season. Earnings in general have been pretty good outlooks.

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Speaker 1: I would say, yeah, I would support the case that

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Speaker 1: growth is going to be quite muted in so you

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Speaker 1: see some I think we'll see some earnings growth, but

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Speaker 1: nothing obviously like we did eighteen, which was powered in

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Speaker 1: part by, of course, the tax cuts. We've seen some

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Speaker 1: great earnings from some really significant companies in the last

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Speaker 1: twenty four hours, Cisco being one of them, and together

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Speaker 1: with the earnings, they come out with it a boost

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Speaker 1: to their buy back program fifteen billion dollars additional boost

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Speaker 1: to the buy back program. What do you make of

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Speaker 1: the politics of buying backs in the last couple of weeks. Yeah,

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Speaker 1: so clearly the Democrats are going to make income inequality

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Speaker 1: a campaign issue in the lex selection, and they're trying

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Speaker 1: to attack it in a number of different ways, including

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Speaker 1: wealth tax, higher marginal rates, and buy backs. I think

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Speaker 1: the misconception around buy backs is that the money that

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Speaker 1: goes into buy backs just goes into a vault somewhere

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Speaker 1: against earned in the street, when the reality is that

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Speaker 1: when we sell into when we sell harvest an investment

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Speaker 1: and sell into a buyback or sell to another investor,

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Speaker 1: the money gets redeployed into high in better uses, and

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Speaker 1: that is what leads to productivity growth and growth in

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Speaker 1: the economy. Coca Cola just came out and headlined four

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Speaker 1: earnings growth. I remember eighteen months ago, two years ago,

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Speaker 1: Honeywell came out and said eight percent earnings growth. It

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Speaker 1: was a buoyant revenue growth. Does your world change with

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Speaker 1: low single digit revenue growth? Yeah, that's the world that

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Speaker 1: we live in based on based on population and productivity growth,

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Speaker 1: which ultimately drive real growth. UM. So you know, copies

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Speaker 1: are trying to boost that by improving margins and we're

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Speaker 1: probably sort of at the late innings and that, uh,

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Speaker 1: and obviously through buybacks. This question came up this weekend.

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Speaker 1: What does that do to companies that can develop double

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Speaker 1: digit revenue growth? It makes it makes makes makes more valuable.

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Speaker 1: Then how much on a multiple do you take that

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Speaker 1: a given twenty multiple? How much do you grows the

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Speaker 1: pe multiple because they can do double digit revenue growth? Yeah,

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Speaker 1: I mean, clearly the companies that there is a scarcity

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Speaker 1: of growth, and that has driven some of the valuations

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Speaker 1: that we've seen around the Fang for example, and as

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Speaker 1: I mentioned earlier, I think it also drives M and A.

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Speaker 1: Companies that have strong balance sheets are going to look

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Speaker 1: to buy growth well, let's talk about the Biback story

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Speaker 1: a little bit more, because you've touched on it, and

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Speaker 1: I think it's really important. Is there any evidence whatsoever

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Speaker 1: that suggests that buybacks are done at the expense of

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Speaker 1: investing in R and date, any evidence whatsoever not that

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Speaker 1: I've seen, And I would say I would go further

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Speaker 1: and say that I think that it's more likely that

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Speaker 1: money ends up in the vault of a company or

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Speaker 1: getting burned in the street, per per se by a

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Speaker 1: company if they're not allowed to buy back stock, because

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Speaker 1: you know, they're more managements are more prone to to

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Speaker 1: waste the money. And ultimately, what the Rubyo proposal is

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Speaker 1: as a tax increase, a corporate tax increase, and he

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Speaker 1: is implying essentially that the federal government is a better

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Speaker 1: capital allocator than the private sector, which is contrary to

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Speaker 1: a lot of Republicans country, to the lot of thought

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Speaker 1: of the individuals listening to this program. I'm sure as

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Speaker 1: well the broader issue. If you've touched on, you you

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Speaker 1: agree that the government is better at distributing capital than

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Speaker 1: than financial private actors. Valentine's Day, in Love with every

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Speaker 1: You're in love with the government, Okay, big government big government,

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Speaker 1: big government, Valentine. Okay, well, happy Valentine's Day to you.

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Speaker 1: The broader issue, quite clearly is wealth inequality, and when

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Speaker 1: that becomes the broader issue, I'm just wondering where the

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Speaker 1: capitalism and financial markets get caught up in this and

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Speaker 1: how we need to think about this really key issue

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Speaker 1: going into Chris. How do you think about it? Yeah, so,

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Speaker 1: you know, I think you saw some of that late

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Speaker 1: last year in the multiple. Right, the airrings are going

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Speaker 1: to be what they're going to be, and then you

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Speaker 1: put a you put a multiple on that, and that

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Speaker 1: multiple reflects a lot of factors, including expectations about interest

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Speaker 1: rates and growth and productivity, and also has some embedded

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Speaker 1: expectations about what the political environment is going to be

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Speaker 1: and if it's gonna be worse it's gonna be, if

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Speaker 1: it's gonna be more hostile to capitalism, then you're we

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Speaker 1: should require a higher equity premium, in other words, put

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Speaker 1: a lower multiple on those earnings. Really, and that's something

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Speaker 1: we should be thinking about doing now as opposed to

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Speaker 1: something that may come up and maybe we're relevant next year.

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Speaker 1: I think it's it's it's something always worth reflecting upon.

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Speaker 1: It's something that we reflect upon. Um, you know, we don't,

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Speaker 1: you know, amongst many other factors. But but I think

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Speaker 1: the market didn't think about that. And like last year,

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Speaker 1: That's what a fund interesting about all this. There's there's

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Speaker 1: new uncertainties to think about. There always are whenever you're

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Speaker 1: looking at financial markets and financial market history. There is

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Speaker 1: always something new to worry about. And it was only

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Speaker 1: a couple of months ago that it was almost seen

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Speaker 1: as sufficient, we can just get through all of this.

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Speaker 1: If we just get some kind of trade truce and

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Speaker 1: the fedbacks away, that would be sufficient for risk markets

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Speaker 1: to perform. Is that enough anymore? Well, there's yeah, there's

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Speaker 1: always another hurdle to jump. Um, you know, if we

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Speaker 1: get beyond the trade deal, I'm sure the focus will

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Speaker 1: return to to Brexit, Italy, slowing growth in China, et cetera. Yeah,

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Speaker 1: but even within what I hear, it was maringue caution

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Speaker 1: and is a value shop belly. What I'm hearing is

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Speaker 1: be in the markets. Understand it's not going to be

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Speaker 1: a bang up year, but you've got to participate because

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Speaker 1: the cash is going to keep coming down the income statement.

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Speaker 1: Is that right? That's exactly right? I mean, listen over

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Speaker 1: a long period of time. If you look at the chart,

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Speaker 1: if you look at the evocent data going back, you

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Speaker 1: know years. Market generally rises over time, and it's based

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Speaker 1: on again population growth, productivity growth, and uh. And you

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Speaker 1: stay in the market and and you continue to grow

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Speaker 1: your assets. John, is there a publicly traded Premier League

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Speaker 1: soccer team? Is there one that you can buy shares

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Speaker 1: in where you can actually make money? Manchester United's listed. Okay,

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Speaker 1: this gentleman here is a larger shareholder of the Atlanta

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Speaker 1: Braves baseball team as well. Explain to our audience and

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Speaker 1: dazzlement of Donaldson and Company down in Atlanta. Well, our

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Speaker 1: clients are the largest shareholders of the Braves. So the

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Speaker 1: Braves are public company. It's actually Tracker stock controlled by

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Speaker 1: John Malone. It's Liberty Braves. And the attraction is the

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Speaker 1: same attraction that a lot of other wealthy people have

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Speaker 1: to sports franchises, which they're they're great stores of value. Um,

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Speaker 1: they've got a lot of secular tail winds behind them. Um,

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Speaker 1: millennials love do they don't always cash? Do you and

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Speaker 1: your shareholders? How do they do not pay a dividend?

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Speaker 1: They do not buy backstock today? They are deploying cash

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Speaker 1: in I guess what you'd call R and D, which

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Speaker 1: is buying new players and which is a second you

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Speaker 1: know the cut off, and we're very hopeful for the

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Speaker 1: season this year, but you know the value of that team.

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Speaker 1: This is cf A institute level two is not the

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Speaker 1: phrase I'm very hopeful. Is not all that correlated to

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Speaker 1: the performance on But yeah, you look at the most

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Speaker 1: valuable franchise in the NBA. It's ten wins this year.

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Speaker 1: So there are a lot of other factors. But what

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Speaker 1: about Celtics up in Boston. Did they do a public thing?

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Speaker 1: Did you guys play with that? We we didn't. That

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Speaker 1: was a quasi public. But there is one other public

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Speaker 1: sports franchise which Johnson nobat, which is Brusia Dortmund traded

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Speaker 1: in Germany. And Stock is not performing. You sit up, Oh,

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Speaker 1: this is more interesting than the Atlanta Braves by by

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Speaker 1: your tots son Son getting done. Um. But but this

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Speaker 1: is important, John Freud. I mean, if I say to

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Speaker 1: Chris marangi is Mario Gabelly doing the tomahawk chop. We're

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Speaker 1: rooting for the Stock, We're rooting for the Yankees, but

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Speaker 1: we're rooting for Shane fond of the Tomahawk chops part

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Speaker 1: of the American fab Michael Barr help us out here, please, Yeah,

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Speaker 1: that's what are they gonna go? Oh? You know the

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Speaker 1: Indian thing we doing. If you have a chance to

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Speaker 1: go to SunTrust Park, their new park, do it or

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Speaker 1: the BB and T SunTrust Park, whatever it is. Chris

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Speaker 1: MARANGI think is so much Liberty Braves the largest holding

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Speaker 1: for Gabelly Tom. The latest day around of Germany is

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Speaker 1: not looking pretty barely avoiding recession in the final quarter

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Speaker 1: of people saying yeah, but it's almost research growth totally

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Speaker 1: stagnating and for the continent, for the Eurozone GDP coming

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Speaker 1: in at zero point two for the fourth quarter. I

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Speaker 1: think the big question for market participants, Tom is is

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Speaker 1: that as bad as it gets, do we stabilize here?

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Speaker 1: Is this an inflation point? Have we bottomed out for

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Speaker 1: European growth? I want to bring in, Carolyn, look from

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Speaker 1: Frankfurt Bloomberg Economy and ECB report and let's talk about

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Speaker 1: the economy. Then the potential for a policy response, Carolyn,

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Speaker 1: Is there a belief that the worst is behind us

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Speaker 1: for the German and Eurozone economy? Hi? John, Um, that's

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Speaker 1: a very good question. You're very right that GDP is

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Speaker 1: the key data point coming out of Europe today. And

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Speaker 1: we had a lot of attention, especially on the German

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Speaker 1: release UM, where you know, we had the economy stagnating,

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Speaker 1: which was worse than a lot of analysts expected. But

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Speaker 1: if you look at the market um reading of those

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Speaker 1: figures so far, it seemed that it wasn't enough to

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Speaker 1: you know, spark another big sell off in the euro.

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Speaker 1: So the story behind that is that UM, there are

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Speaker 1: still quite strong underlying fundamentals UM, and that's what the

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Speaker 1: market is reading into. And the Economy Ministry said as much.

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Speaker 1: They said that domestic demand was still supporting growth in

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Speaker 1: Germany and any weakness that we're seeing right now, it

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Speaker 1: is really due to an industrial recession. Okay, I'll go

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Speaker 1: with that, and maybe then has to fold over to trade.

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Speaker 1: The Commerce Bank CFO this morning alluded to the reality

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Speaker 1: of negative interest rates. Caroline, Look, you are living negative

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Speaker 1: interest rates. What do negative interest rates? Due to the

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Speaker 1: culture and fabric of Europe and particularly Germany. I mean,

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Speaker 1: Germany is uh famous for not being a fan of

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Speaker 1: negative interest rates. UM. I think at the moment the

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Speaker 1: focus of the ECB is more um to to kind

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Speaker 1: of wait and see how the economy responds to their

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Speaker 1: having tapped QUI purchases. Um So, ECP officials really haven't

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Speaker 1: said very much about interest rates beyond the fact that

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Speaker 1: they're going to keep them at their current levels through

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Speaker 1: the summer. Um So, I think what they're looking at

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Speaker 1: is is data releases like the one that we saw

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Speaker 1: this morning and trying to see, you know, is this

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Speaker 1: transitory or is there something more protracted going on? And

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Speaker 1: a lot of that depends on on trade, on certainties,

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Speaker 1: and on Chinese growth. Um So, it's a lot of

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Speaker 1: it is beyond Europe's controls. Yeah. But but John Ferre,

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Speaker 1: I think this is important. I walked down the street

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Speaker 1: in New York and if I see a three month

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Speaker 1: c D, you know, it's a minuscule yield, but there

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Speaker 1: it is. Caroline, do you walk down the street in

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Speaker 1: Frankfort and rates? Did they do they advertise negative rates?

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Speaker 1: I'm serious. Uh, they definitely don't. But I did have

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Speaker 1: I did have an interesting conversation with a taxi driver

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Speaker 1: the other day. He was asking me, when, uh, interest

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Speaker 1: rates might be going up? Um, you know, after after

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Speaker 1: I told him what I do and uh, I told

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Speaker 1: him about how the the narrative at the moment was

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Speaker 1: about you know, waiting and seeing and seeing how current

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Speaker 1: economic weakness plays out. And he had no idea that

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Speaker 1: there was any economic weakness going on. And that's that's amazing.

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Speaker 1: You really do have a very strong domestic economy here.

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Speaker 1: You know, you have a very strong labor market, you

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Speaker 1: have growing real income. So he was like, you know what,

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Speaker 1: I have no idea but that that's even going on,

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Speaker 1: because that's that's really a separate part of it. You

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Speaker 1: guys have touched on something important. We joke about the

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Speaker 1: fact that you don't advertise negative interest rates. The problem

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Speaker 1: is when you look at the German curve toom it's

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Speaker 1: actually really stayed compared to the United States. Well certain,

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Speaker 1: but as you know, as a bank, you borrow short,

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Speaker 1: you lend long. But the banks can't pass on the

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Speaker 1: negative interest rates to the deposit base. They have to

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Speaker 1: absorb the costs themselves. And that's why many people consider

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Speaker 1: this to be a tax on the bank. And what's

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Speaker 1: so important here, folks, for you in America listening to

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Speaker 1: this mus look is in Germany living this where economists

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Speaker 1: in bow ties paper you're talking about yourself. But it's sterile.

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Speaker 1: What I would say, Caroline, is it's sterile analysis versus

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Speaker 1: the malaise that Germany's living. Um. Yeah, yeah, I mean,

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Speaker 1: but as as as John was already saying, I mean,

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Speaker 1: we don't really feel the impact of that, and um,

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Speaker 1: you know it's it's it's really the banks that are

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Speaker 1: absorbing this. And you know that kind of makes sense

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Speaker 1: then in terms of why you often hear this narrative

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Speaker 1: coming from the banks who are complaining more about negative interest,

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Speaker 1: it's because you have a very bank based economy in Europe, right,

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Speaker 1: so for them it hurts for the consumer not so much.

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Speaker 1: I want to pick up on a point that you've made,

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Speaker 1: and I want to leave it here because I think

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Speaker 1: it's critical how you untangle the slowdown in Europe, whether

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Speaker 1: it is based on the trade story, the slowdown in China,

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Speaker 1: or whether there's something more domestic taking place that the

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Speaker 1: Europeans can address. Which one is it, Carolyn, I mean,

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Speaker 1: at the moment, it really seems to be more down

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Speaker 1: to ex ternal factors. Um. You know, in Germany in particular,

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Speaker 1: you're really focused on exports and trade, and you know

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Speaker 1: the situation with growth in China. UM. But you're right

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Speaker 1: that there is also something to be said about the

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Speaker 1: domestic situation. You know, how can the euro Area boost

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Speaker 1: its innovation? It's productivity, um. And you know that's something

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Speaker 1: where the ECB has been very vocal about hosting fiscal reforms. UM. Right,

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Speaker 1: that that kind of thing. So it's it's a bit

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Speaker 1: of both. Really, Caroline, thank you so much, Thank you,

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Speaker 1: really really really interesting. We look forward to speaking to

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Speaker 1: you when interest rates go positive. That's going to be

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Speaker 1: like five, ten years, maybe twenty. I don't get. You

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Speaker 1: don't get. This week marks the twentieth anniversary of Japan

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Speaker 1: taking interest rates to zero, and it makes you think

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Speaker 1: about Europe and the position that the ECB is in

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Speaker 1: and how long we're going to be down here. I'm

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Speaker 1: going to give you credit, Chan, I'm looking to the

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Speaker 1: German tenure point one zero and you said, what three

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Speaker 1: or four weeks ago? Whoa look at that? And there

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Speaker 1: it is and with an effect on America. Much much

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Speaker 1: to talk about this morning. There's a little bit of

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Speaker 1: Brexity news for those to keep up with the soap opera.

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Speaker 1: The Prime Minister, I guess has a vote in Parliament today.

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Speaker 1: Johnny blurs. Ohanna Edwards is a saint. She really tries

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Speaker 1: to keep up with it. I really get the whole

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Speaker 1: team in London is a fantastic job. You try as well,

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Speaker 1: Anna and I try, but not like you. A Brexit

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Speaker 1: tourist a couple of times a year. Yeah that's that's nice.

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Speaker 1: We gotta Washington Terms chief correspondent of Brexit every now

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Speaker 1: and again. I've in London. I enjoy it when you

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Speaker 1: go over that. I love you, Fridge of Brexit. Yeah,

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Speaker 1: well you know, why don't you bring in Mr Freyn.

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Speaker 1: I'm going to okay over there. Yeah, we did Equity Murder. Ye,

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Speaker 1: are just set up for you in the Real Yield

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Speaker 1: tomorrow's show. The Real Yield is undermind. Yeah that one pm?

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Speaker 1: Thank Easton. Aren't you off tomorrow? I am so off.

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Speaker 1: Does that mean you've got a big date tonight? Yeah,

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Speaker 1: with afterthought. It's a Valentine's date date with afterthought. Yeah,

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Speaker 1: that's gonna be good fun. You booked a restaurant, yeah,

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Speaker 1: McDonald's third ever, maybe first ever McDonald Matt fraud Great

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Speaker 1: to have you with us. Colambos Advisor's head of fixed

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Speaker 1: income Strategies and coat ce Io there is a hope Matt,

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Speaker 1: that we can engineer a soft landing. What's the soft landing?

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Speaker 1: And can we engineer one? So I think we absolutely

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Speaker 1: can engineer a soft landing. I think that, Uh. My

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Speaker 1: definition is where growth moderates, where the FEDS objectives of

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Speaker 1: keeping inflation under control keeping an employment high are met,

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Speaker 1: and I think we're on that path. The wild cards, though,

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Speaker 1: are all of the global soap operas that you were

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Speaker 1: talking about and FED policy itself. Are they going to

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Speaker 1: overdo it? And so far we don't think they have

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Speaker 1: any signs of something evolving that would encourage the federals

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Speaker 1: of to come back in put a one in the

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Speaker 1: way they've pulled one over the last culture. Well, I

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Speaker 1: think people have really misunderstood what the FED did. I

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Speaker 1: I think the Fed um was did the right thing.

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Speaker 1: In December they raised rates. The market was expecting a

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Speaker 1: hike sometimes in December or January. Where they got it

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Speaker 1: wrong was the communication afterwards. And I think we're at

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Speaker 1: a stage now where if risk assets continue to do well,

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Speaker 1: if the economy here domestically get some traction um, I

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Speaker 1: think it's quite possible that the FED will be back

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Speaker 1: raising rates later in the year if things. If that

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Speaker 1: doesn't happen, I think we're going to see a long pause.

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Speaker 1: You had such a long history in the business, and

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Speaker 1: then you join this magnificent columbuside of you know, out

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Speaker 1: of Illinois, way out of Chicago, Naper Villain and all that,

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Speaker 1: and you guys own what I'm going to call the

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Speaker 1: early derivative train of fixed income here synthetic things and

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Speaker 1: goofy things if you will. Within fixed income, you guys

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Speaker 1: are decades out in front on all that. John Klumus

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Speaker 1: wrote the book. He wrote the book on this, He

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Speaker 1: literally invented the book, folks on some of the odd

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Speaker 1: things in fixed income. Is it a full faith in

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Speaker 1: credit market, which is what we quote all the time,

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Speaker 1: or our listeners are they missing a true yield opportunity

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Speaker 1: away from government paper? So I think they absolutely are.

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Speaker 1: One of the messages that we try to give is

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Speaker 1: that it is not just one bond market. It is

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Speaker 1: a market ad bonds. And in any given day there

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Speaker 1: are sectors that we like and we think have opportunity.

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Speaker 1: Their sectors that are overvalued and that we we think

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Speaker 1: you want to start with the over valid Where do

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Speaker 1: our where does our audience need to run from right now.

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Speaker 1: So I think the biggest question marks in my mind

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Speaker 1: are the weaker part of the investment grade market. We've

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Speaker 1: seen tremendous growth. There a lot of companies issuing debt

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Speaker 1: to buy backstock. We think that there's potentially a lot

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Speaker 1: of problems there when the market, So you're going to

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Speaker 1: quality is the opportunity. Well, so it's really a barbelled

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Speaker 1: approach because I think on the other side, the high

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Speaker 1: yield market gets tarnished in this whole credit problem. High

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Speaker 1: yield has been very well behaved. There's a handful of

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Speaker 1: deals that we don't like that maybe the covenants were

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Speaker 1: too far, but really the high yield market is also

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Speaker 1: still healthy. Let's talk about the dividing line between investment

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Speaker 1: grade and high yield, triple bays and double bays. That

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Speaker 1: spread is as tight as it has been for the

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Speaker 1: last decade. What's the story in the price action and

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Speaker 1: that's spread right now? Yeah, So I would tell you

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Speaker 1: that it's it's hard to speak in large generalities. And

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Speaker 1: here's why. You can find um single b bonds that

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Speaker 1: are much tighter than double bees. You can find investment

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Speaker 1: grade wider than double bees or or single bees, and

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Speaker 1: so it's really name specific and sector specific. What I

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Speaker 1: guide you to is that well known names, decent liquidity,

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Speaker 1: good business plans there those are still relative in our mind,

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Speaker 1: very attractive three to five years. It's some of the

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Speaker 1: esoteric stuff where you can get into let's go into

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Speaker 1: the triple base and go a bit deeper, maybe sector specific,

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Speaker 1: maybe even company specific, if you'll allow us to go there.

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Speaker 1: There is a concern that a lot of those companies

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Speaker 1: have massive debtloads, that leverages being picking up and they're

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Speaker 1: going to drop down into high yield, into junk full

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Speaker 1: and angels that's sitting on this market is big concerned

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Speaker 1: the triple B universe which has become bigger and bigger

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Speaker 1: and bigger. Can the c suite engineer turnaround where they

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Speaker 1: can defend their credit rating? Are you hopeful that can happen?

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Speaker 1: And where are you hopeful that is happening? So I

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Speaker 1: think that the message went out last year in the

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Speaker 1: second half that this idea that you can borrow forever

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Speaker 1: to buy back stock is a strategy that you need

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Speaker 1: to rein in a little bit, and we think that

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Speaker 1: we're seeing that. So I think, no, don't continue so

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Speaker 1: so so your point is really a good one, and um,

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Speaker 1: we think that that activity is going to uh soften,

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Speaker 1: and we think that you know, for on the equity side.

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Speaker 1: Uh you know you heard Doug before. I mean, that's

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Speaker 1: a source of buying that I don't think is going

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Speaker 1: to be there until balance sheets are are repaired. The

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Speaker 1: rough math, um, so the triple be market, the week

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Speaker 1: trip will be market is about two times the high

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Speaker 1: yield market, and about half of that of that has

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Speaker 1: what used to be when I started in the business

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Speaker 1: high yield statistics from leverage. Wow, that's that's actually some

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Speaker 1: really important math. I'm going to suggest John Colombos did

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Speaker 1: not invent invent the loan market. The senior loan. John

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Speaker 1: was the upwar last year peak of the market. Everybody

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Speaker 1: couldn't sell this stuff fast enough. Leverage loans, that's right.

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Speaker 1: I mean your thoughts on what everybody was talking about

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Speaker 1: six months ago? Was it all clear? Uh So? I

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Speaker 1: think leverage loans can be a very attractive investment. Going

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Speaker 1: from high yield of leverage loans could make sense. Well,

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Speaker 1: so leverage loans are Jeff, generally top of the credit stack.

427
00:23:06,840 --> 00:23:09,119
Speaker 1: Uh so they're gonna get paid back first to the

428
00:23:09,160 --> 00:23:12,440
Speaker 1: extent that there are covenants, they generally have them, uh,

429
00:23:12,480 --> 00:23:15,920
Speaker 1: and they're a floating rate instrument. If you're worried about

430
00:23:16,000 --> 00:23:18,240
Speaker 1: rates still going up, the problem is going to be

431
00:23:18,680 --> 00:23:21,399
Speaker 1: the people who are stretching from the investment rate space

432
00:23:21,440 --> 00:23:24,080
Speaker 1: going into loans because it can have a very different

433
00:23:24,560 --> 00:23:28,560
Speaker 1: return characteristics. So it's de risking from the high yield side,

434
00:23:28,560 --> 00:23:30,239
Speaker 1: but it's taking more. But you have to be so

435
00:23:30,280 --> 00:23:32,800
Speaker 1: active about doing this. And I'll and I'll say why

436
00:23:32,880 --> 00:23:35,040
Speaker 1: some and I think this is really important. We often

437
00:23:35,119 --> 00:23:37,159
Speaker 1: hear a lot of people say this is secure to

438
00:23:37,280 --> 00:23:39,919
Speaker 1: higher up in the capital structure. That's great, so long

439
00:23:39,960 --> 00:23:42,240
Speaker 1: as you've got something beneath you. The worry is in

440
00:23:42,320 --> 00:23:44,680
Speaker 1: leverage loans as there are so many loan only companies.

441
00:23:44,720 --> 00:23:47,840
Speaker 1: Now why you think you are up in the capital structure,

442
00:23:48,359 --> 00:23:50,600
Speaker 1: But you're it because there's nothing below. So you have

443
00:23:50,680 --> 00:23:52,639
Speaker 1: to turn around and see if there's anybody back in

444
00:23:52,720 --> 00:23:55,400
Speaker 1: back of you in the line. And that's absolutely right.

445
00:23:55,480 --> 00:23:58,399
Speaker 1: So that's that's a newer development, and that's something that

446
00:23:58,440 --> 00:24:02,600
Speaker 1: we're very cautious in. You're very cautious in that. So well,

447
00:24:02,600 --> 00:24:05,120
Speaker 1: when I think so it's name specific, but you don't

448
00:24:05,760 --> 00:24:10,320
Speaker 1: so Basically you're saying, don't buy the index, you do

449
00:24:10,359 --> 00:24:14,480
Speaker 1: the legs, high yield or loans. It's idiosyncratic. There are

450
00:24:14,560 --> 00:24:16,840
Speaker 1: art sectors to like and not like. Let's do some math.

451
00:24:17,000 --> 00:24:19,679
Speaker 1: How much yield can we pick up with a Colamos

452
00:24:19,720 --> 00:24:22,640
Speaker 1: approach off of what the perceived yield is of the market,

453
00:24:23,320 --> 00:24:25,439
Speaker 1: because I think people don't realize they can pick up

454
00:24:25,520 --> 00:24:29,320
Speaker 1: more than fifty basis points. Have a percentage point? Are yield?

455
00:24:29,560 --> 00:24:33,800
Speaker 1: Oh sure so? Um so the high yield market today

456
00:24:33,840 --> 00:24:36,760
Speaker 1: is yielding seven seven and a quarter Depending on the yield,

457
00:24:36,800 --> 00:24:38,879
Speaker 1: we generally yield a little bit more than that. We

458
00:24:38,960 --> 00:24:42,000
Speaker 1: take a very bond by bond approach. Uh so more

459
00:24:42,080 --> 00:24:44,119
Speaker 1: like seven and a half. You have to deduct fees.

460
00:24:44,160 --> 00:24:47,680
Speaker 1: So why now today after fees you're probably talking something

461
00:24:47,720 --> 00:24:50,400
Speaker 1: in the mid six is that that we can give?

462
00:24:50,440 --> 00:24:52,239
Speaker 1: The great news here is that you don't have a

463
00:24:52,240 --> 00:24:56,399
Speaker 1: lot of duration if you're worried about that, because if

464
00:24:56,400 --> 00:24:59,160
Speaker 1: you're picking up we're picking up three hundred basis points. Yeah,

465
00:24:59,200 --> 00:25:02,360
Speaker 1: so the ration of the high yield market is generally

466
00:25:02,400 --> 00:25:04,440
Speaker 1: a three to four years sort of, I think John,

467
00:25:04,480 --> 00:25:06,000
Speaker 1: I think that's the number one thing about the real

468
00:25:06,080 --> 00:25:09,240
Speaker 1: yield tomorrow and Bloomberg Television people think hi Yield is

469
00:25:09,280 --> 00:25:11,440
Speaker 1: twenty year paper. Do you when it comes to the

470
00:25:11,480 --> 00:25:15,000
Speaker 1: unitorial mating, No, I don't need to come To've never

471
00:25:15,000 --> 00:25:17,119
Speaker 1: been in the show. Did duration of how Yield already

472
00:25:17,160 --> 00:25:19,520
Speaker 1: have the market last year? It sure did? And then

473
00:25:19,560 --> 00:25:22,240
Speaker 1: the on the other part, the duration of the investment

474
00:25:22,280 --> 00:25:25,440
Speaker 1: grade market is the longest that it's almost ever. I

475
00:25:25,440 --> 00:25:27,399
Speaker 1: always go back to eighty nine because that's when I

476
00:25:27,440 --> 00:25:30,159
Speaker 1: started in the business, and it's almost never been longer

477
00:25:30,240 --> 00:25:33,240
Speaker 1: than it is today. Are you gonna be here tomorrow? Uh? No,

478
00:25:33,440 --> 00:25:42,880
Speaker 1: Actually I'm flying back. That was so brilliant. A email McKinnon,

479
00:25:42,920 --> 00:25:45,480
Speaker 1: who does all of our social media, I said, please

480
00:25:45,520 --> 00:25:48,119
Speaker 1: put that front out on the podcast today. That was

481
00:25:48,160 --> 00:25:51,000
Speaker 1: a clinic. That was folks. If that's what this is

482
00:25:51,040 --> 00:25:54,440
Speaker 1: all about, is talking to people that really inform and

483
00:25:54,520 --> 00:25:59,600
Speaker 1: advance the dialect. Map prone with Klamas of Chicago and

484
00:26:00,000 --> 00:26:14,000
Speaker 1: annoying definitive bond House, this is a joy. Mona Mahajan

485
00:26:14,280 --> 00:26:18,040
Speaker 1: is with Alliance Alian's Global Investors rather Alian's Global Investors,

486
00:26:18,480 --> 00:26:20,520
Speaker 1: and what's cool about her is she has one of

487
00:26:20,560 --> 00:26:25,080
Speaker 1: the most coolest double majors of any school. In the world.

488
00:26:25,160 --> 00:26:27,879
Speaker 1: She's got the Wharton's economics Like, that's a big deal.

489
00:26:28,359 --> 00:26:31,159
Speaker 1: But the magic the Pixie dust down at Wharton is

490
00:26:31,200 --> 00:26:34,920
Speaker 1: to dual major economics and computer sciences. I mean it's

491
00:26:35,040 --> 00:26:39,679
Speaker 1: very few mona. How how did you get through that grind? Oh?

492
00:26:39,760 --> 00:26:41,439
Speaker 1: Thank you Tom, great to be on first of all,

493
00:26:41,440 --> 00:26:44,479
Speaker 1: and happy Valentine's Day. Um, that was quite a grind

494
00:26:44,560 --> 00:26:47,159
Speaker 1: doing that dual degree in squeezing it in four years.

495
00:26:48,240 --> 00:26:50,959
Speaker 1: Anything since then has not been as challenge. Give us

496
00:26:51,000 --> 00:26:55,040
Speaker 1: the mathematics or the organizational structure of the chaos out

497
00:26:55,040 --> 00:26:57,760
Speaker 1: of December in the equity markets. If you do a

498
00:26:57,800 --> 00:27:02,280
Speaker 1: matrix analysis on it, you do it? Can you? That

499
00:27:02,440 --> 00:27:05,560
Speaker 1: was very unexpected, that December move across the board, So yes,

500
00:27:05,600 --> 00:27:08,560
Speaker 1: I don't think any models predicted that, although the quantitative

501
00:27:08,720 --> 00:27:12,600
Speaker 1: analysis may have exacerbated it so soon it How about

502
00:27:12,640 --> 00:27:16,880
Speaker 1: how about the January rallies? You put the December pullback

503
00:27:16,880 --> 00:27:19,840
Speaker 1: in context of what we've seen so far in how

504
00:27:19,840 --> 00:27:22,240
Speaker 1: do you square that peg right there? It seems like

505
00:27:22,280 --> 00:27:25,640
Speaker 1: the volatility there was just extraordinary. Yeah, you know, it's

506
00:27:25,760 --> 00:27:30,919
Speaker 1: interesting the December pullback so down, uh, peak to trough

507
00:27:31,040 --> 00:27:34,959
Speaker 1: and the SMP followed by almost a complete reversal of

508
00:27:35,040 --> 00:27:38,120
Speaker 1: that from decembery to where we are today about up

509
00:27:38,160 --> 00:27:41,879
Speaker 1: seventeen percent um. You know what what I'd say is

510
00:27:41,880 --> 00:27:44,560
Speaker 1: the December pullback a lot of that had to do

511
00:27:44,640 --> 00:27:48,000
Speaker 1: with US recession fears UM and recession fears that were

512
00:27:48,040 --> 00:27:51,960
Speaker 1: probably early and somewhat unwarranted. Now the pullback from that,

513
00:27:52,040 --> 00:27:55,560
Speaker 1: you know, we've we've recovered almost all of it um.

514
00:27:55,600 --> 00:27:58,000
Speaker 1: But I think the next leg up the next five

515
00:27:58,040 --> 00:28:00,960
Speaker 1: to will be a little bit more challenging and a

516
00:28:00,960 --> 00:28:03,760
Speaker 1: little bit more volatile. We obviously still have to climb

517
00:28:04,200 --> 00:28:07,200
Speaker 1: a few walls of worry, not only from the geopolitical side,

518
00:28:07,200 --> 00:28:09,920
Speaker 1: but from the economic side. And clearly you know tomorrow

519
00:28:09,960 --> 00:28:13,600
Speaker 1: will get government shutdown news March first, well we'll talk

520
00:28:13,680 --> 00:28:17,280
Speaker 1: trade March twentieth, another f O m C meeting, and

521
00:28:17,280 --> 00:28:19,680
Speaker 1: then of course somewhere in the background there Brexit has

522
00:28:19,720 --> 00:28:23,080
Speaker 1: to uh secure itself for finalize at the end of March.

523
00:28:23,200 --> 00:28:26,600
Speaker 1: So we're watching all these events pretty closely as we

524
00:28:26,640 --> 00:28:28,679
Speaker 1: move on through the next few weeks. So when you

525
00:28:28,680 --> 00:28:30,520
Speaker 1: mentioned some of those macro items, and they seem to

526
00:28:30,560 --> 00:28:32,800
Speaker 1: have been you know, one of the components in the

527
00:28:32,920 --> 00:28:37,200
Speaker 1: December slide, how much do you think, um, they really

528
00:28:37,520 --> 00:28:40,320
Speaker 1: drove December. And then conversely, maybe we're getting some light

529
00:28:40,320 --> 00:28:41,680
Speaker 1: at the end of the tunnel as it relates to

530
00:28:41,680 --> 00:28:44,480
Speaker 1: trade deals and government shutdowns and how much is that

531
00:28:44,560 --> 00:28:47,520
Speaker 1: impacting kind of what is going on in the markets today.

532
00:28:47,520 --> 00:28:50,040
Speaker 1: It seemed to be pretty pronounced. Yeah, you know, I

533
00:28:50,280 --> 00:28:53,520
Speaker 1: do think that the markets have priced in or have

534
00:28:53,720 --> 00:28:56,040
Speaker 1: climbed some of these walls of worry one by one.

535
00:28:56,080 --> 00:28:58,040
Speaker 1: So we are seeing, you know, on the shutdown front,

536
00:28:58,080 --> 00:29:02,080
Speaker 1: President Trump has said he will likely sign some committee

537
00:29:02,120 --> 00:29:06,760
Speaker 1: resolution tomorrow. On the trade front, we're getting pretty positive feedback.

538
00:29:06,800 --> 00:29:08,800
Speaker 1: You know. I think the fact that President she is

539
00:29:08,920 --> 00:29:11,320
Speaker 1: actually meeting with some of our U S delegates out there,

540
00:29:11,760 --> 00:29:14,320
Speaker 1: um adds a note of you know, gravitas to the

541
00:29:14,360 --> 00:29:17,720
Speaker 1: whole process, adds some real you know, hope as well.

542
00:29:17,760 --> 00:29:20,440
Speaker 1: So I think that's that's the positive. And I think,

543
00:29:20,520 --> 00:29:23,640
Speaker 1: you know, given what's happened with retail sales clearly this morning,

544
00:29:23,840 --> 00:29:26,440
Speaker 1: I do think the Fed, you know, for clearly for

545
00:29:26,480 --> 00:29:30,040
Speaker 1: in March twentie uh f O MC meeting is off

546
00:29:30,040 --> 00:29:33,720
Speaker 1: the table. So um, those are that's a pretty positive

547
00:29:33,760 --> 00:29:37,640
Speaker 1: background for markets overall. And I think that's what we're seeing. Um,

548
00:29:37,680 --> 00:29:39,520
Speaker 1: you know, every time you get this kind of move,

549
00:29:39,600 --> 00:29:41,400
Speaker 1: you always have to worry about the markets don't go

550
00:29:41,560 --> 00:29:44,120
Speaker 1: in this kind of straight line forever. So we are

551
00:29:44,160 --> 00:29:47,480
Speaker 1: cautious about some point taking that maker. The big institutional

552
00:29:47,520 --> 00:29:49,760
Speaker 1: car right now is everybody's on board e M. After

553
00:29:49,800 --> 00:29:54,760
Speaker 1: an ugly two eighteen, is Alian's onboard em And can

554
00:29:54,800 --> 00:29:58,720
Speaker 1: you do that with dollar strengths? A great point on

555
00:29:58,760 --> 00:30:01,120
Speaker 1: the dollar strength. So, you know, our our general view

556
00:30:01,160 --> 00:30:03,760
Speaker 1: coming into the year was that looking globally, we had

557
00:30:03,760 --> 00:30:06,520
Speaker 1: a somewhat of a barbell approach. So on one hand

558
00:30:06,520 --> 00:30:09,560
Speaker 1: of that barbell was the US, which remains kind of

559
00:30:09,600 --> 00:30:11,600
Speaker 1: the best on the block in terms of the developed

560
00:30:11,600 --> 00:30:14,000
Speaker 1: market at least and clearly compared to what's happening in

561
00:30:14,000 --> 00:30:17,280
Speaker 1: the European economies. The other hand of that barbell was

562
00:30:17,840 --> 00:30:21,320
Speaker 1: China in particular and then selective e M. Part of

563
00:30:21,360 --> 00:30:24,080
Speaker 1: that story was, you know, not only the trade progress,

564
00:30:24,120 --> 00:30:26,720
Speaker 1: but clearly some of the fiscal stimulus that's being injected

565
00:30:26,720 --> 00:30:30,720
Speaker 1: in China in particular, and valuations were pretty attractive supported

566
00:30:30,760 --> 00:30:32,840
Speaker 1: by you know, a dollar. You know, at least, the

567
00:30:33,080 --> 00:30:37,000
Speaker 1: story was the dollar may stabilize this year even weekend um.

568
00:30:37,120 --> 00:30:39,760
Speaker 1: What we've seen clearly, at least in the last month

569
00:30:39,800 --> 00:30:43,520
Speaker 1: of dollar has been up almost nine percent UM. When

570
00:30:43,520 --> 00:30:46,120
Speaker 1: the FED kind of paused or reversed, we did see

571
00:30:46,160 --> 00:30:49,960
Speaker 1: some dollar softening or dollar weakness, but that quickly reversed

572
00:30:49,960 --> 00:30:51,760
Speaker 1: when the rest of the world followed suit. So we

573
00:30:51,800 --> 00:30:55,080
Speaker 1: saw surprise rate cuts from you know, Bank of Australia,

574
00:30:55,200 --> 00:30:57,560
Speaker 1: Bank of India, you know, Bank of England followed suit.

575
00:30:58,040 --> 00:30:59,920
Speaker 1: And so the FED is now not the only on

576
00:31:00,200 --> 00:31:03,880
Speaker 1: the block, you know, pursuing this somewhat easing strategy, and

577
00:31:03,920 --> 00:31:07,240
Speaker 1: so I think that's kind of creating some more dollar strength.

578
00:31:07,680 --> 00:31:09,840
Speaker 1: And so clearly one of the tail wins for the

579
00:31:09,880 --> 00:31:12,400
Speaker 1: e M story is now kind of being taken off

580
00:31:12,440 --> 00:31:15,040
Speaker 1: the table. And so we're watching that carefully. EM's had

581
00:31:15,080 --> 00:31:19,040
Speaker 1: a great run already. Um So I do think, uh,

582
00:31:19,080 --> 00:31:21,200
Speaker 1: you know, for it to go up another leg higher,

583
00:31:21,240 --> 00:31:24,800
Speaker 1: we need not only a decent resolution on trade, um,

584
00:31:24,840 --> 00:31:27,800
Speaker 1: a decent you know, the fiscal stimulus to start kicking in,

585
00:31:27,840 --> 00:31:31,560
Speaker 1: but perhaps some more stabilization in the dollar some on it.

586
00:31:31,640 --> 00:31:34,240
Speaker 1: Just real quickly twenty seconds, how important our earnings here

587
00:31:34,240 --> 00:31:36,440
Speaker 1: with the FED on the sideline, what you know, maybe

588
00:31:36,440 --> 00:31:38,280
Speaker 1: have an earnings trough here in the first quarter. How

589
00:31:38,280 --> 00:31:42,160
Speaker 1: closely do you need earnings to really support this market? Yeah,

590
00:31:42,200 --> 00:31:44,480
Speaker 1: you know, I think earnings will be critical going forward

591
00:31:44,520 --> 00:31:46,720
Speaker 1: for this year. I'm clearly Q one will be soft,

592
00:31:46,760 --> 00:31:50,480
Speaker 1: and we've seen estimates already come down. We're actually um

593
00:31:50,520 --> 00:31:52,480
Speaker 1: positive on that that they've come down to now, I

594
00:31:52,480 --> 00:31:55,600
Speaker 1: think about negative one point two for Q one. Um.

595
00:31:55,640 --> 00:31:57,760
Speaker 1: What we're really watching is on a year on your basis,

596
00:31:57,760 --> 00:32:00,000
Speaker 1: our call is for four to six percent earning score

597
00:32:00,000 --> 00:32:04,000
Speaker 1: owth for two. That number has actually come down quite

598
00:32:04,040 --> 00:32:06,080
Speaker 1: a bit um from you know, early last year to

599
00:32:06,080 --> 00:32:08,360
Speaker 1: even the end the last end of two thou eighteen.

600
00:32:08,440 --> 00:32:11,560
Speaker 1: So if we can get that, we do think Mitchell

601
00:32:11,640 --> 00:32:14,520
Speaker 1: digit or equity returns are feasibly you know, four to

602
00:32:14,600 --> 00:32:18,000
Speaker 1: six percent earnings growth plus two percent dived in deield

603
00:32:18,040 --> 00:32:22,160
Speaker 1: and perhaps some multiple compressions. So we remain hopeful for

604
00:32:22,200 --> 00:32:24,880
Speaker 1: that that outcome. That Mona. Thank you so much motivation

605
00:32:24,960 --> 00:32:33,160
Speaker 1: with this Allian's Global Partners. Thanks for listening to the

606
00:32:33,160 --> 00:32:39,680
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

607
00:32:40,040 --> 00:32:44,240
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

608
00:32:44,280 --> 00:32:48,560
Speaker 1: Tom Keane before the podcast, you can always catch us worldwide.

609
00:32:49,000 --> 00:33:00,320
Speaker 1: I'm Bloomberg Radio