Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
Speaker 1: SoundCloud and at Bloomberg dot com. Let's turn our attention
Speaker 1: now to Donald Trump after his inauguration and the immediate
Speaker 1: challenges that he has taking office. Justin Sink is our
Speaker 1: US government reporter for a Bloomberg justin Thank you very
Speaker 1: much for being with us. Where do we start? Affordable
Speaker 1: Care Act? Immigration? What are the hot topics that the
Speaker 1: President Donald Trump will deal with most immediately? Thanks for
Speaker 1: having me. Yeah, I think it's gonna be a little
Speaker 1: bit of everything. Uh, certainly the topics that you mentioned. Um.
Speaker 1: The President act has talked about how he wants to
Speaker 1: take executive action on border security virtually as soon as
Speaker 1: he enters office. Um. Republicans on the Hill are obviously
Speaker 1: very eager to roll back the Affordable Care Act, but
Speaker 1: you know, there's a lot of foreign policy issues where
Speaker 1: he could wait into. There's ongoing to formatic talks um
Speaker 1: regarding the civil war in Syria. There's his sort of
Speaker 1: antagonism with China. He may label them a currency manipulator,
Speaker 1: and um seek to impose new tariffs. And so I
Speaker 1: think across the board, one thing that we're hearing a
Speaker 1: lot from Trump aids is that they want to make
Speaker 1: a kind of a big splash and big impact very early,
Speaker 1: if not today, um certainly by Monday of this week.
Speaker 1: And the idea here is to show that Donald Trump,
Speaker 1: who is somebody who hasn't been in government before, is
Speaker 1: able to be effective and start fulfilling his campaign promises
Speaker 1: very early in this administration. How quickly can we expect
Speaker 1: to see some Supreme Court nominees filled the empty role
Speaker 1: currently out there? So it's just said that they are
Speaker 1: the Donald Trump has already done some interviews that they'll
Speaker 1: be ongoing, but they expect an announcement as soon as
Speaker 1: the second week of the Trump administration and probably no
Speaker 1: later than the third week. And so trying to fill
Speaker 1: Justice Kalia. See, you know, it's something that's lingered open
Speaker 1: for nearly a year now, but we expect pretty quick
Speaker 1: action and most likely a fairly quick Senate confirmation once
Speaker 1: Ah once a nomination aspect. You know, we've heard a
Speaker 1: lot about the hundreds of positions within the administration that
Speaker 1: are currently vacant in as this transition goes on. Do
Speaker 1: you have a sense of who is managing that whole
Speaker 1: transition and sort of vetting vetting different people for those
Speaker 1: rules as Trump takes on these other responsibilities. So, you know,
Speaker 1: Mike Penn's the vice president elect, has been heading the
Speaker 1: transition effort so far. He's going to hand off that
Speaker 1: responsibility as the Centers Office. But Um, one of the
Speaker 1: kind of interesting points that your question gets to is
Speaker 1: the fact that there are kind of different centers of
Speaker 1: power within um, the Trump White House. So there's the
Speaker 1: sort of traditional establishment Ryn's previous R and C area,
Speaker 1: there's the Steve Bannon UM, you know, right, different U
Speaker 1: different kind of Trump Republican power center. And then there's
Speaker 1: the Trump family itself, so Jared Kushner, UM, Ivanka and
Speaker 1: and these are people who also have weighed in, especially
Speaker 1: on kind of top level picks and so especially as
Speaker 1: the administration is getting filled out at lower levels, there's
Speaker 1: a lot of back and forth between these kind of
Speaker 1: different power centers, with all of them kind of needing
Speaker 1: to sign off on, especially people who have influential policy
Speaker 1: making roles. Well, justin as President Obama and the Trump's
Speaker 1: I get ready to leave the White House. One trip
Speaker 1: that Donald Trump may be taking relatively quickly in his administration,
Speaker 1: at least according to Sean Spicer, who's the incoming White
Speaker 1: House Press secretary, is a visit to c i A
Speaker 1: headquarters in Langley, Virginia. Have you heard anything about that? Yeah,
Speaker 1: so obviously I've heard Shawn's comments. And this is interesting because,
Speaker 1: you know, a big sort of theme of the transition
Speaker 1: has been a conflict between the Trump team and Trump
Speaker 1: himself in the intelligence community. I think there's going to
Speaker 1: be some attempt at since men in there and and
Speaker 1: kind of getting past the big controversy over Russian involvement
Speaker 1: in the hack of John Podesto, who's Holly Clinton's campaign
Speaker 1: chairman and the Democratic National Committee, something that Trump kind
Speaker 1: of publicly doubted for a long time but has now
Speaker 1: come to accept. And so I think it would be
Speaker 1: an attempt to reset that relationship. Um, we also expect
Speaker 1: in terms of sort of early tra novel that one
Speaker 1: of if not as first domestic trip, will be up
Speaker 1: to Philadelphia next week where the Republican lawmakers are having
Speaker 1: their their Winner retreat, and that will be an opportunity
Speaker 1: for Trump to meet with them and kind of set
Speaker 1: forward some of those policy goals that will require legislative
Speaker 1: action that we were talking about earlier. Justin Sank, thanks,
Speaker 1: thank you so much for joining us. Justin Sank, us
Speaker 1: government reporter for Bloomberg talking about what President elect Trump's
Speaker 1: immediate steps will be after he takes office. One thing
Speaker 1: that is not up is the US dollar. I want
Speaker 1: to bring in Doug Barthwick, managing director and head of
Speaker 1: f X at Chapter Lane and Company, to talk about
Speaker 1: what President elect Trump will mean for the dollar. He
Speaker 1: has come out and said that he does not want
Speaker 1: the dollar to be too strong. What will this mean
Speaker 1: in practical terms? Doug, Yeah, thank you very much for
Speaker 1: having me. I think that one of the most important
Speaker 1: statements that the Trump has made so far is that
Speaker 1: he wants to make American more competitive. And I think
Speaker 1: that we all know, based on economics classes, that multinationals
Speaker 1: like to manufacturing countries with a depreciating currency while exporting
Speaker 1: to those goods to one with an appreciating currency. And
Speaker 1: for that reason, you see people manufacturing in China exports
Speaker 1: that then go into the United States. Why why would
Speaker 1: you want that? What you want that because you want
Speaker 1: to have cheaper employees and you want to earn more
Speaker 1: on what you're selling. So how could President Trump effectively
Speaker 1: weaken the dollar? And what do you take such steps? Well,
Speaker 1: one of the one of the most interesting things would
Speaker 1: be the strong dollar policy that's been enforced really since
Speaker 1: ever since Lloyd Benson was there with Mickey Cantor and
Speaker 1: back then we were trying to do trade relationships and
Speaker 1: Dolly and was trading at seventy five. Once we had
Speaker 1: the trade relationships in place, they brought in the strong
Speaker 1: dollar policy, which then saw Dolly and moved from seventy
Speaker 1: five to its current levels. Now, now what's happened since
Speaker 1: then is the U s has essentially become more expensive
Speaker 1: in terms of its labor than maybe Japan, and so
Speaker 1: as the dollar keeps on strengthening, it makes the US
Speaker 1: less and less competitive. Now, the US has exported more,
Speaker 1: but what they're exporting these days is US treasuries. So
Speaker 1: many countries in the world say, you know, we'll buy
Speaker 1: US treasuries because the US currency is a strong dollar. Policy,
Speaker 1: the dollar will go up for treasures will be work more.
Speaker 1: It's not really about the yield and the treasures more
Speaker 1: by the fact that the dollar has been strengthening. Now
Speaker 1: the President elect Trump looks at this and says, you
Speaker 1: know what, when you sell treasuries, you're not really creating jobs.
Speaker 1: But if we wanted to create jobs, we have to
Speaker 1: have manufacturing back in the US. One way to do
Speaker 1: that would be to end the strong dollar policy and
Speaker 1: the chase. There's another way. I mean, you laid out
Speaker 1: this scenario about you know, manufacturing and countries with depreciating
Speaker 1: currencies and then shipping to places like the US with
Speaker 1: appreciating currencies. Of course, there's the talk of this import
Speaker 1: tax and in a way for companies to make products
Speaker 1: here in the US is opposed to making them in
Speaker 1: places like China. How does that prospect change the equation
Speaker 1: for companies when it comes to where they do business. Well,
Speaker 1: I think the companies are being encouraged, either to the
Speaker 1: import tax or or from any sort of dollar policy change,
Speaker 1: to be much more encouraged to manufacture in the US
Speaker 1: to sell to the US. And I think that's certainly
Speaker 1: one of Trump's main agenda parts. Hey, Doug, I wonder
Speaker 1: if you could tell us about the Chinese you want
Speaker 1: and whether there's a possibility that the value of the
Speaker 1: juan will rise against the US dollar. China's economy performing
Speaker 1: pretty well, right, We've got the GDP results, but also
Speaker 1: new orders in December they were up restocking cycle. Would
Speaker 1: this be good for the you want to gain value
Speaker 1: and therefore would help other uh you want related currency pairs. Absolutely.
Speaker 1: The the un is linked to the US dollar through
Speaker 1: the basket that it trades off of, which is really
Speaker 1: a guide, but it trades back and forth with it.
Speaker 1: When you see the dollar strength, you also see then
Speaker 1: dollar China go higher or that you want get weaker.
Speaker 1: If you want that, you want to strength, and you
Speaker 1: have to have the dollar weaken. And that's one of
Speaker 1: the key points in this as well, and that the
Speaker 1: market constantly says, you know, we want to see the
Speaker 1: U want strength, and well, it's only going to strengthen
Speaker 1: if the dollar weakens. There's really two ways it's gonna cat.
Speaker 1: You can actually you can ask China to please strengthen
Speaker 1: their currency, or the US can weaken the dollar. You know,
Speaker 1: I have to wonder people sort of came up with
Speaker 1: this idea that the dollar wood strengthen as yields rose
Speaker 1: in the US. Now we see yields kind of flattening
Speaker 1: out for the year, dipping even while the dollar declines.
Speaker 1: I mean, do you think that this can continue this dynamic? Well,
Speaker 1: I think people are very excited right now about the
Speaker 1: FED raising rates a number of times through the year,
Speaker 1: and if you remember last year around the same time,
Speaker 1: there's also the same excitement, and the Fed ended up
Speaker 1: sort of disappointing the market. I think that it's that
Speaker 1: I could see the FED raising rates, but I think
Speaker 1: I think it's more likely the FED would raise rates
Speaker 1: should the dollars start to weaken, and the FAD would
Speaker 1: essentially be the breaks on any sort of dollar weakness,
Speaker 1: and that's what we're expecting for this year. I think
Speaker 1: that that certainly we can look at the differential and
Speaker 1: yields and say, well, that means that the dollar is
Speaker 1: always going to be very well bid. But it's not
Speaker 1: always the case. When Dolly went down to seventy five,
Speaker 1: it wasn't because Japanese had very high interest rates. Well, Doug,
Speaker 1: just quickly tell me about the dollar versus commodity currencies
Speaker 1: such as the Aussie dollar, well, I think that if
Speaker 1: you do see a dollar weakness, i'd expect to see
Speaker 1: the Ausio dollars start to rally. Remember, dollar weakness will
Speaker 1: spread inflation abroad. And there's one thing that old mold
Speaker 1: banks are worried about right now. It's the deflation that
Speaker 1: they're seeing. They're not seeing any inflation. Dollar weakness will
Speaker 1: see inflation in commodity prices. If that's the case, obviously
Speaker 1: the Audio dollar would strengthen. And also I think you
Speaker 1: see the rand strength and Kiwi strengthen and Canada strengthen.
Speaker 1: I want to thank you very much for joining us.
Speaker 1: Douglas Borthwick is managing director ahead of FX at A
Speaker 1: Chapter Lane and Company. Speaking about currencies, all right, let's
Speaker 1: cut to the chase and figure out how to make
Speaker 1: some money in a rising rate environment and a bond
Speaker 1: market that can't seem to figure out which way it
Speaker 1: wants to go. Matt Freund is the co chief Investment
Speaker 1: Officer and the head of fixed income Strategies at Calamo's Investments,
Speaker 1: and they manage over eighteen billion dollars of customer assets
Speaker 1: based in Naperville, Illinois. Alright, Matt Freund what is what
Speaker 1: is the word? What are you telling your clients to
Speaker 1: do or not do well? The first thing we're telling
Speaker 1: our clients is that despite the headlines, we've actually had
Speaker 1: a fairly good year in fixed income over the last
Speaker 1: twelve months. So one of the things we want to
Speaker 1: remind investors is that it's a market of bonds, not
Speaker 1: just one bond market. So high yield up over last
Speaker 1: over the last twelve months, depending on the index the
Speaker 1: broader markets, the the agg is only up about one
Speaker 1: and a half, but active managers in core and core
Speaker 1: plus funds delivered a four percent return. So um. We
Speaker 1: don't think we're going to see the huge capital gains
Speaker 1: of the past five years or so, but we still
Speaker 1: think bonds play an important role in a portfolio. So
Speaker 1: there's been a lot of talk about inflation rising and
Speaker 1: general growth prospects increasing this year. That would be bad
Speaker 1: for government bonds, particularly treasuries. Do you agree. Do you
Speaker 1: agree that this is the outlook for the year. Well,
Speaker 1: clearly it is some people's outlook for the year. I
Speaker 1: think the market is struggling with how much of the
Speaker 1: growth that we're expecting to see is going to be inflationary.
Speaker 1: And inflation is generally bad for stocks and bonds or
Speaker 1: versus real economic growth, So inflation versus real if we
Speaker 1: see inflation spike, and right now, I think the expectations
Speaker 1: are right around two percent, so it's still manageable. But
Speaker 1: if it gets out of control, I think risk assets
Speaker 1: generally UM will be in trouble. If it's real growth,
Speaker 1: I think you're going to see stocks do well and
Speaker 1: credit continue to outperform, credit spreads come in. I'll tell
Speaker 1: you though, we are not in the camp that inflation
Speaker 1: is going to be a problem. We think the next
Speaker 1: quarter or two we're going to see inflation increases. That's
Speaker 1: pretty much baked in the cake because of what we've
Speaker 1: seen in energy past. The next quarter or two, there's
Speaker 1: a lot of deflationary pressures out there that we think
Speaker 1: are aren't going to go away just because of an
Speaker 1: election here in the United States, such as what what
Speaker 1: are the deflationary pressures that you believe are going to
Speaker 1: dominate because clearly we're seeing rates move higher. Rates are
Speaker 1: right exactly, so we think that the market may have
Speaker 1: gotten ahead of itself. But to think about the markets
Speaker 1: over the next two or three quarters, there are high
Speaker 1: levels of debt um, government debt, not personal debt though.
Speaker 1: Well yeah, but you have to look, you know, debt
Speaker 1: is functionable, and you're absolutely right. The deck chairs have
Speaker 1: been rearranged a little bit. But in general, high debt
Speaker 1: levels and by a lot of measures, were higher than
Speaker 1: we were in o A. Uh, you know our deflationary
Speaker 1: strong dollar. UM, how are they? How is that deflationary?
Speaker 1: I thought that if you have an acceleration of inflation,
Speaker 1: that would be exactly what the debtors would want because
Speaker 1: it would inflate away the value of the debt. No, exactly, No,
Speaker 1: that that's right. Those two those two statements aren't in conflict.
Speaker 1: So when you have a lot of debt um and
Speaker 1: you owe money higher than expected, inflation makes it easier
Speaker 1: to repay. But when you look over periods of time,
Speaker 1: economies that are burdened with high debt levels, generally UM
Speaker 1: have lower inflation rather than higher. The next thing is
Speaker 1: the dollar, strong dollar, we're imp warding deflation. The next
Speaker 1: one or demographics. As society's age, you don't see as
Speaker 1: much inflationary pressure. And then finally history is important. Only
Speaker 1: if you look what we went through in two thousand
Speaker 1: and eight was a balance sheet recession. We got in
Speaker 1: trouble because of too much debt, and when you look
Speaker 1: at past balance sheet recessions, it's just hard to get
Speaker 1: not just real GDP growth going, but it is hard
Speaker 1: to get the velocity of money accelerating. It is hard
Speaker 1: to get inflation um significantly higher. And that was true
Speaker 1: in the twenties. It was true. Actually it's been true
Speaker 1: in Japan for almost twenty years. So, um, you know,
Speaker 1: there are some long term headwinds that we think after
Speaker 1: the next quarter or two, Uh, we're still going to
Speaker 1: find tough to to beat. So you said that you
Speaker 1: think that the inflation expectations are currently baked into the
Speaker 1: first and second quarter that have to do with higher
Speaker 1: oil prices. Do you Does that mean in the second
Speaker 1: half of the year you expect credit spreads to widen
Speaker 1: out in sort of a soul of what we've seen
Speaker 1: for the past couple of months. In other words, rates
Speaker 1: coming back down, credit spreads widening out, and possibly stocks
Speaker 1: taking a dip. Yeah. So when you think about so again,
Speaker 1: it's going to come back to, uh, you know, the
Speaker 1: whole inflation versus real growth debate. Uh. You know, so
Speaker 1: we were more optimistic on the economy UH in in
Speaker 1: UH than we were prior to the election. I think that,
Speaker 1: you know, some of the things the new administration is
Speaker 1: talking about doing though, I know that changes um uh
Speaker 1: pretty quickly are going to benefit the economy. But the
Speaker 1: economy and markets are two different things. So I suspect
Speaker 1: that UM, as the economy does a little better, that's
Speaker 1: going to be supportive of credit spreads. But again, credit
Speaker 1: spreads have already come a long way over the last
Speaker 1: twelve months, so we think they can grind tighter, but
Speaker 1: it's not going to be um dramatic, So we we've
Speaker 1: after gradual improvement spreads grinding tighter. I do think that
Speaker 1: inflation expectations may be getting ahead of themselves, so we
Speaker 1: see some um uh you know, constructive movements there. And
Speaker 1: then you know again when you when you think about
Speaker 1: the level of volatility in the market, that's one of
Speaker 1: the calls we got wrong last year. We thought, with
Speaker 1: all of the rather significant events that were happening that
Speaker 1: really caught the market off sides, we would see more
Speaker 1: of all that didn't happen UM. But we think that's
Speaker 1: a matter of time, so I I expect volatility to
Speaker 1: go up and present some opportunities over the next year.
Speaker 1: So what would be some specific investments that you would
Speaker 1: be ready to pounce on in that moment of volatility,
Speaker 1: So high yield is one of them. So we're still
Speaker 1: and my my team disagrees with me a little bit here,
Speaker 1: but I think that high yield on a risk adjusted
Speaker 1: basis is still fairly attractive. So we have positive but
Speaker 1: more modest expectations on equities over the next twelve miles.
Speaker 1: We we we don't expect um losses, but again, valuations
Speaker 1: have priced a lot of the good news in. So
Speaker 1: in that environment, we're high yield is yielding about five
Speaker 1: and a half six percent depending on what part of
Speaker 1: the market you're looking at on a risk adjusted basis,
Speaker 1: we think that makes sense. But most of the opportunity
Speaker 1: is in the triple C space, and you have to
Speaker 1: be very selective and very careful when you're investing in
Speaker 1: triple C, so make sure you hire a good manager.
Speaker 1: We also think that loans can make sense here. Now
Speaker 1: this is a very consensus trade. I hate being in
Speaker 1: the consensus, but I think that loans are are the
Speaker 1: consensus may have this one right. And then lastly, we're
Speaker 1: not afraid of duration here. I think that adding out
Speaker 1: in the twenty year thirty year part of the curves
Speaker 1: selectively makes a lot of sense. Thank you so much,
Speaker 1: Matt Freund, co, Chief investment Officer and head of Fixing
Speaker 1: Strategies at Calumus Investments in Naperville, Illinois. Thanks for listening
Speaker 1: to the Bloomberg pen L podcast. You can subscribe and
Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform
Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter
Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
Speaker 1: It's one before the podcast. You can always catch us
Speaker 1: worldwide on Bloomberg Radio.