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Speaker 1: Good morning, and welcome to the Bloomberg Daybreak Asia podcast.

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Speaker 1: I'm Doug Prisner. Here are the stories we're following today.

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Speaker 1: Joining us now is Patrick Kennedy. He is founding partner

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Speaker 1: at All Source Investment Management. Patrick joins us from Hartford,

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Speaker 1: Connecticut on the eve of the US election. Thanks for

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Speaker 1: making time to chat with us. Can we talk a

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Speaker 1: little bit about what's at stake right now in terms

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Speaker 1: of the election, not just in terms of the presidency,

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Speaker 1: but control of Congress as well. How do you see

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Speaker 1: things right now?

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Speaker 2: Yeah?

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Speaker 3: I think either way, do Doug.

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Speaker 4: The macro view, for you know, call it the next

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Speaker 4: five to ten years is kind of set in stone

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Speaker 4: in our view as far as the risk go. So

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Speaker 4: we think the next ten years is going to be

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Speaker 4: very different than the last ten in our mind, whoever's

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Speaker 4: in office, it's not going to have a huge impact

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Speaker 4: on it. Right, So we think, you know, the last

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Speaker 4: ten years we have low rates, low inflation, fairly low volatility,

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Speaker 4: you know, not much going on with geopolitical stress. Fast

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Speaker 4: forward to today and looking out over the next ten years,

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Speaker 4: we think is very much the opposite, Right, We're going

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Speaker 4: into a higher rate regime. Inflation will continue to be

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Speaker 4: sticky in our eyes. Geopolitical events are happening overseas, lots

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Speaker 4: of volatility. So what we're telling investors is that the

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Speaker 4: thing that we really need to be careful of right

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Speaker 4: now is recency bias. So a lot of folks are

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Speaker 4: focusing on what worked the last ten years, thinking hey,

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Speaker 4: it's going to work the next ten when we're in

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Speaker 4: a very different environment. Now the election will impact that somewhat, right,

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Speaker 4: But you know, in our view, inflation is more of

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Speaker 4: a fundamental problem that's here to stay and isn't going

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Speaker 4: to be corrected by any one presidency.

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Speaker 3: Unfortunately.

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Speaker 1: Well that's interesting, and it takes us to the Fed.

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Speaker 1: I mean, right now, conventional wisdom is expecting the FED

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Speaker 1: to cut rates twenty five basis points this week, some

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Speaker 1: in the market expecting another twenty five in December. But

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Speaker 1: you think that's not right? Am I reading that correctly?

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Speaker 3: That's correct?

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Speaker 4: I mean, so if you go back to the seventies,

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Speaker 4: right as soon as the Fed's started cutting, inflation roared

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Speaker 4: back with a vengeance. We're not saying that's going to

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Speaker 4: happen this time around, but we are saying inflation again

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Speaker 4: is a little stickier than what most people think. In

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Speaker 4: our eyes, you have a lot of fundamental forces that

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Speaker 4: are driving it. When you look at the deficit alone

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Speaker 4: in the national debt, right it's eye watering, So that

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Speaker 4: alone is going to cause a lot of issues with inflation.

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Speaker 4: Then you pile on top of that supply supply chain,

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Speaker 4: on shoring from COVID, a lot of the other secular

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Speaker 4: trends out there. We think that again, it's here to stay,

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Speaker 4: and with the FED cutting, you know, you might not

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Speaker 4: see it pop up immediately, but we feel it will

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Speaker 4: come back in short order.

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Speaker 1: So translate that into an investment strategy. At first, blush,

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Speaker 1: I'm thinking, Okay, I avoid the bond market. But what

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Speaker 1: do I do?

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Speaker 3: Yeah, that's a great question.

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Speaker 4: So we're focusing on a few different areas, one being commodities.

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Speaker 3: Okay, so commodities is so under owned right now.

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Speaker 4: When you look across institutional investor pools, almost no one

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Speaker 4: talks about commodities. We think that market, because it's so

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Speaker 4: under owned, has plenty of inefficiencies that you can exploit,

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Speaker 4: and it ties right in with the environment inflation, higher rates,

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Speaker 4: so on, and so forth. Some of the things going

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Speaker 4: on in Europe disrupting supply chains.

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Speaker 1: So you're talking about the very brief long sharm and strike.

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Speaker 4: Correct, Yeah, correct, So that can create some short term

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Speaker 4: inefficiencies in our view within commodity markets, which you can capture.

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Speaker 3: With the right commodity strategy.

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Speaker 4: So I think that within a commodity strategy, you want

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Speaker 4: to have both a cyclical view and a secular view.

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Speaker 4: The cyclical more so to take advantage of some short

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Speaker 4: term dislocations, if you will, and then the secular aimed

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Speaker 4: more towards taking advantage of some of the longer term

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Speaker 4: trends such as the inflation we're talking about, such as

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Speaker 4: the higher rates talking about.

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Speaker 1: So when I think commodities, I automatically think of oil.

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Speaker 1: I don't know why there's been so much volatility in

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Speaker 1: the crude market lately. We've got OPEC scaling back plans

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Speaker 1: to increase production, so that would be bullish, but a

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Speaker 1: lot going on between Israel and Iran, and the other

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Speaker 1: thing that doesn't get quite as much attention is what's

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Speaker 1: been happening recently with a dollar and dollar weakness and

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Speaker 1: how that's kind of put a floor underneath the price

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Speaker 1: of oil. How do you view the energy complex right?

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Speaker 4: Now, we really like energy, especially within the private markets.

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Speaker 4: So when you look at the public market, its valuations

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Speaker 4: are very cheap right now, right, But the model for

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Speaker 4: the public markets has very much been, hey, maintain production

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Speaker 4: and then payout cash flows via dividends to investors. Okay,

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Speaker 4: there's not much growth in that equation, and I think

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Speaker 4: one of the big reasons is because that space has

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Speaker 4: been starved from investment dollars going back the last ten years, right,

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Speaker 4: so things like ESG and you know other reasons. There's

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Speaker 4: been large institutions, private equity firms, banks, pensions, so on

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Speaker 4: and so forth that have just pulled away from the

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Speaker 4: space completely. In our eyes, that's going to be problematic

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Speaker 4: over the long run. So when you look at energy

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Speaker 4: consumption as a whole, right, so you look at you know,

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Speaker 4: go back to two thousand and then fast forward to

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Speaker 4: twenty twenty, global energy consumption increased by fifty percent. Okay,

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Speaker 4: most of the projections say between now and twenty fifty,

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Speaker 4: global energy production will increase by yet another fifty percent.

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Speaker 4: So the way that most investors are acting right now is, Okay,

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Speaker 4: we'll be able to build out this renewable infrastructure which

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Speaker 4: will take the place of oil. Well, first thing, no

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Speaker 4: energy discovery has overtaken previous energy sources in the past, okay,

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Speaker 4: So any time we've come across a new form of energy,

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Speaker 4: it's never totally replaced previous forms of energy. It's been

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Speaker 4: in addition to okay, And it's because of the massive

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Speaker 4: demand will we as a human race for energy. With

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Speaker 4: that being said, we anticipate this demand to pick up and.

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Speaker 3: Supply needs to be there. When you look at private.

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Speaker 4: Markets, particularly in the energy space, they're not geared towards

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Speaker 4: growth whatsoever. Right, So again, a mnemic investment into the

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Speaker 4: space has caused this big dislocation, So we feel money

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Speaker 4: will have to come back into the space eventually when

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Speaker 4: that dislocation rears its ugly ahead.

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Speaker 1: So I hear what you're saying when it comes to

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Speaker 1: renewables wind solar. But the other thing that's really become

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Speaker 1: a hot topic lately as a result of a lot

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Speaker 1: of the power demand, especially where data centers are concerned.

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Speaker 1: The whole artificial intelligence trait has been nuclear. It's certainly

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Speaker 1: come back into the forth front as a maybe a solution.

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Speaker 1: How do you feel about nuclear as kind of a

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Speaker 1: counter availing for somewhat to conventional carbon forms of energy.

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Speaker 4: I think we're going to need all sources of energy

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Speaker 4: going forward, Doug, Right, So, I think there's absolutely a

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Speaker 4: spot for nuclear, there's absolutely a spot.

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Speaker 3: For a wind, solar, so on and so forth.

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Speaker 4: I don't think any one source is going to be

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Speaker 4: powerful enough to replace oil, gas or the majority of

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Speaker 4: what we need as a human race for energy demand.

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Speaker 5: Right.

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Speaker 1: So I want to turn our attention to talk a

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Speaker 1: little bit about markets offshore, especially China, because we have

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Speaker 1: a top legislative body meeting this week. There will review

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Speaker 1: a lot of financial work and hopefully come to some

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Speaker 1: kind of agreement on a little bit more in the

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Speaker 1: way of stimulus. We're talking about trillions of yuan worth

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Speaker 1: of stimulus.

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Speaker 5: Now.

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Speaker 1: Some will go to fortifying the balance sheet of stay

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Speaker 1: downed banks, and that is critical, not many of them

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Speaker 1: are not really in robust shape. But the other thing

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Speaker 1: that's especially critical is to help some of the local

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Speaker 1: governments in China with their financial stress. How are you

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Speaker 1: feeling about some of the movement that we are seeing

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Speaker 1: in China to apply a lot more in the way

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Speaker 1: of stimulus.

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Speaker 4: You know, we're paying close attention to it, but We've

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Speaker 4: always been very cautious when it comes to investment into China,

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Speaker 4: simply because we feel like it's tough to really have

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Speaker 4: eyes into what you're investing in within the country. You know,

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Speaker 4: when you have a communist regime that's running things, it's

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Speaker 4: tough to see exactly what a company is doing and

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Speaker 4: what their ties are to that government. On top of that,

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Speaker 4: I think that China has some structural issues that hopefully

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Speaker 4: stimulus will give it a leg up, but they're going

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Speaker 4: to have to fix some of these structural issues as

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Speaker 4: well as provides stimulus. And one of those, as you mentioned, municipalities,

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Speaker 4: I think I saw a stat where the revenue for

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Speaker 4: municipalities within China forty percent of it is reliant on

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Speaker 4: land sales. Okay, so when real estate collapse apps over there,

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Speaker 4: not only did it affect huge conglomerates within the real

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Speaker 4: estate market, but it also hit their municipalities in a

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Speaker 4: big way. So I don't know how they're going to

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Speaker 4: make up for that size of a gap when it

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Speaker 4: comes to taking a chunk out of revenue like that.

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Speaker 4: Forty percent is credit number.

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Speaker 1: Patrick will leave it there. It's always a pleasure. Thank

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Speaker 1: you for making time to chat with us here on

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Speaker 1: the Daybreak Asia podcast. Patrick Kennedy is founding partner at

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Speaker 1: All Source Investment Management, joining us from Hartford, Connecticut. Joining

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Speaker 1: us now is Adam Coons. He is the chief investment

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Speaker 1: officer at Winthrop Capital Management. Adam joins us from Indianapolis, Indiana,

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Speaker 1: on the eve of the US presidential election. State side, Adam,

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Speaker 1: thank you so much for taking time to chat with us.

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Speaker 1: It was kind of an interesting day today. We had

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Speaker 1: a slump in the equity market, yields down across the curve,

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Speaker 1: the dollar weekend, a lot of folks were saying this

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Speaker 1: was basically an unwinding of the Trump trade. Is that

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Speaker 1: the way you read it?

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Speaker 2: Yeah, a little bit.

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Speaker 5: I mean if you look at the action of Friday,

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Speaker 5: it was kind of the reverse when you look at

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Speaker 5: the dollar and treasuries. So I mean people are positioning

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Speaker 5: or taking off positions. It's you know, it's one of

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Speaker 5: those where there's a lot of uncertainty, and I think

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Speaker 5: the closer we get, and this is as close as

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Speaker 5: we can get, there's just too much uncertainty.

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Speaker 2: So I think you're going to.

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Speaker 5: See a lot of traders who have some sort of

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Speaker 5: be take those off because you know, traders really aren't

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Speaker 5: in the business of just gambling, and so I think

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Speaker 5: when we get this close and the difference is really

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Speaker 5: a coin flip, it's hard to be positioned with such

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Speaker 5: a big news headline market moving event headed away tomorrow.

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Speaker 1: I think it's fair to say there's a pretty high

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Speaker 1: likelihood that we'll get some kind of disputed result in

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Speaker 1: that could drag the vote count out for weeks, maybe

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Speaker 1: even a month. We'll have to wait and see. But

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Speaker 1: could that produce a lot of allolatility in the interregnum.

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Speaker 5: Yeah, undoubtedly, I mean it obviously, it's just going to

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Speaker 5: increase the uncertainty, like I just said, and that anytime

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Speaker 5: markets feel a high level of uncertainty.

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Speaker 2: That's when you see volatility pick up. Captain markets. You know,

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Speaker 2: even if the.

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Speaker 5: Scenario isn't necessarily ideal, if they understand it can price

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Speaker 5: it in. You can still have lower volatility even on

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Speaker 5: a negative e BIT. But when there's uncertainty about the outcome,

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Speaker 5: that's when markets have a really difficult time pricing in

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Speaker 5: the risk and volatility just absolutely spike. So, yeah, you're

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Speaker 5: spot on, And if we did see some sort of

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Speaker 5: contentious result, I think we'd see markets just kind of

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Speaker 5: whipsawing around volatility, the vics would pick up. So yeah,

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Speaker 5: it would be a difficult time to be an investor

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Speaker 5: or even a trader for that matter, during a period

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Speaker 5: like that.

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Speaker 1: So we've got the election, we also have a FED meeting,

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Speaker 1: and conventional wisdom indicates that the Fed's going to cut

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Speaker 1: rates by twenty five points this week. Is that pretty

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Speaker 1: much your view?

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Speaker 2: Yeah, it's hard to go against that at this point.

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Speaker 5: We're so close, and I think it would be difficult

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Speaker 5: for the Fed to cut before.

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Speaker 2: The election and then pause right after the election.

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Speaker 5: So I think that in and of itself, just for

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Speaker 5: them to try to remain somewhat unpolitical, I think they

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Speaker 5: will cut rates.

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Speaker 2: The job number last Friday too was enough for them,

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Speaker 2: I think, to continue to cut.

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Speaker 5: I think you'll see the FED really moving towards this

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Speaker 5: period where they're just trying to equalize the market. I

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Speaker 5: don't think they're trying to aggressively loosen monetary policy. They're

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Speaker 5: just trying to They use the word last time recalibraed,

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Speaker 5: So I do believe that's really what they're trying to

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Speaker 5: do right now. I think what we're going to see

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Speaker 5: is one cut here, and I personally think they're done

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Speaker 5: for the year.

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Speaker 2: I would be surprised. It would have to be some pretty.

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Speaker 5: Significant data to come out, either in the labor market

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Speaker 5: or in inflation, to really instigate them to cut again.

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Speaker 5: I think right now it's seventy five basis points of

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Speaker 5: cuts in twenty twenty four and then kind of a

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Speaker 5: wait and see is the more likely scenario from.

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Speaker 1: The THAED So the other market driver has been earnings.

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Speaker 1: How would you characterize the results that we have seen

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Speaker 1: so far broadly speaking?

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Speaker 5: Broadly speaking, I mean better than expected that's coming off

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Speaker 5: of you know, the bar was set a little bit

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Speaker 5: lower if you look back to the beginning of the

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Speaker 5: summer earnings. The expectation for earnings growth did start to

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Speaker 5: decline as you move through the summer, but it as

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Speaker 5: a way, we came into this earning season and you

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Speaker 5: are seeing companies beat.

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Speaker 2: Especially on the big tech side. I'm liking what I'm seeing.

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Speaker 5: Even if there is a little bit of excess CAPEC

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Speaker 5: spinning that's hurting some companies, you are still seeing upside

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Speaker 5: earnings growth.

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Speaker 2: And I think that was really one of the.

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Speaker 5: Fears throughout this whole year is what we see in

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Speaker 5: earnings recession, and the fact.

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Speaker 2: Of the matter is we're not going to.

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Speaker 5: So I think this earning season has been fairly positive,

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Speaker 5: even though it has been, you know, relatively in line.

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Speaker 5: I think it's positive just that we can even do

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Speaker 5: that and continue this momentum of earnings growth, revenue growth.

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Speaker 2: It's a tremendous story for US docs.

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Speaker 1: So are you pretty upbeat as well when you listen

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Speaker 1: to some of the guidance that these companies are offering

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Speaker 1: upbeat enough?

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Speaker 5: I mean, I think, you know, the growth that we've

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Speaker 5: seen out of companies and the growth we've seen now

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Speaker 5: the SNBC hunter the last two years has been has

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Speaker 5: been very good. But when you look at the last

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Speaker 5: three years, you know, the SNB cup hundred is pretty

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Speaker 5: much right in line with a three year rolling average.

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Speaker 5: So I think, you know, companies are kind of right

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Speaker 5: in line where they should be. And unless we see

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Speaker 5: some really significant rollover of the US economy, I just

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Speaker 5: don't see anything changing. I think a lot of people

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Speaker 5: just have been trying to look into some sort of

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Speaker 5: crystal ball to determine when the next recession is going

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Speaker 5: to be.

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Speaker 2: And I think you got to you gotta stop fighting that.

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Speaker 5: Can you be defensive, absolutely, But the reality is companies

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Speaker 5: are still growing and the US economy is still growing.

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Speaker 2: So I think you still need to be invested in stocks.

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Speaker 5: You know, maybe you know, be a little bit higher quality,

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Speaker 5: lower volatility, but ultimately yeah, I think you know, when

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Speaker 5: you look at kind of the US stock markets, it's

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Speaker 5: very healthy right now.

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Speaker 1: So if I hear the word defensive in my minds,

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Speaker 1: I go to the bond market a little bit. Are

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Speaker 1: there opportunities right now in bonds?

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Speaker 2: Absolutely?

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Speaker 5: I mean I think right now it's probably one of

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Speaker 5: those prime times. You know, you hear this idea of

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Speaker 5: as the sixty to forty portfolio dead, I think it

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Speaker 5: is alive and well right now, when you've got evaluations

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Speaker 5: of stocks fairly in line, and then when you look.

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Speaker 2: At the bond market, that's my favorite place to be

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Speaker 2: right now.

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Speaker 5: I think this is that rare point in time where

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Speaker 5: the risk or asymmetric, meaning that you know, you've got

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Speaker 5: three scenarios. You could have intertrates going up, you can

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Speaker 5: have interest rates staying where they are, interest rates going down,

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Speaker 5: and I think the likelihood of interest rates going up

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Speaker 5: is very very low. But interest rates staying where they

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Speaker 5: are and I can clip a very healthy coupon is attractive,

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Speaker 5: or if rates do go down, that's even more attractive.

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Speaker 5: So I think two out of the three scenarios I

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Speaker 5: win right now if I'm in bond, so I think

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Speaker 5: that makes it a very attractive place to be where

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Speaker 5: you're looking at corporates. I do like some of the

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Speaker 5: mortgage backed securities because he's been spreads widen out there,

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Speaker 5: but generally speaking in investment grade bonds is very very

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Speaker 5: attractive right now.

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Speaker 1: So how are you waiting overall geopolitical risk, whether we're

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Speaker 1: talking about Ukraine and Russia and the fact now that

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Speaker 1: we have North Korean troops in support of Russia in

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Speaker 1: that conflict, then there is Iran and Israel. How are

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Speaker 1: you waiting overall geopolitics as a risk for markets?

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Speaker 5: Well, the term user is black swans here, and I

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Speaker 5: think we've seen probably too many black swans over the

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Speaker 5: last ten years or so, so maybe an overused term.

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Speaker 2: But what I'm really looking at the fact.

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Speaker 5: That we've got more than one kind of building upon

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Speaker 5: each other. And I don't know how any of these

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Speaker 5: are going to work out. No one does. But when

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Speaker 5: I see this kind of culmination of black swans, and

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Speaker 5: I use quote air quotes there, but I see those

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Speaker 5: start to kind of migrate together.

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Speaker 2: That's when I start to become a little.

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Speaker 5: Bit more cautious on you know, Okay, something could happen

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Speaker 5: here that is not priced into markets, and that's really

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Speaker 5: what we're trying to wait. Here are markets pricing in

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Speaker 5: adequately the amount of risk that's out there?

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Speaker 2: And I would say right now, they're probably not.

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Speaker 5: And that's another reason why I like the bond market

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Speaker 5: even more, because you know, if you saw some sort

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Speaker 5: of geopolitical event happen, you would see a flight equality

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Speaker 5: and you would guess you would assume that bonds without

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Speaker 5: performing that market. So that's another reason why we're bonds

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Speaker 5: right now.

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Speaker 1: I'm curious as to whether or not you're seeing opportunities offshore,

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Speaker 1: particularly in Asia. This week in Beijing, the Standing Committee

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Speaker 1: of the National People's Congress will be meeting, and the

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Speaker 1: gathering really, among other things, will be to sign off

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Speaker 1: on a fiscal package. It could be worth trillions in

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Speaker 1: you want. This is something that obviously the economy needs

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Speaker 1: to take pressure off the local governments. At the same time,

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Speaker 1: I think that there is a great deal of concern

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Speaker 1: about some of the stress that the major banks in

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Speaker 1: China are under right now, so a lot of these

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Speaker 1: funds would be used to recapitalize the big banks, the

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Speaker 1: state owned banks in China. How are you feeling about

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Speaker 1: the Chinese market broadly and perhaps some of the other

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Speaker 1: economies that are linked to China economically.

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Speaker 5: This is a difficult one, and in the last round

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Speaker 5: of stimulus headlines that came out, I was essentially saying,

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Speaker 5: this is a good start, but I'm not ready to

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Speaker 5: move into that market until I see a further move,

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Speaker 5: further momentum into STEMA because it just wasn't enough. I'm

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Speaker 5: glad that I made that call and positioning, and I

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Speaker 5: think this is one of those kind of weight and

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Speaker 5: see stories. I typically don't like to do that investing,

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Speaker 5: but this is one where there's plenty of upside if

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Speaker 5: they get it right. And I'm okay being a little

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Speaker 5: bit late to this.

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Speaker 2: Story rather than be early and be wrong.

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Speaker 5: So I'm gonna sit here on the sidelines and see

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Speaker 5: how this next package comes out. If it is a

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Speaker 5: package that looks like it's really going to help stabilize

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Speaker 5: and stimulate, I will move.

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Speaker 2: Back to that market.

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Speaker 5: It's the China stock market is one that I've been

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Speaker 5: salivating on the sidelines, waiting for the moment to be

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Speaker 5: able to jump back in because I think the evaluations

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Speaker 5: are just way too cheap. I think there's a lot

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Speaker 5: of opportunity there. It's just a matter of seeing if

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Speaker 5: that stimulus can kind of come in and really reinvigorate

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Speaker 5: that market. So I'm hopeful for that, and if I

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Speaker 5: do start to see momented to the upstart, I move in.

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Speaker 5: Outside of the China story, I still like India. I

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Speaker 5: think that's attached enough to If you see growth out

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Speaker 5: of China, it will just percolate into India as well,

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Speaker 5: which has been outperforming already. So I still like that story.

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Speaker 5: But outside of that, it's it's a difficult story. If

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Speaker 5: you look at Japan on the developed side, I just

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Speaker 5: think there's just too many headwinds and so and staying

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Speaker 5: away from that when I'm looking at Southeast Asia. But

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Speaker 5: like I said, India, China, those are really the top

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Speaker 5: plays there. If we see Stamuels pick.

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Speaker 1: Up good stuff, Adam will leave it there. Thank you

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Speaker 1: so much for making time to chat with us. See

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Speaker 1: is Adam Koons the chief investment officer at Winthrop Capital Management,

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Speaker 1: joining us from Indianapolis, Indiana. Here on the Daybreak Asia podcast.

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