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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Now, earning season is in full swing and election risks

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Speaker 2: are a rising as well. Let's get some market perspective

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Speaker 2: from Anne Walsh. She is the chief investment officer at

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Speaker 2: Guggenheim Partner's Investment Management. She joins us here on set

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Speaker 2: and great to have you in the studio. Thanks so

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Speaker 2: much for coming. Let me first ask you about it.

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Speaker 2: Seems like what Lee was telling us is that ups

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Speaker 2: as a bellweather, the shipping volumes aren't as bad. Right,

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Speaker 2: It's a business. It's a margin problem that they're having.

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Speaker 2: Having said that, I know you expect the economy to

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Speaker 2: slow down. So what's your view on GDP and growth?

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Speaker 3: Well, thanks so much for having me here today.

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Speaker 4: I'm so excited for the new format, so congratulations.

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Speaker 3: You know it is interesting.

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Speaker 4: We're a little bit more pessimistic, I guess would be

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Speaker 4: the right word with regard.

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Speaker 3: To where the economy is going.

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Speaker 4: We think it's going to be a little bit slower

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Speaker 4: than most of our peers in the industry believe. So

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Speaker 4: looking for real GDP coming in second half of the year,

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Speaker 4: moving into that one point six to say one point

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Speaker 4: eighty nine level relative to about the two percent level

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Speaker 4: that I think most of our peers are seeing and expecting.

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Speaker 4: What we've really seen is a very bifurcated economy. There

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Speaker 4: really are two economies in the US right now. There's

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Speaker 4: those with access to capital, those that are larger businesses

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Speaker 4: the wealth class, relative to the other part of the economy,

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Speaker 4: which is small and mid sized businesses, which make up

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Speaker 4: fifty percent of the economy. And then also you know,

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Speaker 4: income earners in the lower fifty percent bracket. And this

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Speaker 4: is a very different economy between these two.

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Speaker 1: So how does that bifurcated economy that you describe work

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Speaker 1: its way into the markets? Of course, against that backdrof,

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Speaker 1: we've spoken to a lot of investors who say quality, equality, quality,

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Speaker 1: Does that hold in the fixed income market as well?

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Speaker 4: Absolutely, and in fact I think that's the place to be.

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Speaker 4: I mean, after all, when the Fed started raising rates,

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Speaker 4: I mean they put the income back in fixed income

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Speaker 4: and so as a result, higher credit quality fixed income

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Speaker 4: in particular at this juncture is a really good place.

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Speaker 3: To hang out.

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Speaker 4: You're getting well paid for, you know, being in the

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Speaker 4: more conservative end of the fixed income markets and with

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Speaker 4: you know, little risk.

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Speaker 3: I think from spread widening.

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Speaker 4: Fundamentals are very strong in corporate America, those that are

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Speaker 4: in the capital markets, and even within high credit quality

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Speaker 4: end of the high yield market, you can still get

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Speaker 4: paid a very nice yield for not a lot of risk.

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Speaker 3: What about the lower end.

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Speaker 5: You see leverage finance markets coming back. You see people

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Speaker 5: coming to market with riskier deals and the demand is insatiable.

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Speaker 5: Do you think investors are ignoring.

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Speaker 3: A lot of the risk out there?

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Speaker 4: Well, again, in the spifurcated economy, those in the triple

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Speaker 4: C rated category, for example, have probably the most risk

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Speaker 4: you know, profit margins, which is where we started, for example,

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Speaker 4: with this conversation. I think that's going to be a

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Speaker 4: problem potentially access to capital. You know, we really don't

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Speaker 4: talk a lot these days about the fact that the

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Speaker 4: Fed's continuing its quantitative tightening. Liquidity has been very strong,

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Speaker 4: Fiscal spending has been very strong.

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Speaker 3: It's kept liquidity very high.

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Speaker 4: As liquidity finally sort of recedes as these long and

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Speaker 4: variable lags take effect, that's going to be the part

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Speaker 4: of the market that is the most susceptible.

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Speaker 1: And you said that the income is back in fixed income,

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Speaker 1: and that's been true over the past several years. But

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Speaker 1: when you think about a portfolio holistically.

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Speaker 2: Maybe the income is back.

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Speaker 1: But is that sort of protection, that buffer, that diversification

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Speaker 1: that bonds typically play in haven situations, is that back?

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Speaker 3: I believe it is.

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Speaker 4: Frankly, you know, the balance between the equity market relative

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Speaker 4: to fixed income. I think that's an important place to

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Speaker 4: be thinking about right now. This diversification. Equities have been

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Speaker 4: very strong. Obviously, the S and P five hundred performance

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Speaker 4: has been excellent, but it's also been highly concentrated. Lately,

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Speaker 4: We've made a big deal in the markets with regard

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Speaker 4: to the fact that there's been some broadening out, but

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Speaker 4: there's still risk there.

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Speaker 3: At the same risk that affects the triple C.

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Speaker 4: Particular part of the fixed income market also affects the

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Speaker 4: small and mid sized businesses and that more broadened out

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Speaker 4: market relative to the Magnificent seven, for example. So I

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Speaker 4: think that diversification benefit is definitely important, and that's why

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Speaker 4: fixed income has an absolute role to play in a

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Speaker 4: blended portfolio.

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Speaker 5: Well double down there, because if the bigger companies, the

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Speaker 5: large caps have really been the comfortable place for so

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Speaker 5: many investors to be. Does the fixed income story translate

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Speaker 5: into the broadening. Do you buy that story for small

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Speaker 5: and mid sized companies Given the worries that some investors

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Speaker 5: have about the profitability you're seeing there, the leverage, and

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Speaker 5: the worry you've been mentioning about a slowing economy, I.

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Speaker 4: Think we have to realize something that's really happened differently

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Speaker 4: in the US capital markets over the last decade, and

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Speaker 4: that is the movement from a public market capital markets

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Speaker 4: to a private market capital markets. And as a result,

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Speaker 4: a lot of that risk has been shifted. Small and

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Speaker 4: mid size borrowers are really reliant on banks, and banks

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Speaker 4: are suffering more in this inverted yield curve environment and

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Speaker 4: from this potential risk area, from the very tight conditions

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Speaker 4: that are existing with the FED continuing to remain higher

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Speaker 4: for longer.

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Speaker 5: And while CIO of Guggenheim Partner's Investment Management, there are

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Speaker 5: a lot of worries that if Trump were to take

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Speaker 5: office then there could be an inflationary force under the market.

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Speaker 3: Do you share that view?

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Speaker 5: Can yields actually be rising into next year not falling?

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Speaker 4: So you know, if we just take one step back

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Speaker 4: for a second and just think about the gravity of

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Speaker 4: where we are in history, we are a wash in

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Speaker 4: what I would refer to as grace ones. We had

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Speaker 4: a former President Trump shot at an assassination attempt. We've

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Speaker 4: had the current leading UH contender for the Democrat Party,

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Speaker 4: current President Biden. You know, step back, this is an

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Speaker 4: unprecedented time and in an otherwise larger.

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Speaker 3: Backdrop, if you will, of all.

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Speaker 4: Sorts of other unprecedented economic milestones that we've seen a

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Speaker 4: huge amount of fiscal spending in a very low unemployment world,

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Speaker 4: you know, tightening by the FED.

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Speaker 3: All of this is going on, and now we have.

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Speaker 4: Of course the volatility made worse by by the question

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Speaker 4: of policies.

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Speaker 3: So to your.

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Speaker 4: Question with regard to where we are in the risk

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Speaker 4: of inflation, quite clearly the bond market thinks so that

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Speaker 4: there's a risk of inflation in these policies being inflation

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Speaker 4: because we've seen a bear steepener, and so as a result,

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Speaker 4: I think the market is perceiving additional risks. I'm not

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Speaker 4: entirely sure that I'm convinced that it's because of inflation fears.

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Speaker 4: I think it's just because of the sheer amount of

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Speaker 4: volume that we have to see get placed into the

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Speaker 4: markets in the treasury space, and what we're seeing is

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Speaker 4: a bit of a sell off in advance of expectations

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Speaker 4: and more treasury issuance. We'll keep on with the spickets

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Speaker 4: are still on in Washington. We're still seeing fiscal spending

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Speaker 4: and that's still going to continue.

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Speaker 1: Kathy Jones of Charles Schwab made a great point on

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Speaker 1: our weekend special because to your point, there's been a

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Speaker 1: lot of history happening. But on that weekend special, she said,

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Speaker 1: when it comes to politics, short term it doesn't matter,

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Speaker 1: but long term it does. When you think about some

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Speaker 1: of the potential policies that are being floated right now,

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Speaker 1: And to that point, I'm wondering how you're thinking about

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Speaker 1: it as an investor. We talk about the steepener, the flattener,

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Speaker 1: some of these one off moves that we're seeing, but

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Speaker 1: long term, how are you thinking about actually putting this

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Speaker 1: into a portfolio.

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Speaker 4: So in the what i'll call the intermediate term, I

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Speaker 4: think that probably the more important information is still coming

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Speaker 4: from inflation coming down and our expectation that it will

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Speaker 4: continue to decline. And I think we're going to see

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Speaker 4: the core PCE in line with expectations, may be coming

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Speaker 4: in better and by the end of this year substantially

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Speaker 4: better relatively speaking, and a little better.

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Speaker 3: Than our peers are expecting.

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Speaker 4: And then at the same time we see GDP slowing,

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Speaker 4: we see.

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Speaker 3: Unemployment rising a bit.

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Speaker 4: So in the intermediate term, I think that FED policy

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Speaker 4: is really going to drive the markets, at least in

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Speaker 4: the fixed income space, and obviously earnings and the potential

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Speaker 4: slow down in the S and P five hundred and

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Speaker 4: the equity markets moving forward. Beyond that, I think the

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Speaker 4: number one thing I'm looking at is tax policy, and

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Speaker 4: if Trump were to win again, I think we'd see

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Speaker 4: deregulation again as part of an impetus there. But as

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Speaker 4: far as international foreign policy, obviously tariffs, I think that

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Speaker 4: will have a moving a on the markets as well.

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Speaker 4: But I think taxes and deregulation on the one side,

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Speaker 4: I think both parties are going to continue to spend

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Speaker 4: and we're going to continue to see fiscal spending and

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Speaker 4: that's going to continue to have an impact on how

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Speaker 4: much treasure issues.

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Speaker 2: So does that you know, I've been doing this job

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Speaker 2: at Bloomberg here for twenty five years, and every few

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Speaker 2: years somebody freaks out about the deficit and the debt

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Speaker 2: national debt. Right it's massive, I realize and we're making

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Speaker 2: interest payments now more than one hundred billion dollars a month.

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Speaker 2: We're spending far more on our debt than we do

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Speaker 2: on our military. At this point, however, no one seems

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Speaker 2: to care.

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Speaker 3: I mean, we.

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Speaker 1: Talked to Steve Eisman, doesn't care.

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Speaker 3: I talked to Ed Hayman. He doesn't really care. I mean,

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Speaker 3: not because he doesn't care.

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Speaker 2: But because the treasury market's not freaking out, the dollar

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Speaker 2: is still strong.

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Speaker 3: Does it matter? It matters?

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Speaker 4: I think however, the markets have digested it as a

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Speaker 4: news element and as part of the backdrop, and so

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Speaker 4: far the sustainability of the debt payments hasn't been called

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Speaker 4: into question.

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Speaker 3: We've had a.

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Speaker 4: Few bobbles with regard to rating agencies and the like.

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Speaker 4: But the truth is is that as long as the

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Speaker 4: markets appear to feel that it's stable, then this becomes

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Speaker 4: a non event. And that's why these other participants are saying, yeah,

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Speaker 4: don't worry, nothing to see here, don't look.

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Speaker 2: Even Gary Shilling doesn't care.

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Speaker 5: Well listen, though, at one point, though you mentioned this

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Speaker 5: pigot's still on in the treasury market. People are soaking

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Speaker 5: up the issuance. So far, it's been on the shorter

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Speaker 5: end of the curve for the most part. Here, at

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Speaker 5: what point does that spigot start to close, or at

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Speaker 5: least start to move towards being more closed.

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Speaker 4: Well, I think one of the other false narratives has

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Speaker 4: been that our international friends have stopped buying our treasuries.

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Speaker 3: That's not true. They are still buying.

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Speaker 4: And as long as their remains an appetite for treasuries,

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Speaker 4: and as long as the US dollars the reserve currency,

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Speaker 4: then it appears that that we get to that world

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Speaker 4: of what I call stability. It's not optimal, but it's stable,

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Speaker 4: and so for that time being, as long as that's

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Speaker 4: the backdrop, I don't see a whole lot of change.

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Speaker 1: And I do want to talk about a little bit

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Speaker 1: more in your CIO role. We're talking about treasury issuance.

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Speaker 1: Of course, a lot of issuance at the short end

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Speaker 1: of the.

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Speaker 3: Curve that's been met by very, very.

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Speaker 1: Robust demand, if you want to call it that six

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Speaker 1: trillion dollars in money market funds.

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Speaker 3: How are you thinking about cash right now.

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Speaker 1: Especially with yields at five percent and change.

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Speaker 4: Well, I think that cash is very attractive for many investors.

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Speaker 4: There's still six trillion dollars sitting on the sidelines, ready

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Speaker 4: ready to be redeployed into some other part of the

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Speaker 4: market when the opportunity is right. But at five percent ish,

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Speaker 4: it's very attractive to sit there with no risk and

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Speaker 4: yet get that kind of return. And if you compare

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Speaker 4: that to pre COVID in the year's post financial crisis,

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Speaker 4: that's extremely attractivelative to history.

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Speaker 3: And of those.

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Speaker 5: Grace ones that you started off talking about today, which

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Speaker 5: are you most concerned about.

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Speaker 4: I'm concerned about the fact that we have very a

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Speaker 4: unique set of of of dynamics that are going on

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Speaker 4: in the economy right now that we're not accustomed to seeing. Normally,

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Speaker 4: with this timeline, we'd have seen the Fed's actions really

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Speaker 4: slow down the economy, we'd see unemployment rising. We definitely

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Speaker 4: have already seen the kind of economy reaction that we.

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Speaker 3: Would have otherwise.

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Speaker 4: But because of fiscal spending, because of these strange cross

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Speaker 4: currents that we're getting, it's creating a level of volatility

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Speaker 4: that's almost unprecedented, particularly in fixed income markets and relative

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Speaker 4: to the you know, the Vicks for example, which has

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Speaker 4: been for the most part pretty benign. And I think

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Speaker 4: it's this this uncertainty that is relative to history. As investors,

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Speaker 4: we tend to look for patterns, and what we're seeing

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Speaker 4: this time around is very few of the same patterns,

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Speaker 4: and it makes it very challenging to look forward and

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Speaker 4: prognosticate what's going to happen.

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Speaker 3: As we like to say, it makes that crystal ball

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Speaker 3: very cloudy.

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Speaker 4: And I think that's one of the most challenging things

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Speaker 4: about being an investor right now, is the lack of

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Speaker 4: paradigm or pattern that we're used to seeing.

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Speaker 1: And I really enjoyed this conversation. Great to have you

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Speaker 1: on set and spend so much time with us. Our thanks,

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Speaker 1: of course to Ann Waals. She is Guggenheim Partner's Investor

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Speaker 1: Management CIO