WEBVTT - Trade, Fixed Income, Kelley Blue Book 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast on Paul Swing You. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits, each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:24.439 that Bloomberg dot com. President Trump said there is a 0:00:24.520 --> 0:00:27.360 quote very good chance to make a trade deal with China, 0:00:27.680 --> 0:00:31.080 but the unrest in Hong Kong is a quote complicating factor. 0:00:31.120 --> 0:00:33.960 He was speaking on Fox and Friends earlier this morning. 0:00:33.960 --> 0:00:36.479 He also said that he would not commit necessarily or 0:00:36.479 --> 0:00:39.800 didn't necessarily say whether he was going to sign the 0:00:39.840 --> 0:00:43.240 bill that was passed by both houses of Congress, basically 0:00:43.320 --> 0:00:45.319 saying that that that that the U S stands by 0:00:45.520 --> 0:00:49.720 Hong Kong. Brendan Murray joining us now Bloomberg's Bloomberg's reporter 0:00:49.840 --> 0:00:52.559 and editor covering all things trade. Can you give us 0:00:52.600 --> 0:00:55.160 a sense of where we are and what kind of 0:00:55.200 --> 0:00:57.360 credence we can give to a statement like this by 0:00:57.400 --> 0:01:00.640 President Trump? Well, you heard the President's say, uh, I 0:01:00.760 --> 0:01:03.200 send a couple of different signals there one was yes, 0:01:03.240 --> 0:01:05.720 we're very close to a deal. But he also talked 0:01:05.920 --> 0:01:09.000 about some of the tougher issues that they still have 0:01:09.160 --> 0:01:14.840 yet to resolve, among those being, uh, the intellectual property 0:01:16.040 --> 0:01:18.360 oversight that China that the US wants China to have 0:01:18.480 --> 0:01:21.440 greater uh control over and and and and the and 0:01:21.480 --> 0:01:24.640 the forced transfer of technology. So these are these are 0:01:24.680 --> 0:01:27.480 issues that uh you know that that they still have 0:01:27.600 --> 0:01:30.440 yet to to come to an agreement on. Uh. You know, 0:01:30.800 --> 0:01:33.559 Trump has said four weeks now that we're very close 0:01:33.560 --> 0:01:35.560 to a trade deal. It was six weeks ago today 0:01:36.000 --> 0:01:38.319 when he sat in the Oval Office and said, we 0:01:38.400 --> 0:01:40.000 have a deal. All we have to do is get 0:01:40.000 --> 0:01:42.360 it on paper. Uh so, and he said we could 0:01:42.400 --> 0:01:44.280 do that in three to five weeks. Here we are 0:01:44.360 --> 0:01:47.280 week six and he's still saying it. And we still 0:01:47.280 --> 0:01:51.240 don't have any sign that that that an agreement is 0:01:51.720 --> 0:01:55.160 in fact imminent. Um, it could come any day now, 0:01:55.360 --> 0:01:58.600 or it could drag on from several more weeks. So Brendan, 0:01:58.720 --> 0:02:00.720 both sides, the U S And China have said that 0:02:00.760 --> 0:02:04.200 they ideally would like to keep the Hong Kong issue 0:02:04.280 --> 0:02:08.480 and the trade negotiation issue separate. Do you think that's possible? 0:02:09.800 --> 0:02:12.120 I think this is one of the things that that 0:02:12.200 --> 0:02:15.400 that that President Trump will offer as a concession to 0:02:16.480 --> 0:02:19.360 his Chinese counterpart if if they can indeed get close 0:02:19.400 --> 0:02:21.560 to a deal, he could just say, you know what, 0:02:22.160 --> 0:02:24.520 I won't sign that bill, and but you know, this 0:02:24.600 --> 0:02:26.880 is what I want from you. It's it's it's leverage 0:02:27.360 --> 0:02:31.120 in trade negotiations and and uh, and that's that's what 0:02:31.280 --> 0:02:34.240 this piece of legislation is likely to become. What are 0:02:34.240 --> 0:02:37.720 we hearing from the Chinese side? We heard President Shi 0:02:37.800 --> 0:02:41.280 Jim ping speak overnight about the need for mutual respect 0:02:41.840 --> 0:02:44.440 and equality in a deal, which is which are some 0:02:44.480 --> 0:02:47.919 guiding principles that China has demanded all along. But is 0:02:47.960 --> 0:02:50.160 that significant? Because I saw that headline and I was thinking, 0:02:50.160 --> 0:02:52.000 how do I frame that in terms of does this 0:02:52.040 --> 0:02:54.040 make a trade deal more or less likely? It is 0:02:54.080 --> 0:02:56.800 significant when you hear President Trump, as he did just 0:02:57.280 --> 0:02:59.600 you know, a few hours ago, say I don't like 0:02:59.680 --> 0:03:02.560 that we're equality. China has been ripping us off for 0:03:02.840 --> 0:03:06.360 decades now. Uh, you know that this can't be a 0:03:06.400 --> 0:03:08.000 fair deal. This is going to be a deal that 0:03:08.040 --> 0:03:11.480 benefits us. So you you add those two things together, 0:03:11.600 --> 0:03:15.520 and you've got two leaders who are still apparently very 0:03:15.560 --> 0:03:19.040 far apart, brendon what are next steps? I think the 0:03:19.160 --> 0:03:23.160 last thing I read was a US delegation had been 0:03:23.200 --> 0:03:27.200 invited to Beijing by China. Is there anything on the calendar? 0:03:27.919 --> 0:03:31.560 We don't have any information that that invitation has been 0:03:31.600 --> 0:03:36.400 accepted yet. Uh that that uh was made last week 0:03:36.960 --> 0:03:40.520 and the the U s Trade representative, Robert Leitheiser, has 0:03:40.520 --> 0:03:42.600 been running around Capitol Hill in the past few days 0:03:42.880 --> 0:03:46.920 trying to work out the US Canada Mexico deal and 0:03:46.960 --> 0:03:50.320 get a speaker Pelosi to sign up to that. So 0:03:50.600 --> 0:03:52.880 he said his hands full with with some other things. 0:03:52.920 --> 0:03:56.040 Now he can do multiple things at once, but his 0:03:56.160 --> 0:03:58.760 priority is not flying to Beijing in the next couple 0:03:58.840 --> 0:04:01.760 of days. Uh uh. And certainly with the US holiday 0:04:01.800 --> 0:04:05.400 next week, you know it's it would be. It would 0:04:05.440 --> 0:04:07.440 be a stretch to think it could come together before 0:04:07.640 --> 0:04:10.160 the middle of next week. As Paul was mentioning, the 0:04:10.440 --> 0:04:13.920 trade negotiators on both sides are trying to distinguish the 0:04:13.960 --> 0:04:17.720 Hong Kong issue is unique and separate from other negotiations 0:04:17.720 --> 0:04:20.920 having to do with trade. What's the tipping point here 0:04:21.440 --> 0:04:24.760 for when that is impossible? Well, I think the real 0:04:25.600 --> 0:04:30.520 this whole thing will I think tip when the US 0:04:31.240 --> 0:04:35.800 agrees or disagrees to roll back tariffs that are already 0:04:35.800 --> 0:04:40.080 in place. That seems to be where the US is. 0:04:40.680 --> 0:04:42.880 You know, China really wants the US to to give 0:04:42.920 --> 0:04:45.560 some ground on that, and the US is, you know, 0:04:45.600 --> 0:04:49.080 the whole, the whole US economic strategy with China is 0:04:49.120 --> 0:04:54.200 to apply tariffs and keep them applied until you extract 0:04:54.640 --> 0:04:56.920 you know, changes out of China that you know, bringing 0:04:56.960 --> 0:04:59.000 it more in line with you know, other sort of 0:04:59.040 --> 0:05:04.000 market economy. Uh. So that is where sort of the 0:05:04.080 --> 0:05:08.920 rubber meets the road in this whole, in this whole saga. Um, 0:05:09.040 --> 0:05:12.560 the Hong Kong issue, as President Trump said, you know, 0:05:12.680 --> 0:05:15.719 it is definitely complicating things. But whether it's enough to 0:05:15.960 --> 0:05:18.039 you know, totally throw it off the rails, uh, you 0:05:18.080 --> 0:05:19.600 know as a total as a different question that I 0:05:20.480 --> 0:05:23.679 don't I don't see it happening. So, Brendan, we're talking 0:05:23.720 --> 0:05:26.560 really about a phase one type of deal. That's all 0:05:26.600 --> 0:05:29.640 we're talking about right now, Is that right? That's right? 0:05:29.760 --> 0:05:33.080 So Phase one, as President Trump laid out a couple 0:05:33.080 --> 0:05:37.440 of weeks ago, involves agriculture purchases on China's behalf, you know, 0:05:37.480 --> 0:05:41.880 protection of intellectual property of American companies and some of 0:05:41.880 --> 0:05:46.200 these other sort of structural issues, whether they can get those, 0:05:46.560 --> 0:05:48.440 you know, as a whole. Another question the you know 0:05:48.480 --> 0:05:51.320 they've we've heard you know, phase two. Well we'll come 0:05:51.440 --> 0:05:55.520 right afterwards, and maybe even a phase three, so you know, 0:05:55.680 --> 0:05:58.400 these things we're we're about to head into year number 0:05:58.440 --> 0:06:01.480 three of these negotiations with you know, not even the 0:06:01.800 --> 0:06:05.880 simplest issues worked out in phase one. So we could 0:06:05.920 --> 0:06:08.000 be you know, we could be looking at something that lasts, 0:06:08.040 --> 0:06:10.839 you know, through the election next year and beyond. Perhaps 0:06:11.080 --> 0:06:13.680 Brendon Mury, thanks so much for joining us. Brendan Murray 0:06:13.680 --> 0:06:15.960 covers all things trade for Bloomberg News, joining us from 0:06:15.960 --> 0:06:30.239 our London bureau DIDGA. Under the surface of credit markets, 0:06:30.279 --> 0:06:32.400 you could find a bit of a conundrum. You can 0:06:32.400 --> 0:06:35.080 see that everything seems to be chugging along on average, 0:06:35.120 --> 0:06:37.920 but if you take a look at the riskiest credits, 0:06:37.920 --> 0:06:41.039 the triple C rated debt, it has sold off and 0:06:41.080 --> 0:06:44.000 continued to sell off, with yields on the securities extra 0:06:44.080 --> 0:06:46.880 yields now rising to the highest since two thousand sixteen. 0:06:46.960 --> 0:06:49.560 Joining us is Ken Monahan, co director of Global High 0:06:49.600 --> 0:06:54.239 Yield in a Moondy pioneer in our Bloomberg Interactive Broker Studios, Ken, 0:06:54.440 --> 0:06:56.920 do you think that this is a harbinger of more 0:06:57.000 --> 0:07:00.040 pain to calm the weakness that's been persistent with in 0:07:00.080 --> 0:07:03.279 the triple C rated UH category here? Well, a Lisa, 0:07:03.360 --> 0:07:05.520 you know, the triple C portion of the market has 0:07:05.560 --> 0:07:08.160 often been viewed as kind of a big risk indicator 0:07:08.200 --> 0:07:10.680 for the overall credit markets, and when those trade to 0:07:10.800 --> 0:07:13.240 very high levels, which they're at right now, where spreads 0:07:13.240 --> 0:07:16.680 are wide, yields are high, and they've underperformed woefully in 0:07:16.720 --> 0:07:19.320 two thousand and nineteen, usually people say, Okay, well, that's 0:07:19.320 --> 0:07:21.080 a sign of not such good things to come and 0:07:21.120 --> 0:07:23.600 perhaps a recession. I would think in this case, actually 0:07:23.600 --> 0:07:25.840 it's a little different because there's so much of it 0:07:25.880 --> 0:07:27.680 that's tied up with the energy sector and then a 0:07:27.720 --> 0:07:31.920 few other idiosyncratic situations that that's really driving it. You know. 0:07:32.000 --> 0:07:35.440 You know, we had said earlier that sometimes triple cs 0:07:35.480 --> 0:07:37.440 are the tail that wagged the dog. This time, I 0:07:37.480 --> 0:07:39.200 don't think the fact that the dog the tail is 0:07:39.200 --> 0:07:42.400 wagging that hard is indicative of a major problem. And 0:07:42.400 --> 0:07:44.200 this is what a lot of people are saying. This 0:07:44.280 --> 0:07:48.160 is a specific sector issue energy and then there are 0:07:48.160 --> 0:07:51.600 a couple of retailers, etcetera that have also struggled, along 0:07:51.600 --> 0:07:54.920 with some pharmaceutical companies a number of other uh types 0:07:54.960 --> 0:07:58.240 of stories. I'm just wondering what it says about a 0:07:58.280 --> 0:08:01.200 time when we have so much, such a liquidity, when 0:08:01.200 --> 0:08:04.040 we have you know, such a risk on kind of 0:08:04.160 --> 0:08:07.200 overall feel that there are an increasing number of companies 0:08:07.200 --> 0:08:10.640 going bankrupt, even in some of these troubled sectors right Well, 0:08:10.760 --> 0:08:12.840 you know, I think the energy is a key piece 0:08:12.880 --> 0:08:14.920 of that. And I think if you look at the 0:08:15.000 --> 0:08:17.680 energy sector and you recognize how much money had gone 0:08:17.720 --> 0:08:21.280 into it over the previous ten years and really facilitated 0:08:21.600 --> 0:08:25.800 the expansion of the shale boom in the United States, um, 0:08:25.880 --> 0:08:28.840 you maybe had too much money chasing too few opportunities. 0:08:29.040 --> 0:08:31.160 And I think if you look at those companies, by 0:08:31.200 --> 0:08:34.720 and large, they have not been able to generate a 0:08:34.760 --> 0:08:39.440 sustainable return on capital. And companies that can't return capital 0:08:39.720 --> 0:08:42.720 or generator return on capital over time, I just can't 0:08:42.800 --> 0:08:45.679 raise new money, which is why these companies are in difficulty. 0:08:45.960 --> 0:08:48.320 So I actually talked to a lot of it distressed 0:08:48.320 --> 0:08:51.520 investors and they are actually highlighting energy as one of 0:08:51.559 --> 0:08:54.120 the sectors they think they can actually find value and 0:08:54.200 --> 0:08:58.160 add value? Is it if you do your real bottoms 0:08:58.240 --> 0:09:01.320 up research. Are there still opportunities there? I think you're 0:09:01.400 --> 0:09:04.280 right that there are opportunities and uh, you know, but 0:09:04.320 --> 0:09:06.440 they're they're not a whole lot of them out there. 0:09:06.679 --> 0:09:08.760 I think you really kind of look under rocks here, 0:09:09.120 --> 0:09:11.920 um and uh, but there are some out there, and 0:09:11.920 --> 0:09:14.160 I think we are looking at them. But I would 0:09:14.160 --> 0:09:17.600 not expect in two thousand and twenty necessarily that you'll 0:09:17.600 --> 0:09:21.200 see a wholesale return or surge or returns for the 0:09:21.320 --> 0:09:25.079 energy sector. And if you do, because it's not impossible, 0:09:25.240 --> 0:09:27.240 what it will probably indicate is that a lot of 0:09:27.280 --> 0:09:29.920 the companies have washed out of the index. So when 0:09:30.760 --> 0:09:33.360 a company goes bankrupt, it drops out of the index. 0:09:33.360 --> 0:09:35.640 So if you had enough energy companies going bankrupt in 0:09:35.640 --> 0:09:38.280 early two thousand twenty, um, the rest of them that 0:09:38.320 --> 0:09:41.040 are maybe sustainable, they could have a big rally. How 0:09:41.080 --> 0:09:44.880 far in the shake up are we It's interesting. I 0:09:44.920 --> 0:09:47.120 was up with the capital markets team of one of 0:09:47.120 --> 0:09:50.760 the largest banks yesterday and and talking to them about it, 0:09:50.800 --> 0:09:55.000 and it's amazing how few companies have gotten religion. Um, 0:09:55.040 --> 0:09:57.960 you know, they were offered a second lean paper early 0:09:58.040 --> 0:10:01.080 this year at seven percent, then by midsummer it was 0:10:01.160 --> 0:10:04.480 nine percent. Now there maybe eleven or twelve percent, and 0:10:04.720 --> 0:10:07.120 they still haven't gotten on board. They still haven't figured 0:10:07.120 --> 0:10:09.600 out there's still hope springs eternal. But you know, it's 0:10:09.600 --> 0:10:12.000 the old adage hopes is not a business plan and 0:10:12.120 --> 0:10:14.600 uh and we're we're stuck in that situation right now 0:10:14.640 --> 0:10:17.640 for many of these companies. All right, so energies, dicey 0:10:17.720 --> 0:10:20.240 only for the brave. What are some of the sectors 0:10:20.240 --> 0:10:22.480 that you think are attractive range? I mean high you market, 0:10:22.480 --> 0:10:24.240 I guess up eleven twelve percent this year, it's had 0:10:24.240 --> 0:10:26.280 a pretty good year. Are there still areas that you 0:10:26.280 --> 0:10:29.040 still find attractive? You know, it's it's we're still looking 0:10:29.120 --> 0:10:31.840 under rocks as well in general in this market because 0:10:31.880 --> 0:10:35.440 the returns have been so significant this year. Let's recognize, though, 0:10:35.480 --> 0:10:37.880 what happened is in the fourth quarter of last year, 0:10:37.920 --> 0:10:41.200 we all experienced misery. If anything you had that was risk, 0:10:41.240 --> 0:10:44.200 whether it's equities or high yield, got absolutely pummeled. So 0:10:44.240 --> 0:10:46.760 effectively the return that should have taken place in two 0:10:46.760 --> 0:10:49.840 thousand and eighteen got sucked into two thousand and nineteen, 0:10:49.880 --> 0:10:53.680 so effectively is supercharged the performance for two thousand and nineteen. 0:10:53.960 --> 0:10:55.720 But where we look at when we look at things 0:10:55.840 --> 0:10:58.480 where they are now, it's much going to be much 0:10:58.480 --> 0:11:01.000 more difficult to generate a return Next year. Two thousand 0:11:01.080 --> 0:11:03.160 twenties not going to be a double digit year for 0:11:03.160 --> 0:11:05.160 for high yield. It's just not possible. What's it going 0:11:05.200 --> 0:11:07.360 to be? I think you're looking at kind of mid 0:11:07.400 --> 0:11:09.800 single digits. It could be even lower depending on what 0:11:09.880 --> 0:11:13.280 happens with the washout of certain sectors like energy. Do 0:11:13.320 --> 0:11:16.200 you think that you are guaranteed bigger returns going into 0:11:16.240 --> 0:11:18.760 the double B or into the single B or into 0:11:18.800 --> 0:11:23.240 the triple C. That's the big question. I would tell 0:11:23.280 --> 0:11:26.280 you that the problem with double bees right now is 0:11:26.440 --> 0:11:28.199 one they've got a lot of interest rate to risk 0:11:28.240 --> 0:11:31.080 on them. And to the other problem I would suggest 0:11:31.280 --> 0:11:33.480 is that there's been so much money that's gone into 0:11:33.520 --> 0:11:38.040 double bees from what we call crossover investors otherwise investment 0:11:38.080 --> 0:11:40.680 grade buyers that are so desperate to get some extra 0:11:40.760 --> 0:11:43.679 yield into their portfolio that they're dipping down into buy 0:11:43.720 --> 0:11:46.839 things they don't normally buy. Double be credits, that they've 0:11:46.840 --> 0:11:48.920 compressed the spread on those bonds, And if we look 0:11:48.960 --> 0:11:50.960 at those new issues that come out recently a little 0:11:51.040 --> 0:11:53.280 last several weeks, for example, in the double B space, 0:11:53.840 --> 0:11:56.120 very few of them are trading up significantly. They kind 0:11:56.120 --> 0:11:58.280 of come out, they price it par four and a 0:11:58.320 --> 0:12:00.560 half four and three quarter coupon, and it just sits 0:12:00.600 --> 0:12:04.040 there now arguably, you know, maybe if you know, if 0:12:04.040 --> 0:12:05.839 it stays there at that level for all, the two 0:12:05.840 --> 0:12:08.240 thousand and twenty four and three quarter return may not 0:12:08.320 --> 0:12:11.360 look so bad relative to investment grade, particularly if interest 0:12:11.440 --> 0:12:14.040 rates rise a bit from here. But it's not exactly 0:12:15.440 --> 0:12:18.520 attracting a lot of interest. So outside of energy, how's 0:12:18.520 --> 0:12:21.040 the credit quality in your portfolio? I would say that, 0:12:21.080 --> 0:12:24.320 you know, if we look at our portfolio, historically, we 0:12:24.640 --> 0:12:28.080 generally own credits that on average rated about a notch 0:12:28.160 --> 0:12:31.480 below that of the index. So we tend to seek 0:12:31.559 --> 0:12:34.400 seek value in single bees and that's where we are 0:12:34.480 --> 0:12:36.679 right now. Doesn't mean we're not buying double bees. We are, 0:12:36.920 --> 0:12:38.720 we're a bit more selective about it, but we're very 0:12:38.800 --> 0:12:41.720 much overweight single bees. We're kind of underweight double bees, 0:12:41.720 --> 0:12:43.800 and we're about market way triple cs right now. How 0:12:43.880 --> 0:12:47.560 close are we to our session? Um? Well, not between 0:12:47.600 --> 0:12:50.600 here and Christmas? How's that? And? Uh, I don't think 0:12:50.600 --> 0:12:55.240 it's you know, and I don't think it happens in 0:12:55.280 --> 0:12:57.840 twenty either, but will you know, it will remains to 0:12:57.880 --> 0:13:01.520 be seen obviously, the however happens. We supposedly are on 0:13:01.559 --> 0:13:03.800 the verge, as we have been for over a year now. 0:13:03.800 --> 0:13:08.280 It seems of of of a completion of these trade talks, 0:13:08.800 --> 0:13:11.960 uh and if that keeps getting pushed out or there's 0:13:11.960 --> 0:13:15.280 more saber rattling that goes on on either side, that 0:13:15.280 --> 0:13:18.439 could facilitate something. Yeah, alright, alright, I mean, come on, 0:13:18.520 --> 0:13:22.280 this is literally what we live every day. So can 0:13:22.360 --> 0:13:24.839 just real quickly what's the most attractive area that you 0:13:24.880 --> 0:13:27.880 guys are looking at right now? You know, it's interesting 0:13:27.960 --> 0:13:30.600 the the auto sector had been beaten up fairly bad 0:13:31.120 --> 0:13:33.280 um and there's a bit of a recovery going on there. 0:13:33.320 --> 0:13:36.240 We've found some opportunities there and that's one of the 0:13:36.240 --> 0:13:38.760 places we would point to where there's it maybe had 0:13:38.800 --> 0:13:41.920 gotten oversold. People thought perhaps a recession was coming, people 0:13:43.200 --> 0:13:44.959 sales were going to come down, and that really has 0:13:44.960 --> 0:13:50.920 not happened. Bonds backed by the cyber truck exactly hopefully. 0:13:51.080 --> 0:13:53.960 Ken Monahan, co director at Global Hi, a Monday pioneer 0:13:54.200 --> 0:13:57.320 joining us here in our Bloomberg Interactive Broker Studio. He's 0:13:57.320 --> 0:13:59.920 based in Durham, North Carolina, home of the Durham Bowl, 0:14:00.559 --> 0:14:03.640 amongst other institutions down there and Derham. Looking at quick 0:14:03.720 --> 0:14:07.640 data check right here the SMP. We are absolutely flat 0:14:07.720 --> 0:14:10.160 on the SMP today, no change now at forty two 0:14:10.520 --> 0:14:14.240 uh nasdak off just a little bit. Looking at yields again, 0:14:14.320 --> 0:14:17.480 not much movement there to ten year up three thirty seconds, 0:14:17.520 --> 0:14:20.480 pushing that ten year yield down just slightly to one 0:14:20.520 --> 0:14:24.080 point seven six. Compared that to the two year at 0:14:24.120 --> 0:14:28.120 one point, So the curve flattening just a little bit. 0:14:28.480 --> 0:14:48.320 This is Bloomberg twos, the era of forecasts. A lot 0:14:48.320 --> 0:14:51.360 of the big banks are coming out with the predictions. 0:14:51.440 --> 0:14:53.920 Joining us now is Dan Skelly, head of Equity Model, 0:14:53.960 --> 0:14:57.680 Portfolios and market Strategy at Morgan Stanley Wealth Management, joining 0:14:57.760 --> 0:15:00.120 us here in New York. I'm trying to unders and 0:15:01.040 --> 0:15:04.720 the consensus so far, which is a resurgence in a 0:15:04.720 --> 0:15:07.320 way at least in equities next year that potentially could 0:15:07.360 --> 0:15:10.520 even see double digit returns in the US and perhaps 0:15:10.520 --> 0:15:13.680 even bigger in Europe. Do you agree with that consensus? So, 0:15:13.720 --> 0:15:15.960 I think that at this point in the cycle, you 0:15:15.960 --> 0:15:18.880 want to be more selective. In the US market in particular, 0:15:18.920 --> 0:15:21.480 we think there's less upside to the index in the 0:15:21.560 --> 0:15:24.880 US where we could see more absolute returns as overseas. 0:15:24.880 --> 0:15:27.680 In Europe in particular, just given how much it's lagged, 0:15:27.680 --> 0:15:31.480 and then also given the potential for some rising catalysts 0:15:31.480 --> 0:15:33.640 on the fiscal front. You know, the only game in 0:15:33.680 --> 0:15:36.520 town forever in Europe has been monetary stimulus, and I 0:15:36.560 --> 0:15:39.880 think should we see some fiscal improvement there, that could 0:15:39.880 --> 0:15:42.200 be a potential catalyst. You think we will see that 0:15:42.240 --> 0:15:45.040 because I know, you know, particularly Germany, which is where 0:15:45.040 --> 0:15:48.120 everybody I think kind of focuses, has been pretty resolute 0:15:48.120 --> 0:15:50.280 and saying they're not into that game. Yes, So I 0:15:50.280 --> 0:15:52.720 think that's an interesting question. It's right now. I would 0:15:52.760 --> 0:15:55.920 label it a small probability, but a rising probability, and 0:15:56.240 --> 0:15:59.360 guard and ECB. Maybe she's the you know, the she 0:15:59.400 --> 0:16:01.600 could be the cha agent. I think Merkel, who had 0:16:01.600 --> 0:16:04.720 always been loath to do more spendings obviously leaving. So 0:16:04.760 --> 0:16:07.800 I think that swap in personnel is actually net positive 0:16:07.840 --> 0:16:10.640 for the for the potential um And you know, listen 0:16:10.640 --> 0:16:14.520 when you heard Mario dragging on his way out addressing policymakers. 0:16:14.760 --> 0:16:16.680 He was basically saying, we've gotten to the point of 0:16:16.720 --> 0:16:19.920 diminishing returns on negative interest rates. So I'm trying to 0:16:20.040 --> 0:16:23.800 understand how much a trade truce is priced into the 0:16:23.840 --> 0:16:26.360 idea that we're going to see pretty good year next year. 0:16:27.040 --> 0:16:28.840 I think that's part of it. I think the other 0:16:29.040 --> 0:16:31.760 driving factor has been liquidity. And when you look at 0:16:31.800 --> 0:16:34.240 what's happened in the US the last call it three months, 0:16:34.240 --> 0:16:37.240 the FETE isn't calling it qui, but effectively we're seeing 0:16:37.320 --> 0:16:40.280 QUEI four in terms of generating more liquidity. So I 0:16:40.320 --> 0:16:43.640 think there's this expectation that you're going to continue to 0:16:43.680 --> 0:16:45.560 have the FETE at your back and a tail win 0:16:45.640 --> 0:16:48.040 in the markets. And we don't see that this program 0:16:48.120 --> 0:16:50.520 ends early next year, as we all know, and so 0:16:50.600 --> 0:16:52.920 that could be a potential source of altility next year. 0:16:53.120 --> 0:16:56.480 I'm looking right now at equities uh SMP and NASTAC 0:16:56.560 --> 0:16:59.320 a little little down, but the doubt up all of 0:16:59.360 --> 0:17:02.280 them near the highs. And how much of the gains 0:17:02.280 --> 0:17:04.919 of next year have already been brought forward and priced 0:17:04.960 --> 0:17:06.800 in now. So that's a key question, and I think 0:17:06.840 --> 0:17:09.560 we would argue Morgan Stanley, a majority of the gains, 0:17:09.720 --> 0:17:12.000 and we rely not just our own on our own 0:17:12.080 --> 0:17:15.400 judgment and experience, but also on quantitative models, and our 0:17:15.440 --> 0:17:17.919 earnings model a year ago was telling us that earnings 0:17:17.920 --> 0:17:20.160 were at risk, and what we've seen the last three 0:17:20.240 --> 0:17:24.199 quarters is a meaningful slowdown from we've seen flat to 0:17:24.240 --> 0:17:28.359 down earnings, and frankly, our numbers for next year is 0:17:28.400 --> 0:17:31.080 predicting flat earnings once again in the streets at plus 0:17:31.119 --> 0:17:34.399 ten percent. So we're that spread to normalize in the 0:17:34.440 --> 0:17:38.040 street to come down ten percent. We think that provides 0:17:38.080 --> 0:17:41.040 the genesis behind a potential ten percent correction. I want 0:17:41.040 --> 0:17:43.720 to be perfectly clear though, because we think that's all 0:17:43.720 --> 0:17:45.520 it is. We don't think it's more than that. We 0:17:45.600 --> 0:17:48.800 think we're still amid a twenty year secular bowl market 0:17:49.119 --> 0:17:52.719 that started in and we're just going through some volatility 0:17:52.720 --> 0:17:55.280 and some potential hiccups. So if you see the potential 0:17:55.359 --> 0:17:58.400 for perhaps a ten percent pull back in the equity markets, 0:17:58.680 --> 0:18:00.600 what are you telling your clients to do today to 0:18:00.760 --> 0:18:04.600 get some build some cash or just get defensive. Interestingly, 0:18:04.680 --> 0:18:08.960 our clients are already fairly conservatively positioned already, so when 0:18:09.000 --> 0:18:11.919 you look at our system, cash levels are above average 0:18:12.040 --> 0:18:14.640 versus the last ten years, so we wouldn't be telling 0:18:14.680 --> 0:18:17.680 folks to necessarily raise more cash. Here it goes back 0:18:17.720 --> 0:18:20.119 to my earlier comment at the onset about where you 0:18:20.160 --> 0:18:23.040 position within the equity market. We're saying avoid some of 0:18:23.080 --> 0:18:26.520 the more crowded, expensive areas of the market, like technology 0:18:26.600 --> 0:18:28.880 like growth that have really been on fire this year, 0:18:29.160 --> 0:18:31.960 and being some of the more value oriented areas of 0:18:31.960 --> 0:18:35.480 the market. If text not leading, what will I think 0:18:35.600 --> 0:18:38.160 that's a it's a really great question because you need 0:18:38.240 --> 0:18:41.679 something of size to lead mathematically. And so if I 0:18:41.720 --> 0:18:44.440 look at what has size today, the money center, banks, 0:18:44.520 --> 0:18:46.960 or really what could what could lead so that to us? 0:18:46.960 --> 0:18:49.480 If the FED stays on pause and we have a 0:18:49.600 --> 0:18:52.159 resurgence in the old curve like we've already seen the 0:18:52.240 --> 0:18:55.320 last couple of months. Wait wait, I'm sorry, we need 0:18:55.359 --> 0:18:58.399 to have a just data check because we are seeing 0:18:58.440 --> 0:19:01.120 an eighth straight day of yield curve latining today, which 0:19:01.160 --> 0:19:03.399 I believe is the longest streak in about two years. 0:19:03.440 --> 0:19:05.639 So we're seeing a bit of a reversal already of 0:19:05.680 --> 0:19:08.199 that trade. Yeah, and that's I think related to this 0:19:08.280 --> 0:19:12.080 day to day headline back and forth around China and trade. Right, 0:19:12.080 --> 0:19:14.960 But I think the greater point of the larger point 0:19:14.960 --> 0:19:17.000 I'd like to make is that if the FED truly 0:19:17.080 --> 0:19:19.320 is on hold next year, you could see it an 0:19:19.400 --> 0:19:22.000 environment where the yeld curve does steep and eventually, and 0:19:22.040 --> 0:19:24.720 given how cheap the banks are, and given how big 0:19:24.720 --> 0:19:27.040 again their market caps are, that could be an area 0:19:27.040 --> 0:19:29.880 of leadership. Once you're once you're selling out of large 0:19:29.880 --> 0:19:33.080 cap technology, you need something else of size to buy into. 0:19:33.119 --> 0:19:35.920 You're not just gonna go into microcap stocks or small 0:19:35.920 --> 0:19:38.520 cap stocks, so that, in our opinion, is a logical 0:19:38.520 --> 0:19:41.280 source of funds. Dan Skelly, thanks so much for joining us. 0:19:41.280 --> 0:19:44.760 Really appreciate your smart thoughts there. Dan Skelly, head of 0:19:44.800 --> 0:19:48.280 Equity Model Portfolios, a market strategy at Morgan Stanley Wealth Management, 0:19:48.359 --> 0:19:51.280 joining us here in our Bloomberg Interactive Broker studio. Kind 0:19:51.280 --> 0:19:53.440 of you know a little bit of caution there. Perhaps 0:19:53.480 --> 0:19:57.200 you know the potential for a pullback into markets next year, 0:19:57.240 --> 0:20:00.960 but uh, not interrupting the longer term bowl market. I 0:20:01.000 --> 0:20:03.679 think it's interesting the idea of yield curve steepening. And 0:20:03.720 --> 0:20:06.439 this goes to something that Priamsra was talking about of 0:20:06.440 --> 0:20:10.040 TV securities earlier today, where she was saying she expects 0:20:10.040 --> 0:20:12.399 the FED to cut rates actually at the beginning of 0:20:12.440 --> 0:20:15.159 the year, and some people are expecting the consumer to 0:20:15.160 --> 0:20:17.639 show a couple of signs of weakness heading into the 0:20:17.680 --> 0:20:20.840 new year, as you see a stabilization in the manufacturing 0:20:20.840 --> 0:20:23.479 sector and that that could push the FED over. And 0:20:23.520 --> 0:20:27.200 that's sort of the base is increasingly becoming the base 0:20:27.280 --> 0:20:31.080 case of a number of these reflationary trade bets, which 0:20:31.119 --> 0:20:34.160 is interesting because the market is pricing in a September 0:20:34.960 --> 0:20:38.560 eight cut, not in March. I just think it's an 0:20:38.640 --> 0:20:42.200 interesting kind of dissonance there. Yeah, exactly, exactly. Just a 0:20:42.280 --> 0:20:44.439 quick data check here, we do have the SMP just 0:20:44.520 --> 0:20:47.600 again continues very flat today up only one percent and 0:20:47.680 --> 0:20:52.320