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

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

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

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

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Speaker 1: got an expert in the in the studio right now,

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Speaker 1: Jeff Rosenberg. He is black Rock's chief fixed income strategist.

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Speaker 1: And uh, you know, one of the things I want

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Speaker 1: to understand is are people really willing to buy that

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Speaker 1: thirty year at three point two percent, Jeff? Because unless

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Speaker 1: you're gonna trade it, you're gonna get stuck with a

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Speaker 1: pretty low yield for a long time. And if you

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Speaker 1: are going to trade it, you have to find someone

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Speaker 1: else that's willing to get stuck with that low yield.

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Speaker 1: So there's a couple of perspectives there, Pim. And it's

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Speaker 1: a great question. It's a question we get a lot,

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Speaker 1: but you're seeing the reason why people want to own

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Speaker 1: that thirty year on a day like today. Duration having

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Speaker 1: something in your portfolio that moves in the opposite direction

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Speaker 1: of risky assets like equities is really the reason why

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Speaker 1: people own that. So it's less about the absolute level

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Speaker 1: of yield. You're not really thinking about the thirty year

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Speaker 1: treasury is an income source. You're thinking of it as

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Speaker 1: a stabilizer, and on days like today, it's really showing

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Speaker 1: its value that it goes up a lot when risk

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Speaker 1: goes up, and people own it in their portfolio for

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Speaker 1: its diversification value more than its absolute level of yield.

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Speaker 1: Would you sell it if you own some thirty years

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Speaker 1: in your portfolio, I mean, would you sell some of

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Speaker 1: them today and take advantage of the turmoil? No? No,

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Speaker 1: we're not going to think about sort of the thirty

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Speaker 1: years trade as as as a trade or the thirty

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Speaker 1: years treasury as a as a trading strategy. This is

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Speaker 1: really about portfolio construction and building porto is that are

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Speaker 1: resilient over longer time periods. This is about what's the

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Speaker 1: right percentage allocation in my portfolio two equities to my

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Speaker 1: risky assets. And then given that percentage that's relevant to

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Speaker 1: me in my life cycle of investing for my risk tolerance,

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Speaker 1: I can add some diversification in terms of adding some

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Speaker 1: thirty year treasuries, and I'm holding that portfolio concentration relative

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Speaker 1: to my equity allocation. If I then decide I want

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Speaker 1: to de risk my portfolio because I think, like events

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Speaker 1: today Italy, it's showing me there's a lot more risk

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Speaker 1: in the world. I want to take the risk out

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Speaker 1: of my portfolio. Then maybe yeah, I take the risk

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Speaker 1: out of my equities, and then maybe I don't need

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Speaker 1: that thirty year ballast as much. And hey, one of

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Speaker 1: the areas we've been talking to investors about, look at

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Speaker 1: what you can do in the front end of the

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Speaker 1: US yield curve today. You can get three three and

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Speaker 1: a half percent yield in some attractive investment grade areas

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Speaker 1: of the market. Maybe that's why I sell my thirty

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Speaker 1: year because I'm getting rid of my equity risk. That's

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Speaker 1: a d risking of the portfolio moving into more like

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Speaker 1: cash and cash equivalence. That's a very different kind of

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Speaker 1: strategy talking about the overall portfolio, not just looking at

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Speaker 1: you know, these one day moves. Speaking of these cash

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Speaker 1: and cash equivalence, how do you anticipate all of this

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Speaker 1: volatility and emerging markets in Italian credit, in Italian bonds

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Speaker 1: all over Europe? How do you anticipate that ultimately impacting

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Speaker 1: the FED decision process and the front end of the curve,

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Speaker 1: because it seems the front end is likely to experience

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Speaker 1: a lot of interesting activity throughout the year. If this

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Speaker 1: becomes a big problem, yeah, and and that's really the

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Speaker 1: the key point to your question is is the if

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Speaker 1: how big of a problem? And by problem. From the

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Speaker 1: Fed's perspective, what they're gonna be thinking about is does

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Speaker 1: the Italian political risk rise to the point of affecting

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Speaker 1: the real economy outcomes in the US? Does this event

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Speaker 1: cascade into changing people's views on their investment, on their spending,

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Speaker 1: on their con fidence. Right, And the FED thinks about

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Speaker 1: that in terms of what they'll measure as financial conditions,

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Speaker 1: this is a financial conditions tightening, meaning it's making it

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Speaker 1: harder for companies, individuals to produce real economic activity. Now,

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Speaker 1: where the FED had been where the markets are, is

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Speaker 1: that financial conditions have been very very accommodative. So this

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Speaker 1: is a movement upwards from very very loose financial conditions,

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Speaker 1: highly accommodative financial conditions, to a slight tightening on the

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Speaker 1: margin that reduces maybe some of the odds, but at

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Speaker 1: this point probably doesn't dislodge the FED off of the

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Speaker 1: path of three to four hikes. Maybe it reduces a

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Speaker 1: little bit of the four hike scenario. Markets are pretty

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Speaker 1: much priced for three and that's where I think you'll

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Speaker 1: see this sort of settle in for the front end

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Speaker 1: of the curve, Jeff. If the dollar continues this, uh,

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Speaker 1: this path of of strength, right, I mean one fifteen

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Speaker 1: forty five against the euro. Not only are is everyone

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Speaker 1: going to be able to afford to go to Europe

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Speaker 1: for a vacation, but isn't that going to just raw

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Speaker 1: even more funds into the United States And you're going

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Speaker 1: to end up with this kind of cycle that chases

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Speaker 1: its own tail. Yeah. So you know, the strength of

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Speaker 1: the dollar is another kind of source of tightening financial conditions,

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Speaker 1: because when the dollar is stronger, it makes everywhere else

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Speaker 1: in the world harder to finance their debt. Remember, most

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Speaker 1: of the world's debt is denominated in dollars. So strengthening

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Speaker 1: in the dollar is good for us, good for the

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Speaker 1: European vacations and as as you just mentioned, but it's

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Speaker 1: bad for most of the other countries in the world.

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Speaker 1: So I think what you're seeing this morning is a

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Speaker 1: little bit more about euro weakness than it is dollar strength,

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Speaker 1: because it's about increasing the odds of some disruptive political

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Speaker 1: events showing up in Europe, but certainly dollar strength on

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Speaker 1: the back of the older story, which was we have

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Speaker 1: a better growth story, we have a better interest rate

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Speaker 1: differential is another headwinds to global investing. And so when

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Speaker 1: we think about portfolio construction, we think about global equities,

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Speaker 1: for example, this is a little bit of a headwinds

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Speaker 1: we think about emerging markets investing. You know, first and

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Speaker 1: foremost it's a currency risk, and so the currency risk

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Speaker 1: showing up kind of brings some more attractiveness back into

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Speaker 1: the US markets. Okay, so you hit on a really

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Speaker 1: key topic, and I think that is currency risk in

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Speaker 1: the dollar, and I'm looking at your strategy and you've

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Speaker 1: got sort of this neutral view on emerging markets. Talk

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Speaker 1: us through how you see that playing out, how you

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Speaker 1: see this dollar strength playing out in emerging markets, and

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Speaker 1: where you're still finding opportunities in that space. Yeah, so

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Speaker 1: the emerging market view is really changed for US a

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Speaker 1: lot because of this shift in the currency outlook. So

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Speaker 1: what you had had for a very long time was

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Speaker 1: relatively benign emerging market currency volatility in an environment where

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Speaker 1: the yields that you were getting for taking that currency

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Speaker 1: volatility by buying the locally denominated currency, debt was relatively

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Speaker 1: attractive upwards of a hundred and fifty even if we

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Speaker 1: go back further two hundred basis points above treasury debt,

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Speaker 1: when treasury debt was very low. Now, more recently, what

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Speaker 1: have we seen. We've seen both sides of the argument

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Speaker 1: towards local currency move against the local currency view, which

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Speaker 1: is currency volatility is higher, so the risks to currency

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Speaker 1: are much more apparent, and the extra yield that you're

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Speaker 1: getting relative to the hard currency alternatives has narrowed. So

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Speaker 1: that's shifted our emerging market focus a bit matt back

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Speaker 1: towards hard currency alternatives, where hard currency spreads and yields

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Speaker 1: had moved up, making them more attractive relative to other

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Speaker 1: credit alternatives where you're not taking the currency risk. So

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Speaker 1: that's the shift for us. It's still it's a neutral

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Speaker 1: view because it's an overall portfolio wide view because we're

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Speaker 1: overweight emerging market equities on my colleague side of the

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Speaker 1: equity side, so we're taking the risk more on the

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Speaker 1: emerging market debt equity side then on the debt side. Well,

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Speaker 1: just to that point, Jeff, I mean, isn't this the

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Speaker 1: time when you hear the word crisis, shouldn't that make

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Speaker 1: you smile as an investor and say, okay, let's figure

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Speaker 1: out how to take advantage of this opportunity, because it's

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Speaker 1: not about people liking you, it's about helping people make money.

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Speaker 1: And if you've got a crisis, you try to figure

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Speaker 1: out a way to take it vantage of it. Maybe

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Speaker 1: don't go into all whole hog, but you know you

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Speaker 1: have you find something that might be mispriced, well, it

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Speaker 1: absolutely does if you have risk budget for that. Now, Unfortunately,

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Speaker 1: as we go into these markets, one of the things

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Speaker 1: that we see is a lot of people were very

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Speaker 1: long risk. So crisis is is good if you're a

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Speaker 1: contrarian investor, which meant that two weeks ago, when everybody

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Speaker 1: was very happy, you were saying, well, I'm going to

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Speaker 1: take risk down and and and the reason why you

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Speaker 1: do that is so you have opportunities to add to

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Speaker 1: risk in an environment where risk is going up. That's

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Speaker 1: for very high frequency kind of trading type strategies. I

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Speaker 1: think the broader, longer term message of crises is it's

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Speaker 1: a reminder that markets have risk. Merging markets have risk. Uh,

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Speaker 1: stable markets have risk. It and to review your portfolio

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Speaker 1: to say, is this the kind of allocation, the kinds

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Speaker 1: of waitings that I'm really comfortable with. One of our

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Speaker 1: big themes for two eighteen relative to seventeen is seventeen

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Speaker 1: was a very low risk environment. It was the lowest

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Speaker 1: equity volatility ever. Now you're seeing it much higher. Thanks

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Speaker 1: very much, much appreciated, Jeff Rosenberg, black Rock Chief fixed

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Speaker 1: income strategist. He's a pro when it comes to radio

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Speaker 1: as well as fixed income. Much appreciated. Joining us now

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Speaker 1: to talk about issues such as China trade and after

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Speaker 1: t p P as well as other international issues is

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Speaker 1: Stefan Selick. He is the former Undersecretary for International Trade

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Speaker 1: for the International Trade Administration. He is currently the managing

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Speaker 1: partner of Bridge Park Advisors. Had a career that spans

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Speaker 1: not only UH international relations but also Bank of America

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Speaker 1: Mary Lynch, where he was executive of Vice chairman. Steff,

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Speaker 1: thank you very much for being here. Um, let's get

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Speaker 1: your thoughts right now on the state of trade talks

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Speaker 1: between the United States and China. What do you believe

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Speaker 1: is actually going on? Well, you know, the Secretary of Commerce,

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Speaker 1: willbur Ross is headed there at the end of this

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Speaker 1: week for some follow on discussions um UH to um

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Speaker 1: UH deal with a whole host of issues, including the

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Speaker 1: UH tariffs UM that have been discussed, and so I

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Speaker 1: think it's going to continue to be fluid in ongoing.

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Speaker 1: What I don't expect to see, PHIM is some big

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Speaker 1: grand bargain coming anytime soon, because these are complicated issues

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Speaker 1: they're going to take time to address, and like in

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Speaker 1: most diplomacy, I think you're going to see incremental progress

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Speaker 1: and not um uh some panacea. Speaking of incremental progress,

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Speaker 1: what incremental progress would you expect? Right, So, not a

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Speaker 1: grand bargain, but are there specific product areas where you

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Speaker 1: can see true resolution within the next six months even

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Speaker 1: twelve months At the well Gina, I would hope it

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Speaker 1: would be the exact opposite, because if I think if

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Speaker 1: they focus on specific products and have a shopping list,

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Speaker 1: that they're fundamentally not getting at the right issues. So

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Speaker 1: great if they get China to buy more soybeans they

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Speaker 1: already buy twelve billion dollars of our two billion dollar crop.

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Speaker 1: Great if they buy some more l G. But frankly,

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Speaker 1: this is a commodity product that we're likely to have

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Speaker 1: sold to another market anyway. What they should be doing

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Speaker 1: is focusing on the important structural issues like the joint

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Speaker 1: venture requirements, the investment restrictions, UH, the theft and counterfeiting,

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Speaker 1: counterfeiting of intellectual property. And so unless they get at

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Speaker 1: those structural issues, I'm fearful that actually that not much

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Speaker 1: long term progress will be made. ZTE Corp. Is it

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Speaker 1: normal for a specific company to garner so much attention

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Speaker 1: within the context of trade talks UM, Well, PIM, you know,

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Speaker 1: they were bad actors and they got caught red handed,

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Speaker 1: viole eating our laws. In fact, this happened when I

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Speaker 1: was the Under Secretary of Commerce in two thousand and sixteen,

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Speaker 1: UM and we, as you know, UM had sanctions on

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Speaker 1: countries including Iran and North Korea, and as a result

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Speaker 1: of that, they were prohibited from including US products in

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Speaker 1: UM UH there products that they sold to those countries,

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Speaker 1: and they went ahead and did it, and they went

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Speaker 1: ahead and did it knowingly. They got caught, they paid

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Speaker 1: a fine, they agreed to certain measures, and in fact

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Speaker 1: they didn't follow up on what they had agreed to do.

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Speaker 1: So now this is coming back and apparently now rather

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Speaker 1: than close them down, there's going to be an additional

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Speaker 1: fine of over a billion dollars. There's going to be

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Speaker 1: a forced change of management, and there's gonna be some

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Speaker 1: real stringent oversight um going forward. Um. That is separate

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Speaker 1: and distinct from this issue of using those telecom equipment

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Speaker 1: products to spy on US companies. This is really just

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Speaker 1: a matter of law, and I think it's gonna I

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Speaker 1: think it's a going to play out over the next

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Speaker 1: few weeks. Stuff. And you have some really strong opinions

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Speaker 1: on this focus on the bilateral trade deficit by the

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Speaker 1: administration and how that potentially, I guess presents a sort

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Speaker 1: of false argument. Maybe you can talk us through that

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Speaker 1: focus and how it should shift to really achieve any

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Speaker 1: meaningful reform. Yeah, I mean, Gina, I think first of all,

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Speaker 1: thinking of our trade deficit as a scorecard, it just

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Speaker 1: makes no sense. Um. Uh, it is not. And then

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Speaker 1: in fact, the deficit, our trade deficit is caused by

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Speaker 1: a whole host of things. But it's not caused by

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Speaker 1: our global competitiveness. It's caused by investment and savings rate

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Speaker 1: in respective countries, and it's caused by, um, the fact

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Speaker 1: that the United States is the world's reserve currency. I

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Speaker 1: would also add to that to your point, focusing on

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Speaker 1: that deficit bilaterally with one particular company makes no sense.

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Speaker 1: I mean, you run a trade surplus with Bloomberg every

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Speaker 1: month when they pay you, and you run a trade

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Speaker 1: deficit with your dry cleaner every month when you pay them,

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Speaker 1: And so thinking about this that narrowly is a mistake.

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Speaker 1: And I go back to UM, not using it as

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Speaker 1: a scorecard, but focusing on the real long term structural issues.

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Speaker 1: And at the top of that list are going to

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Speaker 1: be issues that we have with China, given the importance

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Speaker 1: and size of that economy. Do you believe we're going

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Speaker 1: to get a renegototiated NAFTA. Well, UM, it certainly is

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Speaker 1: not proceeding UM as smoothly as one would have hoped. UM.

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Speaker 1: I'm not particularly fearful PIM that UM we're going to

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Speaker 1: withdraw from NAFTA because the consequences I think would be

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Speaker 1: UM profound and severe. I think the administration has heard

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Speaker 1: from companies in industries across the United States as well

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Speaker 1: as our farmers and our ranchers how important the Mexican

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Speaker 1: and Canadian markets are to them. Uh So, while I

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Speaker 1: think it hopefully gets UM modernized, because this is don't

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Speaker 1: forget a twenty five year old agreement. UM, I'm fearful

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Speaker 1: that the asks at the current United States Trade Representative

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Speaker 1: has put in place Representative Trade represent It of Lightheiser

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Speaker 1: are so aggressive that it's unlikely to be able to

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Speaker 1: get resolved in the near term. And as you know,

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Speaker 1: we also have both our and their political calendar. They

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Speaker 1: have an upcoming presidential election on July one, we have

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Speaker 1: our mid term elections. So my fear is that this

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Speaker 1: gets pushed out into the future and the can gets

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Speaker 1: kicked down the road as opposed to making the sort

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Speaker 1: of progress that we should have been able to make

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Speaker 1: with two of our most important allies. UH and friends,

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Speaker 1: thank you very much for spending time with us, being

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Speaker 1: with us this morning. Stefan Selga he is a managing

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Speaker 1: partner of a Bridge Park Advisors, former Under Secretary of

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Speaker 1: Commerce for International Trade, giving us some detailed information about

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Speaker 1: how trade talks are progressing or alternatively not progressing. Dean

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Speaker 1: current It is the chief executive officer for Macro Risk Advisors.

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Speaker 1: He joins us here in our eleven three oh studios

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Speaker 1: and I want to welcome, of course, all of our

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Speaker 1: Bloomberg listeners. UH, in Boston one oh six one Boston,

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Speaker 1: Newburyport and UH in Washington six, San Francisco and one

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Speaker 1: serious dean. Are you panicky or are you celebrating? Well,

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Speaker 1: I don't think it's the reason yet to PANICUM him.

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Speaker 1: I think you make a really good point, which is

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Speaker 1: there are more often than not these events tend to

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Speaker 1: be more idiosyncratic to a specific asset class or region.

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Speaker 1: We've seen these types of UM risk golf events in

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Speaker 1: you know, a particular area UM start to get priced

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Speaker 1: in more broadly into let's say, US stocks, but then

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Speaker 1: ultimately fizzle out. UM. I think the market's trying to

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Speaker 1: do its best to sort of probability weight the potential

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Speaker 1: for UH something to get transmitted more broadly. So I

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Speaker 1: think that's that's what you're seeing, is that the sell

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Speaker 1: off in US equities and the rise in the VIX

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Speaker 1: are UM some discounting of potential future outcomes. UM. That

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Speaker 1: being said, I certainly woke up this morning and was

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Speaker 1: quite alarmed by just the size, the sheer magnitude of

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Speaker 1: the move UH in Italian sovereigns, the massive sell off

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Speaker 1: in bank stocks in Europe. UM. If you're not an

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Speaker 1: expert in Italian politics, which I certainly am not. You

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Speaker 1: look to asset prices to tell you about severity, and

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Speaker 1: this is certainly UM. The asset price move is telling

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Speaker 1: you that people very much care about what what's happening

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Speaker 1: is the situation unfolds. So when you think about that

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Speaker 1: feedback loop, if we if we very much care about

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Speaker 1: UM what's happening in Europe, and then it will ultimately

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Speaker 1: impact the US equity market, how do you navigate that

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Speaker 1: both short term tactically in long term UM in your strategies, Well,

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Speaker 1: I think the first thing is and and so our

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Speaker 1: firm ACAR Risk Advisors tends to focus very much on

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Speaker 1: option based strategies and oftentimes clients will look to us

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Speaker 1: to help them UM design hedging trades. UM Hedging is

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Speaker 1: I think a undervalued discipline, but certainly something that for example,

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Speaker 1: throughout last year, if you tried to hedge, even as

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Speaker 1: the VIX was quite low, you would have been quite

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Speaker 1: early UH to calling calling the risk golf events. So

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Speaker 1: you have to be careful when you get defensive because

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Speaker 1: you can overallocate option premium UH and spend a lot

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Speaker 1: of money in the sideways. And as I said earlier,

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Speaker 1: most of the time these situations have boiled over. But

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Speaker 1: I think collectively investors, antenna should be risk. Antenna should

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Speaker 1: be up at this point. Um, we certainly have a

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Speaker 1: situation which the U. S economy continues to do well.

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Speaker 1: US corporate earnings are are the foundation of asset prices.

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Speaker 1: But at the same time there are these complex risk

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Speaker 1: cross currents. We've talked about the dollar as a of

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Speaker 1: international vix. I think that can be destabilizing, especially for

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Speaker 1: e m um and um. You know, you've got at

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Speaker 1: this sort of at a given time, a lot of

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Speaker 1: international negotiation, uh, North Korea, Iran, China with tariff, so

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Speaker 1: there's a lot of stuff happening, and this meltdown in

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Speaker 1: Italian sovereigns I think just adds to the mix of

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Speaker 1: things to be watchful for. Right. So you talk about

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Speaker 1: size factor in some of your work recently and your

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Speaker 1: preference for small caps over large caps, and that's certainly

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Speaker 1: played out very well and certainly in your favorite so

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Speaker 1: far this year. But it strikes me as really intriguing

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Speaker 1: that at some point if investors are flocking to the dollar,

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Speaker 1: it's a consequence of risk, right, It's a consequence of

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Speaker 1: depleting risk tolerance or decreasing risk tolerance, and yet small

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Speaker 1: caps carry a very high level of risk. Well, ultimately,

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Speaker 1: the dollar rally work to the detriment of the small

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Speaker 1: cap trade, and how do you navigate that? Right? So

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Speaker 1: it's a good it's a good point. We are our

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Speaker 1: favorite of things like i w M as a kind

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Speaker 1: of placeholder for being long in the market. Uh. Certainly

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Speaker 1: was with the recognition that it's a domestic index. It

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Speaker 1: doesn't have as much This is the Russell two of

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Speaker 1: the exchange traded fund for the Russell two thousand exactly. Yes,

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Speaker 1: um So, because the small caps tend to be very

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Speaker 1: domestically centric, they're not as exposed to a rising dollar.

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Speaker 1: But you know, your point is very well taken that

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Speaker 1: um if the scenario of a rising dollar is to

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Speaker 1: is what causes a significant risk off event, it's just

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Speaker 1: hard to say that any anything holds up really, really well.

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Speaker 1: Um So, So this was a recommendation for if you're

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Speaker 1: going to be long. Um we and you don't think

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Speaker 1: the dollar is set to spike, and our work on

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Speaker 1: the dollar suggests that we think tactically you can see

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Speaker 1: it continue to rise. Um. But we're staring at these

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Speaker 1: massive twin deficits. And so from a longer term standpoint, UM,

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Speaker 1: you know, our work suggests that the dot the dot

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Speaker 1: the strong dollar story, while tactically appealing, UM, we just

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Speaker 1: don't see it. Just given the the size of the

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Speaker 1: you know, capital and current account deficits that the US

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Speaker 1: is set to run. You don't think that we can

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Speaker 1: just get people to lend us more money. We can

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Speaker 1: or or they could raise taxes, or you could have

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Speaker 1: economic growth that then increases tax revenue. Uh why I mean,

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Speaker 1: since we print the currency, why is that a problem? No,

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Speaker 1: I don't think it is a problem. I think that

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Speaker 1: it's just a reality that we've never Uh. If you

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Speaker 1: were to look at a UM a chart of the

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Speaker 1: unemployment rate versus the size of the deficit, we're in

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Speaker 1: no man's land right now. UM four percent unemployment and

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Speaker 1: a trillion dollar deficit. This is these two have never

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Speaker 1: coexisted before. UM. So we're we're a uh, you know,

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Speaker 1: consumer of of capital in terms of you know, from

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Speaker 1: from a dollar standpoint, UM, and if you just if

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Speaker 1: you look at charge it's over a long period of time,

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Speaker 1: there's actually a reasonably strong correlation between UM the year

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Speaker 1: over year change in the dollar and the size of

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Speaker 1: the of the twin deficit. And so that's a longer

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Speaker 1: term um issue. And again I think tactically, uh, there's

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Speaker 1: certainly a risk that the dollar continues to rise and

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Speaker 1: it's destabilizing for assetprises. What is market neutral momentum? Yeah,

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Speaker 1: so market neutral momentum is uh. And you guys have

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Speaker 1: built just an incredibly powerful page it's called ft W,

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Speaker 1: which is for factors on blood neither. Well, we're using it,

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Speaker 1: we're benefiting from it. So market neutral momentum is uh,

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Speaker 1: it's a it's a factor. So momentum is what What

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Speaker 1: is momentum? It's it's the winner's right, So it's it's

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Speaker 1: the observation that winning stocks continue to win and losing

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Speaker 1: stocks continue to lose. What market neutral momentum does is

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Speaker 1: it takes the sometimes the quintile, so the the you know, uh,

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Speaker 1: strongest moment some socks and the least strong momentum stocks,

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Speaker 1: and it creates a long short portfolio. Um. So it's

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Speaker 1: it's got no market beta, it's just got exposure to

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Speaker 1: the momentum factor, which is the past performance. Uh. And

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Speaker 1: it continues to do uh incredibly well. It's embodied in

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Speaker 1: big cap text tech stocks. It is Facebook, it is Netflix. UM,

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Speaker 1: you know, it's it's the beheamoth that continues to underpin

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Speaker 1: a lot of the market capitalization growth in US equities.

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Speaker 1: So UM, this has done what up nine percent so

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Speaker 1: far this year. It's tremendous. This this and this is

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Speaker 1: a portfolio that you're running right now. No, this is

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Speaker 1: this is a factor. UM. We we would argue that

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Speaker 1: momentum just because it's been so good to people for

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Speaker 1: so long, UH is one of the risks that UM

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Speaker 1: investors are vulnerable to. UM when you look at the allocation,

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Speaker 1: for example, the passive strategies. Last year, Vanguard took in

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Speaker 1: three sixty billion dollars of new capital. I mean, even

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Speaker 1: Jack bo Goal is saying this is this is insane UM.

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Speaker 1: But Vanguard, UH just does not read the newspaper. They

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Speaker 1: just buy Apple because it's the biggest stock. So indexation

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Speaker 1: is largely a momentum strategy because it buys the winners,

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Speaker 1: right that have the biggest caps. Thanks very much for

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Speaker 1: being with us, Very illuminating, much appreciated. Dean Current is

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Speaker 1: the chief executive of a macro risk advisors and risk

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Speaker 1: I think is going to be the word of the

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Speaker 1: day risk when it comes to Italian debt. UM. Diane

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Speaker 1: Swonk is our guest chief economist for Grant Thornton. Diane,

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Speaker 1: if you were in Michigan, you were paying over three

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Speaker 1: dollars a gallon for gasoline, as many people are in

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Speaker 1: the country. Do you believe that that is going to

430
00:24:56,480 --> 00:24:59,080
Speaker 1: show up in what people are able to put away,

431
00:24:59,119 --> 00:25:01,679
Speaker 1: because we're gonna get and personal spending numbers later on

432
00:25:01,720 --> 00:25:04,840
Speaker 1: in the week, Yes, I do. In fact, our analysis

433
00:25:04,960 --> 00:25:07,840
Speaker 1: is that the depending on how long these higher gas

434
00:25:07,840 --> 00:25:10,159
Speaker 1: prices at the pump linger we do know the Saudi

435
00:25:10,320 --> 00:25:13,159
Speaker 1: Arabia has started to turn this picket back, or at

436
00:25:13,200 --> 00:25:16,359
Speaker 1: least promise to turn the ticket back on. Even as

437
00:25:16,400 --> 00:25:18,600
Speaker 1: much as we're seeing production in the US, it just

438
00:25:18,680 --> 00:25:21,760
Speaker 1: simply can't make up for what Saudi Arabia has in

439
00:25:21,880 --> 00:25:25,760
Speaker 1: spare capacity. And so our analysis is that we've already

440
00:25:25,760 --> 00:25:28,880
Speaker 1: eliminated much of the tax cuts with higher prices at

441
00:25:28,880 --> 00:25:32,119
Speaker 1: the pump for middle and lower income households. Those um

442
00:25:32,280 --> 00:25:35,399
Speaker 1: tax cuts average when you get into the middle income

443
00:25:35,760 --> 00:25:38,639
Speaker 1: households about eight hundred dollars per household. About half of

444
00:25:38,640 --> 00:25:42,119
Speaker 1: that's being wiped out already by higher prices at the pump.

445
00:25:42,200 --> 00:25:45,480
Speaker 1: For low income households, the lowest wage earners, their tax

446
00:25:45,560 --> 00:25:47,359
Speaker 1: cuts are only four year dollars a year, so of

447
00:25:47,400 --> 00:25:51,120
Speaker 1: course they've already seen major loss in earnings. And what's

448
00:25:51,160 --> 00:25:54,200
Speaker 1: really important is with the higher prices that the pump is,

449
00:25:54,240 --> 00:25:57,720
Speaker 1: it also affects things like housing, mobility, people's ability to

450
00:25:57,800 --> 00:26:01,359
Speaker 1: take higher paying jobs because anything a gain in terms

451
00:26:01,400 --> 00:26:04,000
Speaker 1: of paycheck gets wiped out in terms of how far

452
00:26:04,119 --> 00:26:06,240
Speaker 1: they have to dry and higher commute costs. So we

453
00:26:06,359 --> 00:26:09,639
Speaker 1: certainly are crossing our fingers that saw Arabia will go

454
00:26:09,800 --> 00:26:13,000
Speaker 1: through and actually continue to turn on the pickets and

455
00:26:13,000 --> 00:26:15,119
Speaker 1: bring those prices back down and it will show up

456
00:26:15,119 --> 00:26:17,679
Speaker 1: at the pump over the summer, so that we can

457
00:26:17,720 --> 00:26:19,480
Speaker 1: get people in the jobs they need to be in

458
00:26:19,680 --> 00:26:23,120
Speaker 1: and not have to turn down higher paying jobs because

459
00:26:23,400 --> 00:26:27,280
Speaker 1: it's eating away in their commute costs. Diane, I just

460
00:26:27,320 --> 00:26:29,960
Speaker 1: had a pleasure of reading your note No Place Like Home,

461
00:26:30,160 --> 00:26:32,800
Speaker 1: in which you review the prospects for the U S consumer,

462
00:26:33,040 --> 00:26:36,360
Speaker 1: of course mentioning gas prices as a critical component as

463
00:26:36,359 --> 00:26:38,080
Speaker 1: well as income. But the one other thing that you

464
00:26:38,640 --> 00:26:41,280
Speaker 1: dive into quite a bit is how much consumers are

465
00:26:41,320 --> 00:26:44,960
Speaker 1: starting to tap into their homes again to support their

466
00:26:45,000 --> 00:26:47,679
Speaker 1: spending patterns. Wantn't to talk us through a little bit

467
00:26:47,720 --> 00:26:50,199
Speaker 1: about what you're seeing in home equity lines of credit

468
00:26:50,200 --> 00:26:53,800
Speaker 1: growth and how the consumer is utilizing credit markets once

469
00:26:53,840 --> 00:26:57,320
Speaker 1: again to sustained spending. Well, up until now, that's great

470
00:26:57,320 --> 00:26:59,440
Speaker 1: at the question, and up until now we had seen

471
00:26:59,480 --> 00:27:02,520
Speaker 1: people doing cash out refinancing to do remodeling. And this

472
00:27:02,600 --> 00:27:05,200
Speaker 1: is where a lot of areas baby boomers and older

473
00:27:05,440 --> 00:27:09,919
Speaker 1: homeowners Gen acts homeowners are now adding and remodeling and

474
00:27:09,960 --> 00:27:13,399
Speaker 1: repairing their homes instead of trading up. That's also leaving

475
00:27:13,480 --> 00:27:15,680
Speaker 1: us with short supply, but they are investing in their

476
00:27:15,680 --> 00:27:18,080
Speaker 1: homes again and they're doing it by tapping into either

477
00:27:18,119 --> 00:27:21,159
Speaker 1: the cash out refinancing or now home equity lines of

478
00:27:21,200 --> 00:27:23,800
Speaker 1: credit which are coming back. The good news is there's

479
00:27:23,800 --> 00:27:25,800
Speaker 1: more safeguards and there ones where and that is that

480
00:27:25,880 --> 00:27:28,520
Speaker 1: you can't take out more than you know leave yourself

481
00:27:28,560 --> 00:27:32,800
Speaker 1: with less in your home in most cases. Although that said,

482
00:27:33,160 --> 00:27:35,320
Speaker 1: it's interesting is even though there's been a change in

483
00:27:35,320 --> 00:27:38,960
Speaker 1: the tax laws which limits the deductibility of those home

484
00:27:38,960 --> 00:27:41,680
Speaker 1: equity lines of credit to actually remodeling and putting money

485
00:27:41,680 --> 00:27:44,119
Speaker 1: into your home, the signs are seen on the street

486
00:27:44,119 --> 00:27:46,719
Speaker 1: and actually published one without the bank's name on it,

487
00:27:47,000 --> 00:27:49,560
Speaker 1: right in the middle of Lasle Street in downtown Chicago.

488
00:27:49,920 --> 00:27:52,720
Speaker 1: The advertisements were for a third honeymoon, a trip to

489
00:27:52,800 --> 00:27:57,560
Speaker 1: your rome um, you know, braces for your kid band camp.

490
00:27:57,800 --> 00:28:00,639
Speaker 1: It was really sort of a flash back to two

491
00:28:00,680 --> 00:28:03,080
Speaker 1: thousand and five and the idea that you would use

492
00:28:03,080 --> 00:28:05,199
Speaker 1: your home as an a t M. And what we

493
00:28:05,280 --> 00:28:08,200
Speaker 1: don't know is how easy credit conditions are going to get,

494
00:28:08,240 --> 00:28:10,199
Speaker 1: not by the banks per sale though they're trying to

495
00:28:10,240 --> 00:28:14,120
Speaker 1: make up the fees loss to refinancing which have now fallen,

496
00:28:14,400 --> 00:28:18,399
Speaker 1: but also more importantly to the shadow banking industry, which

497
00:28:18,440 --> 00:28:21,119
Speaker 1: so far hasn't been really aggressive in the home equity

498
00:28:21,240 --> 00:28:23,760
Speaker 1: line of credit market. But once they can't get those

499
00:28:23,800 --> 00:28:27,240
Speaker 1: refinancing fees, and we have seen mortgage applications are not

500
00:28:27,359 --> 00:28:29,560
Speaker 1: what they could be because we don't have enough supply

501
00:28:30,080 --> 00:28:32,720
Speaker 1: in the market and prices are going up fairly rapidly.

502
00:28:33,160 --> 00:28:35,560
Speaker 1: That could see a flip flop and you could see

503
00:28:35,760 --> 00:28:38,960
Speaker 1: many more people tapping into it. We're already yet very

504
00:28:39,040 --> 00:28:41,000
Speaker 1: low rates on the saving rate. When you see home

505
00:28:41,000 --> 00:28:43,280
Speaker 1: equity lines of credit go up, that's going to push

506
00:28:43,280 --> 00:28:45,960
Speaker 1: the saving rate even lower. It's at three percent right now.

507
00:28:46,200 --> 00:28:48,640
Speaker 1: The record low is two point four percent, which we

508
00:28:48,720 --> 00:28:51,760
Speaker 1: hit in December because of all the insurance and sort

509
00:28:51,760 --> 00:28:54,800
Speaker 1: of rebuilding after hurricanes. But that was the lowest rate

510
00:28:54,800 --> 00:28:57,720
Speaker 1: since two thousand and five. When you look at the

511
00:28:57,800 --> 00:29:01,560
Speaker 1: general risk of this evolve incredit landscape, banks getting a

512
00:29:01,600 --> 00:29:05,320
Speaker 1: little easier on credit allocation, particularly with respect to Holmes,

513
00:29:05,760 --> 00:29:09,280
Speaker 1: the consumer leaning on credit a little bit more, saving less.

514
00:29:09,840 --> 00:29:12,680
Speaker 1: What are the trigger points that make you really concerned?

515
00:29:12,800 --> 00:29:14,600
Speaker 1: Right because we said, we tend to talk about, oh,

516
00:29:14,600 --> 00:29:16,600
Speaker 1: these things are changing, but it's not a huge risk.

517
00:29:16,680 --> 00:29:19,080
Speaker 1: It's not going to push us into recession. At what

518
00:29:19,200 --> 00:29:21,640
Speaker 1: point do you say, okay, this is it. We've gotten

519
00:29:21,640 --> 00:29:24,080
Speaker 1: to a point where we now really need to worry

520
00:29:24,120 --> 00:29:26,640
Speaker 1: about home equity. Is it rates are a certain um

521
00:29:26,720 --> 00:29:30,240
Speaker 1: level or is it outstanding debt reaches a certain level.

522
00:29:30,440 --> 00:29:32,360
Speaker 1: Is it the unemployment rate that shifts? What are your

523
00:29:32,360 --> 00:29:35,800
Speaker 1: big triggers for the employment rates? A lagged leg an

524
00:29:35,840 --> 00:29:38,760
Speaker 1: indicator in defaults is something. So far they've been pretty low,

525
00:29:38,800 --> 00:29:42,360
Speaker 1: with the exception of vehicle default and student defaults. And

526
00:29:42,360 --> 00:29:45,680
Speaker 1: student defaults have actually come down off their highs. But um,

527
00:29:45,680 --> 00:29:48,480
Speaker 1: we don't know what's out there, and once we start,

528
00:29:48,640 --> 00:29:50,479
Speaker 1: you often get teaser rates on these home a rate

529
00:29:50,520 --> 00:29:53,040
Speaker 1: lines of credit, right, and so the first year you're fine.

530
00:29:53,120 --> 00:29:55,080
Speaker 1: But what we'll really be watching for is a year

531
00:29:55,120 --> 00:29:57,880
Speaker 1: from now is what happens as those rates flip, and

532
00:29:57,880 --> 00:30:00,680
Speaker 1: we will likely have a much higher rate in how

533
00:30:00,720 --> 00:30:03,440
Speaker 1: much is that can to stress these homeowners. Also, I

534
00:30:03,440 --> 00:30:06,400
Speaker 1: think it's really important is that we watch very carefully

535
00:30:06,440 --> 00:30:10,600
Speaker 1: how much people move back into flexible rate mortgages instead

536
00:30:10,600 --> 00:30:14,120
Speaker 1: of fixed rate mortgages. That seems completely counterintuitive to go

537
00:30:14,280 --> 00:30:17,640
Speaker 1: towards shorter term interest rate mortgages when rates are going up,

538
00:30:17,680 --> 00:30:20,200
Speaker 1: but that's exactly what people do. You know. One of

539
00:30:20,240 --> 00:30:23,080
Speaker 1: the things, having been in credit for nineteen years of

540
00:30:23,120 --> 00:30:25,800
Speaker 1: my thirty year career in a bank, I used to

541
00:30:25,840 --> 00:30:27,880
Speaker 1: always warn our credit people as the best way to

542
00:30:27,920 --> 00:30:30,120
Speaker 1: die is in debt, because it means you've gained the

543
00:30:30,160 --> 00:30:32,960
Speaker 1: system and you've lived beyond your means your entire life.

544
00:30:33,040 --> 00:30:35,320
Speaker 1: And that's what I always worry about, is the accumulation

545
00:30:35,360 --> 00:30:37,800
Speaker 1: of debt. And we're doing it even though we're not

546
00:30:37,920 --> 00:30:41,240
Speaker 1: at the highest levels relative to income that we've seen

547
00:30:41,840 --> 00:30:44,720
Speaker 1: since such crisis. We have taken off that access debt.

548
00:30:44,880 --> 00:30:47,200
Speaker 1: We're at two thousand three levels. That was still a

549
00:30:47,280 --> 00:30:50,239
Speaker 1: peak prior to the housing build up, and we had

550
00:30:50,240 --> 00:30:53,160
Speaker 1: already taken on too high a debt build up before

551
00:30:53,240 --> 00:30:57,160
Speaker 1: the housing bubble. Diane Swunk, Can I just shift your

552
00:30:57,200 --> 00:31:00,200
Speaker 1: attention to one of the pieces of information are going

553
00:31:00,240 --> 00:31:02,480
Speaker 1: to get when we look at the labor report, which

554
00:31:02,520 --> 00:31:07,440
Speaker 1: is the prime age male labor force participation rate, how

555
00:31:07,440 --> 00:31:11,080
Speaker 1: many people are actually working. Can you give us your

556
00:31:11,080 --> 00:31:12,960
Speaker 1: thoughts there and whether you believe that this is a

557
00:31:13,440 --> 00:31:17,680
Speaker 1: structural trend that is going to have really nasty implications

558
00:31:17,760 --> 00:31:21,000
Speaker 1: for the economy. It's a great question. It's one of

559
00:31:21,040 --> 00:31:23,480
Speaker 1: the ones we moost worried about as economists. We have

560
00:31:23,640 --> 00:31:27,600
Speaker 1: seen us come off the lows and participation from the crisis,

561
00:31:27,680 --> 00:31:30,480
Speaker 1: but we're still on a downward trend since the peak

562
00:31:30,520 --> 00:31:33,160
Speaker 1: and prime age, particularly as you pointed out male labor

563
00:31:33,200 --> 00:31:36,840
Speaker 1: force participation, but also women um women's labor force participation

564
00:31:36,880 --> 00:31:40,120
Speaker 1: among that fifty four year old group is now lower

565
00:31:40,120 --> 00:31:42,800
Speaker 1: in the United States. In Japan now they include more

566
00:31:42,840 --> 00:31:45,960
Speaker 1: part time women workers. But these are things we really

567
00:31:45,960 --> 00:31:48,800
Speaker 1: worry about because as we are not able to bring

568
00:31:48,920 --> 00:31:51,840
Speaker 1: as many people back from the sidelines because of chronic

569
00:31:51,920 --> 00:31:55,960
Speaker 1: problems like the opioid crisis, a huge erosion in skills,

570
00:31:56,280 --> 00:31:59,560
Speaker 1: people who have just simply not been invested in in

571
00:31:59,640 --> 00:32:02,360
Speaker 1: terms of their human capital, their education to work the

572
00:32:02,440 --> 00:32:04,880
Speaker 1: kind of jobs or working today, and all the burden

573
00:32:04,960 --> 00:32:07,720
Speaker 1: to train is on individual employers. I see it with

574
00:32:07,760 --> 00:32:11,160
Speaker 1: my clients every time they're biggest challenges, they train people

575
00:32:11,440 --> 00:32:13,240
Speaker 1: and then they get poached. And these are people that

576
00:32:13,280 --> 00:32:16,640
Speaker 1: they're paying signing bonuses to their increasing their wages and

577
00:32:16,680 --> 00:32:20,200
Speaker 1: their paying for their training. But unlike higher level education

578
00:32:20,400 --> 00:32:22,440
Speaker 1: things like an m b A or things like that,

579
00:32:22,440 --> 00:32:24,760
Speaker 1: where a company can sort of require you to pay

580
00:32:24,800 --> 00:32:26,680
Speaker 1: that back over a period in time, if you train

581
00:32:26,720 --> 00:32:29,280
Speaker 1: a trucker to be a trucker, they can be taken

582
00:32:29,280 --> 00:32:33,160
Speaker 1: away from you overnight by a competitor next door. Well,

583
00:32:33,160 --> 00:32:35,280
Speaker 1: and this is also something that if you take a

584
00:32:35,280 --> 00:32:38,040
Speaker 1: look at what's going on in Italy, they also have

585
00:32:38,920 --> 00:32:44,040
Speaker 1: matched the United States for low mail primates participations. Exactly

586
00:32:44,080 --> 00:32:46,600
Speaker 1: good company there in Italy, right, Yeah, I know this

587
00:32:46,720 --> 00:32:49,240
Speaker 1: is really serious, and you know, the things that we

588
00:32:49,240 --> 00:32:52,120
Speaker 1: worry about is how much of it is structural and

589
00:32:52,160 --> 00:32:55,200
Speaker 1: how much of it is cyclical. The cyclical component looks

590
00:32:55,240 --> 00:32:57,160
Speaker 1: like it's you know, starting to play out. We really

591
00:32:57,160 --> 00:32:59,560
Speaker 1: are bringing some of those people back that got hit

592
00:32:59,600 --> 00:33:01,680
Speaker 1: hard as but you know, could come back into the

593
00:33:01,760 --> 00:33:04,320
Speaker 1: labor force. But this is a real issue going forward

594
00:33:04,320 --> 00:33:08,240
Speaker 1: because by if we eliminate immigration, and we are cutting

595
00:33:08,360 --> 00:33:11,880
Speaker 1: immigration quite dramatically, it's already down legal immigration is already

596
00:33:11,920 --> 00:33:15,640
Speaker 1: downed quite dramatically from a year ago. That's the administration's desire.

597
00:33:15,800 --> 00:33:19,480
Speaker 1: If you eliminate immigration, by just the aging of the

598
00:33:19,520 --> 00:33:22,760
Speaker 1: labor force and the natural trends, this sort of structural

599
00:33:22,800 --> 00:33:26,920
Speaker 1: trend we see in labor force participation by men in particular,

600
00:33:27,000 --> 00:33:30,200
Speaker 1: gets you to a contraction in the labor force by

601
00:33:30,240 --> 00:33:32,640
Speaker 1: that's only two years away. That's something we want to

602
00:33:32,680 --> 00:33:35,719
Speaker 1: avoid because we really want to re engage these workers

603
00:33:35,720 --> 00:33:37,880
Speaker 1: on this hideline. We want to We don't want to

604
00:33:37,880 --> 00:33:41,160
Speaker 1: lose people. The open word crisis has so many collateral damage,

605
00:33:41,160 --> 00:33:43,360
Speaker 1: but that's only one of many things that are affecting

606
00:33:43,400 --> 00:33:48,280
Speaker 1: incarceration rates, are infecting prime mail participation, all of those

607
00:33:48,280 --> 00:33:52,000
Speaker 1: things together. There are fixes, but there's no sound bite fixes.

608
00:33:52,120 --> 00:33:55,120
Speaker 1: And a good economy alone does not lift all boats,

609
00:33:55,640 --> 00:33:58,520
Speaker 1: thank you very much, Diane swonk Is. The chief economy

610
00:33:58,560 --> 00:34:08,880
Speaker 1: is for Grant Thornton. Thanks for listening to the Bloomberg

611
00:34:08,920 --> 00:34:14,839
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

612
00:34:15,239 --> 00:34:19,440
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

613
00:34:19,480 --> 00:34:23,759
Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.

614
00:34:24,200 --> 00:34:25,280
Speaker 1: I'm Bloomberg Radio