WEBVTT - Euro Weakness vs. Dollar Strength with Rosenberg 0:00:01.360 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:33.480 Bloomberg dot Com, and of course on the Bloomberg. We've 0:00:33.520 --> 0:00:35.800 got an expert in the in the studio right now, 0:00:35.880 --> 0:00:40.320 Jeff Rosenberg. He is black Rock's chief fixed income strategist. 0:00:40.680 --> 0:00:42.839 And uh, you know, one of the things I want 0:00:42.880 --> 0:00:47.000 to understand is are people really willing to buy that 0:00:47.080 --> 0:00:51.479 thirty year at three point two percent, Jeff? Because unless 0:00:51.479 --> 0:00:53.880 you're gonna trade it, you're gonna get stuck with a 0:00:53.880 --> 0:00:56.280 pretty low yield for a long time. And if you 0:00:56.320 --> 0:00:58.520 are going to trade it, you have to find someone 0:00:58.560 --> 0:01:00.840 else that's willing to get stuck with that low yield. 0:01:01.320 --> 0:01:03.360 So there's a couple of perspectives there, Pim. And it's 0:01:03.360 --> 0:01:05.040 a great question. It's a question we get a lot, 0:01:05.080 --> 0:01:07.520 but you're seeing the reason why people want to own 0:01:07.600 --> 0:01:11.120 that thirty year on a day like today. Duration having 0:01:11.240 --> 0:01:14.360 something in your portfolio that moves in the opposite direction 0:01:14.600 --> 0:01:18.000 of risky assets like equities is really the reason why 0:01:18.040 --> 0:01:21.160 people own that. So it's less about the absolute level 0:01:21.160 --> 0:01:23.160 of yield. You're not really thinking about the thirty year 0:01:23.200 --> 0:01:26.160 treasury is an income source. You're thinking of it as 0:01:26.200 --> 0:01:29.639 a stabilizer, and on days like today, it's really showing 0:01:29.640 --> 0:01:33.400 its value that it goes up a lot when risk 0:01:33.520 --> 0:01:36.399 goes up, and people own it in their portfolio for 0:01:36.440 --> 0:01:39.559 its diversification value more than its absolute level of yield. 0:01:39.840 --> 0:01:42.800 Would you sell it if you own some thirty years 0:01:42.800 --> 0:01:45.440 in your portfolio, I mean, would you sell some of 0:01:45.480 --> 0:01:48.280 them today and take advantage of the turmoil? No? No, 0:01:48.400 --> 0:01:50.600 we're not going to think about sort of the thirty 0:01:50.680 --> 0:01:54.080 years trade as as as a trade or the thirty 0:01:54.120 --> 0:01:57.200 years treasury as a as a trading strategy. This is 0:01:57.200 --> 0:02:00.480 really about portfolio construction and building porto is that are 0:02:00.520 --> 0:02:04.520 resilient over longer time periods. This is about what's the 0:02:04.640 --> 0:02:09.280 right percentage allocation in my portfolio two equities to my 0:02:09.400 --> 0:02:13.120 risky assets. And then given that percentage that's relevant to 0:02:13.240 --> 0:02:17.040 me in my life cycle of investing for my risk tolerance, 0:02:17.360 --> 0:02:20.200 I can add some diversification in terms of adding some 0:02:20.280 --> 0:02:25.880 thirty year treasuries, and I'm holding that portfolio concentration relative 0:02:25.919 --> 0:02:28.799 to my equity allocation. If I then decide I want 0:02:28.800 --> 0:02:31.680 to de risk my portfolio because I think, like events 0:02:32.000 --> 0:02:34.519 today Italy, it's showing me there's a lot more risk 0:02:34.560 --> 0:02:36.359 in the world. I want to take the risk out 0:02:36.360 --> 0:02:38.320 of my portfolio. Then maybe yeah, I take the risk 0:02:38.360 --> 0:02:40.280 out of my equities, and then maybe I don't need 0:02:40.320 --> 0:02:43.240 that thirty year ballast as much. And hey, one of 0:02:43.280 --> 0:02:45.720 the areas we've been talking to investors about, look at 0:02:45.720 --> 0:02:47.520 what you can do in the front end of the 0:02:47.600 --> 0:02:50.079 US yield curve today. You can get three three and 0:02:50.120 --> 0:02:55.280 a half percent yield in some attractive investment grade areas 0:02:55.320 --> 0:02:58.440 of the market. Maybe that's why I sell my thirty 0:02:58.480 --> 0:03:01.280 year because I'm getting rid of my equity risk. That's 0:03:01.320 --> 0:03:03.640 a d risking of the portfolio moving into more like 0:03:03.720 --> 0:03:06.440 cash and cash equivalence. That's a very different kind of 0:03:06.440 --> 0:03:09.639 strategy talking about the overall portfolio, not just looking at 0:03:09.840 --> 0:03:12.400 you know, these one day moves. Speaking of these cash 0:03:12.400 --> 0:03:15.200 and cash equivalence, how do you anticipate all of this 0:03:15.320 --> 0:03:19.160 volatility and emerging markets in Italian credit, in Italian bonds 0:03:19.240 --> 0:03:22.440 all over Europe? How do you anticipate that ultimately impacting 0:03:22.480 --> 0:03:25.240 the FED decision process and the front end of the curve, 0:03:25.280 --> 0:03:27.960 because it seems the front end is likely to experience 0:03:28.000 --> 0:03:31.440 a lot of interesting activity throughout the year. If this 0:03:31.520 --> 0:03:34.519 becomes a big problem, yeah, and and that's really the 0:03:34.520 --> 0:03:37.760 the key point to your question is is the if 0:03:37.960 --> 0:03:41.000 how big of a problem? And by problem. From the 0:03:41.000 --> 0:03:45.080 Fed's perspective, what they're gonna be thinking about is does 0:03:45.160 --> 0:03:49.600 the Italian political risk rise to the point of affecting 0:03:50.000 --> 0:03:53.400 the real economy outcomes in the US? Does this event 0:03:54.000 --> 0:03:58.760 cascade into changing people's views on their investment, on their spending, 0:03:59.240 --> 0:04:01.520 on their con fidence. Right, And the FED thinks about 0:04:01.560 --> 0:04:04.560 that in terms of what they'll measure as financial conditions, 0:04:04.600 --> 0:04:08.000 this is a financial conditions tightening, meaning it's making it 0:04:08.120 --> 0:04:13.440 harder for companies, individuals to produce real economic activity. Now, 0:04:13.440 --> 0:04:15.480 where the FED had been where the markets are, is 0:04:15.520 --> 0:04:19.400 that financial conditions have been very very accommodative. So this 0:04:19.480 --> 0:04:23.719 is a movement upwards from very very loose financial conditions, 0:04:23.800 --> 0:04:26.880 highly accommodative financial conditions, to a slight tightening on the 0:04:26.960 --> 0:04:31.039 margin that reduces maybe some of the odds, but at 0:04:31.080 --> 0:04:34.360 this point probably doesn't dislodge the FED off of the 0:04:34.400 --> 0:04:37.400 path of three to four hikes. Maybe it reduces a 0:04:37.440 --> 0:04:40.719 little bit of the four hike scenario. Markets are pretty 0:04:40.800 --> 0:04:43.320 much priced for three and that's where I think you'll 0:04:43.360 --> 0:04:45.480 see this sort of settle in for the front end 0:04:45.520 --> 0:04:48.440 of the curve, Jeff. If the dollar continues this, uh, 0:04:48.520 --> 0:04:52.000 this path of of strength, right, I mean one fifteen 0:04:52.279 --> 0:04:55.159 forty five against the euro. Not only are is everyone 0:04:55.160 --> 0:04:56.719 going to be able to afford to go to Europe 0:04:56.720 --> 0:05:00.280 for a vacation, but isn't that going to just raw 0:05:00.440 --> 0:05:03.440 even more funds into the United States And you're going 0:05:03.480 --> 0:05:05.720 to end up with this kind of cycle that chases 0:05:05.760 --> 0:05:08.359 its own tail. Yeah. So you know, the strength of 0:05:08.360 --> 0:05:12.520 the dollar is another kind of source of tightening financial conditions, 0:05:12.520 --> 0:05:15.400 because when the dollar is stronger, it makes everywhere else 0:05:15.400 --> 0:05:18.520 in the world harder to finance their debt. Remember, most 0:05:18.520 --> 0:05:21.840 of the world's debt is denominated in dollars. So strengthening 0:05:21.839 --> 0:05:24.560 in the dollar is good for us, good for the 0:05:24.560 --> 0:05:28.120 European vacations and as as you just mentioned, but it's 0:05:28.160 --> 0:05:30.440 bad for most of the other countries in the world. 0:05:30.520 --> 0:05:32.200 So I think what you're seeing this morning is a 0:05:32.279 --> 0:05:35.360 little bit more about euro weakness than it is dollar strength, 0:05:35.400 --> 0:05:39.760 because it's about increasing the odds of some disruptive political 0:05:39.760 --> 0:05:43.279 events showing up in Europe, but certainly dollar strength on 0:05:43.320 --> 0:05:45.960 the back of the older story, which was we have 0:05:46.000 --> 0:05:48.200 a better growth story, we have a better interest rate 0:05:48.240 --> 0:05:53.200 differential is another headwinds to global investing. And so when 0:05:53.200 --> 0:05:56.120 we think about portfolio construction, we think about global equities, 0:05:56.120 --> 0:05:58.200 for example, this is a little bit of a headwinds 0:05:58.200 --> 0:06:01.200 we think about emerging markets investing. You know, first and 0:06:01.279 --> 0:06:04.000 foremost it's a currency risk, and so the currency risk 0:06:04.080 --> 0:06:07.520 showing up kind of brings some more attractiveness back into 0:06:07.560 --> 0:06:09.960 the US markets. Okay, so you hit on a really 0:06:10.040 --> 0:06:12.080 key topic, and I think that is currency risk in 0:06:12.120 --> 0:06:14.120 the dollar, and I'm looking at your strategy and you've 0:06:14.120 --> 0:06:17.240 got sort of this neutral view on emerging markets. Talk 0:06:17.360 --> 0:06:20.159 us through how you see that playing out, how you 0:06:20.200 --> 0:06:22.479 see this dollar strength playing out in emerging markets, and 0:06:22.480 --> 0:06:25.279 where you're still finding opportunities in that space. Yeah, so 0:06:25.440 --> 0:06:29.200 the emerging market view is really changed for US a 0:06:29.240 --> 0:06:32.159 lot because of this shift in the currency outlook. So 0:06:32.200 --> 0:06:34.560 what you had had for a very long time was 0:06:34.640 --> 0:06:40.240 relatively benign emerging market currency volatility in an environment where 0:06:40.440 --> 0:06:43.120 the yields that you were getting for taking that currency 0:06:43.200 --> 0:06:47.800 volatility by buying the locally denominated currency, debt was relatively 0:06:47.800 --> 0:06:50.320 attractive upwards of a hundred and fifty even if we 0:06:50.360 --> 0:06:53.320 go back further two hundred basis points above treasury debt, 0:06:53.480 --> 0:06:57.159 when treasury debt was very low. Now, more recently, what 0:06:57.279 --> 0:06:59.599 have we seen. We've seen both sides of the argument 0:06:59.640 --> 0:07:03.200 towards local currency move against the local currency view, which 0:07:03.240 --> 0:07:06.760 is currency volatility is higher, so the risks to currency 0:07:06.760 --> 0:07:09.400 are much more apparent, and the extra yield that you're 0:07:09.440 --> 0:07:13.240 getting relative to the hard currency alternatives has narrowed. So 0:07:13.360 --> 0:07:16.559 that's shifted our emerging market focus a bit matt back 0:07:16.800 --> 0:07:21.360 towards hard currency alternatives, where hard currency spreads and yields 0:07:21.440 --> 0:07:25.360 had moved up, making them more attractive relative to other 0:07:25.440 --> 0:07:28.920 credit alternatives where you're not taking the currency risk. So 0:07:29.000 --> 0:07:31.120 that's the shift for us. It's still it's a neutral 0:07:31.200 --> 0:07:34.360 view because it's an overall portfolio wide view because we're 0:07:34.840 --> 0:07:37.880 overweight emerging market equities on my colleague side of the 0:07:37.920 --> 0:07:40.120 equity side, so we're taking the risk more on the 0:07:40.120 --> 0:07:43.080 emerging market debt equity side then on the debt side. Well, 0:07:43.200 --> 0:07:44.920 just to that point, Jeff, I mean, isn't this the 0:07:44.960 --> 0:07:48.000 time when you hear the word crisis, shouldn't that make 0:07:48.080 --> 0:07:51.520 you smile as an investor and say, okay, let's figure 0:07:51.520 --> 0:07:53.840 out how to take advantage of this opportunity, because it's 0:07:53.840 --> 0:07:56.920 not about people liking you, it's about helping people make money. 0:07:56.920 --> 0:07:59.200 And if you've got a crisis, you try to figure 0:07:59.240 --> 0:08:00.720 out a way to take it vantage of it. Maybe 0:08:00.760 --> 0:08:03.480 don't go into all whole hog, but you know you 0:08:03.520 --> 0:08:06.320 have you find something that might be mispriced, well, it 0:08:06.400 --> 0:08:12.680 absolutely does if you have risk budget for that. Now, Unfortunately, 0:08:12.800 --> 0:08:15.360 as we go into these markets, one of the things 0:08:15.360 --> 0:08:17.320 that we see is a lot of people were very 0:08:17.360 --> 0:08:20.760 long risk. So crisis is is good if you're a 0:08:20.760 --> 0:08:24.040 contrarian investor, which meant that two weeks ago, when everybody 0:08:24.160 --> 0:08:26.640 was very happy, you were saying, well, I'm going to 0:08:26.760 --> 0:08:29.040 take risk down and and and the reason why you 0:08:29.080 --> 0:08:31.120 do that is so you have opportunities to add to 0:08:31.200 --> 0:08:33.920 risk in an environment where risk is going up. That's 0:08:33.920 --> 0:08:37.840 for very high frequency kind of trading type strategies. I 0:08:37.880 --> 0:08:42.240 think the broader, longer term message of crises is it's 0:08:42.280 --> 0:08:47.120 a reminder that markets have risk. Merging markets have risk. Uh, 0:08:47.240 --> 0:08:50.320 stable markets have risk. It and to review your portfolio 0:08:50.400 --> 0:08:53.600 to say, is this the kind of allocation, the kinds 0:08:53.640 --> 0:08:56.160 of waitings that I'm really comfortable with. One of our 0:08:56.200 --> 0:09:00.480 big themes for two eighteen relative to seventeen is seventeen 0:09:00.559 --> 0:09:03.120 was a very low risk environment. It was the lowest 0:09:03.280 --> 0:09:06.480 equity volatility ever. Now you're seeing it much higher. Thanks 0:09:06.600 --> 0:09:10.640 very much, much appreciated, Jeff Rosenberg, black Rock Chief fixed 0:09:10.640 --> 0:09:13.920 income strategist. He's a pro when it comes to radio 0:09:14.040 --> 0:09:30.880 as well as fixed income. Much appreciated. Joining us now 0:09:30.920 --> 0:09:34.000 to talk about issues such as China trade and after 0:09:34.240 --> 0:09:38.520 t p P as well as other international issues is 0:09:38.760 --> 0:09:43.120 Stefan Selick. He is the former Undersecretary for International Trade 0:09:43.160 --> 0:09:47.440 for the International Trade Administration. He is currently the managing 0:09:47.480 --> 0:09:51.920 partner of Bridge Park Advisors. Had a career that spans 0:09:51.960 --> 0:09:56.679 not only UH international relations but also Bank of America 0:09:56.720 --> 0:10:00.000 Mary Lynch, where he was executive of Vice chairman. Steff, 0:10:00.240 --> 0:10:02.400 thank you very much for being here. Um, let's get 0:10:02.400 --> 0:10:05.520 your thoughts right now on the state of trade talks 0:10:05.559 --> 0:10:08.600 between the United States and China. What do you believe 0:10:08.720 --> 0:10:13.959 is actually going on? Well, you know, the Secretary of Commerce, 0:10:14.000 --> 0:10:16.079 willbur Ross is headed there at the end of this 0:10:16.120 --> 0:10:21.960 week for some follow on discussions um UH to um 0:10:22.200 --> 0:10:25.040 UH deal with a whole host of issues, including the 0:10:25.160 --> 0:10:29.440 UH tariffs UM that have been discussed, and so I 0:10:29.440 --> 0:10:31.960 think it's going to continue to be fluid in ongoing. 0:10:32.240 --> 0:10:35.320 What I don't expect to see, PHIM is some big 0:10:35.360 --> 0:10:40.360 grand bargain coming anytime soon, because these are complicated issues 0:10:40.640 --> 0:10:43.840 they're going to take time to address, and like in 0:10:43.920 --> 0:10:47.240 most diplomacy, I think you're going to see incremental progress 0:10:47.280 --> 0:10:52.400 and not um uh some panacea. Speaking of incremental progress, 0:10:52.480 --> 0:10:55.360 what incremental progress would you expect? Right, So, not a 0:10:55.400 --> 0:10:58.120 grand bargain, but are there specific product areas where you 0:10:58.120 --> 0:11:01.720 can see true resolution within the next six months even 0:11:01.760 --> 0:11:03.760 twelve months At the well Gina, I would hope it 0:11:03.800 --> 0:11:05.920 would be the exact opposite, because if I think if 0:11:05.960 --> 0:11:09.520 they focus on specific products and have a shopping list, 0:11:09.840 --> 0:11:12.439 that they're fundamentally not getting at the right issues. So 0:11:12.679 --> 0:11:15.280 great if they get China to buy more soybeans they 0:11:15.320 --> 0:11:18.559 already buy twelve billion dollars of our two billion dollar crop. 0:11:18.880 --> 0:11:21.400 Great if they buy some more l G. But frankly, 0:11:21.679 --> 0:11:23.880 this is a commodity product that we're likely to have 0:11:23.920 --> 0:11:26.720 sold to another market anyway. What they should be doing 0:11:26.840 --> 0:11:31.079 is focusing on the important structural issues like the joint 0:11:31.160 --> 0:11:35.920 venture requirements, the investment restrictions, UH, the theft and counterfeiting, 0:11:36.200 --> 0:11:40.200 counterfeiting of intellectual property. And so unless they get at 0:11:40.240 --> 0:11:43.880 those structural issues, I'm fearful that actually that not much 0:11:43.960 --> 0:11:48.480 long term progress will be made. ZTE Corp. Is it 0:11:48.600 --> 0:11:52.520 normal for a specific company to garner so much attention 0:11:52.640 --> 0:11:55.720 within the context of trade talks UM, Well, PIM, you know, 0:11:55.840 --> 0:11:59.320 they were bad actors and they got caught red handed, 0:11:59.679 --> 0:12:01.800 viole eating our laws. In fact, this happened when I 0:12:01.840 --> 0:12:04.400 was the Under Secretary of Commerce in two thousand and sixteen, 0:12:05.000 --> 0:12:08.560 UM and we, as you know, UM had sanctions on 0:12:08.679 --> 0:12:12.520 countries including Iran and North Korea, and as a result 0:12:12.559 --> 0:12:16.560 of that, they were prohibited from including US products in 0:12:17.000 --> 0:12:21.520 UM UH there products that they sold to those countries, 0:12:21.760 --> 0:12:23.040 and they went ahead and did it, and they went 0:12:23.080 --> 0:12:26.160 ahead and did it knowingly. They got caught, they paid 0:12:26.200 --> 0:12:29.000 a fine, they agreed to certain measures, and in fact 0:12:29.040 --> 0:12:31.080 they didn't follow up on what they had agreed to do. 0:12:31.160 --> 0:12:35.520 So now this is coming back and apparently now rather 0:12:35.600 --> 0:12:39.079 than close them down, there's going to be an additional 0:12:39.160 --> 0:12:41.320 fine of over a billion dollars. There's going to be 0:12:41.360 --> 0:12:43.360 a forced change of management, and there's gonna be some 0:12:44.120 --> 0:12:49.200 real stringent oversight um going forward. Um. That is separate 0:12:49.280 --> 0:12:53.760 and distinct from this issue of using those telecom equipment 0:12:53.760 --> 0:12:57.800 products to spy on US companies. This is really just 0:12:57.920 --> 0:13:00.520 a matter of law, and I think it's gonna I 0:13:00.559 --> 0:13:03.240 think it's a going to play out over the next 0:13:03.280 --> 0:13:06.520 few weeks. Stuff. And you have some really strong opinions 0:13:06.559 --> 0:13:09.040 on this focus on the bilateral trade deficit by the 0:13:09.080 --> 0:13:13.560 administration and how that potentially, I guess presents a sort 0:13:13.600 --> 0:13:16.560 of false argument. Maybe you can talk us through that 0:13:16.760 --> 0:13:19.400 focus and how it should shift to really achieve any 0:13:19.400 --> 0:13:22.160 meaningful reform. Yeah, I mean, Gina, I think first of all, 0:13:22.360 --> 0:13:26.320 thinking of our trade deficit as a scorecard, it just 0:13:26.559 --> 0:13:30.000 makes no sense. Um. Uh, it is not. And then 0:13:30.000 --> 0:13:32.840 in fact, the deficit, our trade deficit is caused by 0:13:32.840 --> 0:13:35.320 a whole host of things. But it's not caused by 0:13:35.320 --> 0:13:39.280 our global competitiveness. It's caused by investment and savings rate 0:13:39.320 --> 0:13:42.199 in respective countries, and it's caused by, um, the fact 0:13:42.200 --> 0:13:45.679 that the United States is the world's reserve currency. I 0:13:45.679 --> 0:13:48.400 would also add to that to your point, focusing on 0:13:48.440 --> 0:13:53.000 that deficit bilaterally with one particular company makes no sense. 0:13:53.040 --> 0:13:56.680 I mean, you run a trade surplus with Bloomberg every 0:13:56.679 --> 0:13:58.439 month when they pay you, and you run a trade 0:13:58.480 --> 0:14:01.240 deficit with your dry cleaner every month when you pay them, 0:14:01.559 --> 0:14:04.600 And so thinking about this that narrowly is a mistake. 0:14:04.640 --> 0:14:07.360 And I go back to UM, not using it as 0:14:07.360 --> 0:14:11.480 a scorecard, but focusing on the real long term structural issues. 0:14:11.520 --> 0:14:12.760 And at the top of that list are going to 0:14:12.800 --> 0:14:15.200 be issues that we have with China, given the importance 0:14:15.200 --> 0:14:17.600 and size of that economy. Do you believe we're going 0:14:17.640 --> 0:14:22.200 to get a renegototiated NAFTA. Well, UM, it certainly is 0:14:22.240 --> 0:14:26.160 not proceeding UM as smoothly as one would have hoped. UM. 0:14:26.200 --> 0:14:29.640 I'm not particularly fearful PIM that UM we're going to 0:14:29.680 --> 0:14:32.840 withdraw from NAFTA because the consequences I think would be 0:14:32.960 --> 0:14:36.640 UM profound and severe. I think the administration has heard 0:14:36.720 --> 0:14:40.680 from companies in industries across the United States as well 0:14:40.680 --> 0:14:43.240 as our farmers and our ranchers how important the Mexican 0:14:43.240 --> 0:14:47.160 and Canadian markets are to them. Uh So, while I 0:14:47.200 --> 0:14:51.280 think it hopefully gets UM modernized, because this is don't 0:14:51.320 --> 0:14:54.560 forget a twenty five year old agreement. UM, I'm fearful 0:14:54.640 --> 0:14:57.560 that the asks at the current United States Trade Representative 0:14:57.560 --> 0:15:00.800 has put in place Representative Trade represent It of Lightheiser 0:15:01.040 --> 0:15:04.400 are so aggressive that it's unlikely to be able to 0:15:04.440 --> 0:15:06.360 get resolved in the near term. And as you know, 0:15:06.480 --> 0:15:09.920 we also have both our and their political calendar. They 0:15:09.920 --> 0:15:12.840 have an upcoming presidential election on July one, we have 0:15:12.920 --> 0:15:15.360 our mid term elections. So my fear is that this 0:15:15.440 --> 0:15:18.320 gets pushed out into the future and the can gets 0:15:18.400 --> 0:15:21.000 kicked down the road as opposed to making the sort 0:15:21.040 --> 0:15:22.880 of progress that we should have been able to make 0:15:23.160 --> 0:15:26.920 with two of our most important allies. UH and friends, 0:15:27.360 --> 0:15:29.400 thank you very much for spending time with us, being 0:15:29.400 --> 0:15:33.000 with us this morning. Stefan Selga he is a managing 0:15:33.120 --> 0:15:37.160 partner of a Bridge Park Advisors, former Under Secretary of 0:15:37.240 --> 0:15:41.960 Commerce for International Trade, giving us some detailed information about 0:15:42.400 --> 0:16:00.400 how trade talks are progressing or alternatively not progressing. Dean 0:16:00.480 --> 0:16:04.600 current It is the chief executive officer for Macro Risk Advisors. 0:16:04.680 --> 0:16:07.680 He joins us here in our eleven three oh studios 0:16:07.680 --> 0:16:09.120 and I want to welcome, of course, all of our 0:16:09.120 --> 0:16:12.640 Bloomberg listeners. UH, in Boston one oh six one Boston, 0:16:12.680 --> 0:16:18.400 Newburyport and UH in Washington six, San Francisco and one 0:16:18.560 --> 0:16:22.600 serious dean. Are you panicky or are you celebrating? Well, 0:16:22.760 --> 0:16:25.880 I don't think it's the reason yet to PANICUM him. 0:16:25.920 --> 0:16:27.640 I think you make a really good point, which is 0:16:27.760 --> 0:16:31.440 there are more often than not these events tend to 0:16:31.480 --> 0:16:36.400 be more idiosyncratic to a specific asset class or region. 0:16:37.280 --> 0:16:41.600 We've seen these types of UM risk golf events in 0:16:41.640 --> 0:16:45.160 you know, a particular area UM start to get priced 0:16:45.160 --> 0:16:49.480 in more broadly into let's say, US stocks, but then 0:16:50.000 --> 0:16:54.120 ultimately fizzle out. UM. I think the market's trying to 0:16:54.160 --> 0:16:58.200 do its best to sort of probability weight the potential 0:16:58.320 --> 0:17:02.920 for UH something to get transmitted more broadly. So I 0:17:02.920 --> 0:17:05.120 think that's that's what you're seeing, is that the sell 0:17:05.160 --> 0:17:07.600 off in US equities and the rise in the VIX 0:17:07.640 --> 0:17:12.480 are UM some discounting of potential future outcomes. UM. That 0:17:12.520 --> 0:17:15.560 being said, I certainly woke up this morning and was 0:17:15.680 --> 0:17:18.919 quite alarmed by just the size, the sheer magnitude of 0:17:18.960 --> 0:17:22.840 the move UH in Italian sovereigns, the massive sell off 0:17:22.960 --> 0:17:27.040 in bank stocks in Europe. UM. If you're not an 0:17:27.080 --> 0:17:30.080 expert in Italian politics, which I certainly am not. You 0:17:30.160 --> 0:17:32.919 look to asset prices to tell you about severity, and 0:17:32.920 --> 0:17:36.159 this is certainly UM. The asset price move is telling 0:17:36.200 --> 0:17:39.560 you that people very much care about what what's happening 0:17:39.640 --> 0:17:42.520 is the situation unfolds. So when you think about that 0:17:42.600 --> 0:17:45.119 feedback loop, if we if we very much care about 0:17:45.320 --> 0:17:47.879 UM what's happening in Europe, and then it will ultimately 0:17:47.920 --> 0:17:51.320 impact the US equity market, how do you navigate that 0:17:51.480 --> 0:17:56.000 both short term tactically in long term UM in your strategies, Well, 0:17:56.040 --> 0:17:58.360 I think the first thing is and and so our 0:17:58.400 --> 0:18:01.439 firm ACAR Risk Advisors tends to focus very much on 0:18:01.520 --> 0:18:05.080 option based strategies and oftentimes clients will look to us 0:18:05.119 --> 0:18:09.600 to help them UM design hedging trades. UM Hedging is 0:18:09.960 --> 0:18:15.320 I think a undervalued discipline, but certainly something that for example, 0:18:15.359 --> 0:18:17.600 throughout last year, if you tried to hedge, even as 0:18:17.640 --> 0:18:20.320 the VIX was quite low, you would have been quite 0:18:20.359 --> 0:18:23.840 early UH to calling calling the risk golf events. So 0:18:23.840 --> 0:18:27.080 you have to be careful when you get defensive because 0:18:27.119 --> 0:18:30.680 you can overallocate option premium UH and spend a lot 0:18:30.680 --> 0:18:32.880 of money in the sideways. And as I said earlier, 0:18:33.040 --> 0:18:36.399 most of the time these situations have boiled over. But 0:18:36.480 --> 0:18:41.760 I think collectively investors, antenna should be risk. Antenna should 0:18:41.800 --> 0:18:44.439 be up at this point. Um, we certainly have a 0:18:44.440 --> 0:18:47.360 situation which the U. S economy continues to do well. 0:18:47.560 --> 0:18:52.480 US corporate earnings are are the foundation of asset prices. 0:18:52.960 --> 0:18:56.000 But at the same time there are these complex risk 0:18:56.080 --> 0:19:00.159 cross currents. We've talked about the dollar as a of 0:19:00.240 --> 0:19:04.159 international vix. I think that can be destabilizing, especially for 0:19:04.200 --> 0:19:07.359 e m um and um. You know, you've got at 0:19:07.400 --> 0:19:09.760 this sort of at a given time, a lot of 0:19:09.800 --> 0:19:15.399 international negotiation, uh, North Korea, Iran, China with tariff, so 0:19:15.400 --> 0:19:19.960 there's a lot of stuff happening, and this meltdown in 0:19:20.280 --> 0:19:22.600 Italian sovereigns I think just adds to the mix of 0:19:22.640 --> 0:19:25.760 things to be watchful for. Right. So you talk about 0:19:26.320 --> 0:19:28.800 size factor in some of your work recently and your 0:19:28.840 --> 0:19:31.199 preference for small caps over large caps, and that's certainly 0:19:31.240 --> 0:19:34.240 played out very well and certainly in your favorite so 0:19:34.320 --> 0:19:37.080 far this year. But it strikes me as really intriguing 0:19:37.720 --> 0:19:41.280 that at some point if investors are flocking to the dollar, 0:19:41.440 --> 0:19:44.479 it's a consequence of risk, right, It's a consequence of 0:19:45.200 --> 0:19:48.440 depleting risk tolerance or decreasing risk tolerance, and yet small 0:19:48.480 --> 0:19:51.520 caps carry a very high level of risk. Well, ultimately, 0:19:51.560 --> 0:19:54.920 the dollar rally work to the detriment of the small 0:19:54.920 --> 0:19:57.439 cap trade, and how do you navigate that? Right? So 0:19:57.520 --> 0:19:59.360 it's a good it's a good point. We are our 0:19:59.520 --> 0:20:03.440 favorite of things like i w M as a kind 0:20:03.440 --> 0:20:06.920 of placeholder for being long in the market. Uh. Certainly 0:20:07.040 --> 0:20:10.159 was with the recognition that it's a domestic index. It 0:20:10.200 --> 0:20:14.879 doesn't have as much This is the Russell two of 0:20:14.960 --> 0:20:18.320 the exchange traded fund for the Russell two thousand exactly. Yes, 0:20:18.600 --> 0:20:21.920 um So, because the small caps tend to be very 0:20:21.920 --> 0:20:25.080 domestically centric, they're not as exposed to a rising dollar. 0:20:25.720 --> 0:20:27.439 But you know, your point is very well taken that 0:20:27.960 --> 0:20:31.000 um if the scenario of a rising dollar is to 0:20:31.600 --> 0:20:34.280 is what causes a significant risk off event, it's just 0:20:34.359 --> 0:20:37.919 hard to say that any anything holds up really, really well. 0:20:38.280 --> 0:20:42.720 Um So, So this was a recommendation for if you're 0:20:42.960 --> 0:20:45.880 going to be long. Um we and you don't think 0:20:45.880 --> 0:20:48.960 the dollar is set to spike, and our work on 0:20:49.000 --> 0:20:52.680 the dollar suggests that we think tactically you can see 0:20:52.720 --> 0:20:56.000 it continue to rise. Um. But we're staring at these 0:20:56.080 --> 0:21:00.159 massive twin deficits. And so from a longer term standpoint, UM, 0:21:00.280 --> 0:21:03.640 you know, our work suggests that the dot the dot 0:21:03.800 --> 0:21:07.679 the strong dollar story, while tactically appealing, UM, we just 0:21:07.680 --> 0:21:10.440 don't see it. Just given the the size of the 0:21:10.640 --> 0:21:12.880 you know, capital and current account deficits that the US 0:21:12.960 --> 0:21:15.000 is set to run. You don't think that we can 0:21:15.000 --> 0:21:18.560 just get people to lend us more money. We can 0:21:19.800 --> 0:21:22.560 or or they could raise taxes, or you could have 0:21:22.600 --> 0:21:27.280 economic growth that then increases tax revenue. Uh why I mean, 0:21:27.440 --> 0:21:30.520 since we print the currency, why is that a problem? No, 0:21:30.600 --> 0:21:32.480 I don't think it is a problem. I think that 0:21:32.840 --> 0:21:36.879 it's just a reality that we've never Uh. If you 0:21:36.920 --> 0:21:39.359 were to look at a UM a chart of the 0:21:39.440 --> 0:21:42.240 unemployment rate versus the size of the deficit, we're in 0:21:42.320 --> 0:21:45.520 no man's land right now. UM four percent unemployment and 0:21:45.560 --> 0:21:48.160 a trillion dollar deficit. This is these two have never 0:21:48.200 --> 0:21:52.399 coexisted before. UM. So we're we're a uh, you know, 0:21:52.560 --> 0:21:56.360 consumer of of capital in terms of you know, from 0:21:56.359 --> 0:21:59.280 from a dollar standpoint, UM, and if you just if 0:21:59.320 --> 0:22:01.080 you look at charge it's over a long period of time, 0:22:01.080 --> 0:22:05.160 there's actually a reasonably strong correlation between UM the year 0:22:05.160 --> 0:22:07.439 over year change in the dollar and the size of 0:22:07.480 --> 0:22:09.879 the of the twin deficit. And so that's a longer 0:22:10.000 --> 0:22:13.960 term um issue. And again I think tactically, uh, there's 0:22:13.960 --> 0:22:16.320 certainly a risk that the dollar continues to rise and 0:22:16.359 --> 0:22:22.360 it's destabilizing for assetprises. What is market neutral momentum? Yeah, 0:22:22.359 --> 0:22:25.600 so market neutral momentum is uh. And you guys have 0:22:25.640 --> 0:22:30.480 built just an incredibly powerful page it's called ft W, 0:22:31.119 --> 0:22:36.760 which is for factors on blood neither. Well, we're using it, 0:22:37.720 --> 0:22:41.000 we're benefiting from it. So market neutral momentum is uh, 0:22:41.040 --> 0:22:43.399 it's a it's a factor. So momentum is what What 0:22:43.480 --> 0:22:46.320 is momentum? It's it's the winner's right, So it's it's 0:22:46.359 --> 0:22:50.280 the observation that winning stocks continue to win and losing 0:22:50.280 --> 0:22:53.919 stocks continue to lose. What market neutral momentum does is 0:22:53.960 --> 0:22:58.840 it takes the sometimes the quintile, so the the you know, uh, 0:22:59.040 --> 0:23:03.600 strongest moment some socks and the least strong momentum stocks, 0:23:03.640 --> 0:23:07.000