Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We've
Speaker 1: got an expert in the in the studio right now,
Speaker 1: Jeff Rosenberg. He is black Rock's chief fixed income strategist.
Speaker 1: And uh, you know, one of the things I want
Speaker 1: to understand is are people really willing to buy that
Speaker 1: thirty year at three point two percent, Jeff? Because unless
Speaker 1: you're gonna trade it, you're gonna get stuck with a
Speaker 1: pretty low yield for a long time. And if you
Speaker 1: are going to trade it, you have to find someone
Speaker 1: else that's willing to get stuck with that low yield.
Speaker 1: So there's a couple of perspectives there, Pim. And it's
Speaker 1: a great question. It's a question we get a lot,
Speaker 1: but you're seeing the reason why people want to own
Speaker 1: that thirty year on a day like today. Duration having
Speaker 1: something in your portfolio that moves in the opposite direction
Speaker 1: of risky assets like equities is really the reason why
Speaker 1: people own that. So it's less about the absolute level
Speaker 1: of yield. You're not really thinking about the thirty year
Speaker 1: treasury is an income source. You're thinking of it as
Speaker 1: a stabilizer, and on days like today, it's really showing
Speaker 1: its value that it goes up a lot when risk
Speaker 1: goes up, and people own it in their portfolio for
Speaker 1: its diversification value more than its absolute level of yield.
Speaker 1: Would you sell it if you own some thirty years
Speaker 1: in your portfolio, I mean, would you sell some of
Speaker 1: them today and take advantage of the turmoil? No? No,
Speaker 1: we're not going to think about sort of the thirty
Speaker 1: years trade as as as a trade or the thirty
Speaker 1: years treasury as a as a trading strategy. This is
Speaker 1: really about portfolio construction and building porto is that are
Speaker 1: resilient over longer time periods. This is about what's the
Speaker 1: right percentage allocation in my portfolio two equities to my
Speaker 1: risky assets. And then given that percentage that's relevant to
Speaker 1: me in my life cycle of investing for my risk tolerance,
Speaker 1: I can add some diversification in terms of adding some
Speaker 1: thirty year treasuries, and I'm holding that portfolio concentration relative
Speaker 1: to my equity allocation. If I then decide I want
Speaker 1: to de risk my portfolio because I think, like events
Speaker 1: today Italy, it's showing me there's a lot more risk
Speaker 1: in the world. I want to take the risk out
Speaker 1: of my portfolio. Then maybe yeah, I take the risk
Speaker 1: out of my equities, and then maybe I don't need
Speaker 1: that thirty year ballast as much. And hey, one of
Speaker 1: the areas we've been talking to investors about, look at
Speaker 1: what you can do in the front end of the
Speaker 1: US yield curve today. You can get three three and
Speaker 1: a half percent yield in some attractive investment grade areas
Speaker 1: of the market. Maybe that's why I sell my thirty
Speaker 1: year because I'm getting rid of my equity risk. That's
Speaker 1: a d risking of the portfolio moving into more like
Speaker 1: cash and cash equivalence. That's a very different kind of
Speaker 1: strategy talking about the overall portfolio, not just looking at
Speaker 1: you know, these one day moves. Speaking of these cash
Speaker 1: and cash equivalence, how do you anticipate all of this
Speaker 1: volatility and emerging markets in Italian credit, in Italian bonds
Speaker 1: all over Europe? How do you anticipate that ultimately impacting
Speaker 1: the FED decision process and the front end of the curve,
Speaker 1: because it seems the front end is likely to experience
Speaker 1: a lot of interesting activity throughout the year. If this
Speaker 1: becomes a big problem, yeah, and and that's really the
Speaker 1: the key point to your question is is the if
Speaker 1: how big of a problem? And by problem. From the
Speaker 1: Fed's perspective, what they're gonna be thinking about is does
Speaker 1: the Italian political risk rise to the point of affecting
Speaker 1: the real economy outcomes in the US? Does this event
Speaker 1: cascade into changing people's views on their investment, on their spending,
Speaker 1: on their con fidence. Right, And the FED thinks about
Speaker 1: that in terms of what they'll measure as financial conditions,
Speaker 1: this is a financial conditions tightening, meaning it's making it
Speaker 1: harder for companies, individuals to produce real economic activity. Now,
Speaker 1: where the FED had been where the markets are, is
Speaker 1: that financial conditions have been very very accommodative. So this
Speaker 1: is a movement upwards from very very loose financial conditions,
Speaker 1: highly accommodative financial conditions, to a slight tightening on the
Speaker 1: margin that reduces maybe some of the odds, but at
Speaker 1: this point probably doesn't dislodge the FED off of the
Speaker 1: path of three to four hikes. Maybe it reduces a
Speaker 1: little bit of the four hike scenario. Markets are pretty
Speaker 1: much priced for three and that's where I think you'll
Speaker 1: see this sort of settle in for the front end
Speaker 1: of the curve, Jeff. If the dollar continues this, uh,
Speaker 1: this path of of strength, right, I mean one fifteen
Speaker 1: forty five against the euro. Not only are is everyone
Speaker 1: going to be able to afford to go to Europe
Speaker 1: for a vacation, but isn't that going to just raw
Speaker 1: even more funds into the United States And you're going
Speaker 1: to end up with this kind of cycle that chases
Speaker 1: its own tail. Yeah. So you know, the strength of
Speaker 1: the dollar is another kind of source of tightening financial conditions,
Speaker 1: because when the dollar is stronger, it makes everywhere else
Speaker 1: in the world harder to finance their debt. Remember, most
Speaker 1: of the world's debt is denominated in dollars. So strengthening
Speaker 1: in the dollar is good for us, good for the
Speaker 1: European vacations and as as you just mentioned, but it's
Speaker 1: bad for most of the other countries in the world.
Speaker 1: So I think what you're seeing this morning is a
Speaker 1: little bit more about euro weakness than it is dollar strength,
Speaker 1: because it's about increasing the odds of some disruptive political
Speaker 1: events showing up in Europe, but certainly dollar strength on
Speaker 1: the back of the older story, which was we have
Speaker 1: a better growth story, we have a better interest rate
Speaker 1: differential is another headwinds to global investing. And so when
Speaker 1: we think about portfolio construction, we think about global equities,
Speaker 1: for example, this is a little bit of a headwinds
Speaker 1: we think about emerging markets investing. You know, first and
Speaker 1: foremost it's a currency risk, and so the currency risk
Speaker 1: showing up kind of brings some more attractiveness back into
Speaker 1: the US markets. Okay, so you hit on a really
Speaker 1: key topic, and I think that is currency risk in
Speaker 1: the dollar, and I'm looking at your strategy and you've
Speaker 1: got sort of this neutral view on emerging markets. Talk
Speaker 1: us through how you see that playing out, how you
Speaker 1: see this dollar strength playing out in emerging markets, and
Speaker 1: where you're still finding opportunities in that space. Yeah, so
Speaker 1: the emerging market view is really changed for US a
Speaker 1: lot because of this shift in the currency outlook. So
Speaker 1: what you had had for a very long time was
Speaker 1: relatively benign emerging market currency volatility in an environment where
Speaker 1: the yields that you were getting for taking that currency
Speaker 1: volatility by buying the locally denominated currency, debt was relatively
Speaker 1: attractive upwards of a hundred and fifty even if we
Speaker 1: go back further two hundred basis points above treasury debt,
Speaker 1: when treasury debt was very low. Now, more recently, what
Speaker 1: have we seen. We've seen both sides of the argument
Speaker 1: towards local currency move against the local currency view, which
Speaker 1: is currency volatility is higher, so the risks to currency
Speaker 1: are much more apparent, and the extra yield that you're
Speaker 1: getting relative to the hard currency alternatives has narrowed. So
Speaker 1: that's shifted our emerging market focus a bit matt back
Speaker 1: towards hard currency alternatives, where hard currency spreads and yields
Speaker 1: had moved up, making them more attractive relative to other
Speaker 1: credit alternatives where you're not taking the currency risk. So
Speaker 1: that's the shift for us. It's still it's a neutral
Speaker 1: view because it's an overall portfolio wide view because we're
Speaker 1: overweight emerging market equities on my colleague side of the
Speaker 1: equity side, so we're taking the risk more on the
Speaker 1: emerging market debt equity side then on the debt side. Well,
Speaker 1: just to that point, Jeff, I mean, isn't this the
Speaker 1: time when you hear the word crisis, shouldn't that make
Speaker 1: you smile as an investor and say, okay, let's figure
Speaker 1: out how to take advantage of this opportunity, because it's
Speaker 1: not about people liking you, it's about helping people make money.
Speaker 1: And if you've got a crisis, you try to figure
Speaker 1: out a way to take it vantage of it. Maybe
Speaker 1: don't go into all whole hog, but you know you
Speaker 1: have you find something that might be mispriced, well, it
Speaker 1: absolutely does if you have risk budget for that. Now, Unfortunately,
Speaker 1: as we go into these markets, one of the things
Speaker 1: that we see is a lot of people were very
Speaker 1: long risk. So crisis is is good if you're a
Speaker 1: contrarian investor, which meant that two weeks ago, when everybody
Speaker 1: was very happy, you were saying, well, I'm going to
Speaker 1: take risk down and and and the reason why you
Speaker 1: do that is so you have opportunities to add to
Speaker 1: risk in an environment where risk is going up. That's
Speaker 1: for very high frequency kind of trading type strategies. I
Speaker 1: think the broader, longer term message of crises is it's
Speaker 1: a reminder that markets have risk. Merging markets have risk. Uh,
Speaker 1: stable markets have risk. It and to review your portfolio
Speaker 1: to say, is this the kind of allocation, the kinds
Speaker 1: of waitings that I'm really comfortable with. One of our
Speaker 1: big themes for two eighteen relative to seventeen is seventeen
Speaker 1: was a very low risk environment. It was the lowest
Speaker 1: equity volatility ever. Now you're seeing it much higher. Thanks
Speaker 1: very much, much appreciated, Jeff Rosenberg, black Rock Chief fixed
Speaker 1: income strategist. He's a pro when it comes to radio
Speaker 1: as well as fixed income. Much appreciated. Joining us now
Speaker 1: to talk about issues such as China trade and after
Speaker 1: t p P as well as other international issues is
Speaker 1: Stefan Selick. He is the former Undersecretary for International Trade
Speaker 1: for the International Trade Administration. He is currently the managing
Speaker 1: partner of Bridge Park Advisors. Had a career that spans
Speaker 1: not only UH international relations but also Bank of America
Speaker 1: Mary Lynch, where he was executive of Vice chairman. Steff,
Speaker 1: thank you very much for being here. Um, let's get
Speaker 1: your thoughts right now on the state of trade talks
Speaker 1: between the United States and China. What do you believe
Speaker 1: is actually going on? Well, you know, the Secretary of Commerce,
Speaker 1: willbur Ross is headed there at the end of this
Speaker 1: week for some follow on discussions um UH to um
Speaker 1: UH deal with a whole host of issues, including the
Speaker 1: UH tariffs UM that have been discussed, and so I
Speaker 1: think it's going to continue to be fluid in ongoing.
Speaker 1: What I don't expect to see, PHIM is some big
Speaker 1: grand bargain coming anytime soon, because these are complicated issues
Speaker 1: they're going to take time to address, and like in
Speaker 1: most diplomacy, I think you're going to see incremental progress
Speaker 1: and not um uh some panacea. Speaking of incremental progress,
Speaker 1: what incremental progress would you expect? Right, So, not a
Speaker 1: grand bargain, but are there specific product areas where you
Speaker 1: can see true resolution within the next six months even
Speaker 1: twelve months At the well Gina, I would hope it
Speaker 1: would be the exact opposite, because if I think if
Speaker 1: they focus on specific products and have a shopping list,
Speaker 1: that they're fundamentally not getting at the right issues. So
Speaker 1: great if they get China to buy more soybeans they
Speaker 1: already buy twelve billion dollars of our two billion dollar crop.
Speaker 1: Great if they buy some more l G. But frankly,
Speaker 1: this is a commodity product that we're likely to have
Speaker 1: sold to another market anyway. What they should be doing
Speaker 1: is focusing on the important structural issues like the joint
Speaker 1: venture requirements, the investment restrictions, UH, the theft and counterfeiting,
Speaker 1: counterfeiting of intellectual property. And so unless they get at
Speaker 1: those structural issues, I'm fearful that actually that not much
Speaker 1: long term progress will be made. ZTE Corp. Is it
Speaker 1: normal for a specific company to garner so much attention
Speaker 1: within the context of trade talks UM, Well, PIM, you know,
Speaker 1: they were bad actors and they got caught red handed,
Speaker 1: viole eating our laws. In fact, this happened when I
Speaker 1: was the Under Secretary of Commerce in two thousand and sixteen,
Speaker 1: UM and we, as you know, UM had sanctions on
Speaker 1: countries including Iran and North Korea, and as a result
Speaker 1: of that, they were prohibited from including US products in
Speaker 1: UM UH there products that they sold to those countries,
Speaker 1: and they went ahead and did it, and they went
Speaker 1: ahead and did it knowingly. They got caught, they paid
Speaker 1: a fine, they agreed to certain measures, and in fact
Speaker 1: they didn't follow up on what they had agreed to do.
Speaker 1: So now this is coming back and apparently now rather
Speaker 1: than close them down, there's going to be an additional
Speaker 1: fine of over a billion dollars. There's going to be
Speaker 1: a forced change of management, and there's gonna be some
Speaker 1: real stringent oversight um going forward. Um. That is separate
Speaker 1: and distinct from this issue of using those telecom equipment
Speaker 1: products to spy on US companies. This is really just
Speaker 1: a matter of law, and I think it's gonna I
Speaker 1: think it's a going to play out over the next
Speaker 1: few weeks. Stuff. And you have some really strong opinions
Speaker 1: on this focus on the bilateral trade deficit by the
Speaker 1: administration and how that potentially, I guess presents a sort
Speaker 1: of false argument. Maybe you can talk us through that
Speaker 1: focus and how it should shift to really achieve any
Speaker 1: meaningful reform. Yeah, I mean, Gina, I think first of all,
Speaker 1: thinking of our trade deficit as a scorecard, it just
Speaker 1: makes no sense. Um. Uh, it is not. And then
Speaker 1: in fact, the deficit, our trade deficit is caused by
Speaker 1: a whole host of things. But it's not caused by
Speaker 1: our global competitiveness. It's caused by investment and savings rate
Speaker 1: in respective countries, and it's caused by, um, the fact
Speaker 1: that the United States is the world's reserve currency. I
Speaker 1: would also add to that to your point, focusing on
Speaker 1: that deficit bilaterally with one particular company makes no sense.
Speaker 1: I mean, you run a trade surplus with Bloomberg every
Speaker 1: month when they pay you, and you run a trade
Speaker 1: deficit with your dry cleaner every month when you pay them,
Speaker 1: And so thinking about this that narrowly is a mistake.
Speaker 1: And I go back to UM, not using it as
Speaker 1: a scorecard, but focusing on the real long term structural issues.
Speaker 1: And at the top of that list are going to
Speaker 1: be issues that we have with China, given the importance
Speaker 1: and size of that economy. Do you believe we're going
Speaker 1: to get a renegototiated NAFTA. Well, UM, it certainly is
Speaker 1: not proceeding UM as smoothly as one would have hoped. UM.
Speaker 1: I'm not particularly fearful PIM that UM we're going to
Speaker 1: withdraw from NAFTA because the consequences I think would be
Speaker 1: UM profound and severe. I think the administration has heard
Speaker 1: from companies in industries across the United States as well
Speaker 1: as our farmers and our ranchers how important the Mexican
Speaker 1: and Canadian markets are to them. Uh So, while I
Speaker 1: think it hopefully gets UM modernized, because this is don't
Speaker 1: forget a twenty five year old agreement. UM, I'm fearful
Speaker 1: that the asks at the current United States Trade Representative
Speaker 1: has put in place Representative Trade represent It of Lightheiser
Speaker 1: are so aggressive that it's unlikely to be able to
Speaker 1: get resolved in the near term. And as you know,
Speaker 1: we also have both our and their political calendar. They
Speaker 1: have an upcoming presidential election on July one, we have
Speaker 1: our mid term elections. So my fear is that this
Speaker 1: gets pushed out into the future and the can gets
Speaker 1: kicked down the road as opposed to making the sort
Speaker 1: of progress that we should have been able to make
Speaker 1: with two of our most important allies. UH and friends,
Speaker 1: thank you very much for spending time with us, being
Speaker 1: with us this morning. Stefan Selga he is a managing
Speaker 1: partner of a Bridge Park Advisors, former Under Secretary of
Speaker 1: Commerce for International Trade, giving us some detailed information about
Speaker 1: how trade talks are progressing or alternatively not progressing. Dean
Speaker 1: current It is the chief executive officer for Macro Risk Advisors.
Speaker 1: He joins us here in our eleven three oh studios
Speaker 1: and I want to welcome, of course, all of our
Speaker 1: Bloomberg listeners. UH, in Boston one oh six one Boston,
Speaker 1: Newburyport and UH in Washington six, San Francisco and one
Speaker 1: serious dean. Are you panicky or are you celebrating? Well,
Speaker 1: I don't think it's the reason yet to PANICUM him.
Speaker 1: I think you make a really good point, which is
Speaker 1: there are more often than not these events tend to
Speaker 1: be more idiosyncratic to a specific asset class or region.
Speaker 1: We've seen these types of UM risk golf events in
Speaker 1: you know, a particular area UM start to get priced
Speaker 1: in more broadly into let's say, US stocks, but then
Speaker 1: ultimately fizzle out. UM. I think the market's trying to
Speaker 1: do its best to sort of probability weight the potential
Speaker 1: for UH something to get transmitted more broadly. So I
Speaker 1: think that's that's what you're seeing, is that the sell
Speaker 1: off in US equities and the rise in the VIX
Speaker 1: are UM some discounting of potential future outcomes. UM. That
Speaker 1: being said, I certainly woke up this morning and was
Speaker 1: quite alarmed by just the size, the sheer magnitude of
Speaker 1: the move UH in Italian sovereigns, the massive sell off
Speaker 1: in bank stocks in Europe. UM. If you're not an
Speaker 1: expert in Italian politics, which I certainly am not. You
Speaker 1: look to asset prices to tell you about severity, and
Speaker 1: this is certainly UM. The asset price move is telling
Speaker 1: you that people very much care about what what's happening
Speaker 1: is the situation unfolds. So when you think about that
Speaker 1: feedback loop, if we if we very much care about
Speaker 1: UM what's happening in Europe, and then it will ultimately
Speaker 1: impact the US equity market, how do you navigate that
Speaker 1: both short term tactically in long term UM in your strategies, Well,
Speaker 1: I think the first thing is and and so our
Speaker 1: firm ACAR Risk Advisors tends to focus very much on
Speaker 1: option based strategies and oftentimes clients will look to us
Speaker 1: to help them UM design hedging trades. UM Hedging is
Speaker 1: I think a undervalued discipline, but certainly something that for example,
Speaker 1: throughout last year, if you tried to hedge, even as
Speaker 1: the VIX was quite low, you would have been quite
Speaker 1: early UH to calling calling the risk golf events. So
Speaker 1: you have to be careful when you get defensive because
Speaker 1: you can overallocate option premium UH and spend a lot
Speaker 1: of money in the sideways. And as I said earlier,
Speaker 1: most of the time these situations have boiled over. But
Speaker 1: I think collectively investors, antenna should be risk. Antenna should
Speaker 1: be up at this point. Um, we certainly have a
Speaker 1: situation which the U. S economy continues to do well.
Speaker 1: US corporate earnings are are the foundation of asset prices.
Speaker 1: But at the same time there are these complex risk
Speaker 1: cross currents. We've talked about the dollar as a of
Speaker 1: international vix. I think that can be destabilizing, especially for
Speaker 1: e m um and um. You know, you've got at
Speaker 1: this sort of at a given time, a lot of
Speaker 1: international negotiation, uh, North Korea, Iran, China with tariff, so
Speaker 1: there's a lot of stuff happening, and this meltdown in
Speaker 1: Italian sovereigns I think just adds to the mix of
Speaker 1: things to be watchful for. Right. So you talk about
Speaker 1: size factor in some of your work recently and your
Speaker 1: preference for small caps over large caps, and that's certainly
Speaker 1: played out very well and certainly in your favorite so
Speaker 1: far this year. But it strikes me as really intriguing
Speaker 1: that at some point if investors are flocking to the dollar,
Speaker 1: it's a consequence of risk, right, It's a consequence of
Speaker 1: depleting risk tolerance or decreasing risk tolerance, and yet small
Speaker 1: caps carry a very high level of risk. Well, ultimately,
Speaker 1: the dollar rally work to the detriment of the small
Speaker 1: cap trade, and how do you navigate that? Right? So
Speaker 1: it's a good it's a good point. We are our
Speaker 1: favorite of things like i w M as a kind
Speaker 1: of placeholder for being long in the market. Uh. Certainly
Speaker 1: was with the recognition that it's a domestic index. It
Speaker 1: doesn't have as much This is the Russell two of
Speaker 1: the exchange traded fund for the Russell two thousand exactly. Yes,
Speaker 1: um So, because the small caps tend to be very
Speaker 1: domestically centric, they're not as exposed to a rising dollar.
Speaker 1: But you know, your point is very well taken that
Speaker 1: um if the scenario of a rising dollar is to
Speaker 1: is what causes a significant risk off event, it's just
Speaker 1: hard to say that any anything holds up really, really well.
Speaker 1: Um So, So this was a recommendation for if you're
Speaker 1: going to be long. Um we and you don't think
Speaker 1: the dollar is set to spike, and our work on
Speaker 1: the dollar suggests that we think tactically you can see
Speaker 1: it continue to rise. Um. But we're staring at these
Speaker 1: massive twin deficits. And so from a longer term standpoint, UM,
Speaker 1: you know, our work suggests that the dot the dot
Speaker 1: the strong dollar story, while tactically appealing, UM, we just
Speaker 1: don't see it. Just given the the size of the
Speaker 1: you know, capital and current account deficits that the US
Speaker 1: is set to run. You don't think that we can
Speaker 1: just get people to lend us more money. We can
Speaker 1: or or they could raise taxes, or you could have
Speaker 1: economic growth that then increases tax revenue. Uh why I mean,
Speaker 1: since we print the currency, why is that a problem? No,
Speaker 1: I don't think it is a problem. I think that
Speaker 1: it's just a reality that we've never Uh. If you
Speaker 1: were to look at a UM a chart of the
Speaker 1: unemployment rate versus the size of the deficit, we're in
Speaker 1: no man's land right now. UM four percent unemployment and
Speaker 1: a trillion dollar deficit. This is these two have never
Speaker 1: coexisted before. UM. So we're we're a uh, you know,
Speaker 1: consumer of of capital in terms of you know, from
Speaker 1: from a dollar standpoint, UM, and if you just if
Speaker 1: you look at charge it's over a long period of time,
Speaker 1: there's actually a reasonably strong correlation between UM the year
Speaker 1: over year change in the dollar and the size of
Speaker 1: the of the twin deficit. And so that's a longer
Speaker 1: term um issue. And again I think tactically, uh, there's
Speaker 1: certainly a risk that the dollar continues to rise and
Speaker 1: it's destabilizing for assetprises. What is market neutral momentum? Yeah,
Speaker 1: so market neutral momentum is uh. And you guys have
Speaker 1: built just an incredibly powerful page it's called ft W,
Speaker 1: which is for factors on blood neither. Well, we're using it,
Speaker 1: we're benefiting from it. So market neutral momentum is uh,
Speaker 1: it's a it's a factor. So momentum is what What
Speaker 1: is momentum? It's it's the winner's right, So it's it's
Speaker 1: the observation that winning stocks continue to win and losing
Speaker 1: stocks continue to lose. What market neutral momentum does is
Speaker 1: it takes the sometimes the quintile, so the the you know, uh,
Speaker 1: strongest moment some socks and the least strong momentum stocks,
Speaker 1: and it creates a long short portfolio. Um. So it's
Speaker 1: it's got no market beta, it's just got exposure to
Speaker 1: the momentum factor, which is the past performance. Uh. And
Speaker 1: it continues to do uh incredibly well. It's embodied in
Speaker 1: big cap text tech stocks. It is Facebook, it is Netflix. UM,
Speaker 1: you know, it's it's the beheamoth that continues to underpin
Speaker 1: a lot of the market capitalization growth in US equities.
Speaker 1: So UM, this has done what up nine percent so
Speaker 1: far this year. It's tremendous. This this and this is
Speaker 1: a portfolio that you're running right now. No, this is
Speaker 1: this is a factor. UM. We we would argue that
Speaker 1: momentum just because it's been so good to people for
Speaker 1: so long, UH is one of the risks that UM
Speaker 1: investors are vulnerable to. UM when you look at the allocation,
Speaker 1: for example, the passive strategies. Last year, Vanguard took in
Speaker 1: three sixty billion dollars of new capital. I mean, even
Speaker 1: Jack bo Goal is saying this is this is insane UM.
Speaker 1: But Vanguard, UH just does not read the newspaper. They
Speaker 1: just buy Apple because it's the biggest stock. So indexation
Speaker 1: is largely a momentum strategy because it buys the winners,
Speaker 1: right that have the biggest caps. Thanks very much for
Speaker 1: being with us, Very illuminating, much appreciated. Dean Current is
Speaker 1: the chief executive of a macro risk advisors and risk
Speaker 1: I think is going to be the word of the
Speaker 1: day risk when it comes to Italian debt. UM. Diane
Speaker 1: Swonk is our guest chief economist for Grant Thornton. Diane,
Speaker 1: if you were in Michigan, you were paying over three
Speaker 1: dollars a gallon for gasoline, as many people are in
Speaker 1: the country. Do you believe that that is going to
Speaker 1: show up in what people are able to put away,
Speaker 1: because we're gonna get and personal spending numbers later on
Speaker 1: in the week, Yes, I do. In fact, our analysis
Speaker 1: is that the depending on how long these higher gas
Speaker 1: prices at the pump linger we do know the Saudi
Speaker 1: Arabia has started to turn this picket back, or at
Speaker 1: least promise to turn the ticket back on. Even as
Speaker 1: much as we're seeing production in the US, it just
Speaker 1: simply can't make up for what Saudi Arabia has in
Speaker 1: spare capacity. And so our analysis is that we've already
Speaker 1: eliminated much of the tax cuts with higher prices at
Speaker 1: the pump for middle and lower income households. Those um
Speaker 1: tax cuts average when you get into the middle income
Speaker 1: households about eight hundred dollars per household. About half of
Speaker 1: that's being wiped out already by higher prices at the pump.
Speaker 1: For low income households, the lowest wage earners, their tax
Speaker 1: cuts are only four year dollars a year, so of
Speaker 1: course they've already seen major loss in earnings. And what's
Speaker 1: really important is with the higher prices that the pump is,
Speaker 1: it also affects things like housing, mobility, people's ability to
Speaker 1: take higher paying jobs because anything a gain in terms
Speaker 1: of paycheck gets wiped out in terms of how far
Speaker 1: they have to dry and higher commute costs. So we
Speaker 1: certainly are crossing our fingers that saw Arabia will go
Speaker 1: through and actually continue to turn on the pickets and
Speaker 1: bring those prices back down and it will show up
Speaker 1: at the pump over the summer, so that we can
Speaker 1: get people in the jobs they need to be in
Speaker 1: and not have to turn down higher paying jobs because
Speaker 1: it's eating away in their commute costs. Diane, I just
Speaker 1: had a pleasure of reading your note No Place Like Home,
Speaker 1: in which you review the prospects for the U S consumer,
Speaker 1: of course mentioning gas prices as a critical component as
Speaker 1: well as income. But the one other thing that you
Speaker 1: dive into quite a bit is how much consumers are
Speaker 1: starting to tap into their homes again to support their
Speaker 1: spending patterns. Wantn't to talk us through a little bit
Speaker 1: about what you're seeing in home equity lines of credit
Speaker 1: growth and how the consumer is utilizing credit markets once
Speaker 1: again to sustained spending. Well, up until now, that's great
Speaker 1: at the question, and up until now we had seen
Speaker 1: people doing cash out refinancing to do remodeling. And this
Speaker 1: is where a lot of areas baby boomers and older
Speaker 1: homeowners Gen acts homeowners are now adding and remodeling and
Speaker 1: repairing their homes instead of trading up. That's also leaving
Speaker 1: us with short supply, but they are investing in their
Speaker 1: homes again and they're doing it by tapping into either
Speaker 1: the cash out refinancing or now home equity lines of
Speaker 1: credit which are coming back. The good news is there's
Speaker 1: more safeguards and there ones where and that is that
Speaker 1: you can't take out more than you know leave yourself
Speaker 1: with less in your home in most cases. Although that said,
Speaker 1: it's interesting is even though there's been a change in
Speaker 1: the tax laws which limits the deductibility of those home
Speaker 1: equity lines of credit to actually remodeling and putting money
Speaker 1: into your home, the signs are seen on the street
Speaker 1: and actually published one without the bank's name on it,
Speaker 1: right in the middle of Lasle Street in downtown Chicago.
Speaker 1: The advertisements were for a third honeymoon, a trip to
Speaker 1: your rome um, you know, braces for your kid band camp.
Speaker 1: It was really sort of a flash back to two
Speaker 1: thousand and five and the idea that you would use
Speaker 1: your home as an a t M. And what we
Speaker 1: don't know is how easy credit conditions are going to get,
Speaker 1: not by the banks per sale though they're trying to
Speaker 1: make up the fees loss to refinancing which have now fallen,
Speaker 1: but also more importantly to the shadow banking industry, which
Speaker 1: so far hasn't been really aggressive in the home equity
Speaker 1: line of credit market. But once they can't get those
Speaker 1: refinancing fees, and we have seen mortgage applications are not
Speaker 1: what they could be because we don't have enough supply
Speaker 1: in the market and prices are going up fairly rapidly.
Speaker 1: That could see a flip flop and you could see
Speaker 1: many more people tapping into it. We're already yet very
Speaker 1: low rates on the saving rate. When you see home
Speaker 1: equity lines of credit go up, that's going to push
Speaker 1: the saving rate even lower. It's at three percent right now.
Speaker 1: The record low is two point four percent, which we
Speaker 1: hit in December because of all the insurance and sort
Speaker 1: of rebuilding after hurricanes. But that was the lowest rate
Speaker 1: since two thousand and five. When you look at the
Speaker 1: general risk of this evolve incredit landscape, banks getting a
Speaker 1: little easier on credit allocation, particularly with respect to Holmes,
Speaker 1: the consumer leaning on credit a little bit more, saving less.
Speaker 1: What are the trigger points that make you really concerned?
Speaker 1: Right because we said, we tend to talk about, oh,
Speaker 1: these things are changing, but it's not a huge risk.
Speaker 1: It's not going to push us into recession. At what
Speaker 1: point do you say, okay, this is it. We've gotten
Speaker 1: to a point where we now really need to worry
Speaker 1: about home equity. Is it rates are a certain um
Speaker 1: level or is it outstanding debt reaches a certain level.
Speaker 1: Is it the unemployment rate that shifts? What are your
Speaker 1: big triggers for the employment rates? A lagged leg an
Speaker 1: indicator in defaults is something. So far they've been pretty low,
Speaker 1: with the exception of vehicle default and student defaults. And
Speaker 1: student defaults have actually come down off their highs. But um,
Speaker 1: we don't know what's out there, and once we start,
Speaker 1: you often get teaser rates on these home a rate
Speaker 1: lines of credit, right, and so the first year you're fine.
Speaker 1: But what we'll really be watching for is a year
Speaker 1: from now is what happens as those rates flip, and
Speaker 1: we will likely have a much higher rate in how
Speaker 1: much is that can to stress these homeowners. Also, I
Speaker 1: think it's really important is that we watch very carefully
Speaker 1: how much people move back into flexible rate mortgages instead
Speaker 1: of fixed rate mortgages. That seems completely counterintuitive to go
Speaker 1: towards shorter term interest rate mortgages when rates are going up,
Speaker 1: but that's exactly what people do. You know. One of
Speaker 1: the things, having been in credit for nineteen years of
Speaker 1: my thirty year career in a bank, I used to
Speaker 1: always warn our credit people as the best way to
Speaker 1: die is in debt, because it means you've gained the
Speaker 1: system and you've lived beyond your means your entire life.
Speaker 1: And that's what I always worry about, is the accumulation
Speaker 1: of debt. And we're doing it even though we're not
Speaker 1: at the highest levels relative to income that we've seen
Speaker 1: since such crisis. We have taken off that access debt.
Speaker 1: We're at two thousand three levels. That was still a
Speaker 1: peak prior to the housing build up, and we had
Speaker 1: already taken on too high a debt build up before
Speaker 1: the housing bubble. Diane Swunk, Can I just shift your
Speaker 1: attention to one of the pieces of information are going
Speaker 1: to get when we look at the labor report, which
Speaker 1: is the prime age male labor force participation rate, how
Speaker 1: many people are actually working. Can you give us your
Speaker 1: thoughts there and whether you believe that this is a
Speaker 1: structural trend that is going to have really nasty implications
Speaker 1: for the economy. It's a great question. It's one of
Speaker 1: the ones we moost worried about as economists. We have
Speaker 1: seen us come off the lows and participation from the crisis,
Speaker 1: but we're still on a downward trend since the peak
Speaker 1: and prime age, particularly as you pointed out male labor
Speaker 1: force participation, but also women um women's labor force participation
Speaker 1: among that fifty four year old group is now lower
Speaker 1: in the United States. In Japan now they include more
Speaker 1: part time women workers. But these are things we really
Speaker 1: worry about because as we are not able to bring
Speaker 1: as many people back from the sidelines because of chronic
Speaker 1: problems like the opioid crisis, a huge erosion in skills,
Speaker 1: people who have just simply not been invested in in
Speaker 1: terms of their human capital, their education to work the
Speaker 1: kind of jobs or working today, and all the burden
Speaker 1: to train is on individual employers. I see it with
Speaker 1: my clients every time they're biggest challenges, they train people
Speaker 1: and then they get poached. And these are people that
Speaker 1: they're paying signing bonuses to their increasing their wages and
Speaker 1: their paying for their training. But unlike higher level education
Speaker 1: things like an m b A or things like that,
Speaker 1: where a company can sort of require you to pay
Speaker 1: that back over a period in time, if you train
Speaker 1: a trucker to be a trucker, they can be taken
Speaker 1: away from you overnight by a competitor next door. Well,
Speaker 1: and this is also something that if you take a
Speaker 1: look at what's going on in Italy, they also have
Speaker 1: matched the United States for low mail primates participations. Exactly
Speaker 1: good company there in Italy, right, Yeah, I know this
Speaker 1: is really serious, and you know, the things that we
Speaker 1: worry about is how much of it is structural and
Speaker 1: how much of it is cyclical. The cyclical component looks
Speaker 1: like it's you know, starting to play out. We really
Speaker 1: are bringing some of those people back that got hit
Speaker 1: hard as but you know, could come back into the
Speaker 1: labor force. But this is a real issue going forward
Speaker 1: because by if we eliminate immigration, and we are cutting
Speaker 1: immigration quite dramatically, it's already down legal immigration is already
Speaker 1: downed quite dramatically from a year ago. That's the administration's desire.
Speaker 1: If you eliminate immigration, by just the aging of the
Speaker 1: labor force and the natural trends, this sort of structural
Speaker 1: trend we see in labor force participation by men in particular,
Speaker 1: gets you to a contraction in the labor force by
Speaker 1: that's only two years away. That's something we want to
Speaker 1: avoid because we really want to re engage these workers
Speaker 1: on this hideline. We want to We don't want to
Speaker 1: lose people. The open word crisis has so many collateral damage,
Speaker 1: but that's only one of many things that are affecting
Speaker 1: incarceration rates, are infecting prime mail participation, all of those
Speaker 1: things together. There are fixes, but there's no sound bite fixes.
Speaker 1: And a good economy alone does not lift all boats,
Speaker 1: thank you very much, Diane swonk Is. The chief economy
Speaker 1: is for Grant Thornton. Thanks for listening to the Bloomberg
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