WEBVTT - Surveillance: Fed Is on Hold for First Quarter of 2017 0:00:00.320 --> 0:00:04.160 Who you put your trust in matters. Investors have put 0:00:04.200 --> 0:00:07.640 their trust in independent registered investment advisors to the tune 0:00:07.640 --> 0:00:12.240 of four trillion dollars. Why learn more and find your 0:00:12.240 --> 0:00:29.040 independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:29.440 --> 0:00:33.120 I'm Tom Keene with David Gura. Daily we bring you 0:00:33.200 --> 0:00:38.200 insight from the best in economics, finance, investment, and international relations. 0:00:38.640 --> 0:00:43.199 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 0:00:43.280 --> 0:00:50.680 of course on the Bloomberg and Frank. We start the 0:00:50.680 --> 0:00:54.760 show with a sad note. Uh former Bundesbank President Hansteep, 0:00:55.000 --> 0:00:57.560 his last president of the Bundesbank before the ECB, has 0:00:57.680 --> 0:01:00.280 died at the age of eighty five. I have a 0:01:00.360 --> 0:01:04.160 statement out from Buddhu's Bank president h Ian Fiedman just 0:01:04.240 --> 0:01:08.520 a few moments ago. Sad four is still a good life. 0:01:08.520 --> 0:01:10.560 But you're right, it's sad. And actually usually in the 0:01:10.640 --> 0:01:13.200 Christmas period we do get a little bit of this 0:01:13.600 --> 0:01:16.360 always always sad news when it comes to death. Um 0:01:16.480 --> 0:01:18.520 away from sad news, Mike, and actually I don't know 0:01:18.520 --> 0:01:20.000 whether it's good news or bad news, but you know, 0:01:20.040 --> 0:01:21.560 you were talking about the fact that we had a 0:01:21.640 --> 0:01:24.800 day off yesterday. We're still trying to figure out and 0:01:24.840 --> 0:01:27.319 actually I urge all of our listeners if you like 0:01:27.680 --> 0:01:31.000 talking about Brexit. There's a great Brexit quiz on our 0:01:31.000 --> 0:01:35.720 Bloomberg dot com. But we're seeing as economic uncertainties may 0:01:35.720 --> 0:01:38.560 actually ratchet up in a lot more people holding cash. 0:01:38.959 --> 0:01:41.720 So this is according Mike to the British Bankers Association, 0:01:42.280 --> 0:01:44.600 and it's the first time that we saw that personal 0:01:44.640 --> 0:01:48.240 deposits growing about five percent in November. I don't know 0:01:48.280 --> 0:01:51.400 whether it means that that people are just a little 0:01:51.440 --> 0:01:54.400 bit concerned about their house prices and things like that 0:01:54.440 --> 0:01:57.280 are inflation, but it's the first time we've seen it 0:01:57.320 --> 0:01:59.800 in eleven months. And they gotta pay their Christmas bills too, 0:02:00.080 --> 0:02:02.400 you know, all the money they spent on gifts, all 0:02:02.440 --> 0:02:05.280 the money you see. I mean when when you say 0:02:05.360 --> 0:02:08.960 hoarding cash, I think of people putting their um, you know, 0:02:09.360 --> 0:02:13.640 sterling coins into a tin on the dresser or something 0:02:13.720 --> 0:02:15.600 like that. Um But you know, we have a new 0:02:15.639 --> 0:02:20.640 coin in One of the probably most popular cultural stories 0:02:20.680 --> 0:02:24.000 here is that we have a new sterling coin, which 0:02:24.000 --> 0:02:26.440 I believe will be unveiled by the Bank of England 0:02:26.440 --> 0:02:31.200 seventeen March or even April of next year that strangely 0:02:31.240 --> 0:02:35.000 looks like the euro. It's it's true, I've seen it. 0:02:35.160 --> 0:02:38.920 Perfect timing. Well, let's ask Mark Chandler about that he 0:02:39.160 --> 0:02:42.200 had of currency strategy for Brown Brothers hairman and he 0:02:42.240 --> 0:02:45.360 has migrated over here with us from Bloombergshire. Aillance on 0:02:45.400 --> 0:02:50.800 television and uh mark um significant the Brits are introducing 0:02:50.919 --> 0:02:53.840 a new coin this year. Actually, the larger question is 0:02:54.600 --> 0:02:56.360 what is the pound? What happens to the pound in 0:02:56.400 --> 0:03:00.920 two thousand seventeen with bragsit in full flower Supreme Court 0:03:00.919 --> 0:03:05.560 decision coming up, the article fifty trigger theoretically in March, 0:03:06.280 --> 0:03:08.480 what do you see happening? Yeah, that's a good question. 0:03:08.520 --> 0:03:10.320 I think that's like. One of the big surprises, of 0:03:10.360 --> 0:03:13.400 course this year was the Brexit, the refervendum. I still 0:03:13.400 --> 0:03:16.560 think that such an important decision made by a very 0:03:16.639 --> 0:03:20.440 small majority of people, less than fifty two percent. So 0:03:20.639 --> 0:03:23.280 some big changes coming to to the UK, and I 0:03:23.280 --> 0:03:25.280 think the market is getting frustrated that this idea of 0:03:25.280 --> 0:03:27.560 a soft Brexit hard Direxit, which is what the market's 0:03:27.600 --> 0:03:30.160 really been debating about. I think next year that all 0:03:30.200 --> 0:03:32.639 that changes, And it seems to me these are splitting 0:03:32.639 --> 0:03:34.960 hair is really it's hard to see how the UK 0:03:35.080 --> 0:03:37.640 is gonna be able to maintain both access to it 0:03:37.840 --> 0:03:41.200 to the Common market and control its borders. It's that 0:03:41.560 --> 0:03:43.200 I think the EU is right that it's not a 0:03:43.240 --> 0:03:45.520 smortgage board type of opportunity where you just pick and 0:03:45.560 --> 0:03:47.560 choose what you want. And so I think that until 0:03:47.600 --> 0:03:49.640 this is resolved, it's hard to see how Sterling has 0:03:49.640 --> 0:03:52.760 a substantial rally. So I'm looking at sterling still to 0:03:52.800 --> 0:03:55.160 be falling. I think that next year, as if I've 0:03:55.160 --> 0:03:57.440 write about the Euro going through parity, I think we 0:03:57.440 --> 0:03:59.640 could see sterling back down to those loads we saw 0:03:59.760 --> 0:04:02.680 on the flash crash. Bring this down about one fourteen 0:04:02.760 --> 0:04:05.320 or so, say a dime from here on the downside, 0:04:05.880 --> 0:04:09.520 And I'm looking at this new pound coin. Looks like 0:04:09.640 --> 0:04:13.400 it's a pineapple. I mean, what is that. I think 0:04:13.480 --> 0:04:17.080 it's a Scottish emblem, but close it's a thistle, it looks, 0:04:17.839 --> 0:04:20.400 but I think it's a thistle. Um, we'll put it 0:04:20.440 --> 0:04:22.040 on social media for the for the people that are 0:04:22.040 --> 0:04:23.360 listening to us, so you can also have a look 0:04:23.360 --> 0:04:26.920 at the new twelve sided one pound coin being unveiled 0:04:27.240 --> 0:04:29.960 next year. Mark when you look at currencies, right it's 0:04:30.080 --> 0:04:34.320 very clear that volatility was largely played out in currencies 0:04:34.320 --> 0:04:37.560 in because docs just kept on going higher. Do you 0:04:37.560 --> 0:04:41.480 think we'll follow a similar pattern in now? I think 0:04:41.520 --> 0:04:43.599 that's good because I think that what we have is 0:04:43.640 --> 0:04:46.960 that there's this idea that the capital markets that letting 0:04:46.960 --> 0:04:50.200 the prices of currencies and money in general, like interest 0:04:50.279 --> 0:04:53.400 rates move be volatile, that means that the real economy 0:04:53.440 --> 0:04:56.280 doesn't have to be That is that these financial instruments 0:04:56.320 --> 0:04:59.040 act as a shock absorber, and we see the economy 0:04:59.040 --> 0:05:02.080 has become more volatile as the financial markets become less volatile. 0:05:02.480 --> 0:05:05.159 So I personally would rather see more volatility in the 0:05:05.200 --> 0:05:08.960 financial assets. So that the problem though with volatiling the 0:05:08.960 --> 0:05:11.800 financial assets that it implies a direction. So we say 0:05:11.839 --> 0:05:13.640 low volatiling in the stock market, what do we know? 0:05:13.920 --> 0:05:15.520 We know from some of the charts that Mike's shown 0:05:15.560 --> 0:05:18.560 before that the VIX tends to go down when the 0:05:18.560 --> 0:05:21.760 stock market goes up. So we're talking about more volatility. 0:05:22.040 --> 0:05:25.359 We're talking about lower stock prices, and we're probably talking 0:05:25.400 --> 0:05:28.039 about lower bond prices. If bond market volatil is going 0:05:28.080 --> 0:05:30.800 to improve. Currencies are a different story. I think that 0:05:30.960 --> 0:05:33.960 some currencies tend to be more volatile. I'd say that 0:05:34.000 --> 0:05:37.120 the dollar, block, Aussie, Canada, Key, we tend to be 0:05:37.160 --> 0:05:40.919 a bit more volatile than say the Swiss shrink. But 0:05:41.360 --> 0:05:43.200 I think that in the year ahead, we still have 0:05:43.240 --> 0:05:44.720 to be careful about the end, which has had this 0:05:44.760 --> 0:05:46.520 big reversal this year. You know, we began at one 0:05:47.000 --> 0:05:50.120 five or so, sold off to almost one hundred, and 0:05:50.160 --> 0:05:53.480 then bounced back here to one eighteen. I'm looking for 0:05:53.600 --> 0:05:56.279 dollar yend to continue to move higher. I'm looking for 0:05:56.560 --> 0:05:58.560 this to take place over the course of the first 0:05:58.680 --> 0:06:00.800 half of the year. But the same thing, I think 0:06:00.800 --> 0:06:02.800 in the other major currencies, we should be expecting a 0:06:02.800 --> 0:06:05.480 little bit more volatilitly, not just because of a trend, 0:06:05.960 --> 0:06:09.080 but really because of these periods of consolidation after these 0:06:09.120 --> 0:06:11.800 large trends like we've just seen. We started a conversation 0:06:11.800 --> 0:06:13.400 with the pound, but you told us earlier that it 0:06:13.640 --> 0:06:16.039 is the euro is your currency of the year for 0:06:16.120 --> 0:06:20.400 two thousand seventeen, that it's going to really influence what 0:06:20.520 --> 0:06:24.640 happens to a lot of the markets in the coming year. Yeah. 0:06:24.680 --> 0:06:25.919 So the way I sort of think of this is 0:06:25.920 --> 0:06:28.560 that the what's going on. I think that beside this 0:06:28.640 --> 0:06:32.599 divergence between ECB policy and FED policy. We also have 0:06:32.720 --> 0:06:35.800 political issues, and I think for me the key the 0:06:35.800 --> 0:06:39.159 political issues is this wave of populism. Nationalism may began 0:06:39.240 --> 0:06:43.240 off in Poland, hungry Czech Republic, moved to the UK 0:06:43.360 --> 0:06:46.400 with the Brexit vote, the US election with the Trump election, 0:06:47.040 --> 0:06:48.960 and now we have in Europe next year. We have 0:06:49.040 --> 0:06:53.279 several opportunities for these populist nationalists to show their hand. 0:06:53.680 --> 0:06:57.400 And I think that this nervousness, this anticipation, it keeps 0:06:57.440 --> 0:06:59.800 the keeps the Euro on the defensive. And I think 0:06:59.800 --> 0:07:03.400 that is particularly problematic because Europe has been held together 0:07:03.520 --> 0:07:07.160 by integration and if we're seeing a wave of nationalism, 0:07:07.400 --> 0:07:10.040 that eats away at that integration. And so this is 0:07:10.040 --> 0:07:12.800 an existential challenge for Europe. And I think that's what 0:07:12.880 --> 0:07:15.920 keeps the Euro. Besides this monetary policy, this wide divergence. 0:07:16.320 --> 0:07:18.680 Investors get paid over two hundred basis points right now 0:07:18.720 --> 0:07:21.160 to belong the US dollar over the Euro, thinking about 0:07:21.280 --> 0:07:24.360 financing through the Germany. This is the key incentive, the 0:07:24.440 --> 0:07:26.000 key driver for the dollar. But I think that the 0:07:26.040 --> 0:07:30.600 politics right behind it. But Mark aren't the politics extremely dangerous? 0:07:30.680 --> 0:07:32.520 And I don't know whether it's because we don't trust 0:07:32.560 --> 0:07:35.480 the polls, But is there a concern that actually one 0:07:35.480 --> 0:07:38.160 of the big countries I'm thinking into the fronts could 0:07:38.240 --> 0:07:41.120 leave the Eurozone the next eighteen months. Oh, I don't 0:07:41.160 --> 0:07:44.480 know about eighteen months to leave the Eurozone, because here's 0:07:44.520 --> 0:07:46.600 what it would have to happen, right, I think about 0:07:47.360 --> 0:07:50.000 next year, we get the Dutch elections at first, most 0:07:50.040 --> 0:07:53.000 likely the Dutch elections, and the far right party does 0:07:53.000 --> 0:07:55.680 seem me pulling ahead, but the majority of the Dutch 0:07:55.720 --> 0:07:57.400 you want to stay in the EU, want to stay 0:07:57.440 --> 0:08:00.440 in e MU. Then you've got the French action, and 0:08:00.480 --> 0:08:03.200 there there's a long tradition of the of the center 0:08:03.240 --> 0:08:07.200 to parties UH combining forces when faced with a UH, 0:08:07.440 --> 0:08:10.920 faced with challenge from the National Front. Even then, I 0:08:11.520 --> 0:08:14.320 can't see how it happens in eighteen months. And then 0:08:14.320 --> 0:08:16.880 of course in Germany where Merkele she might not be 0:08:16.920 --> 0:08:20.160 as popular as she was before due to her immigration policies, 0:08:20.480 --> 0:08:23.000 but doesn't look like she has a local rival that 0:08:23.040 --> 0:08:27.000 could unseat her. So you're right that other elections, like 0:08:27.040 --> 0:08:29.920 in Italy, it's possible. But even then Italy has a 0:08:30.160 --> 0:08:34.200 has a constitutional ban on referendums to affect treaties, So 0:08:34.240 --> 0:08:36.280 I think that people are jumping the gun a little bit. 0:08:36.320 --> 0:08:38.480 You know, I was around for both of the Greek crisis, 0:08:38.520 --> 0:08:40.480 and many people thought Greece was going to drop out. 0:08:40.480 --> 0:08:43.440 I think those uh London bookies were making odds at 0:08:43.480 --> 0:08:45.520 like a seven to one or twelve to one chance 0:08:45.600 --> 0:08:48.040 that Greece was going to drop out. And I think 0:08:48.040 --> 0:08:50.800 that people have underestimated the political will, and that's what's 0:08:50.840 --> 0:08:53.040 so important about now. The political will is being challenged. 0:08:53.080 --> 0:08:54.880 I thought Carolin was rounding off, but it really is 0:08:54.920 --> 0:08:57.640 a dollar four zero zero for the euro, which is 0:08:57.920 --> 0:09:00.520 Mark Chandler's currency of the Year for two thousand and seventeen. 0:09:00.559 --> 0:09:03.400 You think it will go down as low as eight 0:09:03.600 --> 0:09:06.480 two eight one, not next year, but I've got ninety 0:09:06.559 --> 0:09:08.079 seven by the middle of the year. But the A 0:09:08.280 --> 0:09:10.679 two and a half is the October two thousand low, 0:09:10.720 --> 0:09:12.800 and I think we're gonna head there. And during this 0:09:13.040 --> 0:09:17.240 Obama slash Trump dollar rally. Well, when we last saw 0:09:17.240 --> 0:09:19.320 the euro that low, the rest of the world stepped 0:09:19.320 --> 0:09:22.640 in the G twenty intervened to prop it up. Currency 0:09:22.679 --> 0:09:24.680 intervention has sort of gone the way of the Dodo. 0:09:25.080 --> 0:09:28.040 But does it come back, Well, it could come back, 0:09:28.080 --> 0:09:30.160 but I think that depends on what's happening at the time. 0:09:30.200 --> 0:09:31.920 I mean, right now, it seems to me that the 0:09:31.960 --> 0:09:34.360 weakness of the euro is a good thing for Europe. 0:09:34.679 --> 0:09:36.400 It's a good thing for the world economy, because this 0:09:36.440 --> 0:09:38.120 is how this is how it's supposed to work. The 0:09:38.160 --> 0:09:42.160 country that's growing quicker, has stronger fundamentals, gets a stronger currency, 0:09:42.520 --> 0:09:44.680 and those countries that have a weaker economies get a 0:09:44.679 --> 0:09:47.880 weaker currency that helps stimulate them. But so it depends 0:09:47.920 --> 0:09:50.000 only what happens when we get those kind of extremes 0:09:50.040 --> 0:09:52.120 and how fast we get there, right, But market that 0:09:52.200 --> 0:09:54.280 this is kind of the point that I was thinking about, 0:09:54.440 --> 0:09:57.120 is that a week or Europe will be welcomed for 0:09:57.160 --> 0:10:00.199 a lot of the European exporting countries. Is the problem, 0:10:00.240 --> 0:10:02.040 if you want to call it a problem, is not 0:10:02.160 --> 0:10:06.120 dollar strength. Yeah so yeah, so exactly. So, I don't 0:10:06.120 --> 0:10:08.079 think that we had a point yet where the dollar 0:10:08.280 --> 0:10:10.559 is a is a problem for Europe. I don't think 0:10:10.559 --> 0:10:12.280 the dollar is yet really a problem for the US 0:10:12.360 --> 0:10:14.400 as long as the pace that we've seen in recent 0:10:14.440 --> 0:10:17.480 months does not continue at this pace. So I'm not 0:10:17.520 --> 0:10:19.719 sure that we're at a point at a point in 0:10:19.760 --> 0:10:22.880 the foreseeable future, where the G seven will say, we've 0:10:22.880 --> 0:10:25.520 been telling the Chinese, we've been We've been making these 0:10:25.720 --> 0:10:29.040 uh high sounding platitudes that G twenty meetings that currency 0:10:29.120 --> 0:10:32.280 markets ought to determine the value of foreign exchange, and 0:10:32.360 --> 0:10:35.080 to overcome those comments with saying that, well, this time 0:10:35.160 --> 0:10:37.040 is different. We need to intervene because the dollar is 0:10:37.040 --> 0:10:39.480 getting too strong. I think it's a very high hurdle. 0:10:39.520 --> 0:10:42.840 Bar I don't think we're anywhere close to that. All Right, 0:10:43.400 --> 0:10:47.120 other big currency of the year, perhaps in two thousand 0:10:47.160 --> 0:10:50.720 and seventeen, will be the Chinese when because the PRESIDENTI 0:10:50.800 --> 0:10:52.680 like the United States and City, is going after the 0:10:52.760 --> 0:10:57.880 Chinese because they unfairly manipulate their currency. They obviously have 0:10:57.960 --> 0:11:01.880 been manipulating it higher, not lower, as he has suggested, 0:11:02.440 --> 0:11:05.080 trying to keep a floor under it. But what happens 0:11:05.120 --> 0:11:07.800 to the UN in two thousand and seventeen. Yeah, So 0:11:07.840 --> 0:11:09.679 I think that the first thing I say to keep 0:11:09.720 --> 0:11:12.520 in mind is that when it comes to people, you 0:11:12.520 --> 0:11:14.400 and I talk, we want to be uh we want 0:11:14.400 --> 0:11:16.199 to be honest with each other. But I think when 0:11:16.200 --> 0:11:19.520 politicians talk, they make a distinction between like declaratory policy 0:11:19.559 --> 0:11:23.440 what they say operational policy, what they do. And oftentimes 0:11:23.440 --> 0:11:26.080 the US presidential candidates talk tough about China. When they 0:11:26.080 --> 0:11:29.439 get into office, they realize they get presented with new information, 0:11:29.679 --> 0:11:32.440 the complexities of the relationship and the nuances of what 0:11:32.520 --> 0:11:35.120 China is doing. And right now, I fully agree that 0:11:35.240 --> 0:11:38.360 China is if anything, it's trying to strengthen its currency. 0:11:38.640 --> 0:11:40.440 It does not want the currency to fall too fast. 0:11:40.880 --> 0:11:44.080 It's keeping it relatively stable against the basket. But I 0:11:44.160 --> 0:11:46.520 have to because I have a strong dollar review and 0:11:46.559 --> 0:11:49.240 I'm bag back on FED raising interest rates, strength of 0:11:49.240 --> 0:11:51.680 the US economy while the Chinese economy likely to slow 0:11:51.679 --> 0:11:55.040 and if anything, some more monetary stimulus from China. I've 0:11:55.080 --> 0:11:56.839 got the dollar R and B, which now you stay 0:11:56.920 --> 0:12:00.440 is right below seven, going about seven twenty next year. Okay, 0:12:00.440 --> 0:12:02.760 you're suggesting Mark that when the facts change, or the 0:12:02.800 --> 0:12:05.520 facts presented to the president like change, he will change. 0:12:05.880 --> 0:12:09.160 What will it take for Trump's trade advisor, Peter Navarro, 0:12:09.559 --> 0:12:12.760 who has written books called, for example, The Death of China, 0:12:12.880 --> 0:12:15.760 who has clearly on the show, also said he believes 0:12:16.160 --> 0:12:19.360 China's cheating because they have a surplus. Yeah, this is 0:12:19.480 --> 0:12:21.960 uh is a good point you raise, and for me, 0:12:22.040 --> 0:12:25.280 the challenge as an observer is really is really trying 0:12:25.280 --> 0:12:27.600 to figure out which of these voices within the Trump 0:12:27.640 --> 0:12:31.120 administration are really going to carry the day. I first 0:12:31.160 --> 0:12:34.520 got involved in politics when Henry Kissinger was a National 0:12:34.520 --> 0:12:37.560 Securities adviser, and I think Will Rogers was at the 0:12:37.559 --> 0:12:39.880 Secretary of State, and yet it was Henry Kissinger that 0:12:39.960 --> 0:12:42.760 was really running the show. So it really depends not 0:12:42.880 --> 0:12:44.920 just on who the formal appointments are, but where that 0:12:45.000 --> 0:12:47.520 power really lies. And if it's not clear to me, 0:12:47.520 --> 0:12:49.400 where's how it's going to play out. One thing, though, 0:12:49.520 --> 0:12:51.960 is clear to me, And even though Trump's has said 0:12:52.000 --> 0:12:55.240 that he'll declare China currency manipulator on day one in office, 0:12:55.679 --> 0:12:57.800 I would out hold your breath for that. That is 0:12:57.840 --> 0:13:00.480 to say that the Treasury Department has a has a 0:13:00.600 --> 0:13:04.280 quantitative list of factors and they say that China only 0:13:04.320 --> 0:13:07.360 meets one of those three factors. And so whatever brush 0:13:07.440 --> 0:13:10.680 the Trump administration says that China is a currency market manipulator, 0:13:11.120 --> 0:13:13.480 that same brush could be could be used to tar 0:13:13.960 --> 0:13:18.960 many other countries, perhaps including Japan. Well, very quickly, what 0:13:19.040 --> 0:13:22.880 does it mean if they designate them a currency manipulator? Yeah, 0:13:22.920 --> 0:13:25.480 So there's to two parts of it. One is China 0:13:25.480 --> 0:13:28.360 would have to whoever we cited the currency manipulator would 0:13:28.400 --> 0:13:31.839 have to have negotiations with the US. But more importantly 0:13:32.080 --> 0:13:35.439 how it affects like equity investors is that US companies 0:13:35.600 --> 0:13:38.839 could then sue China to get for their grievances that 0:13:38.920 --> 0:13:41.840 try to try to manipulate the currency. Take an X 0:13:41.880 --> 0:13:44.800 percentage dollars from them. How do they respond? They can 0:13:44.800 --> 0:13:46.760 sue them, And so I think that it just opens 0:13:46.800 --> 0:13:49.880 up that World Trade Organization. I think they might be 0:13:49.880 --> 0:13:53.240 even separate judicial like tribunal set up for this. I 0:13:53.240 --> 0:13:55.240 don't think it's fully just at the w t O. 0:13:56.000 --> 0:13:58.640 All right, Mark Chandler for Brown Brothers Herman, thanks for 0:13:58.720 --> 0:14:14.800 joining us this morning here on Bloomberg Surveillance. Tony Kristenzi, 0:14:15.000 --> 0:14:19.960 pimco's Markets TRGY portfolio manager. He's come home for Christmas, 0:14:20.000 --> 0:14:23.120 all the way from Newport Beach to Brooklyn and UH 0:14:23.720 --> 0:14:27.000 and points here in Manhattan. We thank you for stopping 0:14:27.040 --> 0:14:31.280 by this poinning. Your latest note intrigued me because um, 0:14:31.320 --> 0:14:35.280 everybody talked about the taper tantrum. It was a huge 0:14:35.320 --> 0:14:38.200 impact on the markets when the Fed suggested it might 0:14:38.760 --> 0:14:42.400 raise rates and did not. UH might taper and did not. 0:14:43.120 --> 0:14:45.600 Now you're calling what we're seeing in the bontom markets 0:14:45.640 --> 0:14:48.600 a Trump tantrum. But when you use those words is 0:14:49.520 --> 0:14:52.480 it's not the same effect. It's a lot different. On 0:14:52.560 --> 0:14:55.840 two thirteen, there was this fear of withdrawal of stimulus, 0:14:55.880 --> 0:14:58.840 the ending of quantitative easing, the bond buying that the 0:14:58.840 --> 0:15:02.200 Fed had engaged in several trillion dollars of securities. This 0:15:02.320 --> 0:15:05.640 tantrum is a little different released a Trump and omics 0:15:05.640 --> 0:15:08.920 and more traditional factors that affect the bond markets, such 0:15:08.960 --> 0:15:12.480 as growth and inflation. The markets think that growth, which 0:15:12.480 --> 0:15:15.000 had has been subdued at around two percent or so, 0:15:15.440 --> 0:15:20.880 inflation also subdued, would might pick up towards the old normal. 0:15:21.040 --> 0:15:23.040 I mean, the new normal for growth had been around 0:15:23.080 --> 0:15:26.560 two percent. But the markets think that it could pick up. 0:15:26.600 --> 0:15:29.320 The question is whether it will pick up permanently in 0:15:29.360 --> 0:15:33.760 the trajectory move up towards the old normal where suspect 0:15:33.800 --> 0:15:35.800 and the bottom market in fact is while many are 0:15:35.840 --> 0:15:40.040 talking about the all the optimism, look at where the 0:15:40.040 --> 0:15:44.400 bond markets priced for yields in the year. Looking at 0:15:44.440 --> 0:15:49.360 short term instruments difficult for anyone to the average person 0:15:49.400 --> 0:15:51.520 to to see, but we in the bond market. Know 0:15:51.640 --> 0:15:55.360 that the market participants or priced for the Federal funds rate, 0:15:55.400 --> 0:15:57.600 the FEDS policy rate, which is today at about a 0:15:57.640 --> 0:16:00.160 half percent to move up to just two percent in 0:16:01.640 --> 0:16:05.760 that's about half of what is normal for a neutral rate, 0:16:05.800 --> 0:16:07.480 where the fit's either pressing on the gas of the 0:16:07.520 --> 0:16:12.080 brakes historically, so the markets still believe that growth will 0:16:12.120 --> 0:16:14.680 be subdued over the long run. So while there has 0:16:14.720 --> 0:16:18.120 been a Trump tantrum, it's been relatively subdued in the 0:16:18.160 --> 0:16:20.560 sense that the markets are still priced for a very benign, 0:16:21.200 --> 0:16:26.440 shallow path on interest rates. Looking forward, Tony. First of all, 0:16:26.480 --> 0:16:29.720 congratulations on your greeting. Hi, Tony Um. I wanted to 0:16:29.720 --> 0:16:33.040 send you a Bloomberg message through the terminal and as 0:16:33.080 --> 0:16:35.680 a greeting I have. You are only as good as 0:16:35.720 --> 0:16:38.440 your lost trade. I love that. I've used that since 0:16:38.480 --> 0:16:41.040 the nineteen nineties on my Bloomberg terminal and it served 0:16:41.040 --> 0:16:45.720 you well. So what is your best trade for well? Uh. 0:16:45.920 --> 0:16:49.280 For one, it's great news that bond yields have increased 0:16:50.160 --> 0:16:53.880 for bond investors because starting yield is the major determinant 0:16:54.040 --> 0:16:57.160 of future returns. The yield on the Barkley's aggregate, which 0:16:58.200 --> 0:17:00.680 for those who don't know. It's similar to were watching 0:17:00.840 --> 0:17:04.920 these SMP five hundreds, the main barometer by which many 0:17:04.960 --> 0:17:07.360 bond managers are judged against, although there are a lot 0:17:07.359 --> 0:17:10.200 of them these days, the Bockley's aggregate is yielding about 0:17:10.560 --> 0:17:14.080 two and three quarters percent. That's upper percentage point from 0:17:14.119 --> 0:17:17.440 about six weeks ago. In other words, investors, as I said, 0:17:17.640 --> 0:17:20.920 uh can now expect with the idea that starting yield 0:17:21.000 --> 0:17:23.160 is the major determine at the future returns about two 0:17:23.160 --> 0:17:26.240 and three quarters in a passive strategy. But bond managers 0:17:26.280 --> 0:17:29.879 like PIMCO historically earned alpha and earned something above that, 0:17:29.960 --> 0:17:33.040 and we historically have learned about a hundred basis points 0:17:33.040 --> 0:17:35.520 more than that. So bond investors are looking at returns 0:17:35.520 --> 0:17:37.960 in the high threes now and even near four on 0:17:38.040 --> 0:17:41.679 average going forward. So staying invested in bonds is one 0:17:41.680 --> 0:17:46.200 of the important points. It's many are worried about rising yields, 0:17:46.200 --> 0:17:49.080 but as I as I said, higher yields are good 0:17:49.119 --> 0:17:52.600 for one and secondly, one can't try to mock at 0:17:52.720 --> 0:17:56.520 time the diversification benefits of bonds. It's like getting in 0:17:56.560 --> 0:17:59.280 a car and saying, well today I don't need car insurance. 0:17:59.280 --> 0:18:02.560 I'll take the risk. Uh, it's not a wise thing 0:18:02.680 --> 0:18:05.080 to do. So if investors want to buy equities, if 0:18:05.080 --> 0:18:06.800 they want to take more risks because they feel the 0:18:06.840 --> 0:18:11.879 economic outlook is better than it was. Uh, owning bonds, 0:18:11.920 --> 0:18:13.919 of course enables them to get in the car and 0:18:14.000 --> 0:18:17.200 drive and take those risks. So it's good to have 0:18:17.240 --> 0:18:20.280 that anchor. So staying investation and bonds being overweight on 0:18:20.320 --> 0:18:24.280 credit and also being but but by being somewhat cautious 0:18:24.320 --> 0:18:27.040 and leaving some dry powders another factor, and also by 0:18:27.280 --> 0:18:31.480 um simply uh small staying investor is probably the biggest snack. 0:18:31.520 --> 0:18:33.640 I say, there's a lot of little details. Talk too 0:18:33.680 --> 0:18:36.719 long about things, things to buy. But we can talk 0:18:36.760 --> 0:18:38.639 about that if you will. Well, I have to follow up, 0:18:38.840 --> 0:18:40.800 by the way, John Tucker points out, it's the Bloomberg 0:18:40.800 --> 0:18:43.640 Barclays index, So we have to do our own shoots. 0:18:43.680 --> 0:18:47.159 Plug here. So Tony's writing that down. He won't make 0:18:47.200 --> 0:18:50.639 that mistake never again. But how do I know? I mean, 0:18:50.680 --> 0:18:51.919 you don't have to go in to every detail of 0:18:51.920 --> 0:18:55.200 every bottom. But okay, you say I should have bonds, 0:18:55.520 --> 0:18:58.880 you sell bonds, Um, how do I know what kind 0:18:58.920 --> 0:19:01.160 of bonds I want to buy? In the whole universe 0:19:01.600 --> 0:19:05.960 to offer myself protection at time when even if Trump 0:19:06.359 --> 0:19:11.159 produced zero additional growth, growth has picked up enough to 0:19:11.320 --> 0:19:15.360 justify the higher rates that we're seeing right now. Right well, 0:19:15.480 --> 0:19:19.320 um in terms of the types of on course strategies, 0:19:19.359 --> 0:19:21.520 for one of the anchor that I mentioned, the insurance 0:19:22.040 --> 0:19:25.600 that investors tend to need at the vertification benefits the 0:19:25.800 --> 0:19:29.000 type of thing to stick with because investors these days 0:19:29.240 --> 0:19:32.600 want to take more risks, and equities have moved up 0:19:32.640 --> 0:19:36.040 significantly and they want to stay in the car and 0:19:36.119 --> 0:19:39.199 drive and take additional risks. Probably is good to be 0:19:39.280 --> 0:19:43.239 in core strategies, but they're also good income strategies. That 0:19:43.280 --> 0:19:48.440 depends on investments in UH liquid and complex instruments. UH. 0:19:48.680 --> 0:19:52.680 These include non agency mortgages subprime mortgages, for example. We 0:19:52.720 --> 0:19:55.479 would expect returns in those, and we've been investing heavily 0:19:55.520 --> 0:19:59.280 in them to stay in the mid single digits called 0:19:59.400 --> 0:20:03.400 five so on a loss of justice laws adjusted whole 0:20:03.480 --> 0:20:07.159 to maturity basis. Second security of high interest to US 0:20:07.240 --> 0:20:11.440 is a bank capital. Banks in Europe they're getting safer 0:20:11.480 --> 0:20:15.000 and safer, maybe not those in Italy, but in general 0:20:15.040 --> 0:20:17.440 banks are sharing up the capital levels and that's good 0:20:17.440 --> 0:20:21.400 for capital securities which are yielding between seven and nine 0:20:22.280 --> 0:20:25.359 in Europe, so we like those. And being overweight credit 0:20:25.680 --> 0:20:27.840 is a general concept, but leave some dry prowd. If 0:20:27.920 --> 0:20:29.840 we had to put it on the scale of szewould 0:20:29.840 --> 0:20:33.280 attend how in terms of the overweight on credit, we'd 0:20:33.320 --> 0:20:36.880 probably place it around five or so because markets are 0:20:37.040 --> 0:20:40.439 somewhat fully priced for a good scenario, and they'll be 0:20:40.520 --> 0:20:44.080 ups and downs naturally in markets in tween and beyond 0:20:44.760 --> 0:20:47.240 that one will want to take advantage of so, so 0:20:47.280 --> 0:20:52.320 of course strategies number one income strategies UH. Secondly, complexity 0:20:52.359 --> 0:20:56.919 I liquidity good things. Taking advantage of volatility UH is 0:20:56.960 --> 0:21:00.320 something to do in the bond market in as an investor. Really, 0:21:00.760 --> 0:21:03.080 and Tony, does that change given what you've just said 0:21:03.119 --> 0:21:05.560 in terms of the investment landscape? Does it change if 0:21:05.720 --> 0:21:08.520 the US enter as a trade war or something goes 0:21:09.160 --> 0:21:11.240 not to plant. I don't know if it's terriffs, I 0:21:11.240 --> 0:21:14.720 don't know if it's renegotiating messy renegotiations. Francine As you 0:21:14.760 --> 0:21:18.639