Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: In addition to the meeting of the United Nations General
Speaker 1: Assembly week, there is also something called the Sustainable Investment Form.
Speaker 1: It is scheduled for tomorrow at the Crown Plaza Hotel
Speaker 1: here in New York City, and one of the participants
Speaker 1: is our guest, Fred Samama. He is a deputy Global
Speaker 1: head of Institutional and Sovereign Clients at a Mundi And
Speaker 1: for those that may not be familiar with the Mondy,
Speaker 1: I believe it's the largest publicly traded asset manager in
Speaker 1: Europe and it is as out of the combination of
Speaker 1: the asset management business of credit agricole and go ahead
Speaker 1: and suck and yeah, well, okay, you can tell us more.
Speaker 1: Fred Samana, thanks for being here. The reason I wanted
Speaker 1: people to understand about a Munday just a little bit
Speaker 1: is because they reached they purchased pioneer investments I believe
Speaker 1: from UNI credit and so that has really kind of
Speaker 1: changed the profile of a mundy to something that most
Speaker 1: Americans will will sern Louis know about. So I'm wondering
Speaker 1: if you could explain your company's dedication to sustainable UH
Speaker 1: finance initiatives and what are you going to be talking
Speaker 1: about tomorrow. Yes, good morning, and I'm very glad to
Speaker 1: be with you this morning. Um. Sustainable investment is part
Speaker 1: of our DNA. We strongly believe that when you invest
Speaker 1: over the long run, you must integrate these e G
Speaker 1: criteria in your investment process, not only to have a
Speaker 1: positive sorry what kind of criteria e s G. Tell
Speaker 1: people what that is and ther Montal Social and governance
Speaker 1: criteria not only to have a positive impact on society,
Speaker 1: but to manage long term oriented risk as well, because
Speaker 1: we think that this criteria are helping generate returns over
Speaker 1: the long run. So this is this is a crucial
Speaker 1: point because when people talk about sustainable investing out of
Speaker 1: the goodness of your heart, people in the investing universe,
Speaker 1: they want to feel good about themselves with their eyes
Speaker 1: glaze over because it's not their job. Their job is
Speaker 1: to manage risks and their job is to get returns.
Speaker 1: And so what you're saying is that you are showing
Speaker 1: people how they can hedge against some of the economic
Speaker 1: risks of climate change by investing in certain kinds of companies.
Speaker 1: Can you give us an example of companies that investment
Speaker 1: managers would invest in with an eye toward climate change,
Speaker 1: and can you give us a sense of what returns
Speaker 1: have been like to date. You're absolutely right here, we
Speaker 1: are talking about generating um returns over the long run. Conqutely,
Speaker 1: we have in emted for two large European investors a
Speaker 1: P four on low carbon indexes. These indexes are a
Speaker 1: way to decabonize passive investments instruments. It's a way to
Speaker 1: reduce climate change related risks without changing market returns of
Speaker 1: other short runds. How because we do a screening a
Speaker 1: sector per sector, and we will look at the cabin
Speaker 1: food print or how a company is exposed to climate
Speaker 1: change related risks. Concrete example that speaks to everybody. If
Speaker 1: you take the example of the auto car makers. On
Speaker 1: the one hand, you have a company named volves Wagon
Speaker 1: developing softwares in order to to to lie on climate change.
Speaker 1: On the other hand, you have corporates like Toyota or
Speaker 1: Tesla developing cars that are anticipating a shift towards EVS.
Speaker 1: So you can see that for all sectors you actually
Speaker 1: have managements either denying what's happening or autist painting. And
Speaker 1: we strongly believe that it's better to be to be
Speaker 1: invested into the latter ones than in the former ones.
Speaker 1: And the good news is that investors, having started the
Speaker 1: process of using the low carbon indexes, have outperformed before
Speaker 1: a for beating the standout indexes. And now this technology,
Speaker 1: having been developed in Europe, is now spreading around the planet.
Speaker 1: Calster's New York Command Right Tirement Fund, New Zealand Superagnution Fund,
Speaker 1: they're all using this technology in order to reduce their
Speaker 1: climate change related risks, with that impacting their returns or
Speaker 1: the short run. Is that a strategic decision on the
Speaker 1: part of these pension funds that they've decided, I mean,
Speaker 1: as you mentioned, whether it's the New York Common Retirement Fund,
Speaker 1: Unilever's corporate pension fund, is that a strategic position that
Speaker 1: they stake as well that they must pay attention to
Speaker 1: these issues. Absolutely. To take a concrete example, it doesn't
Speaker 1: really even matter whether the money manager believes the this
Speaker 1: is something good to be done out of the goodness
Speaker 1: of everybody's heart. The mandate from the manage, from the
Speaker 1: from the people who actually aren't responsible for the money,
Speaker 1: the pension fund managers. They are telling their potential vendor, Look,
Speaker 1: this is how I want you to invest the money. Correct.
Speaker 1: Concrete example News New Zealand Supernuition Fund and we have
Speaker 1: been speaking to them for four years on this topic.
Speaker 1: They have announced a couple of weeks ago that the
Speaker 1: West switching ten billion dollars of the equity funds towards
Speaker 1: low carbon indexes. So, to make a long story short,
Speaker 1: it's not to look good in an annual report, it's
Speaker 1: not to be on any you know, pictures at the
Speaker 1: UN assemblies. It's really because they believe that here they're
Speaker 1: facing a market figure markets being shot and oriented. They
Speaker 1: don't price correctly the risks associated with climate change, and
Speaker 1: so it becomes their fidusual responsibility to arn aerlie those
Speaker 1: risks and to try to reduce their waitings. It's exactly
Speaker 1: the stage of mc county, the governor of the Bank
Speaker 1: of England says, if you don't integrate climate change rootide
Speaker 1: risks while being a coupled punchion fund manager, you're breaching
Speaker 1: your fidushery responsibility based on worlds. Well, Fred, you know,
Speaker 1: I'd love to get your sense though, because there's been
Speaker 1: there's been some pushback about e s G funds and
Speaker 1: even carbon neutral funds, basically saying, how do you really
Speaker 1: determine that a lot of companies can kind of manipulate
Speaker 1: how they look, but it doesn't really matter that it's
Speaker 1: not really reducing their carbon footprint all that much. You know,
Speaker 1: on e h G um, it's slightly different from cabin
Speaker 1: e h G is differs from one country to the
Speaker 1: other one. To take a contricrete example, if you talk
Speaker 1: about e s G in Japan, it will be all
Speaker 1: about governance. If you talk about e G in China,
Speaker 1: it will be all about climate change. When I'm trying
Speaker 1: to say here it has this world conveys different meanings
Speaker 1: depending on the country is you're in on climate change
Speaker 1: is different. The cabin food print of a Chinese, Japanese,
Speaker 1: or European or US corporate is either same one. How
Speaker 1: polting you are or are you exposed to strongded assets,
Speaker 1: meaning you have asset that could be kept on the ground,
Speaker 1: So it has no um I would say moral values behind.
Speaker 1: It's all about materality and risks of a long run.
Speaker 1: And then for that we have particular pictures which provide
Speaker 1: us having an allied that for for more than one decade.
Speaker 1: You know. Just just briefly, I just wanted to mention
Speaker 1: because we were talking about the New Zealand Superannuation Fund
Speaker 1: and at the time, I believe was Adrian Or at
Speaker 1: the fund who who said that they are still going
Speaker 1: to invest in fossil fuel uh companies, but that they
Speaker 1: don't feel that they're being adequately rewarded for the risk.
Speaker 1: So to your point, and they said they reduced what
Speaker 1: the billion dollar fund exposure to emissions and reserves by
Speaker 1: around twenty percentage. Yeah. That the point that the point
Speaker 1: is not to get rid of fossil fuel companies. The
Speaker 1: point is not to disinvest. Equation is within each industry,
Speaker 1: which corporates our well positioned facing this this shift of society. Yeah,
Speaker 1: Fred's mama, thank you so much for joining us. I
Speaker 1: we could talk to you all afternoon. This is actually
Speaker 1: fascinating and you're raising a two billion dollars in funds
Speaker 1: to create the largest green bond fund for emerging markets.
Speaker 1: Fred's mama, Deputy Global Head of Institutional and Sovereign Clients.
Speaker 1: For a MUNDI let's turn our attention now to what
Speaker 1: to do with your money and some of the world
Speaker 1: strategies that you might employ. Brad McMillan is the Chief
Speaker 1: Investment Office for Commonwealth Financial Network and he joins us
Speaker 1: here in our eleven three oh studio. Brad, always a pleasure,
Speaker 1: Thanks for being here. I'm wondering if, if maybe you
Speaker 1: can describe the importance of let's say a non style
Speaker 1: or uh not fixed income number. And this has to
Speaker 1: do with household income, because I was reading a note
Speaker 1: that you put out a couple of weeks ago, and
Speaker 1: it had to do with paying attention to median household
Speaker 1: income in the United States and what that would mean
Speaker 1: for investors. Tell us about it, well, the point of
Speaker 1: the piece was to talk about the We talk about
Speaker 1: the stock market records, but there are underlying records that
Speaker 1: are much more important when we see where the stock
Speaker 1: market is likely to go, and one of the most
Speaker 1: important ones recently has been household income. Media, household income,
Speaker 1: the household income half the people make more, half make less,
Speaker 1: has actually hit a new record for the first time
Speaker 1: since nine Now think about that for a minute. There's
Speaker 1: there's some good news in there, and there's some bad news.
Speaker 1: The bad news is it took almost a full generation
Speaker 1: to hit a new high. The good news is that
Speaker 1: we have hit a new high, and we've done it
Speaker 1: without a ton of economic growth. So that being the case,
Speaker 1: if we look forward, if we see growth accelerating and
Speaker 1: we may ellen the rest of the year, then that
Speaker 1: actually would mean that wage growth could take up, and
Speaker 1: actually income could get even better. People could spend more,
Speaker 1: and we could move into a positive circle. That would
Speaker 1: be great for the market. So, Brad, it sounds like
Speaker 1: you're bullish right now over the short term, I am.
Speaker 1: I think the markets actually going to do pretty well
Speaker 1: through the rest of the year. I think the signs
Speaker 1: for at least at the start of the year very good.
Speaker 1: I guess I was just gonna In that case, do
Speaker 1: you perceive that companies will spend some of the money
Speaker 1: that they have either raised through bond issues or because
Speaker 1: they've just amassed large cash piles. Will they start spending
Speaker 1: that on something other than share buybacks and dividends. Will
Speaker 1: they spend it on wage increases? Will they spend it
Speaker 1: on technology to make their businesses more productive? I think
Speaker 1: they're gonna have to start spending it on wage increases.
Speaker 1: We're already seeing signs are starting to invest more and
Speaker 1: that actually is the key to future income growth, which
Speaker 1: is increasing more or productivity. That's when one of the
Speaker 1: problems companies are running out of bodies to throw with
Speaker 1: the problem. Now they're going to have to start buying equipment,
Speaker 1: and that's going to be another positive for the economy. Brad,
Speaker 1: At what point are we going to start seeing inflation.
Speaker 1: We're gonna start seeing prices rise, We're gonna start seeing,
Speaker 1: as you said, wages increase. That will lead to higher
Speaker 1: benchmark borrowing costs. And Alan Krueger of Princeton was on
Speaker 1: Bloomberg Television earlier and break. He was talking about how
Speaker 1: he could see a ten year treasury yields rising to
Speaker 1: four percent pretty quickly if we start to see that,
Speaker 1: Do you agree and how disruptive would that be? I
Speaker 1: do agree with that, because right now we've had very
Speaker 1: little inflation, and the assumption is what's never going to
Speaker 1: show up I think that when it shows up, it'll
Speaker 1: show up faster than people think, and that could well
Speaker 1: be in the next eighteen months. Now that that's the case,
Speaker 1: And what kind of inflation? What are we talking about? Energy, food,
Speaker 1: home prices? What kind across the board. One of the
Speaker 1: reasons we've had low inflation is because wage growth has
Speaker 1: been so constrained. Wage growth feeds into everything else. We've
Speaker 1: had a number of things getting cheaper and cheaper. We've
Speaker 1: had cars. Globalization is continuing to work its way. But
Speaker 1: why is that connect? In other words, maybe I'm getting
Speaker 1: the wrong. Wages have not, as you said, waited a
Speaker 1: long time for wages to come back. Wages rise, but
Speaker 1: that doesn't necessarily mean the prices are going to go up.
Speaker 1: I thought inflated. One of the reasons that inflation has
Speaker 1: been held in check is because every time you turn around,
Speaker 1: someone else's vent invented the same thing for less money,
Speaker 1: deliver it to you faster, like an Amazon for example. Well,
Speaker 1: you can look at it a couple of different ways.
Speaker 1: You can look at it as a company and say,
Speaker 1: if I have to pay more wages now, either I'm
Speaker 1: going to make less money or I have to raise prices.
Speaker 1: That's where price increases come from, from a cost in
Speaker 1: the inputs or because there's just not enough capacity. Companies say,
Speaker 1: you know what, I can't make enough to sell all
Speaker 1: I need, so I'm just gonna raise prices and match
Speaker 1: my production with the demand at the higher price. That
Speaker 1: being the case, you can see those dynamics start to
Speaker 1: set up in place, and that's what would generate the inflation. Brad.
Speaker 1: If if you could see ten year treasury yields, which
Speaker 1: are now about twenty basis points over two, rising to
Speaker 1: four percent over the next eighteen months, conceivably, if we
Speaker 1: start to see uh sort of increase in wages and inflation,
Speaker 1: what would that do to stock markets? Well, it would
Speaker 1: do something bad to the economy, and it could do
Speaker 1: something worse to markets. I mean, the one thing that
Speaker 1: really causes a stock market pullback a big one, is
Speaker 1: a recession, and rising rates is one of the key
Speaker 1: indicators of a recession. If you look at all of
Speaker 1: the major indicators. We're fine right now. We're fine for
Speaker 1: the next twelve months or so, but sometime in the
Speaker 1: next couple of years we are going to have a recession,
Speaker 1: and that could be one of the causal factors. So
Speaker 1: in other words, if things accelerate meaningfully more, that will
Speaker 1: put us much closer to a recession. It could. Yes,
Speaker 1: are you calling for one? And what two years? I think?
Speaker 1: I think the next eight to twenty four months. It's
Speaker 1: quite possible. I do a monthly I track significant factors
Speaker 1: on my blog every months. Right now, we're still in
Speaker 1: the green light zone, but you can actually see the
Speaker 1: decay and for example, hiring trends. We're on a downward path.
Speaker 1: Things are slowing down and somewhere in the next year
Speaker 1: or two that can hit The trouble is that is
Speaker 1: that hiring slowing down because it just quickly because the technology,
Speaker 1: or not just because of the economy, just because we're
Speaker 1: running out of people. All right, that's the simple part.
Speaker 1: We don't have enough workers. Brad McMillan, thank you so
Speaker 1: much for joining us. Brid mcbillan, chief Investment Officer for
Speaker 1: Commonwealth Financial Network, overseeing ussets of a hundred and fourteen
Speaker 1: billion dollars and based in Waltham, Massachusetts. Uh. This is
Speaker 1: this is a very important issue and you raise an
Speaker 1: incredibly interesting point. Even though investors have pretty much dismissed
Speaker 1: the idea of higher rates. Some are still saying they
Speaker 1: are near. We want to focus now on the aftermath
Speaker 1: the economic sequences of natural disasters such as Hurricane Irma
Speaker 1: Hurricane Harvey. Joining us Brian Eger, a senior Gaming and
Speaker 1: lodging analyst for Bloomberg Intelligence. Brian, thanks for joining us.
Speaker 1: Here's our studio. UM. I understand that if Florida had
Speaker 1: the hospitality and tourism industry in Florida is worth about
Speaker 1: ninety billion dollars UH, and the storm took a direct
Speaker 1: hit on that, and I'm wondering if you could tell
Speaker 1: us the effects, but also how outsized are the ramifications.
Speaker 1: Is it unusual because we know hurricane season exists and
Speaker 1: we know that you know, many businesses try to prepare
Speaker 1: for it. So Florida is about the twelfth largest hotel
Speaker 1: market in the US in terms of room supply. It's
Speaker 1: also a very big cruise deployment market, as you might
Speaker 1: expect about about a annywhere from a third to a
Speaker 1: half of these cruise lines capacity is deployed in the Caribbeans.
Speaker 1: So the potential for disruption exists. Fortunately, I would say
Speaker 1: with respect to Irma, UH, this storm could have been
Speaker 1: far worse in terms of its lingering impact. You know,
Speaker 1: I have to wonder just in general though, with the
Speaker 1: clean up, with this unpredictability, with this feeling that one
Speaker 1: hurricane after another just keep slamming in the same area,
Speaker 1: is there going to be a long term dampening effect
Speaker 1: on demand for some of these cruise lines as well
Speaker 1: as frankly some of the hotels that are in on
Speaker 1: the coast in Florida. Well, I think for cruise lines
Speaker 1: you have to pass between disruption of cruises versus damage
Speaker 1: to cruise ports. Because cruise ships are are maneuverable assets.
Speaker 1: You can redeploy them. So you know, the twenty five
Speaker 1: or so kore imports resssessments I've seen, or about a
Speaker 1: dozen or open, some other half dozen or closed. The
Speaker 1: rest are pending reassessments. Now, there were a number of cancelations.
Speaker 1: By some estimates, about ten cruises were canceled, ten were
Speaker 1: delayed as a result of this, and that does result
Speaker 1: in some uh necessary maneuving on maneuvering on the part
Speaker 1: of cruise lines. But you know, the difference you have
Speaker 1: to pass between is what happens with the ports now,
Speaker 1: for um, for cruises in the Caribbean, once possible beneficiary
Speaker 1: in a in a perverse sense might be Mexico, the
Speaker 1: Mexican Yucatan Peninsula. There are three cruise ports there which
Speaker 1: are likely to see more arrivals because a lot of
Speaker 1: Eastern Caribbean cruises which might be canceled they're disrupted, might
Speaker 1: get redeployed there because considerably less damage in places like Cosmo. Well,
Speaker 1: I understand that the tourism officials in the Caribbean are
Speaker 1: still trying to assess the damage that you've certainly got
Speaker 1: situation where Royal Caribbean said the future sailings aren't even
Speaker 1: going to stop at the ports in Saint Martin, St.
Speaker 1: Thomas or Key West until the islands have recovered. That's
Speaker 1: exactly it is. As you know, of the or so
Speaker 1: odd some odd ports in the Caribbean, um as I said,
Speaker 1: about half are open, but the rest and they're in
Speaker 1: some transitional state of reevaluation and UH and damage assessment
Speaker 1: or actually being closed. And that does UH push a
Speaker 1: lot of that traffic that might have gone to the
Speaker 1: Eastern Caribbean to the Western Caribbean, some very desirable destinations
Speaker 1: they are, no doubt, but that is a source of
Speaker 1: disruption and if you're on one of those cruises that
Speaker 1: got canceled because of the last hurricane UH, you would
Speaker 1: get a full refund and a partial credit towards the
Speaker 1: future cruise. So there are some ways that cruise lines
Speaker 1: try to make it up to affect the passengers in
Speaker 1: terms of their policies. Have we already gotten any guidance
Speaker 1: from Carnival, Royal Caribbean, Norwegian Cruise Line about how much
Speaker 1: of a hit this will cause UH to their third
Speaker 1: quarter earnings? We have not yet, although Carnival will like
Speaker 1: report their earnings within in the next two weeks, perhaps
Speaker 1: next week, because they just finished their August quarter. UM.
Speaker 1: You know, very often in some past storms that disruption
Speaker 1: in terms of an earnings per share impact has been
Speaker 1: relatively manageable. I mean, when Hurricane Sandy came about in
Speaker 1: it affected um UH annual earnings per share for companies
Speaker 1: like Royal Caribbean by about two cents per shares. So
Speaker 1: there might very well be some impact in terms of
Speaker 1: UH cost of issuing vouchers or some disruption or operational costs,
Speaker 1: but historically pretty manageable. Well, but you know, there's a
Speaker 1: difference between the immediate costs and say the cost of
Speaker 1: not really being able to land at a port, and
Speaker 1: we're not really having clients that want to passengers that
Speaker 1: want to go to an island that has been decimated
Speaker 1: by a hurricane and doesn't even have lodging or things
Speaker 1: to see, right, I mean, and is there some kind
Speaker 1: of sense of what that impact could be. We don't
Speaker 1: know yet. I mean, certainly for Eastern Caribbean ports, for
Speaker 1: the US Vision Islands, for Martin's Islands like Save Martin,
Speaker 1: which are popular cruise destinations. We have the reality of
Speaker 1: ongoing economic and infrastructure damage and damage to ports. Uh
Speaker 1: and I said, just as some of the Chinese cruises
Speaker 1: were rerouted from South Korea to Japan, so some of
Speaker 1: these Caribbean cruises might have been rerouted from the Eastern
Speaker 1: Caribbean to the Western Caribbean. It's not ideal, um, it
Speaker 1: happens every year. I think part of the issue will be,
Speaker 1: or what we're watch is whether or not there will
Speaker 1: be more hurricanes for the remainder of this season, which
Speaker 1: could further either disrupt cruises or cause damage. But at
Speaker 1: least for this storm, as bad as it was, things
Speaker 1: could have been far worse. Brian just to get trying
Speaker 1: to get an update the Keys, the Florida Keys Monroe
Speaker 1: County UH, saying that there's no fuel, no electricity, no
Speaker 1: running water, no cell service, general aviation at key West
Speaker 1: International as well as Florida Keys Marathon International they're closed. UH.
Speaker 1: Any estimates how long it's going to be before this
Speaker 1: is up and running really don't know. I will tell
Speaker 1: you that if you look at a one week impact,
Speaker 1: for example, that the hotel industry centered or not Miami,
Speaker 1: there was indeed an effect. If you look at aupans
Speaker 1: rates or revenue per available room, those metrics are down
Speaker 1: thirty to thirty five percent year of a year for
Speaker 1: the weekended um UH September ninth. Now, of course if
Speaker 1: you roll out over a four week period, things are
Speaker 1: pretty flat, but certainly the hotel industry there no doubt
Speaker 1: took a hit. Brianger, thank you so much for joining us.
Speaker 1: Brian Eger, a senior game and lodging analysts for Bloomberg Intelligence,
Speaker 1: joining us here in our Bloomberg eleven three oh studios,
Speaker 1: and we have seen a hit to those shares of
Speaker 1: cruise liners, and there's a question of whether they will
Speaker 1: rebound as people reassess there is a growing chorus that
Speaker 1: perhaps markets are too sanguine about this. I want to
Speaker 1: bring in Jack Ablin to weigh in on this. Jack
Speaker 1: Avelin as chief investment Officer of BEMO Private Bank overseeing
Speaker 1: about sixty eight billion dollars of assets from Chicago. Jack,
Speaker 1: thank you so much for joining us earlier in the program.
Speaker 1: Brad McMillan of Commonwealth Financial Network, so that there was
Speaker 1: a real likelihood that benchmark treasury yields could rise substantially
Speaker 1: over the next eighteen months to two years and spur recession.
Speaker 1: Do you agree, Um, You know, we are in that
Speaker 1: point of the business cycle where we're kind of reaching
Speaker 1: that full capacity, and so perhaps moving toward a higher
Speaker 1: rates slower growth in the future is certainly a possibility. Jack.
Speaker 1: Can I just turn your attention to obviously, this ongoing
Speaker 1: issue of North Korea. It's nuclear ambitions and test firing
Speaker 1: of these ballistic missiles. I understand it's terrible, and you know,
Speaker 1: world leaders are spending their time trying to figure out
Speaker 1: what to do about it. If something untoward were to happen,
Speaker 1: Why would that be such a direct connection to what
Speaker 1: happens to the stock market, Well, you know, it's interesting.
Speaker 1: I did write a note about North Korea this morning, Pim,
Speaker 1: and my focus is, let's not worry or now, let's
Speaker 1: not focus so much on Kim June un. Let's let's
Speaker 1: look at President she. I think it's really China certainly
Speaker 1: holds the cards here, and our bottom line is, as
Speaker 1: long as China is concerned, not concerned, we shouldn't be
Speaker 1: concerned because really, in many respects, North Korea and China
Speaker 1: share a number of political priorities, and as long as
Speaker 1: Kim John un operates within those shared priorities, China is
Speaker 1: gonna go ahead and let him flap his arms and
Speaker 1: do whatever he's gonna do. Should he start to move
Speaker 1: outside of that realm, perhaps if China sense that he
Speaker 1: would launch an unprovoked attack, then I think they would intervene.
Speaker 1: But for right now, I don't I don't see uh,
Speaker 1: I don't see that happening. So right now, what is
Speaker 1: the biggest concern as far as disrupting this record rally
Speaker 1: that we're saying us stuff. I think it's really just
Speaker 1: gonna be um. You know, obviously you know those unknowns
Speaker 1: are outside my scope, but I will say, you know
Speaker 1: it's going to be monetary policy. The fact is that
Speaker 1: it's been easy policy and quantitative easing that got us
Speaker 1: a lot of the way from two thousand nine till
Speaker 1: where we are today. Uh. And it's possible that quantitative
Speaker 1: tightening and a reversal of those moves. Um, could you know,
Speaker 1: UM at least pamp some of that enthusiasm that we've had. Well,
Speaker 1: and Jack, I guess the FED is made very clear
Speaker 1: that it's not going to raise rates at a at
Speaker 1: a fast pace unless they see some material economic growth
Speaker 1: and inflation. In particular, what are the chances in your
Speaker 1: mind that we do get more material inflation, more material wages,
Speaker 1: wage increases that would lead to a more rapid rise
Speaker 1: in benchmark borrowing costs. Yeah, I would say, Um, you're right. Um,
Speaker 1: you know, on paper, I would say the Fed does
Speaker 1: not have enough evidence currently um to really start to
Speaker 1: restrict things race rates or really um reduce the balance sheet. Um.
Speaker 1: Certainly not both. But given that that m chairwoman yelling
Speaker 1: expects that she will not be reappointed, nor she may
Speaker 1: not even take the position if she was offered it, Um,
Speaker 1: she may want to do kind of a what what
Speaker 1: Bernickey tried to do and just create some closure on
Speaker 1: a strategy that she uh. Maybe she didn't open up herself,
Speaker 1: but she certainly perpetuated, So there could be a motivation
Speaker 1: to start something that, you know, all other things being equal,
Speaker 1: she wouldn't have done on her own. Um that said,
Speaker 1: you know, I think that you're right. I mean, we
Speaker 1: could see some UH inflation pressure down the line. We haven't.
Speaker 1: I would have expected to see, for example, three percent
Speaker 1: wage growth by the end of this year, and we're
Speaker 1: not close to that yet, but eventually it will happen,
Speaker 1: and that's part of the business cycle. So I expect that,
Speaker 1: you know, we can continue on this nice, steady path
Speaker 1: higher probably through UH the first quarter, easily into two
Speaker 1: thousand and eighteen. Then as um some of this inflation
Speaker 1: data comes through, we start to see some higher rates. Um.
Speaker 1: The second half of a team could be problematic for
Speaker 1: equity investing. Does Jack Avelin believe that US equities are expensive? Yeah,
Speaker 1: I believe they're expensive. The only lens you can peer
Speaker 1: through too and squint to make them look cheap is
Speaker 1: through the lens of bonds. If you take, for example,
Speaker 1: the earnings yield. Historically the earnings yield, which is just
Speaker 1: the reciprocal of the pe ratio and the triple B
Speaker 1: pen your bond yield have been identical. They moved in
Speaker 1: tandem on top of one another for decades. That was
Speaker 1: until two thousand nine when they split apart. Right now,
Speaker 1: the earnings yield is about one point six percent higher
Speaker 1: than the earnings than the triple B bond yield. So
Speaker 1: perhaps for those investors who are looking for some rationale
Speaker 1: for jumping into the market, that would be it. So Jack,
Speaker 1: it sounds like you think bonds are the most expensive
Speaker 1: part of the market right now. US government bonds in particular,
Speaker 1: I do. I have a very difficult time with it. Really,
Speaker 1: the only um real use for them is is really
Speaker 1: as a hedge. You know, if you felt that, you
Speaker 1: know this is our this is our main scenario. But
Speaker 1: if we're wrong, you know, we want to have something
Speaker 1: to offset. But you know that really hasn't hasn't played out.
Speaker 1: I will say interestingly, Um, this last quarter, high quality
Speaker 1: corporate bonds outperform high yield bonds, So we may start
Speaker 1: to see a turn in the credit cycle, and that
Speaker 1: tends to go earlier than equities themselves, And that's something
Speaker 1: we're just starting to watch although it's sort of interesting
Speaker 1: because in the latest Bank of America Mary Lynch Fund
Speaker 1: Manager survey for September, they actually showed that there are
Speaker 1: a greater number of investors who are going underweight investment
Speaker 1: grade in going more heavily waited towards high yield. So
Speaker 1: it doesn't you know, it sort of means perhaps that
Speaker 1: people got a little overly enthusiastic with investment grade and
Speaker 1: now they're sort of shifting back, which is I thought
Speaker 1: it was kind of interesting. Yeah, I mean that that
Speaker 1: could be, Like I said, it's it's not enough of
Speaker 1: a trend yet. Um, if we start to see high
Speaker 1: quality bonds continually outperform high yield, and that's possible given
Speaker 1: that where credit spreads are currently set, I mean they're
Speaker 1: so low, Um, that could be an indication. And it was.
Speaker 1: I mean, if you go back to the last financial crisis,
Speaker 1: we saw credit spreads widen four quarters before. Uh it
Speaker 1: was the fourth quarter two thousand seven, so it certainly
Speaker 1: gave us a long warning period for two thousand and eight.
Speaker 1: Thanks very much for spending time with us. Jack Avelin
Speaker 1: is always chief Investment Officer be MO Private Bank, helping
Speaker 1: to manage approximately sixty eight billion dollars of client assets.
Speaker 1: Based in Chicago. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
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Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa abramowits one before the podcast. You
Speaker 1: can always catch us worldwide on Bloomberg Radio