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Speaker 2: Vishell Canduja of Morgan Stanley Investment Management vish Ow, good morning.
Speaker 3: It's good to see you morning.
Speaker 2: We've just had a big month of global easing, which
Speaker 2: you've recognized yourself. We've had a federal reserve cut by
Speaker 2: fifty basis points. We've had China begin to take on
Speaker 2: more of an easy posture. Is that a reason to
Speaker 2: buy bonds or sell them?
Speaker 4: I think after the visa, absolutely by them. I think
Speaker 4: at two fifty bus's points till twenty twenty five, I
Speaker 4: think it was a tough, tough slog there, and we
Speaker 4: were backing away from it. At this point. I think
Speaker 4: we think it's fair value at this point. But I
Speaker 4: think the market is getting a little bit carried away
Speaker 4: with the stimulus, as you pointed out, as well as
Speaker 4: the one or two good data points that have come out.
Speaker 4: Doesn't change the trend for us.
Speaker 2: Well, tell me what the trend is for you, because
Speaker 2: it's been very confusing for the rest of us. We've
Speaker 2: seen contradictory dansa across the board. When it comes to
Speaker 2: the jobs market. You can pick out the employment components
Speaker 2: of the m week, the labor differential not great and
Speaker 2: getting worse, or you could look to headline pay rolls
Speaker 2: at America and just say everything's okay. Unemployment is still
Speaker 2: close to four percent. What is it to worry about.
Speaker 2: What's the trend for you?
Speaker 4: This inflation is very intact for us. I think Kathy
Speaker 4: might mention in the previous slot as well. I think
Speaker 4: the data points that we are getting within inflation. Definitely
Speaker 4: the ones that are a little bit more volatile are
Speaker 4: showing up, which we don't think are going to persist
Speaker 4: for a long time, or we are a big component
Speaker 4: of shelter is going to drop off, as at least
Speaker 4: from the indicators that be track. So this inflation is
Speaker 4: very intact. Economy is still in that exuberant slash soft
Speaker 4: landing phase, so you see the growth perk up from
Speaker 4: time and again labor market being one component of that.
Speaker 4: We don't think that these cuts that they've announced, or
Speaker 4: they've started off with fifty basis points are anything to
Speaker 4: resuscitate an economy which is going into a recession. So
Speaker 4: these are recalibration cuts. They've used that word very very clearly, as.
Speaker 5: Well pause an economy that's going into recession. What signs
Speaker 5: are we seeing of any potential recession anywhere on the
Speaker 5: horizon base and everything that everyone's saying these companies included
Speaker 5: about how strong the consumer is.
Speaker 4: I think narrative shifts are so severe, and we've seen
Speaker 4: that since twenty twenty two. I think we saw the
Speaker 4: two one in fifty basis points priced in with two
Speaker 4: really tough NFP reports where we started to question whether
Speaker 4: these are because of labor pool increasing or people coming
Speaker 4: into the job force, or this is because of layoffs.
Speaker 4: And then I think the market got very tied up
Speaker 4: with that for probably about two and a half months,
Speaker 4: and now we are coming back into it with one
Speaker 4: very very strong labor report that comes out. So yes,
Speaker 4: consumer is strong. Underneath balance sheets are very strong. We
Speaker 4: invest in balance sheets, you have bondholders. One quick point
Speaker 4: also I would raise is this is the issue that
Speaker 4: people have if a big chunk of the economy is
Speaker 4: interest rate insensitive, which is because of the stimulus that
Speaker 4: you put in, and then you ensued a very low
Speaker 4: interest rate environment where all of us three finance said
Speaker 4: three percent thirty y are fixed, very similar to what
Speaker 4: Comcast you.
Speaker 3: Say all of us, all of us wish we had
Speaker 3: done that. Not all of us did. Some of us did,
Speaker 3: and some of us did, and ones around this time.
Speaker 3: I'm very happy.
Speaker 5: About it, and some people are pretty bitter about it.
Speaker 5: But I am wondering you actually are seeing a tick
Speaker 5: up in mortgage at least for financings as a results
Speaker 5: have how much things are coming down. The world that
Speaker 5: you're talking about with this binary risk of narrative shifts
Speaker 5: doesn't speak to a world where credit should be holding
Speaker 5: in as much as it is.
Speaker 6: Wouldn't you think if there was a.
Speaker 5: Risk that in particular high yal bonds should be just
Speaker 5: ticking up, sowing a little bit of a sign of
Speaker 5: concern rather than absolutely cratering when it comes to the
Speaker 5: extra spread that investors demand to own over very fair rates.
Speaker 4: Very fair we are trying to demand a little bit
Speaker 4: and we are getting priced out. So we are at
Speaker 4: the lowest point of high yell in our portfolios. For
Speaker 4: that one reason, I think if we slotted in the
Speaker 4: way of how we look at the world fundamentals, technicals, valuations,
Speaker 4: fundamentals are strong. You can take a few companies out
Speaker 4: of that picture who are edosyncratically going through issues. Right now,
Speaker 4: technicals are fiercely strong, and that is less of a
Speaker 4: spread buyer, more of a yield buyer that is coming
Speaker 4: into the market. Real yields are high, and yields are
Speaker 4: best predictor of total dons analyzed for the next three years.
Speaker 2: When we look at spreads, it spreads exclusively and we
Speaker 2: compare them to a different period and we say they
Speaker 2: are just as time as they work back then multi
Speaker 2: decade sides. How difficult different is the index now versus say,
Speaker 2: pre GFC, How different is this one?
Speaker 4: Much cleaner? Balance sheets are much much stronger. Even if
Speaker 4: growth flatlines from here at one to two percent real GDB,
Speaker 4: I think pop will be just fine. As coming back
Speaker 4: to that homeowner example, I think a lot of balance
Speaker 4: sheets can have connotations.
Speaker 2: So can I just ask an additional question please? And
Speaker 2: I know it's difficult and I don't expect you to
Speaker 2: have a precise answer, but typically historically three hundred basis
Speaker 2: points two fifty on high yield is super super sigh.
Speaker 2: Do you need to rethink that is a new number
Speaker 2: like two hundred one fifty?
Speaker 3: What is it? Could be?
Speaker 4: Absolutely could be if triple cs continue the carnage that
Speaker 4: they've been on probably over the last two and a
Speaker 4: half months. Here you just correctly, if you take out
Speaker 4: distress from high yield, it's another fifty basis points already
Speaker 4: there to your point around that low two hundreds, if
Speaker 4: you will. We think that spreads are very commensurate to
Speaker 4: the fundamentals and technicals we are going through. We could
Speaker 4: be tight and frustratingly tight for a long period of time,
Speaker 4: but we are not expensive at this point. Now. I'm
Speaker 4: going to second statement right after that is sure we
Speaker 4: are at the lowest amount of spread risks in our
Speaker 4: portfolios in a long time, highest quality, highest interest rate duration.
Speaker 4: Were explaining why steepeners. We don't think that volatility adjusted,
Speaker 4: you're getting paid for the spread risks that you're taking out.
Speaker 4: Triple B to double is the lowest and probably about
Speaker 4: two decades At this point. As a spread investor, I'm
Speaker 4: always looking for more premium. I need to get too paid,
Speaker 4: need to get paid for that volatility that I'm taking on.
Speaker 4: So for fixed income portfolios, I can still diversified, high quality,
Speaker 4: can still spit out probably five to seven percent total
Speaker 4: turn in the next three years analyze, I'm taking that
Speaker 4: probability bit higher versus going down below investment rate.
Speaker 5: When you take a step back, you said that the
Speaker 5: technicals are very strong for credit for bonds. Just in general,
Speaker 5: there's a flood of cash coming in. Where's that cash
Speaker 5: coming from. How much is coming from people who are
Speaker 5: waking up to the realization that they're not going to
Speaker 5: get Social Security or some of these other benefits when
Speaker 5: they're old and I need the income and they're going
Speaker 5: to need to really be invested and get something more reliable.
Speaker 4: Yeah. No, I think the lock and yield effect is
Speaker 4: very compelling at this point. I think the except for
Speaker 4: the very front end of zero to two, zero to
Speaker 4: three year part of the curve, where I think the
Speaker 4: sofa should adjust as the fact comes down from the
Speaker 4: lofty levels. I think every other part of fixed income
Speaker 4: curves have already adjusted to be steeper. So the roll
Speaker 4: down the traditional way of earning money within fixed income,
Speaker 4: and sometimes the cliched way of how we put it
Speaker 4: is the dual mandate of fixed income has high probability
Speaker 4: to be met for that long term saver that you
Speaker 4: have income toll return, and then you have the negative
Speaker 4: correlation to risky assets, which is back as inflation is
Speaker 4: coming down.
Speaker 5: How do you hedge against the potential for some sort
Speaker 5: of geopolitical disruption and oil price is surging. I mean,
Speaker 5: there's sort of this counterintuitive connection between bonds and oil
Speaker 5: prices that we've seen over the past few months. How
Speaker 5: much are you really planning for a scenario of that type.
Speaker 4: I think it's tough to like massively shift portfolio positioning
Speaker 4: for that one. I think one way that we are
Speaker 4: trying to adjust portfolios is that your overweight risk were
Speaker 4: overweight credit risk not as much though over the last
Speaker 4: like three years, if you will, so we are at
Speaker 4: the lowest point of our overweight, you still have an
Speaker 4: overweight poster that if this geopolitical tensions do fled up
Speaker 4: even further, which we had a few signs in the
Speaker 4: last like two to three weeks that it could have
Speaker 4: that we have enough potential to add below investment grade
Speaker 4: risk which will sell off and react to these geopolitical tensions.
Speaker 4: And then the back end of the treasury curve is
Speaker 4: one more less geopolitical, more deficit situation that we are
Speaker 4: significantly underweight.
Speaker 6: Are you worried about the deficit?
Speaker 4: We are nauseous about it in terms of the biggest
Speaker 4: post war. Again, we can throw out stats all day long,
Speaker 4: but I think the weight affects is you need to
Speaker 4: grow out of it, or you need to do something
Speaker 4: as some of the European countries are already getting onto,
Speaker 4: is be physically responsible and going through some tough time.
Speaker 1: Do you actually think Washington would do something very tough?
Speaker 4: I think that is one thing that they are deficits
Speaker 4: in China is one thing. How common those two campaigns
Speaker 4: are on and how aligned they are.
Speaker 1: Unfortunately, at this point, if the deficit is one of
Speaker 1: your biggest concerns, especially on a US election, does it well?
Speaker 1: I guess what matters more for you is probably the
Speaker 1: composition of Congress.
Speaker 7: How are you thinking about that?
Speaker 4: I think the bas case, I think they're looking at
Speaker 4: the same numbers that you guys report on the dominal
Speaker 4: etcector as well. Uh, dead heat. But then you know
Speaker 4: centered and and and house would be split, which is
Speaker 4: actually not a bad thing for for deficits. Might be
Speaker 4: we might be looking at a Goldilocks, even treacherous goldilocks
Speaker 4: stable scenario from from.
Speaker 2: That's the least pan out, the least bud outcomes click Congress,
Speaker 2: because they won't make it too much worse basically, but
Speaker 2: not fix it.
Speaker 3: It's good to see you. I appreciate it. Thank you, Michelle.
Speaker 2: To that Morgan Stanley, sarahunt Vampine Saxon would sank with
Speaker 2: earning multiples of robust levels. Any faltering in the growth
Speaker 2: story could have negative consequences, even if it is more
Speaker 2: of a stable outcome versus a deterioration. Ernie's growth is
Speaker 2: key for equities. Sarah john Us Now for more, Sarah
Speaker 2: Goo Mornick, good morning. Good to see what you make
Speaker 2: of the banks so far. Big week of gains last
Speaker 2: week off the Bank of JP, Morgan and wels Fargo
Speaker 2: not just from Bank of America. About twenty minutes ago.
Speaker 8: I think that that is a good start, and I
Speaker 8: think that that is obviously been heralded fairly well, and
Speaker 8: you saw the other financials.
Speaker 7: Besides, if you're Morgan move higher on Friday.
Speaker 8: I think to your earlier discussion, it's going to be
Speaker 8: very interesting to see how the credit companies do or
Speaker 8: how the banks do.
Speaker 7: With the lower credit score folks, because I.
Speaker 8: Think that that's where you're seeing much more pressure and
Speaker 8: pain than you are seeing in the upper end.
Speaker 7: So it's going to see. We'll see how that goes.
Speaker 8: But I think that the fact that you're seeing enough
Speaker 8: spending and that the consumer looks good and even if
Speaker 8: you're looking for it, you're having trouble finding it.
Speaker 7: I think that's good news.
Speaker 2: Sets up retail sales on Thursday as well. Any reason
Speaker 2: to think that we come in soft on retail sales
Speaker 2: given where the consumer.
Speaker 8: Is, I think that's hard to see right now, But
Speaker 8: I mean you might have some areas of softness, but
Speaker 8: I think in general people are still spending fairly well.
Speaker 7: It's too early to catch up for all.
Speaker 8: The economic disruption that the hurricanes had, so I think
Speaker 8: that you probably are going to see reasonably good numbers.
Speaker 6: So this is what a lot of people are expecting.
Speaker 5: That the consumers have plenty of money, and that any
Speaker 5: degree of weakening, even in the savings rate, has been
Speaker 5: really tampered down by some of the recent revisions.
Speaker 6: What's stopping you from just going full bull?
Speaker 8: Well, I think there's still a lot of things that
Speaker 8: we don't know. There's a lot of uncertainty out there.
Speaker 8: We've got an election coming up. Yes, it seems like
Speaker 8: things have calmed down a little bit in the Middle East,
Speaker 8: But is that calm going to remain And just because
Speaker 8: we've got reports of that doesn't necessarily mean that we
Speaker 8: know what the outcome is going to be yet. So
Speaker 8: I think that there is enough out there that you
Speaker 8: could be concerned about. And I think that you have
Speaker 8: next year a big expectation in earnings growth, so you
Speaker 8: want to see that economy continue to roll along fairly nicely.
Speaker 7: And I think that there's, like I said, there's enough out.
Speaker 8: There that that you could get yourself upset about or
Speaker 8: scared about, including the deficits and things that we're not
Speaker 8: talking about right now.
Speaker 7: But at the moment that's not the focus. So right now,
Speaker 7: you know that's good frequities.
Speaker 5: You basically describing the story of my life. I can
Speaker 5: go home and worry about a lot of stuff, but
Speaker 5: you come in the next day and nobody really seems
Speaker 5: to care about it. I am wondering whether we are
Speaker 5: seeing the risk getting skewed to the upside in terms
Speaker 5: of economic growth. We were talking to Max Kattner, who
Speaker 5: was talking about the real tail risk to him is
Speaker 5: actually an upside to inflation and a re ignition of
Speaker 5: some of the price increases that we saw. That this
Speaker 5: could actually create the doomsday scenario that could actually stop
Speaker 5: some of the euphoria that we're seeing in equity markets.
Speaker 5: Is that the risk to hedge right now, given the
Speaker 5: lack of visibility of any other risks, particularly with respect
Speaker 5: to the consumer, I think it's.
Speaker 7: A big issue.
Speaker 8: I think the fact that oil prices have come down
Speaker 8: so sharply that helps a little bit on the inflation front.
Speaker 8: But I think that that's one of the areas that
Speaker 8: if you see you saw an upward CPI print just
Speaker 8: a little bit and all the directionality shifted, and is
Speaker 8: it a full.
Speaker 7: Shift, is it a small shift.
Speaker 8: I think that is one of the bigger risks because
Speaker 8: that's going to keep the FED from acting as decisively
Speaker 8: as it could if you have any weakness in the
Speaker 8: labor market.
Speaker 2: So what do you want to be in equities right now?
Speaker 2: What's your favorite place to big?
Speaker 8: I think you want to be sort of across the board,
Speaker 8: which sounds really boring and annoying.
Speaker 3: Is that at least is equal weight.
Speaker 7: Well, it's I.
Speaker 8: Don't think you want to ignore the equal weight the
Speaker 8: way that you did the last time. Right so, before
Speaker 8: it was all about technology stocks, and if you underweight
Speaker 8: technology stocks, you were underperforming really badly. I think at
Speaker 8: this point the diversity and the fact that you need technology,
Speaker 8: but you also want to see what else is going
Speaker 8: on in the economy. I think that's really come back,
Speaker 8: and I think that that's why you want to be
Speaker 8: somewhat across the board as opposed to having all your
Speaker 8: eggs and the technology.
Speaker 3: Side is a theme that you want to run with.
Speaker 2: This is what my Wilson and Molke and Stanley was
Speaker 2: talking about on the show that we moved from GLP
Speaker 2: ones to AI, this big and video move over the
Speaker 2: last few years.
Speaker 3: Is there another theme you want to run with the
Speaker 3: works right now?
Speaker 8: I think that it's good to understand what is going
Speaker 8: on with the matic investing. I think that what you're
Speaker 8: seeing with the European carmakers right now is they're saying, hey,
Speaker 8: hang on a second, we're not going to be able
Speaker 8: to go full ev in ten years.
Speaker 7: That's not going to happen.
Speaker 8: I think understanding the fact that you're going to have
Speaker 8: an and on the energy front is going to be important.
Speaker 8: I think it's important on a thematic sense to look
Speaker 8: at companies that have continues to get balance sheets and
Speaker 8: can really generate cash, because that's what's going to be
Speaker 8: more problematic. Even if rates don't come down dramatically but
Speaker 8: stay a little bit higher, you're going to start to
Speaker 8: see some of those companies that can't survive on their
Speaker 8: own have more problems. And it hasn't really been an
Speaker 8: issue yet, and credit credits spreads are really tight. But
Speaker 8: I think that focusing on companies that are able to
Speaker 8: do things like buyveck their shares and paid dividends is
Speaker 8: going to continue to be very helpful.
Speaker 1: You mentioned the US election in your notes. You talk
Speaker 1: about the political risk of volatility for equities. What happens
Speaker 1: when we don't know the outcome for potentially days or weeks.
Speaker 8: I would not like to see that happen. I think
Speaker 8: that I don't think markets would like to see that happen.
Speaker 8: I think if it looks like any kind of protracted fight,
Speaker 8: I don't think that that's going.
Speaker 7: To be healthy for equity markets.
Speaker 8: But at the same time, we're almost in new It
Speaker 8: is not the right word, but we have had problems before,
Speaker 8: and we have gotten through them so to the extent
Speaker 8: that we've had challenges, and yet we all come back
Speaker 8: to a point where it's there is an acceptable answer.
Speaker 8: I don't think it's as bad as it could be,
Speaker 8: but I do not think that equity.
Speaker 7: Markets would like that very much at all.
Speaker 1: But are they even pricing in this probability right now?
Speaker 7: I do not think that. No, I don't think so.
Speaker 8: I think that they're not even pricing in a probability
Speaker 8: of a sweep of one side or the other.
Speaker 7: I think they're still pricing in a probability of a mixed.
Speaker 8: Government because that's generally better for equities because things don't
Speaker 8: move as fast, right, you can't make us changes as quickly, So.
Speaker 1: The equity market is pricing in what they would like
Speaker 1: to be the outcome, not potentially what is the going
Speaker 1: to be the outcome.
Speaker 7: Yeah, that's very equity market like though, isn't it.
Speaker 8: I mean, isn't that what equity markets do. It's what
Speaker 8: do we want to happen. We're going to try to
Speaker 8: telegraph that and make it happen.
Speaker 7: You know, if we keep moving this way, maybe thus
Speaker 7: it will be.
Speaker 5: So we are deep in the heart or getting to
Speaker 5: the heart of earning season A. Which sector are you
Speaker 5: most interested to hear from?
Speaker 6: We've already heard from some of the banks.
Speaker 5: We're going to be done with basically the big bank
Speaker 5: earnings by the end of tomorrow. Which really will be
Speaker 5: the company or slew of companies that give you the
Speaker 5: best sense of whether people are a little bit over
Speaker 5: their skis in terms of risk.
Speaker 8: If you think about what's going to drive what we
Speaker 8: think about the consumer, you're going to be looking on
Speaker 8: all the consumer side stuff. But if I think about
Speaker 8: the entire economy, I want to hear what the industrials
Speaker 8: have to say, and I want to see what they
Speaker 8: have to say about margins, what they have to say
Speaker 8: about labor costs, material costs, because that's going to set
Speaker 8: us up for twenty twenty five. And that's I think
Speaker 8: the big question is, like, Okay, we've seen some really
Speaker 8: good earnings growth in twenty twenty four, We're expecting more
Speaker 8: earning growth in twenty twenty five. Do we have the
Speaker 8: underpinning ability to do that and to get those earnings through?
Speaker 8: Because if we do, then the bullishness is not wrong.
Speaker 8: But if you're starting to see cracks in that and
Speaker 8: you saw individual is that intiosyncratic?
Speaker 7: Is Nike having a problem because Nike's having a problem.
Speaker 7: Is this having a problem.
Speaker 8: If we see broader problems like that, I think that
Speaker 8: then the question starts.
Speaker 7: To come what's happening next year?
Speaker 8: If you don't and you see much more stability and
Speaker 8: you see companies saying, hey, you know what, we've really
Speaker 8: got to handle on these costs and we're able to
Speaker 8: push prices just a little just enough to keep margins
Speaker 8: in good shape or growing a little bit, I think
Speaker 8: that's going to be important.
Speaker 6: Is there any sector that you're just completely avoiding?
Speaker 8: Not at the moment, but I think that there are
Speaker 8: places where you want to be careful and you're always
Speaker 8: looking for companies within individual sectors that have their own dynamics.
Speaker 8: But at the same time, I think some of the consumer.
Speaker 8: You have to be a little bit careful for reasons
Speaker 8: like Nike and the individual idiosyncratic problems that you can see.
Speaker 8: But I don't think that there's anything that you would
Speaker 8: say absolutely I want to stay away from here. I mean,
Speaker 8: it's interesting that the IEA is taking numbers down for demand,
Speaker 8: and yet we're taking global growth numbers up for China, right,
Speaker 8: So one of those things is not correct where you
Speaker 8: go from there.
Speaker 7: I don't know. Materials have certainly been hit pretty hard
Speaker 7: on the back of both.
Speaker 8: Oil coming down and some of the other stuff, But
Speaker 8: I don't think that you want to be completely out
Speaker 8: because there's still places to make money in those sectors.
Speaker 3: Sarah.
Speaker 2: Let's got to see you, Sarah if I'm hired Saxon work.
Speaker 2: We begin this out with stocks at all time highs
Speaker 2: as earning season rams up. Max Kenner of HSBC still bullish.
Speaker 2: A powerful combination of dubvish fed China stimulus, low near
Speaker 2: term EPs expectations, and subdued sentiment leaves us very bullish
Speaker 2: on risk assets. We find it incredibly tough to form
Speaker 2: a bearish narrative from here. Max Kenna joins us. Right now, Max,
Speaker 2: you've talked about why you're bullish. Let's talk about where
Speaker 2: you're bullish. High yield credit overweight even with spread sta
Speaker 2: type Max.
Speaker 3: Why, Yeah, good morning.
Speaker 9: I think look, when you look at your high old
Speaker 9: credits fora its actually they are still you know, pricing
Speaker 9: in a bit more premium than the US high held counterparts.
Speaker 9: We did close the US high old overweight that we
Speaker 9: had really for a long long time earlier this month. Overall, however,
Speaker 9: I don't think you know, it's an environment where you
Speaker 9: want to be in risky credit over equity as anymore.
Speaker 9: I think it's particularly you want to be in equities
Speaker 9: in particular.
Speaker 3: Yes, you've want to be a bit overweighted.
Speaker 9: And emerging market dead and highield credit in particular. But
Speaker 9: this is the environment. This is the sort of environment
Speaker 9: that Lisa was just describing. That is that any news
Speaker 9: and all of the good news or all of the
Speaker 9: news is good news, and that is particularly favorable for
Speaker 9: equities and in particular for the US.
Speaker 2: This is echoed the fund manager survey from Bank of
Speaker 2: America this morning. Max, I went through the land a
Speaker 2: little bit earlier, but really it sounds like you wrote it.
Speaker 2: The biggest jump in investor optimism since June twenty twenty
Speaker 2: on Fedcutch, China stimulus and a soft landing Max. The
Speaker 2: question you ask in your own research of yourself that
Speaker 2: you get asked all the time, what would it take
Speaker 2: to make you bearish? Is that question alone? What makes
Speaker 2: you bullish?
Speaker 9: Not alone, but definitely it's one of them. When we look,
Speaker 9: for example, at our sentiment and positioning indicators, the interesting
Speaker 9: thing is that actually the bearers and the bullish signals,
Speaker 9: so the buy and the sales signals are still pretty
Speaker 9: much on balance, pretty much the same. So what we're
Speaker 9: seeing is that sentiment.
Speaker 3: Overall is still pretty neutral.
Speaker 9: So I think at least when we speak to investors
Speaker 9: sort of the overall backdroppers investors are pretty constructive, they're
Speaker 9: pretty positive. But I think overall there's still a bit
Speaker 9: of caution going into the election. Going into you've got
Speaker 9: geopolitical uncertainty. You don't really know around the labor market. Fine,
Speaker 9: we had one good print around the labor market, but
Speaker 9: is it really out.
Speaker 3: Of the woods.
Speaker 9: So there's a few questions around the cracks and the
Speaker 9: labor market as well. Around the strengthen the US economy,
Speaker 9: and that keeps you know, investors in a really really
Speaker 9: weird position where they keep telling us, yeah, right, kind
Speaker 9: of constructive, but at least, you know, in the near term,
Speaker 9: a bit more cautious, and that is reflected in our
Speaker 9: sentiment and position in indicators in the last couple of
Speaker 9: weeks throughout that actually we had them closer to a
Speaker 9: bias signal despite equities that at all time I then
Speaker 9: closer to a sale signal. And that alone is really
Speaker 9: part of the reason why we're so constructive and so polish.
Speaker 3: Max.
Speaker 5: There was a time when no landing was thought to
Speaker 5: be negative for stocks because essentially what that would mean
Speaker 5: would be inflation that didn't come down and bond deals
Speaker 5: that remained high.
Speaker 6: Why is that no longer concerned?
Speaker 9: I think it will be a concern again when it's
Speaker 9: properly no landing, when we really start talking about, hey,
Speaker 9: candor fed not cunt at all anymore, or may they
Speaker 9: even have to reverse cause and may they even have
Speaker 9: to hike again. Let's remember that was the case what
Speaker 9: we had in twenty twenty two, when you know, all
Speaker 9: of a sudden, in all of these episodes, there was
Speaker 9: way more ratetikes being priced in, and that was the
Speaker 9: time when credit spread suffered, when equities suffered, were pretty
Speaker 9: much everything so off. We had the same environment in
Speaker 9: September October last year again where we had Jackson Hall
Speaker 9: saying it's higher for longer, we can't cut rates at all.
Speaker 9: We had the same environment in March April this year
Speaker 9: when the rates market was starting to price a possibility
Speaker 9: of rate hikes. Once that comes back, and once that
Speaker 9: is really properly coming back into the pricing, then it
Speaker 9: will become a problem for valuations.
Speaker 3: Across all the risky assets.
Speaker 9: But let's be honest, right now, we're so far away
Speaker 9: from that, right We've gone from sort of nine ten
Speaker 9: cuts by the end the next year, we've gone.
Speaker 3: To six cuts. So what that's just a reflection of.
Speaker 9: Good growth, good earnest growth, good profitability, good GDP growth,
Speaker 9: And we'll take it right and only once really we're
Speaker 9: going to see sort of one hundred and eighty degree
Speaker 9: shift the FED not even saying pausing, but we're done.
Speaker 9: That would be a problem I think for risk ass.
Speaker 7: So is there just to put a bow under this?
Speaker 5: How much are you basically saying that if the FED
Speaker 5: were to come out and say that they were only
Speaker 5: going to cut by twenty five basis points this year,
Speaker 5: and it only had a few more before they might
Speaker 5: reach neutral. That could be at or it really has
Speaker 5: to be something more definitive where you start to see
Speaker 5: INFLA should reaccelerate in the material way.
Speaker 9: No, I think it would have to be something more definitive,
Speaker 9: and it would to put a bit more precise I
Speaker 9: think it would have been, or it would need a
Speaker 9: really one hundred eighty degree shift from what Powell said
Speaker 9: during Jackson Holl. Remember Jackson Holl two years ago was saying,
Speaker 9: you know, he was saying, there will be pain. There
Speaker 9: will be pain for households and businesses. That's what we need.
Speaker 9: That is what is required to bring inflation down last year,
Speaker 9: and Jackson Holl was all about higher for longer.
Speaker 3: This year.
Speaker 9: It was all about we don't like more pain, we
Speaker 9: don't seek more pain, we don't welcome it, will act
Speaker 9: against it. So it's literally bringing in the FED put again.
Speaker 9: And let's remember there's a way way different level of
Speaker 9: rates compared to the twenty tents. They've got an awful
Speaker 9: lot of room to cards. So if say, for example,
Speaker 9: one of the next two to three payroll data actually
Speaker 9: do come below expectations, they have a lot of room
Speaker 9: to say, fine, now let's the next time, we'll go
Speaker 9: fifty again, and that can cushion any downside for USSET.
Speaker 9: So the fair put, now, I would argue, is much
Speaker 9: more credible even compared to the twenty tenths. So it
Speaker 9: would need a really, really dramatic, much more significant shift
Speaker 9: to become a problem and start becoming a problem for
Speaker 9: risk assets MAX.
Speaker 1: When you look at the Bank of America Global Fund
Speaker 1: Manager survey released this morning, the three top tail risks
Speaker 1: are geopolitics, inflation, US recession in that order, What do
Speaker 1: you rank as the biggest risk?
Speaker 9: Now, I think it is actually inflation. It is the
Speaker 9: rate side of things. I mean, overall, we've got to
Speaker 9: figure out what is the biggest one.
Speaker 6: Is it more.
Speaker 9: Towards recession or is it more towards inflation and rates.
Speaker 9: If you are of the view, like we've been for
Speaker 9: the last two years, that the US is not going
Speaker 9: to go into recession, that really in the market is
Speaker 9: underestimating the strength of the US consumer, the strength of
Speaker 9: the underlying US economy, then by definition your biggest risk
Speaker 9: has to be rates. And you know, at some point
Speaker 9: perhaps yields increasing by so much again, either the velocity
Speaker 9: or the level that it starts becoming a problem for
Speaker 9: valuations across the board. Again, the reason why I also
Speaker 9: think it's because it's the biggest risk, because if that
Speaker 9: really materializes, there is nowhere to hide. Remember in March
Speaker 9: April this year or Q four last year, everything sells off.
Speaker 9: It's air quarters, it's credit, it's emerging markets, it's rates.
Speaker 9: Everything sells off and the only thing the only place
Speaker 9: to hide is the dollar. So from a hedging and
Speaker 9: from an assellocation perspective, it is by far, I think
Speaker 9: the biggest risk.
Speaker 1: So, given how bullish you are, you potentially in the
Speaker 1: no landing camp.
Speaker 9: Now I wouldn't call it no landing. So I think
Speaker 9: the market really always exaggerates a bit. Right. You guys
Speaker 9: were talking about short term inflation expectations. Let's remember we
Speaker 9: started at sub two percent short term inflation expectations at
Speaker 9: the start of the year. They went all the way
Speaker 9: up almost to three percent, we went down to one
Speaker 9: point seven, we're back up to almost two and a half.
Speaker 9: We're backing down a bit. So the market always goes
Speaker 9: from oh my god, it's total no landing No, it's
Speaker 9: total soft landing. It goes from one extreme to the other.
Speaker 9: I think the reality is that it inflation. You know,
Speaker 9: we have this inflation shock, we have disinflation, and now
Speaker 9: we're just not quite down to two percent, right, We're
Speaker 9: a bit stuck. That is actually not a problem. It's
Speaker 9: not a problem at all for earnings. It's actually good
Speaker 9: for earnings because it's a nominal figure. It's good for
Speaker 9: nominal growth. And that I wouldn't call it no landing.
Speaker 9: I think the market is getting a bit too obsessed
Speaker 9: around these definitions and always swing from one extreme to
Speaker 9: the other. I would say it just continues to be
Speaker 9: a really supportive environment for nominal growth, and that is
Speaker 9: an environment that is particularly supportive for equities.
Speaker 2: And Max still bullish and it's good to catch up
Speaker 2: Max Candida of HSBC with your equity market at all
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