WEBVTT - Tariff War Woes Fuel Exodus From US Assets

0:00:02.520 --> 0:00:11.840
<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Bloomberg

0:00:11.920 --> 0:00:16.040
<v Speaker 1>Daybreak Asia Podcast. I'm Doug Chrisner. Economic angst re asserted

0:00:16.079 --> 0:00:19.760
<v Speaker 1>itself in US markets. We have the uncertainty around tariffs,

0:00:19.800 --> 0:00:23.000
<v Speaker 1>combined with the escalating trade war between the US and

0:00:23.079 --> 0:00:27.280
<v Speaker 1>China dominating psychology. Now, the White House confirmed that China

0:00:27.320 --> 0:00:29.800
<v Speaker 1>now faces a one hundred and forty five percent levy

0:00:29.880 --> 0:00:32.960
<v Speaker 1>on all goods it sends to the US, and remember

0:00:33.159 --> 0:00:36.320
<v Speaker 1>all other trading partners are dealing with a baseline tariff

0:00:36.680 --> 0:00:39.120
<v Speaker 1>of ten percent. In a moment or two, we'll be

0:00:39.200 --> 0:00:41.920
<v Speaker 1>joined by Patrick Kennedy. He is founding partner at All

0:00:41.960 --> 0:00:44.960
<v Speaker 1>Source Investment Management. But we begin this morning in the

0:00:45.000 --> 0:00:49.560
<v Speaker 1>Lion City. Joining me now, Mark Cranfield, Bloomberg Market Live strategist.

0:00:49.640 --> 0:00:53.080
<v Speaker 1>He joins us now from Singapore. Mark, it's always a pleasure.

0:00:53.120 --> 0:00:54.920
<v Speaker 1>Thank you. I'm sure it's been a busy day where

0:00:54.960 --> 0:00:57.080
<v Speaker 1>you are. And I guess we could start with the

0:00:57.120 --> 0:00:59.920
<v Speaker 1>idea that we're beginning to see signs of a slow

0:01:00.120 --> 0:01:03.760
<v Speaker 1>down in global trade already emerging. You can look at

0:01:03.760 --> 0:01:07.320
<v Speaker 1>the degree to which equity prices are already reflecting that fact.

0:01:07.560 --> 0:01:10.560
<v Speaker 1>But maybe we can begin with the volatility that we're

0:01:10.560 --> 0:01:14.959
<v Speaker 1>seeing in currencies right now, because this is pretty tremendous,

0:01:15.000 --> 0:01:15.360
<v Speaker 1>is it not.

0:01:16.400 --> 0:01:20.399
<v Speaker 2>Well is indeed Bloomberg already running stories that some American

0:01:20.440 --> 0:01:24.679
<v Speaker 2>companies are suspending their flows of goods which are coming

0:01:24.720 --> 0:01:27.679
<v Speaker 2>from China because they're so uncertain about how to prise

0:01:27.760 --> 0:01:29.840
<v Speaker 2>them for the time being, and traders are reading that,

0:01:30.000 --> 0:01:33.000
<v Speaker 2>so they're seeing that as a negative signal for the

0:01:33.120 --> 0:01:36.720
<v Speaker 2>US dollar, among other things, allied with the fact that

0:01:36.760 --> 0:01:38.840
<v Speaker 2>they do expect for the reserve to learn interest rate

0:01:38.920 --> 0:01:41.720
<v Speaker 2>several times this year. So what we're we're seeing is

0:01:41.760 --> 0:01:45.319
<v Speaker 2>particularly demand for the strongest what was perceived to be

0:01:45.360 --> 0:01:48.080
<v Speaker 2>the strongest currency, so the Euro, the yen, the Swiss

0:01:48.080 --> 0:01:50.800
<v Speaker 2>frank they're leading the way as people are shifting some

0:01:50.920 --> 0:01:53.600
<v Speaker 2>money away from the US dollar. We've just seen the

0:01:53.680 --> 0:01:57.480
<v Speaker 2>euro touch a multi year high today. Dollar yen has

0:01:57.520 --> 0:02:00.360
<v Speaker 2>already been down onto a one forty two and or

0:02:00.360 --> 0:02:02.040
<v Speaker 2>haven't seen that for a very long time as well.

0:02:02.080 --> 0:02:05.320
<v Speaker 2>So you can see these are very significant shifts in

0:02:05.400 --> 0:02:07.760
<v Speaker 2>the currency market, and that will give a little bit

0:02:07.760 --> 0:02:10.280
<v Speaker 2>of respite to the Chinese currency in the short term.

0:02:10.280 --> 0:02:14.000
<v Speaker 2>But the Chinese authorities have made pretty clear that they

0:02:14.040 --> 0:02:16.840
<v Speaker 2>are willing to shift the yuan to a weaker stance

0:02:16.840 --> 0:02:19.200
<v Speaker 2>should they need to, but that's unlikely to be seen today.

0:02:19.200 --> 0:02:22.120
<v Speaker 2>They're getting help from their basket arrangement, which is when

0:02:22.120 --> 0:02:24.680
<v Speaker 2>the euro is strongly helps to strengthen the year one.

0:02:24.720 --> 0:02:28.320
<v Speaker 2>But these are very fluid situations in the currency world,

0:02:28.400 --> 0:02:31.360
<v Speaker 2>and people going into this, we're probably thinking that this

0:02:31.480 --> 0:02:33.480
<v Speaker 2>was going to be a good year for the US

0:02:33.560 --> 0:02:37.200
<v Speaker 2>although expecting stronger economic growth in the United States and

0:02:37.639 --> 0:02:40.720
<v Speaker 2>the feed through from that into securities in America. But

0:02:40.880 --> 0:02:43.560
<v Speaker 2>we are obviously getting the reverse situation. A lot of

0:02:43.560 --> 0:02:46.200
<v Speaker 2>people recalibrating their outlook on the US dollar.

0:02:46.280 --> 0:02:47.920
<v Speaker 1>Who we had a lot of dollar weakness in New

0:02:47.960 --> 0:02:50.080
<v Speaker 1>York trading. If you look at the Bloomberg dollar spot,

0:02:50.080 --> 0:02:51.840
<v Speaker 1>I think we were down one and a half percent.

0:02:52.160 --> 0:02:54.840
<v Speaker 1>We are building on those declines now in Asia. And

0:02:54.840 --> 0:02:56.880
<v Speaker 1>to your point about the rally that we're seeing in

0:02:56.919 --> 0:02:58.840
<v Speaker 1>the end at one forty three to thirty five, I

0:02:58.919 --> 0:03:00.760
<v Speaker 1>think in New York trading, the end was up two

0:03:00.840 --> 0:03:03.080
<v Speaker 1>percent against the green back. But to go back to

0:03:03.120 --> 0:03:05.080
<v Speaker 1>the point that you were making about the yuan and

0:03:05.120 --> 0:03:09.360
<v Speaker 1>the PBOC combined with the influence of Beijing allowing it

0:03:09.400 --> 0:03:12.160
<v Speaker 1>to weaken. Do you think that there is a line

0:03:12.200 --> 0:03:15.960
<v Speaker 1>in the sand that represents the real risk of more

0:03:16.040 --> 0:03:18.520
<v Speaker 1>capital flight out of China as a result of a

0:03:18.520 --> 0:03:21.160
<v Speaker 1>weaker currency or is that not even entering the thinking

0:03:21.200 --> 0:03:22.200
<v Speaker 1>at this point.

0:03:22.520 --> 0:03:25.359
<v Speaker 2>Well, I think it certainly enters their thinking, but it's

0:03:25.360 --> 0:03:27.840
<v Speaker 2>more to do with the speed of the moves in

0:03:27.880 --> 0:03:31.040
<v Speaker 2>the currencies. So I think from what we can see

0:03:31.040 --> 0:03:34.359
<v Speaker 2>at the moment, if there's a gradual weakening of the yuan,

0:03:34.800 --> 0:03:36.720
<v Speaker 2>they seem to be reading that there's something that the

0:03:36.800 --> 0:03:39.920
<v Speaker 2>Chinese economy, Chinese investors they can deal with. That they

0:03:39.960 --> 0:03:43.080
<v Speaker 2>can if there's a small amount each day, that's something

0:03:43.080 --> 0:03:45.480
<v Speaker 2>they can help. What they were really scared of is

0:03:45.520 --> 0:03:48.600
<v Speaker 2>a sudden jump. We saw the experiment with that in

0:03:48.640 --> 0:03:52.000
<v Speaker 2>twenty fifteen when they moved the currency by two percent

0:03:52.040 --> 0:03:55.440
<v Speaker 2>in one day, and that just caused haboc across Chinese

0:03:55.480 --> 0:03:59.280
<v Speaker 2>equity markets, bond markets, everything, and people were panicky and

0:03:59.320 --> 0:04:01.640
<v Speaker 2>they started to move money out of the current the country.

0:04:01.720 --> 0:04:04.240
<v Speaker 2>So they're really wary of that. They don't want to

0:04:04.720 --> 0:04:08.120
<v Speaker 2>get people to be really nervous about the situation, So

0:04:08.160 --> 0:04:11.160
<v Speaker 2>it's most likely they're going to continue with a very

0:04:11.160 --> 0:04:13.960
<v Speaker 2>gradual move, something like we saw in twenty eighteen twenty nineteen,

0:04:14.000 --> 0:04:16.920
<v Speaker 2>as the first round of taris came on against China.

0:04:17.320 --> 0:04:20.080
<v Speaker 2>It was a move which lasted over many months before

0:04:20.320 --> 0:04:22.839
<v Speaker 2>it reached a level where the Chinese authorities thought, Okay,

0:04:22.920 --> 0:04:25.919
<v Speaker 2>now we offset the extra costs we're receiving from the

0:04:26.000 --> 0:04:27.000
<v Speaker 2>United States.

0:04:27.040 --> 0:04:30.800
<v Speaker 1>So difficult in this current environment to get any visibility

0:04:30.800 --> 0:04:34.240
<v Speaker 1>in order to kind of react. Treasury Secretary bess And

0:04:34.560 --> 0:04:38.000
<v Speaker 1>during the New York session was telling Fox Business everything

0:04:38.080 --> 0:04:40.680
<v Speaker 1>was on the table. He was asked the question as

0:04:40.680 --> 0:04:44.719
<v Speaker 1>to whether kicking Chinese stocks off US exchanges was an option,

0:04:44.800 --> 0:04:47.360
<v Speaker 1>and he seemed to keep the door open for that.

0:04:47.920 --> 0:04:50.039
<v Speaker 1>How bad could this get? I mean, when you look

0:04:50.080 --> 0:04:54.039
<v Speaker 1>at the potential for a real destruction in relations between

0:04:54.600 --> 0:04:56.159
<v Speaker 1>Washington and Beijing.

0:04:56.240 --> 0:04:59.320
<v Speaker 2>I think we've already seen investors start to move ahead

0:04:59.320 --> 0:05:02.640
<v Speaker 2>of that for some time. Anyway, you could argue that

0:05:02.720 --> 0:05:06.080
<v Speaker 2>the establishment of the Hangsaying Tech Index, which happened about

0:05:06.080 --> 0:05:09.320
<v Speaker 2>four years ago in Hong Kong, was really there as

0:05:09.360 --> 0:05:13.920
<v Speaker 2>a preparation for people expecting that over time Chinese companies

0:05:13.960 --> 0:05:16.080
<v Speaker 2>would do fewer listings in the United States. They may

0:05:16.120 --> 0:05:20.280
<v Speaker 2>even pull their listings all together. And you've seen volumes

0:05:20.279 --> 0:05:23.760
<v Speaker 2>shifting away from the activity in the ETFs which are

0:05:23.800 --> 0:05:26.839
<v Speaker 2>lifted in the United States, shifting more towards those which

0:05:26.839 --> 0:05:29.560
<v Speaker 2>are listed in Hong Kong. That's a transition that's been

0:05:29.600 --> 0:05:32.800
<v Speaker 2>going on for some time. It may accelerate. This has

0:05:32.839 --> 0:05:36.279
<v Speaker 2>been hanging over the threat of Chinese companies being removed

0:05:36.279 --> 0:05:38.880
<v Speaker 2>from US exchanges is a threat which has been there

0:05:38.920 --> 0:05:42.080
<v Speaker 2>for some time, and some Chinese companies are voluntarily putting

0:05:42.760 --> 0:05:45.640
<v Speaker 2>dual listings into Hong Kong to protect them should that

0:05:45.720 --> 0:05:49.080
<v Speaker 2>they come when they need to remove themselves from the US.

0:05:49.080 --> 0:05:51.520
<v Speaker 2>So it's not something that is a complete shock to investors.

0:05:51.960 --> 0:05:54.400
<v Speaker 2>It will still have an impact, of course, should it happen.

0:05:54.720 --> 0:05:57.279
<v Speaker 2>So we're seeing much more attention to people like Ali Baba,

0:05:57.520 --> 0:06:00.000
<v Speaker 2>JD dot com. They've all got listings in Hong Kong,

0:06:00.080 --> 0:06:03.280
<v Speaker 2>and those flows are starting to increase the compensate for

0:06:03.400 --> 0:06:04.960
<v Speaker 2>money coming out of the United States.

0:06:05.160 --> 0:06:07.920
<v Speaker 1>I'm curious about the pressure that you're seeing right now

0:06:08.320 --> 0:06:12.800
<v Speaker 1>that is being put on institutions, government sponsored institutions, pension

0:06:12.839 --> 0:06:16.640
<v Speaker 1>plans in China to absorb a little bit of equity

0:06:16.680 --> 0:06:19.240
<v Speaker 1>flow right now, given the ructions that we've been seeing

0:06:19.320 --> 0:06:22.520
<v Speaker 1>in markets. The so called national team stepping up to

0:06:22.520 --> 0:06:24.680
<v Speaker 1>do some buying. Is that something that you're expecting to

0:06:24.720 --> 0:06:25.520
<v Speaker 1>see a lot more of.

0:06:26.160 --> 0:06:29.120
<v Speaker 2>Well, just a couple of days ago, China Center Bank PBOC,

0:06:29.520 --> 0:06:32.919
<v Speaker 2>they said that they had more funds available for these

0:06:32.960 --> 0:06:35.960
<v Speaker 2>government linked entities which go into the domestic market to

0:06:36.040 --> 0:06:39.360
<v Speaker 2>buy etf so they're providing them with more liquidity. We've

0:06:39.400 --> 0:06:41.200
<v Speaker 2>also seen a lot of activity in the last couple

0:06:41.240 --> 0:06:43.920
<v Speaker 2>of days. Clearly the volumes are very strong. They are

0:06:43.920 --> 0:06:47.680
<v Speaker 2>buying the ETFs, and Chinese equities have been holding up

0:06:47.760 --> 0:06:51.640
<v Speaker 2>much better than other regional exchanges. So clearly it has started.

0:06:52.200 --> 0:06:55.279
<v Speaker 2>There's nothing to suggest that it will stop anytime soon.

0:06:55.320 --> 0:06:57.599
<v Speaker 2>That seems to be part of their plan is to

0:06:57.880 --> 0:07:00.640
<v Speaker 2>as much as they can is to ring fen the

0:07:00.720 --> 0:07:04.560
<v Speaker 2>domestic economy, ring fence domestic securities, try and show that

0:07:04.600 --> 0:07:07.120
<v Speaker 2>they have some strength there that they can withstand this

0:07:07.240 --> 0:07:09.920
<v Speaker 2>no matter what happens in the outside world, that China

0:07:09.960 --> 0:07:12.560
<v Speaker 2>still has a vibrant stock market as companies are in

0:07:12.600 --> 0:07:14.640
<v Speaker 2>good shape. So they're putting their money where their mouth is,

0:07:15.160 --> 0:07:17.360
<v Speaker 2>and they probably will continue to do so because they

0:07:17.920 --> 0:07:21.760
<v Speaker 2>need to show everybody that they're being as affected as

0:07:21.760 --> 0:07:24.840
<v Speaker 2>little as possible by what's happening in the outside world.

0:07:25.120 --> 0:07:27.120
<v Speaker 1>So put yourself in the mind of a trader right

0:07:27.160 --> 0:07:30.240
<v Speaker 1>now in the Asia Pacific, last trading day of the week.

0:07:30.480 --> 0:07:32.720
<v Speaker 1>How do you want to close out your book this week?

0:07:34.560 --> 0:07:37.800
<v Speaker 2>Well, if you haven't exited things already, you will probably

0:07:37.840 --> 0:07:41.760
<v Speaker 2>be looking to even peer down risk even further. It's

0:07:42.160 --> 0:07:44.920
<v Speaker 2>like a steamroller. You can see a situation where you've

0:07:44.920 --> 0:07:47.760
<v Speaker 2>got this this big truck coming towards you. You just don't

0:07:47.760 --> 0:07:48.920
<v Speaker 2>want to get in the way of it. So there

0:07:48.920 --> 0:07:51.720
<v Speaker 2>are some very clear flows that the dollar is the

0:07:51.800 --> 0:07:54.080
<v Speaker 2>dollar is falling, you don't want to get in the

0:07:54.080 --> 0:07:58.240
<v Speaker 2>way of that. Treasury bonds are setting off, Equities are

0:07:58.320 --> 0:08:01.040
<v Speaker 2>very soft as well. So if you still have short

0:08:01.120 --> 0:08:03.120
<v Speaker 2>term exposure to those things, you're probably just going to

0:08:03.120 --> 0:08:04.600
<v Speaker 2>want to reduce it as much as you can. But

0:08:05.000 --> 0:08:06.800
<v Speaker 2>the sense is that people did a lot of that

0:08:07.280 --> 0:08:09.960
<v Speaker 2>over the past week already we can expect to see

0:08:09.960 --> 0:08:13.040
<v Speaker 2>a lot more erratic day to day movements. That uncertainty

0:08:13.080 --> 0:08:16.800
<v Speaker 2>is extremely high. You imagine it's uncertain in the United States.

0:08:16.800 --> 0:08:18.559
<v Speaker 2>Imagine what it's like for people out here in Asia

0:08:18.560 --> 0:08:21.240
<v Speaker 2>who don't have much clarity at all on how these

0:08:21.280 --> 0:08:24.520
<v Speaker 2>things are going to be imposed. So keep risk as

0:08:24.520 --> 0:08:25.880
<v Speaker 2>small as you can. That's the message.

0:08:26.120 --> 0:08:28.760
<v Speaker 1>Okay, Mark, thank you so much. It's always a pleasure.

0:08:28.920 --> 0:08:32.640
<v Speaker 1>Mark Cranfield, Bloomberg Market Live Strategists joining us from Singapore

0:08:33.000 --> 0:08:43.040
<v Speaker 1>here on the Debreak Asia Podcast. Welcome back to the

0:08:43.080 --> 0:08:46.760
<v Speaker 1>Debreak Asia Podcast. I'm Derek Krisner. There was heavy selling

0:08:46.760 --> 0:08:50.160
<v Speaker 1>today in US risk assets less than twenty four hours

0:08:50.200 --> 0:08:54.720
<v Speaker 1>after President Trump backtracked on his tariff policy, ostensibly to

0:08:54.760 --> 0:08:57.640
<v Speaker 1>prevent a meltdown in financial markets. Today we had to

0:08:57.640 --> 0:09:00.800
<v Speaker 1>sell off in US equities, in the dollar, and in

0:09:00.880 --> 0:09:03.080
<v Speaker 1>crude oil as well. All of this seemed to underscore

0:09:03.120 --> 0:09:06.440
<v Speaker 1>the concern about the possibility of global recession. For a

0:09:06.440 --> 0:09:09.080
<v Speaker 1>closer look, I'm joined now by Patrick Kennedy. He is

0:09:09.160 --> 0:09:12.880
<v Speaker 1>founding partner at All Source Investment Management. Let me begin

0:09:12.960 --> 0:09:15.760
<v Speaker 1>with the question around recession. Do you think this is

0:09:15.800 --> 0:09:16.880
<v Speaker 1>a real risk at this point?

0:09:16.960 --> 0:09:17.240
<v Speaker 2>Pat?

0:09:17.960 --> 0:09:19.840
<v Speaker 3>Right, Doug, thanks so much for having me back on

0:09:20.559 --> 0:09:23.800
<v Speaker 3>I do I think that anyone that plays down the

0:09:23.880 --> 0:09:25.960
<v Speaker 3>risk of recession at this point, you know, you just

0:09:25.960 --> 0:09:29.600
<v Speaker 3>haven't seen what's going on the past two weeks. So

0:09:29.800 --> 0:09:31.680
<v Speaker 3>I think you know, if you go back in time

0:09:31.720 --> 0:09:33.719
<v Speaker 3>a month ago and fast forward today, you have to

0:09:33.760 --> 0:09:37.520
<v Speaker 3>acknowledge that recession risk are much higher. You know, I

0:09:37.559 --> 0:09:41.760
<v Speaker 3>think that we avoided worst case scenario yesterday, where we

0:09:41.760 --> 0:09:44.079
<v Speaker 3>would have a you know, a certain recession and a

0:09:44.200 --> 0:09:46.079
<v Speaker 3>very deep one of that if the tariffs were put

0:09:46.120 --> 0:09:48.840
<v Speaker 3>on how they were first laid out. Now, I think

0:09:49.400 --> 0:09:52.640
<v Speaker 3>the risk for a softer recession is still definitely there.

0:09:53.760 --> 0:09:56.800
<v Speaker 3>And if a deal with China isn't made in short order,

0:09:57.559 --> 0:10:00.560
<v Speaker 3>I think that, you know, that's a real possibility, and

0:10:00.640 --> 0:10:04.000
<v Speaker 3>the risk and odds continue to go up the longer

0:10:04.080 --> 0:10:06.520
<v Speaker 3>that we put off a deal with China. You cannot,

0:10:06.760 --> 0:10:11.480
<v Speaker 3>as you know, uproot manufacturing routes overnight and bring them

0:10:11.520 --> 0:10:15.120
<v Speaker 3>back home or anywhere for that matter. And during that time,

0:10:15.400 --> 0:10:18.840
<v Speaker 3>you know, take Apple for example, they can jack up

0:10:18.840 --> 0:10:21.439
<v Speaker 3>their iPhone prices to two or three thousand dollars or

0:10:21.480 --> 0:10:23.600
<v Speaker 3>whatever it would be if they were to move their

0:10:23.600 --> 0:10:24.880
<v Speaker 3>manufacturing plants.

0:10:25.440 --> 0:10:29.360
<v Speaker 1>So right around the time that the retaliatory tariffs were

0:10:29.360 --> 0:10:32.920
<v Speaker 1>announced by the President, we saw a heavy selling in

0:10:33.040 --> 0:10:36.080
<v Speaker 1>US treasuries during the Tokyo session, and the tenure spiked

0:10:36.080 --> 0:10:39.679
<v Speaker 1>and yield something greater than twenty basis points. And a

0:10:39.720 --> 0:10:43.080
<v Speaker 1>few hours later the President hit the pause button on

0:10:43.160 --> 0:10:46.360
<v Speaker 1>those retaliatory tariffs, and I'm wondering whether or not the

0:10:46.400 --> 0:10:49.440
<v Speaker 1>message from the market, particularly the bond market, may have

0:10:49.559 --> 0:10:52.520
<v Speaker 1>been that. Bear in mind here that China does hold

0:10:52.520 --> 0:10:55.840
<v Speaker 1>a trillion dollars worth of US treasuries, and that seems

0:10:55.840 --> 0:10:59.080
<v Speaker 1>to be almost like a sword of damocles hanging over

0:10:59.160 --> 0:11:00.880
<v Speaker 1>these trade negotia. Is it not?

0:11:01.000 --> 0:11:01.240
<v Speaker 2>Am I?

0:11:01.440 --> 0:11:02.960
<v Speaker 1>Am I making too much of that point?

0:11:03.720 --> 0:11:06.319
<v Speaker 3>No, Doug, I think you bring up a very valid point.

0:11:06.360 --> 0:11:08.440
<v Speaker 3>And that was the first thing that we thought about

0:11:08.800 --> 0:11:12.120
<v Speaker 3>yesterday morning, right. So you know, some people were saying, oh,

0:11:12.120 --> 0:11:14.760
<v Speaker 3>it's a negotiating tactic to go up to the eleventh

0:11:14.760 --> 0:11:17.800
<v Speaker 3>hour and inflict maximum leverage, that sort of thing. We

0:11:18.240 --> 0:11:20.040
<v Speaker 3>think when you look at the markets, it had a

0:11:20.080 --> 0:11:22.960
<v Speaker 3>lot to do with what the bond market was yelling. Right.

0:11:23.040 --> 0:11:25.720
<v Speaker 3>So the old saying is the smart money focuses on

0:11:25.760 --> 0:11:28.760
<v Speaker 3>the debt side, right, And there's a reason for that.

0:11:29.720 --> 0:11:31.920
<v Speaker 3>And then simply because the debt side is what can

0:11:31.960 --> 0:11:34.480
<v Speaker 3>really break the economy. So once you start to see

0:11:34.480 --> 0:11:37.280
<v Speaker 3>problems on the bond market side, that means liquidity can dry,

0:11:37.600 --> 0:11:40.400
<v Speaker 3>banks can have issues, so on and so forth. When

0:11:40.400 --> 0:11:42.800
<v Speaker 3>you go back to the COVID low or eight or

0:11:42.840 --> 0:11:46.079
<v Speaker 3>any of the major lows. You usually saw big issues

0:11:46.120 --> 0:11:48.600
<v Speaker 3>within the bond market right before the FED stepped in.

0:11:49.400 --> 0:11:51.040
<v Speaker 3>Now whether or not the Fed can step and this time,

0:11:51.040 --> 0:11:53.840
<v Speaker 3>that's a whole different question. But typically when you see

0:11:53.840 --> 0:11:56.959
<v Speaker 3>a market low, you start to see the bond market

0:11:56.960 --> 0:12:00.440
<v Speaker 3>get a little messy. The Fed doesn't care, in my opinion,

0:12:00.440 --> 0:12:02.839
<v Speaker 3>doesn't care as much about the equity action as they

0:12:02.840 --> 0:12:05.360
<v Speaker 3>do the bond market. If the bond market starts to

0:12:05.360 --> 0:12:07.040
<v Speaker 3>get out of hand and you start to see some

0:12:07.080 --> 0:12:11.000
<v Speaker 3>wild swings that can make meaningful impacts here and abroad,

0:12:11.160 --> 0:12:13.480
<v Speaker 3>and usually that's when you start to form a short

0:12:13.520 --> 0:12:16.000
<v Speaker 3>term bottom. I say short term because again we expect

0:12:16.120 --> 0:12:17.720
<v Speaker 3>volatility over the next ninety days.

0:12:17.800 --> 0:12:20.000
<v Speaker 1>So, Pat, I'm glad you brought up the FED, because

0:12:20.000 --> 0:12:22.160
<v Speaker 1>today we heard from the head of the Chicago Fed,

0:12:22.200 --> 0:12:25.920
<v Speaker 1>Austin Goolsby, and he was saying that these tariffs put

0:12:25.920 --> 0:12:29.600
<v Speaker 1>the Fed's goals of price stability and full employment essentially

0:12:29.840 --> 0:12:33.880
<v Speaker 1>opposed to one another. Now, does that essentially mean that

0:12:34.000 --> 0:12:36.040
<v Speaker 1>the Fed is kind of stuck here and that we

0:12:36.120 --> 0:12:39.720
<v Speaker 1>may not get a rate cut or several rate cuts,

0:12:40.000 --> 0:12:43.400
<v Speaker 1>even though the economy may we can, just because there

0:12:43.559 --> 0:12:45.920
<v Speaker 1>is the risk of some sort of stagflation.

0:12:46.840 --> 0:12:49.040
<v Speaker 3>So, Doug, last time we were on, we mentioned that,

0:12:49.280 --> 0:12:53.400
<v Speaker 3>you know, we really thought that stagflation was becoming a fear, right,

0:12:53.440 --> 0:12:55.600
<v Speaker 3>it was becoming a fear within markets. And that's the

0:12:55.720 --> 0:12:58.400
<v Speaker 3>last thing that Powell wants to be known for, is

0:12:58.480 --> 0:13:00.640
<v Speaker 3>letting stackflation back out of the bottle.

0:13:00.720 --> 0:13:00.880
<v Speaker 2>Right.

0:13:00.880 --> 0:13:02.760
<v Speaker 3>The last time we saw that was the seventies, and

0:13:03.240 --> 0:13:06.040
<v Speaker 3>you know, obviously it wasn't a good outcome then. Now.

0:13:06.600 --> 0:13:08.920
<v Speaker 3>The tough thing is when you provide as you know,

0:13:08.960 --> 0:13:12.560
<v Speaker 3>when you provide liquidity into markets and you lower interest rates,

0:13:13.679 --> 0:13:16.600
<v Speaker 3>you know, it can create inflation if it's done too early.

0:13:16.880 --> 0:13:20.280
<v Speaker 3>Tariffs are inflationary by nature. So if you raise the

0:13:20.320 --> 0:13:22.679
<v Speaker 3>cost of goods by ten percent coming into the US,

0:13:22.840 --> 0:13:25.120
<v Speaker 3>one can think that, okay, the cost of goods are

0:13:25.160 --> 0:13:27.079
<v Speaker 3>going to go up, right, So inflation is going to

0:13:27.200 --> 0:13:31.320
<v Speaker 3>come along with those tariffs, and if it creates economic pain.

0:13:31.440 --> 0:13:33.400
<v Speaker 3>The FED is very limited at what they can do

0:13:33.960 --> 0:13:37.959
<v Speaker 3>simply because, as you said, their two goals are maximum

0:13:38.000 --> 0:13:41.560
<v Speaker 3>employment and to keep inflation in check. Well, if inflation

0:13:41.720 --> 0:13:44.280
<v Speaker 3>is running rampant, they're going to have to weigh out, Okay,

0:13:44.320 --> 0:13:47.760
<v Speaker 3>how high has inflation gone and how low has growth gone.

0:13:48.480 --> 0:13:50.640
<v Speaker 3>You know, there's an interesting comment made over the last

0:13:50.640 --> 0:13:53.600
<v Speaker 3>few days, and that was essentially that Okay, we'll see

0:13:53.640 --> 0:13:57.400
<v Speaker 3>inflation until we don't, which means, okay, TIFFs will come on,

0:13:57.600 --> 0:14:00.839
<v Speaker 3>you'll see inflation really tick up. But what point does

0:14:00.840 --> 0:14:04.000
<v Speaker 3>the consumer stop buying? At what point does the consumer

0:14:04.040 --> 0:14:05.559
<v Speaker 3>throw their hands up and say, you know what, I've

0:14:05.559 --> 0:14:09.600
<v Speaker 3>had enough. I can't afford a fifteen hundred dollars iPhone

0:14:09.640 --> 0:14:11.400
<v Speaker 3>or two thousand dollars iPhone or whatever it may be.

0:14:11.600 --> 0:14:14.640
<v Speaker 3>Right at that point, you could actually start to see deflation.

0:14:14.840 --> 0:14:16.520
<v Speaker 3>And I think at that point the Fed has to

0:14:16.559 --> 0:14:19.320
<v Speaker 3>step in and will step in. However, there could be

0:14:19.320 --> 0:14:21.800
<v Speaker 3>a lot of pain in markets between now and when

0:14:21.840 --> 0:14:22.600
<v Speaker 3>we get to that point.

0:14:22.720 --> 0:14:25.720
<v Speaker 1>This is going to be a very interesting earning season,

0:14:25.800 --> 0:14:29.400
<v Speaker 1>particularly when we're listening for guidance. Tomorrow, we're going to

0:14:29.480 --> 0:14:32.720
<v Speaker 1>hear from the big banks JP, Morgan Chase, Bank of America,

0:14:32.880 --> 0:14:35.440
<v Speaker 1>Wells Fargo. What do you think we're going to hear

0:14:35.720 --> 0:14:38.280
<v Speaker 1>from the banks in terms of forward guidance.

0:14:39.040 --> 0:14:41.920
<v Speaker 3>I think that they're going to be extremely cautious, right,

0:14:41.920 --> 0:14:44.160
<v Speaker 3>I think they're going to be extremely cautious. When you

0:14:44.200 --> 0:14:46.440
<v Speaker 3>listen to some of the market strategists out there, from

0:14:46.440 --> 0:14:49.560
<v Speaker 3>Morgan Stanley, from Goldman, most of them. I've even pulled

0:14:49.600 --> 0:14:52.200
<v Speaker 3>their twelve month guidance for the S and P right,

0:14:52.200 --> 0:14:54.680
<v Speaker 3>They're more focusing on trading ranges over the next two

0:14:54.680 --> 0:14:57.000
<v Speaker 3>to three months. And I think that's prudent. I really

0:14:57.040 --> 0:14:58.880
<v Speaker 3>think it is. I mean, if if you say with

0:14:58.960 --> 0:15:01.080
<v Speaker 3>a degree of certainty, hey, I think X is going

0:15:01.080 --> 0:15:03.080
<v Speaker 3>to happen a year out, it's very tough to do

0:15:03.120 --> 0:15:05.600
<v Speaker 3>that right now because of all the variables that are

0:15:05.600 --> 0:15:07.600
<v Speaker 3>still up in the air. You know, you can't tell

0:15:07.640 --> 0:15:10.600
<v Speaker 3>me that, Okay, you know, the same is going to

0:15:10.640 --> 0:15:12.840
<v Speaker 3>be true for the market and the economy if we

0:15:12.920 --> 0:15:15.160
<v Speaker 3>have a fifteen percent teriff with China or if we

0:15:15.200 --> 0:15:18.280
<v Speaker 3>have a seventy percent tariff with China. Right, So that

0:15:18.400 --> 0:15:20.520
<v Speaker 3>is just such a huge variable right now, it's very

0:15:20.520 --> 0:15:22.560
<v Speaker 3>hard to give guidance. And therefore we think that the

0:15:22.600 --> 0:15:27.160
<v Speaker 3>banks will be light on guidance, cautious, right, and they'll

0:15:27.480 --> 0:15:30.239
<v Speaker 3>probably give their assessment of what the near term volatility

0:15:30.280 --> 0:15:31.480
<v Speaker 3>means for the book of business.

0:15:31.640 --> 0:15:35.560
<v Speaker 1>Would you expect to hear about a much greater level

0:15:35.600 --> 0:15:37.040
<v Speaker 1>of loan loss reserves?

0:15:37.400 --> 0:15:39.800
<v Speaker 3>So it's funny you mentioned that you know we do

0:15:39.920 --> 0:15:42.720
<v Speaker 3>think that there are risk and credit markets right now,

0:15:43.360 --> 0:15:45.720
<v Speaker 3>particularly when you look at some of the real estate

0:15:45.760 --> 0:15:48.320
<v Speaker 3>debt market. Right. So, I saw an interesting chart a

0:15:48.320 --> 0:15:51.960
<v Speaker 3>few days ago where the missed payments on mortgages are

0:15:52.000 --> 0:15:55.520
<v Speaker 3>the highest they've been since owait So that kind of

0:15:55.560 --> 0:15:56.240
<v Speaker 3>caught my eyes.

0:15:56.280 --> 0:15:57.000
<v Speaker 2>And that was.

0:15:56.960 --> 0:16:00.640
<v Speaker 3>Before all of the news on tariffs and such. So

0:16:00.960 --> 0:16:04.320
<v Speaker 3>I do think that credit could start to weaken once

0:16:04.400 --> 0:16:07.200
<v Speaker 3>tariffs are put on. I don't think we've gotten there yet,

0:16:07.360 --> 0:16:10.200
<v Speaker 3>right because these tariffs have not been implemented for a

0:16:10.200 --> 0:16:12.640
<v Speaker 3>good amount of time. I think very quickly, we're going

0:16:12.720 --> 0:16:15.680
<v Speaker 3>to see if credit deteriorates and at what pace.

0:16:16.160 --> 0:16:18.880
<v Speaker 1>So how are you guiding clients through all of this

0:16:19.080 --> 0:16:21.560
<v Speaker 1>turbulence right now? I know that there are different risk

0:16:21.720 --> 0:16:25.520
<v Speaker 1>profiles based on each individual client, But is there kind

0:16:25.520 --> 0:16:28.680
<v Speaker 1>of an umbrella that we can put over the strategy

0:16:28.720 --> 0:16:29.960
<v Speaker 1>that you've adopted right now?

0:16:30.440 --> 0:16:32.520
<v Speaker 3>Yeah, great question, Doug. So, as you know, we work

0:16:32.600 --> 0:16:34.520
<v Speaker 3>with a lot of high net worth people who have

0:16:34.600 --> 0:16:37.960
<v Speaker 3>access to alternative investments. So we use stocks, we use

0:16:37.960 --> 0:16:41.040
<v Speaker 3>hedge funds, private equity, private credit in the like. Right.

0:16:42.160 --> 0:16:44.600
<v Speaker 3>I think right now hedge funds make a lot of sense.

0:16:44.800 --> 0:16:47.560
<v Speaker 3>They've been doing great year today for a hedge fund.

0:16:47.680 --> 0:16:50.920
<v Speaker 3>Volatility is your friend. For the retail investors who listen

0:16:51.000 --> 0:16:53.280
<v Speaker 3>to this show. You know, I think that a long

0:16:53.320 --> 0:16:56.960
<v Speaker 3>short mutual fund serves the same purchase or purpose. Excuse me,

0:16:57.080 --> 0:16:59.960
<v Speaker 3>so long short mutual fund they can bet on stocks

0:17:00.040 --> 0:17:02.560
<v Speaker 3>going up, they can bet on stocks going down, and

0:17:02.640 --> 0:17:04.840
<v Speaker 3>therefore they can do a lot better in a volatile

0:17:04.960 --> 0:17:07.679
<v Speaker 3>environment like this because they can short the market on

0:17:07.760 --> 0:17:09.240
<v Speaker 3>the way down and that serves as a bit of

0:17:09.280 --> 0:17:12.240
<v Speaker 3>a cushion. We still like commodities a lot, right so

0:17:12.280 --> 0:17:15.040
<v Speaker 3>we talked about commodity exposure over the past six months.

0:17:15.080 --> 0:17:17.160
<v Speaker 3>We haven't changed our stance on that. If anything, we're

0:17:17.240 --> 0:17:20.840
<v Speaker 3>leaning in a bit more. You know, commodity prices we

0:17:20.920 --> 0:17:23.320
<v Speaker 3>think overall will go up because of this. You know,

0:17:23.400 --> 0:17:25.399
<v Speaker 3>some won't when you look at what happens with oil

0:17:25.480 --> 0:17:27.960
<v Speaker 3>right now, but for the most part, when you see

0:17:27.960 --> 0:17:30.440
<v Speaker 3>cost increase across the board, at the very least, you're

0:17:30.480 --> 0:17:33.080
<v Speaker 3>going to get some volatility and commodity markets and that's

0:17:33.119 --> 0:17:36.760
<v Speaker 3>good for commodity traders. So we like commodities right now.

0:17:36.840 --> 0:17:40.160
<v Speaker 3>And then private credit. Private credit has been a big

0:17:40.200 --> 0:17:43.399
<v Speaker 3>part of the portfolio. I know there's you know a

0:17:43.440 --> 0:17:45.680
<v Speaker 3>lot of buzz around. Well, you know, it's a huge

0:17:45.720 --> 0:17:47.520
<v Speaker 3>market now and there could be a lot of risks there.

0:17:47.880 --> 0:17:50.560
<v Speaker 3>There could be, but again there's so many different types

0:17:50.600 --> 0:17:53.840
<v Speaker 3>of private credit. We like asset back to private credit

0:17:53.920 --> 0:17:56.320
<v Speaker 3>right now simply because any loan that you give is

0:17:56.359 --> 0:17:58.760
<v Speaker 3>backed by a particular asset and you can go sell

0:17:58.800 --> 0:18:01.399
<v Speaker 3>that asset if the loan is not repaid. Again, for

0:18:01.640 --> 0:18:04.120
<v Speaker 3>a public market investor, it would be the same as

0:18:04.119 --> 0:18:06.960
<v Speaker 3>like a senior secured right, so we'd focus on having

0:18:07.280 --> 0:18:10.240
<v Speaker 3>loans that are senior secure, that have teeth, meaning, hey,

0:18:10.280 --> 0:18:13.359
<v Speaker 3>if they're not repaid, the lender can do something. So

0:18:13.480 --> 0:18:16.040
<v Speaker 3>just to summarize, you know, we like commodities, we like

0:18:16.040 --> 0:18:20.400
<v Speaker 3>hedge funds, private credit. If you're just a public facing investor,

0:18:20.440 --> 0:18:23.040
<v Speaker 3>it would be a long shore mutual fund of basket

0:18:23.119 --> 0:18:26.040
<v Speaker 3>of commodities or a senior secured loan mutual fund.

0:18:26.359 --> 0:18:28.240
<v Speaker 1>Good stuff. We'll leave it there. Thank you so much.

0:18:28.320 --> 0:18:31.960
<v Speaker 1>Patrick Kennedy is founding partner at All Source Investment Management.

0:18:32.280 --> 0:18:35.320
<v Speaker 1>On the line from Connecticut here on the Daybreak Asia podcast.

0:18:38.680 --> 0:18:42.080
<v Speaker 1>Thanks for listening to today's episode of the Bloomberg Daybreak

0:18:42.240 --> 0:18:45.600
<v Speaker 1>Asia Edition podcast. Each weekday, we look at the story

0:18:45.680 --> 0:18:50.040
<v Speaker 1>shaping markets, finance, and geopolitics in the Asia Pacific. You

0:18:50.040 --> 0:18:54.159
<v Speaker 1>can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

0:18:54.280 --> 0:18:57.280
<v Speaker 1>or anywhere else you listen. Join us again tomorrow for

0:18:57.400 --> 0:19:00.919
<v Speaker 1>insight on the market moves from Hong Kong to Singapore

0:19:01.320 --> 0:19:05.080
<v Speaker 1>and Australia. I'm Doug Prisoner and this is Bloomberg