WEBVTT - Wall Street's Vulnerable to Downturn, Summers Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:31.960 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. It 0:00:32.080 --> 0:00:35.640 is my pleasure and honor to introduce Larry Summers, Distinguished 0:00:35.640 --> 0:00:39.680 Professor at Harvard, former president of Harvard, former Treasury Secretary 0:00:40.000 --> 0:00:45.920 under President Clinton, and top economic advisor to President Obama. Larry, you, 0:00:46.040 --> 0:00:50.159 in your comments that you just made you said that banks, 0:00:50.360 --> 0:00:52.400 despite all the capital that they have raised, or not 0:00:52.440 --> 0:00:57.319 necessarily better capitalized or better protected from a downturn. Does 0:00:57.360 --> 0:00:59.640 that mean that we are as vulnerable now to a 0:00:59.640 --> 0:01:01.920 financial crisis as we were in two thousand and eight. 0:01:02.760 --> 0:01:04.760 I wouldn't go quite that far, at least, so we 0:01:05.000 --> 0:01:08.200 we've done a whole set of things. Banks are much 0:01:08.200 --> 0:01:12.399 more liquid, uh than they were in two thousand and eight. 0:01:12.760 --> 0:01:16.200 They've surely learned some lessons about the management of their 0:01:16.240 --> 0:01:19.640 activities from what has taken place in two thousand and eight. 0:01:20.080 --> 0:01:23.400 But the idea that we're on a new plateau of capital, 0:01:23.959 --> 0:01:28.119 which has been embraced by the regulatory community to an 0:01:28.120 --> 0:01:31.240 extent that surprised me very greatly when I looked at 0:01:31.240 --> 0:01:34.520 it doesn't really show up in market data, so you 0:01:34.560 --> 0:01:37.080 don't see it if you look at the value of 0:01:37.200 --> 0:01:41.240 their common stock relative to the value of their assets. 0:01:41.880 --> 0:01:46.200 If a business becomes much less levered, what you expect 0:01:46.360 --> 0:01:49.040 is that it's going to become much less volatible. And 0:01:49.080 --> 0:01:53.240 there isn't really much evidence for that UH in the 0:01:53.320 --> 0:01:58.840 pattern of UH bank stock prices, And so I am 0:01:59.440 --> 0:02:06.240 relative to stock prices of other of other firms, and 0:02:06.440 --> 0:02:11.680 so I am concerned that we may not be in 0:02:11.760 --> 0:02:15.680 as strong a position as UH we think we are. 0:02:15.720 --> 0:02:18.519 I don't think that's an imminent threat right now, but 0:02:19.800 --> 0:02:22.600 we've not seen the last recession in the United States, 0:02:22.600 --> 0:02:26.639 We've not seen the last period of excess, and I'm 0:02:26.680 --> 0:02:29.320 not certain that our system is quite as robust as 0:02:29.320 --> 0:02:32.680 many people suppose. You also said that you are skeptical 0:02:32.800 --> 0:02:34.600 of the idea that the Vulcal rule has been a 0:02:34.680 --> 0:02:38.720 net benefit to financial stability, So should it be repealed? 0:02:39.560 --> 0:02:41.280 I think it's certainly. We certainly need to take a 0:02:41.400 --> 0:02:47.080 very hard. Uh hard, look at what the consequence, what 0:02:47.200 --> 0:02:50.800 the consequences have been, you know, in some ways, Uh, 0:02:50.960 --> 0:02:53.600 it may already have happened. I'm not sure institutions that 0:02:53.639 --> 0:02:57.640 abandoned businesses are going to go back to those businesses. Uh, 0:02:57.760 --> 0:03:01.520 no matter, no matter what by it does seem to 0:03:01.560 --> 0:03:06.560 me that an idea that had I had a certain 0:03:06.800 --> 0:03:12.880 argument in favor of it um doesn't look to have 0:03:13.080 --> 0:03:18.480 been the contributor to financial stability. Uh that uh that 0:03:18.639 --> 0:03:22.639 many hoped. There isn't really any evidence even in all 0:03:22.639 --> 0:03:27.919 the retrospective since that proprietary trading was an important contributor 0:03:28.360 --> 0:03:32.480 to the crisis. And I think that anything that removes 0:03:33.080 --> 0:03:40.080 a viable business line, anything that involves very large compliance costs, 0:03:40.720 --> 0:03:45.280 and anything that adds to illiquidity and markets is at 0:03:45.400 --> 0:03:50.640 least not is at least having some adverse effects on 0:03:50.760 --> 0:03:53.840 financial stability, and one would have to ask what the 0:03:53.920 --> 0:03:57.720 offsetting benefits were. So do you think that if more 0:03:57.840 --> 0:04:01.080 regulations were rolled back that it could actually increased financial 0:04:01.120 --> 0:04:05.280 stability by increasing profitability of banks? I think. I think 0:04:05.320 --> 0:04:08.880 the great mistake is to have a debate that's all 0:04:08.920 --> 0:04:14.520 about more regulation versus less regulation, instead of better regulation, 0:04:14.760 --> 0:04:21.800 versus worse regulation. And I think that UH more regulation 0:04:22.000 --> 0:04:26.400 on the shadow banking system, more regulation to make sure 0:04:26.560 --> 0:04:32.479 that UH banks are responsive to dynamic changes in their 0:04:32.520 --> 0:04:36.800 capital position UH is very much appropriate. But I think 0:04:36.839 --> 0:04:42.800 it is appropriate to review the huge compliance burdens that 0:04:42.880 --> 0:04:47.120 have been placed on many institutions to see whether those 0:04:47.160 --> 0:04:50.640 compliance burdens are really necessary. And yes, I think you 0:04:50.760 --> 0:04:54.200 caught a key pointly so, which is that a bank's 0:04:54.240 --> 0:04:59.160 expectation of future profitability offers secures to security to those 0:04:59.200 --> 0:05:04.240 who lend it uns and if you undermine that future profitability, 0:05:04.400 --> 0:05:08.520 you are undermining banks borrowing, and that in turn is 0:05:08.800 --> 0:05:12.160 raising questions about financial stability. Another point that you raised 0:05:12.360 --> 0:05:15.560 was the importance of regulators in the next downturn to 0:05:15.760 --> 0:05:20.520 be very open and to respond incredibly proactively to the 0:05:20.600 --> 0:05:23.719 first science of a problem. UM. You also recently wrote 0:05:23.760 --> 0:05:27.400 a column in The Washington Post talking about Secretary Treasury 0:05:27.440 --> 0:05:30.919 Secretary Stephen manution how he has compromised his credibility with 0:05:30.960 --> 0:05:34.599 some of his recent comments. Do you believe that his 0:05:35.160 --> 0:05:38.279 if he continues down this path, that this could compromise, 0:05:38.440 --> 0:05:41.440 for example, the Treasury's ability to fight it downturn or 0:05:41.600 --> 0:05:45.400 or or other policies being think the Treasury secretary's credibility 0:05:45.480 --> 0:05:49.760 is a crucial asset in any time of economic crisis, 0:05:50.360 --> 0:05:55.800 and I think that plutent Treasury secretaries are very conscious 0:05:55.960 --> 0:06:04.000 of preserving that credibility. Deserving that credibility means being seen 0:06:04.760 --> 0:06:10.240 as a person who says what he is analytically true, 0:06:10.920 --> 0:06:15.600 rather than says what is politically convenient or expedient. And 0:06:15.640 --> 0:06:17.839 I think some of the statements that have been made 0:06:18.480 --> 0:06:25.080 outside of the financial regulatory area, particularly in the tax area, 0:06:25.920 --> 0:06:31.920 are hard to understand except through the prism of political expediency. 0:06:34.040 --> 0:06:39.280 The claims that UH tax cuts will raise revenue are 0:06:39.360 --> 0:06:44.560 I think ludicrous. The claims that the currently proposed tax 0:06:44.600 --> 0:06:50.159 cuts will benefit substantially the middle class relative to the 0:06:50.200 --> 0:06:55.000 wealthy are I think indefensible. And I don't think it 0:06:55.080 --> 0:07:00.479 serves us well UM for policies to be advocated in 0:07:01.000 --> 0:07:05.880 UH those kinds of terms. As former Treasury secretary, do 0:07:05.920 --> 0:07:07.760 you think that the idea of a fifty year one 0:07:07.839 --> 0:07:11.120 hundred year bond is is potentially I think it's something 0:07:11.120 --> 0:07:17.360 that deserves study if it is linked to UM commitments 0:07:17.480 --> 0:07:22.720 to long term investments, and if we can commit to 0:07:22.840 --> 0:07:30.560 issuing long term debt to finance high return long term investments, 0:07:31.160 --> 0:07:35.080 then I think it's something that can be very that 0:07:35.200 --> 0:07:40.400 can be very attractive. UH. If it's a standalone independent 0:07:41.200 --> 0:07:46.800 of UH making long term investments, then I think the 0:07:46.840 --> 0:07:51.360 case is less clear, and it depends upon what the 0:07:51.400 --> 0:07:55.160 appetite for those financial instruments is and at what yield 0:07:56.200 --> 0:07:58.880 the Treasury will be able to sell them. In a 0:07:58.920 --> 0:08:02.120 recent column that you wrote for The Financial Times, you 0:08:02.160 --> 0:08:04.960 were talking about how the FED, if the FED overdes 0:08:05.000 --> 0:08:07.760 it now, they will have little room to respond in 0:08:07.800 --> 0:08:11.400 another financial downturn. How likely do you think it is 0:08:11.600 --> 0:08:13.760 for them to overdo it, and sort of what would 0:08:13.760 --> 0:08:18.000 you determine to be overdoing it at this point. Yeah, 0:08:18.000 --> 0:08:20.360 that's a judgment that you have to make on an 0:08:20.360 --> 0:08:24.960 ongoing UH basis. I would just say that I think 0:08:25.000 --> 0:08:30.480 the risks of a the risks of a recession UH 0:08:30.600 --> 0:08:33.600 seemed to me or a downturn seemed to me to 0:08:33.679 --> 0:08:39.040 be far more serious than the risks of developing substantially 0:08:39.080 --> 0:08:43.240 excessive inflation as we did in the nineties seventies, and 0:08:43.280 --> 0:08:46.679 so I think the FED needs to be very cautious 0:08:47.200 --> 0:08:51.920 about rate hikes, and I think the FED is has 0:08:51.960 --> 0:08:56.120 tried to be very cautious about at a rate about 0:08:56.200 --> 0:09:00.520 rate hikes. The tendency has been for the D to 0:09:01.960 --> 0:09:06.320 um expect that over time it will be able to 0:09:06.360 --> 0:09:10.200 engage in more red hiking rate hiking than in fact 0:09:10.720 --> 0:09:13.240 it has been able to. And so I think the 0:09:13.240 --> 0:09:17.640 FED has acted UH prudently in general, but it has 0:09:17.760 --> 0:09:23.920 sometimes been a bit over optimistic about how much rate 0:09:23.960 --> 0:09:27.000 increasing it will be able to do. UH in a 0:09:27.040 --> 0:09:29.240 prudent way. What do you think the terminal level is 0:09:29.720 --> 0:09:31.800 for how high they can go in this particular cyclone, 0:09:32.080 --> 0:09:35.199 I think the neutral real rate is substantially reduced from 0:09:35.200 --> 0:09:38.320 where it was, and so the old idea of four 0:09:39.720 --> 0:09:43.840 seems pretty unlikely to make. But just where it will end, uh, 0:09:44.400 --> 0:09:46.640 I'll wait. I'll wait for some more cards to be 0:09:46.720 --> 0:09:49.920 turned over before making that prediction. One thing that I've 0:09:49.920 --> 0:09:52.640 heard at this conference is people are talking about how 0:09:52.679 --> 0:09:58.320 they are more concerned that benchmark borrowing costs decline rather 0:09:58.360 --> 0:10:02.360 than rise, that the idea of yields falling could be 0:10:02.520 --> 0:10:06.080 more of a threat to financial stability than rising. Would 0:10:06.120 --> 0:10:11.319 you agree, I'm not sure. I think it depends on 0:10:11.640 --> 0:10:14.720 you know, clearly, if you're a pension fund and returns 0:10:14.880 --> 0:10:17.880 rise and there aren't increases and asset prices that can 0:10:17.920 --> 0:10:21.240 be returns decline, and there aren't increases and asset prices 0:10:21.280 --> 0:10:25.880 that can be adverse. UH for you. On the other hand, UH, 0:10:25.960 --> 0:10:30.640 obviously lower rates are in many respects good for borrowers. 0:10:30.880 --> 0:10:34.400 I think on balance, I would tend to think that 0:10:34.480 --> 0:10:37.800 more liquidity and lower rates tends, at least in a 0:10:37.840 --> 0:10:42.160 short run sense, to be favorable for financial stability. I 0:10:42.200 --> 0:10:46.080 obviously would recognize the concerns that over the longer term, 0:10:46.160 --> 0:10:50.680 if they lead to unsustainable asset price inflation or lead 0:10:50.720 --> 0:10:53.880 to the creation of bubbles, that could be problematic. And 0:10:53.880 --> 0:10:55.800 and lastly, I just would love to get your thoughts 0:10:55.880 --> 0:10:58.280 on how big of a risk we are right now 0:10:58.760 --> 0:11:03.760 of another recession than your term, Lisa, I don't. I 0:11:03.800 --> 0:11:09.720 think that I don't see the roots of a near 0:11:09.880 --> 0:11:13.360 term recession in any of the current data flow. On 0:11:13.400 --> 0:11:17.600 the other hand, I'm very much aware that you look 0:11:17.600 --> 0:11:21.080 at the current you look at history, and people never 0:11:21.200 --> 0:11:26.040 predict recessions a year in advance, and so something things 0:11:26.080 --> 0:11:28.800 have a way of coming up. I think the right 0:11:28.840 --> 0:11:31.160 reading of the data is that the odds are about 0:11:31.200 --> 0:11:34.120 twenty percent a year that if the economy has not 0:11:34.200 --> 0:11:37.480 yet gone into recession, that it will go into recession 0:11:37.600 --> 0:11:40.680 in the next year, and that would seem to me 0:11:40.720 --> 0:11:43.400 to be a reasonable estimate right now. Thank you so much, 0:11:43.400 --> 0:11:45.640 Professor Summers, Thank you so much for joining us. Thank you. 0:11:45.920 --> 0:11:49.400 Larry Summer is a distinguished professor at Harvard, former president 0:11:49.440 --> 0:11:54.160 of Harvard, former Treasury secretary under President Clinton, and top 0:11:54.200 --> 0:12:04.880 economic advisor to President Obama. We want to take a 0:12:04.920 --> 0:12:07.680 moment to let you know about something new from Bloomberg. 0:12:07.880 --> 0:12:10.920 Starting right now, you can use our io s app 0:12:11.120 --> 0:12:14.600 or our new Google Chrome extension to scan any news 0:12:14.640 --> 0:12:18.679 story on any website, instantly revealing relevant news and market 0:12:18.760 --> 0:12:22.360 data from Bloomberg and other sources related to companies and 0:12:22.480 --> 0:12:25.640 people you're reading about. So no matter where you're reading 0:12:25.640 --> 0:12:27.920 the news, you can bring the power of Bloomberg's news 0:12:27.920 --> 0:12:31.160 and data with you. It's pretty amazing. Download our Io 0:12:31.400 --> 0:12:33.800 s app or search for the Bloomberg extension on the 0:12:33.840 --> 0:12:36.760 Chrome Store to try it out. Learn more at Bloomberg 0:12:36.800 --> 0:12:47.440 dot com slash lens Well. This morning, a Pacific investment 0:12:47.480 --> 0:12:50.480 management co PIMCO came out and said that it expected 0:12:50.640 --> 0:12:54.280 ten year treasury yields to climb to three over the 0:12:54.400 --> 0:12:57.000 medium term. I am curious to find out whether our 0:12:57.040 --> 0:13:00.720 next guest agrees. Matthew Freund. He is co chief investment 0:13:00.720 --> 0:13:04.239 Officer and head of fixed income Strategies at Calamus Investments, 0:13:04.280 --> 0:13:08.080 overseeing eighteen point three billion dollars UH. The company is 0:13:08.080 --> 0:13:12.400 based in Naperville, Illinois, and Matt joins us now by phone. Matt, 0:13:12.480 --> 0:13:14.840 thank you so much for joining us. I wanted to 0:13:14.880 --> 0:13:18.680 start really with treasuries and the idea that Pimco is seeing, 0:13:19.280 --> 0:13:22.840 the idea of ten years going to three UH in 0:13:22.880 --> 0:13:26.520 the medium term. Would you agree? Yeah? I think I would. 0:13:26.640 --> 0:13:30.520 So when you think about treasuries and where they're going 0:13:31.200 --> 0:13:36.240 UM in the short run, treasuries are really influenced I 0:13:36.240 --> 0:13:40.600 I think by UH the Federal Central Bank policy, meaning 0:13:40.640 --> 0:13:42.440 what what's the Fed going to do? The feed has 0:13:42.520 --> 0:13:45.200 told us that they're raising rates, but very very slowly. 0:13:45.920 --> 0:13:48.160 The wild card is what they're doing with the balance 0:13:48.200 --> 0:13:52.520 sheet and whether they decide to aggressively reduce the size 0:13:52.640 --> 0:13:55.880 of their balance sheet. That's great, but it's put on 0:13:55.920 --> 0:14:00.040 a position of an economy which is actually looking a 0:14:00.080 --> 0:14:02.760 lot like last year. So we had a week Q one. 0:14:02.840 --> 0:14:06.160 It was whether it was seasonal factors, but there's always 0:14:06.240 --> 0:14:11.640 weather or seasonal factors. Earnings look good, jobs look pretty strong, 0:14:11.720 --> 0:14:14.760 but really they're acting very late cycle. So when you 0:14:14.760 --> 0:14:17.800 put it all together, I think that the economy is 0:14:18.000 --> 0:14:21.680 gradually getting better, that rates are gradually increasing, and that's 0:14:21.720 --> 0:14:25.200 actually priced into the forward curves now. But I don't 0:14:25.240 --> 0:14:27.760 think we've seen the low and rates, and I don't 0:14:27.800 --> 0:14:29.920 think we're going to see the low and rates until 0:14:29.960 --> 0:14:33.760 we get through the next recession. Fortunately that's not coming 0:14:33.840 --> 0:14:36.160 up right away. Hold on a second, because this, this 0:14:36.280 --> 0:14:38.280 to me, is a really compelling point. In other words, 0:14:38.320 --> 0:14:42.440 you think that ten year yields could potentially go much lower, Yeah, 0:14:42.480 --> 0:14:45.880 I do so. Again in the short run, uh, this 0:14:46.000 --> 0:14:48.480 year is shaping up to look a lot like last year. 0:14:48.640 --> 0:14:51.920 It's not a recession, but there's no escape velocity either, 0:14:52.400 --> 0:14:55.800 And in that environment, the idea that rates grind higher 0:14:56.240 --> 0:14:59.840 makes a lot of sense very short term. Longer term, 0:15:00.800 --> 0:15:04.280 we have an outlawed recessions just because rates were lower. 0:15:04.320 --> 0:15:07.720 We have a new administration, and when the next recession hits, 0:15:07.840 --> 0:15:10.600 I think we're going to quickly grab the tools that 0:15:11.320 --> 0:15:13.600 worked in the past, and I think we're going to 0:15:13.680 --> 0:15:17.640 see rates come a lot lower. The good news though, Uh, 0:15:17.640 --> 0:15:21.320 you know, the recession doesn't appear to be on the horizon. Uh, 0:15:21.440 --> 0:15:25.280 certainly over the next nine to twelve months. Well, just 0:15:25.320 --> 0:15:27.440 to give a number to that, where do you think 0:15:28.280 --> 0:15:31.240 rates could go? I think no, I think I think. 0:15:31.280 --> 0:15:33.680 I think the idea that forward curves now have rate 0:15:33.760 --> 0:15:37.600 tenure rates staying under three percent for the next year 0:15:37.800 --> 0:15:40.600 or two, and that feels about right. The risk to 0:15:40.680 --> 0:15:43.080 the long end of the curve is not the FED 0:15:43.160 --> 0:15:47.080 moving too fast. It's that the FED moves too slowly. 0:15:47.240 --> 0:15:50.240 So if the FED were to aggressively raise rates in 0:15:50.280 --> 0:15:53.320 the short end, I think you'd see the long end 0:15:53.320 --> 0:15:55.640 of the curve be very well behaved. You would see 0:15:55.640 --> 0:15:59.040 a flattening in the yield curve. So I I think 0:15:59.160 --> 0:16:01.880 that the base case has to be that rates are 0:16:01.960 --> 0:16:05.040 gradually getting higher, not in a big rush, and very 0:16:05.160 --> 0:16:08.320 very slowly. But again, we're keeping an eye out. We're 0:16:08.360 --> 0:16:11.040 watching some things in the economy that worry us, things 0:16:11.120 --> 0:16:16.800 like increased delinquencies, uh, poor real earnings weekly real earnings 0:16:16.800 --> 0:16:20.360 have actually been poor, and and some some troubling numbers 0:16:20.400 --> 0:16:23.200 with tax receipts. So we think the economy is fine 0:16:23.280 --> 0:16:26.720 for a while. We think that the direct natural direction 0:16:26.760 --> 0:16:29.400 of rates would be to trend a little higher. But 0:16:29.480 --> 0:16:31.320 again we're not out of the woods, and when that 0:16:31.400 --> 0:16:36.080 next recession comes, expect rates to retest their loves. So, uh, 0:16:36.280 --> 0:16:38.280 I want to pick up on something that you said 0:16:38.400 --> 0:16:44.040 about increasing consumer delinquencies. We've seen rising credit card charge offs, 0:16:44.280 --> 0:16:47.600 rising auto loan delinquencies. At what point do you care 0:16:47.680 --> 0:16:50.200 from a systemic point of view, what point do you say, 0:16:50.480 --> 0:16:53.400 you know, this means that the consumer is weakening from 0:16:53.400 --> 0:16:56.320 a credit perspective more than is being currently priced into 0:16:56.360 --> 0:16:59.600 the market. Yeah, that is a fantastic question. So when 0:16:59.600 --> 0:17:03.640 you look get delinquencies, they are trending up a little bit, 0:17:03.960 --> 0:17:07.520 but they're trending up from very low level, certainly levels 0:17:07.560 --> 0:17:12.760 that uh bottomed dramatically post what we saw in oh 0:17:12.880 --> 0:17:15.880 eight oh nine, But it feels like we're at an 0:17:15.880 --> 0:17:21.119 inflection point. So again, delinquencies are still very low, but 0:17:21.240 --> 0:17:23.960 the rate of change in those delinquencies is going in 0:17:24.000 --> 0:17:27.960 the wrong direction. And that's what interest rates. As as 0:17:28.000 --> 0:17:31.280 we started talking being very very low, we're interest rates 0:17:31.320 --> 0:17:35.600 to go up unexpectedly, certainly higher. That's in my forecaster 0:17:35.760 --> 0:17:40.919 pimco's forecasts. Consumers are going to be um stressed. But 0:17:40.960 --> 0:17:43.320 the most important thing that I'm looking at is and 0:17:43.359 --> 0:17:46.199 again I don't have to answer, it's a it's a question, 0:17:46.280 --> 0:17:50.199 it's a dilemma for the market. Real weekly earnings have 0:17:50.440 --> 0:17:54.960 been negative, they're they're right around zero now. And typically 0:17:55.160 --> 0:17:58.920 when you're after when you're real wages, meaning after inflation, 0:17:59.000 --> 0:18:04.400 wages are really being crimped, you start to um miss 0:18:04.480 --> 0:18:08.320 your payments. We're seeing that, and then that generally is 0:18:08.359 --> 0:18:11.800 an early sign of weakness in the consumer sector, which 0:18:11.840 --> 0:18:16.760 is the majority of GDP so or or production activity 0:18:16.760 --> 0:18:19.280 here in the United States. So it is an early 0:18:19.359 --> 0:18:22.640 warning sign and it's one we're watching very carefully. So 0:18:22.760 --> 0:18:25.000 as an investor, how do you take this information and 0:18:25.080 --> 0:18:26.960 how do you apply it to what you decide to 0:18:26.960 --> 0:18:29.560 buy or not? You know, that's a great question too. 0:18:29.600 --> 0:18:33.320 So I think diversification is really important in this market. 0:18:33.680 --> 0:18:35.879 And what I've come to find out is that most 0:18:36.000 --> 0:18:39.280 investors don't want to be diversified. I mean, they say 0:18:39.280 --> 0:18:41.720 they do, but when you talk to them, they want 0:18:41.760 --> 0:18:44.000 half their portfolio to go up ten percent and the 0:18:44.040 --> 0:18:46.240 other half to go up twenty And that's not the 0:18:46.240 --> 0:18:50.639 way diversification works. Diversification is where you have assets that 0:18:50.720 --> 0:18:55.040 will do well in different environment. So with that right 0:18:55.080 --> 0:18:59.119 now here at Calamos, we do think um that the 0:18:59.240 --> 0:19:03.160 risk markets have more to run. But again we we 0:19:03.160 --> 0:19:07.080 we like international markets, we like emerging markets. We think 0:19:07.119 --> 0:19:11.080 fixed income, even with our expectation that rates will gradually 0:19:11.760 --> 0:19:14.960 go higher, has a place it will do well. Should 0:19:15.000 --> 0:19:18.920 the economy we can unexpectedly it will provide more income 0:19:19.560 --> 0:19:22.119 and within the fixed income market, and I like to 0:19:22.160 --> 0:19:25.720 remind people it's it's it's not one bond market, it's 0:19:25.720 --> 0:19:29.000 a market of bonds. We do think that high yield 0:19:29.119 --> 0:19:32.239 still has some attractive risk returns. I know people are 0:19:32.280 --> 0:19:36.720 pulling back on risk and we are certainly being more cautious. 0:19:36.760 --> 0:19:39.400 But when you think about high yield, it's always got 0:19:39.480 --> 0:19:42.640 something wrong with it. That's by definition. That's why it's 0:19:42.400 --> 0:19:45.160 it's high yield. And we do think there are select 0:19:45.240 --> 0:19:49.480 areas there that we find attractive. Where so again it's 0:19:49.600 --> 0:19:53.400 it's not something i'd recommend your listeners going to. We're 0:19:53.440 --> 0:19:57.120 spending an awful lot of time in retail. So retail 0:19:57.359 --> 0:20:00.879 is a horrible place um to be From the headlines, 0:20:01.000 --> 0:20:04.679 I mean, there's all sorts of stresses, but when there 0:20:04.720 --> 0:20:07.840 are these sorts of stresses in that space when there 0:20:07.880 --> 0:20:10.960 are more sellers, we often find that people are throwing 0:20:11.520 --> 0:20:15.480 um good companies out with bad and even in companies 0:20:15.520 --> 0:20:18.760 that are a little bit um stressed, they're throwing good 0:20:18.840 --> 0:20:22.280 securities out with the bad. And so we're doing a 0:20:22.280 --> 0:20:25.560 lot of work there. Uh, just nibbling at the moment. 0:20:25.640 --> 0:20:28.160 It's it's not a dramatic change in what we do, 0:20:28.200 --> 0:20:30.520 but that's got is very interested. And then the other 0:20:30.560 --> 0:20:33.639 one is specialty pharma. So we had some interesting news 0:20:33.680 --> 0:20:36.919 from Valiant and Endo today. Um, you know, this is 0:20:36.920 --> 0:20:40.000 the sector that we've been interested in for a long time. Again, 0:20:40.200 --> 0:20:44.400 it's been out, it's been out of favor, negative headlines, 0:20:44.520 --> 0:20:47.439 but we often find the best valuations in areas that 0:20:47.520 --> 0:20:50.880 people don't like. Matt, thank you so much for joining us. 0:20:50.880 --> 0:20:54.200 Really fascinating. Matt Freund co, Chief investment Officer and head 0:20:54.200 --> 0:20:58.720 of fixed income Strategies at Collamos Investments in Naperville, Illinois. 0:20:59.000 --> 0:21:03.119 The company overseas about eighteen point three billion dollars and 0:21:03.240 --> 0:21:06.480 Lisa Abram boys here at the twenty second Annual Financial 0:21:06.600 --> 0:21:22.880 Conference at Amelia Island, Florida. This is Blueberk. I am 0:21:22.920 --> 0:21:26.320 honored to bring in Alicia Garcia Ro Did I pronounce 0:21:26.320 --> 0:21:30.520 that correctly? She is a cheap economist for the Asia 0:21:30.560 --> 0:21:34.000 Pacific Region at NA, Texas and a longtime economist who 0:21:34.000 --> 0:21:36.840 has advised UH with everything from the I m F 0:21:36.960 --> 0:21:42.960 to other authorities to really gauge financial stability across the world. Alicia, 0:21:43.119 --> 0:21:45.439 you know you have a viewpoint on the one area 0:21:45.480 --> 0:21:49.080 that most people have the most questions about, which is China. 0:21:49.520 --> 0:21:51.879 Do you think that the concerns about a hard landing 0:21:51.920 --> 0:21:57.480 are overblown? Yeah, in tramps of economic activity they are, 0:21:57.600 --> 0:22:00.600 at least for this year, but in trimps of financial 0:22:00.640 --> 0:22:05.560 stability they aren't. I think Chinese indeed undergoing major shot 0:22:05.600 --> 0:22:09.400 waves in terms of financial instability. And that's not so 0:22:09.480 --> 0:22:12.280 much about the stock market of what we saw in 0:22:12.280 --> 0:22:16.480 two thousand fifteen is actually about banks. And that's a 0:22:16.680 --> 0:22:21.960 massive endeavor because today Chinese banks are actually larger than 0:22:22.040 --> 0:22:25.000 European banks. So we're talking about thirty five trillion US 0:22:25.080 --> 0:22:28.800 dollar in bank assets in China. It's a major in 0:22:28.960 --> 0:22:32.239 dava for any financial regulator to deal with. Well. Um 0:22:32.440 --> 0:22:35.120 one paper that is going to be presented here today 0:22:35.320 --> 0:22:38.360 is going to talk about how sort of the unconsidered 0:22:38.400 --> 0:22:43.760 consequence of China's actions to prevent a crash is that 0:22:43.800 --> 0:22:47.040 there will just be much slower growth in China over 0:22:47.080 --> 0:22:51.240 the longer term. Do you currently feel like that slower 0:22:51.280 --> 0:22:53.600 growth in China, which has been an engine of growth 0:22:53.640 --> 0:22:57.160 for the world, is currently being priced into markets, particularly 0:22:57.200 --> 0:23:02.800 emerging markets. Certainly not. It isn't priced him because China 0:23:03.240 --> 0:23:08.400 once again as engineered physical simulus package. We're still talking 0:23:08.440 --> 0:23:11.199 about it. It It doesn't it physical Stimus package as if 0:23:11.200 --> 0:23:14.200 they weren't any new package. But if you look at 0:23:14.280 --> 0:23:17.720 fiscal data in China, it is quite obvious that we 0:23:17.800 --> 0:23:21.480 call the augmented fiscal deficits. Unfortunately don't have a consolidate deficits, 0:23:21.480 --> 0:23:23.399 so we need to come up with the numbers that 0:23:23.400 --> 0:23:26.720 are not very accurate. But it's hovering around tempers and 0:23:26.760 --> 0:23:29.639 of GDP. So if and that has been the case 0:23:30.119 --> 0:23:32.520 since two doesn't tend. So you know, once they finished 0:23:32.520 --> 0:23:37.960 that fis Custimus package, they've actually only go on going 0:23:38.000 --> 0:23:41.199 on on the same path. And that means that that 0:23:41.320 --> 0:23:45.080 growth that we see today is pretty fictissues. So yes, 0:23:45.160 --> 0:23:48.679 we're not contemplating lower growth down the road, and I 0:23:48.720 --> 0:23:51.720 think that's due to come. So what do you think 0:23:51.960 --> 0:23:55.439 is the appropriate growth rate in China to price in 0:23:56.160 --> 0:23:59.520 say two years, three years, four years down the road. Well, 0:23:59.560 --> 0:24:02.880 it's not enormously low, so so you know, I don't 0:24:02.880 --> 0:24:04.760 want to go all the way to the you know, 0:24:04.800 --> 0:24:07.960 to the catastrophically, but it's currently about sicks for about 0:24:08.000 --> 0:24:10.680 four percent to answer your question, and this is all 0:24:10.720 --> 0:24:14.119 based on you know, potential growth. What is happening with 0:24:14.240 --> 0:24:19.320 aging labor productivity coming down? Return on assets below two percent? 0:24:19.560 --> 0:24:22.639 That's basically where you get it from. And and we 0:24:22.760 --> 0:24:26.360 are pricing it quite a lot of total factor productivity 0:24:26.440 --> 0:24:29.119 out of innovation, which is indeed there. So that's not 0:24:29.160 --> 0:24:33.120 the problem. The problem is that that massive capital dis 0:24:33.200 --> 0:24:39.720 location in terms of banks, you know, basically allocating capital 0:24:39.760 --> 0:24:44.640 in the wrong sectors through massive government intervention to do so, 0:24:45.840 --> 0:24:49.439 is just lowering down massively the return on assets. So 0:24:49.480 --> 0:24:52.760 what would that do to the real to the countries 0:24:53.320 --> 0:24:55.679 in that region that the countries that depend most on 0:24:55.760 --> 0:24:58.720 China's growth, what would that do to their economies if 0:24:58.840 --> 0:25:00.960 say China does go down to a four percent rate 0:25:01.000 --> 0:25:04.560 from an ultimated six percent rate. Actually, that in a 0:25:04.560 --> 0:25:06.600 way has already happened in two husand and fifteen early 0:25:06.800 --> 0:25:12.439 thousand sixteen, because the actual real growth rate in China, 0:25:12.640 --> 0:25:16.080 especially what was you know, the old economy, was probably 0:25:16.280 --> 0:25:20.879 even lower, and that all the economy, what was the 0:25:20.920 --> 0:25:25.639 one that was driving commodity imports into China, let alone 0:25:25.800 --> 0:25:28.199 also parts and components from the rest of China. So 0:25:28.320 --> 0:25:29.960 I think they've already gone through that. And if you 0:25:29.960 --> 0:25:32.320 look at the resilience, it was quite impressive. The reason 0:25:32.400 --> 0:25:35.760 being that if you look at as An as a 0:25:35.760 --> 0:25:39.840 grouping point, they're actually much less leverage than China. They're 0:25:39.840 --> 0:25:43.119 actually more resilient in a way to China's chock that 0:25:43.160 --> 0:25:46.120 we actually China China shock that we actually think they are. 0:25:46.640 --> 0:25:48.960 So I'm not too worried actually about the rest of origin. 0:25:49.000 --> 0:25:51.720 I'm worried about China though with the worst case scenario 0:25:52.119 --> 0:25:57.920 in thirty seconds um, I don't expect the crisis anytime soon. 0:25:58.000 --> 0:26:01.000 I think they have enough instru ment still today to 0:26:01.080 --> 0:26:06.000