Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify, or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. We begin this hour
Speaker 2: with stocksliding after their worst quarter in nearly three years. EDGYR,
Speaker 2: Danny if Youandenny Research cind Of gives us sm P
Speaker 2: five hundred price target to six k from sixty four hundred,
Speaker 2: writing the expected fallout from trump two point zero s
Speaker 2: ign of tariffs undercuts our former bullishness and dims the
Speaker 2: prospects of our base case roaring twenty twenties scenario. Ed
Speaker 2: joined us now for more.
Speaker 3: Edward Morning in the Morning.
Speaker 2: Second change for you in a number of weeks.
Speaker 4: I hope you're not looking for clarity for me, because
Speaker 4: I'm struggling with all the confusing information coming out of Washington.
Speaker 4: As you said, you're getting different messages from different people
Speaker 4: in the administration, and at the end of the day,
Speaker 4: it'll all depend on what the President concludes he wants
Speaker 4: to do that day, and he can change his mind.
Speaker 1: Again.
Speaker 2: How much damage do you think the accumulating uncertainty is
Speaker 2: doing already to the underlying economy.
Speaker 4: Well, if you look at all the soft data, which
Speaker 4: is very much forward looking, it's not looking good. The
Speaker 4: current data, the present data looks pretty good. The labor
Speaker 4: market is doing fine. I think we had some really
Speaker 4: cold weather in January and February that depressed consumer spending.
Speaker 4: So I think we're going to have this really bizarre
Speaker 4: scenario where the first quarter is we got real GDP
Speaker 4: up one percent. I know others have it even lower
Speaker 4: than that. Then it could be something like three percent
Speaker 4: in the second quarter, because you could really have a
Speaker 4: nice rebound in consumer spending and consumers could be running
Speaker 4: to buy cars before the prices go up, which will
Speaker 4: be kind of another possibility. And then in the second
Speaker 4: half of the year we could have stagflation with the
Speaker 4: economy in a growth recession, maybe very little growth, if any,
Speaker 4: maybe even a shallow recession. And so that's the way
Speaker 4: I've kind of seen this thing playing out in terms
Speaker 4: of its impact on the economy.
Speaker 5: And right now you and the market are focusing on
Speaker 5: the reign of tariffs. What happens when we're focusing every
Speaker 5: day on this potential extension of TCGA and other tax
Speaker 5: cuts that we may get, and they're focused on having
Speaker 5: this done before September.
Speaker 4: Yeah, well it's going to be you know, if you
Speaker 4: think it's messy now, it's going to get even messier
Speaker 4: if you on top of the whole tariff issue, which
Speaker 4: isn't going to go away just because they announced what
Speaker 4: they mean by reciprocal tariffs. I mean, the twenty percent
Speaker 4: number that's out there basically suggests that now the President
Speaker 4: is looking to raise revenues and Navirus saying six trillion
Speaker 4: dollars is what he claims that this could could raise.
Speaker 4: And now off on top of that, we start to
Speaker 4: try to extend the tax cuts, and an extension of
Speaker 4: tax cuts, it's not stimulative, it'll be very negative if
Speaker 4: they don't get the tax cuts extended.
Speaker 5: Well, try sactory last night's talking about that they want
Speaker 5: to get done. No tax on tips, no tax on
Speaker 5: Social Security, no tax on overtime, and also purchasing an
Speaker 5: American car making that tax deductible. Again, if you have
Speaker 5: even one of those sweeteners, would that be bullish for
Speaker 5: the market.
Speaker 4: Well, I don't know that that'll make it that much
Speaker 4: easier to get it through Congress. I mean that it
Speaker 4: is a vowful situation in Congress. The margin that the
Speaker 4: Republicans have is very narrow, and the Republicans always don't
Speaker 4: always stay united. So no, I don't know that those
Speaker 4: particular issues are going to be market moving at all.
Speaker 3: At a certain point. If people are talking about the
Speaker 3: likelihood of recession, what gives you the idea that this
Speaker 3: is going to be more stagflationary than just traditionally recessionary.
Speaker 4: Well, the thing that we all have to worry about,
Speaker 4: of course is the consumer and the consumer confidence numbers
Speaker 4: have all been depressed. The animal spirits that we all
Speaker 4: were kind of counting on to keep the stock market
Speaker 4: going and consumers going is kind of fizzled away here,
Speaker 4: And a lot of it has to do, obviously, with
Speaker 4: the kind of disappointment consumers were expecting that the administration
Speaker 4: would focus on somehow lowering prices and instead now we
Speaker 4: may we will have higher auto prices if we're going
Speaker 4: to have a twenty percent permanent tariff on autos, and
Speaker 4: of course if we have a twenty percent tariff across
Speaker 4: the board, prices are going to go up. So that's disconcerting.
Speaker 3: I guess that the reason why I ask this is
Speaker 3: because Daniel dots point a one time price adjustment. But
Speaker 3: if you have less demand, you'd imagine that would be
Speaker 3: a one time price adjustment, and then you won't be
Speaker 3: able to have the ability to really raise that, especially
Speaker 3: at a time where potentially the labor market could come
Speaker 3: under some stress. So what is giving people the sense
Speaker 3: that this time is different, that there could be a
Speaker 3: prolonged inflationary type of bent that raises questions about US treasuries.
Speaker 3: It raises questions about what the FAT can do.
Speaker 4: Sure, I mean, it's not likely to be a one
Speaker 4: month event where you know, you raise the tariff and
Speaker 4: the CPI goes up to one level and it's a
Speaker 4: bad month for the CPI and then it comes back down.
Speaker 4: As a matter of fact, we raised our inflation outlook
Speaker 4: for the rest of the year from two to three
Speaker 4: percent to three to four percent. I think it's going
Speaker 4: to show up that quickly, and I think it's not
Speaker 4: going to be that transitory. It's not going to be
Speaker 4: one or two months. It's going to last for several months.
Speaker 4: And again, this is an ongoing, dynamic process. We don't
Speaker 4: know whether more tariffs will be added or reduced. It's
Speaker 4: just kind of confusing. But I think companies have already
Speaker 4: anticipated that their costs are going to go up. Certainly,
Speaker 4: if you're in manufacturing, your costs are going to go
Speaker 4: up from all the parts. And as a result of that,
Speaker 4: we're seeing price kind of forward indicators of inflation showing
Speaker 4: that there's a problem, and so the regional business surveys,
Speaker 4: for example, also showing that prices paid are going up.
Speaker 2: Thanks the question ed, why do you think stocks are
Speaker 2: going higher by year, Rent.
Speaker 4: Well, I'm kind of counting on the market to look
Speaker 4: forward as it typically does, and I'm kind of hoping
Speaker 4: that all these issues get somewhat resolved by the end
Speaker 4: of the year, and I think the market starts to
Speaker 4: look ahead into twenty twenty six. I haven't given up
Speaker 4: on'm i roaring twenty twenty scenario, sticking with it. I'm
Speaker 4: sticking with it. I think it's got temporarily waylaid, all
Speaker 4: this tariff issues and all these policy balls that are
Speaker 4: up in the air. But I think the you know,
Speaker 4: I guess my underlying thesis is, look how well the
Speaker 4: economy has done in the past despite Washington and so
Speaker 4: I'm hoping that will work again.
Speaker 2: We've continued to underestimate the performance of this economy over
Speaker 2: the last several years. That's certainly been a feature, which is.
Speaker 3: The reason why a lot of people are saying that
Speaker 3: actually you could see gains and you could actually see
Speaker 3: ongoing inflation, because if you are underestimating the power of
Speaker 3: the consumer, they will be able to absorb some of
Speaker 3: this and they will keep spending. And companies know this.
Speaker 3: You know that they don't have a sense of that
Speaker 3: price target as much as pre pandemic.
Speaker 2: The could is right now on ES ANDP negative by
Speaker 2: four tenths of one percent, just a little bit softer.
Speaker 2: Ed of theardenty research in our nation's capital just moments ago.
Speaker 2: If you aren't just joining us and welcome to the program.
Speaker 2: The Washington Post reporting the White House aides have drafted
Speaker 2: a proposal to impose tariffs of around twenty percent on
Speaker 2: at least most imports into the United States. It's according
Speaker 2: to three people familiar with the matter. There's an additional
Speaker 2: dimension to this story on the tag site that I
Speaker 2: think is worth highlighting that a president's team is exploring
Speaker 2: using true millions of dollars in new import revenue for
Speaker 2: a tax dividend LISA or refund.
Speaker 3: So this would be the sweetener on the flip side
Speaker 3: of some of these tariffs. That would be, as some
Speaker 3: people are saying, the worst case scenario in terms of
Speaker 3: the most maximalist in terms of terriffs. A big question
Speaker 3: here of the timeline of how hard it would be
Speaker 3: to get those through. And I will just say bonds
Speaker 3: are still rallying on the margin, but not nearly as
Speaker 3: much as you'd expect if you think about some of
Speaker 3: the projections from Mark Zandy from Parthenon talking about the
Speaker 3: likelihood of recession and unemployment rising to as much as
Speaker 3: seven percent by twenty twenty seven.
Speaker 2: Tobermarcus of Wolf Research joins us now to extend the conversation.
Speaker 2: Topin good morning, and welcome to the program. How about
Speaker 2: that twenty percent on all imports, Now, this can change,
Speaker 2: As we always say on this program, I said just
Speaker 2: moments ago. Situations very very fluid. But how does that
Speaker 2: snack out relative to what you're expecting for tomorrow?
Speaker 1: Well, happy Liberation Day, Eve to use Well, Jonathan, Look,
Speaker 1: that's certainly at the high end of the range that
Speaker 1: we've been contemplating, even when you throw in gross value
Speaker 1: add a tax into the calculations of these numbers, which
Speaker 1: are the real big thing that drives them higher twenty
Speaker 1: percent as an average rate or rate that applies to
Speaker 1: many or most of the countries that are being here,
Speaker 1: that's definitely at the high end of the range that
Speaker 1: we've been contemplating. I think, even relative to a consensus
Speaker 1: among investors that's moved towards everyone expecting higher numbers tomorrow
Speaker 1: over the course of the past week or two, that
Speaker 1: would definitely be a surprise to the high end.
Speaker 5: Right now, the Washington Post is saying, this is just
Speaker 5: one proposal on the table, Tobin, Do you get a
Speaker 5: sense that the White House has actually made up their
Speaker 5: mind yet?
Speaker 1: By all accounts they have not. It sure seems like
Speaker 1: deliberations are ongoing. As recently as this weekend, it seemed
Speaker 1: like there were multiple reports that the idea of a
Speaker 1: flat across the board universal tariff in that twenty percent
Speaker 1: range had resurfaced. I do think they're going to end
Speaker 1: up with more individualized country by country numbers in this
Speaker 1: reciprocal framework. But exactly where those numbers come down does
Speaker 1: still seem to be up in the air.
Speaker 5: Is twenty percent here to stay if they go with
Speaker 5: that proposal, or is this the opening of a negotiation?
Speaker 1: So at some level, I do think that this is
Speaker 1: the opening of a negotiation. Certainly there will be negotiations.
Speaker 1: I fully expect that there will be talks with many
Speaker 1: our biggest trading partners, and I think there's probably room
Speaker 1: for the numbers to come down somewhat. But I think
Speaker 1: I am more concerned than a lot of the cell
Speaker 1: side about the durability of these tariffs. And I think
Speaker 1: it's really notable. In the past week, you had both
Speaker 1: Trump and Peter Navarro talk about six hundred billion dollars
Speaker 1: a year in tariff revenue, not you know, a week
Speaker 1: before that, you had a lot nick talking about one
Speaker 1: trillion dollars target for a revenue from tariff's as well
Speaker 1: as things like the new Trump Gold card. Those are
Speaker 1: numbers that you can only achieve if you actually keep
Speaker 1: these tariffs in place, not briefly threaten them and then
Speaker 1: quickly negotiate them away. And I do think there's an
Speaker 1: aspiration to fundamentally redirect the global trade system. So you know,
Speaker 1: I think a lot of this is going to be
Speaker 1: here to say, you know, from a negotiation perspective. Also,
Speaker 1: it's notable if that's are the thing driving this value
Speaker 1: add attackses, countries are not going to be able to
Speaker 1: negotiate those away. So this talk about if they drop
Speaker 1: their tariff barriers, will drop hours doesn't really work that way.
Speaker 1: If tariffs themselves are not the things driving these ostensibly
Speaker 1: reciprocal rates.
Speaker 3: Toobin, how long would it take to pass some of
Speaker 3: these other sweetener proposals that could potentially offset the growth
Speaker 3: hit from these tariffs to the United States. I'm talking
Speaker 3: about certain tax rebates.
Speaker 2: Or tax cuts.
Speaker 1: I think the tax bill is probably going to be
Speaker 1: enacted in a July type of timeframe. Certainly they are
Speaker 1: trying to get it done before the debt sealing X
Speaker 1: stage because of the plan in Congress at the moment
Speaker 1: is to include a dead sealing increase in reconciliation to
Speaker 1: have that be the vehicle. So that would mean they
Speaker 1: need to get it done before, probably roughly mid August,
Speaker 1: so that late summer timeline is what we've been circling.
Speaker 1: Sometime in Q three. It will be certainly better news
Speaker 1: for markets than the tariffs have been. But I think
Speaker 1: from a scale perspective, what's currently on the table does
Speaker 1: not look like it comes close to fully offsetting the
Speaker 1: hit from the tariffs. Like there are good things in there,
Speaker 1: both individually and in terms of corporate tax cuts on
Speaker 1: things like bonus appreciation, but it really is at a
Speaker 1: significantly smaller scale.
Speaker 2: I type an appreciate good time, I'm reaction to the
Speaker 2: break in news and a happy Liberation Day gave to
Speaker 2: you as well. Set type of Marcus the before free set.
Speaker 2: Let's turn back to commodities. Gold continuing its record breaking rally.
Speaker 2: Bank for America suggesting the precious metal could reach thirty
Speaker 2: five hundred, driven by central bank buying and haven demand
Speaker 2: a bit rising geopolitical and macro uncertainties. Francisco Blanche and
Speaker 2: Bank for America joint just now for more, Francisco, Welcome
Speaker 2: to the show. A nineteen percent move in the first quarter,
Speaker 2: the biggest quarterly game going back to nineteen eighty six. Francisco.
Speaker 2: Let's talk about the drivers of the first three months
Speaker 2: of this year before we get into the next nine
Speaker 2: months of twenty twenty five. What got us to this place.
Speaker 6: Thank you for having me again, John. So, look, I
Speaker 6: think gold this has been really drifted up by essentially
Speaker 6: we started with center back buying in the the last
Speaker 6: three years, but I think investors have started to accumulate
Speaker 6: it as well. Saving what's really change this has been
Speaker 6: more investor buying, whether it's through ETFs other instruments, but
Speaker 6: also we are seeing asset managers and insurers starting to
Speaker 6: pile in. So so that's that's been the change. Remember,
Speaker 6: we've seen a weekending US war. We've also seen following
Speaker 6: interest rates at least on on ten year yields in
Speaker 6: the US, and that's kind of led to incremental demand
Speaker 6: for gold. Plus, of course there's an issue of tips
Speaker 6: and the potential implications that may have in the economy.
Speaker 6: So I thing all of that has come together. But
Speaker 6: gold's not alone. I mean, we've seen a big rally
Speaker 6: across the commodity complex. We've seen also coffee moving up,
Speaker 6: We've seen you know it's in silver. Actually, commodities are
Speaker 6: up almost nine percent in the first quarter, John, I
Speaker 6: mean it, it's been a really strong run, maybe a
Speaker 6: little bit of unexpected run, and and and the sector
Speaker 6: has helped pace bonds and equities across the board.
Speaker 3: Francisco, Before we dive into just generally the commodity rally,
Speaker 3: how distinct is gold given its hedge factor as well
Speaker 3: as increasing concerns as we were speakingly towards cervellus earlier
Speaker 3: by diversifying away from the US dollar.
Speaker 6: Well, so I think there is an element here of verification,
Speaker 6: no doubt. I mean, central banks are now holding out
Speaker 6: ten percent of their reserve assets in gold, and that
Speaker 6: number is likely to continue to increase at an annual
Speaker 6: pace of one to two percent, probably as far as
Speaker 6: I can see. Remember, one of the things that the
Speaker 6: Trump administration is trying to do is to rebalance the
Speaker 6: US twin deficits, and that rebalancing of the twin deficits
Speaker 6: by definition implies that there is a lower desire bio
Speaker 6: Trump administration to continue to supply this reserve asset that
Speaker 6: the world has been caring for for a long time,
Speaker 6: which is which is US streacheries. Right, So if you
Speaker 6: reduce the deficit, if you're redeal the budget defici If
Speaker 6: you reduce the current count deficit and the trade deficits,
Speaker 6: by definition, there's going to be less treasure is available
Speaker 6: for central banks around to hold. And then there is
Speaker 6: the whole sanctions and tirets over that here that's also
Speaker 6: driving the demand for gold.
Speaker 3: So I guess my question for you is, have we
Speaker 3: seen the book of it? Why isn't your target higher?
Speaker 3: You see thirty five hundred as a recent target. We
Speaker 3: were just talking to Eddie ar Denny who left the
Speaker 3: office saying four thousand by the end of this year
Speaker 3: and five thousand by the end of this year, and
Speaker 3: it seems like people can't get enough.
Speaker 6: Well, I mean there's a little bit of that right now.
Speaker 6: But also remember gold is a pretty good, pretty large
Speaker 6: market already, right It's over ten trillion dollars and in value,
Speaker 6: so of course you can you can put any number there,
Speaker 6: because there is no there's no such things as intrinsic
Speaker 6: value in something like gold. I mean, there is, of
Speaker 6: course a cost of production, but as we know, mining
Speaker 6: increases the stoke gold by all one and a half
Speaker 6: percent a year. But the real story here is how
Speaker 6: much investment can you drive in of course gold could
Speaker 6: spike a or higher, but you would need to see
Speaker 6: a much worse economic outcome than what the market is
Speaker 6: currently pricing in our view, right, So it's going to
Speaker 6: be a steady grind higher as opposed to a big
Speaker 6: jump unless something grammatic happens.
Speaker 5: There's a lot of research that all this has to
Speaker 5: do a lot with the uncertainty about the trade and
Speaker 5: the terrors with the announcement we're going to get tomorrow.
Speaker 5: But how much is it just driven by the fact
Speaker 5: that it is uncertain and most people are projecting the
Speaker 5: next year to just remain uncertain. So the safest thing
Speaker 5: is to just go into gold.
Speaker 6: Well again, just mentioned that earlier. It's a combination of
Speaker 6: factors when you look at a goal. Historically it used
Speaker 6: to be race, it used to be effects, but now
Speaker 6: we have this uncertainty, which is of course triggering the purchases.
Speaker 6: But again, the uncertainty is really impacting all investors across
Speaker 6: the spectrum. As I said, we are seeing retail investors,
Speaker 6: we are seeing asset managers and insurers, pensions. We're seeing
Speaker 6: also center bank so and and again is it the
Speaker 6: safest bed here? I don't know, right, But are we
Speaker 6: going to continue to see interest across the board most likely, yes,
Speaker 6: Now order the downside risks, well, downside risks is that
Speaker 6: the Trump administration is successful at rebalancing it's it's accounts
Speaker 6: and we end up having a very strong US economy
Speaker 6: with relatively limited deficits, and therefore the US becomes a
Speaker 6: very attractive place to investiga in. Right. I mean a
Speaker 6: big part of the rotation to gold is also related
Speaker 6: to the drop in inequity markets, to drop in the
Speaker 6: MAC seven. Right, So let's say that we started to
Speaker 6: see against strong growth and strong rebalancing in the US
Speaker 6: as a result of all these policies, maybe gold isn't
Speaker 6: ass attractive anymore in that in that context, right, So,
Speaker 6: so I think we also have to consider the downside risks,
Speaker 6: not just the upside risks. Is never going to be
Speaker 6: a straight line for any.
Speaker 2: Accident, Francisco, I just want to finish on the availability
Speaker 2: of gold and maybe lean on your conversations with clients
Speaker 2: so you can avoid offer in your opinion unless you've
Speaker 2: got one bio made share it. Do you think that
Speaker 2: losing confidence about that gold availability in places like the
Speaker 2: Bank of England is that behind some of the speculative
Speaker 2: drive we saw into gold over the past few months, I.
Speaker 6: Don't think there's as much like a confidence in terms
Speaker 6: of what the stocks of gold being there. I think
Speaker 6: it's been more about the movement of gold to Europe
Speaker 6: into the US ahead of potential tires. Remember, there's a
Speaker 6: lot of instruments in the US that are issued. There
Speaker 6: are instruments that may have a gold physical backing. And
Speaker 6: if you've promised investors on any kind of note with
Speaker 6: a structure note or an ETF or some kind of fund,
Speaker 6: that that goal is going to be physically available for
Speaker 6: the investor to take to take hold in the US,
Speaker 6: you're probably shipping gold out right just in case that
Speaker 6: those times go up and suddenly you face a big
Speaker 6: dislocation between the promote in the US and the product
Speaker 6: the world. And some extent we've seen that in other
Speaker 6: commora instruments like copper and a bit less so in
Speaker 6: the energy space is a little more fungible. But investors
Speaker 6: are rushing to bring stuff into the US ahead of
Speaker 6: this so called liberation day tomorrow in the rose gardens.
Speaker 6: So what is the impact of those times is going
Speaker 6: to be Well, again, you'd rather have your product in
Speaker 6: the US of a ahead of that potential price change,
Speaker 6: because unlike currencies and legal instruments, komoris are going to
Speaker 6: suffer the tires directly, right, So it's a direct play
Speaker 6: on the tires, and you'd rather be in than out
Speaker 6: when those tireff walls go up.
Speaker 2: Another record hunt of the pounds away Francisco Prety second
Speaker 2: time breaking down Cade Francisco plunge to Bank America.
Speaker 4: Around.
Speaker 2: We begin this now with stock study has traded away
Speaker 2: President Trump for reciprocal tariffs. Emily Rowland of John Hancock writing,
Speaker 2: there is still a broad based global economic cycle that
Speaker 2: will drive earnings and valuations on stocks. Overall. This cycle
Speaker 2: maybe borrow time. As recent economic does start to show cracks,
Speaker 2: we would consider further pruning risk and portfolios. Emily. John,
Speaker 2: just now for more, Emily, welcome to the program. We've
Speaker 2: seen some major moves in this stock market through the
Speaker 2: first quarter. Do you see some big opportunities opening up now? Yeah, John, So.
Speaker 7: We are actually going to be moving to neutral on
Speaker 7: US large cap equities and actually allocating those assets to credit.
Speaker 7: And really it's not necessarily about the policy uncertainty. It's
Speaker 7: really just about the starting point. US stops have handily
Speaker 7: outperformed credit really since the stimulus boom in response to COVID,
Speaker 7: and we've seen a couple of exceptional years where earnings
Speaker 7: have been phenomenal. We've seen massive moldable expansion, back to
Speaker 7: back twenty five plus percent returns for the S and
Speaker 7: P five hundred. So we're looking to where we can
Speaker 7: prove a little bit of risk off the top there,
Speaker 7: and global equities are really what's benefiting from this rotation.
Speaker 7: It is amazing to see what the leadership has been.
Speaker 7: It's German industrial companies, it's European banks, it's Chinese technology companies.
Speaker 7: That's a really odd mix in our mind, especially as
Speaker 7: we think about the potential for tariffs to create this
Speaker 7: negative growth environment. We would actually be looking to look
Speaker 7: at income as a more important component of a portfolio
Speaker 7: than capital appreciation. So actually looking again to go a
Speaker 7: neutral on credit and neutral on US large caps.
Speaker 2: You mentioned the performance we've seen abroad, the performance we've
Speaker 2: seen in places like Europe and we ne do you
Speaker 2: think some pain might be install for some of those
Speaker 2: European lungs going into tomorrow's announcement.
Speaker 7: I think they could be challenged just because of the
Speaker 7: velocity of the move that we've seen there. Again, if
Speaker 7: you guys remember that Sesame Street Show where it was
Speaker 7: like one of these things is not like the other.
Speaker 7: That's what we keep thinking about as it relates to
Speaker 7: the cross asset performance profile in the wake of this
Speaker 7: policy uncertainty. US small cap sucks. Theoretically should be benefiting
Speaker 7: from the potential for these America first policies. We should
Speaker 7: see the US dollar strengthening. Theoretically, that's not happening. Instead,
Speaker 7: we're seeing this massive sentiment driven rotation into these cyclical
Speaker 7: areas of the globe. Typically, cyclical assets should do best
Speaker 7: coming out of a global economic downturn, and we're actually
Speaker 7: seeing them out performing in a late cycle environment. So
Speaker 7: I think that sentiment could shift rapidly here. We have
Speaker 7: to remember that this is a global economy. If US
Speaker 7: exceptionalism is at risk, if US equity exceptionalism is at risk,
Speaker 7: broad equity exceptionalism here is likely at risk as well,
Speaker 7: which is another reason we think that income is going
Speaker 7: to be a more important return driver than capital appreciation.
Speaker 3: Emily, that is the line that I want to pick
Speaker 3: up on. If US accepts equities have lost their exceptional exceptionalism.
Speaker 3: The rest of the world's equities have also lost their exceptionalism,
Speaker 3: which is the reason why you see a good place
Speaker 3: for income producing assets. I wonder do you see bonds
Speaker 3: as actually outperforming equities this year amid this focus on
Speaker 3: income and not necessarily equity premium.
Speaker 7: Yeah, we do, actually, Lisa, And some of the reasons
Speaker 7: that we've made this decision is kind of just thinking
Speaker 7: about that potential you mentioned before. US high yield bonds
Speaker 7: are yielding almost eight percent. Yes, there may be some
Speaker 7: spread widening, so we've come off the lows of about
Speaker 7: two hundred and fifty basis points over treasuries to a
Speaker 7: little bit over three hundred. Now, maybe you could see
Speaker 7: a bit more spread widening here, but now the income
Speaker 7: is enough in our view to overcome that. You look
Speaker 7: at standard deviation over the last ten years for the
Speaker 7: S and P five hundred, about eighteen, we're looking at
Speaker 7: about five percent standard deviation on high yield bonds, and
Speaker 7: then finally looking back over the last decade, the maximum
Speaker 7: draw down that we've seen and stopped through about thirty
Speaker 7: three percent, and it's twenty one percent in high yield,
Speaker 7: so it's not that we love credit. Within the context
Speaker 7: of fixed income, we actually still have an overweight to
Speaker 7: higher quality bonds over credit. But within the entire portfolio,
Speaker 7: we think being able to maximize or to minimize draw down,
Speaker 7: to be able to lower standard deviation, and to be
Speaker 7: able to get nearly an eight percent income on high
Speaker 7: yield is a decision that makes a lot of sense.
Speaker 6: Emily.
Speaker 3: When we started though, or John talked about how sentiments
Speaker 3: never been lower, at least not in the recent past,
Speaker 3: even though we haven't seen an even bigger bear market
Speaker 3: and broader stocks. And then I started to list off
Speaker 3: this recession called this recession call this person has gotten
Speaker 3: graded five times, And I was thinking to myself, I
Speaker 3: sound really bearish, and I sound as though we're heading
Speaker 3: into armageddon. And is that a contrarian indicator? You know,
Speaker 3: the idea that we have discussed all of these worse
Speaker 3: case scenarios at a time where the consumer's talent seat
Speaker 3: is still pretty good. You do have companies that are
Speaker 3: still performing, Okay, Is there a sense that maybe we've
Speaker 3: gone too far and equities can reverberate back, especially lead
Speaker 3: by big tech.
Speaker 7: There is I mean, at the end of the day,
Speaker 7: it's not that bad as it relates to the hard data.
Speaker 7: We watch things like initial claims really closely on Thursday mornings.
Speaker 7: We've been in the low two hundred thousands. There are
Speaker 7: some cracks forming there, Continuing claims are elevated. We've seen
Speaker 7: job opening slowing. We'll get another read on that this week.
Speaker 7: But the hard data are holding in really well, especially
Speaker 7: as it relates to the labor market. The challenge is
Speaker 7: the soft data is horrible. Consumer expectations hitting a twelve
Speaker 7: month low, University of Michigan Sentiment Index declining. You all
Speaker 7: have talked a lot about that on the show. We've
Speaker 7: got to be mindful of that. First of all, those
Speaker 7: that soft data just soared after the election. We saw
Speaker 7: just massive optimism, things like home sentiment and HB Again,
Speaker 7: some of the sentiment surveys around expectations soaring, especially on
Speaker 7: the Republican side. So we've seen a little bit of
Speaker 7: a give back there. And then we also have to
Speaker 7: remember that businesses and consumers sometimes say one thing and
Speaker 7: do another. I think durable goods coming in solid last
Speaker 7: week was another example of that. So we've got to
Speaker 7: be mindful. I'm not saying completely ignore the soft data.
Speaker 7: But we're watching the hard data for signs that a
Speaker 7: contraction is happening or something more nefarious is going on,
Speaker 7: and we're just not seeing it.
Speaker 2: Emily appreciate the update. As always, it's good to see you,
Speaker 2: Emily Rowland of John Hancock. This is the Bloomberg Sevenans podcast,
Speaker 2: bringing you the best in markets, economics, an gio politics.
Speaker 2: You can watch the show live on Bloomberg TV weekday
Speaker 2: mornings from six am to nine am Eastern. Subscribe to
Speaker 2: the podcast on Apple, Spotify or anywhere else you listen,
Speaker 2: and as always, on the Bloomberg Terminal and the Bloomberg
Speaker 2: Business app