1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,119 Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,800 --> 00:00:23,799 Speaker 1: To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:30,200 Speaker 1: and of course on the Bloomberg terminal. Kema Leon joins 6 00:00:30,280 --> 00:00:32,959 Speaker 1: us right now with decades of experience, and he can 7 00:00:33,000 --> 00:00:35,040 Speaker 1: take us back to the ten to one reverse stock 8 00:00:35,120 --> 00:00:40,040 Speaker 1: split of City Group fourteen years ago, Ken fifteen years ago. 9 00:00:40,320 --> 00:00:43,479 Speaker 1: Can City Group and MS Frasier with all of her 10 00:00:43,520 --> 00:00:48,640 Speaker 1: wonderful abilities, can she strategically and tactically compete with these 11 00:00:48,640 --> 00:00:53,240 Speaker 1: other banks? Well, Tom, it's it's hard work for James 12 00:00:53,240 --> 00:00:55,800 Speaker 1: Fraser because we're in the second phase of turner at, 13 00:00:56,280 --> 00:00:59,120 Speaker 1: which is execution and who do they want to be? 14 00:00:59,760 --> 00:01:03,520 Speaker 1: They already a NAPS and are disposing non US consumer 15 00:01:03,640 --> 00:01:06,800 Speaker 1: backs and the question is is do they have meaningful 16 00:01:06,840 --> 00:01:10,560 Speaker 1: scale outside the US to compete? This is a challenge, 17 00:01:10,560 --> 00:01:13,520 Speaker 1: and I think investors are tired of looking at a 18 00:01:13,600 --> 00:01:18,160 Speaker 1: stock that's trading at to net present value or to 19 00:01:18,280 --> 00:01:22,160 Speaker 1: book value, and what that means is is that we're 20 00:01:22,200 --> 00:01:25,800 Speaker 1: gonna have to see concrete signs of improvement. Uh, it's 21 00:01:25,840 --> 00:01:28,520 Speaker 1: it's really tough. She has a change of leadership in 22 00:01:28,600 --> 00:01:32,119 Speaker 1: the wealth management area, and that gets the Hinale's point 23 00:01:32,120 --> 00:01:35,640 Speaker 1: about competing with ubs and private Swiss can't given the 24 00:01:35,720 --> 00:01:41,040 Speaker 1: year ahead is internationally positive or negative in twenty three, John, 25 00:01:41,080 --> 00:01:43,880 Speaker 1: I think it's it's actually moving to a surprise of 26 00:01:43,959 --> 00:01:49,080 Speaker 1: the positive, the reopening of China, potentially Europe not getting 27 00:01:49,120 --> 00:01:52,800 Speaker 1: crushed from natural gas prices all of a sudden, and 28 00:01:52,920 --> 00:01:56,639 Speaker 1: for you large US facts, but the other three large 29 00:01:56,640 --> 00:02:01,480 Speaker 1: ones it's about you know, of total revenue. But for 30 00:02:01,560 --> 00:02:05,400 Speaker 1: investment banking that could be interesting as we go into 31 00:02:06,840 --> 00:02:09,000 Speaker 1: three a little bit further down the road. For Goldman 32 00:02:09,040 --> 00:02:12,960 Speaker 1: and Morgan Stanley, this is the heart of their business 33 00:02:13,520 --> 00:02:19,679 Speaker 1: is really international and having this streamline network for corporate treasuries, 34 00:02:19,919 --> 00:02:21,959 Speaker 1: but it's not there yet. They have to invest in 35 00:02:22,000 --> 00:02:25,440 Speaker 1: their technology platform. Stocks down this morning by two point 36 00:02:25,480 --> 00:02:27,120 Speaker 1: four percent. We can go through some of the banks 37 00:02:27,120 --> 00:02:30,160 Speaker 1: in the pre market just briefly, got City Soft Bank 38 00:02:30,200 --> 00:02:32,880 Speaker 1: of America down by two point five percent, got Wells 39 00:02:32,880 --> 00:02:35,120 Speaker 1: far Go down by four percent, JP Morgan down by 40 00:02:35,120 --> 00:02:37,960 Speaker 1: about two point eight percent or so. So negative across 41 00:02:37,960 --> 00:02:40,200 Speaker 1: the board here looking at the financials, the broader ectority 42 00:02:40,240 --> 00:02:42,200 Speaker 1: market down one percent. Just want to finish on this, 43 00:02:42,280 --> 00:02:44,960 Speaker 1: can just on the international outlook, this from no data 44 00:02:44,960 --> 00:02:46,519 Speaker 1: of Ren mac Tom and I were discussing it just 45 00:02:46,600 --> 00:02:50,560 Speaker 1: moments ago. Europe's warming up, likely avoiding a technical recession. 46 00:02:50,880 --> 00:02:53,079 Speaker 1: China is reopening, the FED is stepping down from the 47 00:02:53,080 --> 00:02:55,840 Speaker 1: aggressive rate hike pace, and fiscal policy is no longer 48 00:02:55,880 --> 00:02:58,359 Speaker 1: a drag. The Fed expects real GDP in twenty three 49 00:02:58,360 --> 00:03:00,880 Speaker 1: to slow down to zero point five per and Q four. 50 00:03:00,919 --> 00:03:03,920 Speaker 1: On Q four he says this, Ken, good luck with 51 00:03:04,040 --> 00:03:07,800 Speaker 1: that one. Can't you agree with that? I think if 52 00:03:07,840 --> 00:03:10,240 Speaker 1: you have an environment of not too hot and not 53 00:03:10,360 --> 00:03:14,600 Speaker 1: too call, it's a great environment for financial sector, protectularly 54 00:03:14,680 --> 00:03:19,200 Speaker 1: banks where the expectations are not as high as perhaps 55 00:03:19,440 --> 00:03:23,520 Speaker 1: other areas that have benefited with a strong bolt Pase scenario. 56 00:03:23,880 --> 00:03:26,440 Speaker 1: Bank's actually are in a pretty good position for performance 57 00:03:26,480 --> 00:03:29,760 Speaker 1: for three as we see it, and we just want 58 00:03:29,800 --> 00:03:32,400 Speaker 1: to see it one bank at a time, have a 59 00:03:32,440 --> 00:03:35,640 Speaker 1: more constructive view as we get through the earning schools. 60 00:03:35,880 --> 00:03:38,240 Speaker 1: I Ken, thanks Obama to Sismonic for the last couple 61 00:03:38,280 --> 00:03:41,080 Speaker 1: of hours. We really appreciate it. Ken Ley on the CFR. Right, 62 00:03:45,440 --> 00:03:48,880 Speaker 1: this is a really really important conversation. We don't do 63 00:03:48,960 --> 00:03:51,680 Speaker 1: this enough. This is sort of what afternoon TV and 64 00:03:51,800 --> 00:03:54,680 Speaker 1: radio do. It's not the province of the morning, but 65 00:03:54,720 --> 00:03:58,440 Speaker 1: we're gonna do it because this weekend across this nation, 66 00:03:59,120 --> 00:04:02,120 Speaker 1: a huge body in the nation is going to reallocate 67 00:04:02,600 --> 00:04:06,680 Speaker 1: their retirement planned disaster. Lindsey Rosner is a student of this, 68 00:04:06,800 --> 00:04:09,160 Speaker 1: a c f A of small college in New Jersey. 69 00:04:09,400 --> 00:04:12,640 Speaker 1: She darkened the door on years ago, and lindsay, I'm 70 00:04:12,640 --> 00:04:15,760 Speaker 1: gonna cut to the chase. P Jim, Greg Peters and 71 00:04:15,840 --> 00:04:19,280 Speaker 1: everybody else in the industry is picking up the pieces 72 00:04:19,400 --> 00:04:25,000 Speaker 1: from a complete disaster of sixty forty allocation and what 73 00:04:25,120 --> 00:04:27,320 Speaker 1: PIJUM does, and I don't mean to pick on Pjum, 74 00:04:27,400 --> 00:04:31,520 Speaker 1: but core this core that core. The other thing is, well, 75 00:04:32,120 --> 00:04:36,440 Speaker 1: how do you reallocate after the debaccle of two thousand 76 00:04:36,480 --> 00:04:40,359 Speaker 1: twenty two? Right? Well, um, I think you're right. It 77 00:04:40,480 --> 00:04:43,599 Speaker 1: was a debacle in two Nobody can deny that. But 78 00:04:43,680 --> 00:04:45,520 Speaker 1: I think what we've got now we know what this 79 00:04:45,600 --> 00:04:49,359 Speaker 1: painful journey led us to is an unbelievable opportunity in 80 00:04:49,360 --> 00:04:53,320 Speaker 1: the fixed income market. You actually have an opportunity to 81 00:04:53,560 --> 00:04:55,920 Speaker 1: do the right thing in the safer thing We've been 82 00:04:55,920 --> 00:04:58,680 Speaker 1: in the world for so long, where the requirement to 83 00:04:58,760 --> 00:05:01,039 Speaker 1: get any kind of return, what's to go out the 84 00:05:01,080 --> 00:05:03,600 Speaker 1: rest spectrum. You don't actually need to do that. Now 85 00:05:03,760 --> 00:05:07,200 Speaker 1: you can get six seven yields in high quality assets. 86 00:05:07,520 --> 00:05:09,600 Speaker 1: So I think the allocation, and I'm biased as a 87 00:05:09,640 --> 00:05:12,880 Speaker 1: fixing comme manager, is bonds. I mean I think it's lindsay, 88 00:05:12,960 --> 00:05:14,680 Speaker 1: what's so important here? And of course you on the 89 00:05:14,760 --> 00:05:17,160 Speaker 1: high ground of this, uh let's call it c F 90 00:05:17,240 --> 00:05:20,120 Speaker 1: A level three territory, folks where your eyes glaze over. 91 00:05:20,480 --> 00:05:23,960 Speaker 1: But the bottom line is, do our listeners and viewers 92 00:05:24,080 --> 00:05:27,560 Speaker 1: want to manage more towards an index fund within our 93 00:05:27,680 --> 00:05:30,640 Speaker 1: squared at to point nine or even higher? Or do 94 00:05:30,680 --> 00:05:34,120 Speaker 1: they want to get a little more supple and flexible 95 00:05:34,240 --> 00:05:37,039 Speaker 1: this year? Not like something like Cathy Woods Art the 96 00:05:37,040 --> 00:05:39,480 Speaker 1: train wreck that is, but do you want to be 97 00:05:39,520 --> 00:05:44,279 Speaker 1: a little more active this year? Or INDEXI you want 98 00:05:44,279 --> 00:05:47,320 Speaker 1: to be active? I think we say we love bonds, 99 00:05:47,720 --> 00:05:50,400 Speaker 1: but we don't love all bonds, and either should you. 100 00:05:50,800 --> 00:05:53,960 Speaker 1: This is a year of security selection, especially as we 101 00:05:54,040 --> 00:05:56,840 Speaker 1: face a recession. There will be winners and they will 102 00:05:56,920 --> 00:05:59,799 Speaker 1: be users, and you need an active manager to sort 103 00:05:59,839 --> 00:06:02,320 Speaker 1: that out for you. Let's talk about that right now, lindsay, 104 00:06:02,400 --> 00:06:04,719 Speaker 1: let's have that discussion. What are you looking for? What's 105 00:06:04,760 --> 00:06:08,200 Speaker 1: on the list? So things that we really like, our 106 00:06:08,279 --> 00:06:11,880 Speaker 1: high quality structured product, great credit enhancement there that even 107 00:06:11,920 --> 00:06:14,279 Speaker 1: if you have problems and for example, some of the 108 00:06:14,320 --> 00:06:19,200 Speaker 1: underlying loans and a CLO, you're protected. Um also select 109 00:06:19,279 --> 00:06:22,440 Speaker 1: names in in corporate world investment great an high yield. 110 00:06:22,720 --> 00:06:25,000 Speaker 1: There's a lot of opportunity to be had a lot 111 00:06:25,080 --> 00:06:27,800 Speaker 1: of yields, but you need the resources to analyze the 112 00:06:27,839 --> 00:06:30,640 Speaker 1: balance sheets. Let's go through high yield then, so I'll 113 00:06:30,640 --> 00:06:32,960 Speaker 1: bring up how you spreads more broadly, and you can 114 00:06:33,000 --> 00:06:34,920 Speaker 1: go a little deeper in town with what sectors maybe 115 00:06:34,920 --> 00:06:37,040 Speaker 1: even what names you're looking at how you spread to 116 00:06:37,120 --> 00:06:39,640 Speaker 1: come down to about four twenty lindsay, this is not 117 00:06:39,680 --> 00:06:41,520 Speaker 1: for your benefits, for the benefit of our audience that 118 00:06:41,600 --> 00:06:43,520 Speaker 1: might not follow this asset class. But the wide's a 119 00:06:43,600 --> 00:06:47,560 Speaker 1: year ago, the whites back in the summer three, so 120 00:06:47,640 --> 00:06:50,040 Speaker 1: we've tiened a tremendous amount at a time when people 121 00:06:50,080 --> 00:06:51,839 Speaker 1: are trying to figure out if we're going into recession 122 00:06:51,920 --> 00:06:54,520 Speaker 1: or not. So what do you like in that lower 123 00:06:54,560 --> 00:06:59,640 Speaker 1: quality cohort of US corporations. Yeah, it is. It is 124 00:06:59,680 --> 00:07:03,440 Speaker 1: really names specific and um. For example, there are some 125 00:07:03,480 --> 00:07:05,680 Speaker 1: in the higher quality. I know you're asking lower quality, 126 00:07:05,880 --> 00:07:09,400 Speaker 1: higher quality fallen angels that we think become those rising stars. 127 00:07:09,760 --> 00:07:12,640 Speaker 1: But then it is is names um specific home builders 128 00:07:12,680 --> 00:07:14,680 Speaker 1: we really like, which kind of sounds crazy with mortgage 129 00:07:14,760 --> 00:07:17,160 Speaker 1: rates where they are, But it's about picking those out. 130 00:07:17,240 --> 00:07:19,560 Speaker 1: And I think the key thing is is that the 131 00:07:19,680 --> 00:07:25,000 Speaker 1: default projections are extremely low, the recoveries are higher, probably 132 00:07:25,040 --> 00:07:27,080 Speaker 1: going to be higher than they were historically. These are 133 00:07:27,080 --> 00:07:29,440 Speaker 1: all good things for high yield at large, but you've 134 00:07:29,400 --> 00:07:32,000 Speaker 1: got to get those names right at these tight spreads. 135 00:07:32,000 --> 00:07:34,960 Speaker 1: To your point, Greg emails in from New Jersey and says, 136 00:07:35,920 --> 00:07:38,960 Speaker 1: Greg must to know, lindsay, are we clipping coupons? Are 137 00:07:39,000 --> 00:07:41,800 Speaker 1: we going for total return this year? Help Greg out? 138 00:07:43,600 --> 00:07:47,120 Speaker 1: I try to That's part of my count. Um. You know, 139 00:07:47,200 --> 00:07:49,920 Speaker 1: we we can clip coupons. We've got a ton of 140 00:07:50,000 --> 00:07:53,800 Speaker 1: spread if we just stay static. Um. But you're you're 141 00:07:53,800 --> 00:07:56,000 Speaker 1: in a case where we are a total return. You 142 00:07:56,000 --> 00:07:59,560 Speaker 1: know you got to keep looking for opportunity. Helpful to Greg, Yeah, 143 00:07:59,640 --> 00:08:01,640 Speaker 1: that's are good, you nailed it. Okay, let's keep this 144 00:08:01,720 --> 00:08:04,320 Speaker 1: going folks. You don't see this on radio, but behind 145 00:08:04,440 --> 00:08:07,680 Speaker 1: Lindsay's all of the Naziine tullub She's she's read over 146 00:08:07,720 --> 00:08:10,600 Speaker 1: the years. I'm sorry. The world's changed. You know that 147 00:08:10,640 --> 00:08:13,640 Speaker 1: all of a sudden the sharp ratio matters as well. 148 00:08:14,200 --> 00:08:17,080 Speaker 1: Our viewers and listeners have to deal with a new 149 00:08:17,400 --> 00:08:20,400 Speaker 1: cost of money. I get it that bonds are the 150 00:08:20,440 --> 00:08:24,360 Speaker 1: place to be, but what's the recovery line back to 151 00:08:24,440 --> 00:08:27,520 Speaker 1: two thousand twenty or two thousand nineteen. Do you and 152 00:08:27,600 --> 00:08:29,840 Speaker 1: p JAM have a three year vision to get back 153 00:08:30,160 --> 00:08:34,160 Speaker 1: or is it a five year vision to get back? Yeah, 154 00:08:34,200 --> 00:08:38,520 Speaker 1: it's it's longer term, right, We're longer than That's what 155 00:08:38,559 --> 00:08:40,760 Speaker 1: we do. Um. I think a lot of people are 156 00:08:40,840 --> 00:08:43,400 Speaker 1: quibbling right now. Is is GDP? For example, in the 157 00:08:43,520 --> 00:08:46,319 Speaker 1: US next year point three is a point six percent? 158 00:08:46,440 --> 00:08:47,880 Speaker 1: Is a point five and they're going to change it 159 00:08:47,920 --> 00:08:50,920 Speaker 1: potentially even on the print we had yesterday. Let's pull 160 00:08:51,000 --> 00:08:53,960 Speaker 1: the camera back and think long term and buy the 161 00:08:54,040 --> 00:08:56,480 Speaker 1: right company's the right collateral that's going to do well 162 00:08:57,080 --> 00:08:58,679 Speaker 1: and pick the spots that are going to have the 163 00:08:58,760 --> 00:09:01,599 Speaker 1: right kind of recovery. Can we talk about allocation to 164 00:09:01,679 --> 00:09:05,720 Speaker 1: bonds from a cross asset portfolio construction perspective. Lindsay, people 165 00:09:05,760 --> 00:09:07,560 Speaker 1: may be looking to allocate to bonds back into that 166 00:09:07,600 --> 00:09:09,840 Speaker 1: traditional sixty this year, and I think we're still trying 167 00:09:09,840 --> 00:09:13,040 Speaker 1: to figure out what snaps that positive correlation between risk 168 00:09:13,120 --> 00:09:16,560 Speaker 1: equities and between traditional fixed incomes. Say so foreigns, do 169 00:09:16,559 --> 00:09:18,439 Speaker 1: you think that breaks this year? And lindsay, why do 170 00:09:18,480 --> 00:09:21,000 Speaker 1: you think it does break? What leads to that? Yeah? 171 00:09:21,040 --> 00:09:22,480 Speaker 1: I think it goes right back to what just the 172 00:09:22,600 --> 00:09:26,080 Speaker 1: time just said, which is we had two black Swans, 173 00:09:26,559 --> 00:09:28,800 Speaker 1: we just had COVID, and we have a land war 174 00:09:29,000 --> 00:09:32,600 Speaker 1: in Europe. So those are things that when you're looking 175 00:09:32,640 --> 00:09:35,640 Speaker 1: at a theoretical model, black Swans aren't part of it, 176 00:09:36,000 --> 00:09:39,120 Speaker 1: and we're had a very much black Swan style of year. Um, 177 00:09:39,200 --> 00:09:41,880 Speaker 1: while we we certainly want to think about the risks 178 00:09:42,000 --> 00:09:45,640 Speaker 1: or the unknown unknowns, but I think we're going to 179 00:09:45,840 --> 00:09:48,640 Speaker 1: enter a more normal time and that's important and that's 180 00:09:48,640 --> 00:09:52,360 Speaker 1: where those correlations you've historically studied come back into play. 181 00:09:52,559 --> 00:09:54,880 Speaker 1: The challenge to that view if I can provide it, 182 00:09:54,880 --> 00:09:57,439 Speaker 1: and I'd love your comment on it. The same reasons 183 00:09:57,480 --> 00:10:01,600 Speaker 1: that we're seeing equities and emerging mark, it's ripped copper 184 00:10:01,880 --> 00:10:06,200 Speaker 1: rallying aggressively European banks up a lot for the same reason. 185 00:10:06,320 --> 00:10:08,160 Speaker 1: I think you could make the argument that yield should 186 00:10:08,200 --> 00:10:11,240 Speaker 1: be higher, that we're seeing a more resilient economy than expected, 187 00:10:11,520 --> 00:10:13,600 Speaker 1: that the central banks will have to go further, the 188 00:10:13,640 --> 00:10:16,480 Speaker 1: ECB being one of them. We will get that growth 189 00:10:16,480 --> 00:10:18,920 Speaker 1: impulse off the back of Hina reopening. Lindsay, why doesn't 190 00:10:19,000 --> 00:10:22,880 Speaker 1: that result in better risk profiles? Equities are credit spreads tighter, 191 00:10:22,960 --> 00:10:26,360 Speaker 1: but also treasury is going lower and yields still going 192 00:10:26,440 --> 00:10:30,320 Speaker 1: higher from here through this year. Yeah, I think you're 193 00:10:30,360 --> 00:10:33,880 Speaker 1: you're bringing up the risk case that is not priced in. 194 00:10:34,160 --> 00:10:36,120 Speaker 1: So what I think is pretty incredible if you just 195 00:10:36,160 --> 00:10:39,760 Speaker 1: look at what's implied in the forwards for February. The 196 00:10:39,800 --> 00:10:42,400 Speaker 1: forwards are saying the Fed's gonna hid twenty seven basis points. 197 00:10:42,400 --> 00:10:44,520 Speaker 1: And this is the way I'm answering your question. I 198 00:10:44,600 --> 00:10:47,480 Speaker 1: can already answer it another way as well, but twenty 199 00:10:47,520 --> 00:10:49,920 Speaker 1: seven basis points is saying that everybody knows what the 200 00:10:50,000 --> 00:10:52,199 Speaker 1: Fed's going to do, and they know what's going to 201 00:10:52,320 --> 00:10:54,240 Speaker 1: do going forward, and despite what it's telling you, they're 202 00:10:54,240 --> 00:10:57,199 Speaker 1: gonna pause, they're going to cut. Why are we so 203 00:10:57,280 --> 00:11:01,760 Speaker 1: confident now? Everybody was last year, and so I think 204 00:11:01,840 --> 00:11:05,920 Speaker 1: your point of that risk of inflation actually being more persistent, 205 00:11:06,160 --> 00:11:10,400 Speaker 1: the economy being more robust, China fueling the economy which 206 00:11:10,440 --> 00:11:13,400 Speaker 1: is inflationary, that is a concern. We can't deny it 207 00:11:13,440 --> 00:11:16,080 Speaker 1: if that can't be on autopilot cruise control. And by 208 00:11:16,120 --> 00:11:19,800 Speaker 1: the way, neither convestors lindsay this was great, just fantastic 209 00:11:29,559 --> 00:11:31,800 Speaker 1: right now. Important to speak to Mr Rochester of n 210 00:11:31,920 --> 00:11:35,600 Speaker 1: MURA here about what will be the study over the weekend. 211 00:11:35,640 --> 00:11:39,240 Speaker 1: He has to be delicate, he is with nu Japanese Bank, 212 00:11:39,640 --> 00:11:44,000 Speaker 1: Jordan's it is just flat out there suddenly the death 213 00:11:44,200 --> 00:11:48,640 Speaker 1: of yield curve control. Explain the ramifications for Global Wall 214 00:11:48,760 --> 00:11:53,120 Speaker 1: Street ex Japan. If China gives if Japan gives way, 215 00:11:53,520 --> 00:11:56,360 Speaker 1: if the Bank of Japan has to show normalize rates, 216 00:11:56,720 --> 00:11:59,720 Speaker 1: what's it mean for the rest of US. It means 217 00:11:59,720 --> 00:12:03,080 Speaker 1: a tom if you think about what Japan has done. 218 00:12:03,080 --> 00:12:06,679 Speaker 1: They've had quantitative using for over a long period of time, 219 00:12:06,800 --> 00:12:08,800 Speaker 1: much more than what we've had in Europe and in 220 00:12:08,840 --> 00:12:12,800 Speaker 1: the US. So, first of all, those carry trades that 221 00:12:12,840 --> 00:12:15,160 Speaker 1: are built up over the better part of a decade 222 00:12:15,240 --> 00:12:17,960 Speaker 1: or longer could be underwound and it could lead to 223 00:12:18,080 --> 00:12:22,079 Speaker 1: fixed income markets having a tightening in terms of credit conditions, 224 00:12:22,080 --> 00:12:25,360 Speaker 1: and therefore it's not clear how risk sentiment would do 225 00:12:25,400 --> 00:12:28,080 Speaker 1: well if they were to suddenly abandon yield curve control 226 00:12:28,360 --> 00:12:30,679 Speaker 1: number one. How does the local market handler? How much 227 00:12:30,679 --> 00:12:33,680 Speaker 1: do j g B sell off is fair value? Around 228 00:12:33,720 --> 00:12:36,560 Speaker 1: eight five basis points. That's a significant daily sell off. 229 00:12:36,760 --> 00:12:38,360 Speaker 1: But you know what markets are like in these sort 230 00:12:38,400 --> 00:12:41,480 Speaker 1: of shock scenarios. You can get a sort of nonlinear 231 00:12:41,520 --> 00:12:44,280 Speaker 1: market reaction. Then it feeds through to U s treasuries. 232 00:12:44,320 --> 00:12:46,640 Speaker 1: One of the largest buyers, one of the largest holders 233 00:12:46,800 --> 00:12:50,640 Speaker 1: of US treasuries outside of America is Japan. So how 234 00:12:50,679 --> 00:12:55,160 Speaker 1: well do treasuries handle the Japanese having tighter conditions, higher 235 00:12:55,200 --> 00:12:59,800 Speaker 1: yields in Japan making US fixed income less attractive. This 236 00:13:00,000 --> 00:13:01,840 Speaker 1: sort of answer is it would need to quite big 237 00:13:01,840 --> 00:13:04,800 Speaker 1: sell offs, I think because the sell offs here speak volatility. 238 00:13:04,840 --> 00:13:08,400 Speaker 1: Ben Emmon's over at New Bridge talks today about China 239 00:13:08,679 --> 00:13:12,920 Speaker 1: exporting disinflation when you work through the dynamics, If we 240 00:13:13,000 --> 00:13:16,679 Speaker 1: work through the dynamics of the end of the Corona experiment, 241 00:13:17,280 --> 00:13:23,480 Speaker 1: does a much larger, healthier Japan export disinflation or the opposite, 242 00:13:25,120 --> 00:13:28,200 Speaker 1: While the world's very much globalized. Let's walk through the 243 00:13:28,360 --> 00:13:30,560 Speaker 1: sort of path of how that could play out. What 244 00:13:30,600 --> 00:13:33,280 Speaker 1: we're seeing is the first chance in a long time 245 00:13:33,360 --> 00:13:36,800 Speaker 1: for Japan to have animal spirits and to escape the 246 00:13:36,840 --> 00:13:41,840 Speaker 1: trap of deflation. We're seeing huge pay rises from certain retailers. 247 00:13:41,840 --> 00:13:46,080 Speaker 1: The big headline for me this week was unique pay rise, 248 00:13:46,160 --> 00:13:49,720 Speaker 1: the first time they've raised pay in twenty years. Four zero. 249 00:13:49,840 --> 00:13:53,080 Speaker 1: That's a massive number across the board. We're seeing other 250 00:13:53,080 --> 00:13:55,640 Speaker 1: companies doing big numbers, but much less extreme, like six 251 00:13:55,640 --> 00:13:59,199 Speaker 1: percent or so. The shunto it's called the wage negotiations. 252 00:13:59,200 --> 00:14:01,760 Speaker 1: They all come up to us around March time. Do 253 00:14:01,840 --> 00:14:04,560 Speaker 1: we get big, big pay rises overall for the whole 254 00:14:04,600 --> 00:14:07,880 Speaker 1: of Japan, then we could see inflation become a bit 255 00:14:07,920 --> 00:14:10,040 Speaker 1: more of a topic that Japan has not had for 256 00:14:10,080 --> 00:14:11,800 Speaker 1: a long time. What does that mean for the rest 257 00:14:11,800 --> 00:14:13,280 Speaker 1: of the world. It means that we have one of 258 00:14:13,320 --> 00:14:16,840 Speaker 1: the last few central banks doing quantitative easing coming to 259 00:14:16,920 --> 00:14:19,040 Speaker 1: an end. If that was to happen, well, Jordan's not 260 00:14:19,040 --> 00:14:20,920 Speaker 1: our base paste, but it's something to watch out for. 261 00:14:21,000 --> 00:14:22,800 Speaker 1: In a big risk for this year. You've said it. 262 00:14:22,880 --> 00:14:25,560 Speaker 1: They see it as a once in a generation opportunity 263 00:14:25,600 --> 00:14:28,800 Speaker 1: to reset inflation higher. We see it as potentially a 264 00:14:28,800 --> 00:14:31,560 Speaker 1: policy mistake on the horizon, and Jordan they've got to 265 00:14:31,600 --> 00:14:34,920 Speaker 1: figure out what kind of policy setting is sustainable. Now. 266 00:14:34,960 --> 00:14:37,120 Speaker 1: I thought that was the effort just a month ago, 267 00:14:37,360 --> 00:14:40,080 Speaker 1: and now there's a conversation about maybe renewing that effort 268 00:14:40,360 --> 00:14:44,560 Speaker 1: in a week's time. Jordan's what is it? While the 269 00:14:44,600 --> 00:14:46,480 Speaker 1: base case from US is that we shouldn't get much 270 00:14:46,520 --> 00:14:48,840 Speaker 1: of a change next week because of these risks we've 271 00:14:48,840 --> 00:14:52,040 Speaker 1: talked about. But there's a trade off for the Center Bank, 272 00:14:52,120 --> 00:14:55,400 Speaker 1: which is, are the benefits of yield curve control which 273 00:14:55,520 --> 00:14:57,720 Speaker 1: are leading to Japan having to do massive amounts of 274 00:14:57,760 --> 00:15:02,240 Speaker 1: quantitative easing to defend that target? Are they working against 275 00:15:02,680 --> 00:15:05,080 Speaker 1: the potential positives from it? So are they? Are those 276 00:15:05,120 --> 00:15:07,920 Speaker 1: positives becoming negatives? So let's just bear in mind Japan 277 00:15:08,040 --> 00:15:11,320 Speaker 1: is experiencing inflation. It's nothing like Europe or the US, 278 00:15:11,440 --> 00:15:13,800 Speaker 1: so it's still quite low compared to our standards, but 279 00:15:13,840 --> 00:15:17,040 Speaker 1: it is high for japan standards, and we're having wage gains. 280 00:15:17,080 --> 00:15:20,480 Speaker 1: So is the yield curve control, which is forcing them 281 00:15:20,520 --> 00:15:24,080 Speaker 1: to do quantitative easing working against the idea of inflation 282 00:15:24,120 --> 00:15:27,160 Speaker 1: going up and therefore maybe they should tighten. That's the 283 00:15:27,200 --> 00:15:30,080 Speaker 1: problem of the policy, that's the buying they're in. It's 284 00:15:30,120 --> 00:15:32,520 Speaker 1: just how quickly do they exit It is the problem 285 00:15:32,520 --> 00:15:35,240 Speaker 1: for market. There's some speculation that could happen as early 286 00:15:35,240 --> 00:15:37,280 Speaker 1: as next week. Hence we're getting these big dolly m moves. 287 00:15:37,480 --> 00:15:39,280 Speaker 1: For us, it's a little bit too soon. We've got 288 00:15:39,320 --> 00:15:41,920 Speaker 1: a new governor coming up. The new governor will start 289 00:15:41,920 --> 00:15:44,800 Speaker 1: probably from April onwards, but it is. It is though 290 00:15:45,000 --> 00:15:47,560 Speaker 1: the risk for next week another surprise from the Bank Japan. 291 00:15:47,640 --> 00:15:50,160 Speaker 1: And that's why for us it's just easier to have 292 00:15:50,160 --> 00:15:52,320 Speaker 1: a short dolly and trade on rather than talking anything 293 00:15:52,440 --> 00:15:55,640 Speaker 1: specific about on this date this will happen. Let's break 294 00:15:55,640 --> 00:15:57,920 Speaker 1: it one thirty right now, we've gone from one fifty 295 00:15:58,080 --> 00:16:01,600 Speaker 1: to break it one on eight. That's dollar end cable 296 00:16:01,600 --> 00:16:03,880 Speaker 1: has gone from one oh three fifty are the lows 297 00:16:03,880 --> 00:16:06,000 Speaker 1: at the end of September all the way back through 298 00:16:06,280 --> 00:16:09,760 Speaker 1: one twenty Euro dollar has gone from through one away 299 00:16:09,800 --> 00:16:12,480 Speaker 1: you're looking for one ten six Jordan. Can we just 300 00:16:12,480 --> 00:16:14,560 Speaker 1: sit on there just for a moment. What did the 301 00:16:14,560 --> 00:16:18,160 Speaker 1: fex community get so wrong at the end of September. 302 00:16:18,240 --> 00:16:20,920 Speaker 1: I remember the conversations we would have. We were talking 303 00:16:20,960 --> 00:16:24,920 Speaker 1: about parity, perhaps on cable. We got close, euro dollar 304 00:16:25,240 --> 00:16:27,920 Speaker 1: getting used to life below parity. Look at us now, 305 00:16:28,360 --> 00:16:33,040 Speaker 1: what changed, Jordans. I don't miss last year at all, John. 306 00:16:33,080 --> 00:16:35,840 Speaker 1: It was doom and gloom and I really didn't enjoy 307 00:16:35,920 --> 00:16:37,840 Speaker 1: being right. So we've got the euro dollar view right 308 00:16:37,880 --> 00:16:40,520 Speaker 1: at the cable right. We had a really good year 309 00:16:40,520 --> 00:16:42,520 Speaker 1: in terms of P and l on our trade and 310 00:16:42,600 --> 00:16:45,880 Speaker 1: gloom it was recession. It was European energy prices spiking 311 00:16:45,920 --> 00:16:49,560 Speaker 1: to unbelievable heights, the trade balance of the euro Area 312 00:16:49,600 --> 00:16:53,080 Speaker 1: collapsing for the first time in a generation, two levels 313 00:16:53,080 --> 00:16:55,880 Speaker 1: that are wider than the US in terms of GDP. 314 00:16:56,560 --> 00:16:59,200 Speaker 1: What's changed, John, is we've had a few factors of 315 00:16:59,200 --> 00:17:02,120 Speaker 1: work in the euro where's favor. Number One, we've had 316 00:17:02,200 --> 00:17:05,280 Speaker 1: energy prices collapse. That has been a massive tale win 317 00:17:05,400 --> 00:17:09,040 Speaker 1: for industry. It's allowed all those steel chemical manufacturing plans 318 00:17:09,240 --> 00:17:12,080 Speaker 1: to turn back on production. It's why we're seeing European 319 00:17:12,200 --> 00:17:17,000 Speaker 1: data start to improve. Number two is thank you Mr. US. 320 00:17:17,280 --> 00:17:21,440 Speaker 1: US inflations now decelerating. We could have goods deflation this year. 321 00:17:22,040 --> 00:17:23,960 Speaker 1: That is a very different story to last year when 322 00:17:24,040 --> 00:17:27,080 Speaker 1: US inflation was accelerating and the story is about how 323 00:17:27,160 --> 00:17:29,800 Speaker 1: much hikes will the FED do. Now it's about when 324 00:17:29,800 --> 00:17:31,960 Speaker 1: will the FED stop and when will they start to 325 00:17:32,000 --> 00:17:34,960 Speaker 1: cut We think from September this year, so I think 326 00:17:34,960 --> 00:17:37,040 Speaker 1: a lot's change on the ground in terms of facts. 327 00:17:37,320 --> 00:17:40,240 Speaker 1: And then the third factor is China reopening. That's the 328 00:17:40,280 --> 00:17:43,560 Speaker 1: new one. China reopening is a bigger deal for Europe 329 00:17:43,600 --> 00:17:46,840 Speaker 1: than it is the US. US exports to China is 330 00:17:46,920 --> 00:17:50,040 Speaker 1: less than one percent of GDP, no point six seven percent, 331 00:17:50,119 --> 00:17:52,960 Speaker 1: to be exact. For the German economy, it's more than 332 00:17:53,000 --> 00:17:55,840 Speaker 1: three times more important. It's around two point six seven 333 00:17:55,880 --> 00:17:59,120 Speaker 1: percent of German GDP. Just exports to China, your biggest 334 00:17:59,119 --> 00:18:02,760 Speaker 1: trading partner, reopening its doors, opening up its tourism flows. 335 00:18:03,000 --> 00:18:06,240 Speaker 1: Makes Europe so much more attractive now with those energy 336 00:18:06,280 --> 00:18:09,040 Speaker 1: story and the inflation story in the US too. Jordan, 337 00:18:09,119 --> 00:18:18,439 Speaker 1: thank you joining us. Katrina Dadly, portfolio manager and research 338 00:18:18,480 --> 00:18:21,240 Speaker 1: an list of Franklin mutual services. Can we get straight 339 00:18:21,280 --> 00:18:23,680 Speaker 1: to you in Katrina on just what you expect from 340 00:18:23,720 --> 00:18:26,760 Speaker 1: the bank earnings a little bit later this morning. Look, 341 00:18:26,800 --> 00:18:28,879 Speaker 1: I think what we're looking for the bank earnings is 342 00:18:28,920 --> 00:18:31,240 Speaker 1: really that arbiter of whether or not we're going into 343 00:18:31,240 --> 00:18:33,480 Speaker 1: a recession. Because I think they're going to be the 344 00:18:33,560 --> 00:18:35,800 Speaker 1: first line of defense here and the first people to 345 00:18:35,880 --> 00:18:38,640 Speaker 1: see it. So we're looking closely at JP Morgan when 346 00:18:38,640 --> 00:18:40,840 Speaker 1: it comes out and to see what Jamie has to 347 00:18:40,880 --> 00:18:45,120 Speaker 1: say about where we are in the economic cycle. Yeah, 348 00:18:45,119 --> 00:18:47,600 Speaker 1: I look at Trina at the economic cycle and I 349 00:18:47,600 --> 00:18:50,399 Speaker 1: would suggest to nine days is change And for a 350 00:18:50,520 --> 00:18:53,920 Speaker 1: portfolio manager with all the sell side advice, you've got 351 00:18:53,960 --> 00:18:58,800 Speaker 1: your internal wonderful advisors at Franklin Mutual have you, you know, 352 00:18:58,960 --> 00:19:04,200 Speaker 1: not radically adjusted, but is there a change agent within 353 00:19:04,240 --> 00:19:08,159 Speaker 1: a given portfolio because we've gone from December twentye to 354 00:19:08,240 --> 00:19:12,400 Speaker 1: what we hope will be January. Where a value managers, 355 00:19:12,400 --> 00:19:15,919 Speaker 1: so we do not make those very very significant shifts 356 00:19:17,480 --> 00:19:20,439 Speaker 1: training you're not shifting on the inflation dynamic now as 357 00:19:20,440 --> 00:19:23,639 Speaker 1: a value manager. No, in terms of the inflation, we 358 00:19:23,680 --> 00:19:26,639 Speaker 1: continue to see the FED working and bringing it down. 359 00:19:26,880 --> 00:19:29,080 Speaker 1: The question is, and that's the question we've been talking 360 00:19:29,119 --> 00:19:32,359 Speaker 1: about all over two, is whether or not the FED 361 00:19:32,480 --> 00:19:35,199 Speaker 1: engine is too much of a recession or whether or 362 00:19:35,200 --> 00:19:38,240 Speaker 1: not they walk that tight load rope of slowing down 363 00:19:38,240 --> 00:19:41,600 Speaker 1: the economy to slow down inflation without tipping us into 364 00:19:41,640 --> 00:19:44,600 Speaker 1: a deep recession. We continue to be of the position 365 00:19:44,640 --> 00:19:47,200 Speaker 1: that if we do go into a recession, it will 366 00:19:47,240 --> 00:19:49,880 Speaker 1: be a mild one. And I think we're seeing all 367 00:19:49,920 --> 00:19:53,240 Speaker 1: the signs of a very mild recession and that has 368 00:19:53,400 --> 00:19:57,160 Speaker 1: very good implications for companies because it's manageable. A deep 369 00:19:57,160 --> 00:20:00,280 Speaker 1: recession is really difficult to manage, as you talk about 370 00:20:00,280 --> 00:20:03,520 Speaker 1: that fixed versus variable cost curve. UM, we think a 371 00:20:03,640 --> 00:20:08,120 Speaker 1: mild recession companies can muddle through. So on a value basis, 372 00:20:08,640 --> 00:20:12,280 Speaker 1: where do you which sectors do you find the best 373 00:20:12,560 --> 00:20:17,359 Speaker 1: dynamics to surprise and to say Junior July in terms 374 00:20:17,359 --> 00:20:21,520 Speaker 1: of surprise, one area we're looking at is the industrial sector. UM. 375 00:20:21,560 --> 00:20:23,840 Speaker 1: I think that when we're talking about industrials, we're not 376 00:20:23,920 --> 00:20:26,680 Speaker 1: talking about as much the autos that you're talking about 377 00:20:26,680 --> 00:20:29,879 Speaker 1: with Tesla, and we are aware of what happened there yesterday, 378 00:20:30,480 --> 00:20:34,440 Speaker 1: well this morning. We are now looking at industrial companies 379 00:20:34,560 --> 00:20:38,600 Speaker 1: well placed, and they have this really good secular theme 380 00:20:38,920 --> 00:20:42,520 Speaker 1: that we're focused on. It's the electrification, it's industry four 381 00:20:42,520 --> 00:20:46,200 Speaker 1: point oh, it's the Inflation Reduction Act. Those things will 382 00:20:46,240 --> 00:20:49,359 Speaker 1: be structural drivers, and we're just making sure that these 383 00:20:49,400 --> 00:20:54,600 Speaker 1: companies have enough wherewithal three, we think the order books 384 00:20:54,600 --> 00:20:57,760 Speaker 1: are very very strong, the backlogs are at very high levels, 385 00:20:58,000 --> 00:21:01,520 Speaker 1: and we think that the variable costs are rising, rages 386 00:21:01,640 --> 00:21:04,760 Speaker 1: and any other type of inflation is really manageable. These 387 00:21:04,760 --> 00:21:07,760 Speaker 1: industrial companies are areas that we like, Katrina, Where did 388 00:21:07,760 --> 00:21:09,800 Speaker 1: they minus fit into this? We caught up with a 389 00:21:09,800 --> 00:21:13,960 Speaker 1: guest a little bit earlier this week, Christopher owners Frateigus, Rio, absolutely, 390 00:21:14,080 --> 00:21:16,960 Speaker 1: Rippley liked Rio, b HP, glen Core. Where are you 391 00:21:17,040 --> 00:21:20,320 Speaker 1: guys on those names? Um? We we do own a 392 00:21:20,359 --> 00:21:23,600 Speaker 1: position in Rio UM and we would we disclose that UM, 393 00:21:23,640 --> 00:21:26,479 Speaker 1: and we like the the the asset quality that we 394 00:21:26,560 --> 00:21:29,040 Speaker 1: have there. But you're right, those type of names have 395 00:21:29,119 --> 00:21:32,440 Speaker 1: gone up substantially, which makes the valuation case a lot 396 00:21:32,480 --> 00:21:34,840 Speaker 1: harder than it was just a few months ago. But 397 00:21:35,000 --> 00:21:37,760 Speaker 1: as a value manager, we're looking at where are they 398 00:21:37,840 --> 00:21:40,960 Speaker 1: positioned in the commodity complex, and we're trying to make 399 00:21:40,960 --> 00:21:44,359 Speaker 1: sure that we've got that really good combination of companies 400 00:21:44,400 --> 00:21:47,919 Speaker 1: that while they are dependent on commodity prices, they have 401 00:21:48,000 --> 00:21:50,480 Speaker 1: a lot of things that they can do internally that 402 00:21:50,560 --> 00:21:54,280 Speaker 1: will drive earnings in addition to realizing the benefits of 403 00:21:54,320 --> 00:21:57,959 Speaker 1: the commodity cost moves, both both up and down. Katrina, 404 00:21:58,000 --> 00:21:59,320 Speaker 1: can you just go a little bit further there? You 405 00:21:59,320 --> 00:22:02,240 Speaker 1: said it's cordant where they are exposed in the commodity complex. 406 00:22:02,280 --> 00:22:04,040 Speaker 1: Where do you want them exposed and why do you 407 00:22:04,040 --> 00:22:07,960 Speaker 1: want them not exposed? Um? I think that we can 408 00:22:08,000 --> 00:22:10,480 Speaker 1: look at something like the copper market, which people are 409 00:22:10,640 --> 00:22:14,000 Speaker 1: very much structurally bullish on. We're seeing some science that 410 00:22:14,080 --> 00:22:17,240 Speaker 1: actually that's coming into balance. And what does that mean 411 00:22:17,320 --> 00:22:21,040 Speaker 1: is you're likely to have some level of pressure on prices, 412 00:22:21,080 --> 00:22:24,639 Speaker 1: but balance is okay. It's when we have over supply 413 00:22:24,800 --> 00:22:26,879 Speaker 1: that we need to be cautious about. So they're the 414 00:22:26,960 --> 00:22:29,600 Speaker 1: type of markets that you want to avoid, and so 415 00:22:29,680 --> 00:22:31,879 Speaker 1: from our perspective, we just pushed them to the side 416 00:22:31,920 --> 00:22:34,800 Speaker 1: and we focus on those type of commodities where we 417 00:22:34,880 --> 00:22:37,639 Speaker 1: have the either iron or exposure, and we have copper 418 00:22:37,720 --> 00:22:41,159 Speaker 1: exposure and various medals where we're very comfortable with that 419 00:22:41,320 --> 00:22:44,920 Speaker 1: supply demand. D'manamy riohans that that's for sure. Katina, thank you. 420 00:22:45,119 --> 00:22:47,399 Speaker 1: Turn it down to their Franklin Mutual series. This is 421 00:22:47,400 --> 00:22:51,400 Speaker 1: the Bloomberg Surveillance Podcast. Thanks for listening. Join us live 422 00:22:51,560 --> 00:22:54,920 Speaker 1: week days from seven to ten AMI Eastern and Bloomberg 423 00:22:55,000 --> 00:22:59,160 Speaker 1: Radio and Bloomberg Television each day from six to nine 424 00:22:59,200 --> 00:23:03,639 Speaker 1: am for insight from the best in economics, finance, investment, 425 00:23:03,760 --> 00:23:08,800 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 426 00:23:08,880 --> 00:23:12,680 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 427 00:23:12,800 --> 00:23:17,000 Speaker 1: the terminal. I'm Tom keene In. This is Bloomberg.