WEBVTT - Surveillance: Big Bank Earnings Kick Off 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.119 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.799 To find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.200 and of course on the Bloomberg terminal. Kema Leon joins 0:00:30.280 --> 0:00:32.959 us right now with decades of experience, and he can 0:00:33.000 --> 0:00:35.040 take us back to the ten to one reverse stock 0:00:35.120 --> 0:00:40.040 split of City Group fourteen years ago, Ken fifteen years ago. 0:00:40.320 --> 0:00:43.479 Can City Group and MS Frasier with all of her 0:00:43.520 --> 0:00:48.640 wonderful abilities, can she strategically and tactically compete with these 0:00:48.640 --> 0:00:53.240 other banks? Well, Tom, it's it's hard work for James 0:00:53.240 --> 0:00:55.800 Fraser because we're in the second phase of turner at, 0:00:56.280 --> 0:00:59.120 which is execution and who do they want to be? 0:00:59.760 --> 0:01:03.520 They already a NAPS and are disposing non US consumer 0:01:03.640 --> 0:01:06.800 backs and the question is is do they have meaningful 0:01:06.840 --> 0:01:10.560 scale outside the US to compete? This is a challenge, 0:01:10.560 --> 0:01:13.520 and I think investors are tired of looking at a 0:01:13.600 --> 0:01:18.160 stock that's trading at to net present value or to 0:01:18.280 --> 0:01:22.160 book value, and what that means is is that we're 0:01:22.200 --> 0:01:25.800 gonna have to see concrete signs of improvement. Uh, it's 0:01:25.840 --> 0:01:28.520 it's really tough. She has a change of leadership in 0:01:28.600 --> 0:01:32.119 the wealth management area, and that gets the Hinale's point 0:01:32.120 --> 0:01:35.640 about competing with ubs and private Swiss can't given the 0:01:35.720 --> 0:01:41.040 year ahead is internationally positive or negative in twenty three, John, 0:01:41.080 --> 0:01:43.880 I think it's it's actually moving to a surprise of 0:01:43.959 --> 0:01:49.080 the positive, the reopening of China, potentially Europe not getting 0:01:49.120 --> 0:01:52.800 crushed from natural gas prices all of a sudden, and 0:01:52.920 --> 0:01:56.639 for you large US facts, but the other three large 0:01:56.640 --> 0:02:01.480 ones it's about you know, of total revenue. But for 0:02:01.560 --> 0:02:05.400 investment banking that could be interesting as we go into 0:02:06.840 --> 0:02:09.000 three a little bit further down the road. For Goldman 0:02:09.040 --> 0:02:12.960 and Morgan Stanley, this is the heart of their business 0:02:13.520 --> 0:02:19.679 is really international and having this streamline network for corporate treasuries, 0:02:19.919 --> 0:02:21.959 but it's not there yet. They have to invest in 0:02:22.000 --> 0:02:25.440 their technology platform. Stocks down this morning by two point 0:02:25.480 --> 0:02:27.120 four percent. We can go through some of the banks 0:02:27.120 --> 0:02:30.160 in the pre market just briefly, got City Soft Bank 0:02:30.200 --> 0:02:32.880 of America down by two point five percent, got Wells 0:02:32.880 --> 0:02:35.120 far Go down by four percent, JP Morgan down by 0:02:35.120 --> 0:02:37.960 about two point eight percent or so. So negative across 0:02:37.960 --> 0:02:40.200 the board here looking at the financials, the broader ectority 0:02:40.240 --> 0:02:42.200 market down one percent. Just want to finish on this, 0:02:42.280 --> 0:02:44.960 can just on the international outlook, this from no data 0:02:44.960 --> 0:02:46.519 of Ren mac Tom and I were discussing it just 0:02:46.600 --> 0:02:50.560 moments ago. Europe's warming up, likely avoiding a technical recession. 0:02:50.880 --> 0:02:53.079 China is reopening, the FED is stepping down from the 0:02:53.080 --> 0:02:55.840 aggressive rate hike pace, and fiscal policy is no longer 0:02:55.880 --> 0:02:58.359 a drag. The Fed expects real GDP in twenty three 0:02:58.360 --> 0:03:00.880 to slow down to zero point five per and Q four. 0:03:00.919 --> 0:03:03.920 On Q four he says this, Ken, good luck with 0:03:04.040 --> 0:03:07.800 that one. Can't you agree with that? I think if 0:03:07.840 --> 0:03:10.240 you have an environment of not too hot and not 0:03:10.360 --> 0:03:14.600 too call, it's a great environment for financial sector, protectularly 0:03:14.680 --> 0:03:19.200 banks where the expectations are not as high as perhaps 0:03:19.440 --> 0:03:23.520 other areas that have benefited with a strong bolt Pase scenario. 0:03:23.880 --> 0:03:26.440 Bank's actually are in a pretty good position for performance 0:03:26.480 --> 0:03:29.760 for three as we see it, and we just want 0:03:29.800 --> 0:03:32.400 to see it one bank at a time, have a 0:03:32.440 --> 0:03:35.640 more constructive view as we get through the earning schools. 0:03:35.880 --> 0:03:38.240 I Ken, thanks Obama to Sismonic for the last couple 0:03:38.280 --> 0:03:41.080 of hours. We really appreciate it. Ken Ley on the CFR. Right, 0:03:45.440 --> 0:03:48.880 this is a really really important conversation. We don't do 0:03:48.960 --> 0:03:51.680 this enough. This is sort of what afternoon TV and 0:03:51.800 --> 0:03:54.680 radio do. It's not the province of the morning, but 0:03:54.720 --> 0:03:58.440 we're gonna do it because this weekend across this nation, 0:03:59.120 --> 0:04:02.120 a huge body in the nation is going to reallocate 0:04:02.600 --> 0:04:06.680 their retirement planned disaster. Lindsey Rosner is a student of this, 0:04:06.800 --> 0:04:09.160 a c f A of small college in New Jersey. 0:04:09.400 --> 0:04:12.640 She darkened the door on years ago, and lindsay, I'm 0:04:12.640 --> 0:04:15.760 gonna cut to the chase. P Jim, Greg Peters and 0:04:15.840 --> 0:04:19.280 everybody else in the industry is picking up the pieces 0:04:19.400 --> 0:04:25.000 from a complete disaster of sixty forty allocation and what 0:04:25.120 --> 0:04:27.320 PIJUM does, and I don't mean to pick on Pjum, 0:04:27.400 --> 0:04:31.520 but core this core that core. The other thing is, well, 0:04:32.120 --> 0:04:36.440 how do you reallocate after the debaccle of two thousand 0:04:36.480 --> 0:04:40.359 twenty two? Right? Well, um, I think you're right. It 0:04:40.480 --> 0:04:43.599 was a debacle in two Nobody can deny that. But 0:04:43.680 --> 0:04:45.520 I think what we've got now we know what this 0:04:45.600 --> 0:04:49.359 painful journey led us to is an unbelievable opportunity in 0:04:49.360 --> 0:04:53.320 the fixed income market. You actually have an opportunity to 0:04:53.560 --> 0:04:55.920 do the right thing in the safer thing We've been 0:04:55.920 --> 0:04:58.680 in the world for so long, where the requirement to 0:04:58.760 --> 0:05:01.039 get any kind of return, what's to go out the 0:05:01.080 --> 0:05:03.600 rest spectrum. You don't actually need to do that. Now 0:05:03.760 --> 0:05:07.200 you can get six seven yields in high quality assets. 0:05:07.520 --> 0:05:09.600 So I think the allocation, and I'm biased as a 0:05:09.640 --> 0:05:12.880 fixing comme manager, is bonds. I mean I think it's lindsay, 0:05:12.960 --> 0:05:14.680 what's so important here? And of course you on the 0:05:14.760 --> 0:05:17.160 high ground of this, uh let's call it c F 0:05:17.240 --> 0:05:20.120 A level three territory, folks where your eyes glaze over. 0:05:20.480 --> 0:05:23.960 But the bottom line is, do our listeners and viewers 0:05:24.080 --> 0:05:27.560 want to manage more towards an index fund within our 0:05:27.680 --> 0:05:30.640 squared at to point nine or even higher? Or do 0:05:30.680 --> 0:05:34.120 they want to get a little more supple and flexible 0:05:34.240 --> 0:05:37.039 this year? Not like something like Cathy Woods Art the 0:05:37.040 --> 0:05:39.480 train wreck that is, but do you want to be 0:05:39.520 --> 0:05:44.279 a little more active this year? Or INDEXI you want 0:05:44.279 --> 0:05:47.320 to be active? I think we say we love bonds, 0:05:47.720 --> 0:05:50.400 but we don't love all bonds, and either should you. 0:05:50.800 --> 0:05:53.960 This is a year of security selection, especially as we 0:05:54.040 --> 0:05:56.840 face a recession. There will be winners and they will 0:05:56.920 --> 0:05:59.799 be users, and you need an active manager to sort 0:05:59.839 --> 0:06:02.320 that out for you. Let's talk about that right now, lindsay, 0:06:02.400 --> 0:06:04.719 let's have that discussion. What are you looking for? What's 0:06:04.760 --> 0:06:08.200 on the list? So things that we really like, our 0:06:08.279 --> 0:06:11.880 high quality structured product, great credit enhancement there that even 0:06:11.920 --> 0:06:14.279 if you have problems and for example, some of the 0:06:14.320 --> 0:06:19.200 underlying loans and a CLO, you're protected. Um also select 0:06:19.279 --> 0:06:22.440 names in in corporate world investment great an high yield. 0:06:22.720 --> 0:06:25.000 There's a lot of opportunity to be had a lot 0:06:25.080 --> 0:06:27.800 of yields, but you need the resources to analyze the 0:06:27.839 --> 0:06:30.640 balance sheets. Let's go through high yield then, so I'll 0:06:30.640 --> 0:06:32.960 bring up how you spreads more broadly, and you can 0:06:33.000 --> 0:06:34.920 go a little deeper in town with what sectors maybe 0:06:34.920 --> 0:06:37.040 even what names you're looking at how you spread to 0:06:37.120 --> 0:06:39.640 come down to about four twenty lindsay, this is not 0:06:39.680 --> 0:06:41.520 for your benefits, for the benefit of our audience that 0:06:41.600 --> 0:06:43.520 might not follow this asset class. But the wide's a 0:06:43.600 --> 0:06:47.560 year ago, the whites back in the summer three, so 0:06:47.640 --> 0:06:50.040 we've tiened a tremendous amount at a time when people 0:06:50.080 --> 0:06:51.839 are trying to figure out if we're going into recession 0:06:51.920 --> 0:06:54.520 or not. So what do you like in that lower 0:06:54.560 --> 0:06:59.640 quality cohort of US corporations. Yeah, it is. It is 0:06:59.680 --> 0:07:03.440 really names specific and um. For example, there are some 0:07:03.480 --> 0:07:05.680 in the higher quality. I know you're asking lower quality, 0:07:05.880 --> 0:07:09.400 higher quality fallen angels that we think become those rising stars. 0:07:09.760 --> 0:07:12.640 But then it is is names um specific home builders 0:07:12.680 --> 0:07:14.680 we really like, which kind of sounds crazy with mortgage 0:07:14.760 --> 0:07:17.160 rates where they are, But it's about picking those out. 0:07:17.240 --> 0:07:19.560 And I think the key thing is is that the 0:07:19.680 --> 0:07:25.000 default projections are extremely low, the recoveries are higher, probably 0:07:25.040 --> 0:07:27.080 going to be higher than they were historically. These are 0:07:27.080 --> 0:07:29.440 all good things for high yield at large, but you've 0:07:29.400 --> 0:07:32.000 got to get those names right at these tight spreads. 0:07:32.000 --> 0:07:34.960 To your point, Greg emails in from New Jersey and says, 0:07:35.920 --> 0:07:38.960 Greg must to know, lindsay, are we clipping coupons? Are 0:07:39.000 --> 0:07:41.800 we going for total return this year? Help Greg out? 0:07:43.600 --> 0:07:47.120 I try to That's part of my count. Um. You know, 0:07:47.200 --> 0:07:49.920 we we can clip coupons. We've got a ton of 0:07:50.000 --> 0:07:53.800 spread if we just stay static. Um. But you're you're 0:07:53.800 --> 0:07:56.000 in a case where we are a total return. You 0:07:56.000 --> 0:07:59.560 know you got to keep looking for opportunity. Helpful to Greg, Yeah, 0:07:59.640 --> 0:08:01.640 that's are good, you nailed it. Okay, let's keep this 0:08:01.720 --> 0:08:04.320 going folks. You don't see this on radio, but behind 0:08:04.440 --> 0:08:07.680 Lindsay's all of the Naziine tullub She's she's read over 0:08:07.720 --> 0:08:10.600 the years. I'm sorry. The world's changed. You know that 0:08:10.640 --> 0:08:13.640 all of a sudden the sharp ratio matters as well. 0:08:14.200 --> 0:08:17.080 Our viewers and listeners have to deal with a new 0:08:17.400 --> 0:08:20.400 cost of money. I get it that bonds are the 0:08:20.440 --> 0:08:24.360 place to be, but what's the recovery line back to 0:08:24.440 --> 0:08:27.520 two thousand twenty or two thousand nineteen. Do you and 0:08:27.600 --> 0:08:29.840 p JAM have a three year vision to get back 0:08:30.160 --> 0:08:34.160 or is it a five year vision to get back? Yeah, 0:08:34.200 --> 0:08:38.520 it's it's longer term, right, We're longer than That's what 0:08:38.559 --> 0:08:40.760 we do. Um. I think a lot of people are 0:08:40.840 --> 0:08:43.400 quibbling right now. Is is GDP? For example, in the 0:08:43.520 --> 0:08:46.319 US next year point three is a point six percent? 0:08:46.440 --> 0:08:47.880 Is a point five and they're going to change it 0:08:47.920 --> 0:08:50.920 potentially even on the print we had yesterday. Let's pull 0:08:51.000 --> 0:08:53.960 the camera back and think long term and buy the 0:08:54.040 --> 0:08:56.480 right company's the right collateral that's going to do well 0:08:57.080 --> 0:08:58.679 and pick the spots that are going to have the 0:08:58.760 --> 0:09:01.599 right kind of recovery. Can we talk about allocation to 0:09:01.679 --> 0:09:05.720 bonds from a cross asset portfolio construction perspective. Lindsay, people 0:09:05.760 --> 0:09:07.560 may be looking to allocate to bonds back into that 0:09:07.600 --> 0:09:09.840 traditional sixty this year, and I think we're still trying 0:09:09.840 --> 0:09:13.040 to figure out what snaps that positive correlation between risk 0:09:13.120 --> 0:09:16.560 equities and between traditional fixed incomes. Say so foreigns, do 0:09:16.559 --> 0:09:18.439 you think that breaks this year? And lindsay, why do 0:09:18.480 --> 0:09:21.000 you think it does break? What leads to that? Yeah? 0:09:21.040 --> 0:09:22.480 I think it goes right back to what just the 0:09:22.600 --> 0:09:26.080 time just said, which is we had two black Swans, 0:09:26.559 --> 0:09:28.800 we just had COVID, and we have a land war 0:09:29.000 --> 0:09:32.600 in Europe. So those are things that when you're looking 0:09:32.640 --> 0:09:35.640 at a theoretical model, black Swans aren't part of it, 0:09:36.000 --> 0:09:39.120 and we're had a very much black Swan style of year. Um, 0:09:39.200 --> 0:09:41.880 while we we certainly want to think about the risks 0:09:42.000 --> 0:09:45.640 or the unknown unknowns, but I think we're going to 0:09:45.840 --> 0:09:48.640 enter a more normal time and that's important and that's 0:09:48.640 --> 0:09:52.360 where those correlations you've historically studied come back into play. 0:09:52.559 --> 0:09:54.880 The challenge to that view if I can provide it, 0:09:54.880 --> 0:09:57.439 and I'd love your comment on it. The same reasons 0:09:57.480 --> 0:10:01.600 that we're seeing equities and emerging mark, it's ripped copper 0:10:01.880 --> 0:10:06.200 rallying aggressively European banks up a lot for the same reason. 0:10:06.320 --> 0:10:08.160 I think you could make the argument that yield should 0:10:08.200 --> 0:10:11.240 be higher, that we're seeing a more resilient economy than expected, 0:10:11.520 --> 0:10:13.600 that the central banks will have to go further, the 0:10:13.640 --> 0:10:16.480 ECB being one of them. We will get that growth 0:10:16.480 --> 0:10:18.920 impulse off the back of Hina reopening. Lindsay, why doesn't 0:10:19.000 --> 0:10:22.880 that result in better risk profiles? Equities are credit spreads tighter, 0:10:22.960 --> 0:10:26.360 but also treasury is going lower and yields still going 0:10:26.440 --> 0:10:30.320 higher from here through this year. Yeah, I think you're 0:10:30.360 --> 0:10:33.880 you're bringing up the risk case that is not priced in. 0:10:34.160 --> 0:10:36.120 So what I think is pretty incredible if you just 0:10:36.160 --> 0:10:39.760 look at what's implied in the forwards for February. The 0:10:39.800 --> 0:10:42.400 forwards are saying the Fed's gonna hid twenty seven basis points. 0:10:42.400 --> 0:10:44.520 And this is the way I'm answering your question. I 0:10:44.600 --> 0:10:47.480 can already answer it another way as well, but twenty 0:10:47.520 --> 0:10:49.920 seven basis points is saying that everybody knows what the 0:10:50.000 --> 0:10:52.199 Fed's going to do, and they know what's going to 0:10:52.320 --> 0:10:54.240 do going forward, and despite what it's telling you, they're 0:10:54.240 --> 0:10:57.199 gonna pause, they're going to cut. Why are we so 0:10:57.280 --> 0:11:01.760 confident now? Everybody was last year, and so I think 0:11:01.840 --> 0:11:05.920 your point of that risk of inflation actually being more persistent, 0:11:06.160 --> 0:11:10.400 the economy being more robust, China fueling the economy which 0:11:10.440 --> 0:11:13.400 is inflationary, that is a concern. We can't deny it 0:11:13.440 --> 0:11:16.080 if that can't be on autopilot cruise control. And by 0:11:16.120 --> 0:11:19.800 the way, neither convestors lindsay this was great, just fantastic 0:11:29.559 --> 0:11:31.800 right now. Important to speak to Mr Rochester of n 0:11:31.920 --> 0:11:35.600 MURA here about what will be the study over the weekend. 0:11:35.640 --> 0:11:39.240 He has to be delicate, he is with nu Japanese Bank, 0:11:39.640 --> 0:11:44.000 Jordan's it is just flat out there suddenly the death 0:11:44.200 --> 0:11:48.640 of yield curve control. Explain the ramifications for Global Wall 0:11:48.760 --> 0:11:53.120 Street ex Japan. If China gives if Japan gives way, 0:11:53.520 --> 0:11:56.360 if the Bank of Japan has to show normalize rates, 0:11:56.720 --> 0:11:59.720 what's it mean for the rest of US. It means 0:11:59.720 --> 0:12:03.080 a tom if you think about what Japan has done. 0:12:03.080 --> 0:12:06.679 They've had quantitative using for over a long period of time, 0:12:06.800 --> 0:12:08.800 much more than what we've had in Europe and in 0:12:08.840 --> 0:12:12.800 the US. So, first of all, those carry trades that 0:12:12.840 --> 0:12:15.160 are built up over the better part of a decade 0:12:15.240 --> 0:12:17.960 or longer could be underwound and it could lead to 0:12:18.080 --> 0:12:22.079 fixed income markets having a tightening in terms of credit conditions, 0:12:22.080 --> 0:12:25.360 and therefore it's not clear how risk sentiment would do 0:12:25.400 --> 0:12:28.080 well if they were to suddenly abandon yield curve control 0:12:28.360 --> 0:12:30.679 number one. How does the local market handler? How much 0:12:30.679 --> 0:12:33.680 do j g B sell off is fair value? Around 0:12:33.720 --> 0:12:36.560 eight five basis points. That's a significant daily sell off. 0:12:36.760 --> 0:12:38.360 But you know what markets are like in these sort 0:12:38.400 --> 0:12:41.480 of shock scenarios. You can get a sort of nonlinear 0:12:41.520 --> 0:12:44.280 market reaction. Then it feeds through to U s treasuries. 0:12:44.320 --> 0:12:46.640 One of the largest buyers, one of the largest holders 0:12:46.800 --> 0:12:50.640 of US treasuries outside of America is Japan. So how 0:12:50.679 --> 0:12:55.160 well do treasuries handle the Japanese having tighter conditions, higher 0:12:55.200 --> 0:12:59.800 yields in Japan making US fixed income less attractive. This 0:13:00.000 --> 0:13:01.840 sort of answer is it would need to quite big 0:13:01.840 --> 0:13:04.800 sell offs, I think because the sell offs here speak volatility. 0:13:04.840 --> 0:13:08.400 Ben Emmon's over at New Bridge talks today about China 0:13:08.679 --> 0:13:12.920 exporting disinflation when you work through the dynamics, If we 0:13:13.000 --> 0:13:16.679 work through the dynamics of the end of the Corona experiment, 0:13:17.280 --> 0:13:23.480 does a much larger, healthier Japan export disinflation or the opposite, 0:13:25.120 --> 0:13:28.200 While the world's very much globalized. Let's walk through the 0:13:28.360 --> 0:13:30.560 sort of path of how that could play out. What 0:13:30.600 --> 0:13:33.280 we're seeing is the first chance in a long time 0:13:33.360 --> 0:13:36.800 for Japan to have animal spirits and to escape the 0:13:36.840 --> 0:13:41.840 trap of deflation. We're seeing huge pay rises from certain retailers. 0:13:41.840 --> 0:13:46.080 The big headline for me this week was unique pay rise, 0:13:46.160 --> 0:13:49.720 the first time they've raised pay in twenty years. Four zero. 0:13:49.840 --> 0:13:53.080 That's a massive number across the board. We're seeing other 0:13:53.080 --> 0:13:55.640 companies doing big numbers, but much less extreme, like six 0:13:55.640 --> 0:13:59.199 percent or so. The shunto it's called the wage negotiations. 0:13:59.200 --> 0:14:01.760 They all come up to us around March time. Do 0:14:01.840 --> 0:14:04.560 we get big, big pay rises overall for the whole 0:14:04.600 --> 0:14:07.880 of Japan, then we could see inflation become a bit 0:14:07.920 --> 0:14:10.040 more of a topic that Japan has not had for 0:14:10.080 --> 0:14:11.800 a long time. What does that mean for the rest 0:14:11.800 --> 0:14:13.280 of the world. It means that we have one of 0:14:13.320 --> 0:14:16.840 the last few central banks doing quantitative easing coming to 0:14:16.920 --> 0:14:19.040 an end. If that was to happen, well, Jordan's not 0:14:19.040 --> 0:14:20.920 our base paste, but it's something to watch out for. 0:14:21.000 --> 0:14:22.800 In a big risk for this year. You've said it. 0:14:22.880 --> 0:14:25.560 They see it as a once in a generation opportunity 0:14:25.600 --> 0:14:28.800 to reset inflation higher. We see it as potentially a 0:14:28.800 --> 0:14:31.560 policy mistake on the horizon, and Jordan they've got to 0:14:31.600 --> 0:14:34.920 figure out what kind of policy setting is sustainable. Now. 0:14:34.960 --> 0:14:37.120 I thought that was the effort just a month ago, 0:14:37.360 --> 0:14:40.080 and now there's a conversation about maybe renewing that effort 0:14:40.360 --> 0:14:44.560 in a week's time. Jordan's what is it? While the 0:14:44.600 --> 0:14:46.480 base case from US is that we shouldn't get much 0:14:46.520 --> 0:14:48.840 of a change next week because of these risks we've 0:14:48.840 --> 0:14:52.040 talked about. But there's a trade off for the Center Bank, 0:14:52.120 --> 0:14:55.400 which is, are the benefits of yield curve control which 0:14:55.520 --> 0:14:57.720 are leading to Japan having to do massive amounts of 0:14:57.760 --> 0:15:02.240 quantitative easing to defend that target? Are they working against 0:15:02.680 --> 0:15:05.080 the potential positives from it? So are they? Are those 0:15:05.120 --> 0:15:07.920 positives becoming negatives? So let's just bear in mind Japan 0:15:08.040 --> 0:15:11.320 is experiencing inflation. It's nothing like Europe or the US, 0:15:11.440 --> 0:15:13.800 so it's still quite low compared to our standards, but 0:15:13.840 --> 0:15:17.040 it is high for japan standards, and we're having wage gains. 0:15:17.080 --> 0:15:20.480 So is the yield curve control, which is forcing them 0:15:20.520 --> 0:15:24.080 to do quantitative easing working against the idea of inflation 0:15:24.120 --> 0:15:27.160 going up and therefore maybe they should tighten. That's the 0:15:27.200 --> 0:15:30.080 problem of the policy, that's the buying they're in. It's 0:15:30.120 --> 0:15:32.520 just how quickly do they exit It is the problem 0:15:32.520 --> 0:15:35.240 for market. There's some speculation that could happen as early 0:15:35.240 --> 0:15:37.280 as next week. Hence we're getting these big dolly m moves. 0:15:37.480 --> 0:15:39.280 For us, it's a little bit too soon. We've got 0:15:39.320 --> 0:15:41.920 a new governor coming up. The new governor will start 0:15:41.920 --> 0:15:44.800 probably from April onwards, but it is. It is though 0:15:45.000 --> 0:15:47.560 the risk for next week another surprise from the Bank Japan. 0:15:47.640 --> 0:15:50.160 And that's why for us it's just easier to have 0:15:50.160 --> 0:15:52.320 a short dolly and trade on rather than talking anything 0:15:52.440 --> 0:15:55.640 specific about on this date this will happen. Let's break 0:15:55.640 --> 0:15:57.920 it one thirty right now, we've gone from one fifty 0:15:58.080 --> 0:16:01.600 to break it one on eight. That's dollar end cable 0:16:01.600 --> 0:16:03.880 has gone from one oh three fifty are the lows 0:16:03.880 --> 0:16:06.000 at the end of September all the way back through 0:16:06.280 --> 0:16:09.760 one twenty Euro dollar has gone from through one away 0:16:09.800 --> 0:16:12.480 you're looking for one ten six Jordan. Can we just 0:16:12.480 --> 0:16:14.560 sit on there just for a moment. What did the 0:16:14.560 --> 0:16:18.160 fex community get so wrong at the end of September. 0:16:18.240 --> 0:16:20.920 I remember the conversations we would have. We were talking 0:16:20.960 --> 0:16:24.920 about parity, perhaps on cable. We got close, euro dollar 0:16:25.240 --> 0:16:27.920 getting used to life below parity. Look at us now, 0:16:28.360 --> 0:16:33.040 what changed, Jordans. I don't miss last year at all, John. 0:16:33.080 --> 0:16:35.840 It was doom and gloom and I really didn't enjoy 0:16:35.920 --> 0:16:37.840 being right. So we've got the euro dollar view right 0:16:37.880 --> 0:16:40.520 at the cable right. We had a really good year 0:16:40.520 --> 0:16:42.520 in terms of P and l on our trade and 0:16:42.600 --> 0:16:45.880 gloom it was recession. It was European energy prices spiking 0:16:45.920 --> 0:16:49.560 to unbelievable heights, the trade balance of the euro Area 0:16:49.600 --> 0:16:53.080 collapsing for the first time in a generation, two levels 0:16:53.080 --> 0:16:55.880 that are wider than the US in terms of GDP. 0:16:56.560 --> 0:16:59.200 What's changed, John, is we've had a few factors of 0:16:59.200 --> 0:17:02.120 work in the euro where's favor. Number One, we've had 0:17:02.200 --> 0:17:05.280 energy prices collapse. That has been a massive tale win 0:17:05.400 --> 0:17:09.040 for industry. It's allowed all those steel chemical manufacturing plans 0:17:09.240 --> 0:17:12.080 to turn back on production. It's why we're seeing European 0:17:12.200 --> 0:17:17.000 data start to improve. Number two is thank you Mr. US. 0:17:17.280 --> 0:17:21.440 US inflations now decelerating. We could have goods deflation this year. 0:17:22.040 --> 0:17:23.960 That is a very different story to last year when 0:17:24.040 --> 0:17:27.080 US inflation was accelerating and the story is about how 0:17:27.160 --> 0:17:29.800 much hikes will the FED do. Now it's about when 0:17:29.800 --> 0:17:31.960 will the FED stop and when will they start to 0:17:32.000 --> 0:17:34.960 cut We think from September this year, so I think 0:17:34.960 --> 0:17:37.040 a lot's change on the ground in terms of facts. 0:17:37.320 --> 0:17:40.240 And then the third factor is China reopening. That's the 0:17:40.280 --> 0:17:43.560 new one. China reopening is a bigger deal for Europe 0:17:43.600 --> 0:17:46.840 than it is the US. US exports to China is 0:17:46.920 --> 0:17:50.040 less than one percent of GDP, no point six seven percent, 0:17:50.119 --> 0:17:52.960 to be exact. For the German economy, it's more than 0:17:53.000 --> 0:17:55.840 three times more important. It's around two point six seven 0:17:55.880 --> 0:17:59.120 percent of German GDP. Just exports to China, your biggest 0:17:59.119 --> 0:18:02.760 trading partner, reopening its doors, opening up its tourism flows. 0:18:03.000 --> 0:18:06.240 Makes Europe so much more attractive now with those energy 0:18:06.280 --> 0:18:09.040 story and the inflation story in the US too. Jordan, 0:18:09.119 --> 0:18:18.439 thank you joining us. Katrina Dadly, portfolio manager and research 0:18:18.480 --> 0:18:21.240 an list of Franklin mutual services. Can we get straight 0:18:21.280 --> 0:18:23.680 to you in Katrina on just what you expect from 0:18:23.720 --> 0:18:26.760 the bank earnings a little bit later this morning. Look, 0:18:26.800 --> 0:18:28.879 I think what we're looking for the bank earnings is 0:18:28.920 --> 0:18:31.240 really that arbiter of whether or not we're going into 0:18:31.240 --> 0:18:33.480 a recession. Because I think they're going to be the 0:18:33.560 --> 0:18:35.800 first line of defense here and the first people to 0:18:35.880 --> 0:18:38.640 see it. So we're looking closely at JP Morgan when 0:18:38.640 --> 0:18:40.840 it comes out and to see what Jamie has to 0:18:40.880 --> 0:18:45.120 say about where we are in the economic cycle. Yeah, 0:18:45.119 --> 0:18:47.600 I look at Trina at the economic cycle and I 0:18:47.600 --> 0:18:50.399 would suggest to nine days is change And for a 0:18:50.520 --> 0:18:53.920 portfolio manager with all the sell side advice, you've got 0:18:53.960 --> 0:18:58.800 your internal wonderful advisors at Franklin Mutual have you, you know, 0:18:58.960 --> 0:19:04.200 not radically adjusted, but is there a change agent within 0:19:04.240 --> 0:19:08.159 a given portfolio because we've gone from December twentye to 0:19:08.240 --> 0:19:12.400 what we hope will be January. Where a value managers, 0:19:12.400 --> 0:19:15.919 so we do not make those very very significant shifts 0:19:17.480 --> 0:19:20.439 training you're not shifting on the inflation dynamic now as 0:19:20.440 --> 0:19:23.639 a value manager. No, in terms of the inflation, we 0:19:23.680 --> 0:19:26.639 continue to see the FED working and bringing it down. 0:19:26.880 --> 0:19:29.080 The question is, and that's the question we've been talking 0:19:29.119 --> 0:19:32.359 about all over two, is whether or not the FED 0:19:32.480 --> 0:19:35.199 engine is too much of a recession or whether or 0:19:35.200 --> 0:19:38.240 not they walk that tight load rope of slowing down 0:19:38.240 --> 0:19:41.600 the economy to slow down inflation without tipping us into 0:19:41.640 --> 0:19:44.600 a deep recession. We continue to be of the position 0:19:44.640 --> 0:19:47.200 that if we do go into a recession, it will 0:19:47.240 --> 0:19:49.880 be a mild one. And I think we're seeing all 0:19:49.920 --> 0:19:53.240 the signs of a very mild recession and that has 0:19:53.400 --> 0:19:57.160 very good implications for companies because it's manageable. A deep 0:19:57.160 --> 0:20:00.280 recession is really difficult to manage, as you talk about 0:20:00.280 --> 0:20:03.520 that fixed versus variable cost curve. UM, we think a 0:20:03.640 --> 0:20:08.120 mild recession companies can muddle through. So on a value basis, 0:20:08.640 --> 0:20:12.280 where do you which sectors do you find the best 0:20:12.560 --> 0:20:17.359 dynamics to surprise and to say Junior July in terms 0:20:17.359 --> 0:20:21.520 of surprise, one area we're looking at is the industrial sector. UM. 0:20:21.560 --> 0:20:23.840 I think that when we're talking about industrials, we're not 0:20:23.920 --> 0:20:26.680 talking about as much the autos that you're talking about 0:20:26.680 --> 0:20:29.879 with Tesla, and we are aware of what happened there yesterday, 0:20:30.480 --> 0:20:34.440 well this morning. We are now looking at industrial companies 0:20:34.560 --> 0:20:38.600 well placed, and they have this really good secular theme 0:20:38.920 --> 0:20:42.520 that we're focused on. It's the electrification, it's industry four 0:20:42.520 --> 0:20:46.200 point oh, it's the Inflation Reduction Act. Those things will 0:20:46.240 --> 0:20:49.359 be structural drivers, and we're just making sure that these 0:20:49.400 --> 0:20:54.600 companies have enough wherewithal three, we think the order books 0:20:54.600 --> 0:20:57.760 are very very strong, the backlogs are at very high levels, 0:20:58.000 --> 0:21:01.520 and we think that the variable costs are rising, rages 0:21:01.640 --> 0:21:04.760 and any other type of inflation is really manageable. These 0:21:04.760 --> 0:21:07.760 industrial companies are areas that we like, Katrina, Where did 0:21:07.760 --> 0:21:09.800 they minus fit into this? We caught up with a 0:21:09.800 --> 0:21:13.960 guest a little bit earlier this week, Christopher owners Frateigus, Rio, absolutely, 0:21:14.080 --> 0:21:16.960 Rippley liked Rio, b HP, glen Core. Where are you 0:21:17.040 --> 0:21:20.320 guys on those names? Um? We we do own a 0:21:20.359 --> 0:21:23.600 position in Rio UM and we would we disclose that UM, 0:21:23.640 --> 0:21:26.479 and we like the the the asset quality that we 0:21:26.560 --> 0:21:29.040 have there. But you're right, those type of names have 0:21:29.119 --> 0:21:32.440 gone up substantially, which makes the valuation case a lot 0:21:32.480 --> 0:21:34.840 harder than it was just a few months ago. But 0:21:35.000 --> 0:21:37.760 as a value manager, we're looking at where are they 0:21:37.840 --> 0:21:40.960 positioned in the commodity complex, and we're trying to make 0:21:40.960 --> 0:21:44.359 sure that we've got that really good combination of companies 0:21:44.400 --> 0:21:47.919 that while they are dependent on commodity prices, they have 0:21:48.000 --> 0:21:50.480