WEBVTT - Surveillance: Rate Stability with Allianz CEO 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 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. 0:00:18.840 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.360 and of course on the Bloomberg terminal. We're gonna pause 0:00:30.400 --> 0:00:32.360 and usually a slot that we have at eight thirty 0:00:32.440 --> 0:00:35.239 one Wall Street time on economics and look at the 0:00:35.320 --> 0:00:38.839 reality of asset manager. When we do this with Oliver Beta, 0:00:39.280 --> 0:00:42.199 he's the chief executive officer of Alian's. He's been on 0:00:42.240 --> 0:00:45.160 a tour of duty for a good number of years 0:00:45.200 --> 0:00:48.080 to see their success. All John and I want to 0:00:48.080 --> 0:00:52.560 know is you have the football sponsorship of the soccer team, 0:00:52.600 --> 0:00:55.840 the football team from Munich as well. We see the 0:00:55.960 --> 0:01:01.080 sponsorship of sports. What's the value to Alian's payoff of 0:01:01.160 --> 0:01:06.160 Byron Munich. Oh, it's a hugely positive because that's the 0:01:06.160 --> 0:01:08.800 best brand in sports and at least in our country, 0:01:09.000 --> 0:01:11.960 and we've been associated with it for many, many years. 0:01:11.959 --> 0:01:14.160 I'm very very proud of it. Now you have a 0:01:14.200 --> 0:01:16.680 bond bear market. Some would say your best brand and 0:01:16.760 --> 0:01:19.800 acquisition was the gross Hill area in combine of Pacific 0:01:20.080 --> 0:01:23.480 Investment Management Company years ago. Give us an update on 0:01:23.680 --> 0:01:28.080 bond asset management in the view forward given this great 0:01:28.120 --> 0:01:32.280 bond bear market. Well, the current circumstances are tough, but 0:01:32.400 --> 0:01:34.760 it's very good to be with the best company in 0:01:34.800 --> 0:01:38.039 these environments. Right, so we see a flight quality over time. 0:01:38.160 --> 0:01:41.080 People are watching. But if because we have a very 0:01:41.280 --> 0:01:43.800 very long duration business model, we look forward, we believe 0:01:43.840 --> 0:01:46.200 it's going to be fantastic for Pinko and us over 0:01:46.240 --> 0:01:49.000 the next few years as the interst rate stabilized, because 0:01:49.000 --> 0:01:51.080 the money will come back into bonds, and think about 0:01:51.520 --> 0:01:54.280 accumulation at the interest rates that we have people off. 0:01:54.360 --> 0:01:56.440 You don't run in a simple MPV model and say 0:01:56.480 --> 0:01:58.680 what does it mean if you're reinvested at five percent 0:01:58.800 --> 0:02:01.760 or four point seven five rather than zero. You buried 0:02:01.800 --> 0:02:03.600 an important line there. It was in there, but it 0:02:03.680 --> 0:02:07.560 was buried. When interest rates stabilize, they're not stable. What 0:02:07.640 --> 0:02:09.200 did you make of what happened in the guilt market 0:02:09.320 --> 0:02:10.840 in the last couple of weeks. What are the lessons 0:02:10.880 --> 0:02:14.720 you've learned from that? The first one is um if 0:02:14.720 --> 0:02:18.000 you have a political idea that it's not anchored in economics, 0:02:18.000 --> 0:02:21.840 it's very dangerous, particularly if you're not the world reserve 0:02:21.880 --> 0:02:24.959 currency like the US dollar. We have learned that number 0:02:24.960 --> 0:02:28.600 one brexit now will start to pay the price and 0:02:28.639 --> 0:02:30.800 you see them. And the second thing is that markets 0:02:30.800 --> 0:02:34.120 have become to dominate again. We're coming out of fifteen 0:02:34.200 --> 0:02:38.440 years of quantitative using, no price for risk, nothing, no 0:02:38.600 --> 0:02:41.519 fiscal discipline, no monetary discipline, and suddenly that's back and 0:02:41.600 --> 0:02:43.480 people have to get used to the fact that the 0:02:43.520 --> 0:02:46.680 laws of physics hold again even for governments. Well, and 0:02:46.720 --> 0:02:49.280 we were talking about how this gives room and gives rise, 0:02:49.320 --> 0:02:52.360 and once again to bond vigilantes, are you the bond 0:02:52.440 --> 0:02:55.800 vigilantes do you actually actively go through some of the 0:02:55.840 --> 0:02:58.680 policies and say not going to buy this company, not 0:02:58.760 --> 0:03:01.120 going to buy this nation because of what they're doing. 0:03:01.880 --> 0:03:05.120 I wouldn't be thinking about negative selection, because that's what 0:03:05.240 --> 0:03:07.280 not what we should talk about. But we're looking at 0:03:07.440 --> 0:03:11.120 countries and companies that properly manage. Now, if you have 0:03:11.280 --> 0:03:14.080 a dual, definitely think about that. Three years ago we 0:03:14.120 --> 0:03:17.120 had three times the financial stimulus in the United Kingdom 0:03:17.160 --> 0:03:19.760 that we saw a few days ago. Nothing happened in 0:03:19.800 --> 0:03:23.160 the market, right, nothing happened everybody was sleeping and then 0:03:23.200 --> 0:03:26.239 suddenly people wake up to the fact that what has 0:03:26.280 --> 0:03:29.720 been done is really a disaster, and suddenly the prices 0:03:29.919 --> 0:03:33.120 are coming. Why is that? Because of inflation? People have 0:03:33.200 --> 0:03:36.920 started to reprice assets fundamentally, not just bonds. And by 0:03:36.960 --> 0:03:39.520 the way, we are not even at the midpoint of 0:03:39.560 --> 0:03:42.280 repricing of assets. We've just seen the liquid assets reprice. 0:03:42.320 --> 0:03:45.280 The rest will come. Now. When you said actively selecting 0:03:45.480 --> 0:03:49.400 specific companies, specific nations, that speaks to the active selection 0:03:49.440 --> 0:03:52.520 that so many different fund managers talk about now as 0:03:52.560 --> 0:03:55.880 really rating supreme. Where does that leave passive management. It's 0:03:55.920 --> 0:03:59.680 really interesting. So it is different between equity markets. If 0:03:59.680 --> 0:04:03.000 you have large cab equity, you can invest in them 0:04:03.520 --> 0:04:07.120 very effectively through index. If you're in the bond market, 0:04:07.360 --> 0:04:09.280 you and you don't know where things are going to 0:04:09.400 --> 0:04:12.400 better be with the people that know what is happening 0:04:12.840 --> 0:04:15.560 and can differentiate. It's a great proofpoint. So I hope 0:04:15.600 --> 0:04:18.880 that all our colleagues are proving themselves now to repeat 0:04:19.000 --> 0:04:22.280 something you said moments ago, the liquid markets have reprice, 0:04:22.360 --> 0:04:25.480 their liquid markets haven't yet. What's that going to look like. 0:04:25.800 --> 0:04:28.440 We spent a long time talking about putting back the 0:04:28.520 --> 0:04:30.680 veil and some of the carnage that might take place 0:04:31.080 --> 0:04:33.479 because of ten years worth of zero interest rates. And 0:04:33.520 --> 0:04:35.320 what we get told is that in public markets and 0:04:35.320 --> 0:04:37.919 credit balance sheets are strong, the resilience is there, the 0:04:37.960 --> 0:04:40.720 maturity walls is way out on the horizon, not coming soon. 0:04:41.040 --> 0:04:44.680 What's going to happen in private markets? I'm not a 0:04:44.720 --> 0:04:47.400 great investor, so let's just we're not trying to do. 0:04:47.560 --> 0:04:51.160 To be is very hard, but it's very hard to 0:04:51.240 --> 0:04:54.280 see it, and therefore it doesn't mean it doesn't exist. 0:04:54.440 --> 0:04:56.680 So people have to face a lot of scrutiny now 0:04:56.760 --> 0:04:59.560 on how the funding is. So watch out more not 0:04:59.680 --> 0:05:02.680 just leverage, but liquidity, I think, and we saw that 0:05:02.800 --> 0:05:06.600 in the in the guilt market. People do underestimate liquidity 0:05:06.920 --> 0:05:10.279 uh traps, and that's something that we need to look for. 0:05:10.560 --> 0:05:12.599 And you see that in private equity when people look 0:05:12.600 --> 0:05:14.679 where our earning is really coming from. Our there trading 0:05:14.680 --> 0:05:17.320 amongst each other's are their true exits? What are the 0:05:17.320 --> 0:05:19.799 funding structure? So it's going to go through real estate 0:05:19.880 --> 0:05:22.560 private equity just slow slow motion, but it's gonna come. 0:05:22.720 --> 0:05:24.880 The gravity is back, the risk free rate is back 0:05:24.960 --> 0:05:28.880 as well. Talk about conservative money, pension money, forget about 0:05:28.880 --> 0:05:31.919 all d I and the gyrations in London, just normal 0:05:32.160 --> 0:05:35.480 institutional money. What's the shock going to be is the 0:05:35.600 --> 0:05:38.760 risk free rate returns. So the key thing is really 0:05:38.880 --> 0:05:41.880 and that's what we also have to do, think about resilience. Right. 0:05:41.920 --> 0:05:44.080 The point is the shops were the shocks will be 0:05:44.120 --> 0:05:47.560 harder than people anticipate. The diversification is the thing that 0:05:47.680 --> 0:05:50.039 is never there when you needed the most. So people 0:05:50.120 --> 0:05:52.159 really need to look at their models and saying, you know, 0:05:52.200 --> 0:05:55.479 how come the world completely missed out on inflation. I 0:05:55.520 --> 0:05:57.640 mean when you think about the fact that in November 0:05:57.680 --> 0:05:59.919 of last year we've started to buy inflation link bonds 0:06:00.080 --> 0:06:02.200 lot a lot of people are still saying yeah, but 0:06:02.240 --> 0:06:04.560 in the middle of this was all central banks, even 0:06:04.560 --> 0:06:07.479 some of our best economy. So the question is why 0:06:07.680 --> 0:06:09.680 is that happening? And the first answer is I don't 0:06:09.680 --> 0:06:11.719 know why. But what I know is we have to 0:06:11.800 --> 0:06:14.240 de risk. And so how do you dus you just 0:06:14.279 --> 0:06:16.239 bring in duration? Do you have to change your actual 0:06:17.080 --> 0:06:22.560 how system? Yeah? The adult money is basically yes, if 0:06:22.760 --> 0:06:26.800 we were, you know, completely in an endowment, you would 0:06:26.880 --> 0:06:30.320 really selectively take risk. In this environment, we can't with 0:06:30.400 --> 0:06:32.159 a double A rating and one of the few places 0:06:32.200 --> 0:06:35.279 in the world and even give the impression that we 0:06:35.320 --> 0:06:38.640 don't have our Telerisk under control. Given that you're based 0:06:38.760 --> 0:06:41.960 in Europe right now, how concerned are you about the 0:06:41.960 --> 0:06:45.200 prospect that the pain that you're experiencing now both my 0:06:45.279 --> 0:06:48.240 business and an investment perspective, is not just going to 0:06:48.279 --> 0:06:51.080 be this winter. It's also going to be next winter. 0:06:51.200 --> 0:06:53.960 It's also going to be potentially for years to come 0:06:54.120 --> 0:06:57.520 if there is not some sort of sustainable energy plan 0:06:57.800 --> 0:07:00.240 put into effect. So I have to be a real list, 0:07:00.240 --> 0:07:02.120 but I'm also a bone optimius. Otherwise I think I 0:07:02.160 --> 0:07:04.240 couldn't do the job right. So the first thing is, 0:07:04.279 --> 0:07:08.800 I think particularly the key thing is that people I 0:07:08.839 --> 0:07:11.840 think have been over selling Germany, if I may say so. 0:07:11.840 --> 0:07:14.600 So I'll give you an example. We have had demand 0:07:14.680 --> 0:07:18.280 contraction on gas fifteen percent already this year. Now much 0:07:18.320 --> 0:07:22.080 for example, it's been only two so we will have 0:07:22.200 --> 0:07:24.640 most likely enough gas to come through the winter. People 0:07:24.680 --> 0:07:27.440 do not factor that in now. The second question is 0:07:27.440 --> 0:07:31.080 what will be the implication for industry to reprice its 0:07:31.120 --> 0:07:34.800 products and its production supply change to a higher energy price. 0:07:34.840 --> 0:07:38.200 And that's happening. I really believe in in our engineering 0:07:38.240 --> 0:07:42.120 capability is very comparable to Western Switzerland, where everybody said, 0:07:42.120 --> 0:07:44.200 when you know the Swiss frank was floated, that all 0:07:44.240 --> 0:07:47.840 the manufacturing companies would die. No, no, we invest in innovation, 0:07:47.880 --> 0:07:50.640 will be very good. The key thing is, however, we 0:07:50.720 --> 0:07:54.480 need for Europe to realize now one important thing. Germany 0:07:54.520 --> 0:07:57.760 needs to really focus on reinventing its business model. It's 0:07:57.800 --> 0:08:03.600 over with cheap energy from usha Um. Successful Um exports 0:08:03.600 --> 0:08:06.680 to China and America providing all the security. I mean 0:08:06.720 --> 0:08:10.200 that three formula is ending and that would require a 0:08:10.200 --> 0:08:12.960 lot of energy on the German people to fix it small, 0:08:13.120 --> 0:08:15.800 which means we have less attention and tolerance for dolling 0:08:15.800 --> 0:08:18.840 out money to other people. This has been really really informatives. 0:08:18.880 --> 0:08:20.760 Are just wonderful to have you in with this, but 0:08:20.840 --> 0:08:24.480 this isn't why we had you in. You people finance 0:08:24.920 --> 0:08:28.320 baron Munich, the soccer team in Munich. Are you guys 0:08:28.320 --> 0:08:31.560 gonna steal Harry Kane from Tottenham? I mean that's the 0:08:31.560 --> 0:08:33.599 only reason we had you. Are you going to bankroll 0:08:34.080 --> 0:08:37.439 this football team in Munich to steal the jewel of 0:08:37.480 --> 0:08:40.079 the United Kingdom? Even if I knew the answer, I 0:08:40.120 --> 0:08:42.400 wouldn't be able to tell you. I mean, this is 0:08:42.440 --> 0:08:45.800 this is that's the only reason we had the I 0:08:45.840 --> 0:08:48.240 called up Quantis and I said, get the guy from 0:08:48.240 --> 0:08:51.760 Alliance Alian's in. I said, get him in because these 0:08:51.760 --> 0:08:54.079 are the people they're gonna steal. Harry Kane are we're 0:08:54.080 --> 0:08:56.320 going to do the show from from bay Munich. I 0:08:56.360 --> 0:08:59.400 think October. So I have to say I do like 0:08:59.440 --> 0:09:03.720 the dormant too, though. You know, every forced German is 0:09:03.720 --> 0:09:06.360 our clients, so we have a lot of a lot 0:09:06.360 --> 0:09:08.319 of fancies. It's going to be very difficult. And then 0:09:08.320 --> 0:09:11.960 you Ventus and you ventors. How the stadiums do you 0:09:12.040 --> 0:09:16.000 have quite a few, but if you're twelve twelve across 0:09:16.040 --> 0:09:19.000 Europe or worldwide, no worldwide. For example in sub Paolo, 0:09:19.200 --> 0:09:23.800 the stadiums also branded Alliance has been a great investment. Amazing. Yeah, 0:09:23.920 --> 0:09:25.760 it's really and people pay a lot of attention, and 0:09:25.840 --> 0:09:28.160 you know football, that's something that politics can do. This 0:09:28.240 --> 0:09:32.079 as we unite people, we bring people together, we make 0:09:32.160 --> 0:09:35.600 them enjoy their lives regardless by the way, most often 0:09:35.679 --> 0:09:38.960 on both sides, you know, whether winners and losers. And 0:09:39.000 --> 0:09:42.079 therefore it's it's great, it's bipartisan. You realize if Harry 0:09:42.160 --> 0:09:46.120 Kane goes from Tottenham to Munich. It's un American's been 0:09:46.120 --> 0:09:48.240 trying to have some greatest sport in the world. Just 0:09:48.280 --> 0:09:50.679 the greatest sport in the world, nothing close to it. 0:09:50.679 --> 0:09:53.920 It just is truly the most brilliant. I don't recover 0:09:54.120 --> 0:09:56.839 regardless whether it's Juventus or Bayan, would would be the 0:09:56.920 --> 0:09:59.400 lated dost. You'll thank you, We will take that under. 0:10:00.240 --> 0:10:02.079 But can you too have a discussion in the World Cup? 0:10:02.120 --> 0:10:04.760 First discussion in the World Cup and Bloomberg surveillance like 0:10:04.960 --> 0:10:07.480 you want to throw that in Germany and Kata? What 0:10:07.520 --> 0:10:09.480 are you looking for, sir? Do you think you can 0:10:09.480 --> 0:10:12.120 make it happen when a world come another one? I 0:10:12.160 --> 0:10:14.920 don't know. It's a lot of a lot about passion, 0:10:14.960 --> 0:10:17.839 but it's also about you know, the right moment and 0:10:17.920 --> 0:10:20.880 to have the energy when it really matters. Certainly crossing 0:10:20.920 --> 0:10:22.760 my fingers. But the most important thing is to have 0:10:22.800 --> 0:10:25.640 a great, great, great tournament. Can you tell faifor we 0:10:25.679 --> 0:10:27.680 never want to do this Winter World Cup ever again? 0:10:28.000 --> 0:10:31.640 I think it's a travesty, I really do. We're taking 0:10:31.679 --> 0:10:33.280 a month off in the middle of the season to 0:10:33.760 --> 0:10:39.760 that's it. It's been air conditioning in the football stadiums. Yeah, 0:10:40.000 --> 0:10:42.760 interesting choice, but it is there, and so I think 0:10:42.760 --> 0:10:46.960 we're always great at criticizing things. I think critic think 0:10:47.559 --> 0:10:56.679 that's what this shows about. Thank you for right now 0:10:56.720 --> 0:10:59.320 and this is a joy with the chaotic weeks that 0:10:59.400 --> 0:11:02.200 we've had in a Monday into another week of chaos. 0:11:02.280 --> 0:11:04.480 Bob be aild to joins us. He's head of America's 0:11:04.679 --> 0:11:09.680 Fundamental fixed income at black Rock, with decades of experience. Bob, 0:11:09.720 --> 0:11:12.480 I want to cut to the chase in the great 0:11:12.640 --> 0:11:16.400 bond bear market. What is the level of pain on level? 0:11:16.480 --> 0:11:19.640 I was talking to Axel Weber in Washington and he said, 0:11:19.679 --> 0:11:23.840 forget about the numbers the spreads. Look at level. Bond 0:11:23.840 --> 0:11:29.760 prices are down. What does it signal? Well, Tom, I 0:11:29.800 --> 0:11:34.000 think that's a great point about spreads versus all in levels. 0:11:34.120 --> 0:11:36.599 So the cost you know, debt spreads for example, I G. 0:11:36.679 --> 0:11:39.440 And high yield spreads aren't at recessionary wides that we've 0:11:39.480 --> 0:11:43.040 seen historically, but the all in cost of capital has 0:11:43.080 --> 0:11:46.679 gone up substantially, right and and and in the investment 0:11:46.720 --> 0:11:49.079 grade space, you're talking about an index that's now a 0:11:49.240 --> 0:11:52.760 six percent yield. And in high yield space you've got 0:11:52.760 --> 0:11:54.640 companies that were funding a year a year and a 0:11:54.679 --> 0:11:57.160 half ago at four to that now can't get funded 0:11:57.160 --> 0:11:59.400 inside of ten and and may not be able to 0:11:59.400 --> 0:12:02.640 fund at all. So the cost of capital has gone 0:12:02.679 --> 0:12:04.600 up substantially. And I understand that there are a lot 0:12:04.679 --> 0:12:09.520 of really good savvy liability management UH strategies that firms 0:12:09.520 --> 0:12:13.319 employed and households employed by refinancing their mortgages two years ago, 0:12:13.880 --> 0:12:16.480 and that there's got they's got these very attractive liabilities 0:12:16.520 --> 0:12:19.480 on the balance sheet. But the incremental spend right, the 0:12:19.520 --> 0:12:23.120 next thing that one might invest in, whether it's residential 0:12:23.320 --> 0:12:26.760 or or commercial, is going to be substantially more expensive 0:12:26.800 --> 0:12:29.600 from a debt capital standpoint. Let's talk about the great 0:12:29.640 --> 0:12:32.559 Dan Fuss at loomas sales and he would say, that's great, 0:12:32.559 --> 0:12:34.880 you've got the free lunch of a high nominal yield, 0:12:35.320 --> 0:12:39.200 But do you buy that nominal yield into reduced credit 0:12:39.360 --> 0:12:43.920 quality across all of fixed income assets? Is there credit 0:12:44.000 --> 0:12:48.640 clouds out there that make this not an easy decision? Yeah? 0:12:48.640 --> 0:12:50.880 I think so. I mean, look, you guys were just 0:12:50.920 --> 0:12:53.880 talking about this. The FED is on a mission. This 0:12:53.920 --> 0:12:59.160 is a very intentional and aggressive tightening of domestic monetary 0:12:59.160 --> 0:13:03.880 conditions in an effort to slow growth, slow demands specifically 0:13:04.280 --> 0:13:07.480 loosen up the labor market a little bit um to 0:13:07.600 --> 0:13:11.760 get inflation back to target. So so definitionally there there 0:13:11.800 --> 0:13:14.280 are going to be some things that probably break along 0:13:14.320 --> 0:13:16.120 the way. It will be really really hard to do 0:13:16.160 --> 0:13:19.880 it without some of that happening. And and but but 0:13:19.960 --> 0:13:22.040 I also think at the same time, here's one of 0:13:22.040 --> 0:13:24.120 the interesting things. Volatility is so high in the rates 0:13:24.120 --> 0:13:27.160 market right now that it's really hard to look, you know, 0:13:27.480 --> 0:13:29.840 three months forward or six months forward. It's it's hard 0:13:29.840 --> 0:13:32.240 to look more than three to six days forward because 0:13:32.280 --> 0:13:33.880 the vall is so high. Right But I think if 0:13:33.920 --> 0:13:36.240 you can take a step back and think about the 0:13:36.320 --> 0:13:39.440 valuation of high quality fixed income assets today, you can 0:13:39.480 --> 0:13:43.960 build a pretty reasonable portfolio treasuries, agency mortgages, investment grade 0:13:43.960 --> 0:13:45.480 corporates where you can go in and do the name 0:13:45.520 --> 0:13:48.320 selection so that you can avoid some of the more 0:13:48.360 --> 0:13:52.240 stressed or potentially forward distressed names. You can build a 0:13:52.280 --> 0:13:55.960 high quality portfolio intermediate maturity in the five to six 0:13:55.960 --> 0:13:58.719 percent range, including treasuries. So you've got to flight the 0:13:58.800 --> 0:14:01.600 quality asset in there in in a shock scenario. That's 0:14:01.800 --> 0:14:04.400 we haven't been able to do that in nearly two 0:14:04.400 --> 0:14:08.440 decades it's it's things are starting to look reasonable. I 0:14:08.480 --> 0:14:10.520 get it that we're probably not at the bottom and 0:14:10.520 --> 0:14:12.440 there's more stress to come, but things are starting to 0:14:12.440 --> 0:14:14.679 look pretty reasonable if you can take a longer time horizon. 0:14:14.960 --> 0:14:16.800 That that is the key point, if you could take 0:14:16.800 --> 0:14:19.320 it a longer time horizon. And I wonder about some 0:14:19.360 --> 0:14:21.880 of these mutual funds or open ended funds where they 0:14:21.920 --> 0:14:25.120 could potentially be withdrawals, especially when it comes to investment 0:14:25.120 --> 0:14:28.200 grade credit. It makes sense perhaps on a thesis basis, 0:14:28.520 --> 0:14:32.320 but on a real basis, investment grade is underperformed dramatically 0:14:32.400 --> 0:14:35.360 because of the rate story as well as this forced 0:14:35.360 --> 0:14:38.160 selling that we've seen international investors that sell what you can, 0:14:38.240 --> 0:14:40.520 not what you want to. How much you concerned about 0:14:40.600 --> 0:14:43.720 that creating some sort of fissure in the short term 0:14:43.840 --> 0:14:45.760 as you see things like what happened in the UK 0:14:46.320 --> 0:14:51.200 for some sellingently. So that is exactly the right thing 0:14:51.240 --> 0:14:54.240 to be focused on. We've seen this movie before, right 0:14:54.280 --> 0:14:57.880 when when you tighten financial conditions this aggressively, this abruptly, 0:14:58.440 --> 0:15:01.240 things are going to break And where do they break first? 0:15:02.000 --> 0:15:06.800 Almost always it's in the levered strategy, the levered business model. 0:15:07.160 --> 0:15:08.560 You know, I would look at I would argue in 0:15:08.600 --> 0:15:11.840 the UK that yes, the push toward you know, a 0:15:11.920 --> 0:15:16.400 much more aggressive fiscal policy kicked off more pressure in 0:15:16.440 --> 0:15:19.640 an already deteriorating market, But the proximate cause of the 0:15:19.720 --> 0:15:22.720 real stress in the long end volatility was the levered 0:15:22.840 --> 0:15:26.120 ld I business model and the increased margin calls. Right So, 0:15:26.160 --> 0:15:28.320 if you're if you're levered, if you have to borrow 0:15:28.440 --> 0:15:31.280 to sustain your strategy, and importantly, if you have to 0:15:31.360 --> 0:15:35.680 pay higher margin calls margin costs, excuse me to to 0:15:35.680 --> 0:15:40.040 to to to maintain your leverage, you're in a really 0:15:40.080 --> 0:15:42.880 difficult spot right now. So those business models, you know, 0:15:43.040 --> 0:15:45.560 kind of should be stressed, and I wouldn't be surprised 0:15:45.600 --> 0:15:47.640 if we don't see some more of that before this 0:15:47.720 --> 0:15:50.680 is over over the next three to six months. Thank you, sir. 0:15:50.840 --> 0:16:05.040 As that of black Crop, Lori Cavasina joins us now 0:16:05.080 --> 0:16:08.200 they had a FEU secuity strategy at IBBC Capital Markets, Laurie, 0:16:08.400 --> 0:16:10.480 it wasn't about three Q earnings, it was about gun 0:16:10.560 --> 0:16:12.600 it's a four Q and beyond what are we learning 0:16:12.720 --> 0:16:16.280 so far? So look, I think if so far in 0:16:16.320 --> 0:16:18.600 reporting season, John, I've been a little bit disappointed that 0:16:18.640 --> 0:16:21.000 it sounded a lot like the last couple of reporting season. 0:16:21.120 --> 0:16:23.560 So we're hearing things like the tone around labors improving 0:16:23.560 --> 0:16:26.360 a little bit, not seeing any major crack chat in 0:16:26.440 --> 0:16:29.320 terms of either the consumer or demand UM. But companies 0:16:29.320 --> 0:16:31.440 are battening down the hatches and getting ready for chopp 0:16:31.480 --> 0:16:33.720 of your time. So at least there's that UM. But 0:16:33.800 --> 0:16:35.520 I think that in terms of you know, if you 0:16:35.560 --> 0:16:37.680 wanted the earnings band aid ripped off, and that's what 0:16:37.720 --> 0:16:40.120 a lot of investors have been telling me so far, 0:16:40.240 --> 0:16:41.480 what I'm hearing is, I don't know if we're going 0:16:41.520 --> 0:16:43.200 to get it this reporting season. I think we may 0:16:43.240 --> 0:16:46.280 have to wait till, you know, February March to get that. Laura, 0:16:46.360 --> 0:16:49.000 you and Ben Laylor on the same page. Ben Laylor 0:16:49.080 --> 0:16:52.160 starts off by saying, the first ever so slight glance 0:16:52.200 --> 0:16:56.000 here at earnings are less bad. Start and then you 0:16:56.040 --> 0:16:59.760 talk about moving to high quality. Define what high quality 0:17:00.120 --> 0:17:04.600 is is a comfortable place to be. So high quality 0:17:04.720 --> 0:17:06.560 is a factor discussion that I have with a lot 0:17:06.600 --> 0:17:09.439 of investors. If you talk to your average portfolio manager, 0:17:09.480 --> 0:17:11.960 small cap or large cap, especially in the small cap space, 0:17:12.000 --> 0:17:13.760 odds are they've done some sort of back test that 0:17:13.800 --> 0:17:15.800 tells them that things like positive earnings and high are 0:17:15.840 --> 0:17:18.719 O we outperform over time, So come invest with me, 0:17:18.800 --> 0:17:21.840 because that's the portfolio I run. And so what we're 0:17:21.840 --> 0:17:24.240 starting to see is that after a summer in which 0:17:24.280 --> 0:17:28.119 the low quality stats so negative earners, highly shorted names, 0:17:28.400 --> 0:17:31.280 negative r OWE, low r O WE, those names were 0:17:31.320 --> 0:17:33.840 actually working pretty well coming off the June low on 0:17:33.840 --> 0:17:36.400 a relative basis, And what we're seeing now is that 0:17:36.600 --> 0:17:39.360 more of the high quality versions, positive earners, the high 0:17:39.480 --> 0:17:42.840 r OE, the lowly shorted names are starting to work, which, frankly, Tom, 0:17:42.920 --> 0:17:44.680 is a silver lining heading into the end of the 0:17:44.760 --> 0:17:47.600 year because that actually bodes well for active manager perpartment. 0:17:47.680 --> 0:17:49.880 To me, Laurie, this goes to the risk free rate 0:17:49.960 --> 0:17:51.920 returning here. And maybe it has to do with big 0:17:51.960 --> 0:17:55.240 combinations like Kroger and Albertson. But all of a sudden 0:17:55.400 --> 0:17:58.760 zombies have to report. Is what we're really talking about 0:17:58.800 --> 0:18:02.359 here is not high quality, but that all of a sudden, 0:18:02.359 --> 0:18:06.399 it's zombie November. I think that's a fair way to 0:18:06.440 --> 0:18:08.320 look at it, Tom, But you know, I would also 0:18:08.359 --> 0:18:11.560 say it depends on your definition of zombie a little bit. Um. 0:18:11.600 --> 0:18:14.120 I think that in general, when you're going into sort 0:18:14.119 --> 0:18:17.800 of a lower growth uncertain time. Investors do cling to 0:18:17.840 --> 0:18:20.440 those higher quality names, and typically those are the ones 0:18:20.480 --> 0:18:23.640 that do come through manage through challenging situations a little 0:18:23.640 --> 0:18:25.800 bit better. So I think that you know, investors are 0:18:25.840 --> 0:18:28.760 sort of circling, circling, not closing the ranks um and 0:18:28.800 --> 0:18:31.160 really just clinging to what's worked over time. And there's 0:18:31.160 --> 0:18:32.960 a lot of PM say to me, you're not gonna 0:18:33.000 --> 0:18:35.600 get beaten up by sticking to your philosophy where you're 0:18:35.600 --> 0:18:37.480 going to get beaten up as if you underperform when 0:18:37.480 --> 0:18:40.320 you deviated from your philosophy. Lorie, how much could you 0:18:40.359 --> 0:18:43.400 see the SMP getting to that thirty two level, which 0:18:43.400 --> 0:18:46.720 is the base case for Mike Wilson over at Morgan Stanley, 0:18:46.880 --> 0:18:49.879 even with some of the constructive field that you have 0:18:50.040 --> 0:18:53.880 in select names and select industries. So I think it's 0:18:53.880 --> 0:18:56.560 a great question, Lisa, and and I understand why that 0:18:56.640 --> 0:18:58.359 number is important. You know, when I talked to my 0:18:58.400 --> 0:19:00.800 friends in the Technical Strategy Commune it they'll often say 0:19:00.800 --> 0:19:04.159 thirty hundred or kind of the next big battle grounds. 0:19:04.359 --> 0:19:06.800 And I see that as well. From a fundamental perspective, 0:19:06.800 --> 0:19:10.400 thirty five hundred is your median recession draw down draw 0:19:10.480 --> 0:19:13.160 down from peak. But if the market starts to think 0:19:13.160 --> 0:19:14.520 that the FETE is not going to be able to 0:19:14.520 --> 0:19:16.080 pull that off, and that we're going to price in 0:19:16.200 --> 0:19:19.960 something more challenging from an economic perspective, an average draw 0:19:20.000 --> 0:19:23.040 down was about thirty two percent from uh in a 0:19:23.119 --> 0:19:25.080 recession going back to the thirties, and that takes to 0:19:25.160 --> 0:19:27.120 that thirty two d mark. And if you go back 0:19:27.160 --> 0:19:30.200 to the pandemically, so we lost thirty fo peak to trough, 0:19:30.200 --> 0:19:32.320 and so I think that thirty two hundred mark. If 0:19:32.320 --> 0:19:34.639 thirty five doesn't hold, I think thirty two hundred is 0:19:34.640 --> 0:19:37.199 the next natural place to go. But it's hard for 0:19:37.240 --> 0:19:39.080 me to imagine we go too much lower than that, 0:19:39.160 --> 0:19:41.879 just because in the face of the pandemic, I mean, frankly, 0:19:41.920 --> 0:19:43.719 when life was on the line and there was just 0:19:43.920 --> 0:19:47.160 a massive uncertainty ahead of investors. That's only as bad 0:19:47.200 --> 0:19:49.960 as the market fell. So I think thirty two hundred 0:19:50.040 --> 0:19:52.120 is a good place to look if thirty five dred 0:19:52.160 --> 0:19:54.199 doesn't hold. But thirty five is proving to be a 0:19:54.240 --> 0:19:57.520 major battleground here for good reason. Glor How how hard 0:19:57.600 --> 0:19:59.680 is it to convince some of your clients to be 0:20:00.000 --> 0:20:03.800 optimistic to be constructive when there is this high likelihood 0:20:03.920 --> 0:20:08.280 of that psychological level on the index. I think that 0:20:08.560 --> 0:20:10.880 what's interesting is I talked to people about it from 0:20:10.880 --> 0:20:13.520 a positioning perspective, what is the next big thing that 0:20:13.560 --> 0:20:15.879 you need to do? And I show them my charts 0:20:15.880 --> 0:20:19.280 basically showing that defensives are at peak valuation relative to 0:20:19.320 --> 0:20:21.760 both cyclicals and secular growth. And I tell them, you know, 0:20:21.800 --> 0:20:25.399 I've been traveling around the country pretty NonStop since June, 0:20:25.440 --> 0:20:27.159 and I tell them, you know, everyone I talked to 0:20:27.320 --> 0:20:30.360 has plenty of defense. They've cleaned up their portfolios, they 0:20:30.400 --> 0:20:33.080 own as much staples or utilities as they're ever gonna own. 0:20:33.320 --> 0:20:36.000 The next thing to do is to go on offense. 0:20:36.359 --> 0:20:38.560 And that really resonates with a lot of people because 0:20:38.600 --> 0:20:41.160