1
00:00:02,529 --> 00:00:04,210
Speaker 1: Bloomberg Audio Studios.

2
00:00:04,690 --> 00:00:07,050
Speaker 2: Podcasts. Radio. News.

3
00:00:12,530 --> 00:00:16,670
Speaker 1: This is the Bloomberg Surveillance Podcast. Catch us live weekdays

4
00:00:16,730 --> 00:00:20,210
Speaker 1: at 7 a.m. Eastern on Apple CarPlay or Android Auto

5
00:00:20,290 --> 00:00:23,870
Speaker 1: with the Bloomberg Business App. Listen on demand wherever you

6
00:00:23,910 --> 00:00:26,970
Speaker 1: get your podcasts or watch us live on YouTube.

7
00:00:27,530 --> 00:00:30,810
Speaker 3: George Noble needs no introduction. He and a guy named

8
00:00:30,870 --> 00:00:37,010
Speaker 3: Mobius basically took Sir John Templeton's path-breaking value large cap

9
00:00:37,950 --> 00:00:41,229
Speaker 3: international investment and said, let's make this dance. What was

10
00:00:41,290 --> 00:00:44,890
Speaker 3: it like way back at Fidelity, like the first couple

11
00:00:44,970 --> 00:00:49,100
Speaker 3: months of Fidelity International? You had to justify your existence.

12
00:00:49,880 --> 00:00:55,700
Speaker 2: So my mentor, Peter Lynch, had insatiable curiosity and he

13
00:00:55,740 --> 00:00:59,590
Speaker 2: needed a foreign stock jock. So they came to me

14
00:01:00,170 --> 00:01:02,550
Speaker 2: in early 84 and they said, you ever been abroad? See,

15
00:01:02,560 --> 00:01:03,980
Speaker 2: I've been to Tijuana. I've been to Montreal.

16
00:01:04,000 --> 00:01:04,640
Speaker 3: What do you need to know?

17
00:01:05,100 --> 00:01:06,760
Speaker 2: So they sent me off to here, and they said,

18
00:01:07,060 --> 00:01:09,840
Speaker 2: get your glove, because end of the year of 84,

19
00:01:09,840 --> 00:01:12,270
Speaker 2: we're going to start our first foreign stock fund. I

20
00:01:12,280 --> 00:01:15,570
Speaker 2: was it. So, you know, but it's one of the

21
00:01:15,590 --> 00:01:19,030
Speaker 2: things with Ned Johnson. They gave you opportunity, threw you

22
00:01:19,050 --> 00:01:20,970
Speaker 2: into the fire, and let's see what you got.

23
00:01:21,250 --> 00:01:24,700
Speaker 3: The fire right now is AI. You are scathing. Our

24
00:01:24,780 --> 00:01:29,340
Speaker 3: listeners and viewers that own this stuff in their retirement plans—

25
00:01:30,300 --> 00:01:33,740
Speaker 3: at Fidelity, everywhere else as well, what should be their

26
00:01:34,140 --> 00:01:35,559
Speaker 3: action into the autumn?

27
00:01:37,090 --> 00:01:40,190
Speaker 2: Why am I not surprised by the question? We spoke

28
00:01:40,250 --> 00:01:42,050
Speaker 2: about it a couple of months ago when I was

29
00:01:42,090 --> 00:01:45,690
Speaker 2: last on. Things have gone from bad to worse. And

30
00:01:45,709 --> 00:01:47,520
Speaker 2: let's just step back for a second because there's so

31
00:01:47,530 --> 00:01:51,220
Speaker 2: much day-to-day volatility, this announcement, that release, et cetera, et cetera.

32
00:01:51,720 --> 00:01:55,910
Speaker 2: Most recently, all this stuff over the weekend. I mean, Tom, Paul,

33
00:01:55,930 --> 00:01:59,790
Speaker 2: think about this. You have a commodity that's deflating at

34
00:02:00,110 --> 00:02:06,490
Speaker 2: record speed with debt that's being built up at record speed.

35
00:02:06,650 --> 00:02:10,750
Speaker 2: What could possibly go wrong? So every day, every week,

36
00:02:10,770 --> 00:02:12,870
Speaker 2: there's another model that comes out, and then the Chinese

37
00:02:12,889 --> 00:02:16,010
Speaker 2: can do it for 95% off. And now there's noises

38
00:02:16,070 --> 00:02:18,970
Speaker 2: about Trump maybe is going to ban Chinese AI or whatever.

39
00:02:20,240 --> 00:02:23,119
Speaker 2: As we said last time, I think this is going

40
00:02:23,180 --> 00:02:28,300
Speaker 2: to be the biggest misallocation of capital in history. And

41
00:02:28,340 --> 00:02:32,079
Speaker 2: when people say, is it worse than. com, not as

42
00:02:32,100 --> 00:02:35,040
Speaker 2: bad as. com, history rhymes, it doesn't repeat. I read

43
00:02:35,060 --> 00:02:36,840
Speaker 2: something interesting the other day, not an original thought, but

44
00:02:36,860 --> 00:02:38,579
Speaker 2: I thought this fellow put it brilliantly. He said, you know,

45
00:02:39,740 --> 00:02:42,179
Speaker 2: this AI thing, it kind of reminds him, it's kind

46
00:02:42,310 --> 00:02:45,150
Speaker 2: of like if you took. com and merged it with

47
00:02:45,550 --> 00:02:48,250
Speaker 2: the great financial crisis, i.e. all the Ponzi finance schemes

48
00:02:48,330 --> 00:02:50,709
Speaker 2: of housing, it's kind of what you got. Oh, boy.

49
00:02:51,430 --> 00:02:54,829
Speaker 4: So what aren't you buying here, I guess, in terms

50
00:02:54,870 --> 00:02:59,930
Speaker 4: of the concept of AI. I think we're all kind

51
00:02:59,950 --> 00:03:01,310
Speaker 4: of in a state where we're trying to every day

52
00:03:01,350 --> 00:03:04,000
Speaker 4: learn a little bit more what this means, what it

53
00:03:04,080 --> 00:03:06,459
Speaker 4: actually is. To me, it just feels like what we

54
00:03:06,480 --> 00:03:08,140
Speaker 4: were talking about five years ago, which was big data.

55
00:03:08,600 --> 00:03:11,820
Speaker 4: And it's just another term. But I've been told, no, no, no.

56
00:03:11,880 --> 00:03:13,739
Speaker 4: This is a new way of computing. This is a

57
00:03:13,780 --> 00:03:18,660
Speaker 4: new way of processing information. And it requires a tremendous

58
00:03:18,680 --> 00:03:21,960
Speaker 4: amount of computing power, which requires a tremendous amount of capital.

59
00:03:22,040 --> 00:03:24,100
Speaker 4: And that's kind of what you've got to get your

60
00:03:24,120 --> 00:03:26,060
Speaker 4: head around. You're not buying that?

61
00:03:26,480 --> 00:03:26,660
Speaker 2: No.

62
00:03:27,600 --> 00:03:29,120
Speaker 3: We all use AI. I use AI.

63
00:03:29,639 --> 00:03:32,660
Speaker 2: People savagely attack me on Substack and X because, oh,

64
00:03:32,700 --> 00:03:33,320
Speaker 2: you used AI.

65
00:03:33,910 --> 00:03:34,850
Speaker 3: Yeah, I like AI.

66
00:03:34,870 --> 00:03:38,870
Speaker 2: It doesn't mean it's a good investment. It's like Peter

67
00:03:38,890 --> 00:03:42,310
Speaker 2: always talks about the difference between the product and the stock.

68
00:03:42,730 --> 00:03:46,960
Speaker 2: The question is, if you do reverse engineer the math

69
00:03:47,200 --> 00:03:49,280
Speaker 2: and you look at the trillions we're spending on CapEx

70
00:03:50,220 --> 00:03:53,410
Speaker 2: and just reverse engineer and say, okay, how much gross

71
00:03:53,450 --> 00:03:56,130
Speaker 2: profits do they need to make to justify that? And

72
00:03:56,170 --> 00:03:58,369
Speaker 2: in turn, what are the implied revenues that you need

73
00:03:58,390 --> 00:04:02,000
Speaker 2: to justify that? Liars figure, but figures don't lie. And

74
00:04:02,030 --> 00:04:05,180
Speaker 2: so the question is, is there going to be an

75
00:04:05,320 --> 00:04:07,600
Speaker 2: acceptable return on capital, all those trillions of dollars are

76
00:04:07,620 --> 00:04:12,290
Speaker 2: being spent, or It's just going to be $ 100 billion TAM,

77
00:04:12,750 --> 00:04:14,589
Speaker 2: and you're going to end up in a commodity business,

78
00:04:14,830 --> 00:04:16,830
Speaker 2: and there's going to be no margins. That's the issue.

79
00:04:17,220 --> 00:04:18,780
Speaker 2: One last point I want to say on this. Peter

80
00:04:18,800 --> 00:04:20,500
Speaker 2: Barrett is a bank credit analyst, made a really good

81
00:04:20,540 --> 00:04:23,060
Speaker 2: observation a couple months ago, likening it to dot com.

82
00:04:23,460 --> 00:04:25,400
Speaker 2: He said, you know, the folks in 99 who were

83
00:04:25,420 --> 00:04:29,660
Speaker 2: all bullish on the internet, they were right. Internet traffic

84
00:04:29,700 --> 00:04:32,200
Speaker 2: went up like 43% compound for the next 25 years.

85
00:04:32,220 --> 00:04:35,000
Speaker 2: It went up like 25 million percent. Didn't stop Nortel

86
00:04:35,020 --> 00:04:37,339
Speaker 2: from going bankrupt and Global Crossover from going bankrupt. These

87
00:04:37,360 --> 00:04:38,040
Speaker 2: are two different things.

88
00:04:38,480 --> 00:04:42,239
Speaker 3: George Noble with us, folks. Hugely visible on social. Can't

89
00:04:42,260 --> 00:04:45,539
Speaker 3: say enough about his careful writings on Twitter, on LinkedIn

90
00:04:45,580 --> 00:04:50,000
Speaker 3: as well. Of course, definitive forever at Fidelity International. I

91
00:04:50,060 --> 00:04:52,360
Speaker 3: love how Justin Baer treated you in the book. I mean,

92
00:04:52,400 --> 00:04:54,300
Speaker 3: I read the book cover to cover. Just enjoyed it.

93
00:04:54,839 --> 00:04:57,850
Speaker 3: They kept lockovers out of it. You know, I went through,

94
00:04:57,870 --> 00:05:00,610
Speaker 3: I did an index search for lockovers just to see

95
00:05:00,670 --> 00:05:02,789
Speaker 3: how many people were in it. Thank God they kept that.

96
00:05:03,029 --> 00:05:06,070
Speaker 3: Then the Boston Racquet Club, they kept out of it.

97
00:05:06,529 --> 00:05:10,130
Speaker 3: What's different now in the racket? Is it easier not

98
00:05:10,210 --> 00:05:14,109
Speaker 3: to lose money now because of the cacophony we're living

99
00:05:14,650 --> 00:05:18,210
Speaker 3: in terms of financial? Is it easier not to lose money?

100
00:05:19,110 --> 00:05:21,690
Speaker 2: I actually think it's easier to lose money. And the

101
00:05:21,750 --> 00:05:23,969
Speaker 2: reason is, and I'm breaking this here.

102
00:05:24,410 --> 00:05:24,770
Speaker 3: Breaking.

103
00:05:27,230 --> 00:05:29,810
Speaker 2: The term fiscal dominance has made the rounds the last

104
00:05:29,870 --> 00:05:32,730
Speaker 2: couple of years. If I hear that term one more time,

105
00:05:32,790 --> 00:05:34,210
Speaker 2: I'm going to put my fist through the wall. Well,

106
00:05:34,230 --> 00:05:37,770
Speaker 2: I'm coming out with a new phrase. It's called narrative dominance.

107
00:05:38,930 --> 00:05:43,300
Speaker 2: Narrative dominance. I love that. Do you remember the book

108
00:05:43,420 --> 00:05:45,020
Speaker 2: Alan Keyes wrote a couple of years ago, a few

109
00:05:45,040 --> 00:05:49,760
Speaker 2: years ago, The Post-Truth Society? We're in the post-truth stock market.

110
00:05:49,779 --> 00:05:52,860
Speaker 2: It doesn't matter what reality is. Right. They're trying to

111
00:05:52,900 --> 00:05:54,480
Speaker 2: tell you this is what you should believe. And we're

112
00:05:54,500 --> 00:05:56,659
Speaker 2: going to put in enough liquidity, spike the drinks enough.

113
00:05:56,720 --> 00:05:59,130
Speaker 2: So what are you complaining about, Tom? You're looking at

114
00:05:59,170 --> 00:05:59,970
Speaker 2: these numbers and everything.

115
00:06:00,270 --> 00:06:03,550
Speaker 3: Can you parse between mag seven or you treat them

116
00:06:03,589 --> 00:06:04,190
Speaker 3: all the same?

117
00:06:04,510 --> 00:06:07,430
Speaker 2: They're all a little bit different, but so for instance, uh,

118
00:06:08,560 --> 00:06:10,560
Speaker 2: no surprise. We've talked about this before. The electric car

119
00:06:10,580 --> 00:06:13,659
Speaker 2: company that shall not be named uniquely stands out for

120
00:06:13,700 --> 00:06:15,900
Speaker 2: being extraordinarily unattractive.

121
00:06:16,240 --> 00:06:16,560
Speaker 3: All right.

122
00:06:16,860 --> 00:06:22,010
Speaker 2: Um, I've never seen a short at such scale, a

123
00:06:22,050 --> 00:06:25,089
Speaker 2: trillion five. And then with its cousin, SpaceX, which we

124
00:06:25,110 --> 00:06:28,430
Speaker 2: spoke about last time as well. SpaceX is not Mach 7,

125
00:06:28,410 --> 00:06:31,589
Speaker 2: but those are just unbelievable companies. They're just atrocious. And

126
00:06:31,610 --> 00:06:35,240
Speaker 2: then at the other extreme, you have Google, fine, and

127
00:06:35,260 --> 00:06:38,320
Speaker 2: then everything in between. So again, it's a market of stocks.

128
00:06:38,620 --> 00:06:40,719
Speaker 2: Know what you own. Peter Lynch, please call your office.

129
00:06:41,740 --> 00:06:45,480
Speaker 4: So how concerned are you about the overall economy if

130
00:06:46,180 --> 00:06:52,159
Speaker 4: Because so much of economic growth, underlying economic growth, is AI-related.

131
00:06:52,860 --> 00:06:56,260
Speaker 4: You pull that out, what does that mean?

132
00:06:57,000 --> 00:06:59,650
Speaker 2: Again, the economy's not the market. The market's not the economy.

133
00:06:59,930 --> 00:07:02,950
Speaker 2: I am concerned. My call has not been for recession.

134
00:07:02,970 --> 00:07:07,670
Speaker 2: Ours has been for rotation, not recession. However, as we've

135
00:07:07,830 --> 00:07:15,330
Speaker 2: been discussing, this Ponzi finance, circular financing with– It's underwriting AI.

136
00:07:15,710 --> 00:07:18,370
Speaker 2: When the market says no mas, when you start looking

137
00:07:18,390 --> 00:07:23,460
Speaker 2: at the CDS on Oracle or whatever, when the market

138
00:07:23,480 --> 00:07:26,340
Speaker 2: says game over, to your point, you're asking the right question.

139
00:07:27,040 --> 00:07:29,900
Speaker 2: And I think we're looking at, I'm focusing on the market,

140
00:07:29,960 --> 00:07:32,380
Speaker 2: not on the economy so much. But when you're spending

141
00:07:32,430 --> 00:07:35,030
Speaker 2: trillions of dollars and running a deficit of 7% of GDP,

142
00:07:35,050 --> 00:07:37,890
Speaker 2: how are you going to get a recession? Problem is,

143
00:07:38,480 --> 00:07:41,540
Speaker 2: you're looking at a global increase in cost of capital.

144
00:07:41,820 --> 00:07:44,200
Speaker 3: And a nominal GDP or a character of it maybe

145
00:07:44,240 --> 00:07:47,750
Speaker 3: we've never seen before. So you mentioned CDS, credit default swap,

146
00:07:47,810 --> 00:07:50,530
Speaker 3: and there's a debate, folks, about its efficacy and that.

147
00:07:50,830 --> 00:07:53,130
Speaker 3: The blunt instrument is, I'm looking on the screen at

148
00:07:53,150 --> 00:07:56,310
Speaker 3: the yield space, it's price down, yield up. How does

149
00:07:56,350 --> 00:07:59,150
Speaker 3: that play out? Is it play out where, like in

150
00:07:59,250 --> 00:08:04,120
Speaker 3: August of 1998, it just breaks because of leverage or whatever?

151
00:08:04,360 --> 00:08:06,800
Speaker 3: Or do you see it as just sort of ebbing

152
00:08:06,920 --> 00:08:08,720
Speaker 3: into some form of cataclysm?

153
00:08:08,740 --> 00:08:12,380
Speaker 2: Well, what's really interesting here, much has been said about

154
00:08:12,400 --> 00:08:15,540
Speaker 2: the passive bid and indexation, and much has been said

155
00:08:15,600 --> 00:08:19,740
Speaker 2: about the huge deficit spending. And so if you think

156
00:08:19,760 --> 00:08:23,020
Speaker 2: about past cycles, Tom, what will bring on the contraction

157
00:08:23,220 --> 00:08:26,950
Speaker 2: is if stocks go down, Corporate managers cut back. And

158
00:08:26,990 --> 00:08:29,170
Speaker 2: that gives you the economic impulse to have a slowdown,

159
00:08:29,210 --> 00:08:33,690
Speaker 2: if not recession. With stock prices, though, continuing to stay

160
00:08:33,750 --> 00:08:38,290
Speaker 2: up there, that sort of information content from the pricing

161
00:08:38,309 --> 00:08:40,850
Speaker 2: was missing. And they keep driving the economy with more

162
00:08:40,890 --> 00:08:43,330
Speaker 2: fiscal spending. So to your question, everyone wants to know

163
00:08:43,370 --> 00:08:46,290
Speaker 2: what's the magic level of rates that is going to

164
00:08:46,350 --> 00:08:49,390
Speaker 2: cause this thing to topple over. As you know, I've

165
00:08:49,410 --> 00:08:51,880
Speaker 2: been pretty outspoken about Scott Besson and what the Fed's

166
00:08:51,910 --> 00:08:55,580
Speaker 2: trying to do. And on August 19th, when he said, oh,

167
00:08:55,600 --> 00:08:57,540
Speaker 2: we're buying bonds, and we're going from $ 2 billion to

168
00:08:57,540 --> 00:09:00,160
Speaker 2: $ 4 billion or $ 4 billion, whatever the number was, I said, no,

169
00:09:00,280 --> 00:09:03,420
Speaker 2: this is a sign to short bonds, not buy bonds.

170
00:09:04,040 --> 00:09:07,520
Speaker 2: Scott Besson is the modern-day equivalent of Norman Lamont. This

171
00:09:07,679 --> 00:09:14,750
Speaker 2: is the UK, 1991. I find it really rich that Mr. Besson, who,

172
00:09:15,290 --> 00:09:17,949
Speaker 2: by the way, is wrongly credited for having been involved

173
00:09:18,070 --> 00:09:20,790
Speaker 2: in the Soros-Druckenmiller takedown of the Bank of England, had

174
00:09:20,850 --> 00:09:21,880
Speaker 2: nothing to do with it at all.

175
00:09:22,980 --> 00:09:23,740
Speaker 5: He basically is.

176
00:09:23,700 --> 00:09:25,920
Speaker 2: Norman Lamont now. And by that, I mean what got

177
00:09:25,940 --> 00:09:27,860
Speaker 2: the Bank of England in trouble is when you defend

178
00:09:28,679 --> 00:09:31,820
Speaker 2: an artificial price that's not justified by the fundamentals, the

179
00:09:31,840 --> 00:09:34,390
Speaker 2: market attacks you. And that's what he's trying to do

180
00:09:34,400 --> 00:09:36,250
Speaker 2: with our bond market right now. As a matter of fact,

181
00:09:36,270 --> 00:09:38,630
Speaker 2: with the whole AI complex, I would say, they're trying

182
00:09:38,650 --> 00:09:41,670
Speaker 2: to prop something up which has no economic justification. It

183
00:09:41,710 --> 00:09:44,410
Speaker 2: goes back to our last meeting where people said, why

184
00:09:44,429 --> 00:09:45,929
Speaker 2: don't you like AI? I said, show me the cash flows.

185
00:09:45,950 --> 00:09:48,949
Speaker 2: You can't. And so I think the market's going to

186
00:09:48,970 --> 00:09:51,650
Speaker 2: continue to attack the bonds. I think yields are going

187
00:09:51,670 --> 00:09:53,700
Speaker 2: to continue to go up. I also think the market's

188
00:09:53,740 --> 00:09:57,349
Speaker 2: going to attack AI, and I expect the whole edifice

189
00:09:57,750 --> 00:09:58,370
Speaker 2: to collapse.

190
00:09:59,390 --> 00:09:59,930
Speaker 5: Well, that's me.

191
00:10:00,360 --> 00:10:01,920
Speaker 4: A lot of the S & P earnings that we've

192
00:10:01,960 --> 00:10:04,660
Speaker 4: seen year to date this year, I mean, 20 handle,

193
00:10:04,660 --> 00:10:08,420
Speaker 4: 30 handle in the second quarter. I'm not sure the

194
00:10:08,440 --> 00:10:11,800
Speaker 4: exact math, but what I'm hearing from strategists is at

195
00:10:11,840 --> 00:10:18,880
Speaker 4: least half of that growth was AI spending-related, margin-related So

196
00:10:18,920 --> 00:10:21,100
Speaker 4: that doesn't bode well for the equity markets at all.

197
00:10:21,820 --> 00:10:26,050
Speaker 2: I don't think so. I agree with you. Markets are

198
00:10:26,150 --> 00:10:30,490
Speaker 2: discounting mechanisms. Wayne Gretzky, please call your office. Let's go

199
00:10:30,510 --> 00:10:31,910
Speaker 2: to where the puck is going, not where it is

200
00:10:31,970 --> 00:10:35,290
Speaker 2: right now. And then the other thing I would say

201
00:10:35,350 --> 00:10:36,980
Speaker 2: in respect to where we are on there in the

202
00:10:37,040 --> 00:10:40,700
Speaker 2: earnings clock right now, I find it remarkable that the

203
00:10:40,760 --> 00:10:43,140
Speaker 2: market has held up as well as it has given

204
00:10:43,200 --> 00:10:45,440
Speaker 2: the surge in bond yields and surge in oil prices.

205
00:10:45,480 --> 00:10:48,050
Speaker 2: If If Tom had come to us, Paul, two months

206
00:10:48,110 --> 00:10:50,070
Speaker 2: ago and said, you know, I have a dream that

207
00:10:50,190 --> 00:10:51,670
Speaker 2: one day bond yields are going to be at five

208
00:10:51,730 --> 00:10:53,990
Speaker 2: and crude's going to be at wherever, what's the equity

209
00:10:54,030 --> 00:10:55,390
Speaker 2: market going to do? We'd say, no, it's going to

210
00:10:55,410 --> 00:10:55,890
Speaker 2: be down a lot.

211
00:10:57,050 --> 00:11:01,650
Speaker 3: George, one final question here, which is people are comfortable.

212
00:11:02,130 --> 00:11:06,000
Speaker 3: And I would suggest every conversation buried in paragraph six

213
00:11:06,460 --> 00:11:09,580
Speaker 3: is they're comfortable because they have, Phil Correa at Pioneer

214
00:11:09,620 --> 00:11:12,819
Speaker 3: was brilliant on that. The inflation, the bright lights of

215
00:11:12,880 --> 00:11:17,170
Speaker 3: inflation helping out and it's into this High nominal GDP.

216
00:11:17,570 --> 00:11:21,270
Speaker 3: Is Mr. Warsh going to depress nominal GDP? And will

217
00:11:21,290 --> 00:11:24,880
Speaker 3: that be the catalyst for your just concerns?

218
00:11:25,820 --> 00:11:27,820
Speaker 2: My crystal ball in Fed watching is no better than

219
00:11:27,840 --> 00:11:29,520
Speaker 2: anybody else's. As a matter of fact, I don't spend

220
00:11:29,540 --> 00:11:30,620
Speaker 2: much time on it at all. I think it's a

221
00:11:30,620 --> 00:11:32,180
Speaker 2: waste of time because I'm not good at it and

222
00:11:32,200 --> 00:11:34,700
Speaker 2: I don't know anybody who really is. That being said,

223
00:11:34,720 --> 00:11:38,300
Speaker 2: I think Warsh is in a possible position. you know,

224
00:11:38,320 --> 00:11:40,160
Speaker 2: if he says, gee, this is, I love these terms

225
00:11:40,179 --> 00:11:42,020
Speaker 2: that come up, but this is a dovish hike or

226
00:11:42,440 --> 00:11:44,340
Speaker 2: a bullish pause or whatever it is. If he comes

227
00:11:44,380 --> 00:11:47,250
Speaker 2: up with a dovish hike, Mr. Mark's going to say, oh,

228
00:11:47,400 --> 00:11:49,550
Speaker 2: so you're done? So I think if he comes up

229
00:11:49,590 --> 00:11:53,150
Speaker 2: with a dovish hike, rates are going up. If he says, no,

230
00:11:53,170 --> 00:11:54,609
Speaker 2: we're going to do two or three rate hikes if

231
00:11:54,630 --> 00:11:56,989
Speaker 2: the market's discounting, they're not going to like that. So

232
00:11:57,030 --> 00:11:59,250
Speaker 2: I think he's in a thankless position. And then coming

233
00:11:59,290 --> 00:12:01,230
Speaker 2: back to Mr. Best and when I've been so outspoken

234
00:12:01,250 --> 00:12:04,059
Speaker 2: and critical of Scott, I said, what should he do?

235
00:12:04,760 --> 00:12:05,650
Speaker 2: What advice would you give him?

236
00:12:07,100 --> 00:12:11,700
Speaker 3: Resign. George Noble, thank you so much. Managing partner of

237
00:12:11,760 --> 00:12:15,060
Speaker 3: Noble Capital Advisors with a small affinity to Mr. Lynch

238
00:12:15,100 --> 00:12:20,050
Speaker 3: and Fidelity from ages ago. Stay with us.

239
00:12:20,350 --> 00:12:23,590
Speaker 6: More from Bloomberg Surveillance coming up after this.

240
00:12:30,870 --> 00:12:34,449
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

241
00:12:34,530 --> 00:12:37,710
Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on

242
00:12:37,809 --> 00:12:41,050
Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app

243
00:12:41,290 --> 00:12:42,970
Speaker 1: or watch us live on YouTube.

244
00:12:43,230 --> 00:12:46,380
Speaker 3: It's across America and worldwide for Global Wall Street. Dominic

245
00:12:46,410 --> 00:12:51,340
Speaker 3: Constam joins us. Parchment, I should say, out of Cambridge

246
00:12:51,460 --> 00:12:54,490
Speaker 3: and Oxford. Dr. Constam, thank you so much for joining us.

247
00:12:55,020 --> 00:12:58,829
Speaker 3: You say we could have three rate increases. Why can't

248
00:12:58,910 --> 00:13:01,550
Speaker 3: Wurst just say one and done? We have to look

249
00:13:01,630 --> 00:13:02,320
Speaker 3: for more data.

250
00:13:03,750 --> 00:13:07,490
Speaker 7: Well, basically, it appears Walsh has sort of shifted the

251
00:13:07,550 --> 00:13:10,250
Speaker 7: Fed's gears in the terms of how they're looking at

252
00:13:10,290 --> 00:13:15,689
Speaker 7: inflation and highlighting the view that underlying inflation is higher

253
00:13:16,290 --> 00:13:18,229
Speaker 7: than they.

254
00:13:17,450 --> 00:13:18,069
Speaker 5: Want it to be.

255
00:13:18,429 --> 00:13:21,290
Speaker 7: And prior to Walsh, Powell would have had a view

256
00:13:21,350 --> 00:13:23,870
Speaker 7: that underlying inflation was actually relatively low and was just

257
00:13:23,890 --> 00:13:25,970
Speaker 7: dealing with a lot of shocks that are going through

258
00:13:25,990 --> 00:13:28,630
Speaker 7: the system. So, Walsh has a different view on inflation,

259
00:13:28,690 --> 00:13:31,130
Speaker 7: it would appear, from Jackson Hole. In your beautiful note, folks,

260
00:13:31,210 --> 00:13:34,620
Speaker 7: get the constant parchment. Get it from Mizzou. We are

261
00:13:34,660 --> 00:13:36,560
Speaker 7: not going to give you that. We protect the copyright

262
00:13:37,020 --> 00:13:40,220
Speaker 7: of all of our guests. Your distinction here is Warsh

263
00:13:40,280 --> 00:13:44,569
Speaker 7: is conventional with a vector or trend analysis. He's committed

264
00:13:44,610 --> 00:13:48,150
Speaker 7: to a higher inflation, where Powell and now the proxy,

265
00:13:48,190 --> 00:13:52,410
Speaker 7: the game theorist from Washington State, Waller, is saying, no,

266
00:13:52,510 --> 00:13:53,650
Speaker 7: this is a shock moment.

267
00:13:53,929 --> 00:13:58,100
Speaker 3: Why can't we be patient? given the war shocks and

268
00:13:58,140 --> 00:13:58,939
Speaker 3: the rest out there?

269
00:13:59,360 --> 00:14:01,500
Speaker 7: Well, I mean, I think the Powell Fed, you know,

270
00:14:01,520 --> 00:14:03,570
Speaker 7: did have the view that you could be patient. But

271
00:14:03,590 --> 00:14:06,130
Speaker 7: the trouble with patience is if it goes on sort

272
00:14:06,170 --> 00:14:08,770
Speaker 7: of too long and you keep waiting, waiting, then basically

273
00:14:08,790 --> 00:14:11,969
Speaker 7: those shocks get embedded into the trend is kind of

274
00:14:11,990 --> 00:14:14,390
Speaker 7: the issue. And I think Walsh is sort of highlighting

275
00:14:14,429 --> 00:14:17,790
Speaker 7: that he feels that sort of has happened already. And

276
00:14:18,100 --> 00:14:20,680
Speaker 7: so we're taking them at face value. And the idea is, yes,

277
00:14:20,720 --> 00:14:23,060
Speaker 7: I mean, this isn't like one or two insurance hikes.

278
00:14:23,080 --> 00:14:26,180
Speaker 7: This is a series of hikes. Three is a reasonable

279
00:14:26,200 --> 00:14:28,920
Speaker 7: could be four. But the market will certain price for

280
00:14:29,370 --> 00:14:32,090
Speaker 7: what I would call a proper tightening cycle. And that's

281
00:14:32,130 --> 00:14:33,270
Speaker 7: what we're in the process of doing.

282
00:14:33,290 --> 00:14:38,090
Speaker 4: Dominic, how important, Dominic, is it tomorrow for the Fed

283
00:14:38,170 --> 00:14:43,160
Speaker 4: to show the market a unified kind of stance here?

284
00:14:43,750 --> 00:14:47,450
Speaker 7: I think it's pretty important. I think Walsh will bring

285
00:14:47,510 --> 00:14:50,950
Speaker 7: along the kind of Powell Fed sort of holdout, so

286
00:14:50,970 --> 00:14:52,710
Speaker 7: to speak. So, I think it will be a pretty

287
00:14:52,730 --> 00:14:58,170
Speaker 7: much unanimous move, assuming they do hike. It would then

288
00:14:58,270 --> 00:15:01,940
Speaker 7: signal some sort of commitment to bring down inflation in

289
00:15:01,960 --> 00:15:03,800
Speaker 7: a fairly timely way.

290
00:15:04,080 --> 00:15:05,400
Speaker 5: And I would think.

291
00:15:05,560 --> 00:15:07,200
Speaker 7: They should just basically get it over and done with,

292
00:15:07,500 --> 00:15:10,620
Speaker 7: I mean, people say Walsh is quite political. Well, you know,

293
00:15:10,640 --> 00:15:13,600
Speaker 7: you've got the midterms, which obviously complicates, you know, an

294
00:15:13,660 --> 00:15:16,360
Speaker 7: October hike, for example. But by the end of the day,

295
00:15:16,540 --> 00:15:17,960
Speaker 7: just get it all over and done with by early

296
00:15:18,000 --> 00:15:20,900
Speaker 7: next year and slow the economy. And then you can

297
00:15:20,940 --> 00:15:25,500
Speaker 7: set yourselves up for some reacceleration and growth in 2028.

298
00:15:25,500 --> 00:15:27,640
Speaker 7: That's the way I would think the politics should work.

299
00:15:28,460 --> 00:15:31,860
Speaker 4: Speaking of the politics, Treasury Secretary Besson came out several

300
00:15:31,880 --> 00:15:33,350
Speaker 4: weeks ago and said, I want to get long term

301
00:15:33,450 --> 00:15:36,990
Speaker 4: rates down. That hasn't really happened, has it? What's going

302
00:15:37,050 --> 00:15:37,489
Speaker 4: on there?

303
00:15:37,870 --> 00:15:39,800
Speaker 5: Well, I mean, a couple of things.

304
00:15:39,820 --> 00:15:43,820
Speaker 7: It's obviously, I mean, the idea had been, had Walsh

305
00:15:44,120 --> 00:15:47,400
Speaker 7: not been so apparently committed to raising rates, then the

306
00:15:47,440 --> 00:15:50,119
Speaker 7: long end was obviously going to have trouble stabilizing in

307
00:15:50,160 --> 00:15:53,410
Speaker 7: this elevated inflation world. So, the idea for Besson was

308
00:15:53,450 --> 00:15:56,430
Speaker 7: to basically try and sort of lean against the moves

309
00:15:56,450 --> 00:15:59,010
Speaker 7: higher in rates by doing something. He could cut supply.

310
00:15:59,270 --> 00:16:01,850
Speaker 7: He could increase buybacks. He obviously signaled this sort of

311
00:16:02,050 --> 00:16:06,120
Speaker 7: potentially aggressive buyback strategy. The problem, if you like, was

312
00:16:06,140 --> 00:16:11,400
Speaker 7: that although this number was quite large, almost $ 6.

313
00:16:09,440 --> 00:16:12,320
Speaker 5: Billion in the last buyback. They didn't really buy through

314
00:16:12,360 --> 00:16:12,780
Speaker 5: the market.

315
00:16:12,800 --> 00:16:13,400
Speaker 3: They didn't buy.

316
00:16:14,100 --> 00:16:15,620
Speaker 5: They still bought bonds at a discount.

317
00:16:16,120 --> 00:16:18,520
Speaker 7: So if you want to really stabilize rates, we'd argue

318
00:16:18,760 --> 00:16:20,400
Speaker 7: they'd probably have to be a bit more aggressive in

319
00:16:20,420 --> 00:16:23,530
Speaker 7: their buybacks and basically buy through the market, buy prices

320
00:16:23,610 --> 00:16:24,810
Speaker 7: higher than the mid, basically.

321
00:16:25,010 --> 00:16:25,650
Speaker 5: And they didn't do that.

322
00:16:25,830 --> 00:16:28,310
Speaker 3: Across America, the way you choose to listen to us.

323
00:16:28,330 --> 00:16:32,790
Speaker 3: Good morning, 92.9 FM, Boston, 99.1 at Nathan Hager Radio

324
00:16:32,910 --> 00:16:36,630
Speaker 3: in Washington. Good morning in a beautiful New York, Bloomberg 11,

325
00:16:36,630 --> 00:16:40,750
Speaker 3: through our dominant constant within with Rizuo. George Noble will

326
00:16:40,770 --> 00:16:45,670
Speaker 3: join us here at some point this morning. As well. Dominic,

327
00:16:45,770 --> 00:16:48,390
Speaker 3: I want to pile into one thing you said there

328
00:16:48,550 --> 00:16:51,470
Speaker 3: about a good economy and that we have a nominal

329
00:16:51,550 --> 00:16:55,650
Speaker 3: GDP of a banana republic. Now, there's a set of solutions.

330
00:16:55,670 --> 00:16:57,660
Speaker 3: I'm going to call it a four box outcome, whatever.

331
00:16:58,060 --> 00:17:01,520
Speaker 3: There's a set of solutions to how you bring nominal down.

332
00:17:02,020 --> 00:17:05,700
Speaker 3: What is the most efficacious way for the Fed to

333
00:17:05,800 --> 00:17:11,139
Speaker 3: assist to bring nominal GDP down to something, quote unquote, normal?

334
00:17:11,670 --> 00:17:14,090
Speaker 7: Well, a lot of the nominal GDP growth is oil.

335
00:17:14,210 --> 00:17:16,859
Speaker 7: I mean, a lot of the contribution, for example, was

336
00:17:16,900 --> 00:17:20,200
Speaker 7: very strong state and local government spending, and that was oil.

337
00:17:20,260 --> 00:17:24,179
Speaker 7: I spoke to the BA about that, and they're basically

338
00:17:24,240 --> 00:17:25,980
Speaker 7: deflators they use that really drive that up.

339
00:17:26,180 --> 00:17:28,400
Speaker 5: So I do think it's mainly an oil issue.

340
00:17:29,300 --> 00:17:31,680
Speaker 7: Ironically, it kind of is vaguely helpful in terms of

341
00:17:31,720 --> 00:17:35,750
Speaker 7: debt GDP to have an elevated nominal GDP. The real concern,

342
00:17:35,770 --> 00:17:38,570
Speaker 7: I think, is the real GDP, and that if the

343
00:17:38,609 --> 00:17:41,330
Speaker 7: Fed's hiking to slow the economy and bring inflation down,

344
00:17:42,160 --> 00:17:45,080
Speaker 7: The consumer is kind of teetering a little bit here

345
00:17:45,900 --> 00:17:48,710
Speaker 7: because they've cut their savings rate so much to accommodate

346
00:17:48,750 --> 00:17:50,470
Speaker 7: the oil price rise.

347
00:17:50,490 --> 00:17:51,450
Speaker 5: They can't really cut it anymore.

348
00:17:51,510 --> 00:17:53,710
Speaker 3: So where are you? Ferroli over at J.P.

349
00:17:53,730 --> 00:17:55,090
Speaker 4: Morgan. He's from Chicago.

350
00:17:55,390 --> 00:18:00,320
Speaker 3: That's an economic school out there. It's West Dominic. Ferroli's

351
00:18:00,380 --> 00:18:04,780
Speaker 3: at 2.75%. Others are looking for a buoyant consumer. How

352
00:18:04,920 --> 00:18:08,960
Speaker 3: quickly and in what level magnitude does a consumer crash

353
00:18:09,280 --> 00:18:10,200
Speaker 3: given the higher rates?

354
00:18:10,530 --> 00:18:13,890
Speaker 7: Well, I think a consumer necessarily needs to slow down significantly.

355
00:18:14,609 --> 00:18:17,320
Speaker 7: And 100 base point tightening, for example, in our estimates

356
00:18:17,359 --> 00:18:19,780
Speaker 7: would definitely do that. The problem is the savings rate

357
00:18:19,800 --> 00:18:23,140
Speaker 7: started at 4.4% this year. It's currently below 3%. It's

358
00:18:23,180 --> 00:18:26,070
Speaker 7: never really been this low on a sustained basis. And

359
00:18:27,150 --> 00:18:30,130
Speaker 7: when you look at the measures of underlying inflation, there's

360
00:18:30,190 --> 00:18:33,629
Speaker 7: actually a negative demand price shock going through the system

361
00:18:33,650 --> 00:18:36,840
Speaker 7: at the moment. Those 200 components that Walsh highlights in

362
00:18:36,859 --> 00:18:39,619
Speaker 7: the PCE, a bunch of them are showing basically below

363
00:18:39,660 --> 00:18:43,380
Speaker 7: trend pricing and below trend demand. That's a negative demand shock.

364
00:18:43,400 --> 00:18:44,120
Speaker 5: Then why are.

365
00:18:44,350 --> 00:18:48,750
Speaker 3: We raising rates per true matters of that life? And Dr.

366
00:18:48,830 --> 00:18:50,290
Speaker 3: Constance at Mizzou.

367
00:18:50,590 --> 00:18:55,240
Speaker 7: Because we're impatient to wait through supply shocks. And we're

368
00:18:55,260 --> 00:18:57,919
Speaker 7: going to work off this elevated underlying, even if that

369
00:18:57,960 --> 00:19:00,219
Speaker 7: comes at the cause of demand. The real irony is

370
00:19:00,240 --> 00:19:03,400
Speaker 7: that Walsh sort of says the dual mandate is in conflict. Well,

371
00:19:03,740 --> 00:19:06,030
Speaker 7: I'm afraid I think the dual mandate is in conflict.

372
00:19:06,050 --> 00:19:08,070
Speaker 7: It's certainly in conflict in the short term. If you

373
00:19:08,090 --> 00:19:09,950
Speaker 7: want to bring down underlying inflation, you're going to see

374
00:19:10,210 --> 00:19:12,070
Speaker 7: that negative demand shock get worse. You're going to see

375
00:19:12,109 --> 00:19:14,490
Speaker 7: a slowing economy. And that's why risk assets are kind

376
00:19:14,530 --> 00:19:16,200
Speaker 7: of on the back foot of Until you sort of

377
00:19:16,220 --> 00:19:19,260
Speaker 7: get through these next few months.

378
00:19:20,800 --> 00:19:23,860
Speaker 4: If he comes out and suggests more one and done tomorrow,

379
00:19:24,619 --> 00:19:25,199
Speaker 4: what does that do?

380
00:19:25,840 --> 00:19:28,760
Speaker 7: Well, I think it takes 10-year notes on the way

381
00:19:29,060 --> 00:19:31,239
Speaker 7: to 5.25% and 5.5%. I think the market would take

382
00:19:31,290 --> 00:19:33,390
Speaker 7: it very badly. I think they need to come out unanimous.

383
00:19:33,410 --> 00:19:35,930
Speaker 7: They need to either basically say nothing about how much

384
00:19:35,990 --> 00:19:38,510
Speaker 7: further they're going to go, or they could be clear

385
00:19:38,530 --> 00:19:40,950
Speaker 7: and say that this is a tightening process, and they're

386
00:19:40,970 --> 00:19:43,170
Speaker 7: going to basically see it through until inflation comes down.

387
00:19:43,430 --> 00:19:45,290
Speaker 7: That's kind of what the market wants, to stabilize the

388
00:19:45,310 --> 00:19:46,950
Speaker 7: back end. And if you don't do that, then they're

389
00:19:46,970 --> 00:19:48,340
Speaker 7: going to have a whole set of problems. And go

390
00:19:48,380 --> 00:19:50,300
Speaker 7: back to Besson. What does he want to do about it?

391
00:19:50,940 --> 00:19:55,159
Speaker 4: We've got a lot of Chair, Warsh has set up

392
00:19:55,200 --> 00:19:57,859
Speaker 4: a lot of committees and commissions and looking at this

393
00:19:57,920 --> 00:19:59,959
Speaker 4: and looking at that. Do you expect any color from

394
00:19:59,980 --> 00:20:01,040
Speaker 4: that tomorrow?

395
00:20:01,760 --> 00:20:03,909
Speaker 5: Well, I mean, OK, so in a funny way.

396
00:20:04,330 --> 00:20:08,129
Speaker 7: So the reason why these committees, if you like, task

397
00:20:08,170 --> 00:20:10,810
Speaker 7: forces were set up, we thought initially, was to buy

398
00:20:10,830 --> 00:20:13,040
Speaker 7: the Fed time to get over the midterm elections so

399
00:20:13,060 --> 00:20:15,859
Speaker 7: they didn't have to make difficult decisions. That seems to

400
00:20:15,900 --> 00:20:18,500
Speaker 7: have sort of, you know, fallen foul basically of the market.

401
00:20:18,520 --> 00:20:19,500
Speaker 5: So that's why you've got these.

402
00:20:19,780 --> 00:20:22,080
Speaker 7: Now, it's just possible. I mean, what is the chances

403
00:20:22,100 --> 00:20:23,899
Speaker 7: that the Fed doesn't raise rates tomorrow? I mean, the

404
00:20:23,940 --> 00:20:26,450
Speaker 7: market obviously thinks there's at least 90% they will. There's

405
00:20:26,490 --> 00:20:29,010
Speaker 7: a small chance they don't. If they don't, then one

406
00:20:29,050 --> 00:20:31,609
Speaker 7: of the reasons why may be because he defers to

407
00:20:31,650 --> 00:20:34,429
Speaker 7: the committees. And that would be where they'd come in. Otherwise,

408
00:20:34,490 --> 00:20:35,850
Speaker 7: I don't think they should really feature.

409
00:20:36,390 --> 00:20:38,510
Speaker 3: I just want to point out, I thought Constant would

410
00:20:38,550 --> 00:20:41,420
Speaker 3: be selected for a task force. Yes. But I think

411
00:20:41,460 --> 00:20:42,780
Speaker 3: he took Ira Jersey.

412
00:20:43,460 --> 00:20:45,699
Speaker 5: It was me or Ira.

413
00:20:45,940 --> 00:20:49,340
Speaker 3: The two of you from Credit Suisse years ago. Bring

414
00:20:49,380 --> 00:20:56,399
Speaker 3: this internationally. I'm looking at German-French spreads jaw-dropping. The 10-year

415
00:20:56,480 --> 00:21:00,970
Speaker 3: Japanese yield well outside two standard deviation move. I got

416
00:21:01,030 --> 00:21:06,980
Speaker 3: the idiosyncratic peso, Philippine peso at 63%. What's the contagion

417
00:21:07,030 --> 00:21:10,109
Speaker 3: effect of everything happening at the Eccles building?

418
00:21:10,650 --> 00:21:13,129
Speaker 7: Well, I think in general, there's this sort of people

419
00:21:13,170 --> 00:21:16,350
Speaker 7: don't like government debt. You know, the debt ratios have

420
00:21:16,410 --> 00:21:19,370
Speaker 7: all sort of deteriorated ever since COVID. There has never

421
00:21:19,390 --> 00:21:22,020
Speaker 7: been any proper fiscal tightening. So I think term premium

422
00:21:22,100 --> 00:21:24,720
Speaker 7: are high everywhere. And there's this pressure, if you like,

423
00:21:25,040 --> 00:21:29,460
Speaker 7: on central banks to kind of tighten policy and bring

424
00:21:29,600 --> 00:21:33,380
Speaker 7: and stabilize those yields since the government's sectors aren't going

425
00:21:33,420 --> 00:21:35,200
Speaker 7: to do it. They're not going to tighten fiscal policy enough.

426
00:21:35,900 --> 00:21:38,510
Speaker 7: And so that's basically what the US is not alone

427
00:21:38,570 --> 00:21:42,170
Speaker 7: in this. And that's why there's pricing, tightening pricing everywhere.

428
00:21:42,310 --> 00:21:43,910
Speaker 7: The only thing for the US is they've probably been

429
00:21:43,930 --> 00:21:46,830
Speaker 7: a bit behind the curve in terms of other central banks.

430
00:21:46,850 --> 00:21:48,670
Speaker 7: And obviously, the ECB has been a bit more forceful.

431
00:21:48,910 --> 00:21:50,949
Speaker 7: The UK is finally catching up in terms of pricing.

432
00:21:51,150 --> 00:21:53,389
Speaker 7: The BOJ has been a bit behind as well. But

433
00:21:53,410 --> 00:21:55,850
Speaker 7: they're going to be tightening as well quite aggressively in

434
00:21:55,869 --> 00:21:56,129
Speaker 7: the end.

435
00:21:56,450 --> 00:22:01,260
Speaker 4: So what do you think is the message really should

436
00:22:01,300 --> 00:22:04,710
Speaker 4: be from Chairman Warsh tomorrow, if he really wants to

437
00:22:04,730 --> 00:22:07,510
Speaker 4: go out and set a tone here, what do you

438
00:22:07,550 --> 00:22:09,730
Speaker 4: think that he should say, do you think?

439
00:22:10,290 --> 00:22:13,650
Speaker 7: Well, I think at this stage, he's got to basically

440
00:22:13,730 --> 00:22:15,129
Speaker 7: kind of go all in. I mean, he said in

441
00:22:15,150 --> 00:22:18,669
Speaker 7: Jackson Hole underlying inflation is too high. And that was

442
00:22:18,710 --> 00:22:21,130
Speaker 7: a very, very profound thing. I think the market kind

443
00:22:21,150 --> 00:22:23,870
Speaker 7: of was a bit slow to understand how important that was.

444
00:22:24,290 --> 00:22:26,489
Speaker 7: Assuming that he genuinely believes that, I think he has

445
00:22:26,510 --> 00:22:28,929
Speaker 7: to go all in and basically say they're going to

446
00:22:28,990 --> 00:22:30,850
Speaker 7: raise rates until the job is done and you bring

447
00:22:30,890 --> 00:22:34,260
Speaker 7: down underlying inflation. And that is a proper tightening cycle

448
00:22:34,500 --> 00:22:37,420
Speaker 7: that will be finished, hopefully, by, let's say, the first

449
00:22:37,460 --> 00:22:38,100
Speaker 7: half of next year.

450
00:22:38,119 --> 00:22:41,820
Speaker 3: The distinction of your research note, Dominic Constam, is the

451
00:22:41,880 --> 00:22:48,550
Speaker 3: supply shocks and demand shocks perceived by Waller of Washington State, Minnesota,

452
00:22:48,750 --> 00:22:53,250
Speaker 3: the governor, and the chairman, Kevin Walsh, I guess, of Stanford,

453
00:22:53,760 --> 00:22:56,840
Speaker 3: to be polite about it, and of Wall Street. They're

454
00:22:57,080 --> 00:23:01,780
Speaker 3: starkly different, aren't they? To Paul's good question on the dissent,

455
00:23:02,140 --> 00:23:05,530
Speaker 3: why won't they show dissent tomorrow between the Waller world

456
00:23:05,890 --> 00:23:06,690
Speaker 3: and the Walsh world?

457
00:23:07,670 --> 00:23:09,530
Speaker 5: It's a risk. I mean, it's definitely a risk.

458
00:23:10,150 --> 00:23:14,290
Speaker 7: My guess is a war shall be very persuasive and

459
00:23:14,390 --> 00:23:17,909
Speaker 7: bring them along. And therefore, there won't be any dissent.

460
00:23:17,950 --> 00:23:20,020
Speaker 7: But it's definitely a risk. If Waller wants to dig

461
00:23:20,060 --> 00:23:22,340
Speaker 7: in his heels and say we should be waiting this out,

462
00:23:22,359 --> 00:23:24,379
Speaker 7: then he could do that. And that would be a

463
00:23:24,480 --> 00:23:26,640
Speaker 7: bit of a mixed message from the Fed that will

464
00:23:26,800 --> 00:23:28,820
Speaker 7: unfortunately not be taken very well by the markets.

465
00:23:28,960 --> 00:23:32,659
Speaker 3: Is Missoula a quieter and more stable place because Steve

466
00:23:32,680 --> 00:23:33,700
Speaker 3: Ruscio retired?

467
00:23:33,720 --> 00:23:36,240
Speaker 7: It's definitely quieter.

468
00:23:36,340 --> 00:23:36,840
Speaker 4: It's quieter.

469
00:23:37,700 --> 00:23:39,140
Speaker 5: I wouldn't say that it's more stable.

470
00:23:39,340 --> 00:23:43,070
Speaker 3: Major shout out to Stephen Rusciuto of Mizzou for decades

471
00:23:43,119 --> 00:23:47,130
Speaker 3: of work in market economics on Wall Street. Absolutely brilliant

472
00:23:47,609 --> 00:23:51,590
Speaker 3: at parsing out our gross national product. Dominic Constance, thank

473
00:23:51,630 --> 00:23:55,189
Speaker 3: you so much with Mizzou. Stay with us.

474
00:23:55,520 --> 00:23:58,760
Speaker 6: More from Bloomberg Surveillance coming up after this.

475
00:24:06,010 --> 00:24:09,609
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

476
00:24:09,690 --> 00:24:12,859
Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on

477
00:24:12,980 --> 00:24:16,240
Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app.

478
00:24:16,440 --> 00:24:18,160
Speaker 1: Or watch us live on YouTube.

479
00:24:18,520 --> 00:24:21,680
Speaker 3: So Marina Zavalacki, when she was at Notre Dame, they

480
00:24:21,700 --> 00:24:24,970
Speaker 3: didn't rate Rice 52 to 0. Were you with the game?

481
00:24:25,720 --> 00:24:28,520
Speaker 8: I was not. I live in London now.

482
00:24:28,720 --> 00:24:31,149
Speaker 3: You were in London because you are a chief euro

483
00:24:31,230 --> 00:24:35,129
Speaker 3: equity strategist at Morgan Stanley. What a well-timed conversation. Marina

484
00:24:35,150 --> 00:24:40,300
Speaker 3: Zavlak with us this morning. How much cheaper is Europe?

485
00:24:40,760 --> 00:24:44,679
Speaker 3: versus America, even with the Mag 7 adjustment? Is it

486
00:24:44,720 --> 00:24:47,619
Speaker 3: like you wake up and go, OMG, the mother of

487
00:24:47,720 --> 00:24:51,600
Speaker 3: all values? Or is there a different story there?

488
00:24:51,660 --> 00:24:55,439
Speaker 8: Now it's about 20% like-for-like discount, sector neutral, taking out

489
00:24:55,480 --> 00:25:00,220
Speaker 8: Mag 7. So more like-for-like comparison, 20%. At the peak,

490
00:25:00,300 --> 00:25:04,420
Speaker 8: it was 40%. So it's not as extreme. But I

491
00:25:04,440 --> 00:25:07,400
Speaker 8: think the interesting thing is if you look at that chart,

492
00:25:07,420 --> 00:25:10,770
Speaker 8: the discount rate on a long-term history is January 1st

493
00:25:10,790 --> 00:25:13,389
Speaker 8: this year, we broke out. So we broke out of

494
00:25:13,430 --> 00:25:16,120
Speaker 8: a 10-year downtrend. Nobody ever wanted to talk about Europe's

495
00:25:16,160 --> 00:25:18,600
Speaker 8: cheapness before. Now, it's the first question you ask me.

496
00:25:19,040 --> 00:25:21,439
Speaker 8: We broke out. And history suggests when we break out

497
00:25:21,460 --> 00:25:24,580
Speaker 8: like this, we will keep going to single-digit levels of

498
00:25:24,619 --> 00:25:25,700
Speaker 8: discount versus the US.

499
00:25:26,400 --> 00:25:29,850
Speaker 4: So talk to us about earnings in Europe. Because here

500
00:25:29,869 --> 00:25:32,609
Speaker 4: in the US, as you well know, the primary driver

501
00:25:32,630 --> 00:25:35,470
Speaker 4: of equity performance, certainly this year, but has been a

502
00:25:35,510 --> 00:25:38,199
Speaker 4: really strong earnings growth coming out of The S &

503
00:25:37,960 --> 00:25:40,340
Speaker 4: P 500, talk to us about in Europe, what you're seeing.

504
00:25:40,859 --> 00:25:43,200
Speaker 8: I mean, it's not quite as strong as the S & P,

505
00:25:43,300 --> 00:25:47,020
Speaker 8: but it's very strong by European standards. So aggregate earnings

506
00:25:47,040 --> 00:25:50,459
Speaker 8: growth for this year is now running at 19%. The

507
00:25:50,500 --> 00:25:53,439
Speaker 8: median stock is doing 12. This is all coming at

508
00:25:53,880 --> 00:25:58,760
Speaker 8: a 20% discount, as I mentioned, to the US. The

509
00:25:58,800 --> 00:26:01,240
Speaker 8: median isn't that dramatically lower. So I think if you

510
00:26:01,280 --> 00:26:05,470
Speaker 8: do that for comparisons, quite attractive. And I would summarize

511
00:26:05,520 --> 00:26:10,940
Speaker 8: what's driving the earnings and how sustainable it's inflation. Companies

512
00:26:10,980 --> 00:26:13,340
Speaker 8: in Europe benefit from inflation because we have a lot

513
00:26:13,359 --> 00:26:15,860
Speaker 8: of real assets and we have banks that benefit from inflation.

514
00:26:16,720 --> 00:26:20,970
Speaker 4: In, I guess, last year, the beginning of President Trump's

515
00:26:21,010 --> 00:26:23,550
Speaker 4: second term with the tariffs coming on, there was a

516
00:26:23,570 --> 00:26:26,869
Speaker 4: real sense that Europe was going to start increasing its

517
00:26:26,890 --> 00:26:32,879
Speaker 4: spending on defense, on infrastructure. Has that happened? Has that-

518
00:26:33,270 --> 00:26:35,950
Speaker 4: been happening and where it's been stronger than other places?

519
00:26:36,170 --> 00:26:40,010
Speaker 8: It is happening very gradually. I think there was a

520
00:26:40,040 --> 00:26:42,800
Speaker 8: lot of excitement about that, as you say, last year.

521
00:26:42,900 --> 00:26:47,219
Speaker 8: That excitement has faded. The infrastructure spend in Germany, we

522
00:26:47,280 --> 00:26:50,860
Speaker 8: estimate two-thirds of it is going to social. The defense

523
00:26:50,920 --> 00:26:53,500
Speaker 8: is happening, but running below target, it will pick up

524
00:26:53,540 --> 00:26:54,180
Speaker 8: at the end of the year.

525
00:26:54,220 --> 00:26:54,500
Speaker 7: I think.

526
00:26:54,680 --> 00:26:59,700
Speaker 3: Marina Zavalec with us, Morgan Stanley here. The European Equity Strategies,

527
00:26:59,740 --> 00:27:01,750
Speaker 3: let's say chief strategist, She has to put up with

528
00:27:01,790 --> 00:27:04,469
Speaker 3: March and March on commodities. I mean, that alone is

529
00:27:04,930 --> 00:27:07,270
Speaker 3: enough pressure. I love at the bottom here, your Morgan

530
00:27:07,300 --> 00:27:11,480
Speaker 3: Stanley police say, Marina cannot speak to single-name stocks.

531
00:27:11,660 --> 00:27:12,300
Speaker 9: Boring.

532
00:27:12,720 --> 00:27:17,600
Speaker 3: Marina cannot discuss political figures. Boring. So let's try to

533
00:27:17,660 --> 00:27:21,040
Speaker 3: do this. France is flat on its back. I'm looking

534
00:27:21,080 --> 00:27:25,920
Speaker 3: at the spread widening. Germany to France. Translate into the

535
00:27:26,160 --> 00:27:30,550
Speaker 3: opportunity for French stocks. given the turmoil there that you

536
00:27:30,609 --> 00:27:31,570
Speaker 3: can't talk about.

537
00:27:31,590 --> 00:27:35,150
Speaker 8: Yeah, I mean, we've written about it, so I won't

538
00:27:35,170 --> 00:27:37,470
Speaker 8: go into political figures. But I will say from an

539
00:27:37,550 --> 00:27:40,040
Speaker 8: equities market point of view, first of all, France and

540
00:27:40,210 --> 00:27:43,580
Speaker 8: everything in Europe is extremely global. So the proportion of

541
00:27:43,619 --> 00:27:46,359
Speaker 8: stocks that are highly correlated to OET spread widening is

542
00:27:46,400 --> 00:27:50,129
Speaker 8: pretty low. It's a quarter of the index. And then

543
00:27:50,210 --> 00:27:52,820
Speaker 8: within that, you have the banks, which is a big chunk.

544
00:27:53,320 --> 00:27:57,300
Speaker 8: They actually benefit from higher yields. It can impact sentiment

545
00:27:57,340 --> 00:28:00,460
Speaker 8: in the short term when yields move quickly. But ultimately,

546
00:28:00,650 --> 00:28:02,710
Speaker 8: when they report earnings, earnings are going to be strong.

547
00:28:04,090 --> 00:28:06,969
Speaker 8: And they're already trading at a 20% discount. So we

548
00:28:07,010 --> 00:28:09,890
Speaker 8: did a case study of how stocks are trading relative

549
00:28:09,930 --> 00:28:14,840
Speaker 8: to many historical presidential elections. We're already pricing a lot

550
00:28:14,880 --> 00:28:18,100
Speaker 8: of negativity. And the feedback we're getting from investors is

551
00:28:18,140 --> 00:28:21,040
Speaker 8: actually they're looking for idiosyncratic stories to buy because the

552
00:28:21,080 --> 00:28:22,920
Speaker 8: market is... has kind of run ahead of itself.

553
00:28:23,000 --> 00:28:25,220
Speaker 3: I mean, Paul, Celine Dion picked Paris.

554
00:28:25,380 --> 00:28:25,800
Speaker 4: Not sure.

555
00:28:25,820 --> 00:28:26,840
Speaker 3: What else do you need to know?

556
00:28:26,859 --> 00:28:30,520
Speaker 4: I know, exactly right. Marina, talk to us, like here

557
00:28:30,540 --> 00:28:33,100
Speaker 4: in the U.S., one of the key drivers, in addition

558
00:28:33,119 --> 00:28:35,560
Speaker 4: to earnings, has been AI, broadly defined, and the spending

559
00:28:35,980 --> 00:28:37,820
Speaker 4: associated with AI. And it's been such a driver of

560
00:28:37,900 --> 00:28:40,200
Speaker 4: so many sectors here in the S & P, as

561
00:28:40,240 --> 00:28:43,780
Speaker 4: you well know. What's the corollary to European investing as

562
00:28:43,840 --> 00:28:44,540
Speaker 4: it relates to AI?

563
00:28:45,270 --> 00:28:48,470
Speaker 8: I mean, it drives Europe as well. So I mentioned earnings.

564
00:28:49,110 --> 00:28:51,250
Speaker 8: Earnings revisions breadth in Europe. Again, not as high as

565
00:28:51,270 --> 00:28:54,310
Speaker 8: the US, but it's 20% now. What's leading? All of

566
00:28:54,430 --> 00:28:57,930
Speaker 8: our AI is leading. So semis, cap goods, cap goods

567
00:28:57,970 --> 00:29:02,570
Speaker 8: in Europe is now largely AI driven. Those continue to lead.

568
00:29:02,690 --> 00:29:05,830
Speaker 8: I would say they're accelerating. If you look at the

569
00:29:05,910 --> 00:29:10,410
Speaker 8: weight of our index, we estimate about 15% is direct

570
00:29:10,690 --> 00:29:13,270
Speaker 8: AI CapEx exposure. And then you have a lot of

571
00:29:13,310 --> 00:29:16,870
Speaker 8: secondary exposure. So banks, huge part of our index, they're

572
00:29:16,930 --> 00:29:22,840
Speaker 8: actually outperforming mega cap tech in the US because yields,

573
00:29:23,080 --> 00:29:26,220
Speaker 8: for multiple reasons, but partly AI-driven yields are going higher.

574
00:29:26,820 --> 00:29:29,260
Speaker 8: Banks in Europe, retail banks, just like regional banks here,

575
00:29:29,340 --> 00:29:30,600
Speaker 8: they benefit from that dynamic.

576
00:29:30,680 --> 00:29:34,310
Speaker 3: How much is your study hinged on Euro dynamics?

577
00:29:36,150 --> 00:29:37,730
Speaker 8: My study, my outlook.

578
00:29:37,750 --> 00:29:41,590
Speaker 3: The performance of Euro equities- given where the euro is.

579
00:29:41,630 --> 00:29:44,580
Speaker 3: To me, the euro is pretty much quiet. It's not

580
00:29:44,620 --> 00:29:46,120
Speaker 3: a topic of discussion.

581
00:29:46,260 --> 00:29:46,620
Speaker 5: Yes.

582
00:29:46,780 --> 00:29:47,080
Speaker 10: Yeah.

583
00:29:47,840 --> 00:29:48,060
Speaker 2: Yeah.

584
00:29:48,980 --> 00:29:53,080
Speaker 8: It is an odd dynamic with euro dollar because If

585
00:29:53,200 --> 00:29:57,010
Speaker 8: euro strengthens, I mean, I come marketing here in New

586
00:29:57,030 --> 00:29:59,890
Speaker 8: York and I hear investors, historically, they've been like, oh,

587
00:29:59,950 --> 00:30:03,270
Speaker 8: euro's weakening, so it's destroying our returns. But then if

588
00:30:03,350 --> 00:30:07,490
Speaker 8: euro strengthens, suddenly, because our companies report in euro and

589
00:30:07,530 --> 00:30:11,800
Speaker 8: local currencies, you'll have downgrades because they're just translating, they're

590
00:30:11,820 --> 00:30:16,660
Speaker 8: very foreign exposed. So right now, it's not really a story,

591
00:30:17,300 --> 00:30:21,040
Speaker 8: but generally, weaker dollar would be positive.

592
00:30:21,060 --> 00:30:21,240
Speaker 5: Right.

593
00:30:21,570 --> 00:30:22,470
Speaker 4: Okay, Paul and I.

594
00:30:22,410 --> 00:30:24,890
Speaker 3: Were talking about you at our 3.30 meeting this morning.

595
00:30:25,350 --> 00:30:28,670
Speaker 3: Paul and I are in real agreement on the mystery

596
00:30:28,690 --> 00:30:31,570
Speaker 3: of this. Maybe you more than anyone we've talked to.

597
00:30:32,390 --> 00:30:36,170
Speaker 3: Should companies report four times a year or twice a year?

598
00:30:36,620 --> 00:30:41,940
Speaker 8: I think four times. This is a great question because

599
00:30:41,980 --> 00:30:45,280
Speaker 8: it's happening here. Half of our free flow market cap

600
00:30:45,300 --> 00:30:49,800
Speaker 8: weight reports semi-annually. And the problem is, I mean, some

601
00:30:49,840 --> 00:30:52,090
Speaker 8: of them, they'll report trading updates and things like that.

602
00:30:52,130 --> 00:30:55,130
Speaker 8: But you just have this kind of vacuum of information

603
00:30:55,150 --> 00:30:58,890
Speaker 8: for six months. You have more volatility in those stocks.

604
00:30:58,930 --> 00:31:03,910
Speaker 8: Those stocks can get left behind. You'll have companies reporting

605
00:31:04,020 --> 00:31:06,620
Speaker 8: sales and squeezing on the back of sales. And then

606
00:31:06,680 --> 00:31:09,220
Speaker 8: later on, you find out that they actually missed on earnings.

607
00:31:09,820 --> 00:31:11,180
Speaker 8: I think it just creates more volatility.

608
00:31:11,200 --> 00:31:14,120
Speaker 3: You're in the trenches on this. Who doesn't want to

609
00:31:14,260 --> 00:31:20,410
Speaker 3: go to more exposure, more visibility? The companies? Yeah. Yeah.

610
00:31:20,550 --> 00:31:22,370
Speaker 8: I mean, I prefer more visibility.

611
00:31:22,390 --> 00:31:24,170
Speaker 3: So there's still a Euro... I'm going to cut to

612
00:31:24,230 --> 00:31:27,190
Speaker 3: the chase. There's still a Euro arrogance. We don't play

613
00:31:27,230 --> 00:31:29,670
Speaker 3: by the rule book. We're not going to switch to

614
00:31:29,690 --> 00:31:33,130
Speaker 3: a more Anglo-American model. We're going to stay the continent

615
00:31:33,150 --> 00:31:36,310
Speaker 3: of Europe. We're fixed income and debt is everything and

616
00:31:36,330 --> 00:31:37,630
Speaker 3: be undervalued forever.

617
00:31:38,860 --> 00:31:41,760
Speaker 8: Well, it's becoming less undervalued from an equities point of view.

618
00:31:41,980 --> 00:31:45,600
Speaker 8: And equities, like I said, majority of equities exposure is

619
00:31:45,680 --> 00:31:46,640
Speaker 8: not in Europe or UK.

620
00:31:47,620 --> 00:31:50,290
Speaker 4: So but just real quickly, 30 seconds. It feels like

621
00:31:51,090 --> 00:31:53,170
Speaker 4: is the AI trade alive in Europe, I guess?

622
00:31:53,310 --> 00:31:54,270
Speaker 11: Yes, it is.

623
00:31:54,510 --> 00:31:54,670
Speaker 2: Yeah.

624
00:31:54,690 --> 00:31:57,130
Speaker 4: OK, because it feels like, you know, obviously you don't

625
00:31:57,170 --> 00:32:00,310
Speaker 4: have that many tech companies per se, you know, relative

626
00:32:00,330 --> 00:32:00,830
Speaker 4: to the U.S.

627
00:32:00,910 --> 00:32:01,430
Speaker 5: In the waiting.

628
00:32:01,770 --> 00:32:03,830
Speaker 4: But AI feels a little bit different, do you think?

629
00:32:04,790 --> 00:32:08,170
Speaker 8: So we don't have as many tech companies, but we

630
00:32:08,270 --> 00:32:12,630
Speaker 8: have adopters. So we are seeing ROI starting to come through.

631
00:32:12,780 --> 00:32:15,700
Speaker 8: At some stage, when that ROI starts to come through

632
00:32:15,740 --> 00:32:18,260
Speaker 8: in force, I think it will be Europe's moment because

633
00:32:18,300 --> 00:32:21,870
Speaker 8: we have so much low-hanging fruit in terms of potential

634
00:32:21,880 --> 00:32:26,150
Speaker 8: for productivity improvements, demographics, where returns are starting.

635
00:32:27,080 --> 00:32:27,820
Speaker 3: This has been wonderful.

636
00:32:27,840 --> 00:32:28,360
Speaker 4: Yeah, fascinating.

637
00:32:28,560 --> 00:32:30,460
Speaker 3: Thank you so much for coming in. Are you based

638
00:32:30,530 --> 00:32:31,000
Speaker 3: in London.

639
00:32:31,070 --> 00:32:32,730
Speaker 5: Paris, Strasbourg?

640
00:32:32,790 --> 00:32:33,110
Speaker 3: London.

641
00:32:33,150 --> 00:32:34,230
Speaker 8: I wish Paris, but London.

642
00:32:34,510 --> 00:32:34,710
Speaker 7: Yeah.

643
00:32:35,350 --> 00:32:36,250
Speaker 4: They're at a Canary Wharf.

644
00:32:37,350 --> 00:32:37,730
Speaker 1: Oh, okay.

645
00:32:37,770 --> 00:32:37,950
Speaker 5: Yeah.

646
00:32:38,190 --> 00:32:38,770
Speaker 3: I didn't know that.

647
00:32:38,830 --> 00:32:39,730
Speaker 4: Yeah, they were one of the first.

648
00:32:40,790 --> 00:32:42,670
Speaker 3: They should move in by us, you know.

649
00:32:42,990 --> 00:32:46,610
Speaker 4: They can't get the big floors for the trading platforms.

650
00:32:46,890 --> 00:32:47,630
Speaker 4: It's hard.

651
00:32:47,990 --> 00:32:48,690
Speaker 7: Also, it's a walk.

652
00:32:48,780 --> 00:32:49,340
Speaker 3: It's a swagger.

653
00:32:50,040 --> 00:32:53,360
Speaker 4: But now that there's direct, Auckland's light rail goes out there.

654
00:32:53,300 --> 00:32:53,520
Speaker 2: To the DLR.

655
00:32:53,540 --> 00:32:54,580
Speaker 8: Oh, yeah, it's direct to you guys.

656
00:32:54,600 --> 00:32:55,920
Speaker 4: When I was there, you had to take like 27

657
00:32:55,920 --> 00:32:56,740
Speaker 4: different subways.

658
00:32:56,800 --> 00:32:57,980
Speaker 3: Is Gatwick better?

659
00:32:58,000 --> 00:33:01,400
Speaker 8: I think it's the same.

660
00:33:01,620 --> 00:33:06,120
Speaker 3: It's the same. Marina Zavala, Morgan Stanley, thank you so much.

661
00:33:08,180 --> 00:33:08,780
Speaker 3: Stay with us.

662
00:33:09,080 --> 00:33:12,320
Speaker 6: More from Bloomberg Surveillance coming up after this.

663
00:33:19,590 --> 00:33:23,200
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

664
00:33:23,280 --> 00:33:26,440
Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on

665
00:33:26,560 --> 00:33:29,840
Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app

666
00:33:30,020 --> 00:33:31,760
Speaker 1: or watch us live on YouTube.

667
00:33:32,500 --> 00:33:34,540
Speaker 3: We did something twisted now. We're going to talk about

668
00:33:34,560 --> 00:33:36,780
Speaker 3: the twist. We're going to talk about the shift. We're

669
00:33:36,800 --> 00:33:39,980
Speaker 3: going to talk about what's going on the butterfly within

670
00:33:40,010 --> 00:33:43,470
Speaker 3: the yield space because it's so simplistic in the media. OMG,

671
00:33:43,530 --> 00:33:46,750
Speaker 3: price down, yield higher, world coming to an end. Sinjin

672
00:33:46,790 --> 00:33:50,430
Speaker 3: Bowen with us right now. High yield bonds and all

673
00:33:50,470 --> 00:33:56,170
Speaker 3: at Beach Point Capital. Decades of experience. But spreads haven't changed, right?

674
00:33:56,570 --> 00:33:56,990
Speaker 11: That's right.

675
00:33:57,070 --> 00:34:01,160
Speaker 10: Spreads are pretty flat. They're historically tight, especially in the

676
00:34:01,200 --> 00:34:02,720
Speaker 10: higher quality parts of the market.

677
00:34:02,820 --> 00:34:03,260
Speaker 3: That's good.

678
00:34:04,230 --> 00:34:06,780
Speaker 10: It is good, especially for the issuer base, which are

679
00:34:06,800 --> 00:34:11,839
Speaker 10: still exhibiting really strong fundamentals. It doesn't bode well if

680
00:34:12,060 --> 00:34:15,520
Speaker 10: a company does have an operational misstep. The asymmetric downside

681
00:34:16,480 --> 00:34:18,100
Speaker 10: can be extreme in price action.

682
00:34:18,640 --> 00:34:19,379
Speaker 3: But so far, the.

683
00:34:19,340 --> 00:34:21,919
Speaker 10: Index is performing really well, and that's in large part

684
00:34:22,000 --> 00:34:23,200
Speaker 10: just because of those fundamentals.

685
00:34:23,700 --> 00:34:24,860
Speaker 4: I go to, this is what I do when a

686
00:34:25,200 --> 00:34:26,860
Speaker 4: bond person comes in because I don't know what's going

687
00:34:26,880 --> 00:34:29,900
Speaker 4: on in the bond market. I go to INGO function

688
00:34:29,980 --> 00:34:31,400
Speaker 4: and I click on fixed income. I look at some

689
00:34:31,420 --> 00:34:34,540
Speaker 4: of the returns in the United States in the various

690
00:34:34,580 --> 00:34:36,860
Speaker 4: bond markets. So just for example, the U.S. ag is

691
00:34:36,900 --> 00:34:40,540
Speaker 4: down 1.46%. So that's the aggregate corporate bond market in

692
00:34:40,560 --> 00:34:43,060
Speaker 4: the U.S. But here's some outliers.

693
00:34:43,500 --> 00:34:43,719
Speaker 7: U.S.

694
00:34:43,800 --> 00:34:48,640
Speaker 4: Corporate high yield, positive 1.8% this year to date. Leverage loans,

695
00:34:48,680 --> 00:34:50,140
Speaker 4: which is where I used to play back in the day,

696
00:34:50,560 --> 00:34:55,180
Speaker 4: actually up 3.4%. So, Sinjin, in your world, people are

697
00:34:55,300 --> 00:34:57,680
Speaker 4: willing to take risk here, it seems like, credit risk,

698
00:34:57,719 --> 00:34:59,529
Speaker 4: and then go a little bit down in the capital structure.

699
00:35:00,620 --> 00:35:01,990
Speaker 5: Yeah, it's true.

700
00:35:02,050 --> 00:35:04,149
Speaker 11: I mean, part of that is a function of bond

701
00:35:04,170 --> 00:35:04,770
Speaker 11: math itself.

702
00:35:04,850 --> 00:35:07,930
Speaker 10: So high yield has lower interest rate sensitivity than the

703
00:35:08,090 --> 00:35:08,509
Speaker 10: ag does.

704
00:35:08,530 --> 00:35:09,969
Speaker 4: Bond math, that's where I tuned out.

705
00:35:11,989 --> 00:35:15,850
Speaker 10: And floating rate, it continues to outperform in mostly simply

706
00:35:15,890 --> 00:35:21,590
Speaker 10: because of interest rates, but also the issuer base itself

707
00:35:22,850 --> 00:35:27,450
Speaker 10: hasn't had the same, there are different degrees of exposures

708
00:35:27,530 --> 00:35:31,110
Speaker 10: to both cyclical functions coming out of the inflationary pressures

709
00:35:31,150 --> 00:35:33,930
Speaker 10: from the macro down, as well as the AI trade

710
00:35:33,989 --> 00:35:34,860
Speaker 10: on both sides of it.

711
00:35:35,050 --> 00:35:40,940
Speaker 3: The marketing chit-chat is, OMG, don't worry about it. Everything's fine.

712
00:35:41,400 --> 00:35:44,460
Speaker 3: Gather yield while you wait for price to come back.

713
00:35:45,200 --> 00:35:49,300
Speaker 3: Translate that into your real adult world. Is it valid

714
00:35:49,320 --> 00:35:52,380
Speaker 3: to say I'm going to capture yield while my price

715
00:35:52,440 --> 00:35:55,500
Speaker 3: is down 3%, 4%, 5%, 6%?

716
00:35:55,500 --> 00:35:57,680
Speaker 11: I think that's valid, especially in floating rate right now.

717
00:35:57,960 --> 00:36:00,900
Speaker 10: And if we do get a hike tomorrow, and all

718
00:36:01,160 --> 00:36:03,480
Speaker 10: signals point to yes, then floating rate should.

719
00:36:03,320 --> 00:36:04,540
Speaker 11: Continue to outperform.

720
00:36:04,660 --> 00:36:08,380
Speaker 10: And that's real income that you're generating off those loan assets.

721
00:36:09,160 --> 00:36:12,920
Speaker 10: On the high yield side, over 50% is rated BB.

722
00:36:13,160 --> 00:36:15,319
Speaker 10: It is longer in interest rate duration.

723
00:36:15,390 --> 00:36:16,200
Speaker 3: It's higher quality.

724
00:36:16,610 --> 00:36:18,930
Speaker 10: And it is more sensitive to those interest rate moves.

725
00:36:18,989 --> 00:36:22,030
Speaker 10: And so that yields might be a little more volatile

726
00:36:22,070 --> 00:36:22,630
Speaker 10: in that space.

727
00:36:23,900 --> 00:36:26,930
Speaker 4: How do you guys pick bonds these days? Is it sector?

728
00:36:27,010 --> 00:36:28,089
Speaker 5: Is it factor?

729
00:36:28,160 --> 00:36:32,410
Speaker 4: Is it just risk weighted adjusted returns? How do you

730
00:36:32,430 --> 00:36:33,410
Speaker 4: guys kind of screen stuff?

731
00:36:33,690 --> 00:36:36,410
Speaker 11: So we are fundamental bottom up investors.

732
00:36:36,510 --> 00:36:40,050
Speaker 10: So we are screening the entire universe of investable bonds

733
00:36:40,110 --> 00:36:44,210
Speaker 10: and loans. And we're doing sector research to understand the

734
00:36:44,250 --> 00:36:48,640
Speaker 10: industry trends, pick which ones might then translate into winners

735
00:36:48,700 --> 00:36:51,820
Speaker 10: and losers who choose to finance themselves in our asset

736
00:36:51,840 --> 00:36:55,310
Speaker 10: classes and And then we do careful security selection from

737
00:36:55,350 --> 00:36:55,790
Speaker 10: that point.

738
00:36:56,190 --> 00:36:58,049
Speaker 3: We've got to get to the market. Let me get

739
00:36:58,070 --> 00:37:01,110
Speaker 3: this in and we'll come back. Sinjin Bowen with us

740
00:37:01,130 --> 00:37:05,150
Speaker 3: with Beach Point Capital. What is your take on the

741
00:37:05,290 --> 00:37:11,420
Speaker 3: next marginal gazillion eight tranche hyperscaler bond deal? Is it

742
00:37:11,500 --> 00:37:14,219
Speaker 3: different than the last 14 or is it a new

743
00:37:14,260 --> 00:37:17,350
Speaker 3: new now? We actually don't think it's a new new.

744
00:37:17,450 --> 00:37:22,870
Speaker 10: We think that there's very little nuance and price differentiation

745
00:37:22,950 --> 00:37:27,450
Speaker 10: between these types of deals. And that won't happen until

746
00:37:27,900 --> 00:37:31,239
Speaker 10: there is some sort of credit differential from a fundamental perspective.

747
00:37:31,420 --> 00:37:34,460
Speaker 10: So we've largely avoided that space. But at some point,

748
00:37:34,500 --> 00:37:36,500
Speaker 10: it's going to be hard to ignore just because of

749
00:37:36,520 --> 00:37:37,660
Speaker 10: the sheer amount of issuance.

750
00:37:38,719 --> 00:37:43,110
Speaker 4: So how's the new issuance in your market? Is it Active,

751
00:37:43,180 --> 00:37:44,719
Speaker 4: is it a new investment grade?

752
00:37:45,360 --> 00:37:46,560
Speaker 11: It is coming back.

753
00:37:46,800 --> 00:37:50,980
Speaker 10: So after Labor Day especially, the new issue market re-amplified.

754
00:37:51,040 --> 00:37:54,779
Speaker 10: There's a range of different use of proceeds from even

755
00:37:54,820 --> 00:37:57,759
Speaker 10: new money transactions in the form of LBOs and M & A,

756
00:37:57,820 --> 00:38:01,630
Speaker 10: as well as dividend deals. In the loan market, because

757
00:38:01,670 --> 00:38:04,830
Speaker 10: it's outperformed so well, you do have this repricing wave,

758
00:38:04,870 --> 00:38:09,110
Speaker 10: which causes some repression among buyers as they crowd up

759
00:38:09,190 --> 00:38:12,109
Speaker 10: into the upper echelons. But in general, the new issue

760
00:38:12,150 --> 00:38:13,770
Speaker 10: market is pretty healthy. And, in fact, there are a

761
00:38:13,810 --> 00:38:17,450
Speaker 10: few indicators showing that even some of the software names

762
00:38:17,510 --> 00:38:19,910
Speaker 10: can push out some of their maturities, but they do

763
00:38:19,969 --> 00:38:20,750
Speaker 10: so at a cost.

764
00:38:20,810 --> 00:38:22,989
Speaker 3: Let's come back. Cedric Barnwell with us with Beach Point

765
00:38:23,030 --> 00:38:26,370
Speaker 3: Capital here on the shades of credit and bills, notes,

766
00:38:26,430 --> 00:38:29,969
Speaker 3: and bonds that are out there. Futures have improved in

767
00:38:29,989 --> 00:38:32,500
Speaker 3: the last two, three hours. Negative 7 now with the

768
00:38:32,540 --> 00:38:37,890
Speaker 3: VIX in nicely, 16.84%. Yields are higher. That's the big

769
00:38:38,010 --> 00:38:40,430
Speaker 3: story of the day. We need to get to the

770
00:38:40,469 --> 00:38:41,049
Speaker 3: market opening.

771
00:38:42,530 --> 00:38:42,790
Speaker 2: All right.

772
00:38:42,830 --> 00:38:45,780
Speaker 9: Thanks a lot, Tom. Not only yields are higher, oil

773
00:38:45,900 --> 00:38:48,580
Speaker 9: higher as well. Brent crude up one and a third percent,

774
00:38:48,620 --> 00:38:53,360
Speaker 9: now above $ 107 a barrel. And WTI crude sitting at

775
00:38:53,360 --> 00:38:55,819
Speaker 9: $ 103 a barrel, up one and a half percent. As

776
00:38:55,920 --> 00:38:59,279
Speaker 9: for stocks, we are seeing some red arrows here in

777
00:38:59,300 --> 00:39:01,540
Speaker 9: the equities market to start our morning. The S &

778
00:39:01,239 --> 00:39:03,980
Speaker 9: P 500 down just three points. We've got the Dow

779
00:39:04,000 --> 00:39:06,640
Speaker 9: Jones Industrial Average down 0.2% or 110. NASDAQ Composite down 34%

780
00:39:06,640 --> 00:39:08,529
Speaker 9: or about 0.1%. And the NASDAQ 100 down about 15

781
00:39:08,530 --> 00:39:11,150
Speaker 9: points to start our day. The Bloomberg Dollar Spot Index

782
00:39:11,170 --> 00:39:13,310
Speaker 9: up 0.1% at 1196.87. And the Japanese Yen down 0.5%

783
00:39:13,310 --> 00:39:13,850
Speaker 9: at 155.08 against the U.S.

784
00:39:13,870 --> 00:39:14,089
Speaker 2: Dollar.

785
00:39:14,110 --> 00:39:15,710
Speaker 9: Bitcoin down about 3% now at 76,781. And as a result,

786
00:39:15,730 --> 00:39:20,670
Speaker 9: we have got a lot of crypto-related Yen down 0.5%

787
00:39:20,670 --> 00:39:23,090
Speaker 9: at 155.08 against the U.S.

788
00:39:23,150 --> 00:39:23,450
Speaker 1: Dollar.

789
00:39:23,570 --> 00:39:28,489
Speaker 9: Bitcoin down about 3% now at 76,781. And as a result,

790
00:39:28,530 --> 00:39:31,420
Speaker 9: we have got a lot of crypto-related stocks starting the

791
00:39:31,460 --> 00:39:36,219
Speaker 9: morning lower. Coinbase down 5%. Robinhood down 3%. And strategy

792
00:39:36,260 --> 00:39:41,060
Speaker 9: down about 4%. And yields mixed the 10-year at 5%,

793
00:39:41,060 --> 00:39:44,580
Speaker 9: its highest level since 2007. That is your Bloomberg Opening

794
00:39:44,600 --> 00:39:45,120
Speaker 9: Bell Report.

795
00:39:45,300 --> 00:39:45,839
Speaker 4: Tom and Paul.

796
00:39:45,960 --> 00:39:48,630
Speaker 3: Alexis Christophers, thank you so much. Really, really appreciate it.

797
00:39:48,950 --> 00:39:51,150
Speaker 3: swanning down negative 170.

798
00:39:51,150 --> 00:39:51,350
Speaker 2: St.

799
00:39:51,370 --> 00:39:54,230
Speaker 3: John Brown from Los Angeles, of course, with Beach Point

800
00:39:54,270 --> 00:39:57,870
Speaker 3: Capital management. Would you buy LA paper now? Would you

801
00:39:57,910 --> 00:40:01,890
Speaker 3: buy municipal bonds out of California? Is there a debt

802
00:40:01,950 --> 00:40:06,290
Speaker 3: opportunity there with the uproar over taxation and people migrating?

803
00:40:07,430 --> 00:40:08,910
Speaker 11: Well, it's certainly good for headlines.

804
00:40:09,910 --> 00:40:14,370
Speaker 10: And it's hard to know sort of what the path

805
00:40:14,530 --> 00:40:17,850
Speaker 10: forward is, especially given the sort of We're in an

806
00:40:17,890 --> 00:40:20,509
Speaker 10: election year, and there's a range of policy proposals, not

807
00:40:20,550 --> 00:40:24,830
Speaker 10: only in California, but across most local municipalities and even

808
00:40:24,870 --> 00:40:27,290
Speaker 10: at the federal level. So it's hard to gauge at

809
00:40:27,330 --> 00:40:30,270
Speaker 10: this point. Probably don't want to touch that volatility.

810
00:40:31,090 --> 00:40:34,719
Speaker 4: How's the private credit market impacted your market, the high-yield market,

811
00:40:34,760 --> 00:40:37,480
Speaker 4: the senior loan market? Because now, if I need some capital,

812
00:40:37,500 --> 00:40:40,100
Speaker 4: I've now got another place to go. How's that impacted

813
00:40:40,140 --> 00:40:40,560
Speaker 4: your market?

814
00:40:41,770 --> 00:40:45,029
Speaker 10: There's been a lot of share shift and issuers now,

815
00:40:45,050 --> 00:40:48,299
Speaker 10: you know, especially sponsor backed issuers can shop around for

816
00:40:48,320 --> 00:40:51,800
Speaker 10: the best asset class and solve for their needs, whether

817
00:40:51,880 --> 00:40:55,000
Speaker 10: it's structure or a specific debt package that they want

818
00:40:55,140 --> 00:40:59,799
Speaker 10: or it's simply cost of borrowing. That convergence between the

819
00:40:59,880 --> 00:41:03,650
Speaker 10: asset classes ebbs and flows. Right now it's more on

820
00:41:03,710 --> 00:41:06,989
Speaker 10: the private issuers coming back to the public side in

821
00:41:07,050 --> 00:41:09,890
Speaker 10: part because they're solving for that cost of borrowing first

822
00:41:09,930 --> 00:41:14,380
Speaker 10: and foremost. But over time, we expect more convergence between

823
00:41:14,400 --> 00:41:17,480
Speaker 10: these asset classes. They're not all that different other than

824
00:41:18,000 --> 00:41:21,239
Speaker 10: size of company and speed of execution of getting a

825
00:41:21,260 --> 00:41:21,680
Speaker 10: deal done.

826
00:41:22,410 --> 00:41:27,390
Speaker 3: What's hidden out there? On October of 1987, I learned

827
00:41:27,450 --> 00:41:32,819
Speaker 3: what was hidden. Portfolio insurance. I've had the honor of talking,

828
00:41:32,880 --> 00:41:35,680
Speaker 3: I think, three times to Myron Scholes about 1998 and

829
00:41:35,719 --> 00:41:40,410
Speaker 3: what was hidden there. It's always in your world. It's

830
00:41:40,510 --> 00:41:44,960
Speaker 3: always your fault. With the history of Harvard and Chicago,

831
00:41:45,140 --> 00:41:46,740
Speaker 3: what's hidden out there, Sinjin?

832
00:41:47,960 --> 00:41:50,000
Speaker 10: Well, first of all, there's been a lot of private

833
00:41:50,060 --> 00:41:53,840
Speaker 10: credit that's been created over the past five and ten years.

834
00:41:53,860 --> 00:41:54,680
Speaker 3: Do we know what it's worth?

835
00:41:54,700 --> 00:41:55,640
Speaker 7: No.

836
00:41:56,290 --> 00:42:00,680
Speaker 10: It's worth par according to most marks. And so, but

837
00:42:00,739 --> 00:42:03,020
Speaker 10: just by the sheer nature of private credit, that is

838
00:42:03,219 --> 00:42:06,580
Speaker 10: opaque in terms of financial disclosures and being able to

839
00:42:06,700 --> 00:42:10,200
Speaker 10: aggregate that up to a more macro view. And so

840
00:42:10,890 --> 00:42:14,109
Speaker 10: it's hard to know if the underwriting standards across all

841
00:42:14,150 --> 00:42:16,770
Speaker 10: of that credit has been created in a responsible way

842
00:42:16,930 --> 00:42:21,400
Speaker 10: and is priced appropriately. And I would say that A

843
00:42:21,440 --> 00:42:24,220
Speaker 10: lot of that credit has been created at times when

844
00:42:24,360 --> 00:42:27,670
Speaker 10: the economy has been performing very well. And so if

845
00:42:27,710 --> 00:42:30,430
Speaker 10: we do get even sort of a garden variety recession,

846
00:42:30,850 --> 00:42:33,610
Speaker 10: how does all of that behave through that time period?

847
00:42:34,410 --> 00:42:36,410
Speaker 3: Thank you so much. It's been wonderful. We're going to L.A.

848
00:42:36,450 --> 00:42:39,370
Speaker 3: in February, right? I mean, Lucas Shaw's got his.

849
00:42:39,290 --> 00:42:39,750
Speaker 4: Thing up there.

850
00:42:39,790 --> 00:42:40,109
Speaker 7: Oh, I know.

851
00:42:40,130 --> 00:42:40,310
Speaker 4: I know.

852
00:42:40,350 --> 00:42:41,009
Speaker 3: He's a player. 3 a.m.

853
00:42:41,090 --> 00:42:41,230
Speaker 8: Sure.

854
00:42:42,600 --> 00:42:42,919
Speaker 3: Out there.

855
00:42:43,200 --> 00:42:43,620
Speaker 4: No problem.

856
00:42:43,900 --> 00:42:45,540
Speaker 3: Beachside Sunset Tower Hotel.

857
00:42:45,700 --> 00:42:46,180
Speaker 5: Yep.

858
00:42:46,700 --> 00:42:48,839
Speaker 3: Sinjin Barn. Yeah, we could do that.

859
00:42:49,020 --> 00:42:49,660
Speaker 11: Shutters on the beach.

860
00:42:49,880 --> 00:42:50,380
Speaker 2: Sounds great.

861
00:42:50,700 --> 00:42:52,910
Speaker 3: Sinjin, thank you so much. Beach Point Capital.

862
00:42:52,989 --> 00:42:53,890
Speaker 6: I learned a lot.

863
00:42:53,910 --> 00:42:56,730
Speaker 3: I love having a bond guy when the equity market opens.

864
00:42:57,070 --> 00:42:59,350
Speaker 3: That's how strange the show is. We'll have to talk

865
00:42:59,370 --> 00:43:00,270
Speaker 3: to the bookers about that.

866
00:43:00,670 --> 00:43:05,589
Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify,

867
00:43:05,710 --> 00:43:09,950
Speaker 1: and anywhere else you get your podcasts. Listen live each weekday,

868
00:43:09,950 --> 00:43:15,420
Speaker 1: 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn,

869
00:43:15,739 --> 00:43:18,799
Speaker 1: and the Bloomberg Business app. You can also watch us

870
00:43:18,900 --> 00:43:22,900
Speaker 1: live every weekday on YouTube and always on the Bloomberg Terminal.

871
00:43:26,130 --> 00:43:26,710
Speaker 2: Thank you.