Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. Rri's with us for
Speaker 2: the aut She joins us around the table. Lorrie, good
Speaker 2: morning to you, Thanks for having fantastic to see you.
Speaker 2: I want to start with this. This came from Peachier
Speaker 2: Academy and he went through some of the big names
Speaker 2: in big tag over the last week. And he started
Speaker 2: with Nvidia two Fridays ago. So two Fridays ago, we
Speaker 2: had a ten percent move on absolutely nothing, a two
Speaker 2: trillion dollar company. Ten percent move just like that Tesla
Speaker 2: last Wednesday, and move a ten percent on a five
Speaker 2: hundred billion dollar market cap Meta. Another move a ten percent,
Speaker 2: this time to the downside on a one trillion dollar
Speaker 2: market cap, and then we had Alphabet with a move
Speaker 2: of ten percent on Friday on a two point one
Speaker 2: trillion dollar market cap. Painter Cheer asking the asking, the
Speaker 2: big question is ten percent the new one percent for
Speaker 2: megacap tech? And what's the message you take away from that?
Speaker 3: So I'll go back to my small cap days if
Speaker 3: I can, and I know these.
Speaker 1: Are the far stace. It feels like, yeah, this is.
Speaker 3: How small caps have always traded. You know, I think
Speaker 3: some of the price reactions in small cap to prints
Speaker 3: have gotten a bit worse than that, But you know,
Speaker 3: I think in small cap this is just something that
Speaker 3: was a normal, you know, sort of reaction to earnings
Speaker 3: for a long time. So it doesn't maybe throw me
Speaker 3: quite as much as it might some other folks.
Speaker 2: What should we take away from the fact that uber
Speaker 2: cap stocks are behaving like small caps though?
Speaker 3: Well, I think what we're seeing if we look at
Speaker 3: the earnings data and Bloomberg does some great work just
Speaker 3: forecasting where the earnings are expected to go based on
Speaker 3: bottom of consensus forecast. We've been talking about this since January,
Speaker 3: and you see a deccelerating growth rate. So coming off
Speaker 3: around I think thirty five percent twenty twenty three. If
Speaker 3: you look at the basket as a whole for the
Speaker 3: mag seven, that's four caps to drop to about fifteen
Speaker 3: percent or so in twenty twenty five and really basically
Speaker 3: come in line with the rest of the market. And
Speaker 3: there's one thing I've learned over the course of my
Speaker 3: career is that when you have these, you know, powerful
Speaker 3: momentum stocks and growth rates to celerate, it doesn't matter
Speaker 3: how good the growth is. Growth investors get angsty. And
Speaker 3: that's what I feel like you're seeing in the stock
Speaker 3: price reaction race is.
Speaker 2: Big questions right now about what's being rewarded and what's
Speaker 2: being punished going and get too numbers from Apple and Amazon.
Speaker 2: We talked about the days for those two names. Amazon
Speaker 2: adets coming tomorrow, Apple coming on Thursday. Can we focus
Speaker 2: on that a little bit more? What you sense has
Speaker 2: been rewarded really well discerning season, what's getting punished.
Speaker 3: So if you look at the Russell one thousand, and
Speaker 3: we have to look that big at this early in
Speaker 3: reporting season, the beats aren't getting rewarded. I mean they're underperforming.
Speaker 3: They're not performing as well as they typically do in
Speaker 3: kind of the one to two day post prints. So
Speaker 3: I think what I've noticed as we're going through commentary,
Speaker 3: and again it's still very early. We're reading as much
Speaker 3: as we can. We don't get through everything, you know,
Speaker 3: they're fast reads. But what I feel like I'm seeing
Speaker 3: is just kind of an intolerance for the we need
Speaker 3: to be patient conversation. We sensed a lot of that
Speaker 3: early on. I sort of felt like there was a
Speaker 3: shift last week kind of midweek where companies who were saying, Okay,
Speaker 3: we're getting the benefit of these things now, and I'm
Speaker 3: thinking about specifically on the AI discussion. You know, we're
Speaker 3: benefiting from the ramp that's going to continue in coming years.
Speaker 3: Investors were okay with that, but the sort of wait
Speaker 3: and see this is going to take time again. We've
Speaker 3: got to celerating earnings growth that you know, kind of
Speaker 3: twenty seven times multiples on a Media and PE and
Speaker 3: those biggest tech stocks. Investors just don't have a lot
Speaker 3: of patience for that right now.
Speaker 4: So is there time for a pullback now?
Speaker 3: So we've been getting a little bit of a pullback,
Speaker 3: and a lot of that has happened as we've had
Speaker 3: some volatility in these bigger names. You know, look I'm
Speaker 3: not looking for any kind of massive pullback in those
Speaker 3: names or massive pullback in the markets. We've said we
Speaker 3: thought the pullback would be worth about five to ten percent.
Speaker 3: We've had more than five. I don't think we're quite
Speaker 3: done yet. If you look at CFTC data on positioning
Speaker 3: in either Nasdaq one hundred futures, SMP futures, or the
Speaker 3: broader market, you know, we haven't even begun the correction.
Speaker 3: If you look at AAII, we've done some damage, but
Speaker 3: we've still got, you know, probably at least a couple
Speaker 3: more weeks of damage to do there.
Speaker 4: So if you look at the Peter tiernoon, he talks
Speaker 4: about how all these big companies are treating like little companies.
Speaker 4: Who's going to be leading If there's not a pullback
Speaker 4: right now, how do you see this rotation?
Speaker 3: So, you know, I think the financials have come through
Speaker 3: this reporting season so far reasonably well. I personally on
Speaker 3: my team read a lot of industrials and materials. I'm
Speaker 3: not really seeing any big kind of demand problems, you know,
Speaker 3: I'm seeing companies that are talking a lot of being
Speaker 3: able to manage through headwinds. I think it's not so
Speaker 3: much a particular sector. I think it's looking for industries,
Speaker 3: for companies within the value cyclical cohort of the market,
Speaker 3: so that could be energy and materials industrials. I think
Speaker 3: certain small caps as well.
Speaker 2: I want to talk about another big ubercamp company, Apple
Speaker 2: on Thursday. This from Bernsteain this morning, the latest note
Speaker 2: dropping from them by the fear of growding the stock
Speaker 2: to outperform. Apple is de rated significantly amid a weak
Speaker 2: iPhone fifteen cycle and fears that Apple's China business is
Speaker 2: structurally impaired. They're taking the other side of some of
Speaker 2: this lorry. I want to ask you specifically about Apple,
Speaker 2: but maybe some of the forces associated with that name
Speaker 2: at the moment. The difficulty navigating international waters, particular China.
Speaker 2: The strength of the US dollar a factor I think
Speaker 2: as well. I was reading through your note overnight. How
Speaker 2: many times have those two things come up on earning
Speaker 2: scolles so fast?
Speaker 3: So the FX headwinds are coming up. I'm noticing it
Speaker 3: more with the tech companies, to be honest, than others.
Speaker 3: When we'll see, you know, we've got a lot of
Speaker 3: stuff in the other parts of the market to hear from,
Speaker 3: but so far it seems mostly to be a tech
Speaker 3: company phenomenon, I will say on the Geographic commentary, and
Speaker 3: it's maybe a little hard to say because we've had
Speaker 3: a lot of financials so far, but at least in
Speaker 3: what I read last week the Geographic commentary, so Europe
Speaker 3: China kind of trends versus the US, things seem a
Speaker 3: lot more balanced, Whereas if you look last year, it
Speaker 3: was all China's not coming through as well as we anticipated.
Speaker 3: There's a lot of uncertainty. Things haven't bottomed yet, and
Speaker 3: I wouldn't say I'm seeing a lot of you know,
Speaker 3: jumping up and down and celebrating on China, but it
Speaker 3: just seems more balanced.
Speaker 2: What do you think the difficulty has been in China
Speaker 2: for tech firms specifically? What is unique about China to them?
Speaker 3: You know, I'm not sure I know the great answer
Speaker 3: to that question, to be honest. I know it's been
Speaker 3: a growth part of the business for many of these companies,
Speaker 3: and when you're encountering, you know, sort of difficulty in
Speaker 3: the post pandemic world. You know, there was so much
Speaker 3: excitement a year ago that we were sort of finally
Speaker 3: getting that recovery and that normalization, and that normalization I
Speaker 3: think just hasn't been as clean as a lot of
Speaker 3: companies would have anticipated. I think there's just not a
Speaker 3: lot of visibility necessarily on when that was going to
Speaker 3: turn around.
Speaker 4: When you read through these earnings reports, I think back
Speaker 4: to what Muhammed and Larian recently told us about how
Speaker 4: a lot of people missed what CEOs are saying, and
Speaker 4: they bought into this transitory inflation, but CEOs were saying, actually,
Speaker 4: we still feel inflation coming down the pipeline. What do
Speaker 4: you gather from reading all these reports about where inflation
Speaker 4: is right now for these corporates?
Speaker 3: So, you know, it's funny. Back in the last reporting season,
Speaker 3: so kind of calendar one Q for the four Q numbers,
Speaker 3: companies were raising the red flag right like, they were
Speaker 3: really complaining about costs, margin pressures. I'm not sensing quite
Speaker 3: as much of that now. It doesn't sound good. It sounds,
Speaker 3: you know, some companies are complaining a lot about inflation.
Speaker 3: Some people are talking about moderating disinflation, deflation. It's a
Speaker 3: little more mixed, but again it is still very early.
Speaker 2: Laurie, this was great. It's going to be fantastic to
Speaker 2: run through some of the top stories ten minute comes
Speaker 2: with Lori Cavasenior of RBC. Not a single mention of
Speaker 2: the federal reserve gone into that decision on Wednesday, which
Speaker 2: I guess is a good thing because we've actually been
Speaker 2: talking about nothing but the federal Reserve over the last
Speaker 2: month or so. As they made event in foreign exchange,
Speaker 2: the end bouncing off its weekest eleven and thirty four
Speaker 2: years dolly yen falling to one sixty before running back
Speaker 2: on thin trading due to a local public holiday. Japan's
Speaker 2: top currency officials saying no comment for now when asked
Speaker 2: by reporters if the government intervened, Mart McCormack, a TEDI
Speaker 2: Securities joins us right now to comment officially on the situation.
Speaker 2: Mart McCormick, what happened overnight?
Speaker 1: Yeah, I think it's pretty clear if you think of
Speaker 1: the sequence.
Speaker 5: We had some hot inflation data come through last couple
Speaker 5: of weeks in the US. Then we basically had BOJ
Speaker 5: that was standing pat basically said we're pretty much not
Speaker 5: changing our stands. We're not doing anything. I think one
Speaker 5: of the things is the BOG is very good at
Speaker 5: telling us what they did his But I don't think
Speaker 5: you should look at the BOJ for four guidance on
Speaker 5: what they'll do in the future. So dollar yen moved
Speaker 5: rapidly higher after those events. And essentially what you have
Speaker 5: is the BOJ and the Ministry of Finance seem to
Speaker 5: not have the same opinion about where they again should be.
Speaker 5: And it looks as if overnight that Japanese officials had
Speaker 5: intervened in the FX market to try to strengthen the
Speaker 5: end mark.
Speaker 2: Let's get into that distinction. It's important. So we've heard
Speaker 2: complaints from the Ministry of Finance, We've heard next to
Speaker 2: nothing from the Bank of Japan. We have to deal
Speaker 2: with the big question, is it a problem or not?
Speaker 2: Do you think it is a problem.
Speaker 1: Well, I think part of it is.
Speaker 5: The problem is is it speculative and does it have
Speaker 5: kind of somewhat of a negative impact.
Speaker 1: I think part of it with that fax is there's
Speaker 1: always winners and losers.
Speaker 5: So you know, if you think about it from one perspective,
Speaker 5: the BOJ they're helping tourism, they're helping profit margins, sourcings
Speaker 5: are good. You can see the exporters are accumulating larger surpluses.
Speaker 5: But again, at the same time, if you look at
Speaker 5: the correlation to the you know, whether or not the
Speaker 5: politics and the politicians are actually doing their job properly.
Speaker 5: I think what we can see is there's a very
Speaker 5: strong correlation with the disapproval rating and the diet versus
Speaker 5: the movement in dollar yen.
Speaker 1: So this is a big pain point for consumers.
Speaker 5: Also, if you look at oil based in yen prices,
Speaker 5: we're back to where we were in two thousand and seven,
Speaker 5: two thousand and eight, So there is a massive consumer
Speaker 5: shock here that's going on from the weakness in the end.
Speaker 5: So I think the Ministry of Finance is more focused
Speaker 5: on the broad based movement and whether or not it's
Speaker 5: kind of dislodged it tell from fundamentals, and the boj
Speaker 5: is essentially just kind of sticking to their party a
Speaker 5: line that this is not something that they want to control.
Speaker 1: They basically control interest.
Speaker 5: Rates and monetary policy, and the FX is basically a
Speaker 5: function for the Ministry of Finance.
Speaker 2: This currency's been bullied all month, Missila describing it as
Speaker 2: a dog chasing an airborne frisbee, which made me laugh
Speaker 2: at least this morning. Mark. Looking at the direction to
Speaker 2: travel over the last month or so, I want to
Speaker 2: know whether you believe we've actually put a sustainable ceiling
Speaker 2: now in this currency pair on Dolly yen. And I
Speaker 2: want your opinion on this from Kit Chooks of Silkgen,
Speaker 2: who said, basically, what we need to achieve that is
Speaker 2: more aggressive policy action from both the Ministry of Finance
Speaker 2: and from the BOJ. Then the BOJ would need to
Speaker 2: signal a willingness to normalize policy even further, which so far, Mark,
Speaker 2: as you know, they've been reluctant to do so. So
Speaker 2: do you think we've established a pretty durable, solid, resilient
Speaker 2: ceiling on dollien around one sixty?
Speaker 5: I think we have in part on the fact that
Speaker 5: what intervention does is it doesn't change the trend, it
Speaker 5: changes a psychology. So you know, typically what we can
Speaker 5: see is at least two weeks of this intervention working.
Speaker 5: I would say what we need on the other side
Speaker 5: is we do need to see the trajectory of the
Speaker 5: dollar change. We do need to see the fundamentals in
Speaker 5: US change. I don't think that's going to change in
Speaker 5: favor of a stronger again in the short term, but
Speaker 5: as you mentioned, the BOJ does have an impact, and
Speaker 5: you know, I think part of what if we go
Speaker 5: back to like every major central bank when they started
Speaker 5: normalizing policy over the last couple of years, everyone chronically
Speaker 5: underestimated what the terminal rate was.
Speaker 1: And I think this was a part of it. It's
Speaker 1: price discovery.
Speaker 5: Where in the new world central banks are are essentially
Speaker 5: their forward guidance and their forecasts themselves have not been
Speaker 5: able to articulate exactly where they think the terminal rate
Speaker 5: should be either.
Speaker 1: So it's bad.
Speaker 5: Basically, you know, the market has basically been forced to
Speaker 5: kind of go through this process of figuring it out
Speaker 5: for trial and error. And I think basically what we
Speaker 5: should think about is that the BOJ and the japan
Speaker 5: policy rate, the natural policy rate is.
Speaker 1: Much higher than what's being priced in the markets.
Speaker 5: If you look at one year one year Japanese basis
Speaker 5: price swap from basically around fifty basis points, I would
Speaker 5: argue it's much higher than that.
Speaker 1: It's probably above one.
Speaker 5: So I think at some point, whether or not it's
Speaker 5: because of the currency, or whether or not just because
Speaker 5: you know the level what's pricing the market and where
Speaker 5: inflation is a bit more sticky in Japan. You know,
Speaker 5: if you look at some of the stuff that's dropped
Speaker 5: out of the inflation basket in Tokyo, and some of
Speaker 5: the other indicators you track in Japan, they're more temporary,
Speaker 5: they're related to fiscal stimulus is come through if they've
Speaker 5: come through on subsidies. So but the level of inflation
Speaker 5: in Japan is generally pretty higher. So I would argue
Speaker 5: here that the BOJ is going to be forced to
Speaker 5: tighten more aggressively at what price in the market that.
Speaker 1: Will help stabilize the end.
Speaker 5: But for the process to turn lower, you just need
Speaker 5: a much more dubbish FED, which looks increasingly unlikely at
Speaker 5: least for the remainder of this year.
Speaker 4: Well, Mark Gouffo, I want to ask, if short term
Speaker 4: the US dollar is not going anywhere, won't the BOJ,
Speaker 4: the financial chiefs in the currency chiefs in Japan just
Speaker 4: be dealing with this episode again.
Speaker 5: Well, I think a big component here is if you
Speaker 5: think about what drives dollar yet, I think there's two
Speaker 5: factors right now that we could kind of see in
Speaker 5: some of the models in data we track. It's hedge
Speaker 5: funds because there's a trade in it, and it's Japanese
Speaker 5: institutional investors.
Speaker 1: So I think a big piece of it is the
Speaker 1: market wants.
Speaker 5: To see institutional investors kind of front run movements in
Speaker 5: the policy, and I would argue that they are lagging indicators.
Speaker 5: So if you think about pension funds, insurance companies, even corporations,
Speaker 5: you know, essentially these are probably some of the institutions.
Speaker 1: That are caught on the wrong side of this trade.
Speaker 5: I think a lot of these places we're probably thinking
Speaker 5: between that's top and dollar yen, So a lot of
Speaker 5: these institutions were probably essentially short dollars long en and
Speaker 5: basically the move to one sixty just was too much,
Speaker 5: too fast.
Speaker 1: So that's where you start to see the shoulder taps.
Speaker 5: But I think in terms of the movements in dollar
Speaker 5: yen over the longer term, the pension fund rebalancing, the
Speaker 5: insurance companies, all these these institutions that are really running low,
Speaker 5: unheaged levels in dollar yen, these are the ones that'll
Speaker 5: start to repatriate that capital. Yes, you need some movements
Speaker 5: coming from the FED and from the US curve, but
Speaker 5: essentially at the same time, you also if you have
Speaker 5: BOJ tightening policy a little bit more aggressively than what
Speaker 5: markets are pricing, we will see the repatrion of those
Speaker 5: flows over time, which is.
Speaker 1: Our expectations, but that's not going to be the short
Speaker 1: term trade.
Speaker 5: That is a process of how they look at an investment,
Speaker 5: which those rebalancings usually come quarterly or even annually.
Speaker 2: If you want just joining us big moves overnight in
Speaker 2: the FX market, allow me to run through them for you.
Speaker 2: We brought through one sixty late last night. Dolli en.
Speaker 2: This mark has just been bullying the Japanese yen, pushing
Speaker 2: it ever higher over the last month or so. Some
Speaker 2: big numbers taken out, numbers we haven't seen since the
Speaker 2: early nineteen nineties that range this morning one sixty seventeen
Speaker 2: at the high than the low, one fifty four, fifty four.
Speaker 2: Japanese yen kicking in some strength big time in the
Speaker 2: last few hours or so, and a lot of suspicion
Speaker 2: that the Ministry of Finance has intervened in this market.
Speaker 2: The official comment from them so far is no comment.
Speaker 2: This from Dow Jones that financial authorities have intervened in
Speaker 2: the FX market. Mark I want to wrap things up
Speaker 2: more broadly in foreign exchange. This came from Mary Robinson
Speaker 2: of Stanchart. He said this for EM the combination of
Speaker 2: weaker currencies and stronger commodity prices you alluded to them,
Speaker 2: is creating a major dilemma that could put rate cuts
Speaker 2: on hold indefinitely. Mark, how do you think this story
Speaker 2: at the moment? Pair what's happening with the US dollar
Speaker 2: with what's happening with commodities. How does it shape central
Speaker 2: bank decisions worldwide?
Speaker 1: Yeah, it's absolutely critical. It's a very strong point the two.
Speaker 5: There's a way to think about it, right, If you
Speaker 5: have strong growth, and strong growth is leading to central
Speaker 5: bank changes.
Speaker 1: That has one way of thinking the FX market.
Speaker 5: If it's strong growth and generally contained disinflation, that is
Speaker 5: bearish for the dollar, and that's where the commodity store
Speaker 5: kicks in.
Speaker 1: You get a terms of trade shock.
Speaker 5: That's good for em especially in the context that they
Speaker 5: have really high level of interest rates in terms of carry.
Speaker 5: What we've seen recently though, this is how it changes
Speaker 5: the market. These are policy shocks, and the policy shocks
Speaker 5: driven by inflation is what causes rate differentials to matter
Speaker 5: a lot. So I think you could see this last
Speaker 5: week Bank of Indonesia surprise markets by hiking rates. No
Speaker 5: one was expecting that we are now dealing with the
Speaker 5: policy trade off for G ten and emerging market central
Speaker 5: banks that if the FED is basically priced to the
Speaker 5: point where they can cut once or cut not cut
Speaker 5: at all, or even depending on who wins the election,
Speaker 5: whether or not they actually have to hike next year.
Speaker 5: What we're seeing is these policy shocks are usually risk off,
Speaker 5: good for the dollar. I think in the context of the
Speaker 5: commodities there's some cushion for the.
Speaker 1: Commodity exporters like Brazil and some of the.
Speaker 5: Other countries around the world, but it's very small and
Speaker 5: it's going to be marginal in terms of the context
Speaker 5: of whether or not these policy shocks driven by US inflation,
Speaker 5: which is starting to accelerate relative to other currencies that
Speaker 5: we track and is more bullish for the dollar, that's
Speaker 5: going to force central banks that will have the ability
Speaker 5: to cut to change their perspective.
Speaker 1: In that changing of perspective.
Speaker 5: Is what titans financial conditions, and it's what changes the
Speaker 5: growth outlook for the next six to twelve months, which
Speaker 5: can be mutually reinforcing and negative for risk and strong
Speaker 5: for the dollar and mark.
Speaker 2: This is great, just fantastic, gay fe' so no'll design
Speaker 2: Franklin Sampletson expecting cuts the stock in September at the
Speaker 2: earliest and rights in this I believe this will be
Speaker 2: a short and shallow right cutting cycle and expect that
Speaker 2: tenure notes will jump around in a full twenty five
Speaker 2: to four seventy five range. After the shallow right cut
Speaker 2: cycle is done, we're likely to see long gen yields
Speaker 2: moving kaigh due.
Speaker 1: To fiscal pressures.
Speaker 2: So now let's start the journey with Wednesday if we can,
Speaker 2: and great to catch up with you as always. What
Speaker 2: are you looking for from chair and Pow in that
Speaker 2: press conference?
Speaker 5: So?
Speaker 1: I think it's going to be the usual.
Speaker 6: I think unfortunately Chairman Powell has a very difficult time
Speaker 6: sticking with a hawkish tone during the Q and A,
Speaker 6: so I wouldn't be surprised if in the Q and A,
Speaker 6: you know, he turned a little bit dubbish left to
Speaker 6: open some roads for rate cuts sooner than I think
Speaker 6: the Fed probably will cut. But you know, this is
Speaker 6: a pretty robust economy. We're looking at a strong labor market,
Speaker 6: we're looking at decent wage growth, we're looking at decent
Speaker 6: productivity gains, and the underlying underlying GDP data last week
Speaker 6: was pretty darn strong and inflation sticky. There's very little
Speaker 6: room for the Fed to be particularly dubbish or quick
Speaker 6: in terms of rate cuts.
Speaker 2: Are the save yes, and I as you know, they
Speaker 2: thought they were on a journey directly towards two percent
Speaker 2: and maybe cutting interest rates, and the market certainly thought
Speaker 2: it was going to be set up to cut interest rates,
Speaker 2: maybe as soon as March. And ultimately we start to
Speaker 2: get these bumps and they refer to them as bumps
Speaker 2: in the road. Do you think they are just bumps
Speaker 2: in the road or if they change course.
Speaker 6: I'll just say that if they're bumps on the road,
Speaker 6: it's a pretty bumpy road, and it's a pretty long one,
Speaker 6: you know. I don't think that these are just bumps
Speaker 6: in the road. I think what you're seeing is genuine
Speaker 6: stickiness and inflation, and it's coming from a lot of misreading.
Speaker 6: I think what went on in the post COVID period
Speaker 6: where everyone assumed that, you know, the economy had fallen
Speaker 6: over and gone to sleep for an extended period, and
Speaker 6: it hadn't, and there was so much a fiscal expansion
Speaker 6: during that period, and we continue to see the impact
Speaker 6: even today. I think it's going to be a long
Speaker 6: time before we start seeing in fishion going all the
Speaker 6: way back to to certainly not this year, sonya Ja Pulowski.
Speaker 7: Here, we were talking earlier before we went live about
Speaker 7: why one should own bonds or buy bonds, and we're not.
Speaker 7: We're very underweight treasuries here at TPW Advisory. You talked
Speaker 7: about strong growth. That's the reason why we're very underweight.
Speaker 7: Strong growth is not really constructive for treasuries. So I'm
Speaker 7: curious what would be the case if you could make
Speaker 7: the case for buying bonds here at these levels or
Speaker 7: where What level would you suggest people should get long?
Speaker 6: But I think it's I think it's very fair. What
Speaker 6: you're saying is definitely a fair point. On the other hand,
Speaker 6: you would say, I would say that most institutional investors
Speaker 6: retail investors are massively underweight bonds. I'm not suggesting going
Speaker 6: massively long here. We were short and we did go
Speaker 6: neutral over the last several months, and we're slightly long
Speaker 6: right now. But I would say that that range that
Speaker 6: I'm talking about in anticipation of a rate cutting cycle
Speaker 6: orbit shallow, and I don't anticipate that this is going
Speaker 6: to be the rally to end all rallies. I see
Speaker 6: some point in actually diversifying fixed income ideally plays a
Speaker 6: diversification role in portfolios, and I think that's really the
Speaker 6: case to be made to whole treasure. So when I
Speaker 6: talk about it being shallow, the reason is I think
Speaker 6: over the longer term, it is inevitable almost that we
Speaker 6: see treasuries moving systematically higher for a while, so we
Speaker 6: might see them come down. And I don't expect them
Speaker 6: to rally all the way down to two percent. I
Speaker 6: don't expect the FED cuts to take us to two percent,
Speaker 6: and certainly treasure aren't going to rally anywhere close to
Speaker 6: what we've seen in the last fifteen years. But then
Speaker 6: we will start seeing the sell off which comes from
Speaker 6: the fiscal pressures, which is going to go on for
Speaker 6: several years, I would anticipate, So it's a period, it's
Speaker 6: a short cutting cycle.
Speaker 1: I think that's really important.
Speaker 7: To think about. Yeah, and I would agree with that completely, Sonia,
Speaker 7: what about credit versus treasuries? And then could you just
Speaker 7: touch on that fiscal pressure, because you're absolutely correct, people
Speaker 7: have very much underestimated the power of the physical side
Speaker 7: of things because we've been so used to monetary policy
Speaker 7: driving everything since a great financial crisis, So help me
Speaker 7: understand the view between credit in the US or globally
Speaker 7: versus treasuries. And then this idea of fiscal how much
Speaker 7: of a window do we have between a rally in
Speaker 7: bonds before that fiscal pressure really manifests.
Speaker 6: So I'd say that the first bit on credit, the
Speaker 6: reality is all in credit yields will still give you
Speaker 6: if you're talking about high yield seven and a half percent,
Speaker 6: and so you can find pockets of value there. The
Speaker 6: all in yield is somewhat attractive, and I can see
Speaker 6: that in spread terms, we're looking at pretty tight spreads. Again,
Speaker 6: the case can be made reasonably and I'm sure you
Speaker 6: would make this one that we're looking at corporates which
Speaker 6: are in better financial health than they happen historically. So
Speaker 6: I accept all that, and I think that credit definitely
Speaker 6: has a space in portfolios, despite how tight it is.
Speaker 6: From an all in perspective, there is room for some
Speaker 6: credit in portfolios. I'd say the second point that you
Speaker 6: were making, which is when does the fiscal ax for
Speaker 6: we have begun to see it, and we periodically see
Speaker 6: it when the market focuses on the fact that we're
Speaker 6: looking at six percent plus six percent of GDP plus
Speaker 6: deficits in a forward looking way, and this is probably
Speaker 6: conservative in the event that we have a split Congress
Speaker 6: at the end of the next set of elections, in
Speaker 6: the sense that it doesn't matter who wins, right, as
Speaker 6: long as you have a split Congress, you are unlikely
Speaker 6: to see much fiscal consolidation. That I think is an
Speaker 6: important factor. I don't think it happens or certainly not
Speaker 6: this year. You know, we're going to see a lot
Speaker 6: of fiscal spending, that's a given this year, but I
Speaker 6: think you would continue to see that. When does that
Speaker 6: really drop that ax. I think we're going to need
Speaker 6: to see more of a buyers strike, and as we
Speaker 6: see long end yels move higher and higher, I think
Speaker 6: the US will be forced to do a certain amount
Speaker 6: of fiscal consolidation. But until we see until we see that,
Speaker 6: I don't see that consolidation happening. And treasury yields absolutely
Speaker 6: can go higher than five percent in that scenario.
Speaker 2: Do you think that's a challenge to treasuries as a diversifier.
Speaker 2: So now, if you think about where the deficit is now,
Speaker 2: that's going to gap out if we go into an
Speaker 2: economic downturn, and typically that's when you would by treasuries.
Speaker 1: Is that going to be a.
Speaker 6: Challenge to that. I think there is a challenge to that.
Speaker 6: I think right now the growth of the economy is
Speaker 6: something that we all have to be really grateful for
Speaker 6: because right now there aren't that many silver bullets, certainly
Speaker 6: not on fiscal and very few on the monetary side.
Speaker 6: So it's the fact that the economy continues to grow
Speaker 6: is the one somewhat saving grace here though the fact
Speaker 6: that it continues to grow also indicates very clearly that
Speaker 6: neither fiscal or monetary policy are particularly tight.
Speaker 1: Yep, So no, thank you.
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