WEBVTT - Three Reasons Why U.S. Stocks Are Going Up: Orlando (Podcast) 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:31.040 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now, 0:00:31.120 --> 0:00:33.760 let's turn back to markets. We are broadcasting live from 0:00:33.800 --> 0:00:36.559 the Bloomberg Interactive Broker's studios, and we have with us. 0:00:36.600 --> 0:00:39.400 We are very lucky to say Phil Orlando, chief Equity 0:00:39.440 --> 0:00:44.160 Market Strategistic Federated Investors here in the studio. Um, Phil, 0:00:44.280 --> 0:00:46.080 so can you give us a sense? Let's start with 0:00:46.080 --> 0:00:50.120 the yields, the rising US yields and how much that 0:00:50.159 --> 0:00:52.640 will just sort of de facto put a halt to 0:00:52.960 --> 0:00:55.360 the rally in stocks. How worried are you? Have we 0:00:55.440 --> 0:00:58.120 reached the tipping point? Well, I don't think we've reached 0:00:58.160 --> 0:01:01.760 the tipping point now. Our target for benchmark ten year 0:01:01.800 --> 0:01:04.520 treasury yields at the end of this year was three 0:01:04.520 --> 0:01:06.840 and a quarter percent. We're there, so we're not the 0:01:06.920 --> 0:01:10.080 least bit concerned about that. What does concern us is 0:01:10.120 --> 0:01:12.600 the rapidity of the move. We've gone from three oh 0:01:12.600 --> 0:01:14.720 five to three and a quarter in what a week? 0:01:15.280 --> 0:01:17.640 So I think the markets looking at that and freaking 0:01:17.680 --> 0:01:20.200 out and saying, Okay, if we went up, you know, 0:01:20.319 --> 0:01:22.480 twenty bases points in a week, what are we going 0:01:22.520 --> 0:01:24.120 to do over the course of the next month or 0:01:24.160 --> 0:01:26.440 the next quarter. We're looking at you know, five percent 0:01:26.440 --> 0:01:29.319 treasury yields by the end of the year. Okay, fair enough, 0:01:29.440 --> 0:01:31.240 But what is the tipping point? Is there sort of 0:01:31.280 --> 0:01:34.360 a number with the ten year treasure yield at which 0:01:34.840 --> 0:01:38.360 the equity markets just cannot rally anymore? Well, in our view, 0:01:38.400 --> 0:01:42.160 that number historically has been five percent, and five percent 0:01:42.760 --> 0:01:45.600 is the point at which you begin to see massive 0:01:45.640 --> 0:01:50.240 disinter mediation from the risky asset stocks into the risk 0:01:50.320 --> 0:01:53.680 free asset bonds because the yield is attractive. And then 0:01:53.920 --> 0:01:56.840 as as yields continue to rise six percent seven percent, 0:01:56.880 --> 0:02:02.320 pe s actually contract up until five pace historically expand 0:02:02.720 --> 0:02:05.760 so why is that? Well, as as as economy has 0:02:05.800 --> 0:02:08.560 come out of recession, as economic growth perks up, as 0:02:08.600 --> 0:02:11.440 inflation starts to perk up, as the Fed is tightening policy, 0:02:11.520 --> 0:02:14.000 is yields arising, all of that is good for corporate 0:02:14.000 --> 0:02:17.040 earnings because it means that the economy is strong. The 0:02:17.120 --> 0:02:20.640 five percent level historically has been the tipping point because 0:02:20.680 --> 0:02:25.160 you've got the risky versus you know, risk free inflection 0:02:25.280 --> 0:02:27.960 point that starts to take money away from from the 0:02:27.960 --> 0:02:32.000 equity market. Now that there are some who argue, well, okay, 0:02:32.200 --> 0:02:35.960 this time is different. Five percent won't be the inflection point. 0:02:36.000 --> 0:02:38.480 Maybe it's four percent, maybe it's three and a half percent. 0:02:38.720 --> 0:02:41.200 And I'm sensitive to the fact that people think that 0:02:41.200 --> 0:02:44.320 the lower numbers right this cycle. But let me point 0:02:44.360 --> 0:02:46.919 out that the foremost dangerous words in the English language, 0:02:47.440 --> 0:02:52.000 this time it's different. Phil Orlando Jamie Diamond, chief of 0:02:52.080 --> 0:02:56.400 JP Morgan Chase, says that people should prepare for US 0:02:56.520 --> 0:03:01.200 yields of five percentage you just described, and he believes 0:03:01.320 --> 0:03:04.400 that the yield on the benchmark tenure Treasury could reach 0:03:04.680 --> 0:03:09.960 four percent this year and perhaps even five or higher 0:03:10.480 --> 0:03:12.600 next year. He says, you better be prepared to deal 0:03:12.639 --> 0:03:18.720 with these rates. Are clients and customers prepared? Um? Certainly not. 0:03:18.840 --> 0:03:23.639 Our clients are customers because our forecast is not Jamie's forecast. 0:03:23.760 --> 0:03:26.680 We thought that treasury yields would get to three and 0:03:26.680 --> 0:03:29.480 a quarter percent this year they have. We think they'll 0:03:29.480 --> 0:03:32.440 get to three and a half percent next year. Uh. 0:03:32.520 --> 0:03:35.240 You know, Jamie thinks probably will get there by Thanksgiving 0:03:35.280 --> 0:03:38.920 this year. Uh. And then our expectation is that as 0:03:39.040 --> 0:03:43.400 the bond vigilantes begin to look out into the back 0:03:43.440 --> 0:03:47.520 half of or the early part of one and see 0:03:47.640 --> 0:03:52.000 some seeds of slowing economic growth, we actually might see 0:03:52.600 --> 0:03:54.840 a rally in bonds from three and a half percent, 0:03:54.920 --> 0:04:00.440 taking yields back down. So if Mr Diamond things that 0:04:00.520 --> 0:04:02.920 we're looking at a five percent treasury over the next 0:04:02.920 --> 0:04:05.560 couple of years, he's got to believe that there's much 0:04:05.600 --> 0:04:10.279 stronger economic growth, much greater inflationary pressures in the pipeline 0:04:10.720 --> 0:04:13.040 that will emanate over the course of the next couple 0:04:13.040 --> 0:04:15.800 of years. All Right, So you sound like you are bullish. 0:04:16.040 --> 0:04:18.919 You are sounding like you don't see treasure yields rising 0:04:18.920 --> 0:04:22.360 to the point of stimming the rally and equities, So 0:04:22.400 --> 0:04:24.640 are you out there buying the dips at this point? 0:04:25.400 --> 0:04:28.440 We will. We're monitoring that there are a couple of 0:04:28.480 --> 0:04:31.279 things that we look at. There's an interesting confluence of 0:04:31.320 --> 0:04:38.640 three indicators that are looking interesting. UH stocks oversold, bonds overbought, 0:04:38.839 --> 0:04:44.000 and UH bonds over sold and and uh, and the 0:04:44.080 --> 0:04:47.279 vics over bought. Uh. And those things are are are 0:04:47.279 --> 0:04:49.640 shaping up right now. So I don't know if today 0:04:49.720 --> 0:04:52.560 is the day or if tomorrow is the day. But 0:04:52.640 --> 0:04:54.839 as I look out at the market, over the course 0:04:54.880 --> 0:04:58.520 of the next month or so, there are several positive 0:04:58.560 --> 0:05:01.800 catalysts that I think will rever this recent weakness. Uh. 0:05:01.960 --> 0:05:05.440 You've got corporate earnings starting later this week, including Mr 0:05:05.520 --> 0:05:08.960 Diamond's firm. I'm expecting his company is going to produce 0:05:08.960 --> 0:05:11.640 some pretty good numbers along with others. We're thinking that 0:05:11.720 --> 0:05:14.840 corporate earnings are going to plus for the large gaps 0:05:15.000 --> 0:05:19.279 this quarter. Uh. We've got the flash report from the 0:05:19.279 --> 0:05:22.360 Commerce Department on third quarter g d P, which will 0:05:22.400 --> 0:05:26.800 be out. I believe October. We've got three point four 0:05:26.880 --> 0:05:30.279 percent is our number. It federated. I think the Atlanta Fed, 0:05:30.279 --> 0:05:33.080 for example, I might have a four handle on their number. Uh. 0:05:33.120 --> 0:05:35.240 And then we've the midterms are going to be over 0:05:35.279 --> 0:05:37.000 in a month and and all of this noise and 0:05:37.080 --> 0:05:42.719 nonsense will be behind us. There will be some certainty. R. Really, 0:05:43.120 --> 0:05:45.880 we're gonna quote you on on that one. I want 0:05:45.880 --> 0:05:49.240 to ask him more a more everyday question. Shot. So 0:05:49.320 --> 0:05:53.159 far this month, the SMP five hundred is down a 0:05:53.160 --> 0:05:57.920 little bit more than one. What is the number based 0:05:57.960 --> 0:06:06.479 on your experience where the customer and the client starts calling, well, uh, 0:06:06.560 --> 0:06:08.880 you know that becomes more of a technical question or 0:06:08.920 --> 0:06:15.240 anything else. So so typically him the third quarter of 0:06:15.480 --> 0:06:18.560 a midterm election year, a year like this tends to 0:06:18.560 --> 0:06:22.760 be a really sloppy quarter. Well, the month of September. Uh, 0:06:23.160 --> 0:06:26.479 we're up seven percent or something in the month of September. 0:06:26.760 --> 0:06:29.720 It was the best month we've seen in like five 0:06:29.839 --> 0:06:33.960 years or something like that, or numbers have been strong. Um. 0:06:34.560 --> 0:06:36.839 I like to look at more at peaks to troughs, 0:06:36.920 --> 0:06:40.080 and and this little correction that we're seeing in the 0:06:40.200 --> 0:06:43.279 large cap market right now is about three or four percent, 0:06:43.600 --> 0:06:46.760 in the small cap market is about seven or eight percent. 0:06:47.120 --> 0:06:51.520 These are healthy corrections, and what I'd like to see 0:06:51.720 --> 0:06:55.160 is some pull back to some longer term support levels 0:06:55.480 --> 0:06:59.000 in conjunction with continued solid fundamentals. We talked about a 0:06:59.000 --> 0:07:02.760 couple of things GDP growth, corporate earnings growth that become 0:07:03.279 --> 0:07:05.720 sort of buy signals for us. So I'm not ready 0:07:05.760 --> 0:07:08.800 to pull the trigger right this second. But I'm not 0:07:08.880 --> 0:07:11.600 getting panicked by this at all. I'm more inclined to 0:07:11.600 --> 0:07:14.680 be buying at the margin than selling, depending upon how 0:07:14.720 --> 0:07:16.880 events play out over the next few weeks. So which 0:07:16.880 --> 0:07:19.480 sectors are you looking to potentially buy when you get 0:07:19.520 --> 0:07:22.240 that valuation that looks attractive? There are two areas that 0:07:22.320 --> 0:07:26.840 just look extraordinarily interesting to us. UH domestic large cap 0:07:27.000 --> 0:07:31.960 value has underperformed growth by something like thirty percentage points 0:07:32.040 --> 0:07:36.200 over the last two years. Financials, industrials, and energy at 0:07:36.240 --> 0:07:39.000 the top of that list. And then small cap stocks 0:07:39.440 --> 0:07:41.360 as I said of pulled back seven or eight percent 0:07:41.400 --> 0:07:44.280 here over the last month or so. For a number 0:07:44.320 --> 0:07:47.160 of reasons. We think that the small cap rally we've 0:07:47.200 --> 0:07:51.280 seen earlier this year has legs. UH and UM I 0:07:51.320 --> 0:07:54.200 think small caps are are are oversold at this point 0:07:54.240 --> 0:07:57.400 and and will rally, will resume their rally later this year. 0:07:57.760 --> 0:08:00.280 Where's the money going to come from? It to come 0:08:00.280 --> 0:08:03.920 out of bonds? Because if Jamie Diamonds right and treasury 0:08:03.960 --> 0:08:06.160 yields go to five percent, we're sitting at three and 0:08:06.200 --> 0:08:08.800 a quarter right now. I don't know why you'd want 0:08:08.840 --> 0:08:12.240 to be long a treasury in this environment. Okay, but 0:08:12.360 --> 0:08:16.680 if Phil Orlando is correct, you won't have been in bonds. 0:08:16.800 --> 0:08:19.320 You will have been in stocks. Where's the new money 0:08:19.360 --> 0:08:21.960 going to come from? Well, I still think we still 0:08:22.000 --> 0:08:25.000 have a significant underweight in fixed income. We are five 0:08:25.000 --> 0:08:30.240 percent overweight equities, five percent underweight cash. And if if 0:08:30.280 --> 0:08:34.480 an investor is really interested at the three and a 0:08:34.559 --> 0:08:38.360 quarter percent Treasury yield because they need the money, I 0:08:38.440 --> 0:08:41.880 can show them our strategic value fund that's giving them 0:08:41.920 --> 0:08:45.240 a five percent dividend yield right now. So so if 0:08:45.280 --> 0:08:47.600 if money, if income is what they want, you can 0:08:47.640 --> 0:08:49.640 do that in the stock market. You don't need bonds 0:08:49.679 --> 0:08:51.960 to do that. And the risk of of of a 0:08:52.000 --> 0:08:54.680 capital loss. All right, So what's the biggest risk to 0:08:54.720 --> 0:08:57.120 your outlook right now? What could potentially happen that would 0:08:57.480 --> 0:09:00.280 make you be wrong? Well, there's you know, I've got 0:09:00.280 --> 0:09:02.559 a list of nine things to keep me awake at night. 0:09:02.600 --> 0:09:05.000 I mean, I'm I'm I'm here talking my book and 0:09:05.040 --> 0:09:08.280 sounding bullish, but that that doesn't mean there's nothing that's 0:09:08.320 --> 0:09:10.680 going wrong in the world. And at the top of 0:09:10.720 --> 0:09:13.360 the list is is the Federal Reserve gonna make a 0:09:13.400 --> 0:09:15.960 policy here in the out years? I mean that concerns 0:09:16.000 --> 0:09:19.840 me trade and tariffs that seems to be falling into place. 0:09:20.240 --> 0:09:22.640 China is sort of the last man standing here. But 0:09:23.200 --> 0:09:24.920 you know, are we're gonna be able to pull off 0:09:24.920 --> 0:09:26.880 the last trick here and and get the trade and 0:09:26.880 --> 0:09:30.520 tariff situation in good shape? The blue wave, I think 0:09:30.520 --> 0:09:32.640 we're gonna end up with the split election. I think 0:09:32.679 --> 0:09:36.880 the House probably flips, the Senate probably stays in Republican control. 0:09:36.960 --> 0:09:39.719 But suppose the d's are on the table. Suppose we 0:09:39.800 --> 0:09:42.880 spend the next two years going through impeachment proceedings, and 0:09:42.880 --> 0:09:45.840 and that takes the focus away from you know, fiscal 0:09:45.880 --> 0:09:49.440 policy and strong economic growth and strong corporate earnings growth. 0:09:49.559 --> 0:09:52.440 So there's any number of things that can go wrong. Um, 0:09:52.640 --> 0:09:54.760 and so you just, you know, you just have to 0:09:54.800 --> 0:09:57.440 evaluate what's going on and try to get the best 0:09:57.480 --> 0:10:00.360 information you can to your clients. So does all of 0:10:00.440 --> 0:10:03.280 this day the same if oil remains that let's say 0:10:03.320 --> 0:10:06.520 seventy four seventy five dollars a barrel for West Texas 0:10:06.520 --> 0:10:09.960 Intermediate or eight plus when it comes to brand. Thank you, 0:10:10.040 --> 0:10:13.560 I'll give your twenty dollars later. Excellent question. You know, 0:10:13.600 --> 0:10:17.160 you pick up any newspaper in America and uh, you know, 0:10:17.720 --> 0:10:20.160 headline writers or crewed gone back to the north of 0:10:20.160 --> 0:10:22.960 a hundred dollars a barrel, and that just isn't happening. 0:10:23.000 --> 0:10:26.640 The supply and demand in balance right now. Uh, we're 0:10:26.679 --> 0:10:31.200 past the peak driving season. Uh, we're fracking to beat 0:10:31.280 --> 0:10:36.040 the band. The Saudis and the Russians are continuing to pump. Okay. 0:10:36.120 --> 0:10:39.920 I think they're going to offset the diminution of crude 0:10:40.040 --> 0:10:43.240 that that we may lose that of Iran if if 0:10:43.280 --> 0:10:46.920 these nuclear sanctions are reimposed. There is concern in the 0:10:47.000 --> 0:10:50.040 Gulf right now with Hurricane Michael. Does that take any 0:10:50.080 --> 0:10:53.640 refining capacity out? I understand all the near term noise, 0:10:53.960 --> 0:10:56.520 but but our view is that the move up from 0:10:56.559 --> 0:10:59.200 forty dollars a year and a half ago would sort 0:10:59.200 --> 0:11:02.839 of settled into sixty five to seventy five barrel range. 0:11:03.040 --> 0:11:05.280 We're at the top end of that range now, so 0:11:05.440 --> 0:11:09.200 I'm I'm fine with with crude at seventy five, staying 0:11:09.240 --> 0:11:12.280 within that sixty to seventy five. I don't think that 0:11:12.320 --> 0:11:15.240 the newspapers are doing a good job getting everyone all 0:11:15.360 --> 0:11:18.160 worked up with with hundred dollar plus crude. I don't 0:11:18.160 --> 0:11:20.200 think crewdes going on a hundred dollars. It's not just 0:11:20.480 --> 0:11:22.960 the headline writers though there's some pretty big analysts on 0:11:23.040 --> 0:11:26.120 Wall Street Corp predicting a hundred dollars or more pre 0:11:26.200 --> 0:11:28.319 barrel of oil, and the i A has come out 0:11:28.360 --> 0:11:30.480 and said, you know, yeah, please pump morps so that 0:11:30.520 --> 0:11:33.120 we can get the prices down. So it's not just 0:11:33.200 --> 0:11:36.120 headline writers. There seems to be an increasing risk of that. 0:11:36.720 --> 0:11:39.160 I'm just wroking that out there, and and that's fine. 0:11:39.640 --> 0:11:42.400 Given the fact that the three largest producers in the 0:11:42.440 --> 0:11:45.480 world at ten to eleven million barrels a day, of 0:11:45.520 --> 0:11:48.040 the United States, the Russians and the Saudis, I think 0:11:48.120 --> 0:11:50.920 will continue to pump when push comes to shove. We're 0:11:50.920 --> 0:11:53.040 at a point in the cycle where the demand starts 0:11:53.080 --> 0:11:57.760 to diminish. Obviously, we've got to watch the hurricane activity. 0:11:57.800 --> 0:12:00.880 Obviously we've got to watch what's happening and rand. But 0:12:00.960 --> 0:12:04.040 I think that this balances itself out and we'll be okay. 0:12:04.480 --> 0:12:05.960 And I thought you were just going to tell us 0:12:06.000 --> 0:12:08.920 that Jerry Jones and the Dallas Cowboys he wants to 0:12:08.960 --> 0:12:12.200 buy more more assets in the in the shail play 0:12:12.240 --> 0:12:15.679 with his comstock resources. I didn't hear that, so I 0:12:15.960 --> 0:12:18.199 don't have any I don't have any knowledge about what 0:12:18.440 --> 0:12:21.360 Mr Jones is doing. Are well done, Thanks very much 0:12:21.400 --> 0:12:23.920 for sharing your knowledge with us. Phil Orlando is the 0:12:24.000 --> 0:12:27.839 chief equity market strategist for Federated Investors and Lisa, I 0:12:27.920 --> 0:12:30.560 think we can just call him a bull right now, 0:12:31.080 --> 0:12:33.760 fish for now. Thanks for having me on, guys, it 0:12:33.840 --> 0:12:36.160 is It is a treat to come out of this show. 0:12:36.240 --> 0:12:38.800 You guys are terrific. Thank you. All right, we'll give 0:12:38.800 --> 0:12:41.600 you the twenty dollars back, Thanks very much, Phil Orlando 0:12:42.000 --> 0:12:55.599 of Federated Investors. Our guest is Carl Weinberg. He is 0:12:55.640 --> 0:12:59.360 the chief economist for High Frequency Economics and you can 0:12:59.480 --> 0:13:04.959 follow Carl on Twitter at c B Weinberg. Carl, can 0:13:05.000 --> 0:13:08.080 you speak a little bit about fatigue when it comes 0:13:08.120 --> 0:13:12.520 to global growth and particularly in the context of the 0:13:12.559 --> 0:13:16.160 meetings that are scheduled to take place in Bali for 0:13:16.240 --> 0:13:19.640 the International Monetary Fund? Yeah, Hi, Pam, good morning. So 0:13:19.920 --> 0:13:22.040 you know, the i m F has been talking this 0:13:22.080 --> 0:13:25.880 story for some time now. They're byline that their last 0:13:25.880 --> 0:13:27.800 set of meetings was you know, is this as good 0:13:27.800 --> 0:13:30.600 as it gets in the world economy? This time around, 0:13:30.600 --> 0:13:33.800 they translated that into some numbers in their world economic outlook, 0:13:34.000 --> 0:13:36.840 shaving down their growth rate. They still have a pretty 0:13:36.920 --> 0:13:39.640 cheeky growth rate of three point seven percent for the 0:13:39.640 --> 0:13:41.760 world economy, and they're the same for this year as 0:13:41.880 --> 0:13:44.719 last year. But most importantly of all, the i m 0:13:44.800 --> 0:13:48.040 F has a lousy record of predicting turning points in 0:13:48.080 --> 0:13:51.840 the world economy. So this document is kind of provocative 0:13:51.960 --> 0:13:54.720 and that it gives people something to think about. But 0:13:55.000 --> 0:13:58.400 the IMF has missed every economic downturn over the last 0:13:58.400 --> 0:14:01.760 twenty years in its world economic outlook. There should be 0:14:01.800 --> 0:14:03.960 nothing new for investors in what came out of the 0:14:03.960 --> 0:14:06.559 i m F today. All right, but Dr Weinberg, do 0:14:06.559 --> 0:14:09.959 you agree with anything that they put out there, putting 0:14:09.960 --> 0:14:12.880 aside their track recording. Yeah, I mean, I think that 0:14:13.040 --> 0:14:15.080 the broad story is that there are risks of the 0:14:15.080 --> 0:14:18.520 world economy coming from trade. There are I think bigger 0:14:18.600 --> 0:14:21.000 risks out there that the fund mentions a little bit 0:14:21.040 --> 0:14:24.240 deeper into the document. Higher US interest rates or a 0:14:24.360 --> 0:14:28.360 drain on growth potential and disposable income for countries that 0:14:28.440 --> 0:14:31.840 have a high foreign currency debts denominated in dollars. The 0:14:31.880 --> 0:14:35.200 stronger dollar is also a drain. Higher oil prices are 0:14:35.240 --> 0:14:37.840 also a drain. So we have clouds forming off of 0:14:37.880 --> 0:14:40.400 the world economy, and we're starting to see that in 0:14:40.480 --> 0:14:43.560 things like the industrial production number for Germany that came 0:14:43.600 --> 0:14:46.040 out on Monday. We're starting to see it in slowing 0:14:46.120 --> 0:14:50.360 GDP growth in places like Japan, uh and uh So. Overall, 0:14:50.400 --> 0:14:53.280 I think the Fund's message is right on, but I 0:14:53.320 --> 0:14:57.000 think that there's still probably more optimistic, and of history 0:14:57.080 --> 0:14:59.560 is any guide. They are too optimistic about how this 0:14:59.600 --> 0:15:02.560 is going evolve over the next year or two. Carl, 0:15:02.640 --> 0:15:05.880 do you believe that the Chinese will be able to 0:15:05.920 --> 0:15:11.680 outweight the United States when it comes to trade negotiations. Yeah, 0:15:11.760 --> 0:15:14.520 I certainly think they will. I certainly think they have to. 0:15:15.160 --> 0:15:19.200 The prize in all of this is China's industrial development policy, 0:15:19.280 --> 0:15:23.120 the so called Made in China, and that's a program 0:15:23.160 --> 0:15:27.880 in China to acquire the technology to produce seventy of 0:15:27.920 --> 0:15:31.000 the stuff that goes into what they assemble and re export, 0:15:31.400 --> 0:15:35.640 rather than thet that they currently produce at this time. 0:15:36.000 --> 0:15:39.160 So that difference of the value of exports is a 0:15:39.200 --> 0:15:42.160 trillion dollar a year prize that comes to China, and 0:15:42.200 --> 0:15:45.600 that's what's really at stake. The US Trade Representative mentions 0:15:45.680 --> 0:15:50.120 this program explicitly in its statements about the US tariffs 0:15:50.360 --> 0:15:52.120 UM and China is never going to give that up. 0:15:52.320 --> 0:15:54.240 So I think the Chinese have a big prize, a 0:15:54.280 --> 0:15:56.160 big pay day at the end of the day for 0:15:56.240 --> 0:15:59.960 sitting out the tariffs. I believe they will. Dr Carl Weinberg, 0:16:00.040 --> 0:16:02.080 thank you so much for taking the time with us. 0:16:02.160 --> 0:16:05.960 Dr Carl Weinberger's chief economist at High Frequency Economics. Talking 0:16:06.000 --> 0:16:08.520 about the I m f S stellar track record, he 0:16:08.600 --> 0:16:10.800 actually it doesn't put a whole lot of credis in that, 0:16:10.800 --> 0:16:16.000 but it's definitely looking at the potential for slowing global growth. 0:16:26.320 --> 0:16:29.520 Joining us now, Mark Lynde Bloom, portfolio manager for Western 0:16:29.600 --> 0:16:33.320 Asset Management. Mark, thank you so much for being with us. 0:16:33.560 --> 0:16:36.640 Can I just ask do you find treasuries attractive here 0:16:36.720 --> 0:16:40.120 given how quickly yields have risen to seven year highs? 0:16:41.240 --> 0:16:43.520 Good morning, Thanks for having me on The answer to 0:16:43.560 --> 0:16:47.040 your question, as we do. We have for most of 0:16:47.120 --> 0:16:50.760 the year had two reasons that we are favoring US treasuries. 0:16:51.720 --> 0:16:54.520 First is that we thought the economic growth this year 0:16:54.600 --> 0:16:56.400 next year would be a bit more moderate, and I 0:16:56.440 --> 0:16:58.360 have to say we've been wrong on that given the 0:16:58.360 --> 0:17:02.560 fiscal impulse that we've seen. Nonetheless, our economists here are 0:17:02.640 --> 0:17:06.399 looking for somewhat slower growth versus what we've seen in 0:17:06.400 --> 0:17:08.560 the middle part of this year, but most importantly from 0:17:08.600 --> 0:17:10.639 a bond point of view, that inflation is going to 0:17:10.680 --> 0:17:14.880 remain around two. The second reason I would say, though, 0:17:14.920 --> 0:17:18.359 is it as important, and that is as part of 0:17:18.359 --> 0:17:20.879 a fix income portfolio, we do want to have a 0:17:21.000 --> 0:17:24.919 risk mitigator and insurance policy, if you will, just in 0:17:25.000 --> 0:17:27.840 case we did start to see you slowdown or financial 0:17:27.840 --> 0:17:32.080 conditions did start to pinch economies around the globe. Both 0:17:32.080 --> 0:17:36.000 of those reasons, we are favoring favoring treasuries here a 0:17:36.000 --> 0:17:38.399 little bit more even around across the curve than we 0:17:38.440 --> 0:17:41.000 have in the past where we have focused on the 0:17:41.000 --> 0:17:44.840 long end mark. Is that also the two reasons why 0:17:45.080 --> 0:17:48.880 you're choosing now to issue and launch the first fixed 0:17:49.000 --> 0:17:54.120 income exchange traded fund UH from Western Asset Management, the 0:17:54.160 --> 0:17:59.680 Western Asset Total Return ets somewhat coincidental there. What we've 0:17:59.680 --> 0:18:05.200 been here from the field UM and from those who 0:18:05.240 --> 0:18:08.359 know Western well over the last four decades is they've 0:18:08.480 --> 0:18:12.840 been looking for an additional vehicle besides the separately managed 0:18:12.880 --> 0:18:16.920 portfolio or a mutual fund or a commingled vehicle, and 0:18:17.040 --> 0:18:20.040 specifically an e t F. So from our point of view, 0:18:20.119 --> 0:18:23.119 it's a it's a great question that it is a 0:18:23.640 --> 0:18:26.440 different rapper, if you will, but it will be managed 0:18:27.080 --> 0:18:30.359 pretty much the same as all the other vehicles with 0:18:30.520 --> 0:18:33.679 all the same Western themes as part of the E 0:18:33.760 --> 0:18:36.240 t F. All right, are you at all concerned about 0:18:36.240 --> 0:18:39.040 revealing your secret sauce since you have to actually disclose 0:18:39.160 --> 0:18:42.920 the holdings in real time basis of the E t 0:18:43.119 --> 0:18:46.560 F Really not mean. We've been always very open about 0:18:46.920 --> 0:18:50.439 what we are doing on a daily basis, so to 0:18:50.520 --> 0:18:52.760 the extent that this is a little different and and 0:18:52.800 --> 0:18:56.600 a from a formal point of view, it's uh, it 0:18:56.640 --> 0:18:59.040 does not bother us in the least in terms of 0:18:59.119 --> 0:19:01.560 letting letting that information out there. So can you give 0:19:01.600 --> 0:19:04.080 me a sense here of what you would have done 0:19:04.280 --> 0:19:06.840 or what you did do in the past week given 0:19:07.160 --> 0:19:10.000 the sell off in in treasuries that we've seen, but 0:19:10.160 --> 0:19:12.919 also the sell off an investment great debt in particular 0:19:13.000 --> 0:19:17.320 that really has been quite quite significant. Yes, it has 0:19:17.359 --> 0:19:19.720 been quite significant to your first part of your question. 0:19:20.040 --> 0:19:22.720 As I mentioned a little bit earlier, in the last 0:19:22.760 --> 0:19:25.520 several years, our clients have benefited from our dedication and 0:19:25.560 --> 0:19:28.720 some would say stubbornness wanting to own the longest part 0:19:28.720 --> 0:19:30.960 of the U S treasury curve, and that was based 0:19:31.000 --> 0:19:34.320 upon our view that the said would very slowly increase rates. 0:19:34.400 --> 0:19:36.199 In fact, they have done that, as we all know. 0:19:36.320 --> 0:19:39.280 The expectation is they'll continue to do that, and we 0:19:39.320 --> 0:19:42.359 are moving some of that contribution, if you will, or 0:19:42.400 --> 0:19:44.960 that duration down into the short and intermediate part of 0:19:44.960 --> 0:19:49.200 the YOK curve, just thinking it's their better value there 0:19:49.400 --> 0:19:52.240 or fully reflect expectations on the part of the Fed 0:19:52.280 --> 0:19:55.359 as we go into two thousand and nineteen, and as 0:19:55.440 --> 0:19:58.240 we all know, there are now actually real yields. They're 0:19:58.359 --> 0:20:01.000 they're they're quite attractive and our opinions, so that has 0:20:01.040 --> 0:20:03.159 been a change. And then one of the things that 0:20:03.200 --> 0:20:05.480 we've been doing over over the last week or so, 0:20:05.640 --> 0:20:08.879 as as the as the market has been backing up 0:20:09.000 --> 0:20:13.919 quite substantially on the non treasury sectors to your to 0:20:13.920 --> 0:20:17.720 your question, we've been growing increasingly cautious, particularly towards the 0:20:17.760 --> 0:20:22.000 corporate sectors, and particularly to the below investment grade corporate sectors, 0:20:22.080 --> 0:20:24.800 where we've been taking our allocation to high yield and 0:20:24.880 --> 0:20:28.480 bank loans lower investment grade corporates. We've been more neutral, 0:20:28.760 --> 0:20:32.399 but our investment grade corporate team has been concentrating on 0:20:32.440 --> 0:20:35.760 those sectors that we feel most good about it in 0:20:35.800 --> 0:20:40.040 the late late stages of this economic cycle. The one 0:20:40.040 --> 0:20:43.080 thing I'll add to that is that the one area 0:20:43.200 --> 0:20:46.680 we do have higher conviction on is emerging markets, while 0:20:46.760 --> 0:20:49.240 all the others we don't have that same high conviction, 0:20:49.280 --> 0:20:51.080 or to put differently, we just don't think we're being 0:20:51.119 --> 0:20:54.080 paid for the risk. When you mentioned emerging markets, do 0:20:54.119 --> 0:20:58.400 you mean dollar denominated emerging market debt or local currency debt? 0:20:59.119 --> 0:21:02.040 A little bit of both, quite selective, like we are 0:21:02.080 --> 0:21:05.600 in every credit sector on those countries or those corporations 0:21:05.600 --> 0:21:08.600 within those countries that we're choosing. But as you look 0:21:08.640 --> 0:21:12.399 at our portfolios today, right across the board, were approximately 0:21:12.440 --> 0:21:15.960 half the dollar the external debt, and we are approximately 0:21:16.000 --> 0:21:19.680 half in some of the local bonds and local currencies. 0:21:20.160 --> 0:21:23.520 There is an increasing sort of din out there that 0:21:23.600 --> 0:21:25.840 the Federal Reserve is on the brink of a policy 0:21:26.080 --> 0:21:30.280 error as it increases the pace of raising rates. Do 0:21:30.359 --> 0:21:31.800 you do you agree with that? I mean, do you 0:21:31.800 --> 0:21:35.720 think that that risk is growing stronger? I think we'd 0:21:35.720 --> 0:21:39.200 have to acknowledge over the cycles that we've all lived through. 0:21:39.240 --> 0:21:44.120 When you look at business slowdowns and actual recessions, there 0:21:44.119 --> 0:21:46.639 are common themes as to why they come about in 0:21:46.760 --> 0:21:50.400 terms of the FED being on the move, perhaps commodity 0:21:50.440 --> 0:21:57.040 prices increasing, uh, some misallocation of capital, inventories, etcetera. So 0:21:57.200 --> 0:22:00.840 we are not about to dismiss what's happening now in 0:22:00.960 --> 0:22:04.040 terms of the FED being on the move uh and 0:22:04.160 --> 0:22:07.840 planning to raise interest rates to neutral or beyond as 0:22:07.840 --> 0:22:11.440 they've been saying recently. The thing that we all just 0:22:11.480 --> 0:22:14.240 don't know how to weigh is this experiment we've been 0:22:14.400 --> 0:22:18.120 conducting for now ten years. As we unwind that, and 0:22:18.320 --> 0:22:21.160 if the speed limited growth around the world and particularly 0:22:21.200 --> 0:22:24.320 in the United States, is lower, we would believe then 0:22:24.400 --> 0:22:27.119 that smaller incremental increases in the FED funds rate and 0:22:27.200 --> 0:22:30.159 market interest rates will start to impact the economy sooner. 0:22:30.760 --> 0:22:34.080 So we are not about to ignore those signs at all, 0:22:34.160 --> 0:22:37.960 and are growing a little bit more cautious towards particularly 0:22:38.040 --> 0:22:42.160