Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now,
Speaker 1: let's turn back to markets. We are broadcasting live from
Speaker 1: the Bloomberg Interactive Broker's studios, and we have with us.
Speaker 1: We are very lucky to say Phil Orlando, chief Equity
Speaker 1: Market Strategistic Federated Investors here in the studio. Um, Phil,
Speaker 1: so can you give us a sense? Let's start with
Speaker 1: the yields, the rising US yields and how much that
Speaker 1: will just sort of de facto put a halt to
Speaker 1: the rally in stocks. How worried are you? Have we
Speaker 1: reached the tipping point? Well, I don't think we've reached
Speaker 1: the tipping point now. Our target for benchmark ten year
Speaker 1: treasury yields at the end of this year was three
Speaker 1: and a quarter percent. We're there, so we're not the
Speaker 1: least bit concerned about that. What does concern us is
Speaker 1: the rapidity of the move. We've gone from three oh
Speaker 1: five to three and a quarter in what a week?
Speaker 1: So I think the markets looking at that and freaking
Speaker 1: out and saying, Okay, if we went up, you know,
Speaker 1: twenty bases points in a week, what are we going
Speaker 1: to do over the course of the next month or
Speaker 1: the next quarter. We're looking at you know, five percent
Speaker 1: treasury yields by the end of the year. Okay, fair enough,
Speaker 1: But what is the tipping point? Is there sort of
Speaker 1: a number with the ten year treasure yield at which
Speaker 1: the equity markets just cannot rally anymore? Well, in our view,
Speaker 1: that number historically has been five percent, and five percent
Speaker 1: is the point at which you begin to see massive
Speaker 1: disinter mediation from the risky asset stocks into the risk
Speaker 1: free asset bonds because the yield is attractive. And then
Speaker 1: as as yields continue to rise six percent seven percent,
Speaker 1: pe s actually contract up until five pace historically expand
Speaker 1: so why is that? Well, as as as economy has
Speaker 1: come out of recession, as economic growth perks up, as
Speaker 1: inflation starts to perk up, as the Fed is tightening policy,
Speaker 1: is yields arising, all of that is good for corporate
Speaker 1: earnings because it means that the economy is strong. The
Speaker 1: five percent level historically has been the tipping point because
Speaker 1: you've got the risky versus you know, risk free inflection
Speaker 1: point that starts to take money away from from the
Speaker 1: equity market. Now that there are some who argue, well, okay,
Speaker 1: this time is different. Five percent won't be the inflection point.
Speaker 1: Maybe it's four percent, maybe it's three and a half percent.
Speaker 1: And I'm sensitive to the fact that people think that
Speaker 1: the lower numbers right this cycle. But let me point
Speaker 1: out that the foremost dangerous words in the English language,
Speaker 1: this time it's different. Phil Orlando Jamie Diamond, chief of
Speaker 1: JP Morgan Chase, says that people should prepare for US
Speaker 1: yields of five percentage you just described, and he believes
Speaker 1: that the yield on the benchmark tenure Treasury could reach
Speaker 1: four percent this year and perhaps even five or higher
Speaker 1: next year. He says, you better be prepared to deal
Speaker 1: with these rates. Are clients and customers prepared? Um? Certainly not.
Speaker 1: Our clients are customers because our forecast is not Jamie's forecast.
Speaker 1: We thought that treasury yields would get to three and
Speaker 1: a quarter percent this year they have. We think they'll
Speaker 1: get to three and a half percent next year. Uh.
Speaker 1: You know, Jamie thinks probably will get there by Thanksgiving
Speaker 1: this year. Uh. And then our expectation is that as
Speaker 1: the bond vigilantes begin to look out into the back
Speaker 1: half of or the early part of one and see
Speaker 1: some seeds of slowing economic growth, we actually might see
Speaker 1: a rally in bonds from three and a half percent,
Speaker 1: taking yields back down. So if Mr Diamond things that
Speaker 1: we're looking at a five percent treasury over the next
Speaker 1: couple of years, he's got to believe that there's much
Speaker 1: stronger economic growth, much greater inflationary pressures in the pipeline
Speaker 1: that will emanate over the course of the next couple
Speaker 1: of years. All Right, So you sound like you are bullish.
Speaker 1: You are sounding like you don't see treasure yields rising
Speaker 1: to the point of stimming the rally and equities, So
Speaker 1: are you out there buying the dips at this point?
Speaker 1: We will. We're monitoring that there are a couple of
Speaker 1: things that we look at. There's an interesting confluence of
Speaker 1: three indicators that are looking interesting. UH stocks oversold, bonds overbought,
Speaker 1: and UH bonds over sold and and uh, and the
Speaker 1: vics over bought. Uh. And those things are are are
Speaker 1: shaping up right now. So I don't know if today
Speaker 1: is the day or if tomorrow is the day. But
Speaker 1: as I look out at the market, over the course
Speaker 1: of the next month or so, there are several positive
Speaker 1: catalysts that I think will rever this recent weakness. Uh.
Speaker 1: You've got corporate earnings starting later this week, including Mr
Speaker 1: Diamond's firm. I'm expecting his company is going to produce
Speaker 1: some pretty good numbers along with others. We're thinking that
Speaker 1: corporate earnings are going to plus for the large gaps
Speaker 1: this quarter. Uh. We've got the flash report from the
Speaker 1: Commerce Department on third quarter g d P, which will
Speaker 1: be out. I believe October. We've got three point four
Speaker 1: percent is our number. It federated. I think the Atlanta Fed,
Speaker 1: for example, I might have a four handle on their number. Uh.
Speaker 1: And then we've the midterms are going to be over
Speaker 1: in a month and and all of this noise and
Speaker 1: nonsense will be behind us. There will be some certainty. R. Really,
Speaker 1: we're gonna quote you on on that one. I want
Speaker 1: to ask him more a more everyday question. Shot. So
Speaker 1: far this month, the SMP five hundred is down a
Speaker 1: little bit more than one. What is the number based
Speaker 1: on your experience where the customer and the client starts calling, well, uh,
Speaker 1: you know that becomes more of a technical question or
Speaker 1: anything else. So so typically him the third quarter of
Speaker 1: a midterm election year, a year like this tends to
Speaker 1: be a really sloppy quarter. Well, the month of September. Uh,
Speaker 1: we're up seven percent or something in the month of September.
Speaker 1: It was the best month we've seen in like five
Speaker 1: years or something like that, or numbers have been strong. Um.
Speaker 1: I like to look at more at peaks to troughs,
Speaker 1: and and this little correction that we're seeing in the
Speaker 1: large cap market right now is about three or four percent,
Speaker 1: in the small cap market is about seven or eight percent.
Speaker 1: These are healthy corrections, and what I'd like to see
Speaker 1: is some pull back to some longer term support levels
Speaker 1: in conjunction with continued solid fundamentals. We talked about a
Speaker 1: couple of things GDP growth, corporate earnings growth that become
Speaker 1: sort of buy signals for us. So I'm not ready
Speaker 1: to pull the trigger right this second. But I'm not
Speaker 1: getting panicked by this at all. I'm more inclined to
Speaker 1: be buying at the margin than selling, depending upon how
Speaker 1: events play out over the next few weeks. So which
Speaker 1: sectors are you looking to potentially buy when you get
Speaker 1: that valuation that looks attractive? There are two areas that
Speaker 1: just look extraordinarily interesting to us. UH domestic large cap
Speaker 1: value has underperformed growth by something like thirty percentage points
Speaker 1: over the last two years. Financials, industrials, and energy at
Speaker 1: the top of that list. And then small cap stocks
Speaker 1: as I said of pulled back seven or eight percent
Speaker 1: here over the last month or so. For a number
Speaker 1: of reasons. We think that the small cap rally we've
Speaker 1: seen earlier this year has legs. UH and UM I
Speaker 1: think small caps are are are oversold at this point
Speaker 1: and and will rally, will resume their rally later this year.
Speaker 1: Where's the money going to come from? It to come
Speaker 1: out of bonds? Because if Jamie Diamonds right and treasury
Speaker 1: yields go to five percent, we're sitting at three and
Speaker 1: a quarter right now. I don't know why you'd want
Speaker 1: to be long a treasury in this environment. Okay, but
Speaker 1: if Phil Orlando is correct, you won't have been in bonds.
Speaker 1: You will have been in stocks. Where's the new money
Speaker 1: going to come from? Well, I still think we still
Speaker 1: have a significant underweight in fixed income. We are five
Speaker 1: percent overweight equities, five percent underweight cash. And if if
Speaker 1: an investor is really interested at the three and a
Speaker 1: quarter percent Treasury yield because they need the money, I
Speaker 1: can show them our strategic value fund that's giving them
Speaker 1: a five percent dividend yield right now. So so if
Speaker 1: if money, if income is what they want, you can
Speaker 1: do that in the stock market. You don't need bonds
Speaker 1: to do that. And the risk of of of a
Speaker 1: capital loss. All right, So what's the biggest risk to
Speaker 1: your outlook right now? What could potentially happen that would
Speaker 1: make you be wrong? Well, there's you know, I've got
Speaker 1: a list of nine things to keep me awake at night.
Speaker 1: I mean, I'm I'm I'm here talking my book and
Speaker 1: sounding bullish, but that that doesn't mean there's nothing that's
Speaker 1: going wrong in the world. And at the top of
Speaker 1: the list is is the Federal Reserve gonna make a
Speaker 1: policy here in the out years? I mean that concerns
Speaker 1: me trade and tariffs that seems to be falling into place.
Speaker 1: China is sort of the last man standing here. But
Speaker 1: you know, are we're gonna be able to pull off
Speaker 1: the last trick here and and get the trade and
Speaker 1: tariff situation in good shape? The blue wave, I think
Speaker 1: we're gonna end up with the split election. I think
Speaker 1: the House probably flips, the Senate probably stays in Republican control.
Speaker 1: But suppose the d's are on the table. Suppose we
Speaker 1: spend the next two years going through impeachment proceedings, and
Speaker 1: and that takes the focus away from you know, fiscal
Speaker 1: policy and strong economic growth and strong corporate earnings growth.
Speaker 1: So there's any number of things that can go wrong. Um,
Speaker 1: and so you just, you know, you just have to
Speaker 1: evaluate what's going on and try to get the best
Speaker 1: information you can to your clients. So does all of
Speaker 1: this day the same if oil remains that let's say
Speaker 1: seventy four seventy five dollars a barrel for West Texas
Speaker 1: Intermediate or eight plus when it comes to brand. Thank you,
Speaker 1: I'll give your twenty dollars later. Excellent question. You know,
Speaker 1: you pick up any newspaper in America and uh, you know,
Speaker 1: headline writers or crewed gone back to the north of
Speaker 1: a hundred dollars a barrel, and that just isn't happening.
Speaker 1: The supply and demand in balance right now. Uh, we're
Speaker 1: past the peak driving season. Uh, we're fracking to beat
Speaker 1: the band. The Saudis and the Russians are continuing to pump. Okay.
Speaker 1: I think they're going to offset the diminution of crude
Speaker 1: that that we may lose that of Iran if if
Speaker 1: these nuclear sanctions are reimposed. There is concern in the
Speaker 1: Gulf right now with Hurricane Michael. Does that take any
Speaker 1: refining capacity out? I understand all the near term noise,
Speaker 1: but but our view is that the move up from
Speaker 1: forty dollars a year and a half ago would sort
Speaker 1: of settled into sixty five to seventy five barrel range.
Speaker 1: We're at the top end of that range now, so
Speaker 1: I'm I'm fine with with crude at seventy five, staying
Speaker 1: within that sixty to seventy five. I don't think that
Speaker 1: the newspapers are doing a good job getting everyone all
Speaker 1: worked up with with hundred dollar plus crude. I don't
Speaker 1: think crewdes going on a hundred dollars. It's not just
Speaker 1: the headline writers though there's some pretty big analysts on
Speaker 1: Wall Street Corp predicting a hundred dollars or more pre
Speaker 1: barrel of oil, and the i A has come out
Speaker 1: and said, you know, yeah, please pump morps so that
Speaker 1: we can get the prices down. So it's not just
Speaker 1: headline writers. There seems to be an increasing risk of that.
Speaker 1: I'm just wroking that out there, and and that's fine.
Speaker 1: Given the fact that the three largest producers in the
Speaker 1: world at ten to eleven million barrels a day, of
Speaker 1: the United States, the Russians and the Saudis, I think
Speaker 1: will continue to pump when push comes to shove. We're
Speaker 1: at a point in the cycle where the demand starts
Speaker 1: to diminish. Obviously, we've got to watch the hurricane activity.
Speaker 1: Obviously we've got to watch what's happening and rand. But
Speaker 1: I think that this balances itself out and we'll be okay.
Speaker 1: And I thought you were just going to tell us
Speaker 1: that Jerry Jones and the Dallas Cowboys he wants to
Speaker 1: buy more more assets in the in the shail play
Speaker 1: with his comstock resources. I didn't hear that, so I
Speaker 1: don't have any I don't have any knowledge about what
Speaker 1: Mr Jones is doing. Are well done, Thanks very much
Speaker 1: for sharing your knowledge with us. Phil Orlando is the
Speaker 1: chief equity market strategist for Federated Investors and Lisa, I
Speaker 1: think we can just call him a bull right now,
Speaker 1: fish for now. Thanks for having me on, guys, it
Speaker 1: is It is a treat to come out of this show.
Speaker 1: You guys are terrific. Thank you. All right, we'll give
Speaker 1: you the twenty dollars back, Thanks very much, Phil Orlando
Speaker 1: of Federated Investors. Our guest is Carl Weinberg. He is
Speaker 1: the chief economist for High Frequency Economics and you can
Speaker 1: follow Carl on Twitter at c B Weinberg. Carl, can
Speaker 1: you speak a little bit about fatigue when it comes
Speaker 1: to global growth and particularly in the context of the
Speaker 1: meetings that are scheduled to take place in Bali for
Speaker 1: the International Monetary Fund? Yeah, Hi, Pam, good morning. So
Speaker 1: you know, the i m F has been talking this
Speaker 1: story for some time now. They're byline that their last
Speaker 1: set of meetings was you know, is this as good
Speaker 1: as it gets in the world economy? This time around,
Speaker 1: they translated that into some numbers in their world economic outlook,
Speaker 1: shaving down their growth rate. They still have a pretty
Speaker 1: cheeky growth rate of three point seven percent for the
Speaker 1: world economy, and they're the same for this year as
Speaker 1: last year. But most importantly of all, the i m
Speaker 1: F has a lousy record of predicting turning points in
Speaker 1: the world economy. So this document is kind of provocative
Speaker 1: and that it gives people something to think about. But
Speaker 1: the IMF has missed every economic downturn over the last
Speaker 1: twenty years in its world economic outlook. There should be
Speaker 1: nothing new for investors in what came out of the
Speaker 1: i m F today. All right, but Dr Weinberg, do
Speaker 1: you agree with anything that they put out there, putting
Speaker 1: aside their track recording. Yeah, I mean, I think that
Speaker 1: the broad story is that there are risks of the
Speaker 1: world economy coming from trade. There are I think bigger
Speaker 1: risks out there that the fund mentions a little bit
Speaker 1: deeper into the document. Higher US interest rates or a
Speaker 1: drain on growth potential and disposable income for countries that
Speaker 1: have a high foreign currency debts denominated in dollars. The
Speaker 1: stronger dollar is also a drain. Higher oil prices are
Speaker 1: also a drain. So we have clouds forming off of
Speaker 1: the world economy, and we're starting to see that in
Speaker 1: things like the industrial production number for Germany that came
Speaker 1: out on Monday. We're starting to see it in slowing
Speaker 1: GDP growth in places like Japan, uh and uh So. Overall,
Speaker 1: I think the Fund's message is right on, but I
Speaker 1: think that there's still probably more optimistic, and of history
Speaker 1: is any guide. They are too optimistic about how this
Speaker 1: is going evolve over the next year or two. Carl,
Speaker 1: do you believe that the Chinese will be able to
Speaker 1: outweight the United States when it comes to trade negotiations. Yeah,
Speaker 1: I certainly think they will. I certainly think they have to.
Speaker 1: The prize in all of this is China's industrial development policy,
Speaker 1: the so called Made in China, and that's a program
Speaker 1: in China to acquire the technology to produce seventy of
Speaker 1: the stuff that goes into what they assemble and re export,
Speaker 1: rather than thet that they currently produce at this time.
Speaker 1: So that difference of the value of exports is a
Speaker 1: trillion dollar a year prize that comes to China, and
Speaker 1: that's what's really at stake. The US Trade Representative mentions
Speaker 1: this program explicitly in its statements about the US tariffs
Speaker 1: UM and China is never going to give that up.
Speaker 1: So I think the Chinese have a big prize, a
Speaker 1: big pay day at the end of the day for
Speaker 1: sitting out the tariffs. I believe they will. Dr Carl Weinberg,
Speaker 1: thank you so much for taking the time with us.
Speaker 1: Dr Carl Weinberger's chief economist at High Frequency Economics. Talking
Speaker 1: about the I m f S stellar track record, he
Speaker 1: actually it doesn't put a whole lot of credis in that,
Speaker 1: but it's definitely looking at the potential for slowing global growth.
Speaker 1: Joining us now, Mark Lynde Bloom, portfolio manager for Western
Speaker 1: Asset Management. Mark, thank you so much for being with us.
Speaker 1: Can I just ask do you find treasuries attractive here
Speaker 1: given how quickly yields have risen to seven year highs?
Speaker 1: Good morning, Thanks for having me on The answer to
Speaker 1: your question, as we do. We have for most of
Speaker 1: the year had two reasons that we are favoring US treasuries.
Speaker 1: First is that we thought the economic growth this year
Speaker 1: next year would be a bit more moderate, and I
Speaker 1: have to say we've been wrong on that given the
Speaker 1: fiscal impulse that we've seen. Nonetheless, our economists here are
Speaker 1: looking for somewhat slower growth versus what we've seen in
Speaker 1: the middle part of this year, but most importantly from
Speaker 1: a bond point of view, that inflation is going to
Speaker 1: remain around two. The second reason I would say, though,
Speaker 1: is it as important, and that is as part of
Speaker 1: a fix income portfolio, we do want to have a
Speaker 1: risk mitigator and insurance policy, if you will, just in
Speaker 1: case we did start to see you slowdown or financial
Speaker 1: conditions did start to pinch economies around the globe. Both
Speaker 1: of those reasons, we are favoring favoring treasuries here a
Speaker 1: little bit more even around across the curve than we
Speaker 1: have in the past where we have focused on the
Speaker 1: long end mark. Is that also the two reasons why
Speaker 1: you're choosing now to issue and launch the first fixed
Speaker 1: income exchange traded fund UH from Western Asset Management, the
Speaker 1: Western Asset Total Return ets somewhat coincidental there. What we've
Speaker 1: been here from the field UM and from those who
Speaker 1: know Western well over the last four decades is they've
Speaker 1: been looking for an additional vehicle besides the separately managed
Speaker 1: portfolio or a mutual fund or a commingled vehicle, and
Speaker 1: specifically an e t F. So from our point of view,
Speaker 1: it's a it's a great question that it is a
Speaker 1: different rapper, if you will, but it will be managed
Speaker 1: pretty much the same as all the other vehicles with
Speaker 1: all the same Western themes as part of the E
Speaker 1: t F. All right, are you at all concerned about
Speaker 1: revealing your secret sauce since you have to actually disclose
Speaker 1: the holdings in real time basis of the E t
Speaker 1: F Really not mean. We've been always very open about
Speaker 1: what we are doing on a daily basis, so to
Speaker 1: the extent that this is a little different and and
Speaker 1: a from a formal point of view, it's uh, it
Speaker 1: does not bother us in the least in terms of
Speaker 1: letting letting that information out there. So can you give
Speaker 1: me a sense here of what you would have done
Speaker 1: or what you did do in the past week given
Speaker 1: the sell off in in treasuries that we've seen, but
Speaker 1: also the sell off an investment great debt in particular
Speaker 1: that really has been quite quite significant. Yes, it has
Speaker 1: been quite significant to your first part of your question.
Speaker 1: As I mentioned a little bit earlier, in the last
Speaker 1: several years, our clients have benefited from our dedication and
Speaker 1: some would say stubbornness wanting to own the longest part
Speaker 1: of the U S treasury curve, and that was based
Speaker 1: upon our view that the said would very slowly increase rates.
Speaker 1: In fact, they have done that, as we all know.
Speaker 1: The expectation is they'll continue to do that, and we
Speaker 1: are moving some of that contribution, if you will, or
Speaker 1: that duration down into the short and intermediate part of
Speaker 1: the YOK curve, just thinking it's their better value there
Speaker 1: or fully reflect expectations on the part of the Fed
Speaker 1: as we go into two thousand and nineteen, and as
Speaker 1: we all know, there are now actually real yields. They're
Speaker 1: they're they're quite attractive and our opinions, so that has
Speaker 1: been a change. And then one of the things that
Speaker 1: we've been doing over over the last week or so,
Speaker 1: as as the as the market has been backing up
Speaker 1: quite substantially on the non treasury sectors to your to
Speaker 1: your question, we've been growing increasingly cautious, particularly towards the
Speaker 1: corporate sectors, and particularly to the below investment grade corporate sectors,
Speaker 1: where we've been taking our allocation to high yield and
Speaker 1: bank loans lower investment grade corporates. We've been more neutral,
Speaker 1: but our investment grade corporate team has been concentrating on
Speaker 1: those sectors that we feel most good about it in
Speaker 1: the late late stages of this economic cycle. The one
Speaker 1: thing I'll add to that is that the one area
Speaker 1: we do have higher conviction on is emerging markets, while
Speaker 1: all the others we don't have that same high conviction,
Speaker 1: or to put differently, we just don't think we're being
Speaker 1: paid for the risk. When you mentioned emerging markets, do
Speaker 1: you mean dollar denominated emerging market debt or local currency debt?
Speaker 1: A little bit of both, quite selective, like we are
Speaker 1: in every credit sector on those countries or those corporations
Speaker 1: within those countries that we're choosing. But as you look
Speaker 1: at our portfolios today, right across the board, were approximately
Speaker 1: half the dollar the external debt, and we are approximately
Speaker 1: half in some of the local bonds and local currencies.
Speaker 1: There is an increasing sort of din out there that
Speaker 1: the Federal Reserve is on the brink of a policy
Speaker 1: error as it increases the pace of raising rates. Do
Speaker 1: you do you agree with that? I mean, do you
Speaker 1: think that that risk is growing stronger? I think we'd
Speaker 1: have to acknowledge over the cycles that we've all lived through.
Speaker 1: When you look at business slowdowns and actual recessions, there
Speaker 1: are common themes as to why they come about in
Speaker 1: terms of the FED being on the move, perhaps commodity
Speaker 1: prices increasing, uh, some misallocation of capital, inventories, etcetera. So
Speaker 1: we are not about to dismiss what's happening now in
Speaker 1: terms of the FED being on the move uh and
Speaker 1: planning to raise interest rates to neutral or beyond as
Speaker 1: they've been saying recently. The thing that we all just
Speaker 1: don't know how to weigh is this experiment we've been
Speaker 1: conducting for now ten years. As we unwind that, and
Speaker 1: if the speed limited growth around the world and particularly
Speaker 1: in the United States, is lower, we would believe then
Speaker 1: that smaller incremental increases in the FED funds rate and
Speaker 1: market interest rates will start to impact the economy sooner.
Speaker 1: So we are not about to ignore those signs at all,
Speaker 1: and are growing a little bit more cautious towards particularly
Speaker 1: the non treasury sectors. In recent months, we're speaking with
Speaker 1: Mark Lynd Bloom. He is portfolio manager for Western Asset
Speaker 1: Management Company. We're speaking about the firm's first fixed income
Speaker 1: et F. It's called the Western Asset Total Return et F,
Speaker 1: and as part of the mandate, you've put a cap
Speaker 1: on the amount of assets that can be put towards
Speaker 1: junior loans that instruments that are either unsecured and subordinated.
Speaker 1: Could you speak a little bit about that and particularly
Speaker 1: about the market for junior loans. Sure, this is consistent
Speaker 1: with how we view here at Western Asset the core
Speaker 1: or a core plus bond fund in that the buyers
Speaker 1: of these these funds, usually which are measured against an
Speaker 1: aggregate indexes as you know, are are meant to be
Speaker 1: an anchor to windward sort of vehicle. UH. Core plus
Speaker 1: does offer some flexibility in terms of the blow investment
Speaker 1: grade sectors to gain some yield and return advantage. Certainly
Speaker 1: were advocates of that, but to your to your point
Speaker 1: about limitations that we want to be very careful that
Speaker 1: the purpose and the objective of a core plus fund
Speaker 1: is to provide higher returns versus and aggregate index over time,
Speaker 1: but without substantially higher volatility. So our intent is through
Speaker 1: the guidelines, the guard rails, if you will, that we
Speaker 1: do limit some of those UH, some of those sectors
Speaker 1: as part of the asset allocation on constraint funds for
Speaker 1: example that didn't have a benchmark and I had a
Speaker 1: lot more flexibility. Certainly, would have a greater greater room
Speaker 1: to add those on your question, your second part of
Speaker 1: your question, you know, what do you think, as I
Speaker 1: suggested a little bit earlier, when we look at many
Speaker 1: of the sectors below investment grade across corporates are even
Speaker 1: structure most recently and buy instructure, I mean cnbs and
Speaker 1: residential loans. We are not at all pounding the table
Speaker 1: and saying we're about to go into a slowdown our recession.
Speaker 1: There are a lot of folks out there with that
Speaker 1: prediction of two thousand twenty. That isn't our call. But
Speaker 1: the key is the valuations just aren't there to benefit
Speaker 1: our investors currently. Thank you so much for being with us.
Speaker 1: Mark Lynn Bloom, portfolio manager at Western Asset Management Company,
Speaker 1: which over sees four hundred and twenty billion dollars. They
Speaker 1: did just launch a new actively managed e t F,
Speaker 1: the Western Asset Total Return e t F, which uses
Speaker 1: the same strategy in the broader non e t F
Speaker 1: fund UH in real time. Right now, we're looking at
Speaker 1: emerging market currencies that are just a slight bit if
Speaker 1: you look at the m s c I index, but
Speaker 1: certainly they're stable as compared to the plunge that we
Speaker 1: saw earlier. The question is this just a relative bit
Speaker 1: of calm before the storm continues? Joining us now, Dr
Speaker 1: Win Thin, global head of Emerging Markets for the FX
Speaker 1: markets at Brown Brothers Harriman, coming to us from New York.
Speaker 1: Dr Winton, thank you so much for being with us.
Speaker 1: So let's talk about that. I mean, the I m
Speaker 1: F came out with this report downgrading their expectations for
Speaker 1: some major emerging market economies, including China and Brazil. Do
Speaker 1: you think that what we're seeing right now is the
Speaker 1: calm before the storm? Well, I say, personal, thanks for
Speaker 1: having me. It's always a pleasure. Uh. Well, look we
Speaker 1: have we haven't exactly had um much calm this whole year,
Speaker 1: So I would say this is within a greater bear trend.
Speaker 1: I mean, as you mentioned, there's a global backdrop for
Speaker 1: EM remains UM, very difficult global growth forecast lower. Uh.
Speaker 1: I'm your postal worked down trade flow forecast, you know,
Speaker 1: reflecting the trade tensions. Um, we gonna hire U S
Speaker 1: interest rates and moving higher, so the backdrop EM remains negative. Um.
Speaker 1: You know, I think this is sort of a little
Speaker 1: bit of a pause. Um, but I think it's very
Speaker 1: way too early to say, hey, this is a good
Speaker 1: time to buy EM. If you look at the ms
Speaker 1: c I um E Mergant Market Index, we're breaking down
Speaker 1: making new loads off of this move um this yesterday,
Speaker 1: and I think that's you know, so the negative sense
Speaker 1: it remains in place. Do you believe that dollar strength continues?
Speaker 1: I do, yes, Uh no, I think you know, as
Speaker 1: you know, the the U S bond mark was closed yesterday,
Speaker 1: so we've ended last week on a very um uh
Speaker 1: sort of strong in terms of the yields we had.
Speaker 1: We had US tenure yield poking up around I think
Speaker 1: the markets started this week worried that we didn't get
Speaker 1: further push up, but for now we know we haven't
Speaker 1: really pushed that Keith twenty five area, and so I
Speaker 1: think as part of the calm is that we haven't
Speaker 1: seen another leg up in US rates, which of course,
Speaker 1: as we mentioned, is very negative for EM very positive dollars.
Speaker 1: So you know, we've got the p p I tomorrow
Speaker 1: and cp I the day after here in the US.
Speaker 1: I think those were very key given that the focus
Speaker 1: on on yields and rates here in the US, I
Speaker 1: think it's still the primary driver for global markets. Not
Speaker 1: just rates markets. You probably know, the equily markets started
Speaker 1: to really feel that the heat. Um. You know, part
Speaker 1: of that is the fact that a lot of these
Speaker 1: UH stock valuations were made under the assumption of low
Speaker 1: interest rates, and that's that's being readdressed. Now. I want
Speaker 1: to turn the focus a bit to China, because China
Speaker 1: eased Paul to see further this week, and they're trying
Speaker 1: to ignite some growth or at least cushion the slowdown
Speaker 1: and growth that we've seen. And I guess I am
Speaker 1: really struck by the reaction of markets, with the equity
Speaker 1: market in China falling after that announcement, basically saying it's
Speaker 1: not enough, and it seems like you're a little bit desperate,
Speaker 1: the Chinese leader of the PBOC to try to gain
Speaker 1: some control over this. How concerning is that? Well, I
Speaker 1: think China is always sort of a simmering concern. Um.
Speaker 1: You know, many analysts called for some sort of big
Speaker 1: disaster there. You know, they've been calling us the last
Speaker 1: ten years. You know, it's clear that they're slowing, and
Speaker 1: you know we always had a discussion, well, how how
Speaker 1: do you trust the Chinese umbers? Well you can't really,
Speaker 1: But what you can trust is the sort of the
Speaker 1: official actions and the fact that this I think the
Speaker 1: fourth reserve requirement cut this year, the West, some other
Speaker 1: directed lending. It's clear they were concerned about a slowdown.
Speaker 1: Um we are seeing UM, I would assume I think
Speaker 1: it's slower than expect to slow down given the policy reaction.
Speaker 1: Bottom line, though, I do think China kind of muddles through.
Speaker 1: It's uh. I think the trade tension of the U
Speaker 1: S makes things obviously much more difficult. And that's you
Speaker 1: had another ball at the juggling um. And so am
Speaker 1: I a little bit worried about China? Yeah? I am.
Speaker 1: I'm probably a little more worre than usual, but I'm
Speaker 1: not in the sort of we're we're heading for disaster
Speaker 1: camp at this point. Can you tell us your outlook
Speaker 1: for currencies that are tied to commodities such as the
Speaker 1: Canadian looney and the Australian dollar. Sure, Um, well, you
Speaker 1: know Canada, it's two separate sets because if you think
Speaker 1: about the commodities, well, Australia is linked usually to iron
Speaker 1: ore and China. Um. So from as a result, the
Speaker 1: Australian dollars and has not been doing well recently on
Speaker 1: the flip side, Uh, the looney is is more linked
Speaker 1: towards oil, and of course oil is on a tear um.
Speaker 1: You know, at some point, though too much of a
Speaker 1: good thing is uh is too much? You know, at
Speaker 1: some point high oil prices are become negative for the
Speaker 1: world economy. I mean, you're sure it's great for the
Speaker 1: producing countries, but if you're an all consuming country, like
Speaker 1: most most industrializations are, uh, that really starts to take
Speaker 1: a toll, whether it's at the pocketbook, at the at
Speaker 1: the pump, or even at the firm wide level. Uh two,
Speaker 1: high prices are not good. Um. So you know, I'm
Speaker 1: hoping that OPEC realized this and then they sort of
Speaker 1: uh take some stronger actions. Even at this point a
Speaker 1: little bit blase about, but I think that the growing
Speaker 1: concern given all the other headwinds on the global economy.
Speaker 1: When you said that you do expect the ongoing deterioration
Speaker 1: in emerging markets currency valuations to continue versus hard currencies.
Speaker 1: But is there anywhe where you see uh sort of
Speaker 1: potential opportunities or do you think that everything's gonna get
Speaker 1: sort of caught up on the and the FED tightening
Speaker 1: and sort of the the QT that's taking over the world. Well,
Speaker 1: you know, one night one e M, I would say
Speaker 1: I'm very negative going into year end, and probably i'd
Speaker 1: say the first half of next year. But uh, you know,
Speaker 1: I think we're sorting halfway do the sell off, maybe
Speaker 1: maybe a little bit more, but I do think there's
Speaker 1: ways to go still before we sort of get to
Speaker 1: an equilibrium. Now um with a they e M though,
Speaker 1: you know, I should say that there are opportunities. You know,
Speaker 1: for instance, the Mexican pace was actually up this year,
Speaker 1: up three, so there's a real differentiation. You know, you've
Speaker 1: got the five so really worst currencies Argentina, Turkey, South
Speaker 1: Africa and now Brazil and India swap places. Brazil is
Speaker 1: rallied on the election, so it's actually gotten pushed up
Speaker 1: to only sixth worst. Uh and you've got Indian Russia
Speaker 1: from rounding up there the worst five. You know, you've
Speaker 1: got the e M weakness concentrated in a handful, whether
Speaker 1: it's five, six, seven countries with adosyncratic risk, other countries
Speaker 1: currencies and countries holding up better thaybot come and taste
Speaker 1: in Malaysian ring get um Mexico. As I mentioned, earlier,
Speaker 1: So there's definitely a differentiation. I think markets in a
Speaker 1: in a tighter global equity story, marks that are punishing
Speaker 1: the sort of the deader countries, those that have high
Speaker 1: current account or budget deficits, and there there's not I
Speaker 1: would say the rewarding, but there's sort of leaving alone
Speaker 1: the country that the surplus countries, and many of those
Speaker 1: are in Asia. So again let you look look under
Speaker 1: the hood. You can't you can't sell em on mask.
Speaker 1: But in channel I do think the asselete classes is
Speaker 1: going to remain under pressure. Now we always talk about
Speaker 1: countries when they are under pressure. For example Argentina. Any
Speaker 1: update on the Argentine Paso and the efforts of the
Speaker 1: Argentine government to contain inflation and produce a credible budget, well,
Speaker 1: I'll say we're we're I look at that glass of
Speaker 1: half full. Um, they've taken all the right steps. They've
Speaker 1: tighten montars policy several times, numerous times, UM, tighten fiscal policy,
Speaker 1: gone to the IMF. In fact, it just increased the
Speaker 1: IMF program um by request. Uh so they've done all
Speaker 1: the right things. That's finally, UM, I think the pacers
Speaker 1: finally starting to get some traction um. So you know,
Speaker 1: I think clearly, uh, you know, the movement forward might
Speaker 1: have been in a bit of an overshoot, but within
Speaker 1: the e m bearing mark, I don't think Argentina Payco
Speaker 1: can be recovered too much in absolute terms. I'd say
Speaker 1: the same thing in Brazil. You know, we've had a
Speaker 1: great sort of pre election and post election, but we're
Speaker 1: in the ear mark. I don't I don't think there's
Speaker 1: much more room for for absolute gains now in on
Speaker 1: a relater basis. You know, I think those two because
Speaker 1: they've been hammered so badly this year, I could start
Speaker 1: could do a little bit more outperforming with an e
Speaker 1: m UM, But you know, absolute terms, I'm pretty negative.
Speaker 1: I want to thank you very much for joining us
Speaker 1: and giving us your thought a doctor when Finn is
Speaker 1: a global head of Emerging Markets f X at Brown
Speaker 1: Brothers Harriman. Thanks for listening to the Bloomberg P and
Speaker 1: L podcast. You can subscribe and listen to interviews at
Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
Speaker 1: can always catch us worldwide on Bloomberg Radio.