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. The
Speaker 1: dollar is down more than seven percent versus the world's
Speaker 1: major currencies so far this year. That is the most
Speaker 1: in over a decade. So what are we expecting for
Speaker 1: next year? Will it just be more of the same.
Speaker 1: Here to answer that question is Daniel Katsi. He's head
Speaker 1: of FX Strategy in North America for BNP Pariba and
Speaker 1: he joins us now. Danielle, thank you so much for
Speaker 1: joining us. Thank you. So what are you expecting for
Speaker 1: next year for the dollar? Well, more of the same
Speaker 1: on net. I think by the end of next year
Speaker 1: the dollar will be weaker again. But we think right
Speaker 1: now we're in a period where the dollar is bouncing
Speaker 1: a little bit counter to that that structural move, uh
Speaker 1: and we think we have it maybe three or four
Speaker 1: five percent move ahead of us. For a lot of
Speaker 1: the dollar pairs over the next few weeks and months
Speaker 1: before the longer term down trend resumes. Wait, just to
Speaker 1: make sure that I'm understanding that. In other words, you
Speaker 1: think that the dollar could strengthen four against a number
Speaker 1: of its peers before returning to a down trend. Exactly. Yeah.
Speaker 1: We think right now the markets under pricing the significance
Speaker 1: of what US rates have been doing, under pricing the
Speaker 1: likelihood UH and the and the consequences of tax legislation,
Speaker 1: and it is generally just under owned. In a world
Speaker 1: where markets looking for a rates and you'll and you'll
Speaker 1: yield delivering currencies, Well, what is held back the dollar
Speaker 1: from posting those kinds of gains recently? I mean this
Speaker 1: is not none of this is in new news. No,
Speaker 1: that's true. I think the market has built up a
Speaker 1: short position to some extent, and I think part of
Speaker 1: that reflects this understanding that, yes, the structure, even if
Speaker 1: you have the opportunity for a cyclical bounce, the big
Speaker 1: ten percent type moves over the next few years are
Speaker 1: going to be to the dollar downside. So there's been
Speaker 1: a reluctance to own the dollar. I think the market
Speaker 1: has been reluctant to fully priced in, uh the consequences
Speaker 1: of tax reform until it actually passes, having kind of
Speaker 1: gotten caught the wrong way, um, the legislative agenda before
Speaker 1: and UM. I think there's a cumulative effect of rising
Speaker 1: front end rates, which is what's been happening in the
Speaker 1: US over the last uh two months. The US front
Speaker 1: and rates have been grinding higher, and this does have
Speaker 1: a cumulative effect on hedging decisions and investment decisions, which
Speaker 1: I think is going to only show up potentially over
Speaker 1: time if the market does can't price it in ahead
Speaker 1: of time for whatever reason. So, just to put this
Speaker 1: all into perspective, the moves in the dollar will be
Speaker 1: tremendously important to a lot of different asset classes. And
Speaker 1: I'm thinking increasingly as I talk with investors and analysts
Speaker 1: that there is a growing complacency that perhaps the dollar
Speaker 1: will rally a little bit against its peers, but ultimately
Speaker 1: will remain in this sort of weekend state, if not
Speaker 1: decline in value over the next year. And I'm just
Speaker 1: wondering what happens if it goes the other way. Let's
Speaker 1: say it does strengthen, how much would it have to
Speaker 1: gain against its rivals in order to disrupt things like
Speaker 1: emerging markets. Well, I think it's a very good question.
Speaker 1: I mean, I think the one thing when I talk
Speaker 1: to people about what's going to happen next year, uh,
Speaker 1: the one thing that would really surprise people, as if
Speaker 1: the dollar moved back to the kind of levels we
Speaker 1: saw after the election, that that would really challenge a
Speaker 1: lot of assumptions about where things are going. We don't
Speaker 1: expect that. It's not our base case either. But if
Speaker 1: I'm looking for the pain trade or the surprise uh
Speaker 1: for markets in the in the first half, and often
Speaker 1: we do get surprises in the first few months of
Speaker 1: the year, it would be the dollar does a lot
Speaker 1: better that this cumulative tightening that the fed from the
Speaker 1: FED finally begins to kick in, and that all the
Speaker 1: things that people talk about, well, other central banks are
Speaker 1: hiking as well, that that's too far in the future
Speaker 1: to really provide sustained support for their currencies, and we
Speaker 1: get kind of a move to something like one ten
Speaker 1: and euro USD and yet again not our base case,
Speaker 1: but I think that would be a big surprise for
Speaker 1: the market and which challenge UH a lot of different
Speaker 1: asset classes to to respond. Well. Daniel talking about that
Speaker 1: response from different asset classes. What does that translate to
Speaker 1: lower oil prices, lower inflation? It could uh, you know,
Speaker 1: for if the example I would go back to is,
Speaker 1: you know, how things played out in early seen. At
Speaker 1: that point, the dollar had been gaining a lot, and
Speaker 1: I think many people in the market underestimated how much
Speaker 1: feedback that would create into the economy, into um uh,
Speaker 1: credit markets, energy markets, equity markets, um into the Fed's
Speaker 1: own thinking um and just you know, remember at that
Speaker 1: point the year on year rate in the broad trade
Speaker 1: weighted dollar it got up to about something like like
Speaker 1: fifteen percent. It's hard for us to do that now
Speaker 1: because the base effects just really aren't really the same
Speaker 1: as they were in twenty sixteen, and or wards of
Speaker 1: dollars already still, even though it's been weak this year,
Speaker 1: as you pointed out, the dollars still at relatively strong levels.
Speaker 1: It's gonna be hard to get as much of a
Speaker 1: headwind from f X as we got at that time.
Speaker 1: But even something you know, smaller than that, you know,
Speaker 1: does create a lot of feedback into other markets. So, Daniel,
Speaker 1: how much do you think that the dollar will weakend
Speaker 1: versus its peers by the end of next year compared
Speaker 1: with where we are today. Well, we've been using our
Speaker 1: long term equilibrium fair value model to try and answer
Speaker 1: that question, and the idea is that you know, the
Speaker 1: dollar got very expensive during the period in when FED
Speaker 1: policy was diverging from policy everywhere else, and over the
Speaker 1: next few years, as other central banks start tightening and
Speaker 1: the FED ends its cycle, uh, we're gonna have reconvergence
Speaker 1: and monetary policies. So we think we could go back
Speaker 1: to these long term equilibrium levels. The biggest excrepancies are
Speaker 1: in versus currencies where the other central bank has been
Speaker 1: doing QI. So, for example, you're a USD our long
Speaker 1: term mac librium estimate is one thirty three UM. We
Speaker 1: don't think we're gonna get there in We think we'll
Speaker 1: get there by the end of so that'll be a
Speaker 1: gradual process with ups and downs along the way. By
Speaker 1: the end, we're thinking one twenty two for euro USD
Speaker 1: so it's basically getting back to where we got around
Speaker 1: the middle of this year. We think dollar end could
Speaker 1: get UM as low as well as high as one
Speaker 1: seventeen in the near term, but then back down to
Speaker 1: one twelve by the end of next year. So a
Speaker 1: bit of a you know, uh V shape or upside
Speaker 1: down V shape. You know, I just want to follow
Speaker 1: up on that, because when you talk about Europe and Japan,
Speaker 1: we're we're heading into a week of a lot of decisions.
Speaker 1: We're going to hear from the e c B in
Speaker 1: the Bank of England, and I'm just wondering, you know,
Speaker 1: who's driving the bus here? Is it the e c
Speaker 1: B or is it the Fed? You know, people talk
Speaker 1: about Trump and the Trump trade, but is it really
Speaker 1: that Europe is doing better than expected, that they're going
Speaker 1: to be forced to start tapering and possibly even lift
Speaker 1: deposit rates sooner than people are expecting. The market is
Speaker 1: very sensitive to any indication that these currency central banks
Speaker 1: like the ECB and the Bank in Japan might be
Speaker 1: beginning to exit. Uh So, you see, whenever the ECB
Speaker 1: says anything even slightly hawkish, you see a big reaction
Speaker 1: in your U s D for example, Whereas the FED
Speaker 1: can actually hike rates, and you know, the benefit for
Speaker 1: the dollar seems much smaller. I think that reflects the
Speaker 1: Euro's cheapness as always expensiveness, and this perception and over
Speaker 1: the next few years things are going to be changing.
Speaker 1: But you know, what I think, really the market sometimes
Speaker 1: forgets is that even if the ECB is talking a
Speaker 1: little bit more about exit, there's still a year away
Speaker 1: from doing anything really meaningful new on the on the
Speaker 1: rate front, at least a year away. And in the meantime,
Speaker 1: if you want to be long euros and hold Euros,
Speaker 1: you have to pay uh, you have to pay care.
Speaker 1: You have to be you know, if your your dollar funded,
Speaker 1: you have to pay a negative rate differential to hold
Speaker 1: that position. So that you know, I think it's important
Speaker 1: to listen to the signal, but not forget that the
Speaker 1: reality on the ground right now is that policy is
Speaker 1: still very accommodative in Europe. Yes, the economy is hot,
Speaker 1: but what that does is create a real downward pressure
Speaker 1: on real rates. Because inflation goes up in Europe, nominal
Speaker 1: rates are held stable and real rates actually get get lower,
Speaker 1: which can hurt the currency in the near term. Thanks
Speaker 1: very much for being with us. Daniel Katze is the
Speaker 1: head of FX strategy in North America for BNP party. Bob.
Speaker 1: There was an election yesterday in al Obama and the
Speaker 1: verdict was somewhat surprising. This very red state turned blue
Speaker 1: for the first time in more than twenty years. Here
Speaker 1: to talk about what the implications are is Jonathan Bernstein,
Speaker 1: Bloomberg View columnist, coming to us from San Antonio. Jonathan,
Speaker 1: thank you so much for being with us. What's your
Speaker 1: main takeaway from the election of Doug Jones to be uh,
Speaker 1: the senator representing the long read Alabama in the Senate. Well,
Speaker 1: we'll be in the Senate. You know, every single Senate
Speaker 1: vote counts, and there's a huge difference between having a
Speaker 1: fifty two majority as the Republicans did you know still
Speaker 1: do until he gets went into having a majority. You know,
Speaker 1: the Vice President Pence has already had to break ties
Speaker 1: six times because Republicans couldn't keep all fifty two together. Um,
Speaker 1: you know, all else equal, Republicans would have lost all
Speaker 1: six of those votes, and we're gonna have more of
Speaker 1: that in the year to come. Well, Jonathan, maybe just
Speaker 1: go through some of the list of the defeated Todd Aiken,
Speaker 1: Richard Moredock, Christine O'Donnell. This could have been the Republicans time,
Speaker 1: but something happened. Yeah, you know, this is yet another
Speaker 1: time where a tea party or an extremist Republican got nominated. Um.
Speaker 1: You know, before Steve Bannon was involved in politics at all,
Speaker 1: this was happening, and now it happens even more with
Speaker 1: Bannonite UH candidates, UM, and they're they're nominating people who
Speaker 1: they should give away seats. Alabama, this should have been
Speaker 1: a lack election, even with the president very unpopular overall.
Speaker 1: Alabama is a very Republican state. They should have won this,
Speaker 1: but they nominated somebody who was a terrible candidate. Well, so,
Speaker 1: Jonathan to that point, how much is this an idiosyncratic
Speaker 1: issue that had to do with choosing a bad candidate
Speaker 1: and how much is it a harbinger for next year
Speaker 1: we get a whole slew of midterm elections. Well, it's
Speaker 1: in some cases both. Um. The three things went into
Speaker 1: the victory for Doug Jones the Democrats. One was that
Speaker 1: Roy Moore has always been unpopular in Alabama. He's won,
Speaker 1: but he won by much less than Republicans typically one
Speaker 1: in his previous statewide races. The second was the scandal
Speaker 1: um which came up after he was nominated. And the
Speaker 1: third was that Trump is just a very unpopular Republican president.
Speaker 1: So it's idiosyncratic of the specific things that happened with
Speaker 1: more but it's not even astocratic that Republicans have made
Speaker 1: a habit of nominating these terrible candidates, and every time
Speaker 1: that happens, they give away a seat. They may wind
Speaker 1: up doing it in the Senate races in Nevada and
Speaker 1: or Arizona. So, Jonathan, I want to press you on
Speaker 1: that one point. You said that this has to do
Speaker 1: with President Trump being very unpopular. Does it? I mean,
Speaker 1: can we really gauge that this had anything to do
Speaker 1: with that, because ultimately, if Roy Moore was unpopular, he
Speaker 1: was unpopular, and yes, Trump added his support at the end,
Speaker 1: But is this really a referendum on him. It's not
Speaker 1: something to a referendum. It's not the people you know
Speaker 1: in Alabama said I'm going to vote against more because
Speaker 1: of Trump. But having an unpopular president of your own
Speaker 1: party depresses enthusiasm within the party. Voters are less likely
Speaker 1: to turn out the other party is more enthusiastic. Um.
Speaker 1: You know, that's what produced a landslide for Republicans against
Speaker 1: Barack Obama and funny ten and um. Right now, Donald
Speaker 1: Trump is about twelve point percentage points less popular than
Speaker 1: Obama was at the same point by years ago. Jonathan,
Speaker 1: you make the point in yours and one of your
Speaker 1: most recent columns, you talk about how Florida's Senator Marco
Speaker 1: Rubio and Utah's Senator Mike Lee had an amendment to
Speaker 1: expand the child credit. Just tell people exactly how that
Speaker 1: played out and what that informs you of. Well, you know,
Speaker 1: that was an interesting case where you had two Republican
Speaker 1: senators who had an amendment that they wanted to push.
Speaker 1: It would have increased the child tax credit, and it
Speaker 1: would have they would have raised the corporate rate a
Speaker 1: little bit or you know, not lowered it as much
Speaker 1: to make up for two senators in a fiftiest majority.
Speaker 1: They didn't have the cloud by themselves to force miss
Speaker 1: mcconnald to make a deal. Now, some people criticize them.
Speaker 1: They could have still tried to They could have found
Speaker 1: a third senator. But now with a fifty one already
Speaker 1: nine two senators, any two senators, Republican senators could go
Speaker 1: to Mitch mcconllull and say, I'm not going to vote
Speaker 1: for this unless you give me my amendment. That one.
Speaker 1: You know, it seems like it's not a big deal,
Speaker 1: one out of a hundred, but in fact, it makes
Speaker 1: it easier for different small groups to be able to
Speaker 1: get their way in the Senate, making it much more
Speaker 1: difficult for the Senate to get anything done for the
Speaker 1: Republicans in the Senate to get anything done. So, just
Speaker 1: going forward, what sort of the strategy for the GOP,
Speaker 1: how are they going to frame this? Well, you know,
Speaker 1: there's what they need to do is to find some
Speaker 1: way to improve the two things, to find some way
Speaker 1: to defeat uh these Bannon type Tea Party type candidates
Speaker 1: who are terrible candidate, who are giving away seats. They
Speaker 1: haven't figured out a way to do that. Um, they
Speaker 1: had thought they did. Mitch McConnell thought that they were
Speaker 1: making some progress in that in the nomination season. We'll
Speaker 1: see what happens as goes along. The other thing that
Speaker 1: they need to do is find some way to make
Speaker 1: Donald Trump less unpopular. You know, good luck figuring that
Speaker 1: one out. I want to thank want to thank you
Speaker 1: very much. Jonathan Bernstein. He is a Bloomberg View columnist
Speaker 1: and previously political science professor at the University of Texas
Speaker 1: at San Antonio. Fascinating, fascinating election yesterday, and the turnout
Speaker 1: was really interesting, and that was definitely something that people
Speaker 1: are to be watching. Is uh is the Democratic Party galvanized?
Speaker 1: What will it take to galvanize the Republican Party in
Speaker 1: the same kind of way for the mid terms. Yes,
Speaker 1: technology alone cannot save your business from cyber attacks, so
Speaker 1: says our net guest. Chris Young is the chief executive
Speaker 1: of McAfee, of course, previously purchased by Intel, and he
Speaker 1: joins us here in our eleven three oh studios. Chris Young,
Speaker 1: thank you very much for coming in. What do you
Speaker 1: mean by this? Technology alone isn't going to save a
Speaker 1: business from cyber attacks. So technology is really important and
Speaker 1: obviously putting together the foundation for security for any organization,
Speaker 1: but you have to have an addition to that, a
Speaker 1: culture of security across your organization. This is really important.
Speaker 1: Security has got to be something that everybody from your employees,
Speaker 1: your partners, your executive staff, as well as your board,
Speaker 1: all parties involved, have to make sure that security is
Speaker 1: a priority and it's something that's part of our consciousness
Speaker 1: and inside of any organization. So that culture is critical
Speaker 1: to augment. Also, you know, augment what you're doing with technology,
Speaker 1: all right? When you walked in here, I asked, ingest,
Speaker 1: do you live in a constant state of paranoia. And
Speaker 1: you were talking about how you would never plug your
Speaker 1: phone into a public outlat outlet because you don't know
Speaker 1: who's on the other side of it, And I have
Speaker 1: to wonder, I mean, I operate by going around thinking,
Speaker 1: are there that many people out there that are trying
Speaker 1: to fleece me? Are there? In reality, the number of
Speaker 1: the number of people who get you know, hit a
Speaker 1: hit in these in these situations are pretty small from
Speaker 1: a mathematical perspective. But the problem is, you know, cybersecurity
Speaker 1: and cyber attacks are getting more pervasive. The numbers are
Speaker 1: going up every year, um, and it's something that everybody
Speaker 1: has to pay attention to well. But I guess from
Speaker 1: a corporate standpoint, have the number of attacks increased exponentially
Speaker 1: and have they gotten more and more sophisticated to the
Speaker 1: point where uh, companies are facing daily barrages that they're
Speaker 1: having trouble keeping up with. So the answer to that
Speaker 1: is yes. I mean we see literally, if I was
Speaker 1: to show you any chart and pick it an attack type,
Speaker 1: literally every attack type is up into the right in
Speaker 1: terms of absolute numbers that we see, Um, we've got
Speaker 1: If I was if I was able to show you
Speaker 1: a presentation. I've got a presentation that I do that
Speaker 1: shows the last thirty years of cyber attacks. One of
Speaker 1: the things you see is that no individual form of
Speaker 1: attack actually ever goes away. They all change, they more
Speaker 1: if they get more sophisticated over time. And now what
Speaker 1: we're seeing a lot of these guys do is there
Speaker 1: actually combining attack types to come up with new attacks
Speaker 1: that you that a lot of those of us who
Speaker 1: are defending have a hard time conceptualizing because they're completely
Speaker 1: different approaches to UH achieving your mission, so to speak,
Speaker 1: if you're a cyber attacker. Well, and it seems as
Speaker 1: though they're also combining the fruits of their labors. For example,
Speaker 1: there is a database that's been reported of about one
Speaker 1: point for billion user passwords has been discovered on the
Speaker 1: dark web, and this is data that is UH taken
Speaker 1: from LinkedIn, MySpace, Netflix, a variety of other sites. And
Speaker 1: the comment is that none of the passwords are encrypted,
Speaker 1: and they've already tested them so that now they can
Speaker 1: be sold through out the world. This is really a
Speaker 1: big business, isn't it. It's one of the reasons you
Speaker 1: have to change your password frequently. I know For some
Speaker 1: people they feel that's annoying to have to change their password.
Speaker 1: But it's back to that culture of security. Security is
Speaker 1: everyone's responsibility, whether you're the person on the street or
Speaker 1: the CEO of an organization, whether you're in the business
Speaker 1: like we are at McAfee of protecting people, um, or
Speaker 1: whether you're there the person who answers the phones here
Speaker 1: at Bloomberg. Everyone has to take responsibility. So how much
Speaker 1: have McAfee's profits gone up. We've we've we've been a
Speaker 1: successful business. As you know. We just spun ourselves out
Speaker 1: of Intel earlier this year in April, to be exact,
Speaker 1: and we've you know, we're one of the largest independent
Speaker 1: cybersecurity companies today. UM, we are, you know, we're I
Speaker 1: like to joke internally that we're um, we're kind of
Speaker 1: like a startup, but we're actually quite large. You've been
Speaker 1: in the business for for several years and it's something that, uh,
Speaker 1: we're very proud of. What do you actually do? So
Speaker 1: we're we provide cybersecurity products and services across consumer markets
Speaker 1: as well as commercial markets. We serve governments and businesses. UM.
Speaker 1: We provide products, we've got services, we do a lot
Speaker 1: of protection and at the foundation of everything we do
Speaker 1: is really strong threat detection and helping stop threats. You
Speaker 1: you recently made a purchase of a sky High UH
Speaker 1: Networks and this has to do with cloud computing. Are
Speaker 1: there specific risks associated with so much data and corporate
Speaker 1: activity moving to the cloud where the people involved may
Speaker 1: not even know where the data resides. They're absolutely, they
Speaker 1: absolutely are. If you think about where the world is
Speaker 1: going in the future state, it's going to be a
Speaker 1: worker in any any organization is just gonna be They're
Speaker 1: gonna be on some device, They're gonna be accessing applications
Speaker 1: and data that are in the cloud, potentially in a
Speaker 1: public cloud environment, and that's going to be the way
Speaker 1: the world is going to work. And so we at McAfee,
Speaker 1: you know, have decided that together when we close the
Speaker 1: transaction with sky High, which happens in the early part
Speaker 1: of next year, will now be able to provide that
Speaker 1: end to end security from you know, kind of the
Speaker 1: devices that users are working with all the way out
Speaker 1: through the applications and data that are in the cloud.
Speaker 1: Where Skyhis establishes established themselves as a leader, we think
Speaker 1: that's the future of where the world is headed not
Speaker 1: only from an I T perspective, but the cybersecurity models
Speaker 1: got to operate that way as well. Just quickly, what's
Speaker 1: your biggest fear with respect to some kind of massive
Speaker 1: data breach? UM? My biggest fear when it comes to
Speaker 1: attacks is is you know the impact on um, you know,
Speaker 1: on major systems. You know, like I, for example, at
Speaker 1: a conference a couple of years ago, I had Ted
Speaker 1: Coppel come and talk because he wrote that book called
Speaker 1: lights Out on you know, an attack, potential attack on
Speaker 1: the power grid. UM. So I do worry about those things.
Speaker 1: I think those are real issues that we have to
Speaker 1: wrestle with, and I think there's a lot of infrastructure
Speaker 1: that needs to be put in place. I think there's
Speaker 1: a lot of process and a lot of back to
Speaker 1: my cultural security, a lot of prioritization that has to
Speaker 1: be placed on the cyber security model in and around
Speaker 1: those critical systems. I do have to say, though, when
Speaker 1: you change your passwords so frequently, it leads to people
Speaker 1: writing down all their passwords in one place, which could
Speaker 1: just just then get hacked. I'm just saying before you
Speaker 1: could use a password manager, that's true, I guess you could.
Speaker 1: You could get more tech savvy Christian. Thank you so
Speaker 1: much for joining us Christians. Chief executive officer of McAfee,
Speaker 1: based in Santa Clara, California. I hope that you are
Speaker 1: okay with the wildfires. It's supposed to be a quiet
Speaker 1: time of the year for municipal bond issuance, but preliminary
Speaker 1: numbers indicate that at least nine billion dollars worth of
Speaker 1: muni debt is expected to be issued during the week
Speaker 1: of well this week December eighteenth alone, actually next week,
Speaker 1: but we're already ahead of ourselves. Now. This is according
Speaker 1: to out of that we've compiled here at Bloomberg, and
Speaker 1: that is more than double more than double the average
Speaker 1: issuance during the last two weeks of December. You have
Speaker 1: to go back to nineteen eighty five to find these
Speaker 1: kinds of numbers. Uh. And here to tell us a
Speaker 1: little bit about this and other things involving the world
Speaker 1: of interest rates and yielding bonds is Rich Taylor. He
Speaker 1: has fixed income client portfolio manager for American Century. They're
Speaker 1: based in Mountain View, California, and he helps manage more
Speaker 1: than forty billion dollars in fixed income assets. Rich thank
Speaker 1: you very much for joining us in our eleven three
Speaker 1: oh studios, your thoughts about muni bonds in this this
Speaker 1: sort of wave of issuance that's that's coming. Is this
Speaker 1: uh directly related to the tax overhaul bill? Yes, I
Speaker 1: think it is. Pemin Again, thank you both for having me,
Speaker 1: and Merry Christmas to you and yours. Um. Yes, Uh.
Speaker 1: Normally as December is a very low supply month, usually
Speaker 1: around six seven billion, but as you know, we're getting
Speaker 1: probably closer to fifties sixty billion this this month alone. Uh.
Speaker 1: That is still being readily absorbed due to the increased demand.
Speaker 1: But it is really issue where is trying to move
Speaker 1: up their issuance. Normally that would come in January February
Speaker 1: in advance of this what may come out of this
Speaker 1: text form bill. So um, we do expect supply to
Speaker 1: drop off dramatically in January February, but right now we're
Speaker 1: getting a big flood, so aside from the tax plan
Speaker 1: which is still up in the air, although there is
Speaker 1: the expectation that Center Republicans will present a bill, possibly
Speaker 1: some kind of final form or draft early next week. Um.
Speaker 1: How are you arranging your portfolio heading into next year?
Speaker 1: Any big allocation shifts. Oh, that's a great question, and
Speaker 1: I think what we're expecting. You know, we don't have
Speaker 1: a whole lot of clarity yet on the bill. I
Speaker 1: think the biggest thing, that's what we're trying to do
Speaker 1: is get in advance of it. If we get a
Speaker 1: tax MP advance for funding elimination, that's of the market.
Speaker 1: So what we could see if the bill goes through
Speaker 1: and its current status, you could see a fifty percent
Speaker 1: reduction in taxes at muni bonds. So that would vastly
Speaker 1: change these sort of demographic of the supply because right
Speaker 1: so we are going along that route. And also if
Speaker 1: the state and local tax deductions get eliminated, that would
Speaker 1: certainly potentially change the way the nature the structure of
Speaker 1: the way state and local governments issue bonds and also
Speaker 1: their ability to race time. But you're not actually changing
Speaker 1: your allocation around this here, not at this point though,
Speaker 1: because we don't have enough clarity left to know what
Speaker 1: the bill is gonna ultimately look like. So one thing
Speaker 1: that I'm wondering. You know, a lot of people come
Speaker 1: in here and they say, we're in a pretty good environment.
Speaker 1: We're not expecting any big hiccups next year. Very few
Speaker 1: people are predicting a recession of any sort gradual tightening,
Speaker 1: but the central banks are all petrified at the markets
Speaker 1: and disrupting anything. Um, there's a lot of risk building.
Speaker 1: How concerned are you about that? Very concerned a matter
Speaker 1: of fact, that is my number one certainly said, I'm
Speaker 1: glad you asked that question. Is that really? Since so eight,
Speaker 1: what we've seen is bond investors have and and understandably so. Uh.
Speaker 1: They're primary, if not soul objective in their bond portfolios
Speaker 1: has been to maximize yield. We're a low interest rate environment.
Speaker 1: We're no longer in an environment where you can if
Speaker 1: when if you're tired, you can clip a coupon and
Speaker 1: not touch your principle. And now and now obviously you
Speaker 1: know you can't. You can't live the twenty three years
Speaker 1: from time and I wanted two percent a year. So
Speaker 1: what investors have done in the last several years to
Speaker 1: get that There's only two ways to get that yield,
Speaker 1: duration risk or credit risk, and pretty much everyone has
Speaker 1: done it by loading, loading the boat and their portfolios
Speaker 1: on credit risk. And now credit spreads are so tight
Speaker 1: and evaluations are so rich, you're not being paid for
Speaker 1: that risk. So what scares me is that as long
Speaker 1: as we're in this goldilocks low volatility environment, that's fine.
Speaker 1: But if we get if and when we get the
Speaker 1: next big equity market correction or when Bolatili increases the
Speaker 1: high correlation between the credit markets and the stock market,
Speaker 1: I mean that the stock market goes down, the bond
Speaker 1: the credit market is going to do the same way
Speaker 1: with it. So I'm concerned that investors have far too
Speaker 1: much credit risk in their portfolios. Is not enough diversification. Well,
Speaker 1: does this mean that they're now going to uh lavish
Speaker 1: themselves with a duration risk to add to their credit risk. No, not,
Speaker 1: especially now if you've got the curve that's flattened so much,
Speaker 1: you know, throughout this year, and if it gets a
Speaker 1: little bit more flat uh going forward. I think it
Speaker 1: would be a big mistake at this juncture. If the
Speaker 1: Feds can continue to slowly renormalize rates and if inflation
Speaker 1: starts to creep up a little bit more uh and
Speaker 1: also with FED balance sheet restructuring that could actually take
Speaker 1: longer rates up a little bit. So I think staying intermediate,
Speaker 1: saying in that four or five six year area makes
Speaker 1: the most sense. But just being modestly overweight credit risk
Speaker 1: and and and not not make really the sole objective
Speaker 1: of the portfolio to be maximizing yield. So do you
Speaker 1: feel like your portfolio has pockets that have excess risk
Speaker 1: that you in another environment would not be comfortable taking. No.
Speaker 1: A matter of fact, we have anticipated this for quite
Speaker 1: some time, and we have one of our hallmarks of
Speaker 1: the way we met it's fixing come money in American
Speaker 1: century is to seek diversified sources of return. We don't
Speaker 1: want duration, or credit risk or sector allocation being a
Speaker 1: big concentrated risk. The flip side of that is that
Speaker 1: returns are likely to be lower. That's right, and the
Speaker 1: well the world has to we have to assume and
Speaker 1: expect lower returns. What are the returns that you're expecting returns? Uh?
Speaker 1: You know this year core bond funds have been getting
Speaker 1: where three, three or four percent. I'm thinking maybe two
Speaker 1: to three next year. So that's the big get right
Speaker 1: to two to three percent returns all in returns, price
Speaker 1: and coupon for core bond funds that are about half
Speaker 1: investment grade corporates and half covernments. That would be the
Speaker 1: lowest performance in a long time in a very long time.
Speaker 1: And again that's exactly right. And that and the thing
Speaker 1: is is achieving those maintaining decent returns and decent yields
Speaker 1: with an appropriate level of risk. And that's the biggest,
Speaker 1: that's the big that's job one for managers and investors. Well,
Speaker 1: just to report this headline from the associate depressed that
Speaker 1: House and Senate leaders have reached a tax package deal.
Speaker 1: We're awaiting the details, of course of that deal. You know,
Speaker 1: rich the Uh, the issue that I that Lisa and
Speaker 1: I speak about every now and again has to do
Speaker 1: with automobile loans and that has been something that has
Speaker 1: offered yield to yield start investors. But ninety day plus
Speaker 1: delinquency rates for auto loans is up to about ten percent.
Speaker 1: That's the highest since the first quarter of Does that
Speaker 1: Does that give you any pause? It does? And interestingly, UM,
Speaker 1: within the asset backed sector allocation our portfolios, we have
Speaker 1: gone the way of sort of issued regular auto loans
Speaker 1: and home acuity and credit card loans because again they're
Speaker 1: very rich as well. And we've gone into some more
Speaker 1: esoteric areas like fleet and rental cars, UH, and also
Speaker 1: time shares. You know, the rate on a on a
Speaker 1: time share ask back, there's you know, ten elve, so
Speaker 1: we can get some very nice yields, and that's a
Speaker 1: market that's been fair the untapped at this point. So
Speaker 1: we when it comes to asset backs and kind of
Speaker 1: mortgage credit area, we uh shy away from your traditional
Speaker 1: asset backed areas because that does concern us and also evaluations.
Speaker 1: Thank you so much, really a pleasure to hear what
Speaker 1: you have to say. Rich Taylor, fixed income client portfolio
Speaker 1: manager for American Century, which is based in Mountain View, California.
Speaker 1: Thanks for listening to the Bloomberg p m L podcast.
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
Speaker 1: It's one before the podcast. You can always catch us
Speaker 1: worldwide on Bloomberg Radio.