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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside

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Speaker 1: my co host Matt Miller. Every business day we bring

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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along

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Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast

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Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and

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Speaker 1: at Bloomberg dot com slash podcast. All right, Matt. My

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Speaker 1: undergraduate university was the University of virgin Richmond. One of

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Speaker 1: the reasons I went through had a really good undergraduate

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Speaker 1: business school. And our next guest is also a graduate

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Speaker 1: of the University of Richmond. And then she went and

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Speaker 1: she had an MBA from the University of Virginia. The wah,

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Speaker 1: Who's they work really hard at the darting school. I

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Speaker 1: remember that when I went from my visit. Rebecca Felton,

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Speaker 1: senior market strategist for Riverfront Investment Group, joins us. Rebecca

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Speaker 1: fellow Spider, Welcome, Happy New Year. What am I doing

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Speaker 1: in two with my four one K? Well, thank you

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Speaker 1: so much for having me in the Spiders. Um, we

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Speaker 1: we are little constructive on stocks, so we're still leaning

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Speaker 1: into stocks over bonds. Using bonds really just to protect

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Speaker 1: us on the downside in terms of volatility, but heavy

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Speaker 1: on the US simply because we believe the economic picture

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Speaker 1: remains stronger here and more consistent, if you will, versus

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Speaker 1: the rest of the world. What what do you think

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Speaker 1: about the forty six portfolio? Well, I mean we we

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Speaker 1: for many of us, that's sort of where we are

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Speaker 1: from a demographic standpoint, right in terms of what our

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Speaker 1: risk tolerance is UM. But we're we're still in that

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Speaker 1: portfolio probably again five to ten points overweight equities UM

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Speaker 1: and still a little bit overweight cash rather than putting

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Speaker 1: that money to work in fixed income right now, So

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Speaker 1: we're up at about full precent cash, I think, which

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Speaker 1: is which is a larger than normal position for us.

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Speaker 1: So we still would like h stocks and cash over bonds.

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Speaker 1: All right, Rebecca, Where do I go here in the

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Speaker 1: equity markets? You know, I've I think a lot of us,

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Speaker 1: a lot of the folks listening have been you know,

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Speaker 1: since even since a financial crisis, you know, long the

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Speaker 1: big tech names, the Apples, the Amazons of the world,

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Speaker 1: and they've done really well. But a lot of folks

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Speaker 1: that have been maybe pretty adept here in the financial

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Speaker 1: crisis have done quite well with the cyclical trade, you know,

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Speaker 1: maybe some of the energy, the financials, some of the

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Speaker 1: reopening stories. How do you think about that over the

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Speaker 1: next couple of years, Well, all of the above, if

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Speaker 1: you will. In terms of, you know, the barbell trade

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Speaker 1: that you've been hearing so many people talk about, that's

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Speaker 1: where we are. We've been there for the majority of

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Speaker 1: the last six to nine months. So we are still

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Speaker 1: overweight technology, particularly in our longer horizon strategies, with an

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Speaker 1: emphasis on software willing to pay up because of the

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Speaker 1: consistency of Womanton revenue growth. On the flip side, we

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Speaker 1: have added back to financials and we have the stuff

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Speaker 1: exposure to industrial, specifically in the infrastructure space, so we

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Speaker 1: and we also have discretionary names that play into um

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Speaker 1: both reopening and stay at home. So not trying to

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Speaker 1: ride the fence here, but since we still know that

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Speaker 1: we are in an uneven trajectory, bumpy but up, it

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Speaker 1: seems to make no sense in terms of the Omicron scare.

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Speaker 1: I mean, the numbers are eye popping, but it doesn't

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Speaker 1: seem to be bothering anybody in the market. Does this

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Speaker 1: seem like the end to you? Well, it could be

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Speaker 1: a prolonged end. I mean, I certainly don't know that

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Speaker 1: much about the medical aspect of it, but what we've

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Speaker 1: seen is that um it is it is less severe,

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Speaker 1: more cases, but fewer hospitalizations. But that doesn't mean it

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Speaker 1: won't be disruptive in the near term. So you're seeing,

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Speaker 1: you know, sporadic shutdown, sporadic UH places where people are

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Speaker 1: being told go ahead and work from home a little

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Speaker 1: bit longer, and that's going to have some implications for

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Speaker 1: that supply chain congestion that we've had, but that doesn't

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Speaker 1: mean it's permanent. That's your point. The vaccination rates are up,

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Speaker 1: the booster rates are up, and this seems to be

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Speaker 1: a less severe strain. Rebecca, how concerned are you that

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Speaker 1: this federal reserve may get it wrong, may find itself

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Speaker 1: maybe behind the curve which some people are suggesting, and

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Speaker 1: maybe be forced to kind of be more aggressive, and

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Speaker 1: that could be a problem. Well, we we believe that

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Speaker 1: they have been again measured throughout. We think that the

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Speaker 1: market seems to be signaling that they don't believe that

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Speaker 1: the BED is UH making a mistake, whether they think

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Speaker 1: that the BED is striking an appropriate balance. Obviously, those

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Speaker 1: UH minutes that you'll get UM. I guess this week

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Speaker 1: are going to be telling because people seem to be

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Speaker 1: sensitive to anything that's a little more hawkish than what

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Speaker 1: was priced in. But net net folks seem to be

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Speaker 1: expecting both tightening and uh, you know, tapering next year.

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Speaker 1: So I think that or this year, I guess I

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Speaker 1: should say, we still have to get used to it.

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Speaker 1: What what kind of I mean, how important is it

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Speaker 1: to you to think about the balance sheet unwind? Is

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Speaker 1: that too in the weeds or do you think it's

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Speaker 1: going to have a serious effect on the market or

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Speaker 1: do you think they're not going to really do it well?

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Speaker 1: I think that I think it's going to be data dependent. Obviously,

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Speaker 1: this week's UM employment and report will be very important

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Speaker 1: in terms of UM if it does hit that four

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Speaker 1: percent number or even below UM. But then again, the

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Speaker 1: Federal Reserves definition of full employment, we still don't know it,

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Speaker 1: and we expect that it's a little bit lower than

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Speaker 1: where we are. But I think that we we we

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Speaker 1: all have this day of reckoning where this is the

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Speaker 1: year where the policy is going to change, and so

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Speaker 1: UM you know, whether it's priced into the market or not.

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Speaker 1: I would tend to believe it is, and that stocks

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Speaker 1: still represent the best um alternative for long term growth

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Speaker 1: just because of the potential again for earnings growth, the

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Speaker 1: strength of US corporation's net net, and the fact that

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Speaker 1: you know, lates go up, your bond prices go down.

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Speaker 1: So um, not our favorite place to be. All right,

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Speaker 1: thanks very much for joint answer back. Great having you

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Speaker 1: on the program. Earlier today we had the I s

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Speaker 1: M data came out with some manufacturing data came in

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Speaker 1: at fifty eight point seven. The consensus was first sixty.

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Speaker 1: It's a little bit below consensus, but still fifty eight

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Speaker 1: point seven. It's more than fifty. That means the manufacturing

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Speaker 1: sector is expanding. Let's bring in Tim Fury, chairman Institute

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Speaker 1: of Supply Management, a business survey committee. Has got his

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Speaker 1: master's and NBA from Rents a Leer polytechnic institute. Those

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Speaker 1: guys are serious math geeks up there at r PI.

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Speaker 1: So Tim loves the numbers. Tim, what did the numbers

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Speaker 1: tell you today? Are you happy? New year? So seven?

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Speaker 1: This is really a transition, mom transition meaning that we

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Speaker 1: saw the input side kind of weakened a little bit.

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Speaker 1: Supply to the livery number came down, Uh, inventory manufact

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Speaker 1: human torment inventory came down a little bit too, primarily

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Speaker 1: because of in your cash management issues. We saw the

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Speaker 1: employment number gain again slightly, which you've been predicting for

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Speaker 1: the last three months. So everything's really good in here,

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Speaker 1: no doubt about it. So the transition means that the

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Speaker 1: production number didn't step up to the level that we'd

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Speaker 1: hope that it would step up to, primarily because of

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Speaker 1: the timing issues. Without the month of December, so I

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Speaker 1: would have thought that production number would have hit sixty

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Speaker 1: four or so with that employment number where it's at.

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Speaker 1: Demand is still clean across all the different elements, the

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Speaker 1: new new export orders, customer inventories, backlog, you know, new

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Speaker 1: order number all really good. And we saw the improvement

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Speaker 1: on the input side, which is what we're hoping for.

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Speaker 1: But we didn't see was the pop on the output

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Speaker 1: consumption side, primarily because production in the step up like

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Speaker 1: it should have, and that was primarily due to the

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Speaker 1: fact that we had timing issues in the month of December. So, um,

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Speaker 1: what do you expect then in terms of the forward

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Speaker 1: looking numbers? Are we going to have an acceleration? Are

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Speaker 1: we hanging around this pace? Um? Or are you worried

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Speaker 1: about a slowdown. Jeez, you know this is the problem.

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Speaker 1: So we had the same issue back in March and

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Speaker 1: April and in May of June. March enables when we

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Speaker 1: fell off the cliff. Uh. May and June is when

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Speaker 1: we climb back up the cliff. And these monthly surveys,

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Speaker 1: which are great, they're the best and earliest syndicator that

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Speaker 1: we have. At the time, I remember saying that I

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Speaker 1: wish we were doing this thing weekly or twice a

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Speaker 1: month because things changed so rapidly. Well, what's happened since

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Speaker 1: you know, these numbers were collected is that the omicron

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Speaker 1: virus obviously is affecting a lot more people in anything

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Speaker 1: that we've seen so far. The positive thing is that

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Speaker 1: it's not as deadly as what we've seen so far,

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Speaker 1: but it's affecting a lot more people. Of people being

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Speaker 1: UH tested are coming up positive, which really equates to

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Speaker 1: absentee is um on plan call outs, kids not being

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Speaker 1: able to go to school. In my own local area

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Speaker 1: here where where I live, UH schools were closed yesterday

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Speaker 1: and today because they couldn't enough bus drivers. So you know,

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Speaker 1: we're now back into this another lumpy wave speed bump

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Speaker 1: where employment numbers are going to be impacted. In January February,

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Speaker 1: supply to delivy numbers are probably gonna end up going

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Speaker 1: back up. Uh. The manufacturing inventory will probably go back

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Speaker 1: up to reflecting people holding more finished goods and more

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Speaker 1: working process So, but as long as the demands stays strong, Okay,

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Speaker 1: we'll deal with this. But you know, here we go again.

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Speaker 1: We saw a similar thing in late summer with delta.

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Speaker 1: This one is probably going to be a bit worse

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Speaker 1: because it's affecting a lot more people. Tim What are

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Speaker 1: your respond to saying about the supply chain? Is this

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Speaker 1: a full year two issue? Well, so, you know, we

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Speaker 1: have really positive comments on the shortage side and on

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Speaker 1: the lead time side. Both of those are early indicators.

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Speaker 1: We had ten percent of the comments around shortage is

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Speaker 1: saying that things are getting better compared to November, twelve

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Speaker 1: percent of comments saying that lead times are getting better

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Speaker 1: compared to November. Our comments around hiring were flat at

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Speaker 1: about seven percent improvement versus November and October. The difficulty

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Speaker 1: in hiring had improved, saying it was difficult to seven

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Speaker 1: percents it was difficult to hire fifty tent saying it

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Speaker 1: was difficult to hire no number. The higher to force

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Speaker 1: manage ratio is still at a really good level. But

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Speaker 1: you know, it's all doesn't really mean all that much.

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Speaker 1: You have to really rely on what's happened in the

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Speaker 1: last five to seven days, and that is that everybody

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Speaker 1: knows somebody who's sick, and everybody knows somebody who's impact

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Speaker 1: and then it's generally running through families. So that's going

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Speaker 1: to impact the labor number, it's going to impact the

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Speaker 1: employment number, and it's gonna impact the transportation efficiency as

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Speaker 1: well as this plier delivery number. So that's kind of

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Speaker 1: the that's the Q one forecast at this point is

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Speaker 1: that you know, we're gonna we're gonna stay probably at

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Speaker 1: a pretty high p m I level one, but it

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Speaker 1: was going to be driven again by the input side,

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Speaker 1: not so much by the output side. Tim, great to

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Speaker 1: get your take. Thanks so much as usual for spending

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Speaker 1: some time with this, Tim Fury. They're from I s M.

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Speaker 1: Let's talk about working right now in terms of this

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Speaker 1: very lonely year Workplace Provider i w G. Formally, you

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Speaker 1: just you probably know them. I certainly do, as there's

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Speaker 1: one in this building. Mark Dixon is the founder and CEO.

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Speaker 1: He joins us to talk about, you know, what this

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Speaker 1: business is like during or hopefully getting closer to after

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Speaker 1: the COVID pandemic. Mark Um, how did I w G?

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Speaker 1: How did we just deal with this last couple of years. Well,

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Speaker 1: we've actually it's a good news and a bad news story.

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Speaker 1: Bad news stories. Clearly, you know, it's very hard to

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Speaker 1: combat government lockdowns where people are stopped from coming into

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Speaker 1: an office. But you know that's the bad news story.

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Speaker 1: The good news story is the entire world has has

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Speaker 1: of work, has really experienced sort of remote working. Um,

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Speaker 1: it's working other than sort of commuting to a central

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Speaker 1: office to carry out your activities and look at it works.

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Speaker 1: I mean, the whole world didn't all over in the

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Speaker 1: last two years. In fact, companies have become more efficient,

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Speaker 1: people have become more efficient, and so I'm working remotely

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Speaker 1: has really become something that's mainstream. From being something that

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Speaker 1: was sort of on the edge of what companies did,

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Speaker 1: it's now absolutely mainstream. And that's the good news story.

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Speaker 1: So we've seen consistent growth throughout one We're going into

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Speaker 1: twenty two very strongly. So you know, we're optimistic on

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Speaker 1: The outlook is more companies change mark, you know, assuming

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Speaker 1: we're going to get through this omicron variant in relatively

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Speaker 1: short order. That's kind of what we're hearing from some

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Speaker 1: of the experts in reality. On the other side of this,

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Speaker 1: what's the office work you know kind of landscape? Are

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Speaker 1: people ever going to go back to the five days

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Speaker 1: in the office kind of thing? Or is hybrid slash

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Speaker 1: work from home the new norm? It's going to be

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Speaker 1: the new norm. It is the norm today and it's

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Speaker 1: going to stay. Look, seventy seven percent of employees are

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Speaker 1: saying that a place to work closer to where they

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Speaker 1: live it. Look, it's not always working from home. A

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Speaker 1: lot of folks don't want to work from home. They've

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Speaker 1: got too many interruptions, they can't get the job done.

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Speaker 1: But what they're asking for is somewhere close to where

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Speaker 1: they live to work. What the enemy is the long commute,

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Speaker 1: The enemy is the expensive commune. People don't want to

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Speaker 1: waste their time doing that. So seventy seven percent employees

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Speaker 1: are saying that it's a must have for their next

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Speaker 1: job mode. They absolutely want it. And this, you know,

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Speaker 1: you can talk to any large corporation or any growth company,

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Speaker 1: and they're saying, look at this, what new talent are

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Speaker 1: asking for? An existence talent in talents asking for So

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Speaker 1: it's absolutely going to become the norm. Look, who would

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Speaker 1: ever vote for a one or two hour commute every day?

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Speaker 1: And mean it's an absolute waste of time and money?

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Speaker 1: Don't doing it for thirty five years? Yeah, but you're

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Speaker 1: you're than a normal pert for more business trips, you

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Speaker 1: vote for a fewer vacation days. You you're strange mark

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Speaker 1: in terms of um looking for real estate right when

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Speaker 1: you're when you are looking for new sites to put offices,

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Speaker 1: are you looking more suburban then now? Absolutely? And we

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Speaker 1: have been looking. We specialized and we have done really

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Speaker 1: since our inception thirty years ago. Getting full national coverage

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Speaker 1: and national coverage is not about being in New York

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Speaker 1: City and San Francisco and Dallas, etcetera. It's about being

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Speaker 1: in every city in America. And that is what we're

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Speaker 1: working on. Every city in the world, every town in

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Speaker 1: the world. That is what we're working on. Today. We

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Speaker 1: operate in eleven hundred cities. We were operating just over

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Speaker 1: three and a half thousand buildings, but eleven hundred of city.

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Speaker 1: It's the coverage people are looking for. So we're in

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Speaker 1: full growth mode going into twenty two. We're still opening up,

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Speaker 1: by the way, in the big cities because it's the

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Speaker 1: buying opportunity of a generation, because you know, the cities

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Speaker 1: are depressed worldwide. People there's a lot of space. Prices

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Speaker 1: are coming down. But our focus more than ever is

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Speaker 1: on the suburbs and the deep suburbs, the countryside because

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Speaker 1: that's where people have moved to in the past two

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Speaker 1: years and they're not coming back. They're not coming back.

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Speaker 1: That's a that's a very very interesting and it kind

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Speaker 1: of drives what we hear from a lot of employers

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Speaker 1: as well. Mark Dixon, founder and CEO of i w

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Speaker 1: G p LC. So let's think about twenty two. We

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Speaker 1: had a great one. We're talking to SMP, but all

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Speaker 1: right now I gotta start all over again. We reset

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Speaker 1: Brian Well and he's a co chief investment Officer and

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Speaker 1: in general's portfolio managic TCWS Fixed Income Group. Brian, I

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Speaker 1: know you guys are TCW, you know have been really

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Speaker 1: I would say caution, it just kind of feels to

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Speaker 1: me a cautious outlook here. How are you thinking about

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Speaker 1: the fixed income markets? In two, where are opportunities for

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Speaker 1: fixed income investors? Yeah, well thanks for having us. Um,

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Speaker 1: I don't know, I there's a lot of opportunities. Talking

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Speaker 1: about a great year in one, I mean that was

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Speaker 1: for equity and a lot of other things. You know,

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Speaker 1: it was well my friends that trade trade credit. I'm like,

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Speaker 1: what do you guys do for a living? I mean,

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Speaker 1: what do you do? I guess that isn't so bad

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Speaker 1: for most people for a bond manage, you know, and

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Speaker 1: even like we don't like to put any negatives in

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Speaker 1: front of our parent numbers, but but nonetheless that's what

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Speaker 1: we had. You know, it's a it's an interesting year. Um.

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Speaker 1: You know, outright, yield levels obviously are not not attractive.

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Speaker 1: I mean, if you were just to put the year

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Speaker 1: to date moving perspective, if you were by the bond

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Speaker 1: on New Year's Eve, uh, you know, we've moved up

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Speaker 1: about seventeen basis points since then, so you've lost almost

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Speaker 1: two years of coupon. Uh. And it just kind of

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Speaker 1: tells you the vulnerability at these yield levels. So, um,

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Speaker 1: not a lot of market opportunities yet, You're right, we've

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Speaker 1: been defensive. We've got our powder dry, um and I think,

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Speaker 1: you know, the moving interest rates and what you're seeing

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Speaker 1: happen in some sectors of the stock market reacting to

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Speaker 1: higher rates, you know, it's probably indicative of opportunities to

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Speaker 1: come in the bond market, particularly in parts of the

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Speaker 1: credit parts of the bond market like corporate bonds, emerging

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Speaker 1: market bonds, etcetera. So what are your clients, I mean,

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Speaker 1: you're not managing a small chunk of change. Got two

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Speaker 1: dred billion dollars in fixed income assets? What are your

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Speaker 1: clients looking to you? Are they mainly um hedging, hiding

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Speaker 1: from risk? What's what's um? What's the interest right now? Yeah? Look,

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Speaker 1: I think you know, you talk about bonds and the

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Speaker 1: and the I think you're kind of alluding to the

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Speaker 1: role that's supposed to play in the portfolio. I mean,

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Speaker 1: you know, let's kind of make it round numbers. I mean,

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Speaker 1: you know, let's talk about the ten year you know,

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Speaker 1: want one point seven percent um on an outright yield

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Speaker 1: basis not that attractive, But you know, it's all about

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Speaker 1: the portfolio. Uh. And you know, if we hit a

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Speaker 1: scenario where you know, let's say we hit the parket

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Speaker 1: of pocket of volatility and for some reason equities declined

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Speaker 1: basis points. You know, what you're going to get from

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Speaker 1: your bond portfolio may not, on an absolute basis be

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Speaker 1: what it provided in the past, you know, but you

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Speaker 1: could still get a kind of an upward of close

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Speaker 1: to a ten percent with positive return, you know, in

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Speaker 1: an overall bond portfolio, um, which what should help kind

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Speaker 1: of mitigate some of those losses. Brian, I know you

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Speaker 1: spent some time at Donaldson Lufkin and Jenrette DLJ. They

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Speaker 1: had in the day. Yeah, feigned high yield effort there

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Speaker 1: until my credit Swiss first Boston came in and bought

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Speaker 1: you guys, and then it all just went south. But

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Speaker 1: let me tap into your high yield expertise. I'm willing

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Speaker 1: to take some risk. I'm willing to go into the

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Speaker 1: high yield market. I'm willing to take some credit risk.

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Speaker 1: What sector should I look at? Be careful? Be careful,

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Speaker 1: I mean you look, I mean, we just things have

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Speaker 1: been so good, and you know, investors memories are short,

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Speaker 1: and we just came off a year um where you know,

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Speaker 1: the default rate in the high yield bond market, I

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Speaker 1: mean was basically zero. We're talking about twenty five basis

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Speaker 1: points of a default rate, which you know, historically those

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Speaker 1: numbers are kind of more like, you know, three percent

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Speaker 1: to four percent uh, And it's just been what's such

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Speaker 1: such a strong recovery, such supportive monetary and fiscal policies,

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Speaker 1: you know, and it's not necessarily to say that that

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Speaker 1: couldn't continue for another year. But you also it's like

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Speaker 1: all risks, you got to decide what you're getting paid

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Speaker 1: for it. You know, in the yield right now in

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Speaker 1: the high yeld bond markets, you know just above you

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Speaker 1: know about four um so, meaning there's there's not a

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Speaker 1: lot of extra spread compression to go. So I think

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Speaker 1: you know ourselves. I think you talk to most you know,

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Speaker 1: experts in the bond market, they're saying, kind of, you know,

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Speaker 1: your returns for the next year in the high old

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Speaker 1: bard market are probably at best a coupon clip, which

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Speaker 1: is kind of that you know, four percent plus or minus.

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Speaker 1: But if we hit a patch of volatility, equity markets underperform,

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Speaker 1: you know, maybe the Feds a little more aggressive than

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Speaker 1: than the markets currently expect expecting um with regards the

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Speaker 1: rate hikes or the balance sheet reduction. I don't think

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Speaker 1: the credit markets, particularly the high old bond market is

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Speaker 1: going to react to well, so you could see you know,

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Speaker 1: returns you know, go down to the low single digits,

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Speaker 1: if not negative. I want to just get your take

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Speaker 1: on the FED quickly, and also check up on my

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Speaker 1: producers English language skills. He wrote here FED tapering too

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Speaker 1: slow with one oh, but I don't know if he

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Speaker 1: means FED tapering is going to slow or FED tapering

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Speaker 1: is too slow with two ohs. Well, I don't think

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Speaker 1: you're gonna get it better what they've offered now, which

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Speaker 1: is basically they're gonna end this tapering. And let's be

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Speaker 1: clear with the listeners, right, tapering means they're going to

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Speaker 1: slow the addition of assets to the balance sheet, which

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Speaker 1: is already close to nine trillion dollars, so you know

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Speaker 1: they're going to kind of end the growth of the

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Speaker 1: balance sheet by March. I don't think you're gonna get

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Speaker 1: anything faster than that. I think the bigger question now,

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Speaker 1: it's not necessarily in today specifically necessarily about rate hikes.

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Speaker 1: You know, the marks expecting about three hikes next year

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Speaker 1: starting you know, around May. Bigger question right now is,

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Speaker 1: you know, once they stop adding to the balance sheet,

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Speaker 1: are they gonna actually start to reduce it, like well

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Speaker 1: they proactively look to sell securities into the marketplace or

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Speaker 1: let the ones mature and not replace it. You know,

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Speaker 1: that could have a big impact because a lot of

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Speaker 1: the rate move we saw in the last three or

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Speaker 1: four months of the year was about the short end

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Speaker 1: of the curve. What's the FED going to do with

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Speaker 1: the FED hikes? If the Fed starts changing it's it's

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Speaker 1: it's plan for what it does with its balance sheet

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Speaker 1: in terms of reducing the size of it, that could

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Speaker 1: really impact the longer end of the yield curve. And

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Speaker 1: that has a lot of impacts, you know, across the economy,

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Speaker 1: including the including markets like housing. Brian, I really appreciate

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Speaker 1: your time. Thanks so much for stopping by. Brian Whale

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Speaker 1: and co Ce i oh In General portfolio manager, TCW

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Speaker 1: Fixed Income Group. Thanks for listening to the Bloomberg Markets podcast.

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Speaker 1: You can subscribe and listen to interviews with Apple Podcasts

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Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm

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Speaker 1: on Twitter at Matt Miller on false Sweeney I'm on

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Speaker 1: Twitter at p T Sweeney. Before the podcast, you can

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Speaker 1: always catch us worldwide at Bloomberg Radio