WEBVTT - Markets, Supply Chain, And Remote Work In 2022 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.560 --> 0:00:15.520 with essential market moving news. Find the Bloomberg Markets podcast 0:00:15.560 --> 0:00:18.479 called Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.600 at Bloomberg dot com slash podcast. All right, Matt. My 0:00:22.840 --> 0:00:26.920 undergraduate university was the University of virgin Richmond. One of 0:00:26.920 --> 0:00:29.480 the reasons I went through had a really good undergraduate 0:00:29.560 --> 0:00:33.440 business school. And our next guest is also a graduate 0:00:33.479 --> 0:00:35.280 of the University of Richmond. And then she went and 0:00:35.320 --> 0:00:39.040 she had an MBA from the University of Virginia. The wah, 0:00:39.080 --> 0:00:41.960 Who's they work really hard at the darting school. I 0:00:42.040 --> 0:00:44.360 remember that when I went from my visit. Rebecca Felton, 0:00:44.360 --> 0:00:48.279 senior market strategist for Riverfront Investment Group, joins us. Rebecca 0:00:48.520 --> 0:00:52.080 fellow Spider, Welcome, Happy New Year. What am I doing 0:00:52.080 --> 0:00:56.160 in two with my four one K? Well, thank you 0:00:56.200 --> 0:00:59.040 so much for having me in the Spiders. Um, we 0:00:59.360 --> 0:01:02.480 we are little constructive on stocks, so we're still leaning 0:01:02.480 --> 0:01:06.479 into stocks over bonds. Using bonds really just to protect 0:01:06.560 --> 0:01:08.960 us on the downside in terms of volatility, but heavy 0:01:08.959 --> 0:01:11.679 on the US simply because we believe the economic picture 0:01:11.760 --> 0:01:15.640 remains stronger here and more consistent, if you will, versus 0:01:15.680 --> 0:01:18.200 the rest of the world. What what do you think 0:01:18.200 --> 0:01:23.600 about the forty six portfolio? Well, I mean we we 0:01:24.160 --> 0:01:26.000 for many of us, that's sort of where we are 0:01:26.160 --> 0:01:29.120 from a demographic standpoint, right in terms of what our 0:01:29.200 --> 0:01:32.200 risk tolerance is UM. But we're we're still in that 0:01:32.280 --> 0:01:37.000 portfolio probably again five to ten points overweight equities UM 0:01:37.080 --> 0:01:40.360 and still a little bit overweight cash rather than putting 0:01:40.360 --> 0:01:42.520 that money to work in fixed income right now, So 0:01:42.560 --> 0:01:45.240 we're up at about full precent cash, I think, which 0:01:45.280 --> 0:01:47.760 is which is a larger than normal position for us. 0:01:47.800 --> 0:01:51.080 So we still would like h stocks and cash over bonds. 0:01:51.200 --> 0:01:53.680 All right, Rebecca, Where do I go here in the 0:01:53.760 --> 0:01:56.640 equity markets? You know, I've I think a lot of us, 0:01:56.640 --> 0:01:59.200 a lot of the folks listening have been you know, 0:01:59.480 --> 0:02:02.360 since even since a financial crisis, you know, long the 0:02:02.400 --> 0:02:04.600 big tech names, the Apples, the Amazons of the world, 0:02:04.640 --> 0:02:06.920 and they've done really well. But a lot of folks 0:02:06.920 --> 0:02:09.880 that have been maybe pretty adept here in the financial 0:02:09.919 --> 0:02:13.760 crisis have done quite well with the cyclical trade, you know, 0:02:13.800 --> 0:02:16.160 maybe some of the energy, the financials, some of the 0:02:16.160 --> 0:02:18.359 reopening stories. How do you think about that over the 0:02:18.440 --> 0:02:21.560 next couple of years, Well, all of the above, if 0:02:21.560 --> 0:02:24.560 you will. In terms of, you know, the barbell trade 0:02:24.600 --> 0:02:27.079 that you've been hearing so many people talk about, that's 0:02:27.080 --> 0:02:29.920 where we are. We've been there for the majority of 0:02:29.919 --> 0:02:32.040 the last six to nine months. So we are still 0:02:32.080 --> 0:02:36.040 overweight technology, particularly in our longer horizon strategies, with an 0:02:36.080 --> 0:02:38.840 emphasis on software willing to pay up because of the 0:02:38.880 --> 0:02:42.240 consistency of Womanton revenue growth. On the flip side, we 0:02:42.320 --> 0:02:44.880 have added back to financials and we have the stuff 0:02:44.919 --> 0:02:49.000 exposure to industrial, specifically in the infrastructure space, so we 0:02:49.080 --> 0:02:53.400 and we also have discretionary names that play into um 0:02:53.600 --> 0:02:56.600 both reopening and stay at home. So not trying to 0:02:56.720 --> 0:02:59.520 ride the fence here, but since we still know that 0:02:59.639 --> 0:03:03.520 we are in an uneven trajectory, bumpy but up, it 0:03:03.560 --> 0:03:09.640 seems to make no sense in terms of the Omicron scare. 0:03:09.760 --> 0:03:12.440 I mean, the numbers are eye popping, but it doesn't 0:03:12.440 --> 0:03:15.280 seem to be bothering anybody in the market. Does this 0:03:15.320 --> 0:03:19.880 seem like the end to you? Well, it could be 0:03:19.880 --> 0:03:22.960 a prolonged end. I mean, I certainly don't know that 0:03:23.080 --> 0:03:25.919 much about the medical aspect of it, but what we've 0:03:25.960 --> 0:03:28.920 seen is that um it is it is less severe, 0:03:29.800 --> 0:03:33.560 more cases, but fewer hospitalizations. But that doesn't mean it 0:03:33.600 --> 0:03:35.960 won't be disruptive in the near term. So you're seeing, 0:03:36.160 --> 0:03:41.400 you know, sporadic shutdown, sporadic UH places where people are 0:03:41.400 --> 0:03:43.240 being told go ahead and work from home a little 0:03:43.240 --> 0:03:45.720 bit longer, and that's going to have some implications for 0:03:45.760 --> 0:03:48.440 that supply chain congestion that we've had, but that doesn't 0:03:48.480 --> 0:03:51.800 mean it's permanent. That's your point. The vaccination rates are up, 0:03:51.800 --> 0:03:54.080 the booster rates are up, and this seems to be 0:03:54.800 --> 0:03:58.360 a less severe strain. Rebecca, how concerned are you that 0:03:58.480 --> 0:04:03.040 this federal reserve may get it wrong, may find itself 0:04:03.080 --> 0:04:05.920 maybe behind the curve which some people are suggesting, and 0:04:05.960 --> 0:04:08.480 maybe be forced to kind of be more aggressive, and 0:04:08.520 --> 0:04:12.760 that could be a problem. Well, we we believe that 0:04:12.840 --> 0:04:16.919 they have been again measured throughout. We think that the 0:04:16.960 --> 0:04:19.800 market seems to be signaling that they don't believe that 0:04:19.880 --> 0:04:23.560 the BED is UH making a mistake, whether they think 0:04:23.560 --> 0:04:26.320 that the BED is striking an appropriate balance. Obviously, those 0:04:26.920 --> 0:04:29.960 UH minutes that you'll get UM. I guess this week 0:04:30.000 --> 0:04:31.919 are going to be telling because people seem to be 0:04:31.960 --> 0:04:35.159 sensitive to anything that's a little more hawkish than what 0:04:35.320 --> 0:04:38.680 was priced in. But net net folks seem to be 0:04:38.680 --> 0:04:44.240 expecting both tightening and uh, you know, tapering next year. 0:04:44.320 --> 0:04:46.120 So I think that or this year, I guess I 0:04:46.160 --> 0:04:49.480 should say, we still have to get used to it. 0:04:51.480 --> 0:04:54.400 What what kind of I mean, how important is it 0:04:54.480 --> 0:04:57.880 to you to think about the balance sheet unwind? Is 0:04:57.920 --> 0:04:59.800 that too in the weeds or do you think it's 0:04:59.800 --> 0:05:01.760 going to have a serious effect on the market or 0:05:01.800 --> 0:05:04.760 do you think they're not going to really do it well? 0:05:04.800 --> 0:05:08.480 I think that I think it's going to be data dependent. Obviously, 0:05:08.560 --> 0:05:12.440 this week's UM employment and report will be very important 0:05:12.560 --> 0:05:15.560 in terms of UM if it does hit that four 0:05:15.600 --> 0:05:18.960 percent number or even below UM. But then again, the 0:05:18.960 --> 0:05:22.000 Federal Reserves definition of full employment, we still don't know it, 0:05:22.640 --> 0:05:24.440 and we expect that it's a little bit lower than 0:05:24.440 --> 0:05:27.200 where we are. But I think that we we we 0:05:27.480 --> 0:05:29.640 all have this day of reckoning where this is the 0:05:29.720 --> 0:05:32.920 year where the policy is going to change, and so 0:05:33.160 --> 0:05:36.320 UM you know, whether it's priced into the market or not. 0:05:37.040 --> 0:05:39.400 I would tend to believe it is, and that stocks 0:05:39.400 --> 0:05:43.040 still represent the best um alternative for long term growth 0:05:43.160 --> 0:05:46.440 just because of the potential again for earnings growth, the 0:05:46.440 --> 0:05:50.760 strength of US corporation's net net, and the fact that 0:05:50.920 --> 0:05:53.120 you know, lates go up, your bond prices go down. 0:05:53.160 --> 0:05:57.680 So um, not our favorite place to be. All right, 0:05:57.680 --> 0:06:00.880 thanks very much for joint answer back. Great having you 0:06:00.920 --> 0:06:07.960 on the program. Earlier today we had the I s 0:06:08.080 --> 0:06:10.520 M data came out with some manufacturing data came in 0:06:10.560 --> 0:06:13.160 at fifty eight point seven. The consensus was first sixty. 0:06:13.320 --> 0:06:15.440 It's a little bit below consensus, but still fifty eight 0:06:15.440 --> 0:06:19.040 point seven. It's more than fifty. That means the manufacturing 0:06:19.080 --> 0:06:22.520 sector is expanding. Let's bring in Tim Fury, chairman Institute 0:06:22.520 --> 0:06:26.120 of Supply Management, a business survey committee. Has got his 0:06:26.200 --> 0:06:29.960 master's and NBA from Rents a Leer polytechnic institute. Those 0:06:29.960 --> 0:06:33.520 guys are serious math geeks up there at r PI. 0:06:33.600 --> 0:06:36.320 So Tim loves the numbers. Tim, what did the numbers 0:06:36.320 --> 0:06:40.159 tell you today? Are you happy? New year? So seven? 0:06:40.200 --> 0:06:43.279 This is really a transition, mom transition meaning that we 0:06:43.320 --> 0:06:45.440 saw the input side kind of weakened a little bit. 0:06:45.440 --> 0:06:48.880 Supply to the livery number came down, Uh, inventory manufact 0:06:48.960 --> 0:06:51.560 human torment inventory came down a little bit too, primarily 0:06:51.640 --> 0:06:54.800 because of in your cash management issues. We saw the 0:06:54.800 --> 0:06:58.120 employment number gain again slightly, which you've been predicting for 0:06:58.160 --> 0:07:00.400 the last three months. So everything's really good in here, 0:07:00.839 --> 0:07:02.919 no doubt about it. So the transition means that the 0:07:02.960 --> 0:07:05.440 production number didn't step up to the level that we'd 0:07:05.440 --> 0:07:08.359 hope that it would step up to, primarily because of 0:07:08.400 --> 0:07:11.680 the timing issues. Without the month of December, so I 0:07:11.720 --> 0:07:13.680 would have thought that production number would have hit sixty 0:07:13.680 --> 0:07:15.600 four or so with that employment number where it's at. 0:07:16.000 --> 0:07:19.760 Demand is still clean across all the different elements, the 0:07:19.800 --> 0:07:23.720 new new export orders, customer inventories, backlog, you know, new 0:07:23.800 --> 0:07:26.520 order number all really good. And we saw the improvement 0:07:26.520 --> 0:07:28.360 on the input side, which is what we're hoping for. 0:07:28.760 --> 0:07:30.720 But we didn't see was the pop on the output 0:07:30.720 --> 0:07:33.840 consumption side, primarily because production in the step up like 0:07:33.880 --> 0:07:36.080 it should have, and that was primarily due to the 0:07:36.120 --> 0:07:41.120 fact that we had timing issues in the month of December. So, um, 0:07:41.160 --> 0:07:44.680 what do you expect then in terms of the forward 0:07:44.760 --> 0:07:47.440 looking numbers? Are we going to have an acceleration? Are 0:07:47.480 --> 0:07:51.080 we hanging around this pace? Um? Or are you worried 0:07:51.080 --> 0:07:54.520 about a slowdown. Jeez, you know this is the problem. 0:07:54.600 --> 0:07:56.960 So we had the same issue back in March and 0:07:57.000 --> 0:08:00.840 April and in May of June. March enables when we 0:08:00.840 --> 0:08:03.720 fell off the cliff. Uh. May and June is when 0:08:03.760 --> 0:08:06.840 we climb back up the cliff. And these monthly surveys, 0:08:06.840 --> 0:08:09.160 which are great, they're the best and earliest syndicator that 0:08:09.200 --> 0:08:11.800 we have. At the time, I remember saying that I 0:08:11.840 --> 0:08:14.520 wish we were doing this thing weekly or twice a 0:08:14.560 --> 0:08:18.200 month because things changed so rapidly. Well, what's happened since 0:08:18.280 --> 0:08:20.920 you know, these numbers were collected is that the omicron 0:08:21.040 --> 0:08:24.160 virus obviously is affecting a lot more people in anything 0:08:24.160 --> 0:08:26.800 that we've seen so far. The positive thing is that 0:08:26.880 --> 0:08:29.240 it's not as deadly as what we've seen so far, 0:08:29.720 --> 0:08:32.560 but it's affecting a lot more people. Of people being 0:08:33.040 --> 0:08:36.520 UH tested are coming up positive, which really equates to 0:08:36.800 --> 0:08:40.640 absentee is um on plan call outs, kids not being 0:08:40.679 --> 0:08:43.400 able to go to school. In my own local area 0:08:43.400 --> 0:08:47.080 here where where I live, UH schools were closed yesterday 0:08:47.080 --> 0:08:50.080 and today because they couldn't enough bus drivers. So you know, 0:08:50.120 --> 0:08:53.120 we're now back into this another lumpy wave speed bump 0:08:53.520 --> 0:08:56.480 where employment numbers are going to be impacted. In January February, 0:08:56.760 --> 0:08:58.880 supply to delivy numbers are probably gonna end up going 0:08:58.920 --> 0:09:03.680 back up. Uh. The manufacturing inventory will probably go back 0:09:03.720 --> 0:09:06.959 up to reflecting people holding more finished goods and more 0:09:07.000 --> 0:09:11.280 working process So, but as long as the demands stays strong, Okay, 0:09:11.320 --> 0:09:13.240 we'll deal with this. But you know, here we go again. 0:09:13.679 --> 0:09:15.760 We saw a similar thing in late summer with delta. 0:09:16.240 --> 0:09:18.200 This one is probably going to be a bit worse 0:09:18.240 --> 0:09:21.240 because it's affecting a lot more people. Tim What are 0:09:21.240 --> 0:09:24.160 your respond to saying about the supply chain? Is this 0:09:25.040 --> 0:09:29.600 a full year two issue? Well, so, you know, we 0:09:29.640 --> 0:09:32.040 have really positive comments on the shortage side and on 0:09:32.080 --> 0:09:34.480 the lead time side. Both of those are early indicators. 0:09:35.000 --> 0:09:38.120 We had ten percent of the comments around shortage is 0:09:38.160 --> 0:09:40.840 saying that things are getting better compared to November, twelve 0:09:40.880 --> 0:09:43.160 percent of comments saying that lead times are getting better 0:09:43.559 --> 0:09:47.679 compared to November. Our comments around hiring were flat at 0:09:47.679 --> 0:09:52.079 about seven percent improvement versus November and October. The difficulty 0:09:52.080 --> 0:09:56.320 in hiring had improved, saying it was difficult to seven 0:09:56.360 --> 0:09:59.079 percents it was difficult to hire fifty tent saying it 0:09:59.120 --> 0:10:01.760 was difficult to hire no number. The higher to force 0:10:01.840 --> 0:10:04.280 manage ratio is still at a really good level. But 0:10:04.320 --> 0:10:06.680 you know, it's all doesn't really mean all that much. 0:10:06.720 --> 0:10:08.280 You have to really rely on what's happened in the 0:10:08.400 --> 0:10:11.560 last five to seven days, and that is that everybody 0:10:11.559 --> 0:10:14.680 knows somebody who's sick, and everybody knows somebody who's impact 0:10:14.720 --> 0:10:17.360 and then it's generally running through families. So that's going 0:10:17.400 --> 0:10:19.480 to impact the labor number, it's going to impact the 0:10:19.520 --> 0:10:24.040 employment number, and it's gonna impact the transportation efficiency as 0:10:24.080 --> 0:10:26.680 well as this plier delivery number. So that's kind of 0:10:26.720 --> 0:10:29.199 the that's the Q one forecast at this point is 0:10:29.240 --> 0:10:31.560 that you know, we're gonna we're gonna stay probably at 0:10:31.559 --> 0:10:34.960 a pretty high p m I level one, but it 0:10:35.000 --> 0:10:37.160 was going to be driven again by the input side, 0:10:37.200 --> 0:10:40.480 not so much by the output side. Tim, great to 0:10:40.480 --> 0:10:43.400 get your take. Thanks so much as usual for spending 0:10:43.400 --> 0:10:50.000 some time with this, Tim Fury. They're from I s M. 0:10:50.080 --> 0:10:54.280 Let's talk about working right now in terms of this 0:10:54.480 --> 0:11:00.079 very lonely year Workplace Provider i w G. Formally, you 0:11:00.160 --> 0:11:02.960 just you probably know them. I certainly do, as there's 0:11:02.960 --> 0:11:05.400 one in this building. Mark Dixon is the founder and CEO. 0:11:05.800 --> 0:11:09.360 He joins us to talk about, you know, what this 0:11:09.440 --> 0:11:14.439 business is like during or hopefully getting closer to after 0:11:15.040 --> 0:11:19.000 the COVID pandemic. Mark Um, how did I w G? 0:11:19.160 --> 0:11:24.560 How did we just deal with this last couple of years. Well, 0:11:24.720 --> 0:11:28.360 we've actually it's a good news and a bad news story. 0:11:29.160 --> 0:11:31.960 Bad news stories. Clearly, you know, it's very hard to 0:11:32.840 --> 0:11:38.680 combat government lockdowns where people are stopped from coming into 0:11:38.720 --> 0:11:42.040 an office. But you know that's the bad news story. 0:11:42.120 --> 0:11:46.200 The good news story is the entire world has has 0:11:46.600 --> 0:11:50.720 of work, has really experienced sort of remote working. Um, 0:11:50.960 --> 0:11:54.160 it's working other than sort of commuting to a central 0:11:54.200 --> 0:11:58.000 office to carry out your activities and look at it works. 0:11:58.080 --> 0:12:00.679 I mean, the whole world didn't all over in the 0:12:00.760 --> 0:12:04.240 last two years. In fact, companies have become more efficient, 0:12:05.240 --> 0:12:08.960 people have become more efficient, and so I'm working remotely 0:12:09.120 --> 0:12:13.600 has really become something that's mainstream. From being something that 0:12:13.679 --> 0:12:17.040 was sort of on the edge of what companies did, 0:12:17.160 --> 0:12:20.240 it's now absolutely mainstream. And that's the good news story. 0:12:20.640 --> 0:12:25.120 So we've seen consistent growth throughout one We're going into 0:12:25.160 --> 0:12:29.440 twenty two very strongly. So you know, we're optimistic on 0:12:29.480 --> 0:12:33.360 The outlook is more companies change mark, you know, assuming 0:12:33.400 --> 0:12:37.120 we're going to get through this omicron variant in relatively 0:12:38.040 --> 0:12:39.880 short order. That's kind of what we're hearing from some 0:12:39.920 --> 0:12:43.920 of the experts in reality. On the other side of this, 0:12:44.960 --> 0:12:49.959 what's the office work you know kind of landscape? Are 0:12:49.960 --> 0:12:52.160 people ever going to go back to the five days 0:12:52.200 --> 0:12:55.319 in the office kind of thing? Or is hybrid slash 0:12:55.360 --> 0:12:59.560 work from home the new norm? It's going to be 0:12:59.600 --> 0:13:01.880 the new norm. It is the norm today and it's 0:13:01.920 --> 0:13:05.520 going to stay. Look, seventy seven percent of employees are 0:13:05.559 --> 0:13:09.760 saying that a place to work closer to where they 0:13:09.800 --> 0:13:11.880 live it. Look, it's not always working from home. A 0:13:11.920 --> 0:13:14.880 lot of folks don't want to work from home. They've 0:13:14.880 --> 0:13:17.360 got too many interruptions, they can't get the job done. 0:13:17.600 --> 0:13:20.320 But what they're asking for is somewhere close to where 0:13:20.400 --> 0:13:23.720 they live to work. What the enemy is the long commute, 0:13:23.760 --> 0:13:26.240 The enemy is the expensive commune. People don't want to 0:13:26.240 --> 0:13:29.480 waste their time doing that. So seventy seven percent employees 0:13:29.520 --> 0:13:32.440 are saying that it's a must have for their next 0:13:32.520 --> 0:13:35.960 job mode. They absolutely want it. And this, you know, 0:13:36.080 --> 0:13:40.120 you can talk to any large corporation or any growth company, 0:13:40.120 --> 0:13:43.120 and they're saying, look at this, what new talent are 0:13:43.120 --> 0:13:46.480 asking for? An existence talent in talents asking for So 0:13:46.520 --> 0:13:49.880 it's absolutely going to become the norm. Look, who would 0:13:49.880 --> 0:13:53.400 ever vote for a one or two hour commute every day? 0:13:53.480 --> 0:13:55.440 And mean it's an absolute waste of time and money? 0:13:56.520 --> 0:13:59.520 Don't doing it for thirty five years? Yeah, but you're 0:13:59.520 --> 0:14:03.480 you're than a normal pert for more business trips, you 0:14:03.559 --> 0:14:07.920 vote for a fewer vacation days. You you're strange mark 0:14:07.960 --> 0:14:12.400 in terms of um looking for real estate right when 0:14:12.440 --> 0:14:16.800 you're when you are looking for new sites to put offices, 0:14:16.920 --> 0:14:22.560 are you looking more suburban then now? Absolutely? And we 0:14:22.640 --> 0:14:26.360 have been looking. We specialized and we have done really 0:14:26.400 --> 0:14:31.640 since our inception thirty years ago. Getting full national coverage 0:14:31.640 --> 0:14:34.480 and national coverage is not about being in New York 0:14:34.520 --> 0:14:38.240 City and San Francisco and Dallas, etcetera. It's about being 0:14:38.240 --> 0:14:40.720 in every city in America. And that is what we're 0:14:40.760 --> 0:14:43.440 working on. Every city in the world, every town in 0:14:43.480 --> 0:14:46.240 the world. That is what we're working on. Today. We 0:14:46.360 --> 0:14:50.240 operate in eleven hundred cities. We were operating just over 0:14:50.320 --> 0:14:53.600 three and a half thousand buildings, but eleven hundred of city. 0:14:53.680 --> 0:14:56.680 It's the coverage people are looking for. So we're in 0:14:56.760 --> 0:15:01.120 full growth mode going into twenty two. We're still opening up, 0:15:01.120 --> 0:15:03.080 by the way, in the big cities because it's the 0:15:03.160 --> 0:15:07.640 buying opportunity of a generation, because you know, the cities 0:15:07.640 --> 0:15:11.280 are depressed worldwide. People there's a lot of space. Prices 0:15:11.280 --> 0:15:15.800 are coming down. But our focus more than ever is 0:15:15.840 --> 0:15:20.160 on the suburbs and the deep suburbs, the countryside because 0:15:20.320 --> 0:15:23.120 that's where people have moved to in the past two 0:15:23.200 --> 0:15:26.160 years and they're not coming back. They're not coming back. 0:15:26.240 --> 0:15:29.240 That's a that's a very very interesting and it kind 0:15:29.240 --> 0:15:31.160 of drives what we hear from a lot of employers 0:15:31.200 --> 0:15:33.560 as well. Mark Dixon, founder and CEO of i w 0:15:33.680 --> 0:15:42.240 G p LC. So let's think about twenty two. We 0:15:42.320 --> 0:15:46.920 had a great one. We're talking to SMP, but all 0:15:47.000 --> 0:15:49.560 right now I gotta start all over again. We reset 0:15:49.600 --> 0:15:51.960 Brian Well and he's a co chief investment Officer and 0:15:51.960 --> 0:15:55.920 in general's portfolio managic TCWS Fixed Income Group. Brian, I 0:15:55.960 --> 0:15:59.080 know you guys are TCW, you know have been really 0:15:59.120 --> 0:16:01.000 I would say caution, it just kind of feels to 0:16:01.040 --> 0:16:04.760 me a cautious outlook here. How are you thinking about 0:16:04.800 --> 0:16:09.480 the fixed income markets? In two, where are opportunities for 0:16:09.560 --> 0:16:13.280 fixed income investors? Yeah, well thanks for having us. Um, 0:16:13.520 --> 0:16:14.880 I don't know, I there's a lot of opportunities. Talking 0:16:14.880 --> 0:16:17.440 about a great year in one, I mean that was 0:16:17.600 --> 0:16:20.520 for equity and a lot of other things. You know, 0:16:20.600 --> 0:16:23.720 it was well my friends that trade trade credit. I'm like, 0:16:23.840 --> 0:16:25.560 what do you guys do for a living? I mean, 0:16:25.560 --> 0:16:27.880 what do you do? I guess that isn't so bad 0:16:27.920 --> 0:16:29.640 for most people for a bond manage, you know, and 0:16:29.760 --> 0:16:31.320 even like we don't like to put any negatives in 0:16:31.320 --> 0:16:33.840 front of our parent numbers, but but nonetheless that's what 0:16:33.840 --> 0:16:36.480 we had. You know, it's a it's an interesting year. Um. 0:16:36.520 --> 0:16:39.600 You know, outright, yield levels obviously are not not attractive. 0:16:39.640 --> 0:16:41.920 I mean, if you were just to put the year 0:16:41.960 --> 0:16:44.160 to date moving perspective, if you were by the bond 0:16:44.600 --> 0:16:47.200 on New Year's Eve, uh, you know, we've moved up 0:16:47.240 --> 0:16:49.840 about seventeen basis points since then, so you've lost almost 0:16:49.840 --> 0:16:52.040 two years of coupon. Uh. And it just kind of 0:16:52.040 --> 0:16:55.520 tells you the vulnerability at these yield levels. So, um, 0:16:55.600 --> 0:16:57.640 not a lot of market opportunities yet, You're right, we've 0:16:57.640 --> 0:17:01.200 been defensive. We've got our powder dry, um and I think, 0:17:01.240 --> 0:17:03.480 you know, the moving interest rates and what you're seeing 0:17:03.600 --> 0:17:06.600 happen in some sectors of the stock market reacting to 0:17:06.680 --> 0:17:10.560 higher rates, you know, it's probably indicative of opportunities to 0:17:10.600 --> 0:17:13.159 come in the bond market, particularly in parts of the 0:17:13.440 --> 0:17:16.240 credit parts of the bond market like corporate bonds, emerging 0:17:16.359 --> 0:17:20.960 market bonds, etcetera. So what are your clients, I mean, 0:17:21.000 --> 0:17:23.760 you're not managing a small chunk of change. Got two 0:17:24.000 --> 0:17:28.280 dred billion dollars in fixed income assets? What are your 0:17:28.280 --> 0:17:33.600 clients looking to you? Are they mainly um hedging, hiding 0:17:33.640 --> 0:17:36.600 from risk? What's what's um? What's the interest right now? Yeah? Look, 0:17:36.920 --> 0:17:38.800 I think you know, you talk about bonds and the 0:17:38.840 --> 0:17:40.560 and the I think you're kind of alluding to the 0:17:40.640 --> 0:17:43.040 role that's supposed to play in the portfolio. I mean, 0:17:43.080 --> 0:17:45.200 you know, let's kind of make it round numbers. I mean, 0:17:45.280 --> 0:17:47.040 you know, let's talk about the ten year you know, 0:17:47.160 --> 0:17:50.520 want one point seven percent um on an outright yield 0:17:50.520 --> 0:17:52.760 basis not that attractive, But you know, it's all about 0:17:52.760 --> 0:17:55.439 the portfolio. Uh. And you know, if we hit a 0:17:55.480 --> 0:17:58.679 scenario where you know, let's say we hit the parket 0:17:58.680 --> 0:18:01.679 of pocket of volatility and for some reason equities declined 0:18:02.520 --> 0:18:04.960 basis points. You know, what you're going to get from 0:18:04.960 --> 0:18:07.439 your bond portfolio may not, on an absolute basis be 0:18:07.480 --> 0:18:09.119 what it provided in the past, you know, but you 0:18:09.119 --> 0:18:10.920 could still get a kind of an upward of close 0:18:10.920 --> 0:18:13.080 to a ten percent with positive return, you know, in 0:18:13.119 --> 0:18:16.239 an overall bond portfolio, um, which what should help kind 0:18:16.280 --> 0:18:19.159 of mitigate some of those losses. Brian, I know you 0:18:19.200 --> 0:18:23.119 spent some time at Donaldson Lufkin and Jenrette DLJ. They 0:18:23.160 --> 0:18:27.240 had in the day. Yeah, feigned high yield effort there 0:18:27.320 --> 0:18:30.399 until my credit Swiss first Boston came in and bought 0:18:30.440 --> 0:18:32.600 you guys, and then it all just went south. But 0:18:33.119 --> 0:18:36.160 let me tap into your high yield expertise. I'm willing 0:18:36.160 --> 0:18:37.720 to take some risk. I'm willing to go into the 0:18:37.800 --> 0:18:39.840 high yield market. I'm willing to take some credit risk. 0:18:40.440 --> 0:18:43.680 What sector should I look at? Be careful? Be careful, 0:18:43.880 --> 0:18:47.359 I mean you look, I mean, we just things have 0:18:47.400 --> 0:18:50.080 been so good, and you know, investors memories are short, 0:18:50.119 --> 0:18:52.560 and we just came off a year um where you know, 0:18:52.600 --> 0:18:54.639 the default rate in the high yield bond market, I 0:18:54.680 --> 0:18:57.760 mean was basically zero. We're talking about twenty five basis 0:18:57.840 --> 0:19:01.520 points of a default rate, which you know, historically those 0:19:01.600 --> 0:19:04.040 numbers are kind of more like, you know, three percent 0:19:04.160 --> 0:19:07.359 to four percent uh, And it's just been what's such 0:19:07.600 --> 0:19:11.200 such a strong recovery, such supportive monetary and fiscal policies, 0:19:11.680 --> 0:19:13.719 you know, and it's not necessarily to say that that 0:19:13.760 --> 0:19:16.600 couldn't continue for another year. But you also it's like 0:19:16.680 --> 0:19:18.560 all risks, you got to decide what you're getting paid 0:19:18.640 --> 0:19:20.879 for it. You know, in the yield right now in 0:19:20.920 --> 0:19:23.240 the high yeld bond markets, you know just above you 0:19:23.280 --> 0:19:27.760 know about four um so, meaning there's there's not a 0:19:27.800 --> 0:19:30.240 lot of extra spread compression to go. So I think 0:19:30.520 --> 0:19:32.760 you know ourselves. I think you talk to most you know, 0:19:32.840 --> 0:19:35.119 experts in the bond market, they're saying, kind of, you know, 0:19:35.400 --> 0:19:37.520 your returns for the next year in the high old 0:19:37.520 --> 0:19:40.280 bard market are probably at best a coupon clip, which 0:19:40.320 --> 0:19:42.639 is kind of that you know, four percent plus or minus. 0:19:42.640 --> 0:19:46.160 But if we hit a patch of volatility, equity markets underperform, 0:19:46.200 --> 0:19:48.080 you know, maybe the Feds a little more aggressive than 0:19:48.160 --> 0:19:51.320 than the markets currently expect expecting um with regards the 0:19:51.400 --> 0:19:53.760 rate hikes or the balance sheet reduction. I don't think 0:19:53.760 --> 0:19:56.119 the credit markets, particularly the high old bond market is 0:19:56.119 --> 0:19:58.080 going to react to well, so you could see you know, 0:19:58.119 --> 0:20:00.639 returns you know, go down to the low single digits, 0:20:00.640 --> 0:20:03.400 if not negative. I want to just get your take 0:20:03.440 --> 0:20:06.639 on the FED quickly, and also check up on my 0:20:06.720 --> 0:20:11.440 producers English language skills. He wrote here FED tapering too 0:20:11.480 --> 0:20:13.280 slow with one oh, but I don't know if he 0:20:13.359 --> 0:20:17.520 means FED tapering is going to slow or FED tapering 0:20:17.760 --> 0:20:22.960 is too slow with two ohs. Well, I don't think 0:20:22.960 --> 0:20:24.800 you're gonna get it better what they've offered now, which 0:20:24.840 --> 0:20:27.879 is basically they're gonna end this tapering. And let's be 0:20:27.920 --> 0:20:30.359 clear with the listeners, right, tapering means they're going to 0:20:30.440 --> 0:20:33.400 slow the addition of assets to the balance sheet, which 0:20:33.440 --> 0:20:35.920 is already close to nine trillion dollars, so you know 0:20:35.960 --> 0:20:37.720 they're going to kind of end the growth of the 0:20:37.760 --> 0:20:39.800 balance sheet by March. I don't think you're gonna get 0:20:39.800 --> 0:20:42.879 anything faster than that. I think the bigger question now, 0:20:43.720 --> 0:20:46.640 it's not necessarily in today specifically necessarily about rate hikes. 0:20:46.680 --> 0:20:49.200 You know, the marks expecting about three hikes next year 0:20:49.320 --> 0:20:52.359 starting you know, around May. Bigger question right now is, 0:20:52.680 --> 0:20:54.760 you know, once they stop adding to the balance sheet, 0:20:55.119 --> 0:20:57.159 are they gonna actually start to reduce it, like well 0:20:57.200 --> 0:21:01.480 they proactively look to sell securities into the marketplace or 0:21:01.600 --> 0:21:03.680 let the ones mature and not replace it. You know, 0:21:03.760 --> 0:21:05.560 that could have a big impact because a lot of 0:21:05.560 --> 0:21:07.240 the rate move we saw in the last three or 0:21:07.240 --> 0:21:08.760 four months of the year was about the short end 0:21:08.760 --> 0:21:10.159 of the curve. What's the FED going to do with 0:21:10.200 --> 0:21:13.080 the FED hikes? If the Fed starts changing it's it's 0:21:13.359 --> 0:21:15.520 it's plan for what it does with its balance sheet 0:21:15.520 --> 0:21:17.720 in terms of reducing the size of it, that could 0:21:17.760 --> 0:21:20.639 really impact the longer end of the yield curve. And 0:21:20.680 --> 0:21:23.320