WEBVTT - Cautious Start to Asia Trading on Volatility Concerns 0:00:02.480 --> 0:00:06.800 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.640 --> 0:00:12.840 This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner. 0:00:12.920 --> 0:00:15.400 You can join Brian Curtis and myself for the stories, 0:00:15.440 --> 0:00:18.560 making news and moving markets in the APAC region. You 0:00:18.600 --> 0:00:21.439 can subscribe to the show anywhere you get your podcast 0:00:21.520 --> 0:00:24.919 and always on Bloomberg Radio, the Bloomberg Terminal, and the 0:00:24.920 --> 0:00:29.400 Bloomberg Business App. Adam Koons is with us. He is 0:00:29.440 --> 0:00:33.360 the co chief investment officer at Winthrop Capital Management. Need 0:00:33.440 --> 0:00:37.239 joins us from Indianapolis. Adam, thanks for joining us Sunday night, 0:00:37.320 --> 0:00:40.280 your time. I'm curious as to what you were hearing 0:00:40.400 --> 0:00:44.360 last week from clients with all the volatility we saw 0:00:44.400 --> 0:00:47.720 in markets, particularly heavy selling in the Monday session last week. 0:00:49.320 --> 0:00:51.519 Well, you know, when we have heighten volatility and kind 0:00:51.520 --> 0:00:55.960 of a more chaotic market, investors start to kind of 0:00:56.000 --> 0:00:58.640 wonder how much worse can this get? And that's always 0:00:58.680 --> 0:01:00.840 the first question that we were seeing, is, you know, 0:01:00.960 --> 0:01:01.840 is this just is. 0:01:01.800 --> 0:01:05.360 This a buying opportunity? Is this just a short term blip? 0:01:05.600 --> 0:01:07.040 Or is there more to this? 0:01:07.959 --> 0:01:10.400 And so I think, you know, when we're looking at it, 0:01:10.400 --> 0:01:14.360 it's it's kind of too early to tell. But one 0:01:14.360 --> 0:01:18.039 of the things that we were really focused on was volatility. Obviously, 0:01:18.080 --> 0:01:21.160 we saw the VIC spike to sixty, which is. 0:01:21.080 --> 0:01:22.000 An incredible move. 0:01:22.400 --> 0:01:24.440 And then if you're you know, if you're a bond trader, 0:01:24.560 --> 0:01:26.920 you're looking at the move index very similar that that 0:01:27.040 --> 0:01:29.000 also had quite a a. 0:01:29.280 --> 0:01:33.040 You know, spike. So we're seeing volatility pick up. 0:01:33.760 --> 0:01:36.240 It did, you know, come down considerably by the end 0:01:36.280 --> 0:01:39.160 of the week, But that shows us that, you know, 0:01:39.319 --> 0:01:42.319 investors in general are going to be quick to try 0:01:42.360 --> 0:01:45.440 to sell any kind of bad news at this point. 0:01:45.560 --> 0:01:47.760 So we've we've kind of gone in a different direction 0:01:47.840 --> 0:01:50.040 where you know, there was a time period where bad 0:01:50.120 --> 0:01:52.800 news was good news because it meant that the Fed 0:01:52.920 --> 0:01:56.279 might cut. Now we're starting it feels like we're entering 0:01:56.320 --> 0:02:00.000 that regime where bad news actually could be bad news 0:02:00.160 --> 0:02:01.040 for markets. 0:02:01.240 --> 0:02:04.160 So what is that thinking done to your investment strategy? 0:02:04.200 --> 0:02:07.080 Were you moving things around in the equity trade last week? 0:02:08.520 --> 0:02:11.200 We were, so we were kind of doing a couple 0:02:11.240 --> 0:02:11.600 of things. 0:02:11.639 --> 0:02:14.640 One is, we did see it as a general buying 0:02:14.639 --> 0:02:15.640 opportunity for some. 0:02:15.600 --> 0:02:17.920 Of the higher quality tech names. 0:02:18.120 --> 0:02:19.400 You know, it's kind of one of those baby with 0:02:19.440 --> 0:02:23.200 the bathwater type mentality where you know, everything in tech 0:02:23.240 --> 0:02:26.360 seem to be selling off quite hard. Some names, you know, 0:02:27.200 --> 0:02:29.560 they should have been like an Intel down twenty five percent. 0:02:29.960 --> 0:02:33.840 I think that was probably a move that needed to 0:02:33.840 --> 0:02:37.240 happen because the business model there is deteriorating. But then 0:02:37.240 --> 0:02:39.840 there were other names like Alphabet and Microsoft that we 0:02:39.880 --> 0:02:43.240 felt like, you know, if things do start to roll over, 0:02:43.480 --> 0:02:45.240 those are still names that we want to be in 0:02:45.320 --> 0:02:48.000 because they are higher quality, they're low debt, you know, 0:02:48.160 --> 0:02:50.800 they're low leveraged, and they have high cash flows so 0:02:50.840 --> 0:02:53.840 they can sustain through maybe an economic downturn. And we 0:02:53.880 --> 0:02:55.519 don't think even if we do see some sort of 0:02:55.600 --> 0:02:57.200 recession or downturn, we don't think it's going to. 0:02:57.240 --> 0:02:57.799 Be that harsh. 0:02:58.200 --> 0:02:59.720 So those are the type of names that we were 0:02:59.720 --> 0:03:03.400 buying during that sell off. So it kind of just 0:03:03.720 --> 0:03:06.160 goes right into our overall strategy of kind of moving 0:03:06.200 --> 0:03:09.079 more defensively. So we, like I said, I did the 0:03:09.200 --> 0:03:11.600 quality factor that I pointed out just a minute ago. 0:03:11.960 --> 0:03:15.200 So lower beta, higher quality names is where we're shifting 0:03:15.240 --> 0:03:17.639 to on the equity side, and then on the fixed 0:03:17.680 --> 0:03:22.400 income side, we do still like the long duration fixed 0:03:22.440 --> 0:03:25.400 income trade where you're you know, buying law treasuries or 0:03:25.520 --> 0:03:28.120 high quality corporate buyds, so that you know, because we 0:03:28.160 --> 0:03:30.480 do think that interest rates are going to come down 0:03:31.200 --> 0:03:33.720 and probably going to come down quite quickly on the 0:03:33.720 --> 0:03:34.160 long end. 0:03:34.240 --> 0:03:37.480 So you mentioned Alphabet and Microsoft, and I'm wondering because 0:03:37.480 --> 0:03:40.120 we'll have the earnings from Nvidia at the end of 0:03:40.160 --> 0:03:42.680 the month, I think on the twenty eighth, have you 0:03:42.800 --> 0:03:46.960 heard anything about the AI trade that that's giving you 0:03:47.080 --> 0:03:48.080 cause for concern? 0:03:49.400 --> 0:03:51.360 We have, So, I mean you kind of heard it 0:03:51.480 --> 0:03:52.680 in some of the earnings. 0:03:52.360 --> 0:03:57.920 Calls with big tech like Alphabet, where they are starting 0:03:57.960 --> 0:04:02.680 to cut back on their spending. Still there's still growth 0:04:02.760 --> 0:04:06.000 in spending, but the acceleration of that. 0:04:06.120 --> 0:04:07.440 Has started to come down. 0:04:07.880 --> 0:04:10.120 And so when you've got to stock like Navidia that's 0:04:10.360 --> 0:04:14.840 really priced to perfection where they need substantial growth really 0:04:15.160 --> 0:04:17.840 right now, you're looking at fifty percent growth rate over 0:04:17.880 --> 0:04:20.920 the next five years in order to justify the price 0:04:20.920 --> 0:04:23.040 of it right now. So I think if you started 0:04:23.040 --> 0:04:27.800 to see any pullback in spending on chipsets, it would 0:04:27.839 --> 0:04:30.320 be it could be quite harsh for a named like 0:04:30.400 --> 0:04:32.200 Navidia kind of you know, at the tail end of 0:04:32.200 --> 0:04:33.880 the earning season here, so. 0:04:33.800 --> 0:04:38.839 We have the CPI data midweek before then PPI retail sales. 0:04:39.000 --> 0:04:42.560 So a lot to kind of consider when you're looking 0:04:42.560 --> 0:04:45.400 at the American economy. How do you feel about US 0:04:45.440 --> 0:04:48.760 inflation right now? Are you confident that it's easing to 0:04:48.800 --> 0:04:51.840 the extent that the Fed will have room maybe in 0:04:51.880 --> 0:04:55.880 September to cut at least by twenty five basis points. 0:04:56.600 --> 0:04:57.880 You know, I actually don't. 0:04:58.040 --> 0:05:01.520 I think getting to that two is going to be 0:05:01.560 --> 0:05:04.440 difficult and it's going to be slow, And so I 0:05:04.480 --> 0:05:08.400 think that that we're running the chance that because inflation 0:05:08.760 --> 0:05:11.839 might surprise to the upside as we kind of head 0:05:11.839 --> 0:05:14.960 into the year end and just prinently have coming up 0:05:15.000 --> 0:05:17.240 this week, I think we're going to get a lot 0:05:17.240 --> 0:05:19.680 of mixed data over the next several months, and it's 0:05:19.680 --> 0:05:22.360 going to make it difficult for the Fed. It's going 0:05:22.400 --> 0:05:24.880 to make it difficult for investors to try to, you know, 0:05:24.960 --> 0:05:28.799 project what's going to happen. And so I still stand 0:05:28.839 --> 0:05:30.840 by I think the Fed is going to be slower 0:05:30.839 --> 0:05:34.279 to act than what markets are predicting right now. If 0:05:34.320 --> 0:05:35.840 you look at the front end of the cycle where 0:05:35.839 --> 0:05:38.640 they were slow to increase interest rates, I think they're 0:05:38.680 --> 0:05:40.960 going to be slow to decrease interest rates, especially if 0:05:40.960 --> 0:05:44.760 we get any data points that show that we're still 0:05:44.800 --> 0:05:47.280 not there, and so I think you know, hitting that 0:05:47.320 --> 0:05:50.520 two percent target is going to be difficult from where 0:05:50.520 --> 0:05:51.200 we're at right now. 0:05:51.440 --> 0:05:54.279 You mentioned the bond market a moment ago. I'm curious 0:05:54.320 --> 0:05:56.520 as to where you see opportunity right now in terms 0:05:56.560 --> 0:05:58.800 of duration, long end, short end of the curve. 0:05:58.800 --> 0:06:02.200 Where are you Yeah, we're definitely on the long end. 0:06:02.320 --> 0:06:03.400 I think you know. 0:06:03.440 --> 0:06:07.680 The reality is everything that was pushing interest rates down 0:06:08.160 --> 0:06:12.159 prior to the pandemic didn't go away. Those are large 0:06:12.160 --> 0:06:17.320 demographic type issues, and because those haven't changed the natural 0:06:17.400 --> 0:06:20.320 path of interest rate, they are to the downside. So 0:06:20.960 --> 0:06:23.720 now we feel like we've really hit that peak and 0:06:23.880 --> 0:06:28.760 interest rates. We're extending in duration quite aggressively to try 0:06:28.760 --> 0:06:30.960 to lock in this yield for as long as we can, 0:06:31.320 --> 0:06:33.239 because I see it as kind of an asymmetric trade. 0:06:33.520 --> 0:06:36.360 Worst case scenario for us is that, Okay, interest rates 0:06:36.400 --> 0:06:38.480 stay where they about where they are for a while, 0:06:38.800 --> 0:06:41.640 and I'm happy to clip higher coupons, and then on 0:06:41.640 --> 0:06:43.200 the flip side, if we do see interest rates start 0:06:43.240 --> 0:06:45.400 to collapse, then obviously I'll get the price appreciation of 0:06:45.440 --> 0:06:47.560 the bonds. I think, you know, the other scenario where 0:06:47.600 --> 0:06:49.680 we see interest rates go higher, I think is a 0:06:49.880 --> 0:06:51.520 very very low probability right now. 0:06:52.160 --> 0:06:54.719 Low probability. I'd like to know about the level of 0:06:54.800 --> 0:06:58.080 conviction in both the equity trade and in the bond 0:06:58.120 --> 0:07:01.600 market trade that you're putting on right now. Are you 0:07:01.640 --> 0:07:05.359 pretty much solidly convinced of the calls that you're making 0:07:05.440 --> 0:07:08.279 right now, or are you hedging maybe by squirreling away 0:07:08.320 --> 0:07:09.720 a little bit of cash at the moment. 0:07:11.240 --> 0:07:14.400 So on the fixed income side, very very convicted on 0:07:14.440 --> 0:07:18.760 that long duration trade. So in our fixed income portfolios, 0:07:18.960 --> 0:07:21.680 we were holding no cash and said we are extending duration. 0:07:22.040 --> 0:07:24.760 On the equity side, holding a little bit higher cash 0:07:24.920 --> 0:07:27.960 than the normal and like I said, and also hedging 0:07:27.960 --> 0:07:31.360 that with moving more defensively. So on the equity side, 0:07:31.800 --> 0:07:33.880 absolutely kind of hedging that out a little bit. 0:07:34.400 --> 0:07:35.960 But on the fixed income side, we're all. 0:07:35.880 --> 0:07:38.720 In Adam, I'm curious as to whether or not you're 0:07:38.760 --> 0:07:43.120 seeing opportunities offshore. We get some data for China later 0:07:43.160 --> 0:07:45.400 in the week. I know that that market has really 0:07:45.440 --> 0:07:49.120 had some tough times. It's been going on for a while. 0:07:49.160 --> 0:07:52.320 We're well aware of that. Is there anything in Asia 0:07:52.440 --> 0:07:55.760 right now? That's attractive to you, you know. 0:07:55.880 --> 0:07:58.600 Unfortunately, no, and it's a trade that I want to 0:07:58.640 --> 0:08:00.720 put on and it's one that I'm going to be 0:08:01.200 --> 0:08:04.000 watching and waiting for. But I think the reality is 0:08:04.680 --> 0:08:08.400 as the US economy begins to slow, so does China 0:08:08.520 --> 0:08:11.280 and the rest of Asia. It's just not immune from 0:08:11.320 --> 0:08:14.600 what's happening in the US right now. And so until 0:08:14.720 --> 0:08:17.480 China can kind of shift away from being so dependent 0:08:17.560 --> 0:08:19.920 on exports, I think you're just going to see China 0:08:20.000 --> 0:08:21.640 go the same direction as the US economy. 0:08:21.920 --> 0:08:24.440 Adam, thank you so much. A great way to start 0:08:24.440 --> 0:08:27.480 the week with Adam Kohn's co chief investment officer at 0:08:27.480 --> 0:08:40.400 Winthrop Capital Management. He joining from Indianapolis, Indiana. Vishnu Varathan, 0:08:40.480 --> 0:08:44.360 he is head of Economics and Strategy at Misohobank. It's 0:08:44.360 --> 0:08:46.720 always a pleasure to have a chance to benefit from 0:08:46.760 --> 0:08:50.560 your perspective. Can you let me know whether we're near 0:08:50.600 --> 0:08:53.760 the end of this yen carry trade unwind or if 0:08:53.760 --> 0:08:55.559 there's a little bit more pain that we've got to 0:08:55.600 --> 0:08:56.200 deal with. 0:08:57.520 --> 0:08:59.800 Doug, thanks for having me in such a kind introduction. 0:09:00.720 --> 0:09:04.319 My suspicion and and that's mainly because I'm a pessimist 0:09:04.360 --> 0:09:04.839 by nature. 0:09:05.520 --> 0:09:05.920 Set. 0:09:06.080 --> 0:09:10.520 My suspicious is we're not quite decisively out of the 0:09:10.559 --> 0:09:12.800 boats yet. I mean, we've seen some glimmers of light, 0:09:13.640 --> 0:09:16.360 and the shakedown in and of itself does clear out 0:09:16.440 --> 0:09:20.320 some of the excesses, uh and the extreme positioning, but 0:09:20.480 --> 0:09:23.320 I don't think we've quite seen the end of it. 0:09:23.360 --> 0:09:28.400 For two reasons. One is markets continue to remain fairly jumpy, 0:09:28.920 --> 0:09:32.720 but at the same time, uh, you know, in so 0:09:32.840 --> 0:09:35.679 called formal mode where they're they're they're you know, they're 0:09:35.760 --> 0:09:38.560 they're really not willing to miss out on taking risk 0:09:38.880 --> 0:09:42.079 at every opportunity, uh. The and and that sets it 0:09:42.200 --> 0:09:46.760 up for latent downside volatility from time to time. The 0:09:46.840 --> 0:09:50.000 other reason is we continue to focus a lot on 0:09:50.320 --> 0:09:55.160 the bog being a source of yen induced carry and wind, 0:09:55.280 --> 0:09:57.480 but really the biggest source of that is going to 0:09:57.480 --> 0:09:57.920 be the FED. 0:09:58.600 --> 0:09:58.760 Uh. 0:09:58.800 --> 0:10:01.560 And if we again lurch back into a mode where 0:10:01.559 --> 0:10:04.200 the FED would have to end up cutting a lot 0:10:04.240 --> 0:10:07.920 more and a lot sooner, that's going to kick, you know, 0:10:08.000 --> 0:10:12.720 kick off another face of yen unwind yen carry unwind inadvertently, 0:10:13.160 --> 0:10:16.200 and the boj probably could do very little to stop that, 0:10:17.240 --> 0:10:20.480 given they would probably not want to make huge, you 0:10:20.480 --> 0:10:23.400 know policy U turns one way or the other. 0:10:23.559 --> 0:10:25.880 Do we have to be concerned at all about what's 0:10:25.880 --> 0:10:29.280 happening in the Japanese financial system? Are banks vulnerable? 0:10:31.240 --> 0:10:33.400 I think generally the banks are in a in a 0:10:33.679 --> 0:10:36.400 fairly good position. I mean, one of the starting points 0:10:36.400 --> 0:10:39.120 for that. And of course you're going to say, you know, 0:10:39.640 --> 0:10:40.559 I'm talking. 0:10:40.320 --> 0:10:43.360 My position here, who does it? 0:10:44.760 --> 0:10:47.679 But okay, putting that aside, you know, imagining that I'm 0:10:47.720 --> 0:10:52.240 somewhat independent here, I think the starting position for them 0:10:52.360 --> 0:10:54.720 was it was really good to get out of negative 0:10:54.800 --> 0:10:58.560 rates because banks, Japanese banks in particular, were struggling with 0:10:58.600 --> 0:11:02.280 the negative rates and getting more steadfastly into a position 0:11:02.320 --> 0:11:06.400 where they're going to get a normal sloping yield curve 0:11:06.480 --> 0:11:10.800 that's somewhat steepening. That also ought to be good for 0:11:10.840 --> 0:11:12.880 the banks. So the banks are in a position where 0:11:12.920 --> 0:11:17.160 they can benefit from that. Slowly diminishing the crossholdings where 0:11:17.840 --> 0:11:20.199 the NIKE is also in a healthier position, means that 0:11:20.360 --> 0:11:25.160 the banks are now positioned better in a structural perspective. 0:11:25.520 --> 0:11:28.400 But it would of course be negligent to say that, 0:11:28.760 --> 0:11:31.720 you know, heightened yet and induce volatility, and the cyclical 0:11:31.760 --> 0:11:35.520 shakedown in Nicke will flow through without any impact, so 0:11:35.960 --> 0:11:39.080 that there are risks ahead. There's a need to watch 0:11:39.120 --> 0:11:42.920 that space very closely and to remain hatched. But overall, 0:11:42.960 --> 0:11:45.120 I think it's moving into a good better position than 0:11:45.120 --> 0:11:45.960 it used to be in. 0:11:46.520 --> 0:11:49.560 So we're also talking about a lot of leverage being 0:11:49.600 --> 0:11:51.559 on whoelnd from the system as well, and that's got 0:11:51.600 --> 0:11:53.200 to be a healthy thing, I would imagine. 0:11:53.240 --> 0:11:57.520 Maybe you disagree, No, I'm totally with you on this one, Doug. 0:11:57.640 --> 0:12:00.640 I mean, the process of unwinding is not so pretty, 0:12:01.800 --> 0:12:04.720 but often getting to a better place would require moments 0:12:04.760 --> 0:12:07.920 of unpretty if you must, uh, and and and and 0:12:07.960 --> 0:12:12.240 it does get healthier that way. But the recognition right 0:12:12.280 --> 0:12:17.280 now is there is still quite a bit of leverage 0:12:17.320 --> 0:12:19.720 in the system. There's still quite a bit of liquidity 0:12:19.720 --> 0:12:20.559 in the system. 0:12:20.880 --> 0:12:21.160 Uh. 0:12:21.240 --> 0:12:23.800 And the liquidity is it cuts both ways. It is 0:12:23.800 --> 0:12:27.920 a source of backstop, given that it does boy markets 0:12:27.960 --> 0:12:33.560 and valuation, but equally, given just how uh, how intense 0:12:33.600 --> 0:12:37.199 and how precarious geopolitics is at the same time of 0:12:37.240 --> 0:12:40.360 the real conflicts and and and and the US elections 0:12:40.360 --> 0:12:44.120 and what it all means for for Asia, it also 0:12:44.400 --> 0:12:48.880 exposes Asia to I think at least bouts of of 0:12:48.960 --> 0:12:51.920 seizures and shakedowns, and that's something we cannot lose sight of. 0:12:52.040 --> 0:12:54.480 We had comments from a former board member of the 0:12:54.480 --> 0:12:57.079 bo J. We were talking about this earlier on the program, 0:12:57.120 --> 0:13:00.959 and from his view, another rate high from the BOJ 0:13:01.200 --> 0:13:04.200 is not possible this year at all. Maybe as soon 0:13:04.280 --> 0:13:07.200 as we get movement is in March of twenty twenty five. 0:13:07.280 --> 0:13:09.119 Is that the way you see things. 0:13:09.920 --> 0:13:13.920 Well, our view has always been that the BOJ would 0:13:14.000 --> 0:13:18.560 necessarily have to move very very gradually and very cautiously. 0:13:19.440 --> 0:13:22.760 We were never very seduced by the wage increment story 0:13:22.800 --> 0:13:26.080 because that was exaggerated by exports earning boosted by the Again. 0:13:27.160 --> 0:13:29.200 We were also very cautious of the fact that you know, 0:13:29.480 --> 0:13:31.559 you know, We did say you know that again is 0:13:31.559 --> 0:13:34.120 a BOJ problem with the fat solution. If that's the case, 0:13:34.160 --> 0:13:38.000 then the FAT can easily move the needle and make 0:13:38.040 --> 0:13:41.840 the boj's tightening seem too much from here on, Given 0:13:41.840 --> 0:13:45.880 what the BOG is indicated, we continue to be open 0:13:45.960 --> 0:13:48.840 to the prospect of another calibrated hike later in the 0:13:48.920 --> 0:13:54.080 year if conditions so allow. And I think confidence doesn't 0:13:54.120 --> 0:13:58.560 cave particularly household confidences is not so great. But yes, 0:13:58.679 --> 0:14:01.760 We never thought that, you know, terminal rate was going 0:14:01.800 --> 0:14:06.080 to be significantly higher than where it is now. Fifty 0:14:06.080 --> 0:14:09.520 basis points seems comfortable for terminal rate that's met, you know, 0:14:09.679 --> 0:14:12.680 that's that's approached, that has a longer approach, not just 0:14:12.720 --> 0:14:15.840 a six month or three month approach, but at one 0:14:15.880 --> 0:14:20.800 percent rate, I think is a stretch, particularly given the 0:14:20.880 --> 0:14:22.960 uncertainty we are heading into end of the year. In 0:14:22.960 --> 0:14:23.800 twenty twenty five. 0:14:24.160 --> 0:14:27.760 It's amazing because we just had one disappointing jobs report 0:14:27.960 --> 0:14:33.240 that kind of created the shearing. I mean, we were 0:14:33.360 --> 0:14:37.440 clearly at some level of a critical critical state here 0:14:37.520 --> 0:14:41.240 in markets globally, and it didn't take much to precipitate that. 0:14:41.720 --> 0:14:44.800 Do you worry that that central bankers broadly are not 0:14:44.960 --> 0:14:46.720 monitoring the situation well enough? 0:14:49.000 --> 0:14:51.560 I want to be fair to the central bankers where 0:14:52.200 --> 0:14:55.280 I'm fully cognizant of them hanging on to the type 0:14:55.280 --> 0:14:58.040 one mistake that they made being too slow to move 0:14:58.080 --> 0:15:02.200 on inflation that was there and appro problem, and necessarily 0:15:02.240 --> 0:15:04.280 that also means they're getting into the type two mistake, 0:15:04.760 --> 0:15:09.200 clinging onto inflation being the boogeyman in the room when 0:15:09.280 --> 0:15:14.320 the balance of risks are shifting where they stand right now. 0:15:14.520 --> 0:15:19.000 I think the tricky part is what higher for longer 0:15:20.400 --> 0:15:24.640 ought to mean. And to the argument, so to use uh, 0:15:24.960 --> 0:15:27.520 you know, Governor Bowman's point, she said, look, inflation is 0:15:27.560 --> 0:15:30.640 still a problem, sticky, so on and so forth. We 0:15:30.760 --> 0:15:33.120 fully take that point, but you know, the bigger picture 0:15:33.120 --> 0:15:35.680 here is, but does it really warrant a five and 0:15:35.720 --> 0:15:39.040 a half percent rate at a time when job losses 0:15:39.080 --> 0:15:42.440 are are starting to seep through, even if you're not 0:15:42.520 --> 0:15:45.840 in you know, full retrenchment mode. The problem is, this 0:15:45.880 --> 0:15:48.960 is a legging beast and like a huge vessel, is 0:15:49.040 --> 0:15:52.040 very quick, hard to turn directions of of the you know, 0:15:52.080 --> 0:15:55.440 the job market, and usually it's a little too late 0:15:55.480 --> 0:15:58.160 when when we see those signs. So that's where I 0:15:58.480 --> 0:16:02.600 think the FED has signal a lot more restraint than 0:16:02.640 --> 0:16:04.720 it probably ought to leave in the system over the 0:16:04.720 --> 0:16:05.720 next six to twelve. 0:16:05.520 --> 0:16:08.360 Months, unless they're just unwilling to say the quiet part 0:16:08.520 --> 0:16:13.200 out loud, which is that there is, well, financial conditions 0:16:13.200 --> 0:16:18.080 are pretty relaxed right now. There are easy financial conditions 0:16:18.600 --> 0:16:20.960 to be concerned about. Is that a fair statement. 0:16:21.560 --> 0:16:23.600 That's a fistatement And in fact, I'm glad you brought 0:16:23.640 --> 0:16:27.800 that up. So the liquidity in the system, how risk 0:16:27.880 --> 0:16:32.240 is priced, where equities are All that point to really 0:16:32.320 --> 0:16:37.440 easy financial conditions. There is always a sense in monitoring 0:16:37.480 --> 0:16:40.440 three aspects of policy separately. One is the policy itself, 0:16:40.480 --> 0:16:43.080 so that's the rates, and then monetary conditions, which is 0:16:43.080 --> 0:16:45.480 where exchange rates are and the rates are, and then 0:16:45.520 --> 0:16:49.880 financial conditions, the overall thing, the overall situation in the markets. 0:16:50.560 --> 0:16:52.800 The trouble with today's market is why it's getting hard 0:16:52.840 --> 0:16:56.040 to read this because increasingly there's a greater divergence between 0:16:56.360 --> 0:17:01.400 the very core policy conditions versus the overall financial conditions, 0:17:01.680 --> 0:17:04.920 which means a lot of the reaction function comes from 0:17:05.000 --> 0:17:08.639 sudden swings in markets, and the high correlation between asset 0:17:08.640 --> 0:17:12.560 classes means that financial conditions can really turn on a dime, 0:17:12.840 --> 0:17:14.919 and that's not a healthy position to be in. 0:17:15.240 --> 0:17:17.560 We'll leave their Vishnu. It's always a pleasure. Thank you 0:17:17.600 --> 0:17:20.080 so much for making time to chat with a vision Overarathan, 0:17:20.320 --> 0:17:24.080 head of Economics and Strategy at Misohobank, joining us from 0:17:24.119 --> 0:17:28.320 the Lion City of Singapore. Here on day break Asia. 0:17:34.280 --> 0:17:37.760 Eric Lynch is with us, Managing director of SCHARF Investments, 0:17:38.080 --> 0:17:41.600 joining from Los Coados, California. Eric thank you for being 0:17:41.640 --> 0:17:44.760 with us. You're a stone's throw from Silicon Valley. Are 0:17:44.800 --> 0:17:47.680 people a little nervous about this AI trade right now? 0:17:47.960 --> 0:17:53.000 I think so. Obviously tech has had a wonderful run 0:17:53.080 --> 0:17:57.320 for really ever since the financial crisis ended, and you know, 0:17:57.359 --> 0:17:59.080 you had the AI Can we give us some extra 0:17:59.200 --> 0:18:02.720 legs post pandemic? So you know, to have this kind 0:18:02.720 --> 0:18:07.120 of underperformance both in July and now actually one third 0:18:07.160 --> 0:18:09.800 through August, it's been something that market has the things 0:18:09.800 --> 0:18:10.879 for a very long time. 0:18:11.400 --> 0:18:13.199 So to what do you attribute that to? 0:18:13.400 --> 0:18:13.440 It? 0:18:13.640 --> 0:18:16.160 Was it the comment that we had from Sundar Pachai 0:18:16.280 --> 0:18:19.080 over at Alphabet Is it the Microsoft report that kind 0:18:19.119 --> 0:18:21.080 of creates this apprehension? 0:18:22.320 --> 0:18:23.280 Yeah, it's a good question. 0:18:23.440 --> 0:18:23.560 You know. 0:18:23.560 --> 0:18:25.120 I think there's a couple of things going on, Doug. 0:18:25.160 --> 0:18:28.840 I think one is you've got, you know, a couple 0:18:28.880 --> 0:18:32.920 hundred billion dollars of some odd estimated investment in terms 0:18:32.960 --> 0:18:36.040 of Cathex and the AI kind of data center, and 0:18:36.440 --> 0:18:38.639 today now even though it's only been less than a 0:18:38.640 --> 0:18:42.080 couple of years, you've got very little revenue to show 0:18:42.119 --> 0:18:44.120 for that. But that's not such an issue. The issue 0:18:44.200 --> 0:18:46.199 is that there's not a lot of clear visibility. So 0:18:46.560 --> 0:18:48.919 if you look at the Q two earn your results, 0:18:48.960 --> 0:18:52.919 there was a very clear kind of pattern. The one stock, 0:18:53.000 --> 0:18:55.800 the one company that reported kind of lesser CAPEX and 0:18:55.880 --> 0:18:59.879 could have been reported but yet revenues kind of outperformed, 0:19:00.200 --> 0:19:03.640 was Meta. The rest of the Max seven kind of underperformed. 0:19:03.800 --> 0:19:07.520 Vias to be the business outperforming expectations as well as 0:19:07.560 --> 0:19:10.119 CAPEC still being pretty significant boilth in this quarter and 0:19:10.240 --> 0:19:12.959 go forward. So I think it's showing you that investors 0:19:13.000 --> 0:19:16.000 are kind of nervous about the AI returns. But the 0:19:16.040 --> 0:19:19.479 other issue, Doug, which is actually really huge positive, is 0:19:19.520 --> 0:19:23.240 that Q two on the earning season, we're ninety percent through. 0:19:23.880 --> 0:19:26.879 This is the first really solid year of year growth 0:19:26.920 --> 0:19:29.679 we've seen in several quarters. We're tracking for eleven percent 0:19:29.720 --> 0:19:32.800 for the SP five hundred. That's off of you zero 0:19:32.840 --> 0:19:36.600 to negatives and twenty three. And what's awesome about it 0:19:36.640 --> 0:19:40.920 is that it's broadening out recent quarters. Max seven responsible 0:19:40.960 --> 0:19:43.680 for over one hundred percent of EPs growth this quarter. 0:19:43.800 --> 0:19:46.639 It's there's a lot of things that are growing. Financial 0:19:46.720 --> 0:19:49.920 sectors on track to grow eighteen percent year every year, 0:19:49.960 --> 0:19:53.840 healthcare seventeen percent, Infotech is just barely ahead at nineteen. 0:19:54.000 --> 0:19:57.199 So this is I think why you're seeing some of 0:19:57.240 --> 0:20:00.760 the broadening out of returns because investors are realized that, hey, 0:20:00.760 --> 0:20:02.360 maybe don't have a way for the AI trade to work. 0:20:02.359 --> 0:20:03.520 There's other stuff that's available. 0:20:03.560 --> 0:20:06.440 Maybe it's a little ironic because now on the macro 0:20:06.680 --> 0:20:09.640 level we're getting indications of economic slowing. 0:20:10.680 --> 0:20:13.639 Yeah, that is interesting, and I'm glad you brought that 0:20:13.720 --> 0:20:15.159 up though, because if you look at kind of what 0:20:15.200 --> 0:20:19.720 happened in July, everything outperformed tech, everything up form the 0:20:19.760 --> 0:20:22.760 Max seven, whether it's financials or it was small caps 0:20:22.800 --> 0:20:27.119 and value, it's more nuanced. Right in August once we 0:20:27.280 --> 0:20:30.199 had these kind of blips with some macro data, and 0:20:30.240 --> 0:20:33.000 so what's really outperforming now are still a lot of 0:20:33.000 --> 0:20:36.159 different sectors Visa the tech Tech is down six percent 0:20:36.520 --> 0:20:39.719 at a sectral level month today, but staples are up 0:20:39.720 --> 0:20:42.880 one point seven, real estates at one point six, Utilities 0:20:42.920 --> 0:20:45.439 and healthcare also up. So I think what that's showing 0:20:45.600 --> 0:20:49.200 is investors still worried about the tech trade. They still 0:20:49.200 --> 0:20:51.440 think that their earnings are converging, but the same time 0:20:51.520 --> 0:20:53.879 they've got their eyes out on wow, what if we 0:20:53.960 --> 0:20:56.640 don't have a soft landing. Perhaps we should be looking 0:20:56.680 --> 0:20:59.320 at some of these laggards of twenty three and year 0:20:59.359 --> 0:21:02.520 to date twenty four and put some bets there. 0:21:03.240 --> 0:21:06.440 So, speaking of putting your bets in the market right now, 0:21:06.680 --> 0:21:10.080 I'm imagining that the expectations for a lot in the 0:21:10.119 --> 0:21:13.280