WEBVTT - Surveillance: Risk That Fed Could Go Faster, Kiesel Says 0:00:00.040 --> 0:00:02.640 Who you put your trust in matters. Investors have put 0:00:02.680 --> 0:00:07.000 their trust and independent registered investment advisors to the two 0:00:07.040 --> 0:00:10.680 and four trillion dollars. Why learn more and find your 0:00:10.760 --> 0:00:26.360 independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 0:00:26.760 --> 0:00:30.480 I'm Tom Keene with David Gura. Daily we bring you 0:00:30.520 --> 0:00:35.560 insight from the best in economics, finance, investment, and international relations. 0:00:35.960 --> 0:00:40.559 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and 0:00:40.640 --> 0:00:47.960 of course, on the Bloomberg. We start this morning with 0:00:48.000 --> 0:00:51.040 the markets. Jason Turner, chairman of Fertiguous Research Partners, who 0:00:51.080 --> 0:00:53.480 join us here in the studio in New York. Morning. Jason, 0:00:53.600 --> 0:00:56.640 good morning. Let's start with just the peculiarity of this 0:00:56.720 --> 0:00:59.440 particular market, the rhythms of course cycles to the market, 0:00:59.560 --> 0:01:01.800 especially the beginning of the year. When you look at 0:01:02.080 --> 0:01:04.759 the market today at positioning at the beginning of two 0:01:04.800 --> 0:01:07.119 thousand seventeen, how different is the beginning of this year 0:01:07.440 --> 0:01:10.800 from years past, well, certainly compared to last year. I 0:01:10.840 --> 0:01:13.640 don't think it could be more different. As you might remember, 0:01:13.680 --> 0:01:17.280 the Fed tightened December of two thousand fifteen, and then 0:01:17.280 --> 0:01:19.280 it's signal that it was going to tighten four more 0:01:19.360 --> 0:01:21.920 times UH, and that uh, you know, to use a 0:01:21.920 --> 0:01:28.240 technical term, freaked out the emerging markets and the commodity markets. UH. 0:01:28.280 --> 0:01:32.199 And the FED had to be level too, I believe. 0:01:33.240 --> 0:01:36.560 But and you wind up having oil down to twenty 0:01:36.640 --> 0:01:39.920 six dollars before too long and the FED reserving um 0:01:40.480 --> 0:01:43.119 reverting course. This is very different. Of course. I think 0:01:43.120 --> 0:01:45.920 there's a lot of attendant optimism about the new administration 0:01:45.959 --> 0:01:49.880 in terms of what it might do with regulatory policy, 0:01:49.880 --> 0:01:53.200 what will do with fiscal policy. Trade obviously remains a 0:01:53.240 --> 0:01:56.760 big question mark. But the FED is i think, content 0:01:56.920 --> 0:02:01.120 to once normalize rates, but is content to uh let 0:02:01.480 --> 0:02:03.880 inflation run a little hot. I'm looking at your most 0:02:03.880 --> 0:02:06.600 recent note and politics right up there at the top. 0:02:06.640 --> 0:02:08.840 But you note here that two sixteen a year in 0:02:08.840 --> 0:02:11.400 which a well established political class learned that democracy was 0:02:11.440 --> 0:02:14.000 its achilles heels. You're talking about the FED wiser if 0:02:14.000 --> 0:02:16.840 you've got politics. So what's the bigger driver here in 0:02:16.880 --> 0:02:19.360 two thousand seventeen of those two things? Yeah, I I 0:02:19.400 --> 0:02:22.560 think central banks, and I think correctly we'll take a 0:02:22.600 --> 0:02:27.160 back seat to UH to fiscal and regulatory and trade policy. 0:02:27.240 --> 0:02:31.040 And I think it's it's high time Certainly, the Fed's 0:02:31.080 --> 0:02:36.239 balance sheet UH quintuppling over the past past eight years. Certainly, 0:02:36.480 --> 0:02:39.080 I think it was for all the right intentions. I 0:02:39.080 --> 0:02:40.560 think there was a sense in which, and I think 0:02:40.639 --> 0:02:44.080 Japan indicated this last year with its experimentation and negative 0:02:44.120 --> 0:02:46.639 interest rates, that there were limits to what you could 0:02:46.680 --> 0:02:50.519 expect monetary policy to achieve. I'm very much of the 0:02:50.600 --> 0:02:54.120 view that monetary policy UH should be used to set 0:02:54.240 --> 0:02:58.320 the potential UH for economic growth. It's it's a very 0:02:58.400 --> 0:03:02.520 imperfect way of creating a economic growth itself. It winds 0:03:02.600 --> 0:03:05.679 up creating misallocations of capital, which is what we've seen, 0:03:05.760 --> 0:03:07.720 and I think it's better to have a more balanced 0:03:07.919 --> 0:03:11.720 policy approach policy mix in two thousand seventeen, Jason, do 0:03:11.760 --> 0:03:13.880 you get the sense that central bankers are reckoning with 0:03:13.919 --> 0:03:17.200 that tectonic shift the minutes out yesterday? As I said, UH, 0:03:17.360 --> 0:03:19.959 some acknowledgement there of the uncertainty amount the potential for 0:03:19.960 --> 0:03:23.040 for fiscal policy in the new year. UH. Do do 0:03:23.080 --> 0:03:24.920 you think that they're coming to terms with the changing 0:03:25.000 --> 0:03:28.160 dynamics between a fiscal policy and monetary policy? I think 0:03:28.160 --> 0:03:29.840 a little, while little, and I don't want to be 0:03:29.840 --> 0:03:31.920 overly critical of the FED it's it's very kind of 0:03:31.960 --> 0:03:34.600 do regord to to do that. But I think that 0:03:34.680 --> 0:03:38.280 there's I think people have realized that central bankers are 0:03:38.280 --> 0:03:41.880 not some pride of superman. Uh they're they're men and women. 0:03:42.240 --> 0:03:45.040 They may have PhDs, but um, there are limits to 0:03:45.080 --> 0:03:48.280 what they can actually achieve. And I think it's it's 0:03:48.280 --> 0:03:51.760 far better, frankly, if we're not discussing from an investment 0:03:51.760 --> 0:03:53.840 point of view, if we're not discussing the central banks 0:03:53.840 --> 0:03:57.160 at every minute of every day, it's you're discussing people 0:03:57.160 --> 0:03:59.800 are actually putting capital at risk. The most important person 0:03:59.840 --> 0:04:02.040 that works for you right now, it's not Jason trentnerd. 0:04:02.400 --> 0:04:05.000 It's one D Clifton, that's right, who was down and 0:04:05.200 --> 0:04:07.880 he must be a little busy right Oh my goodness standards. 0:04:08.120 --> 0:04:10.800 I mean it doesn't smoke anymore, but he still probably 0:04:10.880 --> 0:04:14.119 drinks about a case of diet cocod So, uh, yeah, 0:04:14.400 --> 0:04:18.040 it's good and good for you. What is what has 0:04:18.120 --> 0:04:21.960 he learned about the change in Washington just in the 0:04:22.080 --> 0:04:25.000 last four weeks. Well, I think he's learned that h 0:04:25.800 --> 0:04:27.920 Obviously things are going to be very different in terms 0:04:28.000 --> 0:04:31.279 of the way the administration to be is going to 0:04:31.360 --> 0:04:36.040 be communicating with both the press and market participants. UH 0:04:36.279 --> 0:04:39.880 and UH. I think a lot of the standard um, 0:04:39.960 --> 0:04:44.480 you know, the standard modes of communication, avenues of communication 0:04:44.560 --> 0:04:47.599 are going to be very very different, and so that 0:04:47.839 --> 0:04:51.600 is going to take some getting used to. UH. Probably 0:04:51.760 --> 0:04:55.159 the most among Washington insiders. I think the rest of 0:04:55.240 --> 0:04:58.279 us might not notice much of a difference in you know, 0:04:58.320 --> 0:05:01.720 we live in a social media world. I think Washington, 0:05:02.160 --> 0:05:05.000 at least as far as the interactions between the insiders 0:05:05.880 --> 0:05:09.160 had been concerned, has largely been um, you left out 0:05:09.160 --> 0:05:11.200 of that. We sort of go here, John Tucker, are 0:05:11.240 --> 0:05:14.080 bites this for me and David Gura. Folks, we see 0:05:14.120 --> 0:05:17.200 Trump treats and we decide if it's news. Yes. Here 0:05:17.240 --> 0:05:19.840 we are in real time with Jason Trunner. For those 0:05:19.880 --> 0:05:22.520 of you, we recommend you do not tweet in your car. 0:05:23.360 --> 0:05:26.159 We've had two tweets in the last four minutes, in 0:05:26.320 --> 0:05:29.440 eight minutes, including David gurn I've got to bring this 0:05:29.600 --> 0:05:32.640 up with respect to the senior senator from New York 0:05:33.120 --> 0:05:38.280 quote head clown, Chuck Schumer. I'm trying to think of 0:05:38.400 --> 0:05:45.400 Richard Nixon tweeting that head clowns. Sam Irvins, right, Mr 0:05:45.480 --> 0:05:49.040 Gurrow pick up on this observation of our last two 0:05:49.240 --> 0:05:51.760 president elect tweets. You know, it's interesting because we've had 0:05:51.760 --> 0:05:54.640 so many conversations with the with the Great Valier, among others, 0:05:54.680 --> 0:05:56.400 about the role that Chuck Schumer will play here. He 0:05:56.400 --> 0:05:59.960 actually has a very close relationship with head clown had 0:06:00.000 --> 0:06:08.279 Cloud and from yes, thank you, So you know, I 0:06:08.279 --> 0:06:17.760 I uh keep it, I'm plumbing. I'm not okay, Chuck Schumer. 0:06:17.920 --> 0:06:20.479 I got in an airplane once, folks, and here's a 0:06:20.520 --> 0:06:23.640 guy who's got every lobbyist in his pocket, and he 0:06:23.680 --> 0:06:26.359 gets on with a plastic bag from a grocery store 0:06:26.560 --> 0:06:30.120 and to you know, from Brooklyn or where Queens are, 0:06:30.360 --> 0:06:33.000 and they were an artisanal apples. This guy's down to earth. 0:06:33.000 --> 0:06:37.400 Whatever whatever anybody's politics, Chuck Schumer is a basic guy. 0:06:37.760 --> 0:06:41.200 How's he going to adapt to the majority republicanist? I 0:06:41.279 --> 0:06:43.960 have a feeling though that I think, Chuck Young, we're 0:06:43.960 --> 0:06:46.599 also as a pragmatist. I'm certainly not a political expert, 0:06:46.640 --> 0:06:50.640 but but I think, um, you know, politicians are entrepreneurs 0:06:50.640 --> 0:06:53.080 in their own right, and they can you know, they're 0:06:53.120 --> 0:06:56.599 they're political entrepreneurs and and they'll understand the way the 0:06:56.640 --> 0:07:00.400 winds are blowing and right now like it or whether 0:07:00.400 --> 0:07:04.720 the winds are blowing in Donald Trump's direction, and so 0:07:05.440 --> 0:07:07.960 I think that there's going to be more There may be. Uh. 0:07:08.080 --> 0:07:10.920 The positive surprise this year is that there may be 0:07:10.960 --> 0:07:15.600 more common ground between the Democrats and Donald Trump. Donald 0:07:15.600 --> 0:07:18.400 Trump may have more problems with his own caucus uh 0:07:18.400 --> 0:07:21.480 than he he might have with Democrats. And that might 0:07:21.520 --> 0:07:25.640 seem like an outlandish thing to say, but again, I 0:07:26.040 --> 0:07:30.080 think most politicians job number one is getting re elected. Uh. 0:07:30.120 --> 0:07:33.560 And and certainly U, this election took a lot of 0:07:33.560 --> 0:07:36.200 people by surprise. That's been easy over the last eight, twelve, 0:07:36.280 --> 0:07:38.760 sixteen years to sort of roll your eyes at Washington. 0:07:38.800 --> 0:07:41.160 Not a lot has been happening in Washington. It's been 0:07:41.440 --> 0:07:43.400 a glacial pace. There's been a lot of discord and 0:07:43.840 --> 0:07:46.960 in fighting. Do you expect Washington to play a more 0:07:47.000 --> 0:07:49.840 important role to Wall Street after we get through the 0:07:49.840 --> 0:07:54.320 first three agenda items here, the tax reform, the infrastructure spending, UH, 0:07:54.360 --> 0:07:56.320 perhaps that a change to Obamacare. Do you think that 0:07:56.360 --> 0:07:59.120 Washington is going to remain important throughout this throughout these 0:07:59.160 --> 0:08:02.200 next four years. It's a very good question. I certainly, Um, 0:08:02.560 --> 0:08:05.320 I hope so for I certainly think for the first 0:08:05.400 --> 0:08:08.720 year it will be extraordinarily important. I think after that 0:08:08.840 --> 0:08:12.840 one hopes that that Washington becomes less important, and especially 0:08:12.920 --> 0:08:15.080 you know, if you're a fan of free markets and 0:08:15.160 --> 0:08:17.880 think that free markets are better ways to allocate capitals, 0:08:18.600 --> 0:08:23.400 okay capital than than relatively small groups of people. UM, 0:08:23.880 --> 0:08:26.800 I think that would be a welcome, welcome change. I 0:08:26.880 --> 0:08:28.960 have a feeling that will be the case, just to 0:08:29.000 --> 0:08:32.320 the extent to which uh, the president les political capital 0:08:32.360 --> 0:08:34.840 will never be greatest as it as it is on 0:08:34.840 --> 0:08:37.680 on day one of his presidency. Uh, he'll have both 0:08:37.679 --> 0:08:40.880 houses of Congress in which to effect change. I think 0:08:40.920 --> 0:08:44.160 after that it's I think it's President Obama found it 0:08:44.200 --> 0:08:46.080 gets hot. Once you kind of go long ball in 0:08:46.120 --> 0:08:48.760 the first couple of years of your administration, it's hard. 0:08:48.800 --> 0:08:51.360 It's harder to get big things done after that. Can 0:08:51.400 --> 0:08:53.400 we bring it back? And when did the next sexual 0:08:53.440 --> 0:08:55.800 adjacent try will bring him back? To the equity markets? 0:08:56.160 --> 0:09:00.559 Are you fully invested now? I'm I'm pretty only invested. 0:09:00.640 --> 0:09:04.560 I have some cash available, But I also think that 0:09:04.920 --> 0:09:06.880 this is not a market in which I would start 0:09:06.880 --> 0:09:10.920 fooling around on the short side, because, as we discussed, UH, 0:09:10.960 --> 0:09:13.080 this has been a bull market. No one's loved that 0:09:13.160 --> 0:09:15.240 you're at all time highs, and yet it's not part 0:09:15.280 --> 0:09:18.000 of the zeitgeist of the of the culture. No one's talking, 0:09:18.200 --> 0:09:21.360 you know, cocktail parties. People are not talking about stocks, 0:09:22.200 --> 0:09:25.120 although choice of Trump Trump Trump Trump Trump Trump Trump 0:09:25.160 --> 0:09:28.560 trump Trump for their smartphone or you know, yeah, real estate, right, 0:09:28.559 --> 0:09:31.760 you know, but people are not talking about the last 0:09:31.840 --> 0:09:34.839 stock they bought. Jason Trenitt with this final thoughts with 0:09:34.920 --> 0:09:38.600 Frutiguous Research Partners, let's go back to the equity markets. 0:09:39.080 --> 0:09:43.160 Does Graham, Dot and Coddle matter anymore? It's something you 0:09:43.200 --> 0:09:44.559 and I mean, you and I are the only two 0:09:44.559 --> 0:09:49.079 people who actually read the puppy starts on railroad stocks 0:09:49.120 --> 0:09:53.360 in or whatever. Does all this stuff you and I 0:09:53.480 --> 0:09:57.160 learned matter anymore? Well, it hasn't. Unfortunately, it hasn't mattered 0:09:57.200 --> 0:10:01.719 a lot over several several years, and one hopes right 0:10:01.800 --> 0:10:05.840 that it becomes more important once again. Ultimately, stock prices 0:10:05.840 --> 0:10:10.640 are a function of future cash flows and an interest rates. 0:10:10.800 --> 0:10:13.280 That's that's what they you know, That's that's what we 0:10:13.280 --> 0:10:17.080 should we should be focused on. Um I think part 0:10:17.080 --> 0:10:20.520 of the problem with financial repression, part of the problem 0:10:20.520 --> 0:10:24.080 with with quantitative easing is that you've essentially enforced a 0:10:24.080 --> 0:10:29.480 certain purgatory on companies in which everyone had a low 0:10:29.559 --> 0:10:32.400 cost of capital, and it makes it very very difficult 0:10:32.440 --> 0:10:35.319 to outperform and pick stocks. And and David, what I 0:10:35.360 --> 0:10:39.480 would point out here is it's getting long in the tooth. 0:10:40.120 --> 0:10:42.719 For us to make jokes about it is fine, but 0:10:42.800 --> 0:10:48.280 our listeners who are savers and retirees, there's nothing funny 0:10:48.280 --> 0:10:52.000 about this. Walk me through your your asset allocation matrix 0:10:52.040 --> 0:10:54.160 as it stands right now. I'm looking here at what 0:10:54.160 --> 0:10:56.839 your bullish on your mid cap stocks. If what have 0:10:56.920 --> 0:10:58.680 you adjusted here going into the New y Yeah, I 0:10:58.679 --> 0:11:01.520 think it's good quite I and I generally have I 0:11:01.520 --> 0:11:03.559 would say throughout my career part of its worth, I've 0:11:03.600 --> 0:11:07.120 had a general bias towards being overweight large cap over 0:11:07.200 --> 0:11:09.480 small and mid I think this this time maybe a 0:11:09.480 --> 0:11:13.400 little bit different because small and MidCap stocks obviously have 0:11:13.520 --> 0:11:16.000 more domestic content, probably have a little bit less of 0:11:16.040 --> 0:11:19.400 the risk that may be associated with a change in 0:11:19.440 --> 0:11:22.120 the world order. Put it kindly, as far as trade 0:11:22.559 --> 0:11:25.720 UH is concerned, UM, I also think that they're probably 0:11:25.760 --> 0:11:29.000 gonna benefit the most at the margin from changes in 0:11:29.320 --> 0:11:34.240 regulatory policy as well as corporate taxes. A lot of 0:11:34.320 --> 0:11:38.080 large companies already have relatively low effective tax rates. They're 0:11:38.120 --> 0:11:41.880 able to use um the three and half million words 0:11:41.880 --> 0:11:44.080 in the U. S tax Code to get their their 0:11:44.160 --> 0:11:48.000 their taxes lower. Small MidCap companies don't have that flexibility 0:11:48.000 --> 0:11:51.160 and should benefit more in my opinion, UH this year 0:11:51.200 --> 0:11:53.480 as we make some of those structural changes. And here 0:11:53.480 --> 0:11:55.000 I'm looking at your your list here the best and 0:11:55.000 --> 0:11:57.760 worst performers at the last quarter, the fourth quarter two 0:11:57.760 --> 0:11:59.199 thousand and sixteen. What stands out to me in the 0:11:59.240 --> 0:12:02.840 best category financials and industrials and in the worst it's healthcare. 0:12:02.920 --> 0:12:04.640 Do you expect that to persist here as we move 0:12:04.679 --> 0:12:06.959 into two thousand and seventeen. I think that seems fair. 0:12:07.040 --> 0:12:12.120 I mean, certainly, UM, I'm very bullish and financials, especially 0:12:12.559 --> 0:12:15.160 because of rates or it's because of I think net 0:12:15.200 --> 0:12:17.480 interest margins are going to expand. And I think also 0:12:17.559 --> 0:12:20.079 again you're gonna have a very significant change as far 0:12:20.120 --> 0:12:24.640 as the regulatory UH regulatory regime is concerned. The stocks 0:12:24.640 --> 0:12:26.960 have gone up a lot, but they're still trading probably 0:12:27.000 --> 0:12:29.679 at a round book value. So in my view, there 0:12:29.800 --> 0:12:32.600 there's quite quite a bit of room. Industrials are interesting 0:12:32.640 --> 0:12:35.880 because they're outperforming while the dollar, you're generally speaking, who's 0:12:35.920 --> 0:12:38.560 been strengthening. UH. That is a change. I think that's 0:12:38.559 --> 0:12:40.280 probably a bet on the fact that you're going to 0:12:40.400 --> 0:12:44.720 have UH. The US may lead the global economy out 0:12:44.760 --> 0:12:47.319 of its dold rooms, and the global economy may do 0:12:47.840 --> 0:12:50.720 a little bit better healthcare. I think the headline risk 0:12:50.840 --> 0:12:53.880 is is very significant, certainly in the in the next 0:12:54.120 --> 0:12:56.000 you know, three to six months, and we're going to 0:12:56.080 --> 0:12:59.599 see what we're going to get. UH. Certainly repealing Obamacare 0:12:59.600 --> 0:13:01.640 seems to be number one on the on the list. 0:13:02.280 --> 0:13:05.839 It will be replaced at some future date, will be announced, 0:13:05.920 --> 0:13:09.920 and that will start a whole new round of lobbying, 0:13:10.000 --> 0:13:13.640 in a whole new round of of I guess questions 0:13:13.920 --> 0:13:16.160 about the sector in the way it's going to be structured, 0:13:16.240 --> 0:13:20.160 good for lawyers. Yeah, and you you like Japan right now, 0:13:20.160 --> 0:13:22.760 I'm looking at tell again at let's see one sixteen 0:13:22.800 --> 0:13:24.599 fifty seven. Is it? Is it principally because of the 0:13:24.640 --> 0:13:26.880 weak currency that Japan is attractive to you right now? 0:13:26.920 --> 0:13:28.880 It's yeah. I think there are other things to that 0:13:28.960 --> 0:13:33.200 recommend Japanese equities, like valuation, like a low dividend pay 0:13:33.200 --> 0:13:38.000 out ratio. But the fact that they have reverse course 0:13:38.040 --> 0:13:40.160 on negative interest rates, at least for the time being, 0:13:40.160 --> 0:13:44.480 by focusing on targeting the yield curve as supposed to inflation, 0:13:44.880 --> 0:13:47.920 I think is a very meaningful, meaningful change. I do 0:13:48.000 --> 0:13:51.440 think their experimentation with negative interest rates last year was 0:13:51.480 --> 0:13:54.440 a policy error, and I think the fact that they're 0:13:54.480 --> 0:13:56.760 moving away from that as a positive. Jason, trying to 0:13:56.800 --> 0:13:58.960 thank you so much. Thank you. It was fatiguaus Razors 0:13:59.000 --> 0:14:00.960 with their Cherman. And of course is it ten years? 0:14:01.360 --> 0:14:03.679 It's ten and a half, ten and a half. I'm 0:14:03.679 --> 0:14:07.000 still like a little kid. I count the half of years. 0:14:07.440 --> 0:14:11.040 It's over ten, ten and a half years. Jason, thank 0:14:11.080 --> 0:14:25.160 you so much, sir. Please to have in studio with 0:14:25.160 --> 0:14:27.440 his new Stupet Warrior. He's a drivtive strategist at BNP 0:14:27.480 --> 0:14:30.560 Para BA out with his outlook for two thousand seventeen. 0:14:30.560 --> 0:14:32.640 Always created speak these two. Thanks for coming in. Thank 0:14:32.640 --> 0:14:34.880 you very much. Let's start with volatility. I'm looking at 0:14:34.920 --> 0:14:37.520 VIX right now at twelve, settling around twelve. We've seen 0:14:37.560 --> 0:14:39.800 this degree of complacency for a few weeks now. When 0:14:39.800 --> 0:14:43.280 you're looking at volatility in the year, head is that 0:14:43.320 --> 0:14:45.200 the indicator that you look to, how how useful is 0:14:45.200 --> 0:14:46.880 the VIX to you? And what do you foresee with 0:14:46.920 --> 0:14:50.080 regard to volatility here in two thousand and seventeen. Yeah, 0:14:50.120 --> 0:14:51.840 So I think a couple of things are really interesting, 0:14:51.880 --> 0:14:53.840 especially when you look at the price action at the 0:14:53.880 --> 0:14:57.760 end of last year, particularly the fact that we've had consecutively, 0:14:58.080 --> 0:14:59.600 i think two years in a row now of higher 0:14:59.640 --> 0:15:02.400 real life volatility and the markets also drifting higher. So 0:15:03.000 --> 0:15:05.320 that is in stark contrast to the QII period where 0:15:05.360 --> 0:15:08.120 we had the market drifting higher on lower volatility. So 0:15:08.240 --> 0:15:10.080 I think that trends likely to continue in the future. 0:15:10.080 --> 0:15:12.320 And as far as the VIX is concerned, Um, you know, 0:15:12.360 --> 0:15:15.440 the key driver of that that measure is short data 0:15:15.480 --> 0:15:17.840 realized volatility. And what we've seen both in the SMP 0:15:17.880 --> 0:15:19.800 and the indices globally if you look at you know, 0:15:19.840 --> 0:15:22.600 the v two X in Europe, UM in the eurostocks, 0:15:22.680 --> 0:15:25.000 or the VIX in the SPIRE is the fact that 0:15:25.320 --> 0:15:28.840 correlation is solo sectors are diverse. Um, there's this dispersed 0:15:28.840 --> 0:15:32.240 performance and that's really kind of dampening volatility in really 0:15:32.280 --> 0:15:35.960 either direction. You look at financials in particular, in your 0:15:35.960 --> 0:15:38.120 outlook how are they how are you us financials looking 0:15:38.120 --> 0:15:40.520 to you right now? Yeah, so on on the ball side, 0:15:40.520 --> 0:15:43.400 it's interesting that quite rich, and especially when we look 0:15:43.440 --> 0:15:45.800 at et fs that are linked to financials, uh, those 0:15:45.840 --> 0:15:47.400 are rich as well. And I think part of that 0:15:47.440 --> 0:15:49.120 has to do with the fact that whenever you have 0:15:49.160 --> 0:15:52.160 an asset that really breaks out of a historical range 0:15:52.400 --> 0:15:55.400 range trading which financials had been in some time, the 0:15:55.480 --> 0:15:57.560 valve resets higher and you you have to kind of 0:15:57.560 --> 0:15:59.720 wait to settle into a new price range before the 0:15:59.760 --> 0:16:02.920 mark really settles into into a more comfortable environment. In 0:16:03.000 --> 0:16:06.200 your research note, and folks, we need a math warning here, 0:16:06.560 --> 0:16:08.520 we're not going to do the legitimate math that Mr 0:16:08.600 --> 0:16:12.120 Worther does. From there a lot of great characters. Everything's vague, gamma, 0:16:12.200 --> 0:16:14.840 you know, blah blah blah. But down at the bottom 0:16:14.840 --> 0:16:18.000 of your note you bury the headline, which is what 0:16:18.160 --> 0:16:22.400 pros like you do is try to game sector rotation. 0:16:23.280 --> 0:16:27.600 I find in the media pundits are either clueless or 0:16:27.720 --> 0:16:31.440 glib about sector rotation. This is a great way to 0:16:31.560 --> 0:16:35.680 enjoy losing money. How do I not lose money gaming 0:16:35.800 --> 0:16:39.880 sector rotation? Well, I think you know, and I've mentioned 0:16:39.960 --> 0:16:42.560 this before, is One of the key things is that 0:16:42.600 --> 0:16:44.280 you need to look at when looking at sector rotation 0:16:44.400 --> 0:16:47.280 is trying to find the right variable that describes the 0:16:47.560 --> 0:16:50.120 rotation itself. So one of the things that we look at, um, 0:16:50.160 --> 0:16:51.320 you know, a couple of things. We look at our 0:16:51.440 --> 0:16:55.240 terms of trade, UM, economic surprise, dollar strength, etcetera. And 0:16:55.240 --> 0:16:57.440 we try to figure out from those variables, UM, you 0:16:57.480 --> 0:16:59.720 know what that actually means and what's the real driver? 0:16:59.840 --> 0:17:01.880 You know, is it sector rotation itself is a value 0:17:02.000 --> 0:17:04.440 versus growth UM. And I think what we've really seen 0:17:04.440 --> 0:17:07.440 over the past a couple of weeks or months, first say, 0:17:07.640 --> 0:17:11.640 is value versus growth rather than actual sector sector rotation. 0:17:12.040 --> 0:17:14.040 So it's a matter of how you break up the 0:17:14.119 --> 0:17:16.840 SMP complex. But but I think in this in this context, 0:17:16.920 --> 0:17:20.200 it's really the kind of cyclicals versus defensives, value versus growth. 0:17:20.920 --> 0:17:24.000 You highlight the big macro event of the year ahead, 0:17:24.000 --> 0:17:25.800 that being the elections in France. Of course, been more 0:17:25.800 --> 0:17:29.120 elections and votes across Europe. I wonder what we've learned, 0:17:29.119 --> 0:17:31.760 what you've learned from the string of votes we've had 0:17:31.760 --> 0:17:34.320 here in two thousand and sixteen, the breaks a vote, 0:17:34.320 --> 0:17:37.399 the referentument Italy, the US presidential election. What has that 0:17:37.440 --> 0:17:39.159 taught you and how has that affected the way that 0:17:39.160 --> 0:17:42.480 you strategize you're going into the election France. So I 0:17:42.520 --> 0:17:44.879 think it's really interesting in the context, especially in the 0:17:44.960 --> 0:17:48.000 volatility contexts, in the sense that implied tends to be 0:17:48.520 --> 0:17:51.200 elevated ahead of the event, and regardless of what happens 0:17:51.200 --> 0:17:55.440 in the event itself, Implied collapses thereafter. Rather whether the 0:17:55.480 --> 0:17:58.159 event was well hedged, whether the event was underhedged, as 0:17:58.200 --> 0:18:00.399 it was in Brexit. Um. You know, we seen that 0:18:00.440 --> 0:18:04.440 investors have paid up ahead of the event, and you really, 0:18:04.440 --> 0:18:07.800 regardless of the outcome, UM, you know, Implied has been crushed. Um. 0:18:07.960 --> 0:18:09.760 And I think that has to do partly with the 0:18:09.800 --> 0:18:14.280 fact that all these events are so well televised that UM, 0:18:14.320 --> 0:18:16.920 you know. And yeah, I don't know, continue please, I 0:18:16.920 --> 0:18:19.960 don't mean to interrupt him. I would say, with risk managers, UM, 0:18:20.000 --> 0:18:21.600 you know, both on the buy side and the cell 0:18:21.640 --> 0:18:24.800 side being um, more stringent than they were maybe a 0:18:24.840 --> 0:18:27.560 few years ago, it's you know, how do you go 0:18:27.600 --> 0:18:30.119 in the day after the event, having said I didn't 0:18:30.119 --> 0:18:32.679 hedge or I didn't buy protection, how the event. This 0:18:32.760 --> 0:18:35.920 goes to from electrical engineering, the idea of slew rights, 0:18:35.960 --> 0:18:38.879 which is the rated change of an electrical circuit. This 0:18:38.960 --> 0:18:41.320 was in the movie The Big Short David. The idea 0:18:41.400 --> 0:18:45.080 here that your world was always gained by having an 0:18:45.160 --> 0:18:49.679 information advantage. Just in the last six or seven years 0:18:50.119 --> 0:18:54.880 his your information advantage shrunk because of digital media, digital 0:18:54.920 --> 0:18:58.080 information and of course the fact that everyone listening owns 0:18:58.080 --> 0:19:01.240 a Bloomberg terminal not. That's actually a very good question 0:19:01.240 --> 0:19:03.760 and something we think about pretty much on a daily basis, 0:19:03.840 --> 0:19:07.160 because um, I would say the you know, financial media 0:19:07.240 --> 0:19:10.520 has become um much more aware, UM and you know, 0:19:10.560 --> 0:19:13.240 cognizant of some of these other indicators, looking at the VIX, 0:19:13.280 --> 0:19:16.639 looking at certain applied volatility metrics, UM. And really that 0:19:16.720 --> 0:19:19.840 kind of initial high level analysis that a lot of 0:19:19.840 --> 0:19:22.280 people would do is taken down one or two steps. 0:19:22.280 --> 0:19:25.720 So on that basis that there really is less informational 0:19:25.840 --> 0:19:28.239 advantage per se, and you really have to kind of 0:19:28.400 --> 0:19:30.760 do your work. So I think it really differentiates to 0:19:30.840 --> 0:19:33.480 investor classes between those who do it and those who don't. 0:19:33.640 --> 0:19:36.760 We're talking yesterday, you and I about the prospects here 0:19:36.760 --> 0:19:40.960 for a move of overseas profits back to these US 0:19:41.000 --> 0:19:43.040 companies to have a sort of holiday. They would allow 0:19:43.080 --> 0:19:45.560 them to bring some those profits back into the the US. 0:19:46.040 --> 0:19:47.960 Walk us through how you see the that that playing 0:19:47.960 --> 0:19:50.000 out with the effects would be on the bottom lines 0:19:50.040 --> 0:19:51.520 for for these companies. Were they to do that, we're 0:19:51.520 --> 0:19:53.560 we to get that kind of holiday. So this is 0:19:53.560 --> 0:19:56.720 actually one of the interesting things, especially from a volatility perspective, 0:19:56.720 --> 0:19:59.040 when you when you think about buy backs and the 0:19:59.080 --> 0:20:02.560 way that they're generally um orchestrated their VALL dampening because 0:20:02.640 --> 0:20:04.280 companies tend to buy back more stock on than the 0:20:04.320 --> 0:20:06.560 stocks lower the you know, on an intra day basis, 0:20:06.560 --> 0:20:09.080 and and um buy back less when the stocks higher. 0:20:09.160 --> 0:20:11.960 So on that basis you have this this effect of 0:20:12.440 --> 0:20:14.359 the implied VALL of those names are actually tend to 0:20:14.400 --> 0:20:16.199 be lower than the implied VAUL of other names that 0:20:16.200 --> 0:20:18.919 aren't aren't actually conducting a buyback. So from that basis, 0:20:18.960 --> 0:20:20.520 if we have a number of large caps that bring 0:20:20.560 --> 0:20:23.080 back um, you know, say, of the trillion dollars of 0:20:23.119 --> 0:20:25.720 overseas cash they bring back between um you know, two 0:20:25.800 --> 0:20:28.919 hundred and five hundred billion of that um in of 0:20:28.920 --> 0:20:31.040 of that sixty cents in the dollar is actually spent 0:20:31.119 --> 0:20:33.240 on buy backs and special dividends, then I think that 0:20:33.280 --> 0:20:35.159 would be vall dampening and that would be positive for 0:20:35.200 --> 0:20:37.960 the market. That's likely to happen. I mean you when 0:20:37.960 --> 0:20:39.760 when you think about how much of this could be 0:20:39.800 --> 0:20:43.560 for buyback versus capital expenditure, you satisfied with that ratio 0:20:43.600 --> 0:20:46.520 there So, and this is the key question I think. 0:20:46.600 --> 0:20:49.120 You know, with the proposed tax reform under the Better 0:20:49.119 --> 0:20:52.119 Way plan, if capex is expensed immediately, then you have 0:20:52.240 --> 0:20:54.639 you have a situation where companies will actually be incentivized 0:20:54.680 --> 0:20:57.720 to do more capex. And on that basis, so you know, 0:20:58.400 --> 0:21:00.840 in the two thousand four tax repay creation holiday you 0:21:00.920 --> 0:21:03.760 had sixty cents in the dollar actually returned to shareholders. 0:21:03.880 --> 0:21:07.200 This time around, you might see Stewart, thank you so much, Stewart, 0:21:07.280 --> 0:21:22.760 Orther BMP Perry Boad. We're looking at at retail here 0:21:22.800 --> 0:21:24.840 in the wake of the holiday season, obviously looking at 0:21:25.040 --> 0:21:27.920 Macy's as we just heard uh prospects there were some 0:21:27.920 --> 0:21:29.720 big layoffs at Macy's. I want to bring him now, 0:21:30.040 --> 0:21:32.119 John curn and he is with Collen forres a retail 0:21:32.440 --> 0:21:34.280 and let's se John, great to speak with you, great 0:21:34.320 --> 0:21:36.840 to be on. Let's let's start with Macy's. If if 0:21:36.880 --> 0:21:40.480 we could hear obviously some big headline number jobs going 0:21:40.520 --> 0:21:42.960 away here. What has changed for Macy's here in the 0:21:43.040 --> 0:21:45.000 last couple of quarters, if anything? Or is this the 0:21:45.000 --> 0:21:47.199 continuation of the trouble that department store chain has been 0:21:47.200 --> 0:21:49.600 seeing here for a while. Well, there's a big shift 0:21:49.640 --> 0:21:53.200 to digital and the Amazon's leading that. We at Collen 0:21:53.280 --> 0:21:56.000 we actually forecast Amazon to be the largest apparel retailer 0:21:56.000 --> 0:21:59.360 in North America by the end of two thousand seventeen. 0:21:59.400 --> 0:22:02.359 You have maltrafect declining it essentially a mid single digit 0:22:02.440 --> 0:22:06.280 rate year on year after year since two thousand and fourteen, 0:22:06.359 --> 0:22:09.560 and seeing a big shift away from breaking mortar to digital, 0:22:09.600 --> 0:22:13.359 and Macy's casually in that shift. What are they doing 0:22:13.400 --> 0:22:15.639 to to curb that? We know about the rivalry here 0:22:15.640 --> 0:22:18.600 between Amazon and Walmart. Walmart investing heavily to the tune 0:22:18.600 --> 0:22:21.600 of billions in building up and changing its website. Is 0:22:21.640 --> 0:22:25.520 Macy's trying to do anything to to change its online presence? 0:22:26.040 --> 0:22:29.280 I actually don't cover Macy's myself, my colleague Oliver chen does. 0:22:29.359 --> 0:22:32.560 But everyone's trying to move more towards digital, is trying 0:22:32.560 --> 0:22:34.800 to shut brick and mortar doors. There's way too much 0:22:34.880 --> 0:22:38.040 square footage in general in North America. So you're going 0:22:38.080 --> 0:22:41.639 to continue this is um this is just the beginning 0:22:41.760 --> 0:22:45.000 of a door closure across retail. Two quick questions here 0:22:45.040 --> 0:22:47.000 in the time we got John that's so important. We're 0:22:47.000 --> 0:22:50.640 thrilled that you're on with us with Urine Oliver Chen's work. 0:22:50.880 --> 0:22:55.360 First of all, within the analysis, are we underweighing the 0:22:55.440 --> 0:22:58.360 impact of Amazon? Is this just really, at the end 0:22:58.359 --> 0:23:03.160 of the day, just about Amazon. That's not all about Amazon, 0:23:03.200 --> 0:23:04.840 but certainly a lot of it is. And it's a 0:23:04.840 --> 0:23:07.520 lot about the growth of the director consumer platforms of 0:23:07.560 --> 0:23:08.800 a lot of the brands are out there like a 0:23:08.880 --> 0:23:12.520 Nike and on their armor. Um, as more brands expand 0:23:12.520 --> 0:23:15.639 their own online efforts, it's it's obviously negative. If I 0:23:15.680 --> 0:23:17.800 go to the back of a cow and sheet and 0:23:17.840 --> 0:23:22.000 I'm gonna look at a given retail operation, revenues ain't 0:23:22.040 --> 0:23:26.080 happen in negative two point same s sales, etcetera, etcetera, etcetera. 0:23:26.480 --> 0:23:31.200 Where down the income statement do they get this fixed 0:23:31.320 --> 0:23:33.800 or is it over in the balance sheet with real estate? 0:23:34.359 --> 0:23:38.440 What's the solution for retail America to intition this to 0:23:38.480 --> 0:23:41.359 have product that people want to buy? You sound like 0:23:42.840 --> 0:23:45.440 you take it doesn't work in the consumer space if 0:23:45.440 --> 0:23:47.560 we just haven't seen it, at least in the retail space. 0:23:48.320 --> 0:23:51.000 We've seen seer struggle to monetize their real estate. The 0:23:51.040 --> 0:23:54.120 market caps down to eight hundred million from a peak 0:23:54.160 --> 0:23:57.680 of north ny billion, you know, a decade ago. Um, 0:23:57.760 --> 0:24:01.480 But financial engineering in retail we've yet to ever really 0:24:01.520 --> 0:24:05.080 see work. Um. So that you have to have product, 0:24:05.119 --> 0:24:07.439 you go on, you go back, forget about you know, 0:24:07.600 --> 0:24:11.359 closing a thousand stores, laying off x thousands of people. 0:24:11.440 --> 0:24:14.320 As an industry, they're supposed to find the mother of 0:24:14.359 --> 0:24:17.639 all products. How do you do that? Well, you have 0:24:17.640 --> 0:24:20.480 to own Brandon intellectual property. That's how you do it. Um. 0:24:20.600 --> 0:24:24.080 That's those are That's who's winning now, whether it's the Nikes, 0:24:24.080 --> 0:24:26.760 the under Armors, or the other you know, the brands 0:24:26.760 --> 0:24:29.240 that are out there. But the brick and mortar retail 0:24:29.280 --> 0:24:33.000 community continues to struggle. Help us understand here how retailers 0:24:33.000 --> 0:24:35.760 are looking ahead to Donald Trump's policies. We talk a 0:24:35.800 --> 0:24:39.200 lot about the effective of those potential policies on the 0:24:39.240 --> 0:24:41.760 economy large, but when it comes to retailers, what are 0:24:41.800 --> 0:24:44.360 they most concerned about? What could make the biggest difference 0:24:44.400 --> 0:24:47.120 for them? Here? Going forward. Yeah, it's funny this year. 0:24:47.800 --> 0:24:51.200 I think usually it's fashion trends, consumer trends, they drive 0:24:51.680 --> 0:24:55.199 stock price performance in retail consumer discretionary, but changes in 0:24:55.240 --> 0:25:00.760 Washington policy, those potential changes have a norm of simplications 0:25:00.760 --> 0:25:03.440 for retail in the consumer discretionary space. If border tax 0:25:03.480 --> 0:25:08.440 adjustments are put through indiscriminately and you're just taxing imported 0:25:08.520 --> 0:25:11.280 goods from China and the Far East, it will have 0:25:11.400 --> 0:25:14.159 major negative implications for everybody in this group, and you 0:25:14.160 --> 0:25:18.080 can start slashing your earnings estimates pretty much indiscriminately. He's immigration, 0:25:18.119 --> 0:25:20.000 A big issue? Is that something that is it all 0:25:20.040 --> 0:25:24.040 on the horizon here for retailers. People are thinking about it, 0:25:24.080 --> 0:25:26.560 but there's there's other issues like the border adjustments that 0:25:26.600 --> 0:25:28.240 I think people should be worried about. I think the 0:25:28.280 --> 0:25:31.080 other issue people should be very worried about, at least 0:25:31.119 --> 0:25:36.200 the retail management teams. You're an absolutely booming consumer macro environment. 0:25:36.240 --> 0:25:39.040 Two thousand sixteen saw on acceleration and wages. It's all 0:25:39.080 --> 0:25:41.800 on acceleration and consumer spending. You're seeing a lot of 0:25:41.800 --> 0:25:44.320 really bad numbers from a lot of retailers. So what 0:25:44.480 --> 0:25:47.400 actually happens when the cycle does inevitably roll over. Things 0:25:47.400 --> 0:25:50.879 are going to get really ugly in retail. John Gore, 0:25:51.000 --> 0:25:52.520 thank you very much for joining us here. Again, a 0:25:52.520 --> 0:25:55.840 lot of big news. It's a gloomy that's gloomier than 0:25:55.880 --> 0:25:59.920 Howard divided. Holidays are over. Yeah, it's gloomier than Howard divisied. 0:26:00.000 --> 0:26:05.399 It's difficult commentary er anyway. John cronin there with the 0:26:05.600 --> 0:26:08.520 accounting company joining us. Song all the retail news we've 0:26:08.520 --> 0:26:18.399 done here in the last twenty four hours. Who you 0:26:18.480 --> 0:26:21.960 put your trust in matters. Investors have put their trust 0:26:22.000 --> 0:26:25.800 in independent registered investment advisors to the tune of four 0:26:25.840 --> 0:26:29.840 trillion dollars. Why. They see their roles to serve, not sell. 0:26:30.359 --> 0:26:33.640 That's why Charles Schwab is committed to the success over 0:26:33.760 --> 0:26:40.000 seven thousand independent financial advisors who passionately dedicate themselves to 0:26:40.119 --> 0:26:44.919 helping people achieve their financial goals. Learn more at find 0:26:45.119 --> 0:26:53.600 your Independent Advisor dot com. I'm gonna bring in Drew 0:26:53.600 --> 0:26:56.280 Madis now he's deputy chief US economist at U B 0:26:56.440 --> 0:26:57.760 S Troop. Thanks very much for being with us. I 0:26:57.760 --> 0:27:00.440 know you're processing the the unemployment numb as we got 0:27:00.440 --> 0:27:02.439 this morning, so we'll give you time to do that. 0:27:02.520 --> 0:27:04.920 Let me start by asking you about what we learned 0:27:04.920 --> 0:27:06.879 from the Federatory of yesterday. We've been talking about the 0:27:06.960 --> 0:27:09.280 role of these minutes from that meeting at which that 0:27:09.400 --> 0:27:12.159 that did decide to raise rates. What was unclear to 0:27:12.200 --> 0:27:14.679 you going into getting those minutes yesterday and what did 0:27:14.680 --> 0:27:17.000 you learn when they came out at two o'clock. Well, 0:27:17.040 --> 0:27:19.880 I mean, I think what people were mainly concerned about 0:27:19.960 --> 0:27:22.520 was why there were three rate hikes all of a sudden, um, 0:27:22.640 --> 0:27:25.600 and there had been two. Uh. And I think the minutes, 0:27:26.000 --> 0:27:27.960 you know, what the minute suggested was that that wasn't 0:27:28.000 --> 0:27:29.800 some sort of error, that that was in fact what 0:27:29.840 --> 0:27:32.679 they meant to do, or that it was consistent with 0:27:32.760 --> 0:27:35.400 what what how they were thinking of the world. Uh. 0:27:35.440 --> 0:27:37.120 You know, our view is that they'll still be two 0:27:37.200 --> 0:27:40.240 rate hikes next year. Uh. They they've talked a pretty 0:27:40.240 --> 0:27:43.399 aggressive rate hike schedule pretty much every year. Uh, and 0:27:43.440 --> 0:27:45.560 they haven't been able to get it done. Um. And 0:27:46.040 --> 0:27:47.840 you know, we can debate why that why they haven't 0:27:47.840 --> 0:27:49.680 been able to get done, but I think it's because 0:27:49.720 --> 0:27:51.959 they tend to focus more on financial conditions than they 0:27:52.000 --> 0:27:54.720 have in the past. Um, and that that creates a 0:27:54.800 --> 0:27:58.320 circularity and kind of the whole structure, which which really 0:27:58.359 --> 0:28:02.480 prevents them from moving that much more restie circularity, uncertainty 0:28:02.520 --> 0:28:05.000 that the fit acknowledging that that exists. And it's a 0:28:05.000 --> 0:28:07.520 complicating factory. How complicating is it for you here? Has 0:28:07.560 --> 0:28:09.360 you come up with your growth forecast as you try 0:28:09.400 --> 0:28:11.239 to forecast at what you think is gonna happen here 0:28:11.240 --> 0:28:13.960 in two thousand seventeen, I've tried to make it simple 0:28:13.960 --> 0:28:17.280 on myself. Uh, and so I've only done the work 0:28:17.359 --> 0:28:20.320 on things that have been kind of fully fleshed out. Uh, 0:28:21.000 --> 0:28:24.679 you're you're in a vacuum. Well, you know, the problem 0:28:24.680 --> 0:28:26.960 is there's there's a lot of numbers out there, but 0:28:27.040 --> 0:28:29.679 there's not a lot of detail behind some of the numbers. 0:28:29.760 --> 0:28:32.520 And you know, I think until we get more clarity 0:28:32.520 --> 0:28:34.800 on some on some of the proposals that you know, 0:28:35.160 --> 0:28:38.040 the more cautious approach is probably the one that's best warranted. 0:28:38.120 --> 0:28:43.000 I mean, we have penciled in some acceleration growth from Trump, uh, 0:28:43.440 --> 0:28:48.840 from some of his policies for next year. And we have, um, 0:28:49.200 --> 0:28:52.560 we've penciled in a little more in two thousand eighteen, 0:28:52.880 --> 0:28:55.760 um from his policies. But you know, at the end 0:28:55.760 --> 0:28:59.520 of the day. We have an economy operating towards full capacity. 0:28:59.720 --> 0:29:02.040 The employment rate is pretty much as low as you 0:29:02.280 --> 0:29:06.440 anyone probably wants to see it get um and you know, 0:29:06.480 --> 0:29:08.800 the inflation numbers are moving back up towards the fence 0:29:08.880 --> 0:29:11.440 target zone. So it's pretty you know, for us, it's 0:29:11.440 --> 0:29:13.800 hard to argue that we're far away from some sort 0:29:13.840 --> 0:29:17.120 of you know, natural state and the economy, and that 0:29:17.160 --> 0:29:19.520 means any sort of further stimulus just of and has 0:29:19.560 --> 0:29:22.600 the same bank Ford Spock drew. What's the twelve months 0:29:22.600 --> 0:29:27.320 forward GDP view of UBS. We are just below too 0:29:27.320 --> 0:29:29.880 and a half percent, so about a hundred basis points 0:29:29.880 --> 0:29:33.520 of acceleration versus this year. You are optimistic compared to 0:29:33.640 --> 0:29:37.080 many we speak to our sub two and a half percent. 0:29:37.880 --> 0:29:41.840 What is the requirement to attain your optimism or to 0:29:42.040 --> 0:29:46.200 exceed it? Is it just about investment? You know, to 0:29:46.240 --> 0:29:48.400 be honest with you, Tom, it doesn't take a lot. 0:29:48.480 --> 0:29:52.520 Our hundred basis point acceleration is pretty much. We don't 0:29:52.560 --> 0:29:56.320 have ay repeat in UH energy price movements that could 0:29:56.360 --> 0:30:00.480 generate the same kind of CAPEX decline, which doesn't seem 0:30:00.560 --> 0:30:02.960 like it's likely that we could make that happen, even 0:30:03.000 --> 0:30:07.560 if we wanted to um and uh that we uh, 0:30:07.640 --> 0:30:10.280 you know, we don't you know, effectively, It's just that 0:30:10.440 --> 0:30:14.240 we don't repeat the bad news twice. Uh. You know, 0:30:14.320 --> 0:30:17.120 So that acceleration and growth has nothing to do with 0:30:17.160 --> 0:30:20.240 anything getting better. It has things to do. It has 0:30:20.280 --> 0:30:24.680 everything to do with two things inventory, uh, inventory movements 0:30:24.760 --> 0:30:30.480 and capex not repeating what we're completely unusual years. Uh. 0:30:30.520 --> 0:30:32.760 And so you know, when I look at the fact 0:30:32.760 --> 0:30:35.480 that you know, we are above consensus, I kind of 0:30:35.520 --> 0:30:41.120 wonder what implicitly people are assuming on the consensus about 0:30:41.160 --> 0:30:44.360 the future that you know that they are confident enough 0:30:44.360 --> 0:30:47.040 about that they can put it into their forecasts. I 0:30:47.360 --> 0:30:49.560 think a lot of the consensus is, let's put it 0:30:49.680 --> 0:30:51.640 this way, a lot of the consensus is penciling and 0:30:51.800 --> 0:30:54.520 something bad happening, but they wouldn't be able to define 0:30:54.560 --> 0:30:57.480 what that something bad is. And I think that that's 0:30:57.480 --> 0:31:01.160 a dangerous way to forecasts. When you look at me, 0:31:01.280 --> 0:31:03.560 let me play off of that a little bit. It's 0:31:03.600 --> 0:31:05.440 unclear what the something bad maybe, but I mean we 0:31:05.480 --> 0:31:07.560 have some we have some possibilities here. Trade is certainly 0:31:07.600 --> 0:31:08.920 a big one. I mean, that must be a huge 0:31:08.920 --> 0:31:13.320 weight on you as your forecasting well except for the 0:31:13.320 --> 0:31:16.400 fact that you know, we don't really know what's going 0:31:16.440 --> 0:31:19.440 to happen there. We don't know how much of this 0:31:19.920 --> 0:31:22.480 um you know, how much is talking, how much is 0:31:22.520 --> 0:31:24.880 going to be We're seeing contours this week, though, aren't 0:31:24.880 --> 0:31:28.760 we with GM and Ford and and the rest. Well, 0:31:28.800 --> 0:31:32.960 we'll see. I mean, you know, I'm hesitant to basically 0:31:32.960 --> 0:31:36.000 say that voluntary actions by by firms are should be 0:31:36.000 --> 0:31:37.760 thought of in one direction or the other. I mean, 0:31:37.880 --> 0:31:41.400 that's that's not policy, that's that's firms responding in ways 0:31:41.440 --> 0:31:44.200 that they think our best. UM. So you know, I 0:31:45.000 --> 0:31:47.440 hesitated to comment on anything that they're doing individually, but 0:31:47.480 --> 0:31:51.080 I would say that, you know, until we see a 0:31:51.160 --> 0:31:56.240 tariff or until we see something concrete um that you know, 0:31:56.560 --> 0:31:58.400 I think it's you know, first of all, I mean, 0:31:58.480 --> 0:32:00.280 this could take six months, it could take a year. 0:32:00.640 --> 0:32:02.640 You know, you don't know the time frame for getting 0:32:02.840 --> 0:32:05.440 for for making some of these things happening. Let's talk 0:32:05.440 --> 0:32:08.440 about employment. Here's we look ahead to Jobs Day at tomorrow. 0:32:08.440 --> 0:32:10.240 What are you gonna be looking for here? We're talking 0:32:10.240 --> 0:32:12.720 with Annie Blanche Flowers. Tom said a few moments ago 0:32:12.760 --> 0:32:16.040 about part time is um about wage growth, that what's 0:32:16.040 --> 0:32:18.360 going to attract your your attention tomorrow when those numbers 0:32:18.440 --> 0:32:21.560 come out, well, I'll be blown. I'm not gonna worry 0:32:21.600 --> 0:32:24.240 too much about part time employment because part time employment 0:32:24.280 --> 0:32:28.280 isn't particularly elevated right now. UM. So I'm gonna be 0:32:28.320 --> 0:32:30.680 just looking at the at the overall jobs numbers. I'm 0:32:30.680 --> 0:32:33.280 gonna be focusing probably more on the household survey of 0:32:33.320 --> 0:32:35.960 the unemployment rate. I want to see what's going on 0:32:36.000 --> 0:32:39.920 there with participation, um, and with the employment of population ratio. 0:32:40.840 --> 0:32:43.400 I think we are in a stage in the labor 0:32:43.440 --> 0:32:46.520 market where we should be seeing lower levels of payroll 0:32:46.520 --> 0:32:50.800 growth because we're running out of the easy people to hire. Uh. 0:32:50.840 --> 0:32:52.640 And so now in order to hire someone, you have 0:32:52.640 --> 0:32:55.600 to look a little harder. Uh. And we see that 0:32:55.600 --> 0:32:58.960 that's consistent with the job openings number, the quits ratio, 0:33:00.520 --> 0:33:02.080 and kind of the amount of time it takes to 0:33:02.120 --> 0:33:05.440 fill position. All of you know, in particular that last 0:33:05.440 --> 0:33:08.400 one has been less quite substantially. We saw that sort 0:33:08.400 --> 0:33:11.160 of precipitous drop last month for the month before, and 0:33:11.200 --> 0:33:13.239 I wonder what you think that portends for for this 0:33:13.280 --> 0:33:15.200 month going forward? Here where at four point six now 0:33:15.240 --> 0:33:18.000 surveys four point seven percent, do you think we'll see 0:33:18.000 --> 0:33:21.920 an uptake here. Well, it's funny because uh, you know, 0:33:22.120 --> 0:33:25.760 when you um, you know, you know, my guess is 0:33:25.800 --> 0:33:28.200 that it will stay where it's at. Uh. One of 0:33:28.240 --> 0:33:31.479 the interesting risks though, is that usually are not usually, 0:33:31.520 --> 0:33:33.800 but you know, it's not inconceivable when you see a 0:33:33.880 --> 0:33:36.680 drop like that, that that's the start of a faster 0:33:36.760 --> 0:33:40.440 pace of decline. Uh. And if you look back historically speaking, 0:33:40.440 --> 0:33:43.960 when you see big drops in the unemployment rate, oftentimes 0:33:44.000 --> 0:33:45.960 what economists will do will be the pencil in a 0:33:46.040 --> 0:33:48.120 rebound kind of normalize it back to some sort of 0:33:48.120 --> 0:33:52.600 trend they had in the back of their mind. Historically speaking, though, 0:33:52.880 --> 0:33:55.440 you're just as likely to see a further decline or 0:33:55.560 --> 0:33:57.840 or an acceleration on on the process. And that that 0:33:58.000 --> 0:33:59.800 is just the first step if you want to call 0:33:59.840 --> 0:34:03.320 it to dam breaking um for a more rapid decline 0:34:03.320 --> 0:34:06.920 and unemployment rate. So, uh, we are anticipating an unchanged 0:34:07.000 --> 0:34:09.640 unemployment rate, which which means that we're saying it's it's 0:34:09.719 --> 0:34:12.600 neither the dam breaking nor is it some sort of 0:34:13.160 --> 0:34:16.920 false reading. Um. But if it were to drop further, 0:34:17.239 --> 0:34:19.040 that would be something that would that would make us 0:34:19.080 --> 0:34:21.680 really have to question, like how much further, the fact 0:34:21.719 --> 0:34:23.920 can watch that thing drop before they have to get 0:34:24.000 --> 0:34:26.880 serious potentially moving more quickly. Can I read into your 0:34:26.920 --> 0:34:29.480 prescription then that you think we're full unemployment? Then if 0:34:29.600 --> 0:34:32.200 you think we're going to stay where we are, to 0:34:32.239 --> 0:34:33.719 be honest with you, I think we're probably a low 0:34:33.719 --> 0:34:37.240 full employment. I think you know we have the people 0:34:37.320 --> 0:34:41.560 in the labor force, um we have, we we don't 0:34:41.640 --> 0:34:44.640 have enough. What's been going on in the labor forces. 0:34:44.680 --> 0:34:47.759 We have this nice steady pace of job growth, but 0:34:47.840 --> 0:34:50.880 that's been happening because we've had fewer layoffs and fewer 0:34:50.960 --> 0:34:53.960 higher less hiring. So the dynamics of the labor force 0:34:54.000 --> 0:34:57.600 are actually pretty low right now, even though the labor 0:34:57.719 --> 0:35:01.120 market itself looks pretty healthy. The net numbers look good, 0:35:01.120 --> 0:35:04.600 but the gross numbers look bad. Uh. And what I 0:35:04.640 --> 0:35:07.080 would like to see is a little more job switching. 0:35:07.120 --> 0:35:09.640 I'd like to see a few more people getting fired 0:35:09.760 --> 0:35:12.400 and a few more people getting hired, because that's a 0:35:12.400 --> 0:35:15.200 more dynamic market. That's one that's better for everyone. How 0:35:15.239 --> 0:35:18.799 do you respond to the wonderful aggregate analysis you has 0:35:18.840 --> 0:35:22.760 just given us versus the partitioning of the American labor 0:35:22.840 --> 0:35:27.879 force into those employable those on the margin that want 0:35:27.920 --> 0:35:30.560 to be employable all the analysis should do every day 0:35:30.640 --> 0:35:32.560 and a huge body of Americans that aren't part of 0:35:32.600 --> 0:35:37.279 the discussion. Do you fold that in? Uh, you know, 0:35:37.400 --> 0:35:40.360 it's it's hard to separate it out when you're trying. 0:35:40.400 --> 0:35:45.520 I mean, we're trying to predict policy, right and so um, certainly, 0:35:46.480 --> 0:35:49.359 you know, I mean from a philosophical perspective, what you 0:35:49.400 --> 0:35:54.800 want is a labor market where everyone can find work 0:35:55.080 --> 0:35:58.239 if they're willing to work. Um. And that's that's the 0:35:58.280 --> 0:36:01.200 idea of full employment, right that you that you've reached 0:36:01.200 --> 0:36:04.320 a frictional level of unemployment, and then there's some people 0:36:04.360 --> 0:36:07.520 who are temporarily unemployed because they need to be for 0:36:07.600 --> 0:36:11.399 whatever reason. Um, and the rest of everyone who wants 0:36:11.400 --> 0:36:14.279 to work can work. Uh. And and that's the that's 0:36:14.360 --> 0:36:16.759 you know, probably you know, ideal is probably the wrong 0:36:16.760 --> 0:36:18.759 way of putting. But I'll go I'll go with what 0:36:18.800 --> 0:36:21.120 you just said, Drew. But are we getting the jobs 0:36:21.160 --> 0:36:23.160 if we want to work that we want? Or is 0:36:23.239 --> 0:36:27.759 David Blancheflower said yesterday, is it about getting marginally more 0:36:27.920 --> 0:36:31.440 hours of work? And we can't get that. I mean, 0:36:31.520 --> 0:36:36.760 have we become almost two labor efficient? Well, The problem 0:36:36.800 --> 0:36:40.120 is that that's been encouraged. Right, So we have policies 0:36:40.120 --> 0:36:43.160 in place that have defined full work weeks as being 0:36:43.160 --> 0:36:47.120 below thirty hours or being thirty hours, which is a 0:36:47.719 --> 0:36:51.319 sharp change from kind of historical norms. Uh. And that 0:36:51.360 --> 0:36:56.960 has probably led to a bifurcation of labor force between 0:36:57.000 --> 0:37:00.839 skilled and unskilled labor because why would any firm pay 0:37:01.000 --> 0:37:04.320 for the thirtieth hour of work in an unskilled environment 0:37:04.320 --> 0:37:06.680 when that thirtieth hour of work has a marginal cost. 0:37:06.800 --> 0:37:10.960 It's significant. So giving some of that thirtieth hour of 0:37:10.960 --> 0:37:13.880 work is no longer paying them the extra ten to 0:37:13.960 --> 0:37:17.239 fifteen an hour. It's paying them the fifteen dollars an 0:37:17.239 --> 0:37:21.359 hour and a whole range of mandated benefits um. And 0:37:21.400 --> 0:37:24.120 So because we put a break point in, we've created 0:37:24.120 --> 0:37:29.800 an artificial um stress in the system that encourages firms 0:37:29.840 --> 0:37:33.040 to think in terms of not giving anyone thirty hours 0:37:33.160 --> 0:37:37.120 unless you can justify it from a skills perspective. Let 0:37:37.160 --> 0:37:39.120 me ask you just to to to pivot here a 0:37:39.160 --> 0:37:41.320 little bit here at the beginning of two thousand and seventeen, 0:37:41.320 --> 0:37:43.600 after the holiday season, how's the consumer looking to you 0:37:44.280 --> 0:37:47.239 in the US right now? I mean, I think the 0:37:47.280 --> 0:37:51.680 consumer looks good. Uh. You know when I said, when 0:37:51.719 --> 0:37:54.120 I was talking about the the the gross flows into 0:37:54.160 --> 0:37:56.440 another labor force, you know, and we saw it in 0:37:56.480 --> 0:38:00.319 claims today. No one's being fired. They're very low levels 0:38:00.360 --> 0:38:04.840 of layoffs in the economy relative to the population size. UM. 0:38:04.880 --> 0:38:09.040 There are decent wage gains. They're not they're not incredibly great, 0:38:09.120 --> 0:38:14.719 but they're decent given that environment. UM. And uh, you 0:38:14.840 --> 0:38:19.759 have expanding access to credit for consumers. UM. You add 0:38:19.760 --> 0:38:22.239 all that up and you have a very steady consumption 0:38:23.040 --> 0:38:25.399 profile going forward. And that's one of the reasons why 0:38:25.400 --> 0:38:28.279 our growth forecast accelerates is because we do have that 0:38:28.360 --> 0:38:33.440 steady consumer built into our outlook. That just seems to 0:38:33.440 --> 0:38:35.600 be the most basic case. And of course, with the 0:38:35.640 --> 0:38:39.600 consumer being the economy, UM, that provides you with a 0:38:39.680 --> 0:38:43.439 nice four momentum into the into two thousand seventeen. Thank 0:38:43.480 --> 0:38:59.200 you so much, dramatics UBS greatly appreciate it. Here pleased 0:38:59.239 --> 0:39:01.600 to be joined out by Mark Kiesel. He's the CEO 0:39:01.680 --> 0:39:05.239 for Global Credit at PIMCO, joining us from Newport Beach, California, 0:39:05.360 --> 0:39:08.520 with a new note navigating change Opportunities and quality credit, 0:39:08.560 --> 0:39:12.640 Specialty finance and Mortgages. Great to speak with you. Mark. Hi, David, 0:39:12.680 --> 0:39:15.759 good morning. Let's start with your appetite for credit, how 0:39:15.760 --> 0:39:18.200 it's changed your in the new year, and I'm wondering 0:39:18.200 --> 0:39:22.520 if your appetite for quality credit has changed in particular. Well, David, 0:39:22.560 --> 0:39:25.960 a year ago, we were quite optimistic on credit. UM 0:39:26.160 --> 0:39:29.320 high yield in two thousands sixteen was the strongest performing 0:39:29.360 --> 0:39:33.400 market up fifteen sixt So a year ago, when energy 0:39:33.440 --> 0:39:36.600 prices were hitting the lows, we were buying aggressively high yield. 0:39:37.120 --> 0:39:40.880 Now we're de risking. We basically think under Trump the 0:39:40.920 --> 0:39:44.160 market faces a lot more two way risks. There's positive 0:39:44.160 --> 0:39:48.480 scenarios under Trump, with tax reform and confidence picking up, 0:39:48.520 --> 0:39:51.480 but also there's negative. So we have been de risking. 0:39:51.480 --> 0:39:53.880 We think a lot of good news is christ then, folks. 0:39:53.960 --> 0:39:56.360 De risking is sort of like in the airline business 0:39:56.400 --> 0:40:01.239 when you deplane. What the hell is de risking? Mark? So, Tom, 0:40:01.239 --> 0:40:04.040 what we've been doing is we have been selling into strength. 0:40:04.239 --> 0:40:08.320 UM energy markets have basically gone from twenty six on 0:40:08.440 --> 0:40:11.640 oil to fifty two. We've been selling into that strength, 0:40:11.640 --> 0:40:15.040 and we've been upgrading the overall quality of our portfolio. Mark, Mark, 0:40:15.239 --> 0:40:18.440 I'm marketing as I'm busting his chopped folks, because there's 0:40:18.480 --> 0:40:22.279 a general council it ogre, ogre and miserable out in 0:40:22.360 --> 0:40:26.920 Newport Beach, California, saying, don't say we sell bonds, but 0:40:27.200 --> 0:40:29.560 marks a good sport about it. Let me de risk 0:40:29.600 --> 0:40:33.960 over to David, when when you look at that, at 0:40:34.000 --> 0:40:36.759 the reasons for de risking as you put it in, 0:40:36.840 --> 0:40:38.719 what what are the major ones? Is it? Is it 0:40:38.800 --> 0:40:41.440 the prospect from more political risk here in the new year? 0:40:41.560 --> 0:40:44.320 Is it? Is it central bank policy? What's the driving 0:40:44.320 --> 0:40:47.040 force there behind you doing that? So David just just 0:40:47.160 --> 0:40:50.839 on bonds alone, if you go pre election, we were 0:40:50.840 --> 0:40:54.440 really globally hitting limits of global que There were trends 0:40:54.480 --> 0:40:57.279 in place already for higher rates even before Trump. The 0:40:57.280 --> 0:41:01.600 global economy was gradually healing from very depressed levels. We 0:41:01.719 --> 0:41:06.160 have rising global p m I data, PPI data OPEC 0:41:06.280 --> 0:41:09.040 deal to me was a big game changer. That that 0:41:09.200 --> 0:41:12.360 is the return of the cartel. You're seeing earnings bottom 0:41:12.600 --> 0:41:15.600 and then you have Trump surprise with the win. Now 0:41:15.640 --> 0:41:19.200 you've got animal spirits kicking in, you've got business confidence improving, 0:41:19.239 --> 0:41:22.560 consumer confidence improving, and you've got the prospect for the 0:41:22.600 --> 0:41:25.920 first time in eight years of a very pro business 0:41:25.920 --> 0:41:28.879 pro growth initiatives going through. So to me, I think 0:41:28.920 --> 0:41:32.480 you want to be more defensive. The trend towards higher rates, 0:41:32.560 --> 0:41:35.320 I think is had had been in place even before Trump. 0:41:35.320 --> 0:41:39.080 Trump just accelerates that trend, but critically, and I mean 0:41:39.120 --> 0:41:41.320 it's seriously, Mark, do you have in your head a 0:41:41.520 --> 0:41:47.239 tip point on tenure yield which signals the Trump reflation? 0:41:47.320 --> 0:41:49.680 I know it's not two point four one per cent, 0:41:49.800 --> 0:41:51.799 but is there a number where you say, hey, this 0:41:51.880 --> 0:41:55.799 is for real. Well, we have been basically starting to 0:41:55.880 --> 0:41:58.080 add a little bit of bonds here because we have 0:41:58.200 --> 0:42:01.040 seen the tenure back up a hundred by basis points. 0:42:01.040 --> 0:42:02.799 But I think a lot of this has to do 0:42:02.840 --> 0:42:06.440 with the Fed and will the Fed shift more hawkish 0:42:06.520 --> 0:42:09.200 or more dubbish over time? In my mind, they're gonna 0:42:09.239 --> 0:42:12.239 likely shift more hawkish, and that was clear yesterday in 0:42:12.280 --> 0:42:16.080 the minutes. They clearly highlighted that the risks of growth 0:42:16.120 --> 0:42:20.160 surpassing their forecasts have grown because there is this possibility 0:42:20.160 --> 0:42:23.799 of expansionary fiscal policy. This is happening, by the way, 0:42:23.840 --> 0:42:25.880 Tom at the top at a time when the labor 0:42:25.880 --> 0:42:29.279 markets already tight, So there's this right tail risk out 0:42:29.280 --> 0:42:33.719 there of inflation. I think potentially surprising the FED. And 0:42:33.760 --> 0:42:37.279 also they even mentioned in the minutes yesterday that that 0:42:37.280 --> 0:42:41.080 that has implications for the reinvestment of treasuries and mortgages. 0:42:41.120 --> 0:42:43.640 So I think the market right now, it's priced in 0:42:44.280 --> 0:42:47.440 is two hikes this year and only two hikes next year. 0:42:47.480 --> 0:42:49.520 So you've only got a hundred basis points of hikes 0:42:49.560 --> 0:42:52.160 over the next two years. In my mind, I think 0:42:52.239 --> 0:42:54.560 the risks are that they could go faster. Are you 0:42:54.640 --> 0:42:56.640 going to cash? What role is cash playing in your 0:42:56.680 --> 0:42:59.560 portfolio right now? Well, what we want to do is 0:42:59.760 --> 0:43:03.480 what two thousand sixty improved is the bond managers who 0:43:03.520 --> 0:43:07.920 outperformed most were flexible, nimble, and they capitalized on the 0:43:08.000 --> 0:43:11.360 key moments throughout the year, whether it was the energy crisis, Brexit, 0:43:11.480 --> 0:43:13.600 or Trump. What we want to do now is we 0:43:13.640 --> 0:43:17.120 want to take profits, build up a significant cash position, 0:43:17.680 --> 0:43:20.000 and hang out in what we call the best risk 0:43:20.080 --> 0:43:23.920 reward investments in global fixed income. That would be tips 0:43:24.000 --> 0:43:28.760 because basically we want this this inflation protection. We're upgrading 0:43:28.840 --> 0:43:33.279 quality and corporate bonds, favoring the consumer banks, financials and pipelines, 0:43:33.680 --> 0:43:38.880 and importantly, non agency mortgages and agency mortgages have cheapened 0:43:38.920 --> 0:43:42.000 considerably and offer a very good risk reward right now. 0:43:42.040 --> 0:43:45.800 So these higher quality bonds within global fixed income actually 0:43:45.800 --> 0:43:47.360 are the best place to be right now on a 0:43:47.440 --> 0:43:50.319 risk adjusted basis. David Gern time King were with Mark 0:43:50.360 --> 0:43:57.080 kisel Mark. You know, did it's a migration of yield 0:43:57.280 --> 0:44:01.160 and inflation? Which comes for and what's it mean for 0:44:01.239 --> 0:44:05.759 the return? The inflation adjusted return that our listeners will 0:44:05.800 --> 0:44:10.960 get to yield move higher and then inflation catches up. 0:44:11.280 --> 0:44:14.760 Or do we risk yields moving up but inflation moving 0:44:14.840 --> 0:44:18.239 up faster. That's not good, is it? No, Tom, that's 0:44:18.239 --> 0:44:20.680 not And I think you just highlighted, you know, the 0:44:20.760 --> 0:44:24.120 reason why we have been selling into strength and de risking. 0:44:24.200 --> 0:44:27.319 A main risk for the US economy is that we 0:44:27.360 --> 0:44:30.080 could get a pick up of inflation as a result 0:44:30.120 --> 0:44:32.960 of higher wages. This labor market is very tight, You've 0:44:33.000 --> 0:44:37.360 got rising confidence, animal spirits, and this new fiscal policy. 0:44:37.400 --> 0:44:39.400 We don't know really what's gonna unfold here, but it 0:44:39.400 --> 0:44:44.080 could be quite inflationary. Uh So, the important point is 0:44:44.120 --> 0:44:47.959 that US fiscal stimulus normally works best coming out of recessions. 0:44:47.960 --> 0:44:51.880 This economic expansion is eight years in the making and 0:44:51.920 --> 0:44:54.359 it's coming at a time when the labor markets already tight, 0:44:54.400 --> 0:44:57.160 and that's why the inflation risk is higher today. Are 0:44:57.200 --> 0:45:00.680 you writing the obituary for globalization now in light of 0:45:00.680 --> 0:45:02.840 what we've seen, what we are seeing here when it 0:45:02.840 --> 0:45:04.759 comes to trade, when it comes to this income administration's 0:45:04.800 --> 0:45:08.920 policy towards China, towards Mexico, Are you worried that we 0:45:09.000 --> 0:45:12.000 are going to see a less globalized world. We are worried. 0:45:12.080 --> 0:45:15.640 And in fact, you know, part of pimco secular thinking 0:45:16.200 --> 0:45:20.040 has been that the rise of populism is creates this 0:45:20.080 --> 0:45:24.239 inflationary risk tail. Uh. There has been a shift even 0:45:24.280 --> 0:45:28.839 before the US election away from monitory policy. There are 0:45:28.880 --> 0:45:33.400 limits of global QUEI were shifting gradually towards fiscal Trump, 0:45:33.560 --> 0:45:36.200 you know, could be more reasonable than the market sphere. 0:45:36.280 --> 0:45:39.840 At the same time, his legislative agenda could get deluded. 0:45:39.880 --> 0:45:43.480 As you know, Washington is very unpredictable. There are implementation 0:45:43.640 --> 0:45:45.680 risks with a lot of his policies. So I think 0:45:45.680 --> 0:45:47.920 the big point here is that this is a market 0:45:48.000 --> 0:45:50.080 that can go either way. It can go positive or 0:45:50.080 --> 0:45:53.880 it can go negative. Okay, we got Alicia Manilla on tomorrow, folks. 0:45:54.120 --> 0:45:58.160 I can't begin to describe the excellence of her shop 0:45:58.239 --> 0:46:02.760 at Boston College and their effort on America's retirement planning. 0:46:02.760 --> 0:46:05.400 And I say this with great respect mark for PIMCO 0:46:05.520 --> 0:46:10.000 with your terrific retirement coverage. Uh there help me here 0:46:10.280 --> 0:46:14.160 with Marco Witz the efficient market frontier of where your 0:46:14.280 --> 0:46:17.440 bonds fit in. I mean, if I got equities, I 0:46:17.520 --> 0:46:21.799 got bonds, I got cash. And there's that parabola that 0:46:22.040 --> 0:46:27.680 sideways parabola of most efficient optimal places. How can that 0:46:27.760 --> 0:46:31.719 work given the great distortions we're in right now? So, Tom, 0:46:31.760 --> 0:46:34.120 I think the importance of bonds is that if you 0:46:34.200 --> 0:46:36.800 look all over the developed markets all over the world, 0:46:36.960 --> 0:46:40.640 the populations are aging. Uh no more in the world. 0:46:40.719 --> 0:46:44.880 Is this more apparent than in in Japan, in Europe, 0:46:44.960 --> 0:46:47.440 and and will become a big issue in the United States. 0:46:47.480 --> 0:46:50.600 People are going to need income to retire. Bonds provide 0:46:50.680 --> 0:46:54.960 stability of income, and there's not enough income producing assets 0:46:54.960 --> 0:46:57.480 in the world relative to the demand for those assets. 0:46:57.480 --> 0:47:00.520 So equities are going to do well in a growth spurt. 0:47:00.960 --> 0:47:05.200 But with Trump, you've got this negative scenario of trade restrictions, 0:47:05.239 --> 0:47:10.600 of uh, deterioration in geopolitical bonds will protect investors from 0:47:10.680 --> 0:47:13.640 downside risk and equities. That's the key to bonds is 0:47:13.680 --> 0:47:16.960 because yes, there is upside with Trump and that could 0:47:17.040 --> 0:47:19.800 mean equities do well. But at the same time, Trump 0:47:19.840 --> 0:47:23.160 has a lot of bad risks UH that that the 0:47:23.200 --> 0:47:25.279 market i think is not focused on. And in that 0:47:25.480 --> 0:47:29.319 environment where where the negatives of Trump resurface, bonds will 0:47:29.360 --> 0:47:33.799 then protect UH investors by providing high quality income and 0:47:33.840 --> 0:47:37.960 protect protect from downside if the economy slows. Give us 0:47:38.000 --> 0:47:40.680 the mark case alant look thet PIMCO outlook on European 0:47:40.719 --> 0:47:43.640 corporate credit. We've been following the back and forth the 0:47:43.640 --> 0:47:47.120 the chapter after chapter of the Monte de Pasky situation 0:47:47.120 --> 0:47:50.879 in Italy. What's your attitude toward European corporate credit right now? 0:47:51.440 --> 0:47:54.440 So again similar to what we were talking about earlier, 0:47:54.480 --> 0:47:57.680 we have been selling into strength. So basically, credit spreads 0:47:57.719 --> 0:48:00.160 are at two year tights right now. There's a lot 0:48:00.160 --> 0:48:02.600 of good news priced into the market. That's true not 0:48:02.680 --> 0:48:06.279 only of Europe, but but in the United States as well. UH. 0:48:06.320 --> 0:48:09.879 Within Europe right now, Europe is growing at a slower pace. 0:48:09.960 --> 0:48:14.400 There's more economic upside risk in the United States. With Europe, 0:48:14.440 --> 0:48:17.440 we want to stay in very high quality sectors. We 0:48:17.560 --> 0:48:20.319 have been focused on cable. We have been focused on 0:48:20.360 --> 0:48:23.279 the consumer there because we are seeing a modest improvement 0:48:23.680 --> 0:48:27.040 in the economic data. And banks, really, banks are really 0:48:27.120 --> 0:48:31.320 a pure play on economic growth. As growth gradually heals 0:48:31.400 --> 0:48:33.800 through Europe, banks should do well. They're going to benefit 0:48:33.840 --> 0:48:36.920 from steeper yield curves, higher rates, and in the US 0:48:37.400 --> 0:48:40.320 less regulations. So so banks are a favorite of ours 0:48:40.320 --> 0:48:43.000 in Europe and also in the United States. How about 0:48:43.000 --> 0:48:46.040 that U S China relationship. We haven't talked about China. 0:48:46.200 --> 0:48:48.360 We mentioned at the top of the program the stress 0:48:48.400 --> 0:48:50.759 test the Chinese government has been doing on the what's 0:48:50.800 --> 0:48:53.680 your outlook for China in this year ahead? Are we 0:48:53.719 --> 0:48:55.160 going to see a repeat of what we saw last 0:48:55.200 --> 0:48:57.040 year in two thousand and sixteen with the issues with 0:48:57.080 --> 0:49:01.160 its currency? Do you think so? Fascinating? Uh, David, because 0:49:01.200 --> 0:49:03.040 that was the first two weeks of two thousand and 0:49:03.080 --> 0:49:05.920 sixteen and the markets focused on it again. China over 0:49:05.920 --> 0:49:08.360 the last two days has been intervening. We've seen the 0:49:08.400 --> 0:49:12.360 currency strengthen. The key has been the capital outflow data. 0:49:12.960 --> 0:49:17.719 As the US outlook improves and China is slowing from 0:49:17.719 --> 0:49:21.480 a higher growth level, but albeit slowing, capital is moving 0:49:21.520 --> 0:49:24.120 into the United States. And out of China. Also, their 0:49:24.160 --> 0:49:27.360 property market, you know, is pretty overheated in some of 0:49:27.400 --> 0:49:29.680 these Tier one cities, and so there's a lot of 0:49:30.200 --> 0:49:33.200 capital that is looking to get out of China into 0:49:33.200 --> 0:49:37.879 the United States seeking higher, higher potential returns, and that's 0:49:37.960 --> 0:49:40.680 creating a huge dilemma for China. They've had to now 0:49:40.719 --> 0:49:44.319 put in limits on this fifty thousand dollar limit for 0:49:44.320 --> 0:49:46.600 for capital outflows. Mark, thank you so much for the 0:49:46.640 --> 0:49:58.360 brafing with him. Thanks for listening to the Bloomberg Surveillance podcast. 0:49:58.719 --> 0:50:03.840 Subscribe and listen to interviews on iTunes, SoundCloud, or whichever 0:50:03.960 --> 0:50:08.359 podcast platform you prefer. I'm out on Twitter at Tom Keene. 0:50:08.480 --> 0:50:12.279 David Gura is at David Gura. Before the podcast, you 0:50:12.320 --> 0:50:28.480 can always catch us worldwide. I'm Bloomberg Radio. Who you 0:50:28.520 --> 0:50:31.280 put your trust in matters? Investors have put their trust 0:50:31.640 --> 0:50:35.600 and independent registered investment advisors to the two and four 0:50:35.600 --> 0:50:40.040 trillion dollars. Why Learn more at find your Independent Advisor 0:50:40.640 --> 0:50:41.600 dot com.