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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and
Speaker 1: of course, on the Bloomberg. We start this morning with
Speaker 1: the markets. Jason Turner, chairman of Fertiguous Research Partners, who
Speaker 1: join us here in the studio in New York. Morning. Jason,
Speaker 1: good morning. Let's start with just the peculiarity of this
Speaker 1: particular market, the rhythms of course cycles to the market,
Speaker 1: especially the beginning of the year. When you look at
Speaker 1: the market today at positioning at the beginning of two
Speaker 1: thousand seventeen, how different is the beginning of this year
Speaker 1: from years past, well, certainly compared to last year. I
Speaker 1: don't think it could be more different. As you might remember,
Speaker 1: the Fed tightened December of two thousand fifteen, and then
Speaker 1: it's signal that it was going to tighten four more
Speaker 1: times UH, and that uh, you know, to use a
Speaker 1: technical term, freaked out the emerging markets and the commodity markets. UH.
Speaker 1: And the FED had to be level too, I believe.
Speaker 1: But and you wind up having oil down to twenty
Speaker 1: six dollars before too long and the FED reserving um
Speaker 1: reverting course. This is very different. Of course. I think
Speaker 1: there's a lot of attendant optimism about the new administration
Speaker 1: in terms of what it might do with regulatory policy,
Speaker 1: what will do with fiscal policy. Trade obviously remains a
Speaker 1: big question mark. But the FED is i think, content
Speaker 1: to once normalize rates, but is content to uh let
Speaker 1: inflation run a little hot. I'm looking at your most
Speaker 1: recent note and politics right up there at the top.
Speaker 1: But you note here that two sixteen a year in
Speaker 1: which a well established political class learned that democracy was
Speaker 1: its achilles heels. You're talking about the FED wiser if
Speaker 1: you've got politics. So what's the bigger driver here in
Speaker 1: two thousand seventeen of those two things? Yeah, I I
Speaker 1: think central banks, and I think correctly we'll take a
Speaker 1: back seat to UH to fiscal and regulatory and trade policy.
Speaker 1: And I think it's it's high time Certainly, the Fed's
Speaker 1: balance sheet UH quintuppling over the past past eight years. Certainly,
Speaker 1: I think it was for all the right intentions. I
Speaker 1: think there was a sense in which, and I think
Speaker 1: Japan indicated this last year with its experimentation and negative
Speaker 1: interest rates, that there were limits to what you could
Speaker 1: expect monetary policy to achieve. I'm very much of the
Speaker 1: view that monetary policy UH should be used to set
Speaker 1: the potential UH for economic growth. It's it's a very
Speaker 1: imperfect way of creating a economic growth itself. It winds
Speaker 1: up creating misallocations of capital, which is what we've seen,
Speaker 1: and I think it's better to have a more balanced
Speaker 1: policy approach policy mix in two thousand seventeen, Jason, do
Speaker 1: you get the sense that central bankers are reckoning with
Speaker 1: that tectonic shift the minutes out yesterday? As I said, UH,
Speaker 1: some acknowledgement there of the uncertainty amount the potential for
Speaker 1: for fiscal policy in the new year. UH. Do do
Speaker 1: you think that they're coming to terms with the changing
Speaker 1: dynamics between a fiscal policy and monetary policy? I think
Speaker 1: a little, while little, and I don't want to be
Speaker 1: overly critical of the FED it's it's very kind of
Speaker 1: do regord to to do that. But I think that
Speaker 1: there's I think people have realized that central bankers are
Speaker 1: not some pride of superman. Uh they're they're men and women.
Speaker 1: They may have PhDs, but um, there are limits to
Speaker 1: what they can actually achieve. And I think it's it's
Speaker 1: far better, frankly, if we're not discussing from an investment
Speaker 1: point of view, if we're not discussing the central banks
Speaker 1: at every minute of every day, it's you're discussing people
Speaker 1: are actually putting capital at risk. The most important person
Speaker 1: that works for you right now, it's not Jason trentnerd.
Speaker 1: It's one D Clifton, that's right, who was down and
Speaker 1: he must be a little busy right Oh my goodness standards.
Speaker 1: I mean it doesn't smoke anymore, but he still probably
Speaker 1: drinks about a case of diet cocod So, uh, yeah,
Speaker 1: it's good and good for you. What is what has
Speaker 1: he learned about the change in Washington just in the
Speaker 1: last four weeks. Well, I think he's learned that h
Speaker 1: Obviously things are going to be very different in terms
Speaker 1: of the way the administration to be is going to
Speaker 1: be communicating with both the press and market participants. UH
Speaker 1: and UH. I think a lot of the standard um,
Speaker 1: you know, the standard modes of communication, avenues of communication
Speaker 1: are going to be very very different, and so that
Speaker 1: is going to take some getting used to. UH. Probably
Speaker 1: the most among Washington insiders. I think the rest of
Speaker 1: us might not notice much of a difference in you know,
Speaker 1: we live in a social media world. I think Washington,
Speaker 1: at least as far as the interactions between the insiders
Speaker 1: had been concerned, has largely been um, you left out
Speaker 1: of that. We sort of go here, John Tucker, are
Speaker 1: bites this for me and David Gura. Folks, we see
Speaker 1: Trump treats and we decide if it's news. Yes. Here
Speaker 1: we are in real time with Jason Trunner. For those
Speaker 1: of you, we recommend you do not tweet in your car.
Speaker 1: We've had two tweets in the last four minutes, in
Speaker 1: eight minutes, including David gurn I've got to bring this
Speaker 1: up with respect to the senior senator from New York
Speaker 1: quote head clown, Chuck Schumer. I'm trying to think of
Speaker 1: Richard Nixon tweeting that head clowns. Sam Irvins, right, Mr
Speaker 1: Gurrow pick up on this observation of our last two
Speaker 1: president elect tweets. You know, it's interesting because we've had
Speaker 1: so many conversations with the with the Great Valier, among others,
Speaker 1: about the role that Chuck Schumer will play here. He
Speaker 1: actually has a very close relationship with head clown had
Speaker 1: Cloud and from yes, thank you, So you know, I
Speaker 1: I uh keep it, I'm plumbing. I'm not okay, Chuck Schumer.
Speaker 1: I got in an airplane once, folks, and here's a
Speaker 1: guy who's got every lobbyist in his pocket, and he
Speaker 1: gets on with a plastic bag from a grocery store
Speaker 1: and to you know, from Brooklyn or where Queens are,
Speaker 1: and they were an artisanal apples. This guy's down to earth.
Speaker 1: Whatever whatever anybody's politics, Chuck Schumer is a basic guy.
Speaker 1: How's he going to adapt to the majority republicanist? I
Speaker 1: have a feeling though that I think, Chuck Young, we're
Speaker 1: also as a pragmatist. I'm certainly not a political expert,
Speaker 1: but but I think, um, you know, politicians are entrepreneurs
Speaker 1: in their own right, and they can you know, they're
Speaker 1: they're political entrepreneurs and and they'll understand the way the
Speaker 1: winds are blowing and right now like it or whether
Speaker 1: the winds are blowing in Donald Trump's direction, and so
Speaker 1: I think that there's going to be more There may be. Uh.
Speaker 1: The positive surprise this year is that there may be
Speaker 1: more common ground between the Democrats and Donald Trump. Donald
Speaker 1: Trump may have more problems with his own caucus uh
Speaker 1: than he he might have with Democrats. And that might
Speaker 1: seem like an outlandish thing to say, but again, I
Speaker 1: think most politicians job number one is getting re elected. Uh.
Speaker 1: And and certainly U, this election took a lot of
Speaker 1: people by surprise. That's been easy over the last eight, twelve,
Speaker 1: sixteen years to sort of roll your eyes at Washington.
Speaker 1: Not a lot has been happening in Washington. It's been
Speaker 1: a glacial pace. There's been a lot of discord and
Speaker 1: in fighting. Do you expect Washington to play a more
Speaker 1: important role to Wall Street after we get through the
Speaker 1: first three agenda items here, the tax reform, the infrastructure spending, UH,
Speaker 1: perhaps that a change to Obamacare. Do you think that
Speaker 1: Washington is going to remain important throughout this throughout these
Speaker 1: next four years. It's a very good question. I certainly, Um,
Speaker 1: I hope so for I certainly think for the first
Speaker 1: year it will be extraordinarily important. I think after that
Speaker 1: one hopes that that Washington becomes less important, and especially
Speaker 1: you know, if you're a fan of free markets and
Speaker 1: think that free markets are better ways to allocate capitals,
Speaker 1: okay capital than than relatively small groups of people. UM,
Speaker 1: I think that would be a welcome, welcome change. I
Speaker 1: have a feeling that will be the case, just to
Speaker 1: the extent to which uh, the president les political capital
Speaker 1: will never be greatest as it as it is on
Speaker 1: on day one of his presidency. Uh, he'll have both
Speaker 1: houses of Congress in which to effect change. I think
Speaker 1: after that it's I think it's President Obama found it
Speaker 1: gets hot. Once you kind of go long ball in
Speaker 1: the first couple of years of your administration, it's hard.
Speaker 1: It's harder to get big things done after that. Can
Speaker 1: we bring it back? And when did the next sexual
Speaker 1: adjacent try will bring him back? To the equity markets?
Speaker 1: Are you fully invested now? I'm I'm pretty only invested.
Speaker 1: I have some cash available, But I also think that
Speaker 1: this is not a market in which I would start
Speaker 1: fooling around on the short side, because, as we discussed, UH,
Speaker 1: this has been a bull market. No one's loved that
Speaker 1: you're at all time highs, and yet it's not part
Speaker 1: of the zeitgeist of the of the culture. No one's talking,
Speaker 1: you know, cocktail parties. People are not talking about stocks,
Speaker 1: although choice of Trump Trump Trump Trump Trump Trump Trump
Speaker 1: trump Trump for their smartphone or you know, yeah, real estate, right,
Speaker 1: you know, but people are not talking about the last
Speaker 1: stock they bought. Jason Trenitt with this final thoughts with
Speaker 1: Frutiguous Research Partners, let's go back to the equity markets.
Speaker 1: Does Graham, Dot and Coddle matter anymore? It's something you
Speaker 1: and I mean, you and I are the only two
Speaker 1: people who actually read the puppy starts on railroad stocks
Speaker 1: in or whatever. Does all this stuff you and I
Speaker 1: learned matter anymore? Well, it hasn't. Unfortunately, it hasn't mattered
Speaker 1: a lot over several several years, and one hopes right
Speaker 1: that it becomes more important once again. Ultimately, stock prices
Speaker 1: are a function of future cash flows and an interest rates.
Speaker 1: That's that's what they you know, That's that's what we
Speaker 1: should we should be focused on. Um I think part
Speaker 1: of the problem with financial repression, part of the problem
Speaker 1: with with quantitative easing is that you've essentially enforced a
Speaker 1: certain purgatory on companies in which everyone had a low
Speaker 1: cost of capital, and it makes it very very difficult
Speaker 1: to outperform and pick stocks. And and David, what I
Speaker 1: would point out here is it's getting long in the tooth.
Speaker 1: For us to make jokes about it is fine, but
Speaker 1: our listeners who are savers and retirees, there's nothing funny
Speaker 1: about this. Walk me through your your asset allocation matrix
Speaker 1: as it stands right now. I'm looking here at what
Speaker 1: your bullish on your mid cap stocks. If what have
Speaker 1: you adjusted here going into the New y Yeah, I
Speaker 1: think it's good quite I and I generally have I
Speaker 1: would say throughout my career part of its worth, I've
Speaker 1: had a general bias towards being overweight large cap over
Speaker 1: small and mid I think this this time maybe a
Speaker 1: little bit different because small and MidCap stocks obviously have
Speaker 1: more domestic content, probably have a little bit less of
Speaker 1: the risk that may be associated with a change in
Speaker 1: the world order. Put it kindly, as far as trade
Speaker 1: UH is concerned, UM, I also think that they're probably
Speaker 1: gonna benefit the most at the margin from changes in
Speaker 1: regulatory policy as well as corporate taxes. A lot of
Speaker 1: large companies already have relatively low effective tax rates. They're
Speaker 1: able to use um the three and half million words
Speaker 1: in the U. S tax Code to get their their
Speaker 1: their taxes lower. Small MidCap companies don't have that flexibility
Speaker 1: and should benefit more in my opinion, UH this year
Speaker 1: as we make some of those structural changes. And here
Speaker 1: I'm looking at your your list here the best and
Speaker 1: worst performers at the last quarter, the fourth quarter two
Speaker 1: thousand and sixteen. What stands out to me in the
Speaker 1: best category financials and industrials and in the worst it's healthcare.
Speaker 1: Do you expect that to persist here as we move
Speaker 1: into two thousand and seventeen. I think that seems fair.
Speaker 1: I mean, certainly, UM, I'm very bullish and financials, especially
Speaker 1: because of rates or it's because of I think net
Speaker 1: interest margins are going to expand. And I think also
Speaker 1: again you're gonna have a very significant change as far
Speaker 1: as the regulatory UH regulatory regime is concerned. The stocks
Speaker 1: have gone up a lot, but they're still trading probably
Speaker 1: at a round book value. So in my view, there
Speaker 1: there's quite quite a bit of room. Industrials are interesting
Speaker 1: because they're outperforming while the dollar, you're generally speaking, who's
Speaker 1: been strengthening. UH. That is a change. I think that's
Speaker 1: probably a bet on the fact that you're going to
Speaker 1: have UH. The US may lead the global economy out
Speaker 1: of its dold rooms, and the global economy may do
Speaker 1: a little bit better healthcare. I think the headline risk
Speaker 1: is is very significant, certainly in the in the next
Speaker 1: you know, three to six months, and we're going to
Speaker 1: see what we're going to get. UH. Certainly repealing Obamacare
Speaker 1: seems to be number one on the on the list.
Speaker 1: It will be replaced at some future date, will be announced,
Speaker 1: and that will start a whole new round of lobbying,
Speaker 1: in a whole new round of of I guess questions
Speaker 1: about the sector in the way it's going to be structured,
Speaker 1: good for lawyers. Yeah, and you you like Japan right now,
Speaker 1: I'm looking at tell again at let's see one sixteen
Speaker 1: fifty seven. Is it? Is it principally because of the
Speaker 1: weak currency that Japan is attractive to you right now?
Speaker 1: It's yeah. I think there are other things to that
Speaker 1: recommend Japanese equities, like valuation, like a low dividend pay
Speaker 1: out ratio. But the fact that they have reverse course
Speaker 1: on negative interest rates, at least for the time being,
Speaker 1: by focusing on targeting the yield curve as supposed to inflation,
Speaker 1: I think is a very meaningful, meaningful change. I do
Speaker 1: think their experimentation with negative interest rates last year was
Speaker 1: a policy error, and I think the fact that they're
Speaker 1: moving away from that as a positive. Jason, trying to
Speaker 1: thank you so much. Thank you. It was fatiguaus Razors
Speaker 1: with their Cherman. And of course is it ten years?
Speaker 1: It's ten and a half, ten and a half. I'm
Speaker 1: still like a little kid. I count the half of years.
Speaker 1: It's over ten, ten and a half years. Jason, thank
Speaker 1: you so much, sir. Please to have in studio with
Speaker 1: his new Stupet Warrior. He's a drivtive strategist at BNP
Speaker 1: Para BA out with his outlook for two thousand seventeen.
Speaker 1: Always created speak these two. Thanks for coming in. Thank
Speaker 1: you very much. Let's start with volatility. I'm looking at
Speaker 1: VIX right now at twelve, settling around twelve. We've seen
Speaker 1: this degree of complacency for a few weeks now. When
Speaker 1: you're looking at volatility in the year, head is that
Speaker 1: the indicator that you look to, how how useful is
Speaker 1: the VIX to you? And what do you foresee with
Speaker 1: regard to volatility here in two thousand and seventeen. Yeah,
Speaker 1: So I think a couple of things are really interesting,
Speaker 1: especially when you look at the price action at the
Speaker 1: end of last year, particularly the fact that we've had consecutively,
Speaker 1: i think two years in a row now of higher
Speaker 1: real life volatility and the markets also drifting higher. So
Speaker 1: that is in stark contrast to the QII period where
Speaker 1: we had the market drifting higher on lower volatility. So
Speaker 1: I think that trends likely to continue in the future.
Speaker 1: And as far as the VIX is concerned, Um, you know,
Speaker 1: the key driver of that that measure is short data
Speaker 1: realized volatility. And what we've seen both in the SMP
Speaker 1: and the indices globally if you look at you know,
Speaker 1: the v two X in Europe, UM in the eurostocks,
Speaker 1: or the VIX in the SPIRE is the fact that
Speaker 1: correlation is solo sectors are diverse. Um, there's this dispersed
Speaker 1: performance and that's really kind of dampening volatility in really
Speaker 1: either direction. You look at financials in particular, in your
Speaker 1: outlook how are they how are you us financials looking
Speaker 1: to you right now? Yeah, so on on the ball side,
Speaker 1: it's interesting that quite rich, and especially when we look
Speaker 1: at et fs that are linked to financials, uh, those
Speaker 1: are rich as well. And I think part of that
Speaker 1: has to do with the fact that whenever you have
Speaker 1: an asset that really breaks out of a historical range
Speaker 1: range trading which financials had been in some time, the
Speaker 1: valve resets higher and you you have to kind of
Speaker 1: wait to settle into a new price range before the
Speaker 1: mark really settles into into a more comfortable environment. In
Speaker 1: your research note, and folks, we need a math warning here,
Speaker 1: we're not going to do the legitimate math that Mr
Speaker 1: Worther does. From there a lot of great characters. Everything's vague, gamma,
Speaker 1: you know, blah blah blah. But down at the bottom
Speaker 1: of your note you bury the headline, which is what
Speaker 1: pros like you do is try to game sector rotation.
Speaker 1: I find in the media pundits are either clueless or
Speaker 1: glib about sector rotation. This is a great way to
Speaker 1: enjoy losing money. How do I not lose money gaming
Speaker 1: sector rotation? Well, I think you know, and I've mentioned
Speaker 1: this before, is One of the key things is that
Speaker 1: you need to look at when looking at sector rotation
Speaker 1: is trying to find the right variable that describes the
Speaker 1: rotation itself. So one of the things that we look at, um,
Speaker 1: you know, a couple of things. We look at our
Speaker 1: terms of trade, UM, economic surprise, dollar strength, etcetera. And
Speaker 1: we try to figure out from those variables, UM, you
Speaker 1: know what that actually means and what's the real driver?
Speaker 1: You know, is it sector rotation itself is a value
Speaker 1: versus growth UM. And I think what we've really seen
Speaker 1: over the past a couple of weeks or months, first say,
Speaker 1: is value versus growth rather than actual sector sector rotation.
Speaker 1: So it's a matter of how you break up the
Speaker 1: SMP complex. But but I think in this in this context,
Speaker 1: it's really the kind of cyclicals versus defensives, value versus growth.
Speaker 1: You highlight the big macro event of the year ahead,
Speaker 1: that being the elections in France. Of course, been more
Speaker 1: elections and votes across Europe. I wonder what we've learned,
Speaker 1: what you've learned from the string of votes we've had
Speaker 1: here in two thousand and sixteen, the breaks a vote,
Speaker 1: the referentument Italy, the US presidential election. What has that
Speaker 1: taught you and how has that affected the way that
Speaker 1: you strategize you're going into the election France. So I
Speaker 1: think it's really interesting in the context, especially in the
Speaker 1: volatility contexts, in the sense that implied tends to be
Speaker 1: elevated ahead of the event, and regardless of what happens
Speaker 1: in the event itself, Implied collapses thereafter. Rather whether the
Speaker 1: event was well hedged, whether the event was underhedged, as
Speaker 1: it was in Brexit. Um. You know, we seen that
Speaker 1: investors have paid up ahead of the event, and you really,
Speaker 1: regardless of the outcome, UM, you know, Implied has been crushed. Um.
Speaker 1: And I think that has to do partly with the
Speaker 1: fact that all these events are so well televised that UM,
Speaker 1: you know. And yeah, I don't know, continue please, I
Speaker 1: don't mean to interrupt him. I would say, with risk managers, UM,
Speaker 1: you know, both on the buy side and the cell
Speaker 1: side being um, more stringent than they were maybe a
Speaker 1: few years ago, it's you know, how do you go
Speaker 1: in the day after the event, having said I didn't
Speaker 1: hedge or I didn't buy protection, how the event. This
Speaker 1: goes to from electrical engineering, the idea of slew rights,
Speaker 1: which is the rated change of an electrical circuit. This
Speaker 1: was in the movie The Big Short David. The idea
Speaker 1: here that your world was always gained by having an
Speaker 1: information advantage. Just in the last six or seven years
Speaker 1: his your information advantage shrunk because of digital media, digital
Speaker 1: information and of course the fact that everyone listening owns
Speaker 1: a Bloomberg terminal not. That's actually a very good question
Speaker 1: and something we think about pretty much on a daily basis,
Speaker 1: because um, I would say the you know, financial media
Speaker 1: has become um much more aware, UM and you know,
Speaker 1: cognizant of some of these other indicators, looking at the VIX,
Speaker 1: looking at certain applied volatility metrics, UM. And really that
Speaker 1: kind of initial high level analysis that a lot of
Speaker 1: people would do is taken down one or two steps.
Speaker 1: So on that basis that there really is less informational
Speaker 1: advantage per se, and you really have to kind of
Speaker 1: do your work. So I think it really differentiates to
Speaker 1: investor classes between those who do it and those who don't.
Speaker 1: We're talking yesterday, you and I about the prospects here
Speaker 1: for a move of overseas profits back to these US
Speaker 1: companies to have a sort of holiday. They would allow
Speaker 1: them to bring some those profits back into the the US.
Speaker 1: Walk us through how you see the that that playing
Speaker 1: out with the effects would be on the bottom lines
Speaker 1: for for these companies. Were they to do that, we're
Speaker 1: we to get that kind of holiday. So this is
Speaker 1: actually one of the interesting things, especially from a volatility perspective,
Speaker 1: when you when you think about buy backs and the
Speaker 1: way that they're generally um orchestrated their VALL dampening because
Speaker 1: companies tend to buy back more stock on than the
Speaker 1: stocks lower the you know, on an intra day basis,
Speaker 1: and and um buy back less when the stocks higher.
Speaker 1: So on that basis you have this this effect of
Speaker 1: the implied VALL of those names are actually tend to
Speaker 1: be lower than the implied VAUL of other names that
Speaker 1: aren't aren't actually conducting a buyback. So from that basis,
Speaker 1: if we have a number of large caps that bring
Speaker 1: back um, you know, say, of the trillion dollars of
Speaker 1: overseas cash they bring back between um you know, two
Speaker 1: hundred and five hundred billion of that um in of
Speaker 1: of that sixty cents in the dollar is actually spent
Speaker 1: on buy backs and special dividends, then I think that
Speaker 1: would be vall dampening and that would be positive for
Speaker 1: the market. That's likely to happen. I mean you when
Speaker 1: when you think about how much of this could be
Speaker 1: for buyback versus capital expenditure, you satisfied with that ratio
Speaker 1: there So, and this is the key question I think.
Speaker 1: You know, with the proposed tax reform under the Better
Speaker 1: Way plan, if capex is expensed immediately, then you have
Speaker 1: you have a situation where companies will actually be incentivized
Speaker 1: to do more capex. And on that basis, so you know,
Speaker 1: in the two thousand four tax repay creation holiday you
Speaker 1: had sixty cents in the dollar actually returned to shareholders.
Speaker 1: This time around, you might see Stewart, thank you so much, Stewart,
Speaker 1: Orther BMP Perry Boad. We're looking at at retail here
Speaker 1: in the wake of the holiday season, obviously looking at
Speaker 1: Macy's as we just heard uh prospects there were some
Speaker 1: big layoffs at Macy's. I want to bring him now,
Speaker 1: John curn and he is with Collen forres a retail
Speaker 1: and let's se John, great to speak with you, great
Speaker 1: to be on. Let's let's start with Macy's. If if
Speaker 1: we could hear obviously some big headline number jobs going
Speaker 1: away here. What has changed for Macy's here in the
Speaker 1: last couple of quarters, if anything? Or is this the
Speaker 1: continuation of the trouble that department store chain has been
Speaker 1: seeing here for a while. Well, there's a big shift
Speaker 1: to digital and the Amazon's leading that. We at Collen
Speaker 1: we actually forecast Amazon to be the largest apparel retailer
Speaker 1: in North America by the end of two thousand seventeen.
Speaker 1: You have maltrafect declining it essentially a mid single digit
Speaker 1: rate year on year after year since two thousand and fourteen,
Speaker 1: and seeing a big shift away from breaking mortar to digital,
Speaker 1: and Macy's casually in that shift. What are they doing
Speaker 1: to to curb that? We know about the rivalry here
Speaker 1: between Amazon and Walmart. Walmart investing heavily to the tune
Speaker 1: of billions in building up and changing its website. Is
Speaker 1: Macy's trying to do anything to to change its online presence?
Speaker 1: I actually don't cover Macy's myself, my colleague Oliver chen does.
Speaker 1: But everyone's trying to move more towards digital, is trying
Speaker 1: to shut brick and mortar doors. There's way too much
Speaker 1: square footage in general in North America. So you're going
Speaker 1: to continue this is um this is just the beginning
Speaker 1: of a door closure across retail. Two quick questions here
Speaker 1: in the time we got John that's so important. We're
Speaker 1: thrilled that you're on with us with Urine Oliver Chen's work.
Speaker 1: First of all, within the analysis, are we underweighing the
Speaker 1: impact of Amazon? Is this just really, at the end
Speaker 1: of the day, just about Amazon. That's not all about Amazon,
Speaker 1: but certainly a lot of it is. And it's a
Speaker 1: lot about the growth of the director consumer platforms of
Speaker 1: a lot of the brands are out there like a
Speaker 1: Nike and on their armor. Um, as more brands expand
Speaker 1: their own online efforts, it's it's obviously negative. If I
Speaker 1: go to the back of a cow and sheet and
Speaker 1: I'm gonna look at a given retail operation, revenues ain't
Speaker 1: happen in negative two point same s sales, etcetera, etcetera, etcetera.
Speaker 1: Where down the income statement do they get this fixed
Speaker 1: or is it over in the balance sheet with real estate?
Speaker 1: What's the solution for retail America to intition this to
Speaker 1: have product that people want to buy? You sound like
Speaker 1: you take it doesn't work in the consumer space if
Speaker 1: we just haven't seen it, at least in the retail space.
Speaker 1: We've seen seer struggle to monetize their real estate. The
Speaker 1: market caps down to eight hundred million from a peak
Speaker 1: of north ny billion, you know, a decade ago. Um,
Speaker 1: But financial engineering in retail we've yet to ever really
Speaker 1: see work. Um. So that you have to have product,
Speaker 1: you go on, you go back, forget about you know,
Speaker 1: closing a thousand stores, laying off x thousands of people.
Speaker 1: As an industry, they're supposed to find the mother of
Speaker 1: all products. How do you do that? Well, you have
Speaker 1: to own Brandon intellectual property. That's how you do it. Um.
Speaker 1: That's those are That's who's winning now, whether it's the Nikes,
Speaker 1: the under Armors, or the other you know, the brands
Speaker 1: that are out there. But the brick and mortar retail
Speaker 1: community continues to struggle. Help us understand here how retailers
Speaker 1: are looking ahead to Donald Trump's policies. We talk a
Speaker 1: lot about the effective of those potential policies on the
Speaker 1: economy large, but when it comes to retailers, what are
Speaker 1: they most concerned about? What could make the biggest difference
Speaker 1: for them? Here? Going forward. Yeah, it's funny this year.
Speaker 1: I think usually it's fashion trends, consumer trends, they drive
Speaker 1: stock price performance in retail consumer discretionary, but changes in
Speaker 1: Washington policy, those potential changes have a norm of simplications
Speaker 1: for retail in the consumer discretionary space. If border tax
Speaker 1: adjustments are put through indiscriminately and you're just taxing imported
Speaker 1: goods from China and the Far East, it will have
Speaker 1: major negative implications for everybody in this group, and you
Speaker 1: can start slashing your earnings estimates pretty much indiscriminately. He's immigration,
Speaker 1: A big issue? Is that something that is it all
Speaker 1: on the horizon here for retailers. People are thinking about it,
Speaker 1: but there's there's other issues like the border adjustments that
Speaker 1: I think people should be worried about. I think the
Speaker 1: other issue people should be very worried about, at least
Speaker 1: the retail management teams. You're an absolutely booming consumer macro environment.
Speaker 1: Two thousand sixteen saw on acceleration and wages. It's all
Speaker 1: on acceleration and consumer spending. You're seeing a lot of
Speaker 1: really bad numbers from a lot of retailers. So what
Speaker 1: actually happens when the cycle does inevitably roll over. Things
Speaker 1: are going to get really ugly in retail. John Gore,
Speaker 1: thank you very much for joining us here. Again, a
Speaker 1: lot of big news. It's a gloomy that's gloomier than
Speaker 1: Howard divided. Holidays are over. Yeah, it's gloomier than Howard divisied.
Speaker 1: It's difficult commentary er anyway. John cronin there with the
Speaker 1: accounting company joining us. Song all the retail news we've
Speaker 1: done here in the last twenty four hours. Who you
Speaker 1: put your trust in matters. Investors have put their trust
Speaker 1: in independent registered investment advisors to the tune of four
Speaker 1: trillion dollars. Why. They see their roles to serve, not sell.
Speaker 1: That's why Charles Schwab is committed to the success over
Speaker 1: seven thousand independent financial advisors who passionately dedicate themselves to
Speaker 1: helping people achieve their financial goals. Learn more at find
Speaker 1: your Independent Advisor dot com. I'm gonna bring in Drew
Speaker 1: Madis now he's deputy chief US economist at U B
Speaker 1: S Troop. Thanks very much for being with us. I
Speaker 1: know you're processing the the unemployment numb as we got
Speaker 1: this morning, so we'll give you time to do that.
Speaker 1: Let me start by asking you about what we learned
Speaker 1: from the Federatory of yesterday. We've been talking about the
Speaker 1: role of these minutes from that meeting at which that
Speaker 1: that did decide to raise rates. What was unclear to
Speaker 1: you going into getting those minutes yesterday and what did
Speaker 1: you learn when they came out at two o'clock. Well,
Speaker 1: I mean, I think what people were mainly concerned about
Speaker 1: was why there were three rate hikes all of a sudden, um,
Speaker 1: and there had been two. Uh. And I think the minutes,
Speaker 1: you know, what the minute suggested was that that wasn't
Speaker 1: some sort of error, that that was in fact what
Speaker 1: they meant to do, or that it was consistent with
Speaker 1: what what how they were thinking of the world. Uh.
Speaker 1: You know, our view is that they'll still be two
Speaker 1: rate hikes next year. Uh. They they've talked a pretty
Speaker 1: aggressive rate hike schedule pretty much every year. Uh, and
Speaker 1: they haven't been able to get it done. Um. And
Speaker 1: you know, we can debate why that why they haven't
Speaker 1: been able to get done, but I think it's because
Speaker 1: they tend to focus more on financial conditions than they
Speaker 1: have in the past. Um, and that that creates a
Speaker 1: circularity and kind of the whole structure, which which really
Speaker 1: prevents them from moving that much more restie circularity, uncertainty
Speaker 1: that the fit acknowledging that that exists. And it's a
Speaker 1: complicating factory. How complicating is it for you here? Has
Speaker 1: you come up with your growth forecast as you try
Speaker 1: to forecast at what you think is gonna happen here
Speaker 1: in two thousand seventeen, I've tried to make it simple
Speaker 1: on myself. Uh, and so I've only done the work
Speaker 1: on things that have been kind of fully fleshed out. Uh,
Speaker 1: you're you're in a vacuum. Well, you know, the problem
Speaker 1: is there's there's a lot of numbers out there, but
Speaker 1: there's not a lot of detail behind some of the numbers.
Speaker 1: And you know, I think until we get more clarity
Speaker 1: on some on some of the proposals that you know,
Speaker 1: the more cautious approach is probably the one that's best warranted.
Speaker 1: I mean, we have penciled in some acceleration growth from Trump, uh,
Speaker 1: from some of his policies for next year. And we have, um,
Speaker 1: we've penciled in a little more in two thousand eighteen,
Speaker 1: um from his policies. But you know, at the end
Speaker 1: of the day. We have an economy operating towards full capacity.
Speaker 1: The employment rate is pretty much as low as you
Speaker 1: anyone probably wants to see it get um and you know,
Speaker 1: the inflation numbers are moving back up towards the fence
Speaker 1: target zone. So it's pretty you know, for us, it's
Speaker 1: hard to argue that we're far away from some sort
Speaker 1: of you know, natural state and the economy, and that
Speaker 1: means any sort of further stimulus just of and has
Speaker 1: the same bank Ford Spock drew. What's the twelve months
Speaker 1: forward GDP view of UBS. We are just below too
Speaker 1: and a half percent, so about a hundred basis points
Speaker 1: of acceleration versus this year. You are optimistic compared to
Speaker 1: many we speak to our sub two and a half percent.
Speaker 1: What is the requirement to attain your optimism or to
Speaker 1: exceed it? Is it just about investment? You know, to
Speaker 1: be honest with you, Tom, it doesn't take a lot.
Speaker 1: Our hundred basis point acceleration is pretty much. We don't
Speaker 1: have ay repeat in UH energy price movements that could
Speaker 1: generate the same kind of CAPEX decline, which doesn't seem
Speaker 1: like it's likely that we could make that happen, even
Speaker 1: if we wanted to um and uh that we uh,
Speaker 1: you know, we don't you know, effectively, It's just that
Speaker 1: we don't repeat the bad news twice. Uh. You know,
Speaker 1: So that acceleration and growth has nothing to do with
Speaker 1: anything getting better. It has things to do. It has
Speaker 1: everything to do with two things inventory, uh, inventory movements
Speaker 1: and capex not repeating what we're completely unusual years. Uh.
Speaker 1: And so you know, when I look at the fact
Speaker 1: that you know, we are above consensus, I kind of
Speaker 1: wonder what implicitly people are assuming on the consensus about
Speaker 1: the future that you know that they are confident enough
Speaker 1: about that they can put it into their forecasts. I
Speaker 1: think a lot of the consensus is, let's put it
Speaker 1: this way, a lot of the consensus is penciling and
Speaker 1: something bad happening, but they wouldn't be able to define
Speaker 1: what that something bad is. And I think that that's
Speaker 1: a dangerous way to forecasts. When you look at me,
Speaker 1: let me play off of that a little bit. It's
Speaker 1: unclear what the something bad maybe, but I mean we
Speaker 1: have some we have some possibilities here. Trade is certainly
Speaker 1: a big one. I mean, that must be a huge
Speaker 1: weight on you as your forecasting well except for the
Speaker 1: fact that you know, we don't really know what's going
Speaker 1: to happen there. We don't know how much of this
Speaker 1: um you know, how much is talking, how much is
Speaker 1: going to be We're seeing contours this week, though, aren't
Speaker 1: we with GM and Ford and and the rest. Well,
Speaker 1: we'll see. I mean, you know, I'm hesitant to basically
Speaker 1: say that voluntary actions by by firms are should be
Speaker 1: thought of in one direction or the other. I mean,
Speaker 1: that's that's not policy, that's that's firms responding in ways
Speaker 1: that they think our best. UM. So you know, I
Speaker 1: hesitated to comment on anything that they're doing individually, but
Speaker 1: I would say that, you know, until we see a
Speaker 1: tariff or until we see something concrete um that you know,
Speaker 1: I think it's you know, first of all, I mean,
Speaker 1: this could take six months, it could take a year.
Speaker 1: You know, you don't know the time frame for getting
Speaker 1: for for making some of these things happening. Let's talk
Speaker 1: about employment. Here's we look ahead to Jobs Day at tomorrow.
Speaker 1: What are you gonna be looking for here? We're talking
Speaker 1: with Annie Blanche Flowers. Tom said a few moments ago
Speaker 1: about part time is um about wage growth, that what's
Speaker 1: going to attract your your attention tomorrow when those numbers
Speaker 1: come out, well, I'll be blown. I'm not gonna worry
Speaker 1: too much about part time employment because part time employment
Speaker 1: isn't particularly elevated right now. UM. So I'm gonna be
Speaker 1: just looking at the at the overall jobs numbers. I'm
Speaker 1: gonna be focusing probably more on the household survey of
Speaker 1: the unemployment rate. I want to see what's going on
Speaker 1: there with participation, um, and with the employment of population ratio.
Speaker 1: I think we are in a stage in the labor
Speaker 1: market where we should be seeing lower levels of payroll
Speaker 1: growth because we're running out of the easy people to hire. Uh.
Speaker 1: And so now in order to hire someone, you have
Speaker 1: to look a little harder. Uh. And we see that
Speaker 1: that's consistent with the job openings number, the quits ratio,
Speaker 1: and kind of the amount of time it takes to
Speaker 1: fill position. All of you know, in particular that last
Speaker 1: one has been less quite substantially. We saw that sort
Speaker 1: of precipitous drop last month for the month before, and
Speaker 1: I wonder what you think that portends for for this
Speaker 1: month going forward? Here where at four point six now
Speaker 1: surveys four point seven percent, do you think we'll see
Speaker 1: an uptake here. Well, it's funny because uh, you know,
Speaker 1: when you um, you know, you know, my guess is
Speaker 1: that it will stay where it's at. Uh. One of
Speaker 1: the interesting risks though, is that usually are not usually,
Speaker 1: but you know, it's not inconceivable when you see a
Speaker 1: drop like that, that that's the start of a faster
Speaker 1: pace of decline. Uh. And if you look back historically speaking,
Speaker 1: when you see big drops in the unemployment rate, oftentimes
Speaker 1: what economists will do will be the pencil in a
Speaker 1: rebound kind of normalize it back to some sort of
Speaker 1: trend they had in the back of their mind. Historically speaking, though,
Speaker 1: you're just as likely to see a further decline or
Speaker 1: or an acceleration on on the process. And that that
Speaker 1: is just the first step if you want to call
Speaker 1: it to dam breaking um for a more rapid decline
Speaker 1: and unemployment rate. So, uh, we are anticipating an unchanged
Speaker 1: unemployment rate, which which means that we're saying it's it's
Speaker 1: neither the dam breaking nor is it some sort of
Speaker 1: false reading. Um. But if it were to drop further,
Speaker 1: that would be something that would that would make us
Speaker 1: really have to question, like how much further, the fact
Speaker 1: can watch that thing drop before they have to get
Speaker 1: serious potentially moving more quickly. Can I read into your
Speaker 1: prescription then that you think we're full unemployment? Then if
Speaker 1: you think we're going to stay where we are, to
Speaker 1: be honest with you, I think we're probably a low
Speaker 1: full employment. I think you know we have the people
Speaker 1: in the labor force, um we have, we we don't
Speaker 1: have enough. What's been going on in the labor forces.
Speaker 1: We have this nice steady pace of job growth, but
Speaker 1: that's been happening because we've had fewer layoffs and fewer
Speaker 1: higher less hiring. So the dynamics of the labor force
Speaker 1: are actually pretty low right now, even though the labor
Speaker 1: market itself looks pretty healthy. The net numbers look good,
Speaker 1: but the gross numbers look bad. Uh. And what I
Speaker 1: would like to see is a little more job switching.
Speaker 1: I'd like to see a few more people getting fired
Speaker 1: and a few more people getting hired, because that's a
Speaker 1: more dynamic market. That's one that's better for everyone. How
Speaker 1: do you respond to the wonderful aggregate analysis you has
Speaker 1: just given us versus the partitioning of the American labor
Speaker 1: force into those employable those on the margin that want
Speaker 1: to be employable all the analysis should do every day
Speaker 1: and a huge body of Americans that aren't part of
Speaker 1: the discussion. Do you fold that in? Uh, you know,
Speaker 1: it's it's hard to separate it out when you're trying.
Speaker 1: I mean, we're trying to predict policy, right and so um, certainly,
Speaker 1: you know, I mean from a philosophical perspective, what you
Speaker 1: want is a labor market where everyone can find work
Speaker 1: if they're willing to work. Um. And that's that's the
Speaker 1: idea of full employment, right that you that you've reached
Speaker 1: a frictional level of unemployment, and then there's some people
Speaker 1: who are temporarily unemployed because they need to be for
Speaker 1: whatever reason. Um, and the rest of everyone who wants
Speaker 1: to work can work. Uh. And and that's the that's
Speaker 1: you know, probably you know, ideal is probably the wrong
Speaker 1: way of putting. But I'll go I'll go with what
Speaker 1: you just said, Drew. But are we getting the jobs
Speaker 1: if we want to work that we want? Or is
Speaker 1: David Blancheflower said yesterday, is it about getting marginally more
Speaker 1: hours of work? And we can't get that. I mean,
Speaker 1: have we become almost two labor efficient? Well, The problem
Speaker 1: is that that's been encouraged. Right, So we have policies
Speaker 1: in place that have defined full work weeks as being
Speaker 1: below thirty hours or being thirty hours, which is a
Speaker 1: sharp change from kind of historical norms. Uh. And that
Speaker 1: has probably led to a bifurcation of labor force between
Speaker 1: skilled and unskilled labor because why would any firm pay
Speaker 1: for the thirtieth hour of work in an unskilled environment
Speaker 1: when that thirtieth hour of work has a marginal cost.
Speaker 1: It's significant. So giving some of that thirtieth hour of
Speaker 1: work is no longer paying them the extra ten to
Speaker 1: fifteen an hour. It's paying them the fifteen dollars an
Speaker 1: hour and a whole range of mandated benefits um. And
Speaker 1: So because we put a break point in, we've created
Speaker 1: an artificial um stress in the system that encourages firms
Speaker 1: to think in terms of not giving anyone thirty hours
Speaker 1: unless you can justify it from a skills perspective. Let
Speaker 1: me ask you just to to to pivot here a
Speaker 1: little bit here at the beginning of two thousand and seventeen,
Speaker 1: after the holiday season, how's the consumer looking to you
Speaker 1: in the US right now? I mean, I think the
Speaker 1: consumer looks good. Uh. You know when I said, when
Speaker 1: I was talking about the the the gross flows into
Speaker 1: another labor force, you know, and we saw it in
Speaker 1: claims today. No one's being fired. They're very low levels
Speaker 1: of layoffs in the economy relative to the population size. UM.
Speaker 1: There are decent wage gains. They're not they're not incredibly great,
Speaker 1: but they're decent given that environment. UM. And uh, you
Speaker 1: have expanding access to credit for consumers. UM. You add
Speaker 1: all that up and you have a very steady consumption
Speaker 1: profile going forward. And that's one of the reasons why
Speaker 1: our growth forecast accelerates is because we do have that
Speaker 1: steady consumer built into our outlook. That just seems to
Speaker 1: be the most basic case. And of course, with the
Speaker 1: consumer being the economy, UM, that provides you with a
Speaker 1: nice four momentum into the into two thousand seventeen. Thank
Speaker 1: you so much, dramatics UBS greatly appreciate it. Here pleased
Speaker 1: to be joined out by Mark Kiesel. He's the CEO
Speaker 1: for Global Credit at PIMCO, joining us from Newport Beach, California,
Speaker 1: with a new note navigating change Opportunities and quality credit,
Speaker 1: Specialty finance and Mortgages. Great to speak with you. Mark. Hi, David,
Speaker 1: good morning. Let's start with your appetite for credit, how
Speaker 1: it's changed your in the new year, and I'm wondering
Speaker 1: if your appetite for quality credit has changed in particular. Well, David,
Speaker 1: a year ago, we were quite optimistic on credit. UM
Speaker 1: high yield in two thousands sixteen was the strongest performing
Speaker 1: market up fifteen sixt So a year ago, when energy
Speaker 1: prices were hitting the lows, we were buying aggressively high yield.
Speaker 1: Now we're de risking. We basically think under Trump the
Speaker 1: market faces a lot more two way risks. There's positive
Speaker 1: scenarios under Trump, with tax reform and confidence picking up,
Speaker 1: but also there's negative. So we have been de risking.
Speaker 1: We think a lot of good news is christ then, folks.
Speaker 1: De risking is sort of like in the airline business
Speaker 1: when you deplane. What the hell is de risking? Mark? So, Tom,
Speaker 1: what we've been doing is we have been selling into strength.
Speaker 1: UM energy markets have basically gone from twenty six on
Speaker 1: oil to fifty two. We've been selling into that strength,
Speaker 1: and we've been upgrading the overall quality of our portfolio. Mark, Mark,
Speaker 1: I'm marketing as I'm busting his chopped folks, because there's
Speaker 1: a general council it ogre, ogre and miserable out in
Speaker 1: Newport Beach, California, saying, don't say we sell bonds, but
Speaker 1: marks a good sport about it. Let me de risk
Speaker 1: over to David, when when you look at that, at
Speaker 1: the reasons for de risking as you put it in,
Speaker 1: what what are the major ones? Is it? Is it
Speaker 1: the prospect from more political risk here in the new year?
Speaker 1: Is it? Is it central bank policy? What's the driving
Speaker 1: force there behind you doing that? So David just just
Speaker 1: on bonds alone, if you go pre election, we were
Speaker 1: really globally hitting limits of global que There were trends
Speaker 1: in place already for higher rates even before Trump. The
Speaker 1: global economy was gradually healing from very depressed levels. We
Speaker 1: have rising global p m I data, PPI data OPEC
Speaker 1: deal to me was a big game changer. That that
Speaker 1: is the return of the cartel. You're seeing earnings bottom
Speaker 1: and then you have Trump surprise with the win. Now
Speaker 1: you've got animal spirits kicking in, you've got business confidence improving,
Speaker 1: consumer confidence improving, and you've got the prospect for the
Speaker 1: first time in eight years of a very pro business
Speaker 1: pro growth initiatives going through. So to me, I think
Speaker 1: you want to be more defensive. The trend towards higher rates,
Speaker 1: I think is had had been in place even before Trump.
Speaker 1: Trump just accelerates that trend, but critically, and I mean
Speaker 1: it's seriously, Mark, do you have in your head a
Speaker 1: tip point on tenure yield which signals the Trump reflation?
Speaker 1: I know it's not two point four one per cent,
Speaker 1: but is there a number where you say, hey, this
Speaker 1: is for real. Well, we have been basically starting to
Speaker 1: add a little bit of bonds here because we have
Speaker 1: seen the tenure back up a hundred by basis points.
Speaker 1: But I think a lot of this has to do
Speaker 1: with the Fed and will the Fed shift more hawkish
Speaker 1: or more dubbish over time? In my mind, they're gonna
Speaker 1: likely shift more hawkish, and that was clear yesterday in
Speaker 1: the minutes. They clearly highlighted that the risks of growth
Speaker 1: surpassing their forecasts have grown because there is this possibility
Speaker 1: of expansionary fiscal policy. This is happening, by the way,
Speaker 1: Tom at the top at a time when the labor
Speaker 1: markets already tight, So there's this right tail risk out
Speaker 1: there of inflation. I think potentially surprising the FED. And
Speaker 1: also they even mentioned in the minutes yesterday that that
Speaker 1: that has implications for the reinvestment of treasuries and mortgages.
Speaker 1: So I think the market right now, it's priced in
Speaker 1: is two hikes this year and only two hikes next year.
Speaker 1: So you've only got a hundred basis points of hikes
Speaker 1: over the next two years. In my mind, I think
Speaker 1: the risks are that they could go faster. Are you
Speaker 1: going to cash? What role is cash playing in your
Speaker 1: portfolio right now? Well, what we want to do is
Speaker 1: what two thousand sixty improved is the bond managers who
Speaker 1: outperformed most were flexible, nimble, and they capitalized on the
Speaker 1: key moments throughout the year, whether it was the energy crisis, Brexit,
Speaker 1: or Trump. What we want to do now is we
Speaker 1: want to take profits, build up a significant cash position,
Speaker 1: and hang out in what we call the best risk
Speaker 1: reward investments in global fixed income. That would be tips
Speaker 1: because basically we want this this inflation protection. We're upgrading
Speaker 1: quality and corporate bonds, favoring the consumer banks, financials and pipelines,
Speaker 1: and importantly, non agency mortgages and agency mortgages have cheapened
Speaker 1: considerably and offer a very good risk reward right now.
Speaker 1: So these higher quality bonds within global fixed income actually
Speaker 1: are the best place to be right now on a
Speaker 1: risk adjusted basis. David Gern time King were with Mark
Speaker 1: kisel Mark. You know, did it's a migration of yield
Speaker 1: and inflation? Which comes for and what's it mean for
Speaker 1: the return? The inflation adjusted return that our listeners will
Speaker 1: get to yield move higher and then inflation catches up.
Speaker 1: Or do we risk yields moving up but inflation moving
Speaker 1: up faster. That's not good, is it? No, Tom, that's
Speaker 1: not And I think you just highlighted, you know, the
Speaker 1: reason why we have been selling into strength and de risking.
Speaker 1: A main risk for the US economy is that we
Speaker 1: could get a pick up of inflation as a result
Speaker 1: of higher wages. This labor market is very tight, You've
Speaker 1: got rising confidence, animal spirits, and this new fiscal policy.
Speaker 1: We don't know really what's gonna unfold here, but it
Speaker 1: could be quite inflationary. Uh So, the important point is
Speaker 1: that US fiscal stimulus normally works best coming out of recessions.
Speaker 1: This economic expansion is eight years in the making and
Speaker 1: it's coming at a time when the labor markets already tight,
Speaker 1: and that's why the inflation risk is higher today. Are
Speaker 1: you writing the obituary for globalization now in light of
Speaker 1: what we've seen, what we are seeing here when it
Speaker 1: comes to trade, when it comes to this income administration's
Speaker 1: policy towards China, towards Mexico, Are you worried that we
Speaker 1: are going to see a less globalized world. We are worried.
Speaker 1: And in fact, you know, part of pimco secular thinking
Speaker 1: has been that the rise of populism is creates this
Speaker 1: inflationary risk tail. Uh. There has been a shift even
Speaker 1: before the US election away from monitory policy. There are
Speaker 1: limits of global QUEI were shifting gradually towards fiscal Trump,
Speaker 1: you know, could be more reasonable than the market sphere.
Speaker 1: At the same time, his legislative agenda could get deluded.
Speaker 1: As you know, Washington is very unpredictable. There are implementation
Speaker 1: risks with a lot of his policies. So I think
Speaker 1: the big point here is that this is a market
Speaker 1: that can go either way. It can go positive or
Speaker 1: it can go negative. Okay, we got Alicia Manilla on tomorrow, folks.
Speaker 1: I can't begin to describe the excellence of her shop
Speaker 1: at Boston College and their effort on America's retirement planning.
Speaker 1: And I say this with great respect mark for PIMCO
Speaker 1: with your terrific retirement coverage. Uh there help me here
Speaker 1: with Marco Witz the efficient market frontier of where your
Speaker 1: bonds fit in. I mean, if I got equities, I
Speaker 1: got bonds, I got cash. And there's that parabola that
Speaker 1: sideways parabola of most efficient optimal places. How can that
Speaker 1: work given the great distortions we're in right now? So, Tom,
Speaker 1: I think the importance of bonds is that if you
Speaker 1: look all over the developed markets all over the world,
Speaker 1: the populations are aging. Uh no more in the world.
Speaker 1: Is this more apparent than in in Japan, in Europe,
Speaker 1: and and will become a big issue in the United States.
Speaker 1: People are going to need income to retire. Bonds provide
Speaker 1: stability of income, and there's not enough income producing assets
Speaker 1: in the world relative to the demand for those assets.
Speaker 1: So equities are going to do well in a growth spurt.
Speaker 1: But with Trump, you've got this negative scenario of trade restrictions,
Speaker 1: of uh, deterioration in geopolitical bonds will protect investors from
Speaker 1: downside risk and equities. That's the key to bonds is
Speaker 1: because yes, there is upside with Trump and that could
Speaker 1: mean equities do well. But at the same time, Trump
Speaker 1: has a lot of bad risks UH that that the
Speaker 1: market i think is not focused on. And in that
Speaker 1: environment where where the negatives of Trump resurface, bonds will
Speaker 1: then protect UH investors by providing high quality income and
Speaker 1: protect protect from downside if the economy slows. Give us
Speaker 1: the mark case alant look thet PIMCO outlook on European
Speaker 1: corporate credit. We've been following the back and forth the
Speaker 1: the chapter after chapter of the Monte de Pasky situation
Speaker 1: in Italy. What's your attitude toward European corporate credit right now?
Speaker 1: So again similar to what we were talking about earlier,
Speaker 1: we have been selling into strength. So basically, credit spreads
Speaker 1: are at two year tights right now. There's a lot
Speaker 1: of good news priced into the market. That's true not
Speaker 1: only of Europe, but but in the United States as well. UH.
Speaker 1: Within Europe right now, Europe is growing at a slower pace.
Speaker 1: There's more economic upside risk in the United States. With Europe,
Speaker 1: we want to stay in very high quality sectors. We
Speaker 1: have been focused on cable. We have been focused on
Speaker 1: the consumer there because we are seeing a modest improvement
Speaker 1: in the economic data. And banks, really, banks are really
Speaker 1: a pure play on economic growth. As growth gradually heals
Speaker 1: through Europe, banks should do well. They're going to benefit
Speaker 1: from steeper yield curves, higher rates, and in the US
Speaker 1: less regulations. So so banks are a favorite of ours
Speaker 1: in Europe and also in the United States. How about
Speaker 1: that U S China relationship. We haven't talked about China.
Speaker 1: We mentioned at the top of the program the stress
Speaker 1: test the Chinese government has been doing on the what's
Speaker 1: your outlook for China in this year ahead? Are we
Speaker 1: going to see a repeat of what we saw last
Speaker 1: year in two thousand and sixteen with the issues with
Speaker 1: its currency? Do you think so? Fascinating? Uh, David, because
Speaker 1: that was the first two weeks of two thousand and
Speaker 1: sixteen and the markets focused on it again. China over
Speaker 1: the last two days has been intervening. We've seen the
Speaker 1: currency strengthen. The key has been the capital outflow data.
Speaker 1: As the US outlook improves and China is slowing from
Speaker 1: a higher growth level, but albeit slowing, capital is moving
Speaker 1: into the United States. And out of China. Also, their
Speaker 1: property market, you know, is pretty overheated in some of
Speaker 1: these Tier one cities, and so there's a lot of
Speaker 1: capital that is looking to get out of China into
Speaker 1: the United States seeking higher, higher potential returns, and that's
Speaker 1: creating a huge dilemma for China. They've had to now
Speaker 1: put in limits on this fifty thousand dollar limit for
Speaker 1: for capital outflows. Mark, thank you so much for the
Speaker 1: brafing with him. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever
Speaker 1: podcast platform you prefer. I'm out on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio. Who you
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