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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,

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Speaker 1: SoundCloud and at Bloomberg dot com. Well, let's talk about

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Speaker 1: what's going on in currency markets right now with Douglas

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Speaker 1: both work. He is Managing director, head of FX at

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Speaker 1: Chapter Lane and Company. Doug Borthwick always a pleasure dollar

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Speaker 1: Euro one oh seven. The Federal Reserve raises rates, but

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Speaker 1: the dollar weekends tell us. I think that the Federal

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Speaker 1: Reserve raising rates priced in pretty much over the last

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Speaker 1: three or four weeks, and so there's an expectation that

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Speaker 1: was already there. What people are really looking at is

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Speaker 1: the statements on the comments that came out from the Fed,

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Speaker 1: and I think there are nota in that. People realize

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Speaker 1: that the Fed raised rates even though growth is still

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Speaker 1: not where it should be, and so there's an expectation

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Speaker 1: that rather than having more rate rises going forward, there

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Speaker 1: may be less. I think on top of that, though

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Speaker 1: you've got this overall layering that comes from the Trump administration,

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Speaker 1: where they're out there talking about how they want a

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Speaker 1: weaker dollar. And I think that what you're seeing this

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Speaker 1: week is you've seen the Secretary of State go out

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Speaker 1: to Asia talk to them, and since she's been out there,

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Speaker 1: you've seen Dolly and start to come off considerably. You've

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Speaker 1: seen in Europe, you've seen the German Deputy financements are

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Speaker 1: talking about how to higher euro isn't that bad and

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Speaker 1: they'd like to see higher rates in Europe. And so

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Speaker 1: there's a little bit of a change here in terms

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Speaker 1: of both interest rates but also where people think currency

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Speaker 1: should be. Certainly, with the Fed raised rates by twenty

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Speaker 1: five basis points, but now Europe is talking about maybe

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Speaker 1: ending their chewi and raising their rates as well, so

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Speaker 1: that cancels some of the effects. But also if the Fed,

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Speaker 1: if the US administration was to look for a weaker dollar,

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Speaker 1: they'll be looking forward against the currencies that they have

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Speaker 1: obviously the largest deficits against. You've seen Dollar Mexico come

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Speaker 1: done considerably, You've seen Dolla Enne come off, and you're

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Speaker 1: also seeing the Euro start to rally. On Our belief

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Speaker 1: is that you're going to see at the G twenty

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Speaker 1: meeting this weekend, there's going to be considerable discussion about

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Speaker 1: currencies pressed forward by the new Treasury Secretary, and that's

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Speaker 1: going to cause some movement in that they're going to

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Speaker 1: be no longer approving countries going out there and weakening

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Speaker 1: their currency for the for the pure sense of to

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Speaker 1: get more trade. If that happens, you'll see Dolly inn

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Speaker 1: come off. You expected the eurogo bid, You just actually

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Speaker 1: Dolla Mexico go lower. And I think that what they're

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Speaker 1: doing is they're setting the table for a Plaza cord

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Speaker 1: two point oh perhaps at Mara Lago next week, sorry,

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Speaker 1: next month, when the Chinese premier is coming over. Doug,

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Speaker 1: I want to pass through some of the things you

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Speaker 1: were saying, because you made a lot of fascinating points.

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Speaker 1: Number one, perhaps the feed is taking a backseat to

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Speaker 1: the policies of President Trump. The fact that Rex Tillerson

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Speaker 1: has been going around and meeting with UH foreign officials.

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Speaker 1: We are looking at the end strength and against the dollar.

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Speaker 1: The pound is strengthening a lot against the dollar, and

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Speaker 1: I'm wondering if the pound is not probably the target

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Speaker 1: here but UH in Asia, how exactly would conversations with

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Speaker 1: Rex Tillerson and some of the leaders of those countries

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Speaker 1: directly and immediately trickle out into currency movements. Well, I

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Speaker 1: think it's a quick pro quo in that, you know,

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Speaker 1: when the Trump administration came in, they struck a very

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Speaker 1: hard line, they said, you know, why should we be

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Speaker 1: out there policing your waters And since then they've managed

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Speaker 1: to clock it back somewhat. But I think that by

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Speaker 1: having that fear out there allows these negotiating room, which

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Speaker 1: is suddenly the President Trump obviously likes. By negotiating room,

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Speaker 1: you say to them, look, we don't want you to

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Speaker 1: stop interviewing in your currency markets. In return, will end

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Speaker 1: up being your policeman and continued to pay for our

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Speaker 1: bases out there and to look after you and protect

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Speaker 1: you from North Korea, for example. And so I think

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Speaker 1: that there is there's a direct correlation there between you know,

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Speaker 1: USUS essentially using the big stick in one hand, but

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Speaker 1: then speaking softly in the other. The softly speaking is

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Speaker 1: right now in the currency market, spend the big swift

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Speaker 1: and is thus sending out carriers out to that region. Douglas,

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Speaker 1: I wonder if you could just talk a little bit

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Speaker 1: about Italy and the sort of contradiction between how Italian

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Speaker 1: seemed to view using the Euro and perhaps the French

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Speaker 1: or other members of the European Union, and maybe just

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Speaker 1: put it in the context of the Dutch elections. Well,

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Speaker 1: I think that everyone uses for for someone like Italy

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Speaker 1: that's more in the fringe in terms of normally if

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Speaker 1: they didn't have the Euro, that have much much higher

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Speaker 1: interest rates than they do right now. I think France

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Speaker 1: is closer to the center and closer to where Germany is,

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Speaker 1: and the administration would be high, but maybe not quite

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Speaker 1: as low as they are right now. But certainly all

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Speaker 1: countries in Europe benefit from being part of the Euro

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Speaker 1: because they get that Germany part which lies them to

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Speaker 1: have much much lower rates. But now that can be

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Speaker 1: constrictive at times as well, which the UK certainly, though

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Speaker 1: not part of the Euro, is noting as part of

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Speaker 1: the EU, and that it means you give up a

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Speaker 1: lot of sovereignty. And I think that the Italians probably

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Speaker 1: rather a little bit more sovereignty these days. If they

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Speaker 1: want to get the industry going, they probably rather much

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Speaker 1: weaker currency, so they could sort of rev up their um,

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Speaker 1: their their their economies. But you also have you know,

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Speaker 1: lots of different sex coming out. There are are are facts,

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Speaker 1: are a new positions, are are in each of the

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Speaker 1: markets that are moving towards more of a nationalist state.

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Speaker 1: They look at what Trump's done in the United States

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Speaker 1: and they think maybe this is our turn, you know.

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Speaker 1: They look at the UK leaving the EU and they

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Speaker 1: think maybe this is our turn. They point to immigration,

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Speaker 1: they say, maybe this is our turn. But then you

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Speaker 1: get the election, you know, last night, and obviously and

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Speaker 1: it came out and maybe they know that the right

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Speaker 1: wing side didn't get in quite as many votes as

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Speaker 1: they expected to, and so it seem as a little

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Speaker 1: bit of a fizzle, which obviously helps the euro to

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Speaker 1: rally by its dirty pips since that dnaiment came out.

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Speaker 1: So and then there's a lot of there's a lot

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Speaker 1: of different things, you know. Scotland also as part of

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Speaker 1: this whole discussion, Scotland then turns round and says we'd

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Speaker 1: like to leave the UK, but at the same time

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Speaker 1: we'd like to be part of the EU. Well, it's

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Speaker 1: not going to be allowed by a lot of countries

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Speaker 1: in in Europe because they don't want different areas within

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Speaker 1: their countries to splinter r and say we want to

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Speaker 1: do the same thing real quick thirty seconds. Doug, out

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Speaker 1: of all of this uncertainty, what's the one currency that

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Speaker 1: you think is going to move the most in the

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Speaker 1: next six months. I think that everyone believes the Chinese

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Speaker 1: currency is going to weaken. I think it's going to

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Speaker 1: strengthen considerably. I think it's going to strengthen consivably because

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Speaker 1: I think you're gonna see the Euro move higher, dollar

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Speaker 1: yen move a lot lower. I think that on the

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Speaker 1: back of that, because the Chinese currency is based on

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Speaker 1: a basket, yourency the Chinese currency strengthened, especially given that

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Speaker 1: there's a lot of positioning out there right now that

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Speaker 1: has short China as opposed to along China. Fascinating. Thank

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Speaker 1: you so much for joining us, Doug Barthwick with a

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Speaker 1: contrarian call for a strengthening Chinese currency. He's managing director

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Speaker 1: and head of f X at Chapter Lane and Company.

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Speaker 1: UH and we're looking at a dollar that is weakening

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Speaker 1: against most other currencies from Asia to Europe. After the

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Speaker 1: Federal Reserve spoken as the u AS goes out and

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Speaker 1: tries to sort of change the conversation with respect to

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Speaker 1: currency manipulation. The ticker for the Bank of America, Mary

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Speaker 1: lynch U s issuers of high yield retail bonds is

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Speaker 1: really apropos. It's hurt h u r T and it

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Speaker 1: works very well because these bonds have been in a

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Speaker 1: world of hurt so far this year. They are the

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Speaker 1: worst performing bonds in the high old bond market. And

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Speaker 1: I want to bring in someone who knows a lot

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Speaker 1: more about this, Jenna g. N Nelly. She is a

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Speaker 1: high yield analyst and also focuses on retail and gaming

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Speaker 1: at City Group, and she joins us here in our

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Speaker 1: Bloombrig eleven three oh student studio. Jenna, We're so glad

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Speaker 1: you could be here, And I want to start with

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Speaker 1: the idea, uh that we've seen all of these losses,

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Speaker 1: we've seen mounting bankruptcies and the expectation of more Where

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Speaker 1: are we in this cycle? How much more pain are

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Speaker 1: we going to see in retailers? Hi, Lisa, thanks so

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Speaker 1: much for having me in today. Um having to be here,

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Speaker 1: you know, I I think that's you know, a great question,

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Speaker 1: and I would say that although there are a lot

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Speaker 1: of investors out there that are thinking this might be

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Speaker 1: the opportunity and the time to jump in. And I

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Speaker 1: do still think that there is more pain to be had.

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Speaker 1: I mean, we remain underweight the sector. UM. And I

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Speaker 1: think that when you look at a lot of the

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Speaker 1: issues that investors are concerned about right now, especially for

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Speaker 1: some of these larger LBO candidates, about potential for you know,

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Speaker 1: moving assets, looking at loose covenants. UM. You know, more

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Speaker 1: macro issues like border adjustment, taxes, arising cost environment UM,

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Speaker 1: and really some of the bigger secular issues that we're

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Speaker 1: facing like increasing online print penetration, changing consumer preferences. UM.

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Speaker 1: There's a whole host of things center investors, you know,

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Speaker 1: need to be worried about. It's coming out them from

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Speaker 1: every angle. So I think we're still going to continue

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Speaker 1: to see these play out in two thousands seventeen. And

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Speaker 1: some of the LBO companies that you're talking about, even

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Speaker 1: Marcus Jake, Crude Toys, r Us Claire's, Jimberry, many more. Uh,

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Speaker 1: how many of these do you expect to go bankrupt?

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Speaker 1: Oh that's a good question. I mean, look, the reality

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Speaker 1: has a lot of them don't actually have liquid the

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Speaker 1: issues as it stands right now. UM. You know, when

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Speaker 1: you think about Nieman, UM, you know, even if Claire's

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Speaker 1: has some time left, Jimbury, you know, could be a

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Speaker 1: two thousand and seventeen event, but they do still have

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Speaker 1: liquidity and you know a lot of the maturity runways

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Speaker 1: for at least the next one to two years. Um,

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Speaker 1: So I think we'll see restructuring. I mean a lot

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Speaker 1: of them, you still have you look at the sponsors.

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Speaker 1: They haven't taken a lot of money out of these

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Speaker 1: l b o s, right, so they're gonna do everything

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Speaker 1: that they can kind of kick the can down the

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Speaker 1: road and do some sort of an exchange with the

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Speaker 1: bond holders to really do everything they possibly can to

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Speaker 1: avoid bankruptcy and preserve their equity cushion. So I don't

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Speaker 1: think we're actually going to see a ton for some

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Speaker 1: of these bigger names in two thousand and seventeen. Maybe

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Speaker 1: down the road, um, but we have some time. But

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Speaker 1: so if that's the case, they're basically going to squeeze

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Speaker 1: everything out of everywhere but the equity holders, which means

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Speaker 1: the bond holders will be potentially really bad for all

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Speaker 1: of the debt owners in these companies. That's the fear.

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Speaker 1: That is the fear, and that has been you know,

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Speaker 1: I'd say, the one of the big topics so far

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Speaker 1: here to date is you know, covenants, covenants, covenants, um

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Speaker 1: everyone I think you know, it started with Player's last summer,

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Speaker 1: I mean, and and then J Crew um with with um,

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Speaker 1: you know, the moving of IP assets where everyone's exploring

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Speaker 1: it now as a possibility for all these companies, UM,

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Speaker 1: you know Nemon Marcus looking at their covenants and saying

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Speaker 1: what assets could they move? They just you know, announced

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Speaker 1: the other day that they are doing something of this nature,

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Speaker 1: moving assets into an unrestricted subsidiary for the purpose of

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Speaker 1: of dealing with bond holders. So, UM, we're seeing loans,

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Speaker 1: especially in retail, you know, under some pressure. Uh. And

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Speaker 1: and there's a concern that look there in these documents

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Speaker 1: there are um, I don't want to say, not loopholes,

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Speaker 1: but certainly flexibility to um you know, to to move

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Speaker 1: assets out to the detriment of the creditors. So we're

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Speaker 1: seeing that in levels. And it's one of the biggest

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Speaker 1: concerns on investor's mind right now. It's the supply available

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Speaker 1: for the kind of investor that you are dealing with,

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Speaker 1: because you know, supply begets demand in many cases in

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Speaker 1: terms of yes, I mean I think look generally, um,

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Speaker 1: you know, the supply of of bonds out there. I mean,

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Speaker 1: we've definitely seen more sellers than buyers in retail, especially

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Speaker 1: in most real money accounts. And you think about it,

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Speaker 1: more traditional investors versus hedge funds. Traditional guys have been

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Speaker 1: um largely underweight for most of two thousand and sixteen,

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Speaker 1: and then even into two thousand and seventeen, we've had

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Speaker 1: a lot of hedge funds and more distress players I'd

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Speaker 1: say hovering but not quite stepping in pulling the trigger.

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Speaker 1: No one, no one pulling the trigger, but some are

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Speaker 1: increasingly pulling the trigger on the opposite bet. I mean,

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Speaker 1: you're talking Genna about how it's very common discussion about

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Speaker 1: how much pain has been in the retailers. And there

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Speaker 1: was a story on the Bloomberg just a few days

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Speaker 1: ago about how the big short now is in commercial

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Speaker 1: mortgage backed securities that are tied to retail properties. Also,

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Speaker 1: we're seeing short interest on retail reads rise to the

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Speaker 1: highest level in more than two years. Is now the time?

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Speaker 1: Is this the big short? Is now the time to

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Speaker 1: short sell this stuff? Well, you know, I think it's

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Speaker 1: the first time that we've ever had actually heard any

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Speaker 1: commentary from the retailers where they're staying there starting to

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Speaker 1: see rent relief. Right, We've been everyone's been asking about

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Speaker 1: this trade probably for the last two or three years.

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Speaker 1: How could the rots be doing so well and the

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Speaker 1: retailers be doing so poorly. It doesn't make any sense.

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Speaker 1: And for the first time we're hearing the retailers say, look,

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Speaker 1: we are starting to get some relief. We're starting to

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Speaker 1: see more favorable clauses when we are extending their leases.

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Speaker 1: But that being said, um, you know, the average lease life,

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Speaker 1: you know, you're still looking at five to ten years

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Speaker 1: for a lot of these guys, and so it's going

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Speaker 1: to be measured in terms of the timing of the closures.

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Speaker 1: It's going to be more concentrated in the lower end malls.

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Speaker 1: When you think about the dispersion of A, B and

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Speaker 1: C malls, the C malls are really there are a

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Speaker 1: third of the malls in this country, right, and so

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Speaker 1: it's gonna definitely be more concentrated towards those. When you

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Speaker 1: think about the closures that we're going to be seeing

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Speaker 1: a Macy's in J. C. Penny. That's where these you know,

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Speaker 1: the anchor stores are going to be concentrated again, it's

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Speaker 1: going to take time to play out. Um, And you know,

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Speaker 1: I don't want to say it's a crowded trade, but

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Speaker 1: I don't. But um, it's certainly been a popular one

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Speaker 1: and one that you know, I think a lot of

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Speaker 1: investors have tried to express a view. And you don't

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Speaker 1: have to say it's so popular. It's not crowded, it's

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Speaker 1: just popular. But gently just to be clear, so SEA

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Speaker 1: malls are the ones that are sort of lower tier

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Speaker 1: and lower end and A or this, yeah, more luxury,

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Speaker 1: and B is in the middle exactly. I think the

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Speaker 1: perception is that traffic has been um just week across

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Speaker 1: the board, but when you look at the dispersion, UM,

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Speaker 1: A malls have really held up pretty well, I would say,

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Speaker 1: I mean, occupancy rates are still very strong. Um, you know,

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Speaker 1: the traffic to those malls is still reasonable, maybe flat

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Speaker 1: to download single digit. It's definitely been more concentrated in

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Speaker 1: the lower end where you're seeing um, you know, occupancies

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Speaker 1: decline and um the traffic you know, um, you know,

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Speaker 1: you know week or we've we've heard from a few

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Speaker 1: different retailers that when you think about the dispersion of comps,

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Speaker 1: um it could be anywhere from two to three percentage

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Speaker 1: points for an A versus B versus C mall. So

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Speaker 1: if you're a mall, you're down to you you're down

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Speaker 1: for in your be mall, and you're you know you're

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Speaker 1: down six and your semall just I mean, it's not

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Speaker 1: a perfect rule of thumb, but we've heard to that

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Speaker 1: you know that degree for different retailers, which is why

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Speaker 1: you're seeing such negative comps for a lot of these guys.

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Speaker 1: Thank you very much for coming in and spending time

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Speaker 1: with us. We look forward to having you again in

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Speaker 1: the future. Jenner Gnelli is the high Yield Analysts for

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Speaker 1: retail and gaming from City Group. Thank you very much well.

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Speaker 1: The Bank of England today held its benchmark interest rates steady,

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Speaker 1: but signaled that an increase may not be far off. Indeed,

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Speaker 1: one official dissenting in favor of higher borrowing costs, and

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Speaker 1: others saying that it might not be long before they

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Speaker 1: do the same. Here to tell us more about the

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Speaker 1: decision and also a look at European politics and economy

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Speaker 1: is Jamie Murray. He is chief European, Middle East and

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Speaker 1: Africa economist for Bloomberg Intelligence, and he joins us from

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Speaker 1: our London studio, Jamie, thanks very much for being with us.

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Speaker 1: Tell us about the Bank of England rate decision, well,

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Speaker 1: I think the markets have probably correctly interpreted it as

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Speaker 1: more hawkish than previous statements, and it took most people

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Speaker 1: by surprise. One thing I would say is that this

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Speaker 1: may not last that long because the member that elected

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Speaker 1: to lift rates is only going to be on the

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Speaker 1: Monitary Policy Committee until June before she is replaced. And

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Speaker 1: we expressed in Forbes that's right, yes, so we expect

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Speaker 1: the one. We don't know who's going to replace it.

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Speaker 1: It could be could be anyone um. And the other

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Speaker 1: thing to bear in mind is that the Bank of

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Speaker 1: England is making this contingent on what happens to the

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Speaker 1: data now. So far the data is surprised. On the upside,

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Speaker 1: growth has been stronger, inflation has been roughly where most

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Speaker 1: people expected it to be given what's happened to Sterling. Now,

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Speaker 1: if that continues, then yes we could be in for

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Speaker 1: earlier rate hike. But our view is that the economy,

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Speaker 1: or at least the data will begin to sour little

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Speaker 1: bits GDP growth will slow as that exchange rate effect

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Speaker 1: starts to squeeze real incomes and lift inflation. Well, Jamie,

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Speaker 1: when you talk about the border market and how it

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Speaker 1: responded him in two year yields in the UK more

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Speaker 1: than doubled in response to the Bank of England's decision

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Speaker 1: UM to not do anything but sort of the hawk

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Speaker 1: ish tone, and Paul Dobson, Bloomberg team leader here noted

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Speaker 1: on the Market's live blog that the smoking gun from

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Speaker 1: the BOE minutes that made the market sit up and

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Speaker 1: pay attention was with inflation rising sharply and only mixed

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Speaker 1: evidence and slowing activity domestically. Some members noted that would

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Speaker 1: take relatively little further upside news on the prospects for

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Speaker 1: activity or inflation for them to consider that a more

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Speaker 1: immediate reduction and policy support might be warranted. In other words, uh,

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Speaker 1: they would be more willing to go ahead and hike

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Speaker 1: rates faster with just a little bit more news that

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Speaker 1: would that would that would edify this sense of of

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Speaker 1: inflation rising. Yes, so I completely agree with Paul's assessment there.

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Speaker 1: The thing is that we I'm not expecting the data

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Speaker 1: to show that source of improvement. The wages data came

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Speaker 1: in remarkably weak just this week. UM. The and despite

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Speaker 1: the fact that unemployment is falling to very low levels,

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Speaker 1: so there's no evidence whatsoever that domestically generated inflation is rising.

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Speaker 1: And that's what the Bank of England needs to be

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Speaker 1: looking at. Well, if that's what they need to be

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Speaker 1: looking at, I wonder if you could provide a little

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Speaker 1: bit of context for Brexit, the ongoing negotiations and then

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Speaker 1: dive into Dutch politics. For us, well, we're up to

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Speaker 1: with Brexit is that that's the Article fifty is likely

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Speaker 1: to be triggered towards the end of this month. It's

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Speaker 1: been delayed slightly by some adjustments to the bill going

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Speaker 1: through the House of Lords, and this means that Britain

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Speaker 1: will be on an official exit path from the EU

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Speaker 1: and will have two years from the end of this

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Speaker 1: March to reach an agreement with the rest of the EU.

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Speaker 1: If it doesn't, then all likelihood Britain will default sort

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Speaker 1: of World Trade Organization rules, which should mark a very

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Speaker 1: sharp increase in tariffs and a lot of goods being

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Speaker 1: bought and sold between US and the UK and the EU.

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Speaker 1: So that's we're up to with Brexits. My feeling is

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Speaker 1: that I think it's most people's feeling is that the

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Speaker 1: negotiations are going to be incredibly challenging. There's not a

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Speaker 1: loss of There's not a lot of things going for

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Speaker 1: Britain in this respect. Goodwill could we say not a

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Speaker 1: lot of good will between Europe. That's exactly the word

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Speaker 1: escapes me a couple of moments ago. So yeah, there

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Speaker 1: is not much good will. Um So, my my feeling

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Speaker 1: is that the rest of the U has no incentive

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Speaker 1: to show goodwill to Britain because the more it does that,

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Speaker 1: the lower the hurdle of other countries to leave. Is

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Speaker 1: it encouraging to the outcome of the Dutch elections, the

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Speaker 1: fact that the liberal candidate one and the sort of

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Speaker 1: populist anti Islam candidate was pushed aside? Does this sort

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Speaker 1: of give people a stronger feeling of less political risk

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Speaker 1: right now in European markets? I think in markets it

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Speaker 1: probably is having that effects. I'm not sure whether that's

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Speaker 1: the right interpretation of it. Though the Dutch election was

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Speaker 1: quite unique in that had had the extremest party one

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Speaker 1: the the they had no chance of governing. Really that

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Speaker 1: is not the case so much in other places in

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Speaker 1: the Eurozone. Now, what I would say is that each

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Speaker 1: of these countries is remarkably different, and it's very easy

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Speaker 1: to lump them all together. So it's easy to imagine.

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Speaker 1: The typical distinction is core versus Prephery. So you have

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Speaker 1: the Netherlands, France and Germany and one group and then

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Speaker 1: you have the Italy, the Spains, the Greases and the other. Now,

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Speaker 1: actually there's significant differences even within those categories. So in

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Speaker 1: let's take in the Netherlands. In the Netherlands, only five

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Speaker 1: of under thirty five's voted for the extremest party. In France, however,

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Speaker 1: one third looked like they're going to vote for Le Pen.

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Speaker 1: Now this is this is a real difference in the

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Speaker 1: in not in demographic makeup, in among those groups who

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Speaker 1: is voting that it's completely upside down for between France

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Speaker 1: and the Netherlands. Does it get you frustrated when you

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Speaker 1: hear people like us in the United States talk about

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Speaker 1: Europe and it's like, oh, the populous way of going

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Speaker 1: through Europe and all of these elections and sort of

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Speaker 1: lumping them together. Um, is it? Is it just or

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Speaker 1: you know, in Europe our market players really making the

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Speaker 1: distinctions that you're talking about, or even in Europe, is

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Speaker 1: this sort of there are a lumping together kind of

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Speaker 1: that might lead to unwarranted conclusions. Well, I think it's

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Speaker 1: no no worse than how we'd we describe the US

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Speaker 1: over here. Um. So I think the there is a

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Speaker 1: tendency to lump these economies together and treat their politics

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Speaker 1: is the same. And one distinction, which I think is

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Speaker 1: probably the most important thing for a U S audience

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Speaker 1: to recognize, is that the Euro is remarkably popular across

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Speaker 1: most of the Eurozone, including France, where it isn't popular. However,

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Speaker 1: is Italy and that really singles out. And that's so

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Speaker 1: if you really want a place to look, you think,

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Speaker 1: if you're worried about risk of the Eurozone, Italy is

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Speaker 1: that place fascinating. Thank you so much for joining us.

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Speaker 1: Jamie Murray chief E m E a economist for Bloomberg Intelligence.

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Speaker 1: Day after a federate hike, and you can't find much

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Speaker 1: concern in risk your assets. You've got stocks gaining, you've

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Speaker 1: got junk bonds gaining. Uh. And there was a story

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Speaker 1: on the terminal that Kredent sweets and UBS analysts are

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Speaker 1: telling their wealthy clients it's not too late to buy equities. Well,

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Speaker 1: we're gonna talk with somebody to find out whether he agrees.

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Speaker 1: Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors,

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Speaker 1: which overseas about one point two billion dollars, and he

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Speaker 1: speaks with us now from Albany, New York. Que. Do

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Speaker 1: you agree. Are you telling your clients to don't worry,

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Speaker 1: go ahead buy stocks? It's not too late from one

431
00:21:47,640 --> 00:21:50,760
Speaker 1: point of view, Lisa, Yes, I think that's a good idea.

432
00:21:50,840 --> 00:21:53,639
Speaker 1: You have to have some stocks in your portfolio. The

433
00:21:53,760 --> 00:21:56,760
Speaker 1: simple reason for that is that when they asked the question,

434
00:21:56,800 --> 00:22:00,200
Speaker 1: which I think is the key question now is are

435
00:22:00,200 --> 00:22:03,399
Speaker 1: we at or even near the end of the current

436
00:22:03,560 --> 00:22:07,360
Speaker 1: stock market economic interest rate cycle. The answer to that,

437
00:22:07,400 --> 00:22:10,720
Speaker 1: based on the performance of the markets and the performance

438
00:22:10,760 --> 00:22:14,520
Speaker 1: of important economic variables, is clearly no. So you need

439
00:22:14,600 --> 00:22:18,920
Speaker 1: to have a meaningful allocation to equities. That's the first

440
00:22:18,960 --> 00:22:21,520
Speaker 1: part of the equation. The second part of the equation

441
00:22:22,160 --> 00:22:25,879
Speaker 1: is what about valuation or current valuation? And if you

442
00:22:25,920 --> 00:22:29,040
Speaker 1: were to ask me, and everybody answers the question differently,

443
00:22:29,520 --> 00:22:32,359
Speaker 1: if you were to ask me, are we undervalued, fairly

444
00:22:32,440 --> 00:22:34,800
Speaker 1: valued or overvalued? I'd say we're a little bit ahead

445
00:22:34,800 --> 00:22:37,200
Speaker 1: of ourselves, you know, we've had a big run since

446
00:22:37,240 --> 00:22:39,919
Speaker 1: the election, and so common sense alone says that it

447
00:22:40,040 --> 00:22:42,720
Speaker 1: might have be a little bit pricier overvalued. And I

448
00:22:42,800 --> 00:22:46,800
Speaker 1: would say that the upside potential between right now and

449
00:22:46,880 --> 00:22:51,240
Speaker 1: the end of two thousand and eighteen is about one

450
00:22:51,359 --> 00:22:55,000
Speaker 1: percent at the best. And so the most important thing

451
00:22:55,080 --> 00:22:59,119
Speaker 1: is yes, meaningful allocation to stocks. But if you're going

452
00:22:59,160 --> 00:23:02,040
Speaker 1: to add to your portfolio of the equities in your portfolio,

453
00:23:02,680 --> 00:23:04,919
Speaker 1: wait for a good entry point. This is not a

454
00:23:04,960 --> 00:23:07,960
Speaker 1: good entry point. You need a lower level to be

455
00:23:08,320 --> 00:23:12,240
Speaker 1: buying stocks. That's in my view. Hugh Johnson, Perhaps you

456
00:23:12,320 --> 00:23:14,919
Speaker 1: know an investor that would like to take some profits,

457
00:23:15,040 --> 00:23:19,560
Speaker 1: what would you recommend they sell? Uh, that's a really

458
00:23:19,600 --> 00:23:23,440
Speaker 1: great question because I get that question almost every day.

459
00:23:23,560 --> 00:23:27,320
Speaker 1: There are folks that obviously feel very uncomfortable with the

460
00:23:27,400 --> 00:23:30,399
Speaker 1: kind of move we've seen up in stock prices. Me,

461
00:23:31,320 --> 00:23:33,520
Speaker 1: do you I don't mean that they have to be uncomfortable.

462
00:23:33,560 --> 00:23:36,000
Speaker 1: They can even be gratified and say maybe they just

463
00:23:36,040 --> 00:23:38,600
Speaker 1: want to sell half a position. But I'm wondering, what

464
00:23:38,600 --> 00:23:41,160
Speaker 1: would you sell if you just want to Yeah, I'll

465
00:23:41,200 --> 00:23:44,760
Speaker 1: be honest. With the three sectors which have had the

466
00:23:44,840 --> 00:23:48,200
Speaker 1: big move uh since the election and of course, they're

467
00:23:48,240 --> 00:23:51,000
Speaker 1: right at the top of the list, are the financials.

468
00:23:51,760 --> 00:23:55,040
Speaker 1: The second second too, that I would mention is first

469
00:23:55,040 --> 00:23:57,800
Speaker 1: of all technology, which has had a big move to

470
00:23:57,880 --> 00:24:00,720
Speaker 1: the upside. And then I would take a very hard

471
00:24:00,760 --> 00:24:03,679
Speaker 1: look at the healthcare stocks because there's a lot of

472
00:24:03,720 --> 00:24:07,159
Speaker 1: fundamental problems. There also some industrials that have had a

473
00:24:07,160 --> 00:24:09,840
Speaker 1: big move to the upside. The real issue is is

474
00:24:09,880 --> 00:24:11,879
Speaker 1: if you've had a big move up and some of

475
00:24:11,880 --> 00:24:16,120
Speaker 1: the stocks in your portfolio, particularly the financials, you might

476
00:24:16,160 --> 00:24:18,200
Speaker 1: want to take and it's a great question, you might

477
00:24:18,240 --> 00:24:21,200
Speaker 1: want to take some of that position, shall we say

478
00:24:21,200 --> 00:24:23,640
Speaker 1: off the table or sell it? Well, I just want

479
00:24:23,640 --> 00:24:25,480
Speaker 1: to give you the credit where credit is due, because

480
00:24:25,560 --> 00:24:29,000
Speaker 1: I remember back in August of last year, you were

481
00:24:29,000 --> 00:24:31,920
Speaker 1: pounding the table on financial stocks when no one else

482
00:24:32,040 --> 00:24:34,520
Speaker 1: was really going out on a limb like that. Yeah,

483
00:24:34,600 --> 00:24:37,199
Speaker 1: that was probably as good a guess as any. I

484
00:24:37,240 --> 00:24:41,439
Speaker 1: didn't expect, obviously that Trump would win the election. I didn't,

485
00:24:41,960 --> 00:24:44,680
Speaker 1: I I thought at the time. But I really thought

486
00:24:44,720 --> 00:24:47,640
Speaker 1: after the election of Trump that, of course, with deregulation,

487
00:24:47,760 --> 00:24:52,240
Speaker 1: with dot Frank maybe being under under the gun, obviously,

488
00:24:52,320 --> 00:24:56,480
Speaker 1: with the better outlook for the economy based on the

489
00:24:56,560 --> 00:25:00,199
Speaker 1: so called Trump bump or the Trump stimulus plan that

490
00:25:00,280 --> 00:25:03,240
Speaker 1: we might be talking about higher interest rates, were talking

491
00:25:03,240 --> 00:25:06,399
Speaker 1: about higher interest rates would accrue to the benefit of, obviously,

492
00:25:06,520 --> 00:25:10,639
Speaker 1: the the profits of the commercial banking part of the

493
00:25:10,680 --> 00:25:14,560
Speaker 1: financial sector. So you know, um, yeah, it looked good

494
00:25:14,600 --> 00:25:17,919
Speaker 1: in August. Uh, and it looked particularly good when Trump

495
00:25:18,000 --> 00:25:20,840
Speaker 1: got elected. But the move up in the fourth quarter

496
00:25:20,920 --> 00:25:25,240
Speaker 1: of in one sector alone, that's that's quite a bit.

497
00:25:25,280 --> 00:25:27,920
Speaker 1: And and there again common sense says you might want

498
00:25:27,920 --> 00:25:30,160
Speaker 1: to take some off the table. Okay, So, Hugh, let's

499
00:25:30,160 --> 00:25:34,000
Speaker 1: say somebody does sell some of their financial holdings. Uh,

500
00:25:34,040 --> 00:25:37,479
Speaker 1: they sell around the edges to get prepared for perhaps

501
00:25:37,480 --> 00:25:39,840
Speaker 1: a better entry point. What should they do with the

502
00:25:39,880 --> 00:25:42,919
Speaker 1: proceeds from those sales. Should they keep it in cash?

503
00:25:42,960 --> 00:25:47,680
Speaker 1: Should they go into bonds? Well, you know, Lisa, I

504
00:25:47,720 --> 00:25:51,000
Speaker 1: as I say, I think I'm worried be concerned about valuation.

505
00:25:51,480 --> 00:25:54,359
Speaker 1: So when I'm concerned about valuation, would would be one

506
00:25:54,400 --> 00:25:56,880
Speaker 1: of the reasons why I would sell some financials, maybe

507
00:25:56,960 --> 00:26:01,160
Speaker 1: technology industrials, maybe some healthcare stock. I might go into

508
00:26:01,200 --> 00:26:03,119
Speaker 1: cash for the time being, and again look for a

509
00:26:03,160 --> 00:26:06,080
Speaker 1: better entry point. If someone were to press me and

510
00:26:06,119 --> 00:26:09,080
Speaker 1: ask me, what's a good entry point, I would say, look,

511
00:26:09,119 --> 00:26:12,639
Speaker 1: it's got to be five percent below current levels, because

512
00:26:12,720 --> 00:26:15,880
Speaker 1: unless we go down five from current levels and even

513
00:26:15,920 --> 00:26:19,520
Speaker 1: a little bit more, um, you know, in my judgment,

514
00:26:19,600 --> 00:26:24,399
Speaker 1: the upside potential between the current level and the end

515
00:26:24,440 --> 00:26:28,199
Speaker 1: of two thousand eighteen would certainly not be that attractive. So,

516
00:26:28,320 --> 00:26:32,040
Speaker 1: just from a big picture portfolio management point of view,

517
00:26:32,080 --> 00:26:35,760
Speaker 1: you've got a sharp decline in stock prices before I

518
00:26:35,800 --> 00:26:38,480
Speaker 1: would use that cash. Cash is not a bad thing

519
00:26:38,520 --> 00:26:41,520
Speaker 1: to have right now. I'm not barished by a long shot,

520
00:26:41,600 --> 00:26:43,600
Speaker 1: but I'm just saying from a timing point of view,

521
00:26:43,920 --> 00:26:48,320
Speaker 1: valuation point of view, I have my concerns how much

522
00:26:48,359 --> 00:26:51,639
Speaker 1: in your ideal portfolio, how much would be in cash

523
00:26:51,760 --> 00:26:55,439
Speaker 1: right now compared with say at the end of last year. Yeah, what,

524
00:26:55,640 --> 00:26:58,280
Speaker 1: we we've worked pretty much. We've been pretty bullish. And

525
00:26:58,359 --> 00:27:01,520
Speaker 1: so if a and said to us, look, I have

526
00:27:01,560 --> 00:27:05,240
Speaker 1: got a target for equities and fixed income of fifty

527
00:27:05,600 --> 00:27:09,800
Speaker 1: and equities, I'll let you, folks go to sixty of

528
00:27:09,880 --> 00:27:12,800
Speaker 1: the portfolio and equities when you think conditions are times

529
00:27:12,800 --> 00:27:15,520
Speaker 1: are good, and be down at thirty five percent when

530
00:27:15,560 --> 00:27:18,879
Speaker 1: you think times are bad right now, and quite frankly,

531
00:27:18,920 --> 00:27:22,000
Speaker 1: the end of last year we've been at six and

532
00:27:22,080 --> 00:27:24,920
Speaker 1: that's where we're going to stay. But um as far

533
00:27:25,000 --> 00:27:27,240
Speaker 1: as adding to positions, and we're not going to change

534
00:27:27,280 --> 00:27:31,760
Speaker 1: that adding to positions, we'd wait for that decline in

535
00:27:31,880 --> 00:27:35,360
Speaker 1: stock prices before we would add to positions. If somebody

536
00:27:35,440 --> 00:27:37,760
Speaker 1: said to me, if somebody said to me, look, I'm

537
00:27:37,840 --> 00:27:41,040
Speaker 1: really concerned about the current stock market, I would ask

538
00:27:41,040 --> 00:27:43,880
Speaker 1: them the question, Look, you've got a fifty percent target

539
00:27:43,960 --> 00:27:47,200
Speaker 1: with a little bit of leeway both sides. Maybe what

540
00:27:47,280 --> 00:27:50,200
Speaker 1: you want to do is to reduce that target from

541
00:27:50,240 --> 00:27:53,840
Speaker 1: fifty down to or to what we would call a

542
00:27:54,000 --> 00:27:57,440
Speaker 1: sleep at night level. Uh, that would be the decision

543
00:27:57,520 --> 00:27:59,639
Speaker 1: of the of the client. But right now we have

544
00:28:00,240 --> 00:28:03,439
Speaker 1: over fifty percent allocation to equities, and that's based on

545
00:28:03,480 --> 00:28:05,320
Speaker 1: the fact that we think equities are the place to

546
00:28:05,359 --> 00:28:08,600
Speaker 1: be for the time being. Thanks very much for joining us.

547
00:28:08,640 --> 00:28:11,080
Speaker 1: Hugh Johnson, as always, he is the chairman and the

548
00:28:11,119 --> 00:28:16,640
Speaker 1: chief investment Officer of Hugh Johnson Advisers, joining us from Albany,

549
00:28:16,680 --> 00:28:19,679
Speaker 1: New York, where he helps to manage over one point

550
00:28:19,760 --> 00:28:29,680
Speaker 1: two billion dollars of customer assets. Thanks for listening to

551
00:28:29,720 --> 00:28:32,760
Speaker 1: the Bloomberg P and L podcast. You can subscribe and

552
00:28:32,800 --> 00:28:37,760
Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform

553
00:28:37,920 --> 00:28:40,640
Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter

554
00:28:40,800 --> 00:28:44,480
Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.

555
00:28:44,560 --> 00:28:47,000
Speaker 1: It's one before the podcast. You can always a catch

556
00:28:47,080 --> 00:28:48,840
Speaker 1: us worldwide on Bloomberg Radio