1
00:00:05,120 --> 00:00:09,200
Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene along

2
00:00:09,240 --> 00:00:13,200
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you

3
00:00:13,320 --> 00:00:18,600
Speaker 1: insight from the best and economics, finance, investment, and international relations.

4
00:00:18,960 --> 00:00:23,840
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,

5
00:00:23,920 --> 00:00:29,920
Speaker 1: and of course on the Bloomberg terminal. What we're gonna

6
00:00:29,960 --> 00:00:33,919
Speaker 1: do is dive into a conversation here on the great unspoken,

7
00:00:34,000 --> 00:00:35,920
Speaker 1: and we can do that going back to the giant

8
00:00:36,080 --> 00:00:39,839
Speaker 1: David Ricardo of the early nineteenth century who changed our

9
00:00:40,040 --> 00:00:46,320
Speaker 1: language about how the halves gain advantage. Stiglitz is of Columbia,

10
00:00:46,400 --> 00:00:50,120
Speaker 1: the university professor Joseph Stiglitz, joins us this morning at

11
00:00:50,120 --> 00:00:53,560
Speaker 1: the bottom of your wonderful essay on inflation and project syndicate,

12
00:00:54,000 --> 00:00:58,880
Speaker 1: Joe Stiglets you talk about monopoly rents. I would expand

13
00:00:59,080 --> 00:01:04,360
Speaker 1: extend that even more to monoximistic rents, which is economic

14
00:01:04,520 --> 00:01:08,800
Speaker 1: mumbo jumbo. You teach for they has gained how much

15
00:01:08,840 --> 00:01:13,959
Speaker 1: did they haves gain off the fiscal largesse of this pandemic?

16
00:01:15,040 --> 00:01:18,200
Speaker 1: Who an enormous amount? Uh. You know, it's got a

17
00:01:18,280 --> 00:01:22,040
Speaker 1: lot of attention that while so many Americans were living,

18
00:01:22,440 --> 00:01:26,760
Speaker 1: hand them out money that was going to them just

19
00:01:27,200 --> 00:01:30,520
Speaker 1: enabled them to get by the people at the top,

20
00:01:30,880 --> 00:01:36,000
Speaker 1: we're making literally billions and billions and billions of dollars.

21
00:01:36,040 --> 00:01:38,520
Speaker 1: So one of the things in that article that you

22
00:01:38,600 --> 00:01:42,280
Speaker 1: mentioned that I advocate is we're going through a very

23
00:01:42,319 --> 00:01:46,319
Speaker 1: tough time. Uh, there are prices are going up, and

24
00:01:46,360 --> 00:01:48,240
Speaker 1: it's a little bit hard for those at the bottom

25
00:01:48,280 --> 00:01:52,920
Speaker 1: in the middle. Why don't we have a excess profits

26
00:01:52,960 --> 00:01:57,280
Speaker 1: tax on those companies that have done very well in

27
00:01:57,320 --> 00:02:01,040
Speaker 1: the pandemic and used a a aneuver of that to

28
00:02:01,120 --> 00:02:06,800
Speaker 1: help those who are really struggling by one time attacks,

29
00:02:06,840 --> 00:02:10,200
Speaker 1: just to uh, you might call it a pandemic inflation

30
00:02:10,280 --> 00:02:13,560
Speaker 1: adjustment and Joe and Ah luck in America, which has

31
00:02:13,639 --> 00:02:16,200
Speaker 1: moved on from that kind of language to love of

32
00:02:16,240 --> 00:02:20,720
Speaker 1: the individual. Let's say you can't get through and excess

33
00:02:20,760 --> 00:02:26,280
Speaker 1: profits tax, what's the second best thing to do? Well,

34
00:02:26,320 --> 00:02:28,880
Speaker 1: I can tell you what the second best thing not

35
00:02:29,000 --> 00:02:32,600
Speaker 1: to do the best. It is not a good thing

36
00:02:32,639 --> 00:02:38,400
Speaker 1: to raise interest rates to kill the economy in order

37
00:02:38,440 --> 00:02:43,400
Speaker 1: to be what is still moderate inflation seven And if

38
00:02:43,400 --> 00:02:49,480
Speaker 1: you look at those inflation numbers, they're all distorted by uh,

39
00:02:49,880 --> 00:02:52,560
Speaker 1: you know, a huge increasing energy price that is not

40
00:02:52,560 --> 00:02:56,320
Speaker 1: going to continue. The price of oil went from below

41
00:02:56,440 --> 00:03:00,600
Speaker 1: normal levels because of the pandemic to moren real levels.

42
00:03:00,639 --> 00:03:04,080
Speaker 1: They're not going to go to stratisfy spherical levels and

43
00:03:04,440 --> 00:03:08,320
Speaker 1: use car prices. We know how to make cars, but

44
00:03:08,400 --> 00:03:13,440
Speaker 1: there's a short chips, a shorty called wifire in Japan.

45
00:03:13,600 --> 00:03:17,519
Speaker 1: So why killed economy won't solve the problem? Will help?

46
00:03:17,639 --> 00:03:21,399
Speaker 1: Hill Brand got it absolutely right. There's there's an important

47
00:03:21,560 --> 00:03:24,880
Speaker 1: distinction here within what you're saying, which is, as you

48
00:03:24,960 --> 00:03:27,160
Speaker 1: look toward the FED and the way that they should

49
00:03:27,160 --> 00:03:31,920
Speaker 1: handle policy, they should continue to rely on fiscal policymakers

50
00:03:31,960 --> 00:03:34,320
Speaker 1: to try to help the lower class, but that their

51
00:03:34,360 --> 00:03:37,840
Speaker 1: policies are more helpful to the lower income individuals and

52
00:03:37,840 --> 00:03:40,920
Speaker 1: they are harmful in terms of widening the gap, fueling

53
00:03:41,000 --> 00:03:43,840
Speaker 1: market gains that have really led to the bigger dispersion

54
00:03:43,880 --> 00:03:46,280
Speaker 1: between the wealthy and the poor. Can you explain that

55
00:03:46,320 --> 00:03:48,480
Speaker 1: because a lot of people view the FED as the

56
00:03:48,560 --> 00:03:54,920
Speaker 1: instrument of widening this wealth disparity, Well, the Fed, Uh,

57
00:03:55,040 --> 00:03:58,000
Speaker 1: whatever it does has distribution effects. I mean, we have

58
00:03:58,080 --> 00:04:02,040
Speaker 1: to admit that it tries to attend that it's absolutely neutral,

59
00:04:02,520 --> 00:04:06,920
Speaker 1: but what it does has big distributional effects when it

60
00:04:07,120 --> 00:04:10,880
Speaker 1: lowered the interest rate, as it did beginning and the

61
00:04:10,960 --> 00:04:14,920
Speaker 1: Great Recession two thousand and eight, the big gainers were

62
00:04:14,920 --> 00:04:22,279
Speaker 1: those inequity markets. Losers included those who uh elderly people

63
00:04:22,320 --> 00:04:25,279
Speaker 1: who had put their money and tea bills. That return

64
00:04:25,320 --> 00:04:28,400
Speaker 1: they got on their tea bills went to zip uh.

65
00:04:28,560 --> 00:04:31,880
Speaker 1: So they were the people who lost, and the owners

66
00:04:31,880 --> 00:04:36,440
Speaker 1: of the equity overwhelmingly evidence overwhelmingly those in the upper

67
00:04:36,480 --> 00:04:41,520
Speaker 1: one they did very well. No, at the current juncture,

68
00:04:41,680 --> 00:04:45,320
Speaker 1: if you raise the interest rates, it will slow down

69
00:04:45,360 --> 00:04:49,120
Speaker 1: the economy, and the first order impact is going to

70
00:04:49,200 --> 00:04:54,279
Speaker 1: be on unemployment. People who might otherwise have jobs won't

71
00:04:54,360 --> 00:04:57,400
Speaker 1: get those jobs. But but but, Professor Sigletts, how can

72
00:04:57,440 --> 00:04:59,880
Speaker 1: you say that that's really a risk at raising rates

73
00:05:00,000 --> 00:05:03,480
Speaker 1: fift even a hundred basis points at a time when

74
00:05:03,520 --> 00:05:06,039
Speaker 1: they're near zero and you have a labor market that's

75
00:05:06,080 --> 00:05:08,840
Speaker 1: so tight that you have vastly more job openings than

76
00:05:08,880 --> 00:05:12,680
Speaker 1: you do people to fill them. Well, first of all,

77
00:05:13,240 --> 00:05:17,839
Speaker 1: the numbers in the unemployment rate don't give a full

78
00:05:18,000 --> 00:05:21,000
Speaker 1: picture of what is going on in the labor market.

79
00:05:21,760 --> 00:05:27,279
Speaker 1: We are millions short of the number of jobs that

80
00:05:27,320 --> 00:05:31,719
Speaker 1: we would have had had we continued the pace of

81
00:05:31,800 --> 00:05:40,360
Speaker 1: job creation. Well, I think we've lost bonds school population. Yeah,

82
00:05:40,360 --> 00:05:42,520
Speaker 1: we're gonna leave it there. I think with the technology

83
00:05:42,600 --> 00:05:44,680
Speaker 1: when the professor stickers will leave it there and we'll

84
00:05:44,680 --> 00:05:46,760
Speaker 1: have them on again. I had at least four more

85
00:05:46,839 --> 00:05:54,200
Speaker 1: questions as well. I want you to think of Bank

86
00:05:54,200 --> 00:05:56,480
Speaker 1: of America in the long term roll up of many

87
00:05:56,520 --> 00:06:00,240
Speaker 1: banks into one giant bank that could be black So

88
00:06:00,440 --> 00:06:03,240
Speaker 1: Smith Klein, Yes, it's Glasow from way back, and then

89
00:06:03,279 --> 00:06:06,240
Speaker 1: welcome and Smith Climb Beacham in there as well. But

90
00:06:06,240 --> 00:06:11,039
Speaker 1: it's essentially a pharmaceutical and consumer roll up that is challenged.

91
00:06:11,160 --> 00:06:14,239
Speaker 1: Emma Warmsley is of lorel and of course the chief

92
00:06:14,240 --> 00:06:18,040
Speaker 1: executive officer of Glacksow Smith Klein. She and John Pharaoh

93
00:06:18,400 --> 00:06:22,159
Speaker 1: in a conversation. John is Dame Walmsley is under a

94
00:06:22,279 --> 00:06:24,960
Speaker 1: bit of distress. That is a beautiful introduction, Tom, and

95
00:06:25,040 --> 00:06:26,880
Speaker 1: thank you for that, Emma. Fantastic to have you with

96
00:06:26,960 --> 00:06:29,240
Speaker 1: us on the program. Let's work through the outlook that

97
00:06:29,279 --> 00:06:31,320
Speaker 1: we got from earnings this morning. The Nittam out look

98
00:06:31,360 --> 00:06:34,279
Speaker 1: is good, forecasting earnings from the farmer and vaccines business

99
00:06:34,320 --> 00:06:37,240
Speaker 1: to rise to alter fourteen percent. City came out with

100
00:06:37,279 --> 00:06:40,560
Speaker 1: this in response GS case pass to a higher multiple

101
00:06:40,560 --> 00:06:43,640
Speaker 1: remains dependent on solving the post twenty seven growth rate

102
00:06:43,960 --> 00:06:46,719
Speaker 1: as opposed to the near term guidance. What's in the

103
00:06:46,760 --> 00:06:51,280
Speaker 1: pipeline emma that's going to satisfy those people. Well, first, well, John,

104
00:06:51,279 --> 00:06:54,000
Speaker 1: thank you for having me. Absolutely delighted to be here

105
00:06:54,040 --> 00:06:58,200
Speaker 1: today off the back of announcing strong performance for twenty

106
00:06:58,279 --> 00:07:01,839
Speaker 1: one and excellent quarter and really showing momentum across the

107
00:07:01,880 --> 00:07:06,479
Speaker 1: business as we're building into this landmark year in twenty two,

108
00:07:06,640 --> 00:07:10,760
Speaker 1: when as you know, we are separating into two exciting

109
00:07:11,000 --> 00:07:15,160
Speaker 1: growth oriented companies, and delighted to be guiding as you said,

110
00:07:15,200 --> 00:07:18,240
Speaker 1: for this year for new GSK buy a farmer with

111
00:07:18,400 --> 00:07:21,800
Speaker 1: a five to seven top line growth rate and twelve

112
00:07:21,800 --> 00:07:25,320
Speaker 1: to fourteen in terms of operating margin growth, and that

113
00:07:25,400 --> 00:07:30,720
Speaker 1: excludes any contribution from COVID Solutions. It's also the first

114
00:07:30,840 --> 00:07:34,000
Speaker 1: year of the five year outlook we've given of growing

115
00:07:34,080 --> 00:07:36,400
Speaker 1: up more than five and more than ten percent, which

116
00:07:36,440 --> 00:07:39,760
Speaker 1: is really a step change in delivery four g s K,

117
00:07:40,320 --> 00:07:43,480
Speaker 1: and at the heart of that is the progress in innovation.

118
00:07:43,760 --> 00:07:47,000
Speaker 1: When you look back at twenty one, we actually grew

119
00:07:47,040 --> 00:07:50,360
Speaker 1: on new and specialty products by twenty six percent. That's

120
00:07:50,480 --> 00:07:55,360
Speaker 1: very important momentum. We look forward and seeing vaccines obviously

121
00:07:55,400 --> 00:07:59,040
Speaker 1: adut vaccination hit by the prioritization of COVID vaccines, but

122
00:07:59,160 --> 00:08:02,360
Speaker 1: we see shing it's a very sizable product for US,

123
00:08:02,400 --> 00:08:07,360
Speaker 1: doubling by twenty six And I'll come back to consumer later.

124
00:08:07,440 --> 00:08:10,600
Speaker 1: But across our total R and D pipeline, we have

125
00:08:10,800 --> 00:08:14,160
Speaker 1: sixty four assets, twenty two of them are in pivotal

126
00:08:14,200 --> 00:08:17,200
Speaker 1: stages and seven with big milestones in rs V and

127
00:08:17,280 --> 00:08:20,480
Speaker 1: rheumortided author writers, in oncology and in hepatitus B so

128
00:08:20,640 --> 00:08:22,920
Speaker 1: lots to come. I have to say, written the transcript

129
00:08:22,920 --> 00:08:25,640
Speaker 1: from a recent healthcare conference over at JP Morgan and

130
00:08:25,680 --> 00:08:28,400
Speaker 1: your presentation when it went to oncology, I found it depressing,

131
00:08:28,400 --> 00:08:32,240
Speaker 1: gemma depressing, how neglected that area of healthcare has been

132
00:08:32,240 --> 00:08:35,439
Speaker 1: over the last two three years. Just fixing their emma

133
00:08:35,559 --> 00:08:37,520
Speaker 1: as a macron fade. How much for tell? When is

134
00:08:37,559 --> 00:08:41,240
Speaker 1: that going to be for you? Well? Oncology is one

135
00:08:41,280 --> 00:08:44,600
Speaker 1: of the areas of specialty medicine that GSK has reinvested in.

136
00:08:44,640 --> 00:08:47,320
Speaker 1: Remember one of the most important strategic shifts we've been

137
00:08:47,400 --> 00:08:52,120
Speaker 1: driving as towards vaccines and specialty medicines. GSK got out

138
00:08:52,160 --> 00:08:55,880
Speaker 1: of oncology completely, and then over the last four years

139
00:08:56,160 --> 00:09:01,120
Speaker 1: with new talent, UH, some business development moves and homegrown

140
00:09:01,120 --> 00:09:04,280
Speaker 1: assets as well, we've sound really good growth in oncology

141
00:09:04,280 --> 00:09:08,800
Speaker 1: and exciting emerging pipeline too. The tragedy has been over

142
00:09:08,840 --> 00:09:11,640
Speaker 1: the last two years, as you say, actually diagnosis and

143
00:09:11,679 --> 00:09:14,080
Speaker 1: surgery rates are down a lot. I think in a

144
00:09:14,160 --> 00:09:16,320
Speaker 1: variant cancer. I'll give you that example where we have

145
00:09:16,400 --> 00:09:20,600
Speaker 1: a tremendous medicine for women facing into a really difficult

146
00:09:20,640 --> 00:09:24,120
Speaker 1: cancer diagnosis and surgery rates are down twenty percent. So

147
00:09:24,360 --> 00:09:28,280
Speaker 1: we're all hoping that as the pandemic moves into an

148
00:09:28,280 --> 00:09:31,800
Speaker 1: an endemic stage, we're going to see further growth fueled

149
00:09:32,240 --> 00:09:35,120
Speaker 1: through through that and mainly, you know, real impact for patients.

150
00:09:35,200 --> 00:09:36,640
Speaker 1: We hope we can fix some of that because that

151
00:09:36,679 --> 00:09:39,719
Speaker 1: needs to happen soon and quickly. You mentioned spinning off

152
00:09:39,720 --> 00:09:42,920
Speaker 1: the business, splitting into let's talk about how you're going

153
00:09:42,960 --> 00:09:44,920
Speaker 1: to do that. You've got a plan, You've had a plan,

154
00:09:45,400 --> 00:09:48,160
Speaker 1: only leaves got other plants. Have you spoken to the

155
00:09:48,240 --> 00:09:52,000
Speaker 1: CEO about their bit? Have you spoken directly with him?

156
00:09:52,120 --> 00:09:54,920
Speaker 1: We've been very clear and very public since the news

157
00:09:55,000 --> 00:09:59,760
Speaker 1: on this emerged in our press release statements. That's obviously

158
00:10:00,040 --> 00:10:04,320
Speaker 1: g s k's priority. In fact, since we announced the

159
00:10:04,320 --> 00:10:07,400
Speaker 1: deal with Visor several years ago and are intent to emerge,

160
00:10:07,400 --> 00:10:11,640
Speaker 1: our priority has always been about creating shareholder value. So

161
00:10:12,040 --> 00:10:15,920
Speaker 1: when these unsolicited offers came in, obviously the board took

162
00:10:15,960 --> 00:10:20,200
Speaker 1: its responsibilities to review them very seriously, very seriously, and

163
00:10:20,280 --> 00:10:24,760
Speaker 1: after that we did reject them unanimously, alongside our joint

164
00:10:24,800 --> 00:10:28,319
Speaker 1: venture partners as well, just for fundamentally undervaluing what we've

165
00:10:28,360 --> 00:10:31,520
Speaker 1: built in this pure play consumer business and particularly it's

166
00:10:31,600 --> 00:10:35,560
Speaker 1: future prospects for growth. We've had a lot of support

167
00:10:35,920 --> 00:10:38,280
Speaker 1: and some of it very public from our shareholders who

168
00:10:38,320 --> 00:10:41,160
Speaker 1: we listened to and talked to a lot about continuing

169
00:10:41,160 --> 00:10:43,760
Speaker 1: with the plan forward in terms of a emerger that's

170
00:10:43,760 --> 00:10:45,240
Speaker 1: in a matter of months, and we have a great

171
00:10:45,280 --> 00:10:47,880
Speaker 1: Capital Markets Day coming up on the twenty February when

172
00:10:47,880 --> 00:10:50,120
Speaker 1: we're bringing going to bring a lot more visibility to

173
00:10:50,240 --> 00:10:53,640
Speaker 1: the above market growth prospects for this business. It's sustainable

174
00:10:53,679 --> 00:10:57,079
Speaker 1: margin expansion, great cash generation and the truly unique portfolio

175
00:10:57,120 --> 00:10:59,360
Speaker 1: and great management team. Well, maybe Alan has other plans

176
00:10:59,360 --> 00:11:01,200
Speaker 1: for the end of the Maybe he has other plans

177
00:11:01,200 --> 00:11:03,240
Speaker 1: to come back. Is he aware of what your price is.

178
00:11:03,840 --> 00:11:05,680
Speaker 1: I don't expect you to negotiate with me right now,

179
00:11:05,760 --> 00:11:07,800
Speaker 1: but does he know what your price is? We've been

180
00:11:07,920 --> 00:11:12,000
Speaker 1: extremely clear that our priority is shareholder value creation. We've

181
00:11:12,040 --> 00:11:15,240
Speaker 1: never disclosed any kind of price. Our focus is on

182
00:11:15,320 --> 00:11:19,719
Speaker 1: making sure that we you know, prioritize our shareholders, that

183
00:11:19,760 --> 00:11:24,040
Speaker 1: we unlock the balance sheet for GSK absently a better

184
00:11:24,080 --> 00:11:26,960
Speaker 1: offer than the plan we're working on for the d merger.

185
00:11:27,000 --> 00:11:29,559
Speaker 1: We're going to stay very focused on executing that success.

186
00:11:29,600 --> 00:11:31,400
Speaker 1: You know what Elliott Management thinks. This is what they

187
00:11:31,440 --> 00:11:33,640
Speaker 1: put out in a letter last year. I'm going to

188
00:11:33,920 --> 00:11:36,000
Speaker 1: allow you to respond to that emer and just the moment.

189
00:11:36,040 --> 00:11:38,960
Speaker 1: This was the quote from last July. This is a

190
00:11:39,040 --> 00:11:43,080
Speaker 1: firm with quote a poor record of operational execution and

191
00:11:43,200 --> 00:11:47,520
Speaker 1: value creation, leading to skepticism about the company's future and

192
00:11:47,679 --> 00:11:52,000
Speaker 1: under appreciation of its true potential for some people. M A,

193
00:11:52,080 --> 00:11:54,959
Speaker 1: you are a CEO under pressure at the moment. It's

194
00:11:55,000 --> 00:11:57,480
Speaker 1: almost five years at the top, five years which have

195
00:11:57,520 --> 00:12:00,319
Speaker 1: delivered negative returns for the stock. How you're going to

196
00:12:00,400 --> 00:12:04,400
Speaker 1: keep people like Elliott Management happy? Well, we are very

197
00:12:04,400 --> 00:12:08,360
Speaker 1: focused on listening and to our shareholders and talking to them.

198
00:12:08,400 --> 00:12:12,920
Speaker 1: I was brought in to address perennial under performance for

199
00:12:12,960 --> 00:12:16,160
Speaker 1: this company, and over the last four years we've been

200
00:12:16,200 --> 00:12:21,040
Speaker 1: addressing in a comprehensive way a wholesale transformation of reprioritizing

201
00:12:21,080 --> 00:12:24,000
Speaker 1: investment in R and D and strengthening the pipeline that

202
00:12:24,040 --> 00:12:27,240
Speaker 1: we've definitely seen now with twenty two assets in our

203
00:12:27,280 --> 00:12:32,119
Speaker 1: pipeline and pivotal stage readouts, we have been completely reset

204
00:12:32,520 --> 00:12:36,320
Speaker 1: the group's structure with this path forward into separation into

205
00:12:36,320 --> 00:12:38,800
Speaker 1: two new companies, and most importantly, we're going to see

206
00:12:38,840 --> 00:12:42,640
Speaker 1: all of that translating into meaningful growth and we're incredibly

207
00:12:42,640 --> 00:12:44,720
Speaker 1: excited that the year this year is going to be

208
00:12:44,760 --> 00:12:47,280
Speaker 1: the first year of that delivery of more than five

209
00:12:48,360 --> 00:12:50,880
Speaker 1: five percent top line growth and more than double digit

210
00:12:51,080 --> 00:12:54,880
Speaker 1: bottom line bottom line growth, whilst allowing for continued investment

211
00:12:54,960 --> 00:12:58,760
Speaker 1: in and prioritizing of the pipeline with a great leadership

212
00:12:58,800 --> 00:13:03,000
Speaker 1: team that's completely to delivery for that. So I look

213
00:13:03,000 --> 00:13:05,520
Speaker 1: forward to seeing that step up performance materialized and catching

214
00:13:05,559 --> 00:13:07,000
Speaker 1: up with you soon. Thank you for being with us.

215
00:13:07,040 --> 00:13:15,680
Speaker 1: Emma Walmsley, Dad the CEO of Glacksow Smith Klein. Right now,

216
00:13:15,760 --> 00:13:17,960
Speaker 1: what we're gonna say is this, the research has gotten

217
00:13:17,960 --> 00:13:21,079
Speaker 1: better since the crisis two thousand seven. Two thou eight

218
00:13:21,160 --> 00:13:24,480
Speaker 1: is a broad statement. Research is better, but then there

219
00:13:24,480 --> 00:13:27,559
Speaker 1: every once in a while exceptional pieces where you go, well,

220
00:13:27,600 --> 00:13:29,800
Speaker 1: this ruins my afternoon. I've got to read every word.

221
00:13:30,240 --> 00:13:33,800
Speaker 1: I do that with Alex Schiller, Danny Newman, and Rebecca

222
00:13:33,840 --> 00:13:37,920
Speaker 1: Patterson at the Bridgewater Shop. They wrote a brilliant, brilliant

223
00:13:37,920 --> 00:13:40,920
Speaker 1: note on the dynamics of what we've got with rate

224
00:13:41,040 --> 00:13:44,439
Speaker 1: changes and balance sheet changes at our central Bank. We're

225
00:13:44,480 --> 00:13:48,000
Speaker 1: on the Rebecca Patterson of Bridgewater joins us this morning. Rebecca,

226
00:13:48,040 --> 00:13:51,960
Speaker 1: congratulations on a thought provoking note. How does all of

227
00:13:52,040 --> 00:13:56,200
Speaker 1: this monetary dynamics, think of the mathematics of say Richard

228
00:13:56,240 --> 00:13:59,560
Speaker 1: Clart of Colombia and x FED, how does all of

229
00:13:59,600 --> 00:14:04,000
Speaker 1: that fold into your guestimate on what economic growth will

230
00:14:04,080 --> 00:14:07,360
Speaker 1: do well? First of all, thank you so much, Tom.

231
00:14:07,400 --> 00:14:11,040
Speaker 1: That was very kind of you so early in the morning. Especially,

232
00:14:11,120 --> 00:14:14,840
Speaker 1: I'm only kind early in the morning. So in terms

233
00:14:14,920 --> 00:14:17,320
Speaker 1: of the FED, you know, I really think they're in

234
00:14:17,320 --> 00:14:20,680
Speaker 1: one of the most difficult situations in our lifetimes, and

235
00:14:20,800 --> 00:14:24,360
Speaker 1: that you still have very strong nominal demand. Even if

236
00:14:24,360 --> 00:14:27,480
Speaker 1: growth moderates a little bit this year. We expect nominal

237
00:14:27,520 --> 00:14:29,800
Speaker 1: demand is going to be well over nominal GDP will

238
00:14:29,800 --> 00:14:33,520
Speaker 1: be well over consensus expectations, but also you have inflation

239
00:14:33,600 --> 00:14:37,400
Speaker 1: well overation over expectations. And our view is twelve months

240
00:14:37,440 --> 00:14:40,440
Speaker 1: from now, CPI is probably going to be closer to

241
00:14:40,520 --> 00:14:45,240
Speaker 1: a five figure, not the three ish that consensus is

242
00:14:45,280 --> 00:14:47,920
Speaker 1: looking for. And so what does the Fed do If

243
00:14:47,960 --> 00:14:50,520
Speaker 1: they tighten too much, they risk slowing down the economy,

244
00:14:50,600 --> 00:14:53,000
Speaker 1: starting a recession. They don't want to do that. They're

245
00:14:53,040 --> 00:14:55,760
Speaker 1: dealing with pandemic related data which doesn't give them as

246
00:14:55,840 --> 00:14:59,280
Speaker 1: much confidence in their view, and their scarred I'm being

247
00:14:59,360 --> 00:15:03,760
Speaker 1: generous he by you know, the tightening both rates and

248
00:15:03,920 --> 00:15:08,160
Speaker 1: quantitative tightening guy gave us a sell off, so they

249
00:15:08,200 --> 00:15:10,320
Speaker 1: don't want to go too fast, but they also want

250
00:15:10,320 --> 00:15:13,720
Speaker 1: to make sure inflation expectations don't get deanchored. So our

251
00:15:13,720 --> 00:15:15,360
Speaker 1: our view is that you are going to see more

252
00:15:15,480 --> 00:15:17,880
Speaker 1: rate heights than what has been priced in so far

253
00:15:18,120 --> 00:15:21,080
Speaker 1: over the next couple of years, but not as much

254
00:15:21,120 --> 00:15:24,040
Speaker 1: as needed to get inflation back down to that two

255
00:15:24,040 --> 00:15:26,680
Speaker 1: percent target. I love the nominal analysis. It reminds me

256
00:15:26,720 --> 00:15:28,880
Speaker 1: of cuddlo Ad bear Sturns a million years ago. And

257
00:15:28,880 --> 00:15:31,000
Speaker 1: I want to take it over to a guy named Gallio,

258
00:15:31,400 --> 00:15:34,760
Speaker 1: who has looked at the social dynamics of social aspects

259
00:15:34,960 --> 00:15:37,520
Speaker 1: of this is recent interview with David Rubinstein. I thought

260
00:15:37,560 --> 00:15:40,480
Speaker 1: it was illuminating Rebecca Patterson. If we get a five

261
00:15:40,520 --> 00:15:45,200
Speaker 1: percent inflation rate, what is the societal dispersion, the effect

262
00:15:45,400 --> 00:15:49,240
Speaker 1: of five percent inflation between the halves and the have nots.

263
00:15:50,680 --> 00:15:52,520
Speaker 1: It's a great point and I think it's something the

264
00:15:52,520 --> 00:15:55,040
Speaker 1: FED is also looking at. And one of the reasons

265
00:15:55,080 --> 00:15:58,440
Speaker 1: they're going to lean relatively more on balance sheet rather

266
00:15:58,480 --> 00:16:01,520
Speaker 1: than rates is because when you raise rates, you are

267
00:16:01,560 --> 00:16:04,520
Speaker 1: going to hit small businesses relatively more. You are going

268
00:16:04,520 --> 00:16:07,760
Speaker 1: to hit that lower socioeconomic cohort more because they rely

269
00:16:08,000 --> 00:16:10,600
Speaker 1: relatively more on credit cards. So that's one of the

270
00:16:10,640 --> 00:16:13,040
Speaker 1: reasons the FED would prefer to do a balance of

271
00:16:13,080 --> 00:16:16,640
Speaker 1: these tools rather than just rate hikes. UM. But as

272
00:16:16,640 --> 00:16:19,880
Speaker 1: we're looking at the different quintiles, if you will, of

273
00:16:19,920 --> 00:16:23,520
Speaker 1: wealth in the United States today, one good thing, great

274
00:16:23,560 --> 00:16:28,720
Speaker 1: thing is that the fiscal transfers we got in one

275
00:16:28,880 --> 00:16:33,200
Speaker 1: have created more wealth for everybody. UM. You have seen

276
00:16:33,280 --> 00:16:36,800
Speaker 1: wealth at the bottom cohort go up significantly, their balance

277
00:16:36,840 --> 00:16:40,440
Speaker 1: sheets are stronger, their debt levels are relatively lower. UM,

278
00:16:40,480 --> 00:16:44,760
Speaker 1: they're seeing big wage increases and so high inflation, especially

279
00:16:44,840 --> 00:16:48,120
Speaker 1: gas prices, energy prices, food prices, those are the big ones.

280
00:16:48,480 --> 00:16:51,880
Speaker 1: They're definitely going to be a problem, but at least

281
00:16:52,000 --> 00:16:55,240
Speaker 1: is happening against this backdrop where the starting point is

282
00:16:55,320 --> 00:16:57,760
Speaker 1: so much stronger than it has been coming out of

283
00:16:57,800 --> 00:17:01,400
Speaker 1: past recessions. This dynamic, however, of echa of negative real

284
00:17:01,440 --> 00:17:04,479
Speaker 1: wage growth, particularly at the lower income levels, is one

285
00:17:04,520 --> 00:17:06,720
Speaker 1: of the reasons why people are saying we won't get

286
00:17:06,720 --> 00:17:08,960
Speaker 1: to that five percent level in twelve months. It will

287
00:17:09,000 --> 00:17:12,000
Speaker 1: be much lower than that, because realistically the economy will

288
00:17:12,040 --> 00:17:14,680
Speaker 1: have to slow, and we're seeing that in consumer sentiment data.

289
00:17:14,760 --> 00:17:17,960
Speaker 1: How do you push back against that? Well, I think

290
00:17:18,160 --> 00:17:20,320
Speaker 1: I think that we are going to see stronger nominal

291
00:17:20,359 --> 00:17:23,280
Speaker 1: growth this year for a couple of reasons. One is

292
00:17:23,320 --> 00:17:26,560
Speaker 1: the reopening itself. So as oh Macron continues to fade,

293
00:17:26,560 --> 00:17:29,760
Speaker 1: hopefully and hopefully we have no new variants, we are

294
00:17:29,800 --> 00:17:33,480
Speaker 1: going to see people going out to restaurants more, spending

295
00:17:33,520 --> 00:17:36,040
Speaker 1: more on travel, etcetera. And yes, part of that is

296
00:17:36,040 --> 00:17:38,560
Speaker 1: a shift from goods to services, but overall we think

297
00:17:38,600 --> 00:17:41,880
Speaker 1: that continues to so port growth. I think, even more importantly,

298
00:17:42,080 --> 00:17:45,280
Speaker 1: we think will continue to see an inventory rebuild. Now,

299
00:17:45,359 --> 00:17:47,960
Speaker 1: how it affects GDP is a little bit wonky. I

300
00:17:47,960 --> 00:17:50,159
Speaker 1: don't want to go into that right now, but I

301
00:17:50,200 --> 00:17:53,640
Speaker 1: do think that inventory rebuild will continue to create demand,

302
00:17:53,680 --> 00:17:56,280
Speaker 1: which will create jobs, which will create incomes and spending.

303
00:17:56,680 --> 00:17:58,639
Speaker 1: And then third, we think we're just in the early

304
00:17:58,720 --> 00:18:02,000
Speaker 1: stages of a cap ex goal, which his recent years

305
00:18:02,000 --> 00:18:04,000
Speaker 1: has been mainly tech. We think it's gonna be fairly

306
00:18:04,000 --> 00:18:06,240
Speaker 1: broad based, and that's also going to be a support

307
00:18:06,280 --> 00:18:09,680
Speaker 1: for growth. You still have eleven million job openings out

308
00:18:09,680 --> 00:18:12,480
Speaker 1: there right now, and while the pandemic slowing down is

309
00:18:12,520 --> 00:18:14,760
Speaker 1: going to bring some people back to the labor market,

310
00:18:15,000 --> 00:18:17,520
Speaker 1: we think to get all those people back in to

311
00:18:17,640 --> 00:18:21,040
Speaker 1: reduce that UM that gap, we are going to see

312
00:18:21,240 --> 00:18:23,800
Speaker 1: significantly higher wages. We think the wage growth is going

313
00:18:23,840 --> 00:18:26,879
Speaker 1: to be sticky. We think commodity prices are likely to

314
00:18:26,920 --> 00:18:29,920
Speaker 1: be sticky. We think house prices will be sticky. All

315
00:18:29,960 --> 00:18:34,880
Speaker 1: of those simply because supply can't meet demand. UM Rebecca.

316
00:18:35,119 --> 00:18:38,639
Speaker 1: Within this scenario, here's what I'm struggling with. Five percent

317
00:18:38,720 --> 00:18:42,920
Speaker 1: inflation twelve months out means a serious bond market sell off.

318
00:18:43,000 --> 00:18:47,199
Speaker 1: It means a complete recalibration of longer term real yields

319
00:18:47,200 --> 00:18:51,280
Speaker 1: of longer term base rates that the FED can really address.

320
00:18:51,680 --> 00:18:54,560
Speaker 1: How can the market continue to climb and the economy

321
00:18:54,600 --> 00:18:57,439
Speaker 1: continue to be stronger than it has been pre pandemic

322
00:18:57,720 --> 00:19:01,080
Speaker 1: With that type of market turmoil, I think you just

323
00:19:01,160 --> 00:19:03,120
Speaker 1: hit the nail on the head. What what I think

324
00:19:03,160 --> 00:19:07,200
Speaker 1: we're shifting into right now is is really an inflection

325
00:19:07,320 --> 00:19:11,240
Speaker 1: point versus the last twenty thirty years. We had central

326
00:19:11,240 --> 00:19:15,520
Speaker 1: banks fighting deflationary risks, bond yields worth falling kind of structurally,

327
00:19:16,040 --> 00:19:18,800
Speaker 1: and that was pushing people out into more risky assets,

328
00:19:18,840 --> 00:19:23,040
Speaker 1: out into more stocks, and specifically longer duration stocks because

329
00:19:23,080 --> 00:19:26,000
Speaker 1: they benefit from that liquidity. So where we were left

330
00:19:26,640 --> 00:19:31,960
Speaker 1: is investors long bonds, long tech and growth stocks specifically,

331
00:19:32,040 --> 00:19:34,520
Speaker 1: and guess who has the most of those the US.

332
00:19:34,560 --> 00:19:37,160
Speaker 1: So now we're seeing a reversal of that entire thing.

333
00:19:37,520 --> 00:19:41,600
Speaker 1: We're seeing higher inflation, pushing central banks to tighten um,

334
00:19:41,600 --> 00:19:44,840
Speaker 1: pushing people out of those long duration stocks, pushing people

335
00:19:44,920 --> 00:19:47,560
Speaker 1: out of those bonds. I think that leaves the US

336
00:19:47,600 --> 00:19:51,800
Speaker 1: stock market relatively more vulnerable than a lot of markets overseas.

337
00:19:51,880 --> 00:19:54,840
Speaker 1: We're not barish on US equities, but we think that

338
00:19:54,880 --> 00:19:57,160
Speaker 1: the opportunity this year for the first time in many

339
00:19:57,280 --> 00:19:59,760
Speaker 1: years is going to be more outside the US than

340
00:19:59,840 --> 00:20:02,240
Speaker 1: in And for those reasons I just cited Rebecca, I

341
00:20:02,240 --> 00:20:04,960
Speaker 1: want to go back to your dark, conclouded past in

342
00:20:05,080 --> 00:20:09,280
Speaker 1: talk dollar and foreign exchanges. Well, to me, it's amazing

343
00:20:09,320 --> 00:20:12,719
Speaker 1: the foreign exchange tightness, the range bound nature of it.

344
00:20:12,840 --> 00:20:16,320
Speaker 1: When it breaks, which way does dollar break? Oh, that

345
00:20:16,400 --> 00:20:20,399
Speaker 1: we're wrestling with that one. Internally right now. We have

346
00:20:20,440 --> 00:20:22,879
Speaker 1: a mixed view on the dollar. We're embarished on the

347
00:20:22,920 --> 00:20:25,320
Speaker 1: dollar against some of these currencies that we think will

348
00:20:25,359 --> 00:20:30,280
Speaker 1: benefit relatively more from commodity rises from that inflation cycle,

349
00:20:30,880 --> 00:20:32,880
Speaker 1: and then we're bullish dollar against some of the other

350
00:20:32,920 --> 00:20:35,840
Speaker 1: reserve currencies, especially where the central banks don't face the

351
00:20:35,880 --> 00:20:38,680
Speaker 1: same amount of pressure. Japan would obviously be a good

352
00:20:38,680 --> 00:20:42,040
Speaker 1: example of that, or something like China where we see

353
00:20:42,040 --> 00:20:44,520
Speaker 1: them actually easy and we think there's more easy to come.

354
00:20:44,880 --> 00:20:47,399
Speaker 1: The really interesting thing Tom right now with the dollar

355
00:20:47,680 --> 00:20:50,720
Speaker 1: is that you do have this fed tightening cycle just

356
00:20:50,720 --> 00:20:53,600
Speaker 1: just warming up right now, and higher yields traditionally have

357
00:20:53,640 --> 00:20:56,320
Speaker 1: been a big support for a currency, but we also

358
00:20:56,400 --> 00:20:59,120
Speaker 1: have a pretty wide current account deficits, so a big

359
00:20:59,119 --> 00:21:02,000
Speaker 1: external finance you need. And when I just mentioned a

360
00:21:02,040 --> 00:21:04,680
Speaker 1: minute ago about all these people who have gone into

361
00:21:04,680 --> 00:21:08,440
Speaker 1: the US. Foreign allocations to U stocks and bonds today

362
00:21:08,520 --> 00:21:11,560
Speaker 1: are the highest they've been since the mid eighties. And

363
00:21:11,600 --> 00:21:14,000
Speaker 1: so if we see that foreign money, maybe not all

364
00:21:14,040 --> 00:21:16,639
Speaker 1: of it, but a piece of that coming out harder

365
00:21:16,680 --> 00:21:19,480
Speaker 1: to finance our current account deficit, that's going to be

366
00:21:19,480 --> 00:21:22,240
Speaker 1: a pretty big barrished dollar pressure. And I think that

367
00:21:22,480 --> 00:21:25,800
Speaker 1: is part of the reason in January possibly that we

368
00:21:25,840 --> 00:21:29,040
Speaker 1: saw a dollar weaker despite yields going up. Was that

369
00:21:29,440 --> 00:21:32,280
Speaker 1: saw off and some of those foreign investors maybe pulling

370
00:21:32,400 --> 00:21:34,679
Speaker 1: back a bit. So I think it's gonna be a

371
00:21:34,800 --> 00:21:37,600
Speaker 1: much more unusual year for the dollar than you'd normally

372
00:21:37,640 --> 00:21:40,919
Speaker 1: expect in a tightening cycle. Again, just watch the money

373
00:21:41,000 --> 00:21:44,600
Speaker 1: watch where you see the foreign capital going in and

374
00:21:44,600 --> 00:21:47,520
Speaker 1: out of US bonds and US stocks. Rebecca, that was

375
00:21:47,560 --> 00:21:50,359
Speaker 1: a clinic. Thank you, Rebecca Cadison, that Ridge, what are

376
00:21:50,359 --> 00:21:57,960
Speaker 1: we appreciate it right now? Our math conversation for the

377
00:21:58,040 --> 00:22:00,480
Speaker 1: day we do that with Amy with Silverman, really quite

378
00:22:00,560 --> 00:22:03,959
Speaker 1: good and the derivatives and the dynamics of the market

379
00:22:04,119 --> 00:22:06,920
Speaker 1: at the Royal Bank of Canada RBC Ay, thank you

380
00:22:07,040 --> 00:22:09,560
Speaker 1: so much for joining UH this morning. I want to

381
00:22:09,640 --> 00:22:12,320
Speaker 1: cut to the chase, which as you go cross asset

382
00:22:12,840 --> 00:22:17,880
Speaker 1: and your derivative analysis and look at equity presentation against

383
00:22:18,040 --> 00:22:24,520
Speaker 1: optionality and the credit market, explain that in English, sure,

384
00:22:24,840 --> 00:22:28,280
Speaker 1: you know. Look it's uh, it always makes options people

385
00:22:28,320 --> 00:22:32,040
Speaker 1: a little nervous when you see a flurry of credit hedging,

386
00:22:32,440 --> 00:22:35,639
Speaker 1: so people buying downside protection in h y G the

387
00:22:35,720 --> 00:22:37,760
Speaker 1: high old bond proxy e t F t L t

388
00:22:38,040 --> 00:22:41,280
Speaker 1: l QT. We've seen a lot of that tom a lot.

389
00:22:41,800 --> 00:22:44,480
Speaker 1: And even though we're getting that vixed number, as you said,

390
00:22:44,600 --> 00:22:47,879
Speaker 1: kind of going back to sub twenty levels, that dynamic

391
00:22:48,000 --> 00:22:52,000
Speaker 1: between the cross asset credit hedging uh not abating is

392
00:22:52,040 --> 00:22:54,040
Speaker 1: a bit of a divergence from what we're seeing in

393
00:22:54,119 --> 00:22:56,399
Speaker 1: equities right now. I mean something's going on to the

394
00:22:56,440 --> 00:22:59,399
Speaker 1: single name level as well. Facebook just having a massive

395
00:22:59,520 --> 00:23:01,919
Speaker 1: months to on a single day. That's surprised a lot

396
00:23:02,000 --> 00:23:04,919
Speaker 1: of people. But you take some signal from what happened

397
00:23:04,960 --> 00:23:07,560
Speaker 1: with Facebook about the consumer at the lower end of

398
00:23:07,600 --> 00:23:10,280
Speaker 1: the white spectrum, the lower end of wealth in the

399
00:23:10,400 --> 00:23:13,280
Speaker 1: United States of America not throwing small business confidence as well.

400
00:23:13,720 --> 00:23:15,760
Speaker 1: You've got the media numbers, the average, and you've got

401
00:23:15,800 --> 00:23:18,240
Speaker 1: the top end numbers which seem to blur the average,

402
00:23:18,240 --> 00:23:20,399
Speaker 1: and I mean there's something going on at the lower end.

403
00:23:20,440 --> 00:23:22,000
Speaker 1: I think we've got to pay attention to what are

404
00:23:22,000 --> 00:23:25,920
Speaker 1: you looking at? Yeah, we've been quite fixated on this

405
00:23:26,240 --> 00:23:29,399
Speaker 1: because you know, something our condust Tom port Shelli has

406
00:23:29,480 --> 00:23:32,639
Speaker 1: highlighted is, you know that bottom wind tile of folks

407
00:23:33,160 --> 00:23:35,919
Speaker 1: are now at a point where their liquid assets are

408
00:23:36,080 --> 00:23:39,760
Speaker 1: at you know, lower than pre pandemic levels. And whether

409
00:23:39,880 --> 00:23:42,920
Speaker 1: or not that lead through has really been priced into options.

410
00:23:43,040 --> 00:23:45,320
Speaker 1: You know, the short answer there, John is it hasn't.

411
00:23:45,760 --> 00:23:50,000
Speaker 1: So like an ALI or Dollar Store, Dollar Tree, Dollar General,

412
00:23:50,119 --> 00:23:53,360
Speaker 1: you know that Walmart, Yum, all these cohorts where it's

413
00:23:53,440 --> 00:23:56,879
Speaker 1: very leverage that low end consumer. Uh, you're not seeing

414
00:23:57,000 --> 00:24:00,440
Speaker 1: that concern yet weighted in the options pricing. The second

415
00:24:00,480 --> 00:24:03,920
Speaker 1: thing I'll say is this earning season, options have really

416
00:24:04,040 --> 00:24:07,480
Speaker 1: paid off. So even with those high vixed numbers going

417
00:24:07,560 --> 00:24:10,600
Speaker 1: into Facebook, going into PayPal, going to all these earnings,

418
00:24:10,760 --> 00:24:14,360
Speaker 1: options were probably implying you know, relatively average implied moves,

419
00:24:14,400 --> 00:24:16,640
Speaker 1: and we beat them by two or three times across

420
00:24:16,680 --> 00:24:19,680
Speaker 1: the board. That's very unusual and we think that continues

421
00:24:19,840 --> 00:24:23,359
Speaker 1: in particular for these names leverage that low end consumer. Well,

422
00:24:23,359 --> 00:24:25,800
Speaker 1: what what are you seeing that? Namy with Silverman. That's

423
00:24:25,840 --> 00:24:29,560
Speaker 1: going against the common narrative that the lower income individuals

424
00:24:29,600 --> 00:24:33,040
Speaker 1: are actually doing better, they're seeing disproportionate wage increases, and

425
00:24:33,119 --> 00:24:35,159
Speaker 1: they still have a lot of cash left over from

426
00:24:35,200 --> 00:24:40,000
Speaker 1: the fiscal impulse last year. Yeah, you know, I think

427
00:24:40,080 --> 00:24:42,400
Speaker 1: what what is interesting is some of the read through

428
00:24:42,520 --> 00:24:44,920
Speaker 1: that we've gotten from the recent reports would say that's

429
00:24:44,960 --> 00:24:48,440
Speaker 1: not necessarily true. And you're also starting to say, see

430
00:24:48,520 --> 00:24:50,920
Speaker 1: other companies who have yet report, like I mentioned, like

431
00:24:51,040 --> 00:24:54,480
Speaker 1: that Alis where you know that weakness is. So it

432
00:24:54,600 --> 00:24:57,399
Speaker 1: was all give you an example, Ali normal excuse that

433
00:24:57,520 --> 00:25:00,560
Speaker 1: demand for hedging number this past weekend was trading at

434
00:25:00,600 --> 00:25:03,800
Speaker 1: average and now today has spiked to an all time

435
00:25:03,880 --> 00:25:07,200
Speaker 1: High's that's that downside skew number. So you know, earlier

436
00:25:07,280 --> 00:25:09,440
Speaker 1: this week and even last week, we're not seeing that

437
00:25:09,560 --> 00:25:11,920
Speaker 1: start to be priced in, but now the options market

438
00:25:12,000 --> 00:25:14,879
Speaker 1: is starting to flag that concern to the downside. And

439
00:25:14,960 --> 00:25:17,119
Speaker 1: these again are all the names where they're in particular

440
00:25:17,240 --> 00:25:20,240
Speaker 1: more leveraged to that low and consumer than they would

441
00:25:20,280 --> 00:25:23,160
Speaker 1: be to kind of your middle income or higher end consumer.

442
00:25:23,280 --> 00:25:26,639
Speaker 1: This is a specific idiosyncratic trade targeting the likes of

443
00:25:26,720 --> 00:25:29,359
Speaker 1: Walmart in Dollar General. As you were saying, companies that

444
00:25:29,480 --> 00:25:32,520
Speaker 1: are leveraged to these consumers. However, is there a broader

445
00:25:32,560 --> 00:25:35,960
Speaker 1: read through to the other equity parts that perhaps have

446
00:25:36,080 --> 00:25:41,200
Speaker 1: seemed invulnerable so far? Yeah, so, you know, I think

447
00:25:41,280 --> 00:25:43,240
Speaker 1: like that always goes back Lee said to how the

448
00:25:43,320 --> 00:25:45,679
Speaker 1: meat has made. So if you're looking at a broader

449
00:25:45,800 --> 00:25:48,320
Speaker 1: read through two queues, you know that's going to be

450
00:25:48,440 --> 00:25:50,959
Speaker 1: more tech heavy, whereas your I w M s uh

451
00:25:51,080 --> 00:25:52,879
Speaker 1: you know, are less so. And you have seen the

452
00:25:52,960 --> 00:25:56,520
Speaker 1: performance diverge there. But I will tell you overall on

453
00:25:56,640 --> 00:25:59,680
Speaker 1: an on a you know et F index level option

454
00:25:59,760 --> 00:26:03,159
Speaker 1: prices have still been you know, relatively okay that they

455
00:26:03,240 --> 00:26:06,520
Speaker 1: have not shown that concern even though we've seen a

456
00:26:06,600 --> 00:26:09,600
Speaker 1: lot of demand for downside coming into the credit et s.

457
00:26:10,000 --> 00:26:12,960
Speaker 1: And you know what we did is we ran h basically,

458
00:26:13,320 --> 00:26:16,879
Speaker 1: you know, a cycle of what happens to SMP versus

459
00:26:16,920 --> 00:26:19,719
Speaker 1: something like high yield during different rate cycles, and they

460
00:26:19,760 --> 00:26:23,360
Speaker 1: remain highly correlated. So we're talking ad plus percent correlation

461
00:26:23,440 --> 00:26:26,600
Speaker 1: in different rate cycles, which tells me, you know, one

462
00:26:26,640 --> 00:26:29,760
Speaker 1: way or the other. Uh, someone is wrong. It's it's

463
00:26:29,800 --> 00:26:32,040
Speaker 1: either the SMP or that I M or ques or

464
00:26:32,080 --> 00:26:33,920
Speaker 1: it's going to be those credit bond proxy E T

465
00:26:34,160 --> 00:26:36,040
Speaker 1: s so Amy, just in terms of h y G

466
00:26:36,480 --> 00:26:38,639
Speaker 1: at the moment that junk bond E t F. How

467
00:26:38,680 --> 00:26:43,200
Speaker 1: would you play that at the moment. Yeah, So you know, look,

468
00:26:43,440 --> 00:26:46,159
Speaker 1: something really simple is just to own h y G puts.

469
00:26:46,240 --> 00:26:48,080
Speaker 1: And the reason I say that, even though we've seen that,

470
00:26:48,320 --> 00:26:50,600
Speaker 1: you know, lift up in demand, is you can kind

471
00:26:50,600 --> 00:26:52,760
Speaker 1: of pull h y G back to its full history,

472
00:26:52,840 --> 00:26:57,160
Speaker 1: which includes seventeen rate hike. Your skew levels are still

473
00:26:57,280 --> 00:26:59,879
Speaker 1: in their bottom quartile, even though they look expensive now

474
00:27:00,000 --> 00:27:02,480
Speaker 1: if you just look at on a pandemic basis, and

475
00:27:02,640 --> 00:27:04,760
Speaker 1: one thing, one wrinkle I think you guys will remember

476
00:27:04,960 --> 00:27:06,720
Speaker 1: is h y G was one of the names that

477
00:27:06,800 --> 00:27:09,920
Speaker 1: FED was buying in their facility last year. So I

478
00:27:10,000 --> 00:27:12,639
Speaker 1: think to some degree those numbers in the last two

479
00:27:12,680 --> 00:27:15,080
Speaker 1: years are very skewed because h y G and other

480
00:27:15,119 --> 00:27:17,399
Speaker 1: et s were actually being purchased by the FED in

481
00:27:17,480 --> 00:27:20,080
Speaker 1: the facility, you know, in and around this time, which

482
00:27:20,119 --> 00:27:21,960
Speaker 1: is how most people look at their windows, which is

483
00:27:22,000 --> 00:27:23,880
Speaker 1: why I think you go longer data and you see

484
00:27:24,240 --> 00:27:27,000
Speaker 1: that skew number is still relatively expensive, which means hedging

485
00:27:27,080 --> 00:27:30,399
Speaker 1: is still relatively inexpensive. Really important conversation, Ammy, Thank you

486
00:27:30,760 --> 00:27:33,320
Speaker 1: as always Ammy, with Silverman, the brilliant amy with Silverman

487
00:27:33,680 --> 00:27:36,040
Speaker 1: of our BC in that relationship least of between credit

488
00:27:36,640 --> 00:27:41,199
Speaker 1: and equities. This is the Bloomberg Surveillance Podcast. Thanks for listening.

489
00:27:41,640 --> 00:27:44,920
Speaker 1: Join us live weekdays from seven to ten am Eastern

490
00:27:45,200 --> 00:27:49,200
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from

491
00:27:49,280 --> 00:27:54,520
Speaker 1: six to nine am for insight from the best in economics, finance, investment,

492
00:27:54,720 --> 00:27:59,680
Speaker 1: and international relations. And subscribe to the Surveillance podcast on

493
00:28:00,000 --> 00:28:04,320
Speaker 1: podcast SoundCloud, Bloomberg dot com, and of course on the terminal.

494
00:28:04,960 --> 00:28:15,240
Speaker 1: I'm Tom keene In. This is Bloomberg m