Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. What we're gonna
Speaker 1: do is dive into a conversation here on the great unspoken,
Speaker 1: and we can do that going back to the giant
Speaker 1: David Ricardo of the early nineteenth century who changed our
Speaker 1: language about how the halves gain advantage. Stiglitz is of Columbia,
Speaker 1: the university professor Joseph Stiglitz, joins us this morning at
Speaker 1: the bottom of your wonderful essay on inflation and project syndicate,
Speaker 1: Joe Stiglets you talk about monopoly rents. I would expand
Speaker 1: extend that even more to monoximistic rents, which is economic
Speaker 1: mumbo jumbo. You teach for they has gained how much
Speaker 1: did they haves gain off the fiscal largesse of this pandemic?
Speaker 1: Who an enormous amount? Uh. You know, it's got a
Speaker 1: lot of attention that while so many Americans were living,
Speaker 1: hand them out money that was going to them just
Speaker 1: enabled them to get by the people at the top,
Speaker 1: we're making literally billions and billions and billions of dollars.
Speaker 1: So one of the things in that article that you
Speaker 1: mentioned that I advocate is we're going through a very
Speaker 1: tough time. Uh, there are prices are going up, and
Speaker 1: it's a little bit hard for those at the bottom
Speaker 1: in the middle. Why don't we have a excess profits
Speaker 1: tax on those companies that have done very well in
Speaker 1: the pandemic and used a a aneuver of that to
Speaker 1: help those who are really struggling by one time attacks,
Speaker 1: just to uh, you might call it a pandemic inflation
Speaker 1: adjustment and Joe and Ah luck in America, which has
Speaker 1: moved on from that kind of language to love of
Speaker 1: the individual. Let's say you can't get through and excess
Speaker 1: profits tax, what's the second best thing to do? Well,
Speaker 1: I can tell you what the second best thing not
Speaker 1: to do the best. It is not a good thing
Speaker 1: to raise interest rates to kill the economy in order
Speaker 1: to be what is still moderate inflation seven And if
Speaker 1: you look at those inflation numbers, they're all distorted by uh,
Speaker 1: you know, a huge increasing energy price that is not
Speaker 1: going to continue. The price of oil went from below
Speaker 1: normal levels because of the pandemic to moren real levels.
Speaker 1: They're not going to go to stratisfy spherical levels and
Speaker 1: use car prices. We know how to make cars, but
Speaker 1: there's a short chips, a shorty called wifire in Japan.
Speaker 1: So why killed economy won't solve the problem? Will help?
Speaker 1: Hill Brand got it absolutely right. There's there's an important
Speaker 1: distinction here within what you're saying, which is, as you
Speaker 1: look toward the FED and the way that they should
Speaker 1: handle policy, they should continue to rely on fiscal policymakers
Speaker 1: to try to help the lower class, but that their
Speaker 1: policies are more helpful to the lower income individuals and
Speaker 1: they are harmful in terms of widening the gap, fueling
Speaker 1: market gains that have really led to the bigger dispersion
Speaker 1: between the wealthy and the poor. Can you explain that
Speaker 1: because a lot of people view the FED as the
Speaker 1: instrument of widening this wealth disparity, Well, the Fed, Uh,
Speaker 1: whatever it does has distribution effects. I mean, we have
Speaker 1: to admit that it tries to attend that it's absolutely neutral,
Speaker 1: but what it does has big distributional effects when it
Speaker 1: lowered the interest rate, as it did beginning and the
Speaker 1: Great Recession two thousand and eight, the big gainers were
Speaker 1: those inequity markets. Losers included those who uh elderly people
Speaker 1: who had put their money and tea bills. That return
Speaker 1: they got on their tea bills went to zip uh.
Speaker 1: So they were the people who lost, and the owners
Speaker 1: of the equity overwhelmingly evidence overwhelmingly those in the upper
Speaker 1: one they did very well. No, at the current juncture,
Speaker 1: if you raise the interest rates, it will slow down
Speaker 1: the economy, and the first order impact is going to
Speaker 1: be on unemployment. People who might otherwise have jobs won't
Speaker 1: get those jobs. But but but, Professor Sigletts, how can
Speaker 1: you say that that's really a risk at raising rates
Speaker 1: fift even a hundred basis points at a time when
Speaker 1: they're near zero and you have a labor market that's
Speaker 1: so tight that you have vastly more job openings than
Speaker 1: you do people to fill them. Well, first of all,
Speaker 1: the numbers in the unemployment rate don't give a full
Speaker 1: picture of what is going on in the labor market.
Speaker 1: We are millions short of the number of jobs that
Speaker 1: we would have had had we continued the pace of
Speaker 1: job creation. Well, I think we've lost bonds school population. Yeah,
Speaker 1: we're gonna leave it there. I think with the technology
Speaker 1: when the professor stickers will leave it there and we'll
Speaker 1: have them on again. I had at least four more
Speaker 1: questions as well. I want you to think of Bank
Speaker 1: of America in the long term roll up of many
Speaker 1: banks into one giant bank that could be black So
Speaker 1: Smith Klein, Yes, it's Glasow from way back, and then
Speaker 1: welcome and Smith Climb Beacham in there as well. But
Speaker 1: it's essentially a pharmaceutical and consumer roll up that is challenged.
Speaker 1: Emma Warmsley is of lorel and of course the chief
Speaker 1: executive officer of Glacksow Smith Klein. She and John Pharaoh
Speaker 1: in a conversation. John is Dame Walmsley is under a
Speaker 1: bit of distress. That is a beautiful introduction, Tom, and
Speaker 1: thank you for that, Emma. Fantastic to have you with
Speaker 1: us on the program. Let's work through the outlook that
Speaker 1: we got from earnings this morning. The Nittam out look
Speaker 1: is good, forecasting earnings from the farmer and vaccines business
Speaker 1: to rise to alter fourteen percent. City came out with
Speaker 1: this in response GS case pass to a higher multiple
Speaker 1: remains dependent on solving the post twenty seven growth rate
Speaker 1: as opposed to the near term guidance. What's in the
Speaker 1: pipeline emma that's going to satisfy those people. Well, first, well, John,
Speaker 1: thank you for having me. Absolutely delighted to be here
Speaker 1: today off the back of announcing strong performance for twenty
Speaker 1: one and excellent quarter and really showing momentum across the
Speaker 1: business as we're building into this landmark year in twenty two,
Speaker 1: when as you know, we are separating into two exciting
Speaker 1: growth oriented companies, and delighted to be guiding as you said,
Speaker 1: for this year for new GSK buy a farmer with
Speaker 1: a five to seven top line growth rate and twelve
Speaker 1: to fourteen in terms of operating margin growth, and that
Speaker 1: excludes any contribution from COVID Solutions. It's also the first
Speaker 1: year of the five year outlook we've given of growing
Speaker 1: up more than five and more than ten percent, which
Speaker 1: is really a step change in delivery four g s K,
Speaker 1: and at the heart of that is the progress in innovation.
Speaker 1: When you look back at twenty one, we actually grew
Speaker 1: on new and specialty products by twenty six percent. That's
Speaker 1: very important momentum. We look forward and seeing vaccines obviously
Speaker 1: adut vaccination hit by the prioritization of COVID vaccines, but
Speaker 1: we see shing it's a very sizable product for US,
Speaker 1: doubling by twenty six And I'll come back to consumer later.
Speaker 1: But across our total R and D pipeline, we have
Speaker 1: sixty four assets, twenty two of them are in pivotal
Speaker 1: stages and seven with big milestones in rs V and
Speaker 1: rheumortided author writers, in oncology and in hepatitus B so
Speaker 1: lots to come. I have to say, written the transcript
Speaker 1: from a recent healthcare conference over at JP Morgan and
Speaker 1: your presentation when it went to oncology, I found it depressing,
Speaker 1: gemma depressing, how neglected that area of healthcare has been
Speaker 1: over the last two three years. Just fixing their emma
Speaker 1: as a macron fade. How much for tell? When is
Speaker 1: that going to be for you? Well? Oncology is one
Speaker 1: of the areas of specialty medicine that GSK has reinvested in.
Speaker 1: Remember one of the most important strategic shifts we've been
Speaker 1: driving as towards vaccines and specialty medicines. GSK got out
Speaker 1: of oncology completely, and then over the last four years
Speaker 1: with new talent, UH, some business development moves and homegrown
Speaker 1: assets as well, we've sound really good growth in oncology
Speaker 1: and exciting emerging pipeline too. The tragedy has been over
Speaker 1: the last two years, as you say, actually diagnosis and
Speaker 1: surgery rates are down a lot. I think in a
Speaker 1: variant cancer. I'll give you that example where we have
Speaker 1: a tremendous medicine for women facing into a really difficult
Speaker 1: cancer diagnosis and surgery rates are down twenty percent. So
Speaker 1: we're all hoping that as the pandemic moves into an
Speaker 1: an endemic stage, we're going to see further growth fueled
Speaker 1: through through that and mainly, you know, real impact for patients.
Speaker 1: We hope we can fix some of that because that
Speaker 1: needs to happen soon and quickly. You mentioned spinning off
Speaker 1: the business, splitting into let's talk about how you're going
Speaker 1: to do that. You've got a plan, You've had a plan,
Speaker 1: only leaves got other plants. Have you spoken to the
Speaker 1: CEO about their bit? Have you spoken directly with him?
Speaker 1: We've been very clear and very public since the news
Speaker 1: on this emerged in our press release statements. That's obviously
Speaker 1: g s k's priority. In fact, since we announced the
Speaker 1: deal with Visor several years ago and are intent to emerge,
Speaker 1: our priority has always been about creating shareholder value. So
Speaker 1: when these unsolicited offers came in, obviously the board took
Speaker 1: its responsibilities to review them very seriously, very seriously, and
Speaker 1: after that we did reject them unanimously, alongside our joint
Speaker 1: venture partners as well, just for fundamentally undervaluing what we've
Speaker 1: built in this pure play consumer business and particularly it's
Speaker 1: future prospects for growth. We've had a lot of support
Speaker 1: and some of it very public from our shareholders who
Speaker 1: we listened to and talked to a lot about continuing
Speaker 1: with the plan forward in terms of a emerger that's
Speaker 1: in a matter of months, and we have a great
Speaker 1: Capital Markets Day coming up on the twenty February when
Speaker 1: we're bringing going to bring a lot more visibility to
Speaker 1: the above market growth prospects for this business. It's sustainable
Speaker 1: margin expansion, great cash generation and the truly unique portfolio
Speaker 1: and great management team. Well, maybe Alan has other plans
Speaker 1: for the end of the Maybe he has other plans
Speaker 1: to come back. Is he aware of what your price is.
Speaker 1: I don't expect you to negotiate with me right now,
Speaker 1: but does he know what your price is? We've been
Speaker 1: extremely clear that our priority is shareholder value creation. We've
Speaker 1: never disclosed any kind of price. Our focus is on
Speaker 1: making sure that we you know, prioritize our shareholders, that
Speaker 1: we unlock the balance sheet for GSK absently a better
Speaker 1: offer than the plan we're working on for the d merger.
Speaker 1: We're going to stay very focused on executing that success.
Speaker 1: You know what Elliott Management thinks. This is what they
Speaker 1: put out in a letter last year. I'm going to
Speaker 1: allow you to respond to that emer and just the moment.
Speaker 1: This was the quote from last July. This is a
Speaker 1: firm with quote a poor record of operational execution and
Speaker 1: value creation, leading to skepticism about the company's future and
Speaker 1: under appreciation of its true potential for some people. M A,
Speaker 1: you are a CEO under pressure at the moment. It's
Speaker 1: almost five years at the top, five years which have
Speaker 1: delivered negative returns for the stock. How you're going to
Speaker 1: keep people like Elliott Management happy? Well, we are very
Speaker 1: focused on listening and to our shareholders and talking to them.
Speaker 1: I was brought in to address perennial under performance for
Speaker 1: this company, and over the last four years we've been
Speaker 1: addressing in a comprehensive way a wholesale transformation of reprioritizing
Speaker 1: investment in R and D and strengthening the pipeline that
Speaker 1: we've definitely seen now with twenty two assets in our
Speaker 1: pipeline and pivotal stage readouts, we have been completely reset
Speaker 1: the group's structure with this path forward into separation into
Speaker 1: two new companies, and most importantly, we're going to see
Speaker 1: all of that translating into meaningful growth and we're incredibly
Speaker 1: excited that the year this year is going to be
Speaker 1: the first year of that delivery of more than five
Speaker 1: five percent top line growth and more than double digit
Speaker 1: bottom line bottom line growth, whilst allowing for continued investment
Speaker 1: in and prioritizing of the pipeline with a great leadership
Speaker 1: team that's completely to delivery for that. So I look
Speaker 1: forward to seeing that step up performance materialized and catching
Speaker 1: up with you soon. Thank you for being with us.
Speaker 1: Emma Walmsley, Dad the CEO of Glacksow Smith Klein. Right now,
Speaker 1: what we're gonna say is this, the research has gotten
Speaker 1: better since the crisis two thousand seven. Two thou eight
Speaker 1: is a broad statement. Research is better, but then there
Speaker 1: every once in a while exceptional pieces where you go, well,
Speaker 1: this ruins my afternoon. I've got to read every word.
Speaker 1: I do that with Alex Schiller, Danny Newman, and Rebecca
Speaker 1: Patterson at the Bridgewater Shop. They wrote a brilliant, brilliant
Speaker 1: note on the dynamics of what we've got with rate
Speaker 1: changes and balance sheet changes at our central Bank. We're
Speaker 1: on the Rebecca Patterson of Bridgewater joins us this morning. Rebecca,
Speaker 1: congratulations on a thought provoking note. How does all of
Speaker 1: this monetary dynamics, think of the mathematics of say Richard
Speaker 1: Clart of Colombia and x FED, how does all of
Speaker 1: that fold into your guestimate on what economic growth will
Speaker 1: do well? First of all, thank you so much, Tom.
Speaker 1: That was very kind of you so early in the morning. Especially,
Speaker 1: I'm only kind early in the morning. So in terms
Speaker 1: of the FED, you know, I really think they're in
Speaker 1: one of the most difficult situations in our lifetimes, and
Speaker 1: that you still have very strong nominal demand. Even if
Speaker 1: growth moderates a little bit this year. We expect nominal
Speaker 1: demand is going to be well over nominal GDP will
Speaker 1: be well over consensus expectations, but also you have inflation
Speaker 1: well overation over expectations. And our view is twelve months
Speaker 1: from now, CPI is probably going to be closer to
Speaker 1: a five figure, not the three ish that consensus is
Speaker 1: looking for. And so what does the Fed do If
Speaker 1: they tighten too much, they risk slowing down the economy,
Speaker 1: starting a recession. They don't want to do that. They're
Speaker 1: dealing with pandemic related data which doesn't give them as
Speaker 1: much confidence in their view, and their scarred I'm being
Speaker 1: generous he by you know, the tightening both rates and
Speaker 1: quantitative tightening guy gave us a sell off, so they
Speaker 1: don't want to go too fast, but they also want
Speaker 1: to make sure inflation expectations don't get deanchored. So our
Speaker 1: our view is that you are going to see more
Speaker 1: rate heights than what has been priced in so far
Speaker 1: over the next couple of years, but not as much
Speaker 1: as needed to get inflation back down to that two
Speaker 1: percent target. I love the nominal analysis. It reminds me
Speaker 1: of cuddlo Ad bear Sturns a million years ago. And
Speaker 1: I want to take it over to a guy named Gallio,
Speaker 1: who has looked at the social dynamics of social aspects
Speaker 1: of this is recent interview with David Rubinstein. I thought
Speaker 1: it was illuminating Rebecca Patterson. If we get a five
Speaker 1: percent inflation rate, what is the societal dispersion, the effect
Speaker 1: of five percent inflation between the halves and the have nots.
Speaker 1: It's a great point and I think it's something the
Speaker 1: FED is also looking at. And one of the reasons
Speaker 1: they're going to lean relatively more on balance sheet rather
Speaker 1: than rates is because when you raise rates, you are
Speaker 1: going to hit small businesses relatively more. You are going
Speaker 1: to hit that lower socioeconomic cohort more because they rely
Speaker 1: relatively more on credit cards. So that's one of the
Speaker 1: reasons the FED would prefer to do a balance of
Speaker 1: these tools rather than just rate hikes. UM. But as
Speaker 1: we're looking at the different quintiles, if you will, of
Speaker 1: wealth in the United States today, one good thing, great
Speaker 1: thing is that the fiscal transfers we got in one
Speaker 1: have created more wealth for everybody. UM. You have seen
Speaker 1: wealth at the bottom cohort go up significantly, their balance
Speaker 1: sheets are stronger, their debt levels are relatively lower. UM,
Speaker 1: they're seeing big wage increases and so high inflation, especially
Speaker 1: gas prices, energy prices, food prices, those are the big ones.
Speaker 1: They're definitely going to be a problem, but at least
Speaker 1: is happening against this backdrop where the starting point is
Speaker 1: so much stronger than it has been coming out of
Speaker 1: past recessions. This dynamic, however, of echa of negative real
Speaker 1: wage growth, particularly at the lower income levels, is one
Speaker 1: of the reasons why people are saying we won't get
Speaker 1: to that five percent level in twelve months. It will
Speaker 1: be much lower than that, because realistically the economy will
Speaker 1: have to slow, and we're seeing that in consumer sentiment data.
Speaker 1: How do you push back against that? Well, I think
Speaker 1: I think that we are going to see stronger nominal
Speaker 1: growth this year for a couple of reasons. One is
Speaker 1: the reopening itself. So as oh Macron continues to fade,
Speaker 1: hopefully and hopefully we have no new variants, we are
Speaker 1: going to see people going out to restaurants more, spending
Speaker 1: more on travel, etcetera. And yes, part of that is
Speaker 1: a shift from goods to services, but overall we think
Speaker 1: that continues to so port growth. I think, even more importantly,
Speaker 1: we think will continue to see an inventory rebuild. Now,
Speaker 1: how it affects GDP is a little bit wonky. I
Speaker 1: don't want to go into that right now, but I
Speaker 1: do think that inventory rebuild will continue to create demand,
Speaker 1: which will create jobs, which will create incomes and spending.
Speaker 1: And then third, we think we're just in the early
Speaker 1: stages of a cap ex goal, which his recent years
Speaker 1: has been mainly tech. We think it's gonna be fairly
Speaker 1: broad based, and that's also going to be a support
Speaker 1: for growth. You still have eleven million job openings out
Speaker 1: there right now, and while the pandemic slowing down is
Speaker 1: going to bring some people back to the labor market,
Speaker 1: we think to get all those people back in to
Speaker 1: reduce that UM that gap, we are going to see
Speaker 1: significantly higher wages. We think the wage growth is going
Speaker 1: to be sticky. We think commodity prices are likely to
Speaker 1: be sticky. We think house prices will be sticky. All
Speaker 1: of those simply because supply can't meet demand. UM Rebecca.
Speaker 1: Within this scenario, here's what I'm struggling with. Five percent
Speaker 1: inflation twelve months out means a serious bond market sell off.
Speaker 1: It means a complete recalibration of longer term real yields
Speaker 1: of longer term base rates that the FED can really address.
Speaker 1: How can the market continue to climb and the economy
Speaker 1: continue to be stronger than it has been pre pandemic
Speaker 1: With that type of market turmoil, I think you just
Speaker 1: hit the nail on the head. What what I think
Speaker 1: we're shifting into right now is is really an inflection
Speaker 1: point versus the last twenty thirty years. We had central
Speaker 1: banks fighting deflationary risks, bond yields worth falling kind of structurally,
Speaker 1: and that was pushing people out into more risky assets,
Speaker 1: out into more stocks, and specifically longer duration stocks because
Speaker 1: they benefit from that liquidity. So where we were left
Speaker 1: is investors long bonds, long tech and growth stocks specifically,
Speaker 1: and guess who has the most of those the US.
Speaker 1: So now we're seeing a reversal of that entire thing.
Speaker 1: We're seeing higher inflation, pushing central banks to tighten um,
Speaker 1: pushing people out of those long duration stocks, pushing people
Speaker 1: out of those bonds. I think that leaves the US
Speaker 1: stock market relatively more vulnerable than a lot of markets overseas.
Speaker 1: We're not barish on US equities, but we think that
Speaker 1: the opportunity this year for the first time in many
Speaker 1: years is going to be more outside the US than
Speaker 1: in And for those reasons I just cited Rebecca, I
Speaker 1: want to go back to your dark, conclouded past in
Speaker 1: talk dollar and foreign exchanges. Well, to me, it's amazing
Speaker 1: the foreign exchange tightness, the range bound nature of it.
Speaker 1: When it breaks, which way does dollar break? Oh, that
Speaker 1: we're wrestling with that one. Internally right now. We have
Speaker 1: a mixed view on the dollar. We're embarished on the
Speaker 1: dollar against some of these currencies that we think will
Speaker 1: benefit relatively more from commodity rises from that inflation cycle,
Speaker 1: and then we're bullish dollar against some of the other
Speaker 1: reserve currencies, especially where the central banks don't face the
Speaker 1: same amount of pressure. Japan would obviously be a good
Speaker 1: example of that, or something like China where we see
Speaker 1: them actually easy and we think there's more easy to come.
Speaker 1: The really interesting thing Tom right now with the dollar
Speaker 1: is that you do have this fed tightening cycle just
Speaker 1: just warming up right now, and higher yields traditionally have
Speaker 1: been a big support for a currency, but we also
Speaker 1: have a pretty wide current account deficits, so a big
Speaker 1: external finance you need. And when I just mentioned a
Speaker 1: minute ago about all these people who have gone into
Speaker 1: the US. Foreign allocations to U stocks and bonds today
Speaker 1: are the highest they've been since the mid eighties. And
Speaker 1: so if we see that foreign money, maybe not all
Speaker 1: of it, but a piece of that coming out harder
Speaker 1: to finance our current account deficit, that's going to be
Speaker 1: a pretty big barrished dollar pressure. And I think that
Speaker 1: is part of the reason in January possibly that we
Speaker 1: saw a dollar weaker despite yields going up. Was that
Speaker 1: saw off and some of those foreign investors maybe pulling
Speaker 1: back a bit. So I think it's gonna be a
Speaker 1: much more unusual year for the dollar than you'd normally
Speaker 1: expect in a tightening cycle. Again, just watch the money
Speaker 1: watch where you see the foreign capital going in and
Speaker 1: out of US bonds and US stocks. Rebecca, that was
Speaker 1: a clinic. Thank you, Rebecca Cadison, that Ridge, what are
Speaker 1: we appreciate it right now? Our math conversation for the
Speaker 1: day we do that with Amy with Silverman, really quite
Speaker 1: good and the derivatives and the dynamics of the market
Speaker 1: at the Royal Bank of Canada RBC Ay, thank you
Speaker 1: so much for joining UH this morning. I want to
Speaker 1: cut to the chase, which as you go cross asset
Speaker 1: and your derivative analysis and look at equity presentation against
Speaker 1: optionality and the credit market, explain that in English, sure,
Speaker 1: you know. Look it's uh, it always makes options people
Speaker 1: a little nervous when you see a flurry of credit hedging,
Speaker 1: so people buying downside protection in h y G the
Speaker 1: high old bond proxy e t F t L t
Speaker 1: l QT. We've seen a lot of that tom a lot.
Speaker 1: And even though we're getting that vixed number, as you said,
Speaker 1: kind of going back to sub twenty levels, that dynamic
Speaker 1: between the cross asset credit hedging uh not abating is
Speaker 1: a bit of a divergence from what we're seeing in
Speaker 1: equities right now. I mean something's going on to the
Speaker 1: single name level as well. Facebook just having a massive
Speaker 1: months to on a single day. That's surprised a lot
Speaker 1: of people. But you take some signal from what happened
Speaker 1: with Facebook about the consumer at the lower end of
Speaker 1: the white spectrum, the lower end of wealth in the
Speaker 1: United States of America not throwing small business confidence as well.
Speaker 1: You've got the media numbers, the average, and you've got
Speaker 1: the top end numbers which seem to blur the average,
Speaker 1: and I mean there's something going on at the lower end.
Speaker 1: I think we've got to pay attention to what are
Speaker 1: you looking at? Yeah, we've been quite fixated on this
Speaker 1: because you know, something our condust Tom port Shelli has
Speaker 1: highlighted is, you know that bottom wind tile of folks
Speaker 1: are now at a point where their liquid assets are
Speaker 1: at you know, lower than pre pandemic levels. And whether
Speaker 1: or not that lead through has really been priced into options.
Speaker 1: You know, the short answer there, John is it hasn't.
Speaker 1: So like an ALI or Dollar Store, Dollar Tree, Dollar General,
Speaker 1: you know that Walmart, Yum, all these cohorts where it's
Speaker 1: very leverage that low end consumer. Uh, you're not seeing
Speaker 1: that concern yet weighted in the options pricing. The second
Speaker 1: thing I'll say is this earning season, options have really
Speaker 1: paid off. So even with those high vixed numbers going
Speaker 1: into Facebook, going into PayPal, going to all these earnings,
Speaker 1: options were probably implying you know, relatively average implied moves,
Speaker 1: and we beat them by two or three times across
Speaker 1: the board. That's very unusual and we think that continues
Speaker 1: in particular for these names leverage that low end consumer. Well,
Speaker 1: what what are you seeing that? Namy with Silverman. That's
Speaker 1: going against the common narrative that the lower income individuals
Speaker 1: are actually doing better, they're seeing disproportionate wage increases, and
Speaker 1: they still have a lot of cash left over from
Speaker 1: the fiscal impulse last year. Yeah, you know, I think
Speaker 1: what what is interesting is some of the read through
Speaker 1: that we've gotten from the recent reports would say that's
Speaker 1: not necessarily true. And you're also starting to say, see
Speaker 1: other companies who have yet report, like I mentioned, like
Speaker 1: that Alis where you know that weakness is. So it
Speaker 1: was all give you an example, Ali normal excuse that
Speaker 1: demand for hedging number this past weekend was trading at
Speaker 1: average and now today has spiked to an all time
Speaker 1: High's that's that downside skew number. So you know, earlier
Speaker 1: this week and even last week, we're not seeing that
Speaker 1: start to be priced in, but now the options market
Speaker 1: is starting to flag that concern to the downside. And
Speaker 1: these again are all the names where they're in particular
Speaker 1: more leveraged to that low and consumer than they would
Speaker 1: be to kind of your middle income or higher end consumer.
Speaker 1: This is a specific idiosyncratic trade targeting the likes of
Speaker 1: Walmart in Dollar General. As you were saying, companies that
Speaker 1: are leveraged to these consumers. However, is there a broader
Speaker 1: read through to the other equity parts that perhaps have
Speaker 1: seemed invulnerable so far? Yeah, so, you know, I think
Speaker 1: like that always goes back Lee said to how the
Speaker 1: meat has made. So if you're looking at a broader
Speaker 1: read through two queues, you know that's going to be
Speaker 1: more tech heavy, whereas your I w M s uh
Speaker 1: you know, are less so. And you have seen the
Speaker 1: performance diverge there. But I will tell you overall on
Speaker 1: an on a you know et F index level option
Speaker 1: prices have still been you know, relatively okay that they
Speaker 1: have not shown that concern even though we've seen a
Speaker 1: lot of demand for downside coming into the credit et s.
Speaker 1: And you know what we did is we ran h basically,
Speaker 1: you know, a cycle of what happens to SMP versus
Speaker 1: something like high yield during different rate cycles, and they
Speaker 1: remain highly correlated. So we're talking ad plus percent correlation
Speaker 1: in different rate cycles, which tells me, you know, one
Speaker 1: way or the other. Uh, someone is wrong. It's it's
Speaker 1: either the SMP or that I M or ques or
Speaker 1: it's going to be those credit bond proxy E T
Speaker 1: s so Amy, just in terms of h y G
Speaker 1: at the moment that junk bond E t F. How
Speaker 1: would you play that at the moment. Yeah, So you know, look,
Speaker 1: something really simple is just to own h y G puts.
Speaker 1: And the reason I say that, even though we've seen that,
Speaker 1: you know, lift up in demand, is you can kind
Speaker 1: of pull h y G back to its full history,
Speaker 1: which includes seventeen rate hike. Your skew levels are still
Speaker 1: in their bottom quartile, even though they look expensive now
Speaker 1: if you just look at on a pandemic basis, and
Speaker 1: one thing, one wrinkle I think you guys will remember
Speaker 1: is h y G was one of the names that
Speaker 1: FED was buying in their facility last year. So I
Speaker 1: think to some degree those numbers in the last two
Speaker 1: years are very skewed because h y G and other
Speaker 1: et s were actually being purchased by the FED in
Speaker 1: the facility, you know, in and around this time, which
Speaker 1: is how most people look at their windows, which is
Speaker 1: why I think you go longer data and you see
Speaker 1: that skew number is still relatively expensive, which means hedging
Speaker 1: is still relatively inexpensive. Really important conversation, Ammy, Thank you
Speaker 1: as always Ammy, with Silverman, the brilliant amy with Silverman
Speaker 1: of our BC in that relationship least of between credit
Speaker 1: and equities. This is the Bloomberg Surveillance Podcast. Thanks for listening.
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