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Speaker 3: This is a joy in exceptionally well timed. Waylee is
Speaker 3: prodigious in mathematics out of her China and of course
Speaker 3: out of University of Cambridge as well. She was a
Speaker 3: former trader in equity derives at City Group. You've seen
Speaker 3: her on the show Industry, joining us now from Blackrock
Speaker 3: chief investment strategist way Lee. Waylee, what a tour de
Speaker 3: force out on LinkedIn. On the cash path of the
Speaker 3: risk premium, I can't say enough, folks, how the partition
Speaker 3: between the short term cash path and the longer duration
Speaker 3: focus of the media, the fed parlor game is app Wayley.
Speaker 3: Why should we focus on cash and the cash path?
Speaker 4: Absolutely? Good morning, thanks for having me.
Speaker 5: So as we think about the increase of ten year yields,
Speaker 5: it can be broken down into the increase of cash
Speaker 5: paths and the increase of time premier ten premier increase
Speaker 5: doesn't have.
Speaker 4: To be negative for equities.
Speaker 5: But the miss understood fact is that markets look at
Speaker 5: tens increasing and automatically expecting ten expecting aqulities to come
Speaker 5: under pressure. So what I really care about in terms
Speaker 5: of translating rate moves into its impact on equity is
Speaker 5: how much of that increase in ten year yields is
Speaker 5: driven by cash paths, and so far not a huge amount,
Speaker 5: some of them, but not a huge amount.
Speaker 4: More than eighty.
Speaker 5: Percent of the increase since the September lows in ten
Speaker 5: year yields has been driven by time premier, which means
Speaker 5: that equities can still hold up, especially in the face
Speaker 5: of strong growth.
Speaker 3: What do we see way lee in terms of flows
Speaker 3: into money market funds? We go six trillion, seven trillion.
Speaker 3: Do I need to prepare for ten trillion dollars of
Speaker 3: money market funds to buttress the cash and the cash path?
Speaker 5: Well, right now, there is value to seek income in
Speaker 5: the front end of the curve. You get income, you
Speaker 5: don't take a huge amount of duration risk. I can
Speaker 5: absolutely see why flows are going into money market funds now.
Speaker 5: Having said that, so far this year we got a
Speaker 5: flavor of how long end repricing can quickly deepen the
Speaker 5: curve and potentially make duration attractives down the line. We
Speaker 5: expect youths to push higher still, but at some point
Speaker 5: and it will get to a level that even we
Speaker 5: would find it attractive. You know, we think terminal rates
Speaker 5: set a round about four percent to premiere fair value
Speaker 5: round about one hundred basis point you added two together,
Speaker 5: five percent ten year yearths could look attractive. We're not
Speaker 5: there yet, but which is why we're currently under way
Speaker 5: to US treasuries.
Speaker 3: Wait.
Speaker 6: Thanks so much for joining us this morning. I am
Speaker 6: such a huge fan, and we're both believers in the
Speaker 6: higher for longer narrative. With everyone so focused on rising
Speaker 6: real yields and stable break evens in fives and tens,
Speaker 6: I have to say I think they lost a little
Speaker 6: bit of track of the inflationary pressures emanating from the
Speaker 6: front end. And I'd like to hear your thoughts about
Speaker 6: this week's sharp turn lower in realields in real yields,
Speaker 6: not just in the front end, but along the whole curve.
Speaker 6: Is it durable and where do you see US growth
Speaker 6: expectations settling here?
Speaker 5: We expect US growth to be in the mit kind
Speaker 5: of one point five percent real growth for twenty twenty five,
Speaker 5: which is slightly lower than consensus, but resilient, certainly, certainly strong,
Speaker 5: with potential to the upside depending on the fiscal side
Speaker 5: of things. Not having said that, yes, we have seen
Speaker 5: wild swings in inflation expectations so.
Speaker 4: Far this year.
Speaker 5: You talked about the inflation prend this a week and
Speaker 5: its impact on break even pricing. But let's extend slightly
Speaker 5: further back to last Friday.
Speaker 4: We had NFP headline.
Speaker 5: Job creation was slightly stronger than expected, wage was well behaving,
Speaker 5: and yet markets were immediately reading into greater job creation,
Speaker 5: higher inflationary pressure.
Speaker 4: So even I, even though.
Speaker 5: I had the view of five for longer, for a while,
Speaker 5: I didn't think that that represented additional inflationary pressure. And
Speaker 5: yet markets are very very quick to swing wildly in
Speaker 5: between narratives. And I think this is going to be
Speaker 5: a hallmark of twenty twenty five. Because we don't have
Speaker 5: a firm anchor, and markets are trying to fit structural forces,
Speaker 5: structural patterns into a cyclical lens, we're going to have
Speaker 5: a lot of the macro volatility way.
Speaker 6: I know you're an advocate of staying underweight duration in
Speaker 6: the current environment, and I loved, loved your chart on
Speaker 6: LinkedIn where you compare index US versus duration. But let's
Speaker 6: be I wonder if you could spand on that a bit,
Speaker 6: because look, staying underweight duration in US treasuries, well that's cute,
Speaker 6: not John Tucker cute, but cute. Nevertheless, building short duration
Speaker 6: exposure and high beta asset classes like credit or mortgages
Speaker 6: that could prove interestings as well. No, so I'm just
Speaker 6: asking from your clients what are you seeing. I mean,
Speaker 6: where's the best risk reward for hawks like me who
Speaker 6: prefer to remain duration.
Speaker 4: Light front end of the curve right now with favor.
Speaker 5: And we also like investment grades, but short duration investment grade.
Speaker 5: The spread of hyyot is a little bit more interesting
Speaker 5: than an IG, so we can turn out a little
Speaker 5: bit in hygyot space, and value can be found in
Speaker 5: European credits since their US counterpart. So this is where
Speaker 5: we like for kind of the income within the fixed
Speaker 5: income space. But we are two out of three overweight
Speaker 5: in US equities on a scale of minus three two
Speaker 5: plus three, so that's quite overweight in US equities despite
Speaker 5: the volatility that we have seen so far this year.
Speaker 5: You look at the drivers of Ernie's Magnificent seven. The
Speaker 5: negative in terms of debt. They are negative in terms
Speaker 5: of net debt, so they're quite resilient in a face
Speaker 5: of rate volatility. So we continue to see us corporate
Speaker 5: strength carrying us through.
Speaker 3: We continue with Wayley of Blackrock, Ian Bremer to be
Speaker 3: with us in the nine o'clock Our Katie Kaminski, Jim Carren,
Speaker 3: Carl Weinberg in the eight o'clock are an extraordinary surveillance.
Speaker 3: This morning. Good morning on your commute across the nation, particular,
Speaker 3: good morning to ninety nine one FM preparing for an
Speaker 3: inauguration Monday. I'll give you details on our commitment to that.
Speaker 3: You'll see that Monday from Joe Matthew and Kaylee Lines.
Speaker 3: Good morning on YouTube. It is the best way to
Speaker 3: get us, particularly across the nation and internationally. After your
Speaker 3: commute in the Blackrock office, consider you too. We continue
Speaker 3: with way Lee. Wait. One of your great themes, which
Speaker 3: frankly I endorse, is that we're not going to do
Speaker 3: a simplistic revert to the mean attitude. There's a feeling,
Speaker 3: you know, to give John Williams just do that. We
Speaker 3: go back to two percent, We go back to trend.
Speaker 3: Everything is pre pandemic. Nice you forcefully push against that
Speaker 3: and look for a reset higher. How to equities reset
Speaker 3: off the fixed income new reversion to the mean.
Speaker 5: Well, one way to look at it is in these
Speaker 5: rates are resetting back to the high for longer than
Speaker 5: equities need to reflect that that reality, that new rate reality.
Speaker 5: One measure, so to your point, Tom around me revert
Speaker 5: one measure that I get quoted back to me. Constantine
Speaker 5: is shiner key that it is at the third highest
Speaker 5: level ever on history, just after global financial crisis, just
Speaker 5: after the end of nineteen twenties, Roaring twenties. Right now
Speaker 5: shirape is thirty seven times, and that is indeed quite stretched.
Speaker 5: But if we were to put a consensus podcasts for
Speaker 5: earnings as backward realized earnings for the next ten years,
Speaker 5: then shirape becomes seventeen times instead of thirty seven times.
Speaker 5: So all of that just to say, in the face
Speaker 5: of transformative forces driving economies forward, driving earnings forward, especially tech,
Speaker 5: and as that broadens out to the rest of the economy.
Speaker 4: As well, the earnings wouldn't look as stretched.
Speaker 5: So I cannot agree with you more agreeing with me
Speaker 5: that me reverit is not the playbook.
Speaker 3: I think it's too simplistic. And folks, this goes back
Speaker 3: to a paper by John Campbell and Professor Schuller of
Speaker 3: Yale University. Everyone knows, Ziadore, this is back. You know,
Speaker 3: I'm pushing forty years now before Whaley was born. And
Speaker 3: the answer, Waylee is if you look at Campbell's Schiller,
Speaker 3: they don't really model in a technological shift, a productivity shift.
Speaker 3: Are we pricing in the present productivity and our present
Speaker 3: new technology? Is that our great misjudgment.
Speaker 5: I think there is starting to be priced in, But
Speaker 5: depending on the ultimate magnitude of productivity boost, there can
Speaker 5: still be further for the upside, especially because right now
Speaker 5: in terms of the economic data, yes we see sector
Speaker 5: specific productivity gain, but we have yet to see economy
Speaker 5: wide productivity gain being definitively driven by AI.
Speaker 4: So the upside it's still there.
Speaker 5: And currently Literature Review has a wide range of productivity
Speaker 5: boosts somewhere between zero point one percent per ANON to
Speaker 5: one point five percent per and so that's a wide range.
Speaker 5: There is certainly more room to surprise to the upset.
Speaker 5: In our assessment was still in phase one of the
Speaker 5: AI AI revolution, Phase one being a built out pace
Speaker 5: than we have. Phase two being the adoption phase where
Speaker 5: we're expecting use cases to really broaden out across sectors,
Speaker 5: and phase three being the productive the boost, which will
Speaker 5: take time. Way.
Speaker 6: We're three days away from Trump's inauguration and everyone knows
Speaker 6: that the US channel relationship is front and center. We
Speaker 6: saw some activity data overnight. We saw them hit their
Speaker 6: five percent bogie for full year twenty four. Talk to
Speaker 6: us about sixty percent tariffs on China? How does dollar
Speaker 6: quan react? And more importantly for me as the emerging
Speaker 6: market strategist here at Bloomberg Intelligence, what does it mean
Speaker 6: for the broader Asian dollar block? I mean, can we
Speaker 6: expect Asian currencies to appreciate over the next quarter?
Speaker 7: Let's say I.
Speaker 4: Think all else equal.
Speaker 5: Greater tariffs leads to weaker currencies, which is why the
Speaker 5: M has been under pressure so much so far this year.
Speaker 5: And more broadly, Taraff's concern is why, even though data
Speaker 5: from China is stabilizing and overnight data particularly was reasonably resilient,
Speaker 5: markets don't seem to care. Markets don't seem to care,
Speaker 5: and investors don't seem to care one little known fact.
Speaker 4: I was looking at it at the end.
Speaker 5: Of last year, just reviewing year yearly performance in dollar terms,
Speaker 5: Chinese aarqulities and Chinese government bonds all performed their US
Speaker 5: equivalent for the year of twenty twenty four, but investors
Speaker 5: don't care. Plummeting bond US in China shows that, you know,
Speaker 5: investors are really worried about decades of deflation doom loops.
Speaker 5: So I think this is really a sentiment and confidence
Speaker 5: game at this point.
Speaker 3: I mean, I mean, this is great. We could go
Speaker 3: for four hours. Are you're going to give her a
Speaker 3: code write on your morning note?
Speaker 6: Well me, I mean, look, I'm not going to write
Speaker 6: my note until this weekend. But way you're going to
Speaker 6: be front and center.
Speaker 2: I mean, I have to.
Speaker 6: I have to keep going here. I mean, for me,
Speaker 6: how do you not ignore the fact that you know,
Speaker 6: once the once the PBOC starts allowing the yuan to
Speaker 6: kind of float up to seven forty seven to fifty,
Speaker 6: that you're not going to see some spillover. We just
Speaker 6: saw the Bank of Indonesia cut rates in the FILD,
Speaker 6: and look what happened to its currency. We're at an
Speaker 6: all time low relative to the dollar. I mean, can
Speaker 6: we expect the Korean one, the Indonesian rupee at the
Speaker 6: Philippine pace? Are they all going to start testing lows
Speaker 6: versus the dollar? Is this going to be a regular
Speaker 6: occurrence for the next year plus.
Speaker 5: Well, what we have seen so far after the election
Speaker 5: is that dollar has been very, very strong. But I
Speaker 5: would say though for the entirety of the first Trump term,
Speaker 5: dollar actually hasn't been that strong. So it rallied into
Speaker 5: inauguration and starts to kind of go sideways, right, So
Speaker 5: I wouldn't necessarily extrapolate the dollar strength in definitely from
Speaker 5: here on.
Speaker 4: And also as we think about the goals of the.
Speaker 5: Trump administration around kind of stronger growth, lower inflation, lower deficits,
Speaker 5: and low immigration, there is a market friendly way of
Speaker 5: getting there and there is a market less friendly way
Speaker 5: of getting there. So depending on which way we are
Speaker 5: gravitating towards, it has significant read across to the dollar
Speaker 5: for sure, to US acquity sentiment to Treasury.
Speaker 3: Waley, thank you so much across the nation on YouTube worldwide,
Speaker 3: Wayley of Blackrock greatly appreciated. This morning.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
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Speaker 3: There will not be at Davos. And if doctor Klaus
Speaker 3: Schwabs people came to me and said do a panel,
Speaker 3: this is the year where I would say, I want
Speaker 3: to do a panel, but I want it to be
Speaker 3: just one person, and it would be Ian Bremer. Every
Speaker 3: year he and his team, among others, put out a
Speaker 3: thing called the Top Risks, and it's not funny. It's
Speaker 3: a really serious look at where we are going into
Speaker 3: a giving year, and it's remarkably pressient. Some things he
Speaker 3: gets wrong, but huge amount of OMG, how'd.
Speaker 5: You do that?
Speaker 3: Like Miracle and Germany years ago. But he's really outdone
Speaker 3: himself this year. Hearkening back to his classic G zero
Speaker 3: of twenty twelve, Doctor Bremer joins us this morning, Ian,
Speaker 3: I'm just going to cut right to the chase. The
Speaker 3: summation of your Top Risk twenty twenty five is a
Speaker 3: reversion to the nineteen thirties. How close are we to
Speaker 3: the nineteen thirty five of Hermann Vauch's Wins of War?
Speaker 8: Well, we're close to the thirties, and we're close to
Speaker 8: the fifties. So in other words, the trajectory is not sustainable.
Speaker 8: And the question is whether the crisis that's coming is
Speaker 8: big enough to make us pay attention, but not so
Speaker 8: big that we all end up fighting each other, right,
Speaker 8: I mean, in the early Cold War, we had this
Speaker 8: unfettered decoupling and arms race between the Americans and the
Speaker 8: Soviets culminated in the Cuban missile crisis. We almost blew
Speaker 8: it ourselves up, and then we started recognizing we needed,
Speaker 8: like actually to have some institutions that would create more
Speaker 8: stability between the.
Speaker 7: Two countries, arms control, hotline and the rest.
Speaker 9: You see shades of that, and you also see shades
Speaker 9: of the thirties with a United States that's incredibly powerful
Speaker 9: but is unwinding its own global order, its own institutions.
Speaker 7: I mean, you look.
Speaker 9: Things like the United Nations and the WTO, and these
Speaker 9: are organizations the Americans put in place to coordinate global
Speaker 9: governance and that now Americans don't believe in. So it's
Speaker 9: it's not clear, but it's clearly as you say, Tom,
Speaker 9: this is a definitive moment.
Speaker 3: Ian what's so important here?
Speaker 5: And I live this.
Speaker 3: My grandfather was a textbook Chicago Tribune isolationist of Middle America.
Speaker 3: And you go back to Lindbergh and the rest of them.
Speaker 3: What is the character of President Trump's isolationism.
Speaker 9: I don't think it's isolationist. I think it is strongly unilateralist.
Speaker 9: And so it's not that the United States is saying
Speaker 9: we're only going to focus at home. I mean, you know,
Speaker 9: the Panama Canal and Greenland and Canada. Comments don't feel
Speaker 9: isolationists to me, but they're deeply transactional and in many ways,
Speaker 9: Tom what we have is that the Americans are embracing
Speaker 9: the Chinese worldview that has served China so well over
Speaker 9: the last thirty five years.
Speaker 7: It's transactional. It's not about rule of law.
Speaker 9: They don't care what your political system or economic system
Speaker 9: is like. They will engage with you bilaterally with the
Speaker 9: intention of being more powerful than you, and therefore you
Speaker 9: have to play by their rules.
Speaker 7: And what the Americans are saying is, actually.
Speaker 9: China, we can do that, and we can do it
Speaker 9: a lot better than you can, because we're a lot
Speaker 9: stronger than you, by the way, And that's really what
Speaker 9: Trump is saying, and it does come at a time
Speaker 9: when America's adversaries Russia in deep decline, Iran having lost
Speaker 9: their empire by proxy, the Chinese and the worst economic
Speaker 9: condition since the nineties, maybe the seventies are particularly weak.
Speaker 9: So it's an interesting moment to try this experiment. A
Speaker 9: lot of things are probably going to break as a consequence.
Speaker 6: Doctor Bremer. Eurasia Group's Top ten Risks are required reading
Speaker 6: at the beginning of every year, and this year is
Speaker 6: no different. US, China, Russia, around Mexico, I mean, you
Speaker 6: name it, they're all in there.
Speaker 3: You know.
Speaker 6: The one country that I didn't see in there, well, Syria.
Speaker 6: And I'm curious to hear your thoughts on what the
Speaker 6: fall of the Asad regime means for the Middle East
Speaker 6: and the rest of the world more broadly. I mean, seriously,
Speaker 6: what role America and restoring order to a nation where
Speaker 6: fourteen million refugees were fourth were forced to flee their
Speaker 6: homes in the last you know, call it fifteen years.
Speaker 6: I mean, a nation who's geo strategic position is so
Speaker 6: very important to health in Central Asia.
Speaker 7: You know, what are your thoughts there?
Speaker 10: So Syria's there, but it's underneath the number nine risk,
Speaker 10: which is called ungoverned spaces, and we include Syria and
Speaker 10: Yemen and Libya and Haiti and Mianmar.
Speaker 11: Western Sahara Dan by the way, which is a lot
Speaker 11: more important in terms of numbers of lives than what
Speaker 11: you just mentioned in Syria, and yet no journalists on
Speaker 11: the ground, and they're fleeing mostly to neighboring African countries
Speaker 11: as opposed to Syrians who go to Turkey and go
Speaker 11: to Europe, so we don't pay as much attention to them.
Speaker 7: And that's kind of the point, right is that.
Speaker 9: I mean the danger in Syria, where the Americans had
Speaker 9: slightly more than two thousand troops on the ground and
Speaker 9: under Trump are likely to remove them, and a Turkey
Speaker 9: you mop it up, is that if AHTS is incapable
Speaker 9: of running a unifying government in Syria, which is a
Speaker 9: reasonably plausible outcome, then you can easily have a big
Speaker 9: part of Syria that's ungoverned and would be fodder for
Speaker 9: a new Isis caliphate. And over time, not twenty twenty five,
Speaker 9: and this reports for the year. Over time, of course,
Speaker 9: that's something that will wash up on our shores too.
Speaker 3: Ian Bremer with us here We're thrilled to have of
Speaker 3: here to celebrate his top risk. It's a team effort
Speaker 3: from erase your group each and every year. It'll be
Speaker 3: with us for a good amount of time. Jim Grasso
Speaker 3: to join us here in a bit on this important
Speaker 3: Chinese social media thing which I don't understand, Doctor Bremer.
Speaker 3: One of the moments it stands in time for me
Speaker 3: is Ian Bremer and Robert T. Kaplan with me together
Speaker 3: talking about a zero world within Keplan's Revenge of geography.
Speaker 3: What is the most conc destructive path for moderates in
Speaker 3: America to get out four years or dare I say
Speaker 3: eight years out? What is the initiative that needs to
Speaker 3: be taken? Do we need to take kaplain realist policy?
Speaker 7: Well, it's not. It's not about foreign policy so much.
Speaker 9: Although it is true that a lot of people that
Speaker 9: decided not to vote, that had voted for Biden last
Speaker 9: time around, report that Biden's position on Gaza slash Israel
Speaker 9: was a significant.
Speaker 7: Thing that turned them away from the polls. And that's a.
Speaker 9: Place where Elon Musk and his targeting of very specific
Speaker 9: and important districts that were swinging in the United States
Speaker 9: could have made a difference. But leaving that one piece aside,
Speaker 9: and it's not unimportant, of course, I would say most
Speaker 9: Americans are not going to the polls on the basis
Speaker 9: of Biden or Trump's worldview. It's more about what they're
Speaker 9: doing and what they're rejecting at home. And the fact
Speaker 9: that Trump has become a leader that attracts more working
Speaker 9: and middle class Americans because they feel like he's more
Speaker 9: interested in their well being.
Speaker 7: The fact that he was able to get a significant.
Speaker 9: Majority of labor union voters in the United States, while
Speaker 9: Harris was, you know, the candidate for urban, well educated elites,
Speaker 9: and that's not a sustainable path for the Democrats in
Speaker 9: my view. So they clearly have to reassess a lot
Speaker 9: of their platform that did not appeal to the average
Speaker 9: American that did not feel taken care of. More billionaires
Speaker 9: put money into Harris's campaign than did Trump's.
Speaker 7: That again, that tells you something.
Speaker 6: Doctor Breber, the US chinne of relationships at forefront geopolitical
Speaker 6: risk in the current Vita regime. Yet, if we do
Speaker 6: see something like sixty percent tariffs, do you really think
Speaker 6: that China's going to allow the yuan to debase itself again?
Speaker 6: And if that does indeed occur, do we feel there's
Speaker 6: a I don't know, a clearing price and dollar you
Speaker 6: on where the market can go to that can still
Speaker 6: allow China to grow at five percent per year.
Speaker 9: I don't expect China's going to grow at five percent
Speaker 9: per year over the coming several years.
Speaker 7: I think They've got deep structural problems that are being made.
Speaker 9: Worse by the fact that the only part of their
Speaker 9: economy that is overperforming is their manufacturing export, which feels
Speaker 9: like dumping. It's a trillion dollar surplus, and it's upsetting lots.
Speaker 7: Of countries around the world, not just the US.
Speaker 9: The US is leaning into hitting back, which will occur
Speaker 9: with tariffs, though it won't be a sixty percent number.
Speaker 9: I mean, you know the top line election campaign numbers,
Speaker 9: and never the numbers we see. But even if it's
Speaker 9: twenty five percent, which I think is more plausible in
Speaker 9: the early weeks and months, you're not just.
Speaker 7: Talking about US China.
Speaker 9: You're also talking about the Americans squeezing other countries. We've
Speaker 9: already seen this with Mexico, we will see it with India,
Speaker 9: with Southeast Asian countries. For acting as a pass through
Speaker 9: of Chinese exports to the United States, so it's very
Speaker 9: hard to imagine that US China relations are going to
Speaker 9: maintain a comparatively well managed, you know, sort of incremental
Speaker 9: decline that we've seen in the last year and a
Speaker 9: half under the Biden administration.
Speaker 3: I want you to sit on this question, Iane, because
Speaker 3: I think it's so important to all of our listeners
Speaker 3: and the people that you know enjoy so much your
Speaker 3: international relations. This hearkens back to the fear of the
Speaker 3: first week of August nineteen forty one, a bunch of
Speaker 3: boats sitting off eastern Canada, where Roosevelt and Churchill tried
Speaker 3: to begin to piece together the post World War two world.
Speaker 3: They were humbled by two major wars. The thing out there,
Speaker 3: doctor Bremer, is the only way this is going to
Speaker 3: get solved is a humility of a war discuss That
Speaker 3: is that what it takes to get away from the
Speaker 3: madness we're living in right now.
Speaker 9: I think in the near term we're talking about damage control.
Speaker 9: We're talking about countries and companies on defense. So you know,
Speaker 9: a lot of them are hoping that they just don't
Speaker 9: make headlines. Others are trying to figure out what they
Speaker 9: need to do proactively to kiss the ring and geo politically,
Speaker 9: you're going to see a whole bunch of countries acting
Speaker 9: the way Mark Zuckerberg has in the last week towards
Speaker 9: the commander in chief and towards his chief, his bomb thrower,
Speaker 9: and chief Elon Musk by far the most powerful person
Speaker 9: around the administration, if.
Speaker 7: I can call it that.
Speaker 9: Look, I mean the way that you respond to a
Speaker 9: Gizero world is either you reform and strengthen your existing
Speaker 9: institutions so they are more fit for purpose. You build
Speaker 9: new institutions that better reflect the demands, the opportunities, and
Speaker 9: the concerns of the present.
Speaker 7: Age, or you go to war. And I can give
Speaker 7: you examples of all three. All three are happening.
Speaker 9: We are strengthening NATO right now, we are creating new institutions,
Speaker 9: you know, the Quad, the Chinese are building Belton Road
Speaker 9: and the bricks, and you know there are other examples.
Speaker 7: But the most energy is going into more conflict.
Speaker 9: The most energy is going into more war, and again
Speaker 9: that is not geopolitically sustainable. So I think you know
Speaker 9: your advice to other countries right now, given the power
Speaker 9: and balances and Trump coming in and how consolidated.
Speaker 7: His authority is inside the United States.
Speaker 9: Compared to twenty seventeen, where you know he was riding
Speaker 9: the Republican Party's co tails.
Speaker 7: His administration felt very different. Not this time around. He's
Speaker 7: the guy.
Speaker 9: Is that they have to recognize their playing defense, and
Speaker 9: defense is more effective in depth, it's more effect if
Speaker 9: it's strategic, if you're not just reacting to the latest headline,
Speaker 9: and it's more effective in numbers. In other words, the
Speaker 9: EU is better off than say the Mexicans, because they
Speaker 9: can act collectively and to the extent that other countries
Speaker 9: are capable of doing that and defending the things that
Speaker 9: matter to them, both in their own countries but also
Speaker 9: in terms of international architecture.
Speaker 7: We will all be better off by the way. Trump
Speaker 7: is going to get a lot of wins in the
Speaker 7: next year.
Speaker 9: But unlike Shijin Ping promoting a Chinese worldview, Trump doesn't
Speaker 9: get to do this for twenty years. He gets to
Speaker 9: do it for four, assuming he's in good health, and
Speaker 9: then he doesn't anymore.
Speaker 7: So long term, the United States unwinding its own institutions
Speaker 7: does not strike me as strategically smart.
Speaker 3: Okay, gotta leave it there. Ian Bremmer, congratulations on the
Speaker 3: impact the effect of your top risks for two thousand
Speaker 3: and twenty five. Of course, doctor Bremer with Eurasia Group,
Speaker 3: and I think it'll be a source of great conversation.
Speaker 2: Here is the Bloomberg Surveillance Podcast.
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Speaker 3: This is a joy. Katie Kaminski joins us right now,
Speaker 3: thrilled that she could be with us in Boston because
Speaker 3: she is the queen of the trend and of the
Speaker 3: effort to extrapolate. Katie, are trends in place right now
Speaker 3: at Alpha Simplex, Like do you walk in and say
Speaker 3: this is the trend? I got a feeling of where
Speaker 3: I am now.
Speaker 12: They have been until this week.
Speaker 13: I have to be honest, because trend folling has been
Speaker 13: working very well, particularly in currencies and also fixed income.
Speaker 13: But I think this week sort of marked a little
Speaker 13: bit of a shift in sentiment, particularly for fixed income.
Speaker 13: But the trend in the dollar seems to be very
Speaker 13: much in place, and that's something that is surprising and
Speaker 13: exciting sort of to follow.
Speaker 3: What's the inertial force there? I'm sorry, Damien on the
Speaker 3: dollar strength.
Speaker 6: Damien's getting so excited when anyone tells about the scope
Speaker 6: for dollar.
Speaker 3: Strength, Katie, what is the nature of that trend? Is
Speaker 3: it a momentum, is it a bid or is it
Speaker 3: a lack of people pushing the dollar down? Well?
Speaker 13: I think, you know, I tend to think about the
Speaker 13: dollar as having a few key forces.
Speaker 12: One is monetary.
Speaker 13: Policy, another is sentiment, and the third is of course gross.
Speaker 13: And so since we've seen that the dollar has been
Speaker 13: persistently strong, especially going into the election and post election,
Speaker 13: that seems to be a pro us, pro growth story.
Speaker 13: Then this month we saw sell offs in the in equities,
Speaker 13: which tends to be pro dollar as well. And then finally,
Speaker 13: monetary policy had been a little bit more reticent recently,
Speaker 13: which is also pro dollar. But what surprised me is
Speaker 13: this week, given sort of the shift in sentiment on
Speaker 13: the Fed, actually the dollar hasn't really a wig and
Speaker 13: it didn't waiver last month either, So it looks like
Speaker 13: this theme you know, pro us and sort of US
Speaker 13: dominance is probably one of the stronger themes that we're
Speaker 13: seeing that's holding through all the noise.
Speaker 6: Katie, you're in the managed future strategy at Alpha Simplex,
Speaker 6: the globalalts A strategy also. But let's talk about futures
Speaker 6: for a second, because I need to dial it back
Speaker 6: to the early two thousands, to my CTA days. I
Speaker 6: need to think about Campbell, wint In, jwh you know,
Speaker 6: talk to me about what the state of the market
Speaker 6: is now. I mean those guys are long gone. I mean,
Speaker 6: we know the macro guys used to frequent that market.
Speaker 6: You know, the tutors, the soross Like who is trading,
Speaker 6: who's trend following?
Speaker 3: So what today you're saying right now? Who is the
Speaker 3: new Monroe trout?
Speaker 7: Who's the margin?
Speaker 6: Yeah, exactly right, who's taking the marginal risk in futures markets?
Speaker 6: Who's playing mean reversion, trend momentum, all of that stuff.
Speaker 13: Well, I think there's there's just been a changing evolution
Speaker 13: of different CTA players in the space. I mean, if
Speaker 13: you look sort of Man Group, Alvisimplex, if you look
Speaker 13: at the SG trend Index, there's those are some of
Speaker 13: the largest futures traders out there.
Speaker 12: So that has evolved over time. But what's really cool.
Speaker 13: About this space is that the strategies still remain. They
Speaker 13: tend to work over long horizons, and a lot of
Speaker 13: the techniques that worked earlier when there were less futures
Speaker 13: markets are still working today and now there's more futures
Speaker 13: markets to trade. So it's actually quite you know, it's evolved,
Speaker 13: but it's still sort of the same you know, ecosystem.
Speaker 6: And I think, I mean, let's I mean, correct me
Speaker 6: if I'm wrong, But it seems like the market's evolved
Speaker 6: because the strategy used to be very, very volatile, right,
Speaker 6: and now you're in a different place, right, I mean,
Speaker 6: so talk to us about how you engineer you know.
Speaker 2: Risk adjusted performance.
Speaker 6: How do you keep vol low? How do you dial
Speaker 6: down volatility when you're practicing such a volatile strategy.
Speaker 13: Inherently so in our world, what I think is really
Speaker 13: cool about futures is we think about the world as
Speaker 13: allocating risk instead of dollars, And so the way that
Speaker 13: we think about managing risk is really about measuring the
Speaker 13: strength of sort of each of the markets we trade
Speaker 13: and adjusting that for the size of the volatility of
Speaker 13: that particular market.
Speaker 12: So in some sense.
Speaker 13: It's sort of like a long short risk parity strategy
Speaker 13: where you're managing how much exposure you have to different assets. So,
Speaker 13: for example, cocoa is very volatile, but you know, short
Speaker 13: term debt is actually not that volatile. So when you
Speaker 13: combine these things together, you need to measure sort of
Speaker 13: the relative strength of them and then also adjust for
Speaker 13: the sizing that makes all of those positions better behaved nicely.
Speaker 3: So you just jump in your damon, you're all fired up.
Speaker 6: Well, I mean, you know, we're in a very different
Speaker 6: environment also when that rates are high, right, tom. So
Speaker 6: the embedded leverage within futures and forwards, I mean.
Speaker 4: It just changes.
Speaker 3: The free lunch of the last six years is gone.
Speaker 6: So how does that impact the strategy, Katie? How do
Speaker 6: you look at the inherent leverage the funding embedded within
Speaker 6: your strategies.
Speaker 13: Well, this is a great question because most people don't
Speaker 13: understand that futures markets have implicit leverage instead of explicit leverage.
Speaker 12: And what do I mean by that is that when
Speaker 12: you use.
Speaker 13: Futures, you implicitly get leverage in those commodities or those
Speaker 13: future futures on equity indicies without having to borrow cash.
Speaker 13: It's implicit in the future's contract, which means that eighty
Speaker 13: to ninety percent of your capital is actually in collateral
Speaker 13: that earns cash yield. So we basically have a carry
Speaker 13: that we didn't have in a low interest rate environment,
Speaker 13: and that sort of means that you can be more
Speaker 13: effective with your collateral.
Speaker 3: Katie commiscy with this Alpha Simplex and extended conversation this morning.
Speaker 3: Ian Bremer will be with us at the nine o'clock
Speaker 3: our Just Power Peck show today. Thank you for being
Speaker 3: with us in your commute across the nation on Apple
Speaker 3: CarPlay internationally, and of course I must say on YouTube,
Speaker 3: subscribe to Bloomberg Podcast, Katie, are we competing away, diversifying away,
Speaker 3: and hedging away total return? We featured yesterday a number
Speaker 3: of non trend, non CTA hedge funds with single digit returns,
Speaker 3: and you can rationalize that except I got growth portfolios
Speaker 3: up thirty percent and SPX up twenty percent plus at
Speaker 3: Alpha Simplex, how are you rationalizing single digit hedging versus
Speaker 3: a lift in the market.
Speaker 13: Well, I think the challenges and there's twofold one is
Speaker 13: the market has been up quite a bit, so obviously
Speaker 13: directional strategies might work better, but you also have an
Speaker 13: environment where borrowing is more expensive, so sort of leveraging
Speaker 13: up relative value positions can be more challenging.
Speaker 12: And I think this is sort of a slow migration
Speaker 12: that we're seeing.
Speaker 3: What are you seeing in the equity market. I mean,
Speaker 3: I know it's away from the heritage of CTAs in
Speaker 3: foreign exchange and commodities, but do you believe in the
Speaker 3: American bull market?
Speaker 13: Well, what you're seeing is I mean, especially the growth
Speaker 13: numbers and some of the fundamental data is definitely consistent
Speaker 13: with the technical views where you see that the US
Speaker 13: signals have been much stronger. And you mentioned sort of
Speaker 13: single name equities. What we've seen a lot of single
Speaker 13: name equity strategies have worked very well in the last
Speaker 13: year or so because of the dispersion across different asset classes,
Speaker 13: or not different asset classes, but different sectors, and just
Speaker 13: this sort of big mag Seven versus the Russell and
Speaker 13: other sort of idiosyncratic themes across equity markets. So it's
Speaker 13: been a fun place to be as a technical or
Speaker 13: systematic trader.
Speaker 6: Katie, last question for me, I mean, let's delve into
Speaker 6: commodities a bit, you know, and it's a very different
Speaker 6: place now, right. I remember the good old days, right
Speaker 6: when Cargill and Archers, Daniels and basically those big, you know,
Speaker 6: old stodgy beasts, you know, took them a year to
Speaker 6: turn in the sea and we could kind of pick
Speaker 6: them off. But that's not the case anymore now. Is
Speaker 6: that they're very sophisticated trading shops, right, and they are
Speaker 6: really the marginal risk takers today. And commodities talk to
Speaker 6: us a little bit about what's signaling they're giving you
Speaker 6: in this market. How are they behaving, Are they behaving
Speaker 6: rationally or are they trying to get ahead of these taris?
Speaker 13: Well, I think, you know, if you look at how
Speaker 13: commodities have moved, commodities have been really of in an uptick,
Speaker 13: particularly energies more recently. My guess is that you know,
Speaker 13: if you think, if you believe in price discovery, these
Speaker 13: type of players are really sort of analyzing that information
Speaker 13: and bringing it into the market. So commodities, You're right,
Speaker 13: they're still complicated because one futures contract on one commodity
Speaker 13: is a different commodity than the next one. So they're
Speaker 13: more complex and they're more seasonal. But you know, You're right,
Speaker 13: it's been a space where people have really gotten up
Speaker 13: to park.
Speaker 3: Mean, what's really important here is she was in Boston
Speaker 3: at Logan and she went over the Wheatstone Bridge to
Speaker 3: Cambridge and did a double lee an engineering you know,
Speaker 3: at MIT as well, and she's visiting lecture at Sloan.
Speaker 3: When you're talking to the animals at Sloan, Catherine Kaminski,
Speaker 3: how do you tell them to not lose money?
Speaker 12: Oh, don't overtrade?
Speaker 3: Thank you. I knew.
Speaker 7: It's like a lawyer. I knew the answer.
Speaker 3: Lawyers. The question in this addictive financial media, Katieminski, all
Speaker 3: I see is over trading. How do you operationally say
Speaker 3: no when you's this frenzy I gotta do something, I
Speaker 3: gotta do something. How do you pull back?
Speaker 13: Well, this is why I've been so fascinated with systematic
Speaker 13: trading is the goal is you disconnect your emotional response.
Speaker 12: From your actual trading decisions.
Speaker 13: And that's hard to do because in the heat of
Speaker 13: the moment, we all want to react to Tesla, we
Speaker 13: all want to react to something we read. But really
Speaker 13: that diligence of not doing that is really important, Katie.
Speaker 6: Last question, I keep saying, last question, But I have
Speaker 6: so many more. I mean, talk to us really, because
Speaker 6: I'm not in the market the way you are anymore.
Speaker 6: Talk to us about the cost of trading, right, talk
Speaker 6: to us about what you know banks. I mean, I
Speaker 6: remember for years and years and years the cost of broking,
Speaker 6: of holding custody, of set it was all coming down.
Speaker 6: Now it's a very different place. If I dare, I say,
Speaker 6: it might be going in the other direction. Is it
Speaker 6: expensive to trade? Is that why you're not necessarily an
Speaker 6: advocate of high frequency trading? Has it gotten more expensive?
Speaker 6: Is it getting more expensive than an inflationary environment?
Speaker 13: Well, generally, I think cost of trading has been going down.
Speaker 13: I think where the cost of trading is going up
Speaker 13: right now is with explicit leverage. So if you look
Speaker 13: at something that the biggest theme that would be a challenge,
Speaker 13: that's borrowing money is more expensive today, and that would
Speaker 13: probably be the most important cost when you're thinking about
Speaker 13: hedge funds, because in this environment, anytime you need to
Speaker 13: lever or take two sides of a particular position, that's
Speaker 13: going to be more expensive in a world where you
Speaker 13: have much higher borrowing costs. So I think that outweighs
Speaker 13: any of the sort of themes in trading.
Speaker 12: From my perspective, we're mentioning.
Speaker 3: Some of the giants of CTA. I mentioned mister Trout
Speaker 3: of Bermuda, John Henry, who runs a small baseball team
Speaker 3: up in Boston. You know, it was back when it
Speaker 3: was Damien. It was spark stations and in which you're
Speaker 3: too young to remember this, it was Sun Microsystem spark
Speaker 3: stations on fancy people from MIT. This guy Andrew Lowe
Speaker 3: and others were like, we can do this, and all
Speaker 3: of a sudden the Bloomberg showed up and you could
Speaker 3: pop ad X DMI over a cup of coffee. It
Speaker 3: was unreal.
Speaker 6: I remember those pets. I mean, Katie remembers this. I mean,
Speaker 6: if you could get a guy with a little headphone
Speaker 6: in on the pit where you're doing trading euro dollars,
Speaker 6: trying to pin strikes on where the Fed's going to
Speaker 6: go off. These are the good old days, ryeb or
Speaker 6: Short Stirling.
Speaker 7: I mean, come on, Bruno days.
Speaker 3: Or is it still about legit mathematics, technical analysis and
Speaker 3: trend based Is it the same old, same old or
Speaker 3: are we just something new?
Speaker 9: Well?
Speaker 13: I think the truth is trend still works. I mean
Speaker 13: it works over long horizon, and people are people, and so.
Speaker 12: I think the frequency has changed.
Speaker 13: But we have sort of human behavior which causes us
Speaker 13: to overreact and underreact to news and changing environments and
Speaker 13: to be terrified by change. So I think that creates
Speaker 13: natural trends in markets. So I think it's you know,
Speaker 13: same same, We're still the same, different technology.
Speaker 3: Katie Kimiski, thank you so much, greatly appreciate it. This morning,
Speaker 3: got to go to some breaking news here Arthur Kiminsky
Speaker 3: with Alpha Simplex, Brilliant.
Speaker 2: This is the Bloomberg Surveillance Podcast.
Speaker 1: Listen live each weekday starting at seven am Eastern on Applecarplay.
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Speaker 3: Jim Kern right now from Morgan Stanley on the mix
Speaker 3: that we're in Right now, Jim Caeren makes sense the
Speaker 3: first seventeen days of January, no one else can.
Speaker 7: Well, it's a tall order. I'll try so.
Speaker 14: Look, I think one of the big changes that has
Speaker 14: gone through is that we started the year very very
Speaker 14: sure that the FED was going to cut at least
Speaker 14: two times within about several days we said, well maybe
Speaker 14: it's zero, and now we're back to they're probably going
Speaker 14: to cut you know, one to two times. So what's
Speaker 14: really been what's really been happening is is all of
Speaker 14: the action has really been at the back end of
Speaker 14: the curve. So the curve has been steepening, meaning that
Speaker 14: the ten year yield is spread between the ten year
Speaker 14: yield and the two year yield has been expanding. It
Speaker 14: it's been widening. And I don't think this is necessarily
Speaker 14: a bad thing. And I think when we look at
Speaker 14: the markets today and we say, well, bond yields are rising.
Speaker 14: I know they've recently fallen over the past day or so,
Speaker 14: but bon yields had been rising. Is that going to
Speaker 14: break the equity markets? And I think we need to
Speaker 14: ask why yields are rising, and which yields are rising,
Speaker 14: and if it's the back end and it's because people
Speaker 14: expect there to be you know, better growth and higher
Speaker 14: productive growth with low inflation, and the front end rates
Speaker 14: stay relatively pegged to where the Fed funds rate's going
Speaker 14: to be, then I think that's okay. So in other words,
Speaker 14: you could get a spread between the ten year note
Speaker 14: and the two year treasury to be about fifty to
Speaker 14: even seventy five basis points. So if the two year
Speaker 14: treasury is at around four point two four point two
Speaker 14: five percent, it's not unreasonable to think that you could
Speaker 14: have a tenure note that's around four point seventy five
Speaker 14: or even five percent.
Speaker 5: Now.
Speaker 14: Fortunately today those yields are lower, and that's a little
Speaker 14: bit more accommodative, and that's okay. But the market is
Speaker 14: building in this extra term premia because of this uncertainty
Speaker 14: about the new administration, you know, what the announcements may
Speaker 14: be in everything else, and the bond market has been
Speaker 14: driving the equity markets, and that's I think what we've
Speaker 14: been seeing.
Speaker 6: I mean, Tom how Prehesdant of Morgan Stele, the investment
Speaker 6: merit managements have Jim Karen, I mean, with his experience
Speaker 6: in rates FX, emerging market fixed income to run the
Speaker 6: ship at sim I mean, like not another stock, Jock.
Speaker 7: I mean, you know, so, Jim, you're.
Speaker 6: Talking about the shape of the yield curve, not the
Speaker 6: level of interest rates. And I think that is so,
Speaker 6: so so important, And what's the read through to the
Speaker 6: rest of the world from that, Because we are seeing
Speaker 6: term premium build back into other developed markets, other emerging
Speaker 6: markets for that matter, you are seeing curve steep and
Speaker 6: just you know what's the runway for steeper curves here,
Speaker 6: not just in the US, but abroad.
Speaker 14: Yeah, so this does create a little bit of a headwind.
Speaker 7: Like so, for example, if we look at the UK, right,
Speaker 7: So thirty year UK.
Speaker 14: Bond yields got to levels that we haven't seen since
Speaker 14: nineteen ninety eight.
Speaker 7: Right, So that's not necessarily a good thing.
Speaker 14: Now, what we have to recognize is that a lot
Speaker 14: of countries outside of the US have a high level
Speaker 14: of external debt, like say the UK, which means that
Speaker 14: they rely on the US Treasury to be the price center.
Speaker 14: The US treasury market is the largest bond market in
Speaker 14: the world. It effectively sets the price for interest rates,
Speaker 14: and essentially, if you have long term bonds in other countries,
Speaker 14: it's going to follow the US. So that's not necessarily
Speaker 14: a good thing. But the one thing that I want
Speaker 14: to one thing I want to highlight though, is that
Speaker 14: when we think about the policies that Trump is trying
Speaker 14: to put through, he's effectively saying I want to run
Speaker 14: expansionary fiscal policy. Now, when I say that, I mean,
Speaker 14: you know, lower taxes, deregulation, things like that. But at
Speaker 14: the same time, I also want to cut government spending
Speaker 14: and that's what the Doge Department is all about. And
Speaker 14: if you can do that, you can have low inflation
Speaker 14: and expendory policy. That's the trifecta.
Speaker 7: Can it be done? Is really what the question is.
Speaker 7: Could be a positive, We're to have.
Speaker 3: An extended conversation. You're gonna go to break and come back.
Speaker 3: But let me get this into and Karen, I think
Speaker 3: it's too important. This weekend, you're gonna be sitting with
Speaker 3: somebody who's up to their eyeballs in cash. They're scared
Speaker 3: stiff for whatever reason. If I look at red Sex
Speaker 3: Meddal relief, I'm scared stiff, Jim, Karen, what do you
Speaker 3: say to people afraid to participate in the markets.
Speaker 14: So right now, I still think that we are in
Speaker 14: the midst of a longer term protracted bull market in inequities.
Speaker 14: So I would say that the equity marks strickly, the
Speaker 14: broader sectors, the MidCap sectors, you know, more of a
Speaker 14: broadening out, not just the MAG seven, although I still
Speaker 14: like the MAG seven. But I think the broader sectors
Speaker 14: of the equity markets still have more earnings room to
Speaker 14: run higher and effectively have higher quality city growth and
Speaker 14: increases in prices and valuations in that space. So I
Speaker 14: would say, look a well diversified portfolio in the equity market,
Speaker 14: not just the index because the index is going to
Speaker 14: be highly skewed to those large cap tech stocks, but
Speaker 14: something that's very, very broadly based in.
Speaker 7: The mid cap sector.
Speaker 14: I think if you're a long term investor, large cap value,
Speaker 14: for example, could be an area that you want to
Speaker 14: start to think about and look at into the future.
Speaker 14: So I'm not afraid of the second market. I'm saying
Speaker 14: start to invest, let's go, I mean get going. And
Speaker 14: bond mules are higher, by the way, so they also
Speaker 14: offer better return to.
Speaker 6: You know, Jim, this is my question for you, and
Speaker 6: it's really interesting when you look at your phone, you're
Speaker 6: on your way into Morgan Stanley in the morning, on
Speaker 6: your morning commute, and you see an email from Lauren Reader,
Speaker 6: the incomparable Lauren Reader cheap Risk Officer of m SIM.
Speaker 6: Where are the tail risks in this market? Where do
Speaker 6: the black swan swim in this market?
Speaker 3: Jim?
Speaker 7: Yeah, So it's a good point.
Speaker 14: It's been so cold, it's been hard for me to
Speaker 14: think straight. But let me just say that, you know,
Speaker 14: I say that the big risks are it's really about
Speaker 14: about inflation, because if we start to see that inflation
Speaker 14: becomes unanchored, and if FED policy and other central bank
Speaker 14: policy shifts from cutting rates to actually hiking rates, that
Speaker 14: is really not what's anticipated, and that could unravel a
Speaker 14: a lot of things, and it could end pretty badly.
Speaker 14: So there's nothing that I can see other than something
Speaker 14: like that, because, look, the economic data has been relatively strong,
Speaker 14: the jobs data has been relatively strong, the company level
Speaker 14: data has been relatively strong, earnings are good. So everything
Speaker 14: there's nothing obvious that's out there. Clearly, there's always geopolitical
Speaker 14: risks and things like that. But I think the risk
Speaker 14: that we have is that if we get something more
Speaker 14: like an inflation shock. So let's say, if we go
Speaker 14: through the first one hundred days of the Trump administration
Speaker 14: and the markets interpret things very very differently than what's intended,
Speaker 14: you could start to see a lot of volatility come
Speaker 14: into the markets. And this is stuff that's hard to hedge,
Speaker 14: right because you just can't really anticipate it very very well.
Speaker 7: But that's what I'm focused on.
Speaker 6: Sorry about that blue button, Jim.
Speaker 7: You have to see how trust lions blue.
Speaker 3: You see that this is bar I tried to get
Speaker 3: Buffalo bills blue on the button.
Speaker 6: And I got jim My apologies. You're the chief investment
Speaker 6: officer of a cross asset solutions at Morgan Stanley Investment Management.
Speaker 6: But you previously held a lot of different roles. You
Speaker 6: were had a MAC or you had a rates effs,
Speaker 6: you were head of a merging market strategy. Talk to
Speaker 6: me about the bullish narrative for emerging markets in this market.
Speaker 6: I'm struggling with it, Jim.
Speaker 14: Yeah, So I think a lot of things are going
Speaker 14: to start to get realigned from a trade perspective, and
Speaker 14: a lot of this has to do with some of
Speaker 14: the tensions between the US and China. So effectively, when
Speaker 14: we think of the global markets, right, when we think
Speaker 14: of the SP five hundred, what we have to recognize
Speaker 14: is that forty one percent of the earnings from the
Speaker 14: SSP five hundred come from outside of the U and
Speaker 14: that also includes emerging markets too.
Speaker 7: So you know, when we think about.
Speaker 14: Policies in the US where we say America first, you know,
Speaker 14: for example that you know Trump, you know, would normally
Speaker 14: say it doesn't mean America alone. So one of the
Speaker 14: aspects of how we think about the markets going forward
Speaker 14: is that, yes, you know, the dollar has been strengthening.
Speaker 14: I think that the dollar strengthening has gotten to where
Speaker 14: it needs to be at this point. I don't think
Speaker 14: it really needs to get a whole lot stronger. I
Speaker 14: don't think that it necessarily will. I don't think it's
Speaker 14: going to get a lot weaker either. I think this
Speaker 14: is going to be the range that we're in. But effectively,
Speaker 14: from an emerging markets perspective, if we start to see
Speaker 14: a rise in the CAPEC cycle, which we're already seeing,
Speaker 14: we're seeing global pmis are already starting to pick up.
Speaker 14: The PMI for manufacturing has been in a recession for
Speaker 14: all intents and purposes for the past three years. It's
Speaker 14: been sitting below fifty. Now it's starting to move towards
Speaker 14: fifty and start to rise above. That is a positive
Speaker 14: global for manufacturing, especially for emerging markets who supply a
Speaker 14: lot of the raw materials.
Speaker 3: Karen. One final question fold in the work of Seth Carpenter,
Speaker 3: Ellen Zenner and others within economics at Morgan Stanley the
Speaker 3: great missed call of the last two years has been
Speaker 3: better economic growth, maybe some form of sticky inflation, and
Speaker 3: it sums out to a resilient nominal GDP. What does
Speaker 3: a resilient nominal GDP mean for our listeners and viewers
Speaker 3: deep into twenty twenty five.
Speaker 14: So what it means is that you can still have
Speaker 14: earnings growth rates in double digits for equity, so you
Speaker 14: could have ten, eleven, even twelve percent earnings growth rate. Now,
Speaker 14: what it also means is that this could be more
Speaker 14: broadly based. So when we think about let's let's take
Speaker 14: a look at two indices. Let's look at the S
Speaker 14: and P five hundred, which is what everybody looks at,
Speaker 14: and then let's look at the S and P four hundred,
Speaker 14: which is more of a mid cap index, more of
Speaker 14: a heavily MidCap weighted index. The earnings growth rate of
Speaker 14: the S and P five hundred was primarily led by.
Speaker 7: Those magnificent seven stars.
Speaker 14: If you look at the S and P four hundred,
Speaker 14: the earnings over the past few years has been pretty
Speaker 14: much flatlined and pretty steady. So there's a big divergence
Speaker 14: in what's been happening with the large cap growth and
Speaker 14: tech companies versus the MidCap and even large cap value
Speaker 14: companies where their earnings have been relatively flat and steady.
Speaker 14: So if you have a higher nominal GDP and we
Speaker 14: have a broadening of the market, there are the majority
Speaker 14: of the market has to catch up. So therefore there's
Speaker 14: a great opportunity I think going forward. So that's what
Speaker 14: it means to listeners is if you get higher nominal GDP,
Speaker 14: that's sustainable.
Speaker 3: Jim Keren, thanks to the clinic, greatly appreciate it, mister
Speaker 3: Karen always with Morgan Stanley and Nyu Stern.
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