WEBVTT - Surveillance: Fed's Balancing Act With Hornbach 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.960 Bloomberg dot Com, and of course on the Bloomberg Looking 0:00:27.960 --> 0:00:30.360 ahead to several key events including that events on Wednesday, 0:00:30.360 --> 0:00:33.000 pay Rolls Friday just around the corner as well. Fantastic 0:00:33.040 --> 0:00:35.160 lineup of guests for you through the week and this 0:00:35.200 --> 0:00:37.519 morning as well. And we begin this morning's program with 0:00:37.560 --> 0:00:40.600 Matt Hornback of Morecan Stanley. We're lucky to have access 0:00:40.640 --> 0:00:43.879 to several great rate strategists on the street. Matt, I'm 0:00:43.880 --> 0:00:45.800 pleased to say it's one of them. Matt. Fantastic to 0:00:45.800 --> 0:00:47.800 have you with us on the program. Let's just start 0:00:47.800 --> 0:00:49.839 with the price action right in front of our faces 0:00:49.960 --> 0:00:53.120 right now, equitris law again and a bond market that's 0:00:53.120 --> 0:00:57.520 really not doing a whole lot. Why so, Matt, Hey, John, 0:00:57.840 --> 0:01:00.360 thanks for having me on. So you know, look, this 0:01:00.520 --> 0:01:03.200 goes back to an issue that we actually talked about 0:01:03.280 --> 0:01:05.480 a couple of weeks back, which is the idea that 0:01:06.120 --> 0:01:09.720 bond markets are caught between a fiscal rock and a 0:01:09.920 --> 0:01:14.280 quee hard place right where's basically talking about. Uh, this 0:01:14.280 --> 0:01:17.840 this interplay between all of the issuance coming to market 0:01:18.360 --> 0:01:21.000 and all of the issuance that's ultimately going to be 0:01:21.080 --> 0:01:25.559 bought in the secondary by the Federal Reserve UM. You know, now, 0:01:25.760 --> 0:01:29.440 what we're seeing recently is the FED peeling back on 0:01:29.640 --> 0:01:32.920 the pace at which it is buying treasuries. UM. That's 0:01:32.959 --> 0:01:36.440 probably one of the reasons why on a daylight today 0:01:36.480 --> 0:01:39.800 where the SMP is down about a percentage point, uh, 0:01:39.840 --> 0:01:43.000 you're only getting a basis point rally in the treasury market. 0:01:43.520 --> 0:01:48.520 Investors are very worried about the supply matt If you 0:01:48.560 --> 0:01:50.600 look at the two year yield in the US, it's 0:01:50.720 --> 0:01:53.960 linear and certainly log linear, and it's just grinding ever 0:01:54.120 --> 0:01:57.560 lower yield. Do you extrapolate that out to an ever 0:01:57.760 --> 0:02:00.880 lower and lower and lower yield or can the FED 0:02:01.040 --> 0:02:06.480 actually can control that guide glide path at the end 0:02:06.480 --> 0:02:09.840 of the day, That that the FED um has a 0:02:09.919 --> 0:02:13.520 monoicum of control over the markets during certain periods of time, 0:02:13.600 --> 0:02:16.560 and then there are other periods of time. Remember the 0:02:16.720 --> 0:02:20.920 Taper tantrum in two thousand thirteen, where it completely loses 0:02:20.960 --> 0:02:24.280 control of the market based on you know, a handful 0:02:24.320 --> 0:02:27.840 of words coming out of somebody's mouth, and so it's 0:02:27.880 --> 0:02:31.280 a it's a very delicate balance. Um. I'd say at 0:02:31.360 --> 0:02:35.280 this point, what the FED is trying to figure out 0:02:35.400 --> 0:02:39.080 is what kind of forward guidance can can get them 0:02:39.120 --> 0:02:43.400 to allow yields to remain low and yet when the 0:02:43.440 --> 0:02:46.840 time is right, allow those yields to start to gradually rise. 0:02:47.120 --> 0:02:49.240 It's a very tough balance. This is not an easy 0:02:49.280 --> 0:02:52.079 thing to accomplish. Matt. What would yield to be if 0:02:52.320 --> 0:02:57.200 the US for not selling record amounts of debt right now? 0:02:57.440 --> 0:03:00.120 I think yeah, I like I think they would They 0:03:00.120 --> 0:03:03.760 would probably be much lower. Um. You you could easily 0:03:03.800 --> 0:03:06.960 see the tenure treasury yield revisit the all time low 0:03:07.040 --> 0:03:11.080 of thirty basis points. Again, the amount of securities that 0:03:11.160 --> 0:03:15.840 the FED is removing from the market is unprecedented. And 0:03:15.880 --> 0:03:19.240 when we talk about the supply demand balance between what 0:03:19.320 --> 0:03:21.760 the Treasury will issue and what the FED is buying, 0:03:22.040 --> 0:03:24.320 we also have to put that into the context of 0:03:24.639 --> 0:03:27.280 coupon bonds. Right now, we we know that there has 0:03:27.320 --> 0:03:30.040 been a tremendous amount of Treasury bills that have been 0:03:30.040 --> 0:03:32.960 issued this year. We also know that towards the end 0:03:33.000 --> 0:03:35.080 of last year, the FED was buying a lot of 0:03:35.080 --> 0:03:37.920 treasury bills. Now the FEED is buying a lot of 0:03:37.960 --> 0:03:43.040 treasury coupon bearing bonds. UH. And if they weren't, if 0:03:43.080 --> 0:03:45.160 if the US government wasn't going to issue any of 0:03:45.200 --> 0:03:48.920 those coupon bonds, almost certainly the tenure yield would be 0:03:48.920 --> 0:03:51.840 closer to zero than one. Man. You've got a macro 0:03:51.920 --> 0:03:54.600 mandate for Morgan Stanley right now, let's macro over to 0:03:54.640 --> 0:03:58.960 Ellen Zanner. Combine her inflation view with your view of 0:03:59.000 --> 0:04:02.600 fixed income as indicator a choice for our listeners. Are 0:04:02.640 --> 0:04:05.280 they ever going to garner a constructive real yield? I 0:04:05.280 --> 0:04:07.760 don't mean a positive real yield, I mean one that 0:04:07.800 --> 0:04:12.160 they can actually bank well. I mean this has been 0:04:12.200 --> 0:04:15.720 a phenomenon in the world over And the answer, probably 0:04:15.800 --> 0:04:19.520 for the next five years is no. Um, you know it. 0:04:19.640 --> 0:04:23.360 It's you know, real yield is a scarce sset these days, 0:04:24.279 --> 0:04:27.839 especially when the FED is removing so many of those 0:04:27.880 --> 0:04:32.279 securities that would otherwise offer you a positive real yield. 0:04:32.839 --> 0:04:35.039 I think you would need to see in order in 0:04:35.120 --> 0:04:37.720 order for me to be wrong on that, you would 0:04:37.800 --> 0:04:42.919 need to see the government expand the deficit UH in 0:04:42.960 --> 0:04:45.919 a continuous way, I'm not talking about one year of 0:04:46.000 --> 0:04:49.480 higher deficits or two years of higher deficits. I'm talking 0:04:49.480 --> 0:04:54.919 about year after year after year of continuously expanding deficits. 0:04:54.920 --> 0:04:58.159 This is about a rate of change, not just a 0:04:58.240 --> 0:05:01.320 nominal number every year. We need to see that happen 0:05:01.760 --> 0:05:05.560 in order for real yells to really start going considerably higher. 0:05:05.720 --> 0:05:07.719 Let's talk about the recovery as well, Matt. A little 0:05:07.720 --> 0:05:09.279 bit later this morning, I'll be catching up with your 0:05:09.320 --> 0:05:11.640 colleague chat and I Ah the chief economist at more 0:05:11.680 --> 0:05:15.080 Con Stanley. There is a focus on consumption, and as 0:05:15.080 --> 0:05:17.479 I look at the sequencing of the reopening across Europe 0:05:17.480 --> 0:05:20.800 in a place like Italy, it's manufacturing last first rather 0:05:21.080 --> 0:05:22.640 and then at the back end it will be the 0:05:22.680 --> 0:05:26.400 consumer facing sectors of the economy that opened last. And 0:05:26.440 --> 0:05:29.279 you guys are pointing out the consumption will be the 0:05:29.360 --> 0:05:32.120 LaGG art here, the slowest to recover. Now with that 0:05:32.200 --> 0:05:34.279 in mind, how hopeful can you be about a short, 0:05:34.320 --> 0:05:38.000 sharp recovery if consumer facing sectors the economy a last 0:05:38.080 --> 0:05:41.880 to open and consumption will be the laggett here. Well, 0:05:41.920 --> 0:05:45.960 I mean particularly in the US. John. If if that's 0:05:46.040 --> 0:05:48.880 the case, it's it's going to be a long slog 0:05:48.920 --> 0:05:51.159 because at the end of the day of the US 0:05:51.240 --> 0:05:55.880 economy is mostly a consumer based economy, and so if 0:05:55.880 --> 0:05:58.799 we experience the same type of dynamic that we're seeing 0:05:58.839 --> 0:06:02.120 play out in China, for example, Uh, then it is 0:06:02.160 --> 0:06:04.440 going to be a slow recovery. And that is what 0:06:04.520 --> 0:06:08.920 our economists are suggesting in their forecast. We're not really 0:06:08.960 --> 0:06:13.320 getting back to any any kind of consistent level of 0:06:13.440 --> 0:06:17.880 potential growth until two uh, you know, and and that 0:06:18.040 --> 0:06:20.680 is something that, um, we're all going to have to 0:06:20.720 --> 0:06:23.960 deal with, right It's the U s economy is is 0:06:24.040 --> 0:06:28.760 driven by consumption. I'm struck by Warren Buffett and what 0:06:28.800 --> 0:06:31.120 he said this weekend. He was saying that he didn't 0:06:31.160 --> 0:06:34.880 get calls because, frankly, or the fact that he was 0:06:34.920 --> 0:06:38.200 getting calls were not actually in terms that were attractive 0:06:38.320 --> 0:06:40.919 to him based on what the FED had done, based 0:06:40.960 --> 0:06:44.240 on the intervention that basically they had artificially propped up 0:06:44.279 --> 0:06:46.880 some of these companies and lowered borrowing costs. Do you 0:06:46.960 --> 0:06:51.360 think that investors who are investing alongside the FED ultimately 0:06:51.560 --> 0:06:54.440 will be struck with insolvencies and losses or do you 0:06:54.440 --> 0:06:57.520 think that they just won't get very big returns. Well, 0:06:57.560 --> 0:06:59.360 I just I don't think they're going to get very 0:06:59.360 --> 0:07:02.240 big return please. Uh. At the end of the day 0:07:02.320 --> 0:07:06.120 that the government, um has the government and the Fed 0:07:06.200 --> 0:07:09.560 in the sense have a have a special ability uh 0:07:09.800 --> 0:07:13.080 that it is not sort of commonplace in the sense 0:07:13.120 --> 0:07:15.800 that they can go in uh and they can increase 0:07:15.840 --> 0:07:19.240 their debtload. Right, the government can increase its debtload, um. 0:07:19.360 --> 0:07:23.880 And and the cost of that over time ultimately would 0:07:23.880 --> 0:07:26.680 be borne out through the currency. Right. And and what 0:07:26.720 --> 0:07:30.160 we're seeing um over the over recent months is that 0:07:30.200 --> 0:07:33.120 the currency hasn't had a problem with it. Now, that's 0:07:33.120 --> 0:07:35.880 not to say that it will never have a problem 0:07:35.920 --> 0:07:38.400 with it. And in fact, we do believe that the 0:07:38.480 --> 0:07:41.040 dollar is evolving through a topping process. And at the 0:07:41.200 --> 0:07:43.680 end of the end of the this year, the end 0:07:43.720 --> 0:07:46.080 of of of the next year, the dollar is going 0:07:46.120 --> 0:07:49.840 to be weaker, perhaps substantially weaker than it is today. 0:07:50.200 --> 0:07:53.800 But that's ultimately where you would see uh see the 0:07:53.880 --> 0:07:58.160 pain if you will, hitting the government and the government's 0:07:58.160 --> 0:08:00.520 balance sheet uh is through the current see and we 0:08:00.520 --> 0:08:02.960 have not yet really seen that to any degree worth 0:08:03.240 --> 0:08:05.640 worth writing home about. Matt. We've gotta leave it that 0:08:05.720 --> 0:08:07.440 sam My bestaid of saying, well you mouhm back that 0:08:07.840 --> 0:08:10.480 of Morgan Stanley on the latest and the Treasury market 0:08:10.480 --> 0:08:23.800 beyond right now is a really important interview, folks. I'm 0:08:23.800 --> 0:08:27.120 looking down at the Plaza Hotel here on Central Park. 0:08:27.240 --> 0:08:29.560 Jane Foley knows the history of the Plaza Hotel, but 0:08:29.600 --> 0:08:33.200 what she really knows is eighteen months, seventeen months after 0:08:33.240 --> 0:08:36.280 the Plaza Chord, three or five years ago, there was 0:08:36.320 --> 0:08:39.959 the Louver Accord. The coffee was better there, and and Jane, 0:08:39.960 --> 0:08:43.239 what's so important here is you can have dollar dynamics 0:08:43.240 --> 0:08:46.160 and all this international economics and China in the US 0:08:46.240 --> 0:08:49.439 now and all that, and then it leads to instabilities 0:08:49.480 --> 0:08:51.880 where you've got to have a brand new meeting. How 0:08:51.920 --> 0:08:57.240 close are we to instabilities in the Jane Foley world? Well, 0:08:57.240 --> 0:08:59.120 I mean that is quite interesting. I think if the 0:08:59.559 --> 0:09:03.160 dollar continued to be at these sorts of levels, maybe 0:09:03.240 --> 0:09:05.959 for the next year or so, then I certainly think 0:09:06.000 --> 0:09:08.920 that politics would certainly be coming into that equation. But 0:09:08.960 --> 0:09:11.880 I think for now it's perhaps too early to be 0:09:12.360 --> 0:09:14.880 wondering whether or not politics are going to come in, 0:09:14.960 --> 0:09:18.120 what politics are going to potentially do. But I think 0:09:18.120 --> 0:09:20.200 there's one thing that we can say is that we 0:09:20.240 --> 0:09:22.840 are still, I think very much in the early phases 0:09:22.840 --> 0:09:25.880 of this crisis. What you've just been outlining with respect 0:09:25.920 --> 0:09:29.720 to unemployment is really just still the beginnings of the 0:09:29.840 --> 0:09:32.840 demand site aspect of this crisis. If we get to 0:09:32.880 --> 0:09:36.160 the end of the year, and as most economists untokipating, 0:09:36.480 --> 0:09:41.360 we've still got very elevated unemployment used very suppressed wage inflation, 0:09:41.679 --> 0:09:45.160 then we are still looking at very poor demand dynamic, 0:09:45.280 --> 0:09:49.600 and that is going to feed back into stock market valuations. 0:09:49.640 --> 0:09:51.960 It's going to feed through into all the economic data 0:09:52.000 --> 0:09:53.679 that we're going to see, and it's not going to 0:09:53.760 --> 0:09:56.000 be a pretty site, and gay not the way that 0:09:56.040 --> 0:09:58.199 people are trying to Our governments are trying to plug 0:09:58.240 --> 0:10:01.520 this gap, this demand gap is by printing money and 0:10:01.520 --> 0:10:03.880 by issuing record amounts of debt. And we've talked about 0:10:03.920 --> 0:10:07.360 the U s set to announce its quarterly funding on 0:10:07.640 --> 0:10:10.400 Wednesday with record badge of debt sales. But it's not 0:10:10.440 --> 0:10:13.240 just the US. It's also China, which is set to 0:10:13.400 --> 0:10:16.160 issue a record amount of local government debt. It's also 0:10:16.200 --> 0:10:18.160 in Europe or the e c B is expanding its 0:10:18.160 --> 0:10:21.480 balance sheet. What is the long term consequence of this 0:10:21.720 --> 0:10:26.280 massive sale of debt in nations worldwide. Well, I think 0:10:26.280 --> 0:10:28.720 it depends which nation that you're in, because if you're 0:10:28.760 --> 0:10:32.199 issuing debt in the currency that people really want to have, 0:10:32.280 --> 0:10:35.840 which would be really most Western economies of the US 0:10:35.920 --> 0:10:39.400 obviously and then European economies, they can issue debt and 0:10:39.679 --> 0:10:42.920 they'll they'll they'll probably do okay. But if you want 0:10:42.960 --> 0:10:45.040 to issue debt and you happen to be an emerging 0:10:45.080 --> 0:10:48.640 market nation and you do not have at the patients 0:10:48.800 --> 0:10:51.640 of international investors just wanting or lining up to buy 0:10:51.640 --> 0:10:54.600 your debt, then you have an issue. And that is 0:10:54.640 --> 0:10:57.560 I think again a real aspect of this crisis. I 0:10:57.600 --> 0:11:00.599 think that the crisis that the emerging markets suffer it 0:11:00.640 --> 0:11:04.200 could be really quite marked. And whereas Western governments can 0:11:04.280 --> 0:11:06.200 find a way through this, and it's going to be 0:11:06.240 --> 0:11:08.679 pretty tough. I think it's going to be really, really 0:11:08.720 --> 0:11:11.480 tough if you happened to be in a very poor country. 0:11:11.840 --> 0:11:14.160 Jen Let's touch on the US dollar as well. Many 0:11:14.160 --> 0:11:16.200 people were talking about this for a long long time 0:11:16.280 --> 0:11:19.000 that in the next downturn, any crisis, whatever shape it 0:11:19.080 --> 0:11:22.480 might take, we might question the riskman againing characteristics of 0:11:22.480 --> 0:11:25.040 the U. S dollar. Have we just cemented the status 0:11:25.200 --> 0:11:27.800 as the haven currency. Do your in fact for a 0:11:27.800 --> 0:11:31.040 whole lot longer the U S Dollar. I think we 0:11:31.120 --> 0:11:32.880 have to be honest, and I think this is a 0:11:32.960 --> 0:11:35.319 function of, you know, the last ten years. Maybe that's 0:11:35.320 --> 0:11:38.079 the last twenty years, but certainly the last ten infer instance, 0:11:38.080 --> 0:11:39.440 if you look at the data from the Bank of 0:11:39.480 --> 0:11:42.360 International Secuments over the last ten years, really after the 0:11:42.400 --> 0:11:45.480 global financial crisis, a huge amount of debt started to 0:11:45.520 --> 0:11:48.520 be issued in US dollars. A huge amount of cash 0:11:48.800 --> 0:11:51.240 of U. S. Dollars is held outside of the U S. 0:11:51.280 --> 0:11:53.959 A lot of this is used for transactional purposes, again 0:11:54.040 --> 0:11:56.480 in emerging market countries, and because a lot of these 0:11:56.480 --> 0:11:59.360 have grown really very significantly in the last ten years, 0:11:59.640 --> 0:12:03.079 there's just the need for dollars just to carry out businesses. 0:12:03.480 --> 0:12:06.400 So from that point of view, the dollar is a 0:12:06.520 --> 0:12:09.679 sort of a practical safe haven for many types of 0:12:09.960 --> 0:12:13.840 smaller businesses and people around the world, particularly in e M. 0:12:13.880 --> 0:12:16.760 And that's why I think when the dollar does eventually 0:12:16.760 --> 0:12:19.080 turn lower, it could be a while, yeah, and it 0:12:19.120 --> 0:12:21.720 could be linked to when confidence really does come back 0:12:21.720 --> 0:12:25.240 in emerging markets. Jane, this is fascinating to me because 0:12:25.240 --> 0:12:28.640 the implication here is that the Fed essentially monetizing the 0:12:28.679 --> 0:12:31.320 debt of the United States and the United States selling 0:12:31.360 --> 0:12:36.079 an unprecedented amount of treasuries will have no effective consequence 0:12:36.400 --> 0:12:38.120 on the nation. I mean that is sort of the 0:12:38.120 --> 0:12:41.400 the implication here if the dollar remains the funding source 0:12:41.480 --> 0:12:44.200 to your and and and the the prime way that 0:12:44.200 --> 0:12:46.400 that that people look for the currency. Is that correct? 0:12:46.440 --> 0:12:49.120 Is that your is that your take? It certainly does 0:12:49.160 --> 0:12:51.240 seem to be like that. And to put that into perspective, 0:12:51.280 --> 0:12:53.720 I remember righting essays on this when I was at university, 0:12:53.720 --> 0:12:55.840 and that was a long time ago. And yet you know, 0:12:56.000 --> 0:12:58.839 we we can project ourselves forwards till today and we're 0:12:58.840 --> 0:13:02.360 still at this situation. You know, when does the market crack? Now, 0:13:02.400 --> 0:13:05.280 if you like, you can liken this to Japan. Now, 0:13:05.320 --> 0:13:07.199 in Japan, of course, they've got a huge amount of that, 0:13:07.360 --> 0:13:10.199 much larger than the US, and they have been issuing 0:13:10.920 --> 0:13:14.480 huge amounts of Jgbsdvangage, Bannabeen hoovering up huge amounts of 0:13:14.760 --> 0:13:18.200 of jgbs as well, and for years the market I said, well, 0:13:18.440 --> 0:13:20.240 you know, our investor is going to give up on 0:13:20.320 --> 0:13:22.199 this is as wrong as a yel is going to 0:13:22.280 --> 0:13:24.600 go up, and yet they haven't. And it seems as 0:13:24.679 --> 0:13:29.160 long as credit rating agencies remain calm, then the market 0:13:29.240 --> 0:13:32.200 carries on buying this step. And it seems as long 0:13:32.280 --> 0:13:36.200 as the government's do just enough to give this era 0:13:36.440 --> 0:13:41.040 of fiscal control, then the market seems to poke with 0:13:41.120 --> 0:13:44.360 this quite well. Jane, thank you so much, Jane, fully 0:13:44.559 --> 0:13:58.240 with rabble banking. Julian, Emanuel, I read every word of 0:13:58.320 --> 0:14:00.520 us note. He's got a note for so then they've 0:14:00.520 --> 0:14:03.880 got seven pages of Excel spreadsheet in a fund that 0:14:04.000 --> 0:14:06.520 I think I couldn't read when I was seventeen. I 0:14:06.679 --> 0:14:09.480 certainly can't read it now. So Emmanuel of bt I, 0:14:09.600 --> 0:14:12.120 you can claiming about the guest before they even get 0:14:12.200 --> 0:14:14.960 to speak, But come on, he's one of these guys. 0:14:15.040 --> 0:14:17.840 It's it's like at the end of the conversation, it's 0:14:17.880 --> 0:14:21.440 like something off of a hieroglyphic, a fault museum of art. 0:14:21.720 --> 0:14:24.320 So when it was Julian translate forest right now and 0:14:24.400 --> 0:14:27.520 this and this continuum, Julian, Emmanuel, where do you fit 0:14:27.680 --> 0:14:31.520 in on sell in May and go away? Well, Tom, 0:14:31.800 --> 0:14:34.280 I hope you're going to disinfect the package with the 0:14:34.360 --> 0:14:37.680 magnifying glass. That's gonna be on your doorstep tomorrow. So 0:14:38.080 --> 0:14:40.960 that's the first thing I'd say, Look, if you if 0:14:41.000 --> 0:14:43.880 you think about it, it's very clear that the rally 0:14:44.120 --> 0:14:48.800 Austin the March is very much about the fat injections 0:14:48.840 --> 0:14:53.200 of liquidity. Obviously the fiscal policy as well. And now 0:14:53.320 --> 0:14:55.720 we're at this point where we've we've come all this 0:14:55.880 --> 0:14:59.960 way and and frankly, what we're looking at is seven 0:15:00.000 --> 0:15:03.480 are weeks of uncertainty. How does the economy reopen? What 0:15:04.120 --> 0:15:07.760 does that look like? And you know, crucially, do we 0:15:07.960 --> 0:15:13.920 have a spike in the coronavirus? Julian Gray is risk okay? Beautifully, 0:15:14.000 --> 0:15:17.760 frank Julian Robert Kirby, the giant of capital Guardian Trust 0:15:17.800 --> 0:15:22.920 of a million years ago, would say, opportunity, uncertainty go together. 0:15:23.520 --> 0:15:27.680 Is this with this uncertainty, lousy March grade April is 0:15:27.720 --> 0:15:32.760 now the mother of all times to reaffirm optimism. We 0:15:33.920 --> 0:15:37.360 don't think it's right now. We think May could be rocky. Ultimately, 0:15:37.480 --> 0:15:40.720 we do think that in the bigger picture it is 0:15:40.760 --> 0:15:43.320 a time to reaffirm optimism. But I think we have 0:15:43.480 --> 0:15:46.360 to be very honest and upfront about this. There is 0:15:46.440 --> 0:15:49.680 an element of medicine that needs to progress over the 0:15:49.800 --> 0:15:52.240 next five or six months. We're not exactly sure what 0:15:52.360 --> 0:15:55.800 it is. Obviously a vaccine would be the best case scenario, 0:15:56.160 --> 0:15:58.920 but we do need some sort of medical events or 0:15:59.040 --> 0:16:02.320 some signs that the virus is going to be less 0:16:02.440 --> 0:16:05.120 of an issue as we reopened the economy. But tell 0:16:05.160 --> 0:16:06.480 you a great judy and science is going to be 0:16:06.480 --> 0:16:08.480 a huge factor in the reopening of all of this. 0:16:08.600 --> 0:16:10.680 I think there are some basic economic assumptions that you 0:16:10.760 --> 0:16:13.000 can make and start to think about the kinds of equities, 0:16:13.080 --> 0:16:15.720 the kinds of businesses you want to own in those scenarios. 0:16:15.760 --> 0:16:17.880 So let's talk about it, Julian. This could be a 0:16:18.000 --> 0:16:20.920 high debt, low growth world. Goldman is saying, for that reason, 0:16:21.200 --> 0:16:23.640 you want to pay up for growth by the big players, 0:16:23.920 --> 0:16:26.640 by the big five, by the big tech companies. That 0:16:26.720 --> 0:16:28.320 seems to be the call for a lot of people 0:16:28.360 --> 0:16:31.520 on Wall Street at the moment, increasingly a call on 0:16:31.600 --> 0:16:33.640 the margin of the conversation. Is something we discussed at 0:16:33.640 --> 0:16:35.800 the top of this program. Start to get exposure to 0:16:35.840 --> 0:16:38.520 small caps, the most cyclical aspects of this equity market. 0:16:38.800 --> 0:16:41.880 How do you manage your equity exposure right now, Julian, 0:16:42.960 --> 0:16:46.440 So we are on the small cap cyclical side. We 0:16:46.640 --> 0:16:49.880 looked at every bear market over the last thirty years 0:16:50.080 --> 0:16:53.800 and and absolutely with consistency, and think about it, it 0:16:53.920 --> 0:16:56.880 did very two thousand and eight, the financials led the 0:16:56.920 --> 0:17:00.600 way down, two thousand technology led the way down, etcetera. 0:17:01.120 --> 0:17:04.560 But invariably what we saw is all the sectors and 0:17:04.680 --> 0:17:08.320 the styles and the market caps that were the worst 0:17:08.400 --> 0:17:12.520 performers during the bear market phase ultimately lead the market 0:17:12.600 --> 0:17:15.639 higher once you made the transition to a newable market. 0:17:15.760 --> 0:17:19.240 And for us, that means financials, that means small caps, 0:17:19.560 --> 0:17:23.560 that means energy and industrials. It does not mean fang 0:17:23.840 --> 0:17:26.160 and it doesn't mean sort of the shelter and place 0:17:26.240 --> 0:17:28.359 ministers who's which we think are going to be sources 0:17:28.440 --> 0:17:32.080 of fun as we make this transition to a newable market, 0:17:32.320 --> 0:17:38.520 which is Lisa. Sources of fun is Julian Emmanuel talk 0:17:38.680 --> 0:17:42.520 is they're going to sell the puppies. Sell the puppies. Actually, 0:17:42.840 --> 0:17:44.200 you could get a lot of buyers right now. I 0:17:44.280 --> 0:17:46.520 hear the pounds are actually out of puppies because everyone's 0:17:46.520 --> 0:17:48.840 adopting puppies. Julian. I do want to get a sense though, 0:17:49.240 --> 0:17:52.479 of the numbers versus the hope, and I'm looking right now, 0:17:52.640 --> 0:17:55.600 there's about halfway. We're about halfway through the first quarter 0:17:55.680 --> 0:17:58.880 earnings reporting season, and the Russell two thousand Small Cap 0:17:58.960 --> 0:18:03.680 Index report companies are down sixteen point four percent year 0:18:03.800 --> 0:18:07.200 over year, that is with respect to earnings, and that 0:18:07.280 --> 0:18:09.480 as much more than you're seeing in the SMP five 0:18:10.000 --> 0:18:12.120 in terms of the of the companies that have reported there. 0:18:12.440 --> 0:18:14.800 How do you square that with the optimism that you're 0:18:14.840 --> 0:18:19.080 expressing and recommending that investors go and buy these companies. Well, 0:18:19.440 --> 0:18:21.560 you square with this whole idea that if you think 0:18:21.600 --> 0:18:25.400 about the relative return of the SMP for the versus 0:18:25.480 --> 0:18:29.440 the Russell that is very largely discounted. You also look 0:18:29.480 --> 0:18:31.320 at it and we think about it in terms of 0:18:31.359 --> 0:18:35.040 the risk. Several weeks ago, the Russell two thousand vics 0:18:35.359 --> 0:18:38.359 got to an all time wide versus the S and 0:18:38.400 --> 0:18:41.080 P five vics, and that told you that, you know, 0:18:41.280 --> 0:18:45.240 it was absolute abject panic in the small cap universe, 0:18:45.440 --> 0:18:48.160 even after the market had turned. And then the last 0:18:48.200 --> 0:18:50.800 thing we say about is, you know, think about the 0:18:51.040 --> 0:18:54.920 targeting of the stimulus. We're not you know, we're buying 0:18:55.000 --> 0:19:00.040 large targeting industries, but overall the emphasis is on a 0:19:00.280 --> 0:19:03.680 small town, you know, small main Street us A companies, 0:19:03.920 --> 0:19:06.240 which by the way, make up a large part of 0:19:06.280 --> 0:19:08.680 the electorate this November. So we think it's it's in 0:19:08.760 --> 0:19:11.200 the price, So Julie, and this conversation has gone the 0:19:11.200 --> 0:19:13.720 way if many of these conversations go, which is why 0:19:13.720 --> 0:19:15.120 do you want to buy X? And then I get 0:19:15.200 --> 0:19:17.920 told because in history it shows X, Y and C. 0:19:18.440 --> 0:19:20.400 And I think we can all agree that this shutdown 0:19:20.640 --> 0:19:24.920 this economic downtown. It's totally unprecedented. So with that in mind, 0:19:25.640 --> 0:19:29.200 isn't the comflict branket of history totally redundant as we 0:19:29.280 --> 0:19:35.159 exit this? Uh? No, I don't think so, because this 0:19:35.400 --> 0:19:39.440 has been so extraordinary that there really are only a 0:19:39.520 --> 0:19:42.159 couple of periods that you can measure against um and 0:19:42.280 --> 0:19:45.360 if you look at it, sort of the the incredible 0:19:45.440 --> 0:19:47.760 craft off of an all time high coming in a 0:19:47.840 --> 0:19:53.520 month or two really only harkins. And from our view, 0:19:53.680 --> 0:19:57.720 the reason this isn't nine where you wouldn't say, you know, 0:19:58.080 --> 0:20:02.119 cyck locality is is on the verge of bankruptcy and 0:20:02.200 --> 0:20:05.400 so on and so forth, is because of the response 0:20:05.560 --> 0:20:09.879 that you know, we are now over of us g 0:20:10.040 --> 0:20:14.200 d P in enacted and proposed stimulus, right, and and 0:20:14.280 --> 0:20:18.040 the question is can that last? Yeah, it's it's an 0:20:18.080 --> 0:20:22.240 incredible number. Can that last long enough? There's an optionality 0:20:22.320 --> 0:20:25.040 to it that putting our derivatives at on, there's an 0:20:25.080 --> 0:20:28.520 optionality to can it last long enough to get to 0:20:28.960 --> 0:20:33.119 a medical solution um that helps reopen the economy. And 0:20:33.240 --> 0:20:35.040 we think the answer is likely going to be yea, 0:20:35.560 --> 0:20:47.760 Julia Manuel, thank you so much, great briefing. Bill Smede 0:20:47.800 --> 0:20:51.639 joins us right now. Smede Capital. Of course, value investors 0:20:51.760 --> 0:20:56.080 they sort of like sequoil like stocks, some real concentration. 0:20:56.160 --> 0:20:59.840 They're less diversified, uh, and they're in the value space. 0:21:00.000 --> 0:21:03.119 Will speed your track record over long term is nothing 0:21:03.240 --> 0:21:05.680 short of an act of God. It is a miracle 0:21:06.640 --> 0:21:08.960 unlike the last year, you know, anyway you want to 0:21:09.000 --> 0:21:11.040 look at it, it's been a tough, tough slog for 0:21:11.160 --> 0:21:14.600 large cap vailue away from the seven or eight stocks 0:21:14.680 --> 0:21:18.560 doing well. How do you manage that forward? Well? You 0:21:18.960 --> 0:21:22.119 you get more excited about it. Tom. We took a 0:21:22.200 --> 0:21:26.040 lot look about a week ago at the year to date, 0:21:26.119 --> 0:21:28.720 one year, three year, five year, and tenure on the 0:21:28.840 --> 0:21:31.960 Russell one thousand value versus the Russell one thousand growth, 0:21:32.760 --> 0:21:40.720 and the spreads were and a hundred. Uh So, so 0:21:41.000 --> 0:21:43.520 what it tells you that in virtually every single time 0:21:43.560 --> 0:21:46.679 period for the last ten years, growth has beaten value. 0:21:47.480 --> 0:21:50.720 And and that's we find that really a key in 0:21:51.000 --> 0:21:54.960 the for example, the Birrthire Hathaway meeting. Because from a 0:21:55.080 --> 0:21:58.159 value standpoint, today is a great day to be a 0:21:58.240 --> 0:22:02.119 Ben Graham person, right, this is a great point in 0:22:02.200 --> 0:22:05.040 time to be somebody that looks at asset values and 0:22:05.119 --> 0:22:08.439 cash flows and all those kind of important things for today. 0:22:09.119 --> 0:22:13.200 And and we we uh we definitely like this market 0:22:13.280 --> 0:22:16.280 for that reason. All right, so we give us your 0:22:16.359 --> 0:22:21.120 sense of your takeaways from Warren Buffett over the weekend. 0:22:21.359 --> 0:22:25.960 Uh you know, he's always been enthusiastic about America long 0:22:26.160 --> 0:22:30.320 term American exceptionalism, but it didn't necessarily come across in 0:22:30.400 --> 0:22:34.200 some of his actions. What were your takeaways? Well, first 0:22:34.240 --> 0:22:38.960 of all, you have to understand the capital structure of 0:22:39.119 --> 0:22:42.600