WEBVTT - Trade War Takes Center Stage at G7 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg PENL podcast. I'm Paul Sweene. You, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:25.439 at Bloomberg dot com. Let's welcome our good friend Nathan Sheets. 0:00:25.560 --> 0:00:28.920 Nathan is chief Economists and head of macro economic Research 0:00:29.000 --> 0:00:32.160 for p g i M Fixed Income based in Newark, 0:00:32.159 --> 0:00:34.040 New Jersey, but joining us live here in our Bloomberg 0:00:34.080 --> 0:00:36.680 and or Active Brooker studio. So, Nathan, I mean, there's 0:00:36.680 --> 0:00:39.520 so many topics to talk about here. Um, just last week, 0:00:39.680 --> 0:00:41.280 you know, we had the Fed, we had trade, we 0:00:41.320 --> 0:00:43.960 had tariffs and so on and so forth. Let's start 0:00:44.000 --> 0:00:47.280 with trade because that seems to be, uh, the number 0:00:47.360 --> 0:00:51.240 one issue driving financial markets here just given what we've 0:00:51.280 --> 0:00:54.280 seen over the last several days, several weeks. How do 0:00:54.320 --> 0:00:56.320 you think this could play out? And what how are 0:00:56.360 --> 0:00:59.400 you kind of you know, thinking about your portfolio and 0:00:59.560 --> 0:01:03.920 global trade uncertainty. So it's a pleasure to be here, 0:01:04.160 --> 0:01:08.560 and as you say, uncertainty is certainly the word of 0:01:08.600 --> 0:01:12.560 the day and probably the word of the week. I 0:01:12.720 --> 0:01:17.120 would uh say that the president's remarks this morning that 0:01:17.200 --> 0:01:19.640 he's received a call from the Chinese and they want 0:01:19.680 --> 0:01:24.120 to negotiate, actually it should be interpreted as saying President 0:01:24.160 --> 0:01:28.319 Trump wants to negotiate. Um. My feeling has long been 0:01:28.520 --> 0:01:31.640 that he's not inclined to want to push the markets 0:01:31.720 --> 0:01:35.679 or the economy uh to to the precipice or to 0:01:35.720 --> 0:01:38.920 the breaking point. And so I would expect that the 0:01:38.959 --> 0:01:42.679 administration will be uh finding ways to come to the table. 0:01:43.080 --> 0:01:45.320 And then the key question is how did the Chinese 0:01:45.319 --> 0:01:47.760 respond to that? All right, So we could get out 0:01:48.000 --> 0:01:51.080 a book to analyze both characters and what's going on 0:01:51.120 --> 0:01:53.760 in their mind space, but that might prove fruitless. I 0:01:53.760 --> 0:01:56.320 think one of the key questions here is moving forward, 0:01:56.440 --> 0:01:59.760 how much damage is already happening with respect to businesses 0:02:00.160 --> 0:02:03.480 and their plans. Do you have a sense of that? Well, 0:02:03.600 --> 0:02:09.239 right now we have a two speed to tier US economy. 0:02:09.840 --> 0:02:14.400 The consumer sector in the labor market are quite solid, 0:02:15.120 --> 0:02:21.080 but the business sector is is really feeling a meaningful 0:02:21.200 --> 0:02:24.960 imprint of the uncertainty that you described. Which I think 0:02:25.080 --> 0:02:27.320 is largely about this trade wall. I guess that there's 0:02:27.320 --> 0:02:29.840 a question, there's sort of an understanding or a feeling 0:02:29.919 --> 0:02:32.960 that Trump President Trump will back down or come to 0:02:33.040 --> 0:02:35.480 some kind of deal in order to save the markets 0:02:35.480 --> 0:02:37.160 and save the economics. It doesn't want to go into 0:02:38.200 --> 0:02:41.120 with a stock market that's crashing. At the same time, 0:02:41.720 --> 0:02:44.360 it's hard to know how much can be rolled back. 0:02:44.400 --> 0:02:46.480 At what point do we hit the point of no 0:02:46.600 --> 0:02:50.240 return and businesses have already changed their plans so much 0:02:50.480 --> 0:02:53.600 that even some sort of trade truce could not bring 0:02:53.680 --> 0:02:58.160 necessarily markets back. And uh, I think that Uh, I 0:02:58.200 --> 0:03:01.399 think that's an open question. My feeling is that we're 0:03:01.400 --> 0:03:03.880 not there yet. But if we get to a point 0:03:03.919 --> 0:03:09.080 where we have say, thirty percent tariffs on everything that 0:03:09.120 --> 0:03:14.000 the United States is importing uh from China, and sanctions 0:03:14.040 --> 0:03:17.720 on whalwei, and the list goes on, we may very 0:03:17.800 --> 0:03:21.840 quickly get to that point where the impact on US 0:03:21.960 --> 0:03:27.720 business on investment and investment plans is essentially irreversible, which 0:03:28.320 --> 0:03:32.200 means that recessionary forces at that point will be will 0:03:32.240 --> 0:03:34.760 be quite powerful. I don't think we're there yet, but 0:03:35.000 --> 0:03:37.840 it's it's a possibility. So on the flip side. To 0:03:37.880 --> 0:03:41.440 what extent are the tariffs impacting the Chinese economy do 0:03:41.520 --> 0:03:45.600 you think? I think the uh, the impact on the 0:03:45.720 --> 0:03:49.960 Chinese economy is quite substantial. My rule of thumb is 0:03:50.040 --> 0:03:53.680 that if if the tariffs are taking say three or 0:03:53.720 --> 0:03:57.960 four tenths of a percent off the level of US GDP, 0:03:58.520 --> 0:04:02.640 that it's at least twice that much for the Chinese economy. 0:04:03.040 --> 0:04:07.400 So the Chinese are certainly absorbing a meaningful economic shock, 0:04:07.520 --> 0:04:09.960 and I think you're seeing that in their numbers. But 0:04:10.040 --> 0:04:13.600 the key here is that China also has a higher 0:04:13.640 --> 0:04:17.680 pain threshold. So that's kind of the challenge the US. 0:04:17.800 --> 0:04:21.240 We're feeling less pain, but we have a lower pain threshold. 0:04:21.320 --> 0:04:24.640 China more pain and a higher pain threshold. How how 0:04:24.680 --> 0:04:27.320 do these incentives that result from that? How do they 0:04:27.360 --> 0:04:29.640 play through well? And I guess that that's the question. 0:04:29.680 --> 0:04:32.039 You know, China seems to be playing a more hardball 0:04:32.120 --> 0:04:34.640 this morning than President Trump, indicating that there have not 0:04:34.680 --> 0:04:37.359 been material talk. So at what point will they be 0:04:37.480 --> 0:04:40.120 forced to the table, regardless of the fact that they've 0:04:40.120 --> 0:04:44.799 got a higher pain threshold. So I think that China, 0:04:45.080 --> 0:04:47.720 I don't know the mechanism to force them to the table. 0:04:48.279 --> 0:04:53.080 I do think that as they feel economic effects and 0:04:53.160 --> 0:04:58.840 as the Trump administration UH puts gifts in the negotiation 0:04:58.960 --> 0:05:01.440 on the table. I mean one of the challenges before 0:05:01.520 --> 0:05:03.239 I was at the U S Treasury and I would 0:05:03.480 --> 0:05:06.680 negotiate with the Chinese, one of the challenges was the 0:05:06.800 --> 0:05:09.360 U S didn't have gifts for the Chinese. We were 0:05:09.440 --> 0:05:11.720 asking them to do things, but we didn't have a 0:05:11.720 --> 0:05:15.200 lot to give back. Now the US has has Wahwei, 0:05:15.480 --> 0:05:19.160 we have currency manipulation, and we have tariffs, and so 0:05:19.240 --> 0:05:23.400 I think it does open up a negotiation. We're both claimed. 0:05:23.560 --> 0:05:29.039 Both sides could claim a UH a scope for victory 0:05:29.160 --> 0:05:32.120 or that they got something from it. So you mentioned Hahwei. 0:05:32.240 --> 0:05:35.839 That is a part of the negotiations that sometimes gets forgotten, 0:05:35.839 --> 0:05:38.400 but that could in fact be a material stumbling block. 0:05:38.440 --> 0:05:42.000 How how did does that play into it? So I 0:05:42.040 --> 0:05:46.840 think Hahwei is critical. I think that if the Chinese 0:05:46.920 --> 0:05:51.120 leaders were, you know, to disclose what they feel are 0:05:51.160 --> 0:05:54.560 the key issues, Whahwei would be at the very top 0:05:54.600 --> 0:05:57.440 of the list. So I think that progress from the 0:05:57.520 --> 0:06:02.920 Chinese standpoint, progress on hahweis is central. Then the question is, UH, 0:06:03.120 --> 0:06:06.640 to what extent does the US actually see wahway as 0:06:06.680 --> 0:06:10.640 a national security concern. And even if the administration is 0:06:10.720 --> 0:06:15.360 inclined to want to be software a wahaway, will Capitol 0:06:15.480 --> 0:06:19.680 Hill allow it? So I think always somehow has to 0:06:19.760 --> 0:06:22.160 be included, but there are lots of question marks there. 0:06:22.320 --> 0:06:24.760 We're speaking with Nathan Sheets. He's chief economist and head 0:06:24.760 --> 0:06:28.440 of macroeconomic research at PGM Fixed Income. Just by way 0:06:28.480 --> 0:06:31.000 of background, you also were under the Secretary of the 0:06:31.080 --> 0:06:34.400 US for the U. S. Treasury focusing on international affairs. 0:06:34.480 --> 0:06:36.719 You're representing the U S. Governments. You come with with 0:06:36.800 --> 0:06:40.240 quite a bit of authority on these issues. From an 0:06:40.279 --> 0:06:43.760 investment side, How would you advise or how are you advising? 0:06:44.240 --> 0:06:48.880 UH had a position around this uncertainty at a time 0:06:48.920 --> 0:06:53.039 when growth is still okay. Yeah, so we are. We 0:06:53.120 --> 0:06:56.839 are at a in a place where there is enormous 0:06:56.880 --> 0:07:00.960 demand for safe assets, and I think con significant that 0:07:01.080 --> 0:07:04.000 in that world we see the end appreciate, we see 0:07:04.040 --> 0:07:11.640 the tenure treasury yield UH decline. UH investors are are 0:07:11.680 --> 0:07:15.400 are seeking those places where they can have some confidence 0:07:15.440 --> 0:07:18.520 that they'll actually they'll actually be repaid and we'll be 0:07:18.560 --> 0:07:21.840 able to weather a storm. And frankly, that's my feeling. 0:07:21.920 --> 0:07:26.240 This is uh, this is a challenging environment for risk 0:07:26.320 --> 0:07:30.320 on kinds of assets. We are awaiting the press conference 0:07:30.920 --> 0:07:33.960 with President Macron of France and President Trump of the 0:07:34.040 --> 0:07:36.480 United States that is coming up in moments. We will 0:07:36.520 --> 0:07:39.360 carry that live. Uh, Nathan, was there anything that came 0:07:39.360 --> 0:07:44.280 out of Jackson Hole last week that surprised you or 0:07:45.000 --> 0:07:46.600 kind of made you rethink maybe a little bit of 0:07:46.640 --> 0:07:54.000 your outlook? So H J. Powell's remarks were I thought, 0:07:54.160 --> 0:07:58.280 just a restatement with emphasis of what he had said 0:07:58.960 --> 0:08:01.400 at the July press conference. The Feds in the midst 0:08:01.400 --> 0:08:05.000 of a mid cycle adjustment, which likely means one or 0:08:05.080 --> 0:08:10.040 two more rate cuts, but they're watching closely. Uh. The 0:08:10.040 --> 0:08:15.640 The additional thought that emerged from what Powell implied and 0:08:15.640 --> 0:08:18.440 then what some of the other speakers that Jackson Hole 0:08:18.800 --> 0:08:22.320 uh spoke about is there was a symphasis that central 0:08:22.360 --> 0:08:26.400 banks can't entirely fix the trade war. And I think 0:08:26.440 --> 0:08:30.600 that's a recognition that there's the risk of a vicious 0:08:30.920 --> 0:08:34.800 moral hazard feedback loop where central bank see a week 0:08:34.840 --> 0:08:40.160 economy cut rates and that gives the president more scope 0:08:40.160 --> 0:08:42.959 to pursue the trade war. And I think that that 0:08:43.080 --> 0:08:46.800 was more in the background of Jackson Hole than it 0:08:46.880 --> 0:08:50.680 had been in previous FED communications. You were saying earlier 0:08:50.720 --> 0:08:53.520 that you do think that haven plays are a good 0:08:53.559 --> 0:08:55.520 place to go right now or people are going to 0:08:55.559 --> 0:08:58.640 get their money back and they have that confidence. I 0:08:58.679 --> 0:09:01.360 guess there's a hup side to that. Those are getting 0:09:01.440 --> 0:09:04.959 very crowded, and there is a potential that if there 0:09:05.080 --> 0:09:08.440 is some sort of trade truce that could completely upend 0:09:08.880 --> 0:09:11.160 the way that people are positioned. What sort of the 0:09:11.240 --> 0:09:16.640 chance of that near opinion? So, I would say, over 0:09:17.440 --> 0:09:22.400 over say a six month horizon, I think that both sides, 0:09:22.480 --> 0:09:25.520 both as I've described, both the US and Chinese have 0:09:26.280 --> 0:09:29.840 incentives to find something that they can call on agreement 0:09:30.240 --> 0:09:34.560 and de escalate where things are in the nearer term, 0:09:34.880 --> 0:09:37.600 I don't see how we get to a d D escalation. 0:09:39.080 --> 0:09:43.080 It's gonna be, It's gonna be a ways and uh, 0:09:43.120 --> 0:09:45.280 you know, hopefully over time we'll see it. But I 0:09:45.280 --> 0:09:48.199 wouldn't put a high probability that over the next few 0:09:48.240 --> 0:09:50.880 weeks somehow this all magically goes away. I wish I 0:09:50.920 --> 0:09:53.120 could be more optimistic. And to what extent do you 0:09:53.120 --> 0:09:56.000 think that? I mean, well, that way on corporate America, 0:09:56.280 --> 0:09:57.880 you know what we're gonna see see it in the 0:09:57.920 --> 0:10:00.360 earnings coming up. And we we've seen, we've we've heard 0:10:00.400 --> 0:10:03.160 certainly in the past couple of quarters of earnings that 0:10:03.360 --> 0:10:06.200 you know, CEOs across a variety of industries have highlighted 0:10:06.240 --> 0:10:10.520 the uncertainty of the trade negotiations kind of either weighing 0:10:10.600 --> 0:10:14.120 on their business, weighing on their customers businesses, affecting maybe 0:10:14.120 --> 0:10:16.640 capital spending in R and D. When do you expect 0:10:16.640 --> 0:10:19.640 to see, you know, a big impact on corporate America. 0:10:20.200 --> 0:10:27.480 So we are seeing a a lackluster global economy, and 0:10:27.520 --> 0:10:30.120 I think that these even as the US economy is 0:10:30.160 --> 0:10:33.400 doing all right, the rest of the world is feeling 0:10:34.000 --> 0:10:38.320 adverse effects. As we describe the Chinese economy has slowed. 0:10:38.360 --> 0:10:43.160 I think they're stimulating, but UH, the underlying economy there 0:10:43.200 --> 0:10:47.240 is soft. The European economy is slaw, particularly in the 0:10:47.280 --> 0:10:53.720 manufacturing sector, and UH and global growth is meaningfully below trend. 0:10:54.080 --> 0:10:56.520 And I think given all of that, that's going to 0:10:56.640 --> 0:11:01.000 leave a signature in UH, the earning of Corporate American. 0:11:01.040 --> 0:11:03.640 A large share of those earnings do come from their 0:11:03.720 --> 0:11:08.240 their their operations abroad. Just lastly, here to wrap things up, 0:11:08.280 --> 0:11:10.640 you talk about haven bets, you talk about how it 0:11:10.640 --> 0:11:13.319 wouldn't be a really prudent thing to go into risk assets, 0:11:13.320 --> 0:11:16.480 and yet we do have a tepid rally underway today 0:11:16.520 --> 0:11:19.520 on some of these tweets. How long can markets continue 0:11:19.559 --> 0:11:25.720 to melt up? Good question? Good question. Uh, you know, 0:11:25.960 --> 0:11:29.880 I think what's supporting the equities is the fact that 0:11:30.120 --> 0:11:34.440 corporate earnings so far been okay, coupled with lower long 0:11:34.640 --> 0:11:40.440 term interest rates, and so discount factors are are are 0:11:40.480 --> 0:11:43.680 are affected accordingly. And you put that together, I mean, 0:11:43.760 --> 0:11:45.360 where else are you going to go other than the 0:11:45.480 --> 0:11:48.160 US equities? So there is a narrative that things are 0:11:48.200 --> 0:11:51.000 hanging in there. Okay. In the US bonds look maybe 0:11:51.000 --> 0:11:54.840 a little less attractive for the reasons we've described, and uh, 0:11:54.960 --> 0:11:57.600 you know, equities are done well, and maybe things maybe 0:11:57.640 --> 0:12:00.800 we're all too pessimistic. Nathan needs thank you so much 0:12:00.840 --> 0:12:03.880 for being with. Nathan Sheets is chief economist and head 0:12:03.880 --> 0:12:06.760 of macroeconomic research at p JIM Fixed Income, which overseas 0:12:06.920 --> 0:12:10.280 more than eight hundred billion dollars here so, uh, formerly 0:12:10.480 --> 0:12:13.800 worked on international trade negotiations for the US Treasure Department. 0:12:13.840 --> 0:12:16.520 So he comes to this with a good deal of 0:12:16.600 --> 0:12:36.840 experience and insight. Thank you. What is an investor to 0:12:36.960 --> 0:12:41.160 do as we get a deepening uncertainty around trade negotiations, 0:12:41.240 --> 0:12:44.720 around global growth, around a lot of things, leaving a 0:12:44.760 --> 0:12:48.360 lot of investors sitting on their hands and wondering what 0:12:48.400 --> 0:12:50.880 direction to take next. Not sitting on his hands, Phil 0:12:50.960 --> 0:12:53.880 Orlando joining us here at our blueborgod Active broker Studios. 0:12:53.880 --> 0:12:57.000 Phil is chief equity and market strategist and head of 0:12:57.040 --> 0:13:00.600 client protfolio management and Federated Investors, which overseas more than 0:13:00.600 --> 0:13:03.600 a four hundred and eighty billion dollars. Fill. Let's just 0:13:03.640 --> 0:13:06.200 start with what we just heard from President Trump, because 0:13:06.240 --> 0:13:10.040 that has been sort of the prevailing force in dictating 0:13:10.080 --> 0:13:13.120 some of the volatility right now. How much would you 0:13:13.160 --> 0:13:16.560 be trading off of any kind of development on trade 0:13:16.600 --> 0:13:20.160 on any given day? Uh, The answer is not much. 0:13:20.640 --> 0:13:25.800 UM that that clearly the market is under some pressure 0:13:26.920 --> 0:13:31.040 given the escalation of trade and tariff war between the 0:13:31.120 --> 0:13:34.840 U S and China. UH. If you listen to this 0:13:34.960 --> 0:13:38.079 press conference, there's a lot of pushback from the reporters 0:13:38.080 --> 0:13:42.439 who were there, questioning the veracity as to whether or 0:13:42.520 --> 0:13:45.840 not the Chinese had actually reached out to the US 0:13:45.960 --> 0:13:49.760 over the last twenty four hours to restart UH talks 0:13:49.800 --> 0:13:53.520 ET cetera. And um, I'm not sure if the president 0:13:54.000 --> 0:13:58.160 was able to say any of their desire for some 0:13:58.559 --> 0:14:02.600 corroborative information and to suggest that the talks are back 0:14:02.640 --> 0:14:06.560 on track. I happen to think that the China issue 0:14:07.400 --> 0:14:10.680 UH is probably one of the three most important issues 0:14:10.720 --> 0:14:12.959 that investors are focused on right now. And I think 0:14:12.960 --> 0:14:16.080 all three of these issues are probably interrelated, UH, the 0:14:16.160 --> 0:14:19.840 China trade war, what's the Federal Reserve doing in terms 0:14:19.880 --> 0:14:23.800 of monetary policy, and the inversion of the yield curve. 0:14:23.840 --> 0:14:25.880 And I think that, you know, depending upon what you 0:14:25.920 --> 0:14:29.520 want to talk about today, all of those issues UH 0:14:29.560 --> 0:14:34.120 are significantly inter related in my mind. So it's interesting. 0:14:34.160 --> 0:14:36.120 I think we used to see the least as we 0:14:36.160 --> 0:14:37.480 sit here and look at our screens every day and 0:14:37.480 --> 0:14:39.440 we say and we and we see the markets reacting 0:14:39.440 --> 0:14:41.760 to the tweets as it relates to trade. So clearly 0:14:42.200 --> 0:14:46.600 trade is a big, big issue for investors. To what 0:14:46.720 --> 0:14:49.360 extent would this be, you know, a a real drag 0:14:49.520 --> 0:14:53.080 on the market in general, If in fact these negotiations 0:14:53.480 --> 0:14:57.320 drag on too maybe pass the election, for example, well 0:14:57.520 --> 0:14:59.920 it would be a significant drag. And and our Bay 0:15:00.160 --> 0:15:05.560 case has been that there were significant fiscal policy reasons 0:15:05.640 --> 0:15:09.640 for why Trump had initiated this trade war, if you will. 0:15:09.720 --> 0:15:14.480 We've talked about this before, but you look at the math, uh. 0:15:14.840 --> 0:15:17.840 We the United States running roughly a six hundred billion 0:15:17.880 --> 0:15:20.800 dollar balance of trade deficit in a twenty one trillion 0:15:20.840 --> 0:15:25.240 dollar economy. That that's costing US about three percentage points 0:15:25.240 --> 0:15:28.760 of GDP growth. When you look at the composition of 0:15:28.800 --> 0:15:31.360 that deficit, roughly two thirds of it, let's call it 0:15:31.400 --> 0:15:35.200 four billion dollars is related to China. China's running a 0:15:35.200 --> 0:15:39.880 four billion dollar surplus against the United States. The United States, Trump, 0:15:39.920 --> 0:15:42.560 I think was trying to achieve two things here. Try 0:15:42.680 --> 0:15:47.080 to balance out narrow, have the size of that deficit, 0:15:47.160 --> 0:15:49.800 cut it from four to two billion, and in the 0:15:49.840 --> 0:15:54.600 process boost GDP growth by one percentage point potentially. The 0:15:54.600 --> 0:15:58.480 other thing is the structural issues that have been ongoing 0:15:58.520 --> 0:16:01.400 now for the better of twenty five years, and by 0:16:01.400 --> 0:16:07.680 that I mean the theft of intellectual property, the currency manipulation. Uh. 0:16:07.960 --> 0:16:12.440 These are ongoing developments that that that President Clinton didn't address, 0:16:12.480 --> 0:16:16.040 President Bush didn't address, President Obama didn't address. Yet US 0:16:16.080 --> 0:16:18.600 companies have been sort of pounding on the White House's 0:16:18.680 --> 0:16:23.000 door for a long time suggesting that that we our 0:16:23.040 --> 0:16:26.400 administration should attempt to do something about it. So so 0:16:26.440 --> 0:16:28.200 I think you've got sort of a two front war, 0:16:28.320 --> 0:16:31.080 the structural issues and and an effort to try to 0:16:31.200 --> 0:16:34.920 narrow the deficit and and potentially boost GDP growth in 0:16:35.000 --> 0:16:37.960 the process. Phil was the last time it materally changed 0:16:38.040 --> 0:16:42.720 your recommendation for allocation? Uh we UH started the year, 0:16:43.360 --> 0:16:49.280 remember the declining stocks in the fourth quarter uh SMP 0:16:49.440 --> 0:16:52.320 was down about the level. In our view that that 0:16:52.320 --> 0:16:56.280 that was a complete head fake, that there was nothing 0:16:57.040 --> 0:17:01.280 structurally wrong with the economy. We thought that toxic sentiment 0:17:01.680 --> 0:17:03.920 was what had driven the market down. So we actually 0:17:03.960 --> 0:17:08.080 took our allocation up to an eight percent equity overweight. 0:17:08.160 --> 0:17:11.480 We felt that stocks from that Christmas Eve bottom, we're 0:17:11.480 --> 0:17:14.560 gonna rebound about thirty two percent over the course of 0:17:14.600 --> 0:17:18.200 this year. Our target was thirty Where we stand now 0:17:19.040 --> 0:17:21.680 at the end of July, we we took our allocation 0:17:21.840 --> 0:17:25.119 down from an eight percent overweight to about a three 0:17:25.160 --> 0:17:28.720 percent overweight in terms of our model and in July 0:17:29.000 --> 0:17:33.159 and in our global allocation fund we're actually managing money. 0:17:33.359 --> 0:17:36.480 We took that allocation down a neutral. Our view was 0:17:36.520 --> 0:17:39.520 that at the end of July. Looking out over the August, 0:17:39.520 --> 0:17:42.560 September and October timeframe, there were a number of things 0:17:42.600 --> 0:17:47.000 that concerned us on the immediate horizon, central bank policy, 0:17:47.720 --> 0:17:51.080 UH and and China. We're we're first and foremost on 0:17:51.160 --> 0:17:53.520 that list. But as we look out further into that 0:17:53.560 --> 0:17:57.879 period Halloween, there there are three global developments that are 0:17:57.920 --> 0:18:00.000 coming together on Halloween that a lot of people aren't 0:18:00.040 --> 0:18:03.720 really focused upon. We've moved the bregsit deadline. Remember from 0:18:03.760 --> 0:18:07.200 March thirty one to Halloween. UM Draggy is going to 0:18:07.320 --> 0:18:11.040 transition his role as the head of the e c 0:18:11.200 --> 0:18:14.760 B to leguard on Halloween. UH. And then the Chinese 0:18:14.840 --> 0:18:17.359 of the Chinese, the Japanese are going to have to 0:18:17.359 --> 0:18:19.880 make a decision on whether or not to increase their 0:18:20.040 --> 0:18:23.800 value added tacks from eight percent to ten percent on Halloween. 0:18:24.040 --> 0:18:26.679 Why is that important Because the last two times the 0:18:26.760 --> 0:18:30.520 Japanese increased their value added attacks UH, that decision, that 0:18:30.600 --> 0:18:34.080 fiscal policy decision, pushed the Japanese economy in a recession. 0:18:34.320 --> 0:18:36.560 So you've got these three issues at the back end 0:18:36.600 --> 0:18:39.880 of October. You've got these other issues central bank policy 0:18:39.880 --> 0:18:42.399 and China trade at the front part of this period. 0:18:42.560 --> 0:18:47.560 So given the fact that stocks had rallied, we felt 0:18:47.560 --> 0:18:49.399 that it was prudent to take some chips off the table. 0:18:49.680 --> 0:18:53.000 Are there sectors here, given where, given your neutral position, 0:18:53.040 --> 0:18:56.680 given where we are in the cycle, that still look 0:18:56.760 --> 0:18:59.120 attractive to you? On the margin, some people have talked 0:18:59.119 --> 0:19:02.520 about defensive style, but they're not cheap by any stretch. 0:19:02.720 --> 0:19:07.120 So is there any place for people to look so so, yes, 0:19:07.160 --> 0:19:10.080 they're not cheap, but but being defensive is exactly where 0:19:10.080 --> 0:19:14.960 you want to be um having constable demand kind of 0:19:15.000 --> 0:19:19.480 companies with with the the outsize dividend payments. Remember the 0:19:19.720 --> 0:19:22.600 the SNP dividend yield right now is around two percent. 0:19:23.080 --> 0:19:26.360 Treasury yields are you know, one and a half percent, 0:19:26.840 --> 0:19:29.040 and and the yields that we can get in in 0:19:29.080 --> 0:19:32.159 these defensive kind of companies are are north of four percent. 0:19:32.400 --> 0:19:34.200 For for example, I'll just give a plug for a 0:19:34.280 --> 0:19:37.800 strategic value fund. That's exactly the sort of things that 0:19:37.840 --> 0:19:42.120 they do. Uh separate and apart from defense, I think 0:19:42.160 --> 0:19:44.640 that that small cap still makes a lot of sense here. 0:19:44.640 --> 0:19:47.520 For a number of reasons, small caps underperformed large cap 0:19:47.840 --> 0:19:50.400 by more than a thousand basis points over to last year. 0:19:50.760 --> 0:19:54.320 Yet most of the concerns that we're seeing are overseas 0:19:54.359 --> 0:19:57.199 economic concerns. A small cap company is going to do 0:19:57.240 --> 0:19:59.680 eight percent of their business here. The U S economy 0:19:59.800 --> 0:20:02.640 is fill in pretty good shape. You've got the dollars 0:20:02.680 --> 0:20:06.320 pretty strong right now. A strong dollar tends to be 0:20:06.480 --> 0:20:08.880 very supportive of small cap companies. So for a lot 0:20:08.880 --> 0:20:11.440 of reasons. Oh and then you know M and A activity. 0:20:11.880 --> 0:20:16.160 Companies are are out there actively looking for companies. Greater 0:20:16.280 --> 0:20:20.480 merger and acquisition activity tends to benefit small cap company. 0:20:20.560 --> 0:20:23.000 So we still like small cap here as well, domestic 0:20:23.040 --> 0:20:25.040 small cap. Just real quick, since you didn't mention the 0:20:25.119 --> 0:20:27.000 yield curve, I'm looking right now at a two tents 0:20:27.040 --> 0:20:31.199 spread of negative zero point six percent UH, inverting the 0:20:31.240 --> 0:20:34.199 most since two thousand seven. Do you think that this 0:20:34.280 --> 0:20:37.520 indicates recession in the near term? So I would prefer 0:20:37.600 --> 0:20:40.119 to look at the spread between the funds rate and 0:20:40.160 --> 0:20:43.440 the benchmark tenure treasury yield. We think that's a better predictor, 0:20:43.680 --> 0:20:47.160 a more accurate predictor of recession. So you're looking at 0:20:47.720 --> 0:20:49.720 a tune a quarter up a band of the funds 0:20:49.800 --> 0:20:51.840 rate with let's call it one and a half percent 0:20:51.920 --> 0:20:54.520 in the tents. So you've got a seventy five bases 0:20:54.560 --> 0:20:57.960 point in version there that that's absolutely a signal that 0:20:58.000 --> 0:21:02.600 we're respecting. But based upon our analysis of that cycle, 0:21:02.680 --> 0:21:07.159 we do not see an increased risk of recession before 0:21:07.200 --> 0:21:11.080 we get into the early part of no recession in 0:21:11.200 --> 0:21:14.640 eighteen nineteen or twenty. We are concerned about the first 0:21:14.640 --> 0:21:17.040 half of twenty one. Phil Orlando, thank you so much 0:21:17.080 --> 0:21:20.119 for joining us. Phil Nando, chief equity market strategist and 0:21:20.119 --> 0:21:24.159 have of client portfolio management at Federated Investors Investors joinings 0:21:24.160 --> 0:21:27.359 here on our Bloomberg Interactive Broker Studio. Thanks for listening 0:21:27.359 --> 0:21:29.760 to the Bloomberg P and L podcast. You can subscribe 0:21:29.760 --> 0:21:32.600 and listen to interviews at Apple Podcasts or whatever podcast 0:21:32.600 --> 0:21:36.160 platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. 0:21:36.200 --> 0:21:38.680 I'm Lisa Abram Woyd's I'm on Twitter at Lisa Abram 0:21:38.720 --> 0:21:41.320 woits one. Before the podcast, you can always catch us 0:21:41.400 --> 0:21:42.960 worldwide on Bloomberg Radio.