Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Doug
Speaker 1: Parker joins us now. He's American Airlines chairman and chief
Speaker 1: executive officer, and he joins us through our Bloomberg eleven
Speaker 1: three studios in New York. Thank you so much for
Speaker 1: joining us, Doug. We started out talking about privatizing air
Speaker 1: traffic control, and I would love your take. First of all,
Speaker 1: do you support the privatization of this aspect of air
Speaker 1: traffic uh? And also how much would it change your
Speaker 1: business if this were to happen. Yeah, we do support it.
Speaker 1: Um You know, priortization is a bit of a missing
Speaker 1: umer here. We're not I can to put it into
Speaker 1: a for profit corporation. We don't think that'd be a
Speaker 1: good idea, but not for profit corporation that would allow
Speaker 1: us to invest the way that UM A TC needs
Speaker 1: to be invested in um to put in place the
Speaker 1: kind of technology that exists around the world that we're
Speaker 1: not using in the United States. And it's we believe
Speaker 1: it's primarily due to the governance structure that we have
Speaker 1: in place that requires the FA to go back every
Speaker 1: year and look for you look for new authorization has
Speaker 1: themselves to the whims of sequesters and things that just
Speaker 1: doesn't that doesn't provide itself the right structure for long
Speaker 1: term investment for a long period time. But Doug, do
Speaker 1: you think that there would be fewer delays, that just
Speaker 1: in general, that air travel would be easier and more
Speaker 1: streamlined if there was a privatization of air traffic control
Speaker 1: with things work better. Absolutely, That's why we're doing it
Speaker 1: again that I describe the governance that allows you to invest,
Speaker 1: we need to invest to but the technology in place
Speaker 1: that indeed allows us to provide the level of service
Speaker 1: we know we could would be much more efficient. You know,
Speaker 1: it takes today to get from Dallas Fort Worth in
Speaker 1: Philadelphia about forty when it's longer than it did just
Speaker 1: fifteen years ago, and the airplanes are getten faster. What's
Speaker 1: happened is the air traffic control space has gotten backed
Speaker 1: up and Uh. There again, that shouldn't happen. It's not.
Speaker 1: It's not because we've done anything as a country other
Speaker 1: than that, we haven't invested in technology that keeps up
Speaker 1: with the growth in the airlinesustry. Can you tell us
Speaker 1: an example of an air traffic control system in the
Speaker 1: world currently that you believe is the leader or a model. Um,
Speaker 1: Canada is very good. Um. Indeed, indeed that's where that's
Speaker 1: the model we're looking to replicate here. But but look,
Speaker 1: it's not just Canada, it's all over the all over
Speaker 1: the world. Um. There are countries doing a much better
Speaker 1: job with technology in the United States. But Canada did
Speaker 1: it almost exactly what we're looking to do here. They
Speaker 1: had it as part of the government, they took it
Speaker 1: in a not for profit corporation. UH, and the results
Speaker 1: have been stunningly positive. Doug, how much would you in
Speaker 1: your business be willing to pay to improve the uh,
Speaker 1: the airports in metropolitan areas like New York and Chicago.
Speaker 1: How much would it would it benefit your business to
Speaker 1: have a nicer infrastructure in those cities? A lot? And
Speaker 1: we're doing it actually, Um, you're personally investing money, Well,
Speaker 1: we are, Yeah, our our airline, and are some other airlines.
Speaker 1: I mean, part of the problem here is um that airlines,
Speaker 1: when we weren't profitable, couldn't invest very well. And that's that.
Speaker 1: And indeed how air how airports are financed is through
Speaker 1: rents and landing fees from airlines. So UM, we've certainly
Speaker 1: seen a lack of investment over time that needs to
Speaker 1: be corrected. We we like other airlines, are investing billions
Speaker 1: of dollars throughout the United States and airport infrastructure, which
Speaker 1: we will then pay over time with higher rents and
Speaker 1: landing fees. And we're happy to be doing that. I
Speaker 1: just gotta think you've got a lot of things. It's
Speaker 1: like you're the guy that's got to keep the plates
Speaker 1: all spinning at the same time, right, whether it's security,
Speaker 1: government agencies, landing slots, capacity, the issues, uh, fuel issues.
Speaker 1: What's the most pressing issue for you that you'd like
Speaker 1: to get across to individual travelers, because we I just
Speaker 1: cited the JD Power survey that says that people buy
Speaker 1: and large when they're asked really service, they like airlines.
Speaker 1: It's getting better. Yeah, that that'd be That would be
Speaker 1: the message I'd like to get across the two travelers
Speaker 1: is look, we all know, um, you know, some high profile, hope,
Speaker 1: high profile events in the last couple of months, UM,
Speaker 1: have to say the least, yeah, exactly have highlighted some
Speaker 1: customer service issues that need to be addressed. But please
Speaker 1: don't think that's due to the to the team members
Speaker 1: that American Airlines or the other airlines we have. We
Speaker 1: have phenomenal people out there who who do amazing things
Speaker 1: for our customers, who provide safe travel around the globe
Speaker 1: that makes our country run. Uh. And they're doing it
Speaker 1: every day, UM, in sometimes difficult circumstances. They're doing phenomenal
Speaker 1: jobs and all they want to do is have the
Speaker 1: tools they need to take care of customers to extend
Speaker 1: their customer service issues. That's because we the airlines that
Speaker 1: put those people in difficult circumstances and that's for us
Speaker 1: to fix. UM. But you know, in this world where
Speaker 1: people are trying to you know, figure out how to
Speaker 1: be the next viral video by filming someone doing something
Speaker 1: on an airpoint, UM, that that doesn't disservice to our
Speaker 1: team who is really out there doing great stuff all
Speaker 1: the time. We're extremely proud of them, and that what
Speaker 1: they're doing. We as airlines, uh, need to make sure
Speaker 1: we put in place policies and procedures that don't put
Speaker 1: them in difficult positions, but indeed rather to give them
Speaker 1: the tools they need to do the jobs they know
Speaker 1: how to do so well. So JUG, I'm looking right
Speaker 1: now at crude oil at a little bit more than
Speaker 1: forty four dollars barrel, and I'm wondering how much does
Speaker 1: it increase the profitability of American airlines if oil prices
Speaker 1: were to stay at this level for say another year
Speaker 1: or two. Yeah, look, of course it helps. It's our
Speaker 1: second largest expense behind behind employee costs. So um, a
Speaker 1: drop in oil prices tends to you know, obviously falls
Speaker 1: to the bottom line in terms of expenses in today's
Speaker 1: In today's world, though we we we seem much of
Speaker 1: that go to the consumer, uh, much of not all,
Speaker 1: certainly in the longer term, because what happens as as
Speaker 1: we've seen recently. You know, someone pointed out to me
Speaker 1: the other day that inflation is one of the primary
Speaker 1: reasons inflation is as low as it is in the
Speaker 1: United States because air fares have fallen so much. Well,
Speaker 1: air fairs have fallen so much because fuel prices have fallen,
Speaker 1: and when fuel prices fall, capacity comes in in nexcess
Speaker 1: demand and ferris fall. So, um, we get a benefit,
Speaker 1: there's no doubt about it, but much of that benefit
Speaker 1: of cruised to consumers. All Right, I'm gonna give you
Speaker 1: it's almost like a game a game show here, duck
Speaker 1: be because I'm gonna give you the names of some
Speaker 1: of your hubs and I just want you to give
Speaker 1: me like two words each of three words each to
Speaker 1: describe what's going on and what's the most pressing issue.
Speaker 1: Let's start with Looguardia the Guardians. Guardians an infrastructure issue. Um,
Speaker 1: we need we need to improve the airport. We also
Speaker 1: need to improve the airspace ATC performance help then all right,
Speaker 1: so that's look, Guardia, tell me what's going on in Miami.
Speaker 1: Miami great international hub for American airlines, struggling somewhat because
Speaker 1: of the economies, um in Latin America and South America,
Speaker 1: but they're rebounding nights. They were very encouraged. Can I
Speaker 1: can I interrupt the quiz? I'd love to get this.
Speaker 1: I'm are I was going to get the but a second,
Speaker 1: but I want to get to it. To sort of
Speaker 1: the immigration and the whole concept of uh, the travel
Speaker 1: ban or the travel restrictions that are still being fought
Speaker 1: uh in courts. I'm just wondering, you know, all of
Speaker 1: this talk about limiting immigration has that affected international travel?
Speaker 1: It are you seeing declines as a result of that
Speaker 1: to the US? You know, we haven't, not that we
Speaker 1: can see. You know. The fact of the matter is
Speaker 1: we don't. We don't. American doesn't fly to any of
Speaker 1: the countries that would be affected by the proposed ban. Um,
Speaker 1: so we haven't. We haven't seen anything that we can
Speaker 1: tell anyway, h that is that is affecting demand for
Speaker 1: air travel. But we certainly um, you know, but what
Speaker 1: we know is, um, you know, our business is all
Speaker 1: about being global and being inclusive and connecting the world,
Speaker 1: not not shutting down the world. So UM, we're we're
Speaker 1: always uh. We would prefer to see a world where
Speaker 1: it's easier to fly, not harder. I was gonna just
Speaker 1: ask you you don't want to do the quiz to
Speaker 1: I was worried about some where you're up No, no, no,
Speaker 1: Well you want to about our nation's capital. I mean,
Speaker 1: would they benefit from a new air traffic control system. Absolutely. Yeah,
Speaker 1: there's there's a huge adclis in and out of DC. Yeah.
Speaker 1: All right. I want to thank you very much for
Speaker 1: spending time with us. I guess you could just send
Speaker 1: Doug an email when you know next time you're on
Speaker 1: the tar Max. Also also person, listen, don't worry Doug time.
Speaker 1: Let's see all right, Doug Parker, thank you, American Airlines
Speaker 1: Chairman and chief executive. We are here broadcasting live from
Speaker 1: Pershing's Insight Conference at the Manchester Grand Hide in San Diego,
Speaker 1: and David Masa walked by David Mazes, head of Beta Solutions,
Speaker 1: Investment marketing and E t F specialists at Oppenheimer Funds
Speaker 1: US joined from State Street. Uh, David, it's so good
Speaker 1: to have you. And you know, I'm struck by the
Speaker 1: shift that's going on in the e t F and
Speaker 1: the exchange traded fund industry right now. Moving from broad
Speaker 1: indexed funds, an easy cheap way to get access to
Speaker 1: stocks and bonds, moving now to I guess index that
Speaker 1: have perhaps a little bit of higher fees and somewhat
Speaker 1: a little bit more complicated strategies. What's the risk here
Speaker 1: that you know in some ways there's a sort of
Speaker 1: uh vasterization of the sort of beauty of what the
Speaker 1: e t F industry was. You're touching on one of
Speaker 1: the most important trends that we're seeing in the et
Speaker 1: F industry, where there's now seven eighty five billion of
Speaker 1: assets and management in what are called smart beta strategies.
Speaker 1: And that's a term that nobody likes, but effectively, what
Speaker 1: it tells you is that it takes index like characteristics,
Speaker 1: so that's transparency, rules based and generally low cost, but
Speaker 1: combines it with some of the elements that active managers
Speaker 1: have used for years. So and that's of course potentially
Speaker 1: looking at outperforming index maybe have lower volatility or increased diversification.
Speaker 1: So I just wanted to ask, can you just explain
Speaker 1: how they end up being categorized, in other words, in
Speaker 1: these portfolios if you have, as you describe both the
Speaker 1: best of both worlds to a certain extent, what the
Speaker 1: give us an example of the roles of each Yeah, exactly,
Speaker 1: so effectively, managers of course have been value managers for
Speaker 1: a long time, right or growth managers. So these are
Speaker 1: individuals who have used a team of analysts or their
Speaker 1: own expertise to say I'm gonna look for the cheapest
Speaker 1: stocks in the universe, or I'm gonna look for stocks
Speaker 1: without best growth potential. But guess what, you can actually
Speaker 1: create rules around these strategies. So let me screen a
Speaker 1: universe for the least expensive stocks, or screen a universe
Speaker 1: for stocks with the best momentum or the best quality.
Speaker 1: And that's really the beauty of it. You take um
Speaker 1: this evidence that have existed, these premiums that are out there.
Speaker 1: So those are things like stocks that are inexp sensibly
Speaker 1: valued tend to perform well. Those are stocks with strong momentum,
Speaker 1: tend to continue to have strong momentum, and you just
Speaker 1: you create rules around them, and you can then package
Speaker 1: those as strategies for investors to use in their portfolio
Speaker 1: alongside maybe a traditional index fund. But data, they are
Speaker 1: usually higher costs, right, yes, so you tend to have
Speaker 1: to pay a little bit of a premium. But for example,
Speaker 1: uh you know, e t s of course have actually
Speaker 1: pushed down the price effectively for all um strategies that
Speaker 1: we're seeing actually active management go lower. And generally when
Speaker 1: we're thinking about smart data, these are an average about
Speaker 1: twenty five basis points to fifty so net net that's
Speaker 1: actually still pretty attractive. You know. I'm wondering is this product,
Speaker 1: the smart beta. Is it being driven by the asset
Speaker 1: managers looking to pitch something to the investors, or is
Speaker 1: this coming from investors demanding a little bit more NUANCEDTF
Speaker 1: So I actually think it's coming from both areas. So
Speaker 1: certainly asset managers are looking to take their strategies that
Speaker 1: they've used, packaged them differently, and and for them as products.
Speaker 1: But if we look at the demand for this, it's
Speaker 1: really coming from clients. We're seeing people who are skeptical,
Speaker 1: of course, of active management and saying, hey, we've had
Speaker 1: ten years. Every year comes out, this is your active
Speaker 1: especially in the US market's gonna return and guess what,
Speaker 1: we haven't really seen that. But some folks, some investors
Speaker 1: want the potential to outperform and if I can do
Speaker 1: so not paying a hundred basis points so a percent,
Speaker 1: but I can potentially do so at five that's where
Speaker 1: they see the beauty of it. So a recent survey
Speaker 1: came out where cost used to not be a main
Speaker 1: driver of actual why you'd invest in smart beta. So
Speaker 1: this is looking at four years of data and now
Speaker 1: this year. Actually it's one of the top concerns that
Speaker 1: investors had. So in an environment where returns are hard
Speaker 1: to come by when economic growth is low, when other
Speaker 1: than the stock market potentially continuing to go up all
Speaker 1: the time, but seemingly the risk is that it that
Speaker 1: will stop at some point. Investors are very of course,
Speaker 1: cognizant of what they're paying to get those returns. You know,
Speaker 1: in the presenting this, I'm wondering if being using the
Speaker 1: idea of smart beta is at this point in the
Speaker 1: life cycle of these kinds of products, almost a misnomer
Speaker 1: because it's not about smart beta, it's about having these
Speaker 1: specific strategies that you can execute. Yeah, I think you're right.
Speaker 1: That's why I mentioned earlier that nobody likes his term,
Speaker 1: but that's what the market's coalesced around. Really, what you're right,
Speaker 1: it's about I think about the outcome, right, there's no
Speaker 1: one strategy that's going to be best for anyone, uh,
Speaker 1: whether or not that's cap weighted passive that you can
Speaker 1: get it very low cost or active management, and of
Speaker 1: course smart betafits of the intersection. It's what are we
Speaker 1: looking to get out of my particular outcome? Am I
Speaker 1: looking to get a strategy that seeks inexpensively priced stocks,
Speaker 1: but maybe they also have quite high quality learnings. If
Speaker 1: I can do that systematically package at and generally low cost,
Speaker 1: that's a great benefit for invest because typically you would
Speaker 1: have to engage a very sophisticated organization that would charge
Speaker 1: you a very sophisticated fee, and that's the only way
Speaker 1: you'd be able to access that strategy. Exactly. Can you
Speaker 1: give us a sense of how strong the adoption of
Speaker 1: smart beta, however much people dislike the and what they're
Speaker 1: and what they're adopting. I wonder what strategy they're all
Speaker 1: going for? How how how how big have the flow
Speaker 1: has been? How much is it run? Yeah? So total
Speaker 1: assets anw or close to seven five billion dollars if
Speaker 1: which so that that's significant from what from effectively nothing
Speaker 1: a few years ago. Uh, and so it's grown rapidly
Speaker 1: and and and the categories that have grown the most,
Speaker 1: of course, which would be consistent to the market environment,
Speaker 1: are strategies focused on low volatility stocks. And of course
Speaker 1: there's been a lot of attention paid to this. There's
Speaker 1: work well, I mean, do they deliver on the promise
Speaker 1: if you're going to buy a lots been nowhere, so
Speaker 1: it doesn't really matter what you buy. Ltility hasn't anywhere.
Speaker 1: Everything's love altility, well, it does exactly, So you have
Speaker 1: to be when investing in these strategies. You have to
Speaker 1: know what you own and think about how long you
Speaker 1: want to own it. So low Altility is a good example.
Speaker 1: It had done significantly well uh in the last last
Speaker 1: year up until the summer, and the money float into
Speaker 1: the strategies, but those stocks got increasingly more expensive, and
Speaker 1: then if you look at the performance post July to
Speaker 1: the end of the year, they underperformed. So I recommend
Speaker 1: you look at these strategies, use them, but don't chase
Speaker 1: performance with them. If you want low volatility, you should
Speaker 1: probably own that for ten years because I want to
Speaker 1: smoother ride. That's a good thing. Smart data just with
Speaker 1: equities or is it another asset classes? So so smart
Speaker 1: beta is primarily with equities right now, but all of
Speaker 1: these things can actually be done for other asset classes.
Speaker 1: So fixed incomes a great example, and we're just seeing
Speaker 1: products being launched here. Is that there are some anomalies
Speaker 1: that exist in the fixed income market that managers have
Speaker 1: used for years. Carry right. Of course, you get paid
Speaker 1: to own higher yielding parts of the bottom market term premium.
Speaker 1: You can create rules around all of this, the challenges
Speaker 1: the data is a lot harder to come by in
Speaker 1: the bottom market than it is in equities. Wow, so
Speaker 1: there's gonna be a carry trade smart beta ETF some
Speaker 1: time in the future. I can't I can't tell you
Speaker 1: if that's going to happen or not. But I can
Speaker 1: tell you is that there's a lot of work being
Speaker 1: done to identify if it can. I do have to
Speaker 1: wonder whether e t F providers are a little bit
Speaker 1: nervous that they're gonna throw the baby out with the bathwater,
Speaker 1: because as ETFs get more complicated, there's more risk involved
Speaker 1: as well, and there's more potential for a potential sinkhole
Speaker 1: that investors will will be sort of shaken out of
Speaker 1: their their love for e t S that's in that sinkhole.
Speaker 1: That's a great point. That's that's so that's what we
Speaker 1: have to be cognizittive. Is that you know, I'm a
Speaker 1: I'm a huge believer of e t F s. I've
Speaker 1: committed my career to it, if you will. But when
Speaker 1: we're looking to launch these new products and to the
Speaker 1: research around them. You have to be cognizant that you
Speaker 1: can create a rule around something, but it has to
Speaker 1: be a rule that's formidable and that actually works in
Speaker 1: a multitude of markets. So when we're just testing it,
Speaker 1: we're not just throwing the proverbial spaghetti against the wall.
Speaker 1: We're saying, hey, does this work if I look at
Speaker 1: this ten year period or this twenty year period, thirty
Speaker 1: year period. Doesn't work in the US, does it work
Speaker 1: in emerging markets? Does it work in the United Kingdom?
Speaker 1: And if all of that comes to first and you
Speaker 1: can say, all right, there's actually something here, there's actually
Speaker 1: something that works, and then we can make an investment product.
Speaker 1: All right, I'm gonna give you fifteen seconds. Is there
Speaker 1: a filter that you can apply to all these e
Speaker 1: t f s about what happens to them if interest
Speaker 1: rates increase? Well, that's that's the great question, right I'll
Speaker 1: I'll tell you if if we see interest rates increase,
Speaker 1: you're gonna want to be looking at if you've bought
Speaker 1: these low volatility e t s or divided ets for example,
Speaker 1: some of them have a lot of concentration in these
Speaker 1: bond like stocks, utilities, consumer staples, So be cognizant of that.
Speaker 1: I'm not saying that that means you should sell them,
Speaker 1: because who knows. If interest rates are going to go up,
Speaker 1: these predictions are now going to go down again, and
Speaker 1: you know what, maybe more money will flow into those products.
Speaker 1: The area that's of course been out of favor is
Speaker 1: value UH and what we've seen in the last couple
Speaker 1: of days may change that, but who knows. We saw
Speaker 1: that of course after the election in the US. I
Speaker 1: want to thank you very much for joining us. David
Speaker 1: Masa is head of Beta Solutions, investment marketing and E
Speaker 1: t F Specialists for Oppenheimer Funds. Joins us here at
Speaker 1: Pershing's Inside at the Manchester Grand Hyatt in San Diego.
Speaker 1: We are broadcasting live from Pershing's Inside conference at the
Speaker 1: Manchester Grant Hyatt in San Diego. And there is a
Speaker 1: big debate raging in the bond world right now. It
Speaker 1: is the perhaps fifth year of this debate, which is
Speaker 1: our interest rates headed upwards or are they headed downwards?
Speaker 1: And I'm when I say interest rates, I mean benchmark rates,
Speaker 1: I mean the ten year treasury yield, the thirty year
Speaker 1: treasury yielding. With us UH. To solve this all for
Speaker 1: us and make it all clear. Marvin Low, senior global
Speaker 1: market strategist at BNY Melon joins us here in Santiago
Speaker 1: and Marvin, where do you stand on this? Because we
Speaker 1: have some people saying, look, you know, yields will creep
Speaker 1: upward heading into the year, and people like Jeff Gunlock
Speaker 1: of Double Line, and then you have other people saying, no,
Speaker 1: nothing is different. People have overestimated growth. We see this
Speaker 1: by the shrinking yield curve and yield are going to
Speaker 1: go down. Yeah, you know it certainly is a big
Speaker 1: de bait right now. Um. You know, I think the
Speaker 1: Fed has expressed its resolved that they want to increase rates. Um.
Speaker 1: There certainly are economic concerns around inflation, around those growth numbers.
Speaker 1: But you know, we have to remember that we're looking
Speaker 1: at trying to get healed into this new normal type
Speaker 1: of world. And when we have this new normal type
Speaker 1: of world, I think that we're going to creep up slightly, um, slowly,
Speaker 1: but you know, certainly not um the big jumps that
Speaker 1: I think a lot of people expected after the election.
Speaker 1: If you will, so where is where are we going
Speaker 1: to end a year? But the tenure, you know, I'll
Speaker 1: put my dart board and say about to fifty or
Speaker 1: so to Marvin, A pleasure to see you. Uh. We uh,
Speaker 1: we run into each other at these kinds, at these
Speaker 1: events on a regular basis, regular basis. I'm wondering if
Speaker 1: you could maybe characterize what you have, let's say, over
Speaker 1: the past twelve months, and uh, what that may portend
Speaker 1: for actual you know, investors who have to make a
Speaker 1: decision about what to do with some money, let's say
Speaker 1: over the next quarter. Yeah, you know, the last twelve
Speaker 1: ones certainly have been UM interesting from the perspective of
Speaker 1: investors needing to deal with UM things that don't necessarily
Speaker 1: get modeled very easily into you know, all of our spreadsheets. UM.
Speaker 1: By that, you know, I primarily think about political risk
Speaker 1: and the confusion that it causes in when I see
Speaker 1: UM the reflation trade effectively, you know, move these asset
Speaker 1: classes by large amounts and then slowly creep back. It
Speaker 1: just really shows how difficult it is to UM put
Speaker 1: that into an economic growth perspective. UM. We certainly are
Speaker 1: dealing with asset values around the world that are very
Speaker 1: very rich. UM. I think that's you know, pretty universal,
Speaker 1: if you will, UM risk assets certainly have done, done
Speaker 1: its run, I think, Um, the announcer earlier said the
Speaker 1: NASDAC was on, you know, the longest multi decade run
Speaker 1: starting at already a fairly high point um. So investors
Speaker 1: really need to keep that in perspective. And we kind
Speaker 1: of have this volatility, but it always comes and then
Speaker 1: goes really really quickly. You know, Marvin, you said that
Speaker 1: you think that the ten year treasure yield is gonna
Speaker 1: end at two and a half percent, is currently almost
Speaker 1: less than two point two percent two point six roughly.
Speaker 1: I'm wondering what will it take for people to sell bonds?
Speaker 1: If you think about it. We were talking earlier about
Speaker 1: how big US companies just had their best earnings quarter
Speaker 1: for five years. We've already seen that, and a lot
Speaker 1: of people are expecting that the best news is behind us.
Speaker 1: The economic data is a weakening. What will it take
Speaker 1: for for treasure yields to to really rise? You know, Um,
Speaker 1: what's what's driven yields lower and what's kind of driven
Speaker 1: the commentary now with the flatter curve maybe looking at
Speaker 1: some of the recession numbers, is inflation, and it, you know,
Speaker 1: certainly is always a big component of how you price
Speaker 1: a bond, and I would just take the contra argument
Speaker 1: that nobody expects inflation, so we're supposed to look at
Speaker 1: it a little bit more closely. UM. I've been certainly
Speaker 1: noodling the concept that populism, which is I think a
Speaker 1: trend that's here to stay, has inflationary components to it.
Speaker 1: When we look at France and we kind of look at, um,
Speaker 1: how the vote arose, there were still ten million people
Speaker 1: that felt this populism type of movement. That's something that
Speaker 1: politicians aren't going to, um, just turn their back on.
Speaker 1: They want to make sure that they bring these people
Speaker 1: in the fold. And is wage pressure is kind of
Speaker 1: pressure on greater social services part of that response, and
Speaker 1: does that have an inflationary component? Also have to remember that,
Speaker 1: you know, several of the FED members think that the
Speaker 1: unemployment rate is going to go below four percent within
Speaker 1: the next year. UM. You know, maybe maybe there's certain
Speaker 1: certain questions about what or not the Phillips curve is accurate,
Speaker 1: but that Phillips curve is, by the way, the idea
Speaker 1: that there's an inverse relationship with unemployment rate and inflation. Right, yes,
Speaker 1: thank you, thank you, thank you. UM, if we if we,
Speaker 1: if we don't if we don't start seeing wage pressure
Speaker 1: when unemployment gets below three percent, I guess we'll revisit
Speaker 1: the concept of the Phillips curve. You know, having said that,
Speaker 1: the FED has a multi decade um focus obsession about
Speaker 1: the unemployment rate, so they're going to continue along that route.
Speaker 1: So does that mean that there are like parallel strategies
Speaker 1: at work here that may actually be contradictory at the
Speaker 1: same time, Well, you know, UM volatility is really an
Speaker 1: interesting aspect of kind of that UM very easy and
Speaker 1: ultimately very difficult question to answer. UM. As long as
Speaker 1: volatility remains low, it's certainly UM is going to push
Speaker 1: kind of this risk asset trade that's out there. And
Speaker 1: while we've got a couple of days of altility, you know,
Speaker 1: we have to remember that over the course of the
Speaker 1: last six months, you know, since the beginning there, however
Speaker 1: you want to look at it, these risk assets are
Speaker 1: still outperforming by a very large margin. UM. It's probably
Speaker 1: an opportunity to look at para trades. It's probably an
Speaker 1: opportunity to look at UM curve flattening type trades. UM.
Speaker 1: It seems like you would be able to balance various
Speaker 1: risk calls with maybe some other calls that would give
Speaker 1: you a little bit of protection. It's hard to see
Speaker 1: just an outright by kind of given where valuations have
Speaker 1: moved over the last six months or so. What about
Speaker 1: cash do you recommend people boost their cash allocations? Um?
Speaker 1: You know, I think powder is always I think powder
Speaker 1: is always good. Um, you know, certainly you know, waiting
Speaker 1: for a little bit of a correction, But you know,
Speaker 1: I kind of really look at the amount of liquidity
Speaker 1: that's still coming out of the central banks as keeping
Speaker 1: that volatility attempt. Do you think that the Bank of
Speaker 1: Japan and the European Central Bank and the fact that
Speaker 1: they've purchased more than a trillion dollars of assets in
Speaker 1: the past twelve months, It is just stunning. And you know,
Speaker 1: do you think that this basically makes the FED or
Speaker 1: relevant at this point? Is it really all about the
Speaker 1: b O J and the e c B until we
Speaker 1: get um an actual decrease in the amount of liquidity
Speaker 1: that you're adding into the system. I think that it is.
Speaker 1: I think that there's a lot of insight into that statement.
Speaker 1: We've had years, multi years at this point where we've
Speaker 1: been adding half a trillion a trillion over a trillion,
Speaker 1: Like you said, um coming into the system. Even though
Speaker 1: the FED hasn't purchased single security in years. Next year,
Speaker 1: the Fed's going to start taking liquidity out. Next year,
Speaker 1: the e c B is not going to be buying
Speaker 1: as much as it buys now. Next year, the Bank
Speaker 1: of Japan is probably not going to increase its purchases.
Speaker 1: When you look at that on a year over year basis,
Speaker 1: you're looking at a five hundred to six seven billion
Speaker 1: dollar contractional liquidity. That to me is an underappreciated aspect
Speaker 1: of kind of the thought process. Having said that, the
Speaker 1: market is not focused on it right now. Volatility I
Speaker 1: you know, I feel that vaulatility is going to remain
Speaker 1: low until um, you actually have that occurring and people
Speaker 1: start to focus on it. Well, that's certainly something that
Speaker 1: we're going to be turning to you to help us
Speaker 1: understand when that happens. When much appreciated. Marvin Lowe is
Speaker 1: Senior Global Market Strategies for b N Y Melon and
Speaker 1: he joins us here at the Persian Inside in San Diego.
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