Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Let's
Speaker 1: bring in the guest of the Morning Show. We Bruce Castman,
Speaker 1: JP Morgan, Chief Economist and Money to Bruce the morning.
Speaker 1: For the markets, investors have been focusing on the likely
Speaker 1: stimulus response coming out of China. It's just easy to
Speaker 1: get your hands around the possible fallout from the containment effort.
Speaker 1: Much harder the process. What's your base case at the moment? Well,
Speaker 1: the base case here is that we have a huge
Speaker 1: disruption that's very narrowly based in China and a few
Speaker 1: other countries. In the month of February and in the
Speaker 1: first quarter, we have Chinese growth getting down to want
Speaker 1: it could even be flat on the quarter. Sequentially, global
Speaker 1: growth gets down to the lowest level we've seen since
Speaker 1: the global financial crisis. But the effects on the U
Speaker 1: S and Western Europe are pretty small, and they're not
Speaker 1: one way. Remember that Chinese demand coming down also lowers
Speaker 1: global energy prices at lowers global interest rates, which actually
Speaker 1: is a plus for consumers in the UH in the West. UM.
Speaker 1: But the bottom line, I think is that this is
Speaker 1: going to be extremely disruptive, but it is not going
Speaker 1: to derail what we will actually believe is a pretty
Speaker 1: positive story for the global economy. In let's get some numbers, Bruce,
Speaker 1: Q one, what is it at in China? UH sequentially
Speaker 1: about one percent? Q two nine and a half percent.
Speaker 1: That's a massive v That's a massive be All you
Speaker 1: really need is that by the time we're sitting here
Speaker 1: at the end of March, the virus is starting to
Speaker 1: fade and produces are starting to make up the lost
Speaker 1: output that they had in the month of February in
Speaker 1: early March. That's that's the way it happened after Tohoku.
Speaker 1: That's the way it happened after Stars. You just have
Speaker 1: to believe, and this is the real call, is that
Speaker 1: this doesn't spread and become a global event over the
Speaker 1: next two Have you ever seen that in your study
Speaker 1: your Puch Columbia where you go from one to nine
Speaker 1: in a hundred days. We see it all the time.
Speaker 1: Whenever you have this, Usually it's not on a macro basis.
Speaker 1: But you see these events where you have storms, where
Speaker 1: you have shocks. We have a couple of weeks down
Speaker 1: and then a quick rebound. It's like Whenlan wins, I
Speaker 1: mean the Italian economy shifts. I'm not sure we rebound.
Speaker 1: I will say there is a question also how much
Speaker 1: this rebound is predicated on more stimulus from central banks. Um,
Speaker 1: it's not predicated on more stimulus, but we might get
Speaker 1: some more stimulus. It is predicated on the idea that
Speaker 1: the Chinese government comes in here and prevents any credit
Speaker 1: problems coming from the disruption, and that they continue to
Speaker 1: provide stimulus. But that's more of an issue around growth
Speaker 1: in the second half of the year. Which you really
Speaker 1: just need is for factories to open up and people
Speaker 1: to start moving around again in the month of March.
Speaker 1: Not now, but as we look over the next four
Speaker 1: to six weeks, we have to be comfortable that things
Speaker 1: start to get more normal and you comfortable. I'm not
Speaker 1: as comfortable as I'd like to be, and I don't
Speaker 1: want to ignore the downside risk here. I think what
Speaker 1: you have in the market is a small but very
Speaker 1: dangerous risk factor that things turn out to be unprecedented
Speaker 1: in terms of how it plays out. John, this is
Speaker 1: what I'm struggling with. It's one thing for industrial production
Speaker 1: to come back, It's another thing for services. It's another
Speaker 1: thing for the Starbucks stores that are closed. I don't
Speaker 1: understand from that perspective, Bruce, how we get how we
Speaker 1: compensate for those lost business opportunities. We don't compensate for it.
Speaker 1: We gradually recover. And remember, in growth terms, going from
Speaker 1: having a factory shut down to a factory operating at
Speaker 1: seventy or having a Starbucks shut down to a Starbucks
Speaker 1: opening but still having fifty or six of the of
Speaker 1: the flow is a big change in growth. And I
Speaker 1: want to emphasize this. We we live in a world
Speaker 1: where we talk about growth, but the level of activity
Speaker 1: is going to be lower than it would have been
Speaker 1: probably all the way through the end of the year
Speaker 1: in China, and very small amount though on the global basis.
Speaker 1: We're coming with Europe not Quants was struggling. If you're
Speaker 1: looking for one percent out of China in Q one
Speaker 1: and you have a European economy nest stole speed, yeah,
Speaker 1: do you get a v shak recovery in Europe? Well,
Speaker 1: I wouldn't call the European recovery v shape because I
Speaker 1: don't think Europe is going to get hit by the
Speaker 1: same disruptive effect. But I actually think what we're missing
Speaker 1: is we're watching the weak data in Europe. Is that
Speaker 1: the idiosyncratic drags that have hit the UK have hit
Speaker 1: Germany around the global drag from trade conflicts fading is
Speaker 1: I think setting us up for Europe being the biggest
Speaker 1: surprise to the upside Europe. Swiss this morning, Tom, lowest
Speaker 1: level since the Swissies ripping the Euros breaking down, Bruce,
Speaker 1: what is the quantitative linkage of all these economies if
Speaker 1: you're having a beverage of your choice with Vice German
Speaker 1: Clarada or with Sherman Powell? What are the linkages of
Speaker 1: Mercedes Benz flat on its back in Germany versus You
Speaker 1: know that we're hearing reports of the chance of the
Speaker 1: exchequer stepping aside? Is that right, John? Yeah, we're just
Speaker 1: getting that confirmed. I mean, the challenge, the resigning tone,
Speaker 1: the cacophony of the news out there. How linked does
Speaker 1: all this or is it really idiosyncratic? Well? I think
Speaker 1: the the way to look at what happened in two
Speaker 1: thousand and nineteen is we had a set of country
Speaker 1: specific factors and hitting in Europe around the global story
Speaker 1: around US China trade. And now what we think we're
Speaker 1: seeing is that global shock begin to fade. And we're
Speaker 1: also believing that the Brexit shock, along with you, okay,
Speaker 1: fiscal stimulus, the German auto industry shock, which has proved
Speaker 1: to push German inventories to super low levels, is going
Speaker 1: to be coming together to provide some fuel on the
Speaker 1: issue of China. And I think this is really important.
Speaker 1: The difference between having factory shut down for three or
Speaker 1: four weeks and three or four months is huge. The
Speaker 1: supply chain can handle two or three weeks without a
Speaker 1: serious disruption, but if you extend this out for a
Speaker 1: few months, then the world looks very different and the
Speaker 1: dynamics of spillovers begin to come much more serious. You
Speaker 1: guys still the cost house out of China this morning
Speaker 1: down for the month of January, and the association that
Speaker 1: puts these numbers together looking for another drop of thirty
Speaker 1: sent in the month of February, biggest drop ever for
Speaker 1: the month of January. And this is exactly where my
Speaker 1: mind when which is the question is how does this
Speaker 1: bleed over into Germany? How does this bleed over into
Speaker 1: global auto demand? But here's the point, We're gonna start
Speaker 1: to see data coming in for January and February, and
Speaker 1: particularly February, it's gonna look horrible. And then the real
Speaker 1: question is how much does it bounce back in March.
Speaker 1: If you're a German producer and you think the Chinese
Speaker 1: sales pullback is about the virus and it's gonna last
Speaker 1: four or five weeks, you don't stop production, You build
Speaker 1: inventories for that period and you continue more normally. The
Speaker 1: question isn't going to be coming back to normal relatively
Speaker 1: quickly for something drowning and happy? This week we've had
Speaker 1: three major bulls in the bull market. You're coming in,
Speaker 1: you're happy on a lift as well. I got Valentine's
Speaker 1: to day to small, So I'm ready to fall off
Speaker 1: a cliff into negativity. Okay, help me here. How does
Speaker 1: David Kelly and others at JP Morgan, how do they
Speaker 1: take your optimism and bring it over to markets? Can
Speaker 1: you link Chasman optimism twelve months out into market optimism? Yeah?
Speaker 1: I think are sure? I think we have to obviously
Speaker 1: price in that risk, and we don't ignore that small risk.
Speaker 1: But I think if you're sitting as an investor and
Speaker 1: you think that as I do, by the time we're
Speaker 1: sitting here in June and July, we're not going to
Speaker 1: be talking about viruses, but we're gonna be talking about
Speaker 1: lifting the global economy, then risky acids are gonna do
Speaker 1: relatively well, and we're gonna be watching the world pick
Speaker 1: up in a broad based way. And that's as a
Speaker 1: relatively simple but it's not necessarily ignoring some small tere
Speaker 1: risks that we have to deal with. Here. Here's the
Speaker 1: way it is, Folks, Global Wall Street, Friday afternoon and
Speaker 1: into Friday evening. You will wait for the research note
Speaker 1: from Bruce cas and Michael Fairli and the rest JP
Speaker 1: Morgan John Bruce grab to catch up of the Bruce cask,
Speaker 1: the JP Morgan chief economists wait and get on the
Speaker 1: likess with markets front and sentence home. A new method
Speaker 1: for testing the coronavirus in Hubei leading to a spike
Speaker 1: in coronavirus cases. Yeah, and the methodology of the body count.
Speaker 1: And this is of course done undercast what they built
Speaker 1: a hospital in what ten days or something? I mean
Speaker 1: this is crisis proportions in a new ratios, new mathematics
Speaker 1: this morning that everyone's adjusting to. We have been so
Speaker 1: advantaged to speak to Peter Hotez of Baylor, of Anthony Fruit,
Speaker 1: she arguably America's giant in immunology. And now we speak
Speaker 1: again with Dr Rohn of uc L. She began at
Speaker 1: the University of Washington in their world class microbiology program.
Speaker 1: She still has Malachi Green under her fingernails from micro
Speaker 1: one oh one years ago at Washington, and she is
Speaker 1: truly definitive on virus and particularly some of the oddities
Speaker 1: of the acclaimed cat virus and research from years ago.
Speaker 1: Dr Rohan, wonderful to have you back with us today.
Speaker 1: What have you learned in the last week about this virus? Well,
Speaker 1: things have changed quite considerably, even overnight. So things were
Speaker 1: looking a little bit predictable. It looked as if the virus,
Speaker 1: although it was still going strong in China, appeared to
Speaker 1: be heading toward a plateau. But overnight that all changed
Speaker 1: and it's looking now as if there may be many
Speaker 1: more cases than we initially thought because they've now revised
Speaker 1: the ways they're diagnosing the patients over there. I calculated
Speaker 1: the illness rate on one of the cruise ships, not
Speaker 1: the one in the Gulf of Thailand. It's something in
Speaker 1: the vicinity of six percent of the ship is sick.
Speaker 1: What is and I use this word as an amateur,
Speaker 1: what is the virulence of this virus as compared to
Speaker 1: things you've seen before. Well, it's definitely highly infectious, so
Speaker 1: it's a very contagious virus. However, despite all of the
Speaker 1: scary things that we're hearing from China and Wuhan, at
Speaker 1: the moment, it still looks as it's the lethality right,
Speaker 1: it's not greater than that of say, seasonal influenza. That
Speaker 1: doesn't mean it's a pussy cat. Seasonal influenza in the
Speaker 1: US alone kills twelve to sixteen thousand people a year,
Speaker 1: but we have immunity to influenza. It's an old virus.
Speaker 1: So if if the coronavirus gets that same kind of
Speaker 1: foothold as as our seasonal flu with the same fatality rate,
Speaker 1: we we could be looking at a lot of people dying.
Speaker 1: Speak for Wall Street and for investors in financial markets,
Speaker 1: that seems to be this morning, at least relatively speaking.
Speaker 1: A lack of faith in the data coming out of China. Now,
Speaker 1: are they under reporting? Those are the questions that I'm
Speaker 1: hearing consistently. I think one worry is that the top
Speaker 1: US health experts that want to join an international group
Speaker 1: heading to the center of the coronavirus outbreak in China
Speaker 1: said they still haven't had an answer on whether they'll
Speaker 1: be allowed into the country. What's happening in terms of
Speaker 1: getting that foreign help into the country to get more
Speaker 1: hands on that data. It's really difficult. I mean, I
Speaker 1: don't think they're necessarily under reporting because they're trying to
Speaker 1: hide things. I think Wuhan, in particularly upper center, is
Speaker 1: in complete chaos. Now other other cities in China are
Speaker 1: better off, but still everybody's on lockdown. It's nobody knows
Speaker 1: what's going on, probably not even the Chinese. We can't
Speaker 1: really necessarily blame them for this. It's it's out of
Speaker 1: control in Hubai Province, and I think until we have
Speaker 1: any idea of how contagious this is and how how
Speaker 1: well their lockdown has worked, it probably is quite dangerous
Speaker 1: to travel there. Dr Orohn. What questions you need to
Speaker 1: see answer to determine whether we're getting towards some sort
Speaker 1: of Plateau, Well, we need to know how many people
Speaker 1: are infective. This has become increasingly difficult now because initially
Speaker 1: outside of China, we were using the very old, reliable
Speaker 1: method of contact tracing. We knew every single individual who
Speaker 1: had traveled to China. We were tracing them in their contacts.
Speaker 1: But now with with the recent developments in the United Kingdom,
Speaker 1: where we've had this man who went to a Singapore
Speaker 1: and then he went to a ski chalet in France
Speaker 1: and he inadvertently infected a number of people even though
Speaker 1: he wasn't showing any symptoms himself. That's really scary because
Speaker 1: I think the cats out of the bag now. We
Speaker 1: can no longer trace every last person that has been
Speaker 1: in contact with this virus. And given that the symptoms
Speaker 1: are so non specific, you know, a cough, a fever,
Speaker 1: And if you don't know you've been in contact with
Speaker 1: somebody from China, how on earth are you going to
Speaker 1: know that you need to get tested. It's a really
Speaker 1: difficult proposition. I think if we're starting to lose a
Speaker 1: little bit of control outside of China. Dr Rohn, what
Speaker 1: do you think of China's decision to revise the way
Speaker 1: they diagnose cases and their new tally they released overnight,
Speaker 1: and I mean it's it's been confusing for everybody who's
Speaker 1: tracking the calculations. But actually I totally understand why they've
Speaker 1: done it. That the test itself is not very reliable.
Speaker 1: It can take at least three goes before you're before
Speaker 1: a positive test is actually reliably recorded. You know, it
Speaker 1: has this false negative rate. Um they really need to
Speaker 1: know who's got the virus, and the test isn't reliable
Speaker 1: and they're overwhelmed. So they've they've gone back to the
Speaker 1: old fashioned medical way of doing it, which is looking
Speaker 1: at symptoms, looking at the lung scans and you know, saying,
Speaker 1: you know it quacks like a duck, it must be
Speaker 1: a duck. You know, these people are in the center
Speaker 1: of an episode of an epidemic. They've got the symptoms,
Speaker 1: they've got bad lungs. Let's just say they've got the virus.
Speaker 1: I mean, that makes sense to me. More and more
Speaker 1: companies are pushing out their travel curves. We've heard from
Speaker 1: several air lines now that are talking about not restarting
Speaker 1: flights into the mainland until perhaps April, the end of April.
Speaker 1: It's been a controversial question amongst the community that you're
Speaker 1: in that I've asked several guests and got several different
Speaker 1: answers to where the travel curbs actually help from your perspective,
Speaker 1: do they? You can never get a straight answer from
Speaker 1: a scientist, but I will say, I mean, I think
Speaker 1: obviously a travel plan is going to help. You know,
Speaker 1: if if you keep infected people out of your country
Speaker 1: or potentially inspected people out of your countries, it will
Speaker 1: help it. But at what cost? You know, what economic
Speaker 1: cost can any other country afford to do this draconian
Speaker 1: lockdown that the China has done. I don't think we can.
Speaker 1: It's not reasonable and it's probably not warranted. Yet You're
Speaker 1: in a classroom U c L. You've got a piece
Speaker 1: of chalk in your hand, and you're scaling the illness
Speaker 1: level of this virus with things our listeners no worldwide. Okay, right,
Speaker 1: I'm gonna go back to virulence. How deadly, how how sickly,
Speaker 1: how virulent is this virus versus other compares we have? Yeah,
Speaker 1: I've got to keep going back to the seasonal influenza model.
Speaker 1: I mean, it is looking to be just as contagious
Speaker 1: as flu and just as lethal people don't think of
Speaker 1: flu as a dangerous incredibly dangerous, as I mentioned, killing
Speaker 1: up to sixteen people in the US. Okay, but but
Speaker 1: do we have a hysteria about the seasonal flu like
Speaker 1: we have about China. No, we don't because seasonal flu,
Speaker 1: most of us have immunity to flu. Flu circulates around,
Speaker 1: you know, sometimes we get it sometimes, So the key
Speaker 1: You're not to interrupt, doctor, but this is absolutely critical.
Speaker 1: Your major concern is the globe does not have the
Speaker 1: immunity to this virus like it does to the flu.
Speaker 1: John Farrell had three weeks ago. Yeah, this is this
Speaker 1: is what I'm worried about. So it can sweep through
Speaker 1: the spulation because the population has absolutely no resistance the
Speaker 1: brand new virus. It's just jumped from the animal. Again.
Speaker 1: It could mutate, but it may not be completely stable.
Speaker 1: It might become more virulent. We really have no way
Speaker 1: of knowing. It's a huge unknown. Doctor. I hate to
Speaker 1: say it, but we have a patient here. John Farrell
Speaker 1: has one final question. Dr Jennifer. Right, I'm going to
Speaker 1: let speak to the doctor trying to cause travel. Dr
Speaker 1: Chaffer wrote microbiologists for University College London, John, why don't
Speaker 1: you bring in the Andrew Shapes because the math in
Speaker 1: his research reports is just outstanding. Love catching up with
Speaker 1: Andrew C. Smorgan, Stanley's chief cross assets strategist. He joins
Speaker 1: us Now, Andrew, why are people still confident about the
Speaker 1: global economy and global markets this year? Well? I think
Speaker 1: because there were some pretty powerful tail winds that were
Speaker 1: operating before these recent public health concerns. The base effects,
Speaker 1: given how Week twenty nineteen was make it makes it
Speaker 1: easy to show improvement. Inventory levels in China and Europe
Speaker 1: and other places were low, and fiscal policy in addition
Speaker 1: to monetary policy, is getting easier this year. Japan, China, Russia, India,
Speaker 1: the UK, They're they're all going to ease fiscal policy.
Speaker 1: So you know, the way that we think about this is,
Speaker 1: I think we still have a global recovery that is
Speaker 1: delayed rather than derailed. And I think you have some
Speaker 1: potential that the market still gives the benefit of the
Speaker 1: doubt to the global economy and looks past kind of
Speaker 1: a weak months or two of data. But I think
Speaker 1: the risk lies actually a little bit further out if
Speaker 1: that temporary disruption becomes something bigger. How much is the
Speaker 1: weakness that we're seeing in the data due to the coronavirus,
Speaker 1: and how much is just underlying weakness that people are
Speaker 1: just overlooking. Well, I think it's interesting. I think in
Speaker 1: terms of weakness from the coronavirus itself, I think that's
Speaker 1: still to come. I think that the data that will
Speaker 1: reflect that is is what we're going to see over
Speaker 1: the next month. And I think some of the initial
Speaker 1: readings of that data. Um, if we look at Korean
Speaker 1: import and export data or data directly related to China,
Speaker 1: they're they're quite quite bad. They show quite severer shifts
Speaker 1: in demand and consumption. Now, I think in the background
Speaker 1: of that, you know, some of the data really was
Speaker 1: looking better until this, until this happened. But I think
Speaker 1: it reflects a global economy that's still very uneven, where
Speaker 1: the pace of growth is uneven. I think some of
Speaker 1: the questions about the fiscal policy response and how quickly
Speaker 1: that will come online this year that where there's also
Speaker 1: a lot of uncertainty around that. You've been the place
Speaker 1: to look to for the last two years Andrew to
Speaker 1: understand the dynamic of the US versus the rest of
Speaker 1: the world from the slow down in early that started
Speaker 1: an ASA and started to spread globally from there. Walk
Speaker 1: me through that dynamic now, because as I see things
Speaker 1: at the moment, the US is looking good relative to
Speaker 1: everywhere else. Does it stay that way through well? I
Speaker 1: think these these recent public health concerns ironically probably do
Speaker 1: help keep the US relatively supported. Verse versus the rest
Speaker 1: of the world, the US has less of a direct
Speaker 1: economic impact. The US is seen as as a as
Speaker 1: a safe haven, both on the equity side, the fixed
Speaker 1: income side, and the currency side. But if we take
Speaker 1: a step back and we think of the broader full
Speaker 1: year trends in terms of where inventories are, in terms
Speaker 1: of where fiscal policy is is shifting, just in terms
Speaker 1: of where the base of growth was. That all that
Speaker 1: looks better in the rest of the world. And so
Speaker 1: I still think on a full year basis you could
Speaker 1: see the rest of the world look better, but that's
Speaker 1: certainly been delayed by these effects. You know, it was
Speaker 1: the Brown mathematician we go Matthew and partial differentials paragraph
Speaker 1: two of your important note handrew sheets. You are defined
Speaker 1: by value expansion valuation expansion in two thousand nineteen. What's
Speaker 1: the history of trying to get out front a valuation
Speaker 1: shrinkage in a given year, this year and next year.
Speaker 1: How do you do that? Well, okay, I think it's
Speaker 1: it's very hard. Right. The the efficacy of trying to
Speaker 1: invest based on valuation alone is very good with a
Speaker 1: five or ten year horizon, but very bad even with
Speaker 1: a twelve month horizon. And so you know, look, we
Speaker 1: even as as much as we all want to buy
Speaker 1: things cheap and seldom expensive, that history says that history
Speaker 1: says that that over six or twelve months, that that
Speaker 1: often just just doesn't work. So look, that's why we're
Speaker 1: focused on some other factors. I think that's why we're
Speaker 1: looking for signs at some of the relative momentum shifting. Andrew,
Speaker 1: it doesn't work over six or twelve hours, which is
Speaker 1: one protest before we let you go, Can we bring
Speaker 1: some life into one of the most talked about interviews
Speaker 1: that at least I've heard about for a long long time.
Speaker 1: It's Greg Peters, formerly of Morgan Stanley, sitting across from
Speaker 1: a young Andrew Sheets who could draw cartoons. And Greg
Speaker 1: Peters is sitting there thinking, you know what, I like
Speaker 1: this kid, and I could use this in our research,
Speaker 1: which is why some of this research became world famous
Speaker 1: in credit markets are on the financial crisis because Andrew
Speaker 1: Sheets could take these stories and make little cartoons excuse me,
Speaker 1: and they're like really good carton fantastic And to this day,
Speaker 1: Greg paide Is still talks about have you ever done
Speaker 1: a cartoon for Mr Gorman? Not not not directly, but look,
Speaker 1: Greg wasn't was an excellent um was an excellent strategist.
Speaker 1: He was an excellent analyst. And I think he always
Speaker 1: tried to think about markets in in a different way
Speaker 1: and I think that's maybe, maybe hopefully why he decided
Speaker 1: to take that risk. The tone you just heard their
Speaker 1: folks from Mr Sheets is like if you leave Morgan Stanley,
Speaker 1: it's like you don't exist, just like God. I think
Speaker 1: they were still on a talking basis. Greg's are always
Speaker 1: a great analyst. We're on best buds basis with Mr Gorman.
Speaker 1: I highly recommend a cartoon for Mr Gorman. Andrew Sheets,
Speaker 1: thank you so much, Andrew, thank you. I'm gonna give
Speaker 1: Paul Sweeney's opinion on this before our guest hangs up
Speaker 1: on us. I am biased. There's there's different kinds of
Speaker 1: equity strategists, and Paul, some come from economics great, and
Speaker 1: others come from following an industry and following a sector.
Speaker 1: And I really really listening listen to the people who
Speaker 1: were analysts before they were equity strategists. I think it
Speaker 1: it clears the mind to be right and do occasionally
Speaker 1: be wrong on right. And that would be Tavis McCourt,
Speaker 1: technology guy exactly. Raymond James, institutional equity strategist, joins us
Speaker 1: on the phone. Tavis, thanks so much for joining us here.
Speaker 1: You know, coming into the year after a move up
Speaker 1: in the SP nineteen, a lot of folks were saying,
Speaker 1: all right, expectation wise, let's thank mid maybe it's mid
Speaker 1: to high single digit returns for the equity of markets. Well,
Speaker 1: here we are already up four and a half percent
Speaker 1: in mid February. What is your take for kind of
Speaker 1: performance expectations people should have equity markets? Well, I think
Speaker 1: the virus has has has really upset um expectations, right.
Speaker 1: I mean that this market over the last month feels
Speaker 1: a lot like the trade war market, where you've had
Speaker 1: emerging markets under pressure, UH, risk free yields under pressure,
Speaker 1: commodities under pressure, and yet equities kind of kind of
Speaker 1: levitate um. But they do it in a very liquidity
Speaker 1: centric way, so that the money is just pouring into
Speaker 1: the most the most liquid index isn't even even within
Speaker 1: the S and P the most liquid names within the index.
Speaker 1: And I expect that will reverse once once UM, once
Speaker 1: the impact of the viruses is behind us several months
Speaker 1: from now. UM. But but I think that's probably the
Speaker 1: biggest theme that's changed versus now versus versus you know,
Speaker 1: six weeks ago. So does that suggest here, given the
Speaker 1: uncertainties out there, large cap growth, let's just stick with it.
Speaker 1: Let's not try to find pockets of value, whether that's
Speaker 1: small cap or emerging market. Yeah. I'm actually a big
Speaker 1: believer in finding pockets of value UM. And and and
Speaker 1: you know, I call it kind of a rotation back
Speaker 1: in the cyclicals and the small caps. I suspect it's
Speaker 1: going to happen when when earnings most expectations start to
Speaker 1: broaden out across the economy and UM that was starting
Speaker 1: to happen in December and January, and coronavirus has basically
Speaker 1: delayed that. UM. You've got a very significant dislocation in
Speaker 1: in in UH global economic growth UM, which which is
Speaker 1: basically pushing pushing money back into kind of liquid saper
Speaker 1: bond proxies. I hate to go to your core knowledge,
Speaker 1: but what does technology do? I mean, some of these
Speaker 1: stocks are priced to perfection and other ones are, you know,
Speaker 1: barely under price to perfection. I mean, what's your your
Speaker 1: your appetite for marginal share purchase of the various and
Speaker 1: sundry technology subsectors out there. Yeah, there's there's a lot
Speaker 1: of um interesting things going on in the tech sector
Speaker 1: right out. But I think the primary reason why it's
Speaker 1: outperformed the last couple of years it's just very very
Speaker 1: material share share buy backs, much more as a percentage
Speaker 1: of cash weal from operations than than other sectors. And
Speaker 1: and and that'll start to wane this year and next,
Speaker 1: but I think that's kind of kept kept the sector
Speaker 1: um performing very well even when when we're subpar. Okay,
Speaker 1: well said, But as the margin persistent, I mean, everybody
Speaker 1: got wrong the persistent margins of Apple. Is it a
Speaker 1: proven margin persistency where you have to price in the
Speaker 1: present value of all that future share buy back from
Speaker 1: those ample cash flows. Yeah, and you basically had twenty
Speaker 1: years roughly of of accelerated share buy backs happen in
Speaker 1: in in roughly two years because of all the of
Speaker 1: all the cash that was off shore, so so that
Speaker 1: that benefited the sector UM and the other things benefited sectors. Look,
Speaker 1: the earnings have been better. Like if you're looking for
Speaker 1: a cyclical kind of UH resurgence and earnings growth, of
Speaker 1: all the cyclical sectors, UH, the tech is the one
Speaker 1: where earning has gotten better because because frankly the supply
Speaker 1: change are tighter so so so it tends to feel
Speaker 1: in market demand a lot factor than than sectors like
Speaker 1: like industrial and so UM that the earnings trend is
Speaker 1: helping out the sector well. But the one thing I
Speaker 1: would point out Tom is because I did this yesterday,
Speaker 1: I thought it was fascinating if you look at the
Speaker 1: the large cap versus small cap bias across every sector
Speaker 1: UH in the and in kind of a broad Russell
Speaker 1: three thousand, three thousand index, large caps in tech have
Speaker 1: outperformed small caps in tech by t UH since the
Speaker 1: trade war stars. So it's it's that the the text
Speaker 1: story is not universal across that very specific to large
Speaker 1: cap tech. I want to go out the belly on
Speaker 1: your Paul Sweeney. But the bottom line is there's this
Speaker 1: idea that share buybacks is not a good use of
Speaker 1: free cash flow. And you know, I know, I know,
Speaker 1: it's various company company, but the bottom line is these
Speaker 1: people are mint am I wrong. They're minting money, minting cash.
Speaker 1: And you know, as a growth company, as a tech company,
Speaker 1: as Tabs Wells knows, you'd like to see them reinvesting
Speaker 1: back in their own companies because that's where the growth is.
Speaker 1: But some of these companies, it's just so much cash,
Speaker 1: like like an Apple sixty billion a free cash flow,
Speaker 1: what do you do with it? So, Tavis, as we
Speaker 1: think about just kind of evaluations overall in the market,
Speaker 1: we've got to be getting pretty rich here. I mean,
Speaker 1: you think about the performance we had in SMP that
Speaker 1: it was with little to no earnings growth whatsoever. So
Speaker 1: doesn't that suggest that valuations here in the market overall
Speaker 1: are stretched. Well, it's it's it's a really bifurcated story
Speaker 1: that it did. If you look at the SMP five
Speaker 1: trailing trailing pees um, we've really only been more expensive
Speaker 1: than we are today during a period of time that
Speaker 1: we now call the tech bubble um. Whether or not
Speaker 1: that will be you in history as as a tech
Speaker 1: bubble or not we'll see. But if you look at
Speaker 1: mid Captain small cup and says, Um, we're not exceptionally
Speaker 1: cheap like we were last summer. We're not at twenty
Speaker 1: year lows like we were, but we're still kind of
Speaker 1: slightly below the medium of of twenty of the last
Speaker 1: twenty years. So so so the market is again it's
Speaker 1: got a very significant, uh, liquidity bias to it, and
Speaker 1: and that makes larger stocks more expensive when you look
Speaker 1: at kind of valuations in history than than smaller stocks.
Speaker 1: And you mentioned liquidity, I'm thinking about liquidity in the
Speaker 1: global marketplace. Is that created you know, there's been some
Speaker 1: concern that that has created asset bubbles and that may
Speaker 1: even include US equity markets. How was that on your
Speaker 1: your list of concerns? You know, I would say it
Speaker 1: was it was. It would have been zero concern two
Speaker 1: years ago because there really was no evidence that there
Speaker 1: that that you had this kind of large cap bias
Speaker 1: to returns or to or to valuations. Um, it's modest. Now, Um,
Speaker 1: we we've had basically two consecutive years, a little little
Speaker 1: over two years is a really significant pe inflation in
Speaker 1: large caps relative to smaller caps, which we had not
Speaker 1: seen for the previous seventeen eighteen years. So um, I
Speaker 1: wouldn't say it the first thing on the concern list,
Speaker 1: but it's worth paying attention to now, and definitely colors
Speaker 1: the that the valuation talk, because it's hard to say
Speaker 1: stocks expensive. You know, you can say the hundred largest
Speaker 1: stocks are expensive, but but broadly stocks are kind of Okay.
Speaker 1: Before I let you go, then what is your called
Speaker 1: twelve months out? I mean, we're up twentysomething percent last year,
Speaker 1: four or five percent this year, and we're down right
Speaker 1: now negative one o nine on the Dow with the
Speaker 1: market's trading folks, But twelve months out, can you get
Speaker 1: all double digit on us? Tavis? I think we can.
Speaker 1: I think the big story in the market is going
Speaker 1: to be rotation versus overall index performance. Um that that
Speaker 1: the you know, we may get a little appreciation over
Speaker 1: the course of twelve twelve months in in the SMP,
Speaker 1: but I think that the big the big story is
Speaker 1: going to be how the turns really start to rotate
Speaker 1: into some of these cyclical sectors and into small cap
Speaker 1: indexes as earnings growth broadens out. We had a real
Speaker 1: earnings earnings recession in a lot of parts of the
Speaker 1: economy in in two thousand nineteen, and that recovers after
Speaker 1: the coronavirus, so that it will be several months from now.
Speaker 1: I suspect you're gonna see this really big rotation in
Speaker 1: UM within the equity indexes. Tamas, thanks so much. Tamas
Speaker 1: McCart with us. Raymond James, thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio