WEBVTT - Cash And De-Risking Look Good As We Enter Late Cycle: Kennedy 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.840 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. It's 0:00:32.840 --> 0:00:37.040 been an incredibly quiet August for the bond market in 0:00:37.080 --> 0:00:40.920 the US. Certainly US tenure treasuries were fields that have 0:00:41.240 --> 0:00:44.000 remained in the narrowest range in more than a year. 0:00:44.520 --> 0:00:47.160 But the year ahead, the next six months, the next 0:00:47.200 --> 0:00:49.520 four months could be a little bit more interesting. Joining 0:00:49.600 --> 0:00:51.919 us now is Tom Kennedy had a fixed income strategy 0:00:51.960 --> 0:00:55.440 at JP Morgan at private bank, overseeing about five six 0:00:55.440 --> 0:00:59.320 billion dollars of assets, I believe based in New York. Tom, 0:00:59.320 --> 0:01:01.680 thank you so much for being with us so looking 0:01:01.800 --> 0:01:04.400 out you. You said something in the report that I 0:01:04.400 --> 0:01:07.199 thought was interesting, which is we were entering a later 0:01:07.360 --> 0:01:10.560 stage of the credit cycle and you need to dust 0:01:10.600 --> 0:01:13.720 off your playbooks for this time. What does a playbook 0:01:13.760 --> 0:01:15.920 for late cycle investing in the debt markets? Look like? 0:01:16.000 --> 0:01:21.479 At having me so really it's talking talking late cycle 0:01:21.520 --> 0:01:23.200 is something we haven't had to even discuss for the 0:01:23.240 --> 0:01:26.679 last ten years. It's something new, it's something it's something different. Uh, 0:01:26.720 --> 0:01:28.720 and even candidly, when I look around the floor, there's 0:01:28.920 --> 0:01:30.560 lots of young people on the floor that don't even 0:01:30.560 --> 0:01:33.280 know what late cycle looks like. Um. But late cycle 0:01:33.640 --> 0:01:36.680 is a couple of three, three or four pillars. I 0:01:36.680 --> 0:01:39.320 think we need to talk about its duration. We've been 0:01:39.800 --> 0:01:44.440 underweight duration across the wealth management platform for for many years. 0:01:44.440 --> 0:01:46.399 So it's full disclosure, it's a measure. It's sort of 0:01:46.440 --> 0:01:50.040 how closely tied. Uh. You know your investments are to 0:01:50.440 --> 0:01:53.400 hire yields or yields going up, absolutely so, so we 0:01:54.320 --> 0:01:56.840 there's a if you're underweight duration, you're fearing that interest 0:01:56.920 --> 0:01:59.720 rates will go higher. So we're you've talked about the 0:02:00.000 --> 0:02:02.360 interest rate on tenure treasury is being quite low. I'm 0:02:02.360 --> 0:02:04.560 not so sure it's gonna go much higher. And hopefully 0:02:04.560 --> 0:02:06.400 we can talk about that in the time I'm here. 0:02:06.640 --> 0:02:08.920 But you want to start to slowly dial your way 0:02:08.919 --> 0:02:11.600 into duration. Another one we were talking about in the 0:02:11.639 --> 0:02:14.560 break is about credit. You for years, you have been 0:02:14.800 --> 0:02:17.880 incentivized to reach for yields, so Let's say that's a 0:02:17.919 --> 0:02:21.320 traditional investment grade investor that's gonna say yields and an 0:02:21.360 --> 0:02:23.200 investment grade are not high enough. I'm gonna reach to 0:02:23.280 --> 0:02:25.880 high yield, but maybe not so comfortable with those risks. 0:02:26.320 --> 0:02:29.560 As interest rates by the FED start to rise, those 0:02:29.560 --> 0:02:33.520 credits should be challenged and we should see a readjustment there. Um. 0:02:33.560 --> 0:02:35.840 Those are two two key pillars that we're focused on. 0:02:35.880 --> 0:02:38.600 And then, finally, for the first time in a long time, 0:02:38.680 --> 0:02:41.880 cash actually has a position in a portfolio. Um. Again, 0:02:41.880 --> 0:02:44.040 a challenging discussion to have because you haven't had it 0:02:44.080 --> 0:02:46.160 for so long, but cash is actually yielding you T 0:02:46.280 --> 0:02:49.639 bills are over two percent. That's that's an interesting risk 0:02:49.680 --> 0:02:53.400 reward proposition to discussing portfolios. How do you discuss that? 0:02:53.440 --> 0:02:55.920 When people don't want to talk about relative return and 0:02:55.919 --> 0:02:58.320 they say, you know what, we can't really live on 0:02:58.520 --> 0:03:03.120 two percent tax? Do you send them to the municipal market. 0:03:03.600 --> 0:03:05.799 I think the municipal market is is actually looking quite 0:03:05.800 --> 0:03:09.079 attractive at this point. What's actually interesting about the municipal 0:03:09.120 --> 0:03:11.600 market is in the front end we actually see relative 0:03:11.680 --> 0:03:14.640 value as not especially in your favor, but further out 0:03:14.720 --> 0:03:17.480 in the in the municipal curve. There's actually a steepness 0:03:17.480 --> 0:03:21.720 in that curve. The in in the media outlets, Bloomberg 0:03:21.800 --> 0:03:23.760 is constantly talking about the shape of the treasury Oeld 0:03:23.760 --> 0:03:26.000 curve being very flat, but the Muniol curve is actually 0:03:26.080 --> 0:03:28.160 quite steep. So if you move further out to say, 0:03:28.200 --> 0:03:30.160 ten year MUNI bonds, you can actually pick up a 0:03:30.240 --> 0:03:32.760 hundred basis points and spread relative to short data munies. 0:03:32.880 --> 0:03:35.520 I want to go back to the idea that we're 0:03:35.640 --> 0:03:38.680 in a late stage. Does that mean that you expect 0:03:39.080 --> 0:03:43.320 a recession or downturn in the imminent future in the 0:03:43.360 --> 0:03:45.760 next three months, six months? What does that mean to you? 0:03:46.560 --> 0:03:48.840 So late cycle? I think it's importantly to say late 0:03:48.880 --> 0:03:51.440 cycle is not end cycle. Late cycle means we are 0:03:51.480 --> 0:03:53.680 closer to the end than the beginning. But I actually 0:03:53.680 --> 0:03:55.600 believe this economy has a good bit of runway to 0:03:55.600 --> 0:03:58.440 go in it um the key indicator to look at, 0:03:58.480 --> 0:03:59.880 I mean, if you only had one, would be to 0:04:00.040 --> 0:04:02.880 got the spread between treasure yields two years versus ten years. 0:04:03.200 --> 0:04:06.400 It's flattening, but historically an inverted Yel curve is the 0:04:06.560 --> 0:04:08.480 key measure that I'm looking So you still buy this 0:04:08.520 --> 0:04:11.000 whole thing as an indicator so some people try to 0:04:11.000 --> 0:04:14.560 say this time is different. You're not one of those people. Um, 0:04:14.600 --> 0:04:19.360 the this time is different theory suggest I think when 0:04:19.400 --> 0:04:21.520 I've tried to unearth when people say this time is different, 0:04:21.560 --> 0:04:25.119 to me, they're suggesting that monetary policy is keeping rates 0:04:25.120 --> 0:04:28.680 in the long end much lower than they they fundamentally 0:04:28.680 --> 0:04:32.039 should be. I really don't find that argument compelling, really 0:04:32.080 --> 0:04:34.200 for two reasons. When you look back of what's happened 0:04:34.240 --> 0:04:37.159 over the last ten years, fundamentals in this in the 0:04:37.240 --> 0:04:41.440 United States have changed dramatically. Demographics, it's an aging demographic 0:04:42.040 --> 0:04:45.040 by the Census Bureau is telling us roughly of the 0:04:45.120 --> 0:04:47.440 U S population will be sixty five and older. That's 0:04:47.480 --> 0:04:51.560 relative to seven percent pre crisis. So aging, there are 0:04:51.640 --> 0:04:55.479 less people working. Employment to population ratio is coming down. 0:04:55.960 --> 0:04:58.600 And then importantly, and it's not discussed nearly enough, is 0:04:58.680 --> 0:05:01.480 central bank credibility. We the FED is telling us what 0:05:01.520 --> 0:05:03.960 they're gonna do, and we believe them, We trust them. 0:05:04.160 --> 0:05:06.200 So your term premium that the risk you should be 0:05:06.480 --> 0:05:09.640 the compensation you demand for risk is much lower. So 0:05:09.839 --> 0:05:11.840 all in all, that back end I don't think has 0:05:11.880 --> 0:05:14.640 to reprice very much. When I when I modelowed interest 0:05:14.680 --> 0:05:16.760 rates to actually think they're a little bit rich to 0:05:16.800 --> 0:05:20.200 fair value right now, but not substantially, and just trying 0:05:20.200 --> 0:05:24.200 to understand from an investor point of view that has 0:05:24.240 --> 0:05:26.680 followed what the Federal Reserves said to do, which is 0:05:26.720 --> 0:05:30.719 basically go further out on the risk curve and reach 0:05:30.880 --> 0:05:36.120 for yield. As you described earlier, have they bought products 0:05:36.160 --> 0:05:39.200 that they really don't understand from people who are no 0:05:39.279 --> 0:05:42.719 longer in the business of selling those products. That sounds 0:05:42.760 --> 0:05:45.159 an awful lot like what we went through in two 0:05:45.200 --> 0:05:48.720 thousand and eight. So now you're talking about the next 0:05:48.720 --> 0:05:51.839 piece of this argument, which is the FED has displaced 0:05:51.960 --> 0:05:54.040 natural investors, and that's in the treasury market, in the 0:05:54.120 --> 0:05:58.839 NBS market. I think that has happened quite substantially. But 0:05:59.000 --> 0:06:02.839 the balance sheets size of the FED, the new operating 0:06:02.839 --> 0:06:05.880 framework that they've implemented post crisis, demands that their balance 0:06:05.880 --> 0:06:08.680 sheet be much bigger. So when I look at the 0:06:08.720 --> 0:06:11.000 underlying trends in the balance sheet, I don't see the 0:06:11.040 --> 0:06:13.480 balance sheet for the FED contracting very much more. I'm 0:06:13.520 --> 0:06:15.920 talking about when I start to model out where the 0:06:15.920 --> 0:06:17.960 Fed's balance sheet is gonna go, it's about four point 0:06:18.000 --> 0:06:20.520 two trillion today. I think it's going to intersect it's 0:06:20.640 --> 0:06:23.960 natural level around year and twenty nineteen at about three 0:06:23.960 --> 0:06:26.479 and a half trillion. It's a little bit higher than 0:06:26.560 --> 0:06:30.680 what markets are talking about, but it suggests that this 0:06:30.760 --> 0:06:34.440 monetary policy displacement that's happened for so long isn't likely 0:06:34.480 --> 0:06:36.839 to reverse very much. It's important to sort of put 0:06:36.880 --> 0:06:39.520 into context here your background, because you worked at the 0:06:39.520 --> 0:06:42.760 New York FED and you helped draft the program UH 0:06:42.920 --> 0:06:45.840 that will unwind the balance sheet? Am I correct that 0:06:45.880 --> 0:06:48.240 the Fed is following the FEDS playbook has been out 0:06:48.240 --> 0:06:49.960 for quite some time. When I was there, we we 0:06:50.000 --> 0:06:53.040 put that thing together, all right. So UM, it's wonderful 0:06:53.080 --> 0:06:55.760 then to get your insights on later this year because 0:06:55.760 --> 0:06:59.520 there is some concern among fixed income analysts that there 0:06:59.560 --> 0:07:03.599 will be a choppy sort of stoppage of refinancing some 0:07:03.680 --> 0:07:06.760 of the Fed's UH treasury holdings. In other words, as 0:07:06.960 --> 0:07:10.720 say forty billion dollars of longer term treasuries come do 0:07:11.600 --> 0:07:14.520 or three year tenure, whatever it is, they will let 0:07:14.520 --> 0:07:17.160 it roll off instead of repurchasing those treasuries, and it 0:07:17.200 --> 0:07:19.400 could cause some kind of hiccup in the bond market. 0:07:19.640 --> 0:07:23.800 Do you buy these arguments? I really don't you can 0:07:23.840 --> 0:07:28.200 think about a flow versus a stock concept. And really, 0:07:28.360 --> 0:07:30.480 what I'm trying to say is, as an investor, I 0:07:30.520 --> 0:07:34.440 should be responding to known quantity information. The FED has 0:07:34.480 --> 0:07:37.400 put out its its planned we all know it. We 0:07:37.440 --> 0:07:39.920 can all look at what treasury reinvestments look like, and 0:07:40.240 --> 0:07:42.640 we should be able to tell right now, this per 0:07:42.840 --> 0:07:45.840 this piece of the treasury roll off will be reinvested in, 0:07:45.840 --> 0:07:48.280 this piece won't. So in a sense, when we have 0:07:48.400 --> 0:07:51.400 known information, we should be able to price that into markets. 0:07:51.400 --> 0:07:54.120 And I think that's effectively been done. The FED has 0:07:54.200 --> 0:07:57.800 slowly every quarter been stepping up the amount of treasuries 0:07:57.800 --> 0:07:59.920 and mbs that it allows to roll off its balance. 0:08:00.480 --> 0:08:03.800 It hasn't had a substantial impact in my opinion. Um, 0:08:03.840 --> 0:08:06.280 now that's you can see. I'm a big believer in 0:08:06.320 --> 0:08:10.560 this stock argument. Being on the investing side of the business, 0:08:10.600 --> 0:08:13.920 I can I understand the flow dynamic, but I just 0:08:13.960 --> 0:08:17.080 think it's a marginal contributor to two rates relative to 0:08:17.120 --> 0:08:19.880 the stock impact. Thank you so much for being with us. 0:08:20.080 --> 0:08:23.080 Really really illuminating. Tom Kennedy had a fixed income strategy 0:08:23.320 --> 0:08:26.560 at JP Morgan, a private bank overseeing more than five 0:08:26.640 --> 0:08:31.640 hundred billion dollars based in New York really him important inside, 0:08:31.680 --> 0:08:35.319 especially considering Tom's experience at the New York Federal Reserve. 0:08:35.360 --> 0:08:37.360 At a time when a lot of people say we're 0:08:37.400 --> 0:08:39.400 not paying enough attention to the roll off of the 0:08:39.400 --> 0:08:42.400 balance sheat Evidently we have less than a trillion more 0:08:42.480 --> 0:08:58.840 to go for that balance sheet to roll off. The 0:08:58.960 --> 0:09:03.280 value of goal it has dropped consistently over the last 0:09:03.400 --> 0:09:07.320 couple of months. It currently trades below twelve drear an 0:09:07.320 --> 0:09:12.960 ounce atars on the Comax. Here to help us understand 0:09:12.960 --> 0:09:15.680 what is going on with the precious metal is Ben Hunt. 0:09:15.720 --> 0:09:18.679 He is the co founder and chief investment officer for 0:09:19.040 --> 0:09:22.240 Second Foundation Partners. He is also the creator and the 0:09:22.320 --> 0:09:28.160 author for Epsilon Theory. They're based in Reading, Connecticut. Ben Hunt, 0:09:28.160 --> 0:09:30.160 thank you very much for being here. You've got a 0:09:30.160 --> 0:09:32.280 lot of people who are interested in what you've got 0:09:32.320 --> 0:09:36.440 to say about the value of precious metal, specifically gold. 0:09:36.800 --> 0:09:39.120 Do you believe that it is linked to what the 0:09:39.160 --> 0:09:42.640 Federal Reserve is doing with interest rates? Hey, great to 0:09:42.679 --> 0:09:44.880 be on Tim, Thanks thanks for having me in. And 0:09:45.160 --> 0:09:49.160 the short answer is yes, it is absolutely linked to 0:09:49.280 --> 0:09:51.760 what the FAT is doing. And and frankly, that's the 0:09:51.840 --> 0:09:55.600 only thing I think that really drives the price of 0:09:55.679 --> 0:09:59.280 gold as it's being traded. So this is nothing new. 0:09:59.600 --> 0:10:03.240 I mean, we haven't had gold responding to i'll call 0:10:03.320 --> 0:10:07.640 it a geopolitical crisis for a long time, a decade 0:10:07.720 --> 0:10:12.160 or more. It looks if you're a businessman in Istanbul 0:10:12.360 --> 0:10:15.840 or Kara today, you know, you're you're you're delighted to 0:10:15.880 --> 0:10:18.720 have gold. It's very it's worth a lot to you 0:10:18.840 --> 0:10:22.160 because you can't access your your dollar denominated bank account. 0:10:22.559 --> 0:10:25.360 But for all the rest of US, I suspect, you know, 0:10:25.480 --> 0:10:30.400 ninety nine people listening to this radio broadcast. The meaning 0:10:30.520 --> 0:10:34.959 of gold, the the the factor that gold trades on 0:10:35.800 --> 0:10:38.800 is well, what what's the FED doing? What are central 0:10:38.800 --> 0:10:43.200 banks doing? It's an insurance policy against central bank error. 0:10:43.800 --> 0:10:45.839 That's the way I think you should really think about 0:10:45.840 --> 0:10:48.880 gold in its price. Okay, So before we get to 0:10:49.280 --> 0:10:51.199 the central bank era part, which I want to tease 0:10:51.200 --> 0:10:54.959 out and understand exactly why gold would be a hedge 0:10:55.000 --> 0:10:57.880 against that, I want to just talk about the idea 0:10:58.160 --> 0:11:01.040 that gold used to be a store value. It used 0:11:01.040 --> 0:11:04.200 to be a haven investment. Are you saying it is 0:11:04.240 --> 0:11:08.839 no longer a haven investment in anyway? Uh? In any way? 0:11:09.000 --> 0:11:11.320 Is a is a is a tough you know, tough 0:11:11.640 --> 0:11:15.559 kind of additional clause to put on there, but basically, yes, look, 0:11:15.640 --> 0:11:19.520 you know JP Morgan, the original JP Morgan, you know Jupiter, 0:11:19.760 --> 0:11:22.960 Jupiter Morgan. He had a great quote and his quote 0:11:23.240 --> 0:11:28.560 was gold is money, everything else is credit. And look 0:11:28.640 --> 0:11:31.840 that was right, that was right back when you know 0:11:32.120 --> 0:11:35.680 JP Morgan, the man was you know what was walking 0:11:35.720 --> 0:11:39.240 the earth. But it's but it's not true anymore. It's 0:11:39.280 --> 0:11:44.320 not it's not what gold means to investors anymore, and 0:11:44.360 --> 0:11:48.120 that it really it's not just gold. When people talk 0:11:48.160 --> 0:11:50.800 about whether it's bitcoin or they talk about gold is 0:11:50.920 --> 0:11:55.120 being a store of value, I think they're really missing 0:11:55.160 --> 0:11:59.520 what that phrase means. Okay, well, uh, and perhaps it's 0:11:59.559 --> 0:12:02.679 not entirely a coincidence that we're seeing a dramatic so 0:12:02.800 --> 0:12:06.600 often cryptocurrencies in tandem with gold, although that's probably another story. 0:12:06.640 --> 0:12:08.360 But I do want to get to your point of 0:12:08.720 --> 0:12:10.760 why this could be a hedge, my gold could be 0:12:10.800 --> 0:12:13.000 a hedge against such a bank. Eric, Can you just 0:12:13.040 --> 0:12:17.080 sort of explain that? Sure? Sure, what I'm trying to 0:12:17.120 --> 0:12:21.360 describe as is what well, they back up A second 0:12:21.360 --> 0:12:24.320 one I'm always interested in is not what what you know, 0:12:24.440 --> 0:12:27.400 we the words we have for things. But what actually 0:12:27.600 --> 0:12:31.240 is and what you actually see in the price of gold, 0:12:31.320 --> 0:12:35.720 what you actually see in the price of of any 0:12:35.760 --> 0:12:40.079 precious commodity, is that it goes up or down depending 0:12:40.120 --> 0:12:46.280 on confidence in central bankers, right because because that's that 0:12:46.400 --> 0:12:49.520 that's really what gold is there to be. That's that's 0:12:49.559 --> 0:12:53.080 the insurance policy that I'm talking about if things get 0:12:53.240 --> 0:12:57.719 really awful, right, if central makers make some gruesome policy 0:12:57.800 --> 0:13:01.400 mistake that results in infation or deflation. It can work 0:13:01.440 --> 0:13:05.200 either way, right, But it's it's that sort of mistake 0:13:05.400 --> 0:13:10.520 that gold has meaning for today. It It doesn't have 0:13:10.640 --> 0:13:14.120 meaning as an alternative currency, it does any Look, if 0:13:14.120 --> 0:13:17.200 we get to the point where we need gold to 0:13:17.880 --> 0:13:21.840 buy something at the store, yeah, you're better off owning 0:13:22.360 --> 0:13:26.520 ammunition and seeds rather than gold. My point is that 0:13:26.679 --> 0:13:31.280 as a security, as an investment, what gold goes up 0:13:31.280 --> 0:13:34.720 and down on is the degree of confidence we have 0:13:35.320 --> 0:13:38.680 the central bankers are large and in charge, and right 0:13:38.679 --> 0:13:41.480 now there's a lot of confidence in that, and so 0:13:41.520 --> 0:13:44.680 that's why the price of gold is down ben just quickly. 0:13:44.760 --> 0:13:48.840 Because Doug Cass of Seabreeze Partners, he enjoys listening to you, 0:13:48.880 --> 0:13:51.640 and he wants to know your thoughts about the VIX 0:13:51.760 --> 0:13:55.280 because it rose to fifteen from ten yesterday on less 0:13:55.280 --> 0:13:59.080 than a one percent drop in the SMPI index. Your 0:13:59.120 --> 0:14:02.920 thoughts give you about twenty seconds. Sure, well, we'll look 0:14:02.720 --> 0:14:09.080 like the VIX is another one of these um constructed entities. 0:14:09.120 --> 0:14:11.840 I mean it's it's it's essentially the short to medium 0:14:11.880 --> 0:14:14.720 term volatility in the SMP five hundred. But what it 0:14:14.880 --> 0:14:18.960 also is is a trading instrument, so in exactly the 0:14:19.040 --> 0:14:22.360 same way that gold now means something I think very 0:14:22.480 --> 0:14:26.040 different from what it meant for JP Morgan back in 0:14:26.040 --> 0:14:29.080 the early nineteen hundreds. So do I think the VIX 0:14:29.200 --> 0:14:32.520 as a trading instrument means something very different than we 0:14:32.560 --> 0:14:35.440 when it started. And so you can see these outsized 0:14:35.520 --> 0:14:40.080 movements for things other than just the mechanistic impact of 0:14:40.120 --> 0:14:42.920 a change in the SMP five. Ben Hunt, thank you 0:14:43.000 --> 0:14:45.240 so much. As always, it feels like two little time. 0:14:45.240 --> 0:14:47.200 We'll have to have you back. Pen Hunt, co founder 0:14:47.200 --> 0:14:50.240 and chief investment officer of Second Foundation Partners and publisher 0:14:50.520 --> 0:15:08.600 of Epsilon Theory. Earlier today, Home Depot came out with 0:15:08.760 --> 0:15:14.520 their earnings beating expectations. In response, shares up less than 0:15:15.520 --> 0:15:19.440 one percentage point. Not much here to talk about what 0:15:19.560 --> 0:15:25.120 the Staples, the retail Staples world brings or should bring 0:15:25.360 --> 0:15:27.960 in the next few months. Is Scott Mushkin, Managing director 0:15:28.200 --> 0:15:31.960 and senior Staples retail analyst for Wolf Research in New York. Scott, 0:15:32.000 --> 0:15:33.960 thank you so much for being with us so we 0:15:34.000 --> 0:15:37.280 did get those positive results from Home Depot. I want 0:15:37.280 --> 0:15:39.560 to look ahead. We're gonna get Walmart after the bell. 0:15:40.240 --> 0:15:43.880 What's the biggest concern of analysts on the street, the 0:15:43.920 --> 0:15:47.760 wild card, given how positive the backdrop of the American 0:15:47.800 --> 0:15:51.160 economy is right now. Thanks for having me by the way, 0:15:51.160 --> 0:15:52.760 And I think if you're looking at Home Depot and 0:15:52.760 --> 0:15:54.480 you just said it, stocks barely off even though they 0:15:54.480 --> 0:15:58.640 absolutely just crushed expectations. Um, I think you know, when 0:15:58.640 --> 0:16:02.160 people look at housing, uh, there's concern. Uh, there's concern 0:16:02.240 --> 0:16:04.120 that we're going to We've been a you know, a 0:16:04.160 --> 0:16:07.720 bullish housing market for a long time. Interest rates are 0:16:07.760 --> 0:16:12.640 coming up. Certain housing markets have been so so hot, 0:16:13.240 --> 0:16:16.280 unfortunately not in Connecticut where I live, but in places 0:16:16.320 --> 0:16:21.280 like Seattle, Portland's, Denver, or even Boston. Uh, these markets 0:16:21.280 --> 0:16:23.520 have been so hot and they're cooling off very quickly. 0:16:24.080 --> 0:16:26.680 And I think you know, we all have memories of 0:16:26.720 --> 0:16:29.880 the last financial crisis and what happened to housing. So 0:16:29.920 --> 0:16:32.760 I think people are growing a little concerned with with 0:16:32.800 --> 0:16:34.760 the housing market. That's what kind of holding back the 0:16:34.800 --> 0:16:37.440 Home Depot stock right now. But you know, Home Deepot 0:16:37.440 --> 0:16:39.200 is one of the best companies out there, and so 0:16:39.320 --> 0:16:40.840 you know, we take the opportunity to buy it to 0:16:40.920 --> 0:16:43.360 you know, buy it today with such great numbers. Hey, 0:16:43.440 --> 0:16:47.040 as Scott Mushkin, what about the increases in the cost 0:16:47.120 --> 0:16:51.320 of fuel transportation as well as input costs for things 0:16:51.360 --> 0:16:54.880 such as imported lumber. Yeah, I mean so, I mean 0:16:54.880 --> 0:16:57.800 that's definitely an issue. Right we were seeing some inflation 0:16:57.880 --> 0:17:01.560 creep in. Um. Some of that it's unforced because we're 0:17:01.560 --> 0:17:04.280 putting some tarrass on and we're getting some retaliatory terrorists. 0:17:04.600 --> 0:17:06.840 But right now, you know, the home Depot and the 0:17:06.880 --> 0:17:10.880 home improvement sectors managing through that. Okay. Uh. We saw 0:17:10.920 --> 0:17:13.719 appliances actually do okay at Home Depot, even though we've 0:17:13.720 --> 0:17:16.399 seen prices come up quite a bit. So it's something 0:17:16.560 --> 0:17:18.760 you know, we're watching, it's something the company is watching. 0:17:18.800 --> 0:17:22.000 But at this stage, it really isn't enough to uh, 0:17:22.040 --> 0:17:24.800 to kind of derail the very strong sales that the 0:17:24.840 --> 0:17:27.400 company seeing and the strong earnings, because of course that's 0:17:27.480 --> 0:17:30.800 causing some cost pressures. But Home Depot is a master 0:17:30.920 --> 0:17:36.520 of being efficient in increasing their productivity and we definitely 0:17:36.560 --> 0:17:38.879 saw that this quarter. Okay, So you were saying that 0:17:38.960 --> 0:17:42.120 you are viewing this as an opportunity to buy Home Depot. 0:17:42.119 --> 0:17:44.679 I'm looking at shares right now of the company two 0:17:44.760 --> 0:17:47.960 hundred dollars and seventy two cents. Where do you see 0:17:47.960 --> 0:17:50.199 them going by the end of the year. Now we 0:17:50.240 --> 0:17:53.560 have a two fifteen price target. Uh. Is kind of 0:17:53.560 --> 0:17:57.000 where we you know, where our heads are still. And um, 0:17:57.000 --> 0:17:58.680 you know, it's one of the few companies as this 0:17:58.760 --> 0:18:00.840 market is really rat I look at a lot of 0:18:00.840 --> 0:18:02.280 my companies. I know you guys want to talk about 0:18:02.320 --> 0:18:05.639 Walmart and and some of the other names. Um, but 0:18:05.720 --> 0:18:08.120 the house some of these housing stocks lately have been 0:18:08.600 --> 0:18:11.439 left behind Home Deep belows and so it's one of 0:18:11.440 --> 0:18:14.240 the few places where my DCF is actually this kind 0:18:14.280 --> 0:18:19.120 of cash flow analysis is actually nicely above that one. Um. 0:18:19.240 --> 0:18:21.800 And so you know we do like Home DEEPO. Still okay, 0:18:21.840 --> 0:18:23.720 but but I want to go to that point. I mean, 0:18:23.720 --> 0:18:27.879 you're saying that homebuilders and housing stores or housing related 0:18:27.920 --> 0:18:31.880 stores have done poorly recently, and I'm just wondering, I mean, why, 0:18:31.920 --> 0:18:34.679 what makes you confident that people are wrong about the 0:18:34.680 --> 0:18:39.600 cooling housing market waying on these companies. So, you know, 0:18:39.640 --> 0:18:42.639 always you don't always don't want to be overconfident in 0:18:42.680 --> 0:18:44.680 your analysis. But one of the things I think it's 0:18:44.800 --> 0:18:48.560 under uh, I guess underplayed a little bit. It's just 0:18:48.640 --> 0:18:52.639 the strong supply and demand aspects of what's going on 0:18:52.760 --> 0:18:56.119 and in housing, particularly for home DEEPO and lows, where 0:18:56.480 --> 0:18:58.800 the aging of the housing stock, the fact that we 0:18:58.880 --> 0:19:01.680 haven't built in a bid to enough houses, the fact 0:19:01.720 --> 0:19:04.320 if you look at housing spending or spending into the 0:19:04.359 --> 0:19:09.800 home improvement area, it actually peaks between sixty and seventy four, 0:19:09.840 --> 0:19:12.760 So it's baby boomers are still playing a big role 0:19:12.800 --> 0:19:16.080 and spending on their house. Uh. The other thing that's 0:19:16.119 --> 0:19:18.760 interesting is the millennials. The millennials are you know, we've 0:19:18.800 --> 0:19:23.119 seen homeownership rates rise a little bit. The crest of 0:19:23.160 --> 0:19:27.399 the millennials is now, so they're really starting to get 0:19:27.440 --> 0:19:31.600 into that area of they're going to buy their first home. Uh. 0:19:31.840 --> 0:19:35.200 We've seen household formations pick up. So there are definitely 0:19:35.320 --> 0:19:40.240 besides the macrocyclical aspects. There are definitely things going on 0:19:40.359 --> 0:19:43.560 and housing, particularly for home DEEPO and lows that are 0:19:43.640 --> 0:19:47.159 more more bullish than I think is being recognized. Scott 0:19:47.240 --> 0:19:50.040 Mushkin give you about twenty seconds here just to comment 0:19:50.320 --> 0:19:52.960 on the comps that Home Depot is going to have 0:19:53.080 --> 0:19:55.440 to deal with in the second half of the year 0:19:55.520 --> 0:19:59.480 because of that six hundred million in hurricane related sales 0:19:59.680 --> 0:20:02.720 that have to compare against. Yeah, I mean it's about 0:20:02.720 --> 0:20:07.359 a one headwind, so it's definitely there, you know, you know, 0:20:07.440 --> 0:20:10.200 thankfully knocking on wood there. Thankfully we haven't had any 0:20:10.280 --> 0:20:13.040 hurricanes yet, so that's a good thing. Um. But it's 0:20:13.080 --> 0:20:14.360 you know, it's a little bit of a head wind, 0:20:14.400 --> 0:20:18.119 but certainly it's not such a big headwind that there. 0:20:18.119 --> 0:20:20.159 You know, their sales will be you know, we were 0:20:20.160 --> 0:20:22.840 still expecting five five is typed cops into the back 0:20:22.880 --> 0:20:25.120 after the year. All right, Thanks very much for being 0:20:25.160 --> 0:20:28.400 with us, Scott Mushkin. Of course, he's an expert when 0:20:28.400 --> 0:20:31.000 it comes to all things really related to the world 0:20:31.119 --> 0:20:34.840 of retail, in this case Walmart, Target and the Home 0:20:35.160 --> 0:20:52.480 Depot in China. Spending on fixed assets such as factory 0:20:52.520 --> 0:20:56.640 machinery and public works projects it is at its lowest 0:20:56.680 --> 0:21:01.280 point in nearly twenty years. To tell us more about 0:21:01.320 --> 0:21:06.480 the Chinese economy and the potential for continued trade conflagration 0:21:06.560 --> 0:21:10.000 with the United States States is Christopher Balding. He is 0:21:10.040 --> 0:21:13.959 a Bloomberg opinion columnist. He is also the author of 0:21:14.119 --> 0:21:17.719 Sovereign Wealth Funds, The New Intersection of Money and Power. 0:21:18.119 --> 0:21:21.360 He is the former Associate Professor of Business and Economics 0:21:21.440 --> 0:21:27.160 at the HSBC School Business School, and he joins us now. Christopher, 0:21:27.160 --> 0:21:28.719 thank you very much for being with us. Can you 0:21:28.760 --> 0:21:31.560 just describe the state of the Chinese economy for those 0:21:31.640 --> 0:21:35.360 that made me think it's monolithic? I think what we're 0:21:35.359 --> 0:21:38.600 seeing right now is is some real weakening. What we 0:21:38.640 --> 0:21:42.160 saw in late two thousand and seventeen and really through 0:21:42.280 --> 0:21:45.639 let's say up through about May this year, was a 0:21:45.680 --> 0:21:49.840 real credit tightening, and so this is this has been 0:21:49.880 --> 0:21:54.000 passing through into real activity. And in China, we're typically 0:21:54.040 --> 0:21:55.959 looking at about a six to nine month lag from 0:21:55.960 --> 0:21:59.160 the time credit starts tightening until the time it hits activity, 0:21:59.480 --> 0:22:01.960 and so we're really starting to see the effects of 0:22:02.000 --> 0:22:05.359 all that credit tightening that began in say November December 0:22:05.480 --> 0:22:08.560 trickled down right now UM. I do think what you're 0:22:08.560 --> 0:22:12.200 seeing though, is some conflicting signals. And what I mean 0:22:12.240 --> 0:22:15.760 by that is, UM a lot of fixed asset investment 0:22:16.280 --> 0:22:20.200 is is it a decade decade lows? But there are 0:22:20.200 --> 0:22:24.640 other signs that are actually incredibly robust. Uh. Land sales 0:22:24.760 --> 0:22:29.000 and construction starts are up that in the mid teams 0:22:29.040 --> 0:22:32.159 for the most part. UH. So it really depends on 0:22:32.320 --> 0:22:34.439 what you're looking at. And if you look at the 0:22:34.440 --> 0:22:37.200 credit cycle and where we are with the economy, it's 0:22:37.200 --> 0:22:40.200 not unrealistic to believe that all of those new construction 0:22:40.280 --> 0:22:43.360 starts and land sales are going to filter through into 0:22:43.560 --> 0:22:46.200 let's say, not a boom, but let's say a pick 0:22:46.280 --> 0:22:49.159 up in the second half of this year, in the 0:22:49.240 --> 0:22:51.440