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Speaker 2: Kevin Gordon, who's been on board this bullmarket, joins US now.
Speaker 2: Had a macro research strategy at Schwab Center for Financial Research.
Speaker 2: They have Isabelle, they have in their offices actual like vinyl.
Speaker 2: Really he cues up the led Zeppelin.
Speaker 3: You have to have a field.
Speaker 2: Treon Saunders, I love buried down here. If you're talking
Speaker 2: to Michael Dharta yesterday you say the most important data
Speaker 2: point is six and a half percent nominal GDP discuss
Speaker 2: this boom economy.
Speaker 4: I think it is the most important because it's very
Speaker 4: much at the center of the discussion around what's going
Speaker 4: on in the treasury market this week, and when you
Speaker 4: think about the underlying fundamentals of the economy, you know,
Speaker 4: six and a half percent you over your growth and
Speaker 4: nominal GDP is you know, I think a very sort
Speaker 4: of very indicative, of course of what we're seeing in
Speaker 4: terms of the AI boom. But I think also in
Speaker 4: the context of inflation as well. You know, you can't
Speaker 4: really get inflation down to two percent unless you see
Speaker 4: sort of the greatest productivity boom. Ever, so it's not
Speaker 4: a bad thing. I don't mean that in a bad way,
Speaker 4: but I think that to the content, you know, to
Speaker 4: the point of this sort of booming economy and the
Speaker 4: resilience that we see in the US, we have sort
Speaker 4: of entered this new normal where it's now more normal
Speaker 4: to see nominal growth of that kind versus what we
Speaker 4: saw pre pandemic, which was much slower than six and
Speaker 4: a half percent.
Speaker 5: I want to talk about the bond market because Tom
Speaker 5: and I earlier Indushow, we said that is the big
Speaker 5: story of this week. What did the market learn from
Speaker 5: the bond moves and the best input, so to speak,
Speaker 5: and it's rapid reversal. Is it that skeptical about this move?
Speaker 5: I mean many people have called it the band just
Speaker 5: a band aid, really.
Speaker 4: But no, I mean I think that's probably the right
Speaker 4: way to think about it. You know, the sort of
Speaker 4: duct tape on a leaky pipe situation where they can
Speaker 4: only you know, that can only last for so long,
Speaker 4: and in terms of stemming some of the you know,
Speaker 4: some of the drippage there. But I think that the
Speaker 4: whole discussion around you know, higher deficits and the fact
Speaker 4: that you know, no one's really doing anything about it
Speaker 4: on either side of the aisle. That's been a theme,
Speaker 4: you know, and a feature of the US for so long.
Speaker 4: But that in combination with this structurally higher growth backdrop
Speaker 4: that we've been in, plus the fact that you have
Speaker 4: STICKI your inflation, all of these elements fuse together and
Speaker 4: you get a higher for longer interest rate world and
Speaker 4: it's very, very hard to pull down yields in that environment,
Speaker 4: especially of course at the long end. You also introduce,
Speaker 4: I think another interesting dynamic, which I mean to be
Speaker 4: a fly on the wall right now for for any
Speaker 4: of the FED meetings and discussions, it would be so
Speaker 4: fascinating because you do have a little bit of this
Speaker 4: you know, visious circle dynamic at play. We're on the
Speaker 4: one hand, someone is sort of actively trying to you know,
Speaker 4: pull down yields or do what they can to stem
Speaker 4: the rise. But on the other hand, you did have
Speaker 4: FED Chack Kevin Warsh sort of take some comfort in
Speaker 4: the fact that the long end had risen and it
Speaker 4: was sort of quote doing the Fed's job for it,
Speaker 4: so that dynamic. I think it'll be interesting to see
Speaker 4: if he addresses it at all in Jackson Hole. But
Speaker 4: I think in over the medium term, to see how
Speaker 4: those kind of combat each other, that'll be interesting to me.
Speaker 5: I would love to go to Jackson Hole and where
Speaker 5: jackson Hole's outfit. I love having you because then you
Speaker 5: can talk all asset process. Why did in stocks respond
Speaker 5: more to Washington signaling that it wants easier financial conditions?
Speaker 4: Well, you know, I think, you know, in terms as
Speaker 4: powerful as signaling might be, and we've learned that, you know,
Speaker 4: over the past couple of days, it isn't as powerful
Speaker 4: because of the reversal that we saw in yields. You know,
Speaker 4: we've been in this environment and we're we're we don't
Speaker 4: have too much high conviction these days because it's really
Speaker 4: hard to do so. But what where we do have
Speaker 4: higher conviction is the fact that or the feeling that
Speaker 4: we have sort of exited definitively this Great Moderation era
Speaker 4: where you had this harmonious relationship between the stock market
Speaker 4: and the bond market, where when yields were going up,
Speaker 4: they were responding to positive growth impulses, stocks were also
Speaker 4: rising posts pandemic for most of that time. Most of
Speaker 4: this cycle, that relationship has slipped into negative territory. So
Speaker 4: that means that alose equl, which is of course never
Speaker 4: the case. But when yields are rising, that's putting downward
Speaker 4: pressure in equities and then vice versa. And you've seen
Speaker 4: that play out this week almost it's happening again today.
Speaker 4: You know, if fields are upstocks are down, vice versa.
Speaker 4: So that's not to say that if fields continue to
Speaker 4: go higher a year from now that the market will
Speaker 4: be the stock market will be lower. That's certainly not
Speaker 4: the case. If anything, when you get these more aggressive
Speaker 4: moves in the yields, that's when you sort of have
Speaker 4: that reset period for stocks across America.
Speaker 2: And is Friday, Kevin Gordon, with his years with Charles
Speaker 2: Schwab Yeoman's.
Speaker 6: Duty reappearing today. He's taking this Sikorski reappearing twelve noon
Speaker 6: bloomberd Really I got it, folks, I got ducky bumps over.
Speaker 6: It's sleepy August. No, it's not.
Speaker 2: Rebecca Patterson into Kevin Gordon.
Speaker 3: Big Names, Kenny joining books on.
Speaker 2: Paris, because everyone's there except me in Scarlett. For me, yeah,
Speaker 2: we're not in Paris. We should be in Paris. We
Speaker 2: should be in Passions Levin, I want to remind ourselves
Speaker 2: in Emily Rowling. Coming on, folks, it's a Friday. We're
Speaker 2: going to brief you on the madness at hand.
Speaker 7: Can we recall the broad come has free cash flow
Speaker 7: growth coming out of the COVID sixteen seventeen, nineteen, twenty six,
Speaker 7: thirty two and an anticipated fifty billion.
Speaker 2: Dollars of free canculo. The heart of the matter is
Speaker 2: we forget these are profitable juggernauts we're whining about. Yeah,
Speaker 2: I know.
Speaker 4: The profitability aspect I think is huge and it is
Speaker 4: one of the biggest things we point to, you know,
Speaker 4: especially when we get questions, because we still get a
Speaker 4: lot of client questions around this. I think rightly so
Speaker 4: is this a repeat of what we saw in the nineties?
Speaker 4: And I know this has sort of been you know,
Speaker 4: beaten a lot, but I think it's important because when
Speaker 4: you do look at the factor in the equity market
Speaker 4: that was most correlated with strong performance in late nineties
Speaker 4: into the peak, it was negative earnings. That is not
Speaker 4: the case today. So I think that's a really important differential.
Speaker 4: Not to say that you can't have disruptions and you
Speaker 4: can't go through these you know, sort of momentum implosions
Speaker 4: like we did recently, but that I think for the
Speaker 4: broader structure of the equity market is much more important,
Speaker 4: especially in a context of an S and P five
Speaker 4: hundred that has more than seventy percent of its members
Speaker 4: above their two hundre day moving.
Speaker 2: You get on a Schwab golf stream, you go down
Speaker 2: to Louisville, You're in some hotel room with four hundred
Speaker 2: major shrub hitters in the fifteenth row. Someone raises their
Speaker 2: hand and goes, what do we do with cash? It
Speaker 2: vibrates across America right now, Yes, what to do with cash?
Speaker 4: Well, full disclosure, there's no golf stream in my life
Speaker 4: very much. In the commercial worlds, I want to say those.
Speaker 3: You know, the cash question we get so much.
Speaker 4: I think more in the context and I know you've
Speaker 4: covered this recently in conversations with Bizan, but the cash
Speaker 4: question we get is sort of what is the potential
Speaker 4: for that firepower for the market. And I mean, we've
Speaker 4: looked at this so many ways, but when you do
Speaker 4: look at it relative to market cap, the total cash
Speaker 4: position today is quite small relative to history in terms
Speaker 4: of allocating that cash and where to put it. I mean,
Speaker 4: we can't answer that question in a broad sense because
Speaker 4: we have tens of millions of clients. But if you're
Speaker 4: thinking about, you know, the sort of how the market
Speaker 4: has looked this year, and the fact that it is
Speaker 4: not just the megacap ai trade that is that is outperforming.
Speaker 4: There are other parts of the market that are participating,
Speaker 4: some of which had been sort of a sleep for years.
Speaker 4: I point to small caps as an example, not to
Speaker 4: say that you should just back up the truck and
Speaker 4: load everything into small caps, but that is an example
Speaker 4: I think of how you don't necessarily need to be
Speaker 4: so singular focused in terms of, oh, it's only the
Speaker 4: megacaps that really isn't the case hasn't been the case
Speaker 4: for a couple of years actually, in terms of out performance.
Speaker 4: There have been other parts of the market that are
Speaker 4: performed well.
Speaker 3: I want to go to the economy.
Speaker 5: You argue that the July jobs and retail sales numbers
Speaker 5: are false positives. What's one data point you're watching that
Speaker 5: you saying may prove you wrong.
Speaker 4: Well, I do think that if you well, I think
Speaker 4: that for labor, I'll start with that there's not a
Speaker 4: whole lot I think that is pointing to and is
Speaker 4: supporting this kind of outright weakness that you saw in July.
Speaker 4: And I do think that in an environment where we
Speaker 4: have constrained immigration flow and an aging workforce, it makes
Speaker 4: the labor dynamics a little bit harder to see and
Speaker 4: harder to read in a standard you know, non farm
Speaker 4: payrolls report, meaning you know, last year, last fall into
Speaker 4: the winter, when you did go through that significant slowdown
Speaker 4: in payroll growth, when everybody was sort of starting to
Speaker 4: raise those yellow flags around recession risk because that's typically
Speaker 4: what you see going into recession. If you were looking
Speaker 4: at the layoff data, that's actually what was the more
Speaker 4: important signal. So to me, Java's claims have been the
Speaker 4: best labor indicator in this post pandemic cycle, because even
Speaker 4: though we've gone through this low hiring cycle, hiring rate plunged,
Speaker 4: came down to you know, more than a decade low.
Speaker 4: You didn't have the response that you would tip we
Speaker 4: see on the layoff side. So to me, that's why
Speaker 4: the labor stuff at least from a non farm payroll
Speaker 4: sense has been a little bit of that false positive
Speaker 4: because if you do strip out you know what happened
Speaker 4: with local government, if you strip out what happened with
Speaker 4: the World Cup kind of hangover effect, you were still
Speaker 4: not positive on payrolls in July. It wasn't great. We
Speaker 4: also probably have a lower break even rate at this point.
Speaker 2: Fishures up twenty four right now, down fishers up two
Speaker 2: hundred nanasec lifts six cents of a percent of vis
Speaker 2: up to sixteen, comes back down mid range for the
Speaker 2: week fifteen zero point sixty seven the best and yield.
Speaker 2: I'm starting to call it that five point two five
Speaker 2: percent fractally elevated. Still some real stressor in a thirty
Speaker 2: year on five point twenty five percent. We're gonna rip
Speaker 2: up script right now. We do that with Isabelle Lem's
Speaker 2: studio with Kevin Gordon. In Denmark, a gallon in US
Speaker 2: dollars of diesel and Copenhagen approaches ten dollars, a galau
Speaker 2: in Berlin at eight dollars, Madrid eight dollars. In the Philippines,
Speaker 2: ninety eight percent of their petroleums imported there, and they're poppin'
Speaker 2: nothing like ten dollars a gallon US dollars.
Speaker 5: And the minimum wage back home is ten dollars a day.
Speaker 8: Okay, that's why I.
Speaker 2: Ask, perfectly said, But Kevin, talk about the Brent crew
Speaker 2: to the gallon, I guess here ninety four dollars seven
Speaker 2: cents on Brent to the third world to the parcific rim.
Speaker 2: The distillate effect here is just immense.
Speaker 4: I know, I think when you're talking about the Philippines
Speaker 4: Asbille and I talk about sort of our home countries
Speaker 4: a lot, I think about Korea being having that import
Speaker 4: bias too. I mean, is it is amazing. I think
Speaker 4: the sort of the disconnect in terms of what we
Speaker 4: feel here in the West, especially being in a country
Speaker 4: where you know, we're a lot more insulated in terms
Speaker 4: of oil production versus having that depended. So it the
Speaker 4: longer this conflict persists, you do raise that question again
Speaker 4: of the difference between price increases being your biggest problem,
Speaker 4: which is clearly the case in a country like the
Speaker 4: US versus actual oil uh and and energy sort of
Speaker 4: physical you know, shortages. That's that's the difference that you're
Speaker 4: sort of dealing with. But even in the US. You know,
Speaker 4: you sort of have to put a chart out on
Speaker 4: Twitter yesterday where you know, the rolling correlation between yields
Speaker 4: and oil prices has approached almost an all time high.
Speaker 4: And the longer that you see gasoline prices sort of
Speaker 4: rise and stay higher, that acts as ultimately the consumer
Speaker 4: will start to treat that as a pet.
Speaker 2: I mean, I get the price five dollars cents of
Speaker 2: Manila outside of Makati. They don't sell diesel in Maccati,
Speaker 2: and is so Korea is five dollars thirty cents? Is well,
Speaker 2: I mean those are low numbers, but as you say, Isabelle,
Speaker 2: these are nations with a complete reset. And what the
Speaker 2: wages the wages you said, ten dollars a day.
Speaker 5: It's really honestly very hard. In the Philippines, they've imposed
Speaker 5: a lot of work from home because people just can't
Speaker 5: afford to go to work.
Speaker 2: They literally can't afford the guests to go to work.
Speaker 5: U slash Internet there is so slow it'll take you
Speaker 5: a whole day.
Speaker 2: The highway there's called the edsa am I right days right.
Speaker 4: Plus they do they do more rolling blackouts there too,
Speaker 4: so there's a lot more energy disruption.
Speaker 3: Well, if you should come with me. I'm going in
Speaker 3: up to Let's go. Let's go Tom, but Tom all
Speaker 3: the travels first class. I'm sorry.
Speaker 2: We could remote from the peninsula, right, you know, we
Speaker 2: could do a thing for the beautiful hotel right by
Speaker 2: the Ile triangle. Is that what it's called? Very good?
Speaker 3: Yes, you definitely did.
Speaker 2: Bring Schwab along with us as well.
Speaker 3: Yes, conduct the fields.
Speaker 2: So I think this is really really important and that
Speaker 2: and that there's there's more going on here than just
Speaker 2: what a gallon of gases the wall still, it's the refineries.
Speaker 2: It's a huge impact.
Speaker 4: It is a huge impact.
Speaker 2: I think that.
Speaker 4: And and you know clearly the big wild cart and
Speaker 4: all this has been China over the past several months.
Speaker 4: I mean the import activity and sort of the collapse
Speaker 4: that you've seen and the plunge and import activities. So
Speaker 4: all it really takes is, you know, China sort of
Speaker 4: flip that back on and to see what they do
Speaker 4: with that. I think will be crucial in terms of
Speaker 4: the oil market for the rest of the year because
Speaker 4: that does have a potential to sort of be this
Speaker 4: really big swing factor when it comes to prices.
Speaker 2: Again, thank you so much for coming in. Thanks listening
Speaker 2: son is Kevin Gordon with stay with Us more from
Speaker 2: Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch US Live
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Speaker 2: Joining US now from Boston, Emily Rowland with John Hancock
Speaker 2: and Manual Life. Greatly appreciate her here and she has
Speaker 2: been on board as a bull for quite quite some time.
Speaker 2: The market agrees with you. On a lazy Friday morning
Speaker 2: in August, Emily, what is the distinctive, distinctive argument to
Speaker 2: stand vested given the stresses of the week.
Speaker 9: Well, there's certainly a lot that's been said about earnings
Speaker 9: when we know how explosive this earning season was. But
Speaker 9: I think the other thing that's not being talked about
Speaker 9: as much is the currency market. So everybody's looking at
Speaker 9: the treasury market as a catalyst for what could cause
Speaker 9: downside volatility in stocks. But our argument would be as
Speaker 9: long as a US dollars weaker, which was significantly weaker,
Speaker 9: you know, since this announcement earlier in the week, that
Speaker 9: is a risk on catalyst. It's hard to see a
Speaker 9: lot of downside for markets here based on these currency trends,
Speaker 9: So that's what we would be watching.
Speaker 3: So emily.
Speaker 5: Is the dollar's biggest advantage right now, it's currency reserves
Speaker 5: data service that simply maybe that US really yields are
Speaker 5: still attractive.
Speaker 9: Yeah, Isabelle, it's really this idea that the dollar is
Speaker 9: this kind of liquidity release valve. It is loosens financial conditions.
Speaker 9: It benefits international equities even more than it does US.
Speaker 9: If you're watching this week, international equities are handily outperforming
Speaker 9: the US. Even though the data haven't really been all
Speaker 9: that great overseas, it doesn't matter. They're benefiting from the
Speaker 9: weaker dollar. This is a risk on market. It's been
Speaker 9: fueled by momentum, by technicals, by algos I think underneath
Speaker 9: the surface here and so again, the weaker dollars really
Speaker 9: that critical picture piece of the macro picture that we
Speaker 9: think bears watching.
Speaker 5: Going quickly into stocks because I did like your note
Speaker 5: you said the bond market is the most hated, but
Speaker 5: that everyone loves the stock market.
Speaker 3: I love that.
Speaker 5: So Magnificent seven, they're down, equal weight stocks are up,
Speaker 5: so that I think up nearly ten percent. In fact,
Speaker 5: is this a healthy rotation in your view or just
Speaker 5: the beginning of the end for megacap dominance.
Speaker 9: This is one of the best signs or best periods
Speaker 9: of diversification that we've ever seen. Like everybody comes on
Speaker 9: and they say it's all about diversification, like it's working.
Speaker 8: This great rotation.
Speaker 9: Is probably one of the biggest themes that we've been
Speaker 9: watching throughout the course of twenty twenty six. And what
Speaker 9: we've been doing is we've still been overweight tech. Tom
Speaker 9: knows that we've been overweight technology stock for over ten years.
Speaker 9: But we've looked at where the cash flows are going.
Speaker 9: There's an old phrase that earnings or opinion and cash
Speaker 9: flows are fact, and so what we've been doing is
Speaker 9: we've been looking at where the big hyperscalers are spending.
Speaker 8: We've been going downstream.
Speaker 9: We've been looking at things like industrials, utilities, really the
Speaker 9: you know again the picks and shovels around the AI
Speaker 9: build out, and looking for places where frankly, the earnings
Speaker 9: bar is easier. Industrials had an earnings bar up the
Speaker 9: high single digits. We want to look for places where
Speaker 9: that bar is more reasonable and where we can see
Speaker 9: the money flowing.
Speaker 2: Emily, you have an advantage. It's an unfair advantage, but
Speaker 2: we're going to take advantage of it. At right now
Speaker 2: you get to work with a guy named Matt Michigan.
Speaker 2: And I mean the bottom line here is from the
Speaker 2: equity view and all of our listeners and viewers with
Speaker 2: retirement plans, they're inequity. They own too much in Vidia.
Speaker 2: Unlike me et ceter. The answer is an equity animal
Speaker 2: has to study the bond market. When Emily Roland does
Speaker 2: that with Matt Miskin, what do you talk about.
Speaker 9: Well, we just got off the phone for an hour
Speaker 9: this morning, so we talk about everything that you can
Speaker 9: think of.
Speaker 8: And you're right, Matt is the absolute best.
Speaker 9: But really it's this idea lately that we've been talking
Speaker 9: about is sentiment. So everybody's looking to figure out what
Speaker 9: is it that's causing bon yields to go up. The
Speaker 9: argument is about inflation. Well that doesn't make a ton
Speaker 9: of sense to us. Tips break even started the year
Speaker 9: at two twenty five and we're the same at two
Speaker 9: twenty seven right now.
Speaker 8: It's not an upside surprise on growth.
Speaker 9: In fact, the US Economic Surprise Index has rolled over.
Speaker 9: We lost twenty three thousand jobs last month. We had
Speaker 9: soft PPI and CPI, we had softer retail sales. Then
Speaker 9: everybody starts talking about the deficit. Well why now, the
Speaker 9: last time we had a surplus was in two thousand
Speaker 9: and two and bond yields were guess what, five percent?
Speaker 8: So it comes down to sentiment.
Speaker 9: Everybody hates bonds, everybody loves stocks. When we find ourselves
Speaker 9: in this environment and there's a hated asset class, that's
Speaker 9: where our conversation goes. And I'll tell you from our experience,
Speaker 9: everybody hates spawns right before they love them again.
Speaker 2: I mean, folks, you do this every day. We do
Speaker 2: it for Isabelle, who's too busy working on fancy stuff
Speaker 2: over at Bloomberg News. The SPX drawdown now it's cratered.
Speaker 2: It's down two point two three percent. Wow. I mean
Speaker 2: it's absolute massive pullback there twelve months trailing Dow up
Speaker 2: eighteen percent, SPX up twenty percent, all in Nasca cup
Speaker 2: twenty three and a half percent. Isabelle, it's a terrible market.
Speaker 3: It's in terrible market. And you're forgetting bitcoin, Tom, I
Speaker 3: know you omitted bitcoin.
Speaker 5: It's that best week on track for the best week
Speaker 5: in three years.
Speaker 3: So risk appetite is.
Speaker 2: I have no idea what that's signals. See Isabelle Lee
Speaker 2: with Emily Rowland of Manulife and.
Speaker 5: John Ancott Emily So if you'ld say above five percent,
Speaker 5: where does the pressure move next?
Speaker 3: In your view?
Speaker 5: Is there an investment playbook in this policy regime?
Speaker 9: Yeah, I mean it's amazing that some of the stats
Speaker 9: you laid out, and it's like people just cannot get
Speaker 9: enough risk in their portfolio. So like they started with
Speaker 9: small caps and emerging market equities and like now we're
Speaker 9: onto bitcoin. So I think, you know, taking some chips
Speaker 9: off the table here. You want to stay fully invested,
Speaker 9: you've got to own some of this stuff. But one
Speaker 9: area that's really been picking up on our radar has
Speaker 9: been a healthcare sector. It's showing some signs of life.
Speaker 9: Another area that has a lower earnings bar. The biggest
Speaker 9: job we have as asset allocators right now is like
Speaker 9: finding something that's not AI.
Speaker 8: And I'm not saying that AI is not going to
Speaker 8: help with tech companies becoming.
Speaker 9: More profitable or more efficient and more productive, but it's
Speaker 9: not necessarily an AI trade. It's quality at a reasonable price.
Speaker 9: So those are some of the areas that we're looking
Speaker 9: at right now as opportunities. Thinking about the fixed income side,
Speaker 9: we still have a mild credit bias five to six
Speaker 9: percent on a high quality bond. I know nobody wants
Speaker 9: to talk about it because everybody just wants to own
Speaker 9: stocks right now.
Speaker 8: But that sounds pretty good to us right now.
Speaker 2: Emily, I don't care. The reason you're on is I
Speaker 2: got Giants Red Sox. I mean, it's worth going up.
Speaker 2: It's worth taking the taking the Sikorski up the long range,
Speaker 2: up to Boston. I don't know if Rafaeld Devers is
Speaker 2: going to step up to home play, but Emily Rowland,
Speaker 2: San Francisco Giants Red Sox, it's a weekend for the
Speaker 2: Red Sox to catch up to the Yankees.
Speaker 9: Yeah, you know what, Tom, I I you should have
Speaker 9: had Matt on for this segment because I forgot to
Speaker 9: study the latest Red Sox stats.
Speaker 8: I know you're going to be disappointed. All I know.
Speaker 8: It's been a roller coaster, it's.
Speaker 9: Been volatile, and so we'll have to see, you know,
Speaker 9: how the season continues here over the weekend.
Speaker 2: Finess. That so well, that was like it was written
Speaker 2: by Johnny Google. It was, it was written by Johnny Hancock. Complux.
Speaker 2: That's a great answer, rough Rafaeld Devers return to Fenway
Speaker 2: is part of a carefully balanced partly Emily Rowland, Thank
Speaker 2: you so much. Next time we'll talk to about Emily
Speaker 2: roll in Inequities Coach, Chief Investment Strategists, Manual Life, Johnny
Speaker 2: Hancock stay with us. More from Bloomberg Surveillance coming up
Speaker 2: after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
Speaker 1: Apple Karplay and Android Auto with the Bloomberg Business app,
Speaker 1: or watch us live on YouTube.
Speaker 2: It is extraordinary. B and Why the Bank of New
Speaker 2: York Melon, B and Y. They have Alisia Levigne and
Speaker 2: Jeffrey You. Without question the math acuity there is absolutely
Speaker 2: lights out. Jeffery you joins us right now from B
Speaker 2: and Y. Jeffrey you and your research. Note, you got
Speaker 2: a beautiful short thing, which is foreigners have significant exposure
Speaker 2: to our long paper and you just simply say who
Speaker 2: owns the long end? How much of our long end
Speaker 2: is owned by Japan.
Speaker 10: So let's just say a important share in terms of
Speaker 10: a pack of the international investors, we strip out the custodians.
Speaker 10: You know, Apak are good, say one eighth to one
Speaker 10: seventh them out of that, and I think Japan is
Speaker 10: dominant in terms of all of it. But you know
Speaker 10: you will see their data or not see their data
Speaker 10: in terms of custodian centers elsewhere in Europe as well.
Speaker 10: When you see high numbers out of Belgium and the UK,
Speaker 10: a lot of that is going through GP Japanese and Asian.
Speaker 2: Stephen from Roland, North Carolina sends a question and unfortunately Isabelle,
Speaker 2: it's such a damn smart question, I have to ask it. Steven,
Speaker 2: thank you for this, and folks, this is all part
Speaker 2: of Bloomberg dot com slash Ask radio questions into Jeffrey you.
Speaker 2: You can't do better than that. You need to be
Speaker 2: a subscriber to Bloomberg dot com. You need to be
Speaker 2: a terminal user on board with JEFFREYU. Stephen from Raleigh,
Speaker 2: North Carolina. What if we break out JEFFREYU above a
Speaker 2: five point two five percent, what if we slip price
Speaker 2: down yield up to a six percent thirty year.
Speaker 10: Bond, Well, you tell me where the break even is
Speaker 10: going to be, and then we can tell you who's
Speaker 10: going to be buying and who's not going to be selling.
Speaker 10: If we get to okay, five six, you know, pick
Speaker 10: a number. If the break even it still stays at
Speaker 10: two two and a half, happy days for domestic pension investors.
Speaker 10: It's not just the US story. You're seeing that in Europe.
Speaker 10: You're seeing that in the UK in particular. Let's get
Speaker 10: the real yield right, because the higher that is, the
Speaker 10: better it is, you know, given the way demographics are
Speaker 10: going in the developed world in this case. But if
Speaker 10: break evans go unanchored, if we get to a three handle,
Speaker 10: that's bad news for everyone around.
Speaker 5: Jeffrey, the dollar barely reacted to the treasuries bigger buyback announcement.
Speaker 5: Is that a warning that maybe the market that's losing
Speaker 5: faith in the US fiscal story.
Speaker 10: So you can look at it two ways. Actually heading
Speaker 10: into not just this announcement, but also the July AFFIRMC decision,
Speaker 10: US exceptionalism, dollar exceptionalism that was at near record highs,
Speaker 10: and our clients were very much heading into that, you know,
Speaker 10: owning US assets unheedged. We are seeing over the last
Speaker 10: two or three weeks, so that they've added to their hedges.
Speaker 2: The announcement is I.
Speaker 10: Think, going to facilitate that process as well. So again
Speaker 10: it's not just about a dollar per se story. So
Speaker 10: they still believe in the US growth story. We talk
Speaker 10: about credibility here and there, the US's growth credibility. And thankfully,
Speaker 10: right now, if you look at all the capex I'm
Speaker 10: heading into tech that is independent of whatever the government
Speaker 10: is doing.
Speaker 5: And so if the FED loses credibility and real yields fall,
Speaker 5: for example, this a dollars Haven status suddenly become much
Speaker 5: less powerful in your view.
Speaker 10: So Haven's status is very different from a levels The
Speaker 10: thing is, there is just an alternative right now. Where
Speaker 10: else do you go our Europe, for example, your real
Speaker 10: yields are even worse than negative compared to the dollar,
Speaker 10: and then be actually has higher real yields if I
Speaker 10: just look at the front end stuff.
Speaker 2: But when you're.
Speaker 10: Relying on deflation or very very low inflation, that a juice.
Speaker 2: Up your rebels.
Speaker 10: I don't think that's a very good environment either way.
Speaker 2: Too young, Jeff, for you to remember the joy of
Speaker 2: August of nineteen ninety eight. But the cacophony of this week,
Speaker 2: the vibration, the frontic sense of it, the analogus here
Speaker 2: with visible leverage or less visible leverage to that difficult August.
Speaker 10: So I will say, you have to identify where the
Speaker 10: leverage is, right please. So we talked about private credit
Speaker 10: a couple of months ago, right, So without taking a
Speaker 10: view on private credit, why private credits in boomy of
Speaker 10: the last few years, Because from GFC onwards bank credit
Speaker 10: that has softened. So private credit is merely just supplanting
Speaker 10: where bank credit used to be. What really you know,
Speaker 10: just as look when myconomists had on so many central
Speaker 10: banks of the last twenty years, they've removed like M three,
Speaker 10: M four monitoring aggregates, so we can't crack aggregate money
Speaker 10: supply growth as much as in the past. If we're
Speaker 10: able to do that now with all forms of shadow
Speaker 10: credit and the light I think that's where the concern is,
Speaker 10: not with banks anymore and not with where the fishes maybe,
Speaker 10: but agregro credit's still an issue.
Speaker 2: This is difficult. I understand. You get delicate issues with
Speaker 2: the Bank of New York just to be collegial about it.
Speaker 2: Do you see a total like what Rogoff and Rainer
Speaker 2: would talk about Ken Rogoff with me and Jackson all
Speaker 2: next week. Folks, Jeffrey, you do you see an aggregate
Speaker 2: leverage now that alludes to previous crises?
Speaker 10: Right, So let's just say if I had an M
Speaker 10: four number right back in the day, then let's look
Speaker 10: at But the crucial thing is you've have a high
Speaker 10: n M four for the sake of arbent that there's
Speaker 10: high nominal GDP as well, right, So it's got to
Speaker 10: be relative. If your money supply growth really supersedes where
Speaker 10: your GDP is, then it becomes a problem because you
Speaker 10: can no longer finance that leverage. What the US has
Speaker 10: in its favor right now more than anything else, especially
Speaker 10: compared to Japan, for example, is nominal GDP growth still
Speaker 10: powering ahead when that turns? And I'm saying when, right,
Speaker 10: because cycles come in place, then I think the regulators
Speaker 10: and the FED will all needs to be cautious. But
Speaker 10: we're just not seeing any signs of that yet, at
Speaker 10: least not in the near future.
Speaker 5: And then you also argue that investors shouldn't be aggressively
Speaker 5: short the dollar. What would actually make it change that view?
Speaker 8: Right?
Speaker 10: So yeah, quite a few things right. Oddly enough, if
Speaker 10: we're more positive on the current environment right now, if
Speaker 10: it's going to be global risk on, then you can
Speaker 10: think about shorting the dollar. The dollar becomes a funding currency.
Speaker 10: You go into emerging markets, you go into apac but
Speaker 10: that is a benign environment.
Speaker 2: You know.
Speaker 10: We go back to a dollar smile of the illustrous
Speaker 10: Stephen gen from back in the day, right with when
Speaker 10: you have this middle ground, when it's a risk on environment,
Speaker 10: that's when the dollar serves as a funder. But the
Speaker 10: issue is in the dollar's yields are still quite high
Speaker 10: right now. It's expensive to fund out the dollar. Why
Speaker 10: because growth is still strong. Real rate to still high.
Speaker 2: I mean, folks, what you just heard there from Jeffery
Speaker 2: You he just slips it in like something, but he's
Speaker 2: talking back from another time. And Stephen Jenno was definitive
Speaker 2: at Morgan Stanley and just beautiful Jeffery. You translate that
Speaker 2: from your mortals When you say a smile, are you happy?
Speaker 10: You must always be happy with the dollar. But one
Speaker 10: side of the smile is happier than the other. Put
Speaker 10: it this way, right.
Speaker 2: What what is the smile that's jarging young man.
Speaker 10: So when when so when volatility? If you look at
Speaker 10: when you look at tole implied volatility, for example, that's
Speaker 10: the shape of the smile, it goes up and the
Speaker 10: dollar does strengthen. Based on these metrics, you know, when
Speaker 10: the US is growing strongly, it also strengthens when the
Speaker 10: world is in a bad place and the dollars reserve
Speaker 10: status comes through the rising dollar. A rising US tide
Speaker 10: lifts all boats. I still believe in that. That's why
Speaker 10: I like that side of the right hand side of
Speaker 10: the smile, because US demand as consumers, US corporates, that
Speaker 10: lifts the world. Everyone's happy.
Speaker 2: Jeff, you got a minute left? Mike from Milwaukee emails
Speaker 2: in he says, how come Isabelle doesn't know about perhaps
Speaker 2: blue ribbon beer. Also Mike from Milwaukee, Jeff, you seriously
Speaker 2: for Bloomberg dot Com slash ask radio for subscribers in
Speaker 2: terminal users, Mike wants to know what happens if the
Speaker 2: FED becomes unanchored.
Speaker 10: So the FED becomes unanchored, then that is a volatility our.
Speaker 10: I'm not going to take a view on levels yet
Speaker 10: because let's go back to the treasury curve. If markets
Speaker 10: are concerned and you get inequity sell off. For example,
Speaker 10: there could be rotation back into bonds again. But if
Speaker 10: we have an unanchoring where financial conditions are too loose,
Speaker 10: then you want to own infacian protection. So we're in
Speaker 10: the middle ground here. Let's see where the US economy goes.
Speaker 2: Jeff, you're just brilliant. Love that you bring. You bring
Speaker 2: up Stephen Jeneral I interviewed years ago and still does
Speaker 2: very very good. Reminders me of John Norman at JP
Speaker 2: Morgan as well. These guys like disappear, but Ethan Harris
Speaker 2: is working harder now than he Wasn't Lehman or was
Speaker 2: it the Bank of America. They like quote unquote retire,
Speaker 2: but they don't. Jeff for you, Thank you so much.
Speaker 2: Stay with us. More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance Podcast live weekday afternoons
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Speaker 2: We called Anne Maletti's hotel. I think it's the Waldorf.
Speaker 2: I can't remember it begged her to come over. We
Speaker 2: are honored to have Anne Maletti here of Allspring definitive
Speaker 2: as a voice of the Midwest in Milwaukee on equity investments.
Speaker 2: The resurrection of the Paps Brewery in Milwaukee is one
Speaker 2: of the great redos in America. Describe it was like derelict, right,
Speaker 2: it was like, you know, back to the nineteenth century
Speaker 2: and it was abandoned, right it.
Speaker 11: Was, and pieces of the historical building still stood, and
Speaker 11: they kind of built around it. And it's a really
Speaker 11: fun place to come and see.
Speaker 2: The best place at the historic Paps Brewery, Like you
Speaker 2: go there for brunch, Isn't that kind of place?
Speaker 8: I wish I had time to enjoy it more.
Speaker 2: But happy hours are great and you could still get
Speaker 2: a Paps Blue Ribbon beer. It's made in San Antonio,
Speaker 2: which is on America. Oh yeah, but still there. It is.
Speaker 2: W'ch a couple movies, you know, there's movies on paths
Speaker 2: Blue Ribbon. How are you doing? How I mean? The
Speaker 2: rotation is finally an an Meletti rotation, right, it is.
Speaker 11: It's finally the market's finally paying attention to more than
Speaker 11: just two handfuls of stocks, which is which is good,
Speaker 11: and it's a much easier market for active managers who
Speaker 11: are focused on diversifying risk as well as producing that alpha.
Speaker 3: So we like this market.
Speaker 11: It remains tough though it is you know, a lot
Speaker 11: of volatility, a lot of big moves on a daily basis,
Speaker 11: and so it takes a lot of focus.
Speaker 5: You like mid cap industrial. So what does the market
Speaker 5: misunderstand about that trade?
Speaker 3: I think you know.
Speaker 11: To me, it sits at the intersection of two really
Speaker 11: important trends. Certainly they're benefiting from the AI infrastructure build
Speaker 11: but also kind of that ongoing reach or global supply
Speaker 11: chain realignment. And so in the mid cap space, a
Speaker 11: lot of those companies have a lot more flexibility. They're
Speaker 11: less tied to having revenues outside of the US, and
Speaker 11: so the growth rates are accelerating.
Speaker 3: What about emergency markets?
Speaker 5: They're dramatically under owned and earnings are growing something like
Speaker 5: thirty five percent. Why isn't the money already there? And
Speaker 5: what would I don't know, trigger some billion dollar allocation.
Speaker 11: Well, it's funny because we started talking about EM two.
Speaker 11: I started talking about EM two years ago, and I
Speaker 11: profess not to be an absolute expert in the space.
Speaker 11: I spent most of my career in.
Speaker 8: The domestic space.
Speaker 11: However, what stood out to us two years ago was, gosh,
Speaker 11: it looks like there's an earnings acceleration a lot of
Speaker 11: the EM countries. Actually we're in really strong fundamental shape,
Speaker 11: and we understood that the AI build would also kind
Speaker 11: of lead into EM, so.
Speaker 3: We got involved early.
Speaker 11: What we're seeing though, is in twenty six is earning's
Speaker 11: growth higher than what we're seeing the S and P.
Speaker 11: Five hundred and we talk about how crazy it is
Speaker 11: the growth rates we're seeing here. So good acceleration of growth,
Speaker 11: but is ability to answer your question, it takes time
Speaker 11: for investors to come along when they've seen EM underperform
Speaker 11: for ten fifteen years prior to this.
Speaker 2: Where are we on free cash flow? Do you have
Speaker 2: in the old days, Isabelle? We do a sensitivity analysis
Speaker 2: on five years, and we'd say we believe in twenty
Speaker 2: thirty one now we can't get out to December. How
Speaker 2: far out can you look? Is a measured conservative log
Speaker 2: only by side manager?
Speaker 11: Yeah, I mean it's such a great question, Tom, and
Speaker 11: I think free like you hit the nail on the head.
Speaker 11: It's free cash flow is always something that's been important
Speaker 11: to me and certainly to our investment teams.
Speaker 3: And when you start to see.
Speaker 11: The breakdown of the correlation between earnings and free cash flow,
Speaker 11: it starts to get a little concerning. We've saw that
Speaker 11: obviously with many of the meg seven et cetera. But
Speaker 11: we're watching for that closely too across other industries. I
Speaker 11: do think our time horizon is still long term, and
Speaker 11: we want to buy the best companies throughout the cycle. However,
Speaker 11: you have to be a little bit more flexible in
Speaker 11: your execution and be willing to realize things are changing
Speaker 11: quickly here and we.
Speaker 3: Have to adapt.
Speaker 5: At what point, in your view, does AI spending stop
Speaker 5: creating shareholder value and start maybe destroying it.
Speaker 11: Yeah, you know, it's a great question. I really do think,
Speaker 11: and you know, there's no doubt AI is real. But
Speaker 11: the and the investments bend cycle has been accelerated and
Speaker 11: faster than I believe. But it's the durability of the
Speaker 11: returns that really are important, and.
Speaker 3: It's too early to really know.
Speaker 11: I think what you know we're going to see, and
Speaker 11: maybe hope what we're going to see is profitability flow
Speaker 11: down to many other industries and companies who aren't spending
Speaker 11: that much money to get involved in the space.
Speaker 2: And thank you so much. I'm a lady with us,
Speaker 2: with all spring.
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