Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily, we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Terminent. This is a joy.
Speaker 1: Daniel Kurtz Phelan went to the University of Jonathan Spence
Speaker 1: also known as Yale University, and turned it into a
Speaker 1: China Watch. He has been involved with government, including writing
Speaker 1: speeches for Secretary Clinton, and has now been annointed with
Speaker 1: the worst job in diplomacy, which is filling Gideon Roses
Speaker 1: Shoes at Foreign Affairs, where he has been named editor.
Speaker 1: Daniel Kurtz Phalan joins us at this morning. Daniel, I
Speaker 1: want to go to the United States. I know Lisa's
Speaker 1: very much focused abroad. We had Adam posing on with
Speaker 1: his nostalgia of America. Are we drive owning a nostalgia
Speaker 1: right now? I think you see this across across both parties.
Speaker 1: Right now, there's so much focus on how we get
Speaker 1: back to economic strange to pass that there are ways
Speaker 1: in which families to realize the opportunity with the future
Speaker 1: that's out of opposing piece. The price of nostalgia focuses
Speaker 1: on the trade aspects of this. There's been this really
Speaker 1: fascinating shift against what it in a pretty strong free
Speaker 1: trade consensus across across both parties for some time, and
Speaker 1: the narrative you tend to hear now is that we
Speaker 1: have done too much trade, integrated too much with the world,
Speaker 1: and that has reinforced an equality displaced workers out. Imposen's
Speaker 1: argument is that in fact, for the last twenty years,
Speaker 1: when we've seen this period of rising inequality and stagnating
Speaker 1: wages increast a lot of industries, we've in fact been
Speaker 1: retreating from the world, and trying to to retreat further
Speaker 1: is only going to reinforce those trends. Daniel, in honor
Speaker 1: of John Williamson dying here in the last number of days.
Speaker 1: The nostalgia of the Washington consense is everybody wants to
Speaker 1: go back to when it was cozy, when it was comfortable.
Speaker 1: What does our new Washington consensus look like. So you
Speaker 1: can see some of the outlines of this. In the
Speaker 1: Biden administration, there's much more attempt to to have the state,
Speaker 1: have the government that directs certain portions of the economy.
Speaker 1: There's much more focus on the international competition. I know
Speaker 1: you were just talking about the United States in China,
Speaker 1: but much more focus on how what country controls different
Speaker 1: parts of the supply chain, where semiconductors are manufactured, where
Speaker 1: green technology is manufactured. Uh, those are going to be
Speaker 1: the battles of the future, out imposing and others in
Speaker 1: in this package that leads the major initiative foreign affairs
Speaker 1: try to take a look at this that is not
Speaker 1: about just pulling these things back into our own borders
Speaker 1: or making these all kind of domestic industries, but really
Speaker 1: think about how we shape the global economy in a
Speaker 1: way that addresses those security concerns but also realize the
Speaker 1: economic gains both for Americans in a broad based way,
Speaker 1: but also that really shapes the bubble economy. That's a
Speaker 1: lot of work to dig down. So let's pick up
Speaker 1: on that word consensus. How you established consensus on an
Speaker 1: issue like the Chinese Communist Party right now, how you
Speaker 1: get the European allies to come along with you. So
Speaker 1: this is I think the kind of key tension in
Speaker 1: the Biden China policy. The Biden administration, I think in
Speaker 1: the way that has surprised a lot of people. Came
Speaker 1: really out of the gate trying to set a pretty
Speaker 1: hard line on China's I think one of your your
Speaker 1: previous guests said they made clear as they came into
Speaker 1: office that they were not going back to some pre
Speaker 1: Trump consensus on engagement with China, but really continuing the
Speaker 1: hard line there there change the thing that they're trying
Speaker 1: to do differently than the Trump administration is doing that
Speaker 1: with allies, whether that's Japan you saw you saw Japanese
Speaker 1: Prime Minister in Washington Friday, whether it's with our NATO allies,
Speaker 1: with with the Quad, the India, Japan and Australia, and
Speaker 1: our partners in in the rest of Asia. The problem
Speaker 1: is that a lot of these allies have different views
Speaker 1: about how you compete with China. So you saw this
Speaker 1: on Europe most strongly. Europe was striking an investment deal
Speaker 1: with China at the same time that the United States
Speaker 1: was trying to craft this allied front against against the
Speaker 1: Chinese Communist Party and against Chinese influence. So it's very
Speaker 1: very delicate balancing act where the United States one just
Speaker 1: wants to sustain this hard line, but it wants to
Speaker 1: do it with as many allies and partners as it can,
Speaker 1: and that creates a certain tension. You know, this is
Speaker 1: really the strength United States, and I think the Biden
Speaker 1: administration has has tried to keep this in mind. We
Speaker 1: go into this competition with China with an incredible range
Speaker 1: of allies and partners both in Europe and in Asia
Speaker 1: and elsewhere. China doesn't bring a lot to that fight
Speaker 1: when you think about it in those terms. Well, let's
Speaker 1: build on that tension. Though. The issue is, you know,
Speaker 1: through economic history, at the center of a global system
Speaker 1: is a hedgemm that brings everyone else with them. Right now,
Speaker 1: we can't get the Chinese Communist Party to come with us,
Speaker 1: and that's the issue. The major miscalculation of the last
Speaker 1: several decades, and arguably laced with arrogance, was this idea
Speaker 1: that the Chinese Communist Party would want to be more
Speaker 1: like us, to embrace the system that we've all been
Speaker 1: as from and down. That's not gonna happen. So I
Speaker 1: guess the issue that I have every time this comes up,
Speaker 1: and I'm always asking this question, what kind of system
Speaker 1: can we in our allies embrace. If China doesn't want
Speaker 1: any part of it, doesn't want to play by the
Speaker 1: same rules, that that's a great point in look, I
Speaker 1: wrote a book about US policy towards China in the
Speaker 1: nineteen forties, and you can see exactly that that mistake,
Speaker 1: going back really towards the beginning of the American relationship
Speaker 1: with the Chinese Communist Party. With Communist China, this notion
Speaker 1: that with just the right amount of trade, the right
Speaker 1: amount of diplomatic engagement, the Chinese would really come to
Speaker 1: see the world the way we do. And you know,
Speaker 1: back when I was writing about about George Marshall in
Speaker 1: the nineteen forties in China, that was an illusion that
Speaker 1: we we clung to pretty bitterly. You see that in
Speaker 1: some of the China policy of the nineteen nineties and
Speaker 1: the in the two thousands, this notion that with just
Speaker 1: the right amount of you know, capitalism or or trade
Speaker 1: or diplomacy, the Chinese would come to really see the
Speaker 1: world the way we do. And and that illusion, I
Speaker 1: think has um has has fallen apart over the last
Speaker 1: four years. I think the question is, can you use competition,
Speaker 1: can you use pressure from that coalition to bring to
Speaker 1: bring the Chinese along. We're seeing something like that with
Speaker 1: climate change right now. The by An administration is going
Speaker 1: to hold a climate summit at the White House on Thursday,
Speaker 1: and they've tried to say, look, we want the Chinese
Speaker 1: to come along. We realize that China is the biggest
Speaker 1: admitter of carbon in the world right now, the US
Speaker 1: the second. Only if these two countries are able to
Speaker 1: do something meaningful on climate change, is the world of
Speaker 1: any hope of of being this challenge. But we can't
Speaker 1: we can't try too hard to bring to bring the
Speaker 1: Chinese along. We need to bring a kind of competitive
Speaker 1: edge to this where we show leadership, we show an
Speaker 1: ability to to to shape the global global action on
Speaker 1: this question or working with our allies, and that kinda
Speaker 1: feels really pressure to come along for its own interests,
Speaker 1: not because we expect that with the right amount of diplomacy,
Speaker 1: the Chinese are simply going to see the world the
Speaker 1: way we do. And the global warming discussion is a
Speaker 1: bigger one that we're gonna be having throughout this week.
Speaker 1: I do want to go back to the US China tensions,
Speaker 1: paired with this disenchantment with the way that globalization really
Speaker 1: worked for a lot of people within the United States
Speaker 1: and elsewhere. What is the modern version of globalization that
Speaker 1: economists that you quoted and had in your magazine seemed
Speaker 1: to think is the path forward? So one one really
Speaker 1: interesting element of this, I think when we talk about trade,
Speaker 1: we tend to think of you know, traditional manufacturing and steel,
Speaker 1: maybe services. There's there's one essay in this set of
Speaker 1: pieces on trade by Matt Slaughter and David McCormick. Dave
Speaker 1: mccormicks the CEO of Bridgewater, Matt Slaughters at Dartmouth. They
Speaker 1: were both senior economic officials in the George of the
Speaker 1: Bush administration. They make the point that when you talk
Speaker 1: about global trade increasingly increasingly we're talking about about data,
Speaker 1: about data flows, which have grown something like a hundred
Speaker 1: times in the last the last ten years, and that's
Speaker 1: really the future of global trade. That's a lot of
Speaker 1: what we're talking about, and we're talking about these these
Speaker 1: conflicts over trade going forward. China's working very hard to
Speaker 1: shape global governance of data. You know, they have this
Speaker 1: kind of techno authoritarian model which applies domestically but also
Speaker 1: shapes the way they engage with other countries. The kind
Speaker 1: of economic model the Chinese are trying to bring to
Speaker 1: the rest of the world, And as Slader McCormick argue,
Speaker 1: the US really hasn't gone that far in trying to
Speaker 1: put forth an alternate vision of global governance. So when
Speaker 1: we talk about the trade battles of the future, there's
Speaker 1: likely to be about data as they are to be
Speaker 1: over you know, steel tariffs and the the traditional trade
Speaker 1: battles that were all pretty familiar with. And the question
Speaker 1: is which of these global countries is going to go
Speaker 1: out and shape some kind of global policy about this.
Speaker 1: And this applies to everything from you know how these
Speaker 1: are tax to um to to privacy and all the
Speaker 1: issues that we're familiar with domestically, those are international issues
Speaker 1: as well. And only if the United States goes out
Speaker 1: and tries to put forward it, tries to build some
Speaker 1: kind of coalition, tries to some forward some kind of
Speaker 1: global rules to define data trade going forward. Otherwise other
Speaker 1: countries are gonna are going to step in and do
Speaker 1: that themselves. And that's probably not going to be a model.
Speaker 1: It's probably not going to be an approach that we're
Speaker 1: going to be especially happy with. Just quickly here, I'm
Speaker 1: wondering you're saying that people think that the US is
Speaker 1: behind China and coming up with governance of global data. Meanwhile,
Speaker 1: Tony BLINKLN Secretary of say so that the US was
Speaker 1: behind China when it came to taking advantage of new
Speaker 1: job opportunities resulting from fighting climate change. Is the presiding
Speaker 1: sentiment that the US is falling way behind on a
Speaker 1: lot of the most important issues. I think that's been
Speaker 1: the view over the past few years, whether that's on data,
Speaker 1: whether that's on the technology that goes into UH, into renewables,
Speaker 1: kind of green technology. This is I think at the
Speaker 1: heart of some of what the Biden iministration is trying
Speaker 1: to do with this infrastructure package. You know, we're having
Speaker 1: this debate now about what infrastructure looks like. Some of
Speaker 1: that is twentieth century infrastructure, that's you know, roads and bridges,
Speaker 1: but I think most of us think of when we
Speaker 1: look at infrastructure. The Biden aministration is trying to make
Speaker 1: this case that this really should be about UM, how
Speaker 1: you UH renovate buildings to make them more energy efficient,
Speaker 1: how you invest in these future technologies. That's a politically
Speaker 1: fraud issue. You know, we can go back to the
Speaker 1: cylinder controversy of the Obama administration to see what happens
Speaker 1: when you make some of these investments that go wrong.
Speaker 1: But the case they're trying to make is that when
Speaker 1: we think about infrastructure, when we think about investments in
Speaker 1: ways that are going to be key to the competition
Speaker 1: with the future, whether that's on data and technology, whether
Speaker 1: that's on on renewables, that we need to think about
Speaker 1: these questions much more broadly than we have traditionally. You
Speaker 1: and I and the tame We're gonna be talking about
Speaker 1: this for a long long time. Dan Castrod in their
Speaker 1: Foreign Affairs editor Greater catch up with you, sir, to
Speaker 1: make care Morgan standing Investment Management, fixed income portfolio manager, Jim,
Speaker 1: let's start with credit, shall weight some of these companies?
Speaker 1: Some of this universe is actually stronger than it was
Speaker 1: twelve months ago, Jim. Some people struggle to see that.
Speaker 1: Can you just explain it for for us? Yeah, it's
Speaker 1: all about cash flow, right, So effectively, what people were
Speaker 1: able to do in the last twelve months is with
Speaker 1: rates so low in the aid of QI, is that
Speaker 1: many corporations were able to refinance their debt for longer
Speaker 1: terms and at lower interest rates. And we also have
Speaker 1: to recognize is that as the economy recovers, you get
Speaker 1: this cash flow that starts to come back into the market.
Speaker 1: That cash flow for a bond investor is key because
Speaker 1: that's what's going to keep default risk down. So as
Speaker 1: the economy is growing and we expected to grow this year,
Speaker 1: next year, in in the year following, and as that
Speaker 1: cash flow stays very very positive, and as long as
Speaker 1: we don't expect interest rates to rise substantially consistently over
Speaker 1: the next several years, and that means that the refinancing
Speaker 1: risk of all the debt that they've taken on is
Speaker 1: still going to come at a very very low rate.
Speaker 1: And right now spreads are tight, as you've been pointing out,
Speaker 1: and as long as that doesn't widen so much, it
Speaker 1: basically sets up for um better interest coverage rates, meaning
Speaker 1: the amount of payment that you have to pay on
Speaker 1: the debt that you have outstanding. So they'll start to
Speaker 1: look better, especially with the backdrop of an expectation of
Speaker 1: a better and growing economy with more positive cash flow.
Speaker 1: So that's why credits doing well. Jim, I want you
Speaker 1: to synthesize the x X as it's HSBC on it today.
Speaker 1: Rollen Center has been great, man Hornbox has been great, etcetera.
Speaker 1: I want you to synthesize the game of guessing the
Speaker 1: win of this and the duration of some of these
Speaker 1: arguments about we're gonna see higher yields, we're gonna see
Speaker 1: lower yields. How's the x X is playing well? The
Speaker 1: way that I think about it is that the tails
Speaker 1: are fat on both sides, so effectively, Yes, we have
Speaker 1: a lot of monetary expansion and there could be some
Speaker 1: inflation risks and all of those risks have gone up
Speaker 1: because of what we're doing. But on the other side
Speaker 1: of that, what we have to question is that have
Speaker 1: things structurally really changed where we were prior to the pandemic?
Speaker 1: Is that we had structural disinflation, and the reason why
Speaker 1: is that we had aging population, which is demographics, We
Speaker 1: had technology and all the other factors that have been
Speaker 1: pushed prices lower. Has that just magically gone away as
Speaker 1: the aging population has the technology and everything else. Is
Speaker 1: that really gone at this point? And if the answer
Speaker 1: to that is no, then those structural factors are going
Speaker 1: to reassert themselves and do at least keep yields from
Speaker 1: rising out of control. Or excessively high. Now, if we
Speaker 1: start to get you know, over the next twelve months,
Speaker 1: if the data starts to you know, slow down, which
Speaker 1: we do think the rate of growth will start to
Speaker 1: slow down over the next twelve months, but still stay positive,
Speaker 1: will it be enough to generate consistent de anchored inflation.
Speaker 1: And that's the question that we have to ask ourselves.
Speaker 1: It's not is inflation a risk, Yes, it's a risk.
Speaker 1: It's always a risk. Can rates go up, sure? But
Speaker 1: is inflation becoming de anchored where we expect growth rate
Speaker 1: of prices to consistently move higher over this year, next year,
Speaker 1: or the year after, the year after that, in the
Speaker 1: year after that, And once that gets ingrained in psychology,
Speaker 1: one can think that, you know, yields could stay high.
Speaker 1: But until that starts to happen, I still think that
Speaker 1: we're in a relatively low yielding environment. And I can't
Speaker 1: dismiss a tale of two percent move in the tenure Treasury,
Speaker 1: and I can't dismiss a tale of something closer to either.
Speaker 1: It really just depends on how all of this unfolds.
Speaker 1: And Jim, that's the great story, going back to the
Speaker 1: credit story, and I'm really glad that John brought up Netflix.
Speaker 1: It's a great story and frankly it has survived and
Speaker 1: thrived during the pandemic. There are also the stories of
Speaker 1: United Air, which came out yesterday and said it would
Speaker 1: stop losing money only when business and international travel recovered
Speaker 1: to sixty of where it was back in two thousand
Speaker 1: and nine, team, which seems like a tall feat given
Speaker 1: the pace of vaccinations. Would you say, overall, on average,
Speaker 1: the majority of companies have a better balance sheet now
Speaker 1: than pre pandemic is at fifty fifty. How is the
Speaker 1: overall profile based on where it used to be? I
Speaker 1: think it's just like you said, it's very idiosyncratic, right,
Speaker 1: So it depends, you know, if you're looking at the
Speaker 1: cruise lines, if you're looking at the airlines, you're looking
Speaker 1: at some very very specific, uh, sectors of the economy
Speaker 1: that we're very very hard hit by the pandemic. When
Speaker 1: you look at say the broader industrials, when you look
Speaker 1: at say paper packaging, when you look at other areas,
Speaker 1: we could even look at leisure, all of these areas
Speaker 1: can start to actually get um, you know, better balance
Speaker 1: sheets to extent that they have been able to. Many
Speaker 1: companies have been able to refinance their debt for longer
Speaker 1: terms and at lower interest rates. So in that sense,
Speaker 1: there there there's a cohort of companies that are out
Speaker 1: there that do have stronger looking balance sheets, and that's
Speaker 1: mainly in the investment grade sectors. And I would say
Speaker 1: that many of the financials actually have come out looking
Speaker 1: like they have a lot stronger balance sheets. But then
Speaker 1: there are other sectors still, like the reopening sectors, that
Speaker 1: the sectors that get the hardest hits. So these are
Speaker 1: as you pointed out, the airlines and some of the
Speaker 1: cruise lines and things of that nature, that you know
Speaker 1: that's really going to depend on the vaccine, the rollout,
Speaker 1: how quickly that happens, how quickly people are willing to
Speaker 1: get back on an airplane and start traveling, which, by
Speaker 1: the way, I think will be pretty quick. I think
Speaker 1: the speed at which people return to that will be
Speaker 1: faster than most people think. Jim, it's gonna catch ups.
Speaker 1: As a wise Jim can Morgan Stanley Investment Management, Fixing
Speaker 1: comport Folio manage it right now? And this is a joy.
Speaker 1: Benjamin Laidler not only has done it once twice, but
Speaker 1: indeed three times in a row. He's made a major
Speaker 1: bullmarket call and been right, right right, holding cord at
Speaker 1: hsb C for years and then onto a different projects.
Speaker 1: We are thrilled that Ben Laidler gives us a first
Speaker 1: interview with eat Toro Yanny s. He is Israeli operation.
Speaker 1: It is big in digital and moving over to the
Speaker 1: equity markets, and Mr Laidler will provide global market strategy
Speaker 1: for uh TOROL. Ben Laidler, can you reaffirmed now you're
Speaker 1: very lonely double digit equity return for two thousand twenty one? Yeah,
Speaker 1: I think. Sorry, I don't think it's a forecast anymore though,
Speaker 1: I mean we're up for the year, so I think
Speaker 1: it's really a question so hanging onto what we've got when,
Speaker 1: which is is going to be you know, pretty historic, right,
Speaker 1: I mean we've had I think only twice in the
Speaker 1: last fifty years if we had this sort of three
Speaker 1: in a row strong equity markets. So yes, I think
Speaker 1: we do. Valuations are very high, but I think earnings
Speaker 1: are just going to keep keep surprising. I think first quarter,
Speaker 1: which we're obviously in the middle of reporting right now,
Speaker 1: is going to be um, you know, the latest, I think.
Speaker 1: But I still think with these sort of top line
Speaker 1: growth numbers being revised up and all this operating leverage
Speaker 1: that this earning story is going to keep is going
Speaker 1: to keep delivering, and that I think really is um
Speaker 1: you know, the fact the foundation here, given the Laidler
Speaker 1: bull market, what is your experience or guestimate of what
Speaker 1: they will do with all that cash. We're already seeing
Speaker 1: buy backs being the flavor, the favor of the moment,
Speaker 1: flavor of the moment. Yeah, I think you're going to
Speaker 1: see more of frankly everything right. I mean you're seeing
Speaker 1: more buy backs, You're seeing more dividends. I mean sort
Speaker 1: of dividend and buy back strategies have you know, recovered
Speaker 1: from beginning to recover from how badly they did last year.
Speaker 1: You know, you're going to see a pick up in
Speaker 1: CAPEX as well, which I think is really important to
Speaker 1: keep an eye on because I think, you know, we're
Speaker 1: talking a lot about this year, but really what we
Speaker 1: should be caring about is what next year begins to
Speaker 1: look like. Right, I mean consensus ove percent early go
Speaker 1: for next year that seems a little bit pedestrian compared
Speaker 1: to this year. You know, we want to see more
Speaker 1: than that. If if this rally is really going to continue,
Speaker 1: and I think CAPEX is going to be you know,
Speaker 1: capex is going to be an important part of that.
Speaker 1: And I think how consumers sort of spend down this
Speaker 1: sort of sort of access savings they have right now, Ben,
Speaker 1: you've been a stock bull. You have been right again
Speaker 1: and again. There is a question out in markets right
Speaker 1: now of whether a one point six percent treasury yields
Speaker 1: and the tenure is incoherent with the optimism that we're
Speaker 1: seeing in stocks. Well, I guess there's ten years of
Speaker 1: inflation history that or you know, or thirty years of
Speaker 1: sort of bullmarket history that would sort of argue against that.
Speaker 1: But you know, to your point, I mean, I think
Speaker 1: bond yields are going to go up. I think, you know,
Speaker 1: one of the reasons I think markets are so resilient
Speaker 1: is we've just been hugely stress tested here right with
Speaker 1: this bondy or tantrum um and and sort of markets
Speaker 1: sort of survived. So I think bond yields are going up.
Speaker 1: I think equities can survive that as long as it's
Speaker 1: sort of a moderate rise for the right reasons. I
Speaker 1: you know, growth at growth expectations continue to move higher
Speaker 1: and I fully expect that to be the case. And
Speaker 1: and just more broadly, um, you know, bondy yields are important,
Speaker 1: but it's not just about bond yields, right, I mean,
Speaker 1: bondy yields were at one point nine percent, you know,
Speaker 1: coming into last year, and markets were fine with that.
Speaker 1: And you know, bondy yields are zero or negative and
Speaker 1: the rest of the world and that's not helping their
Speaker 1: equity markets. So you know, bondyles are important, but you know,
Speaker 1: there's a lot more to that, corporate profitability and the
Speaker 1: earnings recovery, all of which I think is is very
Speaker 1: very healthy here. Corporate profitability and earnings potential. Is that
Speaker 1: isolated to the United States? Are you seeing the opportunity
Speaker 1: set shift to Europe or perhaps even beyond? Absolutely? I
Speaker 1: think this we've been in this sort of global rotation trade.
Speaker 1: I mean, it's arted off with China, so first in
Speaker 1: first out, you know, best performing major market last year.
Speaker 1: You know. Now we've had this sort of US exceptionalism
Speaker 1: with the sort of vaccine rollout and and and and
Speaker 1: the stimulus, and obviously U s sort of led the
Speaker 1: world among major markets in the first quarter. I think
Speaker 1: the story is sort of looking into the second half
Speaker 1: is the rest of the world. I mean, Europe is
Speaker 1: going to grow earnings probably twice as much as the
Speaker 1: US so in this quarter. If I look at where
Speaker 1: the economic surprises are coming from and frankic and they're
Speaker 1: coming everywhere, but they've been led by sort of Europe
Speaker 1: and the UK. So I think as you sort of
Speaker 1: look further out this um you know, I think as
Speaker 1: Europe begins to get its act together on the sort
Speaker 1: of vaccine rollout, which I think they will ultimately, I
Speaker 1: think you begin to look for some sort of catch
Speaker 1: up performance there where you know, evaluations are cheaper, earnings
Speaker 1: more depressed, and and and you know there's a much
Speaker 1: bigger sort of cychnical component of those indicries. I mean,
Speaker 1: Ben so far a year to day d sp X
Speaker 1: up eleven percent. And the big surprise there has been
Speaker 1: the reaffirmation of big tech and sort of the stories
Speaker 1: someone Ben Ladler was ready the second or the first
Speaker 1: time as well your third sound big tech? Do you
Speaker 1: participate with them? Or is the international story so compelling
Speaker 1: you've got to go there? Which is it? I think
Speaker 1: the leadership is going to be sort of international plus
Speaker 1: sort of value. But and it's a big butt. You
Speaker 1: have to believe in tech. Right. If you don't believe
Speaker 1: in tech, it's just got so big, then equities just
Speaker 1: don't work. Um and I still think the equity tech
Speaker 1: equity story still works. It's a different story. I mean,
Speaker 1: it's just sort of this longer term structural story which
Speaker 1: I think is going to keep giving. I mean, growth
Speaker 1: is still going to be very good. There's big motes here,
Speaker 1: there's high profitability. None of that is going away. But
Speaker 1: here and now you know, the catch up trade is
Speaker 1: the value. That's where you're getting this. You know, four
Speaker 1: or five times earnings leverage to what's happening on the
Speaker 1: to what's happening on the top line. M and Ben,
Speaker 1: there is a question as you talk about the global
Speaker 1: look for the opportunity, and you say that China is
Speaker 1: the first in first out, I want to bring you
Speaker 1: these headlines from a p B O c H member,
Speaker 1: basically that China has deficient equity capital. It is insufficient
Speaker 1: long term capital, and this is why they have such
Speaker 1: high macro leverage. This kind of feeds into the People's
Speaker 1: Bank of China's effort to reduce leverage in this system.
Speaker 1: Moving in the opposite direction than a lot of other
Speaker 1: central banks around the world. How does this affect your
Speaker 1: view on the assets in China, which we have seen
Speaker 1: underperforming pretty consistently over the past month at least. Do
Speaker 1: you think that that underperformance will continue based on where
Speaker 1: they are in the tightening cycle? So, so you're absolutely right.
Speaker 1: I mean, there are a different point in the cycle, right,
Speaker 1: I mean the central banks just held rates sort of
Speaker 1: four for one year. One year, right, I mean, look
Speaker 1: where the rest of the world is, right, So you
Speaker 1: know that there are a different point in the cycle.
Speaker 1: But I think there's sort of two things going on here.
Speaker 1: I mean, similarly, there's this sort of cyclical story, which
Speaker 1: I think incrementally is going to tighten, but there's a
Speaker 1: long term sort of structural story. I mean, they are
Speaker 1: going to keep opening up that capital market, both on
Speaker 1: the equity side, you know, and on the fixed income
Speaker 1: side to attract more foreign cap and I think that's
Speaker 1: going to dramatically expand the sort of bottom up opportunity
Speaker 1: set for sort of fun managers going forward. But I
Speaker 1: want you to address what I call the Friday gloom crew.
Speaker 1: There's a cottage industry at least in America. I don't
Speaker 1: know if you see it over in the pond, over
Speaker 1: in London, but there's a cottage industry that wanders out
Speaker 1: Thursday evening into Friday and reaffirms and rerationalizes the walls
Speaker 1: of worry that are out there. How do you respond
Speaker 1: to that industry? It's not I want well, you know,
Speaker 1: I want that wall to worry. Right if it didn't exist,
Speaker 1: then you know, it was your incremental buyer coming from.
Speaker 1: And I actually think markets are becoming more secure, not
Speaker 1: sort of less secure here. And I guess what I
Speaker 1: mean by that is, you know, the breadth of this
Speaker 1: recovery is now dramatically different than it was sort of
Speaker 1: last year. I mean it was all tech last year.
Speaker 1: Now sort of everything. It's sort of this everything rally
Speaker 1: right now, which I think is sort of much more sustainable.
Speaker 1: You know. The threats to the rally, I mean, the
Speaker 1: FED making a sort of policy mistake. You know, I
Speaker 1: think they'd be very consistent in their sort of messaging.
Speaker 1: So I think that risk will sort of come down
Speaker 1: a bit, and that sort of investor over exuberance. Um,
Speaker 1: you know, I think the market has been very smart.
Speaker 1: I mean you said pull back in I p O
Speaker 1: performance pulled back in sort of ev performance pulled back
Speaker 1: in sort of solar. I mean, all these sort of
Speaker 1: micro sort of bubbles that the market was maybe getting
Speaker 1: a little concerned about, I've all sort of you know,
Speaker 1: pulled back a little bit. I mean that's not the
Speaker 1: say I'm completely complacent. I mean, earnings do need to
Speaker 1: really keep delivering here with evaluations where they are. But
Speaker 1: you know, actually I think risks have been coming down
Speaker 1: a little bit, actually not not not not going up. Then, Layler,
Speaker 1: thank you so much. Congratulations for the new effort with
Speaker 1: the torial. Mr Laidler of courses enthusiastical about the market.
Speaker 1: Leaf Ferrits joins us right now with State Street, head
Speaker 1: of America's macro strategy writer of really Cogent notes, look
Speaker 1: at the Liverpool Leaf ferryge in a moment right now,
Speaker 1: I want to get to your information of a one
Speaker 1: thirty car on euro Can Germany. Can Europe stand that
Speaker 1: strong of the euro um? It won't be easy for sure,
Speaker 1: But the problem they have is what do they do
Speaker 1: about it? I mean, the bottom line is that that
Speaker 1: that the FED is not moving raids anytime soon. So
Speaker 1: what you have is a very very steep curve in
Speaker 1: the US, and that means for for for Eurozone investors,
Speaker 1: for Japanese investors, they can buy treasure is and they
Speaker 1: can hedge their effex right now, and Eurozone investor can
Speaker 1: buy treasury is tenure treasuries heads their effects for three months.
Speaker 1: They're earning a hundred and twenty basis points over buns, right.
Speaker 1: They're going to do that all day long. That means
Speaker 1: the US current account deficit does not get paid for
Speaker 1: by the bomb market, so you have a basic balance
Speaker 1: shortfall in that world, the dollar has to go down.
Speaker 1: So we saw over the last couple of months, we
Speaker 1: saw this upgrade the US growth expectations. We saw yields
Speaker 1: push up short term momentum, traders bought the dollar. We
Speaker 1: had a big underwey in the dollar that got closed out.
Speaker 1: And now as things calm down, the default for the
Speaker 1: dollar will be for the dollar to go down. If
Speaker 1: we haven't got more good news, if we haven't got
Speaker 1: rates going up, if we don't have a short squeeze,
Speaker 1: the default for the dollar will be this drift lower,
Speaker 1: drift lower, drift lower. And that's what we've seen over
Speaker 1: the last few weeks. And that's a game where we
Speaker 1: are now, and this is why for me, that's going
Speaker 1: to be the default this year. We're abouts of dollar strength,
Speaker 1: but they'll be short lived and then the default will
Speaker 1: be this dollar drift down and that's how we get
Speaker 1: to one thirties. And just in terms of the deficit,
Speaker 1: can you help us understand why this dynamic is so
Speaker 1: different to what we saw in the previous cycle. Well,
Speaker 1: the difference is the ability to hedge. The previous cycle,
Speaker 1: the FED, you know, from seventeen onwards was leading the
Speaker 1: way in terms of hiking rates, right, so they were hiking.
Speaker 1: No one else just hiking. So therefore foreign investors couldn't
Speaker 1: buy treasure is hedged because of the amount they paid
Speaker 1: on the hedge cost them all the yield premium they
Speaker 1: were picking up. So you attracted capital to the U
Speaker 1: s FX unhedged. If the FED aren't playing the game,
Speaker 1: If the Feder keeping rates down close to zero in
Speaker 1: line with everywhere else, the hedging works. So if the
Speaker 1: hedging works, the dollar goes down. And that's the difference.
Speaker 1: This time, it's the reaction function of the Fed. They're
Speaker 1: are hiking into this strength like they were in seventeen
Speaker 1: and eighteen, which pushed the dollar up. If the Fed
Speaker 1: don't hide, the dollar goes down. So let's build on that.
Speaker 1: If you want to play that theme, what's the best
Speaker 1: way of expressing it? Right now? Right now in Q two,
Speaker 1: I think I think we are getting to the state.
Speaker 1: I mean, you know, I like Eurohire, I like Dolly
Speaker 1: and Lower, but their drifts that they're they're slow, gradual grinds.
Speaker 1: I think we're actually in Q two in the stage
Speaker 1: where where EM starts to perform better again. You know,
Speaker 1: we've priced in a lot of good news for the
Speaker 1: US in an awful lot of good news in terms
Speaker 1: of growth. You know, yields have gone up, yields are
Speaker 1: now back in arrange, So you have this sort of
Speaker 1: positive growth outlook. You have yields in arrange, you're having
Speaker 1: no reaction from the FED. That's sort of an ideal
Speaker 1: world for EM. But you've got to be selective. And
Speaker 1: you mentioned before about the COVID cases going up in
Speaker 1: various places. You have to be really selective. You have
Speaker 1: to be wary of of of domestic issues as well.
Speaker 1: We like max Max is at proxy to the US.
Speaker 1: Direct proxy obviously gives you some yield. Mex is one
Speaker 1: of our favorites. We also like South Africa as a
Speaker 1: sort of reasonably liquid EM proxy as well. But but
Speaker 1: we're wary of others. But but there's there's value out
Speaker 1: there in EM just to push back against the weaker
Speaker 1: dollar story. As we have seen the dollar strengthen this
Speaker 1: year on the strength of the economy, markets are discounting mechanisms.
Speaker 1: People are going to be looking to a FED that
Speaker 1: will be tightening at some point. How concerned are you
Speaker 1: about better data spurring expectations for rate hikes even as
Speaker 1: soon as two, causing the dollar to strengthen despite all
Speaker 1: of these dynamics. That's what we've seen, Lisa, that's what
Speaker 1: we say. We've priced the first time at the end
Speaker 1: of two, we've priced another three stroke four three. What
Speaker 1: are the fat dots saying? The fat dots are saying
Speaker 1: they're not hiking through the end of twenty three and
Speaker 1: the rest root from the FED is not changing. They've
Speaker 1: got a highly growth forecast for the market for this year.
Speaker 1: They've got six and a half percent, they got unemployment
Speaker 1: rate at three and a half percent in three and
Speaker 1: still they're saying, we're not hiking rates, and you have
Speaker 1: to listen to Powe. The reaction function from the feed
Speaker 1: has changed inflation. With average inflation targeting, they can ignore
Speaker 1: transitory rises in inflation. They can look through it. They're
Speaker 1: targeting the labor market. They're targeting maximum employment, not unemployment.
Speaker 1: Maximum employment and maximum employment for all. They're looking for
Speaker 1: for underemployment to come down, they're looking for low income
Speaker 1: to go up. All the stuff we saw in eighteen
Speaker 1: and nineteen. Power wants to get back to and that's
Speaker 1: going to take time. Leefar is very direct. Chris Collins
Speaker 1: of Bloomberg News felt we were fair and unbalanced yesterday
Speaker 1: with a focus on Manchester United. What's it like to
Speaker 1: be Liverpool where last night you were tied with leads
Speaker 1: and your team is wandering off to the Super League?
Speaker 1: Were you medicated? And I will be if it carries
Speaker 1: on like this twite honestly, Tom, Yeah, it's it's it's
Speaker 1: not easy being a Liverpool found with this season hasn't
Speaker 1: been easy after after last year which was which was
Speaker 1: a gift, and then the super League news is not
Speaker 1: a positive in my mind, Lee, I'm not sure how
Speaker 1: many people out there feel sorry for Liverpool fans right now,
Speaker 1: I got that right. I've got to say we're enjoying
Speaker 1: it a little bit. It's gonna catch up Lee Ferrit's
Speaker 1: Stay streetead of American Strategy. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
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