Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in
Speaker 1: local communities, economies and a sustainable future. That's a power
Speaker 1: of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated
Speaker 1: Member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best of economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg. Howard Ward, the CIO
Speaker 1: of Growth Equities for Gabelly Funds, kind enough to join
Speaker 1: us here in our Bloomberg eleven three oh studios in
Speaker 1: New York. Hard Great to see you once again, and
Speaker 1: let me start with when I think is an important
Speaker 1: line from one of your most recent notes. You're right,
Speaker 1: this is feeling a bit like late nineteen Help us
Speaker 1: with the historical analog here when you look at the market. Well,
Speaker 1: that's what it was, I thought, as uh, as I
Speaker 1: think many of your listeners have noticed. There's been a
Speaker 1: really tremendous rise in the technology number of the large
Speaker 1: cap technology stocks. Uh, in the last year, you'd be
Speaker 1: hard pressed to find one that has risen less than
Speaker 1: thirty percent over the last twelve months. In the case
Speaker 1: of Apple, it's about sixty above. It's a fifty two
Speaker 1: week low. Uh. You know, Amazon's up, Microsoft, Google, They're
Speaker 1: all up thirty plus. And uh, you know this is
Speaker 1: the and you're having days where some of these very
Speaker 1: large cap names will move two to three percent higher. Uh,
Speaker 1: and a market that has an amazing level of complacency. Um.
Speaker 1: And this you can see it when you look at
Speaker 1: the VIX and you can just feel it from the
Speaker 1: lack of downward pressure in stocks. Uh. We we've gone
Speaker 1: a long time since we've had a five or ten
Speaker 1: percent correction, let alone a fifteen percent correction. And Uh,
Speaker 1: it's gotten too easy to make money. It's gotten too
Speaker 1: easy to make money in large cap tech. Uh. These
Speaker 1: are great companies. They're generating a large sums of profits
Speaker 1: and free cash flow. And that's all good. But you know,
Speaker 1: at some point it probably makes sense to take some
Speaker 1: money off the table. And with respect to the stocks
Speaker 1: that I've just mentioned, I have sold a chunk of
Speaker 1: my Amazon in the last week. I still own a
Speaker 1: chunk of it, but I've I've been a seller of Amazon.
Speaker 1: Great company, but uh, you know, I think that the
Speaker 1: expectations for the overall market are somewhat inflated, and I
Speaker 1: think the expectations for Amazon are as well. How does
Speaker 1: Howard board process and earnings report when this comes out,
Speaker 1: when the Apple report comes out after the buil today,
Speaker 1: what are you gonna be looking for? What's the first
Speaker 1: thing that you check? Well, interestingly enough, in this environment
Speaker 1: that we're in, unless there was a tremendous miss, uh
Speaker 1: in terms of their revenues and earnings. Uh And and
Speaker 1: by the way, the sort of consensus expectations is two
Speaker 1: dollars and two cents of earnings for Apple for the
Speaker 1: quarter on revenues that are going to be real close
Speaker 1: to around fifty three billion dollars for which is amazing
Speaker 1: for one quarter. But unless there's a real miss, the
Speaker 1: focus is really going to be on the guidance that
Speaker 1: they give. Uh. Now you know that also is a
Speaker 1: bit tricky because Apple, I think appropriately has a tendency
Speaker 1: to downplay their guidance, very conservative guidance. And we're heading
Speaker 1: into the the introduction of the tenth anniversary phone, the
Speaker 1: next generation of the iPhone, UH probably coming out this summer,
Speaker 1: and the expectations for this are very large, and that's
Speaker 1: one of the reasons the stock has done so well.
Speaker 1: We've had this rerating of Apple shares in the last year.
Speaker 1: It's gone from ten times forward earnings to fifteen times
Speaker 1: forward earnings, which is still not exorbitant before a company
Speaker 1: of its size, where secular growth and the double digits
Speaker 1: is going to be a challenge, it's probably not far
Speaker 1: from where it's likely to peak. I don't think Apple
Speaker 1: is going to be selling it twenty times forward earnings,
Speaker 1: So the focus with the report is really going to
Speaker 1: be on the guidance. I'm assuming there's not gonna be
Speaker 1: a big mess. It's gonna be uh. There might be
Speaker 1: some news on a new dividend today. They don't always
Speaker 1: do that together with the earnings release. In fact, they
Speaker 1: frequently decouple that. So let's not get our hopes up
Speaker 1: for that. But I think it's going to be a
Speaker 1: pretty healthy report. Apple is made up of a manufacturing
Speaker 1: worry by the gloomsters over the next product won't do it.
Speaker 1: You and I know that we've all known that, folks.
Speaker 1: I mean, everybody's got this stuff. We have almost too
Speaker 1: many loggins at home on Apple, like they shut us
Speaker 1: down because we've got too many toys at home, But
Speaker 1: around it is a service sector that any other CEO
Speaker 1: in the world would die for. What's the sum of
Speaker 1: the parts valuation of Apple? Now, Well, if you've done
Speaker 1: that work recently, Well, what I can tell you Tom
Speaker 1: in the service part, Uh, it's not entirely uh separate
Speaker 1: from the phone itself because a lot of the services
Speaker 1: buying applications through the phone. But really, but but the
Speaker 1: services is about eleven percent of revenues growing in a
Speaker 1: mid teen mid to high teen rate. I'll go with that.
Speaker 1: And and uh, this should over time because it's outgrowing
Speaker 1: the rest of the company. It's going to become a
Speaker 1: bigger part of the business. It should lend a somewhat
Speaker 1: greater to a somewhat greater multiple on the company's earnings
Speaker 1: over time. It's not that material right now. UM. I
Speaker 1: think that the greater issue for Apple long term is
Speaker 1: can they protect that gross margin in the thirty nine area?
Speaker 1: Where is the gross margin created? Is it created in China,
Speaker 1: in the manufacturing process of logistics, or is it created
Speaker 1: in marketing or imagery or goodwill and bad? Well, they
Speaker 1: manage their costs very well, and they get a premium
Speaker 1: price for their product and so uh and by the way,
Speaker 1: the average selling price for the next gen phone is
Speaker 1: expected to be a new high for Apple iPhones. So uh,
Speaker 1: they have continued to defy the skeptics with the pricing
Speaker 1: power of the iPhone. And part of that there's a
Speaker 1: quality of the goods, and part of that the Apple ecosystem,
Speaker 1: which tends to tie you into their applications. Uh, and
Speaker 1: their their their music, and of course they're now getting
Speaker 1: into the area of video content as well. How do
Speaker 1: you mentioned you sold some of your your Amazon stock
Speaker 1: are you? Are you recommending that more broadly? Is this
Speaker 1: a time to a time to sell? Well? I think
Speaker 1: if anybody is sensitive to uh short term market results,
Speaker 1: if they have a tax exempt account, even taxable, if
Speaker 1: you're looking for an exit, what are you waiting for?
Speaker 1: Um You know Amazon, it is a great company, but
Speaker 1: you know it too was up more than more than
Speaker 1: in the last year. And um I can recall back
Speaker 1: in the first quarter of two thousand, which was the
Speaker 1: last up quarter for the bullmarket of the nineties, and
Speaker 1: and and and um I took four hundred million dollars
Speaker 1: of capital gains and technology stocks that quarter doing it
Speaker 1: when I felt like maybe I was a little early,
Speaker 1: but there was the stocks had just gone too far,
Speaker 1: too fast. Um. And that's why I say it feels
Speaker 1: like that again now that it's it's it's gotten too easy.
Speaker 1: You need to take some money off the table here.
Speaker 1: The valuations are more of a challenge than they have been,
Speaker 1: and you're getting more retail investment in these stocks, and
Speaker 1: of course the impact that E t f S is
Speaker 1: is very much part of that. So yeah, I would
Speaker 1: take some money off the table unless you're really committed
Speaker 1: to keeping your position for a long period of time.
Speaker 1: I would let me ask you a bit about growth.
Speaker 1: We've heard the administration talk so much about the potential
Speaker 1: for three percent growth, for percent growth, certainly the unveiling
Speaker 1: of the White House tax proposal, we heard it again
Speaker 1: at what your sense of what the economy is going
Speaker 1: to do domestically, Well, let's start with the sort of
Speaker 1: expectations are right around two percent growth plus or minus
Speaker 1: point to uh for this year and next, and so
Speaker 1: the Trump administration would need to get much more successful
Speaker 1: with their legislative agenda in order to ask, you know,
Speaker 1: improve on that but let's go back to the mathematics
Speaker 1: of how you improve your GDP growth, because it's pretty simple.
Speaker 1: You can have your existing workforce work more hours. That's
Speaker 1: probably not gonna result in much. You can add to
Speaker 1: your labor force and that's a one half of one percent,
Speaker 1: maybe a one percent boost at most. Or you can
Speaker 1: improve your the productivity of your workforce, and productivity has stalled,
Speaker 1: you know, that's a one percent or less than one
Speaker 1: percent improvement these days, and so it's really hard to
Speaker 1: get a rate of growth north of two percent. And
Speaker 1: that's why we haven't done it for a while. Can
Speaker 1: you can you change the tax code and engineer growth
Speaker 1: or three or fourth three or four percent for a
Speaker 1: few quarters? Yes, But unless you can go back to
Speaker 1: the equation of the productivity and labor force and how
Speaker 1: are you going to improve that, it's not going to
Speaker 1: be sustainable. Our word with us with good belly funds, David,
Speaker 1: I think we need to talk to edge funds. Two
Speaker 1: in t Yeah, our colleague Eric Shoutsker, number of our
Speaker 1: colleagues are at the Milk and Institute Global Conference in
Speaker 1: Beverly Hills, and there are some great interviews yesterday. More
Speaker 1: will be on our air, both on radio and television. Today,
Speaker 1: Eric Shatsker sat down with Ken Griffin, the head of Citadel,
Speaker 1: and they had a very wide ranging conversation in which
Speaker 1: they talked about investing, They talked about the political landscape.
Speaker 1: But in Washington they talked about, as you say, the
Speaker 1: status of the future of hedge funds. Here's what he
Speaker 1: had to say. It's not just a shakeout for the
Speaker 1: hedge fund industry, it's a shakeout for active management. Right
Speaker 1: we see the rise of passive money in ETFs and
Speaker 1: index products. We're seeing money come out of active management
Speaker 1: and head towards passive structures. Now, as that happens, the
Speaker 1: money that's in passive structures obviously is not pursuing elpha
Speaker 1: in the same way. That should make the markets a
Speaker 1: little less efficient, but should create a larger profit pool
Speaker 1: for those who remain. So we're gonna find a new
Speaker 1: equilibrium over the months and years to come. Passive's gonna
Speaker 1: be bigger, Active is gonna be smaller, and the firms
Speaker 1: that are best able to assemble, analyze, and incorporate information
Speaker 1: in their investment decision making processes are going to continue
Speaker 1: to earn outsize returns can't grif from there. The head
Speaker 1: of Citadel speaking with Pelli Garic Shatzker yesterday, we've had that,
Speaker 1: We've we've been following this debate for so long, the
Speaker 1: active versus passive today. What did you hear there from
Speaker 1: Mr Griffin? Well, that was interesting. And there's one Greek
Speaker 1: letter in there that there's discussion here, and that is alpha, beta, gamma, delta, vega, theta.
Speaker 1: They all mean different things to different people. But the
Speaker 1: thrust of this, David, is so many of our listeners
Speaker 1: are just trying to beat a benchmark, or even make
Speaker 1: the benchmark. That's the advantage of passive. You're gonna make
Speaker 1: the index, or maybe you want to beat the index.
Speaker 1: Robert Kirby was a legend at Capital Guardian Trust in
Speaker 1: Los Angeles, and he would say, boy, if you can
Speaker 1: make two percentage points better and the SMP, you're living large.
Speaker 1: Mr Bogol and Vanguard has said maybe you will, some will,
Speaker 1: many won't. Alpha is different. Alpha's trying to make it
Speaker 1: so that you can get a two percent hedge fund
Speaker 1: fee and pick up twenty of the gain over some
Speaker 1: hurdle rate. It's totally different than like your four oh
Speaker 1: one K and so you've got to be careful about
Speaker 1: the conflation of those two strains of thought. There is
Speaker 1: less alpha to be had. This interview happened about one
Speaker 1: thirty yesterday, one thirty Wall Street time, right after our
Speaker 1: colleague spoke with the President United States, and Eric asked
Speaker 1: Mr Griffin what he thought about that proposal the President made,
Speaker 1: or the fact that he's considering the breaking up the
Speaker 1: big banks, and Ken Griffin telling him he's in favor
Speaker 1: of breaking up the big banks. He says he favors
Speaker 1: a new glass Steagle and said he saw some opportunity
Speaker 1: there for Citadel if that were if that were to happened.
Speaker 1: Ken Griffin a long time Republican donor, somebody who as
Speaker 1: an affiliated member of that of that party, has given
Speaker 1: a lot of money to that party. He talked a
Speaker 1: lot about Washington the context of that. If you said
Speaker 1: a hundred days is not enough time to judge with
Speaker 1: the President, well yeah, I'll go with that, but you know,
Speaker 1: I would defer to the hedge fund manager Michael the Key,
Speaker 1: who has actually looked around at what people are going
Speaker 1: to do about this incredibly exciting idea of a new
Speaker 1: redux of nineteen thirty three banking uh to take us
Speaker 1: back there. It was a pretty ugly time for the nation.
Speaker 1: And to remind everyone, Glass Steagle's not an act, it's
Speaker 1: not even a legislation. It's it's it's some paragraphs slid
Speaker 1: into a very slim three yet profound thirty four combo.
Speaker 1: No one's talking about any kind of reform, and particularly today, David,
Speaker 1: you're not going to get a slim act today. I
Speaker 1: mean just look at a voluminous DoD Franks Yeah, or
Speaker 1: even that funding billed at the House and saidn't have
Speaker 1: to vote on two thousand pages. They're going to be
Speaker 1: presumably finding their way through this week. Ken Griffin saying
Speaker 1: his biggest concern in the coming years the US could
Speaker 1: slide into recession. I wrote, Eric Shouts grafted this interview.
Speaker 1: He very elegantly asked Ken Griffin about Citadel, noting that
Speaker 1: a lot of people have said it's a tough shop
Speaker 1: to work in. People come through, they get chewed, chewed up,
Speaker 1: and they move on. And I thought that Ken Griffin
Speaker 1: was like he said, there's a lot of good people
Speaker 1: availble to hire. I would suggest people listen to Mr
Speaker 1: Ackman's interview with Francy Lay. I thought the New York
Speaker 1: Times did a nice treatment on Mr Paulson today in
Speaker 1: the cover of their Business section. All these guys is
Speaker 1: Ken mentions there are really struggling to have the opportunity
Speaker 1: for return, opportunity for alpha, given how dampened volatility is
Speaker 1: across asset classes. And I mean the VIX ten point
Speaker 1: one six with that nine print yesterday is symbolic of
Speaker 1: a lot of other asset classes as well. You can
Speaker 1: check out all these interviews on the Bloomberg at tv go.
Speaker 1: Of course you can look at at Bloomberg dot com.
Speaker 1: It's well Bill Ackman and Ken Griffin and a number
Speaker 1: of other ones. Can we talk, say, John, can we
Speaker 1: do two Greek letters and one interviewer? Is that too
Speaker 1: much data? Was that the optunity in college? No? I
Speaker 1: wasn't looking for. That was a sorority. This is Bloomberg.
Speaker 1: This is a great pleasure. I will probably talk to
Speaker 1: Chairman Bernankey about this. We'll see how much time I
Speaker 1: have David Gurrow joining us now. Next year will be
Speaker 1: the twentieth anniversary of Against the Tide. It was definitive.
Speaker 1: If you were cool, you carried Douglas Irwin's Against the
Speaker 1: Tide hardcover around with you. Some people, Doug actually read it.
Speaker 1: Hard to believe. I guess maybe the President United States
Speaker 1: didn't read it. But let me ask you right now,
Speaker 1: in two thousand and seventeen, to vamp off of Paul
Speaker 1: Krugman's Ricardo's Dilemma, what you and Professor Krugman do in
Speaker 1: international economics and international trade is complex, isn't it. I mean,
Speaker 1: what Ricardo did on comparative advantage is a tough concept
Speaker 1: to grasp, isn't it. Actually just a few weeks ago, um,
Speaker 1: it was two anniversary of David Ricardo's theory of comparative advantage. Uh,
Speaker 1: And I've written about that. Krugman's written about that in
Speaker 1: his little essay called Ricardo's Difficult Idea. And as we
Speaker 1: know in the classroom, it's very difficult even with bright
Speaker 1: twenty year olds to talk about this idea of compared
Speaker 1: to advantage. That's certainly tough in the policy realm as well.
Speaker 1: Is it difficult to talk to a grizzled seventy year
Speaker 1: old sitting in the Oval office as well about comparative advantage? Well,
Speaker 1: he does seem that he has this zero some you know,
Speaker 1: a view of trade, and I don't know where that
Speaker 1: comes from his business background as UHM sino owner or
Speaker 1: property developer, where you know, in the casino, if the
Speaker 1: house wins, you lose in property. Either you get the
Speaker 1: property or someone else does. But international trade is a
Speaker 1: very different activity where both countries can benefit from exchanging
Speaker 1: goods and services with one another. Professor, And what are
Speaker 1: we learning about this administration's trade policy at this point?
Speaker 1: We've been citing an interview that our colleagues did with
Speaker 1: the President yesterday. He said he's already to rewrite revise
Speaker 1: and after just waiting on the Democrats in the Congress
Speaker 1: to give him the authorization to do that. Of course,
Speaker 1: there's all this formality with the letter having to be
Speaker 1: sent in this and that. But we certainly saw the
Speaker 1: countervailing duties imposed last week on uh softwood. Talk of
Speaker 1: that happening with Darry wilber Ross now looking at aluminum
Speaker 1: as well. What are we learning about the priorities of
Speaker 1: this administration when it comes to trade. Well, I think
Speaker 1: the administration is learning that politics is difficult. Their divisions
Speaker 1: within the administration about how hard alignes take on China
Speaker 1: and on Mexico and NAFTA, and also divisions between the
Speaker 1: executive branch in Congress over what to do as well.
Speaker 1: You've seen some pushback from members of Congress who are
Speaker 1: afraid of just ripping up NAFTA because Mexico will retaliate
Speaker 1: against our farm ex sports. So we get Republicans members
Speaker 1: of Congress from the Midwest farm states who are very
Speaker 1: much against that. Now, in terms of some of the
Speaker 1: other things you pointed out in UH softwood lumber or
Speaker 1: some of the anti anti dumping and countervailing duties, these
Speaker 1: are actually sort of relatively small product specific trade skirmishes
Speaker 1: that occur under any administration, So that's not really attacked
Speaker 1: or a switch in terms of Trumpet administration. But I
Speaker 1: do expect you'll see many more of those UH, smaller
Speaker 1: problems cropping up as well. When you talk to the
Speaker 1: sector of commerce, he says a priority for the administration
Speaker 1: is more enforcement. Looking back on the last few administrations,
Speaker 1: to what degree was enforcement prioritize? What what stands to
Speaker 1: change here? What stands changes that Usually enforcement depends on
Speaker 1: the private sector petitioning the government, So an import competing
Speaker 1: industry will say no imports are being dumped in the market.
Speaker 1: This is unfair. They notify the government, and the government
Speaker 1: launches an investigation. What the Trumpet administration promises to do
Speaker 1: is be much more proactive, not wait for the private
Speaker 1: industry to file a case, but actually say we're going
Speaker 1: to initiate cases on our own. And the statute that
Speaker 1: they've chosen to invoke now is a very obscure provision
Speaker 1: in the U s Trade Lock dating back in the
Speaker 1: nine saying national security is an issue. So that was
Speaker 1: the case they announced just a couple of weeks ago
Speaker 1: regarding a steal um, and so I think we're gonna
Speaker 1: get any more trade cases that they themselves are going
Speaker 1: to start the initiation process and not wait for the
Speaker 1: private sector to to begin on their own. Professor ages ago,
Speaker 1: you did a wonderful compendium of Jacob Viner of Chicago
Speaker 1: lectures in Economics three oh one. What should we learn
Speaker 1: from Jacob Viner about mercantile is m Well, you're Jacob
Speaker 1: Viner is one of the great students of mercantilism, one
Speaker 1: of the great scholars of all time in terms of
Speaker 1: international trade. He wrote a terrific book called Studies in
Speaker 1: the Theory of International trade, and he wrote in the
Speaker 1: nineteen thirties and forties, and in particularly the period when
Speaker 1: the US was trying aft World or two to set
Speaker 1: up this new institution called the GAT the General Agreement
Speaker 1: on Tarifs and Trade, to try to bring down trade
Speaker 1: barriers around the world. And he was a little bit
Speaker 1: skeptical that they could pull this off, because he realized
Speaker 1: that the pull of mercantiless thinking, the worry about that
Speaker 1: is going to harm the domestic economy if we open
Speaker 1: up to trade. Um is so powerful in the public's
Speaker 1: minds and in the minds of politicians that it's a
Speaker 1: very difficult thing to do. And yet remarkably, over the
Speaker 1: past sixty seventy years or so, the US has exerted
Speaker 1: that tremendous leadership in bringing down trade berries around the world,
Speaker 1: and I think worldwide ecomic prosperity today that we see
Speaker 1: owe something to that. Douglas Irwin, thank you so much.
Speaker 1: With Dartmouth Coology as a wonderful book coming out later
Speaker 1: this year on our Trade policy Vintage two thousand seventeen.
Speaker 1: I just put on Twitter David Gura his classic Against
Speaker 1: the Tide. I also put out Krugman's David Ricardo piece
Speaker 1: which is must must must read of the frustration of
Speaker 1: pros and talking about how trade can benefit societies even
Speaker 1: with a massive labor disruption in the wild, dispersion of
Speaker 1: wages and income. And I even did a photograph of
Speaker 1: Jacob Viner's classic summary by Douglas Irwin, brought you by
Speaker 1: Bank of America. Mary Lynch, dedicated to bringing our clients
Speaker 1: insights and solutions to meet the challenges of a trans
Speaker 1: forming world. That's the power of global connections, Mary Lynch,
Speaker 1: Pierce Federan Smith Incorporated, Member s I p C. There's
Speaker 1: something new from Bloomberg. It's called Lens. Starting right now,
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Speaker 1: In addition, see all the bios of the key people
Speaker 1: mentioned in the story. It's called lens, and it is
Speaker 1: just that, a lens into the people and the data
Speaker 1: of any story you may be reading. Again, Lens brings
Speaker 1: you the power of Bloomberg's news and data download or
Speaker 1: Io s app or search for the Bloomberg extension at
Speaker 1: the Chrome Store to try Lens out. Learn more at
Speaker 1: Bloomberg dot com slash lens. Talking earlier about the Greek letters,
Speaker 1: we're elthinging it about Ken Griffith at Citadel as well.
Speaker 1: Maybe it's time to theta Julian. Emmanuel joins us with UBS.
Speaker 1: He's does derivatives and equities for UBS. Will usually keep
Speaker 1: the conversation sort of not simple, but you know, focused
Speaker 1: on where we're going in stocks and bonds. I guess
Speaker 1: we could do that, Julian, but I want to talk
Speaker 1: about how everybody's smart. And there's a lot of research
Speaker 1: about the time function, the theta function on the X
Speaker 1: axis until you blow up in the bottom line is
Speaker 1: a lot of research, folks, is somewhere in the vicinity
Speaker 1: of three years. You can be a genius. You can
Speaker 1: be smart. You can be oh I got out of that. Okay,
Speaker 1: you can be a genius. You can be smart four
Speaker 1: times a row, and then whammo, you get hit by
Speaker 1: one negative event. And that happens to every hedge fund,
Speaker 1: and frankly it happens to me. David Gura, John Tucker,
Speaker 1: you've never enjoyed the six experience because you're going up, up,
Speaker 1: up for hours. I'm an investment genius, yes, Julian. How
Speaker 1: do you protect yourself from blowing up? In the land
Speaker 1: of data? It is a challenge because basically, when the
Speaker 1: market volatility is as low as it is now, it
Speaker 1: sort of seduces you into taking more risk than you
Speaker 1: might normally. Uh. We saw that in two thousand and
Speaker 1: six and two thousand and seven. That was when the
Speaker 1: concept of our value at risk got debunked. Basically, at
Speaker 1: this point in the cycle eight years in, you need
Speaker 1: to remain disciplined, and that means don't take on more
Speaker 1: leverage than then you believe you can handle. And when
Speaker 1: you think about things that are causing you to perhaps
Speaker 1: reassess the position a stock, what what have you? Uh?
Speaker 1: Theta is actually very inexpensive right now. And hedges make
Speaker 1: sense when when you see the vix where it was yesterday,
Speaker 1: how do you react and what do you do? Disbelief
Speaker 1: to be perfectly frank, because part of this entire story,
Speaker 1: getting back to THEDA, the fact that that, uh, you know,
Speaker 1: money should have some sort of time value. Um, we
Speaker 1: would have thought that with the FED beginning the rate hike, cycle,
Speaker 1: and we think they're going to hike in June. Um,
Speaker 1: that there would be a higher value to THEATA than
Speaker 1: there is now. But so to us. You know, again,
Speaker 1: it comes down to selectively looking at one's portfolio when
Speaker 1: things are a little bit too out of whack or
Speaker 1: you feel a bit uncomfortable. And frankly, we're seeing clients
Speaker 1: do that now thinking about hedging their US exposure as
Speaker 1: they turned towards Europe. Um, it is a perfect time
Speaker 1: to take advantage of THEADA as they turned towards Europe.
Speaker 1: What what do you like in Europe right now? What's
Speaker 1: what's attracted to you there? Well, if Europe is going
Speaker 1: to work, Um, obviously political risk is is dead ahead
Speaker 1: of us on Sunday. But if Europe is going to work,
Speaker 1: it's going to be different than when it worked, uh
Speaker 1: to a large extent in the first quarter of two
Speaker 1: thousand and fifteen. It's going to work because the economy
Speaker 1: is going to accelerate, perhaps uh pound for pound a
Speaker 1: little bit more than the US economy is going to accelerate,
Speaker 1: and so that leads us towards the cyclicals chemicals. Dare
Speaker 1: I say financials Um? Well, we do, um, you know,
Speaker 1: and and again exporters, because this time the exporters aren't
Speaker 1: going to be as affected by a gently rising euro,
Speaker 1: which will happen, um if political risk becomes somewhat less
Speaker 1: next week, and if the economy does better because they're
Speaker 1: exporting to emerging markets who are picking up as well.
Speaker 1: Let's go back to the VIX ten point zero nine.
Speaker 1: We had a nine handle. I went back once folks,
Speaker 1: I looked at the daily charts of the VIX, maybe
Speaker 1: even Introdut, I can't remember right now. It is ray
Speaker 1: Her now Julian to be where we are. If we're
Speaker 1: rare here, why are we at down twenty two thousand?
Speaker 1: Why is volatility so low if we're not bursting out
Speaker 1: to massive record hize. Well, it actually has something to
Speaker 1: do with and I don't know exactly what the Greek
Speaker 1: letter for this is, is something called low correlation. So basically,
Speaker 1: on a day to day basis, for the last three months,
Speaker 1: if you're looking at the Dow, you're looking at the SMP,
Speaker 1: it goes nowhere and nowhere very quickly. Um. And what
Speaker 1: that means is the stocks underlying those indexes are all
Speaker 1: moving in different directions day to day, minute to minute
Speaker 1: and the reason that's happening, in our view, is because
Speaker 1: there's this incredible disconnect between what everyone likes to call
Speaker 1: the hard data where the economy actually is, and the
Speaker 1: soft data the confidence uh that you know gets tweeted
Speaker 1: about so often um, and the market is waiting for
Speaker 1: those two to reconcile. How do you like the VIX
Speaker 1: when you look at measures of volatility? What does it
Speaker 1: offer you versus versus others? Well, it's it's one of
Speaker 1: those things in our business generally, the simplest, most accepted
Speaker 1: measure is the one that makes the most sense. Their
Speaker 1: derivatives of the VIX, there's you know, double levered inverse
Speaker 1: and so on and so forth. But at its simplest
Speaker 1: it just measures, you know, the perception of the risk
Speaker 1: and the fear out there. And again, to us, it's
Speaker 1: one of those things we and and at extremes we
Speaker 1: tend to lose this perspective. The VIX is a mean
Speaker 1: reverting instrument, and the long run average is nineteen versus ten.
Speaker 1: This more, let's get philosophical, folks. Is philosophical Tuesday is
Speaker 1: cash an asset, absolutely, and it's becoming a more valuable
Speaker 1: asset with with you know every piece of fed Rederick.
Speaker 1: How do you position yourself for Sunday night or or
Speaker 1: Monday morning. Tom's gonna position himself at buying up a
Speaker 1: getting some burgundy in Paris. But what are you doing
Speaker 1: to get ready for that a life You see the
Speaker 1: polling and see indications of where it's likely to go.
Speaker 1: How do you prepare for what happens once we do
Speaker 1: get the official results? Well before events such as this,
Speaker 1: what you really should do is plan where you think
Speaker 1: you want to be several weeks in advance. And actually,
Speaker 1: when we think about the run up to both Brexit
Speaker 1: and the U s election, this one is a little different.
Speaker 1: People are saying, my goodness, hedges didn't didn't make any
Speaker 1: sense post Brexit, post the US elections, so I'm not
Speaker 1: going to pay up for hedges, which is why the
Speaker 1: vix is where it is today. What you really want
Speaker 1: to do is have your portfolio in a situation where,
Speaker 1: if you know the the volatile event occurs, you imagine
Speaker 1: yourself to be a buyer down ten percent in the
Speaker 1: US markets. Um Likewise, if the markets start running away,
Speaker 1: you don't want to be chasing that to the upside.
Speaker 1: Is this discussion that we're having all about the great distortion?
Speaker 1: Is it just about the effect of central bank theory
Speaker 1: and practice upon the fixed income market? Did you just
Speaker 1: carry that right through and process it right through the equities? Absolutely?
Speaker 1: I mean historians will be I'm just trying out my
Speaker 1: questions for Ben brunnki on you you know, run by
Speaker 1: Julian Emmanuel at first. Uh, the historians will look at
Speaker 1: this period in awe because literally, you know, the suppression
Speaker 1: of interest rates worldwide, and part of what is potentially
Speaker 1: the allure of Europe next week is that the risk
Speaker 1: on mood, if it materializes, is going to take some
Speaker 1: pressure off the rate markets, and you know, we might
Speaker 1: start seeing you know, positive yields in some other instruments
Speaker 1: that might long been might exactly, but it determines everything
Speaker 1: we I'm looking at the German two year right now
Speaker 1: negative point seven one nine, not in your record lows,
Speaker 1: but still very suppressed towards a larger negative yield everything considered.
Speaker 1: I also look at the Swiss twenty year. That's positive,
Speaker 1: but that isn't going anywhere. Nothing's talking positive yields here
Speaker 1: on my Bloomberg screen. We'll continue with Julian Emmanuel of
Speaker 1: Ubs Julian Emmanuel to Dove Chowel with this from Ubs Julian,
Speaker 1: have you been surprised by earnings? To me from a distance,
Speaker 1: it's actually, oh, they're pretty good, am I right on that,
Speaker 1: absolutely absolutely? Um, you know this rises are coming from
Speaker 1: where we expected them to. Obviously, energy the year on
Speaker 1: year compare is very easy to remember the plunge below
Speaker 1: thirty dollars in the first quarter of sixteen. Financials had
Speaker 1: a tough quarter last year as well, and that's been
Speaker 1: a big bright spot. We continue to like financials and technology.
Speaker 1: This is the second straight quarter of just knocking the
Speaker 1: cover off the ball. So the picture looks pretty good
Speaker 1: to us. What are you looking for today in the
Speaker 1: Apple report? What's it going to tell you about the
Speaker 1: state of the market overall? When you get better market well,
Speaker 1: we tend to focus on on the individual report by
Speaker 1: report all that much. But what will be interesting is
Speaker 1: if on the happenstance that there's a uh talk about cash,
Speaker 1: because um, that is one of the biggest holders of
Speaker 1: offshore cash. And when we think about tax reform, repatriation
Speaker 1: is a big part of the puzzle, and we think
Speaker 1: that's part of the reason that technology in general has
Speaker 1: outperformed here today. Glad you bring this up, because that
Speaker 1: was a facet of this tax reform proposal that the
Speaker 1: White House released last week. And we can quibble over
Speaker 1: what's gonna stay and what's gonna go, But based on that,
Speaker 1: do you begin to game out what that could mean
Speaker 1: for a company like Apple, what could mean for a sector,
Speaker 1: as I say, the tech sector, for for companies that
Speaker 1: have cash overseas, what that might mean for the bottom line, Absolutely,
Speaker 1: no question about it. And to us, they're the opportunity um.
Speaker 1: In November and December of last year, when you know,
Speaker 1: industrials and the deepest cyclicals got bit up, whereas healthcare
Speaker 1: and technology, the two sectors with the largest offshare cash balances, underperformed.
Speaker 1: Was was something coming into seventeen that we thought was
Speaker 1: was really a great opportunity. We've seen those sectors outperformed,
Speaker 1: and the fact is, when you think about it, we
Speaker 1: think they're going to continue out performing simply because when
Speaker 1: you look at tax reform, repatriation is the one thing
Speaker 1: that both sides of the aisle seem to be able
Speaker 1: to agree on. Jennifer Jacobs, one of our reporters who
Speaker 1: sat down with the pressures because it was on the show. Yeah,
Speaker 1: talking about that interview and the degree to which the President,
Speaker 1: over the course of it, continue to maintain that we're
Speaker 1: going to get to three or four percent growth here
Speaker 1: in the US. And something that Jennifer pointed out was
Speaker 1: he seems to be doing this too make the markets
Speaker 1: think that this is happening, whether or not it's happening
Speaker 1: soon later. How is that playing here in your world?
Speaker 1: What the President is saying by talking about tax form
Speaker 1: and the prospects for healthcare reform, even if we're not
Speaker 1: seeing much movement, is the only thing that matters, the
Speaker 1: fact that he's still talking about it. Well, when you
Speaker 1: look at the confidence numbers, clearly the talk has helped,
Speaker 1: there's no question about it. But again to us, when
Speaker 1: you look at a first quarter where GDP came in
Speaker 1: at point seven versus these confidence numbers that are literally
Speaker 1: at all time highs uh, you know its It brings
Speaker 1: back that old Wendy's commercial where's the beef? You really
Speaker 1: need to see the economy pick up and move towards
Speaker 1: where the confidence numbers are. Are we in a trap now?
Speaker 1: Multiple stocks call it almost I mean it is, but
Speaker 1: there there is this valuation. Are we at a point
Speaker 1: where we're beginning to rationalize ownership by buying not one
Speaker 1: year out or two years out, but farther out revenues
Speaker 1: rings in cash flow. Are we falling into that, well,
Speaker 1: it'll be a good value in two thousand nineteen trap.
Speaker 1: There's definitely an element of that in the marketplace, but
Speaker 1: I would suggest it's more in the sectors where growth
Speaker 1: is you know, tends to be at a lower plane
Speaker 1: for longer. Consumer staples utilities in particular, we see some
Speaker 1: very high multiples there um And you know, frankly, if
Speaker 1: all of of the plans are going to unfold and
Speaker 1: the FED is going to hike and we are going
Speaker 1: to normalize, and we are going to achieve north of
Speaker 1: two percent GDP growth next year, interest rate sensitive stocks,
Speaker 1: low growth stocks, even when they beat on earnings, are vulnerable.
Speaker 1: What are you looking at outside of quis when you
Speaker 1: look at say the currency space, what what? What's what
Speaker 1: are you drawn to at this point? What? What pairs? Uh? Oh,
Speaker 1: definitely dollar euro is is absolutely in the focus because
Speaker 1: to us, and again, unlike two thousand and fifteen, when
Speaker 1: you're about performed, it was completely due to a week
Speaker 1: Euro trade. The whole thesis was exporters are going to
Speaker 1: do great because the Euro is crashing, oil is crashing,
Speaker 1: so on. This is completely the opposite set of circumstances.
Speaker 1: We want to see the Euro strength and as a
Speaker 1: sign that the global economy is is stable and accelerating. Julian,
Speaker 1: thank you for the up you and Emanuel with w
Speaker 1: b US there and particularly like the conversation on data.
Speaker 1: We rarely talk about theta are the xxes now we
Speaker 1: have a Washington intergy. Yeah, we continue to to look at,
Speaker 1: talk about analyze the interview that our colleagues, Margaret Talvin
Speaker 1: Jennifer Jacobs did yesterday with the President of the United States.
Speaker 1: They were in the Oval Office with President Donald Trump
Speaker 1: for about half an hour yesterday having a wide, ranching
Speaker 1: interview with him. Margaret tal Of, our senior White House correspondent,
Speaker 1: joins us. Now, Margat, let me just start with where
Speaker 1: you guys started with that interview. The hundred day marker
Speaker 1: had passed. You wanted to look ahead with the president.
Speaker 1: What did you set out to do here in this interview? Well, yes, thanks,
Speaker 1: we set out to talk to him for as absolutely
Speaker 1: long and would keep us in there. Uh, look, we
Speaker 1: wanted to see where he was going now looking forward, UM,
Speaker 1: you know, sort of a a mixed review or a
Speaker 1: humbling review of his first hundred days. He had the
Speaker 1: Supreme Court nominee, but in terms of most of the
Speaker 1: major other initiatives, they have at least been sort of
Speaker 1: stuck or in process. But he obviously has his mind
Speaker 1: and not a number of different areas and sort of
Speaker 1: the big news he made in our interview, um well
Speaker 1: all seem to circle around the theme of things he'd
Speaker 1: be willing to do that would upend orthodoxy or defy expectations. Right,
Speaker 1: his potential theoretical willingness to have for him to be
Speaker 1: the person doing a direct talk with Kim John on
Speaker 1: if it comes to that. Um, the notion that he
Speaker 1: might be willing to uh look at living in a
Speaker 1: gas tax, which would you know, would be very controversial
Speaker 1: among Republicans as well as some folks who would advocate
Speaker 1: for sort of middle class folks gas prices, etcetera. And
Speaker 1: then this idea of breaking up the big banks. All
Speaker 1: of these uh in sort of you know, different um
Speaker 1: channels would all upend orthodoxy, uh potentially depending on how
Speaker 1: he pursued them. Yeah, and you you too. You and
Speaker 1: Jennifer weren't Dickerson Ushion part because we didn't hit the
Speaker 1: Obama wire tap question hard. But and it's certainly like
Speaker 1: if it had an a half hour. I mean, I'm
Speaker 1: absolutely curious about that. But look, we're Bloomberg and we're
Speaker 1: incredibly interested in all things economy, and he was interested
Speaker 1: in talking about them. He knew exactly what he was
Speaker 1: talking to, he knew exactly whose attention he was trying
Speaker 1: to get, and uh, you know Wall Street banks, uh,
Speaker 1: and Congress. There was a tremendous amount of interest and reaction,
Speaker 1: although reaction I would say with kind of a let's
Speaker 1: wait to see what he's talking about sort of feel
Speaker 1: to it. Margaret, thank you for your comments. The other
Speaker 1: night I was watching on c SPAN the White House
Speaker 1: Correspondents Dinner. I thought those were important, uh comes that
Speaker 1: you made when when I look at Trump in the analysis,
Speaker 1: I don't read your stuff, Margaret. I go to Trump
Speaker 1: draws out on Twitter, and my question to you is
Speaker 1: when he's doing the joke of Trump draws and the
Speaker 1: last one is I thought it would be easier there's
Speaker 1: all these people standing behind them. They seem to have
Speaker 1: evaporated in the last forty eight hours. Who is providing
Speaker 1: support to our president on the various and Sunday statements
Speaker 1: of the last thirty hours or is he really going
Speaker 1: it alone right now? His staff as top aids UH.
Speaker 1: In the course of this sort of post under days reset,
Speaker 1: it seemed to be in more reactive mode, in part
Speaker 1: because they're not entirely prepared for all the things that
Speaker 1: he's saying. But I think we will see Gary constevenution
Speaker 1: working both on the Hill and in their public comments
Speaker 1: to try to sort of put offense and boundaries around
Speaker 1: what he's teasing with regard to banks when it comes
Speaker 1: to um foreign policy. You're looking on at least behind
Speaker 1: the scene that at this being sort of again the
Speaker 1: job for hr McMaster for jamatics and for Rex Tillerson UH,
Speaker 1: and on a more public face for his team both
Speaker 1: in the press operation in the National Security Council at
Speaker 1: the sort of dial back some of what he said
Speaker 1: about Kim John and say, well, look, he's preserving his options,
Speaker 1: he's talking about what's possible, but we are not there yet.
Speaker 1: But again, this has left a lot of Republicans on
Speaker 1: the Hill sort of saying, we need to really understand
Speaker 1: what he's talking about when he's seeking we're getting some
Speaker 1: mixed signals here. We understand he wants to keep possibilities
Speaker 1: does and keep people guessing, but we need a little
Speaker 1: more certainty. David quickly, Yeah, Margaret, very quickly. We're talking
Speaker 1: to Marty Shanker just about the message or what he
Speaker 1: learned from that interview about the relationship between the President
Speaker 1: and Congress. And in the hour that has passed since
Speaker 1: we talked with Marty Shanker, your boss, our senior executive
Speaker 1: editor for International Government, President Trump has tweeted here about
Speaker 1: our country needing a good shutdown in September to fix
Speaker 1: the mess How's that going to ring out over Capitol Hill? Well,
Speaker 1: I read it a little bit. I read it as
Speaker 1: a as a dare to Republicans to consider pursuing the
Speaker 1: nuclear option for legislation as well as for for the
Speaker 1: judiciary and for the Supreme Court. And so, uh, look,
Speaker 1: maybe he's telling Democrats get yourself in order or else.
Speaker 1: I'm willing to go there on a shutdown, But I
Speaker 1: think the messaging may even be more complex and be
Speaker 1: dealing with the balance of power. That what distinguishes the
Speaker 1: Senate from the House, and President Trump's are to consolidate
Speaker 1: power around himself. From Margaret, keep the president away from
Speaker 1: the red button on the desk, the one for the
Speaker 1: coke of the pepsi. Yeah, cocon pepsi. Margaret Till, thank
Speaker 1: you so much with the important interview, yes, seriously important
Speaker 1: interview yesterday with the President of the United States. Uh, David,
Speaker 1: what do you make of this? You're covering the Washington
Speaker 1: beat much more than I am. Synthesized this for us
Speaker 1: as as you can do. It's it's fascinating to to
Speaker 1: read through the transcripts of these interviews. About about a
Speaker 1: week ago we got interview the AP did with the
Speaker 1: President and you can really see sort of how he
Speaker 1: talks about these things, comes to talk about them in
Speaker 1: this interview. In the transcript for this interview, you see
Speaker 1: him pausing, wrestling with what to say, acknowledging, as we've
Speaker 1: heard from Marty and from Margaret, he recognizes the news,
Speaker 1: making no of of what he's what he's saying. UM,
Speaker 1: I agree with Margaret. I see I see the dare
Speaker 1: here The line before that one about the shutdown changed
Speaker 1: the rules nowt to fifty one percent, as Margaret was
Speaker 1: alluding to, that would be a pretty radical reformation of
Speaker 1: how uh, the world's most famous deliberative body works in Washington.
Speaker 1: I would suggest that maybe in any regard, he just
Speaker 1: needs to focus on the here in present. And isn't
Speaker 1: that the health care legislation? No, I think it's healthcare
Speaker 1: to get the Thursday based on what I've read, I
Speaker 1: mean that they don't have the votes right now, folks.
Speaker 1: The lights are on until Friday night at last. Yeah,
Speaker 1: I would say, well, but that's normal. I would say
Speaker 1: that that comest is normal as well. Thanks for listening
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