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Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim

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Speaker 1: Box on Bloomberg Radio. Some summertime speculations about assumptions many

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Speaker 1: investors maybe holding as summer comes to a close, may

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Speaker 1: look forward to the autumn. Joining us now is Jim Paulson.

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Speaker 1: He's chief investment strategist and economist at Wells Capital Management

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Speaker 1: based in Minneapolis. Jim, welcome back to the show. Good afternoon, Kathleen. Well,

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Speaker 1: you know that it's almost state fair time here in Minnesota,

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Speaker 1: and people like to you know, of our wonderful deep

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Speaker 1: fried snickers on a stick and more. Right, and so

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Speaker 1: you just sit back and get a dose of sugar

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Speaker 1: and think about what's going on in the market. If

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Speaker 1: you if you just look at the stock market broadly,

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Speaker 1: it seems like a lot of people are still bullish

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Speaker 1: and uh they feel that there's room for the s

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Speaker 1: and p F five hundred to move higher. Are you

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Speaker 1: on board with that or do you have a little

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Speaker 1: bit of a contrarian view in there? Well, I am

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Speaker 1: pretty much on board. I think um, I think stocks

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Speaker 1: as a whole might continue to go up. UM. I

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Speaker 1: do like the international market's quite a bit increasingly better

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Speaker 1: than the United States market because I think that the

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Speaker 1: primary catalyst underneath this rally, Kathleen, is fundamentally based um

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Speaker 1: and that is I think that we might be kind

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Speaker 1: of en route here to the first sort of global

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Speaker 1: economic bounds where not necessarily we all grows real fast

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Speaker 1: or anything, but maybe we all bounced northward at the

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Speaker 1: same time for one of the rare times in this

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Speaker 1: recovery where that's occurred. And the reason that that is likely,

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Speaker 1: I think is because for the first time in this recovery,

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Speaker 1: we have synchronized global economic policies. Everyone everybody is pushing

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Speaker 1: northward on the economic cycle, from from China to Europe,

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Speaker 1: to Japan to Canada, Australia to the United States. It's

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Speaker 1: it's just across the globe and and rather than being

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Speaker 1: in conflict, all policies are aligned. And I think that

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Speaker 1: might result in the first bounce and growth. And I

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Speaker 1: think that's going to be good for stocks globally, but

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Speaker 1: probably better for stocks away from the United States, given

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Speaker 1: that the United States is going to face some full

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Speaker 1: employment pressures. But James Paulson, having central banks around the world,

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Speaker 1: been working to make this happen for almost a decade.

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Speaker 1: I disagree with that. That's where I do have a

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Speaker 1: little contrarian view, I guess PIM and that you know,

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Speaker 1: if you think about the US has persistently pushed upward

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Speaker 1: on the global cycle since this recovery began, no doubt

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Speaker 1: about them. But most of the time that we've been

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Speaker 1: doing that, we've been in conflict with other major parts

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Speaker 1: of the globe. So you gotta remember, Europe spent a

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Speaker 1: good deal of time practicing fiscal austerity in this recovery,

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Speaker 1: and it worked, it created another recession in the euro Zone.

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Speaker 1: Japan spent the better part of the first several years

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Speaker 1: of this recovery hesitant to do about anything, just didn't

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Speaker 1: really know what to do and sat frozen. It wasn't

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Speaker 1: till last couple of years they finally decided to start

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Speaker 1: to expand their balance sheet. China until about uh the

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Speaker 1: start at two thousand and fifteen, was trying to moderate

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Speaker 1: its recovery, trying to slow itself down so it wouldn't overheat.

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Speaker 1: So it's really only been last eighteen months, maybe a

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Speaker 1: little longer, that you finally have everyone pushing upwards. And

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Speaker 1: I would also argue that a lot of the resource

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Speaker 1: based economies like Cannon in Australia, they were feeling pretty

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Speaker 1: buffered from the global malaise with oil prices and client

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Speaker 1: prices doing so well until the summer of two thousand fourteen,

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Speaker 1: so they also weren't very aggressive and pushing up. But

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Speaker 1: now everybody is. And I think what's happened to your point, PIM,

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Speaker 1: is with everyone's given up any hope that policy is

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Speaker 1: gonna work, and I think for the first time it

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Speaker 1: might have its best shot of working the first time

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Speaker 1: in mind, have its best shot of working, because go ahead,

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Speaker 1: in terms of the policies, um, we're not pushing up

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Speaker 1: in the United States while your pushing down with fiscal

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Speaker 1: austerity or with China is trying to moderate for example,

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Speaker 1: we are in concert with our policies. Uh, not just

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Speaker 1: any one policy, but you know, money supply, central balance sheets,

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Speaker 1: rate structures um for the first time or in concert

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Speaker 1: at all aimed at pushing upward on the cycle. But

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Speaker 1: why should having them all in concert necessarily change your view?

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Speaker 1: I mean, if the United States has been trying to

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Speaker 1: do this for at least five years, if not more,

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Speaker 1: and what you're getting is under two percent growth in

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Speaker 1: GDP plus you're barely seeing any increase in wages. How

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Speaker 1: do you measure that as being a move higher in

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Speaker 1: the United States? Well, I've written elsewhere Pim, and I

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Speaker 1: think you raise a good point. I'm not suggesting we're

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Speaker 1: going to have uh, you know, a blowoff growth in

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Speaker 1: the word, I'm just talking over that maybe even three. Yeah,

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Speaker 1: I not for even And I've written extensively about why,

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Speaker 1: because the developed world has a lot of structural issues

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Speaker 1: that prevents that. Primarily among them is aging demographics, which

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Speaker 1: I think is holding back global growth uh dramatically it

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Speaker 1: has been for a while. That's not gonna go away

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Speaker 1: anytime soon. But could we bounce from the slightly above

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Speaker 1: two wish growth up towards high two's to three. I

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Speaker 1: think we could, And it isn't so much that growth

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Speaker 1: would be spectacular anywhere. But if we bounced from UH

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Speaker 1: two and a quarter to two and three quarters, at

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Speaker 1: the same time that Europe went from one and a

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Speaker 1: half to two, same time that Japan went from zero

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Speaker 1: to one, at the same time that China bottomed themselves

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Speaker 1: out and showed a little pick up, at the same

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Speaker 1: time the resource based economies arrested their declines. I think

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Speaker 1: for the first time something would feel very different, and

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Speaker 1: that is, all markets around the globe would be rising simultaneously.

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Speaker 1: If there's one primary reason that we haven't had a

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Speaker 1: capital spending outbreak, I would argue it's because of the

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Speaker 1: there's been the lack of a synchronized global bounce in activity,

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Speaker 1: not not so much the speed of it, but just

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Speaker 1: the lack thereof Okay, so, Jim, you're a positive. Really

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Speaker 1: this that gives you some set, some wind of the

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Speaker 1: sales of the U S stock market, possibly global equities.

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Speaker 1: Let's turn to the bond market, because it has confounded

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Speaker 1: for what four or five years now, all forecasts that

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Speaker 1: yields had to move higher, right, Uh, is this year

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Speaker 1: that they finally have to and will move higher? And

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Speaker 1: if so, well, I think so. But but I'm as

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Speaker 1: burned as the next guy in predicting higher rates. UM.

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Speaker 1: I think a couple of things I noticed in that

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Speaker 1: we I don't think the first synchronized policy stimulus is

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Speaker 1: good for the bond market ultimately if it works. UM.

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Speaker 1: In that if it does lift boats across the globe simultaneously,

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Speaker 1: I think the rate structure is you know, woefully too low,

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Speaker 1: and we'll have to readjust upwards. So I anticipate that. Uh.

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Speaker 1: I also think there's no one really left to anticipate.

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Speaker 1: I mean, there's no one left expecting it anymore. We've

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Speaker 1: all given up. Even if we kind of think that,

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Speaker 1: we don't really bet on it because we've been wrong

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Speaker 1: for so so long. The other thing is I noticed,

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Speaker 1: is you know, underneath this idea of global stagnation and

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Speaker 1: nothing's ever gonna work. If you look around the globe,

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Speaker 1: core cost have already been rising, uh noticeably different in

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Speaker 1: the last eighteen months or so. Core inflation is up,

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Speaker 1: certainly in the United States as our wages by the

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Speaker 1: biggest amounts of the recovery for the most part. But

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Speaker 1: if you look around the globe, core inflation is also

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Speaker 1: up in the Eurozone, it's up in Japan, it's up

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Speaker 1: in China, it's up in the United Kingdom from where

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Speaker 1: it was um at its lows in this recovery. So

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Speaker 1: against the backdrop of a collapse in commodity prices in

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Speaker 1: the last two years that has caught captured everyone's attention.

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Speaker 1: The headlines, consumer and price inflation numbers have been down.

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Speaker 1: Core inflation SAAN has already started to rise and so

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Speaker 1: now that we're reviving commodity prices, some of the attention

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Speaker 1: will return to these core costs and wages, and core

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Speaker 1: inflation already picking up. It wouldn't take much more. I

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Speaker 1: don't think to capture attention. If wage inflation at two

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Speaker 1: six or to go up to two seven, five or

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Speaker 1: two eight, if core inflation at two three were to

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Speaker 1: go to to six, not very big moves if that

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Speaker 1: were to happen. I think it would gain a lot

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Speaker 1: of intention from bond investors. Jim Paulson, what area of

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Speaker 1: the stock market outside the United States would you recommend

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Speaker 1: that people pay attention to? Well, I I really like

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Speaker 1: both developed emerging markets. I guess emerging markets more than

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Speaker 1: developed even but uh, you know, I think these markets

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Speaker 1: PIM have been uh you know, under performing for several years,

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Speaker 1: and by and large everyone's given up on them. So

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Speaker 1: everyone is very much overweighted the United States. And as

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Speaker 1: a result of that, if they start out for in

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Speaker 1: which they have. By the way, urging markets are beating

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Speaker 1: the US market year to date by a pretty good margin.

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Speaker 1: Developed markets are trailing just barely now year to date. Uh,

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Speaker 1: they start out form, you're gonna see a lot of

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Speaker 1: portfolios had to wait more towards international markets because they're

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Speaker 1: also woefully underweighted. Because they want to perform, They've gotten

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Speaker 1: to be much better relative values. They have companies that

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Speaker 1: are in a much early part of earlier part of

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Speaker 1: their earnings cycle compared to US companies because of their

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Speaker 1: recoveries aren't its mature as ours. They're going to continue

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Speaker 1: to have hospitable policy support, where our federal reserve is

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Speaker 1: gonna is already starting to turn away overall, and I

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Speaker 1: think the dollar is already rolling over and is likely

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Speaker 1: to weekend in the next few years as opposed to strengthen.

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Speaker 1: And I think that favors you know. I think a

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Speaker 1: diversified emerging market bet across UH multiple regions makes the

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Speaker 1: most sense. And then i'd also, I guess my of

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Speaker 1: the developed markets, I'd probably look at. Eurozone is one

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Speaker 1: of my favorites. Jim Paulson, thank you so very much.

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Speaker 1: Give as some food for thought. As summer comes to

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Speaker 1: a close. Maybe you'll be at a state fair and

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Speaker 1: you'll be able to get one of those deep fried

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Speaker 1: snickers and think about your investment strategy. I love that

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Speaker 1: tease bullish on US docks and European Equities says central

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Speaker 1: banks are in sync and that could put wind in

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Speaker 1: the equity market sales. This is Bloomberg