WEBVTT - Paulsen on Outlook for Financial Markets (Audio)

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hayes and Pim

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<v Speaker 1>Box on Bloomberg Radio. Some summertime speculations about assumptions many

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<v Speaker 1>investors maybe holding as summer comes to a close, may

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<v Speaker 1>look forward to the autumn. Joining us now is Jim Paulson.

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<v Speaker 1>He's chief investment strategist and economist at Wells Capital Management

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

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

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<v Speaker 1>and people like to you know, of our wonderful deep

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<v Speaker 1>fried snickers on a stick and more. Right, and so

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<v Speaker 1>you just sit back and get a dose of sugar

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<v Speaker 1>and think about what's going on in the market. If

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<v Speaker 1>you if you just look at the stock market broadly,

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<v Speaker 1>it seems like a lot of people are still bullish

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<v Speaker 1>and uh they feel that there's room for the s

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<v Speaker 1>and p F five hundred to move higher. Are you

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<v Speaker 1>on board with that or do you have a little

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<v Speaker 1>bit of a contrarian view in there? Well, I am

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<v Speaker 1>pretty much on board. I think um, I think stocks

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<v Speaker 1>as a whole might continue to go up. UM. I

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<v Speaker 1>do like the international market's quite a bit increasingly better

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<v Speaker 1>than the United States market because I think that the

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<v Speaker 1>primary catalyst underneath this rally, Kathleen, is fundamentally based um

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<v Speaker 1>and that is I think that we might be kind

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<v Speaker 1>of en route here to the first sort of global

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<v Speaker 1>economic bounds where not necessarily we all grows real fast

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<v Speaker 1>or anything, but maybe we all bounced northward at the

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<v Speaker 1>same time for one of the rare times in this

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<v Speaker 1>recovery where that's occurred. And the reason that that is likely,

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<v Speaker 1>I think is because for the first time in this recovery,

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<v Speaker 1>we have synchronized global economic policies. Everyone everybody is pushing

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<v Speaker 1>northward on the economic cycle, from from China to Europe,

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<v Speaker 1>to Japan to Canada, Australia to the United States. It's

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<v Speaker 1>it's just across the globe and and rather than being

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<v Speaker 1>in conflict, all policies are aligned. And I think that

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<v Speaker 1>might result in the first bounce and growth. And I

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<v Speaker 1>think that's going to be good for stocks globally, but

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<v Speaker 1>probably better for stocks away from the United States, given

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<v Speaker 1>that the United States is going to face some full

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<v Speaker 1>employment pressures. But James Paulson, having central banks around the world,

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<v Speaker 1>been working to make this happen for almost a decade.

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<v Speaker 1>I disagree with that. That's where I do have a

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<v Speaker 1>little contrarian view, I guess PIM and that you know,

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<v Speaker 1>if you think about the US has persistently pushed upward

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<v Speaker 1>on the global cycle since this recovery began, no doubt

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<v Speaker 1>about them. But most of the time that we've been

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<v Speaker 1>doing that, we've been in conflict with other major parts

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<v Speaker 1>of the globe. So you gotta remember, Europe spent a

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<v Speaker 1>good deal of time practicing fiscal austerity in this recovery,

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<v Speaker 1>and it worked, it created another recession in the euro Zone.

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<v Speaker 1>Japan spent the better part of the first several years

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<v Speaker 1>of this recovery hesitant to do about anything, just didn't

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<v Speaker 1>really know what to do and sat frozen. It wasn't

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<v Speaker 1>till last couple of years they finally decided to start

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<v Speaker 1>to expand their balance sheet. China until about uh the

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<v Speaker 1>start at two thousand and fifteen, was trying to moderate

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

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<v Speaker 1>So it's really only been last eighteen months, maybe a

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<v Speaker 1>little longer, that you finally have everyone pushing upwards. And

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<v Speaker 1>I would also argue that a lot of the resource

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<v Speaker 1>based economies like Cannon in Australia, they were feeling pretty

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<v Speaker 1>buffered from the global malaise with oil prices and client

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<v Speaker 1>prices doing so well until the summer of two thousand fourteen,

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<v Speaker 1>so they also weren't very aggressive and pushing up. But

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

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<v Speaker 1>is with everyone's given up any hope that policy is

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<v Speaker 1>gonna work, and I think for the first time it

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<v Speaker 1>might have its best shot of working the first time

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<v Speaker 1>in mind, have its best shot of working, because go ahead,

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<v Speaker 1>in terms of the policies, um, we're not pushing up

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<v Speaker 1>in the United States while your pushing down with fiscal

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<v Speaker 1>austerity or with China is trying to moderate for example,

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<v Speaker 1>we are in concert with our policies. Uh, not just

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<v Speaker 1>any one policy, but you know, money supply, central balance sheets,

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<v Speaker 1>rate structures um for the first time or in concert

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<v Speaker 1>at all aimed at pushing upward on the cycle. But

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<v Speaker 1>why should having them all in concert necessarily change your view?

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<v Speaker 1>I mean, if the United States has been trying to

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<v Speaker 1>do this for at least five years, if not more,

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<v Speaker 1>and what you're getting is under two percent growth in

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<v Speaker 1>GDP plus you're barely seeing any increase in wages. How

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<v Speaker 1>do you measure that as being a move higher in

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<v Speaker 1>the United States? Well, I've written elsewhere Pim, and I

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

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<v Speaker 1>going to have uh, you know, a blowoff growth in

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

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<v Speaker 1>I not for even And I've written extensively about why,

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<v Speaker 1>because the developed world has a lot of structural issues

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<v Speaker 1>that prevents that. Primarily among them is aging demographics, which

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<v Speaker 1>I think is holding back global growth uh dramatically it

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<v Speaker 1>has been for a while. That's not gonna go away

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<v Speaker 1>anytime soon. But could we bounce from the slightly above

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<v Speaker 1>two wish growth up towards high two's to three. I

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<v Speaker 1>think we could, And it isn't so much that growth

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<v Speaker 1>would be spectacular anywhere. But if we bounced from UH

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<v Speaker 1>two and a quarter to two and three quarters, at

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<v Speaker 1>the same time that Europe went from one and a

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<v Speaker 1>half to two, same time that Japan went from zero

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<v Speaker 1>to one, at the same time that China bottomed themselves

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<v Speaker 1>out and showed a little pick up, at the same

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<v Speaker 1>time the resource based economies arrested their declines. I think

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<v Speaker 1>for the first time something would feel very different, and

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<v Speaker 1>that is, all markets around the globe would be rising simultaneously.

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<v Speaker 1>If there's one primary reason that we haven't had a

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<v Speaker 1>capital spending outbreak, I would argue it's because of the

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

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<v Speaker 1>not not so much the speed of it, but just

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

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<v Speaker 1>this that gives you some set, some wind of the

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<v Speaker 1>sales of the U S stock market, possibly global equities.

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<v Speaker 1>Let's turn to the bond market, because it has confounded

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<v Speaker 1>for what four or five years now, all forecasts that

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<v Speaker 1>yields had to move higher, right, Uh, is this year

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<v Speaker 1>that they finally have to and will move higher? And

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<v Speaker 1>if so, well, I think so. But but I'm as

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<v Speaker 1>burned as the next guy in predicting higher rates. UM.

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<v Speaker 1>I think a couple of things I noticed in that

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<v Speaker 1>we I don't think the first synchronized policy stimulus is

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<v Speaker 1>good for the bond market ultimately if it works. UM.

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<v Speaker 1>In that if it does lift boats across the globe simultaneously,

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<v Speaker 1>I think the rate structure is you know, woefully too low,

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

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<v Speaker 1>I also think there's no one really left to anticipate.

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

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<v Speaker 1>all given up. Even if we kind of think that,

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<v Speaker 1>we don't really bet on it because we've been wrong

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<v Speaker 1>for so so long. The other thing is I noticed,

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<v Speaker 1>is you know, underneath this idea of global stagnation and

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

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<v Speaker 1>core cost have already been rising, uh noticeably different in

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<v Speaker 1>the last eighteen months or so. Core inflation is up,

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<v Speaker 1>certainly in the United States as our wages by the

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<v Speaker 1>biggest amounts of the recovery for the most part. But

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<v Speaker 1>if you look around the globe, core inflation is also

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<v Speaker 1>up in the Eurozone, it's up in Japan, it's up

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<v Speaker 1>in China, it's up in the United Kingdom from where

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<v Speaker 1>it was um at its lows in this recovery. So

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<v Speaker 1>against the backdrop of a collapse in commodity prices in

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<v Speaker 1>the last two years that has caught captured everyone's attention.

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<v Speaker 1>The headlines, consumer and price inflation numbers have been down.

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<v Speaker 1>Core inflation SAAN has already started to rise and so

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<v Speaker 1>now that we're reviving commodity prices, some of the attention

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<v Speaker 1>will return to these core costs and wages, and core

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<v Speaker 1>inflation already picking up. It wouldn't take much more. I

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<v Speaker 1>don't think to capture attention. If wage inflation at two

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<v Speaker 1>six or to go up to two seven, five or

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<v Speaker 1>two eight, if core inflation at two three were to

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<v Speaker 1>go to to six, not very big moves if that

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<v Speaker 1>were to happen. I think it would gain a lot

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<v Speaker 1>of intention from bond investors. Jim Paulson, what area of

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<v Speaker 1>the stock market outside the United States would you recommend

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<v Speaker 1>that people pay attention to? Well, I I really like

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<v Speaker 1>both developed emerging markets. I guess emerging markets more than

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<v Speaker 1>developed even but uh, you know, I think these markets

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<v Speaker 1>PIM have been uh you know, under performing for several years,

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<v Speaker 1>and by and large everyone's given up on them. So

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<v Speaker 1>everyone is very much overweighted the United States. And as

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<v Speaker 1>a result of that, if they start out for in

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<v Speaker 1>which they have. By the way, urging markets are beating

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<v Speaker 1>the US market year to date by a pretty good margin.

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<v Speaker 1>Developed markets are trailing just barely now year to date. Uh,

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<v Speaker 1>they start out form, you're gonna see a lot of

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<v Speaker 1>portfolios had to wait more towards international markets because they're

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

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<v Speaker 1>to be much better relative values. They have companies that

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<v Speaker 1>are in a much early part of earlier part of

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<v Speaker 1>their earnings cycle compared to US companies because of their

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

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<v Speaker 1>to have hospitable policy support, where our federal reserve is

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<v Speaker 1>gonna is already starting to turn away overall, and I

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<v Speaker 1>think the dollar is already rolling over and is likely

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<v Speaker 1>to weekend in the next few years as opposed to strengthen.

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<v Speaker 1>And I think that favors you know. I think a

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<v Speaker 1>diversified emerging market bet across UH multiple regions makes the

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

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

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<v Speaker 1>of my favorites. Jim Paulson, thank you so very much.

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<v Speaker 1>Give as some food for thought. As summer comes to

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<v Speaker 1>a close. Maybe you'll be at a state fair and

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<v Speaker 1>you'll be able to get one of those deep fried

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<v Speaker 1>snickers and think about your investment strategy. I love that

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<v Speaker 1>tease bullish on US docks and European Equities says central

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<v Speaker 1>banks are in sync and that could put wind in

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<v Speaker 1>the equity market sales. This is Bloomberg