Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: events structure this year is extraordinary. We've got Brad Stone
Speaker 1: and Emily Chang with a technology conference which is world class.
Speaker 1: Look for that in the coming weeks. And right now
Speaker 1: this moment in New York, there is Bloomberg Invests. Brian
Speaker 1: moynihan will be speaking from Bank of America, otherworthies, Raydale.
Speaker 1: I believe mister Drucon Miller is going to darken the door.
Speaker 1: That's all fine and well, and there will also be
Speaker 1: tactical discussion around Bloomberg Invests leading that. As Seamas Show,
Speaker 1: our chief global strategist of Principal Asset Management, who joins
Speaker 1: us this morning. I love Seema, how buried in your
Speaker 1: note you have We are underweight in some way equity
Speaker 1: slightly underweight. You know, you got the adverbs going there.
Speaker 1: How do you do an equity strategy when you see
Speaker 1: what Nvidia is doing?
Speaker 2: Now?
Speaker 3: Oh well, okay, so within our slight underweight to equities,
Speaker 3: we actually have an overweight to large cap. The reason
Speaker 3: we have the way overweight to large caps which we
Speaker 3: made back in February, was actually a cyclical reason, which
Speaker 3: was threefold. One was that you have we believe a
Speaker 3: slow downcoming potential recession. We have the towards the end
Speaker 3: of the FED hiking cycle. And the third thing is
Speaker 3: that large caps typically have a greater international exposure revenue
Speaker 3: than you do in your small cap So that was
Speaker 3: a reason. And now you've added in the Nvidia. So
Speaker 3: actually that is playing out fairly well. But of course
Speaker 3: you have to think about your S and P five
Speaker 3: hundred target. Could it go back to the September low? Well,
Speaker 3: last techer is doing this world. The maths just doesn't
Speaker 3: add up.
Speaker 2: Master does an add up for the S and P.
Speaker 2: Then that's that one hundred. Does the mass add up
Speaker 2: for the US stocks fifty?
Speaker 3: That's an interesting one, the U stocks fifty. I mean,
Speaker 3: we keep having this conversation with clients about US exceptionalism
Speaker 3: about six months ago, Everyone's like, well, look maybe for
Speaker 3: the next decade we could have higher inflation. This is
Speaker 3: value trade. Therefore, Europe is in the ascendency. And then
Speaker 3: you have this movement back INTOAI. Sorry, and actually the
Speaker 3: US is back and that's what everyone is talking about.
Speaker 3: And certainly from our perspective, yes, as a cyclical or
Speaker 3: as a tactical trade. At the moment, the US is
Speaker 3: not our favorite region. But if you're looking out of
Speaker 3: a ten year period, do you want to be focused
Speaker 3: on the US or Europe? Well, it's one hundred percent
Speaker 3: in US.
Speaker 2: Back home, you've just come from London. How are they
Speaker 2: thinking about this now? They've been parlering into our VMH
Speaker 2: stock was flying data out of China starts to weaken.
Speaker 4: Are they abandoning that trade quickly?
Speaker 5: Yeah?
Speaker 3: I think there's a lot of disappointment, and I think
Speaker 3: they're quickly cutting those positions. And the thing is is
Speaker 3: that look at the moment, so many people are positioned
Speaker 3: for bearishness in the in the broad market. They've got
Speaker 3: a cut wherever makes the most sense, where there isn't
Speaker 3: as much confusion, And I think with the China story,
Speaker 3: there is a general feeling that this is going to
Speaker 3: be very disappointing the second half of the year. It
Speaker 3: could still reach slightly the GDP target, but we're not
Speaker 3: looking anything like the kind of stimulus measures that we
Speaker 3: would have seen in previous cycles. So, yes, the China
Speaker 3: trade is coming down, and actually as a result of that,
Speaker 3: because of the European exposure to China that is also
Speaker 3: coming down as well.
Speaker 6: You said that people are looking for ways to express
Speaker 6: their bearish views. They're struggling to find the places. What
Speaker 6: other places are you seeing them express their bearish views
Speaker 6: at a time when it's dangerous to do so, and
Speaker 6: it's unclear the best way to really express that.
Speaker 3: Well, if you have if you can do broad asset allocation,
Speaker 3: then really the place to be focused is fixed income.
Speaker 3: Core fixed income is your best place to show that bearishness. Quality, defensive,
Speaker 3: those are the areas probably hig yield is not the
Speaker 3: area that you want to be focusing on. You if
Speaker 3: you believe that a slow down is cup and then
Speaker 3: there's a core part of it, which is still alternatives
Speaker 3: that that trade continues to play on fairly well. It
Speaker 3: provides really good diversification. I mean, we saw that during
Speaker 3: the SVB crisis, the things like infrastructure continue to perform
Speaker 3: extremely well. So if you are one of the people
Speaker 3: that believes that there is an economic slow downcoming, there
Speaker 3: are ways to play this which maybe are not as
Speaker 3: controversial as cerny what you see for the equity market, have.
Speaker 6: You shifted your view in terms of what you believe
Speaker 6: is defensive? And I ask this because we keep hearing
Speaker 6: about how Apple and some of the big tech stocks
Speaker 6: have gone from high beta interst rate sensitive sectors to
Speaker 6: suddenly the star warts of the market, the engines of growth,
Speaker 6: the place that you have to be if you want
Speaker 6: to be safe. Are you buying that?
Speaker 3: Well, look, the growth trade is typically where you want
Speaker 3: to go if you believe that the economic environment is
Speaker 3: turning more negative. That has always been the case. Only
Speaker 3: all of our models show that same story. The AI
Speaker 3: is that additional secular story where there may be well
Speaker 3: be froth, but certainly we bind the idea that technology,
Speaker 3: and not just AI, but technology is for the future.
Speaker 3: We actually made a very reluctant decision to color tech
Speaker 3: exposure last year, in last January in twenty twenty two,
Speaker 3: because of the FAED hiking cycle coming up. But we
Speaker 3: continue to be the long term believers in tech, which
Speaker 3: is why we went in. Plus, the very important cyclical fact.
Speaker 2: Is, well the start twenty two that was the right
Speaker 2: decision because tech was just brutal. Can I just finish
Speaker 2: on the loads of October? Where are you on the
Speaker 2: loads of October now? Because we used to go back
Speaker 2: and forth about whether we'd retest those lows they're twenty
Speaker 2: points ago, we've had a twenty percent rally off the bottom.
Speaker 2: Are we retesting those loas?
Speaker 3: I'll be honest, I think this is a really, really difficult
Speaker 3: decision to make. So look, the tech story means that
Speaker 3: it's unlikely, right you could see a little bit of
Speaker 3: a pullback because of the froth in the market. Yes,
Speaker 3: But if you don't get that pullback and you get
Speaker 3: the momentum story that Julian was talking about yesterday, if
Speaker 3: you get that momentum pulling up the rest of the market,
Speaker 3: and actually then you're getting a melt up potential deeper
Speaker 3: recession down the line. I do believe if you don't
Speaker 3: get a recession sooner, the later it is, the harder
Speaker 3: it becomes. So you want to get this out the way.
Speaker 3: And if that happens, then maybe you get another move up,
Speaker 3: but next year it'll be a tougher story.
Speaker 2: Same it good to say in New York. Great to
Speaker 2: catch up of principals and management.
Speaker 1: Briefing US now. Marilyn Watson with Black Rocketed Global Fundamental
Speaker 1: Fixed Income Strategy, Maryland. The pain in the bond market
Speaker 1: is down seventeen percent on the Bloomberg Total Return Index
Speaker 1: and we've come back six or seven percent. We've come back.
Speaker 1: Just a simple question, now, what do you presume price up,
Speaker 1: yield down? Do you assume a new leveling or do
Speaker 1: we revisit price down yield up.
Speaker 7: Yeah, So, as you say, we've seen a huge amount
Speaker 7: of holacility in fixing markets.
Speaker 5: In particular this year, which has exceeded that.
Speaker 7: In the equity market in the markets as well. I
Speaker 7: think now that we've seen the resolution of the debt
Speaker 7: ceiling negotiations and then seventy around that, we now know
Speaker 7: that we're going to have a huge amount of issuance
Speaker 7: coming the US treasure We needs to build up the
Speaker 7: TJ balance again, so we know we have a lot
Speaker 7: of issuance coming there, and that amount of supply obviously
Speaker 7: will need to be absorbed by the market. On the
Speaker 7: other hand, that is going to also obviously, you know,
Speaker 7: train some sort of liquidity from the system as well.
Speaker 7: But I think at the moment, you know, when we
Speaker 7: talk about f MC rhetoric, when we look at the
Speaker 7: data coming through, we saw, you know, in terms of
Speaker 7: the jobs data, the name market remains incredibly tight. We
Speaker 7: have seen some softening in terms of sentiment obviously, and
Speaker 7: you know other data, but you know, consumers continue to spend,
Speaker 7: the real estate housing market remains on a pretty solid footing,
Speaker 7: and so the economy actually in the US remains on
Speaker 7: a very us putting at the moment. And so I think,
Speaker 7: you know, coming into next week to say, all eyes
Speaker 7: will certainly be on the CPI data. Inflation is still
Speaker 7: you know, far above the Fed's target, and so they
Speaker 7: may choose to pause or to skip or have you
Speaker 7: want to phrase it. But it's certainly not a dunde
Speaker 7: that there won't be more hikes to come. But I think,
Speaker 7: you know, they need to absorb and continue to look
Speaker 7: at the lags in the transmission, you know, the previous
Speaker 7: rate hikes.
Speaker 1: So take that excuse me, take that MAC review and
Speaker 1: bring it over to a strategy. Do you manage for
Speaker 1: coupon or do you manage for total return?
Speaker 7: Well, we try to manage for both. So I think
Speaker 7: if you have a very flexible, you know, unconstrained approach
Speaker 7: to fixed income, you can have both. And so at
Speaker 7: the moment you can have very high quality, decent carry,
Speaker 7: which given spreads today, you also do have a decent
Speaker 7: amount of buffer. Now you would have to see a
Speaker 7: significant repricing from here to actually see you know, a
Speaker 7: further loss in total return. So I think you can
Speaker 7: have both.
Speaker 8: What we try to do is construct.
Speaker 7: Portfolio where you know, we have you know, low volatility,
Speaker 7: where we have decent carry, decent liquidity, and we have
Speaker 7: a very wide range of different positions as well, so
Speaker 7: we can take advantage of relative value positions where we're
Speaker 7: stripping out the beta effectively. And you know, in today's
Speaker 7: environment where we see a lot more dispersion between individual
Speaker 7: bond issuers in between the individual names, it's much easier
Speaker 7: as well to capture that relative value. You know, we're
Speaker 7: taking advantage of the different valuations between you know, for example,
Speaker 7: some names and emergent markets in her yield in investment
Speaker 7: grade corporate, So I mean think the bond market today
Speaker 7: is a very different beast to the one that was
Speaker 7: a year ago, five years ago, and I think the
Speaker 7: amount of opportunities out there now are so much larger
Speaker 7: that you know, if you can construct a very very
Speaker 7: balanced portfolio with a lot of different risk factors, you
Speaker 7: can get both the income and the carry, but you
Speaker 7: can also help to protect returns.
Speaker 6: I can't remember the last time the two massive bond
Speaker 6: shops have had such divergent views on where long term
Speaker 6: rates are going to go. And I'm thinking of you
Speaker 6: Black Rock as well as JP Morgan Asset Management that
Speaker 6: see you've got by Michael saying the entire curve is
Speaker 6: going to be at three percent or below in the
Speaker 6: near term. How do you push back against that, that
Speaker 6: feeling that we are not going to go back to
Speaker 6: a low rate era and see something that does depart
Speaker 6: from the past twenty years.
Speaker 7: So I think, first of all, we do think that
Speaker 7: inflation it's coming down, but it's going to remain elevated
Speaker 7: and at the higher levels than we've seen in previous cycles.
Speaker 7: I think, you know, inflation is or it looks like
Speaker 7: it's going to be relatively persistent. Secondly, I think the
Speaker 7: FED is going to remain higher for longer as well,
Speaker 7: And as I say, you know, it may well move more.
Speaker 7: We'll see what they do next next week and in
Speaker 7: the coming months as well. But given the economic data
Speaker 7: we have at the moment, then it's highly likely or
Speaker 7: very possible that the FED could hype again and then
Speaker 7: they say, we have this huge amount of issuance you
Speaker 7: know that's coming in the market as well. And I
Speaker 7: mean on the other side of that, obviously, we do
Speaker 7: have a lot of demand from investors who are still
Speaker 7: parked in cash or who are parked in money market
Speaker 7: funds and you know, somewhat on the sidelines. But I
Speaker 7: think when you look at long term, when you look
Speaker 7: at the economy, when you look at growth, and you're
Speaker 7: talking about the tech sector before, we're continuing to see
Speaker 7: huge amount of investment in that area that's continuing to
Speaker 7: drive productivity. So I think there are a huge number
Speaker 7: of factors that mean that you know, inflation and rates
Speaker 7: will remain higher for longer.
Speaker 6: How much higher Where do you see the curve kind
Speaker 6: of settling out at.
Speaker 5: So it's hard to see.
Speaker 7: I mean, we could see a little bit higher sort
Speaker 7: of you know, from here over the next few months,
Speaker 7: depending on how the economic data comes through, depending on
Speaker 7: what we see in terms of the stresses that continue
Speaker 7: toble through in the in the banking sector and elsewhere.
Speaker 7: I mean, I think there are reasonable levels now if
Speaker 7: you look at you know, certainly the fixing market compared
Speaker 7: to the stock market, then you know, I would say
Speaker 7: the actually market maybe is overpriced, but I think from
Speaker 7: here you could see them.
Speaker 5: A little bit higher.
Speaker 7: But it really depends on the data that we see
Speaker 7: coming through in terms of inflation, in terms of the
Speaker 7: economy over the next few months.
Speaker 2: Usually it's the equity people commenting on bonds. Mount and
Speaker 2: that was a comment on equities there. It's kind of
Speaker 2: interesting to me. I've heard that a couple of times
Speaker 2: now in the last twenty four hours. Mounting the bond
Speaker 2: investors thrown some shade at equities.
Speaker 4: What's that about.
Speaker 7: Well, it's been a long time coming, John, I could
Speaker 7: say that, I you know, I really think that that
Speaker 7: now the bond market has a huge amount of values.
Speaker 4: Off Mountain Watson a Blackrock Mountain. Thank you.
Speaker 1: We need a political brief here. She's hugely popular with
Speaker 1: all of you. Thank you so much for supporting Wendy
Speaker 1: shil Or Brown University, Director of the tomb And Center
Speaker 1: for American Politics. Give me the history here on how
Speaker 1: people of low polling either party can advance towards the primaries.
Speaker 1: If I see from five thirty eight to fifty four percent,
Speaker 1: DeSantis less than half that, and the others are all
Speaker 1: single digit. Is there any history, Professor Schiller, of single
Speaker 1: digity people doing better?
Speaker 8: No, no cstantial history. I mean, you remember the expression
Speaker 8: the big mo, and we were talking about George Herbert
Speaker 8: Walker Bush way back when God about the big mo,
Speaker 8: and people perceived other people as more impalatable, and he
Speaker 8: ended up getting the nomination in nineteen eighty eight, for example.
Speaker 8: So I think that the issue here is the difference
Speaker 8: for Donald Trump in August when the first debate comes,
Speaker 8: is that everybody on the stage will be attacking him
Speaker 8: in this subtle way, but they are going to use
Speaker 8: him as the target. That's a new position for him.
Speaker 8: He wasn't really the front runner when he first announced.
Speaker 8: When we first got to the stage, he emerged as
Speaker 8: a star.
Speaker 5: But everybody else is trying to make their own case.
Speaker 8: Now they have to attack him subtly not to anger
Speaker 8: his supporters.
Speaker 5: And make a case for themselves.
Speaker 8: That's the big problem for the debate for everybody challenging Trump.
Speaker 8: You do that, well, there's not enough airtime in a
Speaker 8: debate with ten people. If that's how my people are
Speaker 8: going to be on the stage.
Speaker 1: Professor, you have a definitive textbook, which you know is
Speaker 1: great Civics one oh one on America. I told you once, Wendy,
Speaker 1: that you needed to rename the textbook follow the money.
Speaker 1: Is that what this is about? I mean, are all
Speaker 1: these people running because of a financial advantage in running?
Speaker 5: Well?
Speaker 8: That has become a new cottage industry that you know,
Speaker 8: with the advent of social media and the way of
Speaker 8: making a reputation without the mainstream media, then you have
Speaker 8: a way of getting speaking gigs, of raising donations.
Speaker 5: I mean, it just changes everything.
Speaker 8: But I still think you need the biggest money donors
Speaker 8: to make it through the primary season to really launch
Speaker 8: a challenge to Trump.
Speaker 5: For example, you need Chris Christy. Where's you going to
Speaker 5: get the money. There's a couple of people in Jersey that.
Speaker 8: Have given a lot of money to the Republican presidential
Speaker 8: campaigns in the past.
Speaker 5: Are they going to back Christie? Are they going to
Speaker 5: back Mike Pence.
Speaker 8: I mean, with enough really big money, you can run
Speaker 8: enough ads in some states may be that not me,
Speaker 8: but not super solid to dent him. But where are
Speaker 8: those big money donors going to line up? They haven't
Speaker 8: really announced for Trump, but they aren't really lining up.
Speaker 5: We saw a little movement towards the Santis, but.
Speaker 8: Then they backed off when you had a pretty disastrous
Speaker 8: front announcement of was a campaign.
Speaker 5: So now where do they go? That will make a.
Speaker 8: Difference, exactly as John's saying, between now and August, those
Speaker 8: signals are going to be important.
Speaker 6: One other signal it's going to be important's whether there's
Speaker 6: unification among the different Republican candidates on some key issues
Speaker 6: that affect the money that you're following, such as trade.
Speaker 6: How much is this sort of a unified view not
Speaker 6: only against China but in general in a more sort
Speaker 6: of regionalization of trade, a pullback from sort of the
Speaker 6: traditional globalization models.
Speaker 8: Well, Lisa, this is an amazingly important point because our
Speaker 8: primary is just no regional right, and so you still
Speaker 8: need the big money to worry about regulation and free
Speaker 8: trade and taxes, and that's pretty constant.
Speaker 5: That's what they've always worried about. But they also want
Speaker 5: stability and certainty.
Speaker 8: They don't want chaos, they don't want unpredictability.
Speaker 5: And it's funny because it's not funny.
Speaker 8: But Trump, you know, presents pretty chaotic future. We don't
Speaker 8: know what he's ever going to do in any given moment.
Speaker 8: But now DeSantis has proven to be someone who may
Speaker 8: not be predictable.
Speaker 5: Who may kind of want to jump the shark in
Speaker 5: terms of.
Speaker 8: Regulating business with his few but Disney, is he really
Speaker 8: a reliable investment? And that's what I think businesses are
Speaker 8: looking for traditional Republican platform, but it's also coupled with
Speaker 8: certainty and competence in terms of smooth government running.
Speaker 5: We saw McCarthy sent that signal.
Speaker 8: Clearly to Wall Street. I will make sure the trains
Speaker 8: run on time and I won't crash the economy. One
Speaker 8: big question, very clear signal.
Speaker 6: One big question I keep hearing from analysts on Wall
Speaker 6: Street is if the rhetoric on both sides of the
Speaker 6: aisle is rewarded, if it's inflammatory towards TIA, in particular,
Speaker 6: saying that we want to isolate them, we are in
Speaker 6: a huge rivalry with them. How are we going to
Speaker 6: soften the tensions even as Tony Blinket heads over to Beijing.
Speaker 8: Well that's I mean, I think the question is how
Speaker 8: much cheology or how much credibility do these Republican candidates
Speaker 8: for president have on foreign policy?
Speaker 5: You know, Trump made China the enemy, right, you know,
Speaker 5: very large tariffs.
Speaker 8: And then with COVID, you know, blaming China.
Speaker 5: How's he going to walk that back? He's not going
Speaker 5: to be able to do that.
Speaker 8: And Ron DeSantis, you know, just had a big Asia
Speaker 8: trip trying to sell himself as somebody who can negotiate
Speaker 8: the world stage.
Speaker 5: You know, Mike Pence has a pretty calm demeanor. What's
Speaker 5: he going to do? How is he going to sell
Speaker 5: himself this way?
Speaker 8: And the rest of the candidates don't really have except
Speaker 8: for Rinickki Haley have a lot of foreign policy experience.
Speaker 8: So who's got the credibility in the Republican primary on
Speaker 8: China and China.
Speaker 5: Doesn't even know?
Speaker 8: I mean, who do you really look to and say
Speaker 8: this person could get elected and we can do business
Speaker 8: with them. You know, that's where Biden has been somewhat
Speaker 8: measured with China, as you just point out, you know,
Speaker 8: Secretary Stata sort of attacking China but not attacking China,
Speaker 8: and that's going to be somewhat calming as a signal,
Speaker 8: I think to the business community, Wendy.
Speaker 2: This one nine that we haven't mentioned Kevina Youngkin Wheny
Speaker 2: does this feeling at the moment from people I speak
Speaker 2: to that the worst that governed descentist does, or rather
Speaker 2: the fact that he's not improving the more Governor Youngkin
Speaker 2: thinks about making a run. How are you thinking about
Speaker 2: that one?
Speaker 8: No, I just don't know that he has, you know,
Speaker 8: the ability to jump to the national stage with any
Speaker 8: force or energy.
Speaker 5: He's got a good platform.
Speaker 8: He won an election against somebody was well known and
Speaker 8: not always well liked, term a call up in Virginia,
Speaker 8: so he got kind of lucky with his opposition.
Speaker 5: And Virginia is still a swing state.
Speaker 8: It's swung more to the right recently, but it's still
Speaker 8: a swing state.
Speaker 5: Do you really nominate for your nominee.
Speaker 8: Somebody who cannot absolutely deliver their own state? You know,
Speaker 8: DeSantis will deliver Florida, so al Gore did not deliver Tennessee.
Speaker 5: These are things strategic. People worry about.
Speaker 8: Money people worry about can he sell himself really to
Speaker 8: money people to make a big enough launch.
Speaker 2: Interesting, Wendy just wanted for to get your perspective. Wendy
Speaker 2: shall have there of Brown University.
Speaker 1: Alberto Garlo of Andromeda Capital, John, I want you to
Speaker 1: take bring in Alberto here, and I want you to
Speaker 1: bring in me in off the detailed discussion I'm an
Speaker 1: off camera yesterday at PIMCO about what the moderate end
Speaker 1: and the long ends going to do. And you mentioned
Speaker 1: in the break the term premium. Bring that into the
Speaker 1: shock that we could see priced down in a higher
Speaker 1: long term mul Well.
Speaker 2: I think you have to start with the inflation target
Speaker 2: of the Federal Reserve, which is two percent, and you
Speaker 2: have to make a call on what they're going to tolerate.
Speaker 2: Pimco believes they'll tolerate two point something.
Speaker 4: Claire has been very visible on the former.
Speaker 2: Fed Vice chair, and ultimately they're going to carry on
Speaker 2: forecasting a return to two whilst accepting and tolerating two
Speaker 2: points something. So something may be even approaching three. And
Speaker 2: with that in mind, there is a call on the
Speaker 2: long end that you start to price in and rebuild
Speaker 2: this so called term premium around the inflation story, and
Speaker 2: you end up with a steeper curve, So that's the
Speaker 2: long end yields shifting higher. This is the call right now,
Speaker 2: Alberto from the likes of PIMCO and I think that
Speaker 2: you're thinking about a similar thing.
Speaker 9: So look, we had five hundred basis points off hikes
Speaker 9: and the job market is still pretty solid. So there's
Speaker 9: something central bankers are not doing, and that's the long
Speaker 9: end of curves. If you think about a large company
Speaker 9: in the US, you can fund a three point six
Speaker 9: percent roughly plus a spread, and then you can invest
Speaker 9: in T bills that's a carry trade. Same for homeowners.
Speaker 9: Ninety eight percent of all owners, according to Goman Sex Research,
Speaker 9: has a mortgage that was issued at lower rates. So
Speaker 9: if you just hike the short end even to six percent,
Speaker 9: that's not really tightening. You're doing half of your job
Speaker 9: as the Federal Reserve. So what you really need to
Speaker 9: do is to make sure that the long end funding
Speaker 9: costs also goes up. That's how you tighten financial conditions,
Speaker 9: and so far that hasn't happened. So it's really you know,
Speaker 9: if central bankers are serious about what they're doing, there
Speaker 9: needs to be some steepening in the in the five
Speaker 9: year and ten year point of the curve, and that's
Speaker 9: really what's going to hurt financial conditions. That's going to
Speaker 9: tighten as prices. But that hasn't happened yet.
Speaker 4: So let's make the policy call.
Speaker 2: Do you think they need to rethink Q to say,
Speaker 2: the kind of maturities they let roll off, maybe even
Speaker 2: think about selling.
Speaker 9: So suppose you get to target to pose, you know,
Speaker 9: you hike close to high five maybe six percent, and
Speaker 9: that inflation remains above two percent. We think it will
Speaker 9: be above three at the end of this year in
Speaker 9: the US, and what do you do with QT? You know,
Speaker 9: you need to start thinking about QT. You can't just
Speaker 9: hike the short term rate, and so you need to
Speaker 9: think about balance sheet reduction. There are no targets on that.
Speaker 9: Remember the Bank of Indian told briefly about it at
Speaker 9: the end of May, and guilds wide and fifty basis
Speaker 9: points in a ten year so there's a lot of
Speaker 9: sensitivity there. There's a lot of banks but also non
Speaker 9: bank financial institutions that are long duration, and we need
Speaker 9: as prices to come down. So we're not going to
Speaker 9: have a recession here, but we are in an asset
Speaker 9: price recession. The investible world is shrinking. You know, China
Speaker 9: potentially is not investible, and so everyone is going into
Speaker 9: fewer assets in the US, like tech or like high
Speaker 9: quality credit. Everyone is long high quality credit. You know,
Speaker 9: surprise surprises has a very high so we don't like
Speaker 9: it in this environment where there's a lot of treasurations
Speaker 9: and the long enough curves can steepen.
Speaker 5: But there's this issue.
Speaker 6: If you do see exactly the scenario that you're talking about,
Speaker 6: which is a surprisingly hakish fusual reserve, wouldn't that be
Speaker 6: a huge support for the dollar, especially in this non
Speaker 6: recession kind of period where people are consolidating their wagers
Speaker 6: on an area of dynamism and growth.
Speaker 9: Look, the paint right now is clearly you know, market's
Speaker 9: going up and you know other currency is going up.
Speaker 9: But if we have a persistently hokish central bank and
Speaker 9: if the long end goes up, and then the consequences
Speaker 9: for markets are pretty heavy. I know we're having big
Speaker 9: set fourteen now. Credit spreads in CDs in particular record lows,
Speaker 9: so you know there's some pockets of value, but you
Speaker 9: want to really be careful about that moving the second
Speaker 9: half of the year, where liquidity is going to contract.
Speaker 9: There's a lot of treasurations e CBQT and then the
Speaker 9: boj exiting you've got control.
Speaker 6: How do you play though pain trade?
Speaker 9: So essentially it's very important to be able to stay
Speaker 9: in the trade.
Speaker 1: Here.
Speaker 9: There are some longs that are very interesting with double
Speaker 9: digit yields. So you know, obviously rates are higher, but
Speaker 9: you can get ten percent plus yields on credit in
Speaker 9: some nichues of the market. Some of them are in Europe,
Speaker 9: which has been on love.
Speaker 4: Give us an example of that double digit yield ware.
Speaker 9: So you know, talk about national champion banks in Greece
Speaker 9: or Italy. Greece is going to investment grade this year
Speaker 9: post elections. So there's very few countries that are going
Speaker 9: into the investable universe from being less investible, and Greece
Speaker 9: is one of them, from high yield to investment grade.
Speaker 2: This is what you're doing, So, I mean, I can
Speaker 2: name the names you're thinking about the UNI credits. So
Speaker 2: this world, these big banks, national champion banks, Italy, across Europe,
Speaker 2: is that what you've been doing.
Speaker 9: It's more popular now, but obviously in March and April,
Speaker 9: you know, there was a big opportunity to buy some
Speaker 9: of these and so we're keeping them. And then also
Speaker 9: so European high yield. You know, we're being a differential
Speaker 9: around six months or or maybe longer in the credit
Speaker 9: cycle between Europe and US. So the faults are going
Speaker 9: to rise, but they're going to say two and a
Speaker 9: half to four in Europe, they're probably going to five
Speaker 9: in the US. Everyone is long high quality credit. It's
Speaker 9: the easiest call, but spreads a seventy basis points on
Speaker 9: investment on investment grade. They don't really pay you. So
Speaker 9: you need to write, you need to barble your portfolio,
Speaker 9: You need to have some bills if you want and
Speaker 9: have some high yield.
Speaker 6: Has there ever been a time where you've finished positive
Speaker 6: on European banks? And I ask this because you flagged
Speaker 6: the joke that was the first thing that an alien
Speaker 6: does what he lands on Earth, he destroys the European bank.
Speaker 6: So why is it that now you think this time
Speaker 6: is different?
Speaker 9: So that's that's basically tells you that people normally are
Speaker 9: pretty bearish on you know, on Europe, and we had
Speaker 9: peak bearishness in March and April, so that's where I
Speaker 9: got excited. Unfortunately, the window was very short. It wasn't
Speaker 9: like it wasn't a long lived panic, but there's still
Speaker 9: value and look, we do things, something else will break
Speaker 9: between now and your end, so we're keeping some powder dry.
Speaker 6: How much does China really factor into whether you're going
Speaker 6: to be willing to double down on your European vet?
Speaker 9: So, look, China has definitely been a drag on EMS.
Speaker 9: There's a lot of stressed credits in EMS, a lot
Speaker 9: of countries that have restructured, but unfortunately a lot of
Speaker 9: value traps there in Europe. The Chinese did the foreigner
Speaker 9: man is weaker, but domestic spending is really high. There
Speaker 9: is no government even in the periphery that has talked
Speaker 9: about US thirty as far as I can remember. So
Speaker 9: that's that's very supportive.
Speaker 1: Nice fun talk. How did Napoli do it? I mean
Speaker 1: Napoli was not considered. How did Naples in Italy do
Speaker 1: so well this year?
Speaker 9: I mean Naples is always a contrarian trade, right, it
Speaker 9: took twenty years since Maradona, but okay, we call that.
Speaker 1: But Tatanam is a new coach in the last twenty
Speaker 1: four hours from Glasgow, Right, they dig from the best
Speaker 1: practices of Napoli. Is that how you pronounce it? Yeah, Napoli.
Speaker 1: What is the best practices in Napoli that the loser
Speaker 1: Tots can do that? When was the last time the
Speaker 1: Tots won, like eighteen?
Speaker 4: I can I can tell you, Yeah, what is the.
Speaker 1: Best practice to make it a surprise next year where
Speaker 1: Tottenham does better than good?
Speaker 9: I think they've been investing in players that were undervalued,
Speaker 9: and you know, it's definitely a team that has less
Speaker 9: less capacity, less spending capacity than others. But you know,
Speaker 9: so shows you that.
Speaker 2: They've got a history of picking up some fantastic players
Speaker 2: and they're sending them on for huge sums of money.
Speaker 2: So this song is going to be interesting to see
Speaker 2: whether they can hold onto those players.
Speaker 4: Really interesting.
Speaker 2: Manager is mister Delaarentis, who owns Napoli also I think
Speaker 2: in the family.
Speaker 4: Yeah, in the family.
Speaker 2: They also own Bari, which is the city in Pulia,
Speaker 2: tom which is looking to get promoted this year to Sarahas.
Speaker 2: So that family's having a great year, fantastic.
Speaker 1: I just it's exciting. I see all these changes, and
Speaker 1: Frank it's Greek to me. I like the Greek investment,
Speaker 1: great idea, but the idea here I've taught him. Having
Speaker 1: a new coach from Glasgow. Is that right?
Speaker 4: From Celtic?
Speaker 1: From Celtic, it's pronounced from.
Speaker 4: Rangis what's he going coming in?
Speaker 1: Raise? Hell?
Speaker 4: They need to spend money and do something about that squad.
Speaker 2: I just got to fit and tell them this is
Speaker 2: going to be a repeat of what we've seen before
Speaker 2: time and time again with that club. I better, We've
Speaker 2: got to leave it there. I better Gala Andromeda Capital Management.
Speaker 1: It is a global growth story that's under adjustment. John,
Speaker 1: let's review it now quickly. I usually don't do this,
Speaker 1: but I think it's so important. You've got four five,
Speaker 1: six global institutions. I'm going to say, get to go
Speaker 1: open as at the IMF and our team with the
Speaker 1: Bloomberg OECD, who are going to do in a moment
Speaker 1: here and BOI, it's been underplayed. The shift out one year,
Speaker 1: two years, three years to something. I remember talking to
Speaker 1: Larry and about this years ago and the benchmark was
Speaker 1: three percent growth is a global recession. I think we're there, yeah,
Speaker 1: and it's been underplayed. OECD readjusting and recalibrating clear Lambardelli
Speaker 1: joins us right now, chief economists at OECD in Paris
Speaker 1: with their adjustment. Claire, let me just cut to the
Speaker 1: chase at the margin. Does OECD confirm the shocking duration
Speaker 1: of weakness that IMF modeled a number of months ago.
Speaker 10: We have global growth improving over the period that we're
Speaker 10: forecasting today. So we expect global growth to moderate to
Speaker 10: two point seven percent in twenty twenty three and then
Speaker 10: edge up slightly to two point nine percent in twenty
Speaker 10: twenty four. These are historically low numbers for the global
Speaker 10: for the global economy, we've seen higher rates in the past.
Speaker 10: So the outlook is certainly without change and without action,
Speaker 10: the outlook would be for global growth to return, but
Speaker 10: to be at weak levels.
Speaker 1: Claire, these are shocking numbers. Am I wrong? And for
Speaker 1: all of our listeners viewers that three percent growth is
Speaker 1: a global recession. With that sort of three percent view
Speaker 1: can always see these say it is a global recession.
Speaker 10: It's not a global recession. We're projecting that the global
Speaker 10: economy is going to grow at two point seven and
Speaker 10: then two point three percent. That's not a recession, but
Speaker 10: it's a lower level of growth than we have seen historically.
Speaker 6: Right now, when we look forward at the potential for
Speaker 6: fiscal stimulus, you want governments to pull back.
Speaker 5: Why so what we saw.
Speaker 10: Is fiscal policy played a really important role during the crisis,
Speaker 10: and in twenty twenty two, governments extended high levels of
Speaker 10: fiscal support and that was necessary to prevent the impact
Speaker 10: of the war being greater than it otherwise was. But
Speaker 10: now as we're seeing prices, energy prices falling and some
Speaker 10: other prices beginning to fall, it's time to target that
Speaker 10: fiscal support better so that it's only going to the
Speaker 10: vulnerable people who who need it, and it's time to
Speaker 10: remove away from the blanket support that was put in
Speaker 10: place in immediate response to the crisis.
Speaker 6: People have been predicting a recession for quite a while,
Speaker 6: and we're at a time when in the US the
Speaker 6: promise of artificial intelligence seems to be upending all of
Speaker 6: the persimism and really pushing people into equities. How do
Speaker 6: you feature the concept of artificial intelligence the concepts of
Speaker 6: some of the technological advancements in your forecast, So as you.
Speaker 10: Say, technology is evolving rapidly and the potential upside from
Speaker 10: that in terms of productivity gain is potentially very very high.
Speaker 10: It's quite at this early stage of understanding what the
Speaker 10: impact of things are artificial intelligence can be. There are
Speaker 10: some estimates out there at this point quite uncertain, and
Speaker 10: so I think we're going to learn a lot over
Speaker 10: the coming months and years about the impact of artificial
Speaker 10: intelligence in terms of feeding it through to the numbers.
Speaker 10: There's clearly a high potential upside from artificial intelligence in
Speaker 10: terms of productivity and other technological advances, but quite hard
Speaker 10: to put a number on that at the moment as
Speaker 10: we're learning what it's capable of and also what the
Speaker 10: other wider impacts will be on labor markets, on competition.
Speaker 1: And they're like bring an incredibly sophisticated British view of
Speaker 1: economics which is enjoyed, and I mean they're facetiously. You've
Speaker 1: enjoyed horrific inflation and enduring inflation in the United Kingdom.
Speaker 1: Now the phrase it's tossed around. Bloomberg News mentions this
Speaker 1: and maybe OECD is an inflation plagued recovery. What is
Speaker 1: your optimism that the global system can disinflate.
Speaker 10: So inflate we project inflation to four quite rapidly this
Speaker 10: year and into twenty twenty four as well, from the
Speaker 10: high levels that we've seen. Obviously, there is a risk
Speaker 10: to that, particularly from core inflation and tight labor markets
Speaker 10: in particular, I mean that wages are expected to rise.
Speaker 10: That said, there's a lot of potential out there for
Speaker 10: the labor market in terms of bringing more people into
Speaker 10: the labor market, a lot of opportunity if we bring
Speaker 10: more people into the labor market, that will help on
Speaker 10: that side. So there's an opportunity to bring more women,
Speaker 10: older workers, people with health conditions and disabilities. If you
Speaker 10: bring more people into a labor market, that will use
Speaker 10: some of those pressures.
Speaker 2: Can we just talk about the nature of inflation and
Speaker 2: the contribution from those tight labor markets to the headline
Speaker 2: inflation that we witness every single month. Just how important
Speaker 2: is that tight labor market to the inflation pressure we're
Speaker 2: seeing currently, because there is some debate around that as
Speaker 2: to whether the Federal Reserve just still believe in that
Speaker 2: dreaded tea word transitory and just wait a little longer.
Speaker 10: I mean, obviously the picture differs for different countries, but
Speaker 10: tight labor markets are a key part of what is
Speaker 10: going on at the moment. They're a key part of
Speaker 10: why we're seeing the headline wine. Headline inflation is coming down.
Speaker 10: Core inflation is proving to be more persistent and in
Speaker 10: some ways is going up in some countries still, and
Speaker 10: that is mainly driven by tight labor markets and those
Speaker 10: what we thought were in transitory inflationary pressures feeding into
Speaker 10: wage pressures, and so saying a little longer.
Speaker 2: The latest on the OECD from the chief economists, Claire
Speaker 2: Lombardaddy the Cliff. Wonderful to catch up with you. Thanks
Speaker 2: for that outlook.
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