Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
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Speaker 2: Brian Levit joins US now Global Market Strategist to invest Go.
Speaker 2: Some guests had the courage the confidence to stick with
Speaker 2: it all the way up here today. Brian Levett one
Speaker 2: of them. Brian, you say this, I would view any
Speaker 2: near term challenges as a buying opportunity. Brian, why are
Speaker 2: you still so constructive this equity market?
Speaker 3: Well, typically, if you look, if you look at US history,
Speaker 3: anytime inflation has peaked or come down, or just about
Speaker 3: any time the FED is done tightening, you've done well
Speaker 3: as an investor over the next couple of years. So
Speaker 3: you know when I say in your term challenges, look,
Speaker 3: we know that we still have to see the lagged
Speaker 3: effects of all the policy tightening, and the economy is
Speaker 3: still going to moderate or even weaken from here.
Speaker 4: But history is on our side.
Speaker 3: If you can look beyond just a handful of weeks
Speaker 3: or a handful of months, markets tend to do very
Speaker 3: well in the aftermath of tightening cycles. And we're getting
Speaker 3: quite close to the end of the tightening cycle. If
Speaker 3: we're not already there.
Speaker 5: You guys are the byside.
Speaker 1: You've got all your internal analysts, and you're also of
Speaker 1: course speaking to people pitching equity and bond ideas, and
Speaker 1: of course Invesco is a legendary bond house. If we
Speaker 1: have sticky inflation, Brian Levitt, what does that do to
Speaker 1: revenues of companies? They do better, don't they?
Speaker 4: They do better.
Speaker 3: Although I don't think that you know when we say inflation,
Speaker 3: we don't mean you know that inflation is going to
Speaker 3: sit here at these levels.
Speaker 4: But to your point, they're going to come down but
Speaker 4: likely be higher.
Speaker 3: Inflation is likely going to be higher than it was
Speaker 3: in the last cycle, which you're right.
Speaker 4: That is nominal growth and.
Speaker 3: That is supportive for for corporate earnings. The challenge that
Speaker 3: we have, of course, though, is that you know how
Speaker 3: much tight is the FED going to get and how
Speaker 3: much more inverted is the seal curve going to get
Speaker 3: and what type of economic response are we going to have?
Speaker 3: So we still haven't We still haven't seen all of that.
Speaker 3: So there's still challenges here, and we would still favor
Speaker 3: more quality investments rather than you know, thinking about what
Speaker 3: the beginning of the new cycle looks like. But again
Speaker 3: investors should shouldn't I caution them on being too defensive here.
Speaker 3: Even if you even if you have some retracement in
Speaker 3: the next few weeks or the next few months, ask yourself,
Speaker 3: will things be better over the next couple of years,
Speaker 3: Will inflation be back to a more reasonable level, will
Speaker 3: the FED be on the other side of this, and
Speaker 3: will the economy be recovering? And I think the answered
Speaker 3: all those questions are yes, which means we you know,
Speaker 3: we don't want to be too defensive.
Speaker 5: Now, I've got to.
Speaker 1: Go to the allocation as global market strategist, is too
Speaker 1: important US domestic quality versus international quality? Which way do
Speaker 1: you tilt?
Speaker 3: I think we need to be increasing our exposure to
Speaker 3: international quality.
Speaker 4: I mean, the US does well in these.
Speaker 3: In the in the more challenging economic environments that could
Speaker 3: be ahead of us. But if you're thinking ahead to
Speaker 3: you know, the next stage of this, the.
Speaker 4: End of tightening.
Speaker 3: Well, that means that means the interest rate differential between
Speaker 3: the US and Europe and some of the rest of
Speaker 3: the world is going to narrow, and that tends to
Speaker 3: mean the end of a strong dollar environment, which we've had.
Speaker 4: For quite some time.
Speaker 3: So most investors are light on international you know, building
Speaker 3: up positions, you know, closer fifteen to twenty percent international.
Speaker 4: Equity exposure, I think makes a lot of sense.
Speaker 3: You're particularly giving the valuations and the catalysts of what
Speaker 3: could be finally.
Speaker 4: Peaked dollar, Brian.
Speaker 2: Given what you just said, then are you anticipating a
Speaker 2: change in equity market leadership.
Speaker 3: Well, the equity market leadership will change when we get
Speaker 3: to when we get to the other side of the
Speaker 3: economic downturn, at least in the middle point of the
Speaker 3: economic downturn. That's when you start to see more value,
Speaker 3: more cyclical, emerging market, smaller caps participate.
Speaker 4: So in the near term.
Speaker 3: Here it's it's quality, it's it's larger cap, it's growthier,
Speaker 3: and we're certainly seeing that in the in the market activity.
Speaker 3: The shift comes typically in the in the midpoint of
Speaker 3: the economic downturn and the market getting ahead of what
Speaker 3: will be the new cycle. So I don't think we're
Speaker 3: there yet, but we're on the path to that.
Speaker 4: Brian.
Speaker 2: What do you say to people who have been in
Speaker 2: this market who are hearing a lot of people complain
Speaker 2: about narrow breadth in the equity market, the ap performance
Speaker 2: of ubercap, megacap tech names like Nvidia, Microsoft, and others. Brian,
Speaker 2: what's your message to them this morning?
Speaker 3: Well, the message is that this is playing out as
Speaker 3: we think market cycles tend to play out. If you remember,
Speaker 3: in the beginning of the year, the market thought we
Speaker 3: were getting a soft landing, and so you saw value,
Speaker 3: small caps, emerging markets do very well.
Speaker 4: That was called mid October through probably.
Speaker 3: The end of February, and when inflation remade sticky and
Speaker 3: the Fed kept raising rates and the concerns of a
Speaker 3: recession became more heightened, well, that's when we shifted back
Speaker 3: towards a more defensive posture, quality, larger cap growthier. So
Speaker 3: I'd say that these markets are playing out as you
Speaker 3: would expect them to play out, given what the trajectory
Speaker 3: of the economy is likely to be.
Speaker 4: And you'll see broader participation in these markets. On the
Speaker 4: other side of.
Speaker 3: This again, we're not there yet, but at the midpoint
Speaker 3: of the downturn and economic activity, you'll see a shift
Speaker 3: towards investors favoring those names that are going to do
Speaker 3: well in a cyclical economic recovery.
Speaker 2: What a handful of name's doing well right now, and
Speaker 2: one of them is in Nvidia. Brian, We've got to
Speaker 2: leave it there, Brian Love at the AVESCO.
Speaker 1: We thought we'd dive into this a little deeper than
Speaker 1: the back and forth of OMG, MVDA men deep Sing.
Speaker 1: It knows that when you do double E electrical engineering,
Speaker 1: it starts out with the wheatstone bridge and then you
Speaker 1: cross a bridge over to differential equations, and heaven forbid,
Speaker 1: we get Maxwell and magnetism.
Speaker 6: Right.
Speaker 1: Mandeep Sing owns the high ground at Bloomberg Intelligence.
Speaker 5: Mandeep this is a kid out.
Speaker 1: Of Taiwan off the boat Oneida, Kentucky for population for ten.
Speaker 1: He is a textbook immigrant. He parachutes into Corvallis in
Speaker 1: Oregon State and magic happens.
Speaker 5: When did the magic in Nvidia happen?
Speaker 6: I mean this has been going on, I think for
Speaker 6: the last almost twenty five years, and he has built that,
Speaker 6: you know, in terms of focusing on a knit segment
Speaker 6: and then really expanding this scope of computing and in
Speaker 6: a way that it's so innovative in terms of disrupting
Speaker 6: the existing framework around leveraging CPUs to really a new
Speaker 6: style of computing. And I think that is where everyone
Speaker 6: has been caught off guard with the pace of the
Speaker 6: change that can bring. But clearly the innovation is there
Speaker 6: and that's why everyone is so excited.
Speaker 4: Take us not to the.
Speaker 1: Hopes and dreams of AI three years, five years, ten
Speaker 1: years out, but the here in present, not danger, but
Speaker 1: the here in present reality. For Nvidia, can they sustain
Speaker 1: the growth now of a fifty five multiple stock.
Speaker 6: Well, So, I think it's a little hard in terms
Speaker 6: of looking at it, you know, beyond twenty twenty three,
Speaker 6: simply because right now we have easier comps and we
Speaker 6: are just past this you know, cloud digestion phase. So
Speaker 6: this happened to be a much shallow and correction. And
Speaker 6: what everyone is expecting is for the market to really
Speaker 6: do well in terms of the demand side, on the
Speaker 6: data center side, to hold up for the next six
Speaker 6: to eight quarters. I don't know if that will be
Speaker 6: the case, given how much uncertainty we have. But one
Speaker 6: thing we know is there is this secular shift from
Speaker 6: CPUs to GPUs. And you know, really what they're selling
Speaker 6: is almost two hundred thousand for a box, a server
Speaker 6: box that used to cost ten thousand. So look at
Speaker 6: the ASP increase that they have been able to generate
Speaker 6: from this new device that they have created, and that
Speaker 6: is quite powerful. When you see a company, you know,
Speaker 6: kind of raising ASP's like this, that is very positive
Speaker 6: for the growth margin.
Speaker 7: And I think that's what you're seeing in their results
Speaker 7: right now.
Speaker 2: Manday the cheat guide to the market action this morning,
Speaker 2: it's just to say well and videous up. Because they
Speaker 2: anvelt some new products. I wonder how many people actually
Speaker 2: know what those new products do. Mandate, you're someone who
Speaker 2: probably does. Can you tell is what this new product
Speaker 2: line appears?
Speaker 6: Yeah. So the biggest use case is around training these
Speaker 6: large language models. And what you need for this is
Speaker 6: a lot of computational power, and a GPU can do
Speaker 6: it in a very short period of time compared to
Speaker 6: the traditional CPUs. Even if you stack a lot of CPUs,
Speaker 6: you can train these large language models. So one thing
Speaker 6: they've proven is not only is it an innovative way,
Speaker 6: it's the only way you can train a large language
Speaker 6: model and think of, you know, our computational requirement across
Speaker 6: the board, across industry. You need this type of technology
Speaker 6: to enhance the productivity. And that's something that's not like
Speaker 6: it's going to drive a massive refreshed cycle. And that's
Speaker 6: why everyone is so excited because the existing market needs
Speaker 6: to refresh to the new way of computing. And that's
Speaker 6: a pretty large market.
Speaker 7: When you think of semiconductor as a six hundred billion dollar.
Speaker 2: Market, who is that competition.
Speaker 6: Competition would be you know, AMD, Intel to an extent.
Speaker 6: The problem is they're so far behind, especially Intel, in
Speaker 6: terms of focusing on GPUs and that's where you know,
Speaker 6: they missed the boat for at least five years, where
Speaker 6: they just didn't think this market was big enough and
Speaker 6: they can't still catch up. I mean, there was some
Speaker 6: rumors about n Video partnering with Intel so that Intel
Speaker 6: can make their GPUs, but that's a boundary play. I'm
Speaker 6: talking about that two hundred thousand ESP component that Nvidia
Speaker 6: is selling.
Speaker 7: Who can compete with that? And I think AMD is.
Speaker 6: The closest right now for that along with the hyperscalers and.
Speaker 1: The simplistic view of a fool like me is it's
Speaker 1: about gaming.
Speaker 5: Forget about that.
Speaker 1: What does Innvidia mein Mandy for Productor and Gamble for
Speaker 1: Minnesota mining and manufacturing for Ford Motor.
Speaker 6: Yeah. So, I mean these companies spend billions of dollars
Speaker 6: on their IT, you know, over time and when you
Speaker 6: think about their data center footprint, that will completely go away.
Speaker 6: It will be on cloud. And what large anguage models
Speaker 6: do is not only you need to rent the basic
Speaker 6: cloud capacity, you will run your AI on cloud. And
Speaker 6: that's where Nvidia has positioned in self really well. It
Speaker 6: is partnered with the likes of Microsoft. I don't think
Speaker 6: all the hyperscalers are on board with Nvidia, but for
Speaker 6: a traditional enterprise, they don't need to spend on it anymore,
Speaker 6: especially on the infrastructure side. They will outsource everything to
Speaker 6: these hyperscalers. And then video is trying to becoming one
Speaker 6: of them.
Speaker 2: Mandi when he talked over the weekend, I think everyone's
Speaker 2: bista is you can translate what that means. Manday when
Speaker 2: he talks over the weekend and uses the hyperbolic language
Speaker 2: like tipping point, the dawn of a new computing gauge
Speaker 2: and all those things Mandi, there are some people out
Speaker 2: there who just don't have the specialized knowledge to really
Speaker 2: understand where this is going. And it's a market of
Speaker 2: faith for many people in the stock market who just
Speaker 2: see the momentum and just think I need to be
Speaker 2: a part of this, Mandi, do you have any kind
Speaker 2: of cheek whatsoever to do a distinction between what is
Speaker 2: real and what might be bs?
Speaker 6: Well, so I look at you know who are the
Speaker 6: key players who will determine the fate of this market,
Speaker 6: and they are quite concentrated. I mean I mentioned about hyperscalers.
Speaker 6: Then you have got Apple on the smartphone side. What
Speaker 6: will Apple end up doing in terms of large anguige
Speaker 6: models That will have a big influence in terms of
Speaker 6: the size of the opportunity for someone like Nvidia, if
Speaker 6: they do everything in house, then they're going directly to TSMC.
Speaker 7: Right now, Nvidia has the technology, it has a monopoly.
Speaker 6: But it's going to TSMC to make its chips if
Speaker 6: Apple does the same, and granted they may not have
Speaker 6: that technology that Nvidia has, but clearly you've got you know,
Speaker 6: eight or ten players that will determine the size of
Speaker 6: the opportunity and how this shakes out. And that's where
Speaker 6: I think you have to watch out for what they do,
Speaker 6: not what they say. And the only time will tell
Speaker 6: what the hyperscalers will do. I can't imagine them paying
Speaker 6: two billion dollars in media every year to upgrade their GPUs.
Speaker 6: It's just too much capex. And that's what we're talking
Speaker 6: about here in terms of the animal cap expend on
Speaker 6: something like this.
Speaker 2: Mandate excited for your coverage on this story for the
Speaker 2: years to count. Never mind the wakes and they've sink
Speaker 2: that have Glindagens hatogens.
Speaker 1: Greg Valier knows is this ties directly in to our
Speaker 1: sailors and our officers. Is they are on aircraft, carrier,
Speaker 1: submarines and everything else in the military. And this budget debate,
Speaker 1: mister Valier, is with AGF investments. Greg, you absolutely nailed
Speaker 1: this morning by getting beyond the cable TV idiocy to
Speaker 1: the Senate's outrage over the defense of our nation. What
Speaker 1: are we going to see not in two days, what
Speaker 1: are we going to see in five and six days
Speaker 1: from senators worried about the Pentagon.
Speaker 8: Well, it's going to be a big deal. And Lindsey Graham,
Speaker 8: a famous hawk, blew a gasket and I think it
Speaker 8: was Fox on Sunday because the defense spending in this
Speaker 8: bill will be lower than the rate of inflation. So
Speaker 8: for a country that doesn't spend as much as people
Speaker 8: think we do out of our GDP on defense, this
Speaker 8: really angers a lot of Republicans.
Speaker 1: It angers Republicans. What I'm going to suggest that Democrats
Speaker 1: are going to show up as well. I mean, this
Speaker 1: is critical, Greg.
Speaker 5: Is it a bipartisan fury of our officers and sailors?
Speaker 5: Are infantrymen at risk? Is it bipartisan in the anger here?
Speaker 4: It is?
Speaker 8: But we can't default. I think people realize that a
Speaker 8: default would be even worse. And during the course of
Speaker 8: this year time, I think there'll be supplemental funding for
Speaker 8: the Pentagon. There's ways you can still get money from
Speaker 8: the government, and I think that you will see more
Speaker 8: spending during the year. But there's a lot of complaints
Speaker 8: right now. Just to bring it to tonight, there is
Speaker 8: a big vote tonight in the House Rules Committee. I
Speaker 8: think that Kevin McCarthy will prevail, But I think this
Speaker 8: thing drags on because of Lindsay Graham and others into
Speaker 8: next week and it probably gets right up until June fifth.
Speaker 2: Well, great That's what I was going to last. Do
Speaker 2: we have a week.
Speaker 8: Well, that's a good question. Here's what I would say.
Speaker 8: If we hit the deadline. The Treasury can sell bonds
Speaker 8: out of the Highway Trust Fund. Treasury can sell bonds
Speaker 8: out of the SOBI Security Trust Fund and pay them
Speaker 8: back a week or two later. So I think it's
Speaker 8: highly unlikely that we would see a default. And I
Speaker 8: would add if there actually looked like there would be
Speaker 8: at the fault, I think the markets would get so
Speaker 8: jittery it would finally send a message to Washington.
Speaker 6: Craig.
Speaker 2: We asked ridiculous questions in politics sometimes like who wins,
Speaker 2: who wins? Who won? After the weekend? Who do you
Speaker 2: think is doing a better job of just presenting what
Speaker 2: they got out of negotiations? Is it the president or
Speaker 2: is it speaking McCarthy.
Speaker 8: I think the President has always been underestimated as a negotiator,
Speaker 8: and I think he did a pretty good job. The
Speaker 8: surprise to me, though, is Kevin McCarthy thought. I think
Speaker 8: he was held in low regard until a few months
Speaker 8: ago he became House Speaker. He got something done. They
Speaker 8: didn't get all that they wanted. In fact, in this
Speaker 8: final deal, a lot of what they wanted whittled out,
Speaker 8: especially on the total spending huts. But no, I give
Speaker 8: both of them credit. But I think Kevin McCarthy is
Speaker 8: now a serious player.
Speaker 1: Mean, Greg the senator from West Virginia, got a pipeline
Speaker 1: moving south from Harris. I believe it's Harris, West Virginia
Speaker 1: on celt across the border. Maybe it's Harris where it
Speaker 1: goes across the border to Pittsylvania, just southwest of Appomattox.
Speaker 1: Can you give out pipelines there? It is from Bradshaw,
Speaker 1: West Virginia to Pennsylvania, Virginia. Okay, there's a pipeline for
Speaker 1: Joe Mansion. Can you give conservative Republicans a pipeline?
Speaker 8: You can't give people anything? And this was audacious. That's
Speaker 8: typical of Joe Mansion. He gets what he wants because
Speaker 8: he's still whispering that he may run for president, so
Speaker 8: everybody has to placate him.
Speaker 2: Well, what about.
Speaker 1: Ten to twelve, the fourteen people blocking Speaker McCarthy's efforts.
Speaker 1: Can he give them a bone that's highway like or
Speaker 1: pipeline like?
Speaker 8: Sure, I'm sure there are people who are going to
Speaker 8: have post offices and they're named after them. There's lots
Speaker 8: of deals that are being cut right now to get
Speaker 8: this one hold out to vote for them later in the.
Speaker 2: Day, Hi, Greg, what do you make of what the
Speaker 2: Republican candidates for the presidency have got to say about
Speaker 2: the deal that was struck?
Speaker 8: Well, DeSantis was really striking and said, you know, it
Speaker 8: was a terrible deal and we're still headed toward you know,
Speaker 8: financial ruin. It was a pretty strong statement. DeSantis now
Speaker 8: is in a position where he's got to throw bombs
Speaker 8: because he's so far behind that I'm not sure he
Speaker 8: can catch up.
Speaker 2: Greg, just a final word on defense spend in America,
Speaker 2: and not for me to say what that level should be.
Speaker 2: By the way, Greg, can you just go through the
Speaker 2: numbers for us and you really paint a picture of
Speaker 2: how much a percentage of overall spending defense spend naturally
Speaker 2: is and get to the heart of the issue that
Speaker 2: if you do want to do something about the deficit
Speaker 2: in this country, don't they have to rethink what's happening
Speaker 2: with defense?
Speaker 8: Well, I would say, no, we're not spending enough on
Speaker 8: defense as a percentage of GDP. We're spending less than
Speaker 8: three percent. We complain all the time about Canada, They're
Speaker 8: not spending three percent of GDP. A lot of other
Speaker 8: countries aren't as well. And I think that the as
Speaker 8: the Wall Street Journal can say instantly points out, we're
Speaker 8: not spending enough on defense by any historical yardstick.
Speaker 2: So, Greg, if that's the case, where does that leave
Speaker 2: any negotiations over ever cutting spending and doing something about
Speaker 2: the deficit.
Speaker 8: Well, you got to talk about revenues at some point.
Speaker 8: I mean, at some point we have to at least
Speaker 8: look at taxes. I'm not saying we need a big,
Speaker 8: huge one, but fearless forecast, guys, the next big fiscal
Speaker 8: story is the expiration of the Donald Trump tax cuts
Speaker 8: in a couple of years. That will make this fight
Speaker 8: we've just went through look like a picnic.
Speaker 2: Greg Valiere looking forward to that of Jeff. And if
Speaker 2: you could be long, one thing right now would probably
Speaker 2: be in video. If you could have been short over
Speaker 2: the last two weeks, somethink it probably would have been
Speaker 2: the treasury market. Katie Kaminski was short that treasury market.
Speaker 2: The chief research strategistic Alpha Simplex joined us right now. Katie,
Speaker 2: walk us through the thinking and whether that trade is
Speaker 2: still very much on well, let's.
Speaker 9: Just think about where we are in the cycle, and
Speaker 9: let's think about what's happening in terms of long term cashlows.
Speaker 9: I think people may be underestimating the effect of higher
Speaker 9: rates on long term cashlows because they're just so used
Speaker 9: to things going back to normal. And so what we've
Speaker 9: seen is that the momentum in fixed income markets is
Speaker 9: short and in some sense, the equity markets are saying
Speaker 9: that things are okay. And if that's the case, then
Speaker 9: the curve and we're going to tolerate the inflation, then
Speaker 9: the curve is going to have to steepen, and particularly
Speaker 9: the long end of the curve is what I'm looking at.
Speaker 1: How do you link the equity market on a trend
Speaker 1: based basis with the bond market? How do you take
Speaker 1: trend based analysis of the ten year yield and fold
Speaker 1: it over to trend based analysis of the Nasdaq?
Speaker 9: Well, this is a good question because I think what's
Speaker 9: happened to us, as those of us who are on
Speaker 9: the mathematical, more technical side, is that we've seen some
Speaker 9: very strong themes. We've seen strong equity momentum this year,
Speaker 9: also seen continued support of the short trade and fixed income,
Speaker 9: but we've been somewhat alone because most people have gone
Speaker 9: back to being bullish on bonds this year. And what's
Speaker 9: happening is you've seen correlations shift in March and you're
Speaker 9: seeing new themes emerging. But the correlation between stocks and
Speaker 9: bonds should we go back to an inflation, rising rates
Speaker 9: or even a pause narrative is actually positive on being
Speaker 9: short bonds and more neutral on equity. So you've got
Speaker 9: to think about the correlations and how they're marking, as
Speaker 9: well as the signals.
Speaker 1: Well, the correlations and also with trend following. Can you
Speaker 1: call a bear market low in October? We're now up
Speaker 1: x percent on SPX, And I mean, I get the
Speaker 1: correlations study, but actual trend based analysis Wells Wilder one
Speaker 1: oh one. Did we establish a bull market in October?
Speaker 4: Well?
Speaker 9: I always say that we don't pick the bottoms and
Speaker 9: we don't pick the tops. What we do is we
Speaker 9: look for confirmation. And I can definitely say that we've
Speaker 9: seen a massive turnarounds earning in October that has happened
Speaker 9: across multiple asset classes. It was sort of peaked in
Speaker 9: March when we saw sort of some weakness related to
Speaker 9: the banking sector, but we have really seen a pretty
Speaker 9: strong consolidation period since October, so I'm waiting for that
Speaker 9: to shift, and the new trend may be long equity,
Speaker 9: short bonds.
Speaker 1: Again, Okay, this is a wheelhouse, and I know you're
Speaker 1: looking at this in the Andrew lowbox just to the
Speaker 1: left of the third base dugout at Fenway. But the
Speaker 1: bottom line is the great Luisia Mota would say, Okay,
Speaker 1: you've got consolidation and distribution, and then what what is
Speaker 1: the then what for you in the equity market, what
Speaker 1: is the signal to buy more in Vidia?
Speaker 9: Well, I'd say I am a little more concerned about
Speaker 9: the equity market because it has had such a strong run.
Speaker 9: Could it keep going if we possibly? I think I'm
Speaker 9: more interested in seeing a breakout and fixed income, which
Speaker 9: is going the other direction. Because we're seeing that stocks
Speaker 9: have come up so much. That suggests the equity market
Speaker 9: thinks is very optimistic and thinks that sticky and flo
Speaker 9: is going to be tolerated, which means that long term
Speaker 9: cashows are more at risk. So for equities it's actually
Speaker 9: looking pretty positive. People in general are thinking that we're
Speaker 9: just going to tolerate some modern inflation. The problem's going
Speaker 9: to be is when people realize, wait a minute, look
Speaker 9: at these inflation numbers, they're coming back up instead of
Speaker 9: going down more. I think what you're talking about the
Speaker 9: UK is a perfect example.
Speaker 2: So, Katie, I think what we're trying to figure out
Speaker 2: is whether the high yields that you predict are going
Speaker 2: to be a challenge or not to the narrow leadership.
Speaker 2: So find the equity market, which has been dominated from
Speaker 2: big cap growth, is that a challenge or not?
Speaker 9: Definitely if you think about growth, I mean growth has
Speaker 9: struggled a lot, and it was the most impacted sector
Speaker 9: during last year, and now that we've had a little
Speaker 9: bit of a slowing in interest rates, they've seemed to
Speaker 9: really raged back. So you're right, if we do see
Speaker 9: longer term cashlowers go up, that is the sector that
Speaker 9: could be the most vulnerable because it has the most
Speaker 9: duration risk.
Speaker 2: Well, that would be a big challenge tom to the
Speaker 2: index level getting to the year so far for the
Speaker 2: nat stay which is at more than thirty, Katie, how
Speaker 2: would you explain then how resilient the index level story
Speaker 2: has been. Let's take the Nastak which had I think
Speaker 2: one of his biggest weekly gains of the year so far,
Speaker 2: just last week on the nast that one hundred. Despite
Speaker 2: this move that we've seen in the treasury market, what
Speaker 2: explains that Well, I.
Speaker 9: Think I personally think we're only reverting back to recent
Speaker 9: highs and yields. I'm looking for a breakout. I'd say
Speaker 9: that we've just seen a little bit of movement and
Speaker 9: fixed income relative to where we were earlier this year,
Speaker 9: and that's why we've seen a resurgence. So I'm much
Speaker 9: more thinking about the more extreme scenario as opposed to
Speaker 9: a small adjustment back towards the high. Remember, the tenure
Speaker 9: went to four percent earlier this year. We're not back
Speaker 9: at that level yet, so I'm kind of watching for
Speaker 9: that more than sort of the heck resurgence after a
Speaker 9: period of really really strong tightening of rates which we
Speaker 9: saw last year.
Speaker 1: Katie, let's go all see to commodities.
Speaker 5: Help me here.
Speaker 1: The commodity trend is lower coppers off a cliff. It's
Speaker 1: a China play, I get all the fun undamental chat.
Speaker 1: What does a trend following look like in long trending,
Speaker 1: persistently trending commodities.
Speaker 9: Well, this is a good question because commodities have also
Speaker 9: been decoupled somewhat from equity markets, we've seen downward pressure
Speaker 9: and commodities, particularly the base metals, also energy. One thing
Speaker 9: I've been watching quite a bit is the energy trade.
Speaker 9: I mean, we've seen a massive downward trend and there's
Speaker 9: all sorts of questions all the time from investors when
Speaker 9: are we going to see that move up again? So
Speaker 9: for right now, it doesn't look like that's going to
Speaker 9: happen soon, but it is something that has been in
Speaker 9: a downward trend for a very long time, which could
Speaker 9: you know, if we see some sort of movement, there
Speaker 9: could be something there.
Speaker 4: But you're correct.
Speaker 9: Commodities have been trading recessionary, equities have trading optimistic, and
Speaker 9: treasuries also somewhat optimistic in terms of where yields are catty.
Speaker 2: This was great just to clarify your thoughts on some things.
Speaker 2: Caddy Simplex, Kennthy Kamitski there, it's going to be a new.
Speaker 5: Night when you to speak to someone expert on this.
Speaker 1: Also on macro strategy of North America at State Street,
Speaker 1: Lee Ferris joined this morning. Lee, are you gonna go
Speaker 1: to You're gonna go to see Lowton whatever it is
Speaker 1: at the Hatters when Liverpool stops by.
Speaker 10: I would love to. Yeah, it'd be fantastic to go
Speaker 10: watch a Premier League game at Kenilworth Road. And whether
Speaker 10: I'll be able to get a ticket, I'm not sure
Speaker 10: because as Jonathan's that is not any tickets available, so
Speaker 10: I think be pretty pretty tough to get one of those.
Speaker 5: We're gonna see the ticket.
Speaker 1: With inflation, let's just go to this because I think
Speaker 1: it's something John and you are living with your families
Speaker 1: and all. The inflation in the United Kingdom is of
Speaker 1: an absolutely different character. We're talking about sticky inflation in America.
Speaker 1: How sticky is nine percent food inflation in the United Kingdom?
Speaker 10: Well, I think the food inflation is actually higher than that, Tom,
Speaker 10: It's nineteen percent food inflation. Overall inflation is coming down
Speaker 10: but still in the eighth Yeah, it's remarkable given how
Speaker 10: the consumer in the UK is struggling, how real incomes
Speaker 10: are falling, how mortgage rates have gone through the roof,
Speaker 10: which is very different from what we're seeing here. New
Speaker 10: mortgages here are higher but not existing because we're all
Speaker 10: thirty year fixed. In the UK, people's existing mortgage payments
Speaker 10: in some cases have trebled and yet inflation is proven
Speaker 10: remarkably sticky, and this is such a difficult position for
Speaker 10: the Bank of England. And it was interesting last week
Speaker 10: we got the very strong inflation we're pricing four heights
Speaker 10: by the Bank of England, but Sterling didn't go up.
Speaker 10: Sterling went down last week on the back of that
Speaker 10: because now the market is focused on, Okay, you're going
Speaker 10: to have to hike a number of time secure inflation.
Speaker 10: But what is that going to do to the economy
Speaker 10: over the sort of you know, the medium term. And
Speaker 10: the answer is it's not going to be pretty.
Speaker 2: It's out a bit like September, a replay of some
Speaker 2: of that some of that league. What's been amazing just
Speaker 2: sitting here Lee over the last couple of weeks, speaking
Speaker 2: to people like you, people we admire in the market,
Speaker 2: is just feeling the tide start to turn. All this
Speaker 2: enthusiasm for the rest of the world, for Europe breaking
Speaker 2: down with a couple of data points out of China,
Speaker 2: a reality check in the Eurozone, if you will, with
Speaker 2: Germany potentially heading into a recession, and Lee, at the
Speaker 2: same time, you've got this monster rap performance on the market.
Speaker 2: Catwaight at S and P five hundred on the Nasdaq
Speaker 2: relative to the equal weight, relative to what's developing in China,
Speaker 2: overseas and elsewhere. And Lee, I'm just wondering, and Tom
Speaker 2: and I've been talking about this going into the weekend
Speaker 2: of coming out of it, whether we face another period
Speaker 2: of US equity market exceptionalism because of this AI theme.
Speaker 10: Well, I think because of the AI and also because
Speaker 10: of the relative strength of the economy. And you know,
Speaker 10: I've been on here and I've talked about this before.
Speaker 10: The US is in a very different place from the
Speaker 10: rest of the world, and ninety one percent of mortgage
Speaker 10: has been thirty year fixed. Will do that. The consumer
Speaker 10: here is just thing. We have a very strong labor market.
Speaker 10: We still have excess savings from the pandemic. Yes it's
Speaker 10: limited to those of higher income, but they're spending it.
Speaker 10: And at the same time, we have this fixed rate economy,
Speaker 10: whereas you look at the rest of the world. URBNZ
Speaker 10: stopped hiking last week, worried about the consumer because mortgage
Speaker 10: rates have gone up back in Canada. Have stopped, URBA,
Speaker 10: have stopped. Bank of England have got to carry on
Speaker 10: despite the fact it's probably going to mean a deep
Speaker 10: recession in twenty twenty four. The US is in a
Speaker 10: very different place. So you've got the AI element. You've
Speaker 10: also got the underlying economy, which is in a very
Speaker 10: different place from the rest of the world because the
Speaker 10: structure of our lending market.
Speaker 2: So Lee, this is peculiar for you, almost original, You
Speaker 2: sound almost constructive the US seculary market, Is that right?
Speaker 10: It's a relative story, John, I'm not sure I'm constructive
Speaker 10: of the equity market absolute terms, but relative You've got
Speaker 10: to look at the US and say, look, the US
Speaker 10: economy is in a very different place from the rest
Speaker 10: of the world. The FED, we're still pricing FED cutting
Speaker 10: before anyone else, and that bit I don't understand. We've
Speaker 10: taken out a lot of the cuts rightly, so we
Speaker 10: still have a cut by January, and yet no one
Speaker 10: else has a cut in that early. Why are we
Speaker 10: got an earlier cut in the US when the economy
Speaker 10: is holding up so much better than elsewhere and the
Speaker 10: inflation is still sticky. We saw the PC on Friday.
Speaker 10: Why are we going to be cutting before everywhere else?
Speaker 10: That's actually you know, flirting with recession. In recession, on
Speaker 10: the edge of recession, we're nowhere near it yet.
Speaker 2: So Lee, just listening to you, they're the kind of
Speaker 2: views that we wanted to push through the FX market
Speaker 2: develop a little bit more dollar strength. We've seen some
Speaker 2: of that. As you look at that differential potentially closing,
Speaker 2: how would you play that scene.
Speaker 10: I think you play it through the dollar. Yeah, you know,
Speaker 10: I've been bullish on the dollar for a little while.
Speaker 10: It's rallied back. Well, we've got over one forty one
Speaker 10: dollar yen. That's probably come into the end of the story.
Speaker 10: But I think when you look at euro dollar, you
Speaker 10: look at cable, you look at the dollar against the
Speaker 10: commodity currencies, I think this has got further to go.
Speaker 10: I mean, I think, look, eventually, the dollar is going
Speaker 10: to be a great sell. It's overvalued, it's over owned,
Speaker 10: et cetera. But what we're seeing is institutional investors are
Speaker 10: now buying dollars again, the first time we've seen that
Speaker 10: since March. They've been strong dollar sellers. They flipped around,
Speaker 10: they're buying it again. They're looking at this US exceptionalism
Speaker 10: story again. So I think that that momentum and this
Speaker 10: relative rate price thing can carry the dollar through probably
Speaker 10: during Q three. We're going to see more dollar games.
Speaker 10: We're up around three percent from the lows and the
Speaker 10: d x Y I think there's another three to five
Speaker 10: percent to go on that story.
Speaker 2: Oh, give me some levels. Then we've got dollar index
Speaker 2: right now just short of one I four cable at
Speaker 2: one twenty four euro dollar, a break in one of
Speaker 2: seven earlier, one of seven forty three. What do we
Speaker 2: need to look out for on the single currency league?
Speaker 10: I think we're going to see one o five before
Speaker 10: we see one ten in euro dollar. We're going to
Speaker 10: go below one oh five before we see one ten
Speaker 10: again Sterling. I think we're going to see below one
Speaker 10: twenty before we see one twenty five. And adding sternly,
Speaker 10: we're going to get down back down towards one point
Speaker 10: fifteen over the course of the second half of the year. Wow,
Speaker 10: but I think certainly right now, Yeah, I'm looking at
Speaker 10: the Embassis now we've seen the sort of dollar ye move.
Speaker 10: I think the Embassis now is going to save a
Speaker 10: dollar against Europe.
Speaker 5: I just think this is too important. I mean, you
Speaker 5: too are seriously knowledgeable about this. The new coach at Chelsea.
Speaker 5: Are you kidding me?
Speaker 10: I thought so.
Speaker 2: I thought it fifteen call on cable to Pocketino.
Speaker 1: I've rich just tak home about Pocketino's getting paid and
Speaker 1: sterling you gets to convert.
Speaker 5: It's going to be great. I mean, but the bottom
Speaker 5: line is the guy is supposed to go to the
Speaker 5: Tots and he went to Chelsea. What's that about?
Speaker 2: You'll have to ask the man himself over a spurs,
Speaker 2: you know, I say what Dan leaves up to, I've
Speaker 2: got no idea.
Speaker 5: Get on a plane, John, get over there and figure
Speaker 5: we're yeah going on.
Speaker 2: I mean, just me making some monster calls that TK.
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