Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg terminal. Leon Cooperman folks
Speaker 1: for like forty seven years, was named head Research Strategists
Speaker 1: by Institutional Investor at a tour of duty with Goldman
Speaker 1: Sax a few years ago, Leon, I want to talk
Speaker 1: about the character of this bear market, and you and
Speaker 1: I do that with a bond overlay we've never seen,
Speaker 1: which is bond priced down, yield up. The losses and
Speaker 1: bonds are extraordinary. How does that redound over to a
Speaker 1: stock bear market? Well, actually I went taking a slightly
Speaker 1: different approach. I'm shocked at interest rate to as low
Speaker 1: as they are. You know, for most of my career
Speaker 1: there was a real return associated with buying a bond.
Speaker 1: The bond nominally yield was an excess of inflation. We
Speaker 1: have inflation rate in this country, quote eight percent. You
Speaker 1: have real growth a couple of percent. You have nominal
Speaker 1: GDP growing at ten percent and you have the tenure
Speaker 1: bond at three makes no sense. And that makes everything
Speaker 1: in the stock market look attractive. The stock market looks attractive.
Speaker 1: What parton looks attractive to you? Or are you in
Speaker 1: the triple leverage doll cash fund? No, I'm basically I'm
Speaker 1: of the view that equities are the best house and
Speaker 1: the financial asset neighborhood. But I don't like the neighborhood
Speaker 1: for a lot of reasons, so I have a cautious view.
Speaker 1: I've been a seller on strength and not a buyer
Speaker 1: a weakness. I think that ultimately the price of oil
Speaker 1: or the FED or maybe the strong dollar will lead
Speaker 1: us into a recession. And when the recession hits, which
Speaker 1: will be a three event, when it is that, the
Speaker 1: market will find the bottom somewhere between thirty five below
Speaker 1: its peak of And I think coming on the program
Speaker 1: and having excuse me, a questious view is not evaluated,
Speaker 1: so I differentiate myself. I talked about the Pharaoh. You know,
Speaker 1: I don't know what you know about the Bible. Tom
Speaker 1: but the foul had a dream. The dream was interpreted
Speaker 1: by Joseph, and the dream was We're gonna have seven
Speaker 1: lean years following the seven fat years. I'm not making
Speaker 1: a seven year forecast, but what I'm saying is I
Speaker 1: would be very, very surprised if we went into a
Speaker 1: new bull market anytime soon. We've just been through the
Speaker 1: most speculative period now financials three you know, SPACs, Uh
Speaker 1: would be you know, um fangs, zero commissions and interests.
Speaker 1: We just saw an extraordinary expected the period and Uh,
Speaker 1: we're not going into a bull market at least. What's
Speaker 1: so important here is we can't have the coup for
Speaker 1: bond angle because the seven years of abundance led by
Speaker 1: the seven years of famine. Lisa, that doesn't get it
Speaker 1: done for us. We'll have to put the exodus aside
Speaker 1: and talk about what we're looking for in terms of
Speaker 1: the safety during the seven years of leanness. And you
Speaker 1: talked about bonds in the surprise that yields were so low,
Speaker 1: particularly a bunchmark rates. What is the safety if it's
Speaker 1: not bonds, Oh, I would think under valid common stocks.
Speaker 1: I'd rather be in a common stock that would be
Speaker 1: in a bond any day of the week. Given the
Speaker 1: relative price of bonds versus equities, can buy what we
Speaker 1: gotta what we gotta understand is stocks are very heterogeneous.
Speaker 1: Bonds are homeost genius. What I mean by that is
Speaker 1: a triple a bond, double a bond. They're all trade
Speaker 1: within a quarter point of each other. Stocks are heterogeneous.
Speaker 1: You know, I look at a City bank at seven
Speaker 1: times journeys at discount, the Book Bank of American nine
Speaker 1: times earnings, Apole, Uh, the financial service company at any
Speaker 1: times earnings. Uh. You know I have my I'm doing
Speaker 1: relatively well this year because I have a big energy
Speaker 1: exposure and I had breakfast with the CEO of a
Speaker 1: coming called Paramount Resources up in Canada, and the stocks
Speaker 1: gone from two to like, and I was wondering where
Speaker 1: I should take some money off the table. When I
Speaker 1: got finished talking to the CEO, I figured, I add
Speaker 1: to my position, this is a company that generates over
Speaker 1: three percent of it in the yield, so it was
Speaker 1: at three times cash earnings. It's growing production double digits UM.
Speaker 1: And uh, they have something like the ten eleven twelve
Speaker 1: dollars of cash flow training it like three times cash flow,
Speaker 1: and they have a portfolilo on the other energy holdings
Speaker 1: that are equal to five dollars per share. The ironomy,
Speaker 1: I'm very negative on bonds. My biggest position is a bond,
Speaker 1: but it's very complex. But I happen to think it's
Speaker 1: like a layup. I could be dead wrong. It's a
Speaker 1: coming called Lagato. They had first lean dead outstanding fifteen
Speaker 1: and a half sent coupon. We're to make hope of vision.
Speaker 1: You have paid interest to the end of twenty three
Speaker 1: when the bond matures. And these are very real people,
Speaker 1: they have very real assets. Where I say real people.
Speaker 1: Chairman the boards, Ivan Seidenberg, formerly head of Horizon Red Hunt,
Speaker 1: formerly had of the fccs on the board. Mr Kana
Speaker 1: you who is number two guy to Craig mccoord built
Speaker 1: mcorse Cellulos on the board. There's so much of the
Speaker 1: specific story here that's important to talk about and discern.
Speaker 1: Let's talk about the bear case or the recession call
Speaker 1: of a draw down from the peak, which is about
Speaker 1: further than where we are today in the SMP. What
Speaker 1: leads things lower If there are these positive stories of
Speaker 1: whether it's undervalued financials as you said, or whether it's
Speaker 1: undervalued or at least uh fairly valued energy companies, well,
Speaker 1: I'm a classicist, you know. Let's face it, we have recessions.
Speaker 1: We used to have recessions every four or five years,
Speaker 1: but because of very liberal policies, has been stretched out.
Speaker 1: But if we have a recession, and uh, typically you
Speaker 1: have a bad market preceding recession, and uh, you know
Speaker 1: we're in a bad market already, and the question is
Speaker 1: we're probing for the bottom. And I think given the
Speaker 1: excesses that we've had, having a bottom thirty five or
Speaker 1: below the peak would not be an unreasonable guests multiples,
Speaker 1: that would not unreasonable, you know. Uh, let's face, everybody's
Speaker 1: using the wrong profit est of it. You know, I
Speaker 1: think someone on your program this morning said every one
Speaker 1: percent point improvement a dollar is about eight percent off
Speaker 1: of earnings. Uh, let's talk about that, Leon Cooperman, you
Speaker 1: have seen dollar a bounce. You know, I believe you
Speaker 1: were in the meetings of the Plaza Court a few
Speaker 1: years ago. What does a strong dollar mean for our
Speaker 1: viewers and our listeners? Negative for corporate profits? You already
Speaker 1: got a profit warning out of Microsoft on the strong dollar,
Speaker 1: and uh, you know in a recession, profits typically drop.
Speaker 1: I don't see any uh estimates that would have earnings
Speaker 1: on the SMP five comes, Leon, help me with institutional
Speaker 1: money and what they do with whatever part of their
Speaker 1: portfolio was bonds and those bond losses. We have guests
Speaker 1: after guests after guests rationalizing a bond bear market. Do this,
Speaker 1: do this, do this, do this? Fine, But the fact is,
Speaker 1: on an actually assumption, even if you have a formal
Speaker 1: water or you don't boy, or you underwater off that
Speaker 1: bond bear market, what do you do shift the stocks? Well,
Speaker 1: I would say it's a combination of cash and stocks
Speaker 1: that were in my answer. You know, I'm a different position.
Speaker 1: I'm approaching eighty years of age. I don't have any clients.
Speaker 1: I run my own money. I could take a longer
Speaker 1: term horizon, and I recognize that in the bear market,
Speaker 1: he who loses wins, he who loses least wins. We
Speaker 1: all leon at your August age of seventy nine in holding.
Speaker 1: Should President Biden's serve a second term? Give us the
Speaker 1: Cooper energy level? Is the nation considers a second term
Speaker 1: for the president? I think he definitely should not run,
Speaker 1: and I don't think he will run. I am told
Speaker 1: by people that you're not happy in Washington. He spent
Speaker 1: more time with his grandkids in Delaware. You know, he
Speaker 1: has not done a good job. I voted for him
Speaker 1: because I voted my values and not my pocketbook. And
Speaker 1: I found Trump, who has superior economic ideas to Biden.
Speaker 1: His conduct was just totally unacceptable. And uh, but I
Speaker 1: think the Democrats are gonna get crushed in December, the
Speaker 1: progressives that led them too far to the left, the
Speaker 1: country of centrist in nature. And uh, we gotta we
Speaker 1: gotta start working together, we gotta start cooperating. And you know,
Speaker 1: let me if I may make this point, it's not
Speaker 1: about politics, but I had a sense I would have
Speaker 1: smile my face blame a good man by the name
Speaker 1: of Barack Obama for a lot of these problems. I
Speaker 1: don't think that Bush wanted Bush to don't Reagan. Bill
Speaker 1: Clinton villainized wealth. He villainized wealth. And I sent him
Speaker 1: a letter twelve years ago. They went viral on the end,
Speaker 1: remember that, Okay, And I said to him, Mr President,
Speaker 1: you're telling the pent being screwed by the one percent.
Speaker 1: You should be telling the ercent. But hard work and luck,
Speaker 1: they could become part of the one percent. You depreciate
Speaker 1: the American dream. And unfortunately President Biden has picked up
Speaker 1: on that theme. I see no reason to villainize wealth.
Speaker 1: How do you get to be wealthy? You develop a
Speaker 1: partner service in world needs. And we continue with Leon
Speaker 1: Cooperman of Omega Leon just because Jasmin and beat me
Speaker 1: over the head with this. Are you in bitcoin? Leon?
Speaker 1: What do you think a bitcoin? I take the easy
Speaker 1: way out of bitcoin. They say, if you don't understand bitcoin,
Speaker 1: it means you're old. I'm old, But I take a
Speaker 1: side with Warren Buffett who had said he wouldn't pay
Speaker 1: cents for all the bitcoin out standing for his partner
Speaker 1: Charlie Mungo, who refers to his rat poison. I don't
Speaker 1: see it at all. I don't understand it. I think
Speaker 1: it's a product of the times of very similative policies.
Speaker 1: And uh think, okay, I think Leon Cooperman. Critty just
Speaker 1: told me I was old. I think guess what I heard.
Speaker 1: They're thrilled heavily on Cooperman as we extend our discussion
Speaker 1: with him in these tumultuous times, Leon, over the years,
Speaker 1: how do you adapt and adjust when there's a CEO
Speaker 1: change at a company, even if it's coordinated and there's
Speaker 1: a ballet of course, I'm thinking of Amazon. It could
Speaker 1: be any other company. Is it well, but let's just
Speaker 1: take Amazon Bezos to Jesse. How do you adapt it
Speaker 1: adjust to that? Well, you have to make a judgment
Speaker 1: whether the change in leadership is appropriate, uh and logical?
Speaker 1: It makes sense? And is his leadership change occurring at
Speaker 1: the time when the company doing well poorly? I get
Speaker 1: more worried when the chief financial officers leave for no
Speaker 1: apparent reason. I don't worry about CEOs. You know, Bezos
Speaker 1: wants to kick back a little bit. He has outside ventures.
Speaker 1: It's his handpicked successor. He's not selling his uck, you know,
Speaker 1: So I don't get worried about that. Leon, I want to.
Speaker 1: I can't generalize, you know, you've got to take each
Speaker 1: situation one at a time. Fair enough, Leon, I want to.
Speaker 1: I want to circle back to a comment you made
Speaker 1: on Bloomberg Surveillance just moments ago. You brought up a
Speaker 1: historical trend that a recession used to come every four
Speaker 1: or five years. That's, of course not been the recent trend.
Speaker 1: But I'm curious if you see a return to that
Speaker 1: kind of pattern. No, I wouldn't forecast. And look, we're
Speaker 1: a democracy. Democracy politicians do a better job and fighting recession.
Speaker 1: They're doing fighting inflation, so you know we're I wouldn't
Speaker 1: forecast a change in the pattern, but I what I'm
Speaker 1: worried about is that we're long in the tooth and
Speaker 1: we see a lot of structural imbalances, and we've created
Speaker 1: a tremendous amount of debt, and we don't have the
Speaker 1: leadership in the country that we need. So I'm assuming
Speaker 1: that we're heading to recession, not that they want one,
Speaker 1: but I think this idea of inflation moderating, My guess
Speaker 1: is you have to split it two for one to
Speaker 1: get the inflation rate down to where the Fed wants it.
Speaker 1: You know, a typical business courses labor. Labor is not moderating.
Speaker 1: We're in an environment where there's much more demand for
Speaker 1: labor than their supply. There's not an environment with prices
Speaker 1: go down. So we don't have we don't have intelligent policies.
Speaker 1: They wanted to cut the gasoline tax the last time
Speaker 1: I heard the way do you get prices downage you
Speaker 1: get more supplied, not more, not more not not lower taxes,
Speaker 1: which stimulates consumption. Leon you mentioned the eye word inflation.
Speaker 1: I'm curious about the macro heads that seems to be.
Speaker 1: It feels like the momentum trade of the day, which
Speaker 1: is you buy commodities to hedge against all the other
Speaker 1: turmoil in the markets. Is that a trade you support?
Speaker 1: I understand the merits of the trade. Now. I'm very
Speaker 1: much of a bottom up stock picking kind of guy.
Speaker 1: I got lucky the last couple of years. You know.
Speaker 1: I came into last year with a very overweighted energy
Speaker 1: position because you know, the energy was three percent of
Speaker 1: the index and nobody liked it. And these guys were
Speaker 1: very cheap, And now over a sudden, everybody likes it,
Speaker 1: and I'm getting nervous, but I've held on because they
Speaker 1: seem so inexpensive. Flow you at the time we've got
Speaker 1: left with you, I am fascinated what you think of
Speaker 1: the speed that the SEC is moving where Mr Gunsler
Speaker 1: has so many issues. You mentioned crypto bitcoin whatever earlier,
Speaker 1: or the meme stocks. I know, Leon, you were sitting
Speaker 1: on your couch down in Florida playing Game Stop. But
Speaker 1: for you and me, some of this modern trading stuff
Speaker 1: is nuts. What should THEE do about a tremendous disservice
Speaker 1: to the public? And I expressed that, you know, I
Speaker 1: became a big letter writer in my old age. I
Speaker 1: followed the advice of Aristotle, who said in tolerance and
Speaker 1: indifference is the last vertues of society. So I started
Speaker 1: to speak out. So I sent Jake Clayton a letter
Speaker 1: pointing out to him that the market structure has been destroyed.
Speaker 1: And why do I say that? When I came to
Speaker 1: Goldman Sacks sixty years ago, whether it's Golden Morgan, Stanley, Solomon, Brothers,
Speaker 1: Mary Lynch, they traded stocks to fifty or sixty cents
Speaker 1: to share, and the vocal rule didn't exist. Now it
Speaker 1: commissions near zero and the vocal rule the brokers are
Speaker 1: not stabilizers. Secondly, fifty years ago specialist in New York
Speaker 1: Stock Exchange, and eighty percent of the vium today is
Speaker 1: offboard and thot polls, So specialists are not stabilizers. And
Speaker 1: then finally, for some unexplained reason, they limited the uptick rule,
Speaker 1: which gave rise to these high frequency algorithmic traders. Nothing
Speaker 1: about value, you know everything about price, and they drive
Speaker 1: the market higher than there should be on fundamentals, and
Speaker 1: they driving lower than it should be on fundamentals. Uh
Speaker 1: and uh. He pleaded with the SEC to reinstate the
Speaker 1: uptick role for a period of a few months to
Speaker 1: see what just to experiment. Just I agree, we're out
Speaker 1: of time, we gotta go, but I want to get
Speaker 1: you back on to pick up on the uptick rule.
Speaker 1: I think that's a not a small item. Leon Cooperman,
Speaker 1: I'm gonna call him constructively cautious on the markets, of course,
Speaker 1: iconic and with his omega as well. The distinction today
Speaker 1: is a link up here with yen weaker as well.
Speaker 1: One seven thirty nine is critical and one thirty eight
Speaker 1: print would be truly shocking. George Sarah Ellis has been
Speaker 1: out front on this with global head of Foreign Exchange
Speaker 1: Research at Deutsche Bank, with a note published Worldwide moments.
Speaker 1: I go, there are real interest rates, nominal interest rates,
Speaker 1: George Sarah Ellis, their capital flows, and then there is
Speaker 1: the thermodynamics statics of the hoarding of dollars. What is
Speaker 1: the importance of a static hoarding of dollars versus normative
Speaker 1: flows in the global economy? Hi, tom So, I think
Speaker 1: it's extremely important because if you look at what happened
Speaker 1: this year, you've had a very big regime shift in
Speaker 1: the market. Currencies were generally pretty highly correlated to interest
Speaker 1: rate differentials up until Arch, so you had the more
Speaker 1: hawkish fed the dollar was rallying. Then the ECB turn
Speaker 1: more hawkish, and the rate differential actually turned significantly higher
Speaker 1: in favor of the Euro. But the euro failed to follow,
Speaker 1: and the market more broadly has stopped being responsive to
Speaker 1: the interest rate differential and is instead a lot more
Speaker 1: sensitive to the flow dynamics you discussed, And what we're
Speaker 1: seeing globally is essentially a huge holding of dollars from investors.
Speaker 1: Europe obviously really burdened at the moment by this huge
Speaker 1: energy crisis. Japan also has the energy problems, plus the
Speaker 1: b o J which is easing aggressively. And the conclusion
Speaker 1: the market has is it's just holding onto dollars even
Speaker 1: if investors are selling US assets, the selling U S
Speaker 1: ecurities and bonds as we're seeing, it's just not being
Speaker 1: repatriated back. And for example, that's one reason why the
Speaker 1: yen is no longer a safe haven. So George, let's
Speaker 1: focus on the euro hand locan that currency pair go
Speaker 1: one and two great heights from the ECB. Alish your
Speaker 1: bearish for that, Couracy. Well, your last question is an
Speaker 1: interesting one if if you look at the UK, the
Speaker 1: Bank of England was one of the first currencies, one
Speaker 1: of the first central banks to high grates, and that
Speaker 1: really didn't benefit You've seen the RB a Swede and
Speaker 1: altern hawk ish. So I would say at the moment,
Speaker 1: central bank reaction functions, rate hikes don't seem to matter
Speaker 1: all that much, and it's a lot more about the
Speaker 1: underlying energy balance. How far can it go? I just
Speaker 1: crunched some numbers in the piece this morning. If you
Speaker 1: map out the extra energy deterioration on the back of
Speaker 1: this big spike in natural gas prices, that's worth about
Speaker 1: two hundred billion euros extra off supplying to the market.
Speaker 1: Roughly speaking, that equates to euro dollar parity. But of
Speaker 1: course these are only rough estimates and numbers. When you
Speaker 1: look at how much the Euro has overshot in the past,
Speaker 1: we've come up with a range of anywhere between nine
Speaker 1: and parity, and I think in the current environment that
Speaker 1: sort of range is not early unreasonable. This is actually
Speaker 1: biling on towards City Group is calling for as well
Speaker 1: in on the Euro. Should this gas band go into
Speaker 1: an effect with some sort of weaponization, at what point
Speaker 1: does that become your base case versus a bearish outlier.
Speaker 1: At what point do you have conviction around it? Given
Speaker 1: that Germany is already starting to tweak how it's handling
Speaker 1: a potential lack of gas applies down at the end
Speaker 1: of the year. So when an outcome rests so much
Speaker 1: on what would happen out of Russia and President Putin,
Speaker 1: it's very difficult to have a base case. I think
Speaker 1: the best thing we can do at the moment is
Speaker 1: just put numbers around the different scenarios, and under the
Speaker 1: scenario of a complete gas cut off, I really wouldn't
Speaker 1: say ninety five would be unreasonable, but we can just
Speaker 1: see how unpredictable things are up until three weeks ago,
Speaker 1: and that gas prices will much lower and the flows
Speaker 1: we're going through that pipe, So it is all about
Speaker 1: the North Stream pipeline. What I would say, however, now
Speaker 1: the market is built to risk premium because it knows
Speaker 1: there's uncertainty. It knows it can be switched off. So
Speaker 1: even if this gas returns in terms of full flow
Speaker 1: after the maintenance period, the risk premium is unlikely to
Speaker 1: go away. And I think that's a critical thing that's
Speaker 1: changed over the last few weeks. George, to your point,
Speaker 1: we can do a bunch of scenario studies, but you
Speaker 1: have to understand what regime we're in and what manage
Speaker 1: to foreign exchange and what doesn't. And to your point,
Speaker 1: it's not been about rate so much as it's been
Speaker 1: about flows. So, George, do you think it's going to
Speaker 1: stay that way? Is the reason to believe it stays
Speaker 1: that way because the recession scenario staff, all the scenario analysis,
Speaker 1: whatever it is, that's helpful, But unless we understand what's
Speaker 1: actually driving the underlying currency, who knows where this goes absolutely?
Speaker 1: And what's driving the dollar at the moment is safe
Speaker 1: haven flows. The dollar is the so called risk parity antipole.
Speaker 1: And I think you would need two things for that
Speaker 1: to change, the FED being more sensitive to growth, and
Speaker 1: at the moment that's not the case. They're very growth
Speaker 1: agnostic so to speak. The u S data is slowing,
Speaker 1: but they're still talking about three percent. So number one
Speaker 1: and shift from the FED, and number two are change
Speaker 1: in the energy dynamics, especially as they relate to your
Speaker 1: and the end. So I don't really see the current
Speaker 1: environment changing, which is why we we pushed down our
Speaker 1: euro dollar forecasts in recent months. The last point I'd
Speaker 1: make everyone is talking about this recession. I'd argue the
Speaker 1: recession should be a given. Indeed, the markets already pricing it.
Speaker 1: It's now a question of length and depth, and the
Speaker 1: second half of the year is all going to be
Speaker 1: about that learning process amidst an extremely unusual environment. For example,
Speaker 1: the growth data is slowing, the labor markets globally are
Speaker 1: extremely tight and strong, and people talk about the US.
Speaker 1: If you look at the Canadian data, the unemployment rate
Speaker 1: built a huge record low and drop sharply, and it's
Speaker 1: these things central banks are looking at and they would
Speaker 1: need to see the labor markets overall. Turn, I think
Speaker 1: before we start talking about a more dabash pivot and
Speaker 1: George super interest is stuff as always George Saravellos there
Speaker 1: of Deutsche Bank. Yeah, it's a quote for you. We
Speaker 1: see a high probability that further Hawke is surprises lae
Speaker 1: ahead as even the current expected policy path would leave
Speaker 1: real interest rates negative one into next year. The team
Speaker 1: behind that quote Franklin Templeton, the fixed incomes ce IO
Speaker 1: join us right now, sort I desire sort of great
Speaker 1: to catch up with you. Walk me through why you
Speaker 1: still believe that we could face further hawke Is surprises.
Speaker 1: So I think the surprises stopped being surprises as the
Speaker 1: market starts expecting them, right, so we wrote that even before. Currently,
Speaker 1: I would say, I think that we're going to get
Speaker 1: an inflation number which is higher than one percent this
Speaker 1: this week month on month terms, so we're getting close
Speaker 1: to nine. We might even trickle a little bit about
Speaker 1: nine this month. That's a big number, and I think
Speaker 1: it's going to be extremely difficult to end this year
Speaker 1: with inflation being significantly below eight, which means we're looking
Speaker 1: at seven and a half to eight percent for year end.
Speaker 1: And my concern is that regardless of where we are
Speaker 1: on FED funds at btwhere at three or three point
Speaker 1: two five, it's not going to be enough. And the
Speaker 1: market currently is already pricing in rate cuts next year,
Speaker 1: that might just be way too soon, And that that's
Speaker 1: the call that we will actually see the FED deliver
Speaker 1: getting closer the form, but it will not spin on
Speaker 1: a dime and start cutting as soon as it hits
Speaker 1: four because it does need to get inflation out of
Speaker 1: the system. This happened once before in the seventies. They
Speaker 1: backed off too quickly, and then inflation came back. This
Speaker 1: is a pretty bold call. So no, And I'm wondering
Speaker 1: where you think on the yield curve it is most
Speaker 1: mispriced that there will be cuts to those rates, to
Speaker 1: those rates of the Fed next year. Where is it
Speaker 1: most miss priced that we're going to see inflation come
Speaker 1: down to a mere five or six percent versus what
Speaker 1: you're expecting of eight percent. So I'd say that if
Speaker 1: I look at the yield curve, if I look at
Speaker 1: what is priced in looking forward, we are seeing can
Speaker 1: you we are seeing short end rates pricing in rate
Speaker 1: carts in the second half of next year, and is
Speaker 1: that that to me is a miss pricing. Now the
Speaker 1: long end, it is interesting because I don't think that
Speaker 1: current levels are cheap. I think they're still rich. I
Speaker 1: think the long end does need to sell off more.
Speaker 1: There's a market is counting very much on the Fed
Speaker 1: being in a position to immediately cut rates once we
Speaker 1: get the slow down in the economy, which clearly they're
Speaker 1: expecting and hoping for. That's only if inflation comes down
Speaker 1: as well. And if inflation doesn't come down, I don't
Speaker 1: think the Fed can cut rates even the economy slow sorry,
Speaker 1: you mentioned the nineteen seventies, long ago and far away,
Speaker 1: when I could shave once a week. I was given
Speaker 1: a private meeting with Sir John Templeton that began a
Speaker 1: relationship over decades, and he told me, then provoker, that
Speaker 1: there would be a shortage of bands, essentially folks. John
Speaker 1: Templeton called the Great Moderation, and other people did as well.
Speaker 1: But boy, that was a lonely call. Is the Great
Speaker 1: Moderation over? So? Now, can you you you were a
Speaker 1: morning Star fixed income Manager of the Year, can you say,
Speaker 1: finally we've broken through the trend of the Great Moderation.
Speaker 1: I think that the Great Moderation happened at a time
Speaker 1: when governments and central banks hadn't. We're not coming off
Speaker 1: fifteen years of various forms of QUI from central banks,
Speaker 1: and for governments at least three or four years of
Speaker 1: massively expansionary fiscal policy. So do I think that shortage
Speaker 1: of bonds is history? Eventually it will come back again,
Speaker 1: But I think for the next three to five years,
Speaker 1: I don't see a shortage of bonds. So just quickly
Speaker 1: need to squace this in. We've got about thirty seconds
Speaker 1: with you. What's the big market call for you. I've
Speaker 1: had the big fat code, the big inflation code. What's
Speaker 1: the big market code? The big market call is much
Speaker 1: more volatility coming forward. I've heard in two weeks time
Speaker 1: we had treasuries, the deepest apparently most liquid market in
Speaker 1: the in the world, rally sixty basis points. In two
Speaker 1: days time we had them sell off another twenty or
Speaker 1: twenty five basis points. These types of moves are not done.
Speaker 1: So I'm not ready to make that call to say
Speaker 1: jump into risk assets. I think it's way too soon,
Speaker 1: son of Wonderful to catch out with your son of
Speaker 1: designer of Franklin Templeton. This is a joy and timely
Speaker 1: with dollar strength. Michael Sholl joins US now. Dr Schoel
Speaker 1: out of Manchester. UH does great interest in money and
Speaker 1: also in commodities and um as well. Michael, I got
Speaker 1: eight ways to go here, and I'm gonna go to
Speaker 1: one important idea in your note, which is this time
Speaker 1: is different and that we are far along in the
Speaker 1: tightening cycle. What does that mean for Jerome Powell? You know,
Speaker 1: I think the great danger here is is that the
Speaker 1: third titans too much for financial markets. I think we're
Speaker 1: in a very tricky spot. I think the sort of
Speaker 1: underlying economy of the labor market obviously can withstand a
Speaker 1: fair amount more tightening. But but financial markets here are wobbling. Um.
Speaker 1: And it's the dual nature of this tightening. It's it's
Speaker 1: the combination of the withdrawal of liquidity and the increase
Speaker 1: of interest rates, which I think is starting to bother
Speaker 1: financial markets. Um. And you know, I mean I you know.
Speaker 1: My bet would be that at some point in the
Speaker 1: next few months, maybe even next few weeks, you know,
Speaker 1: we are heading for some kind of a financial accident,
Speaker 1: a break in financial markets that really puts pressure on
Speaker 1: the FED to do something different. Michael, You are and
Speaker 1: I are old enough where we remember the Little Red Book,
Speaker 1: which was Stanley Fisher out of the I M F
Speaker 1: writing I M F essays from a time of crisis, folks.
Speaker 1: Everyone in the game had to read that book at
Speaker 1: the time. And this was Fisher looking at the effect
Speaker 1: of E M. Redounding on the developed world. When you
Speaker 1: see rupia, rupie, any other number of currencies, choy and
Speaker 1: pay so on wine, what does that signal to you?
Speaker 1: You know, it's not like we don't have FX pegs
Speaker 1: to deal with you know, I would say more than
Speaker 1: the e M currencies. But the really surprising thing is
Speaker 1: the weakness of other developed markets against the dollar. You know,
Speaker 1: the sort of stunning weakness, as you said at the
Speaker 1: end of the year of the euro off sterling, and
Speaker 1: and this sort of ability of the dollar to just
Speaker 1: suck up all available liquidity. Um. You know, if we
Speaker 1: were going to have a ninety eight moment, I think
Speaker 1: you're more likely to be at the heart of it
Speaker 1: in East Asia this time. Michael. When you say something
Speaker 1: will break and we can get to that, you're a
Speaker 1: point in a moment because it's an important one. But
Speaker 1: when you say we could have a financial accent, what
Speaker 1: do you think that looks like you've got anything in mind? Well,
Speaker 1: I mean it looks like very sharp Hanward moves and
Speaker 1: a number, you know, in a number of assets. You know.
Speaker 1: I think so far what we've done is sort of
Speaker 1: blew the froth off the equity market and take yields
Speaker 1: up and you know, impose very unpleasant losses on people.
Speaker 1: But by large people have lost what they've made in
Speaker 1: the last twelve to eighteen months, which for themselves outside games,
Speaker 1: you know, I think the danger that we have is
Speaker 1: is you know, I think credits what we have to
Speaker 1: watch now. But if you know, if credit markets start
Speaker 1: to dislocate at the speed with rates markets or or
Speaker 1: sort of peas have come down in equity markets, well,
Speaker 1: then I think that two has the ability to impose
Speaker 1: the sorts of losses on people that they emotionally cannot withstand.
Speaker 1: And Michael, I guess that's what I'm trying to get
Speaker 1: to the point of what's a dislocation. What's the difference
Speaker 1: between just to sell off and the equity market aggressive
Speaker 1: widening of credit spreads and a dislocation? And who would
Speaker 1: be an accident? Four? No, I think the dislocation is
Speaker 1: where you look at market prices and you really can't
Speaker 1: make sense of them. You know, you can make a
Speaker 1: great deal of sense of the reduction in peace that
Speaker 1: we've seen so far. You know, you can argue it
Speaker 1: should be high, you can argue it should be lower,
Speaker 1: but you know, most of what we've seen so far
Speaker 1: has been you know, understandable when one looks at earnings,
Speaker 1: or one when one looks at inflation. The dislocation is
Speaker 1: when markets as they did in ninety seven in October
Speaker 1: August through October in eighty seven. You know, it is
Speaker 1: a move in markets that really breaks its fundamental link.
Speaker 1: But you look at it and you're like, WHOA, well,
Speaker 1: this is just this is just liquidity being withdrawn. Michael.
Speaker 1: This raises a question of when the FED steps in
Speaker 1: just to build on that point, especially if they still
Speaker 1: are trying to fight inflation that may not come down
Speaker 1: beyond seven and a half percent, if you believe Sadasi
Speaker 1: of Franklin Templeton. How do they come in and back
Speaker 1: away even in the face of some of these dislocations
Speaker 1: that you expect very tricky. UM. You know, I think
Speaker 1: they take whatever success they can to the bank. You know.
Speaker 1: My guess is that you know, you may see a
Speaker 1: moderation some of the commodity inflation over a period like that, UM,
Speaker 1: and the FED would usually excuse of looking forwards to
Speaker 1: do something different. UM. I also think the FED has
Speaker 1: different mandates. Fed it balances. It talks about the employment
Speaker 1: mandate and the inflation mandate a lot, but we all
Speaker 1: do understand that there is an implicit mandate to keep
Speaker 1: the financial system functioning at a tolel at a tolerable level. UM.
Speaker 1: And you know, I think that you know, there are
Speaker 1: price levels at which or speeds of movement at which
Speaker 1: the Federal Reserve would be forced to do something. But
Speaker 1: also not the only central bank on the planet. You know,
Speaker 1: You've got the Bank of Japan PBOC and and and
Speaker 1: the ECB to consider. To that point, I did want
Speaker 1: to follow up on what you said about the euro
Speaker 1: being the next real crisis and there will be akin
Speaker 1: to some of the emerging market fissures that we saw
Speaker 1: in previous years. How far along in this are we
Speaker 1: and what is the potential contagion there? You know, very
Speaker 1: difficult to say. You know, I think Europe is you know,
Speaker 1: was a mess going inter this and and continues to
Speaker 1: be a mess, and has the additional strain now of
Speaker 1: you know, sanctions on on Russia, and you know, the
Speaker 1: potential for some you know, some rashoning of energy you
Speaker 1: know into the winter period, and that that that then
Speaker 1: does start to look a lot like the mid nineties seventies,
Speaker 1: where you know, it wasn't just inflation but you had
Speaker 1: to deal with but an actual shortage of energy available
Speaker 1: for general industrial activity and consumer purposes. So you know,
Speaker 1: as I say that the Europe is a risk, it
Speaker 1: has poor political leadership. You know, VCB is not an
Speaker 1: entirely credible central bank. And you know, I would say
Speaker 1: that your itself is a is a major currency, um,
Speaker 1: but for a lot of people it's a voluntary currency. UM.
Speaker 1: So you know, as I say that that that you know,
Speaker 1: if we had a region pulling everything else lower, I
Speaker 1: think that's the region you need to watch out for.
Speaker 1: So Michael, with that in mind, what are you buying
Speaker 1: right now? UM? You know we're still with with energy.
Speaker 1: I still think that that's a sector that has you know,
Speaker 1: that has value. UM. I think that you know, as
Speaker 1: panic builds, you know, I think you'd want to be
Speaker 1: more aggressive. UM. I think that that fascist medals I
Speaker 1: think still have potential here. But the honest truth is
Speaker 1: we're a lot less long today than we were six
Speaker 1: months ago. UM. And you know, to have used recent
Speaker 1: strength to become less longer than we were, you know,
Speaker 1: less long than we were a month ago. So as
Speaker 1: I say, this looks like one of those times that
Speaker 1: you know, whatever, whatever your mandate allows you to do, UM,
Speaker 1: you know, you'll take your exposure down to more I
Speaker 1: would say, cautious levels than in a normal market environment.
Speaker 1: Michael Shell, thank you, sir for catching up with this
Speaker 1: market field asset management CEO. This is the Bloomberg Surveillance Podcast.
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