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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app.

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Speaker 3: Let's bring in Margie Bttell of Oscaring Global investments. She

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Speaker 3: wrote that in twenty twenty five, I expect another decent

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Speaker 3: equity year, although not with the total performance that we

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Speaker 3: have seen this year. Admittedly, the market looks rather frothy.

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Speaker 3: I'm pleased to say Margie joins us now. Margie, thanks

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Speaker 3: so much for spending some time with us on this

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Speaker 3: holiday shortened week. What are you seeing in terms of

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Speaker 3: the frothyness? Where is it most prominent?

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Speaker 4: Well, I think it's not so much in the stock market.

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Speaker 4: I think you can see this manifestation.

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Speaker 5: There's actually a lot of liquidity in the financial markets.

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Speaker 4: You see it in crypto, you certainly see it in

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Speaker 4: real estate.

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Speaker 5: You see it in the explosion of private debt and

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Speaker 5: private equity, which has been a big boost to the

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Speaker 5: financial markets. And it's really kept the law of the

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Speaker 5: Fed's actions out of the control of the FED because.

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Speaker 4: It's been in the market. Not like the bank score

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Speaker 4: things are typely regulated.

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Speaker 5: But as far as a stock market, I'd say it's

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Speaker 5: reasonably price for another decent year next year.

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Speaker 3: Talk a little bit about the interplay between those private assets,

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Speaker 3: whether it's private credit or private equity to a lesser extent,

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Speaker 3: and what that means for money flowing into equities.

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Speaker 5: Well, I think that the first thing is if you

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Speaker 5: think we had the FED make the biggest increase in

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Speaker 5: its history in short term rates from basically zero to

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Speaker 5: five percent in eighteen months, and yet we didn't have

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Speaker 5: a recession as result, that tells you that the money

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Speaker 5: flows in the financial system really isn't under the bank sump,

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Speaker 5: under the bank sump and the Federal Reserve supervision the

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Speaker 5: way it used to be. So you've seen a lot

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Speaker 5: of companies that needed liquidity could actually go to these

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Speaker 5: private markets and get these terms period. And also better

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Speaker 5: terms than.

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Speaker 4: They could have gotten in the public market.

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Speaker 5: And so I think that's why you could say, well,

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Speaker 5: the pe is high, you know, nineteen times something like that.

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Speaker 5: But really, when you look at the profit goos under

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Speaker 5: that and compare that to our treasure yields are it

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Speaker 5: looks rather reasonable to me.

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Speaker 6: Well, Marguie, one of the byproducts of the FED raising

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Speaker 6: short term rates, as you mentioned, from zero to five percent,

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Speaker 6: is that cash looks great here, yields are relatively high,

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Speaker 6: and on money markets even still, you have seven trillion

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Speaker 6: dollars sitting in cash right now.

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Speaker 1: It feels like for the past couple of years.

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Speaker 6: People have been calling people moving off of the sidelines

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Speaker 6: back more fully into risk markets. Do you see that

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Speaker 6: actually happening when you take a look at all that

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Speaker 6: money market action.

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Speaker 5: Yes, I think you'll see a lot of towel throwing

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Speaker 5: from the cash equivalent market, because if.

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Speaker 4: You look at it, if you got a good yeald

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Speaker 4: historically and.

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Speaker 5: Cash just year, say four or five percent, But on

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Speaker 5: the other hand, the equity market was up fifteen to

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Speaker 5: twenty five percent, depending whether you look at value names

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Speaker 5: or more growthing names. That's a big disparity for investors

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Speaker 5: and I think people have been hoping and actually believing

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Speaker 5: that we would have a recession. The recession hasn't come

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Speaker 5: with the FED at least stable of a problem cutting race.

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Speaker 5: It's very hard to see how we can have a

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Speaker 5: recession in twenty five. So we're thinking one and a

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Speaker 5: half two and a half percent economic growth, maybe even

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Speaker 5: surprising on the high side. And I think that's going

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Speaker 5: to draw money out to say, how many years do

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Speaker 5: you want to leave that much of a spread on

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Speaker 5: the table.

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Speaker 6: Well, Margie, let's say that you have been sitting in cash,

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Speaker 6: you've been over allocated, and now you have the luxury

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Speaker 6: of having a lot of money here to deploy. When

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Speaker 6: you take a look at the relative values of the

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Speaker 6: different asset classes, specifically when it comes to fix income

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Speaker 6: to equities, where's the best opportunity right now?

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Speaker 4: Well, I think it's ad equities. Even though we've had

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Speaker 4: two terrific years. I think that if we have the e.

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Speaker 5: Connery growing, you know, two plus or minus percent maybe

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Speaker 5: on the high side, that should allow corporate profits to

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Speaker 5: be up to say ten or twelve percent. Just to say,

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Speaker 5: world this year about thirteen percent, even though we had

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Speaker 5: more modest economic growth, So that says if that's your

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Speaker 5: target on likely you turn on equities. When you look

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Speaker 5: at fixed income treasures of say four and a half percent,

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Speaker 5: if you look at high.

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Speaker 4: Yield, you're only looking at say six and a half

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Speaker 4: to seven and a half percent.

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Speaker 5: And because we've had rallies in the fixed income market,

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Speaker 5: those bonds are really trading in a very small discount

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Speaker 5: from parsave around ninety eight cents on a dollar. So

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Speaker 5: there's an automot of.

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Speaker 4: Capital appreciation in the fixed income world.

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Speaker 5: By the same token, defaults have been very low, so

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Speaker 5: you have been taking much risk when you dip down

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Speaker 5: into below investment grade. So I think that still says

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Speaker 5: opinions over on the equity side, we're return should be higher.

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Speaker 3: Okay, So with inequities, do you go with what's been

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Speaker 3: working all along, the defensives in this case MAGS seven

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Speaker 3: big tech type names, or do you go and maybe

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Speaker 3: start picking up some of the underperforming sectors in the market,

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Speaker 3: whether it's materials companies or energy companies, both those groups

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Speaker 3: not moving more than one percent so far this year.

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Speaker 7: Yes, well, I.

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Speaker 5: Think that you really have to stick with the companies

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Speaker 5: that have proven to have profit growth and a lot

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Speaker 5: of that has been in the chech sector, some industrial

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Speaker 5: sectors that have been tied to the big scenes electrification

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Speaker 5: increases in data centers I think are going to continue

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Speaker 5: to do well, and even in actually energy, I think

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Speaker 5: that gas related names are going to continue to do

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Speaker 5: surprisingly well because of benefit from the expansion and gas

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Speaker 5: is used to increase our base slow power capacity. But

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Speaker 5: I think a low growing company when we've had a

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Speaker 5: decent markets mostly, I think stayload groom. So it says

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Speaker 5: you have to buy the quality by the higher price

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Speaker 5: relative stocks because they probably will continue to have strong

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Speaker 5: earnings in twenty twenty five.

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Speaker 3: You know, I look at the VICS and it spiked

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Speaker 3: up to almost twenty eight on Wednesday after the FED decision.

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Speaker 3: Certainly we saw equity sell office on bond sell off.

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Speaker 3: It's come right back down though, now just about above

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Speaker 3: sixteen and a half. Is the FED going to be

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Speaker 3: the source of volatility in twenty twenty five or is

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Speaker 3: it going to be the incoming White House?

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Speaker 4: Well, the FIT has been pretty dependable.

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Speaker 5: Is causing a lot of volatility in the marketplace by

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Speaker 5: their actions that haven't really produced positive results.

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Speaker 4: So my money is the less offensives, and the more

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Speaker 4: in the background they are, the better.

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Speaker 5: As far as the new administration, there are lots of

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Speaker 5: exciting ideas, lots of frothy talk about what might happen,

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Speaker 5: and we'll have to see how practical and how quickly

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Speaker 5: some of these ideas that look favorable business can get through.

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Speaker 5: I'd say the big positive is that there's no longer

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Speaker 5: any talk about raising corporate income texts, which would have

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Speaker 5: been a real depressant on the market had that gone through.

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Speaker 5: I think to have tax rates for corporations where they

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Speaker 5: are even lower will be a positive factor for the

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Speaker 5: soft market continuing to do.

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Speaker 4: Better next year.

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Speaker 6: Well, let's talk about the relationship between what we're talking

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Speaker 6: about on the fiscal side and what that could mean

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Speaker 6: for monetary policy. Torson slack Over at Apollo put out

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Speaker 6: a note of risks in twenty twenty five yesterday, and

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Speaker 6: it was nice because he actually put probabilities next to them.

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Speaker 6: He assigned forty percent odds that the Fed raises interest

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Speaker 6: rates in twenty twenty five. You aren't seeing that being

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Speaker 6: priced into the market at all virtually right now. Do

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Speaker 6: you think that some of the things that we're talking

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Speaker 6: about tariff's taxes, if those come to fruition, should we

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Speaker 6: be talking about a potential rate raise next year.

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Speaker 5: Well, I'm not so sure about the teriff situation of

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Speaker 5: how seman be imposed, what the immediate impact would be

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Speaker 5: on price levels, But I think it is interesting to

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Speaker 5: think historically you've often seen a second wave of inflation

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Speaker 5: after first wave look like things were tamped down, and

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Speaker 5: really when you look at these other signs in the marketplaces,

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Speaker 5: so there's plenty of liquidity that says maybe inflation is

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Speaker 5: going to be much harder for the FED to bring

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Speaker 5: down to its target level of two percent.

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Speaker 4: So I think it's certainly.

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Speaker 5: I'd say forty percent sounds find that there is that

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Speaker 5: possibility later twenty five if I could say this.

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Speaker 4: Isn't working, we need to raise rates.

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Speaker 5: Economies doing fine, So I think it's a possibility. But again,

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Speaker 5: that would be if we had I think a pretty

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Speaker 5: strong economy. The Fed's always very very sensitive about looking

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Speaker 5: at unemployment rates and the economy before they act, but

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Speaker 5: a strong economy, I think that's likely.

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Speaker 6: What is that spell for the back end of the

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Speaker 6: treasury curve? Scarlet and I were talking just a few

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Speaker 6: minutes ago about how there's been plenty of demand for

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Speaker 6: the short end, and of course you can see that

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Speaker 6: in money market funds, you can see that in the auctions.

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Speaker 6: The long end of the curve has been a much.

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Speaker 1: Harrier place to be.

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Speaker 6: What's expectation in twenty twenty five in terms of duration volatility.

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Speaker 5: Well, I'm not looking for any big spike up in

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Speaker 5: the long end of the treasury market because although I

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Speaker 5: think for domestic investors we tend to want to be

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Speaker 5: shorter in maturity with things like treasuries and municipals, but

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Speaker 5: I think that globally there are many investors international entities

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Speaker 5: that would like that very very long duration because there

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Speaker 5: aren't motip places where a long term investor can get very,

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Speaker 5: very high quality and long duration. So I don't think

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Speaker 5: that's going to be a problem that they can always

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Speaker 5: change what they issue if there looks like there's pressure

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Speaker 5: and one part of the curve or not. But really

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Speaker 5: the issue is the amount of financing that the fit

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Speaker 5: has to do because of the very very large emphasis,

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Speaker 5: meaning that you might have a little bit in my

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Speaker 5: opinion of saying excess supply in the treasury market versus

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Speaker 5: the stock market versus even corporate bond market high yield

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Speaker 5: market where there's a relative supply scarcity, and I think

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Speaker 5: that's what's driven spreads in the corporate market narrower, because

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Speaker 5: there's been people want that extra yield and the supplies

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Speaker 5: rather limited, lot of it been hogged off into the

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Speaker 5: product mark. So I think that says to me that

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Speaker 5: yield spreads are likely to get narrower and we're not

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Speaker 5: going to have any big spike in the long end

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Speaker 5: of the curve. Foreign institutional investors and also the fifth

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Speaker 5: being able to control what they would just should and

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Speaker 5: keep that under control.

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Speaker 3: Yeah, you've really outlined some of the big, big technical

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Speaker 3: issues that investors need to contend with, whether it's in

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Speaker 3: equities or in fixed income. Margie, always a pleasure. Thank

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Speaker 3: you so much for joining us. Happy holidays and happy New.

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Speaker 1: Year to you.

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Speaker 3: Margie Battel of Offspring Global Investments.

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Speaker 6: Brian Peterson of Flexport, writing, We're seeing strong demand for

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Speaker 6: ocean freight.

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Speaker 1: It could be driven by a multitude of factors.

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Speaker 6: Fear of a potential i AL strike and tariff increases

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Speaker 6: earlier than usual, lunar new year, plus a strong economy.

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Speaker 6: Ryan joins us. Now, Ryan really interesting there. When you

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Speaker 6: think about this increased demand for ocean free you name

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Speaker 6: a number.

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Speaker 1: Of factors as we just walked through.

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Speaker 6: Is that taking share from other methods or is this

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Speaker 6: just the pie growing bigger?

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Speaker 8: Well, I think what you're saying is a pull forward,

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Speaker 8: So it's taking share from the future that people are

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Speaker 8: trying to get goods in before a potential strike or tariffs.

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Speaker 7: That if you're concerned about those things, which you.

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Speaker 8: Should be, that you know and you have the option,

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Speaker 8: you have the flexibility your supply chain, you want to

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Speaker 8: get the goods in as soon as possible to avoid

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Speaker 8: the disruption.

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Speaker 6: And how much can we draw on the experience of

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Speaker 6: the twenty sixteen election and the first Trump administration when

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Speaker 6: it comes to mapping out the potential impacts of some

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Speaker 6: of the tariffs that we're talking about.

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Speaker 7: Yeah, I mean we've seen this movie before.

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Speaker 8: In many ways, the tariffs weren't as disruptive as people

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Speaker 8: maybe expected them to be. Their tariffs have existed, you know,

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Speaker 8: throughout all of human history. It's basically how government's always

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Speaker 8: funded themselves.

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Speaker 7: So people are able.

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Speaker 8: To adapt to this. It's not huge shock, but it is.

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Speaker 8: You know, the big thing right now is the uncertainty.

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Speaker 8: It's like what exactly is going to hit, When is

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Speaker 8: it going to hit, how is it going to hit. So,

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Speaker 8: for example, this just this week, the President of Mexico

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Speaker 8: actually imposed large tariffs against imports from China, and to

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Speaker 8: everyone's surprise, those actually affected Mexican fulfillment centers. So these

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Speaker 8: are e commerce warehouses who are not shipping into Mexico

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Speaker 8: but import to Mexico in order to ship, reship the

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Speaker 8: re export those goods to consumers in the US. That's

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Speaker 8: a huge way that US e commerce has done is

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Speaker 8: actually out of fulfillment centers in Mexico. And this morning,

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Speaker 8: you know, the largest or last night, late last night,

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Speaker 8: the largest fulfillment centers in Mexico had to like email

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Speaker 8: all of their customers and cancel all their contracts. So

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Speaker 8: a lot of American businesses are scrambling today to find

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Speaker 8: new new fulfillment opportunities, new ways to serve their customers

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Speaker 8: in the US, even though it had nothing to do

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Speaker 8: with the US government.

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Speaker 3: Yeah, and that feels like a complete card. So when

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Speaker 3: something like that happens, basically someone throws a deck of

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Speaker 3: cards up in the air. How long does it take

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Speaker 3: for a new normal to be set in place.

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Speaker 8: The fun part about working in logistics, we all figured

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Speaker 8: out many years ago there's no such thing as normal,

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Speaker 8: and we got to be ready for whatever happens.

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Speaker 7: So it's every day a new thing.

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Speaker 8: It feels like between the you know, the strikes and

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Speaker 8: the Red Sea disrupting ocean freight, you've got tariffs, You've

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Speaker 8: got a drought that's affecting the Panama Canal. Sort of,

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Speaker 8: you just have to be very nimble and agile if

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Speaker 8: you want to run a supply chain in the modern world.

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Speaker 1: Yeah, makes sense.

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Speaker 3: Going back to the tariffs question that Katie was posing,

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Speaker 3: the details, of course, are TBD. We don't know when,

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Speaker 3: we don't know how much, but we do know that

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Speaker 3: some form of these tariffs are coming on imported goods

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Speaker 3: into the US, and the mechanics are pretty clear in

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Speaker 3: terms of teriffs tend to reduce demand for these imports,

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Speaker 3: at least if you're American. But you also point out

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Speaker 3: that we've seen a decrease in ocean freight rates from

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Speaker 3: China and that could be an offset. So walk us

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Speaker 3: through how that what that might mean for goods that

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Speaker 3: are being imported from China, and how manufacturers think about that.

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Speaker 8: Yeah, Well, see, our ship freight rates have been quite

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Speaker 8: high throughout the year, sort of two to three times

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Speaker 8: long run historical averages. And this is in a market

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Speaker 8: where the supply side of the market, the number of

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Speaker 8: ships at operation in their capacity, has has ballooned. There's

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Speaker 8: been a huge number, a huge deployment of new container

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Speaker 8: ships that as these carriers made a lot of money

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Speaker 8: during the last cycle during COVID, they reinvested that in

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Speaker 8: new ships. So one would predict with this huge surge

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Speaker 8: of supply that the price will come down. The only

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Speaker 8: reason that hasn't happened is because of the Red Sea.

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Speaker 8: It's absorbing capacity as ships have to go around the

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Speaker 8: southern coast of Africa. If anything is to be done

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Speaker 8: and allowing container ships to return through the Red Sea,

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Speaker 8: that will instantly bring the price of motion freight down

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Speaker 8: by two thirds or so, is our guest, maybe more,

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Speaker 8: probably saving companies four to five thousand dollars per container.

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Speaker 7: That or that's a pretty big deal. The average value

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Speaker 7: of an ocean.

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Speaker 8: Container at wholesale the goods inside of it is probably

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Speaker 8: one hundred thousand dollars, So if you're talking about twenty

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Speaker 8: five percent tariffs.

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Speaker 7: That's twenty five.

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Speaker 8: Thousand helps a little bit, it's not going to get

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Speaker 8: you all the way back there. The twenty five thousand

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Speaker 8: dollars per containers are pretty big blow.

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Speaker 1: Yeah.

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Speaker 6: Absolutely, And I mean, as we've been talking about, there's

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Speaker 6: a lot of unknown here and spoils about the levels

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Speaker 6: that we're talking about, the final levels, whether or not

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Speaker 6: we get deals negotiated with our trade partners. But when

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Speaker 6: it comes to actual tariffs. In your notes you write

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Speaker 6: that there's basically only two ways that businesses can deal

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Speaker 6: with new tariffs. They can absorb the costs themselves, or

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Speaker 6: they can increase their prices. And the businesses that you

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Speaker 6: work with that you speak to, what are you hearing

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Speaker 6: so far about what path they're actually going to follow?

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Speaker 8: Yeah, well those are That's a very simplistic way that,

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Speaker 8: you know, trying to simplify things for everybody. I think

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Speaker 8: that's true in a very short run, you know, if

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Speaker 8: you've got goods on the water coming here and not

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Speaker 8: much else to do but hey, tariffs, and then you

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Speaker 8: have to choose whether it make less money or pass

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Speaker 8: it on.

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Speaker 7: But in the medium term, there's a lot of strategies available.

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Speaker 8: You can by the way make goods in the United States,

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Speaker 8: and you don't have to pay the tariffs.

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Speaker 5: UH.

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Speaker 8: You know, you may own the raw materials, but you

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Speaker 8: won't on the on the finished goods, which is most

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Speaker 8: of the value. You can make goods in other countries

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Speaker 8: that have free trade agreements with the United States.

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Speaker 7: UH, there's there's tariff engineering.

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Speaker 8: So by understanding at a very detailed level of partnering

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Speaker 8: with your customs broker like Sarah Flexport, you can understand

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Speaker 8: the raw materials and how those UH create the duty rate,

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Speaker 8: and if you change things, you may get a different

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Speaker 8: duty rate.

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Speaker 7: So there's a lot of.

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Speaker 8: Opportunity to uh to reduce tariffs over the medium term.

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Speaker 7: And I think companies are getting really smart.

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Speaker 8: About this thanks to the last cycle, all of these

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Speaker 8: strategies you've been deployed.

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Speaker 7: UH. People is if you didn't see this coming at all.

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Speaker 8: Sure, people weren't sure that Trump was going to get elected,

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Speaker 8: but by the way, Biden's been increasing tariffs too. So

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Speaker 8: I think people have been preparing for this for a

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Speaker 8: while and and and should be in a reasonably okay

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Speaker 8: place to adapt to it.

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Speaker 6: Well, Ryan, where are we on the near shoring slash

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Speaker 6: on shoring narrative, because that's been a big push over

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Speaker 6: the last couple of years, especially gaining steam in the pandemic.

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Speaker 1: But you know better than most people that.

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Speaker 6: Supply chains are pretty uh slow moving animals. They take

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Speaker 6: a long time to actually shift and move them.

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Speaker 1: So where are we on that push it?

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Speaker 7: Yeah, it really depends on the sector.

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Speaker 8: I mean, there's a there's a massive amount of industry

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Speaker 8: real industrialization taking place in the United States right now,

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Speaker 8: but it tends to be much higher value goods, higher

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Speaker 8: complexity things that where and the deployment of things like

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Speaker 8: advanced manufacturing robotics. But for low value goods, what you're

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Speaker 8: seeing is that the shift down to countries like Vietnam

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Speaker 8: to Mexico as well, but even cheaper countries like Vietnam

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Speaker 8: and Cambodia. India is having quite a boom right now

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Speaker 8: and exports, so it's and then and then certain things.

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Speaker 8: You know, China is still just a rate country at manufacturing,

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Speaker 8: and there are certain sectors where even with higher tariffs,

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Speaker 8: it still makes economic sense to produce there because of

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Speaker 8: the quality and the scale of their manufacturing capabilities.

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Speaker 7: And you see it.

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Speaker 8: You know, I was in China not too long ago,

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Speaker 8: and the quality of their cars is remarkable that even

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Speaker 8: with high tariffs, I think for much of the world,

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Speaker 8: people are gonna still want to import those cars. They're

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Speaker 8: so much cheaper and better than what's produced domestically in

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Speaker 8: most countries.

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Speaker 3: Yeah, and at affordable prices. No less too. Ryan, as

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Speaker 3: you speak with your customers, what is the number one

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Speaker 3: worry that they have for twenty twenty five beyond tariffs,

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Speaker 3: because that is a big unknown and it kind of

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Speaker 3: hangs over everything.

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Speaker 8: Yeah, I mean, short term, it's definitely this isla, the

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Speaker 8: strike on the East Coast that's looming over our heads.

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Speaker 8: We had that back in October for four or five days,

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Speaker 8: and then the Biden administration stepped in and kind of

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Speaker 8: told them, hey, knock it off before the election, So

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Speaker 8: they got to stay until January fifteenth, and extension of

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Speaker 8: the contract five days before inauguration. Obviously, so we are

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Speaker 8: very much in crunch time for what happens with those negotiations.

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Speaker 8: My latest understanding was that the two parties weren't even

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Speaker 8: speaking to each other to get you know, so the

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Speaker 8: odds of.

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Speaker 7: A deal seemed kind of low.

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Speaker 8: The demands of the union right now is not just

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Speaker 8: no more automation and higher wages.

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Speaker 7: They've already achieved those.

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Speaker 8: The carriers and the employers have agreed to that, but

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Speaker 8: they're asking reverse automation, actually eliminate automation that already exists.

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Speaker 6: All right, Ryan, great to speak with you and get

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Speaker 6: your insight. That is Ryan Peterson of Flex Support. We

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Speaker 6: have Stuart Kaiser of City Writing. Our preferred vehicles would

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Speaker 6: be large cap tech.

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Speaker 1: Quality and growth.

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Speaker 6: Given the higher for longer nature of the SEP forecasts

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Speaker 6: looking further ahead, payrolls on January tenth are a major

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Speaker 6: catalyst given last month's data, the SEP update and markets

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Speaker 6: pricing just two cuts in twenty twenty five and a

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Speaker 6: ten percent chance of a twenty five basis point cut

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Speaker 6: in January.

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Speaker 1: And please just say that.

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Speaker 6: Stewart joins us in studio right now. It's great to

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Speaker 6: see you in person, Warnie. So I want to talk

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Speaker 6: about higher for longer trades. We're back to talking about

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Speaker 6: that after palace performance last week. Is that the right

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Speaker 6: conversation to be having going into twenty twenty five.

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Speaker 9: Hi, it's the right conversation if you believe the FED.

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Speaker 9: I think if you're worried about risk reward that you're

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Speaker 9: probably worried about, you know, the unemployment rate kind of

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Speaker 9: rising a little bit, so I mean the FED kind

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Speaker 9: of guided you towards unemployment ras king a flat Now.

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Speaker 9: Inflation is sticker that we would like, but it's going

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Speaker 9: to come down and they're going to do a couple

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Speaker 9: insurance cuts next year. That actually sounds a whole lot

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Speaker 9: like the front half of twenty twenty four when large

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Speaker 9: cap tech and growth did really well. So I think

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Speaker 9: that the Fed's prescription would be to be in those stocks.

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Speaker 9: The risk to that, I think the market is is

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Speaker 9: kind of questioning a little bit this idea that the

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Speaker 9: unemployment rate is going to be as friendly as that is.

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Speaker 6: Well, you write in your notes that the SEP, of

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Speaker 6: course the dot plot as well, was equity positive at

444
00:21:03,440 --> 00:21:05,600
Speaker 6: its core, and that stuck out to me because the

445
00:21:05,640 --> 00:21:07,880
Speaker 6: market reaction was not positive.

446
00:21:08,000 --> 00:21:10,240
Speaker 1: So walk us through that a little bit more.

447
00:21:10,400 --> 00:21:13,760
Speaker 6: That fewer rate cuts in twenty twenty five maybe actually

448
00:21:13,840 --> 00:21:15,200
Speaker 6: good news for risk assets.

449
00:21:15,400 --> 00:21:17,439
Speaker 9: Yeah, I think ultimately the market will come back to

450
00:21:17,520 --> 00:21:19,720
Speaker 9: that view. I think what happened last week is the

451
00:21:19,760 --> 00:21:21,960
Speaker 9: market was kind of had coalesced around the idea that

452
00:21:22,000 --> 00:21:24,000
Speaker 9: we had a strong growth environment. What the Fed did

453
00:21:24,080 --> 00:21:25,919
Speaker 9: is it kind of sprinkled in or added in a

454
00:21:25,960 --> 00:21:29,040
Speaker 9: little bit of additional CPI risk, And I think the

455
00:21:29,080 --> 00:21:32,000
Speaker 9: market traded that negatively last year was that the Fed

456
00:21:32,040 --> 00:21:33,920
Speaker 9: seemed to be a little bit concerned about the pace,

457
00:21:34,160 --> 00:21:36,000
Speaker 9: you know, with which CPI is coming down.

458
00:21:36,160 --> 00:21:37,280
Speaker 7: You also went into that.

459
00:21:37,200 --> 00:21:40,320
Speaker 9: Print with a very very strong, you know, equity momentum,

460
00:21:40,440 --> 00:21:42,639
Speaker 9: very very long positioning and things of that nature. So

461
00:21:42,960 --> 00:21:44,919
Speaker 9: I think what you really got is the core of

462
00:21:44,920 --> 00:21:47,200
Speaker 9: the statement and the core of the SDP et cetera,

463
00:21:47,400 --> 00:21:50,280
Speaker 9: was positive, but you added the new information was not

464
00:21:50,840 --> 00:21:53,280
Speaker 9: super friendly, and that ran into strong positioning and you

465
00:21:53,359 --> 00:21:55,040
Speaker 9: kind of got a little bit of a pullback. You know,

466
00:21:55,080 --> 00:21:57,320
Speaker 9: our view on rate cuts is pretty simple as if

467
00:21:57,320 --> 00:21:59,840
Speaker 9: you're pricing out cuts because growth is strong, that's good

468
00:21:59,880 --> 00:22:02,640
Speaker 9: for equities. If you're pricing out growth because of inflation,

469
00:22:02,760 --> 00:22:05,760
Speaker 9: fiscal and deficit risks, you know that's going to be negative.

470
00:22:05,800 --> 00:22:08,240
Speaker 9: So maybe the market interpreted that last week on the

471
00:22:08,240 --> 00:22:09,280
Speaker 9: negative side of the ledger.

472
00:22:09,600 --> 00:22:12,880
Speaker 3: Well, whatever the catalyst is for yields moving higher, If

473
00:22:12,960 --> 00:22:15,360
Speaker 3: yields on the tenure get to five percent or maybe

474
00:22:15,359 --> 00:22:18,240
Speaker 3: even six percent, how do you expect that to impact equities?

475
00:22:18,880 --> 00:22:20,520
Speaker 9: I think, you know, yields get into five percent, you

476
00:22:20,560 --> 00:22:22,800
Speaker 9: could come up with a good reason why the tenure

477
00:22:22,880 --> 00:22:24,919
Speaker 9: yield can get to five percent, and that reason would

478
00:22:24,960 --> 00:22:27,280
Speaker 9: likely be, you know, tax cuts, the regulation and a

479
00:22:27,320 --> 00:22:29,600
Speaker 9: positive growth impulse. I mean, if you're talking at six

480
00:22:29,640 --> 00:22:31,520
Speaker 9: percent handle, it's hard for me to see the ten

481
00:22:31,560 --> 00:22:34,640
Speaker 9: you're getting to six for quote unquote good reasons. So again,

482
00:22:34,680 --> 00:22:36,280
Speaker 9: I think if you if you go from four to

483
00:22:36,320 --> 00:22:38,359
Speaker 9: sixty to five percent and that's coming from a good place,

484
00:22:38,359 --> 00:22:40,359
Speaker 9: I think equity markets are fine with that. We're a

485
00:22:40,400 --> 00:22:42,320
Speaker 9: little bit more concerned, as Kadie mas Juri, with the

486
00:22:42,400 --> 00:22:44,560
Speaker 9: really long end of the curve, because it's very hard

487
00:22:44,600 --> 00:22:46,680
Speaker 9: to come up with a positive story why the thirty

488
00:22:46,760 --> 00:22:48,760
Speaker 9: year yield would less they get to six percent. So

489
00:22:48,840 --> 00:22:50,920
Speaker 9: I think it's it's that bond term premium and it's

490
00:22:50,960 --> 00:22:52,560
Speaker 9: the long end of the yield curve that I think

491
00:22:52,640 --> 00:22:55,080
Speaker 9: is is probably the bigger risk from a race perspective.

492
00:22:55,280 --> 00:22:56,920
Speaker 9: But again, I think it's the why that matters, and

493
00:22:57,000 --> 00:22:58,440
Speaker 9: we're going to kind of stick to that at least

494
00:22:58,480 --> 00:22:58,760
Speaker 9: for now.

495
00:22:59,280 --> 00:23:01,479
Speaker 3: In terms of the markets move it's been a fairly

496
00:23:01,560 --> 00:23:05,040
Speaker 3: placid move up for twenty twenty four at least in aggregate.

497
00:23:05,520 --> 00:23:07,640
Speaker 3: Talk a little bit about volatility, because you point out

498
00:23:07,640 --> 00:23:10,719
Speaker 3: that implied volatility has gone from cheap to rich in

499
00:23:10,880 --> 00:23:13,520
Speaker 3: just one week. What was behind that and what does

500
00:23:13,560 --> 00:23:16,560
Speaker 3: that signal in terms of where we stand versus other

501
00:23:16,560 --> 00:23:17,280
Speaker 3: asset classes.

502
00:23:17,520 --> 00:23:20,080
Speaker 9: Yeah, I think US secrety markets because of the rally,

503
00:23:20,160 --> 00:23:22,959
Speaker 9: because of the relatively segue view on the FED coming in,

504
00:23:23,000 --> 00:23:26,840
Speaker 9: you had US equity volatility come down substantially when the

505
00:23:26,840 --> 00:23:28,720
Speaker 9: FED kind of surprised to Katie's point a little bit

506
00:23:28,760 --> 00:23:30,479
Speaker 9: to the negative side, which you got, is that impulse

507
00:23:30,560 --> 00:23:33,480
Speaker 9: kind of reversed itself. You know, we do think that

508
00:23:32,840 --> 00:23:35,400
Speaker 9: that's going to kind of calm down. It's very hard

509
00:23:35,400 --> 00:23:38,200
Speaker 9: to keep US equity implied volatility at elevated levels when

510
00:23:38,240 --> 00:23:40,439
Speaker 9: realize VOLU is low, when when the market's you know,

511
00:23:40,520 --> 00:23:42,320
Speaker 9: kind of rallying the way it is. I think the

512
00:23:42,359 --> 00:23:46,400
Speaker 9: really interesting thing in volatility these days is the correlation

513
00:23:46,480 --> 00:23:48,760
Speaker 9: between the volatilities is broken down. So there's just been

514
00:23:48,800 --> 00:23:51,520
Speaker 9: a lot more kind of idiosyncratic risk out there, whether

515
00:23:51,600 --> 00:23:54,439
Speaker 9: that's you know, policy headlines in Brazil, what's going on

516
00:23:54,560 --> 00:23:57,639
Speaker 9: in Korea, what's going on in China, you know, European elections,

517
00:23:57,760 --> 00:24:00,320
Speaker 9: US elections. So really what you're getting is volatile atuity

518
00:24:00,520 --> 00:24:01,840
Speaker 9: is kind of a little bit all over the place.

519
00:24:01,880 --> 00:24:05,480
Speaker 9: And our sort of recommendation there is if you're using

520
00:24:05,520 --> 00:24:08,359
Speaker 9: volatility to head your portfolio hedge at home, you know,

521
00:24:08,400 --> 00:24:10,360
Speaker 9: don't don't try to get creative and say, oh, I'm

522
00:24:10,400 --> 00:24:12,159
Speaker 9: going to head you as equity risk.

523
00:24:12,080 --> 00:24:13,359
Speaker 7: With some China volatility.

524
00:24:13,400 --> 00:24:15,359
Speaker 9: Now that stuff just is it working right now, and

525
00:24:15,400 --> 00:24:17,160
Speaker 9: I think you just need to be pretty conservative about

526
00:24:17,160 --> 00:24:18,320
Speaker 9: how you approach that at the moment.

527
00:24:18,520 --> 00:24:20,960
Speaker 6: Yeah, it's been interesting, of course to see the VIS

528
00:24:21,000 --> 00:24:23,760
Speaker 6: a little bit more elevated than the move index. Haven't

529
00:24:23,800 --> 00:24:25,920
Speaker 6: seen that too often over the past year. I want

530
00:24:25,920 --> 00:24:28,200
Speaker 6: to keep going though on this relationship between the bond

531
00:24:28,240 --> 00:24:30,919
Speaker 6: market and the equity market, because it feels like the

532
00:24:30,920 --> 00:24:34,480
Speaker 6: Magnificent seven can handle anything except in video missing earning

533
00:24:34,480 --> 00:24:37,200
Speaker 6: se expectations of course, But when it comes to other

534
00:24:37,280 --> 00:24:39,560
Speaker 6: areas of the market, when it comes to the small

535
00:24:39,560 --> 00:24:42,879
Speaker 6: caps in particular, that's an area that it feels like

536
00:24:43,000 --> 00:24:45,200
Speaker 6: you really need rates to come down.

537
00:24:45,280 --> 00:24:46,080
Speaker 1: Do you agree with that?

538
00:24:46,359 --> 00:24:47,880
Speaker 9: Yeah, I mean, if you look what happened last week,

539
00:24:47,920 --> 00:24:49,560
Speaker 9: I think I think small cap underformed the S and

540
00:24:49,560 --> 00:24:51,399
Speaker 9: P by by three hundred basis points, So you know

541
00:24:51,440 --> 00:24:54,720
Speaker 9: that smaller cap, lower quality, sort of higher or higher

542
00:24:54,760 --> 00:24:57,000
Speaker 9: credit risk stock is going to be much more sensitive

543
00:24:57,000 --> 00:24:59,480
Speaker 9: to the moving yields. And look how yield spreads also

544
00:24:59,600 --> 00:25:01,920
Speaker 9: rose twenty basis points last week, So I think small

545
00:25:01,960 --> 00:25:04,760
Speaker 9: cap kind of suffered from both higher yields as well

546
00:25:04,800 --> 00:25:07,000
Speaker 9: as kind of wider credit spread. So yeah, there are

547
00:25:07,000 --> 00:25:08,439
Speaker 9: pockets in the market that are going to be much

548
00:25:08,480 --> 00:25:10,680
Speaker 9: more sensitive to that. You know the mag seven large

549
00:25:10,680 --> 00:25:13,640
Speaker 9: cap tech most of those are negative net debt stocks. Anyway,

550
00:25:13,760 --> 00:25:16,080
Speaker 9: you know, the level of yields and refinance risk is

551
00:25:16,080 --> 00:25:18,720
Speaker 9: not really applicable to Microsoft. So I think, look our

552
00:25:18,800 --> 00:25:21,159
Speaker 9: view on small caps, but it's just a very tricky

553
00:25:21,200 --> 00:25:24,080
Speaker 9: trade really for the last six months, because for that

554
00:25:24,160 --> 00:25:27,080
Speaker 9: trade to work, you need a soft landing narrative to

555
00:25:27,160 --> 00:25:29,320
Speaker 9: kind of play out. Higher for longer is a headwind

556
00:25:29,320 --> 00:25:32,480
Speaker 9: because of higher yields. If the economy slows meaningfully, then

557
00:25:32,520 --> 00:25:35,399
Speaker 9: that negative growth impulse is horrible for small caps.

558
00:25:35,400 --> 00:25:36,440
Speaker 7: So small cap.

559
00:25:36,240 --> 00:25:38,320
Speaker 9: You're really kind of threading a needle here. You need

560
00:25:38,400 --> 00:25:40,479
Speaker 9: kind of a soft landing growth narrative and a broadening

561
00:25:40,520 --> 00:25:41,200
Speaker 9: out of earnings.

562
00:25:41,440 --> 00:25:43,520
Speaker 6: I'm glad you brought up that when it comes to

563
00:25:43,560 --> 00:25:46,359
Speaker 6: the big tech stocks, the Magnificent seven, that their net

564
00:25:46,359 --> 00:25:47,760
Speaker 6: debt extremely low.

565
00:25:48,080 --> 00:25:49,720
Speaker 1: And this isn't new, but it feels.

566
00:25:49,400 --> 00:25:52,680
Speaker 6: Like that subverts the textbook explanation of you see higher

567
00:25:52,720 --> 00:25:55,240
Speaker 6: yields and you see tech stocks, you see growth stocks

568
00:25:55,320 --> 00:25:57,480
Speaker 6: kind of go out the window because of of course,

569
00:25:57,520 --> 00:26:00,639
Speaker 6: that longer duration debt. It just feels like market you

570
00:26:00,640 --> 00:26:02,359
Speaker 6: can't really apply that old logic.

571
00:26:02,680 --> 00:26:04,600
Speaker 9: Well, I think you can apply the logic, you just

572
00:26:04,640 --> 00:26:06,480
Speaker 9: can't apply it to the Mac seven. I think your

573
00:26:06,840 --> 00:26:10,399
Speaker 9: smid tech stocks who have that longer duration, Yes, I

574
00:26:10,440 --> 00:26:12,960
Speaker 9: think the rates can really negatively impact them. If you're

575
00:26:12,960 --> 00:26:15,840
Speaker 9: looking at large cap tech, these are negative net det

576
00:26:15,920 --> 00:26:19,280
Speaker 9: huge free cash flow, paid dividends, buy backstock, so you're

577
00:26:19,280 --> 00:26:22,160
Speaker 9: not really as reliant on that long term earning florecast

578
00:26:22,200 --> 00:26:24,159
Speaker 9: as you used to be. I'd argue the duration of

579
00:26:24,280 --> 00:26:27,040
Speaker 9: the mag seven is actually much shorter today than it

580
00:26:27,119 --> 00:26:28,680
Speaker 9: was in the past, so they are a little bit

581
00:26:28,720 --> 00:26:31,520
Speaker 9: less rate sensitive. You've gone to that smid area of

582
00:26:31,920 --> 00:26:33,440
Speaker 9: the tech space, then yeah, I think there is still

583
00:26:33,440 --> 00:26:34,879
Speaker 9: a lot of rate sensitivity there.

584
00:26:35,080 --> 00:26:36,919
Speaker 3: How do you think about the strong dollar and what

585
00:26:36,960 --> 00:26:40,120
Speaker 3: it means for US companies and their ability to rely

586
00:26:40,200 --> 00:26:43,199
Speaker 3: on overseas markets, especially with a president Electrump intent on

587
00:26:43,280 --> 00:26:46,800
Speaker 3: imposing tariffs on incoming goods in order for US to

588
00:26:46,800 --> 00:26:49,640
Speaker 3: be able to sell more goods to those countries. Certainly,

589
00:26:49,680 --> 00:26:52,679
Speaker 3: a strong US dollar says one thing about our energy

590
00:26:52,680 --> 00:26:55,080
Speaker 3: companies versus some of our consumer companies.

591
00:26:55,520 --> 00:26:57,399
Speaker 9: Yeah, the strong dollars, but it's been kind of a

592
00:26:57,440 --> 00:27:00,200
Speaker 9: tricky one because is the strong dollar strong becomes of

593
00:27:00,280 --> 00:27:02,840
Speaker 9: US exceptionalism, which I like, or is a drug dollars

594
00:27:02,840 --> 00:27:04,600
Speaker 9: strong because of you know, some of the tire for

595
00:27:04,600 --> 00:27:06,280
Speaker 9: and other risks. So in our review on the dollar

596
00:27:06,320 --> 00:27:08,000
Speaker 9: is you generally need a pretty big move, and you

597
00:27:08,000 --> 00:27:10,119
Speaker 9: need that move to be fairly sustainable for it to

598
00:27:10,200 --> 00:27:12,640
Speaker 9: really start to get into US equities.

599
00:27:12,720 --> 00:27:13,680
Speaker 1: A seven percent move.

600
00:27:13,600 --> 00:27:15,320
Speaker 3: In twenty twenty four is pretty sizable.

601
00:27:15,400 --> 00:27:15,840
Speaker 7: Yeah, it is.

602
00:27:15,880 --> 00:27:17,400
Speaker 9: And I think if you look at if you broke

603
00:27:17,400 --> 00:27:20,639
Speaker 9: down foreign versus domestic revenue stocks within the US, you

604
00:27:20,720 --> 00:27:23,640
Speaker 9: have seen that trade actually perform, you know, quite well

605
00:27:23,680 --> 00:27:25,800
Speaker 9: since the election. So I'm not sure it's going to

606
00:27:25,840 --> 00:27:28,160
Speaker 9: impact the S and P at the sort of top level,

607
00:27:28,160 --> 00:27:29,640
Speaker 9: but if you get below the surface and you really

608
00:27:29,720 --> 00:27:31,480
Speaker 9: kind of isolate the stocks that are either from a

609
00:27:31,520 --> 00:27:34,399
Speaker 9: supply chains perspective or a revenue perspective.

610
00:27:33,880 --> 00:27:34,720
Speaker 7: More exposed to it.

611
00:27:34,960 --> 00:27:37,280
Speaker 9: You are seeing that because you have seen a pretty

612
00:27:37,280 --> 00:27:39,439
Speaker 9: big move, but that move has not been sort of

613
00:27:39,600 --> 00:27:42,480
Speaker 9: large enough to disrupt kind of I think index level performance.

614
00:27:42,520 --> 00:27:43,720
Speaker 1: At this point, we've.

615
00:27:43,520 --> 00:27:46,480
Speaker 3: Really seen healthcare companies come under pressure now because of

616
00:27:46,520 --> 00:27:51,360
Speaker 3: policy concerns, specifically anyone with a pharmacy benefits manager kind

617
00:27:51,400 --> 00:27:55,280
Speaker 3: of in the bullseye of President elect Trump. How are

618
00:27:55,320 --> 00:27:57,560
Speaker 3: you thinking about this sector because there was so much

619
00:27:57,560 --> 00:28:01,160
Speaker 3: excitement about its ability to leverage technology going forward, and

620
00:28:01,280 --> 00:28:06,119
Speaker 3: of course the fundamental growth store behind healthcare expenses, but

621
00:28:06,359 --> 00:28:09,560
Speaker 3: that kind of changes now with the policy angle that

622
00:28:10,280 --> 00:28:13,120
Speaker 3: a Health and Human Services Secretary R. F. K. Junior

623
00:28:13,160 --> 00:28:13,560
Speaker 3: would bring.

624
00:28:13,800 --> 00:28:16,240
Speaker 9: Yeah, look, coming into the election, our view is like

625
00:28:16,320 --> 00:28:19,280
Speaker 9: banks is the clean trade, Both healthcare and energy are

626
00:28:19,359 --> 00:28:22,200
Speaker 9: sort of much more nuanced from a sector perspective, And

627
00:28:22,480 --> 00:28:24,639
Speaker 9: you know, I think the logic there and today is

628
00:28:24,680 --> 00:28:27,120
Speaker 9: that find if let's say the Democrats win, you get

629
00:28:27,119 --> 00:28:29,679
Speaker 9: broad based you know, healthcare spending. You know, that may

630
00:28:29,720 --> 00:28:31,520
Speaker 9: be positive for parts of the sector, but they also,

631
00:28:31,600 --> 00:28:33,800
Speaker 9: let's say, wanted to negotiate drug prices. And now you're

632
00:28:33,840 --> 00:28:36,719
Speaker 9: seeing from a Trump election win that you also are

633
00:28:36,760 --> 00:28:39,080
Speaker 9: getting some mixed signals here where Yes, he may be

634
00:28:39,120 --> 00:28:41,320
Speaker 9: positive for M and A and maybe that's good for biotech,

635
00:28:41,400 --> 00:28:44,760
Speaker 9: but maybe he's a headwin for the farms and benefit

636
00:28:44,800 --> 00:28:47,720
Speaker 9: managers or kind of the larger cap healthcare sectors. So

637
00:28:47,760 --> 00:28:50,280
Speaker 9: we're seeing a lot of people hide out in medical technology,

638
00:28:50,320 --> 00:28:51,920
Speaker 9: you know, to your point, that is still sort of

639
00:28:51,960 --> 00:28:54,720
Speaker 9: an active theme. But the sector itself, I would say,

640
00:28:54,760 --> 00:28:57,040
Speaker 9: is a little bit discombobulated. And we're seeing a very

641
00:28:57,080 --> 00:28:58,800
Speaker 9: similar thing on the energy side of things. So I

642
00:28:58,840 --> 00:29:02,440
Speaker 9: think like those two in particular, they're very complex sectors

643
00:29:02,720 --> 00:29:05,400
Speaker 9: and different you know, sort of gifts level two kind

644
00:29:05,400 --> 00:29:08,239
Speaker 9: of industry groups are being impacted much much differently by

645
00:29:08,320 --> 00:29:09,520
Speaker 9: the by the election outcome.

646
00:29:09,720 --> 00:29:11,600
Speaker 1: All right, Stuart, we have to leave it there. It's

647
00:29:11,600 --> 00:29:13,760
Speaker 1: great to see you. Happy holidays to you.

648
00:29:13,920 --> 00:29:17,360
Speaker 6: That is Stuart Kaiser of City.

649
00:29:17,400 --> 00:29:20,960
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650
00:29:20,960 --> 00:29:24,280
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651
00:29:24,320 --> 00:29:27,280
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652
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653
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