Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com, and of course on the Bloomberg terminal. Lisa,
Speaker 1: as we go to a bond guy and I think
Speaker 1: you know this is true story, folks. I'm on the
Speaker 1: floor of bear Stearns a million years ago and John
Speaker 1: writing Lisa is ready to go on, and just before
Speaker 1: we cut to live, somebody screamed out at John John
Speaker 1: price up, yield down, and of course the whole place
Speaker 1: erupted in laughters. We went live. I mean, nobody's laughing,
Speaker 1: no are they know? Greg Peters that somebody who's gotten
Speaker 1: the bond market right again and again, as well as
Speaker 1: all of p Jim fixed Income. He's head of multi
Speaker 1: sector and strategy there. And you've been calling Greg for
Speaker 1: this decline in yields or at least a stasis where
Speaker 1: we are despite some of the UH inflated expectations earlier
Speaker 1: in the year for inflation, here we are at a
Speaker 1: precipice where bulls on Wall Street cannot get bullish enough
Speaker 1: about equities, where bond bond veterans are looking at the
Speaker 1: bond yields here and saying they're not going to move
Speaker 1: that much. Do you think that people could be surprised
Speaker 1: by bond yields going lower being a bear case for equities. Yeah,
Speaker 1: I think that's a distinct possibility. It's not my base
Speaker 1: case by any stretch. UM actually think we're in the
Speaker 1: symbiotic relationship where low yields really allow equities to outperform. Right,
Speaker 1: it's not only the discounting mechanism that's much lower, so
Speaker 1: you know, pushing up valuations, But it's just type a low,
Speaker 1: stable yield environment is just broadly supportive of growth, broad
Speaker 1: broadly supportive of earnings h and should be broadly supportive
Speaker 1: of risk asset. So I actually see the two actually
Speaker 1: pretty much aligned here. But I think your question ultimately
Speaker 1: is if the bond market really starts to sense and
Speaker 1: suss out a rolling over of economic activity, and then
Speaker 1: that's clearly not a great outlook for stocks. If J
Speaker 1: Powell this Friday, at his speech at the Virtual that
Speaker 1: Jackson Holl Symposium comes out and forecasts or four tells
Speaker 1: an earlier taper than the market is expecting, says November
Speaker 1: rather than December as most people seem to expect. What's
Speaker 1: the reaction markets, I don't know. I mean personally, I
Speaker 1: don't think a month matters. I mean, if the markets
Speaker 1: are that sensitive around November versus December, then I just
Speaker 1: think it's kind of looking for an excuse to uh
Speaker 1: take some chips off the table. So I'm not overly
Speaker 1: worried about it. That's my personal expectation that the Fed
Speaker 1: starts to taper in November, maybe December, but either way
Speaker 1: they're tapering, UH. And then equally, I'm not as jammed
Speaker 1: up over a taper as some other folks, just given
Speaker 1: the fact that you're seeing this massive shrinking UH in
Speaker 1: treasury supply at the same time, Gregor, part of the
Speaker 1: stresses that are out there now is historic liquidity. Every
Speaker 1: morning I look at overnight repo. We've now gone out
Speaker 1: over a trillion. We're grinding higher. I've got experts telling
Speaker 1: me it's no big deal. But how does the wall
Speaker 1: of money that's out there fold into the pijam yield?
Speaker 1: How does it fold into the simple idea that we
Speaker 1: want to observe and guess where yield is going. Yeah,
Speaker 1: I think the technical dynamics are important here. Typically I
Speaker 1: don't think it um changes the direction, but I think
Speaker 1: it exacerbates the move. Uh. And so that's why I'm
Speaker 1: focused on treasury supply going forward, as I think the
Speaker 1: fact that you're going to see a decline in treasury
Speaker 1: supply next year and several years after, I think is
Speaker 1: highly supportive. At the same time, you know, the US
Speaker 1: is winning by not losing, right, So the fact that
Speaker 1: you're seeing so much foreign investment into the US into
Speaker 1: the bond market is also support So I think these
Speaker 1: are really supportive factors. But ultimately it does does point
Speaker 1: to the fundamental piece. And so I think fundamentals are
Speaker 1: the driver. I think the technical is just uh, just exacerbated.
Speaker 1: I don't want you to make a sales side bracketed
Speaker 1: tenure call, but I do you know, as a guy
Speaker 1: running institutional money with that belief on liquidity and on
Speaker 1: treasury supply bracket the ten year yield as you see
Speaker 1: it now a year out or two years out, Yes,
Speaker 1: so I think our level, uh you know, two years
Speaker 1: forward is about eight basis points on the ten year.
Speaker 1: Our call for the end of this year was a
Speaker 1: hundred and twenty basis points. Um so we're in striking distance.
Speaker 1: That felt like a terrible call in the first quarter, Tom,
Speaker 1: I have to be honest with you, quite painful. Uh, yeah,
Speaker 1: I did, um so. But I think longer term, Uh,
Speaker 1: you know, we see an environment where yield will remain low. Uh.
Speaker 1: And honestly, I struggle with the narrative that yields are
Speaker 1: going to jump post Fed taper, post economic activity that's
Speaker 1: off the charts, peak inflation, all those sorts of things
Speaker 1: are in the rear view, and to me, I just
Speaker 1: don't really see in an environment where yields after all
Speaker 1: that's been thrown at the market, that yields will will
Speaker 1: move higher after the fact. If it doesn't happen during
Speaker 1: then then I'd be shocked to see it happened after
Speaker 1: the fact. I know that in about four and a
Speaker 1: half hours time or so, Tom Keen is going to
Speaker 1: be awakening from his nap, eager really watching the to
Speaker 1: your Treasury auction we're getting at one pm Eastern time.
Speaker 1: He cannot wait, neither can Lisa. When it comes to
Speaker 1: these auctions in the supply and who is buying. How
Speaker 1: do you think about foreign buyers in the treasury market. Yeah,
Speaker 1: I think it's important. I mean, I mean we've been
Speaker 1: seeing it, uh, particularly as we get closer to taper.
Speaker 1: Whether it's November or December or January. Who knows, the
Speaker 1: fact that you're seeing um uh foreign buyers increase their
Speaker 1: purchase power within the U S treasury market is important, right,
Speaker 1: So I do think that's a strong technical factor. So
Speaker 1: I expect that to continue. But I try not to
Speaker 1: get overly taxed by a single auction event. But I
Speaker 1: think you know, over time, though, you'll continue to see
Speaker 1: the auctions do quite well. Foreign to foreign UH participation
Speaker 1: to be quite high, uh, but and auctions that go
Speaker 1: quite well. And of course the US in many ways
Speaker 1: is attractive because it's still the highest yield you can
Speaker 1: get in basically sovereign bond markets globally. And if even
Speaker 1: if you expect yields to be staying lower when it
Speaker 1: comes to treasury yields, is that still going to remain true? Yeah?
Speaker 1: I think so it's a relative game. We play a
Speaker 1: relative game, So we're looking at where yields are. UH.
Speaker 1: In Europe, we look at where yields are in Japan,
Speaker 1: and the US by far has the most attractive field environment,
Speaker 1: so I don't see that changing anytime soon. I don't
Speaker 1: think anyone is forecasting European yields to move above zero
Speaker 1: uh anywhere over the near term or ever. So UM,
Speaker 1: I really think the support for U S treasuries US
Speaker 1: assets period will continue to be quite strong, which is
Speaker 1: why I think the dollar will continue to do quite
Speaker 1: well here, which is somewhat against consensus, or was against
Speaker 1: consensus right before we let you go. I want to
Speaker 1: ask a philosophical question as we talk about the FED,
Speaker 1: and they're ongoing a hundred and twenty billion dollars of
Speaker 1: asset purchases every month at a time of rising in equality,
Speaker 1: at a time of inflated asset prices, at a time
Speaker 1: when a lot of people are saying that corporate profits
Speaker 1: are as good as they're ever going to get, and
Speaker 1: we'll contin will continue to accelerate from here because of
Speaker 1: their eminence over specific sectors. Is this bond purchasing program
Speaker 1: more helpful than it is harmful at this point? That's
Speaker 1: a great question. Um. Clearly inequality is something that has worsened.
Speaker 1: Is worsened um during the pandemic post pandemic, right, you're
Speaker 1: creating the wealth effect. Central bank policy is a blunt instrument.
Speaker 1: This whole portfolio channel effect, whereby raising asset prices to
Speaker 1: increase kind of spending at all to trickle down hasn't
Speaker 1: really worked that well. So I think the FEDS focused
Speaker 1: will continue to be around getting real wages higher. So
Speaker 1: for me, the focus is less on asset prices, but
Speaker 1: getting real wages higher. And I think that's the most
Speaker 1: important piece of the puzzle here to solve, not only
Speaker 1: in the US but globally, as inequality has really worsen
Speaker 1: quite dramatically here over the past twelve eight months. Peters,
Speaker 1: thank you so much. With p Jim ahead of a
Speaker 1: multisector ategy, they're really interesting conversation. I guess this is
Speaker 1: the point where we begin a look back. It's September eleventh.
Speaker 1: There are those that have younger children explaining to their
Speaker 1: younger children exactly what was September eleven, And too many
Speaker 1: of us it is a collective memory. Everyone will pontificate
Speaker 1: only foreign affairs gives us wonderful expert opinion across a
Speaker 1: wonderful cross section. Who won the war on Tera. I
Speaker 1: really can't say enough about this. Daniel Kurtsfahlan joining us,
Speaker 1: driving on the legacy of all that have done foreign affairs. It's, folks,
Speaker 1: an annual subscription, I believe, is a price of an
Speaker 1: over priced martini at an overpriced restaurant. Throw it at
Speaker 1: your offspring and say shut up and read this, Daniel. Congratulations.
Speaker 1: Ben Rhodes is in there, maybe from conventional Washington's other
Speaker 1: people as well. And I'm thrilled to see the marine
Speaker 1: Elliott Ackerman in there was Travitas writing my book of
Speaker 1: the Summer, and Elliott Ackerman makes no bones about it.
Speaker 1: We are a nation preoccupied, We are a nation and fatigued.
Speaker 1: How tired is America? Well, it's it's appropriate in some
Speaker 1: ways that we're seeing this messy, chaotic, in many ways
Speaker 1: tragic withdrawal from Afghanistan, right as the twentieth anniversary of
Speaker 1: nine eleven is approaching. As all of us who remember
Speaker 1: it now, it was such a cataclysmic event for American politics,
Speaker 1: for American foreign policy, and it really shaped the way
Speaker 1: we used our power in the world, the way we
Speaker 1: thought about the rest of the world for so long,
Speaker 1: and in some ways that it seemed to really drop
Speaker 1: out of the foreign policy conversation in the last few
Speaker 1: years in Afghanistan, and what we're seeing now, the scenes
Speaker 1: from probably are really reminder of just how much it
Speaker 1: has changed the world, just how much has changed sense
Speaker 1: of American power in ourselves. There's so many ways to
Speaker 1: go here. Stravits's essay of a few days ago in
Speaker 1: Time magazine what Zacaria rode in the Washington Post into
Speaker 1: me the exhaustion is an exhaustion of theory or belief.
Speaker 1: In putting this addition together of foreign affairs, could you
Speaker 1: discover a modern American foreign policy theory? Does it exist? Well,
Speaker 1: if there's a theory or a tendency, it maybe one
Speaker 1: of overreach and and hubris and these kind of maximalist
Speaker 1: goals that are eventually walked back in time. If you
Speaker 1: remember back to the days after nine eleven and the
Speaker 1: declarations coming from President Bush at the time, but from
Speaker 1: lots of others about the agenda we had in the
Speaker 1: world and the way we were going to achieve this
Speaker 1: ultimate victory in the war in Terror and transform them
Speaker 1: into least and transform our own society. Um, all of
Speaker 1: those goals look so fanciful in retrospect and what we've
Speaker 1: come out of If we look back at this period,
Speaker 1: as you see in these essays, it's something that in
Speaker 1: some ways is would be surprising if you go back
Speaker 1: to days after nine eleven. We haven't seen the kind
Speaker 1: of you know, mass casualty terrorist attacks in the United
Speaker 1: States that most people thought would come repeatedly after nine eleven,
Speaker 1: and that in some ways is an achievement, but look
Speaker 1: at all the costs that have come with it. You
Speaker 1: see in Elliott Ackerman's essay the one you mentioned, just
Speaker 1: how much it has affected American service members in the
Speaker 1: American military and American power. You see in Ben Rhodes
Speaker 1: essay just how much it has changed American foreign policy.
Speaker 1: So we can in some ways look at certain kinds
Speaker 1: of achievements and certain kinds of victories of American policy
Speaker 1: in that period, but if you look at the declarations
Speaker 1: and ambitions that we had in those days right after
Speaker 1: nine eleven, what we've had to pay for those those
Speaker 1: achievements is really staggering. And there's also the question of
Speaker 1: how the concept of the war on terror has changed
Speaker 1: amid a changing world. What do some of the expert
Speaker 1: writers way in on that front. Well, one of the
Speaker 1: one of the most striking things about the Afghanistan withdrawal,
Speaker 1: which I think is a theme that runs through a
Speaker 1: lot of these essays. We closed the issue, of course
Speaker 1: before we saw what was going to happen this week,
Speaker 1: but most of the writers really anticipated what this outcome
Speaker 1: was gonna look like. Is at this moment when the
Speaker 1: United States is trying to balance goals in the war
Speaker 1: on Terror and the kinds of considerations that drove us
Speaker 1: into Afghanistan in the first place, and that kept us
Speaker 1: there for for twenty years, against what are seeing is
Speaker 1: the kind of challenges of our day, China, technology, you know,
Speaker 1: great power competition. That's what people in the national security
Speaker 1: and foreign policy worlds were talking about now. But as
Speaker 1: you see in these essays, the response to the war
Speaker 1: in terror has shaped even the way we think about
Speaker 1: some of these great challenges today. So, even as it's
Speaker 1: it's passed out of the kind of core of American
Speaker 1: foreign policy concerns in many ways, at least before Afghanistan
Speaker 1: became the headline story of the day, uh, it really
Speaker 1: has shaped the way we think about the world and
Speaker 1: about our own power as we discussed this morning the
Speaker 1: idea of top level officials in the United States meeting
Speaker 1: with Taliban officials. The idea here of the legitimacy of
Speaker 1: groups previously designated as terrorist organizations. How much are we
Speaker 1: at risk in the Western world generally at risk from
Speaker 1: terror threats in Afghanistan where we have that much less
Speaker 1: visibility on the ground. That that is the big question
Speaker 1: of the day, and it's one we just don't know.
Speaker 1: Bill Burns, the CIA director who is you you alluded to,
Speaker 1: was meeting with the Taliban leadership in Cobble yesterday. Really
Speaker 1: extraordinary meeting given the history of these past years. Uh.
Speaker 1: He has said very very explicitly that we're gonna face
Speaker 1: some more uncertainty and some more risk, something that that
Speaker 1: I really liked one of the essays that we published
Speaker 1: by Dan Biman. You know, we talked for a long
Speaker 1: time about stamping out evil and standing out terrorism everywhere,
Speaker 1: and what what Dan Bieman points out in his essay
Speaker 1: is that we've come up with what he calls a
Speaker 1: good enough doctrine where we accept a degree of risk.
Speaker 1: We accept that the United States is not going to
Speaker 1: go out and destroy or every terrorist or every terrorist
Speaker 1: group everywhere, but that we can create enough protections that
Speaker 1: there should be defenses at least against the kind of
Speaker 1: large attacks that we worried about in the aftermath of
Speaker 1: nine eleven. So in the wake of years in which
Speaker 1: we talked about these grand victories and stamping out evil
Speaker 1: and all of that really grand, ambitious rhetoric, we're settling
Speaker 1: for something much murkier, and there will be a degree
Speaker 1: of risk and uncertainty as part of that. And Dan
Speaker 1: I saw Emma Ashford's essay on strategies of restraint. It
Speaker 1: is kind of an extension of that. I mean, twenty
Speaker 1: years post nine eleven, once we're out of both Afghanistan
Speaker 1: and of course been out of a rock, are we
Speaker 1: looking at a United States that is more restrained going forward? Absolutely.
Speaker 1: I think it's undeniable that all parts of the political
Speaker 1: spectrum have become much more attentive to limits on our
Speaker 1: power after a period in which there was broad agreement.
Speaker 1: If you remember those years after nine eleven about using
Speaker 1: American power, using the American military, and these fairly expansive
Speaker 1: ways all over the world, people all of a political
Speaker 1: spectrum are much more hesitant about using that kind of
Speaker 1: power now, and we may be at You know, there's
Speaker 1: always a sort of pendulum in American foreign policy between
Speaker 1: these relatively ambitious uses of power and these this sense
Speaker 1: of restraint, and maybe that we're at one far extreme
Speaker 1: of the pendulum and we're about to see it swing back,
Speaker 1: because this is what we've seen in Afghanistan. There's a
Speaker 1: reminder that their costs to restraint as well, just as
Speaker 1: there are are costs to ambition and overreach. And I
Speaker 1: wonder too if the United States is going to look
Speaker 1: internally next. There was also a great piece on from
Speaker 1: nine eleven to one six January six talking about the
Speaker 1: domestic terror threat and far right extremist white supremacists. Is
Speaker 1: that going to be the next error or area of
Speaker 1: terrorism focus. This is just an extraordinary sea by Cynthia
Speaker 1: Miller address who has been studying extremism of all kinds
Speaker 1: for for for years, and she traces the history of
Speaker 1: some of the domestic terrorist groups that we have seen
Speaker 1: a threat more recently, even even as the rep from
Speaker 1: Islamic terrorism started to receive a bit. She she traces
Speaker 1: their rise through these years and as we all know,
Speaker 1: after seeing some of the news events of the past,
Speaker 1: the past couple of years. This is sort of the
Speaker 1: unappreciated threat that crept up on us as we were
Speaker 1: focused on terrorism coming from far away. And what what
Speaker 1: something Milliar just points out in this piece is that
Speaker 1: we tend to apply some of the same frameworks. You know,
Speaker 1: this goes back to this question of how the War
Speaker 1: on Terror will continue to affect the way we approach things.
Speaker 1: We apply some of the same frameworks and tools to
Speaker 1: these groups, even though it's a very very different kind
Speaker 1: of threat. Tell me about our new isolationism. I find
Speaker 1: Dan absolutely fascinating and your wonderful book on George Marshall,
Speaker 1: it was a battle of n as well. What is
Speaker 1: the color of our our two thousand twenty five isolationism, Well,
Speaker 1: it's it's a it may be a little bit more
Speaker 1: subtle than that. It's not purely isolationist. It is a
Speaker 1: reaction to the perceived failures and the overreach of the
Speaker 1: years after nine eleven, when we thought we could use
Speaker 1: the American military to go it in and address threats completely,
Speaker 1: to stamp out threats completely, and to transform foreign societies.
Speaker 1: A lot of those uses, whether in Afghanistan or in
Speaker 1: Iraq or Libia, have proved to be much more difficult
Speaker 1: than people expected at the time and much bloodier and
Speaker 1: much more possible perspective time. At the same time, we
Speaker 1: are as as you know well, very very focused on
Speaker 1: this threat from China, and in some ways there are
Speaker 1: people in Washington and the nash security world who see
Speaker 1: the China threat as a thing that is going to
Speaker 1: keep us from receding into isolationism, precisely because it is
Speaker 1: a kind of what that is defining our our American
Speaker 1: form policy. That Pottngers piece in the issue is a
Speaker 1: great demonstration of that. Daniel Kurs, Phil and thank you
Speaker 1: so much. Just wonderful to begin our remembrance of September
Speaker 1: elevens with you on a Tuesday in August. Foreign Affairs
Speaker 1: who won the War on Terror can't say enough about
Speaker 1: some very controversial essays there to give up respective In
Speaker 1: his uh Dr kurtz Phalan said, particularly with all that's
Speaker 1: going on in Afghanistan, this is a joy because if
Speaker 1: you're at sixty feet, you've got to keep your eyes
Speaker 1: on the ground. Ellen Ruskin has made a career of that,
Speaker 1: and working with David focus Landau at Deutsche Bank, publishes
Speaker 1: the most interesting and twisted literature in this time of
Speaker 1: our paranoias, are worries, are angst about inflation and such?
Speaker 1: Good to catch up with the chief international strategist of
Speaker 1: Deutsche Bank, Alan focus Land on the team worry about
Speaker 1: German inflation. They talk about the tail risks. What is
Speaker 1: your tail risk in the Q four. I think inflation
Speaker 1: globally is very much the tail risk. I think the
Speaker 1: markets have taken a very sanguine view that, particularly in
Speaker 1: the US, the Federal Reserve is going to be correct,
Speaker 1: that a lot of the inflation forces on in fact transitory,
Speaker 1: that the possibility that they're wrong and the consequences if
Speaker 1: they're wrong are enormous. So I would say that, you know,
Speaker 1: in terms of macro risk, this is one of the
Speaker 1: most elevated risks out there, and and and is much
Speaker 1: more important as a concern than macro risks we've had
Speaker 1: for quite some time, Sertay. Since COVID's broken, the theme
Speaker 1: from last week's angst to this week's celebration can be
Speaker 1: institutions changing, arguably keens when the facts change, I change.
Speaker 1: China came to the rescue with a dialogue of accommodation
Speaker 1: by their central bank, do you assume other institutions will
Speaker 1: do the same thing. Under angst, they'll just solve the
Speaker 1: problem for US. No, I think I think the problems
Speaker 1: tend to be quite localized and need local solutions. The
Speaker 1: US economy is just too big to be able to
Speaker 1: rely on other central banks solving its problems. I think Tom,
Speaker 1: you're right to point out that there's there's been this
Speaker 1: dichotomy really between risks associated with China and optimism essentially
Speaker 1: related to the US. And I think you see this
Speaker 1: in terms of the schism we've we we've seen in
Speaker 1: terms of the Chinese stock market and the U s
Speaker 1: stock market, which is having you know, broad ramifications, and
Speaker 1: you know markets that I cover most closely, the currency
Speaker 1: market in particular, So you know, I think there's something
Speaker 1: you've got to watch for. But I think China can
Speaker 1: make things easier for global markets. Absolutely, it has enormous influence.
Speaker 1: But if it's US problems like inflation, for example, the
Speaker 1: Federal Reserve is gonna have to solve that one. Allen
Speaker 1: and curious going forward about how consistent it is for
Speaker 1: a higher inflationary regime and then to see bears become bulls,
Speaker 1: bulls become even bigger bulls when it comes to equities,
Speaker 1: particularly in the United States, is there an inconsistency here? Well,
Speaker 1: I think there are a lot of bond bears out there,
Speaker 1: and they've had a very hard time since pretty much
Speaker 1: the end of the first quarter. Most of them have
Speaker 1: capitulated at this point in time, I think there's an
Speaker 1: acceptance that it's a tenure. Heel is going to trade
Speaker 1: at something like one in a quarter pers end. It's
Speaker 1: going to be very hard to tell a story that's
Speaker 1: particularly negative as far as US equities are concerned. Unlike
Speaker 1: in the Trump era, when you're getting hit by trade
Speaker 1: related issues every now and then creating clean uts and
Speaker 1: by and by by the dip opportunities, you don't have
Speaker 1: that this time around. So you've got to have other
Speaker 1: features that create clean uts, and obviously the inflation stories
Speaker 1: being part of it. But even there, the market is
Speaker 1: taking a very benign look at the FED. You look
Speaker 1: at what's priced in through the end of it's less
Speaker 1: than a hundred basis points of tightening. That's nothing in
Speaker 1: the grand scheme of you know, FED tightening cycles. So
Speaker 1: the market has taken a very benign look at things.
Speaker 1: But obviously the back end of the bond market, I
Speaker 1: think is creating the backdrop for very solid equity market
Speaker 1: and very solid US risk. The SMP is up more
Speaker 1: than year to date last year, the year before. How
Speaker 1: much longer can we continue with these kinds of incredible returns? Um, Look,
Speaker 1: you'd expect the returns to slow down, But I think
Speaker 1: what you're you're saying there as well is that there
Speaker 1: are a lot of participants have got into this equity
Speaker 1: market at relatively good levels, and they're not going to
Speaker 1: get shaken out by something that's willy nilly. They're going
Speaker 1: to have to have some big macro story out there. Um,
Speaker 1: you know, the most obvious one is what the one
Speaker 1: we've been speaking about, which is that inflation is not
Speaker 1: as benign as the FED would make us believe. The
Speaker 1: FED has to jump in and generate some more aggressive
Speaker 1: tightening going forward, particularly two. That would be the kind
Speaker 1: of story that would upset the Apple card. But right now, um,
Speaker 1: you know, if you look at if China is going
Speaker 1: to go through a phase where it's not actually generating
Speaker 1: huge amounts of international volatility, then the US is not
Speaker 1: going to be the instigator that, as I said, not
Speaker 1: whilst the bond markets as well behaved and not while
Speaker 1: expectations and the FED are this benign, something else that
Speaker 1: could upset the apple card, at least for some of
Speaker 1: those more richly valued stocks, would be in theory higher
Speaker 1: yields if they do ever materialize. Do you expect them
Speaker 1: to materialize in the near term? And I think nextary
Speaker 1: in the near term. I think there have been some
Speaker 1: fortunate features behind this bond market rally. The most obvious
Speaker 1: one is that the Treasury has been issuing far less
Speaker 1: in the way of paper, primarily because they've run down
Speaker 1: their cash balances at the FED from you know, approaching
Speaker 1: so one point six trillion in February down to close
Speaker 1: to three billion now. So that's one point three trillion
Speaker 1: that they've avoided in terms of issuance because they've run
Speaker 1: down their cash balances. So that lack of supply, in
Speaker 1: combination with what the FED does in terms of quantitative
Speaker 1: easy has created a very favorable demand and supply dynamic.
Speaker 1: That demanded supply dynamic probably deteriorates, but it deteriorates slowly,
Speaker 1: and therefore I think the pressure will be for higher heels,
Speaker 1: but it's going to be much slower than certainly I
Speaker 1: was anticipating back in quarter one, and it wasn't just you.
Speaker 1: That was the consensus call coming into yields would be higher.
Speaker 1: The other consensus call was the dollar would be weaker,
Speaker 1: and yet that too hasn't really materialized. Can you make
Speaker 1: a case for dollar weakness in this moment? I didn't think.
Speaker 1: Right now, I think you'd make a better case for
Speaker 1: buying dollar the dollar dip as it were. Um, I
Speaker 1: think the dollars fortunate in terms of where the small
Speaker 1: dynamic is playing out at the moment. I think you have.
Speaker 1: On the one hand, if risk looks okay, particularly U
Speaker 1: s risk looks okay, then the tapering story is still
Speaker 1: at play. That's helpful for the dollar against G four currencies. If,
Speaker 1: on the other hand, you have international worries like we've
Speaker 1: recently had in China, then you see, you know, risk off,
Speaker 1: commodity prices coming off, and the dollar does well against
Speaker 1: commodity currencies. So on both science of the smile, the
Speaker 1: dollar does pretty well, so I think, and right now
Speaker 1: that smile those tales as it were, on the smile,
Speaker 1: on balance, I think more helpful for the dollar than
Speaker 1: hurting the dollar Allen Roskin, thank you so much. With
Speaker 1: Deutsche Bank their chief international strategist joining us now, someone
Speaker 1: who's fluent, entailed, entire Sarah Malt joins us right now
Speaker 1: from new being their chief investment officer. Sarah, I love, love,
Speaker 1: love your research note. It's clear, it's crisp, it's sharp.
Speaker 1: What's the single distinction in your note? That's an optimistic note. Well,
Speaker 1: we'll start with one slightly pessimistic note, which is that
Speaker 1: disagreement between the bond market and the stock market recently,
Speaker 1: including yesterday. But really what we think is the stock
Speaker 1: markets looking for a silver some silver linings for three
Speaker 1: key reasons. One is we expect to see some good
Speaker 1: economic data this week, not only with p M I
Speaker 1: S but in consumer confidence. Also, look at vaccination rates,
Speaker 1: they're up quite significantly in August versus July. And we
Speaker 1: think in the US the delta variant is peaking. All
Speaker 1: of that together, we think is the positive of the
Speaker 1: stock market is now leaning into. We expect volatility around
Speaker 1: some of the Jackson hole and back to school uncertainty
Speaker 1: around the variant, but soon the page is going to
Speaker 1: turn too high. Single digit earnings growth, that's not a
Speaker 1: bear market. It's not a recession. That's a type of
Speaker 1: market that can cut up put up strong returns. Not
Speaker 1: as strong as this year and last year, it's still
Speaker 1: strong positive returns going forward based on that earnings growth.
Speaker 1: So how big of a bulls there are you? You know,
Speaker 1: we're fairly bullish over the We're pretty bulish over the
Speaker 1: medium term. Shorter term, we think there will be volatility.
Speaker 1: There could be more of a training range, even a
Speaker 1: buying opportunity as the market adjust to tapering. But I'm sorry, Sarah.
Speaker 1: When I hear this, everyone's like, there could be volatility,
Speaker 1: which means buying opportunity. No one says there could be
Speaker 1: volatility which brings gloom and doom and actually will threaten
Speaker 1: or turns in any meaningful way. I mean, is that
Speaker 1: a contrarian indicator that concerns you? I mean, you know,
Speaker 1: when we're thinking doom and gloom, this is a longer
Speaker 1: term structural issue with the economy. Um, you know, something
Speaker 1: that we saw where there was a bubble or inflation
Speaker 1: is so high that we're going to go into a
Speaker 1: proper recession. Volatility we see coming up would be short term.
Speaker 1: This is more like the market adjust to tapering, you
Speaker 1: see downside of maybe five to ten percent, you know
Speaker 1: it's going to be very short term market timing in
Speaker 1: that kind of environment, that's a loser's game. We think
Speaker 1: that's where you need to step in and buy. You
Speaker 1: can even see with China here we were looking at
Speaker 1: something like Las Vegas Sands. Just recently it's training back
Speaker 1: at March Lows. You saw what happened last night. You
Speaker 1: know these when we see that kind of downside, it's
Speaker 1: very quick to rebound when it's not based on um
Speaker 1: lawn term structural issues. And we don't think the downside
Speaker 1: that you see in a around the tapering will be
Speaker 1: laun term structural for the economy. So I'm wondering what
Speaker 1: specifically would be on your shopping list in that. When
Speaker 1: you look at some of the reopening trades, for example,
Speaker 1: they are already well off of the highs we saw
Speaker 1: earlier this year. And we saw a money manager over
Speaker 1: at Morgan Stanley in an interview with Bloomberg yesterday saying
Speaker 1: you need to buy those reopening trades before it's too late.
Speaker 1: Do you agree with that? Now, we're more interested in
Speaker 1: stocks that have a couple of things going for them.
Speaker 1: One is pricing power, because we think there is some
Speaker 1: permanence to inflation going forward. And second is you need
Speaker 1: to look at companies. We're looking at decade high margins
Speaker 1: for many companies. Who also has that pricing power to
Speaker 1: overcome the margins so they can continue to expand them
Speaker 1: or at least preserve them from here. We like small caps. Actually,
Speaker 1: I heard that one of the prior speakers was saying
Speaker 1: they don't like small caps for us. They're trading back
Speaker 1: at a discount of large caps that we saw in September.
Speaker 1: Looking at January this year, they're some of the lows um.
Speaker 1: They're tied to higher inflation and higher interest rates. We
Speaker 1: like industrials. We think infrastructure spending will be positive for them,
Speaker 1: and as that economic growth continues, positive for industrials. Sarah,
Speaker 1: the heritage of New Vine of Chicago is that of
Speaker 1: clipping coupons. I mean, what they did in municipal as
Speaker 1: I was explaining, is to someone last night with the
Speaker 1: beverage of my choice in my hand that Neuvin invented
Speaker 1: codified the clipping of coupons. Can I clip dividend growth?
Speaker 1: I mean, is dividend growth so entrenched that neuvine has
Speaker 1: occuraged to say it's a ten or twenty year trend.
Speaker 1: If you look at dividend growers um you know, that's
Speaker 1: the important thing that their companies that are so financially
Speaker 1: strong that they can continue to grow their dividends. They
Speaker 1: actually tend to perform well not only in defensive markets,
Speaker 1: but in periods of higher rates, higher inflation, and in
Speaker 1: periods of volatility. These this has been a great segment
Speaker 1: of the equity market for investors who are focused on
Speaker 1: income because they have that sweet spot, the combination of
Speaker 1: not only nice yields to go along with the funnel
Speaker 1: mentally strong of these that can continue to increase their dividends.
Speaker 1: Sarah Hi, you bond still a leading indicator for equities
Speaker 1: now right now. I think what we're seeing is they're
Speaker 1: going in two different directions. We've seen that with widening
Speaker 1: credit spreads. We're also seeing that with the ten year
Speaker 1: that is not matching this the optimism of the stock market.
Speaker 1: And the question is, you know, who will win over time.
Speaker 1: Our view is that economic data is going to be
Speaker 1: what really is the key winner to this battle, and
Speaker 1: we agree with the stock market. You know, we think
Speaker 1: earnings growth, not valuations, will drive markets higher next year,
Speaker 1: and that high single digit earning spread that we expect
Speaker 1: can give us what is typically the third year of
Speaker 1: positive return to poster recession. It's usually not as strong
Speaker 1: as what you see in the first couple of years,
Speaker 1: but it's still as positive even through a tape er tantrum.
Speaker 1: If the yield curve doesn't flatten or invert, we think
Speaker 1: that will be what remains positive for the markets it
Speaker 1: takes its higher after this period of volatility. Sarah Manic,
Speaker 1: thank you so much. They'll be in their chief investment
Speaker 1: officer of the Little Acquiti. This is the Bloomberg Surveillance Podcast.
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