WEBVTT - Surveillance: Risk-On Rotation With Bevan 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.360 Bloomberg dot Com, and of course on the Bloomberg Giant. 0:00:27.400 --> 0:00:29.960 Would of Bank of America Security's head of the Research 0:00:30.000 --> 0:00:33.280 Investment Committee joint us Right now, Jared the difference between 0:00:33.479 --> 0:00:37.760 a sustainable rotation and another head fake draw the distinction 0:00:37.840 --> 0:00:40.639 for us. Look, all right, we keep it simple here. 0:00:40.840 --> 0:00:45.400 I think any move to value, any rotation to supercyclical 0:00:45.479 --> 0:00:48.600 sectors is going to be a tactical, short term flash 0:00:48.600 --> 0:00:52.000 in the pan until you have some real structural changes 0:00:52.040 --> 0:00:54.040 in the economy that can broaden out the economic base 0:00:54.400 --> 0:00:57.240 and provide some real ballots that would that would move 0:00:57.280 --> 0:01:00.320 growth meaningfully higher. Until then, I think these are all 0:01:00.440 --> 0:01:03.400 sort of noisy moves that a lot of investors can ignore. 0:01:03.960 --> 0:01:07.040 I'm certainly also, because yields are higher, that should be 0:01:07.160 --> 0:01:09.720 good for the cyclicals, that should be good for the banks. 0:01:10.040 --> 0:01:13.360 Why is that not another sign perhaps of outperformance Given 0:01:13.400 --> 0:01:16.240 the fact that all things being equal, there isn't necessarily 0:01:16.240 --> 0:01:19.200 any reason behind this rally well, as you mentioned a 0:01:19.200 --> 0:01:21.080 woman to go. I mean, there's a lot of cross 0:01:21.080 --> 0:01:23.080 currents in the bond market right now. There's a lot 0:01:23.080 --> 0:01:25.760 of confusion about what supply will be like in the future. 0:01:25.959 --> 0:01:28.160 And I think most importantly of all, the sense that 0:01:28.400 --> 0:01:30.800 if you'll really do rise in a meaningful way, that 0:01:30.920 --> 0:01:33.039 the feed will come in with yield curve control and 0:01:33.040 --> 0:01:37.360 and and and cap you know, any any big move anyway, 0:01:37.480 --> 0:01:42.160 So the long term benefits the correlation that you might 0:01:42.200 --> 0:01:45.560 expect between yields, UM and UH and banks and other 0:01:45.600 --> 0:01:47.680 cyclical sectors. I think it's not going to be what 0:01:47.720 --> 0:01:51.440 it once was until again, until the economy is structured 0:01:51.480 --> 0:01:53.640 in a very different way. You mentioned the financials. That's 0:01:53.680 --> 0:01:55.680 the problem, isn't it. We saw and yesterday session the 0:01:55.680 --> 0:01:58.960 financials can outperform on the way down? Can they outperform 0:01:59.040 --> 0:02:01.600 in an up market? Charrett? Given the white scenes of 0:02:01.680 --> 0:02:04.400 big tech? Can they? There's a few things that I 0:02:04.440 --> 0:02:06.920 think are special about financials that can that can work. 0:02:06.920 --> 0:02:10.480 If you start to see UM deposit growth slow, you 0:02:10.600 --> 0:02:13.120 start to see you know, loan growth pick up maybe 0:02:13.160 --> 0:02:15.520 in the you know, later part of this quarter, UM, 0:02:15.639 --> 0:02:17.480 then there I think there are some some moves that 0:02:17.480 --> 0:02:19.960 can happen in financials that are worth taking a peak at. 0:02:20.160 --> 0:02:23.040 But for a medium or longer termorial investor, Um, this 0:02:23.120 --> 0:02:25.840 is a moment in which, you know, we're much more 0:02:25.840 --> 0:02:29.800 concerned that you know, secular stagnation plus epic stimulus equals 0:02:29.880 --> 0:02:33.440 a really epic bubble in in growth stocks in tech 0:02:33.480 --> 0:02:36.720 and healthcare. We calculated that you know, tech broadly defined 0:02:36.760 --> 0:02:40.120 plus healthcare accounts now for more than fifty of the 0:02:40.160 --> 0:02:41.840 market cap of the S and P five hunter that's 0:02:41.840 --> 0:02:44.320 the highest ever. And just incidentally, you know, if you 0:02:44.440 --> 0:02:47.799 if you sustain the current pace that we've seen this year, UM, 0:02:47.840 --> 0:02:50.080 you know, tech and healthcare would would would account for 0:02:50.200 --> 0:02:53.280 the entirety of the market. You're I don't have more 0:02:53.280 --> 0:02:55.320 faith in a sustainable rotation if we had a deal 0:02:55.360 --> 0:02:58.359 down in Washington, d C. We don't. Are you surprised 0:02:58.360 --> 0:03:01.440 by the calm around that currently? I am? Actually I 0:03:01.440 --> 0:03:03.840 think that the you know, a lot of investors are 0:03:03.880 --> 0:03:06.880 watching this really closely. They understand that more stimuluts isn't 0:03:06.880 --> 0:03:09.320 necessarily understand that, you know, two hundred dollars a week 0:03:09.360 --> 0:03:13.600 unemployment insurance is a disaster. Three is tough. Four dollars 0:03:13.680 --> 0:03:15.960 might keep us on the footing that we are um 0:03:16.000 --> 0:03:18.200 at today, but right now we've got none of it. 0:03:18.360 --> 0:03:20.200 And um I think there's a there's a real sense 0:03:20.240 --> 0:03:22.239 of watching and waiting. And if it we go into 0:03:22.240 --> 0:03:26.000 another week of of no progress on talks, then I 0:03:26.040 --> 0:03:27.799 think you'll start to see the market care a bit more. 0:03:27.960 --> 0:03:30.200 Al Right, care a bit more. How does that translate, 0:03:30.240 --> 0:03:31.880 in other words, how big of a sell off could 0:03:31.880 --> 0:03:34.639 we see if there is no deal after the next 0:03:34.680 --> 0:03:37.520 week or so. In September two tho eight, when the 0:03:37.560 --> 0:03:40.200 House voted down TARP the first time, you recall, you know, 0:03:40.240 --> 0:03:42.760 the S and P fell I think about in the 0:03:42.800 --> 0:03:46.040 in the sessions after that, just for context, not saying 0:03:46.080 --> 0:03:47.960 we will get the same move you know this year, 0:03:47.960 --> 0:03:49.440 but I think that there is a sense in which, 0:03:49.720 --> 0:03:52.040 if it really does look like policy is going to fail, 0:03:52.560 --> 0:03:55.400 the market can can care a lot and care very quickly. 0:03:55.840 --> 0:03:59.000 Um So, if if you know, maybe a scenario in 0:03:59.000 --> 0:04:00.520 which the market has temple was a little bit of 0:04:00.520 --> 0:04:03.400 discipline on on Washington and you see a big equity 0:04:03.440 --> 0:04:07.240 sell off that sparks finally, uh, some level of compromise. 0:04:07.520 --> 0:04:09.760 We told investors you know this week, we think it's 0:04:09.800 --> 0:04:13.080 a it's a Q three. Whether it's a hedging risk 0:04:13.200 --> 0:04:15.400 or a buying opportunity maybe depends on your time frame, 0:04:15.520 --> 0:04:17.040 but we wouldn't be surprised if we get a lot 0:04:17.040 --> 0:04:20.000 more volatility before there's some peace in Washington. John, I 0:04:20.040 --> 0:04:22.760 gotta say what Jared just said. There, This idea that 0:04:22.839 --> 0:04:26.080 perhaps the market will impose some discipline on Washington goes 0:04:26.120 --> 0:04:28.919 to something that you said last week with Larry Cudlow, 0:04:28.960 --> 0:04:32.120 where you said, isn't it problematic that you have so 0:04:32.160 --> 0:04:35.400 many people losing their jobs at a time when you 0:04:35.440 --> 0:04:38.920 have markets rallying down in Washington? They don't care about 0:04:39.000 --> 0:04:41.080 the jobless rate as much as they do about what 0:04:41.160 --> 0:04:43.840 they get in terms of a signal from equities. I mean, 0:04:43.839 --> 0:04:46.359 you just have to wonder what does that say about 0:04:46.400 --> 0:04:49.280 the deliver a deliberation process down in Washington. Think it's 0:04:49.320 --> 0:04:51.400 embarrassingly su and Jared, I think you can speak to 0:04:51.400 --> 0:04:54.440 that as well. If this market lower, if this equity 0:04:54.440 --> 0:04:56.560 market was down and down hard like it was in March. 0:04:56.600 --> 0:04:58.839 I think we've seen some follow up in Washington, and 0:04:58.960 --> 0:05:02.120 we don't we wanted, Jared for you, what's the cut 0:05:02.120 --> 0:05:03.920 off point? What's the point at which you look at 0:05:03.960 --> 0:05:08.360 things down in Washington and think it's not happening, Well, 0:05:08.400 --> 0:05:11.400 I mean it's it's it's a tough call because our 0:05:11.440 --> 0:05:13.640 conversations with with folks and the and the sense down 0:05:13.640 --> 0:05:17.120 there is that everyone involved, basically everyone involved understands the 0:05:17.160 --> 0:05:19.560 need for for more stimulus, the need for more aid, 0:05:19.600 --> 0:05:22.080 and they're just sort of haggling about who gets what 0:05:22.200 --> 0:05:24.400 and who gets uh, you know, credit for for for 0:05:24.520 --> 0:05:28.279 pushing things through. Um, a little bit of real stress 0:05:28.839 --> 0:05:31.039 can can overcome some of those challenges. So we do 0:05:31.080 --> 0:05:33.480 expect that, you know, whether it's a week from now 0:05:33.560 --> 0:05:35.880 or two or three weeks from now, at some point, 0:05:36.120 --> 0:05:38.240 we do expect there will be you know, more stimulus. 0:05:38.240 --> 0:05:39.680 I guess it's just a question of the path we 0:05:39.720 --> 0:05:42.960 follow to get there. If if you know, on the 0:05:42.960 --> 0:05:46.680 other hand, there was the sense of a different calculation, 0:05:46.760 --> 0:05:50.239 the calculation that maybe some more economic stress now changes 0:05:50.560 --> 0:05:53.480 votes for people, you know, in November in a way 0:05:53.520 --> 0:05:56.000 that they think is favorable. Um, that's something to really 0:05:56.040 --> 0:05:58.080 worry about. So if you started here, you will never 0:05:58.160 --> 0:06:00.080 hear messaging about that. But if you start started the 0:06:00.200 --> 0:06:03.080 sense that people are thinking in those terms, then that's 0:06:03.080 --> 0:06:05.719 something that's a very different market a very different situation, 0:06:05.800 --> 0:06:10.080 something you definitely um, you know, raise cash on the backup. Yeah, 0:06:10.200 --> 0:06:11.559 before we let you go, we need to talk about 0:06:11.560 --> 0:06:13.320 the sixty forty split. It's something that you and a 0:06:13.400 --> 0:06:15.160 team of Bank for America has been talking about for 0:06:15.240 --> 0:06:16.760 quite a one in fact, ahead of the curve in 0:06:16.800 --> 0:06:20.240 many ways, plenty more people talking about this now what 0:06:20.360 --> 0:06:22.599 to do with the forty portion? And I just wanted 0:06:22.600 --> 0:06:24.600 the lessons of the last couple of days, the correlation 0:06:24.640 --> 0:06:28.840 between treasuries and growth and more broadly therefore the equity 0:06:28.839 --> 0:06:30.880 market as well, John, can you speak to that the 0:06:30.920 --> 0:06:35.679 problems there? Well, we wrote this week that that the 0:06:35.680 --> 0:06:38.880 secular stagnation, this economic malaise has really started to blur 0:06:39.000 --> 0:06:41.640 the lines between ourset classes in some sense. You know, 0:06:41.680 --> 0:06:43.880 a long term treasury bond is not that different from 0:06:43.880 --> 0:06:46.480 a high flying tech stock that pays you a tiny dividend. 0:06:46.760 --> 0:06:49.400 Neither one gives you a positive income stream, you know, 0:06:49.400 --> 0:06:52.080 adjustice for inflation, and they both start to look really 0:06:52.120 --> 0:06:55.080 unattractive if we do see a world either of you know, 0:06:55.320 --> 0:06:59.000 stagflationary populism or a world in which industrial policy and 0:06:59.000 --> 0:07:02.599 other investments a boost productivity really change the game. And 0:07:02.640 --> 0:07:04.800 so That's why we suggest investors think non in terms 0:07:04.800 --> 0:07:06.800 of asset classes as much as in terms of the 0:07:06.880 --> 0:07:08.560 kinds of risk they want to take. In the world 0:07:08.560 --> 0:07:10.880 of ample liquidity, that means you can own gold, you 0:07:10.880 --> 0:07:13.080 can also own you know, things like closed in funds 0:07:13.080 --> 0:07:15.280 with a big discount. You can also own credit risk 0:07:15.360 --> 0:07:17.520 in a way that UM has less to do with. 0:07:17.560 --> 0:07:19.600 It's it's it's it's you know, design as a fixed 0:07:19.600 --> 0:07:21.160 income instrant, and what to do with where we are 0:07:21.200 --> 0:07:23.360 in the cycle and what we see is potential for 0:07:23.360 --> 0:07:27.520 fundamentals UM in any world, you know, those conventional methodologies, 0:07:27.520 --> 0:07:29.960 Can the ways of valocating assets start to make a 0:07:29.960 --> 0:07:32.560 little bit less sense? Investors need to be a little 0:07:32.560 --> 0:07:35.640 more flexible, and they're thinking Jared gold. A lot of 0:07:35.640 --> 0:07:38.680 people saying that it could be a hedge against equities, 0:07:38.680 --> 0:07:40.880 and yet they're moving in tandem. Can you reconcile that 0:07:42.000 --> 0:07:44.080 I'd really think about gold as a as a kind 0:07:44.080 --> 0:07:46.520 of a measure of in some ways at this point, 0:07:46.720 --> 0:07:48.880 you know, policy success, You've got you know, one point 0:07:48.920 --> 0:07:52.000 six percent inflation. That's a modest recovery. It's not a 0:07:52.040 --> 0:07:55.880 huge breakout. You've got to fed on hold UM treasuries yield, 0:07:55.960 --> 0:07:58.840 you know, point six percent or so. That negative one 0:07:58.920 --> 0:08:01.320 percent real yield the kind of a signal from both 0:08:01.360 --> 0:08:04.000 the bond marketing from gold moving in tandem that you 0:08:04.040 --> 0:08:06.680 can buy basically anything but nominal bonds and you'll be 0:08:06.920 --> 0:08:09.360 you'd be better off. So in that sense, gold is 0:08:09.400 --> 0:08:11.560 a kind of a get out of here trade from 0:08:11.600 --> 0:08:13.680 the perspective of the bond markets. And and I think 0:08:13.720 --> 0:08:16.200 that's the signal investors are picking up. You see them 0:08:16.320 --> 0:08:18.640 rotating not just to gold, but to other speculative things, 0:08:18.680 --> 0:08:21.960 to spack I p o s too, you know, cryptocurrencies, 0:08:21.960 --> 0:08:24.240 all kinds of assets that otherwise wouldn't make sense if 0:08:24.240 --> 0:08:27.040 the cost to carry was really meaningful. UM. So to 0:08:27.080 --> 0:08:30.320 extent that we get policy success and inflation and growth, 0:08:30.320 --> 0:08:33.440 wee wile to normalize UM. Then you'll see investors, you know, 0:08:33.520 --> 0:08:36.280 continue I think, allocating to things that maybe they wouldn't 0:08:36.280 --> 0:08:38.439 have done in the past. Jeric right to catch you up. 0:08:38.480 --> 0:08:40.439 Our best of the saying job would at that bank 0:08:40.480 --> 0:08:52.640 for America Security. Let's get straight to Harry Chin and 0:08:52.679 --> 0:08:56.360 Carry and Shawi BMP paraplehead of Commodity market Strategy. Harry 0:08:56.440 --> 0:08:58.360 dried to catch up with you, mate. Let's talk about it. 0:08:58.559 --> 0:09:02.200 What happened in the last count of Dace. I think, 0:09:02.240 --> 0:09:05.560 first and foremost gold has reached another historical high, and 0:09:05.600 --> 0:09:07.800 the question eventually was going to be when will be 0:09:08.200 --> 0:09:11.680 when will people be taking profits? But I guess more fundamentally, 0:09:11.760 --> 0:09:14.000 what we're looking at the BNP party about, it's the 0:09:14.120 --> 0:09:16.920 leveling off and break even inflation rates. So that's sort 0:09:16.960 --> 0:09:19.960 of stabilizing negative real rates where they're at right now, 0:09:20.520 --> 0:09:23.520 and that sort of removes one factor of supports for gold. 0:09:23.960 --> 0:09:26.320 And then on top of that you start adding investor 0:09:26.360 --> 0:09:29.120 flows into silver, which is a sort of cheaper alternative 0:09:29.160 --> 0:09:32.280 than engineer macro risk. Then then you could see the 0:09:32.320 --> 0:09:36.720 consolidation that's taken place. Harry, Yesterday's sell off in gold 0:09:37.200 --> 0:09:39.680 really violent, I mean, considering the fact that there weren't 0:09:39.720 --> 0:09:42.240 similar kinds of violent moves elsewhere, it was the biggest 0:09:42.240 --> 0:09:47.319 sell off since April. Does this indicate a positioning squeeze? 0:09:47.320 --> 0:09:50.280 Something about the nature of this trade that gives you 0:09:50.320 --> 0:09:54.680 pause about how much higher gold can go? Well currently, 0:09:55.120 --> 0:09:59.320 in our view, again trying to link gold to sort 0:09:59.320 --> 0:10:03.000 of macro reckon only fundamentals, we really watch closely what 0:10:03.040 --> 0:10:05.439 the US real rates are doing. So with the nominals 0:10:05.440 --> 0:10:08.520 being relatively flatish, it's a question of, you know, did 0:10:08.559 --> 0:10:11.400 it still have the fuel to to move higher? And 0:10:11.440 --> 0:10:14.040 oftentimes when you reach an historical peak and you have 0:10:14.160 --> 0:10:17.440 this kind of acceleration in prices, the correction could be 0:10:17.520 --> 0:10:21.000 quite quite important. Now, I'll give it. The US real 0:10:21.120 --> 0:10:23.560 rates on a five year basis are still at negative 0:10:23.600 --> 0:10:28.720 one point. There is support from a macro perspective for 0:10:28.800 --> 0:10:31.800 gold to hold onto its recent game. So we're thinking 0:10:31.840 --> 0:10:35.760 about gold trading in the nineteen hundred nineteen hundred fifty 0:10:36.200 --> 0:10:41.080 uh thereabouts before potentially having another rally next year. Okay, 0:10:41.080 --> 0:10:45.439 another fundamentally it's it's still good. Okay, so another rally 0:10:45.520 --> 0:10:47.680 next year. Tom Keene took the day off to go 0:10:47.760 --> 0:10:51.480 buy some more jewelry for Mrs Keene to invest in gold. 0:10:51.800 --> 0:10:53.960 How much higher could we see the price go in 0:10:54.000 --> 0:10:56.120 the next heel of this U in the next leg 0:10:56.160 --> 0:11:00.600 of this of this rally. Well, we're viewing in our forecasts, 0:11:00.600 --> 0:11:02.760 are being too power about the next leg coming in 0:11:02.760 --> 0:11:07.160 in Q one next year, especially as you see realize inflation, 0:11:07.160 --> 0:11:10.200 you're on your benefiting from base effects, which would help 0:11:10.240 --> 0:11:14.680 that famous break even inflation measure move higher. Understanding that 0:11:14.760 --> 0:11:17.320 the FED is going to keep yields really low, potentially 0:11:17.360 --> 0:11:20.840 even adopt yield current control. And it's on that basis 0:11:21.280 --> 0:11:24.400 with those break evens moving higher and nominals remaining pretty 0:11:24.480 --> 0:11:27.400 much where they are, you get that further impetus for 0:11:27.520 --> 0:11:31.320 goal to successfully move about two thousand Again, Harry, are 0:11:31.360 --> 0:11:35.840 you having new conversations, different conversations with a different poll 0:11:35.880 --> 0:11:38.520 of investors that maybe you weren't having back in. T's 0:11:38.559 --> 0:11:41.079 a new angle to this gold trate that wasn't there 0:11:41.320 --> 0:11:46.640 about ten years ago, I suppose, and you guys were 0:11:46.679 --> 0:11:50.480 mentioning it. Uh, there's a lot of retail interests that's 0:11:50.480 --> 0:11:54.040 happening that I don't talk to retail investors, but there's 0:11:54.080 --> 0:11:57.000 certainly a big shift in terms of retail interests, even 0:11:57.080 --> 0:12:01.240 robbit Wood investors looking at gold. But I think more prosaically, 0:12:01.320 --> 0:12:04.439 you have a number of institutional investors are looking at 0:12:04.520 --> 0:12:09.800 all as a very good uh macro hedge because equity 0:12:09.800 --> 0:12:12.680 evaluations being sky high. If you do have a correction 0:12:12.720 --> 0:12:16.679 there as a result of disappointing economic outcome tied to 0:12:16.920 --> 0:12:21.520 the evolution of COVID, then golds there to hedge your portfolio. Harry, 0:12:21.559 --> 0:12:23.320 how effective do you think that will be given the 0:12:23.360 --> 0:12:27.040 positive correlation between gold and growth stocks at the moment, 0:12:27.080 --> 0:12:31.440 How effective do you think it will be as a hedge. Well, 0:12:31.640 --> 0:12:34.280 the hedge comes in really if you take losses on 0:12:34.280 --> 0:12:36.920 the equity side, then you will sell that gold portfolio, 0:12:37.040 --> 0:12:39.760 which obviously has seen a very big increase in price, 0:12:39.800 --> 0:12:42.360 so as to mitigate that the losses you have elsewhere. 0:12:42.720 --> 0:12:46.080 That's that's really it's primary functions. Harry, Great to catch 0:12:46.160 --> 0:12:48.600 up with you, as always, really good to see Harry, 0:12:48.640 --> 0:12:50.920 Chin and Gore in there of being parabout all. Now, 0:12:51.000 --> 0:13:03.720 what is happening with this gold market? Johns now straight 0:13:03.720 --> 0:13:06.120 out al under James Berban c c l A, Chief 0:13:06.240 --> 0:13:09.400 investment Officer, James, Great to hear your voice, sir, So 0:13:09.520 --> 0:13:12.160 let's get straight back to it. Is this rotation a 0:13:12.240 --> 0:13:16.600 head faith or something more sustainable. I certainly think that 0:13:16.640 --> 0:13:20.040 exuties will grind higher because I absolutely believe that the 0:13:20.040 --> 0:13:24.160 Federal Reserve and the Treasury will continue to provide liquidity, 0:13:24.200 --> 0:13:25.800 and that has got to be good news for the 0:13:25.880 --> 0:13:31.000 quality growth companies that have been taking the market ever higher. However, 0:13:31.440 --> 0:13:34.680 I was found two notes of caution. One was the 0:13:34.760 --> 0:13:38.679 market reaction to the news from Russia yesterday that they 0:13:38.760 --> 0:13:43.240 had found a vaccine for COVID nineteen. Although it was 0:13:43.360 --> 0:13:47.240 early stage, the market's initial reaction I thought was really 0:13:47.320 --> 0:13:52.480 interesting because what we saw was that the big text 0:13:52.480 --> 0:13:56.560 stocks sold off while bank stocks rallied. It was also 0:13:56.640 --> 0:14:00.720 the case the precious metal prices dipped and bond deals rose. 0:14:01.280 --> 0:14:03.520 And I think this is a real taster of what 0:14:03.640 --> 0:14:08.280 will happen if the COVID nineteen crisis passes by. But 0:14:08.360 --> 0:14:12.440 equally I worry that investors have been very undiscriminating in 0:14:12.520 --> 0:14:15.360 terms of what they have been prepared to buy in 0:14:15.720 --> 0:14:19.440 this liquidity driven melt up. It is the case that 0:14:19.480 --> 0:14:24.440 we can make sensible investment decisions on quality stocks. And 0:14:24.440 --> 0:14:27.480 if you press me for where the SMP five hundred 0:14:27.600 --> 0:14:30.280 might finish this year and next year, I wouldn't be 0:14:30.280 --> 0:14:32.840 at all surprize given where bond deals are, that we 0:14:32.840 --> 0:14:35.000 didn't get to thirty five d this year and thirty 0:14:35.000 --> 0:14:38.040 eight hundred next year. But the villain of the piece, 0:14:38.240 --> 0:14:43.360 I think is distressed debt, because when I look at 0:14:43.400 --> 0:14:47.960 the default volumes in Q two that came in at 0:14:48.040 --> 0:14:51.600 forty one spot one billion dollars. Now that is in 0:14:51.680 --> 0:14:54.440 comparison of the previous record of thirty nine and a 0:14:54.480 --> 0:14:57.920 half billion set back in two thousand and nine. Now, 0:14:57.920 --> 0:15:01.920 while for liquidity can stop markets ending up in a 0:15:02.000 --> 0:15:06.480 credit crunch, they can't provide companies in trouble with cash 0:15:06.520 --> 0:15:09.920 flow and simulated those companies will be found out. And 0:15:09.920 --> 0:15:12.040 that's why I think it's so important to look through 0:15:12.080 --> 0:15:14.960 to what's really going on at the companies level, whether 0:15:15.000 --> 0:15:18.840 it's achieving sufficient revenues to justify long term access to 0:15:18.880 --> 0:15:21.440 the capital markets. So, in other words, an argument for 0:15:21.480 --> 0:15:23.440 active management. I want to stick on this idea of 0:15:23.480 --> 0:15:28.160 liquidity versus solvency, liquidity versus the recovery story. It seems 0:15:28.200 --> 0:15:30.320 to be in me that you believe in a further 0:15:30.440 --> 0:15:32.560 rally in equities, and yet you're saying it's going to 0:15:32.640 --> 0:15:36.280 remain a liquidity story, albeit with perhaps some progress on 0:15:36.320 --> 0:15:39.640 the virus front. How much can it can remain a 0:15:39.680 --> 0:15:43.200 liquidity story to sustain this type of rally? In other words, 0:15:43.320 --> 0:15:45.760 can it just be concentrated in the big tech names, 0:15:45.760 --> 0:15:48.800 have them drive the stock market higher with this idea 0:15:48.880 --> 0:15:52.120 that they will stay solvent through this even if you 0:15:52.200 --> 0:15:55.520 have those bankruptcies increase, or do you expect there to 0:15:55.560 --> 0:15:59.520 be sort of some rotation to sustain that going forward. Well, 0:15:59.520 --> 0:16:03.920 what found very interesting is how many people, when challenged 0:16:04.040 --> 0:16:07.840 us whare equity markets going for, talk about mean reversion 0:16:07.880 --> 0:16:10.280 to the long term averages, And the story I hear 0:16:10.360 --> 0:16:13.720 often is that the forward price sendings multiples the S 0:16:13.760 --> 0:16:17.440 and P five hundred as an index is currently over 0:16:17.520 --> 0:16:22.840 twenty two times the average since fifteen times, and therefore, 0:16:22.920 --> 0:16:27.359 on that simple basis, exuty markets do a very substantial 0:16:27.760 --> 0:16:31.920 mark down. However, that argument forgets what's happened to bond 0:16:32.000 --> 0:16:34.560 yields and bond deals have been craters in the way 0:16:34.600 --> 0:16:37.800 that we have described, and therefore we can justify a 0:16:38.040 --> 0:16:42.040 much higher valuation for the equity market. And if one 0:16:42.120 --> 0:16:44.680 is going to think about the fair valuation of equity 0:16:44.760 --> 0:16:47.960 based on the company's return on equity, cost of equity, 0:16:48.240 --> 0:16:51.400 and growth, then actually the text doc still in my view, 0:16:51.440 --> 0:16:54.840 look reasonably good value. I don't think this is the 0:16:54.920 --> 0:16:57.920 right moment to give up on quality growth. I worry 0:16:58.120 --> 0:17:01.880 that there are plenty of people talking about companies with 0:17:02.040 --> 0:17:06.200 high operational and financial gearing benefiting from a cycle up turn. 0:17:06.560 --> 0:17:08.840 I just don't see that happening, and that'fore I think 0:17:08.880 --> 0:17:11.600 that's a really dangerous strategy to follow. James, You've raised 0:17:11.600 --> 0:17:13.520 a really important point, in fact a couple, So let's 0:17:13.520 --> 0:17:17.600 get to the first one, that's on benchmarking valuations through history. 0:17:17.880 --> 0:17:19.560 Can we just sit there for a moment, James, what's 0:17:19.560 --> 0:17:23.159 the effective way of doing that? Well, I think if 0:17:23.160 --> 0:17:24.639 you're going to look at history, you've got to be 0:17:24.760 --> 0:17:28.520 very clear about which portion of history you want to 0:17:28.560 --> 0:17:33.920 look at. And I would say that the the really 0:17:33.920 --> 0:17:37.400 important issue is to to look at the connection between 0:17:37.800 --> 0:17:42.199 bond yields and valuations and therefore by extension the exty 0:17:42.359 --> 0:17:47.000 risk premium, so the forward return for taking ecuty risk 0:17:47.640 --> 0:17:50.640 relative to the current bond yield. And I would say 0:17:50.680 --> 0:17:54.600 there we are still looking at equities being cheap, and 0:17:54.600 --> 0:17:57.080 hence my expectation that we can get to futty five 0:17:57.720 --> 0:18:01.040 sp five hundred for the end of the year. The 0:18:01.080 --> 0:18:05.680 story goes horribly wrong if bond yields rise very dramatically 0:18:06.160 --> 0:18:08.879 and that there is a sell off in global treasuries. 0:18:09.280 --> 0:18:12.400 But I don't see central banks and governments permitting that 0:18:12.440 --> 0:18:17.080 to happen, because to get rid of the real cost 0:18:17.200 --> 0:18:20.240 of the debt overhang that is now around the next 0:18:20.320 --> 0:18:23.800 of the global economic participants that have to be a 0:18:23.880 --> 0:18:27.639 period where inflation is considerably an excess of nominal bond yields, 0:18:27.880 --> 0:18:30.880 so that the real value of that debt is run down. 0:18:31.240 --> 0:18:33.439 So for me, the obvious long term losers are the 0:18:33.480 --> 0:18:36.800 bond holders. The obvious long term winners are investors in 0:18:36.840 --> 0:18:39.720 good quality companies as long as they buy a decent 0:18:39.800 --> 0:18:42.959 free cash flow that sustained well, James, this assumes they 0:18:42.960 --> 0:18:45.760 can control the yield curve. So let's assume they can. 0:18:45.840 --> 0:18:48.879 Particularly hear the United States, Haven't they just fixed the 0:18:48.920 --> 0:18:52.000 equity game? Then? Doesn't that mean financials cannot work in 0:18:52.040 --> 0:18:58.560 this regime? Well? You know interesting. When I think about financials, 0:18:58.600 --> 0:19:01.400 I would say two things. Why. One is that we 0:19:01.680 --> 0:19:05.359 should not anticipate that the treasury yield curve and the 0:19:05.520 --> 0:19:09.600 pricing of debt in the marketplace are one and the same. 0:19:10.080 --> 0:19:13.200 I mean, I am absolutely aware that there are companies 0:19:13.640 --> 0:19:17.400 issue debts in the marketplace that yields that frankly look 0:19:17.760 --> 0:19:22.679 way too low for the riskiness that they represent to investors. 0:19:22.720 --> 0:19:26.840 But nevertheless, there are record deals going through in the 0:19:26.840 --> 0:19:31.480 bond markets as sensible prices, where banks, if they replicate 0:19:31.600 --> 0:19:34.159 those yields in loans to customers will be able to 0:19:34.240 --> 0:19:38.440 make sensible returns. The other part is that I think 0:19:38.480 --> 0:19:40.359 that there will be some real winners and yet some 0:19:40.400 --> 0:19:43.280 real losers within the banking sector. So I think that 0:19:43.320 --> 0:19:46.680 the muscularity of JP Morgan will mean that they will 0:19:46.720 --> 0:19:49.200 grow market share. They will kind of this with more 0:19:49.240 --> 0:19:52.760 pricing power. They have made some very significant acquisitions, as 0:19:52.760 --> 0:19:54.879 we know, in recent years, and I don't think that 0:19:54.920 --> 0:19:58.400 they have driven the efficiency gains of those acquisitions through 0:19:58.720 --> 0:20:01.240 to shell the value as of yet. So I am 0:20:01.240 --> 0:20:05.199 a bull of JPM, your bull of JP Morgan. I 0:20:05.440 --> 0:20:07.760 want to look forward a couple of months and we 0:20:07.760 --> 0:20:10.840 start talking about the election. I'm old enough to remember 0:20:10.960 --> 0:20:13.359 we weren't talking about the virus, and we weren't talking 0:20:13.400 --> 0:20:15.959 about the worst recession since the Great Depression, and we 0:20:15.960 --> 0:20:19.639 were talking about trade tensions and tensions in general. This Saturday, 0:20:19.800 --> 0:20:22.080 the US and China are going to talk about the 0:20:22.080 --> 0:20:24.720 Phase one trade deal. They're going to assess the progress, 0:20:24.800 --> 0:20:27.520 China still very much behind. How much is this factor 0:20:27.560 --> 0:20:29.480 into your trading at all? I mean, can this is 0:20:29.520 --> 0:20:32.600 this a tradeable event or factor into your investment thesis 0:20:32.720 --> 0:20:35.800 or is this just basically more sort of smoke on 0:20:35.840 --> 0:20:38.919 both sides leading to some protracted cold war that's already 0:20:38.920 --> 0:20:42.639 in existence now. I think it's a really important point, 0:20:42.680 --> 0:20:44.920 and I would say one of the reasons the dollars 0:20:45.000 --> 0:20:48.359 weakness is the global concerned that the US may turn 0:20:48.760 --> 0:20:53.679 the current debate about the current cancer trade into a 0:20:53.760 --> 0:20:57.119 debate about what happens on the Capitola count. And I 0:20:57.160 --> 0:21:01.920 would observe that people are of the view that trade 0:21:01.960 --> 0:21:06.400 tariffs simply hurt consumers because if you're a Chinese company 0:21:06.440 --> 0:21:09.560 exporting to the States, you get your money for the product. 0:21:09.800 --> 0:21:14.240 We all know that the China governments has been subsidizing exports. 0:21:14.240 --> 0:21:16.520 But the loser then is the consumer who has to 0:21:16.520 --> 0:21:19.920 pay more when the tariff is applied. On the capital 0:21:19.960 --> 0:21:24.000 account front, I think that Team Trump recognized that China 0:21:24.080 --> 0:21:29.000 has a huge demand for global capital. Huge chunks of 0:21:29.160 --> 0:21:32.800 the cash generated by US quantity of easing ended up 0:21:32.880 --> 0:21:35.520 in China. I guess not many people have joined the dots, 0:21:35.560 --> 0:21:38.600