Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: popular guests, and I don't mean popular in terms of
Speaker 1: fun and games, I mean insight and intellect. Peter Cher
Speaker 1: joins now at a macro strategy at Academy Securities. Peter,
Speaker 1: you were on fire last time. It was just really
Speaker 1: brilliant about the dovetail of all these narratives. How is
Speaker 1: your narrative changed, say, in ten days.
Speaker 2: Well, we're all having to process what's going on with
Speaker 2: Israel Hamas in the Middle East. So that's probably been
Speaker 2: the biggest change. It's been clearly of very sensitive issue.
Speaker 2: We think it's playing out right now kind of as
Speaker 2: it should. That Israel will eventually, you know, secure their borders.
Speaker 2: They will make sure that it is safe for their citizens,
Speaker 2: but they'll do it in such a way that it
Speaker 2: doesn't escalate this conflict beyond relatively small borders.
Speaker 3: Localized p is that the word that comes up with
Speaker 3: clients a again and again. Is there a belief that
Speaker 3: this can remain localized?
Speaker 2: Yeah, I think that is the belief, and I think
Speaker 2: that's what the market is pricing in right now, and
Speaker 2: it's rightfully so. Israel certainly has the capacity to eliminate
Speaker 2: the threat. They said they will eliminate the threat, but
Speaker 2: I think it's very positive that they are doing this
Speaker 2: carefully and cautiously to minimize civilian casualties. The two risks
Speaker 2: kind of that aren't priced in as an escalation with Iran.
Speaker 2: It seems like we're trying to take some backdoor channels
Speaker 2: to keep that threat low, or that something spurs the
Speaker 2: change in sentiment in Saudi Arabia. Saudi Arabia has been
Speaker 2: making a ton of progress in terms of westernizing their
Speaker 2: economy in terms of the Abraham Accords, so we're watching
Speaker 2: that very carefully and that's probably the main reason Israel
Speaker 2: is being very cautious as well.
Speaker 3: I think, do you believe America has the capacity to
Speaker 3: support two military conflicts simultaneously.
Speaker 4: We do, But.
Speaker 2: As some of our General, General Taptool has been very
Speaker 2: on top of this for a while. We have been
Speaker 2: underfunding parts of the military, so we're going to be
Speaker 2: a little bit stretched two fronts. I think is fine.
Speaker 2: It does leave us a little bit vulnerable. We are
Speaker 2: going to have to see a massive replenishment of our
Speaker 2: weapon systems as we've been providing weapons to Ukraine. It
Speaker 2: looks like we're going to help Israel in terms of
Speaker 2: refilling the Iron Dome weapons. So there's going to be
Speaker 2: a lot going on on the defense side for the
Speaker 2: next years to come.
Speaker 5: At this point, when it comes to refilling all of
Speaker 5: these supplies, it does take money. And something we've been
Speaker 5: talking about is there an appetite to expand defense spending
Speaker 5: at a time where borrowing has gone up and interest
Speaker 5: payments are going up as well. How does that factor
Speaker 5: into your calculus at a time where a lot of
Speaker 5: people are not fully understanding some of the gyrations, the
Speaker 5: long end of the yield curve.
Speaker 4: You know.
Speaker 2: The one thing. So we've got the at retire General's
Speaker 2: admirals and two astronauts to get to work with. The
Speaker 2: unified message we get is that in terms of national
Speaker 2: security issues, DC is actually very bipartisan, very smart. Right,
Speaker 2: You do not get to sit on these high level
Speaker 2: national security committees unless you've demonstrated intelligence bipartisanship. So I'm
Speaker 2: actually very comfortable that when we have these real threats,
Speaker 2: we will put together and do the right thing. So
Speaker 2: there will be spending, it will be well done, and
Speaker 2: it's necessary, and we have to kind of reinstate our
Speaker 2: influence in the globe which has been waiting.
Speaker 5: One thing that you do really well is you game
Speaker 5: out what is priced in and what isn't priced in.
Speaker 5: You said earlier that some sort of escalation with Iran
Speaker 5: is not being priced into the market. How would it
Speaker 5: be priced How do you see it percolating out in
Speaker 5: the market. Should there be some sort of expansion in
Speaker 5: the region with either RAN's, some of its proxy fighters,
Speaker 5: or just the nation itself.
Speaker 2: I think then you definitely see oil hit above one hundred,
Speaker 2: and they're more importantly, it wouldn't just be a short
Speaker 2: term spike. I think you'd start seeing futures build out
Speaker 2: that a much higher price for a year or two years.
Speaker 2: And that had given us some comfort on some of
Speaker 2: these recent spikes. It was much more consolidating the front
Speaker 2: end of the futures contract, not some of the longer
Speaker 2: data contracts. But if we really are going to impose
Speaker 2: sanctions on Iran, if they are going to potentially disrupt
Speaker 2: oil flow in the Middle East, that would have a
Speaker 2: much more serious impact. And I think the bond markets
Speaker 2: can kind of shake off what's currently going on, but
Speaker 2: that would probably push yields higher as we would be
Speaker 2: facing much higher oil prices for much longer.
Speaker 1: Peter with an economics, finance and investment, you are a
Speaker 1: student of history. Amid war is a general rule. What
Speaker 1: do stocks do?
Speaker 2: You know? I think they get volatile and they are
Speaker 2: fluctuating when there's a lot of uncertainty. But once it
Speaker 2: looks like the path has come through, we generally tend
Speaker 2: to rally. I think we had that just recently with
Speaker 2: Russian Ukraine. There's that initial fear factor and then as
Speaker 2: people say, Okay, this is what it looks like, this
Speaker 2: is how it's controlled, this is what we do about it,
Speaker 2: we can rally. And again, the position was fairly light
Speaker 2: I think coming into this, so I'm not surprised that
Speaker 2: we can get a nice rally if we maintain the
Speaker 2: status quo and Saudi keeps making the right signals and
Speaker 2: Iran doesn't escalate this.
Speaker 1: Yeah, I look at the catharsis required and I'll let
Speaker 1: somebody else smarter than me determine if we've had bond catharsis.
Speaker 1: But I think we can certainly say we have not
Speaker 1: seen equity catharsis. Is that required?
Speaker 2: You know, we saw so much equity catharsis last time around,
Speaker 2: you know, the last year, So I'm not sure how
Speaker 2: much catharsis there is left to have. So it's hard
Speaker 2: to get super bullish. You know, Forty forty six hundred
Speaker 2: SMP seems tops. Maybe forty two hundred I think seems
Speaker 2: to be a bottom right now, unless something happens in
Speaker 2: the the least.
Speaker 5: What are you hoping to hear from all of the
Speaker 5: FED speakers? Do you think that they are that important
Speaker 5: at this point with such heightened uncertainty as we get
Speaker 5: the last gasp before the quiet period, I.
Speaker 2: Think they're going to make it very clear that the
Speaker 2: day has not been consistently strong enough to hike, that
Speaker 2: they really don't want to hike. I like the fact
Speaker 2: that they're talking about real yields. We've been talking about
Speaker 2: that for a couple of months of how important that is.
Speaker 2: We are starting to see this filter into the economy.
Speaker 2: Were hearing more and more. I don't want to say
Speaker 2: horror stories, but you know stories of companies that we're
Speaker 2: borrowing at seven percent that are now facing fourteen percent
Speaker 2: as their debt matures. So I think they're supposed to
Speaker 2: pause and let this play out, especially now with the
Speaker 2: global uncertainty.
Speaker 1: Now, well, the global uncertainty is there, but then it's
Speaker 1: by straw hats and winter. What are you acquiring today?
Speaker 1: I mean, I'm assuming you're not one hundred percent in cash,
Speaker 1: So what do you buy?
Speaker 2: You know, I like bonds. Again, We've been trying to
Speaker 2: raytrange this. As you know, we got to four eighty,
Speaker 2: you want to buy a lot of tens. As you
Speaker 2: get back to four fifty, you sell some same on
Speaker 2: the stocks. Right, It's kind of that range. As you
Speaker 2: start pushing towards forty five hundred, you want to be
Speaker 2: reducing risk on the S and p. As you get
Speaker 2: below forty three hundred, you want to be adding. So
Speaker 2: I think it's a trader's market, and you do want
Speaker 2: some hedges. My favorite hedges right now, I think are
Speaker 2: buying calls on treasuries because if we get this geopolitical escalation,
Speaker 2: although oil is going to go high on fed Canton
Speaker 2: Nord at the front end, I think the back end
Speaker 2: is going to start pricing in a true flight to
Speaker 2: safety trade.
Speaker 3: How are you getting a raid on the potential for
Speaker 3: escalation if there's one particular voice you're following at the moment,
Speaker 3: whose voice is it?
Speaker 2: There's not one particular voice. So we're searching around and
Speaker 2: again I've got the luxury that we've got sixteen specifically
Speaker 2: generals and admirals who retired who are talking to people
Speaker 2: across the US, across the world to the IDF. So
Speaker 2: we're trying to distill this information that we get and
Speaker 2: that's what we're trying to look for, these tiny little
Speaker 2: signals that aren't on the radar screen. So it's a
Speaker 2: little bit tricky, but I think we're trying to manage
Speaker 2: it pretty well.
Speaker 3: Pity chaer managing it very well. Thanks for being with
Speaker 3: a acountby Securities. Pete appreciate it as a wiemke.
Speaker 1: What's really great about this is our next guest, Lisa.
Speaker 1: I said to him, Ike said, you know what do
Speaker 1: you think? He says, I'm not coming on again until
Speaker 1: the tots are in first place, so you know, as
Speaker 1: it worked out well.
Speaker 5: Well, fantastic congratulations Steven Major, Global head of Fixed Income
Speaker 5: Research at HSBC, And really I am. I'm so glad
Speaker 5: to speak with you. We're at a time of an
Speaker 5: incredible bond bear market. You've been bullish. How can you
Speaker 5: reconfirm that? Reaffirm that at a time we don't really
Speaker 5: understand why the cell off has been so severe.
Speaker 6: Yeah, there's been a capitulation, so there'll be people like me,
Speaker 6: but people with skin in the game, people who are
Speaker 6: actually long with bonds who have had to cut the position.
Speaker 6: That could be for risk management considerations, it could be
Speaker 6: because clients are taking their money out and they're having
Speaker 6: to respond to that. So I think there's a capitulation.
Speaker 6: There's evidence of capitulation in the way the term premium moved.
Speaker 6: So it's the back end that's where the action is,
Speaker 6: and I think there's a lot more safety in the
Speaker 6: front end.
Speaker 4: Right now.
Speaker 6: You can see twos are behaving differently. Maybe for the
Speaker 6: first time this year, twos have become safe, and I
Speaker 6: think the mantra has been don't touch the twos all
Speaker 6: year because you would have been going against the FED.
Speaker 6: If the Fed's done now more or less, then you're
Speaker 6: fairly safe entering twos. And that's how the bomb market
Speaker 6: can start to perform better. Money will creep up from
Speaker 6: the front. That's why people are leaving the back end
Speaker 6: alone at the moment.
Speaker 5: There's a lot there to unpack. I just want to
Speaker 5: go to the whole capitulation story. You said there are
Speaker 5: signs of capitulation where who is selling so aggressively at
Speaker 5: a time when a lot of people are saying it's
Speaker 5: a buyer strike.
Speaker 6: Yeah, I think it's probably real money. And there's this
Speaker 6: game in fixed income about discussing the marginal buyer and seller.
Speaker 6: The truth is you never know to it afterwards. Right,
Speaker 6: The bomb market is fairly sophisticated, but you don't know
Speaker 6: the buyers until after it happened. You can see the
Speaker 6: supply coming because it's published, but you don't know who
Speaker 6: actually bought.
Speaker 4: There's a lot of gaming of who's going to buy. Right.
Speaker 6: It seems to me the marginal buyer has to be domestic,
Speaker 6: so it has to be here in the US because
Speaker 6: the official sector overseas is not sponsoring the market as
Speaker 6: it was before the private sector isn't picking up enough,
Speaker 6: so it has to be inside here. Now seventy percent
Speaker 6: of treasuries are held in the US. Of course the
Speaker 6: Fed's a big part of that. But the story is
Speaker 6: it has to be here. It's probably not the banks.
Speaker 6: Real money has already taken long positions and maybe adjusting,
Speaker 6: So it has to go into retail. It has to
Speaker 6: go to small investors. It has to go to those
Speaker 6: who are inequities, so big investors on a multi asset basis,
Speaker 6: so people coming out of stocks into bonds, people going
Speaker 6: from cash into bonds.
Speaker 4: That's where the marginal bone is.
Speaker 1: The great furyre Steve Major is what I call the
Speaker 1: Whalen silence. Chris Whalen, with this wonderful one volume of
Speaker 1: America financial history. We're in the buyer amerket. You're trying
Speaker 1: to do something, and all of a sudden, on the
Speaker 1: other end of the phone, whether it's the eighteenth and
Speaker 1: nineteen twentieth century, there's silence. Are we anywhere near that?
Speaker 4: Yeah?
Speaker 6: Well, that's a really good point because it does seem
Speaker 6: that there's been a bit of a buyer strike, and
Speaker 6: so the evidence for that is in the auctions, So
Speaker 6: you look at the cover ratios, so how many people
Speaker 6: showed up to buy the bonds at the auction. There's
Speaker 6: less there, especially in the long end of the ten
Speaker 6: and the thirty year vapor. But it gets to the
Speaker 6: point where the value is just too obvious. You've mentioned
Speaker 6: a real yield several times in the on the show,
Speaker 6: and but when when the But you know, when the
Speaker 6: real yield is comfortably above the trend GDP rate, the
Speaker 6: actual trenched DP and the projected trendy DP, then you're
Speaker 6: pretty covered. So the inflation piece is locked. When the
Speaker 6: real yield is above the trenched DP, you're not going
Speaker 6: to go too far wrong.
Speaker 2: Now.
Speaker 6: I'm not saying that today it's free money. It's just
Speaker 6: that you'll look back in six months time and you
Speaker 6: should be happy with the investment you made today.
Speaker 1: Seven hundred pages at the imfter bluebook, the Green Book,
Speaker 1: the Red Book. Gergiev says she's going to print a
Speaker 1: copy just for me so I can read it. The
Speaker 1: one appendix I read was Tobius Adrian Fiscal Instability, Liquidity
Speaker 1: and Solvency. Does Steve Major have liquidity and solvency issues?
Speaker 1: Is written in his appendix.
Speaker 6: Get the solvency, the US is going to pay its bonds.
Speaker 6: So the the idea that you have a ratings issue,
Speaker 6: and the ratings explain the yould shift.
Speaker 4: So what about liquidity.
Speaker 6: Now, this is the price of getting stuff done in
Speaker 6: plain English, right, that's what liquidity is. So when the
Speaker 6: market is illiquid, it's more difficult to get a big
Speaker 6: trade done, so you have to pay a bigger bid
Speaker 6: office spread. That's my simplistic, plain English explanation. There is
Speaker 6: a liquidity issue right now because the banks aren't prepared
Speaker 6: to hold big inventory.
Speaker 4: The intermediariesm are just not there.
Speaker 6: And liquidity and risk premium tend to move together. So
Speaker 6: if we have an ill liquid market, then the risk
Speaker 6: premium goes up, and that's your term premium and the
Speaker 6: higher yield in the long end.
Speaker 4: That's what's happening right now. I look back at this and.
Speaker 6: I think you've got record moves in the term premium,
Speaker 6: even back to twenty thirteen. And don't forget the context
Speaker 6: is important here, Tom and Lisa. Back in twenty thirteen,
Speaker 6: the taper tantrum was like the main thing that happened.
Speaker 6: Now you've had a two year bear market going into
Speaker 6: a three year bear market, So rates moved up a lot.
Speaker 6: Then the term premium flipped. You didn't have that back
Speaker 6: in twenty thirteen, So you really are entering a good
Speaker 6: level of yield.
Speaker 4: At the moment.
Speaker 5: Given the fact that you think that we're at a
Speaker 5: good level of yield, how do you sort of lean
Speaker 5: into the front end and not the back end?
Speaker 7: Right?
Speaker 5: Why aren't you just going all in on the ten years?
Speaker 4: Let me be absolutely clear.
Speaker 6: I think that investors who want to buy bonds for
Speaker 6: the first time, who rather shy, can creep into the
Speaker 6: two years out of a money market product, and they're
Speaker 6: not going to lose a lot of money. If any,
Speaker 6: you're safe in the two. So if you're shy and
Speaker 6: you're going into bonds for the first time, you're safe
Speaker 6: in twos. Then you creep up to threes. Now, for me,
Speaker 6: if I'm making a call for the next six months,
Speaker 6: of course i'd buy tens or thirties, because I'm going
Speaker 6: to look back in six months time and think that
Speaker 6: the yield's fallen one hundred bases.
Speaker 5: Where's it going though at the end of the year.
Speaker 6: Well, our forecast is three and a half. We're running
Speaker 6: out of weeks and months of course, but three and
Speaker 6: a half could be the right number in six months time.
Speaker 6: So I don't think we've got the directional call wrong here.
Speaker 6: I think yields will be lower. It's just that maybe
Speaker 6: our timing could be off.
Speaker 1: It's the same as I guess in West Ham's going
Speaker 1: to do well. We're running out of time. Steve Major
Speaker 1: One final question, a really just change. JP Morgan on
Speaker 1: stage in Morocco says she's modeling out of two and
Speaker 1: a half percent inflation adjusted yield. That took me back
Speaker 1: that Seeman was elevated. Take your nominal lower yield call
Speaker 1: and squeeze it into a real rate call.
Speaker 6: Yeah, so the two percent inflation is locked. If there's
Speaker 6: one thing that's come through all of this is that
Speaker 6: inflation target targeting is credible. The two percent inflation has
Speaker 6: not been been challenged in the break even forwards. So
Speaker 6: for me, it's all about real yield. Two and a
Speaker 6: half is just way above trend. Therefore we can take
Speaker 6: one hundred basis points off of that. I think that
Speaker 6: a fairer level for the real yield would be one
Speaker 6: and a half, not the two and a half that
Speaker 6: we're trading at at the moment, and by the way,
Speaker 6: that would still be above one hundred over the Fed's
Speaker 6: are star measures. So so you people are saying that
Speaker 6: the real rate needs to be higher, Well, it's priced
Speaker 6: as a lot higher.
Speaker 1: We're going to go Stephen Major, a joint US for
Speaker 1: the Hong Kong Shanghai Banking Corporation. We get expertise now
Speaker 1: as we've done it. Thanks to our team for really
Speaker 1: going internationally to get this done. Julie Norman is at
Speaker 1: the University College London UCL Center on US Politics, but
Speaker 1: also is weaned out of a PhD program and truly
Speaker 1: one of the world's experts on terrorism. Julie, what an
Speaker 1: honor to speak to you this morning. How is this terrorism?
Speaker 1: How is this as the President mentions narrow stridency of Hamas,
Speaker 1: how is it different this time?
Speaker 8: Yeah, Tom, this is a very different tactic than we
Speaker 8: see from Hamas obviously last weekend, and that's why the
Speaker 8: response that's being considered right now I was also expected
Speaker 8: to be very different, very different in scale, very different
Speaker 8: in tactic and operation. And also AUSTI has the end
Speaker 8: goal of quote unquote eliminating Hamas. That's I think going
Speaker 8: to be a difficult endgame that's going to be tactically
Speaker 8: difficult over these upcoming days weeks in Gaza and just
Speaker 8: on a broader level. Also, you know, Hamas has a
Speaker 8: lot of regional dispersal and they represent a certain type
Speaker 8: of resistance and I think a lot of Israel's choices
Speaker 8: in these next few days we have a lot of
Speaker 8: both moral and pragmatic implications in terms of as we
Speaker 8: see civilian casualties rise and whatnot, that will in some
Speaker 8: ways galvanize much of what Hemas's goals have been. And
Speaker 8: I think there are many who will step into their place.
Speaker 8: So it's a very difficult needle to thread right now.
Speaker 8: I think that's part of why we see Biden maybe
Speaker 8: considering a trip there as to seeing how can Israel
Speaker 8: respond to this but also try and avoid just a
Speaker 8: longer term security security risk and to.
Speaker 1: Play off one of your papers from a more peaceful
Speaker 1: time beyond hunger Strikes, a Palestinian prisoner's movement and every
Speaker 1: day resistance. Julie, you're as close to an expert on
Speaker 1: this as we're going to get. How do you perceive
Speaker 1: a military exercise from north to south in Gaza?
Speaker 8: Yeah, so, as it has been noted many times Gaza
Speaker 8: is an extremely difficult place to live but also to
Speaker 8: carry out a military operation. We've obviously seen already the evacuation,
Speaker 8: the movement of up to upwards of one million people
Speaker 8: from the north to the south, but there's really nowhere
Speaker 8: for people to go at this point, and so even
Speaker 8: if the operations stay mostly in the north, we're still
Speaker 8: looking at a very difficult humanitarian situation really throughout the strip,
Speaker 8: as well as just a likely devastation of infrastructure that
Speaker 8: I think makes an endgame very difficult to foresee here.
Speaker 8: We heard Biden speaking yesterday about, you know, trying to
Speaker 8: preclude a possible reoccupation of Gaza. It's very difficult to
Speaker 8: see what what governing or administration look like in Gaza
Speaker 8: after this. And again, most of the civilians where they
Speaker 8: are not going to have anywhere to go, and it's
Speaker 8: going to be very likely a very difficult situation for
Speaker 8: anyone stepping into that space.
Speaker 5: It's been incredibly difficult to understand what's going on, Julie,
Speaker 5: not only because a lot of the conversations are going
Speaker 5: down behind back channel discussions, but also because of a
Speaker 5: vast slew of misinformation intentionally being put out from a
Speaker 5: number of different sides. I'm wondering from your perspective, if
Speaker 5: you have a better sense of where the red lines are.
Speaker 5: We heard conflicting reports of Iran not wanting to get involved,
Speaker 5: then saying as soon as the ground operation starts, so
Speaker 5: ready to go in What have you gleaned over the weekend.
Speaker 8: Yeah, well, you're absolutely right, Lisa, there's been a lot
Speaker 8: of misinformation and I think all of us should be
Speaker 8: kind of careful and double checking many of the sources
Speaker 8: and whatnot. I would say in terms of Iran's movements
Speaker 8: that I think will really be the deciding factor into
Speaker 8: if and when and how this conflx escalates. Iran has
Speaker 8: much closer ties with has the Law in to the
Speaker 8: north and border of Israel than even to Hamas, and
Speaker 8: I think it's really the question of if they would
Speaker 8: activate Hasbelah open up a northern front that would that
Speaker 8: would really change the contours of this war and make
Speaker 8: it a much more of a regional conflict. We are
Speaker 8: not at that point yet. Obviously, served to a state
Speaker 8: blinkn has been a massive diplomacy run through the Arab
Speaker 8: world this week to try and deter Iran or Hezbollah
Speaker 8: or their proxies from further escalating this. But I think
Speaker 8: that's not a given, and that's one reason again why
Speaker 8: these conversations are going to keep continuing to see, Okay,
Speaker 8: there's the operation on the ground, but also what can
Speaker 8: we be doing simultaneously to try and deter other actors
Speaker 8: and especially around or Hasblah from getting involved even further.
Speaker 5: It's a tragedy and we all are seeing the tragedy unfold,
Speaker 5: humanitarian tragedy on both Israeli families as well as in Gaza,
Speaker 5: with people fleeing the north. I'm curious why, if we're
Speaker 5: hearing this there are a hundred trucks backed up ready
Speaker 5: to live our humanitarian aid to gasins that have gone south,
Speaker 5: why they're not being let through.
Speaker 8: Yeah, So my understanding on this is that Israel wants
Speaker 8: to be able to check any of the trucks that
Speaker 8: are coming through for security reasons, so they will not
Speaker 8: give a guarantee that some of those trucks would not
Speaker 8: potentially be that they would not be immune from targeting
Speaker 8: and whatnot. So that's where the impast seems to be.
Speaker 8: There is a lot of aid waiting on the other
Speaker 8: side of the border to come in. There are a
Speaker 8: lot of people in need waiting to come out. And
Speaker 8: I think where a lot of Blincoln and Biden's conversations
Speaker 8: with Israel will be is trying to negotiate some kind
Speaker 8: of opening on that border to allow that passage.
Speaker 1: Professor Norman, We're all falling back on our memories on
Speaker 1: this and our knowledge. If you look at the present
Speaker 1: day horror, and you look at Albert Harani's history of
Speaker 1: the Arabs people, or Frompkins A peace to end all peace?
Speaker 1: Are we now beyond the chain and linkage out of
Speaker 1: World War Two? Of are we onto something new here?
Speaker 8: I think we are, tom and this has been obviously
Speaker 8: coming for a while. You know, this is a broader
Speaker 8: regional question. I think the airp uprisings of the Arab
Speaker 8: Spring that we saw ten years ago, you many thought
Speaker 8: that would be a new direction. There was one, a
Speaker 8: slightly different direction than many hoped or thought they would.
Speaker 8: But we are seeing now, I think is a resetting.
Speaker 8: And again a lot of this is in a context
Speaker 8: of you know, steps forward and steps back. I think
Speaker 8: there was a lot of hope this year around some
Speaker 8: normalization between Arab states and Israel and you know, many
Speaker 8: see this attacks as trying to be a spoiler to
Speaker 8: that which it obviously has been. So there's been again
Speaker 8: a lot of shifts in this region, and I think
Speaker 8: this war will be very definitive of where the region
Speaker 8: goes after this.
Speaker 3: Judi Noilman of you, Siah, Jenny, thank you as so wise.
Speaker 1: Joining us now to say the show Erica and Jerry
Speaker 1: and large cap banks and consumer for Dance Equity Research
Speaker 1: at UBS. She is not wearing a cast on one
Speaker 1: of her ankles this morning. Erica, I do you know
Speaker 1: I just said I did. Thank you.
Speaker 4: You know.
Speaker 1: I look, Erica, at where we are right now, and
Speaker 1: if I look at the Keith Pride Index, we're down
Speaker 1: forty eight percent from the nirvana that we did in
Speaker 1: twenty twenty two, twenty one, and we've only got twenty
Speaker 1: six percent down to go on a blended bank basis
Speaker 1: to get to COVID lows what do they do to
Speaker 1: turn the ship around.
Speaker 9: So it's pretty simple, and I think that they essentially
Speaker 9: have to disprove the negative, which is that higher rates
Speaker 9: is only bad for banks, or higher rates are only
Speaker 9: bad for banks, as you could see in the earnings
Speaker 9: results so far, that's not actually the case. You know,
Speaker 9: a lot of these banks have the raw material to
Speaker 9: make more money in a higher interest rate environment, which
Speaker 9: is a good deposit base. But what we've seen early
Speaker 9: this year with the three bank failures is the dark
Speaker 9: side to higher rates. What happens when you're off sides
Speaker 9: and rates go up faster than you think. And so
Speaker 9: what the market really needs to see is you're not
Speaker 9: seeing massive capital losses. You're seeing deposit stability, and you're
Speaker 9: seeing net interest income progress in the right you know,
Speaker 9: in the right direction as they earn more on their
Speaker 9: assets and their liabilities.
Speaker 1: I mean, correct me if I'm wrong, But Erica, the
Speaker 1: history to me is called synergies or cost cuts or
Speaker 1: moving things. Are they gonna are they just the bone
Speaker 1: now where they can't cut anymore? Are they going to
Speaker 1: choose which divisions to participate in into twenty twenty four
Speaker 1: or is it just going to be, you know, cut
Speaker 1: four percent, let's go.
Speaker 9: That might not be the right question to ask unless
Speaker 9: it's someone like City Group that has a very specific
Speaker 9: expense cutting plan. You know, keep in mind that these
Speaker 9: banks are actually making a lot of money right now.
Speaker 9: They're making a lot more in uninterest income than they
Speaker 9: did last year. Trading has been resilient. Investment banking is cyclic.
Speaker 9: Cyclically depress, but could bounce back, and so, you know,
Speaker 9: a lot of these banks understand that you can't necessarily
Speaker 9: cut your way to glory. And so while we think
Speaker 9: they're going to be mindful of expense growth next year,
Speaker 9: I think that the question really is, how do they,
Speaker 9: you know, think about revenue resilience next year? How do they,
Speaker 9: you know, maintain deposit costs at a certain level if
Speaker 9: the FED does pause in order to enjoy fixed asset repricing.
Speaker 9: I think the question is more about keeping deposit costs,
Speaker 9: or rather keeping operating costs at a lower growth rate
Speaker 9: than revenue growth, rather than outright expense cuts.
Speaker 5: At this point, Erica, they're making bank. Let's be honest, right,
Speaker 5: they just had record quarter as John as mentioning for
Speaker 5: net interest income. If they're doing so well and they
Speaker 5: have surprised the upside and they're not putting as much
Speaker 5: to the side to cover loan losses as many people expected,
Speaker 5: why aren't the shares doing better?
Speaker 9: Because a lot of investors are still really fearful of
Speaker 9: what could be the consequence of higher rates, you know,
Speaker 9: and the you know, the rapid increase in rates, which
Speaker 9: is a recession. And at the end of the day,
Speaker 9: a lot of these banks are, like you say, making
Speaker 9: bank from a revenue perspective, especially on net interest income.
Speaker 9: But a lot of investors are fearful that we'll see
Speaker 9: higher credit losses, whether it's on the commercial real estate
Speaker 9: books or corporate books or you know, the consumer weakening.
Speaker 9: So right now, the valuations are staying cheap because a
Speaker 9: lot of investors are essentially saying, well, I'm going to
Speaker 9: wait till I really understand the complexion of the downturn
Speaker 9: before I really step in, and you know, really call
Speaker 9: these stocks inexpensive.
Speaker 5: So how much are you getting pushed back? How much
Speaker 5: you're recommending to investors to buy certain bank stocks and
Speaker 5: making the argument they're undervalued because of its uncertainty, and
Speaker 5: yet they're increasingly acting like utilities because of how much
Speaker 5: capital they've put aside and how regulated they've become.
Speaker 9: Look, I think the reality is is that the banks
Speaker 9: are in a little bit of a trading range at
Speaker 9: this point. So you know, you brought up two points.
Speaker 9: One is macro and one is regulation. Near term, we
Speaker 9: do think that the rubber band has stretched a little
Speaker 9: bit too far, and they're at the low end of
Speaker 9: their trading range, and they are a little bit too inexpensive,
Speaker 9: you know, relative to the reality of their earnings power today.
Speaker 9: That being said, you know, you bring up a good point.
Speaker 9: Not only is the uncertainty over the economy really tamping
Speaker 9: down what their multiples could be, right, but also you
Speaker 9: have a lot of new rules that are coming down
Speaker 9: the pipeline, you know. That being said, I like to
Speaker 9: describe the new rules in terms of what's coming down
Speaker 9: the pipeline as tough, but not nearly as you know,
Speaker 9: game changing as it was coming out of the financial crisis.
Speaker 9: Is if for money center banks, you know, the regulatory
Speaker 9: landscape went from zero to ten, I feel like Basil
Speaker 9: three endgame and the upcoming liquidity rules, it's going from
Speaker 9: ten to twelve, and perhaps from regional banks it's going
Speaker 9: from eight to eleven and a half. But either way,
Speaker 9: I think what I'm recommending to investor is, look, you know,
Speaker 9: take advantage of these prices at the low end of
Speaker 9: the trading range, but valuations are not really going to
Speaker 9: be able to regrate meaningfully to normal levels relative to
Speaker 9: the broad market until we get more certainty, more clarity
Speaker 9: on what the economy looks like over the next twelve months.
Speaker 3: Eric, I good to hear from you again. Let's do
Speaker 3: it again soon, Eric and ajerin that of ups.
Speaker 1: For anybody linked in to his valuable Twitter account. It
Speaker 1: has been a visceral and direct week for Douglas pet
Speaker 1: cast with family members and business associates in Israel. Doug
Speaker 1: to take a broader view on this in a less
Speaker 1: personal view. You are a nerd with the heritage of
Speaker 1: Israel from nineteen forty eight to what I remember in
Speaker 1: sixty seven and seventy three. I don't see how we
Speaker 1: prosecute forward, whatever anyone's view, with the immediacy of the
Speaker 1: media today, the immediacy of social media and the rest,
Speaker 1: how would you suggest, with the damage your friends and
Speaker 1: your family have had over the last week, how does
Speaker 1: this work progress with the immediacy of the modern media.
Speaker 10: You know, it's a heavyweight. To me, the most astonishing
Speaker 10: thing is that the spiders closed it under four p
Speaker 10: thirty on Friday, the day before the Hamas attack on Israel.
Speaker 10: It's now trading four thirty three, and we can add
Speaker 10: during the internim interval some unpleasant PPI and CPI releases
Speaker 10: the market's extraordinaryly resilient look. I admire people that are
Speaker 10: a confident of view, but I don't see, and I've
Speaker 10: said this to you, for you and John and Paul
Speaker 10: for about eighteen months. I don't see a backdrop that
Speaker 10: can make one confident either being excessively bearish like Morgan
Speaker 10: Stanley's Mike Wilson or Morgan Jack Morgan's Marco, or excessively
Speaker 10: bullish like most of the commentators on the desk store
Speaker 10: or Tom Lee at Funstratt. To me, the range of
Speaker 10: outcomes is we've witnessed nine days ago in Israel as
Speaker 10: wide and the events are unexpected. So the question really
Speaker 10: is what is a hedge fund manager to do to
Speaker 10: deliver superior investment returns?
Speaker 1: How do you filter geopolitics? If we go back to
Speaker 1: the desk at Kidder Peabody and you're doing cell side
Speaker 1: security analysis, I mean, you know we're too young to
Speaker 1: go back to Vietnam. But the answer is, how does
Speaker 1: Doug Cass filter geopolitics or do you observe it while
Speaker 1: you're discreet and separate in investment?
Speaker 3: I think it.
Speaker 10: Builds in Sir Thomas degree of uncertainty that it suggests that,
Speaker 10: at least to us, the clear ramifications is that the
Speaker 10: recent events support the message I just said that it
Speaker 10: underscores why you should be managing your capital conservatively and
Speaker 10: unfortunately without the confidence that is typical. And you superimpose
Speaker 10: that with what Howard Marx has called a sea change,
Speaker 10: specifically as it relates to higher interest rates, that the
Speaker 10: fundamental investment environment has been altered. You don't assume the
Speaker 10: investment strategies that have served you best since two thousand
Speaker 10: and nine will do so in the years ahead. Most
Speaker 10: hedge fund managers have really sought beta leverage long portfolios
Speaker 10: in the last fourteen years. I think it's time to
Speaker 10: seek alpha and to develop strategies perhaps more like and
Speaker 10: we invoke, of course Alfred Winslow Jones, the father of
Speaker 10: the hedged fund industry, who ran a true long short book,
Speaker 10: and that's what we do on those Unlike most of
Speaker 10: the right, this.
Speaker 1: Is yeah, yeah, I don't mean interrupt, I want you
Speaker 1: to jump in here. But what mister Cash just said, folks,
Speaker 1: for those of you who aren't sophistic kids, is absolutely
Speaker 1: critical and that people in the fancy world are talking
Speaker 1: long short, but they're really not. They're not taking Jay
Speaker 1: and Jay against pick A Stock, Pfizer or whatever.
Speaker 10: They're not long short guys. Basically, Paul in the last
Speaker 10: fourteen years have been leveraged long.
Speaker 4: Yep.
Speaker 10: You know I am very comfortable on the short side
Speaker 10: at Sea Breeze. Short selling requires or mandates a degree
Speaker 10: of creativity time concept of it requires a lot of
Speaker 10: primary research because the cell research staffs our geared towards
Speaker 10: lungs and importantly is I've often discussed in my past
Speaker 10: lectures in doctor Shila's course in Yale School of Management,
Speaker 10: short selling mandate strong risk management.
Speaker 1: Skills, like you'd want to go Paul long, Diamondbacks, short
Speaker 1: Dodgers just exactly well.
Speaker 10: What you want to do in fantasy baseball is be
Speaker 10: long curshore erlander and short everyone else. But you know,
Speaker 10: you know typic where where we've moved from being that
Speaker 10: short to being market neutral on the decline right before Hamas.
Speaker 10: But you know, there's so many great opportunities because people
Speaker 10: aren't really dealing in selecting, selecting stocks and making broad
Speaker 10: market decisions like for vet bill, your two vet bills
Speaker 10: and my two long can be long fresh pet and short.
Speaker 1: This missus Keen sent me an email. The two of
Speaker 1: them are set up for dog grooming.
Speaker 7: Sure.
Speaker 1: Mayor Adams team just emailed me he wanted to call
Speaker 1: and thank me for moving the Leeds. New York City's economy.
Speaker 7: So, Doug, I mean, as you think about geopolitical risk
Speaker 7: is just one of the many things that investors have
Speaker 7: to deal with. Are we kind of in a new
Speaker 7: normal now? Because it feels like, at least in the
Speaker 7: Middle East, we're gonna have a number of years where
Speaker 7: it's just going to be very unstable. And I'm not
Speaker 7: even sure about Europe, but certainly in the Middle East.
Speaker 10: Right. Look, we start by saying that on a historical basis,
Speaker 10: valuations are elevated, and we remain of the view that
Speaker 10: credit is more It's not just the Mid East, it's
Speaker 10: credit is more attractive in equities. Slugflation lies ahead, sluggish growth,
Speaker 10: prickly inflation. Political and geopolitical problems are intensifying. I mean,
Speaker 10: the lack of physical of partisanship and physical discipline reminds
Speaker 10: me of that sketch with Laurrel Hardy. That's another fine
Speaker 10: mess we're in it. Interest rates are going to be
Speaker 10: higher for much longer earnings for share expectations of high
Speaker 10: single digit load double digit growth next year. I was
Speaker 10: listening to Jay at TPW Plaski and I mentioned that
Speaker 10: my grandma Calfax had a phrase about his optimism, but
Speaker 10: I can't repeat it on the radio. The upbeat economic
Speaker 10: forecast within the context of rising real interest rates seem
Speaker 10: fanciful to us that US dollar strength portends corporate profits vulnerability.
Speaker 10: I think it's important to recognize that we're moving away
Speaker 10: from globalization and towards nationalizations for obvious reasons. It holds
Speaker 10: a future of lower than expected corporate profit and margins,
Speaker 10: as well as producing more inflationary impulses. Finally, the yields
Speaker 10: available and fixed income, you know, the one your Treasury
Speaker 10: bill yields five point four percent. That's an equity like
Speaker 10: return with little volatility of risk and premium, and risk
Speaker 10: premium is paper thin and at multi decades low. I
Speaker 10: think that the SMP dividend yield is only one point
Speaker 10: sixty two percent. That compares to the one year yield
Speaker 10: to five point four percent. And now we're getting the
Speaker 10: same old crap that we got in twenty twenty one.
Speaker 10: The end of twenty twenty one. Market leadership is narrowing,
Speaker 10: but there are a lot of stocks now that are
Speaker 10: starting to make new lows, that are starting to be
Speaker 10: attractive away from the magnificent cent seven on a reward
Speaker 10: versus risk opportunity. So we expect to see change, and
Speaker 10: we believe that the successful strategies of being met long
Speaker 10: since the Great Financial Crisis is not the desirable strategy.
Speaker 1: Doug, We're out of time, but Paul Sween and I
Speaker 1: say thank you to you for your wisdom here on
Speaker 1: the market, right or wrong, and also heartfelt thank you
Speaker 1: to your reporting of your family and your business associates
Speaker 1: f MI Israel. It's really been of immense value. Douglas
Speaker 1: Cast the Seabreeze Partners. Subscribe to the Bloomberg Surveillance podcast
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Speaker 1: I'm Tom Keen, and this is Bloomberg