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Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane. Along

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Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jaily. We bring you

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Speaker 1: insight from the best and economics, finance, investment and international

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Speaker 1: relations Fine Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,

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Speaker 1: and of course on the Bloomberg terminal. Kristin Bidley is happy,

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Speaker 1: I'm back. The head of North American investments for City

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Speaker 1: Global Maths Management joins us. Now, Christan just reading for

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Speaker 1: your notes is the quote that just jumped off the

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Speaker 1: page for me. Unfortunately, we do not believe that inflation

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Speaker 1: will fall fast enough for the fair to recognize the

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Speaker 1: cumulative impact of its actions in time to moderate its policies.

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Speaker 1: What's the bottom line then, for the secondary market ranny

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Speaker 1: we're looking at on the screens over the last week.

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Speaker 1: The bottom market for the bottom line for this rally

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Speaker 1: that we're seeing is Unfortunately, I think we're going to

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Speaker 1: see continued volatility and this type of price action is

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Speaker 1: quite normal in bear markets. This is why we're big

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Speaker 1: advocates against market timing, because when you see some of

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Speaker 1: the worst performance in market, some of the biggest draw downs,

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Speaker 1: they tend to be followed by then the best days.

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Speaker 1: And so if we look at over the past fifty years,

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Speaker 1: we did an analysis. If you're just out of the

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Speaker 1: market for the two best days of each calendar year,

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Speaker 1: you a race. You erase your per annum returns by

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Speaker 1: over nine point six percent. It's a basically an eight

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Speaker 1: percent reduction in returns. And so in these types of

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Speaker 1: markets you need to expect that type of volatility. And

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Speaker 1: this right now, I think last week, I think we

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Speaker 1: saw some short covering, we saw some defensive buying, But

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Speaker 1: I don't think we're turning a corner until the market

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Speaker 1: knows that we have definitively avoided a recession. We're not

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Speaker 1: there yet. We will stop the show here, folks, because

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Speaker 1: what you just heard from miss Bitterly is a single

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Speaker 1: most important thing of the first half of two thousand

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Speaker 1: twenty two. Let's revisited Kristen, and this goes back to

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Speaker 1: Capital Guardian Trust American Funds in Los Angeles and their

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Speaker 1: landmark research fifty years ago. How many days if I'm

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Speaker 1: in ash do I need to miss before I destroy

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Speaker 1: my return because I didn't get the few ginormous days.

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Speaker 1: Say it again, So two days, just two days out

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Speaker 1: of the market, and basically you've erased the majority of

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Speaker 1: your per annum returns and that's over. Again, we've looked

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Speaker 1: at a fifty year period. Now, sometimes people ask the question, well,

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Speaker 1: what's the probability that I could actually pick those two

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Speaker 1: best days and just be in for those two best days,

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Speaker 1: And unfortunately you're better at playing the lottery, So that

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Speaker 1: is no longer an investment strategy. That is pure speculation.

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Speaker 1: So Christian, that's the argument against cash. The other argument

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Speaker 1: on the other side is there are certain parts of

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Speaker 1: history that are aberrations, including the Great Depression where nothing

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Speaker 1: works and where everything loses, including sixty How do you

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Speaker 1: discern that type of period amide all of the gloom

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Speaker 1: that we're hearing at a strategists, Yeah, so I think

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Speaker 1: we have to look at actually some of the historic

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Speaker 1: anomalies that we've seen year to day. So one of

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Speaker 1: the historic anomalies that we've seen is the fact that

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Speaker 1: this is the first time in history that we've seen

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Speaker 1: both equities and bonds declined by more than ten percent

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Speaker 1: over a six month period. So to go throughout history

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Speaker 1: and try to find other other examples of when have

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Speaker 1: we seen this decline in tandem. We used the threshold

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Speaker 1: of four and a half percent, and we've seen that.

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Speaker 1: There's been five other situations in history where you've seen

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Speaker 1: that in tandem decline of equities and bonds by more

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Speaker 1: than four and a half percent in the six months following.

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Speaker 1: In five out of five of those scenarios, fixed income

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Speaker 1: was higher, with an average total return of around ten

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Speaker 1: point nine percent. Equities were higher only in three out

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Speaker 1: of those five times, with an average return of five

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Speaker 1: and a half percent. So right now, I think, well,

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Speaker 1: many people are questioning whether the sixty forty portfolio is dead.

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Speaker 1: Over a five year rolling period, with the exception of

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Speaker 1: the Great Depression, we haven't seen a negative return of

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Speaker 1: sixty forty portfolio. So, Kristen, just to pick up on

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Speaker 1: what you said, not just for sixty forty, but more specifically,

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Speaker 1: why you have a little bit more confidence is it

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Speaker 1: in the bond market relative to equities or equities to

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Speaker 1: to bonds. I think you need a balance now, John,

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Speaker 1: But I think bonds have been so out of favor,

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Speaker 1: which is why we're talking about bonds more so. Just

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Speaker 1: three years ago, we had you know, over of the

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Speaker 1: world's government that was negative yielding that's now around ten percent.

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Speaker 1: So the sizemanship that we've seen in rates and the

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Speaker 1: comfort and adding quality fixed income to our portfolios. So

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Speaker 1: we're looking at the muni market. We're depending upon what

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Speaker 1: state you're living in, you're getting taxable equivalent yields in

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Speaker 1: the ballpark of seven to eight percent investment grade fixed

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Speaker 1: income where you're actually seeing priced into some of those

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Speaker 1: spreads around the forty percent chance of a recession, so

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Speaker 1: it's not ignoring that probability. So that's where we've been

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Speaker 1: adding exposure over the past couple of weeks. Christ, and

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Speaker 1: this was awesome. Thank you. Christin Billy the a City

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Speaker 1: clubal Weath Management, Lisa R and By with Us with

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Speaker 1: Schroeder's head of US multisector fixed income, Lisa, do you

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Speaker 1: hide in full faith and credit? I think you definitely

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Speaker 1: want to have some of your your risk allocated to

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Speaker 1: pure U S treasuries right now. Um. You know, well,

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Speaker 1: we may have a little bit of a tactical bounce,

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Speaker 1: just given how much things have underperformed in credit recently.

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Speaker 1: I think the path at least resistance from here is

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Speaker 1: still tighter financial conditions, So I think you want to

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Speaker 1: have a decent amount of liquidity in your portfolio at

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Speaker 1: least with that in mine. What's the risk that we

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Speaker 1: still haven't fully realized? Is it the earning story? What

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Speaker 1: is it? I think the market is. I mean, you

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Speaker 1: guys were kind of talking about the correlations between bonds

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Speaker 1: and equities, and I think it's really relevant here. The

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Speaker 1: market is still gyrating between is it a recession story

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Speaker 1: or is it an inflation problem? Which one do we have?

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Speaker 1: Um And as you see, I do think that that

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Speaker 1: the narrative will turn towards it's a growth problem. We're

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Speaker 1: going to be heading into a US recession. We're not

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Speaker 1: quite there yet, which means, um, you know, bonds and

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Speaker 1: equities that those correlations can be a bit unstable, and

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Speaker 1: I think you need a greater risk premium um afforded

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Speaker 1: to riskier assets, and credit would be would be a

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Speaker 1: part of that. So you know, for us, it's it's

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Speaker 1: it's lower it's lower duration credit when we take it.

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Speaker 1: You know, I think the three to five year part

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Speaker 1: of the market credit market, investment grade looks it looks attractive,

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Speaker 1: reasonably attractive with the break evens there um, But it's

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Speaker 1: it's higher quality generally it's like liquidity um and it's

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Speaker 1: not taking a whole lot of risk right now because

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Speaker 1: I don't think we're in a spread compression environment for

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Speaker 1: the foreseeable future. How much volatility do you think we

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Speaker 1: have to tolerate through the rest of this summer? At least,

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Speaker 1: it's been amazing to me to see how much a

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Speaker 1: narrative changes on a single data point within a data point.

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Speaker 1: When did we ever used to talk about, you Mitch

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Speaker 1: reading of long term US consumer inflation expectations? When did

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Speaker 1: that move to bond market by five ten basis points

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Speaker 1: in either directions set the time for a FED that

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Speaker 1: might go fifty or seventy five at any given meeting.

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Speaker 1: When did it come to this? And that's and that's

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Speaker 1: the problem. Right until you can figure out or until

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Speaker 1: the market can call us around where the risk free

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Speaker 1: rate block, how could we possibly decide on a path

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Speaker 1: for riskier assets? You know, you you almost need to

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Speaker 1: get some stability in that in that rate forecast before

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Speaker 1: you can see any stability elsewhere. And I think, I

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Speaker 1: don't know how you want me to measure that volatility question, John,

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Speaker 1: but I think it's more. I think the answer is

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Speaker 1: more volatility continued volatility until we get some certainty that

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Speaker 1: these inflation readings are going to start to trend downward. So, Lisa,

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Speaker 1: if someone were listening to this entire program, they would

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Speaker 1: have heard Christen bitterly make the argument that you don't

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Speaker 1: want to be in cash and that you need to

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Speaker 1: be fully invested because if you missed just a couple

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Speaker 1: of days, you miss an entire eight percent ten percent return,

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Speaker 1: and it really is the winning moment. What is your

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Speaker 1: argument against that in your quest for liquidity? I think

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Speaker 1: you it depends on who you're managing money for, what

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Speaker 1: use at class you're managing what your targets are. Right

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Speaker 1: at the end of the day, we manage fixed income portfolios,

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Speaker 1: and these are meant to be in many ways the

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Speaker 1: ballast the sleep at night portfolios for people. UM. You know,

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Speaker 1: so we perhaps have a different it risk budget and

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Speaker 1: and and sort of target then than than Christian does. UM.

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Speaker 1: But yeah, you know, you can't have all liquidity, which

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Speaker 1: is why I suggest, um a decent portion of your

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Speaker 1: exposure be allocated to some of these really high quality

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Speaker 1: investment grade companies at the short end of the curve

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Speaker 1: where you can earn a four four and a half

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Speaker 1: percent yield. You know, over the next couple of years,

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Speaker 1: I think that's going to be a positive real return trade. Um,

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Speaker 1: it's gonna take some it's gonna take some time to

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Speaker 1: get there, but I think we will. We will be

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Speaker 1: paid and rewarded for something like that, and it gives

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Speaker 1: us the opportunity to sort of hide out and wait

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Speaker 1: and you know, wait for better opportunities to emerge. So, Lisa,

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Speaker 1: when you say liquidity, how much is just pure cash?

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Speaker 1: Pure cash is hard if you're managing relative return portfolios.

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Speaker 1: But I would say, you know, you want a decent portion,

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Speaker 1: double digit portion of treasury exposure across the curve. So

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Speaker 1: we manage relative return, so we're benchmark to the Barclay

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Speaker 1: sac in most in most portfolios, in many portfolios. Um,

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Speaker 1: And so that means we, you know, we want a

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Speaker 1: high quality liquidity overweight, whether it be treasuries, agency, mortgages,

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Speaker 1: some combination thereof cash cash itself. For us, it's hard

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Speaker 1: if you want if you have an absolute return portfolio

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Speaker 1: that certainly cash is is a is a better option. Lisa,

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Speaker 1: Thank you, as always, Lisa Holby, there A Shrowders. We

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Speaker 1: start the program this morning with Lori Canvassin, in the

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Speaker 1: head of US ancuity strategy at RBC Capital Markets and

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Speaker 1: lower let's start with that bond market. What is the

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Speaker 1: dominant factor behind lower yield in the last week or so,

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Speaker 1: and what do you think the implications are for the

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Speaker 1: durability of this equity market rally. So, look, it's a

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Speaker 1: great question. I'll tell you our rate strategy team has

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Speaker 1: been looking for that peak in the tenure yield and

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Speaker 1: they thought that as growth concerns and recession concerns built,

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Speaker 1: that it would weigh on that bond yield. And we've

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Speaker 1: actually looked at that as something that could help stabilize

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Speaker 1: the tech part of the market, which strangely ends up

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Speaker 1: being a stabilizing force for the equity market simply because

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Speaker 1: of the math of the market cap in terms of

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Speaker 1: its contribution to things like market cap and net income.

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Speaker 1: So I think, you know, it feels a little bit

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Speaker 1: contradictory in nature, but I do think that is one

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Speaker 1: of the things that has really been giving some stability

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Speaker 1: to market. And I'll tell you, John, as I've talked

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Speaker 1: to investors the last couple of weeks, there's a real

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Speaker 1: focus on the idea that if we get a recession,

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Speaker 1: it will largely play out in the next couple quarters,

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Speaker 1: and we won't have any lasting wounds and scars, and

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Speaker 1: we can sort of get into three, still have a

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Speaker 1: decent year, still have decent earnings. And so I think

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Speaker 1: that kind of rip off the band aid now get

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Speaker 1: through this economic pain. The Fed's helping that process along,

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Speaker 1: that sort of longer term optimism. One is something else

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Speaker 1: that I've actually just seen in my conversations as lending

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Speaker 1: some optimism to investors. Laura, you're on the road a lot.

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Speaker 1: I want you to get out beyond two thousand twenty

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Speaker 1: three and get away from the strategist game of what's

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Speaker 1: going to happen by next Tuesday, and I want you

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Speaker 1: to look long term. You're more qualified to do this

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Speaker 1: in anybody out of collegiate America. You lived in the

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Speaker 1: most prestigious dorm rooms in America U v A. I

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Speaker 1: want you to go back to Jefferson and say, how

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Speaker 1: do you do this now for the long haul? How

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Speaker 1: in cash right now? So, look, Tom, I think that

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Speaker 1: do typically but get buying opportunities for longer term investors,

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Speaker 1: and you know, we get a lot of caught We

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Speaker 1: get very caught up in my job, you know, without

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Speaker 1: what's the absolute downside, what is the end of the

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Speaker 1: year number look like? But if you actually go back

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Speaker 1: very big pivots areas like small caps. These are historic

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Speaker 1: buying opportunities for that smaller, riskier part of the market.

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Speaker 1: So I think you need to keep those bigger, longer

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Speaker 1: term pictures in mind. First off, the second thing I

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Speaker 1: would tell you is, I think the conversation about recession,

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Speaker 1: yes or no, when does it happen? That's an important one.

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Speaker 1: But we also as investors, if we're really longer term,

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Speaker 1: need to be thinking about what things look like on

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Speaker 1: the other side, what's the longer term growth expectation. I'm

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Speaker 1: talking to a fair number of people who think we

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Speaker 1: exited this hot economy, this above trend economy that was

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Speaker 1: boosted by stimulus, if that stimulus is lacking in this economy,

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Speaker 1: in this economic recovery going forward, anticipate a slower growth

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Speaker 1: backdrop which does typically benefit the secular growth sectors like technology.

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Speaker 1: Those will be the two things I would focus you

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Speaker 1: on right now. So, LORI, that brings us to John's

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Speaker 1: point where he started off, asking are these scenarios consistent

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Speaker 1: with each each other. This idea of a stagflationary spiral

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Speaker 1: where you get slowing growth in a recession and and

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Speaker 1: recession that brings us back to where we before, where

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Speaker 1: we were before, and then some so purse out what

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Speaker 1: the difference is and whether there's still is a chance

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Speaker 1: of that sagflationary environment. So look, I think that there

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Speaker 1: are two parts of the same timeline. I think this

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Speaker 1: idea of recessionary fear sort of playing in the here

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Speaker 1: and now. Frankly, so, I think that's something investors have

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Speaker 1: already been positioned for. If you look at defensive sector

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Speaker 1: valuations that are at p versus cyclical and secular growth,

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Speaker 1: small cap positioning, and the futures market is down below

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Speaker 1: financial crisis lows, so you know it does feel like

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Speaker 1: but the positioning the market already reflects that that longer term,

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Speaker 1: sort of stagflationary type of environment is something investors can

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Speaker 1: still wrap their heads around. So perhaps you don't need

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Speaker 1: to be as barished on things like energy as you

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Speaker 1: did in the past, even if there are some pressures

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Speaker 1: in the short term. So we're market weight on energy

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Speaker 1: for for just that reason. Um, but you also do

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Speaker 1: want to think about sort of that longer term backdrop

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Speaker 1: and kind of how you want to be positioned for

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Speaker 1: that slower growth environment, which frankly, I don't think it's

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Speaker 1: gonna exit anytime soon. So I don't think investors are

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Speaker 1: being inconsistent. I think they're trying to put on different

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Speaker 1: trades for different durations at the same time. Glory also

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Speaker 1: to catch up as always, and great to stop the

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Speaker 1: week with you, Louri Cavassin to that of obbising capital markets.

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Speaker 1: Here's what we're gonna do over a weekend of emotion

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Speaker 1: for American for international audience. It's difficult to calibrate the

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Speaker 1: hortons of the decisions plural of the Supreme Court. We're

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Speaker 1: gonna go to the expert. Mohammed units is editor in

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Speaker 1: chief at Gallup. They've been doing it longer, They've been

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Speaker 1: doing it more measured, They've been doing it deeper and

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Speaker 1: measuring the pulse in cadence of America. Mohammed, I thought

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Speaker 1: Kate Zerinki in the New York Times was spectacular this weekend.

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Speaker 1: I'm looking at the state legislatures, the Revolution of two

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Speaker 1: thousand and ten, which was very much like Gingrich in

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Speaker 1: the fabric of America. And I want to go to

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Speaker 1: a phrase that you know, which is try trifecta America,

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Speaker 1: which was when a state is entirely democrat or a

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Speaker 1: state is entirely Republican. Does Gallup presume that we will

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Speaker 1: stay as polarized as we are now and frankly become

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Speaker 1: ever more a trifecta America? There is That's a great question.

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Speaker 1: First of all, Tomas always um there's no doubt that

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Speaker 1: America is politically are divided than since we started measuring

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Speaker 1: it in the nineteen thirties. There's been no sign during

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Speaker 1: these past um months of the Biden administration that that's

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Speaker 1: improving in any way. However, we do ask Americans whether

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Speaker 1: they prefer this kind of trifecta set up, at least

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Speaker 1: in Congress. And what we find is that Americans, actually

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Speaker 1: the majority of them um prefer a divided government. They

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Speaker 1: prefer there to be balanced between the two parties. But

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Speaker 1: this decision, like you said, comic really can't overstate the

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Speaker 1: magnitude of up ending fifty years of settled law in

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Speaker 1: the United States, and the reaction has been massive. Completely

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Speaker 1: unfair question, but I'm sure you will gauge it. What

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Speaker 1: is the belief in America in the Union almost a

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Speaker 1: Linclonian union back to eighteen fifty eighteen sixty. Do we

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Speaker 1: believe in union or do we nudge towards some form

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Speaker 1: of separation. It's again we've never asked that specifically, but um,

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Speaker 1: I would say that that the Union is still intact

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Speaker 1: and will remain intact. And I say that because Americans

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Speaker 1: are overall pretty positive on their own lives and on

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Speaker 1: their local government. Americans are very disappointed in national government

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Speaker 1: and that's really where we've seen the most declined in

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Speaker 1: confidence in institution in the Supreme Court, in Congress. Overall

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Speaker 1: satisfaction of the United States hasn't been over fift in

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Speaker 1: over a decade now, So Americans are very down on

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Speaker 1: their national government, but there aren't signs necessarily of you know,

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Speaker 1: dissolution of the Union in public opinions, and Mohammada does

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Speaker 1: seem to be a galvanizing of local elections. However, people

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Speaker 1: are looking to the national elections, to mid terms and

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Speaker 1: beyond to understand the overall trajectory here. Do you have

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Speaker 1: a sense of whether some of these social issues could

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Speaker 1: overcome inflation and economic issues. Is the main voter preference

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Speaker 1: or motivator going into the midterm elections? Well, if you

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Speaker 1: would have asked me to out on Friday before this

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Speaker 1: decision came out, I would have told you that's very

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Speaker 1: hard to believe. UM. Now, it's an open question and

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Speaker 1: obviously depends on how bad inflation and the economy really

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Speaker 1: gets for main street moving into the selection. But right

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Speaker 1: before this decision, we asked Americans how important abortion was

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Speaker 1: to your vote, and we did see an uptake in

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Speaker 1: those that that said they would only vote for somebody

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Speaker 1: who shared their views. It's also important to remember this

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Speaker 1: decision is not popular in America. Six and Kent. Americans

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Speaker 1: did not want to see Roe v Waite overturned. UM

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Speaker 1: fifty five percent of Americans described themselves as pro choice,

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Speaker 1: and that's been on the on the increase. So over

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Speaker 1: the past couple of decades, America has really moved, if

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Speaker 1: you will, to the left on abortion. And now this

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Speaker 1: decision by the Court is really out of step with

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Speaker 1: public opinion. Not that it's the long decision, that's not

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Speaker 1: the basis upon which the Court makes its decision, but

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Speaker 1: we know this is not going to be a popular

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Speaker 1: decision with the public. Just a fun a question for me,

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Speaker 1: do you find that is coming up in more than

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Speaker 1: one topic on several fronts. We often talk about in

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Speaker 1: this country being very divided, but on certain issues it's

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Speaker 1: really not. It's just Washington, d c. That's very divided,

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Speaker 1: damn party lines. Do you sense that's becoming a bigger

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Speaker 1: issue across a range of issues. I actually know. But

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Speaker 1: these are the kinds of issues that really can um

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Speaker 1: These social issues can really really become a focus and

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Speaker 1: can divide communities, and we've seen that in the past.

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Speaker 1: But overall, Americans are rather positive on local government. They

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Speaker 1: are not seeing their state governments as nearly as negatively

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Speaker 1: as they see the national government. And that really now

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Speaker 1: goes across the board. The Supreme Court just before this decision,

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Speaker 1: after the league hit a record low of twenty percent

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Speaker 1: confidence in the general public in the nineties that was

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Speaker 1: much more close to sort of six year seven percent.

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Speaker 1: Mohamed one ft to catch up to get your views

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Speaker 1: in the NiTi to off the bank of your appalling

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Speaker 1: mohammate units have count of. This is the Bloomberg Surveillance Podcast.

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Speaker 1: Thanks for listening. Join us live we days from seven

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Speaker 1: to ten am Eastern on Bloomberg Radio and on Bloomberg

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Speaker 1: Television each day from six to nine am for insight

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Speaker 1: from the best in economics, finance, investment, and international relations.

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Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

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Speaker 1: Bloomberg dot com, and of course on the terminal. I'm

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Speaker 1: Tom Keene and this is Bloomberg