Speaker 1: Welcome to the Bloombergs Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment and international
Speaker 1: relations Fine Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. Kristin Bidley is happy,
Speaker 1: I'm back. The head of North American investments for City
Speaker 1: Global Maths Management joins us. Now, Christan just reading for
Speaker 1: your notes is the quote that just jumped off the
Speaker 1: page for me. Unfortunately, we do not believe that inflation
Speaker 1: will fall fast enough for the fair to recognize the
Speaker 1: cumulative impact of its actions in time to moderate its policies.
Speaker 1: What's the bottom line then, for the secondary market ranny
Speaker 1: we're looking at on the screens over the last week.
Speaker 1: The bottom market for the bottom line for this rally
Speaker 1: that we're seeing is Unfortunately, I think we're going to
Speaker 1: see continued volatility and this type of price action is
Speaker 1: quite normal in bear markets. This is why we're big
Speaker 1: advocates against market timing, because when you see some of
Speaker 1: the worst performance in market, some of the biggest draw downs,
Speaker 1: they tend to be followed by then the best days.
Speaker 1: And so if we look at over the past fifty years,
Speaker 1: we did an analysis. If you're just out of the
Speaker 1: market for the two best days of each calendar year,
Speaker 1: you a race. You erase your per annum returns by
Speaker 1: over nine point six percent. It's a basically an eight
Speaker 1: percent reduction in returns. And so in these types of
Speaker 1: markets you need to expect that type of volatility. And
Speaker 1: this right now, I think last week, I think we
Speaker 1: saw some short covering, we saw some defensive buying, But
Speaker 1: I don't think we're turning a corner until the market
Speaker 1: knows that we have definitively avoided a recession. We're not
Speaker 1: there yet. We will stop the show here, folks, because
Speaker 1: what you just heard from miss Bitterly is a single
Speaker 1: most important thing of the first half of two thousand
Speaker 1: twenty two. Let's revisited Kristen, and this goes back to
Speaker 1: Capital Guardian Trust American Funds in Los Angeles and their
Speaker 1: landmark research fifty years ago. How many days if I'm
Speaker 1: in ash do I need to miss before I destroy
Speaker 1: my return because I didn't get the few ginormous days.
Speaker 1: Say it again, So two days, just two days out
Speaker 1: of the market, and basically you've erased the majority of
Speaker 1: your per annum returns and that's over. Again, we've looked
Speaker 1: at a fifty year period. Now, sometimes people ask the question, well,
Speaker 1: what's the probability that I could actually pick those two
Speaker 1: best days and just be in for those two best days,
Speaker 1: And unfortunately you're better at playing the lottery, So that
Speaker 1: is no longer an investment strategy. That is pure speculation.
Speaker 1: So Christian, that's the argument against cash. The other argument
Speaker 1: on the other side is there are certain parts of
Speaker 1: history that are aberrations, including the Great Depression where nothing
Speaker 1: works and where everything loses, including sixty How do you
Speaker 1: discern that type of period amide all of the gloom
Speaker 1: that we're hearing at a strategists, Yeah, so I think
Speaker 1: we have to look at actually some of the historic
Speaker 1: anomalies that we've seen year to day. So one of
Speaker 1: the historic anomalies that we've seen is the fact that
Speaker 1: this is the first time in history that we've seen
Speaker 1: both equities and bonds declined by more than ten percent
Speaker 1: over a six month period. So to go throughout history
Speaker 1: and try to find other other examples of when have
Speaker 1: we seen this decline in tandem. We used the threshold
Speaker 1: of four and a half percent, and we've seen that.
Speaker 1: There's been five other situations in history where you've seen
Speaker 1: that in tandem decline of equities and bonds by more
Speaker 1: than four and a half percent in the six months following.
Speaker 1: In five out of five of those scenarios, fixed income
Speaker 1: was higher, with an average total return of around ten
Speaker 1: point nine percent. Equities were higher only in three out
Speaker 1: of those five times, with an average return of five
Speaker 1: and a half percent. So right now, I think, well,
Speaker 1: many people are questioning whether the sixty forty portfolio is dead.
Speaker 1: Over a five year rolling period, with the exception of
Speaker 1: the Great Depression, we haven't seen a negative return of
Speaker 1: sixty forty portfolio. So, Kristen, just to pick up on
Speaker 1: what you said, not just for sixty forty, but more specifically,
Speaker 1: why you have a little bit more confidence is it
Speaker 1: in the bond market relative to equities or equities to
Speaker 1: to bonds. I think you need a balance now, John,
Speaker 1: But I think bonds have been so out of favor,
Speaker 1: which is why we're talking about bonds more so. Just
Speaker 1: three years ago, we had you know, over of the
Speaker 1: world's government that was negative yielding that's now around ten percent.
Speaker 1: So the sizemanship that we've seen in rates and the
Speaker 1: comfort and adding quality fixed income to our portfolios. So
Speaker 1: we're looking at the muni market. We're depending upon what
Speaker 1: state you're living in, you're getting taxable equivalent yields in
Speaker 1: the ballpark of seven to eight percent investment grade fixed
Speaker 1: income where you're actually seeing priced into some of those
Speaker 1: spreads around the forty percent chance of a recession, so
Speaker 1: it's not ignoring that probability. So that's where we've been
Speaker 1: adding exposure over the past couple of weeks. Christ, and
Speaker 1: this was awesome. Thank you. Christin Billy the a City
Speaker 1: clubal Weath Management, Lisa R and By with Us with
Speaker 1: Schroeder's head of US multisector fixed income, Lisa, do you
Speaker 1: hide in full faith and credit? I think you definitely
Speaker 1: want to have some of your your risk allocated to
Speaker 1: pure U S treasuries right now. Um. You know, well,
Speaker 1: we may have a little bit of a tactical bounce,
Speaker 1: just given how much things have underperformed in credit recently.
Speaker 1: I think the path at least resistance from here is
Speaker 1: still tighter financial conditions, So I think you want to
Speaker 1: have a decent amount of liquidity in your portfolio at
Speaker 1: least with that in mine. What's the risk that we
Speaker 1: still haven't fully realized? Is it the earning story? What
Speaker 1: is it? I think the market is. I mean, you
Speaker 1: guys were kind of talking about the correlations between bonds
Speaker 1: and equities, and I think it's really relevant here. The
Speaker 1: market is still gyrating between is it a recession story
Speaker 1: or is it an inflation problem? Which one do we have?
Speaker 1: Um And as you see, I do think that that
Speaker 1: the narrative will turn towards it's a growth problem. We're
Speaker 1: going to be heading into a US recession. We're not
Speaker 1: quite there yet, which means, um, you know, bonds and
Speaker 1: equities that those correlations can be a bit unstable, and
Speaker 1: I think you need a greater risk premium um afforded
Speaker 1: to riskier assets, and credit would be would be a
Speaker 1: part of that. So you know, for us, it's it's
Speaker 1: it's lower it's lower duration credit when we take it.
Speaker 1: You know, I think the three to five year part
Speaker 1: of the market credit market, investment grade looks it looks attractive,
Speaker 1: reasonably attractive with the break evens there um, But it's
Speaker 1: it's higher quality generally it's like liquidity um and it's
Speaker 1: not taking a whole lot of risk right now because
Speaker 1: I don't think we're in a spread compression environment for
Speaker 1: the foreseeable future. How much volatility do you think we
Speaker 1: have to tolerate through the rest of this summer? At least,
Speaker 1: it's been amazing to me to see how much a
Speaker 1: narrative changes on a single data point within a data point.
Speaker 1: When did we ever used to talk about, you Mitch
Speaker 1: reading of long term US consumer inflation expectations? When did
Speaker 1: that move to bond market by five ten basis points
Speaker 1: in either directions set the time for a FED that
Speaker 1: might go fifty or seventy five at any given meeting.
Speaker 1: When did it come to this? And that's and that's
Speaker 1: the problem. Right until you can figure out or until
Speaker 1: the market can call us around where the risk free
Speaker 1: rate block, how could we possibly decide on a path
Speaker 1: for riskier assets? You know, you you almost need to
Speaker 1: get some stability in that in that rate forecast before
Speaker 1: you can see any stability elsewhere. And I think, I
Speaker 1: don't know how you want me to measure that volatility question, John,
Speaker 1: but I think it's more. I think the answer is
Speaker 1: more volatility continued volatility until we get some certainty that
Speaker 1: these inflation readings are going to start to trend downward. So, Lisa,
Speaker 1: if someone were listening to this entire program, they would
Speaker 1: have heard Christen bitterly make the argument that you don't
Speaker 1: want to be in cash and that you need to
Speaker 1: be fully invested because if you missed just a couple
Speaker 1: of days, you miss an entire eight percent ten percent return,
Speaker 1: and it really is the winning moment. What is your
Speaker 1: argument against that in your quest for liquidity? I think
Speaker 1: you it depends on who you're managing money for, what
Speaker 1: use at class you're managing what your targets are. Right
Speaker 1: at the end of the day, we manage fixed income portfolios,
Speaker 1: and these are meant to be in many ways the
Speaker 1: ballast the sleep at night portfolios for people. UM. You know,
Speaker 1: so we perhaps have a different it risk budget and
Speaker 1: and and sort of target then than than Christian does. UM.
Speaker 1: But yeah, you know, you can't have all liquidity, which
Speaker 1: is why I suggest, um a decent portion of your
Speaker 1: exposure be allocated to some of these really high quality
Speaker 1: investment grade companies at the short end of the curve
Speaker 1: where you can earn a four four and a half
Speaker 1: percent yield. You know, over the next couple of years,
Speaker 1: I think that's going to be a positive real return trade. Um,
Speaker 1: it's gonna take some it's gonna take some time to
Speaker 1: get there, but I think we will. We will be
Speaker 1: paid and rewarded for something like that, and it gives
Speaker 1: us the opportunity to sort of hide out and wait
Speaker 1: and you know, wait for better opportunities to emerge. So, Lisa,
Speaker 1: when you say liquidity, how much is just pure cash?
Speaker 1: Pure cash is hard if you're managing relative return portfolios.
Speaker 1: But I would say, you know, you want a decent portion,
Speaker 1: double digit portion of treasury exposure across the curve. So
Speaker 1: we manage relative return, so we're benchmark to the Barclay
Speaker 1: sac in most in most portfolios, in many portfolios. Um,
Speaker 1: And so that means we, you know, we want a
Speaker 1: high quality liquidity overweight, whether it be treasuries, agency, mortgages,
Speaker 1: some combination thereof cash cash itself. For us, it's hard
Speaker 1: if you want if you have an absolute return portfolio
Speaker 1: that certainly cash is is a is a better option. Lisa,
Speaker 1: Thank you, as always, Lisa Holby, there A Shrowders. We
Speaker 1: start the program this morning with Lori Canvassin, in the
Speaker 1: head of US ancuity strategy at RBC Capital Markets and
Speaker 1: lower let's start with that bond market. What is the
Speaker 1: dominant factor behind lower yield in the last week or so,
Speaker 1: and what do you think the implications are for the
Speaker 1: durability of this equity market rally. So, look, it's a
Speaker 1: great question. I'll tell you our rate strategy team has
Speaker 1: been looking for that peak in the tenure yield and
Speaker 1: they thought that as growth concerns and recession concerns built,
Speaker 1: that it would weigh on that bond yield. And we've
Speaker 1: actually looked at that as something that could help stabilize
Speaker 1: the tech part of the market, which strangely ends up
Speaker 1: being a stabilizing force for the equity market simply because
Speaker 1: of the math of the market cap in terms of
Speaker 1: its contribution to things like market cap and net income.
Speaker 1: So I think, you know, it feels a little bit
Speaker 1: contradictory in nature, but I do think that is one
Speaker 1: of the things that has really been giving some stability
Speaker 1: to market. And I'll tell you, John, as I've talked
Speaker 1: to investors the last couple of weeks, there's a real
Speaker 1: focus on the idea that if we get a recession,
Speaker 1: it will largely play out in the next couple quarters,
Speaker 1: and we won't have any lasting wounds and scars, and
Speaker 1: we can sort of get into three, still have a
Speaker 1: decent year, still have decent earnings. And so I think
Speaker 1: that kind of rip off the band aid now get
Speaker 1: through this economic pain. The Fed's helping that process along,
Speaker 1: that sort of longer term optimism. One is something else
Speaker 1: that I've actually just seen in my conversations as lending
Speaker 1: some optimism to investors. Laura, you're on the road a lot.
Speaker 1: I want you to get out beyond two thousand twenty
Speaker 1: three and get away from the strategist game of what's
Speaker 1: going to happen by next Tuesday, and I want you
Speaker 1: to look long term. You're more qualified to do this
Speaker 1: in anybody out of collegiate America. You lived in the
Speaker 1: most prestigious dorm rooms in America U v A. I
Speaker 1: want you to go back to Jefferson and say, how
Speaker 1: do you do this now for the long haul? How
Speaker 1: do you stay in the market and not not afraid
Speaker 1: in cash right now? So, look, Tom, I think that
Speaker 1: when we go back and we look at the history
Speaker 1: of recessions, what we have to remember is that they
Speaker 1: do typically but get buying opportunities for longer term investors,
Speaker 1: and you know, we get a lot of caught We
Speaker 1: get very caught up in my job, you know, without
Speaker 1: some of my competitors and investors frankly on kind of
Speaker 1: what's the absolute downside, what is the end of the
Speaker 1: year number look like? But if you actually go back
Speaker 1: and look over the course of recession stock at stocks
Speaker 1: actually go up a little bit. If you take the
Speaker 1: n B e R dates, you tend to see these
Speaker 1: very big pivots areas like small caps. These are historic
Speaker 1: buying opportunities for that smaller, riskier part of the market.
Speaker 1: So I think you need to keep those bigger, longer
Speaker 1: term pictures in mind. First off, the second thing I
Speaker 1: would tell you is, I think the conversation about recession,
Speaker 1: yes or no, when does it happen? That's an important one.
Speaker 1: But we also as investors, if we're really longer term,
Speaker 1: need to be thinking about what things look like on
Speaker 1: the other side, what's the longer term growth expectation. I'm
Speaker 1: talking to a fair number of people who think we
Speaker 1: exited this hot economy, this above trend economy that was
Speaker 1: boosted by stimulus, if that stimulus is lacking in this economy,
Speaker 1: in this economic recovery going forward, anticipate a slower growth
Speaker 1: backdrop which does typically benefit the secular growth sectors like technology.
Speaker 1: Those will be the two things I would focus you
Speaker 1: on right now. So, LORI, that brings us to John's
Speaker 1: point where he started off, asking are these scenarios consistent
Speaker 1: with each each other. This idea of a stagflationary spiral
Speaker 1: where you get slowing growth in a recession and and
Speaker 1: you also get inflation that doesn't cool materially and a
Speaker 1: recession that brings us back to where we before, where
Speaker 1: we were before, and then some so purse out what
Speaker 1: the difference is and whether there's still is a chance
Speaker 1: of that sagflationary environment. So look, I think that there
Speaker 1: are two parts of the same timeline. I think this
Speaker 1: idea of recessionary fear sort of playing in the here
Speaker 1: and now. Frankly, so, I think that's something investors have
Speaker 1: already been positioned for. If you look at defensive sector
Speaker 1: valuations that are at p versus cyclical and secular growth,
Speaker 1: small cap positioning, and the futures market is down below
Speaker 1: financial crisis lows, so you know it does feel like
Speaker 1: that is still playing out in the here and now,
Speaker 1: but the positioning the market already reflects that that longer term,
Speaker 1: sort of stagflationary type of environment is something investors can
Speaker 1: still wrap their heads around. So perhaps you don't need
Speaker 1: to be as barished on things like energy as you
Speaker 1: did in the past, even if there are some pressures
Speaker 1: in the short term. So we're market weight on energy
Speaker 1: for for just that reason. Um, but you also do
Speaker 1: want to think about sort of that longer term backdrop
Speaker 1: and kind of how you want to be positioned for
Speaker 1: that slower growth environment, which frankly, I don't think it's
Speaker 1: gonna exit anytime soon. So I don't think investors are
Speaker 1: being inconsistent. I think they're trying to put on different
Speaker 1: trades for different durations at the same time. Glory also
Speaker 1: to catch up as always, and great to stop the
Speaker 1: week with you, Louri Cavassin to that of obbising capital markets.
Speaker 1: Here's what we're gonna do over a weekend of emotion
Speaker 1: for American for international audience. It's difficult to calibrate the
Speaker 1: hortons of the decisions plural of the Supreme Court. We're
Speaker 1: gonna go to the expert. Mohammed units is editor in
Speaker 1: chief at Gallup. They've been doing it longer, They've been
Speaker 1: doing it more measured, They've been doing it deeper and
Speaker 1: measuring the pulse in cadence of America. Mohammed, I thought
Speaker 1: Kate Zerinki in the New York Times was spectacular this weekend.
Speaker 1: I'm looking at the state legislatures, the Revolution of two
Speaker 1: thousand and ten, which was very much like Gingrich in
Speaker 1: the fabric of America. And I want to go to
Speaker 1: a phrase that you know, which is try trifecta America,
Speaker 1: which was when a state is entirely democrat or a
Speaker 1: state is entirely Republican. Does Gallup presume that we will
Speaker 1: stay as polarized as we are now and frankly become
Speaker 1: ever more a trifecta America? There is That's a great question.
Speaker 1: First of all, Tomas always um there's no doubt that
Speaker 1: America is politically are divided than since we started measuring
Speaker 1: it in the nineteen thirties. There's been no sign during
Speaker 1: these past um months of the Biden administration that that's
Speaker 1: improving in any way. However, we do ask Americans whether
Speaker 1: they prefer this kind of trifecta set up, at least
Speaker 1: in Congress. And what we find is that Americans, actually
Speaker 1: the majority of them um prefer a divided government. They
Speaker 1: prefer there to be balanced between the two parties. But
Speaker 1: this decision, like you said, comic really can't overstate the
Speaker 1: magnitude of up ending fifty years of settled law in
Speaker 1: the United States, and the reaction has been massive. Completely
Speaker 1: unfair question, but I'm sure you will gauge it. What
Speaker 1: is the belief in America in the Union almost a
Speaker 1: Linclonian union back to eighteen fifty eighteen sixty. Do we
Speaker 1: believe in union or do we nudge towards some form
Speaker 1: of separation. It's again we've never asked that specifically, but um,
Speaker 1: I would say that that the Union is still intact
Speaker 1: and will remain intact. And I say that because Americans
Speaker 1: are overall pretty positive on their own lives and on
Speaker 1: their local government. Americans are very disappointed in national government
Speaker 1: and that's really where we've seen the most declined in
Speaker 1: confidence in institution in the Supreme Court, in Congress. Overall
Speaker 1: satisfaction of the United States hasn't been over fift in
Speaker 1: over a decade now, So Americans are very down on
Speaker 1: their national government, but there aren't signs necessarily of you know,
Speaker 1: dissolution of the Union in public opinions, and Mohammada does
Speaker 1: seem to be a galvanizing of local elections. However, people
Speaker 1: are looking to the national elections, to mid terms and
Speaker 1: beyond to understand the overall trajectory here. Do you have
Speaker 1: a sense of whether some of these social issues could
Speaker 1: overcome inflation and economic issues. Is the main voter preference
Speaker 1: or motivator going into the midterm elections? Well, if you
Speaker 1: would have asked me to out on Friday before this
Speaker 1: decision came out, I would have told you that's very
Speaker 1: hard to believe. UM. Now, it's an open question and
Speaker 1: obviously depends on how bad inflation and the economy really
Speaker 1: gets for main street moving into the selection. But right
Speaker 1: before this decision, we asked Americans how important abortion was
Speaker 1: to your vote, and we did see an uptake in
Speaker 1: those that that said they would only vote for somebody
Speaker 1: who shared their views. It's also important to remember this
Speaker 1: decision is not popular in America. Six and Kent. Americans
Speaker 1: did not want to see Roe v Waite overturned. UM
Speaker 1: fifty five percent of Americans described themselves as pro choice,
Speaker 1: and that's been on the on the increase. So over
Speaker 1: the past couple of decades, America has really moved, if
Speaker 1: you will, to the left on abortion. And now this
Speaker 1: decision by the Court is really out of step with
Speaker 1: public opinion. Not that it's the long decision, that's not
Speaker 1: the basis upon which the Court makes its decision, but
Speaker 1: we know this is not going to be a popular
Speaker 1: decision with the public. Just a fun a question for me,
Speaker 1: do you find that is coming up in more than
Speaker 1: one topic on several fronts. We often talk about in
Speaker 1: this country being very divided, but on certain issues it's
Speaker 1: really not. It's just Washington, d c. That's very divided,
Speaker 1: damn party lines. Do you sense that's becoming a bigger
Speaker 1: issue across a range of issues. I actually know. But
Speaker 1: these are the kinds of issues that really can um
Speaker 1: These social issues can really really become a focus and
Speaker 1: can divide communities, and we've seen that in the past.
Speaker 1: But overall, Americans are rather positive on local government. They
Speaker 1: are not seeing their state governments as nearly as negatively
Speaker 1: as they see the national government. And that really now
Speaker 1: goes across the board. The Supreme Court just before this decision,
Speaker 1: after the league hit a record low of twenty percent
Speaker 1: confidence in the general public in the nineties that was
Speaker 1: much more close to sort of six year seven percent.
Speaker 1: Mohamed one ft to catch up to get your views
Speaker 1: in the NiTi to off the bank of your appalling
Speaker 1: mohammate units have count of. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live we days from seven
Speaker 1: to ten am Eastern on Bloomberg Radio and on Bloomberg
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Speaker 1: from the best in economics, finance, investment, and international relations.
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm
Speaker 1: Tom Keene and this is Bloomberg