Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal and the Bloomberg Business App. Christopher Erwon
Speaker 1: joins us now had a technical and macro strategy. It's
Speaker 1: strtigas it is a Baird company. Christopher own, thank you
Speaker 1: so much for joining us. Which chart matters right now?
Speaker 2: I think there's nothing more important in the world right
Speaker 2: now in terms of what bon yields do over the
Speaker 2: next number of weeks here I mean ten years. Yields
Speaker 2: have been chopping basically since last October. This is going
Speaker 2: to resolve itself very soon. We're simply running out of
Speaker 2: real estate on the chart. And think you start pushing
Speaker 2: above three ninety three ninety five on tens, that's a
Speaker 2: big deal. I think it's a big deal multiples. I
Speaker 2: think it's a big deal for the growth value equation.
Speaker 2: And Lisa, as you point out very quietly the last
Speaker 2: week or so, there's been some stalling in tech and
Speaker 2: I wonder if that's some reflection in where rates go
Speaker 2: from here. I also think the weakness and utilities might
Speaker 2: be a reflection of where rates may go from here.
Speaker 2: And the move in UK has been absolutely explosive. Here
Speaker 2: you have two year guilts and ten year guildts basically
Speaker 2: back to where they were when all these revelations about
Speaker 2: LDI and British pensions were revealed last fall.
Speaker 3: Can you judge technically? And I we had a guest
Speaker 3: yesterday that talked about this.
Speaker 1: What we really need to see is the high two
Speaker 1: year yields come out to a high five year yield.
Speaker 1: Do you see within the charts of spreads, the charts
Speaker 1: of an actual single yield where we're going to broaden.
Speaker 3: Out these high yields into a higher yield regime.
Speaker 2: You know what's interesting we always look at this relationship
Speaker 2: between twos and FED funds right and twos have largely
Speaker 2: traded south of FED fund on since call it February
Speaker 2: or March of this year. They're starting to creep back
Speaker 2: up there in terms of reclaiming the bar of FED
Speaker 2: funds here and if you look at who's raised rates recently,
Speaker 2: the OSS's, the CADS and UK. What's happened in all
Speaker 2: those markets they've softened, And what's happened with the banks
Speaker 2: in those industries they've softened as well. Canadian banks, OSC banks,
Speaker 2: UK banks are all pretty soft here, as those central
Speaker 2: banks have hiked over the last several weeks.
Speaker 4: There's a real tension heading into this nine thirty AM
Speaker 4: panel of how important the central bankers are and determining
Speaker 4: what happens next in markets. There was a brief second
Speaker 4: where people thought maybe we have moved beyond central banks
Speaker 4: and we're moving to fundamentals. God Willing, are you saying
Speaker 4: that that's not the case.
Speaker 2: I don't think it's the case yet, or at a minimum,
Speaker 2: I think the message or the interpretation of the bond
Speaker 2: market to all of this is still paramount in our
Speaker 2: thinking about what the second half of the year looks like.
Speaker 2: But a Lisa, as you point out, the trend here
Speaker 2: is still the trend, and the trend is in the
Speaker 2: trend in stocks are still up. There are areas of weakness,
Speaker 2: and there are pockets that may get weak, but in
Speaker 2: basically broad aggregate here the Trendon's dock is up. What
Speaker 2: I want to watch as we think about the second
Speaker 2: half of the year. We've seen some modest broadening over
Speaker 2: the last two or three weeks. Does that stall or
Speaker 2: does that continue? We're sitting here today with about sixty
Speaker 2: percent of the S and P above the two HUNDREDAY
Speaker 2: moving average. That's a reading that ordinarily wouldn't worry me
Speaker 2: that much. It's just unusual in a first year off
Speaker 2: below that were not broader. Narrow markets are common, but
Speaker 2: they're common late, they're not common early.
Speaker 3: In a new advance.
Speaker 4: You mentioned that we have seen this stalling out in
Speaker 4: the tech trade. There have been a number of downgrades
Speaker 4: from banks saying perhaps it's gone a little bit too far.
Speaker 4: Are you saying it's more related to the yield story
Speaker 4: and the waking up to an old paradigm that we
Speaker 4: saw a whole six months ago that people had abandoned
Speaker 4: when we had the no landing, the soft landing, and
Speaker 4: the maculate disinflation of say February.
Speaker 2: You know, it feels like a different world ago. We
Speaker 2: spent basically twenty one and twenty two thinking the world
Speaker 2: to change, and we were on the cusp of some
Speaker 2: big regime change for that view to be massively challenged
Speaker 2: over the last three or four months. My suspicion is,
Speaker 2: if we really get rates up here, and I'm talking
Speaker 2: to say, above four on tens, maybe above four to
Speaker 2: ten on thirty's new highs on twos, you're going to
Speaker 2: really begin to question some of the valuations that are
Speaker 2: put on these tech names. And I wonder if that's
Speaker 2: why there's a hint of them starting to stall here.
Speaker 2: It's not everywhere. Apple made a new high yesterday, but
Speaker 2: quietly Google's come in here, AMD's come in here, Microsoft
Speaker 2: has softened a touch. They've all ridden their fifty day
Speaker 2: averages all year. I think those would be very big
Speaker 2: levels moving forward. And if you want to look at
Speaker 2: a test, this is a different sector, but use this
Speaker 2: as a test. The European luxury names, HERMEZ, LVMAH, etc.
Speaker 2: They've all been very tech like this year. Those that
Speaker 2: actually started to stall the last two weeks, I think
Speaker 2: we're going to learn about other corners of the world
Speaker 2: from how those stocks respond going forward.
Speaker 3: Bloomberg with a great story to dan is it Lewis
Speaker 3: Futon the stock yet as well.
Speaker 1: You know, a technical analysis is about looking at the
Speaker 1: past and learning lessons. We came off the mat seventy three,
Speaker 1: seventy four, we had a nice leg up, and then
Speaker 1: in December of nineteen seventy five we discovered a second
Speaker 1: leg up in the market. Can people like Chris Vorone
Speaker 1: discover a second leg before it happens?
Speaker 2: You know, when I think about markets, I don't really
Speaker 2: operate in the world of levels. I operate in the
Speaker 2: world of what is the characteristics of a certain advance?
Speaker 2: And I think, on balance, when you look at this
Speaker 2: current advance, the leadership is still pretty risk seeking. We
Speaker 2: see it with industrials, We see it with discretionary better
Speaker 2: than staple. So I would use those characteristics and say,
Speaker 2: nothing really meaningful has changed yet. I think a shift
Speaker 2: there would cause alarm, but I'm not seeing that here yet.
Speaker 2: And Tom, you bring up this nineteen seventies period. It's
Speaker 2: often referred to as this ten year range. I kind
Speaker 2: of reject that. It was periods of bull.
Speaker 3: A bear markets. Yeah, it was two years.
Speaker 2: Up, two years down, two years It wasn't two weeks
Speaker 2: up two weeks down. So this idea of the seventies
Speaker 2: being a range I actually don't think is very accurate
Speaker 2: if you want to look for a range. I think
Speaker 2: there's some parallels to this market kind of post World
Speaker 2: War two forty five to fifty, I think is very interesting.
Speaker 2: Also a period where all the economists kept thinking recession
Speaker 2: was coming, recession was coming, and it never came. Interesting there.
Speaker 4: Given that fact check, do you reject this idea that
Speaker 4: the past indicators are no longer working, that the models
Speaker 4: are broken, and the technical analysis doesn't hold the same
Speaker 4: kind of cloud.
Speaker 2: You know, it's funny. I suppose it's your definition of
Speaker 2: what technicals is.
Speaker 3: We wake up.
Speaker 2: Every morning and we ask ourselves the simple question, does
Speaker 2: the market agree with the consensus? That's my definition of
Speaker 2: what technical analysis is. Anytime in my career where I've
Speaker 2: begun to question whether the indicators are valid anymore, in
Speaker 2: new regimes, they're about to become very valid. So I
Speaker 2: would just keep that in mind here, you know, put
Speaker 2: that in contact of some of the tech names. Four
Speaker 2: weeks ago we got what I would only characterize is
Speaker 2: blow off like volume in a lot of these semis.
Speaker 2: And what do we know historically about blow off like volume?
Speaker 2: It very rarely marks the top, but it can begin
Speaker 2: the sequence of putting in the top and you were
Speaker 2: doing about a month ago, you were doing four or
Speaker 2: five average weekly four or five times average weekly volume
Speaker 2: in Nvidia amd Avago. So some of those makings, they
Speaker 2: are a very blowoff e type volume.
Speaker 1: With all your study of charts and the in and
Speaker 1: out and being bullish, being embarrassed, does market timing work?
Speaker 3: Okay? If I mean cash?
Speaker 1: Can I figure out when to get in efficiently, productively effectively?
Speaker 2: I might replace the phrase market timing with trend following.
Speaker 2: I think trend following works. I think we can do
Speaker 2: a pretty good job. I think all of us can
Speaker 2: do a pretty good job of getting that middle seventy
Speaker 2: or seventy five percent of a move. I haven't yet
Speaker 2: any I haven't met anyone yet who's particularly good at
Speaker 2: the turns that that middle chunk. We can know all
Speaker 2: the money in this business is made in the trend
Speaker 2: and not at the pulse, right, we can, I think,
Speaker 2: play trends, and that's what we've tri to do.
Speaker 3: I set them up with that question. I knew what
Speaker 3: the answer would.
Speaker 2: Be, and I think.
Speaker 4: I think everyone knew that.
Speaker 3: This is the gospel, the gospel of her own.
Speaker 1: I mean, there's no other way to put it, Christopher,
Speaker 1: and thank you so much for I came out of that.
Speaker 3: You're a bull.
Speaker 2: I think it's too early to back away from the
Speaker 2: trend with your guard on for some things to change.
Speaker 2: But watch rates here, Rachel decide the second half of
Speaker 2: the year.
Speaker 3: Chris, thank you so much, greatly appreciate.
Speaker 4: We are heading toward the midyear level. We are two
Speaker 4: days away from that reset. And joining us now to
Speaker 4: help us reset is someone who is resetting in a
Speaker 4: material way. Joseph Amato, President and Chief investment Officer for
Speaker 4: Equities and Newberberger Berman and joining us here on set.
Speaker 4: How are you, Joe changing your view head into the
Speaker 4: second half of this year.
Speaker 5: Well, we've had an intense debate, like there's going on
Speaker 5: in the market, and you know, our debate within our
Speaker 5: asset Allocation committee probably reflects a lot of the dispersion
Speaker 5: that exists out there in the marketplace. We've got folks
Speaker 5: that are quite bullish and we've got folks that are
Speaker 5: quite verish. But we went into the year expecting the
Speaker 5: economy to slow down at a more significant pace and
Speaker 5: earnings to be more on the disappointing side, and that
Speaker 5: really hasn't played out necessarily, so we went in underweight
Speaker 5: equities and risk assets. We moved up in quality, and
Speaker 5: that's been, you know, so far the wrong call, because
Speaker 5: markets have been pretty good first half of the year, as.
Speaker 3: You guys have talked about.
Speaker 5: But as we debated the issues, and as it looks
Speaker 5: like any slow down is probably extended and pushed out further,
Speaker 5: the earnings decline pushed out further, we felt neutralize our bet,
Speaker 5: sort of lived to fight another day and see, we
Speaker 5: always have a chance to make that a change if
Speaker 5: we see earnings disappoint But right now, you know, we
Speaker 5: took that underweight off and still have a bias toward.
Speaker 4: Quality for sure, So there's going to be more of
Speaker 4: an aggressive shift, albeit on the margins, heading into the
Speaker 4: second half. We've been debating all morning what's more important
Speaker 4: what happens with the individual corporations or what happening and
Speaker 4: what happens today at nine thirty am Eastern in Centro
Speaker 4: with central bankers taking a hawkish tone, how much are
Speaker 4: they still in the driver's seat of what happens next?
Speaker 5: Central bankers are certainly still very much in the center
Speaker 5: of debate around around what's going to happen in the
Speaker 5: economy given the challenges that they have in inflation, and
Speaker 5: you look at across the range of central banks, you
Speaker 5: have a pretty wide dispersion there as well. You have
Speaker 5: the US, which was more aggressive earlier on inflation, has
Speaker 5: come down at a more rapid pace, although still we
Speaker 5: think will be a challenge to get down to the
Speaker 5: FEDCE target. On the other extreme, you've got Japan which
Speaker 5: maintains a quite permissive, if you will, monetary policy, and
Speaker 5: then the UK has got a real inflation problem, so
Speaker 5: they've got to be more hawkish and there used to
Speaker 5: be somewhere in the middle. So that's going to be
Speaker 5: an important issue that we continue to watch over the
Speaker 5: course of the second off.
Speaker 3: Of the year. What matters right now?
Speaker 1: I mean Newburger Berman is priding itself on active management,
Speaker 1: and I want to go into the history of what
Speaker 1: you'd accomplished with Lehman Brothers in a bit, but the
Speaker 1: basic idea here away from passive active is factor analysis.
Speaker 3: Right now. What factors matter into the end.
Speaker 5: Of the year, Well, I think I think quality matters
Speaker 5: for sure, and profitability because if we're in our broad allocations,
Speaker 5: think more up in quality. Whether you're on the credit
Speaker 5: side or the equity side. I think you want you
Speaker 5: want to certainly be overweight that factor and beta. You probably,
Speaker 5: in our view, you want to be underweight beta in
Speaker 5: that sense, you know, again with a bit of a
Speaker 5: more defensive posture. Even though we've neutralized our equity bet again,
Speaker 5: we still lean toward lower beta, higher quality.
Speaker 1: I look at where we are and a bullmarket unloved.
Speaker 1: Can you calibrate and see you on a second leg
Speaker 1: of a bullmarket clicks in? I mean, there was seventy
Speaker 1: six seventy seven, which no one expected after the moon
Speaker 1: shut off of seventy four. Can you find a second
Speaker 1: leg of a bull market or do you just have
Speaker 1: to go back to core fundamental analysis.
Speaker 5: I think the level of dispersion that exists within the
Speaker 5: economy I think to suggest we still need to do
Speaker 5: a lot of bottom up analysis as it relates to
Speaker 5: a bull market. Where we are, it's been you know,
Speaker 5: the equity markets have been quite perplexing over the first
Speaker 5: half of the year because you've had a group of
Speaker 5: seven extraordinary stocks that are up fifty sixty percent that
Speaker 5: dominate the US large cap index. As again, you guys
Speaker 5: talk a lot about and then you've got everything else
Speaker 5: and that everything else has been flatished up modestly. So
Speaker 5: that's been you know, that's been a challenge if you're
Speaker 5: trying to invest and you see the index perform so well,
Speaker 5: yet some of these you know, very few active managers
Speaker 5: are going to put forty percent of their portfolio in
Speaker 5: seven stocks right to be overweight the megacap. So it's
Speaker 5: been you feel, as an active manager, you've been just
Speaker 5: chasing your tail over.
Speaker 3: The first half of the year.
Speaker 4: We're speaking with Joe Motto of Neuberger Berman CIO for
Speaker 4: Equities over there at a time we are resetting into
Speaker 4: the new year and into the new half of the year,
Speaker 4: it feels like a new year. We've been talking a
Speaker 4: lot about some of the trends, and you said that
Speaker 4: there are a number of stocks that have dominated with
Speaker 4: forty fifty sixty percent gains. I think chip makers, and
Speaker 4: then I think geopolitical risk and what we see this
Speaker 4: morning with a proposed plan by the Biden administration. Are
Speaker 4: you going all in on AI. Are you seeing this
Speaker 4: as a lasting trend that can withstand any geopolitical tensions,
Speaker 4: or are you kind of being more tepid about it.
Speaker 3: I think AA is.
Speaker 5: Going to be an incredible long term trend for sure.
Speaker 5: I mean that's going to be as profound as some
Speaker 5: of the things we've seen over the last twenty twenty
Speaker 5: five years. Similar to the Internet broadly broadly defined, but
Speaker 5: as we have seen with different technological innovations, you have
Speaker 5: sort of a boom bust period, things consolidate, and then
Speaker 5: you have long term growth. So I think AI is
Speaker 5: probably going to go through that, but it's going to
Speaker 5: be quite profound. I know, from our firm standpoint, we're
Speaker 5: all in. We're diving in deeply in terms of how
Speaker 5: it can enhance our productivity and our investment insights. So
Speaker 5: it's quite quite important. At the same time, you raise
Speaker 5: the geopolitical issues, which, having just been in China, you know,
Speaker 5: it's an issue that we're very focused on. It's an
Speaker 5: issue that Chinese are very focused on, and I think
Speaker 5: as it relates to AI, that's probably one of the
Speaker 5: most sensitive issues in the transfer of technology between the
Speaker 5: US and China. I think it's going to continue to
Speaker 5: be an issue you guys talked about this morning in
Speaker 5: terms of potential restrictions on selling chips.
Speaker 3: And now, folks, the most important conversation with the global
Speaker 3: Wall Street to the place is of the Lehman Brothers.
Speaker 3: I'm going to cut to the chase.
Speaker 1: There's blood in the street. Credit SUEEE is throwing thousands out.
Speaker 1: Every other firm is throwing those fancy ib bankers out
Speaker 1: the door that you can't stand. You and Jack Riffkin
Speaker 1: build Lehman Brothers from nineteen ninety seven to two thousand
Speaker 1: and three. I remember looking at the cell side analyst,
Speaker 1: is the sheets rather, Lisa, this is when we had
Speaker 1: printed research reports. They got better every year until Lehman
Speaker 1: dominated the business in Newburger Burman involved with that and
Speaker 1: all that is that a history of the past. Are
Speaker 1: we at a point now where we're taking the intellectual
Speaker 1: capital out of the business with all these layoffs, all
Speaker 1: this uproar that's going on in the street right now.
Speaker 5: I don't think so, Tom. I think the fundamental bottom
Speaker 5: up analytical work that helped propel us back in the
Speaker 5: day in terms of our own research rankings or the
Speaker 5: work that we do today at Newburger Burman is still
Speaker 5: hugely important. You have different tools that you use, right
Speaker 5: the bar is higher, for sure. I think the cell
Speaker 5: side has underinvested in research over the course of the
Speaker 5: past decade or so.
Speaker 1: What do you what do you want to see from
Speaker 1: the big banks. If we were having a conversation right
Speaker 1: now with Brian moynhan in the future of Bank of
Speaker 1: America securities research, what would be your counsel to mister
Speaker 1: moynhand Oh.
Speaker 5: I think the breadth of global research that these firms
Speaker 5: are committed to is important to us. We're a global
Speaker 5: investment manager, so there are a lot of parts of
Speaker 5: the globe, whether it's the small cap space or large
Speaker 5: cap for that matter, that have less coverage. Now in
Speaker 5: some respects that's advantageous to active managers because we've invested
Speaker 5: a huge amount research. So the more inefficient the cell
Speaker 5: side is, if you will, the more advantage we have
Speaker 5: as a byside firm if we're committed to research. But
Speaker 5: that said, we value quality research and if it's provided
Speaker 5: by whether it's Brian Mornhance firm or other large firms,
Speaker 5: that's super valuable to us.
Speaker 1: I don't want the dust break with the credit sweets
Speaker 1: resumes coming in. Joseph Amato is at Newburger.
Speaker 3: Burman right now.
Speaker 1: Joining us is Way lead Global chief investment strategist at
Speaker 1: black Rock, and there's always fourteen things to talk about.
Speaker 1: I really want to lead with Secretary Yellen into China
Speaker 1: and what China means within an investment strategy, but I
Speaker 1: got to rip up the script here. There's a guy
Speaker 1: named Fink who's talking about something black Rock has led on.
Speaker 1: You've been directly involved.
Speaker 3: With this, which is the value, the efficacy, the usefulness
Speaker 3: of ESG.
Speaker 1: Larry's come out as a real proponent of talking about
Speaker 1: it inside.
Speaker 3: It's been a challenging time out of the pandemic a
Speaker 3: color force. How you are reinterpreting ESG right now within
Speaker 3: your investment strategy.
Speaker 6: Well, sustainable investing is investing right. We're incorporating considerations around
Speaker 6: the impact of climate in our capitol market assumption. We're
Speaker 6: also thinking about how the transition could look like and
Speaker 6: really thinking about how that then is reflected in portfolio construction.
Speaker 6: Toward extent, it is really in the price. So as
Speaker 6: we think about transition as one example of mega forces,
Speaker 6: what we're doing actually in this media outlook that we're
Speaker 6: releasing today is that we're prominently highlighting a few mega forces,
Speaker 6: including sustainability and transition to net zero, but also including
Speaker 6: gropolitical fragmentation, including aging demographics, including AI to really incorporate
Speaker 6: those mega forces in portfolio construction.
Speaker 4: As you put the review out two days left in
Speaker 4: the first half of the year, what changes for you
Speaker 4: in terms of your positioning after six months of being
Speaker 4: really cautious.
Speaker 6: Well, I think the biggest change is as we think
Speaker 6: about kind of the environment where yields have reason is
Speaker 6: that we're actually within fixed income excited about opportunities across
Speaker 6: the spectrum. So we have been talking a lot about
Speaker 6: front end of the curve, which we still like, but
Speaker 6: we're actually also putting cash to work across the broader
Speaker 6: exposures in a fix income, including MBS mortgage backed securities,
Speaker 6: including inflation linked bonds, especially in the US, and also
Speaker 6: including high grade credit and local currency, emergent market debt,
Speaker 6: and more broadly, as we think about what has changed,
Speaker 6: we're rolling out the new investment playbook, where the first
Speaker 6: layer is around macro based as a location, but macro
Speaker 6: can only take us this far in this environment of
Speaker 6: supply constraint, so we're also thinking about having the second
Speaker 6: layer of very granular, uncorrelated individual investment opportunities to overlay
Speaker 6: on top of the first layer, and then the third
Speaker 6: layer is the megaphosis diet.
Speaker 4: It is talked about where is the idiosyncrasy of artificial
Speaker 4: intelligence in the overlay that you talk about?
Speaker 6: Well, so far, if you look at markets this year,
Speaker 6: it's been a very narrow thematic markets, right, So that
Speaker 6: has taught us that just base as a location a
Speaker 6: macro assessment along is not enough anymore. So far, we
Speaker 6: have talked about bias towards quality, a tute towards quality
Speaker 6: in our US equity allocation. But what we're doing differently
Speaker 6: at this media outlook is to break that out and
Speaker 6: explicitly call out a conviction in develop market AI which
Speaker 6: we have had indirect exposure towards, but now we want
Speaker 6: to call them out explicitly because the interplay between the
Speaker 6: cyclical framing and the structural mega forces is so complicated
Speaker 6: and nuanced that we cannot afford to model them and
Speaker 6: mix them up together.
Speaker 1: Your san outlook, here is a view from sixty thousand feet.
Speaker 1: It is very macro, It is very big picture, and
Speaker 1: in the middle of it is a massive micro reality.
Speaker 1: You say that the pandemic supply constraints that have affected
Speaker 1: the world will have a persistency that they will be
Speaker 1: permanent in some way. That's a stunning statement. Why can't
Speaker 1: we get back to supply demand normality?
Speaker 6: While some of that supply constraint is pandemic induced, but
Speaker 6: a lot of that is getting washed out in terms
Speaker 6: of the cyclical pandemic induced supply consc. But what we
Speaker 6: are putting out, which we have been off the view
Speaker 6: for a while, is that we're moving away from the
Speaker 6: last thirty forty years of Great Moderation characterized by demound
Speaker 6: shocks to the current environment characterized by supply constraint coming
Speaker 6: from structural forces like the Nazeral transition, like geopolitical fragmentation,
Speaker 6: and also aging demographics. And what that means in the
Speaker 6: context of this week being the CenTra a week, is
Speaker 6: that when it comes to central bank policy, you know,
Speaker 6: during the Great Moderation, because of the structural this inflation
Speaker 6: are they were inclined to keep policy easy and the
Speaker 6: rest large.
Speaker 3: For fifteen years that was.
Speaker 6: Easy, and then now they're in an environment where they
Speaker 6: are actually they need to keep policy tight in order
Speaker 6: to lean against this inflationary pressure.
Speaker 1: Mathematically, what we've got here was we finally got a
Speaker 1: return to a risk free rate. We've got a legitimate
Speaker 1: sharp ratio with our question some of the traditional dynamics
Speaker 1: when I studied in book, What does that mean for
Speaker 1: the center panel today?
Speaker 3: What are you going to listen for from these.
Speaker 1: People about their new reality which is a reality from
Speaker 1: seventeen years ago.
Speaker 6: Their new reality is the reality from maybe even thirty
Speaker 6: forty years ago, right, because the Great Moderation is over,
Speaker 6: including the period after Great after the global financial crisis.
Speaker 6: So what I will be paying attention to is to
Speaker 6: understand if they acknowledge the tradeoffs facing them, which is
Speaker 6: that the cost of fighting inflation in a supply constrained
Speaker 6: environment is a lot higher. So if they acknowledge that,
Speaker 6: and also number two, what are they going to choose
Speaker 6: when faced with this stark trade off growth or inflation.
Speaker 4: There's a real tension when you were speaking, and is
Speaker 4: there a possibility for markets for US equities to rally
Speaker 4: even if we do get a recession and even if
Speaker 4: the FED does become very hakish and we get that.
Speaker 4: Is that what you're saying that you could still see
Speaker 4: the market respond in an untraditional way to a central
Speaker 4: and can you slow down.
Speaker 6: Well, US equity market. Currently, the broad market is still
Speaker 6: pricing in earnings to accelerate in the second half of
Speaker 6: the year, which in the context of growth slow down
Speaker 6: is too optimistic, which is why as we think about
Speaker 6: US allocation for the broader market, when it comes to
Speaker 6: US equities, we have a minus one out of a
Speaker 6: scale of minus three to plus three. And translating that
Speaker 6: into portfolios global portfolio US equity is the benchmark is
Speaker 6: around thirty three percent. This minus one modest underweight to
Speaker 6: translate to about thirty one percent. So we're invested, but
Speaker 6: we're modestly underweight. Now, having said that, there are themes
Speaker 6: that we would like to embrace, such as artificial intelligence,
Speaker 6: so we kind of add that on top of the
Speaker 6: broad market underweight modest to underweight to get to a
Speaker 6: closer to neutral but not quite there, which is still modest.
Speaker 3: Jown Willie, thank you so much. With black rock. What
Speaker 3: is it about the airlines?
Speaker 1: Helene Becker joins the SOW Senior Research analyst Most Hated
Speaker 1: person in the World at TD.
Speaker 3: Cowen This morning, Helene, I'm just going to cut to
Speaker 3: the chase. Who do we blame for this early summer mess?
Speaker 7: So it's weather and then there's the airlines who are prepared,
Speaker 7: but there's the government who's not prepared. So the airlines
Speaker 7: are doing less with more that they have more employees
Speaker 7: now than they did in twenty eighteen, but the government
Speaker 7: has fewer air traffic controllers now than they did four
Speaker 7: years ago. And this mess is going to continue for
Speaker 7: the next at least five or seven years because the
Speaker 7: FAA doesn't seem to have a plan to resolve the
Speaker 7: shortage of air traffic controllers. We're supposed to have fourteen thousand,
Speaker 7: we only have eleven. I think something like twenty five
Speaker 7: hundred retired in the last couple of years, and the
Speaker 7: government was supposed to hire fifteen hundred this year. We
Speaker 7: find something like nine hundred and sixty or seventy. We
Speaker 7: expect about half that many to retire and half that
Speaker 7: many to wash out, so they're only going to net
Speaker 7: about five hundred and when you're short, three thousand, five
Speaker 7: hundred into three thousand and six. So yeah, this problem's
Speaker 7: going to last for a while.
Speaker 1: Some of us have a certain vintage, can remember saying
Speaker 1: in any great train station, South Station, Boston, Union Station,
Speaker 1: in Washington, I spent a whole night once in the
Speaker 1: Omaha train station, and the trains used to be like
Speaker 1: people all lined up going in eight different directions. Are
Speaker 1: we asking too much of the airlines to be like
Speaker 1: our train stations of another time and place? Is it
Speaker 1: too much to ask for Newark to be the old
Speaker 1: Penn Central.
Speaker 7: And it's not, and it should be. It should not
Speaker 7: have these problems. The airlines, I mean, the airports I'll
Speaker 7: start there, are just bursting at the seams because demand
Speaker 7: is just so strong. United is forecasting that between June
Speaker 7: thirtieth and September fifth or fourth, whenever Labor Day is,
Speaker 7: they're going to carry five million passengers, and if you
Speaker 7: kind of extrapolate that out to American in Delta, it's
Speaker 7: probably similar. So that's fifteen million right there, and then
Speaker 7: you add in all the other airlines you'd probably have
Speaker 7: another nine or ten million. So we're looking at twenty
Speaker 7: four to twenty five million people that are going to
Speaker 7: travel over the next three months, the rest of June,
Speaker 7: what's that two months July and August, and the industry
Speaker 7: should be able to handle if they have relatively new aircraft.
Speaker 7: You look at American, Delta, United, they've all been refleeting
Speaker 7: most of the other airlines, the Jet Blue, Spirit, Frontier Southwest.
Speaker 7: They also have Young fully Fish and fleets, and so
Speaker 7: it's not an aircraft maintenance problem. It's just that weather
Speaker 7: rolls in and the FAA goes on a ground stop
Speaker 7: and instead of lifting it in an hour or half
Speaker 7: an hour, they it lasts for three or five and
Speaker 7: then crews start to time out. I mean, we still
Speaker 7: have the safest airline system in the world. So you
Speaker 7: add all that, and you add all these people into
Speaker 7: the next and you wind up with these awful delays
Speaker 7: and cancelations and unhappy travelers.
Speaker 4: Alane, yesterday we did hear from Delta CEO at their
Speaker 4: annual meeting, and he acknowledged that business travel is still
Speaker 4: twenty five percent below where it was pre pandemic, given
Speaker 4: all the roadblocks, given the expense.
Speaker 2: Do you expect it.
Speaker 4: To get back to the same levels that it used
Speaker 4: to be, so.
Speaker 7: Lisa, yes and no, the typical analyst answer. So when
Speaker 7: you think about business travel and GDP, it should get
Speaker 7: back to it should be the same percentage of GDP
Speaker 7: as it was in the past. And I think what
Speaker 7: you don't see is that people are just traveling differently
Speaker 7: and from a corporate like large corporate tech for example.
Speaker 7: Tech people from the tech industry haven't really come back.
Speaker 7: Financial services hasn't really come back, So from that perspective,
Speaker 7: we're not expecting it to come back. But we are
Speaker 7: expecting the same number of people to travel for work
Speaker 7: as we've seen in the past on a relative to
Speaker 7: GDP basis. But think about it, Lisa, we're seeing two
Speaker 7: and a half to two point seven million people a
Speaker 7: day travel. That's what we saw in twenty eighteen, with
Speaker 7: twenty five percent more business travelers and fifteen percent more
Speaker 7: international travelers.
Speaker 4: And Helene to that point, and just quickly here, there
Speaker 4: has been a shift under the cover of businesses using
Speaker 4: economy instead of business class because of how much the
Speaker 4: prices there have risen and companies trying to restrain costs.
Speaker 4: How much is that part of why costs, why the
Speaker 4: revenues for some of these airlines isn't picking up from
Speaker 4: business in the same kind of way.
Speaker 7: Yeah, exactly, so so so customers. Businesses are trading down
Speaker 7: from business class to premium premium economies, and then people
Speaker 7: are using mileage their own miles to upgrade into into
Speaker 7: the front cabin. So we definitely are seeing that. And yes, Lisa,
Speaker 7: that's a part of it too.
Speaker 3: What's your single best buy?
Speaker 7: So our top three picks are United, Delta, and Copa
Speaker 7: Airlines in that order.
Speaker 3: Interesting, what's the United Delta distinction?
Speaker 7: So United's bigger in international markets right now than Delta
Speaker 7: is United as about fifty percent international, fifty percent domestic
Speaker 7: and Delta sixty forty domestic international. And the travel is
Speaker 7: really international this summer. So that's that's the difference.
Speaker 3: Helene Backer, brilliant. Thank you so much.
Speaker 1: Paul. You know it's widely understood. I mean whether you
Speaker 1: go to Rosy's or Flora. I mean, the fact is
Speaker 1: every day is brunch day in the Hampshire tearing himself
Speaker 1: away from brunch a three hour brunch joining us now
Speaker 1: Douglas cass use theest case.
Speaker 8: It is a pleasure speak to the Bob Weir and
Speaker 8: John Mayer business commentators.
Speaker 1: Well, we've had a lot of fun with it your coverage. Frankly, folks,
Speaker 1: I'm not a deadhead. I mean I'm really I'm a
Speaker 1: child compared to Jerome Pal But I gotta admit Doug
Speaker 1: Your's spirit of covering the dead and company traveling around
Speaker 1: in honor of fifty years of music has been great?
Speaker 1: Were you in Ithaca.
Speaker 3: When I was?
Speaker 1: When we were buying white bootleg albums?
Speaker 8: By the way, the greatest universally agreed that the greatest
Speaker 8: grave of the concert era was in Barton Hall at
Speaker 8: Cornell University May's nineteen seventy seven.
Speaker 1: It was great about that was you go over to
Speaker 1: the Rangovian Embassy, you know, across the way, and load
Speaker 1: up at the Rangovian Embassy before you went to the concert.
Speaker 8: Doug Kanning A sigh, Paul you. Frederick Nietzsche, thereat German philosopher,
Speaker 8: once said without music, life would be a mistake. And
Speaker 8: I think it's true.
Speaker 4: I'm down that sure, Douglas.
Speaker 8: Last thing on the Dead I was at the Palaestra
Speaker 8: in November nineteen seventy of your fair City. It was
Speaker 8: one of the fifteen marvelous Grateful Dead concerts.
Speaker 1: Doug, I think there's a lot to talk about here,
Speaker 1: but I really think we've got to talk about market
Speaker 1: positioning right now. Unfortunately, the three of us have a
Speaker 1: fun memory of a leg up in seventy four and
Speaker 1: the absolute shock of the second leg up, I believe
Speaker 1: in December of seventy six or seventy seven, What does
Speaker 1: the second leg of a bull market look like, and
Speaker 1: particularly if you're not in.
Speaker 8: Play, well, I think it's a great question, an unexpected question.
Speaker 8: I think it's very humbling trying to trade against a
Speaker 8: primary or bull market trend, which some of us have
Speaker 8: been trying to do over the last two months. You know,
Speaker 8: it requires discipline. I've always said that most retail investors
Speaker 8: should in shortstocks because for a number of reasons, but
Speaker 8: it does require a huge amount of price discipline and
Speaker 8: a money management control that most people don't have. Let
Speaker 8: this too shall pass, everybody does. Remind me of the
Speaker 8: liquidity infused in the market post bear Stearns being acquired
Speaker 8: by JP Morgan and Lehman in two thousand and eight,
Speaker 8: and you remember we had a similar rally of maybe
Speaker 8: twelve or thirteen percent, which led to a twenty two
Speaker 8: percent decline. And I'm fearful of the market's both an
Speaker 8: absolute term and when compared to the credit markets. I
Speaker 8: think I think we have to think in terms of
Speaker 8: the boiling frog syndrome.
Speaker 5: So, Doug, I mean you take a look at the SMP.
Speaker 1: I mean the boiling frog system is also when in
Speaker 1: hell does Judge come back exactly?
Speaker 7: We could use that in a big way.
Speaker 8: You told me you weren't going to talk about the yen.
Speaker 2: So Doug, what do you do when when you when
Speaker 2: you look at an S and P up, you know,
Speaker 2: up twenty two percent off that October low.
Speaker 3: That's a bull market.
Speaker 6: But I think if you ask you.
Speaker 8: Know the person on the street, they're not feeling it necessarily,
Speaker 8: So what do you.
Speaker 3: Do from here?
Speaker 8: Well, question I asked myself is not whether I should
Speaker 8: be that short, which I am, but rather how short
Speaker 8: I should be, again recognizing at the same time how
Speaker 8: humbling training against the trend can be and how discipline
Speaker 8: you have to be to avoid losses. But at the
Speaker 8: core of my concern is a level and path of
Speaker 8: interest rates. And if we solely look at interest rates
Speaker 8: versus stock prices and valuations, sure equities really are more
Speaker 8: overvalued against rates today than they were at the end
Speaker 8: of twenty twenty one, which is saying something. And the
Speaker 8: divergences between valuations and real rates is as wide as
Speaker 8: I've seen in more than a decade. If you think
Speaker 8: about evaluations have risen on the S and P from
Speaker 8: about fifteen times to close to twenty times since the
Speaker 8: October lows. While inflation adjusted interest rates have stayed elevated,
Speaker 8: as you just mentioned in the last segment, against ten
Speaker 8: year it's about one point five percent. So higher rates
Speaker 8: typically reduce the present value future cash flows and valuations,
Speaker 8: so relationships to me out of whack and I'm watching
Speaker 8: for a mean reversion. In addition, the equity risk premium
Speaker 8: is unattractive and also suggests that credit is cheaper than equities.
Speaker 8: And finally, the SMP dividend yield is all the way
Speaker 8: down to one point five five percent. Compare that to
Speaker 8: the one year yield of five point four percent. Again
Speaker 8: of multi decade wide casts.
Speaker 1: For your supporters and for those that go after you
Speaker 1: each and every day, particularly out on the Elon must scape,
Speaker 1: I'm fascinated by a simple question, how do you know
Speaker 1: when to cover a short? What's the setup methodology you
Speaker 1: use to say?
Speaker 3: Enough? I'm out?
Speaker 8: Well, you know I I lecture at Bob Schuler's course
Speaker 8: at Yale Business School, second year Advanced Economics course, and
Speaker 8: I have a three and a half hour lecture on
Speaker 8: short selling, of which about half of it is structure
Speaker 8: of short selling and I'm a short I'm not a
Speaker 8: short seller. I'm a legitimate long short hedge fund manager
Speaker 8: who has basically a bias towards the short side, whereas
Speaker 8: most long short guys have like ninety nine percent of
Speaker 8: bias towards alongside. And what I do is I start
Speaker 8: positions very small and kind of funnel in on strength.
Speaker 8: So I actually want in the beginning the short to
Speaker 8: go against myself.
Speaker 4: And then okay, you get up to your net short
Speaker 4: position that you feel.
Speaker 3: Well.
Speaker 8: The other thing, Paul, is that my in terms of
Speaker 8: sizing short position absolutely and visa v sizing long positions,
Speaker 8: my maximum size on a short is about one and
Speaker 8: a half percent versus say a maximum four or five
Speaker 8: percent on a long position. So that sort of explains
Speaker 8: to you the I create. Remember there are three problems
Speaker 8: with short selling. Number one, the gravitational pull of of
Speaker 8: stocks is higher over time. Number two, Obviously, a short
Speaker 8: sale provides an asymmetric risk reward. You can only make
Speaker 8: one hundred percent if you find a bankruptcy, but you
Speaker 8: can lose an infinite amount as Na Video or Resorts
Speaker 8: for Bob Wilson found out Resorts International. And the final
Speaker 8: thing which people don't really discuss is that when a
Speaker 8: show it goes against you, it's waiting increases. But when
Speaker 8: along goes against you, another m goes down, it's sort
Speaker 8: of systemic risk control because the waiting is reduced.
Speaker 3: Oh, we got to.
Speaker 1: Leave it there, we're out of time. But Doug cast
Speaker 1: that was a fabulous. Subscribe to the Bloomberg Surveillance podcast
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