Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com
Speaker 1: and of course on the Bloomberg terminal right now. On
Speaker 1: the financial system of our international economics, no one is
Speaker 1: better than William Lee at the Milken Institute, is tour
Speaker 1: of duty at the I m F and of course
Speaker 1: expert on a Pacific rim as well. I want to
Speaker 1: do the calculus today, Bill Lee. And of course we
Speaker 1: don't do differential equations on Friday, we do simple math.
Speaker 1: G twenty takeaway G seven. I believe as a G thirteen.
Speaker 1: Nobody talks about how does a G thirteen Eastern year
Speaker 1: up in the red? How do they observe this G
Speaker 1: seven meeting. They're anxiously looking at what the G seven
Speaker 1: is doing with the corporate tax deal that they've come
Speaker 1: up with to say that the smaller countries have to
Speaker 1: start to raise their tax rates, like Ireland and some
Speaker 1: of the smaller countries that have developed the model, to
Speaker 1: say we're gonna develop our country by attracting foreign multinationals
Speaker 1: to our country by lowering our our corporate tax rate.
Speaker 1: That is going to go by the wayside because they
Speaker 1: have come up. That's going to be a challenge. Uh.
Speaker 1: The other thing they're looking at is how on earth
Speaker 1: are we going to deal with China and the G seven.
Speaker 1: The G seven already are in a mess in trying
Speaker 1: to find a way to cooperatively deal with China. Uh,
Speaker 1: China's a customer, China's a big input into their production lighting,
Speaker 1: but but no human rights. How do we live up
Speaker 1: to our values of human rights and worker rights? You know,
Speaker 1: I AMSUSA believe that Michael Milken, taking advantage of William
Speaker 1: Lee and Employment dialed one Bill Lee and said Bill
Speaker 1: Lee on that tax prep plan isn't dead on arrival.
Speaker 1: Every port we see from Hungary, from Ireland is major pushback.
Speaker 1: They want to exempt the city of London, which is
Speaker 1: absolutely absurd. Is it dead on arrival? Well, it's it's
Speaker 1: dead in the sense that no one really agrees firmly
Speaker 1: that the corporate tax is the best space to use
Speaker 1: the finance government spending. One of the greatest controversial economists
Speaker 1: who bears the cost of paying the corporate text and
Speaker 1: and studies have ranged from as low as workers paying
Speaker 1: to as much as workers paying and and and most
Speaker 1: studies show at least over so raising the corporate taxes
Speaker 1: pushes the burden of paying the tax more on the workers.
Speaker 1: And that's a very big controversy that that has yet
Speaker 1: to be settled. And for the G seven to rely
Speaker 1: on the corporate taxes space to finance government expenditures is
Speaker 1: a real political wild card. Well, just to elaborate a
Speaker 1: little bit, bill some people would push back and say, actually,
Speaker 1: if you look at corporate profits, they've increased dramatically. Why
Speaker 1: couldn't it come out of that rather than from the workers? Mean,
Speaker 1: why is that the as a person who's paying for it? Well,
Speaker 1: the I think the political movement now is to stay
Speaker 1: away from taxing workers, especially lower paid workers, and so
Speaker 1: we want to try to tap tap into the resources
Speaker 1: that the very rich have. The question is the corporate
Speaker 1: tax the best vehicle to do that? Because so much
Speaker 1: of the corporate tax is shifted into consumers, workers, and
Speaker 1: people other than the owners of capital. We already know
Speaker 1: that corporate taxes are unfair in the sense that it's
Speaker 1: a double tax sessue the course the taxing the corporate
Speaker 1: income at the source as well as at the shareholder
Speaker 1: level in taxing dividends. So so those questions of incidents
Speaker 1: have played economists for generations and there's no clear answer,
Speaker 1: and all is polluted by a lot of politics that
Speaker 1: that that governed, right, So let's let's try to strip
Speaker 1: out the politics and use an empirical example. And I'm
Speaker 1: looking at President Trump's tax cuts, and you'd expect the
Speaker 1: reverse to be true if that were the case, that
Speaker 1: a tax cut should juice growth and give more money
Speaker 1: to the workers. Is that what happened, Well, what happened
Speaker 1: with the textbook with the Trump administration is that so
Speaker 1: much of the corporate profits that were released went into
Speaker 1: share shared by box. Uh. Now, the question is that
Speaker 1: the shared bock backs lead to more investment. If you
Speaker 1: look at the data UM and the research that I've done, UH,
Speaker 1: it shows that the share bike backs actually lead to
Speaker 1: more investment, but there's a huge lag, almost as long
Speaker 1: as three to four years before we see that investment
Speaker 1: take place. Right now, we have the highest level investment
Speaker 1: in the US for for many many years. Bill one
Speaker 1: of the biggest problems with UM corporate tax beyond the
Speaker 1: double taxation issue, which I'm not sure everyone UM has
Speaker 1: fully wrapped his or her head around, is what companies
Speaker 1: do to try and avoid it. Often here in the
Speaker 1: U S or here in the U S. I'm in Berlin,
Speaker 1: but my home in the US UM they try and
Speaker 1: avoid it with debt financing. So we're basically pushing these
Speaker 1: companies into UM some more risky financing. UM Solutions Does
Speaker 1: that turner round when you see the tax cut at
Speaker 1: least have pointed out well. One of the things that
Speaker 1: Mike has always emphasized to me is the corporate capital
Speaker 1: structure really matters, and pushing people into more debt finance
Speaker 1: has the impact of changing the shape of investment. Investment
Speaker 1: now goes into more safe projects because the one thing
Speaker 1: that death holders wanted to get their money back, They
Speaker 1: couldn't share less that profits lead to more investments that
Speaker 1: lead to more productivity. They just want to get their
Speaker 1: money back. So if you tell a borrower, UH, take
Speaker 1: my money, but make sure you give it back to me,
Speaker 1: all he's gonna do is to invest in the same
Speaker 1: projects that work in the past. We're not going to
Speaker 1: get the innovative investments that we need to draw productivity
Speaker 1: and raise the standard of living among workers and the
Speaker 1: rest of the world. Well, let's talk about the possibility
Speaker 1: of getting a global minimum tax. We've already heard reports
Speaker 1: that the UK wants to exempt the City of London,
Speaker 1: and the City of London has a bigger GDP than
Speaker 1: the Republic of Ireland. If we all start asking for
Speaker 1: these little loophole holes, is it going to be possible
Speaker 1: to get the kind of blanket global minimum tax that
Speaker 1: they've set out for in the first place. This is
Speaker 1: the slippery slope of getting exemptions and loopholes, And this
Speaker 1: is the one thing that has made the tax system
Speaker 1: in the United States and the rest of the world fail,
Speaker 1: which is that creates so many loopholes that regardless of
Speaker 1: what you do with the rate, the amount of revenue
Speaker 1: you raise is actually much less than anticipated. So, Bill,
Speaker 1: we're talking about the corporate tax rate, and the backdrop
Speaker 1: of this is a huge question mark about the trajectory
Speaker 1: of the global economy, whether we're heading into an inflationary period,
Speaker 1: whether it's going to be disinflationary post the pandemic boost
Speaker 1: boost that we're getting from consumer prices Where do you
Speaker 1: stand on this, especially as we see the bond market
Speaker 1: way in and say inflation is not a concern. Well, Lisa,
Speaker 1: we I think are seeing the face of the new
Speaker 1: shape of inflation in the post pandemic world. Supply side
Speaker 1: induced price jumps. Now, price jumps that clear the market
Speaker 1: because of supply shortages, to me, is not inflation. It's
Speaker 1: not regardless inflation but of fit or any other central
Speaker 1: bank Inflation of the sort that they worry about is
Speaker 1: the corrosive increase in wages, costs, and prices that firms
Speaker 1: fail to be able to keep up with that that
Speaker 1: erode profit margins and and and worker and savings and
Speaker 1: and and worker wages. That's kind of corrosive continuing rise
Speaker 1: in prices that exceed expectations is the sort of thing
Speaker 1: that everyone is watching for. But there's no sign that
Speaker 1: the supply side price jumps, which is not inflation, uh,
Speaker 1: is going to lead to that corrosive continuing inflation that
Speaker 1: we had in the seventies. Billy, I want to end
Speaker 1: on your wheelhouse, which is the Pacific rim Every indication
Speaker 1: I see is of a pricing for boom. Now they
Speaker 1: haven't had the fiscal stimulus the United States of America has.
Speaker 1: But do you frame out over the next twelve twenty four,
Speaker 1: thirty six months a Pacific RIM boom. I would love to,
Speaker 1: but the kind of supply size, shortage, overhang and the
Speaker 1: overhang of Chi in the Pacific RIM is really distorting
Speaker 1: the picture of where growth it's going to come from.
Speaker 1: The Pacific RIM has so much depended upon China as
Speaker 1: an intermediary and also as a final demand market that
Speaker 1: with without China coming online and and and being a
Speaker 1: locomotive for the Pacific, it's going to be very difficult
Speaker 1: for the rest of the country's to grow. Right now,
Speaker 1: China has a dual strap, dual strategy of investing in itself,
Speaker 1: developing inst domestic markets, and almost withdrawing from the world
Speaker 1: except in very strategic ways. Strategic ways is to dominate
Speaker 1: the supply chain in technology. Their phrase is so sensitive
Speaker 1: and so current. I mean, we could talk to almost
Speaker 1: Travidas about it. But Bill Lee to say that China
Speaker 1: is withdrawing from the world, and yet our listeners and
Speaker 1: viewers are are familiar with the expansion of the South
Speaker 1: China see and of the Belt in the Road initiative,
Speaker 1: which is it. They're withdrawing their domestic markets from the
Speaker 1: world because they want to develop their technologies. They're expanding
Speaker 1: the military political influence in the world because they want
Speaker 1: to be recognized as a large country power and and
Speaker 1: yet still have the benefits of w t O emerging
Speaker 1: market status. They want to have their cake and eat
Speaker 1: it too. And that's the tension that said is going
Speaker 1: to have to deal with pairing these two ideas together,
Speaker 1: this idea of where inflation is going and the fate
Speaker 1: of China. I'm wondering how much the change in China's
Speaker 1: economy is going to feature in the world inflation outlook.
Speaker 1: The idea that China was the factory to the world,
Speaker 1: it was the low cost factory, and it was importing
Speaker 1: disinflation overseas. Now we have a very different China, a
Speaker 1: lot wealthier, with drawing liquidity, trying to upgrade itself into
Speaker 1: developed market status. How much does that reverse this disinflationary
Speaker 1: trend that we've seen over the past twenty years. That's
Speaker 1: a great question least because what we see about the
Speaker 1: new face of inflation in China is happening right there.
Speaker 1: The factory prices have gone up by uh and all
Speaker 1: down to the supply chain. In China, we see more
Speaker 1: and more pricing increases, and yet at the simmer level
Speaker 1: we see prices going up at one. So what we
Speaker 1: see is a profit margin squeeze because the Chinese don't
Speaker 1: want to destroy the domestic economy, and they're putting in
Speaker 1: price controls at the factory level to contain a lot
Speaker 1: of these commodity price jumps. And I think that's a
Speaker 1: very successful way that they're implementing to try to limit
Speaker 1: the follow through of price jumps, preventing it from spiraling
Speaker 1: into the corrosive inflation we had in the seventies. Billy,
Speaker 1: thank you so much, greatly, greatly appreciated. With Michael Milkin
Speaker 1: in the Milk and Institute their chief economists right now
Speaker 1: on G seven and on these markets. It is thrilling
Speaker 1: to give you your beach reading for the summer. It's
Speaker 1: not a secret that my book of the summer is
Speaker 1: two thousand thirty four. It is by Elliot Ackerman and
Speaker 1: James Travitis. It is absolutely stunning. This is a scary,
Speaker 1: dangerous book. It reeks of a Netflix movie. And maybe
Speaker 1: will see that not your usual expectation from Admiral Stevinus,
Speaker 1: but there is it is a triumph, the author joins us.
Speaker 1: This morning, the former NATO commander James to vinis, I
Speaker 1: want to go to the work of Richard hass And
Speaker 1: is wonderful the world, and particularly John Muzheimer from the
Speaker 1: University of Chicago, and it's your fault. They suggest with
Speaker 1: respect that the G seven world and that the NATO
Speaker 1: countries overreached and expanded too far east too quickly for
Speaker 1: Mr Putin and Russia. Did NATO in Europe overreach to
Speaker 1: pick up Eastern European countries? I don't think so. It's
Speaker 1: always easy in hindsight to say, hey, we could, we
Speaker 1: would oh we should have done something differently. Um, But
Speaker 1: if I could rewind the clock to the days when
Speaker 1: the when the wall fell, you've got to remember the
Speaker 1: zeitgeist for the moment. They were not NATO tanks rolling
Speaker 1: into Prague. There were not NATO aircraft flying over Warsaw.
Speaker 1: Those countries were begging to join NATO, and they wanted
Speaker 1: to join NATO because they've been under the boot of
Speaker 1: the Soviet Union. I don't see in a real world
Speaker 1: where we could have just said, now you stay over there.
Speaker 1: We would have delivered them back to Russia would have
Speaker 1: been a bad moment in my view long agoing far
Speaker 1: away Admiral King and his gentlemen with their courage folks.
Speaker 1: The Tom Anks movie of this year on the courage
Speaker 1: of the Navy across the North Atlantic in nineteen forty one,
Speaker 1: James Travitas, they got together off I believe Newfoundland and
Speaker 1: did the Atlantic Charter. Now we have the politicians with
Speaker 1: the TV moment doing a new Atlantic charter. Is there
Speaker 1: any substance to this new Atlantic Charter? I don't think
Speaker 1: there's anything new in the new Atlantic Charter, but that's okay.
Speaker 1: What it reaffirms is this Transatlantic bridge that frankly has
Speaker 1: been a little creaky for the last four years. Now
Speaker 1: it's a gay strength gaining air speed. And I think
Speaker 1: in this post bregsit moment, it makes geo political sense
Speaker 1: to kind of draw a line under that relationship between
Speaker 1: the United States and the United Kingdom. I'll close Tom
Speaker 1: by saying, even as we're having this conversation, what ship
Speaker 1: is at sea? The sixty thousand ton aircraft carrier Queen
Speaker 1: Elizabeth with British escorts, British submarines, British auxiliary ships. We
Speaker 1: would call that a carrier strike group, and it's headed
Speaker 1: to the Indian Ocean and into the South China Sea.
Speaker 1: They're a good ally to have James Travinus in your
Speaker 1: book two thousand thirty four, folks, And I'm gonna be honest,
Speaker 1: it's so damn good. I'm gonna be very careful here
Speaker 1: not to give it away, but the heart and soul
Speaker 1: of two thousand thirty four in our modern technology is
Speaker 1: a lack of communication. It starts in that opening scene
Speaker 1: in the South China. See how does this G seven
Speaker 1: set up a communication process too? Of void your two
Speaker 1: thousand thirty four, um, First and foremost it's about cyber
Speaker 1: and cyber security and protecting our networks and by the way,
Speaker 1: protecting undersea cables as well. That comes up in the book.
Speaker 1: It's this, uh, putting together the technologies of cyber of space,
Speaker 1: of undersea control, all of that has to be protected.
Speaker 1: That's a job not just for NATO, because NATO's in
Speaker 1: the end a regional alliance. That's a job for all
Speaker 1: the democracies. I think that's going to be a significant
Speaker 1: part of the conversation today in Cornwall. Admiral Steady is
Speaker 1: there's a question about the alliance and how strong it
Speaker 1: is and coming up with a strategy with respect to China. Uh,
Speaker 1: there is. As we get the arrivals at the G seven,
Speaker 1: we have Angele and Merkel German chancellor arriving in Germany
Speaker 1: has an incredible trade partnership with China, even as it
Speaker 1: does take a harder stance. How much of a consensus
Speaker 1: is there on the right approach for the allies versus
Speaker 1: China in terms of reconfiguring trade. I think that's the
Speaker 1: through line for G seven tornato um and and in
Speaker 1: fact the Atlantic Charter is all part of this. And
Speaker 1: one central element to this, Lisa, that you'll be well
Speaker 1: aware of are the Chinese claims of territorial ownership in
Speaker 1: the South China Sea. We are pushing back on that
Speaker 1: by driving our ships through those international waters. That's a
Speaker 1: set piece that opens four. In the today's world. The
Speaker 1: Brits are headed there, the French are doing it, the
Speaker 1: Germans have pledged to send a ship there to stand
Speaker 1: with us. A lot of it derives from concern about
Speaker 1: human rights, but also your point about trade and access
Speaker 1: to Chinese markets. Um. I think there's gonna be a
Speaker 1: continuous conversation about China and Western China relations that run
Speaker 1: from geopolitics to ge economics, to mercantile to market access.
Speaker 1: How good of a job has the Western world done
Speaker 1: at vaccine diplomacy, at shoring up support from regions near
Speaker 1: the South China Sea in their outrage to try to
Speaker 1: help us all get out of the pandemic versus China,
Speaker 1: which has been more aggressive or at least aggressive on
Speaker 1: a pr stands about their efforts on that front. Yeah,
Speaker 1: this is a reflection of the clever, capable Chinese strategy
Speaker 1: one Belt, One Road or sometimes called the Belt and
Speaker 1: Road Initiative b r I. It's a clever strategy that
Speaker 1: seeks to engage China geoeconomically in a mercantile fashion, and
Speaker 1: vaccines have become part of that. That's why the president's
Speaker 1: announcement of five million doses, no strings attached, fightser gold
Speaker 1: standard coming from the United States. Uh, that's a big
Speaker 1: deal and it kind of wraps together, if you will,
Speaker 1: the three c's of the G seven, COVID, China, and cyber.
Speaker 1: We've now hit all three of those. Must venis Anglo
Speaker 1: Medicare is about ready to descend upon her last G
Speaker 1: seven meeting at sixty six years old. She is esteemed
Speaker 1: and venerated. She is a quantum chemist from Eaton, eastern Germany.
Speaker 1: What has been her chemistry? Her impact on the Western world,
Speaker 1: your tour of duty at NATO and after that. I
Speaker 1: met with the Chancellor many, many times, and honestly, there
Speaker 1: is no leader that I would put above her in
Speaker 1: terms of her integrity, her willingness to make hard decisions.
Speaker 1: Germany and nation of eighty million, took in a million
Speaker 1: refugees from Syria. The United States took in less than
Speaker 1: twenty thousand. She made the hard political choices. She's a
Speaker 1: four term chancellor. She's like f DR elected four times
Speaker 1: to office. I cannot say enough good about Angelo Meracle.
Speaker 1: I hope she does not go gently into that good
Speaker 1: night back to a physics lab somewhere, and I don't
Speaker 1: think she will. She's got my vote to be the
Speaker 1: Secretary General of the United Nations. Well there you go.
Speaker 1: Servin is working on the resume for miracle U. Matt
Speaker 1: Miller is in Berlin, and of course she celebrates a
Speaker 1: political domestic victory Matt in the recent days. In recent days,
Speaker 1: but you know those polls come and those polls go.
Speaker 1: I think, Um, the Admiral's point is an interesting one.
Speaker 1: Miracle would make a great secretary general. When I attended
Speaker 1: the G twenty meeting in Hamburg, she got a standing
Speaker 1: ovation from all of the other leaders when she entered
Speaker 1: the the the the opera hall. There. At the end
Speaker 1: of the meeting, she essentially was leading the G twenty.
Speaker 1: And it'll be interesting to see what she can do
Speaker 1: here at the G seven. To me, Admiral, the interesting um,
Speaker 1: the most interesting thing about Miracle is all of the
Speaker 1: all of the good deeds she's done you just listed,
Speaker 1: and yet she is so insistent on building this Nords
Speaker 1: dream to pipeline to Russia, essentially funding you know, billions,
Speaker 1: hundreds of billions of dollars to Vladimir Putin um to
Speaker 1: finance things like the annexation of Crimea. Why. I think
Speaker 1: it would be hard to find any leader who backs
Speaker 1: a thousand. In other words, uh, I think all of
Speaker 1: us can look at any of our leaders and say, hey,
Speaker 1: you got this one wrong, you got that one wrong.
Speaker 1: To to the pipeline question, Miracle, I would say to
Speaker 1: her Chancellor, you've got that one wrong. And it reflects
Speaker 1: her sometimes our greatest strength can be our greatest weakness.
Speaker 1: Um and in many ways she wants to build consensus.
Speaker 1: She wants to pull Russia to the west. There's a
Speaker 1: strategic sense to that, but it won't work with Vladimir Putin.
Speaker 1: Therefore I would score her less perfect on that. For
Speaker 1: particular point, Venus, if you've framed out Russia after Putin,
Speaker 1: I guess none of us are doing that. Miracle is
Speaker 1: thinking forward always, as you say, the Chancellor and others,
Speaker 1: what does Russia look like pulled to the west after Putin?
Speaker 1: Let's hope it happens. And if you look at the
Speaker 1: history of Russia in terms of leaders, you roll the
Speaker 1: cosmic dice. Sometimes you get Peter the Great, the next
Speaker 1: time you get Ivan the Terrible, you get a Joseph Stalin,
Speaker 1: then you get a Gorba job those dice landed on
Speaker 1: Vladimir Putin. He will be the Tsar of all the
Speaker 1: Russians still the day he dies. He's alive in four
Speaker 1: as an octogenarian. But what comes afterward. Let's hope the
Speaker 1: dice land on a different kind of leader. It's possible
Speaker 1: if you look at Russian history, the strategic opening to
Speaker 1: pull Russia away from China is a powerful moment for
Speaker 1: the West. It won't come into Vladimir Putin passes on
Speaker 1: to the Great Commune in the Sky. James Travides, thank
Speaker 1: you so much for joining us this morning. Folks. We're
Speaker 1: gonna get all the answers to the bond market mysteries
Speaker 1: to Badra. Japa has them all. She's standing by ceciatasion
Speaker 1: or our ahead of us rate strategy. And there is
Speaker 1: this question of what has been behind the incredible rally
Speaker 1: in ten your treasuries. I was saying, a lot of
Speaker 1: people are attributing it to a short squeeze. Is that it? Well,
Speaker 1: I think it's one of many factors. Right, You're definitely
Speaker 1: seeing a little bit of positioning being very skewed towards shorts,
Speaker 1: and typically when you see, uh, you know, when position
Speaker 1: gets a little bit skewed, you tennessee a short covering rally.
Speaker 1: But it's also you're seeing very very strong demand coming
Speaker 1: from you know, real money accounts, overseas accounts. In auctions
Speaker 1: this week, if you look at the auction metrics, both
Speaker 1: indirects as well as directs, you know the participation has
Speaker 1: been very very strong. So the primary dealers are not
Speaker 1: taking down these auctions. It's real money investors and end
Speaker 1: investors that are taking down this auction. So it's a
Speaker 1: combination of positioning as well as strong demand from end
Speaker 1: investors for treasuries, which I think is kind of counterintuitive.
Speaker 1: Like you pointed out, at this stage in the recovery,
Speaker 1: you shouldn't be expecting a gradual rising yields. So in
Speaker 1: some respects, the sort of rally that we've seen in
Speaker 1: the last week, at least to me, is somewhat countered
Speaker 1: you do. So that really raises the question how much
Speaker 1: does this rally have legs or is this a one off,
Speaker 1: a sort of positional shakeout that's poised to reverse. I
Speaker 1: think I'm more in the camp that you know, once
Speaker 1: we get this position shakeout, we should see, uh, you know,
Speaker 1: yields start to head ever so gradually towards you know,
Speaker 1: a higher trajectory. And in some respects where we are
Speaker 1: right now is very similar to what we saw earlier
Speaker 1: on this year, you know, in tenny yields where eighty
Speaker 1: or ninety basis points. When we began the year, we
Speaker 1: thought the world would come to an end when tenny
Speaker 1: yields got to the Fed's definitely gonna, you know, talk
Speaker 1: down the market. They're not gonna let yields rise to one.
Speaker 1: Guess what the FED just stepped aside and said, you
Speaker 1: know what, it's okay for yields to rise. We're exactly
Speaker 1: at that same juncture heading into the June meeting where
Speaker 1: tenny years at one forty five, the FED is gradually
Speaker 1: thinking about carrying back acid purchases. They're gonna look at
Speaker 1: tens at one forty five, equities at all time highs
Speaker 1: and say, you know what, we have a little bit
Speaker 1: more room to sound a little bit more hawkish on
Speaker 1: the market, and it yields right, So right, so what
Speaker 1: you know, there's a lot more room for yields to rise.
Speaker 1: So that's kind of where I you know, I think
Speaker 1: the big risk heading into next week is that there's
Speaker 1: a there's a decent out of complacency in the bond
Speaker 1: market that the Fed's going to keep things status Well,
Speaker 1: we'll talk a little bit more about the complacency, and
Speaker 1: I guess the potential here is sabadra for volatility. Should
Speaker 1: we finally start to get a little bit clearer communication
Speaker 1: about the FED, Because while they may be standing pat
Speaker 1: right now. I mean, they've also made it clear that
Speaker 1: at some point things are going up, and we're going
Speaker 1: to get that communication, some sort of roadmap hopefully soon.
Speaker 1: And I'm wondering as we start to drift lower here
Speaker 1: whether that just sets us up for a more volatile
Speaker 1: spike higher at some point soon. Yeah, I know, definitely,
Speaker 1: I think that there's I think the summer itself is
Speaker 1: going to be somewhat more volity. It's not just fed
Speaker 1: communication that good spur bolatility from here on, it's also
Speaker 1: the data. If there's anything we've learned in the last
Speaker 1: couple of months, it's that you can't just turn on
Speaker 1: a switch and have the economy come back online. There's
Speaker 1: just a lot of bottlenecks that each behind out. Uh.
Speaker 1: You know, there's there's data that we're going to get
Speaker 1: that that you know, we don't know. The trajectory for
Speaker 1: employment is it turns out to be a lot slower
Speaker 1: than what we're anticipating. It's not going to be a
Speaker 1: million dollar jobs per month, So you know, at least
Speaker 1: till till we get through the third second quarder and
Speaker 1: third quarder, I think we're going to see a little
Speaker 1: of all, Clilady, the data and the FED is long overdue.
Speaker 1: I would say, in my opinion, to start thinking about
Speaker 1: tapering acid purchases and communicating those intentions. And I think
Speaker 1: that those intentions are going to start getting communicated as
Speaker 1: early as next week on a strategy basis. So Brita,
Speaker 1: with where we are, what does CFOs do? Do you look?
Speaker 1: I mean, is the great unspoken here? There's going to
Speaker 1: be a wall of bond issuance coming out in the
Speaker 1: next six months. I mean I've lost track of you know,
Speaker 1: what the corporations are actually gonna do. Are they going
Speaker 1: to pile on more debt? Yeah? I mean I think
Speaker 1: if interestrates a that's what you should be doing, right
Speaker 1: boring as Yeah, and you know, there's there's definitely a
Speaker 1: case to be made, and it's already happened. I mean
Speaker 1: a good portion of this year we've seen tremendous amounts
Speaker 1: of corporate bond issuance. What's really interesting is the amount
Speaker 1: of demand has been from ended masters for all this
Speaker 1: issuance that's coming to the market. I mean, whether it
Speaker 1: be investment grade or high yield, spreads are extraordinarily tight,
Speaker 1: so you know, and this demand continues. That's where I
Speaker 1: wanted to go, this idea that high yield bonds are
Speaker 1: now yielding one basis point away from the lowest ever
Speaker 1: sub four percent. We're looking at three point eight nine
Speaker 1: percent on high old bonds, and the record sales pace
Speaker 1: has been absolutely employ your sox off. I mean, basically,
Speaker 1: that's the c f A term. Tom. There is a
Speaker 1: question about the moral hazard here, the idea of the
Speaker 1: complacency of a low rate regime here on out tied
Speaker 1: with companies selling bonds to raise money to buy bitcoin,
Speaker 1: like the micro Strategy bond, to raise money to pay dividends,
Speaker 1: to pay money to the private equity ownership. At what
Speaker 1: point does this become a problem or are we in
Speaker 1: a never ending a cycle of ever lower yields. So
Speaker 1: I was listening to Romaine earlier on and he was saying,
Speaker 1: at some point there's going to be a correction. So
Speaker 1: I'm kind of in that same camp that, you know,
Speaker 1: things do get a little bit out of hand and
Speaker 1: then you're going to see some sort of a correction,
Speaker 1: and for that to happen, it's going to come from
Speaker 1: a change in the policy stands right now, you know,
Speaker 1: the FEDS, you know, keeping its asset purchases. At some
Speaker 1: point when they start tapering asset purchases, these real yields
Speaker 1: that you're seeing a negative of nine two basis points
Speaker 1: negative one are going to have to move higher. And
Speaker 1: guess what when when really you start moving higher in
Speaker 1: a steady systematic way because it fed's trying to remove accommodation.
Speaker 1: This is going to have an impact on on risky assets.
Speaker 1: So we're not there yet. It's really hard to time this,
Speaker 1: but definitely that's that's a risk in the horizon's brout
Speaker 1: to thank you so much, harp so to drop of
Speaker 1: there from society general on US rates and the derivative
Speaker 1: heritage of such in there, on the dynamics of these
Speaker 1: rates and the major dynamics in shock and awe here.
Speaker 1: One of the great hallmarks of securities research is how
Speaker 1: you read the research. And one of the you know,
Speaker 1: I literally I do lectures on this, folks. You get
Speaker 1: a four page report and as a way to read
Speaker 1: it in twenty two seconds and get what's out of it.
Speaker 1: And then there's the fifteen page report and you do that,
Speaker 1: and then there's Paul him are you This goes way
Speaker 1: back the reports some kidder pebody behere you go. Damn,
Speaker 1: I've got to read this whole thing. It was Joe
Speaker 1: Almato's fault. It was his fault. Was like that, and
Speaker 1: he went through a story career in securities research. And
Speaker 1: I would suggest the integrity of it. It wasn't about
Speaker 1: by hold cell. It was about inform you about where
Speaker 1: the company fit in within sector in terms of growth evaluation.
Speaker 1: And there wasn't a Motto heritage there, heritage there all
Speaker 1: the way up to Lehman Brothers and and Tom. I
Speaker 1: first bumped into Joe Motto when I was a young analyst.
Speaker 1: I interviewed when he was a director of research at
Speaker 1: Lehman Brothers for media research analyst position and boy, the
Speaker 1: team he said, he probably it was. It was fun.
Speaker 1: We had a we had a good discussion. He had
Speaker 1: a great team there. Joe, thanks so much for joining
Speaker 1: us here at Joe A Motto. He's a new Burger
Speaker 1: Berman President and chief investment officer. Um, Joe, thanks so
Speaker 1: much for joining us here. I mean, you've had such
Speaker 1: a storied career, have seen at all? What are you
Speaker 1: telling your clients here as they think about I got
Speaker 1: a global reopening of this economy like we've never seen before.
Speaker 1: What do I do? Well, good morning, and thanks for
Speaker 1: having me, and thanks certainly for those kind words. Um uh, Well,
Speaker 1: we are certainly uh constructive on the outlook, and we're
Speaker 1: you know, we're talking with clients about the strength of
Speaker 1: the global growth recovery that is clearly in in in
Speaker 1: full swing and how to position oneself for that, uh,
Speaker 1: certainly talking through the inflation risks and the rate outlook.
Speaker 1: All that are quite relevant to how one looks at,
Speaker 1: you know, an acid allocation across the board, whether it
Speaker 1: be in equities or fixed income or what have you.
Speaker 1: But but bottom line is, we're you know, we're constructive
Speaker 1: on risk assets. We see the outlook uh is a
Speaker 1: positive one. We're probably going to achieve record earnings. I know,
Speaker 1: lots of folks have been talking about achieving record uh
Speaker 1: levels in equity valuations right now. But you're also going
Speaker 1: to see equity earnings UM at record levels. So Joe,
Speaker 1: you know, coming out of the financial crisis, Um, you know,
Speaker 1: the great bullmarket coming out of financial crisis was driven
Speaker 1: in large part by these big tech growth stocks that
Speaker 1: work so well uh for most investors. Yet we see
Speaker 1: a nice rotation into more cyclical kind of sectors of
Speaker 1: this economy. I'm thinking, uh, energy, financials. Where do you
Speaker 1: guys see the performance coming from over the next twelve
Speaker 1: to twenty four months. Well, right now, we're we're definitely
Speaker 1: positive toward the value sector, the cyclical sector. We think
Speaker 1: there's more legs to the economic recovery here that you
Speaker 1: can position oneself for to take advantage of it. In
Speaker 1: that In that time frame that you're that you're talking about,
Speaker 1: it's we're going to see economic growth levels GDP levels
Speaker 1: that we haven't seen in a in a long time,
Speaker 1: and I think you want to be positioned for that.
Speaker 1: And during periods of accelerating economic activity, you want to
Speaker 1: be positioned in cyclicals and and and value stocks. And
Speaker 1: that's what you've seen has been working. As you think
Speaker 1: beyond that time frame, one debate we certainly have internally
Speaker 1: is what level of sustainable sort of trend line growth
Speaker 1: you're going to see out to three years from now.
Speaker 1: And we do think the growth is going to slow down,
Speaker 1: and during that period of slow down, you typically will
Speaker 1: rotate back into your secular growers. I don't think it's
Speaker 1: time for that yet, but it is something that you
Speaker 1: know we're thinking about as we as we position position
Speaker 1: portfolios for for long term um uh investment. Joe about it.
Speaker 1: You guys are very sophisticated investors. I think in Charles
Speaker 1: Cantor and his leadership in the equity market, so many
Speaker 1: many others at Newburger Berman, I want you to talk
Speaker 1: to what our listeners are living, which is active passive
Speaker 1: the giant ormous successive passive Joe, j enormous c f
Speaker 1: A word incasion. An familiar with that, but but passive
Speaker 1: is taken over state the case for active Charles Cantor
Speaker 1: like management insecurities research where there's no money in it
Speaker 1: for the street anymore. Six cents used to be big living.
Speaker 1: It's gone. Tell me how we move forward doing active research.
Speaker 1: We still certainly believe that there are real benefits that
Speaker 1: will enhance ultimately returns by doing good, bottom up fundamental research,
Speaker 1: and they're they're still in our view even in markets
Speaker 1: like large cap us which often as I describe as
Speaker 1: ground zero for the active passive debate. Even in that market,
Speaker 1: their pockets of inefficiency that you could take advantage of.
Speaker 1: The challenge active managers have had is when that handful
Speaker 1: of whether you want to call it fang or just
Speaker 1: do super large cap stocks do well. It's very hard
Speaker 1: for an active manager to out perform because very few
Speaker 1: active managers are going to be way overweight five stocks
Speaker 1: that represent thirty of the index. But but as you
Speaker 1: see in small cap land, in non US world, emerging markets, world,
Speaker 1: active managers actually have had a more sustained level of
Speaker 1: of performance relative to indices, and and so you know,
Speaker 1: we we don't just look at large cap US. That's
Speaker 1: been tough. It's been better recently because as the fang
Speaker 1: stocks have slowed down a bit, it's given opportunity for
Speaker 1: active manager to show to show their wares. And the
Speaker 1: other point I would make is in engaging companies and
Speaker 1: acting like active owners and real shareholders, because as you know, Tom,
Speaker 1: we invest for you know, the long term. We're not
Speaker 1: We're not a high frequency trader. If you will not, uh,
Speaker 1: you know that Engaging companies, being response sable owners, whether
Speaker 1: it be capital allocation decisions, the board makeup, compensation of
Speaker 1: the alignment of the senior executives, are all important things
Speaker 1: that I think active manager has been an enormous amount
Speaker 1: of the table. What about diverse diversification or is Peter
Speaker 1: Lynch would say diversification. I mean if in this mill,
Speaker 1: you in this oddity of I don't know where the
Speaker 1: risk free rate is. Maybe you know, but I don't.
Speaker 1: Do you approach this less diversified or more diversified than
Speaker 1: what we were trained as well? If I would, I
Speaker 1: would think about in components. If you're thinking just intra equities,
Speaker 1: I think it pays to be diversified. If you look
Speaker 1: at the powerful swings that are nearly impossible to predict
Speaker 1: in the short term. Write the rotation between growth and
Speaker 1: values small and large US non US. Those were enormous
Speaker 1: alpha generators if you timed it right. But timing it
Speaker 1: is nearly impossible in the short term, So so diversifying
Speaker 1: across those levels. For those investors who came into the
Speaker 1: new year with very little value exposure, they really suffered
Speaker 1: because value is dramatically outperformed growth, just like the reverse
Speaker 1: occurred back in two thousand twenty. As you move across
Speaker 1: asset classes equity fixed income, you do start to question
Speaker 1: the benefits of that sixty forty traditional type diversification because
Speaker 1: your bonds in the past gave you good ballast. If
Speaker 1: you will versus your equity risk and now it feels
Speaker 1: like you get less of that. Yeah, the new Amazon. Hey, Joe,
Speaker 1: you know I'm going to ask you to put your
Speaker 1: director research had on from years ago. How do research
Speaker 1: analysts do their jobs these days in the world of
Speaker 1: a pandemic? I used to be on the road the
Speaker 1: time visitor my companies. Yeah, but mine was going to
Speaker 1: the theme park world to play golf exactly. So, Joe,
Speaker 1: how do you how are the analyst at Burman kind
Speaker 1: of doing their jobs and adapting here? Well, certainly the
Speaker 1: inability to to go kick tires, visit manufacturing facilities, meet
Speaker 1: companies in their offices. What have you have have been
Speaker 1: dramatically affected by, you know, the last fifteen months or so,
Speaker 1: the availability of company managements to talk, whether it be
Speaker 1: through video conference or a phone call or what have
Speaker 1: you certainly gone up because they're just more available, But
Speaker 1: you don't necessarily get the same interaction in that in
Speaker 1: that form. One of the things that I think is
Speaker 1: enhanced fundamental analytical rigor is data science. So we've invested
Speaker 1: a lot in evaluating alternative data sets using the processing
Speaker 1: power that is available today to look at ways that
Speaker 1: in the past, whether it be my early days as
Speaker 1: an analysts or others, you just didn't have access to
Speaker 1: really really interesting, insightful data. And now that I think
Speaker 1: gives gives a lot of our team a big edge.
Speaker 1: Charles Cantor still has a slide rule on his desk.
Speaker 1: Joel Motto, Thank you so much. Joe Moddo, one of
Speaker 1: the legends of the business thrillies with us today, Chief
Speaker 1: Investment Officer Equities, New Burger Bourman. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
Speaker 1: seven to ten am Eastern on Bloomberg Radio and on
Speaker 1: Bloomberg Television each day from six to nine am for
Speaker 1: insight 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