Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
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Speaker 2: Dead Limit talks stolen. Greg Paters of pGEM Fixed Income
Speaker 2: saying investors a pang for default protection in the near term.
Speaker 2: We went out the curve somewhat as our sneaking suspicion
Speaker 2: is that it will continue year after year. The congressional
Speaker 2: disruption in DC is not going away anytime soon. Tks.
Speaker 2: This he the old normal, the new normal, what do
Speaker 2: you want to call it.
Speaker 1: I'm so glad you picked this paragraph from his research. John,
Speaker 1: This is the fixed income note I've seen in ten days,
Speaker 1: maybe two weeks. Reg Peters at PGM right now on
Speaker 1: where we are and where we're moving forward. Joining us, Greg,
Speaker 1: It's a really complex thing. I think we need to
Speaker 1: talk for an hour with you this morning, but I
Speaker 1: want you to set up what the market reaction is
Speaker 1: going to be if we get pgeum persistency and yield
Speaker 1: or dare I say we go to a higher five
Speaker 1: point six five point eight and then the dreaded six
Speaker 1: percent yield? What happens when we get there?
Speaker 3: Well, I think we're a long way to six percent.
Speaker 3: But at the end of the day, we do think
Speaker 3: yields are too low. If you look at the move
Speaker 3: that we've seen, particularly in the front end around the
Speaker 3: banking crisis of March, there was a really deep move lower,
Speaker 3: and that doesn't make a lot of sense to us.
Speaker 3: And so, you know, when we're looking at the curve,
Speaker 3: we feel like it's miss priced. We feel like it's
Speaker 3: already pricing in a recession. And then when you look
Speaker 3: at risk reward, even if you do get a recession,
Speaker 3: which is still you know, probable, of course, will you
Speaker 3: be rewarded for it? And the question on the table
Speaker 3: I think suggests, now.
Speaker 1: Let's go pro here. There's a thing Greg called credit
Speaker 1: default swaps. Brando talks about this all the time. You say,
Speaker 1: there's a real efficacy to follow the CDs market for
Speaker 1: mere mortals listening and watching explain the linkage of their
Speaker 1: yield world with the CDs world.
Speaker 3: Well, it just is a measure of credit risk of
Speaker 3: the US sovereign, right, and so you know what we've
Speaker 3: seen over the past couple months or so is that
Speaker 3: that risk is elevated of course, right, So this debt
Speaker 3: ceiling debate, let's call it, is creeping into the risk
Speaker 3: of the market. You're seeing that in the CDs curves.
Speaker 3: And so what you've seen is investors really pay up
Speaker 3: for short data protection in the event of a default
Speaker 3: or some type disruption. What we decided to do, and
Speaker 3: to be clear, this is very much of a drop
Speaker 3: in the ocean type of trade, but what we've decided
Speaker 3: to do is actually not pay up for you know,
Speaker 3: the couple months or even one year, because we do
Speaker 3: think it's a persistent problem. So you know, we really
Speaker 3: worry about I really worry about a PGM that you know,
Speaker 3: this political debate around spending and using the depth ceiling
Speaker 3: as a prop will be a common occurrence. And with that,
Speaker 3: you know, we think it's good to have a little
Speaker 3: protection on.
Speaker 2: So Greg, can we go out further along the curve
Speaker 2: away from the front end, Let's go all the way
Speaker 2: to the back end. What's the thirty year doing up
Speaker 2: in there four percent.
Speaker 3: Yeah, So the thirty year has different characteristics than the
Speaker 3: intermediate part of the curve and definitely the front end
Speaker 3: part of the curve. What you have in the back
Speaker 3: end is this still do this very much, you know,
Speaker 3: need for duration investors have to go out and hedge,
Speaker 3: or you know, pension funds and LDI accounts have to
Speaker 3: be out in the back of the curve. So there's
Speaker 3: different characteristics there. So I think that the informational content
Speaker 3: that comes out of the thirty year is a lot
Speaker 3: less kind of worthy than the intermedia and the front end.
Speaker 3: So for me, you know, I look at more at
Speaker 3: the intermediate part of the curve and more in the
Speaker 3: front end of the curve than I do the thirty year.
Speaker 3: I mean, it's important, but it's not nearly as important
Speaker 3: from an informational content standpoint. Greg.
Speaker 4: At a time when you do expect this turmoil to
Speaker 4: continue in Washington, do you consider corporate debt of very
Speaker 4: highly rated companies to essentially be more credit worthy right
Speaker 4: now than the US government itself.
Speaker 3: Oh, I think that's a tenuous argument. I've heard that argument.
Speaker 3: That doesn't make a lot of sense to me that
Speaker 3: crops up, you know, every several years or so. You know,
Speaker 3: I really push back on that. So, you know, everything
Speaker 3: feeds off US Treasury US rates, So if the risk
Speaker 3: free gets repriced, everything gets repriced off of it. So,
Speaker 3: you know, hiding out in high quality credit seems like
Speaker 3: a fool's errand to me, and you're not going to
Speaker 3: protect yourself in a way that you think you will
Speaker 3: be protected.
Speaker 4: Do you think that people who are going into credit
Speaker 4: in particular risk of your credit right now are also
Speaker 4: engaging in a fool's errand just simply because of the
Speaker 4: risk that you're seeing down the line of perhaps some
Speaker 4: of the defaults or there's at least the Washington turmoil continuing,
Speaker 4: and this idea of some sort of recession getting priced
Speaker 4: in to the curve.
Speaker 3: Well, if you're definitely going down in quality and credit,
Speaker 3: you are basically an essentially betting that there will be
Speaker 3: no recession, there will be a soft landing. And so
Speaker 3: I think that is also a kind of a difficult
Speaker 3: case to make. So to me, there's much more value
Speaker 3: being up in quality and not going deep down and
Speaker 3: you know, deep recyclical type of company. So I don't know,
Speaker 3: you know, being down in quality doesn't make a lot
Speaker 3: of sense to me. I'm not sure you're getting paid
Speaker 3: for it either. I think it's too early, very simple premise.
Speaker 3: I have yet to see credit spreads tightened into a recession,
Speaker 3: so if you have a high probability of a recession,
Speaker 3: you're you know, leaning against that narrative. So I don't know.
Speaker 3: To me, it's more of a high quality gain dispersion
Speaker 3: is super high.
Speaker 1: Though.
Speaker 3: There are lots of relative value opportunities, and we see
Speaker 3: a lot more value structure products as an example, than
Speaker 3: we do corporate credit.
Speaker 2: Greg, can we try and make this really simple? Just
Speaker 2: to wrap things up, There were some headlines yesterday about
Speaker 2: a security that come to market with a yield to
Speaker 2: six percent and it has one of those at risk
Speaker 2: maturities early next month, Greg, can you explain to people
Speaker 2: what is the actual risk there? What is the risk
Speaker 2: there with that security? Because ultimately, surely doesn't it get paid.
Speaker 3: Well, hopefully it gets baide. This is the debate on
Speaker 3: the table, Jonathan. But the question for an investor is like,
Speaker 3: why would you actually target yourself for that particular maturity?
Speaker 3: So you know, if you do the math around it,
Speaker 3: you know it's a much higher yield divided by three
Speaker 3: sixty five, you know, times ten days, is it really
Speaker 3: worth the risk? So so it's somewhat of an anomalist
Speaker 3: math equation. And so I wouldn't be so worried about
Speaker 3: the six percent because that's not really what you're going
Speaker 3: to earn. So, you know, from most investors' perspective, it's
Speaker 3: just not worth targeting yourself and getting thrown into the
Speaker 3: potential default pool. And hopefully that doesn't happen.
Speaker 2: We all have that doesn't happen Face page and fixed income.
Speaker 2: Thank you, Greg, appreciate it.
Speaker 1: No one better in New York City to do this
Speaker 1: in Oliver Chen, senior equity research analyst at Cowen who's
Speaker 1: just totally plugged into our aspirations as well. Mister Arnold
Speaker 1: has done this forty five times at the MH. John
Speaker 1: has mentioned this. John's really followed this story. He brings
Speaker 1: his sons to an American icon, Tiffany, and is it
Speaker 1: right to say they blew it up.
Speaker 5: Yeah, it's been tremendous in terms of the innovation there,
Speaker 5: and luxury is about magic and logic and bringing new,
Speaker 5: younger customers to the table as well. Tiffany is an
Speaker 5: iconic brand. The partnerships with Nike really elevating the assortment,
Speaker 5: and this flagship is one of the best stores in
Speaker 5: the world right now in terms of what they're doing
Speaker 5: experiential retail art, this unique experience. LVMH is definitely one
Speaker 5: of our top ideas. China is about twenty five percent
Speaker 5: of revenue, so it's quite material and we're really watching
Speaker 5: these near term changes. The mRNA will be important.
Speaker 2: You've coined a phrase that I love. It's South Wealth
Speaker 2: and if you know, you know, I could spot Brunello,
Speaker 2: I can spot the MS orange poking out at your
Speaker 2: pocket right now. And then there are brandings, the aspirational stuff,
Speaker 2: the people who line up outside the Gucci stores and
Speaker 2: they do the buy now, pay later, fifty dollars a month,
Speaker 2: get whatever you want, get a hoodie. It's got a
Speaker 2: big brand in front of it. Lisa and I were
Speaker 2: talking about this before we came on air. We're trying
Speaker 2: to work out has the latter started to crack? Have
Speaker 2: you noticed that at all? Because we used to see
Speaker 2: all these lines around these luxury stores, and when we
Speaker 2: used to speak to people in the store, the consumer
Speaker 2: was changing. They were moving away from dropping five thousand
Speaker 2: dollars on a handbag and maybe that we're thinking about
Speaker 2: it through a monthly payment. Has that started to fade
Speaker 2: started to break in this country for sure?
Speaker 5: John, You bring up a great point in terms of
Speaker 5: aspirational more entry point luxury logos as well as sunglasses
Speaker 5: and footweark be gateways to luxury, and that's been softer.
Speaker 5: We've seen inventory levels that are too high at nor
Speaker 5: Trum Sacks and Nemon Marcus for that reason. At the
Speaker 5: same time, when you think about stealth, well, it's about materials,
Speaker 5: it's about touch and feel, it's about looking great at
Speaker 5: work too. That's been a trend that's been working too.
Speaker 5: As the consumers become more cautious and we've seen many shocks.
Speaker 4: How much are we really parsing through the key shaped
Speaker 4: recovery that we used to talk about that we seem
Speaker 4: to have forgotten. We're basically people with the most power
Speaker 4: are spending it on luxury and able to do so
Speaker 4: in bulk, and you're seeing the others kind of fall
Speaker 4: off as the price increases really catch up. More broadly
Speaker 4: in the economy.
Speaker 5: We're definitely seeing a consumer discretionary recession in terms of
Speaker 5: those products and that market as a whole facing negative trends.
Speaker 5: We're also still seeing shifts where dollars are spent on
Speaker 5: travel and services hotels. At the high high end, that
Speaker 5: customer is very strong and robust, so we're still seeing
Speaker 5: strength at the high end. It's more of that area
Speaker 5: right below the high end, the aspirational, where there's lots
Speaker 5: of pressure. At the high end, the wealthy consumer always
Speaker 5: has money. It's more about sentiment and emotions too. Certainly,
Speaker 5: some of the financial shocks have been disturbing in terms
Speaker 5: of putting that customer on pause. Consumer confidence has been
Speaker 5: volatile as a whole, so it's definitely something we're watching.
Speaker 4: The overlay here of China and what's going on there.
Speaker 4: Is there a sense based on the luxury players that
Speaker 4: are more exposed to the Chinese consumer and less exposed
Speaker 4: of where that trend is. Is it falling off? Are
Speaker 4: people really seeing a shift there?
Speaker 6: Well?
Speaker 5: Structurally, long term, China is the biggest deal in luxury.
Speaker 5: It's thirty percent plus of the market plus even more growth,
Speaker 5: so great luxury retailers and Louis Vuitton's the largest market
Speaker 5: cap company in Europe, so it spends about ten million
Speaker 5: dollars on advertising and promotion, and Tiffany Renovation is well
Speaker 5: over two hundred and fifty million dollars just here in
Speaker 5: New York. China will be important for the long term,
Speaker 5: but it'll be fairly volatile as we watch these issues unfold.
Speaker 5: The name of the game in luxury is flagship stores
Speaker 5: and stores that really make you forget about price. So
Speaker 5: being there physically is important as well as a modern, upgraded,
Speaker 5: you know, rethinking the metaverse, a digital experience that's connected
Speaker 5: as well.
Speaker 1: Our department stores then dead. If I'm at the corner
Speaker 1: of fifty seventh and fifth Avenue and I'm looking from
Speaker 1: Tiffany's waving over at Burg, Hi, what's the future of Bergdorf?
Speaker 5: And you mentioned earlier, Oh, Burgdorf is very exciting. It's
Speaker 5: right there too, in these magic corners. Bergdorf is an
Speaker 5: iconic institution. Our recommendation is Macy's department stores are not dead,
Speaker 5: but they're transforming very rapidly and really needing to offer service,
Speaker 5: differentiated product. They really need to get the younger customer end,
Speaker 5: and that's been a constant, interesting epic struggle. We're following
Speaker 5: Coles this morning, the gross margins were better than expected.
Speaker 5: Back to the basics for retail as well as inventory
Speaker 5: management and supply chain. But I teach at Columbia, don't
Speaker 5: forget it's about magic and logic and really bringing things
Speaker 5: you didn't know existed that you wanted in retail too.
Speaker 1: He's the only want to know on the sell side
Speaker 1: that could conflate coals in Tiffany in one conversation.
Speaker 2: In Macy's as well, quickly, what is it about Macy's
Speaker 2: that you like?
Speaker 5: Inventory management? CFO really focused on an agile CEO, rethinking
Speaker 5: the loyalty program using data. Artificial intelligence will play a
Speaker 5: huge role in personalization the data sets as we think
Speaker 5: about the future of retail, and Macy's has a loyal
Speaker 5: customer too, needs a younger customer for sure.
Speaker 1: We're not doing to giveaway a succession because Pharaoh's got
Speaker 1: to watch season three and four top to bottom it happened.
Speaker 1: What's a succession for our No at.
Speaker 5: LVMH, Listen, the family is doing a really modern job
Speaker 5: rethinking brands and captivating a younger customer, elevating brands. It's
Speaker 5: a company that manages for the very long term.
Speaker 1: Answer my question there's like three sons, two daughters, the
Speaker 1: whole thing. What happens in season three of the LVMH.
Speaker 5: Well, I think it's going to be intensity competition and
Speaker 5: a real interesting battle for the best of the best,
Speaker 5: and that's what happens. You really need this competitive spirit
Speaker 5: to be culturally relevant. Retail is awesome, Luxury is awesome
Speaker 5: because it's always changing. You've got to be in touch
Speaker 5: with how music is moving, how TV is moving.
Speaker 1: To be watching this.
Speaker 2: I love this, Oliver. This is great. Thank you, Oliver.
Speaker 2: Such a startish dude. Double breasted suit, Pete, I'm going to.
Speaker 4: Just postulate that if he had a beating at the
Speaker 4: White House, he would not be wearing shoes hybrids. I'm
Speaker 4: just guessing that I won't.
Speaker 2: I've got a word on the hybrids.
Speaker 7: Kind of in the churches.
Speaker 5: This is Brooks Brothers. So it's back to the basics,
Speaker 5: rethinking and double breasted fashion is about all the new
Speaker 5: and bringing traditional mix and matching. But I'm also versatile.
Speaker 5: I'll do anything like you on the weekends.
Speaker 1: The understated things.
Speaker 5: About materials, craftsmanship, well, materials and heritage and how something
Speaker 5: is made and if it feels great, I mean Cashmere
Speaker 5: is here forever, Yes, and stitching and craftsmanship.
Speaker 2: So you want again for shoe beautiful shoe half bro
Speaker 2: chat Chase, British, British.
Speaker 5: It is not a great tradition of that, so little
Speaker 5: painful in the beginning, but it's worth it.
Speaker 2: Break him in. Yeah, I great.
Speaker 1: I just would kill to get at a larger desk.
Speaker 1: Oliver Chen, Michael Burke who ran burg Dose for years,
Speaker 1: and the great Vanessa Friedman of the New York all
Speaker 1: in together bring ink from from London about He takes
Speaker 1: it so seriously.
Speaker 2: As he should.
Speaker 4: It's a multi billion dollar.
Speaker 1: What do you do if you put a sweatshirt in
Speaker 1: the dryer and shrink it?
Speaker 5: I mean you asked about this before. It really depends
Speaker 5: on the material. But I've done it a few times,
Speaker 5: and sometimes you want to shrink it and sometimes you don't.
Speaker 2: But most of the time it's shrink it.
Speaker 5: He reinvented rethinking a real stature in the industry.
Speaker 1: Yeah, okay, I.
Speaker 2: Think we don't outwait, Yeah, okay, good, thank you.
Speaker 1: Two big stories here to talk to. Jim Lucier about
Speaker 1: senior political analystic capital HEFA Partners barely describes the decades
Speaker 1: of experience. We've got the theater in Florida, We've got
Speaker 1: the theater in Washington. Jim, in your research to Know,
Speaker 1: which I thought was a really calming note, you talk
Speaker 1: about three subsets, the people that will bless this, the blessed,
Speaker 1: the people that will say the deal is acceptable, and
Speaker 1: I would suggest i'd add the furious as well. Who's
Speaker 1: going to win out here in the next ten days
Speaker 1: among the blessed, the acceptable, and the furious to move
Speaker 1: on from his crisis?
Speaker 7: I think the blessed and the acceptable are going to
Speaker 7: outnumber the furious. If you look at the way these
Speaker 7: negotiations proceeded, they've gone from hell, no, we're not budgeting
Speaker 7: to what kind of freeze do you want to? Okay,
Speaker 7: who's going to deliver the votes for this? So I
Speaker 7: think that despite what you see on television about a standoff,
Speaker 7: they're actually fairly close.
Speaker 2: James, I've got to turn to what's going to take
Speaker 2: place a little bit later on this afternoon, this talk
Speaker 2: on Twitter for Gabnor Tsantis. What do you make of
Speaker 2: this as a first step potentially towards a run for
Speaker 2: the big role in the White House.
Speaker 7: Well, I think it's an unlikely match of personalities. The
Speaker 7: thing about Ron DeSantis is he's not exactly the most
Speaker 7: warm and fuzzy guy out there, even though he is
Speaker 7: a terrific administrator and terrific governor, terrific giver of press conferences.
Speaker 7: To have an unscripted moment with Elon Musk suggests that
Speaker 7: either he's prepared to roll the dice and try something
Speaker 7: very different, or else he just doesn't know what he's
Speaker 7: in for.
Speaker 2: Do you think the first steps are important or do
Speaker 2: you think in a couple of months time will forget this.
Speaker 7: I think that in a couple of months time, we'll
Speaker 7: forget this. We have forgotten Elon Musk throwing the iron
Speaker 7: ball through the the truck. We've already forgotten the stealth
Speaker 7: video in which President Biden announced his re election campaign
Speaker 7: early in the morning two or three weeks ago. I
Speaker 7: don't think the announcement makes that big a deal, but
Speaker 7: it is important as we go into Memorial Day that
Speaker 7: we start that one year countdown to the presidential campaign
Speaker 7: beginning in Earnest, which is really going to be next
Speaker 7: Memorial Day.
Speaker 4: How interesting is it to you, James, that Twitter, a
Speaker 4: social media platform, is not so much tiptoeing, as in screaming,
Speaker 4: running into the whole media kind of sphere in Elon
Speaker 4: Musk hosting this conversation. I mean, what is the distinction
Speaker 4: at this point between social media and media? And from
Speaker 4: a regulator standpoint, does this muddy the waters?
Speaker 7: Well, Elon Musk likes to say that Twitter is the
Speaker 7: app for everything, and how do you better prove that
Speaker 7: you're the app for everything than by entertaining Tucker Carlson.
Speaker 7: So he's demonstrating you can do a lot of things
Speaker 7: on Twitter. I think Elong has a great commercial incentive
Speaker 7: to show that Twitter's a very vast, lot, very effective platform,
Speaker 7: right up there with Amazon or Netflix. I'm not sure
Speaker 7: the regulators know how to do this yet. The regulators
Speaker 7: are fighting a retroactive war, I think, battling Bigness, trying
Speaker 7: to fight Bigness by breaking up and turing large mergers.
Speaker 7: But I think Elana is far ahead of them at
Speaker 7: this point.
Speaker 4: Well, and to that point, James, I mean to John's
Speaker 4: point earlier, he was saying, some are speculating that Twitter
Speaker 4: and Elon Musk is becoming the main competitor to Fox
Speaker 4: and sort of this alternative conservative universe, especially if you
Speaker 4: have Tucker Curlson launching his own Twitter space or Twitter platform,
Speaker 4: and you also have a sort of initiation of Ronda
Speaker 4: Santiss campaign, all on the same site.
Speaker 7: Well, you've got no shortage of people who tried to
Speaker 7: launch alternative platforms. For instance, there is Glenn Beck, Megan
Speaker 7: Kelly has your podcast. I guess O'Riley is still out there.
Speaker 7: What's happening though, is that as you see conservative media
Speaker 7: moving into this new video platform with Twitter, the old forum,
Speaker 7: the AM media, the AM radio that was the home
Speaker 7: turf of Rush Limbaugh that is slowly dying off. So
Speaker 7: in other words, the old forest is dying and the
Speaker 7: forest animals are looking for a new environment.
Speaker 1: Jim, you got such a study of history on this.
Speaker 1: I'm going to go back to the legit World War two.
Speaker 1: Here Robert Dole of Kansas, he'd be one hundred by
Speaker 1: here in July. Senator Dole ran for president, came out
Speaker 1: of Kansas in the Midwest, and really never related with
Speaker 1: the American public. Translate that over to the governor of Florida.
Speaker 1: How does he come out of Florida where he won
Speaker 1: big and translate over to a Republican and independent America.
Speaker 7: Well, Bob Dole was a marvelously funny, warm and empathetic guy.
Speaker 7: Everybody who knew him in person loved him. He was
Speaker 7: famous for cracking jokes NonStop in the Senate cloak room.
Speaker 7: He was famous after he retired for sending donuts to
Speaker 7: the cloak room every day. You know, the memory of
Speaker 7: Bob Dole is just incredible in that way. But he
Speaker 7: did have I think a bit of awkwardness with large bodies. DeSantis,
Speaker 7: though nobody's ever really said that DeSantis is warm and
Speaker 7: fuzzy in that way. They're impressed with his smarts, they're
Speaker 7: impressed with his ability to lead as a former military officer.
Speaker 7: They're impressed with lots of things about him. But you
Speaker 7: don't hear people talking about DeSantis inspiring the deep personal
Speaker 7: loyalty among his constituents, among his base, among friends that
Speaker 7: Bob Dole certainly did. I knew Bob Dole. My father
Speaker 7: knew Bob Dole very well.
Speaker 2: James wonderful to get a perspective on things, particularly that
Speaker 2: in mind. James Lucy then of Capital Alpha Partners.
Speaker 1: It's great about Liz Young. She writes his brutally direct notes.
Speaker 1: This head of investment strategy it so far she loses
Speaker 1: the ratio mumble jump and talks about the mood and
Speaker 1: emotion that's out there. You're speaking of housing, Lis, but
Speaker 1: I think just talking to Oliver Chen of Cowen about
Speaker 1: the persistence of luxury, I'm going to steal a phrase
Speaker 1: from you. We're in a milieu of bullet proof demand.
Speaker 1: We just keep seeming to continue to prosper here amid
Speaker 1: all the gloom. How do you see that?
Speaker 8: Well, I think there's a difference between the demand that
Speaker 8: we're still seeing from certain sets of consumers, and especially
Speaker 8: in the housing market, in the face of rising mortgage
Speaker 8: rates again, mortgage rates that are higher than they've been
Speaker 8: in forty years, and there just continues to be this
Speaker 8: appetite to spend. I think when you look at what's
Speaker 8: happening signal wise, both in the economy and in many
Speaker 8: parts of the market, this is pretty classic late cycle behavior.
Speaker 8: The challenging part for many investors, myself included, is that
Speaker 8: late cycle can last a very very long time. It
Speaker 8: can last up to eighteen months, maybe even longer. So
Speaker 8: we could continue to say it's clear that we're in
Speaker 8: late cycle. At some point there's probably a contraction to
Speaker 8: bring us back into early cycle that would soften that demand.
Speaker 8: But could it be another six months perhaps? And I
Speaker 8: think that's the frustrating part in the meantime to try
Speaker 8: to make money in the market.
Speaker 1: John brain Freeze surveillance correction. Liz Young is with us,
Speaker 1: And I was thinking of the day I first heard
Speaker 1: Liz Story the piano player, when she fell on the
Speaker 1: scene of singers Songs, that this story Liz story, was
Speaker 1: this storyline caacular? She's got spectacular voicings.
Speaker 2: Was she as good on the piano?
Speaker 1: Was Liz Young as Liz Young? Liz Young on piano
Speaker 1: as a site to hold I'm so sorry.
Speaker 4: Well, Liz, you said something I want to pick up
Speaker 4: on this idea that late cycle can last a very
Speaker 4: long time. How do you know when you're getting to
Speaker 4: the end of a late cycle that can last for
Speaker 4: eighteen months?
Speaker 8: Well, it's o cult to know exactly what those signals are.
Speaker 8: I think if we all knew exactly what it was
Speaker 8: supposed to look like right before a recession came, we'd
Speaker 8: not have all of this consternation about what's happening. One
Speaker 8: of the things that I watch and I continue to
Speaker 8: watch this every single day is the yield curve inversion.
Speaker 8: Now we know that the inversion itself, especially at the
Speaker 8: twos tens, is more of a signal pre recession or
Speaker 8: a warning sign of, hey, there could be some bumps ahead.
Speaker 8: We don't know when, we don't know how big. And
Speaker 8: then you hear that old adage of the yield curve
Speaker 8: has predicted nine of the last five recessions or something,
Speaker 8: So it's not a fool proof indicator. But when that
Speaker 8: inversion starts to re steepen, meaning the inversion becomes more shallow,
Speaker 8: that tends to be the time when your ears should
Speaker 8: perk up and you start to listen for indicators that
Speaker 8: the FED may pause, the FED may have to cut,
Speaker 8: And that's what we're looking at in the market right now.
Speaker 8: The market still believes that the FED is going to
Speaker 8: have to cut before the end of the year. The
Speaker 8: FED holding steady and saying that absolutely not, we are
Speaker 8: not talking about that yet. Also, their own projections of
Speaker 8: inflation are still above target, both at a core and
Speaker 8: a headline level by the end of this year, So
Speaker 8: if things go the way that they expect, no cuts
Speaker 8: on the horizon in twenty twenty three. The market is
Speaker 8: sending a different signal saying, hey, we think that things
Speaker 8: could weaken. It's possible that we see cuts. So when
Speaker 8: you start to see those yield curbn versions get more shallow,
Speaker 8: you start to see the expectation that the FED may
Speaker 8: have to pivot, may have to change policy at some
Speaker 8: point in the next twelve to eighteen months. That's usually
Speaker 8: the time when you feel like the clock is really
Speaker 8: ticking on, when we're going to find out whether or
Speaker 8: not this recession actually occurs.
Speaker 4: Given that the music is still playing, do you play?
Speaker 4: Do you invest in stocks? I mean, are you basically
Speaker 4: in the Sevita Supermanian camp and not on the Darryl
Speaker 4: Kronk camp of saying cautious amid an n cycle that
Speaker 4: could last for another year.
Speaker 8: I'm cautious on the market, and I admit I did
Speaker 8: not see this rally in tech stocks coming this year.
Speaker 8: I mean, up twenty to twenty six percent, depending on
Speaker 8: what part of the NASDAC you're looking at, is pretty astonishing.
Speaker 8: But if you're a long term investor, and this constantly
Speaker 8: is a theme that I think everybody should think about.
Speaker 8: If you're a long term investor, you should be invested
Speaker 8: in stocks on some level at all times, because there's
Speaker 8: really no other place to generate capital growth in that way. However,
Speaker 8: if you're a long term investor that doesn't have a
Speaker 8: stomach for volatility in the short term, you do have
Speaker 8: to position defensively in this environment, especially at a time
Speaker 8: when we've got yields back up again. I know that
Speaker 8: you talked about that earlier in the program. As yields
Speaker 8: rise again in this environment, valuations really do matter, and
Speaker 8: you're paying a lot for some of those names that
Speaker 8: have done really well so far in twenty twenty three.
Speaker 8: So if you're not somebody that has a ton of
Speaker 8: stomach for short term volatility, and when I say short term,
Speaker 8: I mean six months or less, then you have to
Speaker 8: have defensive positions in the portfolio. But if you're a
Speaker 8: long term investor, let's say beyond three to five years,
Speaker 8: you do still have to have equities.
Speaker 2: Hey, Liz, thank you, Lis Young there are so fine.
Speaker 1: You know we're going to dive right into this right
Speaker 1: away because it's like a three hour conversation with Douglas Cast.
Speaker 1: He's at Seabear's Partners moving money around in Florida, and
Speaker 1: he's been very vocal. But Doug, I want to start
Speaker 1: with what I saw at Oakhill where I used to
Speaker 1: caddy with just stunning memories of my ute. I went
Speaker 1: to dancing school there, Doug, with girls with white gloves on,
Speaker 1: and you know, the whole thing from another time and place.
Speaker 1: And there's a guy from California. You hit a seventy
Speaker 1: five last week, Doug cast in my dreams, I could
Speaker 1: hit a seventy five. You're not too far from Michael Block.
Speaker 1: I mean, you're really working at it. What do you
Speaker 1: think of the miracle the PGA rot last weekend.
Speaker 6: I think that for those that have no idea what
Speaker 6: we're talking about, Michael Block was the PGA club pro
Speaker 6: who had hold in one and finished tied for fifteenth
Speaker 6: in the PGA Championship last week. And I think he's
Speaker 6: the reason why we love sports. It's the unexpected which
Speaker 6: excites us, like my seventy five year reference on Saturday,
Speaker 6: or like Judges home run to tie the game last
Speaker 6: night and Volpi's walk off and the recovery of the
Speaker 6: Yankees in the last three weeks. It's why we root
Speaker 6: for eight FC Richmond over West Ham Tom.
Speaker 1: Yeah, Well, Richmond's doing well this.
Speaker 6: Year, Tedence.
Speaker 1: You know, Doug, they're in the bunkers, And when I
Speaker 1: was at ol Kill, the bunkers didn't look like that.
Speaker 1: It was like the Berlin wall in front of you
Speaker 1: on the way to the green. And where does Michael
Speaker 1: Block's hands fall apart because he's never faced a pressure.
Speaker 1: Is it in the bunker, is it hitting the ball
Speaker 1: the first time with the driver, or is it on
Speaker 1: the putting green?
Speaker 6: I don't know. It was the classic caddy Shack Cinderella's story. Yeah,
Speaker 6: that's why we love the game.
Speaker 1: Just woke up because you mention Caddyshack and she's like, Okay,
Speaker 1: would you like to ask you a question that dodcasts
Speaker 1: about the equity Barker, I would love.
Speaker 9: To I finally recognize something.
Speaker 6: Crey, Good morning, Hi.
Speaker 9: Good morning, lovely to have you on. Let's talk about
Speaker 9: this debt ceiling. What happens if we get say we
Speaker 9: have vert a default. Do we get a relief rally
Speaker 9: or is it just more glum and doom?
Speaker 2: What happens next?
Speaker 6: I think it's just a sideshow to the core problems
Speaker 6: facing the markets. Creedy. Look, we all make mistakes in
Speaker 6: this business, but one of the benefits of having experience
Speaker 6: and managing money over the last year and a half
Speaker 6: in particular, and having been around the block. Is the
Speaker 6: quote Crosby, Stills, Nash, and Young. We have all been
Speaker 6: here before. We were in nineteen ninety nine during the
Speaker 6: dot com mania, we were in late two thousand and
Speaker 6: seven in the home price mania, and again in twenty
Speaker 6: twenty one in the arc disruptive stock mania. We are
Speaker 6: there again in May twenty twenty three. Today it's a
Speaker 6: speculation in AI and in as Mike Darda discussed really
Speaker 6: well in the last segment, the negative market ramifications of
Speaker 6: a top heavy market in which leadership is historically narrow,
Speaker 6: which reminds us of nineteen seventy four when the nifty
Speaker 6: to fifty blew up, leading to seven years of lean
Speaker 6: returns for stocks.
Speaker 9: So it sounds like the AI rally that you're seeing
Speaker 9: not sustainable in your view, correct?
Speaker 6: I think that the two circles we have the square crety,
Speaker 6: are the soft landing and speculation in AI the markets
Speaker 6: at nearly twenty times, it seems to be betting on
Speaker 6: a soft landing, though in reality the market goes up
Speaker 6: and down and oftentimes traders and investors simply chase an
Speaker 6: eye the direction for no real reason other than they
Speaker 6: are evaluated against the benchmark and care more about that
Speaker 6: than they do in making money or preserving capital. I
Speaker 6: think soft landings only tend to happen when the FED
Speaker 6: has been proactive with monetary tightening. In this case, they've
Speaker 6: been badly behind the curve and badly reactive, so forcing
Speaker 6: a somewhat aggressive tightening cyclone the last fourteen months, especially
Speaker 6: relative to the zero base we came from. So we
Speaker 6: have sticky inflation mostly a functional labor costs. Soft landings
Speaker 6: don't tend to take labor out of the system in
Speaker 6: lower pressure on wages. Only hard landings do that. So
Speaker 6: how do we get sticky inflation out of the system
Speaker 6: without a hard landing that the market implicitly is betting against.
Speaker 6: And then, secondly, of course, we have the hot sub
Speaker 6: topic d Jore in which Tina has taken a new form.
Speaker 6: It's in AI this time, but AI has been around
Speaker 6: for years, and as I discussed in an article I
Speaker 6: just wrote for Real Money pro the pathway to AI
Speaker 6: adoption and profits is likely to be rockier than many expects.
Speaker 1: And Critty this is so important mister cass is saying,
Speaker 1: and I go to the railroad bottle. The railroads went
Speaker 1: down in flames in the eighteen nineties for all sorts
Speaker 1: of reasons, and then they finally got together the second
Speaker 1: act around, Yeah saying you know we've seen this with
Speaker 1: AI for years.
Speaker 3: Yeah.
Speaker 9: Well, Doug, I was just reading your column, actually, And
Speaker 9: the case you make here is simply that the adoption
Speaker 9: is going to take much longer than what the market
Speaker 9: is pricing in. But what is the actual value to
Speaker 9: a lot of these big tech companies sitting on piles
Speaker 9: and piles of cash, record amounts of cash that are
Speaker 9: all going into AI, Alphabet and Microsoft.
Speaker 7: Et cetera.
Speaker 9: So is it really fair to say that some of
Speaker 9: these games are unjustified?
Speaker 6: I think it is and creedy. I'm not a luddite,
Speaker 6: you know. I was on with Tom and pol in
Speaker 6: late twenty twenty twenty two when I was buying all
Speaker 6: these stocks, I was buying them under four time sales.
Speaker 6: And now with the stocks up dramatically, there's no longer
Speaker 6: a value in my Yeah, Doug, with.
Speaker 1: Time left here and I there's just so much to
Speaker 1: talk about today. You have a Florida perspective like nobody.
Speaker 1: I know the governor of your state tonight, I guess,
Speaker 1: is going to launch a presidential campaign with Elon Musk. Now,
Speaker 1: you know, mister Musk, you've been very supportive. I believe
Speaker 1: the space stuff and all that, and you know you're
Speaker 1: hugely visible on Twitter. But this is your governor. What
Speaker 1: are you going to listen for from governor to Santa
Speaker 1: this afternoon today?
Speaker 6: Well, let's begin by framing it. You're talking to a
Speaker 6: former Native raider and a progressive liberal who believes in
Speaker 6: pro choice and has a political view, and my political
Speaker 6: view is antithetical.
Speaker 1: To this same He won big in year Florida. Can
Speaker 1: he extend that across the comfortable Republic.
Speaker 6: I don't think he has a chance against Trump. I
Speaker 6: don't think he's a likable character. I actually think he's
Speaker 6: on the spectrum based upon my conversations with him, and
Speaker 6: I don't think he's going to be competitive against Trump.
Speaker 6: So I think it's an academic question. You know, I'm
Speaker 6: much more concerned about the market.
Speaker 1: Yeah, well, you know, let me bring this back to Kidder.
Speaker 1: Peabody being pritty doesn't know this, but long ago, you're
Speaker 1: meeting potatoes. I think a Mario Gabelli and auto parts
Speaker 1: and industrial stuff cass on the high ground in banking,
Speaker 1: I looked at Peck West today and they got a
Speaker 1: thirteen month five point five zero percent cd dug out
Speaker 1: of our ute. I mean, are you going to load
Speaker 1: the boat on regional bankers in crisis?
Speaker 6: No, you can't right now because of the aforementioned conversation
Speaker 6: you had in a prior segment. It simply stated the
Speaker 6: the cost of capital, the cost of funds are going
Speaker 6: up dramatically. This combined with FDICS, extra assessments and other factors,
Speaker 6: are going to a really way on the secular earnings
Speaker 6: growth rate of the industry over the next two three years.
Speaker 6: And unfortunately Sellside has not yet reduced their estimates.
Speaker 2: Doug.
Speaker 9: A final quick question or last minute here when it
Speaker 9: comes to the biggest concern after this debt saga, where
Speaker 9: does China rate on your list the growth concerns that
Speaker 9: we're seeing there.
Speaker 6: China is, as as we all know, is the driver
Speaker 6: of global economic growth, but that really is not my
Speaker 6: primary concern visa visa speculation, I see, I'm not certain
Speaker 6: of much, but one thing I'm certain about is that
Speaker 6: the S and P is highly valued, especially against interest rates,
Speaker 6: and our reasonable and much lower than consensus for Castler profits.
Speaker 6: And I'll just briefly say that yesterday's closed, the Fed
Speaker 6: funds rate was five to eight percent, the six month
Speaker 6: Treasury yield was five point four percent, and that's roughly
Speaker 6: three and a half times the SMP dividend yield of
Speaker 6: one point sixty five percent. It costs seven point one
Speaker 6: percent for a fixed rate mortgage, and the SMP basically
Speaker 6: closed where it did fifteen months ago, when the Fed
Speaker 6: funds rate was only eight basis points, the yield on
Speaker 6: the sixth month note was one percent, or roughly two
Speaker 6: thirds the SMP dividend yield, and the fixed rate mortgage
Speaker 6: rate was around three percent, And the SMP is basically
Speaker 6: the same price. And also fifteen months ago, the consensus
Speaker 6: s and P estimate was two hundred and fifty two
Speaker 6: dollars a share, and now it's most to two hundred
Speaker 6: and fifteen dollars to share.
Speaker 1: So I don't see any amount of time I wanted
Speaker 1: to get to Garret Cole in the New York Out
Speaker 1: of time, Dougcast, thank you so much. As Sea Breeze.
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