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Speaker 1: Good morning, and welcome to the Bloomberg Daybreak Asia podcast.

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Speaker 1: I'm Doug Prisner. Here are the stories we're following today.

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Speaker 1: Joining us now is Mary Nicole or she is Bloomberg

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Speaker 1: and live strategist joining us from Singapore. It's always a

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Speaker 1: pleasure to speak with you. I know that you write

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Speaker 1: a lot for the blog, and I'm curious as to

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Speaker 1: what's top of mind for you today. What are you

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Speaker 1: kind of trying to feature here, what is the market

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Speaker 1: wrestling with and what are you discovering as you take

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Speaker 1: a closer look.

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Speaker 2: Yeah, there's a few headwinds really that's shaping how we're

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Speaker 2: looking at markets. So obviously there's the repricing of the

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Speaker 2: FED because we've seen an improvement in the US data.

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Speaker 2: But then there's also these other confluence of factors, including

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Speaker 2: the US elections, where people are on pause here in

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Speaker 2: Asia trying to figure out how does this affect Asian markets,

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Speaker 2: what are the implications of let's say, a higher fiscal

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Speaker 2: deficit or the occasions of potential tariffs. And then, of

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Speaker 2: course you still have the fundamental backdrop, so you still

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Speaker 2: have to focus on the labor market report, which is

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Speaker 2: coming next week. You have a busy earning season, So

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Speaker 2: there's a whole number of things stacking up that's not

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Speaker 2: giving Asian markets a chance to really breathe. And then,

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Speaker 2: of course you still have China that's hanging in the wings,

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Speaker 2: where we're still waiting for the NPC Standing Committee and

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Speaker 2: some of their decisions and how that will affect the

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Speaker 2: next phase of the implementation of the stimulus that they

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Speaker 2: had are originally planned.

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Speaker 1: So what are people saying about the stimulus that we

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Speaker 1: are aware of so far, the programs that have been announced,

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Speaker 1: and I know in many cases the actual program itself

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Speaker 1: has not been implemented. We're waiting for that. But do

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Speaker 1: people really, the people that you speak with, do they

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Speaker 1: believe that this is going to have a fundamental shift

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Speaker 1: in psychology where the investment community, where the retail community

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Speaker 1: is concerned, hubers are concerned. Is it going to move

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Speaker 1: the needle at all?

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Speaker 2: Yeah, it really comes down to what they're going to

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Speaker 2: do on the property market, right, especially on the retail side.

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Speaker 2: For the remember how involved the retail sector in China

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Speaker 2: is in their own equity markets, and they've lost a

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Speaker 2: lot of money on their property. So if they haven't

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Speaker 2: seen that recovery come through, or if they haven't seen

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Speaker 2: anything come through on the property market, that's still going

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Speaker 2: to weigh on sentiment. And then of course for foreign investors,

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Speaker 2: you're still thinking about, Okay, how are they managing the

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Speaker 2: property sector, how are they going to boost consumer demand?

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Speaker 2: And then on top of that, it's what's going to

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Speaker 2: happen between US China relations. So and then of course

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Speaker 2: you have this report that came out this morning about

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Speaker 2: China stimulus being insufficient from the IMF in terms of

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Speaker 2: improving and curbing you know, deflationary risks, and that's quite

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Speaker 2: and they're saying that what they've set out is not enough.

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Speaker 1: It's interesting. I can't tell you the number of conversations

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Speaker 1: that I've had on this topic where the question that

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Speaker 1: comes into my mind is can China basically fall into

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Speaker 1: the same trap that Japan fell into for three decades?

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Speaker 1: And that's a real debate. Some people say no way,

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Speaker 1: China is a very different economy, but many people say yes,

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Speaker 1: the analog is sufficient and China is running the risk

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Speaker 1: of remaining in deflation for a substantial period of time.

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Speaker 2: Yeah, the similarities are really hard to ignore. At the

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Speaker 2: end of the day, between what Japan experienced in the

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Speaker 2: eighties and nineties versus what we're seeing with Japan today,

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Speaker 2: and a lot of it has to do with we

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Speaker 2: can't forget they had high debt, deflation and then of

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Speaker 2: course depressed consumer confidence. That's what Japan had during their time.

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Speaker 2: That's what we're seeing now with China. So it's hard

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Speaker 2: not to draw the similarities unless you see really aggressive

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Speaker 2: stimulus coming through from China, which really we haven't seen

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Speaker 2: yet to delay some of these concerns and to ignore

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Speaker 2: the potential Japanification of China.

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Speaker 1: Let's stay with Japan for a moment, because this yen

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Speaker 1: has been dramatically weakened in the last several days. I

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Speaker 1: think earlier today we traded on the week side of

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Speaker 1: one point fifty two against the dollar. I know we

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Speaker 1: have a BOJ meeting around the corner. I haven't heard

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Speaker 1: of anyone that's expecting a move from the Bank of Japan.

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Speaker 1: So we are looking for a period of time when

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Speaker 1: you got weakness in the end and maybe intervention on

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Speaker 1: the part of the Ministry of Finance. Is that what

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Speaker 1: we're looking at.

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Speaker 2: Yeah, for now, we're seeing a lot of verbal intervention

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Speaker 2: coming through right just a little bit of jaw boning

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Speaker 2: to talk down to ensure that the end doesn't go

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Speaker 2: two week but it's only it can only help for

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Speaker 2: such a period of time, right, it has its limits.

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Speaker 2: I think what the what the main thing is for Japan.

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Speaker 2: Obviously the key one of the biggest factors that's really

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Speaker 2: impacted the end has been the repricing of the fet

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Speaker 2: that's been first and foremost. The second impact has been

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Speaker 2: coming from the concerns about politics. If LDP doesn't have

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Speaker 2: a clear mandate, then you just leave a vacuum in

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Speaker 2: terms of what the BOJ is going to do in

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Speaker 2: terms of how are they going to move ahead with

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Speaker 2: policy if there's increased political volatility, and I think that's

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Speaker 2: also weighing on sentiment of the en and of course

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Speaker 2: you're seeing just higher volatility with the end.

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Speaker 1: But there's also an inflation story that's been happening in China,

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Speaker 1: and this is something that the BOJ has been waiting

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Speaker 1: for years to occur. It's happened. It's been happening now

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Speaker 1: for two years it seems like where inflation has been

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Speaker 1: above that two percent target. What do we know about

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Speaker 1: the inflation story in Japan right now? Particularly if you

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Speaker 1: look at a currency that's going to continue to allow

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Speaker 1: for the importation of inflation into the Japanese economy.

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Speaker 3: Yeah.

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Speaker 2: Actually, it's really interesting. If you chart let's say, Japan

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Speaker 2: CPI versus versus the yen, it's this perfect relationship, obviously

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Speaker 2: indicating that you know, the much of what has been

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Speaker 2: driving inflation has been the yen weakness. And then you've

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Speaker 2: had some of the numbers coming out today for October

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Speaker 2: CPI on for the Tokyo CPI numbers, they were still

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Speaker 2: above two percent, but they are creeping up in terms

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Speaker 2: of being higher than a little bit higher than expectations.

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Speaker 2: So if and people are feeling the pain on the ground,

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Speaker 2: so if they don't do something, you could see inflation

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Speaker 2: really getting out of control. And that puts a real

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Speaker 2: conundrum for the BOJ because if you, let's say, have

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Speaker 2: political potential political instability or weak government versus higher inflation,

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Speaker 2: how do you manage that balance?

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Speaker 1: So no change in BOJ policy next week, but this week?

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Speaker 4: No?

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Speaker 3: Okay?

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Speaker 1: So is it fair to say that we do get

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Speaker 1: maybe some action either in December or January? Is that

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Speaker 1: what the market is telling us?

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Speaker 2: Market's telling us a little bit later, Oh, they're still

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Speaker 2: not believing that they're looking for any sort of changes

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Speaker 2: from the boj So if we look at let's say,

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Speaker 2: what the market is pricing, they're not looking for really

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Speaker 2: any moves. Let's say, you know, another fifteen basis point

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Speaker 2: move until January for let's say, for looking for a

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Speaker 2: fifteen basis point move, Okay, until January. So there's still

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Speaker 2: some time where the market is. And even boj Uada said,

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Speaker 2: you know times on our side only recently, so there's

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Speaker 2: still something. But I think in terms of what if

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Speaker 2: the if the pressure from the currency and the currency

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Speaker 2: weakness becomes too much, they may be forced to act

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Speaker 2: sooner rather than later.

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Speaker 1: Yeah, it's been remarkable to see how quickly the end

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Speaker 1: got here to around one fifty two against the dollar. Mary,

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Speaker 1: thank you so much for being with us. It's always

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Speaker 1: a pleasure. Bloomberg's Mary Nicola m Live Strategists, joining us

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Speaker 1: from Singapore here on the Daybreak Asia podcast. Joining us

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Speaker 1: now is Gene Goldman. He is the chief investment officer

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Speaker 1: at Satara Financial Group. Joining us from Los Angeles. Gene,

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Speaker 1: thanks for making time to chat. Let's begin with the

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Speaker 1: FED because lately the market has been kind of debating

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Speaker 1: the degree to which the FED is going to potentially

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Speaker 1: scale back its pace of rate cuts. Where are you

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Speaker 1: in this debate right now?

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Speaker 4: When the FED came out with fifty basis points in September,

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Speaker 4: I was shocked. I mean I didn't think they should

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Speaker 4: do that. Think about this, you know, you know, the

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Speaker 4: employee picture was not as bad as the FED had believed.

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Speaker 4: You know, yes, the unemployment rate had picked up a bit,

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Speaker 4: but that was due to labor force participation. Jobs claims

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Speaker 4: are still pretty low. Payroll report looks pretty good, The

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Speaker 4: entire economy is not that bad. Retail sales, the Economic

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Speaker 4: Surprise Index GDP, I can rattle off tons and tons

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Speaker 4: of data that says that the economy is better than expected.

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Speaker 4: What worries me is that the FED is stimulating an

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Speaker 4: economy that does not need to be stimulated. And what

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Speaker 4: happened to the Feds focused on data dependency?

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Speaker 3: Right? Where'd that go? So? I do think the Fed

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Speaker 3: will need a lower.

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Speaker 4: Rates still because we're still pretty restrictive at two and

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Speaker 4: a quarter over over inflation.

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Speaker 3: But they've got to slow it down.

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Speaker 4: I suspect maybe a quarter in November and a quarter

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Speaker 4: in December, but that fifty in September was ridiculous.

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Speaker 1: So if the market has to recalibrate the idea that

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Speaker 1: the Fed is going to be accommodative, I mean to

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Speaker 1: say that maybe it was, as you said, overly aggressive

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Speaker 1: in estimating rate cuts. Is that a risk for the

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Speaker 1: equity space?

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Speaker 4: It is definitely a risk, and the bond market is

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Speaker 4: screaming it's a risk. Look at the ten year treasure yield,

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Speaker 4: for example, right before the Fed cut rates was at

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Speaker 4: three sixty two. Today I'm looking at my Bloomberg it's

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Speaker 4: at four to nineteen. That's a big surge in about

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Speaker 4: a month. That is a scary searche in just ten

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Speaker 4: year yields. And you see what happened. You know, mortgage rates,

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Speaker 4: as we all know, are tied to the ten year

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Speaker 4: treasure yield. Mortgage rates move higher, closer to seven percent,

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Speaker 4: slowed down mortgage applications. You add this with rising geopolitical risks,

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Speaker 4: election uncertainty. Third quarter earnings are okay, and then you

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Speaker 4: add on a little bit of you'll sprinkle in a

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Speaker 4: little evaluations and concentration. We have ourselves a setup for

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Speaker 4: a big volatile period coming up.

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Speaker 1: So what industry groups are most vulnerable right now in

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Speaker 1: your estimation.

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Speaker 4: Clearly the high valuation and the high concentration industry group.

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Speaker 4: So clearly technology communications services, the big ones, commune, consumer discretionary.

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Speaker 4: I think those areas are right for a pullback. I

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Speaker 4: think the areas, on the other hand, that look pretty attractive.

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Speaker 4: You really defensive growth areas like healthcare. Healthcare is one

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Speaker 4: of our favorite sectors. I think it's defensive growth does

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Speaker 4: well under a divided government, and neither Harris nor Trump

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Speaker 4: are proposing any major healthcare reform. Also value sectors. Small

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Speaker 4: cap looks pretty good. We see whenever the Fed cuts rates,

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Speaker 4: market breath tends to widen, and you see, for example,

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Speaker 4: equal weight SMP is outperforming market cap SMP over the

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Speaker 4: last few months. Great, great news. So we would look

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Speaker 4: at value small cap, defensive growth and a great area.

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Speaker 4: I think it's pretty attractive as financials. Yield curve steepening

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Speaker 4: looks pretty good for financials. Banks are going to make

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Speaker 4: more money in this type of environment.

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Speaker 1: Are you seeing opportunities offshore right now? Europe seems to

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Speaker 1: have the inflation story under control. Maybe some rate cuts

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Speaker 1: are in store, and that may be a way of

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Speaker 1: revitalizing growth on the continent, and we've been talking a

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Speaker 1: lot about the stimulus programs being unleashed by Beijing and

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Speaker 1: perhaps a growth spurt that may occur in China. I'm

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Speaker 1: curious as to whether or not you're exposed offshore right

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Speaker 1: now and to what extent.

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Speaker 4: Yeah, so we're neutral in both areas, both emerging markets

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Speaker 4: and international relative to our benchmarks. You know, both areas

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Speaker 4: are pretty good from a diversification standwent. You do want

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Speaker 4: some exposure. We're not ready yet to jump full both

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Speaker 4: feed in yet, just because we want to see see

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Speaker 4: a weaker dollar. A week your dollar will benefit both

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Speaker 4: investing in both areas. We don't see the weaker dollar yet.

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Speaker 4: The dollar has weaken a little bit, but we want

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Speaker 4: to see more boom and that weakness of the dollar

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Speaker 4: and to get that. Once we get that, that will

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Speaker 4: help us drive our investment outside.

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Speaker 3: In the US.

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Speaker 4: I think China, China, you know, has a pretty good

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Speaker 4: surge in the markets really on monetary policy, but we

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Speaker 4: need to see more in fiscal policy. And you think

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Speaker 4: about China, China has this big overhang. You know, the

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Speaker 4: lingering one child policy is really hampered their consumer spending.

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Speaker 4: And China is trying to transform, as we know, from

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Speaker 4: a manufacturing to a consumer. They're trying monetary stimulus, but

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Speaker 4: fiscal stimulus is not there yet, so we're not ready

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Speaker 4: yet to jump in emerging markets really full of board.

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Speaker 1: Yet we're getting very close to the US presidential election.

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Speaker 1: How do you feel about this as a factor in

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Speaker 1: determining the direction of the market going forward.

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Speaker 3: That's a great question. First of all, you know the

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Speaker 3: old story.

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Speaker 4: Listen during an election year, if you like, the last

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Speaker 4: twenty election years, the stock market has been positive in

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Speaker 4: eighteen in the last twenty years. We don't see that

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Speaker 4: being a difference. We do think that the stock market

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Speaker 4: tends to ignore the election. But what that said, though, historically,

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Speaker 4: what you've seen is that usually the first two months

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Speaker 4: going into an election, you know, there's a lot of

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Speaker 4: volatility stocks on average, followed by about sixty basis points,

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Speaker 4: But the key period from election day to inauguration, on average,

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Speaker 4: stock market returns about one and a half percent. So

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Speaker 4: we do see some solace in the fact that whoever

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Speaker 4: wins the election is that at least we find out

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Speaker 4: who wins the election. That's actually pretty good news. And

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Speaker 4: you're seeing a lot of companies out there who have

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Speaker 4: come out and said, you know what, we are going

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Speaker 4: to delay projects, We're going to delay hiring, we're going

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Speaker 4: to delay whatever it is because we are unsure of

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Speaker 4: who's going to win. But the good news is that

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Speaker 4: whoever wins, we're likely going to see a dividing government.

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Speaker 4: So really, at the end of the day, I hate

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Speaker 4: to stay this, but nothing gets done. Markets, you're gonna

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Speaker 4: like that. So I think near term volatility. But the

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Speaker 4: end of the day, just like we've been saying, you know,

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Speaker 4: with the recent pullbacks, any pullback will be a buying

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Speaker 4: opportunity because again, nothing will get done and lots of

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Speaker 4: cash on the sideline waiting to get in at.

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Speaker 3: A better valuation.

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Speaker 1: Boy, I'm glad you mentioned that point because I was

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Speaker 1: reading an article on Bloomberg today. A stampede of cash

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Speaker 1: has been flowing at the US money market funds in

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Speaker 1: the last week. I think something a little over forty

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Speaker 1: billion dollars moving into money market funds. What will it

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Speaker 1: take for that money to come off the sidelines and

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Speaker 1: be put to work in either the equity market or

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Speaker 1: in the bond market.

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Speaker 4: Yeah, so we look at so there's six trillion of

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Speaker 4: money market assets on the sideline. But we also look

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Speaker 4: at money market assets and cash and savings and bank

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Speaker 4: accounts because we do think there's some high correlation there,

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Speaker 4: and that's twenty four trillion dollars what we think will

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Speaker 4: happen if we have a pullback, if we have better valuations,

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Speaker 4: just like we saw in the almost correction in July,

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Speaker 4: just like we saw in the correction in October of

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Speaker 4: last year, that money is waiting to come in for

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Speaker 4: a better valuation. We do expect some of the money

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Speaker 4: will move in as prices come back in line to

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Speaker 4: long term expectations. You know, right now we have high valuations.

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Speaker 4: The pe ratio on the SMP is what twenty two

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Speaker 4: times Ford earnings, high expectations, high concentration. All this is

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Speaker 4: kind of a mix for volatility and markets. Money is

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Speaker 4: weighing in the sideline to move in slowly. On the

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Speaker 4: fixed income side, you know, I think the good news

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Speaker 4: is that if you look at bond fund inflows this year,

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Speaker 4: there's only been one week that's been in an outflow,

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Speaker 4: so there's still a lot of demand for bonds. I

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Speaker 4: just think right now there's a lot of people waiting

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Speaker 4: on the sideline, worry about duration risk. So what we're

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Speaker 4: telling our clients today good news. You know, bonds offer

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Speaker 4: an attractive yield relative to inflation over inflation. But at

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Speaker 4: the same time, though, we do think yields will come

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Speaker 4: down eventually, especially as a FEDS are saying, you know,

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Speaker 4: raize cut rates. I think you look at less next year.

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Speaker 4: You're two years the you know, the ending rate for

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Speaker 4: the FED is a two point nine to three percent,

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Speaker 4: maybe a little bit higher. But regardless, long term rates

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Speaker 4: are coming down. But we'll see what happens.

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Speaker 1: Yeah, there's still a debate over where the terminal rate is.

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Speaker 1: Do you have a sense of that.

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Speaker 4: If you look at the let's say the FED, let's

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Speaker 4: believe the FED, the fest is two point nine to three.

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Speaker 4: I do think it's going to be a little bit

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Speaker 4: higher than that because let's just say that we have

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Speaker 4: more government spending.

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Speaker 3: Let's say that. You know, you look at for example, the.

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Speaker 4: Government the end of this fiscal year, you know, we're

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Speaker 4: at at one point eight trillion dollars, third highest deficit

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Speaker 4: on record over twenty twenty and twenty twenty one, third

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Speaker 4: highest year. Nine hundred and fifty of that billion dollars

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Speaker 4: of that was for treasury payments. We do see a

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Speaker 4: lot of treasury payments coming in. We do see a

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Speaker 4: lot of debt a love yield coming into the market.

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Speaker 4: But again it comes a point when you're thinking it

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Speaker 4: yield over over inflation. So there's some pretty attractive areas.

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Speaker 4: So what we've been telling our clients is it's okay

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Speaker 4: to be you know, strong and durational, you know interest

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Speaker 4: rate sensitivity, but it comes to point you need to

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Speaker 4: ratchet that down a little bit, especially if the yield

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Speaker 4: curve steepens and there some attractive opportunities on the shorter

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Speaker 4: end of the yell curve.

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Speaker 1: Gene will leave it there. Thanks so much for taking

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Speaker 1: time to be on the Daybreak Asia podcast. Jeane Goldman,

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Speaker 1: chief investment Officer at Satara Financial Group, joining us from

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Speaker 1: Los Angeles. This is Bloomberg day Break Asia, your morning

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