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Speaker 1: Who you put your trust in matters. Investors have put

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Speaker 1: their trust in independent registered investment advisors to the tune

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Speaker 1: of four trillion dollars. Why learn more and find your

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Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast.

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Speaker 1: I'm Tom Keene with David Gura. Daily we bring you

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Speaker 1: insight from the best in economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot com, and

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Speaker 1: of course, on the Bloomberg YEP. I am Michael McKee.

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Speaker 1: I am not Tom Keane. Tom Keane is on vacation today,

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Speaker 1: nor am I David Gura. He is on vacation as well.

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Speaker 1: How that happened is the subject to a presidential investigation,

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Speaker 1: and we will let you know probably sometime on Friday,

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Speaker 1: when the two of them have had the complete week off.

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Speaker 1: Joining me instead, Francine Lakwa from our Bloomberg London bureau,

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Speaker 1: as we bring you Bloomberg Surveillance. Well, Francine, it is

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Speaker 1: an honor to be with you again. It's like alumni

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Speaker 1: reunion here for the two of us, and we get

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Speaker 1: to play exactly the two of them. How they both

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Speaker 1: managed to get the week off. As you know, it's

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Speaker 1: kind of amazing to us, and how they did not

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Speaker 1: offer for you and I to do this show live

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Speaker 1: from Hawaii with Barack Obama and shinzo Abe or Florida

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Speaker 1: or Florida any place war so we get started on

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Speaker 1: this weekend. I might mention, friend, and when you and

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Speaker 1: I started with Bloomberg surveillance on TV, futures in the

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Speaker 1: US were lower. They are higher now, as I mentioned,

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Speaker 1: and that suggests that maybe we see another rise this week.

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Speaker 1: Michael hound as a chairman and founder of Holland and

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Speaker 1: Cup Money. I showed a chart earlier on Bloomberg Television

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Speaker 1: that basically showed since election Day, Michael, the stock market

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Speaker 1: that three major indexes, the TAO, SNP, and NASDAC had

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Speaker 1: all gone rocketing up right after the election and then

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Speaker 1: flattened out. We're getting games, but they're very small now.

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Speaker 1: So as we go through the rest of this year,

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Speaker 1: the four days remaining to set your portfolio for your

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Speaker 1: year end close and then into two thousand seventeen, does

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Speaker 1: the Trump rally continue or are we finally at a

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Speaker 1: point where Okay, we've priced in an awful lot. Let's

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Speaker 1: wait and see what happens. Uh, the adult Innis would

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Speaker 1: would go for the ladder, Michael, you'd you'd say that

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Speaker 1: we've we've come a very long way, and why don't

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Speaker 1: we just consolidate these gays. The history, however, argues against that.

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Speaker 1: And the history is that the last five trading days

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Speaker 1: of the year in the US market are decidedly up.

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Speaker 1: I mean, you go back to and it's a it's

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Speaker 1: it's pretty uncanny. Doesn't mean that that it's every year.

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Speaker 1: It doesn't mean it will happen this year. But history

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Speaker 1: would argue that the last five days are up. What

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Speaker 1: is the one thing, Michael, that you worry about seventeen

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Speaker 1: I know we started discussing it also on television. But

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Speaker 1: are we pricing things wrong? Are we miscalculating risk? Yeah, Francine,

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Speaker 1: we we made a slight reference in the early hour

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Speaker 1: about the uh, the fulfillment of the promises that the

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Speaker 1: market is looking for from the new Trump administration. If

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Speaker 1: there's a serious glitch in in the activation of these

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Speaker 1: these things, absolutely the market, the market we take that,

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Speaker 1: I think very badly. And and the other thing is

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Speaker 1: is a trade war with China. When when Trump appointed

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Speaker 1: Mr Navarro to this new trade Council which he has created.

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Speaker 1: Mr Navarro is a serious critic of China's written two

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Speaker 1: books about it, and he's uh someone if Trump listens

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Speaker 1: to him, we could see I don't think we're going

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Speaker 1: to get a trade war, but if we got a

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Speaker 1: trade war, that would that would actually be fairly serious

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Speaker 1: thing smooth Holly uh re ducts. One of the interesting

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Speaker 1: questions that comes up is how much more can we

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Speaker 1: get out of a Trump rally if it's going to continue?

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Speaker 1: When you consider that the S and P multiple is

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Speaker 1: twenty two. Now, everybody says, well, you know, rond Reagan

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Speaker 1: came to office and ignited a big stock market rally,

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Speaker 1: but the multiple then was you know, one or two

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Speaker 1: because we were in the vulgar era and the market

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Speaker 1: crash during the two back to back processions. The only

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Speaker 1: way we get a serious amount of money made in

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Speaker 1: the stock market from here, Michael, is for um, the

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Speaker 1: companies who are going to be beneficiaries or the prospective

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Speaker 1: Trump changes, for them to have much higher earnings. And

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Speaker 1: that is a possibility. That's in fact, that's not a

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Speaker 1: not a bad bet at this point. Doesn't mean it

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Speaker 1: will happen, but that's that's where you have to look

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Speaker 1: for it. But higher earnings, Michael, what's the catalyst for that? Uh?

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Speaker 1: Just greater econom coomic growth around the world, Francy. And

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Speaker 1: that's why the trade war thing I referred to a

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Speaker 1: second ago is such a nemesis to this thought process.

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Speaker 1: If we actually get some comedy among the large powers

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Speaker 1: over the next economic powers over the next couple of years,

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Speaker 1: and we actually get some upward proportion of of of

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Speaker 1: economic growth, those those kinds of things, and this comes

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Speaker 1: it's almost become a cliche in the last few months,

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Speaker 1: but it's um it does go back to less regulation,

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Speaker 1: lower taxes and so on. Well, if we get that,

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Speaker 1: who benefits the most we've seen since the election financials up.

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Speaker 1: I gotta wonder how much more you can squeeze out

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Speaker 1: of that, even with a rollback of Dodd Frank. But

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Speaker 1: is that where you put your money? Well, the one

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Speaker 1: of the reasons of basic reasons, Michael, for the financials

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Speaker 1: doing so well is interest rates going up because people

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Speaker 1: think we'll get a little bit of inflation a little

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Speaker 1: more growth. If neither of those occur, if we get

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Speaker 1: no one lation and we get no growth, of course,

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Speaker 1: you're gonna lose money in the financials for at least

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Speaker 1: for that part of why they're up um. I think

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Speaker 1: it's it's not a bad bet that you could get

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Speaker 1: a three percent handle on the ten year if this

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Speaker 1: continues in the positive direction. Uh, if you continue to

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Speaker 1: get some economic growth that bespeaks higher earnings and greater

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Speaker 1: demand for labor, you could get some more inflation. So

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Speaker 1: both of those things would argue that the money the

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Speaker 1: Brian moren to answer this world and Jamie Diamonds are

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Speaker 1: going to make more money because they're going to have

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Speaker 1: an interest rate structure they can invest in. You know

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Speaker 1: this as well as anybody more money friend for Jamie

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Speaker 1: Diamond what a surprise. But there you go the problem.

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Speaker 1: And and that is also coupled with regulation or deregulation

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Speaker 1: this case which we talked about a little bit, Michael.

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Speaker 1: But overall, are you concerned about inflation coming back worldwide,

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Speaker 1: which would also mean that certain countries that can't really

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Speaker 1: afford to raise rights need to because of rampid inflation.

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Speaker 1: It's interesting the way your position the question for it's it.

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Speaker 1: I think that technology today is at a point where

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Speaker 1: it by itself keeps inflation from becoming the nemesis that

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Speaker 1: it was back in Michael referred to the seventies before. Um,

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Speaker 1: we we had a situation there which supply and amount

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Speaker 1: of commodities and labor we were all screwed up today

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Speaker 1: because of technology. And it just popped into my head

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Speaker 1: three D printing. I mean, we just have so many

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Speaker 1: ways of keeping prices down and cost down. I don't

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Speaker 1: think inflation gets out of hand. That's that's my guess.

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Speaker 1: Uh Neil Data, who's coming on next from Renaissance Macro,

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Speaker 1: would argue with you and say, we get inflation because

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Speaker 1: just mechanically, with oil prices going up and the base

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Speaker 1: effects happening, we're going to see closer to three pc inflation.

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Speaker 1: Can the market handle that? You've answered my question with

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Speaker 1: your question because the fracking technology today is going to

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Speaker 1: keep a lid on energy prices. Just there's no question.

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Speaker 1: We're only ten percent into this fracking thing by some

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Speaker 1: some estimates of experts. You know a lot more about

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Speaker 1: the energy industry than I do. Michael, Um, Yeah, I

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Speaker 1: think there's there's I think are we going to get

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Speaker 1: some more inflation? Yes? Do we get a lot more inflation?

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Speaker 1: I think it's really highly improbable. What do you what

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Speaker 1: do you what do you think the upper limit to

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Speaker 1: what is priced in in terms of inflation right now

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Speaker 1: two to three, which is where we'll be at the

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Speaker 1: end of well, Neil says three percent at the end

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Speaker 1: of the year. Yeah, I think that's fair. Do I

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Speaker 1: think we're at four or five six? I don't think so.

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Speaker 1: I think I think it's just the opposite. I think

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Speaker 1: the pressure will continue to be to try to get

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Speaker 1: it up there. But with with the grudging moves upward,

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Speaker 1: Michael Holland making the first prediction of yeah, it'll be

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Speaker 1: wrong within days. We'll come back. We'll come back three

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Speaker 1: sive days from now. Check with you again, Michael Holland,

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Speaker 1: the chairman of Holland and Company. Now, he's great to

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Speaker 1: kick off the last week of the year. I'm sure

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Speaker 1: your portfolio is up, you know, multiples. It's been a

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Speaker 1: good year. All right, there's your investor letter from Michael Holland,

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Speaker 1: the chairman of Holland that company. Neil Dota has not

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Speaker 1: taken the entire week off. He's taking the rest of

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Speaker 1: the You're going to go visit Francine. You're going to London.

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Speaker 1: I am to to take advantage of the lower bound.

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Speaker 1: He's chief economist at Renaissance Macro. And you put you

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Speaker 1: on the spot right away here. We just had Michael

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Speaker 1: holland on says there's no way we're gonna get three

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Speaker 1: to four percent inflation next year. But you say we

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Speaker 1: are going to see higher inflation. Where do you see

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Speaker 1: it going? Well, I mean, as I say, um, we're

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Speaker 1: gonna get there almost mechanically sometimes where up to three

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Speaker 1: percent headline CPI inflation almost McCann nically um sometime in

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Speaker 1: the first quarter of next year because of favorable base effects.

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Speaker 1: So the fact that energy prices are rising off the

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Speaker 1: February lows tells you that once we lap those base effects,

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Speaker 1: you're gonna get a push in headline inflation. But of course,

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Speaker 1: what what I'm more focused on is what's going on

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Speaker 1: with core inflation. And you know, cor inflation appears to

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Speaker 1: be moving higher. Um, that's a function of obviously rents.

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Speaker 1: So sir, what's going on in this domestic services economy

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Speaker 1: because stronger wage inflation is pushing up part pressure on

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Speaker 1: service prices UM and to some extent, medical care inflation,

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Speaker 1: which had been very very weak for a long time UH,

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Speaker 1: and now appears to be moving up into the right

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Speaker 1: So UM. You know, you take that along with the

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Speaker 1: fact that unemployment has moved lower. UH, Inflation expectations UM

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Speaker 1: appear to be UM stabilizing, moving up to some extent UM.

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Speaker 1: And remember, Mike, a lot of what drives inflation is

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Speaker 1: just inertia, right, So you know, what is inflation going

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Speaker 1: to be tomorrow? Basically what it was yesterday. So the

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Speaker 1: fact that it's moving higher, I think there's a momentum there. Yes,

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Speaker 1: is this three inflation worldwide or is it just on America? Well,

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Speaker 1: I don't. I don't think we're going to get fine, right,

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Speaker 1: But the rest of the world can't cope at this

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Speaker 1: point with three four percent inflation, or can it? I mean,

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Speaker 1: I think that's what the that's what the rest of

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Speaker 1: the world needs to some extent. I mean, I don't

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Speaker 1: think we're gonna get three or four percent inflation in

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Speaker 1: the US on the core, nor do I think we'll

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Speaker 1: see it on the headline in a sustain way, but

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Speaker 1: we'll probably get above the FEDS inflation target of two UM.

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Speaker 1: But I think that's actually what the global economy needs.

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Speaker 1: I mean, the global economy is very weak, and to

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Speaker 1: some extent um, you know, the FED is um acting

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Speaker 1: in some respects as a backstop for the global economy.

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Speaker 1: And in that kind of environment, I mean, what should

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Speaker 1: the FED do? You basically let the U s economy

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Speaker 1: run hot um and allow inflation in the US to

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Speaker 1: drift a bit higher to offset the disinflationary pressures everywhere

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Speaker 1: else in the world. And I think the FED is

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Speaker 1: doing that to some extent um. That should I mean,

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Speaker 1: I know, the dollar strengthened of laid, but that should

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Speaker 1: put some downward pressure on the dollar, the dovish FED,

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Speaker 1: and and and that'll I think that'll bring some relief

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Speaker 1: to the global economy. And remember the global economy. I mean,

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Speaker 1: we were going into the year with horror stories about

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Speaker 1: the global economy. All of these all of these forecasts

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Speaker 1: have been absolutely wrong. I mean, we need to sort

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Speaker 1: of preface all of these conversations with that fact. I mean,

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Speaker 1: if you look at the global manufacturing p M I

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Speaker 1: for example, I mean, the global economy UM is growing

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Speaker 1: above trend for the first time in at least eighteen months.

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Speaker 1: End of discussion, Well, does this are you suggesting the

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Speaker 1: two thousand and seventeen will be a new paradigm. I

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Speaker 1: hesitate to use the word new normal, but we've got

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Speaker 1: into every year since the recession ended thinking things would

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Speaker 1: be good, then getting gobsmacked in the first quarter by something.

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Speaker 1: Is two thousand seventeen going to be different? I mean,

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Speaker 1: let's hope it doesn't snow in New York, right? Um? Well, no,

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Speaker 1: I mean I think that. Well, I mean that is

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Speaker 1: true to some extent. But remember, I mean, you know

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Speaker 1: in some respects that I mean seen looks a little

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Speaker 1: bit different than previous years, right. I mean, for for one,

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Speaker 1: the markets and the FED are going into pretty much

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Speaker 1: in line, right. I mean, I remember last year Stanley

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Speaker 1: Fisher was saying four hikes were in the ballpark, the

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Speaker 1: market was saying, you know, barely two. Obviously we know

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Speaker 1: the markets were closer to what ended up happening. UM.

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Speaker 1: So I think that's the first thing is that remember

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Speaker 1: that the markets and the FED are are aligned in

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Speaker 1: terms of the forward market and the FED dots for

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Speaker 1: the first time in years. UM, and that mitigates some

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Speaker 1: of the risk that you're talking about. Um. The other

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Speaker 1: thing to keep in mind is that there's no there's

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Speaker 1: no breakout expectation for growth among the consensus. I mean,

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Speaker 1: I think and if there's anything, there's a there's a

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Speaker 1: bit of complacence among the cull side consensus. I mean,

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Speaker 1: if you look at primary dealer forecasts in your own

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Speaker 1: Bloomberg Consensus poll um, you know, no one's expecting growth

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Speaker 1: above you know, to two point four percent among the

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Speaker 1: major primary dealers. I mean they're all sort of telling

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Speaker 1: your growth is going to be about what we solve

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Speaker 1: the last six or seven years, which is around two

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Speaker 1: point one to two point two. I think that's a mistake.

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Speaker 1: I mean, I think that there's a risk that growth

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Speaker 1: actually surprises on the upside. I mean, remember that inventories

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Speaker 1: have room to build. Capital spending appears to be improving. Obviously,

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Speaker 1: consumer confidence is strong, which implies stronger consumer spending. You know,

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Speaker 1: what are the chances of something ugly? So I'm thinking

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Speaker 1: of some kind of credit crunch in China or someone

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Speaker 1: coming into power in Europe for example, that spells the

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Speaker 1: end of the European project. I mean that's always a risk.

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Speaker 1: I mean, you know, you mentioned China. You know, China

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Speaker 1: is something we're watching. I mean, they've had about fifty

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Speaker 1: to sixty billion dollars of outflows over the last two months.

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Speaker 1: I mean, UM, you know, that's that's a lot, even

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Speaker 1: for China. Uh. Um, and it's hard to sustain that um.

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Speaker 1: In my view, UM, I do think to some extent

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Speaker 1: that risk is mitigated by the fact that commodity prices

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Speaker 1: are reflating and that's keeping real interest rates lower than

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Speaker 1: the otherwise would be in China, so that that that

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Speaker 1: sort of is helpful. UM. You know with respect to Europe, UM,

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Speaker 1: I mean, I think you're right. I mean, that's always

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Speaker 1: a risk, but we've been you know, it's not here

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Speaker 1: before materialized for a for for for a while. YEA,

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Speaker 1: thank you so much. Data. Their Renaissance macro research head

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Speaker 1: of US Economic Space is Bloomberg. Who you put your

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Speaker 1: trust in? Matters. Investors have put their trust in independent

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Speaker 1: registered investment advisors to the tune of four trillion dollars.

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Speaker 1: Why they see their role is to serve, not sell.

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Speaker 1: That's why Charles Schwab is committed to the success of

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Speaker 1: over seven thousand independent financial advisors who passionately dedicate themselves

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Speaker 1: to helping people achieve their financial goals. Learn more and

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Speaker 1: find your independent advisor dot com. Now let's get to

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Speaker 1: Jonathan Gullup. He's RBC Capital Markets at chief US market strategist. Jonathan,

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Speaker 1: great to have you on this Tuesday morning, a cold

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Speaker 1: but actually quite sunny day in London. I'm not sure

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Speaker 1: what New York is like, but I'm sure it's pretty

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Speaker 1: much the same, and I'm here in South Florida and

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Speaker 1: it's nice and fall me all right, Interviews over, We're

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Speaker 1: done and forget it, Jonathan. When you look at the

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Speaker 1: markets and when you look at the interest rates, but

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Speaker 1: inflation expectations really moving a lot of these markets to

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Speaker 1: record high. Is twenty seventeen going to be more of

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Speaker 1: the same or can it only go down from here? No?

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Speaker 1: I think it is going to be more of the same.

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Speaker 1: And if if we what everybody talks about is this

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Speaker 1: Trump rally really started well before Trump's election in July,

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Speaker 1: when interest rates bottom and inflation expectations bottomed. And the

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Speaker 1: underlying story here is that we have near a four

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Speaker 1: and a half percent unemployment rate and wage inflation is

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Speaker 1: naturally beginning to pick up, and that's really what's fueling

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Speaker 1: the change, and then obviously pro growth policies on top

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Speaker 1: of that are having an impact. You are well, you're

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Speaker 1: done in South Florida. You're not applying for a job,

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Speaker 1: are you? With the guy down there is hiring. No,

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Speaker 1: you'll have me back, Mike than Suder. Everybody wants you.

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Speaker 1: You are one of the most bullish people on Wall

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Speaker 1: Street about the coming year. Let me ask you though,

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Speaker 1: I mean, this is a question we've been asking all morning. Yes,

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Speaker 1: maybe there are there is the possibility we don't know

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Speaker 1: yet of the policies will be adopted that will boost growth.

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Speaker 1: But s andp earnings right now two times? So um,

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Speaker 1: how much more can you squeeze out of this route? Well?

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Speaker 1: I think there's actually, um, there's a little bit of

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Speaker 1: a five in those numbers, which is that everyone on

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Speaker 1: Wall Street expects her to be some Even if a

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Speaker 1: portion of the growth agenda gets put forward, people expect

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Speaker 1: there to be more of a positive hit to earnings.

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Speaker 1: So whether it be taxes or regulation um, you know,

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Speaker 1: or or fiscal spending um. But Wall Street analysts never

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Speaker 1: adjust their numbers until they have um specifics. So what

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Speaker 1: you have is a market or investors who were forced

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Speaker 1: to try to figure out what the likely courses, but

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Speaker 1: investors who are waiting. So the e is probably a

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Speaker 1: little bit understated, and therefore as a result that pe

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Speaker 1: or market valuation is nowhere near as ownerous as the

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Speaker 1: way you describe it. But isn't that everything all or

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Speaker 1: most of it priced in UM? You know, I'm not

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Speaker 1: sure that that that's the case, and I think that

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Speaker 1: it starts um with with the you know where we

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Speaker 1: started beginning, which is, if this thing is solely about

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Speaker 1: Trump policy and nothing else, I would argue that most

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Speaker 1: of it, not all, but most of it's probably priced

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Speaker 1: it um. And the reason I say that, for example,

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Speaker 1: is my estimate is that the tax proposal would probably

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Speaker 1: make something like an eight percent move in the stock market.

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Speaker 1: You'd probably get a couple of percent move from the

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Speaker 1: fact that interest rates are higher and that helps banks.

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Speaker 1: Maybe the energy companies are one or two percent higher

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Speaker 1: because oil prices have bounced off the bottom, and that's

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Speaker 1: better and than another couple from regulation. So when you

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Speaker 1: add that together, maybe we're halfway there. But what's underlying this,

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Speaker 1: I think, which even pushes it up more, is that

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Speaker 1: this really low inflation, low interest rates stagnation that we

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Speaker 1: had UM it kind of naturally comes to an end.

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Speaker 1: When you have unemployment well below I percent, you do

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Speaker 1: get naturally get some inflation that helps corporate sales and

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Speaker 1: things of that nature. And so you could get all

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Speaker 1: that I talked about just a second ago, which is

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Speaker 1: probably tend to fi upside post election, and then get

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Speaker 1: additional boost from the fact that you get reflation in

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Speaker 1: the broader economy neil data from Renaissance. Bacro was making

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Speaker 1: kind of both points earlier on Surveillance when he noted, yes,

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Speaker 1: we're going to get more inflation just mathematically because of

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Speaker 1: the base effects, but also with energy going up. But

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Speaker 1: he also noted that there's a lot of people have

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Speaker 1: been attributing the stock market rally to the Trump election,

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Speaker 1: but they are the economic fundamentals have gotten a lot

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Speaker 1: better as well, So a certain amount of this is

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Speaker 1: not Trump and the economy can keep improving well. And

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Speaker 1: that's and that was my and that's that's my point.

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Speaker 1: I mean, we may have come to it slightly differently, um,

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Speaker 1: but the market had already begun to move since July.

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Speaker 1: And you also have to remember if you look at

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Speaker 1: the business optimism, what you know, n f I be

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Speaker 1: a small business optimism, you have UM measures of of

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Speaker 1: surveys on larger business optimism. You have consumer surveys, they're

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Speaker 1: all they've they've all turned more positive. Now I would

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Speaker 1: assume that that much of that has to do with

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Speaker 1: um change in the election outcome, but some of that

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Speaker 1: may be that that we are seeing some wage increases

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Speaker 1: and that does make people feel better. And also when

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Speaker 1: you have a tight unemployment rate, it also means that

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Speaker 1: if you want to find a job, there there's a

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Speaker 1: better balance in the favor of people um looking for

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Speaker 1: work as opposed to jobs available. So all of that

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Speaker 1: should naturally boost confidence and that also should spur things.

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Speaker 1: So I think that seventeen really is making up for

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Speaker 1: a good year, and I think the risk here is

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Speaker 1: that you sit on the sidelines and what will be

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Speaker 1: a pretty good year for from markets. Now, if you

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Speaker 1: were a bond investor, I wouldn't be saying the same things,

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Speaker 1: but for stock investor for sure. But what I'm struggling

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Speaker 1: to understand, Jonathan, is and I understand the premise, and

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Speaker 1: I understand what you know, how you explain it, But

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Speaker 1: it's such an important change in your government in the

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Speaker 1: US that at this point is it not too soon

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Speaker 1: to understand exactly where it's going, what the policies will

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Speaker 1: be yeah, And I think that's a great question, and

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Speaker 1: I'm hearing it every day from the largest, not sophisticated institutions.

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Speaker 1: But the bottom line is, if you're sitting running a

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Speaker 1: pool of assets, whether it's for your family or whether

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Speaker 1: you're running you know, billions of dollars for a pension

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Speaker 1: plan or a mutual fund, you have to make a

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Speaker 1: best guess on the path of things forward right now.

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Speaker 1: And you don't have the luxury of saying, well, let's

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Speaker 1: wait until everything is in and then let's try to

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Speaker 1: figure out what to do. So the question you have

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Speaker 1: to say is, okay, let's just let's just look at

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Speaker 1: what the tax proposal is. How much would that benefit

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Speaker 1: corporate profits. When I do that, I get about eight percent,

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Speaker 1: some get smaller, some get bigger, um in some some

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Speaker 1: different people who analyze the same information. And if I

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Speaker 1: if I say, okay, well let's put some odds on that.

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Speaker 1: Do we think it's at fifty odds of chance of

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Speaker 1: occurring or and then you need to train on that.

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Speaker 1: And so you don't have that luxury. We love it,

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Speaker 1: but that's just not what we're faced with. And so

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Speaker 1: I think the market being up, you know, five or

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Speaker 1: six percent since the election. Like I started, the conversation

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Speaker 1: is probably discounting half of the benefit um. And so

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Speaker 1: some of the world is friends seem doing exactly what

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Speaker 1: you're saying, which is they're waiting till there's more information,

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Speaker 1: and half the world is jumping forward. And that's why

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Speaker 1: there's a little bit more juice left left in the orange,

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Speaker 1: if you will. I like the way you put that, Jonathan.

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Speaker 1: I love that there's I'm sure there's a Christmas analogy

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Speaker 1: there as well. We're back with Jonathan Gollob. He is

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Speaker 1: RBC Cattle Markets chief US Market Strategies. We're just talking

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Speaker 1: about the Trump Riley and Jonathan, we mentioned your report

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Speaker 1: also a whole New World, the biggest paradigm shift since Reagan.

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Speaker 1: Let's talk now a little bit more specifically about the

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Speaker 1: sectors that could win further. So, I know you mentioned

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Speaker 1: two small caps financial Those two well ones in industry.

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Speaker 1: The other one is just small camps, but they're leading

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Speaker 1: the broader market up. Are they automatically the front ones

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Speaker 1: in line to benefit in I think that those are

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Speaker 1: the the easy one. I mean the financial sector has

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Speaker 1: three benefits. I mean you have the potential for less regulation.

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Speaker 1: This is the most overregulated sector, so there's a benefit

429
00:24:42,720 --> 00:24:45,879
Speaker 1: UM there. They benefit from rising interest rates, and interest

430
00:24:45,960 --> 00:24:48,160
Speaker 1: rates are up UM. You know on a tenure bond

431
00:24:48,160 --> 00:24:52,240
Speaker 1: have nearly doubled since July, which is a huge win.

432
00:24:52,320 --> 00:24:54,720
Speaker 1: And then they also win when the economy is getting

433
00:24:54,760 --> 00:24:56,800
Speaker 1: better because people are more likely to go and buy

434
00:24:56,800 --> 00:25:01,119
Speaker 1: a home or finance their businesses, so they're they're easy. UM.

435
00:25:01,520 --> 00:25:04,920
Speaker 1: With respect to small caps, what they capture is all

436
00:25:05,000 --> 00:25:07,480
Speaker 1: of the things that are working in the market. For example,

437
00:25:07,560 --> 00:25:10,400
Speaker 1: we like companies UM that right now have very high

438
00:25:10,440 --> 00:25:12,639
Speaker 1: tax rates because you're likely going to benefit from a

439
00:25:12,720 --> 00:25:17,200
Speaker 1: change in regulation. Smaller companies tend to pay more taxes. UM.

440
00:25:17,520 --> 00:25:21,480
Speaker 1: You have UM. Companies that are more domestically oriented should

441
00:25:21,480 --> 00:25:24,560
Speaker 1: do better UM than than companies that are more us

442
00:25:24,640 --> 00:25:27,040
Speaker 1: These companies that do more business abroad shouldn't do as

443
00:25:27,080 --> 00:25:30,560
Speaker 1: well as those that are predominantly local, and small companies

444
00:25:30,600 --> 00:25:33,480
Speaker 1: tend to be much more local, so they have a

445
00:25:33,560 --> 00:25:37,760
Speaker 1: variety of different things that benefit them. It's interesting if

446
00:25:37,760 --> 00:25:41,840
Speaker 1: you actually look at the Dow Jones as opposed to

447
00:25:42,000 --> 00:25:47,679
Speaker 1: looking at the SMP five hundred, the Dow actually captures

448
00:25:47,720 --> 00:25:50,840
Speaker 1: these themes much better than the SMP five hundred does

449
00:25:51,720 --> 00:25:54,720
Speaker 1: even though it's this kind of strange certain list of

450
00:25:54,920 --> 00:25:58,840
Speaker 1: only thirty stocks. Let me ask you about both of

451
00:25:58,840 --> 00:26:03,240
Speaker 1: those things. First of all, the small caps, will they not, though,

452
00:26:03,400 --> 00:26:06,560
Speaker 1: be hurt at the same time, because we see their

453
00:26:06,600 --> 00:26:08,560
Speaker 1: cost of borrowing is going to be going up, not

454
00:26:08,640 --> 00:26:11,639
Speaker 1: just from the FED, but because you're getting a steeper

455
00:26:11,720 --> 00:26:16,680
Speaker 1: yield curve it. First of all, it's small companies actually

456
00:26:16,720 --> 00:26:19,920
Speaker 1: tend to borrow less just because it's harder for them

457
00:26:19,920 --> 00:26:22,280
Speaker 1: to borrow. If you make a good point, and if

458
00:26:22,320 --> 00:26:26,800
Speaker 1: borrowing alone worthy issue, then I think that you'd be

459
00:26:26,840 --> 00:26:31,080
Speaker 1: absolutely correct. But UM, we also find, for example, when

460
00:26:31,119 --> 00:26:35,440
Speaker 1: you have a business an economy that's kind of surging

461
00:26:35,600 --> 00:26:37,960
Speaker 1: or or turning around, and that's that's really what we're

462
00:26:38,040 --> 00:26:42,520
Speaker 1: experiencing right now, a bit smaller companies and frankly other

463
00:26:42,560 --> 00:26:46,800
Speaker 1: businesses that are a little bit less stable, UM tend

464
00:26:46,840 --> 00:26:49,440
Speaker 1: to lead. Which is one of the reasons also, Mike,

465
00:26:49,480 --> 00:26:52,479
Speaker 1: that you have brick and mortar retailers, um, you know,

466
00:26:52,600 --> 00:26:58,320
Speaker 1: Coals and Target and Macy's. That basket of companies tends

467
00:26:58,359 --> 00:27:02,280
Speaker 1: to be doing quite well in the last several months. Um.

468
00:27:02,359 --> 00:27:07,080
Speaker 1: Not because they're fantastic business models, but but the exact opposite,

469
00:27:07,080 --> 00:27:09,919
Speaker 1: which is business models that are under pressure kind of

470
00:27:09,960 --> 00:27:13,959
Speaker 1: get bailed out by an improving economy with with with

471
00:27:14,040 --> 00:27:15,959
Speaker 1: prices that are going up and and the same as

472
00:27:16,240 --> 00:27:18,720
Speaker 1: the case for small companies. They don't have the same

473
00:27:18,760 --> 00:27:22,320
Speaker 1: economies of scale um, they don't have the same level

474
00:27:22,359 --> 00:27:25,480
Speaker 1: of professional management often that that larger companies do. But

475
00:27:25,560 --> 00:27:28,160
Speaker 1: that also means that when the economy is surging, they

476
00:27:28,200 --> 00:27:31,080
Speaker 1: tend to actually lead the pack in those environments. Want

477
00:27:31,080 --> 00:27:33,399
Speaker 1: to follow up also on the financial side, you go

478
00:27:33,440 --> 00:27:35,639
Speaker 1: into the Bloomberg and you do a member ranked return

479
00:27:35,800 --> 00:27:39,440
Speaker 1: MR m R R tails on the the S and P,

480
00:27:40,160 --> 00:27:43,679
Speaker 1: and you see that financials since election day have gained

481
00:27:43,760 --> 00:27:46,560
Speaker 1: more than eighteen percent. So I wonder how much more

482
00:27:46,600 --> 00:27:49,640
Speaker 1: you can squeeze out of that. How undervalued are they?

483
00:27:50,720 --> 00:27:53,240
Speaker 1: I mean they were. If you look at the pe

484
00:27:53,480 --> 00:27:56,960
Speaker 1: multiples on the financial sector and you did let's say

485
00:27:57,160 --> 00:27:59,280
Speaker 1: a bar chart of each sectors, you you think that

486
00:27:59,320 --> 00:28:01,640
Speaker 1: you made a mistake with the data. They were so

487
00:28:01,800 --> 00:28:08,680
Speaker 1: obscenely cheap um going into the election that simply renormalizing

488
00:28:08,720 --> 00:28:10,920
Speaker 1: their conditions would have meant that their returns would have

489
00:28:10,920 --> 00:28:14,160
Speaker 1: been way more. But you not only have the fact

490
00:28:14,160 --> 00:28:15,679
Speaker 1: that their p s are going to go up. The

491
00:28:15,720 --> 00:28:17,639
Speaker 1: real story here is that their ease are going to

492
00:28:17,760 --> 00:28:21,280
Speaker 1: go up. Um. Just think about this. A bank. You know,

493
00:28:21,400 --> 00:28:24,200
Speaker 1: there's there's a huge expense for a bank to maintain

494
00:28:24,240 --> 00:28:26,400
Speaker 1: your account. They have to maintain their branch and their

495
00:28:26,440 --> 00:28:28,840
Speaker 1: a T M machine and you know, all their systems

496
00:28:29,040 --> 00:28:31,719
Speaker 1: to simply be able to provide you, um with your

497
00:28:31,720 --> 00:28:34,320
Speaker 1: money when you need it. And yet when interest rates

498
00:28:34,359 --> 00:28:38,440
Speaker 1: are zero, um, it's it's almost impossible for them to

499
00:28:38,760 --> 00:28:43,040
Speaker 1: recoup all of that expense. So bringing interest rates, you know,

500
00:28:43,120 --> 00:28:46,320
Speaker 1: not to something that's high and onerous, but something that's

501
00:28:46,600 --> 00:28:50,520
Speaker 1: even incrementally more normal, is and you know, a huge

502
00:28:50,600 --> 00:28:53,760
Speaker 1: benefit to the banking sector. And you see that's exactly

503
00:28:53,840 --> 00:28:58,200
Speaker 1: what happened when on days where interest rates rise, UM

504
00:28:58,320 --> 00:29:00,880
Speaker 1: banks tend to do extreme really well and a dings

505
00:29:00,920 --> 00:29:04,760
Speaker 1: we interest rates fall, the banks tend to um to

506
00:29:04,760 --> 00:29:08,160
Speaker 1: to to lax. So UM the I think that this

507
00:29:08,240 --> 00:29:11,360
Speaker 1: is a very rational move, even though eighteen percent seems

508
00:29:11,360 --> 00:29:14,600
Speaker 1: like an enormous number. But at the same time, what

509
00:29:14,680 --> 00:29:17,640
Speaker 1: kind of deregulation can we really see that would give

510
00:29:18,040 --> 00:29:20,360
Speaker 1: a leg up for financials? Jonathan. If you if you

511
00:29:20,360 --> 00:29:23,760
Speaker 1: look at they're not going to get rid of all regulation. Um.

512
00:29:23,880 --> 00:29:27,200
Speaker 1: So if stocks are up eight, is that not going

513
00:29:27,280 --> 00:29:30,640
Speaker 1: to go up higher even if Donald Trump does deregulate

514
00:29:30,680 --> 00:29:32,640
Speaker 1: law Street. Well, yeah, I mean we're not and I

515
00:29:32,680 --> 00:29:34,560
Speaker 1: don't think anybody is saying that that we should have

516
00:29:34,680 --> 00:29:37,680
Speaker 1: a host seal deregulation of the banking sector. But if

517
00:29:37,720 --> 00:29:39,920
Speaker 1: you look, for example, in the last um you since

518
00:29:39,920 --> 00:29:44,080
Speaker 1: the financial crisis, um, right now, the majority of mortgages

519
00:29:44,120 --> 00:29:46,480
Speaker 1: that are issued in the United States are done outside

520
00:29:46,560 --> 00:29:49,520
Speaker 1: of the banking sector BOMB and this is clearly a

521
00:29:49,560 --> 00:29:51,760
Speaker 1: response to the fact that there's been a change in

522
00:29:51,800 --> 00:29:55,000
Speaker 1: regulation that that makes it so onerous for banks to

523
00:29:55,240 --> 00:29:59,280
Speaker 1: do business. UM. Banks are limited in the way that

524
00:29:59,360 --> 00:30:02,360
Speaker 1: they can the way that they can train in order

525
00:30:02,400 --> 00:30:05,320
Speaker 1: to provide liquidity as a result of the vocal rule

526
00:30:05,360 --> 00:30:08,440
Speaker 1: and dot frank. Now that on one hand that that

527
00:30:08,720 --> 00:30:12,640
Speaker 1: negatively affects bank profitability, but the more important issue is

528
00:30:12,840 --> 00:30:16,320
Speaker 1: as banks try to serve the public, it becomes harder

529
00:30:16,320 --> 00:30:19,080
Speaker 1: for them to provide liquidity when it's when it's needed

530
00:30:19,080 --> 00:30:22,720
Speaker 1: in a crisis. So I think that um, you know,

531
00:30:22,800 --> 00:30:25,280
Speaker 1: even if we took for example, a portion of dot

532
00:30:25,320 --> 00:30:28,600
Speaker 1: frank UM and and revised it to make it, you know,

533
00:30:28,880 --> 00:30:32,320
Speaker 1: a little bit more consumer friendly and bank friendly. I

534
00:30:32,360 --> 00:30:34,800
Speaker 1: think this could be a big deal. And and even

535
00:30:34,800 --> 00:30:37,240
Speaker 1: the regulators who passed it, I think, are you see

536
00:30:37,240 --> 00:30:40,880
Speaker 1: that as a potential opportunity. Jonathan hum thank you very

537
00:30:40,960 --> 00:30:43,680
Speaker 1: much for joining us this morning. Enjoy South Florida. Let

538
00:30:43,720 --> 00:30:46,680
Speaker 1: us know if you get the job offer from the

539
00:30:46,720 --> 00:30:56,840
Speaker 1: other guy that's down there in South Florida. Thanks for

540
00:30:56,920 --> 00:31:01,200
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe Vibe and listen

541
00:31:01,280 --> 00:31:06,600
Speaker 1: to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer.

542
00:31:07,360 --> 00:31:10,240
Speaker 1: I'm out on Twitter at Tom Keene. David Gura is

543
00:31:10,360 --> 00:31:14,120
Speaker 1: at David Gura. Before the podcast, you can always catch

544
00:31:14,200 --> 00:31:30,400
Speaker 1: us worldwide. I'm Bloomberg Radio. Who you put your trust

545
00:31:30,440 --> 00:31:34,920
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