Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jailey. We bring
Speaker 1: you insight from the best an economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course on the Bloomberg Terminal. Joining
Speaker 1: us now, Christian Miller Glissman, Manager Downright Death for portfolio
Speaker 1: Strategy at Gilment SAX. Christian, is this a bubble burst? Think? Listen?
Speaker 1: I think, Um, you definitely are dealing with a significant evaluation.
Speaker 1: We set here, There's no doubt about it, and to
Speaker 1: some extent that that was in the making. You remember
Speaker 1: we spoke about it a few months ago, Um, and
Speaker 1: we wrote about it in all balanced air research. Unfortunately,
Speaker 1: coming out of COVID, you had this constellation of both
Speaker 1: bonds and equities being incredibly expensive. It and now you're
Speaker 1: entering into a very challenging growth inflation mix where I
Speaker 1: think inflation is sticky, growth is decelerating, and I think
Speaker 1: the market is now de rating those valuations. And as
Speaker 1: you were saying, in particular in the markets where I
Speaker 1: guess the uncertainty on the growth and all the earnings
Speaker 1: is the highest or long duration tech more recently, UM
Speaker 1: and before that sickly consverse defenses. I think they've also
Speaker 1: been derated materially. How far along in this de rate
Speaker 1: in Christian are we always tough to say, because if
Speaker 1: you look at valuations compared to the average since the nineties,
Speaker 1: where we're moving below that average now, but we know
Speaker 1: we're not in the nineties anymore. I think we're dealing
Speaker 1: with much higher inflation, much higher inflation volatility, a very
Speaker 1: different uncertainty on monetary policy, and even the growth picture
Speaker 1: I think has certain uncertainties which are maybe more tactical
Speaker 1: in nature with Russia, Ukraine and China. But I think
Speaker 1: there's also some structural questions with us to what's the
Speaker 1: next growth engine. So you could argue that the valuation
Speaker 1: d rating could continue. But what I would say though, is,
Speaker 1: and I think John mentioned that earlier, I think we
Speaker 1: start to see the peak a bit in the bomb yields,
Speaker 1: and we we we also have seen tentative signs of
Speaker 1: the peak and inflation, and we might shift from a
Speaker 1: high end rising inflation regime to something where inflation maybe
Speaker 1: is starting to decline, so that could start to to
Speaker 1: stabilize things a bit. Hopefully we didn't disrupt anything too
Speaker 1: much and anyone's calling from the compliance department to say
Speaker 1: please think he cleared it perfectly, see the bumble, and
Speaker 1: he said it's evaluation re rent ratings. That's that's how
Speaker 1: you do this diplomatically, all right, so that we didn't
Speaker 1: necessarily get the DJ in charge to call and get complain.
Speaker 1: I am wondering what the opportunities are that might be
Speaker 1: emerging if the D rating has been uneven or perhaps
Speaker 1: have he handed Do you see any opportunities or do
Speaker 1: you think that at this point hiding out in treasuries,
Speaker 1: in duration, in the dollar seems to be a better
Speaker 1: bet and just go at the flow, listen. I think
Speaker 1: near term we might easily be stuck a bit longer
Speaker 1: in a in a fat and flat range. As as
Speaker 1: we've been saying, the range is getting fatter and flatter,
Speaker 1: if you know what I mean. Sort of volatility definitely
Speaker 1: has been a bit larger. Positioning and sentiment is getting
Speaker 1: more bearish as we speak, and that creates a symmetry
Speaker 1: that creates opportunities. But you still need to find momentum.
Speaker 1: Like a good trade, a good investment thesis is always
Speaker 1: built on gooder symmetry, kind of more upside and downside
Speaker 1: and and and good momentum. And I think right now
Speaker 1: you have to be very selective in picking those battles.
Speaker 1: I think we've been very focused on real assets UM,
Speaker 1: and I think opportunities related to that UM. I think
Speaker 1: clearly commodities are pretty high up in that range, and
Speaker 1: commodity related assets. Infrastructure is a very interesting real asset
Speaker 1: because it doesn't do only well when inflation is high.
Speaker 1: It also does well when inflation is high and falling.
Speaker 1: But I think clearly what we need to engage with
Speaker 1: in the next six to twelve months as we kind
Speaker 1: of look a bit forward, is to really add risk
Speaker 1: UM and eventually at cyclical risk, because that's where the
Speaker 1: market is getting the most bearish. So you can think
Speaker 1: about at some point a capic cycle driving selective opportunities.
Speaker 1: You can think about kind of even places that are
Speaker 1: linked to the consumer discretionary spending, which are clearly a
Speaker 1: lot under pressure. Eventually they would prevent provide good asymmetries. Well, Christian,
Speaker 1: as you say these things, and as John Lisa and
Speaker 1: I have been talking about the brutal action we have
Speaker 1: seen in the market. Someone writing into me on Twitter
Speaker 1: that the three of you make me want to crawl
Speaker 1: up in a ball, crawl up into a ball and
Speaker 1: cry this morning. And I'm sure there are a lot
Speaker 1: of people out there who are feeling that way. For
Speaker 1: those people who just want to pull their money out
Speaker 1: of the market and go into cash, what would you
Speaker 1: advise them about how much cash you want to hold
Speaker 1: now to redeploy when those opportunities you just were talking
Speaker 1: about present themselves. Yeah, I mean, this is a very
Speaker 1: tough thing to generalize because it depends on each a
Speaker 1: visual investor, the circumstances, you know it, like the risk
Speaker 1: tolerance and and and these type of things. But I
Speaker 1: think we've been overweight cash since the beginning of the year,
Speaker 1: and and I think I'm not saying that there's not
Speaker 1: opportunities emerging for medium term investors, but I do feel
Speaker 1: a decent cash allocation still makes sense. I think to
Speaker 1: your point, Um, I think bonds are starting to buffer
Speaker 1: a bit, so you could argue that if you're really
Speaker 1: worried about a recession, um kind of starting to introduce
Speaker 1: duration risk via bonds back in the portfolio might make sense.
Speaker 1: But what we've been saying is that duration to some
Speaker 1: extent is not a buffer right now. It's a risk.
Speaker 1: So it really depends on on what you own right now.
Speaker 1: If you own long duration assets, I think adding duration
Speaker 1: back in the portfolio probably doesn't make much sense. So
Speaker 1: I think a decent cash allocation makes sense. Real assets
Speaker 1: UM kind of assets that that can protect you from
Speaker 1: the basement. If your dollar investment a Dollar investor, that's
Speaker 1: been difficult because the dollar has been the key safe asset.
Speaker 1: But if you are a non US investor, UM, clearly
Speaker 1: the dollar still has that characteristic that currently it's protecting
Speaker 1: UM kind of purchasing power as the fetus fighting inflation.
Speaker 1: Christian brilliant work has always made Thanks for being on
Speaker 1: with this, Christian Miliklasman there of government sex. Gabrielle Santos Get,
Speaker 1: a global market strategist of jpmwork in Assets Strategy Management,
Speaker 1: is joining us now. Gabriella, what will give you the
Speaker 1: conviction to go in there and say this is it,
Speaker 1: this is the washout? We can start to buy at
Speaker 1: least I think the issues we have three things happening
Speaker 1: at the same time, there's this growth conundrum with investors
Speaker 1: trying to figure out which is the most likely path
Speaker 1: from here. Is it a soft landing, is it a recession,
Speaker 1: is its stagflation. But you add on to that a
Speaker 1: correction of the excesses that we've built up over the
Speaker 1: last four years and amplified by a third factor, which
Speaker 1: was very low liquidity in both equities and fixed income markets.
Speaker 1: So I think at the moment we've seen a big
Speaker 1: correction and valuations. We've seen nearly a twenty percent contraction
Speaker 1: in the multiple with the SMP five now trading at
Speaker 1: average valuations, But you still have very low conviction from
Speaker 1: investors to really truly believe this is um the end
Speaker 1: because you still have all of these uncertainties. So what
Speaker 1: do we need to see? I think you specially need
Speaker 1: a bigger conviction on that growth scenario front. So you
Speaker 1: do need to see peak uh in housing costs, You
Speaker 1: need to see peak sanctions towards Russia to feel more
Speaker 1: comfortable about commodity prices, and you need to see peak
Speaker 1: lockdowns in China to feel more comfortable about the growth
Speaker 1: outlook there. Gabriella, you talked about liquidity concerns the fact
Speaker 1: that there is such little liquidity. You talked about the
Speaker 1: froth in markets that's getting beaten out by the readjustment
Speaker 1: in valuations. Are you starting to worry about financial market conditions,
Speaker 1: about the functioning of the basic nuts and bolts of
Speaker 1: how things trade and sell. So, in terms of financial conditions,
Speaker 1: we have definitely seen a tightening in those ultra loose
Speaker 1: conditions that we had at the beginning of the year.
Speaker 1: You now have the tightest financial conditions that we had
Speaker 1: since twenty ten, but still uh pretty loose and and
Speaker 1: just approaching neutral levels. So we're not quite concerned about
Speaker 1: tight financial conditions quite yet. In terms of the actual
Speaker 1: functioning of the markets, I think at the moment um
Speaker 1: that is not a reason for concern or a need
Speaker 1: for the Federal Reserve or other regulators to step in.
Speaker 1: It's just something that amplifies any of the moves that
Speaker 1: we see driven by the macro stories, and something that
Speaker 1: causes more risk aversion and hesitancy to step in from investors. Well,
Speaker 1: in your base case, is still being able to execute
Speaker 1: that soft landing on that very very narrow landing strip
Speaker 1: that John and Lisa we're just talking about with each
Speaker 1: day that passes, how much risk grows around that idea.
Speaker 1: So I think you invest based your base case, which
Speaker 1: for us is a soft landing, but you diversify the
Speaker 1: other routes just in case the recession and stagflation scenarios.
Speaker 1: So in terms of the investing based on the soft landing,
Speaker 1: we would still advocate for having a small overweight to stocks,
Speaker 1: a small underweight to duration, a balance between growth and value,
Speaker 1: but you want to still be diversifying the other scenarios.
Speaker 1: So to diversify the recession scenario, it's a small underway
Speaker 1: to duration versus a big one at the beginning of
Speaker 1: the year. It's overlaying a quality factor on top of
Speaker 1: any of the stocks that we're thinking about investing. And
Speaker 1: in terms of diversifying the stagflation scenario, it means bringing
Speaker 1: the prime candidate for a stagflation Europe downboard of a neutral.
Speaker 1: It's focusing on commodity exporting regions like Canada, and it's
Speaker 1: focusing on diversifiers like real assets that do well in inflation.
Speaker 1: Is the concern. Well, while we're talking about regional diversification,
Speaker 1: you mentioned Europe in Canada there, let's talk about China,
Speaker 1: which you mentioned at the beginning, Investors kind of need
Speaker 1: to see something changed with co A zero policy. But
Speaker 1: it's not just that. You also have a serious crisis
Speaker 1: in the property sector. Soon Act defaulted today because it
Speaker 1: didn't make its payment on a dollar bond coupon after
Speaker 1: that grace period expired. How are you thinking about China
Speaker 1: right now and where you would find an entry point
Speaker 1: in that market in particular. So I think emerging markets
Speaker 1: in China are also dealing with this trifecta issues that
Speaker 1: we mentioned. In China, you had a correction of the
Speaker 1: accesses that already happened last year. That was a market
Speaker 1: that February was one standard deviation expensive. Now it's nearly
Speaker 1: one standard deviation cheap. You also have a growth scare
Speaker 1: happening at the same time, driven by some of those
Speaker 1: structural slowdowns in the economy, namely property and low and manufacturing,
Speaker 1: as well as the pandemic. So I think for investors,
Speaker 1: the correction of the valuation accesses is already there in China.
Speaker 1: Now you need to get a bit more comfortable on
Speaker 1: the growth picture. And for that really I'm looking for
Speaker 1: three things. The first is a redefinition of success when
Speaker 1: it comes to COVID zero, So it doesn't mean abandoning
Speaker 1: the policy, which was very tough to do. It's just
Speaker 1: redefining success, lowering the threshold for reopening. We also want
Speaker 1: to see that the policy put is still in place
Speaker 1: in China, so we want to see a little bit
Speaker 1: more monetary stimulus, maybe a cut in the loan prime
Speaker 1: rate this month. And lastly, we want to just see
Speaker 1: silence and regulations for investors talking to get a bit
Speaker 1: more comfortable that we're past the wars and there's an
Speaker 1: important innovation meeting next week and it would be just
Speaker 1: welcome news to not see anything new come out of that.
Speaker 1: Gril A. Santos, if you Morgan Asset Management, thank you
Speaker 1: so much. You want for Shooter, chief US economist of
Speaker 1: Missooi America, Steve, is that light at the end of
Speaker 1: the knock tunnel, Well, there is light at the end
Speaker 1: of the tunnel. Unfortunately, I think we're in the final
Speaker 1: stage of what is going to be a significant bear market,
Speaker 1: especially in equities, as we've started to disengage stocks and
Speaker 1: bond yesterday and it looks like again this morning. I
Speaker 1: think that's recognition of the fact that what's taking place
Speaker 1: in terms of the equity market now is a recialization
Speaker 1: or a recognition of the fact that the Federal Reserve
Speaker 1: is not going to be executing the Greenspan put any time,
Speaker 1: and as a result of not doing that, the equity
Speaker 1: market has to be in taking down earnings expectations. So far,
Speaker 1: the decline and equities has been concentrated in the multiple.
Speaker 1: As long term interest rates go up, the multiple comes down,
Speaker 1: stock in disease come down. Now we're at the phase
Speaker 1: I believe we're starting to see bonds go down and
Speaker 1: equities still go down. At the same time bonds go
Speaker 1: down and yield and equities go down in price. I
Speaker 1: think that's telling us that we're starting to get to
Speaker 1: the point where people need to start to downgrade their
Speaker 1: earnings numbers, and that's the final shoe that needed to
Speaker 1: fall on the equity market. We still could get down
Speaker 1: to that thirty five hundred UM on the SMP five hundred,
Speaker 1: and we could still wind up with slightly wider spreads.
Speaker 1: But if this train continues with the two markets disengage
Speaker 1: hi E bond yields can go down while equity prices
Speaker 1: go down. We've really reached the top in the the
Speaker 1: yield on the tenure note, maybe three thirty would have
Speaker 1: been the absolute top three oh five eyes where we hit.
Speaker 1: I believe at the top on the last couple of weeks.
Speaker 1: I think we could very well be at the point
Speaker 1: where we have the top in the interest rate environment. Yes, okay,
Speaker 1: so there's a lot to unpack there. I want to
Speaker 1: just start with what you first started on the idea
Speaker 1: of where at the final stages of a significant bear market.
Speaker 1: I'm curious what kind of recession you see getting priced
Speaker 1: into markets and frankly as the most plausible in the
Speaker 1: next twelve twenty four months. Yeah, you've asked a great
Speaker 1: question there, Lisa. I mean, I think when you when
Speaker 1: you look at what's taking place in the economy, I
Speaker 1: find a hard landing, which is a growth recession. I
Speaker 1: I think the economy is gonna be running well below trend.
Speaker 1: I can't discount or ignore the fact that we can
Speaker 1: have another quarter of negative GDP in here, unlikely to
Speaker 1: be back to back negative quarters of g d P.
Speaker 1: But we're gonna have an economy running in that one
Speaker 1: percent or slightly lower growth environment over the next four quarters.
Speaker 1: The reason why we don't get a classical recession is
Speaker 1: there's no major inventory overhang, there's no overbuilding in any
Speaker 1: major hard asset category. There are no insignificant financial dislocations
Speaker 1: that we know about um and therefore I think in
Speaker 1: that environment, the hard landing is a more realistic scenario
Speaker 1: than the outright recession. But an economy running at you know,
Speaker 1: sub one percent means Q four of a Q four
Speaker 1: growth for this year is about zero point four percent
Speaker 1: in contrast to five last year, and that takes down
Speaker 1: should take down operating earnings to about five percent growth
Speaker 1: as opposed to ten to eleven percent growth as has
Speaker 1: been recently discounted by the marketplace. Steve, we don't get
Speaker 1: the sense that the Federal Reserve is particularly concerned at
Speaker 1: this point about growth. There laser focused on inflation. Where
Speaker 1: do you think inflation will be able to get down
Speaker 1: to by the end of this year? And where is
Speaker 1: that going to leave the Fed? Well, again, when you
Speaker 1: when you think about what's happening to base rate effects,
Speaker 1: you're gonna come off. So I think we're gonna lose
Speaker 1: about three percent there. It's everything else beyond the three
Speaker 1: percent decline in the year over year numbers from the
Speaker 1: peak that are gonna matter for the FED UM and
Speaker 1: I think, you know, I think in the reality of
Speaker 1: the situation is we're gonna come down more quickly. I
Speaker 1: think we can lose about half of the gains that
Speaker 1: we've seen in the operating numbers year over years. So
Speaker 1: I believe somewhere between July and let's say September, we'll
Speaker 1: see sort of a pivot by the Federal Reserve away
Speaker 1: from aggressively hiking rates to developing a more shallow rate
Speaker 1: hikes scenario that will probably continue over the balance of
Speaker 1: the expansion. What do you expect us to see the
Speaker 1: actual tightening matter to the economy start filtering out to
Speaker 1: whether it's the slowdown and housing the people are expecting
Speaker 1: our companies borrowing less money. Well, I think you're already
Speaker 1: seeing it, to be honest with you. I mean, you
Speaker 1: look at the headlines of the conversation by Meta, You
Speaker 1: look at what's happened to Uber, you look at what's
Speaker 1: happened to Lift. You look at the conversation from Amazon
Speaker 1: that HAPs they may have over built issues. You look
Speaker 1: at the inventory of some of the retailers that we
Speaker 1: see in inventory is accumulating, and then you look within
Speaker 1: the you know, the financial component, and you look at
Speaker 1: the people who lend to households in the middle income
Speaker 1: to lower income areas, and they're starting to see already
Speaker 1: that the performance on the loan book is deteriorating. So
Speaker 1: I think you're beginning to see it already at the
Speaker 1: micro level. When do we get it in the macro statistics.
Speaker 1: I think that just takes about another month or so
Speaker 1: before we'll starts. Steve, Thanks for writing that down, buddy.
Speaker 1: As So, why Steve a shooter that America. Let's talk
Speaker 1: to a member of the Republican Party, Congressman French Hill,
Speaker 1: Republican from Arkansas. Congressman, let's stop that. The president says,
Speaker 1: you have a plan. Mrcono said, it's not the plan.
Speaker 1: What is the plan? Hey, Jonathan Leasa, it's great to
Speaker 1: be with you. You're right, Lisa, there's not a silver
Speaker 1: bullet here. This is the result of ten years more
Speaker 1: plus of suppressed interest rates that have led to increased
Speaker 1: asset values, and then by the Biden administration failed policies.
Speaker 1: They doubled down on spending and increasing demand by adding
Speaker 1: four treeon dollars to spending last year passed through the
Speaker 1: Congress on top of the four and a half tree,
Speaker 1: and that we already uh spend every year to run
Speaker 1: the government, and uh the Federal Reserve was too lax
Speaker 1: and too late in beginning to shrink its balance sheet
Speaker 1: and raise rates. That's coupled with the supply chain issues
Speaker 1: that we have. And here again, the Biden administration has
Speaker 1: done nothing to unleash American energy or really ease the
Speaker 1: supply chain constraints on hiring workers, getting truck drivers back
Speaker 1: to work, easing the logistics burden. So the Republican plan is, first,
Speaker 1: don't keep spending money like drunken sailors to encouraged the
Speaker 1: Fed to do the work that it should do. And three,
Speaker 1: let's unleash the supply side and break down these supply
Speaker 1: chain barriers. Congressman, the Republican plan sounds a lot like
Speaker 1: the Biden plan from what you're saying, because they're not
Speaker 1: talking about spending more, they're actually talking about reducing the deficit.
Speaker 1: They are talking about investing in the supply chain, and
Speaker 1: they have talked about releasing oil and gas and trying
Speaker 1: to figure out ways to bring down costs. What's the
Speaker 1: distinguishing feature about what you're saying, other than just pointing
Speaker 1: at different places for the blame game. Right, Well, thanksfully, so.
Speaker 1: I mean the look the Biden administration policies are the
Speaker 1: ones who have created this demand slide surge on top
Speaker 1: of low interest rates. It's the four trillion dollars that
Speaker 1: he's added in spending that was warned against by Larry Summers,
Speaker 1: Jason Furman, Steve Rattner, strong Democratic economists, saying it would
Speaker 1: lead to too high banned in the face of supply
Speaker 1: and strength on energy. It's all talk. He's doing nothing
Speaker 1: to unleash American energy and make it easier for companies
Speaker 1: to get the permitting, build the pipelines, get the permits
Speaker 1: for new l en G export facilities, and get our
Speaker 1: production back up to over thirteen million barrels a day. Congressman,
Speaker 1: if we could focus on the monetary policy aspect of
Speaker 1: what you mentioned, having the FED do its job. In theory,
Speaker 1: if the Fed does tighten aggressively, it could lead to
Speaker 1: a higher unemployment rate. It could lead to a slowdown
Speaker 1: in growth, if not an outright recession, which is something
Speaker 1: the market in particular is concerned about. Would you be
Speaker 1: happy to see those things if it got inflation under control. Well,
Speaker 1: inflation is a thief. Inflation steals for hard working families.
Speaker 1: It makes it very hard, and also it hurts our
Speaker 1: seniors who are mostly on fixed income. This is a
Speaker 1: result of bad fiscal policies by the Biden administration and
Speaker 1: keeping interest rates too low for too long at the FED.
Speaker 1: So this is the anguish of central banking faced by
Speaker 1: Chairman Pale and his colleagues. They have a tough policy
Speaker 1: choice of tightening and potentially reducing a recession, or uh,
Speaker 1: not tightening as much and perhaps leading to stagflation or
Speaker 1: market volatility. It's a tough position to be in. But
Speaker 1: we should begin to shrink the balance sheet and lower,
Speaker 1: i mean raise rates, and the Fed should try to
Speaker 1: do the best it can to achieve a soft landing,
Speaker 1: which I know as Chairman Pal's ultimate objective. A Congressman,
Speaker 1: two points you've made in the last four or five minutes,
Speaker 1: I'll put some emphasis on them. That this administration made
Speaker 1: some policy mistakes with fiscal policy, and this feeder reserve
Speaker 1: waited too long. Chairman Poal hasn't been confirmed by the
Speaker 1: Senate for another term yet, do you think he deserves
Speaker 1: a second term. I do, Jonathan. Let me tell you why.
Speaker 1: J Powe has the temperament, the knowledge, and the leadership
Speaker 1: skills to navigate the FED through this process. And because
Speaker 1: he was there and I thought did an outstanding job
Speaker 1: during the pandemics height in March of he knows that
Speaker 1: the FED has the tools to do this. I want
Speaker 1: him to own this issue and help guide the FED
Speaker 1: through this next phase that's so challenging. What do you
Speaker 1: think in this term ultramaca that the president's using at
Speaker 1: the moment, Congressman, what do you make of that? What
Speaker 1: I make of Joe Biden is that he campaigned on
Speaker 1: bringing the country together and he's done nothing but drug
Speaker 1: vibe the country even more. In the first year and
Speaker 1: a half of his presidency. He's constantly uh saying the
Speaker 1: dog ate his homework on the exit and Afghanistan inflation
Speaker 1: crisis at the southwest border, and to try to build
Speaker 1: relationships with Republicans, he calls them names. So I don't
Speaker 1: think Joe Biden has been very effective in managing the
Speaker 1: US government or building a coalition to get things done
Speaker 1: on a bipartisan basis, and complishmen great to get your
Speaker 1: perspective of things as awaits to catch up brilliant as owais.
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