Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. Jim biancov Bianco Research
Speaker 2: joins us now for more. Jim, Welcome to the program Sir.
Speaker 2: I was hoping for a quiet weekend. We're not getting
Speaker 2: one going into this open and bow. We've got a
Speaker 2: thread against Europe, a threat against Apple. Out of the
Speaker 2: two of those, what do you think is more important
Speaker 2: to this market this morning?
Speaker 3: Jim, Oh, I think it's probably Europe because it's a
Speaker 3: bigger market and encompasses more goods. So we're back to
Speaker 3: tariffs on and terrify on. I think is going to
Speaker 3: be an interesting way for the market to.
Speaker 4: Try and navigate this.
Speaker 3: Does that mean that we're going to see weakness because
Speaker 3: we're going to have higher prices, or is it because
Speaker 3: we're going to have higher prices? Which one is going
Speaker 3: to be the dominant factor?
Speaker 4: Now?
Speaker 3: When we turn it to the Federal Reserve, they usually
Speaker 3: are focused, I think on more on prices.
Speaker 4: And I think that's the thing.
Speaker 3: That a lot of people on Wall Street are missing,
Speaker 3: is that all things being equal, if tariffs are coming
Speaker 3: back and prices are going up, and that might be weakness.
Speaker 4: The Fed's not going to cut rates.
Speaker 3: They're not going to cut rates until they see their
Speaker 3: prices have stabilized, and right now we might be looking
Speaker 3: at more inflation.
Speaker 2: So, Jim, that takes important because I want to take
Speaker 2: you over to the move of the bond market off
Speaker 2: the back of this news. Yields are lower across the curve,
Speaker 2: with down eight basis points at the front end three
Speaker 2: ninety one. I know we're not breaking down to the
Speaker 2: new range, the range of the last several months, but
Speaker 2: still yields are falling back the ten years down by
Speaker 2: six basis points full forty seven. What your to respond
Speaker 2: to be to that early move, given that you think
Speaker 2: this ends up with more inflation down the road.
Speaker 3: Well, you know that's a knee jerk response to the
Speaker 3: stock market falling.
Speaker 4: I think what we're seeing right now on this move.
Speaker 3: But if you were to back up and go back
Speaker 3: to you know, when we started talking about tariffs, there's
Speaker 3: been a trend higher in yields, and.
Speaker 4: The trend higher in yields is really.
Speaker 3: About as things settle down, we're looking at higher prices.
Speaker 3: You know, as I'd like to argue, you know, if
Speaker 3: you look at the tariffs that were collected in April,
Speaker 3: that was one in three quarters percent increase on the
Speaker 3: four hundred billion dollars of goods. That's an extra seven
Speaker 3: and a half billion dollars of tariffs in April, one
Speaker 3: and three quarter percent on the fourhundred billion dollars of
Speaker 3: goods that we collect that we imported in April.
Speaker 4: Who's paying that? Somebody's got to be paying that now.
Speaker 3: The President wants us to believe it's going to be
Speaker 3: Walmart and Apple eating those tariffs, and maybe the Chinese.
Speaker 3: But if you look at numbers like true inflation and
Speaker 3: price stats and stuff, which are these millions of prices
Speaker 3: that they check on the internet, prices are going up.
Speaker 3: The prices are going up for the consumer, and I
Speaker 3: think as that continues to happen, that reality is going
Speaker 3: to drive the bond market more than a weakness reality.
Speaker 5: One thing that we've been talking about throughout the morning
Speaker 5: Gym is if this is not isolated to the United
Speaker 5: States when it comes to the yield move and some
Speaker 5: of these inflation concerns, how much is this applicable in
Speaker 5: terms of a broader inflation globally in developed markets?
Speaker 6: That leads bonds globally.
Speaker 5: To be less attractive in the same kind of way
Speaker 5: as they were traditionally for a price action, albeit more
Speaker 5: attractive from a yield perspective.
Speaker 4: Oh, I think you're right.
Speaker 3: It does affect the all bonds worldwide, especially developed markets,
Speaker 3: because the tariffs are pushing all these markets to do
Speaker 3: trade deals. You have done a trade deal as well,
Speaker 3: and so what we're seeing is the opposite of globalization,
Speaker 3: which I've become aware is now the word is segmentation.
Speaker 3: So we've got a segmentation coming in global trade, and
Speaker 3: that's going to just add frictions and add more costs,
Speaker 3: and those costs are going to show up as elevated
Speaker 3: or sticky inflation, and that's going to start to impact
Speaker 3: all bond markets, and it has been because if you
Speaker 3: look over the last month or so, develop world bond
Speaker 3: markets have been going higher. The one exception has been China,
Speaker 3: where their interest rates have been moving lower. But their
Speaker 3: economy is in such an alarming shape right now that
Speaker 3: you can almost argue that even with these higher inflationary
Speaker 3: numbers that we have, their economy is more being driven
Speaker 3: by growth than it is being driven by prices.
Speaker 5: I'm struck by the fact that the bond yield move
Speaker 5: is not special to the United States. It is something
Speaker 5: that is global and developed markets. The move, though, in
Speaker 5: the dollar is distinct, and it is raising a lot
Speaker 5: of concern that this could be the biggest casualty of
Speaker 5: some of the trade disagreements. We are seeing a bit
Speaker 5: of a strengthening in the dollar off the heels of
Speaker 5: this news with respect to potentially higher tariffs on Europe.
Speaker 5: I just wonder whether you think that this weaker dollar
Speaker 5: theme is going to persist even if you do get
Speaker 5: some serious, significant increases to tariffs some of the trading
Speaker 5: partners in the US at a time when a lot
Speaker 5: of people have shrugged off some of what these proposals
Speaker 5: could do.
Speaker 3: Well, yeah, I do I do think that the weaker
Speaker 3: dollar would persist for a couple of reasons. One, I
Speaker 3: think it's what the administration wants it doesn't or it's
Speaker 3: the least. It's not going to complain about a weeker dollar.
Speaker 3: And the weeker dollar isn't really bringing around talk about
Speaker 3: the end of dollar dominance or the reserve currency. It
Speaker 3: shouldn't because there isn't a alternative to it.
Speaker 4: So they want it.
Speaker 3: And the second thing is, if you've watched the currency
Speaker 3: markets long enough, you'll realize that when these things trend,
Speaker 3: they trend much further and much longer than everybody thinks.
Speaker 3: Whenever you think the dollar is overbought or over sold,
Speaker 3: the joke is way. Do you see how or overbought
Speaker 3: or oversold it's about to get? And right now it
Speaker 3: is trending lower. And I suspect that over the next
Speaker 3: several weeks or a few months that that's going to continue,
Speaker 3: even if we get higher rates, even if we get
Speaker 3: a widening of spreads to say Europe or something like that.
Speaker 4: It's that hasn't been working right.
Speaker 6: Now, Jim.
Speaker 2: I just want to finish on the equity coll the
Speaker 2: equity market. There is a plainbook here, the president comes
Speaker 2: out and tries to anchor negotiations with extremes. Come out
Speaker 2: and say you're going to face a fifty percent tariff
Speaker 2: on June one. You've not been great to deal with.
Speaker 2: Just the same playbook that applied to China applied to Europe.
Speaker 7: Is this different? Have we exhausted that?
Speaker 2: Because there will be a lot of people out there thinking, okay,
Speaker 2: equity features of Gambler, I'm going to buy that.
Speaker 7: I've seen this movie before. Is this different?
Speaker 4: I mean it could be.
Speaker 3: I mean, you know, the biggest issue I think that
Speaker 3: Wall Street's been struggling with is our tariff's leverage to
Speaker 3: get a deal or our tariff's revenue. If they're leveraged,
Speaker 3: I think most people on Wall Street be fine with
Speaker 3: that to get a deal, you know, to use them
Speaker 3: as leverage to lower tariffs, open up trade. But are
Speaker 3: they a form of attacks on foreigners to try and
Speaker 3: raise revenue. That has been the bigger issue that we've
Speaker 3: been trying to struggle with. When it comes to Europe,
Speaker 3: I think most people think it's more in the leverage camp,
Speaker 3: and therefore this is just a negotiating play. When it
Speaker 3: comes to China, I think more people are worried that
Speaker 3: it's in the revenue camp and it's more than just
Speaker 3: a leverage play. So that's why I think that when
Speaker 3: it comes to Europe, it's going to probably be viewed
Speaker 3: as a leverage play to try to get a deal
Speaker 3: done sooner rather than later.
Speaker 2: Jim, I appreciate your time, sir as always is going
Speaker 2: to say a Jimpianco, the of Bianco Research, Nati level
Speaker 2: of ups down grunting US anquities to neutral, writing we
Speaker 2: see limited upside near term and expend continued volatility as
Speaker 2: trade in the US fiscal uncertainty remain high. Nadia joins
Speaker 2: us now for more, Natia, good morning, Good morning. How
Speaker 2: good does it feel not to defend an overweight gun
Speaker 2: into the weekend?
Speaker 6: You know, it never.
Speaker 8: Feels good when markets are down, but you know, this
Speaker 8: is some of the issues that we were struggling with
Speaker 8: last week and we were concerned about. As Lisa said,
Speaker 8: we'll past peak on certainty, but there was still uncertainty
Speaker 8: still high, and that's why we downgraded US equities last week. Now,
Speaker 8: we had been attractive view on US equities in April.
Speaker 8: We took that opportunity right after the ninety day pause,
Speaker 8: but after being up thirteen percent in a month, we
Speaker 8: just thought that the versual war was balanced. And yes,
Speaker 8: you know, the effective tower for it has come down
Speaker 8: from twenty five percent to fifteen percent, but it feels
Speaker 8: like a lot of the good news is already praised
Speaker 8: it and this risk for it to go higher than
Speaker 8: the fifteen percent it is currently.
Speaker 2: Obviously, price action, as you know, can condition behavior. I
Speaker 2: just wonder how many investors have been conditioned by the
Speaker 2: experience of April big dislocation. Then things suffer and markets
Speaker 2: rip and you can miss out really quickly, and we
Speaker 2: saw that early this week we had this small dip
Speaker 2: of the back of a down grade. Dip gets bought,
Speaker 2: and I just wondered, from your perspective, whether this dip
Speaker 2: is going to be brought too. Because people have got
Speaker 2: the plane book from April, maybe they're comfortable with it.
Speaker 2: We know that the president likes to wank negotiations to
Speaker 2: the extreme, comes out and says to Europe, make a move,
Speaker 2: otherwise you're going to get a fifty percent tariff equity
Speaker 2: markets post back. Would you suggest people be more careful
Speaker 2: this time around or do the same rule still apply?
Speaker 8: Yeah, we are looking for our opportunities to buy dip.
Speaker 8: You know, one percent two percent down is not much
Speaker 8: of a dip for us. If we see a five
Speaker 8: percent down, that's a different conversation. At the same time,
Speaker 8: we also have equity valuations that have recovered.
Speaker 6: We're at twenty one times forward.
Speaker 8: Pe, you know, above the five year average, so there's
Speaker 8: very little room here. And at the end of the day,
Speaker 8: we know that it's earnings over the longer term that
Speaker 8: would drive markets, and we think that the consensus earning
Speaker 8: is still too hot nine percent from consensus this year.
Speaker 8: We think it needs to come down closer to four percent.
Speaker 8: So we're also waiting for just more clarity around what
Speaker 8: the tariff policies will eventually look like. You know, we
Speaker 8: thought that ninety day pause will take us to July obviously,
Speaker 8: now it's you know, potentially June first. And remember we
Speaker 8: still have the sectorial tariffs to come on the five
Speaker 8: critical sectors, you know, farmer, semis, lumber, copper, and critical minerals,
Speaker 8: and we're not sure what those exactly a gonna look like.
Speaker 8: Is a twenty five percent of is it something higher?
Speaker 5: I'm looking at your base case, it's six thousand in
Speaker 5: terms of year end for SP five hundred, the bull
Speaker 5: case is sixty seven hundred, the barecase is forty five hundred.
Speaker 7: What could get you.
Speaker 5: To feel like one or the other is the more
Speaker 5: likely tail risk?
Speaker 8: It depends on what happens, you know, after this ninety
Speaker 8: day pause or something even children and not obviously now
Speaker 8: if we see you know, a re escalation and those
Speaker 8: reciprocal tires get put on even at a higher rate,
Speaker 8: you know, that is going to have a huge drag
Speaker 8: on the economy, and that puts us closer to a
Speaker 8: recessionary scenario that would get us to that forty five hundred.
Speaker 8: What could get us up to that sixty seven hundred?
Speaker 8: Right now? There are legal challenges we know, you know,
Speaker 8: you have Oregon versus Trump, you have you know, Vos
Speaker 8: versus Trump, And there could be a decision in the
Speaker 8: next couple of weeks, potentially an injunction that will challenge,
Speaker 8: you know, do use of IEPA for these broad based
Speaker 8: tires and the market isn't price for that, So you
Speaker 8: could see some of that. But that's not to say
Speaker 8: that that's going to be the end of story, because
Speaker 8: there's always a Supreme Court, and that could be taken
Speaker 8: to the Supreme Court and be reversed. But that's what
Speaker 8: could get us to that sixty six sixty seven hundred
Speaker 8: if we get any sort of rollback, even the baseline.
Speaker 5: Towers who is trading every day, And I asked this
Speaker 5: because there are so many people who come out with
Speaker 5: these conspiracy theories. It's the retail trader on the margin
Speaker 5: that's creating the buy the dip mentality, and everybody else
Speaker 5: is just following them. It's the hedge funds that are
Speaker 5: causing the volatility in the bond market. I mean, is
Speaker 5: there truth to that that there are these technical underpinnings
Speaker 5: that are just whipsawing everything and that we're the ones
Speaker 5: here trying to make a narrative.
Speaker 6: Out of it.
Speaker 8: There is a little bit of that, and there's also
Speaker 8: systematics as well that are in the market, you know,
Speaker 8: and you know when you see spiking volatilities, those funds
Speaker 8: have to also respond to us. So there's some of that.
Speaker 8: You know, the retail investors have been in and out
Speaker 8: of the market. I think the retail investors right now
Speaker 8: is a little bit more hesitant to sort of by
Speaker 8: the dip, and so that's what that's that's at the
Speaker 8: end of the day, it's the flows that are driving
Speaker 8: the near term volatility in the market. But I think
Speaker 8: the real money is still trying to assess, you know,
Speaker 8: what economic growth is going to look like.
Speaker 4: In a second and half.
Speaker 8: We think that you will see the economy slow close
Speaker 8: to a one and a half percent, so again not recessionary.
Speaker 8: But again, although the range of outcome have narrowed, you know,
Speaker 8: it still can end up to be flat growth or
Speaker 8: it could be one and a half percent, depending on
Speaker 8: trade policies and the president's tweets.
Speaker 2: Nadia, Just finally, just before you go within that defensive
Speaker 2: posture you have relative to where you were before, what
Speaker 2: do you like inequities? What's the favorite sector at the moment?
Speaker 8: Look, we still continue to like tech. We've seen a rebound,
Speaker 8: but I would say tech excluding Apple is in a
Speaker 8: better place than it was back in February when it
Speaker 8: was at its high.
Speaker 4: Why.
Speaker 8: We've seen, you know, the pause on the China Yours tariff.
Speaker 8: We've seen a rollback of the AI diffusion rule that
Speaker 8: was supposed to going to affect last week, and so
Speaker 8: we also see.
Speaker 1: A pickup in capex spending.
Speaker 8: Look at all the deals that have been announced, you know,
Speaker 8: around Sovereign's KAPEC spend spending an AI. So we think
Speaker 8: that the outlook for tech has actually improved than it
Speaker 8: was just a few weeks ago.
Speaker 2: Now, dear, I appreciate your time. You knew what the
Speaker 2: follow up would be, then't you. Apple Souse the advisory
Speaker 2: Group down grounding Deck is outdoor to market perform, noting
Speaker 2: the company's lack of visibility around tariffs A stick with
Speaker 2: retail Dania TOUSEI wank In on the mixed earning season, writing,
Speaker 2: a consistent narrative across retailers and brands is that higher
Speaker 2: costs will be passed on to consumers. Dania joins us
Speaker 2: now for more. Donnicot Sea, good morning.
Speaker 1: Nice to see you, Thank you for having me.
Speaker 2: Do you seeing that across the industry? Are there any
Speaker 2: bright spots where they're able to withstand this shock?
Speaker 1: You've seen some companies being able to withstand the shock,
Speaker 1: whether it's Ralph Lauren and a tapestry. Brand leaders are
Speaker 1: making the difference with product innovation, but most others the
Speaker 1: impact of tariffs is uncertain in terms of the magnitude
Speaker 1: and also the acceptance of price increases. By consumers, because
Speaker 1: at the end of the day, retail is are going
Speaker 1: to have to raise prices with these types of teriffs.
Speaker 5: We were talking after Walmart or released to earnings and
Speaker 5: came out saying that because of tariffs they might have
Speaker 5: to increase prices, and said maybe this gives actually a
Speaker 5: cart blaunche to other companies to say, we too are
Speaker 5: getting affected by tariffs, are going to have to raise prices.
Speaker 5: Are you surprised we haven't seen that more or that
Speaker 5: companies have been sort of chastened, in your view by
Speaker 5: what happened subsequently with respect to a response from the president.
Speaker 1: I think no company has the scale or the attention
Speaker 1: of the president like Walmart does. It's the biggest one
Speaker 1: out there. Most of the other companies are now saying
Speaker 1: what the impact of tariffs could be or the magnitude
Speaker 1: of what the cost will be. They're not saying what
Speaker 1: the price increase will be and how much it will be.
Speaker 1: But what they are saying is that the second half
Speaker 1: of the year, we don't know how our customer is
Speaker 1: going to react to price increases. For the most part,
Speaker 1: retailer is going to raise prices, not on every good,
Speaker 1: but on a select amount of goods, and that is
Speaker 1: drawing concern about a slowdown in in terms of consumer
Speaker 1: spending in the back half because will consumers pay or
Speaker 1: will they not pay?
Speaker 2: Companies are spending so much time thinking about how to communicate.
Speaker 2: They're going into NX season almost unbothered by what the
Speaker 2: numbers look like in the quarter and trying to work
Speaker 2: out how to communicate what the next quarter might look like,
Speaker 2: the year ahead. Dual guidance, Cut the guidance, pull the guidance,
Speaker 2: keep the guidance. Who's approached this in the optimal way?
Speaker 2: From your standpoint, who would you like to celebrate? Who
Speaker 2: do you think has done the better job this quarter?
Speaker 1: Well, like I said, I mean Ralph Lauren and Tapestry
Speaker 1: both have done a very good job given they were
Speaker 1: able to talk about what's happening with their pricing now,
Speaker 1: what the consumer acceptance is. When you think who else
Speaker 1: TJX has done a very good job. Also, most companies
Speaker 1: are talking about how sales are here and now, not
Speaker 1: just the first quarter, because to your point, it's almost
Speaker 1: like revenues and business in the first quarter is divorced
Speaker 1: from what's happening now. It's like you said, it's a
Speaker 1: week by week basis in terms of what's changing more
Speaker 1: to come next week, gap Alta, there's a lot more
Speaker 1: to cut Macy's in terms of what we'll.
Speaker 2: See consumers, so they feel terrible, What are they doing?
Speaker 1: I think consumers for the most part, depending upon their
Speaker 1: income level, they're pulling back. They're more discerning on their spend.
Speaker 1: You're seeing it in terms of some of the data
Speaker 1: of travel and what they're not looking to do or
Speaker 1: how they're pulling back. Take a look at luxury brands.
Speaker 1: Luxury brands, except for those at the super high end,
Speaker 1: we've seen a slowdown and luxury brands spend too, so
Speaker 1: they are pulling back on their spending.
Speaker 4: Also at restaurants.
Speaker 2: You say, depending on their income, what is the big
Speaker 2: difference right now between low income and high income earners
Speaker 2: and their spend? And I think what we've been tracking
Speaker 2: around this table now for years is that high income
Speaker 2: spenders consumers in this country of how do well. We're
Speaker 2: trying to work out whether the stress is migrating up.
Speaker 2: You mentioned some pressure and luxury. Are you seeing signs
Speaker 2: of that?
Speaker 1: Well, we've seen signs of pressure and luxury because of
Speaker 1: the slowdown in sales. Look at LVMH's sales which are
Speaker 1: down low single digits. It's different than what you've seen
Speaker 1: from LVMH in the past. We've seen, for example, look
Speaker 1: at traffic to some of the different types of centers.
Speaker 1: We've seen that slow down. We've seen on grocery purchases,
Speaker 1: more of an increase in some of the private label
Speaker 1: So I've seen that change. I'll tell you I was
Speaker 1: at a real estate conference earlier this week, and the
Speaker 1: mood is everything's good, but the butt meaning that when
Speaker 1: is the greatest slow down going to occur? And the
Speaker 1: bulk of what price? When price increases could start sometime
Speaker 1: during the early summer.
Speaker 5: Anyone moving production back to the US very hard.
Speaker 1: Can't move production back to the US too costly to make.
Speaker 1: Who has some of the greatest production in the US
Speaker 1: Back and Body Works around eighty percent of their goods
Speaker 1: are made in the US.
Speaker 7: Did not know that?
Speaker 2: Yes, Dinah, thank you, thanks you for the start.
Speaker 7: Donna T. Townsei, the Townsea Advice recruit, on.
Speaker 2: The Trice situation and what it all means for market
Speaker 2: someplace to say that Russell Brown Pack have crock Is
Speaker 2: with us around a table.
Speaker 7: Russ a good morning.
Speaker 2: Thanks for having me give us the constructive view for
Speaker 2: the US economy this morning.
Speaker 9: Okay, so we have another dose of uncertainty this morning,
Speaker 9: but it's no different really from the last three years,
Speaker 9: where we had a historic FED tightening cycle, we had
Speaker 9: a regional banking crisis that felt scary in the moment.
Speaker 9: Last year, we had a very acrimonious election, and you
Speaker 9: had these structural underpinnings in the US economy where in
Speaker 9: both twenty twenty three and twenty four the economy accelerated
Speaker 9: into the fourth quarter. Now, listen, we've got some real
Speaker 9: sort of fundamental headwinds, some stagflationary kind of evolutions that
Speaker 9: at the margin will reduce growth and maybe tick inflation
Speaker 9: up a little bit, but it's far from a recession.
Speaker 9: From our call, and again to underestimate these points of
Speaker 9: resiliency at your own risk.
Speaker 7: Well, this is your point.
Speaker 2: It's really important you believe that we are underestimating America's
Speaker 2: ability to absorb shocks. I just wonder how you're expressing
Speaker 2: that in financial markets of the moment.
Speaker 9: What are you doing so in our multisector fixed income
Speaker 9: portfolio is actually you've probably heard Rick creaders say this
Speaker 9: is the golden age of fixed income.
Speaker 6: Actually it's the golden age of income.
Speaker 9: And when you have a yield curve that's elevated and
Speaker 9: flatter than it's been historically, that front to the belly
Speaker 9: of the curve is this incredible opportunity. And then you
Speaker 9: can take what is really robust credit quality, put corporate credit,
Speaker 9: securitize assets together and create a high quality portfolio that
Speaker 9: yields six and a half to seven percent. Because of
Speaker 9: where you own your duration, you don't have all that
Speaker 9: volatility at the back end of the curve. So it's
Speaker 9: a super high sharp ratio portfolio.
Speaker 5: Who is it income for? And I ask this at
Speaker 5: a time when a lot of people are wondering exactly
Speaker 5: who the buyer base is going to be for this
Speaker 5: fixed income given some of the international version to US assets.
Speaker 9: So listen, I think the reality is we live in
Speaker 9: a world where there's too much money and not enough
Speaker 9: yielding assets. So there's twenty five trillion dollars of cash
Speaker 9: on the balance sheet of the private sector. That's more
Speaker 9: than all marketable treasury debt. There's two hundred and twenty
Speaker 9: trillion dollars of private sector networth, so when you think
Speaker 9: about the.
Speaker 6: Size of the global or the US.
Speaker 9: Aggurate index at about fifty trillion, there's a reason credit
Speaker 9: spreads are as tight as they are. There's a wall
Speaker 9: of money that needs yield today, and when you think
Speaker 9: about the demographic trends and the increase in savers, you know,
Speaker 9: this narrative that we're on the brink of not having
Speaker 9: enough wherewithal to finance our debt is far from reality.
Speaker 5: Okay, But given that, where is this wall of money
Speaker 5: going at times when you've got bond yields rising, you've
Speaker 5: got stock selling off, and you've got the dollar weakening.
Speaker 9: Okay, So seventy percent of marketable treasury debt comes due
Speaker 9: in the next five years every point on the yield
Speaker 9: curve five years, and in trades that negative carry to
Speaker 9: cash to.
Speaker 6: The overnight rate.
Speaker 9: So where's the outrage? You know, honestly, that's a picture
Speaker 9: of more money than there are investable assets today.
Speaker 5: So this raises a question going forward, is this a
Speaker 5: bet that can get carried over its duration? You said
Speaker 5: that this was something that you were avoiding it basically
Speaker 5: that you see that as the riskiest pot period right now.
Speaker 5: The idea of that thirty year or twenty year treasury.
Speaker 6: That isn't very predictable. It's really a matter of valuation.
Speaker 9: So you know, actually at the long end of the curve,
Speaker 9: when you've got the long bond at five percent and
Speaker 9: corporate bonds high called it corporate bonds at six percent,
Speaker 9: that's a really nice environment. If you're a long duration
Speaker 9: buyer like an insurance company or a pension fund for US,
Speaker 9: you don't really get compensated for the implied volatility of
Speaker 9: being out the curve. So the sweet spot is to
Speaker 9: be in the front of the belly where you get
Speaker 9: almost all of that yield without all that implied volatility.
Speaker 9: For a sixty to forty portfolio, you pit for the
Speaker 9: forty for your fixed income part. You use that optimized
Speaker 9: expression that I just described, and then you marry it
Speaker 9: with equities.
Speaker 2: Well, so, looking at this sponge right now between the
Speaker 2: supposed risk free asset and credit at the moment, it's
Speaker 2: really tight. We were talking about Michael Haunt at Bank
Speaker 2: of America this morning about how tight Microsoft was treading
Speaker 2: to the government bond to treasuries, and in some mature
Speaker 2: it he's thriving through it at the very front end
Speaker 2: to the curve. Typically, we'd say that was a lot
Speaker 2: of confidence about corporate America, that's why it spreads it
Speaker 2: so time. But this time around, people are saying it's
Speaker 2: the opposite. They're saying there's a lot of fear about treasury,
Speaker 2: about treasuries and whether the US government is trading as
Speaker 2: a credit. You push back a little bit against that.
Speaker 2: Could you explain that a little bit more about what
Speaker 2: people are getting so wrong?
Speaker 4: Yep.
Speaker 9: So I think the risk free curve is in equiliveryment.
Speaker 9: It's twist deepened since the election. I don't have my
Speaker 9: terminal in front of me today, but we were four
Speaker 9: forty four on election day.
Speaker 6: I'm guessing we're right about there now.
Speaker 9: Front ends, lower back ends, higher curves evolved in a
Speaker 9: stagflationary outcome.
Speaker 6: That makes sense to me.
Speaker 7: That's what you think. This is a stagflationary shotgun for
Speaker 7: the yield curve.
Speaker 9: Yeah, a modest one, and that's what's reflected since election day.
Speaker 9: But as it pertains to spreads, So, yeah, credit spreads
Speaker 9: are tight. I get asked that in every client meeting
Speaker 9: I go into today. But there's three reasons. One, credit
Speaker 9: qualities pristine across investment grade and certainly in the higher
Speaker 9: part of the high yield market. Second, people don't buy spreads,
Speaker 9: they buy all in yields. And third you think about
Speaker 9: the technical So there's some amazing statistics. So twenty years ago,
Speaker 9: the investment grade Index and the Treasury Index were the
Speaker 9: same market cap. Today the investment grade Index is about
Speaker 9: half the size because the treasury market is growing more
Speaker 9: quickly and the high yield market one point four trillion
Speaker 9: in total market cap. The treasury market grows by that
Speaker 9: size every nine months. So there's a relative scarcity of
Speaker 9: these credit assets today, and that's why spreads are tight
Speaker 9: and will probably remain.
Speaker 5: So do you expect spreads to tighten even more as
Speaker 5: companies refrain from issuing more debt at a time when
Speaker 5: yields are this high, given the fact that there is
Speaker 5: uncertainty and some of the capex ex capex plans might
Speaker 5: be put on hold or M and A and other
Speaker 5: things that would require them to raise money.
Speaker 9: We've seen pretty normal issuance patterns so far this year,
Speaker 9: and you definitely see a pullback when rates back up,
Speaker 9: and then they sort of reaccelerate when rates drop. So
Speaker 9: I see very normal behavior from issuers today.
Speaker 5: You said something before that I thought was really interesting
Speaker 5: that if you wanted to buy long duration bonds, you'd
Speaker 5: barbel it with stocks. You'd have this sort of barbell
Speaker 5: approach at a time when both are considered risky for
Speaker 5: different reasons. Are you believing that in some sort of
Speaker 5: downturn that US treasurers will ultimately, to John's point, have
Speaker 5: the same function that they always have in terms of
Speaker 5: rallying and providing that ballast.
Speaker 6: Absolutely one hundred percent.
Speaker 9: I mean, when you think about perhaps at this moment,
Speaker 9: I think the worry is around deficits, which are clearly
Speaker 9: on an unsustainable path. What is the next move that
Speaker 9: there were a shock, heaven forbid another pandemic where you
Speaker 9: needed a multi trillion.
Speaker 6: Dollar fiscal package.
Speaker 9: The good news is, in this instance, there's hundreds of
Speaker 9: basis points for the FED to cut and they could start.
Speaker 6: QE if they needed to.
Speaker 9: So there's lots of ammunition and the front end of
Speaker 9: the curve would absolutely respond to that easing of policy.
Speaker 9: And again, if you hone your duration in the front
Speaker 9: of the belly, the curve's going to steepen and that's
Speaker 9: going to work for you.
Speaker 2: Final question, the point of asset scacety, which runs right
Speaker 2: the way through this conversation. Does China and Germany have
Speaker 2: something to say about that? Or Japan and Germany rather
Speaker 2: have some that to say about that?
Speaker 9: Well, I think this no of US exceptionalism being over
Speaker 9: is a narrative.
Speaker 6: I don't buy it.
Speaker 9: I mean, I think if you want real equity returns,
Speaker 9: look at the s and P five hundred has an
Speaker 9: average return on equity about eighteen percent, even the equal
Speaker 9: weight to SMP about twelve percent. So even for the
Speaker 9: equal weight to SMP, you can double your book value
Speaker 9: over six years. The returns are exceptional.
Speaker 7: That's the equity story.
Speaker 2: But you were talking about the bond market with regards
Speaker 2: to our sets scarcity supporting fixed income, and what we
Speaker 2: see taking place in Japan might uppends some of that.
Speaker 2: Taking place in Germany years to come might upends some
Speaker 2: of that.
Speaker 7: How is that factor in to your thesis?
Speaker 4: So?
Speaker 9: I think the ubiquity of US debt and the size
Speaker 9: and depth and liquidity of US markets are really unparallel.
Speaker 6: There is no substitute.
Speaker 9: So the US municipal bond market in terms of its
Speaker 9: capitalization is bigger than the German bond market. I mean
Speaker 9: there's just not really a whole lot of alternative Russell.
Speaker 6: This was great.
Speaker 2: I could tell to you all day about this Rick
Speaker 2: Is band, from this show. From now away, I just
Speaker 2: want to speak of Russell Brown back at Blackross, No way.
Speaker 5: Here right to create the set back in the rags
Speaker 5: of Black Right.
Speaker 7: Don't worry.
Speaker 6: I learned everything I know from Rick.
Speaker 7: What's the best?
Speaker 2: I love Rick too. It just doesn't wake up early
Speaker 2: enough to come on this program anymore. This is the
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