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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim

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Speaker 1: Fox along with my co host Lisa Abramowitz. Each day

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Speaker 1: we bring you the most important, noteworthy, and useful interviews

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Speaker 1: for you and your money, whether at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg P L Podcast

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Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. We want

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Speaker 1: to discuss more about the breaking news of President Trump

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Speaker 1: reorganizing his National Security Council, including removing his chief strategist.

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Speaker 1: Stephen Bannon from this committee at Goldberg is an adjunct

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Speaker 1: faculty member at n y U Center for Global Affairs.

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Speaker 1: He is also an adject professor at Brooke College and

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Speaker 1: joins us here in our Bloomberg eleven three oh studio

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Speaker 1: and uh ed we were going to talk initially about

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Speaker 1: President Trump's meeting with President Jan Ping of China today

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Speaker 1: and it's interesting at Steve Bannon was among the people

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Speaker 1: who are supposed to be there, right, Yes, he was.

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Speaker 1: He was one of the people with Secretary of Tragedy

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Speaker 1: Uh Munchen and and Um Kohn and Um and Jared

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Speaker 1: Um who are all going to be at the meeting.

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Speaker 1: So who knows what's going to happen. Now, So what

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Speaker 1: are you expecting to come out of this meeting with

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Speaker 1: president from China? Well, it's it's look, the goal basically

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Speaker 1: would be stability. I mean, this is what China would like. Um.

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Speaker 1: The problem is, of course, the President Trump campaigned using

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Speaker 1: China as a whipping boy, and with in with Presidents

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Speaker 1: Trump truly weak political standing at the moment. Does he

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Speaker 1: need to bluster? Uh? Surely the Chinese UM know enough

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Speaker 1: about President trump senist personality. And we also have to

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Speaker 1: assume that the Chinese intelligence knows exactly much much more

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Speaker 1: than the Senate intelligence can about what went on with

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Speaker 1: Russians in the election. To the Chinese have a little

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Speaker 1: bit of the UM upper hand here, but they they

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Speaker 1: really need to keep things calm. So one has to

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Speaker 1: assume they're gonna offer some UM cameras to Trump. So

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Speaker 1: I could use to say that something was accomplished, but

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Speaker 1: it's a difficult meeting. Well, I want to bring in

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Speaker 1: right now, Wayne Alex Wayne he is our politics editor

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Speaker 1: for Bloomberg, about this breaking story of President Donald Trump

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Speaker 1: and the reorganization of the National Security Council. Alex, maybe

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Speaker 1: you could just tell us the details. Sure, Um, this

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Speaker 1: comes as a bit of a surprise the the administration

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Speaker 1: filed a document with the Federal Register this morning outlining

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Speaker 1: some organizational changes to the National Security Council, which advises

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Speaker 1: UH Donald Trump on foreign policy matters. Um. Broadly, the

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Speaker 1: changes place his National Security Advisor hr McMaster UH in

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Speaker 1: firm control of everything that the that the National Security

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Speaker 1: Council does, and also everything that the Homeland Security Council does.

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Speaker 1: That's like, that's a domestic group that that focuses on

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Speaker 1: on internal security and border security and that kind of thing, um.

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Speaker 1: But also of of of high interest to people in Washington. UH.

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Speaker 1: Steve Bannon, the chief strategist, is no longer a member

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Speaker 1: of what's called the Principles Committee of the National Security Council.

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Speaker 1: And from a policy perspective, how does this change in

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Speaker 1: the composition of President Trump's Security Council affect or potentially

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Speaker 1: affect policy going forward. Well, it seems to give hr

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Speaker 1: McMaster a much stronger voice in the administration. UH. He

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Speaker 1: is regarded as a pretty sober minded guy, um, and

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Speaker 1: probably a positive influence on the on the on the president. UM.

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Speaker 1: The thought to say that the Bannon is is not

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Speaker 1: I'm not making a judgment here, but there is the

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Speaker 1: Bannon is definitely a more controversial figure in Washington. So

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Speaker 1: I am sure that that this change will be applauded

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Speaker 1: by the president's critics. Ed. What about you, Yeah, I

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Speaker 1: think it. It sounds like it. It's things a foreign

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Speaker 1: policy direction, much more to an even hand, much more rational, um,

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Speaker 1: much less American first instead of America and the world.

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Speaker 1: But this is all re means to be seen as

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Speaker 1: far as policy goes, alex Wayne, is there any noted

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Speaker 1: change in policy because Steve Bannon would be leaving the

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Speaker 1: Security Council? You know, it was never really evident what

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Speaker 1: Steve Bannon's influence was. Um. He was put in charge

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Speaker 1: of the council when when Michael around started not put

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Speaker 1: in charge of the council, he was put in the

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Speaker 1: Principles plinny when Michael Flynn was in charge of the council. Uh.

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Speaker 1: Michael Flynn was a much more controversial figure than hr

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Speaker 1: McMaster um, more of a let's say, erratic figure. Um.

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Speaker 1: So it's possible that Bannon was on the Council the

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Speaker 1: Principle's clanning at that time just so that the President

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Speaker 1: would have a close awry on what Michael Phon was doing.

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Speaker 1: The President may have more confidence in hr mc master

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Speaker 1: quite honestly, Well, you know, talking about policy, and I

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Speaker 1: just want to get your quick thoughts on how North

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Speaker 1: Korea and the launch of yet another missile affects the

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Speaker 1: conversation today that President gy and President Treup have. Oh

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Speaker 1: it just it just makes it even more complicated. Look,

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Speaker 1: China basically has been been both the protector and um

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Speaker 1: the pusher to make North Korean more sane for the

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Speaker 1: last um, you know, fifteen twenty years. They really from

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Speaker 1: the Chinese perspective, they realize they have a problem. They

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Speaker 1: really don't know how to handle it. I think, on

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Speaker 1: the other hand, that they don't want to upset the

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Speaker 1: Apple car too much. They don't want, you know, the

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Speaker 1: problem of having no Yeah, well, I guess the upsetting

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Speaker 1: the Apple car too much just sort of goes back

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Speaker 1: ed to your to your comment earlier about trying to

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Speaker 1: maintain stability and that that's the goal at Goldberg. Thank

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Speaker 1: you so much for joining us at Goldberg's adjug faculty

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Speaker 1: and hy U Suenter for Global Affairs, also the author

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Speaker 1: of the Joint Ventured Nation, Why America needs a new

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Speaker 1: Foreign policy, and of course or thanks to Alex Wayne,

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Speaker 1: Politics editor for Bloomberg, Well, there is a revolution underway

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Speaker 1: in bond markets. The e t F industry has taken

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Speaker 1: over with a storm, and to find out just how

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Speaker 1: much it has transformed the way of doing business, we

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Speaker 1: want to bring in Bloomberg's Rachel Evans, a corporate financial

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Speaker 1: reporter who wrote a tremendous piece on it uh in

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Speaker 1: Bloomberg's Markets magazine, as well as Eric Beltunas, senior et

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Speaker 1: F analyst for Bloomberg Intelligence, who is the guru when

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Speaker 1: it comes to things e t F s At Rachel,

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Speaker 1: I want to start with you just to get some

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Speaker 1: perspective on how much bond ETFs have been transforming the

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Speaker 1: debt markets in the US. So this has been going

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Speaker 1: on over the last kind of five to ten years really,

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Speaker 1: and it's really a product of changes we saw after

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Speaker 1: the financial crisis. We saw bond bond traders who typically

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Speaker 1: would have been kind of making the market really back away.

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Speaker 1: The infantries went down and as a result, investors have

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Speaker 1: had to find new ways to actually buy and sell bonds. Now.

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Speaker 1: The e t F at the same time was kind

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Speaker 1: of climbing as a financial instrument that people could get

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Speaker 1: into and out of very very quickly, and that's now

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Speaker 1: something that people look to and when they're trying to

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Speaker 1: get into or out of bonds as kind of a

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Speaker 1: vehicle by which they might do that. Well, Eric Baltunas,

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Speaker 1: maybe you could come in on this. My question has

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Speaker 1: to do with the fact that if you're a bond trader,

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Speaker 1: does that make you different than a bond investor? Are

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Speaker 1: the days of buy and hold over? I think you know,

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Speaker 1: if you look at the turnover in these different bond

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Speaker 1: etf you look at the Vanguard uh B n D

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Speaker 1: that's saying barely turns over. People are going in there

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Speaker 1: and they like the fact that it's under ten basis points.

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Speaker 1: You get a diverse group of bonds. I think there's

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Speaker 1: eight thousand bonds in that fund um and look, that

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Speaker 1: would be one that people buy and hold. Then you

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Speaker 1: have something like h y G, which I refer to

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Speaker 1: as a hotel. People are checking in and checking out

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Speaker 1: of that saying all the time. The turnover is much higher,

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Speaker 1: and I think that's a sort of parallel with the

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Speaker 1: whole E T F universe. It's serving many different investors.

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Speaker 1: But I think this bond movement. The number I like

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Speaker 1: to throw out is if you look at h y G,

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Speaker 1: it's only represents one to two percent of the assets

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Speaker 1: in the high yield market, but it accounts for about

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Speaker 1: of the trading, so they become really a big part

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Speaker 1: of the trading, but still relatively small asset wise. Well,

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Speaker 1: and there wouldn't be a revolution without a good degree

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Speaker 1: of worry that comes along with it, And there are

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Speaker 1: some people who are worried that, uh, the sort of

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Speaker 1: framework of an e t F, which is bundling a

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Speaker 1: group of securities and having that portfolio and then selling

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Speaker 1: shares that trade on a daily basis, could be problematic,

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Speaker 1: particularly in the dead industry. At Rachel, do you want

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Speaker 1: to explain what some of those concerns are sure, I mean,

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Speaker 1: this really kind of relates to the liquidity mismatch, as

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Speaker 1: people put it, between having something that is exchange traded

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Speaker 1: and can be traded at any point in the day

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Speaker 1: and some of the underlying instruments that maybe there's a

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Speaker 1: market for them once a week or once a day perhaps.

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Speaker 1: Um So, I mean we've seen through the financial crisis

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Speaker 1: that when you know, we we were in the depths

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Speaker 1: of two thousand and eight that sometimes the net asset

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Speaker 1: value of these funds, that the value of the underlying

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Speaker 1: holdings I've verged significantly from the price. Now the question

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Speaker 1: really is is kind of what actually represents the kind

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Speaker 1: of fair value of the fund? Is? Is the net

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Speaker 1: value a better representation or is it the price? And

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Speaker 1: often we've seen the price of the underlying securities catch

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Speaker 1: up with the t F. Eric, I want to I

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Speaker 1: want to get you away in on this because I

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Speaker 1: know you and I have talked extensively a out this issue.

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Speaker 1: Is it fair to say that e t s, particularly

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Speaker 1: fixed income ETFs, particularly high bond e t s, which

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Speaker 1: we referred to with h y G, is it Is

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Speaker 1: it fair to say they have not been tested by

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Speaker 1: a major crisis? So yes, and no, Uh look h

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Speaker 1: y G was around in two thousand and eight. People

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Speaker 1: forget that, but it was tiny. Come on, let's be honest.

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Speaker 1: Yeah it was. It was smaller back then, right. So,

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Speaker 1: and what Rachel was referring to as the discount, I

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Speaker 1: referred to that as the arbitrage band. It's essentially the price.

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Speaker 1: The price has to go down below the n A

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Speaker 1: V before somebody thinks it's worth it to buy the

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Speaker 1: bond and sell the E T S and so the

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Speaker 1: arbitrage band over the last ten years has shrunken incredibly.

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Speaker 1: So you have two things I think is consider when

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Speaker 1: you think of this I called the Jurassic part concern um.

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Speaker 1: When you look when when you are looking at the

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Speaker 1: fact that if you were trying to sell high yield

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Speaker 1: debt on a bad day, you'd probably have is tough time,

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Speaker 1: if not tougher than selling shares of the E T F.

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Speaker 1: So I think, you know, look, the E T S

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Speaker 1: is a convenient way to do it, but it's not

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Speaker 1: without risk, and I think there is probably some bit

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Speaker 1: of cost that you will have to pay if you

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Speaker 1: wanted to get out on those bad days, in the

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Speaker 1: form of just the middlemen. They're in there making markets,

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Speaker 1: but there's so many more people with their eyes on

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Speaker 1: the trading, especially the big ones like h y G,

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Speaker 1: that you do see more liquidity in the secondary market

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Speaker 1: for them. Rachel, I wonder if you could just tell

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Speaker 1: us about a gentleman named Layton Chance, because he figures

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Speaker 1: in your article and I thought it explained an interesting

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Speaker 1: process by which bond investors are investigating exchange traded funds. Right.

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Speaker 1: So Layson was really kind of one of the first

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Speaker 1: um to to to really use this process and with ETFs.

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Speaker 1: Basically what he did is he utilized one of the

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Speaker 1: interesting feat and he was at the Lockheed Martin investment

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Speaker 1: management company, right, and also he did Tennessee's retirements right

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Speaker 1: and now he's now he's in Texas with the Employees

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Speaker 1: Retirement System of Texas. UM Yes, So basically, I mean

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Speaker 1: he utilized kind of this this function of ETFs whereby

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Speaker 1: you can buy the shares in the e t F

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Speaker 1: either with cash or what's called in kind. Now, in

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Speaker 1: kind creation basically means that you deliver a portfolio of

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Speaker 1: bonds to the e t F provider and in return

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Speaker 1: they give you some e t F shares for those bonds. Now,

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Speaker 1: of course, you can either keep those e t F

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Speaker 1: shares in your book and that that's a very liquid

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Speaker 1: thing that you can buy more of or sell, or

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Speaker 1: you can sell them and use that kind of cash

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Speaker 1: you free up to to change your portfolio. So he

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Speaker 1: used this as a kind of a novel way to

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Speaker 1: to change his portfolio from investment grade debt to high

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Speaker 1: yield and treasuries. For more information, just check out the

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Speaker 1: Bloomberg Market story by Rachel Evans, Bloomberg's corporate finance reporter.

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Speaker 1: R thanks also Eric baltunas Senior E T F Analyst

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Speaker 1: for Bloomberg Intelligence. Well Wall streets bet against empty malls

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Speaker 1: in the United States is getting too crowded. This, according

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Speaker 1: to a report from Group, instead recommend wagering against individual

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Speaker 1: retailers as the next big short. Well here to tell

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Speaker 1: us about malls and commercial real estate is Paul Adernato.

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Speaker 1: He is the senior reats analyst and Managing director of

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Speaker 1: BEMO Capital Markets, and he joins us here in the studio. Paul,

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Speaker 1: always a pleasure, Thanks for being with us. Let's talk

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Speaker 1: about the death of the mall? Is it the overrated?

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Speaker 1: I mean, have we always been talking about the death

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Speaker 1: of retail and the death of the mall? Him, It's

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Speaker 1: been It's been an ongoing story for for years and years.

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Speaker 1: You know, first it was going to be bird flu,

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Speaker 1: then it was terrorism. Uh, then it was of course

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Speaker 1: that e commerce years ago. And so the mall has

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Speaker 1: always evolved to to to bring consumers different experiences. Uh

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Speaker 1: that would be more like restaurants, movie theaters, etcetera. So, uh,

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Speaker 1: the malls have always been just a place for people

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Speaker 1: to meet and a place of commerce. And so if

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Speaker 1: we just think more general early about those places, uh,

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Speaker 1: they'll probably survive in some form or another. They've been

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Speaker 1: very very good at evolving in the past. Well, Paul,

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Speaker 1: do you think there are specific reads real estate investment

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Speaker 1: trusts that have been oversold as a result of the

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Speaker 1: growing pessimism about the retail sector in general? Alright, A

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Speaker 1: very good points. So if we were to separate the

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Speaker 1: U S. Mall industry into the most productive malls, those

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Speaker 1: would be companies like UH, Simon Property Group SPG, mase

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Speaker 1: Rich and a C and g g P Inc. That's

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Speaker 1: a symbol, g g P. Those would be considered the

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Speaker 1: top tier operators in the US. And UM and this

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Speaker 1: group I think, uh, you know, has been oversold to

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Speaker 1: some extent. The reason I say that is that if

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Speaker 1: we look at the implied cap rate and so really

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Speaker 1: that's just looking at the um the value of the

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Speaker 1: underlying real estate, it's trading much much cheaper than the

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Speaker 1: private market value of of real estate, uh, substantially cheaper.

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Speaker 1: So you know, are the malls are the malls stocks cheap?

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Speaker 1: Very much? So? UM what will be the catalyst to

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Speaker 1: get them going. Um, that's a little more of a

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Speaker 1: tricky question. I'm not quite sure that we will ever have,

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Speaker 1: you know, evidence until this whole you know, UH department

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Speaker 1: store anchor and and you know, small shop retail uh

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Speaker 1: evolution has has really played out. What about the payoffs

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Speaker 1: from these real estate investment trusts? So many people look

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Speaker 1: to those as a source of income. Are those payouts

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Speaker 1: covered by the current operations of these companies? Yes, so

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Speaker 1: all of the three companies that I just mentioned have

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Speaker 1: very strong balance sheets. Uh. The dividends, I would say,

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Speaker 1: are not at risk uh at all. You know, we

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Speaker 1: talk about malls and we talk about the carnage that

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Speaker 1: we've seen in among retailers, and often we conflate the

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Speaker 1: too because we think so goes the fate of retailers

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Speaker 1: goes the fate of malls. Is this true? Um, there's

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Speaker 1: a very, very big disconnect between the fortunes of retailers

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Speaker 1: and the fortunes of the mall owners, for instance, the anchors.

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Speaker 1: Many people don't realize that the anchors pay little or

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Speaker 1: no rent to the mall owner. Historically, they were given

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Speaker 1: the space for free or for a very very low

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Speaker 1: rent in order to generate traffic for the mall. Now

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Speaker 1: they haven't really done that for a long time, and

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Speaker 1: now it's it's finally playing out that the anchors are

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Speaker 1: are disappearing or shrinking. But that's just, you know, kind

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Speaker 1: of one example of how the retailers don't necessarily directly

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Speaker 1: impact the fortunes of the mall owners. Right although, in

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Speaker 1: evaluating the value of a mall, you have to look

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Speaker 1: at the traffic, the foot traffic of the stores that

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Speaker 1: currently are there. And based on those analyzes, do you

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Speaker 1: believe that there is still more pain to be had

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Speaker 1: in the retailers specifically? So, so, there's definitely more pain

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Speaker 1: to be had. I mean that we're we're probably still

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Speaker 1: only in the in the third or fourth inning of

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Speaker 1: the whole e commerce impact on on the retail space.

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Speaker 1: So so I do think that there's a lot more

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Speaker 1: transformation that has to occur in terms of the mall traffic.

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Speaker 1: It's interesting, but the mall owners claim that they don't

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Speaker 1: really track it. Now they have now they're starting to.

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Speaker 1: But you know, this is this is what we're we're

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Speaker 1: we're hearing, and so they say, look at things like

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Speaker 1: gift cards but they you know, they should be able

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Speaker 1: to count cars in the parking lot, etcetera. But um

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Speaker 1: but anyway, I guess the point is is that the

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Speaker 1: way that people shop in malls is changing. Right, so

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Speaker 1: you're probably going to do some research online before you

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Speaker 1: go to a store, Whereas you know, twenty years ago,

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Speaker 1: you might have started at one end of the mall

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Speaker 1: and just you know, made your way all the way

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Speaker 1: down to the other end. Uh And that's the way

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Speaker 1: people used to shop. Uh so so so habits are changing,

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Speaker 1: behaviors are changing, uh so so traffic. While it's it's

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Speaker 1: critically important to know that, um, you know, we have

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Speaker 1: to consider the bigger picture as well. Consider Acadia Realty Trust.

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Speaker 1: This is an interesting company. A k R is the symbol.

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Speaker 1: They've got properties in Brooklyn, Chicago, Washington, San Francisco, Boston's

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Speaker 1: Newberry Street, for example, as well as Milwaukee, uh and

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Speaker 1: and Chicago. Tell us about Akadia? Why is it different? Sure? So,

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Speaker 1: Acadia does not own any mall real estate. In terms

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Speaker 1: of the regional malls. They have a few community shopping

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Speaker 1: centers that are grocery anchored, but none of the of

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Speaker 1: the malls that are currently under under scrutiny. UM so

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Speaker 1: years ago, Acadia, you know saw what was coming, as

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Speaker 1: did as did many folks, but they actually acted on

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Speaker 1: it and built a company around it. And that is

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Speaker 1: the thought that UM dense urban areas, this live, work,

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Speaker 1: play environment is going to be the place that UH

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Speaker 1: people want to want to be UH and where commerce

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Speaker 1: will will occur and also where brand awareness can be established.

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Speaker 1: And so if you talk to retailers today, UH, those

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Speaker 1: that are either UH doing very well online or those

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Speaker 1: that want a better online presence, they will tell you

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Speaker 1: that they you know, first you need to have brand awareness.

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Speaker 1: And so brand awareness generally occurs at flagship locations. These

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Speaker 1: are the very large stores that really really convey the

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Speaker 1: experience of the brand when when you go in these

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Speaker 1: take these UH stores are located generally, UH in the

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Speaker 1: metro areas that you that you just mentioned. Paul at NATO,

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Speaker 1: Thank you so much for being with us. Truly, this

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Speaker 1: is the story of the moment. Is definitely, at least

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Speaker 1: in the debt world and in the real estate world,

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Speaker 1: is what is going to happen among retailers and with

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Speaker 1: commercial real estate, real estate investment trusts and all of

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Speaker 1: the other related instruments. Paul are Donato, senior reads analyst

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Speaker 1: Managing director at BMO Capital Markets, and he was with

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Speaker 1: us in our Bloomberg eleven three oh studio. The minutes

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Speaker 1: to the March fourteenth and fifteen f o MC meeting

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Speaker 1: will be released today at two pm Wall Street time.

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Speaker 1: We will of course be bringing that to you, but

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Speaker 1: we know that Federal Reserve officials have been well less

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Speaker 1: than transparent in telling us all about what adjustments to

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Speaker 1: the balance sheet of the Federal Reserve they might Mike,

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Speaker 1: let's bring in John Augustine. He is the chief investment

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Speaker 1: Officer of Huntington National Bank, helping to manage approximately seventeen

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Speaker 1: and a half billion dollars. Based in Columbus, Ohio, John

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Speaker 1: can be followed on Twitter at John Underscore Augustine, John,

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Speaker 1: thanks very much for being here. As I mentioned, we'll

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Speaker 1: get those meeting minutes at two pm Wall Street time.

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Speaker 1: Do you expect to hear anything or learn anything about

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Speaker 1: adjustments to the Federal Reserves balance sheet? We don't think so.

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Speaker 1: We know that debates obviously picking up to that for

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Speaker 1: an a half trillion dollar balance sheet, and when they

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Speaker 1: may quit renewing purchases from matured securities there, but we

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Speaker 1: don't suspect it. It would be rather surprised, we think

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Speaker 1: the markets if that showed up in meetings or excuse me,

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Speaker 1: in meeting minutes this afternoon, but we'll see you never know. Well, yeah, John,

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Speaker 1: you know this is my big question right now because

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Speaker 1: Dan Trullo today uh FED chair in Uh just who

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Speaker 1: is about to resign? So in fairness, he's not necessarily

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Speaker 1: going to be relevant to this discussion, but he said

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Speaker 1: on a CNBC interview today that he thinks it makes

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Speaker 1: sense to start talking about possibly unwinding the balance sheet.

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Speaker 1: This follows a lot of FED talks saying the same thing.

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Speaker 1: Markets have not responded. Are they just saying we don't

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Speaker 1: believe you. We're gonna call your bluff potentially? You know

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Speaker 1: that the surprise to us today and market so far

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Speaker 1: is the fact that bond yields have gone nowhere today

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Speaker 1: and as a matter of fact, that they're slightly lower

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Speaker 1: now on the tenure as we sit and speak this morning.

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Speaker 1: So the bond market is not buying it um, that's

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Speaker 1: for sure, and they're not buying the economic recovery either.

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Speaker 1: There's two big sets of buyers in the bond market

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Speaker 1: individual investors through mutual funds, and then the TICK data

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Speaker 1: shows foreign investors. Now that's data that's January, the last

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Speaker 1: report Treasury Treasury international flows. So yes, sorry, but anyways,

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Speaker 1: there's there's still big buyers prevalent in the bond market,

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Speaker 1: and it's it's a it's a surprise to us at

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Speaker 1: our shop at Huntington this year to see yield this

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Speaker 1: low and now having negative real rates. Is it possible

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Speaker 1: that we're getting a demographic shift in the investor base

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Speaker 1: that as people age, the baby boomers age, that they

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Speaker 1: will be getting out of stocks and moving into treasuries

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Speaker 1: because they want the security and the consistency of return. Potentially,

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Speaker 1: but we think, at least at our shop, as we

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Speaker 1: look out for our customers again, you know, I'd rather

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Speaker 1: almost own Johnson and Johnson stock right now and get

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Speaker 1: three percent divit and yield than a bond right now

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Speaker 1: and get one percent. So yields we would say we

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Speaker 1: still strive for three percent in our income focused portfolios.

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Speaker 1: Um still below that on a tenure treasury yield, So

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Speaker 1: that may be correct, We're just not approaching it that way,

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Speaker 1: at least at Huntington's So let's say we do get

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Speaker 1: some hints about balance sheet discussions at the Fed today

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Speaker 1: at two o'clock when we get the f O m

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Speaker 1: C meeting minutes. Uh, do you think that there will

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Speaker 1: be a severe, potentially severe market reaction potentially now? And

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Speaker 1: by the way, we may be following Europe a little

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Speaker 1: bit this morning to that bond markets quiet, and we

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Speaker 1: tend to follow the European bond market until the afternoon,

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Speaker 1: so it'll be more interesting here this afternoon. Now, if

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Speaker 1: we do get indication that they may try to at

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Speaker 1: least stop growth or lower the balance sheet, yes, we

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Speaker 1: would suspect you're going to eventually get a reaction in

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Speaker 1: the bond market. Again, that's the surprise does this year's

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Speaker 1: We haven't to most any news. Just to give some

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Speaker 1: perspective on the Fed's balance sheet, it's about four and

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Speaker 1: a half trillion dollars that has been expanding since the

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Speaker 1: financial crisis when the FED started to engage in buying

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Speaker 1: bonds and increasingly mortgages as well. Back in two thousand

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Speaker 1: and nine, it was nearly one point eight trillion dollars,

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Speaker 1: so it has Wow, it is really is more than doubled,

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Speaker 1: nearly troubled, but think of this for this afternoon. Though.

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Speaker 1: One interesting thing this afternoon, what's on our mind is

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Speaker 1: where they're gonna do in the second half of the

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Speaker 1: year and are they going to change their dialogue around

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Speaker 1: the second half of the year. In other words, are

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Speaker 1: they thinking more than three rate increases this year? Because

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Speaker 1: we do think the Fed is going to have an

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Speaker 1: impact on not only the yield curve treasury yield curve,

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Speaker 1: but potentially stock valuations in the second half of the

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Speaker 1: year if their discussion and meeting minutes gets more are hawkish.

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Speaker 1: That is what we're watching this afternoon. All right, let's

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Speaker 1: talk about stock valuations for just a moment. If you

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Speaker 1: had a portfolio manager that consistently made ten percent a year,

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Speaker 1: what would you say, hire him first? Okay, So the

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Speaker 1: reason I ask you this is because you know, if

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Speaker 1: you happen to buy a n ASDAC fund right just

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Speaker 1: tracked the NASDAC, you're up ten percent, So why not

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Speaker 1: just get out? Now? Why do we never hear when

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Speaker 1: you should sell and take some profits. So we're we're

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Speaker 1: a long only shop in general, and our clients are

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Speaker 1: hiring us to basically keep them fully invested unless we

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Speaker 1: see a recession coming. We don't see a recession coming.

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Speaker 1: Alternatives to equities are difficult right now because you could

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Speaker 1: argue most all markets are expensive. So what we're doing

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Speaker 1: is making sure diversification plays into equity markets. We're rotating

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Speaker 1: as those valuations EBB and flow. Uh. This is an

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Speaker 1: environment we as discretionary money managers, don't particularly like, but

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Speaker 1: it's kind of the one that's handed to us. I

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Speaker 1: got an egg it of real yields coming out of bonds,

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Speaker 1: and I got cash that's still well below the inflation rate.

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Speaker 1: So equities are where we have to focus and do

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Speaker 1: it diligently. For clients, we have to be more diligent.

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Speaker 1: You're right, How concerned are you about a sort of

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Speaker 1: perfect storm where longer yields rise substantially and stocks sell off,

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Speaker 1: which is something that people have been worried about. How

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Speaker 1: do you diversify that well? Then that at least would

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Speaker 1: provide us potentially an avenue to rotate from stocks into bonds.

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Speaker 1: How high would yields have to go on the thirty

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Speaker 1: year of the ten year for you to make that rotation.

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Speaker 1: Right now, we're somewhere between two point eight and three

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Speaker 1: point percent. That's what our fixed income team is looking at.

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Speaker 1: On the tenure, that's why our fixed income team is

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Speaker 1: looking at. We've been talking about that already most of

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Speaker 1: this year, when rates got to to six earlier this

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Speaker 1: year but then but then rolled over. So we're we're

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Speaker 1: kind of setting a number there in our mind, and

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Speaker 1: we're kind of setting it around the potential for real GDP.

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Speaker 1: We're kind of using that is our barometer to see

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Speaker 1: when we want to make it, when we eventually want

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Speaker 1: to make that switch. You mentioned rotation, and I wonder

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Speaker 1: if you could tell us what you're rotating out of

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Speaker 1: and what are you rotating into well in sectors for instance,

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Speaker 1: what we're talking to our equity team about is find

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Speaker 1: excuse me, technology has been where the action is so

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Speaker 1: far this year. It's the only sector up double digits. Energy,

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Speaker 1: by contrast, is the one down, one of the two

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Speaker 1: downs so far this year. So there's one potential rotation

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Speaker 1: not to sell out wholesale, but just trim some gains

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Speaker 1: and add now that oil seems to want to hang

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Speaker 1: around fifty dollars a barrel, so PIM that's one. The

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Speaker 1: second one we've been talking talking about consistently and we've

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Speaker 1: been early on is small and mid caps. If we're

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Speaker 1: going to get some fiscal programs here in the US,

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Speaker 1: some policy change, we think that's going to be a beneficiary,

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Speaker 1: and that's on pause right now. But that's another area

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Speaker 1: we're looking at. How long are you gonna wait before

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Speaker 1: seeing fiscal stimulus before saying, all right, maybe this trade

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Speaker 1: isn't isn't gonna workout? Probably two So if we don't

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Speaker 1: see some kind of fiscals Emula's plan by the end

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Speaker 1: of June. You know, in March we really started seeing

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Speaker 1: restlessness coming markets around that issue from day to day.

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Speaker 1: So you're probably here in the second quarter somewhere. John Augustin,

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Speaker 1: thank you so much for joining us. That was really,

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Speaker 1: really fascinating. John Augustine is chief investment officer at Huntington

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Speaker 1: National Bank, overseeing about seventeen and a half billion dollars

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Speaker 1: based in Columbus, Ohio, and I thought it was super

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Speaker 1: fascinating this idea of that bogey, that benchmark at which

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Speaker 1: you get at a stock at stocks and into bonds

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Speaker 1: to capture that higher yield. Thanks for listening to the

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Speaker 1: Bloomberg P and L podcast. You can subscribe and listen

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00:28:45,240 --> 00:28:50,600
Speaker 1: to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.

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00:28:50,920 --> 00:28:54,200
Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.

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00:28:54,480 --> 00:28:57,200
Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one

510
00:28:57,480 --> 00:28:59,880
Speaker 1: before the podcast. You can always catch US World War

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00:29:00,000 --> 00:29:09,520
Speaker 1: ID on Bloomberg Radio mm hm