Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim
Speaker 1: Fox along with my co host Lisa Abramowitz. Each day
Speaker 1: we bring you the most important, noteworthy, and useful interviews
Speaker 1: for you and your money, whether at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg P L Podcast
Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. We want
Speaker 1: to discuss more about the breaking news of President Trump
Speaker 1: reorganizing his National Security Council, including removing his chief strategist.
Speaker 1: Stephen Bannon from this committee at Goldberg is an adjunct
Speaker 1: faculty member at n y U Center for Global Affairs.
Speaker 1: He is also an adject professor at Brooke College and
Speaker 1: joins us here in our Bloomberg eleven three oh studio
Speaker 1: and uh ed we were going to talk initially about
Speaker 1: President Trump's meeting with President Jan Ping of China today
Speaker 1: and it's interesting at Steve Bannon was among the people
Speaker 1: who are supposed to be there, right, Yes, he was.
Speaker 1: He was one of the people with Secretary of Tragedy
Speaker 1: Uh Munchen and and Um Kohn and Um and Jared
Speaker 1: Um who are all going to be at the meeting.
Speaker 1: So who knows what's going to happen. Now, So what
Speaker 1: are you expecting to come out of this meeting with
Speaker 1: president from China? Well, it's it's look, the goal basically
Speaker 1: would be stability. I mean, this is what China would like. Um.
Speaker 1: The problem is, of course, the President Trump campaigned using
Speaker 1: China as a whipping boy, and with in with Presidents
Speaker 1: Trump truly weak political standing at the moment. Does he
Speaker 1: need to bluster? Uh? Surely the Chinese UM know enough
Speaker 1: about President trump senist personality. And we also have to
Speaker 1: assume that the Chinese intelligence knows exactly much much more
Speaker 1: than the Senate intelligence can about what went on with
Speaker 1: Russians in the election. To the Chinese have a little
Speaker 1: bit of the UM upper hand here, but they they
Speaker 1: really need to keep things calm. So one has to
Speaker 1: assume they're gonna offer some UM cameras to Trump. So
Speaker 1: I could use to say that something was accomplished, but
Speaker 1: it's a difficult meeting. Well, I want to bring in
Speaker 1: right now, Wayne Alex Wayne he is our politics editor
Speaker 1: for Bloomberg, about this breaking story of President Donald Trump
Speaker 1: and the reorganization of the National Security Council. Alex, maybe
Speaker 1: you could just tell us the details. Sure, Um, this
Speaker 1: comes as a bit of a surprise the the administration
Speaker 1: filed a document with the Federal Register this morning outlining
Speaker 1: some organizational changes to the National Security Council, which advises
Speaker 1: UH Donald Trump on foreign policy matters. Um. Broadly, the
Speaker 1: changes place his National Security Advisor hr McMaster UH in
Speaker 1: firm control of everything that the that the National Security
Speaker 1: Council does, and also everything that the Homeland Security Council does.
Speaker 1: That's like, that's a domestic group that that focuses on
Speaker 1: on internal security and border security and that kind of thing, um.
Speaker 1: But also of of of high interest to people in Washington. UH.
Speaker 1: Steve Bannon, the chief strategist, is no longer a member
Speaker 1: of what's called the Principles Committee of the National Security Council.
Speaker 1: And from a policy perspective, how does this change in
Speaker 1: the composition of President Trump's Security Council affect or potentially
Speaker 1: affect policy going forward. Well, it seems to give hr
Speaker 1: McMaster a much stronger voice in the administration. UH. He
Speaker 1: is regarded as a pretty sober minded guy, um, and
Speaker 1: probably a positive influence on the on the on the president. UM.
Speaker 1: The thought to say that the Bannon is is not
Speaker 1: I'm not making a judgment here, but there is the
Speaker 1: Bannon is definitely a more controversial figure in Washington. So
Speaker 1: I am sure that that this change will be applauded
Speaker 1: by the president's critics. Ed. What about you, Yeah, I
Speaker 1: think it. It sounds like it. It's things a foreign
Speaker 1: policy direction, much more to an even hand, much more rational, um,
Speaker 1: much less American first instead of America and the world.
Speaker 1: But this is all re means to be seen as
Speaker 1: far as policy goes, alex Wayne, is there any noted
Speaker 1: change in policy because Steve Bannon would be leaving the
Speaker 1: Security Council? You know, it was never really evident what
Speaker 1: Steve Bannon's influence was. Um. He was put in charge
Speaker 1: of the council when when Michael around started not put
Speaker 1: in charge of the council, he was put in the
Speaker 1: Principles plinny when Michael Flynn was in charge of the council. Uh.
Speaker 1: Michael Flynn was a much more controversial figure than hr
Speaker 1: McMaster um, more of a let's say, erratic figure. Um.
Speaker 1: So it's possible that Bannon was on the Council the
Speaker 1: Principle's clanning at that time just so that the President
Speaker 1: would have a close awry on what Michael Phon was doing.
Speaker 1: The President may have more confidence in hr mc master
Speaker 1: quite honestly, Well, you know, talking about policy, and I
Speaker 1: just want to get your quick thoughts on how North
Speaker 1: Korea and the launch of yet another missile affects the
Speaker 1: conversation today that President gy and President Treup have. Oh
Speaker 1: it just it just makes it even more complicated. Look,
Speaker 1: China basically has been been both the protector and um
Speaker 1: the pusher to make North Korean more sane for the
Speaker 1: last um, you know, fifteen twenty years. They really from
Speaker 1: the Chinese perspective, they realize they have a problem. They
Speaker 1: really don't know how to handle it. I think, on
Speaker 1: the other hand, that they don't want to upset the
Speaker 1: Apple car too much. They don't want, you know, the
Speaker 1: problem of having no Yeah, well, I guess the upsetting
Speaker 1: the Apple car too much just sort of goes back
Speaker 1: ed to your to your comment earlier about trying to
Speaker 1: maintain stability and that that's the goal at Goldberg. Thank
Speaker 1: you so much for joining us at Goldberg's adjug faculty
Speaker 1: and hy U Suenter for Global Affairs, also the author
Speaker 1: of the Joint Ventured Nation, Why America needs a new
Speaker 1: Foreign policy, and of course or thanks to Alex Wayne,
Speaker 1: Politics editor for Bloomberg, Well, there is a revolution underway
Speaker 1: in bond markets. The e t F industry has taken
Speaker 1: over with a storm, and to find out just how
Speaker 1: much it has transformed the way of doing business, we
Speaker 1: want to bring in Bloomberg's Rachel Evans, a corporate financial
Speaker 1: reporter who wrote a tremendous piece on it uh in
Speaker 1: Bloomberg's Markets magazine, as well as Eric Beltunas, senior et
Speaker 1: F analyst for Bloomberg Intelligence, who is the guru when
Speaker 1: it comes to things e t F s At Rachel,
Speaker 1: I want to start with you just to get some
Speaker 1: perspective on how much bond ETFs have been transforming the
Speaker 1: debt markets in the US. So this has been going
Speaker 1: on over the last kind of five to ten years really,
Speaker 1: and it's really a product of changes we saw after
Speaker 1: the financial crisis. We saw bond bond traders who typically
Speaker 1: would have been kind of making the market really back away.
Speaker 1: The infantries went down and as a result, investors have
Speaker 1: had to find new ways to actually buy and sell bonds. Now.
Speaker 1: The e t F at the same time was kind
Speaker 1: of climbing as a financial instrument that people could get
Speaker 1: into and out of very very quickly, and that's now
Speaker 1: something that people look to and when they're trying to
Speaker 1: get into or out of bonds as kind of a
Speaker 1: vehicle by which they might do that. Well, Eric Baltunas,
Speaker 1: maybe you could come in on this. My question has
Speaker 1: to do with the fact that if you're a bond trader,
Speaker 1: does that make you different than a bond investor? Are
Speaker 1: the days of buy and hold over? I think you know,
Speaker 1: if you look at the turnover in these different bond
Speaker 1: etf you look at the Vanguard uh B n D
Speaker 1: that's saying barely turns over. People are going in there
Speaker 1: and they like the fact that it's under ten basis points.
Speaker 1: You get a diverse group of bonds. I think there's
Speaker 1: eight thousand bonds in that fund um and look, that
Speaker 1: would be one that people buy and hold. Then you
Speaker 1: have something like h y G, which I refer to
Speaker 1: as a hotel. People are checking in and checking out
Speaker 1: of that saying all the time. The turnover is much higher,
Speaker 1: and I think that's a sort of parallel with the
Speaker 1: whole E T F universe. It's serving many different investors.
Speaker 1: But I think this bond movement. The number I like
Speaker 1: to throw out is if you look at h y G,
Speaker 1: it's only represents one to two percent of the assets
Speaker 1: in the high yield market, but it accounts for about
Speaker 1: of the trading, so they become really a big part
Speaker 1: of the trading, but still relatively small asset wise. Well,
Speaker 1: and there wouldn't be a revolution without a good degree
Speaker 1: of worry that comes along with it, And there are
Speaker 1: some people who are worried that, uh, the sort of
Speaker 1: framework of an e t F, which is bundling a
Speaker 1: group of securities and having that portfolio and then selling
Speaker 1: shares that trade on a daily basis, could be problematic,
Speaker 1: particularly in the dead industry. At Rachel, do you want
Speaker 1: to explain what some of those concerns are sure, I mean,
Speaker 1: this really kind of relates to the liquidity mismatch, as
Speaker 1: people put it, between having something that is exchange traded
Speaker 1: and can be traded at any point in the day
Speaker 1: and some of the underlying instruments that maybe there's a
Speaker 1: market for them once a week or once a day perhaps.
Speaker 1: Um So, I mean we've seen through the financial crisis
Speaker 1: that when you know, we we were in the depths
Speaker 1: of two thousand and eight that sometimes the net asset
Speaker 1: value of these funds, that the value of the underlying
Speaker 1: holdings I've verged significantly from the price. Now the question
Speaker 1: really is is kind of what actually represents the kind
Speaker 1: of fair value of the fund? Is? Is the net
Speaker 1: value a better representation or is it the price? And
Speaker 1: often we've seen the price of the underlying securities catch
Speaker 1: up with the t F. Eric, I want to I
Speaker 1: want to get you away in on this because I
Speaker 1: know you and I have talked extensively a out this issue.
Speaker 1: Is it fair to say that e t s, particularly
Speaker 1: fixed income ETFs, particularly high bond e t s, which
Speaker 1: we referred to with h y G, is it Is
Speaker 1: it fair to say they have not been tested by
Speaker 1: a major crisis? So yes, and no, Uh look h
Speaker 1: y G was around in two thousand and eight. People
Speaker 1: forget that, but it was tiny. Come on, let's be honest.
Speaker 1: Yeah it was. It was smaller back then, right. So,
Speaker 1: and what Rachel was referring to as the discount, I
Speaker 1: referred to that as the arbitrage band. It's essentially the price.
Speaker 1: The price has to go down below the n A
Speaker 1: V before somebody thinks it's worth it to buy the
Speaker 1: bond and sell the E T S and so the
Speaker 1: arbitrage band over the last ten years has shrunken incredibly.
Speaker 1: So you have two things I think is consider when
Speaker 1: you think of this I called the Jurassic part concern um.
Speaker 1: When you look when when you are looking at the
Speaker 1: fact that if you were trying to sell high yield
Speaker 1: debt on a bad day, you'd probably have is tough time,
Speaker 1: if not tougher than selling shares of the E T F.
Speaker 1: So I think, you know, look, the E T S
Speaker 1: is a convenient way to do it, but it's not
Speaker 1: without risk, and I think there is probably some bit
Speaker 1: of cost that you will have to pay if you
Speaker 1: wanted to get out on those bad days, in the
Speaker 1: form of just the middlemen. They're in there making markets,
Speaker 1: but there's so many more people with their eyes on
Speaker 1: the trading, especially the big ones like h y G,
Speaker 1: that you do see more liquidity in the secondary market
Speaker 1: for them. Rachel, I wonder if you could just tell
Speaker 1: us about a gentleman named Layton Chance, because he figures
Speaker 1: in your article and I thought it explained an interesting
Speaker 1: process by which bond investors are investigating exchange traded funds. Right.
Speaker 1: So Layson was really kind of one of the first
Speaker 1: um to to to really use this process and with ETFs.
Speaker 1: Basically what he did is he utilized one of the
Speaker 1: interesting feat and he was at the Lockheed Martin investment
Speaker 1: management company, right, and also he did Tennessee's retirements right
Speaker 1: and now he's now he's in Texas with the Employees
Speaker 1: Retirement System of Texas. UM Yes, So basically, I mean
Speaker 1: he utilized kind of this this function of ETFs whereby
Speaker 1: you can buy the shares in the e t F
Speaker 1: either with cash or what's called in kind. Now, in
Speaker 1: kind creation basically means that you deliver a portfolio of
Speaker 1: bonds to the e t F provider and in return
Speaker 1: they give you some e t F shares for those bonds. Now,
Speaker 1: of course, you can either keep those e t F
Speaker 1: shares in your book and that that's a very liquid
Speaker 1: thing that you can buy more of or sell, or
Speaker 1: you can sell them and use that kind of cash
Speaker 1: you free up to to change your portfolio. So he
Speaker 1: used this as a kind of a novel way to
Speaker 1: to change his portfolio from investment grade debt to high
Speaker 1: yield and treasuries. For more information, just check out the
Speaker 1: Bloomberg Market story by Rachel Evans, Bloomberg's corporate finance reporter.
Speaker 1: R thanks also Eric baltunas Senior E T F Analyst
Speaker 1: for Bloomberg Intelligence. Well Wall streets bet against empty malls
Speaker 1: in the United States is getting too crowded. This, according
Speaker 1: to a report from Group, instead recommend wagering against individual
Speaker 1: retailers as the next big short. Well here to tell
Speaker 1: us about malls and commercial real estate is Paul Adernato.
Speaker 1: He is the senior reats analyst and Managing director of
Speaker 1: BEMO Capital Markets, and he joins us here in the studio. Paul,
Speaker 1: always a pleasure, Thanks for being with us. Let's talk
Speaker 1: about the death of the mall? Is it the overrated?
Speaker 1: I mean, have we always been talking about the death
Speaker 1: of retail and the death of the mall? Him, It's
Speaker 1: been It's been an ongoing story for for years and years.
Speaker 1: You know, first it was going to be bird flu,
Speaker 1: then it was terrorism. Uh, then it was of course
Speaker 1: that e commerce years ago. And so the mall has
Speaker 1: always evolved to to to bring consumers different experiences. Uh
Speaker 1: that would be more like restaurants, movie theaters, etcetera. So, uh,
Speaker 1: the malls have always been just a place for people
Speaker 1: to meet and a place of commerce. And so if
Speaker 1: we just think more general early about those places, uh,
Speaker 1: they'll probably survive in some form or another. They've been
Speaker 1: very very good at evolving in the past. Well, Paul,
Speaker 1: do you think there are specific reads real estate investment
Speaker 1: trusts that have been oversold as a result of the
Speaker 1: growing pessimism about the retail sector in general? Alright, A
Speaker 1: very good points. So if we were to separate the
Speaker 1: U S. Mall industry into the most productive malls, those
Speaker 1: would be companies like UH, Simon Property Group SPG, mase
Speaker 1: Rich and a C and g g P Inc. That's
Speaker 1: a symbol, g g P. Those would be considered the
Speaker 1: top tier operators in the US. And UM and this
Speaker 1: group I think, uh, you know, has been oversold to
Speaker 1: some extent. The reason I say that is that if
Speaker 1: we look at the implied cap rate and so really
Speaker 1: that's just looking at the um the value of the
Speaker 1: underlying real estate, it's trading much much cheaper than the
Speaker 1: private market value of of real estate, uh, substantially cheaper.
Speaker 1: So you know, are the malls are the malls stocks cheap?
Speaker 1: Very much? So? UM what will be the catalyst to
Speaker 1: get them going. Um, that's a little more of a
Speaker 1: tricky question. I'm not quite sure that we will ever have,
Speaker 1: you know, evidence until this whole you know, UH department
Speaker 1: store anchor and and you know, small shop retail uh
Speaker 1: evolution has has really played out. What about the payoffs
Speaker 1: from these real estate investment trusts? So many people look
Speaker 1: to those as a source of income. Are those payouts
Speaker 1: covered by the current operations of these companies? Yes, so
Speaker 1: all of the three companies that I just mentioned have
Speaker 1: very strong balance sheets. Uh. The dividends, I would say,
Speaker 1: are not at risk uh at all. You know, we
Speaker 1: talk about malls and we talk about the carnage that
Speaker 1: we've seen in among retailers, and often we conflate the
Speaker 1: too because we think so goes the fate of retailers
Speaker 1: goes the fate of malls. Is this true? Um, there's
Speaker 1: a very, very big disconnect between the fortunes of retailers
Speaker 1: and the fortunes of the mall owners, for instance, the anchors.
Speaker 1: Many people don't realize that the anchors pay little or
Speaker 1: no rent to the mall owner. Historically, they were given
Speaker 1: the space for free or for a very very low
Speaker 1: rent in order to generate traffic for the mall. Now
Speaker 1: they haven't really done that for a long time, and
Speaker 1: now it's it's finally playing out that the anchors are
Speaker 1: are disappearing or shrinking. But that's just, you know, kind
Speaker 1: of one example of how the retailers don't necessarily directly
Speaker 1: impact the fortunes of the mall owners. Right although, in
Speaker 1: evaluating the value of a mall, you have to look
Speaker 1: at the traffic, the foot traffic of the stores that
Speaker 1: currently are there. And based on those analyzes, do you
Speaker 1: believe that there is still more pain to be had
Speaker 1: in the retailers specifically? So, so, there's definitely more pain
Speaker 1: to be had. I mean that we're we're probably still
Speaker 1: only in the in the third or fourth inning of
Speaker 1: the whole e commerce impact on on the retail space.
Speaker 1: So so I do think that there's a lot more
Speaker 1: transformation that has to occur in terms of the mall traffic.
Speaker 1: It's interesting, but the mall owners claim that they don't
Speaker 1: really track it. Now they have now they're starting to.
Speaker 1: But you know, this is this is what we're we're
Speaker 1: we're hearing, and so they say, look at things like
Speaker 1: gift cards but they you know, they should be able
Speaker 1: to count cars in the parking lot, etcetera. But um
Speaker 1: but anyway, I guess the point is is that the
Speaker 1: way that people shop in malls is changing. Right, so
Speaker 1: you're probably going to do some research online before you
Speaker 1: go to a store, Whereas you know, twenty years ago,
Speaker 1: you might have started at one end of the mall
Speaker 1: and just you know, made your way all the way
Speaker 1: down to the other end. Uh And that's the way
Speaker 1: people used to shop. Uh so so so habits are changing,
Speaker 1: behaviors are changing, uh so so traffic. While it's it's
Speaker 1: critically important to know that, um, you know, we have
Speaker 1: to consider the bigger picture as well. Consider Acadia Realty Trust.
Speaker 1: This is an interesting company. A k R is the symbol.
Speaker 1: They've got properties in Brooklyn, Chicago, Washington, San Francisco, Boston's
Speaker 1: Newberry Street, for example, as well as Milwaukee, uh and
Speaker 1: and Chicago. Tell us about Akadia? Why is it different? Sure? So,
Speaker 1: Acadia does not own any mall real estate. In terms
Speaker 1: of the regional malls. They have a few community shopping
Speaker 1: centers that are grocery anchored, but none of the of
Speaker 1: the malls that are currently under under scrutiny. UM so
Speaker 1: years ago, Acadia, you know saw what was coming, as
Speaker 1: did as did many folks, but they actually acted on
Speaker 1: it and built a company around it. And that is
Speaker 1: the thought that UM dense urban areas, this live, work,
Speaker 1: play environment is going to be the place that UH
Speaker 1: people want to want to be UH and where commerce
Speaker 1: will will occur and also where brand awareness can be established.
Speaker 1: And so if you talk to retailers today, UH, those
Speaker 1: that are either UH doing very well online or those
Speaker 1: that want a better online presence, they will tell you
Speaker 1: that they you know, first you need to have brand awareness.
Speaker 1: And so brand awareness generally occurs at flagship locations. These
Speaker 1: are the very large stores that really really convey the
Speaker 1: experience of the brand when when you go in these
Speaker 1: take these UH stores are located generally, UH in the
Speaker 1: metro areas that you that you just mentioned. Paul at NATO,
Speaker 1: Thank you so much for being with us. Truly, this
Speaker 1: is the story of the moment. Is definitely, at least
Speaker 1: in the debt world and in the real estate world,
Speaker 1: is what is going to happen among retailers and with
Speaker 1: commercial real estate, real estate investment trusts and all of
Speaker 1: the other related instruments. Paul are Donato, senior reads analyst
Speaker 1: Managing director at BMO Capital Markets, and he was with
Speaker 1: us in our Bloomberg eleven three oh studio. The minutes
Speaker 1: to the March fourteenth and fifteen f o MC meeting
Speaker 1: will be released today at two pm Wall Street time.
Speaker 1: We will of course be bringing that to you, but
Speaker 1: we know that Federal Reserve officials have been well less
Speaker 1: than transparent in telling us all about what adjustments to
Speaker 1: the balance sheet of the Federal Reserve they might Mike,
Speaker 1: let's bring in John Augustine. He is the chief investment
Speaker 1: Officer of Huntington National Bank, helping to manage approximately seventeen
Speaker 1: and a half billion dollars. Based in Columbus, Ohio, John
Speaker 1: can be followed on Twitter at John Underscore Augustine, John,
Speaker 1: thanks very much for being here. As I mentioned, we'll
Speaker 1: get those meeting minutes at two pm Wall Street time.
Speaker 1: Do you expect to hear anything or learn anything about
Speaker 1: adjustments to the Federal Reserves balance sheet? We don't think so.
Speaker 1: We know that debates obviously picking up to that for
Speaker 1: an a half trillion dollar balance sheet, and when they
Speaker 1: may quit renewing purchases from matured securities there, but we
Speaker 1: don't suspect it. It would be rather surprised, we think
Speaker 1: the markets if that showed up in meetings or excuse me,
Speaker 1: in meeting minutes this afternoon, but we'll see you never know. Well, yeah, John,
Speaker 1: you know this is my big question right now because
Speaker 1: Dan Trullo today uh FED chair in Uh just who
Speaker 1: is about to resign? So in fairness, he's not necessarily
Speaker 1: going to be relevant to this discussion, but he said
Speaker 1: on a CNBC interview today that he thinks it makes
Speaker 1: sense to start talking about possibly unwinding the balance sheet.
Speaker 1: This follows a lot of FED talks saying the same thing.
Speaker 1: Markets have not responded. Are they just saying we don't
Speaker 1: believe you. We're gonna call your bluff potentially? You know
Speaker 1: that the surprise to us today and market so far
Speaker 1: is the fact that bond yields have gone nowhere today
Speaker 1: and as a matter of fact, that they're slightly lower
Speaker 1: now on the tenure as we sit and speak this morning.
Speaker 1: So the bond market is not buying it um, that's
Speaker 1: for sure, and they're not buying the economic recovery either.
Speaker 1: There's two big sets of buyers in the bond market
Speaker 1: individual investors through mutual funds, and then the TICK data
Speaker 1: shows foreign investors. Now that's data that's January, the last
Speaker 1: report Treasury Treasury international flows. So yes, sorry, but anyways,
Speaker 1: there's there's still big buyers prevalent in the bond market,
Speaker 1: and it's it's a it's a surprise to us at
Speaker 1: our shop at Huntington this year to see yield this
Speaker 1: low and now having negative real rates. Is it possible
Speaker 1: that we're getting a demographic shift in the investor base
Speaker 1: that as people age, the baby boomers age, that they
Speaker 1: will be getting out of stocks and moving into treasuries
Speaker 1: because they want the security and the consistency of return. Potentially,
Speaker 1: but we think, at least at our shop, as we
Speaker 1: look out for our customers again, you know, I'd rather
Speaker 1: almost own Johnson and Johnson stock right now and get
Speaker 1: three percent divit and yield than a bond right now
Speaker 1: and get one percent. So yields we would say we
Speaker 1: still strive for three percent in our income focused portfolios.
Speaker 1: Um still below that on a tenure treasury yield, So
Speaker 1: that may be correct, We're just not approaching it that way,
Speaker 1: at least at Huntington's So let's say we do get
Speaker 1: some hints about balance sheet discussions at the Fed today
Speaker 1: at two o'clock when we get the f O m
Speaker 1: C meeting minutes. Uh, do you think that there will
Speaker 1: be a severe, potentially severe market reaction potentially now? And
Speaker 1: by the way, we may be following Europe a little
Speaker 1: bit this morning to that bond markets quiet, and we
Speaker 1: tend to follow the European bond market until the afternoon,
Speaker 1: so it'll be more interesting here this afternoon. Now, if
Speaker 1: we do get indication that they may try to at
Speaker 1: least stop growth or lower the balance sheet, yes, we
Speaker 1: would suspect you're going to eventually get a reaction in
Speaker 1: the bond market. Again, that's the surprise does this year's
Speaker 1: We haven't to most any news. Just to give some
Speaker 1: perspective on the Fed's balance sheet, it's about four and
Speaker 1: a half trillion dollars that has been expanding since the
Speaker 1: financial crisis when the FED started to engage in buying
Speaker 1: bonds and increasingly mortgages as well. Back in two thousand
Speaker 1: and nine, it was nearly one point eight trillion dollars,
Speaker 1: so it has Wow, it is really is more than doubled,
Speaker 1: nearly troubled, but think of this for this afternoon. Though.
Speaker 1: One interesting thing this afternoon, what's on our mind is
Speaker 1: where they're gonna do in the second half of the
Speaker 1: year and are they going to change their dialogue around
Speaker 1: the second half of the year. In other words, are
Speaker 1: they thinking more than three rate increases this year? Because
Speaker 1: we do think the Fed is going to have an
Speaker 1: impact on not only the yield curve treasury yield curve,
Speaker 1: but potentially stock valuations in the second half of the
Speaker 1: year if their discussion and meeting minutes gets more are hawkish.
Speaker 1: That is what we're watching this afternoon. All right, let's
Speaker 1: talk about stock valuations for just a moment. If you
Speaker 1: had a portfolio manager that consistently made ten percent a year,
Speaker 1: what would you say, hire him first? Okay, So the
Speaker 1: reason I ask you this is because you know, if
Speaker 1: you happen to buy a n ASDAC fund right just
Speaker 1: tracked the NASDAC, you're up ten percent, So why not
Speaker 1: just get out? Now? Why do we never hear when
Speaker 1: you should sell and take some profits. So we're we're
Speaker 1: a long only shop in general, and our clients are
Speaker 1: hiring us to basically keep them fully invested unless we
Speaker 1: see a recession coming. We don't see a recession coming.
Speaker 1: Alternatives to equities are difficult right now because you could
Speaker 1: argue most all markets are expensive. So what we're doing
Speaker 1: is making sure diversification plays into equity markets. We're rotating
Speaker 1: as those valuations EBB and flow. Uh. This is an
Speaker 1: environment we as discretionary money managers, don't particularly like, but
Speaker 1: it's kind of the one that's handed to us. I
Speaker 1: got an egg it of real yields coming out of bonds,
Speaker 1: and I got cash that's still well below the inflation rate.
Speaker 1: So equities are where we have to focus and do
Speaker 1: it diligently. For clients, we have to be more diligent.
Speaker 1: You're right, How concerned are you about a sort of
Speaker 1: perfect storm where longer yields rise substantially and stocks sell off,
Speaker 1: which is something that people have been worried about. How
Speaker 1: do you diversify that well? Then that at least would
Speaker 1: provide us potentially an avenue to rotate from stocks into bonds.
Speaker 1: How high would yields have to go on the thirty
Speaker 1: year of the ten year for you to make that rotation.
Speaker 1: Right now, we're somewhere between two point eight and three
Speaker 1: point percent. That's what our fixed income team is looking at.
Speaker 1: On the tenure, that's why our fixed income team is
Speaker 1: looking at. We've been talking about that already most of
Speaker 1: this year, when rates got to to six earlier this
Speaker 1: year but then but then rolled over. So we're we're
Speaker 1: kind of setting a number there in our mind, and
Speaker 1: we're kind of setting it around the potential for real GDP.
Speaker 1: We're kind of using that is our barometer to see
Speaker 1: when we want to make it, when we eventually want
Speaker 1: to make that switch. You mentioned rotation, and I wonder
Speaker 1: if you could tell us what you're rotating out of
Speaker 1: and what are you rotating into well in sectors for instance,
Speaker 1: what we're talking to our equity team about is find
Speaker 1: excuse me, technology has been where the action is so
Speaker 1: far this year. It's the only sector up double digits. Energy,
Speaker 1: by contrast, is the one down, one of the two
Speaker 1: downs so far this year. So there's one potential rotation
Speaker 1: not to sell out wholesale, but just trim some gains
Speaker 1: and add now that oil seems to want to hang
Speaker 1: around fifty dollars a barrel, so PIM that's one. The
Speaker 1: second one we've been talking talking about consistently and we've
Speaker 1: been early on is small and mid caps. If we're
Speaker 1: going to get some fiscal programs here in the US,
Speaker 1: some policy change, we think that's going to be a beneficiary,
Speaker 1: and that's on pause right now. But that's another area
Speaker 1: we're looking at. How long are you gonna wait before
Speaker 1: seeing fiscal stimulus before saying, all right, maybe this trade
Speaker 1: isn't isn't gonna workout? Probably two So if we don't
Speaker 1: see some kind of fiscals Emula's plan by the end
Speaker 1: of June. You know, in March we really started seeing
Speaker 1: restlessness coming markets around that issue from day to day.
Speaker 1: So you're probably here in the second quarter somewhere. John Augustin,
Speaker 1: thank you so much for joining us. That was really,
Speaker 1: really fascinating. John Augustine is chief investment officer at Huntington
Speaker 1: National Bank, overseeing about seventeen and a half billion dollars
Speaker 1: based in Columbus, Ohio, and I thought it was super
Speaker 1: fascinating this idea of that bogey, that benchmark at which
Speaker 1: you get at a stock at stocks and into bonds
Speaker 1: to capture that higher yield. Thanks for listening to the
Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
Speaker 1: to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.
Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
Speaker 1: before the podcast. You can always catch US World War
Speaker 1: ID on Bloomberg Radio mm hm