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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best and economics, geopolitics, financing, investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always I'm Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. There was

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Speaker 1: just one quote yesterday that stood out for many of

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Speaker 1: you at home. I know. It was from Mike Wilson

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Speaker 1: and Morgan Stanley and it read as follows, Equity markets

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Speaker 1: survived the crucial test of support last week. That suggests

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Speaker 1: this band market Ronnie Tom is not ready to end

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Speaker 1: just yet. How much of a change was that from

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Speaker 1: Mike and a team. This is a pretty substantial change.

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Speaker 1: We're going to dive into that right now with Mike Wilson.

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Speaker 1: Mike John wants to dive into this. I'm gonna I'm

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Speaker 1: gonna talk right now. I'm gonna make some news here,

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Speaker 1: Mike Wilson, so help me out. The Great Ralph and

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Speaker 1: Kompora was on a while back and he said, look,

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Speaker 1: there was an October bottom. We've heard this from a

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Speaker 1: few other select people with this more optimist to call

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Speaker 1: by you can you call an October bottom? Can we

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Speaker 1: call it the encompora? Wilson Bottom? Well, good morning guys,

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Speaker 1: thanks for having me. As usual. What we did call

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Speaker 1: that bottom in October, and we thought it would be

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Speaker 1: a substantial rally fifteen twenty percent. We got that rally,

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Speaker 1: and then we decided, well, the risk reward is no

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Speaker 1: longer attractive, and so we backed off of that and

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Speaker 1: we said we'd probably go down and we test those

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Speaker 1: loads at a minimum and probably take it out, which

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Speaker 1: is really based on our fundamental view that you know,

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Speaker 1: the earnings recession is now in place. People acknowledge that,

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Speaker 1: but I think there's a very wide range of how

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Speaker 1: deep that earnings recession is going to be, with us

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Speaker 1: kind of in the deeper end of that range. Now,

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Speaker 1: this past weekend, we looked at the chart, but we

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Speaker 1: have to be out, we have to be objective about

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Speaker 1: what we see. We're technicians in addition to fundamental strategists.

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Speaker 1: We looked at at the price action last week and

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Speaker 1: we actually talked about it in the week the note

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Speaker 1: the week before we said, like we're going to probably

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Speaker 1: test this level. If it holds it, it'll be a

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Speaker 1: constructive marker at least in the short term, and that's

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Speaker 1: how we're viewing it now. Time it's a short term positive.

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Speaker 1: I don't think it changes our intermediate term view that

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Speaker 1: you know, the risk reward is still pretty blousy at

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Speaker 1: forty one hundred because of that earnings recession view that

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Speaker 1: we have on the fundamental side. So we remained in

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Speaker 1: the trader's market, and part of our job is to

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Speaker 1: help people navigate that. So it might just to be clear,

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Speaker 1: how different is this call compared to the call for

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Speaker 1: the tacticle running a mate back in October. Oh, it's

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Speaker 1: very different, John, because you know, in October we were

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Speaker 1: trading thirty five hundred. Of the evaluations were fifteen twenty

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Speaker 1: percent lower interest rates you know, we're higher. We felt

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Speaker 1: like they were going to come down, so we had

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Speaker 1: a lot of canalysts trying to reopening. There are a

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Speaker 1: lot of reasons to believe that that was a very

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Speaker 1: tradeable load, not just for trader types however, people who

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Speaker 1: were in a real capital and it turned out to

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Speaker 1: be the case. So you know, we don't always get

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Speaker 1: that stuff right. It's impossible to get it right every time.

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Speaker 1: So this is much This is much more tactical. This

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Speaker 1: is just Serve saying, look, we acknowledge that the tactical

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Speaker 1: picture held. We didn't know that was going to be

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Speaker 1: the case, and so you have to respect it. And hey,

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Speaker 1: they could turn down this afternoon again for all I know,

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Speaker 1: given what Jay Powell is going to say this testimony.

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Speaker 1: You know, I have no idea. Maybe that triggers people

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Speaker 1: to get negative. One thing I will say to you all, however,

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Speaker 1: is that we're pretty confident that between now and the

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Speaker 1: next eLearning season, which isn't that far away, that will

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Speaker 1: be when we think the next you know, bear market

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Speaker 1: kind of decline happens, maybe they a more meaningful decline

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Speaker 1: ten percent plus. So Mike, we can get further down

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Speaker 1: the right in just the moment. I just want to

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Speaker 1: sit on the early part of this year. It's difficult

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Speaker 1: to get everything you right. You put out a note

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Speaker 1: early in the year and you said thirty nine hundred

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Speaker 1: was an easy sell. What's more difficult about it now?

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Speaker 1: Besides the technical point the of night, Well, I think

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Speaker 1: there's a couple of things you have to acknowledge. I

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Speaker 1: mean that the economic data has been better. You know,

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Speaker 1: Chad's reopening is kind of just getting going, and they

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Speaker 1: kind of held back. They could get they could gather

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Speaker 1: some steam, you know. So those are things you have

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Speaker 1: to say. Look, I mean, I think people came into

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Speaker 1: this year feeling as if the recession was inevitable, and

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Speaker 1: that no longer is the case. It's probably thirty percent

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Speaker 1: chance and be forty percent chance at best, and that

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Speaker 1: can keep animal spirits alive. The other thing that's happened, John,

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Speaker 1: is we've talked about multiple times, is this liquidity picture

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Speaker 1: from outside the US. So the Fed's doing their job

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Speaker 1: trying to tighten financial conditions. The problem for them is

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Speaker 1: that we have the Bank of Japan and we have

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Speaker 1: the PBOC adding liquidity, and you have a dollar that's

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Speaker 1: kind of softening up, which is kind of neutralizing you know,

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Speaker 1: the Fed's goals of tightening financial conditions, and that's also

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Speaker 1: kind of breede some life into risk assets. That's the

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Speaker 1: only thing that's changed. Ultimately, we think, you know, evaluations

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Speaker 1: and the fundamentals meaning earnings will determine where stock price

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Speaker 1: is trade. That setup is now particularly great, particularly to

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Speaker 1: move higher and rates this year given some of the

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Speaker 1: changes that you talked about just now, Mike, how much

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Speaker 1: does that change what floor you could see in your

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Speaker 1: scenario for equities? Well, I mean, look, we have to

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Speaker 1: be flexible when we're trying to you know, also service

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Speaker 1: a lot of different types of clients, right, whether we're

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Speaker 1: talking about trader types or we're talking about asset owners.

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Speaker 1: You know, for the asset owner or crowd, we've been

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Speaker 1: pretty adamant. You know. We felt like the fall was

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Speaker 1: a really good entry point where people had a longer

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Speaker 1: time horizon and if you added risk there, you probably

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Speaker 1: just stay with it. You know. I do think people

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Speaker 1: that are getting a bit carried away on what they've

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Speaker 1: been buying, Okay, So I think they're you know, given

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Speaker 1: the rally that we saw on the fall versus the

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Speaker 1: rally we've seen this year, they have very different sort

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Speaker 1: of complexions, right. The rally and the fall was based

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Speaker 1: on we think fundamentals meaning rates coming down, economic data

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Speaker 1: getting better because of China and globally at least that

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Speaker 1: would help the kind of typical type areas of the market.

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Speaker 1: Then we had this more speculative rally that started in January,

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Speaker 1: kind of buying last year's losers, which was all the

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Speaker 1: growth stocks and the meme stocks for everyone to call them,

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Speaker 1: and those are just gotten out of control again, particularly

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Speaker 1: in the count of types of higher rates. I think

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Speaker 1: there's there's a lot going on right And I think

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Speaker 1: there's two ways to think about. If you have kind

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Speaker 1: of you know, names that you want to own through,

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Speaker 1: you know, we want to underwrite through what we think

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Speaker 1: is going to be a difficult time for earnings, and

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Speaker 1: you say, look, I think there's value in this security

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Speaker 1: for the next three years, Great, you should just own

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Speaker 1: those through that period. However, there's a lot of stuff

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Speaker 1: that's gotten dragged along here that is wildly speculative. Now

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Speaker 1: in my viewing, it's it's it's actually somewhat reckulous. And

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Speaker 1: that's the stuff that you got to be really careful

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Speaker 1: it's in your portfolio, got to get out of because

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Speaker 1: you know that stuff has gotten revalued in a way

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Speaker 1: that doesn't make much sense to us. What kind of

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Speaker 1: downside could you be talking about? And I assume you're

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Speaker 1: talking big tech names as well as some of the

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Speaker 1: other meme stocks. Well for some of this stuff, I mean,

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Speaker 1: I mean, I think there's plenty of stocks that are

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Speaker 1: probably gonna go bankrupt, you know, I mean, I don't

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Speaker 1: think that's a crazy statement. But that's not the bulk

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Speaker 1: of the stock market. Okay, So this is a is

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Speaker 1: a pocket of the stock market. And then I would say,

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Speaker 1: but overall, the growthier stuff and the thing that even

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Speaker 1: the cychnicals names that have gone too far now could

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Speaker 1: have as much as twenty percent downs had no problem.

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Speaker 1: I mean that that. I mean that our valuation work

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Speaker 1: would suggest that even without the earnings recession, right, the

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Speaker 1: valuations are kind of out of bounds. Again. So it's

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Speaker 1: a stock pickers market a lot that we're saying that.

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Speaker 1: You know, that's usually what people say, by the way,

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Speaker 1: when they're having a hard time calling the direction of

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Speaker 1: the market. We do it too. And so you know,

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Speaker 1: I pays a stock picking market. Well that's hard, okay,

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Speaker 1: So you know that's not an easy game to play,

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Speaker 1: But it is a stock picking market in the stock

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Speaker 1: the stocks that are likely to go up versus down

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Speaker 1: is probably less than fifty percent. It's a stock picking

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Speaker 1: market with not a great you know, macro backdrop. So

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Speaker 1: that's that's a challenge, Mike. I want to go to

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Speaker 1: what I think is the great divide as Tullub says,

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Speaker 1: the gravity is return of the system. You remember this

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Speaker 1: when you were studying this in an armor years ago.

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Speaker 1: The bottom line is when you get a normal interest

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Speaker 1: rate structure, all of a sudden down the income statement

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Speaker 1: matters divide for us. Now, how you look at those

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Speaker 1: that profit from those that do not profit. That seems

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Speaker 1: to be a new metric. Yeah, I mean I don't

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Speaker 1: think this is a new metric. I think it's a

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Speaker 1: forgotten metric, which is that you know, your costs sit

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Speaker 1: on your balance sheet until they have to hit the

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Speaker 1: income statement. And you know, this whole idea of a

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Speaker 1: cruel versus cash accounting which we did learn, you know,

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Speaker 1: seems like forty years probably was forty years ago. And

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Speaker 1: you know, I have a history of studying accounting and

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Speaker 1: it's a it's a great tool to kind of see

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Speaker 1: through the noise. And this is why we know our

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Speaker 1: note this past week we highlighted a great report done

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Speaker 1: by our Goal Tax Valuation team and basically highlighting this

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Speaker 1: you know, spread between cash flow and NETT income that's

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Speaker 1: being reported that's all based on the rules and so

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Speaker 1: it's you know, it ties into everything we've been talking

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Speaker 1: about for the last year a year and a half,

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Speaker 1: which is the pandemic. The lockdowns basically brought on this

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Speaker 1: incredible period of over earning by corporations because their costs

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Speaker 1: were slower to increase than the revenues came back. But

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Speaker 1: now we have the exact opposite, which is the companies

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Speaker 1: that you know basically accrued these costs on the balance

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Speaker 1: sheet at a bad time when you know, inflation was

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Speaker 1: running hot and they thought business is going to continue

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Speaker 1: to be that strong, so they it does not actually

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Speaker 1: happen now, and that has to flow through the income statement,

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Speaker 1: and that will hurt margins. And that's the story. The

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Speaker 1: question is will the markets look through that and suggest, well,

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Speaker 1: we know this as temporary. Ultimately companies get the head

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Speaker 1: around at which we agree with. But our experience is

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Speaker 1: that markets will not look through it if the earnings

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Speaker 1: degradation is as severe as we think it's going to be. Mike,

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Speaker 1: I mentioned that that you see a difference between what

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Speaker 1: could develop in the real economy and what could happen

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Speaker 1: with earnings. How well received is that with clients at

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Speaker 1: the moment? Mike, well, what investors understand that concept that

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Speaker 1: I didn't invent that so I mean, I think they

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Speaker 1: very much appreciate that kindcept. The problem is that is noisy,

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Speaker 1: and there is this you know, we live in this

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Speaker 1: world now where there's sort of almost like hand a

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Speaker 1: mouth guidance, you know, the Fed, you know, doing it

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Speaker 1: for the bond market and companies doing it for the

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Speaker 1: stock market, and so it's a process that takes longer

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Speaker 1: than it probably should. And that's what's frustrating, I think

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Speaker 1: for some investors who are in the weeds on this

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Speaker 1: where we are, it's like, well, my goodness, it's pretty

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Speaker 1: obvious what's about to happen? You know. Why is a

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Speaker 1: marketing solong to kind of prices? That's just the way

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Speaker 1: it is, and that's that's not a new phenomena. That's

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Speaker 1: kind of way it always is at this stage. When

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Speaker 1: you get a significant earnings recession, it just takes longer

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Speaker 1: than than you would think to get it priced. Do

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Speaker 1: you get more questions about single names now, Mike, and

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Speaker 1: what single stock contents do you offer them? We do?

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Speaker 1: But you know, I think most of our clients are

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Speaker 1: pretty good at that job. I mean, they do a

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Speaker 1: good job. That's that's their job. Essentially, We absolutely help them.

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Speaker 1: We We do run amud of portfolio as you know,

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Speaker 1: we've had great success with that. But it's you know,

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Speaker 1: it's it's a it's a helpful tool. And then we

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Speaker 1: run a lot of screens for people based on our

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Speaker 1: view of the work from a macro standpoint, say, okay,

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Speaker 1: these factor variables should be uh in effect and this

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Speaker 1: is what you want to you know, kind of put

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Speaker 1: in your portfolio. We run those screens, and that's kind

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Speaker 1: of how we go at it. We don't we don't

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Speaker 1: you know, talk specifics necessarily with clients around uh, you know,

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Speaker 1: individual companies as much as you know, say, our analysts

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Speaker 1: team does, which is really their job. But let's talk

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Speaker 1: about sectors in particular with margin compression. If the service sector,

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Speaker 1: if sector is possibly seeing more perhaps wage pressure, need

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Speaker 1: to pay more to people to bring them in the

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Speaker 1: door than say tech stocks. How do you look at

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Speaker 1: where margin compression is going to be the greatest and

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Speaker 1: what could potentially get hit as people trickle through and

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Speaker 1: realize this new kind of reality. Well that's exactly right. Now.

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Speaker 1: One of the other features we've just touch on for

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Speaker 1: a second is that the recovery and selfless sort of

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Speaker 1: two stage, right, It was goods first, then services. Normally,

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Speaker 1: in a normal recovery, everything comes back at the same time,

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Speaker 1: so you have the sort of rolling recovery, and now

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Speaker 1: rolling recession. Tech is intercession right now, I think that's

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Speaker 1: obvious right there, losing uh you know there there, there's

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Speaker 1: there're seeing negative growth, They're they're laying people off, more

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Speaker 1: aggresive in other sectors, and I think the big question

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Speaker 1: for the economy is does that spill over into the

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Speaker 1: services sector, which is where the employment really lives, right,

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Speaker 1: I mean, that's that's you know, small medium businesses and

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Speaker 1: services come to employ a lot more people as you suggested. Look,

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Speaker 1: we think ultimately this will roll through kind of the

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Speaker 1: entire economy. Services will probably get hit later in the

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Speaker 1: year when other businesses are showing weakness and then we're

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Speaker 1: seeing layoffs there, which and people spend less money. So

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Speaker 1: it's sort of a circular argument. But clearly this idea

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Speaker 1: of operational efficiency is what the market is paying for.

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Speaker 1: So companies that are showing good inventory controls labor costs

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Speaker 1: as a percentage of costcuts so are smaller, and then

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Speaker 1: capex appreciation is lower. And this word efficiency has been

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Speaker 1: popping up. I find it very interesting. You know, we're

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Speaker 1: hearing it from all different companies. We've been talking about

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Speaker 1: that for twelve months, so you know, people are catching on,

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Speaker 1: and but we think that it's not over. We think

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Speaker 1: the market will continue to pay for companies that are

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Speaker 1: very efficient with their expenses and can get the revenue

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Speaker 1: to the bottom line. This is fascinating, Mike. Are you

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Speaker 1: saying that in the months to come, the good sectors

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Speaker 1: that perhaps have already seen the downturn will outperform as

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Speaker 1: margin pressures and some of the downturns start to hit

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Speaker 1: the later recovering sectors, namely services, leisure, hospitality. We think

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Speaker 1: that could be the case. I wouldn't say that it's

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Speaker 1: like a high conviction view, but we do think that

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Speaker 1: a lot of the good sector stocks in particular, and

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Speaker 1: even the earnings forecasts have come down because it's obvious,

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Speaker 1: right they you know, we had to pull forward of

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Speaker 1: demand and so those numbers are written reset the questions

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Speaker 1: when does the demand profile look like for some of

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Speaker 1: those businesses that we're basically COVID winners? Are they are

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Speaker 1: they winners in the long term that's to be determined.

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Speaker 1: And then services, we do think it's kind a bit

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Speaker 1: for our thing. It's kind of you there's there'll be

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Speaker 1: demand destruction as prices are a bit out of control there,

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Speaker 1: so it's just messy, you know, And that's why I

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Speaker 1: think this our view. We do a lot of work

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Speaker 1: on top down earnings, which we have high conviction, and

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Speaker 1: that way, you know, we don't have to focus so

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Speaker 1: much on trying to call the economy moves everything, which

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Speaker 1: I think is a much trickier, uh you know thing

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Speaker 1: to do. Calling recession is is very hard because you

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Speaker 1: never know when that light switch is going to go

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Speaker 1: off unemployment, but when it does, it's you know, it's immediate,

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Speaker 1: and it's just there's no lead time. It's just all

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Speaker 1: sud to hit you with the earnings picture, we can

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Speaker 1: see out twelve months pretty good, and that's why we've

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Speaker 1: had conviction there. Well said, is always fantastic to catch

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Speaker 1: up with you, said Mike Wilson, that of Mokan Stanley,

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Speaker 1: Thank you. Dana Peterson doesn't call it Humphrey Hawk, and

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Speaker 1: she calls it muscle Listen. She listens to every single

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Speaker 1: word two days at running. She's chief economist at the

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Speaker 1: Conference Board. Dana, what I love about your work is

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Speaker 1: its consumer foundation at the conference board, maybe a little

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Speaker 1: business investment as well. You are heated that measured is

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Speaker 1: not fifty basis points, and that we've got a measured

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Speaker 1: FED that will stay measured and stay at twenty five beeps,

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Speaker 1: whatever that path is. Discuss a nuance of a measured

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Speaker 1: FED versus the jump condition that some are calling for. Sure,

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Speaker 1: I think that a fifty basis point hike is actually

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Speaker 1: inflammatory or would raise a lot of concerns among markets

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Speaker 1: and also consumers and businesses that the FED is losing

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Speaker 1: control over inflation, at least the fight over inflation. So

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Speaker 1: I think the Fed's probably going to opt for more

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Speaker 1: twenty five bases point hikes, probably three more, maybe even

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Speaker 1: more greater than that. Maybe we'll get to something close

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Speaker 1: to six percent. It's not really clear, but it's really

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Speaker 1: going to depend upon inflation and also the labor market

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Speaker 1: and whether wages are starting to cool at all. And

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Speaker 1: so I think that you know, certainly the FED does

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Speaker 1: not want to cause alarm and will probably go with

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Speaker 1: twenty five basis points in terms of interest rate hikes

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Speaker 1: going forward. Dana, you've got unique visibility into consumer confidence

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Speaker 1: and frankly, consumer spending which is the engine of this economy.

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Speaker 1: Are you seeing signs of softening materially or not really,

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Speaker 1: Because we are seeing that kind of wage increase, then

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Speaker 1: a lot of people have been waiting for It's interesting

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Speaker 1: consumers are divided in terms of the present situation. They're saying,

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Speaker 1: we are fine. Most of us are working, many of

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Speaker 1: us who switch jobs are seeing wage increases. We may

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Speaker 1: still have a little bit of spending, a little bit

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Speaker 1: of saving that we can spend. We have credit cards

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Speaker 1: and we're continuing to spend. However, looking at the future,

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Speaker 1: they still say, hey, we do expect a recession at

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Speaker 1: some point. We're concerned about job prospects, we're concerned about

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Speaker 1: the business environment, and we're concerned about our own income.

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Speaker 1: So it's really a mixed picture in terms of how

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Speaker 1: consumers are feeling. How divided is it in terms of

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Speaker 1: the high income and the lower income sectors? And I

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Speaker 1: ask this as you start to see companies increasingly cater

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Speaker 1: to wealthy individuals who still have more than a trillion

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Speaker 1: dollars of discretionary savings in their checking accounts, that's according

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Speaker 1: to some metrics, and then you have the others who

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Speaker 1: are looking at shrinking spending capabilities. How much do you

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Speaker 1: see that reflected in sentiment? Sure, it's interesting in the

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Speaker 1: last reading, folks making thirty five between thirty five thousand

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Speaker 1: and seventy five thousand, we're the most concerned about the outlook.

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Speaker 1: And indeed, when we look at what consumers are saying

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Speaker 1: they're going to do regarding spending, they're saying they're not

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Speaker 1: going to by cars or homes, and they're even pulling

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Speaker 1: back on and expect expectations for going on vacation. And

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Speaker 1: that's really important because that's a harborer of what's going

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Speaker 1: to happen in the services sector, Dana, with all of

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Speaker 1: the uncertainties that are out there. To me, the great

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Speaker 1: divide is the domestic economy versus foreign dynamics. And of

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Speaker 1: course we look at that subdivided into this strange thing

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Speaker 1: called domestic final sales. Does domestic final sales indicate we

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Speaker 1: are near recession? Well, it's a mix again. Consumers certainly

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Speaker 1: did spend a lot of money in January. They were

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Speaker 1: pulling back on consumption late last year, but then there

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Speaker 1: was a big spurt. But certainly when we look at

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Speaker 1: business investment, that's already starting to roll over and certainly

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Speaker 1: investment in capex structures and the residential investment environment are

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Speaker 1: all weakening. And really the last you to fall is

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Speaker 1: going to be the consumer, especially with respect of purchasing.

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Speaker 1: So well, this is the Conference Board x Bertise. Do

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Speaker 1: you see the tea leaves there of a consumer that

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Speaker 1: could fail. Well, I think that's the tough part. Our

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Speaker 1: leading indicators continue to signal a recession. Indeed, they say

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Speaker 1: that recessions should be happening right about now, but consumers

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Speaker 1: are defying all expectations. So I think we really need

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Speaker 1: to see the data that's going to come out for February. Certainly,

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Speaker 1: January was a pretty good month in terms of weather.

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Speaker 1: February was horrible, March was worse, and we'll see if

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Speaker 1: that's born out in the data. Dana Peterson, I love

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Speaker 1: that we're going to codify that. It's going to be

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Speaker 1: in all of our ads going forward. Data February was horrible,

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Speaker 1: March's worst. Stata Peterson of the Conference Board. Thank you.

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Speaker 1: It's interesting to see how the doves have become hawks.

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Speaker 1: This idea that people who had aired on the side

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Speaker 1: of not doing as much are now saying this is

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Speaker 1: a different scenario. Given the inflation. What's important here is

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Speaker 1: to understand that if you do equities, buns, currencies, commodides,

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Speaker 1: all sorts of good things can happen. And what's great

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Speaker 1: is it any given firm, the guy who's the quote

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Speaker 1: unquote fixed strategist, it's always their fault. Well, you know,

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Speaker 1: if it's equities, okay, you can Mike Wilson, just equities

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Speaker 1: partition that. But if you're a fixed strategist every day,

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Speaker 1: it can be here fault. Yeah. Even worse, you're supposed

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Speaker 1: to know what's going on at a time where it's

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Speaker 1: very difficult to do so. Ian Steely understands the angst

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Speaker 1: of that very clearly. He is an international CIO four

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Speaker 1: fixed income at JP who work and asset management and

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Speaker 1: joins us here in studio. And I'm so glad that

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Speaker 1: you are in because I'm really struck by what Robert

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Speaker 1: Holtzman said the ECB, a Governing Council member this morning

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Speaker 1: that he potentially backs raising rates in Europe by two

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Speaker 1: hundred basis points more this year, potentially four or fifty

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Speaker 1: basis point rate hikes. How outlandish is this? How much

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Speaker 1: is this starting to actually gain traction? So he's probably

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Speaker 1: the whole, the more whole kish end of ECB members,

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Speaker 1: but I think they're The reality t is the ECB

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Speaker 1: have still got the inflation problem to deal with. So

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Speaker 1: everyone over here is well aware that core inflation is

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Speaker 1: coming down alb all bit slower than the FED would

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Speaker 1: like it to be. That's not the case in Europe.

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Speaker 1: You know, core inflation continues to move higher in Europe.

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Speaker 1: The way the mix of core inflation is likely to

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Speaker 1: be calculated over the coming months, it's going to continue

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Speaker 1: to move higher. So the ECB, who were behind the curve,

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Speaker 1: who were slower to the party of rate hiking than

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Speaker 1: other central banks, is playing catch up, and it feels

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Speaker 1: like they're going to have to have to go a

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Speaker 1: little bit harder. Although I think we need to be

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Speaker 1: clear this is the probably the top end of expectations,

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Speaker 1: the top end, perhaps extreme top end. That said, this

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Speaker 1: comes at a time when so many people have been

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Speaker 1: bullish on Europe. They've seen the surprise of a warmer

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Speaker 1: than expected winter. They've expected to see perhaps more growth

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Speaker 1: in tandem with inflation. Do you push back against that now?

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Speaker 1: I think that's that's right. I think Europe has you mean,

429
00:20:52,359 --> 00:20:55,399
Speaker 1: there were big big concerns about Europe last summer, the

430
00:20:55,680 --> 00:20:58,439
Speaker 1: gas problems and the hikes. I mean the Bundesbank. I

431
00:20:58,480 --> 00:21:01,200
Speaker 1: think at one point we're saying Germany full five percent GDP,

432
00:21:01,400 --> 00:21:04,199
Speaker 1: and obviously that hasn't transpired. And now you've got an

433
00:21:04,280 --> 00:21:06,560
Speaker 1: environment when Europe's coming out the other side. The gas

434
00:21:06,560 --> 00:21:09,280
Speaker 1: tanks are much fuller than than was expected come the

435
00:21:09,320 --> 00:21:10,800
Speaker 1: end of the winter, and people are seeing a really

436
00:21:10,840 --> 00:21:14,200
Speaker 1: good cycle out of Europe. And again that goes into

437
00:21:14,240 --> 00:21:16,800
Speaker 1: the problem the ECB's got to deal with. They've got

438
00:21:17,040 --> 00:21:19,160
Speaker 1: the growth, but they've also got the inflation, and they've

439
00:21:19,200 --> 00:21:21,200
Speaker 1: got they're gonna have to keep going in coming out

440
00:21:21,200 --> 00:21:23,120
Speaker 1: of the pandemic. And you've got one of the toughest

441
00:21:23,200 --> 00:21:26,159
Speaker 1: jobs at your shop. And that is just simply looking

442
00:21:26,200 --> 00:21:30,520
Speaker 1: across FICK, across all of commodities, currencies, in fixed income

443
00:21:30,600 --> 00:21:33,760
Speaker 1: and in such, what do the correlations look like for

444
00:21:33,880 --> 00:21:37,400
Speaker 1: next year? How predictive or how tight are the relationships

445
00:21:37,800 --> 00:21:41,920
Speaker 1: a fixed income commodities and currencies right now? I think

446
00:21:41,960 --> 00:21:43,600
Speaker 1: what you're going to see is you are going to

447
00:21:43,600 --> 00:21:46,679
Speaker 1: see obviously we saw a big correlation last year, not

448
00:21:46,720 --> 00:21:48,840
Speaker 1: just I think probably not just in fixed last year,

449
00:21:48,840 --> 00:21:51,520
Speaker 1: it was across fixed income, across equities, everything was going

450
00:21:51,520 --> 00:21:52,920
Speaker 1: down in price. And I think we are going to

451
00:21:52,920 --> 00:21:55,119
Speaker 1: see a bit of a difference this year because of

452
00:21:55,160 --> 00:21:59,320
Speaker 1: the huge repricing that we saw last year in fixed income.

453
00:21:59,560 --> 00:22:01,840
Speaker 1: And then you've got, as I say, some central banks

454
00:22:01,840 --> 00:22:04,320
Speaker 1: which are much further ahead. You've got to say the

455
00:22:04,320 --> 00:22:06,720
Speaker 1: Bank of Canada, who are likely to pause this week.

456
00:22:06,720 --> 00:22:08,280
Speaker 1: You had a bit of more doubage message out of

457
00:22:08,320 --> 00:22:11,560
Speaker 1: Australia overnight. You know, the FED there's there's a decent

458
00:22:11,560 --> 00:22:13,359
Speaker 1: amount of price in now, and then there's the ECB

459
00:22:13,520 --> 00:22:16,359
Speaker 1: and other central banks, whatever the relationship is. And I

460
00:22:16,400 --> 00:22:17,920
Speaker 1: don't even want to go in we don't have time

461
00:22:17,960 --> 00:22:20,400
Speaker 1: here to go into you know, the fancy talk. But

462
00:22:20,440 --> 00:22:24,719
Speaker 1: do you assume that the dampening going through two twenty

463
00:22:24,760 --> 00:22:28,120
Speaker 1: three and twenty twenty four is a normal what's caused,

464
00:22:28,160 --> 00:22:30,720
Speaker 1: say nodal dampening where we're just going like this, he's

465
00:22:30,760 --> 00:22:32,720
Speaker 1: in our way along or are we going to see

466
00:22:32,800 --> 00:22:37,360
Speaker 1: more abrupt jump conditions within the relationships of fixed income

467
00:22:37,680 --> 00:22:40,879
Speaker 1: currencies and commodities. I think we're going to have a

468
00:22:41,040 --> 00:22:43,520
Speaker 1: slower journey, or a more smoother journey than we saw

469
00:22:43,600 --> 00:22:46,360
Speaker 1: last year. You know, outside of the European Central Bank.

470
00:22:46,400 --> 00:22:48,399
Speaker 1: I think the central banks wants to slow down the

471
00:22:48,400 --> 00:22:51,840
Speaker 1: pace of hiking, which is going to bring down market volatility,

472
00:22:52,119 --> 00:22:54,440
Speaker 1: and then it's going to be a case of later

473
00:22:54,480 --> 00:22:57,160
Speaker 1: in the year, how high do rates yet? And then

474
00:22:57,400 --> 00:22:59,359
Speaker 1: we do we have to do some sharp decreases if

475
00:22:59,359 --> 00:23:01,040
Speaker 1: we do start to see a slowdown, And Lisa, this

476
00:23:01,119 --> 00:23:04,000
Speaker 1: is just critical. The extension of the xxis out where

477
00:23:04,080 --> 00:23:07,240
Speaker 1: people in particularly financial media, we're always like what June

478
00:23:07,240 --> 00:23:09,479
Speaker 1: look like, and the real question is is what its

479
00:23:09,520 --> 00:23:13,240
Speaker 1: twenty twenty five look like exactly, especially once you've worked

480
00:23:13,280 --> 00:23:17,080
Speaker 1: through some of this reset. Going back to this idea

481
00:23:17,240 --> 00:23:20,080
Speaker 1: of the rate hikes that you're talking about, why haven't

482
00:23:20,119 --> 00:23:22,679
Speaker 1: we seen more spread risk in Europe? Why haven't we

483
00:23:22,760 --> 00:23:26,800
Speaker 1: seen more contagion really feeding through to the peripheral spreads,

484
00:23:26,840 --> 00:23:30,000
Speaker 1: the peripheral bond yields that typically would blow out in

485
00:23:30,040 --> 00:23:32,360
Speaker 1: this kind of situation. So I think there's a couple

486
00:23:32,359 --> 00:23:34,760
Speaker 1: of things there. I mean, firstly, we did see that

487
00:23:34,880 --> 00:23:38,439
Speaker 1: concern around spread risk in Europe last year, last summer,

488
00:23:38,440 --> 00:23:41,520
Speaker 1: when we had these big concerns around a slowdown, and

489
00:23:41,560 --> 00:23:44,280
Speaker 1: as we've come through that and slowdown hasn't materialized. And

490
00:23:44,320 --> 00:23:46,840
Speaker 1: economic growth and strength looks better in Europe. People are

491
00:23:46,880 --> 00:23:49,280
Speaker 1: getting a bit more confidence around Europe, and we've seen

492
00:23:49,320 --> 00:23:51,440
Speaker 1: that not just in peripheries. We've seen that in credit spreads,

493
00:23:51,480 --> 00:23:53,880
Speaker 1: high yiel spreads. They've basically come back down to pretty

494
00:23:53,960 --> 00:23:56,199
Speaker 1: much be in line with where where the US is trading.

495
00:23:56,560 --> 00:23:58,120
Speaker 1: But I think you've also got a much more joined

496
00:23:58,200 --> 00:24:01,440
Speaker 1: up Europe than I can really remember, with the recovery

497
00:24:01,440 --> 00:24:05,800
Speaker 1: plan in place and the coordination that we've seen across Europe.

498
00:24:05,880 --> 00:24:08,960
Speaker 1: So it feels that we haven't got that sort of

499
00:24:09,880 --> 00:24:13,800
Speaker 1: spread risk, the periphery risk that we've seen through previous

500
00:24:13,800 --> 00:24:16,000
Speaker 1: cycles that we've all come to know over the last

501
00:24:16,000 --> 00:24:18,119
Speaker 1: decade or so, and if that goes away, then actually

502
00:24:18,119 --> 00:24:20,760
Speaker 1: there's some decent yields on offer owning some of these bonds,

503
00:24:20,920 --> 00:24:22,639
Speaker 1: which is fascinating at a time when a lot of

504
00:24:22,640 --> 00:24:24,480
Speaker 1: our guests come on and they say, you know, perhaps

505
00:24:24,520 --> 00:24:29,240
Speaker 1: people have overplayed the euro and people are perhaps overseeing

506
00:24:29,440 --> 00:24:31,159
Speaker 1: what's going to happen with the dollar and the potential

507
00:24:31,160 --> 00:24:33,360
Speaker 1: strength later on. Do you push back against that and say,

508
00:24:33,400 --> 00:24:36,720
Speaker 1: not only do you have upsides risk with respect to

509
00:24:36,760 --> 00:24:40,840
Speaker 1: ECB raids, but also the strength, the resilience can maintain that.

510
00:24:41,320 --> 00:24:43,000
Speaker 1: I would say both of those, and I would also

511
00:24:43,119 --> 00:24:45,960
Speaker 1: add just the flow dynamics. So if you think about

512
00:24:46,119 --> 00:24:48,320
Speaker 1: what's been the case of Europe over the last decade,

513
00:24:48,720 --> 00:24:51,639
Speaker 1: negatively yielding bonds, who wanted to invest in Europe, who

514
00:24:51,720 --> 00:24:54,439
Speaker 1: wanted to buy negatively yielding bonds, Well that's not the

515
00:24:54,480 --> 00:24:57,600
Speaker 1: case at the moment. To your Germany now at three percent,

516
00:24:57,680 --> 00:25:00,600
Speaker 1: you're getting north of four percent across the Italian curve.

517
00:25:00,760 --> 00:25:02,720
Speaker 1: You're getting seven seven and a half percent across the

518
00:25:02,720 --> 00:25:04,919
Speaker 1: European high yeld mix. And that's before you even move

519
00:25:04,960 --> 00:25:08,120
Speaker 1: into into the dangerous world of equities. So I think

520
00:25:08,160 --> 00:25:10,119
Speaker 1: there's just a lot of demand that will come back

521
00:25:10,480 --> 00:25:14,200
Speaker 1: into fixed income people who haven't wanted to own European

522
00:25:14,200 --> 00:25:17,200
Speaker 1: fixed income for a long time. We're un duration, are

523
00:25:17,200 --> 00:25:20,359
Speaker 1: you then? I mean, you know, on a global basis,

524
00:25:20,520 --> 00:25:22,240
Speaker 1: is there comfort in the belly? Do you have to

525
00:25:22,240 --> 00:25:24,840
Speaker 1: go short term? I'm hearing that you're don't or can

526
00:25:24,880 --> 00:25:29,080
Speaker 1: you actually be brave like the equity people and extend

527
00:25:29,119 --> 00:25:32,760
Speaker 1: out duration? So I think you still want to. So

528
00:25:32,880 --> 00:25:35,800
Speaker 1: we're still playing for the curve to actually flatten a

529
00:25:35,840 --> 00:25:39,520
Speaker 1: bit further from here. We think there is still concerns

530
00:25:39,800 --> 00:25:41,879
Speaker 1: that the central banks around the world maybe have to

531
00:25:41,920 --> 00:25:44,760
Speaker 1: do a little bit more. That's priced, although the repricing

532
00:25:44,800 --> 00:25:47,280
Speaker 1: that we've seen over the last few weeks has been

533
00:25:47,359 --> 00:25:50,119
Speaker 1: very helpful. And then really it's the back end of

534
00:25:50,160 --> 00:25:53,160
Speaker 1: the curve that gives you that ballast in a portfolio.

535
00:25:53,440 --> 00:25:55,200
Speaker 1: That's the bit of the curve that will do very

536
00:25:55,240 --> 00:25:58,000
Speaker 1: well if things go things go badly and suddenly fixed

537
00:25:58,000 --> 00:26:00,880
Speaker 1: income yields move higher and the cap gains could come

538
00:26:00,920 --> 00:26:03,760
Speaker 1: from from that part of them. Can I ask, okay, well,

539
00:26:03,920 --> 00:26:06,040
Speaker 1: you know I'm asking for a friend. Then you load

540
00:26:06,119 --> 00:26:09,040
Speaker 1: the boat on the ninety seven year Austrian piece right

541
00:26:09,080 --> 00:26:12,239
Speaker 1: now down down seventy one percent from its peak. I mean,

542
00:26:12,280 --> 00:26:15,840
Speaker 1: do you extenduration out seven years? So that that is

543
00:26:15,880 --> 00:26:17,680
Speaker 1: I think that now is we're looking at it last week.

544
00:26:17,720 --> 00:26:19,760
Speaker 1: I think that is now at the lowest the lowest

545
00:26:19,760 --> 00:26:25,080
Speaker 1: price one hundred year bond there. Yes, we did notice

546
00:26:25,080 --> 00:26:28,200
Speaker 1: that continue, So I think obviously then you've got to

547
00:26:28,240 --> 00:26:30,560
Speaker 1: take ano account. That's obviously the European curve where they're

548
00:26:30,600 --> 00:26:34,280
Speaker 1: most possibly more still going through. From an ECB standpoint,

549
00:26:34,320 --> 00:26:35,960
Speaker 1: I think in the US, if you want to go

550
00:26:35,960 --> 00:26:37,359
Speaker 1: out and you look at the ten year part of

551
00:26:37,359 --> 00:26:39,560
Speaker 1: the curve, and your your four percent, maybe it goes

552
00:26:39,600 --> 00:26:41,440
Speaker 1: to four and a quarter. I can't see it going

553
00:26:41,520 --> 00:26:44,520
Speaker 1: a huge amount higher than that. And that means that

554
00:26:44,560 --> 00:26:47,639
Speaker 1: over the next few years that looks like a decent investment.

555
00:26:47,680 --> 00:26:50,679
Speaker 1: And I think, you know, but buying bombs definitely more

556
00:26:50,720 --> 00:26:53,160
Speaker 1: attractive than they were at any point point last year.

557
00:26:53,200 --> 00:26:55,800
Speaker 1: And thankfully the rally that happened in January has reversed

558
00:26:55,800 --> 00:26:57,560
Speaker 1: a bit to give us another opportunity to go back

559
00:26:57,560 --> 00:27:00,240
Speaker 1: into the market. Don't be a stranger and love to

560
00:27:00,240 --> 00:27:13,119
Speaker 1: see here in our New York studios, Luke and Ramen

561
00:27:13,440 --> 00:27:15,280
Speaker 1: joins us up We are thrilled to have her back.

562
00:27:15,400 --> 00:27:18,879
Speaker 1: Really to begin our coverage of what the International Monetary

563
00:27:18,920 --> 00:27:21,360
Speaker 1: Fund will be doing here one month out. We're making

564
00:27:21,400 --> 00:27:23,359
Speaker 1: a lot of good plans out at John Farrell, leading

565
00:27:23,400 --> 00:27:27,199
Speaker 1: our planning meetings on IMF Spring meetings. Lupa Ramen is

566
00:27:27,200 --> 00:27:30,720
Speaker 1: with PIMCO and as well versed on the emerging markets. Look,

567
00:27:30,760 --> 00:27:33,119
Speaker 1: but let's start with the beginning. To me, there's two

568
00:27:33,560 --> 00:27:38,159
Speaker 1: ems at the minimum, the frontier economies greatly belieguered and

569
00:27:38,280 --> 00:27:42,040
Speaker 1: another EM of great prosperity or dare I say could

570
00:27:42,040 --> 00:27:46,040
Speaker 1: there be three worlds of EM. Which is it. I

571
00:27:46,119 --> 00:27:50,760
Speaker 1: think EM is extremely diversified right now, and you hit

572
00:27:50,800 --> 00:27:52,960
Speaker 1: the nail on the head in terms of vibificating the

573
00:27:53,040 --> 00:27:57,840
Speaker 1: frontier economies, especially the low single B high yield economies

574
00:27:57,840 --> 00:28:00,160
Speaker 1: that are facing a lot of stress. Some of them

575
00:28:00,240 --> 00:28:03,119
Speaker 1: have very large external financing needs. They're having to have

576
00:28:03,280 --> 00:28:08,159
Speaker 1: IMF programs or other bilateral lines from creditors like the

577
00:28:08,680 --> 00:28:12,520
Speaker 1: Gulf States and China. And then there is the rest

578
00:28:12,520 --> 00:28:15,040
Speaker 1: of EM. There is the investment grade portion and the

579
00:28:15,080 --> 00:28:18,400
Speaker 1: double B portion of the EM asset class. Even there

580
00:28:18,400 --> 00:28:22,119
Speaker 1: there is a lot of diversification and differentiation, both in

581
00:28:22,240 --> 00:28:24,400
Speaker 1: terms of the balance sheets as well as how these

582
00:28:24,440 --> 00:28:29,360
Speaker 1: economies are coming out of this COVID and growth cycle.

583
00:28:29,600 --> 00:28:31,960
Speaker 1: Do you look at this as country by country or

584
00:28:32,080 --> 00:28:36,320
Speaker 1: by asset class or even subsets of asset class, You

585
00:28:36,400 --> 00:28:40,000
Speaker 1: have to look at all. Unfortunately, I don't think EM

586
00:28:40,120 --> 00:28:42,240
Speaker 1: is a one size fits all in terms of the

587
00:28:42,360 --> 00:28:46,080
Speaker 1: framework or model that you need to use, and so

588
00:28:46,280 --> 00:28:50,640
Speaker 1: you really thinking about asset classes and regions makes a

589
00:28:50,640 --> 00:28:53,320
Speaker 1: lot of sense right now, as well as countries that

590
00:28:53,400 --> 00:28:57,520
Speaker 1: perhaps are going to benefit more secularly from the near

591
00:28:57,560 --> 00:29:01,760
Speaker 1: shoring and structural structural shift that are occurring both in

592
00:29:01,840 --> 00:29:05,600
Speaker 1: the global and macro playing field for EM. Luban I

593
00:29:05,640 --> 00:29:08,120
Speaker 1: was reading this morning all of the rhetorics, the fiery

594
00:29:08,160 --> 00:29:11,719
Speaker 1: rhetoric coming from the Chinese Communist Party, coming from leaders

595
00:29:11,920 --> 00:29:15,200
Speaker 1: talking about the increasingly fractious relationship between the US and China.

596
00:29:15,360 --> 00:29:17,520
Speaker 1: Hear the same coming from a lot of US officials.

597
00:29:17,880 --> 00:29:20,720
Speaker 1: What's the investment consequence of this, because right now I'm

598
00:29:20,720 --> 00:29:25,280
Speaker 1: still seeing a lot of people say Chinese debt, Chinese equities. Thereby,

599
00:29:26,560 --> 00:29:30,080
Speaker 1: I think the main investment implication from this is to

600
00:29:30,120 --> 00:29:34,200
Speaker 1: really think about EM in terms of the various centers

601
00:29:34,240 --> 00:29:37,600
Speaker 1: of global growth and drivers of global growth. For EM

602
00:29:37,600 --> 00:29:41,840
Speaker 1: as a whole, This fractionalization that we're seeing much moral

603
00:29:41,960 --> 00:29:45,880
Speaker 1: from the US and China trade relations and geopolitics is

604
00:29:45,960 --> 00:29:50,080
Speaker 1: really going to be a headwind for many countries within

605
00:29:50,120 --> 00:29:54,840
Speaker 1: the asset class. Slow globalization, as the IMF has coined

606
00:29:54,880 --> 00:29:57,800
Speaker 1: the term, is not a positive for the EM asset

607
00:29:57,840 --> 00:30:01,160
Speaker 1: class as a whole. Having said that, there are areas

608
00:30:01,200 --> 00:30:04,120
Speaker 1: that are going to be growing and perhaps benefiting from this,

609
00:30:04,920 --> 00:30:09,520
Speaker 1: countries like Mexico, countries like India, many other smaller emerging

610
00:30:09,560 --> 00:30:12,680
Speaker 1: markets that perhaps have a niche in particular parts of

611
00:30:12,720 --> 00:30:16,240
Speaker 1: the supply chain, and so for the em asset class,

612
00:30:16,240 --> 00:30:19,920
Speaker 1: I think the investment implication really is to start from

613
00:30:19,960 --> 00:30:23,240
Speaker 1: the bottom up and really focus on country by country

614
00:30:23,320 --> 00:30:27,640
Speaker 1: selection in terms of really thinking about the investment opportunities

615
00:30:27,640 --> 00:30:30,120
Speaker 1: that are out there. Specifically with China. I think about

616
00:30:30,200 --> 00:30:32,960
Speaker 1: Mark Mobius, the emerging markets investor who complained that he

617
00:30:33,040 --> 00:30:35,520
Speaker 1: had some money in China that he couldn't get out

618
00:30:35,920 --> 00:30:38,040
Speaker 1: because of all of the red tapes that he had

619
00:30:38,080 --> 00:30:40,120
Speaker 1: to go through to bring the money out of the country.

620
00:30:40,560 --> 00:30:45,040
Speaker 1: In your view, is China not uninvestable but increasingly a

621
00:30:45,160 --> 00:30:50,400
Speaker 1: fraud investing proposition that perhaps isn't recognized in pricing currently. Well,

622
00:30:50,400 --> 00:30:52,760
Speaker 1: I think that, you know, looking at the fixed income

623
00:30:52,800 --> 00:30:56,440
Speaker 1: opportunities in China with the cyclical horizon, you know, we

624
00:30:56,520 --> 00:31:00,520
Speaker 1: are a bit more cautious given the opportunities elsewhere within

625
00:31:00,640 --> 00:31:04,160
Speaker 1: the fixed income world as well as within emerging markets.

626
00:31:04,400 --> 00:31:07,120
Speaker 1: So if you're looking at the level of real rates,

627
00:31:07,520 --> 00:31:11,200
Speaker 1: really you're getting better opportunities elsewhere, whether it's Brazil or

628
00:31:11,240 --> 00:31:14,880
Speaker 1: even Mexico. If you're looking at currency plays, perhaps the

629
00:31:14,960 --> 00:31:18,440
Speaker 1: CNY is not the best play right now. Given without

630
00:31:18,480 --> 00:31:22,000
Speaker 1: bound tourism, you may see capital outflows resuming. So I

631
00:31:22,080 --> 00:31:26,280
Speaker 1: think that from an investment perspectives, there are more interesting

632
00:31:26,320 --> 00:31:31,160
Speaker 1: opportunities from a risk adjusted perspective elsewhere within em Lipin

633
00:31:31,240 --> 00:31:34,760
Speaker 1: Ramed of Pimco Lapin, Thank you on em China and

634
00:31:34,840 --> 00:31:38,400
Speaker 1: whether It's investable or not. Subscribe to the Bloomberg Surveillance

635
00:31:38,440 --> 00:31:42,840
Speaker 1: podcast on Apple, Spotify and anywhere else you get your podcasts.

636
00:31:43,240 --> 00:31:47,320
Speaker 1: Listen live every weekday starting at seven am Eastern. I'm

637
00:31:47,360 --> 00:31:51,360
Speaker 1: Bloomberg dot Com, the iHeartRadio app tune In, and the

638
00:31:51,360 --> 00:31:55,400
Speaker 1: Bloomberg Business app. You can watch us live. I'm Bloomberg

639
00:31:55,440 --> 00:31:59,640
Speaker 1: Television and Always, and the Bloomberg Terminal. Thanks for listening.

640
00:32:00,120 --> 00:32:02,840
Speaker 1: I'm Tom Keane and this is Plumber