Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, financing, investment.
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. There was
Speaker 1: just one quote yesterday that stood out for many of
Speaker 1: you at home. I know. It was from Mike Wilson
Speaker 1: and Morgan Stanley and it read as follows, Equity markets
Speaker 1: survived the crucial test of support last week. That suggests
Speaker 1: this band market Ronnie Tom is not ready to end
Speaker 1: just yet. How much of a change was that from
Speaker 1: Mike and a team. This is a pretty substantial change.
Speaker 1: We're going to dive into that right now with Mike Wilson.
Speaker 1: Mike John wants to dive into this. I'm gonna I'm
Speaker 1: gonna talk right now. I'm gonna make some news here,
Speaker 1: Mike Wilson, so help me out. The Great Ralph and
Speaker 1: Kompora was on a while back and he said, look,
Speaker 1: there was an October bottom. We've heard this from a
Speaker 1: few other select people with this more optimist to call
Speaker 1: by you can you call an October bottom? Can we
Speaker 1: call it the encompora? Wilson Bottom? Well, good morning guys,
Speaker 1: thanks for having me. As usual. What we did call
Speaker 1: that bottom in October, and we thought it would be
Speaker 1: a substantial rally fifteen twenty percent. We got that rally,
Speaker 1: and then we decided, well, the risk reward is no
Speaker 1: longer attractive, and so we backed off of that and
Speaker 1: we said we'd probably go down and we test those
Speaker 1: loads at a minimum and probably take it out, which
Speaker 1: is really based on our fundamental view that you know,
Speaker 1: the earnings recession is now in place. People acknowledge that,
Speaker 1: but I think there's a very wide range of how
Speaker 1: deep that earnings recession is going to be, with us
Speaker 1: kind of in the deeper end of that range. Now,
Speaker 1: this past weekend, we looked at the chart, but we
Speaker 1: have to be out, we have to be objective about
Speaker 1: what we see. We're technicians in addition to fundamental strategists.
Speaker 1: We looked at at the price action last week and
Speaker 1: we actually talked about it in the week the note
Speaker 1: the week before we said, like we're going to probably
Speaker 1: test this level. If it holds it, it'll be a
Speaker 1: constructive marker at least in the short term, and that's
Speaker 1: how we're viewing it now. Time it's a short term positive.
Speaker 1: I don't think it changes our intermediate term view that
Speaker 1: you know, the risk reward is still pretty blousy at
Speaker 1: forty one hundred because of that earnings recession view that
Speaker 1: we have on the fundamental side. So we remained in
Speaker 1: the trader's market, and part of our job is to
Speaker 1: help people navigate that. So it might just to be clear,
Speaker 1: how different is this call compared to the call for
Speaker 1: the tacticle running a mate back in October. Oh, it's
Speaker 1: very different, John, because you know, in October we were
Speaker 1: trading thirty five hundred. Of the evaluations were fifteen twenty
Speaker 1: percent lower interest rates you know, we're higher. We felt
Speaker 1: like they were going to come down, so we had
Speaker 1: a lot of canalysts trying to reopening. There are a
Speaker 1: lot of reasons to believe that that was a very
Speaker 1: tradeable load, not just for trader types however, people who
Speaker 1: were in a real capital and it turned out to
Speaker 1: be the case. So you know, we don't always get
Speaker 1: that stuff right. It's impossible to get it right every time.
Speaker 1: So this is much This is much more tactical. This
Speaker 1: is just Serve saying, look, we acknowledge that the tactical
Speaker 1: picture held. We didn't know that was going to be
Speaker 1: the case, and so you have to respect it. And hey,
Speaker 1: they could turn down this afternoon again for all I know,
Speaker 1: given what Jay Powell is going to say this testimony.
Speaker 1: You know, I have no idea. Maybe that triggers people
Speaker 1: to get negative. One thing I will say to you all, however,
Speaker 1: is that we're pretty confident that between now and the
Speaker 1: next eLearning season, which isn't that far away, that will
Speaker 1: be when we think the next you know, bear market
Speaker 1: kind of decline happens, maybe they a more meaningful decline
Speaker 1: ten percent plus. So Mike, we can get further down
Speaker 1: the right in just the moment. I just want to
Speaker 1: sit on the early part of this year. It's difficult
Speaker 1: to get everything you right. You put out a note
Speaker 1: early in the year and you said thirty nine hundred
Speaker 1: was an easy sell. What's more difficult about it now?
Speaker 1: Besides the technical point the of night, Well, I think
Speaker 1: there's a couple of things you have to acknowledge. I
Speaker 1: mean that the economic data has been better. You know,
Speaker 1: Chad's reopening is kind of just getting going, and they
Speaker 1: kind of held back. They could get they could gather
Speaker 1: some steam, you know. So those are things you have
Speaker 1: to say. Look, I mean, I think people came into
Speaker 1: this year feeling as if the recession was inevitable, and
Speaker 1: that no longer is the case. It's probably thirty percent
Speaker 1: chance and be forty percent chance at best, and that
Speaker 1: can keep animal spirits alive. The other thing that's happened, John,
Speaker 1: is we've talked about multiple times, is this liquidity picture
Speaker 1: from outside the US. So the Fed's doing their job
Speaker 1: trying to tighten financial conditions. The problem for them is
Speaker 1: that we have the Bank of Japan and we have
Speaker 1: the PBOC adding liquidity, and you have a dollar that's
Speaker 1: kind of softening up, which is kind of neutralizing you know,
Speaker 1: the Fed's goals of tightening financial conditions, and that's also
Speaker 1: kind of breede some life into risk assets. That's the
Speaker 1: only thing that's changed. Ultimately, we think, you know, evaluations
Speaker 1: and the fundamentals meaning earnings will determine where stock price
Speaker 1: is trade. That setup is now particularly great, particularly to
Speaker 1: move higher and rates this year given some of the
Speaker 1: changes that you talked about just now, Mike, how much
Speaker 1: does that change what floor you could see in your
Speaker 1: scenario for equities? Well, I mean, look, we have to
Speaker 1: be flexible when we're trying to you know, also service
Speaker 1: a lot of different types of clients, right, whether we're
Speaker 1: talking about trader types or we're talking about asset owners.
Speaker 1: You know, for the asset owner or crowd, we've been
Speaker 1: pretty adamant. You know. We felt like the fall was
Speaker 1: a really good entry point where people had a longer
Speaker 1: time horizon and if you added risk there, you probably
Speaker 1: just stay with it. You know. I do think people
Speaker 1: that are getting a bit carried away on what they've
Speaker 1: been buying, Okay, So I think they're you know, given
Speaker 1: the rally that we saw on the fall versus the
Speaker 1: rally we've seen this year, they have very different sort
Speaker 1: of complexions, right. The rally and the fall was based
Speaker 1: on we think fundamentals meaning rates coming down, economic data
Speaker 1: getting better because of China and globally at least that
Speaker 1: would help the kind of typical type areas of the market.
Speaker 1: Then we had this more speculative rally that started in January,
Speaker 1: kind of buying last year's losers, which was all the
Speaker 1: growth stocks and the meme stocks for everyone to call them,
Speaker 1: and those are just gotten out of control again, particularly
Speaker 1: in the count of types of higher rates. I think
Speaker 1: there's there's a lot going on right And I think
Speaker 1: there's two ways to think about. If you have kind
Speaker 1: of you know, names that you want to own through,
Speaker 1: you know, we want to underwrite through what we think
Speaker 1: is going to be a difficult time for earnings, and
Speaker 1: you say, look, I think there's value in this security
Speaker 1: for the next three years, Great, you should just own
Speaker 1: those through that period. However, there's a lot of stuff
Speaker 1: that's gotten dragged along here that is wildly speculative. Now
Speaker 1: in my viewing, it's it's it's actually somewhat reckulous. And
Speaker 1: that's the stuff that you got to be really careful
Speaker 1: it's in your portfolio, got to get out of because
Speaker 1: you know that stuff has gotten revalued in a way
Speaker 1: that doesn't make much sense to us. What kind of
Speaker 1: downside could you be talking about? And I assume you're
Speaker 1: talking big tech names as well as some of the
Speaker 1: other meme stocks. Well for some of this stuff, I mean,
Speaker 1: I mean, I think there's plenty of stocks that are
Speaker 1: probably gonna go bankrupt, you know, I mean, I don't
Speaker 1: think that's a crazy statement. But that's not the bulk
Speaker 1: of the stock market. Okay, So this is a is
Speaker 1: a pocket of the stock market. And then I would say,
Speaker 1: but overall, the growthier stuff and the thing that even
Speaker 1: the cychnicals names that have gone too far now could
Speaker 1: have as much as twenty percent downs had no problem.
Speaker 1: I mean that that. I mean that our valuation work
Speaker 1: would suggest that even without the earnings recession, right, the
Speaker 1: valuations are kind of out of bounds. Again. So it's
Speaker 1: a stock pickers market a lot that we're saying that.
Speaker 1: You know, that's usually what people say, by the way,
Speaker 1: when they're having a hard time calling the direction of
Speaker 1: the market. We do it too. And so you know,
Speaker 1: I pays a stock picking market. Well that's hard, okay,
Speaker 1: So you know that's not an easy game to play,
Speaker 1: But it is a stock picking market in the stock
Speaker 1: the stocks that are likely to go up versus down
Speaker 1: is probably less than fifty percent. It's a stock picking
Speaker 1: market with not a great you know, macro backdrop. So
Speaker 1: that's that's a challenge, Mike. I want to go to
Speaker 1: what I think is the great divide as Tullub says,
Speaker 1: the gravity is return of the system. You remember this
Speaker 1: when you were studying this in an armor years ago.
Speaker 1: The bottom line is when you get a normal interest
Speaker 1: rate structure, all of a sudden down the income statement
Speaker 1: matters divide for us. Now, how you look at those
Speaker 1: that profit from those that do not profit. That seems
Speaker 1: to be a new metric. Yeah, I mean I don't
Speaker 1: think this is a new metric. I think it's a
Speaker 1: forgotten metric, which is that you know, your costs sit
Speaker 1: on your balance sheet until they have to hit the
Speaker 1: income statement. And you know, this whole idea of a
Speaker 1: cruel versus cash accounting which we did learn, you know,
Speaker 1: seems like forty years probably was forty years ago. And
Speaker 1: you know, I have a history of studying accounting and
Speaker 1: it's a it's a great tool to kind of see
Speaker 1: through the noise. And this is why we know our
Speaker 1: note this past week we highlighted a great report done
Speaker 1: by our Goal Tax Valuation team and basically highlighting this
Speaker 1: you know, spread between cash flow and NETT income that's
Speaker 1: being reported that's all based on the rules and so
Speaker 1: it's you know, it ties into everything we've been talking
Speaker 1: about for the last year a year and a half,
Speaker 1: which is the pandemic. The lockdowns basically brought on this
Speaker 1: incredible period of over earning by corporations because their costs
Speaker 1: were slower to increase than the revenues came back. But
Speaker 1: now we have the exact opposite, which is the companies
Speaker 1: that you know basically accrued these costs on the balance
Speaker 1: sheet at a bad time when you know, inflation was
Speaker 1: running hot and they thought business is going to continue
Speaker 1: to be that strong, so they it does not actually
Speaker 1: happen now, and that has to flow through the income statement,
Speaker 1: and that will hurt margins. And that's the story. The
Speaker 1: question is will the markets look through that and suggest, well,
Speaker 1: we know this as temporary. Ultimately companies get the head
Speaker 1: around at which we agree with. But our experience is
Speaker 1: that markets will not look through it if the earnings
Speaker 1: degradation is as severe as we think it's going to be. Mike,
Speaker 1: I mentioned that that you see a difference between what
Speaker 1: could develop in the real economy and what could happen
Speaker 1: with earnings. How well received is that with clients at
Speaker 1: the moment? Mike, well, what investors understand that concept that
Speaker 1: I didn't invent that so I mean, I think they
Speaker 1: very much appreciate that kindcept. The problem is that is noisy,
Speaker 1: and there is this you know, we live in this
Speaker 1: world now where there's sort of almost like hand a
Speaker 1: mouth guidance, you know, the Fed, you know, doing it
Speaker 1: for the bond market and companies doing it for the
Speaker 1: stock market, and so it's a process that takes longer
Speaker 1: than it probably should. And that's what's frustrating, I think
Speaker 1: for some investors who are in the weeds on this
Speaker 1: where we are, it's like, well, my goodness, it's pretty
Speaker 1: obvious what's about to happen? You know. Why is a
Speaker 1: marketing solong to kind of prices? That's just the way
Speaker 1: it is, and that's that's not a new phenomena. That's
Speaker 1: kind of way it always is at this stage. When
Speaker 1: you get a significant earnings recession, it just takes longer
Speaker 1: than than you would think to get it priced. Do
Speaker 1: you get more questions about single names now, Mike, and
Speaker 1: what single stock contents do you offer them? We do?
Speaker 1: But you know, I think most of our clients are
Speaker 1: pretty good at that job. I mean, they do a
Speaker 1: good job. That's that's their job. Essentially, We absolutely help them.
Speaker 1: We We do run amud of portfolio as you know,
Speaker 1: we've had great success with that. But it's you know,
Speaker 1: it's it's a it's a helpful tool. And then we
Speaker 1: run a lot of screens for people based on our
Speaker 1: view of the work from a macro standpoint, say, okay,
Speaker 1: these factor variables should be uh in effect and this
Speaker 1: is what you want to you know, kind of put
Speaker 1: in your portfolio. We run those screens, and that's kind
Speaker 1: of how we go at it. We don't we don't
Speaker 1: you know, talk specifics necessarily with clients around uh, you know,
Speaker 1: individual companies as much as you know, say, our analysts
Speaker 1: team does, which is really their job. But let's talk
Speaker 1: about sectors in particular with margin compression. If the service sector,
Speaker 1: if sector is possibly seeing more perhaps wage pressure, need
Speaker 1: to pay more to people to bring them in the
Speaker 1: door than say tech stocks. How do you look at
Speaker 1: where margin compression is going to be the greatest and
Speaker 1: what could potentially get hit as people trickle through and
Speaker 1: realize this new kind of reality. Well that's exactly right. Now.
Speaker 1: One of the other features we've just touch on for
Speaker 1: a second is that the recovery and selfless sort of
Speaker 1: two stage, right, It was goods first, then services. Normally,
Speaker 1: in a normal recovery, everything comes back at the same time,
Speaker 1: so you have the sort of rolling recovery, and now
Speaker 1: rolling recession. Tech is intercession right now, I think that's
Speaker 1: obvious right there, losing uh you know there there, there's
Speaker 1: there're seeing negative growth, They're they're laying people off, more
Speaker 1: aggresive in other sectors, and I think the big question
Speaker 1: for the economy is does that spill over into the
Speaker 1: services sector, which is where the employment really lives, right,
Speaker 1: I mean, that's that's you know, small medium businesses and
Speaker 1: services come to employ a lot more people as you suggested. Look,
Speaker 1: we think ultimately this will roll through kind of the
Speaker 1: entire economy. Services will probably get hit later in the
Speaker 1: year when other businesses are showing weakness and then we're
Speaker 1: seeing layoffs there, which and people spend less money. So
Speaker 1: it's sort of a circular argument. But clearly this idea
Speaker 1: of operational efficiency is what the market is paying for.
Speaker 1: So companies that are showing good inventory controls labor costs
Speaker 1: as a percentage of costcuts so are smaller, and then
Speaker 1: capex appreciation is lower. And this word efficiency has been
Speaker 1: popping up. I find it very interesting. You know, we're
Speaker 1: hearing it from all different companies. We've been talking about
Speaker 1: that for twelve months, so you know, people are catching on,
Speaker 1: and but we think that it's not over. We think
Speaker 1: the market will continue to pay for companies that are
Speaker 1: very efficient with their expenses and can get the revenue
Speaker 1: to the bottom line. This is fascinating, Mike. Are you
Speaker 1: saying that in the months to come, the good sectors
Speaker 1: that perhaps have already seen the downturn will outperform as
Speaker 1: margin pressures and some of the downturns start to hit
Speaker 1: the later recovering sectors, namely services, leisure, hospitality. We think
Speaker 1: that could be the case. I wouldn't say that it's
Speaker 1: like a high conviction view, but we do think that
Speaker 1: a lot of the good sector stocks in particular, and
Speaker 1: even the earnings forecasts have come down because it's obvious,
Speaker 1: right they you know, we had to pull forward of
Speaker 1: demand and so those numbers are written reset the questions
Speaker 1: when does the demand profile look like for some of
Speaker 1: those businesses that we're basically COVID winners? Are they are
Speaker 1: they winners in the long term that's to be determined.
Speaker 1: And then services, we do think it's kind a bit
Speaker 1: for our thing. It's kind of you there's there'll be
Speaker 1: demand destruction as prices are a bit out of control there,
Speaker 1: so it's just messy, you know, And that's why I
Speaker 1: think this our view. We do a lot of work
Speaker 1: on top down earnings, which we have high conviction, and
Speaker 1: that way, you know, we don't have to focus so
Speaker 1: much on trying to call the economy moves everything, which
Speaker 1: I think is a much trickier, uh you know thing
Speaker 1: to do. Calling recession is is very hard because you
Speaker 1: never know when that light switch is going to go
Speaker 1: off unemployment, but when it does, it's you know, it's immediate,
Speaker 1: and it's just there's no lead time. It's just all
Speaker 1: sud to hit you with the earnings picture, we can
Speaker 1: see out twelve months pretty good, and that's why we've
Speaker 1: had conviction there. Well said, is always fantastic to catch
Speaker 1: up with you, said Mike Wilson, that of Mokan Stanley,
Speaker 1: Thank you. Dana Peterson doesn't call it Humphrey Hawk, and
Speaker 1: she calls it muscle Listen. She listens to every single
Speaker 1: word two days at running. She's chief economist at the
Speaker 1: Conference Board. Dana, what I love about your work is
Speaker 1: its consumer foundation at the conference board, maybe a little
Speaker 1: business investment as well. You are heated that measured is
Speaker 1: not fifty basis points, and that we've got a measured
Speaker 1: FED that will stay measured and stay at twenty five beeps,
Speaker 1: whatever that path is. Discuss a nuance of a measured
Speaker 1: FED versus the jump condition that some are calling for. Sure,
Speaker 1: I think that a fifty basis point hike is actually
Speaker 1: inflammatory or would raise a lot of concerns among markets
Speaker 1: and also consumers and businesses that the FED is losing
Speaker 1: control over inflation, at least the fight over inflation. So
Speaker 1: I think the Fed's probably going to opt for more
Speaker 1: twenty five bases point hikes, probably three more, maybe even
Speaker 1: more greater than that. Maybe we'll get to something close
Speaker 1: to six percent. It's not really clear, but it's really
Speaker 1: going to depend upon inflation and also the labor market
Speaker 1: and whether wages are starting to cool at all. And
Speaker 1: so I think that you know, certainly the FED does
Speaker 1: not want to cause alarm and will probably go with
Speaker 1: twenty five basis points in terms of interest rate hikes
Speaker 1: going forward. Dana, you've got unique visibility into consumer confidence
Speaker 1: and frankly, consumer spending which is the engine of this economy.
Speaker 1: Are you seeing signs of softening materially or not really,
Speaker 1: Because we are seeing that kind of wage increase, then
Speaker 1: a lot of people have been waiting for It's interesting
Speaker 1: consumers are divided in terms of the present situation. They're saying,
Speaker 1: we are fine. Most of us are working, many of
Speaker 1: us who switch jobs are seeing wage increases. We may
Speaker 1: still have a little bit of spending, a little bit
Speaker 1: of saving that we can spend. We have credit cards
Speaker 1: and we're continuing to spend. However, looking at the future,
Speaker 1: they still say, hey, we do expect a recession at
Speaker 1: some point. We're concerned about job prospects, we're concerned about
Speaker 1: the business environment, and we're concerned about our own income.
Speaker 1: So it's really a mixed picture in terms of how
Speaker 1: consumers are feeling. How divided is it in terms of
Speaker 1: the high income and the lower income sectors? And I
Speaker 1: ask this as you start to see companies increasingly cater
Speaker 1: to wealthy individuals who still have more than a trillion
Speaker 1: dollars of discretionary savings in their checking accounts, that's according
Speaker 1: to some metrics, and then you have the others who
Speaker 1: are looking at shrinking spending capabilities. How much do you
Speaker 1: see that reflected in sentiment? Sure, it's interesting in the
Speaker 1: last reading, folks making thirty five between thirty five thousand
Speaker 1: and seventy five thousand, we're the most concerned about the outlook.
Speaker 1: And indeed, when we look at what consumers are saying
Speaker 1: they're going to do regarding spending, they're saying they're not
Speaker 1: going to by cars or homes, and they're even pulling
Speaker 1: back on and expect expectations for going on vacation. And
Speaker 1: that's really important because that's a harborer of what's going
Speaker 1: to happen in the services sector, Dana, with all of
Speaker 1: the uncertainties that are out there. To me, the great
Speaker 1: divide is the domestic economy versus foreign dynamics. And of
Speaker 1: course we look at that subdivided into this strange thing
Speaker 1: called domestic final sales. Does domestic final sales indicate we
Speaker 1: are near recession? Well, it's a mix again. Consumers certainly
Speaker 1: did spend a lot of money in January. They were
Speaker 1: pulling back on consumption late last year, but then there
Speaker 1: was a big spurt. But certainly when we look at
Speaker 1: business investment, that's already starting to roll over and certainly
Speaker 1: investment in capex structures and the residential investment environment are
Speaker 1: all weakening. And really the last you to fall is
Speaker 1: going to be the consumer, especially with respect of purchasing.
Speaker 1: So well, this is the Conference Board x Bertise. Do
Speaker 1: you see the tea leaves there of a consumer that
Speaker 1: could fail. Well, I think that's the tough part. Our
Speaker 1: leading indicators continue to signal a recession. Indeed, they say
Speaker 1: that recessions should be happening right about now, but consumers
Speaker 1: are defying all expectations. So I think we really need
Speaker 1: to see the data that's going to come out for February. Certainly,
Speaker 1: January was a pretty good month in terms of weather.
Speaker 1: February was horrible, March was worse, and we'll see if
Speaker 1: that's born out in the data. Dana Peterson, I love
Speaker 1: that we're going to codify that. It's going to be
Speaker 1: in all of our ads going forward. Data February was horrible,
Speaker 1: March's worst. Stata Peterson of the Conference Board. Thank you.
Speaker 1: It's interesting to see how the doves have become hawks.
Speaker 1: This idea that people who had aired on the side
Speaker 1: of not doing as much are now saying this is
Speaker 1: a different scenario. Given the inflation. What's important here is
Speaker 1: to understand that if you do equities, buns, currencies, commodides,
Speaker 1: all sorts of good things can happen. And what's great
Speaker 1: is it any given firm, the guy who's the quote
Speaker 1: unquote fixed strategist, it's always their fault. Well, you know,
Speaker 1: if it's equities, okay, you can Mike Wilson, just equities
Speaker 1: partition that. But if you're a fixed strategist every day,
Speaker 1: it can be here fault. Yeah. Even worse, you're supposed
Speaker 1: to know what's going on at a time where it's
Speaker 1: very difficult to do so. Ian Steely understands the angst
Speaker 1: of that very clearly. He is an international CIO four
Speaker 1: fixed income at JP who work and asset management and
Speaker 1: joins us here in studio. And I'm so glad that
Speaker 1: you are in because I'm really struck by what Robert
Speaker 1: Holtzman said the ECB, a Governing Council member this morning
Speaker 1: that he potentially backs raising rates in Europe by two
Speaker 1: hundred basis points more this year, potentially four or fifty
Speaker 1: basis point rate hikes. How outlandish is this? How much
Speaker 1: is this starting to actually gain traction? So he's probably
Speaker 1: the whole, the more whole kish end of ECB members,
Speaker 1: but I think they're The reality t is the ECB
Speaker 1: have still got the inflation problem to deal with. So
Speaker 1: everyone over here is well aware that core inflation is
Speaker 1: coming down alb all bit slower than the FED would
Speaker 1: like it to be. That's not the case in Europe.
Speaker 1: You know, core inflation continues to move higher in Europe.
Speaker 1: The way the mix of core inflation is likely to
Speaker 1: be calculated over the coming months, it's going to continue
Speaker 1: to move higher. So the ECB, who were behind the curve,
Speaker 1: who were slower to the party of rate hiking than
Speaker 1: other central banks, is playing catch up, and it feels
Speaker 1: like they're going to have to have to go a
Speaker 1: little bit harder. Although I think we need to be
Speaker 1: clear this is the probably the top end of expectations,
Speaker 1: the top end, perhaps extreme top end. That said, this
Speaker 1: comes at a time when so many people have been
Speaker 1: bullish on Europe. They've seen the surprise of a warmer
Speaker 1: than expected winter. They've expected to see perhaps more growth
Speaker 1: in tandem with inflation. Do you push back against that now?
Speaker 1: I think that's that's right. I think Europe has you mean,
Speaker 1: there were big big concerns about Europe last summer, the
Speaker 1: gas problems and the hikes. I mean the Bundesbank. I
Speaker 1: think at one point we're saying Germany full five percent GDP,
Speaker 1: and obviously that hasn't transpired. And now you've got an
Speaker 1: environment when Europe's coming out the other side. The gas
Speaker 1: tanks are much fuller than than was expected come the
Speaker 1: end of the winter, and people are seeing a really
Speaker 1: good cycle out of Europe. And again that goes into
Speaker 1: the problem the ECB's got to deal with. They've got
Speaker 1: the growth, but they've also got the inflation, and they've
Speaker 1: got they're gonna have to keep going in coming out
Speaker 1: of the pandemic. And you've got one of the toughest
Speaker 1: jobs at your shop. And that is just simply looking
Speaker 1: across FICK, across all of commodities, currencies, in fixed income
Speaker 1: and in such, what do the correlations look like for
Speaker 1: next year? How predictive or how tight are the relationships
Speaker 1: a fixed income commodities and currencies right now? I think
Speaker 1: what you're going to see is you are going to
Speaker 1: see obviously we saw a big correlation last year, not
Speaker 1: just I think probably not just in fixed last year,
Speaker 1: it was across fixed income, across equities, everything was going
Speaker 1: down in price. And I think we are going to
Speaker 1: see a bit of a difference this year because of
Speaker 1: the huge repricing that we saw last year in fixed income.
Speaker 1: And then you've got, as I say, some central banks
Speaker 1: which are much further ahead. You've got to say the
Speaker 1: Bank of Canada, who are likely to pause this week.
Speaker 1: You had a bit of more doubage message out of
Speaker 1: Australia overnight. You know, the FED there's there's a decent
Speaker 1: amount of price in now, and then there's the ECB
Speaker 1: and other central banks, whatever the relationship is. And I
Speaker 1: don't even want to go in we don't have time
Speaker 1: here to go into you know, the fancy talk. But
Speaker 1: do you assume that the dampening going through two twenty
Speaker 1: three and twenty twenty four is a normal what's caused,
Speaker 1: say nodal dampening where we're just going like this, he's
Speaker 1: in our way along or are we going to see
Speaker 1: more abrupt jump conditions within the relationships of fixed income
Speaker 1: currencies and commodities. I think we're going to have a
Speaker 1: slower journey, or a more smoother journey than we saw
Speaker 1: last year. You know, outside of the European Central Bank.
Speaker 1: I think the central banks wants to slow down the
Speaker 1: pace of hiking, which is going to bring down market volatility,
Speaker 1: and then it's going to be a case of later
Speaker 1: in the year, how high do rates yet? And then
Speaker 1: we do we have to do some sharp decreases if
Speaker 1: we do start to see a slowdown, And Lisa, this
Speaker 1: is just critical. The extension of the xxis out where
Speaker 1: people in particularly financial media, we're always like what June
Speaker 1: look like, and the real question is is what its
Speaker 1: twenty twenty five look like exactly, especially once you've worked
Speaker 1: through some of this reset. Going back to this idea
Speaker 1: of the rate hikes that you're talking about, why haven't
Speaker 1: we seen more spread risk in Europe? Why haven't we
Speaker 1: seen more contagion really feeding through to the peripheral spreads,
Speaker 1: the peripheral bond yields that typically would blow out in
Speaker 1: this kind of situation. So I think there's a couple
Speaker 1: of things there. I mean, firstly, we did see that
Speaker 1: concern around spread risk in Europe last year, last summer,
Speaker 1: when we had these big concerns around a slowdown, and
Speaker 1: as we've come through that and slowdown hasn't materialized. And
Speaker 1: economic growth and strength looks better in Europe. People are
Speaker 1: getting a bit more confidence around Europe, and we've seen
Speaker 1: that not just in peripheries. We've seen that in credit spreads,
Speaker 1: high yiel spreads. They've basically come back down to pretty
Speaker 1: much be in line with where where the US is trading.
Speaker 1: But I think you've also got a much more joined
Speaker 1: up Europe than I can really remember, with the recovery
Speaker 1: plan in place and the coordination that we've seen across Europe.
Speaker 1: So it feels that we haven't got that sort of
Speaker 1: spread risk, the periphery risk that we've seen through previous
Speaker 1: cycles that we've all come to know over the last
Speaker 1: decade or so, and if that goes away, then actually
Speaker 1: there's some decent yields on offer owning some of these bonds,
Speaker 1: which is fascinating at a time when a lot of
Speaker 1: our guests come on and they say, you know, perhaps
Speaker 1: people have overplayed the euro and people are perhaps overseeing
Speaker 1: what's going to happen with the dollar and the potential
Speaker 1: strength later on. Do you push back against that and say,
Speaker 1: not only do you have upsides risk with respect to
Speaker 1: ECB raids, but also the strength, the resilience can maintain that.
Speaker 1: I would say both of those, and I would also
Speaker 1: add just the flow dynamics. So if you think about
Speaker 1: what's been the case of Europe over the last decade,
Speaker 1: negatively yielding bonds, who wanted to invest in Europe, who
Speaker 1: wanted to buy negatively yielding bonds, Well that's not the
Speaker 1: case at the moment. To your Germany now at three percent,
Speaker 1: you're getting north of four percent across the Italian curve.
Speaker 1: You're getting seven seven and a half percent across the
Speaker 1: European high yeld mix. And that's before you even move
Speaker 1: into into the dangerous world of equities. So I think
Speaker 1: there's just a lot of demand that will come back
Speaker 1: into fixed income people who haven't wanted to own European
Speaker 1: fixed income for a long time. We're un duration, are
Speaker 1: you then? I mean, you know, on a global basis,
Speaker 1: is there comfort in the belly? Do you have to
Speaker 1: go short term? I'm hearing that you're don't or can
Speaker 1: you actually be brave like the equity people and extend
Speaker 1: out duration? So I think you still want to. So
Speaker 1: we're still playing for the curve to actually flatten a
Speaker 1: bit further from here. We think there is still concerns
Speaker 1: that the central banks around the world maybe have to
Speaker 1: do a little bit more. That's priced, although the repricing
Speaker 1: that we've seen over the last few weeks has been
Speaker 1: very helpful. And then really it's the back end of
Speaker 1: the curve that gives you that ballast in a portfolio.
Speaker 1: That's the bit of the curve that will do very
Speaker 1: well if things go things go badly and suddenly fixed
Speaker 1: income yields move higher and the cap gains could come
Speaker 1: from from that part of them. Can I ask, okay, well,
Speaker 1: you know I'm asking for a friend. Then you load
Speaker 1: the boat on the ninety seven year Austrian piece right
Speaker 1: now down down seventy one percent from its peak. I mean,
Speaker 1: do you extenduration out seven years? So that that is
Speaker 1: I think that now is we're looking at it last week.
Speaker 1: I think that is now at the lowest the lowest
Speaker 1: price one hundred year bond there. Yes, we did notice
Speaker 1: that continue, So I think obviously then you've got to
Speaker 1: take ano account. That's obviously the European curve where they're
Speaker 1: most possibly more still going through. From an ECB standpoint,
Speaker 1: I think in the US, if you want to go
Speaker 1: out and you look at the ten year part of
Speaker 1: the curve, and your your four percent, maybe it goes
Speaker 1: to four and a quarter. I can't see it going
Speaker 1: a huge amount higher than that. And that means that
Speaker 1: over the next few years that looks like a decent investment.
Speaker 1: And I think, you know, but buying bombs definitely more
Speaker 1: attractive than they were at any point point last year.
Speaker 1: And thankfully the rally that happened in January has reversed
Speaker 1: a bit to give us another opportunity to go back
Speaker 1: into the market. Don't be a stranger and love to
Speaker 1: see here in our New York studios, Luke and Ramen
Speaker 1: joins us up We are thrilled to have her back.
Speaker 1: Really to begin our coverage of what the International Monetary
Speaker 1: Fund will be doing here one month out. We're making
Speaker 1: a lot of good plans out at John Farrell, leading
Speaker 1: our planning meetings on IMF Spring meetings. Lupa Ramen is
Speaker 1: with PIMCO and as well versed on the emerging markets. Look,
Speaker 1: but let's start with the beginning. To me, there's two
Speaker 1: ems at the minimum, the frontier economies greatly belieguered and
Speaker 1: another EM of great prosperity or dare I say could
Speaker 1: there be three worlds of EM. Which is it. I
Speaker 1: think EM is extremely diversified right now, and you hit
Speaker 1: the nail on the head in terms of vibificating the
Speaker 1: frontier economies, especially the low single B high yield economies
Speaker 1: that are facing a lot of stress. Some of them
Speaker 1: have very large external financing needs. They're having to have
Speaker 1: IMF programs or other bilateral lines from creditors like the
Speaker 1: Gulf States and China. And then there is the rest
Speaker 1: of EM. There is the investment grade portion and the
Speaker 1: double B portion of the EM asset class. Even there
Speaker 1: there is a lot of diversification and differentiation, both in
Speaker 1: terms of the balance sheets as well as how these
Speaker 1: economies are coming out of this COVID and growth cycle.
Speaker 1: Do you look at this as country by country or
Speaker 1: by asset class or even subsets of asset class, You
Speaker 1: have to look at all. Unfortunately, I don't think EM
Speaker 1: is a one size fits all in terms of the
Speaker 1: framework or model that you need to use, and so
Speaker 1: you really thinking about asset classes and regions makes a
Speaker 1: lot of sense right now, as well as countries that
Speaker 1: perhaps are going to benefit more secularly from the near
Speaker 1: shoring and structural structural shift that are occurring both in
Speaker 1: the global and macro playing field for EM. Luban I
Speaker 1: was reading this morning all of the rhetorics, the fiery
Speaker 1: rhetoric coming from the Chinese Communist Party, coming from leaders
Speaker 1: talking about the increasingly fractious relationship between the US and China.
Speaker 1: Hear the same coming from a lot of US officials.
Speaker 1: What's the investment consequence of this, because right now I'm
Speaker 1: still seeing a lot of people say Chinese debt, Chinese equities. Thereby,
Speaker 1: I think the main investment implication from this is to
Speaker 1: really think about EM in terms of the various centers
Speaker 1: of global growth and drivers of global growth. For EM
Speaker 1: as a whole, This fractionalization that we're seeing much moral
Speaker 1: from the US and China trade relations and geopolitics is
Speaker 1: really going to be a headwind for many countries within
Speaker 1: the asset class. Slow globalization, as the IMF has coined
Speaker 1: the term, is not a positive for the EM asset
Speaker 1: class as a whole. Having said that, there are areas
Speaker 1: that are going to be growing and perhaps benefiting from this,
Speaker 1: countries like Mexico, countries like India, many other smaller emerging
Speaker 1: markets that perhaps have a niche in particular parts of
Speaker 1: the supply chain, and so for the em asset class,
Speaker 1: I think the investment implication really is to start from
Speaker 1: the bottom up and really focus on country by country
Speaker 1: selection in terms of really thinking about the investment opportunities
Speaker 1: that are out there. Specifically with China. I think about
Speaker 1: Mark Mobius, the emerging markets investor who complained that he
Speaker 1: had some money in China that he couldn't get out
Speaker 1: because of all of the red tapes that he had
Speaker 1: to go through to bring the money out of the country.
Speaker 1: In your view, is China not uninvestable but increasingly a
Speaker 1: fraud investing proposition that perhaps isn't recognized in pricing currently. Well,
Speaker 1: I think that, you know, looking at the fixed income
Speaker 1: opportunities in China with the cyclical horizon, you know, we
Speaker 1: are a bit more cautious given the opportunities elsewhere within
Speaker 1: the fixed income world as well as within emerging markets.
Speaker 1: So if you're looking at the level of real rates,
Speaker 1: really you're getting better opportunities elsewhere, whether it's Brazil or
Speaker 1: even Mexico. If you're looking at currency plays, perhaps the
Speaker 1: CNY is not the best play right now. Given without
Speaker 1: bound tourism, you may see capital outflows resuming. So I
Speaker 1: think that from an investment perspectives, there are more interesting
Speaker 1: opportunities from a risk adjusted perspective elsewhere within em Lipin
Speaker 1: Ramed of Pimco Lapin, Thank you on em China and
Speaker 1: whether It's investable or not. Subscribe to the Bloomberg Surveillance
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Speaker 1: I'm Tom Keane and this is Plumber