WEBVTT - Wall Street Rethinking Its Gloomy Outlook for Stocks 0:00:01.360 --> 0:00:05.720 This is Bloomberg Business Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:18.640 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:19.160 --> 0:00:22.360 Matt Miller here in the Bloomberg Interactive Broker studio. Jess 0:00:22.360 --> 0:00:25.200 Men were filling in for Carol and Tim. And we've 0:00:25.239 --> 0:00:28.920 got Dan Cole lined up here, senior principal and portfolio 0:00:29.160 --> 0:00:33.200 manager at Eagle Point Credit Management. He's on Zoom from 0:00:33.280 --> 0:00:36.840 Greenwich to talk to us about the leverage loan space. Dan, 0:00:37.040 --> 0:00:40.000 great to have you on the program. 0:00:40.400 --> 0:00:41.879 You are, I think one of. 0:00:41.880 --> 0:00:45.440 The biggest players in this space right and we've seen 0:00:45.760 --> 0:00:49.560 a drop in issuance, we've seen a narrowing of spreads. 0:00:49.120 --> 0:00:51.760 But you think that's about to turn around. Give us 0:00:51.800 --> 0:00:52.200 your pitch. 0:00:53.280 --> 0:00:55.600 Yeah, thanks for having me. We think that Eagle Point 0:00:56.000 --> 0:00:58.880 is the largest kind of seal equity investor out there 0:00:58.880 --> 0:01:02.279 in the market today, and I guess when we've been 0:01:02.320 --> 0:01:05.399 looking at kind of new issue col equity for the 0:01:05.400 --> 0:01:08.800 past nine months or so, it's been pretty unattractive relative 0:01:08.840 --> 0:01:12.760 to the secondary opportunities out there. You know, for the 0:01:12.800 --> 0:01:15.759 kind of the top tier COLO cloral managers, we see 0:01:15.840 --> 0:01:18.720 kind of low teen zels best case, whereas in the 0:01:18.760 --> 0:01:21.600 secondary market we can pick up paper kind of loss adjusted, 0:01:21.959 --> 0:01:24.000 you know, adjusting for all kind of the defaults to 0:01:24.000 --> 0:01:26.720 come kind of in the twenty plus percent range. Now 0:01:26.760 --> 0:01:28.680 that being said, we are seeing kind of a turn 0:01:29.360 --> 0:01:32.639 in the arbitrage, mainly because we've seen loan prices fall 0:01:33.360 --> 0:01:35.760 by a bit kind of over the past couple of 0:01:35.800 --> 0:01:38.800 weeks with all this debt ceiling kind of drama, while 0:01:38.920 --> 0:01:41.480 COLO liabilities have actually held in. So we're seeing that 0:01:41.600 --> 0:01:44.560 arbitrage kind of slightly grow. And so while maybe new 0:01:44.600 --> 0:01:47.960 issues and as attractive as secondary today, the tide certainly 0:01:48.000 --> 0:01:50.520 seemed to be turning, making new issue a little more 0:01:50.520 --> 0:01:51.720 attractive than it was before. 0:01:52.040 --> 0:01:54.400 So, Dan, why has the volume of issuees in the 0:01:54.520 --> 0:01:55.360 US dropped? 0:01:57.320 --> 0:01:59.800 Yeah, I mean so, I think most of it has been. 0:02:00.080 --> 0:02:04.920 The first kind of quarter was these captive funds that 0:02:04.960 --> 0:02:09.400 were printing these clos. So what captive funds are funds 0:02:09.440 --> 0:02:12.920 that were raised by some asset managers or private equity 0:02:12.919 --> 0:02:17.120 firms to really back the clos that they were kind 0:02:17.160 --> 0:02:20.240 of issuing, So buying all the equity, and so a 0:02:20.240 --> 0:02:24.280 lot of these I guess captive fund managers were buying 0:02:24.280 --> 0:02:27.840 equity that was uneconomic to I guess the equity investors. 0:02:27.880 --> 0:02:30.120 And why is that. It's because they had very little 0:02:30.160 --> 0:02:33.359 skin in the game, but I guess they wanted their 0:02:33.400 --> 0:02:35.840 management fee stream to turn on by doing these new 0:02:35.880 --> 0:02:39.440 clos and so you know that clearly had a large 0:02:39.480 --> 0:02:42.720 conflict of interest between the equity investors and the captive 0:02:42.720 --> 0:02:45.880 fund and the cloudal manager. You know that being said, 0:02:45.960 --> 0:02:48.240 now now that a lot of that printed at least 0:02:48.240 --> 0:02:50.880 one one COLO kind of for the year, that are 0:02:50.919 --> 0:02:54.359 being a little more cautious about issuing the second one 0:02:54.360 --> 0:02:56.880 because it could, you know, ultimately end up hurting their 0:02:56.919 --> 0:02:58.960 performance in the long run if you're doing all these 0:02:59.040 --> 0:03:03.000 uneconomic transactions that are going to underperform. 0:03:03.760 --> 0:03:07.880 So I imagine also, you know, as the debt ceiling 0:03:08.080 --> 0:03:13.480 debate has gotten you know, more dramatic, and the price 0:03:13.760 --> 0:03:17.160 for these loans has fallen, it's more difficult for these 0:03:17.160 --> 0:03:20.760 companies to get funding at all, so at least in 0:03:20.800 --> 0:03:24.720 this market. So the the issuance dropped simply due to that. 0:03:25.200 --> 0:03:29.000 With the debt ceiling issue resolved, if the debt ceiling 0:03:29.080 --> 0:03:30.000 issue is resolved. 0:03:30.240 --> 0:03:32.160 Is that part of the reason that you expect issuance 0:03:32.200 --> 0:03:32.600 to pick. 0:03:32.520 --> 0:03:36.440 Up potentially, But it's more of just the fact that 0:03:36.520 --> 0:03:39.600 loan prices have fallen a bunch of SALO liabilities have 0:03:39.720 --> 0:03:41.800 kind of held in. So we're seeing some of the 0:03:41.920 --> 0:03:44.680 arbitrage that was lost kind of middle of last year 0:03:44.760 --> 0:03:48.839 or somewhat coming back, because in about July twenty twenty two, 0:03:49.240 --> 0:03:52.800 we saw loan prices accelerate in terms of prices up 0:03:53.120 --> 0:03:56.440 while SEALO liabilities continue to widen, even though the market 0:03:56.480 --> 0:03:59.200 was feeling firmer. So that's really where kind of the 0:03:59.240 --> 0:04:04.320 COLO the arbitraged, I guess, was severely compressed. And so 0:04:04.360 --> 0:04:07.960 we're seeing that kind of compression go away with loan 0:04:08.000 --> 0:04:10.160 prices being down further today. 0:04:10.480 --> 0:04:13.560 What effect has the debt ceiling debate then had do 0:04:13.640 --> 0:04:17.440 these negotiations have on your market? And you know, if 0:04:17.480 --> 0:04:19.520 the outcome is positive or negative, what does that mean 0:04:19.560 --> 0:04:19.800 to you? 0:04:20.760 --> 0:04:24.960 Yeah, I mean clearly there it's lowered loan prices as 0:04:24.960 --> 0:04:27.719 people have kind of withdrawn or as retail money has 0:04:27.760 --> 0:04:31.159 withdrawn money from the loan market. Surprisingly on the COLO side, 0:04:31.360 --> 0:04:33.840 on the COLO debt side or the liability side. There 0:04:33.839 --> 0:04:36.240 hasn't really been much of effect as kind of spreads 0:04:36.240 --> 0:04:38.680 I held hen and I think that all just speaks 0:04:38.720 --> 0:04:41.640 to just the robust nature of the COLO acid class. 0:04:41.640 --> 0:04:43.560 I mean, it is a floating rate acid class. It 0:04:43.600 --> 0:04:47.720 has historically very low defaults. You know, the junior mezzanine tranche, 0:04:48.040 --> 0:04:50.320 the double B tronch, which is right above the equity 0:04:50.360 --> 0:04:53.679 for colos, has had about a five basis point annual 0:04:53.680 --> 0:04:56.640 default rate. So it's an asset class that has really 0:04:56.680 --> 0:04:59.440 survived I guess, numerous different cycles. And so I think 0:04:59.480 --> 0:05:01.880 people are real that this is an assea class that 0:05:01.920 --> 0:05:04.200 you can kind of ride out in the next kind 0:05:04.200 --> 0:05:06.640 of recession or downturn or whatever you want to call it. 0:05:07.160 --> 0:05:10.279 So are we likely to see more defaults and potential 0:05:10.320 --> 0:05:11.279 downgrades from here? 0:05:12.279 --> 0:05:16.359 Yeah, oh definitely. I mean we're we're not assuming that 0:05:16.400 --> 0:05:19.600 there's no less downgrades or less defaults going forward. But 0:05:19.839 --> 0:05:22.279 that's actually a good thing for col equity. If you 0:05:22.279 --> 0:05:24.159 think about CLO equity, you know, we think of it 0:05:24.200 --> 0:05:26.000 as a kind of a better version of a bank. 0:05:26.360 --> 0:05:29.480 So I guess if you look at the regional banks 0:05:29.480 --> 0:05:32.680 that recently failed, a lot of them had kind of 0:05:32.680 --> 0:05:35.279 short term funding right in the form of deposits, and 0:05:35.320 --> 0:05:38.400 then when the depositors made a run on the bank, 0:05:38.760 --> 0:05:41.239 that obviously caused a lot of these banks to fail. 0:05:41.640 --> 0:05:46.279 Whereas for clos, clos have non mark to market financing, 0:05:46.760 --> 0:05:51.560 so there's no margin calls if prices drop, and it 0:05:51.640 --> 0:05:54.480 has kind of a locked in financing for twelve years, 0:05:54.520 --> 0:05:57.560 and so in times of volatility, you're not kind of 0:05:57.600 --> 0:06:00.800 on the defensive worrying about your nancy and kind of 0:06:00.800 --> 0:06:04.520 getting pulled, but rather you're able to redeploy capital into 0:06:05.960 --> 0:06:09.080 a market that has dislocated prices and loans at a 0:06:09.160 --> 0:06:11.600 severe discount. So in the long run, as long as 0:06:11.600 --> 0:06:14.560 you have a reinvestment period remaining within your COLO. We've 0:06:14.560 --> 0:06:16.279 seen this kind of time and time and again, whether 0:06:16.320 --> 0:06:19.800 it's eight oh nine or during COVID, COLO equity actually 0:06:19.800 --> 0:06:22.240 comes out better than it was going into kind of 0:06:22.240 --> 0:06:22.800 the downturn. 0:06:23.640 --> 0:06:27.440 Hey, I want to ask you, Dan about the transition 0:06:27.600 --> 0:06:30.159 away from lib or to Sofur, which I feel like 0:06:30.440 --> 0:06:34.080 it's been happening for the better part of my life, 0:06:34.120 --> 0:06:38.599 even and I'm fifty. Is it really going to happen 0:06:38.720 --> 0:06:42.960 or are you really gonna, you know, lend money off 0:06:43.000 --> 0:06:44.719 of Sofur rather than libor. 0:06:46.040 --> 0:06:47.920 Yeah, I mean that's what's been happening I guess since 0:06:48.000 --> 0:06:50.000 kind of the beginning of twenty twenty two for the 0:06:50.040 --> 0:06:53.080 new loans that were being issued, and you know, hopefully 0:06:53.080 --> 0:06:55.440 by June thirtieth, this is a topic that we'll never 0:06:55.480 --> 0:06:58.680 have to speak about again. But you know, there still 0:06:58.720 --> 0:07:01.120 needs to be about sixty percent and the legacy loans 0:07:01.160 --> 0:07:04.240 that were issued prior to twenty twenty two switch over 0:07:04.320 --> 0:07:07.880 to SOFUR, and so a lot of these amendments are 0:07:07.920 --> 0:07:12.920 going through where the borrowers are kind of seeking. It's 0:07:12.920 --> 0:07:16.680 a negative consent amendment, so basically the lenders need to 0:07:16.720 --> 0:07:19.040 object to it, and so a lot of them are 0:07:19.120 --> 0:07:21.680 trying to sneak through these CSAs it's called, I guess, 0:07:21.680 --> 0:07:25.160 the credit spread adjustment, and it's because simply because libor 0:07:25.320 --> 0:07:27.840 is an unsecured grade and SOFA is a secure grade. 0:07:27.840 --> 0:07:30.800 So you know, theoretically librar should be a higher number 0:07:30.800 --> 0:07:32.640 than sofur, and so if you were to move over 0:07:32.680 --> 0:07:35.640 to SOFA, you have to kind of receive this also, 0:07:35.760 --> 0:07:38.880 this credit spread adjustment, to be compensator to at least 0:07:38.960 --> 0:07:41.480 have apples to apples between librar and sofur, and so 0:07:41.920 --> 0:07:45.440 a lot of these issuers, these loan issuers and private 0:07:45.440 --> 0:07:48.960 equity firms have been trying to get a nice windfall 0:07:49.000 --> 0:07:53.440 from this this switchover by proposing no CSA or ten 0:07:53.480 --> 0:07:56.280 basis points CSA, even though the I guess the Federal 0:07:56.320 --> 0:07:59.160 Reserve has come out or the ARC Committee which kind 0:07:59.160 --> 0:08:02.360 of sets this proper CSA Raiate has said it's supposed 0:08:02.360 --> 0:08:05.040 to be twenty six basis points. And so a lot 0:08:05.080 --> 0:08:07.200 of these amendments seem to come through come out at 0:08:07.240 --> 0:08:10.400 Friday at five pm, before a long weekend, So we've got, 0:08:10.440 --> 0:08:12.720 you know, a little short of two hours before presumably 0:08:13.560 --> 0:08:15.400 a lot of these firms are going to try to 0:08:15.400 --> 0:08:18.840 put out these negative consent amendments and hope that the 0:08:18.880 --> 0:08:22.920 loan issue or the loan lender sorry miss it for 0:08:23.000 --> 0:08:23.480 next week. 0:08:23.680 --> 0:08:25.880 Dan, we only have about forty five seconds left, But 0:08:25.920 --> 0:08:27.440 I want to get your thoughts. What are you hearing 0:08:27.480 --> 0:08:29.400 from clients right now? What are their concerns? 0:08:30.120 --> 0:08:32.680 Yeah, I mean, certainly there's a lot of concerns with 0:08:32.880 --> 0:08:35.560 kind of like we've talked about defaults and downgrades, but 0:08:35.600 --> 0:08:37.959 I think historically what we've seen with co equities that 0:08:38.000 --> 0:08:40.160 it's a NASA class that's performed, you know, if you 0:08:40.200 --> 0:08:43.120 had invested in COLO equity prior to the global financial 0:08:43.120 --> 0:08:45.920 crisis in eight oh nine, it had I think a 0:08:46.000 --> 0:08:48.640 medium fifteen percent return, and you know there were plenty 0:08:48.960 --> 0:08:51.720 of other I guess top quartile colos that were twenty 0:08:51.720 --> 0:08:54.920 plus percent returns, and so we really do think it's 0:08:54.920 --> 0:08:58.079 a NASA class that thrives during volatility, and so we're 0:08:58.160 --> 0:09:00.800 we're actually pretty excited about this besting environment. 0:09:01.600 --> 0:09:04.520 All right, Dan great having on the program. Thanks so 0:09:04.600 --> 0:09:08.280 much for joining us. Dan Coe joining us there from 0:09:08.600 --> 0:09:11.000 Eagle Point Credit Management, one of the biggest players in 0:09:11.040 --> 0:09:15.240 the c l O resale space, and I think they 0:09:15.280 --> 0:09:18.960 have about seven and a half billion dollars of assets 0:09:19.080 --> 0:09:21.800 under management. So he says, issuance is starting to turn, 0:09:21.840 --> 0:09:23.520 and that's something that we're definitely going to watch as 0:09:23.559 --> 0:09:24.760 well as for default. 0:09:24.480 --> 0:09:26.760 Right, especially just hearing what he's been talking to you 0:09:26.800 --> 0:09:29.520 with clients about in that sort of space, and especially 0:09:29.520 --> 0:09:31.440 ahead of this weekend obviously what you were talking about, 0:09:31.480 --> 0:09:32.760 Matt when it comes to this dead ceiling. 0:09:33.000 --> 0:09:36.800 Absolutely so hopefully he gets on those cssays and is 0:09:36.840 --> 0:09:40.040 able to deny them before he goes on his long weekend. 0:09:41.280 --> 0:09:44.840 You're listening to the Bloomberg Business Week podcast. Catch us 0:09:44.880 --> 0:09:48.240 live weekday afternoons from three to six Eastern Listen on 0:09:48.280 --> 0:09:52.319 Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, 0:09:52.600 --> 0:09:54.880 or watch us live on YouTube. 0:09:55.320 --> 0:09:56.920 You've been talking for a couple of days now about 0:09:56.920 --> 0:10:01.320 the gloom lifting in terms of equity, and we singled 0:10:01.320 --> 0:10:04.400 out a couple of strategists raising price targets. One of 0:10:04.440 --> 0:10:08.280 them Savita Subrmanian, head of US Equity and quant Strategy 0:10:08.280 --> 0:10:11.680 at Bank America, raising her year end price target on 0:10:11.720 --> 0:10:14.240 the s and P five hundred to I believe forty 0:10:14.320 --> 0:10:17.000 three hundred from four thousand. Savida, thanks so much for 0:10:17.080 --> 0:10:20.680 joining us, really appreciate it. Tell us, first of all, 0:10:20.760 --> 0:10:24.520 why you raise your target, especially in the head of 0:10:25.160 --> 0:10:29.840 these debt sealing negotiations. We still haven't gotten an outcome, 0:10:30.120 --> 0:10:33.080 and if it goes the wrong way, it looks like 0:10:33.120 --> 0:10:34.280 stocks could take a real hit. 0:10:36.640 --> 0:10:36.920 Sure. 0:10:37.080 --> 0:10:40.600 Yeah, So, I think the important idea here is that 0:10:41.000 --> 0:10:47.520 the world is positioned for absolutely awful and the indicators 0:10:47.559 --> 0:10:52.120 we're looking at look not fantastic, but they look okay. 0:10:52.320 --> 0:10:54.640 So you know, I think that the idea here is 0:10:54.800 --> 0:10:58.760 the market doesn't really react on actual growth or you 0:10:58.760 --> 0:11:01.520 know what actually happens act on surprise, and I think 0:11:01.520 --> 0:11:07.400 the surprises that we get through the debt dealing with limited. 0:11:07.520 --> 0:11:10.720 I mean, I think the prevailing assumption, even amongst the bears, 0:11:11.280 --> 0:11:16.040 is that even under a protracted kind of deliberation and bringsmanship, 0:11:16.559 --> 0:11:19.480 we get to resolution. Right, So the market sells off 0:11:19.520 --> 0:11:22.040 and then comes right back. And then on top of that, 0:11:22.080 --> 0:11:24.720 I think, you know, I can count, I can't even 0:11:24.760 --> 0:11:27.839 count at this point the number of investors that we've 0:11:27.840 --> 0:11:32.400 spoken to who have capital to deploy but are waiting 0:11:32.480 --> 0:11:37.000 until after we get past that calendar date. The other 0:11:37.040 --> 0:11:41.000 reason that I'm more optimistic on stocks relative to fixed 0:11:41.040 --> 0:11:43.760 income is that I think that folks are thinking, we're 0:11:43.760 --> 0:11:46.600 going to see the exact same reaction. The market's going 0:11:46.640 --> 0:11:49.000 to sell off, bonds are going to rally. But there 0:11:49.000 --> 0:11:53.480 are two big differences today. The first is stoft versus 0:11:53.480 --> 0:11:58.040 bond allocations. Back in twenty eleven, when US debt was downgraded, 0:11:59.200 --> 0:12:04.320 we're about thirty percentage points higher in stocks relative to 0:12:04.440 --> 0:12:08.000 bonds than they are today. The world has bunkered down 0:12:08.480 --> 0:12:12.079 bond allocations of the highest we've seen in ten plus years. 0:12:12.360 --> 0:12:16.080 Stock allocations are life they did a complete reversal from 0:12:16.120 --> 0:12:19.040 being overweight to underweight last year, and by the end 0:12:19.120 --> 0:12:21.199 of this year they got to the lowest levels we've 0:12:21.280 --> 0:12:24.880 seen since, you know, basically the financial crisis. So a 0:12:24.920 --> 0:12:27.560 lot of our work is telling us that investors our 0:12:27.559 --> 0:12:30.240 positions for sort of armageddon, and what we're going to 0:12:30.280 --> 0:12:34.440 get is, you know, some muddle through. And then when 0:12:34.440 --> 0:12:37.840 you look at cyclicals versus defensive I think there are 0:12:37.920 --> 0:12:41.440 actually some positive signs for cyclicals. Dare I say it, 0:12:41.559 --> 0:12:44.280 because nobody agrees with me. But when you look at 0:12:44.440 --> 0:12:47.720 at some of the macro indicators. You know, we have 0:12:47.840 --> 0:12:50.720 a regime model that we track and it's interesting because 0:12:50.720 --> 0:12:54.760 it's made up of eight indicators, and you know, at 0:12:54.800 --> 0:12:56.959 the beginning of this year, all of them were moving down. 0:12:57.440 --> 0:13:00.320 Now five out of eight of them are actually in 0:13:00.480 --> 0:13:04.640 positive territory. So I think the world is changing very quickly. 0:13:04.640 --> 0:13:07.760 But positioning has been priming. You know, investors have been 0:13:07.840 --> 0:13:10.800 priming for a recession over the last six quarters since 0:13:10.800 --> 0:13:13.800 we started talking about it back you know, in January 0:13:13.880 --> 0:13:17.839 or February of last year. And you know, O argue 0:13:17.920 --> 0:13:20.160 is that the pain trade in equities and especially in 0:13:20.200 --> 0:13:23.440 cyclical areas of the market could be higher rather than 0:13:23.520 --> 0:13:24.360 lower from here. 0:13:24.800 --> 0:13:28.120 So Savita, I know your counterpart, Michael Hartnet he always 0:13:28.120 --> 0:13:30.319 has his flow show on Fridays. It sounds like he's 0:13:30.320 --> 0:13:32.280 singing a little bit of a different tune whenever he's 0:13:32.280 --> 0:13:34.880 looking at the flows data, and he's warning of equity stress, 0:13:35.000 --> 0:13:38.360 particularly in the next month, especially ahead of that FED beating. 0:13:38.440 --> 0:13:40.760 How do you square that away when you have a 0:13:40.800 --> 0:13:42.640 different type of call there at your firm. 0:13:45.360 --> 0:13:48.280 Well, you know, I think it's it's interesting, and I think, 0:13:48.400 --> 0:13:51.319 you know, everybody looks, but well, we'll all look at 0:13:51.320 --> 0:13:53.680 the same data. But I guess it's interpretive. And I 0:13:53.679 --> 0:13:56.520 think what I'm sort of paying attention to is the 0:13:56.520 --> 0:14:00.240 fact that our economists have dialed back their re us 0:14:00.280 --> 0:14:03.800 and forecasts to you know, just zero point eight percent 0:14:04.160 --> 0:14:08.600 peak to trust decline in US GDP. A lot of 0:14:08.600 --> 0:14:11.560 economists across Wall streets don't even expect to see a 0:14:11.640 --> 0:14:16.120 recession when you look at stocks versus bonds. You know, 0:14:16.160 --> 0:14:19.880 maybe flows have been aggressive in certain pockets of the market. 0:14:19.880 --> 0:14:22.800 But what we've seen in our desks and in our 0:14:23.000 --> 0:14:27.160 you know, hedge fund and long only positioning barometers based 0:14:27.200 --> 0:14:31.920 on US active investors, is that individual investors have seen 0:14:32.000 --> 0:14:37.280 capitulation like selling over the last four weeks, and hedge 0:14:37.320 --> 0:14:41.680 funds and long only are LFE on cyclicals, heavy on 0:14:41.760 --> 0:14:45.560 defensives and growth. So I think that, you know, there 0:14:45.600 --> 0:14:49.040 is some interpretive element here, But where I see the 0:14:49.240 --> 0:14:54.040 strongest upside risks within the market is in US more 0:14:54.200 --> 0:14:59.200 cyclical GDP sensitive stocks what I don't like, and here 0:14:59.240 --> 0:15:02.120 I think I agree with Michael hartnett Is. I think 0:15:02.160 --> 0:15:05.120 that both of us see risks to megacap tech. This 0:15:05.280 --> 0:15:07.400 is not a cyclical area of the market. In fact, 0:15:07.400 --> 0:15:09.840 this is much more bond like. These are companies that 0:15:09.920 --> 0:15:13.880 have benefited from free capital their long duration. They act 0:15:14.040 --> 0:15:17.200 kind of like ten year bonds, and they tend to 0:15:17.280 --> 0:15:21.600 suffer when real yield drive. Our view is that the 0:15:21.640 --> 0:15:24.360 biggest bubble, and I suppose I should say my view 0:15:24.400 --> 0:15:27.760 is that the biggest bubble on Waltz and across capital 0:15:27.800 --> 0:15:32.400 markets is in the ten year treasury right in long bonds. 0:15:32.480 --> 0:15:35.680 I think that's really where you know, it's been basically 0:15:36.080 --> 0:15:39.200 pushed up by foreign buyers as well as the FED 0:15:39.440 --> 0:15:43.040 aggressively buying treasuries, and now we're at a point where 0:15:43.040 --> 0:15:48.160 the FED is in quantitative tightening mode. Foreign investors are 0:15:48.200 --> 0:15:50.920 no longer buying treasuries and in fact, in some cases 0:15:50.960 --> 0:15:54.200 are selling. So I think that that is the area. 0:15:54.360 --> 0:15:57.800 Anything that looks like a bond, I e. Megacap, tech, 0:15:58.400 --> 0:16:02.400 long duration, by the dream, you know, no pass upfront 0:16:02.600 --> 0:16:07.320 types of investments to me look risky. That's interesting in 0:16:07.920 --> 0:16:08.880 public equities. 0:16:09.040 --> 0:16:10.800 It's interesting that. 0:16:12.600 --> 0:16:15.560 You know, we're also hearing from a lot of strategists 0:16:15.560 --> 0:16:20.600 that we could see a ton of issuance from treasury, 0:16:20.800 --> 0:16:24.000 you know, eight hundred billion or a trillion dollars of 0:16:24.040 --> 0:16:26.440 issuance that would just soak up liquidity in the market, 0:16:26.560 --> 0:16:28.240 especially if the FED continues QT. 0:16:28.880 --> 0:16:30.720 How does that affect your stocks outlook? 0:16:32.440 --> 0:16:35.239 Yeah, I mean I think that bolsters are viewed for cyclicals. 0:16:35.280 --> 0:16:38.200 I mean, look, the fscan stop of the economy is 0:16:38.200 --> 0:16:42.160 starting to tank. Consumers are rolling over, corporates are rolling over. 0:16:42.760 --> 0:16:44.720 But I think that you know, when you think about 0:16:44.760 --> 0:16:47.880 why the seed is aggressively hiking interest rates, it's to 0:16:48.040 --> 0:16:52.880 stem inflation, to stem demand, And that to me says 0:16:53.000 --> 0:16:56.520 you should probably be in more cyclical areas of the 0:16:56.560 --> 0:17:00.520 market rather than companies that benefit from free capital. And 0:17:00.600 --> 0:17:04.800 I think that right now investors might be using the 0:17:04.960 --> 0:17:07.640 playbooks from two thousand and eight, two thousand and nine. 0:17:07.680 --> 0:17:12.159 You know, credit sensitive stocks are financials, homebuilders, energy commodities, 0:17:12.200 --> 0:17:14.720 et cetera. And our viue is that those are actually 0:17:14.760 --> 0:17:18.160 some of the safer areas within the market because they've 0:17:18.160 --> 0:17:21.200 been starved of capital, they haven't benefited from a low 0:17:21.240 --> 0:17:24.240 cost of capital, because they've basically traded at much higher 0:17:24.359 --> 0:17:28.960 multiples for a variety of reasons. They're now probably healthier 0:17:29.000 --> 0:17:33.560 from a balance sheet perspective, from a supply discipline perspective. 0:17:34.480 --> 0:17:37.600 You know, I would say that the big banks, the 0:17:37.640 --> 0:17:41.200 fifties or the regulated banks, are in a much better 0:17:41.280 --> 0:17:43.720 position than regional banks. And you know, the S and 0:17:43.760 --> 0:17:47.480 P five hundred has a much higher exposure to fifties 0:17:47.720 --> 0:17:51.520 than two regional regionals are only I think a percentage 0:17:51.560 --> 0:17:53.960 point of the market cap of financials within the S 0:17:54.040 --> 0:17:57.560 and P five hundred. A lot of this says to me, Okay, 0:17:57.720 --> 0:18:00.560 you want to buy the equal weight to SMPI hundred 0:18:00.640 --> 0:18:04.560 because the market is still front end loaded with a 0:18:04.600 --> 0:18:07.960 bunch of really big cap tech stocks, and I think 0:18:08.600 --> 0:18:11.240 those companies might not do as well in an environment 0:18:11.240 --> 0:18:14.520 where real yields are rising. But if real yields are 0:18:14.600 --> 0:18:19.120 rising and the economy is still doing okay. Consumers are 0:18:19.160 --> 0:18:23.760 still relatively healthy, corporates have balance the strengths. We're actually 0:18:23.800 --> 0:18:26.760 continuing to hear, So this is the most surprising to me. 0:18:27.200 --> 0:18:31.560 We are continuing to hear companies saying they are spending 0:18:31.800 --> 0:18:35.880 on capac and this is more traditional capac rather than 0:18:36.040 --> 0:18:38.680 just tech capecs. There's a bunch of you know, kind 0:18:38.680 --> 0:18:41.800 of penciled in AI or tech spend, but then beyond 0:18:41.840 --> 0:18:47.040 that is actually on refurbishment, infrastructure, reshoring, near shoring, you know, 0:18:47.240 --> 0:18:52.919 structures and property and equipment, single family household constructions. So 0:18:53.280 --> 0:18:56.199 there are areas of the market that are still running hot, 0:18:56.280 --> 0:18:59.920 and those would rhyme more with cyclical sectors than defensive. 0:19:00.320 --> 0:19:02.399 So, Savita, we only have about thirty seconds left, but 0:19:02.480 --> 0:19:04.400 have to get your thoughts on AI. When you're talking 0:19:04.400 --> 0:19:06.399 about things running hot, how are you advising clients to 0:19:06.440 --> 0:19:07.040 position with that? 0:19:09.080 --> 0:19:11.440 Yeah, I think there are pockets of technology that are 0:19:11.560 --> 0:19:13.879 definitely going to benefit, and we obviously saw you know, 0:19:13.880 --> 0:19:17.600 it's a mass of surprises and earnings. I think it's 0:19:17.680 --> 0:19:22.320 not as broad spread a theme across the entire text complex, 0:19:22.400 --> 0:19:24.439 if you will, So you really need to be choosy 0:19:24.520 --> 0:19:27.919 within the tech space. Our biggest worries are that, you know, 0:19:28.000 --> 0:19:32.720 the overspent during COVID that pull forward could translate into 0:19:32.800 --> 0:19:35.760 weaker demand in the years to come. But AI itself 0:19:35.880 --> 0:19:38.120 is a much more such specific story and there are 0:19:38.119 --> 0:19:41.040 fundamental analysts can help with, you know, the areas of 0:19:41.080 --> 0:19:43.560 the market that will really truly benefit. 0:19:44.240 --> 0:19:46.760 Great Well, thanks so much for chatting with us, Savita. 0:19:46.800 --> 0:19:49.399 It's always great to have your take on that and 0:19:49.800 --> 0:19:53.520 wrapping up all things macro and strategy with us. Such 0:19:53.520 --> 0:19:55.760 a pleasure speaking with you. Thanks for having us back 0:19:55.800 --> 0:19:56.080 with y. 0:19:56.400 --> 0:19:59.480 Yeah, thanks so much for joining us, Savita. Really interesting 0:19:59.520 --> 0:20:02.000 to get a take on one of the people, one 0:20:02.000 --> 0:20:05.800 of the strategists who upgraded her forecast, and I wonder 0:20:05.840 --> 0:20:07.040 if we're going to see more of that. I know 0:20:07.160 --> 0:20:09.359 Tom Lee also has a forecast of more than forty 0:20:09.400 --> 0:20:10.080 seven hundred. 0:20:11.160 --> 0:20:14.719 You're listening to the Bloomberg Business Week podcast. Catch us 0:20:14.760 --> 0:20:18.800 live weekday afternoons from three to six Easter on Bloomberg Radio, 0:20:18.960 --> 0:20:22.240 the Bloomberg Business app, and YouTube. You can also listen 0:20:22.359 --> 0:20:25.440 live on Amazon Alexa from our flagship New York station, 0:20:25.920 --> 0:20:30.240 Just Say Alexa, Play Bloomberg eleven thirty. 0:20:30.840 --> 0:20:32.840 We're gonna talk a little crypto right now here we go, 0:20:32.960 --> 0:20:35.359 changing things up from Equity's I'm pretty pumped. 0:20:35.400 --> 0:20:37.960 I mean, it's been a banner year for crypto. 0:20:38.040 --> 0:20:40.800 If you hadn't seen the crash, then you would think 0:20:40.800 --> 0:20:43.920 that this sector was absolutely on fire. I want to 0:20:43.920 --> 0:20:46.879 bring in Thomas Perfumo. He is the head of strategy 0:20:47.240 --> 0:20:49.800 at KRACK and he comes to us via Zoom in 0:20:49.880 --> 0:20:53.520 New York City. He's not just a crypto nerd. He's 0:20:53.560 --> 0:20:56.280 worked on the street as well. He went to the 0:20:56.320 --> 0:20:57.520 Stern School of Business. 0:20:57.600 --> 0:20:58.760 He is a CFA. 0:20:59.080 --> 0:21:01.879 So we understand all of the stuff that I guess 0:21:01.960 --> 0:21:05.040 the masters of the universe know too. Thomas, thanks so 0:21:05.119 --> 0:21:08.000 much for joining us. Tell us first of all, what's 0:21:08.040 --> 0:21:10.639 behind the run up that we've seen this year. I mean, 0:21:10.720 --> 0:21:13.600 is it all about kind of the failing banks and 0:21:13.800 --> 0:21:16.960 failing confidence in the US dollar system. 0:21:18.440 --> 0:21:21.440 Well, of course, the narrative around crypto being an alternative 0:21:21.440 --> 0:21:25.200 solution for traditional finance. I think over time has shown 0:21:25.240 --> 0:21:28.880 supportive empirically. You know, way back when we had rallies 0:21:29.560 --> 0:21:33.240 in cryptocurrency, when we had bail ins of banks internationally. 0:21:33.320 --> 0:21:36.080 So Cyprus is a good example of this many years ago. 0:21:36.840 --> 0:21:39.520 But one perspective that you can take a look at 0:21:39.640 --> 0:21:42.479