Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and I'm Aldanna hik Across Acid reporter with Bloomberg.
Speaker 1: And this week on the show, well, stocks, bonds, crypto, commodities, whatever,
Speaker 1: Just about every asset class is suffering right now. And
Speaker 1: to add salt to the wounds, chaos and British markets
Speaker 1: is reverberating around the world. Many strategists are cutting their
Speaker 1: year ends targets for the SMP five hundred as the
Speaker 1: Federal Reserve doubles down on its inflation fighting strategy. Plus
Speaker 1: the U s midterms are coming up, which could cause
Speaker 1: even more market turbulence. What's it all mean for the
Speaker 1: rest of the year. We will get into it with
Speaker 1: a veteran Wall Street strategist, but first, vil Donna, it's
Speaker 1: exciting news. This week we have finally gotten more than
Speaker 1: three hundred ratings on Apple podcast. And you know what
Speaker 1: that means. That means, I believe the deal was you
Speaker 1: now have to accept me in your professional network on LinkedIn.
Speaker 1: That was not the deal. That was not the deal.
Speaker 1: You are still pending approval on LinkedIn. Still on read
Speaker 1: There you know, Emily Grafao co hosted one podcast with
Speaker 1: Me and your Friends on LinkedIn, and then she invited
Speaker 1: me to join her professional network on LinkedIn. And nice
Speaker 1: of her. It's and you nothing nothing, I'm just the deal.
Speaker 1: The deal was that I revealed my high school nickname.
Speaker 1: I think. Okay, so you're ready to reveal your high
Speaker 1: school nickame. Well, first I have to congratulate you, because
Speaker 1: this is a pretty good ploy to get people to
Speaker 1: write reviews. It was. It was a smart idea. Some
Speaker 1: may called a gimmick. Gimick, and I'm fine with that. Actually,
Speaker 1: if if you want to call it's fun and the
Speaker 1: reviews are on. Remember somebody asked me if I would
Speaker 1: marry them. Yeah, in one of the reviews I accepted.
Speaker 1: I did. We're happily married. Now. Love is love. Love
Speaker 1: is love. But so, okay, to reveal my high school nickname,
Speaker 1: I think we'll just we'll have to wait until we
Speaker 1: do craziest things in markets and then maybe I'll reveal
Speaker 1: it there. All right, sounds good deal. Deal Okay, but
Speaker 1: you I think you heard our guests this week laughing
Speaker 1: in the background, and I do want to bring him
Speaker 1: and I'm so happy to have him on the show.
Speaker 1: Julian Emmanuel ever Core i s S chief Equity and
Speaker 1: quantitative Strategists, and I've been trying to get him on
Speaker 1: for so long and I'm so happy he's here. Great
Speaker 1: to be here. You know, the problem was a little
Speaker 1: pandemic got in the way, But here we are a
Speaker 1: little pandemic, just a minor pandemic, a minor hiccup. But
Speaker 1: Julian um so Mike already mentioned what's been happening in
Speaker 1: the UK over the past couple of days. So maybe
Speaker 1: just to start, you can tell us how important what's
Speaker 1: going on in the UK right now is for global markets.
Speaker 1: So I think the backdrop here is just to understand
Speaker 1: that for investors, the storm that has been two thus far,
Speaker 1: the you know, dominance of macro imperatives across all assets
Speaker 1: has really been unprecedented. And it really goes back to
Speaker 1: this idea that after twenty five years of quiescent inflation,
Speaker 1: we had a breakout in the readings that's now been
Speaker 1: over a year and and obviously you know, really feeding
Speaker 1: into the FEDS imperative to get inflation under control by
Speaker 1: going on this and you know, unprecedented degree of hiking. Uh.
Speaker 1: You know, we we think about the current status as
Speaker 1: something from that movie Supersize Me. You've done three seventy
Speaker 1: five Supersized, you might do a fourth in November. But
Speaker 1: what's happening is that this is the kind of you know,
Speaker 1: rapid acceleration and tightening that reverberates across the globe. Obviously,
Speaker 1: the conduit has really been the strength and the dollar
Speaker 1: feeding into the UK. You've had a leadership change, the
Speaker 1: Queen's passing, a new prime minister, a new government, just
Speaker 1: total huge challenges in a market that had already been
Speaker 1: showing strains frankly since the Brexit vote in So really,
Speaker 1: you know, testing the outer bands of volatility across every
Speaker 1: asset that's in the UK. You know what I find
Speaker 1: fascinating about it, Julian, is this volatility we've seen in
Speaker 1: the bond market globally, but especially this week. You know.
Speaker 1: And and for listeners who are are listening to this
Speaker 1: later we're recording here. It's Wednesday afternoon. So the big
Speaker 1: news today was um, the Back of England came out
Speaker 1: and said, you know, they will basically buy all of
Speaker 1: the British bonds. They need to to to sort of
Speaker 1: tame the bond market. So I'm looking at the ten
Speaker 1: year guilt British guilt yield dawn fifty basis points in
Speaker 1: a single day, uh U s yields as a result,
Speaker 1: Canadian yields everything is down like twenty some basis points.
Speaker 1: I mean, for one thing, these are just I think
Speaker 1: nightmarish moves from sort of a a you know, how
Speaker 1: do you price the risk free rate when it's jumping
Speaker 1: around like this? But I wonder, in particular, what do
Speaker 1: you make of how UK is kind of leading the
Speaker 1: bond market globally? Now? Is it, you know, is it
Speaker 1: just sort of a relative value or correlation that should
Speaker 1: cause US yields to to revert back when UK yields do,
Speaker 1: or is it you know, is there sort of an
Speaker 1: assumption going on that the b o E is is
Speaker 1: foreshadowing what's to come from other central banks, you know?
Speaker 1: Or eventually is the FED and the ECB gonna have
Speaker 1: to come out and say, yeah, well we'll do whatever
Speaker 1: it takes to to keep on markets in check. What
Speaker 1: what exactly is the relationship there? Do you think, Well,
Speaker 1: if you go back to the end of last week,
Speaker 1: it really all started with a point in time, call
Speaker 1: it Friday morning, where one looked up on one screen
Speaker 1: and every single indicator, every single asset, every single market
Speaker 1: was completely read. Okay, you know whatever was indiscriminate selling
Speaker 1: that to us was the start of this emotional phase
Speaker 1: that because it was clear the policy mitch mismatch between
Speaker 1: the new trust government and and Quartet the Chancellor of
Speaker 1: the Exchequer UH, and where the Bank of England felt
Speaker 1: it needs to go, need needed to go, needs to go,
Speaker 1: and that's an open concept, which is why I keep
Speaker 1: changing tenses. UH is is that is that it's really
Speaker 1: caused this instability that got some feeling as if there
Speaker 1: was this idea that the UK was about to become
Speaker 1: an emerging market and seeing the kind of volatility in
Speaker 1: the bond markets there that one had seen throughout time
Speaker 1: and places like Mexico during crisis, or Brazil or you know,
Speaker 1: going back to the Asian UH Tiger crisis, that type
Speaker 1: of volatility, and frankly, because so much of UK debt
Speaker 1: is denominated in sterling, that wasn't necessarily going to be
Speaker 1: uh the way it would play out. But nevertheless, the
Speaker 1: markets have become just very, very liquid, and people got
Speaker 1: very very afraid of buying bonds in an environment where
Speaker 1: there's still no concrete evidence that inflation, particularly in Europe,
Speaker 1: is shown signs of topping, although that evidence is starting
Speaker 1: to build quite rapidly in the US. And Julian, how
Speaker 1: much would you say, how much of what's going on
Speaker 1: in the UK would you ascribe to the choppiness that
Speaker 1: we've seen in US markets or is it more the
Speaker 1: case that what's happening with our stock market for instance
Speaker 1: the last couple of days we can more ascribe, you know,
Speaker 1: blame what's going on with interest rates or whatever else. Well,
Speaker 1: it's definitely sort of what we would call across assets
Speaker 1: psychology and the driver as it has been the entire year,
Speaker 1: is this now positive correlation between stocks and bonds, and
Speaker 1: so as the yields continued to ratchet higher, uh, you know,
Speaker 1: obviously the U K's rise and yields feeding into the US,
Speaker 1: feeding into Italy. With the political changes over the weekend
Speaker 1: that certainly you know, put provide upside pressure two yields
Speaker 1: there as well. It's really became a bit of a snowball,
Speaker 1: which is why from our point of view, the Bank
Speaker 1: of England had to act in a reasonably decisive manner.
Speaker 1: You know, Julian, I was reading one of your most
Speaker 1: recent notes, and UM, obviously the other big story of
Speaker 1: the week is UH set a new law when the
Speaker 1: U star market for this bear market spundred, closing at
Speaker 1: the lowest since November. UM. I get the sense from
Speaker 1: your note though, that you think the acute selling UH
Speaker 1: maybe over and then maybe there's a bear market rally
Speaker 1: and store for us? Is that A Is that a
Speaker 1: fair reading of your note? We are feeling that way
Speaker 1: basically from our point of view. These kinds of bear markets,
Speaker 1: and if you go back to the highs in January,
Speaker 1: they don't move in straight lines. And the last several
Speaker 1: weeks again in response to this ratcheting higher in yields
Speaker 1: across the globe has been pretty much of a straight
Speaker 1: line moved down UM in stocks, which if you think
Speaker 1: about it, September, we don't want to go back to school,
Speaker 1: We don't want to go back to the office four
Speaker 1: or five days a week. The psychology tends to be
Speaker 1: poor in every September, but particularly so this year because
Speaker 1: you have all this macro uncertainty and a FED who's
Speaker 1: commit a it UH to hiking rates and keeping pressure
Speaker 1: uh really on the rest of the world via the
Speaker 1: stronger dollar through the rate hike transmission mechanism. But for us,
Speaker 1: we started seeing signs that this kind of activity was unsustainable.
Speaker 1: The VIX has started spiking. You've seen investor sentiment really
Speaker 1: only as bad as has ever been near the trough
Speaker 1: in two thousand and nine and near the bottom of
Speaker 1: the first Gulf War bear market in And so for us,
Speaker 1: those kinds of ideas, along with the fact that October
Speaker 1: tends to be a turning point for stocks and the
Speaker 1: data that as much as we don't want to think
Speaker 1: about mid terms, the following year after mid terms tends
Speaker 1: to be good as well. Uh, to us, just really uh,
Speaker 1: Given the fact that we thought that the yield moves
Speaker 1: were becoming parabolically unsustainable, we did feel and do feel
Speaker 1: that that will transmit into higher equity prices, certainly in
Speaker 1: the near term, perhaps even longer. And I think, Julian
Speaker 1: you wrote recently for stocks, the bigger, the bigger they fall,
Speaker 1: the harder they bounce, right, So is that part of
Speaker 1: that equation here? Very much so? So? He basically, at
Speaker 1: at the new lows, you were down almost twenty from
Speaker 1: the highs. And what we did was we looked at
Speaker 1: the history of prior bear markets going back fifty years
Speaker 1: or so, and what we found was, once you started
Speaker 1: a bear market rally, which we defined as either five
Speaker 1: per cent or more over five trading days or more
Speaker 1: from that kind of depressed level, the average run is
Speaker 1: on the order of seventeen over the course of thirty
Speaker 1: five trading days, which interestingly enough takes you in proximity
Speaker 1: to the two hundred day moving average, which is where
Speaker 1: the market failed in its rally and August, but more
Speaker 1: importantly takes you in proximity to not only the November
Speaker 1: second FED meeting, but also the November eighth election, which
Speaker 1: you know are going to be very interesting events. Indeed
Speaker 1: so so all the stars are aligning in one place there.
Speaker 1: But what let's talk about those mid terms a little bit, Julian,
Speaker 1: because um, you know that is something people talk about
Speaker 1: a lot, is that uh mid term ears can can
Speaker 1: often be weak in the stock market. I mean, I
Speaker 1: think I think you just have to chalk that up
Speaker 1: to coincidence. Perhaps this year, although you know, maybe some
Speaker 1: of the extenuating uh nos of the of the drop
Speaker 1: was was related to that. But what type of you know,
Speaker 1: scenario do you think is most constructive h two stocks
Speaker 1: in this mid term. There's that sort of generalization people
Speaker 1: like that, you know, gridlock, a divided Congress is often
Speaker 1: supportive of stocks. Is is that the type of setup
Speaker 1: you think that that would work best? Uh? In this
Speaker 1: So it's particularly difficult to handicap that outcome now, especially
Speaker 1: since A you've had as negative a year as you've
Speaker 1: had thus far, and be because the balance of power,
Speaker 1: despite the fact that the Democrats controlled both houses, the
Speaker 1: balance of power is so perricarious. So what we'll do
Speaker 1: is we'll tell you what history actually says about this,
Speaker 1: And what history says is that there is a very
Speaker 1: pronounced out performance over the course of a hundred years
Speaker 1: worth of stock market returns when government is unified, you know,
Speaker 1: one party controls both Houses of Congress and the White House. Now,
Speaker 1: the market would, in our view have a knee jerk
Speaker 1: reaction lower on that kind of outcome because A despite
Speaker 1: the number of times that my team and I remind investors,
Speaker 1: and we've been doing this constantly since of that kind
Speaker 1: of data, people refuse to acknowledge it. Okay, Number one
Speaker 1: and number two. The assumption is here with the presidential election,
Speaker 1: which is obviously going to be an exceptionally contentious event.
Speaker 1: Whoever ends up running two years later, the preference would
Speaker 1: be more than likely for less action rather than more.
Speaker 1: But yet the data clearly shows that unified government i e.
Speaker 1: The potential for more action rather than less has been
Speaker 1: better for some I think in a recent note you
Speaker 1: also said that DCS aggravating some of the recent trends.
Speaker 1: Is that right? So maybe you can talk a little
Speaker 1: bit about this because I know you think a lot
Speaker 1: about how policy is affecting the market. Yeah, there's no
Speaker 1: question about it. Look from from from the point of
Speaker 1: view of the political situation, I don't think that there's
Speaker 1: any debate about the fact that the divisiveness and the
Speaker 1: part citizenship in the country without the ability to actually
Speaker 1: have reason discourse uh is certainly affects markets, It affects uncertainty,
Speaker 1: it affects how people are thinking about policy. But again,
Speaker 1: when when we think about further down the road on
Speaker 1: Constitution Avenue, which is the home of the Federal Reserve,
Speaker 1: there's no question about the fact that the FED, in
Speaker 1: our view, is perhaps gone a little bit too quickly
Speaker 1: and hasn't given the markets and the economy enough time
Speaker 1: to digest the amount of hiking UH that has been
Speaker 1: put into the system already, and that to us has
Speaker 1: really been sort of where the pressure points have come?
Speaker 1: And where are you know, our head of ever, coore
Speaker 1: s I ed Hyman has taken his GDP forecast down
Speaker 1: to zero. So it tells you that in a lot
Speaker 1: of ways, the FED is thinking very closely that a
Speaker 1: recession might be a necessary condition to get inflation under control.
Speaker 1: Certainly not desirable, but counting and counting thing that that
Speaker 1: kind of outcome, as was the case forty years ago
Speaker 1: during the Valkal administration. So all of these underpinn volatility. Well,
Speaker 1: let's talk about that November FED meeting coming up, Julian.
Speaker 1: You know, I think it's safe to say that the
Speaker 1: FED sort of surprised most investors by being more hawkish
Speaker 1: at the September meeting than perhaps a lot of people
Speaker 1: were expecting. The initial sense was that we'd get at
Speaker 1: least seventy five basis points in November and again in December.
Speaker 1: Some I think we're even thinking perhaps a full hundred
Speaker 1: basis points um at at least one of the meetings, UM.
Speaker 1: But you know, financial conditions have tightened quite a bit
Speaker 1: since then, in part because of the UK and just
Speaker 1: the reaction to the the hawk ish FED itself. Is
Speaker 1: have they tightened enough for for maybe the Fed to
Speaker 1: reconsider seventy five basis points, maybe go to fifty in
Speaker 1: the next two meetings. So the first thing I'll say
Speaker 1: is that the fact that you could have an outcome
Speaker 1: more hawkish than those eight minutes at Jackson Hall was shocking.
Speaker 1: I think it was shocking to the markets. It's certainly
Speaker 1: shocked us, UM. But what we think is the FED
Speaker 1: is really potentially in its zeal to not commit the
Speaker 1: mistakes of the mid nineties seventies. I e. Chairman of
Speaker 1: the FED, Arthur Burns cut rates in the middle of
Speaker 1: the inflation firestorm because there was an oncoming recession. Ultimately
Speaker 1: he was able to, uh, you know, cause the recession
Speaker 1: to dissipate, but the outcome was inflation remaining higher for
Speaker 1: much longer. The FED might actually be making a different
Speaker 1: kind of mistake in a similar type of way. By overtightening,
Speaker 1: you really get to the point where you may have
Speaker 1: to cut rates despite the fact that the FED has
Speaker 1: been adamant about not wanting to do that, and and
Speaker 1: from our point of view, you know, what do you
Speaker 1: do if you've got a GDP quarter or quarters. We've
Speaker 1: already had two negative quarters, even though this is not
Speaker 1: a recession in two. But what if you had a
Speaker 1: negative three quarter and it was clear that there might
Speaker 1: be a need to cut rates at the same time
Speaker 1: inflation stays call it above three, which is number not
Speaker 1: tolerable to the FED. That's a conundrum that really really
Speaker 1: could have serious reverberations. And that's part of our view
Speaker 1: that the FED might be better served instead of being
Speaker 1: dogmatic about doing seventy five in November, being more open
Speaker 1: minded about what it may remain not do. And I
Speaker 1: think it's entirely possible over the next number of days
Speaker 1: that we see some commentary from other FED governors that
Speaker 1: perhaps the door is open to a little bit of flexibility. Julian,
Speaker 1: you're very prolific with your note writing, which makes my
Speaker 1: job so much easier. And I read all of your notes,
Speaker 1: but this is why I have to have been referencing
Speaker 1: a lot of them so much so. One of them said,
Speaker 1: the FED space case is a recession in three. So
Speaker 1: do you think that stocks already have prices something like
Speaker 1: that in so we'll clarify that just that was dramatic intent.
Speaker 1: So the FEDS base case, if you look at the
Speaker 1: at the summary of economic projections, is one percent growth
Speaker 1: or thereabouts in three However, it's projection of the unemployment
Speaker 1: rate at four point four percent, up from the trough
Speaker 1: this July at three point five pc, really is an
Speaker 1: implicit call. It nod to the probability of recession being
Speaker 1: close to a hundred percent, because you've never had that
Speaker 1: kind of rise in unemployment without recession happening really almost
Speaker 1: subsequently in in very uh neyar time. And so for us,
Speaker 1: when we think about how stocks are priced, a deep
Speaker 1: recession is absolutely not priced in right now because if
Speaker 1: you look at a hundred years of stock market history,
Speaker 1: the average recession bear market ends up being down on
Speaker 1: the order of forty one and a half percent. We're
Speaker 1: only down around twenty at the trough. But we still
Speaker 1: think there's enough uncertainty and enough potential, particularly if you
Speaker 1: had other geopolitical positive developments, uh you know, lessening of
Speaker 1: the tensions in Russia, or or perhaps you know something
Speaker 1: positive recurring in China. All all outliers right now. But
Speaker 1: this entire year has been a series of outliers, So
Speaker 1: we don't want to fully you know, eliminate the upside
Speaker 1: tail risk along with recognizing the degree of the downside.
Speaker 1: Tell that's what I was gonna ask you. How realistic
Speaker 1: is it to think of um, uh, some improving rhetoric
Speaker 1: out of Moscow? I mean that. The other big story
Speaker 1: obviously this week was that nord Stream pipeline uh, mysteriously
Speaker 1: malfunctioning and springing a leak in the middle of the ocean. Obviously,
Speaker 1: there's a lot of speculation that perhaps it was it
Speaker 1: was sabotaged by Russia. That's that has been confirmed, but
Speaker 1: I think, um, a lot of people are just assuming
Speaker 1: that's that to be the case. Russia sort of sending
Speaker 1: a signal how bad could this winter get for Europe? Um?
Speaker 1: And has the market really priced in that worst case scenario? Uh?
Speaker 1: So far we're um, could could there be a further
Speaker 1: negative shock that really Royal's markets uh, due to the
Speaker 1: the Russia Europe tension? So if you've got a terrible winter,
Speaker 1: I cannot imagine that that's price in you know, rivers
Speaker 1: icing over and so on and so forth. Um, But
Speaker 1: if you actually look at natural gas futures traded in Europe,
Speaker 1: they peaked earlier in the spring. Yes, they've remained at
Speaker 1: this very elevated level that clearly is going to put
Speaker 1: an enormous amount of pressure on the European and the
Speaker 1: UK consumer. But on the other hand, it really hasn't.
Speaker 1: What's happening is the market is adjusting to a base
Speaker 1: case where Russian supply will be next to nothing for
Speaker 1: the foreseeable future. And I think if you go back
Speaker 1: several weeks ago, part of of what calmed markets for
Speaker 1: at least a while was this idea that storage was
Speaker 1: proceeding on pace or even ahead of the normal seasonal build.
Speaker 1: So from that perspective, you know, combine that with getting
Speaker 1: new supplies from the US and and elsewhere. Could you
Speaker 1: bandid it? You could? Do? You need the weather to cooperate. Absolutely,
Speaker 1: This is part of the idea that maybe potentially we
Speaker 1: could have some upside for stocks, right, the idea that
Speaker 1: we could see some positive developments maybe out of DC
Speaker 1: or Moscow or London. I think is what you said recently?
Speaker 1: Is that right? Yeah? Absolutely, And and if you look
Speaker 1: at what's happened this week. Thus far, the b of
Speaker 1: boes intervention and switching really on a dime from quantitative
Speaker 1: tightening quantitative using once more buying bonds is the first
Speaker 1: positive policy development, certainly in terms of stabilizing markets, and
Speaker 1: again going back to that relationship that has been a
Speaker 1: near unity correlation between stocks and bonds recently, you could
Speaker 1: also get a positive policy development out of Tokyo in
Speaker 1: the coming days. The Japanese intervened in dollar again a
Speaker 1: week ago or so, we would say that if they
Speaker 1: were thinking about trying to achieve maximum efficacy, they might
Speaker 1: look at the fact that the market has endorsed the
Speaker 1: Bank of England's policy response and perhaps maybe would endorse
Speaker 1: to a greater extent a further intervention by Japan. So
Speaker 1: that's something that could happen. But again it's one of
Speaker 1: these things where you don't want to plan for a
Speaker 1: base case being positive policy developments, but when the psychology
Speaker 1: turns as we think it could over the next few days,
Speaker 1: it's something that could make the moves and markets all
Speaker 1: the more exaggerated. Yeah, that's even before we get into
Speaker 1: China and the coming Communist Party Congress, which uh could
Speaker 1: could bring some surprises I guess if they decided to reopen, uh,
Speaker 1: who knows what that will do to markets. But Julian,
Speaker 1: I know it's great to talk to you because I
Speaker 1: know you've got an eye on every asset class uh
Speaker 1: and sort of all the different catalysts in the market.
Speaker 1: And I know you you uh always keep at least
Speaker 1: one eye on the options market. And there's really been
Speaker 1: a narrative that's evolved over the last few years that
Speaker 1: options are become sort of the tail that wags the
Speaker 1: dog in the US stock market, that you know, gamma
Speaker 1: hedging and other delta hedging and other Greek letters that
Speaker 1: I don't I'll be honest, I don't really understand completely
Speaker 1: that that you know, all that hedging and expiration activity
Speaker 1: really tends to push and pull the stock market, uh
Speaker 1: in a way that suggests the fundamentals aren't really always
Speaker 1: in charge, that the the the options market has sort
Speaker 1: of taken the driver's seat in the market at least
Speaker 1: certain times a month near expiration. Is that truth to that?
Speaker 1: And how would you suggest to us non Greek alphabet
Speaker 1: experts how to sort of look at the options market
Speaker 1: and its influence on the equity market. UM with a
Speaker 1: reasonable sort of sober minded view of of what its influences.
Speaker 1: So the options market has been this evolving thing, a living,
Speaker 1: breathing organism basically since the pandemic began. Uh you had,
Speaker 1: you know, extraordinary call option volumes in the summer of
Speaker 1: as as you know, the stocks to stay at home
Speaker 1: stocks basically screamed higher driven by options activity. Then you
Speaker 1: had obviously the meme stocks in spring of being pushed
Speaker 1: by options activity. And now it's fascinating, and this is
Speaker 1: something we never really expected that would happen, is that
Speaker 1: there is still a speculative element in the markets, despite
Speaker 1: the fact that we've had as poor year as we've had,
Speaker 1: that instead of buying stocks is actually buying call options
Speaker 1: and parking its cash and treasuries. So in essence, what
Speaker 1: you're doing is you're getting the risk free rate on
Speaker 1: a portion of your holdings, and yet you're actually getting
Speaker 1: the same exposure that you would be getting through holding
Speaker 1: stocks via holding options. So there's a leverage component there
Speaker 1: as well. And what it does is it exacerbates the
Speaker 1: moves in both sides, and we've certainly seen that in
Speaker 1: recent weeks. But interestingly enough, if you're someone who's thinking
Speaker 1: about hedging with options, and we don't think that's for everyone.
Speaker 1: It actually makes hedging both upside and downside more appealing
Speaker 1: depending on the kinds of things that you're looking to hedge.
Speaker 1: For example, in the energy sector, Uh, there has been
Speaker 1: an outright fear of recession. At the same time there's
Speaker 1: been an outright fear that a favorable resolution to Russia
Speaker 1: would depress oil prices. So really what you're having is
Speaker 1: that is that all in there's complete discounting of you know,
Speaker 1: conditions where multiples are half that versus the rest of
Speaker 1: the index. And for options people, you're seeing that in
Speaker 1: fear of puts being much more expensive. But to us,
Speaker 1: that's an opportunity. So what I think the messages is
Speaker 1: that you can find these relationships, um and and because
Speaker 1: we now have the end of free money and we
Speaker 1: have you know, quote unquote real yields. I joke with
Speaker 1: my sons that maybe they're going to have interest on
Speaker 1: their checking account one of these days, weeks or months. Uh,
Speaker 1: that these relationships are much more interesting to express and
Speaker 1: to also analyze where the market may go. So you
Speaker 1: told me that your answer to what goes up these
Speaker 1: days is that we're seeing a bullmarket in cash, and
Speaker 1: everybody's beinging up cash the last couple of days to me,
Speaker 1: and you know how parking your your money in cash
Speaker 1: or you know, short data treasuries or whatever. So what
Speaker 1: is it that that is making cash so appealing right now?
Speaker 1: So obviously the Fed is is behind all of this,
Speaker 1: no question about it, the rapidity with which the hiking
Speaker 1: has occurred, but it's also this idea. And if you
Speaker 1: go back to the spring um, when we first started
Speaker 1: suggesting that investors overweight cash as stock started to weaken,
Speaker 1: we got pushed back because, well, how could you possibly
Speaker 1: lock in a minus five rate of return when inflation
Speaker 1: was trading at eight percent? And our answer to that was, well,
Speaker 1: the thing about cash is in a portfolio context, it
Speaker 1: helps you manage and it helps you buy when you
Speaker 1: should be buying, not sell when you should be buying.
Speaker 1: And that's what we've seen from time to time, particularly
Speaker 1: at the Juli low, and for us, it really becomes
Speaker 1: this whole idea that you know, the whole concept of
Speaker 1: Tina there is no alternative. Two stocks is a thing
Speaker 1: of the past, and we don't think it's coming back
Speaker 1: anytime soon. Supporting the bullmarket in cash and now I
Speaker 1: think Mike, the new acronym is Tara. There's a reasonable alternative. Yeahs, yeah,
Speaker 1: that was Julian. The only way to make a name
Speaker 1: for yourself in this industry anymore is a good acronym.
Speaker 1: You gotta you gotta work on a good acronym. I
Speaker 1: don't know, maybe this this podcast needs a good acronym. Yeah,
Speaker 1: we can try to think of Tara. Well. You know,
Speaker 1: it's it's interesting that the conversation around really yields Julian,
Speaker 1: because I think it's sort of depends on how you
Speaker 1: define real yields, right. You know, if an inflation that
Speaker 1: eight or nine percent and treasuries are at three and
Speaker 1: a half for are you okay? That's deeply negative. But
Speaker 1: you know, looking out at the break even inflation rates,
Speaker 1: you know, basically the difference between yields a nominal treasuries
Speaker 1: and inflation protected treasuries. You know that break even rates
Speaker 1: like to two point three two point three over ten
Speaker 1: years um, which signals that the bottom market's best guests
Speaker 1: is inflation will average roum two point three five over
Speaker 1: the next ten years? Are they? Are they right? Are
Speaker 1: the break evens right? Do you think, or is that
Speaker 1: just a miss priced another miss price market right now.
Speaker 1: So again we tend from point to point not to
Speaker 1: argue with the concept that market pricing is right because
Speaker 1: it's where you can transact at any moment. Look looking
Speaker 1: out over the longer term. If you think about eds
Speaker 1: Hyman's forecast for inflation next year, it's three percent, clearly
Speaker 1: far north of that two three to forty number. Are
Speaker 1: we eventually going to get back closer to two? Absolutely are?
Speaker 1: And frankly that's part of our concern with the Fed,
Speaker 1: perhaps not stepping back to assess the effect of the
Speaker 1: tightening that we've seen, but point blank, what it does
Speaker 1: reinforce is this whole idea that if we believed as
Speaker 1: investors that this was the nineteen seventies ingrain, you know,
Speaker 1: inflation expectations in high single digits, potentially low double digits
Speaker 1: for weeks and months and years on end. This is
Speaker 1: not the nine seventies. As a child, we were on
Speaker 1: a four hour gas line waiting for my mother to
Speaker 1: fill the car up. That's not what this is. I
Speaker 1: think you called when when you were talking about stocks
Speaker 1: and bonds in a recent note both being negative this year,
Speaker 1: you called it breathtaking, I think was the word. Can
Speaker 1: you talk about how unusual that is? I wrote about
Speaker 1: a risk parity e t F that has seen a
Speaker 1: record draw down. I think it's done something like thirty
Speaker 1: two from the highs it reached last remember, So how
Speaker 1: unusual is it for both stocks and months to be
Speaker 1: down as much as we've seen this year. So we've
Speaker 1: been showing a scattered plot of of the stock bond
Speaker 1: return quadrants going back to nineteen seventy seven and two
Speaker 1: is a lower left outlier on the orders of magnitude
Speaker 1: such that you've only actually ever seen one other year
Speaker 1: where the returns on the combined stock bond portfolio we're
Speaker 1: both negative and only marginally so, and that was uh
Speaker 1: the year that people were trying at the beginning of
Speaker 1: the hiking cycle to equate to Obviously you've seen volatility
Speaker 1: of a much higher order there um. But what it
Speaker 1: really does is is when you have this kind of correlation,
Speaker 1: it calls into question risk parity one thirty thirty strategies
Speaker 1: and frankly, the employment of leverage across any investing strategy,
Speaker 1: as well as a rethink of what valuations makes sense.
Speaker 1: Because there's a very good argument to be made that
Speaker 1: the valuation paradigm of the last decade or so, which
Speaker 1: is closer to eight, nine twenty times, is no longer
Speaker 1: the correct way to assess what stocks are worth. Yeah, so, Joya,
Speaker 1: let's uh so break it down for me. If I
Speaker 1: were to send you my brokerage account password and said, Julian,
Speaker 1: just set me up for the rest of the year,
Speaker 1: here can do. Yeah, right, What's what's it gonna look
Speaker 1: like when you're done with it? Oh my goodness, the
Speaker 1: foreheads dripping from that kind But I don't worry. There's
Speaker 1: not a lot to lose in there. So so, so
Speaker 1: what we think is that, particularly when you look out
Speaker 1: towards your end and you think about this heightened probability
Speaker 1: of recession, the thing that's most attractive to us is
Speaker 1: probably the thing that, given the last week, is the
Speaker 1: most difficult to buy, and that's longer term bonds. Uh. Again,
Speaker 1: whether it's thinking about inflation break evens, thinking about a
Speaker 1: heightened probability of recession, thinking about the the importation of
Speaker 1: tighter financial conditions from around the globe to us, it
Speaker 1: really makes sense, uh to go back to at least
Speaker 1: what what has happened over the last couple of years
Speaker 1: is the typical sixty forty bond portfolio has gravitated to
Speaker 1: sixty thirty five or seventy thirty because we've all been
Speaker 1: sold on this idea that owning government bonds was a
Speaker 1: negative expected return outcome, and it's been true in large
Speaker 1: part for the last two years. We haven't been positive
Speaker 1: on bonds since we think that's where you want to
Speaker 1: dip your toe in first again if you want to
Speaker 1: get your equity exposure, which clearly as a function of
Speaker 1: the portfolio breakdown, if you have any cash at all,
Speaker 1: by default your cash levels have been rising, you probably
Speaker 1: do want to put a little bit more um inequities.
Speaker 1: And then let's see how policy and earnings play out.
Speaker 1: Because we have had earnings downgrades, were likely to have
Speaker 1: them again, but the market knows this, so it may
Speaker 1: be come with something that doesn't look like the potential
Speaker 1: for a deep earnings recession, perhaps just a shallow one.
Speaker 1: And Julian, just to wrap things up, I think you
Speaker 1: you recently downgraded your ear and price target for the
Speaker 1: SMP five hundred, So how do we square that with
Speaker 1: you know, what we were talking about earlier about the
Speaker 1: potential for a rally posts the mid terms. Well, what's
Speaker 1: amazing is in again in this market, Uh, things evolve
Speaker 1: literally by the minute or the hour, not by the day, week,
Speaker 1: or month, as is typical in you know, really the
Speaker 1: bull market of the last ten years or so. So
Speaker 1: when we took our price target down to thirty seventy
Speaker 1: five a week and a half ago or so, we
Speaker 1: were probably viewed as still being you know, quite bearish, uh,
Speaker 1: in in that context, and then all of a sudden,
Speaker 1: here we are the markets trading and breaking through the
Speaker 1: loads of thirty six thirty six, and we're looking like
Speaker 1: some of the biggest bulls on wall streets. So what
Speaker 1: we're really trying to do is, you know, strike the
Speaker 1: trade off between what we felt are these oversold conditions
Speaker 1: that have the potential for a rebound with the positive
Speaker 1: fourth quarter seasonality. Um. And and again when you think
Speaker 1: about next year, Uh, it's one thing to get your
Speaker 1: said allocation to where you're comfortable, but it's another to
Speaker 1: make assumptions at this point about how the market is
Speaker 1: going to behave next year with high conviction because the
Speaker 1: range of outcomes is so large. Great stuff that is
Speaker 1: Julian Emmanuel. He is the chief equity and quantitative strategist
Speaker 1: at ever Core. I s I, Uh, Julian always such
Speaker 1: a pleasure to hear your thoughts and catch up with
Speaker 1: how you're looking at things in the market. Uh, no secret,
Speaker 1: I think Fildana. Julian is one of my favorites of
Speaker 1: the strategists, and they're always and he always picks up
Speaker 1: the phone, which is nice. He always gets back to
Speaker 1: nice guy, a brilliant guy. But Julian, we can't let
Speaker 1: you go without hearing your craziest thing you've seen in markets.
Speaker 1: But let's start with. First off, we gotta reveal Aldonna's
Speaker 1: high school nickname because we did get those three ratings
Speaker 1: on Apple podcast. So a drum roll. If I had
Speaker 1: a drama would roll it. I guess maybe maybe Stacy,
Speaker 1: a producer, can add Yeah, that would be good. First,
Speaker 1: st my friends called me Bill, so I'm sorry. However,
Speaker 1: I have a feeling you're going to twist that into
Speaker 1: Bill n or evil evil evil, All right, let's go
Speaker 1: with that. So let's go with those two because the
Speaker 1: other one is a little bit more boring. Evil. That's
Speaker 1: a I'm going with that one. That is that is
Speaker 1: that suits you. It does a little sadly, and of
Speaker 1: course your nickname with the website that transcribes the podcast
Speaker 1: by listening pill Dodi and Madonna. Sometimes I think they
Speaker 1: called you Madonna hijack. So we have yeah, we have
Speaker 1: a transcription service for the podcast. So we looked through
Speaker 1: the ranscript and every time I say my name, it
Speaker 1: transcribes it as phil Doto, which is hilarious. I have
Speaker 1: some I have some friends who make fun of me
Speaker 1: for that now, and another one is Madonna hijack, which
Speaker 1: is also very good. There have been some really good ones.
Speaker 1: How about you, Julian? Did you have a nickname in
Speaker 1: high school? Well? I did. But the first thing I'd
Speaker 1: have to say is, based on what you just said,
Speaker 1: I have to think that there is a slice of
Speaker 1: the voice recognition software world that's probably overpriced still at
Speaker 1: this point. Always a trade, He's always got a trade,
Speaker 1: Always a trade, always a trade. Mine was jewels, Okay,
Speaker 1: very simple jewels, and uh, I think in an environment
Speaker 1: like this, uh, you know, jewels have probably been as
Speaker 1: good an investment as stocks and bonds or art, so
Speaker 1: certainly part of portfolio diversification. That's good. Bringing it back. Yeah,
Speaker 1: bringing it always brings it back to the to the markets.
Speaker 1: I love it. That's good stuff. All right. Well, well, Dona,
Speaker 1: I mean evil, What is your craziest thing for the week.
Speaker 1: So I was originally going to go with something that
Speaker 1: happened in the UK or one of these other wild moves,
Speaker 1: but I'm just going to go with something somewhat happy,
Speaker 1: which is that McDonald's is coming out with a happy
Speaker 1: meal for adults, and I think I think it's aimed
Speaker 1: at millennials, so my generation and you get you know,
Speaker 1: I think the option is one of four figurines when
Speaker 1: you buy your big Mac or you're chicken McNuggets. So
Speaker 1: what are the what are the millennial figurines? Then? Is
Speaker 1: it it's like, oh, I forget it's Taylor Swift, bobblehead
Speaker 1: or something. I wish for that I would go to McDonald's.
Speaker 1: But no, I think it's like regular McDonald's figurines. Uh huh,
Speaker 1: that's pretty good. Yeah, I don't know. I don't know
Speaker 1: how successful that will be. I don't get the idle
Speaker 1: picture millennials eating a lot of McDonald's. To be honest,
Speaker 1: you guys seem too healthy for that. Is that is
Speaker 1: that fair? We love cauliflower. Yeah, all you eat is
Speaker 1: cauliflower exclusively. All right, that's pretty good one, Julian. How
Speaker 1: about you, what's the craziest thing you've seen in markets
Speaker 1: these days? Well? I first got to pay tribute to
Speaker 1: the concept that I lived through college on special big Max.
Speaker 1: So so yeah, exactly exactly. I paid thirteen in Zurich
Speaker 1: a couple of years ago, so you know, Uh, inflation
Speaker 1: and uh, you know, the risk free arbitrage amongst currencies
Speaker 1: and countries just not there. So I have to pay
Speaker 1: tribute to the UK, and I have to pay tribute
Speaker 1: to a legendary president, uh, Ronald Reagan. In our view, Uh,
Speaker 1: the fact that um that Liz Trust and quasi quarteg
Speaker 1: uh didn't fully appreciate the fact that their policy announcements
Speaker 1: tax cuts, subsidies for energy and so on would be
Speaker 1: as destabilizing in the near term as it has been
Speaker 1: to markets. Doesn't recognize the fact that they probably would
Speaker 1: have been better off announcing their policy in cowboy boots
Speaker 1: and chaps, the same way President Ronald Reagan did in
Speaker 1: the early nineteen eighties on top of his horse when
Speaker 1: he announced his version of Reaganomics. That shot directly against
Speaker 1: the vulcar fed the same way that the UK is
Speaker 1: trying to shoot against the Bank of England. Um and frankly,
Speaker 1: for us, that kind of display of revelry and and
Speaker 1: find sartorial splendor might have been able to sell the
Speaker 1: markets a bit better, but alas we've needed the Bank
Speaker 1: of England to step in and hopefully it will have
Speaker 1: a happy ending. I'd love to see her rotting horse
Speaker 1: with chaps and a cowboy hat down Downing Street. That
Speaker 1: would go I think that would go over some funny
Speaker 1: all right, good stuff, good stuff. I have to think
Speaker 1: about Liz Trust and cowboy boots and uh and and
Speaker 1: a hat can own it the way Reagan did though,
Speaker 1: that's uh that was his signature. Look all right, I'll
Speaker 1: give you mine. This is courtesy of Bloomberg our own
Speaker 1: Mark Alwood. He wrote about the investment market for handbags.
Speaker 1: But how many handbags do you want? Just one? Just one?
Speaker 1: I have? Okay too? Maybe three? No, I'm just kidding,
Speaker 1: I'm totally kidding. Literally, what's the most you've ever paid
Speaker 1: for a handbag? I think honestly it was like so
Speaker 1: not not part of the whatever article you read that
Speaker 1: still sounds like a lot to me. For Oh no,
Speaker 1: they can be like ten. Why now, this story is
Speaker 1: all about some of the most ridiculous ones. There's the
Speaker 1: birken bag. I guess yeh, that's like ten tho or more.
Speaker 1: That is like the yeah, the most expensive a so
Speaker 1: black birken in crocodile crocodile skits. I guess it's actually
Speaker 1: made out of a crocodile hide. Fetched two hundred and
Speaker 1: eight thousand dollars three years ago. But here's the here's
Speaker 1: where we get to play. The prices precise, Julie, I
Speaker 1: regret to inform you you're now a contestant on a
Speaker 1: little game show we have here called the prices precise.
Speaker 1: The prices right because I'm afraid of Bob Barker, but
Speaker 1: the prices precise because this story discusses credit Swiss actually
Speaker 1: did a analysis of Chanel handbags and what they did
Speaker 1: over the trailing twelve months ended in June. Now I
Speaker 1: think back into June. Okay, it was a awful period
Speaker 1: for market sentiment. Bonds were falling, stocks were in a
Speaker 1: bear market. Everything was doing awful. Uh, what do you
Speaker 1: think Credit Swiss study of Chanel handbags said that those
Speaker 1: handbags did what was their return over the previous twelve
Speaker 1: months as of June sense percentage terms? Think of it
Speaker 1: as a a Chanel handbag index. I think up one, really,
Speaker 1: even though I mean socks were in a bear market market,
Speaker 1: otherwise we wouldn't be talking about that. You think Chanelle
Speaker 1: was the ultimate safe haven? Up on, Julian, what what
Speaker 1: do you think Chanel handbags trailing twelve month return was
Speaker 1: as of June? Well, you can't have an equity strategist
Speaker 1: in a bear market giving numbers like that, But I
Speaker 1: would say it's probably somewhere on the order of twenty
Speaker 1: five or thirty, because again, this was the year where
Speaker 1: we were all coming out of our homes and re engaging,
Speaker 1: and boy, if you don't look good when you're seeing
Speaker 1: people you haven't seen in two years, you don't have
Speaker 1: a second chance to make a new first impression. So
Speaker 1: you're saying you set up This is why Julian is
Speaker 1: the chief strategist ever queer, I s I hit it
Speaker 1: right on the head there, Julian, It's amazing. Twenty four
Speaker 1: point five previous year, I was shooting for the stars.
Speaker 1: Who knew the ultimate safe haven was a purse basically
Speaker 1: a purse. I won't have to buy one. I'll get
Speaker 1: I'll get you one next time I go to Europe.
Speaker 1: I don't know, right instead of instead of ham, No,
Speaker 1: you fill it with ham if you if you get
Speaker 1: me a luxury handbag and fill it with Iberico ham,
Speaker 1: that that it's a deal. Uh. Anyway, I'm impressed, Julie,
Speaker 1: and you nailed it on the head. I think maybe
Speaker 1: he uh, maybe he saw that report. What do you
Speaker 1: think filled out it? He's shaking his head. No, he's
Speaker 1: just that good and Bloomberg, he is just that good.
Speaker 1: H Joan. Thank you so much for your time. We
Speaker 1: always appreciate it, and I hope we can get you
Speaker 1: back again. Thank you think, Julian, what goes up? We'll
Speaker 1: be back next week. And so then you can find
Speaker 1: us on the Bloomberg Terminal website and app or wherever
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Speaker 1: the time to rate and review the show on Apple Podcasts,
Speaker 1: so more listeners can find us. And you can find
Speaker 1: us on Twitter, follow me at reag Anonymous, Bill Donna
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Speaker 1: Podcasts at Podcasts, What Goes Up is produced by Stacy Wan.
Speaker 1: Thanks for listening, to see you next time.