Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now,
Speaker 1: I want to talk about the big debate that's reaching
Speaker 1: in bond markets. Are we on the precipice of much
Speaker 1: higher yields in the US bond market much lower values?
Speaker 1: Aren't we going to see this bond route develop and deepen?
Speaker 1: And to answer this, I want to bring in Chuck Lieberman,
Speaker 1: chief investment officer and founding member and Advisor's Advisor's Capital
Speaker 1: Management LLC. He's also a Bloomberg profit He writes for UH.
Speaker 1: The website Bloomberg View maintains Chuck. Thank you so much
Speaker 1: for joining us. Right now, I'm looking at longer dated
Speaker 1: treasuries that have lost more than three percent over the
Speaker 1: past month. Do you think that this sell off is
Speaker 1: going to deepen? A sure? Do? Um. The economy is
Speaker 1: doing pretty well, the labor market is tight. Um every
Speaker 1: measure we have on the labor market indicates that we've
Speaker 1: got a progressive tightening of the labor market to a
Speaker 1: level that is tight historically. Um, it looks like the
Speaker 1: Phillips curve has flattened, which means that we're not paying
Speaker 1: for that decline in the unemployment rate yet with higher
Speaker 1: labor costs, at least significantly higher labor costs. But ultimately
Speaker 1: I think we will, and so it's imperative that the
Speaker 1: Fed get interest rates at least back to a neutral level.
Speaker 1: Chuck Liberman, I wonder if you could just step back
Speaker 1: for a second and maybe just opine on the idea
Speaker 1: that you need to separate all the bad news that
Speaker 1: is a constant torrent from all of the information necessary
Speaker 1: to make decent investment decisions. Sure, well, it really comes
Speaker 1: down to what determines the value of equities UH and
Speaker 1: fixed income UM and UH. Theoretically, equity valuations are discounted
Speaker 1: values of future expected earnings. Notice, I haven't said anything
Speaker 1: about politics yet, I haven't said anything about climate. I
Speaker 1: haven't said anything about a lot of other issues. Correct,
Speaker 1: you're trying to keep it straightforward and simple, right, And UH,
Speaker 1: that's really the issue when you look back in the
Speaker 1: last thirty years, there have been lots of awful things
Speaker 1: that have happened, and yet the equity market is at
Speaker 1: all time high. How come it's because the companies have grown,
Speaker 1: profits have grown, the companies are worth more, and cumulatively
Speaker 1: that means the market is worth more and at a
Speaker 1: record high. Chuck, why is now different? I mean people
Speaker 1: have been saying that the economy has been looking better
Speaker 1: steadily over the past few years. People have been expecting
Speaker 1: higher yields for a long time. Now you have an
Speaker 1: economy globally that's a wash with central bank cash. The
Speaker 1: Bank of Japan and the European central banks are still
Speaker 1: printing money. What's going to make the situation turned so
Speaker 1: dramatically in the US? Well, I don't know that anything
Speaker 1: has to change dramatically at all. I think we're on
Speaker 1: a trajectory of pretty stable, almost systematic growth. Uh And
Speaker 1: that growth rate, while lower than in the past, is
Speaker 1: nonetheless more than fast enough to drive unemployment down. And
Speaker 1: so we've pushed the unemployment rate to a level at
Speaker 1: which it becomes a problem for labor costs. When you
Speaker 1: survey firms or look at how firms feel about the
Speaker 1: labor market. They're very, very consistent in reporting that it's
Speaker 1: difficult for them to find the workers they need. Right.
Speaker 1: But but all of this is sort of sort of
Speaker 1: flies in the phase of the idea that with such
Speaker 1: high valuations and stock markets, you have investors saying, look,
Speaker 1: the second that the ten year treasury gets to three
Speaker 1: percent yields two point eight percent yields, I'm buying because
Speaker 1: you can't get that kind of reliable yield anywhere. I mean,
Speaker 1: in other words, fundamentals don't make sense at this point. Well,
Speaker 1: I would say that the stocks would even be attractive
Speaker 1: if if thirty year treasuries or ten year treasuries for
Speaker 1: that matter, we're three percent. When you can buy US equities,
Speaker 1: quality equities that have dividend yields up close to three percent,
Speaker 1: you really don't should not have interest rates as low
Speaker 1: as they are. Uh. Stocks are clearly going to continue
Speaker 1: to grow over the next decade and at a decent rate. Uh.
Speaker 1: And you're getting that yield on many of those high
Speaker 1: quality companies. Uh. Something is wrong. Stocks are miss price
Speaker 1: compared to bonds, and I'll entertain a number of possibilities.
Speaker 1: Bonds are badly overvalued. I would accept that proposition stocks
Speaker 1: are somewhat undervalued. I am tempted to accept that proposition
Speaker 1: because when I do dividend discount models, the interest rates
Speaker 1: that prevail in the market today imply much higher valuations.
Speaker 1: We typically ignore those valuations because people would be embarrassed
Speaker 1: to suggest that the stock market is undervalued. And yet
Speaker 1: if you look at interest rates compared to bonds, stocks
Speaker 1: are cheap. So you can have it anyway which way
Speaker 1: you want. Bonds are expensive, stocks are cheap, or some
Speaker 1: combination of the two. Well, Chuck, let's say that you
Speaker 1: adhere to the idea that it is a market of
Speaker 1: stocks and not a stock market. What stocks or what
Speaker 1: kinds of companies should you be invested in? Well, it,
Speaker 1: I think we still reflect the trauma of two thousand
Speaker 1: and eight. So the stocks that tend to be most
Speaker 1: expensive are the ones that are typically considered safe or safer,
Speaker 1: and the ones that are cheapest are the ones that
Speaker 1: are traditionally considered riskier. So among the ones that I
Speaker 1: considered cheap or the financials, the banks are very cheap
Speaker 1: in my mind. Uh, energy, when you hold on when
Speaker 1: you say banks are, you're talking about big money center
Speaker 1: bank like JP Morgan Bank of America, as well as
Speaker 1: Stanley City Group, City Group absolutely all of the above, um.
Speaker 1: And then the regional banks were also pretty attractive. They're
Speaker 1: not quite as cheap as the money center banks, maybe
Speaker 1: because people were burned more in the money centers than
Speaker 1: they were in the regionals. But I consider the regional's
Speaker 1: attractive as well. UM. That's on the financial in the
Speaker 1: financial sector, and then in uh energy, I consider the
Speaker 1: pipelines very very cheap. UH. People got burned because of
Speaker 1: the drop in oil prices, but you know, we're produced.
Speaker 1: We're almost back to the record high production levels for
Speaker 1: crude oil in the United States. The pipelines are caring more. UH.
Speaker 1: The expectation is we're going to increase production going forward.
Speaker 1: Fracking is becoming progressively more efficient, lower costs. Um, we're
Speaker 1: going to consume more of this product. Somebody's got to
Speaker 1: carry it, and yet the stocks are cheap. Well, So
Speaker 1: here's what I'm struggling with. A lot of people have
Speaker 1: said that the loose credit conditions has enabled the stock
Speaker 1: market rise. And if you start to see tenure treasuries
Speaker 1: at thirty year thirty three yields and above, that's going
Speaker 1: to increase the borrowing costs of a lot of companies.
Speaker 1: Won't that hit the stock market? Uh, it will to
Speaker 1: some degree because stocks are not independent the bonds the
Speaker 1: tour are integrated, and so if interest rates rise in
Speaker 1: the in the bond market, bonds will provide more competition
Speaker 1: for stocks. But I don't think the stock market is
Speaker 1: priced at a level that reflects prevailing interest rates. So
Speaker 1: I think the stock market can handle rising rates surprisingly
Speaker 1: well unless those rates shoot up a lot more. Thank
Speaker 1: you so much for joining us. It's truly a pleasure
Speaker 1: to speak with you. Chuck Lieberman, chief investment officer and
Speaker 1: founding member and Advisor's Capital Management, also a Bloomberg profit
Speaker 1: who writes for our Bloomberg View website, Carl always a pleasure. Um.
Speaker 1: I noticed that there's a story about the final list,
Speaker 1: the short list. It has people such as X board
Speaker 1: member Kevin Walsh, Jerome Powell, who is a current Fed governor.
Speaker 1: Tell us who you think is at least in the
Speaker 1: running and maybe just throwing some wild cards for us
Speaker 1: to kind of understand. Maybe the president's thinking. Sure, absolutely,
Speaker 1: so the shortlist is getting shorter, as as being leaked
Speaker 1: to the press and whatnot. Uh, So we know that
Speaker 1: we are zeroing in on a decision on a reduced
Speaker 1: number of candidates, and that decision could be coming in
Speaker 1: the next two to three weeks, maybe sooner. I think that, uh,
Speaker 1: you know, there's a litmus test being applied to the candidates.
Speaker 1: And so Donald Trump has said, how he's a low
Speaker 1: interest rate guy, and he wants a low interest rate
Speaker 1: FED chair. Uh and that's all. Find it nice. And
Speaker 1: I think that is an important prerequisite which does disqualify
Speaker 1: folks like John Taylor, because pretty much every iteration of
Speaker 1: the Taylor rule that you look at would point to
Speaker 1: higher interest rates and where they currently stand. So I
Speaker 1: think that the Hawks are being crossed off the list.
Speaker 1: And the other part of that litmus test is that
Speaker 1: he basically wants to be sure that whoever's FED chair
Speaker 1: is not going to stand in the way of his
Speaker 1: economic agenda. And more specifically, that means if he is
Speaker 1: passing tax reform, which could maybe not be so comprehensive
Speaker 1: in terms of tax reform, but more of a a
Speaker 1: sugar high from a tax cut that may not necessarily
Speaker 1: be revenue neutral, at least in the short term. He
Speaker 1: does not want a FED Chair to step in front
Speaker 1: of that economic benefit. So if you're going to raise
Speaker 1: rates as the president cuts taxes, you're probably not going
Speaker 1: to be in the FED chair seat next year. All
Speaker 1: this makes me question why Kevin Walsh is even in
Speaker 1: the running. Well, the uh the Worsh family has some
Speaker 1: connections to the president. Uh and he is well liked
Speaker 1: among Republicans and conservatives, but uhh and he certainly is
Speaker 1: a bit of a maverick, even though he was a
Speaker 1: former governor. He's been highly critical of the Fed. Uh
Speaker 1: So in those regards, I think he does appeal to
Speaker 1: the President's sentiments and instincts. However, he was very dismissive
Speaker 1: of the Fed missing on the inflation target earlier this
Speaker 1: year in an interview with Mike McKee. Actually uh and
Speaker 1: also he's concerned about financial stability risks, so he is
Speaker 1: someone who also wants rates to be higher. Uh and
Speaker 1: that again is not consistent with Trump's economic agenda. So
Speaker 1: Bloomberg's shortlist that we've put out includes Kevin Walsh, also
Speaker 1: Jenny Yellen, who is the current FED Chair, Also Jerome
Speaker 1: Power Powell, who is a current FED governor. Um Neil
Speaker 1: kesh Kari has gotten less attention, and yet Jeffrey Unlock,
Speaker 1: the head of Double Line, came out and said that
Speaker 1: he expects Kashkari to be the likely next FED chair.
Speaker 1: Is he wrong? Well, we'll find out soon enough. I
Speaker 1: think he is potentially on the short list, and he's
Speaker 1: definitely the dark horse candidate does a bit of an outsider,
Speaker 1: somewhat critical of the FED, UH and certainly dissenting at
Speaker 1: several meetings over critical exact opposite standpoint than Marsh saying
Speaker 1: that it's moving too quickly. Absolutely, so he's a low
Speaker 1: rates guy, and he's saying until we see inflation hitting
Speaker 1: the FEDS target, we should stop raising rates. UH. That
Speaker 1: is music to the ears of the president. I wonder
Speaker 1: called does this highlight the contradiction that seems to follow
Speaker 1: President Donald Trump, which is that his previous statements and
Speaker 1: many of his previous positions seem more liberal and more
Speaker 1: a dovish in general, whether it is interest rates, whether
Speaker 1: it is social policy, many topics. That is a divergence
Speaker 1: to the Republican Party which he now leads, is that
Speaker 1: the facto president, he leads the party, but he is
Speaker 1: by no means a conventional Republican and so as he's
Speaker 1: looking at FED chairs, that absolutely is the case as well.
Speaker 1: Don't forget the President Obama chose Janet Yellen for the job. Um,
Speaker 1: so he is not conventional I think a conventional Republican.
Speaker 1: If it were Pence picking the FED chair, I think
Speaker 1: Walsh would be very high up on the list. But
Speaker 1: because of this focus on really labor economics, right seeing
Speaker 1: if you can push that unemployment rate down and improving
Speaker 1: the the status of the middle class and the working class,
Speaker 1: those are democratic initiatives traditionally, uh, and that is a
Speaker 1: priority of this president. And don't forget it's a lot
Speaker 1: of Reagan Democrats that crossed over and voted for him
Speaker 1: in those industrial Midwestern states, uh, that he's looking to
Speaker 1: help out. Although President Trump himself isn't going through pages
Speaker 1: of economists and trying to pinpoint the perfect FED chair,
Speaker 1: So he is surrounded by some more traditional Republicans. Who
Speaker 1: are his advisors on this? Who are they and how
Speaker 1: much power do they have in selecting the next FED chair? Well,
Speaker 1: I think Minuchin and Cone have both been influential in
Speaker 1: this regard. I think that cons chances because he was
Speaker 1: originally considered to be on the shortlist diminished after the Charlottesville,
Speaker 1: Virginia violence and the you know, the president wants uh
Speaker 1: loyalty in that FED candidates, so he wants a low
Speaker 1: interest rates person. He also wants a loyal person, uh,
Speaker 1: and I think those are the priorities. So the committee
Speaker 1: shapes to some degree, but the final say will absolutely
Speaker 1: be his and arguably this will be one of the
Speaker 1: key moments for a FED chair to really dictate the
Speaker 1: direction of policy going forward, considering that the FED is
Speaker 1: about to start unwinding its balance sheet and conceivably they
Speaker 1: could speed that process up for low it down. Carl Orgadana,
Speaker 1: thank you so much for joining us. As always, Cargadona's
Speaker 1: chief US economist for Bloomberg Intelligence. Return our attention now
Speaker 1: to Argentina. Argentina's benchmark stock index, the Marvel, down about
Speaker 1: one point three percent today, and that concludes a winning
Speaker 1: streak of thirteen consecutive sessions where the stock market moved
Speaker 1: higher and the polls a show that there are is
Speaker 1: a friendly attitude towards Mauricio Macri. The government is likely
Speaker 1: to maintain its position in the October legislative decisions, and
Speaker 1: the Marvel index is up fifty eight percent year to date.
Speaker 1: Here to tell us more about Argentina is our own
Speaker 1: editor in chief emeritus for Bloomberg News, Matt Winkler. Thank
Speaker 1: you for coming in. What does Asians has mockery made
Speaker 1: that would encourage investors? Thank you, pim pleasure to be
Speaker 1: with you. You know, there are two things that he
Speaker 1: had to address immediately and he promised to. One was
Speaker 1: runaway cost of living otherwise known as inflation, and the
Speaker 1: other was the peril of default, the kind of yin
Speaker 1: and yang of modern times for people living in Argentina
Speaker 1: and uh not as you would expect UM anything close
Speaker 1: to a developed economy. And so far, so good. He's
Speaker 1: almost two years into his presidency and the inflation rate
Speaker 1: is collapsed. It's down from a hive about to twenty
Speaker 1: And if you look at the Bloomberg and look at
Speaker 1: what economists anticipate over the next year, it's gonna get
Speaker 1: to eleven percent within twelve months, and even some people
Speaker 1: are saying single dig it's UM by two thousand nineteen.
Speaker 1: So that's one thing. And the other thing is the
Speaker 1: debt market. You know, in Argentina is UM outperforming most
Speaker 1: emerging markets, and UM that's a real turnaround. So those
Speaker 1: are the two things he's done. They're both big, and
Speaker 1: he's brought Argentina actually to the forefront of global investors
Speaker 1: by making it the best performing market in Latin America.
Speaker 1: And that that wonderful streak that you referred to at
Speaker 1: the outset here, Um, that's the longest winning streak for
Speaker 1: the stock market since it's it's just shocking, really the
Speaker 1: rally here, especially considering the vitriolic decade long battle between
Speaker 1: creditors in Argentina after its latest default. It has defaulted
Speaker 1: numerous times in its sovereign debt. And here you're looking
Speaker 1: at Argentinian bonds price in US dollars that have rally
Speaker 1: nearly thirteen percent so far this year. Matt, can you
Speaker 1: give us a sense of what President McCree said to
Speaker 1: you that gave you confidence that they could continue on
Speaker 1: a rather auspicious path. So there are two things that
Speaker 1: make him um, if you will, a unique um. One
Speaker 1: is he's the first leader president elected who isn't a
Speaker 1: parnast in a hundred years, nor is he affiliated with
Speaker 1: any of the left wing alternatives. So he's right in
Speaker 1: the center, and he's a bit of a pragmatist and
Speaker 1: very practically. He's an engineer by training, so he looks
Speaker 1: at things very analytically. Um. So that's one thing. The
Speaker 1: second thing is he said to us, you know, I'm
Speaker 1: committed to reducing poverty. Now you wouldn't necessarily expect that
Speaker 1: from someone who is in the center, and yet he's
Speaker 1: managed to embrace a very um pluralistic, diverse constituency in Argentina.
Speaker 1: You know, both people who are well off and people
Speaker 1: who are the opposite. I think that's what sets him apart.
Speaker 1: Does he it was there any conversation or does he
Speaker 1: recognize that there are a lot of rules and regulations
Speaker 1: about the kinds of investments that made in Argentina and
Speaker 1: the reciprocity that exists. So, for example, BMW how to
Speaker 1: export a certain amount that equal the amount of automobiles
Speaker 1: they sold. I mean, they're all these wacky rules there.
Speaker 1: He would given his brothers, he would eliminate, via many reforms,
Speaker 1: most of the bottlenecks that you've just identified that prevent
Speaker 1: the economy from performing as it should. And he's committed
Speaker 1: to doing so. But he recognizes, and he says as
Speaker 1: much when we speak with him, that it can happen overnight,
Speaker 1: and he has to essentially bring people with him, and
Speaker 1: he can't do anything that would be considered too abrupt
Speaker 1: because he would lose the opportunity to do the big stuff.
Speaker 1: So he's got to focus on a kind of gradualistic
Speaker 1: approach to reform. I was struck by an article on
Speaker 1: the Blueberg earlier this month where or actually it was
Speaker 1: last year, but Lawrence Fink, the head of black Rock,
Speaker 1: was talking about meeting with President McCree UH and that
Speaker 1: this convinced black Rock to be long term investors in
Speaker 1: the nation. And this struck me as particularly interesting that
Speaker 1: McCree was aligning himself with Wall Street even after what happened.
Speaker 1: How important is that to his success? Very because you know,
Speaker 1: Larry Fink is UH running, if you will, the largest
Speaker 1: money management concern UM. And Argentina needs global investors because
Speaker 1: so much of its financing is done through the liquidity
Speaker 1: that comes out of the global market. So as long
Speaker 1: as the global market is UH poised to do what
Speaker 1: Argentina needs, that's good for Argentina. It does not have
Speaker 1: at the moment anything like the financial system domestically that
Speaker 1: would enable it to do what it needs to do so.
Speaker 1: Global investors are all important in having Larry think um,
Speaker 1: cheering you on is a good thing. The government budget deficits.
Speaker 1: Did he speak at all about trying to reign in
Speaker 1: the government. His priority is to reduce what is known
Speaker 1: as the fiscal deficit um, and he is very public
Speaker 1: about that that it's an essential part of getting Argentina
Speaker 1: to be um economically and sustainably prosperous. How popular is
Speaker 1: he at this point popular enough? You know, he's not
Speaker 1: charismatic in the traditional uh peronist Argentina politician. However, having
Speaker 1: been through, if you will, so many disappointments, the people
Speaker 1: of Argentina are prepared to accept somebody who's a little
Speaker 1: bit less charismatic and more pragmatic. And that's how he
Speaker 1: has managed to be credible even after almost two years
Speaker 1: in office, where he is essentially said, I'm translating a
Speaker 1: bit um. You know, no gain without pain. Well, I'm
Speaker 1: just struck by the idea that in emerging markets we're
Speaker 1: seeing the moderates taking a more prominent role, where as
Speaker 1: in developed nations you're seeing populists. You know, you can't
Speaker 1: make this up. Um that among the top leaders in
Speaker 1: terms of respect and credibility in the world today. This
Speaker 1: man uh Macary is right at the top. I mean,
Speaker 1: and if if any of us thought about it just
Speaker 1: fifteen months ago, we just said that's that's impossible. So um,
Speaker 1: you know, this is a big surprise. Met Winkler, thank
Speaker 1: you so much for joining us. Always a pleasure to
Speaker 1: have you. Met Winkler, Editor in Chief Emeritus of Bloomberg News.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa
Speaker 1: abramowits one before the podcast. You can always catch us
Speaker 1: worldwide on Bloomberg Radio.