WEBVTT - APERS Borromeo Sees Fed on Hold, 'Data Is Not There' (Audio)

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie Pallott. Stocks are trading higher after this morning's

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<v Speaker 1>for a record right now, up twenty nine points twenty seven,

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<v Speaker 1>five thirty seconds had yield one point three six percent.

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<v Speaker 1>oil West Texas Intermediate twenty barrel again there are at

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<v Speaker 1>point one percent. I'm Charlie Tallott. That's a Bloomberg Business Flash.

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<v Speaker 1>You're listening to Taking Stot with Kathleen Days and pim

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<v Speaker 1>Box on Bloomberg Radio. How do you provide for the

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<v Speaker 1>retirement of thousands of people who are public employees? Particularly

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<v Speaker 1>in the Arkansas Public Employees Retirement system. Well, first you

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<v Speaker 1>ask Carlos Borromeo, he is the chief investment officer based

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<v Speaker 1>in Little Rock, Arkansas, how to do it? Carlos, thank

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<v Speaker 1>you very much for being with us. Well, thank you

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<v Speaker 1>for having me so in the Arkansas Public Employees retirement system,

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<v Speaker 1>you have a responsibility to all of those retirees to

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<v Speaker 1>meet those retirement benefits. How are you doing that? When

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<v Speaker 1>you look at a thirty year US Treasury bond that

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<v Speaker 1>trades at two point one per cent, it's definitely been

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<v Speaker 1>a challenge of situation and having it seems like he

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<v Speaker 1>wants to continue even lower. It's going to pose an

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<v Speaker 1>even greater challenge on all retirement systems. You know, I

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<v Speaker 1>think the people who keeps the levelhead and don't start

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<v Speaker 1>reaching for yield and unnecessary risks. Um, you've got to

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<v Speaker 1>keep your cool in this environment. Well, Carlos says that help.

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<v Speaker 1>We've no each other for a long time over the

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<v Speaker 1>years of my different news organizations and your different roles,

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<v Speaker 1>and you've been an arranging bond bull for some time.

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<v Speaker 1>You've been addicting an ever lower level of long term yields.

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<v Speaker 1>You've said that the United States was gonna look more

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<v Speaker 1>and more like Japan. I don't think we necessarily there.

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<v Speaker 1>You and I could debate that, but um, what is

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<v Speaker 1>it that has driven this position and has it helped

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<v Speaker 1>you then in your role not be blindsided by this,

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<v Speaker 1>but somehow at least be able to avoid any negative

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<v Speaker 1>fallout or take advantage of it in terms of the funds.

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<v Speaker 1>As far as avoiding it, it's it's certainly helped. I

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<v Speaker 1>think I have one of the lowest allocations in the

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<v Speaker 1>state two fixed income UM my target, and I'm still

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<v Speaker 1>sitting below that. So in that regard, it's definitely helped. Um,

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<v Speaker 1>but it's still worries me because I'm certainly overallocated to equities. UM.

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<v Speaker 1>So you're just trading one risk for another, and that's

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<v Speaker 1>that's the tricky part of sitting in this seat. Um Yeah,

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<v Speaker 1>I mean you and I have gone back and forth

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<v Speaker 1>over the years that we're looking more and more like Japan.

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<v Speaker 1>And I would argue if you you pull up the

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<v Speaker 1>j g B chart when jgbs were and running from

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<v Speaker 1>ninete to two thousand nine, so approximately twenty years. It

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<v Speaker 1>took the JGBS about twenty years to go from eight

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<v Speaker 1>so about where we are now one one and three

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<v Speaker 1>eight on a tenure note, it's taken us from two

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<v Speaker 1>thousand and sixteen, so twenty two years. So we're mirroring

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<v Speaker 1>their yield curve, whether we like it or not. Carlos,

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<v Speaker 1>the fund itself, the assets under manager, what are you

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<v Speaker 1>talking about? Maybe seven and a half seven half billion?

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<v Speaker 1>And uh, it's the funded status of the of the system. Uh,

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<v Speaker 1>something like that. Okay. Now, the reason I bring up

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<v Speaker 1>these numbers is because you know, when you manage a

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<v Speaker 1>system over a long period of time, and I think

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<v Speaker 1>it was in your own report you say that you

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<v Speaker 1>know the return for let's say two thousand and nine

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<v Speaker 1>was negative twenty to a high of plus in twenty eleven.

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<v Speaker 1>How do you manage that kind of volatility? It's not easy, right, Um,

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<v Speaker 1>if we all had a crystal ball when we look

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<v Speaker 1>at the allocation, look into the future. Um, you look

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<v Speaker 1>back and would we have allocated differently? Um? Would you

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<v Speaker 1>have allocated differently? Do you think? I mean not knowing

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<v Speaker 1>that you know what would happen, but would you have

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<v Speaker 1>made different decisions? I don't think we would have because

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<v Speaker 1>that becomes a board of trustees decision and if two eight,

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<v Speaker 1>two thousand nine didn't change how retirement systems allocate. I

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<v Speaker 1>think people are gonna, uh look at it steady as

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<v Speaker 1>she goes, be content with their allocation, and realize that

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<v Speaker 1>we're in this for a long run. Carlos. Where where

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<v Speaker 1>how much closer are we to the bottom? I mean, look,

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<v Speaker 1>we had we had a tenure note down to about

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<v Speaker 1>what was it? One point three six? The thirty year

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<v Speaker 1>bond was down to what around two point two four?

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<v Speaker 1>Maybe the lower in terms of yield higher in terms

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<v Speaker 1>of price. I mean, the lower you go, the more

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<v Speaker 1>you have to be closer to the bottom. Have we

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<v Speaker 1>had the bottom in bond yields for all the high

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<v Speaker 1>end price? Uh? And are we going to see some

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<v Speaker 1>selling or people gonna say, well, I could sell and

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<v Speaker 1>get some capital appreciation, but I want to hold onto

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<v Speaker 1>some of this fixed income. I bought it a higher yield.

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<v Speaker 1>I don't think we personally belong here, but I think

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<v Speaker 1>that people want to be in dollar denominated assets, which

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<v Speaker 1>means they'ren to come in and buy tenure notes and

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<v Speaker 1>pract push down to one down to one. Now you

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<v Speaker 1>have what about forty five thousand active members average ages

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<v Speaker 1>about forty five years. You have to project out well,

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<v Speaker 1>I would imagine on on a continuous basis to provide

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<v Speaker 1>what the monthly benefit, which is about a thousand dollars. Yes,

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<v Speaker 1>have you gotten any pushback from any of the retirees

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<v Speaker 1>saying look, I'm scared, I'm worried, I don't know what

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<v Speaker 1>to do. We haven't had any of the pushback yet,

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<v Speaker 1>but sitting in this role, I'm certainly worried. Worried that

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<v Speaker 1>about how you're going to meet the bogey, how you're

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<v Speaker 1>going to have get there enough money to pay help

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<v Speaker 1>these people receive their pensions. Is that you're absolutely and

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<v Speaker 1>you know we're hitting the baby boomer and they're starting

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<v Speaker 1>to hit the retirement period right now, and the demand

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<v Speaker 1>on benefit payments is only going to increase. So where

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<v Speaker 1>do you see the FED going? Is the FED going

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<v Speaker 1>to say stay where they are? Are they going to

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<v Speaker 1>say these these are these yields falling around the world

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<v Speaker 1>was potentially native signed. Are they going to say, hey, look,

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<v Speaker 1>the labor market is not doing so bad. You know,

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<v Speaker 1>jobs are growing about a hundred seventy thousand on average

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<v Speaker 1>for the last several months or year, getting to you know,

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<v Speaker 1>kind of rev up for the rate increase, and if

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<v Speaker 1>they do, is that is that bad because maybe it

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<v Speaker 1>hurts the equity market. Is it good because finally there's

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<v Speaker 1>a little more yield out there for people to earn. Well,

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<v Speaker 1>you're seeing the front end come up, come up in yield,

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<v Speaker 1>so you're seeing the flattening being led by the front

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<v Speaker 1>and which which is probably gonna be helpful. Um. I

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<v Speaker 1>personally think the FEDS on hold I. You and I

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<v Speaker 1>have had conversations back and forth. You know, I lost

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<v Speaker 1>the bet to you last year. I said it has

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<v Speaker 1>not raising rates at all in two thousands fifteen, and

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<v Speaker 1>they saved you in December, and then at the beginning

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<v Speaker 1>of this year, I said, the set's not raising rights

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<v Speaker 1>this year, and so far I don't think they're going to.

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<v Speaker 1>So I just think the data that's coming out, and

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<v Speaker 1>it seems like the data they're looking for is just

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<v Speaker 1>not there. Right. It seems like they wanted three things.

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<v Speaker 1>They wanted growth, they wanted employment, and they wanted inflation.

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<v Speaker 1>And I just don't know if they're gonna get all

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<v Speaker 1>three in one year. What would it take to get

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<v Speaker 1>all three in one year. I think it's beyond center banks.

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<v Speaker 1>I think it's gonna become um acts of Congress if

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<v Speaker 1>you will, what to provide more physical stimulus to the

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<v Speaker 1>economy and more pending. I just don't think secial stimius

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<v Speaker 1>is going to do it by itself. What I say,

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<v Speaker 1>it's not the FED fiscal stimulus alone isn't enough. So

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<v Speaker 1>what's it going to take? I don't have the answer

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<v Speaker 1>I wish I did. Negative interest rates? Is there any

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<v Speaker 1>chance the Fed is going to take now? Irana coach

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<v Speaker 1>Lakota's device, former head of the Minneapolis FED, take his

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<v Speaker 1>advice and uh consider tools like that. Is it going

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<v Speaker 1>to get to that? Do you think? And if so,

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<v Speaker 1>then what does it do for a guy like you

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<v Speaker 1>trying to manage public funds? You know, I don't think

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<v Speaker 1>any center banker two years ago would have said, yeah,

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<v Speaker 1>negative interest rates are certainly on the table, and our

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<v Speaker 1>own sort of reserve is saying the same thing. But

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<v Speaker 1>yet we can look at some of the countries right

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<v Speaker 1>now then they have a negative interest rates, not because

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<v Speaker 1>they want it, because that's where the market has taken it,

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<v Speaker 1>and were we may end up in the same boat

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<v Speaker 1>as far as acid allocation goes. Carlos, can you give

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<v Speaker 1>us an idea of what you may have changed. I know,

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<v Speaker 1>for example, that you've got US domestic equity securities. UH,

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<v Speaker 1>increased your allocation I guess last year about two and

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<v Speaker 1>a half percent. What what are you changing in your

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<v Speaker 1>asset allocation model? If anything? So far we haven't. But

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<v Speaker 1>with with the recent lower interest rates that we're experiencing,

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<v Speaker 1>I see we're gonna at that with discussion about it.

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<v Speaker 1>We're kind of discussion. I mean to allocate more money

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<v Speaker 1>to equities, perhaps to dividend paying equities, for alternative investments.

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<v Speaker 1>I think we'll definitely, I'm willing to look at alternatives. UM.

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<v Speaker 1>I think real assets, which I include real estate. UM.

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<v Speaker 1>I think there will be opportunities in Europe given the

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<v Speaker 1>Brexit situation for real estate. UM. So we're certainly going

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<v Speaker 1>to have to look at everything. Again. Are you at

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<v Speaker 1>all concerned about recession? It seems these you can look

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<v Speaker 1>at these latest job numbers Carlos and say, no, we're

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<v Speaker 1>gonna things may not be roaring here, but we're certainly

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<v Speaker 1>not anywhere in near recession. And yet you know, Pim

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<v Speaker 1>and I were talking earlier about the yield curve and

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<v Speaker 1>what its signal could be. The act that you once

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<v Speaker 1>jobless claims, an unemployment bottom, the only way to go

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<v Speaker 1>is usually back up. What do you see as somebody

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<v Speaker 1>from from this fixed income bond investment point of view,

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<v Speaker 1>where you've been in this perch for so long. Recession

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<v Speaker 1>is not a word that I've really worried about just yet.

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<v Speaker 1>I mean, it's certainly down down the road. Um, the numbers,

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<v Speaker 1>the job numbers itself, it seems okay, not stellar, not horrible. Um,

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<v Speaker 1>it just feels like the markets, especially the corporate bond markets,

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<v Speaker 1>the highland markets, there's more and more people coming into

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<v Speaker 1>it and they're grabbing yield, which is just a dangerous

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<v Speaker 1>thing to do. So as far as we're session, Kathleen, No,

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<v Speaker 1>I have not uttered those words yet, but could I

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<v Speaker 1>down the road? Certainly? Carlos Borrow mammo. Carl Carlos Borrow

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<v Speaker 1>Borrow mammo. He is chief investment officer at April's Arkansas

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<v Speaker 1>Public Employees Retirement System, joining us from Little Rock, Arkansas.

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<v Speaker 1>Uh makes you realize is that him and I people

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<v Speaker 1>like us. We talk about what's going on in the

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<v Speaker 1>bomb market. We ask a lot of questions. Boy, when

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<v Speaker 1>you have to be the person who puts the money

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<v Speaker 1>where the state's mouth is that's quite a job. And

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<v Speaker 1>in fact I am Kathine Hays along with Pim Fox,

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<v Speaker 1>and this is Bloomberg.