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Speaker 1: This is the Bloomberg Surveillance Podcast.

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Speaker 2: I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz.

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Speaker 2: Join us each day for insight from the best and economics, geopolitics,

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Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,

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Speaker 2: Spotify and anywhere you get your podcasts, and always on

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Speaker 2: Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App.

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Speaker 3: Laurie Cavasena joins us now at a US equity strategy

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Speaker 3: at RBC Capital Markets. Lurie, wonderful to start the week with.

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Speaker 3: You were just reading a note from Barclay's and they

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Speaker 3: said this, we don't see the tech centric rally broadening

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Speaker 3: to the rest of the s and P five hundred.

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Speaker 3: We've got bank earnings on Friday. Do you see that

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Speaker 3: rally broadening out?

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Speaker 4: Well, thanks for having me as always, and look, I

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Speaker 4: think this market wants to broaden out. We've seen the

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Speaker 4: small cap part of the market make several attempts to

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Speaker 4: fight back.

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Speaker 5: We have looked at.

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Speaker 4: Financials earning provisions as well, in particular, and we're seeing

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Speaker 4: that they're generally negative. Carecord been getting a little bit

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Speaker 4: less negative, same thing on energy.

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Speaker 5: When we look across the S and P, most sectors.

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Speaker 4: Are in recovery mode in terms of earning sentiment, which

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Speaker 4: means their rate of upward revisions has either flipped from

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Speaker 4: negative to positive or they are starting to get less negative.

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Speaker 5: So I think this is a market that has really done.

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Speaker 4: Well in the backs of the tech sector of kind

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Speaker 4: of the broader timt face so far this year for

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Speaker 4: good reasons. But I do think that, especially from the

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Speaker 4: earning's perspective, there are some healthy undercurrents going on in

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Speaker 4: other parts of the market as well.

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Speaker 1: Laurie, I'm looking over the weekend.

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Speaker 2: I thought there's a lot of really good equity zeitgeist

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Speaker 2: as we get ready for the Roulette Wheels starting Friday

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Speaker 2: with JP Morgan. And the answer I see is a

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Speaker 2: massive strategy strategist bet that's pretty darn negative. Is that

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Speaker 2: what you observe out there? There's a pretty gloomy strategist

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Speaker 2: tone forward.

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Speaker 4: I think so, And you know we've talked about this before.

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Speaker 4: My target is forty two to fifty on the S

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Speaker 4: and P. I've pointed to potential to upside the forty

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Speaker 4: four hundred and forty six hundred three of our models

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Speaker 4: are verret three of our models are bullets. The forty

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Speaker 4: two to fifty is is splitting the difference. But even

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Speaker 4: in that context, Tom and I tell people, you know,

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Speaker 4: I personally feel pretty neutral. I don't feel like the

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Speaker 4: market's been crazy. I do see the potential for someome upside,

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Speaker 4: but this is a December thirty first game, so any

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Speaker 4: incremental upside you might get some.

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Speaker 5: Profit taking all of that.

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Speaker 4: Tom, people keep telling me I'm one of the big

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Speaker 4: bulls out there on the street, and I just kind

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Speaker 4: of laugh. But I think the reality is that there's

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Speaker 4: been this view that the earnings expectations are too.

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Speaker 5: High, need to calm down the comble markets. I don't

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Speaker 5: you know. We could walk through that later.

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Speaker 4: But I think that you know interprets how stock prices, discounts,

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Speaker 4: stuff like that in advance, and did it last year.

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Speaker 4: But I also think that this is a unique moment

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Speaker 4: in history, and so if we do have a recession,

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Speaker 4: I think we were all talking about it last year.

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Speaker 4: Is technical in nature. I do think the market has

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Speaker 4: the ability to focus on the bigger picture and might

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Speaker 4: not be as damaged by that as some assume.

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Speaker 2: Give us two attributes when you screen for quality in

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Speaker 2: mid cap small cap I get it. I can screen

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Speaker 2: for quality in the world of Apple, But how do

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Speaker 2: you screen for quality in mid caps?

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Speaker 4: I think it gets supper when you get down into

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Speaker 4: the small MidCap space. One thing we talked to a

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Speaker 4: lot of clients about is healthcare and technology.

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Speaker 5: That's where a lot of your.

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Speaker 4: Loss makers are sitting in the rustle two thousands. So

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Speaker 4: if you were to screen in small caps, say on

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Speaker 4: positive negative earners, things like that, are we especially on

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Speaker 4: about positive negative earners, You're going to come away with

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Speaker 4: the idea that technology is a low quality sector, that

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Speaker 4: healthcare is a low quality sector. Sometimes, you know, we

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Speaker 4: see that. Investors are like, Okay, fine, that's just what

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Speaker 4: the data is. We like these factors over time, let's

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Speaker 4: just let that work in the filter. But right now,

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Speaker 4: there's a more nuanced discussion happening in the small cap space,

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Speaker 4: which is that if we're going to have sort of

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Speaker 4: a subpar economic recovery next year, the DDP stats and

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Speaker 4: even for twenty twenty five are both comfortably below two percent,

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Speaker 4: which is the long term trend and a subpar economic backdrop,

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Speaker 4: you want to buy growth stocks. So people are having

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Speaker 4: to look at things like tech and biotech and healthcare

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Speaker 4: and say, okay, our losses is that necessarily low quality?

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Speaker 4: Not necessarily You really have to do it more from

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Speaker 4: an art than science perspective, take into account the data,

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Speaker 4: but also taken to the long term, long term growth dynamics,

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Speaker 4: Lori out of management team.

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Speaker 5: It's something else you have to look at in small

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Speaker 5: cap as well.

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Speaker 6: Laurie, how much do you push back against people who

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Speaker 6: say that stocks are just ignoring this feeling in bonds

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Speaker 6: that perhaps we're underpricing the risk. The fit has to

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Speaker 6: go a lot further, that the real neutral rate is

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Speaker 6: significantly higher, and as you can see the real yield

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Speaker 6: go higher, you're not seeing that commensurate sell off even

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Speaker 6: in small pats. How do you rebut that?

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Speaker 4: So it's interesting, Lisa, and sort of my late June

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Speaker 4: early July conversations with US based investors, they keep asking

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Speaker 4: me about balance sheets, and I think that's really where

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Speaker 4: the interest rate discussion intersects with the ability of companies.

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Speaker 5: To manage through this higher rate environment.

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Speaker 4: And we talk to people about how I think only

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Speaker 4: two percent of SMP companies have an effected or have

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Speaker 4: an average weighted maturity of under two years and the

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Speaker 4: rustle two thousand even it's less than ten percent. So

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Speaker 4: we have a lot of other metrics we take people through. Right, so,

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Speaker 4: long term debt has risen, short term debt has come down.

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Speaker 4: What does six versus variable look like? And what we

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Speaker 4: come away with is the idea that a higher interest

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Speaker 4: rate isn't as damaging to companies and their balance sheets

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Speaker 4: and their ability to manage their cash flows now.

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Speaker 5: As it was in the past.

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Speaker 4: And I think that investors and portfolio managers who are

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Speaker 4: really deep in the weed are trying to wrap their

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Speaker 4: head around that issue. This seems to me, this higher

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Speaker 4: straight environment like another one of these like five or

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Speaker 4: six things since twenty eighteen, that's you know, a hurdle.

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Speaker 4: It's a challenge, but it's something that companies seem like

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Speaker 4: they're able to manage through so far. And that's giving

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Speaker 4: at least some of the investors I speak with some comfort.

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Speaker 6: Does that mean, Laurie that right now FED policy is

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Speaker 6: not as restrictive as people think, and that in order

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Speaker 6: to bring inflation lower to truly their goal, they have

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Speaker 6: to go significantly higher because those higher rates aren't as

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Speaker 6: damaging to some of these companies.

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Speaker 5: I think that higher for longer is still what I hear.

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Speaker 4: I will tell you pre SBB, I have evaluation model

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Speaker 4: replug in interest rates GDP, tenure yields that sort of

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Speaker 4: stuff inflation rates as well. Pre SVB, everyone wanted me

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Speaker 4: to run that model at six and seven percent and

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Speaker 4: see what kind of pestimate was spit out. I don't

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Speaker 4: get those requests anymore. We've got I think five three

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Speaker 4: five baked in the model right now, and people are

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Speaker 4: pretty content to sort of use that as a general

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Speaker 4: kind of rough bogie for the end of this year.

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Speaker 4: We've got some cuts baked in for the end of

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Speaker 4: next year. People seem pretty sanguine about that. I think

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Speaker 4: in general, investors want the inflation fight.

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Speaker 5: To be one and if you go back to the

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Speaker 5: debt ceilingly sign Awa've it.

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Speaker 4: Talked about this in quite a bit, but I think

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Speaker 4: one of the reasons why the market didn't collapse around

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Speaker 4: that is I do think the equity market was on

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Speaker 4: McCarthy's side and wanted spending to be ranked in so

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Speaker 4: ultimately infreation could be brought back down to more reasonable

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Speaker 4: kind of levels. I think that calculus at least on

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Speaker 4: the equity side of the business. I can't really speak

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Speaker 4: so much for fixed income investors, but I think a

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Speaker 4: lot of the equity pms I talked to they want

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Speaker 4: that inflation fight to be one so they're willing to

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Speaker 4: tolerate no another hiker two higher for longer.

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Speaker 3: Lorie, just the thirty second tis if you can. I've

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Speaker 3: got an article set to one side for reading later

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Speaker 3: this evening. It's Embarren's over the weekend. I saw the

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Speaker 3: headlines your name, and it said something like, it's kind

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Speaker 3: of like the nineteen forties. What's the takeaway?

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Speaker 4: So, in nineteen forty five we had a recession that

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Speaker 4: the stock market completely ignored. It was a technical recession

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Speaker 4: that occurred because of a transition from a wartime economy

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Speaker 4: to a peacetime economy. Underline economy was still okay, but

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Speaker 4: you had a massive withdrawal of government support back then

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Speaker 4: in terms of fiscal very very analogous for what we're

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Speaker 4: going through today, and a lot of the rhetoric we've

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Speaker 4: heard about recession over the past year. I think that's

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Speaker 4: one of the reasons why equity markets have been so resilient.

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Speaker 4: This underlying economy is still in pretty good shape and

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Speaker 4: people really understand.

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Speaker 5: What's happening here.

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Speaker 3: Looking forward to wadding the article a little bit later, Laurie,

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Speaker 3: thanks for famin us to kick off the training week.

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Speaker 3: LORI canvasiting there of RBC on the week ahead.

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Speaker 2: Bruce Casman, first in his class on reflation at Columbia

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Speaker 2: a few years ago, joins us. Right now, Bruce, is

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Speaker 2: a question out of the time of green Span, but

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Speaker 2: here we are. People will go OMG China deflation. Can

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Speaker 2: we import deflation? Can we import deflation from China? Or

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Speaker 2: on a global slowdown basis?

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Speaker 7: I think we can definitely import deflation and goods pricing,

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Speaker 7: and I think there is definitely a force at work

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Speaker 7: which is related to China downshifting the wand going down

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Speaker 7: and perhaps more powerfully simply the unwind of goods price

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Speaker 7: pressures in a world in which manufacturing has been contracting.

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Speaker 7: So I think goods pricing is not going to deflate,

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Speaker 7: but there's a deflationary impulse. I think the problem is

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Speaker 7: that other things are going to be blunting that downward

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Speaker 7: movement and keeping core inflation on an underlying basis probably

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Speaker 7: around three percent, perhaps a little higher in the US

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Speaker 7: and globally as well.

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Speaker 1: Are we beyond the pandemic.

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Speaker 7: I think we are hopefully by on the pandemic from

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Speaker 7: the point of view of its impact on behavior, But

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Speaker 7: there is reverberations from this which are powerful and profound.

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Speaker 7: I think what you're seeing in the US, for example,

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Speaker 7: right now, is in the employment report a moderation in

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Speaker 7: some of the post pandemic recovery sectors, leisure and hospitality

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Speaker 7: perhaps being the most notable. But I don't think that

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Speaker 7: transition and that decline and growth of jobs is a

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Speaker 7: sign of shifting from strength to weakness. I think it's

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Speaker 7: a sign of shifting from strength to more normalization. I

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Speaker 7: think it'd be a mistake to use the normal business

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Speaker 7: cycle dynamics in try to attribute that to the move

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Speaker 7: towards an early start of a US recession.

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Speaker 6: One consistent aspect of both the ADP and the Jobs

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Speaker 6: report was the strength in the wage figure that was

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Speaker 6: far beyond what the FED would like to see. And

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Speaker 6: this comes in the heels of people worried not about

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Speaker 6: the year over year comps so to do see coming

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Speaker 6: down because of rents and because of used cars and

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Speaker 6: things of that nature, but because there is this wage

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Speaker 6: pressure underlying some of this strength and some of this

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Speaker 6: ongoing inflation. How much are you factoring that into how

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Speaker 6: high real rates neutral rates truly are.

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Speaker 7: So I would be a little bit hesitant to put

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Speaker 7: a lot of weight on the swings at average hourly earnings,

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Speaker 7: which went down sharply earlier this year and have bounced

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Speaker 7: back up. But I do think wage inflation in the

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Speaker 7: US is running above four percent on an annualized basis.

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Speaker 7: That's too high to be consistent with getting inflation down

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Speaker 7: into the mid twies. I would not argue that wage

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Speaker 7: inflation is the primary driver of US inflation, though I

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Speaker 7: think there's an issue here of tight labor markets. There's

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Speaker 7: an issue here of psychology having shifted, and I think

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Speaker 7: the interaction of those things, in the absence of a

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Speaker 7: slide into recession or something like that, is just going

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Speaker 7: to blunt some of these unwines that are happening here,

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Speaker 7: and we shouldn't ignore that as well. Running inflation at

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Speaker 7: the core five percent this year, I think we're going

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Speaker 7: to slide below four, but I don't think we're going

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Speaker 7: to slide on a sustained basis below three.

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Speaker 6: How long is it going to take to get there?

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Speaker 6: Below three.

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Speaker 7: I think it's going to take a recession to get there.

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Speaker 7: I think you have to hit pricing power pretty hard.

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Speaker 7: I think it's a mistake to think that the primary

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Speaker 7: thing you need to do is create unemployment. What you

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Speaker 7: need to do is hit pricing power. Unfortunately, when you

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Speaker 7: do that, you change labor market behavior and the unemployment

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Speaker 7: rate will go up alongside it.

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Speaker 6: A rates restrictive enough right now where they are to

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Speaker 6: induce some sort of recession.

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Speaker 7: I don't know, it might be. I don't think the

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Speaker 7: Fed's going to wait around, though, and I think in

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Speaker 7: our forecast of the Fed boiling the frog, they don't wait.

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Speaker 7: They continue leaning against this. They tighten again in July

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Speaker 7: and possibly more later this year, and by time they're done,

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Speaker 7: rates will be high enough with a lag to create

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Speaker 7: a recession, probably sometime in twenty four.

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Speaker 2: Is your study, doctor Casmin that the modern FED will

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Speaker 2: react to higher interest rates?

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Speaker 3: Do they?

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Speaker 1: Actually?

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Speaker 2: You know, if we breach through and we start talking

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Speaker 2: a six percent level for early ages, whatever it is,

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Speaker 2: if we get a higher interrast rate structure, does a

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Speaker 2: central bank respond well?

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Speaker 7: I think when you look at the move up in

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Speaker 7: ten year olds we've been seeing in the last month

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Speaker 7: or eight weeks. I think some of that is a

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Speaker 7: tightening in financial conditions as we reprice the FED, but

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Speaker 7: some of it is also taking out recession risk, and

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Speaker 7: you can see more broadly financial conditions moving up, and

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Speaker 7: I think in that environment it's very hard for the

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Speaker 7: FED to look at that and say, Okay, this is

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Speaker 7: lags in the monetary transmission mechanism and we can be

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Speaker 7: patient against that backdrop. So I think the FED is,

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Speaker 7: as you can see, struggling to figure out where is

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Speaker 7: the right degree of restrictiveness in this economy. It's probably

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Speaker 7: going to be moving too much, at least in the

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Speaker 7: context of trying to preserve an expansion because of the

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Speaker 7: inflation news, and that's eventually going to take us down.

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Speaker 7: I think it's just really hard right now to get

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Speaker 7: the timing and to be too cute about the level

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Speaker 7: of race that's going to end this cycle that's dead on.

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Speaker 2: And I thought about this over the weekend, Bruce, Are

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Speaker 2: we asking too much of our central banks? By definition

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Speaker 2: they don't get the timing right. I think this is

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Speaker 2: this absurdity that they're going to nail. Plus our mind

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Speaker 2: has fourteen days a turn in the macro climate is absurd.

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Speaker 7: Well, I think we're in a really difficult macro environment

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Speaker 7: in terms of getting right the inflation dynamics, the appropriate

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Speaker 7: level of what rates are. But I think the fundamentals

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Speaker 7: here are relatively straightforward. This economy is resilient, it has

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Speaker 7: elevated inflation, and I think the chances of delivering a

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Speaker 7: soft landing here are pretty small. So there's every reason

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Speaker 7: for the FED to try to calibrate and try to

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Speaker 7: deliver that kind of outcome. But ultimately I don't think

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Speaker 7: it's going to be successful, And ultimately I do think

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Speaker 7: we're going to need a recession. It's a question of

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Speaker 7: getting the timing right, getting the rate path right, which

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Speaker 7: I think everybody should realize is hard. People are put

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Speaker 7: forecasting recessions starting this quarter. People have been very confident

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Speaker 7: about forecasting recession. Forecasting a break in the economy like

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Speaker 7: that is just not that easy to do. There's also

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Speaker 7: a question to understand that.

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Speaker 6: There's also a question, Bruce, about what the trigger could

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Speaker 6: be of some sort of recession. And I was thinking

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Speaker 6: a lot about geopolitics over the weekend with Yellen in China.

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Speaker 6: How closely are you watching the price of rare metals

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Speaker 6: of some of these sort of tit for tat focused

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Speaker 6: areas of chips and the instruments the commodity is required

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Speaker 6: to supply said chips.

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Speaker 7: I think it's very unlikely that that dynamics specifically will

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Speaker 7: be the catalyst for recession. But I think your point

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Speaker 7: is really important, which is, recessions are about the FED.

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Speaker 7: Recessions are about the vulnerabilities of the US private sector,

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Speaker 7: and recessions are about shocks. Oftentimes those shocks are in

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Speaker 7: the commodity space and energy specifically, And I think it's

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Speaker 7: quite reasonable to say that the next session will not

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Speaker 7: only be about the FED hiking rates, but it'll be

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Speaker 7: about some shock that hits us Again. Shocks are not

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Speaker 7: easy to anticipate, both in terms of when they hit

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Speaker 7: and exactly where they hit.

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Speaker 6: How do you measure the vulnerability then of a financial

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Speaker 6: system to a potential shock, because that really is the

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Speaker 6: key to how deep the recession may be.

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Speaker 7: So I think vulnerability is broad. It's vulnerability in the

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Speaker 7: financial sector, and as we well know, we've got banking

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Speaker 7: sector stress and credit tightening that's going on. We're not

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Speaker 7: seeing that spill over to the broader financial space and

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Speaker 7: I think that's important. But vulnerability is also about where

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Speaker 7: the private sector is, and this is one of the

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Speaker 7: reverberations of the pandemic is how healthy the US and

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Speaker 7: global private sector is, both on the household and business

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Speaker 7: sector side. That doesn't mean they're going to be a

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Speaker 7: strong engine for growth, but I think they're going to

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Speaker 7: be our buffers against the potential for a break, at

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Speaker 7: least for the near term.

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Speaker 3: Bruce Love catching up with you, sir. Good to hear

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Speaker 3: from you as always, Broce Casman of JP Morgan now

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Speaker 3: Alifia Dorojuana the manage director Rock Creek Groof and if

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Speaker 3: you're wonderful to catch up with you. Big rally year. Today,

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Speaker 3: we've talked to a couple of people about whether they

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Speaker 3: think it continues, can it broaden out? I was looking

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Speaker 3: at your notes and you are saying remain overweight US,

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Speaker 3: underweight em short term positive view on Europe. Let's start

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Speaker 3: with the US and break it down that way. Why

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Speaker 3: remain overweight the US after big games already this year?

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Speaker 8: Yeah, Look, I think investors have been investing, as you mentioned,

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Speaker 8: in a new regime from the last ten years. Right,

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Speaker 8: we're in the higher rates, higher inflation, for longer. But

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Speaker 8: if you look at equity markets, while we're cautious on

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Speaker 8: equities in general after a very strong first half, what's

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Speaker 8: going to break the equity markets? You know? I think

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Speaker 8: consumer spending is something that we're looking at very closely

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Speaker 8: to see if that's what break equity breaks equity markets.

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Speaker 8: But I think we also have to remember that within

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Speaker 8: the equity markets, the bull market this year has been

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Speaker 8: driven by eight mega cap stocks. It's more than seventy

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Speaker 8: percent greater cumulative return in the top eight stocks versus

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Speaker 8: the rest of the Russell two thousand year to date

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Speaker 8: seems immune to that action.

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Speaker 5: When does the party stop?

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Speaker 2: Alifia, I want you to take a long term view.

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Speaker 1: Let's be honest.

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Speaker 2: If your leader, Miss Beschloss went to Marrakesh in the

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Speaker 2: IMF meeting, people would just simply stop to know her

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Speaker 2: opinion on the linkage of the global economy and hydrocarbons.

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Speaker 2: When you guys look out to a three to five

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Speaker 2: year look, do you have the gloom of the IMF?

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Speaker 2: Do you share their view of tepid global growth?

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Speaker 8: I think growth is going to happen in particular niche

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Speaker 8: sectors and areas, So we are investing quite a bit

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Speaker 8: right now. In alternatives, it continues to be very interesting.

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Speaker 8: Investors can take advantage of those secular long term trends

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Speaker 8: US Europe emerging markets. You see tailwinds from the IRA

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Speaker 8: and climate infrastructure projects. You see huge innovation in AI.

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Speaker 8: You see things happening in agriculture, technology, healthcare, data centers,

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Speaker 8: as you mentioned, companies producing renewable fuels for rails, terminals, livestock.

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Speaker 8: There are so many interesting investment opportunities today, but they

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Speaker 8: are not going to necessarily make you money in the

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Speaker 8: next three months.

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Speaker 6: How do you sort of navigate the idea of being

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Speaker 6: less positive over the next three months, but very positive,

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Speaker 6: particularly about the US over the longer term. How do

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Speaker 6: you tell and communicate that message to investors who are

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Speaker 6: not looking to day trade.

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Speaker 8: You know, we manage very institutional portfolios for endowments and foundations,

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Speaker 8: and they are long term investors. They want their endowment

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Speaker 8: to be there for the next fifty hundred years so

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Speaker 8: they can continue doing the good work that they do,

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Speaker 8: and so diversification in an institutional portfolio is key, especially

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Speaker 8: in this type of uncertain environment. Think about it, just

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Speaker 8: in the public equities market. If you had taken a

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Speaker 8: very singular view of small cap stocks, you would be

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Speaker 8: missing out entirely on the first half of this year's rally.

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Speaker 8: So you have to be diversified, we think, but you

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Speaker 8: also have to look long term and start to plant

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Speaker 8: the seeds now for those areas that are going to

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Speaker 8: really be your biggest return drivers in ten years.

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Speaker 6: It feels like diversification is changing the meaning of it,

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Speaker 6: and the people who we talk to used to be

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Speaker 6: in stocks and bonds, and now it means private credit,

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Speaker 6: private debt, some other private equity, other aspects real estate

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Speaker 6: that really are coming to the fore becoming more mainstream

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Speaker 6: and have been over the past couple of decades. But

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Speaker 6: from your vantage point, how has the idea of diversification shifted?

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Speaker 8: You know, that's a great question. And again the flip

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Speaker 8: side is that there's a lot of money chasing some

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Speaker 8: of those opportunities that you set as well, right, So

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Speaker 8: you know, I wouldn't say that we want to just

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Speaker 8: run into diversification for the sake of diversification, but it

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Speaker 8: has changed because in any particular period of time over

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Speaker 8: the last ten, fifteen, twenty years, you've seen one of

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Speaker 8: those asset classes really be able to drive returns in

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Speaker 8: your portfolio even today fixed income, right, there's a spread

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Speaker 8: between shorter term and longer term bonds about one to

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Speaker 8: one and a half percent. Maybe you can do something

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Speaker 8: there eke out a little return and fixed income even today.

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Speaker 8: So diversification means something different today because I think that

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Speaker 8: if you don't have allocations cross different asset classes, you

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Speaker 8: will end up getting in a hole in a certain

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Speaker 8: period of time during the market, and then it's very

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Speaker 8: difficult to climb back out. And again we're looking longer term.

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Speaker 8: We want our endowments to be there in ten, fifteen,

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Speaker 8: twenty years.

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Speaker 3: Well, let's talk about something longer term. Just finally, the

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Speaker 3: geographic diversification Japan. Japan's getting it done yet today tough week,

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Speaker 3: more recently over the last five sessions or so. But Ifia,

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Speaker 3: where are you on that country? We're hearing a lot

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Speaker 3: of people say they're starting to get interested.

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Speaker 8: You know. Japan's funny. I think over the last twenty

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Speaker 8: years that we've been investing, there's been fits and starts

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Speaker 8: in Japan, And the question is can Japan really start

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Speaker 8: to change their economy, change the demographics, and really get

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Speaker 8: out of the disinflationary environment that they have had over

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Speaker 8: the last ten years. If they can do all of that,

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Speaker 8: then there's a chance for Japan to continue on this path.

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Speaker 8: But I think it remains to be on you know,

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Speaker 8: it remains I think a question on whether they can

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Speaker 8: actually get those things done. And in the meantime, it

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Speaker 8: is a stock pickers market, probably more so in Japan

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Speaker 8: than in the US emerging markets today. If you look

439
00:21:01,640 --> 00:21:04,200
Speaker 8: at the dispersion, for example, in the US equity markets,

440
00:21:04,720 --> 00:21:06,960
Speaker 8: there's more dispersion on a single stock level in the

441
00:21:07,000 --> 00:21:09,960
Speaker 8: Japanese market today. So from a stock piggers market, it's

442
00:21:09,960 --> 00:21:12,000
Speaker 8: great right now. I think longer term we're going to

443
00:21:12,080 --> 00:21:14,720
Speaker 8: have to see whether there's some fundamental changes in the economy.

444
00:21:14,840 --> 00:21:17,520
Speaker 3: Nick Kay, Yeah, today of twenty three percent, it's not

445
00:21:17,560 --> 00:21:19,920
Speaker 3: bad of Reck Craik.

446
00:21:30,200 --> 00:21:32,119
Speaker 2: The calendar of the xaxis and what we're going to

447
00:21:32,200 --> 00:21:35,879
Speaker 2: do about it. Seriously about price of bonds. Gnnededi Goldberg

448
00:21:36,160 --> 00:21:39,879
Speaker 2: joins head of US rights Strategy at TED Securities. Gonnedy

449
00:21:39,920 --> 00:21:41,960
Speaker 2: I want to go to the outcome of this, which

450
00:21:42,000 --> 00:21:47,320
Speaker 2: is TED Securities reaffirms with a vengeance curve inversion, and

451
00:21:47,359 --> 00:21:50,879
Speaker 2: we could even get out to a steeper curve in

452
00:21:51,000 --> 00:21:54,840
Speaker 2: version down the road. What is the process that gets

453
00:21:54,880 --> 00:21:56,919
Speaker 2: us to a deeper inversion?

454
00:21:58,359 --> 00:22:01,440
Speaker 9: Thanks for having me well, I do think that front

455
00:22:01,520 --> 00:22:04,280
Speaker 9: end rates remaining quite elevated for a while is what's

456
00:22:04,320 --> 00:22:06,639
Speaker 9: going to get us there. I wouldn't be surprised to

457
00:22:06,680 --> 00:22:08,560
Speaker 9: see it. It's been one of the most painful trades

458
00:22:09,200 --> 00:22:11,560
Speaker 9: this year. I can't tell you the number of clients

459
00:22:11,560 --> 00:22:14,199
Speaker 9: who have tried to enter a curve steepeners here and

460
00:22:14,280 --> 00:22:16,399
Speaker 9: actually haven't been able to hold onto that trade just

461
00:22:16,400 --> 00:22:19,880
Speaker 9: because they're very expensive. From a carrion role perspective. What

462
00:22:19,920 --> 00:22:21,760
Speaker 9: you can see is the front end of the curve

463
00:22:21,880 --> 00:22:24,760
Speaker 9: continuing to actually move a little bit higher as the

464
00:22:24,800 --> 00:22:28,399
Speaker 9: market has capitulated to the FEDS view of slightly higher

465
00:22:28,400 --> 00:22:31,960
Speaker 9: for slightly longer. And that's very painful for the two

466
00:22:32,000 --> 00:22:34,040
Speaker 9: to five year part of the curve. That's going to

467
00:22:34,119 --> 00:22:36,959
Speaker 9: keep pushing up two to five year rates and in

468
00:22:37,040 --> 00:22:39,960
Speaker 9: my mind, could keep the curve actually very very deeply

469
00:22:39,960 --> 00:22:42,800
Speaker 9: inverted for at least the next couple of months. And

470
00:22:42,840 --> 00:22:45,480
Speaker 9: I can tell you know, the steepening typically starts about

471
00:22:45,480 --> 00:22:48,040
Speaker 9: three to six months before the first cut, at least

472
00:22:48,040 --> 00:22:51,199
Speaker 9: that's what our research shows market right now is pricing

473
00:22:51,200 --> 00:22:53,800
Speaker 9: in a cut. Actually, even after US we've got ours

474
00:22:54,080 --> 00:22:56,400
Speaker 9: our first cut penciled in for March of twenty twenty four,

475
00:22:56,880 --> 00:22:59,000
Speaker 9: the markets all the way in May of twenty twenty four,

476
00:22:59,040 --> 00:23:00,800
Speaker 9: they're not looking for a cut anytime soon.

477
00:23:01,160 --> 00:23:04,280
Speaker 6: Gnati, is that including some sort of trauma to the

478
00:23:04,280 --> 00:23:07,520
Speaker 6: financial system? Are you basically plotting in this idea that

479
00:23:07,560 --> 00:23:11,480
Speaker 6: there's going to be some catalyst to that downturn that's

480
00:23:11,480 --> 00:23:13,080
Speaker 6: going to prompt the cuts, And that's sort of the

481
00:23:13,119 --> 00:23:16,159
Speaker 6: reason why you expect the deeper and sooner cuts than

482
00:23:16,160 --> 00:23:16,600
Speaker 6: the West of.

483
00:23:16,600 --> 00:23:21,720
Speaker 9: Wall Street correct. Typically, you do have higher rates acting

484
00:23:21,880 --> 00:23:25,159
Speaker 9: in some unexpected way. We saw that back in March

485
00:23:25,240 --> 00:23:29,480
Speaker 9: with the SVB crisis. I wouldn't be surprised to see

486
00:23:29,480 --> 00:23:31,680
Speaker 9: more tremors in the months ahead. I don't think the

487
00:23:31,720 --> 00:23:35,399
Speaker 9: market is looking ahead and realizing that higher rates a

488
00:23:35,520 --> 00:23:38,520
Speaker 9: real high cost of cash, you know, five percent is

489
00:23:38,560 --> 00:23:42,040
Speaker 9: not exactly cheap at this point. That tends to put

490
00:23:42,040 --> 00:23:45,480
Speaker 9: some downward pressure on the growth momentum that could actually

491
00:23:45,520 --> 00:23:48,480
Speaker 9: push the US economy into recession over time. I do

492
00:23:48,560 --> 00:23:51,480
Speaker 9: think people underestimate how much that can create shocks in

493
00:23:51,520 --> 00:23:54,399
Speaker 9: the economy over the course of the coming year. I

494
00:23:54,400 --> 00:23:56,960
Speaker 9: don't think we're quite pricing that in just yet.

495
00:23:57,119 --> 00:23:59,359
Speaker 6: Let's say we don't get any shocks, Gannadi. Let's say

496
00:23:59,400 --> 00:24:03,280
Speaker 6: that they is truly more resilient to higher rates than

497
00:24:03,320 --> 00:24:06,760
Speaker 6: anyone previously imagined, and that companies continue to, as Tom

498
00:24:06,800 --> 00:24:10,120
Speaker 6: would say, adapt and adjust. Then how high should rates

499
00:24:10,200 --> 00:24:12,760
Speaker 6: go and how high should they stay for a longer

500
00:24:12,760 --> 00:24:13,480
Speaker 6: period of time?

501
00:24:14,280 --> 00:24:16,000
Speaker 9: Well, I think what you're describing right now is the

502
00:24:16,080 --> 00:24:19,439
Speaker 9: nightmare scenario for the FED. You know, they think that

503
00:24:19,520 --> 00:24:23,120
Speaker 9: they're right near the terminal rate. They're actually dancing around

504
00:24:23,640 --> 00:24:27,359
Speaker 9: where exactly they want to dial into on the terminal

505
00:24:27,359 --> 00:24:31,280
Speaker 9: funds rate. If you know, inflation continues to rage, if

506
00:24:31,480 --> 00:24:35,600
Speaker 9: there's no real impact on the economy, higher much higher

507
00:24:35,680 --> 00:24:37,840
Speaker 9: at that point, and that would be very, very scary.

508
00:24:37,880 --> 00:24:40,919
Speaker 9: And honestly, the higher you push rates like that, the

509
00:24:40,960 --> 00:24:44,000
Speaker 9: more likely you want to get downside shocks to the economy,

510
00:24:44,000 --> 00:24:47,440
Speaker 9: to the financial system. You know, something the on par

511
00:24:47,560 --> 00:24:49,920
Speaker 9: with what we saw with SVB good on if people like.

512
00:24:49,880 --> 00:24:53,800
Speaker 2: You talk about the economic consequences of price down yield up.

513
00:24:53,840 --> 00:24:57,399
Speaker 2: I mentioned the Bloomberg Total Return and Aggregate Index here earlier.

514
00:24:57,560 --> 00:25:00,560
Speaker 2: It hasn't breached through to new price lows. But nevertheless

515
00:25:00,560 --> 00:25:03,920
Speaker 2: it's on the cusp. If we get bonds to go

516
00:25:04,080 --> 00:25:08,000
Speaker 2: down in price up and yield on an aggregate, do

517
00:25:08,119 --> 00:25:12,719
Speaker 2: we get gamma. Do they have an accelerative behavioral tendency

518
00:25:12,920 --> 00:25:15,280
Speaker 2: like equities where it picks up steam.

519
00:25:16,640 --> 00:25:20,000
Speaker 9: Well, you saw that back last year, where investors are

520
00:25:20,000 --> 00:25:22,159
Speaker 9: looking at their bond portfolio and saying, well, what is this.

521
00:25:22,400 --> 00:25:25,040
Speaker 9: I thought that these bonds are safe, you know, I

522
00:25:25,040 --> 00:25:27,119
Speaker 9: don't think they were supposed to lose value, and they

523
00:25:27,119 --> 00:25:30,879
Speaker 9: were down a very substantial at some point last year,

524
00:25:30,880 --> 00:25:34,280
Speaker 9: they were down quite substantially. If that happens again this year,

525
00:25:34,359 --> 00:25:38,520
Speaker 9: certainly you can have investors actually selling out interestingly enough.

526
00:25:38,680 --> 00:25:40,840
Speaker 9: The rates are now attractive enough where a lot of

527
00:25:40,840 --> 00:25:43,440
Speaker 9: investors who are you know, really looking at the bond

528
00:25:43,480 --> 00:25:46,160
Speaker 9: market and saying, you know, these yields are quite attractive,

529
00:25:46,200 --> 00:25:47,680
Speaker 9: even if they back up a little bit more, Even

530
00:25:47,720 --> 00:25:49,760
Speaker 9: if I'm down a little bit on my Barbin portfolio,

531
00:25:49,920 --> 00:25:52,119
Speaker 9: I'm looking ahead to the next one year or two years.

532
00:25:52,400 --> 00:25:54,719
Speaker 9: And that's why actually this year, despite the fact that

533
00:25:54,800 --> 00:25:57,080
Speaker 9: the aggregate index hasn't done much, you've seen tons and

534
00:25:57,119 --> 00:25:59,000
Speaker 9: tons of inflows. You've seen over one hundred and twenty

535
00:25:59,040 --> 00:26:03,400
Speaker 9: billion dollars flowing into the fixed income space overall, and

536
00:26:03,440 --> 00:26:06,080
Speaker 9: really not a lot of outflows. So I don't know

537
00:26:06,119 --> 00:26:09,000
Speaker 9: if there's necessarily that kind of moment that happens with

538
00:26:09,040 --> 00:26:10,000
Speaker 9: fixed income this year.

539
00:26:10,440 --> 00:26:14,040
Speaker 1: Good Nattie, I just find it fascinating. What's your ten

540
00:26:14,080 --> 00:26:16,800
Speaker 1: yere yield call? Quickly? Here, what's a ten year yield call?

541
00:26:17,640 --> 00:26:20,520
Speaker 9: Well, as we're heading into the end of the year,

542
00:26:20,720 --> 00:26:22,640
Speaker 9: we do think things start to slow down. The consumer

543
00:26:22,680 --> 00:26:24,680
Speaker 9: starts to slow, labor markets are to slow. So we're

544
00:26:24,720 --> 00:26:26,639
Speaker 9: looking for three and a quarter on tenure rates by

545
00:26:26,640 --> 00:26:27,240
Speaker 9: the end of the year.

546
00:26:27,880 --> 00:26:30,119
Speaker 3: Gotta do appreciate it. Got to go back that of

547
00:26:30,200 --> 00:26:31,360
Speaker 3: Ted Securities.

548
00:26:31,920 --> 00:26:35,760
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