Speaker 1: Welcome to the Bloomberg Surveillance podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Someone
Speaker 1: who is always fold of history into our analysis is
Speaker 1: liz Anne Saunders. She is at Charles Schwab and she
Speaker 1: has been a foundation voice on belief in the stock
Speaker 1: market for decades. We're thrilled to get an update from
Speaker 1: miss Saunders this morning. Liz Ane, I've got to go
Speaker 1: to the money question always with you, which is what
Speaker 1: do you observe at Schwab of what people are doing
Speaker 1: with their money? Are they in this bullmarket? So, if
Speaker 1: you from a fun flow perspective, consistent with with broad aggregates,
Speaker 1: you've seen money actually coming out of equities in the
Speaker 1: last several months more into fixed income more recently in
Speaker 1: the last couple of weeks. Where you have seen aggressiveness
Speaker 1: in terms of flows is in the e t s,
Speaker 1: particularly the q q q s, which is the Nasdaq
Speaker 1: one hundred inflows and then the Russell two thousand, the
Speaker 1: i w N outflows that's really where we're seeing some
Speaker 1: aggressive action. But what we have seen in general is
Speaker 1: not consistent with what some of the headlines have been
Speaker 1: around some of the newly minted smaller day traders, where
Speaker 1: in that coort you have seen some really rampant speculation,
Speaker 1: but broadly among our investors, that's not what we've been seeing.
Speaker 1: I mean, this is interesting folks in the cubes, folks
Speaker 1: of the nastac one D of course of proxy for Apple, Amazon,
Speaker 1: Facebook and the rest of them as well. Luis Ane,
Speaker 1: can you predict a catalyst or event that will finally
Speaker 1: give us a tangible shift from cubes over to Russell
Speaker 1: two thousand? What's going to make that happen? I can't
Speaker 1: predict anything. Uh. You know, you've seen the Russell have
Speaker 1: bouts of relative out performance over the last couple of months.
Speaker 1: You know they're they're trying to develop that out performance.
Speaker 1: I think we would have to see station in sort
Speaker 1: of the financial system, a real sense that we're back
Speaker 1: in recovery mode because a fundamental differential between small caps
Speaker 1: in the aggregate and large caps it's still fairly wide
Speaker 1: when you look at debt to equity ratios, when you
Speaker 1: look at the percentage of the russell that are so
Speaker 1: called zombie companies. When you look at the percentage of
Speaker 1: the russell that are not profitable and likely won't be
Speaker 1: for an extended period of time, versus the larger CAP indexes,
Speaker 1: there's really no comparison. But if we really start to
Speaker 1: see the recovery kick into gear, that tends to bring
Speaker 1: a bias down the CAP spectrum. So one month of
Speaker 1: of good data I think doesn't suggest a v rebound.
Speaker 1: I think we'd have to see a few months of
Speaker 1: it to believe that the recovery is sustainable such that
Speaker 1: everybody can participate. Lazan, this is a huge debate the
Speaker 1: ingredients needed for durable roatation into the most cyclical areas
Speaker 1: of this market. You have any confidence that this V
Speaker 1: this bounce that we witness of off the bottom as
Speaker 1: we re output and can continue, Oh I don't. I
Speaker 1: don't think to the extent of the percentage increases off
Speaker 1: the bottom we saw are able to persist. Absolutely not.
Speaker 1: I think mathematically it just doesn't work that way. That
Speaker 1: the law of small numbers is such you can press
Speaker 1: the data to such a significant degree, it's very natural
Speaker 1: that the bounce back in percentage terms is going to
Speaker 1: be massive, but you can't extrapolate that into the future.
Speaker 1: And that's why I think what we're more likely to
Speaker 1: see is rolling ws. So you get the shot up
Speaker 1: initially and then you back down a little bit. And
Speaker 1: the second order economic effects are not just specific to
Speaker 1: second waves. If you can even consider the first wave
Speaker 1: over of the virus, there are second wave economic effects
Speaker 1: that are coming down the pike regardless of whether we
Speaker 1: see additional increased cases in the virus, temporary layoffs becoming
Speaker 1: permanent job losses, what we're seeing in the bankruptcy environment.
Speaker 1: So I just think there's going to be a pretty
Speaker 1: choppy recovery even absent the implications of the virus and LISIA.
Speaker 1: That means that tech remains the safe haven play here.
Speaker 1: I'm wondering, though, how much the recent regulatory pressures could
Speaker 1: threaten that. Given the Facebook voycott among advertisers, we know
Speaker 1: Facebook is meeting with some of them today. This idea
Speaker 1: that that could actually accelerate some of the pressure coming
Speaker 1: from Washington, d C. How much are you watching this? Well?
Speaker 1: You know this, This risk about regulatory pressure is not
Speaker 1: a new one. This is not really an election cycle risk.
Speaker 1: This has been ongoing for a couple of years now,
Speaker 1: so clearly it has not prevented many of those names
Speaker 1: from doing well. I think as you get close to
Speaker 1: the election, depending on how far up the priority spectrum
Speaker 1: you see it on either candidate, then I think it
Speaker 1: becomes an issue. But with most issues have become election
Speaker 1: platform issues, they don't tend to really start to impact
Speaker 1: stocks until around Labor Day or post labor day environment,
Speaker 1: so I'd be more focused on the messaging around regulator
Speaker 1: environment and of course the ability to do something depending
Speaker 1: on the divisions in Congress as a post labor day phenomenon. Luzanne,
Speaker 1: I think a lot of people in the market would
Speaker 1: agree with you that the regulatory train moves very slowly,
Speaker 1: if at all. On the other hand, how much are
Speaker 1: these boycotts just an excuse for big companies to cut
Speaker 1: their advertising budgets in a highly uncertain environment. That's going
Speaker 1: to affect the Googles, the facebooks, the Twitters of the
Speaker 1: world regardless of policy. Oh, I think companies across the
Speaker 1: spectrum of industries are probably looking for some sort of
Speaker 1: margin edge in this very difficult environment. So you know,
Speaker 1: I don't coverage, you know, at least I don't cover
Speaker 1: individual companies, so I'm not I'm not down in the
Speaker 1: weeds with these companies, but it's not surprising to see
Speaker 1: an attempt at at raining in the cost side of
Speaker 1: the equation in this environment. Luzanne, you were just on
Speaker 1: a Delaware or maybe starting at Delaware when there was
Speaker 1: a modest moment the crash of rucks are on a
Speaker 1: Friday night, Mr Rukaiser, on a Friday night, had Sir
Speaker 1: John Tom Pilton and a few other third were these
Speaker 1: Robert Kirby a capitol group out to comblin nation down
Speaker 1: right now on Global Wall Street? We need to comb
Speaker 1: the nation? Is our new lu Rue Kaiser? Jerome Powell?
Speaker 1: Is he the one doing the calming of the nation
Speaker 1: and the financial markets? Um, maybe without the humorous equips
Speaker 1: that we all remember lou four and I certainly won't
Speaker 1: forget that, particularly the Friday night before seven, where you
Speaker 1: know my boss at the time, the late Great Marty's Way,
Speaker 1: came on and actually predicted the crash that was to
Speaker 1: come three days later, And little did I know how
Speaker 1: difficult that was to do. But I do think I
Speaker 1: think Powell is doing a very good job. He's also
Speaker 1: learned to sort of stay on message a little bit
Speaker 1: more um than maybe in the past half ago tripped
Speaker 1: him up a little bit. But what I think the
Speaker 1: most important message Powell has been imparting is not about
Speaker 1: you know, we will be here or there is this
Speaker 1: isn't a certain period of time, but we've got the ammunition.
Speaker 1: We're not going to run run out of ammunition. I
Speaker 1: think the most important messaging has been well too or
Speaker 1: two of them. One. Some of these tools will go
Speaker 1: back in the toolbox when it's appropriate that this is
Speaker 1: not adam finitum in terms of these new facilities. But
Speaker 1: also he has repeatedly emphasized that there's a difference in
Speaker 1: the fed's mind and should be an investors minds, between
Speaker 1: financial system stability, of which the FED is a big part,
Speaker 1: and financial market volatility. So I think he's trying to
Speaker 1: get the message that volatility in the financial markets in
Speaker 1: and of itself shouldn't trigger FED action unless it becomes
Speaker 1: a risk to the financial system. More broadly, so, that
Speaker 1: to me is the most resident message that he has
Speaker 1: been putting out there, not just in this recent period
Speaker 1: but over the lapt past year. Lasan Love catching Lsan
Speaker 1: sounds a child schwab. You're mid year trying to adjust
Speaker 1: an adapt at all. He's helped talked to one of
Speaker 1: the major bankers of Global Wall Street. We did that
Speaker 1: this morning, for instance, and myself here's our conversation, the
Speaker 1: highlights of it. But just stately of Berkeley's, I think
Speaker 1: there is a sort of gathering storm out there. I
Speaker 1: mean the furlough program, uh, you know, being fund the
Speaker 1: State's quite amazing to watch and how significant the program
Speaker 1: is in the UK and how that has buffered the
Speaker 1: impact of this incredible uh medical crisis. Um. But the
Speaker 1: government has been very strong in terms of you know,
Speaker 1: putting small business loans out guaranteed by the government. We
Speaker 1: ourselves have done over two hundred thousand small business loans
Speaker 1: in the last couple of weeks, about six and a
Speaker 1: half billion pounds UM, all the way to major commercial
Speaker 1: paper programs being bought by Her Majesty's Treasuries and we've
Speaker 1: done over ten billion pounds of that type of of
Speaker 1: lending as as well. So the the reaction has been
Speaker 1: quite strong, and what that has enabled us to do is,
Speaker 1: you know, stay focused on the financial and tech the
Speaker 1: Barkley Barkley is being a very strong, highly capitalized bank
Speaker 1: UH is critical if we're gonna play our role in
Speaker 1: helping the UK and the world recover from this up
Speaker 1: this virus. We were fortunate France scene. We walked in
Speaker 1: with the highest level of capitalization in the history of
Speaker 1: Barkley's thirteen point eight percent capital to a risk, wedded assets,
Speaker 1: very liquid. So I think we had the strength of
Speaker 1: a very strong balance sheet and a profitable underlying business
Speaker 1: that hopefully we can be a you know, a firewall
Speaker 1: as we try to get through this economic crisis. Jes
Speaker 1: if you look at the deterioration deterioration of the UK economy,
Speaker 1: is it actually worse than expected? And again, what does
Speaker 1: that mean for your client activity? I think right now
Speaker 1: the contraction in the economy is probably less than we
Speaker 1: would have expected or anticipated a month or a month
Speaker 1: and a half ago. Spin has started to recover. It's
Speaker 1: not down nearly as much as it was a couple
Speaker 1: of months ago. Um, you know, aided by the government
Speaker 1: programs A to buy the furlough programs. As you said,
Speaker 1: I do think there's a little bit of storm gathering
Speaker 1: once you know, we have ninety thousand mortgage payment holidays
Speaker 1: out there, and we've given payment holidays to our credit
Speaker 1: card holders. You've got the furlough program. A lot of
Speaker 1: that is going to start to end as we come
Speaker 1: into the end of June and July in August, and
Speaker 1: it will be interested to see, um uh, what happens
Speaker 1: to unemployment at that point in time, what happens with
Speaker 1: the furlow program. So we're clearing on out of the
Speaker 1: woods yet. I think we've recovered more right now than
Speaker 1: we would have fought a little bit ago. But there
Speaker 1: is that second storm coming uh in a couple of
Speaker 1: months ago. Heirston Young is really under the gun here.
Speaker 1: There's clearly a massive missed audit at wire Card as well.
Speaker 1: I want you to speak for the rigor of auditing
Speaker 1: at Barclay's. Do you feel there's any mysteries on your
Speaker 1: book in relation to wire Card? Do you think the
Speaker 1: auditing is tight enough just on simple things like what's
Speaker 1: an X number of banks? Yeah? I know we started
Speaker 1: taking a cost this approach to work hard quite some
Speaker 1: time ago. Um uh, you know, so again very mindful
Speaker 1: of we're all wait wait wait, wait, wait wait wait,
Speaker 1: just just some time ago, like last Thursday or a
Speaker 1: few years ago, let's say, uh, a long time ago,
Speaker 1: not last Thursday. You know, wik Card didn't have you
Speaker 1: question uh before, So we've been you know, conservative and
Speaker 1: how we dealt with them. There are very big business.
Speaker 1: They've got a very big business in the UK as well.
Speaker 1: It's a very tough situation obviously. Uh. It seems like
Speaker 1: something quite significant was missed. Uh And I think uh
Speaker 1: and I think the markets will pay a price for it.
Speaker 1: Mr Staley there of Berkeley's with some humor over wire
Speaker 1: card and policy a huge focus for all of us worldwide.
Speaker 1: I started the conversation with David Lebovitz of j P.
Speaker 1: Mulkin Asset Management. David, let's stop there, what's your focus
Speaker 1: a little bit like this afternoon? So, you know, I
Speaker 1: think we're going to be looking for for a couple
Speaker 1: of things. One, the reaffirmation of the message that, as
Speaker 1: you guys point out, you know, more stimulus is almost
Speaker 1: required at this juncture. But also any hints um particularly
Speaker 1: from pal Um as to the trajectory that monetary policy
Speaker 1: may take here over the next couple of months. You know,
Speaker 1: they've finally gotten a lot of these corporate credit facilities
Speaker 1: up and running and in the original term sheets, those
Speaker 1: were actually set to expire at the end of September,
Speaker 1: And so does he suggest that perhaps there's more runway
Speaker 1: around some of these new FED programs. I think will
Speaker 1: be particularly important in complimenting anything that we hear from
Speaker 1: Minutian with respect to more and more on the fiscal
Speaker 1: side over the next couple of weeks. Here and David,
Speaker 1: I thought to note from Casman and Farole from JPM
Speaker 1: Morrigan this weekend was absolutely spectacular, and they talked about
Speaker 1: things like yield curve curve control and being on Mars
Speaker 1: or being on Venus. Your wing of the ship is
Speaker 1: on planet Earth and you have to actually invest money
Speaker 1: in this rate uncertainty? What is your six month strategy
Speaker 1: strategy at JP Morgan Asset Management. So we we continue
Speaker 1: to kind of play it the way that we've been
Speaker 1: approaching things over the course of the past couple of months. Um.
Speaker 1: You know, when we were seeing that nascent rotation into
Speaker 1: value a couple of weeks back, we really held back
Speaker 1: on embracing a lot more cyclicality and portfolios because by
Speaker 1: our lights, this was really about the delta or the
Speaker 1: rate of change, and we assume that at some point,
Speaker 1: the market would begin to focus on the absolute level,
Speaker 1: so still really grounding portfolios and high quality assets. On
Speaker 1: the equity side, that's things like technology, and then from
Speaker 1: a regional standpoint, the US on the fixed income side,
Speaker 1: you know, barbelling between investment grade corporate bonds and various
Speaker 1: securitized types of paper given the inherent FED support in
Speaker 1: those markets with treasury bonds, because we do anticipate um
Speaker 1: that the markets are going to be a little bit
Speaker 1: choppy here, I think that there's a clear expectation that
Speaker 1: that more stimulus is needed. Um, I'm not sure the
Speaker 1: path to get there is going to be smooth. And
Speaker 1: at the same time, you know, as the economy is
Speaker 1: back online for longer periods of time, these big jumps
Speaker 1: in the data like we saw in retail sales a
Speaker 1: few weeks back, are going to become fewer and more infrequent,
Speaker 1: and so I think investors are going to focus increasingly
Speaker 1: on where things stand, and that's going to drive a
Speaker 1: relatively volatile and range bound market here through the through
Speaker 1: the end of the year. David is most reliable investment
Speaker 1: thesis at this point, purely investing on policy, purely investing
Speaker 1: on more FED stimulus on some sort of fiscal bailout
Speaker 1: package from Washington, d C. Rather than look at any
Speaker 1: of the data, rather than looking at the rising trade
Speaker 1: dentis between the China and the US and potentially a
Speaker 1: boycott with social media. So, you know, I think that
Speaker 1: those some of those other issues are are definitely secondary
Speaker 1: right now. I think that fundamentally, you know, when I
Speaker 1: was thinking about this earlier today, and it all comes
Speaker 1: down to cash flow, right and right now, the market
Speaker 1: doesn't care where that cash flow is coming from. Is
Speaker 1: it generated organically by the companies, is it visa the
Speaker 1: various rounds of fiscal and monetary stimulus. Right They just
Speaker 1: want to know that that the economy is going to
Speaker 1: keep running even if we're kind of artificially propping it
Speaker 1: up with FED and government support. But I do think
Speaker 1: that as we get closer to the election in November
Speaker 1: in particular, you may see some of these secondary issues,
Speaker 1: particularly the more political issues, really begin to crystallize in
Speaker 1: in the eyes of the market and just become another
Speaker 1: source of angst. You know, you can you can ride
Speaker 1: the liquidity wave for for only so long, and at
Speaker 1: some point the economy is going to be left to
Speaker 1: stand on its own two feet, and that's when things
Speaker 1: like the corporate fundamentals and the outlook for policy are
Speaker 1: going to become increasingly important. Again. I think that that's
Speaker 1: going to coincide with the election later on this year. Well,
Speaker 1: that might be a story for several months away and
Speaker 1: the here and now. David, it's a market, as you
Speaker 1: point out, that is suffering in the middle of this
Speaker 1: tug of war between the direction of the recovery still positive,
Speaker 1: expected to be so for the next several weeks and months,
Speaker 1: and the pace of it and the realization that we
Speaker 1: will be below potential for a long long time. So
Speaker 1: long as we maintain a positive trajectory, do you think
Speaker 1: that sufficient to drive further equity gains? So, I do
Speaker 1: think that that equity upside is going to be a
Speaker 1: little bit capped until we get more clarity from the
Speaker 1: corporations themselves. And so I think one of the issues
Speaker 1: that we're going to be particularly focused on over the
Speaker 1: next couple of weeks is as companies begin to report
Speaker 1: report their second quarter profit data, are they providing guidance
Speaker 1: for what they expect in the remainder of in the
Speaker 1: beginning of one And I think that you know, the
Speaker 1: market has been kind of standing on this three legged
Speaker 1: stool here of what's going on with case growth, the
Speaker 1: policy response, and the outlook for economic reopening, and the
Speaker 1: trajectory of corporate profits. Um, we we see what's going
Speaker 1: on with the virus, we we see what's going on
Speaker 1: with the policy response. There's still a lot of uncertainty
Speaker 1: around how all of this is going to translate into
Speaker 1: actual economic activity and corporate profitability over the next eighteen months.
Speaker 1: And I think that's going to be the key thing
Speaker 1: that you know, either pushes equities further to the upside
Speaker 1: or perhaps caps their potential over the next the next
Speaker 1: couple of months. I mean, David, I get all this
Speaker 1: hips up. At the bottom line is everybody's recalibrating their
Speaker 1: fundamental investment theories. Dr Siegel down at Wharton is beginning
Speaker 1: to question sixty forty, her sixty ten. He's even advocating
Speaker 1: eight twenty. You've got a pension plan out in California
Speaker 1: talking about leveraging up to get yield. It seems like
Speaker 1: a world tipped upside down. What's the allocation you would
Speaker 1: recommend off a traditional sixty forty split. So I think
Speaker 1: that you know, you increasingly need to take more risk
Speaker 1: in inequities. That is inherently difficult for for some investors
Speaker 1: to do, but we would We would add some equity exposure,
Speaker 1: assuming that return targets are in line with the numbers
Speaker 1: that that we see most clients trying to hit. Um
Speaker 1: you know, within fixed income, we wouldn't get rid of
Speaker 1: fixed income. You need that ballast in portfolios, and particularly
Speaker 1: given the view that things might be a little bit
Speaker 1: choppy here going forward, we want to make sure that
Speaker 1: we have that protection if markets were to strongly move
Speaker 1: to to the downside. But you know, what you're really
Speaker 1: seeing emerge from all of this is a need for
Speaker 1: uncorrelated sources of income. And one of the things that
Speaker 1: we've seen a lot of the institutional investors that we
Speaker 1: work with do over the past couple of years is
Speaker 1: take some of that exposure that has had historically been
Speaker 1: oriented towards fixed income and reallocate that towards core real
Speaker 1: assets things like real estate and infrastructure. You obviously need
Speaker 1: to be selective, but what that allows you to do
Speaker 1: is increase the overall income that your portfolio generates without
Speaker 1: adding more equity volatility. And that's really the the issue
Speaker 1: at the end of the day is people don't want
Speaker 1: to just add volatility to their portfolio to stretch for
Speaker 1: return um and we're increasingly seeing people looking for ways
Speaker 1: of accomplishing that goal without just making their portfolios a
Speaker 1: little more jumpy by adding to the risk asset side
Speaker 1: of the equation. David, Just to tie this all together,
Speaker 1: one big risk people have been talking about is that
Speaker 1: liquidity does not equal solvency and that we get a
Speaker 1: cascading wave of bankruptcies the picks up steam later in
Speaker 1: the year. We have not seen that yet, and some
Speaker 1: people are saying that we are going to see the
Speaker 1: more domestic of those scenarios based on the liquidity in
Speaker 1: the markets. Do you still see that it is a
Speaker 1: very real risk, as we had toward the election season. Um.
Speaker 1: I think it's a risk that needs to be on
Speaker 1: investors radar. I think the chart that's been making the
Speaker 1: rounds looks at the relationship between bankruptcy filings and the
Speaker 1: unemployment rate, and the two have been very tightly correlated
Speaker 1: over the past twenty five years, and so I think
Speaker 1: people look at that and say, well, if the unemployment
Speaker 1: rate only comes down slowly, that inherently needs to result
Speaker 1: in a in a wave of bankruptcies. But you know,
Speaker 1: maybe bringing us back to where the conversation started, we're
Speaker 1: just now seeing the main street lending facility get up
Speaker 1: and running. I think that that's going to help address
Speaker 1: a lot of those issues. So I do think that,
Speaker 1: given the support we've seen from the SAD and the
Speaker 1: federal government over the past couple of months, that relationship
Speaker 1: may not play out the way that it has historically
Speaker 1: here going forward. David Levitz, if Jack f Mugans have
Speaker 1: it always quite to cash? How with you send up
Speaker 1: best to the team, won't you? Right now? Our interview
Speaker 1: of the day for fixed income and for rates. Stephen
Speaker 1: Major has been an HSBC for ages and he has
Speaker 1: been on on on on about the vector of the
Speaker 1: dynamic of the bond market and particularly full faith and credit.
Speaker 1: He joins us now Stephen to begin the conversation. Bring
Speaker 1: us up to date and the inertial force of yields
Speaker 1: lower and particularly the benchmark tenure. How low can the
Speaker 1: ten year go? Well, our forecast is fifty basis points
Speaker 1: for year end, so we're still some way from that.
Speaker 1: I know it doesn't sound very exciting, to go from
Speaker 1: sixty three to fifty. But the consensus forecast, according to
Speaker 1: Bloomberg is nearly one hundred for year end, So clearly
Speaker 1: our view is somewhat different to everybody else. I think
Speaker 1: we have the lowest forecasts on the street. What matters
Speaker 1: to me is looking through the noise. It's it's not
Speaker 1: about the discussion about whether there's going to be a
Speaker 1: recovery or not. Let's not confuse ouns with recovery either.
Speaker 1: To me, what matters is the long term debt dynamics
Speaker 1: and the longer term structural drivers, including the impact of
Speaker 1: technology and the demographics. All of this points to low
Speaker 1: for longer and the FED itself it's guiding rates unchanged
Speaker 1: for for years into the future. So to me, it's
Speaker 1: very difficult for bond yields to go up, and I
Speaker 1: think that we're stuck here for a long time. By
Speaker 1: the way, total return on US treasuries this year is
Speaker 1: pushing towards ten percent in long bonds. That's not bad
Speaker 1: for an asset class that's supposed to be a store
Speaker 1: of value. Better than not bad. Steve, considering where we
Speaker 1: started the year and people's outlook for when we came
Speaker 1: into it. Let's talk about whether the tracery supply matters
Speaker 1: to supply matter for the long end. Short answer is no.
Speaker 1: Do you want the long answer, well, I'm going to
Speaker 1: give it. I don't have the on guardcer um. There's
Speaker 1: not a client meeting when somebody doesn't talk about que
Speaker 1: supply inflation. And there's there's quite a few misconceptions about
Speaker 1: all of these subjects. There's no lack of demand. And
Speaker 1: this is uh fifteen year old economics trying to map
Speaker 1: the demanded supply curves and looking at the various shapes.
Speaker 1: To me, the demand has been huge. Look at the
Speaker 1: savings rate in the US. We're not exactly sure where
Speaker 1: it is, but it's getting close to Second World War levels.
Speaker 1: People are saving. Why is that because they're unsure about
Speaker 1: the future. The money that gets saved gets recycled into
Speaker 1: bills and bonds through the banking system. So this idea
Speaker 1: about supply mattering needs to be put in the context
Speaker 1: of the demand, and I think that that's being missed.
Speaker 1: It's it's really naive to look at one side of
Speaker 1: the equation. The same is true of the que. People
Speaker 1: look at the Fed's balance sheet and they think that
Speaker 1: it has to be an inflationary source of of of
Speaker 1: trouble for the future people. People are looking at one
Speaker 1: side of the balance sheet that the FEDS purchases do
Speaker 1: not explain the fact that the yield is low. The
Speaker 1: fence purchases are just part of the whole dynamic. The
Speaker 1: Feds been able to buy what they have because banks
Speaker 1: have taken so much money in the last few months.
Speaker 1: The banking system is financing the feds asset purchases. Now,
Speaker 1: I've heard guests come on your show and talk about
Speaker 1: printing of money and inflation expectations. This just isn't right.
Speaker 1: It's looking at one side of the balance sheet and
Speaker 1: not understanding the whole picture. There's no lack of demand
Speaker 1: and we see this for quite some time to come. Stephen,
Speaker 1: I would love a window into some of the responses
Speaker 1: that you've gotten to your your theories and your predictions
Speaker 1: going forward, as they do run counter to a lot
Speaker 1: of what's out there on Wall Street. Taking I said,
Speaker 1: is there no limit then to the money printing? To
Speaker 1: this idea that the Fed can monetize the debt of
Speaker 1: the United States as the US deficit gets deeper and deeper. Yeah, Well,
Speaker 1: there's a lot to this. I would say, first of all,
Speaker 1: it's loose talk to talk about monetization in the same
Speaker 1: way that some talk about money printing. It's loose talk
Speaker 1: is technically incorrect. There's an asset and a liability. So
Speaker 1: in answer to your question, there is a constraint. It's
Speaker 1: it's the banking system. And when you look at this
Speaker 1: the FED, the FED is probably aware of where that
Speaker 1: constraint may be. Have you noticed how fast they tapered
Speaker 1: from the QUEUEI that was started in March. In fact,
Speaker 1: it wasn't really quey because in the first stage it
Speaker 1: was reversing some of the QT, it was putting back
Speaker 1: what was missing into the system, and it was dealing
Speaker 1: with some of the dysfunction in the in the asset markets.
Speaker 1: But the tapering is nine t plus percent from the
Speaker 1: original level. That's happened without any disruption to the bomb market.
Speaker 1: Isn't it impressive how the yields have been in a
Speaker 1: ten basis point range for most of the last two
Speaker 1: or three months. People don't give it credit for what
Speaker 1: for what it's clearly worked. The market is functioning very well,
Speaker 1: and looking through the noise now, I think that it
Speaker 1: may be the people a victims of nine seventies education
Speaker 1: looking at the kind of money supply and freedom and
Speaker 1: night view of things. I'm not saying it's wrong, it's
Speaker 1: just inappropriate for the current time. Steve Major, this has
Speaker 1: been a wonderful discussion of theory. I feel like we've
Speaker 1: got to get our new pixel out and reread it again.
Speaker 1: That's all fine and well, but for our listeners and
Speaker 1: our viewers of this simulcast, it's real simple. There's no
Speaker 1: real return and the nominal return is Dickenzie and it's
Speaker 1: out of the nineteenth century as well. That is unsustainable,
Speaker 1: isn't it. At some point there's got to be a
Speaker 1: real rate of return, right, Well, it depends where rates go.
Speaker 1: It's all about rates. So today we're closed to zero.
Speaker 1: We could go negative. It's not out of the questions.
Speaker 1: So it's a non zero probability that rates will be
Speaker 1: negative next year. It's a small probability but a huge impact.
Speaker 1: And when you invest, you invest on a scenario basis.
Speaker 1: You think about all possible scenarios, not one single base case.
Speaker 1: So it seems to me that when we look across
Speaker 1: the possibilities, rates aren't going up anytime soon, and I
Speaker 1: think investors will lower their sites in terms of total return.
Speaker 1: If you can keep your money, that's good news. Keep
Speaker 1: your capital, don't lose money. Um, maybe a total return
Speaker 1: of single digit is going to be reasonable in the
Speaker 1: in the next decade. And I think that the problem
Speaker 1: is is that people have got used to having these
Speaker 1: huge returns in the equity market. That isn't sustainable. What
Speaker 1: is sustainable is a reasonable road of return. Now. So
Speaker 1: far this year we've had nine percent. I imagine that
Speaker 1: we could get another two percent out of that into
Speaker 1: year end. UM, then we'll have to rethink for next year.
Speaker 1: But I don't think we're looking at a huge sell
Speaker 1: off in bonds anytime soon. And I think that there
Speaker 1: are other things to do. You can go into investment
Speaker 1: grade credit, for example. You can go up the yield curve,
Speaker 1: which is quite steep towards the longer end that there
Speaker 1: there's a whole lot of stuff to do. Steve. When
Speaker 1: you say rates could go negative, are you talking about
Speaker 1: the policy rate or you're talking about treaties, Well, well,
Speaker 1: we've already seen treasuries or certainly bills trade negative. It
Speaker 1: may be dismissed as being technical, but it did happen.
Speaker 1: You know that Japan and Europe have got rates. It's
Speaker 1: not out of the question. I think that it's more
Speaker 1: one for next year. It's it's not for this year.
Speaker 1: Any central bank that says it's truly all in and
Speaker 1: using all available tools were not by definition include the possibility.
Speaker 1: So everything is on the table and instrukes me that
Speaker 1: if you're in for a long drawn out with session,
Speaker 1: then negative rates are a policy option. Stay find a
Speaker 1: question for you, and it's an important one. Do you
Speaker 1: have more faith in your year end call on ten
Speaker 1: year treasuries or your beloved west Ham avoiding relegation from
Speaker 1: the Premier League this year? You certainly know how to
Speaker 1: wind me up, Lanky Jonathan, I think I think I've
Speaker 1: I've got more faith in the treasury forecast. I'm sorry,
Speaker 1: I wish, I wish HSBC once they're here to Steve
Speaker 1: Sty've always going to catch out your Steve Major of
Speaker 1: HSBC on this bond market. Tell us for it too?
Speaker 1: Is it d Davidson? And I'll be blunt about it.
Speaker 1: Folks who spent a career being more insightful than most,
Speaker 1: and how all this technology matters to us? And it
Speaker 1: turns out into buy, holding, sell on different equities and such.
Speaker 1: He's a perfect guy to comment on what we've seen
Speaker 1: in this first half, which is the dominance of Apple
Speaker 1: and Amazon. Tom Ford te what's so interesting to me
Speaker 1: is the trees are growing to the sky at Amazon.
Speaker 1: Do they just continue to grow? So, Tom, great introduction
Speaker 1: there and always a pleasure being on your show. So
Speaker 1: COVID nineteen has essentially injected Amazon with growth hormone. So
Speaker 1: you think about e commerce sales and the strength of
Speaker 1: e commerce sales not only in April and May, but
Speaker 1: in June, and it's like injecting new life into Amazon
Speaker 1: from a growth standpoint. So I like your comparison on
Speaker 1: the trees growing to the moon. I definitely think the
Speaker 1: trees are growing, but as you know, at some point
Speaker 1: they have to stop growing. They can't keep growing in perpetuity.
Speaker 1: The cloud has come to the rescue for Mr Bezos,
Speaker 1: But can the cardboard boxes come to the rescue when
Speaker 1: they deliver those boxes and with a new surge of
Speaker 1: unit growth of boxes, can they bring that down to
Speaker 1: some form of gross margin or dare I say net income?
Speaker 1: So the challenge for Amazon has been the same as
Speaker 1: the challenge for Target when you sell a lot of
Speaker 1: toilet paper or essentials in general, and you so sell
Speaker 1: fewer discretionary items or to your point, cloud is robust,
Speaker 1: but maybe not revenue growth in cloud is as robust,
Speaker 1: your profits suffer. And when you think about the June
Speaker 1: quarter for Amazon, they're seemingly doing everything in their power
Speaker 1: to combat COVID nineteen, talking about four billion dollars of
Speaker 1: incremental spin, including hundreds of millions of dollars to test
Speaker 1: their employees. I think the risk for Amazon is if
Speaker 1: they're not careful, they exit COVID nineteen. With the unionized
Speaker 1: labor force in the US, Tom, are we conflating the
Speaker 1: tech sector with Amazon, perhaps incorrectly with the idea that
Speaker 1: you see the Googles of the world, the Facebook, the Twitters,
Speaker 1: they're basically advertising companies. You look at Apple, it is
Speaker 1: a consumer discretionary purchase, although some people might say that
Speaker 1: their iPhone isn't necessarily discretionary. At this point, these things
Speaker 1: basically more susceptible to a significant downdraft in the economy.
Speaker 1: Is that going to be present in the pricing going forward?
Speaker 1: So conflation that is a brilliant term and yes we are.
Speaker 1: So if you look at e commerce trends, what you're
Speaker 1: seeing is the six point seven of the US that
Speaker 1: are still employed is preferring to buy online rather than
Speaker 1: going to a physical store, including for a period of
Speaker 1: time where physical stores were not an option. By way
Speaker 1: of comparison, the more economically sensitive advertising based revenue models
Speaker 1: like Facebook and Google are seeing contraction. They've reported a
Speaker 1: good number for Facebook and April was a flat revenue
Speaker 1: performance on advertising. So yes, I do believe conflation is
Speaker 1: going on and the trends and e commerce are not
Speaker 1: the trends and online average. So I'm looking at Facebook
Speaker 1: shares which are up more than seven percent year to date.
Speaker 1: Are you expecting the gains of this year and a
Speaker 1: lot of the tech companies aside from Amazon and Microsoft
Speaker 1: to stall out heading into the second half as people
Speaker 1: start to delineate between the big tech names and the
Speaker 1: forces they're subject to. Absolutely, And the way that I
Speaker 1: think about it is so COVID nineteen looks to be
Speaker 1: a multi year event, and I think that what you're
Speaker 1: going to see is multi year or multi quarter impact
Speaker 1: on the economy. Now I know that the May retail
Speaker 1: saves sales data was favorable, the May unemployment was favorable
Speaker 1: versus April. But I still feel like a strong argument
Speaker 1: could be made the word a depression and not a recession.
Speaker 1: So to the extent that COVID nineteen again is a
Speaker 1: multi year event, I think you may see some of
Speaker 1: these more economically sensitive names like Facebook and Google start
Speaker 1: to stall. For you, I have to go back to
Speaker 1: your hugely interesting comment that we could see a unionization
Speaker 1: of the hundreds of thousands of employees of Amazon. Does
Speaker 1: that blow up the Bezos model? Absolutely? And if you
Speaker 1: think about the acquisition of zooks, an argument I would
Speaker 1: make is it's about automation at the fulfillment center level.
Speaker 1: So you go back in time too, when Facebook was
Speaker 1: showcasing their drone delivery effort well before it was ready.
Speaker 1: I think they've realized that COVID nineteen has shown that
Speaker 1: they're exposed to physical labor at the fulfillment center front,
Speaker 1: and it's going to expedite their efforts to try to
Speaker 1: automate that, which is why I think Zook's was acquired
Speaker 1: by Amazon or intends to be acquired. I should say
Speaker 1: some fo I gonna leave it that Thanks for listening
Speaker 1: to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews
Speaker 1: on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio