Latest / Bloomberg Intelligence / Dollar Will Likely Resume Weakening Trend: BBH's Chandler

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Dollar Will Likely Resume Weakening Trend: BBH's Chandler · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg P M L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Are
• 0:32
  Speaker 1: we seeing the beginnings of perhaps a dollar rebound? Here?
• 0:35
  Speaker 1: To talk about? That is Mark Chandler, Global head of
• 0:39
  Speaker 1: Currency Strategy at Brown Brothers Harriman. And Mark, you join
• 0:42
  Speaker 1: us on a great day because we're finally getting a
• 0:45
  Speaker 1: breather from the great weakening of the green back. We're
• 0:49
  Speaker 1: seeing a little bit of a rebound against comparable currencies.
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  Speaker 1: Do you think this signals the beginning of a larger turnaround?
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  Speaker 1: At least I wish it did, but I'm afraid it
• 0:59
  Speaker 1: probably doesn't. So far are the dollars bounce here has
• 1:01
  Speaker 1: been fairly shallow, and it comes after it, like you say,
• 1:04
  Speaker 1: after several days that little hammering, you know, the dollars
• 1:07
  Speaker 1: and falling quite sharply, Uh, not quite, but almost uninterrupted
• 1:11
  Speaker 1: since the middle of December. And so I think today
• 1:13
  Speaker 1: we're seeing just you know, we had followed through dollars
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  Speaker 1: selling yesterday when the US markets are closed, if done incentrating,
• 1:20
  Speaker 1: and I think that this is just sort of what
• 1:21
  Speaker 1: I call it, maybe even a dead cat bound. So Mark,
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  Speaker 1: can you just give us a sense of what's driven
• 1:26
  Speaker 1: in the dollar, what's driving the dollar weakness? I mean
• 1:29
  Speaker 1: that you have certainly the euro strength, you have global growth,
• 1:32
  Speaker 1: it's accelerated in other regions more than in the US.
• 1:36
  Speaker 1: But what's the main factor of people should be looking at. Yeah,
• 1:39
  Speaker 1: Lucy asked me the two million dollar question, because Frank
• 1:42
  Speaker 1: I was in the camp that thought that wider interest
• 1:45
  Speaker 1: rate differentials with the FED tightening, the tax cuts in
• 1:48
  Speaker 1: the US, UH, the attractiveness that through the de regulation,
• 1:51
  Speaker 1: attractiveness of the US as a point for investment. We've
• 1:54
  Speaker 1: got inflation expectations driving all these things that I think
• 1:56
  Speaker 1: should be good for the dollar. And if not. And
• 1:59
  Speaker 1: so when I talk of people and trying to listen
• 2:00
  Speaker 1: to why they are saying that they think the euro
• 2:03
  Speaker 1: is going up, primarily is it more the Euro going
• 2:06
  Speaker 1: up than perhaps other currencies going up? And they say
• 2:09
  Speaker 1: that many people think that the ECB is close to
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  Speaker 1: exiting its monetary policy, and as you know, the ECB's
• 2:17
  Speaker 1: papering this year, it went down from sixty billion a
• 2:20
  Speaker 1: month asset purchases in the last nine months of last year,
• 2:24
  Speaker 1: claim them a half to thirty billion months this year.
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  Speaker 1: And some other officials talking over the weekends sound kind
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  Speaker 1: of hawkish, talking about the sequence of events and maybe
• 2:33
  Speaker 1: raising interest rates before the market previously anticipated. Mark Chandler,
• 2:38
  Speaker 1: is a lower value US dollar better for US equities.
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  Speaker 1: I hear what you're saying to him. I know a
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  Speaker 1: lot of people think so because they think that the
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  Speaker 1: logical on something like this, Uh, the weaker dollar means
• 2:51
  Speaker 1: that US can export more, and when the US exports more,
• 2:54
  Speaker 1: those foreign currency it gets can then be translated into
• 2:58
  Speaker 1: greater dollars boost earn And it sounds all reasonable and everything.
• 3:02
  Speaker 1: But I think they'll find plenty of time when the
• 3:04
  Speaker 1: US dollar was strong and corporate America was still reporting
• 3:07
  Speaker 1: record profits. You know, the corporate earning seasons kicking off
• 3:11
  Speaker 1: formerly this week, and people are expecting strong earnings. Last year,
• 3:15
  Speaker 1: the dollar fell and corporate earnings look to be up,
• 3:18
  Speaker 1: say something like twelve year over year. When the bigger picture,
• 3:22
  Speaker 1: I think that for me, the reason I'm not fully
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  Speaker 1: aboard that kind of view. Is that the US is
• 3:28
  Speaker 1: not service foreign markets primarily by exportings. Building locally, selling
• 3:32
  Speaker 1: locally is really the key, and so a lot of
• 3:35
  Speaker 1: US businesses are the export and build locally. They also
• 3:38
  Speaker 1: when they build locally, incur local costs, so they'll have
• 3:41
  Speaker 1: to pay those German workers higher wages or those check
• 3:44
  Speaker 1: workers higher wages, and so that offset some of the
• 3:48
  Speaker 1: beneficial impact I think. But in general, I think the
• 3:51
  Speaker 1: best level for the dollar actually attend. It turns out
• 3:54
  Speaker 1: that a strong dollar that is backed by a strong
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  Speaker 1: economy is actually good for corporate America. It so, having
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  Speaker 1: said that, should we look for higher prices for energy
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  Speaker 1: and commodities such as gold. Yeah, I hear what you're
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  Speaker 1: saying there, and I do think that because a lot
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  Speaker 1: of these commands are price in dollars, like gold or oil.
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  Speaker 1: When the dollar was falling out of bed over the
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  Speaker 1: last several weeks, we did see upward pressure on commodities,
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  Speaker 1: and today, of course it's the opposite. Softer dollar, softer gold,
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  Speaker 1: softer iron ore, softer base metals, softer oil. I'm just
• 4:24
  Speaker 1: not sure that that is some of the hanguans hat
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  Speaker 1: On I think if you think the dollar is going
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  Speaker 1: to fall, should be short to dollar in various times
• 4:31
  Speaker 1: a way long point equities, for example, are long foreign bonds.
• 4:35
  Speaker 1: But if you think that, if you if you have
• 4:36
  Speaker 1: a view on commodities, I would trade that. I think
• 4:38
  Speaker 1: it were best served by training as close to our
• 4:40
  Speaker 1: views as possible. Mark. You know, it seems increasingly like
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  Speaker 1: the consensus trade the dollar will weaken more, and I'm wondering,
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  Speaker 1: what's the risk scenario that upends that. Yeah, well, the
• 4:54
  Speaker 1: risk scenario is really what I've been still counting on,
• 4:56
  Speaker 1: and that that is that continued to interest rate increases
• 4:59
  Speaker 1: by the Stuttlers. And by that I mean it's it's
• 5:02
  Speaker 1: kind of interesting what happens. So if you are a
• 5:05
  Speaker 1: that that interest rate differential, I think is the incentive
• 5:08
  Speaker 1: structure that investors monitor closely, and with the incentive structure
• 5:12
  Speaker 1: telling you is that you're paid to be long U
• 5:16
  Speaker 1: S dollars by an increasing amount. And I don't think
• 5:19
  Speaker 1: that the ECB raises interest rates this year. I don't
• 5:21
  Speaker 1: think the b o J raises interest rates this year.
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  Speaker 1: I think they were still at least a year, perhaps
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  Speaker 1: maybe a year and a half to two years away
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  Speaker 1: from this divergence peaking, and so I would still say
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  Speaker 1: the federal reserves, like the raised interest rates, it's going
• 5:33
  Speaker 1: to cost people an increasing amount to be short of
• 5:36
  Speaker 1: the US dollar mark. Chandler, can you give us your
• 5:39
  Speaker 1: thoughts on the value of the Chinese you want to
• 5:42
  Speaker 1: remember and what the Chinese government's long term plan is
• 5:46
  Speaker 1: for the currency. Well, I don't know if I can
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  Speaker 1: tell you what the government's long term planet. I know
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  Speaker 1: they want to be more international, but I think that
• 5:53
  Speaker 1: they have a lot of stumbling blocks. So the big
• 5:55
  Speaker 1: news over the weekend realier yesterday was when the Bundesbank
• 5:58
  Speaker 1: official indicated that the them in Central Bank had put
• 6:01
  Speaker 1: R and B in reserves, and the shortly thereafter the
• 6:04
  Speaker 1: French announces that they had already done the same thing.
• 6:07
  Speaker 1: It's not so surprising. About about six months ago or so,
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  Speaker 1: June of last year, the ECB itself announced that they
• 6:15
  Speaker 1: had bought about five million euros worth of Chinese R
• 6:18
  Speaker 1: and B to put in reserves, and interestingly interestingly they
• 6:22
  Speaker 1: said that they reduced their dollar holdings to buy China.
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  Speaker 1: But we gotta keep this in perspective. There are something
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  Speaker 1: on the magnitude of eleven point four tillion dollars of reserves,
• 6:33
  Speaker 1: the Chinese juan makes up about about a hundred and
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  Speaker 1: seven million dollars excuse me, a hundred and seven billion
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  Speaker 1: dollars very small, it's it's about one percent of global reserves.
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  Speaker 1: This is not the beginning of the Chinese want replacing
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  Speaker 1: the dollar. Chinese officials themselves recognize that, and they seem
• 6:52
  Speaker 1: to be more circumspect about the role of China, and
• 6:57
  Speaker 1: they have really more strategic view. While I hear a
• 6:58
  Speaker 1: lot of people talking about about China and the end
• 7:01
  Speaker 1: of the petro dollar at the beginning of a petro
• 7:04
  Speaker 1: R and B the launching, eventually they stay of a
• 7:08
  Speaker 1: of an R and B denominated oil contract. People are
• 7:11
  Speaker 1: people in the private sector in the market. I talked
• 7:13
  Speaker 1: about the dollar is gonna be replaced, but I find
• 7:16
  Speaker 1: that sometimes a price action influenced the news, and sometimes
• 7:19
  Speaker 1: the news impacts the price action. This is one of
• 7:21
  Speaker 1: the times I think a following dollar is getting all
• 7:24
  Speaker 1: these kind of like conspiracy series and how the dollar
• 7:28
  Speaker 1: is going to be dethroned out of the woodwork these ideas,
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  Speaker 1: and I think that the R and B is nowhere close.
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  Speaker 1: The dollar makes up about sixty three percent of the
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  Speaker 1: world reserves, the R and B a little bit more
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  Speaker 1: than one percent. All right, thanks for putting it into
• 7:40
  Speaker 1: perspective for us. Mark Chandler is the global head of
• 7:42
  Speaker 1: Currency Strategy at Brown Brothers Harriman. The question of need,
• 8:00
  Speaker 1: does anyone really need an suv that goes from zero
• 8:03
  Speaker 1: to sixty and three point six seconds or can do
• 8:05
  Speaker 1: a hundred and ninety miles per hour? Does anyone need
• 8:08
  Speaker 1: six hundred and forty one horses streaming behind them? It
• 8:13
  Speaker 1: is in yellow or and can be in yellow, and
• 8:15
  Speaker 1: it is the new Lamborghini suv. It is called the
• 8:19
  Speaker 1: Rusts and it joined now by the global Chief Executive
• 8:23
  Speaker 1: of Automobile Lamborghini is Stefano Domenicali. Thank you for being
• 8:27
  Speaker 1: here in our studio as much appreciated. What was the
• 8:31
  Speaker 1: thinking behind the creation of the auras, Because there are
• 8:36
  Speaker 1: already a variety of high luxury SUVs, even from the
• 8:42
  Speaker 1: likes of Bentley and the likes of Audi and so on,
• 8:46
  Speaker 1: that you could call luxury. What inspired the Lamborghini brand
• 8:49
  Speaker 1: to want to make their mark in this market? Well,
• 8:52
  Speaker 1: I would say that the inspiration came from the knowledge
• 8:55
  Speaker 1: of the market. We as Lamborghini had a superspore brand
• 8:58
  Speaker 1: and that's pretty clear and that will be always in
• 9:01
  Speaker 1: the future. But we reckoned that the market in the
• 9:05
  Speaker 1: suv segment is rowing all around the world and there
• 9:08
  Speaker 1: was a perfect occasion to enlarge the portfolio offer to
• 9:12
  Speaker 1: the customer because the end of the day, we were
• 9:14
  Speaker 1: talking about product or cars or looks really good at
• 9:18
  Speaker 1: are not necessary to have. It's a status. It's something
• 9:22
  Speaker 1: that you want to have because you want position yourself
• 9:24
  Speaker 1: in a certain way. So we saw the potential will
• 9:27
  Speaker 1: be different also in this segment. That's the reason why
• 9:30
  Speaker 1: we start this kind of a new project. Okay, so
• 9:32
  Speaker 1: when we talk about necessity, how much as cost in
• 9:37
  Speaker 1: in in hearing other states will be around two hundred
• 9:40
  Speaker 1: dollars and and then of course the least price is
• 9:43
  Speaker 1: a discussion because I know the market of the United
• 9:46
  Speaker 1: States is mainly working on that, and I think we're
• 9:49
  Speaker 1: gonna have a great offer. I get it to portune
• 9:51
  Speaker 1: to give to our customer. Here, which country or where
• 9:54
  Speaker 1: where do you think that most of the customers for
• 9:57
  Speaker 1: this particular vehicle will come from? We say they the
• 10:02
  Speaker 1: success of this after the first couple of weeks, when
• 10:04
  Speaker 1: we launch, the car is normals all around the world.
• 10:07
  Speaker 1: What is incredible is to see that the real question
• 10:10
  Speaker 1: that we need to answer is how many non Lamborghinea
• 10:13
  Speaker 1: customs we're gonna buy the new U s V Because,
• 10:16
  Speaker 1: of course, as you know today, the our normal customer,
• 10:19
  Speaker 1: if I may say normal, don't use that car every day.
• 10:22
  Speaker 1: But with the new supers, they're going to use that
• 10:24
  Speaker 1: Carla therefore is not only having the add that the
• 10:28
  Speaker 1: one by one customer that are already in the Lamborghini family,
• 10:32
  Speaker 1: but that the interesting thing will be to see how
• 10:34
  Speaker 1: many potential customers will come from other branch because it
• 10:39
  Speaker 1: would be may be interested to see our car. They
• 10:42
  Speaker 1: love our design, they love our performance, they love to
• 10:45
  Speaker 1: be connected with the Lamborghinia families. So the real question
• 10:48
  Speaker 1: would be how many process we're gonna be able to
• 10:51
  Speaker 1: catch in the future. And this is something that at
• 10:53
  Speaker 1: least for after the first couple of weeks of the
• 10:56
  Speaker 1: first launch around the world, we see there is a
• 10:58
  Speaker 1: lot of attention. I note that you can customize this
• 11:03
  Speaker 1: almost every way you can imagine, right, fourteen exterior colors
• 11:06
  Speaker 1: to choose from, fifteen interior leather options, head rest you
• 11:11
  Speaker 1: can get them embossed with the raging bull logo. I mean,
• 11:14
  Speaker 1: just customization seems to be the real The real deal
• 11:18
  Speaker 1: here is um UH is the factory that is building
• 11:23
  Speaker 1: these in san Agata. Is that fact You're going to
• 11:27
  Speaker 1: do all the customization or does that get farmed out?
• 11:30
  Speaker 1: It will be done all in Santega the Bolognese in Italy.
• 11:32
  Speaker 1: We were close to Bologna. There was a big challenge
• 11:35
  Speaker 1: because in one year, just one year, we built a
• 11:38
  Speaker 1: completely new line of assembly. We double the dimension of
• 11:41
  Speaker 1: a factor. We hired more of a hundred people to
• 11:43
  Speaker 1: make sure that this was possible to do it. That
• 11:46
  Speaker 1: that is why we we use the claim since we
• 11:48
  Speaker 1: made it possible for the launch of this vehicle. Because
• 11:51
  Speaker 1: you know, if you think what was Lamborghini just a
• 11:53
  Speaker 1: couple of years ago, No, when I would have thought
• 11:55
  Speaker 1: it was possible. Therefore, the personalization is a very important
• 11:58
  Speaker 1: item for our custom and that will be done by us.
• 12:00
  Speaker 1: So I'm seeing a headline crossing the Bloomberg today that Ferrari,
• 12:04
  Speaker 1: a competitor of yours, is planning to make an electric supercar.
• 12:09
  Speaker 1: Um I'm wondering is that in your future? Well, in Uh,
• 12:14
  Speaker 1: I would say September, we launched the third Millennium Project.
• 12:17
  Speaker 1: It was a car that we presented together with the
• 12:20
  Speaker 1: m I T in Boston. Because we have our research
• 12:23
  Speaker 1: that is making sure that we are also ahead in
• 12:26
  Speaker 1: that respect. So we have already launched that idea on
• 12:29
  Speaker 1: our side, and I think that is natural, that is
• 12:32
  Speaker 1: logical to also to be a trend setter in the
• 12:35
  Speaker 1: in this in this new dimension. But when could that
• 12:38
  Speaker 1: car actually be marketed, I would say, realistically speaking after
• 12:42
  Speaker 1: in the second part of the two in that range
• 12:46
  Speaker 1: will be ready, I think, because we need to be
• 12:48
  Speaker 1: current with a couple of elements in that respect. First
• 12:52
  Speaker 1: of all, the performance of a supersport car has to
• 12:56
  Speaker 1: be there. We need to consider the usual our car
• 13:00
  Speaker 1: cost of it. Of course, the affordability of this technology
• 13:02
  Speaker 1: is another element that is very important, and we're gonna
• 13:06
  Speaker 1: be there as a second step. We don't have to
• 13:08
  Speaker 1: forget today we are, let's say, using the normal combustion engine.
• 13:12
  Speaker 1: We're gonna be using the abrilization as a second step
• 13:16
  Speaker 1: before arriving through dilectrification. So there is still a lot
• 13:19
  Speaker 1: of rooms to do, a lot of work to be done,
• 13:21
  Speaker 1: but for sure the trend is there. And we're gonna
• 13:23
  Speaker 1: be there for the future superspokeer models with the aabrilization model.
• 13:27
  Speaker 1: What's the trend for Lamborghini any chance of spinning it
• 13:31
  Speaker 1: off from VW But currently you have you have a cousin, right,
• 13:35
  Speaker 1: I mean, how do you could call like a cousin
• 13:37
  Speaker 1: using their V eight in this new uh in this
• 13:40
  Speaker 1: new SUV spin off in the works. Maybe something that
• 13:43
  Speaker 1: I cannot answer to be honest, because it's not me.
• 13:46
  Speaker 1: That's I'm I need to report to our shareholders, my
• 13:49
  Speaker 1: duty or our uses will make sure that we are
• 13:51
  Speaker 1: bringing up the brand in the right way that we can.
• 13:54
  Speaker 1: We are growing, we need to make sure that we
• 13:56
  Speaker 1: are we are profitable enough. We need to make sure
• 13:58
  Speaker 1: that we have we are strong enough with good product
• 14:01
  Speaker 1: portfolio in the future, and then the show will make
• 14:03
  Speaker 1: their decision. I'm pretty sure that they are proud of
• 14:05
  Speaker 1: having us in their in their portfolio together. But this
• 14:08
  Speaker 1: is you know, what we have to do, make sure
• 14:10
  Speaker 1: that we are doing a good job. Stefano Domenicali thank
• 14:14
  Speaker 1: you so much for joining us, his global chief executive
• 14:16
  Speaker 1: officer of automobile Lamborghini based in Bologna, Italy. Thank you
• 14:21
  Speaker 1: so much. For being with us and uh we look
• 14:24
  Speaker 1: forward to uh each getting our own personal suv Lamborghini
• 14:28
  Speaker 1: in the Maile. Now kidding right now, it seems like
• 14:45
  Speaker 1: kind of a tenuous time in US government pond markets.
• 14:49
  Speaker 1: You have a government deficit in the United States is
• 14:53
  Speaker 1: expected to blossom over the next few years. You have
• 14:56
  Speaker 1: a potential government shutdown, and yet yields are actually dipping lower.
• 15:01
  Speaker 1: Today here to talk about what's going on and how
• 15:03
  Speaker 1: investorship position is. Ira Jersey, chief US interest rate strategist
• 15:07
  Speaker 1: for Bloomberg Intelligence. I want to just start with a
• 15:11
  Speaker 1: question about the government shutdown. Why our markets completely ignoring
• 15:16
  Speaker 1: this even as the rhetoric gets amped up yet again
• 15:19
  Speaker 1: that Congress will not come to a deal. Well, I
• 15:22
  Speaker 1: think there's a few things about government shutdowns that kind
• 15:24
  Speaker 1: of get misconstrued by the general public. I mean, the
• 15:27
  Speaker 1: first is that a short term government shutdown, someone that
• 15:30
  Speaker 1: lasts just a couple of days or even a week
• 15:33
  Speaker 1: um really does not have any significant economic implications. And
• 15:36
  Speaker 1: there are a lot of portions of the government that's
• 15:39
  Speaker 1: still stay open. So for example, the bondmark, it's not
• 15:41
  Speaker 1: going to care about it because UM government securities are
• 15:44
  Speaker 1: still going to get paid. Coupon payments are still going
• 15:46
  Speaker 1: to be made. Things like that, the I R. S
• 15:48
  Speaker 1: stays open, so income still comes in the Federal Reserve,
• 15:51
  Speaker 1: and the Treasury Department or portions of the Treasury Department
• 15:54
  Speaker 1: remain open, so coupons get paid. So this isn't a
• 15:57
  Speaker 1: kind of debt Eventum, a very long term government shutdowns,
• 16:00
  Speaker 1: so one that lasts several weeks or a month that
• 16:03
  Speaker 1: could have some economic implications because of the lack of
• 16:05
  Speaker 1: government spending and the like, um, that that could occur.
• 16:09
  Speaker 1: So you do see that when when in a few
• 16:11
  Speaker 1: periods that you've had long term government shutdowns, you have
• 16:13
  Speaker 1: seen little blips that that affect the um, that affect
• 16:17
  Speaker 1: the growth. But um, you know, we're not expecting necessarily
• 16:20
  Speaker 1: a long one now, So I think that um, any
• 16:23
  Speaker 1: government shutdown in this case is just going to be
• 16:25
  Speaker 1: completely ignored by most markets. All right, right, can you
• 16:27
  Speaker 1: speak about treasury inflation protected securities and their use in
• 16:32
  Speaker 1: people's portfolios. Yeah. I think for for a lot of investors,
• 16:37
  Speaker 1: the ideas is that okay, inflation might be higher than
• 16:41
  Speaker 1: UM in the in the future, and because of that,
• 16:44
  Speaker 1: I'd like to get some some hedges and protections for that,
• 16:47
  Speaker 1: so they buy treasury inflation protected securities. The problem with
• 16:51
  Speaker 1: just going out and buying UM tips, whether it's a
• 16:54
  Speaker 1: thousand dollars or a couple of ten thousand dollars, doesn't matter. M.
• 16:58
  Speaker 1: The problem is is that you're you're still have a
• 17:00
  Speaker 1: lot of interest rate risk that are embedded in these instruments.
• 17:03
  Speaker 1: So when you buy a tip security, you're receiving what's
• 17:06
  Speaker 1: called the real yield, so the yield on the tip
• 17:09
  Speaker 1: plus inflation. Now, the problem is is that when inflation
• 17:12
  Speaker 1: goes up, then yields usually go up much faster than
• 17:17
  Speaker 1: um UH than inflation. So let's imagine a situation where
• 17:21
  Speaker 1: suddenly we think inflation next year is going to be
• 17:24
  Speaker 1: five percent from say two percent today. UM you say, okay,
• 17:27
  Speaker 1: well let me buy tips because I'm going to get
• 17:29
  Speaker 1: three percent. The problem is is that an environment like that,
• 17:33
  Speaker 1: yields might sell off a hundred basis points and then
• 17:36
  Speaker 1: there's UH interest rate risk embedded in these securities, and
• 17:39
  Speaker 1: that's what we call duration. So that's the effect on
• 17:43
  Speaker 1: price by changes and yield. So a hundred basis point
• 17:46
  Speaker 1: increase in UH in yields on a ten year tip,
• 17:49
  Speaker 1: you wind up losing eight percent of your of your
• 17:53
  Speaker 1: dollar value of that of that tip. So if you
• 17:55
  Speaker 1: just do that math, eight percent minus three percent means
• 17:58
  Speaker 1: you lose five percent, even with inflation increasing quite a lot.
• 18:02
  Speaker 1: So so there's a lot of interest rate risk embedded
• 18:04
  Speaker 1: in this. So the way that you really hedge inflation
• 18:07
  Speaker 1: is by buying a tip and then hedging out your
• 18:10
  Speaker 1: interest rate risk. So I'm looking right now at the
• 18:13
  Speaker 1: I shares Tips E t F and I'm just looking
• 18:16
  Speaker 1: at the total assets it has increased since the end
• 18:19
  Speaker 1: of about I don't know, three million dollars or so
• 18:24
  Speaker 1: with respect to assets under management. So a lot of
• 18:27
  Speaker 1: people have been going into tips as a proxy for
• 18:31
  Speaker 1: hedging against inflation. And I'm just wondering, do you think
• 18:35
  Speaker 1: that all the people buying these securities understand the rate
• 18:38
  Speaker 1: risk that they're assuming. Well, I'm not convinced that all
• 18:41
  Speaker 1: of them do. And that's one of the reasons why
• 18:43
  Speaker 1: I think it's important to understand the interest rate risk
• 18:46
  Speaker 1: that you're taking by buying tips. Um. Now that being said,
• 18:50
  Speaker 1: if you if you're buying tips because you think yields
• 18:52
  Speaker 1: are too high and yields might go down, but you're
• 18:56
  Speaker 1: you know, but you think that there might be a
• 18:57
  Speaker 1: little bit of of inflation along the way than than
• 19:00
  Speaker 1: maybe there's a place in your portfolio for that. But um.
• 19:03
  Speaker 1: But I think in general people think, oh, Treasury inflation
• 19:06
  Speaker 1: protected securities, inflation goes up there for you know, I'll
• 19:09
  Speaker 1: make money in this. That's not necessarily the case in
• 19:12
  Speaker 1: the in the short term. If you buy a tip
• 19:14
  Speaker 1: today and you hold it to maturity, you'll make fifty
• 19:17
  Speaker 1: basis points like a ten on a ten year tip
• 19:20
  Speaker 1: fifty basis points plus inflation um. But if you don't
• 19:23
  Speaker 1: hold it to maturity, or you hold a constant maturity
• 19:26
  Speaker 1: instrument like an et F for like a mutual fund
• 19:29
  Speaker 1: that that tracks tips um, you do take a lot
• 19:33
  Speaker 1: of interest rate exposure and risk, and I think that
• 19:35
  Speaker 1: that's something that you might see unwind if you do
• 19:37
  Speaker 1: get a very big sell off in in rates. We're
• 19:40
  Speaker 1: not expecting that, but at the same time, that's a
• 19:42
  Speaker 1: that's definitely a risk that you're taking. Are maybe talk
• 19:45
  Speaker 1: about risk, but have it related to perhaps hedges on
• 19:49
  Speaker 1: Fannie May and the Freddie mac paper. Yeah. So one
• 19:53
  Speaker 1: of the things that that we've noted in the rates
• 19:55
  Speaker 1: market over the last over the last couple of months
• 19:57
  Speaker 1: is just like the VIX being at at multi year lows.
• 20:01
  Speaker 1: So is interest rate volatility. Applied volatility on options on
• 20:04
  Speaker 1: different interest rate products is exceptionally low, and I think
• 20:08
  Speaker 1: a part of that, at least uh UM. A portion
• 20:12
  Speaker 1: of the reason for that is that Fannie Mae and
• 20:14
  Speaker 1: Freddie Max's portfolios, which used to be one point for
• 20:17
  Speaker 1: trillion dollars are are about a third of that today,
• 20:21
  Speaker 1: And because they're UM because they are no longer hedging
• 20:25
  Speaker 1: things like prepayment risks of people repaying their mortgages early
• 20:29
  Speaker 1: and things like that. They used to do that with
• 20:31
  Speaker 1: options on interest rate products and they no longer have
• 20:34
  Speaker 1: to do that in the same size that they did UM.
• 20:36
  Speaker 1: So because of that, I think interest rate UM volatility
• 20:39
  Speaker 1: is much lower than it would be normally UM. And
• 20:42
  Speaker 1: also that the FED now has picked up a lot
• 20:44
  Speaker 1: of that ownership and the FED doesn't hedge at all.
• 20:47
  Speaker 1: But as the FED unwinds their portfolio, it's very likely
• 20:51
  Speaker 1: that banks and other other buyers of mortgages might actually
• 20:55
  Speaker 1: start to buy volatility a little bit more. Thank you
• 20:58
  Speaker 1: very much. I read Jersey very interesting interest rate strategist
• 21:01
  Speaker 1: for Bloomberg Intelligence, giving us some details about treasury inflation
• 21:06
  Speaker 1: protected securities and the lack of hedging that seems to
• 21:10
  Speaker 1: be going on at least when it comes to Fannie
• 21:12
  Speaker 1: Mae and Freddie mac that's agency back paper right now.
• 21:29
  Speaker 1: I want to turn our attention to a letter that
• 21:32
  Speaker 1: black Rock sent to a number of corporate executives today.
• 21:37
  Speaker 1: This according to the New York Times Deal Book uh section.
• 21:41
  Speaker 1: It's sort of interesting and highlights how black Rock is
• 21:44
  Speaker 1: increasingly aware of the actions of corporations that they invest
• 21:49
  Speaker 1: in and whether they are good for society or not.
• 21:52
  Speaker 1: Here to talk about this fuzzy designation. What does it
• 21:55
  Speaker 1: mean to be responsible? Is Greg Elders, who senior Environmental,
• 21:59
  Speaker 1: social and governance analyst for Bloomberg News. Greg I thought
• 22:04
  Speaker 1: this was really interesting because this comes on the heels
• 22:06
  Speaker 1: of Calisters and Janna Partners going after Apple for the
• 22:12
  Speaker 1: use of iPhones by kids and requesting that they study
• 22:16
  Speaker 1: the effects on children of long term use of smartphones.
• 22:20
  Speaker 1: What does it mean for black Rock to get more
• 22:23
  Speaker 1: aggressive with making sure companies act responsibly? Yeah, I mean
• 22:28
  Speaker 1: this is something that I mean to that end. There's
• 22:31
  Speaker 1: growth in this space, so Jenna, they launched their Impact
• 22:33
  Speaker 1: Investing Fund black Rock. So Larry Think two years ago
• 22:37
  Speaker 1: in his letter mentioned that company's CEO should focus on environmental, social,
• 22:42
  Speaker 1: and corporate governance issues. Last year it voted against management
• 22:47
  Speaker 1: at Exxonmobile and Occidental Petroleum, and also Vanguard similarly voted
• 22:52
  Speaker 1: against them. Um, so you know it's coming around in
• 22:54
  Speaker 1: terms of investors no longer just being passive but actually
• 22:57
  Speaker 1: having an active stance at the end of the day,
• 23:00
  Speaker 1: it's because investors are demanding that their clients, both institutional
• 23:04
  Speaker 1: and retail, want to see more active social engagement. Now,
• 23:09
  Speaker 1: is there a way in which investors will be uh,
• 23:13
  Speaker 1: sort of not necessarily happy about this if the market
• 23:16
  Speaker 1: turns south for them? I mean, it's great when stock
• 23:19
  Speaker 1: prices are rising, and black Rock, of course a big
• 23:23
  Speaker 1: E T F provider. It's wonderful when you're making money.
• 23:27
  Speaker 1: I mean, but that's the whole point. So it's letter
• 23:29
  Speaker 1: two years ago. I mean, he said to have long
• 23:31
  Speaker 1: term value creation and again in this letter, according to
• 23:34
  Speaker 1: the New York Times, So this is absolutely about growth
• 23:38
  Speaker 1: and profitability. It's not about the social environmental side, except
• 23:42
  Speaker 1: that it actually goes towards that whole financial performance area. Okay,
• 23:46
  Speaker 1: so how do we parse this out. I mean, this
• 23:48
  Speaker 1: is this is a thing that really makes me scratch
• 23:50
  Speaker 1: my head. You know, on one hand, if you say
• 23:52
  Speaker 1: to Apple, okay, study the effects of iPhones on children,
• 23:56
  Speaker 1: I understand the purpose of that. From sort of a
• 23:58
  Speaker 1: social responsive ability standpoint. From a profitability standpoint not so much.
• 24:04
  Speaker 1: So how do you parse out the difference here? It
• 24:06
  Speaker 1: seems like a pretty uh, pretty fuzzy line. It can
• 24:10
  Speaker 1: be a fuzzy line. I mean, going back to the
• 24:12
  Speaker 1: Exxon and Occidental examples, so the shareholder resolutions that black
• 24:16
  Speaker 1: Rock backed there were specifically around the two oil companies
• 24:20
  Speaker 1: thinking about what's going to happen in a low carbon world.
• 24:23
  Speaker 1: So if we shift away from fossil fuels, right, if
• 24:26
  Speaker 1: you have more electric cars, what does that mean for
• 24:28
  Speaker 1: their business and how do they position themselves? So very
• 24:31
  Speaker 1: much a fundamental business issue. Now with the example of
• 24:35
  Speaker 1: of Apple, I mean I agree that that varies a
• 24:38
  Speaker 1: bit more. And the question is, you know, maybe regulators
• 24:41
  Speaker 1: come along, and obviously the text space has been very
• 24:43
  Speaker 1: much in the focus of regulators around Facebook, um, Twitter,
• 24:48
  Speaker 1: that kind of thing. So yeah, I mean, it's fundamentally
• 24:50
  Speaker 1: what is their long term business? Well, and then there's
• 24:52
  Speaker 1: another question of equality or diversity or some of these
• 24:57
  Speaker 1: other values that a lot of corporate rations espoused that
• 25:01
  Speaker 1: might not be held by all of the investors in
• 25:06
  Speaker 1: their base. I mean, in other words, how vocal do
• 25:08
  Speaker 1: they get on issues that are increasingly viewed as political.
• 25:12
  Speaker 1: I mean, I think very clearly that Larry Fink black
• 25:15
  Speaker 1: Rock says that they have to because again it's going
• 25:17
  Speaker 1: towards financial performance. Today's City Group released data on their
• 25:21
  Speaker 1: pay gap between women and men. After shareholder resolution shareholder
• 25:26
  Speaker 1: pressure in the UK, companies are gonna be required to
• 25:28
  Speaker 1: do this by the end of this quarter. So now,
• 25:31
  Speaker 1: again this is very much an issue about driving performance.
• 25:35
  Speaker 1: So it all comes back to that, and I think no,
• 25:37
  Speaker 1: gender issues social issues are very much about that as well.
• 25:40
  Speaker 1: But this is not Just to be clear, this is
• 25:42
  Speaker 1: not black Rock's money. This is the money that they
• 25:45
  Speaker 1: manage on behalf of investors, correct, but they want to
• 25:49
  Speaker 1: maximize return. No, completely understand, But just to be clear,
• 25:52
  Speaker 1: this is not black Rock money. This is they're saying
• 25:55
  Speaker 1: this on behalf of their investors, saying that this is
• 25:57
  Speaker 1: what investors would like to see happen. Well, it's what
• 26:00
  Speaker 1: they think needs to happen, so they can have the
• 26:03
  Speaker 1: best returns for their clients. Got it all right, well done,
• 26:07
  Speaker 1: Thank you very much. Gregory Elders is our senior Environmental,
• 26:10
  Speaker 1: Social and Governance analyst for Bloomberg News, and of course
• 26:14
  Speaker 1: this is a topic will be following for quite a while.
• 26:17
  Speaker 1: Larry Fink, head of Black Rock, writing a letter making
• 26:20
  Speaker 1: that clear to all investors. Thanks for listening to the
• 26:26
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 26:29
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 26:33
  Speaker 1: you prefer. I'm pim Fox. I'm on Twitter at pim Fox.
• 26:37
  Speaker 1: I'm on Twitter at Lisa Abramo. It's one before the podcast.
• 26:41
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.