Latest / Bloomberg Intelligence / P&L: Could See Mid- to Low-90s for the Euro-Dollar in 2017

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P&L: Could See Mid- to Low-90s for the Euro-Dollar in 2017 · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
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  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. This is shaping up
• 0:30
  Speaker 1: to be one of the most challenging years ever for
• 0:34
  Speaker 1: analysts to come to concrete predictions for Doug Ramsey, c
• 0:39
  Speaker 1: io of the Lootold Group, just came out with their
• 0:42
  Speaker 1: new Green Book of market research and it's It's an
• 0:44
  Speaker 1: extensive book of forecasts and expectations for the year ahead. Doug,
• 0:49
  Speaker 1: just from the outside, how difficult was it for you
• 0:53
  Speaker 1: and your team to come up with a base case
• 0:56
  Speaker 1: scenario for next year? Uh? Well, the the issue, at
• 1:01
  Speaker 1: least I guess with coming up with a forecast at
• 1:04
  Speaker 1: this point in the cycle is that it is a
• 1:06
  Speaker 1: very mature economic and stock market cycle, and valuations are
• 1:12
  Speaker 1: are very high. I mean, forecasting is dangerous I think
• 1:17
  Speaker 1: at any point in the cycle. But you know, the
• 1:19
  Speaker 1: one phase where you might have a higher degree of
• 1:22
  Speaker 1: confidence would be early Bowl market. You know, we're unemployment
• 1:25
  Speaker 1: rates are still high, but coming down, valuations are still reasonable,
• 1:29
  Speaker 1: FED liquidity is still plentyable. We've got really none of
• 1:33
  Speaker 1: that today. We have a very low unemployment rate. Someone
• 1:36
  Speaker 1: say we're at full employment. Valuations are historically very high.
• 1:42
  Speaker 1: We think second only to the tech bubble years, uh
• 1:46
  Speaker 1: in terms of peak valuations. And UH so we're we're
• 1:51
  Speaker 1: reticent to make a let's say, a full year forecast,
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  Speaker 1: but we do have a fairly high degree of confidence
• 1:59
  Speaker 1: that we will see higher highs at least during the
• 2:01
  Speaker 1: first half of the year. And it really just has
• 2:04
  Speaker 1: to do with the internal strength of the market. And
• 2:08
  Speaker 1: I think, you know, animal spirits are a sort of
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  Speaker 1: becoming rekindled here with more pro business talk coming from
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  Speaker 1: the incoming administration. I think you know, that combination of
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  Speaker 1: uh confidence being rehabilitated coming up from from pretty uh
• 2:27
  Speaker 1: skeptical levels and uh and just the action in the
• 2:31
  Speaker 1: market itself had us bullish for you know, at least
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  Speaker 1: the first half of the year. Doug Ramsey, can you
• 2:37
  Speaker 1: just broaden the conversation a little bit by telling us
• 2:40
  Speaker 1: about market breadth and what that's showing you Sure, what
• 2:44
  Speaker 1: we developed a pretty simple indicator, just that we tally
• 2:49
  Speaker 1: each time the SMP makes a new bull market high.
• 2:53
  Speaker 1: So the latest was Tuesday, And we look at UH
• 2:57
  Speaker 1: the spirit indices and indicators like the New York Stock
• 3:00
  Speaker 1: Exchange Daily Advanced Decline line, new high within the last week, UH,
• 3:05
  Speaker 1: Dow transports, UH small cap stocks, financials, various cyclical indices.
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  Speaker 1: I mean, all of these are also poking out to
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  Speaker 1: new all time highs. And just I mean, the history
• 3:17
  Speaker 1: of bullmarket tops going all the way back to the
• 3:20
  Speaker 1: nine is that the final peak in the Dow and
• 3:25
  Speaker 1: the spinal peak and the Blue chips is actually a
• 3:29
  Speaker 1: pretty lonely event where it's really just those two indices
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  Speaker 1: and very little else standing at a new high. So
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  Speaker 1: I've just got to believe in a bullmarket that's lasted
• 3:39
  Speaker 1: almost eight years, that we're going to have a topping
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  Speaker 1: process that is going to be you know, spread out
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  Speaker 1: at a minimum over you know, let's say, four to
• 3:48
  Speaker 1: six months. So one thing that I noticed in your
• 3:53
  Speaker 1: green book was that you said that rising rates aren't
• 3:57
  Speaker 1: always a death now and this is of very interesting point.
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  Speaker 1: It flies in the face of some commentary that we've
• 4:04
  Speaker 1: heard recently, including double lines Jeff Gunlack coming out and
• 4:07
  Speaker 1: saying that, uh, if if treasure yields keep rising to
• 4:10
  Speaker 1: the degree that they have been for a bit longer,
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  Speaker 1: that's going to put pressure on the SMP five hundred.
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  Speaker 1: Why do you disagree, Well, I think there's an offset.
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  Speaker 1: I mean the fact that we're getting back to numbers
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  Speaker 1: and we're not there yet, but you know, if we
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  Speaker 1: if we break above the three handle on the tenure
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  Speaker 1: bond yield, I think there's going to be of course,
• 4:31
  Speaker 1: you know, that's increased competition for the stock market, but
• 4:35
  Speaker 1: there's sort of a countervailing confidence effect that hey, that's
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  Speaker 1: that's a bond yield figure that sounds normal to me
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  Speaker 1: all of a sudden, And even if we get short rates,
• 4:45
  Speaker 1: let's say above one per cent, I think, you know,
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  Speaker 1: they'll just be a sense that, hey, you know, the
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  Speaker 1: rate environment, the policy environment is being normalized, and I
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  Speaker 1: think there's confidence that goes along with that. And even
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  Speaker 1: with the in the cycle, I might and we've already
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  Speaker 1: had a pretty impressive It was an eighteen month stretch
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  Speaker 1: of rising bond yields and rising stock prices from the
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  Speaker 1: middle of twelve to the end of thirteen. The tenure
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  Speaker 1: bond yield went up a hundred and fifty five basis points.
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  Speaker 1: In the face of that, the Spuh. Since this bond
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  Speaker 1: yield rally started in the summer, the SMP is only
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  Speaker 1: up six or seven percent, so there could be a
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  Speaker 1: ways to go. I'm sort of reticent to put a
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  Speaker 1: number on it. You know, where does uh what's a
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  Speaker 1: high enough yield level to inflict some pain on the
• 5:35
  Speaker 1: stock market. But I think it may be as much
• 5:38
  Speaker 1: as a point higher from here, I mean three fifty
• 5:41
  Speaker 1: three sixty um could could be a challenge. So I
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  Speaker 1: think it's always away. Well, Doug Gramsey, as you speak,
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  Speaker 1: the tenure yield topping a two point six percent, The
• 5:54
  Speaker 1: dollar continues its strength against the euro one oh three
• 5:57
  Speaker 1: seventy six, also strength against the pound sterling at a
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  Speaker 1: one four. What does that tell you about the appetite
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  Speaker 1: for US assets? Uh? Well, it's it's strong. Uh, there's
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  Speaker 1: no question about that. I mean, the dollar strength at
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  Speaker 1: some point, I mean sometimes I wonder if that might
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  Speaker 1: be uh a negative stock market trigger. Prior to the
• 6:24
  Speaker 1: rising rates. I mean, it's become very strong. Uh. I
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  Speaker 1: wouldn't be surprised to see the euro dropping into the nineties,
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  Speaker 1: I mean mid to low nineties over the next year,
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  Speaker 1: mid to low nineties for the euro dollar. I just
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  Speaker 1: think when you look at uh the strength of the
• 6:44
  Speaker 1: US economy, and again it's all relative. It hasn't been
• 6:48
  Speaker 1: a great recovery, but it's certainly been far superior to
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  Speaker 1: what's been seen anywhere in Europe. So a simple way
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  Speaker 1: to get Europe competitive shy of the EU in the
• 7:03
  Speaker 1: euro itself um coming undone may just to be to
• 7:07
  Speaker 1: get that currency rate a lot lower, and and they're
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  Speaker 1: benefiting already. You can see it in the performance of
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  Speaker 1: the European multinational stocks. We've got to leave it there,
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  Speaker 1: but thanks very much. Doug Ramsey, chief investment officer the
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  Speaker 1: Loothold Group based in Minneapolis, uh I think that's a
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  Speaker 1: good headline, isn't it. That the euro dollar might trade
• 7:28
  Speaker 1: in the nineties, maybe even in the low nineties over
• 7:31
  Speaker 1: the next six to twelve months. That would be a
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  Speaker 1: huge game changer. Already Europe has seen some advantages from
• 7:37
  Speaker 1: the weaker euro with respect to more trade and more exports.
• 7:42
  Speaker 1: So this will be a very interesting dynamic in the
• 7:43
  Speaker 1: year ahead. But we're trying to imagine what the effects
• 7:57
  Speaker 1: of the United Kingdom's brecks vote will have on wages.
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  Speaker 1: And here to tell us more, as Mark Gilbert Bloomberg
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  Speaker 1: View columnists joining us from our London bureau, Mark Gilbert,
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  Speaker 1: thank you very much for being with us. I note
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  Speaker 1: that the pound right now trading at one against the
• 8:14
  Speaker 1: US dollar, and there have been treasury papers i believe
• 8:17
  Speaker 1: from the Chancellor of the Exchequer and the Bank of
• 8:20
  Speaker 1: England showing that Britain could lose up the sixties six
• 8:24
  Speaker 1: billion pounds a year if it pursues the hard Brexit option.
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  Speaker 1: Tell us what's going on, Well, we had the vote
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  Speaker 1: in June, the referendum, Brits decided they wanted to leave
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  Speaker 1: the European Union, and you can some of the situations
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  Speaker 1: since then. In one word, it's uncertainty. If you look
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  Speaker 1: at the pounds on a trade weighted basis this year,
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  Speaker 1: it's down about fifteen in total. It's rallied seven percent
• 8:46
  Speaker 1: from the October below. But when you've got a weaker
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  Speaker 1: currency like that, what you end up with is important inflation.
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  Speaker 1: And if you look at all of the forecast for
• 8:53
  Speaker 1: what consumer prices are going to do next year, we
• 8:56
  Speaker 1: are looking at a faster inflation rate. So you've got
• 8:58
  Speaker 1: the Office for Budget responsibilit to an independent body here
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  Speaker 1: that kind of marks the government's homework. It says that
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  Speaker 1: the Bank of Englaan's two percent inflation target will get met,
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  Speaker 1: probably in the first quarter of next year, and then
• 9:09
  Speaker 1: inflation will continue to rise, studying out at about two
• 9:12
  Speaker 1: and a half percent. So that's a direct consequence of
• 9:15
  Speaker 1: the weaker pound, which in turn has been sparked by
• 9:18
  Speaker 1: this decision to leave the EU by Brexit. You know,
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  Speaker 1: one thing that I'm struck by is that, you know,
• 9:23
  Speaker 1: inflation has been the holy grail of central banks for years,
• 9:26
  Speaker 1: all of a sudden, now the UK is getting it.
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  Speaker 1: But this seems to be bad inflation. It doesn't necessarily
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  Speaker 1: translate to higher wages. What are we seeing in terms
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  Speaker 1: of UK wages and the ability for consumers to buy
• 9:42
  Speaker 1: goods that are increasingly becoming more expensive. Well, so far
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  Speaker 1: this decade, inflation has been banged on, averaging two percent,
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  Speaker 1: exactly at the Bank of Elian's inflation target, but in
• 9:52
  Speaker 1: recent years it's fallen off. If you look at what
• 9:54
  Speaker 1: wages have done this decade, they've only been one point
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  Speaker 1: eight percent, So Britains have effectively had a pay cut
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  Speaker 1: for the past decade. That arguably is one of the
• 10:04
  Speaker 1: sparks for for Brexit. You know, this argument that all
• 10:06
  Speaker 1: of the benefits of economic growth have gone to capital
• 10:09
  Speaker 1: rather than to labor. They lead into a bit of
• 10:11
  Speaker 1: populism in a lot of countries, and so arguably that's
• 10:14
  Speaker 1: part of what the motivation was for voting Brexit. Wages though,
• 10:19
  Speaker 1: have not tended to move with inflation, and if you
• 10:24
  Speaker 1: look at the forecast going forward, as I said, inflation
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  Speaker 1: expected to accelerate, but wages are respected to stagnate, and
• 10:29
  Speaker 1: by the end of next year the Office for Budget
• 10:31
  Speaker 1: Responsibility thinks that inflation will once again be faster than
• 10:36
  Speaker 1: wage growth and that people will be getting a pay
• 10:37
  Speaker 1: cut again. Marcus, there are a debate about different sectors
• 10:41
  Speaker 1: of the British economy. For example, those workers in the
• 10:44
  Speaker 1: agricultural sector, there's a report that they might actually see
• 10:49
  Speaker 1: wage increases. There's certainly places where you're seeing labor shortages,
• 10:53
  Speaker 1: and so if we close the door to immigration, which
• 10:57
  Speaker 1: is one of the consequences of of Brexit, then you'll
• 11:00
  Speaker 1: only see price pressures in the agriculture industry where a
• 11:03
  Speaker 1: lot of immigrants work. If you look in the construction
• 11:05
  Speaker 1: sense sector workers in their plumbers plasters. They've been enjoying
• 11:10
  Speaker 1: really really good pay growth for several years now because
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  Speaker 1: we still have a construction boom, particularly in the southeast
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  Speaker 1: of the country. But those sexual gains will help the
• 11:20
  Speaker 1: overall picture for wages according to the oh B r
• 11:22
  Speaker 1: um And indeed, there's a question as to how fast
• 11:26
  Speaker 1: inflation the Bank of England will tolerate. It says it
• 11:29
  Speaker 1: will tolerate inflation over target for a while. If it's
• 11:33
  Speaker 1: appetite for for for that faster inflation proves greater than
• 11:36
  Speaker 1: people expect, then the impact on wages could be even greater.
• 11:39
  Speaker 1: So I'm trying to expect to understand this. Today the
• 11:42
  Speaker 1: Bank of England decided to keep its interest rate at
• 11:46
  Speaker 1: a record low level. UM. If the BOE decides to
• 11:51
  Speaker 1: raise rates more quickly than people are expecting in response
• 11:55
  Speaker 1: to some of this higher inflationary pressure, will this caused
• 11:59
  Speaker 1: the power and to appreciate significantly? I mean, is that
• 12:03
  Speaker 1: is that under the Bank of England's control even well,
• 12:07
  Speaker 1: like like most central banks, they say they don't target
• 12:11
  Speaker 1: the currency rate. Certainly, the the European Central Bank says
• 12:14
  Speaker 1: the same. The Federal Reserve says the same. If you
• 12:17
  Speaker 1: look in the futures market, there's about a thirty six
• 12:19
  Speaker 1: percent chance of higher interest rates by the end of
• 12:21
  Speaker 1: next year, so not even at fifty. So the market
• 12:25
  Speaker 1: is definitely expecting the Bank of England to stand pat
• 12:28
  Speaker 1: through next year, and that's in line with it's with
• 12:30
  Speaker 1: its claim that it will it will allow faster inflation
• 12:32
  Speaker 1: for a while to compensate for the slower consumer prices
• 12:35
  Speaker 1: that we've seen. Guessing currencies anyone's any you can't make
• 12:39
  Speaker 1: money guess and occurrencies. I don't think the pound historically,
• 12:43
  Speaker 1: whenever it's had a fall of this kind of magnitude,
• 12:45
  Speaker 1: it's tended to stay at that level for quite a
• 12:48
  Speaker 1: few years. We had in nine we had a similar
• 12:51
  Speaker 1: collapse in the pound after we left the exchange right mechanism.
• 12:54
  Speaker 1: Pound weakness is something that I think that the economy
• 12:56
  Speaker 1: is just going to have to cope with for the
• 12:58
  Speaker 1: rest of the year. You know, we had news this
• 13:00
  Speaker 1: week Lego is going to raise the prices of plastic
• 13:03
  Speaker 1: bricks by five as a compensation for what they've seen
• 13:07
  Speaker 1: in the weakness of the pounds, and most kind of
• 13:09
  Speaker 1: increases for imported goods. I think you're going to be
• 13:12
  Speaker 1: something that we're going to see more of as the
• 13:14
  Speaker 1: months roll by. Mark Gilbert, thank you so much for
• 13:17
  Speaker 1: joining us, Mark Gilbert Bloomberg view calumness coming to us
• 13:20
  Speaker 1: from London ground zero for Brexit and all of the
• 13:24
  Speaker 1: developments that are coming with respect to inflation, wages, and
• 13:27
  Speaker 1: price increases. We're going to try to imagine what is
• 13:42
  Speaker 1: going to happen next year in the bond market. This
• 13:45
  Speaker 1: is the big question, the big mystery. I want to
• 13:47
  Speaker 1: bring in Eric Stein, who is going to solve this
• 13:49
  Speaker 1: mystery for us? Eric Stein, co director of Global Fixed
• 13:52
  Speaker 1: Income at Eaton Vans. Yesterday, the Federal Reserve decided to
• 13:56
  Speaker 1: raise interest rates by a quarter of percentage point that
• 13:58
  Speaker 1: everybody was expecting. What people were not expecting was that
• 14:02
  Speaker 1: the Fed increased the projection from to rate hikes x
• 14:05
  Speaker 1: here to three rate hikes six here. So, Eric, do
• 14:08
  Speaker 1: you think that we are just going to see three
• 14:10
  Speaker 1: rate hikes next year or do you think that there's
• 14:12
  Speaker 1: even a possibility of even four. I certainly think there's
• 14:15
  Speaker 1: a possibility of four rate hikes. You know. I think
• 14:17
  Speaker 1: what's interesting about yesterday is a couple of things. First, off.
• 14:20
  Speaker 1: The dot plot almost never goes um up in terms
• 14:24
  Speaker 1: of rates. It always goes down. We're actually we're debating this,
• 14:27
  Speaker 1: uh in our eating Vance Global Macro Team research meeting today.
• 14:30
  Speaker 1: There's actually been one time that one dot went up
• 14:32
  Speaker 1: if you go back to two thousand fourteen, but generally
• 14:35
  Speaker 1: dots come down. So now we saw the first dot
• 14:38
  Speaker 1: just just just just backing up. The FED dots are
• 14:41
  Speaker 1: the individual FED member projections for where benchmark rates will
• 14:46
  Speaker 1: be over time. So when people talk about the dot plot,
• 14:49
  Speaker 1: they're talking about sort of, uh, that projection, and it
• 14:51
  Speaker 1: moved upwards. It moved from to rate hikes applying to
• 14:54
  Speaker 1: rate hikes at three right hicks last yesterday, Yes, exactly,
• 14:58
  Speaker 1: and so it moved up from two to three. What
• 15:00
  Speaker 1: I was expecting was that it was gonna that was
• 15:02
  Speaker 1: gonna happen, but at the March meeting, not here at
• 15:05
  Speaker 1: the December meetings. So to me, that's very symbolic. And
• 15:07
  Speaker 1: what Chairwoman Janet Yellen said when she was asked at
• 15:09
  Speaker 1: her press conference was that some maybe a few members
• 15:12
  Speaker 1: had incorporated the potential fiscal stimulus from the incoming Trump
• 15:15
  Speaker 1: administration and other regulatory and tax policy changes that could
• 15:19
  Speaker 1: be pro growth as well as some things that could
• 15:21
  Speaker 1: potentially be inflationary, but everyone hasn't incorporated that yet. So
• 15:24
  Speaker 1: they FED also raised their growth projection from two to
• 15:27
  Speaker 1: two point one. They lowered the unemployment projection from four
• 15:30
  Speaker 1: point six to four point five. Marginal changes. But if
• 15:33
  Speaker 1: the growth in inflation out look picks up, as I
• 15:35
  Speaker 1: think it will and the markets they're telling us that
• 15:38
  Speaker 1: it will, I think the dots could also go up.
• 15:40
  Speaker 1: So I think three three rate hikes is certainly likely.
• 15:42
  Speaker 1: Four as possible. Look, maybe the market can't take it.
• 15:45
  Speaker 1: There's no guarantee that happens, but I think four hikes
• 15:48
  Speaker 1: is certainly on the table in two thousand seventeen. Eric,
• 15:52
  Speaker 1: some of those thoughts might disappear in twenty seventeen because
• 15:55
  Speaker 1: they're not going to have the same members of the
• 15:57
  Speaker 1: f O m C. And indeed, Janet Yellen's and I believe,
• 16:00
  Speaker 1: expires in February of eighteen. So what do you see
• 16:04
  Speaker 1: in terms of any change in the disposition of the FED?
• 16:07
  Speaker 1: So I I you know there. I do think it's
• 16:08
  Speaker 1: gonna be very interesting to see how the Trump administration
• 16:11
  Speaker 1: fills those vacancies that are there's a couple. I think
• 16:13
  Speaker 1: on the governor's side that are currently open more will
• 16:15
  Speaker 1: be open. As you mentioned, Chair Yelling's term as Chair
• 16:19
  Speaker 1: ends in February of eighteen. Actually her term as governor
• 16:22
  Speaker 1: goes farther, but typically I don't think it's ever happened
• 16:24
  Speaker 1: that someone stayed Honors chair when they're UM, when they've
• 16:28
  Speaker 1: when they stayed on his governor, I should say, when
• 16:31
  Speaker 1: they lost their their chairship. So I do think Trump
• 16:34
  Speaker 1: will a point at the margin, maybe more hawkish members
• 16:38
  Speaker 1: UM than you would have seen, let's say, under Hillary
• 16:40
  Speaker 1: Clinton administration, that being said as much as Trump in
• 16:42
  Speaker 1: the past is criticized yelling for keeping rates low to
• 16:46
  Speaker 1: boost the stock market. You know, if we're gonna spend
• 16:48
  Speaker 1: more money and we're gonna have more debt, lower rates
• 16:51
  Speaker 1: are are are make that easier. So I wouldn't expect
• 16:54
  Speaker 1: super hawkish members, but I would expect maybe more hawkish,
• 16:57
  Speaker 1: more monitorius, less Kinsian members appointed to the Fed under
• 17:02
  Speaker 1: our Trump administration. You know, how dangerous is the possibility
• 17:06
  Speaker 1: that right now the consensus and markets is completely wrong,
• 17:09
  Speaker 1: that U that rates will potentially even not not benchmark rates,
• 17:14
  Speaker 1: but but treasury yields, particularly the ten year, yield comes
• 17:17
  Speaker 1: down in the first quarter of next year. If you
• 17:20
  Speaker 1: know President elect Trump's team doesn't necessarily come forward with
• 17:23
  Speaker 1: specific plans or runs into some issues convincing Republican leadership
• 17:27
  Speaker 1: in the House and send it to come on board
• 17:30
  Speaker 1: with him, what is the risk uh for for a
• 17:33
  Speaker 1: very serious uh rally that could also spur a pretty
• 17:36
  Speaker 1: serious sell off in other markets. So so that's certainly
• 17:39
  Speaker 1: a risk. Look when when Trump got elected, which is
• 17:42
  Speaker 1: now what five weeks ago, I said, Look, the distribution
• 17:44
  Speaker 1: of economic outcomes has widened. I think the modal outcome
• 17:47
  Speaker 1: has gone up, but the distribution has widen. That's still
• 17:50
  Speaker 1: that still remains. Let's say he can't get those things past.
• 17:53
  Speaker 1: Let's say then we get a bunch of tweets and
• 17:55
  Speaker 1: trade protectionism will definitely get a bunch of treats. We'll
• 17:57
  Speaker 1: definitely get a bunch of tweets, but we'll get if
• 17:59
  Speaker 1: we get trade protec action, is um and some other
• 18:00
  Speaker 1: of his policies that I don't think are so strong
• 18:03
  Speaker 1: that I think the baseline for the markets and myself
• 18:05
  Speaker 1: is that those will be somewhat muted. Then you could
• 18:07
  Speaker 1: have worst economic outcomes. You could see a rally in
• 18:10
  Speaker 1: the bondom market. I do think many of these policies,
• 18:12
  Speaker 1: though even some of the bad ones like trade protectionism,
• 18:15
  Speaker 1: are inflationary, some of the good ones that are pro
• 18:17
  Speaker 1: growth also might be inflationary. So I think we will
• 18:20
  Speaker 1: get somewhat of an inflationary impulse. And I think that's
• 18:22
  Speaker 1: why the Fed moved from two to three hikes in
• 18:25
  Speaker 1: their so called dot plot. Eric Stein, thank you, portfolio
• 18:29
  Speaker 1: manager co director of Global fixed Income for Eaton Advance,
• 18:32
  Speaker 1: helping to manage three hundred billion dollars of customer assets.
• 18:36
  Speaker 1: He is based in Boston, home to Bloomberg. Thank you
• 18:39
  Speaker 1: very much for coming in and spending time with us.
• 18:52
  Speaker 1: All Right, we are a FED day plus one, and
• 18:55
  Speaker 1: here to tell us more is Joe Davis. He is
• 18:57
  Speaker 1: the chief global economist for the Van Card Group. Joe,
• 19:00
  Speaker 1: thanks for coming into the studio. Thanks for having um.
• 19:03
  Speaker 1: So maybe you can just explain a little bit about
• 19:07
  Speaker 1: the vanguard response to the rate decision and then maybe
• 19:10
  Speaker 1: connect that with what you see happening in and then
• 19:14
  Speaker 1: markets as well. You know, so what what we noted
• 19:17
  Speaker 1: the clients, we we we we applauded the decision. Um
• 19:21
  Speaker 1: we were anticipating this year, phim that actually the federal
• 19:23
  Speaker 1: reserve UM through the course of seventeen was actually going
• 19:27
  Speaker 1: to be at least about one UM. And so what
• 19:30
  Speaker 1: I think we saw yesterday was a little bit of
• 19:33
  Speaker 1: building confidence in in the outlook, something I think that
• 19:36
  Speaker 1: quite frankly was warned six months ago UM And so
• 19:39
  Speaker 1: I think I don't think we're gonna see very hawkish
• 19:42
  Speaker 1: activity by the Federal Reserve. But I think we have
• 19:44
  Speaker 1: taken out at the margin this this and this deflationary
• 19:47
  Speaker 1: tale that we were concerned about. Okay, so we might
• 19:50
  Speaker 1: have taken out the disinflationary the deflationary tale, but are
• 19:53
  Speaker 1: we setting ourselves up for gangbusters growth, incredible inflation, a
• 19:58
  Speaker 1: departure from the new normal? Is this the end of
• 20:00
  Speaker 1: the bond bull market in the beginning of you know,
• 20:03
  Speaker 1: clear sailing ahead. It's a great point. So paired with
• 20:06
  Speaker 1: that with those comments, is I think we have to
• 20:08
  Speaker 1: appreciate where where we should be right as you can
• 20:11
  Speaker 1: best estimate that and our estimates say where the tenure treasury,
• 20:14
  Speaker 1: which is a key benchmark right now, and we were
• 20:18
  Speaker 1: we were two point five zero as if you can
• 20:20
  Speaker 1: measure that precisely this time last year and we haven't changed.
• 20:23
  Speaker 1: So we were skeptical that the world, we believe the
• 20:26
  Speaker 1: markets in the world was to the bond market was
• 20:28
  Speaker 1: a little too pessimistic by the summer. At the same time,
• 20:32
  Speaker 1: you are being too PESSI well, we all have. I
• 20:36
  Speaker 1: just like would be careful of not being let animal
• 20:38
  Speaker 1: spirits get out of control. I mean the equity market,
• 20:41
  Speaker 1: if you, if you do the math, is pricing in
• 20:43
  Speaker 1: closer to four percent real GDP grow for twenty seventeen.
• 20:46
  Speaker 1: I think that's highlight unlikely. So I think choose somewhere
• 20:48
  Speaker 1: in between. I think we're actually closer to fair value
• 20:51
  Speaker 1: if you look at say the shape of the Eel
• 20:53
  Speaker 1: curve and the treasury markets, credit markets. But but you know,
• 20:57
  Speaker 1: so if we would see maturial creator move, I think
• 20:59
  Speaker 1: we'd be careful. Okay, you say if we see a
• 21:01
  Speaker 1: material greater move, we should be careful. I was actually
• 21:03
  Speaker 1: just gonna ask you Jeff Gunlock of Double Line Capital
• 21:07
  Speaker 1: that came out and said, if you start to see
• 21:08
  Speaker 1: much higher yields on the tenure, even up to three percent,
• 21:12
  Speaker 1: that's going to start to pressure some of the riskier assets.
• 21:15
  Speaker 1: Do you agree, yes, I mean, I think even before
• 21:18
  Speaker 1: to look at the at the three percent on the
• 21:20
  Speaker 1: tenure treasure would be looking at the US dollar. I mean,
• 21:22
  Speaker 1: we're already a point with which I think we'll we'll
• 21:25
  Speaker 1: be hard pressed to see a further acceleration to manufacturing sector,
• 21:28
  Speaker 1: which again the global economy was rebounding from its law
• 21:31
  Speaker 1: before the election. So I think if you can take
• 21:34
  Speaker 1: that into account, if we see another ten percent rise
• 21:37
  Speaker 1: in the dollar versus the basket of currencies, we will see,
• 21:41
  Speaker 1: you know, further pressure on some of the import prices
• 21:43
  Speaker 1: and on some of the growth. So I think there's
• 21:44
  Speaker 1: a natural limit to how far we can go, and
• 21:47
  Speaker 1: at some point twenty seventeen we could very likely test
• 21:49
  Speaker 1: what that limit is. I think would be shocking to
• 21:52
  Speaker 1: see a further acceleration across the board in the financial
• 21:55
  Speaker 1: assets that we've seen in the past thirty days. We'll
• 21:57
  Speaker 1: glad you mentioned financial assets because this headline coming from
• 22:00
  Speaker 1: the Federal Reserve that big banks are seventy billion dollars
• 22:04
  Speaker 1: short of the debt needed to weather failure. Maybe talk
• 22:07
  Speaker 1: a little bit about the financial sector and the increase
• 22:10
  Speaker 1: in rates and what this means for their future. Yeah,
• 22:13
  Speaker 1: I mean, I think, you know, if you take a
• 22:14
  Speaker 1: broader step back. And you know, I think one of
• 22:16
  Speaker 1: the actually the hallmarks of the U S economy. One
• 22:19
  Speaker 1: one of our thesis for while the USC was going
• 22:21
  Speaker 1: to remain resilient over the past several years, was with
• 22:23
  Speaker 1: the repair of the balance sheets, I mean on the
• 22:25
  Speaker 1: consumer side, household side, clearing in the banking sector, which
• 22:29
  Speaker 1: gets other parts of the world, we have not seen
• 22:31
  Speaker 1: this similar progress. So that aside. You know, obviously the
• 22:34
  Speaker 1: flight near the old curve before recent before more recently
• 22:38
  Speaker 1: was putting some pressure um and so it's nice to
• 22:40
  Speaker 1: see some steepness in the OL curve that clearly you've
• 22:42
  Speaker 1: seen in the financial marketing, equity prices um so. But
• 22:45
  Speaker 1: again it's not all smooth sailing. So I think in
• 22:48
  Speaker 1: one sense, you know, I think I think history will
• 22:51
  Speaker 1: show this, this very strong concern of new normal stagnation
• 22:54
  Speaker 1: was a little bit overdone. At the same time, we're
• 22:57
  Speaker 1: starting to enter the world of some talking about a
• 22:59
  Speaker 1: sickle gold strong recovery, and I think we have been
• 23:02
  Speaker 1: burned over the past four or five years, and I
• 23:04
  Speaker 1: think there are still some structural forces at work, and
• 23:06
  Speaker 1: so I think the truth is somewhere in between. I
• 23:08
  Speaker 1: think right there in the markets were sitting right at
• 23:11
  Speaker 1: that sort of fulcrum, and so we just which is
• 23:14
  Speaker 1: which is fine. It's it's good that we're more balanced, um,
• 23:16
  Speaker 1: but we can't get too carried away. Earlier this week,
• 23:19
  Speaker 1: the Treasury Department's Office of Financial Research came out with
• 23:22
  Speaker 1: the report talking about how concerned they were about corporate
• 23:27
  Speaker 1: debt in the US, the explosion of the market, which
• 23:30
  Speaker 1: is increased in size by more than fifty since the
• 23:33
  Speaker 1: end of two thousand and eight. And they were talking
• 23:35
  Speaker 1: about how, uh, while big financial firms are stress tested,
• 23:40
  Speaker 1: the mutual funds and the pensions and the insurers which
• 23:45
  Speaker 1: own a much greater proportion of the debt today may
• 23:47
  Speaker 1: used to are not stress tested. Do you think that
• 23:50
  Speaker 1: the corporate debt market holds some concern or poses some
• 23:53
  Speaker 1: kind of significant threat to financial stability? Really not. I
• 23:57
  Speaker 1: mean I think you know, particularly we're going to talk about,
• 23:59
  Speaker 1: you know, from the SA management industry. I mean that's
• 24:01
  Speaker 1: concerned around um, them being systemically important or having that
• 24:05
  Speaker 1: sort of risk in our minds, just it's just overstated.
• 24:07
  Speaker 1: I mean, in many ways it's a pass through entity.
• 24:09
  Speaker 1: I mean, you have to look at the mismatch. If
• 24:11
  Speaker 1: there is any between assets and liabilities in that sense,
• 24:14
  Speaker 1: it's not the case. I mean, we have seen deterioration
• 24:17
  Speaker 1: in corporate health right um, outside of the financial greater
• 24:21
  Speaker 1: increase in in some debt, although part of that has
• 24:23
  Speaker 1: to be compared to the c ANI landing which we've seen.
• 24:26
  Speaker 1: So part of this has been a financing remix commercial
• 24:28
  Speaker 1: and industry. Yeah, yeah, so we have this excuse me
• 24:31
  Speaker 1: for the nomenclich but yeah, so there's something that's been
• 24:33
  Speaker 1: a refinance in which in the zero bound, very low
• 24:35
  Speaker 1: industry environment, I think has been natural. You know, our
• 24:38
  Speaker 1: biggest concern on the corporate debt market has actually been
• 24:40
  Speaker 1: overseas in the emerging markets. You know, non financial private
• 24:44
  Speaker 1: sector debt has increased significantly UM and in various you know,
• 24:48
  Speaker 1: government agencies around the world think tanks have called that out.
• 24:50
  Speaker 1: So that that's if there's a pressure point in terms
• 24:53
  Speaker 1: of corporate leverage, it's the emerging markets that I think,
• 24:55
  Speaker 1: you know, so you know, we just have to monitor
• 24:58
  Speaker 1: and to that point, I mean, the as you talked
• 25:01
  Speaker 1: about earlier is the strongest that it's been since two
• 25:03
  Speaker 1: thousand and three. Uh. If this is not the time
• 25:06
  Speaker 1: when emerging markets corporates are going to feel pain when
• 25:08
  Speaker 1: is yeah and you know so yes, and I think
• 25:10
  Speaker 1: we're go and we've seen that already in some repricing.
• 25:12
  Speaker 1: I think, you know, however, in the market, I think
• 25:14
  Speaker 1: it's some of this um um but it but it
• 25:17
  Speaker 1: may be lost over the next six months as we
• 25:19
  Speaker 1: have continued prospects for potential continue US dollar strength. Is
• 25:23
  Speaker 1: that you know, emerging markets today are not emerging markets
• 25:26
  Speaker 1: in late nineteen ninies. I mean, there's one or two
• 25:28
  Speaker 1: potentially that you that you could zero in on, but
• 25:31
  Speaker 1: everything from foreign reserves to to to some better balance
• 25:34
  Speaker 1: sheet measures and and and and level of certain financing.
• 25:38
  Speaker 1: It's different and so at least they're not all in
• 25:39
  Speaker 1: the same bag. And so I don't think we're going
• 25:41
  Speaker 1: to see a set of rolling crisises um, but we
• 25:44
  Speaker 1: will see some pressure points. Thank you so much. Thank you.
• 25:48
  Speaker 1: This is a very interesting time and you've had a
• 25:50
  Speaker 1: lot of interesting insights. Thanks for listening to the Bloomberg
• 25:58
  Speaker 1: P and L podcast. You can subscribe and listen to
• 26:01
  Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 26:06
  Speaker 1: I'm pim Fox. I'm out there on Twitter at pim Fox.
• 26:10
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 26:13
  Speaker 1: before the podcast. You can always catch us worldwide on
• 26:16
  Speaker 1: Bloomberg Radio