Latest / Bloomberg Intelligence / P&L: Does The Fed Still Matter to Equity Traders?

Transcript

P&L: Does The Fed Still Matter to Equity Traders? · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg pm L podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. I'm Lisa Bramo. WIT's
• 0:31
  Speaker 1: my co host, Pim Fox is on vacation. We let
• 0:34
  Speaker 1: him out of the building, but he will be back
• 0:36
  Speaker 1: in about a week and a half. I want to
• 0:38
  Speaker 1: learn more about whether the FED even matters if you're
• 0:43
  Speaker 1: an equity trader anymore, given that inflation expectations have gone
• 0:47
  Speaker 1: up so much that it almost makes the benchmark great
• 0:51
  Speaker 1: less relevant, possibly irrelevant. I want to bring in Matt Malley,
• 0:54
  Speaker 1: equity strategist at Miller t Back, to give an answer
• 0:58
  Speaker 1: to that. Matt, what do you think we always so
• 1:01
  Speaker 1: the one thing that we do have to worry about?
• 1:03
  Speaker 1: What that is? And I certainly understand why, uh why
• 1:07
  Speaker 1: people are starting to feel that way, and and and
• 1:10
  Speaker 1: I think we would all agree that would be a
• 1:12
  Speaker 1: good thing because they've been so dependent on the set
• 1:15
  Speaker 1: for so long. But the one thing I do worry
• 1:17
  Speaker 1: about is we move into next year. Uh. Anything can
• 1:20
  Speaker 1: happen in the next six weeks or so, but UH
• 1:23
  Speaker 1: is that as rates move up, we still have huge
• 1:25
  Speaker 1: amounts of leverage in the marketplace. Now the banking system
• 1:28
  Speaker 1: is certainly the U S banking system anyway, is much
• 1:30
  Speaker 1: less leverage than it was during the during the crisis.
• 1:34
  Speaker 1: But the New York Stock Exchange margin dead is above
• 1:39
  Speaker 1: it's two sounds of seven seven levels. So there's still
• 1:41
  Speaker 1: a lot of leverage out there. And as interest rates
• 1:43
  Speaker 1: move higher, the cost of carrying that leverage, UH will
• 1:47
  Speaker 1: go up, and which means some people will have to
• 1:49
  Speaker 1: unwind some of that leverage. So for one second, I
• 1:53
  Speaker 1: really want to dig into where the leverage could be
• 1:56
  Speaker 1: because a lot of people have talked, as you mentioned, Matt,
• 1:59
  Speaker 1: the banks themselves have de levered. But this is an
• 2:01
  Speaker 1: important point. I mean, where is the leverage? Where are
• 2:04
  Speaker 1: we going to see the pain? Well, you see, like
• 2:07
  Speaker 1: I said that the New York stock has changed, and
• 2:09
  Speaker 1: just in the stock market than the amount of margin
• 2:11
  Speaker 1: debt UH with people are just levering up on the
• 2:14
  Speaker 1: markets is is at all time higher. It's actually I
• 2:17
  Speaker 1: think it's just slightly below that, but it's uh well
• 2:21
  Speaker 1: above where it wasn't two thousand and seven. We've also
• 2:24
  Speaker 1: seen um, you know, with the you know, so much debt,
• 2:27
  Speaker 1: with some of these companies putting on things, so much
• 2:30
  Speaker 1: debt has been put into non uh things that didn't
• 2:34
  Speaker 1: really help service that debt. In other words, they've gone
• 2:36
  Speaker 1: back to buying back stock and such and rather than
• 2:39
  Speaker 1: investing in their in their own businesses. So uh, in
• 2:41
  Speaker 1: a in a weird way, uh, the companies that are
• 2:45
  Speaker 1: more leverage than they used to be. And of course
• 2:47
  Speaker 1: we have a private private debt as a percentage of
• 2:50
  Speaker 1: GDP up at historic Hive. So there's a lot of
• 2:53
  Speaker 1: leverage out there in the marketplace, even though it's not
• 2:55
  Speaker 1: necessarily in the banking system. And therefore I'm not worried
• 2:58
  Speaker 1: about the system collapsing, but they still could have a
• 3:01
  Speaker 1: cause the headwinds for for for the for the stock markets,
• 3:03
  Speaker 1: because leverage help the addition of leverage help the stock
• 3:06
  Speaker 1: market move higher in the last six seven years. I'm
• 3:09
  Speaker 1: not certainly not saying that's the only reason one up,
• 3:11
  Speaker 1: but it's certainly helped it. So we'll cause the headwind
• 3:13
  Speaker 1: if if that leverage needs to be unwound. So what
• 3:16
  Speaker 1: would have to happen for the leverage to be unwound?
• 3:18
  Speaker 1: I mean, is this people borrowing short term in order
• 3:21
  Speaker 1: to finance longer term purchases are riskier purchases, So if
• 3:24
  Speaker 1: the short term rate to borrow goes up substantially, people
• 3:28
  Speaker 1: will need to de lever. Is that the idea here,
• 3:30
  Speaker 1: so that that as benchmark rates climb higher, you will
• 3:33
  Speaker 1: see sort of some of this leverage squeezed out, Yes, exactly.
• 3:36
  Speaker 1: And then I mean, although I will say this, it's funny,
• 3:40
  Speaker 1: you know the people are talking about among one of
• 3:42
  Speaker 1: the things I've been saying for a while is that
• 3:43
  Speaker 1: the FED realizes this, and that's one of the reasons
• 3:45
  Speaker 1: why they said, even before they did their first rate
• 3:48
  Speaker 1: hike that they would go very slow. And part of
• 3:50
  Speaker 1: that has to do with the what with the speed
• 3:52
  Speaker 1: of the economy, but it also has to do with
• 3:54
  Speaker 1: this issue. They don't want to suddenly cause more problems
• 3:58
  Speaker 1: than they're solving. So I don't you know, everybody's starting
• 4:01
  Speaker 1: to say, now with Trump coming in the office, suddenly
• 4:03
  Speaker 1: they're gonna have to raise rates a lot faster than
• 4:04
  Speaker 1: they than they would otherwise have UH, that's probably true,
• 4:08
  Speaker 1: but I don't think it will be quite as fast
• 4:10
  Speaker 1: as people as some of the most various people are
• 4:12
  Speaker 1: calling for. UH. And so again it's causing a headwind,
• 4:16
  Speaker 1: not a major a major problem, but it's definitely something
• 4:19
  Speaker 1: that will have an impact on stock prices away from
• 4:22
  Speaker 1: the fundamentals, and with with the settle reserve having been
• 4:25
  Speaker 1: so important to the markets in the last few years, UH,
• 4:28
  Speaker 1: some of these non fundamental factors have been important and
• 4:31
  Speaker 1: they will be for I'm sorry for to say for
• 4:33
  Speaker 1: some time to come. Which areas of the stock market
• 4:35
  Speaker 1: do you think are most vulnerable to a dramatic pullback
• 4:38
  Speaker 1: as leverage gets squeezed out? Well, and it's really gonna
• 4:41
  Speaker 1: be across the board on a very near term basis,
• 4:43
  Speaker 1: though is oddly enough, is that I worry about the
• 4:48
  Speaker 1: financial stocks only, and this is between. This is really
• 4:51
  Speaker 1: on a short term basis, been between maybe now on
• 4:53
  Speaker 1: the end of the year. They are certainly poised to
• 4:55
  Speaker 1: go higher because UH, interest rates are poisoned to go
• 4:58
  Speaker 1: higher and which should you know, invert the sorry, UH,
• 5:02
  Speaker 1: keep the EO courage steeper, continue to steep, and then
• 5:05
  Speaker 1: that should be helpful However, they've gone so far, so fast,
• 5:08
  Speaker 1: and the problem is we have everybody's on one side
• 5:10
  Speaker 1: of the boat. You look at the sentiment indicators for
• 5:13
  Speaker 1: the mom market, there's over extend as I've ever seen them.
• 5:16
  Speaker 1: I've been doing this for over thirty years. Uh And,
• 5:18
  Speaker 1: and the positioning isn't quite as bad as it has been,
• 5:21
  Speaker 1: but it's still quite extreme, or getting more extreme, I
• 5:23
  Speaker 1: should say. And the same with the bank stocks. You
• 5:25
  Speaker 1: look at some of these charts, they're wildly overbought. Again.
• 5:29
  Speaker 1: I guess my point is these things will may look
• 5:32
  Speaker 1: like they're collapsing for a very short period of time.
• 5:34
  Speaker 1: But if you like these groups and uh and in
• 5:37
  Speaker 1: these sectors you want, you want to think hold off
• 5:39
  Speaker 1: and buy them. I think you get a better chance
• 5:41
  Speaker 1: to buy them at lower levels down the road as
• 5:43
  Speaker 1: we moved towards the end of the year, rather than
• 5:44
  Speaker 1: chasing them up at these levels. Matt malle thank you
• 5:47
  Speaker 1: so much for joining us. Matt Malley, equity strategist at
• 5:49
  Speaker 1: Miller T Back. Thanks for listening to the Bloomberg P
• 5:59
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 6:02
  Speaker 1: at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm
• 6:07
  Speaker 1: pim Fox. I'm out there on Twitter at pim Fox.
• 6:11
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 6:14
  Speaker 1: before the podcast. You can always catch us worldwide on
• 6:16
  Speaker 1: Bloomberg Radio