Latest / Bloomberg Intelligence / APERS Borromeo Sees Fed on Hold, 'Data Is Not There' (Audio)

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APERS Borromeo Sees Fed on Hold, 'Data Is Not There' (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stot with Kathleen Days and pim
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  Speaker 1: Box on Bloomberg Radio. How do you provide for the
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  Speaker 1: retirement of thousands of people who are public employees? Particularly
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  Speaker 1: in the Arkansas Public Employees Retirement system. Well, first you
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  Speaker 1: ask Carlos Borromeo, he is the chief investment officer based
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  Speaker 1: in Little Rock, Arkansas, how to do it? Carlos, thank
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  Speaker 1: you very much for being with us. Well, thank you
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  Speaker 1: for having me so in the Arkansas Public Employees retirement system,
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  Speaker 1: you have a responsibility to all of those retirees to
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  Speaker 1: meet those retirement benefits. How are you doing that? When
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  Speaker 1: you look at a thirty year US Treasury bond that
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  Speaker 1: trades at two point one per cent, it's definitely been
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  Speaker 1: a challenge of situation and having it seems like he
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  Speaker 1: wants to continue even lower. It's going to pose an
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  Speaker 1: even greater challenge on all retirement systems. You know, I
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  Speaker 1: think the people who keeps the levelhead and don't start
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  Speaker 1: reaching for yield and unnecessary risks. Um, you've got to
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  Speaker 1: keep your cool in this environment. Well, Carlos says that help.
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  Speaker 1: We've no each other for a long time over the
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  Speaker 1: years of my different news organizations and your different roles,
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  Speaker 1: and you've been an arranging bond bull for some time.
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  Speaker 1: You've been addicting an ever lower level of long term yields.
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  Speaker 1: You've said that the United States was gonna look more
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  Speaker 1: and more like Japan. I don't think we necessarily there.
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  Speaker 1: You and I could debate that, but um, what is
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  Speaker 1: it that has driven this position and has it helped
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  Speaker 1: you then in your role not be blindsided by this,
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  Speaker 1: but somehow at least be able to avoid any negative
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  Speaker 1: fallout or take advantage of it in terms of the funds.
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  Speaker 1: As far as avoiding it, it's it's certainly helped. I
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  Speaker 1: think I have one of the lowest allocations in the
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  Speaker 1: state two fixed income UM my target, and I'm still
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  Speaker 1: sitting below that. So in that regard, it's definitely helped. Um,
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  Speaker 1: but it's still worries me because I'm certainly overallocated to equities. UM.
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  Speaker 1: So you're just trading one risk for another, and that's
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  Speaker 1: that's the tricky part of sitting in this seat. Um Yeah,
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  Speaker 1: I mean you and I have gone back and forth
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  Speaker 1: over the years that we're looking more and more like Japan.
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  Speaker 1: And I would argue if you you pull up the
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  Speaker 1: j g B chart when jgbs were and running from
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  Speaker 1: ninete to two thousand nine, so approximately twenty years. It
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  Speaker 1: took the JGBS about twenty years to go from eight
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  Speaker 1: so about where we are now one one and three
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  Speaker 1: eight on a tenure note, it's taken us from two
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  Speaker 1: thousand and sixteen, so twenty two years. So we're mirroring
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  Speaker 1: their yield curve, whether we like it or not. Carlos,
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  Speaker 1: the fund itself, the assets under manager, what are you
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  Speaker 1: talking about? Maybe seven and a half seven half billion?
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  Speaker 1: And uh, it's the funded status of the of the system. Uh,
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  Speaker 1: something like that. Okay. Now, the reason I bring up
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  Speaker 1: these numbers is because you know, when you manage a
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  Speaker 1: system over a long period of time, and I think
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  Speaker 1: it was in your own report you say that you
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  Speaker 1: know the return for let's say two thousand and nine
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  Speaker 1: was negative twenty to a high of plus in twenty eleven.
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  Speaker 1: How do you manage that kind of volatility? It's not easy, right, Um,
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  Speaker 1: if we all had a crystal ball when we look
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  Speaker 1: at the allocation, look into the future. Um, you look
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  Speaker 1: back and would we have allocated differently? Um? Would you
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  Speaker 1: have allocated differently? Do you think? I mean not knowing
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  Speaker 1: that you know what would happen, but would you have
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  Speaker 1: made different decisions? I don't think we would have because
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  Speaker 1: that becomes a board of trustees decision and if two eight,
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  Speaker 1: two thousand nine didn't change how retirement systems allocate. I
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  Speaker 1: think people are gonna, uh look at it steady as
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  Speaker 1: she goes, be content with their allocation, and realize that
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  Speaker 1: we're in this for a long run. Carlos. Where where
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  Speaker 1: how much closer are we to the bottom? I mean, look,
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  Speaker 1: we had we had a tenure note down to about
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  Speaker 1: what was it? One point three six? The thirty year
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  Speaker 1: bond was down to what around two point two four?
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  Speaker 1: Maybe the lower in terms of yield higher in terms
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  Speaker 1: of price. I mean, the lower you go, the more
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  Speaker 1: you have to be closer to the bottom. Have we
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  Speaker 1: had the bottom in bond yields for all the high
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  Speaker 1: end price? Uh? And are we going to see some
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  Speaker 1: selling or people gonna say, well, I could sell and
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  Speaker 1: get some capital appreciation, but I want to hold onto
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  Speaker 1: some of this fixed income. I bought it a higher yield.
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  Speaker 1: I don't think we personally belong here, but I think
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  Speaker 1: that people want to be in dollar denominated assets, which
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  Speaker 1: means they'ren to come in and buy tenure notes and
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  Speaker 1: pract push down to one down to one. Now you
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  Speaker 1: have what about forty five thousand active members average ages
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  Speaker 1: about forty five years. You have to project out well,
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  Speaker 1: I would imagine on on a continuous basis to provide
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  Speaker 1: what the monthly benefit, which is about a thousand dollars. Yes,
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  Speaker 1: have you gotten any pushback from any of the retirees
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  Speaker 1: saying look, I'm scared, I'm worried, I don't know what
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  Speaker 1: to do. We haven't had any of the pushback yet,
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  Speaker 1: but sitting in this role, I'm certainly worried. Worried that
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  Speaker 1: about how you're going to meet the bogey, how you're
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  Speaker 1: going to have get there enough money to pay help
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  Speaker 1: these people receive their pensions. Is that you're absolutely and
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  Speaker 1: you know we're hitting the baby boomer and they're starting
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  Speaker 1: to hit the retirement period right now, and the demand
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  Speaker 1: on benefit payments is only going to increase. So where
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  Speaker 1: do you see the FED going? Is the FED going
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  Speaker 1: to say stay where they are? Are they going to
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  Speaker 1: say these these are these yields falling around the world
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  Speaker 1: was potentially native signed. Are they going to say, hey, look,
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  Speaker 1: the labor market is not doing so bad. You know,
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  Speaker 1: jobs are growing about a hundred seventy thousand on average
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  Speaker 1: for the last several months or year, getting to you know,
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  Speaker 1: kind of rev up for the rate increase, and if
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  Speaker 1: they do, is that is that bad because maybe it
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  Speaker 1: hurts the equity market. Is it good because finally there's
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  Speaker 1: a little more yield out there for people to earn. Well,
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  Speaker 1: you're seeing the front end come up, come up in yield,
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  Speaker 1: so you're seeing the flattening being led by the front
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  Speaker 1: and which which is probably gonna be helpful. Um. I
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  Speaker 1: personally think the FEDS on hold I. You and I
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  Speaker 1: have had conversations back and forth. You know, I lost
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  Speaker 1: the bet to you last year. I said it has
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  Speaker 1: not raising rates at all in two thousands fifteen, and
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  Speaker 1: they saved you in December, and then at the beginning
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  Speaker 1: of this year, I said, the set's not raising rights
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  Speaker 1: this year, and so far I don't think they're going to.
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  Speaker 1: So I just think the data that's coming out, and
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  Speaker 1: it seems like the data they're looking for is just
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  Speaker 1: not there. Right. It seems like they wanted three things.
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  Speaker 1: They wanted growth, they wanted employment, and they wanted inflation.
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  Speaker 1: And I just don't know if they're gonna get all
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  Speaker 1: three in one year. What would it take to get
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  Speaker 1: all three in one year. I think it's beyond center banks.
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  Speaker 1: I think it's gonna become um acts of Congress if
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  Speaker 1: you will, what to provide more physical stimulus to the
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  Speaker 1: economy and more pending. I just don't think secial stimius
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  Speaker 1: is going to do it by itself. What I say,
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  Speaker 1: it's not the FED fiscal stimulus alone isn't enough. So
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  Speaker 1: what's it going to take? I don't have the answer
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  Speaker 1: I wish I did. Negative interest rates? Is there any
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  Speaker 1: chance the Fed is going to take now? Irana coach
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  Speaker 1: Lakota's device, former head of the Minneapolis FED, take his
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  Speaker 1: advice and uh consider tools like that. Is it going
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  Speaker 1: to get to that? Do you think? And if so,
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  Speaker 1: then what does it do for a guy like you
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  Speaker 1: trying to manage public funds? You know, I don't think
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  Speaker 1: any center banker two years ago would have said, yeah,
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  Speaker 1: negative interest rates are certainly on the table, and our
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  Speaker 1: own sort of reserve is saying the same thing. But
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  Speaker 1: yet we can look at some of the countries right
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  Speaker 1: now then they have a negative interest rates, not because
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  Speaker 1: they want it, because that's where the market has taken it,
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  Speaker 1: and were we may end up in the same boat
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  Speaker 1: as far as acid allocation goes. Carlos, can you give
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  Speaker 1: us an idea of what you may have changed. I know,
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  Speaker 1: for example, that you've got US domestic equity securities. UH,
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  Speaker 1: increased your allocation I guess last year about two and
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  Speaker 1: a half percent. What what are you changing in your
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  Speaker 1: asset allocation model? If anything? So far we haven't. But
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  Speaker 1: with with the recent lower interest rates that we're experiencing,
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  Speaker 1: I see we're gonna at that with discussion about it.
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  Speaker 1: We're kind of discussion. I mean to allocate more money
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  Speaker 1: to equities, perhaps to dividend paying equities, for alternative investments.
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  Speaker 1: I think we'll definitely, I'm willing to look at alternatives. UM.
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  Speaker 1: I think real assets, which I include real estate. UM.
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  Speaker 1: I think there will be opportunities in Europe given the
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  Speaker 1: Brexit situation for real estate. UM. So we're certainly going
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  Speaker 1: to have to look at everything. Again. Are you at
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  Speaker 1: all concerned about recession? It seems these you can look
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  Speaker 1: at these latest job numbers Carlos and say, no, we're
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  Speaker 1: gonna things may not be roaring here, but we're certainly
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  Speaker 1: not anywhere in near recession. And yet you know, Pim
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  Speaker 1: and I were talking earlier about the yield curve and
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  Speaker 1: what its signal could be. The act that you once
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  Speaker 1: jobless claims, an unemployment bottom, the only way to go
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  Speaker 1: is usually back up. What do you see as somebody
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  Speaker 1: from from this fixed income bond investment point of view,
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  Speaker 1: where you've been in this perch for so long. Recession
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  Speaker 1: is not a word that I've really worried about just yet.
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  Speaker 1: I mean, it's certainly down down the road. Um, the numbers,
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  Speaker 1: the job numbers itself, it seems okay, not stellar, not horrible. Um,
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  Speaker 1: it just feels like the markets, especially the corporate bond markets,
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  Speaker 1: the highland markets, there's more and more people coming into
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  Speaker 1: it and they're grabbing yield, which is just a dangerous
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  Speaker 1: thing to do. So as far as we're session, Kathleen, No,
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  Speaker 1: I have not uttered those words yet, but could I
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  Speaker 1: down the road? Certainly? Carlos Borrow mammo. Carl Carlos Borrow
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  Speaker 1: Borrow mammo. He is chief investment officer at April's Arkansas
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  Speaker 1: Public Employees Retirement System, joining us from Little Rock, Arkansas.
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  Speaker 1: Uh makes you realize is that him and I people
• 11:01
  Speaker 1: like us. We talk about what's going on in the
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  Speaker 1: bomb market. We ask a lot of questions. Boy, when
• 11:05
  Speaker 1: you have to be the person who puts the money
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  Speaker 1: where the state's mouth is that's quite a job. And
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  Speaker 1: in fact I am Kathine Hays along with Pim Fox,
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  Speaker 1: and this is Bloomberg.