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P&L: 2017's 'Bunny' Market That Hops Around But Doesn't Get Far · 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
• 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. It is that time
• 0:28
  Speaker 1: of year when we are bombarded with different expectations for
• 0:34
  Speaker 1: people are so optimistic and potentially wary about some of
• 0:38
  Speaker 1: the risks and pitfalls ahead. We have Jim Paulson, chief
• 0:41
  Speaker 1: investment strategist and economist at Wells Capital Management with billion
• 0:47
  Speaker 1: dollars under management, here with his expectations for the year ahead. Um, Jim,
• 0:53
  Speaker 1: you know, I want to start out with one particular
• 0:56
  Speaker 1: expectation of yours, which is that the US dollar surprisingly weekends.
• 1:01
  Speaker 1: This is what our our analysts, our effects analyst, Vince
• 1:05
  Speaker 1: Cinerella was talking about earlier in the program. So, Jim,
• 1:08
  Speaker 1: why do you think that we're going to see a
• 1:09
  Speaker 1: weekending in the dollar? Well, I think the primary reason
• 1:12
  Speaker 1: Li said that there's such a strong consensus about the
• 1:15
  Speaker 1: dollar going straight northward here is because the Fed is
• 1:19
  Speaker 1: going to raise interest rates, which I totally concur that
• 1:22
  Speaker 1: that's going to happen. And if you look back since nine,
• 1:27
  Speaker 1: during the five previous recovery cycles, every time the Fed
• 1:31
  Speaker 1: embarked on it on raising interest rates during the recoveries,
• 1:35
  Speaker 1: the dollar declined. It didn't go up and came down.
• 1:40
  Speaker 1: And I think it's going to happening in this time
• 1:42
  Speaker 1: is the Fed commences on a titany cycle. And the reason,
• 1:45
  Speaker 1: I think because you have to look at why they're
• 1:47
  Speaker 1: raising interest rates. Interest rates are not don't go up
• 1:51
  Speaker 1: in isolation. If that was the case and the FED
• 1:53
  Speaker 1: just raised rates and nothing else happened, that'd be great
• 1:56
  Speaker 1: for the dollar, bring in foreign capital flow. But almost
• 1:59
  Speaker 1: always the Fed starts to raise in truth because they're
• 2:02
  Speaker 1: concerned about inflation, and rising inflation is a huge negative
• 2:07
  Speaker 1: for the U. S. Dollar, destroying the purchasing power globally.
• 2:11
  Speaker 1: And usually when the Fed's involved in the titany cycle,
• 2:13
  Speaker 1: it means that inflationary expectations are rising, there's concerns about
• 2:16
  Speaker 1: being behind the curve, and the dollar is sold. Jim
• 2:21
  Speaker 1: Paulson tell us your thoughts about treasuries specifically the tenure,
• 2:26
  Speaker 1: and then also when I get your ideas about wage
• 2:28
  Speaker 1: inflation and consumer inflation. Maybe some numbers, yeah, uh p M. I.
• 2:34
  Speaker 1: You know, I think that we've got a backdrop as
• 2:37
  Speaker 1: we had into this year, not only have a pickup
• 2:39
  Speaker 1: in US uh growth. You know, the reports just keep
• 2:44
  Speaker 1: coming in every day a lot better than expected, and
• 2:47
  Speaker 1: we're probably going to do three percent growth this year
• 2:49
  Speaker 1: in the United States, but we got to pick up
• 2:51
  Speaker 1: around the globe and manufacturing commodity price of recoveries happening everywhere,
• 2:56
  Speaker 1: and I think we've got one of the rare synchronized
• 2:58
  Speaker 1: bounces in globally, not the activity going on as we
• 3:02
  Speaker 1: had this year, and it happens to come at the
• 3:04
  Speaker 1: precise moment that the US has finally returned to full
• 3:07
  Speaker 1: employment in this recovery for the first time, so we're
• 3:10
  Speaker 1: going to see the first acceleration on full full employeed economy.
• 3:15
  Speaker 1: I think wages are gonna uh go up quite a
• 3:18
  Speaker 1: bit in the next year, maybe three and a half
• 3:20
  Speaker 1: to four percent year on year by the end of
• 3:22
  Speaker 1: the year. I think headline and co inflation maybe CPI
• 3:26
  Speaker 1: moved towards three and I think that's gonna be a
• 3:29
  Speaker 1: very uncomfortable situation both for the feder reserve, and for
• 3:32
  Speaker 1: bond vigilantes, I wouldn't be surprised if we see the
• 3:36
  Speaker 1: tenure yield spike about three and a half to three
• 3:38
  Speaker 1: and three quarters at some point during the year. You know.
• 3:41
  Speaker 1: There is an article article earlier this week on the
• 3:45
  Speaker 1: Bloomberg siting Paul Smeltzing. He's a PhD candidate at Harvard University,
• 3:50
  Speaker 1: who said, looking back over eight centuries of data, I
• 3:52
  Speaker 1: find that bull market was indeed one of the largest
• 3:56
  Speaker 1: ever recorded history suggests this reverse will be driven by
• 4:01
  Speaker 1: inflation fundamentals and leave investors worse off than bond massacres.
• 4:06
  Speaker 1: And otherwise he's predicting a pretty dire circumstance this year
• 4:10
  Speaker 1: for bonds. Do you agree, well, you know I do
• 4:13
  Speaker 1: in this stance that you know, um, we pigged free
• 4:17
  Speaker 1: market prices throughout the United States history. We packed the dollar,
• 4:21
  Speaker 1: you know much early post war period, we packed gold
• 4:24
  Speaker 1: at thirty announced the said regularly pigs the funds rate
• 4:28
  Speaker 1: in the implementation of monetary policy, but we have never
• 4:32
  Speaker 1: I don't think in the history of the United States
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  Speaker 1: exercise this massive of an artificial pegging of an important
• 4:38
  Speaker 1: free market price. We're not just pigging the short term
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  Speaker 1: interest rate, We're pigging the entire sovereign yield bond curve
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  Speaker 1: across from cash to thirty years, and we're doing it
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  Speaker 1: not just in the United States, but we're doing it
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  Speaker 1: all over the globe. This is the mother of all pigs,
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  Speaker 1: and we are finally the elephant is going to lift
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  Speaker 1: off that peck. And in the balance of this recovery,
• 5:01
  Speaker 1: we're going to start the process of the great unwind
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  Speaker 1: of that artificial price setting. And I think because rates
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  Speaker 1: have been low for so long, because we've developed a
• 5:11
  Speaker 1: population and culture worried about deflation, reversing that suddenly is
• 5:17
  Speaker 1: going to be shocking for most participants, including bond and
• 5:21
  Speaker 1: stock investors. And I do think there's gonna be some
• 5:24
  Speaker 1: pain associated with the unwind of this great deal. Pick Jim,
• 5:29
  Speaker 1: I want to continue with your animal theme, perhaps even
• 5:32
  Speaker 1: animal spirits theme. You say that we are going to
• 5:35
  Speaker 1: enter or are in a bunny market. It's not a bullet,
• 5:39
  Speaker 1: it's not a bear, it's a bunny market. Well, how
• 5:42
  Speaker 1: do you profit from a bunny market? What do you
• 5:45
  Speaker 1: invest in and what do you stay away from? Yeah,
• 5:48
  Speaker 1: well you don't um. I think that the reason I
• 5:51
  Speaker 1: say a bunny marks because I take a bear market
• 5:54
  Speaker 1: HM is not like until the next recession, and I
• 5:58
  Speaker 1: don't see that happening this year or maybe for the
• 6:00
  Speaker 1: next few years. So I don't really think we're in
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  Speaker 1: a bear a bullmark and a lot of the foundation
• 6:05
  Speaker 1: of this bull has already been spent. Uh. We can't
• 6:08
  Speaker 1: take p motibles from ten to twenty again, We've already
• 6:11
  Speaker 1: done it. We can't lower yields from six to one,
• 6:13
  Speaker 1: We've already done it. Uh. We we can't have chronic disinflation.
• 6:18
  Speaker 1: We're going to deal with inflation challenging evaluation levels. We're
• 6:22
  Speaker 1: going to have to have rising rates now and the
• 6:24
  Speaker 1: Feds moving to the sidelines. A lot of the earning
• 6:28
  Speaker 1: cycle is not going to be near as good going
• 6:29
  Speaker 1: forward now that it's mature. So the bull camp two
• 6:33
  Speaker 1: is left. So what are you left If you're not
• 6:34
  Speaker 1: in a bull, you're not in a bear. I would
• 6:36
  Speaker 1: suggest a bunny. And what what the bunny is? It's
• 6:39
  Speaker 1: an animal that hops around a lot but doesn't go
• 6:42
  Speaker 1: very far, and I think that's what we're in. I
• 6:45
  Speaker 1: still think we're gonna move higher over the next few years,
• 6:48
  Speaker 1: but much much less on buy and hold than what
• 6:51
  Speaker 1: we've done up till now. The best of the bulls
• 6:52
  Speaker 1: behind many things you can do in this I think
• 6:56
  Speaker 1: bunnies often happen in the in the second half of recoveries,
• 6:59
  Speaker 1: once you're reachable employment. They tend to have more inflationary
• 7:02
  Speaker 1: and interest rate overtones about them um, and they also
• 7:06
  Speaker 1: tend to be hoppy. So a little market timing, if
• 7:10
  Speaker 1: the bunny hops up big, coming back to risk off,
• 7:13
  Speaker 1: if the bunny hops down big, going back to risk on. Uh,
• 7:17
  Speaker 1: using a little bit of that makes sense. Overall. I
• 7:20
  Speaker 1: think one way to deal with this is maybe to
• 7:22
  Speaker 1: move away from the United States because I think much
• 7:25
  Speaker 1: of the rest of the world is behind us in
• 7:28
  Speaker 1: this recovery cycle, and they're not in the bunny market
• 7:31
  Speaker 1: yet they might still be more in the bull phase.
• 7:33
  Speaker 1: I don't know if people would really want to consider
• 7:35
  Speaker 1: the the year of the bunny, do you think? I
• 7:39
  Speaker 1: don't know. It's the year of the rooster, but it's
• 7:41
  Speaker 1: also maybe the year of the bunny. Who knows? I
• 7:44
  Speaker 1: like that. Maybe we'll call him Jim Bunny Paulson. He
• 7:48
  Speaker 1: is the chief investment strategist and economist for Wells Capital Management,
• 7:53
  Speaker 1: helping to manage more than three and fifty billion dollars. Well,
• 8:09
  Speaker 1: corporate debt has been rising at a pretty fast clip.
• 8:13
  Speaker 1: Consumers have been holding off and really have not been
• 8:16
  Speaker 1: incurring as much debt, at least on a proportionate basis.
• 8:20
  Speaker 1: But perhaps this is about to change. I want to
• 8:23
  Speaker 1: bring in Ellen Zentner, Chief US Economists and managing director
• 8:27
  Speaker 1: at Morgan Stanley. She has been named to Bloomberg Best's
• 8:31
  Speaker 1: list of top forecasters for the U S economy with
• 8:34
  Speaker 1: more than seventeen years experience as a FED watcher, Ellen,
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  Speaker 1: thank you so much for being with us. UM. Why
• 8:41
  Speaker 1: do you think that US consumers are going to build
• 8:44
  Speaker 1: their debtloads more this year? Well, I think one of
• 8:48
  Speaker 1: the things that we look at is when you expect
• 8:51
  Speaker 1: higher income in the future, it tends to dictate how
• 8:55
  Speaker 1: we spend today UM. And the same can be said
• 8:58
  Speaker 1: for revolving credit credit cards. If you think a raise
• 9:01
  Speaker 1: is coming, or in today's case, a tax cut is coming, UM,
• 9:05
  Speaker 1: you might be willing to carry more debt levels, higher
• 9:08
  Speaker 1: debt levels today with the comfort of knowing that you're
• 9:11
  Speaker 1: probably going to be better able to pay that debt
• 9:14
  Speaker 1: in the future. And so what we've seen is that
• 9:16
  Speaker 1: when consumer confidence rises, and we've seen a pretty big
• 9:19
  Speaker 1: rising confidence since the election, about six months later, revolving
• 9:24
  Speaker 1: credit tends to pick up. Uh. And so we think
• 9:27
  Speaker 1: that's going to be some of the dynamics that we
• 9:29
  Speaker 1: see play out this year as consumer has been more
• 9:31
  Speaker 1: in anticipation of the tax cuts. Do you think that's
• 9:33
  Speaker 1: going to be a bad thing? No? I I certainly
• 9:36
  Speaker 1: don't want to see a return to pre crisis growth
• 9:40
  Speaker 1: rates in consumer credit. I mean, first of all, the
• 9:42
  Speaker 1: demographic trends don't support that kind of return to that
• 9:46
  Speaker 1: incredible pace of of debt accumulation. But also we've regulated
• 9:50
  Speaker 1: away the ability of households to accumulate that type of
• 9:54
  Speaker 1: debt or that level of debt burden. Uh, sort of
• 9:57
  Speaker 1: saving saving us from ourselves, if you will, with all
• 9:59
  Speaker 1: the regularation that's gone into place. But we certainly expect
• 10:02
  Speaker 1: a healthy pickup. There's a healthy certain amount of debt
• 10:05
  Speaker 1: to carry, um and with tax cuts coming better income prospects,
• 10:10
  Speaker 1: consumers are heartened by that. The only risk there is
• 10:12
  Speaker 1: if tax cuts are not delivered right. But if they are,
• 10:16
  Speaker 1: um then we expect that to be reflected in a
• 10:18
  Speaker 1: faster pace of spending in the course of faster pace
• 10:21
  Speaker 1: of certain types of debt accumulation, like credit cards revolving credit. Well,
• 10:26
  Speaker 1: I'm glad you mentioned credit cards because I'm wondering if
• 10:28
  Speaker 1: the picture for an equity investor, try to imagine yourself
• 10:31
  Speaker 1: walking the aisles of a home depot or a Lows
• 10:35
  Speaker 1: store and using your Visa or your American Express or
• 10:39
  Speaker 1: another charge card, is that the image that we should
• 10:43
  Speaker 1: hold in our minds for successful investing in Well, I
• 10:47
  Speaker 1: think that brings up a great point because there are
• 10:51
  Speaker 1: a lot of pitfall pitfalls in the retail sector, right
• 10:54
  Speaker 1: and not all retail stores are are doing well. Uh.
• 10:57
  Speaker 1: And so one thing that our our chief US equity
• 10:59
  Speaker 1: strited just Adam Parker likes um is credit card companies
• 11:02
  Speaker 1: as a play to capture that stronger consumer without specific
• 11:07
  Speaker 1: retail risk um And so I think that that you
• 11:11
  Speaker 1: know that that could be a nugget for equity investors
• 11:15
  Speaker 1: this year. We've also done a lot of work around
• 11:17
  Speaker 1: where typically do consumers spin tax cuts. So rather than
• 11:21
  Speaker 1: concentrating on does it benefit the low income consumer more,
• 11:24
  Speaker 1: the high income consumer more, let's just concentrate on what
• 11:27
  Speaker 1: products um benefit from tax cuts? And ironically, we saw
• 11:32
  Speaker 1: auto sales sore yesterday. And one of the biggest categories
• 11:36
  Speaker 1: that garnered those dollars when we get tax cuts is
• 11:39
  Speaker 1: new autos, not used, but new autos, new cars and trucks, motorcycles,
• 11:44
  Speaker 1: other highly discretionary recreational goods. You mentioned home depot, you know,
• 11:49
  Speaker 1: furnished furniture and home furnishings um. And so home improvement
• 11:53
  Speaker 1: stores could do well uh in this environment. Uh. And travel,
• 11:58
  Speaker 1: all right, this is also a stronger all are wrapped
• 12:00
  Speaker 1: up in this theme. Uh. And Uh. It has increased
• 12:05
  Speaker 1: the buying power of American consumers. And so we've seen
• 12:08
  Speaker 1: foreign travel by US residents and just air transportation in
• 12:11
  Speaker 1: general UM typically garner a lot of those tax dollars. Uh.
• 12:16
  Speaker 1: And so that's we're really encouraged about about the the
• 12:19
  Speaker 1: those kinds of dynamics that might play out this year
• 12:22
  Speaker 1: with broader tax reform. You know, I love that phim
• 12:24
  Speaker 1: goes to where are the opportunities for equities and I'm thinking, wow,
• 12:28
  Speaker 1: more debt. Let's think where the delinquency is going to
• 12:30
  Speaker 1: pick up, and especially since we've already seen delinquencies pick
• 12:32
  Speaker 1: up among auto loans. You know, how what are you
• 12:36
  Speaker 1: looking for to determine whether the level of debt is unsustainable?
• 12:41
  Speaker 1: And a lot of people have come on this show
• 12:43
  Speaker 1: and talked about how you know President elect Trump may
• 12:46
  Speaker 1: not deliver on all of his plans that are that
• 12:48
  Speaker 1: are going to be supposedly so stimulative. Well, I think
• 12:51
  Speaker 1: one thing that we look at is, uh, debt obligations
• 12:55
  Speaker 1: as a share of income. So uh, you know, pre crisis,
• 13:00
  Speaker 1: so leading up to the financial crisis, dead as a
• 13:02
  Speaker 1: share of disposable income peaked at at a hundred and
• 13:05
  Speaker 1: thirty five pretty incredible. Um. And since that time, we've
• 13:10
  Speaker 1: cut debt so much and with incomes rising, Uh, we
• 13:13
  Speaker 1: we've cut that back dramatically. Uh. And so we watch
• 13:17
  Speaker 1: that very closely, right, we want to be able to
• 13:19
  Speaker 1: see that households are carrying their debt burden. Well, we
• 13:23
  Speaker 1: also want to look at the household balance sheet how
• 13:26
  Speaker 1: much of it is exposed to a variable rate, because,
• 13:28
  Speaker 1: of course, when the Fed starts raising interest rates more quickly, Uh,
• 13:32
  Speaker 1: you know, historically that interest expense incurred from the balance
• 13:37
  Speaker 1: sheet has crimped income pretty quickly and causes a knee
• 13:42
  Speaker 1: knee jerk reaction on the part of consumers, pulling back, Um,
• 13:46
  Speaker 1: what we see today is an unprecedented household balance sheet.
• 13:49
  Speaker 1: We're only about ten percent of it is subject to
• 13:51
  Speaker 1: a variable rate. Think of all those mortgages that have
• 13:54
  Speaker 1: been refied through the government programs or through organic refined
• 13:58
  Speaker 1: a very low fixed rates. Uh, you know, that's the
• 14:00
  Speaker 1: majority of the household balance sheet, and unlike pre crisis,
• 14:03
  Speaker 1: it's almost all fixed. I want to thank you very
• 14:06
  Speaker 1: much for spending time with us. Ellen Zentner is the
• 14:09
  Speaker 1: chief US economist managing director for Morgan Stanley. I want
• 14:25
  Speaker 1: to bring in Dave Wilson, Bloomberg Stocks Commas to tell
• 14:27
  Speaker 1: us what's going on in the market. And Dave, I
• 14:29
  Speaker 1: just look at retail and it is a wreck today,
• 14:33
  Speaker 1: yes and no, pim. I mean, it's an interesting sort
• 14:36
  Speaker 1: of contrast going on here. And I bring this up
• 14:40
  Speaker 1: because sure, if you look at the department store chains,
• 14:43
  Speaker 1: they are taking quite the hit. Macy's down, Calls down
• 14:48
  Speaker 1: eighteen percent, both those companies coming out late yesterday with
• 14:53
  Speaker 1: the holiday sales figures that were worse than analysts were expecting.
• 14:57
  Speaker 1: J C. Penny down seven percent as well, Nordstrom down
• 15:01
  Speaker 1: eight percent. And and I bring this up. I was
• 15:03
  Speaker 1: actually just looking at this for a market's block. We
• 15:06
  Speaker 1: do here for the Bloomberg terminal. I'm one of the
• 15:08
  Speaker 1: contributors to the blog. The S and P five hundred
• 15:12
  Speaker 1: Department Store index is now down four headed for its
• 15:16
  Speaker 1: biggest loss ever. It is a component of the broader
• 15:21
  Speaker 1: SNP five hundred retailing index, and you want to know
• 15:23
  Speaker 1: how that's doing. It's down two tents of percent. So
• 15:28
  Speaker 1: basically what's happening is that the retailing index, the broader one,
• 15:33
  Speaker 1: has Amazon dot Com, Amazon benefiting at the expense of
• 15:38
  Speaker 1: the likes of Macy's and Coals and Pennies and Northstrom
• 15:42
  Speaker 1: that stocks up, so it's actually helping to hold up
• 15:47
  Speaker 1: the retailing index. And then you can throw in while
• 15:50
  Speaker 1: you're at it, Netflix and price Line Group in terms
• 15:53
  Speaker 1: of today's performance, and what do those companies have in
• 15:56
  Speaker 1: common with Amazon? You're talking about internet based businesses, So
• 16:00
  Speaker 1: what's really happening here. It's another marker in terms of
• 16:04
  Speaker 1: the broader shift that's going on in retailing. People don't
• 16:07
  Speaker 1: want to go to the store. They want to go
• 16:09
  Speaker 1: to the website, buy what they want, have it shipped
• 16:12
  Speaker 1: to the house or maybe to uh, you know, one
• 16:15
  Speaker 1: of the stores. Per pick up. But that's as far
• 16:17
  Speaker 1: as it goes, and that's what's happening here, and we're
• 16:21
  Speaker 1: seeing that play out in terms of the holiday sales figures,
• 16:24
  Speaker 1: and a whole lot of retail stocks are down, no question. Nonetheless,
• 16:28
  Speaker 1: it's more of a transitional story than a people don't
• 16:31
  Speaker 1: want to shop story. You know. Another part of this
• 16:33
  Speaker 1: story is the dollar, and there was this incredible strengthening
• 16:38
  Speaker 1: of the US dollar last year to the strongest level
• 16:41
  Speaker 1: in more than a decade. A lot of people thought
• 16:43
  Speaker 1: that this rally would only gain steam as President elect
• 16:47
  Speaker 1: Trump's policies were implemented. I want to bring in someone
• 16:50
  Speaker 1: who's going to cast some shade on that, vincinere Ella,
• 16:55
  Speaker 1: FX strategist here at Bloomberg. You wrote a piece about
• 16:58
  Speaker 1: the five ways the dollar rally may end if Trump's
• 17:02
  Speaker 1: policies do not get implemented as expected. So walk us
• 17:06
  Speaker 1: through this sort of path of doom. Sure, and good
• 17:09
  Speaker 1: morning to everyone. Well, I mean, five is a fun number,
• 17:12
  Speaker 1: but there are quite a few ways. Actually. I think
• 17:15
  Speaker 1: one of the things that we need to look at
• 17:16
  Speaker 1: is it's one thing for the president elect to have
• 17:18
  Speaker 1: run the table in the Electrical College, and and one
• 17:22
  Speaker 1: the election, it's another to run the table in the Senate,
• 17:24
  Speaker 1: in a Congress and enact all the policies, particularly in
• 17:27
  Speaker 1: the first one days, that he would like to do
• 17:29
  Speaker 1: to stimulate the economy. One of the things that was
• 17:31
  Speaker 1: outlined was repatriation of corporate profits overseas. We have something
• 17:35
  Speaker 1: of two and a half trillion dollars that is available
• 17:37
  Speaker 1: to be brought home. It's meant to spur investment and
• 17:41
  Speaker 1: economic growth. But in two thousand and four we try
• 17:43
  Speaker 1: this once a tax holiday. Companies brought the money back,
• 17:46
  Speaker 1: They paid down dividends, they repurchase shares, they streamline their operations,
• 17:50
  Speaker 1: and actually fired people. So it actually hurt the U. S. Treasury,
• 17:54
  Speaker 1: not helped. So Evince, I'm just going to ask about
• 17:58
  Speaker 1: whether we are at peak dollar, because you know, if
• 18:01
  Speaker 1: we get a weaker US dollar, if we change the
• 18:03
  Speaker 1: if somehow the strong dollar policy of the U. S.
• 18:06
  Speaker 1: Treasury changes or at least goes mute for a while,
• 18:10
  Speaker 1: that's going to be very beneficial to US trade and
• 18:12
  Speaker 1: it could put the kind of pressure that is necessary
• 18:15
  Speaker 1: in order to get these trade negotiations on track. Because
• 18:19
  Speaker 1: the one thing that you know, emerging markets have is
• 18:22
  Speaker 1: that their currency is a weakening, and that means their
• 18:24
  Speaker 1: products are more attractive to US consumers. Well, it is
• 18:28
  Speaker 1: good for US trade, but it tends to be good
• 18:29
  Speaker 1: for US multinationals, and those profits tend to stay once
• 18:32
  Speaker 1: again overseas and then I brought back home necessarily to
• 18:35
  Speaker 1: create jobs really here in the States. It actually creates
• 18:37
  Speaker 1: jobs overseas. So you know one of the things that
• 18:40
  Speaker 1: that's jobs, but not the value of the dollar. I'm saying,
• 18:43
  Speaker 1: is the dollar at a peak value right now? I
• 18:45
  Speaker 1: would not be one to try to catch the following knife,
• 18:48
  Speaker 1: so to speak, and say the dollars at a peak,
• 18:49
  Speaker 1: But it certainly has turned the corner um since mid December,
• 18:53
  Speaker 1: and it's definitely on a downtrend. And we've seen it
• 18:55
  Speaker 1: again and get hit overnight. Um, there are a lot
• 18:58
  Speaker 1: of factors working against it, not us the things that
• 19:00
  Speaker 1: i've I've outlined, but but certainly that whenever you have
• 19:03
  Speaker 1: a currency that's moved in a broad sense very quickly, um,
• 19:07
  Speaker 1: it tends to run out of steam and reverse. So, Dave,
• 19:10
  Speaker 1: you were talking about Sears and ord strum, some of
• 19:13
  Speaker 1: these big retailers, how much in their equation does the
• 19:17
  Speaker 1: dollar factor? Well, I mean only to the extent that
• 19:21
  Speaker 1: you know, we're talking about what does it cost them
• 19:24
  Speaker 1: to say import the products are going to sell. And
• 19:27
  Speaker 1: by the way, I would take issue with the idea
• 19:29
  Speaker 1: of Sears is a big retailer. It's the incredible shrinking retailer.
• 19:33
  Speaker 1: I mean, it's comes in Florida. There are plenty of
• 19:37
  Speaker 1: Sears still there, well still, but you know, they just
• 19:40
  Speaker 1: came out and said they're gonna get rid of a
• 19:42
  Speaker 1: hundred and fifty more stores. They're selling their Craftsman tool
• 19:45
  Speaker 1: brand to Stanley Black and Decker for nine million dollars.
• 19:48
  Speaker 1: That's why the Scots, all right, But the others, Okay,
• 19:50
  Speaker 1: the multinational retailers. Does this matter to them? How much?
• 19:52
  Speaker 1: Is it certainly matters in terms of their ability to
• 19:57
  Speaker 1: source products, you might say, and it matters, you know
• 20:00
  Speaker 1: more broadly. Let's be honest, and I bring this up
• 20:03
  Speaker 1: because we got results out of Constellation Brands today. You know,
• 20:07
  Speaker 1: this is a company that's in the beer, win and
• 20:08
  Speaker 1: spirits business. Corona and Medello, those are the two. So
• 20:12
  Speaker 1: we're talking about Mexico and certainly that's not a front
• 20:14
  Speaker 1: and center when it comes to currencies at this point.
• 20:17
  Speaker 1: And actually their earnings beat analysts average estimates and Bloomberg
• 20:20
  Speaker 1: survey for the fiscal third quarter. Here's the thing, though,
• 20:23
  Speaker 1: was all about tax advantages from reinvesting foreign earnings. So
• 20:30
  Speaker 1: you know, that's sort of really front and center, and
• 20:32
  Speaker 1: the stocks down in the wake of their results, even though,
• 20:35
  Speaker 1: like I said, they beat estimates and it's one of
• 20:37
  Speaker 1: the worst performers on the day and the S and
• 20:39
  Speaker 1: P five hundred down five points. Well, so, Vince, what
• 20:42
  Speaker 1: are you looking for to sort of be a marker
• 20:44
  Speaker 1: for how much more the dollar could potentially fall? Well,
• 20:48
  Speaker 1: I mean, one of the things that just a quick
• 20:50
  Speaker 1: point on what Dave was saying is that one of
• 20:52
  Speaker 1: the one of Trump policies is a consumption or a
• 20:54
  Speaker 1: destination text if that isn't acted, and essentially what that
• 20:58
  Speaker 1: does is will say where can where goods are consumed
• 21:00
  Speaker 1: is where the tax will be applied. So if we
• 21:02
  Speaker 1: bring product from Mexico, for instance, there will be a
• 21:04
  Speaker 1: tax placed on it. It's the equivalent of a tariff.
• 21:07
  Speaker 1: Raises the price of goods, raises inflation essentially will weaken
• 21:12
  Speaker 1: weaken international corporate profits, and that will weaken growth. Uh.
• 21:15
  Speaker 1: That type of process is a quasi protection of protection
• 21:20
  Speaker 1: is amendment and and would certainly weaken the dollar both
• 21:24
  Speaker 1: the dollar gets weaker, Does that mean that the Federal
• 21:26
  Speaker 1: Reserve gets to normalize US interest rate? Well, one of
• 21:29
  Speaker 1: the things about the dollar, it's a sort of a
• 21:31
  Speaker 1: back of the envelope calculation, is that a four percent
• 21:34
  Speaker 1: grade weighted move in the US dollar, either up or down,
• 21:38
  Speaker 1: is equivalent to roughly twenty five basis points for the Fed.
• 21:40
  Speaker 1: So if the dollar would drop by four percent, that
• 21:43
  Speaker 1: essentially loosens financial conditions, makes the FEDS job easier. Thank
• 21:47
  Speaker 1: you very much for joining us. Always a pleasure, Vincent Signarella.
• 21:50
  Speaker 1: He is an effect strategist for Bloomberg. He knows everything
• 21:53
  Speaker 1: about currencies and he knows everything about stocks. Dave Wilson,
• 21:56
  Speaker 1: Bloomberg Stocks calm Is. The description is that the United
• 22:10
  Speaker 1: States under President Trump will abdicate its role as a
• 22:13
  Speaker 1: global leader and there will be repercussions around the world.
• 22:17
  Speaker 1: Here to tell us more, Willis Sparks. He is the
• 22:19
  Speaker 1: director of Global Macro for the Eurasia Group. So Willis
• 22:24
  Speaker 1: maybe explain that description and what you for it see
• 22:29
  Speaker 1: as being some of the consequences. Sure, I mean we're
• 22:32
  Speaker 1: talking about uncertainty. You were just talking about, you know,
• 22:35
  Speaker 1: the uncertainty of what role Jared Kushner and Ivanka Trump
• 22:38
  Speaker 1: may play. That's that's a normal part of a transition,
• 22:40
  Speaker 1: and we don't know how strong the Secretary of State
• 22:43
  Speaker 1: will be or which advisers the new president will listen to.
• 22:46
  Speaker 1: But this is much bigger than that in terms of
• 22:48
  Speaker 1: the uncertainty that's been created. We all know that Donald
• 22:51
  Speaker 1: Trump is the first person ever elected president who has
• 22:54
  Speaker 1: never served in government of the military. And frankly, there
• 22:57
  Speaker 1: are a lot of people who voted for it because
• 22:59
  Speaker 1: he doesn't have that experience, and that's fine, But the
• 23:02
  Speaker 1: rest of the world is thinking what does this mean
• 23:05
  Speaker 1: for the role that the US intends to play? And
• 23:08
  Speaker 1: Donald Trump, if you take him at his word, a
• 23:10
  Speaker 1: lot of the things that he said his America First
• 23:14
  Speaker 1: approach to US foreign policy will be one which looks
• 23:17
  Speaker 1: out for American taxpayers the interests of American voters, without
• 23:22
  Speaker 1: regard for the impact on broader stability around the world.
• 23:26
  Speaker 1: In other words, the the idea has been for a
• 23:29
  Speaker 1: long time that US presidents have an interest in creating
• 23:32
  Speaker 1: a stable world because the stable world is good for
• 23:35
  Speaker 1: the world's only superpower. Trump's formulation is different. Trump's formulation
• 23:40
  Speaker 1: is the U S investing and stability allies allows allies
• 23:44
  Speaker 1: and rivals to free ride off the US, and I'm
• 23:47
  Speaker 1: going to go out and get a better deal for
• 23:49
  Speaker 1: the American people. Okay, So given that perspective, let's take
• 23:52
  Speaker 1: a little look around the world at what the potential
• 23:55
  Speaker 1: responses will be from other world powers. What about China,
• 24:00
  Speaker 1: What do you expect the response from Well, China is
• 24:02
  Speaker 1: trying to figure out how to interpret Donald Trump's tweets.
• 24:05
  Speaker 1: They take Trump absolutely but and they're trying to figure
• 24:10
  Speaker 1: out when when the question is, is North Korea close
• 24:14
  Speaker 1: to being able to put a warhead onto an intercontinental
• 24:16
  Speaker 1: ballistic missile they can hit California? And Trump says he
• 24:20
  Speaker 1: tweets not going to happen. If you're in Beijing, you're thinking,
• 24:24
  Speaker 1: I wonder what he means by that. Does he mean
• 24:26
  Speaker 1: that he doesn't think the North Koreans are smart enough
• 24:28
  Speaker 1: to pull this off? Or does he mean that he
• 24:31
  Speaker 1: would invade North Korea before he would allow that to happen.
• 24:34
  Speaker 1: They don't know what that means, and allies also don't
• 24:37
  Speaker 1: know what Trump's intentions are. You know, NATO allies in
• 24:41
  Speaker 1: Europe for example. So what you have is a lot
• 24:44
  Speaker 1: of allies that are going to begin to hedge their
• 24:47
  Speaker 1: bets on US intentions. Yeah, but well, let's let me
• 24:49
  Speaker 1: just push back on this to start with Europe for example.
• 24:52
  Speaker 1: I mean, if you can accomplish with a tweet or
• 24:55
  Speaker 1: speech an increase in military spending on the part of
• 25:00
  Speaker 1: TELL allies, doesn't that come off as being a pretty
• 25:03
  Speaker 1: shrewd move. Sure, if you can do it, well, haven't
• 25:06
  Speaker 1: the European having certain European NATO allies already said that
• 25:10
  Speaker 1: they are going to increase their contribution to the military budgets.
• 25:13
  Speaker 1: They have said so, but they have said so in
• 25:15
  Speaker 1: the past as well. They have not lived up to
• 25:17
  Speaker 1: the obligations that they've set in the past. So we'll
• 25:20
  Speaker 1: have to see what they do. But you know, again,
• 25:23
  Speaker 1: I'm not saying that this is all negative, but but
• 25:26
  Speaker 1: there is a lot of uncertainty here and so a
• 25:28
  Speaker 1: lot of allies are trying to figure out, well, will
• 25:31
  Speaker 1: we get what we want from Trump if we promise
• 25:34
  Speaker 1: to do more of what he asked us to do?
• 25:36
  Speaker 1: And that's not clear. If Russia starts to to to
• 25:39
  Speaker 1: play with Lafia and Estonia the way that it's played
• 25:41
  Speaker 1: with Ukraine, for example, will be you how will the
• 25:44
  Speaker 1: US respond, Will it respond as it has in the
• 25:47
  Speaker 1: past or not? And if not, are we wasting our money?
• 25:50
  Speaker 1: It raises a lot of questions for which we don't
• 25:52
  Speaker 1: have a lot of good answers right now. The point
• 25:54
  Speaker 1: here is not to vilify Trump or to suggest that
• 25:57
  Speaker 1: everything he's gonna do is going to be some kind
• 25:59
  Speaker 1: of mistake. But he certainly has different assumptions about what
• 26:03
  Speaker 1: role US power should play in the world than pretty
• 26:06
  Speaker 1: much all of his predecessors, and that's creating a lot
• 26:09
  Speaker 1: of uncertainty in every region of the world among both
• 26:11
  Speaker 1: US allies and rivals. Some uncertainty in certain regions, for example,
• 26:16
  Speaker 1: in Europe has not necessarily been caused by President elect Trump,
• 26:20
  Speaker 1: as uch as the populist uprising there. I mean, a
• 26:24
  Speaker 1: lot of people who I've spoken to are are more
• 26:26
  Speaker 1: concerned about Europe frankly than they are even the US,
• 26:29
  Speaker 1: just because of the fragility, frankly of the Union in
• 26:33
  Speaker 1: light of the Brexit vote, as well as the Italian
• 26:35
  Speaker 1: or friendom uh last year. What what do you see
• 26:39
  Speaker 1: happening there? Well, Europe has got so many problems. I mean, really,
• 26:42
  Speaker 1: if you want to describe the risk for Europe, it's
• 26:45
  Speaker 1: it's the sheer number of different challenges that European leaders
• 26:48
  Speaker 1: are facing in a big election year in Europe. We've
• 26:52
  Speaker 1: got presidential elections in France, followed by parliamentary elections both
• 26:55
  Speaker 1: in the spring. We have elections in the Netherlands and Germany.
• 26:59
  Speaker 1: We could have earlier elections in both Italy and Greece.
• 27:01
  Speaker 1: In the Brexit thing is only getting started and it's
• 27:06
  Speaker 1: probably not going to go very far because politicians in
• 27:09
  Speaker 1: EU countries running for reelection have no incentive to seriously
• 27:13
  Speaker 1: negotiate with the British until next year. But the negotiations
• 27:16
  Speaker 1: are going to take up a lot of time. Meanwhile,
• 27:19
  Speaker 1: relations with Turkey are getting more complicated at a time
• 27:22
  Speaker 1: when the migrant deal between the EU and Turkey is
• 27:25
  Speaker 1: crucial for maintaining stability in an election year in Europe
• 27:29
  Speaker 1: avoiding another wave of the migrant crisis. Russia maybe wanting
• 27:33
  Speaker 1: to to to play some kind of undermining role in
• 27:36
  Speaker 1: some of these elections in France and Germany, for example,
• 27:39
  Speaker 1: if you believe that they've played that role in this country.
• 27:42
  Speaker 1: So yes, there are a lot of problems in Europe
• 27:45
  Speaker 1: that have absolutely nothing to do with Donald Trump or
• 27:47
  Speaker 1: Barack Obama or the United States. But it is compounded
• 27:50
  Speaker 1: by the fact that in trying to figure out how
• 27:52
  Speaker 1: to respond to these challenges, the US is no longer
• 27:56
  Speaker 1: the predictable actor that it has been in the past. Well,
• 27:58
  Speaker 1: it's is it worth noting that the United States maintains
• 28:01
  Speaker 1: about eight military bases in more than seventy countries? Sure? Absolutely,
• 28:07
  Speaker 1: I mean that's you know, Britain, France, Russia, I think
• 28:10
  Speaker 1: got thirty foreign bases combined. It's a compelling argument for
• 28:14
  Speaker 1: Donald Trump to say, why on Earth do we allow
• 28:17
  Speaker 1: countries as rich as Germany and Japan to outsource their
• 28:21
  Speaker 1: security to the United States? And American taxpayers responded to
• 28:25
  Speaker 1: that message. It is a very good question that deserves
• 28:28
  Speaker 1: a very good answer. But in this period of uncertainty,
• 28:31
  Speaker 1: we're going to see a lot of governments that are
• 28:33
  Speaker 1: not sure how to make decisions based on the new
• 28:36
  Speaker 1: environment until they have some better sense of what Donald
• 28:40
  Speaker 1: Trump will and will not do in response to conflict
• 28:43
  Speaker 1: real and hypothetical around the world. So this was some
• 28:47
  Speaker 1: of these risks were highlighted in Eurasia groups. Top risks
• 28:51
  Speaker 1: for two thousand and seventeen. Going back the top risks
• 28:55
  Speaker 1: for two thousand sixteen, which of them came to fruition? Well,
• 28:58
  Speaker 1: you know, I mean, I think at what we tried
• 29:00
  Speaker 1: to do this year was to draw attention to the
• 29:02
  Speaker 1: fact that there's been a move away from risk in
• 29:07
  Speaker 1: the emerging market world back to the developed world. So
• 29:10
  Speaker 1: I think, you know, we had a lot of focus
• 29:12
  Speaker 1: this year on Europe. We didn't in the end, we
• 29:15
  Speaker 1: did not believe Brexit would happen, but we knew it
• 29:17
  Speaker 1: was going to be a close enough vote and there
• 29:19
  Speaker 1: was a high enough likelihood that we've done a lot
• 29:21
  Speaker 1: of writing for our clients about preparation for that possibility. Um,
• 29:26
  Speaker 1: you know, I think that what we're seeing is a
• 29:29
  Speaker 1: continuation of that and maybe an intensification of that. End
• 29:31
  Speaker 1: of the risks are really focused in Europe and the
• 29:35
  Speaker 1: United States much more than they are in the emerging
• 29:37
  Speaker 1: market world at the moment. Thank you so much. Willis Sparks,
• 29:40
  Speaker 1: director of Global Macro at your AGIA Group, talking to
• 29:43
  Speaker 1: us from New York. This is thanks for listening to
• 29:53
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 29:56
  Speaker 1: listen to interviews at iTunes. SoundCloud or whatever podcast platform
• 30:01
  Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter
• 30:04
  Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
• 30:08
  Speaker 1: It's one before the podcast. You can always at Catch
• 30:10
  Speaker 1: us worldwide on Bloomberg Radio