Latest / Bloomberg Intelligence / Three Reasons Why U.S. Stocks Are Going Up: Orlando (Podcast)

Transcript

Three Reasons Why U.S. Stocks Are Going Up: Orlando (Podcast) · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
0:15
Speaker 1: you and your money, whether you're at the grocery store
0:17
Speaker 1: or the trading floor. Find the Bloomberg p m L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Right now,
0:31
Speaker 1: let's turn back to markets. We are broadcasting live from
0:33
Speaker 1: the Bloomberg Interactive Broker's studios, and we have with us.
0:36
Speaker 1: We are very lucky to say Phil Orlando, chief Equity
0:39
Speaker 1: Market Strategistic Federated Investors here in the studio. Um, Phil,
0:44
Speaker 1: so can you give us a sense? Let's start with
0:46
Speaker 1: the yields, the rising US yields and how much that
0:50
Speaker 1: will just sort of de facto put a halt to
0:52
Speaker 1: the rally in stocks. How worried are you? Have we
0:55
Speaker 1: reached the tipping point? Well, I don't think we've reached
0:58
Speaker 1: the tipping point now. Our target for benchmark ten year
1:01
Speaker 1: treasury yields at the end of this year was three
1:04
Speaker 1: and a quarter percent. We're there, so we're not the
1:06
Speaker 1: least bit concerned about that. What does concern us is
1:10
Speaker 1: the rapidity of the move. We've gone from three oh
1:12
Speaker 1: five to three and a quarter in what a week?
1:15
Speaker 1: So I think the markets looking at that and freaking
1:17
Speaker 1: out and saying, Okay, if we went up, you know,
1:20
Speaker 1: twenty bases points in a week, what are we going
1:22
Speaker 1: to do over the course of the next month or
1:24
Speaker 1: the next quarter. We're looking at you know, five percent
1:26
Speaker 1: treasury yields by the end of the year. Okay, fair enough,
1:29
Speaker 1: But what is the tipping point? Is there sort of
1:31
Speaker 1: a number with the ten year treasure yield at which
1:34
Speaker 1: the equity markets just cannot rally anymore? Well, in our view,
1:38
Speaker 1: that number historically has been five percent, and five percent
1:42
Speaker 1: is the point at which you begin to see massive
1:45
Speaker 1: disinter mediation from the risky asset stocks into the risk
1:50
Speaker 1: free asset bonds because the yield is attractive. And then
1:53
Speaker 1: as as yields continue to rise six percent seven percent,
1:56
Speaker 1: pe s actually contract up until five pace historically expand
2:02
Speaker 1: so why is that? Well, as as as economy has
2:05
Speaker 1: come out of recession, as economic growth perks up, as
2:08
Speaker 1: inflation starts to perk up, as the Fed is tightening policy,
2:11
Speaker 1: is yields arising, all of that is good for corporate
2:14
Speaker 1: earnings because it means that the economy is strong. The
2:17
Speaker 1: five percent level historically has been the tipping point because
2:20
Speaker 1: you've got the risky versus you know, risk free inflection
2:25
Speaker 1: point that starts to take money away from from the
2:27
Speaker 1: equity market. Now that there are some who argue, well, okay,
2:32
Speaker 1: this time is different. Five percent won't be the inflection point.
2:36
Speaker 1: Maybe it's four percent, maybe it's three and a half percent.
2:38
Speaker 1: And I'm sensitive to the fact that people think that
2:41
Speaker 1: the lower numbers right this cycle. But let me point
2:44
Speaker 1: out that the foremost dangerous words in the English language,
2:47
Speaker 1: this time it's different. Phil Orlando Jamie Diamond, chief of
2:52
Speaker 1: JP Morgan Chase, says that people should prepare for US
2:56
Speaker 1: yields of five percentage you just described, and he believes
3:01
Speaker 1: that the yield on the benchmark tenure Treasury could reach
3:04
Speaker 1: four percent this year and perhaps even five or higher
3:10
Speaker 1: next year. He says, you better be prepared to deal
3:12
Speaker 1: with these rates. Are clients and customers prepared? Um? Certainly not.
3:18
Speaker 1: Our clients are customers because our forecast is not Jamie's forecast.
3:23
Speaker 1: We thought that treasury yields would get to three and
3:26
Speaker 1: a quarter percent this year they have. We think they'll
3:29
Speaker 1: get to three and a half percent next year. Uh.
3:32
Speaker 1: You know, Jamie thinks probably will get there by Thanksgiving
3:35
Speaker 1: this year. Uh. And then our expectation is that as
3:39
Speaker 1: the bond vigilantes begin to look out into the back
3:43
Speaker 1: half of or the early part of one and see
3:47
Speaker 1: some seeds of slowing economic growth, we actually might see
3:52
Speaker 1: a rally in bonds from three and a half percent,
3:54
Speaker 1: taking yields back down. So if Mr Diamond things that
4:00
Speaker 1: we're looking at a five percent treasury over the next
4:02
Speaker 1: couple of years, he's got to believe that there's much
4:05
Speaker 1: stronger economic growth, much greater inflationary pressures in the pipeline
4:10
Speaker 1: that will emanate over the course of the next couple
4:13
Speaker 1: of years. All Right, So you sound like you are bullish.
4:16
Speaker 1: You are sounding like you don't see treasure yields rising
4:18
Speaker 1: to the point of stimming the rally and equities, So
4:22
Speaker 1: are you out there buying the dips at this point?
4:25
Speaker 1: We will. We're monitoring that there are a couple of
4:28
Speaker 1: things that we look at. There's an interesting confluence of
4:31
Speaker 1: three indicators that are looking interesting. UH stocks oversold, bonds overbought,
4:38
Speaker 1: and UH bonds over sold and and uh, and the
4:44
Speaker 1: vics over bought. Uh. And those things are are are
4:47
Speaker 1: shaping up right now. So I don't know if today
4:49
Speaker 1: is the day or if tomorrow is the day. But
4:52
Speaker 1: as I look out at the market, over the course
4:54
Speaker 1: of the next month or so, there are several positive
4:58
Speaker 1: catalysts that I think will rever this recent weakness. Uh.
5:01
Speaker 1: You've got corporate earnings starting later this week, including Mr
5:05
Speaker 1: Diamond's firm. I'm expecting his company is going to produce
5:08
Speaker 1: some pretty good numbers along with others. We're thinking that
5:11
Speaker 1: corporate earnings are going to plus for the large gaps
5:15
Speaker 1: this quarter. Uh. We've got the flash report from the
5:19
Speaker 1: Commerce Department on third quarter g d P, which will
5:22
Speaker 1: be out. I believe October. We've got three point four
5:26
Speaker 1: percent is our number. It federated. I think the Atlanta Fed,
5:30
Speaker 1: for example, I might have a four handle on their number. Uh.
5:33
Speaker 1: And then we've the midterms are going to be over
5:35
Speaker 1: in a month and and all of this noise and
5:37
Speaker 1: nonsense will be behind us. There will be some certainty. R. Really,
5:43
Speaker 1: we're gonna quote you on on that one. I want
5:45
Speaker 1: to ask him more a more everyday question. Shot. So
5:49
Speaker 1: far this month, the SMP five hundred is down a
5:53
Speaker 1: little bit more than one. What is the number based
5:57
Speaker 1: on your experience where the customer and the client starts calling, well, uh,
6:06
Speaker 1: you know that becomes more of a technical question or
6:08
Speaker 1: anything else. So so typically him the third quarter of
6:15
Speaker 1: a midterm election year, a year like this tends to
6:18
Speaker 1: be a really sloppy quarter. Well, the month of September. Uh,
6:23
Speaker 1: we're up seven percent or something in the month of September.
6:26
Speaker 1: It was the best month we've seen in like five
6:29
Speaker 1: years or something like that, or numbers have been strong. Um.
6:34
Speaker 1: I like to look at more at peaks to troughs,
6:36
Speaker 1: and and this little correction that we're seeing in the
6:40
Speaker 1: large cap market right now is about three or four percent,
6:43
Speaker 1: in the small cap market is about seven or eight percent.
6:47
Speaker 1: These are healthy corrections, and what I'd like to see
6:51
Speaker 1: is some pull back to some longer term support levels
6:55
Speaker 1: in conjunction with continued solid fundamentals. We talked about a
6:59
Speaker 1: couple of things GDP growth, corporate earnings growth that become
7:03
Speaker 1: sort of buy signals for us. So I'm not ready
7:05
Speaker 1: to pull the trigger right this second. But I'm not
7:08
Speaker 1: getting panicked by this at all. I'm more inclined to
7:11
Speaker 1: be buying at the margin than selling, depending upon how
7:14
Speaker 1: events play out over the next few weeks. So which
7:16
Speaker 1: sectors are you looking to potentially buy when you get
7:19
Speaker 1: that valuation that looks attractive? There are two areas that
7:22
Speaker 1: just look extraordinarily interesting to us. UH domestic large cap
7:27
Speaker 1: value has underperformed growth by something like thirty percentage points
7:32
Speaker 1: over the last two years. Financials, industrials, and energy at
7:36
Speaker 1: the top of that list. And then small cap stocks
7:39
Speaker 1: as I said of pulled back seven or eight percent
7:41
Speaker 1: here over the last month or so. For a number
7:44
Speaker 1: of reasons. We think that the small cap rally we've
7:47
Speaker 1: seen earlier this year has legs. UH and UM I
7:51
Speaker 1: think small caps are are are oversold at this point
7:54
Speaker 1: and and will rally, will resume their rally later this year.
7:57
Speaker 1: Where's the money going to come from? It to come
8:00
Speaker 1: out of bonds? Because if Jamie Diamonds right and treasury
8:03
Speaker 1: yields go to five percent, we're sitting at three and
8:06
Speaker 1: a quarter right now. I don't know why you'd want
8:08
Speaker 1: to be long a treasury in this environment. Okay, but
8:12
Speaker 1: if Phil Orlando is correct, you won't have been in bonds.
8:16
Speaker 1: You will have been in stocks. Where's the new money
8:19
Speaker 1: going to come from? Well, I still think we still
8:22
Speaker 1: have a significant underweight in fixed income. We are five
8:25
Speaker 1: percent overweight equities, five percent underweight cash. And if if
8:30
Speaker 1: an investor is really interested at the three and a
8:34
Speaker 1: quarter percent Treasury yield because they need the money, I
8:38
Speaker 1: can show them our strategic value fund that's giving them
8:41
Speaker 1: a five percent dividend yield right now. So so if
8:45
Speaker 1: if money, if income is what they want, you can
8:47
Speaker 1: do that in the stock market. You don't need bonds
8:49
Speaker 1: to do that. And the risk of of of a
8:52
Speaker 1: capital loss. All right, So what's the biggest risk to
8:54
Speaker 1: your outlook right now? What could potentially happen that would
8:57
Speaker 1: make you be wrong? Well, there's you know, I've got
9:00
Speaker 1: a list of nine things to keep me awake at night.
9:02
Speaker 1: I mean, I'm I'm I'm here talking my book and
9:05
Speaker 1: sounding bullish, but that that doesn't mean there's nothing that's
9:08
Speaker 1: going wrong in the world. And at the top of
9:10
Speaker 1: the list is is the Federal Reserve gonna make a
9:13
Speaker 1: policy here in the out years? I mean that concerns
9:16
Speaker 1: me trade and tariffs that seems to be falling into place.
9:20
Speaker 1: China is sort of the last man standing here. But
9:23
Speaker 1: you know, are we're gonna be able to pull off
9:24
Speaker 1: the last trick here and and get the trade and
9:26
Speaker 1: tariff situation in good shape? The blue wave, I think
9:30
Speaker 1: we're gonna end up with the split election. I think
9:32
Speaker 1: the House probably flips, the Senate probably stays in Republican control.
9:36
Speaker 1: But suppose the d's are on the table. Suppose we
9:39
Speaker 1: spend the next two years going through impeachment proceedings, and
9:42
Speaker 1: and that takes the focus away from you know, fiscal
9:45
Speaker 1: policy and strong economic growth and strong corporate earnings growth.
9:49
Speaker 1: So there's any number of things that can go wrong. Um,
9:52
Speaker 1: and so you just, you know, you just have to
9:54
Speaker 1: evaluate what's going on and try to get the best
9:57
Speaker 1: information you can to your clients. So does all of
10:00
Speaker 1: this day the same if oil remains that let's say
10:03
Speaker 1: seventy four seventy five dollars a barrel for West Texas
10:06
Speaker 1: Intermediate or eight plus when it comes to brand. Thank you,
10:10
Speaker 1: I'll give your twenty dollars later. Excellent question. You know,
10:13
Speaker 1: you pick up any newspaper in America and uh, you know,
10:17
Speaker 1: headline writers or crewed gone back to the north of
10:20
Speaker 1: a hundred dollars a barrel, and that just isn't happening.
10:23
Speaker 1: The supply and demand in balance right now. Uh, we're
10:26
Speaker 1: past the peak driving season. Uh, we're fracking to beat
10:31
Speaker 1: the band. The Saudis and the Russians are continuing to pump. Okay.
10:36
Speaker 1: I think they're going to offset the diminution of crude
10:40
Speaker 1: that that we may lose that of Iran if if
10:43
Speaker 1: these nuclear sanctions are reimposed. There is concern in the
10:47
Speaker 1: Gulf right now with Hurricane Michael. Does that take any
10:50
Speaker 1: refining capacity out? I understand all the near term noise,
10:53
Speaker 1: but but our view is that the move up from
10:56
Speaker 1: forty dollars a year and a half ago would sort
10:59
Speaker 1: of settled into sixty five to seventy five barrel range.
11:03
Speaker 1: We're at the top end of that range now, so
11:05
Speaker 1: I'm I'm fine with with crude at seventy five, staying
11:09
Speaker 1: within that sixty to seventy five. I don't think that
11:12
Speaker 1: the newspapers are doing a good job getting everyone all
11:15
Speaker 1: worked up with with hundred dollar plus crude. I don't
11:18
Speaker 1: think crewdes going on a hundred dollars. It's not just
11:20
Speaker 1: the headline writers though there's some pretty big analysts on
11:23
Speaker 1: Wall Street Corp predicting a hundred dollars or more pre
11:26
Speaker 1: barrel of oil, and the i A has come out
11:28
Speaker 1: and said, you know, yeah, please pump morps so that
11:30
Speaker 1: we can get the prices down. So it's not just
11:33
Speaker 1: headline writers. There seems to be an increasing risk of that.
11:36
Speaker 1: I'm just wroking that out there, and and that's fine.
11:39
Speaker 1: Given the fact that the three largest producers in the
11:42
Speaker 1: world at ten to eleven million barrels a day, of
11:45
Speaker 1: the United States, the Russians and the Saudis, I think
11:48
Speaker 1: will continue to pump when push comes to shove. We're
11:50
Speaker 1: at a point in the cycle where the demand starts
11:53
Speaker 1: to diminish. Obviously, we've got to watch the hurricane activity.
11:57
Speaker 1: Obviously we've got to watch what's happening and rand. But
12:00
Speaker 1: I think that this balances itself out and we'll be okay.
12:04
Speaker 1: And I thought you were just going to tell us
12:06
Speaker 1: that Jerry Jones and the Dallas Cowboys he wants to
12:08
Speaker 1: buy more more assets in the in the shail play
12:12
Speaker 1: with his comstock resources. I didn't hear that, so I
12:15
Speaker 1: don't have any I don't have any knowledge about what
12:18
Speaker 1: Mr Jones is doing. Are well done, Thanks very much
12:21
Speaker 1: for sharing your knowledge with us. Phil Orlando is the
12:24
Speaker 1: chief equity market strategist for Federated Investors and Lisa, I
12:27
Speaker 1: think we can just call him a bull right now,
12:31
Speaker 1: fish for now. Thanks for having me on, guys, it
12:33
Speaker 1: is It is a treat to come out of this show.
12:36
Speaker 1: You guys are terrific. Thank you. All right, we'll give
12:38
Speaker 1: you the twenty dollars back, Thanks very much, Phil Orlando
12:42
Speaker 1: of Federated Investors. Our guest is Carl Weinberg. He is
12:55
Speaker 1: the chief economist for High Frequency Economics and you can
12:59
Speaker 1: follow Carl on Twitter at c B Weinberg. Carl, can
13:05
Speaker 1: you speak a little bit about fatigue when it comes
13:08
Speaker 1: to global growth and particularly in the context of the
13:12
Speaker 1: meetings that are scheduled to take place in Bali for
13:16
Speaker 1: the International Monetary Fund? Yeah, Hi, Pam, good morning. So
13:19
Speaker 1: you know, the i m F has been talking this
13:22
Speaker 1: story for some time now. They're byline that their last
13:25
Speaker 1: set of meetings was you know, is this as good
13:27
Speaker 1: as it gets in the world economy? This time around,
13:30
Speaker 1: they translated that into some numbers in their world economic outlook,
13:34
Speaker 1: shaving down their growth rate. They still have a pretty
13:36
Speaker 1: cheeky growth rate of three point seven percent for the
13:39
Speaker 1: world economy, and they're the same for this year as
13:41
Speaker 1: last year. But most importantly of all, the i m
13:44
Speaker 1: F has a lousy record of predicting turning points in
13:48
Speaker 1: the world economy. So this document is kind of provocative
13:51
Speaker 1: and that it gives people something to think about. But
13:55
Speaker 1: the IMF has missed every economic downturn over the last
13:58
Speaker 1: twenty years in its world economic outlook. There should be
14:01
Speaker 1: nothing new for investors in what came out of the
14:03
Speaker 1: i m F today. All right, but Dr Weinberg, do
14:06
Speaker 1: you agree with anything that they put out there, putting
14:09
Speaker 1: aside their track recording. Yeah, I mean, I think that
14:13
Speaker 1: the broad story is that there are risks of the
14:15
Speaker 1: world economy coming from trade. There are I think bigger
14:18
Speaker 1: risks out there that the fund mentions a little bit
14:21
Speaker 1: deeper into the document. Higher US interest rates or a
14:24
Speaker 1: drain on growth potential and disposable income for countries that
14:28
Speaker 1: have a high foreign currency debts denominated in dollars. The
14:31
Speaker 1: stronger dollar is also a drain. Higher oil prices are
14:35
Speaker 1: also a drain. So we have clouds forming off of
14:37
Speaker 1: the world economy, and we're starting to see that in
14:40
Speaker 1: things like the industrial production number for Germany that came
14:43
Speaker 1: out on Monday. We're starting to see it in slowing
14:46
Speaker 1: GDP growth in places like Japan, uh and uh So. Overall,
14:50
Speaker 1: I think the Fund's message is right on, but I
14:53
Speaker 1: think that there's still probably more optimistic, and of history
14:57
Speaker 1: is any guide. They are too optimistic about how this
14:59
Speaker 1: is going evolve over the next year or two. Carl,
15:02
Speaker 1: do you believe that the Chinese will be able to
15:05
Speaker 1: outweight the United States when it comes to trade negotiations. Yeah,
15:11
Speaker 1: I certainly think they will. I certainly think they have to.
15:15
Speaker 1: The prize in all of this is China's industrial development policy,
15:19
Speaker 1: the so called Made in China, and that's a program
15:23
Speaker 1: in China to acquire the technology to produce seventy of
15:27
Speaker 1: the stuff that goes into what they assemble and re export,
15:31
Speaker 1: rather than thet that they currently produce at this time.
15:36
Speaker 1: So that difference of the value of exports is a
15:39
Speaker 1: trillion dollar a year prize that comes to China, and
15:42
Speaker 1: that's what's really at stake. The US Trade Representative mentions
15:45
Speaker 1: this program explicitly in its statements about the US tariffs
15:50
Speaker 1: UM and China is never going to give that up.
15:52
Speaker 1: So I think the Chinese have a big prize, a
15:54
Speaker 1: big pay day at the end of the day for
15:56
Speaker 1: sitting out the tariffs. I believe they will. Dr Carl Weinberg,
16:00
Speaker 1: thank you so much for taking the time with us.
16:02
Speaker 1: Dr Carl Weinberger's chief economist at High Frequency Economics. Talking
16:06
Speaker 1: about the I m f S stellar track record, he
16:08
Speaker 1: actually it doesn't put a whole lot of credis in that,
16:10
Speaker 1: but it's definitely looking at the potential for slowing global growth.
16:26
Speaker 1: Joining us now, Mark Lynde Bloom, portfolio manager for Western
16:29
Speaker 1: Asset Management. Mark, thank you so much for being with us.
16:33
Speaker 1: Can I just ask do you find treasuries attractive here
16:36
Speaker 1: given how quickly yields have risen to seven year highs?
16:41
Speaker 1: Good morning, Thanks for having me on The answer to
16:43
Speaker 1: your question, as we do. We have for most of
16:47
Speaker 1: the year had two reasons that we are favoring US treasuries.
16:51
Speaker 1: First is that we thought the economic growth this year
16:54
Speaker 1: next year would be a bit more moderate, and I
16:56
Speaker 1: have to say we've been wrong on that given the
16:58
Speaker 1: fiscal impulse that we've seen. Nonetheless, our economists here are
17:02
Speaker 1: looking for somewhat slower growth versus what we've seen in
17:06
Speaker 1: the middle part of this year, but most importantly from
17:08
Speaker 1: a bond point of view, that inflation is going to
17:10
Speaker 1: remain around two. The second reason I would say, though,
17:14
Speaker 1: is it as important, and that is as part of
17:18
Speaker 1: a fix income portfolio, we do want to have a
17:21
Speaker 1: risk mitigator and insurance policy, if you will, just in
17:25
Speaker 1: case we did start to see you slowdown or financial
17:27
Speaker 1: conditions did start to pinch economies around the globe. Both
17:32
Speaker 1: of those reasons, we are favoring favoring treasuries here a
17:36
Speaker 1: little bit more even around across the curve than we
17:38
Speaker 1: have in the past where we have focused on the
17:41
Speaker 1: long end mark. Is that also the two reasons why
17:45
Speaker 1: you're choosing now to issue and launch the first fixed
17:49
Speaker 1: income exchange traded fund UH from Western Asset Management, the
17:54
Speaker 1: Western Asset Total Return ets somewhat coincidental there. What we've
17:59
Speaker 1: been here from the field UM and from those who
18:05
Speaker 1: know Western well over the last four decades is they've
18:08
Speaker 1: been looking for an additional vehicle besides the separately managed
18:12
Speaker 1: portfolio or a mutual fund or a commingled vehicle, and
18:17
Speaker 1: specifically an e t F. So from our point of view,
18:20
Speaker 1: it's a it's a great question that it is a
18:23
Speaker 1: different rapper, if you will, but it will be managed
18:27
Speaker 1: pretty much the same as all the other vehicles with
18:30
Speaker 1: all the same Western themes as part of the E
18:33
Speaker 1: t F. All right, are you at all concerned about
18:36
Speaker 1: revealing your secret sauce since you have to actually disclose
18:39
Speaker 1: the holdings in real time basis of the E t
18:43
Speaker 1: F Really not mean. We've been always very open about
18:46
Speaker 1: what we are doing on a daily basis, so to
18:50
Speaker 1: the extent that this is a little different and and
18:52
Speaker 1: a from a formal point of view, it's uh, it
18:56
Speaker 1: does not bother us in the least in terms of
18:59
Speaker 1: letting letting that information out there. So can you give
19:01
Speaker 1: me a sense here of what you would have done
19:04
Speaker 1: or what you did do in the past week given
19:07
Speaker 1: the sell off in in treasuries that we've seen, but
19:10
Speaker 1: also the sell off an investment great debt in particular
19:13
Speaker 1: that really has been quite quite significant. Yes, it has
19:17
Speaker 1: been quite significant to your first part of your question.
19:20
Speaker 1: As I mentioned a little bit earlier, in the last
19:22
Speaker 1: several years, our clients have benefited from our dedication and
19:25
Speaker 1: some would say stubbornness wanting to own the longest part
19:28
Speaker 1: of the U S treasury curve, and that was based
19:31
Speaker 1: upon our view that the said would very slowly increase rates.
19:34
Speaker 1: In fact, they have done that, as we all know.
19:36
Speaker 1: The expectation is they'll continue to do that, and we
19:39
Speaker 1: are moving some of that contribution, if you will, or
19:42
Speaker 1: that duration down into the short and intermediate part of
19:44
Speaker 1: the YOK curve, just thinking it's their better value there
19:49
Speaker 1: or fully reflect expectations on the part of the Fed
19:52
Speaker 1: as we go into two thousand and nineteen, and as
19:55
Speaker 1: we all know, there are now actually real yields. They're
19:58
Speaker 1: they're they're quite attractive and our opinions, so that has
20:01
Speaker 1: been a change. And then one of the things that
20:03
Speaker 1: we've been doing over over the last week or so,
20:05
Speaker 1: as as the as the market has been backing up
20:09
Speaker 1: quite substantially on the non treasury sectors to your to
20:13
Speaker 1: your question, we've been growing increasingly cautious, particularly towards the
20:17
Speaker 1: corporate sectors, and particularly to the below investment grade corporate sectors,
20:22
Speaker 1: where we've been taking our allocation to high yield and
20:24
Speaker 1: bank loans lower investment grade corporates. We've been more neutral,
20:28
Speaker 1: but our investment grade corporate team has been concentrating on
20:32
Speaker 1: those sectors that we feel most good about it in
20:35
Speaker 1: the late late stages of this economic cycle. The one
20:40
Speaker 1: thing I'll add to that is that the one area
20:43
Speaker 1: we do have higher conviction on is emerging markets, while
20:46
Speaker 1: all the others we don't have that same high conviction,
20:49
Speaker 1: or to put differently, we just don't think we're being
20:51
Speaker 1: paid for the risk. When you mentioned emerging markets, do
20:54
Speaker 1: you mean dollar denominated emerging market debt or local currency debt?
20:59
Speaker 1: A little bit of both, quite selective, like we are
21:02
Speaker 1: in every credit sector on those countries or those corporations
21:05
Speaker 1: within those countries that we're choosing. But as you look
21:08
Speaker 1: at our portfolios today, right across the board, were approximately
21:12
Speaker 1: half the dollar the external debt, and we are approximately
21:16
Speaker 1: half in some of the local bonds and local currencies.
21:20
Speaker 1: There is an increasing sort of din out there that
21:23
Speaker 1: the Federal Reserve is on the brink of a policy
21:26
Speaker 1: error as it increases the pace of raising rates. Do
21:30
Speaker 1: you do you agree with that? I mean, do you
21:31
Speaker 1: think that that risk is growing stronger? I think we'd
21:35
Speaker 1: have to acknowledge over the cycles that we've all lived through.
21:39
Speaker 1: When you look at business slowdowns and actual recessions, there
21:44
Speaker 1: are common themes as to why they come about in
21:46
Speaker 1: terms of the FED being on the move, perhaps commodity
21:50
Speaker 1: prices increasing, uh, some misallocation of capital, inventories, etcetera. So
21:57
Speaker 1: we are not about to dismiss what's happening now in
22:00
Speaker 1: terms of the FED being on the move uh and
22:04
Speaker 1: planning to raise interest rates to neutral or beyond as
22:07
Speaker 1: they've been saying recently. The thing that we all just
22:11
Speaker 1: don't know how to weigh is this experiment we've been
22:14
Speaker 1: conducting for now ten years. As we unwind that, and
22:18
Speaker 1: if the speed limited growth around the world and particularly
22:21
Speaker 1: in the United States, is lower, we would believe then
22:24
Speaker 1: that smaller incremental increases in the FED funds rate and
22:27
Speaker 1: market interest rates will start to impact the economy sooner.
22:30
Speaker 1: So we are not about to ignore those signs at all,
22:34
Speaker 1: and are growing a little bit more cautious towards particularly
22:38
Speaker 1: the non treasury sectors. In recent months, we're speaking with
22:42
Speaker 1: Mark Lynd Bloom. He is portfolio manager for Western Asset
22:45
Speaker 1: Management Company. We're speaking about the firm's first fixed income
22:50
Speaker 1: et F. It's called the Western Asset Total Return et F,
22:54
Speaker 1: and as part of the mandate, you've put a cap
22:57
Speaker 1: on the amount of assets that can be put towards
23:00
Speaker 1: junior loans that instruments that are either unsecured and subordinated.
23:06
Speaker 1: Could you speak a little bit about that and particularly
23:09
Speaker 1: about the market for junior loans. Sure, this is consistent
23:13
Speaker 1: with how we view here at Western Asset the core
23:17
Speaker 1: or a core plus bond fund in that the buyers
23:22
Speaker 1: of these these funds, usually which are measured against an
23:26
Speaker 1: aggregate indexes as you know, are are meant to be
23:29
Speaker 1: an anchor to windward sort of vehicle. UH. Core plus
23:33
Speaker 1: does offer some flexibility in terms of the blow investment
23:37
Speaker 1: grade sectors to gain some yield and return advantage. Certainly
23:42
Speaker 1: were advocates of that, but to your to your point
23:45
Speaker 1: about limitations that we want to be very careful that
23:48
Speaker 1: the purpose and the objective of a core plus fund
23:52
Speaker 1: is to provide higher returns versus and aggregate index over time,
23:56
Speaker 1: but without substantially higher volatility. So our intent is through
24:01
Speaker 1: the guidelines, the guard rails, if you will, that we
24:04
Speaker 1: do limit some of those UH, some of those sectors
24:08
Speaker 1: as part of the asset allocation on constraint funds for
24:11
Speaker 1: example that didn't have a benchmark and I had a
24:13
Speaker 1: lot more flexibility. Certainly, would have a greater greater room
24:18
Speaker 1: to add those on your question, your second part of
24:21
Speaker 1: your question, you know, what do you think, as I
24:23
Speaker 1: suggested a little bit earlier, when we look at many
24:27
Speaker 1: of the sectors below investment grade across corporates are even
24:33
Speaker 1: structure most recently and buy instructure, I mean cnbs and
24:36
Speaker 1: residential loans. We are not at all pounding the table
24:40
Speaker 1: and saying we're about to go into a slowdown our recession.
24:43
Speaker 1: There are a lot of folks out there with that
24:44
Speaker 1: prediction of two thousand twenty. That isn't our call. But
24:49
Speaker 1: the key is the valuations just aren't there to benefit
24:52
Speaker 1: our investors currently. Thank you so much for being with us.
24:55
Speaker 1: Mark Lynn Bloom, portfolio manager at Western Asset Management Company,
24:59
Speaker 1: which over sees four hundred and twenty billion dollars. They
25:02
Speaker 1: did just launch a new actively managed e t F,
25:04
Speaker 1: the Western Asset Total Return e t F, which uses
25:08
Speaker 1: the same strategy in the broader non e t F
25:10
Speaker 1: fund UH in real time. Right now, we're looking at
25:24
Speaker 1: emerging market currencies that are just a slight bit if
25:28
Speaker 1: you look at the m s c I index, but
25:29
Speaker 1: certainly they're stable as compared to the plunge that we
25:32
Speaker 1: saw earlier. The question is this just a relative bit
25:36
Speaker 1: of calm before the storm continues? Joining us now, Dr
25:39
Speaker 1: Win Thin, global head of Emerging Markets for the FX
25:42
Speaker 1: markets at Brown Brothers Harriman, coming to us from New York.
25:46
Speaker 1: Dr Winton, thank you so much for being with us.
25:48
Speaker 1: So let's talk about that. I mean, the I m
25:50
Speaker 1: F came out with this report downgrading their expectations for
25:53
Speaker 1: some major emerging market economies, including China and Brazil. Do
25:58
Speaker 1: you think that what we're seeing right now is the
26:00
Speaker 1: calm before the storm? Well, I say, personal, thanks for
26:03
Speaker 1: having me. It's always a pleasure. Uh. Well, look we
26:06
Speaker 1: have we haven't exactly had um much calm this whole year,
26:10
Speaker 1: So I would say this is within a greater bear trend.
26:14
Speaker 1: I mean, as you mentioned, there's a global backdrop for
26:16
Speaker 1: EM remains UM, very difficult global growth forecast lower. Uh.
26:21
Speaker 1: I'm your postal worked down trade flow forecast, you know,
26:25
Speaker 1: reflecting the trade tensions. Um, we gonna hire U S
26:28
Speaker 1: interest rates and moving higher, so the backdrop EM remains negative. Um.
26:33
Speaker 1: You know, I think this is sort of a little
26:35
Speaker 1: bit of a pause. Um, but I think it's very
26:39
Speaker 1: way too early to say, hey, this is a good
26:40
Speaker 1: time to buy EM. If you look at the ms
26:43
Speaker 1: c I um E Mergant Market Index, we're breaking down
26:46
Speaker 1: making new loads off of this move um this yesterday,
26:50
Speaker 1: and I think that's you know, so the negative sense
26:52
Speaker 1: it remains in place. Do you believe that dollar strength continues?
26:56
Speaker 1: I do, yes, Uh no, I think you know, as
26:59
Speaker 1: you know, the the U S bond mark was closed yesterday,
27:02
Speaker 1: so we've ended last week on a very um uh
27:07
Speaker 1: sort of strong in terms of the yields we had.
27:09
Speaker 1: We had US tenure yield poking up around I think
27:12
Speaker 1: the markets started this week worried that we didn't get
27:14
Speaker 1: further push up, but for now we know we haven't
27:18
Speaker 1: really pushed that Keith twenty five area, and so I
27:20
Speaker 1: think as part of the calm is that we haven't
27:22
Speaker 1: seen another leg up in US rates, which of course,
27:25
Speaker 1: as we mentioned, is very negative for EM very positive dollars.
27:28
Speaker 1: So you know, we've got the p p I tomorrow
27:31
Speaker 1: and cp I the day after here in the US.
27:33
Speaker 1: I think those were very key given that the focus
27:35
Speaker 1: on on yields and rates here in the US, I
27:38
Speaker 1: think it's still the primary driver for global markets. Not
27:40
Speaker 1: just rates markets. You probably know, the equily markets started
27:44
Speaker 1: to really feel that the heat. Um. You know, part
27:46
Speaker 1: of that is the fact that a lot of these
27:49
Speaker 1: UH stock valuations were made under the assumption of low
27:52
Speaker 1: interest rates, and that's that's being readdressed. Now. I want
27:56
Speaker 1: to turn the focus a bit to China, because China
27:59
Speaker 1: eased Paul to see further this week, and they're trying
28:03
Speaker 1: to ignite some growth or at least cushion the slowdown
28:06
Speaker 1: and growth that we've seen. And I guess I am
28:09
Speaker 1: really struck by the reaction of markets, with the equity
28:12
Speaker 1: market in China falling after that announcement, basically saying it's
28:16
Speaker 1: not enough, and it seems like you're a little bit desperate,
28:19
Speaker 1: the Chinese leader of the PBOC to try to gain
28:22
Speaker 1: some control over this. How concerning is that? Well, I
28:26
Speaker 1: think China is always sort of a simmering concern. Um.
28:29
Speaker 1: You know, many analysts called for some sort of big
28:32
Speaker 1: disaster there. You know, they've been calling us the last
28:34
Speaker 1: ten years. You know, it's clear that they're slowing, and
28:37
Speaker 1: you know we always had a discussion, well, how how
28:39
Speaker 1: do you trust the Chinese umbers? Well you can't really,
28:41
Speaker 1: But what you can trust is the sort of the
28:43
Speaker 1: official actions and the fact that this I think the
28:46
Speaker 1: fourth reserve requirement cut this year, the West, some other
28:50
Speaker 1: directed lending. It's clear they were concerned about a slowdown.
28:53
Speaker 1: Um we are seeing UM, I would assume I think
28:56
Speaker 1: it's slower than expect to slow down given the policy reaction.
29:00
Speaker 1: Bottom line, though, I do think China kind of muddles through.
29:04
Speaker 1: It's uh. I think the trade tension of the U
29:07
Speaker 1: S makes things obviously much more difficult. And that's you
29:09
Speaker 1: had another ball at the juggling um. And so am
29:12
Speaker 1: I a little bit worried about China? Yeah? I am.
29:14
Speaker 1: I'm probably a little more worre than usual, but I'm
29:16
Speaker 1: not in the sort of we're we're heading for disaster
29:18
Speaker 1: camp at this point. Can you tell us your outlook
29:22
Speaker 1: for currencies that are tied to commodities such as the
29:25
Speaker 1: Canadian looney and the Australian dollar. Sure, Um, well, you
29:30
Speaker 1: know Canada, it's two separate sets because if you think
29:32
Speaker 1: about the commodities, well, Australia is linked usually to iron
29:36
Speaker 1: ore and China. Um. So from as a result, the
29:39
Speaker 1: Australian dollars and has not been doing well recently on
29:42
Speaker 1: the flip side, Uh, the looney is is more linked
29:45
Speaker 1: towards oil, and of course oil is on a tear um.
29:50
Speaker 1: You know, at some point, though too much of a
29:51
Speaker 1: good thing is uh is too much? You know, at
29:54
Speaker 1: some point high oil prices are become negative for the
29:56
Speaker 1: world economy. I mean, you're sure it's great for the
29:59
Speaker 1: producing countries, but if you're an all consuming country, like
30:02
Speaker 1: most most industrializations are, uh, that really starts to take
30:06
Speaker 1: a toll, whether it's at the pocketbook, at the at
30:08
Speaker 1: the pump, or even at the firm wide level. Uh two,
30:12
Speaker 1: high prices are not good. Um. So you know, I'm
30:16
Speaker 1: hoping that OPEC realized this and then they sort of
30:18
Speaker 1: uh take some stronger actions. Even at this point a
30:21
Speaker 1: little bit blase about, but I think that the growing
30:24
Speaker 1: concern given all the other headwinds on the global economy.
30:27
Speaker 1: When you said that you do expect the ongoing deterioration
30:31
Speaker 1: in emerging markets currency valuations to continue versus hard currencies.
30:35
Speaker 1: But is there anywhe where you see uh sort of
30:38
Speaker 1: potential opportunities or do you think that everything's gonna get
30:41
Speaker 1: sort of caught up on the and the FED tightening
30:43
Speaker 1: and sort of the the QT that's taking over the world. Well,
30:48
Speaker 1: you know, one night one e M, I would say
30:52
Speaker 1: I'm very negative going into year end, and probably i'd
30:56
Speaker 1: say the first half of next year. But uh, you know,
30:59
Speaker 1: I think we're sorting halfway do the sell off, maybe
31:01
Speaker 1: maybe a little bit more, but I do think there's
31:03
Speaker 1: ways to go still before we sort of get to
31:05
Speaker 1: an equilibrium. Now um with a they e M though,
31:08
Speaker 1: you know, I should say that there are opportunities. You know,
31:10
Speaker 1: for instance, the Mexican pace was actually up this year,
31:12
Speaker 1: up three, so there's a real differentiation. You know, you've
31:15
Speaker 1: got the five so really worst currencies Argentina, Turkey, South
31:19
Speaker 1: Africa and now Brazil and India swap places. Brazil is
31:23
Speaker 1: rallied on the election, so it's actually gotten pushed up
31:25
Speaker 1: to only sixth worst. Uh and you've got Indian Russia
31:29
Speaker 1: from rounding up there the worst five. You know, you've
31:30
Speaker 1: got the e M weakness concentrated in a handful, whether
31:34
Speaker 1: it's five, six, seven countries with adosyncratic risk, other countries
31:38
Speaker 1: currencies and countries holding up better thaybot come and taste
31:41
Speaker 1: in Malaysian ring get um Mexico. As I mentioned, earlier,
31:44
Speaker 1: So there's definitely a differentiation. I think markets in a
31:47
Speaker 1: in a tighter global equity story, marks that are punishing
31:49
Speaker 1: the sort of the deader countries, those that have high
31:52
Speaker 1: current account or budget deficits, and there there's not I
31:55
Speaker 1: would say the rewarding, but there's sort of leaving alone
31:58
Speaker 1: the country that the surplus countries, and many of those
32:00
Speaker 1: are in Asia. So again let you look look under
32:02
Speaker 1: the hood. You can't you can't sell em on mask.
32:06
Speaker 1: But in channel I do think the asselete classes is
32:08
Speaker 1: going to remain under pressure. Now we always talk about
32:11
Speaker 1: countries when they are under pressure. For example Argentina. Any
32:15
Speaker 1: update on the Argentine Paso and the efforts of the
32:17
Speaker 1: Argentine government to contain inflation and produce a credible budget, well,
32:23
Speaker 1: I'll say we're we're I look at that glass of
32:25
Speaker 1: half full. Um, they've taken all the right steps. They've
32:28
Speaker 1: tighten montars policy several times, numerous times, UM, tighten fiscal policy,
32:33
Speaker 1: gone to the IMF. In fact, it just increased the
32:35
Speaker 1: IMF program um by request. Uh so they've done all
32:39
Speaker 1: the right things. That's finally, UM, I think the pacers
32:42
Speaker 1: finally starting to get some traction um. So you know,
32:45
Speaker 1: I think clearly, uh, you know, the movement forward might
32:47
Speaker 1: have been in a bit of an overshoot, but within
32:50
Speaker 1: the e m bearing mark, I don't think Argentina Payco
32:54
Speaker 1: can be recovered too much in absolute terms. I'd say
32:56
Speaker 1: the same thing in Brazil. You know, we've had a
32:57
Speaker 1: great sort of pre election and post election, but we're
33:00
Speaker 1: in the ear mark. I don't I don't think there's
33:03
Speaker 1: much more room for for absolute gains now in on
33:05
Speaker 1: a relater basis. You know, I think those two because
33:08
Speaker 1: they've been hammered so badly this year, I could start
33:11
Speaker 1: could do a little bit more outperforming with an e
33:13
Speaker 1: m UM, But you know, absolute terms, I'm pretty negative.
33:18
Speaker 1: I want to thank you very much for joining us
33:20
Speaker 1: and giving us your thought a doctor when Finn is
33:24
Speaker 1: a global head of Emerging Markets f X at Brown
33:26
Speaker 1: Brothers Harriman. Thanks for listening to the Bloomberg P and
33:33
Speaker 1: L podcast. You can subscribe and listen to interviews at
33:36
Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
33:40
Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
33:44
Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
33:47
Speaker 1: can always catch us worldwide on Bloomberg Radio.