Latest / Bloomberg Intelligence / Central Banks, Markets, Quants, and the SEC (Podcast)

Transcript

Central Banks, Markets, Quants, and the SEC (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
0:06
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
0:11
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
0:15
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Certainly, the news over
0:21
Speaker 1: the last twenty four hours has been this consistent effort,
0:25
Speaker 1: I would say, by the Federal Reserve central banks around
0:28
Speaker 1: the world to continue to fight inflation. Of course, we
0:31
Speaker 1: had the FED yesterday, the Bank of England and the
0:34
Speaker 1: e c B. This morning we heard from Christine Loclegard,
0:36
Speaker 1: uh still moving rates higher. We want to see what
0:39
Speaker 1: that means for markets and what that means for kind
0:42
Speaker 1: of you know, as we think about setting us up there,
0:45
Speaker 1: and we can do that with this round table that
0:47
Speaker 1: we've got together. Vince Signarella, global macro strategists with Bloomberg News.
0:51
Speaker 1: He joins us on the phone, as does Jennifer Lee,
0:54
Speaker 1: Managing director and senior economist with the BMO Capital Markets. Jennifer,
0:57
Speaker 1: let's start with you here. Um again, the central banks
1:01
Speaker 1: have been nothing else if consistent. What is what is
1:03
Speaker 1: your takeaway from the last twenty four hours or so?
1:06
Speaker 1: Good morning, I'm thanks for having me once day. Um,
1:09
Speaker 1: you know what I've if he had told me like
1:11
Speaker 1: ten years ago or so that on all the central banks,
1:15
Speaker 1: the ECB would be on the we're hawk, I guess
1:18
Speaker 1: you could call them on the on the spectrum of
1:20
Speaker 1: central banks, I would have said, get out of town,
1:22
Speaker 1: you know. But that's what's going on. And this is crazy,
1:24
Speaker 1: I mean, especially after her the press conference, and she
1:28
Speaker 1: was extremely clear this morning. Usually she's you know, it's
1:31
Speaker 1: a lot of you know, everything's gonna depend, it's gonna
1:33
Speaker 1: be meeting by meeting, but she actually said that, you know,
1:35
Speaker 1: we're gonna be expecting fifty basis point hikes, you know,
1:39
Speaker 1: steadily for some time until we get to a significantly
1:42
Speaker 1: restrictive level, um, something like that, you know, which is
1:45
Speaker 1: very very clear and very un characteristic for for this
1:48
Speaker 1: for this particular central bank. I thought that was quite interesting.
1:51
Speaker 1: Me on the bake of England, you know, you've got
1:53
Speaker 1: one person voting for seventy five two people saying let's
1:56
Speaker 1: let's do nothing, and the other six saying let's get
1:59
Speaker 1: let's do fifty. You know, if I were there, I'd
2:00
Speaker 1: be like, Okay, is anyone wanting a great cut? At
2:03
Speaker 1: this point? Everyone's all over the map. So I find
2:05
Speaker 1: this very very interesting and very unsuddenly. Excuse me to
2:09
Speaker 1: see at least Vince hop On in here, because what's
2:13
Speaker 1: so striking to me is a very simple comment that
2:17
Speaker 1: Madame Laguard made, which was the recession risks skew to
2:21
Speaker 1: the downside. Obviously, Um, but as this a recession Europe
2:26
Speaker 1: that has been kind of inevitability for almost a year,
2:28
Speaker 1: and it was supposed to hit us the fourth quarter
2:30
Speaker 1: of this year, it was supposed to happen by now
2:32
Speaker 1: and actually hasn't yet happened. When do we get that recession?
2:35
Speaker 1: How bad is it and how long is it going
2:37
Speaker 1: to be? I think you're going to see it show
2:40
Speaker 1: up in the numbers, probably starting in December, most definitely January. Um.
2:45
Speaker 1: You know, I think that Jennifer made a good point,
2:47
Speaker 1: without question. The ECP basically, as a trader said to
2:49
Speaker 1: me today, me kepped the market with their aggressive hawkish output.
2:54
Speaker 1: When you look at the data, and I must say,
2:56
Speaker 1: I'm actually a little surprised at the magnitude of the
2:59
Speaker 1: cell up today. Um that you know, retail sales in
3:03
Speaker 1: the month of November holiday season declining, What is that
3:08
Speaker 1: going to say for us for the first quarter of
3:10
Speaker 1: next year. I think the consumer is absolutely tapped out now.
3:14
Speaker 1: If the market is selling off because they see a recession,
3:17
Speaker 1: uh and maybe a drop in earnings and therefore dropping stocks,
3:20
Speaker 1: I think they also need to see the fact that
3:22
Speaker 1: that procession is going to bring a fent pivot. So
3:25
Speaker 1: it's a bit of a push and pull I think
3:27
Speaker 1: as to what what whether the cart leads to horse
3:31
Speaker 1: or the other way around. I think in this case, um,
3:34
Speaker 1: I think this sell off is is going to be
3:37
Speaker 1: the last hurrah. And as the numbers start to come
3:40
Speaker 1: in quite um slow and uh and such, I think
3:45
Speaker 1: we're going to see markets tern Jen from Vince brought
3:49
Speaker 1: up the retail sales data today, and we just had
3:51
Speaker 1: a retail analyst on just before you guys, and she
3:54
Speaker 1: was suggesting that the weaker than expected retail numbers today
3:57
Speaker 1: reflect in part maybe the pull through that we saw
4:00
Speaker 1: in October when retail sales were up and surprised on
4:03
Speaker 1: the upside, up one point three. So maybe don't get
4:06
Speaker 1: too concerned about the consumer. But boy, this data point
4:09
Speaker 1: that we saw this month has been highlighted. Kind of surprising,
4:12
Speaker 1: kind of disappointing. Another guest this morning says that he's
4:15
Speaker 1: concerned about rising consumer debt that they're buying stuff with
4:19
Speaker 1: on their credit cards. So you put all that together,
4:21
Speaker 1: how do you view the consumer right here and then
4:24
Speaker 1: going into next year? So we um, you know, this
4:28
Speaker 1: is like today's retail sales report. I mean, this is
4:31
Speaker 1: another indication of how we can't we can always take
4:33
Speaker 1: one report, you know, with a with a grand assaults
4:35
Speaker 1: I guess, you know. I mean, we we have that
4:37
Speaker 1: upside surprise last month and everything was great, and now
4:39
Speaker 1: all of a sudden, you know, we said this big
4:41
Speaker 1: pull back, pullback, So it's almost like, um, a lot
4:43
Speaker 1: of expenses were being pulled forward. UM. But of course
4:46
Speaker 1: it is concerning that you know, there is more um
4:49
Speaker 1: consumer credit being being taken on. You know some of that.
4:52
Speaker 1: I'm wondering if it could be you know, because you
4:54
Speaker 1: know some of the credit cards you get points, so
4:56
Speaker 1: you know, you could be using up more of your
4:58
Speaker 1: credit cards for for that reason. But I'm gonna go
5:00
Speaker 1: back to you know, the funnel metal um UM support.
5:04
Speaker 1: I guess below the or beneath of the US consumer,
5:07
Speaker 1: and is that they are still they still have savings,
5:09
Speaker 1: you know, not as much as they used to obviously,
5:11
Speaker 1: but at least they have some savings to work awful
5:14
Speaker 1: right now. Job growth remains very solid. You know, the
5:17
Speaker 1: labor market is still tight as a fetch, your pala
5:19
Speaker 1: said yesterday. As long as wages keep increasing, you know, yes,
5:22
Speaker 1: they're they're they're whittling down there a pile of savings bellies.
5:25
Speaker 1: It's still being replenished with rising wages, and I think
5:28
Speaker 1: that's the more important thing, I guess going forward. But
5:31
Speaker 1: of course, you know, the U. S consumer is not
5:33
Speaker 1: as healthy as it once was, just given that prices
5:36
Speaker 1: are still rising quite quickly. So we do see consumers
5:39
Speaker 1: spending being pulled back. And then you know it's already
5:41
Speaker 1: being pulled back already now, but even more so um
5:44
Speaker 1: in the uh you know, in the next year probably, um,
5:47
Speaker 1: we're probably count see negative growth, I guess in consumer
5:49
Speaker 1: spending for the first half of Okay, Hey, Ben, I
5:53
Speaker 1: want to get your perspective from a trader's perspective. Talk
5:55
Speaker 1: to us about liquidity in the market price broadly defined.
5:59
Speaker 1: You know, we've got the FED no longer flooding the
6:02
Speaker 1: market with liquidity, in fact, kind of the opposite here,
6:05
Speaker 1: How does that play out day to day for kind
6:07
Speaker 1: of just the plumbing of the markets? I think you
6:11
Speaker 1: just see bigger swings um, you know, a lot more
6:13
Speaker 1: volatility uh with liquidity shrinking a touch. But traders are
6:18
Speaker 1: just that they basically don't need as bigger position UH
6:22
Speaker 1: with higher liquidity and higher volatis excuse me, higher volatility
6:26
Speaker 1: UM to make the same nut they need to make
6:29
Speaker 1: on a day to day basis. So the positions of
6:31
Speaker 1: smaller volatilities higher, and you're going to see bigger swings
6:35
Speaker 1: in the market. I just want to make one point
6:37
Speaker 1: about the employment issue that Jennifer mentioned one of them.
6:40
Speaker 1: I got an email yesterday from essentially someone covering resume
6:44
Speaker 1: builder dot com and they did a survey and found
6:48
Speaker 1: one there one third of responses predicted that they were
6:52
Speaker 1: going to do layoffs next year of upwards. Of Now,
6:56
Speaker 1: if that plays out, the FEDS idea of job is
7:00
Speaker 1: being strong is gonna get totally trashed. And I just
7:03
Speaker 1: don't see how they go on the path, all of
7:05
Speaker 1: the central things go on the path that they're they're
7:07
Speaker 1: swinging at right now. Vince again, real real quick, what's
7:10
Speaker 1: the trade going into the end of this year. I
7:14
Speaker 1: think you look at fading the dollar. I think risk
7:17
Speaker 1: is going to turn as we head into the first
7:18
Speaker 1: quarter UM and if if not so, you'll you'll see
7:23
Speaker 1: earnings decline. And that's been the big large cap companies
7:27
Speaker 1: getting hurt by what we've seen as a higher dollar
7:29
Speaker 1: this year. I think we've seen the peak in the
7:30
Speaker 1: dollar for a while. All right, good stuff, Vince Signarella,
7:33
Speaker 1: Global macro strategists with Bloomberg News and Jennifer Lee, managing
7:36
Speaker 1: director and senior economists with BEMO Capital Markets. One of
7:44
Speaker 1: the issues that the market has been dealing with and
7:46
Speaker 1: the face of higher inflation depending the recession, the sumer
7:50
Speaker 1: has been pretty down strong through all of this, and
7:53
Speaker 1: when we got some retail sales today, they kind of
7:54
Speaker 1: put a pause in that retail sales. The headline number
7:57
Speaker 1: zero point and negative zero point six percent anti consensus
8:00
Speaker 1: was for negative zero point two percent, so a little
8:02
Speaker 1: bit worse there. That compares to last month when it
8:05
Speaker 1: was positive one. So that's I mean some Paul's in
8:08
Speaker 1: the marketplace here, uh, you know, bringing up concerns about
8:12
Speaker 1: the strength of the consumer and maybe a recession. Um,
8:14
Speaker 1: let's bring an expert here. First of all, I've got
8:16
Speaker 1: a crick critic group, the Bloomberg Markets correspondent in our
8:18
Speaker 1: studio city and from mat so we appreciate that. Angie Solanki.
8:22
Speaker 1: She's a national director of retail services in the US
8:24
Speaker 1: four Colliers. Uh, Andie, thanks so much for joining us here.
8:29
Speaker 1: What did you make of the retail sales data we
8:31
Speaker 1: saw today? Yeah? Thanks for having me. Um. So, what
8:35
Speaker 1: I would say is that in the sale did definitely
8:39
Speaker 1: drop the drop, but we believe that that's due to
8:43
Speaker 1: the pull forward in October where we saw significant sales
8:48
Speaker 1: in terms of holiday season shopping cyber you know, preparing
8:53
Speaker 1: for Cyber Monday and Black Friday. People decided let's go
8:55
Speaker 1: ahead and shop in October because we started to see
8:58
Speaker 1: discounts from retailers each sooner. It actually started in the
9:01
Speaker 1: summer of So what does this mean, Angie? Again, we're
9:07
Speaker 1: you know, I like to say my holiday shopping is done,
9:11
Speaker 1: but it's not having started yet. But what what's the
9:13
Speaker 1: feeling you're hearing from your retail clients about just kind
9:16
Speaker 1: of how the holiday seasons shaping up and and maybe
9:20
Speaker 1: their recession outlook for next year. Yeah. And one thing
9:24
Speaker 1: I have to just really highlight here is if we
9:27
Speaker 1: look at our year over year core retail sales, so
9:31
Speaker 1: excluding food service, car and gas, because prices have come
9:34
Speaker 1: down car prices have come down, we still have a
9:38
Speaker 1: pretty healthy retail sales here to date at five point
9:40
Speaker 1: six percent. So we're actually looking at a pretty good
9:44
Speaker 1: i would say, first test to the holiday season, where
9:47
Speaker 1: the retail sector has cleared some hurdles, is still been
9:50
Speaker 1: looking positive, maybe not for the month in November, but
9:54
Speaker 1: it still should be a pretty solid holiday season, even
9:57
Speaker 1: though consumers are going to be mindful of how they're
9:59
Speaker 1: spending where they're spending, because we've still seen increases in pricing,
10:04
Speaker 1: especially in the grocery sector, um and some and also
10:07
Speaker 1: some decreases in some of the other categories such as
10:12
Speaker 1: you know, the the apparel side, home furnishings, etcetera. So,
10:18
Speaker 1: and one of the concerns we were just speaking with
10:20
Speaker 1: the Dennis Gartman of the Garben Letter has been following
10:23
Speaker 1: markets for decades, and he brought up a concern that
10:25
Speaker 1: he has that consumers are running up their credit card
10:28
Speaker 1: debt after being flush with cash Uh, they've exhausted most
10:31
Speaker 1: of that. They're now running it up with credit card debt.
10:34
Speaker 1: Is that a concern for as you think about retail sales?
10:39
Speaker 1: It is. I would say that would be in certain
10:41
Speaker 1: categories where we're going to see maybe the higher price points, electronics,
10:46
Speaker 1: things of that nature. Um, So we will see some
10:50
Speaker 1: debt creep. However, I think that hopefully we'll start to,
10:54
Speaker 1: you know, when we start to look at the spend
10:58
Speaker 1: and the type of spin in the differ and categories,
11:01
Speaker 1: we hope to see that that may start to slow
11:03
Speaker 1: down a little bit and balance out. Um, but we
11:05
Speaker 1: are a little nervous about that looking into Q one,
11:08
Speaker 1: Q two, Well, Angie, as we see these numbers, these
11:12
Speaker 1: inflation numbers, at least on the headline novel decelerate. It's
11:15
Speaker 1: not a secret inflation is coming down. A lot of
11:17
Speaker 1: that is coming from the base effects. Though on the
11:20
Speaker 1: way up. Is that going to actually show up in
11:22
Speaker 1: consumer patterns? How long before the consumer says, oh, actually
11:26
Speaker 1: things are getting more affordable. You know, I think if
11:30
Speaker 1: we have to look at, you know, the way the
11:32
Speaker 1: consumer is spending. So we're seeing some interesting trends, especially
11:36
Speaker 1: in the grocery sector. So that's a daily need, a
11:39
Speaker 1: weekly need. So they're coping with these different inflationary issues
11:43
Speaker 1: by adjusting those shopping habits and they're balancing that um
11:47
Speaker 1: you know, you know, the way of their spend through
11:51
Speaker 1: looking at private label goods, lower cost brands, um opting
11:56
Speaker 1: for less expensive. So that pattern will continue, and I
12:01
Speaker 1: think when we if we continue to see gasoline prices,
12:04
Speaker 1: you know, decrease, that will also help in terms of
12:08
Speaker 1: just kind of that mindset in terms of where we're going. Now,
12:11
Speaker 1: keep in mind cp I still at seven point one
12:14
Speaker 1: per cent, whereas sales um growth have been less than that.
12:18
Speaker 1: So we're definitely managing and or monitoring. Managed to say, alright, Angie,
12:23
Speaker 1: thank you so much for joining us. We always appreciate
12:24
Speaker 1: getting your perspective and we get some of these retail
12:27
Speaker 1: data points. Angie Solanki, National director of Retail Services for
12:31
Speaker 1: the United States for Colliers. Uh So, retail sales came
12:34
Speaker 1: a little bit weaker than expected. Look at the markets here,
12:40
Speaker 1: it's a little ugly. We've got a lot of stuff
12:42
Speaker 1: that digests. We had central banks moving over the last
12:44
Speaker 1: twenty four hours, raising rage, talking tough. We've got some
12:46
Speaker 1: weaker retail sales. So we need to break it all
12:48
Speaker 1: down here with some smart people, and we got that going. Uh,
12:51
Speaker 1: we've got a roundtable this thing. Jonathan Hurdle, executive chairman
12:55
Speaker 1: of Hurdle, Callaghan and Company. Uh, he's been doing that.
12:59
Speaker 1: He manages about twenty million dollars. But for me, the
13:01
Speaker 1: highlight of his resumes he's a Penn State grad. So
13:04
Speaker 1: we're talking to Penn State football. Here. We got Ira Jersey,
13:07
Speaker 1: he chief US interest rate Strategists with Bloomberg Intelligence. Both
13:10
Speaker 1: of these gentlemen joined pretty night in our Bloomberg Interactive
13:13
Speaker 1: Broker studio. John, you've been doing this a long time,
13:16
Speaker 1: managing money for others. What do you make of the
13:19
Speaker 1: last twenty four hours when we've got seemingly concerted effort
13:21
Speaker 1: on the part of these central banks that continue to
13:24
Speaker 1: raise rates. Well, I think today's action is just a
13:26
Speaker 1: simple selling the news reaction. Okay, So this is what
13:29
Speaker 1: they did, what we anticipated, and they're selling on the news.
13:32
Speaker 1: So I think one of the things that people do
13:34
Speaker 1: that make a mistake in the market is they see
13:36
Speaker 1: trading action and they try to apply fundamental logic to it.
13:40
Speaker 1: And so if you've been long and you get this
13:42
Speaker 1: trip tick and you say, I've got to get away
13:44
Speaker 1: from that trade. All of a sudden, new cascades the
13:47
Speaker 1: markets down six fifty points. People say, what happened, Nothing happened,
13:51
Speaker 1: it's just trading. They're selling on the news. That's one
13:54
Speaker 1: of the first things I was taught by one of
13:56
Speaker 1: my mentors on the prince side. He said, sometimes traders
13:58
Speaker 1: just trade because they trade. That's all they do. Ira
14:01
Speaker 1: hop on in here. Would you agree with that? Would you?
14:03
Speaker 1: Would you say that's happening? Positioning matters so much? Right,
14:06
Speaker 1: So what happens is is that you get people in
14:08
Speaker 1: positions like right now, just about everyone in the world
14:10
Speaker 1: is in flattening trades in my market, in the in
14:13
Speaker 1: the rates market, particularly in the US, and then um,
14:16
Speaker 1: you know, so it makes it harder and harder because
14:19
Speaker 1: so many people are in those positions for the curve
14:21
Speaker 1: to flatten more. But then all of a sudden, there's
14:23
Speaker 1: something fundamental that occurs, like you know, Christine Leguard being
14:26
Speaker 1: very hawkish, and the next thing you know, you know,
14:28
Speaker 1: you can you can flatten a little bit more because
14:30
Speaker 1: you now bring in what would be weaker hands. So
14:33
Speaker 1: so I agree, I mean the intra day volatility. Sometimes
14:36
Speaker 1: it's just all about positioning and people, you know, just
14:38
Speaker 1: squaring positions and managing risk, as opposed to longer term trends,
14:42
Speaker 1: which obviously I think ultimately do have to come back
14:44
Speaker 1: to more fundamentals. Well, you're talking about the inversion. Talk
14:47
Speaker 1: to me about the depth of the inversion, because I
14:49
Speaker 1: think that's really significant. It's been in the two tents,
14:51
Speaker 1: for example, has been inverted for a while. But the
14:53
Speaker 1: fact that we've got I think to like two I
14:55
Speaker 1: want to say negative at two basis points, that seems
14:58
Speaker 1: extreme going back to um even the seventies when we
15:01
Speaker 1: saw I think negative two hundred. Yeah, so briefly so
15:03
Speaker 1: negative two hundred, but but basically the market had spent
15:06
Speaker 1: about the better part of a year on nine months
15:09
Speaker 1: plus at negative hundred to a negative hundred and fifty
15:12
Speaker 1: basis points. Now I'm not sure that we'll get to
15:13
Speaker 1: a hundred negative hundred and fifty again this cycle, although
15:16
Speaker 1: it's not out of the question. But our targets about
15:18
Speaker 1: negative a hundred, and the way that we get there
15:20
Speaker 1: is that the the the long end stays more or
15:23
Speaker 1: less where it is three point four to three point
15:25
Speaker 1: six on on the tenure um. But then the two
15:28
Speaker 1: year yield still is has to go a little bit higher.
15:31
Speaker 1: So two year yields have to sell off a little
15:32
Speaker 1: bit because the market still doesn't believe that the Fed
15:35
Speaker 1: is going to hold interest rates at the five percent
15:37
Speaker 1: plus or mind us a little bit level for all
15:39
Speaker 1: of next year. The market is still pricing for there'll
15:42
Speaker 1: be a FED put and they think that if you know,
15:45
Speaker 1: unemployment starts to go up, that the Fed's gonna start
15:47
Speaker 1: cutting rates at the end of next year. Once we
15:49
Speaker 1: take out that pricing for cuts next year, that's where
15:51
Speaker 1: you get two year yields higher. Hey, John, you know
15:55
Speaker 1: here in December two this is a year where stock
15:58
Speaker 1: there's just no place to hide stocks, I mean just
16:01
Speaker 1: ugly out there. And we haven't seen that in a
16:04
Speaker 1: in a long time. And I wonder what you're telling
16:06
Speaker 1: your clients here, and you're I'm assuming you're penning a
16:08
Speaker 1: year ahead outlook letter to your clients. How do you
16:11
Speaker 1: put into context just set up for well, I mean
16:15
Speaker 1: it's um you know, one of the first of all,
16:18
Speaker 1: we're chief investment officers, so we're looking to invest in trade,
16:21
Speaker 1: and I want to draw a bright line between those two.
16:23
Speaker 1: I was struck by, you know, the there are two
16:25
Speaker 1: types of forecasters, those who don't know and those who don't.
16:28
Speaker 1: Those who don't know, they don't know, you know, So
16:30
Speaker 1: we try not to forecast. We're looking at the current
16:32
Speaker 1: cash flows and reacting, so we like the US better
16:35
Speaker 1: than non US. We're managing global portfolios who are overweight
16:38
Speaker 1: US but fully invested in stocks. That doesn't mean we
16:41
Speaker 1: won't accumulate some cash. So in other words, when a
16:44
Speaker 1: lot of the risks that people think about in the
16:45
Speaker 1: marketplace should be addressed by portfolio construction, So the words,
16:49
Speaker 1: do you have enough cash and short term fixed income
16:52
Speaker 1: in your portfolio that you can weather down terms? So
16:54
Speaker 1: this is a time where you might be accumulating dividends
16:57
Speaker 1: and putting them in things where like short term fixed income,
17:00
Speaker 1: the yield has gone up. There's nothing wrong with that.
17:02
Speaker 1: So that um, so we like that. We're neutral equity
17:04
Speaker 1: market overweight US. Shorter duration still we were, um we were,
17:09
Speaker 1: we were quite short, and then we took some of
17:11
Speaker 1: that off recently, but we're still a little short. So
17:14
Speaker 1: short duration overweight US, fully invested in equities is sort
17:17
Speaker 1: of where we are. But like On the stock side,
17:19
Speaker 1: we like um sort of growth stocks with pricing power.
17:22
Speaker 1: But in general, UM, I just think. I mean, I'm
17:25
Speaker 1: gonna be controversial in a minute and say I think
17:26
Speaker 1: we're spending too much time talking about I don't mean
17:29
Speaker 1: this conversation, but the world is talking too much about
17:31
Speaker 1: the ft. We know about the fet you know, Chairman
17:34
Speaker 1: Pal's trying to be as transparent as he can. There's
17:37
Speaker 1: nothing that I know that the market doesn't know. And
17:40
Speaker 1: so it's all in there, he said, he tells us
17:42
Speaker 1: what he's doing, and then he does it. So I
17:44
Speaker 1: really instruct by some of the more fundamental things that
17:47
Speaker 1: are going on that give us huge reasons for optimism
17:49
Speaker 1: that I never feel like anybody's talking about. For example,
17:52
Speaker 1: we actually may have fusion energy in my lifetime. People
17:57
Speaker 1: said the other day, oh yeah, this is don't get
17:59
Speaker 1: over excited. It may take a few years before it
18:01
Speaker 1: really works. Really, I can wait a few years. I mean,
18:04
Speaker 1: this is unbelievable. And the other one is the m
18:07
Speaker 1: r N, a breakthrough that we just talked about in
18:09
Speaker 1: the news, and what that does for mankind. So we've
18:12
Speaker 1: got this never before positive environment in the world. I mean,
18:17
Speaker 1: if you go through every statistic, you know, birth rates, UH,
18:21
Speaker 1: health around the world, economic expansion, everything around the world
18:25
Speaker 1: is better than it's ever been. And I would make
18:27
Speaker 1: the case that almost everything we're seeing is a trend
18:30
Speaker 1: in that direction. It's not linear, it's bumpy. But I
18:34
Speaker 1: just saw while I was waiting to come in that
18:37
Speaker 1: the China a d r D listing maybe delayed because
18:40
Speaker 1: we're gonna get access to audits. Well, isn't that interesting?
18:44
Speaker 1: The free markets, the truth will set you free. If
18:47
Speaker 1: you can answer transparency and you add value, you get
18:50
Speaker 1: access to global capital, and good things happen. So there's
18:54
Speaker 1: a I do think we have a lot of rational
18:57
Speaker 1: reasons to be optimistic. UH. And the Fed's gonna do
19:00
Speaker 1: what the FED does UH, And it doesn't really change
19:04
Speaker 1: much for a long term investor, right it is what
19:08
Speaker 1: should what's gonna be the next data point that? You know,
19:12
Speaker 1: the FED the other central banks are just going to
19:15
Speaker 1: be really looking at it. You know, as John said
19:17
Speaker 1: that the long term trends UH for most of the
19:20
Speaker 1: world are positive, but they have to live in the
19:22
Speaker 1: here and now. So how do you think they're gonna
19:24
Speaker 1: be playing this out? Because I don't I can't imagine
19:27
Speaker 1: either any center banks are going to push the economy
19:30
Speaker 1: into a significant recession. So so this we're just we're
19:33
Speaker 1: talking for here. I think a little bit about trend
19:36
Speaker 1: versus cycle. Right, So a lot of people, you know
19:37
Speaker 1: where your news. I was on a trading desk for
19:40
Speaker 1: a long time, so we cared a lot about the
19:41
Speaker 1: cycle as opposed to the trend, right, and the long
19:44
Speaker 1: term trends in some cases are might be positive. So
19:47
Speaker 1: you know that the next data point, like and and
19:49
Speaker 1: the FED is right now data dependent in trying to
19:51
Speaker 1: kind of smooth out this cycle, right and trying to
19:53
Speaker 1: get inflation down. Um, so so the next inflation print
19:57
Speaker 1: is going to be important, right, So next next, actually
19:59
Speaker 1: next Friday gonna be insanely busy. From a data perspective,
20:02
Speaker 1: You're gonna have so much data to talk about. You're
20:04
Speaker 1: not gonna know what to do. Because you get the
20:06
Speaker 1: PC data, we get the personal spending and income data,
20:09
Speaker 1: we get again, I'll see what I can do. So
20:14
Speaker 1: the importantly, though, I think it's going to be the
20:16
Speaker 1: January CPI print because because that that print and the
20:19
Speaker 1: PC print later in January are going to be both.
20:22
Speaker 1: We get those before the February one FED meetings. So
20:26
Speaker 1: so with the idea that is the Fed going to
20:27
Speaker 1: go twenty five basis points or fifty basis points in
20:29
Speaker 1: February is going to be answered probably middle of January
20:33
Speaker 1: based on what the CPI number is. Well, Jonathan hop
20:36
Speaker 1: In here, because what do you think the tenure treasury
20:39
Speaker 1: being like after this news? It goes from three fifty
20:43
Speaker 1: three to three sixty? Other words, it's not really doing
20:45
Speaker 1: much as an investor, And I think about discounting future
20:48
Speaker 1: cash flows, those farther out cash flows mean a lot
20:52
Speaker 1: more on the discounting than the short term cash flows
20:54
Speaker 1: to so I think that tenure at three sixty is
20:57
Speaker 1: still what's it telling us? I mean, what is it
21:00
Speaker 1: telling us about core inflation? Do you think? And I
21:02
Speaker 1: know it's a global number, but what do you think
21:04
Speaker 1: it tells us about core inflation? Well, it's really very
21:07
Speaker 1: little about core inflation in and of itself, except that
21:10
Speaker 1: the markets anticipating that inflation over a long period of
21:14
Speaker 1: time is going to be three pc plus or minus
21:16
Speaker 1: fifty basis points right, So um, and probably a little
21:18
Speaker 1: lower than that. Um. So you know, I I used
21:22
Speaker 1: I do use the market numbers there was someone who
21:24
Speaker 1: was trying to convince me the other day that that
21:26
Speaker 1: the markets being still being manipulated by the FED, even
21:29
Speaker 1: though the FEDS now running off its balance sheet. But
21:32
Speaker 1: you know, ten year yields at three and a half
21:33
Speaker 1: percent still is not saying that the markets worried about
21:36
Speaker 1: long term inflation. It's worried about inflation here and now.
21:39
Speaker 1: That's why we have two year yields at four and
21:41
Speaker 1: a half. Four and a quarter should be four and
21:42
Speaker 1: a half. But longer, longer term, the market is not
21:46
Speaker 1: fearful that inflation is going to be particularly sticky, real quick. France, Argentina, God,
21:53
Speaker 1: I really I want Argentina in this one, just because
21:55
Speaker 1: I want Messy to be the goat, and there would
21:57
Speaker 1: be no question. But but the same time, France is
22:01
Speaker 1: so deep beautifully against Morocco. Their defense, the French defense.
22:06
Speaker 1: Morocco had some good chances though, you know hit the post.
22:08
Speaker 1: I mean there was a really nice spicyclel kick yeah,
22:12
Speaker 1: Portugal and John I was actually a part owner of
22:15
Speaker 1: a minor league soccer club in central New Jersey, so
22:18
Speaker 1: he does actually know what he's talking about. So you know,
22:21
Speaker 1: he's actually been in demand now during this World Cup.
22:23
Speaker 1: Nobody cares really about the Fed. Uh. Jonathan Hurdle, executive
22:26
Speaker 1: chairman at Hurdle Callahan based down Westconscha Hacken p a
22:30
Speaker 1: good part of the world in our Jersey Bloomberg Chief
22:34
Speaker 1: Us Interest Rate Strategies, both in our Bloomberg Interactor Broker study,
22:37
Speaker 1: breaking down what we've been seeing from the central banks.
22:44
Speaker 1: Lots going on in the marketplace. Tom King, send him home.
22:47
Speaker 1: He's been working like crazy keeping up with what's going
22:49
Speaker 1: on with the the central banks. Jason Greenbal joins us.
22:53
Speaker 1: He's a senior portfolio folio manager at American Century Investments
22:57
Speaker 1: are located in Kansasy. He joins us here in our
22:59
Speaker 1: Bloomberg Interactive Broker studio and yet another Penn State grad
23:03
Speaker 1: in our studio. So these people are everywhere. Jason, what
23:06
Speaker 1: do you make of the last twenty four hours central
23:09
Speaker 1: bankers around the world raising rates? We've got some a
23:11
Speaker 1: little bit weaker than expected print on the retail sales
23:14
Speaker 1: um you know, on the on the credit side, global
23:17
Speaker 1: fixed income side. What do you do after it's been
23:20
Speaker 1: such a brutal year for global fixed income? Yeah? Great,
23:23
Speaker 1: great question and great to be here with you today.
23:26
Speaker 1: Thank you. Um what do you do? So, I think
23:29
Speaker 1: you need to have dry powder. This this rally that
23:31
Speaker 1: we've experienced since October, the the expectation that inflation has peaked.
23:37
Speaker 1: We agree with inflation has peaked, but the central banks
23:40
Speaker 1: clearly do not like it. Um, there's more work to do.
23:44
Speaker 1: Quoting Powell from yesterday, we agree there's more work to do.
23:47
Speaker 1: The markets are realizing that, and we've gone probably a
23:50
Speaker 1: bit too far too fast. Well, the markets are realizing that,
23:54
Speaker 1: but they're also pricing and cuts next year, which is
23:56
Speaker 1: the Federal Reserve is actively saying we're not gonna do
23:59
Speaker 1: believe us not gonna cut. We're gonna stay elevated for
24:02
Speaker 1: a while. What happens if they do? Though? How quick
24:04
Speaker 1: does that decision happen? So I think you have to
24:08
Speaker 1: take a step back and ask why would they be cutting.
24:10
Speaker 1: It's not going to be for a positive event. And
24:13
Speaker 1: fundamentals are slowing. If you look at their UH Summary
24:16
Speaker 1: of Economic projections, they're coming down. Um, is the market
24:20
Speaker 1: prepared for that? There's a there's a huge question mark.
24:22
Speaker 1: And I think if you rewind the quock twelve months ago,
24:25
Speaker 1: many strategists did not anticipate the rate hikes and the
24:30
Speaker 1: pace that we saw this year. I just think it's
24:33
Speaker 1: it's maybe two premature to look out twelve months and say, well,
24:36
Speaker 1: there's gonna be a rate cut. If that happens, I
24:39
Speaker 1: think that's a bad outcome. But isn't that the playbook
24:41
Speaker 1: that the FED has been operating on for the past
24:43
Speaker 1: two decades, essentially that the minute things go south, you
24:46
Speaker 1: cut rates. Yeah, we're we're accustomed to buying the dip.
24:49
Speaker 1: I mean that's we saw that this year. The FED
24:52
Speaker 1: has our back, and I agree with that. I mean,
24:55
Speaker 1: why why let everything unwind since the financial crisis till now? Um,
25:00
Speaker 1: you're right, they have our back. It's so interesting to
25:03
Speaker 1: hear an investors say the FED has our back, Yes,
25:05
Speaker 1: exactly when the Feed has been raising rates. Here, Jace,
25:09
Speaker 1: I know in your in your career, you've done some
25:12
Speaker 1: high yields, some discrested credit. If we are in fact
25:15
Speaker 1: going into a recession in three and maybe it's a
25:18
Speaker 1: little bit deeper than most people think, how are the
25:20
Speaker 1: credit markets going to react? How's the credit quality out there? Uh,
25:24
Speaker 1: it depends on which part of the market you're looking at.
25:26
Speaker 1: Investment create corporates were not too concerned about evaluations do
25:30
Speaker 1: look tight. We think there's some weakness, but that's not
25:32
Speaker 1: where the problems are gonna come. Problems are gonna come
25:34
Speaker 1: from the smaller companies. The companies who have you been
25:37
Speaker 1: battling to UH to bring workers onto wage inflation. Now
25:42
Speaker 1: they're laying some of them off. Um the rate hikes.
25:45
Speaker 1: The rate hikes are are chewing into their free cash flow.
25:48
Speaker 1: These single be rated bank loans that have you know,
25:51
Speaker 1: floating rate capital structures. Those are gonna be the areas
25:54
Speaker 1: that you know, with with our credit expertise, we can
25:57
Speaker 1: go in and buy these these opportunities is cheap, but
26:00
Speaker 1: it's probably not going to be for another six to
26:02
Speaker 1: twelve months until we really start to see some of
26:04
Speaker 1: this carnage. And what are your economists they're saying about
26:07
Speaker 1: a recession in is they talk to you guys the
26:10
Speaker 1: portfolio a moment, managers, the analyst actually putting the money
26:12
Speaker 1: to work. Yeah, probability in our minds from our investment
26:16
Speaker 1: committee is is a sixty plus percent chance of a recession.
26:20
Speaker 1: I think when we look back at third quarter earnings,
26:23
Speaker 1: there's some companies that you know, really struggled with margins.
26:26
Speaker 1: You're seeing that with retail um chemicals, there's probably more
26:31
Speaker 1: of that to come. Um, So looking backwards, things look okay.
26:35
Speaker 1: Looking forwards were a lot more cautious in the corporate space.
26:40
Speaker 1: Are there any sectors that you guys like right here
26:44
Speaker 1: or maybe going into where there might be a you know,
26:47
Speaker 1: a six percent chance of a recession. Yeah. The spaces
26:51
Speaker 1: that we like is, you know, certainly high quality parts
26:53
Speaker 1: of the market, um, you know, single a's we we
26:55
Speaker 1: certainly like the banks, Um, we like utilities. Those are
26:59
Speaker 1: those going to be more stable, they'll they'll come out
27:03
Speaker 1: probably unscathed in our minds, um. But there's certainly a
27:06
Speaker 1: lot of other sectors that we think, you know, we'll
27:09
Speaker 1: feel some pain here. Well. I think it's interesting to
27:12
Speaker 1: me about just the carnage that we've seen in the markets,
27:15
Speaker 1: and it feels like it's been a no brainer that
27:17
Speaker 1: it's has the Federal reserve hikes rates, everything sells off,
27:20
Speaker 1: from bonds to the stock market, arguably in commodities, depending
27:24
Speaker 1: on how you look at it. But it almost feels
27:26
Speaker 1: like this year has been the year in which you're
27:29
Speaker 1: pricing in this kind of doom and gloom or sessionary scenario.
27:33
Speaker 1: Do we actually see some sort of turn around in
27:36
Speaker 1: or is it just more of the same. Well, we
27:39
Speaker 1: think a lot of the pain has been done already
27:41
Speaker 1: in the rates market on the spread side and credit
27:44
Speaker 1: we haven't seen that yet. Fundamentals haven't fully caught up
27:47
Speaker 1: to what's going on. And again, Powell recognize that that
27:50
Speaker 1: this massive tightening that's taken place hasn't been fully filt
27:54
Speaker 1: yet by the market, and I think that's where the
27:56
Speaker 1: opportunities are gonna uh to present themselves next year. Is
27:59
Speaker 1: that through though, has it not been fully felt by
28:03
Speaker 1: the market When you're looking at um, I mean it
28:06
Speaker 1: feels like what he's using to say that is financial
28:08
Speaker 1: conditions essentially, which are still sort of easing. But isn't
28:11
Speaker 1: that kind of the market's job to price this in
28:14
Speaker 1: and then to look six to nine months down the road.
28:16
Speaker 1: So if they are easing a little bit, it's not
28:18
Speaker 1: saying that there isn't going to be paying in the
28:20
Speaker 1: front half three but that things will turn around later
28:23
Speaker 1: down the road. At least that was my interpretation. Yeah, yeah,
28:26
Speaker 1: So the pain that I think you're referring to is
28:28
Speaker 1: is really again from from treasuries being up two to
28:31
Speaker 1: four d basis points this year in terms of spreads,
28:35
Speaker 1: credit spreads are not pricing in a recession. They usually
28:38
Speaker 1: peak about six months in advance of a recession. So
28:42
Speaker 1: if you're thinking six to twelve months out, the corporate O, A,
28:45
Speaker 1: S and I G at one thirty, typically it's two
28:48
Speaker 1: hundred plus basis points. So we've got quite a bit
28:50
Speaker 1: of way to go. If if that's the downs typical
28:53
Speaker 1: for typical for a normal run of the mill recession. Um,
28:58
Speaker 1: if it's worse, you know, I've seen strategist pencil in
29:01
Speaker 1: to fifty plus. We don't think it's going to be
29:03
Speaker 1: that bad. So all right, putting perspective historic losses across
29:09
Speaker 1: many verticals in fixed income, given that at backdrop, what
29:13
Speaker 1: are your clients asking you today? Yeah? Um, what should
29:18
Speaker 1: we be doing about duration? So interest rate risk? Uh,
29:22
Speaker 1: you know we have an inverted curve. Should we be
29:24
Speaker 1: adding duration? The answer is yes, in our minds, we
29:26
Speaker 1: should be going out the curve, should be adding duration
29:29
Speaker 1: because again our higher higher probability or recessionary risk you know,
29:34
Speaker 1: further out and inflation coming down that we should see
29:38
Speaker 1: at least stability in the long end of the curve.
29:40
Speaker 1: Tens thirties. UM, we do see some more upward pressure
29:44
Speaker 1: in the front end of the curve, so we would
29:46
Speaker 1: be adding duration in the longer end of the curve.
29:48
Speaker 1: And this whole inverted yield curve stuff. It's I think
29:50
Speaker 1: it's like negative eighty basis points on the two tens.
29:53
Speaker 1: I'm an equity guy. I don't know. Is that important
29:55
Speaker 1: to you? It sure is. I mean, I think it's technical.
30:00
Speaker 1: You know, it signals whether you look at two s
30:02
Speaker 1: tens or the three months versus tens, certainly signaling that
30:05
Speaker 1: you know that there's stress on the way. UM. I
30:09
Speaker 1: think it's something that equity investors and fixed and investors
30:12
Speaker 1: should should certainly be aware of. All right, good stuff.
30:14
Speaker 1: Jason Greenblath, senior portfolio manager at American Century Investments. UH,
30:19
Speaker 1: joining us here on a Bloomberg Interactive broker studio. UM,
30:22
Speaker 1: lots of good clients. I had an American Centry out
30:24
Speaker 1: in Kansas City. You got an office here in New York.
30:26
Speaker 1: You guys are everywhere. Uh, they've got about two billion
30:28
Speaker 1: in assets under management. How about that? There's money everywhere
30:31
Speaker 1: out there? All right, let's switch gears and talk a
30:37
Speaker 1: little quantity hate of analysis. How are the quant geeks
30:41
Speaker 1: out there? How are they play in this market? Uh?
30:43
Speaker 1: So far? And what's the outloot going forward? And yes,
30:45
Speaker 1: I always refer to them as quant geeks UM. And
30:48
Speaker 1: you'll see why. George Patterson c I O Pjim Quantitative Solutions,
30:52
Speaker 1: PhD in physics from Boston University. Like he's like a
30:55
Speaker 1: rocket scientist and then he goes it starts getting investing
30:59
Speaker 1: during Thanks so much for joining us here. Really appreciate it.
31:03
Speaker 1: You know, how do guys like you and the way
31:05
Speaker 1: you guys look at the market and your clients. What
31:09
Speaker 1: what do you make so far? Thank you very much
31:14
Speaker 1: for the introduction and uh and for the quant geek. Uh.
31:21
Speaker 1: I'm more than other people actually a rocket scientist because
31:23
Speaker 1: I actually did spend my first few years working at
31:26
Speaker 1: a NASA research facility before getting getting down getting into
31:31
Speaker 1: a quantitative quantitative investments UM. So if you look at
31:35
Speaker 1: the past three years, we've had three cycles. Really in
31:40
Speaker 1: three years. We had a slowdown or a shutdown really
31:44
Speaker 1: from COVID, you know, extraordinary fiscal and government support and
31:50
Speaker 1: then the resulting inflation. So this has just been a
31:54
Speaker 1: massive shock to the system. I think the current environment
31:58
Speaker 1: is not surprising given that we've had such strong returns
32:01
Speaker 1: in the past couple of years, but those returns have
32:04
Speaker 1: really been fueled by, you know, huge stimulus from both
32:08
Speaker 1: central banks and governments, So so I'm not surprised we're
32:13
Speaker 1: seeing a little bit of softness in the market. But
32:15
Speaker 1: the real what I see as the opportunity is that
32:18
Speaker 1: people have really just gotten out of equities and there's
32:22
Speaker 1: been a huge shock to the system because people are
32:24
Speaker 1: just selling things indiscriminately. So there's really a lot of
32:28
Speaker 1: relative value opportunities where where people are just getting out
32:32
Speaker 1: of names wholesale and and not looking at fundamentals. Um
32:36
Speaker 1: that was really true in in but you know, we've
32:40
Speaker 1: really seen types of quantitative strategies that that are very
32:44
Speaker 1: broad based and look across markets, look across assets, really
32:50
Speaker 1: do very well because there's just been such a such
32:53
Speaker 1: a shock to the system, not unlike following the financial crisis,
32:57
Speaker 1: not unlike following the tech bubble, where it's really going
33:00
Speaker 1: to be several years of this going forward that there's
33:03
Speaker 1: just been such a displacement, it's going to take time
33:06
Speaker 1: for things to get back into equilibrium. Well, George tell
33:10
Speaker 1: us a little bit about how quickly that could recalibrate
33:15
Speaker 1: if in fact the market is right, and if in
33:17
Speaker 1: fact we do see some sort of FED cut in
33:20
Speaker 1: the back half of that, the central bank is very
33:26
Speaker 1: I want to say, um um dogmatic for lack of
33:30
Speaker 1: a better term, in terms of saying no, that's not
33:32
Speaker 1: going to happen. But how quickly does the liquidity story change?
33:35
Speaker 1: How quickly um does the positioning change if indeed the
33:39
Speaker 1: FED decides to pull that trigger. Uh, well, this is
33:43
Speaker 1: this is a challenge because everything we know indicates that
33:47
Speaker 1: the FED policy acts with a with a significant lag.
33:50
Speaker 1: So you know, we're we're seeing impact now from cut
33:54
Speaker 1: from from increases that were made months ago. And again
33:58
Speaker 1: it's a it's a challenging it's a challenging process. So, um,
34:02
Speaker 1: you know, from my perspective, how quickly can we get
34:05
Speaker 1: back to equilibrium? It's going to take some time. There's
34:08
Speaker 1: a number of Um, there's a number of pressures on equity.
34:12
Speaker 1: I mean, first of all, people are just hesitant to
34:14
Speaker 1: be in equity when inflation is that level, at this
34:17
Speaker 1: level and rates are going up. All of our research
34:20
Speaker 1: shows that it makes sense to have, you know, some
34:22
Speaker 1: allocation of real assets, some allocation to commodities as as
34:26
Speaker 1: a very good inflation hedge. Commodities may have pulled back
34:29
Speaker 1: a bit since the highs, but it's still had a great,
34:33
Speaker 1: great performance here today, and we still think it makes
34:35
Speaker 1: sense to have something like that in client portfolio. But
34:39
Speaker 1: there's a lot of pressure on equities because you know,
34:42
Speaker 1: many large institutions have just focused on private assets and
34:47
Speaker 1: that's been a great place to be. It's helped them
34:49
Speaker 1: meet their long term return needs. But the challenges is
34:53
Speaker 1: that they're illiquid, so a lot of so what you've
34:56
Speaker 1: seen is as equities have come down, equities get marked
34:59
Speaker 1: to market every day. Your public portfolios get marked to
35:01
Speaker 1: market every day. Private assets don't get They're typically on
35:05
Speaker 1: a quarterly cycle. It's a slow moving cycle. So right
35:08
Speaker 1: now people are seeing their private allocations go up, mostly
35:11
Speaker 1: because of the fact that they've just not adjusted. The
35:14
Speaker 1: problem is is that if you're in that position and
35:17
Speaker 1: now you're at where you need to be with your
35:19
Speaker 1: private assets and your public assets are worth less, you
35:22
Speaker 1: still may need to eat meat cash flows and you
35:25
Speaker 1: likely can't get out of those private assets, so you're
35:28
Speaker 1: gonna sell what's liquid, and that's likely going to be
35:30
Speaker 1: equities or fixed income. So this is gonna be structurally
35:34
Speaker 1: away on the market for you know, probably for the
35:37
Speaker 1: next six to nine months. I think George as a
35:41
Speaker 1: quantitative manager, I just envisioned in your office, there's a
35:44
Speaker 1: black box sitting on your desk and it spits out
35:47
Speaker 1: trading and investment ideas all day long. Could you kind
35:50
Speaker 1: of lift the cover off that box force and tells
35:52
Speaker 1: kind of how yours works a little bit, how you
35:54
Speaker 1: guys identify opportunities. Yeah, so so so. Funny thing is
35:58
Speaker 1: that when people say quant I think, you know, quant
36:01
Speaker 1: gets you know, pictured as everybody's doing the same thing.
36:04
Speaker 1: There's a there's a blackboard full of full of formulas,
36:08
Speaker 1: and that you know, all quantitative firms are the same
36:10
Speaker 1: across the street. In reality, there are many different types
36:14
Speaker 1: of quants. There are some that are kind of, you know,
36:16
Speaker 1: really much more like electronic market maker is very high frequency.
36:21
Speaker 1: We tend to and I view those more as a
36:23
Speaker 1: trading strategy, very short horizon. We tend to be much
36:27
Speaker 1: more fundamentally driven. So you know, yes, we do have
36:32
Speaker 1: a number of you know, mathematical models about how we
36:34
Speaker 1: think markets behave, but one of the key hallmarks particularly
36:38
Speaker 1: at PIGION quantitative solutions, is that we're always thinking long term,
36:42
Speaker 1: you know, fundamentally driven or something that is really driven
36:46
Speaker 1: in research. You know, from our perspective, it's very easy
36:50
Speaker 1: with financial data to fool yourself. There's a lot more
36:53
Speaker 1: noise than there are signals. So it's important to really
36:56
Speaker 1: have something that is that is driven by you know,
37:00
Speaker 1: long term investment beliefs, you know, long term models about
37:03
Speaker 1: how behaviors, how how investors behave, and how markets work.
37:08
Speaker 1: We find that that for a long term investor that's
37:11
Speaker 1: looking over a cycle is really the right way to
37:14
Speaker 1: be thinking about things. So, yes, we do have we
37:17
Speaker 1: do have some equations, but a lot of times, like
37:19
Speaker 1: if you look if you look at our portfolios, you're
37:22
Speaker 1: going to find that they you know, they're a well diversified,
37:26
Speaker 1: but they oftentimes, you know, have stocks that we think
37:29
Speaker 1: are relatively attractive adjusting for growth um and and sector
37:34
Speaker 1: um generally slightly higher quality and places where we think
37:38
Speaker 1: that there's you know, like there's not really a chance
37:40
Speaker 1: of a value trap. So if you look at our portfolios,
37:43
Speaker 1: you're gonna find they really make a lot of long
37:45
Speaker 1: term investment sense. And that's really the type of of
37:49
Speaker 1: equity portfolio that we build at at Pigeum Quantitative Solutions.
37:53
Speaker 1: On the multi asset side, we spend a lot of
37:56
Speaker 1: time thinking about how we position defensively, you know, whether
37:59
Speaker 1: we have stratg gs that provide downside protection or you know,
38:03
Speaker 1: some strategies try to like offset with inflation. That's been
38:06
Speaker 1: a very successive I've been very successful call for us
38:09
Speaker 1: over the past cycle, where you know, we've always had
38:12
Speaker 1: a commitment to having some commodities in the portfolio, but
38:15
Speaker 1: it's really paid out very well for us over his
38:17
Speaker 1: past cycle. George, really interesting stuff. Appreciate getting a few
38:20
Speaker 1: minutes of your time, George Patterson, he's the chief investment
38:24
Speaker 1: officer at PGIM Quantitative Solutions. Well on other and I
38:31
Speaker 1: think it's going to be potentially big news. US regulators
38:34
Speaker 1: took the first step towards the most widespread revamp in
38:37
Speaker 1: more than a decade of the way stocks are treated,
38:40
Speaker 1: a move that aims to spur better prices for investors
38:43
Speaker 1: and direct more business to traditional exchanges. Folks, That's all
38:47
Speaker 1: I know, um, but I need to learn more. I
38:49
Speaker 1: think it's important. Uh So, let's bring on Larry tab
38:52
Speaker 1: He's head of market structure research with Bloomberg Intelligence. He
38:55
Speaker 1: actually does this for a living and he's very good
38:58
Speaker 1: at it. We also managed to have Barry Ridholts stick
39:01
Speaker 1: around a little bit. He knows a thing or two
39:02
Speaker 1: about market so he'll be joining us as well. Larry,
39:05
Speaker 1: can you, in layman's terms, tell me what the SEC
39:09
Speaker 1: is proposing here? Well, they put out for proposals. The
39:13
Speaker 1: first is greater transparency on retail broker execution quality, so
39:19
Speaker 1: basically giving broker or individuals that the ability to see
39:23
Speaker 1: if Robin Hood or Schwab or Merrit Trade or whoever
39:28
Speaker 1: has better execution stats than the other. So so that's
39:31
Speaker 1: generally good. The second um is going to be reducing
39:36
Speaker 1: tick sizes. So the tick size now, which is basically
39:39
Speaker 1: the spread between the bit and the offer, is set
39:41
Speaker 1: at a penny for all stocks over a dollar. They
39:45
Speaker 1: want to reduce that and they're going to create four
39:48
Speaker 1: different bands for the most active and tightest stocks. They're
39:52
Speaker 1: going to wind up making that a tenth of ascent.
39:55
Speaker 1: For the next tier, it's going to be two tenths
39:58
Speaker 1: of a percent. For the next year it's going to
40:00
Speaker 1: be half a penny. And then for all of the
40:03
Speaker 1: things that trade generally wider than a four cents they're
40:08
Speaker 1: gonna make They're gonna lead at a penny. The the
40:12
Speaker 1: third thing, uh is they want retail investor orders to
40:17
Speaker 1: be auctioned off, so uh, they're going to try to
40:21
Speaker 1: get a larger percentage of retail float into exchanges to
40:26
Speaker 1: the auction. And then the last is the best execution rule,
40:31
Speaker 1: which not just only applies to equities, but applies to
40:36
Speaker 1: all other securities as the classes that the sec looks over,
40:39
Speaker 1: which would be uh, bonds, um option. I guess you know,
40:46
Speaker 1: bonds and communies and corporates and things like that. So
40:50
Speaker 1: Barry hop on in here for the average investor, what
40:53
Speaker 1: does that mean? Good thing, bad thing? Yeah, anytime spreads tighten,
40:57
Speaker 1: anytime you you make the cost of execution a little cheaper,
41:03
Speaker 1: it's really good for for investors because their costs go down.
41:08
Speaker 1: And we know that costs are are a big drag.
41:10
Speaker 1: As much as we forget because the changes happened so
41:15
Speaker 1: incrementally over time. This is and as much as you know,
41:20
Speaker 1: apps like robin Hood and the gamification have been in
41:23
Speaker 1: FOMO have been a crazy distraction. This really has become
41:27
Speaker 1: the Golden Age for investing, spreads are the narrowest they've
41:32
Speaker 1: ever been. You could buy and sell e t fs
41:35
Speaker 1: for free. And by the way, if you want to
41:37
Speaker 1: buy the whole market, the Vanguard Total Market or the
41:40
Speaker 1: SMP five dred it'll cost you three or four bits
41:44
Speaker 1: a year. So the world today is so different than
41:48
Speaker 1: it's been over the past half century. We sometimes forget that. Yeah,
41:52
Speaker 1: I mean when I started trading on Wall Street it
41:54
Speaker 1: was price and increments of an eighth of a point. Boy,
41:57
Speaker 1: those were the good old days. Uh, Larry, you forget quarters.
42:01
Speaker 1: I know, I'm not sure. There are going to be
42:03
Speaker 1: some There are going to be some unintended consequences here.
42:08
Speaker 1: Pricing stocks that tents um will probably hurt institutional investors
42:14
Speaker 1: who want to trade a lot, So we may see
42:15
Speaker 1: a lot of their orders go dark, go into a
42:18
Speaker 1: t s s, or go into hidden midpoint orders because
42:23
Speaker 1: they don't want to get their orders picked off. And
42:27
Speaker 1: with adding neither five or ten price points between each penny,
42:31
Speaker 1: what are size will go down. So the average order
42:33
Speaker 1: size now is about a hundred five shares, we will
42:36
Speaker 1: absolutely see this go below a hundred shares. The average
42:39
Speaker 1: trade size will go below a hundred shairs UM and
42:43
Speaker 1: and any displayed order. You know, for five hundred or
42:46
Speaker 1: six hundred chairs, there's gonna be somebody who's going to
42:48
Speaker 1: penny you for a tenth of a cent or two
42:51
Speaker 1: tenths of a cent. So that's gonna push institutional flow
42:54
Speaker 1: into into the dark UM. And then the other question
42:59
Speaker 1: will be is you know right now the current wholesaling
43:02
Speaker 1: process UM. The wholesalers work with the brokers to internalize
43:07
Speaker 1: a lot of this flow, but the swabs and the
43:10
Speaker 1: merrit trades and the Robin hoods hold them accountable, not
43:13
Speaker 1: just for the actively traded names, but for the ten
43:17
Speaker 1: or eleven thousand NMS names are basically all of the stocks.
43:21
Speaker 1: So we could see the most average stocks doing better,
43:25
Speaker 1: are the most um active stocks doing better and having
43:29
Speaker 1: better pricing. But really we're retail investors do a lot
43:33
Speaker 1: of their trading in the less active stocks, the stocks
43:35
Speaker 1: that really have very little institutional demand. We could see
43:39
Speaker 1: their spreads getting much worse. So what's been the pushback
43:44
Speaker 1: or what do you anticipate? The pushback will be larry
43:47
Speaker 1: from the big Wall Street firms, the big trading firms. Uh,
43:52
Speaker 1: the big ones not not so sure. Certainly the retail
43:56
Speaker 1: brokers are going to push back because the wholesalers actually
44:00
Speaker 1: take good care of them. These are the Citadels and
44:02
Speaker 1: the virtues in the Jane Streets and two stigmas. They
44:05
Speaker 1: take pretty good care of the institutional or the retail brokers, um,
44:10
Speaker 1: because not only do they give their clients price improvement.
44:13
Speaker 1: Now you can argue the price improvement should be more
44:15
Speaker 1: on the exchange and with auctions, will see that, but
44:18
Speaker 1: they also provide them with size improvement. Basically, they execute
44:23
Speaker 1: larger orders for for lower prices and they get they
44:29
Speaker 1: get taken care of. In case, uh, you know, they
44:31
Speaker 1: have a bad trade, the market maker will make them hold.
44:34
Speaker 1: The question will be as um, what will happen there
44:37
Speaker 1: and will the market makers continue to do that. The
44:40
Speaker 1: other thing is that the brokers receive a lot of
44:43
Speaker 1: money and payment for word flow, um, which the question
44:46
Speaker 1: will be, as will with tighter ticks and and this
44:49
Speaker 1: auction will will the wholesalers still provide them with payment
44:53
Speaker 1: for water flow And if there's not enough payment for
44:55
Speaker 1: water flow, the retail brokers could go back to charging commissions.
44:59
Speaker 1: So I think, um, uh you know, on the institutional side,
45:03
Speaker 1: the brokers will probably be okay, they have algorithms that
45:07
Speaker 1: can trade in the dark, and a lot more of
45:09
Speaker 1: the flow will be automated. Um, it'll be the retail
45:13
Speaker 1: side that will and the whole sablers that will complain,
45:15
Speaker 1: and possibly even the exchanges because the exchanges, uh, they're
45:19
Speaker 1: going to see their access fees cut. Will probably see
45:22
Speaker 1: fewer exchanges. There'll be some solidation there. Um, you'll see
45:26
Speaker 1: probably some some more concentration in the New York and
45:30
Speaker 1: nastac uh their formal exchanges, and I think you'll see
45:34
Speaker 1: New York NaSTA can see but maybe shutter some of
45:37
Speaker 1: their smaller exchanges. Currently there are sixteen exchanges. We may
45:42
Speaker 1: see that go down to ten, which probably wouldn't be
45:45
Speaker 1: a bad thing. All right, good stuff. We'll cap on
45:49
Speaker 1: top of this. Larry tab he's head of Market Structure
45:52
Speaker 1: Research with Bloomberg Intelligence, and Bat Haults, head of Hults
45:55
Speaker 1: Wealth Management and the Masters in Business podcasts getting the
45:58
Speaker 1: latest on some chain just in the rules of how
46:01
Speaker 1: stocks are traded. It's kind of sounding like kind of
46:03
Speaker 1: the plumbing of the stock market to me, But I
46:05
Speaker 1: guess the takeaway, as Barry suggested, is and Larry suggested
46:09
Speaker 1: is lower prices for investors, and that's a that's a
46:13
Speaker 1: good thing. Yeah, but I have to say on those headlines,
46:15
Speaker 1: you saw the likes of robin hood Shares, Virtue shares
46:18
Speaker 1: really take a hit, so you can see that this
46:21
Speaker 1: is going to have a very real effect for a
46:22
Speaker 1: lot of these brokers. Thanks for listening to the Bloomberg
46:28
Speaker 1: Markets podcast. You can subscribe and listen to interviews with
46:31
Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.
46:36
Speaker 1: I'm on Twitter at Matt Miller three. Put on false
46:40
Speaker 1: Sweeney I'm on Twitter at pt Sweeney before the podcast.
46:43
Speaker 1: You can always catch us worldwide at Bloomberg Radio.