Latest / Bloomberg Intelligence / Borthwick Looks for Weaker Dollar, Sees Strong China Currency

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Borthwick Looks for Weaker Dollar, Sees Strong China Currency · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. Well, let's talk about
• 0:29
  Speaker 1: what's going on in currency markets right now with Douglas
• 0:32
  Speaker 1: both work. He is Managing director, head of FX at
• 0:35
  Speaker 1: Chapter Lane and Company. Doug Borthwick always a pleasure dollar
• 0:39
  Speaker 1: Euro one oh seven. The Federal Reserve raises rates, but
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  Speaker 1: the dollar weekends tell us. I think that the Federal
• 0:46
  Speaker 1: Reserve raising rates priced in pretty much over the last
• 0:49
  Speaker 1: three or four weeks, and so there's an expectation that
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  Speaker 1: was already there. What people are really looking at is
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  Speaker 1: the statements on the comments that came out from the Fed,
• 0:59
  Speaker 1: and I think there are nota in that. People realize
• 1:01
  Speaker 1: that the Fed raised rates even though growth is still
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  Speaker 1: not where it should be, and so there's an expectation
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  Speaker 1: that rather than having more rate rises going forward, there
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  Speaker 1: may be less. I think on top of that, though
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  Speaker 1: you've got this overall layering that comes from the Trump administration,
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  Speaker 1: where they're out there talking about how they want a
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  Speaker 1: weaker dollar. And I think that what you're seeing this
• 1:21
  Speaker 1: week is you've seen the Secretary of State go out
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  Speaker 1: to Asia talk to them, and since she's been out there,
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  Speaker 1: you've seen Dolly and start to come off considerably. You've
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  Speaker 1: seen in Europe, you've seen the German Deputy financements are
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  Speaker 1: talking about how to higher euro isn't that bad and
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  Speaker 1: they'd like to see higher rates in Europe. And so
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  Speaker 1: there's a little bit of a change here in terms
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  Speaker 1: of both interest rates but also where people think currency
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  Speaker 1: should be. Certainly, with the Fed raised rates by twenty
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  Speaker 1: five basis points, but now Europe is talking about maybe
• 1:45
  Speaker 1: ending their chewi and raising their rates as well, so
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  Speaker 1: that cancels some of the effects. But also if the Fed,
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  Speaker 1: if the US administration was to look for a weaker dollar,
• 1:54
  Speaker 1: they'll be looking forward against the currencies that they have
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  Speaker 1: obviously the largest deficits against. You've seen Dollar Mexico come
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  Speaker 1: done considerably, You've seen Dolla Enne come off, and you're
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  Speaker 1: also seeing the Euro start to rally. On Our belief
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  Speaker 1: is that you're going to see at the G twenty
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  Speaker 1: meeting this weekend, there's going to be considerable discussion about
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  Speaker 1: currencies pressed forward by the new Treasury Secretary, and that's
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  Speaker 1: going to cause some movement in that they're going to
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  Speaker 1: be no longer approving countries going out there and weakening
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  Speaker 1: their currency for the for the pure sense of to
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  Speaker 1: get more trade. If that happens, you'll see Dolly inn
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  Speaker 1: come off. You expected the eurogo bid, You just actually
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  Speaker 1: Dolla Mexico go lower. And I think that what they're
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  Speaker 1: doing is they're setting the table for a Plaza cord
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  Speaker 1: two point oh perhaps at Mara Lago next week, sorry,
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  Speaker 1: next month, when the Chinese premier is coming over. Doug,
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  Speaker 1: I want to pass through some of the things you
• 2:46
  Speaker 1: were saying, because you made a lot of fascinating points.
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  Speaker 1: Number one, perhaps the feed is taking a backseat to
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  Speaker 1: the policies of President Trump. The fact that Rex Tillerson
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  Speaker 1: has been going around and meeting with UH foreign officials.
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  Speaker 1: We are looking at the end strength and against the dollar.
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  Speaker 1: The pound is strengthening a lot against the dollar, and
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  Speaker 1: I'm wondering if the pound is not probably the target
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  Speaker 1: here but UH in Asia, how exactly would conversations with
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  Speaker 1: Rex Tillerson and some of the leaders of those countries
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  Speaker 1: directly and immediately trickle out into currency movements. Well, I
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  Speaker 1: think it's a quick pro quo in that, you know,
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  Speaker 1: when the Trump administration came in, they struck a very
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  Speaker 1: hard line, they said, you know, why should we be
• 3:26
  Speaker 1: out there policing your waters And since then they've managed
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  Speaker 1: to clock it back somewhat. But I think that by
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  Speaker 1: having that fear out there allows these negotiating room, which
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  Speaker 1: is suddenly the President Trump obviously likes. By negotiating room,
• 3:37
  Speaker 1: you say to them, look, we don't want you to
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  Speaker 1: stop interviewing in your currency markets. In return, will end
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  Speaker 1: up being your policeman and continued to pay for our
• 3:44
  Speaker 1: bases out there and to look after you and protect
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  Speaker 1: you from North Korea, for example. And so I think
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  Speaker 1: that there is there's a direct correlation there between you know,
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  Speaker 1: USUS essentially using the big stick in one hand, but
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  Speaker 1: then speaking softly in the other. The softly speaking is
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  Speaker 1: right now in the currency market, spend the big swift
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  Speaker 1: and is thus sending out carriers out to that region. Douglas,
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  Speaker 1: I wonder if you could just talk a little bit
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  Speaker 1: about Italy and the sort of contradiction between how Italian
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  Speaker 1: seemed to view using the Euro and perhaps the French
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  Speaker 1: or other members of the European Union, and maybe just
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  Speaker 1: put it in the context of the Dutch elections. Well,
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  Speaker 1: I think that everyone uses for for someone like Italy
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  Speaker 1: that's more in the fringe in terms of normally if
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  Speaker 1: they didn't have the Euro, that have much much higher
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  Speaker 1: interest rates than they do right now. I think France
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  Speaker 1: is closer to the center and closer to where Germany is,
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  Speaker 1: and the administration would be high, but maybe not quite
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  Speaker 1: as low as they are right now. But certainly all
• 4:38
  Speaker 1: countries in Europe benefit from being part of the Euro
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  Speaker 1: because they get that Germany part which lies them to
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  Speaker 1: have much much lower rates. But now that can be
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  Speaker 1: constrictive at times as well, which the UK certainly, though
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  Speaker 1: not part of the Euro, is noting as part of
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  Speaker 1: the EU, and that it means you give up a
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  Speaker 1: lot of sovereignty. And I think that the Italians probably
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  Speaker 1: rather a little bit more sovereignty these days. If they
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  Speaker 1: want to get the industry going, they probably rather much
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  Speaker 1: weaker currency, so they could sort of rev up their um,
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  Speaker 1: their their their economies. But you also have you know,
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  Speaker 1: lots of different sex coming out. There are are are facts,
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  Speaker 1: are a new positions, are are in each of the
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  Speaker 1: markets that are moving towards more of a nationalist state.
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  Speaker 1: They look at what Trump's done in the United States
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  Speaker 1: and they think maybe this is our turn, you know.
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  Speaker 1: They look at the UK leaving the EU and they
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  Speaker 1: think maybe this is our turn. They point to immigration,
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  Speaker 1: they say, maybe this is our turn. But then you
• 5:26
  Speaker 1: get the election, you know, last night, and obviously and
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  Speaker 1: it came out and maybe they know that the right
• 5:31
  Speaker 1: wing side didn't get in quite as many votes as
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  Speaker 1: they expected to, and so it seem as a little
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  Speaker 1: bit of a fizzle, which obviously helps the euro to
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  Speaker 1: rally by its dirty pips since that dnaiment came out.
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  Speaker 1: So and then there's a lot of there's a lot
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  Speaker 1: of different things, you know. Scotland also as part of
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  Speaker 1: this whole discussion, Scotland then turns round and says we'd
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  Speaker 1: like to leave the UK, but at the same time
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  Speaker 1: we'd like to be part of the EU. Well, it's
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  Speaker 1: not going to be allowed by a lot of countries
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  Speaker 1: in in Europe because they don't want different areas within
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  Speaker 1: their countries to splinter r and say we want to
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  Speaker 1: do the same thing real quick thirty seconds. Doug, out
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  Speaker 1: of all of this uncertainty, what's the one currency that
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  Speaker 1: you think is going to move the most in the
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  Speaker 1: next six months. I think that everyone believes the Chinese
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  Speaker 1: currency is going to weaken. I think it's going to
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  Speaker 1: strengthen considerably. I think it's going to strengthen consivably because
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  Speaker 1: I think you're gonna see the Euro move higher, dollar
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  Speaker 1: yen move a lot lower. I think that on the
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  Speaker 1: back of that, because the Chinese currency is based on
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  Speaker 1: a basket, yourency the Chinese currency strengthened, especially given that
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  Speaker 1: there's a lot of positioning out there right now that
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  Speaker 1: has short China as opposed to along China. Fascinating. Thank
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  Speaker 1: you so much for joining us, Doug Barthwick with a
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  Speaker 1: contrarian call for a strengthening Chinese currency. He's managing director
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  Speaker 1: and head of f X at Chapter Lane and Company.
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  Speaker 1: UH and we're looking at a dollar that is weakening
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  Speaker 1: against most other currencies from Asia to Europe. After the
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  Speaker 1: Federal Reserve spoken as the u AS goes out and
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  Speaker 1: tries to sort of change the conversation with respect to
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  Speaker 1: currency manipulation. The ticker for the Bank of America, Mary
• 7:09
  Speaker 1: lynch U s issuers of high yield retail bonds is
• 7:14
  Speaker 1: really apropos. It's hurt h u r T and it
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  Speaker 1: works very well because these bonds have been in a
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  Speaker 1: world of hurt so far this year. They are the
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  Speaker 1: worst performing bonds in the high old bond market. And
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  Speaker 1: I want to bring in someone who knows a lot
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  Speaker 1: more about this, Jenna g. N Nelly. She is a
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  Speaker 1: high yield analyst and also focuses on retail and gaming
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  Speaker 1: at City Group, and she joins us here in our
• 7:37
  Speaker 1: Bloombrig eleven three oh student studio. Jenna, We're so glad
• 7:40
  Speaker 1: you could be here, And I want to start with
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  Speaker 1: the idea, uh that we've seen all of these losses,
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  Speaker 1: we've seen mounting bankruptcies and the expectation of more Where
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  Speaker 1: are we in this cycle? How much more pain are
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  Speaker 1: we going to see in retailers? Hi, Lisa, thanks so
• 7:56
  Speaker 1: much for having me in today. Um having to be here,
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  Speaker 1: you know, I I think that's you know, a great question,
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  Speaker 1: and I would say that although there are a lot
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  Speaker 1: of investors out there that are thinking this might be
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  Speaker 1: the opportunity and the time to jump in. And I
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  Speaker 1: do still think that there is more pain to be had.
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  Speaker 1: I mean, we remain underweight the sector. UM. And I
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  Speaker 1: think that when you look at a lot of the
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  Speaker 1: issues that investors are concerned about right now, especially for
• 8:19
  Speaker 1: some of these larger LBO candidates, about potential for you know,
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  Speaker 1: moving assets, looking at loose covenants. UM. You know, more
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  Speaker 1: macro issues like border adjustment, taxes, arising cost environment UM,
• 8:30
  Speaker 1: and really some of the bigger secular issues that we're
• 8:32
  Speaker 1: facing like increasing online print penetration, changing consumer preferences. UM.
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  Speaker 1: There's a whole host of things center investors, you know,
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  Speaker 1: need to be worried about. It's coming out them from
• 8:41
  Speaker 1: every angle. So I think we're still going to continue
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  Speaker 1: to see these play out in two thousands seventeen. And
• 8:45
  Speaker 1: some of the LBO companies that you're talking about, even
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  Speaker 1: Marcus Jake, Crude Toys, r Us Claire's, Jimberry, many more. Uh,
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  Speaker 1: how many of these do you expect to go bankrupt?
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  Speaker 1: Oh that's a good question. I mean, look, the reality
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  Speaker 1: has a lot of them don't actually have liquid the
• 9:00
  Speaker 1: issues as it stands right now. UM. You know, when
• 9:02
  Speaker 1: you think about Nieman, UM, you know, even if Claire's
• 9:05
  Speaker 1: has some time left, Jimbury, you know, could be a
• 9:07
  Speaker 1: two thousand and seventeen event, but they do still have
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  Speaker 1: liquidity and you know a lot of the maturity runways
• 9:13
  Speaker 1: for at least the next one to two years. Um,
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  Speaker 1: So I think we'll see restructuring. I mean a lot
• 9:17
  Speaker 1: of them, you still have you look at the sponsors.
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  Speaker 1: They haven't taken a lot of money out of these
• 9:20
  Speaker 1: l b o s, right, so they're gonna do everything
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  Speaker 1: that they can kind of kick the can down the
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  Speaker 1: road and do some sort of an exchange with the
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  Speaker 1: bond holders to really do everything they possibly can to
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  Speaker 1: avoid bankruptcy and preserve their equity cushion. So I don't
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  Speaker 1: think we're actually going to see a ton for some
• 9:33
  Speaker 1: of these bigger names in two thousand and seventeen. Maybe
• 9:36
  Speaker 1: down the road, um, but we have some time. But
• 9:38
  Speaker 1: so if that's the case, they're basically going to squeeze
• 9:41
  Speaker 1: everything out of everywhere but the equity holders, which means
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  Speaker 1: the bond holders will be potentially really bad for all
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  Speaker 1: of the debt owners in these companies. That's the fear.
• 9:50
  Speaker 1: That is the fear, and that has been you know,
• 9:52
  Speaker 1: I'd say, the one of the big topics so far
• 9:54
  Speaker 1: here to date is you know, covenants, covenants, covenants, um
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  Speaker 1: everyone I think you know, it started with Player's last summer,
• 10:00
  Speaker 1: I mean, and and then J Crew um with with um,
• 10:04
  Speaker 1: you know, the moving of IP assets where everyone's exploring
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  Speaker 1: it now as a possibility for all these companies, UM,
• 10:10
  Speaker 1: you know Nemon Marcus looking at their covenants and saying
• 10:13
  Speaker 1: what assets could they move? They just you know, announced
• 10:15
  Speaker 1: the other day that they are doing something of this nature,
• 10:17
  Speaker 1: moving assets into an unrestricted subsidiary for the purpose of
• 10:20
  Speaker 1: of dealing with bond holders. So, UM, we're seeing loans,
• 10:24
  Speaker 1: especially in retail, you know, under some pressure. Uh. And
• 10:27
  Speaker 1: and there's a concern that look there in these documents
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  Speaker 1: there are um, I don't want to say, not loopholes,
• 10:32
  Speaker 1: but certainly flexibility to um you know, to to move
• 10:36
  Speaker 1: assets out to the detriment of the creditors. So we're
• 10:38
  Speaker 1: seeing that in levels. And it's one of the biggest
• 10:40
  Speaker 1: concerns on investor's mind right now. It's the supply available
• 10:45
  Speaker 1: for the kind of investor that you are dealing with,
• 10:47
  Speaker 1: because you know, supply begets demand in many cases in
• 10:52
  Speaker 1: terms of yes, I mean I think look generally, um,
• 10:55
  Speaker 1: you know, the supply of of bonds out there. I mean,
• 10:57
  Speaker 1: we've definitely seen more sellers than buyers in retail, especially
• 11:01
  Speaker 1: in most real money accounts. And you think about it,
• 11:03
  Speaker 1: more traditional investors versus hedge funds. Traditional guys have been
• 11:07
  Speaker 1: um largely underweight for most of two thousand and sixteen,
• 11:10
  Speaker 1: and then even into two thousand and seventeen, we've had
• 11:12
  Speaker 1: a lot of hedge funds and more distress players I'd
• 11:15
  Speaker 1: say hovering but not quite stepping in pulling the trigger.
• 11:20
  Speaker 1: No one, no one pulling the trigger, but some are
• 11:22
  Speaker 1: increasingly pulling the trigger on the opposite bet. I mean,
• 11:25
  Speaker 1: you're talking Genna about how it's very common discussion about
• 11:28
  Speaker 1: how much pain has been in the retailers. And there
• 11:30
  Speaker 1: was a story on the Bloomberg just a few days
• 11:32
  Speaker 1: ago about how the big short now is in commercial
• 11:35
  Speaker 1: mortgage backed securities that are tied to retail properties. Also,
• 11:39
  Speaker 1: we're seeing short interest on retail reads rise to the
• 11:42
  Speaker 1: highest level in more than two years. Is now the time?
• 11:46
  Speaker 1: Is this the big short? Is now the time to
• 11:48
  Speaker 1: short sell this stuff? Well, you know, I think it's
• 11:50
  Speaker 1: the first time that we've ever had actually heard any
• 11:52
  Speaker 1: commentary from the retailers where they're staying there starting to
• 11:56
  Speaker 1: see rent relief. Right, We've been everyone's been asking about
• 11:58
  Speaker 1: this trade probably for the last two or three years.
• 12:00
  Speaker 1: How could the rots be doing so well and the
• 12:02
  Speaker 1: retailers be doing so poorly. It doesn't make any sense.
• 12:04
  Speaker 1: And for the first time we're hearing the retailers say, look,
• 12:07
  Speaker 1: we are starting to get some relief. We're starting to
• 12:09
  Speaker 1: see more favorable clauses when we are extending their leases.
• 12:13
  Speaker 1: But that being said, um, you know, the average lease life,
• 12:16
  Speaker 1: you know, you're still looking at five to ten years
• 12:17
  Speaker 1: for a lot of these guys, and so it's going
• 12:19
  Speaker 1: to be measured in terms of the timing of the closures.
• 12:22
  Speaker 1: It's going to be more concentrated in the lower end malls.
• 12:25
  Speaker 1: When you think about the dispersion of A, B and
• 12:27
  Speaker 1: C malls, the C malls are really there are a
• 12:29
  Speaker 1: third of the malls in this country, right, and so
• 12:30
  Speaker 1: it's gonna definitely be more concentrated towards those. When you
• 12:33
  Speaker 1: think about the closures that we're going to be seeing
• 12:35
  Speaker 1: a Macy's in J. C. Penny. That's where these you know,
• 12:38
  Speaker 1: the anchor stores are going to be concentrated again, it's
• 12:40
  Speaker 1: going to take time to play out. Um, And you know,
• 12:43
  Speaker 1: I don't want to say it's a crowded trade, but
• 12:45
  Speaker 1: I don't. But um, it's certainly been a popular one
• 12:47
  Speaker 1: and one that you know, I think a lot of
• 12:49
  Speaker 1: investors have tried to express a view. And you don't
• 12:51
  Speaker 1: have to say it's so popular. It's not crowded, it's
• 12:53
  Speaker 1: just popular. But gently just to be clear, so SEA
• 12:56
  Speaker 1: malls are the ones that are sort of lower tier
• 12:58
  Speaker 1: and lower end and A or this, yeah, more luxury,
• 13:00
  Speaker 1: and B is in the middle exactly. I think the
• 13:02
  Speaker 1: perception is that traffic has been um just week across
• 13:06
  Speaker 1: the board, but when you look at the dispersion, UM,
• 13:09
  Speaker 1: A malls have really held up pretty well, I would say,
• 13:11
  Speaker 1: I mean, occupancy rates are still very strong. Um, you know,
• 13:14
  Speaker 1: the traffic to those malls is still reasonable, maybe flat
• 13:17
  Speaker 1: to download single digit. It's definitely been more concentrated in
• 13:20
  Speaker 1: the lower end where you're seeing um, you know, occupancies
• 13:24
  Speaker 1: decline and um the traffic you know, um, you know,
• 13:28
  Speaker 1: you know week or we've we've heard from a few
• 13:29
  Speaker 1: different retailers that when you think about the dispersion of comps,
• 13:32
  Speaker 1: um it could be anywhere from two to three percentage
• 13:34
  Speaker 1: points for an A versus B versus C mall. So
• 13:37
  Speaker 1: if you're a mall, you're down to you you're down
• 13:38
  Speaker 1: for in your be mall, and you're you know you're
• 13:40
  Speaker 1: down six and your semall just I mean, it's not
• 13:43
  Speaker 1: a perfect rule of thumb, but we've heard to that
• 13:45
  Speaker 1: you know that degree for different retailers, which is why
• 13:47
  Speaker 1: you're seeing such negative comps for a lot of these guys.
• 13:50
  Speaker 1: Thank you very much for coming in and spending time
• 13:52
  Speaker 1: with us. We look forward to having you again in
• 13:53
  Speaker 1: the future. Jenner Gnelli is the high Yield Analysts for
• 13:57
  Speaker 1: retail and gaming from City Group. Thank you very much well.
• 14:13
  Speaker 1: The Bank of England today held its benchmark interest rates steady,
• 14:16
  Speaker 1: but signaled that an increase may not be far off. Indeed,
• 14:20
  Speaker 1: one official dissenting in favor of higher borrowing costs, and
• 14:25
  Speaker 1: others saying that it might not be long before they
• 14:28
  Speaker 1: do the same. Here to tell us more about the
• 14:31
  Speaker 1: decision and also a look at European politics and economy
• 14:34
  Speaker 1: is Jamie Murray. He is chief European, Middle East and
• 14:39
  Speaker 1: Africa economist for Bloomberg Intelligence, and he joins us from
• 14:42
  Speaker 1: our London studio, Jamie, thanks very much for being with us.
• 14:45
  Speaker 1: Tell us about the Bank of England rate decision, well,
• 14:49
  Speaker 1: I think the markets have probably correctly interpreted it as
• 14:52
  Speaker 1: more hawkish than previous statements, and it took most people
• 14:56
  Speaker 1: by surprise. One thing I would say is that this
• 15:00
  Speaker 1: may not last that long because the member that elected
• 15:04
  Speaker 1: to lift rates is only going to be on the
• 15:07
  Speaker 1: Monitary Policy Committee until June before she is replaced. And
• 15:11
  Speaker 1: we expressed in Forbes that's right, yes, so we expect
• 15:14
  Speaker 1: the one. We don't know who's going to replace it.
• 15:16
  Speaker 1: It could be could be anyone um. And the other
• 15:19
  Speaker 1: thing to bear in mind is that the Bank of
• 15:21
  Speaker 1: England is making this contingent on what happens to the
• 15:24
  Speaker 1: data now. So far the data is surprised. On the upside,
• 15:27
  Speaker 1: growth has been stronger, inflation has been roughly where most
• 15:30
  Speaker 1: people expected it to be given what's happened to Sterling. Now,
• 15:33
  Speaker 1: if that continues, then yes we could be in for
• 15:36
  Speaker 1: earlier rate hike. But our view is that the economy,
• 15:40
  Speaker 1: or at least the data will begin to sour little
• 15:42
  Speaker 1: bits GDP growth will slow as that exchange rate effect
• 15:45
  Speaker 1: starts to squeeze real incomes and lift inflation. Well, Jamie,
• 15:50
  Speaker 1: when you talk about the border market and how it
• 15:52
  Speaker 1: responded him in two year yields in the UK more
• 15:55
  Speaker 1: than doubled in response to the Bank of England's decision
• 15:59
  Speaker 1: UM to not do anything but sort of the hawk
• 16:02
  Speaker 1: ish tone, and Paul Dobson, Bloomberg team leader here noted
• 16:06
  Speaker 1: on the Market's live blog that the smoking gun from
• 16:09
  Speaker 1: the BOE minutes that made the market sit up and
• 16:11
  Speaker 1: pay attention was with inflation rising sharply and only mixed
• 16:15
  Speaker 1: evidence and slowing activity domestically. Some members noted that would
• 16:19
  Speaker 1: take relatively little further upside news on the prospects for
• 16:22
  Speaker 1: activity or inflation for them to consider that a more
• 16:24
  Speaker 1: immediate reduction and policy support might be warranted. In other words, uh,
• 16:28
  Speaker 1: they would be more willing to go ahead and hike
• 16:31
  Speaker 1: rates faster with just a little bit more news that
• 16:34
  Speaker 1: would that would that would edify this sense of of
• 16:36
  Speaker 1: inflation rising. Yes, so I completely agree with Paul's assessment there.
• 16:40
  Speaker 1: The thing is that we I'm not expecting the data
• 16:43
  Speaker 1: to show that source of improvement. The wages data came
• 16:47
  Speaker 1: in remarkably weak just this week. UM. The and despite
• 16:52
  Speaker 1: the fact that unemployment is falling to very low levels,
• 16:55
  Speaker 1: so there's no evidence whatsoever that domestically generated inflation is rising.
• 17:00
  Speaker 1: And that's what the Bank of England needs to be
• 17:01
  Speaker 1: looking at. Well, if that's what they need to be
• 17:04
  Speaker 1: looking at, I wonder if you could provide a little
• 17:06
  Speaker 1: bit of context for Brexit, the ongoing negotiations and then
• 17:10
  Speaker 1: dive into Dutch politics. For us, well, we're up to
• 17:14
  Speaker 1: with Brexit is that that's the Article fifty is likely
• 17:18
  Speaker 1: to be triggered towards the end of this month. It's
• 17:21
  Speaker 1: been delayed slightly by some adjustments to the bill going
• 17:24
  Speaker 1: through the House of Lords, and this means that Britain
• 17:28
  Speaker 1: will be on an official exit path from the EU
• 17:31
  Speaker 1: and will have two years from the end of this
• 17:33
  Speaker 1: March to reach an agreement with the rest of the EU.
• 17:37
  Speaker 1: If it doesn't, then all likelihood Britain will default sort
• 17:42
  Speaker 1: of World Trade Organization rules, which should mark a very
• 17:45
  Speaker 1: sharp increase in tariffs and a lot of goods being
• 17:47
  Speaker 1: bought and sold between US and the UK and the EU.
• 17:52
  Speaker 1: So that's we're up to with Brexits. My feeling is
• 17:56
  Speaker 1: that I think it's most people's feeling is that the
• 17:58
  Speaker 1: negotiations are going to be incredibly challenging. There's not a
• 18:02
  Speaker 1: loss of There's not a lot of things going for
• 18:06
  Speaker 1: Britain in this respect. Goodwill could we say not a
• 18:09
  Speaker 1: lot of good will between Europe. That's exactly the word
• 18:13
  Speaker 1: escapes me a couple of moments ago. So yeah, there
• 18:16
  Speaker 1: is not much good will. Um So, my my feeling
• 18:19
  Speaker 1: is that the rest of the U has no incentive
• 18:22
  Speaker 1: to show goodwill to Britain because the more it does that,
• 18:25
  Speaker 1: the lower the hurdle of other countries to leave. Is
• 18:29
  Speaker 1: it encouraging to the outcome of the Dutch elections, the
• 18:32
  Speaker 1: fact that the liberal candidate one and the sort of
• 18:36
  Speaker 1: populist anti Islam candidate was pushed aside? Does this sort
• 18:41
  Speaker 1: of give people a stronger feeling of less political risk
• 18:44
  Speaker 1: right now in European markets? I think in markets it
• 18:48
  Speaker 1: probably is having that effects. I'm not sure whether that's
• 18:50
  Speaker 1: the right interpretation of it. Though the Dutch election was
• 18:55
  Speaker 1: quite unique in that had had the extremest party one
• 19:01
  Speaker 1: the the they had no chance of governing. Really that
• 19:05
  Speaker 1: is not the case so much in other places in
• 19:08
  Speaker 1: the Eurozone. Now, what I would say is that each
• 19:11
  Speaker 1: of these countries is remarkably different, and it's very easy
• 19:13
  Speaker 1: to lump them all together. So it's easy to imagine.
• 19:16
  Speaker 1: The typical distinction is core versus Prephery. So you have
• 19:19
  Speaker 1: the Netherlands, France and Germany and one group and then
• 19:22
  Speaker 1: you have the Italy, the Spains, the Greases and the other. Now,
• 19:25
  Speaker 1: actually there's significant differences even within those categories. So in
• 19:30
  Speaker 1: let's take in the Netherlands. In the Netherlands, only five
• 19:34
  Speaker 1: of under thirty five's voted for the extremest party. In France, however,
• 19:39
  Speaker 1: one third looked like they're going to vote for Le Pen.
• 19:42
  Speaker 1: Now this is this is a real difference in the
• 19:45
  Speaker 1: in not in demographic makeup, in among those groups who
• 19:49
  Speaker 1: is voting that it's completely upside down for between France
• 19:53
  Speaker 1: and the Netherlands. Does it get you frustrated when you
• 19:55
  Speaker 1: hear people like us in the United States talk about
• 19:58
  Speaker 1: Europe and it's like, oh, the populous way of going
• 20:00
  Speaker 1: through Europe and all of these elections and sort of
• 20:02
  Speaker 1: lumping them together. Um, is it? Is it just or
• 20:05
  Speaker 1: you know, in Europe our market players really making the
• 20:08
  Speaker 1: distinctions that you're talking about, or even in Europe, is
• 20:11
  Speaker 1: this sort of there are a lumping together kind of
• 20:14
  Speaker 1: that might lead to unwarranted conclusions. Well, I think it's
• 20:18
  Speaker 1: no no worse than how we'd we describe the US
• 20:21
  Speaker 1: over here. Um. So I think the there is a
• 20:24
  Speaker 1: tendency to lump these economies together and treat their politics
• 20:28
  Speaker 1: is the same. And one distinction, which I think is
• 20:31
  Speaker 1: probably the most important thing for a U S audience
• 20:34
  Speaker 1: to recognize, is that the Euro is remarkably popular across
• 20:38
  Speaker 1: most of the Eurozone, including France, where it isn't popular. However,
• 20:43
  Speaker 1: is Italy and that really singles out. And that's so
• 20:46
  Speaker 1: if you really want a place to look, you think,
• 20:47
  Speaker 1: if you're worried about risk of the Eurozone, Italy is
• 20:50
  Speaker 1: that place fascinating. Thank you so much for joining us.
• 20:52
  Speaker 1: Jamie Murray chief E m E a economist for Bloomberg Intelligence.
• 21:09
  Speaker 1: Day after a federate hike, and you can't find much
• 21:13
  Speaker 1: concern in risk your assets. You've got stocks gaining, you've
• 21:17
  Speaker 1: got junk bonds gaining. Uh. And there was a story
• 21:20
  Speaker 1: on the terminal that Kredent sweets and UBS analysts are
• 21:23
  Speaker 1: telling their wealthy clients it's not too late to buy equities. Well,
• 21:27
  Speaker 1: we're gonna talk with somebody to find out whether he agrees.
• 21:30
  Speaker 1: Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors,
• 21:34
  Speaker 1: which overseas about one point two billion dollars, and he
• 21:38
  Speaker 1: speaks with us now from Albany, New York. Que. Do
• 21:41
  Speaker 1: you agree. Are you telling your clients to don't worry,
• 21:43
  Speaker 1: go ahead buy stocks? It's not too late from one
• 21:47
  Speaker 1: point of view, Lisa, Yes, I think that's a good idea.
• 21:50
  Speaker 1: You have to have some stocks in your portfolio. The
• 21:53
  Speaker 1: simple reason for that is that when they asked the question,
• 21:56
  Speaker 1: which I think is the key question now is are
• 22:00
  Speaker 1: we at or even near the end of the current
• 22:03
  Speaker 1: stock market economic interest rate cycle. The answer to that,
• 22:07
  Speaker 1: based on the performance of the markets and the performance
• 22:10
  Speaker 1: of important economic variables, is clearly no. So you need
• 22:14
  Speaker 1: to have a meaningful allocation to equities. That's the first
• 22:18
  Speaker 1: part of the equation. The second part of the equation
• 22:22
  Speaker 1: is what about valuation or current valuation? And if you
• 22:25
  Speaker 1: were to ask me, and everybody answers the question differently,
• 22:29
  Speaker 1: if you were to ask me, are we undervalued, fairly
• 22:32
  Speaker 1: valued or overvalued? I'd say we're a little bit ahead
• 22:34
  Speaker 1: of ourselves, you know, we've had a big run since
• 22:37
  Speaker 1: the election, and so common sense alone says that it
• 22:40
  Speaker 1: might have be a little bit pricier overvalued. And I
• 22:42
  Speaker 1: would say that the upside potential between right now and
• 22:46
  Speaker 1: the end of two thousand and eighteen is about one
• 22:51
  Speaker 1: percent at the best. And so the most important thing
• 22:55
  Speaker 1: is yes, meaningful allocation to stocks. But if you're going
• 22:59
  Speaker 1: to add to your portfolio of the equities in your portfolio,
• 23:02
  Speaker 1: wait for a good entry point. This is not a
• 23:04
  Speaker 1: good entry point. You need a lower level to be
• 23:08
  Speaker 1: buying stocks. That's in my view. Hugh Johnson, Perhaps you
• 23:12
  Speaker 1: know an investor that would like to take some profits,
• 23:15
  Speaker 1: what would you recommend they sell? Uh, that's a really
• 23:19
  Speaker 1: great question because I get that question almost every day.
• 23:23
  Speaker 1: There are folks that obviously feel very uncomfortable with the
• 23:27
  Speaker 1: kind of move we've seen up in stock prices. Me,
• 23:31
  Speaker 1: do you I don't mean that they have to be uncomfortable.
• 23:33
  Speaker 1: They can even be gratified and say maybe they just
• 23:36
  Speaker 1: want to sell half a position. But I'm wondering, what
• 23:38
  Speaker 1: would you sell if you just want to Yeah, I'll
• 23:41
  Speaker 1: be honest. With the three sectors which have had the
• 23:44
  Speaker 1: big move uh since the election and of course, they're
• 23:48
  Speaker 1: right at the top of the list, are the financials.
• 23:51
  Speaker 1: The second second too, that I would mention is first
• 23:55
  Speaker 1: of all technology, which has had a big move to
• 23:57
  Speaker 1: the upside. And then I would take a very hard
• 24:00
  Speaker 1: look at the healthcare stocks because there's a lot of
• 24:03
  Speaker 1: fundamental problems. There also some industrials that have had a
• 24:07
  Speaker 1: big move to the upside. The real issue is is
• 24:09
  Speaker 1: if you've had a big move up and some of
• 24:11
  Speaker 1: the stocks in your portfolio, particularly the financials, you might
• 24:16
  Speaker 1: want to take and it's a great question, you might
• 24:18
  Speaker 1: want to take some of that position, shall we say
• 24:21
  Speaker 1: off the table or sell it? Well, I just want
• 24:23
  Speaker 1: to give you the credit where credit is due, because
• 24:25
  Speaker 1: I remember back in August of last year, you were
• 24:29
  Speaker 1: pounding the table on financial stocks when no one else
• 24:32
  Speaker 1: was really going out on a limb like that. Yeah,
• 24:34
  Speaker 1: that was probably as good a guess as any. I
• 24:37
  Speaker 1: didn't expect, obviously that Trump would win the election. I didn't,
• 24:41
  Speaker 1: I I thought at the time. But I really thought
• 24:44
  Speaker 1: after the election of Trump that, of course, with deregulation,
• 24:47
  Speaker 1: with dot Frank maybe being under under the gun, obviously,
• 24:52
  Speaker 1: with the better outlook for the economy based on the
• 24:56
  Speaker 1: so called Trump bump or the Trump stimulus plan that
• 25:00
  Speaker 1: we might be talking about higher interest rates, were talking
• 25:03
  Speaker 1: about higher interest rates would accrue to the benefit of, obviously,
• 25:06
  Speaker 1: the the profits of the commercial banking part of the
• 25:10
  Speaker 1: financial sector. So you know, um, yeah, it looked good
• 25:14
  Speaker 1: in August. Uh, and it looked particularly good when Trump
• 25:18
  Speaker 1: got elected. But the move up in the fourth quarter
• 25:20
  Speaker 1: of in one sector alone, that's that's quite a bit.
• 25:25
  Speaker 1: And and there again common sense says you might want
• 25:27
  Speaker 1: to take some off the table. Okay, So, Hugh, let's
• 25:30
  Speaker 1: say somebody does sell some of their financial holdings. Uh,
• 25:34
  Speaker 1: they sell around the edges to get prepared for perhaps
• 25:37
  Speaker 1: a better entry point. What should they do with the
• 25:39
  Speaker 1: proceeds from those sales. Should they keep it in cash?
• 25:42
  Speaker 1: Should they go into bonds? Well, you know, Lisa, I
• 25:47
  Speaker 1: as I say, I think I'm worried be concerned about valuation.
• 25:51
  Speaker 1: So when I'm concerned about valuation, would would be one
• 25:54
  Speaker 1: of the reasons why I would sell some financials, maybe
• 25:56
  Speaker 1: technology industrials, maybe some healthcare stock. I might go into
• 26:01
  Speaker 1: cash for the time being, and again look for a
• 26:03
  Speaker 1: better entry point. If someone were to press me and
• 26:06
  Speaker 1: ask me, what's a good entry point, I would say, look,
• 26:09
  Speaker 1: it's got to be five percent below current levels, because
• 26:12
  Speaker 1: unless we go down five from current levels and even
• 26:15
  Speaker 1: a little bit more, um, you know, in my judgment,
• 26:19
  Speaker 1: the upside potential between the current level and the end
• 26:24
  Speaker 1: of two thousand eighteen would certainly not be that attractive. So,
• 26:28
  Speaker 1: just from a big picture portfolio management point of view,
• 26:32
  Speaker 1: you've got a sharp decline in stock prices before I
• 26:35
  Speaker 1: would use that cash. Cash is not a bad thing
• 26:38
  Speaker 1: to have right now. I'm not barished by a long shot,
• 26:41
  Speaker 1: but I'm just saying from a timing point of view,
• 26:43
  Speaker 1: valuation point of view, I have my concerns how much
• 26:48
  Speaker 1: in your ideal portfolio, how much would be in cash
• 26:51
  Speaker 1: right now compared with say at the end of last year. Yeah, what,
• 26:55
  Speaker 1: we we've worked pretty much. We've been pretty bullish. And
• 26:58
  Speaker 1: so if a and said to us, look, I have
• 27:01
  Speaker 1: got a target for equities and fixed income of fifty
• 27:05
  Speaker 1: and equities, I'll let you, folks go to sixty of
• 27:09
  Speaker 1: the portfolio and equities when you think conditions are times
• 27:12
  Speaker 1: are good, and be down at thirty five percent when
• 27:15
  Speaker 1: you think times are bad right now, and quite frankly,
• 27:18
  Speaker 1: the end of last year we've been at six and
• 27:22
  Speaker 1: that's where we're going to stay. But um as far
• 27:25
  Speaker 1: as adding to positions, and we're not going to change
• 27:27
  Speaker 1: that adding to positions, we'd wait for that decline in
• 27:31
  Speaker 1: stock prices before we would add to positions. If somebody
• 27:35
  Speaker 1: said to me, if somebody said to me, look, I'm
• 27:37
  Speaker 1: really concerned about the current stock market, I would ask
• 27:41
  Speaker 1: them the question, Look, you've got a fifty percent target
• 27:43
  Speaker 1: with a little bit of leeway both sides. Maybe what
• 27:47
  Speaker 1: you want to do is to reduce that target from
• 27:50
  Speaker 1: fifty down to or to what we would call a
• 27:54
  Speaker 1: sleep at night level. Uh, that would be the decision
• 27:57
  Speaker 1: of the of the client. But right now we have
• 28:00
  Speaker 1: over fifty percent allocation to equities, and that's based on
• 28:03
  Speaker 1: the fact that we think equities are the place to
• 28:05
  Speaker 1: be for the time being. Thanks very much for joining us.
• 28:08
  Speaker 1: Hugh Johnson, as always, he is the chairman and the
• 28:11
  Speaker 1: chief investment Officer of Hugh Johnson Advisers, joining us from Albany,
• 28:16
  Speaker 1: New York, where he helps to manage over one point
• 28:19
  Speaker 1: two billion dollars of customer assets. Thanks for listening to
• 28:29
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 28:32
  Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform
• 28:37
  Speaker 1: you prefer. I'm pim Fox. I'm out there on Twitter
• 28:40
  Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
• 28:44
  Speaker 1: It's one before the podcast. You can always a catch
• 28:47
  Speaker 1: us worldwide on Bloomberg Radio