Latest / Bloomberg Intelligence / Deflationary Forces Will See 30-Year UST Going To 2%: Shilling

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Deflationary Forces Will See 30-Year UST Going To 2%: Shilling · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa A. Bramowitz. Each day
0:11
Speaker 1: we bring you the most important, noteworthy, and useful interviews
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Speaker 1: for you and your money, whether you're at the grocery
0:17
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Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com.
0:33
Speaker 1: Time to turn to the US economy and what we
0:36
Speaker 1: can read out of its performance in terms of investments.
0:40
Speaker 1: Joining us as Gary Shilling. He is the president of
0:42
Speaker 1: a Gary Shilling and Company. He is also a Bloomberg
0:45
Speaker 1: View profiting columnists and Gary always a pleasure to speak
0:49
Speaker 1: with you. UM, wonder if you could just give us
0:51
Speaker 1: your thoughts based on today's payroll report non farm payroll report,
0:55
Speaker 1: and are you still positioning yourself as long US treasuries. Yes,
1:01
Speaker 1: we are, a matter of fact, we've we've stepped up
1:02
Speaker 1: our position in the last several weeks and the portfolios
1:05
Speaker 1: we manage. UM. I think we're in a situation here
1:08
Speaker 1: where pay rolls are are growing but rather modestly. Nothing
1:12
Speaker 1: really uh to get excited about. Nothing that's going to
1:16
Speaker 1: change the Fed's view of the world. And of course
1:19
Speaker 1: there's a big difference between what the Fed does on
1:21
Speaker 1: the short end of the curve and where you get
1:23
Speaker 1: out into the ten uere. And even more so as
1:26
Speaker 1: you know him, the thirty year that I like, the
1:28
Speaker 1: spillower is very limited when you get out there and
1:30
Speaker 1: you've you've got a lot of deflationary forces, safe haven effects.
1:34
Speaker 1: You look at what's happening just today here with the
1:37
Speaker 1: latest turmoil on the on the trade front, and where
1:41
Speaker 1: do people go. They go to treasuries, business as usual,
1:45
Speaker 1: so Gary, So it sounds like you are currently out
1:48
Speaker 1: there buying thirty year treasuries on a day like today.
1:52
Speaker 1: I'm just wondering how overweight are you? And where do
1:54
Speaker 1: you see the yield ending up? Because right now I'm
1:56
Speaker 1: looking at a three percent yield on three year treasuries.
1:59
Speaker 1: Where's it go? Well, all on record is as saying
2:03
Speaker 1: I think it'll go to it'll go to two percent,
2:06
Speaker 1: And really it's really the fact that the skin I
2:10
Speaker 1: think we're in a world of a lot of deflationary forces,
2:14
Speaker 1: and you know, protuctionism elenly is deflationary excent that dispose
2:18
Speaker 1: economic growth. Although we're in a kabuki dance right now
2:22
Speaker 1: posturing more than anything else. Uh. But but again the
2:26
Speaker 1: safe haven effect. And you know one other thing. The
2:28
Speaker 1: Chinese people worry about their dumping treasuries, but they're on
2:32
Speaker 1: record is saying that they are not going to change
2:35
Speaker 1: their their policy. And obviously if they started to sell treasuries, UH,
2:39
Speaker 1: they would tank. And who would be the big losers
2:42
Speaker 1: the Chinese because then the rest of their portfolio would
2:44
Speaker 1: be vastly reduced. So UM, I think again the safe
2:49
Speaker 1: haven effect and deflationary forces. So I think we go
2:52
Speaker 1: to two and if we go to two percent, if
2:54
Speaker 1: we go to two percent from here, in one year,
2:57
Speaker 1: you'll make thirty percent on a thirty year coupon treasure
3:00
Speaker 1: three and thirty three on a zero UH coupon treasury
3:03
Speaker 1: thirty year. Tell us what your thoughts on the outlook
3:06
Speaker 1: for commodity prices and specifically oil, well oil oil. Obviously
3:12
Speaker 1: we're facing OLFAC, which is trying desperately to do what
3:15
Speaker 1: they what they have had to do traditionally, which is
3:18
Speaker 1: to be the swing producer, to cut back to accommodate
3:22
Speaker 1: everybody else who wants a bigger share of the market.
3:24
Speaker 1: The American frackers in particular, UH, They did that for
3:27
Speaker 1: ten years. In November of often they said enough is enough.
3:31
Speaker 1: They fled to the market. They went from thirty million
3:34
Speaker 1: barrels a data thirty three point eight million almost overnight.
3:37
Speaker 1: They wanted to squeeze out the flackers. Uh, frackers play
3:40
Speaker 1: a glorify game of chicken, and hoof turned out to
3:42
Speaker 1: be the chicken. It's olfac. So they're they're trying to
3:45
Speaker 1: cut back. But the point is that the frackers are
3:47
Speaker 1: very resilient and they're producing now. We're now looking and
3:50
Speaker 1: I think at ten point four million barrels of a
3:53
Speaker 1: US production atuff about half half a million barrels from
3:57
Speaker 1: a year ago. And uh, yeah, I think there is
4:00
Speaker 1: there is a range on this, but I think the
4:03
Speaker 1: pressure is is down on oil prices. And the point
4:06
Speaker 1: is that the longer OPEC goes and they've got to
4:08
Speaker 1: Russia in other countries with him, of course, but the
4:10
Speaker 1: longer that goes, the comfort is to maintain discipline because
4:14
Speaker 1: they have huge budget deviasits are trying to fill it
4:17
Speaker 1: one higher prices in order to get the revenues to
4:19
Speaker 1: do that. In Saudi Arabia, Ran, Olivia, you name it. Uh.
4:23
Speaker 1: And the point is that at some point somebody's gonna
4:27
Speaker 1: say enough is enough. I'm gonna cheat. I'm going to
4:30
Speaker 1: sell more because I desperately need the revenues. Gary. It
4:34
Speaker 1: sounds like you're pretty barrish. Actually it's to other people.
4:37
Speaker 1: What would what would you have to see to sort
4:39
Speaker 1: of say to yourself? You know Paris on treasuries. Right,
4:42
Speaker 1: you're not farrish on this in the traditional human ascid.
4:45
Speaker 1: I have been since nineteen one when I said we're
4:48
Speaker 1: entering the bond rally of the lifetime in the yield
4:50
Speaker 1: on the third of your bond was was twelve point
4:53
Speaker 1: six percent at that point. Yeah, but right now there's
4:55
Speaker 1: something else driving in And I wanted to ask you
4:57
Speaker 1: what would you have to see to think, huh, maybe
4:59
Speaker 1: I'm maybe the U. S. Economy is doing better than
5:02
Speaker 1: I think it has. It doesn't just the economy doing
5:05
Speaker 1: better than The link with treasure yields is very clearly inflation.
5:09
Speaker 1: There's about a sixty percent correlation between long term treasure
5:13
Speaker 1: yields and inflation. And it would really take something that
5:16
Speaker 1: would dramatically increase inflation. Now, historically that's been wars periods
5:22
Speaker 1: when government spending vastly exceeds revenues on top of a
5:25
Speaker 1: fully employed economy, and the economy is strained, you get
5:29
Speaker 1: in inflation. The last time we had that, of course,
5:32
Speaker 1: was with a great society and Vietnam spending back to
5:36
Speaker 1: back in the late sixties and early seventies. Uh, could
5:39
Speaker 1: that be created again? Sure? I mean if Congress the
5:42
Speaker 1: administration really go hog while in terms of infrastructure spending
5:46
Speaker 1: and military spending, there's a lot of pressure to do
5:49
Speaker 1: so because voters are mad as hell or hasn't been
5:51
Speaker 1: any growth in in real incomes for most people in
5:54
Speaker 1: over a decade. That could do it, But that's that's
5:57
Speaker 1: in a longer in a in a more fundamental stample,
6:00
Speaker 1: you've got to see inflation and and otherwise we're in
6:02
Speaker 1: an excess supply world. I mean, that's why Trump's got
6:05
Speaker 1: the upper hand and the with the Chinese in an
6:08
Speaker 1: upper in a in an excess supply world, who's got
6:11
Speaker 1: the upper hand? And say not the seller? Gary? You
6:14
Speaker 1: mentioned military spending. What do you think about investing in
6:17
Speaker 1: aerospace and defense companies? We are in poor fellow as
6:21
Speaker 1: we managed we we do have positions in the aerospace
6:24
Speaker 1: and defense area. Have you been increasing them? No, No,
6:30
Speaker 1: we've helped steady, but we have we have a we
6:32
Speaker 1: have an extraordinary amount of cash. I mean having said that,
6:36
Speaker 1: you know, we're in psories for aerospace, but we're really
6:40
Speaker 1: very heavy on cash because you've you've had some much
6:43
Speaker 1: more volatility, and I think there's this long bowlmarket in
6:46
Speaker 1: stocks that started in March of of of two thousand nine. Uh,
6:51
Speaker 1: you know, very steady and obviously spawned a lot of
6:54
Speaker 1: a lot of excess risk taking because interest rates were
6:57
Speaker 1: low and people thought they deserved more and they took
7:01
Speaker 1: advantage of low volativity, the big play with VIX. But
7:04
Speaker 1: of course that really started to come on glue in
7:06
Speaker 1: early February when we saw the Vics take off and
7:10
Speaker 1: and stocks Plumbert and Shan. But it's a very tricky
7:14
Speaker 1: world right now because you haven't seen the usual massive
7:18
Speaker 1: run for either treasuries or goal right, which would normally
7:22
Speaker 1: be that the haven type of trade. Unfortunately, gonna have
7:25
Speaker 1: to leave their Gary Shilling, president of A Gary Shilling
7:27
Speaker 1: and Company, also Bloomberg View Profit and columnists, how do
7:44
Speaker 1: trade disputes figure into the value of investments in China?
7:49
Speaker 1: Here to help us understand this is Brendan A. Hearn.
7:51
Speaker 1: He is the chief investment officer of Crane Shares and
7:54
Speaker 1: he joins US now. Brendan, maybe you could just describe
7:59
Speaker 1: sort of what is happened in the Chinese stock market,
8:02
Speaker 1: what has been the reaction to trade tariffs and trade
8:05
Speaker 1: potential trade wars between the United States and China. Yeah,
8:09
Speaker 1: you know, the Shanghai and Shenzen markets PAM have been
8:12
Speaker 1: closed for my my my favorite Chinese holiday tomb sweeping
8:16
Speaker 1: both Thursday and today on Friday. Hong Kong was open today, um,
8:21
Speaker 1: and I think most investor to be surprised. The the
8:24
Speaker 1: Hanks saying actually gained uh just over one per cent
8:27
Speaker 1: um and this was obviously included the post market close
8:31
Speaker 1: uh comments from President Trump. So so actually the Hong
8:36
Speaker 1: Kong market took it in stride. You know, Brandon, you
8:39
Speaker 1: could argue that the US market is as well. A
8:41
Speaker 1: lot of people who I speak to anyway, uh, they
8:44
Speaker 1: just tell us, you know what, this is just a
8:46
Speaker 1: war of words. This is chest beating. This is part
8:49
Speaker 1: of the art of the deal. We're not paying attention,
8:51
Speaker 1: should they? Yeah? I mean, I think ultimately there's there's
8:55
Speaker 1: so much at risk for for both countries around further
8:59
Speaker 1: s f lation that we certainly hope that this war
9:02
Speaker 1: words is simply a part of that negotiating tactic. Uh, certainly,
9:06
Speaker 1: there's just so much at stake that to to unravel UM,
9:11
Speaker 1: you know, the great progress that's been made or do
9:13
Speaker 1: a real, real, real shame and really would have a
9:16
Speaker 1: disastrous effect for for arguably both parties. Right then, just
9:20
Speaker 1: looking at the shares of Ali Baba Group as a
9:23
Speaker 1: proxy down about one and a half percent so far
9:26
Speaker 1: this year, is Ali Baba perhaps indicative of what we
9:30
Speaker 1: can expect? In other words, would you be watching those
9:32
Speaker 1: shares for any reaction based on these trade negotiations? Yeah.
9:37
Speaker 1: I think it's interesting that the US list of Chinese
9:40
Speaker 1: companies that that we hold within our k web or
9:43
Speaker 1: trying to focus Internet Strategy UM are used as trying
9:47
Speaker 1: to proxies. But the fight thing is, though UM, only
9:52
Speaker 1: four per cent of the revenue generated by the companies
9:56
Speaker 1: that we hold within k web are generated out side
10:00
Speaker 1: of China. UM. You compare that to the SMP five hundred,
10:04
Speaker 1: where over twenty of the US companies held within SMP
10:09
Speaker 1: five hundred UH come from outside of the United States.
10:12
Speaker 1: So it's so it's interesting if if you're if you're
10:13
Speaker 1: selling your Ali Baba because you're worried about a trade war.
10:16
Speaker 1: The reality is Ali Baba has virtually no exposure to
10:19
Speaker 1: the United States. It's a domestically oriented company. It's hard,
10:24
Speaker 1: it's really hard to understand that rationale. You know. One
10:28
Speaker 1: thing that I'm trying to understand right now is it
10:31
Speaker 1: seems quite clear, uh, that perhaps there could be a
10:35
Speaker 1: more level playing field with China and the rest of
10:38
Speaker 1: the world. A lot of the world agrees with that, frankly, Uh,
10:41
Speaker 1: But what's unclear to me is how much are is
10:45
Speaker 1: there concrete talking going on and versus how much is
10:48
Speaker 1: this just sort of like a you know, one blow here,
10:51
Speaker 1: one blow there, chest pouting here, and kind of like
10:54
Speaker 1: a drumbeat something actually happening. Yeah, I definitely. One one
10:59
Speaker 1: thing that I think the market, you know, didn't like
11:01
Speaker 1: to hear was was, you know, Larry Cudlow, who threw
11:05
Speaker 1: through a life life preserver to markets on Wednesday by
11:10
Speaker 1: coming out and saying, oh, you know, this is a
11:11
Speaker 1: negotiator coming out and saying that there's no talk has
11:14
Speaker 1: taken place. Over a trillion in global market capitalization has
11:19
Speaker 1: been lost um over the last several weeks globally. UM,
11:25
Speaker 1: and and it's it's it's it's a little disconcerting that
11:28
Speaker 1: that you know that the talks, these negotiations I haven't started. Um,
11:32
Speaker 1: you know, so day came out and uh, I think
11:36
Speaker 1: that's accelerated. Uh that you know, this is this says
11:39
Speaker 1: serious implications and you know, I think you know, I
11:42
Speaker 1: hope cooler heads prevail and discussion does take place. Uh.
11:47
Speaker 1: There's great opportunities for both countries to enhance this relationship,
11:51
Speaker 1: but you've got to get down and talk. Hopefully that
11:53
Speaker 1: that takes place shortly. Brendan, what about smart investors? What
11:57
Speaker 1: are they doing? I want to note that you've described
12:00
Speaker 1: how the Lippo Group, which is a big real estate
12:03
Speaker 1: company based in Indonesia, has been adding to their China stockholdings. Yeah.
12:09
Speaker 1: One of the things that we've continued to see that
12:12
Speaker 1: that is quite interesting. Over the last several weeks, we've
12:15
Speaker 1: seen increased within Southbound connect trading, which has been closed
12:19
Speaker 1: due to tomb sweeping, holiday um buying, and then more
12:23
Speaker 1: recently we had uh the Lippo Group, who you know,
12:26
Speaker 1: anyone who's traveled to Hong Kong, you see the big
12:28
Speaker 1: skyscrapers with with the family name. So it is interesting
12:33
Speaker 1: that we're seeing buying on weakness from both mainland as
12:37
Speaker 1: well as now in this case a very very prestigious
12:39
Speaker 1: family in in Hong Kong so Um and and even
12:43
Speaker 1: even earlier this week it was interesting we actually saw
12:46
Speaker 1: northbound foreign buying on weakness. So so I like to
12:50
Speaker 1: hope that institutional investors are keeping up. People are willing
12:54
Speaker 1: to to sell based on emotions Um and you know
12:58
Speaker 1: professional investors are going to by those shares. Brendan are
13:01
Speaker 1: real quick. If you could give a percent chance that
13:04
Speaker 1: we are going to escalate into some sort of trade
13:08
Speaker 1: or what percent chance would you give it, I think
13:11
Speaker 1: on the talk it's it's probably in terms of the
13:14
Speaker 1: reality of an actual trade war having a much much
13:19
Speaker 1: low low percentage. There's just too much at stake. I
13:24
Speaker 1: I would think, you know, I think Li said, you know,
13:26
Speaker 1: no one wants to be known as orchestrating the smooth
13:29
Speaker 1: hally and that that is what people will be go
13:34
Speaker 1: down in history for if if this escalation actually takes place.
13:38
Speaker 1: I don't think the reputation people have built successfully in
13:42
Speaker 1: business are worth throwing away for for really just you
13:47
Speaker 1: know a lot. I mean, there are very much grievances
13:50
Speaker 1: that should be addressed by by the China side around
13:53
Speaker 1: infectual property. At the same time, they've made great strides
13:55
Speaker 1: in opening up. So hopefully those cooler heads prevailed in
13:59
Speaker 1: her and thank you so much, Io of Crane Shares.
14:15
Speaker 1: So with today's declines, we have turned read for the
14:19
Speaker 1: year on the SMP five hundred uh. The Dow Jones
14:23
Speaker 1: also read for the year. Who is out there willing
14:27
Speaker 1: to buy? Well, perhaps we'll get our answer from Aaron Brown.
14:30
Speaker 1: She is head of acid Allocation at UBS Asset Management,
14:33
Speaker 1: overseeing about seven hundred and seventy billion dollars. It's based
14:36
Speaker 1: in New York. Aaron, thank you so much for being here.
14:39
Speaker 1: So we have seen this weakness. Are you buying yes,
14:44
Speaker 1: So we have the view that through throughout the duration
14:47
Speaker 1: of this year, we expect that equies are going to
14:49
Speaker 1: end the year higher. So we're still expecting about mid
14:52
Speaker 1: single digits earnings or SMP returns this year and double
14:57
Speaker 1: digit earnings growth. So we are buying into pockets weakness. However,
15:01
Speaker 1: right now here we've taken a little bit of a
15:03
Speaker 1: weight and c mode to see some of the trade
15:05
Speaker 1: tariff discussions come to a conclusion before we really start
15:09
Speaker 1: in in force and start buying. This is important. In
15:12
Speaker 1: other words, even if you don't necessarily believe that there's
15:15
Speaker 1: going to be a full blown escalation, it isn't worth
15:18
Speaker 1: it to you. It sounds like, if I'm interpreting this
15:20
Speaker 1: right and correct me if I'm wrong, to step in here,
15:23
Speaker 1: because that possibility is potentially highly damaging and could change
15:28
Speaker 1: your view. Yeah, so I think for now you're getting
15:30
Speaker 1: paid to weight right. I don't think that there's a
15:32
Speaker 1: necessarily a need to be stepping in right here, right
15:35
Speaker 1: now and buying stocks. That said, on the margin, we're
15:38
Speaker 1: nibbling when we see real pockets of weakness in specific
15:41
Speaker 1: sectors or in specific you know, sort of areas of
15:44
Speaker 1: the market that we like. We actually think that given
15:47
Speaker 1: the declines, valuations look attractive. But you're also having a
15:51
Speaker 1: higher risk premium priced into stocks. So the counterbalance of
15:54
Speaker 1: that right now means we're standing on the sidelines with
15:57
Speaker 1: some dry powder, getting ready to buy more some of
16:00
Speaker 1: the changes we have made of late. We are buying
16:03
Speaker 1: a little bit of a e M because we think
16:05
Speaker 1: that e M has been hit but actually has been
16:07
Speaker 1: performing pretty well as actually held in there, and we
16:10
Speaker 1: think that the earnings trajectory and the structural underweight within
16:12
Speaker 1: emerging markets still supports and overweight to e M, so
16:16
Speaker 1: we're buying there, but we're also on the other side
16:19
Speaker 1: of that doing some currency trades like buying the en
16:22
Speaker 1: um to support and to support sort of our our
16:25
Speaker 1: risk off positions, and also being a little bit longer
16:28
Speaker 1: US treasury yields, so buying a little bit of equities,
16:32
Speaker 1: but also counter balancing that with a little bit more
16:35
Speaker 1: defensive positioning in our FX and our rape books. I
16:38
Speaker 1: want to just continue on what you talked about having
16:40
Speaker 1: to do with currencies and get your thoughts on the dollar.
16:42
Speaker 1: Do you think that we're going to see increased dollar
16:44
Speaker 1: weakness throughout the duration of this year. Absolutely. Our view
16:48
Speaker 1: is that the dollar will weakend versus the euro to
16:50
Speaker 1: about one thirty by the end of the year. We
16:53
Speaker 1: expect that versus the end we expect a dollar end
16:56
Speaker 1: to end the year around a hundred. So throughout the
16:59
Speaker 1: duration you know, this year, we are expecting that the
17:01
Speaker 1: dollar will continue to weaken. Most of that is based
17:04
Speaker 1: on the fact that we think that the FED is
17:06
Speaker 1: further ahead in terms of the rate trajectory path than
17:09
Speaker 1: either the E C B or the B O J.
17:12
Speaker 1: And so we think as we continue throughout the duration
17:14
Speaker 1: of the year and we start to see interest rate
17:16
Speaker 1: differentials converge, that will drive the dollar weaker versus our
17:20
Speaker 1: d d M counterparts. However, versus emerging markets. We think
17:25
Speaker 1: that the emerging markets are again structurally underweight, and so
17:28
Speaker 1: we think that E M will also outperform the dollar.
17:31
Speaker 1: In the near term. We are running fairly neutral in
17:34
Speaker 1: terms of our overall dollar exposure, but we do expect
17:37
Speaker 1: that as we move into the second half of the year,
17:40
Speaker 1: we will start putting on fairly significant dollar underweights. Again, UM,
17:44
Speaker 1: I want to I want to just pick up on
17:45
Speaker 1: one thing that you said, where you were saying, you know,
17:48
Speaker 1: perhaps for we're taking a weight and see approach, but
17:50
Speaker 1: nibbling around the edges and sectors that we like. What
17:54
Speaker 1: sectors are those? And I'm thinking is that tech? Are
17:57
Speaker 1: you out there buying Facebook when face fit goes down?
17:59
Speaker 1: So we leg tech as a sector right now. We
18:02
Speaker 1: do think that the earnings fundamental picture for tech is
18:05
Speaker 1: still very strongly And are you gonna be watching Mark
18:09
Speaker 1: Zuckerberg next week? Absolutely. But but but I also think
18:13
Speaker 1: you know, what's interesting about this is that you actually
18:16
Speaker 1: may see a comparative advantage for the larger tech the
18:20
Speaker 1: larger cap tech companies who are able to appropriately size
18:24
Speaker 1: their their staff in order to potentially deal with higher regulation.
18:28
Speaker 1: So if you think about small cap tech, they may
18:30
Speaker 1: not have the resources to appropriately put the governance and
18:34
Speaker 1: the compliance structures in place, similar to what we saw
18:37
Speaker 1: with the banking sector several years ago UM. And so
18:40
Speaker 1: going forward, actually, these big tech companies actually have the
18:44
Speaker 1: capabilities to potentially, you know, sort of adapt themselves in
18:49
Speaker 1: order to deal with the more compliance or regulatory heavy
18:52
Speaker 1: industry to come bigger. If you're if you're adding to
18:55
Speaker 1: let's say, emerging market positions, if you are adding whatever
19:00
Speaker 1: valuation you feel appropriate to technology holdings, what are you
19:04
Speaker 1: selling or what are you diminishing in the asset allocation
19:08
Speaker 1: model in order to bring up those portions of the portfolio. Right, So,
19:12
Speaker 1: overall we've decreased our equity weight somewhat, and that that's
19:16
Speaker 1: really broad sector equity weight. So if you think of
19:18
Speaker 1: just sort of our broad market beta to the SMP
19:21
Speaker 1: five hundred UM, we don't as an asset management firm
19:25
Speaker 1: we and and in the multi asset space we predominantly
19:29
Speaker 1: by e T F s or futures or sectors. We
19:32
Speaker 1: don't buy individual companies, um, So that's that we're selling
19:36
Speaker 1: down some of our SMP weight. We've also started to
19:39
Speaker 1: sell down some of our European equity overweight, which we
19:42
Speaker 1: had been running overweight for the last six months. That
19:44
Speaker 1: hasn't performed as we would have expected if you started
19:47
Speaker 1: to see some of the economic data rolling over. So
19:49
Speaker 1: we've lightened our risk a little bit there. And then
19:51
Speaker 1: one of the most significant changes is we've also started
19:54
Speaker 1: to sell down some of our Japanese equity overweight as well.
19:59
Speaker 1: It's interesting, especially since you're going into the end. One
20:02
Speaker 1: thing that we've heard from a lot of investors is
20:05
Speaker 1: that they've been increasing their allocation to treasuries, and you
20:08
Speaker 1: said that you were as well, although not necessarily on
20:10
Speaker 1: the long end, but on the short end of the curve. Basically,
20:13
Speaker 1: now that you're actually getting yield onto your treasuries, it's
20:16
Speaker 1: a great time, do you agree, I mean, is that
20:18
Speaker 1: sort of a great holding spot. So for for us,
20:21
Speaker 1: we actually think the longer end for asset managers as
20:24
Speaker 1: a better holding spot. And that's because a you get
20:27
Speaker 1: incremental yield, but also when you look at the stock
20:29
Speaker 1: bond correlation, it's the ten year yield oft historically has
20:34
Speaker 1: offered a very good counterbalance to the equity, you know,
20:38
Speaker 1: risk that you're holding in your portfolio. So as a
20:41
Speaker 1: diversifier of risk over the long to medium term, the
20:44
Speaker 1: tenure bond actually in portfolios works very well to diversify
20:48
Speaker 1: out some of the equity risk. And so typically you
20:52
Speaker 1: see that as a is a minimizes the overall portfolio
20:57
Speaker 1: risk in our asset allocation models pretty significantly. Even though
21:00
Speaker 1: you've seen that that stock bond correlation start to move
21:04
Speaker 1: less negative, it's still in negative territory and it still
21:08
Speaker 1: is I think a very appropriate asset for diversified portfolio holdings.
21:13
Speaker 1: Just quickly as an something that's got a lot of
21:16
Speaker 1: experience in the world of hedge funds, I'm sure you
21:18
Speaker 1: noted the Pershing Square capital and the redemptions. There any
21:22
Speaker 1: thoughts on what you can see for hedge funds this
21:24
Speaker 1: uh this year, So I think for so what we've
21:28
Speaker 1: actually started to see is active management as a factor
21:31
Speaker 1: has started to do better. Um, we've been in you know,
21:34
Speaker 1: sort of four to five years where active management has
21:37
Speaker 1: greatly underperformed passive management. As a result of that, you've
21:40
Speaker 1: seen hedge funds and active managers suffer pretty significantly. I
21:44
Speaker 1: think what you're starting to see now is that active
21:47
Speaker 1: managers with the right business model are now starting to
21:49
Speaker 1: do quite well, and you saw them actually outperform in
21:52
Speaker 1: the most recent period of volatility. Historically, during periods of
21:56
Speaker 1: higher volatility, active management outperforms. So we like active management here.
22:01
Speaker 1: Thanks very much for being with us. Aaron Brown is
22:03
Speaker 1: the head of asset Allocation for u Bsset Management, helping
22:07
Speaker 1: to manage within seven hundred and seventy billion dollars of
22:10
Speaker 1: customer assets. Since George Korean became the president chief executive
22:29
Speaker 1: officer of net App in mid two thousand and fifteen,
22:33
Speaker 1: this data storage company's stock has gained more than a
22:37
Speaker 1: hundred and sixteen per cent. George Korean joins us now
22:42
Speaker 1: along with our own Non sinof Sven, who is a
22:45
Speaker 1: senior semiconductor and hardware analyst for Bloomberg Intelligence. George, I
22:49
Speaker 1: want to just start with you and ask, you know,
22:52
Speaker 1: can you give us just a short overview of what's
22:55
Speaker 1: happened at the company, what the company is, and how
22:58
Speaker 1: it's transformed since you took office. We are a company
23:02
Speaker 1: that enables customers to use data for business advantage. Increasingly,
23:09
Speaker 1: trends like the hybrid cloud or artificial intelligence and machine
23:13
Speaker 1: learning depend on sophisticated data management capabilities to allow businesses
23:19
Speaker 1: to operate efficiently and productively in service of their customers,
23:23
Speaker 1: and net app is the data authority for these trends.
23:27
Speaker 1: We have superior technology, attract record of working with the
23:31
Speaker 1: world's leading institutions, as well as increasingly endorsed by the
23:36
Speaker 1: biggest hyper scala cloud providers. So Ananata Bus and I
23:39
Speaker 1: want to just bring you in here. Can you give
23:41
Speaker 1: us sort of an overview of where this data storage
23:45
Speaker 1: industry is right now? Where are something like what's the
23:47
Speaker 1: biggest challenge right now for it? Great? Thanks, So, one
23:50
Speaker 1: of the biggest trends in data storage overall, if you
23:53
Speaker 1: look at network storage systems, that market is shrinking. But
23:57
Speaker 1: one of the things that NetApp has done and transformed
24:00
Speaker 1: itself is it is the only company in our minds
24:03
Speaker 1: that has become relevant to the public cloud model. They're
24:05
Speaker 1: transforming themselves from a legacy network storage provider to a
24:10
Speaker 1: company that is cloud biased, increasingly software based, and increasingly
24:15
Speaker 1: new technology based away from spinning disks to more all
24:19
Speaker 1: flash arrays. So if you put all of those things together,
24:22
Speaker 1: this is a company that is pivoted itself pretty aggressively
24:27
Speaker 1: successfully over the past three years. And and I have
24:33
Speaker 1: to give credit or creditors due George is responsible for
24:36
Speaker 1: a substantial portion of that. George, maybe just delve a
24:39
Speaker 1: little bit into the actual technology something called fabric attached
24:44
Speaker 1: storage as well as all flash storage, and maybe just
24:48
Speaker 1: explain it and offer it as a story so that
24:51
Speaker 1: people understand when they are using the data either that
24:55
Speaker 1: their company is able to create internally or that they
24:58
Speaker 1: received from their customer base. M companies want to aggregate
25:03
Speaker 1: large amounts of data to understand their customers better, to
25:07
Speaker 1: understand their own business performance better, and to do that
25:11
Speaker 1: they connect different computing systems to common network connected storage.
25:18
Speaker 1: Those network connected storage systems were historically within the company's
25:23
Speaker 1: data center. What customers want to do now increasingly is
25:26
Speaker 1: to use storage that's available in the public cloud. And
25:31
Speaker 1: what we uniquely in the industry do is to be
25:34
Speaker 1: able to make all of those locations where people want
25:38
Speaker 1: to use data seamlessly integrated. We call that idea data fabric,
25:44
Speaker 1: and it's growing very quickly as a percentage of our business.
25:49
Speaker 1: You know. One of the things that's also impressive is
25:51
Speaker 1: the fact that this is a company that is very
25:54
Speaker 1: differentiated versus legacy I T providers such as Dell, EMC
25:58
Speaker 1: or HP Enterprise. Perhaps UM George, you could you could
26:03
Speaker 1: sort of honing on sort of the differences. Why is
26:07
Speaker 1: net app different? I think one of the unique things
26:11
Speaker 1: that we are focused on is being the world's best
26:14
Speaker 1: at the problem of data management, which is not only
26:17
Speaker 1: increasingly business critical but also more complex. So we can
26:23
Speaker 1: partner effectively with the cloud providers, we can partner with
26:27
Speaker 1: software companies, we can partner with chip manufacturers to build
26:32
Speaker 1: the best solutions for our customers. And we are entirely
26:36
Speaker 1: focused on that problem. And that's why, as a percentage
26:40
Speaker 1: of our business, the new technologies, which we call strategic solutions,
26:45
Speaker 1: are now seventy of net product revenue and are growing
26:49
Speaker 1: twent year on year. It represents the power of our
26:53
Speaker 1: new technology portfolio. How concerned are you about the protection
26:57
Speaker 1: of data against breaches or hacks or inappropriate usage? Considering
27:03
Speaker 1: how much focused there is on that These days, it's
27:06
Speaker 1: an absolutely important challenge that we help our customers deal with.
27:11
Speaker 1: Data is the lifeblood of a digital organization and being
27:16
Speaker 1: a steward of that is something that our customers stake
27:19
Speaker 1: as a core part of their mission. We provide them
27:22
Speaker 1: with tools and technology that enables them to accomplish their mission.
27:27
Speaker 1: What's your biggest fear when it comes to data security?
27:30
Speaker 1: I think it's malicious insiders that have access to data
27:37
Speaker 1: to support a business's mission now becoming opposed to that mission. Right,
27:43
Speaker 1: So it's very very hard for companies to be able
27:46
Speaker 1: to protect their resources from internal attack, and those internal
27:51
Speaker 1: attacks now take on state sponsored agents, for example. And
27:57
Speaker 1: so we continue to work with the industry to build
28:00
Speaker 1: more and more capabilities to not only provide customers with
28:04
Speaker 1: ideas of who is accessing the data, but when and
28:08
Speaker 1: where they are accessing it from. They had their handless
28:12
Speaker 1: day yesterday and they sent a very upbeat message both
28:15
Speaker 1: in terms of top line and bottom line growth. So
28:18
Speaker 1: in this era, from a from a technology legacy technology
28:21
Speaker 1: hardware perspective, where trends are generally deficionary, this is a
28:25
Speaker 1: company that is going to grow conservatively at the mid
28:28
Speaker 1: single digit on the top line and earnings growth the
28:30
Speaker 1: word about so I thought there was a great upbeat
28:34
Speaker 1: message that that net app sent on its handless stay.
28:40
Speaker 1: Thank you. We feel bullish about our prospects. Yesterday we
28:44
Speaker 1: talked about growth top line growth in the mid single digits,
28:48
Speaker 1: which represents both share gain in our existing markets at
28:52
Speaker 1: the expense of legacy competitors, as well as the addition
28:55
Speaker 1: of new markets like the cloud. It reflects the discipline
29:00
Speaker 1: our operating model, where we are raising our guidance for
29:03
Speaker 1: operating margin from where it is today to reflecting an
29:09
Speaker 1: increased focus on the best markets and an increasing contribution
29:13
Speaker 1: from software or our portfolio, and earnings leverage by big UH,
29:19
Speaker 1: commitment to capital returns through doubling our dividend and a
29:23
Speaker 1: new authorization for four billion dollars in buy back on
29:27
Speaker 1: a trade of Austin as our senior semiconductor hardware analyst
29:31
Speaker 1: from Bloomberg Intelligence, I keep hearing about how storage is
29:34
Speaker 1: a commodity. How does something like net app uh evade
29:40
Speaker 1: the commodity trap? Is it through their software, through the
29:44
Speaker 1: use of on tap? What makes it happen? You answered
29:47
Speaker 1: the question, your storage is the commodity? Absolutely So what
29:50
Speaker 1: value add can you provide on top of that storage
29:53
Speaker 1: system is what makes it differentiated, what makes it key. Right,
29:57
Speaker 1: anybody can sell your disk, anybody can sell you sew
30:00
Speaker 1: this data race. But the value and comes from the software.
30:04
Speaker 1: And again it's it needs to be consistent with its
30:07
Speaker 1: storage as in house or in a public cloud, or
30:10
Speaker 1: somewhere in between, a composite of all of those. The
30:13
Speaker 1: software is what drives the architecture. All right, well done,
30:16
Speaker 1: Thanks very much a gentleman for coming in on a
30:18
Speaker 1: train of us and as our senior semiconductor and hardware
30:21
Speaker 1: analyst for Bloomberg Intelligence, and our thanks also to George Curran.
30:25
Speaker 1: He is the president and the chief executive of NetApp.
30:29
Speaker 1: Coming up on Bloomberg Markets and we're gonna be talking
30:33
Speaker 1: about municipal bonds. We've got Joe Maisak, editor for the
30:36
Speaker 1: Municipal bond brief for Bloomberg Briefs. I'm pim Fox, my
30:41
Speaker 1: co host Lisa Abramwitz. This is Bloomberg. Thanks for listening
30:48
Speaker 1: to the Bloomberg P and L podcast. You can subscribe
30:51
Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
30:54
Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
30:58
Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
31:02
Speaker 1: one before the podcast. You can always catch us worldwide
31:05
Speaker 1: on Bloomberg Radio