Featuring:
Adam Coons, Co-Chief Investment Officer at Winthrop Capital Management
Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank
Eric Lynch, Managing Director at Scharf Investments
Louis Navellier, Founder and Chairman at Navellier & Associates
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This is the Bloomberg Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. Adam Koons is with us. He is the co chief investment officer at Winthrop Capital Management. Need joins us from Indianapolis. Adam, thanks for joining us Sunday night, your time. I'm curious as to what you were hearing last week from clients with all the volatility we saw in markets, particularly heavy selling in the Monday session last week.
Well, you know, when we have heighten volatility and kind of a more chaotic market, investors start to kind of wonder how much worse can this get? And that's always the first question that we were seeing, is, you know, is this just is.
This a buying opportunity? Is this just a short term blip? Or is there more to this?
And so I think, you know, when we're looking at it, it's it's kind of too early to tell. But one of the things that we were really focused on was volatility. Obviously, we saw the VIC spike to sixty, which is.
An incredible move.
And then if you're you know, if you're a bond trader, you're looking at the move index very similar that that also had quite a a.
You know, spike. So we're seeing volatility pick up.
It did, you know, come down considerably by the end of the week, But that shows us that, you know, investors in general are going to be quick to try to sell any kind of bad news at this point. So we've we've kind of gone in a different direction where you know, there was a time period where bad news was good news because it meant that the Fed might cut. Now we're starting it feels like we're entering that regime where bad news actually could be bad news for markets.
So what is that thinking done to your investment strategy? Were you moving things around in the equity trade last week?
We were, so we were kind of doing a couple of things.
One is, we did see it as a general buying opportunity for some.
Of the higher quality tech names.
You know, it's kind of one of those baby with the bathwater type mentality where you know, everything in tech seem to be selling off quite hard. Some names, you know, they should have been like an Intel down twenty five percent. I think that was probably a move that needed to happen because the business model there is deteriorating. But then there were other names like Alphabet and Microsoft that we felt like, you know, if things do start to roll over, those are still names that we want to be in because they are higher quality, they're low debt, you know, they're low leveraged, and they have high cash flows so they can sustain through maybe an economic downturn. And we don't think even if we do see some sort of recession or downturn, we don't think it's going to.
Be that harsh.
So those are the type of names that we were buying during that sell off. So it kind of just goes right into our overall strategy of kind of moving more defensively. So we, like I said, I did the quality factor that I pointed out just a minute ago. So lower beta, higher quality names is where we're shifting to on the equity side, and then on the fixed income side, we do still like the long duration fixed income trade where you're you know, buying law treasuries or high quality corporate buyds, so that you know, because we do think that interest rates are going to come down and probably going to come down quite quickly on the long end.
So you mentioned Alphabet and Microsoft, and I'm wondering because we'll have the earnings from Nvidia at the end of the month, I think on the twenty eighth, have you heard anything about the AI trade that that's giving you cause for concern?
We have, So, I mean you kind of heard it in some of the earnings.
Calls with big tech like Alphabet, where they are starting to cut back on their spending. Still there's still growth in spending, but the acceleration of that.
Has started to come down.
And so when you've got to stock like Navidia that's really priced to perfection where they need substantial growth really right now, you're looking at fifty percent growth rate over the next five years in order to justify the price of it right now. So I think if you started to see any pullback in spending on chipsets, it would be it could be quite harsh for a named like Navidia kind of you know, at the tail end of the earning season here, so.
We have the CPI data midweek before then PPI retail sales. So a lot to kind of consider when you're looking at the American economy. How do you feel about US inflation right now? Are you confident that it's easing to the extent that the Fed will have room maybe in September to cut at least by twenty five basis points.
You know, I actually don't.
I think getting to that two is going to be difficult and it's going to be slow, And so I think that that we're running the chance that because inflation might surprise to the upside as we kind of head into the year end and just prinently have coming up this week, I think we're going to get a lot of mixed data over the next several months, and it's going to make it difficult for the Fed. It's going to make it difficult for investors to try to, you know, project what's going to happen. And so I still stand by I think the Fed is going to be slower to act than what markets are predicting right now. If you look at the front end of the cycle where they were slow to increase interest rates, I think they're going to be slow to decrease interest rates, especially if we get any data points that show that we're still not there, and so I think you know, hitting that two percent target is going to be difficult from where we're at right now.
You mentioned the bond market a moment ago. I'm curious as to where you see opportunity right now in terms of duration, long end, short end of the curve.
Where are you Yeah, we're definitely on the long end.
I think you know.
The reality is everything that was pushing interest rates down prior to the pandemic didn't go away. Those are large demographic type issues, and because those haven't changed the natural path of interest rate, they are to the downside. So now we feel like we've really hit that peak and interest rates. We're extending in duration quite aggressively to try to lock in this yield for as long as we can, because I see it as kind of an asymmetric trade. Worst case scenario for us is that, Okay, interest rates stay where they about where they are for a while, and I'm happy to clip higher coupons, and then on the flip side, if we do see interest rates start to collapse, then obviously I'll get the price appreciation of the bonds. I think, you know, the other scenario where we see interest rates go higher, I think is a very very low probability right now.
Low probability. I'd like to know about the level of conviction in both the equity trade and in the bond market trade that you're putting on right now. Are you pretty much solidly convinced of the calls that you're making right now, or are you hedging maybe by squirreling away a little bit of cash at the moment.
So on the fixed income side, very very convicted on that long duration trade. So in our fixed income portfolios, we were holding no cash and said we are extending duration. On the equity side, holding a little bit higher cash than the normal and like I said, and also hedging that with moving more defensively. So on the equity side, absolutely kind of hedging that out a little bit.
But on the fixed income side, we're all.
In Adam, I'm curious as to whether or not you're seeing opportunities offshore. We get some data for China later in the week. I know that that market has really had some tough times. It's been going on for a while. We're well aware of that. Is there anything in Asia right now? That's attractive to you, you know.
Unfortunately, no, and it's a trade that I want to put on and it's one that I'm going to be watching and waiting for. But I think the reality is as the US economy begins to slow, so does China and the rest of Asia. It's just not immune from what's happening in the US right now. And so until China can kind of shift away from being so dependent on exports, I think you're just going to see China go the same direction as the US economy.
Adam, thank you so much. A great way to start the week with Adam Kohn's co chief investment officer at Winthrop Capital Management. He joining from Indianapolis, Indiana. Vishnu Varathan, he is head of Economics and Strategy at Misohobank. It's always a pleasure to have a chance to benefit from your perspective. Can you let me know whether we're near the end of this yen carry trade unwind or if there's a little bit more pain that we've got to deal with.
Doug, thanks for having me in such a kind introduction. My suspicion and and that's mainly because I'm a pessimist by nature.
Set.
My suspicious is we're not quite decisively out of the boats yet. I mean, we've seen some glimmers of light, and the shakedown in and of itself does clear out some of the excesses, uh and the extreme positioning, but I don't think we've quite seen the end of it. For two reasons. One is markets continue to remain fairly jumpy, but at the same time, uh, you know, in so called formal mode where they're they're they're you know, they're they're really not willing to miss out on taking risk at every opportunity, uh. The and and that sets it up for latent downside volatility from time to time. The other reason is we continue to focus a lot on the bog being a source of yen induced carry and wind, but really the biggest source of that is going to be the FED.
Uh.
And if we again lurch back into a mode where the FED would have to end up cutting a lot more and a lot sooner, that's going to kick, you know, kick off another face of yen unwind yen carry unwind inadvertently, and the boj probably could do very little to stop that, given they would probably not want to make huge, you know policy U turns one way or the other.
Do we have to be concerned at all about what's happening in the Japanese financial system? Are banks vulnerable?
I think generally the banks are in a in a fairly good position. I mean, one of the starting points for that. And of course you're going to say, you know, I'm talking.
My position here, who does it?
But okay, putting that aside, you know, imagining that I'm somewhat independent here, I think the starting position for them was it was really good to get out of negative rates because banks, Japanese banks in particular, were struggling with the negative rates and getting more steadfastly into a position where they're going to get a normal sloping yield curve that's somewhat steepening. That also ought to be good for the banks. So the banks are in a position where they can benefit from that. Slowly diminishing the crossholdings where the NIKE is also in a healthier position, means that the banks are now positioned better in a structural perspective. But it would of course be negligent to say that, you know, heightened yet and induce volatility, and the cyclical shakedown in Nicke will flow through without any impact, so that there are risks ahead. There's a need to watch that space very closely and to remain hatched. But overall, I think it's moving into a good better position than it used to be in.
So we're also talking about a lot of leverage being on whoelnd from the system as well, and that's got to be a healthy thing, I would imagine.
Maybe you disagree, No, I'm totally with you on this one, Doug. I mean, the process of unwinding is not so pretty, but often getting to a better place would require moments of unpretty if you must, uh, and and and and it does get healthier that way. But the recognition right now is there is still quite a bit of leverage in the system. There's still quite a bit of liquidity in the system.
Uh.
And the liquidity is it cuts both ways. It is a source of backstop, given that it does boy markets and valuation, but equally, given just how uh, how intense and how precarious geopolitics is at the same time of the real conflicts and and and and the US elections and what it all means for for Asia, it also exposes Asia to I think at least bouts of of seizures and shakedowns, and that's something we cannot lose sight of.
We had comments from a former board member of the bo J. We were talking about this earlier on the program, and from his view, another rate high from the BOJ is not possible this year at all. Maybe as soon as we get movement is in March of twenty twenty five. Is that the way you see things.
Well, our view has always been that the BOJ would necessarily have to move very very gradually and very cautiously. We were never very seduced by the wage increment story because that was exaggerated by exports earning boosted by the Again. We were also very cautious of the fact that you know, you know, We did say you know that again is a BOJ problem with the fat solution. If that's the case, then the FAT can easily move the needle and make the boj's tightening seem too much from here on, Given what the BOG is indicated, we continue to be open to the prospect of another calibrated hike later in the year if conditions so allow. And I think confidence doesn't cave particularly household confidences is not so great. But yes, We never thought that, you know, terminal rate was going to be significantly higher than where it is now. Fifty basis points seems comfortable for terminal rate that's met, you know, that's that's approached, that has a longer approach, not just a six month or three month approach, but at one percent rate, I think is a stretch, particularly given the uncertainty we are heading into end of the year. In twenty twenty five.
It's amazing because we just had one disappointing jobs report that kind of created the shearing. I mean, we were clearly at some level of a critical critical state here in markets globally, and it didn't take much to precipitate that. Do you worry that that central bankers broadly are not monitoring the situation well enough?
I want to be fair to the central bankers where I'm fully cognizant of them hanging on to the type one mistake that they made being too slow to move on inflation that was there and appro problem, and necessarily that also means they're getting into the type two mistake, clinging onto inflation being the boogeyman in the room when the balance of risks are shifting where they stand right now. I think the tricky part is what higher for longer ought to mean. And to the argument, so to use uh, you know, Governor Bowman's point, she said, look, inflation is still a problem, sticky, so on and so forth. We fully take that point, but you know, the bigger picture here is, but does it really warrant a five and a half percent rate at a time when job losses are are starting to seep through, even if you're not in you know, full retrenchment mode. The problem is, this is a legging beast and like a huge vessel, is very quick, hard to turn directions of of the you know, the job market, and usually it's a little too late when when we see those signs. So that's where I think the FED has signal a lot more restraint than it probably ought to leave in the system over the next six to twelve.
Months, unless they're just unwilling to say the quiet part out loud, which is that there is, well, financial conditions are pretty relaxed right now. There are easy financial conditions to be concerned about. Is that a fair statement.
That's a fistatement And in fact, I'm glad you brought that up. So the liquidity in the system, how risk is priced, where equities are All that point to really easy financial conditions. There is always a sense in monitoring three aspects of policy separately. One is the policy itself, so that's the rates, and then monetary conditions, which is where exchange rates are and the rates are, and then financial conditions, the overall thing, the overall situation in the markets. The trouble with today's market is why it's getting hard to read this because increasingly there's a greater divergence between the very core policy conditions versus the overall financial conditions, which means a lot of the reaction function comes from sudden swings in markets, and the high correlation between asset classes means that financial conditions can really turn on a dime, and that's not a healthy position to be in.
We'll leave their Vishnu. It's always a pleasure. Thank you so much for making time to chat with a vision Overarathan, head of Economics and Strategy at Misohobank, joining us from the Lion City of Singapore. Here on day break Asia. Eric Lynch is with us, Managing director of SCHARF Investments, joining from Los Coados, California. Eric thank you for being with us. You're a stone's throw from Silicon Valley. Are people a little nervous about this AI trade right now?
I think so. Obviously tech has had a wonderful run for really ever since the financial crisis ended, and you know, you had the AI Can we give us some extra legs post pandemic? So you know, to have this kind of underperformance both in July and now actually one third through August, it's been something that market has the things for a very long time.
So to what do you attribute that to?
It?
Was it the comment that we had from Sundar Pachai over at Alphabet Is it the Microsoft report that kind of creates this apprehension?
Yeah, it's a good question.
You know.
I think there's a couple of things going on, Doug. I think one is you've got, you know, a couple hundred billion dollars of some odd estimated investment in terms of Cathex and the AI kind of data center, and today now even though it's only been less than a couple of years, you've got very little revenue to show for that. But that's not such an issue. The issue is that there's not a lot of clear visibility. So if you look at the Q two earn your results, there was a very clear kind of pattern. The one stock, the one company that reported kind of lesser CAPEX and could have been reported but yet revenues kind of outperformed, was Meta. The rest of the Max seven kind of underperformed. Vias to be the business outperforming expectations as well as CAPEC still being pretty significant boilth in this quarter and go forward. So I think it's showing you that investors are kind of nervous about the AI returns. But the other issue, Doug, which is actually really huge positive, is that Q two on the earning season, we're ninety percent through. This is the first really solid year of year growth we've seen in several quarters. We're tracking for eleven percent for the SP five hundred. That's off of you zero to negatives and twenty three. And what's awesome about it is that it's broadening out recent quarters. Max seven responsible for over one hundred percent of EPs growth this quarter. It's there's a lot of things that are growing. Financial sectors on track to grow eighteen percent year every year, healthcare seventeen percent, Infotech is just barely ahead at nineteen. So this is I think why you're seeing some of the broadening out of returns because investors are realized that, hey, maybe don't have a way for the AI trade to work. There's other stuff that's available.
Maybe it's a little ironic because now on the macro level we're getting indications of economic slowing.
Yeah, that is interesting, and I'm glad you brought that up though, because if you look at kind of what happened in July, everything outperformed tech, everything up form the Max seven, whether it's financials or it was small caps and value, it's more nuanced. Right in August once we had these kind of blips with some macro data, and so what's really outperforming now are still a lot of different sectors Visa the tech Tech is down six percent at a sectral level month today, but staples are up one point seven, real estates at one point six, Utilities and healthcare also up. So I think what that's showing is investors still worried about the tech trade. They still think that their earnings are converging, but the same time they've got their eyes out on wow, what if we don't have a soft landing. Perhaps we should be looking at some of these laggards of twenty three and year to date twenty four and put some bets there.
So, speaking of putting your bets in the market right now, I'm imagining that the expectations for a lot in the way of fed accommodation here that they begin cut or it begins cutting interest rates. Uh, maybe as soon as September. Is that a part of your thesis a reason to be bullish on equities?
Yes, I think clearly, you know, any type of monetary kind of help is appreciated, right for investors. We're still sitting on these you know, historically in recent times higher rates and certainly slowing down the housing market. Certainly some lower rates would help certain areas more than others. And so yeah, that's that's that's part of it. I think the real part of it, though, and the optimism is that you're you're finally getting this broad based or earnings uptick. You know, eleven percent earnings grow for Q two just a couple of quarters ago, Doug, we're kind of sitting around three or four is pretty subs substantive. And what's nice is that you're also seeing profit margins up. You know, profit margins are tracking for twelve point two in the SMP for Q two earning season, and that's notably higher than where we were in Q one, and also, you know, much higher than where we were a year ago. And you know, kind of perhaps corely with that is you had a strong productivity improvement both in Q two as well in five of the last seven quarters. You know, we've got us productivity and are growing two point seven percent year of a year in Q two and that kind of two percent plus August something we haven't seen since kind of the post tech bubble of the knots.
So Vice President Kamala Harris is going to be in San Francisco for a fundraiser. She's leading in a number of the polls. Talk to me very quickly, Eric about regulatory risk of a Harris Walls victory. I mean, are you concerned about the way in which big tech could be impacted by such a thing.
That's a great question. Uh, yeah, clearly, there's probably more risk. But at the same time, based on you know, based on the rhetoric. Uh, at the same time, you know, both parties are kind of intriguingly and probably not great for business. Big business and public equities are kind of converging on certain points, whether it's you know, kind of anti capitalists kind of tariff rhetoric, or it's kind of anti tech rhetoric they're saying kind of the same things word we're different, or or also you know, kind of underwriting uh, exceptionally high kind of federal deficits which long term should be inflationary and crowd out private investment. So both parties are kind of subscribing to this new normal of a policy framework, which is exactly great now that the benefit of the Trump campaigns are they're kind of advocating an extension of the tax eric.
Pleasure or as always, we'll leave it there. Eric Lynch from Sharp Investments joining us here on a daybreak aship. Louis Nevalier joins us. Louis is a founder also chairman of the Navalier Associates, joining us from Florida. Louis, it is always a pleasure before we get into technology, I'm sure you have a lot to say on that front. Let's talk about the volatility last week and the underpinnings of that seem to be an unwind of the yen carried trade. I'm just going to shoot right here and ask whether you think most of this unwind is behind us now.
Yeah, it looks like about seventy five percent is Obviously, we need Japan to open up a firm like they did since Tuesday, and because you know, if Japan opens all week, we're going to gap down as well. But bonnields firmed up quite a bit last week the treasury auctions, and some of them didn't go that well. So it's just a sign that you can't get yields too low too fast because the market won't buy the bonds. So I think we found equilibrium here. A lot of the carry trade to risk has dissipated, but we're still in August. We still have air pockets and you know, most of my Wall Street friends aren't in at their offices and will not be until after Labor Day.
Air pockets. Talk to me about what you see right now in markets? Where are the risks?
Well, I think the best way to explain air pockets is August of twenty fifteen, we had one day there where some circuit breakers were hit, and what happened is some stocks can open, but the ETFs opened, but they couldn't price the ETFs because the stocks were open. So a lot of ETFs went down immediately, almost thirty five percent at the opening, stayed there for over ninety minutes. At the end of the day, prices were largely changed. So that's the risk of August. I recommend a lot of small cap stocks. Obviously we're static with a small cap or rally. But you know, when I look at my best small cap stock, something like our Powell Industries, you know, it's a bunny stock. It sits at hops, it sits at hops, and people have to realize when they go in the small cap arena that's what they're going to get. I think the liquid will be a lot better if we get in early January. Fact in November, just before Thanksgiving. We want to get all our distractions out of the way. Clearly, we want to get their election out of the way. We want to get the FED cutting rates, and then we want to, you know, have optimism for the future.
Do you think there's still too much leverage in the system. I mean putting the end carried trade aside. I mean the FED in its balance sheet, Global central banks, their balance sheets are still very very large by historical standards. Is there still too much liquidity?
No, but there is leverage. And that's a very good point you brought up. Your average financial advisor doesn't sell stocks, They sell leveraged debt, and it yields about eleven percent, And you've got these little exit windows. And because it's a very popular seller, and because the exit is restricted, I worry that if something goes bad in that arena.
Uh.
You know, this is a two trillion dollar ar industry, up from about four hundred and thirty eight a billion a decade ago. But I worry if something bad happens there, it'll be a minibox swan event and the whole market will freeze up, and then that will definitely cause the FED to cut. Because you we've become like China. We have our we have two tiers of lending in America, the banks if you have a perfect credit score, and then private credit if you're less than optimal.
Were you seeing AI right now? I mean there was a big unwind obviously as a part of that and carry trade unwind. We saw megacap tech very hard hit. I mean, how are you still positive here?
Yeah?
I'm still in the camp that eighty percent of your AI investments should be Navidian super micro Obviously super Micro missed, but they guide it higher and they started one hundred and forty three percent sales growth. Uh, there seems to be some sort of delay with the Blackwell chip from the video. Whether it was quality control or wise another matter, but the video's incredible sales have come from their previous ships, and Blackwell's only going to make it grow faster. So the video is lock and load.
Now.
You know, super Micro's only eleven times forecast at earnings, so it's very fairly priced.
We're going to get earnings from Nvidia at the end of the month, I think on the twenty eighth, after the bell, which will make the next day in the cash market very very interesting. Are you expecting a big beat here? What's your sense? And if there's disappointment, what happens.
Well, the video will be the grand finale regardless of what happens. They have an incredible history of beating I think Jensen is one of the few founders that can actually run his company. You know, most of these tech founders have to be replaced by professional management. And I have nothing but the highest respect and hope for him. But yeah, if you want regenerat of AI chips, in the videos of the Big Game.
If you mentioned super micro and video, I mean, is that the only way to play it right now?
Yeah, that's the hardware side. Obviously, you can buy Microsoft and get regetitive AI with chat GTPT. Obviously, there are a lot of low tech AI chips coming out AMDs trying to catch up.
You know.
I have a friend in Boise, Idaho that's building low tech AI chips for Samson. It's basically like a super Alexa. The chip tries to figure out who you are. It's no different than our pets condition us at home, and that's that's It's just that will he consumer electronics things that will try to learn and understand us better.
What about playing in Nvidia through TSMC? Is that advisable in your view?
You could, But you know, I like to see tm SC's plant in Arizona startup. You know, that's that's a big question mark. I mean, I suspect they're gonna have to move a whole bunch of Taiwanese to Arizona to get it going. You know, It's funny. I have a lot of friends at the Tesla plant and Reno and they work on the Panasonic side of the battery side, and there's plenty of Japanese from Panasonic and Reno too. In fact, the kids are pretty good at baseball, so I suspect as soon as Taiwan wants to get some engineers to move to Arizona, I think it will run a lot better.
Interesting, Louis, it's always a pleasure. Thanks for making time to chat with us, Louis Nevali or founder chairman Nevalier Associates, joining from Florida. This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.