Bloomberg Surveillance-Peter Tchir, Academy Securities Head of Macro Strategy
-Evan Roth Smith, Slingshot Strategies Founding Partner & Blueprint Lead Pollster
-Jitania Kandhari, Morgan Stanley Investment Management Deputy CIO of the Solutions and Multi-Asset Group
Peter Tchir of Academy Securities says there 'is room for further downside' after stocks clawed back gains for the first time in a week. Evan Roth Smith of Slingshot Strategies and Blueprint previews tonight's presidential debate. Jitania Kandhari of Morgan Stanley says the 'pace and path of inflation is going to get a little more difficult' going forward.
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Peter Cheer of Academy saying there is still risk ahead, writing quote, I'm looking to take out the August lows. I really think there has been a major disconnect between people believing that we had capitulation versus having seen any actual capitulation. Pete joins us now for more pink and monitor. Taking out the August lows seems absolutely terrible. And then I look at the August lows on August fifth, of about fifty one hundred, about eight percent south of right now, it doesn't sound so bad. What was it about August fifth that you wouldn't describe as capitulation?
You know.
I think a lot of people looked at the VIC hit sixty five at eight thirty in the morning. It was a calculation, right, It's no one actually traded Vic's futures much above forty. So I think people really took comfort, Oh we had this VIC hit sixty five, everything calmed down. There was never really panic in the futures market. There was never panic during the actual trading hours of the US market. So I think people started reloading the boat and saying, Oh, we're good. We've had this wash out trade, we had the capituation. I don't think we've got that. And as we start hearing this, the Nasdaq one hundred is already back close to those August lows. I think we pushed through this. We've got another maybe ten percent downside. I don't think we get back to the March lows, but I think there is room for further downside.
You suggest there was no panic, I would suggest in Japan there was panic. The biggest one day moved since eighty seven. At one point that morning, Dolly Enna dropped down to about one forty one seven set. That was a three percent move. We suggesting for the global picture, that was the tremor and not the earthquake correct.
I think really it's the US market that matters, and the US we watched what happened in Tokyo overnight. We got that little bit of panic in the morning, futures are down, but it actually opened fairly stable, started turning around by the end of the day. Then next day we rallied, went probably further than I think we should have, but that was kind of obvious. But that everyone just feels like, Oh, we've washed out all the bad longs, this is all good. We can really rebuild from there. And I don't think we had that sort of a wash out trade, and I don't think we can rally much further until we get that wash out trade.
What's the catalyst for that, for that ten percent downside and for that wash out of those lungs.
You know, I think as usual, part of it's just going to be positioning. People have got them positions very long. People have been reloading in the all sorts of ball selling strategies.
You know.
The one thing I keep watching is ENVDL, which is a two times levered Nvidia ETF. I don't understand why we have leverage single stock ETFs to make no sense to me, there's a huge drag on performance just the way they're set up, and yet that keeps getting inflows, and to me, until we see something kind of shake the faith of that trading crowd, that's when I think we kind of see the bottom and it's not getting the inflows now, and we're having a lot more questions about AI. I think that's going to be the catalyst, Like is the promise got ahead of itself?
So this is going to be led by big tech? From what you're saying that you think that this is going to be an ongoing kind of deterioration from the beta trade that we saw earlier. I'm just wondering what the economic backdrop is for this, because some people might say overly bullish, overly complacent. You're saying the Skuy's falling and a recession is imminent.
Is that the case?
No, I think we're kind of I think the one thing we've now done is actually priced out. The soft landing is guaranteed, right, so now I think there's at least some possibility of a harder landing. So I've been looking for a bumpy landing. I think you're going to see bits and pieces of data showing you know, positives negatives. It's going to be by industry, it's going to be you know, regional. This to me is really again just about valuations. You know, when I started on Wall Street, we first training day, they talked about options. They said, you know, if you buy an option, it gives you the right to sell high, right to buy low. You get to trade the gam and like, what's everyone want to do? And like we all raise our hand buy options. They're like, no, it depends on the price, right, depending on the price you want to sell those options because you're getting paid more than that. So I think that's where we've hit on a lot of these stocks. We've moved beyond what's rational in terms of what they can generate. And it's disappointing and sadly we talk about markets and these broad markets, but fifty percent of the indices are really just a handful of companies. So it really does matter what these tend to twenty companies do.
Where's this concern about the election and politics play into your bumpy landing?
You know, I'm kind of really concerned, confused, what are we even going to see tonight? Like at this point. I haven't bothered spending any time really trying to figure out what either party's policies are going to be, because I don't think we've had any sort of definition. Where I've been working is what I think is going to stay the same, and that is really going to be no matter who wins. This friction with China, this tech battle is going to continue. We are going to see more and more protectionism around AI, the semiconductor business. I think it goes back to one thing you were talking about earlier. Europe. Europe is not going to be good for AI. Europe's not going to be a good investment vehicle because it's all about constricting and constraint and rules and regulations. So I don't think that's going to be a hotbed of this. I think ultimately the US is going to do well, but we are going to see friction with China on that, and I think whoever wins is going to have to rebuild Europe, the US's reputation globally. Where do we stand with our enemies and more importantly, where do we stand with our allies? Do we have ten twenty year thirty year commitments or do we live election cycle through election cycle. So I don't think anything that is going to come out tonight on that, but those are things I'm going to start looking for as we near the election.
A lot of people's base cases is gridlock in Washington. But some of the issues that Trump talks about, like terror, spent a lot of time in this program talking about that he could do unilaterally on day one so have a massive impact on what's going on in China. Do you think China is basically waiting to find out what happens with the election because their economy is suffering before they really have set policy moves.
I think everyone's on hold a little bit. They want to see how this plays out. I think everyone has a decent understanding of what Trump does or doesn't do. He says a lot and then he tends to back down. We're not sure what Kama is going to do. I think people want to see what's going to be like and will she be easier to negotiate with right Will people prefer to negotiate with her or will they prefer to stick to Trump? So right now, I'm kind of discounting everything both sides say, and that is probably I think you One thing is we are kind of assuming split tickets. If there's something that comes out that one side is really going to, you know, win completely, then I think that changes the narrative for Wall Street. Then we have to pay a lot closer attention to the risks.
Let's just park the politics just for a moment, just to wrap this up. When I walk away from listening to this conversation, Lisa correctly identified that you see tech and the AI trade, it's the biggest risk a fighting hat to demonstrate whether this return on investment is going to come from. Was the Apple and Vanu in the beginning of that yesterday do you think it was?
You know, it did not seem to give that excitement. But you've seen some of the earnings come out. Oracle had great earnings last night. They're up, but yet the Nasdaq one hundreds down a little Futures are down a little bit this morning. So I think it's taking more and more to get that story. The one positive thing I'll say that I keep an eye on is Walmart did come out and say that AI really helped them with their quarter and then they're planning. So I need to see more of that to believe in right now, you know, what I'm seeing is a lot more people I think we've been struggling through using these lams or generative AI and I'll keep coming back like, oh, is it there yet? And since the cost rose so quickly with the cost of chips, the cost of getting data centers, electricity, that I think the risk reward or the cost benefits not there right now. And I think that's what we'll see some slowing down on.
Peter Cheer looking to take out the August Low's Peter Cheer Acountaby Securities paid to tank you. Evan ross Smith of Slinkstart Strategies, writing Harris heads into Tuesday's debates, still searching for a durable advantage in the states that will decide the election, but with important openings she can press. Evan joined us now for more. Evan, good morning, sir.
Good morning.
Let's talk about the very specific, highly specific pre debate polling that you've been conducting. Can you just walk us through it to begin, Well.
The selection is increasingly becoming focused on the handful of voters really only about five hundred thousand voters who are going to decide the outcome. Right, These are swing voters, largely independent in six states right, swing states in the Ross Belt and the Sun Belt that we all know about, and this debate is largely about them. What do they want to hear, what do they need to hear, and particularly what does Kamala Harris need to tell them to get them over the edge and make this more than just a knife sedge election where she's clawed back out of the hole that Joe Biden was in and reached basically parody with Donald Trump, where this election could go either way, as just about any analyst or polster would tell you. And really, what these swing voters in these swing states want to hear, at least in our polling that that we just released this week, is you know, they want to hear her continue to gain ground on the economy to press her advantage on prices. Right, Donald Trump still has a very narrow advantage, a two point advantage and overall in these swing states on inflation and jobs, but with independence in these swing states, Harris has a four point advantage. These are very close to margin of error, but it means these critical voters are looking to hear on the economy and here on prices specifically, and she has to mitigate concerns on immigration, where she still down in these swing states to Donald Trump.
And then when you look at the New York Times Santa Paul for the weekend, more than sixty percent of likely voters. So the next present represent a major change from Biden. Do you see that in this polling group that you're going after in the swing states?
So it's interesting we pulled this with independent voters in swing states, who represents change, who represents the right kind of change? And voters in these swing states independent voters by ten points say that Kamala Harris is a breath of fresh air, and she is. It's undeniable. She has a breath of fresh air in this race, but by only about seven points to voters say that she's the right kind of change. She's still more or less more or less tied with Donald Trump on being a change candidate. And that's because she hasn't yet broken in a meaningful way rhetorical or policy wise with the administration. She isn't a change candidate beyond the literal change of who the candidate is. And now that slight advantage on the right kind of change with independent swing state voters is very good, but she needs to do more. She can do more.
Does she need to completely break with Biden in your polling to win over those voters.
I don't know that it's a complete break with Biden.
She doesn't need to.
He's the sitting present, he's her sitting president, her running mate in twenty twenty. You know, there is some merit to the idea that she could draw a greater distance, particularly on immigration. There's very little downside to drawing distance. But on policy, most of the Biden policy agenda, when it's not tied to Joe Biden, is very popular when you pull it. So how do you break with the present. You can't break with him on policy. You have to break with him in more subtle rhetorical ways, and we'll see what she does. We'll see how she manages that. And you also want to continue to be able to take credit for things that the administration does that is very popular, like Medicare and negotiation and prescription drug prices, which is enormously popular, including in these swing states. With these swing.
Voters, how engaged are some of the independents and perspective voters, those five hundred thousand people that are going to determine the election I mean, awmuch. Are they watching every iteration looking for policy, trying to understand the two candidates.
Well, that's really what's critical tonight, because those voters are looking to learn a lot of people who follow politics closely, journalists, practitioners, the kind of people who get up at six in the morning to watch the news and get a little edge on everyone else, we know a lot about what's going to come out of their mouths. These swing voters who haven't made up their mind, they're watching to learn. They're not necessarily watching for the reparte the zingers. And that's why I discount the mics being on or off or anything like that. The voters who will determine this selection really really care about what these candidates are saying. They're looking for substance, they're looking to be educated. They have open questions largely about Kamala Harris, very much less so about Donald Trump, and they want answers to those questions, particularly on the economy, particularly on her immigration policy and how she's going to be different than the status quo. And an important mission for Harris is also to raise the salience of abortion and reproductive rights in this selection.
That's what I was going to say, how do you sort of pair those two ideas? Is social versus the economic? Especially to a time where frankly, there isn't that much daylight when it comes to certain policies, particularly with China versus a US and other international issues between Trump and Harris.
Well in foreign policy, you know, Harris is very fortunate in that the part of the Biden administration agenda and policy said that she has tied the least to is foreign policy, so she can kind of do it and say whatever she wants and feels she needs to do and is politically advantageous. It's also true that the vice president has had very little to do with American foreign policy over the last four years, you know, sort of Dick Cheney. It's hard to find a vice president who has ivan Can we pick up on who she is too? Independence?
At least? Is this the person that ran back in twenty nineteen, twenty twenty? Is she progressive? In moderates closing here in twenty twenty four, how do they see her?
She's not. I mean when she ran in twenty nine teen, it was in a Democratic primary where she didn't even make it die ulis she never saw the voters in twenty twenty, she's a vice president on a presidential ticket. And also it should be noted in a year where campaigning was different than any other presidential election in our lifetime, right, she wasn't barnstorming. The swing state's media consumption was very different during COVID, and so she is very much doing her first introduction to voters. We're now several months, a couple months into that introduction, so things are starting to firm up. But this is you know, we did this test on what policies, what campaign promises that Harris has made. Do you believe she will try and succeed on try and fail and not even try? Right? So these are all These are all policies that she is that the campaign has promised to pursue. And on some things like the child tax credit, voters really believe she will try and get it done. On other things like deficit reduction, she's underwater by a couple points.
Right, She's not the only one.
She's not the only one. She's not the only one. I mean, where's the candidate who hasn't promised to some form of deficit reduction? But so there are still elements of her record and the border, by the way, her promises to following up, you know, trying to get the bipartisan border deal done. Voters more or less buy that from her surging resources to the border, which is a popular idea that her campaign has promised to do, you know, more border agents. Voters aren't quite sure that she means that promise, so there's reassuring to do. It's less about new promises. It's more about affirming that the things she has promised voters are real and something she will try.
As something you imagine the former president will be pushing on pretty hard. A little bit. Lengster on the Savenik.
I think they're all just going to be watching the fifty eight billion dollar action at one pm.
Is that right? Yeah, because the very focused exit on def sent reduction. It's great again, Evan, Thank you sir. It's going to see. Let's do it again soon, Evan rod Smith. Then the limits of this bond market rally. We've had a big move last week of almost thirty basis points lower on a two year yield. The tended year dropped by close to twenty basis points had a single week. We see a big move lower through the summer as well. Are we've reaching the limits of this bond market rally?
I think so. I think we maintain models and we think it's overshot on the downside pretty much. If you have a FED funds rate of three and a half percent, which is which I think is close to the natural neutral rate on the nominal side and typically post cutting cycles, if you have the youth cur of pricing in another fifty basis points on the ten or four percent, anything lower than that seems to be like overdone.
You mentioned three fifty. Do you think we're actually quite well priced already for two hundred basis points with.
The basin I think on the last couple of years, the markets pricing any kind of move in the market in an extreme way. So we are really well priced on that, I think, and what I think is important. On the inflation side, a lot of our work is suggesting that the next few months, INFATIONI the pace and path of inflation is going to get a little more difficult in terms of the disinflationary stent trend. So it may just stabilize, so you may not see consistent print prints down. What's going to happen beginning of next year the two thousand and four beginning had a very high base effect because of high infationion. So beginning of next year in Fatian is actually going to be better and trend down more.
So.
I think that's the path I'm working with. And from that perspective, you know, Treasury seem to have overdone.
They might have overdone, but that doesn't mean not to earn them the same kind of way. You have an interesting point about sixty forty that we're going to see kind of a reversion back to that kind of balance in terms of opposite reaction to stocks. How much can you lean into that story, given the fact that you have already seen this huge rally, does it still stand?
It still stands because the most important reason the sixty to forty did so terribly in twenty twenty three, when this combination was down seventeen percent, was because stocks and bonds correlation got positive. And history suggests that whenever inflation is above to and azo half percent, stocks and bonds this is for the last seventy five years, stocks and bonds correlation gets positive, which is taking away the diversification benefits of bonds. Now, with infasion coming down below that level, that correlation will resert its negative relationship, And I think in an overall asset allocation portfolio, that's a more structural, long term portfolio that gives you the benefit of having that hedge with the duration in case the outcome on the economy is worse than the consensus soft landing.
How hard of a cell is that right now? Given how scarred people were over the past few years and some of the losses that you saw on bond portfolios, and some of the questions people have around the deficit, around some of these other sort of structurally higher inflation types of regimes that some people are talking about.
Yeah, you know, I think the question on the sixty forty was a bigger question in twenty twenty four because twenty twenty three was such a worse worst outcome for that combination. I think at this point there is more recognition that that may be a good allocation. But what people are doing and what act owners are looking to do is you know, take you know, think about what in that sixty forty, right whether if it's forty in US treasuries, Oh, let's look at emerging market debt if ed if the dollar is weak and interest rates are coming down, then the local bonds and the emerging market world will do well. So what within that forty is an interesting question? And what within that sixty interst rate differentials, growth differentials that have worked in favor of the US all along now seem to be peaking in favor of the U in favor of the non US world because pricing in the US interest rates is much more aggressive than many other markets in terms of rate cards. So how do we look at the x US universe even in the equity space is another important consideration within that broader alley.
So quicker deeper into that idea, what do you like within the sixties in the forty?
Yeah, So, I mean, I'll start with the US. You know, clearly we've liked the equal Weighted Index because we think concentrations extreme peak multiples, peak earnings, and some of these technology stocks within that. Within US, we do like pockets of industrials, financials with the eel curve steepening. We we really like pockets of Europe because there are idiosyncratic reasons but also structured reasons. The world is industrializing. A lot of the industrial companies are in Europe trading at very cheap multiples. We like pockets of Japan that are leveraged to an appreciating yen because we think that the parts for the yen is up. We do like several emerging markets like India Southeast Asia that are also more consistent.
You're not mentioning China.
Yes, I've been a bear on China for a while. I think China has three problems. It has the excessive debt, it has a demographic headwind, and it has a deglobalization headwind. I mean, look at what it's doing, like it wanted to raise consumption, but it's ending up following the industrial policy again dumping goods in the world because that's the only engine for growth in terms of the exports side. The domestic economy is laden with unproductive debt which is slushing around the system without a cleanup act. So that continues to be something that may have some tactical runs, but not a structural story. For acid Alkin, can.
You reconcile that with your more constructive view on Europe? If you don't like China, how can we like Europe? Isn't that just a play on China?
So you know Europe? Of course, the consumer story in Europe and the brands, you know, the luxury brands that has a problem, and some of it is getting priced in pretty decently with respect to current valuations. But I think in some of the global themes today, which is whether it's defense gapics, it's industrial automation gapics, it's resilience gapics, substitution capecks, some of the European stories are linked to that, and you know, pockets of energy materials. UK has a large part of metals and materials kind of companies. So I think scattered around it's an active time for active management. You really need to kind of pull the thematic leaders from these different We've.
All heard these arguments a million times, of course, and the question I always sort of go back to is valuation gap or valuation trap? What are they doing right now that deserves the premium you think these companies demand. How are we going to attract that kind of capital back to Europe, back to the UK given how they've squandered it for most of the last few decades.
So in certain pockets of you know, Europe, the earnings infection is happening, So it's not a valuation trap when they're a catalyst to unlock that value, right, So that's what we're focusing on. And I think when you talk about valuation, you really have to think about equity valuations and currency valuations. So the dollar now is really extended. And as I said, the great differentials and the growth differentials that have favored the dollar all along in the last few years, that's now going to favor the x US universe. And work suggests that nearly a third of returns on average come from currency. So taking that nuanced currency view across international markets is another big part of Wait for that.
Just one step further. If that big dollar long there's been accumulating over the last few years, which essentially that's what it is. It's a massive dollar long at the expense of the rest of the world into dollar denominated assets. If that begins to unwind, there's a whole host of people out there, deep thinkers who think that maybe you engineer moves of like ten percent in the Chinese currency, big move site in the Euro as well. Do you think about it the same way and what kind of destruction would that cause for the US assets that that money was originally in.
Yeah, so dollar is not an emerging market currency, right, it's not that, you know, it's not a currency that that's so volatile. I think if you plot a long term dollar price, it trades between that ten to fifteen percent ban So I think there will be countertrend rallies. We probably probably you know, at a point on the tactical side where the dollar a little more weakness could get a counter trend rally on the upside. But I think the home bias in the US, with just US assets, US domiciled assets, that probably that shift, if that were to come, should lead to some assets moving away from the dollar, not something that dislocates and calls for a demise of the dollar, because it still is the reserve currency, it still has the exorbitant drivial. But I do think that dollar weaknesses have happened, like in the two thousand decade when international markets did better. I think we're getting to that point.
We used to come over here and basically chop everything in half. Do to remember that fifty percent off. You won't remember that as a brick coming to America. Used to come here and just do fifty percent off. It was two for one. Great times. It's great times. Obviously I live here now.
It was the other way around.
Yes, I was speaking to our producer Jamie about that, and Jamie was talking about the other way around, how expensive eating was in London.
It was back the dice. It was absolutely absurd. And then now that's why the US can't get enough of everything European exactly because John Seal.
Yeah, in a big way. You I live here. I'm one of you to tell you can Dowry of Morgan Stanley, it's got to see you. Thank you. This is the Bloomberg Survenants podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business Out
