How Global Political Crises are Playing Out in Markets

Published Dec 4, 2024, 4:00 PM

Watch Tom and Paul LIVE every day on YouTube: http://bit.ly/3vTiACF.
Bloomberg Surveillance hosted by Tom Keene & Paul SweeneyDecember 4th, 2024
Featuring:

  • Wei Li, Global Chief Investment Strategist at BlackRock, discusses the global economic implications of political unrest in France and South Korea, and also discusses BlackRock's 2025 outlook
  • George Saravelos, Global co-Head of FX Research at Deutsche Bank, discusses the latest FX moves in French and South Korean currencies, and can also touch on Trump tariffs
  • Jay Bowen, President & CIO at Bowen, Hanes, on managing Tampa pension plans and outlook for US markets in a second Trump term
  • Lisa Mateo on newspapers

Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple car Player, Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.

Joining us now for an extended conversation like we should have for three hours is way Lee of black Rock. I don't know where to begin, so Wayley, let's start. Since we're on a Pacific rim with Ross Matheson. You were acclaimed in your China from mathematic skills as a kid. You're a student of the Pacific Rim. I don't buy the idea of doom and gloom on China. There's a resiliency there. Do you detect a political an American phrase, come to Jesus where they're going to be able to assert five percent growth?

As a mathematician, one number that jumped out to me just yesterday is ten year yields in China just all time low below two percent. That is really remarkable. That speaks to markets not feeling confident about China exiting deflationary environment. That speaks to markets being quite worried about jeffentification of China. So structurally there are concerns around Chinese growth.

Is there an embedded deflationary vector right now? I mean, is it Clement Atlee nineteen thirties, Great Britain. Is it a deflation that we saw with Japan over the years.

Well, if we look at the consumers in China, they are still quite muted and really quite depressed. There has been effort to stimulate consumption, but that remains below trend coming out of the pandemic and looking ahead well talking about environment where exports could also come under pressure. So this is why we're less positive over the longer term around where China is heading towards. We're expecting three percent growth by the end of the ROWS, which is quite a bit lower than five percent for this year, and maybe they're looking at five percent for next year. We're not expecting We're not expecting that given the uncertainty around it. But in a very very near term valuation remains quite attractive. We have events coming up around the corner, the Central Economic Working Conference and the National People's Congresses Wow, so all of that could provide kind of near term stimulous hopes, but really the longer term story is really not that encouraging.

I would say, is China is the government of China? Are they to what extent are they concerned about really, I guess isolating themselves from the rest of the world. Did they see that as a material risk? Because that seems to be how it's drifting.

I think geopolitical fragmentation has been happening, has been deepening, and is expected to continue going forward. So that's part of a kind of China isolating or building spheres of influence around themselves. But it's also generally the spheres of influence between US and China moving further apart, which is why geopolitical fragmentation is a key megaphones that Blackrock has identified. There is inflationary and that is why we are positioning our strategic portfolios for high for longer.

I want you to come back.

Let's start with this question, when should kids start learning calculus? I mean, you know, in America used to be learned at twenty two and then I was twenty. Now we got kids freshman year in high school having this you know, the product rule crammed down their throat.

When should kids start learning calculus? Way?

I honestly do not remember when I started learning calculus maybe in junior high school.

Junior high school. That's sick.

I was good in school.

Did you drop that in your interview with black Rock?

Listen?

Seventh grade?

But the point is I don't use calculus these days in my day to day job. So what exactly is going to future proof the future generation in terms of the things that they learn in school? Right? As AI changes the nature of Johnson.

She gets right in the AI chat, I give it up Fallsweti and Tom Kenyan.

Where there's Wayley of Blackrock to say she's.

Chief, a global chief investment strategist, barely describe your duties.

Look for her on LinkedIn.

I think of Urine, Timerate, Fidelity, and Wayy at black Rock, like not just you know, hey, this is you know what I had for lunch, but like really serious investment stuff. Here's a drill. I'm calling it the great bull market or this great bull market we're in. There's off the December eighteen low up one hundred and forty five percent, SPX, off the October twenty two low up whatever it is, forty sixty percent. The risk of extrapolation now is front and center.

How do you handle the emotion that we want.

To extrapolate this good equity news with the reality of taking measured risk.

I think the big picture right now is not one of mean revert. It's one of transformation. We're talking about in an environment where actually the key focus ought to be where the longer term trend is heading towards, rather than where the fluctuations are around what used to be a stable longer term trend. And that is also why we see ten year yields being so much more sensitive to months to months data releases, because we're now it is almost unprecedented environment where longer term trend is actually shifting. That means mean revert does not quite apply when we're talking about transformation and moving targets. And that also means if we think something is expensive, they can get more expensive. If we think something is concentrated, they can get more concentrated if there are good reasons for that to continue.

How did you respond to what David Costin did over at Gulben Sachs modeling out since we've come so far so fast, our central tendency is a low single digit outcome. Heated complaints from the academic math community on how they went about that study, Are you that cautious on where the terminal value is of equity prices?

We actually took an inspiration from that analysis to try to understand if the measure of concentration, which is to look at the market cup of the biggest the company versus the seventy fifth percent hel and look at that racial right by that measure, US Aquady market is close to the most concentrated in almost one hundred years, and we try to understand, okay, that concentration, does it have significant varying on subsequent market return over twelve months, over ten years. The verdict of the analysis inspired by the by the by the research a piece of research that you're referring to, is that over the very near term horizon, let's say investing for twenty twenty five, concentration doesn't have significant bearing. And over the longer term, in a mean revert environment, then it has significant baring. But we're not in the mean revert environment. So we continue to think that Erniest can can come through.

For next year.

We're looking at high single digit return expectation, and there is reason in the context of US exceptionalism for US to lean more into US equities, which is what we're doing for this outlook.

Wait, I should buy my first share.

I think you should judge to this market book.

We should keep you one hundred shares exactly, two or three shares.

Of that exactly.

Welly, So it's been a month since the US presidential election. We now know we have a Republican in the White House, and we now have a pretty republic controlled Congress, orthough some you know, very tightly controlled. Did that change the outlook for you folks at black Rock did when you woke up from the election the next day, did you materially change your outlook on asset allocation, stocks, bonds, US, non US Did it change your outlook?

I think in equities America first policies would support US at the expense of potentially global equities. We actually use UK equity allocation to fund the further upgrade of you as equities. This is what we did for this outlook. But in government bonds, actually the reverse is true. Given the fiscal trajectory that we now expect from well from the Trump administration, but also specifically in the in the US, we think that there is room for term premiere to come back even more in US government bonds, which is why we prefer likes of guilts over US long duration. So there is a different reader cross in risk assets and government bonds with the policy is that we now expect. The last thing I would say credit is an interesting one. Spread USIG spread is the titles since the early two thousand, but that in part reflects number one, reasonably good fundamentals of credit and corporates and number two worsening indebtedness for US government. Right, so when we look at it from a whole income total yield perspective, quality income is still a very interesting theme that we want to play.

Are you concerned about here in the United States continued deficits, continued growth in the debt. There doesn't seem to be any political will to address that at all, and it may just be just don't worry about it.

How do you guys think about that?

I would say two things. First, it is not a US specific phenomenon, and I think what's happening in France really shows that this is really across the boat. A higher indebtedness is really a phenomenon across the boat. Number two, we are risks on for now, we're dialing up risk taking but great reprise think is the key sign post that we're monitoring as we look to dynamically dow up and dow down risk taking through the course of twenty twenty five. So that's definitely something that we pay a lot of attention to. Related to Tariff's announcement as well, because higher tariffs, higher inflation, higher rate expectations, so all of that is really under risk monitor as we keep risk for now.

One final question, you were sitting in your classes, I believe at Cambridge, and you ran through productivity. The great myst call this year has been American economic growth resilient nominal GDP. Everybody got the growthiness wrong. What portion of productivity is the why we're achieving right now?

I think US growth has been very resilient because this is not your typical cycle. I think there are some force alarms, especially during some looking at the sign rule, the typical recession signal not working because we are in this environment of transformation rather than standard cycle. Right. There are multiple disconnects that points to this is not your typical business cycle. We're looking at an environment where the fat is cutting rates when financial conditions are very very easy. Those traditional recession signals not working. So all of that means that we cannot use the old playbook to understand where economy is, but also to kind of think about us our location cover.

So at the margin, can you buy MEG seven if we're not mean reverting and if we're going to a new way lead terminal value? Can you add the mag seven This morning.

Mag seven multiple is thirty times, and at the beginning of twenty twenty two it was thirty five times. At the inception of chat GBT late twenty twenty two it was twenty five times. It is expensive, but it's not extremely expensive. There are good reasons earnings momentum that supports those valuations. You know, like me revert. If we're talking about an index that has become more growthy in nature over time, then that the meme needs to reflect the more growthy nature of the of the benchmark. So we continue to like Max seven. But we have broughtn out how we play the AI theme because we expect that to have broader read across to how economy. So public market, private market, we are building the transformation, we're financing the transformation.

Really, thank you so much.

With black record, you're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am. Easter Listen on Apple car Play and and brot Outo with a Bloomberg Business app, or watch us live on YouTube.

Return to the Litmus paper of the global system. We welcome out of you on YouTube on your communite quickly with George Sarahs of Deutsche Bank. George, whither the dollar in your view for not like the year end outlook, but the bet and the dollar. Is it a resilient dollar and can you model out dollar strength?

Hi, morning, Tom.

So it really all is about the policy mix over the next few years. That's how I think we think about it, the combination of fiscal and trade policy. And the bottom line is, if you think about what is priced, you're still not pricing an aggressive mix of physcal easing or protection is trade, which is what President Trump communicated in the election campaign. So we still see the market as pricing on a scale of one to ten, roughly a three out of ten. And therefore there is more potential I think for the dollar to strengthen over the next few months as we price more in.

But over the.

Medium term it really boils down to whether the rest of the world can solved some of these structural issues which are weighing on both China and Europe. And the longer these things are delayed, I think the stronger.

The dollar will remain over the longer term.

George, we were just trying to get getting update from from one of our reporters in Paris about the uncertainty there, the political uncertainty in France. I'm looking at the euro here as a proxy. We're now below one spot zero five. It is parody something that you think is possible for the Euro with the dollar.

That's our forecast for the Euro next year.

I think depending on what happens both out of Europe and the US, there are even scenarios where we could go below parity towards ninety five for example. I would say the key variable at the moment that is impacting the market and the economy is uncertainty.

Especially in Europe.

There are very high levels of uncertainty across the board, both in terms of the political outcomes, and we're seeing the negotiations around the budget in France, around global foreign policy, and the difficulty with uncertainties, it's very hard to model the economic impact but it's very clear that this is showing up, and I think this is one reason why the European economy is underperforming.

For example, is.

There a credible barecase for the US dollar. I'm hard pressed to find one, So.

I would say there is.

There always has to be, because if there's no way for something to go down, it must mean we're not doing our job properly in terms of thinking about the scenarios.

So here are the two downside risks for the dollar. The first one.

Would be if we are wrong about the fiscal policy outlook and we get a material fiscal tightening in the US, whether that is due to an inability to agree to something, although presumably that probability is low given you've had a red sweet but if you have fiscal tightening, that would lead to slower growth and the more duble shredd and I think the dollar would go down.

That would be one scenario.

The second would be what I would call institutional instability, a challenge of the stability of the institutions in the US. You would see that, for example, if FED independence was challenged. That would be one that would certainly hit the dollar. And I think one reason the dollar is actually strong is that the market is seeing institutional virginity outside of the US, seeing it in France, seeing it in Korea. And I think that's a key driver over recent resive dollars.

Strand you tell me about the opportunity in Canada. They got a president who's unloved, they got the teriff.

Wherees George, You're writing about Canada?

How do you profit from week Canada? Now? Do you go Looney or do you go Canada? Remind me what's the take that Deutsche Bank has there.

I think Canada is going to be an interesting test case as far as President Trump's tariff policies go. So we did see Canada being lumped together with Mexico in the post in a social media post president Trump mate just a few days ago, highlighting immigration and the fentanyl epidemic. Now, the interesting thing is when you compare the flow of immigration and fentanyl in Canada to the US and Mexico to the US, the orders of magnitude are immensely different.

Now, that would.

Suggest the odds of an aggressive tariff policy towards Canada are quite low. The market is indeed pricing that, and that is our assumption, which is why we have this view that Canada should be outperforming currencies such as the Europe for example. But let's see. I think if come January twentieth and there's no tariffs on Canada, we'll be fine.

But there is still a very high degree of uncertainty on that front as well.

George, too short a conversation, George servellos at Deutsche Bank. We need a longer conversation, soonest here is with Deutsche Bank and foreign exchange of civilies.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.

Bohen Haynes in Florida has all sorts of abilities, and one of them is a more conservative path.

Joining us this morning is Jay Bowen here, too short a visit.

You are basically not taking in the alternative investment kool aid. To me, this is a story for next year. Where's private equity? Where's private credit going to be? Twenty four months thirty six months from now?

Yeah, with our approach. It's somewhat we say that we're unconventionally conventional. With our largest client, the Tampa Fire Police Fund. We just start our fifty first year. We've never owned private equity, private or the latest whip, so you.

Got a fifty position in MEG seven.

Now I will say this, which is important. One of our largest holdings and we decided this along several years ago. You can play these markets in the public markets. One of our largest holdings is Blacksman, which is the as you know, the largest private equity firm in the world, so we can we can play these markets in a very efficient liquid way, including real estate, also without having to go into the more risky corners of those areas.

Tommy's you can probably tell from Jay's accent University of North Carolina at Chapel.

Hill that this is Merry Christmas.

Pool seems another Carolina guy coverman in here. Oh boy, Jay, talk to us about your work with the Tampa Firefighters and police.

You mentioned you.

Manage your pensions fund for fifty years.

Correct. My father forged a relationship in nineteen seventy four. The firm was founded in North Carolina. We were in Atlanta forever now we're caught the COVID wave and then the of the Jacksville area. And yeah, it's just a very high quality, long term approach and it's proven to be The model has proven to be quite successful. And every year that goes by, we're able to show another set of twenty year rolling data, which they will do you.

That's short term right here. What are you doing on a twenty year roll? Are you doing in a sixty forty split? What is the pixie dust you're doing? Like to beat USPX is at the goal.

We are certainly oriented towards equities in common stocks specifically, typically we're allowed to invest sixty five percent of the portfolio in common stocks on a cost basis, not on a market value basis. So in a bull market that's going to move up close to seventy seventy five maybe. And the balance is that the bond side of the portfolio is strictly for income instability.

We don't trade the bond. We gotta interrupt.

You're running to find benefit program for a public sector pension fund and you're popping sixty five seventy seventy five equities.

Correct, And we've been the sole manager for fifty years and according to all the public fund.

Got the number one performing define benefit program in the country.

That's what they say for one years through fifty years. So if you believe the database, what.

Have you done since December of twenty eighteen? Our theme to the end of the year. Here is this great bull market. What are you up from Christmas Eve twenty eighteen? Is you got that number in your head?

Don't I don't have that number in my head. I've got the thirty I've got the thirty one separate twenty year rolling increments, and I had that.

So what's what's it? What's a type of stock you guys like to own?

Are you?

Do?

You have a technology bent here? You're owning corporate? Corporate's financials.

How do you guys do?

It's top down in thematic we're trying to get ahead of these trends. Well currently one of our big trends we like finding these we call them technology companies disguised as industrial companies, companies like Eating and Corning and Teledigm. You know, you might think, oh wow, these are somewhat honey. Well they might be industrial, but they're very sophisticated from a technology standpoint. They're providing, they're helping electrify and digitize the industrial base. There's a lot of demand and massive tailwinds in that area that we see going forward.

Do you guys have a value? Let me ask you put it to this. What is your valuation crates here? How do you think about valuation? Because you could look at some of these names, whether they're Max seven, we're just some other technology names and really have to have some gumption here to buy some of these things.

How do you think about valuation?

Correct?

And that has really changed over the last particularly the last fifteen years or so, where it's a much more dynamic type of approach. We've always looked ahead. We're not really that concerned with current earnings. With our long term approach. We have the luxury and they've given us. The board down there has given us the luxury of really looking out. So a company that might look expensive on a current basis, if we look out and feel like the tailwinds are there and the trees are there, we're willing to pay up a little.

Bit for it.

Tell me about Florida, I mean I make jokes about It's not funny. Tampa's stadium was destroyed they're going to play in the Yankee spring straining park. I guess they're hurricanes in the Florida economy. Where is it all two years from now?

For her?

I mean, are we done with?

Are we done building six thousand square foot houses.

On the water that get blown over?

I think that that trend is going to be curtailed somewhat because of the insurance situation down there, which is is changing as we as we speak. But it's still a Look, it's still a high growth market state from an economic policy standpoint. Is I think going to continue to attract, but I think that the certainly it's going to moderate.

Now you got to come back.

I mean, I can't tell you, folks how unusual this conversation is with Jay Bowen, but I just want to know. I mean, I'm certain every meal you've ever taken with the Tampa Union has been at burn Steakhouse. Are you eating in the bar or do you go into one of the back rooms when you get to eat?

Because the wine list is in a phone book?

Have you been in? Then?

I get lost in that phone book and I never it's time to go.

Have they ever taken you downstairs to the wine cellar of Burned Steakhouse, Tampa, Florida.

Yeah, but they maybe put a blindfold only.

They took me down there once, paul It's like acres. It's it's unreal.

I eat in the barn.

I try to eat right directly across the bar, and I get better service there, I think. But it's great. Is it written into the bow and Haynes agreement that you only can dine at Burns Steakhouse in Tampa.

You've given me the idea of the day.

I think if Paula says, road trip to Tampa Bay will talk to the firefighters. Jay Bowen, thank you so much, and I really exceptional day.

Here for news, this is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Applecarplay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.

Our newspapers, it's a Lisa Mantale hour. She's not seen Mawana too, either of I. What do you got, Lisa?

I know I definitely not this weekend. This let's see where I want to start, Okay, so we'll start with the Washington Post. They're talking about Starbucks and Neslie. They're facing some scrutiny. This is because of labor practices over in China. They're saying coffee farms in Starbucks, Nestlie's supply chains and China they're not living up to ethical standards.

This is according to report by China Labor Watch.

They said they're using kids as workers, they're making workers work excessive hours, different safety standards. So it's an investigation that covered twenty six farms, but it really starts to show how the challenges of these big companies are facing monitoring labor costs, labor in China. Both companies do did say that they pledged to investigate further, but it's just something going on now that that they're starting to become more aware of all mentions.

His driver, I had a driver this morning, Bentley in the garage and and he said he's just back from Thailand, and he says, do Americans understand those people are making twelve.

Dollars a day?

I mean the labor Steve Roach called it the labor arbitrage.

And so this is all price of coffee is up fifty eight percent year to date. So it's been Yeah, it's amazing. How does Starbucks manage they Well, what's your daughter's lattelet?

He runs me about eight bucks now exactly for public coffee. Well she gets the big one, of course, the ven.

Pittsburgh Martini's cost eight bucks.

Exactly.

That's the world we live in.

I need a Martinia.

I would just say we got I might have to ask Baltoonis about the next story. But meme coins, they are having a moment financial time, saying you can thank President Electrum Donald Trump for this. So these are tokens that are representing online viral moments, things like the euthanized gray squirrel, like the pygmy hippopotamus, the cartoon dog. They've all exploded in value since last month's US presidential election. More established meme coins like doge coin, Tom's favorite, they've outperformed Bitcoin over the past month. They've even been joined by a group of new coins. But critics are saying, you know what, meme coins nothing more than this entertaining asset. Yeah, they say they're reminiscent of the craze from NFTs during.

The crypto crypto bubble of twenty twenty one.

But so traders I guess they're betting that the Trump administration will usher in more crypto friendly attitudes and regulations in Washington. I guess that's the fun metal play behind it, the reason.

No other reason.

Comment, everyone knows.

Yeah, so just those kids. You can have fun with that. Speculat all you want.

Have fun.

Okay, we'll go to sports now.

Okay, Juan Soto, you know they've been, he's been having talked with everyone. His agent is sick from the Yankees. His agent is saying he's starting to eliminate teams from those negotiations. Okay, all right, So who is he met? He's met with the Yankees, right, the Mets, Los Angeles, Dodgers, Boston Red Sox, Toronto Blue Jo.

He just cut that ship.

That's where it is.

We'll give him Plymouth Rock.

Good morning ninety nine, Boston.

Let's give one Soto Plymouth Rock showing the Red Sox.

What do you got?

What's the updated?

So his agent is just saying jan is a methodical thinker. He hasn't said yet, but he rejected those who say high spending teams like the Yankees and Dodgers are buying championships. So he rejected that offer, but sodo, what's the history? So he turned down four hundred and forty million dollars fifteen year offer from Washington back in twenty twenty two that moved him to the Nationals to trade him to San Diego, which dealt him to the Yankees last December. So he's looking for money, so who's going to give it to him?

Will? But he started to eliminate some of those.

I think that's what it comes down here.

There was a picture named Snell who reminds me Red Sox fans of bruce Hurst from years ago were when he shows up, he's the best picture in baseball. And he Snell just joined the Dodgers.

Yep.

So for Snell and Soto to be back with the Dodgers as sick, yep, it's gonna be Who's he? Do we know he's eliminated?

No, he won't say, but he's starting to eliminate.

Oh boy, what I've here on sports Raiser, We'll here's something next week and I'll.

Defer to ari on that he knows all that stuff.

But okay, well, official surveillance team coverage, probably a remote in Boston coming from Plymouth Rocket to give me get to one soda.

What do you got?

All right? Last one?

You can now get a pizza and a wedding dress delivered all in one.

The reason why David's.

Bridle teamed up with door Dash. So now door Dash is delivering bridal dresses in under an hour if you can buy it or not.

But the company really needs it. I mean, you think about it. They filed for bankruptcy twice.

But what they thought They thought it would be big because they did test runs with like accessories like necklaces shape where they thought that would be the hot thing, but they said, no, it's actually the dresses that women are ordering, not just wedding dresses, but you know, you have the prom dresses, you have, you know, the bride'smaid dresses, all those kind of things. So now this is becoming, I guess, the hot new thing.

So here's the demo. I think Lisa two thirds of brides between the ages of twenty seven and twenty eight, which is the key demographic for David's Bridle, used last mile delivery service via apps on a regular basis.

So that makes sense.

Yeah, that's shut.

That down in my household, you too quick? Yeah, that's never I will never pay for that.

Well, I know they tried the door dash with the McDonald's. Doesn't work either, because I'll dress.

Yeah, that's something, all right.

It depends on the price of it.

I don't know, but yeah, so that's something new retail file door dash getting into that.

Soo the Lisa Matteo or Thank You So Much Newspapers with Alisa Matteo.

This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal

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