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Bloomberg Surveillance hosted by Tom Keene and Paul SweeneySeptember 4th, 2024
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This is the Bloomberg Surveillance Podcast. I'm Paul Sweeney along with Tom Keene. Join us each day for insight from the best in economics, geopolitics, finance, and investment. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten Eastern Remark Global Headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. All right, I have my all time list of over educated guests, and our next one is certainly on this list. Okay, So Christina Hooper, chief Global Market Strategists for Invesco undergraduate degree from Wellesley.
That's good. I have a lot of respect that.
Then she gets some Masters and Industrial Relations from Cornell. Not sure what that is, but I know it's good. MBA from NYU. Okay, I think we're over doing it there a little bit. And then not only on that, she gets a law.
Degree from Pace University.
Oh my god, a law degree.
I did not know this I did not know that either, so I knew she was the smartest person I talked to you.
I know exactly.
So we appreciate getting a few minutes at Christina Hooper's time. Hey Christina, what did you make of yesterday's trading? Was it just kind of the market kind of blowing off some steam here?
What did you make of that?
I think there are a lot of jitters right now, and I think a lot of it has to do with psychologically the fact that now markets are very confident that the Fed is going to cut bad news becomes bad news. You've heard it before, but it really is true. And so any signs that this economy is weakening more than we had initially thought is cause for a selloff, especially among stocks that are more closely priced for perfection. And that really is the story that we saw yesterday and we may very well see it again today.
So it's a bad news is bad news situation when it comes to economic data.
And then the equity market.
But it's still a slowing not a downturn, right so I'm trying to understand the distinction.
Then when we do have some sort of big equity move.
Well, it is a slowing but keep in mind we don't exactly know how this monetary policy tightening plays out because of the long, variable lagged effects of monetary policy, and so that is the underlying fear that gives markets pause and jitters when we do get, for example, a disappointing manufacturing PMI, or we see earnings warnings from companies, or whatever the case may be. So I think that right now markets are walking on eggshells, and we could very well see this leading up to the FEDS meeting, and again we lead up to the election. So this should be I think a more volatile fall, one where there's more downside potential. But I think ultimately we end six months after the start of easing, I think we end in a better place because that is an environment that's supportive of risk assets.
In the near term.
Christina, how are you positioning or how are you suggesting to your portfolio managers at Invesco that they position themselves for I don't know the next three to six months. Whereas you say there may be some volatility.
Well, I think there has to be. What we've been saying to clients is it's really important to have diversification. Sometimes you can look at periods of time and decide it doesn't make sense anymore to be well diversified among equities, fixed income, and alternatives. But this is a reminder that diversification helps to smooth out follow utility, and so having that exposure outside the US in the equity space, and keep in mind that there are many many investors who probably are overweight the US simply because they're not rebalancing frequently enough and we've had such a strong run up. There are many clients that are likely overexposed to large caps versus small caps, overexposed to growth versus cyclicals, overexposed to equities versus fixed income and alternatives. So this is an opportunity, I think, or a reminder at least to be well diversified, but also don't be afraid of equities, don't be afraid of risk assets. I look to ninety five ninety six as a guide. That was the last time the FED was actually successful and avoiding a recession when it tightened. Now there are some conditions that are very different than they are today, but my key takeaway is that it easing provides a tailwind for risk assets. Now. There wasn't much of a tailwind in ninety five ninety six. Because the FED only gave seventy five basis points and cuts for hiking rates three hundred basis points. We're looking out on expectations around two hundred basis points and cuts over the coming year, so we could have a far more powerful engine, far more fuel to support risk assets this time around.
I have a question, which degree did you like getting best?
I actually loved getting my MBA in finance. That was my sweet spot, and I love taing. I did it at night while I was working during the day, and I found it to be a virtuous circle.
Half of Wall Street has their MBA from the Start School in NYO.
I'm convinced.
Yeah, I mean it unbelievable program. Now not what to do, but David, just a fantastic program. Christina, What do I do here with fixed income? Do I sit with my two year treasury close to four percent? Or do I try to take some credit risk?
So I think you do both in the spirit of diversification. There when I look at the numbers, For example, in that six month period after the FED began easing in ninety five, high yield did very well. But I believe very strongly that history can often rhyme, but it's not repeating itself. So in my opinion, I think it's important to have some exposure to investment grade, and I also think there's a place for treasuries. I would go longer duration in this environment, locking in these higher yields, but this should be an environment in which we could see a variety of different asset classes perform well, as we did in that six month following the FED start of easing in July of ninety five.
All right, thank you so much for joining us, Christina. We always love getting a few minutes of your time. Christina Hooper, she's a chief Global market strategist at Invesco. Politics. The election, it's here, I think three days to go or something. I think it's important for Global Wall Street. So let's try to figure out what it means for Global Wall Street. Libby Control she joins it. She's a managing director, head of Public Policy for Pimcoach. She joins us here in our studio in New York City. Libby, you were just mentioning how you've been traveling all over the place talking to Pimco clients. They want to know what you think about the election. Maybe what it means for markets, what's been your message, Yes, so.
I would say, but there are non US clients are really interested in both the election promise and implications, particularly implications for debt sustainability.
For the US dollar, and then taxation.
I think what we're telling them, what we've been telling them, is that they really needed to wait until after September because that's actually when the polling starts firming up. It becomes a lot more predictive in terms of kind of providing some clarity in the race. Now we are in September and there is no clarity.
I will just say I.
Think our message to clients now is that this really is a is a jump ball. It will likely come down to those six swing states that everyone has been reading quite a bit about, particularly Pennsylvania. Pennsylvania is the most important state in our view. There are some themes though that sort of regardless of the election outcome, are going to be common between the candidates. One is that the deficits are going up regardless, and that's because the Trump task cuts and the individual side I'll expire at the end of next year. Maybe some of them are going to be paid for if they are extended will be extended, but most of them won't be, and so that will add to the deficit. And then also importantly, and I think people sort of forget this, but if you just look at sort of the base case scenario under the CBO's estimate for the nonpartisan Budget Scorekeeper in Washington, I mean, deficits are just structurally high because of entitlement spending, because of Medicare, of Social Security. These are really important programs, but they're also really expensive, and neither candidate is going to reform those. So I think the kind of the main takeaway here is deficits are going up regardless of who's actually going to win. And then we also think the direction of travel on tariffs is also clear, and export controls and sort of some of this protectionism. Of course they're gonna be shades of gray Trump most likely sort of more draconian than Harris, but still again.
Direction of travel here is clear.
Do you think that any of this is yet reflected in the market. I keep obsessing about like the low tax and high tax companies, to see if there's something there within this and just nothing.
I would say that the only time we really started seeing this actually price in the market was that very short period of time in early July when it did look like, after the debate and after the assassination attempt of a former President Trump, that there the odds would be a red you know, red Republican sweep. That's when you start seeing sort of the term premium reinsert itself, and the and the US yield curve. You started seeing some of the sort of sector differentiation. But all of that basically is kind of you know, collapse has gone away effectively as this race has basically tightened and gone back to really where.
It was in the spring, which is again just just to jump.
Off, how about the down ballot? What happens to two houses of Congress? What's the thinking?
Yeah, well so, and I you know, I used to work in Washington, used to work on the Hill, so I have a bias towards really focusing our clients on the importance of Congress. But I really think from a from an investor's perspective, what happens down ballot is just as important as what happens at the top of the ticket in many ways, particularly from a fiscal policy perspective, tax and spending.
Again, I think it's gonna be very close.
So this is really unsatisfying, I realized, And we're not just trying to punt on not making a call.
I really do think it's going to My grands were talking about the Senate, the.
Senate and the House.
I think that you know, the Senate right now controlled by one vote by Democrats.
The Senate map for Democrats.
In terms of the number of seats that they're defending, much more difficult than for Republicans, and so very likely, you know, possible that the Democrats hold their majority, but unlikely at this point, so likely that the Senate flips, but again by probably just one vote, so that that actually has implications in twenty twenty five, and then the House again, maybe the House flips from Republican control the Democratic control. But regardless of actually who wins, it's going to be a very narrow majority. And what we have seen this session of Congress is that when you have a narrow majority of especially particularly we have divided chambers, but even if you have a Republican or Democratics sweep, it is just difficult to get a lot done.
So exactly that gets exactly so then to that point, does it I'm going to get a lot of hate mail from this.
Does it matter who's in the White House.
I mean, it does matter, and particularly I just can't underscore. I'm just you know, everybody just needs to buckle up for next year. It is going to be a you know, tax palooza, if you will, There will be because of all the individual tax cuts on the Trump you know, the Trump Task cuts from twenty seventeen expiring at the end of twenty twenty five. Everything is going to be on the table. The corporate tax rate is going to be on the table, the child task credit is going to be on the table, Carried interest is going to be on I mean everything. So there will be a lot of headline risk. So it does it does matter because a lot of those things will go the way of the White House in terms of ideology. But outside of that, alex and this is what we're sort of guiding our clients to is outside of the debt ceiling you know issue, which it will be an issue sadly early next year, always an issue, right, unfortunate, especially as if you're a debt investor. And then also then tax I don't I just don't think Congress is going to be able to get very much, again, regardless of who's.
The White House.
But the White House does matter as obviously as it relates to many other things outside of fiscal policy.
But from a tax perspective, it does matter.
Are our election is going to be this close like forever?
I mean, it seems like the last couple elections have been you're counting votes like starting.
In two thousand. Is that kind of where the new world is today?
I mean, it's possible.
I think it's really difficult to prognosticate this sort of a super secular but you know, because of the geographic sort of self sorting that we've seen in the United States, you know, it has become and because of our sort of highly polarized nature, it has become you know, very close, particularly at the top of the ticket, and I do think that will likely, you know, that will likely continue. I mean, if you just look, you know, since the nineteen eighties, just the number of elections where one candidate has won the popular vote and the other candidate has won the electoral college. But I mean, it's really quite sort of staggering, and that is just because of sort of the kind of polarized nation of our country. The Senate and the House, I think are quite a little bit different the Senate in particular, just because that is more predicated on which seats are up and sort of the Senate map. But in terms of the top of the ticket, yeah, I think this is probably likely.
To But even when the stake the Senate, it's still going to not Senate.
But the House is me zoning like it's all redistricting, right, Like it's still all it.
Redistricting happens once every ten years, and we just went through a registrating taking period, so that won't happen for another ten years. But yeah, that people are, you know, the way that state legislatures are right, are drawing these districts more blue and more red. But I think the upshot here for investors, maybe the silver lining is actually that this isn't such a bad thing, right, And I think that usually if you just look at how the SMP market at SMP has fared since nineteen thirty three, the market is actually does better under divided government under very narrowly controlled government. And that's, of course that's intuitively makes sense.
Right.
We like checks, checks and balances, and so does the market.
All Right, we had sixty three days ago more or less Lebby Kentrell, thank you.
So much for jacky Kin as a managing.
Director, head of Public Policy at Pimcoke. All right, my finance professor Cam Harvey at Duke, he penned this paper about the inverted yield curve, leaving recessions and all that kind of stuff. I don't know, we've had an inverted yield curve for like a couple of years now. It seems like although today the two's tens the two three point eight five percent, the tenure three point eight three percent, So it's kind of uninverted or kind of flattened what the bond geeks called all astley almost disinverted, disinverted. Yeah, I like that very good. Andrew Sizarowski, he does his stuff for a living. He is a senior portfolio manager Morgan Stanley Investment Management. Hey, Andrew, what does it mean to you if anything that this yield curve is Alex just told me is kind of disinverted right here?
Does that mean anything to you?
Yeah?
Look, I think it's the market kind of sending a signal that the Fed's about to kind of embark on this easing policy. You know, I myself have never kind of been a believer in the inverted yield curve being a kind of predictor of recessions. I think there's been a lot of distortions over the last couple year years between monetary policy. We had kind of QI and then QT and just to kind of a ton of supply it at the front end. So I think that the inverted yeal curve this time doesn't send the same signal that it's sent in past past cycles. But I think the one thing that's been happening, as you mentioned, the curve has been uninverting, and that's been sending investors a signal that, hey, you can actually go out the yeal curve now without giving up that same yield that you would have just a year ago or so. So I think that as you extend out the curve, it's getting more and more attractive, and I think that's something that investors should be looking to do. With the FED about to embark on this cutting.
Cycle, with the set about to embark on a cutting cycle, what do I do with my money?
Send it's yielding still that fu Yeah.
Look, look there's over six trillion dollars that's sitting in money markets and that's money that again, not all of it's going to move out the curve. But if you stayed in that money market fund over the next sixteen months and the FED cutting cycle played out as the market's expecting, by the end of twenty twenty five, you're looking at a three percent T bill rate and by March of twenty by March of twenty five, you're looking at four percent people rate. So while you collect that five and a quarter percent today, if you just go out six months or so, it's going to be dramatically lower. So I think you do want to be moving out the curve. I think there's a lot of places that you can still lock in if you like that five and a quarter percent yield today, you can actually lock in over five percent yields without taking any credit risk by going out into the agency mortgage backed security market. So again, triple a government agency yielding north of five percent. That's a place that investors should be kind of moving to, even if they're worried about a recession. This is a this is a kind of a natural place to go. The other nice thing about extending out the curve is that bonds once again as inflation declines acts as a hedge on your risk portfolio again, and we're starting to see that. You saw it yesterday as equity sold off, bonds rallied. I think that's something that when inflation is moderating, bonds kind of fit in that balanced portfolio much better.
Again.
So I'm just looking at the Bloomberg US MBS index total return about three point eight percent year to date, but I can do a lot better than in the US corporate high yield market. How do you think about high yield versus maybe again some of the mortgages that you were talking about.
Yeah, look, I think that there's kind of when you look at spreads and high yield, the aggregate spreads are a bit tighter when you look on a kind of historical average. But you got to be as I mentioned, I think that we're heading for a kind of a shallow kind of slow down in the economy here. So I think this is a bond pickers market. In the high yield market, I think you've got to be selective, you know. We think that at the end of the day, you want to be kind of up in quality in that market and wait for spreads to widen out. We just had a kind of dramatic tightening over the last couple of weeks, and then we just saw spreads wide out about seventeen basis points yesterday. So I think there's going to be opportunities to kind of move more into the high yield market. You know, I run a multisector fund right now. We're a little underweight high yield, but it's a space that we're looking to kind of add on dips, and it's a space that we think will remain attractive as yields come down. That's going to be great for kind of companies that are borrowing and have to kind of roll over this debt. But it's something that again you got to kind of pick and choose over time kind of where to add, and we think that's a space that will get more attractive as the year goes on.
What's so interesting in August is when we saw the melt on and equities that spike and vicks.
We saw a little to widening out in.
Credit spreads, but not a lot, not that we'd normally see with a jump in the VIX like that. Are we still seeing it this time with the rollover in equities and then jump on the vix.
Yeah, I mean, look, we saw it yesterday and as you mentioned, there was this We had the high yield spreads widen out to almost four hundred basis points and then they tightened into around three hundred twenty five, and then they widen out around seventeen basis points yesterday. So I do think that credit markets will will move with risk assets at the end of the day, with the equity market. But I also think that at the same time, it's if you're a corporation and you had turned out your debt, let's say in twenty twenty, and you issued a five year bond, you have to roll that over in twenty twenty five. So I think that lower yields are not or lower yields are not actually a bad thing this time for corporations. It's going to be something that they're going to use to take advantage and kind of turn out that debt once again.
So Andrew, what do you guys that we're going to stand the investment manageer? What do you think or how do you think the Fed's going to proceed here?
Are they going to front load some of the rate cuts here?
Where are they going to be I guess more systematic twenty five basis points every meeting or every other meeting.
How do you think they're going to do this?
Look, I think that the Jolts number today is going to be very telling, and even more important is the payroll numbers on Friday. I think the payroll number is going to tell you one hundred percent whether the Fed's going to go twenty five or fifty basis points if we get a weak number all of a sudden. You know, right now there's about a forty percent chance priced for a fifty basis point cut. But the FED is shifting from an inflation like a single mandate on inflation. Over the last two years, while they have this duel mandate, they've been solely focused on inflation to all of a sudden, solely focused on the labor market because inflation's coming back in order, and the one thing that the FED wants to do is have this soft landing. And so the FED knows that they're well above neutral. So the Fed's that kind of five and a quarter to five and a half percent. At the same time, core PCE has come down from five point six to two point six percent, so there's been about three hundred basis points of net tightening from as far as the Fed's concerned. So the FED needs to kind of get going, and at the end of the day, the market, you know, the Fed, the FED policy operates with these long and variable lags, So anything the FED does today won't have an immediate transmission through the economy. It's going to take some time. And so the Fed's turning this giant ship. It's going to take a while to turn it. I think that when you look at what's priced in for the market, so around nine cuts total for the cycle, that still puts the FED funds right north of three percent, which keep in mind the last hiking cycle we only hiked to two and a half percent. So even if we are in a higher neutral rate environment, which I'm not convinced that it's substantially higher than where we used to be, I think at the end of the day, we're talking about where neutral is, and if we have a slow down, the Fed's going to go through neutral and below neutral, and that's where the value proposition is in bonds.
All right, Andrew, appreciate it. Thanks a lot.
Andrew Cisarowski, a senior portfolio manager at Morgan Stanley Investment Management, all.
Right, your daily look at the front pages around the world. All right, what are the guys there in the newspaper segment Lisa mutt Teyo, I know you've got some good stuff for us.
What do you get we do?
Okay, So remember you're talking to us about Vice president Kamala Harris said US Steel s she remained domestically owned and operated. Well, if Financial Times had this report out, it's reporting that Japan's Nippon Steele has made this pledge to promise the company would be run by Americans. So a few things. At a promise, it pledged to appoint a board for US Steal with a majority US citizens. It said the board's going to include three independent directors who are US citizens, and that that core senior management members would be American. But here's another thing. It also said US Steel would be owned by Nippon Steel North America, So that's a New York based subsidiary of the company. But then you have the Wall Street Journal now coming out saying US Steel CEO saying the company could close steel mills, likely move its headquarters out of Pittsburgh if that sale to Nippon Steel collapses. So all these things kind of coming together after what President Kamala had said.
I mean yeah, I mean they lost money for like a decade US steel, right, higher cost prices for steel, Like it's it's a commodity cyclical business and it is really hard.
I mean, other than the name United States Steel, like it's only eight billion dollar market cap company. I get the name, I get the affinity, I get all that stuff Pittsburgh Steel. But you know, I mean economics or economic side.
Seems like the difference is that Cleveland Cliffs has also offered a deal for US steel, but it wasn't as good.
Isn't it fun Steel?
So you just wonder if like Harris campaign and Biden is going to talk more about.
That now it just seems political. You know, we'll just let it.
I mean, the day after the election, neither side will care just let.
The deal happen.
That's probably true.
All right, what do you got do you guys carry around like.
The I don't like the story and I don't want to talk about it. Yes, we have to talk about it.
Yes, Okay, it's bossing one of those So you carry around these reusable water bottles, right, but they're like infested with bacteria because you have to think about how I think I wash it once a week.
That's so bad, like pop it in the starts? How do you wash it?
You need like a little tiny baby hand, yes, or you need the little brushes. So the bus and Globe like laid out a plan for you, like what to do?
They say.
One of the things this Stanley Summer dishwashers safe and some aren't. And that's like the most popular one. So some people are popping it in the dishwasher.
You really shouldn't.
So you need, like, yes, the little tiny brush to wash it every day.
They say, you have way deeper than how you clean it. Yes, why do you even have it? When I was growing up, if you were thirsty, you gotta drink of water. You didn't have to hydrate, hydrate.
But at all, do not see how much water I drink?
I know, but I mean it's like the kids today, they've got these huge things sitting at their desk and they're hydrating. I mean the water fountains literally three feet away. Why do you have this jug of water because you have to.
Keep track of how much you're drinking.
No, you don't. If you're thirsty, then you drink some water. That's how it was.
If you are also taking a mountain of pills and have Asafa guy is like, I do you need a whole glass of water with every pill you take? So I down like those like two and a half liter bottles when my pills.
This is a good Yeah, don't get me started on these.
You have to half your what is it half your body weight and ounces.
That's how much you're It's always been that way. So what have we done since the beginning of time? When you're thirsty, you drink water.
Water. There you go.
You can't overhydrate though I read that that's the thing and it can actually cause a physical reaction that's not good.
But you can o d on water.
This is just the right em very good.
Okayst Taylor Swift.
I don't know if your daughter is a fan.
Okay, there we go. Okay, so this is the thing the Dodgers show. Hey, Otani could be have like that Taylor Swift effect, because you know he joined the Dodgers this season seven hundred million dollar deal. Right, But tourism officials telling the Wall Street Journal he's bringing visitors to Los Angeles as far away from his native Japan Omni Los Angeles, California Plaza. They've been seeing bookings for Japanese visitors jump thirty percent this summer from Expedia alone. He's made the Dodgers this hotter ticket on the road too. So on the road people are going to travel to go see tour operators are selling packages featuring Dodgers games, and then you know, if they're in first place in their division, they now get ready for these playoff package to get away. So all this different money kind of going into all the talk about shoe Hey o'tani.
I bet that's cheaper than tailor sub tickets.
Right, yeah? Could he?
Here's the East coast bias.
I haven't seen him play. I'm a baseball fan. I'm going to the Yankees next week. I haven't seen him play.
I mean, if you're on the West Coast, you might as well be, you know, you just nobody cares, it seems like.
But again, sho he Atani here.
I know he's huge and he's a once in a lifetime kind of Babe ruth Ten kind of player here.
But it was on the West Coast. I just I need to pay more attention, I think, I mean, right, move over, Taylor swift.
I know, I don't know if they're going to be doing will say thousand dollars tickets.
As per Ari and from the Bleachers show, he is closing in on the first fifty home run and fifty stolen based season ever.
Oh see, how amazing for.
A reason exactly all right, I don't know if he's getting the friendships though, that's true and you can trade him.
I don't know, guys, I don't know what else you're looking at.
Okay, are you drinking less wine these days? I don't know if you guys were like wine drinkers, but you're switching.
It up, you are.
I'm into the barber Eska now we've been pouring that recently. Grape.
I mean, I drink a lot less than I used to. Let's just put a lot. You are a lot less and I used to.
Yeah, another we need to discussion.
Rack them up. We're them up. They're all probably.
Well, there's the thing, because people are doing Constellation brands.
They're said they weren't.
They're warning that they're going to write down the value of its assets by as much as two and a half billion dollars this year. So, I mean, they make Robert Mundavi on wine, but they also do the beer Corona MODELO.
You know, they do those two.
They say, or not as well too. But they're saying inflation, consumers are pulling back. They're saying wine is not a not an essential item, so people are pulling back.
I wonder if it's also like the post pandemic. People drink more during the pandemic because they were locked up.
I remember.
What else was there to do exactly, And now people are out and about doing stuff maybe I don't know.
Yeah, and then people are getting like a little bit more health conscious, like wine has more sugar and more like.
Well what everybody's drinking at least down at the Jersey shore bars or the you.
Know, the like the vodka, the Seltzer's Spike Selzer, yes, everywhere.
Yeah.
It sort of reminds me of sort of the I p A trend and like craft beer, what like ten years ago.
That was what do we have growing up? The Winders girls were drinking. I was like in high school.
Now it's the hard Seltzer's because some of them have you sugar, it's right, but.
They have like really high alcohol content. They're like five six percent alcohol content. Yeah, yeah, some are even more.
I don't remember wine coolers having on that much short for Zeemas. No, do they still exist? No, but yes I did so.
All right.
That is the newspaper segment with Lisa Mitello. Thank you so much. This is the Bloomberg Surveillance Podcast, bringing you the best in economics, geopolitics, finance, and investment. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.