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I know somebody who's watching all this very very closely.
It's got to be busy.
That is Gina Martin Adams. She's Bloomberg Intelligence Chief equity strategist. She's here in our Bloomberg Interactive at Brokers Studio. Gina on a daylight today and the context stuff. Where we are with earning season, Where do we even begin?
Yeah, good question, you know, you tell me it's been so busy between you know, the different policy shifts that we've experienced over the last couple of weeks, right in the midst of earning season, which is a pretty exciting earning season. Frankly, you know, I think big picture where we begin is what's happening in the end agregate, and what's happening in the aggregate is a pretty significant rotation, and we're all kind of trying to dismiss it as
it is a temporary it's not really lasting. But you know, small caps six hundred as an example, is touching close to new highs at this point in time. We've seen some really strong recovery on the on the policy put trade, the Powell trade. What's going to happen at the FED is extremely meaningful for driving stocks returns, and fundamentally, what's happening outside of the MAG seven is really important to keep your eye on. We have seven percent earnings growth
for that group. It's the first quarter of earnings growth since twenty twenty two, So suddenly we're starting to see some recovery. Financials have been leading that charge. Small cap financials in particular have been surging. We saw a massive beat among the financials companies. So what happens with tech can be very distracting, right because tech expectations were the highest,
These were the biggest stocks. But what's happening beneath that is very compelling evidence of a pretty big bull market starting to emergen.
Stocks enough to support the overall indices. Though, yes, when those other names are so influent.
Depends on your index, right, the S and P five percent? No, yeah, so the MAG seven is just too big. These megacap stocks have driven all the valuation rerating so far this year, and stocks are up double digits. It's been a great year as far as the S and P five hundred is concerned, because of that concentrated gain. If those stocks turn over and become more volatile, as I think we're starting to see, it's really difficult for the rest the other four ninety three to make up for that loss
of leadership. Instead, the S and P five hundred maybe churns in a sideways fashion. If the MAGS seven do fine, yeah, and the rest is catching up, that's an incredible market. And I think that that's actually a possibility given what we've seen in earnings so far.
Well that's in terms of MAG seven or in terms.
Of the MAG seven. Maybe they're not actually turning over, but they're moving into a period of just not no longer being leaders on the market, and that's okay. They don't have to lead for the S and P five hundred to move higher. So it is a critical question for the index. Beyond that, non domestic stocks are breaking out, small caps are breaking out, sort of global equities are suddenly emerging as real possibilities. Japan's been weak without a doubt.
China is still a little dodgy, but Europe's been doing fantastically, Canada's breaking out, so there's there's some interesting opportunities that are starting to emerge.
Is it a long term in your view, trend that will start to see diversification away from winners in the S and P five hundred? I mean the S ANDP has beat everybody for the last three decade.
Yeah, we should, you know, over a decade. That's a little outside my pay grade to be quite honesome. I'll just take over the next year ready and go with that. But I do think what we should see is some of the laggards of this cycle start to catch up. And by the cycle, I mean for me, it was a critical moment in twenty twenty two when the earning stream for the.
Globe started to turn over.
The S and P five hundred was at the early stages of that. Small caps joined in the party. Europe is just now getting past its low point, right. The S and P five hundred, led by the megacaps, led the uptrend in twenty twenty three. Now we're starting to see the rest of the world's economy start to participate. And it's difficult to paint it with one big brush US versus the rest. It's not necessarily that's not necessarily
what's going on. But there are some laggards of that cyclical recovery that are starting to get on board, and I would anticipate that the results of that is some of that just hasn't had any attention. Some of those stocks just have been left for dead. Looks. You know, nobody's even putting any capital to work outside of the US and the Megan It's amazing.
I feel like conversations used to be much more like, oh, yeah, you always want to make sure if something overseas, and it really has been so US focused.
Yeah.
You put out research today right that fed rate cut cycles outside of recessions have historically have historically led to global risk rally. Yeah, outside of recessions. We had a conversation earlier with our Ira Jersey and he's still thinking that we're going to get some kind of recession.
Well, the earnings stream would tell you not, that's not happening. So you know, I care most about earnings, and earnings went through a recession in twenty twenty two, and they're in a recovery. Now will earnings turn over and hint some kind of recession emerging in twenty twenty five. That's
a real possibility, but it's not happening right now. And the way that we structure our product is really all about real time movements, what's happening in real time, not what do we think is going to happen into the future. And so from an equities perspective, I think it's important to acknowledge where we are in the cycle and where we are is actually improving. We're improving off of lows.
For instance, in Europe. Europe had its worst quarter of year over year growth just in the first quarter, and it's starting to dig out of that recessionary experience, at least in terms of the stock market, right that's not necessarily the economy, and I know that there are very big differences on occasion. The US is in very similar position where we were digging our way out of that earnings recession but really just led by a few names. Now we're starting to see some real earnings growth emerge
small caps, for instance. By the end of this year, the analyst community is telling us we're going to get small cap revenue.
Growth they've been upping numbers and they've been.
Moving higher, So I do think it's important to follow the c clinton. Certainly, if recessionary signals emerge in the earning stream, then I have to get a little bit worried. But will we or won't we fall into recession in the economy? You know, I think we've I've learned my lesson the hard way over the last several years. I can't project what the economy is going to do, and neither can the stock market, So we're going to stick to earnings, and that's what really drives stock prices.
Do you know one thing that keeps coming up in conversations that we have internally when we're planning for our show is a conversation that we had with you back at Bloomberg invest where you talked about AI and you talked about I believe. I asked you the question about whether or not we're seeing AI gains show up in non AI specific companies, and you said that that hasn't happened yet. Here we are, it's only been six weeks since we've had that conversation, but we're hearing from more
companies over the last couple of weeks. About how AI is helping them. Has your view shifted at all or we still not seeing margin improvement things.
I think it's early yet in the earning season. I need to get further through the consumer numbers and the industrials numbers to make really vast conclusions. In financials, which was the one area that we already were detecting companies talking about implementing AI and utilizing AI to drive growth, we are starting to see some real margin improvements, some real cost cutting measures. So there's a little bit happening in financials.
What's happening They're able to hire fewer analysts, are they able to use get rid of customer service agents because they can use chatbots? What do we know?
Well, so far, what we know is it's making them faster, Okay, right, So if anything, it's just making turnover faster. It's not necessarily resulting in job cuts, which I think is everybody's biggest year is that the bots are going to replace us. We haven't necessarily seen that.
I'm scared of it.
But it is making existing worksporce faster at what they do, so I would say it's just making profitability improvements and efficiency gains more than anything else will that change going forward. We're certainly open to seeing that. I'm most curious to see how it impacts the industrial space in the consumer space because those are big, big swaths of the economy that can really make a big difference in the overall economic outlook. And we just haven't seen enough companies come
out with reports yet, so we'll see. It is something that we're definitely tracking. I think that from a tech perspective, it's still very much a big part of the conversation. I think you get fits and starts depending upon the company that you're talking to as to whether or not the analyst community maybe got ahead of their skis and anticipating the impact or not. And that's really a company to a company specific conversation, and that's having an impact
on stock prices. But net there, we're still in the upweight.
Okay, well, but in terms of like fundamental analysis, when you look at a company, I feel like you go back a year and if somebody reported and they didn't talk about AI or talk about how they're planning some of their investing, they got penalized in the trade. Now it's like we're a little bit more, you know, kind of scrutinizing, you know, the CAPEX spend and looking for the ROI is that smart to be thinking about that?
I mean, you know what I think about. Companies have to invest for the future, and sometimes it takes a while, but I'm curious how you.
Are looking at them.
Yeah, I think it's too early for AI specific capital spending to really overwhelm capital spending trends across the entire index, but it is a really big focus within the tech and communications space and the tech I call those tech and tech adjacent companies where it is very clear that you have to spend and have to now spend smart. A year ago you had to spend now you have to spend smart. In those groups the rest of the index, I think there's a lot of tolerance for spending on this.
CAPEX is really just at long term average share of sales, so we're not looking at an ende that is overspent by any stretch of the imagination, and sales are improving incrementally, So as long as cash flow and sales are improving, there's a lot of wiggle room for them to spend a bit more. And frankly, I think that the market loves to see spending in the anticipation of future growth prospects.
So I think that these companies can announce a lot more spending outside of tech and tech adjacent without having penalties.
Kind of explained the metastory right in terms of all the spending, and yet they're bread and butter helped by AI. But in terms of advertising, even though we can't quite quantify maybe the impact, it certainly shows. I want to go back to the markets, because here we are looking at a day where we are seeing a fair amount of selling. I want to go back to something like the socks which up seven percent yesterday, down eight percent today, Like that's a wide gap. So I'm trying to understand.
Definitely a lot more volatility in this market, but I'm not quite sure what it says to me about kind of where we go from here, especially if I hear from you that, hey, guys, earnings look pretty good and it's widening out just the usual suspects.
Yeah, I think it's a great point because semiconductors have been our fearless leader in this market advance for the last year and a half or however long it's been. Semiconductors has been this very strong, very big breakout sector, and so loss of leadership in semiconductors is always going to be someone uncomfortable, and without a doubt, we have lost a lot of that leadership. It is now a
very volatile contributor on a day to day basis. Investors are getting a little bit nervous, and justifiably so considering how extremely overbought that sector was, and I think this is the really important point. New investment opportunities are emerging outside of that space. And something we did talk about six weeks ago when we were together is we went through an anomalous period of time where and AI affiliated organizations, in particular semiconductors, really drove all of the optimism on
the index. It was the only source of sort of growth and capital naturally concentrated there. So it has been very painful as some of that is unwound and sought new sources of opportunity. But in the longer term, it is a much healthier market if it has more than one leader, and I do think we're moving into a slightly healthier market condition, but that can be kind of
painful in the short run. You know, when you had your biggest champion that suddenly kind of takes a back seat, and you have all these new smaller leaders kind of move forward.
Gina. One thing that has changed significantly since we last spoke to you is what the election looks like in November. Yeah, how is your team watching a change at the top of the ticket And yeah, who could be in the White House come January.
Yeah.
I think that there are two issues that are really important to watch, and that is how policy prescriptions play out on trade and how they play out on tax. And what I think is most important to watch in this election is really, no matter who you watch, we have a populist sort of tax structure that could emerge over the course of the next year, no matter who's
in office. And this is important to consider because I think there is a mental constant among most people that invest in stocks that there's one party that's historically been much friendlier to companies in terms of tax and the other one is less friendly. But in this election, it looks to us like tax rates are generally going to change and go higher, no matter who is at the top of the ticket and who wins in November, and
I think that that's incredibly important to watch. Trade is the other issue to watch, but it'll depend upon how policy prescriptions evolve over time.
Any of you who are listening watching missed any of it, You got to download our podcasts because that's everything you need to know. Thank you as always, Gina Martin Adams are Bloomberg Intelligence Chief Equity Strategy.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Easter Listen on Apple car Play and ed Brout Auto with a Bloomberg Business app, or watch US live on YouTube.
So Market's certainly front and center, but also front and center is geo political news. And this has to do with Russia, freeing Wall Street Journal reporter Van Gershkovich as well as Gerald Kremlin critics in the largest prisoner exchange with the Western decades in return for a prized assassin
sought by President Vladimir Putin. President Biden addressing the exchange, calling it a good day earlier from the White House, he was surrounded by family members of the four prisoners who are now coming home to the US.
This still would not have been made possible without our allies Germany, pauland Slovenia and Norway. In Turkey. They all stepped up. The deal that made this possible was a feat of diplomacy and friendship. Friendship vulnerable countries help get this done. They joined a difficult complex negotiations at my request, and I personally thanked them all again.
That was President Biden. Earlier today from the White House with Moore, were joined by doctor Angelas Stant, senior fellow at Brookings Institution, also the author of Putin's World, Russia Against the West End with the Rest. She's a former National intelligence officer for Russia and Eurasia at the National Intelligence Council. Also served in the Office Policy Planning at the US Department of State. He joins us now from Nantucket.
Doctor Stent. Always appreciate you taking the time and joining us on a Bloomberg business week. Why is this swap happening right now?
So?
I think, first of all, we have to congratulate the Biden administration, the White House Estate Department, all the people who work very, very hard and tirelessly to get this done. I think it's happening now because Putin really wanted this assassin from Germany back. I think the message that he's trying to send to his own people when they try and recruit them to join the intelligence services. You know, we have your back, and we're not going to let
you die in some other prison you know where. We're going to take care of you. So I think it was very important for him to get this particular man back. But also I think it's partly to show that, hey, you can negotiate with us, we're reasonable, and to sort of make the Ukrainians look as if they're not reasonable because right now, of course, the Ukrainians are saying they're not going to go negotiate with Russia because there's nothing
to negotiate. So I suspect there are a number of reasons for this, and Putin obviously decided not to wait until the US election to do this, but to do this now.
That's what I wondered, Why not wait until the next administration. Is there any you think strategizing around that in terms of who might ultimately we know we're going to get a change. We know it's not going to be President Biden. It's either going to be we assume at this point, either Donald Trump or Kamala Harris. Do you think any of that played in to his thinking?
Angela, Well, I think when the Kremlin looks at what's happening in the US. They see all the polarization and the chals here, and they're actually not quite sure what's
going to happen after November. Don't forget Germany was a key country in this because Chancellor Schultz had to agree to release an assassin who was in a German prison as part of a US deal essentially with Rocha, although it was multinational, as President Biden said today in his remarks, but they just weren't sure what was going to happen. And at least they knew that at this point. And apparently Vice President Harris also was negotiating earlier on with
Chancellor Schultz. She was involved in this, so they knew that it could happen with the current people in the administration, but they just weren't sure about what would happen after November. And I think at that point, who you know, he got back a number of spies, you know, the Russians got from the Western country spies, and what the West got was sixteen people who were essentially political prisoners. It was probably viewed to be a better deal for Russia.
Better deal for Russia, So talk to US a little bit about Vidim Krasikov, who was serving a life sentence in Germany for a twenty nineteen killing of a Chechen separatist in a Berlin park. What do we need to know about him?
So what you need to know about him was that you know, he joined the Russian security services. He was a trained assassin. He had assassinated other people before, and he very methodically planned how he got to Germany. The man he killed was a Georgian citizen, but an ethnic che who was a rebel and who'd been involved in fighting the Russian government, and so he was sent to
assassinate him. He had, of course a false passport. He traveled to Germany via various other countries composed as a tourist, and he shot the man in broad daylight in the Teargarten, one of the main parks in Berlin. He was apprehended shortly thereafter. For years he wouldn't tell them who he really was. It took the German police, obviously with other in conjunction with other services, trying to figure out who the man was. And he was in prison in Germany
having been convicted of this. So he is a trained assassin and from everything. We know Putin really wanted him back. He was the number one person that Russia wanted back.
So if this is maybe a show of faith on the part of Russian Russia and Russian President Vladimir Putin, Angela, is it also showing that he might be open to some kind of negotiation to end this war?
Ball But you know, if you listen to what National Security Advisor Jake Sullivan said earlier today, there really is no connection between this prisoner swap, which was meticulously worked out over months and which is a kind of a finite negotiation, and the much broader question of how would you begin negotiations to have a cease fire or to
see an end to the war with Ukraine. And we do know that what Putin would like to use is to sit down with the US president two if there are going to be negotiations, and President Biden was also asked Thatt briefly today that's not going to happen with this administration. We don't know about what would happen after.
January, doctor stan If Americans who travel to Russia understand that they could be arrested and held and indeed convicted for things that they have no connection to or did not do. What are the implications of that for a relationship that is certainly already strained. I mean, I think about the freedom of the press and the lack of reporting that we see from Russia. Very few news organizations have a lot of journalists in Russia currently, So it's very.
Dangerous to be a Western journalist in Russia now, and I think most Western journalists have left. There are a few. There are a few Americans there, I think going forward, and the State Department has already warned people for months, Americans think twice about going to Russia because we do know that this is a modus operandi that Putin has. Some of the people who were released today were arrested before the full scale invasion of Ukraine, almost because Putin
was planning this to take hostages. So Russia does this. It's not the only country, Irano, a number of other countries clearly that do this, that is to arrest people and hold them hostages. So I think the messages, whatever the negotiation was, that produced this success. Today, it's still very dangerous for an American to travel to Russia without knowing exactly, you know, what they should be doing, and without really keeping their mouth shut.
Doubt about it in your view. I mean, US officials have accused Moscow of basically, you know, taking American hostages to basically release or win the release of their own Russian agents and others. Moscow says that's not the case. But do you believe that is their mode as you just kind of said, oh, I.
Think it is. I think if you look at the Americans who were released, three with US citizenship and one bloody were Kara Musa, who has a green card, you know these are not spies. These were people who were legitimately in Russia doing other things they I mean, in Kara Musa's case, he certainly criticized the government. The other three Americans were there either doing reporting, recording or in
Paul Wieman's course case, I guess, on vacation. And the other the Russians who were released today are all political opposition people. And then the other the German nationals and one man from Yellarius who were released. There are none of these people are remotely spies. So this is clearly a political hostage taking, whereas, of course the people who were released to Russia, most of them with spies and criminals.
So how does it make you nervous that the people that were released back to Russia are spies and criminals, and how does it kind of factor into your thinking about Russian President Vladimir Putin's ambitions still his ambition.
I mean, they're back in Russia now, so and they're not going to leave Russia or certainly they're not going to come to the West anytime soon. So I think Putin, you know, the Russians, we know have heightened their espionage activities in Europe, in the United States for some years now already, and so I think it doesn't really change the view of Russia as seeing the West as its enemy, of believing it can win in Ukraine, that it can
outlast the US and the European countries. I think what it means is there were practical reasons for Putin to engage in this exchange that we've talked about, but not much is going to change in any.
Future, Doctor Sten. Thirty seconds left on what happens in November. If when there is a change at the White House come January twentieth, how does that impact relations between Russia and the US. If it's Harris, if it's Trump.
Well, I think if it's Harris, there's going to be continuity. We know the people who've been working for her in this administration, the Vice President's office, so I think they would be continuity. If it's Donald Trump, we don't know. He has said a number of things. He said that he's going to end the ward, you know, in forty eight hours, and a number of other things, but we really don't have any sense of what he would actually do,
so I think that's a big unknown. And I think, again, coming back to what we discussed before, this is probably why this exchange has taken place now.
All right, so appreciate it. Everything just explained so clearly. Angela Again, Angela Stent, thank you so much. Really appreciate it. See your fellow over at the Brookings Institution. Joining us from Washington, DC.
You're listening to the Bloomberg Business Week podcast. Listen live each weekday. He's starting at two pm Eastern. Book car Play and Android Auto with the Bloomberg Business Ad. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty Yeah.
As the big tech earnings parade continue, Shares of Meta platforms off and running at its high up eleven percent, up right now by four point four percent, the most in six months earlier, the nearly one point three trillion dollar market cap Megacap reported better than expected sales in the second quarter, the fourth quarter in a row of
more than twenty percent growth. It also gave an upbeat sales forecast after the close yesterday, signaling Carol at the company's investments in AI are helping it sell more targeted as Yeah.
Their Kpe spent to by the way, also moved up with a roundup of the quarter and the II trade that investors are obsessed about but increasingly scrutinizing. Back with us is Bloomberg Intelligence senior Tech Industry Alice Man Deep seeing right here in studio. Great to have you here. So is the rally, which at its high was up
about eleven percent. We saw it in the aftermarket. We're trying to understand, like the capex bender is up, but what they are showing in terms of what they're making on ads that delivered and is that why investors are happy?
I think a couple of things to call out here. One is Meta is uniquely positioned now with their large anglid model. And you know, it's hard to put it in numbers in terms of how much really that drove the growth in the quarter. But when you hear their earnings call, it wasn't about metawverse. Metawverse is like not
even in their reference once. It was all AI and the fact that they have their own large anglid model and they are able to apply it to their family of apps, whether it's the Blue app, Instagram, WhatsApp that was called you know, big adoption in the US here, and how they see that monetization. I mean, that was to me the standout thing and that was a complete shift from you know, twelve months back when they were
just so abeat on metaverse. So clearly changing narrative. And look, you may say Reality Labs still lost four point five billion dollars, but a lot of those investments are going towards integrating AI within their ray Bang glasses, so they are looking at the AI opportunity everywhere they are operating because of their own large anguin model should.
Go ahead, Royl, Well, but if advertising revenue had disappointed, it's still their bread and butter. We'd be having a different conversation.
Absolutely, But that's the thing about AI. It's all about data and compute, and Meta has a lot of that because of their scale. So that's why they're doing so well with that ad revenue, because they're applying that in their products, in their ad stack. I mean, they called out how their ad campaign management has become so much easier with generative AI tools, and advertisers are finding a lot of ROI in that.
It's very clear that the company has done a very good job pivoting to AI. But my question for you, man Deep, is was it a strategic mistake to rename this company Meta Platforms and publicly say going all in on the metaverse when it seems like they've made, at least internally a real pivot to AI. And look, I know they're related, but you know we're not doing this in the metaverse yet.
I think the name change is all gone now. I mean, clearly they got a lot of slack for you know, the metaverse spend and the shift for a while. And look, we're still going through those easy comps. Second half, the comps get much tougher, so it'll be hard to sustain that twenty percent plus top line growth. But it was music to everyone's ears. The fact that you know, they are just they've moved on from the metaverse.
It seems yeah, it really does seem like that. One thing that they did call out, one thing that Mark Zuckerberg called out right at the beginning of the press release was these ray Bann glasses that you alluded to. How big of a product is that? How do you think about that product at Bloomberg Intelligence.
I mean, look, Meta's strategy is very clear. They want to have vertical integration where they own the hardware and the operating system and then deploy their AI on top of that. What they don't like is deploying their AI
on Apple's iPhone or on Android. They want to own everything, which is why you know, Mark Zuckerberg had this big pivot towards ar VR, and with ar they find that opening that even though the addressable market will not be as big as the smartphones and PCs, but it will still be a good chunk of people who may want, you know, like a glass based voice assistant, and that
could have a lot of use cases. It may not serve as a full fledged phone, but it could still be pretty handy in terms of driving productive.
Now the platform to read all those ads are going to come at you through AI. Having said that, when I think about we kind of keep having these conversations man deep about jen Ai and large language models and the application and the productivity. Is it easy the application in terms of ads? Is that why they're having such a big payoff?
Like?
Is that an easy application?
Do you know what I'm saying?
Well, so I'm trying to figure at how Jenai impacts our world, right, it makes us more productive, how it pays off in terms of financial returns. It's the easy route.
The best way to contrast it is with Microsoft. You look, they're making a big bed on AI and they're monetizing it through their you know, the ads stack, the cloud infrastructure, right, and also the co pilots. So everyone is looking for one of the big applications of generative AI co pilots and the other one is chat pot Chat pot is where you know, Meta has a lot of room because one they have engagement. You know, people spend maybe two hours across their family of apps.
If your Matt Biller maybe eight hours.
But anyway, so that's where if you deploy AI capabilities and then they have the most sophisticated ad stack. It becomes, you know, such a huge revenue opportunity.
Just twenty seconds. What are the questions that people are asking of these virtual assistants in Meta's family of apps that it's able to answer.
Well all sorts of things that you are looking at, Let's say a marketplace or groups where people already had a conversation. The chatpot has become so sophisticated that it can answer any basic question that people may have on a Facebook group, or you know, any sort of interaction you have had on WhatsApp Messenger. The chat pot can understand that really cool stuff.
Meta up four percent today, It's up almost forty percent here in twenty twenty four, Man Deep saying, always always amazing.
You're listening to the Bloomberg Business Week podcast. Listen live each weekday starting at two pm Eastern on Apple car 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 Brother Marco.
A Journal, Yeah about you?
Let me drive you?
Oh no, no, no, no, holry please, I'll do the gravel.
Wait, I want to try it's a good question.
Good time.
This is the drive to the globe. Well, young Don on Bloomberg Radio.
All right, it's an interesting day. Morning morning.
Maybe not.
I don't know. Stock's getting hit. Bond's a rolling treasury tenure we talked about breaking below four percent. Swap traders now fully pricing in three rate reductions this year. Those days a five six percent on the ten year seem a long long time ago. I feel like it's like a Star Wars movie, a long long.
Time ago in the galaxy far far away.
Yes, exactly.
Well, we got a perfect guest to talk about what is going on with the ten year and what she thinks it's going to do over the next few months and maybe even year. We got Katie Kaminski with us. She's chief research strategist and portfolio manager at Alpha Simplex. She joins us from Boston, Massachusetts. A favorite guest when it comes to the treasury trade trade, no doubt, A
good day to have you on. With the tenure falling below four percent for the first time since this winter, what do you make of what's going on in the treasury market today?
Well, the thing is things have changed.
We've seen signals go from short to long in fixed income, and I think we're going to continue to see that. The biggest change. I'm starting to feel like today reminds me a lot of June, where people are starting to get concerned about demand destruction, and that is just a very different market than a strong economy with higher rates. It's really more about weakness and is this really weak demand? And I think that means a stronger bond market.
Well, go back to you said signals have gone from short to long. Explain that.
So in the trend falling space, we are looking at where the direction is moving in different markets, and for almost the last three years, it's been mostly short signals in fixed income, and now we're actually seeing net flattening out and also long positioning in fixed income, which is a suggestion that sort of tides have turned and that these markets are actually starting to shift back to more of a long positioning with cuts potentially on the way
in the short term. So I think that that's really a big change from the last three years.
Where did the change come from?
Was it?
Thank you J Powell yesterday saying September like we're finally getting to it. Is it weak economic data? I mean We've been having conversations internally our Bill Maloney that we were just in here like that this market trade doesn't completely make sense. So I'm just curious, what is it specifically that has said, Okay, things are differently guys.
Well, I think there was some interesting weaker economic data this week, right. The challenge has always been that it's mixed, right, and so I think people are a little nervous because obviously valuations are very high, and as other central bankers have already started to cut rates, like the Bank of England today, and you start to see that there's a
lot more pressure on the FED. So it's really both the FED and also just general risk off concern about the fact that the weak economic data is starting to show up, which means that bonds are likely going to rally and stocks may recover. Have to sort of retract a little.
Bit any time I would say it any of this Katie about the US presidential race and the outcome come November.
I think definitely that's part of the uncertainty we're seeing. Sort of most people are a little ambivalent about how to think about risk going into the second half of the year and what potential outcomes might be. They seem to be very broad. There's just really not a clear path. The only things that are sort of certain are that we're probably going to see cuts, so that would explain
the ten years of breaking that four percent bound. But in general, I think uncertainty is never very good for equities. We're seeing a lot of it right now.
Hey, Katie, the FED is it behind the ball? Did it drop the ball? Not cutting?
Well, I would say that, you know, the FED had been looking at very different data than some of the other central banks, so I'm not surprised given how they've been a little bit more cautious. But as we start to see data that is confirming weaker economic data, they're going to have to react more. And I think that's where you know, they could get behind the ball in the sense if that data continues to come in negative, it's just going to be more certain that we do
have cuts later this year. But of course, our data has been very different from some of those economies that cut a little bit earlier.
How low can we go on the ten percent? I mean ten percent? How long can we go?
You and I I'm mixing metaphors.
Kim and I were just saying what is wrong with our break.
I can't.
I'm like, am I drop the curve behind the ball?
I can't saying activism.
Active activision A. Yeah, yeah, we're just it's it's August.
Yeah it should be Friday, but it tain't, as they say, So how lo can we go on the tenure? In your view?
Well, it's really going to depend what happens to economic weakness and the data that comes out. I wouldn't be surprised, especially if we have a serious retraction inequities, that you're going to see yields go down a lot more because that risk off trade would definitely be visible if we do see sort of a strong reversal inequity markets. So I'd say that, you know, even though the market is expecting three cuts, you might still see yields dropping quite a bit more if people get nervous.
What's quite a bit more? You know, we we at Kallenberg love these numbers, or I.
Know you love numbers. I think I think that's hard to say. I mean, if you look at where we've come, we've gone about one percent from the peak, so we could potentially see another couple of percent. So maybe we could get that back into the three range this year.
I'm not thinking extremely low. I think it's going to take time, but you know, you could definitely see pretty big moves and bonds if it's a sort of reversal, you know, retraction and equities that is really indicative of a risk off move where people are actually seeing reprising.
So three percent if we see that reversal retraction, yes, likely, yeah, okay, all.
Right, you know what, you know, We'll hold you to it, Katie. We always do when you come.
Back at the digital recording.
Well, how should we think about the curve or the new normal of the curve in this post COVID environment.
That's it's tricky because you know, really when you think about the curve, it has to do a lot as well with future expectations and also relative yield valuations between different different you know, different currencies as well. And I think for now we've seen a lot of inversion and flattening. Maybe we'll eventually see a steepening at some point. I know that that's what everybody was expecting at the beginning of the year, but we'll have to wait and see.
I think right now we've seen long term yields being more bullish than short term yields. So that may indicate that the longer term expectations for the long end of the curve are lower yields, but it's still very uncertain how long it's going to take for the short end of the curve and how much time.
That's going to take.
You know, Katie, in a year where we have geopolitical we have a US presidential race, we have earnings, we have AI, we have you know, go through all the things that are out there, you know, trying to make sense of FED policy or monetary global monetary policy. Thirty seconds left here. What is the thing that you think investors just should always keep an eye on to really get an idea of kind of where we go on the fixed income side of things.
Well, I think what is important now is once the tide has turned, now you're seeing that fixed income is definitely there's signals that we're going to see higher at lower rates, and so if that's the case, oftentimes people don't move quickly enough. So really be aware that you're going to have a big repricing and if fields come down, and write something to take.
Advantage of when it moves right exactly Katiekimitski, Thank you so much, Chief Research Strategies Portfolio manager of at Alpha Simplex.
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