APERS Borromeo Sees Fed on Hold, 'Data Is Not There' (Audio)

a gain of one point four percent. Nass Stack hired by seventy four points, a gain of one point five percent. Dow In dust reels up two hundred thirty five points, a gain of one point three percent. The tenure of five thirty seconds had yield one point three six percent. Gold up three ninety ounce the thirteen sixty six. That is a gain of three tenths of one percent. Crude oil West Texas Intermediate twenty barrel again there are at

point one percent. I'm Charlie Tallott. That's a Bloomberg Business Flash. You're listening to Taking Stot with Kathleen Days and pim Box on Bloomberg Radio. How do you provide for the retirement of thousands of people who are public employees? Particularly in the Arkansas Public Employees Retirement system. Well, first you ask Carlos Borromeo, he is the chief investment officer based in Little Rock, Arkansas, how to do it? Carlos, thank

you very much for being with us. Well, thank you for having me so in the Arkansas Public Employees retirement system, you have a responsibility to all of those retirees to meet those retirement benefits. How are you doing that? When you look at a thirty year US Treasury bond that trades at two point one per cent, it's definitely been a challenge of situation and having it seems like he wants to continue even lower. It's going to pose an

even greater challenge on all retirement systems. You know, I think the people who keeps the levelhead and don't start reaching for yield and unnecessary risks. Um, you've got to keep your cool in this environment. Well, Carlos says that help. We've no each other for a long time over the years of my different news organizations and your different roles, and you've been an arranging bond bull for some time. You've been addicting an ever lower level of long term yields.

You've said that the United States was gonna look more and more like Japan. I don't think we necessarily there. You and I could debate that, but um, what is it that has driven this position and has it helped you then in your role not be blindsided by this, but somehow at least be able to avoid any negative fallout or take advantage of it in terms of the funds.

As far as avoiding it, it's it's certainly helped. I think I have one of the lowest allocations in the state two fixed income UM my target, and I'm still sitting below that. So in that regard, it's definitely helped. Um, but it's still worries me because I'm certainly overallocated to equities. UM. So you're just trading one risk for another, and that's

that's the tricky part of sitting in this seat. Um Yeah, I mean you and I have gone back and forth over the years that we're looking more and more like Japan. And I would argue if you you pull up the j g B chart when jgbs were and running from ninete to two thousand nine, so approximately twenty years. It took the JGBS about twenty years to go from eight so about where we are now one one and three eight on a tenure note, it's taken us from two

thousand and sixteen, so twenty two years. So we're mirroring their yield curve, whether we like it or not. Carlos, the fund itself, the assets under manager, what are you talking about? Maybe seven and a half seven half billion? And uh, it's the funded status of the of the system. Uh,

something like that. Okay. Now, the reason I bring up these numbers is because you know, when you manage a system over a long period of time, and I think it was in your own report you say that you know the return for let's say two thousand and nine was negative twenty to a high of plus in twenty eleven. How do you manage that kind of volatility? It's not easy, right, Um, if we all had a crystal ball when we look at the allocation, look into the future. Um, you look

back and would we have allocated differently? Um? Would you have allocated differently? Do you think? I mean not knowing that you know what would happen, but would you have made different decisions? I don't think we would have because that becomes a board of trustees decision and if two eight, two thousand nine didn't change how retirement systems allocate. I think people are gonna, uh look at it steady as she goes, be content with their allocation, and realize that

we're in this for a long run. Carlos. Where where how much closer are we to the bottom? I mean, look, we had we had a tenure note down to about what was it? One point three six? The thirty year bond was down to what around two point two four? Maybe the lower in terms of yield higher in terms of price. I mean, the lower you go, the more you have to be closer to the bottom. Have we had the bottom in bond yields for all the high

end price? Uh? And are we going to see some selling or people gonna say, well, I could sell and get some capital appreciation, but I want to hold onto some of this fixed income. I bought it a higher yield. I don't think we personally belong here, but I think that people want to be in dollar denominated assets, which means they'ren to come in and buy tenure notes and pract push down to one down to one. Now you have what about forty five thousand active members average ages

about forty five years. You have to project out well, I would imagine on on a continuous basis to provide what the monthly benefit, which is about a thousand dollars. Yes, have you gotten any pushback from any of the retirees saying look, I'm scared, I'm worried, I don't know what to do. We haven't had any of the pushback yet, but sitting in this role, I'm certainly worried. Worried that about how you're going to meet the bogey, how you're going to have get there enough money to pay help

these people receive their pensions. Is that you're absolutely and you know we're hitting the baby boomer and they're starting to hit the retirement period right now, and the demand on benefit payments is only going to increase. So where do you see the FED going? Is the FED going to say stay where they are? Are they going to say these these are these yields falling around the world was potentially native signed. Are they going to say, hey, look,

the labor market is not doing so bad. You know, jobs are growing about a hundred seventy thousand on average for the last several months or year, getting to you know, kind of rev up for the rate increase, and if they do, is that is that bad because maybe it hurts the equity market. Is it good because finally there's a little more yield out there for people to earn. Well, you're seeing the front end come up, come up in yield, so you're seeing the flattening being led by the front

and which which is probably gonna be helpful. Um. I personally think the FEDS on hold I. You and I have had conversations back and forth. You know, I lost the bet to you last year. I said it has not raising rates at all in two thousands fifteen, and they saved you in December, and then at the beginning of this year, I said, the set's not raising rights this year, and so far I don't think they're going to.

So I just think the data that's coming out, and it seems like the data they're looking for is just not there. Right. It seems like they wanted three things. They wanted growth, they wanted employment, and they wanted inflation. And I just don't know if they're gonna get all three in one year. What would it take to get all three in one year. I think it's beyond center banks. I think it's gonna become um acts of Congress if you will, what to provide more physical stimulus to the

economy and more pending. I just don't think secial stimius is going to do it by itself. What I say, it's not the FED fiscal stimulus alone isn't enough. So what's it going to take? I don't have the answer I wish I did. Negative interest rates? Is there any chance the Fed is going to take now? Irana coach Lakota's device, former head of the Minneapolis FED, take his advice and uh consider tools like that. Is it going

to get to that? Do you think? And if so, then what does it do for a guy like you trying to manage public funds? You know, I don't think any center banker two years ago would have said, yeah, negative interest rates are certainly on the table, and our

own sort of reserve is saying the same thing. But yet we can look at some of the countries right now then they have a negative interest rates, not because they want it, because that's where the market has taken it, and were we may end up in the same boat as far as acid allocation goes. Carlos, can you give us an idea of what you may have changed. I know, for example, that you've got US domestic equity securities. UH, increased your allocation I guess last year about two and

a half percent. What what are you changing in your asset allocation model? If anything? So far we haven't. But with with the recent lower interest rates that we're experiencing, I see we're gonna at that with discussion about it. We're kind of discussion. I mean to allocate more money to equities, perhaps to dividend paying equities, for alternative investments. I think we'll definitely, I'm willing to look at alternatives. UM.

I think real assets, which I include real estate. UM. I think there will be opportunities in Europe given the Brexit situation for real estate. UM. So we're certainly going to have to look at everything. Again. Are you at all concerned about recession? It seems these you can look at these latest job numbers Carlos and say, no, we're gonna things may not be roaring here, but we're certainly not anywhere in near recession. And yet you know, Pim and I were talking earlier about the yield curve and

what its signal could be. The act that you once jobless claims, an unemployment bottom, the only way to go is usually back up. What do you see as somebody from from this fixed income bond investment point of view, where you've been in this perch for so long. Recession is not a word that I've really worried about just yet. I mean, it's certainly down down the road. Um, the numbers,

the job numbers itself, it seems okay, not stellar, not horrible. Um, it just feels like the markets, especially the corporate bond markets, the highland markets, there's more and more people coming into it and they're grabbing yield, which is just a dangerous thing to do. So as far as we're session, Kathleen, No, I have not uttered those words yet, but could I down the road? Certainly? Carlos Borrow mammo. Carl Carlos Borrow

Borrow mammo. He is chief investment officer at April's Arkansas Public Employees Retirement System, joining us from Little Rock, Arkansas. Uh makes you realize is that him and I people like us. We talk about what's going on in the bomb market. We ask a lot of questions. Boy, when you have to be the person who puts the money where the state's mouth is that's quite a job. And in fact I am Kathine Hays along with Pim Fox, and this is Bloomberg.