Deflationary Forces Will See 30-Year UST Going To 2%: Shilling

a Gary Shilling and Company. He is also a Bloomberg View profiting columnists and Gary always a pleasure to speak with you. UM, wonder if you could just give us your thoughts based on today's payroll report non farm payroll report, and are you still positioning yourself as long US treasuries. Yes, we are, a matter of fact, we've we've stepped up our position in the last several weeks and the portfolios we manage. UM. I think we're in a situation here

where pay rolls are are growing but rather modestly. Nothing really uh to get excited about. Nothing that's going to change the Fed's view of the world. And of course there's a big difference between what the Fed does on the short end of the curve and where you get out into the ten uere. And even more so as you know him, the thirty year that I like, the spillower is very limited when you get out there and you've you've got a lot of deflationary forces, safe haven effects.

You look at what's happening just today here with the latest turmoil on the on the trade front, and where do people go. They go to treasuries, business as usual, so Gary, So it sounds like you are currently out there buying thirty year treasuries on a day like today. I'm just wondering how overweight are you? And where do you see the yield ending up? Because right now I'm looking at a three percent yield on three year treasuries.

Where's it go? Well, all on record is as saying I think it'll go to it'll go to two percent, And really it's really the fact that the skin I think we're in a world of a lot of deflationary forces, and you know, protuctionism elenly is deflationary excent that dispose economic growth. Although we're in a kabuki dance right now posturing more than anything else. Uh. But but again the

safe haven effect. And you know one other thing. The Chinese people worry about their dumping treasuries, but they're on record is saying that they are not going to change their their policy. And obviously if they started to sell treasuries, UH, they would tank. And who would be the big losers the Chinese because then the rest of their portfolio would be vastly reduced. So UM, I think again the safe

haven effect and deflationary forces. So I think we go to two and if we go to two percent, if we go to two percent from here, in one year, you'll make thirty percent on a thirty year coupon treasure three and thirty three on a zero UH coupon treasury thirty year. Tell us what your thoughts on the outlook

for commodity prices and specifically oil, well oil oil. Obviously we're facing OLFAC, which is trying desperately to do what they what they have had to do traditionally, which is to be the swing producer, to cut back to accommodate everybody else who wants a bigger share of the market. The American frackers in particular, UH, They did that for ten years. In November of often they said enough is enough.

They fled to the market. They went from thirty million barrels a data thirty three point eight million almost overnight. They wanted to squeeze out the flackers. Uh, frackers play a glorify game of chicken, and hoof turned out to be the chicken. It's olfac. So they're they're trying to cut back. But the point is that the frackers are

very resilient and they're producing now. We're now looking and I think at ten point four million barrels of a US production atuff about half half a million barrels from a year ago. And uh, yeah, I think there is there is a range on this, but I think the

pressure is is down on oil prices. And the point is that the longer OPEC goes and they've got to Russia in other countries with him, of course, but the longer that goes, the comfort is to maintain discipline because they have huge budget deviasits are trying to fill it one higher prices in order to get the revenues to do that. In Saudi Arabia, Ran, Olivia, you name it. Uh. And the point is that at some point somebody's gonna say enough is enough. I'm gonna cheat. I'm going to

sell more because I desperately need the revenues. Gary. It sounds like you're pretty barrish. Actually it's to other people. What would what would you have to see to sort of say to yourself? You know Paris on treasuries. Right, you're not farrish on this in the traditional human ascid. I have been since nineteen one when I said we're entering the bond rally of the lifetime in the yield on the third of your bond was was twelve point

six percent at that point. Yeah, but right now there's something else driving in And I wanted to ask you what would you have to see to think, huh, maybe I'm maybe the U. S. Economy is doing better than I think it has. It doesn't just the economy doing better than The link with treasure yields is very clearly inflation. There's about a sixty percent correlation between long term treasure yields and inflation. And it would really take something that

would dramatically increase inflation. Now, historically that's been wars periods when government spending vastly exceeds revenues on top of a fully employed economy, and the economy is strained, you get in inflation. The last time we had that, of course, was with a great society and Vietnam spending back to back in the late sixties and early seventies. Uh, could

that be created again? Sure? I mean if Congress the administration really go hog while in terms of infrastructure spending and military spending, there's a lot of pressure to do so because voters are mad as hell or hasn't been any growth in in real incomes for most people in over a decade. That could do it, But that's that's in a longer in a in a more fundamental stample, you've got to see inflation and and otherwise we're in

an excess supply world. I mean, that's why Trump's got the upper hand and the with the Chinese in an upper in a in an excess supply world, who's got the upper hand? And say not the seller? Gary? You mentioned military spending. What do you think about investing in aerospace and defense companies? We are in poor fellow as we managed we we do have positions in the aerospace and defense area. Have you been increasing them? No, No, we've helped steady, but we have we have a we

have an extraordinary amount of cash. I mean having said that, you know, we're in psories for aerospace, but we're really very heavy on cash because you've you've had some much more volatility, and I think there's this long bowlmarket in stocks that started in March of of of two thousand nine. Uh, you know, very steady and obviously spawned a lot of a lot of excess risk taking because interest rates were low and people thought they deserved more and they took

advantage of low volativity, the big play with VIX. But of course that really started to come on glue in early February when we saw the Vics take off and and stocks Plumbert and Shan. But it's a very tricky world right now because you haven't seen the usual massive run for either treasuries or goal right, which would normally

be that the haven type of trade. Unfortunately, gonna have to leave their Gary Shilling, president of A Gary Shilling and Company, also Bloomberg View Profit and columnists, how do trade disputes figure into the value of investments in China? Here to help us understand this is Brendan A. Hearn. He is the chief investment officer of Crane Shares and

he joins US now. Brendan, maybe you could just describe sort of what is happened in the Chinese stock market, what has been the reaction to trade tariffs and trade potential trade wars between the United States and China. Yeah, you know, the Shanghai and Shenzen markets PAM have been closed for my my my favorite Chinese holiday tomb sweeping both Thursday and today on Friday. Hong Kong was open today, um,

and I think most investor to be surprised. The the Hanks saying actually gained uh just over one per cent um and this was obviously included the post market close uh comments from President Trump. So so actually the Hong Kong market took it in stride. You know, Brandon, you could argue that the US market is as well. A lot of people who I speak to anyway, uh, they just tell us, you know what, this is just a war of words. This is chest beating. This is part

of the art of the deal. We're not paying attention, should they? Yeah? I mean, I think ultimately there's there's so much at risk for for both countries around further s f lation that we certainly hope that this war words is simply a part of that negotiating tactic. Uh, certainly, there's just so much at stake that to to unravel UM, you know, the great progress that's been made or do a real, real, real shame and really would have a

disastrous effect for for arguably both parties. Right then, just looking at the shares of Ali Baba Group as a proxy down about one and a half percent so far this year, is Ali Baba perhaps indicative of what we can expect? In other words, would you be watching those shares for any reaction based on these trade negotiations? Yeah. I think it's interesting that the US list of Chinese companies that that we hold within our k web or trying to focus Internet Strategy UM are used as trying

to proxies. But the fight thing is, though UM, only four per cent of the revenue generated by the companies that we hold within k web are generated out side of China. UM. You compare that to the SMP five hundred, where over twenty of the US companies held within SMP five hundred UH come from outside of the United States. So it's so it's interesting if if you're if you're selling your Ali Baba because you're worried about a trade war. The reality is Ali Baba has virtually no exposure to

the United States. It's a domestically oriented company. It's hard, it's really hard to understand that rationale. You know. One thing that I'm trying to understand right now is it seems quite clear, uh, that perhaps there could be a more level playing field with China and the rest of

the world. A lot of the world agrees with that, frankly, Uh, But what's unclear to me is how much are is there concrete talking going on and versus how much is this just sort of like a you know, one blow here, one blow there, chest pouting here, and kind of like

a drumbeat something actually happening. Yeah, I definitely. One one thing that I think the market, you know, didn't like to hear was was, you know, Larry Cudlow, who threw through a life life preserver to markets on Wednesday by coming out and saying, oh, you know, this is a negotiator coming out and saying that there's no talk has taken place. Over a trillion in global market capitalization has

been lost um over the last several weeks globally. UM, and and it's it's it's it's a little disconcerting that that you know that the talks, these negotiations I haven't started. Um, you know, so day came out and uh, I think that's accelerated. Uh that you know, this is this says serious implications and you know, I think you know, I hope cooler heads prevail and discussion does take place. Uh. There's great opportunities for both countries to enhance this relationship,

but you've got to get down and talk. Hopefully that that takes place shortly. Brendan, what about smart investors? What are they doing? I want to note that you've described how the Lippo Group, which is a big real estate company based in Indonesia, has been adding to their China stockholdings. Yeah. One of the things that we've continued to see that

that is quite interesting. Over the last several weeks, we've seen increased within Southbound connect trading, which has been closed due to tomb sweeping, holiday um buying, and then more recently we had uh the Lippo Group, who you know, anyone who's traveled to Hong Kong, you see the big

skyscrapers with with the family name. So it is interesting that we're seeing buying on weakness from both mainland as well as now in this case a very very prestigious family in in Hong Kong so Um and and even even earlier this week it was interesting we actually saw northbound foreign buying on weakness. So so I like to hope that institutional investors are keeping up. People are willing to to sell based on emotions Um and you know

professional investors are going to by those shares. Brendan are real quick. If you could give a percent chance that we are going to escalate into some sort of trade or what percent chance would you give it, I think on the talk it's it's probably in terms of the reality of an actual trade war having a much much

low low percentage. There's just too much at stake. I I would think, you know, I think Li said, you know, no one wants to be known as orchestrating the smooth hally and that that is what people will be go down in history for if if this escalation actually takes place. I don't think the reputation people have built successfully in business are worth throwing away for for really just you know a lot. I mean, there are very much grievances that should be addressed by by the China side around

infectual property. At the same time, they've made great strides in opening up. So hopefully those cooler heads prevailed in her and thank you so much, Io of Crane Shares. So with today's declines, we have turned read for the year on the SMP five hundred uh. The Dow Jones also read for the year. Who is out there willing to buy? Well, perhaps we'll get our answer from Aaron Brown. She is head of acid Allocation at UBS Asset Management,

overseeing about seven hundred and seventy billion dollars. It's based in New York. Aaron, thank you so much for being here. So we have seen this weakness. Are you buying yes, So we have the view that through throughout the duration of this year, we expect that equies are going to end the year higher. So we're still expecting about mid single digits earnings or SMP returns this year and double

digit earnings growth. So we are buying into pockets weakness. However, right now here we've taken a little bit of a weight and c mode to see some of the trade tariff discussions come to a conclusion before we really start in in force and start buying. This is important. In other words, even if you don't necessarily believe that there's going to be a full blown escalation, it isn't worth

it to you. It sounds like, if I'm interpreting this right and correct me if I'm wrong, to step in here, because that possibility is potentially highly damaging and could change your view. Yeah, so I think for now you're getting paid to weight right. I don't think that there's a necessarily a need to be stepping in right here, right now and buying stocks. That said, on the margin, we're nibbling when we see real pockets of weakness in specific sectors or in specific you know, sort of areas of

the market that we like. We actually think that given the declines, valuations look attractive. But you're also having a higher risk premium priced into stocks. So the counterbalance of that right now means we're standing on the sidelines with some dry powder, getting ready to buy more some of

the changes we have made of late. We are buying a little bit of a e M because we think that e M has been hit but actually has been performing pretty well as actually held in there, and we think that the earnings trajectory and the structural underweight within emerging markets still supports and overweight to e M, so we're buying there, but we're also on the other side of that doing some currency trades like buying the en um to support and to support sort of our our

risk off positions, and also being a little bit longer US treasury yields, so buying a little bit of equities, but also counter balancing that with a little bit more defensive positioning in our FX and our rape books. I want to just continue on what you talked about having to do with currencies and get your thoughts on the dollar. Do you think that we're going to see increased dollar

weakness throughout the duration of this year. Absolutely. Our view is that the dollar will weakend versus the euro to about one thirty by the end of the year. We expect that versus the end we expect a dollar end to end the year around a hundred. So throughout the duration you know, this year, we are expecting that the

dollar will continue to weaken. Most of that is based on the fact that we think that the FED is further ahead in terms of the rate trajectory path than either the E C B or the B O J. And so we think as we continue throughout the duration of the year and we start to see interest rate differentials converge, that will drive the dollar weaker versus our

d d M counterparts. However, versus emerging markets. We think that the emerging markets are again structurally underweight, and so we think that E M will also outperform the dollar. In the near term. We are running fairly neutral in terms of our overall dollar exposure, but we do expect that as we move into the second half of the year,

we will start putting on fairly significant dollar underweights. Again, UM, I want to I want to just pick up on one thing that you said, where you were saying, you know, perhaps for we're taking a weight and see approach, but nibbling around the edges and sectors that we like. What sectors are those? And I'm thinking is that tech? Are you out there buying Facebook when face fit goes down?

So we leg tech as a sector right now. We do think that the earnings fundamental picture for tech is still very strongly And are you gonna be watching Mark Zuckerberg next week? Absolutely. But but but I also think you know, what's interesting about this is that you actually may see a comparative advantage for the larger tech the larger cap tech companies who are able to appropriately size their their staff in order to potentially deal with higher regulation.

So if you think about small cap tech, they may not have the resources to appropriately put the governance and the compliance structures in place, similar to what we saw with the banking sector several years ago UM. And so going forward, actually, these big tech companies actually have the capabilities to potentially, you know, sort of adapt themselves in order to deal with the more compliance or regulatory heavy

industry to come bigger. If you're if you're adding to let's say, emerging market positions, if you are adding whatever valuation you feel appropriate to technology holdings, what are you selling or what are you diminishing in the asset allocation model in order to bring up those portions of the portfolio. Right, So, overall we've decreased our equity weight somewhat, and that that's

really broad sector equity weight. So if you think of just sort of our broad market beta to the SMP five hundred UM, we don't as an asset management firm we and and in the multi asset space we predominantly by e T F s or futures or sectors. We don't buy individual companies, um, So that's that we're selling down some of our SMP weight. We've also started to sell down some of our European equity overweight, which we

had been running overweight for the last six months. That hasn't performed as we would have expected if you started to see some of the economic data rolling over. So we've lightened our risk a little bit there. And then one of the most significant changes is we've also started to sell down some of our Japanese equity overweight as well.

It's interesting, especially since you're going into the end. One thing that we've heard from a lot of investors is that they've been increasing their allocation to treasuries, and you said that you were as well, although not necessarily on the long end, but on the short end of the curve. Basically, now that you're actually getting yield onto your treasuries, it's a great time, do you agree, I mean, is that

sort of a great holding spot. So for for us, we actually think the longer end for asset managers as a better holding spot. And that's because a you get incremental yield, but also when you look at the stock bond correlation, it's the ten year yield oft historically has offered a very good counterbalance to the equity, you know, risk that you're holding in your portfolio. So as a diversifier of risk over the long to medium term, the tenure bond actually in portfolios works very well to diversify

out some of the equity risk. And so typically you see that as a is a minimizes the overall portfolio risk in our asset allocation models pretty significantly. Even though you've seen that that stock bond correlation start to move less negative, it's still in negative territory and it still is I think a very appropriate asset for diversified portfolio holdings. Just quickly as an something that's got a lot of experience in the world of hedge funds, I'm sure you

noted the Pershing Square capital and the redemptions. There any thoughts on what you can see for hedge funds this uh this year, So I think for so what we've actually started to see is active management as a factor has started to do better. Um, we've been in you know, sort of four to five years where active management has greatly underperformed passive management. As a result of that, you've

seen hedge funds and active managers suffer pretty significantly. I think what you're starting to see now is that active managers with the right business model are now starting to do quite well, and you saw them actually outperform in the most recent period of volatility. Historically, during periods of higher volatility, active management outperforms. So we like active management here.

Thanks very much for being with us. Aaron Brown is the head of asset Allocation for u Bsset Management, helping to manage within seven hundred and seventy billion dollars of customer assets. Since George Korean became the president chief executive officer of net App in mid two thousand and fifteen, this data storage company's stock has gained more than a hundred and sixteen per cent. George Korean joins us now along with our own Non sinof Sven, who is a

senior semiconductor and hardware analyst for Bloomberg Intelligence. George, I want to just start with you and ask, you know, can you give us just a short overview of what's happened at the company, what the company is, and how it's transformed since you took office. We are a company

that enables customers to use data for business advantage. Increasingly, trends like the hybrid cloud or artificial intelligence and machine learning depend on sophisticated data management capabilities to allow businesses to operate efficiently and productively in service of their customers, and net app is the data authority for these trends. We have superior technology, attract record of working with the world's leading institutions, as well as increasingly endorsed by the

biggest hyper scala cloud providers. So Ananata Bus and I want to just bring you in here. Can you give us sort of an overview of where this data storage industry is right now? Where are something like what's the biggest challenge right now for it? Great? Thanks, So, one of the biggest trends in data storage overall, if you look at network storage systems, that market is shrinking. But one of the things that NetApp has done and transformed itself is it is the only company in our minds

that has become relevant to the public cloud model. They're transforming themselves from a legacy network storage provider to a company that is cloud biased, increasingly software based, and increasingly new technology based away from spinning disks to more all flash arrays. So if you put all of those things together, this is a company that is pivoted itself pretty aggressively successfully over the past three years. And and I have to give credit or creditors due George is responsible for

a substantial portion of that. George, maybe just delve a little bit into the actual technology something called fabric attached storage as well as all flash storage, and maybe just explain it and offer it as a story so that people understand when they are using the data either that their company is able to create internally or that they

received from their customer base. M companies want to aggregate large amounts of data to understand their customers better, to understand their own business performance better, and to do that they connect different computing systems to common network connected storage. Those network connected storage systems were historically within the company's data center. What customers want to do now increasingly is

to use storage that's available in the public cloud. And what we uniquely in the industry do is to be able to make all of those locations where people want to use data seamlessly integrated. We call that idea data fabric, and it's growing very quickly as a percentage of our business. You know. One of the things that's also impressive is the fact that this is a company that is very differentiated versus legacy I T providers such as Dell, EMC

or HP Enterprise. Perhaps UM George, you could you could sort of honing on sort of the differences. Why is net app different? I think one of the unique things that we are focused on is being the world's best at the problem of data management, which is not only increasingly business critical but also more complex. So we can partner effectively with the cloud providers, we can partner with software companies, we can partner with chip manufacturers to build

the best solutions for our customers. And we are entirely focused on that problem. And that's why, as a percentage of our business, the new technologies, which we call strategic solutions, are now seventy of net product revenue and are growing twent year on year. It represents the power of our new technology portfolio. How concerned are you about the protection

of data against breaches or hacks or inappropriate usage? Considering how much focused there is on that These days, it's an absolutely important challenge that we help our customers deal with. Data is the lifeblood of a digital organization and being a steward of that is something that our customers stake as a core part of their mission. We provide them with tools and technology that enables them to accomplish their mission. What's your biggest fear when it comes to data security?

I think it's malicious insiders that have access to data to support a business's mission now becoming opposed to that mission. Right, So it's very very hard for companies to be able to protect their resources from internal attack, and those internal attacks now take on state sponsored agents, for example. And so we continue to work with the industry to build more and more capabilities to not only provide customers with ideas of who is accessing the data, but when and

where they are accessing it from. They had their handless day yesterday and they sent a very upbeat message both in terms of top line and bottom line growth. So in this era, from a from a technology legacy technology hardware perspective, where trends are generally deficionary, this is a company that is going to grow conservatively at the mid single digit on the top line and earnings growth the word about so I thought there was a great upbeat message that that net app sent on its handless stay.

Thank you. We feel bullish about our prospects. Yesterday we talked about growth top line growth in the mid single digits, which represents both share gain in our existing markets at the expense of legacy competitors, as well as the addition

of new markets like the cloud. It reflects the discipline our operating model, where we are raising our guidance for operating margin from where it is today to reflecting an increased focus on the best markets and an increasing contribution from software or our portfolio, and earnings leverage by big UH, commitment to capital returns through doubling our dividend and a new authorization for four billion dollars in buy back on a trade of Austin as our senior semiconductor hardware analyst

from Bloomberg Intelligence, I keep hearing about how storage is a commodity. How does something like net app uh evade the commodity trap? Is it through their software, through the use of on tap? What makes it happen? You answered the question, your storage is the commodity? Absolutely So what value add can you provide on top of that storage system is what makes it differentiated, what makes it key. Right, anybody can sell your disk, anybody can sell you sew

this data race. But the value and comes from the software. And again it's it needs to be consistent with its storage as in house or in a public cloud, or somewhere in between, a composite of all of those. The software is what drives the architecture. All right, well done, Thanks very much a gentleman for coming in on a train of us and as our senior semiconductor and hardware analyst for Bloomberg Intelligence, and our thanks also to George Curran.

He is the president and the chief executive of NetApp. Coming up on Bloomberg Markets and we're gonna be talking about municipal bonds. We've got Joe Maisak, editor for the Municipal bond brief for Bloomberg Briefs. I'm pim Fox, my co host Lisa Abramwitz. This is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter

at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio