Dollar Will Likely Resume Weakening Trend: BBH's Chandler

Currency Strategy at Brown Brothers Harriman. And Mark, you join us on a great day because we're finally getting a breather from the great weakening of the green back. We're seeing a little bit of a rebound against comparable currencies. Do you think this signals the beginning of a larger turnaround? At least I wish it did, but I'm afraid it

probably doesn't. So far are the dollars bounce here has been fairly shallow, and it comes after it, like you say, after several days that little hammering, you know, the dollars and falling quite sharply, Uh, not quite, but almost uninterrupted since the middle of December. And so I think today we're seeing just you know, we had followed through dollars selling yesterday when the US markets are closed, if done incentrating, and I think that this is just sort of what

I call it, maybe even a dead cat bound. So Mark, can you just give us a sense of what's driven in the dollar, what's driving the dollar weakness? I mean that you have certainly the euro strength, you have global growth, it's accelerated in other regions more than in the US.

But what's the main factor of people should be looking at. Yeah, Lucy asked me the two million dollar question, because Frank I was in the camp that thought that wider interest rate differentials with the FED tightening, the tax cuts in the US, UH, the attractiveness that through the de regulation, attractiveness of the US as a point for investment. We've got inflation expectations driving all these things that I think

should be good for the dollar. And if not. And so when I talk of people and trying to listen to why they are saying that they think the euro is going up, primarily is it more the Euro going

up than perhaps other currencies going up? And they say that many people think that the ECB is close to exiting its monetary policy, and as you know, the ECB's papering this year, it went down from sixty billion a month asset purchases in the last nine months of last year, claim them a half to thirty billion months this year. And some other officials talking over the weekends sound kind of hawkish, talking about the sequence of events and maybe

raising interest rates before the market previously anticipated. Mark Chandler, is a lower value US dollar better for US equities. I hear what you're saying to him. I know a lot of people think so because they think that the logical on something like this, Uh, the weaker dollar means that US can export more, and when the US exports more, those foreign currency it gets can then be translated into greater dollars boost earn And it sounds all reasonable and everything.

But I think they'll find plenty of time when the US dollar was strong and corporate America was still reporting record profits. You know, the corporate earning seasons kicking off formerly this week, and people are expecting strong earnings. Last year, the dollar fell and corporate earnings look to be up, say something like twelve year over year. When the bigger picture, I think that for me, the reason I'm not fully aboard that kind of view. Is that the US is

not service foreign markets primarily by exportings. Building locally, selling locally is really the key, and so a lot of US businesses are the export and build locally. They also when they build locally, incur local costs, so they'll have to pay those German workers higher wages or those check workers higher wages, and so that offset some of the beneficial impact I think. But in general, I think the

best level for the dollar actually attend. It turns out that a strong dollar that is backed by a strong economy is actually good for corporate America. It so, having said that, should we look for higher prices for energy and commodities such as gold. Yeah, I hear what you're saying there, and I do think that because a lot of these commands are price in dollars, like gold or oil. When the dollar was falling out of bed over the last several weeks, we did see upward pressure on commodities,

and today, of course it's the opposite. Softer dollar, softer gold, softer iron ore, softer base metals, softer oil. I'm just not sure that that is some of the hanguans hat On I think if you think the dollar is going to fall, should be short to dollar in various times a way long point equities, for example, are long foreign bonds. But if you think that, if you if you have a view on commodities, I would trade that. I think it were best served by training as close to our

views as possible. Mark. You know, it seems increasingly like the consensus trade the dollar will weaken more, and I'm wondering, what's the risk scenario that upends that. Yeah, well, the risk scenario is really what I've been still counting on, and that that is that continued to interest rate increases by the Stuttlers. And by that I mean it's it's

kind of interesting what happens. So if you are a that that interest rate differential, I think is the incentive structure that investors monitor closely, and with the incentive structure telling you is that you're paid to be long U S dollars by an increasing amount. And I don't think that the ECB raises interest rates this year. I don't think the b o J raises interest rates this year.

I think they were still at least a year, perhaps maybe a year and a half to two years away from this divergence peaking, and so I would still say the federal reserves, like the raised interest rates, it's going to cost people an increasing amount to be short of the US dollar mark. Chandler, can you give us your thoughts on the value of the Chinese you want to remember and what the Chinese government's long term plan is for the currency. Well, I don't know if I can

tell you what the government's long term planet. I know they want to be more international, but I think that they have a lot of stumbling blocks. So the big news over the weekend realier yesterday was when the Bundesbank official indicated that the them in Central Bank had put R and B in reserves, and the shortly thereafter the French announces that they had already done the same thing.

It's not so surprising. About about six months ago or so, June of last year, the ECB itself announced that they had bought about five million euros worth of Chinese R and B to put in reserves, and interestingly interestingly they said that they reduced their dollar holdings to buy China.

But we gotta keep this in perspective. There are something on the magnitude of eleven point four tillion dollars of reserves, the Chinese juan makes up about about a hundred and seven million dollars excuse me, a hundred and seven billion dollars very small, it's it's about one percent of global reserves. This is not the beginning of the Chinese want replacing the dollar. Chinese officials themselves recognize that, and they seem to be more circumspect about the role of China, and

they have really more strategic view. While I hear a lot of people talking about about China and the end of the petro dollar at the beginning of a petro R and B the launching, eventually they stay of a of an R and B denominated oil contract. People are people in the private sector in the market. I talked about the dollar is gonna be replaced, but I find that sometimes a price action influenced the news, and sometimes

the news impacts the price action. This is one of the times I think a following dollar is getting all these kind of like conspiracy series and how the dollar is going to be dethroned out of the woodwork these ideas, and I think that the R and B is nowhere close. The dollar makes up about sixty three percent of the world reserves, the R and B a little bit more than one percent. All right, thanks for putting it into perspective for us. Mark Chandler is the global head of

Currency Strategy at Brown Brothers Harriman. The question of need, does anyone really need an suv that goes from zero to sixty and three point six seconds or can do a hundred and ninety miles per hour? Does anyone need six hundred and forty one horses streaming behind them? It is in yellow or and can be in yellow, and it is the new Lamborghini suv. It is called the Rusts and it joined now by the global Chief Executive of Automobile Lamborghini is Stefano Domenicali. Thank you for being

here in our studio as much appreciated. What was the thinking behind the creation of the auras, Because there are already a variety of high luxury SUVs, even from the likes of Bentley and the likes of Audi and so on, that you could call luxury. What inspired the Lamborghini brand to want to make their mark in this market? Well, I would say that the inspiration came from the knowledge of the market. We as Lamborghini had a superspore brand and that's pretty clear and that will be always in

the future. But we reckoned that the market in the suv segment is rowing all around the world and there was a perfect occasion to enlarge the portfolio offer to the customer because the end of the day, we were talking about product or cars or looks really good at are not necessary to have. It's a status. It's something that you want to have because you want position yourself in a certain way. So we saw the potential will be different also in this segment. That's the reason why

we start this kind of a new project. Okay, so when we talk about necessity, how much as cost in in in hearing other states will be around two hundred dollars and and then of course the least price is a discussion because I know the market of the United States is mainly working on that, and I think we're gonna have a great offer. I get it to portune to give to our customer. Here, which country or where where do you think that most of the customers for

this particular vehicle will come from? We say they the success of this after the first couple of weeks, when we launch, the car is normals all around the world. What is incredible is to see that the real question that we need to answer is how many non Lamborghinea customs we're gonna buy the new U s V Because, of course, as you know today, the our normal customer, if I may say normal, don't use that car every day.

But with the new supers, they're going to use that Carla therefore is not only having the add that the one by one customer that are already in the Lamborghini family, but that the interesting thing will be to see how many potential customers will come from other branch because it would be may be interested to see our car. They love our design, they love our performance, they love to be connected with the Lamborghinia families. So the real question would be how many process we're gonna be able to

catch in the future. And this is something that at least for after the first couple of weeks of the first launch around the world, we see there is a lot of attention. I note that you can customize this almost every way you can imagine, right, fourteen exterior colors to choose from, fifteen interior leather options, head rest you can get them embossed with the raging bull logo. I mean, just customization seems to be the real The real deal here is um UH is the factory that is building

these in san Agata. Is that fact You're going to do all the customization or does that get farmed out? It will be done all in Santega the Bolognese in Italy. We were close to Bologna. There was a big challenge because in one year, just one year, we built a completely new line of assembly. We double the dimension of a factor. We hired more of a hundred people to make sure that this was possible to do it. That that is why we we use the claim since we

made it possible for the launch of this vehicle. Because you know, if you think what was Lamborghini just a couple of years ago, No, when I would have thought it was possible. Therefore, the personalization is a very important item for our custom and that will be done by us. So I'm seeing a headline crossing the Bloomberg today that Ferrari, a competitor of yours, is planning to make an electric supercar.

Um I'm wondering is that in your future? Well, in Uh, I would say September, we launched the third Millennium Project. It was a car that we presented together with the m I T in Boston. Because we have our research that is making sure that we are also ahead in that respect. So we have already launched that idea on our side, and I think that is natural, that is logical to also to be a trend setter in the

in this in this new dimension. But when could that car actually be marketed, I would say, realistically speaking after in the second part of the two in that range will be ready, I think, because we need to be current with a couple of elements in that respect. First of all, the performance of a supersport car has to be there. We need to consider the usual our car cost of it. Of course, the affordability of this technology is another element that is very important, and we're gonna

be there as a second step. We don't have to forget today we are, let's say, using the normal combustion engine. We're gonna be using the abrilization as a second step before arriving through dilectrification. So there is still a lot of rooms to do, a lot of work to be done, but for sure the trend is there. And we're gonna be there for the future superspokeer models with the aabrilization model.

What's the trend for Lamborghini any chance of spinning it off from VW But currently you have you have a cousin, right, I mean, how do you could call like a cousin using their V eight in this new uh in this new SUV spin off in the works. Maybe something that I cannot answer to be honest, because it's not me. That's I'm I need to report to our shareholders, my duty or our uses will make sure that we are bringing up the brand in the right way that we can.

We are growing, we need to make sure that we are we are profitable enough. We need to make sure that we have we are strong enough with good product portfolio in the future, and then the show will make their decision. I'm pretty sure that they are proud of having us in their in their portfolio together. But this is you know, what we have to do, make sure that we are doing a good job. Stefano Domenicali thank you so much for joining us, his global chief executive

officer of automobile Lamborghini based in Bologna, Italy. Thank you so much. For being with us and uh we look forward to uh each getting our own personal suv Lamborghini in the Maile. Now kidding right now, it seems like kind of a tenuous time in US government pond markets. You have a government deficit in the United States is expected to blossom over the next few years. You have a potential government shutdown, and yet yields are actually dipping lower.

Today here to talk about what's going on and how investorship position is. Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence. I want to just start with a question about the government shutdown. Why our markets completely ignoring this even as the rhetoric gets amped up yet again that Congress will not come to a deal. Well, I think there's a few things about government shutdowns that kind

of get misconstrued by the general public. I mean, the first is that a short term government shutdown, someone that lasts just a couple of days or even a week um really does not have any significant economic implications. And there are a lot of portions of the government that's still stay open. So for example, the bondmark, it's not going to care about it because UM government securities are still going to get paid. Coupon payments are still going

to be made. Things like that, the I R. S stays open, so income still comes in the Federal Reserve, and the Treasury Department or portions of the Treasury Department remain open, so coupons get paid. So this isn't a kind of debt Eventum, a very long term government shutdowns, so one that lasts several weeks or a month that could have some economic implications because of the lack of government spending and the like, um, that that could occur.

So you do see that when when in a few periods that you've had long term government shutdowns, you have seen little blips that that affect the um, that affect the growth. But um, you know, we're not expecting necessarily a long one now, So I think that um, any government shutdown in this case is just going to be completely ignored by most markets. All right, right, can you speak about treasury inflation protected securities and their use in

people's portfolios. Yeah. I think for for a lot of investors, the ideas is that okay, inflation might be higher than UM in the in the future, and because of that, I'd like to get some some hedges and protections for that, so they buy treasury inflation protected securities. The problem with just going out and buying UM tips, whether it's a

thousand dollars or a couple of ten thousand dollars, doesn't matter. M. The problem is is that you're you're still have a lot of interest rate risk that are embedded in these instruments. So when you buy a tip security, you're receiving what's called the real yield, so the yield on the tip plus inflation. Now, the problem is is that when inflation goes up, then yields usually go up much faster than

um UH than inflation. So let's imagine a situation where suddenly we think inflation next year is going to be five percent from say two percent today. UM you say, okay, well let me buy tips because I'm going to get three percent. The problem is is that an environment like that, yields might sell off a hundred basis points and then there's UH interest rate risk embedded in these securities, and that's what we call duration. So that's the effect on

price by changes and yield. So a hundred basis point increase in UH in yields on a ten year tip, you wind up losing eight percent of your of your dollar value of that of that tip. So if you just do that math, eight percent minus three percent means you lose five percent, even with inflation increasing quite a lot. So so there's a lot of interest rate risk embedded in this. So the way that you really hedge inflation is by buying a tip and then hedging out your

interest rate risk. So I'm looking right now at the I shares Tips E t F and I'm just looking at the total assets it has increased since the end of about I don't know, three million dollars or so with respect to assets under management. So a lot of people have been going into tips as a proxy for hedging against inflation. And I'm just wondering, do you think that all the people buying these securities understand the rate risk that they're assuming. Well, I'm not convinced that all

of them do. And that's one of the reasons why I think it's important to understand the interest rate risk that you're taking by buying tips. Um. Now that being said, if you if you're buying tips because you think yields are too high and yields might go down, but you're you know, but you think that there might be a little bit of of inflation along the way than than maybe there's a place in your portfolio for that. But um.

But I think in general people think, oh, Treasury inflation protected securities, inflation goes up there for you know, I'll make money in this. That's not necessarily the case in the in the short term. If you buy a tip today and you hold it to maturity, you'll make fifty basis points like a ten on a ten year tip

fifty basis points plus inflation um. But if you don't hold it to maturity, or you hold a constant maturity instrument like an et F for like a mutual fund that that tracks tips um, you do take a lot of interest rate exposure and risk, and I think that that's something that you might see unwind if you do get a very big sell off in in rates. We're not expecting that, but at the same time, that's a

that's definitely a risk that you're taking. Are maybe talk about risk, but have it related to perhaps hedges on Fannie May and the Freddie mac paper. Yeah. So one of the things that that we've noted in the rates market over the last over the last couple of months is just like the VIX being at at multi year lows. So is interest rate volatility. Applied volatility on options on different interest rate products is exceptionally low, and I think

a part of that, at least uh UM. A portion of the reason for that is that Fannie Mae and Freddie Max's portfolios, which used to be one point for trillion dollars are are about a third of that today, And because they're UM because they are no longer hedging things like prepayment risks of people repaying their mortgages early and things like that. They used to do that with options on interest rate products and they no longer have to do that in the same size that they did UM.

So because of that, I think interest rate UM volatility is much lower than it would be normally UM. And also that the FED now has picked up a lot of that ownership and the FED doesn't hedge at all. But as the FED unwinds their portfolio, it's very likely that banks and other other buyers of mortgages might actually start to buy volatility a little bit more. Thank you

very much. I read Jersey very interesting interest rate strategist for Bloomberg Intelligence, giving us some details about treasury inflation protected securities and the lack of hedging that seems to be going on at least when it comes to Fannie Mae and Freddie mac that's agency back paper right now. I want to turn our attention to a letter that black Rock sent to a number of corporate executives today. This according to the New York Times Deal Book uh section.

It's sort of interesting and highlights how black Rock is increasingly aware of the actions of corporations that they invest in and whether they are good for society or not. Here to talk about this fuzzy designation. What does it mean to be responsible? Is Greg Elders, who senior Environmental,

social and governance analyst for Bloomberg News. Greg I thought this was really interesting because this comes on the heels of Calisters and Janna Partners going after Apple for the use of iPhones by kids and requesting that they study the effects on children of long term use of smartphones. What does it mean for black Rock to get more aggressive with making sure companies act responsibly? Yeah, I mean

this is something that I mean to that end. There's growth in this space, so Jenna, they launched their Impact Investing Fund black Rock. So Larry Think two years ago in his letter mentioned that company's CEO should focus on environmental, social, and corporate governance issues. Last year it voted against management at Exxonmobile and Occidental Petroleum, and also Vanguard similarly voted

against them. Um, so you know it's coming around in terms of investors no longer just being passive but actually having an active stance at the end of the day, it's because investors are demanding that their clients, both institutional and retail, want to see more active social engagement. Now, is there a way in which investors will be uh, sort of not necessarily happy about this if the market turns south for them? I mean, it's great when stock prices are rising, and black Rock, of course a big

E T F provider. It's wonderful when you're making money. I mean, but that's the whole point. So it's letter two years ago. I mean, he said to have long term value creation and again in this letter, according to the New York Times, So this is absolutely about growth and profitability. It's not about the social environmental side, except that it actually goes towards that whole financial performance area. Okay,

so how do we parse this out. I mean, this is this is a thing that really makes me scratch my head. You know, on one hand, if you say to Apple, okay, study the effects of iPhones on children, I understand the purpose of that. From sort of a social responsive ability standpoint. From a profitability standpoint not so much. So how do you parse out the difference here? It seems like a pretty uh, pretty fuzzy line. It can

be a fuzzy line. I mean, going back to the Exxon and Occidental examples, so the shareholder resolutions that black Rock backed there were specifically around the two oil companies thinking about what's going to happen in a low carbon world. So if we shift away from fossil fuels, right, if you have more electric cars, what does that mean for their business and how do they position themselves? So very

much a fundamental business issue. Now with the example of of Apple, I mean I agree that that varies a bit more. And the question is, you know, maybe regulators come along, and obviously the text space has been very much in the focus of regulators around Facebook, um, Twitter, that kind of thing. So yeah, I mean, it's fundamentally

what is their long term business? Well, and then there's another question of equality or diversity or some of these other values that a lot of corporate rations espoused that might not be held by all of the investors in their base. I mean, in other words, how vocal do they get on issues that are increasingly viewed as political. I mean, I think very clearly that Larry Fink black Rock says that they have to because again it's going

towards financial performance. Today's City Group released data on their pay gap between women and men. After shareholder resolution shareholder pressure in the UK, companies are gonna be required to do this by the end of this quarter. So now, again this is very much an issue about driving performance. So it all comes back to that, and I think no, gender issues social issues are very much about that as well. But this is not Just to be clear, this is

not black Rock's money. This is the money that they manage on behalf of investors, correct, but they want to maximize return. No, completely understand, But just to be clear, this is not black Rock money. This is they're saying this on behalf of their investors, saying that this is what investors would like to see happen. Well, it's what they think needs to happen, so they can have the best returns for their clients. Got it all right, well done,

Thank you very much. Gregory Elders is our senior Environmental, Social and Governance analyst for Bloomberg News, and of course this is a topic will be following for quite a while. Larry Fink, head of Black Rock, writing a letter making that clear to all investors. 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.