Examining Markets, The Fed, Yields, And Tech At Work

FED Day. Bloomberg Radio TV will have complete coverage this afternoon, and it's uh, it's all about the tone of the interest rate environment going forward that we're gonna be looking for from this Fed Reserve Chairman. David Bianco, Chief Investment Officer d w S Group joins us. David, I guess you know the taperings is well I guess well discounted, well understood by the market. What are you looking for from Fed chairman Pal this afternoon? Good morning, thanks for

having me. It's FED Day, which is definitely an exciting day here at THEWS and for all investment managers. What we're going to be listening to is just thoughts on on inflation, of course the transitory versus structural debate, but also importantly what's the FED going to do? About it. You know, our view is that inflation will decelerate over the coming year from what has been very high levels.

But even though inflation is decelerating, it's still very likely going to be above the Fed's target, and therefore the FED needs to start continuing to remove accommodation. We're gonna hear about tapering today. Uh, the real question is what's going to happen to overnight rates. Our view is there still will not be a hike in overnight rates until the fourth quarter of next year. But let's hear. And by the way, this is uh, this is a moment where we're gonna get to hear from from the FED chair.

And after this there's gonna be a lot more. It's gonna open the window to hearing whether we get the renomination from the President for j. Powell or not. So it's a it's when where we all want to hear the current chairs mind thoughts, and before we get into a little bit more of you know, political considerations about the future leadership of the FED. The FED has nothing to do with the supply chain crisis or really even

shipping um issues. The costs that come from that aren't anything the FED can control, but it does have a mandate for the labor market, and the labor shortage seems to be one of the things that people are pointing to more and more often, even beyond the chips and ships issue. So what do we expect to hear from

the FED on that? We expect the FED to talk about all of these issues, and the FED will rightly point out that there has been an inflationary shock from the supply side related to the pandemic supply chains, and also a little labor scarcity that is getting better but getting better slowly. At the same time, the FED should

acknowledge that there's been monetary effects occurring here too. Cash in circulation has jumped tremendously since the pandemic, in part to fund the emergency fiscal policy response, and that was important, but cash in circulation and even household deposits up a

lot since the pandemic started. The FED can't do anything and really shouldn't fight supply side inflation when it's you know, when it's not something structural, But they need to acknowledge that there is a demand side, and part of this demand side, whether it be government spending or even just households being flushed with cash. The Fed does have something to do with that now, to keep all this cash kind of on on ice and chilled rather than turning

into hotter money. Well, this is why you see short term interest rates beginning to lift up. Where we've got the two year year old at about it's gotten close to fifty basis points, three year yields at seventy basis points. The bottom market seems to be very confident that the Fed is going to take actions to contain inflation um and and we believe that's gonna play out. Let's watch and see what the you know, what leadership the FIT

is and what they say. Um. But there is still inflation risk out there, and we want to protect again those inflation risks. And our view is the best way to protect against inflation is simply to own the best businesses you can. Out of all these concerns about inflation. Year to date, after years of this trend being persistent, year to date, growth stocks are out performing in the SMP um and and and we believe that it's better to own businesses that are uh raising their productivity rather

than raising their price. David, are you share the concern that is held by some that perhaps this FED reserve is falling behind that the markets getting ahead of them, and even some other central banks out there. Well not yet, you know, I mean tapering is probably gonna be announced today, um, and that is uh going to move out a little bit of a faster pace than most of us thought,

say six months twelve months ago. The Fed we'll be talking about how they're thinking about raising interest rates you probably late next year, so you know, they're using their communication tools. Well, all the bond market, as I said, it's beginning to move and do some you know, it's a little bit of you know, pulling back accommodation and reason to cost the capital uhs. The bond market is doing some work for the FED right now. And yeah, this is a tough thing that the FED is trying

to wrestle with. What parts of inflation are really transitory and supply side shocks that will fade. And they'd be wrong if they were aggressively going to fight versus other things that might be more structural, like you know a lot of people have gotten into retirement uh since the pandemic, and you know, there may be more labor um difficulties in the future, and you know, the trade activity, import activity, tariffs and so forth. These things are still you know,

a challenge to uh TO to to keeping inflation low. Also, when there is an emergency and you've got low interest rates, one of the best things that they can do is to promise to keep interest rates low for a long time. So they don't want to lose credibility either on keeping rates low if they need to in an emergency. David, thanks so much for joining us. David Bianco there, chief investment officer at DWS Group. This is Bloomberg Now. I want to get out to Dr Mary. Dr Anne Marie

sastry Um. She joins us on the phone from ann Arbor, Michigan School. There. I believe it's a place I love to go, especially around Thanksgiving to watch Ohio State the Buckeyes beat the Wolverines, although I have to say it's really depressing every time that happens. She's the CEO of am a site, and she's gonna talk to us about people getting back to work. I'm sure. First of all, I'm joking a little bit with you about Anne Arbor. It's gorgeous. I absolutely love it there. Um, I'm sure

people want to go back to work. Uh. There, but it seems like here in New York and out in London and over in Berlin, nobody's coming back to work. What's happening. What's happening is that people are demanding greater flexibility. And again, Paul and Mats, great to be with you this morning in the stadium here in Anna is big enough to hold lovers and haters so that you guys can come and help economy. You can help the up economy. Uh. Yeah.

That The reality is that people are demanding flexible work because a lot of the notions that we had about how work needs to be done have been upbended by the pandemic. That people realize that, yes, the conduct of business was possible online and that has led to greater degrees of digitalization, not only because it's more efficient for companies to deliver goods and services that way, but with much of the logistics and most of the engineering, design,

etcetera going on online, but also that people appreciate it. Uh. The stats are are telling. Thirty four percent of employees say that they're more productive now than they were before the pandemic, and over half of executives say that average employee productivity has improved with online work, So so the numbers bear it out. The numbers bear it out. And you know, a lot of folks, as I'm sure you're where in rear, are concerned about inflation, concerned about wage inflation.

But again a lot of folks economists will say, don't be so worried about it. Yes, Uh, nominal wages are going up, but people are becoming more productive and so it's less of an issue in this economy. Do you think that's a longer term issue? I do, UH. And when you look at the most valuable companies in the world and and what their models are, their models are fewer people with incredible productivity generating great high degrees of

revenue per person um. If you look at the jobs available, the BLS we're of Labor Statistics found that UH may smashed every prior record. Nine point two million job openings are available in the country. But the economy hasn't ground to a halt. Instead, we have fewer people doing more of the work. And what that means is that a higher degree of training is required in order to allure people back to the workforce and get people back working.

But also people are adapting to digitalization strategies, meaning that they are using skills that they've learning college and they need to be constantly upskilled. And when you look at the data there again they tell the story in a very clear way. The vast majority of employees demand flexibility their work. And what we see is that scent of workers thinks that they will have to up skill in

order to stay economically viable. So these changes, these disruptions are changing the game for employers who find themselves needing to to conduct more business digitally and for workers who need more skills. So I you know what, I absolutely respect that workers want flexibility, um, and that remote work

can be better for a lot of people. The problem is the technology just doesn't seem there yet for every company, right so UM this morning, for example, I was trying to get in touch with a bunch of economists and then with a bunch of tech people, and all over Europe they all seem to be out of the office. Then I had to try their cell phones try and figure out their home phone number. I'm wondering if they forwarded, um, you know, they're calls. It just doesn't seem like the

infrastructure is ready. Sass growth has been enormous, as you know, and SAS companies have have kept the economy going. SASS being software is a service, correct, yes, and an AMA site my company is also a SAS business. We are in the in the training space and so we happen to know a little bit about this. We're Nasdaq a MST. What we've discovered is is a course that people don't want to fiddle or fool with three or four different platforms in order to engage. They want to be able

to perform their work functions on one platform. They also want to be served materials uh smartly. And if you think about it for a second, if you think about Spotify or you think about Netflix, nobody has to come to your house to show you how to use those apps, right, and so business apps need to become more user friendly. The unit user experience needs to be streamlined. But in the interim, people will use the tools they have now.

The companies that are going to be very successful are going to be the companies that provide those softwares of service tools that reduce the friction of business and the companies that adopt those tools quickly. Dr Henry Sastry, thank you so much for joining us to really appreciated. Uh Dr Henry sasstry CEO of emassites on the phone from an arbor, Michigan, Home of the Big House. UM, absolutely, absolutely love the Big House. It is a game this year.

Wears it in an arbor, Columbus. I do not. I assume it's in an arbor, because otherwise I'm going home for thanks you. My brothers would have gotten me tickets at the Horseshoe. The Big House is loud and it's a lot of fun until, like I said, they lose. Then everyone is super bummed out, which happens usually, which happens. All right, let's see if they can turn it around this year. Let's talk a little bit about what you can get from fixed income in the world of high yield.

We have Brent Pink with US Global Co had of high yielded Aviva Investors and I guess, um, you know, the question is is the return worth the risk? Um? And and some people, a lot of people have been answering yes lately. What do you think you know? High yield at four percent in historical context does not seem like a lot. But we're also in an extremely low default environment. The support that the economy got from the Federal Reserve last year has really eliminated a lot of

the downside to high yield. So while yields from a long term perspective look relatively low, there's also very few alternatives in other asset classes you can get that sort of income from. So we still think the asset classholds of value for investors that are are income focused or or looking for a steady stream of coupons going forward. All right, Brent, how far out on the risk curve are you guys going these days for returns? Because when I was in the market four percent, we would have

kicked that down out of the room. Um, So if you're looking for a return, how far down on the curve are you guys going. Well, we play across the capital structure, so we will go from triple B even down to triple C. We think there's some pockets of value right now. One of the most popular trades in the market today are rising stars. So these are the companies rated double B currently but on their way back to triple B or investment grade rated. We think that

this is a very popular trade. So some of the upside has been squeezed down already, but we do think that there's a lot of momentum behind these rising stars that will continue for the next two years. So we think that's the particularly of interest. We also are seen an increase in LBO activity that will bring a lot

of triple C rated bonds to the market. We think you have to be very selective in this portion of the high yeld market, but we do think there are some interesting individual credit opportunities within that lower quality tire.

Well kind of economic cycle assumptions do you have to make? Well, you know, right now you look at GDP consensus growth estimate at four percent, and that's actually a really healthy environment for high yield companies hw YOUELD bonds typically do well when the economy is growing in positive territory but not overly hot, and that's the environment where you really get that restrictive or tightening FED policy that can dampen

down economic growth. So this is similar the sweet spot for high yield here, this low but positive growth environment. Brent in a new issue market, do you guys on the buy side have any leverage or these When I go to the covenant section of x y Z widget manufacturer, it's basically just a couple of pages. Yeah, kind of quality is certainly deteriorated over the years, and you're right, the power kind of went to the issuers. But we have seen some evidence of discipline from investors right now.

There's a few uh new issues on the on the docket right now that that have struggled from a covenant standpoint, but price where the investors and the issuers have not come to terms. Um, maybe there's some creative structuring or covenant agreements that can be met, but we are seeing some signs of discipline from the market. It's not anything goes at this point. So when do we get back to a world where high yield is paying out seven or eight or ten or twelve percent? I mean, seeing

three or four percent on high yield coupon is just nuts. Yeah, it's kind of a misnomer to call it high yield when it's only four percent. Really, I think the less inflations at five because then you're getting nine really right, Yeah, Well, you know, you could you could make the case the real yield on on high yield right now is negative. I think for yields to go back to seven, we're really going to need to see an economic cycle were

significantly higher interest rates. Right now, spreads are credit spread as about three hundred basis points above treasury, So if you did see a meaningful increase in interest rates, you would see that carry through to credit as well. Now, for investors that are concerned about interstrate risk, high yield historically has had a negative correlation to interst rate, So it is one asset class within fixed income that historically has been able to weather a rising rate environment. Bright

what's the sector you guys like the most right now? Well, if you look at the pace of fundamental improvement, energy is growing the fastest. We've had a significant recovery. We've also cleansed a lot of the worst players in the high yeld market through two thousand and fifteen, and early during the pandemic we saw a lot of defaults within the energy sector. So I think the credit quality there

is better than it was historically. It still offers a premium to the overall market, and given the pace of fundamental improvement, we do think that that is one sector that we'll see uh a large amount of rising stars over the next two years. So that's one particular area of the market we find attractive today. All right, Brent, thank you so much for joining us. We appreciate, always love getting your perspective on the high old market as

high as it can possibly be. I guess at this point it four percent again, like Matt say, not kind of the old days. Seven eight nine, All right, Brent fit Global, cohead of the high led biz at Aviva Investors, joining us on the phone from New York, and again, Um still thinks he sees some opportunity out there in a high yield space. Credit spreads remain pretty tight, but credit quality is surprisingly good given all the liquidity we've gotten from the Federal Reserve and from fiscal stimulus, So

the credit quality has been pretty solid. They're good. Getting his perspective on the high old market a little more coming up, This is Bloomberg. Well these fed days. I always need to know what am I supposed to look out for in the release, what am I supposed to focus in on the press conference? I'm not sure because it kind of changes kind of period to period. But Danielle de Martino booth absolutely on top of that, and we're glad to have her here. Danielle de Martino both

CEO and chief strategist for quill Intelligence. Danielle, thanks so much for taking a time on what I know is a busy day for you. What should I be looking out for from uh FEDS released today in the commentary? Well, um, you know you're seeing, first of all, you're seeing rents rise at the fastest pace since two thousand one in the CPI. So we're no longer waiting to see the whites of the eyes of housing inflation manifest in the inflation data. It has past tense. That's a sticky form

of inflation. And we're obviously seeing that the port situation, shipping freight, all of this is not going away anytime soon. Unraveling this supply chain disaster is going to take time. So I think investors are going to want to know, how are you planning if inflation continues to accelerate from here, How are you planning to do a hurry up taper?

What does your what? What? What? What? What does your plan be on the taper such that you're going to be able to get to raising interest rates more quickly? And I think that that that is rightly the first question that should be on investors mind. You know, the labor issue seems to be even a bigger deal for

a lot of companies than UM Shipping and Supplies. We had a story on Dear that even after UM the company came back with bonuses a ten percent raised now five percent and three years five percent in five years. Even then the workers still said, no, we want more UM. Is this at some point going to become a concern for Jerome Powell? You know? This is Uh, this is a huge issue and worker empowerment is a big deal

right now. Uh what is what? What's problematic for j. Powell is that even though we saw a nice dead cat bounce in auto sales yesterday, for the month of October, they're down from eighteen point five million, eighteen point three million in April to thirteen million in October. That's a quick slowdown. We're seeing with this Zello business that all of a sudden, you know that that homes are not flying off shelves for any price. We're seeing the ability

for you know, to buy big ticket items. They're really pushing back, and it's being led. If you look inside the University of Michigan data, it's being led by the highest income earners. Those who are account for sixty percent of car sales just to give you one example. So he Powell knows he's tightening into a slowing economy, and he's probably betting that this worker empowerment movement is going to subside at some point as the economy slows, and

it will. But at the moment, as you say, it is very, very difficult for to be companies hiring or dealing with union negotiations. Like howing me imagine what the long long shore uh renegotiations is going to be on in Long Beach End in Los Angeles come the end of June. That could make things even I mean, it could be a biblical union strike. Um. Well, I wondered,

how do they measure full employment? Because if we're not there now, um, with the worker shortages that we're seeing, with these huge wage increases that um the unions are allowed to demand, then what is full employment gonna look like? It's really hard to say. I think that there is a lack of appreciation for the simple amount of money that companies have thrown into I T. Spending, and that means that the automation that we always knew was going

to arrive has been accelerated. So there's a good chance that that we are already at full employment today, and that there's going to be four million or some odds, so four and a half million, four million jobs that just don't come back. They've been automated out of existence. We could be at full employment. We had millions retire early as well. So it starts to become very problematic,

very fast. Danielle m about third thirty seconds. What's the risk that federal the feder Reserve just is too late, It just gets passed by either by the market or by other central banks. I think that the FED is already so far behind the curve it's not even a discussion that could be had. I think most beneficials know it, and that's why we haven't heard boo out of rich clarative for so long. Interesting, all right, Daniel D. Martino bou thank you so much for joining us. We always

appreciate its specially on FED day. Daniel D. Martino Boots, CEO and chief Strategies at Quill Intelligence, former advisor at the Dallas feder Reserve, which again is another great reason why I we love to talk to her specifically on these FED days. And she's also a Bluemerk opinion contributor. So very very busy down there and so at it

again today. I guess is if Danielle is suggesting um inflation, inflation, inflation is something that you know, I think investors are gonna want to hear the Chairman's view on inflation and how the FED is going to react. Yeah. Absolutely, Um, it will be interesting to see, especially what the FED can do if we are headed into a slowing economy, you know, because um, the kind of inflation that we're seeing, it doesn't look like monetary policy is going to be

able to to stop it. It's a different there are different issues that are the roots. So uh, what can Pale do other than keep um financial conditions? Yeah, uh lacks for longer. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller put on Falsewheney. I'm on Twitter at pt Sweeney. Before the podcast, you can always

catch us worldwide at Bloomberg Radio. M