Look at Value Compared to growth says Bent Hunt

I want to bring in Ira Jersey. He's chief US interest rate strategist for Bloomberg in chaligence, and before we look ahead to what we're expecting from the Federal Reserve tomorrow, I want to talk about this inflation data that we got out this morning. UH inflation accelerating to its highest in six years, and yet not a wholesale cheer necessarily from markets. Why Yeah, high A couple of things, Lisa. I think one is that the UH UM the market

was expecting the numbers that we received. And I think one of the reasons why you have UM, certainly interest rates near where they are you know, tenure yield right close to three percent, yet again after the big risk off we had two weeks ago. Is because we are expecting inflation to kind of hover with co inflation at

just over two percent. So um, you know, you have that plus a risk premium on top of that, and that gets you too close to three percent and that's where um, we're we're likely to hover for for a little while. Um. It does have big implications for the economy though, because when one of the things that that we calculate based on this inflation data is what are real wages? So what are wages minus inflation? And those have been coming down from from a from a high

last month. So um, so that's something we have to keep track of. Is is you know, will spending be able to be kept up if inflation can and used to rise? So how will the FED view this? Yeah, so I think the FED is going to say, Okay, this is evidence that what we're doing is the right policy path because we've been hiking you know, irregularly, but certainly consistently, and as such, we you know, we were trying to get inflation under control. We don't want inflation

to be significantly above where it is today. UM. But you know, it says that their gradual path hasn't really disrupted the economy, but it also hasn't yet brought inflation and inflation expectations down very much. So until it does that, I think that they're going to continue to be reasonably hawkish. So right now I'm looking at the expectations that are being priced into the futures market for a FED rate hike tomorrow. It is pretty much chance of a rate

hike tomorrow. UM. I think the more interesting thing that we can hear from the Fed is guidance for the rest of the year for next year, and there's been some speculation that the Fed might hint that it would be willing to slow or cretail it's balance sheet normalization if the economy didn't accelerate more. Have you heard about that? What do you make of that? Yeah? So, so certainly one or two UM, what one or two economists have suggested that maybe the UM the FED might consider slowing

the pace of adjustment. I think part of the reason for that is that you've seen the FED funds market start to creep up toward the interest that the FED pays on access reserves and because of that, they're thinking, oh, well, that means that money markets are very tight, and because money markets are tight, we should maybe not reduce the balance sheet as much. I'm not convinced that it's really

it's port folio runoff that's doing this. There's a lot of other factors that are involved in the pricing of Fed funds and and other short end um short end rate So, for example, right now, there's a lot of treasury bills in the market because of the fiscal stimulus. The Treasury departments issued a lot of them, so that's caused almost every single front end interest rate to move a bit higher than it had been prior to this year.

So it's not that the Fed can really do much about it except maybe lower um and not hike interests that paid on reserves by as much as they do their UH, their range of where they want to keep the Fed funds right. You know, I'm glad that you mentioned bills. We've been talking a lot about the treasury auctions this week. They're nearly two hundred billion dollars of debt auctions. Most of them are bills. UH. The ten year auction of a coupon debt yesterday went really well.

Today we have more bill sales. How are the bill

sales going? And who is buying? Yeah? So the so the bill sales have really been, uh been up and down, and in particular, what's been really good is actually six months bills, which which a little bit surprises me because when we don't know if the Federal Reserve is going to hike perhaps two times over the next couple of months or one time over the next couple of months, you know, why lock in for six months when you can just do a four week bill or three months

bill and be able to capture and additional FED hike if if the Fed happens the hike in both June and September. Um so so demands good. Who's buying it's it's mostly it's mostly end users. So when you look at at who's purchasing those longer term securities, it's UM, it's UH investment funds and the like. The front end bills of four week bills tend to go to dealers, and then the dealers then UM then sell them on to other other investors such as money market funds and

and UH and just cash equivalent investors. Um I do want to just bring you some headlines just crossing. The Senate panel voted twenty four and five against rich Clorida for his nomination is FED vice chair? Excuse me. The Senate panel also voted eighteen four seven against for Bowman for his FED nomination. And do you think that any of these sort of changes to the composition of the Federals or of will affect sort of the direction of policy?

I don't think so. I think Richard Clarenda, in particular is is a pretty mainstream, um mainstream economists. I think that he'll look at the economy where it's going, and how policy might might impact both markets and importantly the economy, and as such he'll you know, he's not going to really rock the boat as much as some other people that we may be thought, um that that President Trump might might actually pick um. You know, he's not a

particularly hawkish or dovist person. Um. You know, when you know you've spoken to him, I've spoken to him. He's really a reasonable, a reasonable person when it comes in and a real monetary policy expert. So I think when when it comes to things like changes in the Balancie composition, he'll be one person that they'll definitely lean on for his opinion as to you know, what size the balance should be or the pace of reduction there I Jersey, thank you so much for being with us our Jersey

chief US interest rate strategist for Bloomberg Intelligence. Great insight ahead of the announcement to borrow from the Federal Reserve as well as all of the Treasury auctions the first two days of this week. This is a confusing US economy. While it is very strong now, certainly a growing number of traders are saying, perhaps this is as good as it gets, and how do you maneuver given the fact that the hangover from the really incredible expansion that we've

seen could be potentially dramatic. Joining us now, Ben Hunt, He has chief investment strategist at Salient, which manages about thirteen billion dollars and is focused on real assets. Ben Hunt is also the author of Epsilon Theory dot com um and it has a hundred thousand professional investors as regular readers. Ben, thank you so much for joining me. Um. I want to start with how you're viewing the economy right now, because on one hand, you're seeing US inflation

at six years six year highs. You're seeing wages that are not being up to the degree that people would like to see, a federal reserve that's hiking. Where where are you thinking as far as the sort of risk appetite that you're willing to make. Well, it's great to be on again, Lisa, Thank thanks for having me. And I think you put your finger on what is the

real I'll use a ten dollar word dichotomy. You know, it's this, it's this real uh fracture that we're seeing between the real economy and what i'll call the market economy. You know, what's happening in the in the in the stock market. And look, you know, for the last nine years, we've had a stock market that is really rocked uh and A and a real economy, particularly here in the US,

it's been mich right. And and what what I think you're seeing today is that that's really been turned on his head, right, that you've got a real economy that is starting to to really pick up here. And we can talk about signs off of that and what's driving that. But at the same time, you're you're seeing the markets you here kind of looking mech right, and and what I'm trying to say, is that's not an accident. Right.

We've had this split in this this this dichotomy between the real world, the real economy and markets for about nine years now, and now it's truly flipping on his head. Well, you know, I want to just push back a little bit because I think that when you talk about the

real economy, what are you looking at? Because you know, there are signs that you know, there still is a large swath of people that have been left behind in the recovery because there has been so much focus on the stock market and you know, assets that only the wealthiest people are really heavily invested in. And so I'm just wondering, you know, what's where are you getting the sense it's going to accelerate? Yeah? Yeah, No, what I mean by the real economy, I'm really focusing on small

and medium businesses here in the United States. You know, we got some some some new data out today. You know, the I'll call it the confidence, the intention to grow, the intention to spend, the intention to higher from small businesses, which still are the economic backbone of this country, of our real economy. You know, that confidence at least for intention to grow, it's never been higher since they've been taking this survey, and they've been taking it for a

long time. Now. Look, I totally agree with you that there are so many people that have been left behind in what i'll call the inflation we have had over the last nine years, which is an inflation in asset prices. So we're seeing wealth inequality return to levels we haven't seen since the nineteen thirties, and that has enormous consequences,

particularly in politics. But what I'm talking about with the real economy, I'm talking about small the medium businesses year in the United States and their perception, their intention has never been more growth oriented. Uh, new hiring, new expansion, all of that. That's what I'm talking about with the real economy. How are you capitalizing on that? How are

you investing around that? Well, look, it's it's it. It really means, you know, thinking about how to invest your money away from the public markets that have been the beneficiary of what I'll call is the monetary stimulus, you know, central banks buying everything inside for the last nine years. And now how do you think about, well, what if that gets turned on his head with the SAD now shrinking its balance sheet, with the tide going out on

the monetary stimulus. But at the same same time, you've got fiscal stimulus in the form of tax cuts. You've got and I know this sounds weird, but as the Fed normalizes interest rates from this very low base, I think that's actually stimulative again to these small and medium businesses. And third, I don't think you can overestimate I really don't.

What I'll call is the Donald Trump narrative that you know, whatever the reality is, there is a reception that there's enormous change of foot particularly informs of deregulation, all of those things benefiting the mindset, let's call it the expectations of small to medium businesses. So what do you do for that for investing? Well, look, you can certainly look at private markets as opposed to public markets, but you

can also look at value of compared to growth. And you can look at you know, the Russell two thousand, which tends to doesn't tend it's comprised of those smaller cap stocks which tend to match or mimic those smaller to medium businesses in the real economy. But one thing that I'm struck by is that the Russell two thousand is actually outperformed dramatically this year. I mean, it's almost what I'm talking about. Yeah, I mean, I'm just wondering

how much is left. Look, I think there's a lot left, frankly, right because I I think there's been such a tent up I'll call it demand, but it's it's there's there's such a tent up energy in the small and medium businesses in this country that I think this can go on for quite a long time. Now. Look, ultimately, mistakes will be made, right, the said will hike rates too

you know, an an interest rate hike too far. Ultimately we will get really inflation starting to kick in, which hits the margins not just of you know, big companies, but also small and medium companies. That that that's all going to happen. But right now we're at this phase where these small and medium businesses are really picking their heads up and are intending to spend expand and that can do well for stocks to represent that. Then, what do you think is the biggest thing that investors are

getting wrong right now? You know, the biggest thing they're getting wrong had in my view, is that we are still trapped in this perception that we live in a deflationary world forever and ever. I'm in just as far as the eye can see. And you know, frankly, this has been the right bet for forty years, right that that we have been in this deflationary rates are always going down type of world. What I'm trying to suggest is is that when these big picture items like are

we in an inflationary world or deflationary world? When these ideas change is at moments just like this, because it's driven by change in politics, is driven by a change in the mindset, the expectations, particularly of small to medium businesses.

So I think there's a you know, I'll use another ten dollar phrase, a non trivial chance that where at the cusp of a big shift here in the investment environment, our business environment, and that's moving from a world where it's deflation all the time to where we really have to start flexing those How do you invest in an inflationary market all over again? And Hunt, thank you so much for joining me, really really interesting. Ben Hunt, chief

investment strategist at Salient. Salient Managers about thirteen billion dollars. It's focused on real assets. Been also is the author of a blog epsilon theory. Dot com markets have been struggling to figure out the real world impact from the increasing trade tensions between the US and other major economies. One place so where perhaps we'll be able to see that is with tourism. And the question is has tourism to the United States declined? Joining US now Chris Thompson, President,

chief executive officer of Brand USA. It is a federal agency that focuses on trying to attract international dull travelers to the U as Chris, thank you so much for being with me, so good morning, my pleasure. So I'd love to get your sense of exactly this, whether or not fewer tourists are coming to the US as a response of to the growing tension that has frankly erupted

during President Trump and some of these longstanding allies. You know, we have seen some softness in international visitation to the United States. That was after record visitation for six or eight years, But the majority of that actually happened prior to the elect of the majority of the reasons for that happened prior to the election and have really been influencing since then, the main thing being the strength of the dollar. You know, you look at market flag Canada,

Mexico and others. You know, when the dollars strong and obviously makes it a little more challenging for folks looking to travel to the United States. So that has been the case for uh an extended period of time at at levels that have been higher than normal. So I think that's contributed significantly some of our uh you know, some of the things that affect people's intent to travel and their willingness to travel or what's affecting them back home.

So a lot of economic, political, social tensions back home also influence intent to travel. So I'm not sure you can really pay it on, uh, the things that are happening at the moment um. You know, the beautiful thing about travel is it really has the ability to transcend politics. It's you know about destinations, experiences and US as Americans.

And you know, we know once people travel to the United States and they can immerse themselves and our destinations and and they get to feel from US as Americans, uh, as far as as being some of the most welcoming people in the world, that that has ability to kind of rise above all that. Did you notice an uptick in visitors international visitors to the US earlier this year when the dollar weakened. Yeah, you know, there was some some moderation in the dollar, so it was hard to tell.

The numbers that we get are lagging numbers from the Department of Commerce, so I'm not sure we'll really know the true impact on what our final numbers as a result of that. But we did see some some increases in numbers going into seen which was encouraging. And a lot of that, as you pointed out, had to do with the fact that the dollar was weakening a bit. But I think now it's maybe heading back in the other direction, and and so it just depends on where

that all ends. Can you give us some perspective on how important tourism is to the U. S economy? So most people don't realize that travel is actually an export. The product is the experienced people have, the memories they take home. As an export, it's a service export. So of everything the United States exports that's a service is tried to tie to people coming here, having the experiences

and leaving their money. Eleven percent of everything the largest economy in the world exports is tied to people traveling to the United States enjoying them els and leaving their money behind. You know, you look at balance of trade. Trade is obviously a big topic right now. In the last time we had annual numbers, we had seventy six million people spend two billion dollars and that was an eighty four billion dollar positive contribution to the balance of trade.

So when you look at it as an economic engine, it's certainly a huge contributor. And then on the soft diplomacy side, we know that, as I said earlier, once people have a chance to come and experience the United States, they always walk away with a more positive opinion of it, whatever their opinion was coming in Chris. Last year, there were a number of stories that came out saying that President Trump's budget eliminated funding for Brand USA and would

effectively kill the organization. Have you heard more about that? What was your response? You know, anytime a president comes in the way for them to make a statement of priorities through budget. Uh And so obviously there were a lot of priorities. There's never enough money in Washington to do everything that everybody wants to do. Uh. So the good news is that the people that actually appropriate or Congress Congress we have a tremendous bipartisan, strong majority relationship.

As far as support in Congress, UH, when Congress actually got to the business of appropriations are funding state impact as as budgets were moved forward. So UH, though we would have liked it, liked it to have been a different situation. As far as the President's budget, we understand that it is a statement of priorities and it's a way to navigate a situation where there's really never enough funding. Just a real quick what is how exactly do you

market the US to international investors? So our job is to reach out to all the markets around the world. We're we're headquartered here at Washington, d C. We're actually a private company that had that's in partnership with the federal government. We have fifteen offices around the world. We take UH messages direct to consumers, and in this year, our theme is music. Before there were destination marketing organizations like Brand USA, the way people found out about US

was through movies and music. And we just released a Imax film called America's Musical Journey, which documents the heritage of American music and the cities that it was founded in and tells a story about how UH that is is a great way to talk about the United States, America and what there is to see and do through music.

So our job is to be storytellers, to inspire travel uh from our friends and visitors from around the world, and in the end to really remind them why they want to come to the United States, why it is the most aspirational destination in the world. Chris Thompson, thank you so much for being with me, President and Chief executive Officer of Brand USA, coming to us from Washington, d C. One notable thing about this week, which some have dubbed the most important week of the year, is

that markets just don't care. They have not cared about the Trump Kim Jung summit. UH. They haven't necessarily cared about the inflammatory rhetoric out of the G seven meetings. Here we had inflation data that came out pretty much in line with expectations. No one cared. The Fed's going to raise rates tomorrow, and then the ECB meets. Evan Brown joins us now to see what'll make him care

and change potentially his views on the market. Right now, Evan Brown is Director of Asset Allocation as part of the Investment Solutions team for UBS Asset Management and he joins us here in our eleven three oh studios. So, Evan, what will make people care sort of change their strategies

that that's coming out potentially this week? Yes, So I think, I mean, if anything is gonna gonna make us care, it's it should be the tomb important central banks, arguably at least in the development in developed markets to fend the e CB this week. So um, I think for the FED, we are going to get hike. We're finally going to get to a priced in at its priced in. But of course right after that you'll get the summary of economic projections. Everyone will be wanting to looking at

at the forecast. What the people still care about the dots? People still care about the dots? Uh, And people will say, oh, the FED is moving to four hikes or or in two thousand eighteen, maybe they're moving their their forecast for two thousand nineteen as well, and share Powell is going to do everything he can to de emphasize those dots. That's something that he wants to do is is move the FED away from forward guidance and more towards data dependence,

which I think is is healthy. It gets us focused on the economy and and look, I think one of the reasons why the markets haven't been so focused on some of the other geopolitical risk right now is that the economic news is is is pretty good. So let's focus on that. The FED will want to focus on that and uh, and and that really is what should

be guiding markets broadly. You know, there has been some speculation as people try to spice up this week's meetings that perhaps the FED and signal that they're willing to curtail their balance sheet normalization. Uh, if they got a little bit concerned about lack of acceleration economic data. Is that pie in the sky or do you think that that's a real discussion. I don't think that's a real discussion. That set is all right, that the FED is on autopie.

I know that the Reserve Bank of India governor was was calling on FED to to slow down its pace of normalization, but there is a very very high bar for doing that. The FED is on autopilot with the balance sheet. They'll use rates as there as their main policy lever. All right, So how are you positioning right now? And when was the last time you changed your positioning. Yeah. So, um, so look, we're we're broughty broadly constructive on on risk appetite, on on risk asset. So we we uh, you know,

like global equities. I think, you know, more recently we pivoted a little bit more towards the US and away from Europe and Japan. Uh. Clearly we had the Italian risks rise over the over the last few weeks, and and those are non neglig non negligible. I know that they've kind of disappeared a little bit from the headlines.

But um, you know, I think in September, you're gonna get this Italian the budget from from the new Italian government, and if that is in any way in line with what the new government has promised in terms of fiscal stimulus rising by five to seven percent of GDP, that's gonna put them on a real collision course with with the EU. So I know we all say that, look, Italy ultimately will stay in the EU. Um, there will be market pressure growing in September as this collision course, uh,

you know, it starts to starts to build. Here, You're not alone in favoring the US over Japan and Europe. In fact, Bank of American Mary Lynch put out a fund manager survey today that showed that sixty four of people who responded to the survey I think the US has the most favorable outlook for profits. That is a

seventeen year high. So does that Does that give you a little bit of banks the fact that this has become a consensus trade at a time, especially with the UH fanmag FAM, the big tech stocks in the US being at such high high levels right now. Yeah, No, I mean we always, we always want to be focused

on what's consensus, and uh that obviously raises questions. You don't you don't want to be positioned the same way that that everyone else is, and you have to be hyper focused on the risks or catalyst that could lead to an unwind of that UM. At the same time, you cannot ignore what is an extraordinarily strong economy, what are extraordinarily strong earnings. Uh So, yeah, it's hard and ultimately, if we do get a downturn in the end, uh, it's going to be those those foreign markets that that

get hit hardest. Europe and Japan. Emerging markets a higher beta than the US. The US is a relative safe haven. Do you think that some of the distress that we've seen in emerging markets is just the beginning. I don't. I think I think we're we're coming to the end.

You will have uh, specific countries, specific spots kind of blow up at any given moment um, But broadly in emerging markets, I think what you're seeing is, uh, some of these central bankers in these economies, they increasingly realize that they need to shore up their system. So you're seeing Brazil central bank intervening and foreign exchange markets, you're seeing Turkey, you're seeing India. These central banks are are hiking. They get it. They realize that as the fetest tightening

that they need to protect themselves. At the same time, one way in which you know this e M quote unquote crisis or or or sell off is different from previous ones is that you know, China is doing pretty pretty well. China's growth is is quite strong. Uh So that keeps us from getting too bearish on e M. Here, so when was the last time that you changed your

recommendations for acid allocation. We've tilted a little bit here and there, But in terms of having a broadly constructive outlook on risk and on equities and and a short duration view globally. Um, it's been a while well, I mean, and and as far as the little tankers is, it's sort of more cash here, feed LUs duration here. Is

it that type of idea? Yeah, I think so. I mean, one one thing that I think is becoming increasingly important for US and and uh global acid allocators is that as the FED is hiking rates, the short end of the yeol curve or cash is increasingly in attractive option. So, um, you know, we think about ways in which you want to move to the shorter end of the yeol curve.

You know, there's a there's a decent argument. Why do you want to be earning, say two ninety on the tenure and be taking all that volatility, inflation restoration risk when you can park your funds in the two year yield that at about to fifty, is it is it worth it to be out there? So I think if there's if there's any shift, which I think will continue to see, it's it's just moving shorter duration across you know most of our US investments. Is anyone leveraging up

to your treasure yields right now? Not that I know, because I'm really I was having a conversation with the Trigger yesterday and and we were asking this question. You at a certain point, if you're getting you know, four and a half percent on junk bonds, you're getting you know, the triple C a version of the of the spectrum outperforming dramatically, why not just left her up to your No, I think there's there's something to be said for that.

The risk there is that if you do get inflation accelerating in the FED hiking a lot more aggressively than is currently priced, then that leads you vulnerable. You have a problem. Evan Brown, thank you so much for being here. Really great. Evan Brown, director of Asset Allocation, is part of the investment solutions team of EUBS Asset Management. 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.