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All right, so let's see if it matters to Fill Orlando, chief Equity strategis of It Federated Hermez joining us to talk about that. Feel so good to have you here on Bloomberg with Billy and myself. What is it that you find interesting and what are you seeing in terms of trends and flows right now?
First of all, thank you very much for having me back on. We were expecting that the powerful rally that we saw in the equity market, largely driven by that you know, relatively narrow group of eight technology stocks in the first seven months of the year, that there was going to
be a reversion of the mean. And you know, certainly the August, September, October time frame is as good as any for that to occur, and so we thought the pullback might take the s and p back down about the forty two hundred level, or so let's call it
a ten twelve percent correction. A good chunk of that has happened, and certainly the backup and interest rates you know, benchmark tens going from you know, three and a half percent up into the four and a half percent neighborhood here over the last couple of months has facilitated that.
The thing that I find really interesting when you talk about flows, and I'm going to throw in a little bit of amateur technical analysis here, is that our bond guys tell us that once the benchmark tens broke about the four thirty five level or thereabouts on yield, there really wasn't a lot of overhead resistance until you get
up to a five handle. So it's interesting that you've, you know, you hear a lot of the you know experts and well known people in recent days talking about the fact that they wouldn't be surprised to see treasuries at five percent.
For six or seven or well.
I don't know that I'm willing to step in front of that freight train just yet, but certainly it's interesting that our duration committee is not adding to duration lengthening duration here, you know, with this big move up into the four and a half percent neighborhood, I sort of think they they're sort of seeing that a five percent number is reality, and let's let's cool our jets a little bit until we get a little bit better feel for what's going on.
Yeah, And so, looking at some of the major averages so far this year, the equal weight to S and P five hundred is now actually read on the year. This is obviously the SMP still up eleven percent.
Where are you putting money to work? And what do you make of that?
Just given the magnificent seven for better or worse, is still holding major averages higher.
Well, if you look at the perform of the equity market over the course of the last couple of months since this correction started, the growthier technology oriented names disproportionately are the ones that are giving up some of the games, and that makes perfect sense. The areas that we like, that we've liked have been the areas that were left for dead in the first seven months of the year.
Domestic large cap value, smaller cap names, international names, stocks that have lower valuation profiles, higher dividend yield support and we see that rotation. So energy, for example, which has been one of our favorite categories. You couldn't give that stuff away in the first six months of the year. Now everyone loves energy. Well, you know, crude oil has also gone from the mid sixties into the low nineties over the last three or four months. Again based upon
you know, technical analysis or momentum or whatever. Some folks are now saying, well, you know, crew's going to get to one hundred. The fundamentals Back in June, when crude was sitting at sixty five dollars a barrel told us that we could get to eighty or ninety. We're there probably earlier than we thought. And now we're starting to get some momentum that may take crude back up to park.
Yeah.
It's kind of interesting, right, and we do talk about that certainly at Bloomberg in terms of the energy price impact. Hey, Phil, thank you so much, really appreciate it. Fill Orlando Chief Acrety strategist of it Federated Urmes joining us with his market out look. I'm Carol Masser along with Bailey Lipshelt. You are listening and watching Bloomberg Markets on this Monday, and this is Bloomberg Radio.
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Nancy Curtin and partner of Global C the head of the investment advisory at out the TEDAM and Global, Thanks for being with us today.
Get it.
You heard the Jamie Downing there mentioned what I did. They could handle seven to eight percent rates the ten year at four sixty five. That would appear to be at least partially in the driver's sea for equities. What is your outlook for rates and the impact on the risk assets?
Well, look, you know, near term we're a bit cautious here, and we said to clients at the end of July that trees don't grow into the skies. You know, after twenty percent total return of the S and P five hundred, we needed to pull back a correction of consolidation. Okay, but if we look at the fundamentals, the reason that we have near term caution is what I call sort of a litany of triple loows. You know, the first is the higher rates that Jamie mentioned and that you've
mentioned in your program. These higher rates are coming at the long end that sets the cost of capital for companies. So that's going higher. In part maybe it's about a long term view on structural inflation. It's also about a rising term premium. I think investors getting to grips with the size of the fiscal deficits. So you know, higher interest costs for companies and borrowers. You also have higher
oil and that's a tax on the consumer. And finally you have a higher dollar and dollars up about seven percent from the July low. So I put those three things together. I've got a higher cost of capital, I've got a tax on the consumer, and I've got global tightening. So we do expect growth to slow. Growth to slow in the United States in particular, but by the way, that's no bad thing. The third quart of the United
States growth has been accelerating here. Whether the number comes in at three percent or three and a half or two point six, it's going to be higher than the second quarter. And we do think it's important that growth slows, and that's part of what has to happen here to.
Down inflation and Nancy. All we talk about seemingly is the Magnificent seven driving major indexes higher. When we look at some of the steam coming off of those big technology companies, where are you looking to put money to work in terms of growth sectors, growth assets, whether it's in the US or outside.
So, first of all, as I said, a notive caution here near term, although I wouldn't be at all surprised to see a year end rally. But let's go back to the fundamentals that I just mentioned. We need to get inflation lower. We think it will grind lower as we head into twenty twenty four. And remember, for our clients who are long term investors, we're not trying to trade in trade out of the market anyway. That's fools erin. As you know, you missed the best days and markets,
you miss Allian's share of the return. But as we look forward to twenty twenty four, we think there's a possibility of a soft landing, which is to say, central banks are able to get inflation low enough that they can dial back on this tightening cycle, ease a bit of financial conditions, and that can lead the groundwork for a bit more of a cyclical recovery, other parts of
the market and economy that haven't participated doing better. And so yes, while we have US large cap everyone does know the S and P five hundred and the Magnificent seven are such a large component of the index. But we also have diversification and things like MidCap rest of world areas that trade at a thirty to forty percent discount to US large cap, and we think these are the areas if we can get a cyclical recovery next year.
We see market breadth widening in these the areas in particular that will participate and as they said, trade at much more attractive valuations.
Nancy, welcome to the fourth quarter, the end of the earnings recession. I mean, comparison's going to be a lot easier going forward, right.
Well, not only that, but look, as I just mentioned, the third quarter growth has been pretty strong here, so we wouldn't be at all surprised to see third quarter earnings come in above expectations. And by the way, the people that have been wrong have been the top down and the strategists. The people that have been right have been largely the bottom up analysts, And if you look at analyst expectations, you know, and if you just give
their price gain times the index weight, you know. According to factset, most analysts bottom up are expecting a pretty decent recovery over the next year. Now, critical to earnings are critical to market is that we actually see some positive earnings growth. That's our view that we'll get it. Whether we get to forty six to forty next year or something less or more than that remains to be seen.
But positive earnings growth is absolutely critical here because markets have moved higher on price, we now need earnings not just to beat, you know, do better, less downside, less negative actually produce that positive earnings growth. But that is our view. Again, it remains to be seen, and like everybody else, will be watching the data.
And Nancy soft landing, is it possible? What are you expecting in terms of where the economy is going?
So look, what is the definition of a soft line. It has like no formal economic definition, but basically it means if plation can come down without huge damage to the economy and out huge damage to the labor market. And we think that remains a possibility. Nobody can be sure here, but that is our view, and part of it is by the way, is we do think economic growth will slow. We think it needs to slow from
the rather toward pace of the third quarter. But actually there are other parts of GDP that are kicking in here. KAPEC spend in the second quarter was up seven and a half percent. Trade is a positive contribution to GDP growth because we're bringing production back home again and that means where we're exporting more than we're importing. We think the government will remain broadly stimulative, just given the programs
that have passed already. So while the consumer was slow, we think there are other parts of the economy that will kick in, and we do think there's a likely possible soft landing. Now they're very unusual in history. We'll only seem like two since the nineteen seventies. But both of those have also coincided with an increase in cap x span that I just mentioned and also innovation.
Nancy, always a pleasure, appreciate it. Thanks for being with us on the program today. Nancy Kurtin, the chief investment Officer out the health of TETAM and global.
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Let's say hello to our next guest. We've got to get them seated first, and the higher edg chat. And we're also welcoming Bloomberg stand at Lauren in on this discussion. Our resident education expert here at Bloomberg, Reginald Derosius. As the president of Rice University. You know, I want to start out it was over the weekend that the student loan payments began. I wanted to get your take on that first off, after the pandemic induced delay that was initiated by the Biden administration.
Yeah.
So for Rice, as I mentioned a few times, we're no loan institution. We meet full need, and so at least from our perspective, we really work hard to make sure that we provide a full financial need for our students where need blind. As an admissions organization and so from our student body, it's not as much of an issue. I know it's an issue for many students. Across the country the issue of the loan repayment.
Janet Lauren joining us in studio or education expert. I want to bring you into the discussion.
So we were talking a little bit earlier about graduate loans. Later this year, perhaps next year, you're going to see the student loan portfolio of new loans are going to be mostly for graduate students instead of undergrads.
Can you talk a little.
Bit about graduate education and programs and how those are funded, especially by loans, and how some of your students, how are they doing in terms of income.
Yeah, So we have a number of graduate programs at RICE, and particularly in the business and in the engineering side of things, data science, engineering and then business. One of the things we focused on recently is making sure in addition to the full time programs where students do have to stop work and in some cases take out a loan, we have programs now that are part time, that are online. We have a fifth year of the online MBA at RICE.
Online program popular in large part to allow the flexibility for people to be able to continue to work while they do these programs online on their own time. And that's really helped with the affordability piece. And we have that both on the engineering and the management side and business side, and in both cases these students come out doing very well financially.
And he was just telling us about a new program that was custom designed for students to work at Chevron where the employer pays. That's certainly the way to go if you can get someone else to pay for your master's degree. Can you tell us a little.
Bit about that.
Absolutely. So this was a program that we designed in concert with Chevron where they were very interested in taking their employees who didn't have a background in data science but needed to understand more about data science and AI. And we take around twenty five people per year through that program. We've crafted it specifically for people in that industry, and we really provide them with the skill sets to be data science within the context of what they're doing
at Chevron. And we're looking to do more of that with the various indus trees that are in the city of Houston.
You know, I got to answer about artificial intelligence. How is that impacting higher education? And I don't mean just like you know, looking at term papers and like, oh my god, where did this come from? Because you didn't write this kid right.
So in many ways, I mean there's a research piece and then there's education piece. The research pieces, it's impacting just nearly every field that's there. Where you happen to be across the street from the largest medical center in the world, the Texas Medical Center, with many institutions and medical schools there, and their number one interest in working with RICE is around AI and data science because they know it's rapidly transforming that those industries into healthcare.
Similarly, the energy.
Industry is being transformed through AI and data science, and so we're forming a lot more partnerships and we're seeing how research in that space is really transforming nearly every industry. And so we're really focused on making sure we build our faculty with that expertise so that we can be a major player in some of the research that's taken place in the city of Houston and around the world. On the education side, clearly we hatch YOUTP and other
tools like that. Our approach has been to understand that it's here and make sure that we craft our assignments and our exams with the understanding that students have access to this. And now we're even asking our faculty to on their syllabus, to ask the students whether or not they're using it for then assignment, just to understand whether or not they're they're going to use it and make sure you keep that in mind as you're reviewing the assignment.
And given the shift that we've seen with a number of companies moving to Texas, how does that position or better position RICE graduates to be better set up for careers after college.
Very well, both at the undergraduate level, We've always worked hard to prepare our students to be able to work in a variety of industries. Replace our students very well. Our students are very well regarded. We have a robust, rigorous undergraduate education that's a good mix of both technical training as well as a broad based liberal arts education. So we've done a great job at the undergraduate level
preparing our students. What was mentioning earlier, Janet was mentioning is one of the things we're focused on now is how do we grow more graduate programs that help with the upskilling that's needed for all the industries in the city of Houston. And that's why we're growing more of these professional master's programs and engineering in the Business School and other areas where we know there's a major need in the city of Houston.
Are there enough student visas to go around? And I wonder if you could weigh in on that.
Yeah, we particularly at the gradual level, in particular at the doctoral level, many of our doctoral students are are foreign students, and we've been challenged. I think many universities are challenged every year with the ability to get students in the timely fashion, getting their visas in the timely fashion, to be able to come here and do their doctoral work. It's mostly really at the doctoral level. We have a
large number of foreign students. About half of our PhD students are from outside the US, and that's that's something that's been a challenge for us, and I think many of my peer peer institutions.
Let me just reintroduce everyone here, Reginald Derocious, the president of Rice the University, discussing higher education, among other things. Janet Lauren from Bloomberg News or education expert. I'm John Tucker along with Bailly Lipschultz. You want to weigh in again.
Yeah, we were talking a little bit when we were meeting with reporters and editors about attracting faculty you're growing not only your student body but your faculty. Can you talk, Is it a challenge to get people to want to move to Texas, especially if they're coming from the coasts.
So yeah, so we are growing. We're adding two hundred faculty for university of all size. It's pretty sign significant. We have about seven hundred faculty currently at Rice, and
we're growing undergraduate student body by twenty percent. You know, we find that if we can get people to Texas, we can get people to Houston and they can see how cosmopolitan it is, how diverse it is, the rich culture, museum, the museum, culture and music culture that we do well in recruiting people, and so we've been able to so far to exceptionally talented group of faculty to Rice. We're really pleased with that and we will continue to work hard.
The main thing is to get them there. Hopefully not during the summer when it's one hundred and four degrees as it was most of the summer, but we get them a nice time of the year and they really are surprised as to how diverse and cosmopolitan and what a great city it is.
The research that you do does that then generate business that the university and the researchers can then capitalize on.
Absolutely it does. And one of our big focuses moving forward as a university is helping to accelerate that. And so we've created when I became President and Office of Innovation and Commercialization with the sole purpose of helping our faculty in concert in some cases with industry, to commercialize their research and have new startups in the Houston area.
And we have a new innovation district about a mile and a half from campus, is called the Ion District, with the sole purposes around fourteen acres of land right between Rice and downtown, with the sole purpose of industry to create more startups in the high tech area of in Houston.
Does any of that conflict and wonder your thoughts on that conflict with the idea behind research in the first place.
It doesn't conflict.
It's fact it's synergistic. And increasingly now it used to be people recruiting faculty to universities they're really interested in the lab space more importantly in the graduate student quality, but now they also want to know what resources do you have to help them start a business or start a company from their research. It's becoming a part of what universities do on the research side, absolutely, and we want to make sure that we are equipped to help
out faculty who have the interest in doing that. Not all disciplines do that, not all faculty have that interest, but those that do, we want to put the infrastructure there for them to be able to do that.
And then do you often help them, you know, with patents and then and then licenses. We do companies.
We have an entire office that does that and increasingly now we have we've uh, we have some seed funding for them who want for the faculty who want to start a company, just allow them to get off campus, have space somewhere else off campus, because you really can't do that on campus. And we have new seed grant program that allow them to do that.
And then if there are innovations that are licensed, the university keep some of that revenue.
They do.
There's always a split, and sometimes we negotiated abortion goals to the university, a portion goals to the founder of the company and his or her partners, and.
That's often coming from government research grants.
In some cases it's coming from government grants, in some cases it might be coming from private industry. Grants and there are different contracts depending on where it's coming from.
So another potential revenue source.
It is, it is.
It takes the time sometimes to develop that, but absolutely it is.
That comes to mind Lyrica at Northwestern.
Erica, Northwest and there are a few of them obviously, Google at Stanford and many others like that.
How the el's doing.
They're doing well, We're three and two. We had a big win earlier this year against our partner down the street, University Houston, for time in thirteen years that we beat them. And we're excited about being in a new conference, American Athletic Conference.
And will you explain to me how this is all working, because it's a complete mystery college sports at this.
Point, you know.
I mean, if you're in California, you know, on the lacrosse team, you now have to get on a plane to play on the East coast.
Or yeah, Syracuse, right, I mean that really.
Imporacts a student's ability to then it.
Does, No, it does. I think a lot of us are concerned about the conference realignment. My daughter was a student athlete at Rice. She was on a soccer team. She just graduated in May.
Congratulations, thank you, and I.
Saw the work, the hard work that she did, traveling around the country to play games and coming back late at night and having to study for an exam the next day. So I think there's a lot of concern about the conference realignment. I'm a big proponent of intercollegiate athletics.
I think it's an important part of a university. I think the student athletes at Rice are incredible people to be able to balance competing at the highest level with the academics produce as leaders, and we will continue to support them despite some of the challenges that that we're facing right now in the industry.
That was a fascinating discussion. Good to see you, nice to meet you, Thanks for sing thank you to you than you appreciate it. And Janet, you too. Reginald de Rosius, the President of Rice University and Bloomberg News Higher Education reporter Janet Lauren.
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With that in the background. Our next guest, Matt Stuckey to senior portfolio manager at Northwestern Mutual with your market outlook and expectations to what extent are rates in the driver's seat and do you have an adequate explanation for us?
Yeah, those are all really important points, and we do think rates are ultimately going to be the driver of the outcome of this FED tidening cycle, which from our perspective, is of recession, the timing of which we think is uncertain. I think that we've been surprised with resiliency that we've seen from the economy throughout twenty twenty three, especially within
the labor markets. But I think anytime we look at FED tightening cycles since World War Two, ten out of thirteen of those cycles have resulted in a recession, and the three that did not did not end up there and resulted in a soft landing. The FED was not in inflation hiding mode and they certainly are today. So you know, we think the outlook is fairly is fairly kind of headed towards you know, the recession camp. However,
you know, the timing of which is uncertain. So ultimately, the tightening of monetary policy conditions in the form of rates are likely going to be the driver of the en macro result.
Yeah, but it does feel like we've been talking about a potential recession for quite some time. With that call, I guess, kind of what are we ignoring or what's different this time than it had been for really the past year.
Well, I think the big difference is going to be just the passage of time, and let me kind of explain what that will explain what that means. You know, if we look back to twenty twenty, what happened, We had such a big refinancing opportunity for individuals as well as companies in terms of kind of what the balance you look like. Unfortunately that you know, you're you're deferring kind of those those larger interest pains out into the future.
But as companies have to come back and refinance those issues, you know, it does start to dig into growth outlooks. And I think you're actually seeing a case study on this in the utility sector right now. Look at next Steir Energy as an example of kind of reducing forward growth as a result of the higher interest rate environment.
It just essentially costs more to fund the projects that they need to grow, and you know, that's just a case study for what's likely to unfold the higher the longer that rate state and it's kind of higher rate environment.
Is it the defensive shares that we need to focus on now?
Well, ultimately, defensive parts of the market you are going to have their time to shine in terms of the market cycle. But certainly defensive parts of the market that are rate sensitive, like utilities, are feeling the pain right now.
And I know you called out wages being something you're keeping an eye on and think that you know it is going to have kind of a higher impact on what lies ahead.
What's the thinking behind that? Why are you focused on wages?
Well, ultimately we think wages are kind of the last kind of standing component of the inflation equation that the
FED is fighting against. We have a hard time seeing and I think the FED likely would agree with this, that you know, for sustainable move lower to the fedes two percent goal, wages have to be a part of a part of that picture and age environment of four and a half percent year in the ear, even though it's it's falling and kind of getting down underneath, the Fed's kind of four percent tolerance level still is not going to cut it as it relates to kind of
the services component of the inflation equation. You know, John Williams talked about this in a Bloomberg interview a week or two ago and talked about a three point two to three point five percent wage rate that's kind of being necessary for the Fed hitting their two percent goal. We're a ways from that today. And if you look through history, you sustainable moves move lower moves lower in wages typically only happen, you know, when when recessions occur.
So we think that ultimately, what's likely to take place again this cycle?
Where is the team allocating assets at this point?
You know, we've taken our time over the last couple of years leaning into you know, upward moves and rates, and you know, this leg up in rates over the last three months has been no eccepstion'. We've recently, for the first time in the last seven years, been over We just moved to an overweight position in fixed income. But that's been you know, a two to three year process for our team. You know, we do like the real interest rate environment that we're getting as fixed income investors.
You know, real rates on the tenure are you know, above two point three percent that's the highest that we've seen since two thousand and seven. We think that there's multiple ways for individual investors to have an advantaced position here. You know, either through a recessionary outcome where the FED responds with lower real interest rates, or if inflation does continue to move lower, you know, those real rates are still attractive in an your environment.
Hey, how tough has your job become? I mean, do you have customers saying, look, Matt, I can you know, stick money in a Marcus account and have absolutely no fees associated with that and still get a pretty decent return on my money or even you know, a short term treasuries bills.
Yeah, that's a common conversation we're having, and not so much in terms of, you know, whether or not it makes sense to have a more diversified portfolio, but more within the conversation about how should we be allocating within fixed income. You know, it's really comfortable to sit in the front end of the curve not deal with any volatilities it relates to movements and rates, or movements and
credit spreads. But we do think that duration is a wonderful diversification tool in one's investment portfolio, particularly just because of the refinancing risk. You know, certainly it was comfortable to sit in the front end of the curve in
two thousand and six, two thousand and seven. However, you know when you went to kind of go back if you were sitting into your notes as an example, and buy those again come two thousand and nine, it was a very very painful conversation saying, yeah, those five percent rates are gone. You know, you have to lock those in over longer periods of time to have that kind
of a great diversification asset within one's investment portfolio. So the conversation is more about diversification and kind of walking in, you know, truly locking in higher for longer within your portfolio, versus just avoiding volatility at all costs.
Matt, we had Jamie Diamond say, when asked if rates can go to seven percent, the answer is yes.
Is that something you agree with?
And where are you going to be putting money to work if we see rates getting into the seven percent range, Well, I.
Think it's possible in financial markets. You know, I think that's probably more of a tail risk scenario. But you know, if if we do see that happen, I think we would be aggressive buyers of just pure rate. In that environment, we would avoid credit.
Welcome to the fourth quarter, By the way, what the comparison's got to be a lot easier. But what's what's your expectation as we move forward on the earnings front?
You know, the earnings inside of the picture I think is a tough one to figure out right here. You know, we've been in a decelerating, rined growth environment. We dipped
into negative territory in twenty twenty three. But as you look into what's King of baked in in terms of consensus expectations for the fourth quarter and especially into the front half of twenty twenty four, there's a natural acceleration of earnings growth kind of coming back into the s and P five hundred, you know, kind of capping off with a second quarter of twenty twenty four calling for double digit earnence growth. You know, I kind of scratched
my head at that number. You know, that would be one of the kind of kin of abnormal abnormal situations that I've ever seen, where the economy naturally re accelerates
in the face of significant monetary policy tightening. I guess it's possible, but for me, I think I'm skeptical, and you know, to me, I think it's kind of more of the same what we've se been seeing late lately, where companies are going to continue to try and put price down on consumers and consumers are pushing back with kind of unit volume declines for a lot of companies. So yeah, I question how long that dynamic can persist.
Certainly the consensus is calling for that as we pushed into twenty twenty four, but you know, we're cautious with that, with that consensus estimate, and so it's another reason why we prefer fixed income over traditional equities at the margin.
Here, Matt, A pleasure, appreciate it. Matt Stuckey, Senior portfolio manager at Northwestern Mutual.
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President Biden urging house speaker McCarthy to follow up quickly with funding for Ukraine this comes just hours they up to Congress pants that spending bill without funding for Ukraine, and we say hello to our next guest, ed Price, a senior fellow at NYU and a principal at ERKO joining us. Now, how is this being received?
Well, personally, I think it's insane. You know, remember when I was growing up, the Russians were going to kill us at the drop of a hat, and now we seem to have an opportunity to kill bad guys with pennies on the dollar and we don't want to do it. I mean, does that strike you guys as normal? I mean I thought the Republicans at least used to be into that sort of thing.
Yeah, And at this point, what is your outlook in terms of whether or not this is actually to get reintroduced and there will be funding for Ukraine?
I think it has to be. I think that if the Democrats, if the Biden administration were to come to any sort of deal with the House Republicans that did not include funding for Ukraine, they have to give up their entire democracies versus autocracies foreign policy. Then that's basically the Biden doctrine, I would argue, So they have to do it. But again I'm a bit surprised and slightly dismayed, if I'm being honest with you.
You just recently wrote a paper just to switch gears for a moment. Forget about the bricks, what about the VIPs. First of all, we have to, with the apologies to Jim O'Neill, you and Neil explain what the bricks are and how they've been replaced by the VIPs.
So Jim O'Neil, in his genius about twenty years ago, came up with this very famous acronym brick, which was Brazil, Russia, India, and China. Later South Africa joined in to make the bricks. And his argument was, well, if you look at long term GDP trends in those countries, eventually they will take over the so called West. That's kind of happening, which is great in my bid for acronym fame. The other day I said, well, hold on the second, the bricks
are a thing. We know about the bricks. What about the VIPs. Vietnam, India, the Philippines, Saudi Arabia. These are the countries Uncle Sam really needs to get on board if he wants to win the twenty first century.
Alright, let's start with Vietnam, because I will argue that Vietnam, once an enemy of the United States, is now one of our best friends in the region.
That's true. I mean, I would argue that Vietnam is never our enemy. If we're thinking about South Vietnam, the country as was, and it was actually the communist north. Right, Maybe that's nitpicking that was the enemy, but that actually makes your point even better because now the communists in Hanoi are friends with Uncle Sam. So you might say, Look, Vietnam is a slam dunk, but it is still nominally
a communist country. They've seriously got beef with China, but that doesn't necessarily mean that they're at the level of treaty.
Ally in India somehow is both in the bricks and also in the VIPs.
Yes, I knew you guys would point that out. That's very smart. Yes, India is in the bricks. It's a quincidential member of the bricks. But India also behaves however India wants to behave. This is the non aligned tradition, and it's a member of the quad as well as accepting Russian arms imports.
So I think.
India is to play for, and India is important because it essentially has the deciding vote in World War iie, how big it is and who wins.
What does the Philippines have for us?
Well, the Philippines is essentially a massive aircraft carrier. I mean this is the Chinese want the Spratley's, they want the nine dash line.
I will argue that does not come cheaply because mister marcos As did his father charged as exorbitant fees to the United States for there.
Yes, I think that's probably true. And there was a time in American history where we might have annexed the Philippines outright and chose not to. So we've decided not to be a formal empire. And the cost of that is that you have to get on board with local politics, you have to pay people to get on board with your vision of the world, and you have to keep up soft power engagements.
Right, And how does the US get kind of on better terms with Saudi Arabia? Is that just through you know, golf partnerships or letting them by sporting teams.
Well, that's part of it, for sure, But I think that really and truly the Saladis needs security. The reason the Saudis and his rollies are willing to sit around a table is their common distaste for Iran, and I think that if we provide the Saudis essentially with modern defense weapons, modern defense systems, they will be more inclined to help us out with oil supply problems should the Russians later down the line decide to restrict oil supply.
Can these countries, especially with Vietnam, effectively replace China as the place where the United States manufacturers go to get the cheap labor and stuff produced well.
So this is a multi trillion dollar question, right. I think the assumption in the back of American business people's minds is that there is a place to replace China. There's some place in the world, a combination maybe of Vietnam, Mexico and so on for near shuring, friends shoring, and so on. I think the problem is that the disruption entailed between the United States and China decoupling or even effectively shrinks the oval size of the global economy. It's
hugely disruptive. So I don't think there's ever going to be a one for one replacement. Countries such as India I don't think that works.
Yeah, And in terms of the other countries, what is the future of the relationships between the United States and these other countries as you can tell, well, I'm hoping that is it based on manufacturing or something else.
I think ultimately people are considering two possible futures. One is some sort of continuation of Pax Americana orbeit damaged,
and another is some sort of Chinese hegemony. And whereas for the last maybe twenty years, people were slightly more comfortable with China rising as this commercial power, now I think some regional players, particularly Vietnam and the Philippines scratching their heads and thinking, well, maybe we wouldn't quite like that as much as the international trading system that we have now led by Uncle.
Sam going for a longer acronym.
What kind of countries could have been playing for a position in the VIPPS basket that you built.
Right, Well, I mean it only had space for four, so I had to mold the analysis around the acronym. I think countries in the global South are going to be important. I think Mexico's already on board. Brazil is huge, but again that's firmly in the bricks. I mean, you can see what they're doing with the goal backed currency project. I mean, ultimately, ultimately it would be nice to have
Russia on board. And I think that one of the you know, to sort of echo Vladimir Putin's words, it wasn't the collapse of the Soviet Union that was the greatest strategy of geopolitics in the twentieth century. In my money, it was the fact that we didn't then give a Marshall Plan two point zero two Russia and sufficiently get them on board with the Western system, you know, maybe
even NATO membership, maybe even EU membership. So ultimately, I think the player is to try and get Russia back into the system.
And nice to see again. Thanks for rescued by the studios. We appreciate it. Ed Price, senior fellow at NYU, the principal at Ergo on the geopolitical risks and the latest research that he's doing.
You're listening to the tape Can't Our Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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Thirty with an investment outlook is Evanna della Vesca. She is founder in CIO at Spear invest They describe theirs them as a fundamental asset manager and an etf issuer specializing investments in industrial technology value chain. So I'm curious to see what her take is on the market. She joins us here in studio, Nice to have you here with us. How are you?
Thanks for having me on, Carol, Hey remind our world.
I did the description off your website, but to be honest, tell us about what you guys do and what you focus on well.
As you mentioned, Carol, we focus on B too B technology, and our niche focus allows us to really have a good sense of what's going on in tech, specifically in B to B business to business where companies are selling products to other companies. So we are pretty positive on the cycle. We think we're at the bottom of the cycle. What we're seeing today is that hardware bottom, and we're just in the early innings of investments of hardware investments.
We think this is going to be a pretty big data center investment cycle ahead of US, and that's going to really drive the rest of technology out of this downturn.
So continuing to see more upside for a company like in Video, which already has tripled this year and is one of the best performers in.
The US, absolutely, So what's happened to in Vidia for example, as we saw numbers bottom and increase of the bottom, the stock is just getting cheaper and cheaper on traditional valuation metrics. So we believe what we're going to see
with Nvidia. Historically the focus has been growth investors and people trying to capture the AI hype, but as we go forward, really there is fundamental support from the numbers here, So we believe that as you go forward, there's going to be value investors that will be looking at this at the stock.
Talking about AI, talking about data centers, while though.
The event video is value stock, value stock.
That's one point one trillion dollars more upside after a triple different world arm the biggest IPO in the world this year, talking up a lot of AI soft.
Bank town talking up their partnerships within VideA.
Is that a company that you see upside with alongside the likes of an Invidia or an AMD.
So we don't own ARM at the moment, they are indirectly an AI play. But what I would question investors is that over time everything is going to be an AI play. Right, So you're going to have most applications have AI embedded in them, and most products will be able to will be able to enable AI to run on them. So over time, we believe ARM will benefit from this trend, but it's not nearly as big of a beneficiary as Nvidia would be.
At this point in time.
Do we think about the AI in the same vein that we thought about going online?
Right in the Internet?
And at some point I remember having these conversations every company is going to be an Internet play.
Well they're not even retail.
While online and mobile ordering and all that good stuff, we still think about brick and mortar, And I'm just wondering, like, can we think about them as the same thing. To hear you say everything's going to be an AI play, I just remember saying that about the Internet. Everything's going to be an Internet play, and I don't know that it's actually played out that way.
Well, that's an interesting point. So when I say everything is going to be an AI play, AI will take part in most of applications that we use. That doesn't mean that every company is investable and every company will
offer value. So that's where we come in. We try to look at the fundamentals, model out how much earnings potential does each company have, where does that stand compared to the street estimates, And we're really looking for capturing alpha of opportunities where people are maybe seeing out on or not understanding how they are related to AR or how they're going to benefit.
Because I remember one of the ways of thinking about the Internet play was like ups right, everybody's ordering, so you know, very different. So how do you think about it? Where do you think will be the best opportunities. Is it somebody who's making the chips for the AI sector or is it something else.
So what we see is opportunities across several layers of AI. So the first layer is the hardware layer, which we talked about, so that would be in VIDIMD, Marvel, basically companies that not only offer GPUs but just broader data center networking equipment as well. We still see those as being in the early innings. The next layer of opportunity will be in.
The data layer. So here you have a lot.
Of software companies that offer services in addition to the cloud vendors that are also in this data layer. In addition to them, they offer services such as data streaming, enabling you to organize your data better. So this is where we see a lot of opportunities right now because they're not necessarily called AI and they're not necessarily seeing the benefiting the numbers just yet because.
It's a little too early.
But over the cycle, we believe we're going to start seeing it as we get into next year.
And it's your third layer.
And then the third layer would be the application layer. And this would be like the application that go either directly to businesses or directly to consumers. So an example would be Chad GPT, an example would be Microsoft Office Copilot.
So these are the actual applications, and that's probably the most uncertain layer because we're still trying to figure out how much are consumers willing to pay, how much our company is willing to pay for these products, how much do they actually cost on the back end, because running on GPUs is pretty costly. So this is where there
is the most uncertainty. There are going to be some winners as well, But there's going to be some losers as well, right, companies that are not going to be able to make the business case work.
Well, when you're talking AI, you can't not talk about the dot com bubble and one of those things that you're mentioning though, and I've seen this being mentioned the barecase against Nvidia. Cisco was building the Internet and was going to be this behemit that made all the money, but it was actually companies that were working on the applications and actually benefiting from that.
I know you mentioned that's kind of in like, we haven't scratched the surface of that.
But where are you seeing the money going to be made in the longer term with AI being built out.
Well, we believe there is going to be opportunities across all three layers.
Right.
So in the hardware layer, we're still in the early innings, so it will take few years. Hardware is very cyclical, so we'll go through cycles, right, So this is just
where the early innings of this cycle. It takes usually several years for you to be putting the infrastructure in place, and then at some point the valuations will reflect the strength of the cycle and we would be looking to exit those investments, and then the second layer, we're just starting, right, So that's going to be a little later cycle if you want to think about it from that perspective, and
it's going to be a lot less cyclical. There is still clickality in it, right, like you will go through natural down downturns in that layer as well. But it's all about how much is priced in today versus how much upside you see.
We're in a new month, we're in a new quarter, earning seasons on the horizon, and Vidia has been the big driver for this entire space. Can they live up to your expectations in this next quarter and.
They report next November twenty First.
Well, we still see a lot of upside to the numbers. The CEO mentioned that capacity is higher each quarter, so it's increasing each quarter, so they should be able to beat numbers. I think where investors may be mismodeling the numbers, and this is why they keep beating by such large margin is on the pricing side. So everybody's focused on volume, everybody's focused on hey, are they really going to be
able to produce this many chips? The key is pricing just because these new products the h one hundred is priced at a two to three times premium to the prior prior version. You're seeing a big uplift to earnings from the pricing side.
Is there a tangential play off of this, like I think about security, is that like what is the other aspects that we're maybe not talking about that's kind of AI pure but none the less important in this play.
And just get about forty five seconds.
Absolutely, so that cybersecurity would be in that second layer, so the data layer, so as you're talking about how to use the data, key will be how are you going to secure this data as well? So we're going to see a lot of companies first protecting applications on the cloud, so cloud is a big team. And then another big theme is companies trying to embed security in their applications earlier in the process, so before they even write the code. So those are the two big themes in cybersecurity.
Are there any names in particular that you guys like, Yeah.
We like z scaler a lot, so that's a cloud a networking play, and then we also like CrowdStrike. That would be more going downstream into embedding cybersecurity in the applications.
Is there one AI company that we're not talking about that we should and again just got about fifteen seconds.
Well, there's a lot we disclose all our holdings on our website and some of them.
Are directed in the headlines that you think we should be paying notes.
Cloud Flat would probably not be getting enough attention. They are building out a very unique network of GPUs and they're enabling companies to be able to run these GPUs and use a lot of the lllms. So I think that's one maybe that I would highlight.
Great perspective on AI and I feel like covered ground that we don't always cover.
So thank you.
Evanad Levska. She's founder in CIO at Spear Invest joining us here in studio.
You're listening to the tape Can't our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
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You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Well, let's see what our next guest has to say about kind of the macro environment that we are living in. And what type of investments investors are really trending to with us right now? Is Amanda Rabello, head of Extracker sales US. I'm sure at the global asset manager DWS Group Extrackers of course, the ETF brand owned by DWS, which has roughly nine hundred billion in assets under a manager.
She joins us in studio. Hello, Hello, how are you? I'm very well, thanks, How are you good? What do you make of the macro environment?
We're kind of happy to start off a new quarter, but it doesn't mean things won't carry over.
How do you see it?
Yeah, I think that what we feel is that FED policy is being felt in the slowing housing market, and we see that there are higher rates which are really a reflection of real rates as opposed to like higher inflation expectations. From the equity perspective, we're expecting by the end of the year that SMP is going to be at forty one hundred, and we do expect that there will be a rebound into next year to around the forty five hundred level, but it's a bit about months.
Yeah, I was not expecting to go there.
So if you think you'll depressed, we're depressed as.
Well looking at different benchmarks. So you sp equal weighted, we were saying turn negative for the year today. Is that going to be trending more towards the downside given that call? Or do you see the Magnificent seven some of those bigger technology shares underperforming the rest of the kind of market.
Yeah.
So actually equal weight is something that we've been speaking to investors for a long time. We actually have a product in Europe which is almost five years old, and you know, I think that all of these kind of sexual overweights are definitely something that investors are thinking about.
Only last week we actually had clients also asking us about how do they get rid of overweights in financials as well, for example, you know, especially and I don't think that's necessarily a big name financially like the big name financial so not even like the fears around smaller banks and more banks collapsing. I think that, you know, at the end of the day, there is a need
for stepping away from market cap weighted. We think it makes sense a little bit more to think about quality and value inherent in.
US large caps.
So we've been speaking a lot about our co product quality as a reasonable price so it's based on like the Russell one thousand, thinking about those stocks that display strong, strong components or a strong kind of direction towards quality and value. And we think that usually we kind of think more about single.
Facts quality in today's environment.
Yeah, so quality is thinking about you know, kind of smaller draw downs, but also thinking about robustness and paying out dividends as well, and you know divs more more broadly. You know, there's a lot of demand for bird in hand basically, so if you can't be sure where your price return is going to be, at least thinking about your total return, but grabbing the dividend beforehand.
That feels conservative to me when I think people are I think about old dividend reinvestment plans.
Even if you don't need income, right people are asking for this.
Well, when you look at the market right now, we have a ten year old yield at four point sixty nine percent. Jamie Diamond was asked if rates can go to seven percent. He said, the answer is yes. What starts to break if we see rates in the seven percent range?
Well, I think, really you think about kind of the impact something that we're speaking about on the desk, A lot is consumer credits, right, So then I think already we start to feel the pinch all of us, you know, like people in our industry, for example, we're definitely not at the brunt of like having kind of very tight kind of earnings and so forth, like from a household perspective.
But if even we're complaining about oil prices, about the price of gas, about the price of milk, eggs, kind of all of these things, then I think a lot of people start to be more dependent on credit cards, for example, and you obviously see then like a higher rate that they need for financing.
Then.
So, I mean, I was in the industry in two thousand and seven. I remember US launching GMAC bonds at par and then two weeks later they're selling it like sixty five to the dollar. I'm hoping it's not going to be as drammass as dramatic as that, but I think that there is a possibility that you start to feel like more pressure on the consumer from.
That from a credit perspective, that feels pretty negative. Yeah, that we could actually get there on the consumer side of things. And you know, we always talk about how important the consumer is, certainly to the US economy and keeping momentum going. So yeah, are you saying that we could potentially see an seven eight feel But it's the consumer version of the story.
I think it kind of ends up transpiring through the whole system potentially. But what's interesting is that maybe versus two thousand and seven, you actually have more global equity firms now that are reliant on kind of US consumer
revenues and vice versa. Right, So maybe there's kind of scope for some contagion in some regard in terms of you know, I'm from the UK, foots one hundred is not just about UK consumer spending and UK kind of industrial demand, the same for you know, dax KAC forty and likewise the SMP as well with the rest of the world, and especially now you start to see kind of more broadly not just US rates going up, but
also European rates as well for example. Then I think it's maybe not not something that we can always isolate.
So new month, new quarter earnings are on the horizon. What matters the most when we go into the fourth quarter. You said forty one hundred on the SMP. We haven't been that level since the day, So is that that's me since is that earnings breaking is that the FED hiking again, is that the economic data really kind of petering out.
So we do think that.
There are some opportunities even despite this this kind of embarish tone that in that projection, what we quite like is we think there's some opportunities in small cap. We think again it goes back to buying the right names within the S and P five hundred as well if you if you do want to look at large cap and then also in the MIDP part, we quite like thinking about Europe as well. And that's not just because we're a European house. We do think even our US
American's CIO thinks this as well. There is some opportunity in European equities. Obviously, they were hammered last year, you know, continue to be hammered into the first half of the year as well, so we think there's a value component there. And then when you think about European equities they typically always yield more than US equities as well. So SMP did yield is about one point five five percent the EUROSOX fifty for examples around I think four thirty five
something like that. And then if you think about a dividend focused strategy on international equities, of which European equities is a large part of that. Think about HTEPH for example. In our range, you can end up yielding something like five point six five percent on an annual Live.
Amanda, were you guys as negative? This feels pretty negative? Were you as negative a month ago? Two months ago?
I think we were feeling around the same level, to be honest, Ye, But then you know, you see days like today where the screen is read again because r.
We go back pre August and it felt like it just kept getting.
Better and everyone was exciting. There was no one really calling a forty one hundred for sure.
Yeah, I think it's forty one hundred forecast. It emerged from US at the end of August, so we've had it on for about a month.
Yeah, for about a month. Okay. It's just interesting.
That feels like a much more negative tone, although it kind of seems to me to fit with some conversations we've been having with folks about like maybe we're underestimating that it could be worse off than we thought.
Yeah, and if we see a US recession, how long and how deep does that go?
I guess with your kind of expectations.
Just got about five seconds, I think.
To be honest, we haven't yet thought about how long that will be, but when we do, we'll.
Get back to you.
All right, Well, we will definitely check in. Meta Rebello, head of ex Tracker Sales over at DWS Group. This is Bloomberg Radio.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
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