'Missing Inflation' Is Seen In Asset Prices: Shalett

SNP up about one percent. We had some good, very good consumer confidence day to come out this morning, so that's clearly supporting the market. To get a sense of kind of where we are right now, we welcome at Lisa Chalotte. She's a chief investment officer Wealth Management and Morgan Stanley. They got like a gazillion dollars under management two point for eight trillion to be more precise. Lisa, thanks so much for joining us on our Bloomberg Interactive

Broker studio. So how do you put yesterday in today kind of in context? Because folks out there driving around there saying, wow, yesterday was really ugly, but what's costing today's bounce? Back. Yeah, So yesterday was very much about out a classical global growth scare UH. And we get these every now and then, UH, and they very often

lead to market sell offs. And you know, the idea, UH is basically that UH, the nascent rebound that we have potentially we're beginning to see might get curtailed by the spread of coronavirus and and the idea that the rebound that may have begun in China gets stalled. And I think that that's really what the markets were obsessed with yesterday. All that being said, when the dust settles

and the markets, UM, you know, sold off. I think there are a lot of investors who believe, UH rightfully that the US is disconnected in many ways from the global economy is kind of UH in oasis. Only nine percent of net GDP, of net trade UH is related UH do DP is related to trade UH, And so in many ways, the US is very much a domestic oriented economy. And so you come into today UH with ample liquidity UM still extraordinary sentiment and positioning people wanting

to be long this market. UH, and you get a little piece of data that says the US consumer, which is of the mix, is UM still feeling good. Uh, and people are willing to say, yeah, we're gonna weather this storm to yeah, this storm being a one point six percent decline yesterday and today we're up almost a percent. So uh, these these huge moves are are sort of infantestable and historical perspective, But nowadays, I guess volatility has

been killed. But I am curious. Right now we're seeing uh, financial conditions at all time the easiest ever based on a Chicago FED and St. Louis FED measures coming out in the past few weeks. Capex, though continuing to trend lower. US GDP growth still only two percent. I'm trying to square the idea of relatively slow ish growth, lack of wage inflation, lack of capital expenditures on the part of companies, with this incredibly strong job confidence and and just really

low jobless rates. What am I missing? These pieces don't seem to go together. Yes, they don't. UM. And so you know what we have very often said is, look, the lack of inflation in the real economy UM has completely shown up in financial asset markets. UM. We know that for the past eleven years we've been in a pretty profound bowl market UM where U s docks have compounded at about four which is two times normal. UM. We think a lot of the provision of FED liquidity,

and you noted financial conditions among the easiest they've ever been. UM. That liquidity has found its way to financial assets UH and been recycled not into fundamental capital spending and fundamental capital formation, but into share repurchases and a return of capital UH to UH to shareholders. So there's been the huge wealth transfer UH and many of our clients and certainly investors in the stock markets have benefited from that.

But that's where the inflation is UM. In the real economy. UH. The real economy itself has really been struggling over this last decade with UM reasonably weak UH working age population growth UM and reasonably weak productivity growth UH. And so we've kind of been bouncing around this two to three percent UH. And even though we have UM low unemployment UM,

we have not seen wage pressures UH. And so as a result, UM, we haven't seen the classical capital for labor substitution effects that you typically get UH end of cycle. What we've seen is companies saying, hey, I can get away with hiring people. I don't really pay them anything. I don't give them wage increases. UM. So I'll just you know, I'll hold them in there as long as as the cycle holds up as good enough. And that's

what we've been this good enough. So I'm looking at your tactical asset allocation UH, and the global equities underweight the US but overweight emerging markets international. What's your thoughts behind that? So look, our our thoughts there are really around relative valuation. You know, we've been in at this period as we talked about for the last eleven years where US markets have profound the outperformed um the other regions, and as a result, we have a very very strong

US dollar UM. So as we look at relative valuations today, UM, you know, we see the US and and really the top decile of p ratios for the last hundred years, it's it's getting to be an expensive market. UM. We know that on an equity risk premium basis or adjusted for low interest rates, you know, evaluations are not yet extreme. But in terms of nominal ps UM, the US market is really um, you know, getting expensive at at nine

times at nineteen times forward. So our view is that as we look into t any the improvement in global growth that we thought was going to come both cyclically and from the trade deal. Really we think has the highest beta outside the US. We just talked about the fact that the US is kind of an isolated economy. Um, well, you can't have it both ways. You can't say, oh, global growth and global trade are gonna pick up and the US is gonna benefit. Um when you just said, hey,

you know, the US is its own um story. So, Um, we have favored non US markets this year basically believing that there's more operating leverage and better valuations. How long can this disconnect continue where the inflation really is in assets and not in the real economy. Um. So I think we're starting to approach, um, the point of pain, and and that's where you know, valuations start um, you know, begging uh um, you know belief uh and and our

senses were starting to see examples of that. Um. We think you know that the history books are gonna reflect um, you know that we work debacle as maybe you know an example of valuations becoming disconnected. And certainly a lot of folks have said, oh no, no, no, that's just an idiosyncratic situation. But we see examples of it, whether we're looking at um valuations in VC or we're looking at valuations some of the valuations that are being paid

in the private equity markets, etcetera. That's fascinating. This is really really interesting, Lisa Chellette, thank you. Apple shares up more than two percent ahead of reporting earnings after the bell today. A lot of questions about just how robust their growth has been, whether it can justify the tremendous rally that we saw last year and some of the estimates that analysts have across Wall Street. But I want to turn our focus to what actually is going on

right now and help us do that. As John Butler, Senior tell Services and Equipment analyst for Bloomberg Intelligence, and that is the effect of the coronavirus on its supply chain, which may or may not be in the front and center today as the report earnings. But you think it could be potentially substantial, right I do. I want to stress I view it sort of as a near term risk. So Bloomberg did a great piece last night on m Live blog where they talked about epidemics and the typical

bell curve that goes with that. So uh from beginning to peak, it's typically ten weeks, call it two and a half months, and that's sort of the before the number of cases begins to decline. And so my thought in reading that was that that's the risk, that's the window where Beijing could remain proactive about closing down factories, restricting travel and in general doing the right thing, but putting measures in place that could threaten the Apple supply chain.

So looking ahead to the coming year for Apple, they reportedly are set to launch a lower cost replacement to the old iPhone. See if you remember that, So it's a lower cost iPhone sort of positioned at the high end of the mid price market, which is a big segment. But if you're gonna launch that in March, you got to start building it in February at the latest. So in my mind, that sets up a near term risk

for them. It could lead to a push out of the introduction of that phone, and god, if this whole scenario plays out longer than that ten week peak, then ultimately it could may even threaten the September refresh, although to be clear, I don't see that happening. Um. I think this whole scenario with coronavirus is probably going to

play out over a typical bell curve. So John is, as Apple or any other technology companies that have a big president in China, they talked about any supply chain disruptions. They have not, and so I think a lot of people are going to be coming into tonight's Apple report and the earnings call anxious to hear something. I would be amazed if they didn't address it already in China. If you look at the retail store base, they have limited the number of hours those stores are open across

all of China. So clearly it's on Apple's mind and they're already taking measures to address the the thread of this virus. All right, So let's get to the big, the big kuna here, which is the earnings, right, the first two trillion dollar company, right. Yeah, it's interesting they're set up for this great year. You know, the iPhone tennis, which sold throughout last year, did not really resonate well with people, and every quarter last year they booked to

a double digit decline in iPhone sales. So we have very low hurdle set up for this year. Every quarter this year, and the iPhone eleven that they introduced in September last year has done really well, um by any measure. You know, we're hearing from third party researchers as well as the tech community. Uh, just in general. I'm seeing a lot of it out there, a lot of iPhone elevens in in people's hands. What I think they got

so right is they introduced a new camera system. So you've got sort of a hit on your hands, some new devices coming to market and a lot of selfies. He likes the filters, he likes the multiple cameras. I looked at Tom Keene. Tom Keine posts some amazing photos on Twitter from his phone eleven, so he's really been efficient. I just point and pushed a little point. He spends He spends entire radio segments filming said videos. You know, it is interesting though, and it's just the idea of

phone camera. I mean, that's essentially what's happening. Cameras have become digital digital. I'm sorry, today's smartphones are digital cameras with a phone app basically, and so the phone is honestly no all kidding aside is it's the most important feature on any smartphone. And I really think Apple did a lights out job with the iPhone eleven. And they

lowered the starting price by fifty dollars. So it just has done very well and I think we're gonna hear that tonight and it sets them up for a great year where you have this low bar set from how we performance. How important is that five G story to Apple? A lot of bulls are out there saying this is the next major refresh cycle. I think I think they're right, but I think it's going to play out over a

longer period of time than they think. People don't upgrade immediately to the new technology, so if you look at four G, it was sort of a multi year ramp to the point where sat uh not saturation penetration levels in the US we're really meaningful. So I think we'll see the same thing happened this year, where we have a decent year of early adopters. The iPhone five G coming out in September, I think is going to be a popular device, but it will take a couple of

years to really get out there, so to speak. I feel like sociologists are going to look at this period of time where it's no longer about the conversation, it's just about how you look. I mean, honestly, I do think that this is going to be a transformation that people, you know, just want to see themselves others, but they don't actually want to have and conversations have gone to texting yes for the most guilty. By the way, John Butler,

thanks so much for joining us. John Butler, Senior Telecom Services and Equipment Annals also is the ace on Apple for Bloomberg Intelligence. There is a big question right now as US equity is rebound after yesterday sell off, how will China's market respond in the wake of the closure of the Wuhan City How how big it is it accounts for one point six percent of the total GDP of China, as well as the potential ramifications for JN paying the president of the country. Christopher Balton joining us

now Associate professor at Fullbright University, Vietnam. Also a Bloomberg Opinion columnist, joining us from Saigon in Vietnam. Christopher, can you give us just a sense, uh, first of all, just what the response has been like on the ground where you are right now. Um, what we're basically seeing is is that even though it's a typically busy time when people are out in restaurants with families, enjoying Chinese New Year. What we're really seeing is people saying indoors

and ordering lots of food and grocery. We're actually seeing reports of heavy buying in in grocery stores UM, and cities working to make sure that they can guarantee residents that they continue to have enough food. People are stocking up, But we're not seeing panic buying from from the people

I've been talking to. So it seems that even though the impact on the economy is basically going to be even though people might not be eating at restaurants, they seem to be making sure that they're getting a lot of food UH and doing a lot of online shopping elsewhere. So, Christopher, how important is it for presidents she here to get you know, to handle this successfully, to get it out in front of it? What's the risk for President g

with the coronavirus there, there's a lot of risk. And it's it's it's no coincidence that that President Lee was actually appointed to lead the working group on on this issue primarily because it's it's she is does not want to be seen as as in charge of this UH debacle. UM. And I think what you're seeing inside of China right now, and everything that that you're hearing is is that there's deep frustration at the level of competence in handling and

really getting out and addressing this um. There was a there was a something that's gone viral on Leach had a very important event where the mayor of Wuhan is holding this UH press conference and he's talking about their their capacity to to make face masks, and he starts off saying, well, we can make one point eight billion, and then it's like, no, it's it's one point uh. It's it's one point zero eight, and then it's uh,

and then it goes to an even lower number. And so I think there's this sense among the Chinese public that that their their government is not nearly as competent, and there's a lot of very deep frustration of the government because over the years they have a a history

of not handling public health crisis well. And so there's kind of this mounting frustration going to connect the idea that in the US and elsewhere there seems to be a complacency about China's response, and there's been kind of a theme where people say, well, it's so much better than two thousand three when Stars was spreading this seems to actually be proactive. Where where well can you explain

that disconnect? Well, it's it's difficult to say because you get so many conflicting responses about what the actual nature of preparedness and China's ability to act. They're clearly acting, that doesn't necessarily mean that they're acting well in in solving the problem. Um, you know, there's there's videos that and and I want to emphasize videos that you see on things like we chat or or other social media platforms. We don't always know how accurate they are, so it's

difficult to say, well, are are they acting? You know, there's this there's this video of there's China has made a great fanfare that they're building a new hospital. Well, these types of the construction form that they're using is basically a type of reinforced heavy duty plastic cardboard. Uh, and they use these on Chinese construction sites. And so it's not really like a quality construction. There's not gonna be air filtering and sanitation standards and things like that.

But they've clearly gone to the trouble of building something that they can put people in. So it's very very difficult to disentangle what is actually helping uh with regards to what China is doing and what is just action for the sake of appearing busy. Christopher, is it worthwhile making the analogy two stars as it relates to the potential impact on the Chinese economy which was material at the time? Um, I think it's still in a way very early, too early to to say with with significance.

I think the first crack that we've really seen in how big an impact it's going to have on the economy is China has announced that they're actually pushing back the return to return to work date by one week. At the moment, um, I wouldn't be surprised if that flips another week or two. Um So, I think it's still really too early to just start making solid comparisons to stars or really anything else, because this is just

so unprecedented at the moment. There's also an idea that Wuhana is a very big city, but it only accounts for one point six percent of China's entire GDP. Is the potential impact on the economy much greater Based on Wuhan's rule in terms of a node of transportation and manufacturing and a part of supply chains of companies both locally and internationally. Yes, absolutely, it's it's it's kind of like right in the middle in the center of China.

It's it's a big rail hub, lots of manufacturing. And so what you've really seen is you've seen these you know, as people leave. And so when when this happened, right as people were leaving for Chinese New Year and so on, on some days, there were estimates that more than a million people we're leaving the city of Wuhan in a

specific day. And if you've ever been in a city, a major Chinese city during Chinese New Year, you can have these cities that you know, of a fifteen million people that will literally you know, fifty in the population will leave. Um. That that's not that's not a crazy number. And imagine if Manhattan was suddenly fifty smaller by population um and dispersed all over the Eastern seaboard. That's kind

of what we're talking about with Wuhan. And so all of a sudden, the risk that that virus gets transported all over the Eastern Seaboard, or in this case, all over China is much much greater and a very real possibility. Christopher, you're on the ground in Saigon in Vietnam right now. What's the feeling there. Um, there's absolutely lots of precautions

being taken. I was actually at a health facility today on an on an unrelated matter, UM, and they had actually set up a tent outside of the facility where they were checking people. Everybody was given a mask and it was mandatory. UM. There was of course all types of all nature of sanitation available to people around. UM. They're absolutely tracking uh, any travelers that have been to

China recently. UM. It's absolutely a lot of concern, but I think they're they're absolutely on top of things and tracking people that need to be tracked. Christopher Balding, thanks so much for that on the ground UH commentary. We really appreciated. Chris Balding, Associate Professor Fulbright University in Saigon, Vietnam. He's also Bloomberg Opinion Commism. Let's take a look at the coronavirus and how it relates to the global energy markets.

We saw let's sell off in oil over the last several sessions and really off from the peak of early January. Here w T I today just to quote that that's actually staging a little bit of a rebound today up about one per cent. Do you get a sense of kind of global oil markets and the driver's on the supply and demand side. We welcome John killed Off, founding

partner of Again Capital. So, John, how are you thinking about global oil markets given some of these issues as it relates to the coronavirus as well as some other geopolitical issues globally, well on the demand side of the equation right now, there's just a tremendous fragility as a result of this outbreak of the coronavirus. UM. You know, a lot of us were dusting off the charts from two thousand three when the stars epidemic hit and oil

took quite a hit. Then oil prices were basically just about cut in half UM from about thirty eight dollars a barrel danto almost five, So quite a bit of a sell off because you know, when I talk to you guys about the price dynamic, it's always Asia, Asia,

Asia and China in particular. UM. You know, there was had been some hope that they were getting back on their feed economically after the at least the partial resolution of the U S. China trade war and now this hits and it's just uh, you know, skewing the demand growth back to down to flat, if not down on the year, because this is still early days. If you ask me, I don't quite understand the rush to say

the oil clear has been sounded. Here what we're seeing in the stock market today and and even oil to a degree, We've got a long way to go on this, you know, I want to pick up on that, because we are seeing a rally in equities almost completely erasing yesterday's declines at this point if it continues throughout the day. But oil it's just flat, I mean essentially, I mean it's it's a little up. We're not seeing that big of a price gain. What's going to tip the scales

one way another? It's one percent, but still after losing what more than ten dollars in the past month. This is this is not um massive what will tip the scales one way or another in order to determine whether there's another substantial like lower the price of oil. Yeah, and then at least, if you think about it, we've actually retraced or so of the of the gains from the October lows. That got it that we saw, we got as high as sixty dollars on the on the

most intense ran fears. Um, what's going to tip us to the downside here is if it is that we don't get another further response out of OPEC and Russia. Uh. They were already been on the wires that this has gotten their attention. I can tell you that they've been talking about it already about potentially extending their current deal to June. At least they're gonna have to go longer than that, and they're gonna have to cut more if

they want to support this price. The big line in the stand, the first line of the stand here and we saw it yesterday get tested was down around was below, but really fifty dollars if you go back several years, that has been the number that has held up. Um. There's a tendency to think it will hold up again because you will get a response from some of the producers. But if we break that, then you're you're looking at significant uh more downside to the low forties uh in

pretty rapid fashion. So, Jeff, what's the thinking as it relates to OPEC and it relates to the supply side of the equation, is there a growing determination to support global oil prices or we just don't have that coordination in than opaque and OPEC. Plus you know, it's it's aspirational on their part. I can tell you that, particularly Saudi's who you know, you finally got that a ramco I p O out the door. They've been watching that stock price come down as the price of oil comes down.

So I just want to remind people if you're looking to buy into that at some point or in some shape, way, shape or form, you've got tremendous exposure to the crude commodity, So be careful with that. There's no silver bullet there with that company. And um so they're they're gonna try.

I mean that they were on the wires all weekend, uh making noise about about addressing this this slide, and even actually by chastising the analyst community for being overreactive and too aggressive on the on the on the demand outlook cuts, which which is impacting the price. So I thought that was an interesting thing on their part that shows you how and engage they are with the price of the commodity these days. So, but there's a sense

in the market that it's just beyond their grasp. There's too much US soil, there's too much US exports, and is even moril coming on from different spots that's also helping to keep these global markets rather well supplied. John Kilduff, thank you so much for the perspective. John Kilduff is uh the founding partner of Again Capital. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast

platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyds. One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio