More Fed Rate Cuts Will Help EM Assets: Eric Stein

a response to? Is it monetary policy alone or is it the idea that we're headed for a global downturn. Joining us now is Eric Stein, portfolio manager and co director of Global fixed income at Eaton Vance, which oversees four hundred and sixty billion dollars in Boston. Eric, thank you so much for being with us. I want to start with your prediction going forward. Have we seen the lows of US treasury yields in particular? Um? Well, first off,

thanks for having me on you great great question. Uh, you know, I still think we probably will head lower at some point. Um. You know, both given just pressure from global monetary policy where we're one central bank cuts and then more need to cut, as well as the US China trade war. And you know what's interesting to me is that everyone's focused on the FED meeting last week with the you know, slightly more more hawkish than expected,

but cut uh. And then when the trade war ramped up, you just saw massive, massive amounts more and more an interest rate volatility from the trade war and the tariff tweet from Trump then you actually did from the FED meeting. So Eric, wonder kind of what the house call is on the economy as you guys with your vast holdings. I mean, I seem to have growing concern about the global slowdown and might create a global recession. How are

you guys viewing it? Yeah, so I'd say, you know, first of the great thing at being in a place like Eating Vance, we don't have a house call. We have you know, lots of different portfolio managers running running different funds around the firm. We all have our own different views on the economy, so that there is no house view per se at Eating Vance management. But you know, I will say my own particular view is that you know,

the economy is still okay, that pretty good. You know, globally you see strong consumers, strong labor markets, yet weak investment. What you know, what would concern me is just that, you know, uncertainty and lack of investment that we've really seen for for some period of time has ramped up. And if the trade war rhetoric and tariffs are ramp up, you know, that could lead to the further concerns. So right now, the US economy consumers in very good shape,

labor markets in very good shape. It's just the delta based on investment is what's concerning people and concerning me as well. Eric. It's interesting you say that people have different views within eating vans and are able to execute on them. What's the biggest debate among Yeah, so, you know, i'd I'd say one debate I have with some of my colleagues on you know, is does the does these yield curve matter? Does the shape of the yield curve, uh,

you know, actually meet anything? And you know, I have been, you know, personally of the view that the yield curve connotes information and investors should not ignore information. And I think I wrote a blog post that or et vance website, you know, ignore it, ignore it at your peril. You're talking about the three months tenure or the two year

tenure or all of them, all of the above. You know, I don't get so precise and you know, which a part of the curve because they think, you know, focusing on a couple of basis points in version here there, I think is missing the bigger point. Uh. And certainly their arguments and sometimes my colleagues make them that look certain parts of the curve or uh, you know, or are misleading because of you know, FED purchases and other foreign central bank purchases and treasuries. And I think all

that's true. Um. But to me, when you see you know, significant moves in the curve, it's telling your information. So if you go back to the FED meeting last week, that hawk ish cut um, Fed cut rates, and the yield curve flattened pretty dramatically, which is not typically what a central bank would want to see when they're cutting rates and trying to ease monetary policy. So, Eric, we have over fifteen billion or trillion dollars of negative yielding

debt out there in the marketplace. What do you think that's telling us? I think it's it's telling you know, well, a few things. One is, there's uh, you know, a lot of countries that have negative interest rates at the front end, whether that be Europe, Japan, UH, Switzerland, countries like that. Uh. In addition, it's just saying, you know, some of those places, I say, particularly in Europe and I think of Germany, you know, there's just too much

demand for that debt relative to supply. And you know, typically my own view isn't then I'm usually not a big, big believer of fiscal stimulus per se, because I sometimes think it's misguided. But I think in the current environment, and particularly in Europe and particularly in Germany, the market is effectively demanding more debt, and I think, you know, in Europe and Germany, I think we will see more fiscal stimulus down the road, and I think that's very

much needed. So you previously worked on the market's desk of the New York Federal Reserve, which makes me want to ask so many questions to you about what we've recently seen in terms of the turmoil there and some of the people who have departed. Are you concerned that the Federal Reserve doesn't necessary really have the market insight to be able to telegraph their intentions effectively, as I would say, no, that's not a particular concern of mind.

You know, as a as a veteran who worked in the New York Fed Open Markets desk in oh seven o eight in the really the beginning of the crisis, you know, and I still keep in touch with people there.

There are lots of you know, very talented professionals that whose job it is to um, you know, talk to financial market participants and kind of gauge market reaction of various um, you know, Paul, of various monetary policy actions where whether that be FED cutting rates, or or operations with the balance sheet or even sometimes you know, FED speeches.

Where I think it becomes challenging is when there are FED speeches that are sometimes designed to kind of give a a Fed Reserve officials kind of medium term view, UM, but market participants a kind of are looking at it word by word, and I think that's where the FEDS communication, you know, gets really really challenging. Well, and then there's also the expectation currently baked into markets that there will be four rate cuts by the end of next year.

Do you think that the Federal Reserve will deliver on that. So look, honestly, to me, it's it's it's it's about the trade war, and it's about you know, what you see with inflation expectations. I think we will get you know, significantly more rate cuts from here, uh, and then it's really what happens from that, um, you know. And I think that the Fed, you know, if anything, would like to be forward looking, uh and do more rate cuts earlier than not to have to get to the zero

lower bound issue. And I think, you know, to some extent, it was tough on the communication again last week. It was all before the trade war tweets heat up again. Um. But but by cutting rates but doing so in a hawkish manner, you know, they didn't really get inflation expectations up. So to me, yes, the trade war matters, um, but it's also about inflation expectations. And if I were the FED, I'd be concerned that the inflation expectations are now lower

than they were before before they cut rates. So, Eric, given your sense that that rates are likely to go down, what does how does that kind of position your view on emerging markets? Yes, well, you know, it's a great question. I think that's to me one of the real beneficiaries of this race to the bottom in developed market yields is emerging markets. Um. You know, obviously you know we've

eat advanced management. We we take a very much a country focused approach to investing in emerging markets and trying to find countries that are that are going in the right direction or avoid or short countries that are going in the wrong direction. But just from a broad asset class perspective, certainly having a lower base rate UH in developed market yields, whether that be US, Europe or or Japan, that you know, that makes the broad asset class, you know,

all that much more attractive. So you're buying e M. Just real quick, thirty seconds, what else you're buying? So like emerging markets in treasuries, if I had their own treasuries, I said, I think rates may go down, but obviously there's not a huge amount of value. I like TIPS. I think I think the FED will ease to get inflation expectations higher. So so I like I like TIPS. Also certain parts of the mortgage markets and credit markets

as well. But you know, I think we're central banks around the world, They're going to try to get inflation expectations up. So in addition to us tips, we like New Zealand inflation link bonds. We like tie inflation link bonds, so other inflation link bonds around the world as well. Eric Snyinan, thanks so much for joining us. We appreciate your time. Eric's a portfolio manager and co director of

Global Fixed Income out of eating Vance based in Boston. Well, as interest rates grind lower, homebuyers are finding it more affordable to buy, So let's get the latest on the housing market. Return to our good friend Logan motor Shami. He's a senior loan officer for a mc lenning group based in Irvine, California. Logan, thanks so much for joining us again. Um again, interest rates for you've had, you know,

kind of touch or get near some very long term lows. Here, give us a sense of what's going on in the housing market in this interest rate environment. Well a ten your yield finally got to my forecast on one point six percent. We've had a big reversal since the loads of yesterday. But in regards to the mortgage market, right now we're seeing an uptick in refinances. But we have to be mindful that we were working for twenty one century lows in refinance refinances. So it's not like we're

having another refinancing boom. I don't think we'll surpassed twenty six never surpassed the refinance booms. So until more the tenure yield can actually break under one percent, um, well, we'll have an uptick and refinances. But a lot of that are the buyers of homes from eighteen where mortgage rates are higher. Those people can do radar term refinances. You're left looking at roughly nine million home buyers at that where those two years combined that helped them get

a little bit more disposable income. In terms of existing home sales, even though mortgage rates are lower, sales are down slightly a year over year, inventories up, but new home sales. That's where low mortgage rates has really helped the housing market is the recovery and new home sales

and the monthly supply draw down UH in that data line. Okay, so let's dig in a little bit there, because we do have the thirty year mortgage rate, at least is measured by Freddie Mac at the lowest since seen and

continuing to fall in tandem with yields. I'm trying to figure out how much of a boost is that to the US housing market and where I mean really the best place to look as the new home sales data, I mean new home sales were trending recessionary towards the end of the monthly supply spiked up to about seven months, and when rates got lower because that's mortgage market, that's where the demand recovery came so and because of mortgage rates are low, what's going to happen is that the

year over year data for all housing data is going to be positive now because the comps are a lot better, and that's where we're gonna start to see year over year games and existing home sales, depending home sales, housing starts, and new home sales, and that's where it's stabilized the market enough to where we're not going lower anymore. So that's kind of how you should look at it. It's not really boosting total home sales as much as people

would like. So look and give us a sense, maybe are there any geographic areas that are sticking out to you that are particularly strong or weak. Pretty much everywhere outside of the coastal areas are doing fine. The areas that you know like, for example, California, inventories up, sales are down, things are taking longer, so that's that's a

weakness of demand. Now lower mortgage rates have stabilized, I would say the California market is stabilized, maybe in the Seattle markets as well, but they're not really boosting demand on a year or your basis, even with the inventory increases. So those places are just pricey and there's just the level of buyers are just not there. But if you look at California home sales for ten years, it really

hasn't done much. So we're just working off of these you know, some up years, some down years out here well, and we have seen a slowdown in luxury home sales, certainly in those areas as well as on the on the East Coast to New York City, And I'm wondering where are we in that sort of downturn cycle, you know, the luxury market. You know, mortgage rates, you know, sometimes it doesn't really impact that kind of market. It's it's

it's it's money. You know. Obviously, we we see the you know, foreign buyers are down, you know from China, so that impacts just a little bit out here. But again Uh, we're getting to areas where when you adjusted to inflation, now home prices are starting to get to levels to where during the housing bubble years you needed exotic loans to really boost the luxury market out here. So you can need to keep an eye on that

because you know, there's no more exotic debt anymore. So pretty much everyone who owns the house can own a house in real terms right now. But back doing a housing bubble years, you know, this is where you needed, you know, exotic products to boost the upper end of the market. We don't have that anymore. So that's that's an area to always keep an eye on considering where we are in the home price days. So logan where we in terms of kind of the credit quality of

the mortgage market right now. That was obviously, uh, you know, a big big issue in the financial crisis. Kind of where we now in terms of credit quality. Credit quality is excellent, and we've never really had tight lending in America, even from two thousand and on. We've just lend to the people that can own a house, and I think that's the difference. Uh, this is the best loan profile I've seen in my twenty three years there's no exotic

debts out there. The FCO scores, which means these homeowners have really good cash flow, are very high. They're very good out here. And the best part is that the nested equity, the equity position from buyers from two thousand ten or two thousand sixteen looks really solid. There's no cash out boom. This is as good as it gets in terms of credit quality in the history of America right now. And I hope we don't ruin it. You know. I know there's a lot of people out there that

says lending is tight. I totally disagree with them. This is how it should be. And uh, you'll see that's when the next recession finally hits. We're not going to have a mega wave of defaults like we had in the previous cycle. Who really uptick supply would be more late cycle lending, you know, low down payment, low cycle score of homebuyers running into the recession because they have no selling equity. But the credit quality, I cannot stress

how wonderful it looks in this cycle. So Logan, you nailed it when you had your call for ten year treasury yields. They did hit your target price for the year, and they have bounced from there, currently trading at one point seven five. Where do you see them going through the end of the year. Boy? That really you know, I think that tweet you and I had about you know, fifteen days ago, we said, yeah, I could get to one sixty with one selloff in the stock market. But

you know what panic buying. That's what I saw the last few days. Uh, it was. It was just panic buying, similar to what we saw in twenty sixty. Now I'd like to say, hey, we got to the one sixty level, and that's it. We should we should hold the whole hold that level and yield should rise. And I've always held at this one six level because I've always had that in my prediction articles for his last five years.

But right now we have a lot of things in play that I just can't you know, I can't model out. You know, who knows what Trump's gonna do with China? Who knows what China is gonna do? Bret exit two point Oh it's gonna come at Halloween. Imagine adding that to this dance. Right now, there's this so many headline risks, but in terms of the economics, because p M. I

data has the ability to even go lower. That can drive UH yields lower globally and here, but we're not gonna have a double dip manufacturing recession that had the same kind of impact this. So I will hold the line here at one sixty and say that this is the low for the year. But if you get p m I data to get worse, if you get to China and Trump trade wars to start, you know, going at each other left and right, if Bret exit two

becomes really messy. But absolutely not only could the tenure deel go below one, we could take the tenure heel below, but those are things that we can't control. Loogan Modashami, thank you so much for being with us and sharing your insights with us today. Logan Modashami, a senior loan officer at MC Lending Group, joining us on the housing market and yields him saying that one point six on the tenure probably is the year's low. Well, I would

like to give a narrative to today, Paul. I think that there is a narrative picking up, which is people have exhausted themselves, having some of themselves having a tantrum over the prospect of a global trade debacle and are basically now going back and looking at specific companies and actual economic data. Dave Wilson, Bloebergs Socks Editor, joining us here in the Bloomberg Interactive Broker Studios. Do you think

that that's fair? I mean, it's sort of like a child, a toddler that has a tantrum and then only can go on for so long before they just get tired. If that's how you want to characterize characterizing, go for it, because there's certainly a number of examples where you're seeing some positives here that are being well received. Think about a company like Advanced micro Devices, right, I mean I'm

thinking about it. Okay, big name in the chip business. Well, they come out with this new processor for server computers called EPIC, and they tell you that Google is already using this chip in their data center equipment. And so what do you get out of that? A gain of almost twelve percent, biggest in the S and P five hundred, you know, And you can go from there. I mean, you had numbers out from Booking Holdings and trip advisors, so we're talking you know, online travel there. Trip advisors

numbers didn't look that great. At all. But they're reaffirming their full year projections, and the stocks up ten and a half percent. In booking, whose numbers look better for the second quarter after coming up short of antaly assessments in the first quarter, up about six and a half percent.

So you know, you can find enough of those stories to give people some comfort at a time, you know, when the bigger picture, when you think about trade and interest rates and currencies and you name it, is looking a bit unsettled. You know what I'm thinking about today, not trade or currencies. I'm thinking about ketchup. So are good friends at Kraft Hein's head and exactly ketchup on a Thursday morning? Are good friends at Kraft Heins? Uh? Kind of a rough quarter they just reported, and it's

so rough that they don't even give guidance. So investors are spooked. Style down. Let's break it down with our good Fred Craig Giammona covers all things consumer for Bloomberg News. He joins us here in our Bloomberg eleven three studios. Craig give us kind of the highlights or low lights of what we're seeing here. So they haven't reported earning since February February was when they put out the release basically saying that they had an sec investigation, fifteen billion

dollar write down, weak profit numbers. They did an internal investigation, found some accounting problems. They haven't filed earnings for two straight quarters, so this was the first six months of twenty nineteen that they put out and the numbers are bad, profit and sales are down. And you know the new CEO, Miguel Patricio, he's a longtime Annheuser Bush guy. He's been

in there for a month. Took over July one, and basically, I think what we're seeing here is the extent of the challenge that he faces as he tries some amount to come back at a company that really was never supposed to be about growing sales. It was supposed to be about buying something else. And this thing has been kind of off the rails since they got rebuffed by

Unilever all the way back in Okay. So Warren buffin It has admitted that he just overpaid for this acquescence, right, So he's come out and he said, uh, you know, not that it was a mistake, but it was a mistake. My question is, what are the main problems here, bad brands, nobody, I mean, so you know, and it's I'm not I'm not making a joke. Like the problem here is that they put this company together to build a gigantic food company.

Allah and Heuser Busch. Right. So what they did was they took Hines private, they slashed all the costs, they produced industry leading margins. Year and a half later, they bought Kraft, slashed all the costs, fired thousands of people, got the margins way up. February rolls around, right on schedule. We're buying Unilever for a hundred forty three billion. Hold on a second, Paul Pullman, you know, basically robuffs them.

The deal doesn't happen. Since then, the market cap has just gotten absolutely destroyed because this isn't about building brands. So here's my question, Dave Wilson, question of the day. Does this just go to show that big conglomerates are a thing of the past, because we've seen the big conglomerates and industrial space in spaces certainly be in a breaking up cycle. Now, is this evidence it just doesn't work in today's environment. Well, when you think about conglomerates,

you know that word implies. You're talking about a company that cuts across a whole bunch of industries and craft hen's you know, as much as even buying Unilever, if they've been able to do that, they still would have had to focus on food maybe household products of some extent, so you know, a bit more focused. It's the challenge of size basically at a time when you have all

this competition. I mean, you bag you know, you know that the folks who are in charge of craft hnes are also in charge and analyze a push in bed and they're dealing with competition left right and center and having challenges come out of that. And you know, you think about the food business, who's sort of in a similar position. I mean a lot of stuff happening on local level. So you know, that's really the the issue

for this company. It's not necessarily you know, conglomer or it isn't exactly the right word, you know, just behave there's more like it. So, Craig, I'm looking at the stock here. It's down over the past twelve months of fifty two week low today. Is there a solution for this company? What are what's so here's the real problem. I mean, the thing with them was they were always had the idea was that they had Buffett behind them.

The Bank of Buffett could come along and they could basically do another deal to get back to what they do best, which is cutting costs. The problem now is that with the debt they have, with the stock where it is, they can't do a deal. And especially since Buffett is saying, you know, basically I made a mistake, and you know, or Paulo Laman, the chairman of Three G also is kind of admitted that this didn't really work out the way we thought. So the question is

what's the way out. They have to boost growth, they have to sell more food, and when you look at their brands, it's like, how is that going to happen? I mean things like Maxwell House and or Ida, you know, and and Capri Son and Oscar Meyer. These are not brands that are on trend with what people want these days.

So I'm gonna have a moment of truth here. We're gonna go around, We're gonna go around the room, and we're gonna say what our favorite condiment is mustard cat like soura crown on my hot dogs any but without anything else. I have a little mustard too, But mustard interesting because I'm also mustard. I'm not catchup and I actually my kids are not into catch up. I mean, look, Hines, catch up is probably their strongest brand. It's in like

of American households. Catch up is not the problem for them, you know that. I mean it's not it's not, no, seriously. I mean, Hines is like one brand that has not been disrupted. You know, people still want Hines. You know, Hunts, the second brand is way far behind. That's an example of, you know, one brand that is sort of impenetrable as far as you don't have enough boxes of macaroni and cheese get around in their pantries. Oh I I do though.

Dave was in Socks editor and Craig Giamona covering all things that consumer related for us here at Bloomberg News. A number of countries have come out and issued warnings to residents who might be thinking of traveling to the United States in the wake of some of the mass shootings. The latest to do so is Japan. The question is, how is this among other things, I mean, aside from the human tragedy that we have seen with respect to

these mass shootings. How will this affect the tourism industry and the international appetite to go to the United States? Joining US as Dan Wislek, he's senior equity analyst with Morning Star in Chicago. Dan, so let's just get sorted there. Do you think that these types of warnings, the latest being out of Japan will impact the tourism to the United States? Well, I think what we've seen, uh in you know, past terrorist attacks for example in France, is

that yes. I mean when when these human tragedies do occur for a period of time, that can subdue travel to that country. Um. You know that being said, uh, you know, international travel as a percent of overall travel within the US represents about four maybe five percent of total room nights. So um, just to give a little bit of context there. So Dan, it's interesting, what have you seen any impact I guess just historically from geopolitical

issues just generally speaking. I know it's a you mentioned international is kind of a smaller a small piece of the pipe, but historically hasn't been an issue that the companies have called out. Yeah. Well, you know some of the data that we see is that actually us their global share or our global share of international travel. It's been declining for the last three or four years. So in two thousand fifteen, our share of international travel was

around thirteen point seven percent. Last year it ended eleven point seven percent. And it's probably reasonable to assume that some of that has to do with, you know, trade tensions more recently, immigrant rhetoric. Um. You know, the recent warnings around the mass shootings, UH and hate crimes, and

perhaps other things like a strong dollar. But you know this is something you know, uh, you know, that's all these add up to kind of a picture where the US is slowly been losing some share here where are where are we losing share in the United States? And other words, where tourists sort of coming less from What parts of the world are people avoiding the US uh in a way that they hadn't been in the past. Yeah, you know, I'm not sure you know what countries are

you know, maybe shining away more from the US. I know, well, actually China is one where you know, last year represented the first year where Chinese travel to the U s

was actually negative growth. Um, So that's that's one region. Um. You know, Marriott had their call this week and there was a little bit of discussion in the US at the top twenty five largest markets that there has been a little bit of a slow down in some of the demand that they've been seeing there too, which maybe kind of supports the overall point of the US for you know, various reasons losing some share to uh, you know, the international travel coming to this country. So, Dan, I'm

looking at the hotel stocks right here. It looked like some good solid double digit gains for the stocks year to date, led by Hilton up over over what's the investor call out there in the market on hotel stocks right now? Yeah, you know, these are good business models. They they the growth is really driven by having hotelers joined these brands. Uh. And you know that type of growth for some of the larger companies like Marianne and

Hilton is around mid single digit UM. You know, I guess the one potential or two potential warning signs I would say is, well, you know, some of the travels slow down that we've seen recently, uh, you know, some driven by geopolitical events and others just by you know, ctality slowing down would be one thing. And this year represents the tenth year that we're going to have positive

demand growth. Uh. And that's a pretty long time. Uh. Typically the cycle's last maybe seven the nine years, So we might be getting a little bit long in the tooth as far as this cycle. But you know, otherwise, good business models give you pretty good growth. Uh. And I think you know that's being rewarded in the marketplace today. Dan, I'm I'm struggling to sort of put these two things together.

The idea that the US is losing share when it comes to international tourists, and yet you're seeing solid growth as some of these tourist focus chains like Marriott. Where is the growth coming from? Yeah, So it really it's

it's less about um, you know, room night growth. Rooms being filled is certainly one driver of growth, but even a bigger driver for these guys is getting you know, boutiques that convert into say a Merriott flag or brand or have a third party hotel owners decide to build a new hotel using the license of a Merriott brand or a Hilton brand, And it's that unit growth that you know is driving again mid single digit growth for

these companies. So even if the revenue per available room or the amount of people that are going into rooms even if that's slowing, and it has, it's slowed for probably like two three percent growth uh last year to one to two percent growth today. You know, that's a smaller growth driver factor relative to the units that these guys are are seeing. The unit growth that these guys are seeing. Dan Wazelec, thanks so much for joining us. Dan as a senior equity analyst at morning Star based

in Chicago. 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 Woyd's I'm on Twitter at Lisa abram Woit's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.