Nike Down, Muni Check-In, Geopolitical Unrest

It gives you all the total returns on a year to date basis for a lot of the fixed income aggregates the U. Alright, so look at this, folks, The Bloomberg US aggregate fixed income return here to date minus fourteen point three five. Yikes, that's sixty forty portfolio that ain't working for you this year. Alfonso Peccatiello, author and former head of Fixed Income Portfolio manage at I n G Deutschland, he joins us here. Uh, Alfonso, thanks so much for taking the time here. Boy, it has been

a brutal year for fixed income investors. Nowhere to hide. What do you make of it? You've been doing this for a long time, what do you make of this? Well? Will that make of this is that basically central banks try to warn us that they were very serious about fighting inflation, but the bond market didn't want to listen at first, and they just had to double down to

make sure that everybody understands it. This is not like it does in an eighteen or nineteen, where you know they can basically tighten a little bit and make sure that they are respected by markets. Because inflation and inflation expectations went out of control, the reaction function is not linear anymore, and they need to get ahead of the curve. And that's what they're trying to do now, which obviously

hits the bond market. I find I'm looking at the volatility across treasuries and we're at a stage or at a height that's even greater than what we saw in this kind of crunch moments of the pandemic where none of us knew what was going to happen. And what I'm struggling to understand is why is this market struggling to price in the future path in terms of recession, in terms of where policymakers go next. Some things more certain now than they were in that early pandemic era.

This is such a great point. And the problem with this is that central bankers told us they're going to be pretty mechanical, So I'm gonna quote power. Basically, it told us that he wants to have a real fat funds rate at least in the one percent positive area before it feels relatively satisfactory with the stunts. And that means that even if inflation slows down a little bit, and we all hope that next year, that fat funds rate will have to be in the four and a

half five percent area. Now, if inflation doesn't slow down, on the other hand, that means that mechanically the Federal Reserve, to preserve the credibility, will need to have nominal fat

funds rate even higher than that. So when new price volatility, as a bond trader, obviously you left to look at both the right end and the left end of your distribution, and at the moment, because of recession risks, the left end is open, but the right end is also open because if inflation doesn't slow down, then central banks will just mechanically keep hiking rates. The last one I have is that higher bond volatility actually deters investors from taking

risks in other rest classes. The bond market is the biggest market in the world, the most liquid and deep. And if people can figure out and they have to price alativity is so wide in the most liquid us at so ball, how can they take risks when it comes to risk your uset classes. And that also has implications for equities and credit spreads which are widening. Indeed, so one of the things we hear about when we talked about fixing come folks, particularly on on the trading

sign is poor liquidity in the marketplace. Can you define what that means to you and maybe how the practical implications day to day for investors. So how would define that is, if you're a market practitioner, if you try to trade anywhere above a hundred to two hundred millions of ten year treasuries, you would have big dusk quotes which are much wider than you know, what you're used

to be, you're used to have in the past. So when you have that kind of big dusk spreads that tend to widen in the most liquid market doable, it's a sign that the plumbing is not really working well. And for plumbing, refer to the ability of market makers to warehouse risk, and this ability was crippled from Great Financial Pride, the post Great Financial Prices regulation, which effectively made it much more capital expensive and inefficient for market

makers to provide liquidity to such a market. But the real underlying problems actually happen when the report market doesn't work because most of this balance sheet, the risk, the risk taking ability out of market makers and hedge funds actually happens to be balanche it heavy. So there are report transaction underlying the ability to provide liquidity. If the report markets show some sign of stress, you immediately see that in the treasury market right now, That's really not

the case yet. It also has to do with some facilities the Federal Reserve set up, like the standard reper facility. But it is definitely something to ever look at. I want to look some other corners the market Europe corporate bond September is kind of classically. I believe a great month for the bond market this year. It's not why well, this year is not because we saw an acceleration of inflation, both in your up and in the US. And when I'm in acceleration, guys, it is not only the level

of inflation which is undoubtedly very high. But it's the momentum and the composition of these inflationary pressures which is interesting if you look at the moving average of core inflation x energy. So I'm looking like at the momentum of the stickiest part of the inflationary basket, the one that central bankers are the most worried about because they're tough to bring down. They're actually accelerating, both in the US and in Europe, two levels last set in momentum

terms in the eighties. So no wonders that actually have to tighten the stands, which hits the bond market further. Alright, a fan, so great stuff. Really appreciate getting your thoughts on your perspective. Afonso Peccatillo, author and former head of fixed income portfolio management at I n G Deutschland. Looking at the shares of Nike down by ten and a half percent today eight change on agre day basis down almost fifty per sent here so uh, and they reported

some numbers today that disappointed Wall Street. Let's get the latest with Bloomberg's Abigail Doolittle. Abigail, I guess they got, like a lot of other retailers. They got an inventory problem. They do. North American inventories up six overall global inventories up more than And what's interesting about this is a piece of it has to do with the supply chain kinks because they can't get what they have had made

abroad where they needed to get it on time. By the time it gets to where it's needed, it's out of season and it's sort of rocks like bad food. So, yeah, bloated inventories like so many other UH companies and retailers. So that led to a miss and led to them cutting the outlook. Gross margins are real big problem. They're now going to be two two hundred and fifty basis points lower than expected. But it's not just the inventories. It's also those higher freight their freight issues, but the

higher freight costs and of course for an exchange. Yeah, they had the kind of full potion cauldron of problems, right. And it's interesting. I'm gonna get some of the other stocks in the market that pays Lulu lemon for example, some of the shoemake is also lower. It's not getting better, is it? It's not getting better? And the sense that I get from this quarter because the miss actually wasn't

that bad. They actually beat on sales sales three percent out of than estimates, and the earnings miss by less than one percent. Again, it's more the outlook. First of all, China was very weak because of the continued COVID outlook. But my sense is that there's not so much of a weak US consumer factored in here yet. It has

more to do with these other issues. So if we are stumbling into some sort of a true recession, I think we can all agree that on some level the economy is slowing, it could really be a strong issue when you put it together with these other factors. And what I've learned from you know, reading the research of like Punham Goyle from Bloomberg Intelligence, for example, is when you got extra inventory in the pipeline, it's not like you just kind of keep there and I'll sell it

next year. You gotta blow it out. You gotta blow it out. The way you do it is a discount, massive discounting. Well, I will admit the first time I was reading these discounts, as I told you, I'm in the the market for some new golf clothing. I was thinking, oh, but you know what the one thing I will say is, so we heard this. We've heard the story so many times, but we heard it in big time earlier this year.

Probably the real the big company that started all this target I went to those stores and I didn't find any of the good deals, right, So I'm thinking that maybe some of the inventory problems are more regional. But I'm still going to try relative to Nike. Something relative to the stock though, to think about. So as we're mentioning Paul, it is down on the year, the worst

year ever. The evaluation is still sky high. That they're trading at a pe of twenty four times forward, that is at the high end of the two year range, and it's also above the mean of eighteen point times for the rest of the group, and it's also high for all the other evaluation metrics. So you could make the case that fundamentally and technically this stock has more to go as high to most of them has some of the stretched chip covering day to day. It's actually

astonishing to see that stats walking behind us. He made the point earlier that actually another intr entry issue. You go onto the website, you can't get the thing that you want anyway, and that speaks to the shipment issues. But you love golf, I love football, European football soccer to you out there. We have a World Cup here, and you do wonder if that event that catalyst helps

a company like Nike later on in the year. Well, if it could, if they can make the product that is appealing to you and to John and to other folks, and then if they can actually get it to you, if you can order it and buy it. I mean to have these supply chain kinks. I remember these sorts of issues back in the tooth, that early two thousand area, that their bear market unrelated to uh this sort of

factor was actually more about uh fashion wrong. So companies would make the fact, you know, whatever the style was, and then folks didn't want it, so kind of sit there and they would have to discount it. But it'll be interesting to see whether or not they'll be able to take advantage of it. That could that could be a nice opportunity for them to kind of come out of this hole. All right, So ed you mentioned this. The World Cup. English plans notably are good. They travel well,

they do travel well. Are they going to go to cutter? It's really interesting there are lots of moral cultural issues. Football fans, I would say, tend to look past those. Qatar is an expensive place to go at the best of times if you're if you're a UK football fan. Remember also Whales are in that group as well. I'm proudly Welsh and I'm looking forward to that show down with the United States and h are on um. Do

they travel? I have no idea, but they can drink I think now I saw news not twenty four hours a day, but maybe like eighteen or nineteen hours a day. They can, but only in like selected places. I mean football fans like that their adult beverage of choice they do. And also how big a factor is the pound right now? If you I mean, I'm hoping to go home in December for the holiday period and as a somebody that draws a salary in dollars, you know, it's not so

bad for me but for my family. Yeah. Well it's interesting you're saying that because I've been thinking about winning a trip and somebody was saying, well, you should go to Europe, you know, because it's on ze um. So the same thing with UK. You know, looking at these Nike numbers, it kind of makes me think about and whenever we have these earnings issues, it kind of goes to show you that the earnings risk in this market. I think it's still there. Oh, I can't say. I

think it's it's just starting. Yeah, And I just wonder how much you know earnings are going to come down in this period. Are our company is gonna kind of really throw in the kitchen sink? And if so, this market can't really make a bottom until we get through that. Yeah.

I think that that's a great point. And to go back to that two thousand to two thousand three time period that was just a long, slow move lower for earnings and companies not being able to manage expectations and having to cut quarter after quarter after quarter, like the kitchen sink really didn't exist at that point. So now you see a company trying to do this but kind

of get worse than this. Absolutely, if the consumers slows down, earnings expectations are coming down, but in a recession, historically, looking at the data, they get a mega reset right ten to depending on the sector. Is that happened yet? No? Absolutely not. And the other thing is this is a recession that will also come against with the FED raising

I mean, I think a lot of people are. I saw something about like the FED pudd is coming back soon, because it's uh that personally, I don't agree with that. I think that every single UM FED official and you know, if you look at the dot plot, the average year end rate FED funds rate for the media and FED is four thirty seven. WARP has it at four twenty. That's a seventeen bit difference between what the FED is saying and what the markets are saying. If the FED serious,

even just this year, there's some catchup. So to have that kind of liquidity pressure, uh, in addition to the fundamental slowdown, it's just it's something we haven't seen. I mean, I guess we sort of stow in the early eighties. I don't remember it, but wasn't that I was very small. Early eighties were very good for me. Thank you very much. All right, Abigail the little thank you so much. We appreciate it. She covers all things markets for Bloomberg Radio

and Television. Let's talk geopolitics as we talk about these markets, because boy, there's a lot going on in the world with Russian, Ukraine and so on. We can do that with Nick stat Miller, Director of Emerging Markets at Medley Global Advisors. So, Nick, I mean emerging markets at a time when interest rates are rising, We've got geopolitical issues like we haven't seen since World War Two in Europe. How does that factor into what you guys do in

your emerging market work there? Well, you know, one observation I've heard from a lot of a lot of our clients is that they feel like geopolitics is more relevant for the market now than it has been any time in the last thirty years, going back to the First Gulf War. So it obviously takes up a lot more of our bandwidth. And geopolitics is, by necessity, by definition, a very qualitative discipline, so it becomes very hard to

quantify what the impact. You know, you can talk through all the scenarios and assigned probabilities, but figuring out what that's going to do to a currency or rates or stock markets is is really hard. So you have to spend a lot of time tracking the psycho oology of the market around those events. We're talking about Russia, but we're also thinking about Turkey. I find this fascinating that Riship tie Burdwan is kind of offering himself as a

mediator in the conflict Russian Ukraine conflict. At the same time, the Turkish economy is suffering. I think I'm right and saying the trade deficit hit the worst on record in August, Right, So where do you look to in that scenario? Should should Turkey stay out of the way? What's going on there? Yeah, there are a lot of moving parts, and Turkey is on track to post a record current account deficit this year. It probably is going to be around fifty billion dollars.

And the other problem they have is that their effects reserves are very low. Radwan is forcing the central Bank to keep interest rates low. They're at twelve percent when inflation is eighty percent and they're looking to cut more. So you know the energy markets that are a big factor in this, right absolutely, the the energy import bills is the biggest driver in that current account deficit, and

uh in the high cost of energy. So everyone is in a very weak position economically, and He's tried to sort of balance his support for Ukraine and Russia and you know, play that sort of impartial mediator, but he

frequently gets caught on the side. And then you've got Russia that has faced unprecedented unified sanctions from the West and really looking to figure out ways to do foreign trade and investment around those sanctions, and they're trying to do it in Turkey, and Turkey really needs the money, but the US really does not want Russia to subvert those sanctions, so it's really sort of becoming a pressure

point in the confrontation between Russia and the West. So just broadly to find how do you think, how do you guys think about Turkey as a place to invest. Is it just too too risky at this point? You need more stability, whether it's from the government or just the fiscal side. It's it's wrong on all fronts. You have a lot of political instability and increasing repression, so you know, it doesn't score very well on policy predictability

and stability. Monetary policy as a disaster, the central banks balance sheet is a mess, Fiscal policy is becoming increasingly not credible um, so it's very hard to see how anyone would want to firm make some firm commitments there until you see some serious policy changes. When we consider emerging markets, how has the war in Ukraine prompted the market to reshuffle where it places capital because of all the interlink between these nations and also of course because

of the effects of sanctions. Right well, the big impact initially, of course, you know there's risk off whenever you have any sort of geo political uncertainty, you get this broad risk off, and emerging markets are always friends in the fire line. But then you had this price shock into commodities because particularly on grain and wheat and on the oil side. That's largely subside it since then. But then

you have these lingering sort of regional problems. Great example is the cut off of Russian gas into europe Um, particularly in the emerging markets front. You have the central European economies, most notably hungry, very vulnerable to that. So it there is a global impact in terms of the you know, the commodities and the risk off sentiment, but then there's sort of this regional impact that you have to sort of suss out on a country by country basis.

And again back to Turkey, higher energy prices really hurts them on the external account. Where are given all these uncertainties in the backdrop in whether it's interest rates, monetary policy, political issues, the least place I want to be as emerging markets, But you have to do it for a living. So what where are you and your clients kind of

doing work and seeing opportunities in emerging markets? Yeah, I mean the strong dollars killing EM currencies, higher rates, and tighter liquidity globally are really tightening up their access to credit. I think at this point it's it's a relative value story. So you look for places, um, you know, where they're that could outperform others. And so you know, you have the Czech Republic which has you know, a stronger balance sheet, uh and um, you know, a very stable currency because

of the central bank policies. You know, I think that has a really strong chance about performing Hungary. You know, if you look in Latin terms of trade, probably favor countries like Columbia that are oil exporters over places like Chile which are very exposed to copper prices which have really taken a plunge in recent months. So it's really sort of selective and it's more relative value than just hey,

let's expand our exposure to EM as a whole. What's the biggest cat list for emerging markets in I think I'm gonna say two very interrelated things, which is how long this dollar strength persists, and I don't think it's so much a story about what the Fed does. You know, if it's fifty or seventy five and an individual meeting, But the overall structurally higher set of dollar rates that you're seeing, I think, um, those two and then I would say, secondarily is the extent to which inflation starts

to normalize globally and this inflation shock recedes. All right, Nick, that's great stuff. Nick stad Miller, Director Emerging Markets at Medley Global Advisors. Joining us live in studio, so it gets a gold star for being in studio. We appreciate that today's focus on munities has brought to you by Built American Mutual. When the market is volatile, BAM provides stability. BAM insured municipal bonds delivered the fall protection, value, preservation,

and a durable rating. Ask your broker about BAM in short municipal bonds. That that's a read that Matt Miller just loves to read. He goes all off on the BAM thing, and it's it's kind of embarrassing, but it's his thing, so I leave him to it. Yeah, I did not do it justice. Joe Mysac joins us here. Joe does all things municipals for Bloomberg News. Joe, we're you know, we're all kind of looking at the images in the video of the terrible tragedy down in Florida.

Is it an issue for the missible bond market when you see that type of disruption and destruction, destruction, and you know, not just Florida. If it's kind of it back out in the ocean, it's winding up, it's going

to South Carolina, more destruction there. But in answer your question, it's very surprising to most people that natural disasters tend not to be a credit issue for municipalities, for states and municipalities, purely because insurance money, you know, following the waves, following the actual water that comes in comes waves of cash, insurance money, federal assistance, rebuilding efforts get under way. So yes, you know, it's a tremendous agity, tremendous destruction and then

this tremendous renewal, if you will. So unless a municipality goes kind of out of business. Uh, the the jet service is completely intact. Things occur um just as they normally would, and natural disasters are really just uh, you know, something that the market, shrugs off. The only thing that I could think of otherwise is, uh, you know, a couple of those towns that were destroyed by wildfire in California, they missed debt service because the whole town was wiped

out and records were lost and things like that. But otherwise, no, it's not really a credit event. Interesting, all right, you've got let's move from South Florida up to preppy island of Nantucket. Are you trying to tell me, Joe that Nantuckett is going into the bond market? Are they gonna do an issuance here? They did? They, they did it. Yes, they sold this week. And most of the issue is for affordable housing because Nantucket, like uh, your nearby island,

Martha's Vineyard. Um, like I want to say Aspen, I think Veil as well. Uh. These are places that people love and they're charming and they're enchanting, and there's no room for the people who are essential service providers to live. They're being priced out of their own homes. So you know you're seeing police and fire, nurses and teachers. Uh, that's who's going to benefit from this affordable housing bond issue.

And Nantucket, let's face it, and Martha's vene your two there's really you can't say, well, you ought the community from the suburbs because you just know the ocean. This sting in your column, which you wrote beautifully by the way, you paint an idyllic picture of Nantucket, Massachusetts. But ultimately they're issuing this debt for affordable housing, and in the prospectives they're very much not focused on affordable housing. They're

just trying to sell the vision of the town. Well, yes, and it's you know, the kind of the amazing factoid I think I discovered there was that the median house price on Nantucket is three million dollars. Interesting, you know, so who funds it? Who pays this bond? Like is it gonna be property taxes or is it going to be this is a general obligation bond, so full faith

and credit of Nantucket. Uh, you know that includes all the money they bring in, including this tax on hotel rooms, that size taxes, and that has that's been a bowman since the pandemic because people really wanted to get out there and they couldn't go abroad. It couldn't you know, uh, go to London, Like we're talking about so like, well, let's you know, go domestically equisode Nantucket. Let's go there so that the money has been coming in over the guddals.

If I were going to ever buy a house in Nantucket and I'm not in the market, you have to factor in the cost of an ownership of a plane, because there's no way you're doing that fery thing. That's a crazy trip. So if I can't afford a plane and the house, I'm not buying the house. What do you think of that strategy? Not a boat? Come on? Yeah? No, No, I need to take off from you know, like Marshtown

and just jet up to Nantucket. If I can't afford that, that that doesn't fit into talking about a little propeller plane or what. Yeah, I could do that, but no, I probably need a jet because the weather gets kind of funky up there, you know. So the last person, you know, John F. Kenny Jr. Flew a plane up there and propeller. That didn't work out so well. Well no, all right, So Nantucket in the bond market raising money.

I'm assuming it's a top rated bond, right triple, A rated triple because Nantucket has the money coming in and they also got money from the federal government, the ARPO funds and things like that. So uh N, tuxs doing very well, and these bonds sold at very you know, good prices for them, so they'll be able to uh you know. The building of affordable housing is something that they have been doing, so it's not as though this

is brand new. They have been trying to keep up with this, and yet the demand is fabulous because they haven't sold enough. They haven't built enough affordable housing. All right, Joe, good stuff. No, that's it. That's it, Joe Mysa, Editor. Bloomberg brief are weekly overview of all things municipal bond. We go from all of America in Secaucus, New Jersey, all the way up to Nantucket for affordable housing. The municipal bond market is everywhere, and it is triple tax free.

ED has no idea about the US municipal bond market, but what we'll school them on it here. It's triple tax free. That's what I know. Let's check you with Dr Quincy Crosby, chief Global Strategist for LPL Financial LP. L A is the stock symbol to put into your Bloomberg terminal. I'm looking at it. It's a seventeen billion dollar market cap company, stocks up thirty nine year to date. Go figure one of the big strong names out there. Uh, Quincy, thanks so much for joining us here. Why is your

company stock up? This is a great company with the largest we're the largest independent UH broker dealer in the country, and it's also growing at at a rapid pace and very well manage as you can imagine in this environment to see the share price up, you know, in that trajectory. Yeah, you can't say that. It's also a great company to work. All right, good stuff, all right, we got a little green on the screen today. But this has been just a brutal year. What's the view from LPL Financial? With

your stock up thirty percent? What are you guys thinking about this market? Well? Yeah, I mean this it's a market that is is chopping. There's tremendous uncertainty. And you know what's interesting about this is we we've seen the volatility index climb, the vix UH as the said began raising rates. The next sape fairly dormant, fairly quiet. It was understood what the Fed was doing. It was, you know, clear.

But what has happened as other central banks are raising the rates and as their concerns grow that the FEDS um aggressive campaign maybe pushing us into a recession. And also, uh, you know, just what happened in the UK that perhaps there are other thought lines lurking in the global global system. Uh, you know, the vix is climbing because there's more uncertainty. There's uncertainty regarding where this is taking us, and how does the set actually bring us to price stability, which

out as the proverbial breaking something. You know what happened in the UK with the pension fund issues and the Bank of England having to go out and um, you know, buy bonds again. It could happen anywhere and it does and it does when financial conditions tighten. So that's the uncertainty. And also, you know we're going into third quarter earning season and the questions are what are those companies saying not only their bottom line but their margins, But what's

the guidance? How are they seeing things? Are they all going to be giving us the same guidance as set Ex did on that Friday that you know the market melted down. We don't know. So this is the uncertainty, and we've got to just navigate through this. And it looks as if the market wants to go lower and find a you know, a level that has discounted all of the headwinds, all of the problems. But you know, most likely we're not there yet, so that that's what's

going to gone, but more defensive quincy. In periods of recession, earnings expectations come down. Right, have earnings expectations come down enough that we're reflecting that recession risk? Probably not? No, no, no no, And that's that's the that's the other issue

for the market. It probably hasn't. But until we hear from companies, either before they actually come out and you know, have their official earnings call, but perhaps with pre announcements, will have a will have an understanding of what they are seeing, and the market then has to adjust. And by the way, you know, no one knows if there will be a recession. If there is, will it be a shallow one, will be a growth recession, or just

an earnings recession. The market right now is trying to figure that out, and until it does, expect more chopped So I mean this federal reserve, I mean, are you in the camp that says this Federal Reserve is likely to go too far, too fast, too high, and and in fact pushes into recession. That seems to be the consensus. It is, it is the consers. Clearly, it's the consensus. I mean, they've made it very clear. They don't want to wait and watch to see how, you know, things

are turning out. They want to frontload it. And by doing that, at least they have the luxuries. You can see from the from the data, people are still spending. Retail spending is still is still maybe not stellar, but it's still solid. The labor market remains solid, probably too much for the Fed. But the point is it's not denting the economy in the way they want. Surely the housing market is slowing, but they need rents that come down.

That's number one. The second thing is they need proofs food prices to pull back, along with gasoline prices which have obviously started moving back, and they need to have overall, uh, the entire economy and demand to decrease, to decrease to the point it's not going to push prices higher. I just have to mention, you know, I saw the announcement from Amazon. They're raising wages for those who work in factories and the driver's nine. Amazon is going to pass

that along somewhere along the line. They're not. They're not going to sit there and say do we we'll we'll take care of this somewhere that is going to be passed along to consumers, either to the companies on their platform or yeah. So that's what the set is fighting. This is the irony of this whole thing. I doesn't want to see this private wage price spiral. It's a difficulty, all right, Quincy, great stuff. Really appreciate getting your insight

this morning. Quincy Crosby, cheap Global strategist for LPL Financial Again. It trades on the nastac lp l A is the ticker to put into your Bloomberg Professional Service. It's got a seventeen point seven billion market cap stock up. There's a winner for you in Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three On

Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg radio