Pervasive Pessimism Is a Reason to Be Bullish: Hyzy

at Bloomberg dot com. Everyone hates this rally. I think it's fair to say this is probably one of the most hated rallies ever, although there are a growing number of people who say that the US equities can continue to melt up. Here with us to talk about his mid year outlook and what investors are looking to do heading into the second half is Chris Heisie. He's chief investment officer at Bank of America Global Wealth and Investment Management, And I want to start with this sort of hatred

of this rally. There is a feeling that there's no way that after more than ten years of an incredible run and a slow growing economy, that this market can just keep chugging along for another year. Do you think that that is the most likely outcome that we will

just continue to chug along for another year. Yeah, that's the most likely outcome in our view for a variety of reasons, but I think the biggest one is the fact that you hit it right off at the top there, which is the barish sentiment if you if you talk to people, uh, they feel like you know. Some of this rally, at least the latest portion of this rally is justified because of a stalemate on the trade front, no further tariffs that were about to hit UH, an

easier FED, etcetera. But in action, the private investor is simply not in the market as much as they normally

would be. That's point number one. Point number two is is when you get a FED that goes from literally hiking in December to an about face a big pivot two months later, starting in January that on that panel that share Powell did, and then now with the market suggesting at least three cuts between now and the end of the first quarter, that allows multiples to go up climb the wall of worry, and if the risks remain muted, that's where you get a pretty powerful surge between now

and the end of the year. Even though we are pretty aggressively off of the lows um late last year. So, Chris, we're coming into the earnings period for the June quarter. How important is the near term earnings outlook for this market? You know it's uh. I think it's the tail of the tape. At this point. You've got a dual track economy UH, led by the U S consumer in the US, and you've got manufacturing and trade that is uh, the

leverage of global economies. And you're gonna get a mixed bag in our view coming out of the industrial space versus the financials, versus tech versus retail or consumer discretionary. And when you roll it all up, the earnings numbers that are coming out now should be a small beat. Because of the low bar, a small beat is likely to support the market. Uh. And then it's gonna come down to guidance. It's all going to be guidance. Guidance

guidance on a go forward basis. UH. So we can actually determine whether or not we're just bottoming out or are we actually going to get some growth in the second half. So, Chris, if you do think that we're going to chug along here on the US equity side for another twelve months, or so I'm wondering what that means for bonds because there has been something of a divergence with bond yields going lower and lower, typically a

bearish sign, while equity markets continue to climb higher. And do you think that this is an incompatible reality that has to at one point, at some point mean that bonds are going to experience losses or stocks will? You know? It's a great point, because I think what we have to figure out is how long this can actually last where bond yields do at least remain close to record low levels or creep even lower from here with equities going up. Part of that is the fact that the

multiple is going up as discount rates go down. But most importantly it's a flow argument. At this point, I think we've had the greatest divergence and flows uh probably ever if you think about close to four billion difference two into fixed income flows UH and two under billion out of equities, even though we're at all time highs on the equity side. So from our perspective, the big reason for the creep lower and yields has a lot to do with demographics around the world and the need

for any kind of a yield. Given the fact that of the world's bond markets have a negative carrier negative yield to them, which is close to twelve twelve to thirteen trillion, people called, you know, Tina, there is no alternative. I don't really like to use that phrase because there's plenty of alternatives. But at the end of the day, if you can get a dividend yield um potential total return that's three times the tenure yield, UH, that's an

attractive equity market backdrop on an absolute and relative basis. So, Chris, want to get your sense of valuation in the equity markets. We've had this big run up, and equity markets this year, earnings estimates for the most part have not risen. What is your sense of where we are in terms of

valuation right here? It seems like we're borrowing a little bit from from next year or borrowing a little bit from the future in terms of returns, And that tends to happen if the FED makes an about face switch, and it's because there's the potential to create a soft landing. So the FED is seems to be doing. They seem to be trying to right size the curve. The yield curve.

If that's the case, which is what we believe, and it's not a situation where the fed UM is raising rates last year to stop inflation, because that's simply not in the cards. But if they have to right size the curve and that is likely to go on, then you get earnings following later. You get multiple expansion first, liquidity first, multiple expansion second, and then earnings follow And that seems to be what UM investors that are coming back into the market are telling us. Where we think

earnings are gonna come. Now, that's where comes into play. Where if earnings don't show four or five six percent earnings growth, that's where the market's got in ahead of itself. So, Chris, if you do think that perhaps we're building in some gains now, are borrowing from next year, what kind of return can people expect to other equity investments over the next twelve months. I think if you you put it well, if you look away from the calendar. I know everyone's

patterned on the calendar. They ask you about year in price targets, etcetera. But if we just look at a rolling twelve month basis, we think earnings growth of around five percent between now and that twelve month rolling basis, plus the fact that yields should remain low, if not lower, from here, that should push the multiple up another point. And if we get five percent earnings growth, that gets you still double digits low double digit return potential in

the next twelve months. So, Chris, one of the things we've heard from some investors is this expanding their search for yield and returns. What an alternative investments do you think people should be looking at at this point in the cycle. You know, I think, um, we have a risk out there in the next two years of getting

too complacent on inflation. Meaning there's been an attempt to get to the two percent level a couple of times in the last eleven years, and we haven't really reached that, and said realizes that, and now they're willing to let things run hotter. So the big thing we have to worry about is do we get too complacent on inflation. That's number one, and then number two, when you just step back a little bit in terms of earnings guidance and earnings estimates, we have now pushed them too low.

The analyst community is about to do the same thing, for they haven't pulled them back yet. Um. But as they pull them back and then we we borrow some future gains. At the end of the day, it's going to come down to what type of correction and what's the driver of it. UM. Typical years have two to

three five percent pullbacks. One correction. We had that this year. UM. The question is is do we have another five percent pullback in the cards that's likely to be earnings driven, not necessarily FED driven, and that's a buy on weakness pullback from our perspective. Chrisze, thank you so much for joining us. Chris is the chief investment Officer for Bank of America Global Wealth and Investment Management, based in New York City. Well, we are ten plus years into this

economic cycle. The FED appears to remain quite dubbish, and many investors are questioning how much risk they should be taken given the extraordinary performance of the first six months of this year. To get a better look at the state of the global fixed income markets, returned to Ted revel Tad as chief investment officer for fixed Income at TCW with a hundred seventy billion dollars under management, based in Los Angeles. H Tad thanks so much. For joining US.

I wonder if we could just start off by getting a sense of your thoughts about allocation between you know, investment grade, high yield, emerging markets. Where are you on the risk curve here, Well, we're pretty defensive on the

risk curve. I think that the investors are supposed to think about their asset allocation in terms of a protracted asset price cycle that we have experienced obviously, but that the time for taking enthusiastic risk with your fixed income portfolio is typically in the first few years of the cycle. That's when you want those big allocations to things like high yields, emerging markets, leverage loans, the most leverage parts

of the capital structure. As you get into the later stages of the cycle, which I think there is abundant evidence that we are. In those late stages, you're supposed to be actually very cautious about making allocations to leveraged

asset classes and against leverage business models. So that counsels a portfolio that has a significant character um with respect to using sovereign debt, using investment grade debt top of the capital structure, type of exposure, and asset backs meaning triple A triple a exposure and commercial mortgages and avoidance generally speaking of let's say, uh, much of the high yield market, and particularly the single be and below portions of that So ted, One thing that I find striking

is that the vast majority of investment managers who we speak to echo the sentiment that you just had. And I'm wondering whether that in and of itself is a reason to be more bullish, uh than cautious, just because if so many people are baking in such caution, what exactly is going to cause this market to turn? And and the positioning isn't really there for something violent, right right? Yeah, Well,

those are great questions. First of all, I'm I do sympathize with the observation that many people are talking the late cycle game in terms of caution in their asset allocations. I'm not sure how many our walk in the walk, though, Um, the pricing that exists in much of the the fixed income market doesn't suggest that that is actually the case. But as it relates to what might be a catalyst for turning the cycle and flushing out the risk, you

don't have to look very far. Indeed, look back at the fourth quarter of last year, there wasn't really much of a catalyst. It's simply that there was a there was an abrupt shift in risk preferences, and you saw an abrupt widening of the high yield market to roughly five and a half or five and fifty basis points over treasuries from a level that I think had started the fourth quarter at about three hundred and today we're

sitting at about three hundred and seventy. But I think that if you're looking for confirmation of the light cycle type of environment, you have your inverted yield curve. You have what may turn out to be a profits recession as divine, as defined by two consecutive quarters of of negative growth with respect to earnings, that potentially being this quarter. There's a slowdown in China going on, We've seen the statistics with respect to trade. There's a lot of leverage

already built into the investment grade market. We have actually seen under performance in the triple ceas. And then you have this whole conundrum of negative yields, that of the global investment grade debt out there is yielding less than zero. Not exactly a compelling argument for taking risk in your portfolio. So tad. It kind of brings me into my next question, kind of what are you seeing as you look across

UH your portfolio in terms of credit quality. Given where we are in the psychole, are you seeing anything any red flags popping up in terms of red flags in the market. Absolutely, arguably even as recent as this morning the news with the i p O that that failed with him and that I don't know if I should call it a failed i p O with in BEV, but certainly one that was shelved and pulled. UH. That

is a relatively levered business model. That is one of those investment grade companies out there that I think is running at least four turns maybe closer to five turns of leverage, which is out of alignment with what you typically think of as an investment grade UH leverage level.

The fact that the i p O was pulled and therefore the proceeds are not available for de leveraging tells you something about this specific credit but it also I think tells you a lot about the mood and the mind of the marketplace that the the need or the urgency to delever or to get your metrics back down to more in line for where they ought to be

in a light cycle environment, isn't there. The reason this is important, at least in our judgment, is that when you look at past cycles, you'll actually see that something like between at the low end and at the high end of the triple bes. Okay, not the entirety of the investment grade corporate market, but about a quarter to a half of the triple B universe suffers downgrades to below investment grades gets junked uh into a into a

de leveraging type of environment. Given how much triple bees have expanded in terms of their market value and the size of that market, it could have really devastating consequences for the pricing of below investment grade debt and leverage loans. So that's I think one avenue that you're supposed to be very thoughtful about the fallen angel risk that may exist in in the what would otherwise be thought of

as a relatively conservative investment grade portfolio. Ted Earlier in the conversation, you were saying that a lot of people talk the talk, but they don't walk the walk, and they're not perhaps de risking as much as it may seem. Where in particular are you seeing this I think you're seeing it in the corporate markets primarily and in the leverage loan markets, and the leverage loan market, since we haven't spoken about it, is probably a really good place

to focus on that. So, the leverage loan market has grown enormously over the course of this cycle and is would appear to be one of the primary vehicles of of choice as it relates to financing relatively leverage and smaller type type type businesses. What appears to be the case is that the covenant light structures and the very generous terms that exist in these loan agreements vias of that of the of the borrower, generous to the borrower.

That is um our suggestive that the traditional originators of these loans are not putting them on their books. It's a it's a going back to the Mark Twain is um about cycles rhyming. In the last cycle, those that were very knowledgeable and very up close and personal with respect to the underwriting of sub prime mortgages weren't putting it on their own balance sheets. They were securitizing them and sending them into C d O type structures or

somewhere else. In this particular cycle, you're seeing an inordinate amount of those leverage loans going into the CLO structure, but something like six of all of these leverage loans are not ending up on the balance sheets of the people who are presumptively underwriting them. That in and of itself should serve should serve to raise a question about why is that the case? And of course the answer is because there is cheap and a capital available in

the CLO market. How knowledgeable uh, that some of those investors might be. I mean, obviously there are many investors in that space that are knowledgeable, but it's not all of them. Tad Revel, thank you so much. We could speak with you all day. We love that you came on. Tad Revel, chief investment officer for fixed income at TCW,

coming to us from Los Angeles. Well, we got some economic data out of China overnight, and I guess the takeaway is that Chinese economy slow to the weakest paced since quarterly data began, but there was some signs of stabilization as well. To get the latest, we welcome Tom or like Tom's cheap economist for Bloombrick Economics. He joins us on the phone from Washington, d C. Tom, thanks so much for joining us. Kind of what your key takeaways from the most recent round of economic data out

of China. I think you put it pretty well, Paul. Yes, this is the weakest number since back in six point two percent growth. Um. Yes, there are some signs of a little bit of additional resilience coming through in the more high frequency June data. We've got a bounce in retail sales, we've got a bounce in industrial output. But and this is the crucial caveat, I want to throw in a bunch of the factors which were behind that more optimistic June data aren't going to be very long lasting.

Retail sales, for example, a big factor there was one off discounts to get rid of inventory of old cars sitting on dealer's lots. That drove a huge surge in car sales. That's not something which is going to be repeated. Um. So we think the June numbers might be a bit of a false dawn and there could be more weakening to come for China. Tom, how much can we trust these numbers as being accurate? So? Um, that's the perennial question with China's data Lisa UM And what we do

is we run a bunch of different checks. We look at the GDP numbers against what we call the Leaka Chang Index that's based on rail freight, electricity UM and loan numbers UM. We look at it based on different private and academic gauges of how fast the Chinese economy is going. At different points in the past, there's been really wide deviation, especially back in two thousand and fifteen, the government was saying six point five seven percent growth.

Are private gauges were saying now, Actually it's closer to three or four percent. Right now, our private gauges and the official numbers are actually matching up. So, Tom, you lived and worked in China in Beijing for many many years. Love to get your sense based upon your experience of where do you think China is right now as they think about trade negotiations with the US. We've got this

latest batch of economic data. It's a sense of where you think they are and what they really want to achieve. So I was in Beijing for the week ahead of that G twenty negotiation between President she and President Trump and the week after UM and we spoke to to a bunch of people there, and I can tell you the mood after that G twenty agreement was I would say a combination of relief and caution. Relief that she and Trump had at least managed a handshake deal things

didn't get any worse. Caution, because well, we've seen this show. Before the top leaders meet, they agree to get along, but once you get into the detailed negotiations of who's going to give up what, talks start breaking down. Um. So I think that's the view in Beijing right now. Relief things aren't getting worse immediately, Caution, concern that we're

not far from the next blow up. Do we have a sense of how much of the slowdown is due to the trade, the tariffs and the trade wars, and how much has to do with just the fact that China has been slowing down as it shifts from an industrial economy to more of a service oriented economy. Yeah. So you've got three things going on at the same Timely, so, you've got the trade war, which is hitting exports directly

but maybe more important having a big negative impact on sentiments. Um. Then you've got the government's deliveraging agenda, that awareness that they've taken on too much debt um and that needs to be managed down if they're going to steer clear of financial stability risks. And then you've just got the kind of natural inertia, the natural drag that comes when you've got a shrinking working age population UM and an economy which is trying to shift to a new set

of growth drivers. All of these things are happening at the same time, UM, and I think that's what's weighing on growth. And until we see some more stimulus coming in, our concern is that we could see some more weakness in the months ahead. So Tom, just real quickly, maybe next thirty seconds. It's just how committed do you think the Chinese government is to this de leveraging issue. As you mentioned, eight taken on tremendous amount of debt over

the last decade or so. So I think the thing which China has on their side when it comes to deleveraging is time. Yes, they've taken on a lot of debt, but it's all domestic and that means they can manage it down over a period of years, maybe even a decade. They're not going to be forced into doing it over a period a few months. UM. And so what we've seen in two thousand and eighteen and two thousand and nineteen is well, you know what, the trade war supporting growth,

that's the bigger priority now. Deleveraging, Yes, we need to do it. We're not going to do it right now. Tom more Like, thank you so much, as always for your insights. Tom or Like as chief economist for Bloomberg Economics, talking about those GDP data out of China overnight, oh, a staggering forty two million people face hunger in the United States, while at the same time, roughly the food produced in America goes to waste. Our next guest is

trying to address a small part of this problem. Matt jos mac jils We, act founder and executive director of Rethink Food NYC that is based in Brooklyn, joins us here in our Bloomberg Interactive Broker Studio. Matt, thanks so much for joining us. I wonder if you could just give us a sense of what your company does, Rethink

Food NYC. What do you guys do? So basically, we take xx food that is you know, normally seen as unusable, we repurpose it and we distribute it to community service organizations to help alleviate the burden on running like you're you know, what you would think of as a sup kitchen. So we collect food from Goldman Sachs, the bank, the cafeterias, fine dining restaurants, um so how Stumbo House, and we

bring it back to our kitchen. We make new meals out of it, and we bring them to other community service organizations and essentially cater them to alleviate that pressure, that's stress of having to produce food every day for hundreds of people. What's the economics here? I mean, how do you incentivize these companies to work with you and how do you fund yourself? So initially we're funded by

you know, large scale donations. Um you know the eleven Madison Park guys have been really generous and helping us raise money and raise awareness. But what we're trying to do is help people realize that this food actually has tangible value. Like if you were to go to a restaurant like the Nomad and get like this beautiful roasted chicken and just because it's eleven o'clock and it doesn't mean that that chicken is now the value of that is zero. Other you know, businesses that operate that way.

Like you know, the only one I can think of is concert tickets that go to the value of zero. But if you run a business like that, it's just never going to be successful. So we're trying to do is incentivized business owners to really truly realize the value in their product so that we can offer and suggest. We can't actually tell them what it's worth, but suggest higher in kind donation receipts so that the tax return

is larger there in the air. So when you talk to restaurants, is it is there prime just give us a sense of what their motivation is for I guess entering into relationship with you and uh donating their food. Well, we all know, everybody knows it's a problem. I mean, you know, when we were chatting here before, you had some some options, you know, some situations where you know it was a problem, and we all do. Everybody sees it. Everybody knows, everybody is aware, we're all we're all we

all know poverty exists. Um, we're simply just solving the problems. And everybody says, oh, the liability or this issue or that issue. We think it's just a problem solving organization. Every single food donor is different, and we take the time and really put in the effort to make sure that they you know, they get that food out safely.

And what you're referring to is something when back in college, when I was working at a coffee shop and there was food left over at the end of the day and wanted to donate it to someone who is hungry, I was told that we wouldn't because it was a potential legal liability for us should the food be spoiled and someone gets sick from it. You're saying, that's not true,

that's not true. So the Good Samaritan law protects you that if you donate food in good faith, um with the intent to feed the poor, that you are you're okay. So you have to donate it to a five O, one C three. So I'm sure in the neighboring area there was some soup kitchen. And the reason that you're you're the business owner didn't want to do that is

he's protecting his brand. He's saying that, look, we made this product and we don't want to give it away for free, because if we spread it out into the ecosystem, it's going to eventually reduce its value. And what we're saying is that's not true. It's still just as valuable. You're just looking for the value in the wrong place, all right. So I like the way you phrased it. I'm sitting at a restaurant, beautiful meal in front of

me that I paid sixty dollars for. When that restaurant closes that night at the stroke of eleven, in theory, that value goes to zero and and the and the restaurant owner would throw it away. What you guys do is you have, um, I guess, um, some type of method to really calculate the value of that meal, which then becomes important for the restaurant as the restaurant thinks about it, you know, the text deduction for it. So just give us a sense of what you guys do

in terms of really assigning value to meals and food. Yeah. So it's a really kind of a complicated thing, and we we're still always working on it and still retooling it and still you know, always under review. But basically we say, you know, what is what portion of this meal is this is this going for? What's the quality

of it? How labor intensive is it? And it's basically an algorithm that kind of measures these things in and we say, okay, how much food did you donate over the course of a month or a quarter, depending on how you want to do it. And this is what we we kind of think the value of this food is, and if we have to defend it, we will, but you know, we're just trying to give a better sense of it. What's important to note is that the average food donation value assessment system is a dollar a pound.

So if you give me a watermelon, I tell you that six pound watermelon six dollars. If you give me six pounds of fua graw, it's also six dollars. If you give me six pounds of caviare, it's also six dollars. So it is completely nonsensical. So this is something for the accountants that you need to sit down with the accounts and figure this out fast. By well, I guess

that I'm struggling to understand. Also, so do you have like what kinds of chefs you have in and and how you get to figure out which areas need the food the most. Considering the fact that the amount of food that you're going to be getting will vary at any given day. Yeah, that's a huge challenge. So what we've done is we're super data heavy one because we're super food safety heavy, so everything's monitored, all the temperatures, what comes in, where it's coming from, coming from, and

all that stuff. So another issue we have is you're right, so people usually it's like a two day rule, so we'll get like huge spikes of food, not so much the next day, so we have to buy like five percent of our ingredients to supplement those lower valleys and then we get it out there. It's really not our decision, and we say this all the time, and we think we're not community service leaders, were not like, you know,

trying to like out there trying to save the world. Basically, there are institutions already in place that are distributing food doing it well, and our job is to just help make it easier for them. That's it on both sides. So just real quick here, how can people donate if they want to? If people go to rethink Food dot NYC, there's a donate button at the top of the page. Also, you know, I don't know if I regret saying this, but my email address is actually on the page. If

you want to get out. We were trying to solve this problem. We just need help and support, So reach out if you think you can help in any way possible. Matt Jobs we act just gave out his email address on live radio and sitting here looking deeply uncomfortable as a result. Matt jos React is founder and executive director of Rethink Food NYC, based in Brooklyn, bejoining us here in our eleven three oh studios talking about a problem that many people have noticed, which is food waste as

well as hunger. The two things, you pair them up and perhaps you can solve both. 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. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyd's one before the podcast, you can always catch us worldwide on Blue Brook radioh