Queen Elizabeth, Bond Market, Compound King ETFs

John Authors this morning. He covers Markets, Forest, Bloomberg News. John, thanks so much for taking the time here give us a sense of how the country will mourn the queen over the coming days and I think weeks. Just explain how the whole process works. Well, yes, this has been a long long planned uh event um like literally from bacts decades place. As I understand, if we have ten days of morning before the funeral takes place, any coronation

for childs will be in when Elizabeth's face. He wasn't crowned until from that sixteen months after she succeeded to suffering said, the coronation is still a ways off. In the interim the country basically shut down. So um, that's most dramatically Football is pantils or soccer, which really as American business. Yeah, it's a very big deal, but um, you know, it doesn't feel right to be going out

and playing playing soccer this weekend, so that disappears. Um. Similarly, the last night of the Proms, which is this this big music festival in the Albert Hall, um, and the last night is um uh you know, a big display of patriotism. People waved their Union jack's they see land of Hope and glory Jerusalem or that kind of thing that's been canceled or I believe the first time since the shopping World War. I haven't checked that, but I

don't think they have. That's another almost imponderable how could you possibly not have the last night of the Proms? Um? So yes, the country it's very strange in this this day and age, because the country still really does close down. Um knots of closed today. So if you wanted to go take advantage of the strong dollar and you're shopping in Region Street, Knox Street, this is not the day to do it. They're not going to stay close to

the full ten days. Um. But a lot of stores have just such completely Today, I think the only really significant aspects of life that does continue as normal is is schools. I think primarily because one of the lessons we learned from the pandemic was that of all the different things wanted to to shut down during the pandemic, it was small closes that put the most. So are john are our financial markets expected to be open on as regular I can't actually choked on the day of

the Unity. I'm not. I haven't checked us to as do exactly um what the plans are, but you would normally expect um. Britain doesn't have as many national holidays as most other panties, and it's sort of a convention that, um, when there is an event in the royal family, we get a you know, we get a day off for it. When when Harry and um Will got married, that was that was a day off for that, Queen Black and

jubilably to see those a day off for that. This will be a day I mean the day and she is actually when when the funeral actually happens, will be a local shutdown and day. Of course you can't I can't imagine, you know, a good subject the queen, well now the king trading through um the Queen's funeral. I'm really interested to know what you expect from King Charles the Third. He's going to give an address I believe in about two and a half hours and um, you know,

he's been a very outspoken Prince of Wales. But a lot of people are saying that that could very much change once he's wearing the crown. I suspect it probably has to. He does indeed have a very difficult um financing position because we don't need to rate over it yet again. But certain things we all know about his private life, which have even been dramatized in fantastic Netflix series and so unmediu that that sensible authority, that mystique that his mother had is something that you cannot be

retrieved of. Him was a big as a person, uh, and that is a problem. The fact that he has already been around so long um also makes it very difficult still seems extremely straight to even be used of the word is uh. The idea that he is the king now is very difficult for a lot of us the stomach. I think he needs to make clear that um, he's going to take his his mother as a as a as a guiding light that he's he's going to

try to do things the same way. And I imagine we do have William will now get to be the Prince of Wales, which will also require zone foreignation ceremony. Uh. If I were Charles, I would um trying to maintain authority by being quite a quiet figure and really put um it's some and he's you know, and his beautiful white forwards as the as the people for the nations who identify with that, that would work very well. One.

We only have about thirty seconds left. But I wonder if you think this strengthens the union because the Queen did pass at Balmoral in Scotland and you know there will be a new Prince of Wales. It makes me think of the United Kingdom. Um kind of yes, I felt like it was falling apart. Does that turn around now? No, That's one of the greatest consents for me is that. Uh. Yeah, as an English person and I respect to Scotland, I really hated the idea that they would leave that they're

entitled if they want to. I think the sense of total loyalty to the Queen may not be there, but I think I think this makes it easier to leave. Okay, all right, John, great perspective appreciated. John authors. He covers markets for Bloomberg News Bloomberg Opinion, UH, as you can tell by Zac and he is a British so we love getting his perspective here on the news of the passing of Queen Elizabeth. A second, I end go that

is a function Matt turning me onto recently. That is a Bloomberg Index browser gives you all the you know, the bond fixed income in disease, uh, gives you kind of a sense of where they're going. And the US aggregate, the Bloomberg US aggregate corporate you know in the index is down eleven point five percent on a global basis. It's not like, I mean, just brutal, brutal returns in the fixed income market. I'm kind of thinking it can't get any worse. I'm gonna go in there and buy

some bonds. Adam Coon's portfolio manager went through Capital Management. Adam, what do you think of my call there? I think I might be going in on the bondom mark. I can't get any worse in it. I mean, it can't get worse but from our viewpoint, bonds are the tray for the next year. And when you when you look at um just kind of where markets are right now, we kind see three and a half percent of the ten years the peak for this cycle and rates and

in the long term secular bullet trend to continue. This is just kind of a blip and we've gotten pretty used to easy returns and fixed income of the last ten years, so this should be expected to have a sell off. This has definitely been more aggressive than than what we expected. But when we look across the universe of of corporate bonds, specifically higher grade corporate bonds, we

we we really like what we see. Um. We've been using the phrase kids kids in the candy store, but I mean when you're looking at a names like Alphabet and Apple trading well but four percent, and then you've got Facebook and Meta bonds trading above five. Um. There's just a lot of opportunities in the corporate world right now. UM, in terms of the indexes or in terms of the rapper what what do you like? Do you've owned by the bonds themselves? Do you buy a tracking fund? You

buy e t F? How do you get into that? Trade. So so for us, we're we do buy individual bonds and specifically we are not shying away from duration right now. Uh Over the last several years we have been a shorter duration till to cross our strategies. But right now we are adding to our A and double A rated corporate uh corporate paper by buying individual bonds UM adding to the basis now you can add through e t F carticular like l q d UM just to get corporate exposure is a great way to do it if

if you don't want to buy individual bonds. But like I said, we are looking at adding to duration um you know, ten years and now. So when you kind of look at at the landscape from a monetary policy standpoint, we kind of see there two scenarios and both of which we think farewell for interest rates and bonds in general. So let's say they act to aggressively and they break the economy. Ultimately that's going to lead to a decline

in interest rates. Or they pivot and say, you know what, we've We've done our job and inflation is waning, so we're going to pull back and and and may even begin to uh cut interrut rates, which the euro are your euro dollar curve is thing. They're going to cut interest rates in the first quarter, So in either of those scenarios, you're going to see interest rates decline. And when you look at balance sheets and just credit in general,

it looks fairly firm and stable. So we don't see any credit issues hitting the market, which is why we're adding to credit exposure to not only get the duration but also the credit spread exposure. Adam, some economists are telling me I need to be ready for a recession in the not too distant future. So what does that mean. I have to actually look at leverage ratios and interest coverage. Do I have to be really focused on credit quality? I mean, if you're if you're a fixing income investors,

you need you need to understand out of quality. Um. But I think where we're at in the cycle, and when you look at where spreads of actually widened too,

you're compensated for that risk right now. So we we view right now an asymmetric return profile where the risk reward is in favor of going along credit versus a year ago when we were if we had this conversation, we were struggling to get three percent and spreads were an all time type, so it was asymmetric in the other direction, where there were in a lot more you could squeeze out of the markets, UM, but a lot more downside. So we we have run through that cycle.

Right now, we're looking at the markets, we're seeing that this reward you're you're getting for the risk you're taking, you are being compensated. I have a listener who wants to know what your take is on the volatility we've seen in currency, specifically the yen and the Taiwan dollar UM and foreign investors reducing exposure to US assets. Yeah, I mean I look with the dollar, STRING think that's

exactly what we should expect. I think that the US dollar has kind of reached its maximum of evaluation relative to other currencies. So if we see the US economy begin to roll over, which there's plenty of evidence for that, I think we'll start to see the U S Dollar decline on a relative basis, which will move more assets back to the U S. So, so that's that's another case for Bobs. Alright, Adam, good stuff. Appreciate getting your perspective,

your thoughts there, Adam Coon's he's a portfolio manager. At Winthrop Capital Management, located in beautiful Carmel, Indiana, just outside of Indianapolis. Carmel's are very nice burb of Indianapolis. Getting his thoughts on fixed income here. Uh, they're pretty bullish here. Interesting to see, all right, that's Adam Coon's portfolio manager with our capitol manager. Nice kind of little rip here

to the market. Sharre I wasn't really expecting it. It's interesting as well because we had um uh Bullard come out and say he's leaning towards seventy five basis points to the next meeting that is coming up September twenty one. You can always see when the FED meetings are if you just type f E d GO on your Bloomberg term auld. The same goes for b O E B O j E C b b OC Bank of Canada nice, which we follow closely here of course, Well they're so

close exactly. But that is a good one. That's f E D go is a good one in the next right decision. September twenty one, at two pm Wall Street Time, let's check out Ted Oakley, founder and managing partner at Oxbow Advisors and a prod alum of the Texas Tech. I think their long Long Horns, is that, right, Ted Longhorns? The University of Texas Longhorns, University of Texas Long There's a very big difference between the University of Texas Texas Tech. Is Texas tex a great school? And I know what

what under God did my undergrad there? It's a it's a right engineering school, right, Actually, it's a it's a real good college. Excellent. Hey, Ted, what do you I mean? You've been around the block a few times here, You've seen markets come and go. Um, what do you make of these equity markets, these fixed income markets at sixty portfolio that a lot of us were kind of brought up on. What do you make of that whole concept?

Given what we've seen so far this year? Well, you know what happened on the sixty forty is really it came into play where people really got hooked on it. You know, the last twelve years or so prior to that, you know, you would come and go, but nothing like this last time because they could just plug and play

on sixty and it worked. Now you're in a situation where we, like I've seen it many times, where you're in a true bearer market and you can't lean on anything, and necessarily you've got to be able to be reasonably nimble. And you keep going to lower lows and you get good bounces like but in July. Maybe you're getting one right now, But then they go to lower lows, and

I think that's what frustrates people the most. And then on the bond side, you know, you can have bonds raids peak and start down like you did, no aid like you did, and no one and the market still goes on down. And I think that's what a lot of the what I should say the novice, the younger players don't understand is that you know, there's a lot of things that happened here, nuances that you've gotta do. You have to know a little bit about what you're

doing in this kind of market. What are you expecting um in terms of the US stock market over the next year, you know, into two into three. I guess your FED call is pretty important in that aspect, in

that in that respect, isn't it? Well? It is. I think I think what people forget is that if the FIT is serious about keeping you know, the funds rate half a point over the inflation, right, we leave interest drift back to you know, three and a half or four uninflation, you're still you're still well behind on the funds rate at two and a half, and on the market itself, we're thinking, uh, we think we don't get a low in the market until the first or second

quarter of twenty three more than likely, because it's just look, we're nine months end of the year and nobody's ahead of the market right now. So there. I don't think they can catch up in ninety days. Maybe we're wrong, but I've seen it before. It gets hard to do, and then they start protecting, and then you go into the new year, we think the earnings will be lower. Companies are just now coming into what's going to be trouble, and then real estate is just now coming into the

tough part. And we think both of those will come together. So what do you do? Well, you gotta hold a lot of cash. I mean we hold in our three strategies, we hold on average, we hold more than fifty percent cash all of them right now. And and when I take cash, you know, we're getting on a variable rate treasury, which is a ninety day reset. We get three now, which is pretty good, you know, fully guaranteed we're getting three fifty three sixty on a two year treasury, you know,

three and a half on eighteen months. We can hold it in places and make some money. Um, And we don't buy into this idea that well, I don't want to hold cash because I can't make any money three per cents better than a minus twenty the way we look at it, Yeah, exactly, that's where we are. What do you typically hold? Ten? Like, what's what would be your average cash holding relative to what you're doing now? Well, on the stock side, it would be, you know, five to seven uh in m BE ten it was a

little higher last year. We started raising cash in twenty one. UM. On the income accounts, we move up and down the yield curve, particularly on the bond accounts, and you know, we have brought a lot of things in short the last two years and now we've actually started just gradually moving back out the yield curve some. So it just depends on what which strategy it is. Really. How are things down in Corpus Christie where you are? Ten, Well,

I'm in Austin, Corpus Christie, but I'm in Austin. Austin is different than any other city in Texas. It's sort of like a California city in a way, but for better for worse. You got influx of people like crazy, Yeah it's good or good and bad. Now on the coast, uh you know, they're doing okay because they have a lot of you know, they have ports and they have a lot of the energy is really keeping those sports busy. Houston, Brownsville, Corporus, screw,

they all keep the sports busy. So they're they're they're pretty busy right now. And is it still I mean, you know, just being in Texas in general, oil up. You know, oil is eight six dollars a barrel. That's that's a pretty good price historically. How are people feeling about energy down there? They feel okay. I think the energy people, and I've said this before, they're not very good at a sentiment on where they should be. But but I will say this, they're a little surprised. I

think that it's at five. But it doesn't you know, I think it's okay. I mean they they can still drill, they can still do projects, um that sort of thing. Uh Um. I know we're getting ready to purst this a personal thing, but I'm getting ready to go into a project that we think we'll do pretty well. But it's you know, it depends on depends on whether it's gas or oil where they are, but generally it's staying fairly steady. Yeah, it looks like that way, all right, Ted,

Thanks so much for joining us. Always appreciate getting your thoughts on these markets, your perspective, Ted Oakley. He's a founder and manager part of ox Bow Advise. Great new movie by the way, called Vengeance, which I rented on Apple yesterday, and it's about um kind of you know, like an arrogant New York City hipster who goes down to Texas for a funeral and he thinks he knows

everything and they're all country bumpkins. Ye, Robert can't well, Founder and portfolio manager of Upholdings, Robert was, was I right, are you guys the ones behind the first hedge fund to go through a conversion to an e t F structure? And if so, why we were? Uh? You know, the two thousand nineteen et F rule adjustments really open the floodgates for for active managers to bring their strategies inside of e t F s. And the short answer is, um, the e t F is the most efficient vehicle in

the world to manage money. You know, the tax efficiency of it, the liquidity and the low fee structure, and the access that you get. It was just a no brainer for us because if your goal is to maximize you know, long term compounded returns to investors, you've got to minimize fees and taxes. And you know, we saw no other vehicle than that that could beat the e t F and doing that, that's not why you run a hedge fund. You run a hedge fund again super

super rich. I mean you're giving away two and twenty Uh. You know it makes sense for a buyer of the e t F, But what's what's your motivation? It depends on your time horizon. You know, I I turned thirty nine last week. You know, I've got a thirty year investment career ahead of me. And uh, if you the more you you backload your your earnings and your winnings, that the larger of a firm that you can build.

So uh, you know, our focus is not on extracting all the value in the first ten years of running this business. It's it's focusing on, you know, the decades ahead of us. It's a relatively low expense ratio as well. I'm looking at point six here, Um, that's got to

be very competitive. How are you doing? So what was interesting is, yeah, we looked at the at the when we did the conversion, we looked at the history of active management, going back to mutual funds in the forties, fifties, sixties, seventies, and over any period of time, the long term average that you know, investors are willing to pay for active management was about sixty basis points. So people were there's discussion out there about you know, race to bottom with

indexes that charge zero, indexes strip charge zero. You know, there's no there's no research, there's no management, there's there's nothing that's happening underneath the surface. So we thought that the fair thing to do was was charged What what has been the industry norm now for for almost eighty years. What do you think about Amazon? It's a question. Amazon has clearly built an incredible company. It's a it's a it's a mid size holding in our portfolio right now.

But but I gotta be honest that um there, Uh, capital intensity is a real problem and one of the things that we focus really intensely on is what is the return on invested capital that companies are generating. So when a company has new capital expenditures or new operating expenses, what what is the new operating cash flow that has generated off of that incremental spend in the in the

coming years. And the problem with Amazon is that if you were to take a Google, every new dollar that Google puts in capex, they're generating sixty more cents of operating cash flow in the subsequent year. For Amazon that numbers about ten cents. And so they are in a structurally lower return on invested capital business. And even the that's always that's always been the case with Bezos. He's buying, he's building these fulfillment centers in all over the country.

But the stock kind of works. So I kind of feel like, I kind of I don't disagree with your math. But for some reason Amazon has gotten the benefit of the doubt from shareholders because the strategy they can turn it seems like they can turn on when they want. Don't don't forget. It's not Bezos anymore, right, Jesse. So it's basis to make come on, It's like Alphabet and Google. Please. So I mean, what do you so. I mean, look, I think a lot of investors have have exposure to Amazon,

whether they realize it or not. Uh, you know, there's such a huge component of a lot of indices and stock stocks work until they don't. And I think that's been one of the big reckonings this year is it's especially amongst growth investors. They've been shocked at how much a couple of percentage points moved in the tenure treasury

resulted in multiple reratings across growth assets. So Amazon is held onto its valuation for now, but eventually the math of return on investor capital catch up to your business and you need to you need to generate the cashual

to justify your valuation. And to again, just to pick on Amazon for a second, if you're to look ten years ago, um, I believe the business was was trading for a couple hundred billion dollars and over the last ten years the business generated seventy billion dollars of free cash flow. So that's a cumultive investment of a long

period of time. Now they have a one and a half trillion dollar valuation, is Amazon gonna deliver at least a trillion dollars of three cash flow over the next ten years right now, their capital intensity tells you that that's probably not gonna happen. So those are the things that we focus on. What you love, what's something that gets you really excited in the morning, well or all day depending well, So there's yeah, there's a couple of

different ways to make money in the market. There's there's investing in the outstanding companies like like an adie end that does ended end payments and has that's plugged in these little APIs and just gets all this growth. You get to be a venture capital investor without having to pick amongst all these individual venture companies. So I'd say a company like that is one that I'm more excited

about than just about any company in the world. But it's more expensive and you've got to know that or expect that they're going to grow even faster than than than what the market things. So I'd say that's on just quality of business and growth of the industry and the differentiations. Technology ad is definitely a tough and at the other end of the spectrum, where you know we have a very different view than the market is i'd say meta. I mean, you talking about companies that are

considerate more more cash flow than their market cap. It's going to be really easy for Meta to generate more than four hundred billion dollars of pre cash flow. All right, Robert Greig Stuff really appreciated some fascinating discussion near Robert can't well found our portfolio manager of Upholding. 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 V three, pt on Faull Sweeney. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio