We're Looking At A Secular Shift To Lower Rates: PGIM's Tipp

It's not as if we haven't been hearing from FOOD members, but he can only add to the dialogue or the conversation that's being had across the country. Let's bring in somebody else who will be speculating about this, and that is Robert tip Managing director, chief investment strategist at p Jim, Robert, thanks for joining. So we'll get the statement to two pm. What will be different from the last statement I think

the FED is going to take a breather here. I think they're gonna, you know, continue to emphasize that they're there, that they're bringing online all of the aggressive programs that they've announced. But I think they're at the bridge stage, you know, we've gone through the drop into the void, and they sprung into action and they instilled in the Market's really the first phase, which was the leap of faith. But now we're on the other side, we're getting evidence

of recovery. And as you may have been made clear by the payroll number, I mean, obviously it's early days, but you'd expect the first stages could see some pretty rapid growth and so it's difficult for them to pour a lot of gas on and fire all remaining bullets as the economy is is um really accelerating. I think they're gonna plant some seeds here, uh and leave the door open and leave the impression that they definitely want to ensure this recovery and that they're not taking it

for granted. But I think fresh steps here, I programs kind of shock and awe. I think it's gonna those are going to be limited. So, Robert, you mentioned that better unexpected jobs report we got last week. How are you thinking about the economic recovery for the remainder that you're going into next year? Now, how's that changed for

you over the last several weeks. Sure, Well, I think the expectation was based on the way this is played out in other places that that you you know, should expect to see a rapid recovery in some ways in these early stages. I mean, we had a sudden stoppage and activity, everybody locking down and staying home. But you immediately saw sequential growth beginning weeks ago in auto sales in activity levels. And as that happens, you know you need service people on the ground coming back to work.

So I think that this is a much more difficult stage. The leap of faith stage, there was a lot of police. There's a lot of value in the markets. Now you're looking at valuations and markets that are below average. Uh,

and you're at the evidence stage. And so I think you're you're going to continue to get progress in markets, but you're going to get a lot more volatility, a lot more back and forth as people question whether this is going to be fast enough in terms of growth to get companies to the other side, how long it's going to be sustained, and so on. If we don't get more physical stimulus and unemployment benefits and the extra

stimulus runs out in July, what happens, Robert? Yeah, I mean, I think you're going to have to get some more stimulus. They're going to have to keep that going to some extent um because you can't have uh, you know, a huge swap of the population, you know, without income, and there's a you know, when you look at the dead styles in terms of wealth, income, savings, and so on, there's very little wiggle room for uh, you know, broad

spectrum of the population. And so I think that even if you're getting millions of jobs created every month, it's not going to be the majority of jobs getting recreated in the next few months. And so they're going to have to keep something going there. So, Robert, where do you see value in the fixed income markets? We've had again a nice rebound in risk assets. Where where do you see value? Yeah, let me answer that question and

back and fill a little bit on the last one. So, you know, looking out over the long term, I think spread product is going to outperform. You're gonna have to be very selective though. You know, we're looking across pretty much all sectors, whether it's high quality structured product UH, European peripherals, hard currency and local emerging markets i g. High yield corporates. UH. There are good values in all

of these areas UM. But as legislation is worked on, as we get closer to the election and we see more of Biden and the competition for leadership in that race, UH and all the other things geo politics, trade wars, UH. You know, you have UM investors in many cases that may have been chased into a rally that they didn't believe in. And you'll see, you know, more days like today where it's not just one way progress. You're gonna get backing and filling. I think over the long run though,

that's where the value is going to be. Number one is in spread product. I think number two, there's gonna be a lot of opportunities on the interest rate side because I think whether the said UH really doubles up on their programs today or not, and I think that's unlikely. I think in the long run you're still looking at a shift of secular shift to lower rates and the

long term forwards and markets. Frankly, right now, I don't really reflect that it's still some value even laft At back into the treasury curve, Robert, thank you, the back end of the treasury curve and spread products. Much appreciated your time today. It is Robert Tip, chief investment strategist at p JIM joining us there, and I do want to point out that the tenure yield today is at seventies seven basis points, just a little bit of move after we got that CPI data negative month over month,

down by point one percent. At the two stands spread at fifty nine basis points right now, Remember when we were worried about that going negative. Surely fixed that one. Alright, Thanks once again to p Jim's Robert Tip. Always love chatting with him. It is time to check in with me work opinion. Now we're joined by opinion columnist Jonathan Bernstein on his latest column, to do with the elections coming up in a short five months from now. The

column entitled be ready for a long election night this year. So, Jonathan, you say that administering the action would already be a challenge even if everyone acted in good face. But there are many more challenges this year, including that we could actually be looking at a whole week. Just explain if you can, what you mean by by that. Well, what's happened is as more and more voters are doing early voting, doing vote by mail, doing other forms of absentute voting,

it just takes longer to count the ballots. And that's been a trend that's happening over the last several elections, and it's going to be accelerated this year because we're expecting way more vote by mail this year, and so there's going to be a lot of states that only can count you know, sixty or so of their ballots on election night, and so we need to expect that it's going to take days, maybe up to you know, ten days, fifteen days to get a final result from

some states, including some of the battleground states. So is it the case that you know, we're not going to see uh, the election called on election night that no matter what, it's very likely that we won't have a conclusion to the election for again, up to maybe ten days. It depends on how close the election is. Of course, um, there are gonna there's a bunch of states that you know, basically are still going to be able to call the

state that election night. But um in some of the other states, including Pennsylvania and Arizona, which are both major battleground states, expected to be this time if those states turn out to um be the margin of you know, victory we're not going to know, possibly for quite some time. And the thing is, there's nothing wrong with this. This is planned. This is how it needs to be to get everybody to vote and to have an accurate account.

So one of the important things for everybody to do in a in a position to do so is to warn everyone in advance this is going to happen. This is okay, this is not fraud, this is not questionable. There's nothing wrong with this. This is the best way to let everybody vote and I get an accurate count. And yet, Jonathan, why do I have premonitions of all sorts of challenges and court cases on an attorneys general bring broad in. Well, there's no There's two things. One

is legitimately, there's a close election. Both parties are going to fight for their rights, and that's you know, there's nothing wrong with that. Then, on top of that, we have a president United States who who alleged fraud without evidence in an election that he won. So we're sort of all expecting him to allege fraud no matter what happens, because that's what Donald Trump does. He claims fraud based on nothing. So you know it's it's gonna be a there's a good chance it's going to be a mess,

especially if it's a close race. It's gonna be a mess. It's gonna look ugly. And the best we can do is warn everybody, Hey, this is what to expect. I mean, Paul, just you know, stop there for one second. I just think how strange it is that you're putting effort into explain to the public that fraud is not going to take place, but you have the president saying is taking place. How do you exact about that? It's interesting, you know, Jonathan,

that's a great question. I mean, I think the issue is here, is the delay this election primarily driven by the write in votes, the mail in votes that are resulting from the pandemic, or is there anything else going

on here? Well, a lot of states are just shifting more to mail in votes to begin with, and states have different rules so that some states you can the deadline is to get a um to give the ballot in, to give the ballot um you know, in the mail on election day, so it may take another day or two to be to arrive, and then they have to sort it and they have to come and it takes a lot longer to count um absentee votes and vote

by mail because you have to certify it. You have to make sure it's a real bad You can't just you know, throw everything through the machine, so it takes longer. And then there's an additional complication, which is in the thing we have to let people know, which is that the people who tend to vote at the last minute tend to be more Democratic than Republican. So we need to expect in most states. It's not it's not consistent across all states, but it is true in both Pennsylvania

and Arizona. We expect the election night count to be better for Republicans than the final result. And there's a good chance that Republicans may have to lead on election night, while experts who know you know, who know how this works, know that Democrats have a very good chance of overtaking that. How will this affect how we should read pulling on

the way up to the election? Obviously pulling has not had a great record recently anyway, but you know, presumably there would be you know, different polls this year, a different types of of of collecting data and people reading them differently, and you would have thought, hopefully better than the last couple of elections. Will it make a difference. That's a great question. The pulling actually last time around was better than people thinking the national polls basically got

it right, some of the state polls were wrong. Um, where there's no particular reason to think that absolutely voting vote by mail will really affect that. Posters have learned. You know, people now start voting in early October. Um, it's more of a one month election that then takes a week to count than a one day election that takes one night to count. Um. So so there's actually sort of slipped the JOm. Both sides and posters have gotten better, have gotten pretty good at knowing that's happening

and adjusting for it. So we may have polling errors, but it shouldn't really affect the count that much. Johnathan Bernstein, thanks so much for joining us. Jonathan Bernstein, Bloomberg Opinion columnists covering all things political. I think, as you suggested, Vanni, this is going to get kind of ugly as we kind of get up to this election and trying to process the days after. Yeah, I mean we're definitely five

months away. But yesterday alone you had Paul to to Jonesy and Bruce Richards already talking about starting to look towards the election, and so you know when you have major investor is like that doing it, you know the rest of the country is. But of course there's the conventions to get through first Pall Yeah, exactly, And Johnson said the key here's uh kind of education letting people know that this is going to happen. But Jonathan's columns the first time I kind of kind of came up

to this issue. So there's a lot more education that needs to be had going forward, but it will be certainly an issue. Great Jared, thank you so much. We appreciate that. Market Drivers is brought to you by Commonwealth Financial Network for the sixth raight time. JD Power ranks Commonwealth number one and independent advisor satisfaction among financial investment firms.

Visit Commonwealth dot com to learn more. Looking at the markets here, as Greig was just mentioning, we're kind of kind of a mixed SMP down slightly down, down a hundred and fifty points. But the NASTAC is hired to get a sense of what's really going on and how we should be thinking about these equity markets going forward. In the face of this global pandemic. We welcome our good friend Gina Martin Adams. She's an equity strategist for

Bloomberg Intelli. Gina, thanks much for joining us here. Give us your sense here of kind of how you're viewing the markets here. After this nice bounce off the lows that we've seen any equity markets, how are you kind of taking a look at the next twelve months for the equity markets. Yeah, so when we think about where equity markets are, the bounce in our view has been

entirely driven by policy infusion. Much lower rates for a longer period of time, a commitment by the Fed to at least double the size of the balance sheet and purchase many, many assets across the bond market spectrum has certainly elevated valuations and equities um. But we've now priced effectively priced that policy infusion in, so we're waiting for our next like higher And I do think that's why you're seeing the market sort of take a pause here,

rotate back into some longer term winners. And I do think we're in for a period of maybe a rockier climb as we move into more of us show me market and by that I mean, we're going to have to see the economic data continue to improve of maybe a little upward revision momentum emerge in the earnings UH in the earnings expectations stream to really drive performance from here. So we've gone from policy driven market to what's likely to be more of an economically and earnings driven market

over the next several months in our view. Yeah, just as you talk about that, we're seeing the fangs hire today which again shows the NASDA two thirds of percent, while the other indicries are lower, but Gina not by very much. And if you say we're going back to the fundamentals, you know, what does an improvement look like, Because we're looking at seriously negative numbers, particularly for earnings next quarter. We are, but the expectation is for that

negativity to persist. And I think that's an important and

important point to make. If you look at your average recovery following recession lows, you typically get a ten percent growth pace in EPs following those lows in the year after those lows, So ten percent is your average we're making in a five for some expectation in terms of our forecast for where the SMP five fundered is most likely to go the consensus expects only one and a half percent growth, So I think this is an important thing to keep in mind, is there's no implied expectation

for recovery really in the earning stream. In terms of consensus expectations, I would argue the market is probably be pricing in about two percent growth following our our second quarter trough. So that's why we're so sensitive to what happens with the pace of economic growth and earnings recovery. Yes, the current economic numbers look bad, but they are getting

less bad. As long as they continue to get less bad and start to migrate to potentially growth, we're more likely to see revision momentum revert higher or more likely to see earnings beat expectations, and that's going to keep the market most likely moving higher, albeit certainly not at the double digit pace of monthly growth that we've experienced

most recently. It'll be it'll most likely be a rocky, rockier climb because it's driven more by improve the earnings expectations and improving economic outlook, which by its very nature is much more difficult and more difficult portion of the equity market climb than the pure valuation expansion driven portion

that we've just been through. So you know, we've had the FED kind of come out, you know, since the beginning of this pandemic, could be quite aggressive, quite a forthright in kind of their views of how they need to stimulate the market and add to liquidity to the market. Fiscal stimulus is kind of taken a back seat here. Is that does the market need to see another big round of fiscal stimulus here or is that not a

prerequisite for the support of this market right here? I think it will entirely depend upon the pace of economic recovery. I mean, I think we can all admit that we were very shocked by the pace of employment recovery recorded in the month of May, just on a couple of weeks of reopening. To see that kind of employment growth. There's a lot of skepticism as to whether it will continue.

But if it does continue into June, I think the fiscal bodies are going to really start the question how much spending they need to do, how much stimulus they need to do. At the same time, you've got a lot of fear out there that we're going to have another reinfection wave, that we're going to experience some you know, sort of um greater shutdown come winter months, and so I think that they want to reserve some firepower in the event that we do see some sort of reinfection

going forward. Not to mention, the fiscal budget is not exactly sanguine at this moment in time. We certainly accumulated a tremendous fiscal fiscal deficits, so I think they're going to be somewhat conservative, certainly follow the data. I think in certain cases there's enough political momentum, such as the

extension of unemployment benefits, to probably get something through. But we're unlikely to see a massive Zooka package like we saw in the spring, simply because we do appear to be pushing past the worst of the worst, and as long as we're going to continue to see some incremental improvement in economic growth, your case for extraordinary fiscal expenditure um in that kind of environment, it is diminished somewhat, and the equity market is not necessarily counting on it.

You know, with one and a half percent growth forecast for earnings over the next twelve months, the equity market is essentially just saying, hey, we're going to have incremental improvement in the economy. I would say another fiscal package is um likely to provide a big booth. Gina, very briefly, what do you make of the distressed equity investing that we're seeing right now? Her, it's jes a big j C penny. Yeah, I mean, I think it's just a

risk tolerance move. I do think that what's happening in general is an improvement and risk tolerance investors are willing to go out the curve in terms of lower quality investments, higher volatility investments. That's very symptomatic of sort of recession loads,

very consistent with experience as the past. UM. I wouldn't call it necessarily taking a flyer, but certainly finding those um those potential opportunities where we've seen extraordinary dislocation and maybe some mispricing in the market is definitely the risk appetite of the day, right, Gina. Thank you have to live there, Gina, Martin Addam when we're intelligence the chief equity strategists, Thank you for that. There's one CEO I probably not want to be during these times, and that

is an insurance company CEO. They are on the hook for so much or at least they say they're not. But those who are claiming they are sometimes have a pretty good argument, or at least they think they do. Let's bring in somebody who knows both sides of the story, and that is Matt Pozzola, who covers all of the insurers, particularly the property and casualty insurers for US at Bloomberg Intelligence. So, Matt, the story for the insurers just keeps getting more and

more complicated. We had the pandemic, we had events canceled for that reason, and then of course we had protests, some of which turned into riots. Just how on the hook are insurers for all of these events? Yeah, the combination of all these events will probably make for the

worst insured loss year ever. UM as a bull of distinctions to make when you're you know, saying that, typically, UM, when you have a large event, which previously the most cost the event was Hurricane Katrina in the United States, that's usually isolated to at least one geographic region. So what's really distinguishing the pandemic is the fact that it's impacting pretty much every major, large global city in the world. UM. And that's what's going to contribute to this large loss Alright,

so Matt, can the insurance industry handle this? Yeah, for sure. So the insurance industry is well capitalized. Two thousand seventeen and two thousand eighteen were pretty bad years in the United States for insured losses, with a number of hurricanes adding up, and even through that, insurance companies remained pretty

well capitalized. And I think the other important point is that if these losses are very geographically dispersed um by region, they're going to be very very dispersed by company me too, So it's going to be spread across the entire global industry. So I wouldn't have capital concerns for the entire industry. Some companies here and there could get into trouble thought well.

And of course we should note that when it comes to that side of the equation, insurance companies are huge investors, and with the out and NASDAC and all those industries at all time highs, that part of their balance street hasn't really been hurt like it might have been. But one of the other side, I mean, we had so many lobbying groups trying to get injurers to pay out money for things like rent or you know, COVID nineteen stoppages, and they just are not prepared to do so they're

going to fight it all the way. It may go to you know, a higher court or even the Supreme Court at some point. But what what what will happen with contract law? Will those contracts be changed post talk? Yeah? I don't think so, Vanni. So a number of states tried to essentially force insurance cut these to retroactively pay business interruption claims that specifically excluded viruses, and those bills have seemed to have lost momentum um in the various

states and none of them came into law. The industry would have fought that very hard, and like you said, it could have even been the case that went all the way up to the Supreme Court. I don't think that's going to happen retroactively. I do think going forward there will be a number of things. Were already discussing a global or i should say United States Pandemic fund where insurers would potentially pay pandemic claims but then could be reimbursed, kind of similar to what we have for

terrorism right now. So I think the effects are going to be in the future more than they are changing contracts that already happened in the past. So, Matt, how these big property and casualty insurance stocks, how they performed here in the markets. You're talking about some of the biggest losses ever. I can't imagine investors wanted to have anything to do with these things. Yeah, I think so.

What happened initially was the stocks took a big dip in conjunction with the market, and in our published view was that the stocks went down a lot more than what their exposure might be even in the worst year ever. Uh, they've since rebounded, and as Vonnie was mentioning earlier, obviously these companies are big investors, and when a lot of industry participants are talking about this being the biggest loss ever, they are including, uh, the investment impact, which is not

typically included when we talk about this. So, uh, there's a little bit of I guess, you know, building up the event, maybe even bigger than it is. And what I would note is that several large insures have already said that in the second quarter they did see and as we've seen with the market, a dramatic rebound in that. So I think that's going to be a little bit of a limiting factor. What about events, how long will

events be canceled for? And you know, out to when our insurance companies liable in the sense of, you know, when do people actually start booking things? I mean, are people booking things pre pandemic for two or is that like not even on the cards? Yeah, it's not the These policies will typically be written on an annual basis, so stuff that may be happening in one Uh, those policies may not even be written yet. And if they are,

they're certainly going to exclude um viruses and pandemics. So you know, what we're what we'll see now is the fall out of stuff for this year and maybe the first half of next year, and a lot of that's going to fall on the European market, which writes a lot of that event cancelation insurance, especially for these big events like Wimbledon. Um, you're not going to see US

insures taking a lot of that risk. So I mean, have we seen these companies take some big low loss provisions or just put you kind of provisions for losses on their policies that Um yeah, I mean, well, so far, I'd say the US companies have not. The first quarter they didn't have huge losses. Child for instance, it was very low number, but they said, you know, we need to be prepared for the second third quarter that we're

going to have a lot higher of losses. So the biggest losses right now have been in European companies and um reinsurance companies, which is insurance for the insurance companies. So as of right now, it's it's still a little bit of a weight and see game where you know, everyone's talking about the big losses out there. We do see the Europeans having them, but as far as the US, we still have to wait for the second and third quarter. And Matt, thanks so much for joining us. We appreciate

it as always. Matt few Palazzola senior analysts covering the property and casual the insurance business for Bloomberg Intelligence. He's got years of experience covering that space. And you know, interesting, even though it's going to be uh the worst year ever in terms of losses for the insurance companies AI, they're able to handle it from a financial perspective, and b their stocks are actually bouncing back off those thods

really fine. Fascinating. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn. And I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio