This is the Bloomberg Surveillance Podcast. I'm Carol Masser, along with Manis Crowny and Katie Greifeld. Join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand at Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot com, the Bloomberg Terminal, and of course on the Bloomberg Business app.
Bcorny's more than double this year on hopes that the SEC will approve that holy grail, the spot Bitcoin ETF in the coming weeks.
We're waiting Beta breath.
We are all waiting, and so is Kathy Wood and she joins us on this Thursday. Kathy Wood, of course, founder, CEO and CIO of ARC invest. I'm Kathy. Merry Christmas, Happy holidays, So great to have you here. Let's start there with the news because we do have this story on the Bloomberg tell tell us a little bit about this overhaul and your thinking when it comes to how you are thinking about the investment strategy for you guys, specifically when it comes to crypto.
Sure, and Merry Christmas. Very happy to be here again Carol, Katie and Massive. So we're as optimistic about bitcoin as we ever have been, but there are a few regulatory and tax uncertainties, and we had been waiting for the
discount between GBTC and NAV to narrow. It was as high as fifty percent at one point last year when there was great uncertainty around all of the turmoil in crypto generally, and now it's a single digit and there are now other products out there that we can use to gain exposure to bitcoin in this moment, and it's just a moment of uncertainty between now we think and January January eighth to tenth, somewhere in that range perhaps, but well out of an abundance of caution, didn't want
to take any risk.
And I mean, let's get a little bit specific here, because we're talking about the ARC Next Generation Internet ETF. The ticker there is ARC W and I think what caught a lot of people's attentions is that you completely sold down your remaining stake of the Grayscale Bitcoin Trust. Instead on the same day you bought into the pro Shares Bitcoin Strategy ETF. Of course, that tracks bitcoin futures, it doesn't actually hold the physical bitcoin.
Can you explain that shuffle? What was the thinking there?
Sure a couple of things.
First of all, Biddo with pro shares is already approved. There's no regulatory uncertainty having to do with it, so we chose to maintain our exposure through biddo for the time being. And as I mentioned before, there are some tax and regulatory uncertainties still as part of this process. We don't know exactly who's going to be approved and whether they've met all the criteria that the SEC has put before us. We know we have, but we don't know if others, including GBTC have We just don't know.
So again, out of an abundance of caution and gbt's discount again it was as much as fifty percent relative to NAV. So not only have we enjoyed this year the run in bitcoin itself, but we've had the nice closing of that discount, so it's been double good news for us.
But you've talked about January tenth, Kathy, I think in another report, is that possible, whether it's you or somebody else, in terms of the first spot Bitcoin ETF actually getting approval.
Well, we think the probabilities have gone up because the SEC has been highly engaged compared to what was happening before.
Before it was just denying.
Approval, denying approval, and we just kept putting our filing in again, you know, try, try.
Try, dogged and determined, and so here we are.
We think we're first in line, and that's why there is this January tenth deadline.
But we like the idea that the.
SEC has been so engaged, and it's not just with us, it's others as well. We think a number of a number of funds could be approved at the same time. And they've been asking not only one set of questions, but follow up questions, and again that's a very good sign.
Well, speaking of engaged, Oh go ahead, please, no, no, no, no.
The last few questions have been very technical and so more dirriger and you know, you'd expect them to be asking these questions as we head toward an approval. Now it's not one certain and so we want to make that clear as well. This is the SEC, and we never know, you know, what might happen along the way.
Regulators can be tricky, that's for sure. Hey, listen, you mentioned engagement. Let's talk about engagement with your funds overall, and especially the ARC Innovation Fund, up seventy two percent year to date, easily outperforming some of the major market benchmarks, still down sixty five percent from the high back in February of twenty twenty one. For you, though, a lot of critics, we bring up your name, we bring up ARC, and you have a lot of fans, and you have
a lot of critics. There's a lot of discussion. Does it feel though a little bit like a victory lap this year?
Well, you know, we are very happy that a couple of things have happened that this idea that interest rates we're going to continue moving higher has been proven incorrect.
And I think even the.
FED, while there is that small possibility, even the FED is now starting to talk about the other side of the interest rate movement. So I do believe all we've seen so far is a reaction to that macro phenomenon
or judgment call. We went through our flagship strategy, and all of our strategies went through a very difficult time from February twenty one through December of twenty two, as interest rates, first of all, were presumed to move up or forecasts move up, and then when they did move up, so it was almost like a double discounting.
And so we've seen the first.
Installment of the.
Correction.
There to the upside for our funds with this notion, and it's again the forecast that interest rates will come down, and we would presume that if they do come down for the reasons we think they're going to come down, the most important one being deflation, then our funds will be in good shape because we are very our companies thrive on deflation technologically and bold innovation is deflationary.
So, Kathy, a very good morning too. It's Manus the first time we've met on So we're going to move to a deflationary environment. We'll come back to the big macrocoll in a moment. Just let's square it away before I talk to you about the flows in the funds, which is how much interest rate cuts do you presume? Are you forecasting? Leave the forecast of everybody else's side? Well, what do you what do you presume what happen next year?
Well, we put up a chart in one of our in the in the Nose, which is a YouTube video that I do every every month Employment Friday, and in that chart you will find.
A ratio.
It's the metals to gold ratio, so metals price to goal price, and there has been an extremely tight correlation between that ratio and long term interest rates. In October we published it or early November, and what you will see is that was a very wide gap that had developed. The metals to gold ratio was near its low for the past twelve fifteen years, and interest rates were at their highs five percent.
The correlation.
If you just eyeballed that chart, the correlation suggested that rate should go to two percent. Now, maybe they won't go all the way to two percent, but we think that long term interest rates are way above where they're going to end because of deflation.
Okay, well, let's we'll come back to that and see why that we get to the two percent level. I've got to ask you about the flows into the funds, which is obviously you know, as Kyl just said, you've got a bit of a victory lap going on at the moment. But this is the first year of outflows. Have those outflows stopped. You've had a great performance in the back part of this year. Have the outflows stopped and has that bleed stopped?
Yes, Well, we were very gratified at our asset retention in twenty one and twenty In fact, we had net inflows if you combine both years of more than eighteen billion dollars and this year one, what might expect that those who average down into the very steep declines that we were seeing in twenty two.
Especially might take some profits.
So we have had I know, for our flagship strategy, it's roughly five hundred million dollars in outflows, maybe for all of our strategies one point eight million, so maybe ten percent of the inflows that we enjoyed during twenty one and twenty two. So again, we're very gratified and grateful to our clients for the support that we continue to receive.
So has the iflow stopped.
We have had days of on balance very recently, yes, And I think part of this is many people do tax management towards the end of the year, and so some of the outflows might have been associated with clients who got in at a high cost base and we're just harvesting some tax losses.
But I think we're through that.
Do you find a little surprising though, Kathy, considering the run up or do you I'm curious about the conversations you do have with investors considering the year that you're having, and then to see those flows, it's got to be a little disheartening.
Yeah, oh no, no, no, no, not at all.
Actually, we put out a piece for a resolute our distributor who and we basically showed them, if you rebalance our strategy when there have been big moves one way or the other, if you rebalance regularly or based on a rule, like when the fund's up fifteen percent relative to everything else, take some profits.
And what it.
Showed that study showed that if you are disciplined that way that over any rolling five year period, it is highly likely almost one hundred percent, I'm not quite sure if it's quite that high, but that you will beat the market, meaning as measured by the Nasdaq or the SMP over a rolling five year period. And so a lot of our funds are with advisors who are very sophisticated and responded somewhat perhaps in this tax management part of the year to that message.
Kathy would founder, CEO and CIO of ARC invest She's joining Manis, of course, and Katie and myself here on Bloomberg Surveillance Kathy, I feel like we can't talk. We
have to talk about Tesla. An Elon Muska, I know you just had a conversation on Twitter X. This has been I think from day one right in terms of you starting out that you've had this investment in Tesla, and I remember when we first talked and you were getting started, you talked about him being the next Thomas Edison and how his vehicles would turn the US economy upside down. Having said that, there's an evolution and the eed world has changed, how are you thinking it's still
a top holding? How are you thinking about the Teslas story right now?
Well, first of all, Carol, thank you very much for letting me interview that time.
That was nearly ten years ago.
Arquet is about to celebrate his tenth year anniversary and you gave us that opportunity, so thank you. The world is evolving, actually, I think even more closely to what we expected, because we expected a lot of traditional auto manufacturers to see the writing on the wall and rush as quickly as they could into scaling big time into electric vehicles. And what has happened recently both GM and Ford have said we're stepping back. We're not going to
do this until it's profitable. The problem with that is, in order to be profitable, they need to scale.
That's how this works.
These are learning curves that they are writing down, and those are expressed in cost toclines. So the fact that they're pulling back means there's more share for Tesla and others who choose to go for it and CAVI.
I want to keep the conversation going on Elon Musk, but I want to bring it to the Arc Venture Fund. Of course, it's not an ETF. You invest in private companies etc. In there, and you take a look at the portfolio. You have SpaceX in there, and you also have X formerly known as Twitter. And in July you had told the Wall Street Journal that you had written down your Twitter steak by forty seven percent. Fill us
in on the past couple of months. Have you written it down further or how has that changed?
No?
I think it's still there. You know, we have to be very careful. This is an interval fund. It is a forty act fund, and we have to mark to market every day. The good news is our clients can get in and have access to these amazing companies for just five hundred dollars and they get quarterly liquidity, so that's the good news.
The markdowns are.
Simply you know, if we see in the secondary market employee stock trading at a steep discount, we have to take that into account. If we see others in the more traditional asset management work world, like Fidelity and others marking their holdings down, we need to take that into consideration during our daily mark to market. So it's an abundance of caution. We have a five year investment time horizon.
Do we think that's.
Where X belongs in terms of valuations? Absolutely not, absolutely not. A roughly twenty ish billion dollar valuation for what we believe truly will become the everything app think we chat pay. Elon started his entrepreneurial career in the payment's industry, and he's been thinking about this for a long time. He now has money transmitter licenses in more than half of all of the states, which we've learned on Twitter spaces or on x spaces, i should say the other day
when we had our interview with him. So that's exciting.
He's going for it.
He's going for it. We'll see if that one lands.
But let's talk a little bit more about the private markets, because obviously the private credit market has gotten a lot of attention. Right now, you're looking at the private markets through this interval fund that you have, when you think about the opportunities there on that five year horizon that you have, do you see more so in the public markets or in the private markets right now?
Well, now that we've had this very nice run this year, we think the answer to that question is in the private markets.
They're close. They're close.
What's fascinating to us is that the public markets have been the private markets for the past three years. As our funds were were falling in twenty one, private evaluations were going to all time highs along with the Nasdaq. They were taking their cues, I suppose from the Nasdaq, but real innovation, if you looked at our portfolios, was starting to revalue to the downside, and even more so in twenty twenty two. We are still seeing major down
rounds taking place in the private markets. And I'm always surprised at this sort of thing because you would think that the private markets lead the public markets. That has not been the case in the last few years.
Hey, Kathy, I've got to be honest with you. I think whenever we think about Elon Musk brilliant but also erratic. And I'm curious how you think about Elon the individuals versus Elon the companies he's creating the things he's doing, because I think if there is time, any other CEO of a major publicly held company would I think it's safe to say not be able to get away with
a lot of what he has done. So help us educate us how you make sense of it of someone you have followed, talked with for many years.
Well, first of all, very often we just look at what he does, not exactly what he's saying, which can often be a distraction, or it can be an advertisement for his cars or for X or for SpaceX and so forth. But we have a scoring system as we are evaluating companies and their founders and their management teams. And there are six metrics and one of them is mote and barriers to entry.
And I think Eylon is a.
Maestro of raising barriers to entry with innovation, which that is so much faster than anyone else. Why Because he's so first principles physics driven in his analysis of how to approach a new idea, A big idea.
So tell me this then, Kathy.
I mean, if you look at the cohort of the CEOs that you back, Brian Armstrong, does he hit that bar?
Is he above Elon? Or is he at the money?
You've got Elon, You've got Brian, You've got Tony Wood at Rocco.
Does anybody come close to Elon?
Or is Brian Armstrong maybe even at the money with Elon or above?
Well, we don't actually look at the world that way, one relative to the other.
In terms of management teams, we do look.
From our scoring system at the scores, which include mote management, people and culture, execution of valuation that might surprise people, and product and service.
Leadership and thesis risk.
Those are the six scores, and both well, all three of them score very highly. Which one scores the highest. They're actually very close to one another.
To be honest, they're very close to one another. So, I mean, obviously Coinbase is one of your key holdings. We've talked a little bit about that. The other feature that we want to talk about is AI. I'm curious to know in open AI the valuations have ranged between eighty billion to one hundred billion. Will you take a position in open ai. Is that going to be part of your holdings as you explore the next development of AI and your holdings well.
In our private portfolios, we are already exposed to Andthropic, which has been a major beneficiary of the drama around open ai that we all witnessed a few months ago. But if you look at GPT four, which is the latest large language model that open ai has published, it is way above others in terms of performance. So there you have it, the pros and the cons. So we can't tell you what we're going to do in that portfolio, but we are so impressed at how open ai has
led the industry. We're also impressed, however, at the open source models, and we'd like to encourage.
More of that movement.
We know that Meta Platforms has with Lamaitu and it's working on others, is moving very quickly and making great strides. So for much lower cost open sources, free companies can get close at GPT four, but close. So we want to see the open source movement in the venture fund. We also own.
Kathy Oh sorry, no, no, no, We never have enough time with you. Can I ask you really quick question? Five seconds? An ATF's coming our way from you guys next year.
Well real quickly, as you may know, we bought a company in London.
Yeah, they have some very interesting funds.
All right, Gonna leave it there. Like we said, we always leave our audience wanting more from you. But we so appreciate all the time you gave us. Happy New year of course. Kathy Wood, founder CEO CIO of ARC Investigator. Let's do what Lara Raim has to say. She's chief US economist at FS Investments, joining us on this Thursday. Lara, great to have you here with the team. So let's go to jobless claims. First of all, is that significant in terms of that uptick?
So this one month of readings is not significant. But this indicator, to me is one of my most watched indicators. The fact that it's been low really Carol uninterruptedly for months and months now to me says that while their concerns about you know, the labor market renormalizing or people are starting to talk about tracks in the labor market, when I look at this indicator, I see companies still really eager to hold on to workers. They may be
taking more time to rehire if somebody's lost. They may be, you know, a little more rational about job openings, but when it comes to layoffs, companies are very closely guarding their workers, and I think that has big implications. It has had throughout this last year and going into next year means that it's one of the reasons why the economy has been a lot stronger than and a lot of us expected.
So the labor hoarding continues. I want to ask you about Joemo replacing Fomo, what exactly are we talking about.
My idea for the coming year is that, you know, the business cycle lives and dies around the consumer, and the consumer has just been surprising with spending strength throughout this expansion that is still a very young expansion. The FOMO, you know, we have to now's the time to spend. We put it off, we have to go take the trip, buy the car, whatever it is. We're going to find a way to do it. That is going to be replaced by a more moderate sort of Joe Moo joy
of missing out. It's just a way of saying that people may choose to have more staycations, they may start to be a little more budget conscious. That's not to say that household budgets are in trouble, but we know that credit card debt is high now and interest rates on credit cards are unlike home mortgages, they're not fixed right, they are moving up fast. So it's this idea that over the next year, we're still going to have a
healthy consumer. We have a healthy jobs market. We are not going to get the consumer in contraction, but you're going to have a consumer that's maybe a little more moderate and maybe decides that they can wait a little bit or defer some joy instead of taking it all.
Right now, I think we have a new T shirt and hat and a coat.
Joe needs to make itize weaponized fomo.
This is our guest the other day.
By the way, our guests the other day said that we all had weaponized. We have weaponized formo. But now you've christened you on Joe, mo.
I love it.
It's almost like it can be a boy band or or a band of a band of many.
I want to know.
Catch on by midyear.
You won't believe it.
You are in the camp of uncomfortably high inflation in twenty twenty four. Now does that just mean we get stuck where we are because the disinflation has been really quite quite aggressive. One could say, but you say we're going to get persistently high inflation, what is that going to do?
Is that going to mar the sort of.
The clarion call for multi rate cuts of one hundred and fifty basis points in the US?
I think, I think we do get stuck where we are, and I would argue that where we is uncomfortably high. And I think it does three big things. The first one is that it keeps this wet blanket on consumer sentiment. You know, we've seen this trend of households spending a lot, but also in surveys being very downbeat about the economy.
I think that gap has to close, and I think it closes more towards spending decelerating, and part of that is the inflation picture and partly the housing affordability picture too. The second thing it does is give the FED less room to maneuver. I don't think that, you know, six rate hikes in a non recessionary economy is a likely outcome.
I could see them strategically trying to cut rates, but the reality is that with inflation where it is today, it's very hard for me to see them just making the deep sort of programmatic costs that they do when we're seeing a recession. And the third thing it does is really challenge fixed income investors. I think everybody looks at you know, the two year four and a quarter, they think that this is a you know, it is a multi decade high, is right? It seems like a
very good investment. When you think about inflation at four percent versus two percent, your real return is much smaller than you'd think.
Should we be talking about the possibility of another rate hike here? You mentioned that against this sticky inflation backdrop, six rate cuts maybe looks unrealistic. Is there a possibility that the Fed has to hike rates again in twenty twenty four?
You know, I was one of the last holdouts saying that they would raise rates in the fourth quarter. Obviously that didn't happen. I think from here, they're messaging has really changed. They've talked about rate cuts being not an if, but a when. So the more likely scenario to me is if data really surprised the upside, or we get you know, inflation data that really harms their you know,
goals to cut rates, they would instead just hold rates steady. Here, I think it's important to harken back to the mid nineties, and this is something that I really cover a lot in my outlook for next year. Over forty years, we do not have a good roadmap for non recessionary rate cut scenarios, and the mid nineties is one of the only episodes they cut three times over eight months, and then they waited almost a year and they raised again. So we have to be really, I think careful. We
just do not have a good roadmap. History is never a perfect guide, but in this case, we are really, i would say, in much more unchartered territory than markets believe.
Today, flying blind to some extent. There so clearly a communication challenge for the Fed. Let's talk about the balance sheet, though, because that's one of the big questions, and Paul did get asked about this at this month's meeting. What happens to the balance sheet if they do try to do those sort of fine tuning rate cut and continue to roll off the balance sheet on the you know, from the outside looking in, that appears that the Fed is
working at cross purposes. How are you thinking about the balance sheet in relation to their primary tool of interest rates?
I think you bring up an important point, which is again speaks to the unique nature of easing monetary policy. When we don't have a recession, it looks really different. And I think, first of all, the FED would like to get out of the balance sheet manipulation game. I don't think it's a place where they've been comfortable, so I think, to the best exset that they can, they'd like to de emphasize that as a policy tool, and I think that's what they're trying to do right now.
But I also look at the broader treasury landscape, because over the coming year we need to roll to almost ten trillion nine point seven trillion dollars of treasury debt the matures within the next twelve months. Three years ago that was only five trillion. So when I look at long term interest rates, my expectation is that we will continue to hold or this drift up pattern throughout the next year, sort of holding the same three fifty to
five percent range that we held this last year. And the reason for that is because you know, we think about the YO curve today deeply inverted, but if we do get a soft landing.
That will probably correct at some.
Point through some rate cuts.
But also some drift higher and long term interstrates a very different outlook.
Twenty seconds really quickly. Are you rolling out a recession for the US next year completely?
I'm not completely rolling out a recession, Carol. I think so many of us tripped on the landmine and now feel a little bit shy to come out and talk about a recession next year. I think the risks are still elevated. We need to look at traditional bank lending, We need to look at the lagged defects of higher interest rates. My forecast, though, is for slower growth, not a recession.
All right, On that note, we're going to say happy New Year, Lara. Always appreciate all the time you give Bloomberg, Lara Raim, of course, of FS Investments.
Mona Maha jan is standing by senior investment strategist over Edward Jones.
A very good morning to you.
The nasdag's up fifty five percent, The S and P is desperately trying to make a new record high. Do you think we're going to shift a little bit more aggressively into the new year to a full bull mode or will there be you know, a bit of pulling back Once Pole and the other fed members get into jawbony mode in January.
Good morning, Yes, thanks Manas, And certainly you've brought up probably one of the key points that we've been thinking about in recent weeks. Now, Look, certainly this has been a phenomenal probably eight weeks or so for the S and P five hundred, and you have to kind of you can't ignore the fact that the nature of this
rally has shifted a bit. You know, we started the year really driven by that Magnificent seven, a large technology trade, and over the last few weeks we have seen a broadening of participation, whether it's value cyclical parts of the market, whether it's small and MidCap parts of the market, whether it's bond markets, all of which have played some catch
up in recent weeks. We think that's a healthy sign. Certainly, a lot of ingredients came together to kind of drive this rally forward, and that included not only inflation moving lower, but a FED that told us they're likely to pivot next year, and of course bond markets and bond yields that moved substantially lower. Now, to your point, as we head into the new year, one we know markets can't move up in a straight line. Indefinitely. And two, you know,
you give the markets an inch. FED talked about three rate cuts, they take a mile. Markets are now pricing in about six rate cuts for next year. So we do think as we head into the new year there could be some sparks and bounts of volatility, especially as the markets and Fed FED go head to head on this, and we do think the FED will push back. Keep in mind, the first FED meeting is January thirty first, there will be speakers between now and then as well.
We think they do take that opportunity to push back on the six rate cuts that have been priced into the market. Our view is we probably still get three to four rate cuts next year, but they don't start until later in the year, especially as a FED does want to see that core inflation number move lower from four percent to probably sub three percent.
A lot can happen in a month before that first FED meeting. Having said that, I do undermoona how we've been spending so much time this week. It's kind of quieted down, but we've been watching very much what's going on geopolitically. How does that potentially complicate what the FED needs to do here?
Yeah, you know, look It's been an interesting year in geopolitics, and certainly one way that that has manifested is through the oil and energy markets. And certainly, when the Israeli Gaza conflict first hit, we saw an immediate move higher in oil prices, and we've seen since then a real
cooling in oil and energy. And perhaps part of the reason is one that those players alone are not substantial oil producers, but two, maybe there was this whole building that the conflict would not escalate, and so we did see an easing and oil and energy prices now that is probably the closest asset class we're watching as geopolitics
unfolds in twenty twenty four. Our hope is that the direction of travel does continue to go towards de escalation rather than re escalation, and that would be positive for stability in the oil and energy markets. So it's something we're watching closely. Certainly the FED, we'll be watching it from an inflationary perspective, especially as oil and energy plays
a key component of headline inflation. But as we think about volatility heading into the new year, for those investors that hadn't quite participated in this last few weeks, we would say any volatility really provides an opportunity for investors to get involved and position for potentially a continuation of this broadening of market participation.
Also important to the economy is, of course, what the consumer does. Ultimately, we still see a relatively tight labor market. Having said that, we got to read on weekly job list a little bit of an uptick, certainly today's. But we talked with Larra Raim earlier who talked about companies still holding on to their workers. They want to do that. Can the consumer, as we talked earlier, moving from FOMO fear of moving out to JOMO joy of missing out.
Maybe they've got bills to pay and they're going to hold back. Can the consumer continue spending in the new year.
Yeah, it's a critical question. And I did hear the Joemo phrase and I loved it. You know, we we also are in the camp that the consumer is facing some headwinds heading into the new year. And you know, keep in mind we are coming from a very strong position of strength from Q three of this year where GDP growth was five percent nearly in consumption was four percent roughly, and so from that high level, do we
think there could be a potential for a slowdown. Yes, keep in mind for the consumer, excess savings have been worked down. We are seeing still elevated interest rates, mortgage rates, you know, despite the recent cooling, and of course bank lending standards remain tight. Credit card debt, as we know, is mo higher, and we're seeing some early signs of delinquencies as well. So, all that being said, some challenges facing the consumer as we're heading into the new year.
But we know the US consumer likes to spend and does you know, does and can remain resilient in the face of some challenges.
Consumer right to the very end, the last consumer to put their credit card away.
Hard to bet against the US consumer.
But I want to bring this conversation back to the markets because you mentioned participation, and something that we've been talking about all week is that six trillion dollars that's sitting in money market funds right now, and many a bowl case has been built on the idea that basically you'll see that cash come out of money market funds and venture into risk assets, venture into equities and fixed income. Is that your view as well, or maybe a little bit of caution around that one.
Yeah, you know, we do think that part of the money that has flown and it's been a tremendous inflow, and you mentioned the six trillion dollar figure into CDs and money markets. We think some of that money now is starting, you know, as CD money comes due, as investors are thinking about reinvestment risk, we think there is a case to be made that the money that maybe would have flown into your CD in money markets will now start to flow into more traditional asset classes like
equities and bonds. And certainly there's a couple of reasons for that. One of course, as a FED is potentially embarking on a rate cutting path, we will have reinvestment risk too. There is an opportunity cost to sitting in cash, and hopefully investors are starting to see with the SMP up twenty five percent, but even the bond market rallying close to five percent in recent weeks gives you a
run for your money for traditional cash assets. And then thirdly, you know, over time, over any thirty year period, we have seen historically that cash has been a lot class. So sure as we are thinking about our portfolios that we're not too overweight cash and cash like instruments, and we're strategically you know, allocated so that you can kind of meet and exceed long term investment returns. And we do think this year in particular will be a great
one to compliment. You know, we understand the reasoning to get into these CDs rates are higher than we've seen in recent history, but that could start to be trending downwards and good time to start thinking about complementing CD money with traditional equities and bonds.
Well, just to sit with this thought a little bit longer.
The pushback to that argument, basically that you're going to see cash come off the sidelines that we've gotten is that you think about that one trillion dollars that's come into money market funds just from March, of course, and the banking struggles that we had, then maybe that's going to be stickier than usual, that it won't be you know, this additional fuel that for equity markets and risk assets that maybe we've seen in the past. What's you're thinking, Does that hold water with you at all?
Yeah, you know, I do think we are going to see a different portfolio construction in the next you know, call it five to ten years. Even given that FED funds rate are likely not move back to the zero bounds, so you're probably looking at a FED funds rate over time of three percent, and so in that environment, treasury yields are probably somewhere between three and four percent themselves. And so this idea that you had to be all in inequities or all in in growth even probably doesn't
hold over the next several years. So we think there's better balance between your equity and bond portfolio, and there is more room for cash like instruments that are yielding attractive values. And so you know we'd say is make sure that you are thinking about not only equities, but think about investment grade bonds to complement some of that money market cash like instruments. So we do think there is a place for cash and CDs, but we think
that it's important to think about investment grade bonds. Not only are you locking in some of those longer, better yields for a longer period, but you get the potential for appreciation if fields continue to move lower as well. So just some kind of alternative.
Just on those investment grade bonds, just briefly here before we go, is perhaps an alternative to equity exposure in the mag seven if you want to diversify more broadly away from MAG seven on the equity side, Can I look at the IG bond side off the MAG seven as perhaps a slot on the board that the IG component makes up.
Yeah, you know, that is a very interesting call out, and I do think that's a way to play it as well, if you're thinking about some of the growth parts of the market and want to play it from the bond perspective that you know, these are the companies that are very cash rich, that will probably make good on their investment grade bonds, and you know they will likely not often need the bond market to raise cash, so when they do, it's a great opportunity for investors.
So we would say, you know, investment grade bonds in the Magnificent seven or broadly in the technology space is a great way to complement your portfolio as well.
ownA thank you so much for being with us point.
Jeff You is senior market strategist of it B and Y Mel and we do want to talk about what we're seeing when it comes to this global bond market rally. Jeff, does it continue into twenty twenty four?
Well, broadly, looking at the easing cycle, I guess bonds will do well. You know, we're seeing that our underlying flows, the people are going into duration that has too much been priced in too soon. I would say for the Fed yes, I would say for the ECB no. So going back to your point by Madam Leguard about Chair Powell that all pushing it back against easing right now, I would just say these pushbacks, some are a bit more credible than others.
So the pushing back Leguard is desperately pushing back. We're just showing some treasury yields at the moment. Across the world, we have this global bond market rally. So you say we're going to get more easing from the ECB than the market expects, because right now it's pricing in one hundred and seventy five basis points. So what do we get and what does that do to duration in Europe?
I don't think it's about the amount of easing. It's more about timing. So they're pushing it back out when they are easing. I think market pricing of starting around March and or the meeting after that, so the second or the third meeting, I think that is a credible view. And then we just go from there. That's sticking with the ECB. In know, one other thing to look at in the context of duration. They announced more QT you know, unminding the PEPP starting the second half of next year.
Will they be in a position to actually execute that is the mark at going to be ready for supply even though they do want duration right now. So quite a few moving parts at this point. So yes, there is a duration plan they're heading into next year. But just to put things in context, so we saw like standard three four standard deviation moves throughout December. It's going to be very hard to repeat that heading into January. So after a correction, yes, I think flows thin head
back in. But then the race that you mentioned it truly begins, and I do think the FED is going to be losing that race in terms of who cuts first.
Okay, so they're possibly going to have to go first and go earlier. Does that say something more malevolent about the scale of recession here in the United States of America? Thankfully you've studied the PSALM rule. I haven't got the depth of quant knowledge, Jeff.
It does for us.
Can you quiz manas because that would be a lot of fun.
Actually, it indicates when global recessions. Yes it does look Jeff, you're on.
Nescient in this regard. Just run us through for our viewers. What is the sum rule? What does it matter?
And where is the worst shirt globally recession wise?
So looking at the strict definition, the three month moving average of the three unemployment rates in the US rises by zero point five percentage points or more relative to the low during the last twelve months, right, So that's explicit definition there. So applying it to Europe, you know, which is what we're really focused on right now. Oddly enough, UK and Sweden really are not doing too well in
that respect. The UK, I'm quite poorly. But just to put things into context, so this rule can also be satisfied if the prior employment levels or the an important rate was far too low, so the labor market was excessively tight, which in fairness that had been in certain European economies, then you could have that push up them as well. But overall, going back to the hard landing soft landing push, I think the US definitely in the soft landing camp, but for Europe is a bit mixed
match right now. Overall, I think we need to focus on the fiscal side in Europe, can journey get past this constitutional wrangle with regard to the budget, because what you don't want is fiscal contraction into a cyclical downturn. But that, to be honest, is what Germany is looking at right now and they really need.
To resolve it. All right.
I hope you guys wrote all that down because there is going to be a connected I've.
Got the print I here with the highlights on it.
You know, don't on the phone right now.
We'll awquise each other. But Jeff, let's stay in Europe. I want to go back to what you said about basically the ECB's credibility because obviously the market is pushing rate cuts and just today I thought it was interesting you had Government Council member Robert Holsman coming out and saying rate cuts in twenty twenty four they aren't guaranteed. Of course, he's one of the most hawkish members there. But still this pushback that you're seeing from the ECB,
it's just not landing. What does that say about the ECB's credibility here?
Well, if in facial data keeps on surprising to the downside, which it really has been over last them two or three prints. Then your credibility is damaged. We saw it on the way up, right, Transitory is transitory, transitory all the time, and it turns out it wasn't transitory. So that's when you use credibility. So the last thing central bank is anywhere right now? What is to have lost some credibility on the way off and you lose it on the way down as well. So this is where
they need to be reattuned to right now. So I just questioned, what is euro dollar doing up here? Yes it is a fed story, but can you justify having a very strong euro right now with the exports environment very weak? Mentioned China being quite weak as well, and also we've seen a downturn in the labor market as well. You look at job openings in France and Germany, they
finally started to soften heading into December. So that services element in Europe, which and logata that have been holding European wages up, that seems to be coming off as well. Look at the PMIS, so again it's really difficult to justify based on the data the hawkish retric at this point.
All right, Jeff, So I'm going to go into Japan Bank of Japan. Right, We had some comments from the governor saying that that the BFJ can reach a judgment on policy before complete wage figures from small and medium sized figures come out. He did an interview with NHK. So, how are you thinking about Japan this policy of negative rates that has been in existence for so long. Do we start to see some kind of shift in twenty twenty four?
Can they actually do the shift?
Will absolutely have to shift, and the end is going to be very much on part of that equation. We do see a material drop in dolly en, so the end is going to be one of the best performing currencies heading into a next year. And also, let's just go back to what they're actually doing, so leaving the rectric aside, they're tweaking their bond purchases as well, leaving more scope and for yields to go higher. So it is happening. They will do it at their own pace.
Judge it on data, judget on wages, as you mentioned, but they know that importing inflation via weakergain that doesn't work anymore. It is a problem and it is going to be one of the tweaks. Well, the major shifts heading into next year, and to be frank, Asia needs
it as well. So on top of that, if the yen is allowed to strengthen, I think it will allow a lot of other central banks in Asia to let their currencies move a bit more as well, especially on the strengthening side, especially those still with a bit more inflation to worry about. But now that's going to be the central story in a pack of course, on top of whatever China does with respect or growth, the.
Two hours are going to define what happens to the dollar recession and rates. Your call is a soft landing, and the market has one hundred and fifty hundred and sixty basis points of rates cuts. The question I have for you then, is soft landing in the United States of America? Is that short the dollars sell the dollar on the rates at and a risk on narrative? Does that define a lower dollar twenty twenty four So on a trade.
Weata basis dollars absolutely peak right, But pick your dollar shorts carefully, and there's still plenty of opportunities for dollar long So like euro dollar, I think she'd be heading back to parity. You know, given what I've just said about PCB easing timing cuts and then the Fed's going to be later than that. So I certainly will not be short the dollar on the euro leg dollar versus Asia. Just mentioned, you're probably the dollar's going to soften a
bit as well. Also on a trade data basis. One of the two most important trading partners for the US closer to home Canada and Mechs and those are going to be very very interesting pairs as well. And I do think Latin American carry trades, they run their course. Bank of Mexico going to start easing rapes, so the dollar can pretty much hold its own maybe against Canadian
dollar and the Mexican pace. So and that is going to be material for US financial conditions as well, especially for the exporters.
Jeff, you're a rock star. Thank you so much, really appreciate it. And happy New Year, Jeff, You and b and Y Melan joining us. Ellen Wall she follows the energy markets, has for a long time. She's senior fellow at the Atlantic Council and author of Saudi Inc.
Ellen.
Great to have you back here on Bloomberg. So how are you kind of adding up some of the tensions that are happening in the Middle East. We're talking about stockpiles here in the United States. What does it mean for the energy markets.
One of the important things, at least that I'm taking in is to kind of pull back and look at the larger Middle East geopolitical picture here.
And if you kind of step back, you'll.
Notice that there have been apparently one hundred and three separate attacks on US troops across the Middle East, even in places where at least I wasn't aware we even had any troops, and that's a very large number. Then that's been since I think October seventeenth, and to me, that says that things are kind of bubbling under the surface,
potentially escalating. And then on top of that, you've got iraniant drone attacks on chemical tankers in the Indian Ocean, and you've got this Red Sea situation which is just.
Getting more and more tense by the day.
Like you said, you've got half of all container shipping is avoiding the Red Sea. And then when you look at the oil situation and the oil product situation on top of that, I think there is a real risk for Europe here, not that they won't get the.
Products and the frude oil they need, but since.
They're no longer buying from Russia, they're basically either importing from the Middle East, so now that a lot of that's got to go around Africa, or they're importing products, say that are made maybe in India from Russian oil, that's also got to go either through the sus Canal or around Africa. Now, so we're talking about longer transport times, higher costs, higher insurance costs, and just a general higher risk And to me, like you said, that sends.
The idea of inflated prices, though.
Of course we've got to balance that with these higher stockpiles.
Well, let's just focus in on the Red Sea. We have this coalition and a hefty coalition of defense trying to help shippers return there. You flag a concern about to what extent will this coalition actually be prepared to protect the maritime fleets going in there, because the last thing the Coalition of the West wants is a deep escalation, So you dite the teeth of this coalition of protection exactly.
I think that the fact that it's been assembled does not necessarily mean that it's going to do anything. I think there's been a lot of hype about kind of the coming together of this coalition. But to me that says too little, too late. Where was this coalition last month when container ships and tankers were being attacked, And it doesn't seem you know, it's one thing for the who this to say, Okay, we're going to attack Israelly
linked ships. Now they're just basically attacking anyone. A tanker that was going from Pakistan to Saudi Arabia was recently attacked and had no links to Israel or anyone else.
So to me, this says that they're going to continue to be They're going to continue.
To step up these attacks and at defensive positions. We've got US destroyers in the Red Sea trying to basically intercept these attacks as they're happening.
That may not be enough.
In fact, it's looking like it's not enough for most of the shipping industry.
And Ellen you lay a very febrile image in my mind in terms of what's actually going on, and I think we're so physically far away from it. Sometimes we don't really understand the level of risk. Why such a phlegmatic response from the energy markets in that case? Is it just thin volumes? As Carol said, or is it now this will pass. We've seen these flashes in the pan before. We don't need to worry that much. Why such phlegmatic response in the energy.
Market, That's a really great question, And I think it's a combination of the high production levels from the United States. There's a sense that this, you know, thirteen plus million barrel a day production is just going to offset risk, which I think is a bit of an oversight. Then you've got you've got the fact that nothing has happened before. And then you've got the fact that I think it's in the interests of the Biden administration to avoid a
larger conflagration at all costs. But on the other hand, they may not be able to do this, and the risk of a conflict, while still low, is not zero at this point, and I do believe that that number is getting higher the longer that these attacks on international shipping are allowed to go on.
Well, Ellen, given that that is a non zero risk in your view, I mean, you think about the war premium to borrow phrase from manas that's priced into oil right now. Should there be more of a premium priced in I do.
Think that there should be, particularly as we go on in the year. We're at a period now of generally seasonally low demand. But as we head into say April May, when things pick up, do you think that that premium unless if this conflict has not been resolved by then, you know that premium should definitely be much higher, particularly if OPEK plus is going to continue to hold barrels off the market.
How much higher? Ellen give us a quote.
That's a good question.
I don't like to predict oil prices, but I wouldn't be surprised if it's if it's more than several dollars a barrel.
I do think that it's that.
This risk is being underestimated now, and I think that the fact that that US supply and the fact that we know OPEK is holding so much oil off the market is kind of negating that geopolitical risk.
At the moment above eighty she's bushin.
I'm not going to say no.
All right, wow, that would be a very different trade than We'll change.
The dynamics for the White House as well, in terms of refilling the SPOR can tell you that on the price comp Ellen.
Wall, thank you so much of the Atlantic Council. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday, starting at seven am Eastern, on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg Terminal. Thanks so much for listening. I'm Carol Master, and this is Bloomberg