This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. You do a book and like, that's okay, that's a big deal. But then if you do a second book on the same topic, you're like an authority. He is an authority. Thomas Orlick has out understanding China's economic indicators. It's a good book that doze off to. But when you're done with that, you can wake up with China The Bubble That Never Pops. It is now the required read as
the Bubble Pops China, the Bubble that Never Pops. Joining as sant, Thomas orl like driving all of our economics as well. Did you ever think Tom Orlock it would get as bad it is now, where basically the President of the United States President g of China has to directly intervene to put a bit under equities. Was that imaginable two years ago or twenty years ago.
The Chinese stock market's a strange beast, Tom. I think it's important to keep in mind a couple of things. The first is that there's a signal there. The fact that China's stocks are amongst the worst performing in the world this year is a gauge of the weakness in China's economy. At the same time, it's important to remember that China's stock market, whilst kind of symbolic of the economy, is not the economy. There's not a lot household wealth
in the stock market. Businesses aren't raising a lot of capital by issuing shit dares. So, yes, this is scary, Yes, this is a bad sign. Yes, this is why t jimping himself. We here is planning to intervene. But it's not quite the catastrophe for China that it would be in the United States. The S and P five hundred was down so much.
Right now, we're clear in a market in New York City. It's called office towers and you know, we have a whole process bankruptcy or transactions whatever to clear. They don't have that structure. How does a totalitarian regime clear a distress market.
So it's a really interesting question, Tom, And actually I don't want to sign two kind of Pollyanna. Everything's fine about this, But part of the problem here, part of the short term pain, is that China is moving to get rid of that problem of moral hazard, get rid of that problem that investors believe that the government in the fire analysis will stand behind all the banks, stand behind all the real estate developers, and prevent them from failing.
It's the removal of that implicit guarantee, which is actually one of the big causes of stress and pain in China's markets and economy right now. But when they get through the end of it, and there's going to be a long process, we think the property correction still has a couple more years to run. In economy and markets without such a severe moral hazard problem, well, hopefully it'll be an economy and a market which is prime to grow and rise again.
Hey, Tom, I know President g and other Chinese leaders over the last six months or so we've been courting Western investors Western countries kind of arguing about or supporting the investment thesis for China. But there are a lot of investors, not just em investors are saying China is
uninvestable because of the China risk, the government risk. Do you sense that is that the government of China understands that and that they're willing to make any types of changes to be more receptive to Western investment.
So the China investment story has got I think three really big problems. The first big problem is that we've gone from an economy which in nominal dollar terms was growing about twenty percent a year to an economy which in nominal dollar terms isn't growing at all. That's significant negative for investors. The second is relations with the United States. Ten years ago, twenty years ago, you put your money
in China, there wasn't that geopolitical risk. Now there's the risk of tariffs, the risk of sanctions, the risk of political blowback. The third challenge, as you mentioned, Paul, is that investors now believe that Beijing doesn't have their back, right, and I think it's that piece of it which she and his premiere and other members of China's leadership are now trying to row back from the trouble. Is those
other two negatives falling growth, increase, geopolitical stress. They're still there, and that means the mood music remains pretty pretty challenging.
What's the expectation, Tom, I kind of think about, I guess, what's the expectation that this Chinese economy can fundamentally turn itself around. I think of, you know, just the demographics of China just don't bode well for the economy longer term, and I'm wondering, you know, what can the government do to really turn this economy around.
So when I think about China right now, I think about a really significant negative in the real estate sector, and I think about a really significant positive signal in the electric vehicle space. Right real estate is collapsing. We can't sort of put lipstick on the pig. They've got massive overcapacity there. It's going to be painful as they work through that, But this too shall pass. Right by twenty twenty five, twenty twenty six, they'll be through the
worst of this property correction, the electric vehicle story. I think what that speaks to is China's longer term potential, China's economic miracle from nineteen eighty till today. It's not been based on real estate, it's been it's been based on moving up the value chain from textiles to toys, to leadership in high speed, trained sustainable energy, and now
electric vehicles. And it's that story, which, if it's sustained, means that China's economic miracle, while not what it was, is also not overin.
To clear the market. And let's assume they, you know, as they've done before, they just write off refund where's the money come from to bail out the property market? Do they just print renmnby? Is it that simple?
So I think there's a couple of things to say here, Tom, is that China is a high saving society with a closed financial system, and what that means is that the banks are almost always really well funded. Think about the Lehman collapsed in two thousand and eight, where money fled from the big banks in the United States. That's just
not going to happen in China. So that sort of funding crisis, if you isn't going to be an issue for bathing now, clearing the market, getting rid of the bad investments, getting rid of the bankrupt property developers, that's the process which China is in right now. And yes it's extraordinarily painful. If you're holding an Evergrand bond, you've lost a lot of money. If you're waiting for a Chinese property developer to finish building your house, you could
be waiting a pretty long time. But at the end of that process, China is going to have an economy with less moral hazard, less dependency on building houses which no one is going to live in, and more opportunity for folks like the electric.
View going to be time. He sounds like you know, he sounds or like, I mean, he's got this downb cold. But what's a timeline on that workout? On a Hyachian basis, they got to clear the market. Is it like an or like one year or is it a four year or is it a perfect date to a party congress.
It's always nice to time things to these moments in the political calendar, isn't it.
So?
Look, this is kind of an art rather than a science. The Chinese data is not perfect. There's lots of uncertainties there. But by our estimate two years ago, China was building about twenty thirty percent more property each year than it needed to live in each year. Now we're about halfway through that correction. What that suggests to me is there's a by two years more pain in China's properties.
Actor Tom Rlick never enough time. Thank you so much. I learned a lot there informative on China as well. Look for his wonderful book. Arthur joining us. Now we see a good one goal of you on economics, finance, investment, and also the correlations, the linkage of all this, and no one's better at it than Andrew Sheets of Morgan Stanley joins us. As we discussed the linkages of the market. Andrew, I saw a stockbond correlation that was wackle. It was like the needle pegged, and that it was an odd
and strange time. How odd and how strange is this time?
Yeah?
Thanks, thanks Tom, It's great to be here with you. You know, look, as I think you've discussed in this program that the stockbond correlation has moved around a lot
during history. There's a lot of evidence, you know, certainly kind of prior to the nineteen nineties, we're stock and bond prices moved together, i e. Lower yields were generally better for stocks, and then you know, more recently it's been the other way around, where stocks have generally preferred higher yields, And you know, I do think a good way to frame that is previously the markets were more worried about inflation, and obviously both bonds and stocks like
lower inflation, and more recently we've worried about growth. So I do think the performance this week was was fascinating. Right if you look at Wednesday where you saw this big draw down inequities with the FED kind of pushing back on March. I mean, yields fell, you know when that happened, So this wasn't you know, Oh no, the Fed's not cutting rates, are not going to be low
enough to support stocks. That was not the message of the bond market, and I think it was much more about concern around around growth, concerned that maybe the FED was ignoring some of the weaker data earlier this week. So I think we've seen some stronger data. I think ultimately that will be the best path for market.
Paul, I can't emphasize enough what Andrew Sheet said there, how important it is, and that the financial media I'm as guilty of this. Paul is not guilty of this. Lisa Montail's an angel on this. We're addicted to the parlor game, the fed, the monetary ballet, and what mister Sheets just said, there is hello the real economy, maybe the new burgeoning productivity as well.
Absolutely, Hey Andrew as a cross asset strategist for Morgan Stanley. Where do you see the greatest opportunities here? When you sit down with your clients, where do you see the greatest opportunity? What do you suggest a focus here across assets?
So I think you know the this is not going to be an easy year. You've seen a big run up in prices in November and December, and in many cases those prices rapidly move towards targets. We thought, you know, you get to by the end of the year. But but I think there are some still some opportunities. You know, we think Japan is an equity market that still has a good cyclical and structural story. Cyclical because the economy
remains quite strong. You have some of the cheapest cost of capital in the world still, and then a good structural stories. You still see corporate reform. A number of the lad Am equity markets are relatively inexpensive. You have policy easing cycles. We think some of those could still be relatively attractive, and then it's not nearly as exciting. But you know, in an asset class you know I'm
calling talking to you here in Europe. You know, European investment grade credit spreads are kind of at the twenty year median, which doesn't seem all that bad considering you've got reasonable growth, you're going to have easing of ECB policy, a very light supply, and I think that's another area where investors can teak out some extra return.
You can do this on the Bloomberg Professional Service. The Equity Index in Japan ye in ye end you're up ten plus percent, double digit return. Nice. If you're in dollars, as I believe I am, it's not quite as good, up seven point six percent, so you're not two hundred and fifty beeps off.
Hey, Andrew, you know, when Tom and I began our Wallster careers way back when Japan was the bomb. You had to be there, you had to work there, you had to have exposure there, you had to have you know, people there. But man, we haven't heard about Japan in like thirty years. But now in the last year or so, I'm hearing Warren Buffett, I'm hearing Andrew Sheets of Morgan Stanley, people talking to me about Japan. Why are we talking about Japan now?
So I think it's a fascinating example that you know, markets move in in waves, and I do think at one level, right you have, Japan is a very interesting part of this global economic story. You know, if we use the full Goldilocks narrative, you could argue China is at risk of being too cold, there's not enough inflation, the US and Europe are more in the middle, and then Japan is hot. Japan is the market that is going to be raising rates on our forecast this year.
So I think that puts it in an interesting part of the macro narrative. You know, valuations have risen, but they're notarticularly extreme, and I think that's still a market where we see more corporate efficiency to be squeezed out. And I think you've seen a push at the corporating government level that's that's pretty unique and pretty rare that we think can finally change that narrative frame.
Out the real yield. Had a wonderful evening last night with Tracey Loa and Joe Wisenthal Andrew Sheets, and my first question within their wonderful event was went downtime? Well, I went, you know, Andrew Sheets came on just because he celebrated. I went below fifty seventh Street. Someone's ever heard of that? Andrew the real yield frame out the Morgan Stanley view or the Andrew Sheets view on what we do from one point nine zero percent? Do you just see a lower real yield?
So I think the Morgan Stanley view here is quite clear. We do see a lower real yield. And you know, I think that that will be driven by our thinking is that that will be driven by clarity that policy is sufficiently restrictive, that core inflation will continue to come down. And again, if we think about you know, what is one of the more surprising stories over the last six months. You know, a lot of last year was driven by
fear of this last mile of inflation. We could get down to three, we could never get down to two. You know, six month annualized core PCE in the US is one point nine. I mean we've kind of made it. I mean it will still be choppy, but you've come a long way. So I think as the market gets more confident that policy is sufficiently restrictive, it will become more confident that real rates do not need to be
this high over a longer period of time. And I think that's where we think the most kind of value is. So we're estimating really yields being somewhat lower. And then conversely, I think as you move closer to the election, you might get more concern around inflation longer run inflation expectations. Could you see larger policy fifth there, So if yield were to rise due to political uncertainty, we think that
comes through much more. Is more likely to come through the inflation expectation side of the yield than the real real side.
Hey, Andrew, just in fixed income last year, I was surprised to see that the best performing fixed income area was high yield. And with all the talk about recession and it's right around the corner you got to be worried about. I was surprised to see how yield does so well. Where do you see opportunities in a fixed income space here in.
Twenty four So I think that's absolutely right. High yield was a surprisingly strong asset last year and benefited a
lot from the surprising strength of the economy. You know, I think again, if we go back to a lot of investors, and you know, we certainly fell victim to this somewhat as well thought that you know, you were in more of a late cycle market last year, or a market that would be more have more growth risks associated with them, even even as our economists expected the soft landing, and so high yield really benefited from from you know, the economy going down that more positive middle
path of avoiding those recessionary concerns. And then you know, hy yield as a low to ration asset, so as yield sold off, it benefited. So you know, that's I think one explanation for the strength that we've had. You know, the challenges yields have spreads of tightened yields have come down, So you know, I think when we look within high yield,
we do have to be somewhat more more selective. You know, we do think the loan market, where threads have lagged, if if higher for longer loans can do somewhat better. You also benefit potentially from some refinancing of loans into bonds.
And then while it's a much more difficult to be kind of strategic about it, you know, triple C credit has really lagged, and so you do have this market and the one hand is seeming to embrace a soft landing narrative, and yet the kind of riskiest, most economically sensitive part of credit has really lagged in the US in Europe, and I think that could be hard to sustain if if the economy really is okay.
Andrew Sheets, thank you, it's been too long with Morgan, Stanley and Londons. Just thrilled to have a mind. Peters shere's one of those young guys. He joins us right now. Real holistic view on the market with Academy security. Peter. Is it a bull market? And by that, I mean, do you see the exuberance in the silliness that comes always with a bull market?
Not quite. I don't think. I've been thinking we saw a little bit too much exuberant. I've been a little bit concerned that we were topee on the market. I would have to say some of the data, especially jobs last week, is making me reconsider that we've seen an uptick in the economic data since the middle of January. Yeah, and I've been in this blowing economy's view and I'm rethinking that maybe I'm missing something. Maybe we can really sound to be strong, in which case is plenty of
room for the rest of the market to run. Are with some of the big tech maybe's gone too far?
Peter? Are we aneuittizing cash flows? In that the romance here and the rationalization and whatever the pe multiple is depending on the sector, is that corporate leaders are having persistent day after day, tick after tick casuals like say the Apple app store is just one example. Is that part of our bullmarket feel?
That is definitely part of the bullmarket feel. And I would have to say, though, one thing that does give me pause for caution, though that could keep running, is when you have a trillion dollar company gain twenty percent or two hundred billion dollars in market cap on Friday. It really makes you question this market sor efficient or not. Now, maybe we have that stock way under price, But that's
just a move that struck me as odd. It might be significant that we could get more, but it's certainly odd that we can be mispricing a company by so much. Collectively.
Yeah, that was a great Bloomberg piece on Friday, noting that big, big move up in marketcap two hundred billion dollars, and of course mister Zuckerberg has a big shareholder benefits there. Talk to us, Peter. It's just kind of about valuation here, when I feel like we don't talk about valuation enough.
We had this big, big move up in the market in November and December, I don't recall a commensurate increase in earnings per share for the S and P. So I'm wondering, are we stretched your own valuation?
No?
I think two things are happening to me when I'm looking at valuation. One seems to be people have now just accepted that big tech can trade at a much higher pe maybe than it did in the past. It felt like last year people wanted to be underweight, that people spot those highps. It seems like that fighting's going away, which is a contrarion tells me maybe it's trying to be a bit cautious there, and we have gotten away
like I liked it. In late November, when we finally started seeing small tech rally, we saw not small tech small caps rally. You saw a bank's rally, and you really started getting this fixation on valuation. Hey, I can buy these things that lower multiples. These are interesting companies strong free cash flow, and that discussion dictated. So I'm waiting for a sign to get back into those because they've underperformed a lot this year. It is what I'm
looking at. And the one thing that does strike me somewhere in between is I look at ARKK so Arc kind of as you know, yep, weird tech, and that struggled. So people are being a little bit discerning, right It's not like it was during the peak of COVID, where anything with the story was getting bought. This is really a little bit more specific, which gives me some comfort that we're not going to have a major pullback and that we have some upside if these other stocks really
start catching you know a bit. Again, are there.
Any sectors out there in the marketplace that maybe screen well for you right now?
I love the commodity space, commodity commodity RATEDTOX. I think we are doing reshoring. There's deeopolitical pressure. I think we're finally getting our story together, our act together on sustainable energy in that for the next ten years we're going to build out sustainable but we're also going to build out traditional energy sources. So I think the energy is great and for a trade I like China right.
Now, Well that's where I wanted to go, Paul, excuse me, Peter, I need to go to China with the admirable securities differential, which is a huge board commitment by our American military, the thought of Academy securities on China and on the new projection of the United States the Pacific Room.
So longer term, nothing is really changing. There is a high degree of friction, and there are going to be levels of technology we will just not share with China, so that is not changing and it's probably going to expand. So I think biotech chips, all those are going to be at issue with China. We are having the separation. I think everyone wants to figure out a way to work together. It's going to be tricky though to figure out where on that chain of technology you're comfortable with.
And what still appeas is China that they want to do business with us. So I think long term there's struggles. Short term, we see it as a potential opportunity, partly because I think alile G may or may not be a dictator, he does have to cater to his middle class to some degree to remain in power. We saw that when we went from COVID with awful in China, there are some protests and all of a sudden COVID
restrictions were lifted. I think he's going to do something to do boost markets and the economy because he cannot afford to have that middle class supper and maybe rally against the party.
So you're optimistic of action by Beijing when you look at all the resources at Academy Securities.
Yes, I think near term he has to do something. It's for his own political party, for his own staying in power, and that will propel market and right now China is so er invested. That's the opportunity.
Peter Cheer, thank you so much with the Academy Securities. Many choices today in the headline's Lisa, where do you start?
All right?
Starting with the Wall Street Journal, there's been a shift in the retail real estate market. So it's happening in Europe now it's starting to happen in New York City. I want to point out a couple of them. You have Prada. They've agreed to buy the building on Fifth Avenue where their store is, the building next door as well, for more than eight hundred million dollars. You have Gucci's
parent company. They're paying about one billion for a retail space just you blocks south of that, and then LVMH they're reportedly and talks about that Fifth Avenue retail space that's occupied by burned off.
I wonder if they're getting deals now, I mean, because you know, you just think real estate down commercial real estate can't be strong here, so maybe they're getting some some deals here relative to three or four years ago.
It could and I mean luxury goods there are sales are up, so they have the cash, you know, to do it. And it just makes sense because they're paying so much rent, especially.
When they when they know, I mean, Pols the only one that shops over there. But the answer is it's from fifty seven Street ish yep, sort of down to Sacks fifth Avenue, right, I mean the goal is to get down to Rockefeller Center. And is a basic tone is that's going to have a complete revitalization off of COVID.
Yeah, it's supposed to, because what they want to do is set their mark. You know, they want to know that they're going to be there hundred years from now.
As opposed to paying rent exactly, and it just keeps going.
Well.
I think it's great. It's a great validation New York City. It's great validation at Midtown Manhattan. And when you see some of these these serious retailers, you know, investing their capital in Lewis Viutona.
I mean the rumored number is they put one hundred million dollars into Tiffany.
Yeah. Oh that's a great run.
I mean they did a renovation.
Yeah.
And I think next door is the Nike Remember the Nike store. The kids would go in there and lighten your wallet, right, I think that's like a Deor store now while they wait to rebuild the you or something like. Okay, I can't.
Contract them, all right, that's good for Fit, that for Madison.
Antay.
Way too much luxury talk, missus, missus King's listening this morning. Anytime, Lisa, you're in trouble, anytime you mentioned Rada, it gets me in trouble.
Go it's good, all right.
We're going over to London right now. A lot more people there opting to rent rather than buy because they don't want to pay Britain's high taxes. A lot of workers on short term contracts there. They're also working out where they want to live. Some still aren't sure yet. And because of that we talked about rent rising. Yeather, the rent is rising over there too in London for
a place to live. The average prime rent in London increase three and a half percent between December twenty twenty two and December twenty twenty three.
All right, I've got this is for Tom Keane. The living room of a four bedroom, four bathroom apartment in London's London's fashionable Chelsea neighborhood, which is where Tom would want to be potentially, if not. Mayfair listed with estate agent Chesterton's for thirty seven nine dollars.
Per week per week.
That's the rent.
Yes, that's the rent. Because you don't want to buy over there necessarily right now, you maybe want to rent? Is why is what's happening?
I don't even know from a lot of people. I don't think it's just London, but you know it's it's it's sort of basically out of control. And there's no other way to put a stagger on to our last idea.
Yes, super Bowl commercials.
Here we go. Super Bowl potatoes can be NonStop super Bowl to what Monday of next week are you off Monday? Take you take the super Bowl?
Rich?
Are you off Monday?
Who's off?
Yeah? You've booked that in when you thought the Giants would make it?
Thinks all right the second you're in a row. The average cost of a thirty second ad spot during the Super Bowl seven million dollars.
Right.
But this a lot of businesses though they're tightening up their budgets and marketing, but not for their Super Bowl because Paul knows this is the one time like this is the big show, this is where they get the most eyes.
Why Because everybody's audience has been fragmented across every single medium, which makes the fact that one hundred million people are going to watch an event, any event, which in this case is the super Bowl, you just can't get it anywhere else and you can't put a price to thave
on that. So not only has CBS sold their spots for about seven million dollars a spot, but I guarantee you they've got three or four spots in their back pocket that they haven't sold, and somebody's gonna come in on Thursday and say I have to have this for want a new movie's coming out of whatever ten million dollars.
So we know, is is crypto big now? Like remember it was the dot com nonprofitable dot com money spending their you know, Paul would go to a lunch bringing I p O money and they spend it on a super Bowl then and now it was crypto, right, Is there like a theme this year? Is like ai, I.
Don't I think it's gonna be a lot of the there's.
Like seven Apple are we in there?
Yeah?
I think you know, I talked to Reto keeper the MX we could run that puppy, so seven million bucks?
Yeah, how about that? So I mean, but you're paying a gajillion dollars.
For that, Like a lot of people, a lot of it's it's breaking up, like some are going to stream like a lot of shows are going to streaming. There's marketing and streaming. There's marketing in regular you know that Where is the money? Where do you get the most bang for your buck? That's what they're looking at.
I still don't get the streaming model. We've really enjoyed watching the Spielberg Hanks Vehicle Masters in the Air about World War Two. It's just out, you know, you watch it.
I'm into episode three.
Yeah, yeah, But Paul, I still don't get the math. What did that thing cost? The answer is, I mean one hundred million plus.
Yeah, I mean the cinematography and that thing and the quality of that production of this message year is unbelievable.
My nine dollars a month or whatever is paying for.
The I don't know.
I you told me that was in a movie theater on the Upper West side Lincoln Center. I'd go over there with one or two or three people. I'd pick twenty something dollars per ticket.
Popcorn podcast.
You know, on the way out, I'm spending sixty sixty five bucks. They're doing it on nine dollars subscription. I don't get it.
I don't get it. So you know, but again, that's the streaming model. Netflix makes plenty of money, plenty of profit. We can see that. Everybody else we have no idea, and we well, we do know that they're losing money, but when can you get profit?
This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.