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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Let's bring in Margie Bttell of Oscaring Global investments. She wrote that in twenty twenty five, I expect another decent equity year, although not with the total performance that we have seen this year. Admittedly, the market looks rather frothy. I'm pleased to say Margie joins us now. Margie, thanks so much for spending some time with us on this holiday shortened week. What are you seeing in terms of the frothyness? Where is it most prominent?
Well, I think it's not so much in the stock market. I think you can see this manifestation.
There's actually a lot of liquidity in the financial markets.
You see it in crypto, you certainly see it in real estate.
You see it in the explosion of private debt and private equity, which has been a big boost to the financial markets. And it's really kept the law of the Fed's actions out of the control of the FED because.
It's been in the market. Not like the bank score things are typely regulated.
But as far as a stock market, I'd say it's reasonably price for another decent year next year.
Talk a little bit about the interplay between those private assets, whether it's private credit or private equity to a lesser extent, and what that means for money flowing into equities.
Well, I think that the first thing is if you think we had the FED make the biggest increase in its history in short term rates from basically zero to five percent in eighteen months, and yet we didn't have a recession as result, that tells you that the money flows in the financial system really isn't under the bank sump, under the bank sump and the Federal Reserve supervision the way it used to be. So you've seen a lot of companies that needed liquidity could actually go to these
private markets and get these terms period. And also better terms than.
They could have gotten in the public market.
And so I think that's why you could say, well, the pe is high, you know, nineteen times something like that. But really, when you look at the profit goos under that and compare that to our treasure yields are it looks rather reasonable to me.
Well, Marguie, one of the byproducts of the FED raising short term rates, as you mentioned, from zero to five percent, is that cash looks great here, yields are relatively high, and on money markets even still, you have seven trillion dollars sitting in cash right now.
It feels like for the past couple of years.
People have been calling people moving off of the sidelines back more fully into risk markets. Do you see that actually happening when you take a look at all that money market action.
Yes, I think you'll see a lot of towel throwing from the cash equivalent market, because if.
You look at it, if you got a good yeald historically and.
Cash just year, say four or five percent, But on the other hand, the equity market was up fifteen to twenty five percent, depending whether you look at value names or more growthing names. That's a big disparity for investors and I think people have been hoping and actually believing that we would have a recession. The recession hasn't come with the FED at least stable of a problem cutting race. It's very hard to see how we can have a
recession in twenty five. So we're thinking one and a half two and a half percent economic growth, maybe even surprising on the high side. And I think that's going to draw money out to say, how many years do you want to leave that much of a spread on the table.
Well, Margie, let's say that you have been sitting in cash, you've been over allocated, and now you have the luxury of having a lot of money here to deploy. When you take a look at the relative values of the different asset classes, specifically when it comes to fix income to equities, where's the best opportunity right now?
Well, I think it's ad equities. Even though we've had two terrific years. I think that if we have the e.
Connery growing, you know, two plus or minus percent maybe on the high side, that should allow corporate profits to be up to say ten or twelve percent. Just to say, world this year about thirteen percent, even though we had more modest economic growth, So that says if that's your target on likely you turn on equities. When you look at fixed income treasures of say four and a half percent, if you look at high.
Yield, you're only looking at say six and a half to seven and a half percent.
And because we've had rallies in the fixed income market, those bonds are really trading in a very small discount from parsave around ninety eight cents on a dollar. So there's an automot of.
Capital appreciation in the fixed income world.
By the same token, defaults have been very low, so you have been taking much risk when you dip down into below investment grade. So I think that still says opinions over on the equity side, we're return should be higher.
Okay, So with inequities, do you go with what's been working all along, the defensives in this case MAGS seven big tech type names, or do you go and maybe start picking up some of the underperforming sectors in the market, whether it's materials companies or energy companies, both those groups not moving more than one percent so far this year.
Yes, well, I.
Think that you really have to stick with the companies that have proven to have profit growth and a lot of that has been in the chech sector, some industrial sectors that have been tied to the big scenes electrification increases in data centers I think are going to continue to do well, and even in actually energy, I think that gas related names are going to continue to do surprisingly well because of benefit from the expansion and gas
is used to increase our base slow power capacity. But I think a low growing company when we've had a decent markets mostly, I think stayload groom. So it says you have to buy the quality by the higher price relative stocks because they probably will continue to have strong earnings in twenty twenty five.
You know, I look at the VICS and it spiked up to almost twenty eight on Wednesday after the FED decision. Certainly we saw equity sell office on bond sell off. It's come right back down though, now just about above sixteen and a half. Is the FED going to be the source of volatility in twenty twenty five or is it going to be the incoming White House?
Well, the FIT has been pretty dependable.
Is causing a lot of volatility in the marketplace by their actions that haven't really produced positive results.
So my money is the less offensives, and the more in the background they are, the better.
As far as the new administration, there are lots of exciting ideas, lots of frothy talk about what might happen, and we'll have to see how practical and how quickly some of these ideas that look favorable business can get through. I'd say the big positive is that there's no longer any talk about raising corporate income texts, which would have been a real depressant on the market had that gone through.
I think to have tax rates for corporations where they are even lower will be a positive factor for the soft market continuing to do.
Better next year.
Well, let's talk about the relationship between what we're talking about on the fiscal side and what that could mean for monetary policy. Torson slack Over at Apollo put out a note of risks in twenty twenty five yesterday, and it was nice because he actually put probabilities next to them. He assigned forty percent odds that the Fed raises interest rates in twenty twenty five. You aren't seeing that being
priced into the market at all virtually right now. Do you think that some of the things that we're talking about tariff's taxes, if those come to fruition, should we be talking about a potential rate raise next year.
Well, I'm not so sure about the teriff situation of how seman be imposed, what the immediate impact would be on price levels, But I think it is interesting to think historically you've often seen a second wave of inflation after first wave look like things were tamped down, and really when you look at these other signs in the marketplaces, so there's plenty of liquidity that says maybe inflation is going to be much harder for the FED to bring down to its target level of two percent.
So I think it's certainly.
I'd say forty percent sounds find that there is that possibility later twenty five if I could say this.
Isn't working, we need to raise rates.
Economies doing fine, So I think it's a possibility. But again, that would be if we had I think a pretty strong economy. The Fed's always very very sensitive about looking at unemployment rates and the economy before they act, but a strong economy, I think that's likely.
What is that spell for the back end of the treasury curve? Scarlet and I were talking just a few minutes ago about how there's been plenty of demand for the short end, and of course you can see that in money market funds, you can see that in the auctions. The long end of the curve has been a much.
Harrier place to be.
What's expectation in twenty twenty five in terms of duration volatility.
Well, I'm not looking for any big spike up in the long end of the treasury market because although I think for domestic investors we tend to want to be shorter in maturity with things like treasuries and municipals, but I think that globally there are many investors international entities that would like that very very long duration because there aren't motip places where a long term investor can get very,
very high quality and long duration. So I don't think that's going to be a problem that they can always change what they issue if there looks like there's pressure
and one part of the curve or not. But really the issue is the amount of financing that the fit has to do because of the very very large emphasis, meaning that you might have a little bit in my opinion of saying excess supply in the treasury market versus the stock market versus even corporate bond market high yield market where there's a relative supply scarcity, and I think that's what's driven spreads in the corporate market narrower, because
there's been people want that extra yield and the supplies rather limited, lot of it been hogged off into the product mark. So I think that says to me that yield spreads are likely to get narrower and we're not going to have any big spike in the long end of the curve. Foreign institutional investors and also the fifth being able to control what they would just should and keep that under control.
Yeah, you've really outlined some of the big, big technical issues that investors need to contend with, whether it's in equities or in fixed income. Margie, always a pleasure. Thank you so much for joining us. Happy holidays and happy New.
Year to you.
Margie Battel of Offspring Global Investments.
Brian Peterson of Flexport, writing, We're seeing strong demand for ocean freight.
It could be driven by a multitude of factors.
Fear of a potential i AL strike and tariff increases earlier than usual, lunar new year, plus a strong economy. Ryan joins us. Now, Ryan really interesting there. When you think about this increased demand for ocean free you name a number.
Of factors as we just walked through.
Is that taking share from other methods or is this just the pie growing bigger?
Well, I think what you're saying is a pull forward, So it's taking share from the future that people are trying to get goods in before a potential strike or tariffs.
That if you're concerned about those things, which you.
Should be, that you know and you have the option, you have the flexibility your supply chain, you want to get the goods in as soon as possible to avoid the disruption.
And how much can we draw on the experience of the twenty sixteen election and the first Trump administration when it comes to mapping out the potential impacts of some of the tariffs that we're talking about.
Yeah, I mean we've seen this movie before.
In many ways, the tariffs weren't as disruptive as people maybe expected them to be. Their tariffs have existed, you know, throughout all of human history. It's basically how government's always funded themselves.
So people are able.
To adapt to this. It's not huge shock, but it is. You know, the big thing right now is the uncertainty. It's like what exactly is going to hit, When is it going to hit, how is it going to hit. So, for example, this just this week, the President of Mexico actually imposed large tariffs against imports from China, and to
everyone's surprise, those actually affected Mexican fulfillment centers. So these are e commerce warehouses who are not shipping into Mexico but import to Mexico in order to ship, reship the re export those goods to consumers in the US. That's a huge way that US e commerce has done is actually out of fulfillment centers in Mexico. And this morning, you know, the largest or last night, late last night, the largest fulfillment centers in Mexico had to like email
all of their customers and cancel all their contracts. So a lot of American businesses are scrambling today to find new new fulfillment opportunities, new ways to serve their customers in the US, even though it had nothing to do with the US government.
Yeah, and that feels like a complete card. So when something like that happens, basically someone throws a deck of cards up in the air. How long does it take for a new normal to be set in place.
The fun part about working in logistics, we all figured out many years ago there's no such thing as normal, and we got to be ready for whatever happens.
So it's every day a new thing.
It feels like between the you know, the strikes and the Red Sea disrupting ocean freight, you've got tariffs, You've got a drought that's affecting the Panama Canal. Sort of, you just have to be very nimble and agile if you want to run a supply chain in the modern world.
Yeah, makes sense.
Going back to the tariffs question that Katie was posing, the details, of course, are TBD. We don't know when, we don't know how much, but we do know that some form of these tariffs are coming on imported goods into the US, and the mechanics are pretty clear in terms of teriffs tend to reduce demand for these imports, at least if you're American. But you also point out that we've seen a decrease in ocean freight rates from
China and that could be an offset. So walk us through how that what that might mean for goods that are being imported from China, and how manufacturers think about that.
Yeah, Well, see, our ship freight rates have been quite high throughout the year, sort of two to three times long run historical averages. And this is in a market where the supply side of the market, the number of ships at operation in their capacity, has has ballooned. There's been a huge number, a huge deployment of new container ships that as these carriers made a lot of money during the last cycle during COVID, they reinvested that in new ships. So one would predict with this huge surge
of supply that the price will come down. The only reason that hasn't happened is because of the Red Sea. It's absorbing capacity as ships have to go around the southern coast of Africa. If anything is to be done and allowing container ships to return through the Red Sea, that will instantly bring the price of motion freight down by two thirds or so, is our guest, maybe more, probably saving companies four to five thousand dollars per container.
That or that's a pretty big deal. The average value of an ocean.
Container at wholesale the goods inside of it is probably one hundred thousand dollars, So if you're talking about twenty five percent tariffs.
That's twenty five.
Thousand helps a little bit, it's not going to get you all the way back there. The twenty five thousand dollars per containers are pretty big blow.
Yeah.
Absolutely, And I mean, as we've been talking about, there's a lot of unknown here and spoils about the levels that we're talking about, the final levels, whether or not we get deals negotiated with our trade partners. But when it comes to actual tariffs. In your notes you write that there's basically only two ways that businesses can deal with new tariffs. They can absorb the costs themselves, or
they can increase their prices. And the businesses that you work with that you speak to, what are you hearing so far about what path they're actually going to follow?
Yeah, well those are That's a very simplistic way that, you know, trying to simplify things for everybody. I think that's true in a very short run, you know, if you've got goods on the water coming here and not much else to do but hey, tariffs, and then you have to choose whether it make less money or pass it on.
But in the medium term, there's a lot of strategies available.
You can by the way make goods in the United States, and you don't have to pay the tariffs.
UH.
You know, you may own the raw materials, but you won't on the on the finished goods, which is most of the value. You can make goods in other countries that have free trade agreements with the United States.
UH, there's there's tariff engineering.
So by understanding at a very detailed level of partnering with your customs broker like Sarah Flexport, you can understand the raw materials and how those UH create the duty rate, and if you change things, you may get a different duty rate.
So there's a lot of.
Opportunity to uh to reduce tariffs over the medium term.
And I think companies are getting really smart.
About this thanks to the last cycle, all of these strategies you've been deployed.
UH. People is if you didn't see this coming at all.
Sure, people weren't sure that Trump was going to get elected, but by the way, Biden's been increasing tariffs too. So I think people have been preparing for this for a while and and and should be in a reasonably okay place to adapt to it.
Well, Ryan, where are we on the near shoring slash on shoring narrative, because that's been a big push over the last couple of years, especially gaining steam in the pandemic.
But you know better than most people that.
Supply chains are pretty uh slow moving animals. They take a long time to actually shift and move them.
So where are we on that push it?
Yeah, it really depends on the sector.
I mean, there's a there's a massive amount of industry real industrialization taking place in the United States right now, but it tends to be much higher value goods, higher complexity things that where and the deployment of things like advanced manufacturing robotics. But for low value goods, what you're seeing is that the shift down to countries like Vietnam to Mexico as well, but even cheaper countries like Vietnam
and Cambodia. India is having quite a boom right now and exports, so it's and then and then certain things. You know, China is still just a rate country at manufacturing, and there are certain sectors where even with higher tariffs, it still makes economic sense to produce there because of the quality and the scale of their manufacturing capabilities.
And you see it.
You know, I was in China not too long ago, and the quality of their cars is remarkable that even with high tariffs, I think for much of the world, people are gonna still want to import those cars. They're so much cheaper and better than what's produced domestically in most countries.
Yeah, and at affordable prices. No less too. Ryan, as you speak with your customers, what is the number one worry that they have for twenty twenty five beyond tariffs, because that is a big unknown and it kind of hangs over everything.
Yeah, I mean, short term, it's definitely this isla, the strike on the East Coast that's looming over our heads. We had that back in October for four or five days, and then the Biden administration stepped in and kind of told them, hey, knock it off before the election, So they got to stay until January fifteenth, and extension of the contract five days before inauguration. Obviously, so we are very much in crunch time for what happens with those negotiations.
My latest understanding was that the two parties weren't even speaking to each other to get you know, so the odds of.
A deal seemed kind of low.
The demands of the union right now is not just no more automation and higher wages.
They've already achieved those.
The carriers and the employers have agreed to that, but they're asking reverse automation, actually eliminate automation that already exists.
All right, Ryan, great to speak with you and get your insight. That is Ryan Peterson of Flex Support. We have Stuart Kaiser of City Writing. Our preferred vehicles would be large cap tech.
Quality and growth.
Given the higher for longer nature of the SEP forecasts looking further ahead, payrolls on January tenth are a major catalyst given last month's data, the SEP update and markets pricing just two cuts in twenty twenty five and a ten percent chance of a twenty five basis point cut in January.
And please just say that.
Stewart joins us in studio right now. It's great to see you in person, Warnie. So I want to talk about higher for longer trades. We're back to talking about that after palace performance last week. Is that the right conversation to be having going into twenty twenty five.
Hi, it's the right conversation if you believe the FED. I think if you're worried about risk reward that you're probably worried about, you know, the unemployment rate kind of rising a little bit, so I mean the FED kind of guided you towards unemployment ras king a flat Now. Inflation is sticker that we would like, but it's going to come down and they're going to do a couple insurance cuts next year. That actually sounds a whole lot like the front half of twenty twenty four when large
cap tech and growth did really well. So I think that the Fed's prescription would be to be in those stocks. The risk to that, I think the market is is kind of questioning a little bit this idea that the unemployment rate is going to be as friendly as that is.
Well, you write in your notes that the SEP, of course the dot plot as well, was equity positive at its core, and that stuck out to me because the market reaction was not positive.
So walk us through that a little bit more.
That fewer rate cuts in twenty twenty five maybe actually good news for risk assets.
Yeah, I think ultimately the market will come back to that view. I think what happened last week is the market was kind of had coalesced around the idea that we had a strong growth environment. What the Fed did is it kind of sprinkled in or added in a little bit of additional CPI risk, And I think the market traded that negatively last year was that the Fed seemed to be a little bit concerned about the pace, you know, with which CPI is coming down.
You also went into that.
Print with a very very strong, you know, equity momentum, very very long positioning and things of that nature. So I think what you really got is the core of the statement and the core of the SDP et cetera, was positive, but you added the new information was not super friendly, and that ran into strong positioning and you kind of got a little bit of a pullback. You know, our view on rate cuts is pretty simple as if you're pricing out cuts because growth is strong, that's good
for equities. If you're pricing out growth because of inflation, fiscal and deficit risks, you know that's going to be negative. So maybe the market interpreted that last week on the negative side of the ledger.
Well, whatever the catalyst is for yields moving higher, If yields on the tenure get to five percent or maybe even six percent, how do you expect that to impact equities?
I think, you know, yields get into five percent, you could come up with a good reason why the tenure yield can get to five percent, and that reason would likely be, you know, tax cuts, the regulation and a positive growth impulse. I mean, if you're talking at six percent handle, it's hard for me to see the ten you're getting to six for quote unquote good reasons. So again, I think if you if you go from four to sixty to five percent and that's coming from a good place,
I think equity markets are fine with that. We're a little bit more concerned, as Kadie mas Juri, with the really long end of the curve, because it's very hard to come up with a positive story why the thirty year yield would less they get to six percent. So I think it's it's that bond term premium and it's the long end of the yield curve that I think is is probably the bigger risk from a race perspective.
But again, I think it's the why that matters, and we're going to kind of stick to that at least for now.
In terms of the markets move it's been a fairly placid move up for twenty twenty four at least in aggregate. Talk a little bit about volatility, because you point out that implied volatility has gone from cheap to rich in just one week. What was behind that and what does that signal in terms of where we stand versus other asset classes.
Yeah, I think US secrety markets because of the rally, because of the relatively segue view on the FED coming in, you had US equity volatility come down substantially when the FED kind of surprised to Katie's point a little bit to the negative side, which you got, is that impulse kind of reversed itself. You know, we do think that that's going to kind of calm down. It's very hard to keep US equity implied volatility at elevated levels when realize VOLU is low, when when the market's you know,
kind of rallying the way it is. I think the really interesting thing in volatility these days is the correlation between the volatilities is broken down. So there's just been a lot more kind of idiosyncratic risk out there, whether that's you know, policy headlines in Brazil, what's going on in Korea, what's going on in China, you know, European elections, US elections. So really what you're getting is volatile atuity is kind of a little bit all over the place.
And our sort of recommendation there is if you're using volatility to head your portfolio hedge at home, you know, don't don't try to get creative and say, oh, I'm going to head you as equity risk.
With some China volatility.
Now that stuff just is it working right now, and I think you just need to be pretty conservative about how you approach that at the moment.
Yeah, it's been interesting, of course to see the VIS a little bit more elevated than the move index. Haven't
seen that too often over the past year. I want to keep going though on this relationship between the bond market and the equity market, because it feels like the Magnificent seven can handle anything except in video missing earning se expectations of course, But when it comes to other areas of the market, when it comes to the small caps in particular, that's an area that it feels like you really need rates to come down.
Do you agree with that?
Yeah, I mean, if you look what happened last week, I think I think small cap underformed the S and P by by three hundred basis points, So you know that smaller cap, lower quality, sort of higher or higher credit risk stock is going to be much more sensitive to the moving yields. And look how yield spreads also rose twenty basis points last week, So I think small cap kind of suffered from both higher yields as well
as kind of wider credit spread. So yeah, there are pockets in the market that are going to be much more sensitive to that. You know the mag seven large cap tech most of those are negative net debt stocks. Anyway, you know, the level of yields and refinance risk is not really applicable to Microsoft. So I think, look our view on small caps, but it's just a very tricky trade really for the last six months, because for that trade to work, you need a soft landing narrative to
kind of play out. Higher for longer is a headwind because of higher yields. If the economy slows meaningfully, then that negative growth impulse is horrible for small caps.
So small cap.
You're really kind of threading a needle here. You need kind of a soft landing growth narrative and a broadening out of earnings.
I'm glad you brought up that when it comes to the big tech stocks, the Magnificent seven, that their net debt extremely low.
And this isn't new, but it feels.
Like that subverts the textbook explanation of you see higher yields and you see tech stocks, you see growth stocks kind of go out the window because of of course, that longer duration debt. It just feels like market you can't really apply that old logic.
Well, I think you can apply the logic, you just can't apply it to the Mac seven. I think your smid tech stocks who have that longer duration, Yes, I think the rates can really negatively impact them. If you're looking at large cap tech, these are negative net det huge free cash flow, paid dividends, buy backstock, so you're not really as reliant on that long term earning florecast
as you used to be. I'd argue the duration of the mag seven is actually much shorter today than it was in the past, so they are a little bit less rate sensitive. You've gone to that smid area of the tech space, then yeah, I think there is still a lot of rate sensitivity there.
How do you think about the strong dollar and what it means for US companies and their ability to rely on overseas markets, especially with a president Electrump intent on imposing tariffs on incoming goods in order for US to be able to sell more goods to those countries. Certainly, a strong US dollar says one thing about our energy companies versus some of our consumer companies.
Yeah, the strong dollars, but it's been kind of a tricky one because is the strong dollar strong becomes of US exceptionalism, which I like, or is a drug dollars strong because of you know, some of the tire for and other risks. So in our review on the dollar is you generally need a pretty big move, and you need that move to be fairly sustainable for it to really start to get into US equities.
A seven percent move.
In twenty twenty four is pretty sizable.
Yeah, it is.
And I think if you look at if you broke down foreign versus domestic revenue stocks within the US, you have seen that trade actually perform, you know, quite well since the election. So I'm not sure it's going to impact the S and P at the sort of top level, but if you get below the surface and you really kind of isolate the stocks that are either from a supply chains perspective or a revenue perspective.
More exposed to it.
You are seeing that because you have seen a pretty big move, but that move has not been sort of large enough to disrupt kind of I think index level performance.
At this point, we've.
Really seen healthcare companies come under pressure now because of policy concerns, specifically anyone with a pharmacy benefits manager kind
of in the bullseye of President elect Trump. How are you thinking about this sector because there was so much excitement about its ability to leverage technology going forward, and of course the fundamental growth store behind healthcare expenses, but that kind of changes now with the policy angle that a Health and Human Services Secretary R. F. K. Junior would bring.
Yeah, look, coming into the election, our view is like banks is the clean trade, Both healthcare and energy are sort of much more nuanced from a sector perspective, And you know, I think the logic there and today is that find if let's say the Democrats win, you get broad based you know, healthcare spending. You know, that may be positive for parts of the sector, but they also,
let's say, wanted to negotiate drug prices. And now you're seeing from a Trump election win that you also are getting some mixed signals here where Yes, he may be positive for M and A and maybe that's good for biotech, but maybe he's a headwin for the farms and benefit managers or kind of the larger cap healthcare sectors. So we're seeing a lot of people hide out in medical technology, you know, to your point, that is still sort of an active theme. But the sector itself, I would say,
is a little bit discombobulated. And we're seeing a very similar thing on the energy side of things. So I think like those two in particular, they're very complex sectors and different you know, sort of gifts level two kind of industry groups are being impacted much much differently by the by the election outcome.
All right, Stuart, we have to leave it there. It's great to see you. Happy holidays to you.
That is Stuart Kaiser of City.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app