This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App. Short introduction Because every word matters, Jeffy you joins us, will be
n Y Melon Yes. Off their twelve page I'll look see forward of twenty twenty four, but far more on where we are, the interdependencies of everything that we're doing right now. How is our stability, Jeff you to get started? Are you worried about glide pass being stable forward? Or is there instabilities jump conditions out there?
I'm actually compared to a few months ago, you know, probably I am less worried about the instabilities. You look at how markets are reacting to geopolitics and other facets, and I think things are being handled pretty well.
I think we should be thankful.
That there was a nice loosing of financial conditions over the last few weeks.
Now, some correction is needed.
The question in the short term, the tactical play is do you play the correction of the correction that I think is going to be something markets need to deal with.
What's interesting in Damien is what I think doesn't matter because Damien says are is going time? Shut up. We got to talk to jeff you about higher.
Yields, about real stuff. I mean, look, Jeffy, you know your iflow macro investor themes piece is just it's required reading for anybody in the market. But I'm looking at two of your views here, the first being a view of the US Treasury tenure yield at five percent or higher. Obviously that's a steeper curve, but more importantly to me, you're a dollar down to parody before stabilizing. I mean, talk to us about that. That seems quite out of consensus.
It is out of consensus.
But if you look at what the euro curve is pricing right now, you're surprisingly so people ask me, okay, you see you're a dollar at parity. Do you see very aggressive ECB cards? I said, well, yes, but relative to what markets have been pricing towards era and no, I thought markets were adequately priced we were at one hundred and fifty basis points for the UCB. I thought
that was perfectly fine. But if you believe it one hundred and fifty basis points from the UCB, then what was zero dollar doing up here?
Right?
So I think that needs to be reconciled. Even if we meet halfway. I don't think parity actually is is quite a bold call at all.
Well, what's a bit of this way in fax? I mean the big heavy lifting models, those you know, relative value, those great differential relative rate differential models are doing a lot of the explaining in terms of, you know, how currencies are performed over the better part of not just the last year, but the last two years. Talked to us about carry in foreign exchange markets, Jeff, is it still going to be the driver performance in.
The short term? Not really, I think because things are starting to come off. You know, I look at our carry indecks. Are people buying Latin not as much as last year? If are they buying Central and Eastern Europe? Yes, over the last month, but that's coming off as well. We saw the news out of Hungary this morning. How but the dollar's role is very interesting. Last year it
was a carry currency. So you own dollar yield against CNY against the en, but you funded out of dollars against Brazilian real and Mexican pay so it was a funder and it was a carry name. This year, however, we think on balance dollar strength, you know, again it will depend on what you play against. Maybe Asia can come back a bit, but against the rest like Latin for example, I think the dollar can actually hold well.
Jeff you on a strong dollar in a parody hero, What does that do to the stock market and particularly what does that do to the Magnificent seven? Is long duration assets?
Well, I'll always say for the US, thankfully, especially for US equity markets, you know, the lowest proportion of foreign earnings exposure compared to the rest of the major economies, so it shouldn't worry them too much if there is a global.
Demand story or an earning story.
And on the external side, what if China starts to export deflation disinflation again, that's where the things for US tech we'll have to worry about.
And that's a wheelhouse of Jeffrey, you Damien to talk about this, this exporting of price change.
That's exactly right China, and it's the Asian currencies. I mean, all the talk this morning, Jeffrey is about you know, the dollar dominance and how it's triggering intervention fears across some of those more developed Asian markets. You know, I'm talking China, South Korea, Taiwan and perhaps even Japan. I mean, talk to us about that. What do you what are your thoughts about official buying of of currencies and equities in Asia?
I think most Asian central banks are you know, much more neutral these days. Know, they're happy to let the markets do its job. You know, they don't want misalignments. And if there's there are moves. And it's always about pace. It's never really about levels, right, It's about pace if it goes too much too soon. You've heard the Swiss National Bank come president here talk about this as well, so.
They could start to push back a bit.
But the fact is, you know, China's numbers are the inflation numbers. They need a bit of a lift, and so the central banking and may say, come on, stronger dollar right now may not be a bad thing.
Your report, folks, we've protected the copyright of being mel go to by Melon to get the Jeffrey you report with mister Savage. But there, Damien, it's just simple three or five percent GDP growth in China. Right, that's the way, Jeff Well.
I mean, Jeff, you know the other thing I'm really curious to hear your thoughts about is geopolitical risk. Right, I mean, if you just think about performance since Israel Hamas began in early October. I mean, we have equities up, we have oil down, spreads, you're tighter. I mean we've been saying this over and over again. Does geopolitical risk even matter? And in an election year, I mean, forget about the US. We have a lot of other countries
in an election year. I mean, I think two out of three individuals in the democratic world are going to be voting for a new leader in twenty twenty four. How does that kind of resonate with you?
I think it will always matter. But people want to wait these days rather than preempt and policy outcomes.
Right, it doesn't matter where you are.
You want to just look at policy proposals with a fine toothcomb and then identify what could be a risk. If now there's a sudden geopolitical event that comes through, we can deal with accordingly. But the fact that we have been able to respond on markets being able to one in a much more obviously calm manner. I think you can read this two ways. One we have the tools available to deal with risks. Or is there still
too much liquidity? And that's an argument, you know, for more financial conditions tightening.
Is needed as well, maybe that they need to do more.
Jeffro quickly, here are you worried about the United States ginormous debt?
So two things there there is no replacement or the dollars dominance, you know as the world's funding assets.
You know, this has been talked about for twenty years.
Is it going to be them? Be the euro crypto dollars? Press prominence is not going to be challenged. Alternatives always come through, So it's about a decline in share, but from a very high level. So yes, people will worry about that. We always ask the counter question, Okay, we agree there is a risk, what is the alternative? And if there's still a lack of alternatives at this pace, I don't see that challenging the status.
Quote a briefing from Jeffrey You terrific kickoff report from bny Mel and Jeffrey You there their lead strategists. This is a really important conversation and at Dovetail's perfectly office
work is incredible carefulness about measuring the American economy. Shree Kamar out on the left coast just iconic it doing this so well in Shre Bob Burgess, who's legendary at Bloomberg, Robert Burgess driving all of our bond coverage for year had arguably could be the chart of the year in January and basically it shows the linear growth, the straight line growth of American retail and then we enjoyed one two and the final Damien Sassar stimulus and retail has
boomed off the projection the trajectory that it was supposed to be on. Shree Kamar is our GDP of fiction because we've got a consumer pop as we saw yesterday retail simply because of the COVID stimulus.
I think Bob is correct in this analysis. It's a good one, Tom, and I would mention, yes, GDP growth as well as the retail sales increase being so substantial is a large measure due to both the fiscal and monetary stimulus that we have had nine hundred billion dollars in the final months of the Biden about the Trump administration, and another one point nine trillion in the initial months
of the Biden administration. That is along with the Federal Reserve keeping zero interest rates much longer than the economic recovery required, and also the fact that the interest rates not only were kept zero, but the balance sheet was doubled from the beginning of twenty twenty to twenty twenty two.
That was That's what you're seeing in consumer hands. More than one trillion dollars of stimulus is estimated to be with them, and that is what is giving rise to what you see the postponement of the recession tom rather than an abandonment of it. And that's how it put it.
Forget about the parlor game of like what the Fed is going to do January March whenever the next meeting is our twenty four month tree thirty six months where you really work. Are you optimistic our federal reserve can get us there with stability?
I think despite the Federal Reserve, we are going to get there to economic growth and we are going to get to recovery. That because the Federal Reserve is present, we are going to get there with a lot of volatility a lot more than it's needed. Example, you have Jerome Power telling us in his December thirteenth press conference essentially indicating the next move is downward and suggesting several
rate cuts. The markets took off after his speech. Then we hit people like John Williams of the New York FED who had to do the clean up pat and they essentially contradict the chairman. That provides volatility. But I think the US economy is strong enough, as Bob mentioned in this article, that you really will have a good result two to three years from now, which is the timeframe you suggested.
I can't say enough Damian about how Shriek Kamars he always does explains this and this is Stiglitz one O one and that all the worries out there, and shre frames it beautifully. But if you have this miracle, which is American economic growth, it can solve the debt, the deficit problem.
Things of the Past by Shriek Kumar three. I have to ask you this. I read your work religiously. You're talking about the mention of a slowing of QT and the read through into how that might mean that the FED is thinking about perhaps something breaking in the market. It's a credit event as opposed to you know, PC below two percent is clearing the way for the FED the cut I mean, talk to us about that. What does that mean for financial markets?
And as the prices very timely questioned Damien. Look back to September twenty nineteen, QT, or quantitative tightening, had been in effect for two years. At that time. The FED had been reducing its balance sheet from twenty seventeen until September twenty nineteen and was fined one fine day the
week of September sixteenth. The short term interest rate shot up as the FED had not anticipated, so they had to give up on the quantitative tightening switch over to provide liquidity in order to bring the interest rate down. We are, I think, in an exactly same situation today.
We have quantitative tightening, which resumed in mid March after the regional banking crisis, and having done that and reached where we are, Damiene, we are finding out that the amount of reserves in the hands of the banks the reverse repurchase agreements have fallen off a cliff in the last few days. That is what I think the FED is reacting to. That's where the Wall Street Journal article in the last two days about the resumption of a slowdown of the QT is coming from so stree.
I just have to cut in here. I mean, so let me ask you this. Do we want something to break? Is that the way we get that egg your Denny six thousand in the S and P only after something breaks? Or are we trying to avoid that with a soft landing? I mean, what's better for the US economy?
Off landing would be better for the US economy. But I don't think you reach a six thousand on the SNP without a break.
And there it is. I agree completely straight.
Please, thank you and thank you, and then again once something breaks. I would say, you are in the September two thousand and eight situation. Lehman Brothers has just gone bankrupt, but the stock market continues to decline for the next three or four months. An end of two thousand and eight, the Fed says they are going to increase the balance sheet,
keep the interest rate at zero. We reach the S and P five hundred bottom in March of two thousand and nine, so wait for three months after a breakage, and then you will have the rally starting.
In stre Thank you so much, so you comar with us from Santa Monica.
Thank you very much this one.
I really really appreciate joining us now with PNC Bank with a look to your portfolio. Amanda A. Gotti joins his PNC's the chief investment Officer asset Management. Amanda, thank you so much for joining today.
I get the.
Memo that sixty forty worked last year. Can the theory of sixty forty work in twenty twenty four.
Well, I'm delighted to be with both of you. By the way, I can't compete with those pirates tickets, but I have knit Neilon for tickets. Maybe we can go to a game sometime. Look, but to get yeah, to get there, you go, there you go. We're going to have a big year next year. I have no doubt. To get to your question, absolutely, sixty forty will be
alive and well in twenty twenty four. A lot of calls for the death of sixty forty previously, and that was effectively the case when we were in a different
interest rate, you know, regime and environment. But given all of the FED policy action, given where yields are sitting today, it's breathing a lot of new life into fixed income markets, and so we do think that that sixty forty portfolio does make a lot of sense, not for everybody, but certainly does make sense, make good sense in this environment.
How do you at P and C take a measured approach when you see the growth the revenue growth modeling of say Magnificent seven or Luxury Goods Reachmunk today out with a nine percent pop in revenue surprising with some good China growth. What do you do with the super growers after a bang up year.
Well, we're certainly not backing up the truck and adding to positions, but we're very grateful that we have had a pretty broad based exposure to them in addition to the rest of the market over the course of the
rally last year. I do think, though, given where valuations are, and even though the fundamental story continues to be pretty strong, we can't hang our hat on seven stocks to carry the day in twenty twenty four, and so we really need to see broader based reacceleration from the bottom four hundred and ninety three. And so that's one of my biggest wish list items for twenty twenty four. We'll see whether that wish is delivered by the time we get to the end of.
The year, Amanda. You know, I'm a fixed income guy, but we've had a lot of stock jocks on in the past few days, and they're talking about beats beats over concerning consensus estimates. How that's going to be a big driver of equity market performance. But would you write in your note here it's not so much the beats, it's the missus. And I'd like you to expand on
that a little bit. I mean, if you miss your earnings here in twenty twenty four, given this kind of positive undertone, the soft landing scenario that's being painted here, what do you think that will do to valuations and to total returns?
Well, I think it's a challenging, if not fragile environment that we start twenty twenty four here with such a torrid rally and the lion's share of market returns last year being driven by valuation multiple expansion. We really need
to see the earnings deliver to justify those valuations. And so I think this is the scenario in particular here for Q four earning season, where the misses can be pretty punishing, and so the beats or the inlines may be more muted in terms of reaction, but I think it's going to be a tough slog out there for those who miss, particularly given that we've had this really negative revisionary period is one of the worst in the last ten years, and so the bar has been set
lower from an earnings perspective. But that valuations, I think is going to be a tough one to achieve here with Q four results.
Yeah, and all the while, we see the VIX involved just kind of hanging in here at some very low levels. I mean, what are your thoughts there? I mean, should we be buying protection, should be looking at options markets, It's a way to hedge.
The VIX has been in hibernation mode, certainly in a winter slumber here. I do think we're set for a bit of a resurgence in terms of volatility. Historically, though I've been very focused on a higher volatility regime or high volatility regime. I'm not sure we're going to see that kind of environment here in twenty twenty four. I
do think things are going to be choppy. The start of the year has been pretty choppy, but it doesn't mean that it's going to be an extreme volatility environment like what we've seen really since the onset of the pandemic.
State the dynamic as fields come down of what all that cash does. We popped six trillion a couple days ago in money market funds. It's a huge Pennsylvania heritage, folks of money market development, a federated at PNC is as well. If the yield comes down, what happens to our listeners portfolio?
Well, I don't know that I'm particularly worried about yields coming down. Materially, there is quite a bit of cash sitting on the sidelines. I think a function of that is really locking in many of the games that we've enjoyed over the last year plus, and so I think there is definitely a yearning to put that capital to
work again. But I think it's really hard to pound the table and back up the truck here given where equity valuations are, and so I think I would probably see more room and fixed income markets for some of that cash to be put to work, even if yields do start to come down ever so slightly.
Thank you so much, yeadye whatever it is eighty listening in Altuna, Pennsylvania, where the Pennsylvania Railroad makes a tight turn with Miszagatti and Penn State football guy emails in from Altuna, Amanda, and he says, like Franklin can't get it done in the middle of the game. I mean, what do you do with your coach, James Franklin with always you know, game day coach and all that. I mean, where's the improvement got to be next year for the Nitney Lions.
Oh my god, that is such a horrible question to end on here. I am not going to bet against Franklin. We've had just a tremendous recruiting history here these last couple of years, and I think next year is our year, and so I'm not going to bet against him. I think it's going to be fix.
We'll take the odds. It's like the Fed. Let's take you think Amanda Gotty is going to come back again, Davey.
You know, well Franklin used to coach the The mandible commodore is Maya. He's a andy guy, you know. I mean, we we're sorry to see him go.
Yeah, James Franklin out of Penn State. Amanda Gotty never to appear again. Amanda, thank you so much. With P and C Banking, this is a Joy for a first conversation in twenty twenty four and the bankdrop here to talk to Marghi Patel of Allspring is wonderful. Torsen slock at Apollo out with a wonderful note which I'm in very strong agreement on, and his question is will twenty twenty four be a repeat of twenty twenty three. I've been suggesting that that's an outside non consensus call of
the boredom. It will be just the same, Margie, after the oddities of twenty twenty three. Will this year be the same?
No, I think it'll be a little different. I think the first half of the year will be choppy, probably down a bit, and after midyear the album for eurnings will look better, and also the run up with the presidential election. I think we'll all rally in the second half and finish say mid single digits or low double digits, so a little different.
Let me get to the money question, always with Margui Patel, and that's the use of cash. Is dividend growth part of a good equity return?
This year, I think it'll still be that. I think the hurdle rate was traders or they are still favors stocks especially those a little bit of a dividend. But at the end of the day still we have to see earnings growth, not just the dividend. That's not how stock.
So, Mark, we're looking for S and P target for your No, I'm just kidding. I'm joking. I would never ask you for your year end target. But in seriousness, let's talk about some of the sectors within the S and P and which ones are projected to perform this year. I mean energy stands out to me. Energy, you know, it's kind of been the laggard if you look back to twenty twenty three. What's your thoughts on the outlook for energy? Do you think oil prices are going to be you know, skew to the upside.
Here, No, I'm not expecting a lot. I think energy is going to stay at a relatively lower trading range. I think there's some opportunities in the energy space. We've seen some recent M and A activity, and actually that's a pretty good indicator of what those in the industry see. That says there's a little bit of optimism, especially because it's sector that's really not very well liked.
To well, MARKI you mentioned them, an activity seem could be said for healthcare right, which I do know is one of your selected sector, and talk to us about where in healthcare investors want to position.
Well, we think healthcare is still coming to the end of the day period where all the macro things are pretty negative, you know, pricing, COVID, drop off in demand from China and so forth, and we think that still has to play out a little bit before we see an uptiket earnings, which we don't think will really occur probably till next year. So we think there are a
few opportunities. Problem with healthcare is a lot of the names are very highly priced and modern, and then you still have some pitfalls like you see in the managed care today.
Margie is an amateur. I have a gut feeling that CFOs like Lemmings off a Cliff are going to go through a massive issuance this year. What is the underpinning of your call about issuance? How do you approach that?
Well, when you look at at bonds, really it's been pretty muted last year, and I think it's going to be pretty muted this year, if only because companies raise so much money during the period of zero interest rates. They really don't need to raise more cash sitting on their books, So we're not looking for any big upcheck, and I don't think companies really have the aquetite to increase their leverage.
Margie.
When I think of all Spring, one of the things I often think of is your exposure internationally outside of US dollar equities. I mean, talk to us about international equities, international fixed income. What are your thoughts there, I mean, what sort of you know, place does it have in a diversified portfolio.
Well, we all have our biases, and I think we're all entitled to our biases, and my biases, US is best. That's a country that I can understand that has the most transparency, the most highest quality market, and so I don't have a lot of interest in overseas, either emerging market or development. And honestly, you really don't see the higher growth rates that made those sectors supposedly attracted. So we think US is the best.
You know, that's interesting because you know, I was always trained that, you know, these emerging developing markets are going to grow at a faster pace, but I think we've turned that on its head in recent years. I agree with you completely. Margie talked to us about the growth differential between the US and some of the other G ten economies. What are your thoughts there, Well, again.
It's pretty mixed, and really I think overall you're looking at pretty low slightly negative to slightly positive. They have some of the same issues we did. They spend a lot during COVID, so they have a lot of difference too that they have to do to cover the deficits of it. For deficit spending and particular, you don't see a lot of avenues for accelerating growth because again we're not looking for China to have very very high growth.
The other emerging markets tied to China and also have growth, so it's really more very modest growth.
Is cash here? I mean I keep asking this interview to interview. We have six trillion in cash and the sideline. Most of that's at all spring by the way, Damien, but we've got all the trillions of dollars of cash market Patell and that is a Marguie Patel opportunity. Where is the opportunity if yields.
Come down, Well, I'm not really looking for gels to come down. I think yields at four percentage and treasures are pretty low. So We're not looking for a big rally there. I think that high yell bonds continue to look relatively attractive in the investment in the corporate bomb space. You're looking at yields to say, six and a half to seven and three quarters down from where they were,
but still pretty good premier over say four percent. And it's true the short term are high, but I don't think they're going to stay up to five percent that much.
Yeah, I mean, Damian, I use a WACC the work way to the average cost of capital function in the Bloomberg. It's really really lovely. I get a quick snapshot. I mean, Apple burdened with four point four percent debt? Are you kidding me?
You know this just in from one of our listeners in Red Bank in New Jersey, Anthony Young, asking about the way that average cross the capital for consumer staples pretzels. Talk to us about you know, the demand for pretzels, I mean for consumer staate ap is writ large across the whole of the US economy. You know, Is that a place we want to hide out here in the equity market.
Well, I think it's actually an interesting safe space. Those companies really did very badly in the market last year, although their results are not terrible, so we see those as a middle of the road opportunity in place conservative probably better than us, say investment great bonds, where you
get in most cases a dividend. We already know the slower out look for consumers, a little bit of pricing pressure, but you know, altogether, I think that was a dividend and very modest growth two to four percent in earns will be enough to make them reasonable for a conservative investor.
Margy, thank you so much. With ulstoing Margy Patil there. 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. Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app you can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg