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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. Brian Leavitt of Invesco joining the chorus of warnings, writing this, for the first time and a year, we favor a more defensive posture in the near term. That does not mean that we eliminate equities from the portfolio, but rather shift towards higher quality. Brian joins us for more.
Brian and Morningtier. Good morning.
Before we get into what you're doing beneath the surface, this is a big change for you. Typically you come on the program, you sort of push all the bears aside, and you say, I O want to be part of this market.
What's changed for you?
Well, the first thing I want to say, is I still believe over the intermediate term we want to be inequities.
I still come.
Back to peak inflation, peak rates, peak tightening is favorable for equities over the intermedia term time peer What we're looking at is more of a tactical indicator that says, look, the global economy is growing below trend and it looks like things are starting to soften. So when your below trend and things are weakening, you want to be more defensive in the portfolio. And some of that global weakness is being led by the United States.
Things are slowing. It's not a recession call.
It's not you know, something ominous is coming, but rather tactically things are slowing down and we're still waiting on the FED to respond.
That's the change, and I think that's the important distinction. We've been talking about global growth xus below trend for quite a while now. The new ingredients is the US slowing down's slow, And something we've been talking about is at what point does someone like you become more concerned about what's slow down, that it's not just slowing, that it's slow.
That it's slow, and that you may in fact have a recession. The good news is that we don't have a lot of excess in this economy. If you look at residential investment as a percent of GDP, if you look at inventory to sales ratios, this isn't an economy that's dealing with a lot of excess. We don't have businesses that are over levered, banks that are sitting on piles of bad loans, and you see it.
In the corporate bomb market.
Corporate bomb market isn't worried about this economy as of yet at all. Instead, what you're seeing is weakness, slow down, which by the way, is what the Federal Reserve wanted.
It's here. The challenge is.
We've got a five and a quarter five and a half percent FED funds target, and yet the economy is slowing and inflation's in the comfort zone. So you're you've you know, it's not a perfect backdrop for equities over the next few months.
You know, you say, go into quality, and I wonder how quality has changed given the fact that some of the companies that are minting money have gained so much value over the past twelve months that they're the ones and I'm thinking of Market Stanley, they're the ones that people are getting nervous about are you on board with that This idea that some of the high flyers I'm thinking of Nvidia and thinking of Microsoft maybe have gotten over their skis well.
Perhaps a little, but that doesn't mean that it doesn't go on.
You know, as the economy slows, investors are going to be looking for a spot for businesses that they think are going to continue to do okay in this environment. And so I think part of the challenge was our risk on call, which started last July was a great one, but really most of the broadening of the rally happened in a couple of months, right small mid twenty percent in two months November and December on expectations of rate cuts, and then it's been all concentrated.
So the risk on rally should have been broader.
Then when you get to a more defensive spot, you tend to get more higher qualities. So yeah, they are perhaps a little bit elevated, but I think that's where investors camp out in a slowdown that could persist.
Ultimately, what ends up happening.
Over the next couple of years is in a easing cycle with a normalization the yield curve, you should broaden out, But in the near term I think investors hunker down a bit and stay in those names.
So you're still a fomo kind of guy, just with respect to Nvidia and Microsoft, not necessarily what the rest of the broadening at is that correct?
Well, I'm a fomo kind of guy. Over the next three to five years. Absolutely. Again, you know, in the near term the headline might be it turns a little bit bearish from where we've been.
I mean, we were full risk on since July.
As things slow and we wait for easing, we get a little bit more defensive. But again, over the next three to five years, peak tightening, peak rates, peak inflation, favor stocks.
Some of these words that people use, like becoming cautious or being more risk on, have different meanings depending on who the person is, and the idea of being cautious in the past has been going into long bonds, having more cash and going into say dividend place in the equity market, what's the new conservative position.
Yeah, So the way we think about it, if you take a sixty forty portfolio, when we're more risk on that forty percent fixed income is going to be far more credit. Credit tends to do well, in more of a recovery risk on type of environment, we would increase exposure to longer duration bonds, quality bonds play Frank can get some very nice yields there these days, and I would be a little bit cautious about sitting out in money markets because those yields will ultimately.
Be coming down. On the equity side.
When you're more cautious, you reduce some of your exposure to international and you move into factors like quality and low volatility, and you reduce a little bit of your small cap exposure and go more large cap. So it's not wholesale changes, it's protecting some of the gains you've had in the portfolio and adding some protection in the fixed income market to a portfolio.
We had this debate yesterday about whether or not as an investor you can look through the noise of politics. Do you find potentially advantages ahead of November opportunities or do you think they're.
Setbacks look through the noise of politics.
If you look back historically and you look at volatility in markets, it doesn't come because of elections. So if you look at October and November of election years, the only years that you see a meaningful increase in volatility are two thousand and oh eight, and that was clearly for other reasons than what was going on in politics, And if we have time for it, I like to
tell investors three points on politics. The first one is since nineteen fifty seven when the SMP went live, every president has had a positive return over their administration except w and Nixon because their terms ended in bad recessions or they left office in bad recessions. Number two, Trump's portfolio over Trump's term SMP was up sixty percent. Where's Biden right now? Sixty percent? So it didn't matter at all.
And the third point I like to make is if politics matter so much, then how did Obama and Reagan both have two hundred percent advances in the.
Market during their term? They both had great starting points.
You know, I could become president in a recession when the Fed's helping out and probably get a two hundred.
Are you running because I think that that's a Amory.
Told me I have zero chance.
So you could head to the convention in August and make a challenge if you want. I think some people might be thinking about that. There have been changes though over the last decade twenty sixteen. November sixteen, we were talking about investment in infrastructure, the Trump Trade.
Twenty twenty.
You saw what happened when we started to see signs of a blue sweep and the prospect of more fiscal stimulus coming down a pike. There have been changes, and we're starting to wonder whether there's going to be consequences for the bond market for two presidents, two leaders that don't seem to be willing to do anything about the deficit in a big way anytime soon.
Yeah.
Well, I mean with regards to the changes, you know, if we do go back to that twenty sixteen moment, it was the whole I think from a lot of voters that Trump could unlock growth, could unlock value, and you had very much the same market leadership you had on dur Obama. So we we didn't change the economic envo ironmen as a result of simply electing a new president. I mean, they basically get to get a couple of things done. They don't get to have their whole agenda
play out. Now with regards to rates, I heard this a little bit a week or two ago. You would know better than me, but right there was a quick move up in the ten year treasury eight a handful of days ago, and people were asking me, is this the bond vigilantes or they finally here?
There there's nothing in the bond.
Market that suggests the bond vigilantes are here. This is a bond market that's been moving very much on nominal growth expectations and expectations for the Fed. If the bond vigilantes were here, the US dollar would not be as strong.
As it is.
So no, it doesn't seem as if the bond market views this as a problem. And I've been saying for a long time, John, I don't think that this is going to be a problem. My clients think it's the biggest problem we have. The US debt level job is to provide therapy. Well, I've been doing this for twenty five years, and the debts increase by seven times, five trillion to thirty five trillion, and yet rates are at
four percent and the dollars strong. So you know, it's the Alfredy Newman what me worry at this point?
Right?
I mean it's it's we're a very wealthy country.
Total household network, there's one hundred and fifty trillion in this country compared to thirty five trillion in debt.
So I'm not overly concerned about this. Bran.
It's going to see it, Bran Levitt IV Invesco. It's the latest Congresswoman Mikey Sheryl of New Jersey becoming the ninth House Democrat to call on President Biden to drop out of the race. Bidon's campaign working to restore confidence in his candidacy and bolster support from progressive leaders around the country. Joining us now, please to say is the Democratic Congressman Jonathan Jackson of Illinois. Congressman, thank you for
being with Bloomberg Surveillance this morning. I just want to share a quote of yours with our audience, which I think is going to imply where you stand. I think he's up to the grueling of the presidential campaign season. A question I would have for you, Congressman, I think is a question that a lot of people in this country have too. It's not just about the four months
ahead of us, it's the four years after that. What gives you the impression that he can handle not just the campaign for the next four months, but the four and a half years of governing. Kate still need today well.
I think he's got a great team around him. I think his agenda is clear. His focus has been very precise. When I think of what the alternatives that we are confronting at the moment, it's about direction, it's about character. President Biden has been very robust on the campaign trail in the last week since that debate, if you will, and so I'm very excited for him. I think that he's got a very strong number two and Vice President Kamala Harris, and he was able to share with us
as the CBC members on a private zoom call. He was able to take our questions, and so I'm very excited. I'm very confident that he can go forward and will go. So we'll go for in a very robust manner.
If you think he has a strong number two, and he's eighty one years old, and the polls continuously show not just post to debate, this has been an issue with the electorate for over a year that they just think he is too old to continue. Why not promote the number two?
I think he has been promoting Vice President Harris, and so we don't know what the future holds, but I would tell you this that they've been out on the campaign. This has been a scandal free administration. He's been very focused. If you look at what the alternative is on the chaos, the confusion, the calamity, if you will. I think the
press has not put it in the proper lights. If you think at a person that's been convicted by jury of their peers of sexual assault, you usually get a handle on your name being called a sexual offender former president, but no, they've given him a pass on that. So character is on the battle, and I think the African American community is very clear at what's at stake. We've gone in the wrong direction with the United States Supreme Court,
if you will. We've had one hundred and sixteen justices in American history, roughly twelve thousand, five hundred and ten representatives in the House of Representatives. We've had forty six presidents. But this non elected group of people, the citizen of the United States Supreme Court, is able to dictate law. I think we need to look at some sort of judicial reform in the future. That the power that they
have and the corruption that they've displayed is unprecedented. So the Supreme Court is on the ballot for this election season. As well, and I would trust President Joe Biden and Vice President Harris to make that decision and recommendation before the American people Congress.
And I want to share you some new data we got this morning from the Cook Political Report. They said that Trump's currently is forty seven to forty four percent lead, the most dramatic shift they've seen in this race. And David Walserman, an analyst there, said, quote, Trump's current numbers among Black and Latino voters are incompatible with any plausible Democratic victory scenario. What does Joe Biden need to do to really shore up the black and Latino communities.
Well, I think he has to continue to stay in front of the community and also share with him all the things that he's done and what's to be promised in the future. We know on the Sunday before the Tuesday election, most Democratic candidates find their way to the African American Church. There are some more games that the African American Church certainly deserves in the African American community.
If you think about what President Biden has done, one thing that's huge, and there have been many things, is that this is the first time an African American woman was even considered to go onto the nation's highest court in Katanji. Brown and her opinions and her decisions, her character is very important for us to have there. What he's done on trying to put people on the judiciary has been very outstanding. We're now seeing the erosion of
African American wealth. We're looking at going towards twenty fifty where there'll be zero African American wealth. That's also being projected that we can talk about peace and security in Ukraine and Israel and Gaza and Taiwan and talk about
rebuilding plans. We can talk about rebuilding urban America. Those persons that have had the history of being the descendants of Americans, that have been enslaved, that have faced redlining, that have faced all the worst of America, that have been truly American since the founding of this nation, have not had an economic plan that has been sustained and that has been implemented. Our cities don't have to look
this drab, in this dire. We can also pick up people in America, and once we do so, we will expand the market. I believe in America. I believe there's a lot more potential when we saw the past of segregated athletic fields once they were transformed into a level playing field. Now we're proud of the NBA, proud of Major League Baseball, proud of all of these other endeavors. We can do that same with our economy when people have equal access to capital. That has to be a
major focus of the Biden administration. What are they going to be the financial institutions created to have long term sustainable growth and inclusivity in the American economy. That's a promise, as a commitment that should be made to the African American community. It'd be good for America, it'd be good for the world.
Congressman, I want to go back to what you were talking about at the outset, where you were saying that it's character on the ballot is who you are going to elect as just a person a candidate, and you're talking about Donald Trump. There are a number of polls that have shown that Kamala Harris or many other candidates would do better than Joe Biden across from the ballot,
across from Donald Trump. Why are you still supporting Joe Biden if you think that he has a lesser chance than other potential Democratic contenders to win in an election that you're framing is quite important.
Well, I would say it this way. You're talking to someone that's in elected office, and anyone that's been in this position before, you understand critics come after doers, and so we don't look at all the opinion polls. Opinion polls would tell us we're wrong. Opinion polls would tell us that we shouldn't, we can't win, and we've overcome many of those obstacles. We're in the position now of molding and shaping opinion. And that's where I stand on
the side of I appreciate those that have dissented. I disagree with them. I think it's healthy that we have debates. I would have liked to have seen a more rigorous primary debate schedule that gives other persons the opportunity to get on the stage. But here we are. We're about four weeks away from the Democratic Convention, and I think these different opinions and party persons that may disagree, I disagree with them, but I respect their opinion. I think
in the end, it all comes together. And so I don't want someone to be crowned the next president. If someone has a dissenting voice. I want them to be heard at the convention. Let's keep it open, let's keep the conversation robust, and let's take our case to the American people. This ultimately is decided not by the donors, but by a radical proposition, and that is that every person has a vote, and it counts on election day.
One person, one vote. And so this is where the bigg in their class and the working class all have one voice, one vote on election ding. So I follow opinion. Now it's time for us to shift opinion, not simply follow what the opinion polls are seeing.
A Congressman, I wish we had more time, because we've got plenty of follow ups to that particular last comment, Congressman, thank you. Congressman Jonathan Jackson of Illinois joining us from Washington, DC, Drew Pettit writing this sentiment around stocks with high exposure to AI is the most elevated it has been since twenty nineteen. We advocate taking some gains in AI high flyers and redistributing more broadly across the themes value chain.
Drew joins us now for more dre It's wonderfully have you with us on the program. Lots of people talking about your note in the last twenty four hours. I think we have to draw a distinction, as you have done, between the AI and enablers and perhaps the AI adopters. Can you help us work through your framework for thinking about equacies at the moment.
Yeah, well, thanks for having me on this morning.
So when we think of AI, we think of it in three pieces. The enablers, so the semiconductors, the picks and shovels. We get that that's the trade that's really working. The creators, so the software sided thing things. After you have the hardware, you have to teach it to do something and package that in a product. And then I think the last category it's the users. So you call
them the adopters, we called users. Those are the companies that are going to take those tools and either integrate it into their products to make it better or in their background processes to make their companies more efficient. So I think that whole value chain eventually benefits. But the market is just trading the enablers right now.
In part true because it's very hard to see where the money is and we haven't seen it in the earnings for some of the end users. So why is this the right time in your view to make that shift.
You've just had that almost parabolic move in some of these high flyers, like you see that with Nvidia, TSMC overnight is up another two percent. So a lot of these names, with how aggressive they have moved, portfolio managers are overweight. So we're not saying dump these names because to your point earlier, yeah, there's some career risks there if you're not in them, but if you're overweight, use that to fund the next leg.
It will come.
Markets don't stay on the same theme forever, and in some cases, I think the implied expectations with these enabler stock prices moving very far, very fast, get really hard to meet and exceed going forward.
You know, it's fascinating to me, Drew, because on the surface your call sounded quite verish. Actually, the idea of it's time to liquidate some of the positions is time to take profits. It screams as okay, I get out of Nvidia, and then you start listening to what you're actually saying, and it's actually incredibly bullish, is that we haven't valued high enough some of the AI and you could get better gains in other names that haven't made
parabolic moves. How do you sort of reconcile that at a time when people are concerned about valuation, when people are concerned about a weakening growth picture, And frankly, there is that kind of uncertainty of whether we're actually seeing the profitability in some of these companies.
So to me, again, we're focusing on larger cap, already profitable stocks. But I hate to say this, but I don't really care about traditional valuation metrics. Don't talk to me about a fifty pe stock that's in the early
innings of a new growth phase. What we do is we look at the market price today, make some assumptions about the discount rate and what the terminal value should be for the company, and we try to figure out what kind of growth rate do I need in the next five years to justify the stock.
And some of these stocks do.
Have expectations, like cell side consensus expectations that tell me they can meet what the market's pricing in. So that's why we don't think AI is a bubble yet. Yes, it's getting extended. Yes, price moves make you answy. Yes, some of the options data makes you a little nervous, But really there is a growth and fundamental story here.
That's why it's not a bubble, at least not yet.
At least not yet. What would take us there, then, Drew.
If you really don't see increased beats and raises from a lot of the AI pure plays, I think Number one, you have to recognize when stocks move this fast, it's more than just good earnings.
You need to change future expectations as well.
And then if prices keep moving this way without fundamentals following that, that's the concern. That's what really got us in the tech bubble. I think that's the big difference from then to today, Drew.
I think we're all interested in just how clients received this call yesterday, just trying to engage sentiment. Did they push back, did they engage with it? What was it like yesterday?
I was actually a little bit surprised that there wasn't more pushback. I think a lot of people actually we're on the flip side, like I am getting nervous. I am worried that we are pricing in too much. So it was actually relatively well received, But on the flip side, I'm not sure.
People are ready to hedge.
Again, that's not our base case, but we always have to recognize when we could be wrong because markets make a lot of smart people look silly over time, and people weren't ready to consider the hedge or the complete.
Other side of the tree.
So there's still a lot of AI balls out there, but they're cautious bulls.
Trey, I appreciate the update.
Ready to do.
Thanks for making time for us this morning, Drew Pettit there of City. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. 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 Amp.