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Time to frame things up, we do that from the physicists from Morgan Stanley. James Karen joins us this morning on price down, yield up, Jim Karen's CIO process of solutions. Morgan Stanley is the bond move over. Jim, do you acquire bonds, notes, and bills today looking for a lower yield a higher price?
Good morning, Tom.
I think currently right now in the markets, I think bond yields have entered into a zone where they're probably gonna it's probably gonna.
Be relatively sticky.
I don't see that inflation is going to come down dramatically, at least over the near term. Could there have been some you know, stress higher of a release in bond yields higher? Yeah, you know that certainly happened. I don't think that we're necessarily going to get that either. But in order for bond yields to come down, we'd really start to need to see the disinflationary pressures of lower
oil prices. Now today's are going to start, but we'd have to stay at these low oil prices, and they'd have to even decline further for bond yields to meaningfully move down and stay lower.
Talk to me about the partial differentials, the dynamics of equities and bonds wrapped around a conventional sixty forty split. Describe those dynamics right now, given the chaos of news slow we have.
Yeah, this is this is probably the most topical thing that's out there, at least something I focus on quite a bit, because essentially we are in a higher nominal growth world with above tar get inflation, which is not necessarily bond friendly. So that what that means is that if you're using fixed incompassively to hedge your equities, you may be disappointed, meaning that we're just not in a lower trending world of lower interest rates where bond returns
just perpetually move higher steadily year after year. So when we think about bonds hedging equities today, we have to say we have to recognize that the correlation of returns between fixed income and equities is as high as it's
been in the past one hundred and years. What that means is that bonds today are not a very good hedge to equities if you but if you use your bonds efficiently and you think about Carrie, and you think about spread, and you think about credit, then you can use your bonds as a source of alpha and a hedge against your against your equities. So there is a place for it, but it's not as traditional as it was.
And what's great about Jim caaren Folks is all that complexity. He actually puts it into English, which is a gift to say the least. So if you're not hedging traditionally sixty forty, where's your equity hedge?
So it really becomes a question of how you diversify across the equity market. So clearly you want to have some growth, you want to have some value. You also want to have some high quality and defensives mixed in there too. The reality though, is that you can still use bonds as a hedge, but you should have less
than index duration in your bond portfolio. So I think I think that most people are making is that they say that their neutral allocation of fixed income is just to be neutral the index and just to have the same duration as the index. I would argue that having about a year's less one year less of duration in your fixingcome portfolio would do a better job at hedging your overall your overall equity exposure.
Jim latest Offspring is doing his semester broad in Japan.
So now Japan is all over my social media feed for some reason. You like Japan.
Why do you like Japan? I?
Yeah, so this is structurally one of our top picks, you know, in our in our ascid allocation and in our portfolios. So Japan is you know, we've left the zero lower bound rate in Japan. Japan has some inflation, They have a lot of fiscal stimulus coming through. This is a really really big push from not just this administration, not just from Takeiichi, but also from previous administrations. So this movement towards higher fiscal stimulus, a higher fiscal impulse,
better corporate governance. Uh, you know, shareholder returns. There's a lot more caring about the equity investor.
Within within Japan.
That makes it much more viable for investors, and Japanese equities have done extremely well over the past few years.
Now.
The issue with Japan though, in your portfolio, and everybody needs to take note of this, is that it is a very volatile market. It a five percent move in Japan and Japanese equities and why day is not a big deal.
I mean that happens quite a bit.
So you have to right side in your portfolio. So it's a good investment, but you have to have the right size and be mindful of that and be mindful of that volatility.
All right, I'll go with you in Japan, but I was there. I lived there in eighty seven eighty eight. Then you couldn't buy.
A story on Japan for the next thirty years. But I guess it's back.
How about Europe.
Europe seems to be filling the brunt tier of some of the disruption we're seeing coming out of Iran.
With just raw materials. What's the thought there in Europe?
Yeah, so from our perspective, we are underweight Europe. We're more cautious. And the reason is is, as you mentioned, higher energy prices, some fiscal strains that are coming through on the European side. I think it's going to be a head win. So I mean, just look at the FED versus the ECB. The ECB is very aggressive about telling you that they're probably going to high grates in June, whereas the FED is more likely to be on hold for an extended period of time.
So there were just elements here.
And the reason is is because inflation cuts deeper in Europe than it does actually in the US. And the reason for that is because European economies are more structurally rigid and they can't necessarily adjust to inflation very well. In fact, the investor class in Europe is mainly a fixed income investor class, whereas the investor class US is
mainly in equity investor class. So higher inflation, we all know what that does to bond returns, so that in terms of your wealth effect, you know, it can be much more detrimental in Europe than in the US. So a lot of the fiscal stimulus that was supposed to be coming through in Europe is now really becoming more support to try to you know, hold up the you know, to hold up the broader economy. So we are a
little bit more cautious. We're not abandoning Europe. I mean, we still think that there's a lot of positives, but for right now we think that the investments better in the US in Japan.
Shoe Karen, thank you so much. Always with Margen Stanley and investment.
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And well, what's great about this is Windin and I haven't had a driver's license since time began, like teen years ago. He's Chief Economists Bank of nwsaw Windin this morning as well. When the financial stability of the EMS system, it's like a Bill Lee question when he was, you know, at milking. You know, what does the financial system EM look given the shocks of this war.
Well, you have so have and have nots as always right, So the the first of all again, thanks for having me. It's voice a pleasure to be with you guys. The energie exports are doing okay. The energy importers and sort of the frontier countries are not. So it's we have to go back to how this oil shock, how much longer it lasts.
We'll see how this rolls out.
I think I've talked about some million times, but I think we are in what the IMF calls the adverse scenario, and that's when things get.
A little dice.
You get slower global growth, higher inflation, merging markets or some You have Columbia, Sri Lanka, Pakistan and Philippine central banks already high rates to defend the currencies and to sort of tamp down inflation. So it's going to be a i'd say stressful time ahead. I don't see any big, huge blow ups, but it's going to be very challenging for merging markets.
I think it's gonna be pretty challenging for our new FED chairman, mister Walsh. I mean, coming in presumably he's got feel some pressure to lower rates, yet the data doesn't seem to support that at all.
No, it's you're absolutely right, Paul. He's inheriting a very different situation than he saw I think six months even three months ago. So he's one of twelve people on FMC. His job is chairs to cajole and to discuss and corral.
But there is a huge.
Contingent of hawks right now on the FED. So I think right now, well, it's the Fed is on hole for the foreseeable future until these rates the inflation comes down. But the market's pricing fifty base points of tightening over the next twelve months, which seems litt aggressive.
But let's see how the data comes on.
How sticky do you think this inflation is going to be?
Is if like if we have some agreement today, which could certainly happen given the actors here.
Oil comes back down? Is that it?
Or do we have something underneath that.
I do feel there's some lingering effects.
I think if you listen to the oil industry experts, you know, the sort of normal production isn't really going to come back in the Gulf for any three to six months, may even longer. We're talking about all the backlogs as well as the destruction of the infrastructure there, so.
It's going to take a while.
And obviously oil prices have a huge had a huge risk premium, and that's what's coming down.
We don't I don't think anyone has a feel be.
Where the sort of the fair value is given all the destruction we've seen in the oil sector.
It's a risk.
Yeah, I don't know, we say that, but this is US consumer. You cannot keep this consumer down.
What do you make of the US consumer?
So I'm starting to see some cracks.
If you look at the real numbers, you know, the nominal numbers look great because if you look at the retail sales, the personal spending, the headlines are all nominal. So remember we're in a high inflation environment. If you can dig deeper the real it's the real spending, the real consumptions. A little bit on the soft side, we'll get personal spending, real personal spending this Thursday, along with
the PCE. I think it's I think it's gonna show the dilemma that the phase we're in high inflation, sort of slow in growth environment. That's that's always sort of the challenge for for policymakers around the world, the sort of stackflationary environment. There's no easy answer.
How long does stagflation last?
Typically well so, and it seems like you could.
Bump along that road for a while.
Yeah, so there's a lot of in some ways, there's some parallels obviously the seventies and a lot, but really the main thing right now is that the US is in a world exporter, so that's the one thing I really has cushioned us. But physically, you know, we got back to what you said, the consumer seventy percent of the US economy, and we're getting squeezed by high grass prices, high energy prices, high food prices.
The lamrockets stabilizing.
But I don't think it was out the breaking the Champagne open. You know. I know that this graduating college class had a really tough time. So I see some signs of nervousness within the consumer, and it's again to be determined.
I haven't written on this yet, folks, because it's too difficult, and also I got to find his magnificant speech. Let's do it for the first time with Winthin of Columbia University. We've lost Ned Phelps, ninety two years old, a giant, argumentative, giant of economics. I loved what Olivier Blanchard said. He said, we didn't agree. Basically to paraphrase, Professor Blanchard said, Ned and I didn't agree. And if the sun came up
in the ease, but there it was. I want you to define his work on dynamism in this time of AI.
Well, Unfortunately I did not have the pleasure of having any classes with him, but he was there during my time when we had quite a few giants there that are unfortunate rest in peace there many are gone. Now that sort of tells you how old I am. But but you know, the Columbia University was a real incubator for just just great growth. I think a lot of the sort of the neoclassical and classic comments would have a hard time, uh, trying to figure what's going on
in AI. I mean, obviously there's a whole boost to labor productivity that's great for the economy.
But you know, Paul and I.
Always discussed this, what does this mean for labored overall? Is this going to be a net job creator or not a net job destroyer. I don't think we've seen this sort of technological innovation.
Over in this short period of time.
So I think be great right now to be a PhD student. There's so much to write about in terms of the impact of AI on productivity, labor demand, favorite destruction.
But but to go to el Arian, the unknown unknown is real, that's right, I mean it's hugely real.
Yeah, you know, that's way about my pay grad I do know that right now we're benefiting this huge investment in all the infrastructure. We're finally seeing some payoffs. But you know what, who if all these people are being being proud of work, who's going to buy these goods?
Who's going to buy Who's in consume?
And that's what Paul says.
I'm a Paul on this.
I'm I'm gonna be a bit pessimistic, but you know, I'm you know, someone's being a lud eyed.
The bank, the Bank of Nassa went in there.
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We're gonna go QUI, how about commodity analysis from another time in place we can do that with are going to work in a city group VP of researching commodities and actually looking for trends and commodities in the last six months, which commodity has trended, appropriately trended in order in a good way.
Well in the act sector and the one to look at. All of them are starting to trend in a proper way, and it's all kind of been in the sort of low price environment from which they were coming out as we started learning more about the conflict, the disruption in the strait of hormones and how long will it take? So I would say corn wheat, soybeans on the grain side. As we say that, fertilizer impact being the most relevant for those type of commodities.
Robs Carolyn just emailed and he wants to know about Aldino in the drought is a drought based moving prices rot Paul ready for this.
Yeah, go in the softs, softs, that's how we do it well.
Al Nina is another risk that developed in the last two months or three months where meteorologic agency started to be very confident about this coming in the next month and then getting gaining some strength over the period of the next six months. Some meteorologic agencies are expecting very
strong or record Almina and El Nina. Just to clarify, it's the level of sea surface in the Pacific Ocean, the degree of it, and whenever it reaches to two degrees, that's where we kind of say that there is an al Nina, and if there's deviation, if there's more than two degree warming happening in the Pacific Ocean, then that will characterize it as a strong Alminia. Now, what al
Nina brings with it is this abnormal weather patterns. Abnormal weather patterns across the globe where you can see drought in the in the India, around India, around Southeast Asia, Australia, and you typically see some sort of high level of precipitation in South America, in Brazil and Columbia in those countries.
So the bottom line because software very much concentrated around the production of softs are very much concentrated around the equator, right, and they would have kind of this bigger impact on the yields coming from this strong or moderate on Ninia. It's really early to tell what how how how strong this is significant the sweat pattern would be, but as it's developing, but from we know what we know now.
The factual data is that the temperature in the Pacific Ocean is the warmest at the moment when we compare it with any observable history historical port in the past, at this at this moment. So that probably tells us that there's a relatively high probability and likelihood that this system will develop over the summer months and going forward.
A look at some of the eggs here.
I can do that my GLCO screen, the Global Commodity screen, it's my savior.
It's the only thing I know about commodity.
I soweteans up fifteen percent year to date. I got weed up twenty three percent, cottons up eighteen percent, Sugar down five percent.
What's going on with sugar?
Yeah, and we think that's the lagger in this case.
I think sugar.
There is a lot of news and expectations about the crop and sugar, especially.
In Brazil.
Brazil is the largest producer, marginal producer. About two thirds of what Brazil produces is being exported. The second biggest producer is India. However, in India about everything that's being produced in India is being consumed domestically. Whenever there is a bumper crop, that's where India gets into the market
starts exporting. The risk there is that in the last strong on Nino, which was in twenty fifteen twenty sixteen, production in India fell by about thirty percent, and India came into the market aggressively importing sugar and that kind of spiked the preceures.
Just a minute here, I'm going to take a chance from your Armenia, Georgia down to Armenia over to Azerbaijan. I think Americans are clueless about the importance of the Caspian Sea. We're absolutely clueless about it. It means I think it's a lake wall I don't know, but it's not like lake your ear. It's it's like ginormous tell us the importance of the Caspian Sea to the eastern Mediterranean and the stand nations.
Well, it's a little bit of seguey, but yes, Caspian Sea is very important.
Yeah, we call them sui for.
It's it's very much relevant, but more for the energy complex. And part of my research agenda that I look is we're going in the segways. I look at the uranium and Kazakhstan is the biggest producer of uranium.
And over the last.
Four years, since twenty twenty two, really the development of the trans Caspian kind of route has developed as an alternative root rather than exporting uranium through Russia as typically Kazakstan would do that. But as Aerba, John is a big oil and gas producer, and so the Caspian importance is there and it kind of connects.
Yeah, I can just see you in a meeting with Jane Fraser. He starts sting in the Caspian uranium. She's taken notes. This has been wonderful. This is like old school. I mean, I'm loving it.
I love it.
This has been great, Arkady, Thank you so much, Arcady Gevorkian. He's with City Group. That was absolutely brilliant to stay with us. More from Bloomberg Surveillance coming up after this.
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What a wonderful time quickly, or Carol Striker with us with KPMG Deal Advisory Strategy Service at Leader. Call it the exuberance out there right now. What is the character of exuberance the KPMGCS.
Yeah, I mean from an exciting perspective around deals and just the pent up demand for deals. There is a private equity space. There are thirty three thousand portfolio companies that are wanting to trade over three trillion dollars in those assets, and so there is a demand to be trading within the private equity space.
So this year, I mean, we're going to get some mega mega IPOs in the marketplace SpaceX and maybe we'll get some AI deals.
How about the other stuff.
That's just in the PE portfolios that I've had a tough time over the last four or five six years getting liquidity. I mean, if I see another PE firm sell at portfolio company to another PE firm, I'm going to scream. I mean, that's like, that's the weakest exit you can ever have in my opinion.
Well, it's interesting that you say that. So if you look at the data over this last quarter and the quarters before, the sponsored sponsor activity is actually significantly down from where it was. And if you look at the last quarter, a majority of the deals have been private equity selling to corporates and corporate seeing the strategic nature of being able to bring those companies into their their portfolio and have strategies.
Paul, I got to go here. I mean, I just got to impress everybody a nation. You have a bullet point paragraph on your use of Claude at KPMG. You guys are out front on this the uproar this weekend that Microsoft's cutting Claude back because everybody's using it, it's costing a fortune. Are you observing that at KPMG.
Well, I'm glad you asked. One of the things that we're really excited about is we just announced a partnership, a strategic partnership with Anthropic and Claude, and so we are absolutely leaning in.
What you observing on token use in OMG. We're spending a lot of money.
Yeah, I mean, don't get me wrong. The world that we're moving to is not going to be a world that's not having that token use, and so we are experiencing it as clients zero around increase in token use this last quarter. But we're also you know, hearing it from our clients in regards to their concerns around the cost that the token usage is going to have. That's going to figure itself out over the mist.
I agree, it's going to just figures. That's a nice one. That's University of Chicago to figure itself out.
So what are your companies, like when you look for in the advisory side of the business to get liquidity in some of your client's portfolios, they have to have confidence in the economy, they have to have confidence in, you know, the overall geopolitical situation.
There's not a lot of that out there exactly.
So what are they saying in terms of we want to buy or we want to sell?
What are they doing?
Yeah, absolutely so. I think there's two things. I'd say. First is volatilities in New norm and our clients get that and they have been working through volatility. But when there's shockwaves to the system, it's a little bit harder for them to transact. And so when we saw the first part of the year January coming out real strong, then the war broke out and it came to a stop.
But within several weeks we saw in our business and with our clients is that they really want to transact and the deal market started to pick back up pretty quickly.
With your relationship with Claude, is it generational? The young Turks are learning Claude over the week in and the fossils are like over my dead body.
What I would say is that the younger generation is definitely leaning in more than the older generation. But that being said, we've got a lot of people who are leaning in the and the older genera.
An example, what KPMG uses Claude for besides.
The summer party, we use Claude for and a lot of the different AI. But with Claude we use it for a ton of analysis with our clients to help them improve their operations. So for example, if we're talking to them around.
You've got a plast six manufacturer in Toledo.
Yeah, Pardi help them thinking through their production, thinking through their distribution, thinking through their vendors. It can be helping them through collecting AR and receivables faster. So there's multiple use cases around how we're using information, taking data from all different types of sources. There's internal, external, and using claud to understand what can help to optimize.
I'm going to ask you get back to the key question to the zeitgeist right now, which is who's going to pay for all this? You say token pricing will work its way out just within an open hyachin system, or is there going to be a regulator or is there going to be a price dominant user like Microsoft or Anthropic that can say no, this is what we're going to do. How do you envision that?
I mean, I go back to just like you said, University of Chicago. Right, is the market basic price theory? Yeah, I mean this is going to work its way out in the long term. In the short term, it's it's something that everybody's focused in on and figuring out what's what's the right for their business, the right usage.
Can you come back tomorrow because I learned a lot about Claude.
I know, I know every day.
It's all brand new. It's like a whole new world. Fl Carol, thank you, it's brilliant. Don't be a strange.
Are you based in New York Chicago? Yeah? Okay, Cubs Cubs.
But I mean seriously, this last one, the one before winning streets and then it's terrible.
Alexis would like your tickets and it's better than the Mets. Nice to see Carol. Just get up and leave with the mic on Carol Striker.
You know who does this?
You know who just leaves with the mic on Michael Bloomberg just good walks away. You're in good company.
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