Gains Resume as US-China Trade Tensions Ease

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Michael Green joins you strategists, simplify asset manager. Mike, let's start with you first principles. Why is the vixit twenty one in a bull market?

Well, I mean, the simple answer is that we've been realizing relatively high volatility, particularly amongst the megacap names, and that is affecting the composition of the index. The other thing is the vixit highs or VIC moving higher in the face of the equity markets moving higher. Part of that is simply a mechanical process, the reflection news strikes being brought in, and so the width of the variant swap actually in increases that mechanically can push it up.

Do you assume that it will dampen it down and come in under nineteen under seventeen at some point.

Yeah, that would be my core expectation. Unless exogenous events occur. The VIX has spiked significantly, It was very primed for that sensitivity. What we call the implied correlation, which is the relationship of the index to those individual stocks, had pressed it down to very very low levels. Most of what we've seen in this pop has actually been that phenomenon. The increased concern about some of the stocks is now manifesting itself into is.

This a bigger broader issue?

That implied correlation rose in the past couple of weeks, but we're not realizing those levels of volatility, and the pressure is always there to sell all If the implied are well above the realized, i'd expect to see that pressure coming down.

What about in the credit space? That's what I was reading all of the whole weekend because I was wondering whether this is isolated or not.

You get conflicting answers.

Some are saying maybe this will be signs of more further stress to come, but others are saying it's isolated.

What is your take on that?

My take on it is is that this is actually indicative of a much broader problem we've been seeing bankruptcies themselves have actually been elevated in the corporate space those with assets above fifty million dollars. Bankruptcies for assets above fifty million dollars have actually been surging in our levels that are consistent with a much higher level of credit spreads.

People are piling money in.

There's not a lot of issues, particularly in high yield, because they resist the higher yields. That means they're chasing the secondary of securities and pressuring credit spreads.

Do you noticed Isabelle that he dresses up for Charles Pain over at Fox Business, but he doesn't dress up for us.

He did?

You know?

I saw that.

Slides in seven am in the morning. You were talking to the wonderful Charlie Pain and you're going to talk to us now about translate the private credit banks that's out there. It's it's not a frenzy, but it's fermenting, is how i'd put it. Discuss the fermenting of our fears. Well, the biggest.

Thing to remember about private credit and private equity is at the end of the day, these are just really allocators in another form. Right, you are taking a private credit firm, they are receiving an equity investment from their end investors. They are then levering that with bank loans. This comes through the banking system of what we call the non depository financial institution lending, which is absolutely exploded.

I got to interrupt. This is really important. What do you perceive as a leverage ratio of private credit as a lever up versus two thousand and sixty seven relative to where the banks were in two thousand and six. Two thousand and seven is well below that.

NDFI also captures hedge fund lending that in some situations, particularly in the treasury basis, trade is running quite high. So the overall leverage ratio in that sector is probably in the ten to filaus.

It's pretty high. I say, Isabel, save me.

And so you said that this is a sign of broader stress, So then will that mean we should be on the lookout for further blowout?

And how cautious.

Will that make lenders because that will have ramifications for the economy.

That's really the critical observation is about is the fact that when you start to start asking questions, you become less willing to extend credit. When you are less willing to extend credit, you suddenly discover that people that desperately needed that credit no longer have it.

The stresses begin to emerge. It's Warren Beffett's.

Expression, you find out who's naked when the tide is going out right. It's the same underlying phenomenon where less money available means it's easier to miss that payment.

Tom, can I ask about Vanguard? You wrote a paper about Vanguard. It's called setting the record straight retraious questions about passive investing, which is you know, an interest out for everyone. I mean, yes, a big question always asking the team is the S and P actually passive? Because when they rebalance there's a committee in charge of it which asked this question. Anyway, what do you make of that? Why did you write the paper? What do you see as Vanguard's central blind spot?

Well, I think the core issue is is that passive investing is, first of all, not passive So the definition of passive in the academic literature is somebody who never transacts.

That means you can't get in. It means you can't get.

Out, right, So they are not passive strategies, But it turns out they are as systematic algorithmic strategies that simply say, did you give me cash? If so, then by did you ask for cash? If so, then sell. Any systematic strategy can get crowded. And what we're experiencing now is the impact of crowding into a strategy that most people had presumed had nearly unlimited capacity.

You can see crowding about a lot of things like AI or gold.

Now, well, what.

You actually are seeing is a little bit even more perverse, so things like the rising concentration. This is actually the subject of my first academic paper, which I will send a copy over to you.

Yes, as soon as it's ready.

But what you actually have with passive investing because you are allocating on the basis of market capitalization. That means when a stock goes up, the next dollar in gets a larger allocation. And the perverse thing that we are now finding out is that markets are not nearly elastic enough to take in the scale of the flows that we're sending them from passive vehicles, It has a really

This is what the paper is about.

It lowers the threshold at which we discover that passive becomes a negative feature in the market.

Can you quantify a set of PE points where it's overvalued because of passive internal dynamics. Walmart's at forty should it be at thirty eight or thirty six or fifteen?

So this is one of the real challenges tom, because if you think about what should be happening when companies are experiencing extraordinary levels of profitability, we should expect those profit margins to mean revert at some point in the future. That would actually tell you the valuation should be even lower than you would otherwise expect. I know this sounds absolutely crazy, but my estimate for Walmart is probably somewhere in the teens.

Oh that's I can't say I agree with that because I'm not allowed to have an opinion, But there it is. I got to squeeze a sentence to important. We have a planum in Beijing. It's off the radar for the American people, the American business community. I don't buy it for a minute. And you watched China in this development of a five year plan forward. What are you watching for?

Well, the single most important thing that's happening at this planet is the relative lack of news about gi going into it and the wholesale replacement of many of his loyalists that we've seen in the million terry in the past couple of weeks.

There's nine nine and well that's just in the last week.

I believe about seventeen that have been replaced over the past couple of months. It's unclear whether this is driven by g or whether this is a loss of power for G.

Right.

We look at American politics, We're very familiar with the travails between the Trump administration and the Democratic Party, et cetera. Every other country has those as well, the simple reality as they are largely concealed from us, but there very much appears to be a significant power struggle underway in

On G himself. We just don't know yet. Brilliant synopsis. Michael Green, thank us so much. Is simplify asset management something we'll be watching through the week. Here are these important meetings in China. Stay with us. More from Bloomberg's Surveillance coming up after this.

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We now turn, incredibly importantly, turn to Henrietta Trees joining us from Veda Partners here on the shutdown. Henriette, I look at the Washington Post this morning and there is not a single article on the shutdown. I'm sort of shocked by that. Give us an update X number of days in to the agony of our federal workers.

Yeah, that tells me pretty much everything you need to know. There's not going to be any resolution this week. I wouldn't even expect one next week. The White House is not engaged. It's clear to me for my conversations with Republicans on the House and set outside, that they're waiting for the White House to decide what they want to do here, whether there's anything that they want to offer to Democrats to make anything shake loose.

They'll have their eleventh vote.

It will fail again, and we'll just keep repeating the same thing, knocking our heads against the wall for a while.

What part of our federal government will we observe failing? Don't tell me like national parks. Okay, there's twelve people out there, I get it. But within the real day to day of our listeners and viewers, what will fail because of the shutdown?

Well, I think we already have seen the data releases fail, so we're already in the thirds of that. The market's already had to adapt to that. But the next big one, as everybody always knows, is going through the airport and trying to travel. It's very scary to be concerned about whether or not you're going to be able to get through, whether or not the flights are going to get shut down. That's generally the main branch of AACK.

Okay, but Isabelle at the golf stream. So I had to take thank you Delta for a great trip down to Houston. And the answer is it was seamless andry. There was no problem. Are there really problems with TSA and air controllers?

Now they're starting to register upticks in folks calling in sick from work, And the longer it goes, and as you miss those pay cycles, you'll start to see more of that. And I think that's really the story of the shutdown. It's not one being silver bullet. It's a compounding of a bunch of little things. No military pay, no federal employee pay, that starts to weigh on members

You said that in your note that polling shows that Republicans are bearing the blunt of the blame, but most of their ads are actually targeted towards the Democrats. And I've seen some of them. Where do you see the breakdown and messaging is why isn't one party more effective than the other when it comes to the blame game?

Yeah, I asked staff across the aisle both sides about this last week on Capitol Hill, and Republicans are a little bit split. There's some who think that none of this matters. Voters are totally disengaged and therefore it's not a big deal. The President can keep tweeting, you know, AI images if he wants to and it doesn't move

And had one final question here to get the week started. It's October. How many people what's the level of Henrietta Tre's radar on retirement of representatives and senators? Are we going to see a wave of people retire.

We already have seen the announcements come there from all over as well, so from farming states. I think that the next round of elections, this midterm cycle is going to be really telling. Everybody's sort of already in twenty twenty eight, even on Capitol Hill, which is really fascinating.

You know.

The main story is Jadie Vance will be, you know, deemed to be the onner op and the follower to President Trump. Who are the Democrats going to pick?

We're focused on that.

A lot more in conversation than even the midterms. It's kind of interesting to see that we just move ahead to that.

Henrietta, Thank you so much. A Monday Brief with Henrietta Tray's Beta partners stay with us. More from Bloomberg Surveillance coming up after this.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Cocklay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa Play Bloomberg eleven thirty.

Stephen Angler joins us. He's with a standard charter bank and it can't be a normal day. When you see the headlines coming out of Argentina. Oh, I guess we booked Yeller. Darius Dale was just in all ivy football at Yale. Were you on the football team? Ill, Stephen Englander?

I had to turn them down because they would be unfair if I joined the team.

It's great to go from darius Dale to Stephen Englander of Yale. At University Argentina, we have the stereo Troy uh stereotype Avia Pirona and that maybe we have a Germanic history, and then coming out the prosperity of Argentina fading away within standard charter. Where is Argentina right now? How chaotic is it? Well?

You know I should preface anything I say by saying I'm not an expert, as you know, I do G ten mostly.

Well, it's G eleven. Okay, Well, you know, maybe let me rephrase this. When you look at Argentina dealing with the Secretary of Treasury and the President of the United States, his swap agreement this morning is unusual, right.

You know, all of these types of agreements are unusual, and you know ultimately they get decided, you know, in the course of years by whether or not they're consistent with the fundamentals, and what they're trying to achieve is, you know, sort of makes sense. You know, does the exchange rate make sense? Do the policies make sense? And you know, aid like that can be a bridge. It's never, it's never the entire edifice itself.

What about let's talk about the quality of the US data.

You've said that it's now a risk to the market and the policy itself. How much is it actually distorting the FED decision.

If it is, well, I think it distorted it pretty much. I mean, if you compare the comments that the FED was making about the labor market may June July into August and what we now know about the labor market and the fact that the data are still wrong in the sense that they overstate the contribution of new firms consistently. You know, I think it probably the more hawkish than they ought to have been.

So the FED aal always sys their data dependent. If the data is flawed, it was it that What does that say about policy reliability then, especially around employment inflation readings.

I think there's risk there.

I think what ultimately the data are probably correct over a period of say four quarters two years. But I think in terms of making real term, real time policy and in terms of market participants, you know, pricing assets, the fact that there's so much volatility and error and the short term numbers is a big deal.

Steve Dangler wrote is the standard Charter Bank and extended conversation for Global Wall Street. This morning, we said good Morning around the world on YouTube, in your office, at home, even in your car. Don't look at the screen while you're driving. Subscribe to Bloomberg podcasts Good Morning across the nation ticularly ninety nine one FM in Washington, ninety two nine FM in Boston, and Bloomberg eleventh three to zero.

Well, lately we've been looking at things like euro Brazil or sterling Brazil as a gauge of you know, Brazil being a very risk on type of currency and sort of a gauge of how kind of willing the market is to take on risk and buy Carrie.

Europe a kind of a very mixed.

Bag and getting sort of slightly more negative mixed than positive mixed.

So Zabelle to translate this into the real world, I punch up EU BRL euro Brazil on the Bloomberg. I take it back twenty years and there's just been a massive Brazilian weakness and euro strength until now. And that's, folks, just as a window into the Steve Englander world. Are you suggesting go long Brazil versus more dominant economies?

You know, we we have some sympathy to that view. I mean we you know, you look at some of the risk negative events of the last week.

They are a couple of weeks.

They look as if they're likely to fade, and we do think that the markets could well go back to looking at Carrie and a, you know, as the risk environment becomes more favorable.

I do see that this is a stunning chart. Actually, it's almost like, I don't know, how do you draw it? A day, I'm gonna liigne the EU RBRL go.

That's Steven Englander's world across right as well. Tell me about Swiss Frank, I mean, for America. We perceive Swiss Frank is strong, strong, strong, and they've got their own unique issues. I mean, Nestley makes headlines with sixteen thousand people out the door. But the flow of money into Switzerland with dollars Swiss or EuroSwiss, how does that ultimately play out?

You know, over time, I've changed my view on Swiss because you know, I was always focused on overvaluation.

But you take a look at it.

They continue to have a trade surplus, so you know, they and they tend to be in product segments where it's not you know, there's some product differentiation, so the you know, there's interlastic sleeve demand there, so prices go up, man doesn't collapse. And at the same time, you know, they have a surplus in their income account and at the same time money wants to come into Switzerland. That's

Six months? For steven Ing?

Well, you know, we we like our euroview your weakness, and we think and dollars think, we think it will play out over that time horizon, and we think that it's you know, we think that the market consensus is still very dollar bearish.

You mentioned dollar strength, So if the US is overstating it's labor growth, labor growth and market growth strength, then is the US dollar miss price?

The dollar is mispriced, but not for that reason, I think, I think what you know, what we're seeing. I mean, if you think of it, the GDP now before the shutdown was running three eight three nine, it looks like labor input and correctly measured was probably down one percent. So productivity is booming. Historically that's been a very dollar positive development.

I mean, I look at the charter folks a bbd x Y. This is the Bloomberg Dollar Index. Michael Rosenberg and his team invent of this. It was immediately taken up by the IMF. It's more than the d x Y includes China, includes the world of standard charter bank as well. I see one about two bouts three bouts of catharsis move strong dollar? Yes? Yes, yes, yes, yes, reversal. I mean, does that indicate is there a catharsis out there?

You know, you can look at it both ways. I look at it the other way. I think that exporders to the US. They have less competitive currencies because of appreciation, and then they're facing the tariffs. I think it's hard for the you know, for them to swallow for their appreciation. And you know, i'd say that the you know potential, you know what we're seeing in terms of productivity, productivity potential in the US that's emerging very late in the cycle.

Steven Angler are an extensive conversation this morning, Isabelle in time, can we welcome all of you around the world and particularly the standard charter world.

Isabelle, you've highlighted that employment population ratio is a more reliable labor metric than headline unemployment.

Can you talk to us about why.

Well, because the unemployment trade is affected by labor force participation. So if you're losing jobs but you know people are dropping out of the labor force, it doesn't show up, or if you're it doesn't show up as much. But normally you'd say that, well, you know, say people want to work and so if the employment of population goes down, that tells you that there are fewer people working.

So if all these data are inaccurate, what could Affed or the BLS do realistically and urgently to shore up data credibility without, of course, massive new funding, given that the government is on day twenty of the shutdown.

Well, I'm not sure they need that much funding. I think that the issues are more conceptual. I mean things that would be easy, like counting gig workers. Because there's so few big gig firms you can they're now not picked up at all or virtually not at all. In NFP, you know so much RELI there's so much reliance on the unemployment rate. But it's a tiny sample compared to you know how much policy and markets rely on it.

But doesn't that require staff though, and that's their main complaint.

Well, look, I'm not an expert on the inner workings of BLS, but I'd say that what it requires. And just as an example, the data show that the native born population of the US increased two and a half million between March and August. Well, that didn't happen because there there wasn't a surge of birth sixteen years ago

O come on and it's a great work of anaalong to help us out. I want to get back in the time we've got left, Steve Angler. I want to get back to your arch call of euro weakness, and it's Robert Schiller at Yale, Marty Feldstein, years and years, just a challenged euro experiment. We've got We're looking at the six Republic of France, depending on how that works out, London and complete chaos in the United Kingdom is well, how does that push euro weaker? If there's geopolitical upset

So we have one twelve by the middle of next year and we basically keep it there. I think what the market is under estimating is the ECB's willingness to cut raids. The market basically has things flat. We have another cut in in Q four coming or the end of Q four. But I think the ECB is likely to be much more reactive to weak data than the market is now.

Is that because they enjoy a lower nominal GDP set, they just simply have room to move without upsetting the system.

You know, inflation isn't the problem, but the right wing politics are a problem, and I think that they in so far as they could push back against it with stronger growth, they're going to do it.

But we have right wing politics in America, and I believe we have a financial boom going on.

I think right now the ECB seeds that, well, a, there's not a financial boom in Europe, but I think the ECB seeds itself is part of the you know, European political framework, and you know they, you know, the sort of center of gravity in Europe is for more unification, not the sort of right wing agenda, and I think that they're trying to make it easier to stay at the center.

So the Eurozone economy continues to underperform. Is the FX market then reacting to current data or more forward looking expectations in your view?

You know, I think the the FX market has been very focused on what Donald Trump does, and you know too much in the sense that even Trump laughs that kind of you know, the seriousness, the literal and the degree of literal interpretation they take of every policy move that he makes, which he knows he's prepared to pull back.

I got to get this in your frame out right now, your euro dollar call, just to give global Wall Street scope and skill. Yeah, well, I.

Think we expect one fifteen at the end of this year, when twelve at the middle of next year.

One twelve?

Really?

Okay? Wow? Is that upset that up? This has been wonderful. Can you do this tomorrow at your Beckon call? Steven Agler, thank you so much for the standard Charter Bank. I just can't say enough, folks, his ability to synthesize in all of our global system. Stay with us. More from Bloomberg Surveillance coming up after this.

This is the Bloomberg Surveillance podcast. Listen live each weekday starting at seven am Eastern on Applecarplay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty folks.

I don't do enough of this. I'm not going to mince words. It's the cottage industry up in Boston, the leadership up in Boston within the financial business of trying to figure out retirement. This goes back well to World War Two, back to Arisa of nineteen seventy four as well. It's work at Boston College and their retirement work, and also at the Massachusetts Institute of Technology. They have the mit Age Lab. They're the ones that send me a note every year and say you're one year older, joining

Good morning, Tom, and thank you for having me and I think you'd be working till ninety regardless of this report. Having listening to you for a while. So the study is a new one. As you mentioned, with mit Age Lab, we wanted to take a more holistic look at retirement

I've always said there's a kink at age forty two. We finally get serious about retirement. At forty two. Are the younger kids learning from our lousy retirement history to start saving earlier? Is Isabelle leading the way by saving earlier?

I would like to say yes, but I think they trends continue. So the younger generations, just with the immediate needs, whether that's student loan or just attention span, is not where we see the most prepared. That still continues to be just before retirement age pre retirees and retirees having been gone through some of the thought process.

But there's some bright spots.

There are places where the American score highest is around social connections. So great to stay connected, whether that's directly in person, phone, social media, what have you, and community. Are you at a place where you have access to facilities, whether that's healthcare, great food sources, fresh produce and things like that, and transportation, which is really important as you get older as well.

Those are lifestyle things as it well, yeah, and how.

Can you afford it if you can't afford the groceries is the heart of them.

I feel like they're all interconnected.

And Wayne has made the point that working with a financial advisor who discusses longevity planning makes a meaningful difference. But what exactly does good longevity planning look like? Because as we've pointed out, it's not just I thought it was just money to be friend, but it seems like it's not.

Yeah, So our study shows that someone that actually has a financial advisor, that's not surprising, is probably better prepared. But if that financial advisor talks about longevity planning, they score solid seven points higher than the US average. So what are those things? And yeah, we typically talk about do you have enough money saved? And sometimes health, but there's actually six other domains like are you planning to have daily activities so that you can get used to networking?

And you're not going to tell us to get rid of the dogs, right, dogs? Yeah, because you trip over the dogs. That's how everybody breaks her. Like the first time you're saying we can keep the dogs right.

I think yeah, depends on the size of the house. Actually, I was visiting a friend this weekend and I miss stepped on the tiny little dog that was constantly on my feet. But maybe larger dogs will be better. But other things like like I mentioned the community, but place where we scored the lowest as Americans was talking about care because at one point, one way or the other, we will either need care or provide care to somebody else.

What's one thing every listener should do this week? I guess to improve their longevity preparedness so that you know, the people in the circular table could take note as well as me.

Yeah, to end on a really hopefully positive note. The good news is we're living longer, right, so we want to make sure we prepare for that longer life. And

You gotta run Wing Park. Thank you so much. Please come to our studios in New York when you're in town with many in your life. Johnny Ncock and the mit Age Lab an important study on We're living Forever.

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