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Julian Emmanuel starts us strowing this morning single best paragraph I've seen on innovation, bullmarkets and draw down quote.
Don't fear a bullmarket draw down. It's normal. It's not a correction. Even it's sort of like a video was down four days in a row. How do you respond to that?
As an investor not as sophisticated as Julian Emmanuel.
You have to think long term.
And again you hit it a few moments ago, people up in the snack court getting teary eyed because they're sending their kids.
Back to school.
September never fails to disappoint the bulls. There's always always a time, and it started that way yesterday. And from our point of view, none of the elements that end bull markets are present. And so you know, even if you look back at all the great bubbles nineteen ninety nine, for instance, you had four discrete ten percent plus drawdowns in a nine month period where the Nasdaq rowse over one hundred percent.
So what are we doing here?
Are we sticking with the big tech names, Julian, or are we trying to find some value outside of what has worked so well for so long.
So our view into twenty twenty six is that big tech will continue to lead. This is an AI driven bull market, Okay, but again Stomaching that volatility isn't necessarily for everyone. And frankly, what we're trying to do is sort of isolate the people that would prefer to have an element of hedging in the portfolio, because quite honestly, if you sort of transfer a little bit of risk,
it enables you to buy the dip that's inevitable. So for us, that's low evaluation stocks and a little bit of a defensive tilt.
Can you go into La Techdor downtown the steakhouse Daniel Blue Steakhouse in the place the place falls quiet when Juliana Manuart walks in because you write the single best earning summary every day of the earning season. Nobody's talking about quarter ending September thirty. How do you and Ed Hyman frame out revenue growth off nominal.
GDP and the earning season it begins October fourteenth.
Well, it's it isn't going to be as strong as these last couple because it's.
Just not I just said that last time I got it wrong, and well no, no, actually actually the person that concox our surprise guys in disease actually got it right.
Hats off to my colleague Stan Schipley for that. But frankly, what it says in general is there's more to all of this than just the bump from inflation. There is organic growth going on across business, and frankly you're seeing it, you know, really broad based, given the fact that what's different about this bull market as opposed to the Internet in the nineteen nineties is you're seeing the vast majority
of stocks advancing together. Tech is outperforming, but you're seeing them advance together.
What do you think we're going to get from this Federal Reserve? What does a market need from the Fed? Does a market need a big easing kind of play over the next twelve months or.
Not the market expects seizing. Certainly, the political will seems to be pointing towards more easing rather than less. I would say that if you look at the last couple of years, provided that the direction of travel in terms of the economy is an expected trough in BROW in the fourth quarter, and then you get gradually higher growth. We don't necessarily need that degree of easing, but we certainly do require a cut in September.
How do you respond to the idea that retail has a wall of money, they have pension money. Eric Belchuna says, it's all going into ETFs almost is an immovable force, like an aircraft carrier going through the water.
How does that change guessing the market?
Well, Jack Bogel had been talking about this for twenty thirty years previously, and what it actually does at the margin, because there's so much money going into ETFs, is that it gives you more of an opportunity to isolate the winners and the losers because there are mispricings at the individual stock level, and we've seen that throughout this bull market, because correlations among stocks are at some of the lowest levels they've been in a generation.
When you go talk to your institutional investor clients joining around the world, what do they want to talk about? What's the question they really hit you with the most.
It's certainly all surrounding AI. You know, yeah, surprise, surprise, and then the other surprise is valuations. Look, it's an uncomfortable time if you're sensitive to valuations, and generally we are, but this is an environment that all the fundamental underlying trends support, you know, persist didn't higher valuation.
One final question, way Lee from Blackrock, So she's gonna leave if if you don't answer this?
Where's Dheimen on the American economy? Right now?
We're troughing, and I go back to April when the entire world thought we were going.
To have her Asuay Wally didn't.
She was long well evercore is I certainly did not, and we don't see it either. And we also see inflation peaking in the fourth quarter and gently falling over valuable.
Julian Emmanuel, thank you so much for getting us as started to stay with us.
More from Bloomberg Surveillance coming up after this.
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To Juliana Manuel the Way, lead global chief investment strategist at Blackrock well Waitalie. We can do like a two hour conversation here, but let me just dovetail it over to the bond. As to me, it still reads idiosyncratic story by story.
Versus a large global bond sell off. Do I have that right?
There is a fundamental theme underpinning this bond yield reprising and this is to do with Tim Premier needing to reprise to reflect the deeper fiscal trajectory and the broadly still persistent inflationary pressure. Now there is a country specific flavor to the individual country bond market. But for the reasons that I just laid out, we have long held the view that long dated bond yields needs to reprice higher.
They never reprise gradually.
They always reprise suddenly, which is where we are right now.
That's very suddenly.
Really, what does it mean when out past ten years we reprice?
What does it mean for the shorter term paper that most of our listeners and viewers are in.
So, Thomas, you know, we have had the view of the curve needing to steepen. So in part there is a underweight to the long end of the curve, but there is also a preference, an implicit overweight to the front end of the curve, and so far this year we have seen significant steepening, but more relative to the very long end, so on poking about thirty year rather
than ten years. But what has also happened is that the front end of the curve actually priced in more raycards, especially kind of going out to the end of next year. So that is further supporting this deepening view, meaning that they actually played out better than we expect. We were expecting to just collect coupon from the front end of the curve, and we're also getting capital appreciation because of the rape repricing rape path repricing, so that's done really
well and almost almost too well. We still have the steepening view, but because of the very significant steepening that we have already seen relative especially kind of all the way out of thirty years, I think that view is a lower connection at this point.
Wait, we saw early this year when there's all the concern about some of the tariff policies, a mi A shift and asset allocation. Outside of the US, the rest of the world, including European equities and so on.
How do you see that these days?
How do you think about geographic allocation of capital?
I would say from a part of consideration alone, that does not immediately translate to international markets over the US market because it has global read across, and international market have also come under pressure because of tariff read through, and we think about kind of the dynamics of negotiations. It does not automatically mean that tariffs because it's mostly uncertainty coming from the US. It needs to be negative for US and more positive for international market.
What's happened so far this year in.
Terms of the our performance of international market, specifically Europe and may be parts of emergent market relative to the US,
has everything to do with a weaker dollar now. A weaker dollar now close to ten percent down on the year, has everything to do with number one cash path has reprised the lower and number two term premier has reprised higher, and the combination of both of those things would lead to a weaker dollar, which we have had, and that has meant international markets are looking on a relative basis better.
But the bigger fundamental picture remains when we look at earnings, it's still mostly US markets that are driving meaningful earnings growth, and within US is still around the ecosystem of technology AI tech plus international markets are really struggling to grow earnings. The emerging markets are doing better, but there's a translation effact.
Well, in one final question, the United Kingdom is an ungodly mess. We're going to be governors Marcus Ashworth folks out with a brilliant essay today.
We hope to get them on tomorrow.
Walley, how does that work out? I mean with Liz Trust, it was a true crisis. Are we like a list trust moment? Or is this different with the Chancellor of the Exchequer?
Well, UK seems specific, but the challenge that they face is not specific to the UK. UK is perhaps more emblematic and more pronounced. But the bigger picture is this is a tougher trade off environment facing the government and facing central banks. The government is facing a taugher trade off between fiscal discipline and also the need to spend more to boost growth, and a central bank is facing a tafa trade off between supporting growth and managing price
stability and inflation. So in this world shaped by a supply constraint because of mega forces, We've talked a lot about them. Tafer tradeoff is really characterizing the UK in particular, but across the major economies.
Too. Short of visit, Whaley would love to get you in the studio here when you can again. Wally is with Blackrock. Stay with us.
More from Bloomberg Surveillance coming up after this.
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YouTube with us with City Group, head of Emerging Market Economics, Chief Asia Economists with a huge platform for the International Bank. You're at the University of Philippines. You're flying to Logan. Good morning, your first day at Harvard. What was it like your first day at Harvard in their PhD program?
Well, this is back in the mid nineties. Completely intimidated. But hey, I'm a product of globalization. I mean, here's someone who came into Philippines, had nothing and it was a great experience.
Who was your advisors at Harvard?
So Martin, Marty Felsen, you're the privilege of Martin.
Absolutely and David Cutler and you know other professor, fantastic professor.
That's a good way to migrate to the fiscal debate.
He got a little bit of that with Marty Feltsiegin folks, he was Professor Felsain was a huge supporter of what I've done for years. How messed up is it? Or is it idiosyncratic right now? Where the Philippines say we'll do well in Japan's killing over.
No, it's really interesting the divergence we're seeing between emerging markets and developed economies. And I guess that's probably symptomatic of the fact that so many emerging market countries have gone through repeated bouts.
Of crisis in the past.
So in a way they've learned to kind of be They've been disciplined by the market to keep their fiscal indexes.
Yes, but you look at us. You know, I'm an exorbitant privilege.
So if you've gotten away with a lot of things, you know, it takes a lot politically, it becomes very difficult to actually self correct. So it is interesting to see some of these divergences happening. But of course, you know, we are still getting in. I mean, a lot of the sell off we're seeing in developed markets obviously seem to impact a lot more what's happening in DM markets
for a lot of adiosyncratic reasons. And then we'll see to what extent parts of emerging markets can be relatively more insulated.
You're based in Hong Kong. Yes, you're coming here to New York.
You're meeting institutional investor clients. What's your message today that Asia?
Look, I think the message is we are slowing down. I mean, we've had a lot of positive surprises in second quarter GDP growth, but I think there's really a risk going in the second half with the reversal of the export payback effects because a lot of these tariffs kick in belatedly, and then all this uncertainty is going to have an impact on capets, and capex is a
very trade intensive activity. So overall, I mean, if Asia hasn't really had much inflation, I mean, even before all of this, we've had very benign core inflationary pressures, and so I really think there's not a lot of hurdles for central banks to continue to be relatively you know, dubbish and benign. And that's kind of the the macro
theme is really more of a slowdown theme. But having said that, despite the slowdown, we can still have some kind of disconnect between macro fundamentals and financial markets.
Look, what's happening to Chinese equities.
So.
How are the terrors playing out across Asia?
Rit large?
No, So it's really kind of interesting because at the start of the year, you know, Trump campaign sixty percent tariff on China and ten percent on everyone else, and there was a lot of hope that there will be a capex supply chain move to other parts of Asia, like Asion. But if anything, what's happened is China's net export engine has actually been stronger than expected, and the tiref differential is narrower than expected. And then when you
factor in this shipment levee, it even complicates things. So in a way, this rebalancing is kind of not really happening. And so I think, you know, you know, I mean,
obviously it's still a challenge. I do think we're not seeing it fully into data because of this front loading, but we are starting to see parts of Southeast Asia really see a slow down in exports, like Thailand, Malaysia, Singapore, and I think this kind of excess deflationary pressure, excess supply out of China impacting manufactured goods is a challenge, so overlay.
A dollar call here.
I don't want you to do effect strategy for City group, but to me, the heart of the matter is the release valve of the system, and a given structured trilemma is currency movement.
How does the steam out of the pressure cooker in the dollar work out in the eighteen months forward?
Okay, well, our view is that at least in the next you know, until by the end of the year, we are still expecting dollar weakness. And part of that is really on the view that we're expecting the FED to cut and we're you know, we're expecting to cut every meeting for the next five meetings. So as US economy is expected to slow down, I mean, we had this upburger vision in second quarter, but inevitably it's going to slow down. It's going to slow down faster than someone little pen pays.
So strength, that's singing dollar strength, that's even yen strength. I mean, I don't want you to make a call in yen, but a one forty eight down to a one forty can they withstand now?
Those strong currencies given the Trump terrafi.
The case of Japan, I mean, the currency despite any movement, I mean, it's still relatively on a real effective exchange a quite cheap in Japan for the rest of Asia. I mean, this is why I kind of started off talking about central banks having more room to cut because if in the end, your economy is slowing down, and you know, dollars not really a hurdle. If anything, when you have an export slow down, rather than have the fts weaken as an automatic stabilizer, it's kind of going
against you. It gives you a little bit more room to kind of ease monetary policy. The other interesting thing that's happening is kind of dollars cnah, you know, the dollars c and why fixings being relatively strong and stable. So again, I mean it's going to be interesting whether going into five fifteen to five year plan, if there's more messaging from China rebalancing to what extent does that get reflected with a greater acceptance of a bit of stronger redmen B.
So, how does China view the US as an economic partner competitor? What's China thinking?
I mean, obviously, I mean trust, Trust is something Once you lose that, it takes a lot of time. Look, I think China is going to be very very careful. They now realize the lesson that, Hey, you know, it pays to have economic leverage to have a choke point. So having that chokepoint of critical minerals really help them to de escalate the tariff, which is why I don't think they want to give up that choke point. It's very important to have leverage. And again, of course they
still need to deal with China the US. It's still a very very important economic relationship. So I think they're going to want to, you know, obviously kind of stay engaged to a certain extent and have some positive overtures if there is a Sheet Trump summit by APEC in November. But I mean, China is still going to be diversifying its economic relationship.
When you were at Harvard, did Ken Roga throw a piece of chalk at you?
He wasn't at Harbor when I was there.
He was lucky for you. Here's my book of the summer, Our dollariar problem, folks. I'll do all the books out, try to get it out today as we begin the autumnal season. Here our dollar your problems is wonderful compendium of fiscal financial crisis. Do you have in the back of your mind, given Trump tensions, France tensions, Italy, whatever, that where we could get to a point of volatility here them.
I think it's really interesting.
I mean, look, I think there are some debates about how much of dollar weakness is structural versus cyclical because US is going to slow down. Look, I think I don't want to over exaggerate the structural dedollarization story because the reality is there's not really be a lot of alternatives.
But I do think something is happening in terms of markets wanting to have a higher term premium for a long data US treasuries because of fiscal risk, inflation risk, kind of mercantileist policy, wanting a weeker dollar, and any risk of economic coercion. So I think there is something there that's happening at the margin, but the dollar is the very dominant.
I want to final question. We have a display back to.
My ute of a Chinese military might in the last twenty four hours, North Korea, Russia, China all lined up lots of holding hands with the India and that what does it symbolize for your bank about the Pacific rim and over to South Asia.
No, look, I think there is really a tug of war going on globally now about the kind of the levers of economic power. And I think, you know, there is a lot of changes. I mean, a lot of people are talking about changes in world order and to what extent are we moving towards multipolarity and this is going to be an orderly adjustment or not. And I think what we're seeing here is really a sign of kind of a posturing that's coming out of you know, obviously China and kind of showing them there.
I need to get you in trouble with compliance, absolutely, I got to get you in trouble with your lawyers.
Do you look at the Trump regime as one off which we will heal from or is this a seismic shift and global economics?
Well, again, I am from you know, I'm hardly you probably know more about US politics than I do. So again I think hopefully this is part of an adjustment and pendulum swing, and they may be pivot a little bit.
But look, I think he got elected twice.
So it's hard to ignore the fact that there is something underpinning kind of this populist movement going on in the US.
Why you're going to bring the m bar back at the Old Mandarin in Hong Kong. We'd like to see that they took it away. They had a brass plaquet in seats. Joanna, Thank you so much, Johanna and Shua where this was city group, Just wonderful. They're the Asian economists.
Stay with us.
More from Bloomberg Surveillance coming up after this.
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Time for your September Civix lesson only with Professor Cantrell of Pimpko Pocket Recision, Murkowski of Alaska's Mental about It, Mike Ground's pheasant Hunter from South Dakota, Mental about It, inform us what in God's name is a Trumpian pocket recision?
Basically, this is an effort by the White House to cut spending that Congress has already approved. And this is a real poke in the eye to the institution of Congress. I think there have been several of those, actually, both President Trump and President Biden, and just I think the executive branch in general of the last few decades, as the executive branch has become more powerful and Congress has become less powerful. But pocket recision, I think is definitely
exacerbating already already tensions on Capitol Hill. I don't think they'll allow for it. I don't think this will actually happen, but just the fact that we're talking about it and members of Congress are very upset about it, I think, will you know, cause even more frictions we get to New York.
When they go out, they go back home, it's recess. A lot of people are getting yelled at in meetings. What's the internal body language of representatives and senators after going home and listening to the voters.
Well, I think, you know, the Republicans in Congress, and both the House and the Senate were took a very bold vote by voting for the one Big, Beautiful bill of course that the extension of the Trump Task cuts, additional new task cuts, but also some Medicaid cuts. And they are hearing from those folks who are really upset about those cuts. I think they are trying to sell this as a pro growth, sort of pro middle class bill.
I think remains to be seen if you look at polling, you know, I think that folks are a sort of skeptical of that narrative. I think the big question, though, will be in the beginning of twenty twenty six, when some of these tasks will come to fruition. It will that sort of the sentiment around this change. But it's been difficult. I mean, they are this was a big legislative feat honestly for Speaker Johnson to pass this with
such a smull majority. But not sure not well sort of TBD on whether the electorate is, you know, how well we'll be received.
Is our government going to shut down dan September?
I think that's a big question, and actually this pocket decisions sort of makes it I think even more uh, you know, maybe more relevant. You know, of course, the government has to be funded every every fiscal year. That fiscal year begins October first. Unlike lots of different types of bills for government funding, that requires sixty votes in the Senate. That means that by definition, Republicans need democratic
co operation. So you need by definition a bob bipartisan bill to avoid a government shutdown because of these things like pocket recisions, because of friction between Republicans and Democrats. Right now, I do think there is a pretty high chance that we could see at least a temporary government checkdown or at least a lot of drama around.
Let's go micro here with Friendschill.
I mean, we know Friendshill quite well Financial Services Committee, Arkansas. You know, I'm going to say he's putting up with a Trump Act as being a different kind of Republican. People like French Hill and the GOP. What's the backstory right now? Are they just trying to get to March where again it's the election frenzy of November.
Well, look, I mean I think a lot of Republicans in Congress, I mean, I don't know about Chairman Hill, whether he feels this way or not, but presumably he does. Is that they have their majority much thanks to President Trump. So you know, I think that what we see in every cycle, every new administration, the party in power gives that their president a lot of wiggle room, a pretty wide birth in terms of doing whatever they want to do.
I do think though, to your point that that starts that kind of window, that flexibility starts to close as we get closer to the midterm election, and.
We'll book, don't give me a weaker day.
Come on, Oh my goodness, I look, I think that next year, as we go closer in fundraising, what have you mean? Republicans have done a great job of fundraising. I mean really, the Democrats are much more in the wilderness, if you will, than Republicans particularly and fundraising. You know, the fundraising continues to be healthy. You know this they you know, the president may be able to keep his
his party you know, together. But usually what you see is going into a midterm election cycle, usually the spring, Tom, to give you sort of a time frame, is usually white.
Broncos rebuild for the next year.
Okay, you know what, We're not going to have to rebuild Tom. This we are looking quite strong, thank you very much.
So let me I mean, is it too early to start thinking about the mid midterm elections here?
I mean I think it's uh, you know, we'll we'll see in terms of you know, the the the sentiment. I mean September of usually of the year before the midterm, usually pretty early, we'll have some elections that are happening in November, you know, the Virginia gubernatorial race. New Jersey has it. Yeah, so these are you know, these can be kind of canary in the coal mine, if you will. I think it's it's important not to extrapolate too much
from those those sort off cycle elections. Broadly speaking, though, if passes prologue, you know, Republicans will probably lose some seats in the House. They of course only have a two seat majority right now. That's why you're seeing them really focus on this redistricting effort, which is quite unconventional.
Usually redistricting happens every ten years after the census. They're accelerating that with the hopes that they can actually add some new Republican safe seats and potentially defy history and keep the House.
Give one more here.
I ask a lot of the Washington folks, where's the Democratic Party today? I don't hear them, I.
Don't see them.
I don't know who to likee.
Rebuilding.
There's gonna be a rebuilding year or rebuilding years. Yeah, I mean, look, their brand is incredibly tarnished. I mean you look at you know, polling. Take polling for what it's worth on both Republican and Democratic side, but the polling suggests that they have the lowest favorability rating that they've had for decades.
Okay, but in nineteen sixty two Nixon he loses the California governor's race. He's at the absolute bottom in what six years later he was President of the United States. Where is that initiative on the part of the Democratic Party.
Well, I think a lot of folks who are going to be the future leaders of the Democratic Party are trying to sort of, you know again, maybe give the Democrats in the House and the Senate a wide berth if you will. I think what you'll really start seeing after the maternal elections is folks are appearing kind of sticking their heads out of the sand and maybe start leading the Democratic Party. But until then, I think it's going to be what we're seeing, which is just you know,
ail here. It may be too strong of a word, but it's it is pretty incompas shock.
That's some young male or female hasn't just stepped up and says I'm going to be the face. You know, we haven't just haven't seen that.
I mean, we do have a New York City mayror race that I think.
Is Washington watching the race. We saw Mayor de Blasio endors mister.
I think.
I think Republicans are chomping at the bit. I think they would love to have a New York City mayor Mandannie because then they can, you know, demagog him.
And even though, of course.
As we all know, New York City politics is quite different than national It's a weekly visit.
I love it, and a calendar.
She's with Pimco, folks, a great student of what our elected officials are doing.
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