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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. Joining us Stats Kim Dawson, New Edge Wealth. Who you know, people make jokes about it, but there's strategists that have a conviction in the market. Kim Dawson, I think the bears percolated this weekend off the calendar and said, OMG, now's the time to get out. Why are you still in the.
Market because the trend is still up, momentum is positive, and liquidity is supportive.
I think that we.
Are very attuned to the brewing risks, meaning that for the first time in twelve months, you saw GDP forecast get cut on Friday.
That's significant.
I was on a beache.
So for the last eighteen months, we've been seeing a rising growth forecast environment, which has been really good for risk assets. It's allowed valuations to continue to expand, EPs estimates to continue to drift higher. If that starts to change in a more meaningful way, then we would grow more cautious. But really it's a matter of balancing the fact that you still have this positive trend with some of these brewing risks.
You know, Torsten Slock was out with a good note in the last couple of days, our good friend over at Apollo. The top ten companies in the S and P five hundred makeup thirty five percent of the market cap, but only twenty three percent of the earnings. Talking about that concentration risk in the market, how much of a risk is that for you if an Nvidia or somebody else really just really disappoint somewhere along the line.
One of the phrases that we keep repeating is that trees can grow a lot longer than you think, but they usually stop short of the sky, meaning that eventually you're going to have a challenge where you will have priced all of these unending growth parts of the market at such lofty valuations that even if they deliver growth, you will see an unwind in the valuation. The problem is you need a catalyst and you need earnings to stop going up.
What's important, your folks, is cam Dawson brings bulletproof mathematics to this. She's not just spouting paragraphs. Do you have a discount of cash flow model or some form of net present value study that allows you to stay in the market? How do you get there?
I will say that we are in very rarefied air for valuations, and so if you're just looking at fundamentals, what you have to acknowledge is that you're back up to twenty twenty twenty twenty one levels of valuations. So if you do a DCF, you would argue that focussally we are over.
You slam your terminal value more present and put extra weight on quarterly and annual free cash flow assumptions. That seems to be the rationalization.
Look, every time you try to say this time is different, that's usually when you run headfirst into a market peak.
Go back to December of twenty twenty one.
Robert Schiller came out and said, don't worry about high valuations because interest rates are so low. We ended up being in a bubble for both equities and for bonds, and that's twenty two was a bad year. I think that that discipline about valuation needs to be very, very present, which just means we're not chasing growth stocks at this time. And if we're looking within the growth index, we're looking at names that are trading at a discount to the index.
Where do I go here?
I'm afraid of tech stocks? Do I go, financials, energy industrials? Where does a normal person go?
I think that there are plenty of opportunities outside of the megacap stocks, but you have to be highly selective, which means that we don't think that you should be indexing your value your international or your small cap. Meaning active management is absolutely imperative because there's a big divergence
between the winners and the losers in that space. And so if you can look at names with high free cash flows, strong return at invested capital, good growing dividends, all the things that we love as long term investors, you weed out the strength from the weakness, and that's where you can cut value, and.
The textbook will say, out of one hundred stocks, thirty have strength, seventy have weakness. How do you find a seventy percent you don't want to own?
Yeah, well, it's a combination of the fundamentals and then that discipline around the technicals, which is that what we do is we screen up names that do have high debt, meaning that they rely on capital markets just to keep the lights on. We screen up names that have really volatile free cash flow generation.
We want stability in that.
And then what we're trying to identify is those names that have high roc return on invested capital. Every dollar they put into the business they generate more out. That doesn't mean you get the stocks right at every moment, because a lot of those names are still being left behind in this extraordinarily narrow market.
What we reminded, I guess Thursday night into Friday, is this is an election year and there's election political risk in the marketplace. When you talk to your clients, how do you talk to them about what could be a volatile time on the political front over the next six months.
I think we have to first identify what neither party is talking about, which is balance budgets in austerity. So no matter what party you affiliate with, you have to acknowledge that both parties are going to probably contribute to higher deficits, which just means that the bond market is going to have to continue to.
Digest this higher issuance of treasuries.
That could mean a step you'll curve through a bear steepening, and it could mean this continued drift higher in the long end of the curve.
Let me double use of cash here. It's real simple use of cash, share buy back, gibbling growth. And I'd compound with that the nascon idea that big tech and other companies frankly will issue more bonds. Am I onto something there?
They don't do they need to.
I think they don't need to. That's precisely the point. But you do it and you retire stock. I mean, that's the big It's Mario Gabelli one on one.
Yeah, I think that the calculus for using debt in order to do share repurchases is less attractive at today's rates. But to your point, credit spreads are also extraordinarily tight, so you could take advantage of say, yes, my base yield is higher, but nobody really is demanding extra compensation for credit risk.
The triple B to double B spread is.
Actually tighter today than it was in twenty twenty one, showing just how price per perfection the credit market is.
I mean, right right there, I think, Paul, that's the quote of the day here is the bond market is telling the equity market what to do. The most important thing that happened last quarter was at home Depot Yep, they had a bond offering. Was a four foot starts. Yeah, that's the.
Most important exactly the last quarter. What are you guys thinking about our feed of reserve here this year? When, if, when? How many times? What are you guys factoring in?
I think that the Fed is far more balanced, and this is their words, We're more balanced in the risks between unemployment going up and inflation going up, meaning that they are growing more concerned about some of this fraying in the labor market. We are already at their four point two four point zero percent target for unemployment this year, which just means that if we creep higher into that four point two zone, it could be the room for them to be able to cut.
We're got to rip up the scripture, sure on it. I mean, YouTube's on fire. There's a there's a woman or guy here, I don't know which, and their daughter's watching you right now, and the daughter wants to be you. How did you get into the academics of finance? How did you get so damn smart?
Down in Florida, Down in Florida, the caveat look. I think read a lot of books, be a voracious reader, and I think that the study of economics is the most beautiful study in a liberal arts education.
You get mac theology book.
I just told my nineteen year old that yesterday.
What's the number one investment book that changed your life? I know mine, but you know what was the one where you said, hey, this is interesting. Yeah, no, not flying on one engine? What was the book? What was the book that you know? You're seventeen, eighteen years old and it was an investment book. Yeah.
I think More Money than God is a fantastic book, sabashed Malaby about some of the great hedge fund investors. I think that books like Austerity, which is a fantastic book about politics and economics coming out of the year.
For me, it was against the Gods. Peter Burnstein, you know, on.
Risk and uncertainty, Wealth born Wisdom, Martin Biggs.
Yeah, absolutely fascinating, talking about seeing through volatility essential reads.
We're going to rip up the script. We're going to put this on single best Idea today with Kim Dawson. Here. This is how you do it, folks. You got to get kids interested in this. You throw the book at them and say no TikTok till you read the book that Kim Dawson says to read. Right now, we're going to migrate to the bond market and gauge. Here the coupon the side joins us right now with Franklin Templeton. So you're managing for coupon or can you actually give me total return?
So you know, this year, I think total return and maybe for a while total return is not looking fabulous it is for coupon. I think we're getting to a stage where, just if you're just looking at high quality bonds, spreads are really coming so much in all the spread sectors, and if I I look at I actually see them as being pretty fair where they are between we've been I've been calling for four twenty five to four seventy five most of this year, and I have no reason to really alter that very much.
Kathy Jones with us earlier was Schwaba. She just puts out on Twitter an amazing chart and this is something I don't look at, Paul, but it's basically ten or fifteen bond categories, bank loans, all the stuff Franklin Templeton does, Paul, I would have done better in cash.
I know.
That's what that's the challenge, exactly. All right.
So now so in honor of Joe Mysak, who is enjoying his first day of retirement today, the Dean of municipal Reporters out there talking about the municipal bond market. I think I can get some really attractive tax equivalent yields out there. How do you view the municial bond market?
We do like it. We like the municipal market. We think technicals are favorable. You know, it was very out of favor for most of law Stier enormously so, and this year it is coming back and it is one of the areas which we like. We think Actually, you know, to go back to what you and Tom are just saying, you could have done better in cash. This is true, yer, but you can't stay in cash. That's the risk, because you've got to start dipping your feedback into the bond market.
My advice would be at least go out for short before you before you take the deep dive, because when the time comes, you won't always have the yields which you currently have now. Total return is something we've gotten very used to over the last twenty years of easy money and liquidity. But I don't think that that's what. That's not where the bond market necessarily is going to take us over the next several years. It's going to
do what it says on the can. It's going to deliver a certain amount of income, ideally with less volatility than we're seeing right now, as markets adjust to what I think is the new state, the new state, which is a lot like the old state, which was from nineteen fifties until the global financial crisis. You know, bonds delivered decent returns, but not equity like returns.
I'm looking at the Bloomberg US corporate high yield total return indext positive two point five to eight percent year to date high yield.
That's your thoughts there, So high yeld.
Here's the thing that high yield I think, you know if you manage it actively, So not buying the index, high yield can actually deliver a decent return, but once again, what you're really looking at is the overall yield that you're getting from it, and what you're getting in total from high yield bonds right now is between seven and eight percent, which relative to what you've gotten over the
last couple of decades, is really not terrible. However, in spread terms, we definitely are tight, which means that the cushion against things like defaults is not is not very high. Therefore, troking my book a little bit here, you have to be active. You can't just jump in there and buy these indices because there's very very little cushion against defaults. I'm not anticipating a massive slowdown which would really get
us going towards a space of high level defaults. We actually think corporate health is pretty solid right now, but I would not want to buy any indices, whether it's bank Clon's or high yield or investment grade at this point.
Should on de side. Thank you so much joining us now, Leslie, Benja Murray, Chathamhouse on all that's going on in Washington prior. Frankly, she saw this coming, which helps out Leslie not so much now what But if we've forgotten that we're supposed to have contested elections. We had the Bush Royalty, the Obama Royalty, maybe the Clinton royalty times two. I guess have we forgotten that it's okay to have a Donnybrook to the convention?
I think we've gotten very risk averse. American politics is tough, it's expensive, The electoral system is a very high bar. Name recognition is everything. So you know, you might be cynical about the American people. I'm not, but I do think the system and the institutions make people very verse. People at the top of the party structures.
All the money that's being involved, Mister Cassenberg is driving the donor component of this debate in the last seventy two hours, and I get the idea that money can go to the vice president. Can these other candidates if we get to that, can they run to the convention in eight weeks? I believe it is with less money, or can they not run because they don't have a gajillion dollars?
You know that, as we all know, the first the first thing that has to be decided is by President Biden whether he's going to run. If he decides not to run. Then, of course the entire field opens up in a way that you know, we don't have a good roadmap for because it's not the normal scenario. But could donors get behind a new candidate, Yes, of course they could. And this is the conversation that everybody is
having pretty much around the clock since the debate. But so far, you know what we know, and I suspect we know a lot less than what's actually transpiring. Is that the Biden teamer are locking in. But watch the space. One more very significant stumble by President Biden that would be difficult to recover, and the very bad scenario is that that happens far too late to make a change.
There are a lot of people now that think that they're the vote for Donald Trump is just going to be much stronger than people will stay home that we're sort of on the fence and thinking about maybe voting for President Biden. This is a very risky period and comes September when politics and students in America is sort of back from the summer. It's going to be a
very difficult campaign season of very difficult politics. We're a little bit on hiatus through July and August, even with the conventions.
Leslie Matt from the fifth floor writes in and just asked, was Thursday night just a bad night? Or is it something more? If it's something more, what role does a democratic I guess party have in kind of suggesting where we go from here? Or is it entirely up to President Biden?
Look, I have two answers to that. One is that ken President Biden governed for four more years. Absolutely, he has an extraordinary team of people around him and pretty much every single issue that matters. He doesn't have to work twelve hour days. He can make decisions, but let other people really do the daily work and the hard work of governing. The bigger question, though, is can you get elected? And you know, was it a blip? It doesn't really matter if it was a blip. The American
people of the world watched the so called blip. They will make their own decisions about whether it was a blip. And undoubtedly it is going to unsettle the confidence of very many people that were already concerned.
A couple times this weekend the phrase smoke filled rooms came up. I mean, I'm old enough to remember sixty eight quite clearly. I guess we're going to redox it in Chicago. Define the smoke filled rooms Leslie vin Ja Murray of twenty twenty four.
Now you're going to have to define the smoke filled rooms. Tom, I mean, I think it's just not being able to see through clearly to what's coming next. On the sixty eight. You know everybody wants to go back to nineteen sixty eight. Sure, there are some really significant lessons and parallels there. But history is, you know, history, what doesn't repeat itself, it does rhyme.
Yeah, let's say, but I think this is really important. I'm sorry, but is there no more small field rooms because there's a monopoly of a family that runs a given party. I don't want to get a Democrat Republican here, but there used to be a conversation nationally with cigars in hand among a party. Is that like a fiction now where it's just run by the critics would say the president and the first lady.
No, I suspect. And again, Tom, this is where we don't know everything we'd like to know. We know what the New York Times has said, we know what the Wall Street Journal has said, we know what the ft and the economists have said. The end of the day, those conversations are happening. Of course they're happening. They're happening
out of sight and certainly out of hearing distance. And this is why, you know, everybody over the weekend who's talking is saying that the Biden team is locking down, that they're going to keep the keep President Biden on the ticket. And and maybe that's the case, but they're
certainly not going to say, well, we're not sure. I imagine the volatility, uncertainty at a time of two major wars, a China threat, you know, a whole amount of global disarray, dysfunction, polarization, that's you don't send the signal until you until or unless you've made a decision there we will hear nothing from the top unless they make that decision.
Leslie. What's going to happen at this convention. It seems like Tom and I need to pay attention to this convention coming up.
I think we all need to pay attention to this convention. You know, we can imagine a couple of different scenarios. We can imagine that it just sort of goes talking obviously about August and not about July. It's a shame
they're not reversed in terms of the timing. But August it could just go as as as planned, or we might be in a situation where we are looking at Josh Hero, Gretchen Whitmer, Gavin Newsom, you know a number of candidates that whose names are out, and about Kamala Harris obviously, you know, perhaps to staying as a vice
president with somebody else on top. There are all sorts of scenarios and conversations going on, but that, again, we know, depends on the decision that ultimately President Biden opt Tom.
We gotta go, doctor Vinjaminry, thank you so much. I'm a little congested, Lisa, please.
Sir, very good transition.
I like that.
We were just talking about New Jersey transit raising prices. My goodness, let's make this transition so congestion pricing in New York. It could be getting a new life, but it could be okay, So state lawmakers, The New York Times says they've been privately this informal campaign to persuade Governor Holcal to move ahead with the tolls, but make
them less expensive, so below the fifteen dollars. They say they won't mind adjusting that toll other features of the plan, because approving additional revenue could make up for the shortfall to the MBA MTA, but only if this program is allowed to move forward. So if it moves forward, they said, well, let's try and bring the price down a little bit. I mean, in London we talked about this. London had an initial fee that was half the fifteen dollars charge
that's being proposed to vehicles in New York City. So they're saying, hey, if London, you know, brought it out at a cheaper price.
Well, they've already installed all the monitors all around Manhattan. I mean, I don't know what that costs. But here on Lexington Avenue and sixty Street you can see them right there.
They're right there.
They're and they're huge. They're not, I mean they're.
So they're say, seriously, let's put him to use. Yes, OK, but just at a lower price. All right, we'll know how that will.
We'll roll that by John Tucker at some point, see what he thinks.
I don't know where this goes, other than when I read about the projects, they're mostly projects we need. They're not like desolutely as they're like, okay, we're twenty million plus people. We need this, and now we can't do this. Ye, and there's people that are saying, you know, no fees, like they're like Sweeney in the New Jersey transit thing. But I to me, it's just fifteen dollars. Yeah, that's
you forgot. You gotta pop down to the new era baseball cap store at Times Square to keep the little one happy. Fifteen bucks to go down and get a stupid baseball cap add on it. That's how I look at this.
Yeah, I'm not sure what the price point is, but hopefully they can come up with one next.
All Right. New York Post is pointing to more evidence workers in New York City are coming back.
To the office.
You guys haven't seen this year, you're not buying it. This is according to the Real Estate Board of New York Manhattan office visitations. That's what they're saying. In May, we're about seventy four percent of level working today new visiting are you working? So they base it on visits right to about three hundred and fifty office buildings. They based it on cell phone records, but also the retail traffic in those buildings too, So they're trying to show that more people, yes.
Working, we're still like seventy five percent of pre pandemic or something, right.
Seventy four percent, Yeah, pre pandemic level.
Do you believe it.
I'm starting to.
See more people coming to the office. When I'm talking with friends, are like, yeah, we're back like three days now instead of fully from Soacre.
For here, folks, rich, can you get the surveillance cork out and put it in my mouth right now? Save my employment?
But look at the flow of people.
I look at Lexington Avenue.
Today's a Monday, there's coming up.
I look at the I look at Lexington Avenue and here's the way I look at it. Folks. You're twenty something years old, you got a bunch of fancy degrees. You're lucky to work at one zero zero xx and you're not in on Friday when you can get twenty minutes or forty minutes with somebody twenty five years older with you to pontificate about wisdom. Yeah, that's that to me, that's missing.
I agree, But I'm I think the hybrid thing is here to stay, and that might be that might be something that the workforce can be about.
Come on, Bob, get the court down, next save me mixed.
How much would you need to make to feel financially secure? This is a question that's being put out there. There's a study from Bank Great that says, on average, Americans think they would need to make one hundred and eighty six thousand dollars just to feel comfortable. But if you think about it, according to Census Bureau data, it's more than two times with the average full time, year round
worker made in twenty twenty two. So just thirty per seven cent percent said that they are likely to even earn that much. So people are feeling like they're they're not financially secure. That's up from like seventy two percent twenty twenty three. Older Americans, baby boomers, gen xers, they're more likely to feel that way. And if they want to feel financially rich, they have to make five hundred and twenty thousand dollars, that's what they're saying.
This came up not once, but twice this week, and I'm sure all of you had the same thing, all of you listening across this nation. It's simple. The system's broken, and the discussion there's no other way to put it.
And I think inflation these higher prices that everybody's paying for a lot of goods and services. That's making you feel probably less secure because I mean you just whatever dollar you are making is not buying as much as it did four or five, six years ago. So that inflation shock that we've all dealt with is still there, and I think it's the top of mind for everybody. You go to COSTC, you go to a restaurant, you go anywhere, I mean.
Quickly here, you got to have a tough mother like Lisa Matteo. Yeah, I mean that's really the first order condition because a lot of these kids are just not working like we worked. I mean, we thought nothing working seventy hours a week, eighty hours a week. It was just seven days a week. It was understood.
Next times changeing, well, you know, it's also changing how much money goes into your for one K. Yes, new hires putting more money into it, but it's not actually their choice in some reasons because the six percent saving that's what they're putting into. It's a new standard for nearly a third of companies. They use automatic for a one K enrollment, So companies are automatically rolling into that six percent.
So you don't opt in, they just take it automatic.
Really Yeah, major shout out Peter Orzag right right in the shop now at Lazard. Peter Orzag at Brookings years ago led the charging this. I can't convey how lone voice he was on opt in and Peter Orizec coming out of LLC with all of his great academics, said this is the only way we're going to get it solved. My only problem with that is it's six percent correct and not more. And I, you know, I don't know how we get there. I'll let senior management any given
firm figure that out. But Orzag drove the boat on this.
Yeah, but a lot more come sixty percent of companies.
This is the Bloomberg Surveillance Podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.