Markets, Earnings and a Ceasefire

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This is a joy in exceptionally well timed. Waylee is prodigious in mathematics out of her China and of course out of University of Cambridge as well. She was a former trader in equity derives at City Group. You've seen her on the show Industry, joining us now from Blackrock chief investment strategist way Lee. Waylee, what a tour de

Absolutely? Good morning, thanks for having me.

So as we think about the increase of ten year yields, it can be broken down into the increase of cash paths and the increase of time premier ten premier increase doesn't have.

To be negative for equities.

But the miss understood fact is that markets look at tens increasing and automatically expecting ten expecting aqulities to come under pressure. So what I really care about in terms of translating rate moves into its impact on equity is how much of that increase in ten year yields is driven by cash paths, and so far not a huge amount, some of them, but not a huge amount.

More than eighty.

Percent of the increase since the September lows in ten year yields has been driven by time premier, which means that equities can still hold up, especially in the face of strong growth.

What do we see way lee in terms of flows into money market funds? We go six trillion, seven trillion. Do I need to prepare for ten trillion dollars of money market funds to buttress the cash and the cash path?

Well, right now, there is value to seek income in the front end of the curve. You get income, you don't take a huge amount of duration risk. I can absolutely see why flows are going into money market funds now. Having said that, so far this year we got a flavor of how long end repricing can quickly deepen the curve and potentially make duration attractives down the line. We expect youths to push higher still, but at some point and it will get to a level that even we

Wait.

Thanks so much for joining us this morning. I am such a huge fan, and we're both believers in the higher for longer narrative. With everyone so focused on rising real yields and stable break evens in fives and tens, I have to say I think they lost a little bit of track of the inflationary pressures emanating from the front end. And I'd like to hear your thoughts about this week's sharp turn lower in realields in real yields, not just in the front end, but along the whole curve.

We expect US growth to be in the mit kind of one point five percent real growth for twenty twenty five, which is slightly lower than consensus, but resilient, certainly, certainly strong, with potential to the upside depending on the fiscal side of things. Not having said that, yes, we have seen wild swings in inflation expectations so.

Far this year.

You talked about the inflation prend this a week and its impact on break even pricing. But let's extend slightly further back to last Friday.

We had NFP headline.

Job creation was slightly stronger than expected, wage was well behaving, and yet markets were immediately reading into greater job creation, higher inflationary pressure.

So even I, even though.

I had the view of five for longer, for a while, I didn't think that that represented additional inflationary pressure. And yet markets are very very quick to swing wildly in between narratives. And I think this is going to be a hallmark of twenty twenty five. Because we don't have a firm anchor, and markets are trying to fit structural forces, structural patterns into a cyclical lens, we're going to have a lot of the macro volatility way.

I know you're an advocate of staying underweight duration in the current environment, and I loved, loved your chart on LinkedIn where you compare index US versus duration. But let's be I wonder if you could spand on that a bit, because look, staying underweight duration in US treasuries, well that's cute, not John Tucker cute, but cute. Nevertheless, building short duration exposure and high beta asset classes like credit or mortgages that could prove interestings as well. No, so I'm just

Light front end of the curve right now with favor.

And we also like investment grades, but short duration investment grade. The spread of hyyot is a little bit more interesting than an IG, so we can turn out a little bit in hygyot space, and value can be found in European credits since their US counterpart. So this is where we like for kind of the income within the fixed

We continue with Wayley of Blackrock, Ian Bremer to be with us in the nine o'clock Our Katie Kaminski, Jim Carren, Carl Weinberg in the eight o'clock are an extraordinary surveillance. This morning. Good morning on your commute across the nation, particular, good morning to ninety nine one FM preparing for an inauguration Monday. I'll give you details on our commitment to that. You'll see that Monday from Joe Matthew and Kaylee Lines. Good morning on YouTube. It is the best way to

Well, one way to look at it is in these rates are resetting back to the high for longer than equities need to reflect that that reality, that new rate reality. One measure, so to your point, Tom around me revert one measure that I get quoted back to me. Constantine is shiner key that it is at the third highest level ever on history, just after global financial crisis, just

As well, the earnings wouldn't look as stretched.

So I cannot agree with you more agreeing with me that me reverit is not the playbook.

I think it's too simplistic. And folks, this goes back to a paper by John Campbell and Professor Schuller of Yale University. Everyone knows, Ziadore, this is back. You know, I'm pushing forty years now before Whaley was born. And the answer, Waylee is if you look at Campbell's Schiller, they don't really model in a technological shift, a productivity shift. Are we pricing in the present productivity and our present new technology? Is that our great misjudgment.

I think there is starting to be priced in, But depending on the ultimate magnitude of productivity boost, there can still be further for the upside, especially because right now in terms of the economic data, yes we see sector specific productivity gain, but we have yet to see economy wide productivity gain being definitively driven by AI.

So the upside it's still there.

And currently Literature Review has a wide range of productivity boosts somewhere between zero point one percent per ANON to one point five percent per and so that's a wide range. There is certainly more room to surprise to the upset. In our assessment was still in phase one of the AI AI revolution, Phase one being a built out pace

We're three days away from Trump's inauguration and everyone knows that the US channel relationship is front and center. We saw some activity data overnight. We saw them hit their five percent bogie for full year twenty four. Talk to us about sixty percent tariffs on China? How does dollar quan react? And more importantly for me as the emerging market strategist here at Bloomberg Intelligence, what does it mean

Let's say I.

Think all else equal.

Greater tariffs leads to weaker currencies, which is why the M has been under pressure so much so far this year. And more broadly, Taraff's concern is why, even though data from China is stabilizing and overnight data particularly was reasonably resilient, markets don't seem to care. Markets don't seem to care, and investors don't seem to care one little known fact.

I was looking at it at the end.

Of last year, just reviewing year yearly performance in dollar terms, Chinese aarqulities and Chinese government bonds all performed their US equivalent for the year of twenty twenty four, but investors don't care. Plummeting bond US in China shows that, you know, investors are really worried about decades of deflation doom loops. So I think this is really a sentiment and confidence game at this point.

I mean, I mean, this is great. We could go for four hours. Are you're going to give her a code write on your morning note?

Well me, I mean, look, I'm not going to write my note until this weekend. But way you're going to be front and center.

I mean, I have to.

I have to keep going here. I mean, for me, how do you not ignore the fact that you know, once the once the PBOC starts allowing the yuan to kind of float up to seven forty seven to fifty, that you're not going to see some spillover. We just saw the Bank of Indonesia cut rates in the FILD, and look what happened to its currency. We're at an all time low relative to the dollar. I mean, can we expect the Korean one, the Indonesian rupee at the

Well, what we have seen so far after the election is that dollar has been very, very strong. But I would say though for the entirety of the first Trump term, dollar actually hasn't been that strong. So it rallied into inauguration and starts to kind of go sideways, right, So I wouldn't necessarily extrapolate the dollar strength in definitely from here on.

And also as we think about the goals of the.

Trump administration around kind of stronger growth, lower inflation, lower deficits, and low immigration, there is a market friendly way of getting there and there is a market less friendly way of getting there. So depending on which way we are gravitating towards, it has significant read across to the dollar for sure, to US acquity sentiment to Treasury.

Waley, thank you so much across the nation on YouTube worldwide, Wayley of Blackrock greatly appreciated. This morning.

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There will not be at Davos. And if doctor Klaus Schwabs people came to me and said do a panel, this is the year where I would say, I want to do a panel, but I want it to be just one person, and it would be Ian Bremer. Every year he and his team, among others, put out a thing called the Top Risks, and it's not funny. It's a really serious look at where we are going into a giving year, and it's remarkably pressient. Some things he gets wrong, but huge amount of OMG, how'd.

You do that?

Like Miracle and Germany years ago. But he's really outdone himself this year. Hearkening back to his classic G zero of twenty twelve, Doctor Bremer joins us this morning, Ian, I'm just going to cut right to the chase. The summation of your Top Risk twenty twenty five is a reversion to the nineteen thirties. How close are we to the nineteen thirty five of Hermann Vauch's Wins of War?

Well, we're close to the thirties, and we're close to the fifties. So in other words, the trajectory is not sustainable. And the question is whether the crisis that's coming is big enough to make us pay attention, but not so big that we all end up fighting each other, right, I mean, in the early Cold War, we had this unfettered decoupling and arms race between the Americans and the

Two countries, arms control, hotline and the rest.

You see shades of that, and you also see shades of the thirties with a United States that's incredibly powerful but is unwinding its own global order, its own institutions.

I mean, you look.

Things like the United Nations and the WTO, and these are organizations the Americans put in place to coordinate global governance and that now Americans don't believe in. So it's it's not clear, but it's clearly as you say, Tom, this is a definitive moment.

Ian what's so important here?

And I live this.

My grandfather was a textbook Chicago Tribune isolationist of Middle America. And you go back to Lindbergh and the rest of them. What is the character of President Trump's isolationism.

I don't think it's isolationist. I think it is strongly unilateralist. And so it's not that the United States is saying we're only going to focus at home. I mean, you know, the Panama Canal and Greenland and Canada. Comments don't feel isolationists to me, but they're deeply transactional and in many ways, Tom what we have is that the Americans are embracing the Chinese worldview that has served China so well over the last thirty five years.

It's transactional. It's not about rule of law.

They don't care what your political system or economic system is like. They will engage with you bilaterally with the intention of being more powerful than you, and therefore you have to play by their rules.

And what the Americans are saying is, actually.

China, we can do that, and we can do it a lot better than you can, because we're a lot stronger than you, by the way, And that's really what Trump is saying, and it does come at a time when America's adversaries Russia in deep decline, Iran having lost their empire by proxy, the Chinese and the worst economic condition since the nineties, maybe the seventies are particularly weak. So it's an interesting moment to try this experiment. A lot of things are probably going to break as a consequence.

Doctor Bremer. Eurasia Group's Top ten Risks are required reading at the beginning of every year, and this year is no different. US, China, Russia, around Mexico, I mean, you name it, they're all in there.

You know.

The one country that I didn't see in there, well, Syria. And I'm curious to hear your thoughts on what the fall of the Asad regime means for the Middle East and the rest of the world more broadly. I mean, seriously, what role America and restoring order to a nation where fourteen million refugees were fourth were forced to flee their homes in the last you know, call it fifteen years. I mean, a nation who's geo strategic position is so very important to health in Central Asia.

You know, what are your thoughts there?

So Syria's there, but it's underneath the number nine risk, which is called ungoverned spaces, and we include Syria and Yemen and Libya and Haiti and Mianmar.

Western Sahara Dan by the way, which is a lot more important in terms of numbers of lives than what you just mentioned in Syria, and yet no journalists on the ground, and they're fleeing mostly to neighboring African countries as opposed to Syrians who go to Turkey and go to Europe, so we don't pay as much attention to them.

And that's kind of the point, right is that.

I mean the danger in Syria, where the Americans had slightly more than two thousand troops on the ground and under Trump are likely to remove them, and a Turkey you mop it up, is that if AHTS is incapable of running a unifying government in Syria, which is a reasonably plausible outcome, then you can easily have a big part of Syria that's ungoverned and would be fodder for a new Isis caliphate. And over time, not twenty twenty five,

Ian Bremer with us here We're thrilled to have of here to celebrate his top risk. It's a team effort from erase your group each and every year. It'll be with us for a good amount of time. Jim Grasso to join us here in a bit on this important Chinese social media thing which I don't understand, Doctor Bremer. One of the moments it stands in time for me is Ian Bremer and Robert T. Kaplan with me together talking about a zero world within Keplan's Revenge of geography.

Well, it's not. It's not about foreign policy so much.

Although it is true that a lot of people that decided not to vote, that had voted for Biden last time around, report that Biden's position on Gaza slash Israel was a significant.

Thing that turned them away from the polls. And that's a.

Place where Elon Musk and his targeting of very specific and important districts that were swinging in the United States could have made a difference. But leaving that one piece aside, and it's not unimportant, of course, I would say most Americans are not going to the polls on the basis of Biden or Trump's worldview. It's more about what they're

The fact that he was able to get a significant.

Majority of labor union voters in the United States, while Harris was, you know, the candidate for urban, well educated elites, and that's not a sustainable path for the Democrats in my view. So they clearly have to reassess a lot of their platform that did not appeal to the average American that did not feel taken care of. More billionaires put money into Harris's campaign than did Trump's.

That again, that tells you something.

Doctor Breber, the US chinne of relationships at forefront geopolitical risk in the current Vita regime. Yet, if we do see something like sixty percent tariffs, do you really think that China's going to allow the yuan to debase itself again? And if that does indeed occur, do we feel there's a I don't know, a clearing price and dollar you on where the market can go to that can still allow China to grow at five percent per year.

I don't expect China's going to grow at five percent per year over the coming several years.

I think They've got deep structural problems that are being made.

Worse by the fact that the only part of their economy that is overperforming is their manufacturing export, which feels like dumping. It's a trillion dollar surplus, and it's upsetting lots.

Of countries around the world, not just the US.

The US is leaning into hitting back, which will occur with tariffs, though it won't be a sixty percent number. I mean, you know the top line election campaign numbers, and never the numbers we see. But even if it's twenty five percent, which I think is more plausible in the early weeks and months, you're not just.

Talking about US China.

You're also talking about the Americans squeezing other countries. We've already seen this with Mexico, we will see it with India, with Southeast Asian countries. For acting as a pass through of Chinese exports to the United States, so it's very hard to imagine that US China relations are going to maintain a comparatively well managed, you know, sort of incremental decline that we've seen in the last year and a half under the Biden administration.

I want you to sit on this question, Iane, because I think it's so important to all of our listeners and the people that you know enjoy so much your international relations. This hearkens back to the fear of the first week of August nineteen forty one, a bunch of boats sitting off eastern Canada, where Roosevelt and Churchill tried to begin to piece together the post World War two world.

I think in the near term we're talking about damage control. We're talking about countries and companies on defense. So you know, a lot of them are hoping that they just don't

I can call it that.

Look, I mean the way that you respond to a Gizero world is either you reform and strengthen your existing institutions so they are more fit for purpose. You build new institutions that better reflect the demands, the opportunities, and the concerns of the present.

Age, or you go to war. And I can give you examples of all three. All three are happening.

We are strengthening NATO right now, we are creating new institutions, you know, the Quad, the Chinese are building Belton Road and the bricks, and you know there are other examples.

But the most energy is going into more conflict.

The most energy is going into more war, and again that is not geopolitically sustainable. So I think you know your advice to other countries right now, given the power and balances and Trump coming in and how consolidated.

His authority is inside the United States.

Compared to twenty seventeen, where you know he was riding the Republican Party's co tails.

His administration felt very different. Not this time around. He's the guy.

Is that they have to recognize their playing defense, and defense is more effective in depth, it's more effect if it's strategic, if you're not just reacting to the latest headline, and it's more effective in numbers. In other words, the EU is better off than say the Mexicans, because they can act collectively and to the extent that other countries are capable of doing that and defending the things that matter to them, both in their own countries but also in terms of international architecture.

We will all be better off by the way. Trump is going to get a lot of wins in the next year.

But unlike Shijin Ping promoting a Chinese worldview, Trump doesn't get to do this for twenty years. He gets to do it for four, assuming he's in good health, and then he doesn't anymore.

So long term, the United States unwinding its own institutions does not strike me as strategically smart.

Okay, gotta leave it there. Ian Bremmer, congratulations on the impact the effect of your top risks for two thousand and twenty five. Of course, doctor Bremer with Eurasia Group, and I think it'll be a source of great conversation.

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This is a joy. Katie Kaminski joins us right now, thrilled that she could be with us in Boston because she is the queen of the trend and of the effort to extrapolate. Katie, are trends in place right now at Alpha Simplex, Like do you walk in and say this is the trend? I got a feeling of where I am now.

They have been until this week.

I have to be honest, because trend folling has been working very well, particularly in currencies and also fixed income. But I think this week sort of marked a little bit of a shift in sentiment, particularly for fixed income. But the trend in the dollar seems to be very much in place, and that's something that is surprising and exciting sort of to follow.

What's the inertial force there? I'm sorry, Damien on the dollar strength.

Damien's getting so excited when anyone tells about the scope for dollar.

Strength, Katie, what is the nature of that trend? Is it a momentum, is it a bid or is it a lack of people pushing the dollar down? Well?

I think, you know, I tend to think about the dollar as having a few key forces.

One is monetary.

Policy, another is sentiment, and the third is of course gross. And so since we've seen that the dollar has been persistently strong, especially going into the election and post election, that seems to be a pro us, pro growth story. Then this month we saw sell offs in the in equities, which tends to be pro dollar as well. And then finally, monetary policy had been a little bit more reticent recently,

Katie, you're in the managed future strategy at Alpha Simplex, the globalalts A strategy also. But let's talk about futures for a second, because I need to dial it back to the early two thousands, to my CTA days. I need to think about Campbell, wint In, jwh you know, talk to me about what the state of the market is now. I mean those guys are long gone. I mean, we know the macro guys used to frequent that market. You know, the tutors, the soross Like who is trading, who's trend following?

So what today you're saying right now? Who is the new Monroe trout?

Who's the margin?

Yeah, exactly right, who's taking the marginal risk in futures markets? Who's playing mean reversion, trend momentum, all of that stuff.

Well, I think there's there's just been a changing evolution of different CTA players in the space. I mean, if you look sort of Man Group, Alvisimplex, if you look at the SG trend Index, there's those are some of the largest futures traders out there.

So that has evolved over time. But what's really cool.

About this space is that the strategies still remain. They tend to work over long horizons, and a lot of the techniques that worked earlier when there were less futures markets are still working today and now there's more futures markets to trade. So it's actually quite you know, it's evolved, but it's still sort of the same you know, ecosystem.

And I think, I mean, let's I mean, correct me if I'm wrong, But it seems like the market's evolved because the strategy used to be very, very volatile, right, and now you're in a different place, right, I mean, so talk to us about how you engineer you know.

Risk adjusted performance.

How do you keep vol low? How do you dial down volatility when you're practicing such a volatile strategy.

Inherently so in our world, what I think is really cool about futures is we think about the world as allocating risk instead of dollars, And so the way that we think about managing risk is really about measuring the strength of sort of each of the markets we trade and adjusting that for the size of the volatility of that particular market.

So in some sense.

It's sort of like a long short risk parity strategy where you're managing how much exposure you have to different assets. So, for example, cocoa is very volatile, but you know, short term debt is actually not that volatile. So when you combine these things together, you need to measure sort of the relative strength of them and then also adjust for the sizing that makes all of those positions better behaved nicely.

So you just jump in your damon, you're all fired up.

Well, I mean, you know, we're in a very different environment also when that rates are high, right, tom. So the embedded leverage within futures and forwards, I mean.

It just changes.

The free lunch of the last six years is gone.

So how does that impact the strategy, Katie? How do you look at the inherent leverage the funding embedded within your strategies.

Well, this is a great question because most people don't understand that futures markets have implicit leverage instead of explicit leverage.

And what do I mean by that is that when you use.

Futures, you implicitly get leverage in those commodities or those future futures on equity indicies without having to borrow cash. It's implicit in the future's contract, which means that eighty to ninety percent of your capital is actually in collateral that earns cash yield. So we basically have a carry that we didn't have in a low interest rate environment, and that sort of means that you can be more effective with your collateral.

Katie commiscy with this Alpha Simplex and extended conversation this morning. Ian Bremer will be with us at the nine o'clock our Just Power Peck show today. Thank you for being with us in your commute across the nation on Apple CarPlay internationally, and of course I must say on YouTube, subscribe to Bloomberg Podcast, Katie, are we competing away, diversifying away,

Well, I think the challenges and there's twofold one is the market has been up quite a bit, so obviously directional strategies might work better, but you also have an environment where borrowing is more expensive, so sort of leveraging up relative value positions can be more challenging.

And I think this is sort of a slow migration that we're seeing.

What are you seeing in the equity market. I mean, I know it's away from the heritage of CTAs in foreign exchange and commodities, but do you believe in the American bull market?

Well, what you're seeing is I mean, especially the growth numbers and some of the fundamental data is definitely consistent with the technical views where you see that the US signals have been much stronger. And you mentioned sort of

Katie, last question for me, I mean, let's delve into commodities a bit, you know, and it's a very different place now, right. I remember the good old days, right when Cargill and Archers, Daniels and basically those big, you know, old stodgy beasts, you know, took them a year to turn in the sea and we could kind of pick them off. But that's not the case anymore now. Is that they're very sophisticated trading shops, right, and they are

Well, I think, you know, if you look at how commodities have moved, commodities have been really of in an uptick, particularly energies more recently. My guess is that you know, if you think, if you believe in price discovery, these type of players are really sort of analyzing that information and bringing it into the market. So commodities, You're right, they're still complicated because one futures contract on one commodity is a different commodity than the next one. So they're

Mean, what's really important here is she was in Boston at Logan and she went over the Wheatstone Bridge to Cambridge and did a double lee an engineering you know, at MIT as well, and she's visiting lecture at Sloan. When you're talking to the animals at Sloan, Catherine Kaminski, how do you tell them to not lose money?

Oh, don't overtrade?

Thank you. I knew.

It's like a lawyer. I knew the answer.

Lawyers. The question in this addictive financial media, Katieminski, all I see is over trading. How do you operationally say no when you's this frenzy I gotta do something, I gotta do something. How do you pull back?

Well, this is why I've been so fascinated with systematic trading is the goal is you disconnect your emotional response.

From your actual trading decisions.

And that's hard to do because in the heat of the moment, we all want to react to Tesla, we all want to react to something we read. But really that diligence of not doing that is really important, Katie.

Last question, I keep saying, last question, But I have so many more. I mean, talk to us really, because I'm not in the market the way you are anymore. Talk to us about the cost of trading, right, talk to us about what you know banks. I mean, I remember for years and years and years the cost of broking, of holding custody, of set it was all coming down. Now it's a very different place. If I dare, I say, it might be going in the other direction. Is it

Well, generally, I think cost of trading has been going down. I think where the cost of trading is going up

From my perspective, we're mentioning.

Some of the giants of CTA. I mentioned mister Trout of Bermuda, John Henry, who runs a small baseball team up in Boston. You know, it was back when it was Damien. It was spark stations and in which you're too young to remember this, it was Sun Microsystem spark stations on fancy people from MIT. This guy Andrew Lowe and others were like, we can do this, and all of a sudden the Bloomberg showed up and you could pop ad X DMI over a cup of coffee. It was unreal.

I remember those pets. I mean, Katie remembers this. I mean, if you could get a guy with a little headphone in on the pit where you're doing trading euro dollars, trying to pin strikes on where the Fed's going to go off. These are the good old days, ryeb or Short Stirling.

I mean, come on, Bruno days.

Or is it still about legit mathematics, technical analysis and trend based Is it the same old, same old or are we just something new?

Well?

I think the truth is trend still works. I mean it works over long horizon, and people are people, and so.

I think the frequency has changed.

But we have sort of human behavior which causes us to overreact and underreact to news and changing environments and to be terrified by change. So I think that creates natural trends in markets. So I think it's you know, same same, We're still the same, different technology.

Katie Kimiski, thank you so much, greatly appreciate it. This morning, got to go to some breaking news here Arthur Kiminsky with Alpha Simplex, Brilliant.

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Jim Kern right now from Morgan Stanley on the mix that we're in Right now, Jim Caeren makes sense the first seventeen days of January, no one else can.

Well, it's a tall order. I'll try so.

Look, I think one of the big changes that has gone through is that we started the year very very sure that the FED was going to cut at least two times within about several days we said, well maybe it's zero, and now we're back to they're probably going to cut you know, one to two times. So what's really been what's really been happening is is all of the action has really been at the back end of

Now.

Fortunately today those yields are lower, and that's a little bit more accommodative, and that's okay. But the market is building in this extra term premia because of this uncertainty about the new administration, you know, what the announcements may be in everything else, and the bond market has been driving the equity markets, and that's I think what we've been seeing.

I mean, Tom how Prehesdant of Morgan Stele, the investment merit managements have Jim Karen, I mean, with his experience in rates FX, emerging market fixed income to run the ship at sim I mean, like not another stock, Jock.

I mean, you know, so, Jim, you're.

Talking about the shape of the yield curve, not the level of interest rates. And I think that is so, so so important, And what's the read through to the rest of the world from that, Because we are seeing term premium build back into other developed markets, other emerging markets for that matter, you are seeing curve steep and just you know what's the runway for steeper curves here, not just in the US, but abroad.

Yeah, so this does create a little bit of a headwind.

Like so, for example, if we look at the UK, right, So thirty year UK.

Bond yields got to levels that we haven't seen since nineteen ninety eight.

Right, So that's not necessarily a good thing.

Now, what we have to recognize is that a lot of countries outside of the US have a high level of external debt, like say the UK, which means that they rely on the US Treasury to be the price center. The US treasury market is the largest bond market in the world. It effectively sets the price for interest rates, and essentially, if you have long term bonds in other countries, it's going to follow the US. So that's not necessarily

Can it be done? Is really what the question is. Could be a positive, We're to have.

An extended conversation. You're gonna go to break and come back. But let me get this into and Karen, I think it's too important. This weekend, you're gonna be sitting with somebody who's up to their eyeballs in cash. They're scared stiff for whatever reason. If I look at red Sex Meddal relief, I'm scared stiff, Jim, Karen, what do you say to people afraid to participate in the markets.

So right now, I still think that we are in the midst of a longer term protracted bull market in inequities. So I would say that the equity marks strickly, the broader sectors, the MidCap sectors, you know, more of a broadening out, not just the MAG seven, although I still like the MAG seven. But I think the broader sectors of the equity markets still have more earnings room to run higher and effectively have higher quality city growth and

The mid cap sector.

I think if you're a long term investor, large cap value, for example, could be an area that you want to start to think about and look at into the future. So I'm not afraid of the second market. I'm saying start to invest, let's go, I mean get going. And bond mules are higher, by the way, so they also offer better return to.

You know, Jim, this is my question for you, and it's really interesting when you look at your phone, you're on your way into Morgan Stanley in the morning, on your morning commute, and you see an email from Lauren Reader, the incomparable Lauren Reader cheap Risk Officer of m SIM. Where are the tail risks in this market? Where do the black swan swim in this market?

Jim?

Yeah, So it's a good point.

It's been so cold, it's been hard for me to think straight. But let me just say that, you know, I say that the big risks are it's really about about inflation, because if we start to see that inflation becomes unanchored, and if FED policy and other central bank policy shifts from cutting rates to actually hiking rates, that is really not what's anticipated, and that could unravel a a lot of things, and it could end pretty badly.

But that's what I'm focused on.

Sorry about that blue button, Jim.

You have to see how trust lions blue.

You see that this is bar I tried to get Buffalo bills blue on the button.

And I got jim My apologies. You're the chief investment officer of a cross asset solutions at Morgan Stanley Investment Management. But you previously held a lot of different roles. You were had a MAC or you had a rates effs, you were head of a merging market strategy. Talk to me about the bullish narrative for emerging markets in this market. I'm struggling with it, Jim.

Yeah, So I think a lot of things are going to start to get realigned from a trade perspective, and a lot of this has to do with some of the tensions between the US and China. So effectively, when we think of the global markets, right, when we think of the SP five hundred, what we have to recognize is that forty one percent of the earnings from the SSP five hundred come from outside of the U and that also includes emerging markets too.

So you know, when we think about.

Policies in the US where we say America first, you know, for example that you know Trump, you know, would normally say it doesn't mean America alone. So one of the aspects of how we think about the markets going forward is that, yes, you know, the dollar has been strengthening. I think that the dollar strengthening has gotten to where it needs to be at this point. I don't think it really needs to get a whole lot stronger. I don't think that it necessarily will. I don't think it's

Karen. One final question fold in the work of Seth Carpenter, Ellen Zenner and others within economics at Morgan Stanley the great missed call of the last two years has been better economic growth, maybe some form of sticky inflation, and it sums out to a resilient nominal GDP. What does a resilient nominal GDP mean for our listeners and viewers deep into twenty twenty five.

So what it means is that you can still have earnings growth rates in double digits for equity, so you could have ten, eleven, even twelve percent earnings growth rate. Now, what it also means is that this could be more broadly based. So when we think about let's let's take a look at two indices. Let's look at the S and P five hundred, which is what everybody looks at, and then let's look at the S and P four hundred, which is more of a mid cap index, more of

Those magnificent seven stars.

If you look at the S and P four hundred, the earnings over the past few years has been pretty much flatlined and pretty steady. So there's a big divergence in what's been happening with the large cap growth and tech companies versus the MidCap and even large cap value companies where their earnings have been relatively flat and steady. So if you have a higher nominal GDP and we have a broadening of the market, there are the majority of the market has to catch up. So therefore there's

Jim Keren, thanks to the clinic, greatly appreciate it, mister Karen always with Morgan Stanley and Nyu Stern.

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