Reframing Market Volatility and the Yen Carry Trade

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Bessemer Trust. They should say that she could join us. Paul, We're going to ignore the Patterson paragraph on bitcoin.

Okay, We're just going to ignore it because there's too many other things going on right now. I want to go back to JP Morgan, where you understood dollar yen versus Korean Wan and the rest of it the carry trade, JP Morgan publishes this morning. You know what, it's mostly done. I've got my own theory. What's the Patterson theory on when this agony is over?

I think you actually do need to listen a lot to the big investment banks that have large FX trading operations right now. JP Morgan's obviously one of them, because they're going to have the best real time data on where investors are versus where they were and what might seem comfortable in the new environment we're in. So you've seen JP Morgan say maybe we're almost done. A few other banks I've read in the last twenty four hours say we're not done, but we're.

Close to the end. In the beginning, Okay, what.

You do in this summer and in August at the Patterson household and the Keen household, when the brats are up, you slap them and say shut up and watch a real movie. You can't watch Glee five times so you're watching Butch Cassidy, who are these guys? Who are the people in? The carry trade? Is a dreaded hedge funds at huts and yards.

So, just for the record, I've never slapped anyone. I know you're joking, feel like I need to get that out there. I think we don't know yet who exactly has been in the carry trade, but I would certainly assume that hedge funds have played a role. But one piece of the market that I think we need to

What do you make over the last four or five days of trading? We had that Job's number less Friday that really seemed to spook the market a little bit. We had some a lot of you know, selling and instability in the marketplace last several days. Maybe you know, what do you make of kind of where the economy is and maybe what the federal reservice.

Thing came about.

Sure, so you know, the poor manufacturing sentiment and the payrolls certainly came right together with the Bank of Japan decision not just to raise rates but give hawkish guidance. That plus positions, I think all came together to trigger this sell off. When I but when I take a step back and look at the economy, I think we're still kind of fifty to fifty. If we get a soft landing or something bumpier the service sector sentiment, and the service sector is a much bigger part of the economy.

So what does our feeder reserve do here? Come September.

Well, you know, we have almost fifty basis points priced in for September. I do think it's likely we get a cut. The question is is it twenty five or fifty. I think that will be a debate. We'll get guidance from Powell at Jackson Hole, as you mentioned earlier, and we have a lot of data, so it's going to be I hate to say this because it sounds like a cop out, but it is going to be data dependent in terms of the degree of the cut we get September.

I agree in the data dependency. Bruce casmen out with a note this morning, falling up on a statement ten days ago.

That he sees global disinflation.

What I don't see in the zeitgeist right now, Rebecca, is the discussion of the damp effect of disinflation and deflation on the optionality that institutions have.

They're going to run out of choices here.

If we get Wayley's three percent China GDP growth, if we get Chasmin's global disinflation, how constrained are institution's going to be six months from now?

Yeah, I mean we're already starting to see more companies feel the heat from not being able to raise prices as much.

Yeah. Did you see Warner Brothers Discovery that was key esting?

Yeah, that was a little heat or the McDonald's five dollars meals. You know, we're seeing companies realize consumers are saying no more, and so they're having to react to it. And if that continues, obviously we're going to see it feeding through into profit margins.

What have you seen from earnings in this period? How would you characterize it?

Yeah, I mean I wouldn't say it's bad by any stretch, but I think what the market is latching onto is the sense of caution with a consumer. What struck me though, is it it's coming from China and the US. So there's two stories here. There's the soft China story and the cautious US consumer story. And I wouldn't take my eyes off of China.

Tom.

You mentioned the Chinese rememby earlier, you know, when we talked about here carry on Wines and China. You know, their bond yields have fallen so far the government's now threatening to intervene to push up bond yields because they don't want a speculative bubble in bonds. The last thing they need is higher yields right now with their economy so soft, so they're kind of stuck, and I think we need to keep watching how that flows through, both to disinflation and growth.

I want to overlay here your experience with talking to people where short term is three years? How do you prosecute an adult investment cycle or unknown future given the cacophity of short term idiocies.

Wow, what a great sentence. This is why I love going on.

I'm not awake.

I stayed up and watched Siberia synchronized swimming, so I'm not awake.

Well, just like Christine. Look I was a synchronized swimmer, so I'm all about that. Yes, that's another conversation.

We'll stop the show, breaking news. Here were minutes left?

No, no, no, no, no, God's name.

Do you put your feet up in the air like that? I mean I talked to Leguard yesterday about this. How do you what are you doing.

With your hands to get your feet that far up in the air.

Well, the technical term is sculling, but you're just moving your arms back and forth, almost like a little propeller. But let's get back, let's get actually investors.

Yes, no swimming in the sun.

No, not a million years. Okay, get back, okay, all right, so let's okay, focus, focus. You know, I've had the luxury of dealing with very short and very long term investors, and I think for the longer term investor today, you know, this is an opportunity to say, is there anything I've liked that I can now get ten or twenty percent cheaper. I think some investors are looking at Japan saying, you know, we're getting a lot of reform, corporate reform, that's it's important.

Right now.

When you look at Europe and the UK, you don't have a big techt exposure there, so you're talking about stuff they actually make stuff in the export at the China, so that there's a China risk in those markets, right I.

Think more so in Europe than in the UK. If we were talking about Germany, i'd say one hundred and ten percent. I think the UK, the sectors in the UK equity market are a little different and I would be focusing more frankly right now on the UK domestic equity market, so that index specifically.

Rebecca Patterson, thank you so much for.

Great to see you guys.

I just wanted just a.

Great brief there in this.

Pream miser with this JP Morgan Asset Management, a portfolio manager, and I've just got to go to your arch call of lower yields over tow twenty four months. It's prea misra genius Ian lincoln'sat in that chair yesterday it bemo Capital Markets and said out there we will power through four percent well down into a three percent and he frames out two point ninety five percent somewhere out there, distant.

Do you have the same overlay price up yield lower lower lower?

I do? And here's why.

I think the last week, if you didn't think that bonds and stocks were covered were essentially negatively correlated.

Well the last week shows you that they are.

So you know, if we stay in a soft landing, the interest rates are going to fall because the Fed's going to have to cut.

To some normal level.

We don't know what that normal is, but it's not five and a half percent, right. If it's three percent and the Fed's cutting all the way down to two and a half to three percent, that tenure is going to fall. If we actually slip into a recession. That's where risk assets are going to struggle, and that's when interest rates are going to fall much below that.

Somebody said to me yesterday, they said, what's a single thing we're not talking about?

And I talked. I quote it Bruce Kasman.

He's an economist at a small bank down on Perk Avenue. Bruce Kasson wrote a piece on global disinflation, and to me, that's the heart of the matter. Fold in the China driven global disinflation into your portfolio management.

Absolutely, So I think inflation is extremely global. We saw that on the way up. It's going to happen on the way down. I would argue markets extremely global, but we can sort of focus on I think one or two things at a time. So the last week has all been about the US payroll report or dollar en but look at globally, where is the engine of growth? I think the engine of growth was in the US, and now there's a question there are we slowing to

Coming up versus.

So what should our federal Reserve be doing? I mean, Monday morning we had discussions of an emergency inter meeting rate cut.

On Monday morning early. What do you think the Fed should do?

In you know, I think they should start normalizing. We're at five and a half. Inflation is decelerating, you know, globally it's decelerating. In the US, service inflation, wage inflation's all coming down. I think they should absolutely be cutting. Where I've struggled with is this idea of gradual normalization.

We know monetary policy works with a lag.

So if the labor market, which I Pao said, is back to twenty nineteen levels, if inflation is decelerating close to that two percent, they should absolutely be cutting. I think they should be cutting fast to normal normalition levels. So fifty basis points make sense the inter meeting. I think the market went a little too far for an intermeeting rate cut. I think you need severe financial market stress, which is going to threaten the recovery.

So at that point we're talking about either.

An institutional failure or markets breaking down.

You know.

I think the speed of the move.

Was interesting, but it is August, you know, there is summer liquidity. Everyone was in the soft landing trades. I don't think we should get carried away about intermeeting cuts, but I think the FED really here should be normalizing. Perhaps they should have started last week, but they can catch up quickly.

They can catch up. So what happens when a FED begins to cut? How do they do it?

They do it like every meeting, every other meeting, twenty five bass point fifty to fifty basis pots. I can't even remember the last time we were in a cutting cycle.

So I think people look at the last cutting cycle, which is COVID, and that's where this intermeeting cut comes in, or they look at the one before that and the fed's cutting really fast. I think this could be a very different cutting cycle, and you know, fairly similar to the hiking cycle. Remember they started, they went aggressively seventy five,

I don't want to get you in trouble with Stacy Friedman and general counsel over at JP Morgan, but I got to ask because I think all of global Wall.

Street wants to know.

You killed it as a strategist and now you're a portfolio manager. What's been the biggest surprise about being quote unquote a portfolio manager?

It's the correlations, which as a strategist, I could look at Excel and you know, have a lot of conviction on correlations, and then you live days where the core relation goes from negative to positive across asset classes. Because interst rates was hard enough trying to figure out interest rates and then how does that feed through across portfolios or you know, does it have differential impacts in different parts of credit.

That's sort of what I speak.

So where's the opportunity now in those differential impacts? That's the key question.

So I think I ask it for Jamie. He just emailed me, So there is opportunity. I think high quality spread product. You're locking in yields of five and a half six percent. But here's where where you end of cycle, cost of capital is high. This is where that research background helps. You have to look at companies. You have to look at business models. What are companies doing with debt?

Thirty seconds? Can you frame a sub three percent ten year yield?

Not the drama back the negative rates, but can you see price up yield down that much?

I can.

I think we're normalizing if the Feds, you know, in terms of the economy as of the data right now, if the FED doesn't cut quickly enough, or the lags are long, they were long on the way up, they could be long on the way down. The economy slows into recession, the Fed's cutting to two percent or below. At that point, the tenure is going to be the only thing that investors are going to want.

That's when you're going much low.

In Neil Prea, thank you so much. Pria Misra is with JP Morgan. This is classic Belski, folks. He writes a mental note paragraph to pay if you hate him, because if it's a six page note, you got to read all six pages. He writes a blistering two paragraph, three paragraph note, which is what everybody calmed down. Figure out what you're going to buy when you have the

Well, good morning.

Uh, you know the market seems to be this fire aim ready again, which for us creates great opportunity because we have a process and a discipline.

The names that you know we listened in our note this morning are all kind of core names.

And because we don't do a lot of or invoke a lot of turnover in our portfolios that we manage for our great wealth management system in both the United States and Canada.

Our clients are already invested in those names.

And if you take a look at where where there's been blood in the streets, not like a Warner Brothers Discovery today, because obviously there's some operational issues there, but names like Morgan Stanley that were down, or the Apple pull back, or even Lulu Lemon when there's when there's there's strong fundamentals underneath that, Tom, we want to own those names longer term. We've had an opportunity this week to kind of rebalance portfolio.

And what's important here, folks, is the adults look at the Bloomberg and they use fundamental technical and economic analysis. Paul the weekly ch, not the daily gyrations. Smooth it out a little, Paul the weekly chart. Take it log arrhythmics, standard and poors five hundred and Belski has his tattooed to his brain. We are perfectly back to the long term bull market moving average using the exponential moving averages I use. We haven't even broken long term support and we're all going to cash.

We'll go crazy, Tom.

You know, about a million years ago, Brian was a student at Saint Cloud State University. So I had to Google map this, dude. It is practically in Canada. Its way up there in Minnesota, and it's awesome. Exactly the Herbrooks National Hockey Centers, the Change River, I forgot, the Mississippi Rivers.

I played with the animals from a Dyna Minnesota. Yeah, and they were like basically junior a player from Canada masquerading as Americans.

Continue with Bran.

All right, Brian, people were freaking out in Monday morning. Brian, there was a sense of panic in the market here. I mean, did you sense that?

And what does that tell you about maybe how investors are thinking about this market?

We did, Paul, and you know, it's still the old notion attention spans of nats and oh, by the way, it's gotten worse. We seem to forgotten that August is usually a very bad month, and we've had it in twenty twenty two, in twenty twenty three.

But if you go back to the nineties, it was five.

Straight years or August we're negative and it's really I mean, especially this year, Paul, I think too, because a lot of people are on vacation and the adults are away quote unquote and I think that's what's caused even this morning with the goofy move in the treasuries off of an employment report, which we are guessing by the way that the employment report is going to be restated and not as bad next month. So I think people are way too Macararion. We've said it on your network before.

So we're actually excited.

About what's gone on because this is actually quite normal.

Quite normal.

Yeah, a lot of folks Brian has been saying, you know, in a normal bullmark, you do need to see some pullbacks here, five, ten, fifteen, twenty percent. So maybe that's kind of what we saw a little bit here. How about some of these big tech stocks that historically have moved this market higher, they have been weak, there's been that rotation trade.

What do you do with some of those big tech stocks here these days?

Well, we really continue to believe that from a thematic basis, those big tech stocks we call.

Them super seven are really your.

Consumer staple stocks now, and you keep core positions there, much like Warren Buffett did. By the way, he just sold a little Apple. He was way overweighted and he's owned the stock for twenty plus years. So I think that's been way too there's been way too much negativity surrounding that. But then you start buying these other tech stocks like Palentier, an Oracle.

And amd in Qualcommon, Broadcom.

But I think I think what people are missing is the broadening out effect of owning a.

Little bit of everything.

It means small MidCap stocks, it means value stocks, it means mantles, it means playing themes and being more fundamental.

Brian one final question I got, Well, you know it's all this tech love.

I get it. I don't even know what palingtary is. What do you do with Walmart?

I got a company who with single digit revenue growth, poppin' a forward twenty seven to twenty eight multiple as well. Is there finally now an opportunity with these slow revenue growers with these huge valuations?

What do you do with Walmart?

We love Walmart.

We own it in three or four portfolios in the consumer stable space, our core names are Costco and Walmart.

Who's not going to shop there?

And especially considering if people are worried about stretching their dollar, they're going to go to Walmart and they're certainly going to go to Costco. And I think Walmart's done an amazing job on their web platform as well.

I think it's a name that.

I actually a lot of core people don't own the stock and core portfolio, so I think there's a real opportunity longer term there as well.

Lisa, do you want to drop in a question here on Costco to mister Belski here? I mean she is our securities analyst on a dollar fifty hot dog.

You know they are increasing their membership, but that's how they make most of their money. Is this where some of these retailers are going to go toward more the membership? Whew? Do is that going to track more people in?

I think that might be part of it too, Lacy.

You remember here in America's heartland in Minnesota, I mean, we sit and stand in line to get gas at Costco.

Because we're very cost conscious. The American consumer.

Is super smartly, so you know, they have one hundred dollars, they're going to spend it where they can get the most for one hundred dollars. And so I think that we can't discount how strong and consistent the US consumer is.

How do the Vikings look this year? Brian?

We got to go, but I mean, is this finally where the Vikings get their act together?

We're all excited. You got training. Have we got a new quarterback? Which means probably we're not going to do very well.

Good Brian Belski, thank you so much with your Vikings update from Minnesota.

Your daily look at.

The front pages at least a mateo hour.

Tell me we're bumble free on the newspaper.

We are bumble free, but not Costco free. It's about Costco. You know, I had to go and start there. Okay, they are cracking down on the membership sharing, kind of like Netflix is doing the same thing. Uh, the problem is that too many people are sharing it. They're going into I don't know if either of you have been to a Costco, but when you go in, there's someone at the door who checks your ID, but the picture is really small. They can't see it. They just you know,

And they just say yes or go ahead, so you're a member.

So I'm a member.

Yeah.

So they're starting to do is they're having these ID scanners so that when you go in, now what's going to happen is that you scan it and it comes up on this bigger screen so they can actually see the picture and say, oh, yeah.

That's you things.

Are people really doing that?

People are really doing that. They're just all they're doing because they don't really look at it.

Which a cost come membership.

I have the higher versus shots. Yeah, that's about one hundred and thirty dollars. The fees are going up in September, right the first time in seven years. For me, it's worth it because you get a percent back. So at the end of the year, I get a check that basically pays for it.

Is it nice?

Is it the same as the magic?

It was like in Red Too, when Mary Louise Parker's in there and you know John Malkovich is in there and there.

Like an aisle four with the Kirkland toilet paper and.

That is Costco toilet.

This is Costco the same as it was when Bruce Willis made that great movie.

I think, hey, the hot dog price is still the same, all right.

But the Kirkland item is not.

As well next so yeah, they're cracking down on that.

Okay.

A new report shows a pandemic shifted US jobs away from big cities.

Into smaller metros.

So I'm gonna break this down for you. This is from the Federal Reserve Bank of New York analysis job listings. Large central metro areas now count for about thirty eight percent of total listings nationwide.

That's down from.

Forty six percent pre pandemic, and the portion of job bob making in smaller metros that increase. There's also a shift in the type of jobs. You have postings for jobs related to computers, math that fell, and then job listings and healthcare that rose. And they say, why, Well, what's the reason behind? Well, it's remote work.

Okay.

People are moving away from the big cities because they can work remotely from wherever. And as they start to relocate, then you have people who are needed for let's say, food workers, healthcare, other services. So that's the reason.

Paul Chef were up to speed on this I'm thunderstruck by how empty the streets of New York are. Selected times, it's like, you gotta, can we say work from home?

I think, I think it is.

Full disclosure and I think this is nuts.

But no, I think you're right, Tom. I think you're right. I think and again, I just think about my own offspring. It's part of their That's just how they view the workforce as a as a hybrid kind of environment.

That's where we are.

Are they doing the hybrid?

Yes, even like fidelity. My son works a fidelity hybrid Universal.

Music group of Peter Lynch was never hot.

I tell you what is the defence contractors my son works for, not hybrid?

Is bumble work from home home?

Okay, Well, we've been talking about the rivers sin right, and if the water is safe, if it's not safe as they get ready to start the swim, I think the women start today. So there's something going around that the swimmers are drinking a can of coke that is a secret to not getting sick after you get into the water. There's reasons behind this. Okay, it's not proven. Just want to put that out there. There's no medical evidence for this whatsoever. But they say they're fans of it.

You don't get sick that way.

I mean, think of it.

If you take a can of coca and you pour it down your drain, it clears it out.

Wait, wait a minute, is this plus for Atlanta?

Which is this? Well?

I mean after a big night out. So many days I've said there's nothing better in this world than coca cola.

Really, oh my god. It just revives you like nothing else in the world.

But the athletes like it because of that sugar rush too, because it returns like those glycic gin levels that they.

And you have Coca cola and Mateo house. Never I mean again reason number like three thousand. I'm never going into the Mateo household.

No Coca cola.

It's sorry, sorry, too much sugar, too much sugar.

Lisa Mateo. Thank Lisa Mateo with a newspapers today. Thank you so much.

Wait, there's.

Have video to go with this bowl on it next this one.

Okay, we have the video. There were these dogs.

There's video of the dogs in the house and what happens is that Make sure you keep Vet Bill and Kennelfey away from your cell phone battery. Pat, okay, because you see the dog, he's biting on it.

He's chewing on it.

If you're watching on YouTube, you can watch along with us. And all of a sudden it starts to spark up. Oh, and he jumps, and he jumps off the bed and it bursts into flames because he's on his pet bed. So the other dog runs for the hills. And now he's saying, what are you an idiot?

What were you doing?

Dog?

So the two dogs and the cat scooch out the dog door.

They're saved. No one's hurt.

That's the main idea here this story. But the lesson learned is these things can be kind of dangerous.

It's serious.

John Tucker's really let on this. So I think John's did some great reporting on him. Sorry, he's not here, he's looking at Siberian Olympic outtakes. But but Paul, I'm sorry for Mayor Adams in New York City, there's no more serious there.

The FDNY will tell you this is a huge, huge him that puts their firefighters at risk. And I learned this a long time ago with my oldest son who was into all these those battery packs for his various RV vehicles, and he would store them out in the garage. You would never bring him the home, put him any special wraps and special containers because he was trying to explain how right and sure enough?

Okay, I'm not good at this. Does a vespa have a lithium battery?

No it does not. We are gasoline power.

Okay, there safety on the Jersey. Sure, Lisa Mateo, thank you so much for the newspapers. This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube.

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