Surveillance: Active Management With O'Rourke

let's start right here where we start. Every single year, we start this conversation about this is the year for active management, and then we have a double digit gain on the SMP five hundred. We've had that over the last three years, and here we are year four, Michael, we're talking about this is the year for active management. Michael Rourke, what do you say when you face that debate,

that conversation. I think it's interesting because we're for the first time in a long time, we're seeing a different economy, a different global financial and economic outlook, where you have this inflation um scourge that's kind of taking over the globe. That's gonna shift monetary policy throughout the world. So when you look at the monetary policy of the past thirteen years, there's always been this lower for longer outlook or the static easy monetary policy that worked really well for index

investors and passing investors. As far as this year is concerned, I think we're going through this major secular shift um where rates and inflation are gonna matter, and it's also gonna be fueled by things like you know, deglobalization and decarbonization. So you're gonna need someone to actually be making decisions if you want to navigate what could be a very treacherous So give us a sense of your take on the diversion that we divergence that we've seen so far

between value and growth. Michael, is the head fake or is this the beginning of a rotation that could persist for more than just a couple of months. Well, at least, I want to say your daily rundown was superb because I'm watching the same things that you are, and I do think this value versus growth argue it's important. Um, I've been in this value camp for most of one so I you know, am I concerned about the head fake a little bit? But I think last year's head

fake really had to do with Jay Powell. You know, looking for that further progress in the job market market. And we're in a reverse situation this year where all of a sudden, Jay Pale has become an inflation hall. And again inflation is very aggressive um influence on the economy in the sense that it hurts the people who can afford the least the most, so it also becomes

a political football in that case. I think Jay is gonna be a little much more diligent this year than we've seen him in his past, in the past of the Fed, and I think that's gonna be the key difference going forward, which I do think plays well for the value space. Michael, the moment is a great bull market after thirty six months coughing, coming off Christmas Eve of two thousand eighteen. What is the character of this bull market in the year four? You know what it's

it's driven by financial conditions. We have record easy financial conditions. Don't forget this easy policy that we've had started well before the pandemic. Power started cutting rates in the summer of nineteen. So you know, there's been a lot of liquidity piled at this market, a lot of fiscal stimulus.

So I think we're watching for as we shift years here and looking look to a tighter policy, especially monetary policy, whether it's obviously tapering and eventually balance sheet normalization and of course tightening. I think that's gonna be the shift. But right now, the liquidity is abundant out there, and that's why we see so many bubbly aspects of the

small market. I mean, just to quickly go back to the value verse growth argument, Tesla had that move one day and add a hundred and forty billion dollars in market cap. That's more than City Bank or City Group or Goldman Sacks. So again there's a big disparity in this market out here. And again that's what this liquidity is driving, is that slowly gets taken away. We should see big shifts in the market. And Michael, I just want to pick up on that story on Test and

just get a final thought from you on it. I think it's important. What does it say to you to see that much additional market cap added to that name off the back of each and every additional auto they'd be estimates by that to me just felt wild. I wouldn't call it insane. It happened, the market did it, but it felt wild to me, Michael, it was. It was definitely wild. What's interesting are we valuing this company

at you know, a billion dollars per unit sold? I mean, it is an insane move, but it's interesting because now you had Ford come out yesterday and they said they were going to ramp up their production of the e v F one fifty and those shares have a nice What you're seeing is, you know, obviously competitions coming into the space. People see the market reacting like that, traditional automakers.

Bloomberg obviously has a story this morning about Volkswagen and Toyota looking to make a push to take down Tesla. You had Sony come out and see yesterday and they're gonna introduce their electric car. Uh. This type of euphoria and you know, this typer market response definitely invites more competition, which is gonna make the environment more challenging. Ford had a massive year last year. Can I do that again, Michael? Thank you, sir, Michael Royal challenge trading, just going through

some of the big issues right now. The passive as if active debate continues now to an important conversation with Christian Millard Listman. He's with Golden Sacks but far more importantly acclaimed for very dense detailed reports on the view forward and allocation. Christian, thank you so much for joining us. One of the hearts of your report is the trajectory of the inflation adjusted yield and that the real rate in some way will migrate up through a negative statistic

up near a positive statistic. Is that a linear function? Or do we have to worry about acceleration and the effect on our portfolios? Is the real you real yield moves out of the abyss, it's in. Yeah, listen, I think you asked the most important question for two are we going to get a significant increase in the real yield? And in particular is it going to be gradual or is it going to be very quick? And will there be step changes? And if you look at the last

few weeks, it's had this very clear reflationary behavior. The market has gotten less worried about omichron, looking at the UK, looking at the cases, the hospitalization, at death rates, all of that gives gives the market comfort that maybe the growth impact is less less bad. So you go back to reflation temper it so bomb yields have gone up a lot and fast, but most of that increase has

been in facial expectations, not the real yield. And this has been a story which we've seen all of last year, but for this year, the big difficulty is that the FAT is life and it's going to start hiking. And what we found historically is once the FETs starts hiking, the real yields and the back end real yields start to move higher. So our views, it's a gradual move.

We're expecting implicit in our forecasts maybe thirty to forty BIPs, and that could very well be digested by equities in aggregate, but it means law returns and there's always the risk that it gets a bit shaky from time to time. Every time when we are in this kind of period where the FATS starts that tightening cycle, there's a risk of a bit more volatility, right. I gotta follow up to that, But that answer was so smart, Christian. I'm gonna move on to other topics of the moment. I

want you to speak for all of Goldman sex. I don't want to get you in trouble here with Mr so Amen, But when are we going to finally and the active versus passive management debate. Give us your take on the value of active management after what we've seen the last twelve months. Yeah, I mean you mentioned it at the very early beginning already. I think if returns a slow, if you start to see the beta um as a driver of your portfolio, return become less important,

alpha automatically gets more important. And and I think it's a typical early cycle versus mid cycle discussion. Early in the cycle, things are highly correlated on the way down, on the way up, and it's all about getting the beta right. Whereas when you are going into a more mid cycle backdrop, usually there is a place for active management.

And we generally think that that we're entering that type of period now where even the style rotations which have been very violent, and we we saw a bit of that again in the last few days, even though style rotations become less significant relative to individual stock picking. So I definitely think that there is an increasing focus on active management. Active management is not just about stockpicking. It's about the whole investment process, market timing, it's about timing regions,

it's about timing styles and individual stocks. But we certainly see that there will be much more pressure and much more focused on active management as the type of return potential comes down a bit Christian. One of the active moves so far this year has been into value away from growth. And we keep talking about whether this is a head fake, something really similar to what we saw last year. Is this something that you think will pretend a trend or simply something that will get reversed in

two months? To me, I think the whole coming cycle, um, there is a strong case for being a bit better diversified. I think in the last cycle, as we know, the best thing you could have one is on us large kept rold stocks and and you would have been very happy with the sharp ratio, very tough to beat. Whereas in the coming cycle, we think that the return differentials between regions and styles, as I mentioned, they might narrow

and there's a real risk benefit. I give you an example, um, the correlation between value and growth and the two styles has actually declined in the last twenty years. UM so makes sense because growth has outperformed a law to value hasn't done that well. But that type of correlation can be a diversification benefit. So it tells you that if you want to reduce portfolio risk, there's a really strong case to to to just strategically think about incorporating a

bit more value stocks in your portfolio. But as you set yourself, there are these waves, and these waves have a bit of that flavor that after one to three months you're done with. And I think there's a good risk that the kind of current value wave again will will kind of excel rate and slow and maybe partially reversed depending on the news flow we have on a micron.

But what's really different with regards to value versus growth compared to last year is as I mentioned that the fat is very likely to start the tightening process via higher rates, and that means that you have maybe a bit more longevity towards this rotation. Christian. Before we let you go, I want to get your sense. Scott Croner of City Group came out two days into the trading session and increased his SMP target for your end. Does it concern you that everybody is competing to be the

biggest bill right now? Listen? I think, um, we look at the positioning and the sentiment a lot, and um, I think people are overweight equities and they're probably at the margin more overweight quality equity, not really down in quality UM and and and that combination has meant that

we're not that worried. So I think people at the margin at knowledge that equities are kind of especially relative to fix income UM, they're having a lot of support from flaws from valuations UM and to some extent from fundamentals, and I think that's correct. I think we are overweight equities as well, and we do actually think that there's more scope for demand for equities UM in the coming years if you continue to to keep the cycle going. What I would be worried about is if increasingly the

bulishness is focused on very cyclical parts. And we see a lot of the indicators with regards to what we're just discussing value UM cyclical riskier parts of the market leading for a prolonged period of time, and and that could then kind of create a certain bullishness for the cycle, which eventually could get disappointed and create the risk of a larger correction. But we don't have that right now, UM, So I think we're not that worried yet about the

extent of bullishness we have. Christian, thank you always gonna have from you, Sir Christian Klisman. There of government sex on a year ahead. We drive forward this conversation with Bagd and Sadi also at Johns Hopkins University. Dr In Sati, thank you so much for joining us. What should the CDC do? Should they just say, look, PCR, we tried it, it doesn't work and we need to look at far more rapid rapid testing. So PCR does work, and that's

the wrong messaging. But the correct messaging here is look right now, we just don't have enough tests, access to tests, extremely challenging. Systems are overwhelmed. Rapid tests are expensive but

also not available to major parts of our society. If you are symptomatic given the current pandemic, you should isolate for the full ten days because what is also known is after five days from your onset of symptoms, most people will be uninfectious, but about thirty individuals continue to be infectious and there is a risk that they will continue to transmit the virus onwards. You're acclaimed doctor Hansatti worldwide in dealing with testing and virology in poor nations.

I don't think that describes America. How did we get in the spot where we don't have enough rapid tests? You know? I think it was we had a lot of tests available within health facilities. I think this is a consumer market. UM. Only thirteen rapid tests were ever approved by the FDA, right, so number of the number of tests is low when it comes from rapid testing. There was over four hundred tests approved UM that are

non rapid tests. But then there's also issues around distribution, market share, UM and the pricing of the tests, which is really cause delays in making sure that everyone has access to a test. Dr Hansati, what's your sense of the CDC's guidelines. I mean, John was just reading it's as clear as mud that you know, if you have a test, great, you can take it. If you don't, don't worry about it, Just go about your life. I mean,

is this more harmful? Is it's going to actually undermine trust in a health system that's really struggled to get the right message across. I mean, that's been a story of this pandemic right to some point. We agree that the pandemic has evolved with this guidances also need to evolve, as our data or knowledge of vaults, but the messaging has been frankly confusing. UM. It leaves employers unsure what to do with their workforce. Right, so test symptomatic isolate

for five days? Okay, that's clear, But then how do I get a test to you? Will those test results be available on the same day? When do you make the decision whether it to isolate for a further five days or return back to the workforce. And if you do return back to the workforce, how do we ensure

that that return does not put others at risk? Um And so I think that guidance has been challenging to interpret but all so challenging to implement, which is frankly the reason why people, a lot of companies have gone to PCR tests, have gone to something that is the most extreme to prevent outbreaks from offices. At what point do you see that actually becoming a mood issue. We were speaking with Dr Amishdalogy yesterday who said this is

absolutely the wrong test. Would you agree and do you think that it will start being phased out as the barometer of infectiousness in the near future. So rapid tests are wonderful. True, there are sensitive but extremely specific. So if you have a positive rapid test at home, there is no reason for you to go and get compromatory testing. Use consume that space in the health system that needs to be made available to others. Also, PCRs do not

make sense. Are asymptomatic individuals, symptomatic individuals that need to know for certain that they are positive or not. I don't have access to a rapid test, although only ones that should be getting a PCR at this time. Don't wonderful stuff, wonderful word kinds of white We appreciate it.

Don't about town Sanci that of John's helpkins. Right now, we're gonna dovetail in the always interesting Eurasia Group top ten risks with what we see immediate and Ian Bremer is known for years as he's done the top ten risks that he gets rewritten by the moment, we're gonna rewrite it right now. Alex Pardeaux joins us right now, the expert on Russia at Eurasia Group, Mr Burdeaux. How does Putin respond to the upset in kazakh Stone. I

think he responds carefully at first. Um, everybody's sort of watching to see how these protests develop, and I think that's true in the Kremlin as well. I think that they may have been caught by surprise as much as anybody one thing that Putin does not want to see his chaos on the streets in Kazakhstan. So they'll be looking to see what the Kaza government's responses UH look like UH and whether or not they can control the

situation aation. And I think also they'll take some lessons in terms of what this means with popular uprisings that are connected in particular to the raising of gas prices, which it seems to be the immediate cause of this particular situation. When we look at this and study, we hearken back to our collective memories, and that is a memory of the Soviet Union. Address right now, how much there is a tinge of the Soviet Union and your analysis of Moscow the present states of Russia and the

former states of the Soviet Union. M Well, certainly, I think for President Putin UH, there are these linkages back to the Soviet past that he know he's expressed regret about the breakup of the Soviet Union. But I think also there really is not a sense that Poton wants to go back to those days, um, that this is sort of some kind of ambition of his UM. But I think in the general area, whether we're talking about Kazakhstan, and whether we're talking about Ukraine or the crisis in

Yellowers as well. Moscow continues to believe that it has a very important role to play in this region, that it's its sphere of influence, and that leads to some of the tensions between Russia and the West that we've been seeing just over the last couple of years. So Russia is always a problem spot typically when you look at some of these geopolitical maps of potential risks, and here we have it at number five. It moved up significantly. I believe that you said it wasn't even on the

list last year. So what changed to make it in a situation, And certainly the relationship between the US and Russia at the brinks edge of precipitating some sort of international crisis now versus a twelve months ago when it was just Russia. Well, I think in two we're looking at, you know, a few issues that could actually lead the crisis. Certainly, there's you know, the US Russia relationship has been a

particularly bad over the last separate years. But it's these specific problems, and of course right now the big focuses on the situation with Ukraine would put his demands about a basically a redrawing of the Eastern European security order as well. And that's led to these major tensions just over the last couple of months. But beyond that, if we look ahead later to the year, there's concerns about whether or not Russian actors, whether their state or non

state actors, will interfere in the US midterm elections. UH. That has been a big redline for President Biden. He's made that pretty clear, UH. And so the trigger for some sort of US response to that UH is fairly low. UM. Other issues of concern would be in the cyber realm uh. You know, a repeat of the colonial pipeline ransomware attack last year or the solar winds case and saw something

of that nature that would also be a concern. So these these problems have been mounting and this year there's a real risk that one of them turns into a christ Going back to where we began the conversation with Kazakhstan and the idea of higher gas prices igniting social unrest, how much has the nord stream to issue really caused a fissure between Europe and the United States with Europe in a much more delicate position, with such a strong

geopolitical location with respect to gases, gas prices, and Russia. Well, certainly the European reactions I think have driven US responses to a certain degree. And with the nord Stream to pipeline, the Biden administration basically struck a deal with the Germans over, you know, to allow that pipeline to go ahead with some very heavy conditions. Uh. You know that the instinct from Washington has been to impose sanctions to try and

stop the pipeline. The Biden administration has resisted that, I think because they're, you know, in the interest of trying to repair the trans atlantic relationship, especially with the German government, they want to be very careful about how the US response. Also, I think it's a recognition that ultimately the German government and their regulatory authority over the pipeline is probably the single biggest obstacle to North String to becoming operational. But

for Russia this is a big deal. Putin certainly wants this pipeline to become operational, and he wants to make sure that gas from is able to keep its market share. Uh. In Europe, uh, and that leads to tensions between Russia and the EU as well, where there still is a lot of skepticism for many members, included especially Poland, about this pipeline and whether it should be operational at all. Alex, thank you so much. I've got eight more questions, but

we don't have the time today. Alex Brudeaux, you raise your group on the top ten risks for two thousand twenty two. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern. I'm Bloomberg Radio and Bloomberg Television each day from six to nine am for insight for the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple, podcast, SoundCloud,

Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg