Surveillance: Bear Market Rally with Cronk

the Bloomberg Terminal and the Bloomberg Business App. Tara Crunk with us the CIO off and investment management at Wellcot to see you, John, Do you have the courage to be barished? We have had the courage to be barish for all of two you know. Look, I think you'll hear to the earlier conversation two mixed messages on jobs. Today. You're gonna hear Powell at the at the Economic Club say he's concerned about the economy overheating in too many jobs.

And then President Biden's going to get up at the State of Union and tout how he's done such a great job creating jobs. Right, So you're gonna have this kind of deck economy that's going to happen. Um. I think you know you've had a subtle change since the FED meeting. Obviously the point about UM thirty five basis point move in the in the two year UM the

dollars reverse course gold has started to come down. Um, you do have a you have a different message right now on on the equity market between technicals and fundamentals. Your path was wrestling economics and finance at Dames Iowa and then off you went to v BODI and bu. The bottom line is you need courage to buy quality right now. All the media razzle dazzles in nonprofit tech, what memes stocks is that what they're called? And the rest is well and what Wells Fargo was saying, get

brave and buy quality defined quality. Well quality is everything that wasn't this rally at the being of the year. So if there's only two themes that have driven this entire rally at being a year, including across all assets, it's long duration assets. And that's not just equities, you know, think tech comm services, discretionary golds along duration asset it's rallied hard to here. Right for up until the FED meeting, the body the long end of the monk curve was

still rates were still falling and we're rallying. So eating this huge long duration rally and then it's low quality, right, it's it's all the things you don't want to own. Basically that we're just either some form of a January effect, some form of short UH covering, or some form of just um reversion to the mean after tax lots selling. That's not really the basis for a good sustainable rally

from here. Right now, you've you coiled the fifty day, twenty day and two d day moving averages into a tight band that had to break out one or the other. They broke to the upside here in the short term, but all near term indications suggest you're probably over bought at this level, so we would fade this latest rally. We still think it's probably a bear market rally allah, you know, four or five of them in two and probably fails into resistance and and eventually comes back down

before you move higher. How do you fade it? Do you fade it with options? Do you bet against the NASDAC, do you bet against specific companies? Do you just sell on the margins what's gone up? I think you sell on the margins. It's giving you a second chance, you know, to unwind that lower quality If you want to, or

you just reduce your equity positions. You take your risk budgets down in portfolios like you need to if you don't have them where you want to be, and then you hold that dry powder to your point of your getting paid handsomely on the short side of the old curve to hold dry powder, and you're actually, for the first time in a long time, getting positive real rates. Right If you look at the three month run rate on the PC deflator or the CPI, there a two

point nine three point one percent. If I'm getting four eighty two on a twelve month treasury, real rates are finally now in a positive place. They hadn't been for much of all of last year and the year before, So that gives you some nice carry while you wait out as this thing kind of the fundamentals catch up. How distorted is your portfolio right now? Waited too fixed income waited to short term debt versus equities versus other assets.

So it is definitely underweight equities, there's no doubt about it. Um Uh. We had on the fixed income side, we're overweight fixed income, but we barbelled the whole fixed income element. So short term makes all kinds of sense the belly of the yeld curve. You don't want to be there, right because now you have instead of rolled down, you have roll up in the yolk curve, which is not the place to be. And you know, the tenure peeked

out in on October twenty four. We went long duration on October twenty nine, so we were five days late. But that's been just a heck of a trade, right, I mean it is really um added, you know, mid double digit returns to portfolios. At this level, I'd be a little careful legging too far into the backside of the ool curve. We think the tenure trades between three forty and three ninety for most of this year and back and forth. So I'd be a little careful here

at at the level we're at. If this takes up the next question, ready, if they can only say to keep surprising to the upside, like the types we got on Friday with that change anything for you? How many change things for you? Well, the obvious is it has to price in more hikes. Right. It brings may into the conversation, right which today, Um, it's it's all about March is now basically a given and then another basis points in May, and it takes out any hope of

cuts in the back half of the year. Great niece, Yeah, I think that's the case right now. I mean, you you just have to you have to let this thing play out. I mean, earnings growth is just now turning negative. Right In the last years, we've only seen that happen four times. Every time we've seen it happen, it ends up being a recession. Yesterday you saw the FEDS Senior Loan Survey. Financial conditions are tightening quickly, right, So every time you you think about a recession, you have three

things that happened. You have um interest rates have to go up, you have inflation spikes, and you have lending and conditions tighten. I think the chairman is more focused on the lone survey than perhaps what's happening in public markets. Uh No, I think I think still he's he's focused on financial conditions too easy, right, I mean, you can look at a whole bunch of financial conditions to this time last year and Wednesday about what was that about?

Well Wednesday? Wednesday was his attempt to be hawkish, but the but the market interpreted as dovish yeah, So he's going to try and walk that back, I think today and in subsequent speeches, to try and just continue to pound the pulpit about like we have more work to do, We're not there yet. Um. And so I think that's that's an important thing for markets to kind of reconcile. The reality is the equity markets and the bond market

have not believed the fed up at this point. They just don't believe things like the disinflationary processes starts it. I'm not going to hear the rest. Wasn't that the problem? And that that was what they were looking at and that was what they were hoping about. Is it's just you know that he kind of failed at the communication. That's right. Do we give you an evil evaluation? Killed

We've got people we talked to. It wonderful And she described better than anyone I know, this path of disinflation down. And she used the Amazon challenge of the last mile to get to your house dating from three to two. When you talk to Sarah House and you listen to Sarah House, what's your yield there that you're trying to get to three to two? Are you even trying to get from four to three. Well, actually, I think that's

the mistake the markets are making right now. It's an excellent point and I agree with you, Sarah, you did great, she said a word. So, um, what what the markets are missing is they keep using the inflation data on year over year? Who cares about last year? Right? Last year at this time was irrelevant. Right right now as we speak for three month the rolling three months run right on pc deflators two point nine and on cp

I at the core is three point one. So let's just call it three at three year of stones throw away from two to two and a half with still downward pressure on prices. Right, So we're gonna get there faster than what people think. That's what we wrote in our economic Our outlook was, look, the great surprise of this year is how fast inflation is gonna come down. And if you think back in November December, people were like, no, way, no, how right, and it is it's there already. Well that's

why this counts. Yes, run, this is a joy force right now and a real symbol here, uh John, of everything to move beyond the pandemic. To have Gerard Cassidy with this remote from Maine is a legend Uh Tucker Anthony uh for for years and onto RBC Capital Markets, but have them in studio. I think it's a real three years almost three years to the moment when we last talked to you, A lobster role in Maine costs

eighteen dollars. Now it's like a bottle of champagne. What happened, Tom, Rising costs even the lobstermen a facing higher inflation costs obviously fuel also labor costs are very high. And that's that's that's what's driving it. And look at the real

estate pricing. It's right out. Let's get to it right now, Gerard Cassidy, I'm gonna look at securities analysis in the four percent return over the last ten years I got with a dog like City Group versus the fourteen percent return I got as Harrison passed off JP Morgan to James Diamond, that differential. How do you, with the legend that you are, how do you grind out not to pick the dogs in banking? It's very interesting, Tom, because it's all about execution, as you know, and obviously JP

Morgan Chase has executed and City Group has not. And now under the new leadership, Jane is trying to execute and divest many of the businesses outside the United States. Mexico is the big one, and I think if they get that done this quarter, that will help the style will buy Mexican City Group Banking, and there's such an emotional loadstone there for the heritage of the company. Back

to Mr. Read No, you're you're quite right. At either a local bank or a spent one of the Spanish banks are most likely to be the buyers, not an American bank. Though, as we reflect on the last decade or side, just how much more defensive are these knips? How much of these banks actually changed? John, That's really a good question because we're gonna find out. This is

going to be the true test. We do go through a recession and the banks have been derisked because of the financial crisis and the stress tests they go through every year. This will prove assuming they get through without having a major earnings problem, assuming none of them cut their dividends, imagine what's gonna what they're gonna look like coming out of the next cycle if this all takes place, which is what we think could very well. So what does that mean for how we should value some of

these big banks there you go. So then do they become so called financial utility. So they'll never trade like Doke energy. But should they trade it eight to ten times earnings? Maybe they get revalued to twelve and thirteen times earnings. They'll they'll never be marking multiple stocks, of course, but the point is that we could have a revaluation coming out of this whatever we're going into slow down slash recession, assuming the banks don't blow up like they

didn't of course eight or nine. So let's talk about one of their main utilities, which is a place to part cash right for consumers. Last year, in the second third quarters, banks saw the biggest outflow of withdraw of of of deposits on record. Going back, at what point do they have to start attracting deposits with higher rates. It's really going to be the question in this high

rate environment. But we have to remind ourselves if you go back to two thousand nineteen, the system had just over thirteen trillion dollars of deposits and they were growing approximately six billion a year. Today the system is closer to eighteen trillion dollars because of que So I would argue the banking system has over three trillion dollars of deposits that shouldn't be there. So I think you're going to see the continued outflow because of QUI as now

as QT Well. Another way to put this is do they want these deposits? Are banks happy to see them go? It's in a way I think they are, because you know, they don't want to lose the good cored deposits like you know, Tom's account or something like that. Of course they you know they will lose some of the hot money, and that's okay. But what's interesting is that the loan to deposit ratio so still very low, and so a normal loan to deposit ratios over and the system today

is under seven. Can I digress here? This is a real hockey history. You and I knew Brian moynihan when he was unheard of at the Bank of Boston long time ago, correct, And you and I every year would go to the St. Patrick's Day party for the Irish banks. I remember sitting in one of their drunk fests on St. Patrick's Day, four or five people going, this is gonna end ugly. You saw the collapse of the regional bank experience moynahan and after Ken Lewis helped pick up the pieces.

Now what's out there right now? That's the same emotion that you and I felt on that Sat Patrick's day morning long ago. Tom. We asked her to ask that question to ourselves all the time, because every cycle we've had something blow up. And one of the things that I find so amazing is FED funds rates have gone from zero twenty five basis points to four and three quarters and there hasn't been any debacles yet. Exactly which where is it? We're digging, We're turning over, We're turning

over every rock we ken. We do believe that loans to non depository financial institutions could be the place where it blows up, meaning loans to private equity companies. That's where the valuations have come down dramatically. It's Harvey Shorts watching this. It's going to be a conversation about private mind that that's we're looking. Anytime you have rapid loan growth in a specific asset class, that's where we take our nose to and we just haven't really so wait, wait,

is this the question Paul asked Rubinstein today? Is that the rest? But how about that loan about about sixty seconds. Child. I want to want to kind of fit this in bonuses happening with pay. If these banks are going to become utilities, what does that mean for the pay of the people that work at these companies? Credit Swace right now talking about delaying some bonuses for bankers. What's the message for maybe a group of college graduates to want

to go into this industry. What's the message for them? Now? The pay is still quite good, even though the pay has come down quite a bit, as you know, John, and we have to remember one was all time record years, so we're coming off a very high base. That being said, pay is not what it was, you know, twelve or eighteen months ago. But there's cycles, as we all know, and there will be a capital market cycle. E C M will come back, I P O S will come back,

and that's when the bonuses really do grow. So it's very cyclical. Let's do this more often. I'd love to. I'm thrilled you brought three pounds of lobster. Surprise, Tom is not promoting the trip up to Maine. We want to fit that in. No, you know, we get that in. But May's weather is tough. We're gonna go up to He doesn't like the weather, John, that's the reason why he has there's better breakfas and bar. You went on vacation that the guy didn't you. It was called I

took one day sabbatical. It was a three day weekend, three day week I remember I went up to Bar Harbor. We stopped in Portland, looked for Cassidy and he was out in this fifty seventh Hinckley picnic boat than Portland Harbor. That that that Hinckley boat you've got is gorgeous. I wish I had one, But they are gorgeous. I wouldn't make that clear. I wish I had one. Those are great boats. That's a hedge fun boat there. It's like you go sideways in it. Yeah, you got signed ways

on it. It's got little thrust is on the side. Seen the Reefa boats like, yeah, that's the proper bout. Yeah, that's a beautiful. But we didn't. More of a lake kind of guy than I would be on the open waters. That's the way, a kind of a big calma. Yeah. This was thank you. Henrietta Treys joins us right now, Director of Economic Policy Vada partners here on what we just heard from the Speaker the House, Henriette, I want to talk about the moral overlay, the moral politics of

O MG, we're in debt, o MG, we have a deficit. Hile. Broner and Bernstein wrote brilliantly about this two lifetimes ago. What's the moral debate in the Congress? You know so well about our debt and about our deficit. It's a great question. Um, and you mentioned Heritage before. I kind

of want to segue into that a little bit. The Heritage Foundation, which is a lynchpin of the sort of Republican morality component as you're referencing, is actually just embarking on a study to figure out exactly how much defense spending Republicans can cut right now in order to balance the budget. It's this tremendous morality question that's not just Democrat versus Republicans, but also Republicans within their own party. Are we a party that is trying to reduce domestic

spending an increase defense spending? Do we want to keep the parody? The Heritage Foundation is about to launch into a investigation and to see where the Pentagon can cut, where the Defense Department can cut um, and that is a pretty unique um segue from the Republican Party. We haven't seen and as long as I've been alive for sure.

UM So, I think that there's a lot of soul searching from both sides right now, and especially from Republicans before they even enter into conversations with Democrats about what to do about this. To the memory of Pete Peterson, Sangas of Massachusetts and the other sam none I'll even put in here that fought about the debt and the deficit. Where do, as President Trump would call them Republicans in name only stand, where is the moral fiscal politics of

the middle ground of Republicans and Democrats? Um, I'll answer your question in two phases. One, I think there's a middle ground that is achievable. That is about three billion dollars in fraud, waste and abuse trimming. That's a drop in the bucket compared to the debt ceiling which is currently thirty one point three eight one trillion dollars and needs to get raised to at least three tri you gonna get presidential election. So that's your moral like middle

ground that's achievable. But then you have Republicans that I think they would call them rhinos. Certainly members that they have tried this before. They want to do things like tether the spending cuts to the debt ceiling hike on a one to one ratio, so you see the numbers

are just relayed. You're looking at cutting one trillion at a minimum from federal spending without touching Social Security, without touching Medicare, without touching defense to get you two hundred eighteen votes in the House and sixty and the Senate. It's unworkable. Then there's an even uh more impossible theory where you try to tether the debt to GDP ratio um and if you get or exceed a certain amount, you trigger automatic cuts. The current debt to GDP ratio

is a hundred and twenty four percent. They've never been able to identify a ratio that they're comfortable with, and they've certainly never been able to identify an automatic trigger of what gets cut in the event you exceed that. So there really is no middle ground at least. So it's so important about what you use heard there on which I was shot by. There's a lot of people in that room tonight to think we're on the edge

of France. That's what this is really about. That's uh, that's some of the messaging that we may hear after the State of the Union. I am curious just to pivot a little bit, Henrietta, not only domestic but internationally. What you're looking for when it comes to China and what President Biden's responses the latest increase intentions. That's a

great question. There's gonna be no fewer than three hearings today on the House and Senate side, starting at ten am, along with briefings of the Gang of Eight around the sort of spy balloon fiasco over the weekend. I think that what we've heard consistently from everyone from you know, former ambassador Ambassador tie at Ustr even going so far back is when she was chief of staff on the trade subcommittees. This is an area where you can actually

get agreement from Democrats and Republicans. Especially heading into the presidential um, we're gonna see Republicans and Democrats race to out hawk each other. So one of the things I'm focusing on for investors right now is what that means for potential additional sanctions, what that means in terms of Treasury auditing, the financial services industry in China, what it

means for potential ban on TikTok. I think all those things are on the table and will be um at a minimum headline risk for investors and probably very real prospects as we head into the next two years. And to just quickly here, what does that mean for large international companies based in the US who are betting on

China's rebound to really help use their profits. You've got to really be careful about which sector you're looking at, because they're gonna be obviously those macroeconomic headwinds that benefit them just from the reopening prospect and the sort of fundamentals, but you must layer on the risk of federal intervention from the United States, either through siffious Treasury, the Pentagon um congressional action. Those risks are very real and present.

I think the second conductor in the battery space would tell you that on a very clear recent illustration. And you've got to be able to understand that the American administration is ready willing and able and thoroughly prepared to maintain existing tariffs, ratchet up existing tariff um you know, we just saw the two tariffs on Russian aluminum floating yesterday.

Those are all the kinds of things that we should expect for the foreseeable future, and probably at greater um instances of frequency going into the presidential I've got thirty seconds left, Henrietta, when this president announced he's running for when we get that announcement from Biden. This is the second time you've asked me that, So let's see if I can actually get it right this time. My understanding is that it is coming in the next couple of weeks at the latest. You know, maybe a month or

two from now. We're gonna get Nicki Haley announcing next week, and then more in May from the Republican side. There we go and read a trace next accountle of weeks one of the best, also awesome Christine account money Off Investco, who I hope is still alongside base case for the is they deliver an additional twenty five basis points in March, bring FED funds to four seventy five, with the risk of a continuing to at a twenty five basis point

pace for one or two additional meetings. I think that's where a lot of the street right now, TK have to pay rolls on Friday. Our heads are spinning. Invest such a big shop and joining so Christina cat Manage, Senior portfolio manager, Global Debt invest I'm gonna assume you're not hanging on every word of the chairman today, but yet all of our heads, institutional and retail, our heads are spinning right now. How do we get controlled back of a thought process to the future. I think that's right.

I mean, obviously, we came off of a massive data week last week with the ECB, the FED, the b O E, I, S, M h C. I mean, this is this massive week, but it seemed that the market took away the narrative that it wanted to find rather than really listening to what all of these central banks speakers gave us. And I think if you look at the statements alone from all of these central banks, they lean hawkish and that is not the market reaction that

we got Wednesday Thursday. And you've obviously seen a correction the next couple of days. But I think the Fed speak in the next couple of days, and Mary Daily is kind of echoed it new and Cash Kari this morning, I think say the same thing, and I think yesterday, Yeah, you're gonna have this back and forth of where nobody said we're done right, like we've made progress. I think Friday's payroll report is a flying appointment for them, like it doesn't give them the green light to just back off.

So the pushmat might be. On Wednesday, Chairman Pals said the disinflationary process has started. He was asked about financial conditions, which had eased markedly of the last couple of months, and said they haven't changed too much. Was that a mistake?

What was he trying to tell us? I think on when he spoke, the one kind of nod he gave was more it seemed to shift to a singular focus on inflation versus before it's really been the dual mandate of inflation and we need to control the labor market. And I still believe that they need to see both. But perhaps the inflation coming down, if we actually fulfill the market narrative and where we're pricing to get to this back to two percent target by June, perhaps that's

sufficient for them to pause. I think where I have trouble with the markets pricing or the markets narrative is about this turnaround easing in the second half of the year, even with the soft landing, Like if the FED navigates a soft landing, there's not a real aggressive case for them to ease. That's a good point. So this is the pricing for FED funds. Let's talk about market pricing

and fixed income credits rounded so hard. Lesa's talked about what's happened in investment grade further down the quality spectrum to high yield as well. Do you move away from certain parts of credit now? It's roundy so much? I think, Look, I think you do, and I think we've across. I think some of the easy, the easier trade of two um of a duration trade and directional has has been taken off the table in the last two days. We've done a lot of work to reprice off of the

extreme richness in the treasury market. But I don't think it's a duration trade as much. From here um so spreads are tight. The underlying health of the corporate sector remains strong, and global growth, if we take a step back, looks a lot better than we thought we would be six months ago. Six months ago in the summer, we were talking about a massive energy crisis in Europe in

a very deep recession. European growth has continued to beat to impress to the upside, China reopening has come to the table sooner than we expected, So I think that there's a lot of positive momentum um. But yeah, credit

is less appealing of the options for us. This is fascinating because it actually builds what Darryl Cronk was saying as well as Fargo, where he basically said that they had really done it amazingly with the duration trade was talking about when they got in, but saying perhaps that's kind of over for now. He sees a range of three point four to three point nine percent on the tenure. Do you agree? Would you sell duration here and just go into some of the areas that aren't the bar bell,

which basically you're saying isn't gonna work now? Yeah, I think look the price action in the last two days. I guess today would be three takes the compelling weird, way too rich on the spectrum off the table, But I think on the margin, yeah, duration isn't so compelling here. I think it's more of a curve trade. Um. I appreciate Priya's argument on the curve, and she has been right, but I don't think that an inverted curve is sustainable in the long run, right, And um, I think that

that's where the market will push back. But I think positioning and all of these markets continues to be a very large driving force. And you see it in equities, and you see it in for in exchange the last couple of days, and you you see it across the board. And I think again, the price action on Thursday and reversal on Friday speaks to positioning and people capitulating out of things. I got an email from Lisbon last night and I said, my god, Christina's on talk ben Fica

John at the World Cup. I don't know nothing, okay, and I'm rooting for France and there's this kid on Argentina, Enzo Fernandez. Who's would you explain? I mean, we got the all time ben Fica fan ever with us from Investco. Were you explained why Chelsea paid a hundred million dollars get a big buyout, this piece of meat at a big buyout, Claus and who is he? Ultimately that means if Benfica even want to keep him, even if they wanted to keep him, if it's met you meet the

buya clause, He's gone. So much money. I mean, this is a This is not a benfi Lorenzo Fernandez issue. This is a Chelsea issue. In the January transfer window where they spent something like four hundred million. Why are they different Benfica chel in terms of where's the money comes exactly? That's going to be an important question. Okay, I did okay there, It's going to be an important question. Okay, okay, would you like to join us in her soccer in analysis?

I think she's going to take a pass you don't have night, Is that right? You're ready? On top of it? Should we send Tom to Should we send a hundred million dollars on a player? And I think that was Sterling actually Stern pant Sterning. He's that good Hetty Argentine, No he's not. He does look any questions Tom Messi does play for Argentine and no he's not as good

as Messy. I just think that transfer transfer valuations for some of these plans now has just gone insane, insane, and unlike American sports, that's the fee for the club, Tom, that's not what the player gets. I didn't say he's got to negotiat his sound read separate. Thank you, for bringing this up, Christina. Thank you for the stuff on the market. Thank you great cow money that I invest God. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and

anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the I Heart Radio app tune In, and the Bloomberg Business app. You can watch as live. I'm Bloomberg Television, and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg