Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily we bring you insight from the best in economics, finance, investment, and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg. George Rusnack joins us right now. George, it's real simple. I looked at the UK two year yield today and I couldn't go la rhythmic because it's a negative yield. But the math is real simple. It is a persistent trend.
How grinding is this bond market? And does it Does it indicate for you that the US tenure yield could grind ever lower, it could grind glower here We've been in a range here for quite a while, Tom, So since June five, where he hit roughly eighty nine basis points. We've been sort of this sixty seventy five basis point range for the last month or so. We think it's going to probably stay in that range. Unfortunately, over the longer term, we do think it might trend a little
bit higher. And a little bit higher is only ten twenty basis points, but quite frankly, Tom a ten basis point move higher in tenure rates is a negative one return for investors here. So that's the challenge that investors are facing right now, is that they're just really with yields so low they actually just a small backup and cause a pretty significant negative yield and negative return for clients. But George has been fascinating to see what happens at
the front end. But of course the front end is high persensitive to expectations about the policy right. What's been more interesting for me, it's what's happening down the longer nd. But Michael JP. Morgan thinks that here in the United States we can converge down towards the policy right on a ten year maturity in the treasury market and to be clear, but not far off those levels. Do you think that can happen, George, it's feasible, John. We don't
think necessarily that's going to happen. That's not our base case scenario. It's feasible, though, And certainly what's happening here domestically, we're catching up to international what we're seeing overseas in Europe and Japan, and that's that's actually not a good thing for US. So we actually like the fact that the yolkerve is actually widened a little bit and more specifically a steep in a little bit. That's something that's a healthy thing for the economy. That is part of
our base case forecast that continues. And again though, I think the key here is that it's going to be gradual. And I think the other key of why that's potentially gonna happen, John, is the idea of the issuance that's
coming out. That was well absorbed last week, last last week's issuance, but going forward, it for means to be seen if that's going to happen, and the Feds actually gonna have to step in here from quantity of easing perspective to pick up on that, to stave off any kind of great tantrum that you could get if you don't see if you don't see them stepping again, George, Typically when benchmark government yields are this low, that is
negative for the economy. Certainly we see a lot of dark clouds out there for the economic recovery, and yet a lot of people going further into risk with a preference even increasingly for high yield over investment grade. Why is this a good time to take credit risk at a time of so much skepticism about the recovery being expressed in government debt markets. It's a great question, Lisa, and we're actually in that camp as well. Believe it or not, we've been stepping into high yield a little bit.
We're neutral on it overall. Right now, we're looking for opportunities to take on credit risk. And the reason why is right now you're actually getting compensated to take that risk. So in the past you had such tight spreads, there were no opportunities to do that. Even if the fall rates pick up just a little bit. Here you're getting compensated six and a half percent type yields and high
yields you're looking at a five any type of spread. Historically, that's a good opportunity to get into that, even if it seems like a challenging time to get into it. We think over the long haul, those returns will offset any kind of volatility that you're gonna see, any kind of defaults that you're gonna see. We think it's a good opportunity. Investment grade corporates, HI corporates preferred to step
into that risk. We think from an income perspective, there's just such a dearth of income out there that you're gonna see a lot of demand coming into that and that's going to support those levels despite some of the challenges that they might see financially, the spread you're saying sufficient to absorb the bankruptcies and the losses that are expected. Right now, we're seeing the highest default rate among US high yield debt in ten years, with it expected to
go even higher. What kind of default rate is your analysis pricing in to make the five point eight percentage point yield cushion worth it? Right now, default rates are roughly between five and eight percent. Even if you go up to that eight percent level, we still think it makes sense to stay within high yield right now. You have to leg in. You have to be in there
over the long term, and you're getting compensated. Look if you look at where else you go on the market, and this is a challenge that every client is facing right now. Pre COVID for fixed income, you could count on getting two things. You could get down count on getting good income and an offset to your risk portfolio going forward. You do not have to choose one or
the other. You're gonna have to choose either the income component you're not going to get the risk off set, or you're gonna have to choose the risk offset, which is Treasury agencies, Asset Act mortgages, but you're not going to get the income. We actually think going for the income right here is making sense, and we think that actually more and more investors are going to be doing
that and will support the high yield market. George, the backdrop here is a new statistic, and Greg Valier published it today, but many others have talked about it as well. It's all a lot of bond analysis. Again. What appears to be four trillion dollars of national debt, that's the new statistic, not to trillion, not three trillion, four four four trillion. What do you say to Wells Fargo clients who say, wait a minute, there's four trillion dollars out there.
That's a number we've never perceived. It's scary, Tom. The amount of debt that we're taking on is very significant. The amount of stimulus that you're seeing in the marketplace is something that we haven't really seen before the two thousand and eight crisis. You saw roughly three trillion dollars in in fiscal stimulus. Over a two year time frame, you're gonna see two trillion dollars over a period in
this so six times as much in stimulus. And you're right, that's a huge debt burden and that's going to cause challenges for us for time to come. But the reality is we need it. We need it right now. When you stop the economy, when you slow it down as significantly as you do, and you have the pandemic, you this is the time to be adding the fiscal stimulus. So we're doing the right thing both on the fiscal
side and the monetary side. It's scary over the long term, but for the short term we really need that to jump start the economy, and over the long term we're gonna have to work for ways to pay that down. Well over a long term, I mean, can we do this with stability? I mean not only stability in the bond world, your world, but also Scott Rens world, the equity world as well. Do you see this as a
stable processor. We're gonna have some volatility out there. Yeah, we do think more of the volatility Again, resilience is one of the key themes that we've talked about. Yeah, that's what we've talked about over both over our midyear and the idea that you know, yes there's a path back, that path might be quite a bumpy one, and so you're gonna see that within the stock market. Obviously, though we do still see sort of a neutral positioning. We're
slightly favorite towards equities. We do think there's some good growth out there and are roughly forecasting about a three percent growth now and your end, Georgia gotta wrap up this conversation with a question that basically addressed the only thing that I think people like Lisa Branvits, Marco McKay and Molly Smith would be following, which is waste management debt bought by the Federal Reserve three million dollars worth at about a hundred and five cents on the dollar.
It's just been redeemed a hundred of one cents. That's a loss for the Federal Reserve, the Central Bank loss says matter. I think right now, in the short term, they need to support stability, they need to support liquidity within the marketplace, and they're gonna have some losses. Unfortunately. Over the long term, I think they'll be in good shape.
But I think you're right. Over the short term, there's gonna be some bumpings there, John, and they're gonna have to absorb that in order to get back to more liquid, well well operating market. And point frankly, they've done a good job of the short term. Yeah. We think of the long term things will pan out fine. Of last FAGA private bank, Joch always tried to catch up the other.
David Bianco is going this family's dysfunctional. Mr Bianco's with the DWS America's and he joins us now with investment perspective. David Bianco Benjamin Bernanke's core theory was the financial system in any crisis must stay sound. Is the American financial system sound today? Yes, Tom Corning, it is sound. Um, there are challenges, but it's sound. And last recession, the banks for very much the patient. This time they are a medic. They are responding to the crisis. They're helping
facilitate many federal programs. They are still providing credit. Uh, their earnings are under a lot of pressure. And although they're not the yeppie center of this recession in terms of being part of the cause, UH, they are still suffering quite a bit. Of the brunt and the low lost provisions which we saw in the first quarter and where will be more to come that is hitting the earnings as you see this morning. The big banks are getting through it in part because of fees from other
capital markets oriented businesses that they have. But it's not easy for these big banks. They are making their contribution to UH to absorbing the costs of this pandemic of that society suffering. But it's good to be a big bank. And I think as the earning season goes on, you'll see if the challenges to smaller banks that are more dependent on that typical that interest income margin, that's even tougher, and it's gonna stay tough in this zero interest rate
environment as far as the I can see. The implication in your comments perhaps is consolidation, if not in actual purchases of smaller banks in market share And is this this mean from your perspective, you want to buy the JP Morgan's of the world. You want to buy the strongest US banks right now given their beaten up valuations and given the scope for their consolidation of market share going forward. Within the bank's biggest is best um. A lot of people are moving the debate to should they
own big banks versus um super cap tech. I think the portfolio should have at least equal weights, probably in both at this stage, to bring a little bit more balance between this growth first value dynamic that's been so extreme consolidation amongst things. The regulators would have to approve it,
endorse it. Hopefully we don't have too much of that activity going on in voluntarily, because there will be some smarts that will have a very tough time should this challenge economy spell into one, and that's a real possibility, and the regulators are certainly asking the banks to consider that outlook. David Bianco, one of the hallmarks of your research for years is a bigger, broader perspective. You've got to overlay onto all of this talk of America and
call it developed world markets China. Where do we stand out with this mentioned to China and how will that impinge on markets ADWS. We've been pretty bullish on China for quite some time. We recognize the country as its challenges, return on capital UM, many other types of UH progress that is making, as becoming a not just a heloped
country but a leader in the world economy. UM there's this tension between the United States and China, which is an understatement which begs the question, should US investors be investing in China. We monitor this, but our answers yes. Our answer is whether it be investing in a currency that looks like it's going to be one of the world's more important currencies over the long term, in in companies, h and an economy that we think is an important
part of the global economy for the longest time. We would simply argue, just go by China tech tech stocks. This rise of Eastern tech, not just the Western tech companies. These Eastern tech companies, you know who they are, their beheaming, They've performed just as well as our being of tech names. But at a time like this where the China economy is bouncing better since the virus and showing signs of its ability to grow, maybe at a slower piece, but grow.
If you're looking for value stocks beyond technology, we would point you in the direction of China, maybe first their consumer and their healthcare stocks. Dare I say that even their financials, they're they're banks. I wouldn't make it a big part of the portfolio, but I think the currency and the interest rate environment in Asia being better than in the Western world. Chinese stocks belong in the portfolio.
But I think what people struggle with is every single morning we could write the same headline, tensions rising between the United States and China. It's almost become a joke, except it Isn't You see the news out of the UK this morning, essentially kicking out Huawei. Over the next several years, towards the back end of the decade, you see what's happening in the South China Sea once again, that's become an issue, a much bigger issue in the last twenty four hours, David, No one knows what to
do with that story anymore. What do you do with it? Well, a lot of these big macro pictures, we try to think about how to invest through them, around them, trying to keep perspective about what really matters to the stocks. Are you comfortable with the currency, are you comfortable with the business? Are you comfortable with the valuation? Uh and And in those simple questions, we are. And that's why
China stocks are in the portfolio. And I think as time goes on, as people think about maybe ms C I EVA being a crucial part of the of an equity portfolio. I think Asia ex Japan is going to become an equally important and strategic weight in in in U S investors equity portfolios. But but look, as you said, John, unfortunately it's not a joke. It is real. There's a lot of tension between the US and China about the way the world should be a run and and and
elements of of individualism and the country surrounding China. And look, this is this is something that won't go away. Most the US election issue. I think the United States, both sides of the aisle see the tension with China and and I have different ideas about how to deal with it. But this tension between the U S and China is real. It's not going away. As long as it doesn't expode. I do think it's investable for for U S investors.
Devin Bianca of DWS Investments learning season a full swing and it's amazing on Gerard Kiss and the RBC Capital Markets really like Mr Mayo saying this is as bad as it gets, and he was quite forceful about better time to come, particularly looking out past two and three quarters. Someone to discuss this and provide broad market perspective is Gina Martin Adams. She is Bloomberg Intelligence chief equity strategist. But what she's really in charge of his courage more
than anyone I know. She's never gone to cash. She's always participating in the market and that has been a good and good, h better than good outcome for Geno Martin Adams. If you have confidence to be in the markets right now, can you have confidence to be in the financial sector and the too big to fail banks specifically? Yeah, I think it largely depends upon your outlook for revenue growth. I mean, frankly, these are extremely discounted stocks at large.
The financial sector when you look at the history has been training at an incredible discount for most of this year. Even though they bounced back significantly from March to early June, this is a group that's still training between one and happen to standard deviations below five year average. So you've got a discount available to you. It's really just a question of where do you think things are going to head, because in order for this group to outperform, it's got
to get better revenue growth. That's been the sticking point throughout the cycle. Everybody focuses on the yield curve. But the reality is, when you look at the factors driving financials, it's that lack of revenue growth that's been incredibly important.
So you've got to get some economic visibility, I think, to feel a little better about your investment Opportunit many in this space, and I went right to the revenue growth headlines folks that you see coming across the bloomberg, and it's real simple geno that has to get fixed. And the way it gets fixed is cost cutting. Forget about aggregate demand, forget about yield curve. Dynamics is one of their ways here, one of the factors to a
better outcome. All these banks are going to start cutting costs. Yeah, they have. They really have no choice because revenue has been somewhat paltry. I mean they've got you've got JP Morgan and City out this morning talking about trading revenues extraordinarily strong. That certainly has been an offset to what's happening with the consumer books and the loans in general. But that is that big portion of sort of their core lending operations is a moss as a massive drag
the result of slow growth. There is going to be that they have to cut costs to maintain some degree of margin stability, because that's what's going to drive earnings growth in the shorter term. Um. You know, the other thing that they've got to contend with is the yield curve. When we look at the history of the yield curve, it does have some predictive power or for obviously not
interest margin and margin at large. For the financial space, the yield curve stepening out of the markets low this year has been about half as much as you usually get following recession loads and stocks. So it's been a really really slow time for the yield curve and that's going to restrain growth in this space as well. So absolutely they're going to have to cut costs or right size operations with a slower growth environment and also contend
with what's happening in the macro. Do you know it's important that you say that they need to have some visibility into the economy to gain conviction about bank stocks. Is to give you a sense one of the supports to profitability has been investment banking revenues, and we have JP Morgan CFO coming out and saying that they do not expect investment banking fees to be as high in the next quarter, given the fact that we are expecting
a decline in debt issuance. Gina. Just broadening out to the rest of the market, there was a story today Bank of America Managers Fund Manager survey came out for the month of July showing that people believe seventy percent of all respondents believe that tech is the most crowded trade. It is a record for the survey. Do you agree? Oh? Yeah, Tech has absolutely the most crowded trade. There's no doubt
about it. It's been between tech, some of the select consumer discretionary names such as Amazon, as well as communications services, and then healthcare. Those are kind of the only spaces and investors have been really willing to put longer term capital to work over the course of the last several months. They're just sort of hiding in what is more defensive stocks at this point in time, and defense is a very different tone and characteristic than it was, say a
year ago. It's not utilities in real estate consumer stables so much as the technology, healthcare, communication services groups that actually do have relatively stable growth prospects and even more more so stable growth prospects, not only but growth possibilities into that combination has been sort of the the ideal space for people who are willing to take a chance in equities to put capital to work. Now, is that
going to be the winner longer term? If we do see economic recovery, what you should see is some catch up in these lower valuation stocks, high cyclical groups, higher risk, higher beta groups that no one really wants to own, like the financials and the industrials, the rest of consumer discretionary maybe even some energy and material stocks, which you know, frankly that's just been so volatile, but it is high value. I mean, it's their extraordinary discounts available in this space.
If you can find that economic visibility catch up is not the same thing as tech selling off. Do you see tech as being overvalued and poised for a fall or just poised for an underperformance relative to other parts of the market. Yeah. Most of the time, what you see in economic recovery is still participation. You get participation from all groups, but you see the cyclical stocks lead
the recovery. You see the catch up story. So we sudn't see an outright decline in tech valuations that said, there has been so much crowding and select names and select portions of tech, think software and some of the services groups, even some of the communications stucks where investors have hidden a tremendous amount of capital. You may see a modest rotation out of those groups in order to
put that capital to work in other cyclicals. But in general it should be a catch ap, not necessarily a massive sell off, even though valuations do look somewhat extended, and that is that's a big if. I mean I say if very carefully, because I don't have a ton of conviction that we're going to have this rip roaring economy developing into the second half of this year and into one. So even in our sector scorecard, we're still
hiding in those defensive groups. We've got a technology and communication services and healthcare right up at the top as well. I'm not sure how many people actually have high levels of conviction about anything right now. Gina, fantastic to catch on with you as always, Jena Martin Adams. There a Bloomberg Intelligence the chief equity strategists right now on the charts. He is just exquisite at the trends of the market.
Christopher Ron joins from Strategic Chris, an open question to begin, what is the trend of the equity market right now? I think the tactical trend is sideways. We were digesting what was a rally off the lows. We don't have much seasonal support over the next sixty to ninety days, So I think the next month or two is going to look a lot like the last month or two, where markets just don't make a lot of progress. Chris, when do you think that the virus counts are going
to matter again? So you know, it's an important question, and it's certainly the topic of almost every client conversation we have, but I would encourage people to think about it a little bit differently. I think this is less about um, what the trajectory of the virus is. I think this is about the financial markets interpretation of that and what I've actually been encouraged by over the last
several weeks. As the news around the virus has gotten has got more dire, you have not seen credit conditions really deteriorate to any meaningful extent. And that's just a big difference from late February early March, where the credit fact drop really began to deteriorate in a very very quick fashion. That has not happened here. So I think credit markets are actually more important than what the daily
buyers count is Chris or just looking right now. Jamie Diamond speaking on the call after JP Morgan reported earnings, and he was asked about the health of the consumer, and he said, this is not a normal recession. Consumers incomes are up, savings are up, home prices are up. The traditional recessionary part has been delayed and it will come down the past. We will see the weakness down the road. How well is that being priced into markets currently, given the fact that we do have some of the
delayed pain that will come along with this recession. Yeah, you know, I'm always headed to the forecast. I don't think anyone out there is a great forecaster. Uh certainly will defer to Mr Diamond on his expertise. I do think when you look at what the market already discounted, you had draw down against stocks. And remember most stocks didn't peak in February of two thousand and twenty. Small
caps peak two years ago. Cyclicality is broadly peep in the fourth quarter of So I'm trying to ask ourselves the question um has cyclicality, Have small caps have the secondary issues after a two year bear market? Are they starting to come out of that? And I think the resiliency to really ban news over the last four or five or six weeks. You've got to give market the hat tip, because you know, we're talking about discounting mechanisms. The market surely is aware of what the future will hold.
We just got to figure out what it's focused on. Well, Chris, let's get into the technicals. Over the last month, it's pretty clear that breath is narrowed. The post COVID highs is something we can't breach it and hold we saw that tape place yesterday. How key is that for you? You know, it reminds me a lot of and I remember it distinctly reminds been a lot of like May
through July August two thousand nine. You had this fortent move off the March two thousand nine loads, and then you went through three months of all the leading issues starting to correct, breath maturiated. It was a very very tense three or four months as the market consolidated that game and it was resolved higher. So I just think it's interesting that the expectation is I think among a lot of investors at this consolidation we've been in over
the last month must resolve lower. I'm not convinced of that. And right now, folks, Bloomberg Surveillance and Nerd Alert, we're gonna do this with Christopher Brown because he can do it. Christopher Oone, I was stunned yesterday to look at the Tesla chart and there are five gaps, folks, jumps within the Tesla stock price, five since the beginning of June. I believe I can say, Christopher Ron, I've never seen that. This goes back to John Maggie and his classic text
of nineteen forty eight. For our global Wall Street audience, who have all made a ton of money on Tesla, what does it signal that Tesla has served through five technical gaps just since early June. I think when you look at Tesla or the charter in particular, this has really been the hood ornament of liquidity. It's been the hood ornament of the growth trade. Is there an access
to correct here? Likely we had what looked like blow up value yesterday you did almost forty million shares on Tesla, similar to what you did near the high and early February. But the trends here is up. So I would approach this from the perspective of what do you do with weakness, and when trends are positive, you're inclined to buy weakness. I think you start filling some of these gaps near eleven twelve fifty, I'd be more inclined to be a
buyer of that weakness giving the trend. Bring that over to the major growth stocks that have driven this market. Is it the same thing by the weakness when they fill the gap get long. Yeah. And I think that's the process that's going to play out over the next
several months. I think the more difficult question is as some of the high flyers correct, do some of the secondary issues stuff step up and fill that void, for example the banks right as earnings get underway this week in that group, is that going to be enough to support the tape while some of the high flying momentum stocks actually come in here. I think that's the question that's going to be answered over the next several days. Here, Chris, a little bit of risk aversion coming in ahead of
the cash open. We've got equity futures declining now down by a tenth of one percent, mild moves, but worth pointing out. In the bond market, yields were higher by a basis point now lower by about a basis point on a ten year maturity to zero point six one. Before we let you go, Chris, the outperformance that we've seen in e M over the last month, how constructive are you on that continuing? So I want to answer
that a little bit differently. I want to answer it through the lens of the US dollar, and I'll say this, I am very, very barished on US dollars here. I think we're putting in a major, major talk in USB and I think as a consequence of that, we should expect to see some new developments in the macro landscape. One of those jobs being the resurgence of emerging markets as a leadership idea, and not just EM but rest of world quietly starting to outperform. I've got to jump
in k self and asked this question this morning. If stock stock going up, can the dollar really decline? Now? If you think stocks have going sidewise for the next several months, is that an environment where the dollar gets weak up? Yeah, I think it is, and I think weaker dollar is a headwind to some of the big index weights that have driven this market over the last four or five six weeks, while it may be a tailwind to the basic resources, to the industrials, to even
the banks that have largely been on the sideline. So I think what we're on the cut stuff. Here is some leadership change, and I think the dollar is driving that. This is the most important shot in the world. US dollar is topping. I know that's the bolt call. It's what we see in our work. It's just bouncing. As you say those words, Chris, I appreciate that this is a long term call, not a five minute time arise
and Chris grab to catch up with you. Has always made cross her own at a tannical and macro strategy and fatigues security. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast, you can always catch us worldwide. I'm Bloomberg Radio