Surveillance: Bond Guys Tend To Have It Right, Bailin Says

Bloomberg dot Com, and of course, on the Bloomberg. So the trade story once again front and center, the clock ticking, but President Donald Trump said he won't meet Chinese President Jejing thing before a March first deadline to avert high US tariffs on Chinese goods, injecting some pessimism into the market. Global equities well on course for the first weekly drop for this year. David Balin dropping by City Private Bank chief investment officer here in New York. Good money to David,

Good morning to you. Your confidence not shaken, But the last twenty four hours why not not? Really? I think that the expectations that people had are are are probably muted. I think that the best thing that could happen in March is that the there's an agreement to continue to talk, maybe an agreement on a couple of major points in

an agreement to continue to talk. The fact that Trump is not traveling is actually a head fake takes weeks to prepare for a president to travel abroad, and the whole idea that was going to travel before March first

seems like a kind of a misnomer to me. Sounds clichey, but it feels like an excuse to sell, not a reason, and perhaps tells me a little bit more about the low levels of conviction people have about this reabout in January, David, well, you know, if I look at the headlines in last December, it was the worst December in thirty years. Right in

January the best January and thirty years. I think we're in a situation where people got well ahead of their negativity in in in December, and they're probably very optimistic in catching back up in January. We're going to a more more normal, normal market environment. We're gonna see more volatility, and we're going to see markets tend to trend up

for the remainder of the year. Frankly, though, amongst people would say it's right to price out recession risk after overly pricing it in through December, the argument now, I think, is whether we should have any kind of multiple expansion on a year where earnings are being revised lower they're not being revised higher, and uncertainty is increasing worldwide, and there's a real question markets to whether that feeds back

in the United States into what degree. Right, Let's let's assume that you're right and that there is no multiple expansion. We actually think that the US market in general, it's going to be up in terms of earning seven. We've taken a look at our growth statistics. Let's you know, we think the US is a two and a half percent grower, Emerging markets four and a half percent grower.

China is stimulating their economy at six percent grower, So we don't see the recession that everyone is sort of talking about as in two thousand nineteen, and maybe not even in early two thousand and twenty. That's the blue button right there. What's that means? That's the first time I've been in the studios I see the blue button is a Tottenham blue. As they take on lest is it Lester or Luster? It's Lester. I was stopped by John from your Castle, who said, talk up Lester Castle.

I have no I think is Dodger blue. That's Dodger blue. It does look Dodger blue. Friends, and Lue needs a baseball cap. Maybe we'll do that is sound confused, now, so am I? You talk about granular fundamentals. Okay, granular fundamentals, David, Do they come from the revenue line surprises the gloom crew, The operating income line surprises the bloom crew. How do you get multiple expansion? I'm not suggesting that we're going

to see a significant amount of multiple expansion. You're dealing in what I think is pessimism, which is when will the recession occur? And yet the data doesn't suggest that there should. Clare agrees with you, right and so so the so the question then is what should stocks do if multiples don't expand? And the answer is they should go up somewhere between eight and ten percent from where they were let's say at the beginning of the year.

For sure, given where we started. But when you look at global equities, travel outside of the United States, Tom, and you're gonna see in the emerging markets, you know, a much or robust environment right now for the much more constructive given that rates in the United States have peaked, this is a time when you can actually see you know,

growth in those markets come through. And John also lingoes earlier this morning with the RBC was adamant about this are the title shifts of em where you're gonna see real currency dynamics that will support a more stable a global economy. Let's fold the bond market into all of this. And there's two ways of looking at the bond market right now. The bullish way of looking at things for equities to say, well, yield to low with that supportive

of equities. The negative way of looking at all of this is saying, one on Earth, the Bundy yields doing back at ten basis points on a German ten year the curves negative all the way out, and then year nine years the tenure treasury yield is now to sixty four. That doesn't spell out a nice, good, beautiful global growth story. How do you look at it right? It actually, Uh, I've learned over the last ten years, certainly a city that the bond guys tend to have it right more often.

And I want to just acknowledge that to all of the people out there listening. This is a big statement. They're very happy this morning because they're faster now. But but this is the thing. It's uh, it's hard to imagine, but if you if you look back at what the Fed has done. They've had nine rate increases, but they've done it over a very long period of time. Yelling and Powell looking very similar in terms of their approach. There.

Inflation not a big deal. Unemployment you know at four percent, these are these are positive things in terms of sustaining an economy that's growing slowly. What you just said is vitally important for all equity people always listen to the bond guys, So I'll pick on Steve Major HSBC, who looks like a genius this morning with a thirty year bond. John two point nine eight seven three on a thirty

year bond. What do those yields signal in the bond space for the equity space, Well, what they're signaling is a very long term outlook of benign inflation in greater vailue on equity cash flows, righty, cash flows on dividends, on buy backs. If you think about where your total return is going to be greatest over the course of the next decade, you can't help but think that this is going to be bullish frequities. I think he's auditioning

for the real yield job. I mean, I think you can come on that guy on the Real Yield, which you can see on Fridays. It would be a short will give you ninety seconds. Seriously, the real Yield today, he's like a real show because these are real bud yeles. Yeah, and not just in the sovereign space, but the credit space as well. We've just had the biggest net increased, biggest inflows into high yield bond funds since huge amount of money feeling against It's not just equities running away

on their own. I mean, we've had a big move, a corresponding move in the credit spaces. While David right, and I mean we are advising our clients now opportunistic their core portfolios. We've moved them already into like EM dead in some of the high yield spaces, but opportunistically we think that EM dead in local currency is going to turn out be a terrific opportunity because again benign outlook for the dollar, and ultimately you're going to see uh,

you know, emerging market currencies rally. So it's a good combination for bond invests. Assuming the FED is out of the game, is that the central assumption here that the Federals has done that well, not necessarily done, but very nearly done. Like another rate rise. One more type of thing could happen, depending on whether there's an optimistic burst

in the US, but largely done. That's right, Devin Bannon writes, to catch you out with the City Private Bank chief investment officer here in New York City right now, Gregg failure joining us. He is with the Horizon Investments. And of course let's go to the political score. Woodrow Wilson forty or four thirty five electoral votes. Mr Roosevelt from New York eighty eight electoral votes, William Howard Taff eight

electoral votes, and Eugene Debs Socialist, zero electoral votes. And this is of course the election of n when yug Villier began his work UH in political economics. Greg, it's all the rage. I'm talking about it. Mike Allen, are over to Axios leading with the Greg ipp in the Wall Street Journal. It's a new socialism described for our audience, the new socialism of the Democratic Socialists of the Democratic Party. Well,

it's very big government. On the proposal unveiled yesterday by the left, UH talks about an enormous role for government. How you pay for this stuff as a mystery to me, even with confiscatory taxation, I don't see how they can pay for all this stuff. So to me, it gives the Republicans a potential foil. Reagan had to win. He went right and then, like clockwork, and you know it

better than me, he moved back to the middle. In this polarized time, if it's Trump and somebody leftish, do they move back to the middle as they moved to November of two thousand and twenty. It's a great opportunity for Trump. I think getting two hundred and seventy votes is a little more difficult this time. But if he shows some willingness to compromise and we get a litmus test in the next week on the wall, if he says, well, I'll take whatever deal I can get. I'm not going

to declare an emergency. I'm not going to shut down the government. That would be a sign that he may be turning a little more pragmatic. What does it mean for the pragmatic Vice President Biden? I mean, in terms of the decision tree of all this, we can assume that the gentleman is now Biden for Hick and Looper, the former governor of Colorado. Maybe from Michael Bloomberg. There clearly is an avenue where I think a moderate Democrat

could have a chance. Now we note that Mr Bloomberg is an audien acquaintance with Bloomberg Radio and Bloomberg Television and as the principal owner. If that's true, Greg Valier, If if if we have a middle ground of Democratic party, can there be a middle ground of Republican Party to take on Mr Trump? No? I don't see that. When when you look at the pulse time you see the Republican base is overwhelmingly supportive of Trump coming like Mitt Rodney,

Jeff Flake, uh, Bob Corker, they'd have no chance. Okay, this goes back to my you know, I'm talking about nineteen twelve Eugene debs a socialists. Have the Republicans Now with the last election, are they getting whiggish? Are they beginning to look like this is before your time? Greg Bellier? But are they look in eighteen eighty five where they disappear into the minority? Ether Well, they have their divisions,

just because the Democrats have a division. On the Republican side, there's the Chamber of Commerce, pro business, pro free trade Republicans there in retreat, and then you've got the much stronger social conservatives populist that trumpet. So the Republicans have a division too, But I would argue the division that's going to be the most apparent is going to be among the Democrats. And then John Farroll, you mentioned this

the other day brilliantly. I can't remember on Mike Off Mike about in England, there's a whole socialist debate, you know, going back with the memories of the nineteen seventies in the minds of a lot of people that do not want to go back there. Greg you do an excellent job of falling in the world of Washington, d C. Into the world of Wall Street. Does some extreme left

wing proposals coming from some Democrats. As we've talked about, when does Wall Street start to listen, and when I mean listen, start to move, start to act, start to care. Is it a twelve month story? How far away we from that moment? It's it's not imminent. And I tell you guys, but I think is the key is what happens in the Senate. If the Senate stays Republican and and there's a chance it will that's the that's the firewall. All of this very activists led dislation would die in

the Senate. So I think Wall Street would correctly think even if a Democrat became president, the chances of getting really sweeping stuff enacted really hinges on a Senate that may stay Republican. Is you right for Friday and into the weekend? Greg? Set us up for Monday Tuesday next week? What are you looking at? I'm trying to think. I think it's probably going to be two stories. One the titilating one about the National Enquirer. That's legs and there

may be a lot more looming there. And secondly the wall. I think that there's going to be a deal proposed to the president. Who proposes that in the Republican side. We spoke to the congressman from Chattanooga and he said it was basically going to come out of thin air blowney. Who comes up with that deal to give it to the president? Oh, I think they have one already, and I think they have a messenger. The messenger is Lindsey Graham. I think he'll tell the President, look, this is the

best you can get. We'll get you to three of four billion for border security, and since the president's other options are so unpalatable, he just might take it to wrap things up. We've tried if we can. Greg, I thought the discussion yesterday with a whether this deal would or wouldn't get done by the end of the month was ridiculous. But it was ridiculous because it was based on a bunch of reporters shouting at the president whether a meeting with him or Jing Ping would happen by

the end of the month. He shook his head, he said, no, we're trading headlines here, Greg and big time without much context. What do you make of that? Well, that's a good point, and I think that we're not close to a deal by March first or March second, I guess is the deadline. I think there'll be an extension. What I think happens is in the spring or maybe early summer, there's a crescendo, a meeting between Trump and z in which they reach

an agreement in principle. But an agreement in principle is not imminent. Greg, thank you so much, greatly appreciate it. Really looking forward to the comments from Mr Value into the political season as well. David Stubbs, where us, who was a senior vice president of surging at JP Morgan Asset Management, as terrific economics in folds it into market analysis. David,

what are you writing Friday from Monday morning? Tom, I'm writing about the hope that we'll see some kind of turnaround soon in China and European data, because if we don't, we're looking increasingly, um, you know, in a very difficult situation for both earnings, for macro economics and um, you know, a continuation of the theme of the last twelve months where the US was leading, uh, you know, the global economy,

earnings and equity markets. Um. We expect the US are slow late New year, but that's no good for the rest of the world if the rest of the world is already in great difficulty. Well, David, you know this weekend our listeners are gonna be at the kitchen table. John Farrell and his family is going to be watching Luster, tottson and all that, and they're gonna be talking about their investment allocation. When the facts change, David Stubbs change,

what's the new allocation? Given the January February shift, we've seen what's on We're still absolutely advising clients to use strengthen markets, to gradually retool their portfolios to be slightly more defensive, because we see twenty as a time when the US economy is going to be slowing significantly. Um. We don't yet have the faith that international markets are going going to to you know, to pick up. So it really depends obviously on the goal of the money

the time Horise and I saw that. Yeah, I had the intro about the pension funds and there you know, and the sovereign wealth companies, insurance companies. We advise a lot of those and they are obviously been as as John said, extending equity allocations over the last few for years. But we see now after you know, a very long cycle, um, too many portfolio years with very short duration allocations, with too much cyclical exposure in the equities, and so we

have a range of things we're recommending. Firstly, you know, right size the kind of safe havens of the portfolio lengths and that duration if you if you're if it's quite short, we do like gold tactically as well. Over the next year or so, don't just go to cash, because if this situation is going to get worse. Other things are going to perform better than than cash and last year, just on the equity side, we still like a large chunks of technology and healthcare as secular growth themes.

We don't want clients backing away from all growth assets. We do want them to folks on the secular themes who other than the secular local drivers. So remove some cigulicality, add to the secular themes. That's the equity story for you, David, I want to pick up on the bond story. Let's do a little bit of a bonds clinic for those listeners who are outside of the bond market world. The

concept of duration and being long duration. David, just walk us through the concept and why it's important to add some duration right now. It's it's it's actually important to understand again the total return of your bond fund. It's not just about clipping that coupon. It's about a movement in the price. And if yields go down, price goes up, and the relationship between the two is a sensitivity the

change industrates. That's duration. It tends to be bigger, longer duration in the further go out the curve, the longer than maturity. So if you have say only say two or three year bonds um is as yields full potentially as markets fear risk off, you get some movement in the price minology, but not a huge huge movement. If you're owning ten year, let alone twenty thirty year bonds, you get a very very significant move up as well.

And that's indeed what we've seen. Your long bonds have performed very well since they October and you know in November. And also you want to inside uh you know the you know you're fixed income. I see a lot of people pointing at corporate credit and saying, well, there's my duration. That's what's gonna gonna protect me on the way down. That's right. As long as as long as the bonds

of the corporate bonds are high enough quality. We want people to getting out of the triple b's where I know you've talked a lot on your show, The Real Yield about the big growth of triple B market. We put you want to go up into this single as double as um and be tached going to high into high yield. Who want to not be holding that paper when there's any rewrating stories. We think that's going to

be a big story in the corporate credit market. As we go into who wrote David Stubbs a check to to plug real yield one pm Eastern Time, it's it's I guess beautiful. I'm in restaurants bars. I was a trembling madness about three weeks ago in New York. Minsters they have the TV on. They don't have a TV. They don't do that. It's like eleven year or whatever. But everywhere I go that the ned across from Queen Victoria's Street, Ah, they talk about is the roof. It's

very nice of David. Let's reverse engineering just a little bit. Conversely, if yields go up at the long end, you can really have to absorb some damage. Why is that not going to happen? Why is the why is the possibility of that happening limited in your mind? You know, we don't get don't get us wrong. We think that you know that yields could you know, move higher up towards

three per cent. As we go to the next couple of quarters, if US growth hangs in there, you get a resolution of some of these political overhand issues Italy trade, Brexit, government shut shut down, sentiment, can push yields up there. I think the change inside JP Morgan in the last six or twelve months is just to lower the kind of yield levels where we would be more enthusiastic buyers.

We used to say three percent and up. I think if we get you know, uh, your your two point eight or or up, and then we start to get more and more aggressive. Now. I think that markets are telling you that the neutral rate is lower than you thought it was. The FED, I think, is listening to markets, and you have around the world, as you were just talking about the dramatic move lower in some of the

Eurozone bond yields. You know, two point eight two point nine in the US tenure looks good valued to us. So yes, we there's possibility there could be some mark to market losses if you go out and buy a long government bond now. But the starting point of portfolio matters. If you have none of this stuff right now, you

need to start accumulating where we are. If you have quite a lot relative to your risk profile, maybe you're not an aggressive by today, but you give another ten fifteen basis points on that yield, I think we should start buying again. Another hour David stuff, JP Morgan, don't

be a stranger thing, greatly greatly, greatly appreciated. Yeah, he's he's just he's just wonderful again out of London School of Economics, and he's got a very cool doctorate from the New School in New York, which is a wonderful twisted program. Good morn into the memory of Mr Heilbronner among others in Peter Bernstein and the Academic Energy School

from JP MULGANESM management. We always have our good friend Margaret Brennan joined us Margaret as he hosts of CBSS Face the Nation, and she always gives us her sense of what is going on in Washington and market. We have so many topics that I'm sure you're looking at, the on again off again trade talks, the possible second government shutdown. But where I want to lead off, Margaret,

is where I left off with Tom just recently. Is that is my dupe Devils are going to pay a visit to your University of Virginia Cavaliers tomorrow for big basketball game. My question to you, Margaret is will you be watching um Well, Saturday is usually prep time for me, but I will hopefully watch a little bit of the game. My husband's also a wah who, and my five almost five months old son already has Virginia gay or waiting

for him. Where all right, Well, I'm gonna shift gears a little bit away from the game because you interview President Trump last weekend and I thought that it was a great interview. Congratulations. I want to ask what was his demeanor like? Um, you know, it's rare that the president sits to talk to a network like CBS. He's very often on television, so it's normally on cable with

Fox News. Um, And so it's rare for him to sit for an extended interview with the Sunday show host like myself, where you get to talk about for an extended period, very serious topics and follow up and follow through. And the President, I will say, seemed to be prepared for that moment, seemed to actually want to engage. Um. He uh sat down and gave us about forty five minutes of time. That's not what we walked in thinking we'd get who was supposed to be less time than that.

But he had a number of things he wanted to say. He I think enjoyed the back before. Um, you know, I was tough on a few things, but I felt fair in uh the approach and challenging him where I did. Um And to his credit, Uh, you know, he gave us that lengthy amount of time on some really serious issues. Well, Margaret, one of those serious issues that is confronting the president administration is the trade talks with China. They are on again,

off again. Uh, it appears that they might be off again, at least at the presidential level before the March first deadline. What is your sense of what is going on with the trade talks and how they might play out. Well, that March first deadline is looming large. And I know there was some disappointment yesterday to hear from the White House that they did not plan for the President to tack on a trip to China on the back end of his North Korea summit which will be upcoming last

week of February in Vietnam. Um. And I think that was definitely in about face for the White House. They had expected to be invited to China. They had been

um talking about the potential of going there. You know, the President said at least one to two meetings with Shi Jumping himself, he may have gotten ahead of his skis on that because those doing the negotiations, Robert Leightheiser, that's the trade representative and his team, UH, don't appear to want to um go full steam ahead and go to a country without having a deal hammered out um

in the first place. The optics of that obviously was difficult. UM. And so the president seems have pulled back some of his enthusiasm, I would argue intentionally there. So, Margaret, the reason why I started by asking about President Trump's demeanor is because the way he has portrayed of late is kind of embattled a little bit more than he has been earlier in his president see certainly feeling the fact that Congress is not with him anymore, even Republicans are

pushing back more. Did you get a sense that he felt more isolated? Uh? And and and whether he felt cowed by that or emboldened. Well, you know, because of what you just laid out, And certainly on the end of the thirty five days shutdown where he didn't get a single thing he asked for and seemed to lose that political battle, I was expecting him to be, you know, coming from that place of deep frustration, uh, and to sound like it. What's clear is he is frustrated. He

seems to be giving up on Congress. But that didn't seem, at least in the demeanor in our conversation, to be disrupting his confidence level. If anything, he Um was dismissive of the majority of Senate Republicans who rebuked his foreign policy choices, you know, voting to say you're endangering national

security by withdrawing from Syria and Afghanistan. I mean, that's a significant and rare break for s Republicans to do something like that, uh, when they've largely fallen in line, even if privately they have problems with some of the president's policies. He didn't seem swayed in any way by that. Um. He also it was very clear in our conversation that the facts and changing facts as presented by the intelligence

community aren't going to change his opinion. He said, I have intelligence people, and I don't have to listen to them. I don't have to agree with them. That's a true statement, but that causes some concern among um those who say, is there a political filter that's going to be put on intelligence in the way that it was arguably um going into the Iraq War that it wasn't just a problem with intelligence, it was cherry picking intelligence to meet your thesis. So if the facts and the changing facts

aren't influencing opinion, where does that lead us? But I'd say for the President himself, he seems very confident in his convictions despite these breaks from him, he seems to enjoy uh the being in that old Margaret Brennon, we really appreciate you taking the time. We're very much looking forward to you seeing the next episode of Face the Nation on CBS Market. Brennon of course, is host of that show, and you can hear Margat Brennon this weekend

on Bloomberg Radio. Listen to Face the Nation's Sunday at two pm in New York, Washington, d C. And Bloomberg One of six one in Boston, Newberry Pork. Let's Face the Nation this Sunday at two on Bloomberg Radio. 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 Keane before the podcast. You can always catch us worldwide I'm Bloomberg Radio