Surveillance: Correction Was Long In The Making, Memani Says

points over the last eighteen hours or so. We are thrilled to bring you this morning. Jeffrey, you of UBS Wealth Management, of course with his wonderful ability on correlations of market, particularly back to foreign exchange. Jeff let's start there. What are the correlations in the market now that allow

you to be more equities? Well, right now, the lack of correlations, you know, between what's going on in foreign exchange markets, you know, for example, versus what's happening in equities and thinking the fact that FX is ignoring this, which tells you, especially if you look at the MFX and the dollar, it's been discounting. Let's just say the divergence between us and the rest of the world already. So I think FX traders are not too fuss about this dolly and down two big figures, you know from

the highs. Again, not too fuss about it. So again reason to be not pessimistic, Jeff, I want to go a little Matthew here right now, within the global leverage, within the mysteries of the financial system, everybody, including Mr Tullub, worries about tail risk. What are the distributions of the financial system now and how exposed are those tail risks, those so called fat tales out that lead to jump

conditions that lead to abrupt moves. I believe you're pretty sanguine and that well, again they need to be more

specific about tail risk coming from. Where is it an event risk that's in the price already or is this just code for the likes of risk parity, risk control other products out there where you have enforced the leveraging you know, so leverage type structures, which is actually causing vicious cycles in At this point, I think we need to be clear about you know what Peter talked about earlier. Is it a market structure issue or an event risk issue.

I think we're looking for technical issues and market structure right now a bit too much and ignoring some of the positive and negative issues in the markets right now. So again focus on fundamentals. I don't worry too much about the tail risks coming from market structures. We continue

to worry about the tail risks from events. But if I guess the concern is that we have a numerous events or risks, it's emerging markets, it's a dollar higher, it's a concern about encycle in the US, it's the and if they all come at the same time China, they all come at the same time, could it be the perfect storm? So there's not one catalyst, but all these little bits coming together, absolutely and then the perfect storm.

Then people ask what is the safe haven? Right So it's the safe haven the dollar, and people are asking questions from clients already. Do you think China is actually exacerbating the treasury sell off, you know as a counter punching near to the trade wars and whatnot. Well, in an environment where emerging markets are using reserves already and you're seeing the data, of course they're not going to have less flow to buy treasury. So again that should

be in the price. It's in the price of dollar performance against emerging markets already, So again I wouldn't overplay that angle. When the time comes, diversification should start to do its job and the FED will react as well. Okay, so what do you think the FED will do? I know UBS have an outlier call right on the FED probably having from here having having to stop hiking. Does

the Trump accusing them of being local change that? So that's where we have to be very careful in terms of if is the FED So the sake of argument, you know, if they let's say, pause up ahead, are they responding to political pressure domestically are they responding to data? Let's focus on the data as much as possible. If the market starts a second guest that then we may have more issues about credibility. Jeff, I want to walk

your risk parity right now. I want you to explain to our global audience what this phrase risk parity is and why it may blow up with the correlations where they are now between equities and thick income. So fundamentally, you are targeting to rather than target and return framework, You're you're targeting a volatility framework and deploying leverage at the same time. So it starts to break down. And that's the worry right now. When conventional diversification starts to do,

it stops doing its job. So you don't get the positive diversification benefits from owning bonds in a leverage manner for that matter. And the risk is the fear in markets where I know what's been talked about the structure is you get a correlated sell off where if equities for and bonds for, it starts to accelerate. But I think that's overplayed. In January it was shown ultimately risparity didn't contribute aggressively to that. So you're this is critical.

You're not concerned about an overlay of risk parity damage that leads to a greater volatility right now, So risk parity intrinsically is not short volt It is leverage that we need to distinguish leverage short vol versus leverage in a volatility framework. These are completely separate, right, very good. So it was like the Green Book of the International

Monetary Funds, Jeff for you there with a clinic. Take Christmas charity right now with ubs we enjoy is it once a year or twice a year that we go to the land of avocado toast. I believe this once a year. Okay, Well, here at Oppenheim our Funds, we thank them for their commitment to Bloomberg on the economy, Bloomberg Surveillance and all of John Farrell's various media properties,

which is a good way to bring in. Christian Momaney can just say that we have a live audience Oppenheim the Funds, and it didn't fill out until Krishna walked into the room. They're not here for us, they're mostly his his entourage, which is a paid audience. Christian mamany ce io and had a fixed income here at Oppenheimer Funds. What's your observation the keys from the last couple of weeks in the price action, we've seen well, so the

correction was long in the making. When you have the Fed talking about there are no neutral rates or we are not close to neutral rates and we can keep going. And when Trump is declaring victory that NAFTA was an easy win and we're gonna show it to the Chinese, that's a bad combination for the market. I think at the end of the day, though the economy is doing reasonably well, earning should be reasonably good. We have. We still have an up trend still in place despite the correction.

We have seen these types of corrections before, so this too shall pass. So it's a couple of things I want to get into with you, whether you think rights have repriced enough in treasuries and whether there are any worrying signals coming from credit. So let's do both with us now. Sure, so rates have definitely repriced. I think the question for US is our rates going to three and a half percent anytime soon? And my answer is the likelihood is yes. Probability is probably uh, relatively low

at this point. So the as far as credit is concerned, I think that is probably the strongest place in the market right now. And I take a great deal of comfort watching the credit markets even today after a massive correction, and all year for that matter, credit spreads have been relatively resilient, especially in the high yield market. And if there's if there's going to be a significant correction in equities, credit not showing any cracks, I think that would be

very unusual. The mathiness of this is the search for fat tails in the idea of a jump condition. Some would say we saw a jump condition in February. Those that loaded the boat on what was a February eight look pretty smart. Now that was just a correction congresion most of the people, and I would suggest most of the shareholders of Oppenheimer funds. It's a distant memory what a real bear market is, isn't it. We don't remember

what negative eighteen percent is, do we? We We don't, But for good reason that is the underlying trend really

has been very, very modest. So when you have two growth rate, inflation not manifesting itself in any significant way, a central bank that is accommodative, that's a good that's a good combination expecting type corrections in that environment, I think is relatively this is a coiled spring and alogy, I mean, we're not being given the opportunity for the coil spring unless John we sustained four GDP without an

inflation re element. Do you see treasury yields at three eighteen right now in a ten year going much higher than they are at the moment, Krishna, No, I don't. I think if you kind of take a one year view, our view would be that rates are lower in one year's time rather than meaningfully higher from where they are. So you think tens and thirties were vine right now, I think tenth and thirties for long term investors are

extraordinarily goodbye at the moment. What than that mix of a higher price ands picked a tenure in a lower yield. What part of that will be in the real space in one part will be in that squishy inflation space above it. Well, so I think that's really the kind of not the beauty, but I think that's really the thing to watch today. That is, the rise in yield has been entirely driven by real rates, belief in the economy,

and all that exactly. The fact that real rates have risen sort of slows the economy down meaningfully in six to nine months, and I think that will lead to a rally and treasuries at something. This is a really important point. Goes to Christian's work, but also Jeffrey, you we mentioned earlier from us, because John, we've had uprise in the real rate. It's a compensating factor that can

give you confidence out if you believe that story. But you think this can be self limiting, essentially, that's what you say in Christna, Oh yes it is. And and throughout the cycle this has been self limiting. That is, coming into two thousand and eighteen, we had a trillion dollars worth of stimulus dropped in the economy. Economy accelerated in a very very very rapid way. And uh, and then we are talking about FED tightening and things like that.

That's all self regulatory, regular regulating mechanism. UH. In today's world, when the trend growth rate is still two percent and inflation is absent, you know, we will have lots of ups and downs, but at the end of the day, things are not going to change. One here, you make the observation of what is happening in credit and what is been happening in credit through eighteen. And there are two observations you can make, and that two binary opinions you can have. One is that you look at high

you and you say, everything's okay. The other is that you look at investment gride and you say it's not. What's handing an investment grade? And why is that so different? Well, so investment grade, the issuance was meaningfully higher in investment grade than it was in high yield. So I think that technical consideration certainly drove widening in investment grade spreads.

But even investment grade spreads in the later half of two thousand and eighteen into the third quarter, for example, have done materially better, and even when they're widened, they only widened marginally. So if you you know, with the tightest the coming into the year was d basis points spreads that went to a little over a hundred and ten. Now we are back close to hundreds. So it's been

back and forth. We panic in the market because it's a big move relative to that's the surveillance bre exclusive momonty panics. But at the end of the day, the move isn't that the move isn't that substantis this is important because the conversation for the last thirty two seconds has been entirely the real yield conversation. Your property tomorrow? What time is it tomorrow? Quite often, oh probably tomorrow? So well, Christian, very importantly here the Oppenheimer funds heritages

the international markets. Is this pullback again with dal future is improving negative one versus negative three hundred ninety minutes two hours ago? Is it an opportunity in international stocks? Were they hammered yesterday or is it just a domestic story? So clearly equities have gone down globally, but remember equities International equities went down meaningfully lower long before the US market crack. So if you look at valuations on a

global basis, international valuations are extraordinarily cheap. You look at the emerging market valuation relative to the U S valuations, Even with the sell off, I think international valuations remain far more attractive than US. Doesn't mean US equities won't come down, but I think for long term investors the better opportunities internationally. I've heard a lot of people make the big convergence call for equities. Can you make the

same call for the bond market. I'm looking at the BODON treasury spread right now on a ten year maturity of about two sixty five basis points. Can you make the same code for convergence in fixed income? Well, there's not going to be an equity convergence unless there is a band convergence. And I think there will be a band conversions coming in two thousand nineteen, and it will be driven not typically as international economy is doing much better. It will come from the U S economy starting to

slow down. The convert sense will be driven by US lowness as opposed to acceloration in internationally kind I want to touch on her next conversation is he I am f right about global slowdown? Well, I am f is right and in that things are slowing down and we have probably seen the peak of the recent sport in

economic growth. So I think two thousand nineteen is going to be lots slower than two th canvass the world with Christian MoManI here at up and I'm her friends John Farren I visiting at today in their studios down down their beautiful studios. It's pretty fancy, you know. I could get comfortable here. I'm thinking, can we come more often? Christian? Would you welcome? You could do your could do your other properties here. I'm a nice guy. Really never said that.

He does not say that about me. She is from the University of Middletown, Connecticut. Dana Peterson was City Group out of the Wesleyan University Economic Shop as well and critically Dana Peterson with expertise at the FED on the fiscal watch as well. Dana, wonderful to speak to you. Where are we in the dynamic of all the debt we're going to have to create to pay for our deficit and what it means for the American economy. When you see all the gloom, the reports chronic trillion dollar deficits,

how do you respond? Sure, absolutely, it seems like no one's paying attention in Washington. Indeed, as we did have the tax reform passed in December of last year, and then also the Biparson Budget Act of eighteen earlier this year, and certainly how the Republicans have already advanced UM legislation for tax reform two point oh which would cost another six and sixty billion UM. And when we look at this, certainly the fiscal stimulus from the federal government is definitely

bolstering the U s economy. We're looking at probably three pc growth to this year with at least seven tents of contributed by fiscal stimulus, and the next year probably around two point eight percent, but again around one percentage point from fiscal stimulus. But over time this is going to to really affect the economy in terms of outside debt, as you mentioned um, certainly crowding out of business investment, and even currently now we're seeing the Treasury, the US

Treasury responding to this with increased issuance. In fact, the Treasury has increased its nominal UH note issuance and bond issuance as a February of this year, and in the second half of this year, we're probably looking at the most debt issued ever, Danna Peterson. If growth is coming from added fiscal stimulus, then what should be the real interest rate level currently? If interest rates are moving because people anticipate greater economic growth, well, I would like to

say that underlying growth is still quite strong. We're looking at around two in a quarter percent and that's normably about potential, which is probably you know, one in three quarters percentage point. So the other eyeling economy is doing

very well despite the stimulus. But the set is is normalizing rates so they're not responding to and overheating in the economy, and the neutral rate is uh, you know, I'm looking and looking at the different research of particularly the Lobock Williams model is suggesting that the neutral rate is in the range is at two point seven five. She she did that without avoiding the art starting She's just you know, but see here here's my point. Let

me just go back to this for a second. The idea being that if everyone looks at the physical stimulus because and then they say, oh, well, you know, the federal government budget deficit and all this is, and that's what's fueling the economy or getting us, you know, an extra half a percent or an extra percent of GDP growth. And then you get people that say, all right, so why do interest rates move? They move either because there's a lot of the inflation or because there is real

economic growth. So if you have this one time fiscal stimulus that goes away, shouldn't rates then anticipate a lower growth trajectory. So as a result, rates should actually be going down. Well, rate should actually be rising if you're anticipating lots of debt coming down the line. Indeed, for the federal budget deficit was close to eight billion dollars and then next year we're gonna be looking at a trillion dollars and it's only going to get worse going forward.

So naturally rates should reflect that. And indeed, uh, you know, when you look at a tenure yield, it's been lower than what fundamentals would suggest. And you know, certainly now that we're at three and a a quarter, that's probably more in line with the expectations for for growth at least the next few years and the tenure outlook for for federal budget deficits. Danna, I want to get in troup with Katherine Man. That's what our job is here this morning.

You're wonderful Chief Economists. Is President Trump right about feed independence? Do we need a FED that's a little more politically sensitive? Well, I think that's great. Actually wrote a couple of papers about this, and history tells us that an independent set is probably the best bet because when you had instances of government, either Congress or presidents or even sometimes a populist interfering with the fed's work, you get pretty bad outcomes.

And I think the important thing is that the FET is not restricting policy to slow down and over the economy. The FET is just normalizing, trying to create some monetary policy space. And it's best if you don't have commentary from those, uh you know, who are not within the feed. And so FET independence is very important. I think we look around the world, we see a number of cases where uh, the central bank is not an attendant, and you see rampant inflation and flower growth. Dana, thank you.

So Dana Peterson was City Group and update here more towards fiscal and fixed incomes as as you would do with the market move then economics him I want you to bring in our esteem, guest, but there's two ideas here that are really important. First, anybody out of the combine at California San Diego is Wayne Matthew, Waste statistics like James Hamilton's and time series analysis and all that stuff, which is really cool. A bunch of they like grow

Nobel Laureates out there and in how things move. And then you combine that with I think the gross misreporting of the Chinese technology companies, including ten Cents. I make jokes about it. So we finally have in front of us a real authority on that consumer juggernaut in Asia, in China and on ten Cent as well. Why don't

you want justin? Guest? Justin Leverenz is the director of Emerging Market Equities portfolio manager of op and Heimer's Developing Markets Fund and the Emerging Markets Innovators Fund, and he joins us here at beautiful Oppenheimer Funds Studios. Thanks very much for being with us, Justin. All right, as Tomas describing, We're going to use this as a point for you to talk a little bit about Chinese equities and in

particular ten Cents. I think just before we went on, you said you've been buying ten Cent for how long? Been in the main dynasty for years? Okay? What is going on with that kind of commerce in China? And I know in the fund you've also got Ali Baba in a variety of other stocks. But what what's the thesis for ten Cent for owning it? Now? Sure? Well, the thesis for ten Cent is slightly different than commerce.

Commerce would be Ali Baba or Pindo Door or those companies, some of which are related to wehe Chat, the super app that ten Cent owns as a property to distribute. Does everybody use wheat Chat in China? We Chat has a billion subscribers, you know, so slight the smaller than Facebook of course, but we're talking about one particular geography, so you know, effectively all of organized China has whet Chat. Is that something that they have already monetized completely? Absolutely not.

So if you think about what ten Cent was when I invested twelve or thirteen years ago, was kind of speculative bet that a large user base would eventually be monetized. That got monetized in a way that I had not anticipated, which will come to in the moment. I had anticipated it was going to become a massive platform for advertising.

What it became was a massive platform from content. So you know, this is the company with the largest music of course, the company's going public at the moment, the largest literature base, and really the core of the company from profitability perspective is games. You know, the largest game market in the world, and ten Cent complete dominates games.

Then four or five years ago they came out with wheat Chat, which all of a sudden became a billion of users, and is this super app platform that we've never seen in the rest of the world that lots of the ecosystem, and ten Cents invested in all of those companies, whether it's j D or Pindo, a Door or may Twin, d mping have invested in all those companies which create distribution capabilities for all of these things.

And that, to your your direct question, is absolutely not monetized properly yet because unlike Facebook, in my particular view, this company has been very deliberated about user engagement and making sure that they don't put ad loads that start to disrupt the entire ecosystem. So very cautious. Okay, to cut to the chase. You own this thing at two dollars sixty seven cents. Yes, I'm still trading a two hundred.

He said that with a straight face. Okay, well that's why he takes twelve weeks off in a row, and I don't. Okay, it's gone from two dollars to two hundred sixty seven dollars. I'm looking at a log moving average and I've had one, two, maybe three, and now four times to buy the long term moving average? Is this the mother of all buying opportunities? To enter ten cents? If I know the boat left the dock fifteen years ago, Well,

our horizon is the long term. I think you know the reason why the largest actively manage emerging market investor in the world, just because we're all about the long term. So things like the last couple of days don't really when you get when you get a pull back to it, when you get let's go. Well, I'm not a technical investor, so I'm not sure about moving averages, but I would agree, But I would agree with you. You know, three thirty billion dollars, this is a company that's gonna be a

trillion dollars in the next five or ten years. You know him. There are no charts in the building of a minami. There's no charts here, no charts. They do no technical analysis here. I got a charter to Mamani might do technical analysis. I do not. Yes, okay, we'll go with that, all right. I want to ask you about innovation because, as I described the title of one of the funds, do you believe innovation is going to

reap profits for investors in China? Absolutely so. If you think about the developed world in the last ten or twenty years, significant disproportionate returns have come out of disruption. If you think about emerging markets in the twenty five years I've been involved, it's largely bent about mean reversion sort of investment opportunities. I think the emerging markets have completely shifted in the last decade in the sense that actually disruption is becoming a very common theme and developing

in the emerging markets as well. So if you look kind of across the globe, there are really two pools of significant talent, two pools of continental size sort of tech opportunities. One, of course, we know it is in the United States and the second, which most didn't believe me five years ago, is actually China. You know, if you look at unicorns around the world, almost unicorns are in China. The top seven of the largest market capitalization companies,

seven of the ten or in China. Your comments on Facebook, what can Mr Zuckerberg learn from ten Cent? What does the ten Cent best practice that he needs to learn in Facebook? I think the issue is about sustainability. You know, ten Cent is a company that's enormously cautious about sustainability and not over monetizing in the short term. Is that because there's a cultural bias in China to look at time as something that is very powerful and you can

look ten fifty years into the future. I think it's about governance. You know, it's not distinctively ready to ten Cent in Facebook, but one of the things that we constantly think about is governance. You know, most companies are run by people are not either intelligent or they follow ten cents of very clever company. That's got why they distributed set of management that that thanks for the longer.

Within every book in China, there's a red phone linked to the Communist Party on every s oes desk, every industrial justice is ten Cent linked into the government. Can you be so bold as to say that? Well, what I can say is all companies have to operate in a particular context, whether it's Russia, which we invest in, or China or the United States. And absolutely ten Cents, the largest content company in China has to be very careful about things like content rules. And this has been

the most intelligent conversation hit on China Intencent. Yeah, I think so shy. You know, let's let's have them back at China. No, I just see, I see all this techie polming at the most enthusiasm about making money Intencent over the next sixteen weeks. And the fact is two dollars sixty seven cents to two sixty seven dollars move the decimals, you know, that's what we're talking of. All

the unicorns are in China. What's the unicorn? He acquired a company above billion dollars and the market valuation and private markets we few as well see the way you did that. Okay, Yeah, 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 just worldwide. I'm Bloomberg Radio