Surveillance: Currency Intervention Risk With Nordvig

He came back from a sabbatical, okay, trust well, yeah, but I didn't have the romance of the images of you. I thought we were gonna wait at least twenty minutes before we started taking dicks at each Jans asked me, didn't Did he really claimbed the matter Horns taught to me about the morning so far, because it has been,

fair to say, pretty crazy. So I think I think what's going on is that we've had a big drop in the equity market on Friday, and the U S authorities are keen to generate a bounce today and that's why the communication is how should we say, confusing, But the attempt to to talk up the equity market. That's what's going on. If I can make another comment on the dollar, like on Friday, obviously we had a lot

of things going on. We've we've seen in a number of occasions that the dollar tends to now be weakened against the end and the euro when you have dramatic escalation on the trade fund because the Fed has now communicated that they are going to be potentially easing more aggressively when these things happen. So that's the kind of bounce you're having today, like the dollars coming back after

after that set back on Friday. And that's what you're seeing in the euro cross and in the end cross in the general sort of cheat guide for foreign exchange over the last couple of years. And you and I have gone back and forth on this end a couple of times. When global risk appetite is good, the dollar is weaker. When it's bad, the dollar is stronger. But there's some extra nuance and you've touched on it. The

way the euro behaves in global risk off. It's not the story this morning, but it's been the story over the last several months. Just walk out listeners through it. Yet why this is slightly different for the Euro just in terms of the risk mitigating characteristics of the single

currency that maybe they didn't have several years back. Well, I think you can actually see it, and this is something we tracked closely in our data that over the last couple of weeks, we've had various types of repatriation, Like people normally invest outside their country in good times, and then we when we had tension, some of that

money comes back. We've seen a lot of money, especially in equity space, come back to the US that was previously invested in the emerging markets, and in Europe you've had a little bit of the same. So essentially equity investors in Europe are getting more cautious and repatriating. That's why we've had both the euro and the dollar actually been quite strong at the same time in the month

of all this. What we've observed in August, what we've observed Friday, what we see today, what we're going to see this coming Thursday, etcetera. Do you look at it is continuous functions of smooth vectors or is there a

discontinuity in an instability right now at critical levels? Well, so, I would say We all know that Pounds spoke on Friday, and we all know there was tweets about tariffs, but there was actually a third thing that was news reporting about like things going on in the background to get the dollar to trade weaker. Right, So that almost didn't get any airtime on on Friday because there was so

much else going on. But there is this talk about a currency tacks or things that would be done to essentially remove power from his position of power, all meant to weaken the dollar. So that was part of the reason why the dollar was weak against the end and the Euro on Friday. And the question is we come back and say, okay, is that just something that's being discussed or is it really something investors have to take seriously.

So it is definitely unnerving as a global portfolio manager not knowing what the dollar policy is and it creates a lot of volatility. So where do you come out on that debate? Right now? Yin's because it's an important one. What do you tell clients? Do you think that it's something that gets followed up with action? So, as as I mentioned with toma on on the TV, like a couple of minutes ago, we have to think about currents intervention.

But we also have to acknowledge that if current intervention US unilateral current intervention is going to be effective, it's going to be a commitment to do unlimited amounts. It's not enough to do ten billion. Where does the limited come from? With a fiscal deficit, etcetera, etcetera. We we're very simple. Do we print? It's very simple, Like the only balance sheet that can offer unlimited potential just a

fat balance sheet. So that's why it's crucial. Right in the past, it has always been the case that there was a chord in Asian between the Treasury and the Fed. There was even a kind of like rule thumb that they did half and half. So if the Trump administration wants to go ahead with currency intervention, they have to get the FED on board with it, otherwise it's going to be meaningless. I'm broke, dude, you have a trade that can get me to September? I mean, is there

a trade right now in all this craziness? Well, so, I think one thing that's interesting is that because we have so much going on in terms of uncertainty about US policy, it has been forgotten that the e c B is probably going to deliver more quee on September twelve. So I think there's some trades around that that could be very interesting. If we can push the intervention risk

and all that crazy stuff in the background. We're probably going to see the eurodrift lower as we get that que priced, and it would be a huge shock to investors if we trade below one ten now. So it's not very far from where we are, but that's we haven't seen. And thank you so much with you this morning. Up until the summer, we had a massive year for credit instore. The back half is looking a little bit

more complex. Please to say that Markie Patol joins US now whilst Farco Asset Management Senior portfolio manager Markie walkers through it. What's the message from our listeners this morning in the world of US credit. Well, I think that everything looks okay for risk assets. That is how your bonds and invest in great corporate bonds and we clearly or in see treasuries in that trading range probably heading lowers.

So that's a pretty good backdrop if powers committed to being passive, data dependent and not aggressively trying to tighten credit conditions. Marky now is a good opportunity to reflect on the speech from Chairman Poal on Friday. It has been overtaken by events. But what was in that speech for you that stood out that you think we need to pay a little bit more attention to. Well, two things. One, the FIT is clearly going to be a follower leader

in determining credit conditions. And the second thing is they clearly are still working on an intellectual framework for where should they try to send interest rates? What's the neutral rate of interest with the economy growing? So I think they don't have a larger framework. So they're just sort of, you know, just taking it as it goes and looking at each data point. Mark follower, not a leader. This

is really important. Financial conditions are loose, and are loose according to Chairman Pow because of the anticipated path of federal reserve policy. MARKI is that as close as we've come to an endorsement of market pricing from this chairman so far, I would say of any chairman that I can recall, yes, and I think that's positive. I'm looking at a thirty year investment grade piece. It has a four percent coupon price to perfection, yielding two point eight

zero percent it's a famous American brand. We don't even bring up the name of the company. Why should I own that versus full faith in credit? Just for the extra yield that you get that extra two to two and a half percentage points, well, you'll simply compound more and you really aren't taking much risk in investment grade corporates, even with a huge premium of one one where it's going to roll out to a one hundred thirty years out. Yes, but you know that's the way the math works on bonds.

And actually, in my experience, those very high dollar bonds tend off for the investor a little bit of value because the yield is greater than because no one wants to pay the big premium. Folks, that is margat Patel one oh one that you just heard there, do not be a feared of premium. Are there any bonds out there, Margaret discount? They were very, very few, and typically they're distressed or they the doll. Let's talk about the young

character than Daniel Fuss. He's at UH in Boston at Looma Sales, and Margie, I look at you and the heritage of Fuss and Patel and and all that. There was a point where you you bought bonds at a discount and you made a credit upgrade as you went along, and you actually made some snappy total return. Will we ever get back to that? I don't think in our lifetime. Now, wow, I mean that you know these are important statement life.

Well this, John, this goes to the heart of your show, the real yield, I mean, Margaie, do let me rephrase, do we ever get back to a legitimate, really yield where our listeners who are saviors, savers can actually look up twelve months and say, hey, I made a little money. Well, they can make a little money. And of course, if you compare to inflation, if you make eight percent on a bond but inflation was seven, you haven't really made

that much. And today you're making one or two percent over inflation, So that's not That reminds me of a conversation I had about a year ago with Mike Collins of p JIM and I raised the following question. I said to Mike, how will we look back at this bond market in ten years time? Looking back in ten ten years ago and saying all that negative yielding debt sixteen trillion dollars worth wasn't this crazy? And I remember Mike turning around to me and saying, never mind that.

What you'll do in ten years looking back ten years is look at the treasury market and wish you'd bought a thirty year with a three percent coupon because you probably won't be able to get it. And guess what a hundred basis points south. Here we are at Margie. All of the concerns about the deficit, about the debt pile, it's just not in the treasury market, Markie, is this it? Are we heading to the japanification? Not at the bund market will beyond that. But is that the direction of

travel for the treasury market too? I think it is. We've seen Japan go first, in Europe second, we're on that same trail. We have a little bit more robust economic condition, so we're behind them. But you know that burden of death is simply weighing on returns and growth and as legislationary force. That's just the way it is. Do you have equities within your portfolio, within your blended portfolio, Wells Fargo. Do you have equities for dividend growth? Yes?

I do right now, it's about at fifteen hil bonds. That's where the return will be. I mean, that's where the return will be. What's an appropriate dividend growth for our listeners? I mean everybody's addicted to double digit growth or the big fat coupon and say telephones whatever. But what's an appropriate dividend growth for Margie patell? Is it

nominal GDP? Well, the standard poor is a dividend yield is a touch under two percent, and so for me one and a half percent is good enough if I think I can get capital appreciation to be a lot more than the total. But do you model and dividend growth off a one percent yield? Uh? No, because I think it's really more important is what's the earnings growth cash flow the whole company that dividend. That's really important statement folks on the Monday morning, I mean financial planning

one oh one. Uh it's simple. Do you look at the company as a whole in its financial metrics or do you focus in on the dividend growth mantra and you just mislay and market. Just as a final question, there'll be many listeners looking at the equity market and saying those safe bond type proxies in the equity market is where the biggest appreciation has been. They look expensive right now. We don't want exposure to that area market.

What's the message for those individuals this morning. I think the messages you should dial back income for friends in favor of capital appreciation. I think capital appreciation is still undervalued by investors of yesteryear. Terrific Monday briefing, Margaret Patel, thank you so much, Capital Management greatly greatly appreciate it. Josh Allencott joins us down from Janis Sanderson. Dr Alan Carr is always a joy to listen to with his work at m I T and Chemical Engineering and also

at Berkeley UH as well. Ash writes a hyper detailed note as he is global asset allocation and portfolio manager for Janis Ash. I'm a big, big believer in sharp ratios because beta, the volatility of the market really isn't in there. There's a purity to the sharp ratio. You go further and you normalize the sharp ratios. What that signal within the market hysteria of the last two weeks. Great? Thanks Tom for the other kind words. Um So we

do normalize or we adjust the sharp ratio. Um and we adjust the sharp ratio very quickly for what turns out to be the most important driver of portfolio performance, which are the large moves um. The average moves UH don't impose as big of an impact on how your overall portfolio performs in the long run, but it's the tails that matter the most. So one of the problems with the sharp ratio is the fallacy of averages. Right I could, for example, if I didn't know how to swim.

I'm not a very good swimmer, and I was trying to cross a river and Tom, you told me the river on average has a depth of three feet. Should I feel comfortable crossing that river or not? I'm probably not going to be comfortable because what if the cross section I'm sitting at right now is not a three

ft foot depth, but rather it's twenty um. So we look at the insurance markets to give us an idea of the potential expected large upside um as well as the potential large downside um, using a combination of call prices and put options and put prices and what these

option contracts are telling us. Which are insurance contracts they tell us today risky assets aren't offering a very attractive risk premium UM UH equities globally, from US equities, UH, non US developed equities, emerging market equities, they all are showcasing not much upside given the downside risk you bear UM. And I think that's all an artifact of what's going on in the markets today with UH uncertainty obviously on the trade front, uncertainty on the political front UM, and

slowing economic um real economic numbers so actual. Was there anything coming out of Jackson whole last week from FED Chairman Poal that might suggest that the FED has an opportunity here to really help markets now? I actually think that the biggest takeaway UM from the FED was and I believe this is the first time Powell directly said this monetary policy may not be able to do much to quell the uncertainty UM to cushion the blows on

the trade front UM. That that's something which is outside of the purview, outside of the toolkit of monetary policy UM so, so I think he took a stand in a call to action that don't look at monetary policy um UM to be able to be the panacea for everything. It's just not going to help much when you have these structural risks that that are potentially hitting UM global trade and the fabric UM that that really has um UM led to to this great expansion over the last

I don't know, two decades, three decades. And so unfortunately it sounds like, I mean, there's some of the market that are kind of coming to the conclusion that they're likely won't be resolution into this trade uncertain until after election. If that's in fact the case, then is the best move just to stay on the sidelines here. I think that's right. UM. There's a lot of noise, and I actually think you're correct. UM. I do believe UM, and

the data supports this. The parallels that people are drawing today between the trade issues that exist today and the trade issues UM and the trade problems that came about during the Great Depression UM and the use of terroiffs and a protective stance taking by countries globally UM intensified the recession into a Great depression are unfounded. UM. What the data shows is it was the gold standard. It was the inability of countries to control the value of

the currency that really accelerated this recession into a great depression. UM. And the fact is those countries Ease which were off the gold standard or abandoned the gold standard very quickly only suffered mild recessions by e Japan. It was only those countries that stayed on the gold standard, such as the US, such as Germany, will suffered the Great Depression. Yeah, Ken Rogost done a ton of work on this, on

the advantage. Do you guys at Jennis Henderson have a confidence in floating right right now to compensate for all the uproar were in? Yeah, I think you see that. I think that's the power. And that's the characteristic of an efficient market. What an efficient market does for you and why an efficient market is so powerful. It figures out ways to get around artificial barriers, just like gravity will figure out a way. And Tom, you try to

um prevent water from flowing down a hill. Um, Sure, you might be successful for a couple of days, but gravity will figure out a way to get that water to the bottom of the hill. Um. And that's what the capital markets. So if there's an artificial embaran imbalanced artificial years such as Harris, currencies will adjust. And that's what you're talking in China right now. Well, we're going to run out of time, Ash, we needn't make a note your cong Can you make a note that we

could drag drag dr Alan Car on again? Soonest with Janisonder said, because I got like, I got like forty two more questions and only four of them have to do with the Greek letters. We get you got your shop ratio question, and so they always leave it the strongest AshEL and car Where this is, Janiser said, love having him on to talk about the dynamics in the market. John Hudack speaks I think fourteen languages. He's at Brookings

where he dissects American policy. John help us with one of the themes this weekend, which is the durability or the longevity or the entrenchment of various presidential policies we've seen in the last three years. Is there a durability to Trump foreign policy? I don't think there's a durability necessarily to Trump foreign policy, in large part because it has been fairly scattered from one moment to the next. On a given issue, we're not entirely sure what the

president believes is best. I think one of the best examples of that is the president's position on troops in Afghanistan. Um, we have gone from a president who is now saying there's no timeline to pull troops out, um, coming all the way from a president who was ready to pull all the troops out very quickly. And so because of that, it's hard to imagine that a set of policies that

are so volatile could possibly be durable. So, John, as we take a look at the waning moments of the G seven meeting, it's at you know, when we think about the global trade here obviously that was discussed um probably at length there at the G seven. Is it realistic to believe that any country could enter into a substantive trade agreement with the United States given how President Trump has been so I guess, you know, back and

forth on so many key issues. You know, I do think it is possible for a country or for um, the EU UH to enter into a trade agreement with the President. Certainly there are mutual interests that extend among countries and the possibility really exists. I think you're right Paul that because of the President's vacillation, it's hard to nail him down. And of course when it comes to a trade agreement, everyone needs to be very firmly on

the same page. But I do think it's possible, maybe not grand trade agreements, but something more narrowed in on the fuss of things that you can nail the president down on John twice today, At least I haven't watched all of the president's actions. He turned a secretary minution and and lined up officers for whatever the answer was as having to do with China and the dialogue with China. How engaged are they in the Trump messaging that we

saw him particularly observed on Friday. You know, I think that the team around the president is critical to however the trade talks will proceed with China. The reality is that the president often speaks off the cuff. Um. It appears that that sort of conversational style approach to presidential

rhetoric is not always one informed. And while I think that some might view the president constantly turning to someone like the Treasury Secretary as a signal of weakness, I actually think it's the president at least UH substituting uh better judgment for his own when it's not fully informed.

And so I think the more that the president turns to his advisors and asks for a more firm answer is much better for UH, this country and for the world than the president just simply saying whatever comes to the top of his mind. So, John, given some of the vacillations of this administration, what incentive do you think the Chinese have for actually engaging in meaningful discussions and trying to get a deal done? Or are they kind

of on the flip side saying we'll just wait. Well, you know, I think this is something that the Chinese are still figuring out. Ideally, um, they are going to strike a trade deal when it is most opportune for them. And I think for President she he has had moments during the Trump administration where he has thought, you know, this is the administration to strike this deal with, and

then those moments passed. I think over the next six months, probably the Chinese are really going to start to game this out and say, is Donald Trump the person we need to do this with or is there a democratic nominee emerging who might be easier to work with and more stay to work What is their lobbying effort in Washington? I mean, with Brookings and all your connections. I mean, I think the idea that China's in Beijing and they get an airplane and they fly over here is pretty naive.

What's there political thrust in lobbying in Washington, you know, I would get I mean, I don't have an inside track on that, but from the outside, I would say, obviously, the Chinese have tremendous leverage with regard to the interests of American companies. Any two economies on this planet the size of the U. S. And China are going to

have a lot of overlapping interests. And I think they're using both their leverage in China but also their leverage among American companies and consumer references to to move this forward again. Bloomberg Surveillance worldwide. Of course, on Bloomberg Radio today, we're waiting for the press conference of the President Republic of France Mr McCall and the President the United States Donald Trumpet. They it's that will be coming up in a bit. Paul, this is like um with Roper, with

Brooks Sutherland. I mean, it's fifty employees in Shanghai. It's not Boeing, No, it's not seem as of Germany, but all these little companies at up exactly, and so John kind of going on that, you know, what do you make of the president's call. I think I'm not sure how to really describe it, that U S companies should leave China. This is very confusing. I mean, this is not the type of rhetoric that you would expect out of a free market conservative. This is not something you

would expect out of a Republican president. And I think the irony, of course, is that the president's favorite attack on Democrats in this country is to call them socialists. And it's it's odd to imagine the president trying to, you know, sees the means of production abroad for American

companies to advance his own personal interests. And so I think we've only seen the beginning of the blowback that the president is going to get from this, and I think part of it will be whether this was one tweet and then it dies off, or whether the President really considers pursuing it um That will tell us the extent to which this blowback is going to happen. John Hudeck, thank you so much with Brookings today. Just terrific perspective here.

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