Surveillance: Disciplined Investing With Kelly

build on that. What do you mean by that? Well, I think that we were in a recovery, but this recovery is about it slow down. I mean the sound that you hear outside is screeching breaks because this V shaped recovery is going to slow a lot in the fourth quarter and and um early next year. I think it's important not to just, you know, to pile into

momentum stocks. We've seen, we've seen, you know, the stock marker do wonderfully well this year, but there are parts of the the stock markets which are frankly done too well, giving the amount of uncertainty out there, and given the fact that down the road we are looking at higher

taxes and higher interest rates. So I think it's very important for investors in this stage to be disciplined realized that just because we've seen some good economic numbers, because the marketers seem to be okay here, you know, don't don't take your eye off the bull. Recognize that we've still got a long way to go before this pandemic is really over. Within it is the idea of what

the return will be. All the actual assumptions David Kelly has been we're supposed to invest for single digit return. Nobody believes that that's on these high flyers. Do we go back to a single digit world? We have to eventually, because in the end, it's about nominal GDP growth and what's happened for a long time, actually for decades now, as we've seen the value of financial assets um in

the US rise much faster than overall nominal GDP. But ultimately it's about the growth and goods and services produced by the U S economy. And so there is gonna be some correctional long the way here and there are and we are going to see a return to single digit returns. And so it's very important for people, you know, look at valuations carefully because the things that are most overvalued are the things that are going to get hurt

the worst when there is a more significant correction. Well, David, when you talk about how we could see a correction in what in tech stocks? Because right now we're seeing an ongoing performance at least for today. A return to the underperformance in small caps in financials and tech is what's recovering. Well, yeah, and and and because this market is very momentum driven. I mean, I think this year

has been so difficult for fundamental analytics. I mean, how do you figure out, you know, what these companies are really worth and the sort of world we're looking at post pandemic. So I think investors are just jumping into the momentum trade here. But when we get through this, when we have a more normal economy, as that begins to shape, you know, shape as we have a sense of it. In two, I do think that value stocks should do better than growth. Growth is very expensive RealD

of the value. You know, it's most expensive its means since the tech bubble. I also think that international ought to do better than the US a very similar story. Both em and developed country international are cheaper out in the US, So I think you need to think about the boring middle of the market here and try not to be too enticed or enamored of of high tech um large cap megacap growth stalks. David, fold your economics in your Castman and Farola. Your economists make very clear

they have a very cautious view out. Is that conscious view folded in the fourth quarter or is that a conscious view for next year? It should be in the fourth quarter. If we're looking at quarterly GDP, we saw a GDP full by two percent in the second quarter. We think would rise by as much as thirty percent in the third annualize. But then when you rise by about three percent annualized in the fourth, so there's a very sharp deceleration growth. And you're gonna see that in jobs.

I mean if you look sequentially, Okay, we saw we added one point four million jobs last month. That's good, but we think that job growth will now decelerate about less than a million per month, which sounds okay, except we're still eleven million jobs shorter where we were in February, So again a deceleration there. So I think in the monthly numbers it's upon us. In the quartine numbers, we're gonna have to wait for the fourth quarter to see

that deceleration. What's the run rate of nominal GDP that you then fold into your forecasting of the equity markets. Um, well, it's it's hard to talk about a run rate in either twenty one when you get but once you get into two, we're looking at something in the order of four to five percent once we get back to close to full employment. But yeah, you're gonna be you know, we'll have to bring that unemployment rate rate down for

for a while here. But you know, we've got another problem, which is that we've got a demographic crash going on right now, which is also going to take something out of GDP growth for this pandemic is Oh, it's what you make if. What's happening in Washington at the moment, it's all politics. I mean, I think that they I was hoping we'd see some sort of new support package, a Phase four deal before the conventions, because honestly, there are a lot of unemployed people in this country who

need that. A lot of people are going to suffer through this winter. But nobody wants to make a deal at this stage, it seems to me before the election. So hopefully after the election, however, it goes in that lame duct session of Congress, we'll have something to support people who just can't get back to work until a pandemic is tamed, and hopefully we'll tame the pandemic in twenty twenty one. But right now it's just partisan posturing

because everybody is focused on the election. David, is no deal or a very skinny deal priced into the market currently. I think it probably is. And remember we're talking about eight weeks. I mean we're talking about that there are

perhaps ten weeks. But once the election is over, I think there is a majority probably in Congress for some sort of skinny deal because after all, and things like state and local government, you can come back in January with a new Congress and if you know, if, if, depending on how that that shapes, that you could you could do something then So you just need to do something about the unemployment support. You need to do something

to try and help these small businesses. But it's you don't need to spend a fortune right now, because you can always come back next January and do something bigger. It's even just a comment on the language that we're using at the moment. A skinny deal is now something between five hundred and seven hundred billion dollars down in Washington. What are your thoughts on that there are no fiscal

hawks left. There's no monetary hawks left either, and the hawks have all left Washington, which is a little worrying. We do need to do this right now, but I am very concerned that as the economy cover is particularly get a good vaccine and it begins to move forward fast. Later next year, We've got a lot of government debt, and this is going to be a time when we need to be really disciplined in terms of policy, just to maintain the credibility of you know, of our you

know of treasury bonds and credibility of the currency. So we're going to need to have some discipline down the road. But you know, I have no problem with spending money right now because there are a lot of people who are really in some stress and you're not going to create inflation in the middle of a of an economy with the almost ten percent unemployment. David Ran to catch up as always, stay well, send out records to the team.

David Kelly there of JP Morgan Asset Management. Let's stagger to our guests as we can Omar regular shrub chief Investment. You know, I can't, I can't come out after Quinneth Peltrow Good Morning on Bloomberg Radio and Bloomberg Television. Thrilled you with us under simulcast and Mr Aguilar will give us some brilliance right now. What is the character of this pullback? You have the advantage of Kathy and Lisianne to give you perspective as well. What is the nature

of the pullback we've seen? Omar Well, good morning Town. Definitely is that out of my range of understanding A lot of the discussion of reline and celebrities. But I can tell you though that um big part of what the more it is going through now is something that in a way, it shouldn't be coming as a surprise. As we come out of this summer and such an amazing run in the market, we clearly speculated what would

could be the fault look like. And if you actually see all the sources of uncertainty we had and the gap between the market and the economy getting bigger and bigger, that all of a sudden created that the environment for a you know, a potential volatility and what we're observing right here you put it into the context of the size of the rally that we have seen since April,

we're just seeing volatility. The size of the correction, even though in the NASDAK has significant, is still, you know, very small relative to the size of the bold market we saw earlier in the year. Our really serious question, and I don't want you to speak for the executives A Swab and Mr Schwab as well, you can do that firm self. Swab and others in retail electronic brokerage have been pinatas about the sizeable retail trading we're seeing.

Do you buy that idea that there's something ill about all that retail trading? Well, you know, the the our job a CHUAB is always to guide retail investors to find their best way to trade and in many cases to find, you know, the opportunities they find in the market so that they can use their capital in the

wise way. Of course, there's a lot of players in the market, there's a lot of activity in the market, and the size of the retail trading, especially the high frequency retail trading, has had an impact in the market, no question about it. Now. I think a big part of the discussion of what we do at investment management part of CHUAB, it also involves, you know, trying to guide them in through the behavioral aspects of the market.

If you actually see a lot of the retail activity usually tends to be very short term in age nature, and in many cases tends to be fairly related to behavior of economics. Um So we do a lot of research and we provide a lot of advice to our retail clients to try to guide them to understand what is really the motivation be find a lot of the trading. Is it really more for a short term trade? Is it really more consistent with their investment objectives? Well, I am.

You mentioned two things. They're one on side the volume clearly increased over the last six months on the retail side. The other on the character of the trading. Can you talk a little bit more about that, Whether you've seen a shift to more short term than perhaps it was twelve months ago, Whether you've seen a shift from just the underlying stock to more options activity, which is a big discussion in the last week or so. Can you

give us some color some clarity there. I'm a well, you know, the the I think the market environment has actually put you know, clients and in generally investors in like two camps, and you can actually barely clearly see

through the activity that we see in the market. On one hand, we have what is called in behavioral finance, the overconfident crowd, the over confident crowd, that is a cognitive bias that basically feels that clearly, short term trading it is the place to go, mostly because central banks provide that extra liquidity and backstop for the market to continue to follow that trade. You can actually see that more in options, you can see that more in just

the momentum trade. You can actually see it. You can obviously think about all the different participants that are trading on on and off regarding those short term you know components on the other hand, and we see that more and more often, we actually see more of the other side of the trade, which is some of those you know investors that tend to be more risk averse were loss a version, which is more of an emotional bias in behavioral economics, that tend to actually drive more and

trying to be more safe and try to put more cash on the sidelines and looking for protections. So when you think about options, it's it's both ways. It basically allows for you to put money to work in the market to try to put you know, your views, but also to try to seek protection. So we actually see, you know, basically a bifurcation in terms of the the way that activity goes. One is more short term in nature, the other one tends to be more long term in nature.

So does this all balance itself out and keep the rotation into cyclicles intact despite the textile off or we're gonna be basically be set back and it's not going to regain the helm and everything else going to kind of limp along for a while. Well, you know, I've I've always you know, described this induced the theory of economics that basically say, when you look at history of recessions, normally the market takes off before the recession is finally completed.

But in one thing that has been common in all the prior recessions is that the source of the recession gets resolved before you start seeing the rotation from growth

to value. Even though the market can continue to go up, you actually see the rotation you know, into value from growth, and that's very typical and most of the recessions what we what is unique about this one is that these looks more as a recession that comes for a nashural disaster more than an economic you know, driven recession, and the reality those and the majority of the natural disaster recessions, they are actually solved because the natural acester has gone.

In this particular one, we have not solved the source of the recession. We're still trying to figure it out, and therefore it's going to be very hardly to basically think about a series of rotation until we actually have our kids to the source of that you know, solution for the recession source. I'm a time on time, just a quick one from May. Clearly there's many people that

still haven't come back to the office. Have you got any basic assumptions of what happens to volume with guys like yourself right now once people start going back to

the office again. Well, it's actually quite interesting, you know, John, because what we actually think is that there is a significant amount of people that are actually more comfortable trading from home, and in fact, a lot of the activity in terms of day trading tends to be more often or people that are now have more time to actually be training at home, so we we don't necessarily anticipate to see any significant change in terms of how the

different um you know, activity within trading will actually happen. Of course, it's solid speculation, you know what we think about the bigger players people obviously, like on the asset management side, you know, we obviously all are working from home and therefore for that is not going to make any difference in terms of how we operate now in

terms of retail clients and in terms of others. Clearly, you know, the advantage that they have in terms of their technology that is provided by different providers is there. So it is it is unclear to me that there will be a significant change in the volume that we see, and we see a significant pick up invalume already. I'm not great to catch up as always, I'm Aguila from

shaf Thank you right now. In oil, we really ignored this since it's been my fault, and we to send join us with energy aspects, terrific micro economic analysis of what's going on in oil, but also the broader picture as well. How do you respond, Emriata to the certitude of the pundits that this is just a bad and weaker global demand a weaker global economy. Do you buy it? Well, Tom, I said that we really never were talking about a strong global economy, right. I think, if anything, the price

of oil is finally catching up with fundamentals. We talked about it not that long ago. The kintango in the market, so the futures prices was telling us that, you know, prices in the future will be higher, um. And that was already showing the kintango had widened. It was showing the physical market was oversupplied when opek had started to ease their carts and US production was coming back a

little bit. Um. But the price isn't move and that was to do with the fact that you know, Fed's kept the interest rate so low, sas so much money around, and the dollar was extremely weak. Finally those factors changed, and that's essentially what dragged price as well. This was long over you, um. And I think what this should help is accelerate some of those inventory drawdowns which we're already seen. But it should get better bigger, um. And

that's the only way we will rebalance this market. Well, Okay, I'm gonna draw the ire of some my co hosts, perhaps, but trying to come up with a narrative to understand whether the moves in the equity market have been consistent with what we're seeing in oil. Oil seemed to be moving somewhat independently of the stock cell off that we saw, the nastac cell off in particular over the past three sessions, particularly having to do with OPEC cutting prices and people

not increasing their orders all that much. Do you find the price action in oil, the weak demand in oil to be consistent with the large to the large degree the recovery and equity prices. I would say that what is the problematic thing with oil? Of course right now the headwinds really is that demand is recovering, like you'd say, I think, and you can see that in the equity market, but also whether it be home sales data and just

generally even you know, broader mac data in China. Are the parts of the world recovering for sure, But it's transportation that's the weakness, right and unless and until there's a vaccine, it is going to be hard to get people moving in the same way. Yes, traffic data is picking up, but you know, flying check field demands remains at record low still and that is the issue over here, and that that's why I think it is correct for

oil to diverge from equity is broadly. But once you have run down the infantry, and once you do get the demand recovery, which by the way is a good year if not too away, then things will probably correl it a lot better. This is crucial, this idea that perhaps the economy can recover without keep a flying around and traveling around to the degree that they did in

the past. How low could oil prices go in your view, I don't think that when you're talking about the recovery in the man we're not saying that the recovery is going to go take us back to pre COVID levels. Right. We should be very clear on that we are recovering. But it's just that unlessen unt that last bit, which is going to be very all intensive recovers, we're really not going to be able to go back to I don't think there's much more than a two dollar you know,

left in the corrections. We it's been very, very violent. I think at around thirty five dollars we should find the floor. I think us production, the recovery we were seeing very gradual. That's going to go back down again um and I think as a result of that, you will probably start to see more pressure generally um on on those supplies, which again helps in the rebalancing. Is this pullback advantageous for Saudi Arabia to provide new discipline

to OPEC plus? I think it's not going to do them any harm, especially given they've been trying to get compliance up, and to be honest, Iraq and Nigerian compliance has been picking up. It's been more of the other GCC countries, some of them that their compliance has been slipping off late. But yes, I think that's very much the focused and while Saldi Arabia would of course light pricing to be around forty dollars, they all have very high budgetory requirements. I think this does play to their

advantage in the short term. What do you see next? And Lisa's point, I mean on the date calendar here, what does oil do next? I think for now it has to consolidate, and unfortunately it's going to be pretty boring because unless anounder, the billion barrels we built gets kind of absorbed, um, it's really not going to get exciting and prices can't really move higher. I think the next big thing has to really come from the winter

demand side. So you know, that's what I think a lot of people are focusing on because the macro picture is gradually improving, right, but that's very gradual that are risked around the second wave and second lockdowns around the world. So it's really going to be about the winter demand next. I'm rata right to catch up with you this morning.

I'm ready sad ad Energy aspects. Thank you. This is a conversation of the day within the selection season with question over what the wealthy the haves are doing with their money. Providing leadership on this, including his wonderful new book is David Rubinstein, of course, of the Carlisle Group and his peer to peer conversations. One of them has

been with Read Hastings. David, I want to cut to the chase Mark benny Off of Salesforce, that doubt component in a recent conversation with Bloomberg was scathing about the lack of philanthropy, the clumsiness of the new rich of California, the new rich of technology. Read Hastings seems to be providing real leadership. Here is his gift to black universities is that enough to be a game changer, to teach

the younger crew how to give away the millions. Well, it was a twenty million dollar gift and it got a lot of attention, as it should have gotten. When I asked him about it, he said, he's actually made very other large gifts. Actually some are larger, but they just haven't been publicized. So I think he will have an impact. But I think Mark makes a good point. You have people that are now worth tens and twenties and thirties and billions of dollars, and you wonder what

they're gonna do with all that money. I'm just piling it up. Well, what do you do with it? I mean, this is something you with your successive face and you know full disclosure, folks. Mr Bloomberg, the founder of Bloomberg LP, in this radio and TV property, his face the same conundrum. Why is it so hard for some and particularly these

young technology types to give money away. Well, typically throughout the history of the world, people tended to give away money towards the end of their life and they would live at the sixties, seventies, eighties. Now a lot of people making money in their twenties thirties and forties, and they haven't really expected to make this much money, and it takes a while for them to give it away.

I guess hopefully they will do some things. A number of these people have signed a giving pledge, as Mike Bloomberg has and as I have, But I think it will take a while because the amount of money that people accumulated quickly is just unbelievable. For example, the founder of Tesla, He's now has a net worth of let's say seventy billion or hundred billion dollars. He made it so quickly. It just takes a while to give it away and figure out what you want to do with it.

But more philanthropy should be done, for sure by all the wealthy people that now have it money. So, David, there are those who are looking to give away money, and then there are other people who are counting on continuing to work until they are very old because they need to support themselves. For those individuals, uh And speaking to your interview with read Hastings, can they expect to go back to the office. Can you tell us what

Netflix is CEO had to say about that? Um? Well, I think read Hastings would like people to come back to the office, but they want to make certain that it's safe and so forth. He's been working remotely and actually from uh, you know, his house in California. Many CEOs like Read Hastings recognize that people are not coming back to work really until there's a vaccine, until there's there's safe public transportation, and until there's a lot of

childcare for you for you people have young children. So I think it's gonna take a while. I think you probably aren't going to see people back to work in full man for another six to nine months. So he didn't ask you whether you have a Netflix subscription. And we've learned some private information about that, David, which you can or cannot share on this program. It's just us, but I do want to hear what he expects going forward.

Was this a blip giving him a boon during this work from home era or does he see the success par laid into a longer term establishment of streaming as

the entertainment of choice. Well, when he started Netflix, people remember he basically had a system where you you rented a DVD and he mailed it to you overnight, you mailed it back to him and then he eventually got into the streaming business ahead of everybody else and caught the rest of Hollywood by a flat footed He built the biggest streaming business now with the market value about two and twenty three billion dollars, And at one point

he wanted to sell the company for fifty million dollars to then the biggest company doing this blockbuster, and they said no, they didn't want to pay fifty million dollars for it. That's the best thing that ever happened to him financially, David, how do you parse the Netflix is and how did Mr Hastings speak about the idea of

spending spending, spending spending and not really generating profits. How do you partition companies that clearly make an income statement profit in those where it's not smoke in mirrors but it's a little bit mysterious. Well, people made fun of Jeff Bezos for a while he was just building market share. They said he'd never gonna earn any money. People made fun of Elon Musk that that Tesla would never get anywhere, and people made fun of Netflix spending a lot of

money on original content. Turns out that these entrepreneurs have had the last laugh so far. Clearly, when you can build market share, you can really get a lot of customers and they get addicted to what you're what you're producing, and ultimately that's what happened to Netflix. People are now I want to say, addicted, but people really love it and it's really unique. Nobody else is really competing with them at the scale they're able to produce and show

their their their content. David Rubinstein one final question. This is quite a security over to soft Bank and the latest derivative uproar that we've seen. Could soft Bank do what they did in investment management out of Abu Dhabi with the ex Deutsche Bank crew. Could they have generated these derivative strategies with call options if they were simply

registered in the United States. I think it would be tougher, and I think a lot of people in the investment world we're surprised by this because that's a staggering amount of money. It appears about twenty billion dollars of call options right now. It may be profitable, but it's a fairly risky thing to do. David. Let's leave it there. Thank you so much, greatly appreciate it, and this is wonderful David Rubinstein, peer to peer conversations. This with Read

Hastings of Netflix. Look for that tonight at nine pm. 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