Surveillance: Dudley Irresponsible, Posen Says

puts have expired. Has been a game of deteriorating fundamentals versus a pivoting FED and hope for a resolution to the US China trade uncertainties. With the Fed's first rate cut in a decade not having the desired effect on markets, and a trade deal looking less likely every week, these two puts, the FED and trade deal may have expired, leaving investors facing the potential reality there is no second half rebound coming. Michael Wilson joins US now Morgan Stanley's

chief US equity strategist. Market's always great to get your inside. Just explore that a little bit further for us. Yeah, thanks, guys, Uh, I mean I think you said it right. John At the at the outset I mean, this has been building for a while. This is not new news to the market. I've been a little bit perplexed why a lot of folks have been, I guess unwilling to kind of acknowledge the slowdown. Maybe it's just the eternal optimism around the

FED and that the Fed can always fix things. So the feds dubbish pivot was absolutely a positive development earlier this year. Uh. And it's interesting, you know, whenever the FED pauses after a long rates hiking cycle, it's always positive for markets. And we went back and looked at this, it's usually markets go about. However, once the FED starts cutting, it's usually negative because I think it usually means that

things are getting worse, not better. And so I think that was just a misunderstanding by folks going into the FED meeting that if they were to cut, I mean, sure, maybe they could have cut fifty and maybe when it looked to react and that the President tweeted that next morning that obviously was negative too. But I think I think the die was cast once they cut that. You know, now we have to deal with the reality of the slow down. I want to point out folks, twelve months

trailing sp negative on Mike Wilson. I want to congratulate you on your reticence against the uber bulls. Let's frame your reticence and equity markets. Are you in cash or are you in a certain kind of equities. We're both. We're both, and we actually bought a bunch of the low you sound like Ellen, Zanner continued, you know, we're h I mean we we've been defensively positioned since last summer. We didn't feel the need to, you know, pivot and

get really aggressive earlier this this year. That hurt us in the first quarter, but now it's coming home to have been been the right moves. We've been overweight utilities and staples for over a year. We've been overweight a long duration since April. That's turned out to be even better than we hoped. And we've had a bunch of cash, so uh, you know, it's helped, and we're not we're not totally disinvested. I mean, we have equity positions and we have exposures. We just took it over the edge.

You know. That's it. This John, this is so important Alo Gino, Martin Adams, and others. The idea that if

someone's cautious there in a undred percent cash is just wrong. Well, let's pick out two with those trades, long utilities that has performed up around about through so far, the long end of the treasury curve that has performed really well up around about through so far, Mike, with many people on those trades, and listen to the program right now, they're trying to understand what would unpin the circumstances, underpin rather these circumstances where you rotate out of some of

those traits. What are you looking for, Mike, I mean, that's that's the right question. We're getting closer, I mean, as you know. I mean, we've been correcting now for eighteen months. We'd call it a rolling bear market, a cyplical bear market. That's frustrating to the bears because the bottom doesn't fall out either because rates are coming down. Evaluation is supportive, but the defensive rotation has been clear and that's been the way to really protect your portfolios.

So the thing we got to look for now is um we're actually waiting for, like just full acknowledgement of a US recession. And I think we're starting to hear that now. Finally in the rhetoric. You know, Ellen is not calling for a recession epitter, She's definitely looking at me. I think we're probably have been the loudest on the street of looking for elevator risk of recession in the US now probably or so over the next six or twelve months. And that's you know, that's a pretty high risk.

And so the market is obviously priced a lot of this. You know, calling a recession as it's happening is not very helpful. You have to get in front of it. And and we've been defensively positioned for that reason. So what we're waiting for now is full acknowledgement by you know, basically the mainstream, and when that happens, you'll get a final purge of these areas that have been somewhat protected.

The two areas that have been protected is basically high quality defensive stocks and then what we call you know, secular gross stories because they tend to hold up the best at the end. We know that from past grows scares that the secular growth stocks tend to fall at the end and the defensive stocks hold up. So we're waiting for now, is that is that sort of the secular growth stocks to kind of fall away. That's starting

to happen. In fact, after the FED cut, it's interesting the secular growth stocks stocks started underperformed defensive ones again, and so that's that's good, and we want to see more underperformance there before we rotate out of defenses. And the second thing is more important is that the Yoo curve has to start to re steep, and from the back end in particular, we want to see the long bond or tenure start to stabilize and and see the Yol curve start to re steep. And so that hasn't

happened yet. Sentine cloths are still under performing defenses and secular growth is under performing defenses. So we think we have a little bit of time, but it's going to happen quickly. We think it could happen in the next thirty to sixty days. Target on the SMP has reached probably breached on the downside, and that all kind of happened at once, So it's we're getting closer to that moment,

but we don't think it's time yet to rotate other defenses. So, Mike, we're seeing some of this tension in treasuries, as you mentioned, you'lds aren't rising at the long end, they're falling there down another three basis points. Today many people focused on what's happening in high yield. At the moment, high yield spreads have really hold in there. But something is starting

to happen. If you just break down high yield through the various credit ratings, say the top credit rates can high yield double bees versus the bottom triple c's, that spreads start into widen just a little bit. Mike, What does that signal to you? Well, it's exactly the same

thing that's happening in the equity market. You know, one thing that we we've talked a lot about and you guys know this this year is that we don't think the equity and bond markets have been that disconnected, right that the equity markets are trading defensively, uh and and so are so are the bond markets. So you're seeing

quality outperform just like in equities. And it's extreme because there is there is still Tina, right, I mean they basically people are gonna put the money somewhere so people feel okay own high quality credit investment grade or the highest quality high yield and I'll get rid of the lowest quality. Is the exactly thing is happening in equities. This has been a wonderful brief Michaelson, thank you both.

John and I yesterday said we need to speak to a select group of people and we continue this off of William Dudley's essay for Bloomberg Opinion. Gena Smilek writes it up on the cover of The New York Times today, quoting Dr Posen Leaderson Institute in his public service for the Bank of England years ago. Adam John Farrell just mentioned the response of the Central Bank as they look at a dual mandate. Will this change the dialogue of the speeches ex. Jackson, Hall of Presidents, governors and the

Vice German. I think this will tom focus everybody to more solidarity and discipline around the message and more clearly stating that they are only looking at the near term of inflation and goal. I have no idea what Bill Dudley's goal isn't. Frankly, I don't care. It just feeds conspiracy theories and it was totally irresponsible to talk that way. The issue of discipline is one that was going to

happen anyway. You could see what Neil Cashgari said an NPR about independence, which was totally in line with what everybody else was saying. You know that the FED realizes that they have to be careful in this situation. And careful doesn't mean respecting Trump's tweets. Careful means showing the Congress and the American people that they don't overstep the trust that's been given in them, and that's what they're gonna do. The other thing is just I think JR.

Pale said it bluntly as he could in his speech at Jackson Hole. You have to treat the trade war, however destructive it is, just like you treat bad fiscal policy. You cannot predict it publicly, you cannot prepare for it, you cannot try to game it. If you're a central baker, you just have to react to it and then be honest about what the reaction is. And I think that's

exactly what the FEDS are going to do. I remember hearing a great story about the former governor Irvin King, and he told policymakers on the FIC NPC that if you're going to go out there and say that you didn't vote for que that you don't like Hui. The one thing I don't want you to do is say that QUI does not work. You can say whatever else you want to say, but you are not allowed to

say that QUI doesn't work. And Adam, I just wonder if you can touch on your experience over at the Bank of England many years ago, your experience for that matter, with Mervyn King as well, how you got behind one message even when there was disagreement about the policy. Just how does that work internally? Adam, Well, I think there were two instances that were relevant, Jonathan. I mean, one was as you said, and it wasn't that Irvin King

could say, the governor could say you're not allowed. It was of course rightly made the case that this would just be destructive of if you were not on board with que then you could basically leave. He didn't have to say that. But I think that was the right message and we all said, you know, this is a true crisis and this is something that is legitimate for the Central Bank to do, so we're going to all stand by it and we're not going to feed destructive chatter.

But the other instance was some people on the NPC came out in May April and May of talking about physical policy, talking about the need for austerity. It was part of the panic around Greece at that time. Then a lot of countries shifted to austerity mistakenly. And I was against the Bank talking that way because it was right on top of the UK election. And I was against the Bank talking that way because they have no business lecturing fiscal policy, especially ahead of the election. You

just have to take it as it comes. And the bank had suffered as a result of moves. Adam posted with this folks at Peterson Institute where thrilled he could be with us today. Adam, none of this is in the text books. What were is a textbook? You add, Adam, freshman year Economics. You're a wonder child. I know you went through college in twenty four months. But what was it. What was the first com book you had in school? Uh?

The first one I remember was dorn Bush and Fisher Macrow. Okay, so you got you got Dornbush Fisher Stars, which I've read I think cover to cover twice, Stanley Fisher's classic book with Dornbush. Great is any of this in Dornbush Fisher Stars? No? But it is in the third year course. It's actually pretty straightforward, Tom that we know economists know one big lesson from development, which is what they call institutions.

If you roade you of law, if you rode rule of law, if you have a government that's capricious and deterring investment, if you have a government that tries to politicized decisions beyond simplice stating its values, you end up with a flight of investment, you end up with a flight to safety, you end up with bad results. And that's what we're seeing. And that's the one Dudley has

right that the Trump administration's approach is hurting institutions. But it's the same saying about the military, about the here, we're gonna run out of there. We got like eight things to talk about, Adam Pose, and let's do a three hour conversation next time, Dr Posing with the Peterson Institute. We welcome a woman who just heard her voice on radio, Tara la Chapelle. What is it like hearing your voice like in real time on radio like that. You're like,

oh MG, yeah, it makes me cringe a little. Imagine with this voice what it's like. It's really strange. Isn't it is. It's very weird. It's like, really, you're over there square and I'm like, why am I? Why are they doing this? Team? So we just heard from Tera Les Chapelle on m O and Altria and you know, I got like eight ways to go here, folks. Let us start with profitability on an Eva da Bay. They still are hugely profitable on no revenue growth. Is that

all that bad of a thing? Um? No? But I think if you start to look down the into the future and look at the smoking prevalence trends, I mean they're going down in most parts of the world, especially in the US. So I think it's coming to a point that yes, they're very profitable. Austria throws off a ton of cash. But I think now these newer products, even though they're not really contributing much to revenue or profit yet, that's the future and that's where this business

is headed. You've got a great chart showing that the glide path it's not a log basis, but the glide path on US consumption of tobacco, I'll say, is a smoking prevalence is you know, like we'd expect, But even globally it's getting is it does the globe catch up the America? Is that sort of the belief of health

officials Maybe eventually. I mean some parts of Europe and other parts of Africa are still in growth mode, I believe, But when you look at the bigger picture, I think overall it's going down and it's becoming less about cigarettes, which is why Aultrey and Philip Morris they really don't even talk about cigarettes that much anymore, even though it drives most of their profits. They don't identify with that. They don't want that to be part of their image.

They want to be seen as a growth company, something that's you know, into these newer, hotter products like very vaping, all this coronouncing their you're not is not a camel no filter right right, It's not a combustible cigarette. It's a device that heats tobacco so it doesn't burn it. There's no real smoke that comes off. It's a different way of getting nicotine and it Philip Morris and Altria

partnered on this. So Philip, no, I haven't now I've seen them though, I mean they're they're becoming very popular. Smoke come out or you know, can I look like Katherine hepburn in one of those movies. Yeah, I mean you see something coming out, but it doesn't look like a cigarette burning. It's it's just like a plastic device. Basically,

it's just the working. Because I you know, I feel like, you know, I'm out of touch on this, but can you tell me there's actually a transference from a palm all or you know, the days of Madmen a lark over to what we're looking at now with these quote unquote devices. Well, Philip Morris had an interesting line in

their last running statement last month. They said Icast delivers nicotine and levels close to combustible cigarettes, suggesting a likelihood that I Coast users may be able to completely transition away from traditional cigarettes and use this exclusively. And it's really gaining traction in Japan and parts of Europe where they've launched so far. Next month it will launch in the US, starting in stores in Atlanta. How is that different from vaping? Help them? So vaping, it's just a

it's a little bit different. So east cigarettes are a form of vaping, and that's what we think of when we think of Jewel, which is the time cigarette, and it's very controversial. So it's it's made with US chemicals and vapor and it still delivers nicotins. You're talking about reported serious illness, even death. Yes, there is a death just last week that for the first time, medical officials

are starting equivalent or is it? Is it like worse than you know, the tragedy of cancer and cigarettes and all that. I mean, no one knows yet. There hasn't been enough research. We just don't know. But I think the concern is starting to come, and especially since jewel is very attractive to teens. They used to have all these flavors, so I think the government is trying to crack down on that because it's the co stop they

did close cigarettes. I mean remember close cigarettes. You'd hang around and your Tony Lama boots and some girl would have a close cigarette and oh yeah, all the clothes. I mean, what's the difference between a close cigarette from Indonesia or Gentan from France and the flavored jewels, right?

I mean that's the problem. Right. And then that's why you know, it's so hard to talk about this merger, because I think what these companies wanted to be about is this future, and they're seeing themselves a sort of reduced risk products. It's no longer cigarettes, it's these reduced risk They're they're safer, but we don't actually know that, and it's going to take a lot of time to

find out the effects of this. Okay, you tarrells Chappelle with us, folks, and really an extensive conversation on something that really touches all of us, whatever your beliefs on the American politics of tobacco use. Is nicotine safe? I mean the goals to get from no smoke, no lungs, no Chesterfield cancer from years ago? Great? I mean to this day I look at a pack of Knson, I can't look at them because my grandfather smoked three packs a day down to the filter. Great, that's the past.

But is pure nicotine safe if we get rid of the past, I don't know, but we know don't. Is addictive, right, And that's what these companies are counting on. They need that to be the basis of their future. And then on the side of that, they're also looking at marijuana of course, but right now the focus is on nicotine products that are in a different form than a cigarette.

And when will we see this? So next month, Icos is going to launch in the US, and that's the catalyst for this merger of p m I and Altria. I think so because Altria would be sharing the profits on that so Philip Morris sells that in other parts of the world. In the US, Altria would be the ones selling it. So I think part of the motivation for merging now is Philip Morris won't have to split

those profits. They'll get all that margin, and also they'll get to take advantage of al Trea's cash flow and do things like dividends and buy backs. I think that's the basis for coming together now. Um, but again it's it's all about these new products that they're trying to not only have some growth and get new customers so to speak, but also change their image into something that is a little bit more wholesome seeming, right. And I think that's what they're doing, is the proof of growth

in other cities or nations in Europe and in Japan. Yes, but again it's it's just so small at this point, but I think that they're what they're trying to say is, you know, we're we're doing a really good job of converting cigarette smokers to these products. Whether that's a good thing or not. You know, that's another debate. But from the company's standpoint, they do see this as the future

and they're plowing a lot of money into it. And cigarettes still drive the bulk of their business, but you'll notice more and more they're going to be talking about these other products. Breathing. Le Chapelle writing with a wonderful density for Bloomberg opinion No smoking a cigarette Giants Reunion. This is Philip Morrison all three as they look to devices to change their future. Pausanian Tom Keene into the

markets and linking it into your future equity investment. We are thrilled to bringing Alicia Levin and she's been very good about not so much holding our hands in all this August turmoil, but actually cogently thinking about a plan forward. I just had a record low by three decimal points in German tenure thirty year US Italian under one percent. Italian tenure is dividend growth. The new coupon in the

short answer is yes. So the long end of the curve is telling you everywhere is that the market does not think that central banks are able to really rescue these economies. And so the only way you're going to get any return is going into the equity markets of the steady dividend growing pain company. So what do you do if and when price turns around? Paul? Do you know bonds can go lower? And that's what I hear. It's a m How do you manage you know, forget

about fancy talk equity, gamma, beta, delta. How do you manage across the kitchen table at home knowing someday price will go down in bonds? Well, that's true, when when this turn is going to be vicious, right, It's it's going to be a vicious term because every trade right now is into the long end of the bond market. So you've got to be well diversified on the credit side,

and on the sovereign debt side. You've got to go short end as well, and you've got to look at high quality investment grade credit as well to round out the fix income side. So you can't just be you just can't be in the sovereign debt market, all right. So we haven't inverted yield curve here in the US looking at the twos in ten years, where does that bring us in terms of the inflation? I'm in the recession discussion. This is actually a great question because it

goes so deep. So every person who comes on I'm sure you're hearing, is saying, well, the actually the inversion doesn't matter right now because the long end is being controlled by the global bond market, and I'm very sympathetic to that. The issue is whether, once the inversion happens, whether the FED is forced to action because it has

a causal effect on the economy. And I think the evidence is that it does actually at some point, not today, but at some point banks will be less likely to lend and so we'll have a further slowing of the economy. So I think the FED is forced to cut. So the Fed, you know, everybody's looking at the Fed. The cut again in part due to trade. We had a very news worthy opinion piece yesterday by bed Bill Dudley had sparked a lot of conversation. Do you think the

Fed to what extend? You think the Fed is looking at trade when it thinks about its next mover too. So I think that trade is intricately linked to what the Fed does next. And the basis points for September, which is essentially locked into the market right now, and the fact that Powell left open the possibility of further cuts this year is all due to the uncertainty created by trade. But as he said last week, the Fed actually it is not clear it can affect this at all.

All it can affect is sentiment and the cost of capital here in the US, and if it helps on the margins then it should do. So. I think that the Dudley piece yesterday was interesting, but in the end it creates more instability and conversation about you know, degrigating our our institutions. Frankly, with the way things were, it's not was not helpful to the stability of the market.

And just moments ago I should mention Ferdinando Giuliano outstanding in Europe for Bloomberg Opinion, just wrote a very thoughtful piece off the Dudley essay that just breaking right now. Paul. We we may get Fernando on Bloomberg surveillance this morning. Oh we have them next. Very good. That's just what a team, you know what I mean, you know, to go from a staff for twenty five out to people

and it's just amazing how that works. Paul. So, I mean, so does that suggest here, you know, kind of the uncertainty of trade, the uncertainty of the impact of the FED, that what do we do in the markets? Are kind of a tight range bound market and we just kind of wait for new news. I guess yes. So so our message right here to investors that we're in a we're in a trading range and it may not be tight, but we're in a trading range here through September through October.

We just had news out of the UK today that that the Prime Ministers is looking at suspending parliaments so we can get breaks it through. These are not coming times for the market. You should expect the market to go lower. I think there's a couple of interesting entry points and people look, you're looking at the twenty hundred level, and then if that breaks, probably, but there's clearly a lid here. It's hard, it's gonna be harder to move higher and easier to move lower. But I think you

have to be invested. I got one final question Alicia Levine with this bn y melon you can hear, of course in her voice or academic authority. You know Shingle from Brown You wandered by the University of Chicago for some parchment in school in pelo Alto as well, and you've really done a lot in the invest in business. Is Billions accurate the TV show Billions? When you watch Billions, are you like, you know Bobby x L Rod gets it right? I mean, is it even close to accurate?

The first season was brilliant. Then what happened? Then they lost their mojo? Thank you? They lost their mojo. But the first season was brilliant and the lingo of the traders was terrific. It's like in the Big Short, the way they talk. I go, that's normal, that's normal. The interesting thing about the third season, which I thought was lousy, is listening to the traders who are Generation X talk about not knowing who the other person is on the other side of the trade to pick up on phone,

used to pick up the phone. You had relationships with everybody, and they're like, I have no one to call. How am I going to get this trade off? I have no one to call? That was brilliant. That's in the last two days. It would furrow you, me and Harry Church what we've all gone through. That was the most important. That was I mean, Billions, Paul, is this is streaming? I mean, they need more billions to make streaming work right, and they need to spend billions and billions and billions

more to make that streaming work. So, Alicia Levine, thank you so much for joining Cheap Travis at B and y Melan getting our thoughts on the market here. Ferdinando Gilian Giuliano uh joins us now from Europe. I don't even know where you are, Ferdinando. Are you in Rome with Maria today or you someplace else we want to be Oh, that's good, you're in Milan. I'll take Milan,

you know that would be great. In essays, Dudley's political central Bank exists, and as you and John Fairroff said, it is the e c B. How political will Madam Leguard's e c B B? Well, I think she will be political, and I can tell you that man in Europe would love her to be very political and very effective and finally making sure that the European governments make that progress in the construction and completion of the monetary

Union that Europe has been missing for many years. So it's not just I think, an expectation, but it's also hoping that the ECB is political and your dance academic has essay with a lot of history involved. You go back where one of our listeners went this morning, which is to define moral hazard. From where you sit in Europe, is Chairman Powell and the FED redefining moral hazard as

they deal with an original president? Well, I think you know what, certainly Bill Dudley is is redefining moral hazard. The what what power is doing, I think is trying to you know, keep the you know, just keep the FED as independent as possible while without and I think that's very very tough with what, as you say, very regional president is doing. I think that the challenge in Europe was quite the opposite in a way. Here the

president is being too intrusive in Europe. Mario Dragon e c but didn't really have any political real political leader of Europe to speak um, you know, to speak to. I mean, obviously there was Chancellor angular America, but she's still the Chancellor of Germany. Um. The absence of a political leader made dragon is so political and luckily it

was effective. So Fernando, your countday is so timely because I think a lot of people here in the US are trying to understand what a what a more politicized FED might look like. So what's the history been in Europe with the e c B, And perhaps it's political bent a little bit and you know, still trying to wear that independence. Well. I think there are two sides

to it. One is with individual governments. I mean, in a number of cases, the c B has had to step in and either help banks with emergency liquidity or help governments by buying their government bonds. And in all these cases it's been asking for conditions, for guarantees that you know, all these money would not be wasted because the government and does something stupid with it or or

the bank is not solvent. And this happened in Ireland, in Italy, in Greece, and this is you know, this is a true an exchange between the central bank and the and the government. But that means that the central bank was being politically in a way. The second issue is about the the euro as a whole, which I don't think applies so much to the really to the US because likely the US is in a much better

place from this point of view. That has been pushing for greater Eurozone integration with some speeches and pressure on politicians, and some would say this is political because you know, why should the Central Bank promote a political project. But at the end of the day, you know, dc behas the euros and banks, and I think it's pretty normal that it promotes the euro Giuliani with US folks. He as an essay just out moments ago in the Bloomberg terminal, and we will get that out to you on Twitter

as we can. William Dudley's political central Bank exists and Mr Giuliano makes clear he believes it is Mario drug ECB for lander. While we have you on Bloomberg surveillance, give us a state of populism in Europe into the autumn of two thousand nineteen with the news in Italy but also in Eastern Europe. Give us a populism update. But I think it's not doing. It's not going great

for populism this year. I mean clearly in the UK we are what I think is the final battle between you know, the I would say, the British populist to our part of the lead campaign and you know, the mainstream establishment. And we see how that ends in the coming weeks. But see look at Italy, I mean the kind of turbo populist government as I defined it between the League and Five Star has failed. You know, the government has collapsed and now five Star looks to be,

you know, set to join a new government. But this would be a more mainstream government with the with the center left Democrats, and the markets are really liking it. Italian bonds, tenure bonds are now below one percent. But I think it is the first time ever. Um So, you know, look at France, Emmanuel mccron, very mainstreams having a very very good few months. In Germany alternative for Deutschland,

the ultra right party not doing very well. Um So I think you know, it's if you are, if you don't really like European populism, I think this is a pretty good, uh a few months for you. So Fernanda, you said you're in Milan and we are jealous for that. So just give us a sense of what the thinking is with this new government in Italy. Does it it does a you know, suggest any stabil greater level of

stability for Italian government and Tian economy. Well, I think short, probably yes, because I remember the League had a faction within the party which really wanted Italy out of the of the Euro and Mattel Salvini, the league lead League leader was you know, in a way promoting, you know, was campaigning on or very least flirting with the idea of Italy living the Euro. So the fact that he's out of government is certainly an element of stability, and

that's what investors are looking at celebrating. But remember this is a coalition of very strange bedfellows. It could it could be quite a left wing government. Some some fear and it's ald to be seen whether whether this would be stable. I mean, I wouldn't really bet on its stability long term. He writes a lot Republica in Italy. Ferdinando Giuliano writing an important essay off of William Dudley's work with Bloomberg Opinion Yesterday. Dudley's Political Central Bank exists.

It is a tour to force for Wall Street and the history and detail of the e CD. Thanks for listening to the Bloomberg's Banlast 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