Surveillance: Earnings Bar with Bitterly

exceptionally important single sentence of courage in her research. Note anytime the index has sold off by more than the three year future return has an average of forty Kristen, this is off the bounce. How do you know when to step in and go along? It's it's a really really hard decision, and we can understand why people are

naturally nervous given everything that's going on. But I think for those investors that are able to take a long term view, and three years isn't necessarily a long term view, the data is in your favor and and time it's certainly on your side. So exactly as you said, Tom, the three year forward return. Any time that we've seen the SMP five hundred sell off by more than twenty five percent has always been positive and has averaged a to Google return of five years. It's actually talk to

times on your side. There are buying opportunities here. Talk to us at City Group about the huge advantage you have. And I'm gonna pick on Jim Suva today, but there's Horrowits and the rest of them. You've got the security analysts talking day today today with the corporations. Now ban came out of Bank of America said business is good J and J is giving some form of decent forward guidance. What are you hearing from your research staff about corporations

are weathering this moment? Yeah, so we've been coming into Q three earnings and you will talking about this a little bit earlier. The bar has been revised down and said pretty low, so we could see some of those counter trend rallies on the back of it. But what are we watching and what are we listening for in earnings? All about the consumer? So obviously that was a key point in financial earnings, just listening to is the consumer strong?

Are they continuing to spend? I think there's a nuance here though, so as we see credit card balances increase, as we're looking at spending patterns. There's a big difference between nominal and real numbers here, and so inflation is impacting our consumers. They are impacting spending patterns, and so inflation benefits top line revenue growth. So we have to get down to those unit numbers and see whether they're spending on the same things and whether they're buying the

same quantity. And that's something that can flow through to earnings and put pressure in on Q four and going into as well. Christen, I'm still stuck on the first point here talking about history and not necessarily predicting the future, but being a guide for perhaps it is a good time to invest just based on how much stocks have gone down, And I do ask is this time different? I mean, does that give you enough conviction in its own right to go all in with risk if you

have a longer time horizon. So to be fair here, and so we are actually defensively positioned. We're fully invested, but defensively positioned in this market. We believe that these markets require patients, diversification and discipline, so we don't want investors all in cash, and so in our portfolios we're actually overweight fixed income. Ever since we saw. I mean the tenure right now at four percent for investors who are in cash, and you even look out at six

months te bills yielding close to four percent. We want to basically increase those yields and see opportunities and fixed income in investment, grade, in in government, in munis, and even in prefers where we see some opportunity as opposed to going long financial stocks. Getting that yield and preferreds of high single digits is something that's attractive and can combat some of the impacts of inflation. So how much are you going to the long end of the curve?

And I go there because a lot of people have been hesitant saying, yeah, perhaps skills are close to their peak, but not quite yet, because we have seen the whole curve shift up again and again again. It depends on the risk applicate of the investor. I would say the sweet spot right now, because we could continue to see some volatility is probably out about two to five years. And most of our investors are long individual bonds, so

that ability to be able to hold. And we have to remember that even just two years ago we had forty of the world's government dead was negative yielding so seeing some of these yields out five years pit mid single digits and slightly more is an area where we're comfortable and we're comfortable holding and withstanding some of that mark to market movement. Yeah, but in the bills portfolio right now, I think of the great Margie Patella on this.

How do you judge between forget about sixty theory, it's all gone down in flames. How do you judge between bonds and equities? Our equity has given your enthusiasm the new bond. Yeah, so I think this is why we're actually pretty balanced, are in pretty defensive. So we do think that we are going to see pe grades. We do think that we are going to see peak inflation. But what you're going to see dominate over the next couple of months is volatility, and so you will see

these type of counter trend rallies. Like we mentioned. If you are playing that long game, there are certainly opportunities, But if you're someone who's looking right at the short term, what you want to have is that balance. Because Q four so Q four in U S equities going back to Night of the Time has generated positive returns and an average of four point four percent it is the best quarter for US equities of any quarter throughout the year if we have some surprises and earnings as well.

But where do you want to be positioned there? You want to be positioned in dividend growers. You want to be positioned in sectors that will be able to withstand the recession. This is why you hear a lot about healthcare. Health Care is a sector that's been able to consistently grow earnings the past four recessions at a clip. THEMA eight percent. Consumer staples is supposed to five percent, So you're not searching too much there, but you still have

exclosure to equities. What about high quality big tech? I mean we're coming into that season. I think it's October is when we get Apple learn is what about big tech? So high quality big tex you were talking about this thrilier. We have to look at the international exposure, We have to look at at the pressure in terms of just how strong the dollar is. Overall. That being said, in technology, there's a huge difference between profitable tech and unprofitable tech.

When we think of unprofitable tech, I like to think of that as a call option on an unknown future. So in long term secular bowl markets and low interest rate environments that call option on an unknown future is much more palatable than in this type of market conditions.

So even when I was talking about the dividend growers, these types of companies exist within technology as well, and you could make the argument that a lot of the profitable tech we're going to be looking for those signs of not only margin compression, but we're also going to be looking for signs of durable demand. Which of these companies continue to have durable demand, whether that's a partner that's in software. Christen, awesome to hear from you, as

always Christin Piddley that a city Global West Management. Let us continue right now, and we do so and celebrate the holiday season. We begin Thanksgiving with Jerome Schneider, Managing Director. I had a short term portfolio management an adviser and Thanksgiving dinner at Pimco and here on Bloomberg Surveillance as well. How's your year been? Short term paper is a place to hide, right, It's busy, It's quite busy, and absolutely

short term paper is a place to hide. I think the nuances a short term paper really are with the story is about for two thousand twenty two in actually two thousand twenty three, folks, as you've highlighted before is cash is not necessarily as democratic as people would like to think. And well cash is king the crown jewel of how you want to think about it is really more nuanced than that. Yes, bank deposits are some cases

slowly moving. Higher T bills may offer some attraction, but the reality is they're treating act quite rich in some cases thirty to fifty basis points through benchmark rates, meaning what the FED is expected to be at. So there's other value if you actually want to be more appropriately highlighting and thinking where interest rates should be headed based

upon Fed expectation. PIMCO meeting that you have out there, the tenant meeting, whatever the legendary meeting is, what do you say about the short term space and dollar ill liquidity worldwide? There was no other theme, Well, there's there's a reality of what we're thinking about is that we are facing a change where people need to digest the changing cost of capital, and the notion of liquidity is

one that has been more prolific. People are concerned about liquidity has been sort of a call word, if you will, but it means very different things to very different people, and I think that's the consequence of when we want to think about the marketplace. You have macro economic liquidity,

you have liquidity concerns driven to quantitative tightening. You have haircut concerns and marginal requirement concerns, which we've clearly it's seen within England, and more importantly as the as the economy progresses to more of a state of concerns about growth, then we're gonna see other tightening, ratchets of illiquidity and haircuts. Those are the liquidity fact thats we really need to

be paying attention to. So from a starting place at PIMCO and everybody else, we have relatively judicious high amounts of liquidity, preventative liquidity, defensive liquidity. But the key then comes into how do you use it? How do you think about it opportunistically given the uncertain outcome, given the growth environment, given the slow GDP but perhaps shallow but longer recession that we think at PIMCO, And then ultimately how do we then extrapolate that to value in the future.

So it's all about really how does liquidity translate to volatility within the marketplace and how do investors absorb that volatility properly? The problem for a lot of people in the market right natural roum, as you know, is when you expect that to be liquidity in an act of class where there should be liquidity and then there is not. Right. Can you talk to us about what's happening in the

treasury market? We know that last week the Treasury reached out to a group of individual is to try to he has this connection with a group of individuals in the market. They spake to they try and get feedback about what's going gone. One thing they asked about was whether they should buy back certain securities to improve the

liquidity and the functioning of the market. What do you say back to that there's there's This has actually been top of mind, not just simply over the past few months, and we published a paper at PINCO sort of highlighting this, suggesting some all to all trading and actually elicited some

pretty positive constructive dialogue within the marketplace. That's a function aspect of where you want to think about where the market and how the market is digesting actual functional, high quality assets is a concern, but it's also an opportunity for investors those investors they can really think about how to maneuver around these higher cost of capital and more importantly,

the opportunity sets because of the wider bit offers. So what I would suggest is, yes, it's a transformation from what we've been used to over the past one to two decades. And it is a concern when you think about some of the curtailments that you have more regulatory and sort of functional framework, But as an active manager, you're going to incorporate it and find opportunities to incorporate it.

And it just might simply mean that, yes, there's more volatile volatility, but you're gonna have to be more convicted and have longer holding periods. So there are two different things here. There's one about the treasury possibly buying back debt, and then there's investors acting as liquidity providers and stepping

in and the all to all and disintermediating banks. Is that what you're saying that if the banks were not necessarily the ones that were there, and you had a platform where you could really make markets in real time, that that would possibly be a more effective way providing liquidity to this market. Well, I think liquidity in general

isn't necessarily a democratic process. And so when you think about it, there's different layers of liquidity within the marketplace, and we're suggesting is you have more degrees of freedom than maybe perhaps that's better for the market liquidity as you go for it. It doesn't necessarily mean that people have a view or a more constructive you are a

less CONSTRUCTI view of where the market is headed. The market is the market, but when we think about it, that broader based landscape is we're really trying to head in that regard. I mean, while the Bank of America Fund Manager survey showed that investors are holding the highest cash piles going back to two thousand and one, and we hear that from everyone. You know, cash is your friend. You want to be liquid, you want to be nimble.

Is your experience, And it's just flooding in that people are coming to you and basically just saying, please give us anything you can to give us a sense of what our income could be, how to be safe, and you're sort of overwhelmed or is it not really the case?

You know? Where the problem is LESA is that people are focused on looking and driving in the rear view mirror and the reality is that as you're thinking about where it is to come, they're so focused on what has happened in the past one to two quarters they don't necessarily have the ability to look out the front window and see the opportunity set that perhaps that cash and more importantly fixed income provides in this landscape. One

of the concerns that you have is obviously growth. One of the concerns you have is sort of does the risk parity element of having interest rate exposure duration offset some credit risk taking and broader risk taking with inequity markets, And maybe those correlations don't hold at this moment, but if they do re emerge, then there's some different opportunity sets.

And the higher, the higher rate of environment we're finding in right now is actually the setting of the table or something that's very different than we had for the past few years, in decades. So don't keep looking in the review mirror. Ultimately, in that review mirror is not just two quarters, it's a decade's worth of zero rights negative rights QA. When I hear you talk and I get the sense that you think this is something that's going to hang around, well just one year, twelve months,

that this is something we need to adjust to. It's going to be unlikely that we get back to a zero rate level for you know, in a flat yolk curve like we've been witnessing. Is a two year note at twenty five basis points seems to be something that's out in the past. But what I do think is going to happen is that when you see where we are at least for the next one to two years, a higher inflationary print. When you're a PC that might level out about three point five percent closer to two percent.

That means front and rates are probably going to be in this vicinity for some period of time, and investors

should be comfortable with that. In that notion obviously has onset effects of what happens with equity markets, risk taking, and things like that, but fundamentally, this is a higher rate level and investors need to think about the value of fixed income in this environment, not just because of higher rates, but because of its complementary effects to total portfolio alt Well, that's where I wanted to go to to short term, guy, let's go we could long term.

Does the actually assumption shift we've been going from eight percent to six percent? Good news? In terms of cash imputed into plans. Are we going the other way now where we're gonna have a higher actuarial assumption of our retirement plans? Yeah, Tom. Ultimately, investors are gonna look for different sources of how to produce total return. What we've focused on is declining interest rates happened over the previous three decades with simply that lower rates spread on higher

capital appreciation opportunities. That calculus has fundamentally changed, and so the total return composition is not just on capital appreciation. It's on the ability to carry and earn income with us through dividend income or income from bonds in the traditional sense. And that is quite honestly one of the things that investors who are maybe new to the markets or the past decades so need to be thinking about.

So a lot of factors are putting us back into a more traditional nineteen seventies, eighties and early nineties mindset, not only how to trade markets from a liquid perspective, but also how to think about constructing portfolios. When was the last time we sat around the table together? Isn't this nice? It's going to see? It was more and more in town for the Yankees, t k no, no, no, just just happened to the Yankees are playing that he's in town. Total coincidence. Okay, I'm sorry to accuse you

for being in town for the Yankees. I'm here to give tricky advice. Of course, Jo Schnyder and Pimcoke great to see it. Let's talk about the raped market. We can talk about QT, and let's talk about Sterling. We'll do that with Kit Juke's chief FX strategistics sock Gen. Kit help me out here. So when a report that QT gets delayed, Sterling climbs to session highs through one fourteen.

On the pushback from the Bank of England, sterling falls to session those Kit am I to believe that QT is somehow sterling negative if and delaying QUT is somehow sterling positive based on a price action, That's what it's telling me. What do you make of that? I think the price actually tells you. By the time you've had two conflicting messages within one morning, the second one coming at the start of a guilt auction, everybody's looking at the UK and said, please, please, please, can you get

the messaging right to us? We are all confused because you know what, what we need for the currency, what we need for the market, is for the volatility to go away, for everything to calm down, and to put this kind of period of massive uncertainty behind us. So contradictory reports just don't help in that regard at this point in time. I mean, the most confusing thing of all.

Next would be and that, although they're not planning on delaying the start of QUT, if they go on and do it anyway because of the volatility and the guilt market at some point in the next couple of weeks, and then we'll then we're full circle. I thought you maybe some people should say less. I thought, you know, today was really lovely and it was very indeterminate. It was like, we need to wait, we need to wait. Now. What what do you do with a straw dollar reality,

given the unsettled nous of your note? Can you go the other way and call finally week dollar or do you just sit here? I wish I could, But that's why I think that what we do is we get stuck with less volatility. I mean, you know that there are two problems with with looking for a week dollar. One is you just have to embrace the idea that we're going to have the softest of soft landings in the United States and everything's going to be fine and lovely,

and the equity bulls are right. And the difficulty with that is if the economy doesn't slow, they'll they'll hike more, not less, and we're going to get a very very inverted curve by Christmas at this rate. So that that's the first tip, and the second one, frankly is still Russia Ukraine. The whole problem that we have out there that how how do I turn around in Europe and say I want to sell the dollar? Shall I buy? Shall I buy the pound? Shall I buy the euro?

When I'm getting newspaper reports about Yeah, if we have cold days in the middle of winter in January February, you're gonna have to light slow going to go out um that that you know, have we priced that in properly yet? I'm not sure? So it could We could get stuck here, I guess that's the that's the end conclusion of that until we get the next trend, and the next trend might be kicked off by the next

leg up. Inten you not just quickly. Jordan Rochester resign yesterday of Nomura, and he was talking about how, yeah, central banks are important, but really it's about the economic trajectory and right now, more of an austerity kind of approach from fiscal policymakers in the UK will lead to a deeper recession and that means a more negative outcome for the pound. Is that the kind of rash now that you think is what you should be following? How

much is the economy really the main driver here? I think the economy becomes one once we start focusing on the policy because it's not as important and the economy is heading into a recession that could last a long time.

And yes, to the extent of that, you know that there's a sort of a wisdom out there that says what you need to do when your financial position as a country, your fiscal positions poor, is tighten fiscal policy really aggressively, and you know in the hope that will improve it as opposed to get yourself any chance of

growing out of your fiscal problems. Then then we start looking more like Japan every second, and so you know that that's pretty scary for a country like the UK with the current account deficit and for sterling so yeah, it's not a great picture. Um. I think the only piece about Sterling right now is you know we're priced for a lot of bad news. Sterling can be held down here. I don't know how much further it can

fall unless something really negative happens. What I still can't see is the policies that would let the economy do better than expected and people start looking around and saying, hey, you know this thing a cheap asset that I want to buy. Final question, can Arsenal win the league? No, it's flat out no. Are you saying no because you're worried that if you say yes, it won't happen. I'm saying no because Manchester City of the best side in

that lead. Whatever happened at the weekend, thank you. We need to get an update on entertainment always. We can do this with Krackten and Michael Nathanson of Moffat Nathan Center division of SVB, and we're thrilled at the well caught Nathanson could join us at this morning. Michael, I'm gonna digress here to when the thund you heard was me falling off my chair is Mr Murdoch wants to piece umpty Dumpty back together again. What did you think when you saw young Murdoch said, let's bring it back

together again. Yeah, that was not the other playbook we wanted to see. We have a buying Fox. Robert Fisherman covers it are viewing foxes. It's the it's a pure play on sports and news, which we think is the glue of the bundle. And they're not wasting their money fighting streaming wars. Right Tom's a very clean story. We thought at some point they would sell Fox to private

equity or another another media company. So here, I think what the narrative is from here is the company that the company is gonna need approved from the majority of the minorities. And I don't think that's coming because I think our clients we talked to who own Box are not happy with this decision. We'll see, we'll see what comes next. There's probably a second a second leg of

the story right there. Put them together and then do something with those assets, which we're waiting to hear more from the Murdocks of what's their intention after they combined these two companies. Just because of the calendar, I've got to go to Netflix. They're teetering on three legs. Someone even say a two legged table is well, what will you listen for from Netflix today? Okay, so they're introducing

an advertising tier for six in the fourth quarter. What I want to hear is why are they so confident that that there won't be as spin down as they say in the UK from a higher price point down to this new tier, which would be very dilutive in

the near term for for for revenue for users. So I'd like to hear why they're so confident that this will not be in the near term very diluted of strategy, right, that's to us, you know, given the drop, their dropping price and as as we talked earlier, you know, they don't have the same grip on users as they once did. I think there's a risk that there's a spin down here. Michael.

How much are you looking at the potential for some of these media Darling's the online streaming services, certainly during the pandemic at least being acquired by the likes of Walmart, being acquired by the likes of Apple, and this has been something increasingly rumored about. Yeah, we're The challenge we have is some of these companies are family held. You know Tom mentioned the Murdochs. The red Stones control Paramount Global, NBCU is controlled by the Roberts family. There has to

be capitulation, which we don't see yet. Right everyone thinks they have the right strategy of bleeding linear and investing in streaming. At some point, we think in the next twelve months twenty four months, there will be capitulation. Your companies will realize that they have the wrong st agy. They don't have the balance sheet to make us pivot there under undersized, and maybe there'll be some M and A. But you know that's not our working thesis right now.

Right there has to be some level of realization that these strategies are just not going to work. Right, Like, you have four or five large players in streaming with much better positions. So the people who are lagging have to have to get out, and I'm much where they're ready to do that right now. So how do you

think the ones that need to get out? Actually, yeah, well you would say that Peacock Paramount there has to be some combination that would be Comcast and Paramount level that they've done well within the US, but they're really not They're not going to scale to that higher level with a profitable business model, they're gonna need to find somebody to combine combined streaming assets. So it happens to Warner's w B d um. You know, like the market

is really worried about the debt load there. There's a true asset value of that company, but the debtload is scaring people away. So you would say those three companies need to figure out some path forward, maybe consolidation, to get some some more scale. Michael, do you think that Disney is making the cable package the cable bundle all over again with Hulo? Is that where that's coming They're trying to write so they have Disney plus hul plus

Hulu and ESPN plus you're John, are you know? Our concern is the cable bundle is the best product we've ever seen or from from an economic standpoint. Right, everyone's paying the same amount of money, no one's watching the same amount of channels. You have to be very very careful not to further disrupt that bundle. I think Disney things long term. We have the goods that we can replicate the product, but the economics of that new offering

are going to be so below them. What we're coming from, and I think it'd be really, really careful, but they have the pieces in place. I'm just hoping that the speed to change is slower by them. Maybe what they want to do. Michael, we didn't have you on for all this chet chat Yankees Cleveland cut to the chase. Tom the guy behind me. I wish he was pitching tonight, right or today I'm worried about I'm worried about the bullpen is as everyone is right, it's not the bullpen

of number forty two behind me. He's satisfied with that response. I am radio. It was great. Mr rivera behind as well. Michael. Thank you. Michael Knightthensen of Moffatt nine and Sin. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg