Surveillance: Expect Others to Follow Apple, Campling Says

on this market looking ahead to it all. I'm really pleased to say David Kelly joins US now JP Morgan Aid Management, Chief Global Strategist. David, fantastic to have you with us. Talked to me about the message that you have for clients this Tuesday morning. Well, yeah, I think the messages you've You've got to look at the sort of different paths that markets and the economy have taken. I think we've gotten a little complacent. You know, this is eleven years into an expansion, not much it seemed

to go on. So the markets keep on drifting high iron in terms of equity markets, rates keep on drifting lower. But the main story is really the one that you and Tom have been talking about, which is there are plenty of signs of the global economies slowing down. Very weak numbers out of Japan, week numbers out of Europe and China obviously in some trouble here. And in the US we're looking at about one percent growth maybe even less for the first quarter, and that brings US down

to about one point seven percent year over year. So there is this slowdown. We're not seeing recession yet, but given these slowdown and the troubles in the in the global economy, it does seem like the market is a little too exuberant here. Let's take the analysis and take it a step further. What's the capital annocation decision? What

are the decisions for captain allocation that supplement your worldview? Well, I you really if you start with the notion that valuations have just become a little unhinged from each other. What's expense if your bonds expensive? US equities are a bit expensive, what's cheap um? Global equities are cheap um? And so I've been a little overweight global equity, international equities well to the US notwithstanding their short term problems.

And then also with in the US market, um, if you look at the things like utilities and reads above twenty times earnings. To look at financials damage about thirteen times earnings. So there are pockets of value within the US market, but generally speaking, I'd look carefully at evaluations, and this is a kind of market in which I would want to make sure I load up on the on the cheap stuff and make sure I'm not overweight

the expense of stuff. And a profit warning from Apple twelve months ago and then the stock double David, The problem is going into that profit warning, the stock was down by about a third or one percent from the high. This is a stock that's near all time highs as the company issues of revenue warning. Just in terms of how we set up now versus twelve months ago, it

just feels like night and day. David. Yeah, well, and I think the key is if you're a long term investor, and what I mean is you're not going to be spending the money in the next four or five six years, You've got to stop trying to make a timing decision.

The real question is never when it is what and you and you just are not going to be able to time the way markets behave in terms of bad news good news, I mean market market is gonna work in very perverse ways in the short run, but in the long run, the economy does really matter, and the long run is about earnings and interest rates, and so you just go to you know, try and to take

that long term. You recognize what happens is you have this this spread and evaluation, somethings get very cheap, something to get very expensive, and then you have something some sort of shock, and everybody has to pay attention again. And when they pay attention, the stuff that's most expensive tends to get hit the hardest. Um. So, you know, I would not try to time this very much, but just recognize there's some areas of the market, some areas

of global markets which are cheaper than others. Let's get a little more specific. In the Bank of America Maryland February fund manager survey that came out today, over half of those who responded said that the most crowded trade was the long US tech growth stocks, but they also said that growth stocks are expected to outperform value talks over the next twelve months. Attention here, they're overcrowded, yet

will continue to outperform. Do you view this as an area that is particularly expensive and worth perhaps lightning up on Well, yeah, I think that that's a fair fair point. And and the key is that if you have not rebalanced, you're probably overweight anyway. And that's really the most important thing to to look at because of the outperforms of

large cap growth stocks. But as of you know, the end of last week, the large cap growth sector overall broad sector was about thirty percent above its average PE ratio of the last twenty years. Small cap value is about five below UM. So you know, I think this is a time if you can to move a little bit of money out of large cup growth into small cap value to try to, you know, be a little

bit more normal in what is increasingly abnormal market. David ten years assume means it's thirty year bond with handle goal is going to edge up to six d here in two cups of coffee? Is well? Is the market getting out front of the FED? Or does the FED have control of the situation where they can wait for the March meeting and the meetings after that decide to cut rates. I don't really think this is about the FED, or should be about the FED, because the said there's

really no point in the FED cutting rates. If the FED cuts raised in March um, it is not going to estimate any economic growth and will simply leave them with less ammunition if we actually face a recession. I don't see a recession right now. But I think the bigger point is money is funneling towards richer and richer Americans, and you know, the gap between rich and poor is increasing. What that's doing is it's leaving a huge fund of money to be invested in market. So you know, the

average person might spend some money. Richer people tend to invest money, and that's pushing down yields, pushing up stock prices, and I think, what's really go You know what's fascinating to me. It's not about inflation or even the economy. It is that there's so much money pushing into the bond market that you know, for example, tip seals are now running at about ten basis points negative on the ten year tip and that's that's crazy. You're locking in

negative real return for ten years. This is really important. Back up David and explain that's a little I think jargon laced for our listeners, including me. The tips yield, what's the tips yield? And what's it mean that it's a negative by a little teen sweens amount? Well, what what it is? That these are treasury inflation protective securities? So what the government does. They give you a yield and then they say, but we'll give you whatever inflation is,

so basically takes inflation out of the picture. This is what you get after inflation. But the point is that number has now turned negative. So so essentially they say, whatever inflation turns out to be your we will reward you for that. But apart from that we will give you we will give you actually a negative return. Now, well you know, I mean think about it when when you save money, the ideas you save money, you're disciplined enough to save because you want to have eleven apples

in the year instead of ten apples. What this says is we'll give you nine apples in a year. And people are still willing to do that. That's called German negative rights. David Kelly, thank you so much. That JP right now an Apple, we've a show of of of Switzerland. Neil Campling joins us right now, uh with a the brighter thematic view on Apple. Neil, how do you take Apple over to other tech companies in China. Is that a legitimate exercise or is it just too much guessing? Well?

I think for one thing, Apple is the first major who have explicitly come out where they're warning for the Q one to say they will be impacted, even though they haven't actually given us the quantifiable of how big the impact is, and we would expect many others to to follow. Um. You know, there are the supply chain risks or Apple itself given an Apple is twelve of

global semiconductor demand purchases. There is also the fact that if we look at the SMP five hundred in totality, to date, we've had earnings calls from three hundred and sixty four companies of the SMP five hundred. Of those, only thirty four have said that there will be an impact from coronavirus in their guidance or modified guidance in

some capacity due to the virus. So the vast majority have not mentioned the virus, either because they just do not know yet or in a few instances because there won't be an impact because perhaps there are a utility company. But the majority, i think it's fair to say, just don't yet know how big the impact will be. But this is an ongoing, dynamic situation which is still to play out, I think for many companies and near I've been surprised that for many companies we haven't seen the

kind of news that was dropped by Apple yesterday. But I guess to your point, they just can't get their hands around this year. What's been amazing for many of us reading through the south Side research, No, it's getting our hands around the analyst community and their views is the T word just keeps coming up again and again and again. Transitory, temporary, transitory, temporary, nil. At what point do you look at things and say, perhaps this one

be as transitory as some people think. I think that's when we have to start thinking that if you think that in China specifically, given the size of the economy, there is effectively no no red envelope season for this year. UM. There Now we're seeing some data such as the germanw data this morning, UM, such as the Beer of a Fun manager surveys. They're all now being impacted in terms

of lower confidence. We are seeing issues in terms of hitting European confidence and that the risk, I think is that there won't be this snap back potentially in Q two because of this kind of hangover effect that affects many industries and it's not just specific to pure Chinese demand. Um so the risks of five G smartphones in the second half of the year could be impacted. Travel, tourism, retail is obviously having having the bront of some issues

as well. If we've heard from we've heard from the likes of under Armor last week and Ralph Lauren as well, trying to give some sort of qualification around how risky this could be going forward. Now if you think that we haven't impacted that yet, but it will be an issue. Neil, with all your experience at mirror buz securities as you look at the broader effects and implications in response to the coronavirus and wondering what you're seeing in some of

the emerging Asian economies. A lot of people saying that China is responding with more stimulus, that they'll be able to stave off some of the economic slowdown, some of these other economies less prepared to do. So what type of demand cannibalization, what kind of loss in demand are we going to see from those nations. It's a great question. I think that we're already I'm seeing, for example, visions

down to Singapore GDP. For example, we've had South Korea UM politicians coming out just this morning and talking about a risk of an existential crisis is not controlled. UM. You know you're seeing impacts on auto vendors in South Korea. You would naturally expect some fall out into other countries such as Vietnam. So supply chain that exists around China is essential for the whole of the UH, the economic region.

What your study or and they say, respect your guestimate of the elasticity of cutting expenses for industrial and tech and TMT, can they do they have the wiggle room to cut cross fast given revenue prospects that are slower. I think what we generally generally see if you're if you're a company that's reliant on industrial or your you're

tech heavy's very difficult to reduce that. If you think of if you're a capacity utilization focused semiconduct to fab, you might not need the people that you would need a hon highst iPhone city, but you have to keep those fabs at plus capacity utilization rates otherwise your margins get negatively impacted very quickly and it's also very slow to to increase capacity and once it's been cut, so it's often not something you can just dial down for

two weeks and not have an impact thereafter. And I'd like to turn to something else just to wrap things up. And that's the Trump administer ration, according to several reports, considering new restrictions on exports to kind of get technology into China. This is something that over the last month or so has been increasing the overlook because of what has been happening with the coronavirus. How closely are looking

at those kind of moves potentially coming up this year? Neil, I think it's it's something which we described as an ongoing I P war between China and the U S which is very concerning for supply chains. For one thing, I think that we've had obviously the blacklisting of Harway last year, but actually what what it ended up happening was that Hallway just supply got components supplies from other countries outside of the US and displacing the US component companies.

So the US is now looking at other tactics. If you basically banned equipment being shipped out to China and not giving those licenses. It has rumsfications for for many

companies around the world. And I think basically what is happening here is we have a superpower battle to which which superpower nation becomes the lead for five G technologies because many reports suggestive fourteen trillion dollars of economic gains potential between now and twenties thirty five from five G and that I think is the heart of what's going

on in this battle. A huge, huge issue right now between the United States and China and Europe Toime Europe, funny At somebody stuck somewhere in between, and Prime Minister Johnson maybe more in between than the others in between, you know, I mean his trip is canceled or somebody's trip is canceled. I haven't seen that. Yeah, I think we saw that over the weekend. He's not getting along with the President of the United States. Right now, we're going to touch on the politics story for a moment.

Is of course reigned supreme. This morning we had two poles, Emerist Paul More of a national poll in the Nevada and South Carolina and then a month university pol which was very specifically on Virginia as well, a land America has been very good to join us from Brookings. She's

a senior fellow. There was some important books on presidents. Elena, I believe we have a debate and our Kevin SURREALI would suggested debate will be contentious, raucous, particularly if Mr Bloomberg uh shows up and is part of that debate as well. How does a grizzled pro like you look at one of these debates? What do you look for that we miss? Well? I think what you look for is who is going to have the greatest effect on

the upcoming contest. So it's not necessarily who quote wins the evening, but what the momentum is coming out of the debate into the contest, because we are now in the real thing. So for instance, in the New Hampshire debate a couple of weeks ago, we saw a stellar performance by Senator Amy Globachar and that translated immediately into support from uncommitted, previously uncommitted voters in New Hampshire. And your study of these elections, are there too many candidates

for the debate tomorrow? Like like you should somebody fall on the sword here before the debate to clear it up for the either the liberals or the moderates. Well, actually the field is cut down considerably for this debate.

It's a much smaller field than we have had, and it's a very interesting field because we have two strong left of center candidates, especially senator standards, And of course the introduction of Michael Bloomberg into this mix is going to really shake things up, and we will see if he has actual voter appeal when he's on his own as opposed to in a package, um, you know, setting like a TV commercial. So when you mentioned Mike, so let's talk about him. The found a majority onder of Bloomberg.

I'll pay the parent company of Bloomberg News. As we've seen in the previous debates, if you make a search in the polls, you'll become the focus of attention. Happen to Mattie put a judge just a couple of weeks back, and most people assume it what happened to Mr Bloomberg this coming Wednesday? And then how willing will they be to make that pivot to shopping that shopping that sword,

so to speak, and aim at Mr Bloomberg himself. Well, that's going to be very interesting because I think that We have a little bit of precedent that in that in Tom stire Um, people are reluctant to be too mean to these front running billionaires because in fact stire and Bloomberg have been very generous with their money all the way across the board to the Democrats. So a Democratic uh candidate up there, on the one hand, would like to take down Michael Bloomberg a couple of notches.

On the other hand, doesn't want to make them too mad, because we, the we and the Democrats, everybody needs his money going into the fall. There's also a question about how much people are going to be looking for some sort of message which is being given by the pot pulists versus the electability argument that the Canada could actually

beat President Trump in an election. How much do you think where where do you think the Democratic Party is tipping at this point in terms of the importance of both of those things, a sort of driving message versus just beating Trump. Well, I think it's still mostly on the beating Trump page. However, Bernie Sanders has a very very coherent message. It's been a constant message and he

has a very devoted core in the Democratic Party. What we're going to see probably not um in Nevada or South Carolina, at least for the first time on Super Tuesday. Is whether or not he can expand his base. Some people say it is both the ceiling um and the floor. Well, where are you on that? I mean, that was my question. You just answer my question. But but where are you on that? Is there any evidence that the senator from

Vermont can quote unquot would expand his base? Um? There's a little bit of evidence absolutely, um, Um, but not much in New Hampshire. He um seems to have done not really as well as he did four years ago. On the other hand, Um, he is moving slightly among African American voters, which is something he hasn't done in the past. So there's a little bit of evidence that he's getting some traction beyond his traditional base. Ellen, thank

you so much. Ellenne kimberk with Brookings this morning in Harvard joining us here and particularly where they're important books on presidential history as well. I'm Mark Paul swinging slide into our esteem guest. Michael Holland has been so entrenched in our equity cadence are equity discourse for decades that we forget his accomplishments not only with Oppenheimer Company years ago in a small shop called black Stone, but his worked for his Harvard uh College and also the Winston

Churchill Foundation of the United States. This is not Michael Holland's first rodeo, is it, Tom, No, it's not his first great bullmarket. Michael Holland, Chairman of Holland and Company. Thanks so much for joining us. Michael. So, you know, as we step back here and look at the market, the performance we had in twenty nineteen, the uh, you know, pretty solid start here to you know, to the extent that there are some concerns out there. One of them

is the concentration of the performance. And you know, roughly a handful of names, some some tech names that we all know. The Amazons are, the Microsoft's are the Apples of the world. How concerned are you about that aspect of the market's overall performance. Well, concerned, Paul, is a word. I would just move back from that and say, mindful that when these things get crazed. And I was born

into the business. Tom knows in something called the nifty fifty or a handful of stocks back in the seventies was doing what we're seeing today. But it's it's different in that the valuations of the big names, for the Microsoft's and the Apples, the valuations are not as egrageous as they were back then. Some friends have recently asked me, as they want to do, uh, when would you sell all of your stocks, which is a variation on some of the things Tom King has asked me over the years.

And I would sell all my stocks if they became egrageously priced, as I observed pain Fleet in the nine seventies when I broke into the business, because the crash of those nifty fifty stocks was was breathtaking, and how much capital was was was destroyed, And so I think at this point it's it's something to be mindful of.

I would actually say, you've actually actually asked a great question, because the coronavirus may actually cause it has the possibility of causing something like that to happen again if the world liquidity spigots go wide open sometime in the next six or twelve months. But but what's so interesting, Michael, is the backdrop are stunningly negative real yields and in some places in the world truenominal yields negative thirty year

bond with the handle three cups of coffee. Ago is almost a negative yield that we saw in oh eight oh nine. What is that signal to you to see bond prices bid up and yields ever lower. Uh, it's it's something that we've never seen in our lifetimes in business. It makes all the economics of minds go go crazy when they talk about how do you how do you get real pricing in all of the world's markets when

you have negative yields? There's a there's just a an inherent contradiction and and all of this so that risk free rates of return no longer have any meaning. So what But Tom, it's it's actually interesting because you and I hope are not talking about this a year from now.

But it's possible that because of what you just described, as well as uh, the possibility that we have a Spiccot opening in terms of even further liquidity around the world, that we could get to crazy evaluations once again, which causes then we know what the other side of that is. But in the meantime, so the risk is in both directions, I think always, but I think now we have a little more risk in the other direction, which would be

upward rather than onward. It's not a good time. Euro breaking down one oh seven nine, d X y stronger d X yes, dollar strength. Yeah, Michael, you know, it's interesting, were just following up on Tom's you know question about you know, the bond market. You're just looking at our commodity screen here on the Bloomberg terminal. You look at the energy down, double digit, metals down, mid single digits,

aggs down, you know, read on the screen. So the commodity market is clearly saying, hey, maybe there's some slowing global growth. Maybe the coronavirus here is a big issue for global growth. The equity markets not so much. And again, is that just kind of go back to that argument of the Fed and central banks around the world keeping liquidity in the marketplace. Yes, and yes, and and and Paull to your to your point. Uh the inflation, That inflation has been a word that has been around Bloomberg

a lot recently in the different formats and media. But uh, and and the inflation today is what Tom just talked about. With the bond markets. The prices there are stratospheric. Uh so knows bleed time in terms of prices and as he says, negative yields. So those financial assets, and then you have the stock market, you have the the facebooks and the test list and so on, so you have you have all of these things going on simultaneously with

with the commodities marketing. There's no there's no inflation of that kind of thing to be worried about with gold, etcetera. On the other hand, you have inflation in the asset prices of financial assets, and right now I don't think it's as worrisome as your original question. Uh positive. But on the one hand, on the other hand, that's what I'm watching right now. We run out of time. Michael Holland, thank you as so much. I got about ten more

questions and we'll continue with him another time. Mr Holland, Holland Company, 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.