Surveillance: Expect Volatility, Bitterly Says

Because we are no longer at the beginning of this cycle. Leadership becomes less clear at this time in the cycle, and while the leadership will narrow, it can also be quite shoppy. Let's get to Christine Bitterly, City Regional head of Investments for North America's Christy, let's start there. Why should we expect volatility? So when we look at any cycle, right when you're you're looking at the beginning of a cycle,

that's where you see the strongest rallies. And we've see in that over the past twelve months, we've seen essentially everything moving up and and there's been periods of different leadership, very clear periods of whether it was growth versus value

COVID defenses versus COVID cyclicals. But now the leadership isn't quite clear, and so one of the things that has investors very, very nervous and why we're expecting volatility is that realized volatility in US equity markets are at the lowest end of the twenty year range, in the single digits. And you can see this through the market action that

we've seen. We've not had one pullback of five per cent or more in one This has only happened twice since nineteen and well, we've had a couple of pullbacks of about three percent, they've been bought very very quickly, and so I think this has a lot of investors wondering, Okay, well we actually see realize volatility rise, and will that put us into what is actually a pretty normal equity market of a couple of pullbacks of five per cent or more and even up to one of ten percent.

But Kristen, is this the same equity market as ten thirty years ago? And I'm looking at the dominance of the big names, I'm looking at the composition that has actually performed very differently depending on which sector of the market you're looking at. I mean, can we get a broad based five percent draw down given how much money

and given how selective people are with respect to sector selection. Yeah, it's a great point, right when we're looking at the rally that we've seen even year to date, there has been a lot of breakdown in correlation so up until even recently, right the under performance of small caps when you look at what we went through with with the delta variant, almost like a mini kind of what we went through last year in terms of tech coming out ahead as opposed to value really dominating the first on

half of the year. I think what the market is going to differentiate going forward, and this is where we're allocating in our portfolios, is to quality. So this becomes much more a conversation around those companies with strong balance sheets that have the ability to grow their earnings, have the ability to grow their dividends, which is very important in this rates environment, and so earnings are really going to drive this conversation and fundamentals going forward. So a

flight to quality. You have a lot of other calls to get a little bit more defensive within this equity market, Kristen, But is it time to go to cash? So we do not believe it's time to go to cash. So cash, there's really multiple purposes of cash. Right from an investor perspective, one of course, have a safety net, have your operating cash what you need. But in terms of an investment, right now, when we look at the inflationary pressures, this

is an asset that's guaranteed to lose money. And so if you want some tactical cash in your portfolio because you are there to buy the dip, you can confidently buy the dip. There's some value in that. But what we're seeing in a lot of investors portfolios, and we've seen this for several months, is a lot of cash sitting on the sidelines. So this is no longer about an investment decision. This is really someone trying to market time, which doesn't work in the short run or the long

run for that matter. Christan, just to conclude, I want to go through this research report and might get really clear some of the think that you're highlighting. Lumber down sevent since May on all down thirty percent of the same time period, Chinese equities down thirty percent is the

middle of February. Brasilian equities getting hammered as well. US small camps down to performing is the middle of March at the time of publishing those numbers are assume were correct, and I'm sure they're still there and they're abouts the same, christin what's the punch line here? So the punch line is despite a lot of the central bank support and liquidity,

markets are differentiating, right, and that's that's quite healthy. I think what you need to do as an investor again always bringing this back to actionable ideas and what we can do within our portfolios, is this becomes a period

of being selective. Right, this is not a market of everything is going to go up, everything is going to win, and so being selective not only in terms of regions of the world that you're in, as you've been discussing all morning, but also in terms of security selection because there will be winners and losers based on fundamentals and earnings. Christ and always got to cash out with you. Thanks

for being with us. Christin Biddley there of city people have missed out on the upside, how much becomes above love and response where if in doubt by right and this idea that if you miss out, you will just keep missing out, because that's how it has been over the past twenty years. What breaks that paradigms brund shooting.

Now we can do that with Northwestern's Mutual Wealth Management chief investment strategist Brend your words, investors and the three camps they fall into right now, Those were the economy is growing too fast, those worried growth is peaking, and those worried stock valuations are simply too high. Are you in any of those three camps right now? Brent, No,

It was something we worried about. So we got to mayor June and economic growth was finally strong, COVID cases were declining, and we all set around and thought about what is next. And I think as you've kind of been tweaking, lisagested that people were worried about those three things occurring. That was where the worries were. We see each one of those subsiding as you move towards the end of the year, and that to us means a higher equity market led by more cyclical aspects of the market.

So think value stocks, think uh, small cap stocks, and think the Eurozone, and so we do think there's room left to run. It's just you've had this defensive versus cyclicals defenses have really won the day over the summer. But I think it's because of those three worries, and I think each one of those three pulls back into the end of the year, and I think that's the impetus for the rally that we expect to occur. Bright, Let's try to put some quantification around how much room

there is to rally. What kind of returns are you expecting are you shooting for with the likes of a small cap bet at this point in the cycle. Well, I mean, I think everything is less than it was before, correct, And so if I think back to last year, we went overweight equities with an uncertain outcome, but but the opportunities that was so wide. I think about today, I'm a bit more certain about what the economy holds pushing forward.

There are still, as always uncertainties, but the opportunity set is smaller, and so I think about relative performance more and I think small caps are set to outperform their large cap counterparts, and the Eurozone is set to outperform probably both of those and so much much more muted returns, but still in the contact of a tenure treasury. As

you opened the show at one two three. Whatever it is today, stocks are still a relative valuation advantage towards bonds and that isn't changing until the ten your treasury changes, and that's still where central banks are impacting the most. Well, brend I'm glad you brought that up because we were having a conversation in the previous hour about big tech and how it was kind of unusual that we had record highs for the Fang stocks yesterday on a day

when yields actually rose. But when we saw the low for the NASDAC one hundred this year, it was on March eighth, and the tenure treasury yield was at one sixty on that day. We are still twenty five basis points below that. So can you make a case really against big tech if yields kind of stay in this range? Yeah? And I mean I think it's more of an economic growth and what's keeping the treasury in that range? And so is it tapering as a distortion? Is it just

a lot of liquidity around the globe? Um? I just think the small cap in the cycnical trade to me, is more tied to strong economic growth that I think people were worried about or peaking. UM. If anything, it's a plateau. You have companies with huge amounts of new orders hugh backlogs order UH and low inventories. You have consumers with incredibly strong balance sheets who have probably been pushed out just a bit because of what Delta has done. And so I think you continue to see economic growth

that remains strong. I'm not for sure what the tenor Treasury does. I expected to have an upward biass tapering is announced, but I think all those things point to an economic cycle that lasts just a bit longer and is a bit higher for a while. UH and valuation. We think many economic cycle investors are ignoring still points to small caps and value stocks are being cheap relative to their counterparts brand. You mentioned small caps, small caps

over large caps. You mentioned cheap. A lot of people would say Europe cheap in the Owned States, and we've said that for a long long time. You touched on the euro Zone and talked about the potential for our performance there. What do you like about Europe? Bren It's much more cyclically inclined, and so they set up of the index is much more cyclical in nature. Europe has been cheap for a while. It was in need of

a catalyst. It actually has that now the Central Bank there has done things quite frankly, that they hadn't done in the past. Germans have even gone on a fiscal stunding spree. And so I just think that you have strong cyclical economic growth for really the first time in ten years to twelve years, and I think that's a backdrop for yours on stock Stanley being appreciated by investors. Brent. There's a column in the Telegraph by Ambrose Evans Pritcher

talking about how Germany does. Those seem to be losing patients with quantitative easing, and they're starting to indicate perhaps they don't want to keep the pedal going for as long as they have for the foreseeable future. This really bleeds into the potential for taper talk tomorrow at the ECB meeting. If they were to start talkering and talking about tapering, their QUI will that change your view on Europe? Yeah,

it's certainly a risk. And I think of UM, the Central Banks right now is three yards in a cloud of dust. So sorry, Jonathan, just a different football game than you're used to, UM. But they're advancing the ball slowly to try not to get any market reaction, and I think central banks around the globe, I think people need to stop focusing on their day to day operations and focus on their action function. And it's still to

do more, not to do less. Certainly the years on, probably a bit less than the US, but in general, overall central banks stand at the ready and we'll continue to do so until there's a cost on either side. Right now, I know there's talking inflation, but that cost is still relatively low. Interest rates are well behaved, and they've failed on their mandate for ten years. They're going to push as hard as they can for as long as they can, as long as inflation allows them to

do so. And I just think that as you move into the end of the year, inflation is going to pull back and that taper talk and everything else going to subside just a bit. Is that football with the hands they used the hands for the hands, three yards in a cloud of dust towards the goal line. Is this good? Is this a good? Tom Keane? It's an oblong round ball. Thank your French Northwestern Mutual Wealth Management

chief investment strategist. I'm pleased to say that my good friend, my old buddy Bloomberg's Manners Cranny standing by in Cairo. Mannus go to hear from you, sir, and just look at that chair. If only the could see this on radio A palatial Mannas Cranny this morning, Jonathan, New York, thank you very much for the welcome. Yes, we are in the Ministry of Foreign Affairs at a very timely moment. Were joined by his Excellency Summer Chokri, the Foreign Minister

for Egypt. Sir, thank you for having us into your office. Is at a grand home. It's an interesting time in our region. Biden is delivering on Trump's plan to leave Afghanistan. That is done. What does that mean for the Middle East for you? Certainly, the ongoing conflict in in Afghanistan and Iraq has burdened the region quite substantially over the years, and the departure, of course from Afghanistan has its ramifications and will be followed and deliberated upon within the context

of uh the other region. Tomorrow we have a meeting of the Ministerial Arab League and that issue will will

come will be a focus of discussions between the ministers. Undoubtedly, transformation of this nature and this magnitude will have interesting repercussions, and we are wait to see what those repercussions are in terms of how the the new Taliban government will operate, how it will sustain the commitments that it has made, and and how we can have a the security and the stability of the region within the newly existing situation. But do you see this as a disengagement by the

Biden administration making this region more unstable? Uh? No, I don't think the United States has a superpower, as a power with both interests and very deep relationships with the countries of the Middle East, is in a position or can disengage. I think it will continue to rely on its traditional relationships and partnerships among them with Egypt strategic ally, and will continue to extract its interests and also provide

the security and the stability that the region needs. My assessment as I got on the plane to come to Carl is there is a tectonic shift in discussions between the nations here in the Middle East. Would you describe that between yourselves and and Turkey, the UAE and Turkey, there is in my mind a tectonic shift. Do you agree?

Not necessarily, I agree that the region is undergoing a very turbulent and volatile situation where there has been, of course, conditions that have not been readily contributing to the peace and security of the region. We have conflicts in Libya, in Yemen, in of course, the situation of terrorism and and the threats the current situation in Syria and Lebanon.

These are all issues that have to be addressed, and I think it is in the best interest of the nations of the region to uh expand the communications and the understandings that can provide for the security and stability. You're a boy to enter blind too of discussions with Turkey. Egypt Turkey upgrade bilateral relationship. What does that mean? Will you store diplomatic ties at this stage? This is the second round of exploratory talks between Egypt and Turkey. This

comes at the invitation of the Turkish government. We have ben eager to find a resolution and to find the necessary formula for regaining the normal relations between the two countries. But I think at this stage we still have to evaluate the the outcome of this second round of discussions

and primarily the context of the bilateral relations. The bilateral relations and certain measures that were taken by Turkey need to be somehow addressed, and when we are satisfied that those issues have been resolved, that will open the door for further progress. I have a lot to get through, and time, of course, is a natural enemy. But if I say to you in a suctinct way, what do you need to see from the text to move forward to restore a by lateral relations, what would that be.

We have provided Turkey with a with our assessment and our requirements. I think they very well comprehend and can fulfill all of these issues, and we hope that they do so that we can move forward on the renaissance. Damn. It's a very contentious issue, obviously, and you've tried to arbitrate with Ethiopia, and several times President CC has said all options are on the table, including military action. Sir,

are you prepared to take military action against Ethiopia? The President has never indicated that he would be taking military action, But I think the terminology has always been that for any country, all options are always open, and we have

committed ourselves to the negotiating process. We have endorsed the negotiations over the last ten years, and we have supported the negotiations of the African Union under the chairmanship of Presidents Acadia, and they'll continue to seek an enhanced stroll for the observers to help the parties to find a resolution. Would you do everything to avoid conflict? Definitely. I think

nobody seeks conflict. We have been committed over ten years to a peaceful resolution of this issue based on international law, based on best practice, and I think we are still would seek that the political will of the Ethiopian government is demon strated by signing an agreement. Thank you very much for joining us, Foreign Minister, thank you for the welcome to the country. I hope that we come back again.

Sally Schell create the Foreign Minister for agent joining me. Uh, it's been a great trip and I've got to say when it comes to when it comes to offices, sir, I think you're on a winning trade. Thank you very much. Sick joining us now is the man himself, David Rubinstein, the co founder of the Carlisle Group, but of course the host of its fantastic show, Reid Hoffman, a really important person to be talking to at this moment where we see this tech battle really heating up between the

US and China. Where did he sort of throw his hat in terms of which region had the upper hand in this tussle. There's no doubt that the Silicon Valley has had the upper hand for decades. But he does think that China is now competing effectively with the United States. And you have these two polar opposite in effect, China with one system for entrepreneurial activity and Silicon Valley with another. And he thinks that China is doing what he calls

blitz scaling, which means building very large companies. That's what's happened in the United States with Amazon and Apple and Netscape, very large companies that operate at scale. And he thinks that China is doing the same thing. Well, that's the bigger picture. And yet the micro picture has been an increasing crackdown on some of these behemoths, and some of the blitz creeged companies are the companies that have benefited

from their approach. How does he view that, I mean, does he believe that that will foster innovation and the potentially put a damper on it by raising regulatory uncertainty. Well, clearly in China wants to make it clear that the Chinese government is the most important thing in Chinese society, and once the entrepreneurs recognized that they can go about

their business. But clearly China doesn't want companies that are more powerful than the President of China or their entrepreneurs being more powerful, so they have had some kind of crackdown or or regulatory constraints. We haven't had quite the same thing in the United States. So the American entrepreneur are free to build companies without the kind of constraints and concerns that now some people have in China. Well, talking about building companies, David, it's it's Kaylee Lines in

New York. Good morning to you. You mentioned their Apple, Amazon, these behemous we have seen grow here in the US. Does he believe that those companies are getting too large? Well, he doesn't say that in part because remember he is a person I think he's still on the Microsoft board. He's sold linked In, which he built to Microsoft, so he'd be difficult for him to say that Microsoft is becoming too big and too powerful, So he doesn't really

say that. He does say that we now have five of these gigantic technology companies United States, and we're gonna get ten of them soon. So a company that like say Salesforce will become one of those kind of companies, or Netflix will become one of those kind of companies, which they are are big now, but they're gonna be much much bigger. So he doesn't worry because he thinks they're gonna be more and more of these gigantic companies,

not fewer and fewer of them. And are those the kind of companies he's interested in getting into now or what would you favor? Well, he's a venture investor. He's at Graylock, very good venture firm. He's an entrepreneur who built linked In and helped to build PayPal, but he's also a venture investor. He was an early investor in Facebook, an early investor in Airbnb. So he likes to find young entrepreneurs who are really talented, have a good idea,

and back them. So he's an unusual mix of being an entrepreneur and a venture investor and a very successful angel investor as well. David yourself also being a pretty big investor in companies at the earlier stages. There is a question of what the structure of such dominant tech behemoths at the top does for innovation for some of

the smaller companies. In other words, how much of a competitive competitive advantage can they have and how much UH can they get with respect to data, which reigns supreme. There's no doubt that the large technology companies now have a lot of data and they're using it, they would say, for their purposes, their corporate purposes. But there's always going to be entrepreneurs, always somebody with a new idea, somebody

that is very creative. And he likes to back people who he thinks have a vision of where they to go and have the capability of getting there. And it's a different skill set than being an entrepreneur, where you have to have the vision yourself and build a company. But reen Hoffman is a very talented individual, and when he's in the room, it's pretty clear he's always the

smartest person in the room. But he doesn't tell people that, and so he has a certain modesty that I think reflects the fact that he's very secure in who he is and he's very well respected by his colleagues. Lots of times you have very bright people and behind their back, people are snickering about them because their egos too big, or they're not as talented as they think. That's not the case with Reid David. I want to bring the conversation back to where we started, and that is China.

We've heard a chorus of large name investors over recent weeks kind of weighing in on the debate and whether or not you can invest there. You have George Soros on one side saying that would be a tragic mistake. You have Black Rock and Ray Dalio on the other. I'm just wondering what your take is on China given

the crackdown that we are seeing. I think George Soros this point had to deal with geopolitical issues and government constraint issues and things that are different than whether China is going to old companies that if you invest in them you'll do well. As a general rule of thumb, I do think investing in China will produce very good profits. You have to get comfortable with some of the constraints who have in China, but there's no doubt there constraints

in lots of countries as well. So I wouldn't say that China is not a good place to invest. I think it's a very good place to invest, but there are some challenges you have to get comfortable with. And you have to get comfortable that some of the governmental actions are not gonna be ones you might be comfortable

with if they were happening in this country. For example, as you shift focused at all with respect to your your your appreciation of China investments, even with Jijimping's recent pronouncements around the common good, well right now, you have to remember China has one point three billion people and it's going to be a gigantic market for some time. But the Chinese governmental system is different than Americans, and

you have to get comfortable with that. And so if you're not comfortable with that, then you can invest in many other places. But if you're comfortable with the fact that China is going to have a heavy regulatory hand in things, you can you can get comfortable with investing there. We have invested there, I have invested there. I'm not pulling out of China. I think it's actually a very good place to invest. But every country has its challenges.

The United States has challenges too. You can't argue that we have all the kind of governmental actions that everybody has come from with here either. David Rubinstein, you make a very valid point. Nobody would disagree David Rubinstein, host of Perit Peer Conversations on Bloomberg Television Television, a co founder of the Carlisle Group. Don't miss that at nine pm tonight, Reid Hoffman, an entrepreneur who helped co found linked In, speaking about the landscape for technology at a

time when it really is pre eminent. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the UR. I'm Tom keene In. This is Bloomer