Surveillance: Flight to Quality With Rabobank's Foley

as well. How are you processing the news this morning, Troy? Yeah, well, clearly it's bad. I mean from a standpoint of the pandemic you know, resurging over Europe, which as you guys remember back in March led the u S resurgence at the time, and and remember the big left tail risk for markets for quite some time now has been a significant resurgence above expectations, coupled with the potential for a

more stimulus right. And so you know, up until today, most of the selling we've seen from the two kind of tops we had in late August in mid September have been tied to the fact that fiscal stimulus was being priced out of the markets, and one day was the day where it was effectively priced out completely prior to the election, and now with a combination and resurgence and any of I mentioned this, equities are only off six from the recent high. We were about twenty three

times earnings. You know, there could be more downside as we closed the month into early next month UM, prior to the election UM, and then hopefully post election will get more clarity on the stimulus side and the pandemic will be at somewhat under control at that point, Troy, your charm is to know what people are doing with their money. What are alternative investors doing right now with their money? Are they loading up on growthiness, are they

making rotations? And is anybody making alpha? Well? I think I think in general right prior to the past two months, risk on was very much the mantra of the day for hedge funds. There was quite a bit of risk being taken in tech in particular, but not only they are broader beta and as we've moved closer to the election, managers of de risk modestly they've taken down their growth

in their net exposures. But directly to your point, Um, the biggest concern arguably for the industry right now is how crowded techniques have been because that's been such a significant profit driver. But the problem there is that no one really knows when that reversal will come. Will be driven by higher interest rates which look unlikely, will be driven by a more significant reopening of the economy hard to say so. In the meanwhile, growth still favored over value,

although that's starting to change a little bit. And then within regard to alpha, you know, it depends on the strategy. Right In general, the hedgeman industry has had the best alpha year really since two thousand thirteen, if not before the crisis, because you've had so much dispersion in the equity market in particular, which is still a very heavy focus, and you have had big sector winners and big sector losers.

And then on top of that, many of the credit managers that got hit back in March have really made a significant portion of their losses back and the outlook there looks good. So it has been a fairly strong

healtha year for the hedge fund industry. Troy David Ironhorne of green Light Capital yesterday at the conference has been going on the Robin Hood Conference, said that tech was in a bubble, that it probably already peaked in September, and that he is shorting a certain overpriced I p o s as he sees them as well as other more peripheral tech companies. Are you getting on that train? Well, look, we don't have a lot of growth or tech exposure right now. Um, we do have it through some long

short multi strategy exposures. The problem is is really not in a bubble per se. It's nothing like the late nineties where you had these weak, dramatically overvalued companies, many of the case, in many cases had no business case. We're at a period where the strong techniques are very good businesses and continue to grow margins for the most part.

But but you do have very elevated valuations, right and so when the SUPs at twenty three times four earnings in the NASTACS five seven multiple points higher, that just set yourself up for for near term weakness. But in terms of having some significant bear market over the short term,

we think is unlikely. So with all due respect to Mr Iron Moore, and we could be in for you know, a prolonged correction, but we're in for nothing like we had you know, two thousand o two, which was you know, fifty down Beau the trot for the SNP with the NASDAC down to eighty. We just think that's very unlikely. But you have to be very careful if you're over your skis in terms of tech exposure. You know, the

next two three months can be pretty painful. But I think the point that on Hones, Mike and Osa you bring up the nineties, that the ninet nineties shouldn't be the bench amount for whether we're in a bubble or not because it was sub Cristy thirty years ago. Troy. The question is asking is whether we are moving just in terms of sentiment from great towards complacency. You look at across fixed income and the universe right now, can you identify I that shift from great to complacen? Say,

what would that look like? Well, look, in terms of fixed income, I think you're starting to see prices adjust for worst growth, lower probability of stimulus, and that's why you're seeing the curve flat and combined with the pandemic complacency. I mean, I would say the term would be more exuberance like we had in August. I mean August was a month where you had very frothy behavior in markets.

You had many parable behavior, not only in broader indices, but also in some of the larger cap tech names in particular, many of them type of the pandemic. So that was arguably the peak froth, and then you started to build it back up a little bit last week, and now you're seeing some of the froth come out. We just don't see complacency in terms of you know, managers being very comfortable with their risk and not factoring

in all the various risks that are coming about. You know, again, people have been de risking modestly going into the election. So I don't think it's necessarily complacency. Um, it's just that the froth that was built up in August has not quite come out, and we might need to have three to five percent more downside and SMP to kind of clear out some of that excess. Getting about half of that right now, Troy right to catch up, so

get to see its capital. Thank you, Troy. I appreciate it, said like, do you want to mention gold hammered down one eight oil cannot find a bit. Daniel Morris has seen this before with BMP, Perry Bond. We notice service to t I A craft over the years. The chief market strategies for BMP, Perry bout Daniel. I like what you're say in your note about the Transatlantic partition. The p m I numbers are different. Is Europe in recession? Well, certainly the risk of that happening in the fourth quarter

has gone up, is going up. You know, we had talked about the different shapes of the recovery several months ago, and it does look more and more likely that you may well see a W in Europe, if not necessarily in the US. If we do get that W, that W double dip down, what does that mean for your allocation to Europe in the next few quarters. Well, currently we're we're overweight US and emerging markets as opposed to Europe in our multass or portfolios. I think that you know,

simply reflects that risk that you see in Europe. Uh And in addition to that, the relative lack of tools options in Europe to compensate for that being monetary stimuluspit fysical similar cities don't have as many lovers as you see in China or in the US for that matter. The fear that I think a lot of people have this morning, Dan, And I'm not saying what the probability of it happening is you can talk to me about that, is that Europe's present right now is in America's near

term future. Does it have to be that way? Dan, I think there's two things we really need to keep in mind. When there's just the evolution of the pandemic itself, number of infections, number of deaths and so on. Uh. And from that point of view, I think it is certainly a possibility that Europe is just ahead of the curve in this and so this is what we're going to see in the US. But what's really going to matter more for the markets is a reaction to and

that's really been the story all along. It's the restrictions that are driving the reaction in the market today. We've had the increase in infections, frankly in France since August, but the markets are relatively blase about that because the assumption had been no more lockdown has been there done that they just can't go back to nationwide lockdowns is too costly, except what we're seeing now in the face of these just very high numbers in terms of daily

infections that governments are kind of stepwise moving in that direction. Now, of course they still want to avoid that, but the pressure is building and the markets are pricing, and now that that's the ultimate endpoint that we reach, maybe not full nationwide lockdowns, with something a lot closer to that

than they would have thought a month ago. Janue, is this a buying opportunity then if there's more of a pullback in the in the face of restrictions and lockdowns, given the fact that people are still expecting some sort of fiscal support bill next year, well we're not allocated that way currently. We have a modest overweight to aquities in general. You know, I think you're always waiting for

a goodbye the day opportunity. Our medium term outlook is constructed partly based on the anticipation of some sort of fiscal stimulus, certainly in the US UH anticipating that you know in Europe even you know, there will be a point where stocks just look so attractive and you want to move in. But we'd probably say it's premature to

be making that type of change right now. What do you make of the fact that earnings have been coming in broadly better than expected, and yet people have just been punishing anyone who's underperformed, and even those like Microsoft that have outperformed but not crossed the high enough bar. Well, I think it's you know, the refrain, what have you've

done for me lately? Partly, and I think the fact that you've had such a swing and sentiment over the last month, you know, over the last week or so, frankly, uh. And you know, inevitably, earning seasons are backward backward looking. Uh, and we're going to say, well, gosh, that was really great for the third quarter, but it isn't telling me as much as I would like about the fourth quarter.

So even though the surprises are are quite good, that's not necessar ssarily helping, you know, as you point out that said, if we do look at the guidance of forward guidance, it has been you know, very very positive. Two thirds of the companies that have given guidance so far, it's been upwards. Now, of course, there's always that qualifier that we know fewer companies are offering guidance and in the past, and it's still relatively early in the earning season.

But if there is something that people are investors want to focus on to justify more positive meetings her outlook. I think it is that guidance that companies are giving Daniel Morris across all of b MP Perry Boss Securities research. Do you see what I'm gonna call an elasticity of CEO s? I mean Boeing right now, horrific numbers. They're being elastic. John Farrell mentions they go to a hundred and thirty thousand jobs. Do they have a lot of room to cut costs to John loves this phrase to

right size? Do they have a lot of room to globally right size? Given this pandemic, I think it's going to be extremely challenging for those industry these like airlines, for example, where you appreciate that you know, it's not just the short term effect from the lockdowns, it's a longer term ramifications of what's changed thanks to the pandemic.

It's a change of mentality. People realizing they don't need to fly around the world for a couple of hour meeting anymore, or do they even need to commute into the office every day the way we've done in the past. So those are arguably permanent changes that's going to hit some industries quite significantly, and there's gonna be much bigger

restructuring is necessary than anyone would have anticipated. So I think there's without questions, certain parts of the economy UH that are going to go through a pretty wrenching change and inevitable is probably never going to be fast enough. But at the same time, then we also need to be thinking about, Okay, where is that demand going to go? I mean, you would still believe that agg demand is going to continue to rise, It's just going to be spent in different ways, and we need to really focus

on where those opportunities are as well. Down I just want to finish on the market at the headline level and just think about the following concept. I wonder how much support is beneath this market on a daylight today, and the concept of the vaccine put down, how important is that vaccine put just this idea that people want to stay allocated to risk because they believe at some point in the next few weeks, the next few months,

we could get that key announcement. Well, certainly the timing is crucial beneven if it is and in the next few weeks, and it is more the months that you that you mentioned, you know, if we think a year out and you know, if you are an equity investor, you are buying hopefully a stream of ouriens that goes a bit further out than the next quarter of the next six months. Absolutely that's going to be important. I think the other thing we we can't put aside is

it is the week before the U S election. There's still then inevitable uncertainty about the outcome and the implications of that. So you've got kind of these two negative factors weighing on the market. Increase in infections and certainty head of the election. You know, one of those will hopefully be resolved by this time next week, though maybe not, and then the second as we all hope sooner resident later. I don't great to catch up. As always, Dan Morris

of BNP PO Asset Management, thank you sir. It is very difficult, and again, as Lisa mentioned earlier, the spread narrowing, the difference in yield between that big negative tenure and in every larger negative two year yield really coming down and squeezing down to a flat or flatter negative based

yield curve. In Germany, Jane Foley knows as well with Robbo Bank senior foreign exchange strategist, but she understands that foreign exchange not linked to the equity markets, who cares, but linked to the bond market, No question about that, Jane Foley. It's real simple. There's something going on in Germany is signaled by those greater negative yields. What is it, Well,

of course, it's sort of flight to equality. It's fear tom And we do have the CPI dated for hero don't Happeople the end of the week, and that is going to highlight that more disflation. Now, we did have import process for Germany this morning a little bit better, but it leaves that TPR number later in the week. That's again going to worry investors. It's going to be quite interesting because we have that EP data for Q three that's gonna look really quite good at and nearly temperacent.

Bounced back Q and Q and in Q three. But of course the market is already going to disregard that because even though it's not been released yet, it's already all news we all know now about the new lockdowns up throughout the region, and that of course means it's going to be bad news economically for the full quarter.

So it doesn't look good from the European perspective right now, export import dynamics, importantly in the United States advanced goods trade balance, it's a secondary statistic, I'm going to call it. It's a pretty grim negative number, not to where it was supposed to be on survey. But nevertheless, another key data point there is well Jane Foley. Then when I look at this and John has mentioned the resiliency of the euro, of the euro, how does euro get a

bid here? Well, I mean it doesn't if you're looking at against the end certainly. I mean that definitely is pushing, is pushing lower and even against the the US dollar one sevent you, I mean, it wasn't too long ago and we were above one eighteen. So the euro is looking at like it's on the back foot. There is some anxiety going into the ECB meeting tomorrow and it could they potentially pull the trigger on policy measures tomorrow. Well, I mean our central view is December, and I think

that's probably closer to consensus. But there is some rumblings that given the worsening in the backdrop this week, given the fear about further lockdowns nationally in France, and maybe more restrictions in Germany and elsewhere that maybe the the guard the UCB president could pull the trigger. So I think a little bit of anxiety and that's pushing the

the Euro on the back foot today. I've been really surprised by how resilient it's been up until the last twenty four hours, given the direction of travel the continent was on. It's been pretty obvious for the last four weeks. But here's the break this morning with a broader dollar bid. Jane.

We've been looking at the Italian bond market and I think we can all agree the jury is still out as to whether this is really transformed from behaving like a credit to a self in the lower Today Italian bonds are softer, yields are hired by five six basis points. It's not dramatic, but the move is there, and I think a lot of people are focused on it, whether we can break that positive correlation between the single currency

and the periphery. Jane. If I'd ask that question a couple of weeks ago, I think people would have had confidence and said yes. I think the move that's starting to emerge this morning, just slowly as this session grows older might be making some people nervous. Jane, what's your take. I think there were doubts really emerging. I mean, for instance, we did have headlines suggesting that there were protests in

Rome about the restrictions. But I think more than that, if we if we look back over the spring and the summer about what really drove the euro higher. There was a lot of confidence about the shop policy, certainly, but also about the recovery fund. And as we go into this the second dip of this, of the second wave and the and the double dip of this, this recession, you know we would have asked about the recovery fund

a is it big enough? Well, it's it's not that big as a percentage of GDP for the whole week. But there's also concerns, there's biggering going on about the timing. When are they going to get the funds out? Can itally given its its history of not being able to invest productively that can it actually use the loans that it will get and turn them into in a productive

capacity rather than just more debts. So I think there are doubts beginning to emerge, and certainly, if those restrictions really do take a toll on the economy throughout Europe and certainly in Italy. I think those doubts can only get bigger in Q four. Well, Jen, that's the question. Where is that recovery fund? That recovery fund hasn't been ratified yet, and you've talked about the political difficulties. We've been really keen to draw a distinction between a European

economy that's struggling and redenomination risk. Jane, do you think before year end? And I'm not saying that we start to think about the breakup of Europe, just that people start to conflate the two issues. Where the periphery starts to trade significantly weaker, it feeds back into the banks again. Can you see that scenario developing before your rise? Now? I can see Niggoline certainly arising. I mean we're starting

off from a very strong position. If you look at the euro if you look at the amount of long positions built in the euro over the spring in the summer, really extensive. Now to put it, to put it in perspective, if we got back to sev seventeen, was I think a will go deluxe that year for the Eurozone. We had really strong growth from the outset or stronger than expected growth from the outset, and we had better political outcomes.

That was the year. Remember that the market was fearful of the far right and the French presidential election in the Dutch election that didn't happen, So we had better outcomes. We had a really good year for the Euro. Long positions building and this year, this spring and summer, the markets become even more optimistic about the Europe. So I think that there is the perceptive that the risk that we could get some sort of more reality emerging and

people lowering those long positions in the Euro. At what point, Jane, will central bank policy not have that bigger effect to uncurrency differentials? And it really all comes down to the economy, And it seems like perhaps that's what we're seeing today

involved given the ongoing restrictions that we're hearing about in Europe. Well, certainly confidence is a lot of it um, you know, and and and certainly today we've seen confidence really taken not by those headlines, but in terms of such about policy. I think what the ECB did back in May and and really pushing hard against talk of fragmentation by you know, stepping up the types of bonds that it was going

to buy. By by really making that message very clear, it really did help with the whole confidence in the notion of the Euro moving forward. And of course, at the same time was that recovery fund that the whole notion that perhaps they had taken a step forward to more of a fiscal comprehensiveness within the region. Now again, I think that during you for just the background of the economy, the worst union conditions is going to poke

some holes in that confidence. And I think that's why perhaps the Euro is looking a little bit more vulnerable right now. And of course that is independent of course of the possibility that the dollar will see a bit more of a safe haven bid going into Quey for with the similar sorts of concerns about COVID nineteen and

the double dip recession Gina. Based on positioning the sense that you're you're giving now that there could be dollar strengthening, How violent could that be given how many short positions have been put on on the dollar. Well, I don't think it could be as violent as anything like that we saw in March, and the reason for that is just the huge amounts of liquidity provisions at the FED is put in place. But I think we could see

some sharp movements certainly now. I think the movement that we've seen in neuro dollar today is reasonably sharp and and and certainly if we're looking for in exchange um you know, and we've seen some quite sharp movements in in well certainly Turkey, but also some of the other emerging market classes as well. So I think we could

certainly have sharp movements. I don't think we're going to see anything like what we saw back in March and all Jenna, I look at all this and I guess at some point here, with futures negative fift AID deteriorating on a session i'm watching, yen was some resiliency even with dollar stronger. At some point, I want to be opportunistic within this calamity, this natural disaster. What's your trade right now? I don't say that lightly, what's your trade

right now to create gain in this pain? Well, to be honest right now, you know, I would probably be a sort of several of the emerging markets. I would like, you know, the dollar against many of those UM, EU, A, Yen. I think that's a very interesting one. Although we've come back very sharply. Today We're still very elevated compared with where we were in EU an earlier on in the year, even in the summer months. So I think we've got

a movement there. And also I think if fear of certain I think we could see the Aussie pushing down as well of there perhaps a little bit of a lift there, because there is this perception that Asia and China are perhaps faring better in terms of recovery from into Barris and we are in Europe and in the US as well. Jane, always fantastic to catch up with you and take you in the morning light this morning

in Europe. Thank you, Jane Thardi that of Ramba Bank, Alex Scorsky, Captain Gorsky of Johnson and Johnson out of West Point, someone with a really really interesting executive career and of course in the cross heres of this pandemic right now. Of course, a good conversation peer to peer conversations with David Rubinstein. I'm Bloomberg Television and the gentleman

from Carlisle Group joins us this morning. What if I'm fascinating here, David by besides the predictable discussion of the pandemic is this is a guy who was at J and J in left and then he came back to Johnson and Johnson. That's an interesting move, isn't it. You don't see that often, do you. Well, you certainly don't see it where they rise up to be the CEO

very often, and so that's unusual. I remember he's also started out a relatively low level marketing job in a subsidiary of Johnson and Johnson, did that for a while, then left, then came back and rose up to the CEO position, which he's had now for about eight years. I think it is, and it's done an incredible job. Their market capitalization now is about the tenth playas in the United States of any company the United States, about a hud billion dollars. There was a lethargy. You've seen

this across all market capitalizations of Carlisle Group. There was a J and J lethargy. And then something changed under Gorsky. What was that, Well, he diversified a fair bit um. You know, some people would say, well Johnson Johnson that they make band aids or don't they make Q tips, But they're gigantic and so many different areas of healthcare. In fact, many people didn't realize that they were in the vaccine business, and now they're producing what maybe one

of the best vaccines that's coming out for the COVID virus. David, one thing that this pandemic has thrown into cold relief is there's a conundrum for pharmaceutical companies whether to focus on simply developing the high costs, high return cancer drugs, other types of drugs that perhaps might not have the same sort of global benefit as a vaccine. Did he address a shift in that mentality and how to compensate

pharmaceutical companies going forward to focus in a different way. Yes, vaccines are not the most profitable part of the pharmaceutical business because typically you take them once a year and it's not going to repeat business where you take it once a month or once a week or something like that. However, um there are a limited number of companies that do specialize in it, but it's not the main thing that they do. Johnson and Johnson does do vaccines, but it's

not their main business for sure. However, in this case, the US government is subsidizing so many companies that they're not going to lose money on it that will do okay on it, But it's really I think the public relations benefit of coming up with a vaccine that will be so helpful to all these companies. And then there's also question of actually getting the vaccine manufactured and distributed in some sort of timely manner. What did he say about supply chain issues? How to manufacture us in the

most expeditious way possible? While the US government has done something that no one had ever done before. Typically of vaccine takes, I would say somewhere around seven years to develop. The fasts have historically been four years, let's say for Ebola. This is being done in one year. Now. It's being done because so many companies are getting so much money from the federal government, but also they are manufacturing the vaccine before they know whether the FDA will approve it.

That has never been done before. And so once the FDA approves one of the vaccines or more than than one of the vaccines, they're ready to be distributed. The issue is who's going to get them, and then whether people will take them. A lot of people are nervous about taking them because they think they're not either safe or they've been politically Uh fine tune to make them available,

maybe before they should be. So there's gonna be a while before people really take these, and most experts would say not until the third or fourth quarter up next year. Are you going to see people really fully vaccinated? David, you told us the last time we've visited that you certainly weren't taking sides in this presidential campaign, and you're trying young to stay removed. What do you expect to see in the next six days. Will this be a

traditional dash to Tuesday or will it be something different? Well, traditionally people vote on election day, and now we will see that maybe sev the people have already voted before election day. That's a big difference. Secondly, elections tend to tighten towards the end. People tend to come home, and as we know, the country is relatively split evenly between

Democrats and Republicans. Obviously not completely evenly, but I do think that you're gonna you're gonna see some people come home to their base, and therefore I suspect it will tighten up, which is what you normally see right before the election. David Rubinstein, thank you so much for joining us today at a conversation with a gentleman from Johnson and Johnson UH their chairman and CEO, Alex Gorski. Look for that tonight nine pm. Peer to peer conversations with

Mr Rubinstein. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio