Surveillance: Global Growth Is Bottoming, Cantrill Says

pretty much subject to getting it written. It will take probably three weeks, four weeks or five weeks. That was five weeks ago. Five weeks later, and the Financial Times is reporting that both sides are still struggling to close the gap. They write that, according to people close to the talks, Trump administration officials are frustrated that China has not offered enough concessions to justify reduction in US tariffs on Chinese goods, along ending demand from Beijing that has

become further entrenched in recent weeks. And yet, just as Larry Cudlow insist, we are coming down to the short strokes, we are in communication with them every single day, right now apparently that is enough to keep us at all time high school. But there was a news of the in the last dare too that they still haven't even agreed upon soybeans. I thought soybeans was the easy part of the deal. I thought intellectual property and other big issues were there going to be the really tough parts.

But soybeans. The optimistic view of this market is unbelissable, isn't it? Here in New York City? I'm police to say, Howard Ward, give Belly Funds, Sea Hio of Growth Equities, a man that you were struggle to find on Wall Street at the moment, a man that doesn't believe in much of this and isn't getting behind the recent risk

on rally. Howard, what's going on? Well, I think you've described the recent market action very accurately, But I do I think it's time for Larry Cover when the White House, to put up or shut up and stop manipulating the market by tweet and comment about how how good the talks are going. When the talks are done, tell us what you have. In the meantime, please keep quiet. This is really not, I think a professional way to be handling this situation. So is it sits here the market.

It seems to be pricing in a phase one type of deal. We're not even sure what a phase one type of deal really will look like. So in the interim, how are you positioning yourself in the market? So um on the growth side, really, we've been pretty defensively positioned for the last year, and actually for all but the last five weeks or so. That's been a very good place to be on the last five weeks. So really going back to the announcement of the phase one deal

that so seems so imminent five weeks ago. Uh. Since then, the defensives have underperformed. In the more cyclical stocks have done well. But I think we're at a point now where the pro cyclical rally over the last five six weeks is probably premature. I don't think the economics slow down has bottomed. I think we're we're looking at slower growth in the United States, in Japan, and Europe for next year. That's actually the consensus forecast, and earnings have

stalled out. Earnings have contracted for the last couple of quarters. They're probably going to be flat to down this quarter. We're in an earnings recession. Meanwhile, the stocks are priced at seventeen eighteen times earnings, which is pretty full and market capp as a percentage of GDP is that an all time high, higher than it was at the peak in two thousand, which was the strongest bull market in history. With all that in mind, how and how do you

position your staff gun into them. We've had so many people talking about buying the rest of the world load up on beta, by Europe, by Asia, by e M. What do you say back to them? What do you so? I think that you know, as a general rule, when the p M s and I want to say p M I s, I'm talking about the manufacturing p M I s because that they're the ones that give you the value added as an indicator, as a leading indicator.

They create the beta in the economy and earnings and have been very helpful leading indicators when they're below fifty as they are and in downtrends. Okay, so maybe you had a minor uptick in the last month or two, there's still below fifty in down trends, and when earnings installed,

this tends to be a dangerous time for stocks. So I would recommend that people not go after beta because when the p m izer declining, for example, the JP Morgan or Market m A r k I T Global Manufacturing p m I, when it's in a downtrend and below fifty, you tend to get pe compression. You tend to have stocks go down, and you want lower beta. You don't want higher beta when that when that indicator and is a downtrend, UH low beta tends to outperform.

So I would stick with the low beta. And you know, all year long the emerging markets have underperformed, I wouldn't go after that. I wouldn't chase that. Particularly with what's going on in Hong Kong and China right now, we don't know how that's going to play out. China start up between a rock and a hard place. If they really clamped down in a military way with Hong Kong, that's gonna send a really chilling message to the world

about doing business in Hong Kong. And if they back off and a seed to the demands of the demonstrators, well that sends perhaps a sets them up for some trouble in mainland China, which they don't want to invite. So they're in a really difficult situation. They're a little bit of a tight rope walk. We'll see how that

plays out. So hard. I'm glad you brought up the p M s and the weakening p M e s. It kind of goes right back to the consumer puts more and more pressure on the consumer in this economy to keep things going. What's your view of the consumer right now? Well, the consumer has been a source of strength, and as you know, the labor market has been strong. It's been we've we've seen the unemployment rate it's sixty year lows, and the weekly unemployment claims have been bouncing

along the bottom for several months. I do think it's it's it's exactly the time in this cycle, based on an analysis of the Fed funds rate with a two

and a half year advance. That's because as the interest rate lags as considerable here in the market, we are exactly at the point in time when we should see an increase in weekly unemployment claims and right on q in the last two weeks we've seen increase five thousand two weeks ago, ten thousand or more this week, and the reading this week was the high reading since late June.

It's a bit of a breakout in four week moving average technically bottomed in April but hasn't had much of an increase incident, but it is beginning to move higher now. If that number continues to advance, that is a real red flag for stocks because there's a strong negative correlation

between weekly unemployment claims and the stock market. How would you think, and this would be a very contrarian cool at this point, that we might have seen a cyclical peak in the labor market in the United States of America. Oh absolutely, I think we're forming that as we speak,

and look at the JOLTS data. Job opening data again is consistent with what would be arise and claims because the numbers for job openings have rolled over in recent weeks, consistent with full employment or a cyclical peak in the labor market, because those two things can be quite different. Well, full employment, of course is tricky because that gets you know, what is real full employment? When? When do you want to look at the labor participation rate which has been

very sticky around seemingly forever. Uh, it has not increase the way you would have expected it to, you know, this far into an economic expansion, So cyclical peak, I think in employment is probably what we're a fun A word from you, then, Howard conviction call going into what do you do if you want to stay defensive the risk reward looking at the price of that story at the moment over the last six months or so, that story got quite expensive. What do you do? It's healthy.

I think the healthcare sector, particularly the parts of health care that lagged this year, uh for political reasons HMS for example, and pharma fear of medicare for all. I don't think that's going to happen. And therefore I think there is some very good value in the United health cares and the humans and the Bristol Myers of the world. Howard would always great set thoughts, really thoughtful stuff as always get Ballly fund seat io of growth equities a

test on equity market. But one man there, Paul Sweeney, the things you should still remain defensive because it's a little too premature to call the end of this global slump. Very very reasonable points Howard made, and uh, you know, clearly, I think it kind of comes down to the summer here. We know where the FED is, we know where earnings are um and you know, barring some major move on the trade front. Um, you know, it comes down to what can the you know this really this trade talks

really deliver for the market. Do you remember the auto tariffs on Europe? What happened to them? We were meant to get an announcement on that this week. I haven't seen an announcement whatsoever. In fact, I've seen several reports that suggests the United States may well delay any decision on it. But I've seen nothing official from the administration. Not in the market for a new car, so I'm on that. Letby Cantroll, not on the market for a

new car, Pimco's head of public policy. Let's be very little clarity on anything over the last five weeks except we're getting closer. We're getting closer, and we have heard that. We've heard that before. I mean, if you remember back in the spring, we were there to a to a much bigger and more comprehensive deal. Now we're just talking

about a much skinnier deal. But even then, and this is what I've told our our clients that the things that we're asking China to do, even in sort of this scale down deal, are things that they've been very resistant to do. And um, I think it's a bit naive to think that they're going to change that posture, especially given that at least their perception is of the president that he's he's weaker domestically. They want to sort of wait this out, so they don't really have any

incentive to give on these bigger structural issues. And it's those issues. I mean, there's a lot of press about the soybeans, but it's about i P enforcement, It's about forced technology transfer. It's these big things that have been the hang ups to to previous deals, um, that are still continue to be outstanding. Let me just take at each how those client conversations are going at the moment. For me, either investors thinking agreement with still materializes, or

they just think that global growth bottoming. Isn't that dependent on a trade truce. What do they sink back to you in those conversation. Yeah, and you know, I think we would probably take issue with this idea that global growth is bottoming. Um. I mean, we think we still continue to see a deceleration. I think our view, at least in the US is that growth will probably bottom uh more in the first half of next year than it is now. But um, you know, with that with

that aside. You know, I think I think the expectation right now, and I think where the market is priced is that we will get some sort of Phase one deal. Now, the way that I'm characterizing this with our clients is this is much more a reprieve from escalation than a

de escalation. I mean, remember, we still have tariffs on three hundred sixty billion dollars of goods that is still impacting the real economic growth um and probably will continue to be a source of uncertainty for the markets as well. So even if we get a Phase one deal, I don't think uncertainty and tensions with China going away anytime soon, certainly not with this president, but even with a democratic president.

So I think what we're saying is, yeah, this is you know, might be welcomed in terms of again a reprieve of escalation, but it still doesn't do anything, most likely about those you know, existing tariffs on that huge bulk of Chinese imports oliby. We still see these jarring in images coming out of Hong Kong, the unrested there. It seems to be not only not going away, but maybe even escalating. What does that do for China and

their view of a trade deals. I gotta think it makes it maybe a little bit more pressure on them and maybe get something done. Yeah, And I think it's a it's a great point. And honestly, you know, I don't know how much the market has been focused on it. I think the market should be more focused on it, because this feels like, you know, a possible source of disruption honestly in terms of getting to the phase one deal, only because there's a bill that's making its way through Congress.

It's already past the House. It's now something called you know, it's hotlined in the senate's expedited in the Senate for consideration. And and the reason why this is important is because the Chinese have said that they will retaliate if the you know, if Congress does pass this um. But to your point, does this make you know, President she you know, even more inclined for a deal. Maybe. But I also think it makes him probably more inclined not to look

weak on the world stage. And I think that's actually attention for President Trump as well. I think they're both having some ways the same kind of domestic, you know, political pressures that they want sort of a deal for their both kind of economic purposes and their political purposes, but that neither of them can a forelooking weak either.

Is there recognition on the China side though, that if they do go in, they send the troops into Hong Kong, that it blows up the prospect of getting a face one to temperate China's approach, that this trade truce is still lingering, that we don't have it yet, does it temper their approach? And you know from our folks who are on the ground and in Hong Kong, I mean

they they've said that. I think you know they said that. Also, she has you know, a different set of um, you know, pressures not to go into from a fam military perspective as well. So it's not just because of the US China trade discussions, but I'm sure that is absolutely a factor. Let me super smart as always and always great to

catch out with you. Let me cancel their pimpco head of public policy on the latest in Hong Kong, wrapping up all the numbers for us on places to say do you want to go stay in New York City? Blinberg corporate finance reporter and Molly Smith, what a wait we've had? We have, and it's not just investment grade, it's high yield too. It's the busiest weekend two months

in the high yield market. And I think a lot of this goes to show that, uh, you know, it's just comes into all in borrowing costs at the end of the day, of course, and that you can say all that you want to, like companies have too much debt, leverage is so high, but when it's so cheap, like you kind of have to look at a corporate treasure of the CFO and say, why not can we talk about Emvy thirty billion dollars worth? Just how wow did that price? How big was that order? But what were

your thoughts on that particular issue. So when we see these M and A deals come now, they're so well telegraphed that everyone and their moms knows this is coming. So we've been ready for Abby since last week and the orders definitely definitely reflected that and the price talk as well. So I think a lot of us were thinking that price talk at the onset was pretty tight actually, and I would say the order book fairly reflected that.

We saw that it was about two and a half times oversubscribed, which seems pretty good, right, seventy seven billion dollars of orders on a thirty billion dollar offering, But we've seen some of these go way way higher, usually when the price talk comes with a lot bit more of a premium to investors. So I think this one was well telegraphed from the beginning, and that's why you didn't see the book blow up the way you see some of the other ones do. Who's buying this stuff?

So this is, uh, I mean, pretty widely bought. When you see a huge issuance like this, there's so much pressure for the investment community to own it, especially if you're an index buyer, that this is going to make up however much percent of your benchmark now, and if you're not in it, I mean you're really missing out. So you have to be in on these orders. Somewhat counterintuitive for people outside of the market, isn't it that when a big issue with like this comes through the

Molday issue, typically the more demand they will get. Molly, Yes, definitely, and it especially helps as well that this is a very high quality issue and also a mergery that makes sense to a lot of people. When we see a lot of these acquisition financing. A lot of people will roll their eyes and be like, you know, does this combination really makes sense? Should this one company be buying another? Are these expected synergies and cost cuts really going to

be realized? And there's kind there can be a lot of doubt, but I think on this one, you know, I saw a lot of people in the investor community and the rating side as well, there's a lot of confidence that this is a really good tie up for Abby and Allergan, that it makes sense for both of them. If you've ever heard me on Bloomberg TV or Bloomberg Radio talk about the triple bs and break down a

load of numbers, I stole those numbers from Molly Smith. Molly, you did some fantastic work in the last couple of years talking about how big that particular area the market has become. Was an interesting year for much of the year because many people turned around and said, at least the Waltons in the market turned around and said, you know what, there's no worry here. They'll get this sorted,

they'll address it. And we started to talk about what people cheer of academy security is called a debt diet. What happened to the debt diet in the back half of this year, so it's a little mixed. And the main companies that needed to go on this diet have the biggest issuers in the index, the ones that have taken on the most amount of debt in the last several years, exactly A T and T InBev, Verizon, uh CVS, all of these ones. They're doing it. They are absolutely

cutting their debt levels, getting leverage down. Being incredibly communicative of that, and a lot of that also coming because shareholders of all people are asking these companies to cut their debt levels. So a nice rare time when shareholder and bond interests are aligned. Do you never see this happen?

The bond holders love it. But and but the thing is is that while these guys are kind of like Bellweathers for the whole index because they are just so huge, the index at a larger level, leverage is still broadly unchanged from a year ago. And that's when we look at, well, yes, we are still seeing all this issuance because rates are still so low, and why not keep issuing debt? Why

not keep refinancing? So you mentioned the hield market in another big strong week here, So investors in that market, I guess they're pretty constructive on the economy because if if we do see an economy rollover next year, those are the kinds of companies that are going to be

impacted first, higher leverage, less room. Right. Well, that's why we've definitely seen an up and quality trade and high yield for sure, and that double Bees that's the highest ratings tier in high yield, has been so rich and a lot of people would say it's just very overpriced right now, a really crowded trade. So that's getting a little bit tight right now. And I think you see more people looking for value in single Bees, which is

that next ratings tier down. You see fewer people though, going for triple c's, that's the lowest ratings bucket in high yield. But as we were just talking about, we were speaking with Colin Robertson of Northern Trusts this week and he's saying, look, if you think the economy still got room to run, which he does, this is a great time to buy triple c's, that the weakest credits should be boosted by an economy that's still running. He's had some pretty contribuing cols over in the last couple

of years. Remember, we came on one of the problegrams with me maybe about eighteen months ago, said one fifty US ten year, and we were in and around three percent at the time, and we came down to one fifty. So I want to how his credit call turns out. Molly, great to catch up. Whether your great workouts are always always making us all smarter here at Bloomberg, Bloomberg Corporate Finance reporter Molly Smith there line for the Bloomberg Interactive

BROCA studios here in New York City. And let's get you some Bloomberg opinion, shall we? The only word you need to explain emerging markets China. It's fear of a Minsky moment is driving a tectonic shift in the availability of money. And how about this for a lead, Let's get liquid. Isn't that fantastic? John Author's Bloomberg Opinion columnists joining us on the phone. I'm pleased to say, John, talk to me about it, explore it a little bit

further for us. Right, What is very interesting, given how much time we spent talking about geo politics, treat wars and stuff, is that, in fact, if you just look at straightforward provision of liquidity across the world. It's that's very obviously complained, explains the great majority of everything that we've been seeing in markets this year. In a NUTSHELLUS we generally know developed markets, you've seen a big turnaround, a huge extra turning on of the tap of liquidity

in the last few months. What is less appreciated is that you're seeing the exact reverse in emerging markets. And the critical thing here is China. At the beginning of the year, there was this strong belief over strong bet that the p VOC, the People's Bank of China, was going to turn on the taps again, as it's done several times since the crisis. Instead, it's actually, it's not really interested at this point in macro economic stimulus. It's

interest in macrew prudential avoidance of a Lehman disaster. The they are working very hard to get to help local governments get the various off balance sheet that they had

taken on back onto the books. They're trying to clean things up to avert the risk of a disaster, I think quite knowingly taking the risk at the in the process that we're going to get slower Chinese growth as a result, and Chinese growth, the basically effects flows to the entire of the rest of the emerging market complex, and that ends up with this situation where you have a very strong dollar and still a very risky situation

across across the emerging world. So Chinas, you talk to and think about emerging markets, you talk to people in the emerging market space. Is there just an overall sense that if China doesn't work, emerging markets as an asset class not work, and I make can I make it that simple? I think you probably can at this point, I mean you could. The other thing you could very reasonably suggest is that emerging markets as an asset class is something we should we should begin to give up on.

But that's a that's another, very very much bigger story. Ultimately, either the number of emerging market countries that either provides stuff to China, which is basically the business model for more as the whole of South America, or have intimate links with it in terms of supply changes the rest of Asia, and also the to a great extent, Eastern Europe, which is involved with creating creasing cars and so on.

For the German industry, which exports a lots of China. Ultimately, so much of the rest of um the emerging world is economically tied to China, and then thanks to the growth of passive investing and the treatment of them as an asset class, it's financially tighter the China. Yes, yes, China, this point really dominates the entire e ms at cars. So, John, I have to compliment you on this column here about the emerging markets. You're charting game and graphics. Game is

very very good right here. There's a lot of great stuff in here. And one of the things that really jumped out of me is that China is really slowing down. You cite the Bloomberg's China Real Activity Index, gives your sense of what's going on there, because the China is still the government is still saying six six and a half percent debt. Yes, growth GDP growth, Yes, that's slower, but it's still pretty good growth. What do you think, well, that that much is true, that China lives by different

standards from the from the rest of us. From memory, I don't have the number in front of me. With the our own Bloomberg's own Chinese activity gauge is still something like five percent which most of us would kill for, but is still if you look at the context of Chinese growth up over the last thy years, is dramatically lower. We've known for years that China needs to manage a transition that Hi Jimping has obviously been quite keen to grasp the nettle of managing the transition trying to move

away from an export lead economy. They are very painfully trying to do that. Whether they succeed, I suspect remains a much bigger question than you know than the trade war, the trade board. The trade boards plainly will feed feed into that. But the question is, can China really manage its transition move on from a middle income country without having one major crisis, one major stop or reverse along the way. It's there are truly no other examples of

countries that have managed that. Even the Nine the U, the U S and the late century is in many ways very similar to the China now and had depressions and panics every few years. Um Korea and Japan both had their their moments of sharp economic and market problems. Can China somehow or other avoid that, given that so much of the rest of the world relies on them, very uncomfortably to keep growing for us. Hey, John, let's switch gears quickly. You had earnings, we had. You had

another column out yesterday talking about earnings. And you know, it's interesting, it doesn't the earnings period I woul characterize in the third quarter was okay, lackluster. So so yet the market grinds higher every day. Does the market not really care about earnings right now? I'm inclined to say

that it doesn't. Yes. I mean the research I was highlighting was from b c A which BC Research, which showed that if you actually look at whether you look at how much a quarter and aggregate surprised compared to prior expectation, or if you looked at how good it was in absolute terms, you really couldn't make that to have the stock market was performing at all. Um I mean, obviously, if you take a nice long chant over fifty or sixty years, there's a very close relationship between earnings in

the stock market. But in the short term it's just not there. And I think that is in large part because rates at this point are so central to UM, to what we would expect from EPs, because of because of the matter of of share buy backs, because of the impact of credit costs, because the economy is seen as so driven by by credit that the the interest the interest rates effect swamps the earnings effect, or an

even greater extent than it normally does. John Author's thanks so much for joining us, too, really interesting accounts done. Author's Bloomberg Opinion calms joining us on the phone. You can read John's work and all the great work from Bloomberg Opinion on our website Bloomberg dot com dot com, slash opinion, and on the terminal typing in O P I n go some really really great work that dig deep into some really key issues. Countries across the globe

face a mounting challenge. That's how to offer adequate financial security for retirees today and sustainably into the future. To help us dig into this topic, we welcome Lord Adair Turner UH Lord Turners, the Institute for New Economic Thinking, Senior Fellow. He's a House of Lords member, Group of Thirty member and former UK Financial Services Authority Chair. Lord Adair, thank you so much for joining us. This is a crucial topic, not just in develop markets, but increasingly in

developing markets. You can just scope out for us the issue well at one level of the issue rises because of a result of two thoroughly good things. People are living longer. Life expectancy is going up across most of the world, and they also have fewer children. We end up with population stabilization, and that's a pretty good thing as well, because it makes it easier to deal with

environmental challenges, etcetera. But those two good things, living longer and having population stabilization, they create a challenge because if you don't do something to your pension or your lifetime security system in the face of those changes, you are just going to have, you know, more retirees per worker, which either means that workers are going to have to put in significantly more savings or taxation to support longer years in retirement, or retirees are going to be poorer.

And I'm afraid there is a sort of relentless mathematical triangular logic here which is faced with these developments, either retirement ages have to go up, or people have to put in more money in some way or another depension systems,

or on average they will be worse off. And the crucial thing that we're saying in this group of thirty report that we've just published is to set out that logic, to illustrate it in multiple countries, and to say there has to be a more robust engagement with this by policymakers throughout the world. What you can't propose is what is the single perfect solution to be you know, pursued in each country, because the solution in each country has

to reflect its own political dynamics it's starting point. But the fundamental nature of the challenge and the three possible solutions at the most generic level, they are common across the world. So the issue seems to be common across the world. As you mentioned, do we have any examples of any countries that are actually tackling this issue with some success. Well, um, I would say that Sweden has

made some sensible policies. What it has done is it has a tier of its state system which it caused a notional defined contribution system, so it's still a payers who you go is paid for by compulsory contribution system. But within that it said, look, we're not going to tell you in advance what your retirement age is going to be. Your future retirement age is going to reflect the increases in life expectancy which occur between now and when you get to retirement, and by the way, we'll

give you some trade offs. You can take retirement a bit earlier, but you know you'll have to face a lower cost there, or delay it a few years and you'll get a higher pension. So that's quite a sensible idea. My own country, the UK, as a result of a pench And commission which I cheered ten years ago, is now committed to increasing the state pension age within our state pension system. We are going to take that up from sixty ten. It will be sixty six by next

year and it will reach by the midties. And that has actually enabled us to provide a slightly more generous pension, but at a later date. And then there are other countries around the world. I would say Singapore, with its large form of compulsory savings, has provided a significant amount

of a security for many of its citizens. And I think what intelligent policymakers do is not believed that they can go to any one country and say let me copy that, but look around the world at different examples of how different countries have addressed particular parts of the issue, and then try to work out what is the best

combination of solutions given one's particular national starting point. So, Lord Turner, the in the United States, this country is you are I'm sure well well aware has moved away from a defined benefit pensions that were kind of my parents generation, if you will, and more towards you know, kind of user savings, whether it's four one case or or something along those lines, individual savings. Where is a country like the United States in terms of this global

issue of we're living longer, we might not have enough money. Well, you, of course do have a social security system. And unlike, for instance, in healthcare, where you have an extremely limited state private market solution, social security is actually, you know, a very robust um state driven, government driven, federal government driven system. And I think actually you know the absolutely inch pin of your system because it provides a baseload for many people of low and modest income to at

least get up to adequacy. And I certainly wouldn't move away from that. And you have taken some moves to overtime in future, increase the effective retirement age within that if you go to the private space of how people then provide additional pension provision on top of the basic social security. Of course, you're quite right. You have seen, like many other countries, have seen a very significant move

away from defined benefits schemes provided by employers. And I think that was bound to occur in the way that defined benefits schemes were designed in the past, because they

just placed too much risk on the employee. The employer took all of the risk of what was the market rate of return on the investments, because the pension that got paid out was independent of that return, and the employer took all of the risks of where the life expectancy went up a faster than was anticipated when somebody originally joined the scheme, and so and it's a bit tragic what has happened across the world is that as it were, over gold plated employer private defined benefit schemes

had tended to close. And in a sense, we've moved to the other extreme, where individuals take all of the risk. You know, if their life expectancy rises, they're going to have to deal with all of that. If the investment returns are less than they anticipated, they will have to deal with that. What one of the points we make in the report is that one could think of hybrid solutions.

One could think of forms of employer provided pensions which provide an element, a sort of guaranteed bit of design benefit, but where the amount that you get on top of that depends upon the investment return on the funded assets, or cut it short there. We could talk about this for a long time, a looming issue pensions across the world. Lord Adair Turner, UH Institute for New Economic Thinking, Senior Fellow Group of thirty member, former UK Financial Services Authority Chair,

talking to us about long term pensions. 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