Surveillance: Goldilocks Scenario with Levine

get a strategy grounded in first order condition mathematics. That's Alicia Levina, head of Equities and Capital Market Advisory at b n y Mellon, with some serious math chops out the end of the algebraic function. There's an epsilon. It's a Greek letter. You and I used to look at it like, what's that mean? Now it really means something.

What does the systemic risk we see right now? So the systemic risk is that we've priced in the Goldilocks scenario, which is that the FED manages to do the soft landing with inflation that's coming down on its own, so it doesn't have to go that last mile from the four to the two percent, and that the consumer more or less stays healthy even as the FED hits the labor market job openings but not actual jobs. That's the goldilocks scenario. It is possible, but that's what we're priced for.

We've now got the s Impeach rating at eighteen times forward earnings as the tenure move lower, and you know, the risk is, of course, that that stickiness of inflation that you've talked about this morning is going to make things a lot more difficult. So Alicia, how do you want to use that strength over the last couple of months? How do you reposition? What do you fade? Where do you fight what's vulnerable? So I think that the what's vulnerable here are the are the stocks that have rallied

the most. So when you think about the long duration text sucks and the growth names, they've bounced back the most. And they've bounced back because tens have that ten years have moved lower. So I think there's going to be some sort of reversion to the meme there, and I think that's what we've seen really all year. When sectors have become over bought or um oversold, they tend to

bounce back. We're coming into the most seasonally difficult time of the year September and October, with the with the Goalilocks scenario priced in. Now, our investors stayed fully invested all the time. We don't trade around the market, so they've participated in this rally, but we do think that

the inflation stickiness is not going away anytime soon. So the minutes today, I don't think we're going to add anything necessarily new because you've had this panoply of FED speakers that have come out over the last three weeks essentially trying to talk down expectations of a pivot, and all we've gotten is the tenure moving lower and lower and lower, financial conditions going going, UM easier, and the

and tech stocks rallying. And find America touched on this yesterday, and I'd like you to put it in English for us. They talked about us no longer being apocalyptically bearish, but we were still too bearish to get an immediate turnaround in the bear market rally. Can you translate that west sentiment and what does that mean for the prospect of a further move high here? So I think this rally

took most strategists off guard. UM because the market was and strategists were essentially pricing in a recession as the base case scenario with earnings going lower. And what that means is that the risk is still higher because investors are still defensively positioned, meaning not buying duration and and not really going all in on risk trades. And so with that you could see a squeeze higher simply because you've had such a huge structural shift to the defensive side.

The real pain in this market, as terrible as the first five and a half months were, where where the accounts that were defensively positioned starting in mid noon, because those positions got destroyed. So, you know, we tend to be very neutral. We tend to be you know, we tell our clients stay, stay, stay fully invested because you can't trade it because when it turns, you're not going to get those upward moves. Alicia, you mentioned earnings there, and of course we're at the tail end now of

the second quarter earning season. There's only about thirty companies in the S and P five left to report, and by and large, it's been pretty decent, at least relative to expectations. Average revenue growth of fourteen percent earnings growth of eight point four percent. Both have been surprising to the upside more often than not. Looking forward, though, are we too optimistic about the trajectory of earnings through the back half of the year. So look, earning season has

definitely come in better than feared. I think some of that was definitely um the impact of inflation, because earnings are nominal so much better. And I think some of the retail reports we've gotten over the last couple of

days have actually come in better than feared. And then with some optimism looking forward, i'd say that as I think that the falling gas prices is really something very interesting because while in one sense it's it's disinflationary, on the other hand, if you're putting lower gas prices on top of an economy where workers are getting five point five percent wage increases, you do see that there's more

spending power there um. And if July is better than June because of falling energy prices, then you have to wonder whether what direction inflation really is going in. If you look at new orders on the I s M, that tends to be predictive of where SMP earnings are going. By about six months, we've been under fifty for a couple of months, and at forty eight, it tends to mean that your SMP earnings will be moving lower in

the next six months. We're just not there yet. Oh you and I are reminiscing you were too young for it. But when you were talking about the joys of turkey tetrazini with a can of cream of Campbell's cream of celery. So there's a whole analysis going on now, the Dow Jones Industrial average of the inflation now versus the inflation

back when I was eating turkey tetrazzini at school. This inflation is different than that inflation, right, This inflation is different because essentially it's been driven one by commodities, but also on the service sector and the wage side. It's a different America, a different economy, right, totally different economy. We're not manufacturing based anymore. We're a service based economy, and so when the inflation is on the services side, it's going to be harder to get it down. And

also we're more heterogeneous. I mean, back then it was a more aggregated analysis and you can't do that now, which is our factor analysis is more important. It is more important I think the interesting thing to hear to watch is, even as we've talked about the lower end consumer struggling, it is completely obvious that the higher end consumer is not just doing fine spending, you know, in a profligate way, supporting the economy and supporting corporate America.

And so I think that's different that the range and income and what that the effect of top line nine percent inflation means is very different. John, do you know Turkey Tutrasini? John was wasn't familiar with that something. The big debate we had that, Yeah, the big debate with Turkey Tutrasini is do you do put the soup in before the parmesan cheese or after trying to wind out what account? Which part of this is winding me up something? The Mail of the Doubt John's reference with the mail

back then, that's all there was. In fact, still there is no town. Wasn't down now down? Yeah, thousand within the gloom out there. Alicia Levin is put pushed against the gloom. We're two thousand dow points away from Nirvana. Point change on the Doubt song, You're killing me, wag, Turkey will kill you to have you with us in a studio Michael Collins with us. Now this is an important conversation senior portfolio manager at p JAM and steeped

in the mathematics of Binghamton and other good universities. Was all Michael Love talking to you about the dynamics of the moment. There's a major core debate on the glide path of disinflation. How does it fold into owning and a husbanding yield right now? Yeah? Well, Tom, one thing we're seeing is this big tug of war between growth and inflation, right, and growth globally actually seems to be holding up pretty well. We've seen European GDP continue to

be actually a little bit stronger than expected. In in the US, you know, we saw it in the labor market. We'll get retail sales UH in an hour, and real retail sales will probably continue to be really weak, are slightly negative, but obviously nominal retail sales are really strong UH. And And inflation, right, inflation, as you've all pointed out, especially in places like Europe, in the UK, UH and to some extent the US are really sticky. But that disinflation,

every trend is beginning to re emerge. We are seeing goods inflation. We are seeing leading indicators of goods inflation pointing towards zero goods inflation, and I would bet in the next six twelve months you see zero goods inflation globally in the US, and I think that's a big deal. Obviously, services inflation is sticky, but I think that will give the FED some optatism to slow down the pace of John. This is like Michael Collins is writing the speech for

Jerome Pale, the separation your services and goods. How many people John are expecting the massive disinflation of goods. I'd say it's a lonely crowd. So how much more work does this FED need to do with that in mind? I think this is so important. Mike, You've been in the camp that we've seen the high of the year on a tenure yield. I wonder if that same theory applies to the two years. Something's happening quietly here for

the two year yield. It peeps back in the middle of June, two days before the equity market bottomed at then it faded away and equities were off to the racist and we ran it really hard as we faded that real yield as well we've seen that two year Ye, the nominal yield just pick up pick up a fair

bit as well, Mike. I just wonder what you think about that back at three four on a two year in America and the way US bond geeks look at it, as you know, Jonathan and Tom and Kaylee to we look at those forward rates and what's priced into the market right now with this jump in in the front end of the curve, the markets are pricing in obviously a higher terminal funds rate of getting close to three

and three quarters. So the question is is the Fed actually going to be able to engineer another you know, hundred and fifty basis points of rate hikes from here and and that is not clear. I mean, I don't have a lot of conviction either way on that. I mean, even if goods inflation goes to zero and services inflation is at five, that's still a three and a half percent, you know, core PC or core c P. I I don't know if the Fed stops hiking at three and

a half percent unless growth is probably below two. So I think it's this balancing act between growth and inflation. I'd like to think about it in nominal GDP terms. You know, if you add those two up, If those two added up are below four, let's say, maybe that's enough for the Fed to to pause. But if they

remain above for I think the Fed probably keeps going. Well, John was talking about the work being done at the short end and where that leaves to the two year yield is about forty five basis points above that of the ten year yield. How much further can this inversion go? What will the depths ultimately be and how does your assumption of what the height of the FED funds rate

factor into that? Yeah, you know that that curve inversion has has been you know, not totally unsurprising in a world where inflation is sticky, central banks all over the world of raising rates and and growth is moderating and slowing, you do see these flat inverted curves. The question is how deep can that inversion go? It's you know, negative call it two's tens can go to negative eighty or

negative a hundred. Sure, I mean if the funds rate ends up at four this cycle, certain, probably, Bryan Weinstein Morgan Stanley said the same thing last week too. Sure, I mean, I mean we're actually thinking over the next. You know, we're long term thinkers, as you all know, and long term investors. Over the next three years, what is the curve going to look like? And I think it's gonna be back to the old you know, bull steepener where the FED. By that point, we'll be cutting

rates and you'll have this big bull steepener. But in the meantime, you know, it's really unclear which direction that that curve shape is going. We're pretty flat right now in terms of the curve positioning because of the uncertainty. But but yeah, I mean, if the FED keeps going, the curve continues to invert. So, Mike, given that what business to how your spreads have being down at forms the basis points. Yeah, where we are in the camp, you know that that you're supposed to really take some

chips off the table here. I mean, ye, credit quality has been sound. We've just started to see the first sign of some downgrades, uh in the high old market and some very specific sectors cruise lines and healthcare. But by and large the upgrades continue to out number downgrades. Credit quality is good. These companies are flushed with cash. They've done a great job managing liquidity, managing the bottom lines, but valuations I don't think right now. And maybe you

could apply this to the stock market as well. The investment great corporate market may not be fully compensating investors for these for these big kind of tail riffs that are still out there, right I mean, we could have a deepening recession globally that that is certainly in the cards as well. Mike Colon is just awesome to get you on the show. Let's catch up against suit. Mikelin's there with PHM on the nicest inness bond market. Right now,

we're going to digress and move to Norway. Nicola Tangan his chief executive officer of the Norwegian Sovereign Wealth Fund. They are challenged by his target mentions the uncertainty that is out there, and we are thrilled. He joins us today with an up date. Nikolai, you know there on the back end of the core algebraic function as a Greek letter epsilon for uncertainty, What is the level of uncertainty your Sovereign Wealth Fund sees as you drift to

two thousand twenty three. Well, I would say it's a continuation of the uncertainty we've seen for for a year or so. Now it consists of the inflation, the energy prices, and the geopolitics, and so it's a continuation of what we've seen for some time. With the situation that we're in. Leads to diversification. You people are to using American phrase ser ginormous. How do you diversify or choose bets given

this uncertainty? Well, first of all, we have a very long term view on what we do, so we um you know, invest with kind of a generation hats on. We spread over investments across the world. We are we have ownership in the nine thousand companies across the world. We have both equities and bonds and VTA sate so well verse of out portfolio for the long term. What do you think of the American growth technology companies? Are you overweighting them? Do you own too much of them?

I know the Swiss National Bank has a little bit of Apple as well, But is there the opportunity there in the TUMBL to reaffirm large cap growth. Well, these companies are of course very very big parts of the index, and so we would have big holdings in these companies. Uh. The USA companies typically be amongst the top down holdings, and and we continue to think the well positioned And clearly we have seen a bit of a recovery in

the equity markets in recent weeks. Nikolai, there is a bet on the part of the markets that we're going to see a more devish tilt from federal reserve. How are you positioning potentially for Fed policy and how ultimately do you think they will react? How does that inform your decision making going forward? Well, it's uh, that's a really really tough one. We came into this year with with some underweighting shares and and uh, you know, a

less risky bond portfolio. We've taken off some of that underweight, but we remain slightly cautious on the oklak care. You know, clearly markets don't go down in a straight line, and and we are in certain in terms of whether we've seen a bit of a bottoming hair or whether we'll see a continuation of that of the tough market. And of course, in addition to the monetary policy picture, there's a number of risks that the market has to weigh as well, including the ongoing war in Ukraine which is

now approaching six months. Have you come to any decisions around strategies of what your endgame with your Russian assets is. Well, when it comes to the Russian assets, we have been instructed by by the government to to exit these for the time being, they don't really trade and also we can't be certain about where they where they end up, so so they are still frozen and we we haven't

sold them yet. Nicola I'd like you to step away from the huge mass and the different responsibilities you have with your sovereign wealth fund and look at the heritage you have of hedge funds. It has been an absolute battle for hedge funds in timing the market. Obviously they've got a much more shorter term mandate than what you have now. And then there's a question of long short and the different formulas or that is the alternative investment game over? Is the two and twenty game over? Well,

it's a tough one to say. I mean it's over for me personally in that by network for the Someone Love Fund, but now it's it's it's difficult to say, I mean the returns from that as Claus goes up and down. Um for the moment, they are having a tough time. They have previously bounced back from these tip of situations. But but I haven't really got a storm on this. I must ask Nikolai the view from Oslo

of the rest of continental Europe. I've been working through the morning and natural gas equivalences in dollar and in Brent crude barrels that directly involves Norway. Your comments on how Norway and your investment fund will withstand what we're seeing in hydrocarbon prices. Yeah, now energy prices are high,

guess price high, but unfortunately for some sad reasons. The result is that we have big influence into the fund, and we have big influence into the fund at a time where bondsen and in equities are cheaper than they have been. So from that point of view, that's a bit of a silver lining from this fund. Nikolai always enjoy hearing from you, and what a time to hear from you. A wound difficult complex the future with Nikolai's hanging there to see of the Norwegian self or in

Wealth Fund. Michael Dart joins its chief economists and micro strategist at M Camp Partners, and what's wonderful about his work is how he synthesizes the economic view into the equity belief. Michael, I'm not going to mince words, and my umpteen years of doing this, I've never seen the raging debate about the stock market linked to the mysteries of our economy. Do you feel the same way? Do

you see record uncertainty out there? Well, Tom. One of the last times I was on in the dark days of mid June, one of my messages for your retail investors was not to get too negative, even though the SMP five was down almost twenty four percent, and the reason for that was it's notoriously difficult, probably impossible, to time market bottoms, and what we were seeing with the big decline in equity markets in the first six months of the year was mostly a rate shock, the ten

year yield going from one and a half to almost three and a half percent. But we're well off the highs in terms of the ten year treasury yield, even though the rates bumped up today with a good data and the stock market is now up seventeen plus percent from the lows. So the first six months of the year, the equity market decline really wasn't about negative GDP or recession or a big earnings crash. It was about evaluation adjustment as the ten year yield moved up, and that

adjustment is now mostly in their rear view mirror. I looked Michael at the view forward, and the view forwards ends with the thud. I believe it's on Thursday or Friday, Friday next week at Jackson Hole. What does Chairman Powell

not want to do in his speech at Jackson Hall. Well, we've seen a bevy of recent FETE speakers out there with essentially the same message, which is that they're going to continue to persist in pushing the front end of the curve up, meaning the policy rates and those rates most closely tied to it, and they're not going to be deterred. They expect some economics loaning, but they want to be very certain and inflation comes down and stays down,

and that inflation expectations stay anchored at low levels. So they're going to persist with the rate hikes. They're going to persist at a slower pace, though, and that's what the market has gotten wind of, and I think that's the main reason that we've seen this big equity market move off of the lows in the stabilization and the long end of the curve. If that can do whatever it wants with short rates, it doesn't mean the long

rates are going to go along with it. So we're seeing an increasing array of yield curves move into inversion now and that is a cautionary tale about three. But I think the mistake that some people made with the yield curve is that it's not an immediate indicator of imminent recession. It tends to be a long leading indicator. The bond market is simply saying the short rates are going to go up above three, but they're not going to persist there for years and years and years because

the economy to take it. So, Mike, do you think though, that the using of financial conditions we have seen are underminding well Fedish trying to achieve And how do you think this fat chair is going to address some of that next week in Jackson Hope. Yeah, that seems to be the perception of some of the FED speakers that are trying to push pretty hard against this idea of rate cuts, but they really have no idea what the

economy is going to look like. I would say this, if financial conditions are easying because credit spreads are narrowing now from the highs, and equities are off the lows very strongly. Does that warrant more FED tighten than what other wise be the case? I would say only if

inflation expectations are also rising in sympathy. But bond market inflation expectations are well off the highs, and they've recently stabilized, and so I don't think that the recent so called easing of financial conditions necessarily means the FED has to

be a whole lot more aggressive. If they choose to do so, then you know, certainly that simply amplifies the risks of a of a downturn in three You know, that's the f O m C S see fafor m C seems willing to take here because they really do want to ensure that inflation comes down stays down at the at those inflation expectations stay anchor at low levels.

Well on the point of those inflation expectations, Mike, which you've mentioned a few times now, we know a lot of that caters on the price of oil, which has come down, and that is reflected in those inflation expectations moving lower and in the retail sales data today, with what we're seeing with the x auto and gas and control figures, is too much predicated on pricing at the pump staying low. When we had the OPEC new Secretary General telling Bloomberg earlier today that he sees the likelihood

of a supply squeeze this year. Yeah, it's possible. Um. You know, those break even spreads do move around based on shocks on energy prices in gasoline, but it's not entirely driven by that, so there certainly is some interplay there. I really think the best thing the FED could do here is to watch the evolution of nominal spending in the second half of the year. In the first half, nominal GDP was very strong, high single digits, but we didn't have much real GDP growth. I think that is

going to change because it's not just energy. You see metals down very sharply from the highs I mentioned the break events. We have a whole array of yield curves going into inversion, much slower money supply growth. So the whole front edge of the reflation in inflation and nominal GDP surge has rolled over, and so I think in the second half of the year we're going to see slower in more appropriate nominal GDP growth on the back

of tighter monetary policy like the path forward. What a complex one miked out of that of m campound Us, off the back of the REFS house house print. He is the chemical Engineer of Queensland, greatly assodassiated with Brisbane where he will lead the Olympic effort of ten years out. Andrew Levers you know him from Dobt Chemical of course and now and one of as many of affiliations Lucid

Group Chairman. He'll be interviewed by David Rubinstein. You'll see that tonight at nine pm peer to peer conversations with Mr Rubinstein, and he joins us this morning to speak of this really most interesting guy. And what's great about Andrew liver is is he's really hardwired into the hopes and beliefs the prayers of an American renaissance in manufacturing.

Is it for real? Well, he thinks so. He thinks that the manufacturing loss we had in textiles and other kinds of things that were dependent on labor costs is not relevant for the future of high tech manufacturing. He thinks we can be a leader in high tech manufacturing because that depends on supply chain and other related things, not so much on the cost of labor. But Andrew is an incredibly diverse person in his interests. He's from

Australia of Greek immigrant background. He Randal Chemical as president for and CEO for fourteen years, merged into DuPont. Now he's a chairman of Lucid Motors, which is an electric vehicle ups ale car. He's also an advisor to the Saudia Sovereign Wealth Fund. He's also on the board of Saudi a Ramco and as you note, he is also the chairman of the Olympics for a Brisbane in twenty two.

And I can't think of that far right. We're gonna be here for it though, where Kayle, you know, I I look at this and so much for me, Andrew Liver's is about process. He's the process guy in American business. Yeah, and he's trying to build something with this EV company in particular. But David, obviously, when we talk about evs, the comparison always is to Tesla, who, in many ways Elon Musk was the first mover on this. How does he see them competing, whether or not they realistically can well.

Tesla is designed to produce cars. I won't say for the average person, they're they're not inexpensive, but they're not going after the luxury market at the moment. Lucid is really going after the luxury market. It's cars begin at over a hundred thousand dollars per vehicle and they go up from there. Um. They will address the lower call market later on, but right now their focused on the

upscale market and that's why they're not directly competing with Tesla. Well, and of course, the US has been looking at making more investments into the EV infrastructure space. That's part of what we see with the Clean Energy spending in the Inflation Reduction Act that the President just signed yesterday. What were his thoughts on US infrastructure policy what it ultimately needs to look like. Well, Andrew Liberes has been involved

involved advising several presidents when infrastructure spending. And now that we have a bill, hopefully it'll be appropriations behind the bill. Remember the bill was early only to authorize spending. We have to actually appropriate the money. But assuming it's app appropriated, we can begin to redo some of our big bridges and roads and toll roads, airports and things like that, which should make um e V cars more accessible too, because they're going to build out a fair amount of

electric charging stations throughout the country. David, I have to turn to the issue at hand, and I know these are delicate discussions. You don't want to talk specifically about the Carlisle Group, but I do want to talk about scale and heritage. Doubt chemical of Andrew Liver's is thirty five thousand employees, and I've never bought the idea that big companies have smooth transitions. It can be as challenging

as any Carlisle Group is, roughly people. One of the great challenges we've seen in smaller projects hedge funds, alternative investment, private equity, venture capital is a generational shift. What's your best practice on that? What's the best practice to say I want to move on and do this this this this your your exceptional philanthropy to the American people and our history. How do you make a generational shift? There's no perfect model. Each of the firms have gone through

it in different ways. I think a good thing to do is to have somebody who's been at a firm for a long time part of the culture, they know the ethos of the organization, and gradually they come in and take over control and the founders step back. But it's more complicated than a typical situation. So let's suppose your lou Gerstner, you're the CEO of IBM, and you retire. When you retire, you don't own twenty or thirty percent of the company still and you're not still you know,

a major investor in the funds. It's a different situation. You're not a founder. So all the founders of the large privately firms are still involved, uh largely with some exceptions, still involved in as owners, investment committee members and as big shareholders. And it's a little different than the lou Gersner situation or Jack Wells situation when they retire and they don't really control the company through the ownering ownerships

large shares shares in the company. Thanks for those comments. David Rubinstein here of course, continuing the Bloomberg coverage of what we see and all of these different firms as they make generational moves. Mr Rubenstein with the full interview Lucid Groups chairman Andrewlivers. 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 in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg