Surveillance: Higher Equities Base Case with Koesterich

manager for the Global Allocation Fund of black Rock. RUSSI, your words are base cases equities and the yea higher. What's the base case? Based on Russ and more and John, I think the base case is pretty simple. That we're in an environment where the economy is slowing. That's one of the tricky parts. But nominal GDP real growth plus inflation is still likely to be somewhere around seven percent

this year. And when you look at that and you think about the relationship between m g DP revenue earnings, you're probably gonna have a stronger year for earnings growth that is currently discounted. And yes, as rates back up a bit, you may get some multiple compression, but to our minds, unless they tighten much more aggressively than we think you're probably not gonna have so much multiple compression

that over up it overtakes the earnings growth. So still a year where stocks are positive, although not nearly as positive as we were last year or the last few years Russ, as we saw from Apple and I guess Amazon's on Thursday as well. How does black Rock vailue these tech bohemus profiting tons of money? How do you

value that right now? Well, Tom, this is I think part of the bull case that you've got companies like Apple that are still cash flow machines, and as large as they are, they're still growing their cash flow at an incredible rate. They're unbelievably profitable. This is where some of the dislocations are probably creating opportunities. We know that a lot of the early growth names and names that are not gonna have earnings for a decade, they've been hit.

A lot of that is tied to the bubble coming out of speculation, a lot of this type of real rates going up. When you have companies like Apple and you can pick any other name within that large cap tech universe, you know they've come under pressure, but maybe for the wrong reason, because these are not companies where you're looking at discounting cash flow in ten years as we saw last week, of generating from menace cash flow

in real time. Russ. Given the fact that you are constructive on these companies, you've got such positive things to say, and black Rock has had a stance of holding a bit more cash. When do you know it's time to deploy it? Well, you know, the cash is not just about trying to time the market. I think part of the reason for the cash, and honestly so we're running with the high cash balance today as well, is less about I'm going to time the market, is more about cash.

In an environment in which bonds have become the source of risk. Cash along with that, say, a long hour position has become one of your risk mitigainst And if you're running a multi asset portfolio and you're thinking about risk and managing that risk and you're not getting the same diversification used to get from bombs, you're gonna run with a bit more cash, Russ. Just quickly before you go Friday, A lot of people expecting a self print,

maybe even a negative one. How do you think we're going to internalize that with the number drops, you know, I think we're back in the environment where people are gonna get a little bit nervous about strong data because obviously the big tears that fans going to be more aggressive. That said, you know, there's still some noise in this print. We know that the seasonality numbers around the holidays have

been off really since the financial crisis. They've probably been even more off since the pandemic, So I wouldn't base too much on one print. Russ Coast of black Rock, Russ fantastic as always, sir, Thank you very much joining us now. Sarah Hunt, portfolio manager at Alpine Woods Capital Investors. Sarah, can we just stop here? You're pull photio manage. How

active were you this month? Well, we were fairly well positioned coming into this month, so we've been active in terms of what we're looking for that might have gotten hit with the rest of the stocks. So we were somewhat active, but it's not like we went much. We had a much different activity level than normal because we were fairly well positioned coming into this because we were concerned about this coming into and the end of last year. If someone has a bullish cast, where is the opportunity

right now? I think there's a lot of opportunity in some of the tech stocks that have gotten hit. I mean, you saw that rally in the Nastack on Friday. I think part of that was Apple coming out and saying that some of their supply chains of ease. I think that gave people some comfort that some of the issues that they were concerned about are getting a little bit better. I don't have the numbers in front of me, Sarah,

but this is really important. Joe Feldman, with Dana Telsea's advisory group has operating income at Amazon and again over a longer time frame of twenty four months. It's breathtaking the growth. When you look at the tech stocks, you're not looking at one week performance or one quarter. How long is your timeline to judge the value of big tech? I think the timeline has to be pretty long because some of those companies have grown fairly, fairly well for

a very long period of time. And when people start to talk about the tech issue earlier on with a great tightening issue, there is a bifurcation and technology for the companies that can grow and grow profitably. And I've said this before, and I really think that that's starting to really starting to see that. But there are some stocks that have gotten hit with all of this that

I think are decent values here. I mean, you've got some fifteen times earning stocks and some of the chip makers who've got some of the chip equipment makers that are cheaper now too than they were before. And I think that there's some real growth ahead because you're going

to continue to move where we're making semiconductors. If the supply chain issues have taught us anything, I think you're going to see a different People are going to be basing their their production of semi conductors in other places than they have been because they don't like the dependency. So I think that there's a long runway for some of these stocks to grow, and I think that that is what people are going to be looking for as we go forward. Sarah, it has never been a fundamental issue.

It's always been a valuation issue at least, and some people are looking at the potential for real rates in the United States to go to zero. David Costin among them, of Goldman Sachs, how much are you including that scenario when you say it is time to start going in

and buying some of these high quality names. Well, I mean, if you think about the fact that historically we have never seen negative rates before, I think just getting back to zero should not be a cause for major concern, and I think that growth can still happen under those conditions. But the problem with inflation is that it's systemic in ways it is very difficult to fight. The energy issue is one thing, the housing issue is another thing, and

those are not that easy to fix. I mean, if you've got a global move away from hydrocarbons without a lot of non expensive ways to replace them, that's not going to be a transitory issue. That's going to be a longer term issue. And the housing problem, as rents go up, is going to be non transitory as well. So I think that just getting back to zero is

not a tragedy most of this group. But I think that the longer term question is going to be what does that look like going forward, where do rates go, and what happens in the interim to inflation. But there are a lot of people are saying that because of that inflation story, it's the cyclicals that you should lean into and not necessarily the growth names that have benefited by low rates. Do you disagree with that are you saying that actually, these big names have the greatest capacity

to grow with inflation. I think some of these big names have the biggest capacity to continue to raise prices. The problem with the cyclicals is that if you've got a slowing economy, then you've got you know, a talent on one side and the headmand on the other. And I'm not sure that that's going to be the biggest place to make money. Although we think some of those stocks have come down too, so it's not I wouldn't

ignore them either. It's really just looking at individually, stock by stock, what is this company's what does it look like for them in the future for the next two or three years, what does it look like for what does the interest rate due to them? And what do their end markets look like? And I think that's really the kind of individual stock by stock analysis that has to be done. Sarah Vom palm Wood's Capital Investors. Sarah, what a busy month, all that work last week for

a flat market just unread exhausting stuff. Sarah, thank you, thank you very much. We start strong with Lisa Hornby, head of the US multisector fixed income at Schroeder's with a backdrop out of A. Rutger's economics and the great Michael Bordeaux as well. Lisa Hornby, you are grounded in economic history with Bordo place. The economic history right now is you allocate forward to the market. How do you

combine all the econo babble into an investment view. I think it comes back to Lisa's coming earlier about things being corrupted. I mean, I would take that a step. It's not yield curve, right, It's not just the yield

curve that's been corrupted. It's all financial assets. I mean, you look at the price appreciation we've had over the last couple of years, and you'd say nothing could justify that except for the fact that we had literally trillions of dollars poured into the economy UM, thanks to both FED and and and policymakers and UM. Markets now need to correct to some level of normalcy, and that's what we're seeing. We're in a transition phase now. UM. So you know, our view on risk assets is a little

bit more cautious. We've probably I think we've spoken about that on this show for the last couple of months. When you get valuations in the bottom quartile and we were in the bottom desile. I think in UH in November you have to be a bit more cautious in your approach to risk taking. So that's where we are. Um. You know, we look at at all in treasury yields right now and we say they do offer a little bit more value and the market is discounting a lot

in terms of the FED. Maybe we could go a little bit further, but certainly we think we're a lot of the way there at this point. Um. And so you know, we're we're kind of being cautious and waiting for the macro backdrop to stabilize a bit. Hopefully the Fed gets this right. I think the chance of that is is fairly low. But hopefully the Fed does navigate

this well and doesn't overtighten into a slowing economy. Um. But if they can sort of land this uh land this well, then there should be opportunities for more risk taking later this years. Unreliing on other programs and other networks now for Fed speed because no FED officials coming back on this program anytime soon. In the ft Atlanta FED President Raphael Bostick just opening South up to maybe need to go quicker if they need to. Maybe not.

If they don't, at least we're still sticking with maybe three hikes for twenty two. I'm just wondering in your mind where the gap is right now between the communication we're getting from the FED and what the market is baking game. Do you think that's a widespread would you think it really narrows the next time we get the dot plots safe from the FED in the middle of March, so you know, I've seen some of the street forecasts out there as far as high as seven hikes. I

think that's too much. I don't think the FED gets there. I think the market disconnected between the FED in two is probably not the material. My base case still at this point is that they probably do for basis point takes rather than five. I do think inflation peaking will give them a chance to pivot office something slightly slightly as aggressive as they are now, um so, become a little bit less aggressive. I think where the gap is is probably next year, Uh, the market is discounting very

very little. I think you probably need to shift some of what's in two into three. Um so. I think that's probably where the bigger gap is, and and the overall terminal funds rate is still fairly low in the market, UM, so you know, between one and three quarter percent and two percent, that's still a very very low terminal rate. I think there could be a little bit of scope for that to move higher as well. Lisie, you said something earlier that the chances of the FED actually well

orchestrating a soft landing is fairly low. Can you walk us through what it looks like if they fail to? I mean, what you see in your likely scenario in terms of tightening and subsequent economic reaction. Yeah, I mean I think it looks a lot like what happened in where you know, the FED was basically overtightening into a slowing economic backdrop UM and they were forced to pivot in the first quarter, actually the first month of twenty nineteen.

I think that's that's the template. Uh, this time, I think there's more there's potentially even more danger of that. Right. A lot of this, a lot of the market, um, at least in financial asset terms, has been predicated off the fact that we've had very very negative real yields for quite some time. If we continue to see really

yields normalized, which I think they should, to some degree. Um, that should put some pressure on how other financial assets, how risk assets are discounted, and that macro you know that macroeconomic backdrop. That volatility is a bit concerning. It doesn't immediately translate into slower economic activity. But if it happens too aggressively and too quickly and we start to seek companies question the the backdrop and make different decisions based on hiring, um, that could be that could pose

a challenge. So it's I mean, it is financial conditions ultimately that we're watching. I think there's a lot of metrics that feed into that. So far they're relatively well contained. UM. I think the other part of it is that Pale was pretty clear that financial conditions don't matter, and so are as the household balance sheet is strong, and so that's what they're watching. And I suppose there is a

there is a potential for a gap there. Right. The household balance you can remain strong for some time because there is there are still some access savings, people are employed, we've seen wage gains, UM, household network is high. That could probably remain a little bit stronger than the financial asset backdrop for some time. You look across sectors just quickly.

I want to finish on this. Some people have been raising cash and I'm wonder if you look across sectors right now, what you'd be using to fund that cash position, why you'd completely walk away from in credit right now? Can you do that on a sector to sector basis? Is it an individual name, single name to single name. What's the process you go through to do that? I don't think it's as simple as that at the moment. I think you have to watch the companies you own.

I think we're seeing the companies that are doing uh M and A get hit a little bit harder um, at least at the outset. I think we have to be careful on security selection here. I mean, I think it's about taking broad data down. But there has been sector out performance right Energy has done well, at least in credit market so far. Triple B is ab outperformed on a beta adjusted basis, So you know, I think you have to be more specific than just say cut

a sector um at this juncture. It's more about the individual names and the overall level of data in your portfolios. Small as always gonna catch up. Lisa Home be there right now. A great honor for Lisa, Bryan Watson and I to bring to you on radio and television across this nation. Someone who viscerally understands this story. As we spoke to the ambassador of France to the United States last week and his history of Eastern Europe so too,

George Friedman of Budapest. He is founder and chairman of Geopolitical Futures and has a family that has viscerally lived living near Russia. George Freedman, what does the media, what does the analysis get on about Vladimir Putin? Well, he wants Ukraine, but he did something very strange. Wait, he did not attack weeks ago. You don't launch an attack

without surprise if you can get it. And sitting there waiting for the United States to build up at its defensive capabilities, which the US has done, just increases the chance of losing. So right now he's not going to defend in the Ukraine. He's really looking at how to split NATO. Within splitting NATO. And this is Angela's stent writing in Foreign Affairs this weekend on the Putin doctrine. I guess I have to ask, what is the Putin doctrine that you see that will allow for a split

a fracture of NATO natural gas. Russia is supplying almost all of Germany's natural gas. The rest of Europe too, but Germany is a key it's to be a big player. If Germany joins with NATO, it risks having a shouldnt cut off a natural gas If, on the other hand, it doesn't, Uh, it goes against the grain about the United States, the British and other players, particularly Eastern Europeans.

So what I think Putin is really doing is creating a situation with his hammerlock on natural gas where the Germans are in an impostible position and are likely to go and split from the West in resisting the Russians, or at least to the extent of not cooperating in Billion events George. In other nations, we might ask about popularity. Does it even matter here whether this move that Vladimir Putin is embarking on is popular among the rank and

file Russians. I think at this point, near war situations, popularity doesn't matter anywhere. Uh. You notice in the United States everybody is quite quiet about it. The Germans are I'm the whole opposed to any operation to British, are very deep into it. Each one of them is following their national interest and the decisions are going to be made soon, very quickly, very rapidly, and I don't think public interests will affected, except that no one wants to

come out of this looking like a loser. It's how you come out of it. This matters. Well. So how does Watiman Putin look like a winner from all this? Well, at this point he appears to be a winner because the West has grown up and gotten really alarmed. So already he shows the Russian people that they've taken us seriously, which we really haven't. The second step is, however, he's got to do something. An invasion is a very risky thing.

You can lose, and he cannot afford to lose. On the other hand, you're in a situation where if he can manage to split NATO, if he creates a crisis in NATO, you can do something. Which is why the United States right now is scrambling defined a natural gas frows is that they could send to Europe to support them, because that's where the key is. Uh. If he doesn't want NATO to advance in the East, perfect way to do that is what NATO wide open on the natural

gas issue. Well, George, this is important and this goes back to your at Stratford, and frankly, your academics are Cornell before that, is it feasible to salvage Europe with a delivery of hydrocarbons? Have you ever seen a study where we can deliver to Germany and the rest enough oil gas and the rest. What I have seen is that it can't be done. There's not enough bottoms to do.

But at any rate, the United States has to give it a try, has to make it clear to the Europeans that we care about this situation, that even if there's going to be an interruption, it will be a short interruption and we'll be able to handle it and so on. But the problem, what Putin has done very well is to shift the burden over to the Germans in particular to Europeans in general, where the choice between defending Ukraine and having their economies wrecked has to be made.

And whatever public opinion now comes in they're gonna go craze is not that important to them. Is it a generous is it a generational shift of a new German government after miracle? Does that matter in your analysis? Well, Germany is built an economy that's really very powerful in Europe. It is a leader economically in Europe. Without natural gas, that doesn't have that economy, it's built itself into that position.

The U. S should have perhaps try to build alternatives years ago, but it didn't, so let this situation develop, and now it's playing out. It's really a reality that can't be ignored. George Freeman, thank you so much. Greatly appreciated. With geopolitical futures today, just authentic analysis. They're one perspective on our international relations right now. Josh ra Charstein with

US Vice JOHNS Hopkins Bloomberg School of Public Health. Of course Michael Bloomberg, h are not an acquaintance with his television and radio property as well. Dr Scharstein, it is good news, whether it is the thousands assembled in Los Angeles and Kansas City for football, or in the walk up I live in in the lobby, everybody has to wear a mask. There seemed to be great polarities. Here's

the reality. We see cases rolling over nicely, we see hospitalizations rolling over somewhat, we're waiting for deaths to roll over. When deaths roll over, how will public policy change. Well, I think public policy is changing in places where the cases are coming down, in the hospitalizations are coming down now, so I think it's going to be a regional phenomenon. And then I think, to your point, I think the national mood will really start to change as deaths come

much further down. Um. And this is the you know, approaching the moment you know where we are going to see COVID start to fade a little bit more into the background. Um. I don't think we'll have nearly as much disruption in our lives in barring the emergence of something that we haven't anticipated, which of course could still happen. The vaccine rate, I'm gonna call a amateur an amicron from sixty or sixty one out to sixty how critical is it to double that out to a sixty eight

percent statistic? Sorry? That is what's The vaccine rate was sixty six it's now sixty according to most the media reports. I see, how critical is it to double that out to sixty eight percent? Does that mean something? Well, I mean with every increase in vaccination, we're gonna get fewer hospitalizations and fewer deaths to value of vaccination again, proved itself during the amicron wave. So we have tools um to protect our cells and we have to keep going.

So just because it's going to fade into the background in our lives, the more we are smart about, you know, protecting ourselves, preparing the mortal fade into our lives. It's not just by ignoring it all together that we get that benefit. Dr Sharfstan. Meanwhile, that's the US, and that's Europe. Perhaps over in China they've been trying to pursue as euro COVID policy. Uh, and we do have the Olympics

starting on Friday. Hong Kong is experiencing a pretty big upsurge in a macron and one professor at the University of Hong Kong who has researched a macron said, the horse has bolted, and I don't think that the government is going to be able to get on top of this. What's the trajectory of COVID cases that you expect over in China given the lack of social immunity built up

by natural infection and just a normal life. Well, it's the lack of immunity in part because the vaccines they used to have not been the strongest vaccines and so um, they are vulnerable to COVID, there's no question about it. Um and this virus and some of the amicron variants we're seeing are crazy contagious. So that's not a situation that's very good. And the idea of persisting in zero COVID without the benefit of better vaccines is a real

challenge for China. And you know, I don't know. It's it's hard to believe that they could make it through with so many people coming in without it getting out. Of course, they have tools and approaches that we would find unacceptable in this country to accomplish that, So I don't know what's going to happen those tools that we would consider unacceptable. Are they even enough though to stave off the up surge in likely amicron cases and likely

COVID cases after the Olympics. Can you game out what it might look like in the weeks following well, I mean, if the omicron gets out into the Chinese population, it's likely to spread very quickly given the fact that the vaccines used they are not as effective, and then we'll have to see the scale of the reaction from the Chinese authorities. You know, I I don't know what's going

to happen. I'm not someone who's going to be able to put together a scenario between the biology and the politics, but I don't think it's going to be um, you know, very pleasant for people in China if they go for a zero COVID approach in the setting of such an incredibly infectious variant. So you know, on the other hand, they may, you know, have to do some pretty significant actions to avoid people so many people getting very sick. You surprised these Olympics are ham like from every point

of view. I love the fact that Vladimir Putin is going to be going and helping with the inaucuration of this Olympics, just giving you a sense of it. But honestly, John, I don't understand how they can pursue a zero COVID policy while having individuals from all around the world come into their borders and basically celebrate an international kind of con fab It doesn't make sense to me. We'll see

this plays out. Good luck to them. Dor Joshua Shastain that of the Johns Helpkins Bloomberg skilled a public half thank you said, 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