Surveillance: Increased Downside Risks With Swonk

of cogenity. Equity strategists right to have Tony with us on a day like this, Tony, many people trying to play politics in this market right now convinced them they shouldn't. How do you how do you guess? We don't know how people are going to vote yet. We don't know. It's kind of fifty fifty right now. Biden's in the lead, but we know not to trust the polls from the last election. We don't know what the implication of the

Supreme Court nominee's going to be. We don't know if they're going to have the Senate, if the Democrats are gonna s week and have both the White House and the Senate. I just don't think it's an investable event. But what you do have is hesitance towards buying. But I don't think there's it's possible. It would be just an unadulterated gas at this point to say, Okay, I think X is gonna win and this is gonna happen,

So this is what the market's going to do. You don't know what the market's gonna do and whatever outcome may come until you know how the market trades into it. And history shows that when you have a significant equity market decline in the end of September into October, it usually means, according to the net Davis research chart that I use, it usually means that the incumbent loses. So we're gonna I think the market is going to be a better tell over the course of the next month

than any pundits. Tony Duar, your charm is to say we need a recession for a down market. Do you see your recession? No? I you know this is guys. Remember what creates a reset. A recession comes when you have a need for money and limited or no access to the money. We have a historic amount of excess liquidity. We have the recession, the worst of the recession than the rear view mirror, because we shut down the economy and we have a synchronized global recovery. Is it perfect

and ramping? No, And I wish that everybody was employed in every small business. My kids have a small business. Every small business was doing great. But we are still having, even though it's not perfect, a synchronized global recovery, according to all the data that any of us can have. So when you combine historic excess liquidity and a synchronized global recovery. The only time I've seen the data kind of like it is is in the fall of two thousand and nine, which, as you guys know, I've been

writing about. You know, the concept of corrections, Like the fall of two thousand and nine, you had four corrections that range between three and seven percent over the course of a month to month and a half after the first fifty percent move off the lower O nine and the recession was just beginning to abate and recover. It

was in place. Well, given that thesis, is this the time to double down on cyclicals, which, as Tom as John pointed out, underperformed yesterday in this new type of sell off that we're seeing in response to no fiscal deal down in Washington. Listen's a great question that, yes is the answer. I would double down. That's that's an individual question, so I can't answer that for anybody. Um, is it time to add risk when you're down almost ten percent in the SMP more than that in the

mega cap names, don't forget up. Until yesterday the cyclicals were so significantly outperformed. It was the theme because they were so significantly outperforming the NAZ the NAZ deck mega cap stay at home names, So clearly there was a

bounce there. Towards the end of the day, you've really you've taken apart the fang stocks that they're back to where they were at May right, So you know, the idea which we've propelled and kind of took a lot of incoming for a month ago to not chase them and to advocate taking some off the table and into cyclicals. To some degree, that's been neutralized by the total drubbing in that space. These are good companies, they're not horrible companies. They have just gone up into the right too much.

Tell me that rotation stole an arty tune along with the Rise and Treasury yoats as well. That's what telling you a Treasury yots topped out around about naughty basis points do you see putting together that kind of run again, I don't. I don't think you can have that kind of run in the induses. I think it's going to be a stair step higher again, like to follow two thousand and nine. Every time you had one of those corrections, you bounced back and went to a new high, only

to have almost immediately another correction. There's so much uncertainty. John, I just I think the idea that we're gonna have this incredible, you know, parabolic move higher and five or six names, I thought it was really extraordinary. I saw David Costant from from Goldman Um he mentioned and it really took me by surprise that that that five companies represented over thirty five And I did the research myself after that. Actually at the time was thirty seven of

the rush one thousand growth. That is the that is so far from diversification. It's extraordinary. So you you really it's gonna take time for these magat cap names to kind of um, I don't know, correct, churn, consolidate, base, whatever the name is, because there was such a concentration in them that now as they rally all those people over the last two or three months that had bought them, they're looking, they're probably gonna be looking to cut their losses,

which means you're gonna have some overhead resistance. Bottom line is I think the market is just going to be in this churning phase, certainly through the end of the year. Appreciate the honestate as olwise, it's great to see you looking. Right now, we come to groups with their fears, as we witnessed yesterday until a huge answer to four seven pm James, A thing is perfect for this with everything standard Looking at long term investment, James, how do you

manage fear here? What do you do on a day to day tick when the fear is so evident? Morning, Tom. We wouldn't like not to be responding to any of these short term generations, you know, we'd like to be positioned in such a way that we can ride out some of these short term storms. You know, take medium term views, be aware and cognizant of where some of the short term risks lay, and ensure that as best we can, the portfolio is robust to deal with them.

I mean, it just so happens that what's happened yesterday, you know, it was fairly good for the portfolios that we're running and fairly good for the positions that we have on because we've been very cautious about being risk facing in this environment. It's very very difficult on a day to day basis. At the moment, valuation as any kind of anchor in any kind of financial market is almost impossible because things look so stretched and extreme relative

to history or fundamentals. But what we see is increasingly been a market which has ignored all incoming bad news information and embraced all incoming good news information. And when that happens, very difficult to point out x ANTI what triggers will be. But when everybody's on one side of the boat, it doesn't really take much of a trigger, much of a wave to tip the boat over and everybody fall in. So we've been defensive and that yesterday

was the right place to be. What does defensive look like? Yeah, there's a good question, I mean, being it's the world of one trade. There's you know, one of the banks we speak to has been calling it the world of one trade for a while and it certainly is. Some people call it row row risk on risk off funding diversification been very difficult. Um. I think it's interesting, you know, the two asset classes that I main mainly look at, which is core sovereign bonds, rate products and the FX markets.

You know, sovereign bonds didn't really move yesterday, Treasury is rallied a couple of basis points. There was a lot going on in effects. I think that's been a trend recently where investors have seen bond volatility at zero, central banks trapping yields in one place and said, well where else can I go and express a view which might react to this stuff? So I think dollars, yen and Swiss francs are good places um to put risk budget to work where you can actually see some benefits if

we do have a risk off period. But quite what your portfolio looks like obviously depends on exactly what talking you've got at your disposal. For US, it's definitely long duration, is favoring the U S treasury market, and it's being defensive you know short certainly MFX short, risky short video syncretically weak effects and along the current account surplus and or the flight quality currencies. Does that mean that you're

betting on deflation? Um? I mean express expressly no. Do I think there's a chance that we end up in a deflationary depression. Yeah, absolutely, I think there's a chance, and I think it's very difficult. The decision tree, the problem ability tree of outcomes going forward is probably as tough tough as I've ever known, because so much is dependent on a lot of policy choices which interact with one another and which will be dictated by something as

unpredictable as, for example, the virus, So really tough. I think inflation is something we just don't understand well enough to have a high conviction call, and I could see it going either way. I could see us in inflation. Equally, I could see us with really high inflation. But again recognizing that central banks are determined at the moment, I want to position for what they're doing, not what they're

trying to achieve. So for now, that means they're keeping yields low, they're crushing yields, and they're keeping that as an asymmetric bet in my in my opinion, so I'm not too worried about inflation near term. I think it's definitely something that make may happen later. We welcome all of you on Bloomberg Television and Bloomberg Radio. Jonathan Ferrior, Lisa Bramwards and term keen is the most eventful Tuesday, huge, huge news or particularly out of the United Kingdom, James Athy,

whether from Abydeen and James. If that's the case, and if the symmetrics and the asymmetrics are so hard to judge, what is the value or error of being in cash? Yeah, that's um. I mean go back to the start of this year and I would have said there was very little era potential era. I think that cash was a very attractive part of your portfolio because I just saw so many risks and I saw so little chance of the one true risk which you you wouldn't want to

be invested in cash for. And that's really a lot of inflation today as we sit here, it's a kind of bimodal distribution. There is there is a good chance of very high inflation, there is a good chance of very low inflation, and cash is kind of good for one of those and not so good for the other. Again,

diversification is key. Even if that's diversification which isn't giving you as much and more as an efficient to portfolio as it would have done through history, there is still value and diversification, and I think cash is part of that, but I definitely think pressures metals are a part of that. Today, James are going to think out loud, so go with

me and forgive me for doing this. Real yields, for many people have been incredibly supportive of risk assets worldwide, but real yields have been driven by inflation expectations building up, and rates effectively being anchored by the feder Reserve. What I'm trying to understand if we reprice inflation lower and real yields actually start to go the other way for that reason, I'm just trying to get my head around this, James, what that actually means going forward for risk assets with

inflation rate or at least expected inflation coming in. Yeah, unfortunately, it's still one big trade, but it's exactly as you describe. Essentially, we've seen break evens widening through the period from the March lows, which is correlated almost perfectly with risk asset recovery. Because the FED has been keeping nominal treasury yields kind of anchored around sixty basis points in tenure, that meant that real yields had to form fairly dramatically in order

to get that increase in break even inflation. That's also correlated with the eyes im precious metals, which are often thought of as an inflation edge. It's one big trade. So if that gets unwound, you know what does that mean for risk assets? Well, I don't know if risk assets or the tail or the dog in that scenario. I think eat boats is equally possible. Risk assets are up here, in my opinion, largely because the central bank policy has driven them up here, not because there's some

rational repricing of growth or inflation outcomes. I think break evens are up here because they're correlated with risk assets. Therefore, if there is some shock which either forces equity prices risk asset prices lower or indeed pushes real yields higher, those are both going to look like the same trade being unwound. And I think pretty much everybody is in it. That could get ugly quite quickly. James gred to catch up as always really good to hear from me. James

Athy of Aberdeen Standard Investments, Great on Washington. Isaac Voltanski is a wonderful policy water At Compass Point Research. We fold in now the uproars plural that we see his Washington, Isaac, thank you so much for joining us as any policy discussion dead on the fistful side for right now. The

simple answer is yes, um. Policymakers like to say that they can walk and chew gum at the same time, but in my experience that has not been the case, and the Supreme Court m developments are going to overtake the capital and they will be the topic to Jore, which means that the focus on the fiscal package, which was already waning, is effectively dead at the moment, Isaac, How can people even begin to trade this given the

binary potential outcomes. In talking to clients, I find it interesting that there is still a subset in among my clients in particular, who believe there's this possibility for a grand bargain at the end of the month that covers the funding deadline as well as some of the fiscal stimulus. And I think the reality is we have been conditioned over the past ten years to expect Washington over time to eventually find its way to avoiding these fiscal clips.

That assumption was proven wrong with these phase for negotiations, which I think is a mere term concern for markets. But I think it's also going to weigh on the markets longer term confidence and policy makers. Well, just to to sort of put a bow on this, Kevin's really talking about how this feels different than the normal Washington dysfunction. You're saying people have gotten conditioned to a lot of noise, a lot of messiness, and then for it all to

come together. But from your discussions with policymakers paired with your discussions with people in the markets, is there a disconnect? Are people too optimistic about that neat ending this time? The simple answers, yes, there is still too much optimism regarding a fiscal package by the end of the month. Um my ill um in the policy world believe that Washington could come together because the simple reality is we need more to school support. And you don't need need

to tell you that. The Chairman of the Federal Reserve will testify before Congress three times this week and he is going to suggest as much. And I think people would also make the point that the Cares Act, which was passed in March, actually worked. Isaac right now at this moment, the Prime Minister of the United Kingdom and some I'm going to say political peril is saying let's go, We're gonna reset, and Isaac to me the headline here as he's resetting from March of two thousand twenty one.

Is anyone in your Washington looking out dare I say to March of two thousand twenty one. Not even close. We are focused on the next tweet. We are not focused on long term policy making. And I think that this is part of the systems failure that we that we have seen in Washington in recent years, that there is no long termism UM and that is clearly evidenced by the lack of focus on a fiscal package that

would help us emerge from from this crisis. I mean, you were wined in Ohio, which is a battleground state. Is any of this cluelessness going to show up at the ballot box? Does this fold in to the political calculus of mail in ballots and November three ballots? At the moment, I think the simple answer is no. Um. The reality for many voters is that other issues are

going to animate them. And that's why I believe that the Supreme Court headlines over the past few days can be played for both bases in different ways, and so that will be what the big focus is now. The point I want to make here is that as if the economy continues to show signs of weakness in certain corridors, that's clearly negative for the president because he is still viewed, at least in terms of the polling, is stronger on

economic matter. So when we see economic weakness, it does accrue at least in certain battleground states to the benefit of the body campaign. I said, just finally on the polling, the story there is that there hasn't been much of a story for many people. They've identified the stability in the polls in many places. Do you still identify with

stability or things changing as we get close up? I can tell you that I think that the polls will remain stable for about another week, And most of my clients as well as most of my contacts, have September twenty nine circled on their calendar. That is the first presidential debate, and I think that a lot of folks are going to get there their first real feel of this campaign that night, because up until that point, it's really just um tested sound bites that have defined this campaign.

As we have two men yelling at each other from different states, and so to see them in the same form is going to be meaningful for a whole lot of voters, especially those voters in battleground states, are going to decide this thing, Isaac. From two men yet to get each other from different states to two many at each other, run in front of each other, eyes at, botasky, compas, point research and try to have eyes at. Fantastic to

catch up with you right now. Arguably our most important interview of the day folding in FED policy from Chairman Paul and also our conversation tomorrow with the Vice Chairman of the FED, Richard Clara Diane swarmp Joints is of course so helpful typically on our FED day as well. Diane. I want to get to the Fed and claratave, but I first must ask you about the economic backdrop of the battleground states of the Midwest. Is the presidential debate

goes to Cleveland and the wonderful case Western University. This is gonna be fascinating. What's the state of the economy in Ohio and the broader Midwest. Well, we're all suffering from the pandemic, and unemployment rates have risen quite dramatically. What most people forget is as much as Chairman Pale emphasizes that this is a low age recession, this has hit disproportionately those who can bear the burden the least.

It also has hit college educated workers, and in fact, the unemployment rate is hired today for college educated workers than it was during the Great Recession. So it is a low wage recession. But it also has reached up into higher levels of education. And I think just the numbers are so allowed to get lost, are so large they get lost in translation, Diane, I've got to move forward to this important conversation with Clara tomorrow. You know, he is truly our expert on ds G E, which

is a lot of fancy math. Forget the math, let's go Latin. My first question to him will be on how a central bank acts when inflation rises. Do they get out front or do they get behind expost? Where where is the FED going to be? Where are they going to act if and when they get inflation to rise. Well, clearly they don't agree on this, or they would have told us exactly what their triggers on inflation were as

they shifted to forward guidance. It's still very loose, but I think what we're seeing is a FED It's not just the level of inflation moving up. But the FED would like to see is that inflation get up to sort of tune a quarter two and a half percent for a sustained period of time, which they've not been able to achieve. But also, it's such arajectory on inflation, the FED would not hesitate to act if all of a sudden inflation was moving up to two two and

a half to three percent very rapidly. That delineation, that nuance makes this whole new overshooting aspect of the Fed's policy very hard to convey to the average American, let

alone financial markets. If financial markets really absorbed what the FED was saying, they would accept that the Fed is saying, we're willing to shift the balance of bargaining power between Wall Street back to workers a bit and allow wages to rise as a share, and run the economy a little heat hot to allow workers to have a little more bargaining power out there for a period in time. If that really set into Wall Street would see a very different Wall Street today. So I'm how divided is

this FBC right now? You know, it's mostly in the same direction, although you've seen Bullard talk about his concerns about inflation. If they were completely unison and in anonymous I'm sorry, um unanimous in terms of what they wanted, you would not have seen two dissents. You've got Neil Kashkari at the Minneapolis FED asking for much more overshooting than the FED is willing to do, and Rob Kaplan saying we weren't really ready to go to full forward guidance.

Includely the chairman felt some kind of forward guidance where they commit to overshooting after the announcement at Jackson Hole was necessary. So it isn't deeply divided, but it's clearly not all on the same page. And when you're talking about overshooting on inflation, it does make a difference if you're talking about a mild overshoot or this trajectory notion. And I think this is very hard to communicate in

the noise is undermining their message. It would be hot as a communicate, just as hot if you did have a broad concer census on the FMC. And I'm not in the business of making up excuses for Sham and Pale and what many people fought was a bad news conference for him just the other week. But Dina, I wonder if that goes some way, to some degree to explain just why he couldn't answer some questions in a

clear and transparent way exactly. This is one of the issues that we saw was that he couldn't say exactly what these triggers were. The FED clearly wanted to provide more support. You can read in his early comments that he's going to give to Congress today as testimony, says, Listen, we've done our job. It's your turn to your doing your job, Congress, and we're trying to do more. Well in expressing what the FED is trying to do more about,

he can't be clear about that. And if he can't be clear because he doesn't have a unanimous vote in the FED and they don't have clear triggers, it makes it much harder to really say what this means. And we know that sort of the idea of for some time date based guidance does not work as well as actual numerical triggers, but they can't agree on what those

triggers are. All this highlights the deep uncertainty about how much momentum there is in the U S economy and the global economy, as we haven't gotten rid of the virus yet, So let's talk about the balance of risks, because we're not gonna necessarily come to some sort of

conclusion on on those uncertainties. Where is the balance of risk incurring more debt to have more fiscal support or entering a period of a slowing economy that could potentially head back down into a further leg lower O recession. UM sadly, I worry about it being the latter. The downside risks are great or given the complete and aptitude

of Congress at this point in time to act. We know that M. J. Powell actually pointed out in his comments today that it was because of the support we had that we were able to get the rebounding growth we had. And now not only is it the course of the virus that determines the course of the economy, but now we don't have that support anymore, and we

don't see any forthcoming. I think with your earlier guests, I agree that UM financial markets are very much under estimating the ability of Congress to come together, and the cocks already taking people are already going hungry. Food insecurity has picked up, and this really going into the holiday season when we like to gather a lot seasonally adjusted think about how many seasonal celebrations that we can't have this holiday season as the rate of virus cases pick up.

And that's what consumers do on their own, infirms do on their own all those holiday parties that are canceled. This is going to make the two thousand and eight cancelation of parties look like a cakewalk from a corporate standpoint, and all the kinds of entertaining that usually goes on inside of restaurants that just can't occur to the same degree, and then that will have its own slowing effect on

the US economy. At the same time, you're seeing the outbreak abroad in Europe pick up and these additional lockdowns in Europe. So I think this is a very dire situation. I wish that it was better. What bothers me is that we still are are going into this weakness with so many people still unemployed. Well, you can talk about

people not having parties, not consuming as much. You can also talk about if states and local governments don't get the funding from Washington that they're asking for and that they say they need, how much more could public unemployment rise? I mean, how much could we see the unemployment rate significantly increase beyond current estimates? Now that's really important. We already at one point one million down still from February

on state and local government employment. That number could compound. You could easily add another percent to two percent onto unemployment over the next six to twelve months um as the state and local government struggled to deal with the holes, the gaping holes in their budgets. And I think that's very important as well, because it's yet another headwind of cool temperatures and the inability to eat outside like we've seen and moving inside again, they could exacerbate the situation.

I know it's tourism Dane, but just what's come up in the last number of days is some really good research on what I'm gonna call the goods services partition. I think we've never seen it before. Given a natural disaster like a pandemic, some states are good producing, agriculture producing, maybe they have room to breathe and other states or service sector, uh drive does does the federal government have to take that into account when they try to do

stimulus someday? They certainly do. I mean mine. Do you want to have enough people's, enough companies still in business to be able to pick up when we can congregate again. And clearly a vaccine alone isn't a panacea, but it gets us towards that. But that's still a year away in terms of herd immunity with a vaccine. And I think it's very important to understand the need to keep

these businesses. It's an eighty year trend in a discretionary spending on discretionary services that we've seen come up that we've turned on its ear. While at the same time, you have higher income household households work from home, where the idea that college educated workers aren't actually unemployed. They are, but they don't see it as visceral as you see it with layoffs. But those households that have survived so far are buying new cars, are buying boats, so buying

exercise equipment. They're buying a lot of goods that have kept the economy doing much better and come back much faster in some sectors than many expected. Also, repairs and upgrades in second homes that's only something in certain certain

households can afford it. Also, we've seen in the housing market as strong as it is, it embodies this inequality um and what we've seen in response to COVID so um dramatically, where you see people buying their first homes and getting more room though who can afford to be able to be further from city centers do, while those who can't are stuck and now facing eviction and john This timeline goes through what we've learned in the simulcast today,

which is Prime Minister Johnson teaching us to look out the March of two thousand twenty one. I'm sorry, that's the news item today for Global Wall Street. See you in spring. Get extended below potential for many economies, including a study the out of Kingdom that I'm great to catch up when he gets to see you one of my favorites. Just throwing that out there. Thanks Swamp and Cheap Economist. Thank thank you. 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