Surveillance: International Markets With Doll

with your investment at Capital. We're thrilled he could join us and federated him as this morning up Steve. You know, I look at your note which is basically, hey, everybody, wake up. The US isn't as bad as all. And does that mean that you and the team at Federated stay hugely US centric. No. Actually, for the first time in a while, we've closed some of our underweights internationally.

I think that the big story that's out there in the marketplace, that's hiding in plain sight, but's the big driver, is collectively large parts of the world are exiting recession to stay at home. Recession is most likely ended in a lot of places, and we're entering recovery and in that environment, value parts of the market are likely to catch up. And when you look at European in disease, when you look at developed non US, there's more value in those industries. So it's not a story about growth

rolling over and dying. It's not a story about the US do importantly, but we think international can start to catch up. This is so so important, Steve, you and I've talked about it before. Let's review it right now. I think it's of such great importance. It's not about tech down and vailue up. It's on a relative basis, just the value starts to do better. Right, Yeah, and within value, right, you have to separate that between the survivors and the and the dyers. Right there, almost all

value was a loser from the pandemic. The question is which companies are going to survive, because those companies are going to take share from those companies that don't survive, and they're gonna be rerated higher when they're no longer being priced for you know, pandemic and recession. And so we think there's a lot of alphah to be generated on the value side if you can engage in good research and pick the right stocks. See if good morning to you. What is it that drive what is the

catalyst that drives that move into value? Then? Is it's a vaccine and and what will be the definitive vaccine news that sort of sleepens the yield cave drives people into value here in Europe. No, I think the vaccine is part of this, but let's make no mistake about it. It's not an investment strategy to pray for a cure. All. I think any vaccine we're likely to get is more flu vaccine than smallpox vaccine. I think the big catalyst

here is just the end of the recession. If you look at p M I s, if you look at retail sales, if you look at housing activity, they're all showing economic recovery. Labor markets they're showing recovery. That in and of itself is a catalyst. Now, what will confirm it is if we continue to see the tenure yield remain firm or firm. And that's what was different in this past value run than the head fix we've gotten before is you've got twenty basis points of ten year

bond yields up, which which you didn't get before. So the bond markets telling you it also thinks that things are normally as is the dollar. The dollar weakening is a sign of normalization. You're you're taking off that safety trade in large part. And we'll get to the dollar the dollar shortly. Perhaps I'm just looking the year to dight moves on some of these big stock indexes, and many in the US well, the NAZAK and the SMP notably of course, have termed positive year today Europe really

drags behind. Is that just a function of sector exposure, a function of being more driven by values and growth or does Europe deserve that kind of discount right now? He deserves a discount. And I think you're largely because of the sector exposure. When you look at at the SMP five, it has, you know, significantly more tech and calm services. When you look at you know, the eurostocks, You've got a lot more financials, you have a lot more energy, you have a lot more big farm and

so I think that's that's a part of it. But I also think that there have been some overhangs in Europe that are starting to lift. You're seeing a little bit more fiscal cohesion up until you know, last day or so, the virus state has been relatively well behaved. And then I think that dollar weekening also helps make you know, international markets a little bit more attractive for US investors. So what are you actually doing to deploy capital?

I want to talk to you about a broader institutional idea here had federated about what sectors actually matter now in terms of participating in the market, Steve, but not getting my head handed to me if I get it wrong. That's that's exactly right, and it's a very it's gonna be an interesting answer, and it's small caps actually, uh, small caps is a way of playing this cyclical rotation Shin. But even if the value story doesn't materialize as much as you know we think it may, small caps have

another way of winning. In the first year off of a recession bottom small cap equities tend to outperform large caps by about twenty to five, which is a big boost. They benefit from low rates, and we think they'll benefit when the Fed ultimately announces average inflation targeting. They benefit from a cyclical pickup um and we think longer term they benefit from a manufacturing renaissance in the center of the United States. So we've moved overweight to small caps,

particularly on the value side. We've closed our underweight internationally and we remain overweight equities. Those are the three big calls that we're implementing or suggesting the clients implement through their portfolios. And Steve, what drives that manufacturing renaissance in this in the center of the United States that you refer to in your notes ahead of our conversation, you

talk quite a lot about population dynamics. And not to sound too MALFUSI in a bouncing it, I'm either simple as that or or or does that not play well with our E s G. Credentials means to find other investment things other than just where is the population going to grow? Most? No, but I think population is a big driver. It's not the only one. I think in the long run the drivers of economic growth are in

fact population growth and innovation. And and remember companies went to China primarily for cheap labor, you know, ten twenty years ago. But when you're when your factory is more technology and less labor in terms of input costs, which you're left within China or higher shipping costs, higher energy costs, not enough intellectual property protection, uncertainty on the GEL on

the Korean peninsula. Hong Kong's gone from the financial capital of Asia to a state of rebellion, and there have been some transparency issues at least around the beginning of

the pandemic. By contrast, when you look at the center of the United States, and I would include Mexico here and parts of Canada as well, but the center part of North America, you have easy shipping routes to great end markets, one of the lowest tax rates in the world, abundant and ergy, geopolitical stability, even in these kind of crazy political times. Um and we think that for a

lot of reasons, that becomes an attractive emerging market. And I think policymakers on both sides of the political divide are gonna are going to encourage that. Steve, and thank you so much for being with Steve Schavaroni or federated or miss with us this morning now with p JUM and I should say, the award winning PI JAM and fixed Income Robert Tip joins us their chief investment strategists. What do I make of the real yield Robert Tip, other than John Farrell's show is award winning? What do

I make of the inflation adjusted yield in America right now. Yeah, let's it's the difficult time for people to figure out their bonds and there's no doubt the yields are allowed the real yield or negative and trying for people to wrap divines around what that means. I can focus on the normal yield, and I think that looking inside they

that those are likely to remain where they are. If the said is going to succeed, that is going to be measured in terms of they're pushing up inflation expectations. Have a colleague kish line. He likes to think in

terms of the real yield. Well, he would say that Tom is that if they succeed right now, break evens are below two percent, and the said, once you target a PC of two, the CPI, which is what break evens trade off of, you're gonna have to go with me one second, right still involve CPI is usually higher than the PC. So the fens PC is going to be to the CPI has got to be above two.

If the CPI is above two, and the market beliefs that your ten your real yield, which is at minus one, it's going to be at minus one and a half or less. So really yield a negative and one sign of the Feds going to said success it's gonna be Does the market believe inflation is going to go to target? It didn't believe it, or this crisis it doesn't believe it. Now, well you just heard their folks. Is an adult conversation

on bonds. We've heard this across the show. I can't say enough the value of John writing at Breen Capital and what you're hearing from Mr Tip of Pigeum. The way this is reported and fixated on in the media is wrong. I don't know what else to say. It was literally the first project I did for Matt Winkler at Bloomberg. You take the nominal yield, as Mr Tip just did, and then you look at the inflation expectations

and the residual is the real yield. So with that said, Robert Tip, what would you suggest nominal yields will do? So my my comments here have been that the friend of the curve like just five years and then a little bit expensive, that they're gonna stay down here. The statins is beating a drum, and we make that a little bit of a w type recovery, a little bit of a step back on growth acceleration. The middle part of the curb. The tenure is going to be in

this forty eight range. Think how whether people acknowledge at w or seeing it, or whether they're getting a little more optimistic. And they pushed up to eighty the back end of the curve again diving back inside of the yolk curt Come on, sorry, those forward rates that you love, what's priced in in terms of where treasuries are going to be ten, fifteen, twenty years from now, are way too high. They're in the mid to high two percent area.

They were above, you know, and we had a correction a few months back, but they're back pushing two percent, which does your your bond yield is too high. So we're looking for a stable to flatter yields on average, which means treasuries are gonna be outperforming cash. And that's before you even get to spreads and spread product is

training ahead of the economy. It's gotten very optimistic, it's priced that in, but that's probably going to be the case on balance and next trawl to twenty four months. So this is the bottom market that looks sick, you know to people from the outside, But when you dive inside of it. You look at what's going on in the economy with the trajectories like the to be uh, you know, zero cash is gonna be a low hurdle for the bond market the next point four months. So

what but you expect a stop good morning. You expect a steeper curve. What is the biggest threats of that view? Does a vaccine change that? What would be the definitive bit of vaccine news that might threaten sorry, you expect a flatter curve? What would what would change that from a vaccine perspective? Absolutely? So that is uh. You know.

The thing is when you have that burst of optimism on a vaccine, you know web and if that hits we get to the far side of this, then you know, CRITC ten shoot up to one percent to one thirty or even higher depending on how effective, how quickly thinks to normalize and so on. Um. But if the at the end of it, right now, we've had uh, you know, not even you know fifty recovery in employment and in comes are being sustained by benefit payments and what we

know from past recessions. Even in this case, if it's more rapid, it's gonna take a very long time to get incomes elevated. And right now consumption is at a record level. We printed record retail sales, but incomes are quite depressed, and that, you know, speaks to a gap that's going to be filled by some falling back. So it will be a lot of back and forth. We've seen a lot of rapid fluctuations in the market. I think that you can't have births of optimism that will

temperate poor shields up. But in the long run, the world we were in before this crisis get Let's say that's what the world looks like with AVA being you are looking at sub price and inflation in the treasury

market that needed to be a few cans higher. You know, the market is going to believe, so you're gonna need a vaccine, and you may need something like a like a renewables boom on an energy platform the US maybe joining Europe and then push for green and declbinization, something you know, rightly or wrongly, whether you like it or not, that gets you a why two K hype economic boom to get your sustainably over one percent and the tendu

the treasury. Otherwise you're not going to see it, it's going to be a stable to gladder curve grinding as the secular dynamics of demographics, you know, keep these yield well, keep bond return. Okay, so we came from a low yield environment, that that that the virus hasn't changed that necessarily we go back to still a low yield environment.

But when as we look for this news flow surrounding a vaccine Robert from the from the perspective of the bond market, should we see this as a very binary thing, like here's some good news on a vaccine that works from a Western drugs developer and that perhaps will be seen positively by investors. Or should we get a bit more granular than that, dig down into you know, how

long is it going to be effective for? And there'll be a lot of questions, won't there as soon as we see that needs you that's right, that's why you want to give that nightmare to people like you to follow and for for me to try and trade, because the underlying dynamics dot long term secular backdrop is going to remain unchanged, and in fact, if anything, it's worse than as we've gone through this crisis and it's going to continue to the deceleration workforces. Those things are just

really beginning, so that dynamic is going one way. In the short term, you're going to get these pops and optimism and they're going to provide training opportunities. But I think it's going to change your secular environment being below one percent of the tenure in all likelihood. Robert Tiff, thank you so much for tak that discussion of nominal less inflation expectations deriving the real yell Mr Tip with Pigam.

Robert Dawle is an interesting guy. He's a guy who is smart, smart, smart on framing the why of optimism And like our Gina Martin Adams of Bloomberg Intelligence, Robert daw of Nouvene is one of those people that gives you courage to stay in the market. So maybe you can make some money with Home Depot, Bob Donk. You know that you have a stock and they sort of hang out and then they go up off news or something.

How do you identify companies like Home Depot or Apple that just every quarters seemed to do it and every quarters seemed to go up thankfully on both stocks. Tom these are companies First of all, they have products that are interesting. Second of all, they manage their business well, and third of all, they generate a bunch of cash. If you can find companies do those three things rather consistently, generally,

you're gonna be in good shape on those stocks. I mean, Home DuPont news, the Walmart news, they really good news. I mean, I mean, I know you're a glass half full guy, But I want you to speak to the people who are not Robert dal They don't have your experience, they don't have your sense of history. What do you say to the people that have missed the home Depot boat? How do you get back on board with a total enterprise value to But that's not in any book you

or I ever studied. Yes, well, first of all, you have to agree that a year from now the stock market is going to be hiring it is today, that's my view, because the economy will be doing better and earnings will be hired. Maybe we'll have a vaccine. That doesn't mean we we'll have short term, short term bumps along the way. But if that's the case, Home Depot is probably gonna be higher a year from that is today.

So dollar cost average into those stocks that you think are in the stratosphere and you've missed if they have the propositions that we just talked about and aren't ridiculously valued. Home depots up a lot, but it's still not horribly expensive, and well, good to speak to you. I was reading

some research. It says a by the national or the sites, the National Association of Actsive Investment Manages, and he talks about how even those who were previously baries, you're just kind of giving up and joining in with this bull joining in with this rally. Do you sense that you've got more company in or in your your bullish view on where u S stocks head? So I'm commented about a year from now, I'm also in the camp too many of us are that we're a little hell ahead

of ourselves. In the short term, We've come a long way, We've retraced the entire bear market. Earnings today are nowhere near where they were when stocks are at the all time high in February. So uh, and we have an election, we have a bill we can't seem to pass. Valuation levels are not particularly cheap, so I can make the cautious case I don't see big downside, but those who are a little nervous. If you have a ton of cash,

you've gotta step up and put some in uh. In my view, UM, if you've been fully invested the whole way and want to take a profit or two, I'm fine with that as well. Um. Markets don't go straight up in bull markets are straight down in bear markets, as we all know. But do you like European stocks at this point or is it just about the the US?

I asked, because I'm confused by the market reaction some days during August we've got headlines of plenty about the virus taking upwards in various parts of Europe, and yet that doesn't weigh on European stocks as if as if it's a big global liquidity story that's dominant. What what do you make of Europe? You just said it, it's the liquidity story for equities overall. The US no longer has the interest rate advantage it had versus the rest of the world, and the US is the most defensive

market in the world. So if you postulate that the globe is gonna do a little better economically, non US markets are probably going to do it better. And then you layer on top of that the dollar weakness we've experienced, and I think non US international stocks do a bit better. Europe's got a lot of long term problems, as you know, but it's fairly cheap and I think we'll continue to

do a bit better here in the near term. About Dawn Nouvine is a t I A a company, and that is a venerable institution looking at the long long term of investment. The leadership of Roger Ferguson is no. What do you advise Mr Ferguson and others about the actuarial assumption that we're all going to live with. What's our actual real assumption reality? Well, you know, lifespans we know are are getting longer. Um. I had a friend who retired recently at sixty five, and he said, I

guess I should go all in bonds. I said, wait a minute, he's married and they're both pretty healthy. I say, at least one of you is gonna lift a ninety. Don't don't run away from equities. There there there's no twenty five year period where stocks haven't beaten out the things. So we have to make sure people are aware of those sorts of things. The other actual real assumption I think that we have to think about is what's the long term return for you know, the traditional sixty forty blend.

It's not gonna be in the next ten years most likely, Tom what has been in the last fifty kind of nearly ten percent. It's going to be much lower. And that's the reality of the These long term s allocation programs are gonna have to pay in Bob doing those, I'm just setting them up for the second question. I mean, that's the act here, folks, bobbed all. The question is if that's the reality of a lower actual assumption, do you go more diversified or less diversified or maybe more general,

how do you diversify? Yeah, so you have to have diversification, but it's not just stocks and bonds. Uh, they're alternative assets, um that have to be considered in portfolios. Uh, louvine T I a big investor in farmland, for example, and that that's an area people don't even think about generally. But there's an area for diversification within the public markets,

within US equities where I've spent my career. You've got investing companies that are gonna make it happen, and so you might want a more targeted portfolio in an environment where the gains overall the market is not going to lift every boat, is what I'm trying. There's some really important observations there, folks, against the canon of the last twenty years and how things are changing. Robert doll is always thank you. He is with now Vene. He is

the double degree to engineer out of ann Arbor. Garland Gilchrist. He is Lieutenant Governor of the state of Michigan, and he is vice chair of the Democratic National Committee. You know the math. You know it better than anybody in the party. Garland. You've got to get out the vote. How are you going to get the kids out? And how are you going to get blacks out from sea to shining Sea. Well, thank you for having me today. And this is exactly the question that Democrats are looking

to answer in Michigan around the country. To put it in perspective, Donald Trump won Michigan by ten thousand, seven four votes. But Gretchen Whitmer, our governor who you heard from last night from a U a W. Union hall, from a manufacturing facility. Her and I won Michigan by four hundred thousand votes or points. And we did that by simply showing up and making sure that every voter

heard from us in every part of the state. And when you talk about black voters in particular, you know, Joe Biden Kamala Harris are running on the most progressive agenda for opportunity and racial equity that any president's ever run on. And we can tell that story, as you said, from she Seed to see. Well, you can do it from c to Shining Sea. But let's go west to Kalamazoo, Michigan, where they used to build checker cabs. Okay, it's a different Kalamazoo than it was. Now, how do the Democrats

win in Kalamazoo if they're gonna go progressive liberal? How much do you have to shift to the center to take Flint and to take Kalamazoo. You gotta stay with you gotta never shipped, you stay with your values. And even in Kalamazoo, we just saw this week, Uh, the far right, neo Nazi Proud Boys were demonstrating on the streets to Kalamazoo and they were met with resistance from people who were stepping up and calling for racial justice

and racial equity. They were stepping up for an agenda like Joe Biden and Kamala Harris and saying no to the rhetoric and the division and the danger and destruction and depth of Donald Trump. And so I think in Kalamazoo, in Grand Rapids, in Macomb County, all places where Gregion I one eighteen we laid out the blueprint, and I'm proud that Joe Biden Kamala Harris are ready to pick up where we left off and take it to the

next level. Lieutenant Governor, good morning from London. If if we don't have a new stimulus package, who will your voters blame? The Republicans are the Democrats? I think that Michigan voters have been clear for this entire crisis that Donald Trump is not only a failure, but his failure, his lack of a national strategy has led to dead Michiganers that did not have to die. And this is personal for me. Twenty three people in my life have died from COVID nineteen uh. They all have stories like

the people whose stories we heard about last night. They will hold this president accountable. And you heard Governor Woman talk about responsibility. Leaders take responsibility, they don't run from it. And that's exactly what Donald Trump has been doing. And he's denied, he's lied, he shirked, he shrunk away, he's hid from the problem rather than stepping up and solving them.

But I'm not worried about that. With Joe Biden and Kamala Harris and Joe Biden has showed up for the people of Michigan, for the people of Detroit time and time again over the years. I think it's what he's going to continue to do here. But if that's the case and people think that's then it wouldn't be at all a contested election. Do you worry that people say that they'll vote for Joe Biden and actually vote for

for you know, Trump. Do you worry that the polls aren't really reflective of what people will do come November. I think that we always have to consider this to be a close election because it was so close in seen. We have to work hard, and as I indicated before, we have to talk to every voter, and the Michigan Democratic Party and the Democratic Party across the country never stopped talking to voters after twenty sixteen because we knew we had a lot of work to do. And you're

going to see the evidence of that. In Michigan, We've been able to connect with people because we knocked on their doors in twenty nineteen, so when we had to stop knocking doors in we could keep calling them and keep text message him. Our movement is strong, and I believe it's going to deliver Michigan and across the country, and we have to run through the finish line. So no, we're not going to rest on any laurels or any polls.

We're gonna continue to work all the way through November so that we have the privilege of working and leading on behalf of all the American people in January. Was that the difference the last time around. You have mentioned twice in this conversation, Lieutenant Governor, the idea of showing up in campaigning is a stark reality that Secretary Clinton

did not campaign to the greatest advantage four years ago. Well, I think that we need to focus on is how we can connect with that local community intelligence rather relitigating. What I think we need to focus on is the fact that we learned a lot in ten here in Michigan. For example, Governor women visited all eighty three counties of our state when I came onto the ticket as her running mate. I visited forty counties myself. It's about showing

up and about being president. And you saw with the virtual convention we have to get creative about how to do that safely in COVID nineteen and I think what you saw is how that creativity can lead to real human connection, to elevate the stories of people and of voters and of Americans. And that's what we have to

focus on here. We have some really creative tactics. Were excited to roll out to engage voters of all stripes, to make sure black people maximized turn out, to make sure the suburbs turn out, to make sure our Latino brothers and sisters turn out. And I'm excited um that we're gonna have record breaking turnout this year. And when more people vote in Michigan, Democrats win and we are not afraid of that. We want everyone to vote safely and got by mail. We look forward to further updates,

Lieutenant Governor. Thank you so much. Mr gil Christ, of course from Michigan, is a vice chair of the Democratic National Committee. Karla Freeman with us right now of JOHNS Hopkins, the executive director of Foreign Policy Institute UH and a professor of Chinese studies is well, Carla, what I find interesting about what Inbassador Bolton said there. It's not China US or Russia US, but the thing we never talked about, which is the relationship of China and Russia. You know

in our childhoods that was a huge deal. Is the relationship with Russia and China is fractious as it was then, it's certainly become a much closer relationship in recent years. Of course, we we remember fears of the China Russia partnership. Their alliance of China's first alliance UH forged on Valentine's Day in nineteen fifty UH and that lasted until the late nineteen sixties and was a major feature of the

Cold War. After the split, of course, that helped create an opening for the U. S and China relationship to develop. But in recent years China and Russia have become closer, even working out diverging tensions in Central Asia, which is the country of the region which both countries have subucbstantial energy and other strategic inter US. Then Dr Freeman, we talked to Dr Roach of Viale University about this Stephen Roach earlier this morning, let me ask you the same question.

Is the final result of Washington policy, of Trump policy or Biden policy, will they be all that much difference in regards to China. That's a really compelling question. And I think that what will happen in Biden administration is that many of the concerns that the Trump administration has

raised will carry through to the Biden administration. But I do think that the Biden administration will look for grounds to cooperate where uh it can with China so that we have uh continue to have competition, concerns about technology fast and uh other other worries about China's authoritarian push around the world. But we will try to find areas where we can work together. There are so many global

issues that require us China cooperate. But Carla, you're saying is that the Democrats won't necessarily more be more sympathetic to China, but that will they'll just do it in a different form or do you think that there they

will find actually coming ground on things significant like trade. Yes, I do think that will the The Democrats come from a tradition that recognizes that globalization, appreciates globalization as a source for economic growth, and I think that the democratic administration will look for a way to restore an architecture for international trade, also look for ways to deal with issues that are important to a democratic administration, like climate change.

Of course, one of the first actions that the Trump administration took was to withdraw the US from the Paris Climate Accord. So there are areas where the U. S And China have a work to productively. Have seen their their engagement together, if you use that word, has yielded significant benefits economically and and also in terms of managing global threats to human security. Carla, what can you tell us about Chinese vaccine? So there's a global race. Russian

say they have a vaccine against COVID nineteen. Where are we on China? Will the Chinese even use the Russian vaccine? I am not not sure about whether China would use the Russian vaccine. There are a lot of questions about whether that vaccine has gone through adequate testing. China's on in a big push to develop a vaccine and is in I think third base testing of that vaccine, and it will uh. It's already setting up plans to distribute

the vaccine, it sell it widely around the world. There are a number of companies in China with with with hopeful signs of being able to launch a vaccine fairly fairly soon. Thank you so much to Carla Freeman there of Johns Hopkins, and be sure to check out vr US go on the Bloomberg for the latest information, and tune in every day for exclusive conversations with John's Happy Experts for an inside look at battling COVID nineteen. 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.