Surveillance: Market Conditions with Cooperman

and of course on the Bloomberg terminal. Leon Cooperman folks for like forty seven years, was named head Research Strategists by Institutional Investor at a tour of duty with Goldman Sax a few years ago, Leon, I want to talk about the character of this bear market, and you and I do that with a bond overlay we've never seen, which is bond priced down, yield up. The losses and bonds are extraordinary. How does that redound over to a stock bear market? Well, actually I went taking a slightly

different approach. I'm shocked at interest rate to as low as they are. You know, for most of my career there was a real return associated with buying a bond. The bond nominally yield was an excess of inflation. We have inflation rate in this country, quote eight percent. You have real growth a couple of percent. You have nominal GDP growing at ten percent and you have the tenure bond at three makes no sense. And that makes everything

in the stock market look attractive. The stock market looks attractive. What parton looks attractive to you? Or are you in the triple leverage doll cash fund? No, I'm basically I'm of the view that equities are the best house and the financial asset neighborhood. But I don't like the neighborhood for a lot of reasons, so I have a cautious view. I've been a seller on strength and not a buyer a weakness. I think that ultimately the price of oil or the FED or maybe the strong dollar will lead

us into a recession. And when the recession hits, which will be a three event, when it is that, the market will find the bottom somewhere between thirty five below its peak of And I think coming on the program and having excuse me, a questious view is not evaluated, so I differentiate myself. I talked about the Pharaoh. You know, I don't know what you know about the Bible. Tom but the foul had a dream. The dream was interpreted by Joseph, and the dream was We're gonna have seven

lean years following the seven fat years. I'm not making a seven year forecast, but what I'm saying is I would be very, very surprised if we went into a new bull market anytime soon. We've just been through the most speculative period now financials three you know, SPACs, Uh would be you know, um fangs, zero commissions and interests. We just saw an extraordinary expected the period and Uh,

we're not going into a bull market at least. What's so important here is we can't have the coup for bond angle because the seven years of abundance led by the seven years of famine. Lisa, that doesn't get it done for us. We'll have to put the exodus aside and talk about what we're looking for in terms of the safety during the seven years of leanness. And you talked about bonds in the surprise that yields were so low,

particularly a bunchmark rates. What is the safety if it's not bonds, Oh, I would think under valid common stocks. I'd rather be in a common stock that would be in a bond any day of the week. Given the relative price of bonds versus equities, can buy what we gotta what we gotta understand is stocks are very heterogeneous. Bonds are homeost genius. What I mean by that is a triple a bond, double a bond. They're all trade within a quarter point of each other. Stocks are heterogeneous.

You know, I look at a City bank at seven times journeys at discount, the Book Bank of American nine times earnings, Apole, Uh, the financial service company at any times earnings. Uh. You know I have my I'm doing relatively well this year because I have a big energy exposure and I had breakfast with the CEO of a coming called Paramount Resources up in Canada, and the stocks gone from two to like, and I was wondering where

I should take some money off the table. When I got finished talking to the CEO, I figured, I add to my position, this is a company that generates over three percent of it in the yield, so it was at three times cash earnings. It's growing production double digits UM. And uh, they have something like the ten eleven twelve dollars of cash flow training it like three times cash flow, and they have a portfolilo on the other energy holdings that are equal to five dollars per share. The ironomy,

I'm very negative on bonds. My biggest position is a bond, but it's very complex. But I happen to think it's like a layup. I could be dead wrong. It's a coming called Lagato. They had first lean dead outstanding fifteen and a half sent coupon. We're to make hope of vision. You have paid interest to the end of twenty three when the bond matures. And these are very real people, they have very real assets. Where I say real people.

Chairman the boards, Ivan Seidenberg, formerly head of Horizon Red Hunt, formerly had of the fccs on the board. Mr Kana you who is number two guy to Craig mccoord built mcorse Cellulos on the board. There's so much of the specific story here that's important to talk about and discern. Let's talk about the bear case or the recession call of a draw down from the peak, which is about

further than where we are today in the SMP. What leads things lower If there are these positive stories of whether it's undervalued financials as you said, or whether it's undervalued or at least uh fairly valued energy companies, well, I'm a classicist, you know. Let's face it, we have recessions. We used to have recessions every four or five years, but because of very liberal policies, has been stretched out.

But if we have a recession, and uh, typically you have a bad market preceding recession, and uh, you know we're in a bad market already, and the question is we're probing for the bottom. And I think given the excesses that we've had, having a bottom thirty five or below the peak would not be an unreasonable guests multiples, that would not unreasonable, you know. Uh, let's face, everybody's

using the wrong profit est of it. You know, I think someone on your program this morning said every one percent point improvement a dollar is about eight percent off of earnings. Uh, let's talk about that, Leon Cooperman, you have seen dollar a bounce. You know, I believe you were in the meetings of the Plaza Court a few years ago. What does a strong dollar mean for our

viewers and our listeners? Negative for corporate profits? You already got a profit warning out of Microsoft on the strong dollar, and uh, you know in a recession, profits typically drop. I don't see any uh estimates that would have earnings on the SMP five comes, Leon, help me with institutional money and what they do with whatever part of their portfolio was bonds and those bond losses. We have guests after guests after guests rationalizing a bond bear market. Do this,

do this, do this, do this? Fine, But the fact is, on an actually assumption, even if you have a formal water or you don't boy, or you underwater off that bond bear market, what do you do shift the stocks? Well, I would say it's a combination of cash and stocks that were in my answer. You know, I'm a different position. I'm approaching eighty years of age. I don't have any clients. I run my own money. I could take a longer term horizon, and I recognize that in the bear market,

he who loses wins, he who loses least wins. We all leon at your August age of seventy nine in holding. Should President Biden's serve a second term? Give us the Cooper energy level? Is the nation considers a second term for the president? I think he definitely should not run, and I don't think he will run. I am told by people that you're not happy in Washington. He spent more time with his grandkids in Delaware. You know, he has not done a good job. I voted for him

because I voted my values and not my pocketbook. And I found Trump, who has superior economic ideas to Biden. His conduct was just totally unacceptable. And uh, but I think the Democrats are gonna get crushed in December, the progressives that led them too far to the left, the country of centrist in nature. And uh, we gotta we

gotta start working together, we gotta start cooperating. And you know, let me if I may make this point, it's not about politics, but I had a sense I would have smile my face blame a good man by the name of Barack Obama for a lot of these problems. I don't think that Bush wanted Bush to don't Reagan. Bill Clinton villainized wealth. He villainized wealth. And I sent him

a letter twelve years ago. They went viral on the end, remember that, Okay, And I said to him, Mr President, you're telling the pent being screwed by the one percent. You should be telling the ercent. But hard work and luck, they could become part of the one percent. You depreciate the American dream. And unfortunately President Biden has picked up on that theme. I see no reason to villainize wealth. How do you get to be wealthy? You develop a

partner service in world needs. And we continue with Leon Cooperman of Omega Leon just because Jasmin and beat me over the head with this. Are you in bitcoin? Leon? What do you think a bitcoin? I take the easy way out of bitcoin. They say, if you don't understand bitcoin, it means you're old. I'm old, But I take a side with Warren Buffett who had said he wouldn't pay cents for all the bitcoin out standing for his partner Charlie Mungo, who refers to his rat poison. I don't

see it at all. I don't understand it. I think it's a product of the times of very similative policies. And uh think, okay, I think Leon Cooperman. Critty just told me I was old. I think guess what I heard. They're thrilled heavily on Cooperman as we extend our discussion with him in these tumultuous times, Leon, over the years, how do you adapt and adjust when there's a CEO change at a company, even if it's coordinated and there's a ballet of course, I'm thinking of Amazon. It could

be any other company. Is it well, but let's just take Amazon Bezos to Jesse. How do you adapt it adjust to that? Well, you have to make a judgment whether the change in leadership is appropriate, uh and logical? It makes sense? And is his leadership change occurring at the time when the company doing well poorly? I get more worried when the chief financial officers leave for no apparent reason. I don't worry about CEOs. You know, Bezos wants to kick back a little bit. He has outside ventures.

It's his handpicked successor. He's not selling his uck, you know, So I don't get worried about that. Leon, I want to. I can't generalize, you know, you've got to take each situation one at a time. Fair enough, Leon, I want to. I want to circle back to a comment you made on Bloomberg Surveillance just moments ago. You brought up a historical trend that a recession used to come every four or five years. That's, of course not been the recent trend. But I'm curious if you see a return to that

kind of pattern. No, I wouldn't forecast. And look, we're a democracy. Democracy politicians do a better job and fighting recession. They're doing fighting inflation, so you know we're I wouldn't forecast a change in the pattern, but I what I'm worried about is that we're long in the tooth and we see a lot of structural imbalances, and we've created a tremendous amount of debt, and we don't have the

leadership in the country that we need. So I'm assuming that we're heading to recession, not that they want one, but I think this idea of inflation moderating, My guess is you have to split it two for one to get the inflation rate down to where the Fed wants it. You know, a typical business courses labor. Labor is not moderating. We're in an environment where there's much more demand for labor than their supply. There's not an environment with prices

go down. So we don't have we don't have intelligent policies. They wanted to cut the gasoline tax the last time I heard the way do you get prices downage you get more supplied, not more, not more not not lower taxes, which stimulates consumption. Leon you mentioned the eye word inflation. I'm curious about the macro heads that seems to be. It feels like the momentum trade of the day, which is you buy commodities to hedge against all the other turmoil in the markets. Is that a trade you support?

I understand the merits of the trade. Now. I'm very much of a bottom up stock picking kind of guy. I got lucky the last couple of years. You know. I came into last year with a very overweighted energy position because you know, the energy was three percent of the index and nobody liked it. And these guys were very cheap, And now over a sudden, everybody likes it, and I'm getting nervous, but I've held on because they

seem so inexpensive. Flow you at the time we've got left with you, I am fascinated what you think of the speed that the SEC is moving where Mr Gunsler has so many issues. You mentioned crypto bitcoin whatever earlier, or the meme stocks. I know, Leon, you were sitting on your couch down in Florida playing Game Stop. But for you and me, some of this modern trading stuff is nuts. What should THEE do about a tremendous disservice to the public? And I expressed that, you know, I

became a big letter writer in my old age. I followed the advice of Aristotle, who said in tolerance and indifference is the last vertues of society. So I started to speak out. So I sent Jake Clayton a letter pointing out to him that the market structure has been destroyed. And why do I say that? When I came to Goldman Sacks sixty years ago, whether it's Golden Morgan, Stanley, Solomon, Brothers, Mary Lynch, they traded stocks to fifty or sixty cents

to share, and the vocal rule didn't exist. Now it commissions near zero and the vocal rule the brokers are not stabilizers. Secondly, fifty years ago specialist in New York Stock Exchange, and eighty percent of the vium today is offboard and thot polls, So specialists are not stabilizers. And then finally, for some unexplained reason, they limited the uptick rule,

which gave rise to these high frequency algorithmic traders. Nothing about value, you know everything about price, and they drive the market higher than there should be on fundamentals, and they driving lower than it should be on fundamentals. Uh and uh. He pleaded with the SEC to reinstate the uptick role for a period of a few months to see what just to experiment. Just I agree, we're out of time, we gotta go, but I want to get you back on to pick up on the uptick rule.

I think that's a not a small item. Leon Cooperman, I'm gonna call him constructively cautious on the markets, of course, iconic and with his omega as well. The distinction today is a link up here with yen weaker as well. One seven thirty nine is critical and one thirty eight print would be truly shocking. George Sarah Ellis has been out front on this with global head of Foreign Exchange Research at Deutsche Bank, with a note published Worldwide moments.

I go, there are real interest rates, nominal interest rates, George Sarah Ellis, their capital flows, and then there is the thermodynamics statics of the hoarding of dollars. What is the importance of a static hoarding of dollars versus normative flows in the global economy? Hi, tom So, I think it's extremely important because if you look at what happened this year, you've had a very big regime shift in

the market. Currencies were generally pretty highly correlated to interest rate differentials up until Arch, so you had the more hawkish fed the dollar was rallying. Then the ECB turn more hawkish, and the rate differential actually turned significantly higher

in favor of the Euro. But the euro failed to follow, and the market more broadly has stopped being responsive to the interest rate differential and is instead a lot more sensitive to the flow dynamics you discussed, And what we're seeing globally is essentially a huge holding of dollars from investors. Europe obviously really burdened at the moment by this huge energy crisis. Japan also has the energy problems, plus the

b o J which is easing aggressively. And the conclusion the market has is it's just holding onto dollars even if investors are selling US assets, the selling U S ecurities and bonds as we're seeing, it's just not being repatriated back. And for example, that's one reason why the yen is no longer a safe haven. So George, let's focus on the euro hand locan that currency pair go one and two great heights from the ECB. Alish your

bearish for that, Couracy. Well, your last question is an interesting one if if you look at the UK, the Bank of England was one of the first currencies, one of the first central banks to high grates, and that really didn't benefit You've seen the RB a Swede and altern hawk ish. So I would say at the moment, central bank reaction functions, rate hikes don't seem to matter all that much, and it's a lot more about the underlying energy balance. How far can it go? I just

crunched some numbers in the piece this morning. If you map out the extra energy deterioration on the back of this big spike in natural gas prices, that's worth about two hundred billion euros extra off supplying to the market. Roughly speaking, that equates to euro dollar parity. But of

course these are only rough estimates and numbers. When you look at how much the Euro has overshot in the past, we've come up with a range of anywhere between nine and parity, and I think in the current environment that sort of range is not early unreasonable. This is actually biling on towards City Group is calling for as well in on the Euro. Should this gas band go into an effect with some sort of weaponization, at what point does that become your base case versus a bearish outlier.

At what point do you have conviction around it? Given that Germany is already starting to tweak how it's handling a potential lack of gas applies down at the end of the year. So when an outcome rests so much on what would happen out of Russia and President Putin,

it's very difficult to have a base case. I think the best thing we can do at the moment is just put numbers around the different scenarios, and under the scenario of a complete gas cut off, I really wouldn't say ninety five would be unreasonable, but we can just see how unpredictable things are up until three weeks ago, and that gas prices will much lower and the flows we're going through that pipe, So it is all about

the North Stream pipeline. What I would say, however, now the market is built to risk premium because it knows there's uncertainty. It knows it can be switched off. So even if this gas returns in terms of full flow after the maintenance period, the risk premium is unlikely to go away. And I think that's a critical thing that's changed over the last few weeks. George, to your point, we can do a bunch of scenario studies, but you have to understand what regime we're in and what manage

to foreign exchange and what doesn't. And to your point, it's not been about rate so much as it's been about flows. So, George, do you think it's going to stay that way? Is the reason to believe it stays that way because the recession scenario staff, all the scenario analysis, whatever it is, that's helpful, But unless we understand what's actually driving the underlying currency, who knows where this goes absolutely? And what's driving the dollar at the moment is safe

haven flows. The dollar is the so called risk parity antipole. And I think you would need two things for that to change, the FED being more sensitive to growth, and at the moment that's not the case. They're very growth agnostic so to speak. The u S data is slowing, but they're still talking about three percent. So number one and shift from the FED, and number two are change in the energy dynamics, especially as they relate to your

and the end. So I don't really see the current environment changing, which is why we we pushed down our euro dollar forecasts in recent months. The last point I'd make everyone is talking about this recession. I'd argue the recession should be a given. Indeed, the markets already pricing it. It's now a question of length and depth, and the second half of the year is all going to be

about that learning process amidst an extremely unusual environment. For example, the growth data is slowing, the labor markets globally are extremely tight and strong, and people talk about the US. If you look at the Canadian data, the unemployment rate built a huge record low and drop sharply, and it's these things central banks are looking at and they would

need to see the labor markets overall. Turn, I think before we start talking about a more dabash pivot and George super interest is stuff as always George Saravellos there of Deutsche Bank. Yeah, it's a quote for you. We see a high probability that further Hawke is surprises lae ahead as even the current expected policy path would leave

real interest rates negative one into next year. The team behind that quote Franklin Templeton, the fixed incomes ce IO join us right now, sort I desire sort of great to catch up with you. Walk me through why you still believe that we could face further hawke Is surprises. So I think the surprises stopped being surprises as the

market starts expecting them, right, so we wrote that even before. Currently, I would say, I think that we're going to get an inflation number which is higher than one percent this this week month on month terms, so we're getting close to nine. We might even trickle a little bit about

nine this month. That's a big number, and I think it's going to be extremely difficult to end this year with inflation being significantly below eight, which means we're looking at seven and a half to eight percent for year end. And my concern is that regardless of where we are on FED funds at btwhere at three or three point

two five, it's not going to be enough. And the market currently is already pricing in rate cuts next year, that might just be way too soon, And that that's the call that we will actually see the FED deliver getting closer the form, but it will not spin on a dime and start cutting as soon as it hits four because it does need to get inflation out of the system. This happened once before in the seventies. They backed off too quickly, and then inflation came back. This

is a pretty bold call. So no, And I'm wondering where you think on the yield curve it is most mispriced that there will be cuts to those rates, to those rates of the Fed next year. Where is it most miss priced that we're going to see inflation come down to a mere five or six percent versus what

you're expecting of eight percent. So I'd say that if I look at the yield curve, if I look at what is priced in looking forward, we are seeing can you we are seeing short end rates pricing in rate carts in the second half of next year, and is that that to me is a miss pricing. Now the long end, it is interesting because I don't think that current levels are cheap. I think they're still rich. I think the long end does need to sell off more.

There's a market is counting very much on the Fed being in a position to immediately cut rates once we get the slow down in the economy, which clearly they're expecting and hoping for. That's only if inflation comes down as well. And if inflation doesn't come down, I don't think the Fed can cut rates even the economy slow sorry, you mentioned the nineteen seventies, long ago and far away,

when I could shave once a week. I was given a private meeting with Sir John Templeton that began a relationship over decades, and he told me, then provoker, that there would be a shortage of bands, essentially folks. John Templeton called the Great Moderation, and other people did as well. But boy, that was a lonely call. Is the Great

Moderation over? So? Now, can you you you were a morning Star fixed income Manager of the Year, can you say, finally we've broken through the trend of the Great Moderation. I think that the Great Moderation happened at a time when governments and central banks hadn't. We're not coming off fifteen years of various forms of QUI from central banks, and for governments at least three or four years of massively expansionary fiscal policy. So do I think that shortage

of bonds is history? Eventually it will come back again, But I think for the next three to five years, I don't see a shortage of bonds. So just quickly need to squace this in. We've got about thirty seconds with you. What's the big market call for you. I've had the big fat code, the big inflation code. What's the big market code? The big market call is much more volatility coming forward. I've heard in two weeks time we had treasuries, the deepest apparently most liquid market in

the in the world, rally sixty basis points. In two days time we had them sell off another twenty or twenty five basis points. These types of moves are not done. So I'm not ready to make that call to say jump into risk assets. I think it's way too soon, son of Wonderful to catch out with your son of designer of Franklin Templeton. This is a joy and timely with dollar strength. Michael Sholl joins US now. Dr Schoel out of Manchester. UH does great interest in money and

also in commodities and um as well. Michael, I got eight ways to go here, and I'm gonna go to one important idea in your note, which is this time is different and that we are far along in the tightening cycle. What does that mean for Jerome Powell? You know, I think the great danger here is is that the third titans too much for financial markets. I think we're in a very tricky spot. I think the sort of underlying economy of the labor market obviously can withstand a

fair amount more tightening. But but financial markets here are wobbling. Um. And it's the dual nature of this tightening. It's it's the combination of the withdrawal of liquidity and the increase of interest rates, which I think is starting to bother financial markets. Um. And you know, I mean I you know.

My bet would be that at some point in the next few months, maybe even next few weeks, you know, we are heading for some kind of a financial accident, a break in financial markets that really puts pressure on the FED to do something different. Michael, You are and I are old enough where we remember the Little Red Book, which was Stanley Fisher out of the I M F writing I M F essays from a time of crisis, folks. Everyone in the game had to read that book at

the time. And this was Fisher looking at the effect of E M. Redounding on the developed world. When you see rupia, rupie, any other number of currencies, choy and pay so on wine, what does that signal to you? You know, it's not like we don't have FX pegs to deal with you know, I would say more than the e M currencies. But the really surprising thing is

the weakness of other developed markets against the dollar. You know, the sort of stunning weakness, as you said at the end of the year of the euro off sterling, and and this sort of ability of the dollar to just suck up all available liquidity. Um. You know, if we were going to have a ninety eight moment, I think you're more likely to be at the heart of it in East Asia this time. Michael. When you say something will break and we can get to that, you're a

point in a moment because it's an important one. But when you say we could have a financial accent, what do you think that looks like you've got anything in mind? Well, I mean it looks like very sharp Hanward moves and a number, you know, in a number of assets. You know. I think so far what we've done is sort of blew the froth off the equity market and take yields up and you know, impose very unpleasant losses on people.

But by large people have lost what they've made in the last twelve to eighteen months, which for themselves outside games, you know, I think the danger that we have is is you know, I think credits what we have to watch now. But if you know, if credit markets start to dislocate at the speed with rates markets or or sort of peas have come down in equity markets, well, then I think that two has the ability to impose the sorts of losses on people that they emotionally cannot withstand.

And Michael, I guess that's what I'm trying to get to the point of what's a dislocation. What's the difference between just to sell off and the equity market aggressive widening of credit spreads and a dislocation? And who would be an accident? Four? No, I think the dislocation is where you look at market prices and you really can't make sense of them. You know, you can make a great deal of sense of the reduction in peace that

we've seen so far. You know, you can argue it should be high, you can argue it should be lower, but you know, most of what we've seen so far has been you know, understandable when one looks at earnings, or one when one looks at inflation. The dislocation is when markets as they did in ninety seven in October August through October in eighty seven. You know, it is a move in markets that really breaks its fundamental link. But you look at it and you're like, WHOA, well,

this is just this is just liquidity being withdrawn. Michael. This raises a question of when the FED steps in just to build on that point, especially if they still are trying to fight inflation that may not come down beyond seven and a half percent, if you believe Sadasi of Franklin Templeton. How do they come in and back away even in the face of some of these dislocations that you expect very tricky. UM. You know, I think they take whatever success they can to the bank. You know.

My guess is that you know, you may see a moderation some of the commodity inflation over a period like that, UM, and the FED would usually excuse of looking forwards to do something different. UM. I also think the FED has different mandates. Fed it balances. It talks about the employment mandate and the inflation mandate a lot, but we all do understand that there is an implicit mandate to keep

the financial system functioning at a tolel at a tolerable level. UM. And you know, I think that you know, there are price levels at which or speeds of movement at which the Federal Reserve would be forced to do something. But also not the only central bank on the planet. You know, You've got the Bank of Japan PBOC and and and

the ECB to consider. To that point, I did want to follow up on what you said about the euro being the next real crisis and there will be akin to some of the emerging market fissures that we saw in previous years. How far along in this are we and what is the potential contagion there? You know, very

difficult to say. You know, I think Europe is you know, was a mess going inter this and and continues to be a mess, and has the additional strain now of you know, sanctions on on Russia, and you know, the potential for some you know, some rashoning of energy you know into the winter period, and that that that then does start to look a lot like the mid nineties seventies, where you know, it wasn't just inflation but you had to deal with but an actual shortage of energy available

for general industrial activity and consumer purposes. So you know, as I say that the Europe is a risk, it has poor political leadership. You know, VCB is not an entirely credible central bank. And you know, I would say that your itself is a is a major currency, um, but for a lot of people it's a voluntary currency. UM. So you know, as I say that that that you know, if we had a region pulling everything else lower, I think that's the region you need to watch out for.

So Michael, with that in mind, what are you buying right now? UM? You know we're still with with energy. I still think that that's a sector that has you know, that has value. UM. I think that you know, as panic builds, you know, I think you'd want to be more aggressive. UM. I think that that fascist medals I think still have potential here. But the honest truth is we're a lot less long today than we were six

months ago. UM. And you know, to have used recent strength to become less longer than we were, you know, less long than we were a month ago. So as I say, this looks like one of those times that you know, whatever, whatever your mandate allows you to do, UM, you know, you'll take your exposure down to more I would say, cautious levels than in a normal market environment. Michael Shell, thank you, sir for catching up with this

market field asset management CEO. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and I'm 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 In. This is Bloomberg