Surveillance: Negative September with Slimmon

who've been successful. Douglas cast nailing it at Sea Breeze on a short term basis, and as John mentions, Mr Wilson over at Morgan Stanley, absolutely nailing it on a more long term, measured let's call it institutional basis in this storm. As Andrew Slim and Mr Wilson's colleague, senior portfolio manager at Morgan Stanley Chicago, Andrew, thank you so

much for joining us in this turmoil. You go, as a guy more optimistic where Mike Wilson goes, which is now we must study earnings, and you suggest that margins must be maintained. Can we be optimistic for maintained margins through the end of the year. Well, we we certainly haven't seen the you know, the earnings collapse that you know, many of the bears have predicted. We'll have to see.

I would say from a stock picking standpoint, it's better to find the companies that actually already have had the the earnings clocks. I think he's talking at the at the S and P level. You know, we'll have to see.

The counter argument is that we are still only two years from the previous recession, and therefore balance sheets can withstand the shocks that you're seeing to cost and so forth better than they would if we were, you know, coming off a long period of economic story with a two year back to an Autumn two thousand seven yield? Is cash attractive? Is a legit asset? Yeah? Yeah, yes. And the point of this is is I am in the camp of p compression. So I think that is

the negative. The FED raising rates, yields going up pushes the pe down, and that's the negative that I see. I'm just haven't embraced as much the you know, the the earnings collapsing side, which is the positive that to me has been the story of the year. And we got a little but you know, we had a very big bance off the June low on the fact that the second quarter was not as bad as expepected. And

you know, now we're pulling back. That's the push pull of you know, they're very much a lackluster year for requas and I'm still on that camp Andrews. You know, the bond market backdrop changed as well, since the middle of June is back to where we were. So here's the question about the June lows and the equity market. If the two yield is back through the June fourteenth highs, why do equities along anywhere near ten above the June

six loaves? Probably not. They probably will head lower. I think, you know, September is not a great month, but I still think we could get a you know, gate late rally in the fourth quarter as the market starts to price off, you know, next four months, next four quarters of earning, which is three But you know, look, we've had a big bounce. You know, high risk came back in the market very quickly, and I think that's you

know that that was a dangerous sign. So your own power getting up and saying what he said, and boom down goes all the speculation that had come quickly back to the market. So I think the Yeah, I think the near term is it's negative for the market. Will we hold the loads of June? I think it's possible, even with rates higher, But I think speculation is right for short term speculation right to be you know, washed out. So you sound really farish, Andrew, and you're talking about

reducing risk. And then I look at some of the stocks that you like, including restoration hardware, Lulu Lemon, among other consumer discretionaries that usually do worse during downturns. What gives what's the rush now? Yeah? So, first of all, at the macro level, consumer sentiment hit a forty four year low in July, so a lot of very negative views. And when you think about that, it's all the stock market rewards the direction of change, and so inevitably direction change,

it's got to go high. At some point. It has and it has improved. And then from a stock standpoint, those stacks are damned forty fifty, sixty, seventy piked the truck. There is just a turn of bad news priced into so so I guess going back to the original question of earnings, you know, these companies have already brought down their numbers. They you know, the market is priced sing in as if they're going to miss earnings. So I think that it's safer to buy companies that have already

you know, the expectation is is bad. I I always am interested in buying companies with great long term track records that that the stocks are down a lot, with a lot of negative expectations. So I think that's safer than thinking you can pick and choose companies that aren't

going to have earnings problems. Following that logic, Andrew, do you think that the opposite holds true, that you should sell the names that have held in better I'm thinking of big tech that have had incredible rallies over the past few months. I absolutely, I absolutely, I think it's very dangerous, be careful if the Mike Wilson scenario comes to bear. I don't want to stock this down from its you know five. I think there's a lot of risk into that area, and I'd rather buy the companies

that already priced in a lot of bad news. How do our listeners and viewers do, Andrew? If everybody he's buying four or five stocks which were x per cent of the bullmarket rally out of June, and then you've got to look at everything else. Do you participate in those glory stocks and figure out what to buy or do you finally jettison the glory stocks and actually run

a diversified portfolio. Well, yeah, I mean, for I I think there's plenty of companies out there that are down, uh you know a lot, as I said, and there's real opportunities. But those big, very big stocks, some of them are really not down that much. And you know, if you go back in long time at the history of the SMP, what brings down the largest companies that

they never stay on top for ever? It's usually the government, the government, And I think, you know, you've you've got a very high waiting and a few names, and that is going to weigh on the S and P at the index level, I think for the a few years, which will be good for investors that go out and buy individual stocks because I think the opportunities that is probably better at the stock level than the index level, just given the waiting in those few names at the

time when they're you know, the government is you know, like I said, starting that you know knows in some of these companies, Andrew got a squazes in energy when with the year on spid, Jeff carrying the team over a goldman. They're telling people to keep buying commodities, even going into what could be in recession. They say, the following commodities the best asset class to war into an

a late cycle face where demand remains above supply. Andrew, where are you on the commodity equity side of things? The energy equities which have delivered some stellar returns this year. So we solicit some stocks that we like, we got to sell something to buy them because I'm a long

equity marriage or what have I been reducing energy? And I've been reducing energy because just where you said, it's a significant to do at Uh, this industry is classically cyclical, and if in fact the economy does weaken, UH, to me, energy is vulnerable because it's done so well versus stocks that you know we're listed that are already done a lot. So I think energy is a source of funding. It's come roaring back here. I would continue to view it

as a source of uh source of funny. So I'm you know that the halt pitch in energy was a year and a half two years ago, when you know the poor occurred with negative prices. I think the fat pitch right now is a sentiment is at a forty four year loved. I think that's the that's the opportunity, and you sell things that are done very well like energy. Andrew, thank you, Andrew Slim and management Numerus Surveillers has been

committed to economics. We're really looking forward to giving the Jackson Whole treatment to CenTra when they come around again. In poor artegal and at those efforts there are academics. We avoid them like the plague. We do that for all sorts of reasons. But every once in a while we get lucky and lasso in one of them. If at Jackson Hall this year, Francesco Biancy of Johns Hopkins Ex Duke, EX Princeton stop traffic by speaking the word that no one wanted to speak, and that is fiscal economics.

It's a twenty nine page paper loaded with math. I don't understand matrix algebra. We just can't do that on TV, but we can talk about the basics and the policy prescription out of this. You say there can be a monetary lead solution or a fiscal lead solution rhythm MMT. Does the FED do a fiscal lead solution or is that the part of Congress and the president so sor right now, I think the FED is committed to bringing

fish on down. I guess the main point of our paper is to show that the FED also needs a cooperation from the physical authority. So we take an historical perspective and we look back at the sixties and seventies and provide an argument that that was a phisical phenomenon. Ultimately was dabbish monetary policy, but combined with overspending and not commitment to de stability. And so now the question

the FED is acting is moving interest rates up. So our question in the paper is that if going forward we will see the necessary physical adjustments to bring thecation down, that would be the fiscal solution to the problem. What did you learn from Stephanie Kelton's mm T. This has been all the ways the media loves to pick on it. There's a political polarity to that. You come from the neutrality of Europe, of Italy, Caustanza over in Portugal and

the rest of them. So you're the foreigner looking in at the debate of MMT. What have you learned about MMT in this crisis? Um So, I think what we learn the more, I think all of us. What we learn is that phisical policy can be extremely powerful. Phisical policy are probably put a stop to the low interest rate environment, and we were for ten years in at the zero over bound. In fact, we risk of deflation. I think we tend to forget where we were one

year ago. The FED was generally concerned about deflation. Um we intervene very forcefully with fiscal policy, and that contributed to the solution. Um. Of course, it cause a big jump in inflation, arguably because it compounded with some exogenous forces like the pandemic of course, uh, the supply chain problems, the Russian conflict. But ultimately fiscal policy proved to be a very powerful mechanism. I think what we learned, on the other hand, is that this comes with a cost,

and and the cost is inflation. Now, it's always easy to do policy with the benefit of hindsight, but with the benefit of insightro we went a little bit overboard. Well, Francesco, there's a really profound application here. It's not just what the rest PUNTS was, it's the expectation of the consumer's mind that there will be more fiscal stimulus if there is another downturn, and that that is what it's going

to lead to inflation expectations becoming unmoored. How much does that really crimp the ability of policymakers to either add phiscal stimulus in the face of a recession, mitigating some of the downturn, or be going for the fiscal stimulus of the past few years and leading to inflation that's much higher than it has been in the past. That's an excellent point, and in fact, what we emphasize is what really matters is a long run phiscal sustainability. So what we want is to be able to use this

powerful mechanist during recessions. But in order to do that, we need to guarantee that overall in the long run, or at least in the medium run, we are on a stable path. So what that implies is essentially that when things are good, when we don't need that to uh provide fiscal steamulus, we should refrain from doing that exactly to keep this ammunition to when we need it. I got one quick question. I saw Richard the Jackson Hole, and I want to go back to the core of

your paper, which is DSG. Richard Claire has worked with Girdler and the rest. Right, how can we trust this math, all the math in smart guys like you are doing. Has it been proven wrong given these shocks that we've seen that So I don't think so. I think like the math is just a way to formalize some ideas. So what we are discussing here, I think is something that everybody can relate to. People have had first ideas and then came the math. So the math is only

a way to put order there. And I don't think that um DSG models of money general macro models in themselves have failed. If anything, there are some risks that we forgot about. Okay and John, it's important, Lisa, good news. I just got the car to take you to the brandma with house to explain matrix algebra to Lisa's kids.

It's waiting, Marcesco. Thank you, Francesco Biankee. That on fiscal policy and what it makes for inflation expectations, some legitimate tension with record dollar strength off the good Bloomberg Dollar Index. Part of that, of course is commodities. We're looking at all the asset classes this morning, in this turmoil, this reset into the end of the year, Ellen Wall provides advice senior fellow in Atlantic Atlantic Council. I should say in a definitive effort, Saudi, I can't say enough about

the terseness of her book. Saudi inc. Just a really wonderful walk through of the originality of what we see in riod Ellen. I want to talk what John mentioned earlier, which is the idea of the US as a global manufacturer of hydrocarbons. In a select few saying it's un American export the stuff discussed. That is the adult in the room. Yeah, I can I can understand where these people are coming from, especially because for so long we did have a crude oil export band, uh and that.

But you have to remember that that really is only a very recent phenomenon. We only had a crude oil export band starting in the seventies during the um when when we had the oil shocks, and the idea was to try to keep as much oil as we had at home. Before that, America was a major supplier of energy to the world. Basically during World War Two, American crude oil, American energy, American gasoline and diesel, and jet fuel was essentially you could argue responsible for winning World

War Two for the Allies. UH. So, I think to say that it's un American to export our energy products UH is a very shortsighted view of of America. So Ellen, the deparotmat of Energy, led by Secondary ground Home, appears to be very concerned about the low stock pass of diesel and gasoline, particularly in the Northeast. This is what she said in a letter to some of the energy players here it is our hope that companies will proactively address this need or quote the administration will need to

consider additional federal requirements or other emergency measures. And on how credible it's that threat. I mean, if that's not a threat, then I'm not sure what is a threat. I mean that was She pretty much laid it out, saying, if you don't get American stockpiles out of you don't stop exporting products that are you know, commercially viable uh to to export, then we're going to you know, ban

the export of certain products. And that's I think very damaging to the global energy market because the United States is an important participant in this global energy market and we we import tons of products as well as as we export them, and that's what helps things run smoothly.

Right now, the prices in Europe for diesel, for liquefied natural gas, for all sorts of products are much higher than you can get in being United States, and so that's why we're seeing a lot of products go to Europe, especially because Russian products are no longer available for these places to import. If you know, we wanted to correct this, we could stop, you know, sanctioning Russian exports, or Europe could take a hard look at it. You know, it's the answer to this problem is not to say don't

export or we're gonna ban exports. The answer is to look at the larger flow of of products and figure out, you know, where things could be improved. For example, they could get rid of the Jones Act or suspend the Jones Act, which would make it much easier to transport diesel from certain places in the United States to the Eastern Seaboard where diesel supplies are very low. Well, there's a question about whether Jennifer Granham has credibility within the

energy industry at this point. We could get into that. Perhaps a little more instructive is what companies are actually doing whether they're going to actually invest in producing more natural gas, producing more crude products in the United States. What do you see on the investment side at a time when prices, while they have come down, are still

much more elevated than they have been in years. You know, you you would think that ordinarily, when prices are high, that there's a much higher level of certainty for producers to say, Okay, we're going to invest, We're going to

produce more. But right now, at least according to the survey that the Dallas Set and other fans have done of energy producers in their regions, show that actually there's a very high level of uncertainty, and a big part of that has to do with inflation and supply chain issues. A lot of producers are finding that while they thought that their costs would go up maybe ten, they're finding that costs are up or higher and that's really hurting

their ability. Even those that want to produce more, that want to drill more, they want to open more wells, Uh, they're finding that this is very difficult. They don't know where they can get this steel, they don't know where they can find labor and sand and other inputs. That they need in order to get get these wells going. So wells are taking these seven to eight months to complete, whereas before that timeline was much much shorter. Can we

just probe the tail risk it? Just to wrap up, Allen, what do you think would happen if the administration cut out the export of a fuel of energy product to say Europe. What would happen? What would the main characteristics of the energy market look like in that world? I think that the first thing we would see is a major, major spike in the price of um fuel products and

oil all over. I mean, speculators would just you know, ramp things up, and it would be such a high, you know, increase that maybe the likes of which we we've almost never seen, or at least even if this was just foreshadowed, we'd see a jump in prices. And then we probably also see some issues in terms of w t I that would see a much bigger differential between Brent and w t I developing. And then thank

you and I'm wild the Atlanta Council. We celebrate now and we do this of Washington, and whether conservative or liberal, we celebrate someone who in this geriatric Senate that we have is doing the right thing. Lady of Vermont will retire and he's retiring with his full abilities at eighty two years old, and he retires with a wonderful memoir for all the Road taken a memoir. Senator Patrick Lahy, we welcome the former DJ at W S. S. E. St.

Michael's College, Patrick Lady. This morning, Senator, I want to cut to the chase. The liberals of your youth, Scoop Jackson of Washington, H. H. H. Of Minnesota and a young lady have been substituted for the new progressives. What do the new progressives need to learn from the liberal three theology you lived well? I think they have to learn that you can talk about doing things or you

can do it. Yep, they accomplishing the accomplishing legislation is more difficult, but it requires you to uh stop talking except with each other work out. Both Republicans and Democrats try to get coalitions and past six I mean, you go way back at the time of Lennon Johnson getting civil rights bill has passed and he had a number of senators who supported segregation. All he brought people together, but it required hard work. Humphrey and Jackson did the

same thing. They would bring in Republicans, uh and work with him and get it done. I worry that, and I appreciate a number of things that you so called progressive stand for on climate control, it and education all. But it's one thing to talk about it. It's another thing to accomplish it. And you had a lot of these things. You have to settle for eighty five percent this year in legislation, get another fift pcent next year.

It's never an all or nothing game. Senator, did you think that President Biden is the right person to take that country and lead that a particular effort post, Well, he's done a lot of great legislation past. He's uh uh lord the deficit in many ways he's and most importantly, he brought us back into the world of nations. Look at the animosity Mr Trump has shown towards NATO and other countries and his favoritism of Russia, and said, Joe Biden came remember the clear view of what Russians like,

what Putiners like with Ukraine. He brought the natural countries, our European allies together in the way we haven't seen in decades. And uh, I know that totally surprised a lot of our putent, but it also showed that the

United States was back in the leadership role. Senator. There are a lot of people speculating that perhaps he shouldn't be the person to run again, specifically because of the fact that he is older and that he isn't necessarily generating the same enthusiasm, and we're certainly seeing that in the polling. Do you agree, do you think that it is time for new leadership? Well, I think if Joe Biden wants to run again, I'll support him. That's a

decision only he could make. It's the same way I had a lot of people urged me to run again in Vermont, but it's a six year term and I have things I want to do and still do, and so I retired probably at the top of my influence of the Senate is protrac But but Joe's gonna Joe

Biden's going to make that decisions out. But I I can't think of anybody, any the people who ran, including the former president, who could have brought NATO together the way he did and could have gotten uh some of the legislation we've passed and everything from from COVID to uh Child, no treasure, I mean name it. I don't think anybody else could have done that the way he did. Senator, we are out of time, but I urge you to speak again to Bloomberg, to David Weston and all of

us about the road take in a memoir. It is really extraord and I can't say enough, folks about how it is of a liberal of another time and place. The gentleman from the from Vermont, Patrick Lay, this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am. He's Stern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg