Surveillance: Risk-On Rotation With Bevan

for us. Look, all right, we keep it simple here. I think any move to value, any rotation to supercyclical sectors is going to be a tactical, short term flash in the pan until you have some real structural changes in the economy that can broaden out the economic base and provide some real ballots that would that would move growth meaningfully higher. Until then, I think these are all sort of noisy moves that a lot of investors can ignore.

I'm certainly also, because yields are higher, that should be good for the cyclicals, that should be good for the banks. Why is that not another sign perhaps of outperformance Given the fact that all things being equal, there isn't necessarily any reason behind this rally well, as you mentioned a woman to go. I mean, there's a lot of cross currents in the bond market right now. There's a lot of confusion about what supply will be like in the future.

And I think most importantly of all, the sense that if you'll really do rise in a meaningful way, that the feed will come in with yield curve control and and and and cap you know, any any big move anyway, So the long term benefits the correlation that you might expect between yields, UM and UH and banks and other cyclical sectors. I think it's not going to be what it once was until again, until the economy is structured in a very different way. You mentioned the financials. That's

the problem, isn't it. We saw and yesterday session the financials can outperform on the way down? Can they outperform in an up market? Charrett? Given the white scenes of big tech? Can they? There's a few things that I think are special about financials that can that can work.

If you start to see UM deposit growth slow, you start to see you know, loan growth pick up maybe in the you know, later part of this quarter, UM, then there I think there are some some moves that can happen in financials that are worth taking a peak at. But for a medium or longer termorial investor, Um, this is a moment in which, you know, we're much more concerned that you know, secular stagnation plus epic stimulus equals a really epic bubble in in growth stocks in tech

and healthcare. We calculated that you know, tech broadly defined plus healthcare accounts now for more than fifty of the market cap of the S and P five hunter that's the highest ever. And just incidentally, you know, if you if you sustain the current pace that we've seen this year, UM, you know, tech and healthcare would would would account for the entirety of the market. You're I don't have more faith in a sustainable rotation if we had a deal

down in Washington, d C. We don't. Are you surprised by the calm around that currently? I am? Actually I think that the you know, a lot of investors are watching this really closely. They understand that more stimuluts isn't necessarily understand that, you know, two hundred dollars a week unemployment insurance is a disaster. Three is tough. Four dollars might keep us on the footing that we are um at today, but right now we've got none of it. And um I think there's a there's a real sense

of watching and waiting. And if it we go into another week of of no progress on talks, then I think you'll start to see the market care a bit more. Al Right, care a bit more. How does that translate, in other words, how big of a sell off could we see if there is no deal after the next

week or so. In September two tho eight, when the House voted down TARP the first time, you recall, you know, the S and P fell I think about in the in the sessions after that, just for context, not saying we will get the same move you know this year, but I think that there is a sense in which, if it really does look like policy is going to fail, the market can can care a lot and care very quickly.

Um So, if if you know, maybe a scenario in which the market has temple was a little bit of discipline on on Washington and you see a big equity sell off that sparks finally, uh, some level of compromise. We told investors you know this week, we think it's a it's a Q three. Whether it's a hedging risk or a buying opportunity maybe depends on your time frame, but we wouldn't be surprised if we get a lot more volatility before there's some peace in Washington. John, I

gotta say what Jared just said. There, This idea that perhaps the market will impose some discipline on Washington goes to something that you said last week with Larry Cudlow, where you said, isn't it problematic that you have so many people losing their jobs at a time when you have markets rallying down in Washington? They don't care about the jobless rate as much as they do about what they get in terms of a signal from equities. I mean, you just have to wonder what does that say about

the deliver a deliberation process down in Washington. Think it's embarrassingly su and Jared, I think you can speak to that as well. If this market lower, if this equity market was down and down hard like it was in March. I think we've seen some follow up in Washington, and we don't we wanted, Jared for you, what's the cut

off point? What's the point at which you look at things down in Washington and think it's not happening, Well, I mean it's it's it's a tough call because our conversations with with folks and the and the sense down there is that everyone involved, basically everyone involved understands the need for for more stimulus, the need for more aid, and they're just sort of haggling about who gets what and who gets uh, you know, credit for for for pushing things through. Um, a little bit of real stress

can can overcome some of those challenges. So we do expect that, you know, whether it's a week from now or two or three weeks from now, at some point, we do expect there will be you know, more stimulus. I guess it's just a question of the path we follow to get there. If if you know, on the other hand, there was the sense of a different calculation, the calculation that maybe some more economic stress now changes votes for people, you know, in November in a way

that they think is favorable. Um, that's something to really worry about. So if you started here, you will never hear messaging about that. But if you start started the sense that people are thinking in those terms, then that's something that's a very different market a very different situation, something you definitely um, you know, raise cash on the backup. Yeah, before we let you go, we need to talk about

the sixty forty split. It's something that you and a team of Bank for America has been talking about for quite a one in fact, ahead of the curve in many ways, plenty more people talking about this now what to do with the forty portion? And I just wanted the lessons of the last couple of days, the correlation between treasuries and growth and more broadly therefore the equity market as well, John, can you speak to that the

problems there? Well, we wrote this week that that the secular stagnation, this economic malaise has really started to blur the lines between ourset classes in some sense. You know, a long term treasury bond is not that different from a high flying tech stock that pays you a tiny dividend.

Neither one gives you a positive income stream, you know, adjustice for inflation, and they both start to look really unattractive if we do see a world either of you know, stagflationary populism or a world in which industrial policy and other investments a boost productivity really change the game. And so That's why we suggest investors think non in terms of asset classes as much as in terms of the

kinds of risk they want to take. In the world of ample liquidity, that means you can own gold, you can also own you know, things like closed in funds with a big discount. You can also own credit risk in a way that UM has less to do with.

It's it's it's it's you know, design as a fixed income instrant, and what to do with where we are in the cycle and what we see is potential for fundamentals UM in any world, you know, those conventional methodologies, Can the ways of valocating assets start to make a little bit less sense? Investors need to be a little more flexible, and they're thinking Jared gold. A lot of people saying that it could be a hedge against equities,

and yet they're moving in tandem. Can you reconcile that I'd really think about gold as a as a kind of a measure of in some ways at this point, you know, policy success, You've got you know, one point six percent inflation. That's a modest recovery. It's not a huge breakout. You've got to fed on hold UM treasuries yield,

you know, point six percent or so. That negative one percent real yield the kind of a signal from both the bond marketing from gold moving in tandem that you can buy basically anything but nominal bonds and you'll be you'd be better off. So in that sense, gold is a kind of a get out of here trade from the perspective of the bond markets. And and I think

that's the signal investors are picking up. You see them rotating not just to gold, but to other speculative things, to spack I p o s too, you know, cryptocurrencies, all kinds of assets that otherwise wouldn't make sense if the cost to carry was really meaningful. UM. So to extent that we get policy success and inflation and growth, wee wile to normalize UM. Then you'll see investors, you know, continue I think, allocating to things that maybe they wouldn't

have done in the past. Jeric right to catch you up. Our best of the saying job would at that bank for America Security. Let's get straight to Harry Chin and Carry and Shawi BMP paraplehead of Commodity market Strategy. Harry dried to catch up with you, mate. Let's talk about it. What happened in the last count of Dace. I think, first and foremost gold has reached another historical high, and the question eventually was going to be when will be

when will people be taking profits? But I guess more fundamentally, what we're looking at the BNP party about, it's the leveling off and break even inflation rates. So that's sort of stabilizing negative real rates where they're at right now, and that sort of removes one factor of supports for gold. And then on top of that you start adding investor flows into silver, which is a sort of cheaper alternative than engineer macro risk. Then then you could see the

consolidation that's taken place. Harry, Yesterday's sell off in gold really violent, I mean, considering the fact that there weren't similar kinds of violent moves elsewhere, it was the biggest sell off since April. Does this indicate a positioning squeeze? Something about the nature of this trade that gives you pause about how much higher gold can go? Well currently, in our view, again trying to link gold to sort of macro reckon only fundamentals, we really watch closely what

the US real rates are doing. So with the nominals being relatively flatish, it's a question of, you know, did it still have the fuel to to move higher? And oftentimes when you reach an historical peak and you have this kind of acceleration in prices, the correction could be quite quite important. Now, I'll give it. The US real rates on a five year basis are still at negative one point. There is support from a macro perspective for

gold to hold onto its recent game. So we're thinking about gold trading in the nineteen hundred nineteen hundred fifty uh thereabouts before potentially having another rally next year. Okay, another fundamentally it's it's still good. Okay, so another rally next year. Tom Keene took the day off to go buy some more jewelry for Mrs Keene to invest in gold. How much higher could we see the price go in the next heel of this U in the next leg

of this of this rally. Well, we're viewing in our forecasts, are being too power about the next leg coming in in Q one next year, especially as you see realize inflation, you're on your benefiting from base effects, which would help that famous break even inflation measure move higher. Understanding that the FED is going to keep yields really low, potentially

even adopt yield current control. And it's on that basis with those break evens moving higher and nominals remaining pretty much where they are, you get that further impetus for goal to successfully move about two thousand Again, Harry, are you having new conversations, different conversations with a different poll of investors that maybe you weren't having back in. T's a new angle to this gold trate that wasn't there about ten years ago, I suppose, and you guys were

mentioning it. Uh, there's a lot of retail interests that's happening that I don't talk to retail investors, but there's certainly a big shift in terms of retail interests, even robbit Wood investors looking at gold. But I think more prosaically, you have a number of institutional investors are looking at all as a very good uh macro hedge because equity evaluations being sky high. If you do have a correction there as a result of disappointing economic outcome tied to

the evolution of COVID, then golds there to hedge your portfolio. Harry, how effective do you think that will be given the positive correlation between gold and growth stocks at the moment, How effective do you think it will be as a hedge. Well, the hedge comes in really if you take losses on the equity side, then you will sell that gold portfolio, which obviously has seen a very big increase in price, so as to mitigate that the losses you have elsewhere.

That's that's really it's primary functions. Harry, Great to catch up with you, as always, really good to see Harry, Chin and Gore in there of being parabout all. Now, what is happening with this gold market? Johns now straight out al under James Berban c c l A, Chief investment Officer, James, Great to hear your voice, sir, So let's get straight back to it. Is this rotation a

head faith or something more sustainable. I certainly think that exuties will grind higher because I absolutely believe that the Federal Reserve and the Treasury will continue to provide liquidity, and that has got to be good news for the quality growth companies that have been taking the market ever higher. However, I was found two notes of caution. One was the market reaction to the news from Russia yesterday that they

had found a vaccine for COVID nineteen. Although it was early stage, the market's initial reaction I thought was really interesting because what we saw was that the big text stocks sold off while bank stocks rallied. It was also the case the precious metal prices dipped and bond deals rose. And I think this is a real taster of what

will happen if the COVID nineteen crisis passes by. But equally I worry that investors have been very undiscriminating in terms of what they have been prepared to buy in this liquidity driven melt up. It is the case that we can make sensible investment decisions on quality stocks. And if you press me for where the SMP five hundred might finish this year and next year, I wouldn't be at all surprize given where bond deals are, that we didn't get to thirty five d this year and thirty

eight hundred next year. But the villain of the piece, I think is distressed debt, because when I look at the default volumes in Q two that came in at forty one spot one billion dollars. Now that is in comparison of the previous record of thirty nine and a half billion set back in two thousand and nine. Now, while for liquidity can stop markets ending up in a credit crunch, they can't provide companies in trouble with cash

flow and simulated those companies will be found out. And that's why I think it's so important to look through to what's really going on at the companies level, whether it's achieving sufficient revenues to justify long term access to the capital markets. So, in other words, an argument for active management. I want to stick on this idea of

liquidity versus solvency, liquidity versus the recovery story. It seems to be in me that you believe in a further rally in equities, and yet you're saying it's going to remain a liquidity story, albeit with perhaps some progress on the virus front. How much can it can remain a

liquidity story to sustain this type of rally? In other words, can it just be concentrated in the big tech names, have them drive the stock market higher with this idea that they will stay solvent through this even if you have those bankruptcies increase, or do you expect there to

be sort of some rotation to sustain that going forward. Well, what found very interesting is how many people, when challenged us whare equity markets going for, talk about mean reversion to the long term averages, And the story I hear often is that the forward price sendings multiples the S and P five hundred as an index is currently over twenty two times the average since fifteen times, and therefore, on that simple basis, exuty markets do a very substantial

mark down. However, that argument forgets what's happened to bond yields and bond deals have been craters in the way that we have described, and therefore we can justify a much higher valuation for the equity market. And if one is going to think about the fair valuation of equity based on the company's return on equity, cost of equity, and growth, then actually the text doc still in my view, look reasonably good value. I don't think this is the

right moment to give up on quality growth. I worry that there are plenty of people talking about companies with high operational and financial gearing benefiting from a cycle up turn. I just don't see that happening, and that'fore I think that's a really dangerous strategy to follow. James, You've raised a really important point, in fact a couple, So let's get to the first one, that's on benchmarking valuations through history. Can we just sit there for a moment, James, what's

the effective way of doing that? Well, I think if you're going to look at history, you've got to be very clear about which portion of history you want to look at. And I would say that the the really important issue is to to look at the connection between bond yields and valuations and therefore by extension the exty risk premium, so the forward return for taking ecuty risk

relative to the current bond yield. And I would say there we are still looking at equities being cheap, and hence my expectation that we can get to futty five sp five hundred for the end of the year. The story goes horribly wrong if bond yields rise very dramatically and that there is a sell off in global treasuries.

But I don't see central banks and governments permitting that to happen, because to get rid of the real cost of the debt overhang that is now around the next of the global economic participants that have to be a period where inflation is considerably an excess of nominal bond yields, so that the real value of that debt is run down. So for me, the obvious long term losers are the

bond holders. The obvious long term winners are investors in good quality companies as long as they buy a decent free cash flow that sustained well, James, this assumes they can control the yield curve. So let's assume they can. Particularly hear the United States, Haven't they just fixed the equity game? Then? Doesn't that mean financials cannot work in this regime? Well? You know interesting. When I think about financials,

I would say two things. Why. One is that we should not anticipate that the treasury yield curve and the pricing of debt in the marketplace are one and the same. I mean, I am absolutely aware that there are companies issue debts in the marketplace that yields that frankly look way too low for the riskiness that they represent to investors.

But nevertheless, there are record deals going through in the bond markets as sensible prices, where banks, if they replicate those yields in loans to customers will be able to make sensible returns. The other part is that I think that there will be some real winners and yet some real losers within the banking sector. So I think that the muscularity of JP Morgan will mean that they will grow market share. They will kind of this with more

pricing power. They have made some very significant acquisitions, as we know, in recent years, and I don't think that they have driven the efficiency gains of those acquisitions through to shell the value as of yet. So I am a bull of JPM, your bull of JP Morgan. I want to look forward a couple of months and we start talking about the election. I'm old enough to remember we weren't talking about the virus, and we weren't talking about the worst recession since the Great Depression, and we

were talking about trade tensions and tensions in general. This Saturday, the US and China are going to talk about the Phase one trade deal. They're going to assess the progress, China still very much behind. How much is this factor into your trading at all? I mean, can this is this a tradeable event or factor into your investment thesis or is this just basically more sort of smoke on both sides leading to some protracted cold war that's already

in existence now. I think it's a really important point, and I would say one of the reasons the dollars weakness is the global concerned that the US may turn the current debate about the current cancer trade into a debate about what happens on the Capitola count. And I would observe that people are of the view that trade tariffs simply hurt consumers because if you're a Chinese company exporting to the States, you get your money for the product.

We all know that the China governments has been subsidizing exports. But the loser then is the consumer who has to pay more when the tariff is applied. On the capital account front, I think that Team Trump recognized that China has a huge demand for global capital. Huge chunks of the cash generated by US quantity of easing ended up

in China. I guess not many people have joined the dots, but that's the reality of the credit flows to China, and the US is clearly again to look at this, and I think that one of the things that we can observe is that has been very considerable borrowing of dollars outside of the US, which has depressed the value of the US dollar, and were we to see either an end to the aggravation there's been escalating between the China, between China and the US, or actually an outright decision

so the uncertainty is removed on what will happen on the capitol tone, the dollar has room to runny. So I am not at the school of thought that the dollar is one way and one way only being done, and norma of the view that the RMB, China's currency has any chance of becoming a global reserve currency. Hey, James, great to catch up wide regging interview there, James Review. Good to hear from you, sir. You sounds safe and

wow too. That makes me happy, James Bevan of c c l A. Jeffrey right joining us now you write a group the US analyst Jeffrey Kamala Harris getting the VP pick. I just wonder for enthusiasm, which is what former VP Jo Biden has been criticized for that he lacks the enthusiasm in his base that maybe the current president Donald Trump has. Does this do anything to make in roads there? It may help a bit. I think it probably helps somewhat with African American Democrats, who are

very important constituency for the party. But I think in general, President Trump is going to do all the bring all the enthusiasm for Democrats. I think as the campaign really kicks into gear, as you saw in the twenty eight teen midterms, you know, the negative partisanship, the feelings of hatred that Trump inspuyers in the Democratic base, that's going to be I think enough motivation. Uh. And so Harris

is really a pick to do no harm. She's a pretty safe pick, and I think you you start with somebody who's not going to hurt you, and she certainly does that all right. Well, given the fact that she's a safe pick and she's in line with where Joe Biden was going, or that it seems to be the party line, what does that mean in terms of the

US is international policy. And I say this ahead of trade discussions between the US and China and increasing hard line from President Trump that President Trump will probably be uh campaigning on how different will it be in the Democratic candidate. I don't think Harris's selection changes much there. Trump has tried to attack Biden over China. It's been I think tough sledding for them so far, because the only thing that voters really care about right now is

the coronavirus and the economy. Uh. And so you know, Harris, I think comes with uh, you know, some political help for the ticket. I don't think she brings a whole lot of policy heft or or changes to the places that that Biden was already in. On policy and particularly in foreign policy. Biden has a very well developed operation from his years in the Senate and his time as Vice president. So I think her influence on on foreign

policy is probably going to be pretty small. Maybe on on some domestic policy areas, you see her her impact. All right, let's go to the domestic policy. Then we really don't have any kind of agreement. In fact, you've got stalemate in Washington, d C. When it comes to the second round a fiscal support even as we have an unemployment rate it seems to be uh stabilizing here

above that ten percent rate. Do voters in general, from what you can tell, view President Trump is doing the right thing and winning this round in the stalemate with Democrats or do they do you see increasing ambivalence about which party has the better plan here? Economically. Yeah, I don't think that voters in general are paying close enough attention to understand the sort of machinations going on in Congress. I think basically, the longer they go without a deal,

the more it hurts Trump. It's generally a very simple equation. The incumbent is on the hook for the economy. Whether that's fair or not. I mean, you can say that Democrats are holding out, but ultimately Trump owns the economy, and the longer it goes without additional fiscal support, uh, you know, the more severe this, this sort of mini downturn is going to be. I think so. I think regardless of who blames who for what, Trump is on the hook here because he's the president, he owns the

economy for better or worse. Jeffrey, do you have to assume that we get a deal done in Washington before the end of the month. Yeah. We maybe not before the end of this month. I think there's a good chance now that it stretches into September. But I do think we get a deal before the end of September, before the government funding deadline, which provides sort of another forcing mechanism for Congress. What are the signposts that you're

looking for. That might change your calculation and say, there's a chance here we won't get a deal, because everyone we're speaking to still assumes deal, maybe at the end of the month, maybe at some point in September, but deal and something around one point five trillion dollars. What would change that for you, jeff I think if if Trump decides that he doesn't want a deal anymore, which

is you know, I think possible. I think that move would be against his own political interests, because he really needs fiscal support for the economy right now. But you know, we've seen him make make moves in the past that we're not in his own interests, and you know, it's possible that he gets so frustrated with Pelosi and Schumer and the and the way that they've tried to handle this negotiation that he walks away from it. I think that's the that's the most plausible way that you you

don't get a deal. Jeffrey, great to catch up, as always, our best of the team, Jeffrey, right there of your AGA group. Special coverage of the Democratic Conventions standing Monday night on Bloomberg TV and on radio as well, and then the week after of course the Republican Convention, kicking our full coverage of that as well. Let's continue the conversation, shall we with Anna Hannahels Fargo, securities equity strategist. Anna Great to catch up with you. Let's start with a

simple one. I wonder whether we are overestimating Europe's recovery and underestimating what is happening in the United States. What's your take? Well, you saw Europe kind of be one of the first areas to fall with the COVID crisis, and usually we're the belief that first in, first out. But what they didn't have necessarily was a size and the depth of the monitoring the fiscal stimuluts that we've had here in the States. So while they are progressing, if you want to put neck to neck, it's a

bit difficult to say who's the front runner here? And how do you price in a delayed second fiscal support deal in Washington, d C. Since we are not getting one. It doesn't look like this week, and it's unclear one exactly Republicans and Democrats will get together. Well, yeah, we started miss the deadline this time, right before the summer

recesses started. But what we do know is we have another deficit or a budget deficit plan that's going to be due at the end of September and towards that fall, as we get closer to the U S elections, it's gonna become a big indicator of how the economy is going to go forward and what things are going to shake out for equities in particular, and what do you look at what data to give you confidence that there is some sort of continuing recovery and not the stalling

out that a lot of people were talking about when they were looking at the high frequency data. Well, I think you have to acknowledge that we are seeing song stalling. It's been a bit slower since let's say late June and July, but we are seeing far from a reversal. And as we get that sequentially improved story in indicators, for example, like an earning or you see even with investor confidence weekend from before maybe a month ago, but

still much better than we were in the winter. Those are the signs that things are progressing slowly but forward. Are you comfortable embracing cyclicality at this point? We're still risk on, John. We do think that cyclicality in particular with its COVID BAT data. Data will be the winning play longer term. But that's not to say that this melt up doesn't have us a little more cautious than usual.

What are the cycnical parts of the security market at that you would be uncomfortable with just breaking it down from sector to sector if you can, Well, when you dig in really sectorist sector, where you think about a locality and where value may be uncomfortable is where is the traps? Where are the areas of the market where they look like they're cheap but they're not going to have a multiple expansion as rapidly or as easily as

you would suspect. And for now, what's been a difficult spot for us, it's probably the financials market a lot to do with also the suppressed yields, the financials, the banks and low yields which are gonna be here with us for a long time. And it right to catch up with you, Anna had wist Fuga Securities Equity Strategists. 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 two.