Surveillance: Risk Tolerance Has Changed, Joseph Cohen Says

you are not getting one. Joining us to discuss the legend of Wall Street, Abby Joseph Cowen Goldman Sachs Advisory Director and senior investment strategist, and she joins us, Now, good morning to you, Abby. Have we seen have we already seen the top of this bullmarket? Um? I think that we certainly reached stretched valuations in September or you know, based upon the arithmetic of earnings and economic growth and interest rates. We thought fifty for the S and P

five hundred was fair value. We got a little bit higher, but we are of course having great difficulty holding that level. We've now moved down to the low ends of valuation ranges. UM. For all the obvious reasons, there's such uncertainty about the fundamental outlook and risk tolerance perhaps most importantly has changed. It's not that the arithmetic of earnings expectations or economic

forecast have changed very much in recent weeks. What has changed is the perception of how willing investors are to write out this confusion about what's happening in Washington, and of course the deceleration we're seeing in other economies around the world. So we've had conversations about this through the week. The only certainty as we go into uncertainty, and as you touch on, it's the sentiment issue that really gets my attention. Sentiment appears to be totally battered, and I'm

trying to understand where the comfort comes from. Is it the earnings, Will it be the data? Because even on the morning light this morning, when the Chinese come out and promise more tax cuts and signal looser monetary policy, this market abbey still can't catch a bit um. One of the issues, of course, is that we're dealing with this major change um with regard to risk tolerance, but it is being fueled and exacerbated by many of the

decisions underway in Washington. And I'm not talking about the FED. I'm talking about the confusion having to do with government shutdown. I'm talking about the confusion um in the government, in the president's cabinet and so on, and perhaps most importantly for investors looking at economic policy, where the recognition is that that big fiscal stimulus through the tax cut really was perhaps only a sugar high um and trade policy is really at this point quite a erratic and I

think that's what investors are concerned about. They're nervous that the arithmetic assumptions that they put into their models may be tossed up in the air. Add that to this change in risk tolerance, and I think you see the ugly mix that we've were now in. If you're just joining us John Farrell and Tom King with Abby Joseph Cohen of Goldman Sachs, we welcome all of you across

this nation in worldwide. Abby, there is a thing called standard deviations, which is the price movement of gold is different than the price movement of general electric, is different than the price movement of sterling. I've noticed high yield is out to three point eight standard deviations price down, yield up. How do you define catharsis or panic in the market. Do you do it quantitatively or do you look at crystals and pyramids down at Goldman Sachs until

you see it behaviorally. I've I've always been interested in crystallography, Tom, I didn't know that you were aware of that. UM. Clearly we are looking at things like UM standard deviation, but we always begin with the fundamentals and evaluations. And I hope I've been very clear every time I've spoken with you for more than the past two years that sixth incomes securities UH writ large were overpriced. UM. We

saw that in treasuries that we thought were priced too low. Clearly, some of Chairman Powell's comments have indicated that where they feel they're just trying to get back to normal with regard to government yield. But the gaps the yield spreads have been so narrow UM in corporate securities and also it's been so narrow in term securities UM that this

was a miss pricing in the sixth income market. So I think one of the things that happens when people get nervous is they take a look around and they said, we really have to price for the fundamental This is a problem. John Abby, Joseph Cohin's on the Y axis, going to drag her down on a Friday to an X axis analysis Abby, this is becoming chronic. We've had negative interest rates chronically forever. I spoke the Secretary Gightener

about this eleven years ago. How do you perceive the X axis in the two thousand nineteen there's chronic nature of our fixed income distortions. Much of the distortion tom as you've already discussed previously, relates to not just the US, but to what's going on in other countries. Um if you look at interest rates, say two year government bonds for countries around the world, more than half of those developed countries have negative yields, and that of course drags

down the yield on treasury securities. Because even if our mathematicians at Goldman Sachs say the yield on a US government bond should be fifty basis points higher or seventy five or whatever it might be based upon the term structure, there is international demand coming from other countries where those yields are dramatically lower. So we are in a world where there has been mispricing in fixed income, and that

is part of the dilemma that we're now facing. Also in the world seemingly appy, where our tolerance for higher rates has diminished markedly over the last ten years. Leverages up, debt levels are up in our tolerance is down a lot. Appy Why every time we get to a one percent real yield and treasuries this market just creates why. What's fascinating is that the sensitivity is much more in markets

than it is in the economy UM. And I think that though when the Fed makes decisions, they're thinking about just how sensitive um interest rate sensitive sectors will be UM in the real economy to the rise in interest rates. But you're right, markets are responding in a very dramatic way. I also think we may be overly concerned about corporate

debt UM. We see so many corporations that are well runned, that are successful, have high returns on equity borrowing, and they're borrowing because they've been taking advantage of these extraordinarily low interest rates. You know, I sort of wonder why the Treasury didn't borrow for fifty years out um when well, why not, Peter Fisher that let me interrupt, that's a

critical statement. Why can't we extenderation or do we have such a large deficit now and chronically down the road that we can't even get out to ten years I think that there has been this UH tendency at the Treasury UH to say, look, we're going to continue to do this sort of in a laddered function um and and and that has been the approach. That's been the

cash management approach UM really for years and years. But corporations who have shall we say less pressure, people looking over their shoulders, etcetera, have been going extremely long and I think that's one of the reasons the debt levels are so high. Where I am concerned are companies that have raised their debt levels so that they could bolster their dividend payouts. That to me is a no win game.

Good morning to all at General Electric this morning. Oh no, I didn't mean to say that, Abby, Joseph Cohen with us, with us right now, William Lee of the Milk and Institute for years at the International Monetary Fund and as City Group and Bill Lee. We look at the American economy, we see some revisions, but we see some negatives on the screen for durable goods at all. What is the

animal spirit of business right now? You know it's been made even worse where they would have to really jolt the great optimism when trouble was elected, we had this big jolt of expectitious for investment coming in, and we see from these data that the uncertainty caused by the trade on confrontations with China, the unknowns about how China's go react, is causing everyone in the business world to say,

let's pause, let's not do our investment plans. So all that tellne that we got is now being cut off by these headwinds of uncertainty caused by the trade that stuff in and that's really unfortunate because what we're hoping for was that the investment would really lead to a compositional change in GDP to give us the productivity gains that would allow us to grow at a fast pace without inflation. I think we've just got some really constructive news from China overnight. Bill, I don't want to let

price set narrative too much. The idea that the policy makers are looking at supporting the economy a little bit more, cutting taxes, the idea that monety policy shifts away from neutral and maybe towards an easy bias. This is an important development. I think, Bill, do you share that view John, that that's absolutely the one hope that we have. That's blowing the wind is that China is hurting more than

we are from all this trade confrontation. And China, I think, is ready to deal at whether they're really deal in a structural basis or it's just more rhetoric, that's the big unknown. And until that unknown is cleared up, I think American basses are not going to be investing. I have real trouble with the idea that we're gonna be better because they're gonna be worser to borrow, you know,

sophisticated phrase for a guy like you. I mean, basically, what you're painting is a global slowdown, right, Oh, there's no questions. A global slowdown is whether we can come out of that slowdown or not. And China, because it's hurt, okay, they are more willing to deal at the table than they were six months ago. On the edge of surveillance, viral and break exclusive is William Lee speaking an hour ago calling Chairman Powell's performance pathetic? Is it pathetic because

even if he raised rates, he didn't color a global slowdown. Well, you know the F and C instructions to the chairman, right, it was clear from the statement we're watching the world because of the global and certain game. We are lowering all of our forecasts of GDP and growth. How the hell did we go from there? Too? We're on autopilot with a balance sheet and we are looking to models to base our analysis. From a guy who denied models at Jackson Hall, this is a weird message, I have

to say. And and not in the markets punished him for the doing of bad messaging. You know what, Bill, I'm tugging with you. I think the chairman had an absolute nightmare in that news conference. He was asked two really simple questions. You're forecasting another undershoot for inflation next year? Why you're raising interest rates? Gave a terrible answer. Jina smilt a bloombacks very I'm one of our finest reports. Some of the news conferences up it was Binion and Apple.

Bob asked the question you're talking about if it's a symmetrical target, why are you allowing for a small overshoot after years of undershooting it now doesn't have an answer? Bell go ahead. All all you have to do is say, but we are pausing. We're seeing the data is causing us to lower the trajectory of interest rates and was slowing down the number of increases that we think it's appropriate. Bingo, that would have done it, but no, he said the balance.

She's on pilot Friday Clinic William Lee. What do they mean by a symmetry? You know that they have yet to defined that. And the condition when he was there was trying to define a better communications for what the goals were. I don't think he did the job. And now it's up to Rich and I hope Rich is going to do a better job of coming from PIMCO and the not only a great academic career but also

a market's career. He's got to have a better sense of what has to be communicated about the nature of symmetry.

There was now day vice Chairman Clarada has done a much better job communicating to this market than the chairman himself has Tom And it's been a real problem if you change your view on what the chairman is saying three times in the space of two months, to go from Hawkes to divers to totally confused, then the problems with the chairman's communication in the vice chair in from the University of d s G. E. Fine, what's the symmetry asymmetry Is it inflation, is it jobs? Is it output?

You know what? They have an egg salad sandwich. What's the symmetry asymmetry debate. I don't want to put words in Rich's mouth, but I'm guessing it kind of smells and looks like nominal GDP targeting, because that's that's the kind of place where you can get symmetry but at the same time get the looseness and and and and discretion you need to be able to put policy in place that is controversial. Williambe will be joining us here to a week or two and will continue this discussion

country John H. Deck with us with Brookings. John, a single sentence from your note, the unstable behavior in erratic decision making is likely the biggest DC based issue to cause rockiness in markets in two thousand nineteen next year. That was penned by Brooking's quill dipped in ink before the Maddest resignation. Things changed yesterday, didn't they? Oh, things

definitely changed yesterday. Although the Maddest resignation is certainly connected to that type of unstable behavior and erratic decision making I'm talking about. His resignation came in part because of the way that the President has been treating allies his

decision making on Theoria and now possibly Afghanistan. And the President needs to recognize that these types of behaviors have ripple effects beyond just the one item he's talking about in that moment, and it's a real problem from market. One of your great expertise is the dialogue between institutions in Washington. Explain the ballet between the Pentagon in the Senate. You know, the Pentagon and the Senate have typically a

very effective working relationship. These are two institutions that play extraordinary roles, not just in foreign policy, but in keeping really the entire administration on the same page in a variety of areas. The Defense Department touches a lot more than just the military. It touches issues around climate change and energy and a variety of topics. And oftentimes the Senate and the Pentagon are on the same page, whether

they like to admit that or not. And I think we saw yesterday a Secretary of Defense stepping away and the Senate being shocked and really throwing their hands up in frustration at the President. And you know, folks, as you know, when I get bored, I either look at Red Sox Hot Stoves League Baseball, or I read the Congressional Budget Office and Johnny Hudak there it was a white paper, if you will, from the Congressional Budget Office, the cost of replacing two days Air Force Fleet. Now

that's center tendency. General Maddis. I get that those dialogues don't end with a shock resignation, but what kind of Secretary of Defense are we going to have that could drive forward the day to day mundane discussion of billions of dollars of budgetary decision. Well, that's a great question. The president has a variety of choices, not just in terms of individuals, but sort of profiles of individuals. He could ask a current or reformer senator, he could ask

another general. But it appears what this president wants as a sycophant and not a bureaucrat. And that's the real problem. A yes man in charge of the Defense Department is a recipe for disaster, not dust for the President's agenda, but for our military as well. I mean the first I want to read this first paragraph at all. It's a little nerdy, but folks, this is the real world. The US Air Force has about five thousand, six hundred aircraft, which range an age from just delivered to sixties six

zero years old. Many of those aircraft, including the cost to replace F sixteen, fifteen fifty D E, C one thirty and B one B bombers, are nearing the end of their service life. Do you think that this president understands that there's a business to our military that has to be done day to day or is he just looking at whatever the latest debate is on Syria? Yeah? I don't think the president understands that there's a business on side to our military. Bureaucracy was invested in it,

he would be, but he's not. And it's a real problem. You know. It's and it's not just our air Force, our Navy. We have ships that need to be replaced or repaired. There are enormous parts of our military that need resupply or need to be transformed for a modern military and in a modern world stage. And the President is behaving in ways that is turning away the best people equipped to help advance those interests. So how does

this work out? Am I right? But I believe my colleague John Farrell mentioned this knowing more about American civics that I do. The Secretary Defense has to be confirmed, right, Yes, he has to be confirmed by the Senate. Yeah, here she has to be a confirmed Do you anticipate a brawl there are They just like, let's get a warm

body and let's go. You know, Typically the Defense Secretary is a position that ends up not being terribly confrontational with the Senate, in part because the President and the Senate have a conversation about this um. But I think what was most surprising yesterday in a day full of surprises, was Mitch McConnell's response to the Maddest resignation. He essentially threw down a red line and said, you are going to pick someone who thinks like Jim Maddest and not

someone who thinks like you. And I think it was a subtle threat to the White House that the confirmation is not just going to be automatic, but the Senate, especially Republicans in the Senate, are gonna look hard at what type of person the president. Then, thank you Anna Edgerton and Washington for our comments on that. Before let us talk pray tell within this news flow about the shutdown. I mean, I guess there's a shutdown in the media covers it, and there's a there's probably gonna be a

countdown clock. Uh, I guess it's Friday night into Saturday tonight, and I see you in CNN. I'm looking here in our studios folks that I'm going to pick on CNN shutdown countdownturs six minutes, twenty one seconds. What are we counting down too? So what we're counting down to is appropriations running out for a group of federal agencies and

departments that includes the Department of Justice, State Department, Homeland Security, Agriculture, Treasury. UM. Some of the government has been funded into next year, but there remains outstanding appropriations bills that not the office. They don't come into office Monday. Yeah, so actually the President has by executive order UM signed everyone to have Monday off. Of course, Monday would have been paid for those employees. John are we joined that at blue Here?

Did you see a memo coming from mail from New Jersey? I will not be here's an executive on my shutdown begins at twelve, Johnny Deck, and I will be working on Monday. So really they shake that in Washington on Monday, right, Yeah, Monday will be shut down. Tuesday's Christmas, and so that

Monday will be an unpaid holiday. UM. So so will Tuesday. Um, and then every day after that until Congress passes something, the President will signal employees at least in those departments will not come into work and they will not be paid. Tell me, okay, you sound like you're in the media, John. They're not going to be paid. But when they agree to agree again forward, they make up the pay right. Uh So that is Congress's discretion to do that. It's

not a requirement. Congress has always done that. But but it's not a requirement. But that said, you're also not getting a paycheck during that time, and though if you have rent coming to no paycheck is coming in. Yeah, this has become a common feature. I mean, and are you this was a rare, rare discussion. But the President's

really change that dialogue, hasn't he? He absolutely has, And I think, um, you know, one of the things that's flown under the radar this week is that there was actually quite a bit of cooperation between Mitch McConnell, Chuck Schumer, and Nancy Pelosi about a path forward, and it was the President and the Freedom Caucus who blew that up. I mean, how often is Nancy Pelosi and Mitch McConnell

on the same page on a big budget decision. But they were here and they were ready to move forward with appropriations through February, and the President changed that overnight. One final question, then, I want to go into February into March, into April when the Red Sox redo their World Series new season, if you will, John, is this going to be legislative versus Trump? I mean, you mentioned the cooperation of Republicans and Democrats. Is that the new

theme for next year? You know, I don't think so. I think there's still going to be a lot of partisan gridlock on Capitol Hill on a variety of issues. But there is a sort of opening, I think for members of Congress to start to recognize that they are the adults in the room, that it is incumbent upon them as a separate branch of government, a coequal branch, to be the ones who babysit the president. Um for for a long time Republicans and Congress and Democrats to

sort of delegated that to some of the cabinet. But those cabinet members are gone now, or they're going to be gone soon, and I think Congress really needs there at a crossroads where they need to think about what kind of role they're going to play or whether they're going to abdicate that kind of authority. Jones, you Dieck, Thank you so much. What a terrific briefing. He is

with Brookings and their governance study. Steve Gallow joins a Stephen Gallow with bemo capital Margaret, Steve, what's your calls the dollar? Let's get that out of the way. Is there ambiguity here? Are you going outlier dollar strength or do you go dollar weakness? Is dollar strength really an outlier view? Right now? We we um that's a question. I guess the the the cases that we started to we started to make a case for a stronger dollar around mid year. At the time, I think it was

out of consensus. But now given the global backdrop, even though the FETE is turning a little bit more cautious, the global backdrop suggests that we're still going to we're still very much likely to get another like higher in the dollar in the first half of the year. I would say that the two biggest risks to that call,

although we don't really see them materializing anytime soon. The two biggest risk to that call would be a significant mammoth uh stimulus package from China or a quick resolution of the of the U S China trade and pass. UM. We don't think those things will happen anytime soon or

or at all. Indeed, So what do you how are all these the craziness we're seeing globally in a geopolitical realm, whether it's Brexit, whether it's the China you mentioned, whether it's potential US government shutdown, How do you and your clients kind of factor that into your assessment of kind of where you think various currencies are going well. Unfortunately, from the investor community, I mean, most of the FX

manager returned into sees that I look at. They suggest that unlevered and levered FX specialty investors are are along the dollar. But they got into that those positions that trade pretty late in the cycle UM and with positioning holding back further gains in the dollar. Right now, it's still been a tough year for for f X investors UM.

But look, I mean in this environment when like as you say, geopolitical risks are very elevated, and also now it seems economic risks at the global level are becoming um more realized or more palpable. The only game in down is the dollar. It has natural safe haven attributes. We could debate over the next three to five years if it will retain those safe haven attributes, but right now, in the short run, it has safe haven attributes and

it also pays decent carry. It's a no brainer. UM. So the intensification of geopolitical and economic risks of materializing in the first half of the year suggests us there will be another leg higher in the dollar, but by around me year we're expecting that dollar strength to break a little bit. Is the leg higher in the dollar against everyone or is it partition M G seven whatever? I would say most of G ten. But E M. You know you have to you have to put pick um.

You have to make your selections. Wisely, there will be our performers and under performers. Um. The reason is going into two and nineteen, we have already seen a very significant about face and in capital altflows for me and this was a story for a large portion of two eighteen, so those flows are very mature. At the beginning of Q four we were actually starting to see flows return

to some em currencies. Obviously that stopped getting its tracks now in recent weeks given the financial term market TERMO we've seen, but but capital alflows from many E M S H that they've they're pretty well advanced at this stage. Are you're gonna have to pick and choose wisely what I would say a big, big theme for the U s Dollar in the first few months of the year.

One reason why we don't see the dollar turning and heading south significantly is we expect more weakness in the R and B. The main point that I would make here is that this depreciation cycle which has been organized by the PBOC has not coincide with the same type of proficient, pernicious net capital albums were SWO so that gives them confidence that they can allow their currency to behave like a normal G ten free floating currency and

weaken as fundamental shift to the downside. Okay, Stephen Gallows, thank you so much. It's be more capital. 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.