Surveillance: Rolling W's Recovery Likely, Sonders Says

miss Saunders this morning. Liz Ane, I've got to go to the money question always with you, which is what do you observe at Schwab of what people are doing with their money? Are they in this bullmarket? So, if you from a fun flow perspective, consistent with with broad aggregates, you've seen money actually coming out of equities in the last several months more into fixed income more recently in

the last couple of weeks. Where you have seen aggressiveness in terms of flows is in the e t s, particularly the q q q s, which is the Nasdaq one hundred inflows and then the Russell two thousand, the i w N outflows that's really where we're seeing some

aggressive action. But what we have seen in general is not consistent with what some of the headlines have been around some of the newly minted smaller day traders, where in that coort you have seen some really rampant speculation, but broadly among our investors, that's not what we've been seeing. I mean, this is interesting folks in the cubes, folks of the nastac one D of course of proxy for Apple, Amazon,

Facebook and the rest of them as well. Luis Ane, can you predict a catalyst or event that will finally give us a tangible shift from cubes over to Russell two thousand? What's going to make that happen? I can't predict anything. Uh. You know, you've seen the Russell have bouts of relative out performance over the last couple of months. You know they're they're trying to develop that out performance.

I think we would have to see station in sort of the financial system, a real sense that we're back in recovery mode because a fundamental differential between small caps in the aggregate and large caps it's still fairly wide when you look at debt to equity ratios, when you look at the percentage of the russell that are so

called zombie companies. When you look at the percentage of the russell that are not profitable and likely won't be for an extended period of time, versus the larger CAP indexes, there's really no comparison. But if we really start to see the recovery kick into gear, that tends to bring a bias down the CAP spectrum. So one month of of good data I think doesn't suggest a v rebound. I think we'd have to see a few months of it to believe that the recovery is sustainable such that

everybody can participate. Lazan, this is a huge debate the ingredients needed for durable roatation into the most cyclical areas of this market. You have any confidence that this V this bounce that we witness of off the bottom as we re output and can continue, Oh I don't. I don't think to the extent of the percentage increases off the bottom we saw are able to persist. Absolutely not.

I think mathematically it just doesn't work that way. That the law of small numbers is such you can press the data to such a significant degree, it's very natural that the bounce back in percentage terms is going to be massive, but you can't extrapolate that into the future. And that's why I think what we're more likely to see is rolling ws. So you get the shot up initially and then you back down a little bit. And the second order economic effects are not just specific to

second waves. If you can even consider the first wave over of the virus, there are second wave economic effects that are coming down the pike regardless of whether we see additional increased cases in the virus, temporary layoffs becoming permanent job losses, what we're seeing in the bankruptcy environment. So I just think there's going to be a pretty choppy recovery even absent the implications of the virus and LISIA. That means that tech remains the safe haven play here.

I'm wondering, though, how much the recent regulatory pressures could threaten that. Given the Facebook voycott among advertisers, we know Facebook is meeting with some of them today. This idea that that could actually accelerate some of the pressure coming from Washington, d C. How much are you watching this? Well? You know this, This risk about regulatory pressure is not a new one. This is not really an election cycle risk.

This has been ongoing for a couple of years now, so clearly it has not prevented many of those names from doing well. I think as you get close to the election, depending on how far up the priority spectrum you see it on either candidate, then I think it

becomes an issue. But with most issues have become election platform issues, they don't tend to really start to impact stocks until around Labor Day or post labor day environment, so I'd be more focused on the messaging around regulator environment and of course the ability to do something depending on the divisions in Congress as a post labor day phenomenon. Luzanne, I think a lot of people in the market would agree with you that the regulatory train moves very slowly,

if at all. On the other hand, how much are these boycotts just an excuse for big companies to cut their advertising budgets in a highly uncertain environment. That's going to affect the Googles, the facebooks, the Twitters of the world regardless of policy. Oh, I think companies across the spectrum of industries are probably looking for some sort of

margin edge in this very difficult environment. So you know, I don't coverage, you know, at least I don't cover individual companies, so I'm not I'm not down in the weeds with these companies, but it's not surprising to see an attempt at at raining in the cost side of

the equation in this environment. Luzanne, you were just on a Delaware or maybe starting at Delaware when there was a modest moment the crash of rucks are on a Friday night, Mr Rukaiser, on a Friday night, had Sir John Tom Pilton and a few other third were these Robert Kirby a capitol group out to comblin nation down right now on Global Wall Street? We need to comb the nation? Is our new lu Rue Kaiser? Jerome Powell? Is he the one doing the calming of the nation

and the financial markets? Um, maybe without the humorous equips that we all remember lou four and I certainly won't forget that, particularly the Friday night before seven, where you know my boss at the time, the late Great Marty's Way, came on and actually predicted the crash that was to come three days later, And little did I know how difficult that was to do. But I do think I

think Powell is doing a very good job. He's also learned to sort of stay on message a little bit more um than maybe in the past half ago tripped him up a little bit. But what I think the most important message Powell has been imparting is not about you know, we will be here or there is this isn't a certain period of time, but we've got the ammunition. We're not going to run run out of ammunition. I think the most important messaging has been well too or

two of them. One. Some of these tools will go back in the toolbox when it's appropriate that this is not adam finitum in terms of these new facilities. But also he has repeatedly emphasized that there's a difference in the fed's mind and should be an investors minds, between financial system stability, of which the FED is a big part,

and financial market volatility. So I think he's trying to get the message that volatility in the financial markets in and of itself shouldn't trigger FED action unless it becomes a risk to the financial system. More broadly, so, that to me is the most resident message that he has been putting out there, not just in this recent period but over the lapt past year. Lasan Love catching Lsan sounds a child schwab. You're mid year trying to adjust an adapt at all. He's helped talked to one of

the major bankers of Global Wall Street. We did that this morning, for instance, and myself here's our conversation, the highlights of it. But just stately of Berkeley's, I think there is a sort of gathering storm out there. I mean the furlough program, uh, you know, being fund the State's quite amazing to watch and how significant the program is in the UK and how that has buffered the impact of this incredible uh medical crisis. Um. But the government has been very strong in terms of you know,

putting small business loans out guaranteed by the government. We ourselves have done over two hundred thousand small business loans in the last couple of weeks, about six and a half billion pounds UM, all the way to major commercial paper programs being bought by Her Majesty's Treasuries and we've done over ten billion pounds of that type of of

lending as as well. So the the reaction has been quite strong, and what that has enabled us to do is, you know, stay focused on the financial and tech the Barkley Barkley is being a very strong, highly capitalized bank UH is critical if we're gonna play our role in helping the UK and the world recover from this up

this virus. We were fortunate France scene. We walked in with the highest level of capitalization in the history of Barkley's thirteen point eight percent capital to a risk, wedded assets, very liquid. So I think we had the strength of a very strong balance sheet and a profitable underlying business that hopefully we can be a you know, a firewall as we try to get through this economic crisis. Jes if you look at the deterioration deterioration of the UK economy,

is it actually worse than expected? And again, what does that mean for your client activity? I think right now the contraction in the economy is probably less than we would have expected or anticipated a month or a month and a half ago. Spin has started to recover. It's not down nearly as much as it was a couple of months ago. Um, you know, aided by the government

programs A to buy the furlough programs. As you said, I do think there's a little bit of storm gathering once you know, we have ninety thousand mortgage payment holidays out there, and we've given payment holidays to our credit card holders. You've got the furlough program. A lot of that is going to start to end as we come into the end of June and July in August, and it will be interested to see, um uh, what happens to unemployment at that point in time, what happens with

the furlow program. So we're clearing on out of the woods yet. I think we've recovered more right now than we would have fought a little bit ago. But there is that second storm coming uh in a couple of months ago. Heirston Young is really under the gun here. There's clearly a massive missed audit at wire Card as well. I want you to speak for the rigor of auditing at Barclay's. Do you feel there's any mysteries on your

book in relation to wire Card? Do you think the auditing is tight enough just on simple things like what's an X number of banks? Yeah? I know we started taking a cost this approach to work hard quite some time ago. Um uh, you know, so again very mindful of we're all wait wait wait, wait, wait wait wait, just just some time ago, like last Thursday or a few years ago, let's say, uh, a long time ago,

not last Thursday. You know, wik Card didn't have you question uh before, So we've been you know, conservative and how we dealt with them. There are very big business. They've got a very big business in the UK as well. It's a very tough situation obviously. Uh. It seems like something quite significant was missed. Uh And I think uh and I think the markets will pay a price for it. Mr Staley there of Berkeley's with some humor over wire card and policy a huge focus for all of us worldwide.

I started the conversation with David Lebovitz of j P. Mulkin Asset Management. David, let's stop there, what's your focus a little bit like this afternoon? So, you know, I think we're going to be looking for for a couple of things. One, the reaffirmation of the message that, as you guys point out, you know, more stimulus is almost required at this juncture. But also any hints um particularly from pal Um as to the trajectory that monetary policy

may take here over the next couple of months. You know, they've finally gotten a lot of these corporate credit facilities up and running and in the original term sheets, those were actually set to expire at the end of September, And so does he suggest that perhaps there's more runway around some of these new FED programs. I think will be particularly important in complimenting anything that we hear from Minutian with respect to more and more on the fiscal

side over the next couple of weeks. Here and David, I thought to note from Casman and Farole from JPM Morrigan this weekend was absolutely spectacular, and they talked about things like yield curve curve control and being on Mars or being on Venus. Your wing of the ship is on planet Earth and you have to actually invest money in this rate uncertainty? What is your six month strategy strategy at JP Morgan Asset Management. So we we continue to kind of play it the way that we've been

approaching things over the course of the past couple of months. Um. You know, when we were seeing that nascent rotation into value a couple of weeks back, we really held back on embracing a lot more cyclicality and portfolios because by our lights, this was really about the delta or the rate of change, and we assume that at some point, the market would begin to focus on the absolute level,

so still really grounding portfolios and high quality assets. On the equity side, that's things like technology, and then from a regional standpoint, the US on the fixed income side, you know, barbelling between investment grade corporate bonds and various securitized types of paper given the inherent FED support in those markets with treasury bonds, because we do anticipate um that the markets are going to be a little bit choppy here, I think that there's a clear expectation that

that more stimulus is needed. Um, I'm not sure the path to get there is going to be smooth. And at the same time, you know, as the economy is back online for longer periods of time, these big jumps in the data like we saw in retail sales a few weeks back, are going to become fewer and more infrequent, and so I think investors are going to focus increasingly on where things stand, and that's going to drive a relatively volatile and range bound market here through the through

the end of the year. David is most reliable investment thesis at this point, purely investing on policy, purely investing on more FED stimulus on some sort of fiscal bailout package from Washington, d C. Rather than look at any of the data, rather than looking at the rising trade dentis between the China and the US and potentially a boycott with social media. So, you know, I think that those some of those other issues are are definitely secondary

right now. I think that fundamentally, you know, when I was thinking about this earlier today, and it all comes down to cash flow, right and right now, the market doesn't care where that cash flow is coming from. Is it generated organically by the companies, is it visa the various rounds of fiscal and monetary stimulus. Right They just want to know that that the economy is going to keep running even if we're kind of artificially propping it

up with FED and government support. But I do think that as we get closer to the election in November in particular, you may see some of these secondary issues, particularly the more political issues, really begin to crystallize in in the eyes of the market and just become another

source of angst. You know, you can you can ride the liquidity wave for for only so long, and at some point the economy is going to be left to stand on its own two feet, and that's when things like the corporate fundamentals and the outlook for policy are going to become increasingly important. Again. I think that that's going to coincide with the election later on this year. Well, that might be a story for several months away and

the here and now. David, it's a market, as you point out, that is suffering in the middle of this tug of war between the direction of the recovery still positive, expected to be so for the next several weeks and months, and the pace of it and the realization that we will be below potential for a long long time. So long as we maintain a positive trajectory, do you think

that sufficient to drive further equity gains? So, I do think that that equity upside is going to be a little bit capped until we get more clarity from the

corporations themselves. And so I think one of the issues that we're going to be particularly focused on over the next couple of weeks is as companies begin to report report their second quarter profit data, are they providing guidance for what they expect in the remainder of in the beginning of one And I think that you know, the market has been kind of standing on this three legged stool here of what's going on with case growth, the

policy response, and the outlook for economic reopening, and the trajectory of corporate profits. Um, we we see what's going on with the virus, we we see what's going on with the policy response. There's still a lot of uncertainty around how all of this is going to translate into actual economic activity and corporate profitability over the next eighteen months.

And I think that's going to be the key thing that you know, either pushes equities further to the upside or perhaps caps their potential over the next the next couple of months. I mean, David, I get all this hips up. At the bottom line is everybody's recalibrating their fundamental investment theories. Dr Siegel down at Wharton is beginning to question sixty forty, her sixty ten. He's even advocating eight twenty. You've got a pension plan out in California

talking about leveraging up to get yield. It seems like a world tipped upside down. What's the allocation you would recommend off a traditional sixty forty split. So I think that you know, you increasingly need to take more risk in inequities. That is inherently difficult for for some investors to do, but we would We would add some equity exposure, assuming that return targets are in line with the numbers

that that we see most clients trying to hit. Um you know, within fixed income, we wouldn't get rid of fixed income. You need that ballast in portfolios, and particularly given the view that things might be a little bit choppy here going forward, we want to make sure that we have that protection if markets were to strongly move to to the downside. But you know, what you're really seeing emerge from all of this is a need for

uncorrelated sources of income. And one of the things that we've seen a lot of the institutional investors that we work with do over the past couple of years is take some of that exposure that has had historically been oriented towards fixed income and reallocate that towards core real assets things like real estate and infrastructure. You obviously need to be selective, but what that allows you to do is increase the overall income that your portfolio generates without

adding more equity volatility. And that's really the the issue at the end of the day is people don't want to just add volatility to their portfolio to stretch for return um and we're increasingly seeing people looking for ways of accomplishing that goal without just making their portfolios a little more jumpy by adding to the risk asset side

of the equation. David, Just to tie this all together, one big risk people have been talking about is that liquidity does not equal solvency and that we get a cascading wave of bankruptcies the picks up steam later in the year. We have not seen that yet, and some people are saying that we are going to see the more domestic of those scenarios based on the liquidity in the markets. Do you still see that it is a

very real risk, as we had toward the election season. Um. I think it's a risk that needs to be on investors radar. I think the chart that's been making the rounds looks at the relationship between bankruptcy filings and the unemployment rate, and the two have been very tightly correlated over the past twenty five years, and so I think people look at that and say, well, if the unemployment rate only comes down slowly, that inherently needs to result

in a in a wave of bankruptcies. But you know, maybe bringing us back to where the conversation started, we're just now seeing the main street lending facility get up and running. I think that that's going to help address a lot of those issues. So I do think that, given the support we've seen from the SAD and the federal government over the past couple of months, that relationship may not play out the way that it has historically here going forward. David Levitz, if Jack f Mugans have

it always quite to cash? How with you send up best to the team, won't you? Right now? Our interview of the day for fixed income and for rates. Stephen Major has been an HSBC for ages and he has been on on on on about the vector of the dynamic of the bond market and particularly full faith and credit. He joins us now Stephen to begin the conversation. Bring us up to date and the inertial force of yields lower and particularly the benchmark tenure. How low can the

ten year go? Well, our forecast is fifty basis points for year end, so we're still some way from that. I know it doesn't sound very exciting, to go from sixty three to fifty. But the consensus forecast, according to Bloomberg is nearly one hundred for year end, So clearly our view is somewhat different to everybody else. I think we have the lowest forecasts on the street. What matters to me is looking through the noise. It's it's not about the discussion about whether there's going to be a

recovery or not. Let's not confuse ouns with recovery either. To me, what matters is the long term debt dynamics and the longer term structural drivers, including the impact of technology and the demographics. All of this points to low for longer and the FED itself it's guiding rates unchanged for for years into the future. So to me, it's very difficult for bond yields to go up, and I think that we're stuck here for a long time. By the way, total return on US treasuries this year is

pushing towards ten percent in long bonds. That's not bad for an asset class that's supposed to be a store of value. Better than not bad. Steve, considering where we started the year and people's outlook for when we came into it. Let's talk about whether the tracery supply matters to supply matter for the long end. Short answer is no. Do you want the long answer, well, I'm going to give it. I don't have the on guardcer um. There's not a client meeting when somebody doesn't talk about que

supply inflation. And there's there's quite a few misconceptions about all of these subjects. There's no lack of demand. And this is uh fifteen year old economics trying to map the demanded supply curves and looking at the various shapes. To me, the demand has been huge. Look at the savings rate in the US. We're not exactly sure where it is, but it's getting close to Second World War levels. People are saving. Why is that because they're unsure about

the future. The money that gets saved gets recycled into bills and bonds through the banking system. So this idea about supply mattering needs to be put in the context of the demand, and I think that that's being missed. It's it's really naive to look at one side of the equation. The same is true of the que. People look at the Fed's balance sheet and they think that it has to be an inflationary source of of of

trouble for the future people. People are looking at one side of the balance sheet that the FEDS purchases do not explain the fact that the yield is low. The fence purchases are just part of the whole dynamic. The Feds been able to buy what they have because banks have taken so much money in the last few months. The banking system is financing the feds asset purchases. Now, I've heard guests come on your show and talk about printing of money and inflation expectations. This just isn't right.

It's looking at one side of the balance sheet and not understanding the whole picture. There's no lack of demand and we see this for quite some time to come. Stephen, I would love a window into some of the responses that you've gotten to your your theories and your predictions going forward, as they do run counter to a lot of what's out there on Wall Street. Taking I said, is there no limit then to the money printing? To this idea that the Fed can monetize the debt of

the United States as the US deficit gets deeper and deeper. Yeah, Well, there's a lot to this. I would say, first of all, it's loose talk to talk about monetization in the same way that some talk about money printing. It's loose talk is technically incorrect. There's an asset and a liability. So in answer to your question, there is a constraint. It's it's the banking system. And when you look at this the FED, the FED is probably aware of where that

constraint may be. Have you noticed how fast they tapered from the QUEUEI that was started in March. In fact, it wasn't really quey because in the first stage it was reversing some of the QT, it was putting back what was missing into the system, and it was dealing with some of the dysfunction in the in the asset markets. But the tapering is nine t plus percent from the original level. That's happened without any disruption to the bomb market.

Isn't it impressive how the yields have been in a ten basis point range for most of the last two or three months. People don't give it credit for what for what it's clearly worked. The market is functioning very well, and looking through the noise now, I think that it may be the people a victims of nine seventies education looking at the kind of money supply and freedom and night view of things. I'm not saying it's wrong, it's just inappropriate for the current time. Steve Major, this has

been a wonderful discussion of theory. I feel like we've got to get our new pixel out and reread it again. That's all fine and well, but for our listeners and our viewers of this simulcast, it's real simple. There's no real return and the nominal return is Dickenzie and it's out of the nineteenth century as well. That is unsustainable, isn't it. At some point there's got to be a real rate of return, right, Well, it depends where rates go. It's all about rates. So today we're closed to zero.

We could go negative. It's not out of the questions. So it's a non zero probability that rates will be negative next year. It's a small probability but a huge impact. And when you invest, you invest on a scenario basis. You think about all possible scenarios, not one single base case. So it seems to me that when we look across the possibilities, rates aren't going up anytime soon, and I think investors will lower their sites in terms of total return.

If you can keep your money, that's good news. Keep your capital, don't lose money. Um, maybe a total return of single digit is going to be reasonable in the in the next decade. And I think that the problem is is that people have got used to having these huge returns in the equity market. That isn't sustainable. What is sustainable is a reasonable road of return. Now. So far this year we've had nine percent. I imagine that we could get another two percent out of that into

year end. UM, then we'll have to rethink for next year. But I don't think we're looking at a huge sell off in bonds anytime soon. And I think that there are other things to do. You can go into investment grade credit, for example. You can go up the yield curve, which is quite steep towards the longer end that there there's a whole lot of stuff to do. Steve. When you say rates could go negative, are you talking about the policy rate or you're talking about treaties, Well, well,

we've already seen treasuries or certainly bills trade negative. It may be dismissed as being technical, but it did happen. You know that Japan and Europe have got rates. It's not out of the question. I think that it's more one for next year. It's it's not for this year. Any central bank that says it's truly all in and using all available tools were not by definition include the possibility. So everything is on the table and instrukes me that if you're in for a long drawn out with session,

then negative rates are a policy option. Stay find a question for you, and it's an important one. Do you have more faith in your year end call on ten year treasuries or your beloved west Ham avoiding relegation from the Premier League this year? You certainly know how to wind me up, Lanky Jonathan, I think I think I've I've got more faith in the treasury forecast. I'm sorry, I wish, I wish HSBC once they're here to Steve Sty've always going to catch out your Steve Major of

HSBC on this bond market. Tell us for it too? Is it d Davidson? And I'll be blunt about it. Folks who spent a career being more insightful than most, and how all this technology matters to us? And it turns out into buy, holding, sell on different equities and such. He's a perfect guy to comment on what we've seen in this first half, which is the dominance of Apple and Amazon. Tom Ford te what's so interesting to me is the trees are growing to the sky at Amazon.

Do they just continue to grow? So, Tom, great introduction there and always a pleasure being on your show. So COVID nineteen has essentially injected Amazon with growth hormone. So you think about e commerce sales and the strength of e commerce sales not only in April and May, but in June, and it's like injecting new life into Amazon from a growth standpoint. So I like your comparison on the trees growing to the moon. I definitely think the trees are growing, but as you know, at some point

they have to stop growing. They can't keep growing in perpetuity. The cloud has come to the rescue for Mr Bezos, But can the cardboard boxes come to the rescue when they deliver those boxes and with a new surge of unit growth of boxes, can they bring that down to some form of gross margin or dare I say net income?

So the challenge for Amazon has been the same as the challenge for Target when you sell a lot of toilet paper or essentials in general, and you so sell fewer discretionary items or to your point, cloud is robust, but maybe not revenue growth in cloud is as robust,

your profits suffer. And when you think about the June quarter for Amazon, they're seemingly doing everything in their power to combat COVID nineteen, talking about four billion dollars of incremental spin, including hundreds of millions of dollars to test their employees. I think the risk for Amazon is if

they're not careful, they exit COVID nineteen. With the unionized labor force in the US, Tom, are we conflating the tech sector with Amazon, perhaps incorrectly with the idea that you see the Googles of the world, the Facebook, the Twitters, they're basically advertising companies. You look at Apple, it is a consumer discretionary purchase, although some people might say that

their iPhone isn't necessarily discretionary. At this point, these things basically more susceptible to a significant downdraft in the economy. Is that going to be present in the pricing going forward? So conflation that is a brilliant term and yes we are. So if you look at e commerce trends, what you're seeing is the six point seven of the US that are still employed is preferring to buy online rather than going to a physical store, including for a period of

time where physical stores were not an option. By way of comparison, the more economically sensitive advertising based revenue models like Facebook and Google are seeing contraction. They've reported a good number for Facebook and April was a flat revenue performance on advertising. So yes, I do believe conflation is going on and the trends and e commerce are not the trends and online average. So I'm looking at Facebook shares which are up more than seven percent year to date.

Are you expecting the gains of this year and a lot of the tech companies aside from Amazon and Microsoft to stall out heading into the second half as people start to delineate between the big tech names and the forces they're subject to. Absolutely, And the way that I think about it is so COVID nineteen looks to be a multi year event, and I think that what you're going to see is multi year or multi quarter impact

on the economy. Now I know that the May retail saves sales data was favorable, the May unemployment was favorable versus April. But I still feel like a strong argument could be made the word a depression and not a recession. So to the extent that COVID nineteen again is a multi year event, I think you may see some of these more economically sensitive names like Facebook and Google start to stall. For you, I have to go back to your hugely interesting comment that we could see a unionization

of the hundreds of thousands of employees of Amazon. Does that blow up the Bezos model? Absolutely? And if you think about the acquisition of zooks, an argument I would make is it's about automation at the fulfillment center level. So you go back in time too, when Facebook was showcasing their drone delivery effort well before it was ready.

I think they've realized that COVID nineteen has shown that they're exposed to physical labor at the fulfillment center front, and it's going to expedite their efforts to try to automate that, which is why I think Zook's was acquired by Amazon or intends to be acquired. I should say some fo I gonna leave it that 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