Surveillance: Stocks Are A Little Overdone, Mann Says

Why don't you bring in the esteemed economist from Oh? Yes, And in fact I had to say I was just watching it on watching you speak with Katherine Mann, h City Groups Global chief economist while you are on television. Katherine Man, It's always a pleasure. Thanks very much for being here. Can you explain what the real relationship is between the performance of the US economy and the performance of the U S stock market? Well, actually, the two of them makes sense right now. I mean the US

economy is doing extremely well. I mean the unemployment raised is quite low. Uh, there's a tax cut. Um, profits are high. Uh, growth is strong. You know, it makes perfect sense that stocks should be very elevated. Now you got to ask the question though, Um, we knew that growth was going to be really strong, and we knew that unemployment was going to be really low, and we knew everybody was going to get a tax cut. So

maybe it's a little overdone. When you say overdone, meaning the exuberance, the enthusiasm to buy stocks, Well, I you know, I think that there's quite a bit of enthusiasm. A lot of people are buying stocks. And uh, you've got to ask, what is the new information that UM is being incorporated in the stock valuations that we have today. I think that's really the question, because I'm not sure

there's much new information that would warrant UM this much exuberance. Well, how about new information that looks at the U S stock market relative to what's happening in the rest of the world, whether it be Turkey or China, or continental Europe and Brexit, or indeed even Brazil and Argentina. And as a result, you take a second look and you think that decision to sell US equities and go someplace else is a decision that you're not going to make

right now. Well again, I mean, my view is is that UM, there are a lot of UM emerging markets that actually are very good opportunities UM, and all of the emerging markets are sort of being tarred with the same brush and looking, you know, there are some definite places that you do not want to invest, but there are a lot that where you do want to invest. Uh, they do represent opportunities. And and where would you be booking a ticket to go and check out the companies um, Indonesia, Malaysia,

I would. I would also look at some some Latin countries Peru, Chile, Colombia. These are countries that we don't hear about a whole lot, but in fact they have been extremely disciplined in terms of their policies and they represent good opportunities. Now you've got to wonder about the neighborhood. We always have to wonder about the neighborhood. UM. But you know, whether it's the Asia or whether it be Latin America or Europe. But you know they are a

good opportunity. This is a really important insight because, as you say, nobody focuses on Peru except I had a wonderful conversation with the President Peru two years ago about that distinction of Peru. This goes back to Douglas UM. This goes back to Douglas North at Washington University in St. Louis about the strength in need of institutions and really what we're really talking about in this debate is country a doesn't have the institutional structured leadership and governance, and

a country really can be adjacent, can be fine. I mean, it's really what we're talking about it all. This isn't it well? As I say, I think the neighborhood does matter. I mean there's no question that that if you're surrounded by challenging, challenging environment you don't get you're not you're not going to do as well as you know, a situation where you have, um, the opportunity to trade with your neighbors. Uh, and that's that's beneficial for both. So

you know, you you do care about the neighborhood. But on the other hand, getting back to you know, the choices that investors have to make, Um, do you do which which place? Or you're going to get more value? Uh, you know the S and P or on a more disaggregated basis, individual companies. Uh, maybe some companies that we don't hear about so much in the United States and some companies and countries that we don't hear about so much, so that it's you know, we talked about activists versus

passivist investing. UM, this is a time to be an activist investor and really, you know, do your homework and do your analysis and figure out what the good deals are point taken. And I'm wondering whether when you speak about countries such as Peru and Chile and Colombia, are you talking about commodity driven economies. Well, Peru's not. Well, Peru does have commodity, so there are commodity elements to it, for sure, But um, these are countries that actually have

have been able to diversify. They also have been able, as I say, have disciplined policies, and that is something that that has been important for the stabilization of those economies and to put them on a growth path and to have the actual determination and I would say conviction to stay in if indeed there are any short term declines in the value of these companies or assets that you describe because of the mistakes or the headline reading

that goes on around them, to take advantage of those opportunities, that means you've got to have the same kind of wherewithal let's say, with the United States, if stocks were to the client, do you see any possibility that we're going to have a correction and asset values well, I think there, you know, as we think about the sort of the pathway that the that the Federal Reserve is on, which is to in a measured pace, increase interest rates,

increase the policy rate. Uh you know, we have to think about what does the you know that do for other financial assets? Um and I think there's a question as to whether or not, uh at we get another you know, basis points. What does the financial market look like at that point. Robert Angle, the Laureate of n y U, talks about guards and hugely fancy econometrics, but what it comes down to is at some point to see the system seizes up. PIM talks about asset prices

and the fear that they'll going down. What do you what do you observe in hindsight that we should watch to determine if the system seizes up? Is it just simply foreign exchange? Is the global litmus paper? Or do you have to look at short term paper, full faith and credit two years? What's what's the thing you watch every day on your four terminals at your desk. Uh So,

I do look at quite a variety of things. But what I look at right now is I'm looking at what I see are variety of risks across asset prices that seem to be a little bit underpriced. Let's talk about credit risk for example. Um, when you can have a high yield bond or covenant light loan and you're paying very very little for it, Uh, you're figuring out at some point that that's going to go bad. We can also look again, I think that the you know,

the stock market is an interesting animal. I mean, we all know that that financial markets do heard and uh, you know again, I have to ask the question, what is the new news that warrants the degree of exuberance that is in the market today. Well, I want to get maybe just but not get to the whole question, because we're going to come back and spend more time with you, Catherine. But if people are buying at the short end of the curve, right that everyone's talking short

and short and shorter, why are right? Why is the curve so flat? Wouldn't that make what does that make

sense to you? We wouldn't prices just increase and increase? Well, there are I mean this is we spend many hours and talk with many people about this question about what's going on with the ten year yield at being an important factor, important anchor to too many financial decisions, and uh, we can go through a number of different arguments for what's going on with it, but you know, there are there are issues about the flows into ten year long

duration bonds that come from other countries who currently have very low interest rates on their sovereign obligations sovereign debt. And so if you if sovereigns is really what you want, then the US is really your part than it's problem. Thank you so much. Wide discussion today with the chief Global Economists for a City Group, Katherine Man. Let's talk about what's going on in politics for just a second. Yeah, well budget as well. Uh, stand a calendar of course.

He's an executive vice president and national director of financial communications for MSL Group in the United States, and Stan Collender, it's always a pleasure to hear what you've got to say about what's going on in Washington. My question is how long do you believe Attorney General Jeff Sessions is going to have that job. Let's the election day is November six, so maybe the seven really that that's what's gonna happen. Well, look, it's not like Donald Trump calls

me and tells me what his plans are. But um, it looks as if he's been lobbying, and the reports are that he's been lobbying the Democratic Republican senators to say I want to get rid of this guy, and you've got to let me do it. Um So, right after that, why can't he do it? What is it? He doesn't need their approval, No, no, he doesn't need their approval, but he does need them to confirm a replacement.

Number one. Number two, he doesn't want to do it before the elections where it might have some impact on the voting. Uh. And three he wants to the Mueller probe to move a little bit further along so it doesn't look like he's trying to obstruct justice. Um So, Uh, it doesn't make any sense for him to do it before the election, and all the reporting is that right afterwards. Look, it wouldn't be surprising if two years after an election

the president replaces many people in this cabinet. The difference is that in this case a lot of people have been replaced already. Standy, you've got in one of your notes an alarming observation for at least for me. You put a chance of a government shut down at six zero six percent. I just didn't know that. Well. Normally you would say in a situation like that like we're

in now, that it would be very local possibility. That is, the Republicans in the majority in both houses don't want it because it'll keep them in Washington and enable unable to go home and campaign and hold fundraisers. Um that they need to campaign because especially in the House, because there may be a democratic waiver, a democratic takeover. But that same situation is what gives Donald Trump the ability gives him an additional leverage to get money for his wall.

That is, if if the Republicans want to go home and he has the ability to keep them here, he has some leverage to say, give me the money for the wall, You're not going anywhere. Also that Trump may need to use the wall, and the impact on the immigration is to help him with his his voters, his base, which is petition particularly important because of all the other legal stuff going on. I saw this tweet, and I and I'm sorry, Pam, I wasn't sure if it was

from Donald J. Trump for Stanley Colander. Here it is Ivanka true Ump and Jared Kushner had nothing to do with the so called pushing out of Don McGann. The fake news media has it purposely so wrong. They love to portray chaos in the White House when they know that chaos doesn't exist. Just today, and this is colinder classic quote, just a smooth running machine with changing parts, is that our budget process stand in Washington? All right?

First of all, I did not write that. I don't know. Um. Second, did you did you see the news this morning? Tom and Pinn that pin that another member the White House Council's Office who handles their ethics investigations is leaving Friday, that is tomorrow. So um, yeah, there, there, there, There is There is nothing here that's going on in the White House. It's smooth. But Tommy, you've got to say, the budget process to the extent that there is one

is even worse. That is, there is no process. There was no budget resolution this year. We're way behind on all the appropriations. There's only eleven legislative days before the start of the fiscal year. Nothing has been enacted, nothing has even been sent to the White House for evaluation. So doesn't the majority have the power to do that? Oh? Absolutely, budget resolutions cannot be filibustered, but did. The reason they didn't do it this year is that they didn't want

to take votes on trillion dollar deficits before the elections. So, I mean, it's legally required to do a budget, but they just there's there's no enforcement if Congress doesn't want to do it themselves. And yes, the Democrats could filibuster appropriations in the Senate, so the majority of the Republicans don't have full control. But has anyone heard the word compromised recently in Washington? Probably not that could get these

bills done. If they had committed to them months ago, they could have got them done by the start of the fiscal year and taken away any chance of a government shutdown. Stan Colinder midterm elections handicaptam for us, Well, look I am I am not the elections forecaster that several other people are, but from every the people I trust and I go to for advice and information, it looks as if the Democrats as of today will take over the House by maybe twenty with maybe twenty seed margin.

That's not enough to get anything done next year, but it's enough to stop a lot of things from happening. The Senate seems a little bit more problematic for the Democrats, only because the map is so difficult that the Republicans might even gain a couple of seats while the Democrats take over the House. Um. But look, we're we're only what two months away from the election, and anything could happen, especially given the the let's let's call it a craziness

of the president a little bit. We just don't know where things are going. The popularity of the president connected to the strength of the US economy, and your thought only to a certain extent. Obviously, if the economy we're not doing as well as it's doing, the president's popularity would probably be down five points or so. But let's go back to something he said during the campaign. He could shoot somebody in Times Square and this his base

would still stay with him. Um. I think you find the same thing here, That is that the economy is not the only issue. It's abortion, it's immigration, it's this magath, this magath feeling, you know, emotional issue. Um. So that you know, the economy would have to go bit down very far, very fast for him to lose a lot of his base support. What's your number right now. I mean, CBO I guess we're due for another renumber. But are we at one point three or one point four trillion

out there at some point? You mean for a deficit? Um, Yeah, we'll look well, we're probably gonna hit we we'll hit one point one trillion in two thousand nineteen, maybe a little bit higher if we get a space force and a and a billion for the wall and god knows what else for infrastructure. UM. But CBO is saying that it's only going to go up from there, not down.

And if there's a if there's an economic downturn, time even a mile downturn, we're talking about a deficit that will approach two trillion easily easily, and and and it'll be that'll be a combination of one point one one point to permanent deficits and in about eight hundred billion dollars in cyclical changes. So this is the first I've ever heard this, PIM. Are you willing to say the two trillion number, given some form of migration of g D P self, g D becomes it under two percent

stand trillion? Well, yeah, tom it we're at four point two chillion, PIM, four point two percent last quarter. So it's not clear that it's going to be a effect. It's very clear that it's not going to be a long term trend um. But Tom, if you look at the CBO numbers, they have the economy growing at less than two percent. And and that's the point at which you start to get, you know, deficits of one point

five one point six trillion. So to be clear here, when we get under two point what do we get begin to see that incremental deficit add on, Well, it depends on what you're assuming right now. Right now, we're assuming about a three percent growth rate, or the administration's assuming about a three percent growth rate. Once you start blow that, the deficit gets higher than you were projecting um and and you know, at a blow two you get the numbers that TV I was looking at. Stan,

Thank you so much. Stan, Calendar the budget on Churse writing for Forbes, piercing short articles for Forbes that really cuts through all the the black Joining us now within the morning Chaos of moving to Canada And moving on to the tweets of the day is Andy Hunt with Wells Fargo. Andy, have you tweeted this morning if you had you know anything about cross said policy in your tweet stream this morning. I sadly, no, I'm not not active.

You have an exceptionally sophisticated chart leading off your research note on Jensen's alpha, which I'm gonna guess is some form of relative performance. Where is the best value now on a relative basis within the markets? So we we still like US credit, though less maybe than we have in times recently passed, and the consumer. The state of the US economy, the fundamentals are very strong and technicals are are still positive with relatively little issues coming in

some parts of the market. So we still seem still value in the US credit and credit sector. Within this is at some point it will end. Within fixed income, What signs do you look for where you say price up and yield lower is going to end? What are the signals that you look for? Mr? Hunt? The interesting question there is some signs of of late cycle behavior. I mean people ask you know, where are we at in the you can making credit cycling? And then what

innings are we in? And I do kind of happily say we're in the eight or ninth innings, but happily to suggest it might be a ten or eleven innings match but we are getting there late in the cycle, and there is some late cycle behavior and appearing in some parts, particularly, I would say in the US loan market, where we see many of the protections and the indentures that are weakening the covenants of lightning. And you know that that's sort of number of fronts, but that that's

that's maybe an early warning sign. Happily to say though that we think you know many of the signals, and some people are pointing to the suggests an imminent recession or imminent problem. We might be two or three years out from from a warried state, Andy Hunt. It is not a new Netflix original, It is not a new movie. What is Jensen's alpha and why is that something we need to learn about? So we've it's a measure of risk of just it's value add or risk adjustive return.

So it's a way of adjusting for our portfolios beta and then seeing what alpha has left over. So it's it's kind of a fancy way of just saying out performance or genuine out performance after be to adjusting the performance stream and are people trying to outperform in a market that is just not going to help them when you've got the nastack up more than se and the S and P five hundred approaching a nine percent return

this year. So, um, everyone's alwaysh to outperform. The question is where is it easier or harder to out perform? And my, my, my chart. You're referring to centers around the fixed income markets primarily, and it was a research piece we did which was just trying to ask ourselves the question whether passive mandates were going to make great

inroads into the fixed income management landscape. As we've seen in the equity markets, percent of money is now invested passively in equity, and I saw a stat to say that around twenty of fixed income markets were parently invested. The question was connective managers justify their existence by continuing to provide risk adjusted out performance. Andy and a Pimp Fox asked a really, really sophisticated question about the three differentials of trainer, Jensen, and Sharp, and I thought your

answer was great on Jensen Alpha. But what this really comes down to is a study of beta and the study of relative performance within the individual security or a portfolio. And here's the critical question for Global Wall Street and everybody else as well. Does that mathematics and dynamics still work in a time of ETFs bundled products in index funds.

I think so because essentially, what you're get in with an e t F if you if it's a good one, and if it performs as you hope it does, that you kind of get what you buy, which is the market beta. And then the question is, well, what's left over You either allocate between ets and add value by sector selection as allocation, or you're trying to beat bts at their game, which is getting better access to the

part of the market that you're trying to target. And so I think these measures and risk adjusted performance or alpha type scores are very relevant because alpha is an are uncorrelated form of return if it's done well, and it's almost like another premier to harness. If you can find parts of the market which are inefficient that you know you can find a better access point than a

than a reactive ETF. And so that's the purpose of this this trainer ratio analysis was to substantiate that many parts of the fixed income market do show evidence of inefficiencies and therefore consistent opportunity for alpha. What does active management need to do in bonds to take the high ground back from index funds. Is there a is there an Andy Hunt due list? And what needs to be done besides simple security selection bunds? Is it like things like private debt Ian you got it, you got and

you've gotta understand. Our sophistication on pim Fox's desk is the E. F. Hutton Blue SMP bond book from what sixty four something. I mean, that's the level of sophistication here. I'm sure you're selling yourself way short. The yes is the answer. I think the fixed and come into season. Therefore, ets that center on the more passive managers that focus on them are not that great. You know that's a sweeping statement and I'm sure people are criticized before it,

but I think there's plenty of room for improvement. We've seen a lot so as well as traditional active management of fixed income, which I think is alive well and has a very vibrant future. I think there's a middle ground where we've seen in the equity space a lot of so called smart beta initiatives and work done, a lot of research around factors and rewarded risk factors within equity.

We've seen the inside momentum low boll Those types of concepts need to watch across the fixed income and also become embedded in the in the vernacular, in the in the taxonomy of products that you have plain traditional passive against standard market benchmarks, the market issuance, market cap style benchmarks we all know and love and have kind of blindly invested in for years. You've had active managers against them.

And then in between I think you'll you'll see this growth of a smart BEATA future where we'll have the rewarded risk factors are better benchmark constructions created to give again more efficient access to what really you're trying to get, which is efficient yield characteristics such as duration that you want, but but broad based year from diverse income sources that then generate that that that that reliable income stream that frankly, bond investors wish Andy Hunt, if you have to choose

between purchasing loans in order to get the yield or high yield bonds, where does Andy Hunt recommend you put the money loans or high yeld bonds? We have have two answers to that. I would say, in the States, we go for bonds over loans, but out of Europe, we might turn that around and say loans over bars.

Why is that the different the different players in the market, a different recent history of the market, their oil energy market, or crisis of a couple three years ago kind of taught the bond market, kept the bond market honest and gave it some discipline, and we see good issuance, good indentures, good good behaviors, and without overage directors, supply coming in the bond market, whereas in the States the loan market is is being fed by a full lot of sort

of issuance for clo use, and we see weakening covenants and we worry that that that that implies a problem around the corner. The loans prepay at will and therefore we don't get all the upside if things go well, but if things go badly, us sit with a spread widening instrument and it's um. In Europe, the nature of the beast is a little different, and they didn't have

the oil energy problem. Therefore kind of the market didn't sort of have that wake up call a couple three years ago in the bond market and on the loan market because of the nature of the beast. Again, you don't have the rules around use it's funds, particularly which is that's called the mutual fund equivalent. In Europe, they

don't permit loans, only use it's funds. It's just the REGs don't allow it unless we kept the retail investor out of the loans market and so it's more of an institutional market and it's kept its US quality better. This has been wonderful, Andy, don't thank you so much with Wills Fargo, just Thrill davy on today he has co had at their global fixed income and ahead of loan and global credit. He went to Building Academy where

the entire hockey team was Canadian. Then he went to Yale University where he aided every Mexican restaurant alternating with pizza. We welcome Austin goals Be, the former chairman of the President's Council of Economic Advisors. He holds court in the land of the Chicago Cubs and the Chicago White Socks, and we welcome him this morning. Austin on the complexities

of trade, which come down to political simplicity. What are you listening for in this argument between Canada and the United States, In this separate argument of Mexico in the United States. What has your attention, Well, first of all, thanks for having me back again. Um um. What has my attention, I guess is whether it remains what it is now, which I would characterize as a bunch of minor small stuff, and that makes me feel better any as, as I say, any day that we don't have a

trade war is a good day for the economy. And so if we want to argue about should we put in some little provision that applies to one sector or one thing or something, and they can agree on that, and by agreeing on that they don't engage in a

full blown trade war, than that's great. Um. So I don't anticipate I guess my prediction is that Canada wouldn't have too much problem with the things that the that the US and Mexico agreed to, because they were they were a bunch of small things that they seemed less they seemed less significant than what Canada had already agreed to for the t p P which which was thrown out. So I would think that we could get to a to a deal pretty correctly. Did you give President Obama

and President Trump credit? They're dealing in a different world than the world of gat of Uruguay, of what we did out of World War Two and onward. In trade, in this modern trade debate, what does President Trump get right? He looked I have made no secret. I don't think he's getting much right. I think he has in President Trump has in his mind a zero sum world in which, uh nobody, there are only winners and losers. We can't

do anything that makes us both better off. Um And I think the emphasis on bilateral deals rather than building robust institutions for the whole world, I think that's a mistake. UM. So, I don't know that on trade, Donald Trump is getting a lot right. I guess I would say that was

one thing that he's getting right. He's not the first to discover it is that there are non terroriff barriers and non terroriff things going on in the world of trade that do matter, Like that the Chinese take the intellectual property, they force people that invest in China to turn over their blueprints and hand over their technology. He's getting that right. Um. I just disagree with how he's trying to address that. But but I do think he's

diagnosed that problem right. Austin Coulsby is the World Trade Organization and effective for for mitigating or remediating trade problems between nations. Doesn't work. Yeah, mostly it has worked. Um, if the United States tries to blow it up, it's definitely not gonna work anymore because we're one of the

lynch pins of it. The I mean, I can I can tell you my view of what's good and what's bad about the w t L. What's is far more important than what's bad and what's good is it's a It's an institution that allows not objective but kind of an objective view that all the countries that participate agree we will treat each other with at least this much respect. You can't put specific tariffs on a w t O country. You have to they have to be treated as a

most favorite nation status. To sign up for w t O, you have to agree to abide by certain conventions, and if you don't, you can be called to account. You can the and the US has benefited significantly filing w t O grievances, receiving compensation, or forcing countries to stop their protection and stuff against the United States. The what's been wrong with the w t O or what's proved

hard as the decades have gone on. Is there are countries, most especially China, which joined the w t O as a small emerging market, which they kind of give small poor countries more latitude than big developed economies. So China got in and follows the rules of a small emerging market and now they're the second biggest economy in the world. So it's a it's a it's an uncomfortable fit of

how that um of how they're treated. But overall, the w TL has been far, far more beneficial to the US economy as well as to the world than than what its problems have been. I mean, there's no doubt about that. Professor Goolsby, thank you so much. This has been incredibly from Austin goes Be, Thank you so much with the BOOST School, Chicago, former Chairman of the President's Council of Economic Advisers. 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