Surveillance: The Equity Market Can Rally, Calvasina Says

begin with the top story. According to a person briefed on trade talks, US and Chinese negotiators are working on multiple memorandums of understanding that would form the basis of a final trade deal, covering areas including agriculture and non tariff barriers, services, technology transfer, and intellectual property as well. Jo winting us on the phone to discuss is Carl Weinberg,

High Frequency Economics Chief Economists. So, Karl, walk me through where you think we can make a breakthrough and what the sticking points might be as well. Yeah, Hi, good morning, Jonathan. Well, you know these trade talks right now, the idea is to postpone or to avert an increase in teriff rates. And I think that we will get that, but not necessarily because we get a deal, but simply because we're

moving closer to a deal. On the Chinese side, we have the national People's Congress on March five, and beginning in the next few days, all of China's leaders are going to be focused on preparing for that congress. So probably get something in the form of a memorandum or an outline of an agreement, or something that's sufficient to postpone the increase of tariffs that might happen on March

one in the absence of progress. But I don't think we're going to get final deals anytime in the foreseeable future. The question I here asked again and again increasingly over the last week or so, is who is next? Europe? Is Europe next? Is that the next target for negotiations between the United States and trade partners. Well, we're watching what the what the administration has to say about cars, and cars seem to be the next bone of contention.

It's a particularly delicate topic with respect to Europe. We have all of the main European Let me say that probably German automakers are very heavily invested in the United States, moving parts and bits and kids into it and out of it. We'll see what the declaration is about whether these enterprises are a threat to national security. If they are, the Europeans that promised to respond quite vigorously to any US trade action, So that could very well be the

next front. Karl Weinberg with US, so high Frequency Economics, and we're thrilled these with US because he, before pretty much anyone else, actually wrote a China note. I remember that, Carl, when High Frequency Economics came out with a China focus note. You looked at their behavior for years, What is there incentive to do anything? But weighed out two thousand and twenty in the election. Well, I think Tom, you hit

the nail on the head. I think that the Chinese view of trade relations, or the Chinese view of relations with the United States, is extremely long term. President g will be president of China long after President Trumps president of the United States. And I think they view the current administration as overtly hostile. I don't think we have to think very hard to understand why that's the case.

And I think that they are hoping that the next administration will be a little bit less hostile towards them, so they'll drag their heels. But they also under no circumstances will give up their long term industrial development plan. The contentious made in China and their business practices are their business practices, and even though they may be modified slightly to deal with intellectual property or to deal with

um transfer of technology. Uh, they're not going to make big changes in those simply at the request of a foreign government. Would it be a mistate to believe that whoever the next president is, whenever the next president comes along, that there will be a change of approach towards China, Cow Because what I see in Washington, d C. Right now is it bipartisan approach to the problems in the

world Second Larncht economy. Well, you see it bipartisan within the United States, But what you don't see is a

multinational approach. I think that there are um I won't choose right or wrong in this conversation, but I'll say there are disagreements about how economic policy and business conditions should be conducted between the United States and China, and some of them may be legitimate, But to the extent that the United States wants to improve those conditions, history shows that a better course of action is to move in unison with our economic allies rather than to go

it alone. And right now, this administration is very much an isolationist administration. I'm hoping that this was a diversion from the recent historical trend of the United States to be more global. What does it do to your calculations of g DPM the basic idea of Carlos. You do a lot of international relations, international economics, but you and Jim O'Sullivan will it down to what is the economy going to do? How does all this talk fold into

your call on the American economy? Yeah, Well, for the American economy right now, the impact on trade is marginal. There are clearly some sectors that are affected, uh profoundly by this. If you're a Soybee informer, you're very unhappy right now. If you're in a technology industry that's dependent upon equipment coming from China that's now tariff, you care about this. If you're in the steel sector, you care

about this. But overall, we've got a very very large US economy and the amount of goods and services that are affected by this trade war so far are not significant. Having said that, China's imports from the United States plummeted in the fourth quarter of last year, so we're looking at a thirty something per cent average drop in imports of China from the United States according to their data um in the fourth quarter, and that is you know, it's a it's visible, but it's not significant to the

overall growth trajectory of the economy. Kel just one final question from myself. The Chinese are looking to stabilize their their economy. They have been doing this for much of the last twelve months. The easy measures don't seem to be stabilizing the economy though. I'm wondering whether the transmission mechanism is blocked up somehow. Why is it blocked up, and is it going to hamper their effects, their ability

to really stabilize the situation. You know, John, you and I have to sit down and look at the data. But it looks to me as if GDP has been growing around six and three quarter percent for the last four years, and industrial production has been around eight percent seven eight percent, And while the trend has been very, very gradually downward, right, the economy is running very stable. On their numbers are a lot more stable than ours. Now.

Some people will say that that's artificial, but the numbers that we look at tell us that while there may be a slow, gradual decline in the growth rate of China's economy a quartered a quarter. There's not much of the world decline in trade or an economic growth that you can blame on an incremental slowdown in China growth there is slower than they want to see, but absolutely still doing three times faster growth than we are. So, Carl,

what is the manufacturing pm I doing sub fifty? Well, you know, John, you and I also have disagreed about the p m I. I think the p m I is an interesting statistic, but it's the industrial production number that tells you the story. The p m I wants you to believe when it's below fifty that industrial production has declined year over year, And quite frankly, if you look at the data, you're hard pressed to find any

declines in China's GDP. Ever, so, in my view, using a p m I in an emerging market economy analytical mistake. Carol Weinber, thank you so much. I freaking see economics right now, John Farrow and I trying to figure out with the editor in chief how to fix the microphone stand. It's for him. This is when you're when you're high saluting. Let it go. We can what can let it go? It's broken. Can you get the duct tape, the one the Rangers and broke the studios again, the New York

Rangers duct tape. We've had this studio for a couple of months and you've broken it already. Company. This is because print gets a budget and we don't. The rescue as well, joining us down, John Michel Tweede, what an introduction to thank you? I like to do that with a really important essay on the broader state of the Anglo Saxon experiment. You hear me talk about this Anglo Saxon economics and corporate theology in that But John Michael Tweede, of course, and so he can only do takes much

much further. The feeling at the end of your essay is we're a critical point that clearly centers around Brexit, clearly centers around in the US election. What are the things you're watching which give you confidence that the Anglo sphere as you call it, can be maintained into the future. Just to give a little background, first, the article makes the argument that, and it's a very big picture article when it makes it makes it makes the argument that

for the past thirty forty years, certainly since Thees. The mood music of the world was set by a combination of America and Britain, and obviously with America much bigger. Britain's economy is currently smaller than California's. But since the nineties, especially since Reagan and Thatcher, and then with Bush and Blair, Blair and Clinton, Cameron and Obama, all these different people, they basically spread a tune of globalization, liberalization, freedom, and

around the rest of the world. Most people, even if they didn't like pontificating anglos and you've never met one, they even people didn't like it, they generally accepted that that was the way the world was going to go.

And obviously had problems. You have the problems of Iraq, you had the problems with the credit crunch, But it really in two thousands and sixteen, with Brexit and then with the Trump election that that alliance has come into trouble and it's it's going basically in the wrong direction. Brexit is chaos, and Trump is singing something which is exactly the opposite. He doesn't wander around the world talking

about freedom. He doesn't do the things that you would expect an American president to do, and so the dominant message has stopped, and to some extent it's been taken over by China. I think the Europeans hope that people like Macron would fill that void, but he doesn't seem to. And I think this does make a difference to the

future of the world. So even if you don't like pontificating Englishman, and there maybe many people even in the studio who reached that conclusion where actually it's better to have us than what you think. Right now, you can't get into the glass dome with the interactive broker studio a palace before I asked you what it's replaced with. I think we have to decide whether this is just a moment in time or whether it is an inflection point. What do you think it is that that is the debate.

I mean, I fear that it's an inflection point because these things um, you have a momentum. Victor Hugo has a very good line about nothing can stop an idea whose time has come, and that's how it felt in the eighties, nineties, and the first century, the first first decade of the century. Now it's at a certain point when momentum loses, other ideas begin to come in. You've already got the Chinese pushing the idea of the Beijing Consensus.

You don't really see Europe pushing anything particularly new. That the main, the main argument for it being able to come back is a mixture between two things. One, politics can change. You know, Britain could just about mudel its way through to a slightly orderly breaks it will perhaps even remain. And on the other hand, you could have Trump himself could get into trouble, and you know there

are other options. Europe can't get his act together. Seemingly, does China have the willingness, never mind the ability, to take a leadership role on the global stage. I think you can see you see the sort of things which she did at Davos um when she Shan did again this year. You know, they are becoming slightly more overt in that way, or at least saying this is an

alternative way of thinking about the world. And the point about when you deal in these big ideas is that it placed where these things often really matter is the emerging world, and there it's definitely true, you know, emerging world governments quite like what China says. You know, what's better than saying that in order to have a successful economy you just need to be slightly more authoritarian. Government

strangely tend to quite like that. What I think, though, is that on the whole, that there are still some the amosphere still got some big strengths. Most of the world's big companies, eight of the biggest term American, you've got, and you've also got the basic fact that the people of the world, I think, do not necessarily think that

more authoritarian. And the discipline of all this, taking a back to Kissinger's diplomacy and a lot of the experience of the United Kingdom, is the cliche what the world needs as a good war. We've had a huge time of peace within the Western world where we can get distracted into other ideas besides the discipline of institutions, and

we've lost that. You could argue that the biggest another big thing that has happened over the past six or nine months, is that the general fraction between especially between America and China, and that that could also be an inflection point, but I do think it doesn't. It does tied back a bit to the idea that the dominant mood music, the presumption of the world, I think for the past forty years was in general most countries, even

if they didn't like it. I thought the world was going to move slightly more towards the direction that America and Britain were singing. And I think it's very this obviously being English, like the useless Mr Farrow, we we we we tend to exaggerate our our our own importance, as you often point out. But in this particular case, I think it mattered that there wasn't just one country saying this, because it made the made the message broader.

Britain brought many things about global media right board room, in the room, in the European Union, other things that made a difference. Do you'll make with white that I must read today? And we need a desperate guest to talk about desperate markets, and we do that now with Dennis Gartman, local Pinada. Of course Mr Gartman has our respect, and then he publishes his trades in detail in the

back of his acclaimed newsletter Red Worldwide. Dennis, the only reason I wanted you on today is because you lead with the fact there are more sixty five year olds than the rest of the world combined. I mean, it's the United Nations, and it's a serious thing that we're an aging global population. And to bring this over to investment, Dennis, the percentage of us nowhere near able to retire. It's

off the proverbial chart, isn't. Oh, it's really quite sad when you look at the amount of money that the average American has, I think it's somewhere in the neighborhood of less than fifteen hundred dollars in his retirement account. It's it's something, uh, really shockingly low. The ability for the average American consumer to meet even the slightest emergency need in cash is is shockingly low. So we've really done a very very bad job individually trying to say

for retirement. And it's only I'm afraid going to get worse. With the whip saw are round trip move early December, we've now piqued that here in the middle of February. For long term investors, what do you do now with cash for quote long term unquote? Do you go into the equity markets? It's still nobody's gonna like to hear what I have to say. But it's still a bowl market, isn't it. It's still moving from the lower left to

the upper right. The violence of the downward swinging in September, October, November until December twenty six last year was awe inspiring. The rally that we've had since December has also been on sparing. The answer your question is what do you do now. If you have not done anything, you have to put something into the equities market. If you've done something, you probably want to sit and wait. After after the rally that we've had since December twenties, you probably don't

want to buy today's rally. You probably want to wait for a couple of weeks or so. But if you're outlooked this for the next ten years, you have to be a buyer. There's no question if you're If you're outlooking for the next six weeks, you probably want to stand on the sideline. We protect the copyright of our research guests, and of course we do that with Dennis Garban, who writes us every morning at two am with ink and quill in the back. Dennis, there's no mention of

equities on the short term. Gartman trades all the criticism and a claim that you get you don't have anything on equities, Why uh for? For actually I like to stay clear of the sec They get upset with me sometimes when I write about specific equities, so I don't put them into Yeah, there's nothing to hear about Dennis

car in the stock market. Why is that? Well? Actually, if you read the newsletter, and if you read a section on the equities market, I explained that I am long of a local bank here, I am long of f c X, I am long of of gold and silver equities. So I am actually long, and but I haven't put it out as as an original, as an official recommendation, as I like to call it. Nonetheless, if you read the newsletter, you'll find out that I have been and continue to be rather long of the of

the stock market in various in various manners. Jeff Curry at Goldman Sachs boldly three months ago climbed on the Gartman gold band wagon Goldman Sacks. I believe working in dollars review with this the idea you you do this in euros and yen, and am I right? Denisit within all the tribulations this has actually worked out. Oh, it's worked out dramatically. So if you take a look at

if you go back to November, just abjectly. Pick a day in November golds up dramatically from that period of time, and if you look at that same period of time, the euro has gone essentially side ways or even slightly down. So if you have funded a position in gold using euros, you're you've actually increased the amount of return that you've gotten from gold marginally, but you have increased should I saw you, You've actually decreased the volatility on a daily

basis materially. And it isn't that the essence of great trading to get the same return with a decrease in volatility. And that's exactly what's happened there. This is why we love to have Dennis garbmen. Now we get in a research report in from someone acclaimed and Gartment can give us some mediate analysis. The wonderful George Seravellos at Deutsche Bank is always interesting reading, and he comes out moments ago Dennis Gartment and reaffirms euro and says, this is

a fed that will blink in. The interest rate difference between the United States and Europe will narrow. Do you agree? I think the spread between the United States and Europe will continue to widen. Our economy is stronger than is their's ten year yields in Europe, are are in Germany, for example, are still negative takor yields here in the United States or two point six three, that's probably gonna

continue to widen. It's been widening for years. Many people have called for it to narrow for years, and they have been They have been decidedly wrong for years. The trend is clearly for that interest rate spread to move in the United States favor and for the United States dollar to the beneficiary that move. So so can you go stable dollar or strong dollar? I think on balance, if you're if you're only looking at the U. S. Dollar versus the Euro, probably going to see the dollar

get stronger. You're probably going to see the euro get weaker. If you're talking about the dollar versus Canada, Australia or New Zealand, maybe that's a different story entirely. But most people when they speak about the dollar speak about the dollar versus euro, and the dollar is likely to get stronger. Now we Dennis one final idea here. I just look at the soy being chart and we're off the bottom. I know that, And we kid Dennis about red wheat

and winter wheating all the rest. Dennis, You are, more than anyone we speak to, are hardwired to the fields of the American Midwest. How tough is it out there right now? For the people you know in the Midwest. It's very tough. It's been four years of steadily declining or or stable low prices. Bankers are very reticent this year to extend credit to to farmers to put the

crop in the ground. If there's one thing to be concerned about in the United States, it's that it's precisely that we are going to plant the smallest amount of wheat in a hundred and ten years, and it probably is even going to be smaller than the original usd A projections something because the banks will not extend credit. It really is tough out there, no question about it, Dennis.

One final question March nine. There's these two schools in North Carolina that you know they bounce off North North Carolina State. Does Duke have any chance March nine against the dynamic crew from Chapel Hill after what happened last night, and and and the injury to to the best player in the country this year is Zion Williamson. No, Duke does not have a chance. I hate to say that I dislike both teams. I'm an MP States fan through

and through. I was hoping that the game, As I told my wife last night, I hope this game goes to seven overtimes and then ends in the tie, because I didn't want either team to win. But Williamson Ducas is really a demonstrably lesser team than they were. No questions. Dennis Gartman, thank you so much for a wide ranging discussion this morning. We've had this big move in the market. The question is is on many investors mind is how much is left? So to get a professional opinion, let's

bring in Lori Calvacina. Lori is the head of US Equity strategy at RBC. Lorie, thanks so much for joining us. So, given this huge reversal that we've seen in the equity markets from December through to year to day nineteen, what is your view of the equity markets? Is there any room left here? So? I think there's a little bit of room. I don't think there's a ton of room. Um. You know, we've came into the our price target on the SMP is. We think the PE on a trailing

basis can expand to about seventeen times. That's not heroic. I mean that gives you about five six percent upside from here. I think, you know, it's it's going to be a bit slower as the year progresses than what we saw in January. I think it'll be more of a grind. We might take a few steps back before we go forward. But I do think there is room. Um, you know, I I would say the story in the

market is probably not that exciting right now. But when we look at positioning, when we look at valuations, things look fine. Um. Some of the problems we have had last year have gone away, and earnings, you know, I know, we probably have the potential for some further downward revisions. Um, but we do think the market can rally through that. We think a lot of that was already discounted at the December Was there anything in the FED minutes yesterday?

The calls you do maybe change your opinion? No? And you know, actually, what what I like about what I've been hearing from the FED recently. I remember, I'm not an economist, I'm an equity market person, So I'm not going to get into the debate about whether or not the FED should be listening. But but I've been hearing a lot about that debate, and I can tell you as an equity person, I think that monetary policy was one of the top concerns that investors had coming into

the year. So equity investors hearing that is listening to their concerns, I think actually permits those multiples to expand and removes one of the big problems on the sentiment side. That you have a deck that is absolutely brilliant, the RBC Hedge Fund Handbook, And let's get some definitions here. What's a what's a hedge fund hot dog? So that the hedge fund hot dogs are what we call the

most crowded stocks and hedge funds. And the way we define it is we look at the SMP five hundred stocks and we look at the total total dollar value UM that's owned by hedge funds. And so a lot of the names that you see at the top of the list, um, you know, frankly the top five or so, I think it wouldn't surprise anybody. Um you get you get some more surprises when you work your name farther down on the list. Like I t services to cut to the chase of our sophisticated audience. Aren't these guys

just momentum trades? I mean, isn't the hotdogs just it's going up, let's climb on board, you know, to some extent. But if you actually you know, I think that's what people may think. But if you actually look at the performance of these stocks last year, they had a great first half relative to the SMP, but they pretty much

underperformed throughout the second half of the year. They bottomed, you know, sort of midway through November and then started to rally again, but sort of the underperformance of hedge funds favorite stocks, which are frankly, you know, large cap growth investors on the mutual fund side also invest pretty heavily in a lot of those names. That was really one of the massive headwinds and challenges that we saw in the second half. So, Laurie, I'm looking at the

bloomber terminal here. In the year to date, the Russell two thousand is up seventeen percent versus the SMP up eleven percent. What is your view year to date? What is your view on kind of small caps versus the larger brilliant Yeah, so, you know, we've been neutral and the way we came into the years, we said, look, it's too late to go underweight, and we look at it. You know, we have these drivers of market performance that we track, and frankly, when we look at those, they're

pretty split between small and large. But the one that still argues in favor of small cap is valuation. Now we've seen multiples rebound a little bit in both small and large, but when we compare the two, small caps still look cheap relative to large caps on a forward

pe basis. And in fact, the gap that we see on that valuation is similar to what we saw in the middle of right before you had the big Trump rally in small So we think you don't want to you know, we we've said if the right catalyst comes along, small caps should do well. I think that catalyst we've seen is just, uh, the underlying strength of the domestic economy. We've really not seen a big breakdown. Now, there are

some problems on small caps, so earning's quality is lower. Um, you have an increase in variable rate debt, which a lot of investors are wary of recently. So you know, I think the risk kind of counterbalance the rewards. But I think bottom line is you don't want to be underweight here. Very cool. Thank you so much with our BC Capital Market, so I will do this again. 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