Surveillance: U.S. Not In Liquidity Trap, Henry Says

join us with JP Morkan Asset Management today. Dane, if you were writing a research note for a dummy like me today, as Mr Farrell just mentioned, what's the salient point indicated by yield? Right now? What's the yield thing that our listeners need to know about. They are saying that, um, the FED needs to act, and they need to act um into a deeper cutting cycle. So I think um,

John's actually nailed it. It's the sense that if they're waiting for uncertainties to be resolved come July, if those uncertainties are unresolved, they might start to look as if they're behind the curves. And I think the bond market is starting to first that in a bit are we are we really? When everything is sata and done here with the oddities of GDP and growth, are we really

setting ourselves up for a Bruce Casman economy? I mean, even though the FED won't admit it is the zeitgeist now a US one point five percent, except nobody will talk about it. Well, you can't discount that given where bonds deals are globally, right, we have an increasing stock of negative guielding bonds um Once more, we have ECB indicating that they're willing to go farther into negative rates.

You have the bug against starting to state that they're willing to consider all tools in the context of what's happening externally. So beyond this economy, I think a low bond yield environment is actually here for now. Yeah, wells as John and I was wrong, you were right. So we should cut that and replay it every morning and put it in a highlight real Danna is great to have you with us on the program. You run an e M fund, You're in and out of the market.

That's why I love talking to you about what is happening in emerging markets right now. There is a belief that people will be staffed for income, they will be pushed to go out somewhere Danna. Will they be pushed to go back into em in a more pronounced way than maybe we have seen over the last twelve months. I think they will. We've already seen a lot of money coming back into the hard currency so sovereign hard

currency debt in the last few months. What we're starting to see now is with the dollar turning a lot more interest in local markets. So that's been the bit that's been lugging flows because of we've come from an eight year dollar bull trend. I think as as the belief that we've seen the pick in the dollar builds momentum, investors will look beyond our dollars in non needed assets and to those emergine market economies that need to be cutting rates where you still get paid at descent pickup

in yield um. I think for me it's just pretty much a no brainer. If you think the dollar has picked, what kind of yield can we pick up at the moment? Dina in local currency, so the index level yielded about five point eight percent. But then within that these stories, um, you can go to a market like South Africa where you're getting paid close to temp scent. On the longer end of the curve UM on a story that's still decent. UM. You can look at places like Mexico, which I think

is really interesting right now. Um. Historically the Mexican rate rate cup would move one to one with the FED. They haven't really done that time round because of what's been happening with the trade. So I think that's probably one that could reply reprice quite aggressively and you get paid around seven and a half eight percent to own Mexican bonds. Diana very quickly. The equity market, so many people feel so behind the railly what's the mood in

the bond market? It are people? Do they feel way behind what the industries are doing? UM. I'd say generally fixed income investors have traded this rally well because we came in quite cautious into the start of the year. UM. I think the disconnected is equities are rallying UM, and bonds are rallying. But for you know, you'd expect these things to move in different directions. UM. So everyone came

into the year cautious, actives kept going actives. Investors filled they've missed that we came in cautious, we were long duration, and that trade has worked out Dynamo. Thank you so much. Appreciate right now we want to pause an investment. If you are behind, if you're looking at indicas the markets. I'm looking at sp X right now. Year to date up, um and I got market, Kevin, Where did that? Somebody's been playing with my screen. Um, I'm falling apart year

to date of SPX. This is the interview of the day. William Smade buys Value. He is in the nineti percentile plus across all sorts of timelines. He's hitting the ball out of the hedge fund park. He joins us now from our studios in London. Bill Smede, let's back up and look at it. How did you perform so well? How are you garnering double digit performance where so many others are falling behind? Well, I I thank you very

much for the kindness. The main thing that we're doing, I think different than most of the value community is most value buyers going and try to buy a fifty cent dollar and then in the next year and a half of it goes to ninety cents they sell it automatically. We're trying to buy outstanding companies when they get to be a fifty cent dollar and then hope to hold

them for a long long time. And if there's anything that's helped in the last ten years, it's holding your winners to a fault so that that that's that's a blessing. Once in a great while, you'll round trip a stock. You'll you'll buy it at fifty, it'll go to a hundred, and I'll go it all the way back to fifty. But most of all the time, most most of the time, the mathematics of common stock investing are that when you're wrong, you can only lose a hundred percent of what you

put in if you paid cash. But if you're right, you can go up many times your money. And those three and five and seven and ten beggars make a huge difference over a ten year times. Jenni Ferroll what he just said there, you can take down to people trading five intervals or five year interviews. We heard this the other day. It's incredibly important to let your winners go. Remember the rebalancing interview we had with a gentleman. Yeah,

number of weeks ago. Yeah, I remember, he's on your che chevon Steve Chevalon nailed Bill Smede one a one, so Bill. Let's talk about the smide Value Fund. It's got about a billion dollars in assets. Just north of that. You've returned a round about fifteen percent year today. And what you guys do is pick fifteen to thirty companies rather so twenty five to thirty companies within that portfolio. But talk to me about why that's the optimal number

for you guys in that fund. Really good question, uh. I think of the benefit of diversification and common stock ownership comes with the twentie security. So we have over fifty of our portfolio the top ten. Think of us as a producer of a play or a producer of movies. We audition actors and actresses uh, based on our eight criteria for a common stock selection. If they enter the portfolio, then in the first three years they're basically on probation

to see what kind of audience they can draw. And you move move up the ladder in our portfolio by your success because we let our winners run. So you might think, and typically we might start with a two percent position and maybe go up to three if we have a lot of confidence, and then five or six years later, if you've been successful, you might work your way up into the top ten. How does that strategy work in a legitimate correction, plus moving to a bear market?

Forget about the gloom and negative What does the elasticity of your portfolio if you're down sp X? Wonderful question by only good one of the day Bill enjoy it. Yeah. So, our eight criteria for common stock selection are mostly qualitative, so wide mode, long history of profitability, consistently high free cash flow, shareholder friendliness, strong balance sheet, et cetera. So

most of the eight criteria qualitative. When you get in difficult markets and they're virtually guaranteed to come, those qualitative characteristics allow you to be patient in that environment. By

the way, since you asked it. The other thing that's really helped us the last three to five years is we're back to what we used to be before the O seven to oh nine to bacle, because in O seven at O nine, the normal qualitative things did not protect you, because the hedge funds had to sell what they could sell because they couldn't sell what they couldn't sell, and since they had to sell what they could sell, we owned what they could sell. Now on the decline

in August through December, of last year, we outperformed. In in May, when the market fell sharply, we outperformed. We're back to the normal historical ability of quality or dividend yield to defend you on the downside, which makes us very excited for the future because we're very positive about what we're doing. The price rings ratio discount to the SNP is among the highest we've had. But but we're also conscious of fact that the chart of the day

for Bloomberg is momentum has blistered value. Uh and and momentum is due for a come up in sometime in the next year or two. So let's talk about where the opportunities on right now for you guys. You want buying small caps that people have never heard of, and you're buying large caps, So wont me through a company names and White you like these companies right now? Well,

let's just be in the news. Uh CBS is talking about getting remarried to Viacom, and there are there's some rumors out there that they would like very much for David Zasloft that runs Discovery Inc. To To run a a three headed monster rather than the two headed monster. We don't necessarily think That's a great idea because the big behemoth market compization companies, the Amazons and Apples and and uh Netflix, their biggest problem is they're they're just

pretenders in content. They're just pretending that their content producers and and the best UH profit margins in the entire industry are unscripted television. UH and and UH. I might add that, Joseph Mr. Seed, that's right. In intercom, the guy that the manor owner of Intercom is loading the boat. He's buying up every every share of intercomy cam, so he agrees with you completely. So unscripted television has ten percent of the cost of of of of scripted TV

and movies. And so here are these tech companies who are loaded with confidence, loaded with arrogance, and they're spending money in Hollywood like drunken sailors on leave when the truth of it is they could pay seventy dollars a share to buy the premier UH content UH in television, which is h G t V, food network, travel channels, Catch Shark week, I D You're you're on a roll bill? I got a Bloomberg's Surveillance bill, s U. Harvey, we're doing a direct listing, Um, Bill, I got time for

one more question. What are the hedge funds getting wrong? You are one of those humble guys. I've ever met your truly folks. Clock and David Harrow numbers you're likeentile percentile. All these smart guys off Madison Avenue and Mayfair are getting crushed. What are they doing wrong? Well, there's there are thousands of people that want to make money in six to twelve month durations and they all have access to massive computer power. And the problem is the laws

of supply and demand haven't changed. There's hardly anyone that wants to work in five to ten youre durations and and so by what we've been left the five to ten year duration to a few other players, and there's not much there now. The negative is the capital should be coming to us, and that has not been the case. Uh that there's net outflows even among meritorious her strategies. Yester carlike con Oxy Darko Ana Darko overpaid by Oxy. Did you look at that transaction? Uh, we're researching it.

And by the way, Icon has been following us around for the last five or six years and others. Yeah, Carl's out in Central Park with his two dogs walking around. He's not following Bill smeed, you think he's following you? No, just kidding. He happened to be an activist in a number of stocks that we already owned. So the bottom line is uh, since value looks extremely attractive relative to momentum,

I don't think they overpaid for Anadarko. Thank you, Bill, sat appreciate a huge response if you're an economist, without question, the easy thing to do as a market economist, he's to blame your bond guys, blame your equity guys, Jannet Henry is professional and not doing this because our bond guys and our equity guys have been on the edge of perfect No one combined has that a bond equity house call like the Hong Kong and Shanghai Banking Corporation

in the last I'm going to say eight months. She'll tell me to the month, maybe longer than that. The Steve Major Ben Laidler tandem has been lights out, Jane. What is it like to work with those guys? How did they influence Laidler's optimism on equity? Steve Major nailing lower interest rates? What does that do to shape your forecast day to day. Well, Tom, we all talk to each other, you know, and I think the economic view for the last few years, especially the lower for longer call,

we work very close with speed Major. We've been of the view for the last five years at the pickup and wage growth was going to be very slow, very gradual, for a number of reasons to do with labor market disruption. And must admit over the last year or so that the kind of optimism on bonds and optimism on equities seem to fit a little oddly, And to be honest, over the last few weeks, I've been surprised myself at the extent to which everything is good news for the

equity market. If the Fed cutting rates because things are going wrong, that's good news for equities. But if we get a trade deal, that's good news for equities, whereas the bond market obviously is much more kewed towards the downside risks on global ground. Does a traditional punchball model work And if it is, where's the punch ball right now overflowing on the floor. UM, I think it's it's it's difficult, Um, you know, it's going into the meeting yesterday of the Fed, it was how can the Fed

out of the market? What could they possibly do? Um? You know, we thought maybe if they cut rates in June, the market maybe even happier. But it was almost the perfect set of dots. It's basically, are you know, suggesting that most of the Fed, you know, nearly half of the Fed is now ready to cut rates by fifty basis points this year, but there's no pre commitment to actually do it. Their growth numbers were good, they were not downgraded, they were edged up. Unemployment rate was edged down.

But we seem to be now on their projections in this perfect world where they're about to cut interest rates because inflation is lower than expected. Are we yeah? I think there's a lot of optimism priced into the equity market. Are we too close to a liquidity trap? Or is it something different this time? Let's say, Okay, it's premature, I guess, but it's radio Come on, stay with me here. It's premature, I get there. But if we get one to nobody's looking forward. But what if it happens three

rate cuts? Are we right back to where we were in oh eight or nine ten. I think a liquidity trap is when no one is borrowing, no matter how low or negative interest rate. It's very clear that corporate sector has been borrowing in the US for the last few years. And we've seen the resurgence in mortgage refinancing in the US as long term interest rates have come down. I don't think the US is in an aquidity trap. I think what the US is seeing is that, of course,

inflation in the US is influenced by global developments. And that was a lot of what we heard yesterday. It was about global uncertainties, global p m s, and they matter to what are uncertainties to me? They are less data dependent, less function, less reaction function in much more things tangible like trade and trade war. Is that what we mean by modern uncertainties? I think yeah, trade is

a big part of it. And you know, a lot of the slowed the way in which trade has impacted the trade trade wars has impacted over the last year has been on investments. We've seen a slowdown in demand for capital goods. We've also seen particular things related to

the auto sector and to the semiconductor sector. Industry is very weak, and the longer industry is weak, the greater the likelihood that that does feed through into employment and into consumer spending, which, let's be honest, is the real area of resilience. Even in the Euro Area. Over the course of last year, consumer spending has still been pretty solid because unemployment rates and weight growth is now at

the highest level for a decade. Okay, wage growth is the highest level, but a lot of America feels the anks. This is a really interesting point, and that there's a part of America not participating. And there's another part which Chairman Paul mentioned yesterday. We're you know, consumer data is pretty good, service sector is pretty good, etcetera. Is that going to be the surprise staggering the September eighteenth, whatever that two meetings out is, is that we still get

good consumer data. Maybe we get okay, unemployment numbers. Yes, I think, well that's already in the FED Central forecast to some degree. Of course, we just had another solid initial jobless claims. They fell to a new lower level. So I think what the Fed was saying yesterday is that, you know, the lower the unemployment falls, the greater the likelihood that more and more people who have not so

far benefited from the recovery do start to benefit. But it would appear that just a continuation of the solid consumer data is not for the FED to remain on hold. It is still that global weakness and what it means for global inflation, and therefore US inflation will be what tips the balanced for the FED if it cuts right. So, Jani Hearry, you're saying with our question, Jeron Pal's central banker to the world, that's what I'm hearing. Yes, yes,

it is. And remember last year there was a lot of the FED tightening on the back of strong US growth, which was helped along by fiscal stimulus. Because it was out said tightening that impacted on the rest of the world and contributed to the slow down and growth elsewhere in the world. My first question the Vice Chairman Clara tomorrow has to be on his word salad. I associate that with the vice chairman. We heard Chairman Pile talk about salad yesterday. What would be your question, Janet Henry

for the vice chairman. My my question for the Vice chairman is, uh, well, I suppose a lot of it would still be to do with the labor market, and this is something that talked about in his recent speech. You know, economists always talk about the stars it's all in the stars. Be our star. The neutral rate, um, and you star is the new thing, the maximum level of employment. They don't know what that is. Um Clarada actually mentioned that it would be. He now think it's

you know, around four percent, possibly below. We're already below four percent. How low does he think unemployment in the US without wage growth picking up? Jeneen, I'm gonna give you a shout out if I get to that question with Vice Chairman Clarata. But this is important, folks, and and and Jenneh Henry, this is just so key. Is you star in this dream of a perfect unemployment rate?

Is a tangible and an agg regated basis? Or are we so polarized that we have two or even three Americas and we really can't get there even if we want to get there. It is, But also it matters for how this whole expansion plays out. You know, we've become used to over the last few decades of most FED tightening cycles being a response too higher than expected inflation. They have to squeeze inflation out of the system. That

requires a sharper slowdown. If we are now back in this world whereas you know, you're alluding to you've got different parts of the labor market seeing some pick up in wage growth. If that's coming through more through the profits cycle, it's back to an old fashioned business cycle.

You could see different parts of the economy and being affected in a different way, and that means that it's it's not necessarily just about the response to inflation, but we could still get areas of the economy slowing down because they're the parts that are being hit more on the profit snide. This has been wonderful, Jenna Henry think of so much. Hs BC sure over day Bloomberg opinion columnists covering all things technology really wanted to get her

thoughts on Slack. That company's raising capital today? I should know Tom that Bloomberg Beta, the venture capital arm of Bloomberg LP, is an investor in Slacks. Make that disclosure, yep um So again Slack raising capital? Can you just give it? Walk us through kind of what's happening today? Who's raising capital? Is it? How this you know? Listening this direct listing is different from an I P O. Well, the way it's different is that they're actually not raising capital.

The company is not raising The company is not raising capital. So Basically, you know, Slack over the years as a private company has issued about five hundred million shares in its lifetime, and basically today it declares those five million

shares are in essence available for trade. So the company is not selling new shares to to a new crop of investors, as typically happens in an I p O. It's simply decides two days the day that we become a public company, and it makes shares available for trade. So people who previously owned Slack shares when the company was private are now able in principle at least to to sell those shares to willing buyers, and buyers are going to line up potentially to purchase those shares, and

we'll see what happens. How many of million will end up in new hands. It's a good question. So part of the issue with a direct listing, right is that it's a little bit less controlled than an I p O. So it's not like the company can say we determine that thirty million shares trading. It's not. It's manipulated. What

way is it manipulated? And in what way is an ippulia? Well, you know, stop it, they're going out toad, They're making a fictitious pricing up and they're launching this puppy, right, Yes, I agree with you. I do not really see the point yet of direct listings, thank you. Can we have her back tomorrow? Thank you. I mean, it's supposed to be this kind of more pure less financially manipulated process than an IPO controlled by the masters of Wall Street.

But it's not really that. As Tom said, right the bank there are bankers that are getting paid tens of millions of dollars in fees by the company, and they're going out to people who own shares of Slack and saying, how about selling some shares? How many are you thinking?

What price are you looking for? And it's doing a similar thing to prospective buyers, and those kinds of conversations starts to look a lot like what happens in an IPO process, that fake, manipulated, controlled by the masters of Wall Street IPO process. So um to me right now, a direct listing looks like a solution in search of a problem. But I am open to the possibility that there really is. Um Well already called me a cynic, and I guess I have to live one of the

ways again. One of the ways it is different from slacks perspective is it's less costly and the fees are so there. Again, Slack is paying I cannot remember the number, but it's something like five million dollars in return for raising no new capital. Right so you're paying banker fees, not that much less than you'd pay in an I P O. But the company is not making any money from this process. So again, right now, a direct listing

is a novel thing. It probably requires a little bit more work than it might in two or three years if this process becomes more normalized. But right now a direct listing is not true. You have been through this, sin sure as an expert on this, and we make jokes folks about she's truly lights out. It's sort of kind of like a Dutch auction where you go out and find a price. Do we know how they actually

get to twenty six dollars? Again, if one on one, I think a lot of it is very similar to an I p O process that you have conversations with potential sellers of stock and potential buyers of stock, and you figure out what they're what it seems that they're willing to so they're basically doing an end around SEC process of a red herring to discover price, which is what you do with a standard initial public golf freak. I don't want to say that anyone's violating any rules.

You know, this is still a process. This is still a process that is governed by a SEC rules. Like you know, Slack filed a perspectus as they would in an I p O. Um they have yea, you know, they have regulated conversations with potential investors. So this is all on the up and up. But again my issue is just that this is supposed to be some kind of holier than now, more pure process than an I p O and I do not yet see those merits. Can we ask one question about the actual company today?

The company? Yes, what makes now? This is a you know, there's so much remote working today and you've got to have these video conferences and Bloomer's got its own system which works great. Um, what makes this company so special? Their technology? Look, Slack, it is good technology, and it's particularly useful on mobile devices, which was less true of

many of its predecessors. But I will say I was having a conversation with somebody yesterday about Slack and the fact that there were a number of very similar software companies that started around the same time as Slack. Think about companies like Yammer, which was bought by Microsoft, or Jive Software, a company that went public um a few years ago, or Chatter, which is owned by Salesforce. Cisco

had a workplace chat product. There were lots of these kind of Facebook for work whatever you want to call them products, and almost all of them either died or essentially irrelevant in the journal did they share they had that great compared attracts of actually paying subscriptions of d verses two million from Microsoft. I mean, the revenue girls vectors are declining, the grow the down, the income statement vectors are declining. Let's let's flip it over. I'm gung

ho on Slack. Why well, look, they do have six hundred thousand paying organizations, which is, you know, not nothing. Even maybe it's nothing compared to Microsoft and all of the customers that they have. But this is a software that has caught on relatively quickly in a relatively large number of organizations. The the advantage of software as a service, you know, this kind of subscription software. The reason investors love that business model so much is. It's very easy

to understand. You have companies paying money every month or every year for a product. You can kind of model it out. You can see the retention rates and the ability to upgrade those customers. Look, investors may have gotten carried away about this whole category of software, but there is something real happening. There are new kinds of technology that are catching on. In single best conversations, Today's shore Overday is always thank you so much. Thanks for listening

to the Bloomberg Saveillance 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