Surveillance: US Resiliency with Fillion

for frost this air MS tie. We wear that when Johnny Phillion shows up chief executive of BMP Parry bout, Lisa brownwits and time King John Farrell wishing it was here. I mean it's it's frankly too bad because John is far more knowledgeable of this. But for the gentleman from BMP parow, We're gonna get right into it. With futures up thirt Lisa's got actually adult questions forget about it. Explain the joy in two thousand eighteen when France pled

this incredibly differ are called feed off. What was it like for all of the BNP Perry pat family to see France do this four years ago? Well, Tom, thank you for having me. By the way, Lisa as well, it was a real celebration for the whole country, including at bmp PI. But obviously, and that was the second time that France won the World Cup. Then there with a lot of expectations for this upcoming World Cup viavly Blue, right, it's always complex to be the defending country, right exactly.

And you know today in this uh, in this soccer landscape, there is no small teams anymore. Francis play Denmarks or Tunisia Australia, and you just never know. I will keep an eye. I have the privilege of being French an American. Then I have two teams, you know, to support and because of John is not here with us today, but

I would keep an eye on England, I promise. I went to John and I said, give me a smart question there, uh John even and he said, asked about a thirty six year old Olivier is getting a little old, how an older French team do and the heat. Well, it's a combination. You know. The World Cup is a long journey, it's a one months competition, and you're right, it's a combination of youth energy but experience. And I think this French team is putty what equipped on on

both fronts. So you said that you're both us as well as French, and you can vote for both teams, and you can read from both teams as the US arm of the biggest European bank, how much is your main company diverting money to you because it is so much stronger here in the US. Well, this economy is

still the most basilient economy in the world. Uh. If we look at the status today in terms of tight labor market, in terms of status of corporate balance sheets, households are still spending and the capital markets are still functioning. And uh, a US bank here has been benefiting from this. Having said that, our economists are pretty predicting a shallow recession in because the US economy is still very quite interconnected with the rest of the world, we expect to

rebound in. How much does that affect your willingness to lend right? I mean, because if you basically you're tasked with trying to support other aspects of the bank, perhaps that are in other areas that aren't as optimistic, perhaps as the US, but the US is also in a difficult spot. How do you decide how loose to be with your purse? You? Risk management is critical. You have to be quite selective with the sectors you cover with

the clients you support. But I have to say, if I look at my client needs today, it's around three dimensions. Lending your right. Even the most frequent issuers in high grade, you know, because of the higher cost of funding, they try to wait, and we're actually bridging significant number of capital market transactions to optimize your capital raising. Hold on

a second, So this is really important. Other words, you're taking on your books that basically you're saying you'll lend at a lower rate than the market rate to have them wait until rates are lower. It's a combination of lower rates or making sure they can pick the right window high rate as remain open. But you have to pick your windows if you want to optimize your capital rating.

The second important need I see from clients today is waste management and hedging sprategies, and it's really across rates and communities and currencies and in equities. They took a cup of coffee in Beijing decades ago with the senior officer of BMP parabout with the decades of French experience in China, give us your perspective and our China is going to extricate itself from this mess. Well, it's definity another country. We have a lot of connection with the

bank as presidents there. Uh oh, you understate, come on the bed. It's huge traditional presence there. And still if you expect this economy in two any two eight three to go through a shadowy session, your bozone is already in my session. You still see to a China providing some growth to the double economy which we expect to be for two around two and it's a it's a downturn. Uh in China. A lot of it will be around, you know, getting truly out of the pandemic and obviously

expecting some most ability there. The heritage of your shop is a wonderful reticence to speak about economic boom. Your economist, Carl Rico, donno, we've got a not in a quaince. So thank you, sir for stealing him from Bloodboard. Will never forgive you. But Mr Rickodon and back to Dr Cornado has been dead on about g d P. What does he say in this titanic battle we're having on recession? Calling by his way, it was my only way to be to really continue to be part of the Bloomberog

family to have called on that. And we love to thank you for that, having trained in post so many years college saying in three shadow accision as we've just discussed, you know, minus one percent, but he's very confident done that. In four he sees is rebound because of the good foundations of the resiliency of this economy and back to a more normalized g D pig voles around. You know. Two,

how concerned you as you are? You as you look at some of the risk management you're talking about earlier, as you decide how much to lend, how do you factor in exogenous events? How do you factor in a colder winter? How do you focus in how do you fold in the prospect of a federal reserve that potentially could go well beyond what people currently I wish we had all the answers to your wonderful questions. So how do you even model it out? I wait, well, definitely

in bring out. But you know the way it really works in the real life, it's really about the sectors, about the clients, and honestly about the management you deal with, because a big part of managing the companies between the hands of the leaders um. You know, you you mentioned in flish and you mentioned energy. If I look at back to comparison between Europe and US. I think you're up as two main challenges in the in the months

to come. It's obviously inflation and the e c B is going exactly in the same direction as the FED. You know they're gonna be okish, they're doing the job. And the second one is energy. And on the energy side you start seeing with the good news is for two for the winter three. I think the Eurozone has managed to, you know, to to to navigate through this energy crisis. And I think the second trend and I can see this happening already there, it will happen here eventually.

You see a real commitment to diversify sources of energy renewable hydrogen, star wind, hydro when it works. But I think the trainers left the station on this front. And in Europe there is a probably very favorable regulatory and UH fiscal environment to support this trend toward s G and sustainability. Johnny Julian, thank you so much for joining us here and we do accept your invitation to come to Paris and April. You got team surveillance at the

little cafe. There's a little cafe overlooking Dander Luxembourg effee sweets and you know the three of us out there remote on the street, but are you really that person? Thank you for inviting yours. I'll be going to bucket. I need a bugette great as with BMP Perry. Thank you so much for telling us France will do it again at the World Cup as well. Right now. David Balan,

Chief Investment Officer, Global Head of Investments, It's City Global Wealth. David, I'm not surprised to hear you say quality is in order for two thousand twenty three. But color to the quality, what does it look like? Well, you know, we're gonna continue to earn money all the way through the next

year without a decline. Those stocks that pay dividends and pay buybacks, well you and Lisa were just talking about is incredibly important because the Fed has raised rates and is going to raise rates more looking at the data on inflation that is behind it, the leading you know, the lagging indicators, that's what they're looking at, and as a result, they're gonna have rates go too high and

they're going to keep them there for too long. And if they do that, we are going to have not only a recession, but potentially it's seriously you know, serious in terms of its length, and potentially it's breadth. And that's really what's being set up here. And the market you know, looks at it somewhat sanguin, you know when the senguin lens, and I think that's a mistake because really what we're dealing here is potentially with an earnings decline that is not yet priced into the market. For

the earnings decline assumes also revenue declined. Do you just assume, with the dearth of nominal GDP off the the oddities of the last twenty four months at revenue growth comes in as well as earnings, but actually is going to come in tom is the is the is the profit margin? Right. Revenues will go up, of course with inflation, but costs are going to go up more than that. The ability for people who produce goods to actually pass on pricing creatures is going to go away. And the reason is

because inventories are extremely hot. And what inventories do is they, you know, they drive prices down so we'll all be able to buy, you know, things less expensively during this coming in Black Friday, in Christmas season, but ultimately it's going to make profits you know, go down next year, and I think it's going to cause you know, the economy to slow more than people think, because you know, once inventories build like this, then production, your future production

will be reducing disproportionately downward. David, I want to sit on something that you said that potentially because if it's going to raise rates far beyond people think, even in the face of weakness, that is happening more rapidly than perhaps people realize. This is going to lead to a long and potentially deep recession, right, I mean, that's essentially what you're saying, and then that's not being priced in. I'm looking right now at NASDAC down this year. I'm

looking at an SMP and down this year. Where is it not being priced stand well, Le, So you know, if you actually take a look at recessions historically, you know they could see markets down you know, easily between thirty But this is the most important single line that you know, I think people are missing. Markets have never

bottomed before a recession has begun. Look back at the historical data and that's why you know, you see these bear market rallies, you see shortcovering, you see the fact that we're in the fourth quarter, and the fourth quarter is always a good quarter. You know, all of those things are true too. But what we have to do is actually price in what is going what is going to happen in the future, and what you said earlier. You know, let's take a look at housing as a

leading indicator right right now. You know, housing, how the houses that were started a year ago when interest rates a three percent needs to be completed, so the amount of housing unemployment that's taken place is virtually zero. We think that there'll be four hundred thousand people unemployed in housing next year, and about two million people who will be unemployed across the economy, which is not especially deep recession, but it's certainly not positive employment growth as we've almost

all year long. David, what does this mean in terms of what you're recommending to her clients? I mean, if you're talking about a long and deep recession, is this hide out in tenure treasuries? Is this hiding out in t bills until we have a better sense of what's

going to happen. Yeah, we are deeply wave Lisa over were deeply overweight bonds at the moment you know, we think the bonds are going to be a terrific investment, by the way, because you know, if you buy attaining your bond today, let's say three a D right, and it happens to go to you know, three P and you hold it for a year and change, you know that total return on that bond could be because we think interest rates are going to be down a year

to a year and a half from now. You know, we hit the long term rate on the Tenure Committe between two fifty and three. And that's because once our recession begins, rage will of course, you know, come down, and once we have unemployment prints for a couple of months, will finally realize as vocal, did they have to do

something about it? Well, your economics team, and good morning Andrew Holland Horse has been way out front on the slowdown, called David Bale, and we've got a stagger to December two and all of a sudden the jobs report, which is of interest. Are we going to see the unemployment rate move in December yet or does that all wait till the first week of January? Well it certainly could, you know, Tom. The rders come down relatively little so far, you know. But what we're seeing are you know, the

postings come down. We're seeing a lot of pre announcements of layoffs all across the tech industry. Some of the names you were talking about, you know, are are planning you know ten in fifteen thou uh, you know, layoffs next you next year. But those haven't happened yet. And of course we haven't seen this sort of industrial company off anybody at this point because of the hoarding of labor. David, thank you for the brief. David Balin City Group Global Wealth,

just thrilled to have them on. We are briefed by Amrita Sind of Energy Aspects this morning. A Marina help me with a recent pullback in oil? Is it just a bat Demand won't be there now? I think there's a lot of confusion in the market right now, right and yes, demand in China is weak, and this is something been saying for some time. Don't get too excited by all the headlines coming out of China about reopening because that reopening isn't happening until April of next year.

So right here, right now, there are more locked down. So absolutely demand in China will remain weak. Now the thing is the rest of the world demand is actually pretty decent and the numbers coming in have actually surprised to the upside and not downside. So how does that frame up for next year? Every you know, a hundred page report I skimmed through says Pacific rim demand is the variable. If we get what Lisa talks about five China GDP growth, does that reverse you out to a

hundred and twenty a barrel? Absolutely, China, It's going to be critical for next year's balances. And I think again, if you look at what has caused this year's kind of softness, it's been China. It's not that we were expecting a reopening, but these renewed lockdowns have actually dental demand quite substantially more than we all the market was expecting. And I think that's one of the biggest reasons why

China is not out buying crude right now. They are going to be the biggest variable for next year, especially

given all the uncertainties around Russian oil. With the EU and bargo ticking in on the fifth of December, we are going to lose some Russian barrels, but that is again going to be after the products embargo on the fifth of February, So the timing is going to be critical that if China starts to reopen from April, the real upside and the drill tightening and balances is going to be Then why is the bookcase for oil now coming truition now given that we are getting a bit

colder now and that we do have a bit more resilient of US economy. Yeah, I mean, look, there's a lot of your end positioning going on as well. But what I and this gets a little bit technical to bear with me, but I think what's been interesting is, you know, and I've seen a lot of kind of narrative around this that Accruede has obviously sold off and

that just means everything. It's very verish. If you look at the products markets, pretty much every single products and all of all of them in Asia are back dated. That tells you that the underlying demand conditions are strong. Usually when the market is wobbling because of fundamentals, it tends to come for the product site. But if you look at gasoline, diesel, even fuel oil and after which had been weaker, have all strengthened over the course of

the month. So this is more of a macro thing that's driving crude stronger dollar obviously, worries about continuous rate highs. We had even correlation with bitcoin, which is just insane and tells you that not that many specialists are trading crude oil right now. And policy uncertainty, which we've talked about on this show before as well, is just not helping. We don't know because of the amount of even media

reports constantly contradicting one another. You know, we have very strong views about the EU embargo, but people are telling us, clients are telling us, oh, do you think Europe is going to go ahead with the embargo? And I think that's what's creating a lot of confusion in the market.

So even putting aside all of that confusion, when you hear from people who say they're actually Europe isn't a much better position than they previously were, not just for this winter, but for next winter, do you pay credence to that? Do you feel like crisis averted regardless of what happens in Russia and Ukraine and that there has

been immunization from the conflict. I'd say right now, sure, Europe is in a much more comfortable position because it's been mild and we have a bunch of energy cargoes sitting um waiting to be discharged. But if it does get cold, and I really tread to think how people can say that next year is going to be fine as well. We can get through this winter, assuming it's a mild enough winter, no problem. Next year there's a huge issue. And by the way, this is much more

a gas story than an old story um oil. We haven't lost Russian or to begin with, So I don't understand why even if the talk of ceasefire again instruction which we completely disagree with to begin with, but let's say it does again credence, how does it affect oil because oil wasn't impacted, So why should oils sell off now?

If you know, even if there is a ceasefire, And that's where I think the market is very fused and you're just selling getting like suits of just macro sell off and oil getting caught in with that one final unfair question and then all of a sudden, money costs something, the risk free rates legitimate, all of a sudden, the investment calculation is like we remember, do you assume there will be a boost in energy production? And what politicians of all ILK are calling for, which is more production?

Are you optimistic hydrocarbon producers will produce more at the margin. No, And for two simple reasons. One, shareholders continue to tell them not to do so and prioritize green energy. And too, because interest rates are going up again, servicing debt just gets a lot more expensive. This is the other problem that we're seeing in the U S. U S. Production isn't rising particularly sharply, and I think the market will

realize this next year. But of course the problem for the US is that freight rates have skyrocketed so moving that oil has become extremely expensive. And I think that's actually good to be a double whammy and way on US production. Even Samrita sent thank you so much. Always a clinic she is with energy aspects just outstanding as well. Duck Cass now on the market's Duck. I loved your note where you talked about old stock strategist named Voltaire and it's just a point where you have to learn

to climb on board. How do you climb on board a bull market? No one believes in it's rough. I mean this has been some year, um. Most investors have been beaten up. Fortunately, we had a profitable year a hedge run Sea Breeze partners UM. We started the year bearish, But the real key to our success this year and hopefully in the future is that we're a throwback. We're throwback to the original hedge fund A. W. Jones, which

was formed actually the year I was born. And I think the business media spent a lot of time in talking about market outlook Tom and Paul, not enough about process. What's the process at Sea Breeze if you remember, Unlike most investment funds of the day, Jones was created essentially along and short long short hedge fund, or as Jones called it, a hedged fund UM. So, like Jones, Sea Breeze strategy is to balance long positions or bets that the security is going to rise in price, with short

positions that bets security will fall UM. And they introduced this approach in order to reduce exposure to market swings and create alpha, and certainly relevant today with all the economic and market outcomes uncertain they introduced something called pairs trading, and I think it seems to be a continued ticket or strategy in a period of very sluggish, uncertain and uneven growth. And this direction we're taking. By the way, you were talking about Taylor Swift. My favorite pair of

strade is short Taylor Swift and long El Fitzgerald. People. If you think about it, if you think about the last ten or fifteen years, guys come on ast traditional plane, vanilla asset managers come on and they say they do all the same thing. They buy the thirty favorite stocks, they hold them through hell or high water, they play a lot of golf, they acquire more assets their at there's not managers. And when the tide went out as

it did this year, their exposed was swimming naked. Quote of the year not seeing teleb love him to death and he said gravity is back in physics and years in mind Paul's world, the risk free rate is back. How does the risk free rate change? Naive long only active investment? You know, risk free is a big issue. Um uh, this is the way I look at it, Tom. The S and P dividend yield today is one point six The two year yield just broached four point five

percent UM. With the profit cycle turning down, it is quite obvious with this relationship materially different than it was as little as eleven or twelve months ago that this should be a fundamental part of one's core bearish view. And obviously there are other headwinds that we have political partner partisanship, we have the lack of leadership in Washington. We have a wayward central bank. We have rising geo political risks, were weakening non US economic growth, most notably

in China and Europe. And as you've talked all morning, we have curb and version, which typically pre sages recession. I think that that the profits cycle is turning down much harder than most realized. In terms of market view, however, I think we're basically model value. There's a tendency I think to be hyperbolic and market views. It gets media attention and gets celebrity. But I've observed that outlier forecasts, both fulish and bearish, are rarely met. And as Buffett says,

it tells you more about the four asked than the forecast. So, Doug, I mean, one of the many reasons we like chatting with you is we come away knowing exactly what you're doing in the market. Are you buying or selling this market? Are you waiting? Um? I have said that UM that with the market decline over the last three months, I've been able to buy great companies at good prices, but not great companies that great prices. As the markets rallied, I'm no longer being able to buy great companies at

good prices. I do see value. I see value in several sectors. I think large cap technology has begun to look very attractive. I'm back very large long in Amazon as well as Alphabet and Microsoft. I think that their competitive modes, if you think about it, have improved in the last three years, and all these less well capitalized

competitors are falling by the wayside as well. If you look at the NASTAC one hundred UM, the index is selling at roughly four times sales and that's UH compared to eight point five times at the peak in November December. I'm buying bank I'm buying the banks UM, which Bank of America, wells Fargo. As rates go higher and stay higher for longer, the interest rates UH. The industry is interest rates sensitive and assets sensors. And finally, I'm very

high on cannabis stocks UM. I own Green Thumb Industries, which is the Krem Della Kreme. I own a small stock terrorist t R SSF, which is benefiting from the New Jersey exposure, is managed by the best executive in the business, Jason Wilde. And in terms of unfavorable sectors, I'd avoid all companies naturally. They are heavily indebted and have large debt maturities coming up. And if you look at companies like Carnival Cruise Lines and Carvana, they come

to mind, of course. And then there is f t X. I want to go, Doug, what do you? What do you? You know? This is removed from Doug cast folks, but Doug cast on you and I have seen this a million times before. And basically, to come on of this is whatever the bigcoin chat chat chat is, you can make eight percent with us, or whatever the bigcoin chat chat chat is, you can make ten percent. This is like the annuities Doug in our ut. I mean, we have we seen this before and we should learn a

lesson from all this. Pol Um. By the way, I'm looking forward to ft X, the movie starring Jonah Hill as Sam Banquin. Fraud. But I've long been an outspoken crypto bail bear, calling it a backslapping millennium fraud clear many times with you in barrens and elsewhere. I like what Charlie Munger said. He described bigcoin as stupid and evil, and I think it's an epic failure that has plumbed

the depths of human investing. File Ali. It was a monumental failure, failure accountability, transparency, filled with a numerous supporters who possessed clear but often unexposed conflicts of interest and driven by raudulent actions barring customer funds, creating FTX coins, using them, showing them as reserves among the nonsensical and okay,

stupid and the other thing. The final thing is that we should always remind us elves that we, as Benjamin Disraeli, the Exchequer of England said, what we've learned from history is that we haven't learned from history. And these things endron ft X world Coom made off. They always occur in the lot of stages of a bull market. Okay, we gotta leave it there. Doug Cass, thank you so much. Great to talk to you about Justin Verlander, his MVP.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten ami Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance and astment and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg.