Surveillance: Valuation with Mueller-Glissmann (Podcast)

I think, Um, you definitely are dealing with a significant evaluation. We set here, There's no doubt about it, and to some extent that that was in the making. You remember we spoke about it a few months ago, Um, and we wrote about it in all balanced air research. Unfortunately, coming out of COVID, you had this constellation of both

bonds and equities being incredibly expensive. It and now you're entering into a very challenging growth inflation mix where I think inflation is sticky, growth is decelerating, and I think the market is now de rating those valuations. And as you were saying, in particular in the markets where I guess the uncertainty on the growth and all the earnings is the highest or long duration tech more recently, UM and before that sickly consverse defenses. I think they've also

been derated materially. How far along in this de rate in Christian are we always tough to say, because if you look at valuations compared to the average since the nineties, where we're moving below that average now, but we know we're not in the nineties anymore. I think we're dealing with much higher inflation, much higher inflation volatility, a very different uncertainty on monetary policy, and even the growth picture I think has certain uncertainties which are maybe more tactical

in nature with Russia, Ukraine and China. But I think there's also some structural questions with us to what's the next growth engine. So you could argue that the valuation

d rating could continue. But what I would say though, is, and I think John mentioned that earlier, I think we start to see the peak a bit in the bomb yields, and we we we also have seen tentative signs of the peak and inflation, and we might shift from a high end rising inflation regime to something where inflation maybe is starting to decline, so that could start to to

stabilize things a bit. Hopefully we didn't disrupt anything too much and anyone's calling from the compliance department to say please think he cleared it perfectly, see the bumble, and he said it's evaluation re rent ratings. That's that's how you do this diplomatically, all right, so that we didn't necessarily get the DJ in charge to call and get complain.

I am wondering what the opportunities are that might be emerging if the D rating has been uneven or perhaps have he handed Do you see any opportunities or do you think that at this point hiding out in treasuries, in duration, in the dollar seems to be a better bet and just go at the flow, listen. I think near term we might easily be stuck a bit longer in a in a fat and flat range. As as we've been saying, the range is getting fatter and flatter,

if you know what I mean. Sort of volatility definitely has been a bit larger. Positioning and sentiment is getting more bearish as we speak, and that creates a symmetry that creates opportunities. But you still need to find momentum. Like a good trade, a good investment thesis is always built on gooder symmetry, kind of more upside and downside and and and good momentum. And I think right now you have to be very selective in picking those battles.

I think we've been very focused on real assets UM, and I think opportunities related to that UM. I think clearly commodities are pretty high up in that range, and commodity related assets. Infrastructure is a very interesting real asset because it doesn't do only well when inflation is high. It also does well when inflation is high and falling.

But I think clearly what we need to engage with in the next six to twelve months as we kind of look a bit forward, is to really add risk UM and eventually at cyclical risk, because that's where the market is getting the most bearish. So you can think about at some point a capic cycle driving selective opportunities. You can think about kind of even places that are linked to the consumer discretionary spending, which are clearly a

lot under pressure. Eventually they would prevent provide good asymmetries. Well, Christian, as you say these things, and as John Lisa and I have been talking about the brutal action we have seen in the market. Someone writing into me on Twitter that the three of you make me want to crawl up in a ball, crawl up into a ball and cry this morning. And I'm sure there are a lot

of people out there who are feeling that way. For those people who just want to pull their money out of the market and go into cash, what would you advise them about how much cash you want to hold now to redeploy when those opportunities you just were talking about present themselves. Yeah, I mean, this is a very tough thing to generalize because it depends on each a visual investor, the circumstances, you know it, like the risk

tolerance and and and these type of things. But I think we've been overweight cash since the beginning of the year, and and I think I'm not saying that there's not opportunities emerging for medium term investors, but I do feel

a decent cash allocation still makes sense. I think to your point, Um, I think bonds are starting to buffer a bit, so you could argue that if you're really worried about a recession, um kind of starting to introduce duration risk via bonds back in the portfolio might make sense. But what we've been saying is that duration to some extent is not a buffer right now. It's a risk. So it really depends on on what you own right now. If you own long duration assets, I think adding duration

back in the portfolio probably doesn't make much sense. So I think a decent cash allocation makes sense. Real assets UM kind of assets that that can protect you from the basement. If your dollar investment a Dollar investor, that's been difficult because the dollar has been the key safe asset. But if you are a non US investor, UM, clearly the dollar still has that characteristic that currently it's protecting UM kind of purchasing power as the fetus fighting inflation.

Christian brilliant work has always made Thanks for being on with this, Christian Miliklasman there of government sex. Gabrielle Santos Get, a global market strategist of jpmwork in Assets Strategy Management, is joining us now. Gabriella, what will give you the conviction to go in there and say this is it,

this is the washout? We can start to buy at least I think the issues we have three things happening at the same time, there's this growth conundrum with investors trying to figure out which is the most likely path from here. Is it a soft landing, is it a recession, is its stagflation. But you add on to that a correction of the excesses that we've built up over the last four years and amplified by a third factor, which was very low liquidity in both equities and fixed income markets.

So I think at the moment we've seen a big correction and valuations. We've seen nearly a twenty percent contraction in the multiple with the SMP five now trading at average valuations, But you still have very low conviction from investors to really truly believe this is um the end because you still have all of these uncertainties. So what do we need to see? I think you specially need

a bigger conviction on that growth scenario front. So you do need to see peak uh in housing costs, You need to see peak sanctions towards Russia to feel more comfortable about commodity prices, and you need to see peak lockdowns in China to feel more comfortable about the growth outlook there. Gabriella, you talked about liquidity concerns the fact that there is such little liquidity. You talked about the froth in markets that's getting beaten out by the readjustment

in valuations. Are you starting to worry about financial market conditions, about the functioning of the basic nuts and bolts of how things trade and sell. So, in terms of financial conditions, we have definitely seen a tightening in those ultra loose conditions that we had at the beginning of the year. You now have the tightest financial conditions that we had since twenty ten, but still uh pretty loose and and just approaching neutral levels. So we're not quite concerned about

tight financial conditions quite yet. In terms of the actual functioning of the markets, I think at the moment um that is not a reason for concern or a need for the Federal Reserve or other regulators to step in. It's just something that amplifies any of the moves that we see driven by the macro stories, and something that

causes more risk aversion and hesitancy to step in from investors. Well, in your base case, is still being able to execute that soft landing on that very very narrow landing strip that John and Lisa we're just talking about with each day that passes, how much risk grows around that idea. So I think you invest based your base case, which for us is a soft landing, but you diversify the other routes just in case the recession and stagflation scenarios.

So in terms of the investing based on the soft landing, we would still advocate for having a small overweight to stocks, a small underweight to duration, a balance between growth and value, but you want to still be diversifying the other scenarios. So to diversify the recession scenario, it's a small underway to duration versus a big one at the beginning of the year. It's overlaying a quality factor on top of

any of the stocks that we're thinking about investing. And in terms of diversifying the stagflation scenario, it means bringing the prime candidate for a stagflation Europe downboard of a neutral. It's focusing on commodity exporting regions like Canada, and it's focusing on diversifiers like real assets that do well in inflation.

Is the concern. Well, while we're talking about regional diversification, you mentioned Europe in Canada there, let's talk about China, which you mentioned at the beginning, Investors kind of need to see something changed with co A zero policy. But it's not just that. You also have a serious crisis in the property sector. Soon Act defaulted today because it didn't make its payment on a dollar bond coupon after

that grace period expired. How are you thinking about China right now and where you would find an entry point in that market in particular. So I think emerging markets in China are also dealing with this trifecta issues that we mentioned. In China, you had a correction of the accesses that already happened last year. That was a market that February was one standard deviation expensive. Now it's nearly

one standard deviation cheap. You also have a growth scare happening at the same time, driven by some of those structural slowdowns in the economy, namely property and low and manufacturing, as well as the pandemic. So I think for investors, the correction of the valuation accesses is already there in China. Now you need to get a bit more comfortable on the growth picture. And for that really I'm looking for

three things. The first is a redefinition of success when it comes to COVID zero, So it doesn't mean abandoning the policy, which was very tough to do. It's just redefining success, lowering the threshold for reopening. We also want to see that the policy put is still in place in China, so we want to see a little bit more monetary stimulus, maybe a cut in the loan prime

rate this month. And lastly, we want to just see silence and regulations for investors talking to get a bit more comfortable that we're past the wars and there's an important innovation meeting next week and it would be just welcome news to not see anything new come out of that. Gril A. Santos, if you Morgan Asset Management, thank you so much. You want for Shooter, chief US economist of Missooi America, Steve, is that light at the end of the knock tunnel, Well, there is light at the end

of the tunnel. Unfortunately, I think we're in the final stage of what is going to be a significant bear market, especially in equities, as we've started to disengage stocks and

bond yesterday and it looks like again this morning. I think that's recognition of the fact that what's taking place in terms of the equity market now is a recialization or a recognition of the fact that the Federal Reserve is not going to be executing the Greenspan put any time, and as a result of not doing that, the equity market has to be in taking down earnings expectations. So far, the decline and equities has been concentrated in the multiple.

As long term interest rates go up, the multiple comes down, stock in disease come down. Now we're at the phase I believe we're starting to see bonds go down and equities still go down. At the same time bonds go down and yield and equities go down in price. I think that's telling us that we're starting to get to the point where people need to start to downgrade their earnings numbers, and that's the final shoe that needed to

fall on the equity market. We still could get down to that thirty five hundred UM on the SMP five hundred, and we could still wind up with slightly wider spreads. But if this train continues with the two markets disengage hi E bond yields can go down while equity prices go down. We've really reached the top in the the yield on the tenure note, maybe three thirty would have been the absolute top three oh five eyes where we hit. I believe at the top on the last couple of weeks.

I think we could very well be at the point where we have the top in the interest rate environment. Yes, okay, so there's a lot to unpack there. I want to just start with what you first started on the idea of where at the final stages of a significant bear market. I'm curious what kind of recession you see getting priced into markets and frankly as the most plausible in the next twelve twenty four months. Yeah, you've asked a great

question there, Lisa. I mean, I think when you when you look at what's taking place in the economy, I find a hard landing, which is a growth recession. I I think the economy is gonna be running well below trend. I can't discount or ignore the fact that we can have another quarter of negative GDP in here, unlikely to be back to back negative quarters of g d P. But we're gonna have an economy running in that one percent or slightly lower growth environment over the next four quarters.

The reason why we don't get a classical recession is there's no major inventory overhang, there's no overbuilding in any major hard asset category. There are no insignificant financial dislocations that we know about um and therefore I think in that environment, the hard landing is a more realistic scenario

than the outright recession. But an economy running at you know, sub one percent means Q four of a Q four growth for this year is about zero point four percent in contrast to five last year, and that takes down should take down operating earnings to about five percent growth as opposed to ten to eleven percent growth as has been recently discounted by the marketplace. Steve, we don't get the sense that the Federal Reserve is particularly concerned at

this point about growth. There laser focused on inflation. Where do you think inflation will be able to get down to by the end of this year? And where is that going to leave the Fed? Well, again, when you when you think about what's happening to base rate effects, you're gonna come off. So I think we're gonna lose

about three percent there. It's everything else beyond the three percent decline in the year over year numbers from the peak that are gonna matter for the FED UM and I think, you know, I think in the reality of the situation is we're gonna come down more quickly. I think we can lose about half of the gains that

we've seen in the operating numbers year over years. So I believe somewhere between July and let's say September, we'll see sort of a pivot by the Federal Reserve away from aggressively hiking rates to developing a more shallow rate hikes scenario that will probably continue over the balance of the expansion. What do you expect us to see the actual tightening matter to the economy start filtering out to whether it's the slowdown and housing the people are expecting

our companies borrowing less money. Well, I think you're already seeing it, to be honest with you. I mean, you look at the headlines of the conversation by Meta, You look at what's happened to Uber, you look at what's happened to Lift. You look at the conversation from Amazon

that HAPs they may have over built issues. You look at the inventory of some of the retailers that we see in inventory is accumulating, and then you look within the you know, the financial component, and you look at the people who lend to households in the middle income to lower income areas, and they're starting to see already that the performance on the loan book is deteriorating. So I think you're beginning to see it already at the micro level. When do we get it in the macro statistics.

I think that just takes about another month or so before we'll starts. Steve, Thanks for writing that down, buddy. As So, why Steve a shooter that America. Let's talk to a member of the Republican Party, Congressman French Hill, Republican from Arkansas. Congressman, let's stop that. The president says, you have a plan. Mrcono said, it's not the plan. What is the plan? Hey, Jonathan Leasa, it's great to be with you. You're right, Lisa, there's not a silver

bullet here. This is the result of ten years more plus of suppressed interest rates that have led to increased asset values, and then by the Biden administration failed policies.

They doubled down on spending and increasing demand by adding four treeon dollars to spending last year passed through the Congress on top of the four and a half tree, and that we already uh spend every year to run the government, and uh the Federal Reserve was too lax and too late in beginning to shrink its balance sheet and raise rates. That's coupled with the supply chain issues

that we have. And here again, the Biden administration has done nothing to unleash American energy or really ease the supply chain constraints on hiring workers, getting truck drivers back to work, easing the logistics burden. So the Republican plan is, first, don't keep spending money like drunken sailors to encouraged the Fed to do the work that it should do. And three, let's unleash the supply side and break down these supply

chain barriers. Congressman, the Republican plan sounds a lot like the Biden plan from what you're saying, because they're not talking about spending more, they're actually talking about reducing the deficit. They are talking about investing in the supply chain, and they have talked about releasing oil and gas and trying to figure out ways to bring down costs. What's the distinguishing feature about what you're saying, other than just pointing

at different places for the blame game. Right, Well, thanksfully, so. I mean the look the Biden administration policies are the ones who have created this demand slide surge on top of low interest rates. It's the four trillion dollars that he's added in spending that was warned against by Larry Summers, Jason Furman, Steve Rattner, strong Democratic economists, saying it would lead to too high banned in the face of supply

and strength on energy. It's all talk. He's doing nothing to unleash American energy and make it easier for companies to get the permitting, build the pipelines, get the permits for new l en G export facilities, and get our production back up to over thirteen million barrels a day. Congressman, if we could focus on the monetary policy aspect of what you mentioned, having the FED do its job. In theory, if the Fed does tighten aggressively, it could lead to

a higher unemployment rate. It could lead to a slowdown in growth, if not an outright recession, which is something the market in particular is concerned about. Would you be happy to see those things if it got inflation under control. Well, inflation is a thief. Inflation steals for hard working families. It makes it very hard, and also it hurts our

seniors who are mostly on fixed income. This is a result of bad fiscal policies by the Biden administration and keeping interest rates too low for too long at the FED. So this is the anguish of central banking faced by Chairman Pale and his colleagues. They have a tough policy choice of tightening and potentially reducing a recession, or uh, not tightening as much and perhaps leading to stagflation or

market volatility. It's a tough position to be in. But we should begin to shrink the balance sheet and lower, i mean raise rates, and the Fed should try to do the best it can to achieve a soft landing, which I know as Chairman Pal's ultimate objective. A Congressman, two points you've made in the last four or five minutes, I'll put some emphasis on them. That this administration made some policy mistakes with fiscal policy, and this feeder reserve

waited too long. Chairman Poal hasn't been confirmed by the Senate for another term yet, do you think he deserves a second term. I do, Jonathan. Let me tell you why. J Powe has the temperament, the knowledge, and the leadership skills to navigate the FED through this process. And because he was there and I thought did an outstanding job during the pandemics height in March of he knows that the FED has the tools to do this. I want him to own this issue and help guide the FED

through this next phase that's so challenging. What do you think in this term ultramaca that the president's using at the moment, Congressman, what do you make of that? What I make of Joe Biden is that he campaigned on bringing the country together and he's done nothing but drug vibe the country even more. In the first year and a half of his presidency. He's constantly uh saying the dog ate his homework on the exit and Afghanistan inflation crisis at the southwest border, and to try to build

relationships with Republicans, he calls them names. So I don't think Joe Biden has been very effective in managing the US government or building a coalition to get things done on a bipartisan basis, and complishmen great to get your perspective of things as awaits to catch up brilliant as owais. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join

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