Surveillance: We're De-Risking, Topcuoglu Says

with us now. Morgan Stanley Investment Management, Head of Global fixed Income Brown, we have come a long day, a long year, a long way, yields down and now we've had a little bit of a bounce off around one forty in the last couple of months. Back up to what are your talent clients now? Not to expect rates to go up that much, but they're still too low. It's amazing. I think you're right that ten year notes went from three to one forty. Unloved the whole time.

I think I was with you when when they were loved to think you and uh, and we discussed that was too low. Listen to five seems like a good ceiling for now. Central banks don't want to ease, but rates do seem low. You're confident we've come out of this growth scale. No, we wish we were and there's a hundred reasons to be optimistic, but you really haven't seen a lot of data that shows it is. Um Listen, the markets are expecting p M I is to go up,

the markets are expecting employment to be okay. The danger is that that it doesn't come through. At this point, our bonds linked to equities now, yes, it looks like it us. I mean if you told me, what if you ask me what's the most dangerous thing for equities? I would think it could be meaningfully higher rates. I think it would. It would ruin the narrative that you have to find yield, you have to move out the curve that you have to We've been looking for meaningfully

higher rates for what fifteen years at least? I mean, do do you? Can you guys? You guys have made some really important calls. Ellen sentor Mike Wilson and the rest. Can you make a call that we range out and break through to higher yields? I don't hear that. No, it's hard to make that call. You don't see inflation, you don't see growth breaking out. It would take some

other policy movement I think to break out. I'm watching European bond markets because we're focused on the US market, But frankly, uh, European bonds have actually had a much bigger sell off, and I want to get a sense of this being capitulation. The negative yields a haven't worked, and that be the ECB has no more ammunition. Are you more concerned about the European debt market right now than the US? No? Not not really. I think to say negative fields haven't worked is is you have to

break it down a little bit more granularly. Obviously, if you're borrowing at higher rates, like some of the periphery was lower rates and negative rates been very important. Do you think Italy would issue a sixty basis point bond today? They should they? I mean should they be able to? It's a it's a great question, but that they are, it's great for them, it's great for for risk assets. So listen, I think European heels are going to stay low. I don't think they're going to give up on the

negative yield experiment. Um and and and yes there's been a sell off, but they're still pretty negative. So I don't think a forty or fifty base point moving European yield from negative seventy. Negative thirty or to zero is what's going to break the card. With the policy right at negative fifty basis points, it's hard to construct an argument the front end of the yield curve in Europe is going to sell off massively with the policy rate

where it is. Brian totally totally agreed, And as I said, I wish I could give you a magical high interest rate call, but it's not. It's that doesn't seem like it's in the cards. Markets are telling you a story about the future. The fundamentals continue a very different story in German Germany right now. Arguably we're in a recession in Germany, yet the decks in is up around about and button yields have had a massive move. What do you make of the spread between sentiment and fundamentals at

the moment. The one thing I'll say about equity markets is that there was a big swoon between October November of last year and today. So I think the SMP from the October highs is only up about six percent, depends how you measure it. So, yes, equities are done well. I think the I think go back to what Tom said, which is that I think that this promise of lower yields is driving people in equity markets. And even though people don't feel great about the world, it's an unloved

equity market. Uh, they're still slowly trickling in and and levels keep going higher. Extraordinary the market action yesterday, just the sector by sector diffusion and the dynamics of it. John, I can honestly say I've never seen all time high on the natstack, on a Dow and on the SMP five hundred as well. The outperformance yesterday coming from energy industrials, financials, the value sectors that many people have been waiting for this rotation into and waiting for tracery yields to move

with it. Your call now going into year end? What's the conviction call now for you? Brian? The conviction call for us is that that some of these unloved sectors are going to find some love. So you can see them in fix income too. Right, if you look at what's underperformed emerging markets, and and and the energy sectors in high yield, a few others, So we'd buy triple cities in high guild. Well it's not that simple, right, A bunch of those triple cs are actually really bad.

So you can't just go and buy the triple C index, but you can certainly find names that in there that that are Okay, It's not easy, I'll be honest. Fixed income valuations are are are are not obviously wide. For the benefit of our listeners, I asked that question smiling quite a lot because I know how complex that is in that space. Right now, By a second, I want to just give a little statistic. Yesterday the one day move in triple C rated bond yields, they went from

eleven point two percent to ten point nine percent. Bam. It was just a massive rally in the triple C space, and it was really on the heels in particular of the energy rally that we saw. But really interesting to see people going back into that. There are so few things that you can pick fixed income. They have that type of coupone. So it's funny, well, the well, the fundamentals and the and the technicals separated. In other words, will you buy what's terrible just to get the yield

for a little while. It's definitely a danger right here, yea Aprom, We appreciate your time this morning, thanks for running back into the studio, But I'm staying the Stanley Investment Management head of Global fixed Income, Phoenix Klein, now with us, it was sock Jen as we look at emerging market, Phoenix, can you link a better China directly into a better e M or is it a discreete

matter right now? I think the Chinese story has become a huge part of the e M overall story, and I think that's one of the reasons why you know, our our views and e M is grossly intricately tied to what happens to China over the course of the next month. Is it a broader dollar coal head, Phoenix?

Is it a broader dollar coal here? Yes, So so that in terms of the dollar call, you know, we're expecting for dollar c n y to go towards seven point five by the end of the third quarter and years so, you know, within twelve months UM, and that's going to likely to lead to further EM weakness UM

across the M complex. So uh, So far, we've gotten a number of pm I data industrial production data out of merging markets, particularly in Eastern Europe, and it does appear that there is at least some bottoming out or getting a whole host of p M I s this week as well from other developing markets. What are you expecting? How important are those figures? Those figures are quite essential in reflecting the state of the economies, especially in Eastern

European markets. And as we've seen in the numbers released yesterday from Poland, there is spill over from the weakness coming out of the German manufacturing complex. And that's still I think a long term story ahead for this economy's um and and that's likely to weigh on the economic growth picture and and still hold back the overall region. So I think that's still going to impact currencies in particular.

So how tied is a slowdown in industrial production to what we're seeing in China, I mean just sort of connecting it back to the U N Yeah, So I think that this is part of a much bigger global trade story, and China's slowdown has certainly impacted other regions,

and Germany's linked into that intricately. Um And I think that's that's kind of the global slowdown that's being reflected across the manufacturing in the season in particular, and unless so in the services and season, do you partition e M bigger more sophisticated big cap companies away from other e M stocks or is it all one basket? Now, there's there's a huge amount of videos incre seas and diversity across the e M world, So I think there's

there's lots of ways to partition its um. And certainly you know some of the countries as well as well as bill functioned by blocks, still functions by regions. And then there are the videos and that we hear from time to time. We'll give us an idiosync at a sock gen view. What what where is that opportunity right now geographically on a nation's basis? Where where would you suggest the opportunity is for someone that believes these ill winds will clear and that we will have a better market.

But that goes against the core sucks and dow which is quite bearish in nature in fact, and because in terms of new US growth for next year, we're expecting for US to print only zero point seven present GDP versus consensus at one point seven. So um, yeah, I think what you are kind of the standouts in terms of the market, in terms of how bearished we think the economy will perform um And in that context, you know our our views are along the lines of still

being very bullish bond various currencies. Yeah, very good. We gotta get you back on that Phoenix. Kalin will be appearing with us every three months here on a zero point seven g d picle. I mean, John, that's extraordinary. It is famous. Kind that is I'm gonna call that a hundred and twenty basis points South, director of a

M strategy gun into. One of the great things you can do is drive across the fabric of the country and outside Des Moines there's a sign five and eighty miles Denver, and that's where Eastern coast people like me go, oh, it's a big country out there. Joseph Fricketts lived in He's the second most famous person out of Nebraska City, Nebraska. Greg Whorton, football player, is the most famous. Joe Ricketts joins us. The book is the harder you work, luckier

you getting. Yes, we will talk a merry trade, and yes we will talk cubs. At some point. What was Nebraska City like in World War Two? And I bring that up because we have a president nostalgic for the smallness of America of the forties, of these sixties, what was it. I was born in forty one, so I was a baby during the war. I remember though, the anxiety that people had. I felt it as a baby.

But coming out of the war, which is when I started to become a child and grew up through the late fifties, Nebraska City was the perfect place to grow up. I had the freedom to room, to ride my bicycle in the morning, and the summertime, my wife or my mother would give me a zack lunch and I didn't come back. And you capture that in your book and the fabulous photographs as well. We have a president who you support, President Trump, who has a nostalgia for what was.

How do we take our belief in what was and drag it forward into the modern America. I I don't know how to answer that question correctly, accept to say that if we don't keep the free enterprise system, our society is going to change dramatically for the worlds. So that one of the reasons why I wrote the book was to encourage young people, if they have an entrepreneurial band, to start a business. And suggested John, we don't have

a vote here for Senator Warren. Let's let's talk about it carry on, please do we No, no, no, I'm stunned at the conversation that's that's in the arena today with this presidential election coming up. Our greatness comes from pre enterprise. Every society that has tried socialism has failed, and there is poverty and despair that comes out of socialism. Senator Warren says, she's a capitalist. She just wants markets to work more efficiently. Do you believe that? No, not

at all, not when you listen. What is it that tells you that she's not what she says she is Because all the benefits that she says she as the leader of the government is going to provide to society is going to read ware that she changed society dramatically and not in favor of for enterprise. She says, all she needs to do to get Medicare for rule is tax the billionaires. The billionaires are the only people that

are going to be paid more. And last count I think Forbes had six hundred and seven billionaires in the United States of America's still quite a rare think, isn't it joke to be that it's a very that much money, very rare thing. And these are the people that make society work. If you'll look at that list with the top four billionaires, they're all people that are in business

that are providing jobs and providing benist society. Did you ever think did you ever think they're becoming a billionaire would be seen as a sign not of success but of market failure. Never never dreamed of it. No, not at all, Joe. We got to bring in and introduce you. Lisa Abrahamo. It's her great claim to fame is at the University of Chicago. She begged Richard Taylor to go to the Cubs game with him, but it never worked out. Dude, when you said when you said your claim to frame,

I got this wave of nervousness come over me. I had no no clue where you're going with that. But the number of the number of Nobel laureates that darkened the door of really field is just something to talk about. Yeah, And I could never get them to go with it with me to a Cubs game. But I will ask you, Um, you talk about free enterprise, and that brings me to

the business of TD merrit Trade, which you founded. Uh. Increasingly it's moving toward free trading of assets, and I'm wondering can you connect that the idea of uh, sort of the availability and the ease of which people can buy and sell securities without paying anything. Do you think that that is a good thing. I'm not sure. I think it has to play out. I I am hesitant

to say it's a good thing. First of all, is the culmination of what happened in so we've had all of this time for the discount brokerage industry free evolved to come to this point. But the thing that we need to be careful with f from my point of view, is we don't want to equate I in a stock with betting on a football game. That and if that kind of goes there, it's going to turn out to be a bad thing. Do you think that that's sort of implication of having no fees on these transactions. I

don't know. We have to see it play out. That's my hesitation. That's what I don't know. That's what we're gonna have to see. We don't want the wrong type of volume in the business. I would point out, the harder you work, the lucky to get. Joe Rickerson back of the book says it all he's got. George will uh, channeling branch Rickey, X of the Cardinals, a guy named Diamond in the banking business, and one of your arch competitors Charles Schwab as well. You invent a t DA merritrade.

I remember the wonder of it off of Mayday in all that, but has it become a barbell business where it's adults holding equities forever essentially versus the micro hyper trading? Does that industry that you invent do they now live and die on that hyper trading? Uh, that hyper trading segment. A lot of them do, but a lot of them also don't. We have evolved out of Merritorde just from providing trades to providing a lot of other services that

the customer can pay for, which include financial planning. So there's an evolution that has come about it. So there's spectrum of traders that are in the customer base of our merritrade, but there's also the buy and hold people your silence. I mean, look, I think that it's an interesting point, this idea of uh, you know, whether removing the difficulty of entrance, the barriers to entry in the market will encourage imprudent behavior and will encourage people to

trade more and not necessarily be deep dive investors. But in some way, don't index funds already do that. They do. Yes, they trade often, and they provide a lot of volume to the business, which is good. It's help the market grow in depth. Uh So, it's not so much that they're going to harm the market, is that they may not help themselves. I want to ask you about the title of your book, the Harder you Work, the Lucky You Get, which is an ethos of Pete Peterson's Nebraska.

You're in Nebraska as well, and it speaks to a massive body of disaffected Republicans who have had it with this president. What do you say, and your family is raised funds for President Trump, what do you say to the group of the Grand Old Party out there? It doesn't like this guy's style. I really don't feel like I have to talk to them, but I can tell you this. All you have to do is look at the figures. Look at the employment figures, look at the

gross national product, look at our factories. I thinks are reviving in a fresh way in the United States. We gotta come on, Joe, we gotta we gotta run rate of one point nine g d p of for lucky on a trade ward that this guy invented. I mean, what does that trade war doing to a farmer? Forget about that. My distance is wrong, John, I think New Jersey. What is this due to a farmer four hundred and seventy miles west of Omaha on the way to cose It?

What's it due to him? I think that in the short term is you I know what I read in the papers. It's it's caused them some harm, but he's given them some help and now he's got one of the biggest trade arrangements for soybeans that the United States have ever had with China. I don't you worry about that though, that that help came from the government. The farm is increasingly depending on handouts. I prefer society without handouts, but sometimes there needs to be some help for a society.

I know that my grandfather had one of the most successful farms near Manly, Nebraska, and he went broken during the depression and he moved to a house in Nebraska City to work in the packing house, into a house with dirt floors. I mean, there was no social programs, So there needs to be some where you where you draw that line is the big question. Can do a surveillance correction, Joe, in honor of you in Nebraska? I mentioned four and seventy miles west of Omah, that would

be Sydney, Nebraska out I eighty. I was wrong Cosad's in closer to Omah than I recall, okay years ago. That's our surveillance correction for the Dayphy. The harder you work, the luckier you get get you know him from merri Tree. The family's got a night and acquaintance with Anthony Rizzo in the Chicago Cubs as well, and we thank him for coming in today. Uh truly. And I think John,

in the history it's forgotten. They revolutionized the business. John, I've really been looking forward to this, this serious bontom dynamics to discuss, really really happy to site it. Joining Lisa Tom of myself is Lally too of j O H. C Mly Good morning to you, Good morning, big day yesterday for credit spreads, some real tightening. What do you make of the moves with staying at the moment? Complacency is a beautiful thing, isn't it? Is that what you

think it is? Complacency at the moment? Well, look e t f are getting inflows. And when e t f s have gone inflows, uh, they're just buy. That's just the rule of the game. And if you actually look at the active manager cash holdings, it's been steadily rising. What I mean my complacency is everybody's hiding out in the same trade. Everybody's long double bees. That's just the

name of the game. When is it not complacency? Uh, if you're getting returned so far, you're to date on higail bonds of twelve point one percent, I mean at a certain point, they're right, it's right. But when you cash in and just say, you know what, going forward, because you got to look forward, not backwards. So going forward, what's the best you can make out of double bees today,

which you'll three point eight percent? I think it's interesting that you're delineating double bees, which have a much lower yield and have had a much bigger rally versus triple cs versus single bees. Is now the time to either take big risk or go home, go into the triple cs or not by high yield. I'm going home? Are you coming home? Are you d risking? At the moment, we we have been um so remember we run a

comingal portfolio between equities and credit. When you look at the restroared ratio, to me, equities seem a lot more interesting if you think the growth is going to recover than than credit from here, and if you think we're gonna sell off. Look, I think people forget credit is a risk asset class. It is not a hedge against equities. If you want to hedge, you go by treasuries, you

don't go by credit. Well, in your research note, you've got something pro which I want you to explain to the public, which is how much of bonds are trading the first call. This is a really important idea of folks. This goes way back to the Bloomberg y a screen where you have language like yield the worst, yield, the first call, et cetera. What is yield the first call? Me? I mean, I know, yield the last call, you know,

but what is yield the first call? So, unlike investment grade, high yield bonds are always callable, and they're typically callable three to four years first year after the issuance, and the way the call is calculated is a function of the yields and the spreads. So if it's cheaper for the company to refinance. Today where the things are trading, it is likely that the call then will come forward.

And when you look at the high yield market today between the double bees and the and even the single bees, majority of the market close to somewhere like I would say three quarters of the market is trading into the first call and in some cases trading at above prices the first call. This is so important, folks, because another way to say this is yield to refinance or yield to rollover. It's just assume the liquidity is out there, is theirsty out there to do the refive three to

four years out. Well, today is the belief of it is? I mean today it's there, right, liquidity, You know, I joke about it and I say, like, liquidity is kind of like having a line as a pet. Right. It's really nice when they're calm, but once no whilecomes and just molds you. Um, So today we're in that calm period. But when I hear things like investment grade managers are looking at triple A CLO spreads to add a little

bit on the margin. Insurance company is going to look at buying stubs of bonds that haven't been tenders, so they can earn extra twenty BIPs. But but here's the problem with that. And I'm sympathized with that view as as someone who enjoys the sensational kinds of headlines. But the reality has people have been doing this for a while and they've been winning. So the question is when is this imprudent? What are you looking for that indicates

this can't keep going? Sure, and we've been winning as well, and there's nothing wrong with winning. You just have to know when it is time to pack your bags and call it a day. Um, and I think we're slowly getting to that point. I'm just on a risk adjusted basis. Look, if I have an extra dollar to to spend, I'm not telling you don't put it anywhere in the markets.

I'm just saying I rather put it in the equities and the cyclicals, where I think I can make almost two extra money and by the way, earn a dividend yield that probably two x what you can earn on the treasury then basically hiding out in the double b. So it's just a function of how you want to craft your portfolio. And now you don't like me talking about your performance too much. But for anyone that's interested, you can't go on the Bloombow terminal and take you look,

look yourself. It is a really really good year, Arlo. Let's talk about where else is crowded. You've mentioned the double bees part of high Yield. Where else is crowded at the moment that you think if people are in, they should be considering getting out, regardless of the performance at the moment. I mean broadly, I think the credit asset is I really struggle with making heads or titles out of it. And I know I wrote this like

long email tea. I was trying to justify myself. But look at the triple C's right, because I mean the math has to matter at some point in time, and this is the flow of averages. Everybody looks at the averages and they look at this high you'll spread that has been exceptionally well behaved. They say, you know what, four hundred spread. It doesn't look that bad. I can still earn it when you start digging into it. It

just tells you a different story. If you assume half of the triple sees default just half of the triple seeds, which is not outrageous because they tend to default. That's fift of the market at seven and a half percent. The fault rate, the average high you'll spread should be around six hundred. It's not the triple sees that I think are miss priced. It's the double bees and this defensive that everybody is hiding out in that is grossly mispriced.

I think the call point is really interesting because it's also indicating that people are buying bonds at prices that are higher than where the company can buy it back from them at right, So it's basically guaranteeing a loss if the company chooses to refinance. I'm just wondering you're saying, if triple cees see like half of them default, are you see any fundamental signs of deterioration? I mean the easiest one. So there's two things you can look at.

One is just look at the ratings, upgrades and down grades. You are now on a trend. You're seeing more down grades broadly speaking, than upgrades. The other part you see is it's you know, look at the volatility both in the loan and the high yield market. Right a company reports good earnings, maybe the bonds go up half a point to a point, you report bad numbers. I mean we've seen three, five, ten, in some cases twenty points of downside. It's insane, like bonds are not supposed to

be like that. Like at the moment. If we let you go right now, many of our listeners will think you're this uber bear who's sound in the alarm on global markets. That's not the case. Let's wrap things up with the opportunities in front of you. In the equity market. You've been doing wow this year. I imagine that's coming a lot also from your equity investments. What are you

doing at the moment in stocks, I mean equities. We we always look at it from a portfolio castilation and and think of it where where are we in credit and where are we in equities? In context? So we we like some of the cyclicals, we like some of the you know, European financials is something that we've looked at.

Um it's and and really Europe and Asia are the two areas where everybody has just thrown in the towel, and sometimes you can find quite interesting companies have been around for a long period of time that you know, it's already pricing in a pretty bearish scenario. That doesn't mean you can't go in a lower but people are already assuming pretty much the worst. What a negative interest rates? Due to your world you're removed from full faith and

credit Europe, but nevertheless there it is. Does that change the dynamics of the non full faith and credit market? I you know, simplistically, I don't think. I'm not a believer that negative rates work. It doesn't work anywhere else.

And I think if you are company, including Mr Solomon speaking to our Matthew Miller today in Berlin, you know, I think if the US were to go negative too, I mean you may perhaps can think of an example, but I can't think of an example where the entire world with negative of UM Today, I think it kind of works because US is not negative, it's positive. You can still do relative trades, and I think that's part

of the that's part of the challenge. You know, there's a lot of influence coming into the US because we're positive. You know, everybody is long US dollars, US exposure, US swaps. I mean, follow the money trail. It's actually pretty scary. Nice great to see you. M U sad fund manager in New York City, so smart. 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