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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. David Biancle joined us right now. Good morning, sir, It's good to have you here with DWS. It's like a Deutsche Bank wing right, Yes, Management, what are you gonna down thirty? What I see right now is a lot of window dressing. People are going, oops, I'm behind I better buy some things. Is that what's going on right now?
Yeah, there's definitely been anxiety of market and to try to figure out a way to keep up with this market without being overly concentrated, because how do you do that? Well, that's the challenge. The benchmarks have become concentrated, and you know, we've got to relentless momentum market. The thing is, the fundamentals are good in terms of earnings growth at those stocks,
those magnificent seven Grade eight. Maybe it's going to go from G eight to G ten, G twelve, But you know, so much of the rest of the market has had really sluggish earnings growth, particularly sluggish real I think you'll see the same thing in two Q results. You know, maybe three percent growth at the S and P four ninety two, but ten percent growth with the benefit of the grade eight.
Let's take up magnificent eight whatever they are, right, and so there's another four hundred eighty stocks left. Let's take them down to one hundred random stocks. How many of one hundred of the rest of the S and P have earnings growth, have free cash flow growth.
The majority do have scant earnings and free cash flow growth, not the healthy mid to upper single digit earnings growth you'd expect, particularly when you have had inflation and pricing power at companies as we have over the past couple of years. I'm not saying things are bad. I'm just saying earnings growth, particularly setting the grade eight a side, is not something that really justifies a twenty two to
twenty three PE multiple. Now, I do think that a twenty ish PE is sustainable as long as ten year yields stay closer to four rather than five, which is a risk, as long as the ten year tips yield stays under two, which it is right this moment. But I do think right now is a good time to de risk and diversify. And I say d risk because there's still a very good opportunity at one two three year points on the curve and taking a little bit
of credit risk, you'll make your five percent. And I'm doubtful that over the next two two and a half years there's anything more than five percent total return upside annualized at the S and P. And for the summer, okay, for the summer, I think we're about to turn our attention even more to the elections. We've got the debate next week, we've got the conventions coming up, obviously, the
elections in November. What we'll hear more about is that fiscal policy needs to be addressed after this election if it's not, and I think it'd be unwise for the FED to cut before the election, not knowing the outcome. This is an important event, and it's very important for fiscal conditions and thus ten year yields, and I don't think the FED should cut before that.
So should we?
So we're de risking in part because some of the political uncertainties exactly.
And those who think the Fed's going to cut this summer or even in September, I don't think so. Those who think that there's going to be this broadening of health to healthy, strong earnings growth beyond the magnificent seven, I don't think so.
Not yet.
Maybe next year, and these valuations, you go from twenty two and a half to twenty twenty times this year's earnings is forty nine hundred, okay, and so you can easily have a ten to fifteen percent decline.
All right, So do we park ourselves into your treasury at four point seven percent?
Do we not a bad idea? To not a bad idea to overweight that? We know we're always in equities, but the preference now is for the shorter end of the curve and a little bit of credit risk, and then not that we have our the ones we like and the ones we're concerned about. When it comes to magnificent seven, But we are trying to diversify away from the Magnificent seven because portfolios do benefit from diversification. You
never know what's going to happen. And we're adding to the others, and we're adding to foreign equities, but we're not adding to small caps. Or actually we've gotten more cautious than small caps for the summer.
With Europe blowing up. I thank yesterday Adrian Wooldridge was great on London and the United Kingdom and Leonard Laurento and France. What a half hour that was on these elections. Do you buy straw hats in winter and that means you buy europe blue chips?
Well, yes, I would stick with the larger cap blue chip companies in Europe. And while we do expect European earnings to get back to growth as soon as the second quarter and third quarter, and they've been in a profit recession for a long time, the thing about the European market is it's your typical or quintessential value investors market.
And so as long as you think things are going to be okay politically or geopolitically and even economically, and we think things are improving on the earnings front out of Europe as long as things are okay, and it's hard to crush the European economy. It's a resilient economy, albeit it doesn't grow strongly. As long as things are okay, the valuations provide provide upside, and we think Europe continues
to generate strong returns and it offers that diversification. We also like Japan, so i'd say EFA in general.
Japan again coming he is, he's very big again kind of how I mentioned to Tom. I mean, you know, we haven't talked about Japan for twenty five or thirty years, and now it's almost every day I hear someone in your position. So you're looking at Japan. What's really changed there?
Well, you've heard the government story. They finally got religion on, return on capital and corporate discipline. But they do have good businesses and finally the banks or anticipating a higher interest rate environment, even a little bit higher than here. That will take time. But they have a lot of good industrial companies machine tools and automation, and even components and materials that are important to semi conductors. The valuations
are very reasonable. These are good businesses. It's a diversified index. The yen is really really weak, and it makes Japanese products affordable. Also, it's under the US security umbrella, which means that's the beach hold for investors into Asia.
Right right, I mean just wing it back to Europe. Semens, which I haven't looked at in ages a moonshot off the pandemic folks. Semens of Munich three hundred and twenty three thousand employees. Basically, it's ginormous dividend growth, single digit. It's there, but I'm sorry, with a limited capex, they get some serious free cash flow. And everybody's like beyond gloomy about the German manufacturing model.
And the German economy has been sluggish, and there are probably concerns to be had about auto given the.
Semens is not all exactly so.
The thing about it is there are European companies that are very well positioned for the transition to electrification, like the one you said, and I can think of a few others I can talk about. I can, but the point is Europe is well positioned for electrification. I think that's known in many of these industrial companies in the US and do well. But look at utility companies that I think is an underappreciated play, not just on electric vehicles but on data center.
Paul, I haven't said this in ages the forward multiple and semens sixteen. Yeah, remember that it's been a while. We used to go, I don't know, it's twelve multiple. I think they can span out to sixteen. And now what are we looking at? Yeah?
But when I think a semens and I think, I think of the German economy, and I think of the export, and I think at the reliance upon Chinamens twelve percent of the revenue thanks to you to the pg EO function on the Bloomberg trimninal twelve percent of the revenue from China seamen gregious to me. I mean, I mean, I guess that's a little bit of a discount the multiple.
But it's amazing how that has become something that people toa concern with and discount the multiple over the China exposure of the foreign exposure used to be the other way around. But electrifications alive and well there are industrial companies US and Europe exposed to it. The other thing that's going on in Europe and maybe it comes. Let's watch the elections in the United States are carbon credits
and utility companies. Electricity prices are going to be going up a lot unless the government figures out a way to help subsidize this, and clarbon corts could help.
We had to run David Biancochitz, thank you so much. Bulletproof Engineering. Katie Kaminski joins Alpha Cineplex right now on Trench double and also, as Paul mentioned, operational research out of a school in the Charles River in Boston. Katie, we could go for three hours this morning, but just basically have we reversed to finally trend in place higher fixed income prices in lower.
In the process of pivoting, the signals have been switching more to long particularly in international fixed income.
But I'd say that you're still seeing a little bit of.
Residual signal short and fixed income for the US because of the recent moves not being enough relative to long term trends. So it's definitely feels like an inflection point this month.
The general rule I get thanks to zero It for great work on this every week is on a Friday, these sort of assess the bet it's out there. It seems to me that retail is betting America big cap, large cap Nvidia blah blah blah, and hedge funds are maybe not on that page, they're on a different page. What is the bet right now that you observe in the CTA community.
So right now, it's been interesting because this year, most of the year, it's been a hedged bet in the sense that you've seen long equity signals. That's been one of the best momentum plays this year till now. But you've also seen some changes in the commodity sector, so the copper trade, the positioning in gold, a lot of commodities has been long but has been dissipating, and then this month you've seen suddenly now energy is moving upwards again.
So there's this disjoint in the commodity sector. Fixed income has been short most.
Of the year except for now. Recently you're starting to see that pivot.
The US dollar again a tricky one has now been rallying again. We can talk about that, but in general, it does feel a little bit like a pivot or an inflection for current trends into what could be the trend going in the second half of the year.
So I mean, broadly speaking, Katie, the folks you talk to, Is it a risk on environment? Do why would be long stocks, bonds things like that? Or are people just too concerned here about where the global economy is going.
So this is a very good question because before June my answer would be yeah, it's pretty risk one with the exception of short fixed income positioning. But this month we have seen several synchronous sell off periods for some of the prevailing trends, and we've seen some consistent risk off days, meaning that people are running to bonds when things are looking bad. And I think this is an indication that they're actually starting to get concerned about some
of the weaker data, particularly on the economic side. And so to me, it feels like sentiment has shifted some in the markets and the signals are adjusting to that.
So in the fixing can market, Katie, do you want to just I don't know, sitting it to your treasury you can get close to five percent yield? Or do you want to take some credit risk on here? And if so where?
Oh, that's a good question.
I mean, I think a lot of in terms of the credit space is not something we are focused on. But what you have seen is that you know there is this trade off between locking in that higher yield if you do think that rates are going to come down. So I think a lot of investors are also considering that, like, could this be the moment if things do calm down? And so if you're seeing a significant enough spread in
a credit product, that may make sense. But of course there's always issue that if we do actually see a longer time to get lower rates, their substantial volatility around the bond positioning in general.
Right now, should we go double honor? Sure? Okay, ladies and gentlemen. For the first time ever on Bloomberg Surveillance, Brownian motion in drift function with Katie Kaminski. Katie, I look at bitdog and I can't find a legitimate time series. This is Hamilton, folks, out of University California, San Diego. It doesn't drift within a random sense like most time series. Can you chart? Can you get actual time series motion out of bitcoin? Well?
I mean I think so, because bitcoin just has way more volatility. So I think you just got to have a different input function to that drift process. And notoriously, it's difficult to estimate the mean of a Brownian motion.
It's easier to estimate the ball.
So I'd say that, you know, you can definitely be sure that you're going to have much higher volatility in those type of assets, right, not to mention the fact we don't have as much data that haven't been around exactly.
Is it maturing though? And on the Kaminsky Mit timeline, when does bitcoin start to drift like Microsoft or Sweeney algamated the metal company out in a Jersey.
Well, I think that's what you know.
Initially, people like to think that something is so different, and it's not. It's different from everything else. And I think that bitcoin has really shown as an asset. It's just a highly volatile asset, but it does have drift and it does behave in some sense less like a you know, risk off asset, less uncorrelated to stock markets than anything else. So people thought, oh, this is totally different.
It's an uncorrelated process. But it actually does have a lot of inputs to people's demand because who's buying it, people buy it, Therefore.
It's still connected to the general economy.
Was this too much for Friday?
Katie commits can go away with Alpha Simplex. There are Brownie in Motion and bit Dog. I love that I mean, we're gon frame that right right there, Katie commitsy just truly outstanding. This is a wonderful conversation now and we pause, and I'm going to do my annual lecture. It's summer. You have kids at home, they're in high school, they're bored. They're in college, they're bored. They're out of college, they're bored.
You start screaming Daniel Kurt's Falin, Daniel Kurtz Fhalin, and you throw a subscription to Foreign Affairs Magazine at them and say they don't get lunch money for the next Gen and Tonic until they read two articles joining us from foreign fairs. Always might read it the summer, Daniel Kurtz Phalen, Daniel, congratulations on the issue, and you brilliantly frame out Biden and Trump foreign policy with Ben Rhodes
In O'Brien of the Trump administration. Tell me the distance between those two articles.
Yeah, thanks Tom. First of all, for the new the new marketing pitch. I'll send it over to our business. See what they think.
I mean.
I think that there are a lot of fascinating things as you read through these two articles you have I think Robert O'Brien, who is the last national advisor in the Trump administration, laying out probably in more detail and more specificity than we've seen from anyone in the Trump camp,
what a second Trump term would do. And then Ben Rhodes, who was one of the most senior foreign policy advisors Obama, kind of laying out I think a slight difference from the Biden administration, but you know, broadly sympathetic to the immigration. And what's kind of fascinating about both of them is they both are kind of reacting to a sense of failures of American foreign policy and proceeding decades that they
go in slightly different directions. Brian, you know some of the hawkish impulses that you get from Trump at a very very high level, you know, in a kind of very abstract way in some sense, with a lot of specificity. So he talks about going back to testing nuclear weapons, something we haven't done actively in a long time, fold decoupling with China and really ramping up pressure there.
That's where I wanted to go. Daniel, your claim is still will Onto Marshall in our distance from China, and I'm going to say nineteen forty eight nothing's changed, right, these two candidates really want a distance from China, right.
That's exactly right. And just to flag one other thing in the issue. You know, Tom, we had talked in the past about and Escay. We ran by Matt Pottinger, who was the kind of chief Chinahan in the Trump administration, and Matt Gallagher, former Republican congressman who ran the China Subcommittee, laying out a really hardline policy, hardline strategy against China that included call for really weakening the Chinese Communist Party.
They it's regime change has become a dirty word because of its association with the Rock and American foreign policy, but they call for trying to change the nature of power in China. And there's an exchange between Pottinger and Gallagher on the one hand, with rush Doshi, who just left the Biden administration working on China policy. What's really
amazing is how much agreement there is. So they split on that question of weakening the regime, but there's a lot more agreement than disagreement, which I think reflects where we are on the China debate.
Daniel, if you're President Biden, you're obviously an election year. What are the to do list for President Biden here in an election year. From a geopolitical perspective, You've got China, You've got obviously the Middle East, and you've got Ukraine. What's the strategy here, do you think?
Yeah?
I mean it's it's it's not a moment where you envy people are kind of sitting in the in the US government trying to manage these three crises. You know, I think what they're trying to do on China, which you know, remains, as we've talked about in the past, the really the kind of framing the dominant issue for American foreign policy, even in with with other crises and hot wars going on. I think on China there's this desire to just keep it as calm as possible for
UH through November. So Chi Jimpang and Joe Biden met in San Francisco in California last last November, and it's not that they settled any of the really deep fissures and tensions in the relationship, but they did basically say, look, let's let's let's clumb this right now. We both have reasons for doing it. The Chinese economy, as you all know, extremely well is in terrible shape, so there's a mutual interest in not stirring the pot too much at this moment.
But it doesn't really solve any of the basic issues. So I think Biden would like to keep that at a low boil even as he finds some way to to get through what are still these kind of you know, frozen terrible status quos in both Gaza and Ukraine. So the Hail Mary and Gaza is of course a Saudi normalization deal. They're still pursuing really aggressively, which you know what the odds of that are. It's really hard to say.
It seems like seems like a long shot to me, but it would really be transformative, similar in Ukraine, hoping that the battlefield shifts a bit and things don't look quite as grim as they do right now.
I got to leave it there, Daniel Chris Fahn, thank you so much. With foreigners affairs, I can't say enough about it. From school, Lisa, what do you have?
All right?
We wh are we talking about? Missing out on that? Nvidios stock right? The big Yeah? Tom So SoftBank CEO Masi Yoshi's son. He's known for some of the most successful investments in technology history. But he made that mistake. Okay. At the company's shareholder meeting, he talked about missing out on one hundred and fifty billion dollars after selling in video shares in twenty nineteen. Okay, so you have the breakdown. It was SoftBank's Vision Fund. They sold an entire four
point nine steak in Nvidia. They booked a three point three billion return on the investment, so it seemed like a good thing because they spent about seven hundred million for the steak. But if he had held on to that in Vidia steak, it would be worth around one hundred and sixty billion dollars today.
There will be a biography Linel Barber, who wrote the ft for years. Lionel Barber out with a one volume. I think it's the beginning of the year Gambling Man, The Secret Story of Masa yoshiks Son. I don't have a really informed opinion.
There's some big winners and some big losers.
You nailed that a big steak and arm and Alibaba, so that's not too bad. O. What else you missed? The train?
Okay?
Taylor Swifty on me has landed in Europe. Tom, Yes, the European summer tours kicked off today. Actually she's performed the first of eight shows at London, London's Wembley Stadium.
Seven hundred thousand shows at Wembley.
Seven hundred thousand people expected to see that show all Americans. So that's the thing. A lot of Americans flying in, spending money, airport, hotels, restaurants, you name it, spending money down there, all right.
So there's a photo there, Amma's sitting next to Stephanie rule of MSN. What you know, lizz Ane Saunders is like three rows over come on continue.
But they're saying you put a straight on inflation because when she comes in, everybody raises the prices, you know, and for the hotel, for the restaurants.
Everything, so economic input has got to be just extraordinary.
Keeps going, it keeps going.
It is just I haven't seen anything like it again. It feels tom and I'll confer to you it feels like Beatlemania, just that whole I haven't felt anything or said anything like since Beetlemania.
I'll go that. I will say. There's a lot of talk about she's put out too much product and the new album just is not the magic that we saw with Antonov in the National in the pandemic, and you know there's an eb and flow that happens to any artist, right, and I'm gonna cut her some major slack on that. But who's the Is there an opening act?
That's a good question.
Yeah, that would be a good gig.
That's getting you some Okay, this one, Okay. It turns out men aren't the only one to benefit from viagara. A lot of doctors prescribing it for women. Okay, this is in the New York Times. I'm treading very carefully here, okay. But there's a lot of research. It shows how the drugs affect female arousal. It's limited, there's not much research on it, okay, but the doctor's been prescribing these pills
and creams anyway. Telehealth companies are coming out with them, pharmaceutical companies looking for FDA approval for different kinds to market specifically to women. Is it worth it though? Okay, So the experts are saying stick with me here. Physical arousing women similar to a rectal did function because it has to do with blood flow. Okay, that's where that's as far as I'm going. But it's not a solution for everybody there it is. It's out there. Study show
mixed results either way. The doctors are prescribing it for women. Why not there, I'm telling the New York Times.
Has it there?
All right, we'll go with it.
It's different men, why not borderline?
I don't know if you can say all that, but we did.
There you go, okay, since we're heating things up, all right. So finally the new Bugatti. It's the hybrid. It has a powerful price tag four point one million dollars. Yes, it is called the turboullon. Okay, because it is the French word for whirlwind.
You get a lot with it.
You get the V sixteen powertrain, two electric motors, one on the front, one by the real axle, eighteen hundred horsepower hybrid power plant, speeds of two hundred and seventy six miles per hour. You have to check it on the terminal. It's a great article. The pictures are amazing.
What I mean, Matt Miller's gonna pull up one of those any day now, I do totally.
I mean, Katie Kaminski's getting ready to come on here, and she's setting up you're talking about the Dan Bagotti. She's such a hitter. She's taking notes. She's gonna be down at the local Bugatti dealer in Cambridge Banks.
It looks it looks like and here here's the best part about it. It has this screen that pops out of the center. And guess what that screen has on it? Apple car Play?
Are you kidding? Apple car plays into Bagotti. We love the Bagatti. Yeah. All I can say, folks that we get the numbers. We are humbled worldwide by what Apple car Play has done. She's no question about it. Is that the last one? Or would you like to go back to medicine?
No?
No.
This is a Bloomberg Surveillance podcast, bringing you the best in economics, finance, invest and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.