Volatility Will Stay in a High Range, Gallo Says

market risk assets rolling go over. But the bid into treasury is really mild. Why I think today it's seasonal effect. Investors bod duration at the end of the first quarter, and today there's a little bit of widening in yields. Having said that, we think that the growth momentum is fading, and UM, you know, all the idea of having four or three and a half percent yield conten your treasury, you know we're gonna have to wait a lot longer

for that. So we are still in a bookmarket for bonds, and UM duration is still UM is still in demand from investors, not just in the US, but also across the world, in emerging market, local currency and in Europe, because remember, investors want also alternative to treasuries. Treasures are slowly losing say fav and status due to also political volatility. I bet so the front end is a very different story.

Though despite the market dropping two down three percent seemingly at one point, the bid does not come into the front end of the treasury curve. There is a view in the market still that the FED will continue to deliver great hikes. Is that the right view from where you guys are sitting at Algebras. I believe that is

still the case. And let's remember that the FED is hiking in an environment where the e c B and the b o J and other central banks are still dobbish, so they have the benefit of hiking without the long end of the curve moving wider. The long end of the curve in the end is very It's much more influential for for long term investment decisions by companies and also households buying buying homes with with long long end

mortgages ten t any third year mortgages. So effectively the bo J and d c B are keeping the long end of the U s treatory stable and making the FED a favor. But overall um normalization across global central banks it's going to be a lot more difficult because growth momentum is fading and you know the impact of the fiscal stimus is fading, and instead of that, we're having you know, a trade a mild trade war or

trade uh skirmish at the moment. So what we need to regain momentum here is is another physical effort, but at this time not by the US but by Europe or Japan, and I don't see that at the moment. Well, the backdrop to all of this at the moment is a higher volatility regimail bet. So we've got the VIX north of twenty. It bleeds a little bit lower today, but the story has been elevated volatility over the last

couple of months. We had the Vick shock of about a month ago, and what's clear is it's taking a long long time to actually clear the decks and for volter to roll over south of twenty. Why is that happening? Why have we got this elevated volatility ragiume And just look at the term structure of the VIX at the moment Albert, so counterintuitively, it is still inverted. Can we remain like this for a lot longer? I think so. The short answer is financial markets are a lot more

fragile with corninative easing. For ten years, we had a recovering the economy, but we have built fragilities embedded in the market. Investors have been buying equities for yields, have been buying bonds for capital gains. A lot of investors have been selling volatility, and markets overall have become a lot more one sided, with more passive strategies that that

heard into the same trades. So we end up with a pyramid of trades that we've discussed over the last month, where a lot of trades, a lot of strategies depend on continued fiscal continued march ary steamuless, on interest rates staying low, and political stability, and gradually some of the assumptions at the bottom of the pyramids are are are basically falling apart. So I think the market, you know, we're still in a growing economy, but the market needs

to deal with this increased fragility. Volatility is going to remain high, and this is one of the trades I like the most to to to bet on volatility staying in a higher range within that bet. Are there a lot of opportunities out there? Or is there Vertegalo managing for the coupon? I mean, can you actually may whether you go along short or whatever the creative aspect is the trade. Can you can you actually make a trade happen, you know, and get a total return or is it

to manage to the coupon? In fixed income, we're with stills think that duration outside of the US is interesting. So European periphery and also emerging market local currency bonds in Russia and Brazil. So there is a flight of capital away from the U S which has been increasing over the last you know, ten years, has been the destination of a lot of the serve into other assets. So it fixed to come at relative trade works. In equities, we're focusing on shorts. Johnny, you want a theme for April?

What Mr Gallo just said there the bad the idea, the observation of money moving out of the US. That's a really interesting trend. I think that's been a trend through the first quarter as well. A lot of people talking about that after the back of some of the issues the market issues here in the United States. How bad. I didn't miss that short equities, short equities where because as a house Algebras has been incredibly bullish on the continent in Europe. So so where are you short equities?

I mean, overall, we still keep a positive bias because the economy has grown in but we've been buying protection on these sectors that we you know, we thought were

the most over valued. So we're talking about the US and and tech and you know, no one knows if the correction has been uh, if the correction is done now, But generally the markets which we think are still undervalued are emerging markets Europe and Japan, which haven't benefited from earnings uplift over the last five six months as much as the US and and you know, haven't benefited from

investor flows as much. So valuations are lower and earning earning expectations are a little bit more moderate outside of the US. Now, obviously, the question is whether there will be another big tail event, another big sell off. No one knows the answer to that um, but generally, you know, we're we're mildly cautious at the moment um we're closing some of our shorts as the market has already corrected again, but we do think volatility will stay in a high range.

So UM, I don't think we are going to go back to goldilocks now. Bet so. Your bread and butter is credit, and credit hasn't been great in Europe over the last month or so. It's been phenomenal since the c B started its bombining program. Where are you guys on credit right now Europe versus the US, and how are you exposed for it? We're looking for places to hide. There's less, less and less. Europe is still one of them.

Balance feets are less levered than the U S. D. C B is still very dorvish and worries about periphery spread. So in Europe you still have UM, you still have Greece, you still have Portugal, and also BTPs in Italy didn't widen, even though the election outcome is uncertain, because there is

demand for substitutes to to dollar assets. Bank debt. Banks are going to do better in an inflation in an environment where inflation is slowly picking up an interest rate or slowly picking up globally, so there's a few niches. There is not trade with a massive capital appreciation, but you can get a decent coupon in some markets were central banks are still Dobbs Alberta Gala, thank you so much with Algebras this morning greatly. I appreciate John. That's

always valuable. You know he's got he's got a real European focus. I get there was work at Royal Bank of Scotland for years, but it's really interesting about flows.

It's something I gotta read a lot more about. Yeah, and now Better, let's be very clear, has done a phenomenal job moving from RBS to to Algebras to head up the macro Credit Fund, to Algebras delivering a one year return tom in credit over the last year, which I think is really significant in the global bond market and credit markets have just over seven percent, which is one had have a return over the last year for many credit investors. Yeah, that was with smoke and or mirrors,

um smoking a couple of merrors. N Better Gallop Algebra's head of macro strategist John Farrell, and Tom Keane with this now seth masters for years with Bernstein. He's now a private investor looking at Angel like companies. John wants to go to Spotify, and I want to do that. But quickly here, you are fluent in Mandarin. Right, did your mother make you do that? And for a third grade or fifth grade or something? No, I did that

in college. To myself, you inflicted it upon yourself. What do you think of striving Upper East Side mothers that go you need to learn Mandarin? How do you respond to that? I think it's um predictable because the same people would have been saying, you've got to learn Japanese and exactly um. But I hope that some of the kids come out of that really enriched with the ability to at least a culture in the history. Yeah, John, I had a little different upbringing. My mother looked at

me and said, you've got to learn English. You know where that one. Let's go to spot that work. I'm still trying to work it out. Seth. It's always great to get your insight on on something. And what I think is really interesting about Spotify today is no new shares, no new capital, just setting a price in public markets, and what we've seen over the last few years in private markets, it's incredibly rich valuations and money just literally

flooding flying towards absolutely everything and anything because an angel investor. Now, do you look at that situation in private markets as one of which whether it's too much cash being thrown at everything, or do you draw a line somewhere to say that, actually it doesn't work like that. Well, it's a really great question, and I think it's very nuanced because there are different segments of that market. When companies are first started, they actually aren't necessarily that highly priced

because the risk is stratospheric. Very few new companies actually succeed as they moved through the process of success, though at some point they become attractive to venture capitalists and maybe then to private equity investors. And what's happened is so much money has gone into equity funds and venture capital funds that I think right now those areas have gotten extremely fully priced, or probably overpriced. That's why we're seeing more down rounds and also more I p O

s coming out below the last private valuation. Well, it's very hard to get a read on what Spotify will actually price that today there is no IPO price. They will bring this to market, they'll bring the bus and sellers together and hopefully they'll establish a price in a couple of hours, but when there will be a price there eventually, But it's very hard to gauge from what happened in the private markets what will ultimately happen in

the public markets. How do you gauge at the moment the ability of these companies to go from being private to going public and achieving the kind of valuations they've achieved in private markets. Well, I think it depends on two things. Um One is the specifics of the individual deal and to the overall environment in which it happens. And the problem is these companies don't control the ladder.

Spotify probably dearly wishes it had done this a month or two ago, but now it's too late to fix that, right. The only thing they can do is run their business as effectively as they can. And look, the reason that they're doing this is because they know they need to provide some liquidity to some of their investors and and and keep key talent. That's that's what this is about. I read the zeitgeist today, and folks, I want to make clear Spotify is gone beyond usual Wall Street talk

to actually people are curious about this transaction. Mark Mahaney. RBC Capital has got a big pop out to two hundred dollars for share Fine. The real under the real backstory is how institutional shareholders will behave versus retail. Do you buy that idea that there are two different markets and they will react differently on a transaction? Uh, well, yeah, I think that there there's truth in that. It's also to that institutions are not monolithic and sometimes neither our

retail investors. The whether or not those two forces coincide is the key question, because if you have a lot of excitement from both institutions and retail, that's when you get nice pops um. Sometimes though, you actually have cross currents. I don't know what will happen, obviously, and it's fair you don't know, I don't know fair, or you know

what's going to happen. Jack, I'm looking at the spread of buys on Spotify today and the buys go from target prices of eight to a target price of T twenty. I would say that spread on the buys just tells you that many of these analysts have no idea where this is going to price today. I would also say, based on this Spotify IPO just raise a question whether the I p O now is just about the exit and not raising capital and whether that's a broader story

or whether that's a Spotify story. Which one is it? Seth I think it can be either. I think it depends on whether or not you need to raise capital or whether you need to provide some liquidity to the moment in private markets if you want to raise capital, which you can, So why go public? Where did we Well? I don't mean to interrupt, I just this is can you can we get set Masters back for our six hour program we're doing on Spotify program. We're doing six

hours Spotify for this is fascinating. Seth Masters, thank you so much today and we've got to get you back to continue this discussion when Spotify is either eighty or what was the other bye? That's from our BC. That's that's Mr Mahany. Yeah, when he's a full disclosure. Mr Mahoney has a respect of Bloomberg Surveillance as well. Seth Masters for years with Bursday and we thank him as he goes out and looks for angelic type of companies.

Michael Jesus with Morgan Stanley, John Farrell help us with Michael's USUS son Washington, Morgan Stanley's chief US public policy strategist, Michael J's tech getting absolutely hammered over the last few weeks, and the presidents had had a hand to play this administration. Are we going to see the policy or just the rhetoric? Well,

the rhetoric at first. Uh. And so the first and foremost when it comes to to any kind of regulation or tech regulation in particular, is you gotta know exactly what you want to regulate and how you want to regulate it. And as far as we can see, policymakers are still trying to understand the complexity of the issue. So um uh. And you know, there's not much existing law that we can tell that the president can sort of act on unilaterally by kind of rewriting regulation. So um.

I think the pressure is clearly there. There's clearly a bipartisan push um for more regulatory issues on on tech, but it's unclear exactly what the path is. So you have to you have to praise in that Washington serious about this, But what exactly it's gonna look like it's going to take wild developed? Well, Michael human, Washington is serious about what because there's a bipartisan pushing Congress, I assume around the personal data issue. Then within the White

House there's a separate issue. The President seems to be renewing his attack on Amazon. They're two very very different stories. What do you lend more weight to at the moment as far as you think something might actually happen in terms of policy. Well, you know, the the Amazon thing is interesting in the sense that it don't clear me exactly what the president wants to do, so we're paying

a lot of attention to it. But you know, other than the President expressing a grievance on Amazon, which is which you know, by his own words, is related to um their media coverage of him as well, it's hard to suss out exactly what he wants to change there. Whereas the tech regulatory issue, there's actually some some clear grievances that need to be addressed. So it's hard for me to gain out exactly what the US hypothechically could do on Amazon. It's not sure where they want to

change the tech issue there. There's there's some clear implications of what they want to do. Is just a question of taking time to actually get down that path. When you dovetail your work with your economist, Ellen Zanner. How do you treat the new fiscal policy and fiscal realities to come? Is it a second quarter event or does that way for later in the year. Um, probably more

of a later in the year story. So we've been talking a lot about UM, what fiscal policy actually delivers, and you know, we think it's it's pretty clear what it delivers from a macro perspective. It adds a few tens um, you know our GDP. But you know, the question is, UM, what do we actually get for those deficits? And UM, do we get something more sustainable beyond that? And a lot of that is gonna have to do with corporate behavior and what some of the corporate incentives

created by tax reforms were. And some of our questions are basically, UM, did we actually extend the cycle? And if not, UM, if the cycle is going to kind of end or start to slow around the same time as some of these corporate incentives created by tax reforms start to roll off, like immediate expensing um, and they could possibly sync up with things like a more restrictive intersductibility on the corporate side, you get a lot of

pro cyclical behavior um at the wrong time. So you know, all we think about is we we know, we know almost by definition that growth is better this year than it would have been um without the tax reform. But what do they get us beyond that? That's what we have to price in now. And that's a lot more complicated. And and would you agree with me that within the machinery of fiscal analysis, we really haven't seen good analysis yet.

I mean, this stuff is heavy lifting, and that comes in April, we're gonna begin to see people really think about what the dynamics are of guns and butter financing. Yeah, I mean, I think that's right. And there was obviously the big debate around tax reform as to how much it would really increase the deficit. The static analysis was one a half trillion and um, the dynamic analysis said it'll only be you know, once a one point two.

And you know, then if you believe the president's rhetoric or some of the you know, the real optimists within his own parties to actually I think it was Secretary of Manuchi and who said, actually, we're gonna um get in next for a trillion dollars of revenue office it's not ann increase the depths at all. Um So the the the sort of truer depth inside of the story starts to become more clear over the course of the year.

And you know, then of course the question is, uh, you know, going forward over the long term, um, have we done as much as we can you know, cumulatively in terms of fiscal expansion. Is the room for more

fiscal expansion in the next downturn? And that's hypothetically one of the um you know, one of the issues we had that markets are gonna have to account for it here and I think it's one of the real you know, there's a whole host of policy issues where in seventeen you've got good stuff, you've got to account for the more complicated story. This is one of them. It's not the only thing that's driving markets, but it adds to

the volatility. And Jim Farrell Michaels has had a great, great concept which was this is the dessert before vegetables. President O, you would understand that, so you'd have you have the chocolate in the ice cream, have the fancy expensive cakes that you're known to wander by with. I understand you have your less like what children would do. Yes, yeah, you do it the other way around. I still do because I'm an adult now and I can. Michael Jesus. Just to wrap things up, the third policy tool that

I want to get to you is with trade. And we're reporting this morning that NAFTA and the United States, the United States pushing NAFTA partners to come up with a preliminated deal to announce next week. Do you see things settling down on the trade side or ramping up again? Can I say both? You can, but you've gotta tell

me where. Yeah. Yeah, well so, I mean the problem is, or at least the problem from an investor's perspective, is that in order for the administration to achieve what it probably wants to achieve here, which is a relatively benign negotiative outcomes, both in terms of NAFTA and in terms of China, Uh, it's following a negotiating path that requires them to kind of ramp up the risk, ramp up the escalatory rhetoric. And so you follow a risky path, you sort of play with fire to get to um

hopefully a benign outcome. So because of that, you're supposed to think about this at least from our perspective, we're supposed to think about this as we're ultimately going to end up in a place it's not two different economically from where we started. But the risk that we deviate from that path along the way um is pretty bad. So there's going to be we think, in the end, a fair amount of the escalation, but there's a lot

of escalation in the interim. So it kind of feels like we're headed towards smooth Holly, but we ultimately end up in a place that looks more like Bush two steel terrfors and was certainly nowhere near smooth Holy. Let's be let's be clear about that. The average tariff of the United States compared to its compared to yesteryear is

radically different. Michael Jesus, thank you so much, Morgan Stanley, James Sweeney, whar this with Credit sweetz always eighteen ways to go with James Sweeney, Let's start there in the micro data with the chief economists for for Credit sweet Um James Sweeney. When you look at frequent data, monthly data, is that more valuable or do you want more smoothed quarterly and annual data which has better value? Well, It

really depends on what the question is. But we do we do spend a lot of time in the in the short term month on months data, but we basically I would say that view has more of a kind of quarterly so we we kind of have a sense of what the noise is and what the signal is. Right now, there's a slowdown in manufacturing growth momentum globially, and understanding the kind of very high frequency data is

really the best way to see that. I bring that up because right now a massive conundrum over our economic growth where we are what the one quarter winter subpar Q one is versus where we're gonna be Let me not ask a dumb question, because give us a general statement on the Credit Suites view on America's economic growth. Well,

America's economic growth is quite good right now. So I mean, the labor market has been delivering around four and a half percent annualized growth in in total nominal labor income. So just add up everyone's paychecks. They've been growing at four and a half percent for about ten years. That that growth is essentially continuing. So the mix of what's driving it is a jobs as it wages shifting is

shifting a little bit. But basically that the payroll income is coming in, um, that's going a little bit farther because taxes have gone down a little bit recently. And on the business side, profit income is strong and businesses are getting a little more confident and investment plans are rising. So if you're looking at consumption and investment, the data have been good, real rightly, the outlook is good. It's it's further by basically income and cash flows and you know, otherwise,

you know, trade a little. The drag, housing it the drag from the thirty thousand foot view of James Sweeney, we go down to the reality. John Tucker joining us at this morning. Are we seeing pay up in Texas down? Mr Tucker, Well, with the payroll, yeah, they're they're taking less out of my paycheck. But just just sending my cough and ignore him. This is important. But the property

taxes are going up. James Sweeney. I bring this up because we get huge mail when guys like you saying comes her up and Texas are down, and most of our our our listeners and viewers just say, really, so, so where is Texas down? Where our taxes down? So well, withholding this are down according to the new withholding schedule, so you know, basically disposed income after tax and come we'll go up a little faster than it did last year. Um,

So it's it's straightforward. I mean, whether that should change the outlook for the economy is essentially is a different question. I mean, we know that taxes have gone down most of the people who are paying that most taxes, which are very high income people. So you know, we don't have the consumption outlook profoundly interesting. As a result of the tax tax plan. There was a great bloom review piece North Smith, I believe, which really emphasized our need

to grow exports in America. What is the export import dynamic now is we try to figure out where economic growth is well. The big change is a lot of the tech sector has basically left the country in the last ten or fifteen years and moved to Asia. And so what that means is when you have this kind of stimulus and this pickup in business investment that we're seeing, then you're naturally going to get a surgeon imports. And we are getting that surge and imports now. So no,

our exports are benefiting somewhat from good global growth. And global trade volumes which are rebounding from slump from a couple of years ago. But um, but really the short term story is that imports are surging business equipment. I mean, one of the most stunning charts we have is the is the trade balance in capital goods, which as a share of capital goods sales in the US is kind

of more than minus fift in deficit right now. And it used to be kind of used to meaning ten years ago, used to be kind of close to flat on on trend. So we've moved into this enormous structural trade deficit in capital goods, which includes a lot of business equipment. And the reason is because a lot of factories basically have relocated to Asia in the last in

the last fifteen years. So in a roundabout sense, all this stimulus and this pickup in business activity, which is increasing GDP on the investment line, is subtracting GDP on the trade balance line through this surge of imports, and hence the decline in the in the in the kind of net trade number got to can't tell me the Credit Swits managing director and chief economists, 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio