We Are Starting to Use Up Capacity, Ablin Says

and six month bills. Three month bills worth fifty one billion dollars, six month bills for forty five billion dollars, both unprecedented in their size. So let's ask what price will the tready get for them? Joe, I guess now is Jack Alvin Here is Crescent found ending partner and chief investment officer. Jack Great cant shop with you on a on a newly founded firm as well, So congratulations to that, Jack Caplin. Let's just get to the bond market if we can, first a huge week of issuance.

What price is the Treasury're gonna have to cough up for that much supply They've already had to suffer with a higher than expected yield on the tenure when they came a week or two ago. Uh. Supply is an issue at least near term. Longer term, however, and I think that you know, remember we have to keep in mind that the European Central Bank and Bank of Japan

are still pedal the metal monetary policy. UH. And it's remarkable, but over two trillion dollars of printed money has found its way in the financial system over the last twelve months, so there's still a tailwind of buying going on from the central Bank. It's two ninety enough on a US tenure to attract foreign capital at a time when the budget deficit is seemingly getting wider and wide. To Jack Um,

I'm not sure. I think if you look at the ten your treasury, it tends to track at least over time before two thousand nine, tends to track nominal GDP. If I take a snapshot of nominal GDP right now, it's about four percent. So I think fair value on the ten years four not two point nine. UM. So we at some point, I think we have to migrate our way back to four. And if that happens, then the premium that equities have enjoyed over that bond. UH

price has has has to come down. So the big night that came from Andrew Sheets over a Morgan Stanley that is one of the most red stories on the Bloomberg. He's basically with you. We've had the appet size, with the potential damage that high yields can do to the equity market, the main course is still to come. What's your base case of what the main course looks like, Jack Well, I would say a lot of it just depends on what the European Central Bank and the Bank

of Japan ultimately do. E c B has said they're going to continue its current policy through the end of the year. Bank in Japan hasn't really articulated any specific plan UH and as they start to pull back, I quite honestly, I also think that the tenure treasury is probably more closely linked to the German bond than it

is to the Fed funds rate. So I do think that um that as that Fed funds rate rises, if we don't see a concombinant rise in the bond, we could invert the yield curve in inadvertently, and I think that's something power has to pay attention what I keep hearing again and again, Jack, is this is okay so long as the move higher is slow and gradual and

treasury yields. Would you say a doubling at the front end on a two year note over just five months it's slow and gradual, because that's probably not what I would define as slow and gradual. This has actually been quite quick through September, from around two percent on a ten year through to two ninety where we are now and at doubling on a two year note yielding just five months. That ain't slow and grandtual. No. I mean the fact that even the tenure was was pushing two percent,

uh you know, six not more than six months ago. Um, so we have a spike there. You know. It reminds when the Fed doubled the overnight right from three to six percent in a period of of twelve months. And of course we had Orange County, California, we had some mortgage problems. It was too too much, too fast, Jack, Kevin, let's fold in the news right now. We have a

mega merger in retail in America. This morning, the Wall Street Journal reporting that Albertson's, which you and I know is a iconic Western Grocer Private owned by Cerberus among others, is going to do a bolt on with right aid, right age. Shareholders will own twenty eight to twenty nine point six percent of the new company the dominant company buys in the publicly traded small company. We've seen this before and what it amounts to is corporations desperate for

revenue growth in this word scale. You're expert of this. You you know, you've been known for decades to have the idea of folding our economics into where we are right now. Is this a scale decade? I think it is. Tom. The fact is that the pie is not growing fast enough, uh, to um satisfy shareholders, to satisfy management, to satisfy anybody, and so um, you know, the next best thing is to increase the pie slice. Um. Best way to do it is to grow faster than than what the pie

is allowing. Is is acquisition, I mean within the press release, John, and it goes on forever and ever. Ever. This is a well thought up plan of synergy, which is again, we can't make it the way we are. We've got a mate. We you know, forget about the names. We've got a mate. We've got a bond to get revenue growth that's six seven, eight nine, and then work down the income statement from there. That's all this is about. Yeah, and it's a first of all, a very thinly margin

business to begin with. And so uh you know that that that's problematic too, of course, right a wider margins uh than a grocer. But uh still, and I will say that it also had the Amazon effect that created problems. John, it's some eighty billion, eighty three billion, and is is Jack mentions they come down to about eight nine. But of the three point seven billion, is I love this John, run rate cost synergy. I thought we had a rule on Bloomberg's surveilance that we didn't use the word corporate

spaces one of job cuts and slashing costs. So we staid in the cost stripping business in twenty eight Saint Jack, No, I think we I I will say that companies have a scene a remarkable amount of pricing power, much more so than I would have expected recently. You know, of course we're starting that's the pricing how a chat that's gonna be surprising to a lot of paper well pricing path it's gonna come around where we start running out

of capacity trucking, for example, we're running out of trucking capacity. Uh, Shipping prices are are rising. Amazon is gonna try to fight back with its own aircraft and infrastructure. Well, I understand, Jack. Can I apologize to jump in that supply constraints, I get that, But pricing power usually assumes this tolerance on the other side. I don't see where the tolerance is on the other side, it's the tolerance for higher prices,

don't I'm not sure. I mean, I do think that consumers and businesses are are used to continually lower prices, but we also haven't been in an environment where we we are bumping against supply constraints. So uh, in in a world where we're now growing faster than potential GDP is probably the third quarter where we're outstripping our our potential run rate, we are starting to use up capacity.

And that's really what I'm on the lookout for. The fact is that if we do start running out of capacity in certain parts of the market, Yeah, maybe labor um maybe its certainly as as I mentioned trucking, but other productive capacity we could see higher prices and so so a question we usually lean on in this program, and others are on Bloomberg is the optimal cool option on inflation this year? What is it? Is it something as vanilla as tips or is there something else you

need to do? Jack to already hedge that exposure. The potential that you do get a pop pie in prices this year, Well, I think it all depends on how bonds react, if if if bonds overshoot inflation, which I expect they will, unless the central banks continue to hold rates lower than they should, Um, we will see real rates rise. We will say, well, we will see uh, potentially equity premium fall uh. And so in an environment like that, you want to own, you know, things related

to commodities like master limited partnerships. Remarkably, of all the incomasca classes, master partnerships actually have a positive correlation to interest rates. Interesting. Jack Amplerman is the Crescent founding partner and chief investment officer. Let's not guess in the politics of our nation. He knows that it's February twelfth. In February two, Greg val joins us with Horizon, and that's what's right now. Greg, We've got to go to jerrymandering.

Mr Jerry of Salem Massachusetts. We all understand it's nationwide, it's Pennsylvania unique and it's jerrymandering. Or will there be other Pennsylvania's where the courts say you've got to redraw the map. Well, Pennsylvania, Tom was uniquely blatant with their jerryman Just look at the map and it's like it's crazy. So I do think they stand out, but there will be other states. And in general, this trend of maybe

dealing with jerry mandering will help the Democrats. Within your note today, and you don't talk specifically about this, but you're so up to speed, we're gonna do it. Lay out the special elections is we get to summer when the campaigns really heat up for November of two thousand eighteen. Well,

first of all, the big story is Republican retirements. They're up to about thirty now, which is very unusually high, indicating there's a lot of House Republicans who do not want to serve under Nancy Pelosi if she returns as speaker. So you do see a lot of retirements, and you do see some special elections, and so far, in general, the special elections have broken for the party that has the most motivated voters in that party is a Democrat.

That's right where I wanted to go. I put out a tweet this weekend about turnout, and you know where we want to be a political here at Bloomberg Surveillance, we try and full disclosure. We fail at that sometimes, folks. But but but within this is the turnout? What is the turnout dynamic you see in your research? Greg, Well, you certainly start in Virginia the goobernatorial race. Alabama's Senate race was kind of flukey. That judge was pretty weird.

But I think in most races we've seen so far show there are a lot of angry women, angry people of color, angry young people as we're seeing with guns, and they tend to break for the Democrats. Some would suggest our president is angry. Maybe all would suggest that how is his advice this week, General Kelly have any impact with an angry president. I think the General has had decreased clout is halo has slipped, and I think Trump was almost unsupervised this weekend where he went on

just a rant, a Twitter storm rant for the entire weekend. Uh, he has to show some sign. I talked to Republicans who say, he's got to show some sign of displeasure over what the Russians have done. He blames everybody, but doesn't blame Russia for hacking into our election last fall. So, Greg,

big question, when is the gip with the president? If it's home, they're too chicken, Jonathan, I think that they talked to their voters back home, and we all have to remember Trump has about approval among Republicans, so a lot of Republicans are scared to do anything. And to be fair, they're also hoping that by Labor Day this economy will look even stronger because people have more money in their pockets. And are you going to see that tax cup in the mid terms. You're going to see

them come up in the numbers. Absolutely. There's a new poll out now showing a slim majority of Americans now support the tax cup. The number has been going straight up for the last few weeks. I think the White House is counting on GDP of three or better, unemployment under under four, and I think that could help them in the fall. Despite all of these motivated voters for the Democrats you mentioned earlier, did the House Democrat would you explain to our global audience why this Senate isn't

part of the VILLI a mass. Sure, it's sort of a fluke. As we all know, one third of the Senate is up every two years. It just so happens that the third three seats that are up this time have our twenty five Democrats, including ten in states that Trump carried, including five and states that Trump won in a landslide. So just based on who's up, the Republicans have a decent chance. Then does that mean the Senate

is more in play in two thousand twenty? Is it's one in twenty, there would be an opportunity for the Democrats. But it's just a it's a weird break right now, greg I. One, you're insight on one thing and it came up at the back end of last week and it it breads some life into this week as well. Mitt Romney, how does that change things if it's all and what you'll read on what's going going on there?

You know we've all been to weddings where people at the reception have looked at the bride groom and said this is not going to last. This is one that will not last. I think it's it's just a matter of time. Guys, before Romney and Trump get into a big tweet storm. You can just see that one coming. Oh my word, therapy with Dr Greg this morning, Bob John, Please so Greg, if it's not gonna last, I just

wonder what it means. Does it change the calculus on what they can and can't get done if Romney gets in I don't think so. Let me make two really quick points. Even if the Republicans lose both houses, Trump still has his zto. That's why the market shouldn't worry too much if the Democrats have a big, big election.

You know. The other thing is that I think when you've got someone like Romney as maybe a lightning rod, the chances that he could take out Trump, I mean the same as the chances for k Sake or Flake. The base would never go along with Mitt. Romney has a replacement for Trump, and I think everybody in the party knows that. But John's a good question on the governor of the Commonwealth of Massachusetts and the Olympian from Utah. Uh. Where are the moderate Republicans now? I mean, Mitt Romney's

got a certain cachet, do what he wants. What are the mere mortals of the moderate Republican Party do. They're adrift, and you know, there's no place for them to go. The Chamber of Commerce, pro business, pro free trade program controlled moderate Republicans are becoming an anachronism. There aren't enough of them. The base of the party hates them. So where do they go? I mean, I could be after three glasses of wine, I could be persuaded that we

might get a third party. But you know, Michael Bloomberg is probably too old. He's seventy four. We can't comment on that. This program, we can't do that. Surveillance trap door. I got you, I got you, Greg. Yeah, let's get out of trouble quickly and move on to to what we could get in terms of policy. Who's going to inherit the fiscal discipline position? And does the fiscal discipline position win you any budge these dice? No, it really doesn't. I mean, no one can see what bad things the

deficit can do. I would argue in two or three years, but be crowding out bond markets, vigilantes all that stuff. But for right now, everybody says, hey, the stock and bond markets look pretty good. They're fat and happy. Why should we care? So who was to take on that thankless task being the prescriptions we all know are curves, security, curb, medicare. Nobody wants to do that, Greg, Thank you for the briefing. Greg, alright with us today and Bloomberg, it's just a huge yeah.

We can. We can have him back, We can want exception. It is good after the uproar of the last eleven days to have a modest quiet and we do that with Sam Stovill of c f A. Sam, would you learn in the last week and a half? Good morning, Tom, Well, what I learned is at the mark it does tend to look forward bottoms um. Sometimes they're simply relief rallies, as we might have gotten last week. But then typically what we do is retest those loaves to see if

they indeed are the lows for this correction. Do you believe in technical analysis, I mean your standardum Poor's heritage is fundamental based, outlook based, five star based, and that the charts matter. To Sam stoval yes they do. I think that fundamentals tell you what, but technicals tell you when and how far. So the combination of the two, and I also like to add history as a third element to help to sort of read the tea leaves

of the market. Mr Fox agree with what Mr Stovall said there with the wisdom he learned from his father, I would say fundamentals, technicals, history, maybe adding a little economics to that's a Himan way. Okay, I was going to add in behavioral sam because I'm just I'm trying to understand why we're not hearing more calls to sell into the rally in equities. Well, I think because people have been convincing themselves for so long that we are

in need of a correction, and indeed we were. We went the longest stretch since World War Two, five hundred and sixty four calendar days without a decline of five or more, and it was just a matter of time. But I think most people say we don't see a recession on the horizon, and we are among those. So as a result of the feeling, is you want to be buying into this kind of a decline? Uh? The real question is how low will it go? No? But I want to know, Okay, buy into the decline. I

get that you know you buy the dips. I've heard that you know a bazillion times, But I'm just trying to understand how come you don't hear the calls for sell into the rally and come back and play another day. Well, I guess it all depends on what your overall approaches. As Tom had mentioned. You know, I've come from an S ANDP heritage which looks a year out. We don't look a week out, so we're not going to be able to time when to get out one to get

in in simply a matter of days. I mean, you've got your traders who can do that, but that's not our forte Okay, But I guess what I'm trying to understand is it always seems time to buy, it never seems time to sell. And that might be great if your time horizon is indefinite, but if you're looking to actually pay for things like tuition or retirement or a home, you need cash at those moments where you've got to write the big check in particularly if you're buying something

like a house, you want to take advantage. Unfortunately, if someone else is misfortune and you want to make your money when you make the purchase, not when you sell it. All right, Well, that's a good point. As Tom had mentioned before about technical analysis, I learned a lot from Mark Arbiter, somebody who used to work at S and P, and he likes to look at moving averages that tend

to cross one another. Seventeen three in particular, the seventeen week moving average breaking below the forty three week moving average. That gave him a longer term perspective as to our heading into very challenge. We had did not see that this time. We did see that in January of two thousand and eight, however, so it did give you a pretty good lead time into the financial mega meltdown. So what are you looking at right now? What are the

areas of the market that you think of the most underpriced? Well, I wrote an article a couple of weeks ago that talked about, UM, what you want to do as you go for those areas that actually lost the most UH in the overall decline. UH areas such as technology, consumer discretionary, which were beaten up the most because investors had the greatest number of profits that they could take from those groups. And as a result, I think you want to be

buying into those companies. So areas where we have favorable stock recommendations, and these are companies with consistent track records of raising earnings and dividends would include companies like um Walt Disney, would also include Comcast foot Locker, UM Window Worldwide. So our belief is that you can take advantage of some cyclical sectors at this point, uh and buy into them, especially when they offer lower beta and higher quality of earnings.

And just quickly, Sam, what about rebalancing the portfolio? Do you find that people have been doing that consistently? Um? I think that it's one of those things that if you are too afraid to buy, but you also realize you don't want to be selling, by engaging and rebalancing, you're sort of forcing yourself to to do that. Uh. And if nothing else, it's a behavioral thing because it helps an investor to say, say, I'm actually doing something

during this decline, but I'm not really messing up my portfolio. Sam, So, well, thank you so much, greatly appreciate that up to here eleven days and it's been very kind of him to join us here we roop up the script and migrate to Washington or Chief Washington correspondent Kevin so really is within Mike Ellen's note this morning, Mr Mueller works fast. Kevin, what does it say that Mr Mueller seems to be doing an indictment or an allegation charges every other day

or maybe every third day. What is that signal? Who signals that they have essentially build a case. Look headline's crossing terminal down that Rick Gates. You'll remember the deputy the Paul mana FOURT Trump campaign manager, charge of inspiring against the United States. His right hand man, Rick Gates is also charged and that round of charges he's gonna

plead guilty in the next couple of days. That suggests that Rick Gates is totally cooperating with the authorities, with Thought Mueller's team and could potentially, you know, provide information against Palm Maniport or against the administration officials. There's also another associate names in this latest round of charges who essentially is gonna be wrapped up in the Ukraine money

laundering connected to Paul Maniport. So it appears, based on these latest round of charges that the Mollo probe is really intensifying and building a case against Manifoard, which from a political standpoint, if you're the Trump administration, still doesn't penetrate the inner circle as a now and on Friday, you know, we all we all remember that of the Russian uh as now it still hasn't penetrated into the inner circle as fits well within that And again David

Voracious writing it up. Scanner's lawyer charged with role in US Russia probe. Alex vanders One who has been very visible in Ukrainian debates on money moving around, charged in federal court in Washington. And this is and again drawing in Ukraine that he helped prepare on the trial of Ukrainian politician Yulia timos Chenko and the key sentence. Kevin Crelli. Vander Swan was charged with a quote criminal information unquote,

which typically precedes a guilty plea. How would you assume that the President's attorneys or administration attorneys react to this or do they just ignore it because it's they're not touched by this? I won't. I mean, I think it's bad news for Paul Maniport, and I think we should we should know. I mean, Paul Maniport is the former campaign manager of the President of the United States too, and the campaign manager was charged with conspiring against the

United States. I mean, let's just like that in and of itself is a very serious charge. Obviously, but you're right to your point, and I don't you know when we covering this, you know this time I hate to speculate about like where this is going to go, but as of today, I mean, it's it's important note none of these charges touched the inner circle, and none of nothing in that thirty plus page document on Friday touched

the inner circle. But how the administration is responding to what the intelligence community has found, which is a a well orchestrated cyber attack on a democratic institution, on Silicon Valiance. I mean, I just haven't seen a core, accorded, organized response and that is something that Americans can take, whether or not the acid in a moren issue in the midsterm So I do think there's no timetable on this. Remember James Comey, who, by the way, it's coming out

with a book next month. Uh. Having released these types of finding a couple of days before the election, where in a situation and an environment where a Mueller indictment could drop any second of any day. Kevin CURRELLI do we know the extent of the interest of Robert Muller in scatting arms because it wasn't Paul Man of Furt the person that arranged for scatting arms to put together a report that was used by Victor Janakovich. This was the Russian Aligne president of the Ukraine to justify the

jailing of a political rival. Yes, so yes, So essentially you had a situation where Paul Manaford was working with the pro Russian factions of the Ukraine and the the individual charge today whose name I'm not gonna butcher is Um because I'm literally walking into the White House. Um is the person who helps to range those financial dealings.

And so again, the you're you're outside of Washington, if you're trying to figure out where this is all headed, there's an intense focus on uh, the former campaign manager of the President of the United States, I mean, press Kevin that you're walking to the White House instead of taking the surveillance Sikorski. That's always uh noted. One more one more question, Kevin, if we could, you're walking towards the White House. Who is advising the president this morning

at the White House? Does General Kelly still have critical mass? I mean, I thought it was interesting over the weekend was to see the President tret out a criticism of Secretary Maddis for his public speech that he gave on Saturday saying that Russian clearly had um a concerted effort

to medal in the two thousand and sixteen elections. President treated right after that speech criticism of him, saying, well, what he forgot to mention was that there was no collusion that would suggest that he since turned his ire and his latest jury of the day fire and fury for act of a better time on UM on that Secretary maddist as opposed to General Kelly. So maybe you know how this guy is. When you're at the dog house, you're out of the dog house. Yeah, who's up and

who's down? It looks like General Kelly has for now survived. We will see Kevin Surli. Thank you so much for the briefing. I'm here. I'm sure folks across our Bloomberg platforms today we'll hear much more from Mr sir. Really, 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