Bloomberg Presents "What Goes Up"

this show is for you. We're going to play you the latest episode of What Goes Up and if you like what you hear and want to hear more, the show's out now and you can subscribe to What Goes Up on Apple Podcasts or wherever you get your podcasts. Thanks and enjoy. Hello and welcome to What goes Out, a Bloomberg weekly markets podcast. I'm Sarah Panza, a markets reporter on the Cross Asset Team, and I am Mike Reagan,

a senior editor on the Markets Team. This week on the show, from long shot to base Case, Wall Street is growing increasingly pestimistic, but a trade deal might not be reached over the summer months, and even as the Fed preaches patients, bonn yields continue to fall with the ten year treasury yield reaching the lowest level since And of course, sir, we will finish the show with the ever popular the Craziest Thing I ever saw in markets this week, at least this week. I hope you have

a good one. Do you have a good crazy thing? I will have a good one by the end of the podcast. All right, I've got a good one. No pressure on our guests. The mind's mind's pretty good. I'm just throwing it out there. That's it. I'm not trying. Well, that's one of our guests there, Emily Barrett, you better have something good. Uh. Emily is our correspondent straight fresh from the trade Wars covering the bonds and FX markets. That's exactly how it feels, and also joining us on

the show. Geno Martin Adams, the chief equity strategist here at Bloomberg. Gina spent many years as a strategist Wells Fargo Wacoba Corp. Before that. But Sarah, I was looking at Gina's bio. Something I did not know about her. She's a Gator. Yes, you know that. I am from South Florida as well. I'm a Gator by birth. No, that's too Florida women on the show. I don't know, Florida women don't make the news quite as entertaining. Yeah,

but maybe we can change that. Don't underestimate that. But this week We've been talking about US China trade for a while now, but it seems like we got a bit of a step up. We think about what's changed, for one being the Huawei blacklist. We've also heard talks that other surveillance companies out of China could be blacklisted as well. And we even have a fight song out of China and for gators. I went to school at Michigan. You know, a good fight song can really rile people

up Gina. From your perspective, is this becoming something that traders investors can really no longer ignore. Yeah. I don't necessarily think they have ignored ward it, but it did take a new step this week, and it took a step into a tech war as opposed to just a trade war. I think when you look back over the course of the last year, that's been the most dangerous aspect of the U. S. China relationship shift. It's not

the tariffs. The tariffs are a teeny tiny portion of GDP growth, they're a teeny tiny portion of earnings growth. You know, you've run through the quantification of tariffs and you find out real quick how small they are, which is why stocks could sort of bounce around in the one to three percent decline range up until this week, and we did see an elevated level of volatility this week. We've seen a lot more angst evident in broad market classes,

with the rise and gold as a good example. This week. Small caps really getting creamed this week, So much bigger risk off sentiment this week than last week. And I think the reason for that is this week it became about tech, not about trade. Gee, I'm curious, in uh, your career, have you ever thought about politics as much as as we have through these days. It seems like a very uncomfortable thing for fundamental technical analysts. Yeah, it's uh.

I have thought about politics a lot over the course of the last several years. I mean, I can distinctly remember sixteen as a year in which it was all you know, the popular sentiment on Wall Street was if Hillary Clinton wins, stocks should do fine. If trade, if Trump, when stocks are gonna get pummeled, right, and the opposite, The exact opposite thing occurred right after the Trump election. Inen then the thing was stocks just climbed this wall

of wari because everyone was really concerned about Trump. I think throughout my career, I've always had to focus on policy in general, but more so on monetary policy than on fiscal policy, and certainly never on trade policy. And you know, even the smartest trade policy movements in the Bush administration weren't so meaningful for the broad market. So it's definitely a very different kind of policy that we

were now focused on. Though policy is always important, it's just usually monetary rather than than trade or fiscal that really matters. And you mentioned how and I think everyone's doing this now. You take the x percent tariffs on x dollar value of goods and you get why you get a certain effect on earnings on revenue, But I

wonder is there more to it than that? Or there's sort of unquantifiable risks uh to confidence, to sentiment, that sort of thing, and and how you know, how do you wrap your head around that as the type of strategists you are who is deep into the numbers. Yeah, it's it's frankly, very very difficult because behavioral analysis is a huge part of markets, and I think the only way to really analyze the potential impact to this is through price itself. You know, we can all speculate as

to what it means for GDP growth globally. We can all speculate as to how much of this is either inflationary or deflationary, But the hard truth is nobody knows. We could try to quantify it, we could try to pretend we know more than anybody else, but the reality is the market itself, which is an aggregate of millions and millions of people's opinions, is probably smarter than any

of us in this room. Right I've made a whole career out of pretending I know more than uh and so I watched price very very carefully, and what price tells me right now is okay. So far the risk of this, there's somewhat contained five percent correction and stocks is nothing. These things come around every nine months or

so on average. But if we start to work our way toward ten percent, we break that ten percent line, it becomes very clear that the market's impression of this is something much worse right now, something I've been hearing as to why markets have been decently resilient. We're not too far off the highs. Like you said, is that you look at the economic data, you look at the fundamentals, and they're still largely strong. However, this past week we did see some weaker p m I numbers in the US,

not yet contracting, but pretty close on the cusp. What could it take to really push us off the edge? So historically you're not pushed off the edge until manufacturer p m I in the US is all the way down at forty three. I think the market will absolutely hesitate reach a point of very big insecurity if I s M falls below fifty. Uh. That's one of the big keys that we watch. Initial claims is another one incredibly important to the direction of equities, long term initial claims.

If initial claims start rise, saying, and especially if they rise more than fifty thousand, start to move towards seventy in a rise, you're pretty much assured that you're falling into recession. Uh. The other thing to watch is, of course the bond markets. We you still haven't had that inversion of the two stents at least last I checked, and that's a big key trigger for the equity market sentiment.

As well. So there are a lot of different things that I think you want to watch for the economic data. You know, frankly, consumer confidence, which is still near a fifteen year high, is still pretty supportive, So you need to see a big deterioration and consumer confidence as well. What's a good segue into our next guest on the Bonds team, Emily, You had a story out UM this

week talking about the market expectations for inflation. I just want to read one line because I think it's it's pretty important, uh, right that since consumer price gains have been lagging the FEDS two percent target for much of the past decade, it's a little wonder that inflation isn't a hot topic in the market yet, don't duntune, but it may be warming up with the Fed actively debating how it can meet its inflation goals, including a June

fourth the fifth conference to discuss different approaches. I feel like the trade tensions are UH causing a lot of

confusion about what we should expect for inflation. Obviously, the market is pricing in lower inflation going forward, Um, but a lot of people are talking about the pure inflationary effects of the tariffs on the consumer what is sort of the consensus out there or what's the smartest take you've heard about what we should expect as far as inflation, uh in the trade trade war, right, Yeah, I mean

this is the interesting thing. I think people try and disaggregate what's the shorter term issue in terms of the inflation impact, and directly I've seen some Golden Sacks Golden Sacks analysis saying, you know, this is the boost that we might see two c p I and the mean in sort of the medium term. But people are really focusing on that longer term potential drag on growth, and as they're looking to that, they're sort of seeing if growth starts to slow, then you have more and more

headwinds to that inflationary impulse. And so really that's where we're seeing this decline and break evens, which is the inflation premium that are built into treasuries. Um, we're seeing that just coming down and down. And that's despite the fact that you know, we've had tariffs put on, there are other things. There's been oil price gains sort of uh in the year to date hasn't been reflected at all,

and normally break evens would follow that pretty closely. So we're seeing this kind of really sort of counterintuitive moving inflation markets. And it's because you know, people talked for ages about secular stagnation. You've got bored of hearing about this. But it seems that the forces that are pressuring inflation lower it's not just in the US, it's globally and so much stronger else where. People would argued, UM really our top of mind for most investors, and so that's

going to be hard to fight. And this is this is where it comes down to people's expectations for rate cuts. I mean, there's a sense in the market that the FED, if it's going to be serious about hitting its two percent inflation target, is really going to need to take some action on rates to lower them UM. And people have gone so far as to say, a couple of people I spoke to, you know, it's not just one cut, it's probably two or three if you want to hit UM.

The thing that's interesting about where c p I is at the moment is relative to the Fed's target. The FED prefers consumption expenditure, so they look at a PC rate which is actually forty to forty basis points below where CPI is, so Um, so that's it's even worse really if you look at the Fed's preferred measure. I know a lot of people are looking at the FED

minutes that came out this week and calling it old news. Um, but I ran a little control fine just to see where the word transitory comes up, and transitory appeared twice as it relates to inflation, whereas the last time around we saw the word transitory once, but it was related to GDP and first quarter slower growth being transitory. What else did we possibly learn from the minutes, if it's possible to clean anything more from what we've heard from

FAT officials, I think what people wanted to see. I mean, this must be the shortest lived transitory impact on markets ever, because after you know, when Fed the Fed's Powell was really pushing that transitory message, you know what's weighing on inflation, It's going to be very short lived. You did see a market correction that started to sell off a little. Oh right, Okay, we might come back if the FED believes this is going to happen, But that just got crushed.

And what the minutes gave us was this sense that at least among the f O M c that the FEDS Committee, there is a broad agreement that these or at least they're own message that people seem to think that, yes, this could be a transitory impact. But from the people I've spoken to, they're listening at the fact to the fact that the transitory effects don't quite make up for the short form inflation. They really do believe that they're a longer forces at work here. So what we learned

from the minutes, it's a really good question. I mean, I'm not even sure that, uh, you know, the trade impact wasn't factored in because obviously most of the trade fallout really happened after the minutes were released. Um, so the bump that we should have got, I've got a much more hope of getting it back. Really at this point now, if the break evens are right and we're due for some weaker inflation going forward, what does that make certain sectors, certain factors look more attractive to you?

How would how would you recommend playing sort of the low inflation environment? Well, it depends on if we are indeed in for a transitory or a longer term sort of disinflationary deflationary trend first start. But if we assume that it's very very short term. More than likely it pushes you into more defensive sort of sectors, and I think we've seen that over the course of the last couple of months. Our sector strategy model even pushed us into defensive sectors as early as the end of April,

and that largely reflects what's happening in rates. And rates are rallying so much, indicating that this inflation pressure is somewhat nil at least in the short run, suggesting that the downside risk to growth is still pretty evident. And at a time after stocks had already rallied tremendously in the first quarter, the valuation multiple started to shift as

well on the cyclicals versus defensives. Call I could tell you one sector it absolutely suggests you want to stay away from, and this is manifestans price performance as well as energy. There's one sector that is just constantly the inflation play in the equity market. It's energy, and then to a lesser extent, materials. As much as this last month of weakness in the equity market seems to have been about tech, the energy sector is down four bases

points more than tech stocks. I mean, it's just getting crushed. It's making new relative price lows in comparison to the SMP five hundred, and has been persistently for the last several years. So the equity signal is actually very deflationary. If not deflationary, then at least disinflationary, and has persisted through a long period of time. At the beginning of the year, I heard the case being made a lot that we needed to see energy prices close the gap

with oil prices because we had seen oil rally so much. Well, now clearly we're seeing oil prices roll over, we're seeing energy stocks roll over. Is the case for that, for energy prices to move up to oil prices and close the gap kind of disintegrating? Yeah, you know, that gap has been existing for the last three years, so you could even take it all the way back toleven when

the gaps started to widen. You know, I think that the terrible fate for energy stocks is unfortunately, every time oil prices rise, it's met with a new wave of supply, which constrains profitability and constrains the inevitent and constrains the oil price from continuing to rise. And that's very well played out in energy stocks and energy investors. Investors just don't want to touch the sector on that premise alone. From a sentiment perspective, you got a love energy for

a long term sort of sentiment call. You're looking at a sector that's now less as a share of market cap of the SMP five than it was when oil prices were ten dollars of barrel. So nobody wants to

touch this stuff. But how do you jump in in the face of clear signals from the rates market generally sort of depressed economic signals relative to where we were at least a year ago, stock price signals that are still very very negative, and frankly, the dynamics of oil supply and demand are different today than they were ten

years ago. So it's a tough space. And there's just not a lot to suggest that that gap necessarily needs to close, because frankly, oil prices keep closing back toward energy stocks every time they try to rally, and that's just a the fracking boom. I take it. Just the supply, Yeah, I mean, if you think about sort of how things have changed over the last decade or so, go back to two thousand seven, two thousand eight, when oil prices were moving towards a hundred and fifty dollars, and the

sentiment was, We're never going to find supply again. I mean, there's just just not enough oil in the world, and oh yeah. But the course of the next several years we found out, oh lo and behold, there is actually plenty of supply. We just needed to use new technologies

to get to it. That's created this massive downtrend and oil prices really since they peaked in two seven and then again in and the result of that is just this this persistence of supply, or even the perceived persistence of supply, con strange your upward potential for price growth,

and it's feeding through the energy stocks emily. To get back to the Fed minutes, there's this weird situation that happens where, okay, the trade were escalates a couple of weeks ago with President Trump's tweets, and then he follows through and raises the tariffs. Then along come the minutes, which are reflecting a meeting that occurred before it. So

yet people still seem to react to them. I mean, assuming this is the last best evidence we've gotten from the Federal Reserve on their thinking, but at some point to people just to ignore them. You've talked to a lot of investors after the minutes, presumably they're still reading these minutes even though so much has changed since then,

or did they discount them to some degree. I think this is the weird thing, and this is the thing that always makes me just sigh and kind of a scream sometimes when you look at the minutes, because like this is essentially stale news, right, and particularly at this point because it's prior to all of the trade stuff

that happened. So I was actually really interested myself to see what the market was going to do to this, And it just it's funny because I don't know if people actually forget they're still they're so busy reading the Fed's ruins sometimes that any signal, like this sort of smoke signal is going to tell them what to do.

But I think the interesting thing that most people are trying to pause out of that document is how much consensus is there, how firmly held a belief is this in the fit, and how difficult it might it be to dislodge, Like how much they're looking at the data really and what what is their interpretation of the data.

So people are constant. The thing that I find most amusing is looking at how people understand the word few versus several versus a number of us some know as a measure of how many people on the committee actually hold a certain view. So that's that's one of the things you talk about stale news. If you looked at the staff economic projections in the minutes, they actually talked about how trade the U. S and China coming together was positive, optimistic. So how that's changed since good minutes

were actually written. I want to ask you, though, how far off does it seem like the bond market is from where the Fed actually stands at this point in time. This is starting to feel as if that disconnect is actually widening again. I mean, we saw earlier this year there was, you know, the market was really doubling down to say even as many as you know, sort of too high, starting to get pricing. We're getting closer to

that now. I think that the interesting point from what the market is pricing in is there is actually now still more than one hike pricing by the end of the year, just a little more. The Fed. I think that after giving that message of transient, they're just sitting there with that for the time being, and it seems as if that that conviction among policymakers is really at odds with the markets movements lately. Um But it's hard

to see. I mean as as you, Jina, you were discussing before, you know, the data are still reasonably strong. There's there's actually looking at it objectively from a dispassionate viewpoint, it's hard to see whether the FED would find a

decent case to cut rates at this point. And now that they're starting up their inflation review, this is going to become a really interesting topic to follow over the next couple of months because they're really going to have to look at what other kinds of strategies they might take to try and meet their mandate. Now, Gina, you have a lot of letters after your name, c IF, A, c MT. I also have three names. I'm just trying to extend their business parts as continued on the confusion

part of the game here. So I was I was curious to see your technicals, putting your CMT head on Chartered Market Technician and and looking at the technicals. UM, so walk us through two things. I'm curious a sort of what levels you're looking at but also is it the time, uh right now where technicals kind of take a backseat to the fact that everyone's waiting for the

next headline, waiting for the next tweet. You know, are there times when you sort of uh discount technicals to some degree and don't give them as much weight as you normally would, And are we in a period like that now? I never discount technicals. I am a technician. I think they're actually always valuable at every market stage,

and they're valuable in different ways. They give you different signals, either they're confirming or not confirming your fund to until case that gives you a reason to go back and look at the fundamental case. Nonetheless, I think you know right now what the technicals are saying is near term, there's just not a lot of reason for optimism. It's

still markets. You know, maybe testing the early May lows, which were support levels created by resistance points that we had matched on the SMP five hundred back in the October attempted an advance, November attempt at advance, and then during the rise earlier this year, we sort of got stuck in this level in the SMP fire. We're back

there again. If we can hold these levels. Fantastic stocks are probably in pretty good shape, but it's really questionable because you're getting breakdowns, some small capture getting breakdown some semiconductors, you're getting breakdowns and transportation stocks. Just the near term weakness is evident. Longer term, is there any evidence of

the bull market is over? No? Right? I mean, even line last year only confirmed that the bowl trend is still intact because it bottomed right at major support lines that have existed since two thousand nine. I use a fifty week a lot, but that really defines sort of

shorter term bowl trends and bear trends. The fifty week moving average on the SMP five hundreds right around twenty seven seventy seven seventy six right now, Uh that if we crossed through the fifty week, then you're most likely going to continue to go lower and see a fifteen correction again. But you have to go all the way down into the twenty three hundreds to really eliminate the

long term bowl trend. So, just thinking perspective wise, you could easily have another recession with the twenty correction and stocks and you're still in a long term secular bowl market, right, short term, you're absolutely in another bearish condition like we were in eighteen. But you've got to have a significant dismantling of trend in order to eliminate the overall bowl trend that's been in place for now more than ten years.

How about my personal favorite shampoo, head and shoulders. A lot of people are talking about a head and shoulders, are talking about the size of the neckline, right I am. But the other the really strong fundamental like tenant of technical analysis is you never call a pattern before it actually occurs. And that's what people are at risk of doing. Um, I think you know, to call this a head and shoulders, you have to have a significant breakdown beneath the neckline.

I haven't had that yet. To call it a triple top, you've got to have a similar breakdown. So I you know, just I like to follow the rules, despite the fact that I'm from Florida or Florida. The rules of technical analysis say, don't get hasty to call a pattern before it actually occurs. All right, Well, there's one role in this podcast, and it's if you show up. You have to have a crazy thing, the craziest thing you've seen

in markets this week? So Emily is looking nervous. I don't think I don't and she prepared, hang on, hang on, you have little faith. Actually I tried here. I don't want to go to last because then you're going to give you a great ones and then I'm going to kind of limp in with So yeah, I'll go first. Okay, this is this is a royalties thing, so it's not actually our markets thing, for say, but it's about money, so it's close all out. But I was a fan

of The Verve back in the nineties. So there's this song, Bitter Sweet Symphony, if anyone knows that I was very fond of. It has this lovely string sort of intro to it. And it turns out that Richard Ashcroft, the lead singer of The Verve, lost the royalties to that song because he sam put a little too much of a Stone song to do it, and so the Stones ended up getting all the royaltiest at that time, it was huge. That album was huge, um, and they just

recently gave them back. So so they petitioned for Mick Jagger to handback the royalties and without hesitation, apparently said yeah, just how did they're just out of their good nature. Well, I'm suspecting they may not have needed it. I thought you're gonna go Rick Astley there. I thought I was getting Rick rolled. For a minute, I'm trying to think of the fact that about him. Next alright, Gina Martin Adams. Yeah, so I'm afraid I'm going to disappoint everyone because mine

is incredibly obvious. But it just has to be noted that we had a video go viral out of China with a giant gold fist and a nationalist, populist message that suggests like the Soviet Union is rising again, except for it's in China. I see that video and I'm just blown away. If you haven't seen it, you need to go out and search the Chinese trade war fight song.

It's it's just amazing and really, you know, and then you have all the just the yamp up in uh sort of this nationalistic sort of message coming out of China. Speak has been extraordinarily aggressively. They're not back and down, you know. Also tells me this is a lot about tech. This is not And then I go back to what I said at the beginning. Everybody's focused on trade. It

is not about trade. It's about tech and who's going to be the global leader in technology development and advancement and dissemination around the world over the next several decades. So China is not backing down because they're taking this really seriously. Sarah, want to bring ye back on to singing. You can sing song for US translator. He's sang the US bond Markets theme song last week, so pretty impressive.

Also last week I have to bring us an update just because last week, for those of you who didn't tune in, we talked about how Steve Minusian's dad Um actually bought a ninety over ninety million dollar bunny rabbit. It was an art piece UM on the behalf of someone and now we know that it was on behalf of point seventy two Steve Colin Um. So he is now I think I can't believe we didn't guess that. Yeah, yeah, he is now the owner of a beloved Oh we're

ninety million dollars silver inflatable bunny rabbit. Pretty amazing. Um. But another one that I'll bring forwards this week that I guess two is kind of obvious, Tesla. I mean, we have analysts coming out one after another, going as far as saying that the worst case scenario, we could see Tesla stock fall down to ten dollars a share, and we did see Tesla fall below two hundred dollars a share, which we haven't seen in quite a while. So pretty amazing. I've got to say it is that

is a soap opera for the ages. I think, yes, all right, I'll give you mine. Uh now, Sarah, it was a pretty ugly day in the stock market on Thursday. You wouldn't expect to see a lot of companies rising. What if I told you there was a stock that rose thousand and nine on Thursday, A penny's This is why I love the penny stocks there. Uh so, Rhino

International Corp. It's a Chinese company. Sounds legit right, designs, manufacturers, installs and services, proprietary and hattented wastewater treatment, desulfurization equipment and YadA, YadA, YadA. Anyway, Yes, it rose to one penny a true penny stock, from one a penny um by. By my math, it required about seven hundred bucks to do this. The funny thing is the market cap of the company yesterday it was only like two d and sixty eight dollars period, not millions. It's amazing, so um

congratulations to all the shareholders of Rhino International. Core about there. Uh. I try to find out more about the company, but when you click on their website are web security software prevented me from saying, I think that's how's you all you need to know about company? But with that said, Gina Martin Adams, Emily Barrett, thank you so much for coming on the show today. We really enjoyed it. Thank you, Thank you. What Goes Up. We'll be back next week.

Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate interview the show so more listeners can find us, and you can find us on Twitter. Follow me at at Sarah pontzat, Mike Is at reg Anonymous. Our guest, Pina Martin Adams is at Gina Martin Adams, and Emily Barrett is at Not That ECB. What Goes Up is produced by topor Foreheads. The head of blooperg podcast is Francesca Levi. See you next time.