Impeachment and Fat Tails

markets this week, come on. Of course we did, so we will close out the episode with the craziest things we saw on markets this week. Sarah, I'm gonna give you one hint for mine, all right, give us a hint. The Hamptons. The Hampton's all right, you know where I'm going with that. I don't. This is always how it goes. You give us a hint. I have no idea where you're going with it. And then we have to wait. Now we have to wait. But remember we do have

our very own Bloomberg Podcast hotline. You have any questions for us, you want to call in, tell us about the crazy things that you guys have seen in markets. Give us a call, leave us a voicemail. It's six four six three two four three four nine zero and we may even play it on the show. So, Sarah, one of the things I do before every show is I like to look up the biographies of our guests, and I gotta say our first guest, I I haven't

seen anything quite like this. Um. I always I always look for what letters they may have after their name and sort of what degrees they have, and boy, I've never seen anything like this. She is a CFP, which we all know as a Certified Financial Planner. She's also a Chartered Alternative Investment Analysts, a Certified Investment Management Analyst, and a chartered Financial consultant. She has not one but two master's degree and a law degree. Alien underachiever and

under achiever. I would love to know her budget on textbooks on tuition, um, but we're It all leads up to this final crowning achievement of her career is appearing on the What Goes Up podcast and Christina Hooper, chief Global market Strategist at Investco, welcome to the show. Thank you for having me, and I assume your business card is like you know, letters after name continued on the back or something. Well, compliance really tries to limit you

to the number of letters you have. So luckily they've they've they've urtailed any kind of interest in and expanding on business cards. Then I looked up our our second guests bio and I felt a little bit better. I mean, he's he's got a good a good resume too, Cornel Guy, right, Cordell Guy. And one of the things he's certified in is standard first Aid from the American Red Cross, which I did not know we could claim on our resume. I got the same thing. I'm putting it on there.

I don't know if we get to put that was that'll be a qualification for everyone who comes on the podcast. Christine, I don't know if you're you've got your first age. I was a lifeguard, but that lapsed many years ago, and so I feel very very safe right now that if I were to have any kind of issue, you don't know where to do. But Christine, let's start with you. You had a really interesting piece out on the Investo blog headline News News versus Noise, assessing the market impact

of three major headlines. Really interesting take. I wanted to go through a few of the things. One obviously is the big story you cannot avoid in the news, uh, the impeachment inquiry into President Donald Trump, And you put

that in sort of the noise category. It's not really something that should necessarily affect the markets, but there's always a butt and I think there's always a risk that this could begin to affect markets, especially when you start to think of, well, uh, does this damage Joe Biden, doesn't make Elizabeth Warren more of the front runner? So walk us through, you know, when could this story move from that noise category into the news that really could

affect the markets. I think it's going to take a long time for it to be eligible to move from noise to something that really matters, because at this juncture, what we're really doing is going through a fact finding um investigation. And I think everyone, you know, almost everyone assumes that even if the House were to impeach that you wouldn't see a conviction in the Senate. So the

whole issue becomes mood. But you're right, there can be some peripheral damage to other candidates in the process of this fact finding investigation, and all the media attention that it's getting. Um. The reality is, though, that we have no idea who the nominee is going to be for the Democratic Party and uh and so um. One can assume that the most pro growth candidate on the Democratic side is Joe Biden. But I would give a put a big asterisk after that because we just haven't heard

enough from the candidates. The only candidate willing to really get out there in terms of in depth policies on so many different issues is Elizabeth Warren. So that's causing a little concern on the part of of capitalists, members of you know, on the part of Wall Street. Um, but we haven't yet heard from other candidates, and perhaps

we could be surprised by some some pro growth policies. Certainly, I think one positive for Joe Biden is it he suggests that if he were to become president, he would end the trade war and we would go back to a pre trade war kind of relationship with China, which I think would be viewed very positively. Nick Collis of Data Track, who is a former podcast guest, sent out an email this week pointing out the fact that at this time in ahead of the presidential elections, Ben Carson

and Donald Trump, or even in the polls. I mean, when you take that into account, how difficult is it to actually even think about any election risks to markets because so much could change from here on out. Well, that's exactly right, and that's why even if we were to see a different president, no matter what their policy position is, that would not be that material without looking at the composition of Congress. But it's very hard to

define what we would actually see come January two twenty one. Now, the one headline that I think you agree is is less noise, more actual news that we have to worry about is obviously the trade tensions. In the back and forth. Um. A lot of people I've heard have offered the theory that while this impeachment risk sort of puts the pressure on Donald Trump to agree to the water down deal

a little bit sooner than he may have otherwise. Um. At the same time, he tweeted this week that, oh boy, look at what this impeachment is doing to the stock market. So he seems to be trying to to push the narrative that it's the impeachment that's causing the volatility in the markets. Are the two related? I mean, can Can the impeachment threat actually get us to a trade deal sooner? Do you think? Or is it? Is it just crazy to even try to predict what is going to happen

in this situation. Well, I think what the impeachment threat

does is it creates fatter tails. UH. It increases the likelihood of extreme outcomes, whether it is a greater likelihood that the U S takes minor concessions from China and calls it a deal or um, we could see something moving in the opposite direction where the U S takes a very extreme aggressive position with China, something along the lines of the news report from Bloomberg last week on capital controls and the US mulling that banning or restricting

of investments in China. So I think that that uh impeachment does UM does matter in in that it could cause an outsized reaction one way or the other in terms of the U s is trade policy. Sorry if you're wondering why I'm smiling, it's because I just had the headline Donald Trump and fatter tails popping into my head. I think we might have to go with that. I

think we're bringing you back how many years? Uh, Peter let's let's bring you in here a little bit because a lot of the economic data we've seen this week, it kind of looks like the economy needs a little first aid. You see what I did there? Yeah? Really really making these jokes today, It was really clever. That was good, right, thank you. But walk us through all the releases we've seen this week. What is sort of the bottom line takeaway, uh from the I s M

UH manufacturing services adp uh. You know, what's your sort of end of the week assessment of what the economy is doing? Well? Have the three numbers that got a lot of attention. First was the S M manufacturing, which came in at like a ten year low, and then we had the I s M Services, which was three year low, but that was still about fifty. So we have manufact ccturing basically in a recession, services, which is bigger, bigger and more important part of the economy, hanging in

above fifty. And the question really being which pulls which? Right does does manufacturing pulls services down? Or is the overall strength of the consumer has reflected in the services I s M enough to kind of get businesses feeling more optimistic. And I would say What will make the

difference between those two scenarios is probably politics. And if you include trade and politics, which I do, I think that what's we're having now with with the U. S. China trade tensions are much more about the politics of j Ping and Donald Trump than they are about any underlying economic issues. So and that's far more unknowable than you know, broad economic trends. So yeah, I'm just with Christina. What happens with trade is going to be really really

important for the next few months. Christina. The big question all along really has been is Peter mentioned, how long can you have services and the consumer hanging there while you do see the manufacturing sector languish a bit. This week, I've heard many people bring up the word recession once again, even after a month in which it really kind of

fell off the back and wasn't mentioned as much. Do you think at this point it's still a bit dramatic and it's more about slowing growth or do you think recession fears are actually valid at this point in time. I think it is a bit traumatic. It was just a shocker. Um. You know, markets had gone on quite

merrily throughout um the end of August and through September. Uh, not dissimilar to when I UM put on my first pair of pants after the summer, after probably a little going a little too easy on my diet and drinking a little too much, and and it was this huge shock and I, you know, I've got to get on a workout program. And so very similarly, we had this this I S M manufacturing print that reminded everyone that hey,

we're actually part of a trade war. And it's not just the Eurozone and Japan and China that are being hurt by this, but actually it is having an impact on the U S. So um at this juncture, I expect our base case is that we see a deceleration in the U. S. Economy, but that we don't go into recession in the next year. However, so much of that is dictated by where the trade war goes from here. If it accelerates, if it gets worse, we're likely to

see more damage to the U. S. Economy. Now, I've seen analyzes that focus in on the actual impact of tariffs, but it's not that. The big issue, of course, is the psychological dimension. It's creating economic policy uncertainty, which discourages business investment and we've seen companies, I mean really it's been reporting the Federal Reserve bage book for over a year that companies have pulled back on spending plants. Now

first to go, of course is capex. But then oftentimes, if it lasts long enough, this state of economic policy and certainty, we see it impact jobs. And that's where it becomes an issue because then it filters over into um the consumer side and impacts consumers ability to spend. That's why it's so important for us to focus in

on consumer metrics right now. You know, another big story this week was the U S one a bit of a victory at the World Trade Organization which allowed them to proceed with tariffs on some imports from from Europe. The number I saw it was only seven and a half billion, but it's headline catching items Scotch, Irish whiskey, French wine. I mean, sort of hitting hitting you where it counts. Um. You know, seven and a half billion, it's kind of a drop in the bucket of the economy.

But is there a knock on effect here as far as uh is? This a ratcheting up of tensions with Europe and we have to worry about reaction from Europe. I don't think so, just because this is actually sanctioned UM tariffs. This is the way the US should be pursuing its trade disagreements. It's trade grievances is through the w t O, and so I look at this very differently than the kind of tariffs that the US decided

unilaterally to levy against other countries. Put in a different bucket. Certainly, it's going to give the Eurozone some pain, but keep in mind that there are also gonna there's also going to be a decision about Boeing subsidies. So it's not a one sided um decision. We just haven't gotten the outcome, the full outcome. Peter Christina mentioned that we have seen trade way on business confidence. When it comes to those

consumer metrics, where do we actually stand right now? I mean we keep hearing people say that the consumer is carrying the economy on its back. What does the picture actually look like. Let's start with the obvious, which is we have three point seven percent unemployment. It's really historically low. We've sort of gotten used to it because it's been going on for a while, but this is really just almost unheard of. And and the beauty is that it's

occurring without inflation. Um inflation is actually below the fed's target. Usually if that the FED word would have expected by now that if inflation, if an unemployment never got this low, you would have had an outburst of inflation. So consumers are in a great, great position here, and I think what's important to keep that in mind is, well, we tend to focus on the negative, but there's a huge positive here and consumers again are the bulk of the economy. So, uh,

consumer sentiment is pretty decent. Stock market, you know, we keep looking at the every time it comes down, but we're not that far away from historic highs on the major indusicries. So there's a lot to like. And I'll just throw in a um. Bloomberg Economics came out with the report today about the outlook for the US economy the next twelve months. Only prediction of a risk of recession in the next twelve months. That's based on a

survey on model. That's their model. Yeah, and a lot of has to do with the confidence in the consumer for a lot of these models. So that's still a pretty high number, right, I mean the New York Fed model, I mean it's only it only looks one yield curve, but it's I don't think it's ever gotten above like thirty something without a recession following. I mean, by the time it hits a really alarming then you're in trouble. I agree. Another widely watched indicator, of course, is the

yield curve. And when the yield curve between the twos and the tents went inverted, everybody panicked, Well, it's not inverted anymore. It's actually in positive territory, So you know, I I. You can easily write a story, tell a story of pending recession, but you can also tell a story that maybe things be okay. It depends why your editor asked for again, seeing such a divergence into scenarios

that you could potentially see playing out. What do you actually advise clients to do at this point in time, especially when so much of it seems to hang on the back of what happens with trade, which is so so difficult to predict. Well, we need to encourage investors to take a long look at their portfolios have a

long time horizon. So for those that can do that, that enables them that perspective to really put on blinders, not listen to the noise, because we know that over time usually equities turn in a strong performance with more volatility, but they turn in a strong So if you can wait a long time UM, usually you're rewarded by being by having exposure to risk assets. That's particularly so in

an environment where the feed is accommodative. UM. We are late cycle, but it is an abnormal late cycle because usually late cycles are characterized by central bank tightening, and that is not the case. The central bank is actually getting more accommodative UM. Just this week we saw you know, expectations go up UM significantly and and I think that UM that speaks to a very UM positive environment for

risk assets. So UM. So to put it simply, expect more volatility, be very well diversified UM, and that includes not just equities and fixed income but alternatives. And be well diversified within those three buckets UM, and and try to drown out the noise. That is such creat advice. You hear it so often. Uh, if you're a long term investor, don't even look at your four O one K, just ignore the the noise. The people really listen to that though, or do you find clients just can't can't

help but peek at that those numbers. I think when the headlines become alarming enough, clients can't help but worry. And that is completely understandable. Look at two thousand eight, two thousand nine, UM, there was just so much alarm, and I think it took many by surprise that things got so bad so quickly. So that creates a hyper

sensitivity to what's going on now. But the reality has had someone UM put on you know, put on blinders back then and ridden through it, they probably would not have even realized how bad things got before they got better. I do want to ask in the same post that Mike mentioned at the beginning of the show, I saw that you also wrote that investors should take advantage of opportunities created by downward volatility in order to acquire oversold

assets such as Chinese stocks. Now, I feel like that's kind of an interesting take Chinese stocks Why? And also what other areas do you feel like at this point are oversold but have enough positivity going forward that it's worth it to hop in And if I can butt into, how should a US investor approach the Chinese stock market? I mean E. T F S or Ali baba, you know, how would you go about it? Well, Uh, first, let me say that Chinese stocks look attractive because they've been

beaten down for a while. Um, when the US China trade war started, there was a conventional wisdom that suggested that the U S would win and China would lose a trade war, and that costs a real sell off in Chinese stocks, and they've really been depressed for a while. Now valuations are very attractive. I think there's a growing recognition that there are no winners in a trade war.

And then in fact, China maybe in a better position given its ability to throw all kinds of stimulus at its economy, whether it's fiscal or monetary versus what the what the U S has its its disposal, which is not as many tools to stimulate it economy. And so that to me creates an environment where Chinese stocks um our opportunities, especially if one has a long enough time horizon.

How do you access Chinese stocks? Well, it's very interesting, but um, you know a shares could be one way to do that in this environment and starting to look more attractive beyond just Chinese stocks, I would focus in on emerging markets equities in general as well as e M debt just because of the yields. UM. We are in a world of low yields and it doesn't look like it's going to change anytime soon, or though it might get lower, and so we're gonna have to sniff

out whatever opportunities we can in terms of yield. That's going to take us to dividend paying stocks, but will also take us to e M debt, which relative to historical um uh, historical yield looks pretty good right now. Any particular countries look at or sovereign corporates for you, well, I think you can really run the run the gamut and have exposure to both sovereigns and corporates UM. But for sovereigns I would focus in on Asia. UM. I

have a question about that. This sounds a little bit like reaching for yield, being dissatisfied with what conventional assets give you, and saying, well, I'll go to some more obscure corners of investing world, and of course that can turn out really badly. What about the alternative of just saying, Okay, I'm gonna have to live with the fact that yields are kind of low and that will just dust us my life. It doesn't sound like a very happy Well,

you haven't given a great set of options. But if you want, if you're willing to take lower yields, then you're going to have to save more. UM. Yeah, but I would say that going out on the on the risk curve, so to speak, UM, moving into higher yielding asset classes as long as you're well diversified and UM

can make sense. Uh. If you if you're adding US municipals, high yield municipals as well as he AM debt UM, you're getting a well diversified array of yielding debt and some correlations don't go to one as long as the correlation of one. But I will tell you that one big headwind has been removed from emerging market equities and that is balance sheet normalization that was creating a huge

liquidity stuck and that is going away. I'm going all hundred year Argentina bonds entire PORF sounds very safe and I will tell you that it's not advocated. That was just a joke for anyone else, a joke where it was completely serious for our listeners in Argentine. Do we have some sort of a footnote weekend read right now compliance footnote on yeah, right right, read all the footnotes.

Do not listen to Mike reading, I think is the main foot as Peter real quickly, before we get to the crazy things, I have to ask you about this piece you have in a business week. Everyone has a wealth number, what's yours? And the lead is really funny. You say the world needs a more precise way to describe wealth. Millionaires too broad, covering everyone from random pikers with a scant one million in net worth all the

way up to people just shout of billionaires. Billionaire has the same problem and being you know, what's the meaning to be a millionaire? Billionaire? So so tell us real

quickly what you did with this. You basically created a scale scale, a scale which is based on logarithms, and said, okay, look, uh, if you're a million, one million dollars is ten to the six power dollars, so you're a six, right, A thousand dollars is tend to the third, so you're three until your net worth it can be boiled onto a single number. Um, if you're worth one penny, that's tend

to the negative seconds, so you're a minus two. That's kind of low and then the richest people in the world, and they're really only two of them in this category, Bill Gates and Jeffrey Bays. Those are elevens. They have more than a hundred billion dollars in net worth. So that's the fun of it, is like, well, everybody is somewhere in that scale, even if you're have liabilities exceeding your assets, so the logarithm is undefined. I just arbitrually

stuck them into the minus two categories. That's really interesting, especially that catches on. It is catching on. It's like amazing people should look at it on the internet, like everybody is saying, oh, what's your one or what's your number? Has been pretty fun. Yeah, alright, well we will not disclose our numbers. No, no, no, Well, in this show, we will disclose the craziest things we've seen this week? Is it to the invest go is a eleven in terms of the amount of an assets under manage nine

hundreds something billion. Actually we're at a close to one point to trillion, so you're a twelve. Amazing bezos. Yeah, wow about those crazy things, Sarah, I believe we got a call in to the what goes up hotline. Is that true? We did. It's from Morgan Hill. He's an investment associate at Providence Wealth Advisors in Fort Lauderdale, Florida.

So let's take a listen. I've noticed on Tuesday that Charles Schwab Interactive Brokers actually announced that they're issuing a commission free trading platform for stocks, et s and options online. And what was crazy about it that as soon as that announcement came out, both of their UM kickers as well as TDA Merrit Trade and other brokers dropped at least nine percent. So the market interpret of that is a negative, I guess, but I just thought it was crazy.

So it was. And then we saw TDA Merrit Trade follow, we saw each trade follow, and that just really plays into that whole narrative of what we've seen of these different brokerages just in a race to the bottom. It's pretty it was a pretty big story. And the question people always ask me about that as well, how did these guys make money? And you know the answers well, net interest margin, like banks, you know, people have cash sitting there and they make money off of those bounces.

But also what I think is really interesting is the payment for order flow. You know, these firms basically sell their order flow to electronic market makers a k. High speed traders. So I'll be curious if that whole controversy over h f T comes back. People always love talking and ragging on h f T, so I wouldn't be surprised. I think that's it's a day in the sun again. Well thanks to the color. That's a That's a good one, Sarah.

Can you top the zero commission fees? I don't know if I can, but I think this is a pretty good one. I think we could say there's been some craziness going on over at Credit Suites. There was this investigation disclosed in which one of the former heads of the wealth management unit left and the CEO had sent

a private investigator detective after him. Well, Bloomberg had a great story out this week, and what they disclosed was that there was one day um when the two parties were at the same party together and they got in a fight, supposedly over gardening, and they make it out to seem as if ever since that moment, there's been this back and forth between the two which because one criticized the equality of the other's garden right, So it's

pretty pretty unbelievable. I guess you asked for gardening leave after that. Yeah, man, the Crowns need a better studio audience here, Peter, Can you top the Great Garden Words? It's kind of a weird one. I went to a book party for Stephen Schwartzman this week. He has a new book coming out called What It Takes, and he spoke with the New York Pollitic Library and the Schwartzman

Building as it happens. Um, what a coincidence. And at the end of it, he was asked about what Bernie Sanders said, which is that I don't think billionaires should exist. So uh, impromptu, he shot back, I don't think Bernie Sanders should exist, so bold. I wrote a story about this and it was getting a lot of traffic, and then suddenly we had the terrible news about Bernie Sanders. Extents put in um and I'm sure he's gonna be fine, but it was a little scary, and so we kind

of submerged that story. Timing not the best timing, but thankfully they have come out now and said Bernie Sanders should be fine. I'll be at the next debate etcetera, etcetera. Yeah, well you won't get a lecture for me. I've never been famous for my good taste. What did Schwarzman's what a seven or an eight on your scale? Yeah, he's a ten. That's okay. Yeah he's up there, but he's not as well. You know, Christina, did they inform you

of our our tradition here with the craziest thing? Yes, but I'm not as interesting certainly as the stories you have, so I have to apologize in advance. But it seems this seemed pretty crazy to me, and it just has to do with FED funds futures. If you look at the CMEME FED Watch tool, in just a week, and of course during the course of that week, we got the I s M manufacturing number and we got the

I s M Services number. But the course of a week, um, we went from less than fifty expecting a rate cut at the end of the month to a full eighty eight percent or so expecting a rake cut at the end of the month. So talk about a story where bad is good. Um. Markets always seem to find a way to find a silver lining, and this seems to be it, especially to move that close to the meeting. I think is is pretty rare that to see those those moves that close, especially given how much dissension we've

heard from the FED um. The reluctance with which some members actually voted for a cut in September very interesting. There's no doubt that the meeting this month will be very very well watched, and hopefully they will only have plastic utensils, because you know, we don't want to see any kind of a violence breakout on the course of a FED meet that could be very charged. Yes, yes, okay, these are all good crazy things. I'm gonna go out on a women say I think I consider you a

trendy New Yorker. That's that's safe to say. I think you might be. You might be giving me something from a bridge and tunnel guy like myself. You're you're a trendy. So this is straight out of the headlines from the New York Post. I'm not making this up. By the way, the hottest new psychedelic drug trend among trendy New Yorkers is illegal toad venom. But illegal toad venom, so apparently you take a Colorado River toad and you have to milk the venom out of it. Then you try. I

won't ask how I don't ask. It's like that, Robert, I'm not sure you're calling me a trendy New Yorker. Is really much of a compliment? Have you been spoken? Absolutely not. So you drive into a paste and you smoke it. And remember, Peter, when we were kids, people used to joke about licking toads. I think it was the same idea, but now they they've taken it. I'm

just surprised it's not vaping toads. But here's this one guy sitting cross leg on a blanket in his Soho apartment Parrot Paul and held toad venom smoked through a glass stemp pipe. I saw my younger self with my parents and next boyfriends and places I've been hurt. I experienced forty five minutes of shooting through the universe and being reborn. So this is the crazy story I've ever seen.

I've seen, and obviously it's very Of course, if you're gonna have a psychedelic drug trend, it's going to be popular in the Hampton's uh. Recently, the Post reports twenty one people in white robes gathered at a mansion in the Hamptons to smoke the substance with the same shaman that Poul used. So you may ask, well, what does this have to do with market, what does it want? And the answer is not nothing. Really, it's such it's

a black market, right Mike. If I had known that that there was such a liberal interpretation this week, I would have told you the story about the squirrel that actually asked a hiker for help um for its injured baby. Yes, absolutely, this was in the news in the last week. UM in Pulaski, Virginia. A hiker was walking on a trail. A squirrel came out and wouldn't let it pass and brought it to it, tugged on the hikers pants and brought it to its injured um, small baby squirrel um,

which was being managed by a cat. This is beautiful, isn't this. I mean, this is one of those feel good moments that's not just crazy, but it's heartwarming. All is good in the world now. But they didn't really ask for help. I was assuming the hiker was smoking some toad venoms. That could have been the case. All right, that's a good one too, But this is a black market, so it is okay. I give you that a stretch. It's a stratech, but it was crazy, so i'll give

you that, and the squirrel relates to first date. All coming together with that said, though, Christina Hooper Peter Coy was so great having you both on the show today. 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 on Apple Podcasts so more listeners can

find us. And you can find us on Twitter. Follow me at at Sarah pont Seck, Mike is at Regnonymous. Our guest Christina Hooper is at Christina Hooper, and Peter Coy is at peter Ki. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Toper Foreheads. The head of Bloomberg podcast is Francesco Levie. Thanks for listening to you. Next time,