Jerome Powell’s Necktie Is Too Tight

are gone. Rather, the G twenty meeting is next week, and now there's actually concerns over a real war with Iran after our U S drone was shot down. Meanwhile, the March of the Unicorns continues with Slack Technologies making its triumphant debut on Wall Street, and our guests will help us sort all of that out, and of course we'll finish with our tradition the craziest thing I ever saw in markets this week, Sarah, I'm assuming you're prepared well.

Our two guests are today. I don't know if you realize, but they both remind me of my days over on Bloomberg Opinion. What was called gadfly back then, and this is back when I was licensed and accredited to actually have opinions in this company, I'm you're no longer allowed to have opinions, and I'll tell you have an opinions is harder than it sounds. I mean, it's one thing to call up someone and get his opinions on the market, and then if he's wrong, it's it's his problem and

you can move on. But when you have to have him yourself, it's it's actually pretty incimidating. But our first guest here, uh Julian Emmanuel of bt I G, the chief Equity and Derivative strategist. Welcome to the show. Joints. Great to be here. And Julian, Now, when I used to have opinions, I can assure you they were all valid, serious opinions, except on Fridays when I went off my meds. And one week, one week, the story I wrote about was a Bloomberg story about how Jay Crew had widened

neckties by a quitter. And that made me think, we have to do a league table of the best dressmen on Wall Street to to find out how why their their neckties were. And I did, and I did, and I'll tell you some of our friends in Bloomberg did not perform well in this league table. John Farrow was at the bottom at about two and a quarter. Yeah, even Lukawa was near the bottom at two and a quarter. Julian, I'm proud to say it was right in the middle, which I think is where you want to be in

this particular league table three and a quarter. I gotta call you out on that one, Mike, because basically, a couple of years ago I was on with Keen and Tom looked at me said that is a beautiful So I don't know about that. I'm not even sure if you voluntarily participated or if I just hijacked you with a ruler after he came off TV or something I

I can't remember. Yeah, how do you even get I'm surprised You've got so many people to participates in the middle, and I think that is the sweet spot, right at near the national benchmark average. You don't want to be in the in the tail of this bell curve at all. But also from Bloomberg opinion, my old pal Shira over Day, who covers all things technology and whatnot, sure can probably explain that maybe that necktie story is why I'm no

longer allowed to have opinions disagree. We need more necktie content on Bloomberg Opinion. I was hoping someone would refresh that league table once a year, but no luck. Can you imagine if they assigned it to an intern or someone new, make sure that they track every single person down and measure their necktime. I have to admit that I am looking at your necktie right now, Mike, to see how wide it is. Little, but anyway, from neckties to FED, I don't really know how to make that

it's truly smooth transition. If everyone has ideas, shout let me know. But Julie and I want to come to you, because everyone was talking about before the FED meeting on Wednesday, the statement that it was going to be so difficult for them to truly out of the markets, but it seems likely. Did I mean, is that truly what happened here? That is definitely part of it. And I have to say,

I'll give you the trade transition here. Chair Pal's necktie at the press conference was about as tight as it could possibly have been given the tweets of the previous forty eight hours. Um. You know, from from our point of view, we actually expected that the FED might disappoint given the debvish expectations. But Chair Powell really did come through UM, and you can see it in the market pricing in a really a hundred percent chance of a twenty five basis point cut at the July meeting, and

actually almost a chance of a fifty basis point cut. Uh. So the markets definitely did like it, but importantly the Fed like the market's reaction to what it said. Right. But last I read from you, you're actually thinking it won't come until September, that that first cut and then maybe another in December. Is that still you're thinking after this week's performance, we're sticking with that, although clearly the

the odds of skewed of the potential for July. But if you think about the sort of quandary that the FED chair is in if you wait till September, particularly given the markets positive reaction over the last several days UM and what we think could be positive news coming out of G twenty UH in the next week and a half or so UM, the asset markets are perhaps

giving the Fed the time to wait. And if you think about it again, from this challenge of the tight necktie with regard to political independence, waiting past July sends a message that the FED is independent of of the White House number one, and importantly actually is independent of what the market is trying to force them to do with the knowledge that you could still go in September

and continue apace. So there are many people who say that if we don't get a rate cut now in July, because it is so highly expected that we are going to see pretty much a fit from the market. Well, your guys, price target, I know for your end is still around three thousand. How is it that you guys see the potential for the FED to not cut in July. But stocks are really still hang in there and potentially

moved much higher. Well, you know, setting a new all time high uh this week at least on an intra day basis, as we have, um, we're pretty darned close to that three uh So, you know, happily so of course, But in that respect, it really is a case of you know, whether you measure it in terms of financial conditions. In the Bloomberg Financial Conditions Index is really a very valuable tool, and that is reasonably loose compared to the

last year and a half or so. UM, the FED actually has the leeway and if the market walks back its own expectations, particularly if you get good news from Trump and G And remember we've also got earning season reporting starting in the middle of July, which tends to be a tale when for stocks in general you still get the three thousand. Now, what does good news at the G twenty look like? Is it a handshake and

a letter to keep talking? Uh? Is it? I mean obviously they're not gonna presumably have a deal signed, sealed and delivered between the US and China. There what what would sort of you know, define good news to you at the well? I think it smiles after the steak dinner, red wine for G and the diet coke for President Trumps,

as appears to be the case. But for US, if you look at financial markets over the last several years, whatever the quandary has been, bregsit, debt, ceiling, China, whatever it is, if you're able to successfully call it, kick the can down the road and leave markets optimistic that you're gonna get an eventual the solution to whatever it is,

that's gonna be enough. And we think that's the case here, particularly since in the last forty eight hours it's very clear that North Korea is on the table as well when it comes to a trade deal versus a FED cut, So you can only get one or another, which is

actually more valuable for the stock market. I mean, in a way, can you make the case that maybe a deal of the G twenty or really a positive outcome there isn't the greatest outcome because then maybe the FED takes that away and they start to see economic data turnaround, really start to tighten up, toughen up, and the FED decides that they're not going to cut the data doesn't imply it well. So we give Chairman Pal a lot of credit for pivoting as quickly as he did in

January from cut from tightening to neutral. But the way this week is sorted itself out, we are in easing mode, whether we actually get the cuts where they're delayed, and so you know, we don't expect a repivot back to neutral or tightening in that respect. The trade deal is really very important because if you look at the last year and the cause of the Fed's concerned, it's been

inflation being too low. And one of the mistakes the FED made last year in tightening what we think they overtightened and shouldn't have tightened in December, was in assuming that a trade war was going to be inflationary, and in fact it's proven to be disinflationary by by leaps and bounds. Now, Julian, your business card says chief Equity and Derivative Strategists. So I want to I want to

ask you about the derivatives end a little bit. You know, I've noticed the VIX has sort of flattened out here at about fifteen or so during June. We're not getting back to those single digit readings on implied volatility as far as the VIX goes, Um, is there any information in that to you? I mean, is it just sort of uh embedded nervousness until all these issues are resolved, or or what I mean, are those days of single digit VIX just just gone forever gone, forget about them.

That we traded below nine at the end of two thousand and seventeen and and when we began our coverage would be t i G in January of eighteen, we may the point that that was a turning point in what we saw as a six year cyclical regime change in volatility. And so obviously the spikes that we saw throughout two thousand and eighteen and then again in uh

in early this year. UM to us makes sense. They're logical, and when you think about it with respect to the political risks that are building as the world really redraws itself in terms of trade and relationships and so on,

it makes a lot of sense. And what it also tells you, it's a reminder that while things seem good now, and and we do think that there is enough good news out there to potentially take carry markets perhaps even beyond three thousand, we're still going to have to deal with the debt ceiling and a budget battle in the fall, and Brexit. The thing, the gift that keeps on giving

is going to be there waiting for Halloween exactly. What about the divergence that we've seen though between volatility in the bond market and volatility in the stock market, because I know, if you use the move Index from Bank of America as a sort of benchmark for bond market volatility, we have seen such a spike in recent weeks, and now we have the ten year dipping below two percent for the first time in yet the VIX is still

very muted. I mean, do you make the case that we will have to see a convergence that two come together. And if so, I mean, does the VIX move higher or does bond volatility finally start to settle down a little. We think there will be a convergence, probably in the in the guys of bond market volatility coming in and and the VIX rising um. Essentially, a lot of the activity and financial markets over the last year has been

about positioning. So when we got to the end of March and German yields first went back to the negative bound, which you know, to all of US financial professionals with any gray hair, is almost completely inconceivable, there was a a an initial panic. But then in in April, as markets sort of turned better and yield stabilized, there was a thought that you wouldn't have the US ten uere yield go back to two percent. Well, that sort of

went out the window of the last few weeks. I mean, honestly, we didn't see yields plunging to this depth, but then again we didn't see German yields trading to minus thirty basis points, and that caused what we call in the options market a short gamma squeeze. Basically people had been selling sort of those downside strikes and and really short exposure in that area, and once you got to around two,

the vall started to build. We think ultimately, in fact, as the Fed UH loosens policy at the short end builds inflation expectations, that you actually have a rise in the long end i e. Is steepening yield curve. And that's part of the happiness of the last several days if you're j Powell, because inflation expectations were the first thing to ratchet higher UH post the f o MC conference. Now, given what you're expecting some good news at the G

twenty and eventual monetary easing later in the year. What sort of sectors stocks would it be? Your your traditional cyclical industrial semiconductors or you know, our tech columnists here, Shara, should she uh start writing about utilities instead? What you know? How how should we position? Yeah, it's having been doing this for quite some time, I never thought I'd use

the phrase momentum Darling when referring to utilities. I mean, again, going back to the nineties and and and trading technology on the way up, it's absolutely extraordinary um from our point of view, this is the part of the cycle, particularly given our view that the yield curve is going to steep in um that you want to lean a bit more cyclically oriented, and that means financials which have been suppressed because again German yields and the yield curve

being as flat as it's been. Also energy, obviously energy is has a geopolitical backstop at this point given the tension in Iran, but it's also sunk to less than five percent of the way to the SMP. And we are true believers in autonomous driving and electric vehicles and all that, but energy is still a story that in the medium term looks very interesting to us, and it's

a sector that's poise for consolidation. Cherre, I want to come to you because we did have a new I p O or direct listing as we could call it, this week. But start a little broader on the tech front, because software companies are just trading at such high valuations. I know software is the best performing industry in the SMP five hundred. What is it about this market right now that is just making investors so interested in the

software space. I think it's a particular type of software companies that investors are really excited about these sort of software as a service or B two B software cloud software companies, however you want to describe them. But these are companies that investors have fallen in love with, kind of to the point of mania. We're talking about companies like Workday or Salesforce or Viva Systems, which makes pharmaceutical software. And I think the appeal here is these companies sell

an understood product. They sell software for money to companies that have money, and there's kind of a repeat business, right, It's a subscription basis. You're the companies are paying you know, monthly or on an annual basis, and it's sort of fairly easy to model out what the revenue model and what the financial model looks like long term once you get companies paying kind of a recurring subs dryption for software.

And so what you've seen is these companies have, you know, for the most part, do not have profits, but they do have revenue and free cash flow in some cases and are trading at very very high multiples to revenue. In particular. Now, sure, let's uh, let's pretend I'm not the young, hipster, tech savvy guy that I am, because we all know you are. Just imagine I don't. I don't know. I'm a middle aged dad talking about the

width of your necktime. Hypothetical hypothetical situation. Let's say hypothetically, I've never heard of this Slack Technologies. I'm not quite sure what they do, but I do know they lost a hundred and thirty nine million dollars last year on sales of about four hundred million. Just walk us through what Slack is and why investors seem to be excited to buy a company that's that's losing more than a quarter of their sales. I will tell you that my

tech journalist brain is now broken. Where I see a company that's like, oh, they're only bleeding a hundred million dollars in cash everywhere, sounds great. Signed me up. So the basic explanation of Slack is it's instant messaging designed for the workplace, and I think that under sells it a little bit. And Slack, I think has this issue where it is a little bit difficult to describe their

software until you really use it. But again, it's instant messaging, and the idea is it kind of collects, You're able to kind of organize multiple people's in boxes essentially in a semi public way that you can organize groups or teams, and then everything that's related to let's say some marketing project that a team is working on will go into one channel, as Slack calls it, and only the people who are on that channel need to see it. So it avoids the sort of reply all pain that we

have sometimes felt inside of companies. And you know, it also does a good job of kind of connecting to others them. So I know companies, for example, that all of the customer service requests or complaints, no matter what

channel it's coming from. If it's like an angry tweet or an instant message that a customer might send through a company's website, it all gets sent and and kind of distributed through Slack, so that people on the East Coast, let's say, we'll see all of the messages no matter where it's coming from, customer service complaints from the coast that they live on. So it is a clever piece

of software. I think there are open questions about whether it is a kind of nice to have software for companies or whether it becomes an essential tool inside of a modern office. But definitely it's good software that now investors are over the moon about and on that subscription basis. On that subscription basis, yes, and they have they say they have ten million people who use it on a daily basis inside of organizations and something like six kind

of paying customers, paying organizations. How can you print out all these chats and given them a guy like me to interesting, I've never noticed. If they're there's probably a print option. Um, do not do that. However, do not print your slack chats. But so you talk about the subscription model, but how are investors actually going about valuing a company of this sort, especially if, like you said, they are losing money like many of the other tech

ideas that we've seen lately. I mean, I think the metrics that have become important are looking at sort of recurring revenue sort of you know, how much money is repeatable business, and also looking ahead at at billing so basically booked business that is not yet paid. So really growth and revenue and kind of retention rates of existing customers. Those are the metrics that people look at in the absence of you know, conventional gap profits. Another column you

had that caught my eye. The headline was something like who knows what lurks in the emails of tech executives. You know, obviously, with the anti trust scrutiny coming up on Facebook, Amazon, Google, is this the right time for Facebook to be trying to revolutionize the payments system with its own cryptocurrency. You're saying this is not a time they will want to attract more attention from regulators. Yeah,

fair enough. Look, I've heard Mark Zuckerberg say a few times now in the last couple of years that they can't stop running the company and they can't stop coming out with new products and ideas because of the scrutiny they're under, which I think is true and also not true. Right, they obviously want to be a little bit more cautious and careful than they would have been prior to two thousands six or but they you know, you've got to

keep innovating. That's the role of a tech company. Julian, How do you think about this regulatory risk with a group as important as the Fang stocks? I mean, is it make you sort of want to look elsewhere in the market or these still going to be the stocks that that lead us highre Well, when we're looking at over the balance of this year and into an election

year next year. Uh, we're neutral on the group, but you know, if you look at the last ten twenty thirty years, it's very clear the technology is the bowl market. You you you know, we've done a lot of work that says markets can continue to go up, but technology can only underperformed by a certain amount. So from our point of view, it's something we'd like to see it

get further along in the election cycle. UM valuations are reasonable broadly, and I would say, you know, again, when you're thinking about software in particular, it's that that phrase recurring revenue that is literally music to the streets ears And if you think about it like we do from an options perspective, if you have a company with recurring revenue, you can actually there's like less volatility to its streams, so you can in fact pay more for that company.

What about the I P O market this year? I know, if you look at the I P O E T F it's having its best first half of the year pretty much. Ever, so is this something that you guys actually think about participating in or is it just very risky and you need to wait until things kind of die down? A little well, B T I. G. S. Capital Markets at desk has been very, very busy, which is a great thing. And and you know, we look at that to try and gauge signs of of froth.

We're nowhere near the excesses that we saw in and two thousands. And if you think about it, part of the reason that the optics of it over the last several months have been as busy as they've been is because you actually had a delay for the first several months of the year and getting the paperwork through because

of the government shutdown. So it will be interesting to see as we get into the heart of the summer whether there's going to be a slowdown or not that that that will be an important sign slowdown in issuance or slowdown into the price appreciation slowdown in issuance. And if you look at it in terms of the price, there have been winners and losers. It's not all straight winners. Um, you know, it's uh and and and they differentiated. And

it isn't necessarily technology only that's captured people's imaginations. Well, sorry, I'm looking at your stop what Sarah keeps a stopwatch running very intimidating a little bit that we don't go on for too long, but that's our que to get to the really the most important part of the podcast, which is the craziest thing I've seen in markets ever, or at least this week, Prince Jasons. We really haven't finalized that title of it yet, Julian. Did they warny

about this about this sec They absolutely did. We try We try so, so from our point of view, this week has been a great example of artificial intelligence run wild. And as you know, part of the reason that you brought me here to join you it was is to talk about the fed an interest greats very important in

terms of thinking about stock prices. Well, what we noticed was if you did a search for stories with the keyword yield curve into and through the f o m C press conference this week, we saw a massive spike in that story count, and from our point of view, it really is a big justification for why the yield curve steep and nine basis points that may not sound like a lot, but on something that was trading at nineteen to go from nineteen to twenty eight, that's a

huge move. So we don't know whether it was, you know, revenge of the nerds or return of the bond vigilantes. But we do know it's a big deal. Sorry, it's it's illuminating how guys on the street use our work product here we think they're they're they're reading our stores and you're really getting to the bottom. It's we start messing with it. I'm just gonna write as that just goes you have really mess with you. I'm not really gonna do that, Sarah. Have you seen any crazy market

things this week? So something I thought was interesting was in the aftermath of the Jerome pal pressor, we saw stocks rally, we saw bonds rally, we saw gold's rally, and we saw oil rally altogether, and I thought it was kind of funny. Macro risk advisors called it as cats and dogs playing together, basically because on the one end, you think of bonds and gold being the safe havens, and then you think of stocks and oil being risk assets.

But the reality is that now we have low interest rates, we also see the dollar falling at last um, so we're just seeing pretty much a bid to everything, which is I thought it was pretty pretty crazy. Everything that's an old Steve Martin reference, isn't that? The cats and dogs living together. Sure have we warned you about this gimmick we have here? You did? I may I may

have done it wrong. However, so I read there was a story in the woll Street Journal this week about Venezuela, the Venezuelan Central Bank basically smuggling seven or eight tons of gold to be melted down in Uganda and then resold secretly in the Middle East. Which is I mean, it's it's it hasn't everything right, It's got just imagining eight tons of gold on these Russian cargo planes being flown to Uganda in the middle of the night and

then being trucked to some refinery and melted down. So they concluded that it was that's what the Ugandan authorities said that they believe that is what happened. That's a way of Venezuela basically getting cash by going around US sanctions. Didn't someone tell them they were probably better off trying to smuggle in et F much less and then you redeem it afterwards and they have to find the vault where your gold is. At least suggest that to the

Maduro government. All right, well, mine, I'm stretching the definition of markets here a little bit which I've got to do. You go to our are you jewelry? This week? I'm going, yeah, that was you. This week, I'm going to the gambling market. That's a real market. Julian, right, absolutely, sports, it's legal now sports spouting in Jersey. I can't believe. I still can't believe it when I read this, but so I'll just read the story. The lead of the story here

from Evan Novie Williams here at Bloomberg. National Basketball Association has come up with a way for fans to gamble real money on fake games. Have you guys seen this story? So what happens is they basically spliced together a bunch of clips from different basketball games and create a fake game out of it. I'll read you the sort of the nutcraft here. Vetters will be dropped into the final nineties seconds of a virtual matchup between two NBA teams.

The game will then splice together random possessions from various nets Lakers games. In reason, do we not have enough things to gamble on? Julian to my avatar is backing away from that very I'll tell you one thing, with the exception of the last several weeks, you don't want bet against Steph Curry. The editors of that. Whatever they are doing is placing together different possessions, they've got to be talented mess them up. Yeah. Well, you know, I

think it's kind of done randomly. It almost sounds like it's just a computer program that takes various possessions artificial intelligence. I don't know. We'll find something better to gamble on than that. That's pretty crazy. I'll give it you absolutely. But with that said, Julian Emmanuel Sierra Obi Day, thanks so much for joining us today. Thank you, Thanks what those out will be back next week. Until then, you can find us on the Bloomberg Terminal, website and app

or wherever you get your podcasts. We 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 Pontzack, Mike is at reag Anonymous. Our guest, Sierra Obi Day is at Shira ob Day, and Bloomberg pot Cast is at Podcasts. What Goes Up is produced by sober Forehead. The head of bloomber podcast is Francesco Levie. Thanks for listening. See you next time,