Bloomberg Markets (01/19/2022)

Bloomberg Markets (01/19/2022)

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From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the US trading day on Wednesday January 19th. Here are the top market stories we're following for you at this hour. To the brink and back the debt buyers come in and the NASDAQ rebounds after falling dangerously close to correction territory. The global bond sell off takes a breather. That's a wrap. Bank of America thinks loan growth at Morgan Stanley is equity traders as the two close out big bank earnings on a more positive note. And credit check. We'll take a look at the potential ripple effects of tighter financial conditions as the market braces for more Fed rate hikes. We'll discuss with Bruce

Richards Marathon Asset Management chairman and CEO from New York. I'm Gately Lines with my co-host in London. Guy Johnson Alix Steel is off today. Welcome to Bloomberg Markets. Guy it's looking a lot better today than it did yesterday. The question is does it stick. Well that's the big question everybody's asking themselves after yesterday it is unsurprising I think that you do see something of a stabilization particularly in equity markets. As you say Caylee. We are seeing the bond market taking a breather but there's a long way to go in this journey. Cameron cries on the Bloomberg writing a really interesting piece over the last few minutes which he's just published talking about the fact that at some point you've got to get your nose out of the spreadsheets and take a look at the price action.

It looks like one of those times he basically has a list of charts that you want to pay attention to. You've got the Russell in there. You've got a inverted head and shoulders when it comes to treasuries. You've got what is happening with the S&P. You've got the real yield. There are a whole bunch of charts that are worth paying attention to. The one that I think we may focus on over the next few minutes is what is happening with the S&P which is in and around its 100 day moving average. And that has been a great signal of late for debt buyers to come in. The question is this

time different. But the question of the day is a fairly straightforward one. Is it time to buy the dip. Joining us now to discuss this and even devotes a Bloomberg Markets life Abigail Doolittle joining us on set as well. Eddie let me start with you. You wrote a piece that caught my eye first thing this morning. CAC kind of followed that up with a whole load of other charts as well. This 100 day moving average has been a great signal. Is it going to work this time or is this time going to be different. Look if CAC tells you today is the day to take your nose out of the spreadsheets then you know it's a big day in markets. And really I think I think it's been

building up towards this road because there's been as you say the years just started off with a slightly tentative slightly confused note with stocks pulling back bond yields pushing higher. But every time over the past year really since the end of 2020 every time either we we saw the 100 day moving average or we saw stocks pull back about 3 to 5 per cent that's where the dip bias came in. But here's the thing. If you don't see the dip by step in on these levels you see the hundred day fail and you see you know the pullback going maybe to 6 per cent which we haven't seen for more than a year now. We see those reliable indicators starting to file for the levels of which the dip buys come in. And then I think it could turn really nasty. But it doesn't look like today is that day. It looks like today they are happy to come back on the beat again. All right. So Abigail obviously it's the 100 day moving average we're paying attention to with the S&P with the NASDAQ. It actually breached that 200

day yesterday for the first time. And I think. Four hundred and thirty nine trading days. How significant was that move. You know it's interesting Kelly. That is a tremendous test of support of course. But I think that when we talk about these technicals and I say this as somebody who loves the charts we want to consider this all from a macro perspective. And what we have going on here is a real repricing of risk as the Fed tries to normalize policy and the other central banks. It's a time when you're going to see obviously yields go higher and that jitters through all the different asset classes. That's a long way of saying lots of volatility. So if you take a look at the S&P 500 over the last couple of

months it's been going up and down testing that 100 day moving average. Now yesterday I was sharing with you and Guy that one of the old trade saying set trade savings is by the first test and then sell the others. But this 100 day moving average on the S&P 500 has been very reliable. The fact that you had the Nasdaq down on its 200 day moving average the Russell 2000 has been flirting with its 200 day moving average all year. That does say something that there really is a war here between the buyers and the sellers. It's going to take time for investors to get comfortable with

the idea that rates are going higher. Last year if you recall you had that 10 year yield back right up to 175. And then investor it caused a lot of jitters that investors got used to it. And then you had the Nasdaq 100 up a lot higher on the year. So I think volatility is the name of the game here. Abigail as you say it has been rates that have been moving the equity

markets we've seen a huge repricing a massive repricing at the start of this year in US rates. Any indications from the chart whether that move is over how much more there is still to come because equity markets are going to take their cue from that. They certainly are Guy. And a very quick look at the 10 year yield to my I would suggest that we're going to see 225 pretty quickly similar to last year. You had that 10 year yield. Once it went through 1 percent it just took off for one seventy five. These moves go further and longer than you could possibly think. So I would not be surprised to see the 10 year yield that benchmark yield go again above 2 percent really very quickly. That could cause the jitters that we're seeing. Think of this as

a car in terms of normalization of policy for the Fed. It's almost like a car stuck in a ditch. It's not going to be straight up. It's back and forth. Now the yield there could go straight up but they're going to cause that back and forth for stocks. So I think again volatility as this repricing happens could be here for much longer than would seem possible perhaps.

Well talking about how long volatility may stay around it now seems like it's the March meeting and traders now pricing in more than a 25 basis point hike. Is that realistic in your view. And how would the market have to play catch up to that. You know I think the market really has come out and really got behind the Fed narratives of a really hawkish year with several rate hikes. I think you know even maybe for this year from the Fed looking possible if you're looking at pricing. The real question for me though is if we do see a significant sell off in stocks and we see that then nothing goes right. You know the charts are only important as long as they they support the fundamentals. But again nothing changes the narrative like the price. And if we see a big drawdown whether the Fed will say OK hang on a second. Maybe

that sentiment too much. And we pull back a little bit on our on on our expectations of a bite. I think really the Fed has given itself a lot of room to be dovish this year. Right. And I think throughout the year perhaps they scaled back just a little bit. If inflation allows them to do so and that way the Fed can come in you know through the end of the year deliver two rate hikes look dovish and we see a very very supportive environment for the equity markets. That's a bit further down the road. We've got to deal with the debt maybe the hawkish story unfolding a little bit further. Eddie we're looking forward to that March meeting. I think there's a lot of concern around what is going to happen there

and what the Fed is going to signal. We're in the quiet period now. We're not getting much commentary killing through from the Fed. You spoke this morning in your piece about the idea that there could be other catalysts. We've talked already about what is happening with yields. We've talked about what is happening with the charts. We've got the earnings story coming through as well. How will the dip buyers going to be looking at what is happening with the earnings story. Because the financials were meant to be one of the big areas that took advantage of the story of rising yields. However we've had this flatter curve which has unnerved them. We've got rising costs. Margins are being called into question. Eddie if we're looking for other

Catholics to we're trying to think about what is going to encourage or discourage investors in the equity markets the dip buyers whether they come in or not. How important are earnings going to be. Earnings are really important but earnings are a little bit backward looking. And don't forget we had Arbitron and you know this is this wave of infections that around the world and affected supply chains again and so on. So it's a little bit backward looking to me. For me what I think the the traders are going to care about are the anecdotal stuff right there that the commentary comes alongside the earnings. Look what the what the CEOs what the executives tell us they are expecting for the quarter going forward. Of course that is always important but the same for PMI and the Beige Book. Those are the three things that I'm really looking forward you to tell

me where we go from here because I think the backward looking stuff just I think Christmas was a little bit cloudy this year. And Abigail when we look beneath the surface what about breadth. What does that signal to you. That's interesting point for sure Kaylie because yesterday I was taking a look at a chart on the S&P 500 and maybe it was the Nasdaq 100. In any case 90 percent

of the members I believe were off the 2 under day. It was something that was essentially bear. So the breath is not great here. But you know to Eddie's point around earnings I would say that's something to think about is they may be backward looking but very important relative to the rates because if earnings come in strong it suggests that the economy can digest rising rates which would be seen as a very healthy signal. So if you take that in context with other positive data it could help. And

something else I would point out about the yield curve which is sort of an interesting thing. So this could be a Goldilocks macro rotation because to Eddie's point the Fed has a lot of room here. People like to you know harbor on them. But I would make the point that they really don't make mistakes. The Fed put something out there. The market meets them. They meet the market. They can back off if they need to. If there's real wobbles. But the yield curve as it comes in while it does cause the repricing of risk until it actually inverts that tends to support stocks it creates this volatility. But if you look back in time as the yield curve comes in. That could support stocks. So again it may be a volatile period but overall it could be

constructive for stocks until maybe it's not. If we do some time at some point see that inversion. Super interesting. What we are seeing a steeper yield curve today. Thank you so much to Bloomberg's Abigail Doolittle as well as adding Vanderbilt. And coming up our next guest continues to predict Project 2020 too will be a positive year on the back of a strong consumer. Sylvia Blonsky Defiance CIO and co-founder joins us next. This is Bloomberg. So we're 43 minutes into the US session stocks beginning to climb back a little bit today. So let's pick up where we left

off. Talk about our Question of the day is it time to buy the debt. We're joined now by Sylvia Jablonski Defiance CEO and co-founder Sylvia. Great to have you on the show. What do you think. Good morning. I think yes it's time to buy the dip. I am. I am a very persistent perpetual dip buyer and I think that you know these opportunities. It's sort of hard to say that they're hard to come by because they have popped up multiple times in the last two or three years. But each of those times showed us that when we talk when retail traders and institutions come back into the market on these two to six percent pullback sort of depending on where you look the market begins to kind of go back to status quo and revert to the mean. So I think the the story is there. You know we're in a growing economy. These companies

are sort of flush with cash. I'm not too worried about the 10 year where it is. I think that the market is sort of over reacting to the potential for rate hikes and the 10 year. And you know we have a lot of quality strong cash laden companies out there to invest in. Well Sylvia I could see how it could be easy to be a buyer over the last year and change because there's been abundant liquidity. Financial conditions have been really quite easy. But now we're starting to talk about the prospect of liquidity getting drained out of the market rather than put it in tighter policy from the Federal Reserve. Is it going to get a lot harder to do. Do those dip ISE to get in to this market when it's lower.

Yeah and that's a great point Kelly and I think you know what we have to sort of reckon with is that the growth stories and the returns on equities won't be perhaps as high as they were in the past couple of years because of liquidity. So if you take a company like that for example that has a 60 percent year over year revenue growth maybe that number gets gets cut down in the 10 to 20 percent range. But you know you're still looking at healthy growth in that particular example. So I think that in the short term in the next year or so there's still enough liquidity left in the market. You know the Fed is going to taper

but they still have a sizeable balance sheet you know rate hikes. I agree with sort of the last conversation that you had where the market is just pricing in such a hawkish Fed that the Fed now has the liberty to be a little bit dovish if inflation plays plays along. And that could surprise the market to the upside. So again it just goes back to you know corporations and individuals have so much cash. And that remains the case regardless of what we see in the next year or so. And that cash will go to cap ex. It'll go to buybacks and it'll go into investing. Because you know the truth is even if you get a mid

single digit growth that's more than you're getting in fixed income. So I do think that the market will will fare well this year. So do you buy every dip. We aren't getting a lot of talk at the moment on this program about significant volatility this year. You could see a 10 percent correction would do. I need to pick my moment when I buy the debt or do I just buy every dip. You know I think you can definitely have an argument that we're expecting a higher pullback based on what will happen in March and perhaps will be this immediate reaction in equities. But I think it's impossible to time the market for when you see NASDAQ testing 200 day moving averages S&P 500 hundred day and you see these sort of significant pullbacks in a short amount of time we're not a whole lot changed. I agree. We're talking about changes to come but they're not as drastic as the market is

reacting to you know for them to be. So I do think that when you look at a time like this or the last couple of days these are dips worth buying particularly with a secular outlook for certain sectors. Silvia obviously we're talking very broad headline level debt buying here but let's get granular. What specifically do you like right now that you would be eager to add positions to. Yeah. So. So that's that's the great question right because we see sort of everything pulling back. But what has a future. Well I think you're going to have a lot

of volatility the highest growth names. However if you sort of drill down into the biggest secular themes and the largest opportunities for the future I view those things to be 5G Web 3.0. The metaverse and in general block chain technology cryptocurrency things like that. So I would be looking to get into things like semiconductors in the video and AMD for example

that have just been pulled back. I'd be looking at RTX that represent these various themes. I'd be looking to Apple Alphabet Microsoft Amazon for companies that are going to be part of the Metaverse and Web 3.0 cybersecurity cloud computing. Those are names that are very much on sale. And then on the other recovery side look at the cruise ships look at the airlines and look at the hotels. They are kind of at the bottom. In terms of what the flip of that is. What's the other side of

the coin. What do you want to be avoiding right now. Yeah I mean I think you know that work from home stay at home trade is probably worth avoiding now. I think it played out very well over the last couple of years. But you know when you look at some of the High Flyers that did well there and I don't want to necessarily pick on any one particular stock but perhaps you know a Palatine might have have seen its best days. You know in the near future it wouldn't be a name that I'd be looking to allocate to. But I think you know sort of that you know reopening that reopening trade that we've been talking about forever it's now a revenge trade because it just hasn't fully happened yet because we'll be coming back. So yeah I think the

stay at home games are sort of probably a little bit overplayed for the moment. By and large though Sylvia are you on more of it's OK to take risk or it's time to go to quality side of the spectrum. Well I think you know if you look at the market over the last couple of days and I think you know Abigail actually made a similar kind of I mean there's so much volatility or there's more volatility in the market. It's something that we're now

living with. So everything in a sense feels like a little bit of a risk. But I. Yeah. But I do look at. I do look at quality to your point. I like I like the companies that have strong balance sheets. And again the apples the Microsoft's like let's call them the the you know mang thing. Considering Facebook is better now. And you know again secular growth trend participation. But the cash to deploy in order to make those things happen. All right. Thank you so much for joining us. That was Sylvia Blonsky defying CIO and co-founder. And coming up so far so good. Shares that the online lending platform are soaring after regulator

regulators gave it a conditional banking license. We'll have more on that next. This is Bloomberg. It's time now for the Bloomberg Business Flash a look at some of the biggest business stories in the news right now. Once again J.P. Morgan is raising the paper's junior bankers. Bloomberg has learned that the bank is increasing salaries for first year investment banking analysts by ten thousand dollars to one hundred and ten thousand. Second year analysts will go to one hundred twenty five thousand. And third your pay goes to 135. Procter and Gamble has raised its sales outlook for its current fiscal year. Price hikes helped offset a round of higher costs among PND main lines of business. Health care as well as fabric

and home care posted organic sales growth of 8 percent. And President Biden's anti-trust regime is facing its first big test of the year. Microsoft Sixty nine billion dollar takeover of Activision Blizzard brings together two major gaming platforms in a deal that directly affects consumers. It could also raise objections from some of their biggest rivals. The agreement is likely to get an extensive review from regulators. And that's your business flash guy. Absolutely. Let's turn the conversation around what is happening in the banking sector. We need to talk about the results. We also need to talk about so. The fin tech company has been cleared to become a bank shares. As a result reacting really

quite strongly. That's the TGA job. But as you can see we've got a gap higher on the back of this news. Let's talk about it all. Sonali Basak the person to go and talk to. IBEX Wall Street corresponded slowly. Walk us through the process that so far I had to go through and how big an impact this is going to be. Listen. It was years in the making guy. It's taken forever. It

feels like four so far to get this nod from the Fed and the S.E.C. Remember they were the first real neo bank to go public. They did so with a stack and very non-traditional. And in that interim time you saw so far really grow in nontraditional products and loans and investing and really expand its footprint despite not having that banking charter. So what happens now. They have about a million or so more than a million customers and so far money. Those will eventually convert into checking accounts. So they start off the bath back with a significant base here. And they will also have the ability to charge them

more competitive rates or provide more competitive rates for those checking accounts. Yeah all of that comes at a time as rates rise. Well let's talk about competition though. I mean who is this likely to directly encroach on. I'm thinking Marcus of Goldman Sachs. Yeah well that's the most interesting to me because they are planning on launching their checking account this year. Why does checking matter so much. It's the primary point of entry for so many consumers. Once you have checking you're likely to do all the other things cards and best loans whatnot. So Goldman has been really looking forward to that checking account. And so far doing this so quickly starts to put them on a more competitive edge. Moving off the back of things

think about it this way as well though Kelly you have a million or so checking potential accounts that so fi you have more than 40 million digital accounts at Bank of America. So the competition here is really tough. Among the biggest of the consumer banks. But it does really start to put an interesting fintech into the forefront at a very competitive time. Should only presume this is why Jamie Diamond and others are spending so much money. This is the competition and it's coming and coming fast. It is coming fast. And in the US in particular. This is at a time where we thought that the Fed the S.E.C. the

new RTS in particular under the Biden administration would be very very tough on fintech. And this is a validation that they are allowing innovation among the newest competitors at a time when we thought they were going to crack down and be a little tougher on new technology. With that said they have an entry way now and a pathway into being a more normal bank and compete on a more normal scale. All right. Bloomberg Sonali Basak thank you so much. And always had a busy couple days guy covering all of

these big bank results. Of course it's got a lot better for Morgan Stanley and Bank of America today than it did for some of their peers. Absolutely. But I think you you have to just see today in context in so many ways. You look at what Morgan Stanley share price result looks like the result looks like today on the back of the results. Sorry I can get the words out in a in a reasonable order. They

got they got slammed yesterday. So I think I think it's unfair to compare the reaction to Morgan Stanley's results to the reaction we got to. Fair enough. J.P. Morgan's results and Goldman Sachs results. I can some way. It's already already priced most of this in. Yeah expectations had been tempered. We'll discuss that next with Walter Todd of Greenwood Capital from New York and London. This is Bloomberg.

We are one hour into the U.S. trading session and Abigail Doolittle is here with a look. Abigail still a positive day but we're off the highs. Yeah. That dip buying not looking quite as attractive as it had maybe just half an hour ago. The S&P 500 up just fractionally at this point. And the Dow is down down to a two tenths of one percent. What's interesting this year of course has been all about the growth rate. Great rotation into value out of tech today. You have tech actually doing better up six tenths of one percent. This as yields come in just a little bit as the KBW bank index is down two point one percent. Now if we take a look at what is happening relative to yields we are going to see here the five year real yield the 10

year real yield in the 30 real yield real yield a little bit of a tongue higher there. We are going down down down. But more recently higher. It's pretty amazing. You actually have. I believe it is going to be the 30 year real yield. All most positive. That of course is that inflation pressure. That's been the story of this year. That's why we have tech under pressure this year but not quite as much today in fact. Let's take a look at what is happening relative to the Bloomberg

Commodity Index because this is a very interesting divergence relative to the sell off that we have seen in stocks this year. All year we've had oil trending higher. So that commodity index right now up about 1 percent. Crude oil one point five percent. Now up for a fifth week in a row at its highest level since 2014. Technically looking like it will go back above 90 dollars a barrel. Copper joining in Dr. Copper. These are positive reads on the economy perhaps suggesting that traders and investors

think the global economy is strong enough to absorb to digest these rising rates. And then platinum really on fire up 4.5 percent. And then finally the banks overall may be down because yields are down on the day. Here we have that five year yield in five basis points. The two year 10 year yield down 3 basis points. However very strong earnings reports out of Bank of America and Morgan Stanley now in the premarket. Both of these stocks had been up well more than 4 percent. Bank of America of course our loan growth very impressive. Morgan Stanley talking about 10 trillion dollars worth of client assets. That of course is annuity like revenue raising the

profit view. Stocks still higher but off of the highs it seems as though the volatility we were talking about earlier guy it's in play on an intraday basis today. Yeah. Morgan Stanley is still a three day basis down by 7 percent. So I think he needs a little bit of context as to what happened yesterday. The beginning of the week just to kind of put what we're seeing today from Morgan Stanley Bank of America into a little bit of context. But yeah we are seeing or we saw a bounce earlier on that bounce as Abigail says definitely fading. Abby I thank you very much indeed. Let's dig deeper into what we've learned from the bank reporting season. Joining us now Walter Todd Greenwood capital chief investment officer. He owns

JPM. He owns Bank of America. He owns Morgan Stanley. Walter welcome to the show. Thanks for your time today. We really appreciate it. We've wrapped up the big bank reporting season. What do we learn. Yes I think I think we've learned a couple of things. One is there are significant cost pressures at the bigger banks. We are that first from JP Morgan. We heard again from Goldman Sachs. I think Bank of America Morgan Stanley benefited from not reporting first. The reset expectations they had you know flat to slightly up expenses. So that helped them relative to those prior reports. I think we've also learned that your traditional bank the traditional banking business in the regionals has

actually done better. I think what you've seen from a weakness standpoint is the trading revenues and some of these bigger institutions that rely on that. And you've seen from truest and other regional and super regional banks is how the traditional banking business we saw this from Bank of America today. Also just lending money and making money on that is doing pretty well. Well Walter as you rightly point out Bank of America is starting to see some loan growth coming back in a way that the other banks aren't. How confident are you about that return to loan growth as we move forward through the year. Yeah. So if we

look at some of the credit statistics you know people and companies are starting to borrow money get companies that borrow money for a while. But you see in the consumer lending start to come back. I think the real question here is for investors and for the market in general is is the Fed going to be able to kind of walk this line of tightening rates but not tightening too much to slow the economy down and ultimately push it into recession. And I think that's the struggle you're seeing with the market today. We've seen this violent rotation to start the year between growth and value as was alluded to. But now the value trade people are stepping back and saying well wait a minute I've seen some softer economic data. Are we slowing down

too much into a fad. That seems pretty bent on tightening at least one or two times. The market thinks four times by the end of the year. The financials in many people's minds are meant to be a hedge against what is happening with REITs that meant to hedge your portfolio as inflation rises. Walter do you think they're going

to be able to fulfill that in many people's portfolios. Yes a great question. I mean they certainly did last year as we saw inflation start to pick up in the back half of last year. And financials did very well at Morgan Stanley Bank of America also within that. But as we sit here today or the last three to four days of experience which they would say no because they're dealing with these rising cost pressures. So I think it is going to be a little bit more nuanced and mixed. Again we're seeing some of those traditional banks like Truest Financial PNC and others have done been able to manage that process. And Bank of America quite honestly at Morgan Stanley managed it better than the JPM and Goldman Sachs did at least initially. So I do think

it's not as straightforward as that playbook might suggest. And we're just going to have to kind of see out how we play out the rest of the year. Well Walter our question of the day today was is it time to buy the dip on a broad macro basis looking at the equity market as a whole. When you look at some of these banks in particular like J.P. Morgan which you hold in your portfolio would you be buying the dip and adding to that position here. Yeah we will. In fact we've we've run that model as we say here

for clients is new money has come in. So yeah we will be adding two to these names as they are correcting after a very strong runs to end last year. And as the market in general I think is important to keep the perspective that there's a lot of divergence. You know the market overall the S&P is down only 4.5 percent off its high. But yet you have other areas like biotech software that have been hit much harder. So I think there are opportunities within financials as they come in but also beyond

the traditional value sectors in areas that have been hit the hardest at the start of the year. You bring up biotech you bring up software actually. I think the latter is a useful point of comparison maybe here. How should we value. How do you think about how you should value banks. I listen to J.P. Morgan the other day. I listen to what other banks have said as well. I Jamie Diamond is talking about investing huge amounts of money in technology. How should I think about valuing these businesses given that appetite that exists to almost turn these institutions from being financial institutions to being quite tech companies. Yeah. Yeah. So. So last year that the hot item right was buy now pay later in the

year valuing these software companies that you know 10 15 20 times sales. And here you have the banks that traded you know they're considered expensive. If they traded two to two and a half times book book value. So I do think there is the opportunity to sell that frustrating as a financial investor that every other sector of the market seemingly has been redefined in terms of what what is what is value and what we would pay for a given asset. Banks have really stayed in that

bucket of hey you can't pay more than two and a half times book. So I do think as that business transition transitions you have the potential to see some rerating in some of these areas to pay a little bit more than you would have traditionally for banks. Water is great to catch up. Thanks for the insight we really appreciate your time today. Author Todd Greenwood Capital C I oh we're going to carry on the conversation around these bags. Brian Moynihan. Bank of America chairman and CEO. We're going to

be speaking to him a little bit later. So that's going to be a fascinating conversation. Hear what he has to say. Coming up we're going to come at this from a different angle as well. Financial conditions. Are they going to tighten. How will they affect markets when they do. What kind of trajectory is the Fed on here and what does that mean for credit markets. Bruce

Richard's marathon asset management chairman and CEO he is joining us next. This is Bloomberg. This is Bloomberg Markets. You're looking live at the principal room coming up in the next hour. I ordered Director General Willie Walsh. That's an eight thirty. I am in New York for thirty p.m. in London. This is Goober.

So where are we. We're a week away from the Fed's next policy decision. Markets are already starting to brace for the impact. The major impact of monetary tightening. How far will the Fed have to go. How will the Fed manage this process. Bruce Richard's Marathon Asset Management's chair and CEO. Joining us now. Bruce fantastic to catch up. These are some of the greatest conversations we have on Bloomberg. So I'm really looking forward to what we have to say over the next few minutes. Give

us a set wrap. Give us an update on where we are. Inflation is climbing. The data all points to that. The Fed is talking about tightening. How far will the Fed have to go in order to bring inflation under control. Well that's the big question. And now time financial conditions get twenty four twenty point two will determine how the markets perform and eventually how the economy then responds in terms of growth. But the Fed is way behind the curve as we all know and there's no easy choice because the die has been set. And you know it's it's pretty well known right now that the Fed today

remarkably is still behind the curve is still easing zero rates right now today. Still buying for the balance sheet through QE right now. Today inflation 27 percent in America is paying the price literally in the higher and higher cost. So you know the Fed is crossing at this point where they've crossed the Rubicon and you don't we remember you know deja vu 2018. You know equities fell from peak to trough 20 percent as the Fed raised rates and shrank the balance sheet. But that's when inflation

was running. Now inflation's running. They have much more to do. So to your question the balance sheet that they shrunk back then at 18 was to the tune of five hundred billion today the balance sheet to extend. So in cooling terms. That's a trillion that they'd have to reduce the balance sheet by on a per annum basis from having expanded balance sheet by one point five trillion a year. That's a big delta. That's a big swing. And so how far will equity markets fall when Fed funds rate move to 2 percent.

I said 2 percent 2 percent 8 rate place not 3 or 4 like what's priced into the market. So I think we know that answer. I think that equity markets are incredibly vulnerable from Europe by the dip. That was the earlier discussion in your show today. Yeah it makes sense because the Fed still easing right now. And I think the first two or three or four tightening can be absorbed. But what happens after that. Because what happens after that is really critical and what I'm referring to is not just to move up and treasuries a tightening of credit conditions that might fall. Well let's talk about those tighter credit conditions right now. Spreads are still very very tight race. What at what

point do we see the read through not just in terms of equity markets and risk assets but into credit and start to see some cracks appear. Well it hasn't happened yet. The high yield market hike rates holding in very well I mean duration. There was a lower on the year because of duration but not because the spreads high yield likewise is 310 basis points off treasuries and hasn't budged all year long. Neither leverage loans but there's a lot of excess in the marketplace. Access is with some of the tech companies particularly the high flying high multiple tech companies sparks venture capital early stage biotech. You

know we see a lot of you know the excesses in the marketplace. The excesses are really not in credit. So we expect with strong earnings this year for credit to maintain its spread or it will widen because conditions will get that much tighter as the year goes on forcing it to widen. But on that widening. We think it's a buy because default rates remain rather good. You know 1 percent or less. So I think you know when it comes down to is just printing people talk about you know it's a supply chain. Is

there too much demand. Yes it's both. But it really really is. Is the money that the Fed has printed. We've gone from seven trillion in money supply M2 to 21 trillion today. And since Covid of 6 trillion. And the printing of money this money for nothing policy. The great giveaway this happened. As a price to cap and his price to pay it the Fed with credibility as a price to pay. With no inflation. And that's

worth paying now. And since it's just logistics I'm just a backup. Sorry. Finish your thought. It's unfortunate because consumers are going to bear the brunt know from our senior citizens to working class America. It is a big price to pay for food for housing for oil for transportation at the pump. And it is due to these excessive policies of how we printed money. ISE. Our analyst team was recently studying doors and windows because there's a lot of doors and windows are going to the exterior of a home and the interior of a home. Anderson tell. You know that produced these vinyl windows these wooden doors have taken prices up on average from 150 to 250. That's a 60 percent increase since Covid. They're making 2 3 percent to three times a year 10 percent

price increases. And so this is you know it's because material costs are up shipping costs are up. Labor costs are up. Yep. And it can pass through these costs. Bruce just to back up a little bit. You're talking about potentially eight hikes. Can the Fed thread the needle. Can the Fed deliver a soft landing or do you think we need to start if

we are talking about a hikes a recession. You know a recession does come after the Fed raises rates four times you'll see a recession on average. If you look historically at all the recesses have happened since the Great Depression. You'll see the recession began about two years later. So you're talking about May 24 if presumably they raised rates which they will in Q2 beginning March let's say. Of of of this year and so beginning March because 8 Fed meetings a year they have one in January. That leaves seven Fed meetings left for the year. Will

they raise rates. All seven meetings will raise rates three or four times. Take a pause. But they have to tighten financial conditions to bring inflation down. And that's what they need to do because right now it's you know all that excess savings that we had built up from all the distributions and and folks being able to save that all now the vaporized by inflation. Consumers still have savings but the excess savings have been built up. Has has declined. So you look at retail sales which

recently softened. Was it doing only crawl. Well that's what you know the press would have you think. But I think it was really due to inflation. People are spending more at the pump more and housing more to heat their homes. They have less discretionary money now to spend on retail sales. That's why retail sales were soft at Christmas. But in this kind of environment that you're describing is it one in which there's going to be more opportunities in distress.

I think credit can be really strong really strong. His earnings will be up 8 or 10 percent. And this calendar year. And with that companies are in good shape. Most of the companies that we track are in good shape. Some can't pass through you know the higher cost but almost all these companies are tracking or passing through higher costs. So I think it's not a corporate default rate event that happens now. Save that one for the recession not for financial conditions. Financial conditions tightening first round as Treasury rates move up as the Fed moves buys less for

its balance sheet and as they raise rates. The second part of that is finance conditions. Tightening will be wider credit spreads. Those wider credit spreads can be absorbed by the companies because companies are for the most part still highly profitable. But it's when a recession hits. When the economy turns down. So right now the economy last year grew at 6 percent

this year expected to grow at 4 percent and might start that way. But we think end of the year growing about one half to two percent. We're going to see a deceleration of growth due to tighter financial conditions and this higher inflationary rate that stymies the consumer's ability to spend. That's what's going to happen in the next year and how it plays out.

Bruce there's an expectation over here in Europe that the ECB is going to sit this one out. Significant pushback every time the idea of a rate hike this year is mentioned. What do you think the ECB have the ability to sit this one out or do you think it's going to be dragged into inflation. Really expressed interest in a 10 year bonds just one from negative to positive just right around zero. But you know just touch positive for the first time I think since nineteen in three years. So that's remarkable. See what's also really interesting to see is their futures contracts in Europe. So the ECB are starting to tick up

a little bit for and ancillary pricing in one tightening for this year one tightening for next year. So I think inflation will impact Europe to a lesser degree because they didn't print as much money. And it wrote a balance sheet nearly as much as the US Fed did. That's number one. Number two they see less wage inflation but they'll start to see some wage inflation. And I believe they'll have to tighten once or twice just on the margin. But they didn't have the growth that we had last where the excess of monetary policy that we had. So their reaction

then will be less. First we're talking in Europe and in the US about the prospects of tighter policy in China. The direction is going the other way. They are easing. How does that affect your world. Well not so much. I think a lot of supply chain will begin to move from China to logistical points. They're much closer to the distribution of products and goods. And so we'll start a lot of companies that we're speaking to already moving your supply

chain from China to the U.S. and Latin America. That's a longer term move but it's starting to happen. You know China's easing is really about the housing market. The U.S. housing market is about 3 3 1/2 percent of our GDP in China. Housing has been home construction has been 18 percent of its GDP. So they can't see their housing market decline and their housing markets decline rather substantially ever granted. All the other companies that went way beyond their skis and are in the process of defaulting and restructured said that they're in the process of easing to making it to make housing affordable to allow an easier financial condition for the companies to complete these projects. And the fact that they tighten the year prior it gives them the ability to now ease. So I think China is a very different place than what's happening in the US. Indeed wish we

had more time but unfortunately we have to leave it there. Thank you so much for joining us. First returns Marathon Asset Management CEO. This is one. I spoke to Secretary of Commerce Raimondo just you're looking at a live shot of the Bloomberg Quicktake year ahead event. Currently Bloomberg's editor in chief John Micklethwait is speaking to Intel's senior o girls again. I can find this on

your Bloomberg terminal. Fantastic event live. Go to function. You want to be using that. What do we got coming up. You've got to talk more about what is happening in the European market. Stock 600 up by two tenths of 1 percent the fading. You've got a German 10 year that briefly earlier on in the session went positive. We were flat. We are just below that line right now. Less than half of a basis point away. So that move continues. We'll continue to watch what's happening there. U.K. inflation absolutely surging. The Bank of England's

governor giving testimony down in Whitehall right now. We'll continue to monitor that. Liz Martin's HSBC senior UK economist joining us next. This is but.

2022-01-20 12:31

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