Bloomberg Markets (05/02/2022)

From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. So we are 30 minutes into the US trading day. It's made the second. What do you need to know. Let's talk about the top stories that we're following for you at this hour. Stocks to be honest are struggling to stabilize after Friday's nasty tech driven sell off. The Nasdaq's up a little bit but it doesn't feel convincing yet. Buffett though is buying big over the last quarter. Berkshire Hathaway has been on its largest spending spree in a decade. It's boosting holdings in Chevron and

Activision Blizzard. And European investors are whipsawed by a five minute flash crash started in Stockholm before hitting other Nordic markets. It's got us the weak China PMI data hasn't helped either. From London I'm Guy Johnson today with Gina Martin Adams in New York. Alix Steel is off. Welcome to Bloomberg Markets Gina. Friday was ugly. Would you expect this Monday morning to see a convincing bounceback for stocks. You know normally after such a massive price correction you would get a little more optimistic about the day after. The problem is that there's no evidence of capitulation in that price correction. So when we look at things like momentum and breadth they're still holding in at much higher levels than you would

think that you would normally expect considering the degree of price correction. So until we get some momentum and breadth capitulation I think that the wiser the wiser sort of strategy is to fade all bounces. It's interesting isn't it. So we initially baited the move first thing this morning families being kind of in and out of positive territory throughout the day. The NASDAQ up by around half of 1 percent but it's already off its session highs. Let's talk about the data because maybe that's a factor behind what we're seeing here. We're getting the ISE said manufacturing numbers coming through through fifty five

point four. Now that is well at a headline level below the survey that we were anticipating a fifty seven point six. We've come down from fifty seven point one to fifty five point four. The survey was fifty seven point six. Let's dig into the details as they always matter. The prices paid component interestingly enough has faded quite significantly.

Eighty four point six euro is going to be joining us a little bit later on from the ISE said to give us some analysis here but that's down pretty sharply. New orders fade as well down fifty three point five and the ISE employment number comes through at fifty point nine. That's quite a big dip as well. So in aggregate that number those numbers are not particularly good and maybe account for the fact that we are seeing stocks beginning to turn around a little bit off the intersection highs we've seen thus far. So let's get back to our question of the day.

April was ugly. The sell in May. If you haven't already. Let's kick it around. All right Josie. Chief U.S. right strategist joining us as well for a lot of bull market perspective on what we're seeing here IRA. Was joking a little bit earlier on our morning meetings like yeah stocks and stocks are being buffeted here. Is pretty ugly out there. We're dealing with the volatility but we know how to deal with it. For the bond market that's where the real pain is being felt. Can you answer that question from a bull market perspective. What do you think. Do you sell in May and go away.

Yeah I think that not having a lot of risk right now in the bond market is probably your best bet. I think that there's likely to be a little bit more weakness here in the bond market. You know bond markets off eight and a half percent this year for Treasury securities and that's by far the worst performance that we were just to end right here. That would be the worst performance ever for the Treasury market. And so I do think that there's going to be a little bit more pain a

little bit more risk. The Fed's going to be doing its its run off of its portfolio and you're going to have obviously more interest rate increases. So so it's hard to like treasuries here right now. I think that will change later this year. But but for the moment I think you have to have to be very cautious the bond market.

IRA talk to us a little bit about where you see the pain in the bond market ending. Where are we going to see rates stabilize. I know in our macro call this morning you talked about maybe some help emerging in the third quarter in terms of rate stabilization. Talk to us about the short and the long into the curve and where we can finally see an end to this yield right. Sure. So Gina to your point I do think that we're going to see additional flattening of the yield curve. I mean part of that is just the Federal Reserve hiking three or four times 50 basis points each time. That's not unprecedented yet. But you have to

go way back to the 19th the late 70s and early 80s to see that type of action by the Federal Reserve. So I do think that the front end of the yield curve can move probably another 50 basis points higher. So for two year notes and for 10 year notes you're talking about maybe another 20 25 basis points. So basically we're talking about everything completely flat just above 3 percent. And that's usually a pretty good time to think about buying duration. So thinking about buying market risk is when the yield curve gets to completely flat and over time what what usually then happens. And I think that this will probably repeat sometime over the next 12 to 18 months is that the long end of the yield curve winds up rallying and you get an inverted yield curve. And the reason for that is just expectations of a slowing

economy and slower inflation at some point in the future. Importantly I just want to turn his back on Gina maybe for a second. We now have 10 year real yields so 10 year tips. Yields are now positive for the first time in quite a while. And you have five year real yields looking like they're going to become positive over the next couple of months as well. You know is does the stock market look at that at all Gina or is that something that you think is just going to come and go in nominal yields matter more. Yeah I think it's a really good question IRA because I do believe the stock market looks at it. In particular the stock market likes the short end of the curve. So we tend to rely on the two year end and the real yield in the two year as a

pretty predictive indicator for the equity market. You know I think we'll in terms of the broad market outlook for the equity market you've got kind of this double barreled negativity right now. You've got earnings which unfortunately we're seeing earnings expectations come in largely reflecting what's happening in China and a slowdown in China. Now you've got some ISE some numbers that are looking a little bit weaker than anticipated here in the U.S. A slowdown in the housing market

certainly coming over the next several quarters. They've got a sort of a downdraft in earnings expectations on one side. And then the discount rate that you would apply to those earnings growth expectations is also going higher. So you've got this sort of double. Their on pain in the equity market and nowhere to turn until rates stabilize and or the earnings outlook stabilizes. It's just really difficult for stocks to find their footing.

Equity is waiting for the bond markets. Guys are going to wrap it up there. Thanks very much indeed IRA. Always a pleasure. Thanks for jumping in. General I are going to stick with you but I want to turn our attention now to what is happening at the Milken Institute Global Conference Bloomberg Businessweek. Editor at large Erik Schatzker. Currently sitting down with the Apollo CEO. All right. Let's take a lesson into that conversation that are off. You did. OK. It's now about to run in reverse. So S&P forty one hundred ish.

Last I looked the end of 19 it was three thousand. S&P today 21 long term average 16. It's just not that bad. People power the business. OK. You've brought up the market context. It's probably worth spending a few minutes at the very least talking about that. People would probably say it feels like a challenging time to

invest for some of the reasons that you just enumerated right. There's a lot of inflation. The most we've seen in four decades there's war. There's the prospect of rising rates. There's quantitative tightening. We haven't seen that really in a serious way yet. You mentioned that there's a correction in the equity market.

There's a correction in the credit market too. What kind of future are you preparing for. A volatile one I mean but I start with you know sometimes I'm asked to explain what our strategy is and I put it in three words purchase price matters. So if I can buy a fundamentally good business today at 15 percent less than I could buy it three months ago. That feels like a good outcome. Will there be bumps along the way will there be deviations. Of course there will be. But I I think the notion of purchase price matters. Some call it value in the extreme. You can be like while Warren Buffett and Charlie Munger. But I think it's a strategy that's built for multiple market cycles in the equity business. It's the price you pay. It's the companies you buy. And in the credit business

it's being senior secured. It's not being long duration being floating rate. There are lots of ways still to protect yourself. Maybe it doesn't feel as good. Given what we've been through and just how positive the last decade it's been. No it certainly doesn't feel as good. But on the subject of purchase price mattering. And value is a concept. And time. That's something of an unknown is 15 percent enough. If you can buy something for 15 percent less right now might you be able to buy it for 30 percent less. Six months from now perhaps. I mean this is always the question

of what's cheap enough and what what what's what's worth doing. I think we have more to go. I'm more in what sense. I think there's more of a correction to come. I think you know being a macroeconomics prognosticator is not what we do but understanding fundamentally good businesses that maybe had more options three months ago and have fewer options today. We'll find that category of things that make sense for us to do. We always do.

Yes. History would suggest so. But if you think. If you don't have the luxury of being the kind of investor that Apollo is and you put yourself in somebody else's shoes for a moment do you look at the market and say to yourself. I think the future that I envision is relatively priced ending with if there's a little bit more of a correction to come or that is not unknowable answer right now. I don't think it's a noble answer right now but certainly we saw in today's announcement from the Fed. The signs that they are taking the need to get inflation expectations under control very seriously and that will manifest itself through their liquefying their balance sheet and selling down which they outline this morning but also through rate increases. But you know something. We. I was in DC last week and I spent a lot of there's a lot of free

time. By the way in D.C. it's a great time to go and visit. And the key point I was making is that everything that you believe prior to 2008 no longer exists. And in the context of your question I'll take public markets 60 plus percent of the equity market today is indexed. Is which indexed meaning it trades on liquidity. Just people going in and out the fixed income market. 100 percent liquidity driven at this point in time. And so investors the public fixed

and public fixed income markets. Investors who are relying on public stocks and public bonds are finding out that everything is correlated to liquidity. Because you've had one of the worst fourth first quarters ever. You've had equities down about 14 percent. You've had investment grade credit down 17 percent. Wasn't that supposed to riskless. And I think institutions kind of already know this. Public markets have become better. And if you want excess return you need to step back from the public markets. So.

What you've just said. I would summarize with something along the lines of we lived through a dozen years of rock bottom rates and most recently endless liquidity and it felt like a riskless era. Does risk matter again now for the first time maybe since before the crisis. Absolutely. I think we're seeing things correct. We're a long way from means or medians in the equity market where 30 percent from the median which is pretty scary in the credit market. We also have a long way to go. But I do think that the mentality with which investors have focused has they've been lulled into this sense that everything goes up that everything is supposed to go well. Because we've had one could say 30 plus years of declining rates but extreme liquidity in the past 14.

So if you think about what you see and what you anticipate. You have an idea of what businesses of yours still work what businesses don't work anymore yours or others. Look I think the on the run long only markets business are very difficult to the extent you have been the beneficiary of trends. So you know there'll be a number of speakers who will come here and we'll talk about the massive increase in technology and the technology growth curve. And I would say tech and growth in particular have benefited from low rates because they are their business plans are further out. They're discounted back at much lower rates. Therefore they've been the beneficiaries of the speculative boom. And to quote one of the speakers we'll hear

from later. Technology. Technological change is real it's fundamental. But that doesn't mean the purchase price doesn't matter. And the entry point doesn't matter. So I think people who have benefited from this extreme low rate high liquidity environment where growth all manner of growth have been rewarded. I think that's where the greatest correction will come. And that of course is not just the ETF manager whom you're thinking of. That

presumably extends to growth equity. It extends to late stage venture early stage venture. It extends spectrum. It extends to all these markets. I look at the traditional alternative market and so much of the traditional alternative market has become data as well. Even with our our own firm you know I my joke internally as you've worked for me for 10 years. But I said no if you're a good investor. I think we're about to find out.

Any sense having lived through what now three solid market cycles. It's a fourth. Yeah. How long this shakeout lasts. No no. I know an unknown. Look we if we profess to know we we just mislead. But what we can do is return to some basic playbook. So I look at the three businesses we're in we're in the equity

business we're in the hybrid business and we're in the credit business or the real business of those three. The yield business is our largest some three hundred and sixty billion. Senior secured top of the capital structure. Floating rate. Generally shorter duration

that feels like a good place to be and it feels like business is going to be good because credit creation is going to be more difficult. That generally is good for people who are able to create credit. If I move to the hybrid business hybrid is the piece of investing where you give away all the upside in return for downside protection. You essentially become a solutions provider that also feels like a pretty good business. People are going to need solutions to the extent your business plan was predicated on raising easy money every year. Maybe it's changed. Toughest business will be the equity business because the equity business is the most volatile in difficult economic times. But there it's it's very granular it's very company specific and there are a whole host of sectors that will not see cycles as a result of what's happening at a macro level where they're just fundamentally good businesses. Credit.

Hasn't seen a real distress cycle since the great financial crisis. We'll see another. At some point it has to look we. 2008 is actually a really good dividing line for the credit markets. So much changed the role of the banks changed the role of the investment marketplace changed. But you're right it has not been tested. We have as a general rule not seeing the kind of speculative excesses that we saw prior to 2008. This at least the corporate side of this credit cycle feels more benign. You don't see the same kind of pent up leverage so or systemic leverage or use of

off balance sheet leverage. So I would expect it to be significantly more benign than we did. But inevitably there will be corrections. Is that also because the lenders have. Less that thanks to the deterioration of documents have less power over the borrowers. I'm not sure I would say it. Look I said when I was in DC last week Dodd-Frank worked. Dodd-Frank

took risk out of government guaranteed institutions and put it into the investment marketplace. So in the US today the banking system is less than 25 percent of credit creation in Europe at 65 percent in Asia. Depending on the country close to 90 percent. We have essentially matched credit and the creation of credit with institutions who have the capacity to hold long term. That's not true in every market. We still have open and mutual funds. We have ETF. We have some mismatches like that but we don't have the kind of built up leverage on regulated balance

sheets that we had pre crisis. So I personally would expect a more benign crisis. Mark you referred to this earlier. The 30 year call it bond bull market. That was an enormous tailwind for. The industry that you and your peers and private equity and more

broadly alternatives a built. And then again as we've acknowledged the tail end of that was the most aggressive central bank easing since the Great Depression. Now that we're living in a different era. Let's let's. For however long it lasts. It's definitely a different era. There's a different area require different strategy. I don't know. I mean I'll give you for us. And I know every

market participant will be different. We built our yield business on the back of what I call fixed income replacement. Think of actually replacement of investment grade fixed income but with more yield. And we built it to serve initially our own retirement services balance sheet a theme. The way that business works is we make promises to retirees and we back those promises with highly rated credit. Whether rates are higher or low is not really that relevant to us. It's about spread. Because if rates are high and promises we make to retirees will be high and if rates are low. Promises will be low. Our job is to earn a spread and therefore inflation. Market price of

securities does not really impact the way we invest or how we think. Very much like a pension fund or an endowment or sovereign wealth fund where they also have obligations sometimes fixed to retirees and sometimes not fixed in the case of a sovereign wealth fund. And so what we're seeing is the biggest rotation is the acceptance by institutions and others that publicly traded markets offer beta. And if they want excess return they need to go step back from

the daily liquid market and do something else. So is that different. Maybe sell. A couple of questions arise for me out of that. What about. A recession defaults and credit losses. And then I'll get to the second question after that. Look the fundamental risk is collect ability and it's why in an uncertain time and the business we've elected to scale has been fixed income replacement. Not high yield not levered loans all of which have a place in

the financial ecosystem but the business that we are massive in is the top of the capital structure senior secured typically in a recession you do not suffer significant losses if you're a good investor. We've been through a mini test for Covid and the shutdown we had in 20. We like where we stand. But I would much rather be at the top end of the capital structure today than at the bottom. And then on the point about the. I guess that the nature of the instrument and the degree to which it offers Alpha that you can no longer find in public markets. How long is that sustainable. There is think about the amount of money that you're deploying into

private credit every day. I could look at what's going on at your peers right. The amount of money that they're raising and permanent capital vehicles and that they have to invest. This just keeps mushrooming. And at what point does that begin to erode the alpha that remains and in private markets. I think we're a long way from that. And you know there are very subtle

gradations today that are taking place in the marketplace for alternative credit. So there are two words that go together but actually don't mean anything. Private credit. They sound like something but they're not because private credit can be the most risky private credit. It can be financing of levered loans or it can be the most secure. Each of us each of the alternatives firm

have chosen their place in the ecosystem that they want. The bet that we have made is at the top end of that. The primary competitor for us is not Blackstone. KKR TPG Carlyle. Areas Brookfield whoever. It's J.P. Morgan. Goldman Sachs. B of A securitization market. And I feel at three hundred and sixty billion that we are just

like that. We're just not a massive player yet in the market. We're growing fast. As I've said this business is going to double over the next five years. Even at 750 billion it's just not that big in the scheme. The market is immense. I mean I look at one little subject sector of it. I took energy transition. Little Apollo has put out 20 billion of energy transition financing over the past three years. We'll do another 50 billion over the next three.

The need for capital and by the way most of that financing senior secured project type financing or a little bit of hybrid it is not for the most part risk. It is not for the most part equity. The capital needs of our country and the world given the state of change not just in technology but in commodity usage are immense. So I think the market will definitely get more crowded. There is no market that persists for very long without increased competition but at least at the little sector we've chosen. We have a long way to go. I was going to save this for the end but I'm going to front load it because what you just said reminded me of what you're talking about Mark is such a different business than the business that you got into. 30 plus years ago. It's like night and day. You know so I it's it's actually funny because I'm. I find myself now going for

instance in D.C. last week explaining what it is we do. So I go down and I say first what is an alternative. And people look at me well. Of course it's like private equity in this and I said no. An alternative is nothing other than an alternative to publicly traded stocks and bonds. Some alternatives can be rated double A. And some alternatives are equity. There is nothing inherently riskier about private or alternative than public just like public can be double aid to really risky. And so what we're seeing is the growth of this marketplace.

Given the indexation of public markets we're seeing the private market massively expand in size and scale and the alternatives firms in their own way are picking their spot along that continuum of double aid down to equity as to where they choose to grow. And I think we look forward five years. Our clients portfolios are going to look profoundly different. In what way would you start with the the top end of the scale the most sophisticated institutions the largest institutions in the world. They were backers of the alternatives industry. They were well-known. Now of course they want to be our partners in the alternatives business and increasingly they are becoming our partners in the alternatives business. As I said there is no permanent friends or permanent permanent enemies anymore.

Everyone is in a state of flux. The other place we're seeing just massive change is at retail particularly high net worth. You know over the past three or four years we have seen nothing short of a revolution in alternatives take place in the retail marketplace and that's without yet starting all retail is seeing thus far from our industry. Our existing products at institutional fees. Over the next six months I think you're going to see the first products created especially for this marketplace and it will not surprise me in five years if a retail investors portfolio is 50 percent alternatives 50 except it won't. Alternative will mean alternative to publicly traded stock and bond not alternative.

The way many people have associated it traditionally with private equity or hedge fund or risk. And what will some of these first purpose built products look like. I think they're going to solve fundamental needs. I mean if you think about how a retail investor might have been educated historically a 60 40 portfolio debt and equity well feels like a bad idea right now. But it's certainly it's it's certainly been a bad first quarter. Imagine if you could replace your publicly traded equity with

private equity. And I don't mean private equity in a fund but you could have lower risk better returns and some amount of liquidity. How we do that is up to us to to crack. But the we've spent as an industry thirty five years solving problems for the largest institutions in the world. And that creativity has now flipped in part to solve problems for this retail marketplace. For the first 15 or 20 years maybe of your career there was an enormous illiquidity premium to be harvested in the private market. To what degree has that premium eroded.

Well I'd say this was so clearly the premium has eroded. So as I sometimes say private equity started thirty five plus years ago as a black art. And people rarely participated in it. And now it's an asset class. And how we as an industry go about that asset class remains to

be seen. The firms and I'll get to the firms no longer look exactly the same. Private equity does not mean the same thing to each firm. So for us purchase price matters for some of our peers. Different story different focus. I look at the transactions we've elected to do as private equity Scarlet Fu being among the most interesting. Las Vegas Sands. They are very people in this room. I'd say they're very Apollo. Ask a lot of complexity on the front end lot of trading of perspiration for purchase price. It is our mentality it's our brand. It's how we come to market. And it's it's timely. Maybe hasn't been so timely for the past few years. We did just fine but certainly not the kind of market that we really excel in.

When you say you did just fine. You did just fine. Of course but in a competitive context others did better. Over the past five years you have been either outperformed by your peers or underperforming your peers this year as well I should add. Does that matter to you in the short term. No it really does not. I mean I look at this business over now 30 years 32 years in our case generally not generally mid 30s gross returns high 20s net return generally a thousand basis points better than our peers. I'm very proud of that record. I think you'll see divergence in the first quarter when we all announce.

Which is next week. So if I'm not right about that I don't know much about our business. And I think you'll continue to see divergence. But we look at the private equity business as an absolute rate of return business. We want to produce 20 percent plus net rate of returns for our clients. What clients have not been doing is adjusting for risk. Lower purchase price. Less leverage. I'm very comfortable with with the place we've chosen in the system. I asked you earlier if pollinated change needed to change its business model to reflect the new reality.

And maybe it doesn't. But do you get. You're listening to Erik Schatzker in conversation with Mothra. The Apollo C E O gonna move from the Milken conference coming up a little bit later on. A really fascinating conversation I expect with Citigroup CEO Jane Fraser. She's sitting down with Bloomberg Scarlet Fu. So that conversation is happening in the next hour. Jeanne a couple of things really stand out to me from that conversation that Eric was having with Mark. Mark talking about the fact that he thinks that the credit is going to come through this relatively unscathed or he talks about a more benign environment certainly relative to 2008. It's hard to imagine a more difficult environment than 2008 but we'll just pop right one the moments.

And he talks about the fact that tech growth stocks benefit from low rates and the correction really sort of ongoing in growth stocks including tech. Does that fit with your view of the world. Yeah I think it fits frankly with the view of most investors right now with the exception of maybe credit. I think there's more nervousness emerging for credit in particular high grade credit certainly performing very poorly so far this year on a lot of investors radar. Certainly you know investors are capitulating left and right on tech. There does appear to still be more to come on that trade. The other thing I think he said

guy that is really reflective of the overall investment universe right now is just this idea that you cannot derive alpha from public markets. I think that there has been just this sea change in mentality over the course of 20 years even where public markets are just the low man on the totem pole. No one wants to invest in that and everyone's putting more capital to work in private. And that's where I would really question the outlook is. Is there really that much more alpha to be derived in

private markets. Is it worth allocating an enormous share of your overall portfolio there. Is it really just about not having to mark to market and sort of riding the wave over a longer period and not having to suffer the pain of public markets or is there really that much more alpha. There is a big question for us. Well I think also the indexation argument that he was making around that as well. And you listen to what he has to say. You kind of almost feel as if private markets are basically going to go through the same thing the public market in some ways have. And it's going to be and see how that ecosystem changes as a result of what he's describing is much more tailored focus maybe on the retail clients. Absolutely fascinating to see because ultimately that's the process that we've been through in private

markets. We're going to come back to talk much more about this go to great guests lining a great guest lined up to talk about what is happening in these equity markets. Let's figure out exactly what is happening right now. He's going to digest the ESM data that came to a little softer at the top of the hour. Pretty good to track all the action. Yeah. Guy you think you would have a little bit more effects when it came to the stock market but you are seeing green on the screen. A lot of this might simply be a reaction to what you saw on Friday that massive sell off that really capped April as the worst month in two years. While you're seeing a pretty important technical rebound. Remember a lot of that is concentrated in tech where you're seeing NASDAQ outperform the S&P 500. That's something that is not necessarily translating to European stocks broadly

though. But just given that the U.K. is off I wonder how much of that is a volume story as opposed to anything based on fundamentals. We should also mention the dollar a little bit stronger. That weakness in the yen the weakness in the euro we were talking about so much last week really continuing. But let's circle back to the equity market because as Gina said it really is about the valuations is about the selling. It's about the pain that you're continuing to see in the markets. And let's just take a quick step back year to date. You are seeing two 10 percent corrections one over here. A little bit of a rally with

Mike Wilson correctly pointed out was a bear market rally and then another 10 percent decline. So really speaks to the pain you're seeing in the equity market at the same time as you're seeing a lot of volatility in the bond market. If you look at the yields for example in some of these bonds base as the 10 year yield and the 30 year yield both trading at parity right now. And this is really interesting as we talk about the FOMC meeting in just a couple of days how much of that volatility has some of these yields a little bit out of whack. Absolutely. A lot of questions. Maybe we'll have some answers by

the end of the week. We will wait and see. Kitty thank you very much indeed. Equity markets are higher as we're just hearing. The Nasdaq is now up by one point to four percent. Still doesn't feel kind of that convincing. I think you need to see a decent close here really to kind of think about what happened Friday and get the context of the Monday. Correct. But our Question of

the Day basically talks about the idea that coming out of April and boy was April horrible. So what do you now do in May. The old adage is that you sell in May. We've added if you haven't already let us ask Savage Polanski Defiance ETF C I O and C E 0 7. It's always great to catch up. Look April is ugly. What do you think May's going to look like. What do you think people should be doing right now is seeing some big sell offs over the last few days. What do we take away from them. Hi. Great to see you. And yes you know the old. The old saying that April showers bring May flowers is what we're hoping for.

But historically it actually hasn't been the case. It is may go away and April tends to be a strong month for equities. But look I think we're in a different situation than we have been before. If you look back from the 1940s or so you've had about twenty three moves where the market has been down between 10 and 20 percent and the average decline is about 15 percent. And that average decline has lasted for about four months historically. Now this time time's a little bit different. We have geopolitics. We have fed hikes. We have inflation. Know there are a lot of sort of headwinds in the market. So what I think is

going to happen in the near term is that we're going to continue to have these big bear types of bounces and rebounds in the short term. I think we'll have short term pullbacks that are that are aggressive and difficult to stomach like we saw on Friday post some of those those big tech earnings. But short term volatility and and you PS that are down from the 30s to the low 20s. Companies that generate strong free cash flow are part of secular technology growth stories for the future and things like that. These are good buying opportunities for investors I still believe. You know I've been saying for a long time where the tradable bottom you know people who who sort of bought it on Friday and today that a little bit better than than perhaps I have over coming weeks. But I really believe that you know the long term story here of buying at these levels over the past

couple of months is going to play out for investors who have who are willing to hold and kind of ride this out. Sylvia can you talk to us about how the bond market plays into your outlook for stocks. I mean you specifically mentioned those long term cash flow sort of secular growers. Those happen to be the companies that are also long duration most sensitive to interest rates. So are we somewhat dependent upon a topping formed in yields in order for investors to really come back to the equity market and mass. Or do you think we've largely priced in the rise in interest rates at this point. It's a great question. And I think you know it's sort of it depends on the company itself. Right. So when when I'm thinking about some of the growth companies I think that they've actually started to look like like value companies. I think Apple

Microsoft Google Amazon for example I don't think they're going to be greatly impacted by by fixed income and rates but I think they have plenty of free cash flow. And I think that you know sort of what happens in the short term and bond markets and perhaps even in the long term in the next year or two with with rate hikes isn't going to be a huge driver for those names. But for some of the smaller cap growth your names you know I do think they're going to suffer in the near term. Right. So in

terms of of where you know Fed hikes settle out how many rate hikes we get and sort of when they stop and we see some some stability in bonds I think will impact the high growth means. Sylvia generally stocks don't like a recession. We've just seen quite a sharp slowdown in the headline manufacturing I assume. No. When do you think the recession happens. What does it hit the hardest. When should we start preparing for a recession. So I I don't know when the recession happens. I am not looking for a recession in the next year or so. And the reason why is that I do think that there are still some positive things to talk about in the backdrop. So you know we still have this story of strong consumer. Yes. We've seen some spending slowing down. Yes. We've seen that Amazon. Really really kind of put some fear

into the market. But if you look at there to your average actually spending the spending growth is looking pretty good and stable at that 7 percent. You know consumers have been out there spending. So that continues. Jobs are at you know jobs. Employment levels are at all time highs. Wages are higher. Savings still sits at two

trillion. Consumer debt servicing ratios look great. So you know there are a lot of positive factors in the market. I think what we need to see happen is inflation cooling off. You know hopefully we're we're pretty close to that and we start seeing inflation numbers going in a different direction. Russia Ukraine is an issue obviously and fed hikes are an issue. But you know I

think what'll happen in the next couple of months with inflation will be interesting in terms of what the Fed actually does. I think the market maybe has overpriced Fed hike in. And you know I expect volatility I expect a contraction expect this sort of pain in the short term. But it doesn't mean that we can't sort of come out of this and see a positive year at the end of all of this. Silvia what's your take on flows in the ETF universe right now. Certainly flows have become something of an indicator of sentiment given the sort of dominance of ETF over the course of the last several years. Are you seeing client capitulation.

So I think what happened in the last couple of months is some of the most popular ETF out there. You know some of ours included. I think they they tend to take it on the chin first because investors will when they're looking to raise cash perhaps they will get out of some of the semantic types of products that they've purchased over the last year or two because no that's not something that was familiar to them in the past. Maybe it's the first thing that gets sold. But I do think that's going to change because if you look at if you look at the flows now and I I read an interesting stat about some of the top dramatic ETF out there it's really NAVs that are bringing down a level for the ETF companies. It's not necessarily consumers redeeming. So I think at these low levels actually these low pricing levels we think about themes like 5G electric vehicles hydrogen just just sort of big tech secular growth. I think things along that line block chain technologies. I do think that investors who have cash on the side to deploy particularly young investors are going to start looking at some of these RTX and they're going to position perhaps 5 percent of their allocations into some of the interesting themes that they like and they'll hold it for longer periods of time. But yeah I mean in the long term a lot of the top the Maliki RTX are suffering because they represent technology and disruption. And that also translates often to small cap growth and pain when interest rate gets.

So it's always great to catch up. Really useful insight. Thank you very much indeed. SAVAGE BLONSKY CIO somebody show of defiance. It's yes. Coming up think your banks that data that ISE data we saw at the top of the hour tough April for the U.S. economy certainly for the manufacturing sector. Tip Europe chair of the I.S. Manufacturing Business Survey Committee is going to join us next. He's going to work through the data. He's going to tell us which bits we really want to be paying attention to here. This is Bloomberg. This is Bloomberg Markets ISE Angel Feliciano live in the principal room at about 10 cents and. Executive chairman joins

balance of power. That's at noon in New York. This is Bloomberg. So let's get back to that. I said no we got out at the top of the hour. The data from the Institute for Supply Management may be showing the manufacturing activity in the United States turning a little bit lower. So adding to the growth jitters that

the market is starting to focus on right now let's figure out what we should know here. Let's figure out exactly how we should read these numbers as ever to provide some insights. We're joined now by the chair of the ISE Manufacturing Business Survey Committee Tim Fury. Tim great to catch up. How should I read the numbers. Give me the takeaway. OK complicated report. I think the situation is we underperformed. We disappointed a bit but I think a lot of it had to do with timing the timing from the standpoint of

manufacturing inventory aside more than I would've thought and especially timing from the demand side. I think the demand side really was stronger except for new export orders. Our backlog is still 85 percent of the comments are growing or at the same level of backlog. So I think the real story guy this month is around employment and the fact that because we couldn't really hire enough people on the factory floor due to a lot of turnover primarily because of quits we weren't able to see that production number come up. And I do think that the month of May we'll see inventory come back. I think that you're going to see that new order number come back. I'm more concerned about employment and production. Dig into us a little bit into that employment number with us a little bit if you don't mind. 10. I know. I think it's really key that you highlight this is about

not being able to attract enough laborers as opposed to cutting jobs available on the market. Talk to us about the comments and some of the details that you're getting in your survey with respect to that. So we have an overwhelming amount of people who are hiring versus trying to manage or headcount through attrition. No comments really around firing. In the month of April we actually saw 38 percent unemployment comments saying that they were

having difficulty in hiring versus 31 percent back in March. So it's kind of going the wrong way. And if you if you dig into the detail it's really around the turnover level. And that's that's really people quitting for for other jobs. What we through the price is paid no. Well you know we weren't coming down until the Russia Ukraine conflict and then we started to turn around primarily driven by energy numbers. I mean that's really what's happening is that

the you know the price of a barrel of crude is worldwide very high. It's hurting our natural gas prices here in the U.S. as we export more gas into Europe. And you know crude oil gets into everything plastic steel transportation. So most of our panelists saw an immediate impact on transportation and people didn't wait this time to actually see it. They began to pass

along immediately. That's right. When you finally in 2021 we finally pass along increases. We probably wait a little bit too long. This is the second time around though. It is in a way. It's just in terms of in terms of how manufacturers are sourcing product though are they getting better access. As you say this is something that caught a lot of people on the hop. Maybe they got the timing wrong when they prosper of high priced pass the prices on it like this. But those what's out. But are they getting better. And now they're getting more creative in terms of being more flexible in terms of what they put into the

business and the prices they pay for the stuff they're putting into the business as well. So our investment sectors are really strong. Our capital equipment sectors computer electronics machinery those numbers are really strong. I mean that's that's a that's obviously what you really want to look at is what's happening in that area. Know I think that you know the biggest issue here is really we have really long lead times. We have record capital equipment lead times and raw materials. Tons of.

Never been this long. And we're sitting here at the highest price point that we've probably seen the last 35 years that's causing buyers to pause and wait. They have orders laid out much longer than they normally do and probably at much higher prices than they would really like to pay. So I think in some respects that's why you saw the new order number come down a little bit because they've got orders probably out all the way to 2023 at prices that they really don't want to pay. But you know I think the month kind of indicated that we're still starting to see some kind of price easing. 4 percent of the comments were lower prices compared to 1 percent in March because positive move in the right direction on the supply delivery number. I think we're

going to continue to move closer to a 60 to 60 kind of level. And you know the big concern here is production and then just getting enough people on the factory floor to really convert our product as you saw in the first quarter. Durable and non durable goods are still very positive as we've been indicating in the PMI number. Any detail you can provide on that net export. No. I mean I think that most investors have a sort of gut check reaction when they see the net export number deteriorate. They

think oh darling it's all about this dollar strength. Is there any evidence in the comments that this is currency related or is it just a slowdown. And a lot of friction still in supply chain. Well you know I think in Q4 of last year we had a lot of difficulty getting containers into the U.S. ports. We struggled with that all the way to the Lunar New Year. And then in the February timeframe in February and March we kind of free that up. So we allow more imports coming. I think it's more of

an import story and it's really timing between Q4 and you want to get a really high GDP in Q4. But we didn't we weren't able to unlock an important number. So I think a bit of that caught up to us in Q1. I'm really concerned though about the future here because you've seen the amount of miners piled up outside of Shanghai and Ningbo and the major ports in China. They've had the ports shut for about a month. There's difficulty in transporting product to the ports inside of China. And all

that's going to lead to a big tidal wave of container ships sailing to the US. And we're going to be back in the September October timeframe of last year when you gonna have 100 ships waiting to be unloaded. That's gonna put strain on on the road freight situation in the US. You can see spot right rates go back up and then you add on top of that we have a labor union

negotiation going on the West Coast in July. Now when that's all over you've got the season rush. So you know I think the only only seasonality we really had and cold it is the holiday season and everything else has been dealing with long. Got. Tim just to kind of start to wrap this conversation up the market's initial knee jerk reaction was that this was a negative number. I've listened to you and I'm hearing that this is an economy that is still humming along. It's got shortages. Those

are the bottlenecks that are providing problems right now. How would you characterize just in a few words what this number these numbers should tell us about where we are with the U.S. economy. I think we're still really strong. Your last guest really commented about no sign of recession inside of next year some time. We're 23 months into what typically is a 34 to 35 month manufacturing expansion cycle. And we think we've had a governor put on because of the supply constraints which means this is probably a 40 to 42 month expansion cycle. So we're really not seeing any indication of weakening demand there at all today and not expecting anything really until the end of next year. I think that 20 24 discussion if that. So you know we

have three to one positive and comments not so positive that the number of comments is really hard to figure out these days because I have a lot more people talking about price increases in late deliveries and the general comments. But no no indication at all that there's an easing of the. Like I said the backlog number 85 percent of the same or better. And it was in the prior month. Customer inventories are still well below 40. And you can explain the new export number because of what's going on in Europe and Asia. So you know I think we're in for a strong run. We're continuing and continue to be in for a strong run. Glass half full term it's always great to catch up and get your

analysis of how we should read these numbers. Really appreciate your time as ever. And the data that you deliver for us on what is happening out there. Timothy Fury of the ISI Manufacturing Business Survey Committee. Thank you very much indeed. This is Bloomberg. So we're coming up on the European clothes. Now remember London is out today. That is a big chunk of volume that is taken out of

the European space. But there's still plenty of interesting stories that we want to be talking about here. One of them represents this market here. Stockholm the oh Max a little bit earlier on. I'm sitting there at my desk. Suddenly the market nosedive is down by 8 percent. Turns out it was something of a flash crash. It spreads across the Nordic markets. We've come up off that low but still down pretty hard. Euro dollar down by two tenths of one percent. Brent crude down by 3 percent. We're

going to talk about energy in the next half. The European closes coming up. This is Bloomberg.

2022-05-05 13:15

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